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July 1st, 2021

It’s All Stocks

A portfolio manager I used to work with once remarked that if you stay in finance for long enough, you begin to see everything as a stock. When I first heard this, as an intern at an investment firm in 2017, it seemed like one of those Wall Street neologisms that sound true, but don’t feel true until you’ve lived them firsthand (other neologisms that fall under this category: “Don’t short on valuation”, “Don’t short on competition”, and my personal favorite: “Don’t try to predict the future. Try to describe the present”). This particular piece of wisdom was palpable almost immediately: in August of 2017, I drove to the Hamptons with some friends and realized that the PM who said that everything looked like a stock had a long or short position in half of the retailers occupying the strip malls along the Southhampton Bypass. In finance, even a trip to the beach is a quest for alpha.

The 2017 internship turned into a job offer, which turned into a full time position in 2018 after I graduated from college. I felt luckier than a lot of my peers who spent senior year either cramming for McKinsey case studies or lamenting because they doubted they had the quantitative skills to even attempt one. Before the summer of 2017, I probably would’ve put myself in the latter camp: a history major who only did theater, film, and journalism in college. But the internship taught me that you can learn any quantitative skill on the job, by sheer force of attrition. Someone will ask you for the diluted share count of an upcoming IPO, or to input a company’s EBITDA into an earnings model (which raises other questions, like what is depreciation and amortization, and how do you use Excel?), or might say to you “yes, gross margins are 50% right now, but what happens when GMs reach 65%, and S&M spend falls to 30% of revenue, and Trump manages to pass corporate tax cuts? How much are they earning then?” Early on in my internship, it might take me an hour to figure out what question I was even being asked, and another few hours to answer it. But over time -- through attrition -- the concepts fall into place. And then you begin to start seeing everything as a stock.

In the initial phase, “seeing stocks'' might just mean the sudden realization that the vast majority of items and systems you interact with on a daily basis are actually public companies. This understanding gets augmented even further when the above concepts (diluted shares, EBITDA, tax cuts) get layered in, and you begin to think of companies as their own little organisms: sentient income statements with hopes and dreams that evolve with every quarter. Then, the companies begin to talk to each other: you have a laser component company over here, and a global OEM powerhouse over there, and a Chinese phone manufacturer somewhere else, and a smorgasbord of social camera apps, and with all of that information you might ask yourself something like: where is the 3D imaging industry heading? If you were to peer inside the brain of a truly great portfolio manager it would look a bit like a timelapse of a rapidly industrializing metropolis. A single question about the destiny of 3D imaging would be the launching pad for a mental model around the P+L of dozens of companies, implications for global supply chains, and assumptions around how consumer behavior will continue to evolve. Change one input, and the other variables will instantly recalibrate.