In Search of the Alpha Career
Can one effectively manage multiple companies? Is it possible to pursue numerous ventures simultaneously, or does the age-old adage 'jack of all trades but master of none' hold true?
(Originally published in The Independent Investor)
Professionals today vary from entrepreneurs and investors to corporate executives. As an investor, it’s crucial to keep an eye on what generates what’s often referred to as “Alpha.” In financial terms, Alpha measures an investment’s performance relative to a market index, serving as a gauge of a portfolio manager’s ability to yield returns beyond what would be expected based on the associated risk (source: ChatGPT).
What this definition means is that the market anticipates a certain level of returns based on a given level of risk, which we call “Beta.” Imagine investing in a company like Microsoft, and everyone believes it’s a strong pick because of its connection to ChatGPT. In this scenario, the market expects a solid return.
Now, enter “Alpha.” Alpha is the return that goes beyond what the market expects, and it can take various forms. For instance, there might be a few contrarian thinkers who believe that ChatGPT and AI, in general, are getting too much hype. They might take a short position on Microsoft, essentially betting that the stock’s price doesn’t match the excitement. If these contrarians turn out to be right and make a substantial profit that exceeds the market’s expected returns (what consensus believes), they’ve achieved Alpha.
The same principle applies to those who took short positions during the tech boom in 2000, those who bet against the market just before the 2008 financial crisis, or those who steered clear of NFTs over the past four years. Think of iconic investors like George Soros, Michael Burry, Seth Klarman, John Paulson, and Warren Buffett. In the world of investing, they stand out as non-conformists who embody the concept of Alpha.
In essence, Alpha and Beta are just fancy terms that mean “above the norm” (Alpha) and “the norm” (Beta). This concept extends beyond the realm of finance. It’s a universal idea that can be applied to anything, whether it’s entrepreneurship, art, sports, or any other pursuit.
Beta would be considered consensus. It is what everyone agrees on and what you read and see in the news everyday.
What fascinates me is Alpha in entrepreneurship. Since this is a publication about entrepreneurs and founders, I started to think of what is considered “Beta” and “Alpha” in the professional/career sense.
In the world of professionals, we encounter two distinct paths: the specialist professionals (career types) and the entrepreneurs/owners. Each in and of themselves are respected paths and success means hard work and a bit of luck in both respects. But what distinguishes these professionals, and how can we categorize each type?
Recently, Michael Girdley shared his perspective on a concept he terms the ‘Regular CEO’ and the ‘HoldCo CEO.’ You can delve deeper into his insights in his original post here. In a nutshell, the HoldCo CEO mirrors the likes of Warren Buffett, adept at managing a group of diverse investments from a high-level (often holding substantial control, albeit with trust in executives below). The Regular CEO, on the other hand, is the individual deeply entrenched in the arena, focused intensively on a single project or company. Think of figures like Satya Nadella (Microsoft), Frank Slootman (Snowflake) and Greg Abel (Berkshire Hathaway). In his post, Girdley states the following:
I was particularly interested in the statement ‘Don’t get too black and white.’ But what does this really mean in the context of business? It seems to indicate that there are two fundamental approaches to one’s career and approach to business. On one end, you have the specialist or the single-focused professional who operates with intense concentration on one company or project at a time. On the other, there’s the more diversified and passive approach, similar to that of a mutual fund manager. Then, there’s the middle ground – those who oversee and own various companies in different domains. It’s a territory where one blends the skillsets of an asset manager and an operator while maintaining full ownership. In essence, it involves outsourcing where you can and stepping in with an active role when necessary.
I began to question which individuals fit into each of these categories within the professional world. To visualize this, I’ve created a spectrum to categorize each type of professional:
The more I think of it, the more I come to realize that embracing diversification with multiple exposures provides a unique sense of personal freedom and leverage. This sets entrepreneurs and investors apart from pure operators and mutual fund managers, who often find themselves tied to individual companies and roles for the rest of their lives. Being a diversified owner opens up opportunities to engage in various projects, resulting in the blending of ideas from different fields, all the while going against conventional practices. In fact, that’s basically the definition of a contrarian.
The career paths of those on the opposite ends of the spectrum tend to be more linear than those in the middle (think of the typical paths in college). You can be equally successful being in A and C, but I believe true Alpha is generated when you lie along B.
The fundamental question here is: How can one effectively oversee various companies without prior expertise in any particular field? How can you successfully juggle multiple investments and projects, some requiring active involvement and others more passive? This is where the wisdom from gaining professional experience early on in your career, and having an extremely curious mindset, pays off.
This becomes clear when professionals engage in side hustles that ultimately yield substantial returns. I’ve encountered a number of individuals who maintain multiple side businesses while holding down demanding corporate roles, and nearly all of them have a vision of eventually transitioning into full-time entrepreneurship, leveraging the success of their side hustles. Some of these side hustles have grown substantially that they’ve reached a point where they can sustain themselves without relying on their traditional nine-to-five jobs.
In Paul Graham’s article titled “How to Do Great Work,” I came across several key points that strongly resonated with me:
“It’s good to know about multiple things; some of the biggest discoveries come from noticing connections between different fields.”
“I think for most people who want to do great work, the right strategy is not to plan too much. At each stage do whatever seems most interesting and give you the best options for the future. I call this approach “staying upwind.” This is how most people who’ve done great work seem to have done it.”
“Four steps: choose a field, learn enough to get to the frontier, notice gaps, explore promising ones. This is how practically everyone who’s done great work has done it, from painters to physicists.”
“Interest will drive you to work harder than mere diligence ever could.” (Paul Graham)
What he is saying is that the most effective way to uncover connections between diverse fields is to constantly expand your knowledge, and position yourself at the forefront of learning, whether that is through reading or connecting with experts in fields that bring you curiosity. Entrepreneurship revolves around identifying market gaps or “inefficiencies”, and being rewarded for fixing those gaps. To identify and seize these opportunities, one must break free from the confines of a corporate mindset and venture into experimentation. I firmly believe that this journey begins with the pursuit of a side hustle. Over time, side hustles can take you from point A/C to B as seen below:
Now, should one choose to remain at point A, it doesn’t mean they are making a bad decision. In fact, they can look forward to an enriching life with all the perks and benefits of being a Single Company Operator. CEOs and executive leaders match this profile. This works well especially if they love their work (whether most do or not is beyond the point of this article).
It’s fair to say that Single Company Operators operate with limited downsides, offering them a favorable risk profile with a steady stream of income. Their upsides include substantial salaries, generous fringe benefits, and the anticipation of post-retirement returns. The risk is minimal, while the rewards can be generous.
Opting to remain at point C entails a role centered around the responsible management of others’ money. While it may involve fewer operational demands, it places a heightened emphasis on effective money management. In this capacity, a professional money manager, much like a single company CEO, can anticipate a structured compensation package that includes a salary, management fees, and a share in the potential gains generated from mutual funds. The potential for upside in this role is promising, and the associated risks are comparatively low.
As you transition from point A/C to point B, you embark on a journey away from the life of a corporate professional and begin to explore the world of entrepreneurship and investments (direct ownership). Unless you are truly gifted with all the right skills and have inherited a good amount of money, point B can only be done over time as one accumulates both (1) wealth and (2) knowledge from their years of professional experience.
As you progress towards point B, your appetite for risk expands, bringing the promise of extreme rewards. Your ties to a single company tend to loosen, and you might find yourself parting ways with the security of a steady paycheck as your focus shifts towards direct ownership and investments. While maintaining a steady income becomes more challenging, the value of your assets steadily rises, albeit accompanied by heightened risk.
The result, if successfully achieved, translates to higher returns compared to points A/C. However, the increase in risk remains within reasonable bounds. In Finance speak, we refer to this balance as the “Sharpe ratio”. At this point, your personal Sharpe ratio should be at its highest.
The question that often arises is: Can one effectively manage multiple companies? Is it possible to pursue numerous ventures simultaneously, or does the age-old adage ‘jack of all trades but master of none’ hold true? There seems to be two schools of thought regarding this.
The first school of thought advocates for the focus on a single pursuit throughout one’s life—a path of specialization. According to this perspective, individuals should dedicate themselves to a specific field, attain expertise through MBAs and experience, and climb the ranks to become CEOs and industry leaders. While there’s merit in this approach, it may not fully embrace the advantages of a diversified career.
The second school champions the idea of a diversified career—a path chosen by a new generation of entrepreneurs like Naval Ravikant, Reid Hoffman, Paul Graham, David Sacks, and Peter Thiel. These individuals believe that success doesn’t necessarily follow a linear trajectory. Instead, they encourage exploring multiple roles and experiences. These guys shy away from the predetermined path and allow life to show them new paths. The ‘old guard’ is represented by figures like Warren Buffett, Charles Koch, and Bernard Arnault. Even Jeff Bezos and Elon Musk fit this mold (They started single companies but diversified as they accumulated wealth).
The next questions that entrepreneurs often face from specialists are “how do you manage so many companies? Isn’t it difficult to do so many things at once?” I believe it comes down to two key factors that most people tend to disregard: time management and incentives. As you transition from one venture to another, you must be willing to delegate operational control and outsource management tasks to single-company operators. This relationship between Single-Company Operators and Diversified Operators is important. Diversified Operators delegate responsibilities to specialists while maintaining active board duties in each of their companies. This shift involves a transition from day-to-day tasks to more high-level decision-making, nurturing creativity, strategic thinking, and a focus on long-term vision.
Naval Ravikant, for instance, exemplifies this shift. He explains in this podcast how he transitioned from being a CEO to gain more freedom and time for creative/strategic thinking. Despite numerous failures, he achieved over 85 exits, including 10 unicorns, all while founding his own successful company, AngelList, which became a unicorn itself.
Now, a specialist might wonder, ‘How do you establish trust with the CEOs overseeing your various companies?’ This aspect, rooted in creativity and human interaction, doesn’t fit into any formula nor is it taught in any business schools. It’s where individuals like Warren Buffett and Charles Koch shine, despite them employing different business models. Their success lies in their ability to identify compelling opportunities and choose dedicated operators who share their vision, while successfully incentivizing them. The best Diversified Operators seem to understand the value of their time, and are able to identify which areas of their professional lives are worth outsourcing to free up their time for big picture thinking. They are willing to make the trade between money (and even equity) and time, and this I believe is what differentiates most successful Diversified Operators. I am not sure what to call this but I believe it is a form of personal leverage. Building trust is a gradual process that evolves through your professional network and years of experience.
I’m not suggesting that you can’t achieve significant wealth as a pure operator or a mutual fund manager. These professions often come with substantial financial rewards. However, history has proven that multi-generational wealth results from direct ownership and investment, where individuals have ‘skin in the game.’ Many successful ‘B types’ were willing to take calculated risks that diverged from certainty and status quo. They consistently explored new ideas and projects, while managing their downside effectively and creatively. This is also evident in successful self-made Philippine entrepreneurs and investors.
All of the leaders mentioned above are remarkable figures in their respective fields, having made significant contributions to society. The likelihood of any one of us achieving their level of success at every stage is relatively low. However, when we bring this concept down to a more realistic level for the average person, everyone can identify the area in which they want to make an impact.
Returning to the topic of ‘Alpha,’ it’s important to recognize that individuals who venture from points A and C and into the realm of B are often seen as unconventional or even outcasts. These are the trailblazers who defy conventional wisdom. Consider the examples of Jeff Bezos, who left his job at DE Shaw to start an ‘online bookstore,’ or Naval Ravikant, who started seven companies and more than 40 projects, many of which faced failures before achieving significant success. Even Warren Buffett in his early years had a hard time explaining to people what he did for a living, all the while building his conglomerate from his bedroom in Nebraska.
To take such outsized risks, one must have conviction in their career path, a conviction that outweighs the associated risks of new ventures, investments, or companies. Engaging in side-hustles and projects serves as a means to test the validity of your ideas. If they prove to be incorrect, consider it an investment in learning and a form of option cost. These investments and companies are similar to high-risk call options with the potential for tremendous upside, all while carefully managing the downside. Success in this arena often requires just one or two wins, and it is clear that those along point B never give up searching for those big wins.
ABOUT THE AUTHOR
Keenan Ugarte is Managing Partner at DayOne Capital Ventures, an independent private holding company based in the Philippines that partners with entrepreneurs across a wide range of industries. He is the Co-Founder and Director of The Independent Investor, a digital newsroom focused on early stage companies in the Philippines and Southeast Asia.