Editor’s note: Today, Porter turns the Daily Journal over to his colleague, Distressed Investing analyst Marty Fridson. Marty spent years at leading firms like Salomon Brothers, Morgan Stanley, and Merrill Lynch. While doing innovative work in credit analysis and investment there, he became friends with the late Martin Leibowitz – the subject of today’s essay.

Here’s Marty…

There’s more to life than a yield curve…

Earlier this summer, I attended a memorial service for Martin Leibowitz, a giant of financial analysis whom I had the great privilege of getting to know when I worked at Salomon Brothers in the 1980s.

The event’s distinguished speakers explained how he revolutionized bond management. One opined that if Marty had published his work as an academic rather than a practitioner, he would have received a Nobel Prize in Economics. As it was, he published more articles in the prestigious Financial Analysts Journal than anyone else and won numerous awards for his contributions.

Even more impressive than the recitations of his extraordinary accomplishments was the praise of his character. On Wall Street, brilliance is rarely found in combination with humbleness, but Marty exemplified both qualities. People meeting him for the first time expected to be intimidated by his intellect, but he instead made them feel special by taking a sincere interest in them. One speaker recounted how, newly arrived from India and with little experience, he approached the legendary man fearing he’d be overawed by a barrage of technical talk far beyond his comprehension. But Marty most of all wanted to know what his name meant in Sanskrit.

Hearing these comments, as well as descriptions of Marty’s wonderful sense of humor and his devotion to his family, it occurred to me that he could have written another book just as successful as Inside The Yield Book (co-authored with Sidney Homer), which became the bible for newcomers to the bond business. If he’d distilled his approach to dealing with his fellow human beings into a volume along the lines of Dale Carnegie’s How To Win Friends And Influence People, it would have been a bestseller.

In the bond world, Marty transformed the way portfolio managers perceive their jobs. Before he came along, they basically had two options:

That second option involved transactions such as switching to a longer-maturity bond, which will experience a bigger gain if interest rates fall – and being right about which way interest rates are headed. After Marty’s work became known, portfolio managers and chief investment officers saw the task as designing the most efficient portfolio to achieve the institution’s long-range objectives, for example, satisfying pension obligations or funding an insurance company’s liabilities.

Marty’s extraordinary influence over bond managers’ practices resulted from two factors. One was his application of highly sophisticated mathematics. The other was his ability to explain the practical implications of his findings in terms accessible to people lacking a PhD. A sad truth is that many supersmart financial researchers know how to communicate only with other quants and consequently have far less impact than they might.

Another key reason that Martin Leibowitz became the obvious choice to be the very first inductee to the Fixed Income Analysts Society Hall of Fame was that he sincerely and passionately wanted to get to the right answer.

That might seem the obvious way to go about things, but it’s not how all Wall Street research is done. Too much of it is conducted with an eye toward confirming a predetermined conclusion. Evidence that fails to support the desired message – “You should buy this!” – is excluded from the analysis. Marty had a master’s degree in physics and applied that discipline’s rigorous scientific method as fully as possible to finance.

As an investor, you need to be on your guard against research that doesn’t measure up to Marty Leibowitz’s standards. Make sure the findings are not just assertions, but instead are backed up by logically sound arguments.