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Interview With Simon Lack: Masters in Business (Audio) · Masters in Business

• 0:00
  Speaker 1: Masters in Business is brought to you by proper Cloth,
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• 0:23
  Speaker 1: Business with very Ridholts on Boomberg Radio. This week on
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  Speaker 1: the podcast, I have an extra special guest. It's somebody
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  Speaker 1: I've known for actually a good couple of years. His
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  Speaker 1: name is Simon Lack. He's probably best known for the
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  Speaker 1: book The Hedge Fund Mirage. He's written several others. Funny
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  Speaker 1: story which we talk about in the podcast portion I
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  Speaker 1: get invited to speak somewhere and I really don't want
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  Speaker 1: to talk to this group because they're annoying, and I
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  Speaker 1: decided to do a little counter programming. And I know
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  Speaker 1: they're very, very big and fairly hedge fund investors that
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  Speaker 1: can't figure out why the returns have been so terrible.
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  Speaker 1: They think it's something they're doing wrong, and so I
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  Speaker 1: create a presentation called romancing Alpha Forsaking Beta. And one
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  Speaker 1: of the big sources I used in the book was
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  Speaker 1: Simon's Hedge Fund Mirage. Based on the strength of that presentation,
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  Speaker 1: which was really me being um rude. I get invited
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  Speaker 1: to speak at UM the Kennedy School of Socially Responsible
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  Speaker 1: Investing a couple of years ago, and I make a
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  Speaker 1: presentation about why Beta for many institutional investors is better
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  Speaker 1: than Alpha. Who else is presenting at the same conference,
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  Speaker 1: but Simon Lack and we chatted up a conversation and
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  Speaker 1: ironically we each were citing each other's research. It was
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  Speaker 1: It was pretty funny. I strongly recommend the book. He
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  Speaker 1: pulls no punches, especially given what he did UH in
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  Speaker 1: his earlier career, which gave him a front row seat
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  Speaker 1: to what was going on in hedge funds. I could
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  Speaker 1: wax on for a much longer about this, but really
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  Speaker 1: he is so knowledgeable and full of so much information.
• 2:12
  Speaker 1: Rather than me continuing to babble with no further ado
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  Speaker 1: my conversation with Simon Lack. This is Masters in Business
• 2:23
  Speaker 1: with Barry Ridholts on Bloomberg Radio. I have a special
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  Speaker 1: guest today who I have been looking forward to sitting
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  Speaker 1: down and chatting with for a long time. His name
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  Speaker 1: is Simon Lack. He spent twenty three years with JP
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  Speaker 1: Morgan prior to founding sl advisors in two thousand and nine.
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  Speaker 1: His career JP Morgan was spent uh doing fixed income
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  Speaker 1: derivatives and forward FX trading before he ran the Investment
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  Speaker 1: Committee in charge of allocating over a billion dollars to
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  Speaker 1: hedge fund managers, as well as foul thing the JP
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  Speaker 1: Morgan incubator funds and a number of private equity vehicles
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  Speaker 1: that took economic stakes in emerging hedge fund managers. That
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  Speaker 1: experience led him to write the first of his three books,
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  Speaker 1: called The Hedge Fund Mirage, The Illusion of Big Money
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  Speaker 1: and Why It's Too Good to be True. His subsequent books,
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  Speaker 1: Bonds Are Not Forever and Wolf Street Potholes Are are
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  Speaker 1: both must reads. Simon Lack, Welcome to Bloomberg. Thank you
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  Speaker 1: so it's I've been looking forward to chatting with you,
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  Speaker 1: and I have so many things UM to go over
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  Speaker 1: with you. Let's let's start, given what's going on in
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  Speaker 1: the world to fixed income in the Federal Reserve, Let's
• 3:43
  Speaker 1: start with your book on bonds and and talk a
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  Speaker 1: little bit about UM. Bonds. Interest rates go all the
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  Speaker 1: way back to eight hundred BC, that's about four thousand
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  Speaker 1: years ago. How important our interest rates for consumer spending? Credit?
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  Speaker 1: And the over all economy. I mean critical, right, I mean,
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  Speaker 1: maybe the most important economic variable out there is interest
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  Speaker 1: rates and people getting her favorites and on their money,
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  Speaker 1: and from the investment side, or from the consumer side,
• 4:11
  Speaker 1: or both from the investment site, certainly, but obviously low
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  Speaker 1: rates stimulate demand, allow consumers to borrow money to buy
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  Speaker 1: things as well. So it's it's critical. I mean, it's
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  Speaker 1: probably the most important variable. So here in the United States,
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  Speaker 1: we as a nation have pretty much set rates for
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  Speaker 1: much of the globe. Taking rates down to such low
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  Speaker 1: levels in the early two thousands really helped set the
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  Speaker 1: table for a global financial crisis. Now, the US is
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  Speaker 1: a little out of step with Europe and Japan in
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  Speaker 1: that Qui is over, zerp is over. We're embarking on
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  Speaker 1: a reat raising regime. The rest of the world is
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  Speaker 1: still cutting, still doing their version of que Does the
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  Speaker 1: United States still set the interest rate for the world,
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  Speaker 1: I mean, to a large agree, certainly impacts the emerging
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  Speaker 1: world and clearly sets its own rates. And it's a
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  Speaker 1: great situation for the US to be because the financial
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  Speaker 1: crisis came about through too much debt, and the solution
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  Speaker 1: to too much debt is low rates. And I've often
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  Speaker 1: said to people that if Janet Yellen or Ben Banankey
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  Speaker 1: before her had got up and given a speech and said, hey, listen,
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  Speaker 1: here's the deal. We've borrowed too much money and we're
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  Speaker 1: just going to keep rates really low and transfer real
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  Speaker 1: wealth from savers to borrows. If they've given that speech,
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  Speaker 1: monetary policy would have been as it's been. They haven't
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  Speaker 1: given the speech, but you've had the outcome that's consistent
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  Speaker 1: with that low rates are in our self interest. Well,
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  Speaker 1: the political pushback to that explicit statement would have been
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  Speaker 1: pretty fierce. Absolutely absolutely. So I think that although you
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  Speaker 1: know in my book I'm negative on bonds, it's not
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  Speaker 1: because we think bond deals are going to go up sharply.
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  Speaker 1: I think you're going to see rates lower than they
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  Speaker 1: should be from an investor standpoint for a long time.
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  Speaker 1: I mean, the return on bonds is just inadequate to
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  Speaker 1: justify putting money into them. So I want to I
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  Speaker 1: want to stick with the concept of of the US
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  Speaker 1: Federal Reserve Bank setting rates for the world. In your book,
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  Speaker 1: you actually right, and I guess this is a little
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  Speaker 1: bit of a forecast, or certainly is looking forward a
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  Speaker 1: number of years ultimately, the United States may find that
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  Speaker 1: it can no longer set its own interest rates. Explain,
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  Speaker 1: it's possible, it's possible. We have a you know, a
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  Speaker 1: very bad indebted position, and under most forecasts, it's only
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  Speaker 1: going to get worse. And eventually it's quite possible that
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  Speaker 1: other countries will decide what rates the lender's money at.
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  Speaker 1: But I think it's actually, although that's a possibility and
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  Speaker 1: it's something you worried about, I think it's more likely
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  Speaker 1: that we will continue to set rates, and will continue
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  Speaker 1: to set rates lower than they really should be for
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  Speaker 1: the interests of the lenders. And and you know, I
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  Speaker 1: have trust of the lenders, meaning to avoid default and
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  Speaker 1: make sure lenders get to get a fair return. And
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  Speaker 1: so I explore this idea of populism in the Bond Book,
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  Speaker 1: and a couple of years the books of the Way,
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  Speaker 1: hopefully ahead of the curve. And here's the thing, right,
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  Speaker 1: we've had this transfer of wealth from one generation to
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  Speaker 1: the next. The baby boomers have basically brought a lot
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  Speaker 1: of money to pay entitlements, and the next generation is
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  Speaker 1: going to be left to pay for that. So now,
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  Speaker 1: just so we've got a new president, and just suppose
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  Speaker 1: interest rates went to ten. Just suppose the Chinese and
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  Speaker 1: Japanese who added selling bonds. What do you suppose President
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  Speaker 1: Trump would say to those guys. And I think he'd say, hey, listen,
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  Speaker 1: if you want to keep selling bonds, I'm just going
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  Speaker 1: to cut the interest rate in half on what we
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  Speaker 1: pay you as weaponized fixed income instruments. Is that it's
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  Speaker 1: you know what I mean, it's it's not something that's
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  Speaker 1: at all on the horizons to day. But my point
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  Speaker 1: is that the moral obligation to repay what's been borrowed
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  Speaker 1: with fair value is going to become more and more
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  Speaker 1: tenuous over time because the people who are repaying the
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  Speaker 1: dead are not the ones who made the decision to borrow.
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  Speaker 1: And I think you're going to see that connection weaken,
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  Speaker 1: and it's going to be at the expense of the
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  Speaker 1: people who own the debt. Let me push back a
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  Speaker 1: little bit on this and and just observe there is
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  Speaker 1: a global shortage of high quality sovereign paper like US treasuries.
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  Speaker 1: We haven't been doing the sort of tax and spend
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  Speaker 1: or tax and borrow like we used to. We haven't
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  Speaker 1: been doing the big infrastructure projects. It seems that demand
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  Speaker 1: for quality paper absolutely overwhelms the supply. If the Japanese
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  Speaker 1: or the Chinese or other holders of US treasuries decide
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  Speaker 1: to suddenly hit the bit at once, how hard is
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  Speaker 1: it to imagine that all the paper just gets sucked
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  Speaker 1: up by foundations, pension funds and everybody else who could
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  Speaker 1: be I mean, you know, they've each got over a
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  Speaker 1: trillion dollars, and as a practical matter, it's hard to
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  Speaker 1: see how you could sell that sort of amount in
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  Speaker 1: a short period of time. But the Chinese, of course,
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  Speaker 1: have been reducing their holdings recently. I think part of
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  Speaker 1: without much impact to letting things roll off, and they'n not,
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  Speaker 1: you know, opening at all trans the way they were,
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  Speaker 1: so it hasn't caused really any discernible disruption to this point.
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  Speaker 1: So I think that's true. I'm Barry Hults. You're listening
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  Speaker 1: to Masters in Business on Bloomberg Radio. My guest today
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  Speaker 1: is Simon Lack. He is the author of the hedge
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  Speaker 1: Fund Mirage, The Illusion of Big Money and Wow, it's
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  Speaker 1: too good to be true. And I have to reiterate
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  Speaker 1: for listeners that you spent twenty three years at JP Morgan.
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  Speaker 1: Part of that time was you sitting on an investment
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  Speaker 1: committee that was responsible for allocating over a billion dollars
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  Speaker 1: in hedge in money to hedge funds and emerging market
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  Speaker 1: emerging managers, and you had a front row seat to
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  Speaker 1: really the emergence of hedge funds as a major set
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  Speaker 1: of players in the market. I mean, it was so
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  Speaker 1: cool because in the early nineties, that's when I first
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  Speaker 1: started investing in hedge funds, sitting on that committee, and
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  Speaker 1: it was a very obscure backwater and you'd go and
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  Speaker 1: see these very talented people in a small office with
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  Speaker 1: very complex strategies, with leverage and Cayman vehicle, and it
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  Speaker 1: all sounded quite risk and banks we're not doing that.
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  Speaker 1: I mean, we were really sort of pioneers in terms
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  Speaker 1: of allocating proprietary capital to that. And it was so cool.
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  Speaker 1: I mean, there's never a boring meeting with their hedge
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  Speaker 1: fund manager. Each one of them is interesting in their
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  Speaker 1: own way. And of course the industry just completely took off.
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  Speaker 1: And in the early nineties when we were doing that,
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  Speaker 1: the markets were very inefficient and you could make some
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  Speaker 1: very very attractive returns, and as in most things in investment,
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  Speaker 1: you know, popularity is eventually going to kill it, and
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  Speaker 1: that's what happened over the last ten or fifteen years.
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  Speaker 1: Let me put a little flesh on the bones. And
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  Speaker 1: this comes right from the hedge fund mirage. A m
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  Speaker 1: for all of hedge funds was a hundred and eighteen
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  Speaker 1: billion dollars ten years later, by two thousand and seven
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  Speaker 1: it was two point one trillion, and last year we
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  Speaker 1: just crossed three trillion. So despite all the talk about
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  Speaker 1: this is the end the hedge funds, they've been under performing.
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  Speaker 1: Everybody knows the fees are too high. They continue to
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  Speaker 1: accumulate massive amounts of capital, and it's an extraordinary disconnect
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  Speaker 1: by generally public pension plans. I mean, those are the
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  Speaker 1: those are the big source of capital today for hedge funds,
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  Speaker 1: not so much high net worth investors. And they what
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  Speaker 1: they do is generally investors will understand that small hedge
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  Speaker 1: funds are better than big ones. I mean it can
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  Speaker 1: be expensive to have a portfolio of small hedge funds.
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  Speaker 1: You need a lot of them. They also know that
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  Speaker 1: any big hedge fund they look at was better when
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  Speaker 1: it was smaller. That's why it's big today. There are
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  Speaker 1: inefficiencies that can only be mortified. You can't put twenty
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  Speaker 1: billion dollars into it, and so they missed the obvious
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  Speaker 1: third step, which is that a small hedge fund industry
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  Speaker 1: was better than a big one. And I would challenge
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  Speaker 1: any institutional investment hedge funds today to ask themselves what's
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  Speaker 1: the optimal size of the hedge fund industry? And generally
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  Speaker 1: those investors don't even contemplate the question. They don't think
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  Speaker 1: of it in terms of any sort of finite pool
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  Speaker 1: of arbitrage type profits to be exploited. And it's a
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  Speaker 1: huge disconnect. It's a huge error, and they're getting the
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  Speaker 1: results that they deserve for such shallow analysis. The themed
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  Speaker 1: short seller Jim Chanos, who himself runs hedge fund Kinnicoast Associates,
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  Speaker 1: was a guest on the show and he said when
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  Speaker 1: he launched his hedge fund, and I think it was
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  Speaker 1: sometime in the eighties, because there was a couple of
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  Speaker 1: hundred guys, they all generated alpha. Now there's eleven thousand
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  Speaker 1: hedge funds, those same two or three hundred guys are
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  Speaker 1: the ones generating the alpha. That's a little bit of exaggeration,
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  Speaker 1: but not a whole lot, is it. I mean, the
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  Speaker 1: problem is that it's very hard to forecast who's going
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  Speaker 1: to do well, you know ahead of time. So there's
• 12:45
  Speaker 1: always going to be happy class and there's always gonna
• 12:46
  Speaker 1: be hedge funds that do well. But hedge fund performances
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  Speaker 1: mean reverting, and so you have a set of investors
• 12:53
  Speaker 1: who very largely look at performance to decide where to invest.
• 12:55
  Speaker 1: I mean, I sat in so many meetings with hedge
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  Speaker 1: fund managers and you have the whole discussion about security
• 13:01
  Speaker 1: selection of portfolio construction. So one manager leaves your caucus
• 13:05
  Speaker 1: and we talk about it, and then somebody says, you
• 13:07
  Speaker 1: know what, he was up fifty last year. Yeah he's
• 13:09
  Speaker 1: pretty good. Yeah, I like him. He's pretty good as
• 13:11
  Speaker 1: opposed tone you want to take your money off of that, Yeah,
• 13:15
  Speaker 1: so hege. So you've got this the way hedge fund
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  Speaker 1: investors are helplessly momentum driven hedge funds are mean reverting investments.
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  Speaker 1: This is never going to be a good combination. They're
• 13:27
  Speaker 1: always buying what worked yesterday and it's actually less likely
• 13:30
  Speaker 1: to work tomorrow. But they're generally institutional investors in hedge
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  Speaker 1: funds are not that sophisticated. In my experience, my head
• 13:36
  Speaker 1: of research gave me a little tidbit which I found fascinating.
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  Speaker 1: In America today, there are more hedge funds than taco bells. Amazing.
• 13:45
  Speaker 1: Do we have either too many hedge funds or none
• 13:48
  Speaker 1: enough taco bells. What's the takeaway? I think you get
• 13:51
  Speaker 1: better value for money taco bell. There's no question about that.
• 13:54
  Speaker 1: Given the choice, I'd picked the Taco Bell. So here's
• 13:56
  Speaker 1: the fascinating anything about this. There are a small all
• 14:00
  Speaker 1: group of of the alpha generators that chainos referred to.
• 14:04
  Speaker 1: And whether it's Jim Simons or Cliff ast Nests or
• 14:08
  Speaker 1: d Shore or Steve Cohen or go down the list,
• 14:11
  Speaker 1: the concept of the significantly outperforming manager seems to keep
• 14:18
  Speaker 1: everybody else in pursuit of that alpha. They're willing to
• 14:22
  Speaker 1: forsake beta in order to chase alpha. Is it just
• 14:26
  Speaker 1: that simple. It's a problem with the accounting treatment that
• 14:29
  Speaker 1: public pension plans use, and it's a little bit of
• 14:31
  Speaker 1: an obscure issue, but basically, with a pension fund, normally
• 14:35
  Speaker 1: use a corporate bond rate to figure out what your
• 14:37
  Speaker 1: liabilities are. Pension plans used the expected return on their
• 14:41
  Speaker 1: investment portfolio, which is a made up number. It's yes,
• 14:45
  Speaker 1: it's an estimate, right, And that's the account of standards
• 14:48
  Speaker 1: that government entities have to use. And the result is
• 14:51
  Speaker 1: it biases them towards hedge funds because of their historic performance.
• 14:55
  Speaker 1: Let's let's put more flesh on this. So if you're
• 14:57
  Speaker 1: a public pension fund that let's use Jersey is an example,
• 15:01
  Speaker 1: because there's such a mess anyway. So the New Jersey
• 15:04
  Speaker 1: pension funds sets up what they're expected returns are, and
• 15:07
  Speaker 1: they create that number by saying, here's the historical returns
• 15:11
  Speaker 1: of stocks, here's restored historical returns of bonds. And oh
• 15:15
  Speaker 1: look how giant there are expected returns are for hedge funds.
• 15:20
  Speaker 1: And that means that New Jersey has a smaller tax
• 15:24
  Speaker 1: obligation to put money into the state pension. That's entirely correct,
• 15:28
  Speaker 1: and so taking hedge funds out would cause their unfunded
• 15:32
  Speaker 1: position to be worse and put more pressure on the
• 15:35
  Speaker 1: governor to add, you know, to raise taxes. Even though
• 15:38
  Speaker 1: hedge funds have been as a group, have been significantly
• 15:41
  Speaker 1: underperforming mutual funds and certainly underperforming the index. Aren't we
• 15:47
  Speaker 1: just creating a giant, bigger problem down the road. Aren't
• 15:51
  Speaker 1: we just kicking the can? Yeah? The can is totally wrong.
• 15:53
  Speaker 1: And in fact, the other end of that is if
• 15:55
  Speaker 1: if a pension fund own treasury bills, which they wouldn't,
• 15:58
  Speaker 1: but if they did, and they pay what quarter percent,
• 16:01
  Speaker 1: and that affects they're expected return and the discover rate
• 16:04
  Speaker 1: on their liabilities. If they burned the cash that was
• 16:07
  Speaker 1: in those trosury bills as opposed to keeping them, if
• 16:10
  Speaker 1: they literally if they burned on my fire, it would
• 16:13
  Speaker 1: drive up their expected return because cash is a drag,
• 16:16
  Speaker 1: and that higher expected return would translate into a lower
• 16:19
  Speaker 1: present value of their obligations. And so that actually look
• 16:22
  Speaker 1: as if they're in better shape even after destroying some
• 16:25
  Speaker 1: of the assets that they would use to meet those obligations.
• 16:28
  Speaker 1: And it's obviously, you know, an unrealistic example, but the
• 16:31
  Speaker 1: math is what it is. You put in an asset
• 16:34
  Speaker 1: with a high expected return, it makes your funny position
• 16:37
  Speaker 1: look better regardless of how those assets do. And so
• 16:41
  Speaker 1: it's a huge problem and it's unlikely to be a
• 16:43
  Speaker 1: crisis because it unfolds over time, but it's to the
• 16:47
  Speaker 1: cost of taxpayers in any state, including New Jersey where
• 16:51
  Speaker 1: I live, who have that. I'm very ritolts. You're listening
• 16:55
  Speaker 1: to Master's in Business on Bloomberg Radio. My special guest
• 16:58
  Speaker 1: today is Simon lack of sl Advisors. He previously spent
• 17:02
  Speaker 1: twenty three years with JP Morgan, where he spent a
• 17:06
  Speaker 1: good part of his time allocating money to hedge funds
• 17:09
  Speaker 1: and other alternative investments. Let's talk a little bit about
• 17:15
  Speaker 1: something that has come up in one of your books,
• 17:17
  Speaker 1: Wall Street Potholes, about what is now called the fiduciary rule.
• 17:23
  Speaker 1: When when we look at people like your attorney, or
• 17:27
  Speaker 1: your accountant, or even your doctor, they're all obligated by
• 17:31
  Speaker 1: law to serve your interests. Why shouldn't financial advisors have
• 17:36
  Speaker 1: that same obligation. Yeah, I mean it's a fair question.
• 17:39
  Speaker 1: I think that a lot of investors think they aren't
• 17:42
  Speaker 1: dealing with the fiduciary when they're really not. And I
• 17:45
  Speaker 1: think that the easiest solution is to just ensure fair
• 17:49
  Speaker 1: disclosure that if you're not a fiducier, that your business
• 17:51
  Speaker 1: card says I'm not a fiduciary. Because there's also a
• 17:54
  Speaker 1: big segment of the investor market who perceives that dinner
• 17:58
  Speaker 1: with the fiduciary is more expensive because the fiduciary is
• 18:00
  Speaker 1: going to charge an asset fee and there's a lot
• 18:04
  Speaker 1: of ass who say, look, I don't want to just
• 18:05
  Speaker 1: pay you a fee every quarter just for my money
• 18:07
  Speaker 1: sitting now. I want to pay you a fee when
• 18:09
  Speaker 1: I do a transaction, which is the non fiduciary model.
• 18:12
  Speaker 1: And I think that the regulations should be flexible enough
• 18:15
  Speaker 1: to allow both of those to exist. But I certainly
• 18:19
  Speaker 1: think it should be disclosed. People should know whether they're
• 18:21
  Speaker 1: dealing with a fiduciary or not. What what about twelve
• 18:24
  Speaker 1: B one fees? Where advisors and and and we you know,
• 18:28
  Speaker 1: we run into a nomenclature title issue when we have brokers, advisors,
• 18:34
  Speaker 1: registered representatives, go down the list of names. Not all
• 18:38
  Speaker 1: of these people are fiduciaries. And some of these people
• 18:41
  Speaker 1: are both brokers and fiduciaries depending on what had they
• 18:45
  Speaker 1: happen to be wearing at that moment. It's still relatively complicated,
• 18:49
  Speaker 1: isn't it. It's complicated for people don't understand and and
• 18:52
  Speaker 1: so it's a very very highly regulated industry barriers, you know,
• 18:57
  Speaker 1: and it's hard for me to believe that even more regulations,
• 18:59
  Speaker 1: the answer it should be just explained clearly to people.
• 19:03
  Speaker 1: So you're in favor of transparency and disclosure, not full
• 19:06
  Speaker 1: on fiduciary obligation. Right, But disclosure doesn't mean that it's
• 19:11
  Speaker 1: buried in a document. Disclosure means it's on your business card. Really,
• 19:15
  Speaker 1: I mean, really it should be really. So if I'm so,
• 19:18
  Speaker 1: I've I've previously had a Series seven, which I gave up,
• 19:22
  Speaker 1: and I've also had a sixty five. The series seven
• 19:25
  Speaker 1: is the brokerage license. The sixty five is the advisory license,
• 19:29
  Speaker 1: and I found complying with all of the rules as
• 19:34
  Speaker 1: an advisor. The fiduciary standard is incredibly simple. The governing
• 19:40
  Speaker 1: question is what's in the client's best interest. You have
• 19:43
  Speaker 1: a lot more room as a broker to do things,
• 19:46
  Speaker 1: but the compliance is much more complex, absolutely right. And
• 19:49
  Speaker 1: in my business, I'm a fiduciary, and it's dead simple.
• 19:52
  Speaker 1: You just do what's right for the clan. As you say,
• 19:55
  Speaker 1: the broker dealer model, where you're not where you have
• 19:57
  Speaker 1: the lower standard, there's so much potential for conflicts. So
• 20:00
  Speaker 1: there's so many more rules and regulations. So let's let's
• 20:03
  Speaker 1: talk about that a little bit. How if you want
• 20:06
  Speaker 1: to have a disclosure obligation on non fiduciaries, do you
• 20:10
  Speaker 1: simply want their business card to include the word non fiduciary.
• 20:13
  Speaker 1: Is it that simple? I mean, maybe it would say,
• 20:15
  Speaker 1: you know, my responsibility is to act as an agent
• 20:18
  Speaker 1: of the company I work for. Some wording non fiduciary
• 20:21
  Speaker 1: might be you're telling me that wouldn't be in six
• 20:23
  Speaker 1: point tiny text. They can regularly sec regulation fund size
• 20:27
  Speaker 1: as we do. So I'm thinking about things like twelve
• 20:30
  Speaker 1: B one rules where mutual funds and this goes way
• 20:35
  Speaker 1: back to two when this wasn't an especial lucrative business.
• 20:39
  Speaker 1: Um mutual funds were paying brokerage firms for carrying their
• 20:44
  Speaker 1: product line, just like various food companies pay for shelf
• 20:48
  Speaker 1: space in a supermarket. Hey, you want to be eye level,
• 20:51
  Speaker 1: You want to be at the end of the row.
• 20:53
  Speaker 1: You don't want to be on the bottom shelf in
• 20:55
  Speaker 1: the middle of your lost So various fun families would
• 20:58
  Speaker 1: pay these fees, and it really wasn't well understood, and
• 21:03
  Speaker 1: whatever disclosure there was, we're buried in pages and pages
• 21:07
  Speaker 1: of fine print. Nobody really understood that, And so the
• 21:11
  Speaker 1: disclosure can always be better. But also investors have a
• 21:15
  Speaker 1: responsibility to invest the time to understand that. I mean,
• 21:20
  Speaker 1: it doesn't have to be that expensive to invest money
• 21:22
  Speaker 1: and you don't have to be paying twelve B one
• 21:25
  Speaker 1: fees or loads. You know, we run a mutual fund
• 21:27
  Speaker 1: in my business, and you can access it very cheaply
• 21:29
  Speaker 1: through SHOUB and Fidelity with I shares with no upfront fees,
• 21:33
  Speaker 1: or you can access it for a financial advisor, where
• 21:35
  Speaker 1: there will be some fees. And so it really is
• 21:38
  Speaker 1: up to the investor to decide do I want to
• 21:40
  Speaker 1: go into this fund through an advisor and pay for
• 21:43
  Speaker 1: him for the advice and that may be justified, or
• 21:45
  Speaker 1: am I happy doing my own research? And I think
• 21:48
  Speaker 1: that that, you know, the vast majority of retail investors
• 21:51
  Speaker 1: don't do enough hard work and research on who's going
• 21:55
  Speaker 1: to be investing the money and how and the economics
• 21:57
  Speaker 1: around that. They're so focused on warching an individual stock
• 22:01
  Speaker 1: they forget that there's alpha creation outside of just assets.
• 22:06
  Speaker 1: So we call that organizational alpha. It's absolutely right. I
• 22:09
  Speaker 1: mean a case in point is, you know, we we
• 22:12
  Speaker 1: specialize in energy infrastructure, and there's fifty billion dollars of
• 22:16
  Speaker 1: mutual funds and ETFs that are taxed as corporations, and
• 22:20
  Speaker 1: so only sixty of the return on those assets goes
• 22:23
  Speaker 1: to the class MLP or something like that. That's I mean,
• 22:26
  Speaker 1: so investors are paying, they're investing in funds where only
• 22:29
  Speaker 1: two thirds of the return goes back to them, and
• 22:33
  Speaker 1: I can tell you the vast majority don't even realize
• 22:35
  Speaker 1: that they're subject of this tax, and it just shows
• 22:38
  Speaker 1: that they don't read the prospectuses. I'm very redults. You're
• 22:41
  Speaker 1: listening to Masters in Business on Bloomberg Radio. My guest
• 22:44
  Speaker 1: today is Simon lack of sl Advisors. He spent twenty
• 22:48
  Speaker 1: three years in the trenches at JP Morgan, where, amongst
• 22:51
  Speaker 1: other things, he allocated a ton of money to various
• 22:55
  Speaker 1: hedge fund managers and UH founded a few incubator funds
• 23:00
  Speaker 1: that specialized in emerging managers. Let's let's talk about your
• 23:04
  Speaker 1: most recent book, Wall Street Potholes. You are very critical
• 23:10
  Speaker 1: of the industry where we apply our trades. Tell me
• 23:15
  Speaker 1: what the pushback to the book was. I think generally
• 23:17
  Speaker 1: has been well received. I mean, Wall Street's got mostly
• 23:21
  Speaker 1: honest people, but not everybody, and it's certainly a very
• 23:24
  Speaker 1: expensive place to do business at its worst. And so
• 23:27
  Speaker 1: the goal of that book was to try and educate
• 23:30
  Speaker 1: the clients, not to get Wall Street to change what
• 23:32
  Speaker 1: it's doing, but make the clients better educated, so they
• 23:35
  Speaker 1: can be more discriminating and ask better questions about what
• 23:38
  Speaker 1: they're paying for. I'm so glad you say that you
• 23:41
  Speaker 1: said that, because I've said this to people and they
• 23:44
  Speaker 1: look at me like I have two heads. My reputation
• 23:47
  Speaker 1: has been a critic of Wall Street, and when I say,
• 23:50
  Speaker 1: most of the people I know who are can finance
• 23:52
  Speaker 1: are completely honest. Some of them have their compensation system
• 23:57
  Speaker 1: missile misaligned, but it's always us a handful of bad Yeah.
• 24:02
  Speaker 1: Absolutely absolutely. I mean, like you, I've got a lot
• 24:04
  Speaker 1: of friends in the business, right, These are honest people.
• 24:07
  Speaker 1: I mean, it's not that the industry is dishonest. You
• 24:09
  Speaker 1: get some bad actors, and you get I think you know,
• 24:13
  Speaker 1: complexity and insufficient research by investors, and you get people
• 24:17
  Speaker 1: being charged too much for things or inappropriate products, and
• 24:20
  Speaker 1: the subsequent effects when people are dishonest in this industry
• 24:24
  Speaker 1: are outsized. It's billions of dollars and the spillover effect
• 24:28
  Speaker 1: of the real economy can be very destential. Yeah. So
• 24:31
  Speaker 1: let's talk about about some of the potholes you reference
• 24:34
  Speaker 1: in the book Non Traded Reads. Let's discuss this a
• 24:38
  Speaker 1: security that should not exist. It's a disgusting product it really,
• 24:43
  Speaker 1: I mean that might say that might be one of
• 24:45
  Speaker 1: that might be the worst investment that could ever be
• 24:48
  Speaker 1: sold to retail. Really, So the fees fifteen points, I mean,
• 24:52
  Speaker 1: if you think hedge funds are expensive, fifteen points of
• 24:54
  Speaker 1: upfront fees. Now, I saw one piece of two and
• 24:59
  Speaker 1: twent fifty. You put in a hundred dollars, you've got
• 25:03
  Speaker 1: eighty five dollars on day One's working for you. I
• 25:06
  Speaker 1: saw one. At least it's liquid and you could sell
• 25:08
  Speaker 1: at anytime you want. Yeah. I saw one piece of
• 25:10
  Speaker 1: research saying non traded reachs, which of course are not
• 25:13
  Speaker 1: liquid and can't be solved, and being sarcastic, I understand,
• 25:16
  Speaker 1: and non traded reads are better than the publicly traded
• 25:19
  Speaker 1: reads because they have less volatility. Sure, and they have
• 25:23
  Speaker 1: less volatility because the prices don't move because they're not traded.
• 25:27
  Speaker 1: My house has no volatility, so it doesn't trade every so. Yes.
• 25:30
  Speaker 1: So so this fellow said that the illiquidity of non
• 25:34
  Speaker 1: traded reachs benefited the long term investor because it prevents
• 25:38
  Speaker 1: you from making an impulsive and self destructive decision to
• 25:41
  Speaker 1: sell it because you can't. And it's so stupid. I mean,
• 25:45
  Speaker 1: it's so self serving. I couldn't believe that this fellow
• 25:48
  Speaker 1: was much less volatility. You know, that's we build a
• 25:53
  Speaker 1: gate in that prevents you from selling this for your
• 25:57
  Speaker 1: own your own good and then of also littered with
• 26:00
  Speaker 1: conflicts of interest. And it seems to be that if
• 26:03
  Speaker 1: you tell investors how many ways you're going to screw them,
• 26:07
  Speaker 1: it's okay to go and screw them. Disclose, disclose it.
• 26:10
  Speaker 1: So what I'll say, well, how you're going to lose
• 26:11
  Speaker 1: your fortune? So even though a reat is supposed to
• 26:14
  Speaker 1: invest in real estate, they charge you additional fees to
• 26:16
  Speaker 1: buy real estate, to manage it, and to sell it.
• 26:19
  Speaker 1: There's extra incentive fees paid to the management. There's there's
• 26:22
  Speaker 1: granting of extra shares to the management. I mean, it's
• 26:25
  Speaker 1: utterly anybody who has sold non traded reads honestly should
• 26:30
  Speaker 1: not feel that good about what they've been. So two
• 26:32
  Speaker 1: questions about this, and and by the way, I've had
• 26:35
  Speaker 1: some friends who have written about it very very negatively,
• 26:37
  Speaker 1: very disparagingly. Two questions. First, how much money is in
• 26:41
  Speaker 1: non traded reads? Oh? Today, I don't know it's going
• 26:45
  Speaker 1: to be in the it's going to be in the
• 26:47
  Speaker 1: hunters of billions. Oh really, I think it's Yeah, I
• 26:50
  Speaker 1: think it's going to be in the low hunt. My
• 26:51
  Speaker 1: guests would be a couple hundred billion dollars. And I
• 26:54
  Speaker 1: may be confusing this vehicle with another one, but wasn't.
• 26:57
  Speaker 1: Non traded reads are writtenly set up for a very
• 27:01
  Speaker 1: very unique and specific purpose, and now it's just been
• 27:04
  Speaker 1: completely morphed into something else. Like what who who said?
• 27:08
  Speaker 1: What was the thinking behind the original non traded I
• 27:12
  Speaker 1: think I don't know the answer, but I believe that
• 27:15
  Speaker 1: they are sort of arbitrage in the regular system because
• 27:19
  Speaker 1: non traded rates are registered securities, and the register they
• 27:22
  Speaker 1: could be sold to anybody, but by no accreditation requirements,
• 27:27
  Speaker 1: any suitability issues, not there for your suitability lament. But
• 27:31
  Speaker 1: they're basically their their public securities. But because they're not
• 27:35
  Speaker 1: publicly traded, they don't draw any research because there's no commissions.
• 27:39
  Speaker 1: And so if you're going to design a security that
• 27:42
  Speaker 1: really does fleece investors, you don't want sell side resource
• 27:45
  Speaker 1: to write about it. So if it's not traded, there's
• 27:46
  Speaker 1: no commissions, there's no incentive to write research about it,
• 27:49
  Speaker 1: so you can stay in the shadows because there's no
• 27:52
  Speaker 1: money to be made being critical of non traded rich
• 27:54
  Speaker 1: has the SEC looked into making these sec to their credit?
• 27:58
  Speaker 1: Has an investor Alerts page on their website which has
• 28:02
  Speaker 1: non traded rates on there. Don't buy this. So you
• 28:05
  Speaker 1: could ask your own investment advisor do you push products
• 28:09
  Speaker 1: that are the subject of an SEC investor alert? And
• 28:13
  Speaker 1: if yes, why that would be a fair question. That
• 28:15
  Speaker 1: is a fair question. Let's talk about structured notes. Why,
• 28:19
  Speaker 1: what are structured notes and why are they rarely the
• 28:22
  Speaker 1: best choice? So structured notes are basically securities that give
• 28:27
  Speaker 1: you exposure to the return on an asset class, generally
• 28:31
  Speaker 1: with some barrier or some protection against losing more than
• 28:34
  Speaker 1: a certain amount of money. And of course structured notes
• 28:38
  Speaker 1: are created by Wall Street banks issuing them and then
• 28:41
  Speaker 1: hedging the risk out, generally with options, and so you
• 28:44
  Speaker 1: can always create the same exposure yourself with options if
• 28:46
  Speaker 1: you want to counter party risk. Counterparty risk because there
• 28:51
  Speaker 1: will be three to five points of fees that are
• 28:54
  Speaker 1: taken out that are very hard to discern after you've
• 28:58
  Speaker 1: done the transaction, and so almost anything you can do
• 29:00
  Speaker 1: with a structured note you could do more cheaply elsewhere.
• 29:03
  Speaker 1: So a previous guest was Ken Fisher of Fisher Investments,
• 29:06
  Speaker 1: and if you go anywhere on the internet you'll see
• 29:09
  Speaker 1: Ken's ads. I hate a nuties, but not all types.
• 29:13
  Speaker 1: Click here to find out why. Tell me what your
• 29:15
  Speaker 1: thoughts are on both fixed and variable and nuities. I mean,
• 29:19
  Speaker 1: annuity is generally a terrible because once you're in, you
• 29:22
  Speaker 1: can't get out, and you can't see what the fees are. Right,
• 29:25
  Speaker 1: it's not even visible to what the fees are, and
• 29:28
  Speaker 1: there's exit cost if you want to cancel it, and
• 29:31
  Speaker 1: you can't see what the return is going to be
• 29:32
  Speaker 1: relative to the index. So their whole products, and of
• 29:35
  Speaker 1: course the people who issue anuities are just investing your
• 29:38
  Speaker 1: money in stocks and bonds to create that return, taking
• 29:41
  Speaker 1: out several points of fees in the process. People don't
• 29:44
  Speaker 1: realize that annuity is just a wrapper around whatever portfolio
• 29:47
  Speaker 1: you wanted to be exactly. By the way, if you
• 29:51
  Speaker 1: look at um the nonprofit version of four in one
• 29:54
  Speaker 1: case four or three b s, and you drill down
• 29:57
  Speaker 1: into what's offered for teachers at various public schools, it's
• 30:03
  Speaker 1: something like seventy plus percent our annuities and the only
• 30:07
  Speaker 1: the best reason to own an annuity is because you've
• 30:09
  Speaker 1: already exhausted all your other tax deferrals. But a four
• 30:13
  Speaker 1: H three B is a tax deferdentity. Why are you
• 30:15
  Speaker 1: putting a tax de ferdentity in a tax to ferdentity
• 30:18
  Speaker 1: with a giant fee. It's a bad name. It's well,
• 30:25
  Speaker 1: this is mostly insurance, not so much. That's true. That's true,
• 30:28
  Speaker 1: and there's a proper usage of annuities, but I assure
• 30:31
  Speaker 1: you that is not it. So so what about high
• 30:36
  Speaker 1: frequency trading? You've you've called it a tax. Other people.
• 30:41
  Speaker 1: Bill McNab a Vanguard says that there's a way to
• 30:43
  Speaker 1: work within it. It narrow spreads and makes everything cheaper.
• 30:47
  Speaker 1: I tend to be more in your camp. Someone's got
• 30:50
  Speaker 1: to pay for that, and it's really the investor. Yeah,
• 30:53
  Speaker 1: I mean, it's a very complex topic. I thought Michael
• 30:56
  Speaker 1: Lewis wrote a fantastic book about that with Flashboys. What.
• 31:00
  Speaker 1: He's a terrific writer anyway. But um, there may be
• 31:04
  Speaker 1: some liquidity benefits from high frequency trading, but the fact
• 31:08
  Speaker 1: that it's in many cases based on faster access to
• 31:11
  Speaker 1: the markets and using connectivity and fiber optics to beat
• 31:15
  Speaker 1: you to the price. I mean, Michael Lewis goes through
• 31:18
  Speaker 1: the example of essentially front running h f T algorithms
• 31:21
  Speaker 1: front running you know, a human driven order. I mean,
• 31:25
  Speaker 1: if a human was doing what these algorithms are doing
• 31:27
  Speaker 1: to be illegal, and so clearly they shouldn't be allowed
• 31:30
  Speaker 1: to do that. In in Flesh In Flesh Boys, he
• 31:34
  Speaker 1: describes as soon as you come out of the Holland
• 31:37
  Speaker 1: Tunnel on the New Jersey side, opposite Wall Street is
• 31:40
  Speaker 1: a whole run of buildings and they're essentially ghost buildings,
• 31:43
  Speaker 1: just filled with floors of servers. And the reason they're
• 31:46
  Speaker 1: there is it's physically closest to the street without actually
• 31:50
  Speaker 1: being in Manhattan. You can actually get space because the
• 31:54
  Speaker 1: latency the closer you are, the faster the thing. It's
• 31:58
  Speaker 1: the speed of way. And the New York's Stock Exchange
• 32:01
  Speaker 1: renting out space for service to reduce latency is clearly
• 32:05
  Speaker 1: not in the public interest. I mean, I think the
• 32:07
  Speaker 1: New York's docquestration should be utility. It should never have
• 32:09
  Speaker 1: been converted into it for profit entity anyway, couldn't possibly
• 32:11
  Speaker 1: agree more. Let's let's talk about leveraged e T F.
• 32:16
  Speaker 1: I really am interested in this three time leveraged inverse
• 32:19
  Speaker 1: s and P funds. Tell me why I'm an idiot
• 32:22
  Speaker 1: from wanting to buy that. I mean, there's no way
• 32:26
  Speaker 1: that anybody achieves their investment objectives with with two or
• 32:29
  Speaker 1: three times levered e t s. And in fact they're
• 32:32
  Speaker 1: designed if you read through the perspectives is it tells
• 32:36
  Speaker 1: you that they're designed to eventually go to zero. So
• 32:39
  Speaker 1: the course of explain why, because people really don't understand,
• 32:42
  Speaker 1: it's because of the negative effect of compounding. It's sort
• 32:45
  Speaker 1: of like, if you imagine a security goes up by
• 32:47
  Speaker 1: ten percent, by a security a hundred dollars goes up
• 32:50
  Speaker 1: by ten hundred ten if it goes down by ten percent,
• 32:53
  Speaker 1: it goes to So it's gone up and down by
• 32:55
  Speaker 1: ten percent, but you're a dollar worse off. That's what
• 32:58
  Speaker 1: compounding does. We have been speaking with Simon lack of
• 33:02
  Speaker 1: sl Advisers. If you enjoy this conversation, be sure and
• 33:06
  Speaker 1: stick around and check out the podcast extras, where we
• 33:09
  Speaker 1: continue chatting about all things financial and Wall Street. Be
• 33:14
  Speaker 1: sure and check out my daily column on Bloomberg View
• 33:17
  Speaker 1: dot com. You can follow me on Twitter at rid Halts.
• 33:22
  Speaker 1: We love your comments, feedback and suggestions right to us
• 33:26
  Speaker 1: at m IB podcast at Bloomberg dot net. I'm Barry
• 33:30
  Speaker 1: rid Halts. You've been listening to Masters in Business on
• 33:33
  Speaker 1: Bloomberg Radio. Hey guys, let me ask you a question.
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• 34:18
  Speaker 1: Welcome to the podcast. I don't know why I do that.
• 34:20
  Speaker 1: I do that every time, Simon, thank you so much
• 34:22
  Speaker 1: for doing this. I've been looking forward to this for
• 34:25
  Speaker 1: a long time. And and a little background. I have
• 34:28
  Speaker 1: to share the story because it's it's so true. I
• 34:32
  Speaker 1: won't mention the name of the group, but there's a
• 34:35
  Speaker 1: wealthy group that is notorious for inviting people to speak
• 34:40
  Speaker 1: to present to their conference, and they don't want to
• 34:43
  Speaker 1: pay anybody for it. And my you know, if you're
• 34:46
  Speaker 1: a nonprofit. If your school, I've spoken, we actually met.
• 34:50
  Speaker 1: We met at the Harvard Kendidy, I've spoken an n
• 34:53
  Speaker 1: y U, Columbia, m I T University, Wash, I've spoken
• 34:56
  Speaker 1: all over. If you're a nonprofit, I don't feel the
• 34:59
  Speaker 1: needs to stick my hand in your pocket. If you're
• 35:01
  Speaker 1: a billion dollar entity and you're not a client and
• 35:04
  Speaker 1: I want to you want me to come chat, I'm
• 35:07
  Speaker 1: happy to just share of the right. I think it's
• 35:11
  Speaker 1: pretty So this group was hounding me. I don't remember
• 35:16
  Speaker 1: what happened, but for whatever reason, maybe it was bail
• 35:19
  Speaker 1: Out Nation, for whatever reason, suddenly my phones are lighting up,
• 35:25
  Speaker 1: and I know their audience. I know who their clientele is,
• 35:32
  Speaker 1: very very wealthy people who I think should read your
• 35:35
  Speaker 1: book because they're there. Their capital is malinvested, misinvested, and
• 35:42
  Speaker 1: they don't Professor Meyer Stateman would say they're investing for
• 35:47
  Speaker 1: expressive reasons, not utilitarian return on capital. And so I
• 35:56
  Speaker 1: finally say, Okay, I'm gonna do your conference, but it's
• 36:04
  Speaker 1: it's gonna be my presentation. It's not going to be
• 36:06
  Speaker 1: what you want. And they said fine, So I created
• 36:10
  Speaker 1: the presentation called Romancing Alpha Forsaking Beta. We happen to
• 36:14
  Speaker 1: be recording this the day after Valentine's Day, and all
• 36:20
  Speaker 1: of the data points or much of the data points
• 36:23
  Speaker 1: from within your book ended up in my presentation. Really
• 36:27
  Speaker 1: it's the other way around. Most of the presentation data
• 36:30
  Speaker 1: points came from you, or or certainly at least the start.
• 36:34
  Speaker 1: And and some of my favorite um numbers that that
• 36:39
  Speaker 1: I brought into the presentation. I just have to share
• 36:43
  Speaker 1: two of these because they're insane. In two thousand and eight,
• 36:47
  Speaker 1: the hedge fund industry lost more money than all the
• 36:50
  Speaker 1: profits it had generated during the prior decade, possibly more
• 36:55
  Speaker 1: than it had generated. Ever, how on earth is that?
• 36:59
  Speaker 1: Possibly it's amazing, isn't it. I think that's just amazing,
• 37:03
  Speaker 1: And for his for an industry that used to call
• 37:05
  Speaker 1: itself the absolute return industry. I mean, a R magazine
• 37:10
  Speaker 1: is called that because of the industry it covers. But
• 37:12
  Speaker 1: hedge funds, of course, over time moved the goalposts or
• 37:15
  Speaker 1: the consultants moved because it was an absolute return, because
• 37:18
  Speaker 1: obviously they lost the huture amount in two thousand and eight,
• 37:21
  Speaker 1: and then it was relative return. But then their relative
• 37:24
  Speaker 1: returns have also been pretty bad, so now it's an
• 37:27
  Speaker 1: uncorrelated returns that you're looking for, and they are uncorrelated
• 37:30
  Speaker 1: because they're pretty bad and the worst the most other
• 37:32
  Speaker 1: things you can invest in. So they just got too big.
• 37:35
  Speaker 1: I mean, the industry showed that at a trillion dollars
• 37:39
  Speaker 1: there's enough opportunities to generate attractive returns, and you go
• 37:43
  Speaker 1: above a trillion dollars, there aren't. And it's a form
• 37:46
  Speaker 1: of sort of cognitive dittizens by investors that they don't recognize.
• 37:50
  Speaker 1: This driven in part by the consultants and the mechanic
• 37:53
  Speaker 1: treament that we discussed a little earlier. I've found that
• 37:56
  Speaker 1: the errata of the pension ones are different than the
• 38:02
  Speaker 1: rata of the meaning the misunderstanding and misallocation of the
• 38:07
  Speaker 1: high net worth individual. There is a lot of bragging rights,
• 38:11
  Speaker 1: even to say on the links my hedgephone money, this
• 38:15
  Speaker 1: guy is killing me. He used to be so hard,
• 38:17
  Speaker 1: you know, he's crushing me this year. I don't know
• 38:19
  Speaker 1: what I'm gonna do with this guy. That is a
• 38:22
  Speaker 1: form of social signaling and bragging, and I didn't realize
• 38:26
  Speaker 1: that until fairly I think that's true. But you know,
• 38:29
  Speaker 1: the high net worth investors are generally smart people. Because
• 38:32
  Speaker 1: you have to be smart to be to get rich. No,
• 38:35
  Speaker 1: not not always. You can be lucky, right, But they're
• 38:38
  Speaker 1: not the big attention investors that, no, they're not. And
• 38:41
  Speaker 1: you know what, when you hear this term sophisticated institutional investor,
• 38:45
  Speaker 1: I'm telling you public pension plans are some of the
• 38:48
  Speaker 1: least sophisticated people I've ever met. I have to share
• 38:50
  Speaker 1: a quick war story, and I may have shared this previously.
• 38:54
  Speaker 1: After the presentation. You and I each gave a presentation
• 38:58
  Speaker 1: at the Kennedy School, which was filled with um representatives
• 39:03
  Speaker 1: of various endowments and state pension funds. Apparently someone went
• 39:08
  Speaker 1: back to their state pension fund to trustee and said, hey,
• 39:12
  Speaker 1: you know this guy Ridholtz told an interesting story. You
• 39:15
  Speaker 1: might want to have him come speak to the advisory board.
• 39:19
  Speaker 1: So I get an invitation, and you know, again, nonprofit.
• 39:23
  Speaker 1: I'm happy to do it for free. And I won't
• 39:26
  Speaker 1: identify them, but I'm sitting I get arrived early, and
• 39:29
  Speaker 1: I'm sitting in the back of the room, and I'm
• 39:31
  Speaker 1: listening to one hedge fund consultant after another do their presentation,
• 39:36
  Speaker 1: and and my carefully crafted bullet points throw them out
• 39:42
  Speaker 1: the window and I immediately figured out these guys are
• 39:46
  Speaker 1: never going to do business with me until there's a
• 39:49
  Speaker 1: wholesale slaughter and replacement of every person in that room.
• 39:52
  Speaker 1: They're doomed. They're just going to cost the taxpayer billions
• 39:56
  Speaker 1: of dollars down down the road. So I basically said,
• 40:00
  Speaker 1: I prepared a nice, tidy presentation, but you don't want
• 40:03
  Speaker 1: to hear it. I'm going to tell you something else.
• 40:06
  Speaker 1: And I proceeded to destroy all the nonsense that I
• 40:10
  Speaker 1: had heard in the previous hour and said said, I
• 40:13
  Speaker 1: don't understand why you would believe. And I used this
• 40:16
  Speaker 1: that's where that metaphor comes when when you're uh, when
• 40:20
  Speaker 1: your scouts come out and tell you this guy is
• 40:22
  Speaker 1: the greatest picture ever, this is the greatest batter we've
• 40:25
  Speaker 1: ever seen. And year after year they're sending you one
• 40:28
  Speaker 1: bumb after another, and all these guys wash out of
• 40:30
  Speaker 1: the league. Why do you keep listening to them? All
• 40:33
  Speaker 1: I heard was here's why we did so terribly last year.
• 40:37
  Speaker 1: But at least you're you know you're you're paying a
• 40:39
  Speaker 1: lot for it. And here's why we're gonna do better
• 40:40
  Speaker 1: next year. It's it's come for the under performance, stay
• 40:44
  Speaker 1: for the high fees. And I don't mean to imply
• 40:47
  Speaker 1: that there aren't hedge funds that do really, really well.
• 40:50
  Speaker 1: It's that these guys have no ability to find them,
• 40:54
  Speaker 1: to manage them, and to know how to say, okay,
• 40:57
  Speaker 1: it's time to move on. Well, that's absolutely right. Unless
• 41:00
  Speaker 1: an interesting thing about how you should use hedge funds
• 41:02
  Speaker 1: because hedge fund returns on average of poor. So generally,
• 41:06
  Speaker 1: if you're investing in an asset class, you want diversification.
• 41:09
  Speaker 1: That's the only free lunch. But that's assuming that the
• 41:12
  Speaker 1: asset class has an average return that you want. Now,
• 41:14
  Speaker 1: because with hedge funds, you don't want the average return.
• 41:18
  Speaker 1: Diversification is going to make it more likely that you
• 41:21
  Speaker 1: get the average. The only way to be a hedge
• 41:24
  Speaker 1: fund investor and be successful is to be good at
• 41:26
  Speaker 1: picking funds. And certainly less than half the people, right
• 41:31
  Speaker 1: I mean I say less, I would say it's a
• 41:35
  Speaker 1: very small percentage. Maybe you know there's a quote I've
• 41:38
  Speaker 1: been trying to chase down, and the earliest mention I
• 41:41
  Speaker 1: found of it, I want to say in the ft,
• 41:44
  Speaker 1: and I don't remember was the late nineties or early
• 41:47
  Speaker 1: two thousand's, and the quote goes something like a hedge
• 41:52
  Speaker 1: fund is a wealth transference vehicle masquerading as an asset class. Yeah, well,
• 41:58
  Speaker 1: I mean that sounds like something buff it would say
• 42:00
  Speaker 1: your Charlie Manga, right, But I've never been able to
• 42:04
  Speaker 1: track the first one. I want to say it was
• 42:08
  Speaker 1: early two thousands or late nineties, and I know I'm
• 42:11
  Speaker 1: sorry it was the economist, not the f T. But
• 42:13
  Speaker 1: I've never been able to find the original quote for that.
• 42:18
  Speaker 1: I mean, you've got to love that bet the Buffett
• 42:20
  Speaker 1: had with Protege, right, genius, I mean not even close.
• 42:24
  Speaker 1: And they went through the financial crisis with that bat
• 42:27
  Speaker 1: right he was in. This bet was done before two
• 42:30
  Speaker 1: so he had the whole collapse in stocks as well
• 42:32
  Speaker 1: as part of that. Vanguard has this wonderful chart showing
• 42:34
  Speaker 1: the effect of a two percent mutual fund versus a
• 42:37
  Speaker 1: ten basis point hedge fund and how that compounds over time,
• 42:42
  Speaker 1: and it was it was insane. The gap was huge.
• 42:47
  Speaker 1: So they redid it it one and a half percent,
• 42:49
  Speaker 1: and then they redid it a one percent, so it's
• 42:51
  Speaker 1: ten basis points versus one, and it's still enormous. How
• 42:55
  Speaker 1: on earth can you capture how can you make up
• 42:58
  Speaker 1: for the loss of two percent up front and then
• 43:03
  Speaker 1: of the net gains. Another data point from you that's
• 43:06
  Speaker 1: astonishing says that all right, total hedge fund profits two
• 43:12
  Speaker 1: thousand and ten, we're four hundred and fifty billion dollars
• 43:16
  Speaker 1: four nine billion dollars. Seventy billion of that went to investors,
• 43:21
  Speaker 1: three hundred and seventy nine billion were fees paid to
• 43:24
  Speaker 1: hedge funds. That's sixteen percent to the investors and to
• 43:29
  Speaker 1: the fund managers. Yeah, and I mean it's all based
• 43:32
  Speaker 1: on public data. I mean, anybody can figure this out.
• 43:34
  Speaker 1: You just take the assets on the manager for the
• 43:36
  Speaker 1: industry assumed two and twenty the returns of public and
• 43:39
  Speaker 1: so public I thought a lot of the routine industry returns,
• 43:43
  Speaker 1: so for those for that for those data, and it
• 43:46
  Speaker 1: was done very very conservatively, because we assume, for example,
• 43:50
  Speaker 1: that all hedge funds were charging incentive fee when CENTI fees,
• 43:54
  Speaker 1: and then they all stopped after the financial crisis, when
• 43:56
  Speaker 1: some still were, So we didn't adjust for survivor bias,
• 43:59
  Speaker 1: which the numbers it's something like a year wink out
• 44:03
  Speaker 1: of existence and a new batte because of the high
• 44:06
  Speaker 1: water mone. We didn't make any adjusts that, so that
• 44:09
  Speaker 1: worse than it's worse. It's definitely worse than that. And
• 44:12
  Speaker 1: and anybody recommending hedge funds should have to justify why
• 44:16
  Speaker 1: with those numbers it's a good place to put your money.
• 44:19
  Speaker 1: So here's my pushback, and let me anticipate the angry
• 44:22
  Speaker 1: emails there. And we mentioned this earlier. There are a
• 44:26
  Speaker 1: handful of managers who are spectacular, whether it's Jim Simons
• 44:31
  Speaker 1: or d Shaw or David Tepper or I could give
• 44:35
  Speaker 1: you a list, and what makes that list of cliff
• 44:37
  Speaker 1: astness is another one in Ray Dalio. What makes the
• 44:41
  Speaker 1: list so special, isn't that, Hey, these fifty guys are spected,
• 44:45
  Speaker 1: and it's almost all guys are spectacular managers representing the
• 44:49
  Speaker 1: hedge funds. They're the outliers. It's the other Yeah, And
• 44:53
  Speaker 1: you know, Berry, the people who are happiest with their
• 44:56
  Speaker 1: hedge fund investments recognize that the diversified, poor folio of
• 45:00
  Speaker 1: thirty forty hedge funds is never gonna be good. The
• 45:04
  Speaker 1: people that are happiest have a couple of hedge funds.
• 45:06
  Speaker 1: They have a couple, maybe they've got Ray Dahlio or
• 45:09
  Speaker 1: David Tepper, and they're not relying on hedge funds to
• 45:12
  Speaker 1: solve their underfunded pension problem. Right, They were relying on
• 45:15
  Speaker 1: hedgephones to add a little bit of something extra to
• 45:17
  Speaker 1: the portfolio. And those are the intelligent people. And that's
• 45:20
  Speaker 1: not the institutional approach to hedge fund invested, but that's
• 45:23
  Speaker 1: how the people who actually are successful of picking hedge
• 45:25
  Speaker 1: funds do it. I have to another war story. So
• 45:28
  Speaker 1: we review a lot of four and one ks in
• 45:30
  Speaker 1: the office for people, and I'm I'm reviewing. I'm reviewing
• 45:36
  Speaker 1: the four oh one K. I won't even mention the
• 45:38
  Speaker 1: field the persons in and I can't figure out. Wait,
• 45:44
  Speaker 1: First of all, the foreign K is immense for a
• 45:46
  Speaker 1: firm with a handful of people, Like how do you
• 45:49
  Speaker 1: have so much money? In this long story short when
• 45:53
  Speaker 1: the firm was forming and they formed their um from
• 45:58
  Speaker 1: form firm, their forgh one care the founders of the
• 46:02
  Speaker 1: firm we're working with. I think it was D sure,
• 46:05
  Speaker 1: I'm not positive. Which is a fund that has done
• 46:09
  Speaker 1: fabulously well. I left out Howard Marks is another guy.
• 46:12
  Speaker 1: Spectacular returns, d Shore, spectacular turns. And apparently when you're
• 46:18
  Speaker 1: when it's just a partnership, you can have hedge funds
• 46:21
  Speaker 1: in a four oh one k up to a certain point,
• 46:24
  Speaker 1: and then once you have a whole bunch of other employees,
• 46:28
  Speaker 1: it becomes complicated and hard to do. So the founding
• 46:33
  Speaker 1: partners original investment in d show the returns are mind boggling,
• 46:39
  Speaker 1: like a year for twenty years and they didn't touch it.
• 46:43
  Speaker 1: They left it alone. It grows tax free home run.
• 46:46
  Speaker 1: But but if you're not in the that sort of situation,
• 46:50
  Speaker 1: I think that situation is is the lottery ticket that
• 46:55
  Speaker 1: tempts everybody because there's always when it's just like in
• 46:58
  Speaker 1: a casino, there's always paid that are winning. Right, it's
• 47:01
  Speaker 1: very hard to That's why the bells and lights, they
• 47:03
  Speaker 1: make a lot of noise when the food machines play out, right. So, yeah,
• 47:06
  Speaker 1: there's always going to be hedge funds that are successful,
• 47:09
  Speaker 1: but there's not enough that a're libably successful to justify
• 47:11
  Speaker 1: having thirty or fourt These guys have been successful for decades.
• 47:16
  Speaker 1: How many hedge funds you know? Again it's that top fifty,
• 47:19
  Speaker 1: top hundred. And then of course when they're successful, they
• 47:21
  Speaker 1: don't need your money anymore, right, because they've made so
• 47:23
  Speaker 1: much in fees. They start to close and you know,
• 47:25
  Speaker 1: just managed to My favorite story is Jim Simmons of
• 47:29
  Speaker 1: Renaissance Technology. The Medallion Fund is their biggest, best a
• 47:35
  Speaker 1: year for thirty years. Stop and think about how insane
• 47:38
  Speaker 1: that is. And we know we know that's true because
• 47:44
  Speaker 1: I think it was eight or ten or twelve years
• 47:46
  Speaker 1: in they said to their outside investors, Hey, thanks a lot,
• 47:50
  Speaker 1: here's your capital back. We unfortunately can't use it anymore.
• 47:54
  Speaker 1: And that fun that Medallion Fund is only Simmons and
• 47:58
  Speaker 1: his employees. Yeah, so he's great and he's made a
• 48:02
  Speaker 1: normal huge fortune. I mean, it's it's mind box. That's
• 48:06
  Speaker 1: the only word for it. There's just nothing else. There
• 48:09
  Speaker 1: are funds that have been up a hundred percent for
• 48:11
  Speaker 1: a year or or triple digits, but that's a one off.
• 48:15
  Speaker 1: It's some crazy situations, extraordinary. But investors overestimate their ability
• 48:20
  Speaker 1: to access funds like that, right, and when they are good,
• 48:23
  Speaker 1: then they make so much money that I need yours.
• 48:25
  Speaker 1: So you were allocating billions of dollars to this asset
• 48:29
  Speaker 1: class for a long time. Did any of them, you know,
• 48:34
  Speaker 1: light up and have the bells and whistles go off,
• 48:36
  Speaker 1: Did any of them really hit the cover of the
• 48:39
  Speaker 1: ball or or what was what was in the nineties. Yeah,
• 48:42
  Speaker 1: in the nineties, Yeah, we we had some some great
• 48:45
  Speaker 1: funds that we're doing things that were very obscure at
• 48:48
  Speaker 1: the time. And then when I got into the seating business,
• 48:51
  Speaker 1: the hedge fund seating was all about making money from
• 48:54
  Speaker 1: the business of hedge funds. So in two thousands, in
• 48:57
  Speaker 1: other words, you're part of the You're not an LP,
• 48:59
  Speaker 1: you're we're GP. We were part of the general party
• 49:02
  Speaker 1: economic interest in the g P because we we we
• 49:06
  Speaker 1: felt at that time that institutions were going to start
• 49:09
  Speaker 1: looking for hedge funds and there was a lot of
• 49:11
  Speaker 1: money and the business of hedge funds was going to
• 49:13
  Speaker 1: be so much better than being a client of hedge funds.
• 49:16
  Speaker 1: And so that was how we say that again the
• 49:18
  Speaker 1: business of hedge funds. Being being a partner with hedge
• 49:21
  Speaker 1: funds was better than being an investor. And absolutely, So
• 49:24
  Speaker 1: what's the typical structure you want the back in those days,
• 49:29
  Speaker 1: we would put in twenty five million dollars in exchange
• 49:32
  Speaker 1: for the economics of the funds, so you were owner
• 49:37
  Speaker 1: of the g P x y Z Capital, Inc. And
• 49:41
  Speaker 1: then they would go out and using hey, GP Morgan
• 49:45
  Speaker 1: because is hard. So we'd be the first investor in
• 49:49
  Speaker 1: and so we wanted hedge funds obviously that could make money,
• 49:51
  Speaker 1: but that could grow as well. And in that strategy
• 49:55
  Speaker 1: we made so much more of our return from the
• 49:57
  Speaker 1: economics of the business. You know, the hedge returns ourselves
• 50:00
  Speaker 1: are kind of mediocre, but they were good enough to
• 50:02
  Speaker 1: raise assets, and it was sharing in the fees that
• 50:05
  Speaker 1: drove our returns. Performance. The performance was just it was
• 50:10
  Speaker 1: was okay, it wasn't great, but the fees really boosted
• 50:13
  Speaker 1: ours else up better than they would have been otherwise.
• 50:15
  Speaker 1: That that's similar to you you're selling the pics and
• 50:20
  Speaker 1: and shovels to the golden exactly. You're not out looking
• 50:23
  Speaker 1: for gold. You're absolutely that's absolutely fascinating. There's some other
• 50:27
  Speaker 1: questions I did not get to. I don't want to keep.
• 50:31
  Speaker 1: By the way, I have many friends who run hedge funds.
• 50:34
  Speaker 1: I am a fan of some of the biggest and
• 50:37
  Speaker 1: best hedge funds in the country. People always write me
• 50:40
  Speaker 1: and say, why do you spend so much time busting
• 50:43
  Speaker 1: on hedge funds. I don't mean to. I mean to
• 50:46
  Speaker 1: bust on people who make big promises and fail to
• 50:49
  Speaker 1: deliver and charge a big fee for film. I mean
• 50:52
  Speaker 1: you know what, I don't really blame the hedge fund managers.
• 50:55
  Speaker 1: I blame the investors and the consultants, because all the
• 50:58
  Speaker 1: hedge fund manager is doing is saying I think I've
• 51:01
  Speaker 1: got the best hedge fund, and any business owner is
• 51:04
  Speaker 1: entitled to say that. Hedge fund managers don't walk around
• 51:07
  Speaker 1: saying everybody should have a big hedge fund portfolio. They say, look,
• 51:11
  Speaker 1: I don't know about the industry. I just think I
• 51:12
  Speaker 1: want a great hedge fund. Did they contain thirty times
• 51:15
  Speaker 1: the earnings that are corporate executive retain for themselves? Meaning?
• 51:19
  Speaker 1: What why the feast? It's the greatest structure in the
• 51:23
  Speaker 1: world if you're side of it. But hedge fund managers
• 51:27
  Speaker 1: were the wrong business. Yes, yes, yeah, I don't want
• 51:29
  Speaker 1: a hedge fund. Obviously, you can't write the hedge fund
• 51:31
  Speaker 1: mirage and run a hedge fund. That wouldn't look too cool.
• 51:34
  Speaker 1: I want I want to I've actually joked about this privately,
• 51:39
  Speaker 1: but I'll out myself. I want to form a hedge
• 51:41
  Speaker 1: fund called bad Idea Capital. And the disclosure documents, every
• 51:46
  Speaker 1: paragraph is not like a warning, not like the usual
• 51:50
  Speaker 1: boiler print risk. This is a horrible idea right on
• 51:55
  Speaker 1: the fees. This hedge fund is designed to transfer as
• 51:58
  Speaker 1: much wealth as possible from you, the ignorant investor, to me,
• 52:01
  Speaker 1: the savvy manager, Like I want the private placement memorandum
• 52:05
  Speaker 1: and to be hilarious but legally enforced. Nobody will read
• 52:09
  Speaker 1: it anyway. That's that's I think bad idea capital should
• 52:15
  Speaker 1: be a warning, but I don't know if it would be. Yeah,
• 52:19
  Speaker 1: it's it's an amazing somebody would do it. So here's
• 52:23
  Speaker 1: before we leave hedge funds um and again, I don't
• 52:28
  Speaker 1: like bad hedge funds. I love great hedge Yeah, I
• 52:32
  Speaker 1: believe it or not. I I still have all my
• 52:34
  Speaker 1: hedge fund industry friends and more. Because of the book,
• 52:37
  Speaker 1: I had a lot of people say, to be Simon,
• 52:39
  Speaker 1: you're right, there's a lot of mediocrity in the business.
• 52:41
  Speaker 1: Not my fund, of course, but there's a lot of
• 52:43
  Speaker 1: media will be absolutely everybody, And so the hedge fund
• 52:47
  Speaker 1: industry is populated by a lot of smart people. And
• 52:50
  Speaker 1: people said, yeah, you know what, you make some good
• 52:52
  Speaker 1: points in the book and so on, and so I yeah,
• 52:55
  Speaker 1: Michael Mobisockle is at the paradox of skill that there
• 52:58
  Speaker 1: are so many smart, hard working, well incentivized really savvy
• 53:03
  Speaker 1: people looking to invest there and looking to run of funds,
• 53:08
  Speaker 1: that the opportunities for alpha are essentially competed away and
• 53:13
  Speaker 1: so so so you end up it's not that these
• 53:16
  Speaker 1: are dumb guys by any stretch imagining these are. You
• 53:19
  Speaker 1: don't want to be competing with with these guys. They're
• 53:22
  Speaker 1: that good. There's just so many some of the smartest
• 53:25
  Speaker 1: paper in finance one hedge funds, because that's where the
• 53:26
  Speaker 1: money is. That's and that's absolutely right. It's amazing. So
• 53:30
  Speaker 1: here's a quote from from I think this is Wall
• 53:33
  Speaker 1: Street potholes, but I have to ask, if you want
• 53:36
  Speaker 1: to defraud people, a slightly mysterious trading strategy with an
• 53:40
  Speaker 1: apparent strong history of performance in an LP structure, generally
• 53:46
  Speaker 1: outside the regulatory framework, is one of the best ways
• 53:49
  Speaker 1: to do it. Now, what that describes is either a
• 53:54
  Speaker 1: run of the mill hedge funds or Bernie made off.
• 53:57
  Speaker 1: And it's an amazing thing. And I think that's something
• 53:59
  Speaker 1: the hedge fund right that quote. But you know, there's
• 54:01
  Speaker 1: a book called the Hedge Fund Fraud Casebook. Really just
• 54:06
  Speaker 1: think about this, but there's enough material to fill a
• 54:09
  Speaker 1: book on frauds of hedge funds. Now, the hedge fund
• 54:12
  Speaker 1: industry is very largely run by honest people. However, if
• 54:18
  Speaker 1: you want to defraud people, you're not going to start
• 54:21
  Speaker 1: a mutual fund because it's impossible to DeFord people with
• 54:23
  Speaker 1: a mutual fund. You're so, I would say it's impossible,
• 54:27
  Speaker 1: but it's hard, it's really hard, right, So if you
• 54:29
  Speaker 1: want to to afford people, hedge funds the place to
• 54:32
  Speaker 1: do it. So, unfortunately, the hedge fund industry attracts people
• 54:36
  Speaker 1: who want to do that. So it's not that it's
• 54:38
  Speaker 1: got a lot of crooks, it's just that attracts the crooks. Well,
• 54:41
  Speaker 1: you know what Willie Sutton said, right, go where the
• 54:43
  Speaker 1: money is right? Why do you write that what rob banks?
• 54:46
  Speaker 1: Well for all the months that's right, doesn't make sense
• 54:48
  Speaker 1: to robbed gas stations. Of course there's no money there. Um,
• 54:52
  Speaker 1: So there's an issue I haven't I'm gonna I'm gonna
• 54:56
  Speaker 1: challenge you on something that that you said before, and
• 54:59
  Speaker 1: I want to repeat it precisely. The fault lies squarely
• 55:03
  Speaker 1: with the many sophisticated investors who have applied a far
• 55:07
  Speaker 1: less critical analysis and cynicism to their allocation decisions. So
• 55:13
  Speaker 1: you're you're blaming to some degree, you're blaming the investors.
• 55:19
  Speaker 1: Shouldn't all of the various regulators, and shouldn't the entire
• 55:24
  Speaker 1: industry be a little better at self policing? Aren't we
• 55:28
  Speaker 1: burden shifting here a little bit? I mean it's no,
• 55:30
  Speaker 1: it's definitely the investors and the consultants that help them.
• 55:33
  Speaker 1: And I mean it's as simple as any investor should
• 55:36
  Speaker 1: force themselves to ask the question how big should the
• 55:39
  Speaker 1: hedgephone industry be? And how big is too big? And
• 55:41
  Speaker 1: if they don't ask that question, that very sort of
• 55:44
  Speaker 1: fundamental question, they're just not working hard enough. So, in
• 55:47
  Speaker 1: other words, it's your money you're putting at risk. You
• 55:49
  Speaker 1: better know what the heck you're doing with it? Right,
• 55:52
  Speaker 1: How could you not ask that questions? Okay's three trillion
• 55:54
  Speaker 1: dollars the right size for the hedgephond industry, and it's
• 55:58
  Speaker 1: fair enough for investors to say, I have analyzed, said
• 56:00
  Speaker 1: I think they can manage up to five trillion. And
• 56:02
  Speaker 1: here's why has anyone really said that? No, they don't
• 56:04
  Speaker 1: even ask the question. They don't even ask the question.
• 56:07
  Speaker 1: So your number is a trillion? Is about well, because
• 56:10
  Speaker 1: that's what the evidence says, right, add a trillion dollars
• 56:12
  Speaker 1: and lower. The returns were good. Now was it the
• 56:15
  Speaker 1: size of assets or was it the number of funds?
• 56:19
  Speaker 1: Because it was well, I think it's funds. It's the
• 56:23
  Speaker 1: size of assets most clearly, because there's a finite pool
• 56:28
  Speaker 1: of inefficiencies to exploit. But I'm sure the number of
• 56:31
  Speaker 1: funds is a factor as well. But the size of
• 56:33
  Speaker 1: the industry is a bigger problem. The size of the industry. Um,
• 56:37
  Speaker 1: I'm going through. Uh oh, we we're talking about the
• 56:40
  Speaker 1: wealth transfer earlier. Let's let's put some flesh on those bones.
• 56:44
  Speaker 1: So the baby boomer generation, which are people just a
• 56:48
  Speaker 1: little older than me, I'm I just kind of I'm
• 56:50
  Speaker 1: in between generations. Um, they're sitting on a pile of
• 56:56
  Speaker 1: about thirty something trillion dollars and they're retiring at some
• 57:01
  Speaker 1: ungodly number, sixty five thousand a day, a week, some
• 57:05
  Speaker 1: crazy number. The millennial generation, the twentysomething generation, everybody who
• 57:12
  Speaker 1: was born I don't I don't know what that number is.
• 57:15
  Speaker 1: After I think, Um, they're now a bigger demographic group
• 57:20
  Speaker 1: than the boomers. So the first time a we had
• 57:22
  Speaker 1: Gen X, we had Gen Y. This is the first
• 57:24
  Speaker 1: time a defined group are bigger than Remember, not a
• 57:29
  Speaker 1: whole lot of babies during the war, and then when
• 57:32
  Speaker 1: all the g I is forty million g i's come
• 57:34
  Speaker 1: home in nineteen forty five six, suddenly, uh, everybody moves
• 57:40
  Speaker 1: to the suburbs. We developed the automobile culture, the rise
• 57:45
  Speaker 1: of interstate highways and and the rise of suburbia, and
• 57:48
  Speaker 1: boom a ton of kids. That was a giant demographic
• 57:53
  Speaker 1: and now the here it is fifty years later. Now
• 57:56
  Speaker 1: the millennial generation is bigger than that. So this already
• 58:00
  Speaker 1: plus thirty one trillion dollar wealth transfer that's going to
• 58:04
  Speaker 1: take place, first to the surviving spouses, typically the wives
• 58:08
  Speaker 1: who tend to outlive the husbands, then to the children
• 58:12
  Speaker 1: in the next generation. What should this coming generation be
• 58:17
  Speaker 1: doing thinking about preparing themselves for when this wealth transfer
• 58:22
  Speaker 1: takes place. How should they be educating themselves to become
• 58:27
  Speaker 1: stewards of capital. Well, they should clearly be taking a
• 58:32
  Speaker 1: much longer term focus on investing than it's prevalent today.
• 58:35
  Speaker 1: I mean, it just seems that people are more short
• 58:38
  Speaker 1: term in focus every year than the year before. So
• 58:42
  Speaker 1: that would be the first thing. Average holding period is
• 58:45
  Speaker 1: some days or something. It's it's even if you're back
• 58:48
  Speaker 1: at h f T it's still it's getting shorter and
• 58:51
  Speaker 1: shorter and Chris, and when you think about it, the
• 58:54
  Speaker 1: whole point of investing is to give yourself the ability
• 58:57
  Speaker 1: to consume more in the future. You need to stay
• 58:59
  Speaker 1: ahead of inflation after taxes. And yet so much of
• 59:03
  Speaker 1: all the media is focused on short term out performance,
• 59:07
  Speaker 1: whereas the market going tomorrow, and the media presents that
• 59:10
  Speaker 1: because the people, because the viewers want that. That's just
• 59:14
  Speaker 1: that's just supplying demand working. But at the same time,
• 59:17
  Speaker 1: it's clearly not the right way to say for the
• 59:20
  Speaker 1: long run. I mean, transaction costs and taxes and churning
• 59:24
  Speaker 1: are all going to destroy wealth over time. So I
• 59:27
  Speaker 1: think the first advice I give people is is have
• 59:30
  Speaker 1: a long term investment plan that doesn't rely on having
• 59:34
  Speaker 1: to figure out where the market is going tomorrow or
• 59:36
  Speaker 1: even next month, and stick with that long term plan.
• 59:40
  Speaker 1: So we talked earlier about the fiduciary rule. My question
• 59:44
  Speaker 1: for you is is isn't the genie really out of
• 59:47
  Speaker 1: the bottle. If we look at how fast a firm
• 59:50
  Speaker 1: like Vanguard has grown. There were barely a trillion dollars
• 59:53
  Speaker 1: before the financial crisis. They are now four trillion dollars.
• 59:57
  Speaker 1: We look at black Rock, which is also another giant
• 1:00:01
  Speaker 1: index are five trillion dollars. Haven't much of the investing
• 1:00:06
  Speaker 1: public figured out I'm done with market timing, I'm done
• 1:00:10
  Speaker 1: with wacky non traded reads. I'm not picking stocks. I'm
• 1:00:13
  Speaker 1: just going to buy a portfolio of indexes and put
• 1:00:16
  Speaker 1: it away for a few decades. It has that taken
• 1:00:20
  Speaker 1: rude enough that the Fiducier rule is here no matter
• 1:00:24
  Speaker 1: what the d L does. I mean, I don't know
• 1:00:26
  Speaker 1: that clearly. Vanguard's growth has been a good thing in
• 1:00:30
  Speaker 1: terms of people invested in the long run, but that
• 1:00:32
  Speaker 1: doesn't necessarily mean just because the index funds are big,
• 1:00:35
  Speaker 1: doesn't mean people are not going in and out of them.
• 1:00:37
  Speaker 1: And market timing as well well, when we look at
• 1:00:39
  Speaker 1: firms like Dimensional Funds or Vanguard, their clients tend to
• 1:00:43
  Speaker 1: be pretty stable and they're not. So it's a good thing.
• 1:00:47
  Speaker 1: That's absolutely a good thing in terms of wealth creation
• 1:00:50
  Speaker 1: for their customers. Definitely, that's that's good. So more of
• 1:00:53
  Speaker 1: that would be better. And the thing is in investing,
• 1:00:57
  Speaker 1: it's very hard to people to accept that. I just
• 1:00:59
  Speaker 1: want to get the average return because average seem client
• 1:01:01
  Speaker 1: you know who wants to be averaged. That's an ad
• 1:01:03
  Speaker 1: that we see on TV all the time. And yet
• 1:01:06
  Speaker 1: average and investing is better than if you just get
• 1:01:10
  Speaker 1: the index return. Obviously you're doing better than the average
• 1:01:12
  Speaker 1: because the average includes people who are always trading and
• 1:01:15
  Speaker 1: spending money. Most people don't, you know, most people fail
• 1:01:18
  Speaker 1: to keep up. Howard Marks tells a wonderful story about
• 1:01:22
  Speaker 1: the early part of his career where he's talking to
• 1:01:26
  Speaker 1: a UM I want to say, a client or a
• 1:01:29
  Speaker 1: pension funds and the person basically gives him this fascinating insight,
• 1:01:37
  Speaker 1: don't be in the top ten percent because the only
• 1:01:39
  Speaker 1: people who were in the top ten percent in any
• 1:01:41
  Speaker 1: given year. In order to achieve that, you're gonna end
• 1:01:45
  Speaker 1: up in the bottom ten percent another years. Where you
• 1:01:48
  Speaker 1: want to be is the second quartile. If you're and
• 1:01:52
  Speaker 1: you do that consistently over time, your gross returns over
• 1:01:57
  Speaker 1: that over twenty years will put you in I want
• 1:02:00
  Speaker 1: to say, top five percent. That's interesting, So he's saying
• 1:02:02
  Speaker 1: to be in the top deck all over the long
• 1:02:04
  Speaker 1: run to if you want to find your way in
• 1:02:07
  Speaker 1: the top deck, don't have any blow ups. So don't
• 1:02:11
  Speaker 1: be bottom ten percent ever, and target the second quartile
• 1:02:15
  Speaker 1: because you compound that over twenty years and the up ten.
• 1:02:20
  Speaker 1: If you're top five percent one year and bottom the
• 1:02:24
  Speaker 1: next year, that does much worse than that's good advice. Yes,
• 1:02:27
  Speaker 1: it's fascinating. Yeah, I can see that. So so when
• 1:02:31
  Speaker 1: we look at Vanguard, by the way, they're about a
• 1:02:33
  Speaker 1: third active, two thirds passive. But they're big focus is
• 1:02:39
  Speaker 1: not so much passive as low cost. If you keep
• 1:02:42
  Speaker 1: your costs under control, that you eliminate that direct we
• 1:02:46
  Speaker 1: get to win twenty And you know, it's a fascinating
• 1:02:48
  Speaker 1: company because they asked me to go and give a
• 1:02:50
  Speaker 1: presentation on the hedge umbrage a few years ago, and
• 1:02:53
  Speaker 1: I drove out that to Valley Forge and they totally,
• 1:02:57
  Speaker 1: it's a campus. It's it's a campus. But if you
• 1:03:00
  Speaker 1: you might have been that. I interviewed Jack Bogel there.
• 1:03:03
  Speaker 1: So yeah, so you go in and I joked with
• 1:03:05
  Speaker 1: them and I said, you know, I'm glad to see
• 1:03:06
  Speaker 1: that the only German car in the park and lot
• 1:03:08
  Speaker 1: was mine. Right, everybody's got a domestic guy. They are
• 1:03:11
  Speaker 1: known for really watching their first of all, the reason
• 1:03:14
  Speaker 1: they're in Valley Forge, Pennsylvan. They're not even forget New York.
• 1:03:17
  Speaker 1: They won't even be in Philly Philly expense, so they
• 1:03:21
  Speaker 1: you know, before they were there, this was just this
• 1:03:24
  Speaker 1: wasn't even suburbs. It was excerbs to the invest in
• 1:03:29
  Speaker 1: public totally. I mean, I have money with Vanguard. My
• 1:03:32
  Speaker 1: kids are investment Vanguards, so I think it's full disclosure
• 1:03:35
  Speaker 1: from my wife's four three B is all Vanguard, and
• 1:03:38
  Speaker 1: my portfolio is a mix of Vanguard, d f A
• 1:03:42
  Speaker 1: and a handful of other Black Clock, Wisdom Tree, but
• 1:03:45
  Speaker 1: it's mostly Vanguard. Good that they they have Jack Bogel, um,
• 1:03:51
  Speaker 1: so I've worked my way through Vanguard, Jack Brennan, the
• 1:03:55
  Speaker 1: previous CEO. That's a guest. Bill McNabb was twice and
• 1:04:01
  Speaker 1: Jack Bogel. Let me tell you that was a thrill.
• 1:04:05
  Speaker 1: First of all, you've seen the campuses. It's a campus. Yeah, absolutely,
• 1:04:10
  Speaker 1: You're like, I can't believe this is a financial services firm.
• 1:04:14
  Speaker 1: I thought I was walking through, you know, uh, like
• 1:04:18
  Speaker 1: a Vermont Liberal Arts very tight security though ye get
• 1:04:21
  Speaker 1: into absolutely absolutely. And then Bogel, I think he's eighty six.
• 1:04:26
  Speaker 1: He we should all be as sharp as he is
• 1:04:30
  Speaker 1: at a sharp as attack. And just you can hear
• 1:04:34
  Speaker 1: his voice, he's passionate, he's incredibly knowledgeable. He built a
• 1:04:40
  Speaker 1: four trillion dollar Definitely, it's it's really quite fascinating. I
• 1:04:47
  Speaker 1: don't even know. I don't even know where else to go.
• 1:04:50
  Speaker 1: My own Vanguard. Most of my money's in energy infrastructure.
• 1:04:53
  Speaker 1: But so let's talk about that. So because that's really fascinating.
• 1:04:57
  Speaker 1: We we have a new president and both candidates during
• 1:05:02
  Speaker 1: the campaign talked about building infrastructure. My definition of infrastructure
• 1:05:08
  Speaker 1: and other people's definition are very, very different. Tell me
• 1:05:13
  Speaker 1: what your definition of energy infrastructure. Well, energy infrastructure is pipelines,
• 1:05:18
  Speaker 1: storage assets, it's compressor stations, it's all of the hardware
• 1:05:22
  Speaker 1: that moves hydrocarbons from under the ground to the consumer
• 1:05:26
  Speaker 1: who ultimately needs them. And it's just a really really
• 1:05:30
  Speaker 1: cool place to be invested. Because America is heading towards
• 1:05:35
  Speaker 1: energy independence and I think we're just about there. We
• 1:05:38
  Speaker 1: export on natural gas, we were net exporters. In November. Basically,
• 1:05:44
  Speaker 1: OPEC took on the American private sector and lost. That's
• 1:05:48
  Speaker 1: that's the headline. Say that again. I love that OPEC
• 1:05:51
  Speaker 1: took on the American energy sector and they lost. Two
• 1:05:56
  Speaker 1: years ago, OPEC said, Okay, we're going to let the
• 1:05:58
  Speaker 1: price of oil collapse. We're going to keep pumping and
• 1:06:01
  Speaker 1: we're going to crush those shale producers in America, those
• 1:06:04
  Speaker 1: high cost producers, and that industry did what the American
• 1:06:09
  Speaker 1: private sector does so fantastically well. They innovated, they found
• 1:06:13
  Speaker 1: new technologies, productivity enhancements, They've had all kinds of ways
• 1:06:17
  Speaker 1: to bring down their break even and OPEC basically conceded
• 1:06:20
  Speaker 1: defeat in November said we can't do it. We just
• 1:06:23
  Speaker 1: can't afford to keep the price this low. And so
• 1:06:25
  Speaker 1: America today is the swing producer, which is amazing. It
• 1:06:30
  Speaker 1: is absolutely from from the oil embargo in ninety three
• 1:06:35
  Speaker 1: to forty years later. It took four decades for this
• 1:06:40
  Speaker 1: country to basically say we are not going to be
• 1:06:42
  Speaker 1: dependent on anybody else for energy. I mean, two years ago,
• 1:06:46
  Speaker 1: we weren't even thinking about energy independence, and now there's
• 1:06:48
  Speaker 1: a very real pathway to energy independence over the next
• 1:06:52
  Speaker 1: five to ten years, where will be met natural gas
• 1:06:56
  Speaker 1: ex borders. Still importing some crude oil, but less than
• 1:06:59
  Speaker 1: we you us to and in a much much more.
• 1:07:02
  Speaker 1: I mean, we've fought wars in the Middle East in
• 1:07:04
  Speaker 1: part because we spent five trillion dollars or maybe more
• 1:07:08
  Speaker 1: between Afghanistan and Iright, it's a fantastic story for America.
• 1:07:12
  Speaker 1: And it's just you know, America has the labor force
• 1:07:16
  Speaker 1: in the energy sector, the access to capital, the technology, technology,
• 1:07:21
  Speaker 1: also the fact that mineral rights belong to the landowner
• 1:07:24
  Speaker 1: in America, which is very very un as opposed to
• 1:07:27
  Speaker 1: the sovereign, as opposed to the government. Right, So that
• 1:07:30
  Speaker 1: facilitates expratio production. And it's just a financial incentive to
• 1:07:34
  Speaker 1: get because it's it's easy to you know, you just
• 1:07:37
  Speaker 1: have the e MP company, the drilling company, and the landowner.
• 1:07:40
  Speaker 1: I mean, I was in Pennsylvania last year given a
• 1:07:44
  Speaker 1: presentation and I met somebody who's who's got you know,
• 1:07:46
  Speaker 1: one percent of their property has some drilling equipment. Again
• 1:07:49
  Speaker 1: a six thousand dollar monthly check. They're growing corn on
• 1:07:52
  Speaker 1: the rest of the land. They're happy. Right, So let
• 1:07:54
  Speaker 1: me push back on this because I want to talk
• 1:07:56
  Speaker 1: more about Allen g And and nat Gas and in
• 1:08:00
  Speaker 1: the industrial production of energy. Um. So it's great they're
• 1:08:07
  Speaker 1: getting six thousand dollars a month. What about when they
• 1:08:09
  Speaker 1: turn on the tap water and flaming water comes out? Yeah,
• 1:08:13
  Speaker 1: So when you when you frag, when you drill down,
• 1:08:15
  Speaker 1: and for a natural gas include all, you're going much
• 1:08:19
  Speaker 1: farther down than the than the water table. Typically aquifers
• 1:08:21
  Speaker 1: are a few hundred feet down and drilling goes down
• 1:08:25
  Speaker 1: thousands or five and so accidents can happen. But there
• 1:08:29
  Speaker 1: isn't anything about the overall technology of fracking that is
• 1:08:34
  Speaker 1: bad for drinking water. And yes, of course there was
• 1:08:36
  Speaker 1: that gas Land movie, but I think generally, you know,
• 1:08:39
  Speaker 1: we drill thousands of wells a year in America. It's
• 1:08:42
  Speaker 1: another very very highly regulated industry, and I think that
• 1:08:47
  Speaker 1: that's the exception. What about all the earthquakes in Oklahoma.
• 1:08:50
  Speaker 1: I used to get three or four a year, Now
• 1:08:52
  Speaker 1: they're getting thousands. I think that's an example of where
• 1:08:54
  Speaker 1: there's certain geologies that you learned maybe we shouldn't be
• 1:08:57
  Speaker 1: tracking there, right, And so we learned right. But America
• 1:09:00
  Speaker 1: has been fracking for decades really wells, thousands and thousands
• 1:09:04
  Speaker 1: of wells, and so there's always this feedback loop and
• 1:09:07
  Speaker 1: you're learning, and that's the learning process is going on there.
• 1:09:11
  Speaker 1: What about the pushback that now I just converted my
• 1:09:14
  Speaker 1: house to natural gas from oil, it's cheaper, it's it's
• 1:09:18
  Speaker 1: supposed to be much cleaner, much cleaner. But the pushback
• 1:09:21
  Speaker 1: that I've gotten from some of my environmental bodies is, hey,
• 1:09:24
  Speaker 1: when you use natural gas to get that out, a
• 1:09:27
  Speaker 1: lot of methane and other very big chemicals get released
• 1:09:30
  Speaker 1: into the atmosphere, and it's effectively the same as coal
• 1:09:34
  Speaker 1: or oil. I think that overstates it, but you do
• 1:09:37
  Speaker 1: release methane when methane is what you're burning, right, so
• 1:09:40
  Speaker 1: I think it is what goes into the natural supply.
• 1:09:43
  Speaker 1: So there can be leaks and so on. So there's
• 1:09:46
  Speaker 1: a lot of regulations around capturing that, and clearly there's
• 1:09:49
  Speaker 1: an economic incentive for the companies to capture that so well,
• 1:09:53
  Speaker 1: not if the cost of capturing it is more than
• 1:09:55
  Speaker 1: the value of the guests, but then they wouldn't drill
• 1:09:57
  Speaker 1: because methane is the basic commodity that you're getting out
• 1:09:59
  Speaker 1: of the ground. And so methane captures improved and leaks
• 1:10:03
  Speaker 1: have gone down dramatically as a percentage of natural gas
• 1:10:06
  Speaker 1: extracted over the years. So there's lots of data to
• 1:10:09
  Speaker 1: show that we're getting more efficient than that. I'm better
• 1:10:11
  Speaker 1: at it over time. I can tell you this is
• 1:10:13
  Speaker 1: our first winter and it's been a with natural gas,
• 1:10:17
  Speaker 1: and it's been not as cheap as I expected, but
• 1:10:23
  Speaker 1: so much cheaper than oil we we have. We used
• 1:10:27
  Speaker 1: to have a thousand gallon tank, and I get these deliveries.
• 1:10:30
  Speaker 1: I'll get a bill for eighteen hundred dollars and then
• 1:10:32
  Speaker 1: the next month there'd be another. Wait, how did I
• 1:10:35
  Speaker 1: go through a thousand My house isn't that big, and
• 1:10:38
  Speaker 1: it was cheaper. Um, so you get bills in the winter,
• 1:10:42
  Speaker 1: it's three and four and that's running everything in the
• 1:10:46
  Speaker 1: house on it, including the fireplace, which used to be
• 1:10:50
  Speaker 1: a pin in the neck to clean up. I love
• 1:10:52
  Speaker 1: lighting the fire, cleaning up after it. And now I
• 1:10:55
  Speaker 1: grabbed the remoment I go, all right, fire. So here's
• 1:10:58
  Speaker 1: a cool thing, right. We've explored natural gas from Pennsylvania
• 1:11:02
  Speaker 1: food pipeline down in Louisiana to the Sabine Pass where
• 1:11:05
  Speaker 1: it's liquefied and put on one of those big tankers,
• 1:11:07
  Speaker 1: and that to the United Arab Emirates in the Middle
• 1:11:10
  Speaker 1: East where they are awash in natural gas. And why
• 1:11:14
  Speaker 1: are they buying our gas because it's cheap, Because we're
• 1:11:18
  Speaker 1: really good at produce cheaper than they are producing enough
• 1:11:21
  Speaker 1: to cover the transportation cost. That's amazing because look at
• 1:11:24
  Speaker 1: the cost. So it's a big difference between oil and gas.
• 1:11:28
  Speaker 1: I think a lot of people don't realize not every
• 1:11:32
  Speaker 1: barrel of oil clus the same. You go to Saudi Arabia,
• 1:11:37
  Speaker 1: hundreds of grades Saudi Arabia, the oil is as cheap
• 1:11:41
  Speaker 1: and can as can be defined. It's easily accessible, it's
• 1:11:44
  Speaker 1: not too hard to find, it's not too deep, and
• 1:11:46
  Speaker 1: it's fairly um it's fairly clean, it's not heavy right process,
• 1:11:52
  Speaker 1: it's it's all good. On the other hand, you're going
• 1:11:55
  Speaker 1: eight thousand feet below the ocean. That's expensive oil to find. Well,
• 1:12:00
  Speaker 1: and here's the thixt draft. You've had a trillion dollars
• 1:12:03
  Speaker 1: of cutbacks in exploration budgets for crude oil because of
• 1:12:07
  Speaker 1: the price collapse a roe over what time period between
• 1:12:10
  Speaker 1: now and three or four years of exploration. Yes, basically
• 1:12:16
  Speaker 1: that's a huge drop, and so it takes a while
• 1:12:20
  Speaker 1: to bring new cruds that crude I'll supply on Right
• 1:12:22
  Speaker 1: in America, shale production happens very quickly. And when the
• 1:12:26
  Speaker 1: price goes down, they still stop drilling. They have these
• 1:12:28
  Speaker 1: drilled uncompleted, well, they start drilling again. Ninety days is
• 1:12:32
  Speaker 1: the is the payback time typically from when you first
• 1:12:34
  Speaker 1: start the really too, when you get enough cash back
• 1:12:37
  Speaker 1: to pay for the cost that you've incurred. And so
• 1:12:40
  Speaker 1: that's put America in a fantastically strong position in terms
• 1:12:45
  Speaker 1: of providing more and more of our own energy, and
• 1:12:48
  Speaker 1: as you said, for gas, for for oil, for both,
• 1:12:51
  Speaker 1: for both. I mean, let's talk about gas for a minute.
• 1:12:54
  Speaker 1: It's been said that the United States is the Saudi
• 1:12:57
  Speaker 1: Arabia of coal, the Saudi Arabia of gas, but not
• 1:13:02
  Speaker 1: the Saudi Arabia of oil. Why is that, Well, North America.
• 1:13:07
  Speaker 1: A lot of that depends on the price. And so
• 1:13:10
  Speaker 1: North America, which is obviously including Alberta and British Columbia
• 1:13:14
  Speaker 1: with all the tar stands at a high enough price.
• 1:13:17
  Speaker 1: There are Saudi type reserves of crude oil there, but
• 1:13:20
  Speaker 1: it's very expensive to extract. So typically those estimates of
• 1:13:24
  Speaker 1: what's available at ultimate recovery depends on the price and
• 1:13:29
  Speaker 1: the technology and so they so they can change. I
• 1:13:31
  Speaker 1: would say that recoverable oil in the United States, estimates
• 1:13:35
  Speaker 1: for that keep going up every year because of new technologies.
• 1:13:39
  Speaker 1: I mean, look at the Permian Basin in West Texas.
• 1:13:42
  Speaker 1: We've been drilling there for almost a hundred years, and
• 1:13:44
  Speaker 1: it seems in thesest growing place there's a land rush
• 1:13:48
  Speaker 1: crying on there. They get in because the new technology
• 1:13:52
  Speaker 1: is making it impossible to extract crude or from areas
• 1:13:55
  Speaker 1: that were thought to be basically non economic anymore. Describe
• 1:13:58
  Speaker 1: the new technology because I find some of this stuff
• 1:14:02
  Speaker 1: fascinating and full disclosure, my now retired brother in law
• 1:14:06
  Speaker 1: for many years was a senior attorney in the legal
• 1:14:10
  Speaker 1: department of Amaco. That little b p Amico thing he was,
• 1:14:14
  Speaker 1: he was involved in, and he has been telling me
• 1:14:19
  Speaker 1: for a long long time the way technology is changing
• 1:14:23
  Speaker 1: is going to change as much as the alternatives have
• 1:14:26
  Speaker 1: their own attractiveness. What's going on in carbon based stuff
• 1:14:29
  Speaker 1: I've been hearing for a long time is just mind boggling,
• 1:14:33
  Speaker 1: including the ability to drill sideways. Yeah, I mean, who
• 1:14:37
  Speaker 1: would think you could do that? So, yeah, drilling sideways
• 1:14:40
  Speaker 1: longer laterals. They'll have spider formations now where you drill
• 1:14:44
  Speaker 1: down a well and then go laterally in multiple directions
• 1:14:47
  Speaker 1: so you can be more efficient. They used the drills
• 1:14:51
  Speaker 1: for less time, so they finish a well more quickly,
• 1:14:53
  Speaker 1: So obviously that cost lester. Drill gees in they get
• 1:14:55
  Speaker 1: out and there they'll they'll use actually more sad. So
• 1:15:00
  Speaker 1: sand is one of the things they pump down into
• 1:15:02
  Speaker 1: the ground when they do the fracking and the grains.
• 1:15:05
  Speaker 1: So it was water another chemics. It's mostly water. I
• 1:15:08
  Speaker 1: mean it's water by volume. There's some other chemicals, but
• 1:15:11
  Speaker 1: the sand is critical because when they push the water down,
• 1:15:14
  Speaker 1: it fractures the rock and the grains of sand prop
• 1:15:18
  Speaker 1: open all of these tiny little cracks. So now one
• 1:15:21
  Speaker 1: of the innovations has been that more sand with finer grains,
• 1:15:25
  Speaker 1: really even smaller cracks open and allows better production from well.
• 1:15:30
  Speaker 1: So there's lots of innovation and and and technological improvements
• 1:15:36
  Speaker 1: that are happening all of the time. And it's less
• 1:15:39
  Speaker 1: than five million dollars to drill a well, which sounds
• 1:15:41
  Speaker 1: like five million dollars five million dollars. And what is
• 1:15:44
  Speaker 1: that produce in terms of income? I mean, it depends
• 1:15:47
  Speaker 1: on the play, but you could easily have wells that
• 1:15:49
  Speaker 1: will pay you back in thirty days if it's a
• 1:15:51
  Speaker 1: very high producing well. So I'm trying to be respectful
• 1:15:56
  Speaker 1: of whatever compliance rules you have. So I don't want
• 1:15:58
  Speaker 1: to go any place you can't go. But you run
• 1:16:01
  Speaker 1: an MLP, right, Yeah, we run an MLP mutual fund.
• 1:16:04
  Speaker 1: The name of it is the Catalyst MLP and Infrastructure Fund.
• 1:16:08
  Speaker 1: And so what do you buy? You're obviously really knowledgeable about. Well,
• 1:16:12
  Speaker 1: you know what's really cool about that strategy is we
• 1:16:14
  Speaker 1: found an analogy with hedge funds, believe or not. So.
• 1:16:17
  Speaker 1: MLPs Master limited partnerships are partnerships that own pipelines, and
• 1:16:23
  Speaker 1: they're organized like hedge funds legally now mean that you're
• 1:16:27
  Speaker 1: the general partner and everybody else, right, so the investors
• 1:16:31
  Speaker 1: have no liability and you have all whatever liability there's
• 1:16:34
  Speaker 1: right now. It turns out that an MLP general partner
• 1:16:39
  Speaker 1: runs an MLP the same way that a hedge fund
• 1:16:41
  Speaker 1: manager hedge fund GP runs the hedge fund, And you
• 1:16:44
  Speaker 1: can buy MLP general partners and they have the same
• 1:16:48
  Speaker 1: type of preferential economics that hedge fund managers have. So
• 1:16:52
  Speaker 1: it's sort of like if you could buy hedge fund
• 1:16:54
  Speaker 1: managers or hedge funds, what would you buy? When you
• 1:16:56
  Speaker 1: buy the hedge fund managers, you just can't because they're private.
• 1:16:59
  Speaker 1: In the mlppers this you can actually buy the MLP
• 1:17:03
  Speaker 1: general partners and that's what we do. And the beauty
• 1:17:06
  Speaker 1: of that is that MLPs are growing. MLPs are growing
• 1:17:09
  Speaker 1: their assets because we need more infrastructure because the oil
• 1:17:12
  Speaker 1: and gas is in places it wasn't always. North Dakota
• 1:17:15
  Speaker 1: was not a big place for crude or Pennsylvania is
• 1:17:17
  Speaker 1: not a big place for natural gas. So m LPs
• 1:17:20
  Speaker 1: are growing their assets. And you know, if you invest
• 1:17:24
  Speaker 1: in hedge fund managers, when hedge fund assets are growing,
• 1:17:26
  Speaker 1: you know that's going to be good because more assets,
• 1:17:28
  Speaker 1: it's more fees. And it's the same thing with MLP
• 1:17:31
  Speaker 1: general partners. So our mutual fund which was last year's
• 1:17:35
  Speaker 1: best before mutual funds up sixty five, you allowed to
• 1:17:37
  Speaker 1: say that, I can say that's public information. So I
• 1:17:41
  Speaker 1: had a conversation with someone who runs an et F
• 1:17:43
  Speaker 1: shop who said he couldn't say that because there's certain
• 1:17:47
  Speaker 1: hoops he has to jump through, even though one of
• 1:17:49
  Speaker 1: their funds was had generated the highest return in the
• 1:17:53
  Speaker 1: calendar year. What do you need to be able to
• 1:17:55
  Speaker 1: do in order to say our MLP was the best
• 1:17:58
  Speaker 1: performing energy MLP last year. I mean, I think if
• 1:18:01
  Speaker 1: I'm just studying public information, I feel pretty comfortable with that. Um. Okay,
• 1:18:05
  Speaker 1: the e t F folks, who I think are governed
• 1:18:07
  Speaker 1: by Finnrott told me. They can't just say here's the math.
• 1:18:11
  Speaker 1: Somebody else has to say it and then they could
• 1:18:13
  Speaker 1: quote them. I don't know. I don't know SEC regulations.
• 1:18:16
  Speaker 1: So you don't deal with the finn Ren sense, which
• 1:18:18
  Speaker 1: is good for you. And they're but but it's the
• 1:18:25
  Speaker 1: catalyst MLP and infrastructure fund investors canna look at up.
• 1:18:28
  Speaker 1: So the holdings are other MLPs, the MLPs and the
• 1:18:32
  Speaker 1: general partners on MLPs. The MLP general partner looks like
• 1:18:35
  Speaker 1: a hedge fund manager, got it, And so that's so
• 1:18:38
  Speaker 1: it's not a fund of funds, it's a fund that
• 1:18:40
  Speaker 1: holds other MLPs. Absolutely, So I know the restructure is
• 1:18:45
  Speaker 1: really tax advance advantageous tax wise, because so long as
• 1:18:51
  Speaker 1: N of the net gains passed through, there's no tax
• 1:18:55
  Speaker 1: at that level. Am I stating that correctly? How is
• 1:18:59
  Speaker 1: how MLP structured relative to two tax I mean, there's
• 1:19:03
  Speaker 1: similar MLPs don't pay tax and that's why. But they
• 1:19:07
  Speaker 1: do issue a K one and lots of investors they
• 1:19:11
  Speaker 1: hate k ones. They hate the fact that the MLPs
• 1:19:13
  Speaker 1: don't pay tax, but they hate the k ones and
• 1:19:16
  Speaker 1: so their accountants have taught them to hate the Yeah,
• 1:19:18
  Speaker 1: and I think that the problem with k ones of overstated.
• 1:19:21
  Speaker 1: But the world is you're right. I think you're right. Um, so,
• 1:19:24
  Speaker 1: so the K one passed through shows up. It's almost
• 1:19:27
  Speaker 1: like getting a ten ninety nine. Well, fund gives a
• 1:19:30
  Speaker 1: ten ninety nine, so we masually we take the K
• 1:19:32
  Speaker 1: one out of it. For the client. The client gets
• 1:19:34
  Speaker 1: at ten ninety nine, but they get exposure to m
• 1:19:37
  Speaker 1: LPs but they don't have to deal with the k
• 1:19:39
  Speaker 1: ones that happens at the fund level. Oh really, yeah,
• 1:19:42
  Speaker 1: I had no idea about that. That's interesting. I don't
• 1:19:44
  Speaker 1: have an issue with k ones because they get one
• 1:19:46
  Speaker 1: and I have to deal with it. Of course, if
• 1:19:48
  Speaker 1: you're dealing with one, alright, one or ten doesn't exactly
• 1:19:52
  Speaker 1: what are zero is a big different. Accountants overstate it.
• 1:19:54
  Speaker 1: I've talked to a canist who complained about it, and
• 1:19:56
  Speaker 1: I said, why don't you just charge more for that?
• 1:19:59
  Speaker 1: How much do you charge to do the Well? I
• 1:20:00
  Speaker 1: don't know. I just don't like the words. Well, they
• 1:20:02
  Speaker 1: charge hourly, so if it takes longer, they're going to
• 1:20:04
  Speaker 1: charge more. Everybody spends a hundred grand preparing their taxes, right,
• 1:20:09
  Speaker 1: isn't that what your I got to talk to my
• 1:20:12
  Speaker 1: that's um, hey, listen. You know everybody has the thing
• 1:20:15
  Speaker 1: that they're naturally good at. And I know if I
• 1:20:18
  Speaker 1: had to do my taxes myself, I would be in
• 1:20:20
  Speaker 1: tears before I was finished. Whatever they charge me, and
• 1:20:24
  Speaker 1: in anywhere near that sort of money, I'm happy to
• 1:20:27
  Speaker 1: pay it because I don't The greatest thing about Henry
• 1:20:30
  Speaker 1: Ford was was the assembly line, where each person did
• 1:20:34
  Speaker 1: what they specialized in. And I'm happy to say, please
• 1:20:38
  Speaker 1: do my talk. I just don't want to. Just trying
• 1:20:41
  Speaker 1: to check that it's correct is complicated. You have to.
• 1:20:46
  Speaker 1: I'm a big picture guy. I'm not a detailed guy
• 1:20:49
  Speaker 1: as much as I get into the weeds with number
• 1:20:51
  Speaker 1: and data, numbers and data and stuff. Being able to
• 1:20:55
  Speaker 1: track all that is and the people who do it
• 1:20:59
  Speaker 1: well are worth their win and goals, and it's a
• 1:21:02
  Speaker 1: it's appalling that it's so complex. So the original concept
• 1:21:07
  Speaker 1: of submitting your taxes on a postcard from Steve Forbes,
• 1:21:12
  Speaker 1: We're never going to see anything like that. It's so
• 1:21:14
  Speaker 1: hard because with tax reform, the losers know who they
• 1:21:16
  Speaker 1: are and the winners don't, right, and so the winners
• 1:21:19
  Speaker 1: don't appreciate let me, let me qualify that lots of
• 1:21:25
  Speaker 1: people who pass through these doors. One of the themes
• 1:21:28
  Speaker 1: that come up over and over again is I know
• 1:21:31
  Speaker 1: how how lucky I have been in my career life
• 1:21:35
  Speaker 1: profession I've heard time and time again for people that
• 1:21:38
  Speaker 1: this happened and it was serendipitous and it changed my
• 1:21:42
  Speaker 1: whole life. So I think some of the people who
• 1:21:46
  Speaker 1: are the tax winners are very much aware of that.
• 1:21:49
  Speaker 1: Maybe not enough, but my point is in terms of
• 1:21:52
  Speaker 1: tax reform, change the tax for sure, there's winners and losers, right,
• 1:21:58
  Speaker 1: and the problem with the change is that the losers
• 1:22:01
  Speaker 1: of vocals may not really know that winners. And that's
• 1:22:06
  Speaker 1: that I completely misspoken. And it's tax reform that's that's
• 1:22:09
  Speaker 1: needed to simplify it so at least it might fit
• 1:22:12
  Speaker 1: on a couple of postcards. So you're a little more
• 1:22:14
  Speaker 1: plugged into what's going on in d C than I am.
• 1:22:17
  Speaker 1: Are we really going to see any form of corporate
• 1:22:19
  Speaker 1: tax return in our lifetime or personal tax reform or
• 1:22:24
  Speaker 1: closing of loopholes? Or is that just election year? I
• 1:22:28
  Speaker 1: mean it looks that way, right. The consensus is that
• 1:22:30
  Speaker 1: work at some simplification, lower corporate tax rates, fewer personal
• 1:22:36
  Speaker 1: brackets for taxes, and so, so you think that's going
• 1:22:40
  Speaker 1: to actually happen. I would say it's better than but
• 1:22:46
  Speaker 1: I couldn't say probability, but it's probably. You know, the
• 1:22:49
  Speaker 1: odds seem to favor that. I since Donald Trump seems
• 1:22:53
  Speaker 1: to only appreciate tweets. Just this morning, I exhorted him,
• 1:22:57
  Speaker 1: can we please stop with the National Secure the nonsense
• 1:23:00
  Speaker 1: and the immigration junk, and why don't you not your
• 1:23:04
  Speaker 1: win and clean up the tax code and stop with
• 1:23:07
  Speaker 1: all this other stuff which I'm waiting for the hate
• 1:23:10
  Speaker 1: mail to come. Wouldn't that be great? I mean, Reagan
• 1:23:12
  Speaker 1: was the last president who really oversaw any sort of
• 1:23:15
  Speaker 1: big tax reform, and so I think that it's well
• 1:23:19
  Speaker 1: well overdue. And what's amazing is Reagan, unlike Trump, had
• 1:23:25
  Speaker 1: to deal with an opposing party. Not that Trump doesn't
• 1:23:28
  Speaker 1: have to deal with it, but currently the Republicans controlled
• 1:23:32
  Speaker 1: the House the Senate, and it would be great if
• 1:23:36
  Speaker 1: we got bipartisan approval of tax form. That might be
• 1:23:39
  Speaker 1: naive to assume that we'll get that, but un least
• 1:23:41
  Speaker 1: they get some Democrats on board. I think that you
• 1:23:44
  Speaker 1: don't have to do a whole lot to get Democrats
• 1:23:47
  Speaker 1: on board, especially if you dangle a two trillion dollar
• 1:23:51
  Speaker 1: infrastructure plan. Hey we're gonna repatriate to trillion. That could
• 1:23:56
  Speaker 1: be done. That right, But it's been there for a
• 1:23:58
  Speaker 1: long time, using the time, maybe this, this is the
• 1:24:02
  Speaker 1: time it'll get done. And and I'm not talking about
• 1:24:06
  Speaker 1: income distribution. I'm talking about making the task code simpler, fairer, better,
• 1:24:14
  Speaker 1: not saying Okay, we're gonna take money from billionaires and
• 1:24:16
  Speaker 1: give it to piece or vice versa. I'm talking about
• 1:24:20
  Speaker 1: making it a little less complex and a little more
• 1:24:24
  Speaker 1: the complex and the Yesne Parkling, I mean you're probably
• 1:24:27
  Speaker 1: like me that I have a tax return that's probably
• 1:24:29
  Speaker 1: two d pages. I mean, it's amazing they get any money.
• 1:24:32
  Speaker 1: It's so complicated. I send them all my money and
• 1:24:36
  Speaker 1: they send me back what they think I should get.
• 1:24:38
  Speaker 1: So it's a one pager and they say here's what
• 1:24:40
  Speaker 1: you're gonna live on this, and I say things. So
• 1:24:43
  Speaker 1: it's I work it and I have. All my accountant
• 1:24:46
  Speaker 1: does is double check their work. And so far that
• 1:24:49
  Speaker 1: seems to be. It seems to be working out. I
• 1:24:51
  Speaker 1: know I only have you for a finite amount of time.
• 1:24:55
  Speaker 1: Let me get to some of my standard questions, my
• 1:24:58
  Speaker 1: favorite questions I ask all of my guests. So we
• 1:25:01
  Speaker 1: know you spent twenty three years at JP Morgan. What
• 1:25:05
  Speaker 1: did you do before that? Well, I worked in London
• 1:25:08
  Speaker 1: for a couple of years. I worked you originally from
• 1:25:10
  Speaker 1: the from the UK. I worked in the Stock Exchange
• 1:25:12
  Speaker 1: in London. So so, so you're from London. Where did
• 1:25:16
  Speaker 1: the Australian accent come from? I don't know. That's that's
• 1:25:19
  Speaker 1: start that I've only spent a week there in my life.
• 1:25:21
  Speaker 1: Is that true? Um? So you were in London, who
• 1:25:24
  Speaker 1: did you work for? In London? I worked for a
• 1:25:26
  Speaker 1: company called Desert and Bevan, which became part of Barclays,
• 1:25:29
  Speaker 1: and I was a money broker for a short period
• 1:25:31
  Speaker 1: of time and I transferred with them to New York.
• 1:25:34
  Speaker 1: Explained to us ugly Americans what a money broker? Well,
• 1:25:37
  Speaker 1: money broker deals with big banks and other institutions trading
• 1:25:40
  Speaker 1: currencies or derivatives or eurodollar deposits, and that's what I
• 1:25:44
  Speaker 1: did for a short time. I did that for a
• 1:25:46
  Speaker 1: few years, and then I moved over to banking and
• 1:25:48
  Speaker 1: joined what became JP Morgan in the age. So what
• 1:25:52
  Speaker 1: motivated you to come to the United States? Uh? You know,
• 1:25:55
  Speaker 1: I was born in Canada, and so I spent some
• 1:25:57
  Speaker 1: time in Canada with my dad. My parents split up.
• 1:26:00
  Speaker 1: I was young, so maybe it's Canadian accent. So I
• 1:26:05
  Speaker 1: always had this idea that would be nice to move
• 1:26:07
  Speaker 1: back to North America and New York. It was obviously
• 1:26:09
  Speaker 1: a much bigger financial center in Toronto. So I moved
• 1:26:12
  Speaker 1: to New York and and at the time I thought
• 1:26:15
  Speaker 1: maybe I'll move up to Toronto at some point, but
• 1:26:18
  Speaker 1: dropped that idea because once I got here, it was
• 1:26:20
  Speaker 1: just like how why would you be anywhere else? That
• 1:26:22
  Speaker 1: is a question a lot of people wrestle with um,
• 1:26:25
  Speaker 1: and the answer is weather. Weather is right. So so
• 1:26:29
  Speaker 1: I'm here. I have no interest in going anywhere else.
• 1:26:32
  Speaker 1: But whenever anyone says, why would you want to leave
• 1:26:34
  Speaker 1: New York City, it's the way it's feywhere for the
• 1:26:37
  Speaker 1: climate right, it's it's I walked the dogs early in
• 1:26:41
  Speaker 1: the morning. This morning it was twenty two degrees. It's
• 1:26:43
  Speaker 1: going to be forty five today. Maybe it was, maybe
• 1:26:46
  Speaker 1: it was twenty seven today. Yesterday it was twenty two.
• 1:26:50
  Speaker 1: I have a have an I pad on the wall,
• 1:26:53
  Speaker 1: and all of those is run the weather app. There
• 1:26:55
  Speaker 1: are a bunch of other apps that I can access there.
• 1:26:57
  Speaker 1: But when I walk out that door, I'm like, look
• 1:26:59
  Speaker 1: at the temperature outside, and then I have the thermometer
• 1:27:01
  Speaker 1: outside and I could check if the iPad app is accurate,
• 1:27:05
  Speaker 1: and it is. It's mostly um, let's talk about mentors.
• 1:27:09
  Speaker 1: Who were the people who influenced the way you think
• 1:27:13
  Speaker 1: about finance. Yeah, I get you know, I spent a
• 1:27:16
  Speaker 1: lot of years in trading and as a follical Don Layton,
• 1:27:19
  Speaker 1: who's now the CEO of Freddie Mack who ran the
• 1:27:21
  Speaker 1: trading JP Morgan, and he he was he was just tremendous.
• 1:27:26
  Speaker 1: He was a great leader. He's a great leader. Um,
• 1:27:29
  Speaker 1: He's he really exemplified integrity and strategy with detail orientation.
• 1:27:37
  Speaker 1: There's another fellow who's retired now, Bill Pike, used to
• 1:27:40
  Speaker 1: around government bond trading when I was there. He's about
• 1:27:44
  Speaker 1: thirteen or fourteen years older than me, and I was
• 1:27:46
  Speaker 1: in my twenties when I was first working there, and
• 1:27:49
  Speaker 1: he was running government bond trading, and it was just
• 1:27:51
  Speaker 1: always fascinating listening to his interpretation of market psychology and
• 1:27:56
  Speaker 1: how people were thinking about bonds because that's what I
• 1:27:59
  Speaker 1: was trading at the right. And so you know, there
• 1:28:02
  Speaker 1: are two people that I work with in those days
• 1:28:05
  Speaker 1: when I was a lot younger, and I have still
• 1:28:08
  Speaker 1: have a tremendous respect for both of them. Let's talk
• 1:28:11
  Speaker 1: about investors. One. Investors have colored the way you look
• 1:28:15
  Speaker 1: at the world of investing. I mean, obviously Buffett has
• 1:28:19
  Speaker 1: a has a that's a fault setting everybody, everybody cannot
• 1:28:24
  Speaker 1: not see. And we don't invest in necessarily the things
• 1:28:28
  Speaker 1: that he invests in because that he doesn't you know,
• 1:28:30
  Speaker 1: he's but his process is fascinating. Well, just the idea
• 1:28:33
  Speaker 1: that you want to have a mote and that you
• 1:28:35
  Speaker 1: want to be holding things that you'd want to own forever.
• 1:28:38
  Speaker 1: And that's a hard thing to do because that's not
• 1:28:41
  Speaker 1: the time frame that a lot of investors have. And
• 1:28:43
  Speaker 1: we found that two years ago when energy infrastructure was
• 1:28:46
  Speaker 1: down a lot. Yeah, and we found just just how
• 1:28:50
  Speaker 1: high quality our investors really are because they stayed with
• 1:28:54
  Speaker 1: us and in many cases they added money. We picked
• 1:28:56
  Speaker 1: up new clients, but that's sort of a self selection
• 1:28:59
  Speaker 1: that we add clients who understood that we're not going
• 1:29:02
  Speaker 1: to get you out of the high we're going to
• 1:29:03
  Speaker 1: be invested for the long run. So that that really
• 1:29:06
  Speaker 1: helped a lot. That that is Ah, that is quite fascinating.
• 1:29:11
  Speaker 1: Let's talk about any other anybody else besides Buffett, especially
• 1:29:17
  Speaker 1: You're you're an energy. Who else besides Buffett catches your attention?
• 1:29:22
  Speaker 1: Who else in there? It's interesting? No, he's probably the
• 1:29:27
  Speaker 1: one you could do a lot worse. Yeah, exactly, that's right.
• 1:29:32
  Speaker 1: You can't get it that, you can't get hurt, saying
• 1:29:34
  Speaker 1: Laarren Buffett. How about books you you mentioned, um a
• 1:29:37
  Speaker 1: couple of books earlier. You mentioned Flashboys by Michael Lewis.
• 1:29:41
  Speaker 1: Anything by Michael Lewis, I totally Can I tell you something?
• 1:29:45
  Speaker 1: I have blind Side, The blind Side tied up for vacation.
• 1:29:49
  Speaker 1: It's the only book of his I haven't read. How
• 1:29:52
  Speaker 1: is there? I'm looking forward to that. Yeah, I mean listen,
• 1:29:55
  Speaker 1: I read Moneyball. Listen to me, right, Baseball? I mean
• 1:29:59
  Speaker 1: it's fascinating. You've forgotten more than I know about baseball.
• 1:30:02
  Speaker 1: And I loved Moneyball. It was it was fast, it
• 1:30:05
  Speaker 1: was a great book. I just read The Undoing Project amazing,
• 1:30:10
  Speaker 1: which is all about behavior, finance and Traversky and Daniel Cannerman.
• 1:30:15
  Speaker 1: I love the digression in the beginning about the basketball. Yes, yes, yes,
• 1:30:20
  Speaker 1: And it's the same thing. It has nothing to do
• 1:30:22
  Speaker 1: with the sport. It's about what assumptions are everybody making
• 1:30:26
  Speaker 1: that's wrong. Yes, So, Michael Lewis, I'm reading Finding Pixar Today,
• 1:30:33
  Speaker 1: which is by former CFO of Pixar, Lawrence Leaving, Lawrence
• 1:30:37
  Speaker 1: Leaving previous and it's wonderful. They've just done the I
• 1:30:42
  Speaker 1: p O. Okay, so you're you're deep into it. Yeah,
• 1:30:45
  Speaker 1: it's fastening book. Well, you know what caught my attention
• 1:30:48
  Speaker 1: is Andrew Ross Saukin commented on it and he said,
• 1:30:51
  Speaker 1: like every great Pixar movie has a happy ending as well,
• 1:30:55
  Speaker 1: and I'm looking forward to that. So so I'm reading
• 1:30:57
  Speaker 1: that here's a guy who were closely with Steve Jobs. Yeah,
• 1:31:00
  Speaker 1: nobody really I never heard of this guy? Did you
• 1:31:02
  Speaker 1: ever heard? And he tells stories about Steve Jobs that
• 1:31:07
  Speaker 1: are I learned from the book that Steve Jobs became
• 1:31:11
  Speaker 1: a billionaire not because of Apple, because yes, he made
• 1:31:16
  Speaker 1: so much more money out of Pixel in the beginning anyway,
• 1:31:20
  Speaker 1: So that's what I'm reading to that became the biggest
• 1:31:22
  Speaker 1: shareholder in Disney through the Pixel of the acquisition. Yes, absolutely, absolutely, Yeah,
• 1:31:27
  Speaker 1: So that's great. Who else? Who else do you enjoy reading?
• 1:31:29
  Speaker 1: What are the books do you like? Well, you know,
• 1:31:31
  Speaker 1: I read Finance Misbehaving by Richard Taler last year, which
• 1:31:36
  Speaker 1: builds on the work by Cannaman and first and so
• 1:31:42
  Speaker 1: I read all the books on the financial crisis. They're
• 1:31:46
  Speaker 1: still coming out. I mean, I thought Hank Paulson's book
• 1:31:49
  Speaker 1: was Back from the Hank Paulson's was I forget that
• 1:31:53
  Speaker 1: his but that was terrific um Back from the brink,
• 1:31:56
  Speaker 1: I think was his my list to read. But Nankees
• 1:32:00
  Speaker 1: it was good as well. I mean, we were so
• 1:32:02
  Speaker 1: fortunate to have people like Paulson and Bernanke in the
• 1:32:05
  Speaker 1: positions that we were in at that time. Howard Marks
• 1:32:08
  Speaker 1: said the same thing you did. I really because imagine
• 1:32:11
  Speaker 1: that meeting where Paulson gets all the CEOs in the
• 1:32:13
  Speaker 1: room and says, here's the deal. You're all going to
• 1:32:16
  Speaker 1: take ten to twenty five billion dollars of capital and
• 1:32:18
  Speaker 1: you're not leaving until you get So he's got you know,
• 1:32:21
  Speaker 1: Jamie Diamond in there, and and and Lloyd Blank find
• 1:32:25
  Speaker 1: and people who are not used to being told that,
• 1:32:29
  Speaker 1: and who else could pull that off? One or two
• 1:32:31
  Speaker 1: people said, we don't need the money, we don't want
• 1:32:34
  Speaker 1: to take it. Why do we have to take this
• 1:32:36
  Speaker 1: And the answer was, well, you're gonna need it, and
• 1:32:39
  Speaker 1: even if you don't need it, we have to hide
• 1:32:41
  Speaker 1: who does need it exactly. It was fascinating. It was
• 1:32:44
  Speaker 1: absolutely the right strategy, and so few people could have
• 1:32:48
  Speaker 1: executed that. The former CEO of Goldman that's what it took.
• 1:32:52
  Speaker 1: He was one of their peers. Right. So, um, so,
• 1:32:56
  Speaker 1: all of the books under Financial Crisis I thought were
• 1:32:58
  Speaker 1: really good. I find so that there are three books
• 1:33:01
  Speaker 1: that I feel obligated to read Paulson's, Bernanke's and Gethner.
• 1:33:07
  Speaker 1: And I can't bring myself to read Bernanke or Guythaner
• 1:33:11
  Speaker 1: because they were kind of they were there beforehands and
• 1:33:16
  Speaker 1: helped contribute to the crisis. Paulson say what you will
• 1:33:20
  Speaker 1: about Goldman Sacks. You can bash Goldman Sacks all you want.
• 1:33:23
  Speaker 1: You can't really say they were a major cause of
• 1:33:25
  Speaker 1: the crisis. Well, they created some synthetic c d os
• 1:33:30
  Speaker 1: and they did stuff for John Paulson, but you can't
• 1:33:35
  Speaker 1: say these guys were the approximate cause of of the
• 1:33:38
  Speaker 1: there was I had. I had a list of about
• 1:33:41
  Speaker 1: twenty five people, and Goldman Sacks people, organizations, institutions, they
• 1:33:47
  Speaker 1: don't even make the top um. I've pushed back against
• 1:33:53
  Speaker 1: that argument, and it goes something like this, if lending
• 1:33:57
  Speaker 1: to the poor caused the crisis, then the boom and
• 1:34:00
  Speaker 1: bust should take place in places where the poor are.
• 1:34:04
  Speaker 1: The boom and bust wasn't in Harlem, it wasn't in
• 1:34:06
  Speaker 1: South Philly, it wasn't in the bad parts of Chicago.
• 1:34:09
  Speaker 1: It was in California, Arizona, Nevada, and Florida. It had
• 1:34:13
  Speaker 1: nothing what's over to do with lending to the poor.
• 1:34:15
  Speaker 1: So that's been my counter argument. But it was increasing
• 1:34:18
  Speaker 1: home ownership to open to the high sixties, for sure.
• 1:34:22
  Speaker 1: But you had you had Clinton, you would Bush, you
• 1:34:25
  Speaker 1: had every Republican and both parties, both parties of bipartisans. However, however,
• 1:34:33
  Speaker 1: look at the Democrats in California and the Republicans on
• 1:34:37
  Speaker 1: the Federal Reserve. When you had all of these non
• 1:34:41
  Speaker 1: bank lenders not covered by uh Fannie and Freddie unable
• 1:34:45
  Speaker 1: to buy their stuff because it's nonconforming loans and not
• 1:34:50
  Speaker 1: covered by the fdi C, you have a whole run
• 1:34:52
  Speaker 1: of like four hundred lend to securities UM mortgage underwriters
• 1:35:00
  Speaker 1: located in California. People started to complain about them. William
• 1:35:04
  Speaker 1: Poole went to Alan Greenspan, then chair of the Fed.
• 1:35:08
  Speaker 1: Greenspan called them innovators. Leave them alone. People went to
• 1:35:12
  Speaker 1: the Democratic controlled UH Congress, California Senate, an Assembly and
• 1:35:18
  Speaker 1: same thing. Hey, these are our business owners, these are
• 1:35:22
  Speaker 1: thriving businesses in California. Leave them alone. So it is
• 1:35:26
  Speaker 1: fairly bipartisans. It was an oversight and a public policy
• 1:35:31
  Speaker 1: failure that allowed that behavior to take and some missincentivize,
• 1:35:35
  Speaker 1: some miss or were My favorite was the I'll be gone,
• 1:35:39
  Speaker 1: You'll be gone bonuses, where you take the bonus you leave,
• 1:35:43
  Speaker 1: and if it blows up after you're gone, it doesn't
• 1:35:45
  Speaker 1: matter someone else. So let me keep plowing through any
• 1:35:49
  Speaker 1: other books you want to bring up before So the
• 1:35:52
  Speaker 1: Pulsing book is also on my list. How about nonfiction?
• 1:35:55
  Speaker 1: Do you ever, I mean, how about fiction? Do you
• 1:35:57
  Speaker 1: ever read anything that's not nonfiction? I'm in the same
• 1:36:00
  Speaker 1: loop as you. Everything I read as nonfish and well,
• 1:36:04
  Speaker 1: Pillars of the Earth, Pillars of the Earth. Who is
• 1:36:07
  Speaker 1: of the Earth? Yeah, you're asking me, you know you
• 1:36:10
  Speaker 1: can look that up after what type of book is?
• 1:36:12
  Speaker 1: It's a novel based in medieval Britain without the construction
• 1:36:17
  Speaker 1: of a cathedral, and um that is a and there
• 1:36:24
  Speaker 1: was and then there was a sequel ken Ken Filets,
• 1:36:28
  Speaker 1: Ken Filet. That is sort of an epic story Pillars.
• 1:36:33
  Speaker 1: I don't read a lot of nonficxure, don't a lot
• 1:36:35
  Speaker 1: of fixture. This thing is one all manners of award. Yeah. Look,
• 1:36:40
  Speaker 1: that's a fascinating It's one of those stories that you
• 1:36:44
  Speaker 1: were sorry when it's finished because you were so into
• 1:36:47
  Speaker 1: the characters. It's sort of a multi generational story all
• 1:36:52
  Speaker 1: around the building of this cathedral in medieval Britain, and
• 1:36:55
  Speaker 1: it's and the characters are well developed, but it also
• 1:36:58
  Speaker 1: tries to give you a flavor what everyday life was
• 1:37:01
  Speaker 1: like for people who are not you know, royalty, but
• 1:37:04
  Speaker 1: regular people living in sixteenth century Britain. Enormous and brilliant,
• 1:37:08
  Speaker 1: A great epic tale, crammed with characters unbelievably alive across
• 1:37:13
  Speaker 1: the gulf of centuries. Wow, that's a hell of it. Yeah. So,
• 1:37:17
  Speaker 1: like I said, I don't mean a lot of fiction,
• 1:37:18
  Speaker 1: but that's one of my favorite. I need I need
• 1:37:21
  Speaker 1: one more fiction book to bring a vacation that this one.
• 1:37:25
  Speaker 1: Maybe it um so since you've joined the industry, what
• 1:37:29
  Speaker 1: do you what do you see as having been the
• 1:37:31
  Speaker 1: major changes that have had the most impact. Well, it's
• 1:37:35
  Speaker 1: the speed, isn't it. And it's and it's a lot
• 1:37:38
  Speaker 1: less personal. I mean it used to be when I
• 1:37:41
  Speaker 1: started the business, transactions happened face to face. In many
• 1:37:45
  Speaker 1: cases are over the phone with people that you knew,
• 1:37:47
  Speaker 1: So you had a lot of iteritive transactions with familier people.
• 1:37:51
  Speaker 1: And of course exchange flaws have largely gone and everything
• 1:37:54
  Speaker 1: about trading is so impersonal. Now software is eating every
• 1:37:58
  Speaker 1: software is doing everything. So there's a there's you know,
• 1:38:01
  Speaker 1: it's a whole global community where you don't know the
• 1:38:04
  Speaker 1: people that you're training with, and that's had all kinds
• 1:38:06
  Speaker 1: of ramifications. That and the speed has led to an
• 1:38:10
  Speaker 1: even greater focus on the short term. I get this
• 1:38:13
  Speaker 1: question from from readers all the time. What do you
• 1:38:15
  Speaker 1: what do you ask your guests what they do to
• 1:38:17
  Speaker 1: relax or for enjoyment out of the office. Um, I
• 1:38:22
  Speaker 1: play golf. That's the time you're in Florida part of
• 1:38:25
  Speaker 1: the year. Yeah, so I belong to a club down
• 1:38:28
  Speaker 1: in Florida as well. Um I used to play a
• 1:38:30
  Speaker 1: lot of chess. Um New York's a fantastic place for chess.
• 1:38:34
  Speaker 1: Now I can play on walk right over to Washington
• 1:38:35
  Speaker 1: Square Park, get embarrassed by some twelve years. Oh yeah,
• 1:38:39
  Speaker 1: there's some good players there. Um. I just started doing
• 1:38:42
  Speaker 1: the New York Times crossword on my wife my tablet,
• 1:38:46
  Speaker 1: you know, and and and that's a lot of fun.
• 1:38:49
  Speaker 1: So so you know, it's an odd thought process. I
• 1:38:53
  Speaker 1: find the cross words. I've never been into crosswords, and
• 1:38:56
  Speaker 1: I just, hey, this is easy. I get on my
• 1:38:57
  Speaker 1: tablet anyway in bed, and yeah, it's it's it's pretty cool.
• 1:39:02
  Speaker 1: I think it's good to have. It's good to to
• 1:39:04
  Speaker 1: test your brain and to and to work on new challenges.
• 1:39:07
  Speaker 1: One of the ways that you just you know that
• 1:39:09
  Speaker 1: you don't age as quickly to what otherwise. It's a
• 1:39:12
  Speaker 1: different thought process I find. So I hate looking at
• 1:39:15
  Speaker 1: a blank crossword. I despise them. My wife will take
• 1:39:19
  Speaker 1: a hard crossword puzzle and get stuck nine tenths of
• 1:39:23
  Speaker 1: the way through. Come right, and that's the easy. But
• 1:39:27
  Speaker 1: I need the cross word is terrible, and you have
• 1:39:31
  Speaker 1: to know geography, and I don't know the name of
• 1:39:33
  Speaker 1: that river in this stage. But it's fascinating and it
• 1:39:36
  Speaker 1: is does keep them mind well, earlier in the week
• 1:39:38
  Speaker 1: is easier. The Sunday Monday, it's fabulous. Anybody could do
• 1:39:41
  Speaker 1: the Monday, right. I used to take the train with
• 1:39:44
  Speaker 1: someone who was retired, and her greatest pleasure was if
• 1:39:48
  Speaker 1: she can finish the Friday New York Times crossword puzzle
• 1:39:52
  Speaker 1: before the train pulls in. I mean it's like at
• 1:39:55
  Speaker 1: eight minute, right, that's she She's really had pretty good Monday.
• 1:40:00
  Speaker 1: It's before we're half with it, right. Um, So let's
• 1:40:03
  Speaker 1: talk a little bit about millennials and people just graduating
• 1:40:06
  Speaker 1: in college. What sort of advice would you give somebody
• 1:40:09
  Speaker 1: who says, hey, I'm interested in finance. What would you
• 1:40:13
  Speaker 1: tell them through Instident of Finance. Well, the first thing
• 1:40:16
  Speaker 1: is have a have a career strategy. I mean, one
• 1:40:19
  Speaker 1: of the ironies I've found for myself is I've I've
• 1:40:21
  Speaker 1: had more of a career strategy as I've got older.
• 1:40:24
  Speaker 1: But of course, the time to really develop a strategies
• 1:40:26
  Speaker 1: when you're young and you've got your whole career ahead
• 1:40:28
  Speaker 1: of you. Have a strategy, stay focused. The people who
• 1:40:31
  Speaker 1: are successful pick the right goals and they stay focused
• 1:40:34
  Speaker 1: on achieving those goals. I think that going into finance totally.
• 1:40:40
  Speaker 1: Make sure you're doing things that that are going to
• 1:40:44
  Speaker 1: be demonsibly good for clients. Make sure that whatever you're
• 1:40:47
  Speaker 1: doing there's a there's a clear value add for the client,
• 1:40:50
  Speaker 1: and it's and it's got some meaning for the client,
• 1:40:53
  Speaker 1: because then it's more likely to be sustainable. And my
• 1:40:57
  Speaker 1: final question, what is it that you know about in
• 1:41:00
  Speaker 1: vesting in the world of finance today that you wish
• 1:41:03
  Speaker 1: you knew twenty five years ago when you were starting.
• 1:41:06
  Speaker 1: I mean, I think behavioral finance is so fascinating. I mean,
• 1:41:09
  Speaker 1: it explains so much more. This is under Richard Tyler
• 1:41:13
  Speaker 1: talks about in finance misbehaving. Is that so much of
• 1:41:16
  Speaker 1: economic theory assumes people are just these agents rational products, right,
• 1:41:21
  Speaker 1: he calls them e cons Right, these theoretical people, and
• 1:41:24
  Speaker 1: of course you get booms and busts and all kinds
• 1:41:26
  Speaker 1: of emotion because of human activity. And really appreciating the
• 1:41:32
  Speaker 1: impact of human decision making on markets is something that
• 1:41:35
  Speaker 1: I've come to appreciate much more in the last five
• 1:41:39
  Speaker 1: or ten years relative to when I started out earlier. On, Simon,
• 1:41:44
  Speaker 1: thank you so much for being so generous with your time.
• 1:41:47
  Speaker 1: We have been speaking to Simon lack of sl advisors.
• 1:41:51
  Speaker 1: If you enjoy this conversation, be sure and look up
• 1:41:54
  Speaker 1: an inch, ro down an inch at any of the
• 1:41:56
  Speaker 1: other hundred and thirty nine or so such previous conversation sations.
• 1:42:01
  Speaker 1: I believe you will find most of them to be
• 1:42:03
  Speaker 1: absolutely fascinating. If you want more information about Simon, go
• 1:42:08
  Speaker 1: to Amazon or any fine bookstore and you can get
• 1:42:12
  Speaker 1: the Hedge Fund, mirage, Wall Street, potholes or bonds are
• 1:42:16
  Speaker 1: not forever you publish house where, don't you? What? So
• 1:42:21
  Speaker 1: if someone else wants more information about you, what's the
• 1:42:24
  Speaker 1: best online? Go to our website s l dash advisors
• 1:42:28
  Speaker 1: dot com. Well just google me, Just google Simon Lack,
• 1:42:30
  Speaker 1: Google Simon Lack Um. I would be remiss if I
• 1:42:34
  Speaker 1: did not thank our staff. My recording engineer is Medina Parwana.
• 1:42:42
  Speaker 1: Taylor Riggs handles all of our booking, Charlie Volmer as
• 1:42:46
  Speaker 1: our producer, and Michael bat Nick is the head of
• 1:42:50
  Speaker 1: our research. Our research team, our crack research team. We
• 1:42:55
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• 1:43:01
  Speaker 1: at m IB podcast at Bloomberg dot net. I'm Barry
• 1:43:05
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