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Ted Seides on the World’s Elite Money Managers · Masters in Business

0:02
Speaker 1: This is Master's in Business with Barry Ridholds on Bloomberg Radio.
0:09
Speaker 2: This week on the podcast, once again, I am fortunate
0:13
Speaker 2: to have another extra special guest. Ted Side's has a
0:18
Speaker 2: fascinating career in allocating capital, both on an institutional basis
0:25
Speaker 2: and as an academic theoretical philosophical approach. Perhaps he is
0:31
Speaker 2: best known for a bet he made on a lark
0:35
Speaker 2: with this guy named Warren Buffett, which we spend a
0:37
Speaker 2: lot of time talking about. Really a hilarious and amazing
0:42
Speaker 2: conversation about this delightful experience he had. But he spent
0:47
Speaker 2: most of his career allocating capital to various hedge funds,
0:51
Speaker 2: private equity, venture etc. First working for David Twentzon at
0:56
Speaker 2: Yale and then later at Protege Partners, and now talks
1:01
Speaker 2: about the philosophy and art and science of allocation at
1:06
Speaker 2: Capital Allocators. I found our discussion to be an absolute joy,
1:11
Speaker 2: and I think you will also with no further ado,
1:15
Speaker 2: my conversation with Ted Side's of Capital Allocators.
1:19
Speaker 1: Thanks Barry, great to be here with you.
1:21
Speaker 2: That is quite a CV I stumbled through. Let's talk
1:26
Speaker 2: a little bit about your alternative investments career. How did
1:31
Speaker 2: you get started in this space.
1:33
Speaker 1: I got lucky in a sense that when I was
1:35
Speaker 1: an undergraduate at Yale, I took a class with David Swinson.
1:40
Speaker 2: God, I'm just so jealous at that sentence right then
1:44
Speaker 2: and there.
1:44
Speaker 1: Yeah, I didn't know a whole lot about markets or stocks.
1:48
Speaker 1: I had a mild passing interest in it. But he
1:51
Speaker 1: mentioned in this class that they hired one person a year,
1:54
Speaker 1: and so, alongside of Wall Street recruiting, in my senior year,
1:57
Speaker 1: I interviewed at the Ye Investment's office. Was fortunate to
2:01
Speaker 1: get that job and violated the two principles I had
2:04
Speaker 1: at the time, which was I wanted to be in
2:06
Speaker 1: a training program and I wanted to leave New Haven.
2:09
Speaker 2: And so you stayed in New Haven and did not
2:13
Speaker 2: enter a training program, although arguably working on just Onson
2:17
Speaker 2: is its own sort of training program, isn't it.
2:19
Speaker 1: Of course it was, but who knew at the time.
2:22
Speaker 1: This was back in nineteen ninety two. So that was
2:25
Speaker 1: my initial foray into the investment business.
2:29
Speaker 2: So you graduate cum LAUDI from Yale, you end up
2:32
Speaker 2: going to Harvard Business School. Tell us a little bit
2:36
Speaker 2: about how that led you to working with some of
2:40
Speaker 2: the managers that worked with the Yale Endowment.
2:42
Speaker 1: Sure, well, I spent five years working for David and
2:46
Speaker 1: learned just to a tremendous amount.
2:48
Speaker 2: That was really your MBA right there.
2:50
Speaker 1: That was my true investment MBA. David didn't want me
2:53
Speaker 1: to go to Busins school. He said, you're not going
2:54
Speaker 1: to learn anything about investing. You just stay here for
2:57
Speaker 1: a couple more years. But I really had an interest
2:59
Speaker 1: in trying to work directly at markets, and so my
3:04
Speaker 1: summer job at business school, I worked for a hedge
3:06
Speaker 1: fund that Yale had money with, and that was the
3:08
Speaker 1: summer of ninety eight. They were value long growth short.
3:12
Speaker 1: When Amazon went from forty dollars to two hundred and
3:15
Speaker 1: sixty dollars the same summer, phenomenal firm.
3:18
Speaker 2: Did long term capital management impact them at all?
3:22
Speaker 1: No, I mean not while I was there. I was
3:24
Speaker 1: there during the summer so that a few months later,
3:26
Speaker 1: two months later, it did. And then when I came out,
3:31
Speaker 1: I felt like I wanted to learn more about business
3:33
Speaker 1: analysis compared to stocks, even though that was my passion
3:37
Speaker 1: for stocks. So I worked at a private equity firm,
3:40
Speaker 1: that middle market private equity firm Yell had money with,
3:42
Speaker 1: and then I got wooed by a friend from business
3:44
Speaker 1: school to a larger one. And those were my kind
3:47
Speaker 1: of three formative experiences in direct investing.
3:50
Speaker 2: Hedge fund, private equity, and Yelle endowment. Right now, that's
3:54
Speaker 2: a that's a hell of a list. Are you still
3:58
Speaker 2: working with any of the managers Yale or is that
4:00
Speaker 2: along the disc.
4:02
Speaker 1: I mean that I left Yale twenty five years ago,
4:04
Speaker 1: so it's a little bit in the distant past.
4:07
Speaker 2: So it's funny because for a while what we were
4:10
Speaker 2: calling the Yale model. Really the genius of David Swinson
4:15
Speaker 2: was that he was so early to alternatives when they
4:18
Speaker 2: were small, they were mostly outperformers. There was a lot
4:21
Speaker 2: of alpha generation, not a giant pond to fish in,
4:27
Speaker 2: and the Yale model did spectacularly. What's the driver for
4:32
Speaker 2: endowment if not under performance? Well, certainly worse performance than
4:36
Speaker 2: we saw in the eighties, nineties and early two thousands.
4:39
Speaker 1: Yeah, I mean, the only caveat I would give to
4:42
Speaker 1: what you said is, I'm not sure if you measured
4:44
Speaker 1: it properly, the performance is worse.
4:48
Speaker 2: Oh no, it's much was it's lower. May it's lower.
4:51
Speaker 2: That's fair.
4:52
Speaker 1: But market returns the.
4:55
Speaker 2: Past decade twenty ten to twenty twenty, we were what
4:58
Speaker 2: fourteen fifteen.
4:59
Speaker 1: Percent your benchmark, which it isn't. For these pools of capital,
5:03
Speaker 1: what should.
5:03
Speaker 2: Be their benchmark? That's a that's a very by the way,
5:06
Speaker 2: very fair point your global investor. Maybe the SMP isn't
5:10
Speaker 2: the best manage that's right.
5:11
Speaker 1: I mean the one of the early innovative beliefs that
5:15
Speaker 1: David Swinson had was that if you're managing a pool
5:18
Speaker 1: of capital for what's effectively a perpetual time horizon infinite, right,
5:22
Speaker 1: you want thoughtful diversification. So if you start with the
5:27
Speaker 1: S and P five hundred, or in this case, stocks
5:29
Speaker 1: and bonds, you only have two asset classes. And the
5:32
Speaker 1: question was, if you can find other areas of investment
5:35
Speaker 1: that can generate the types of returns you need for
5:37
Speaker 1: your liability stream, diversification becomes the free launch. So the
5:42
Speaker 1: proper benchmark for those pools has to look a little
5:45
Speaker 1: bit like the underlying assets they're investing in.
5:47
Speaker 2: Fair enough, what so what what do you use for
5:50
Speaker 2: a benchmark? Now keep in mind, let's let's talk about
5:54
Speaker 2: what David invested in as an example. So of course
5:58
Speaker 2: there was stocks and bonds, but there was real estate,
6:01
Speaker 2: There were commodities before anybody had any idea, Wait, timber,
6:05
Speaker 2: why are we investing in timber? And then there was
6:08
Speaker 2: venture capital and private credit and hedge funds. So how
6:12
Speaker 2: do you create a benchmark for an allocation that looks
6:16
Speaker 2: nothing like a sixty forty allocation?
6:19
Speaker 1: Well you have to think about what you're trying to measure.
6:22
Speaker 1: So one reasonable benchmark, as you said, could be a
6:25
Speaker 1: sixty forty or seventy thirty. That's a really easy portfolio
6:28
Speaker 1: to create, and for sure, over the last ten fifteen
6:31
Speaker 1: years it's been hard to beat. Over a longer period
6:34
Speaker 1: of time, maybe not so much. If you look at
6:37
Speaker 1: the types of assets that you'll invests, and you can
6:40
Speaker 1: create a benchmark for each pool, and that allows you
6:44
Speaker 1: to do two things. It allows you to understand, generally speaking,
6:47
Speaker 1: what is a reasonable beta for that whole portfolio. And
6:51
Speaker 1: the other thing it allows you to do is to
6:53
Speaker 1: benchmark your ability to select managers that outperform both in
6:57
Speaker 1: each areas and across the sleeve. So you can imagine
6:59
Speaker 1: in real estate, there's a net Creef real estate index
7:03
Speaker 1: you could use. You could also use it read index,
7:05
Speaker 1: though it's not the same. In private markets, there are
7:08
Speaker 1: pure benchmarks in venture capital and private equity that you
7:11
Speaker 1: can use, and then you can aggregate those across the
7:13
Speaker 1: asset classes to get a benchmark for the pool as
7:16
Speaker 1: a hole. Huh.
7:17
Speaker 2: Really intriguing. So the two issues that have changed since
7:22
Speaker 2: the heyday of the Yale model. One is everybody's imitating
7:27
Speaker 2: the Yale model. So the first question is does that
7:30
Speaker 2: create challenges for an allocator that wants to follow the
7:34
Speaker 2: Yale model. It's no longer Hey, I got this whole
7:38
Speaker 2: field to myself. I got five hundred other endowment's foundations
7:42
Speaker 2: institutions trying to play in, trying to fish in this pond.
7:46
Speaker 1: Yeah, it absolutely does. And I think when you think
7:49
Speaker 1: through the Yale model, it helps to understand what David
7:54
Speaker 1: was thinking as opposed to what you put a label
7:57
Speaker 1: on the Yale model on what that means. David's brilliance
8:01
Speaker 1: was he started everything with first principles, you know, what
8:05
Speaker 1: makes sense? What set of beliefs do you have about
8:08
Speaker 1: the world in investing? And then how do you go
8:10
Speaker 1: about and applying that with extreme discipline. He kind of
8:13
Speaker 1: wrote about that in his book, and people look at
8:16
Speaker 1: that and say, oh, I can replicate that, But most
8:18
Speaker 1: people have trouble having their own beliefs and then sticking
8:22
Speaker 1: to them when the rubber meets the road. In terms
8:24
Speaker 1: of execution. The other piece of it that David had
8:27
Speaker 1: that no one really could replicate is this deep belief
8:30
Speaker 1: in continuous improvement and incredible vision to see both, you know,
8:36
Speaker 1: big opportunities like you could think about hedge funds way
8:39
Speaker 1: back when, and then also small opportunities. So he thought
8:42
Speaker 1: about fees thirty five forty years ago before anyone else,
8:45
Speaker 1: and when you could do something about.
8:47
Speaker 2: It, it was him and Jack Bogel. That was pretty
8:49
Speaker 2: much it. Yeah, thinking about fees. So the other side
8:51
Speaker 2: of this is, and I'm gonna channel Jim Chenos who
8:56
Speaker 2: said of Kinnico's associates famous shorts, he said, you know,
9:01
Speaker 2: in the eighties there was five hundred hedge funds. They
9:05
Speaker 2: all generated alpha. Now there's eleven thousand hedge funds and
9:09
Speaker 2: five hundred generating alpha. So the other challenge is how
9:13
Speaker 2: do you choose from the pool of eleven thousand hedge
9:18
Speaker 2: funds and ten thousand venture funds and god knows how
9:21
Speaker 2: many private equity funds and private credit funds. Making the
9:24
Speaker 2: choice within the allocation seems to have become a whole
9:28
Speaker 2: lot more difficult, more complex, and even if you find
9:34
Speaker 2: a fund manager you really like, you're now competing with
9:37
Speaker 2: other LPs to put your billion dollars there.
9:41
Speaker 1: Yeah, that's absolutely right, And depending on the asset class,
9:45
Speaker 1: there are a different set of lenses. But just to
9:47
Speaker 1: use that example, in long short equity investing, the first
9:50
Speaker 1: question you have to ask is is that a place
9:51
Speaker 1: you want to be anymore?
9:52
Speaker 2: Right?
9:53
Speaker 1: Because it is a much tougher game, particularly adding value
9:56
Speaker 1: on the short side.
9:56
Speaker 2: Than shorting has always been hard. There's this there's this
10:00
Speaker 2: myth that people put out a short position and then
10:04
Speaker 2: talk it down and just count the money. It's much
10:07
Speaker 2: harder than that.
10:07
Speaker 1: Yeah, So I think selecting managers in any asset class
10:12
Speaker 1: has that two pieces right. So one is going back
10:16
Speaker 1: to David's first principles. What do you believe about what
10:20
Speaker 1: type of manager should outperform it. There's some people who
10:22
Speaker 1: think fundamental discretionary investing with people who know their business
10:27
Speaker 1: is better than anyone else is the right way to
10:29
Speaker 1: do it. There are other people that think, no, you
10:30
Speaker 1: need to be large and systematic, like Citadel or Millennium.
10:34
Speaker 1: There's no right or wrong, but you have to follow
10:37
Speaker 1: your own set of beliefs for what you think will
10:39
Speaker 1: work for your pool. The other piece of it, say,
10:42
Speaker 1: in something like venture capital, which you mentioned, access really matters,
10:47
Speaker 1: and that's where you could look at a Yale and
10:50
Speaker 1: say they had a first mover advantage thirty years ago.
10:53
Speaker 1: They are already in the top tier venture managers who
10:56
Speaker 1: don't take money from anybody else. And there are a
10:58
Speaker 1: lot of investors say that I have on the podcast
11:01
Speaker 1: to say, if we can't get into those top venture
11:03
Speaker 1: you don't have an allocation to venture. You have a
11:06
Speaker 1: group of managers and you take what you can get,
11:08
Speaker 1: but you don't extend beyond what you believe or the
11:12
Speaker 1: very top tier, because the dispersion of returns in that
11:14
Speaker 1: asset class is really wide, and you only want to
11:16
Speaker 1: be intay that top quarte.
11:18
Speaker 2: So we'll circle back to this podcast thing you referenced
11:21
Speaker 2: later because I'm interested in that. But I love the
11:25
Speaker 2: idea of the first move advantage. When you think about
11:28
Speaker 2: the Yale model. When Swanson was first allocating to these
11:33
Speaker 2: other asset types, commodities, lands, alternatives, it was the wild West,
11:40
Speaker 2: it was wide open. How much of an advantage did
11:44
Speaker 2: he have being a pioneer in those spaces. The old
11:47
Speaker 2: joke is yeah, yeah, the second mouse gets the cheese.
11:51
Speaker 2: In this case, it looks like the first mouse got
11:52
Speaker 2: the jets.
11:53
Speaker 1: It was shooting fish in a barrow. Really, when I
11:55
Speaker 1: worked at Yale, the hardest part of the game was
12:00
Speaker 1: understanding that the game was getting played, knowing where to
12:03
Speaker 1: go to access it, and then on top of that,
12:05
Speaker 1: having your board approval to let you do it. So
12:09
Speaker 1: to give you some examples of that, I joined Yale
12:12
Speaker 1: in ninety two. David was there in eighty five. There
12:15
Speaker 1: were some venture investments. When they got there. It wasn't
12:17
Speaker 1: a full thing, but they loved it. They quickly understood
12:21
Speaker 1: the potential for that. Oh the board, no yell David
12:24
Speaker 1: and Dean Takashi the team at Yale.
12:27
Speaker 2: But did the oversight. The governance was already in place.
12:30
Speaker 1: They really did.
12:31
Speaker 2: That's a huge aspect of Yale's success, no doubt the success.
12:35
Speaker 1: Of that governance. So they then had time to go
12:41
Speaker 1: to Silicon Valley to meet with the people, to see
12:44
Speaker 1: over a decade who was good and who wasn't, to
12:47
Speaker 1: ask questions and to make mistakes. That's a huge first
12:50
Speaker 1: move advantage. By the time I got there in ninety two,
12:53
Speaker 1: they had a great venture portfolio and almost nobody else
12:56
Speaker 1: even understood what venture.
12:58
Speaker 2: Capital was just starting to run up up ninety three,
13:01
Speaker 2: ninety four, ninety five, and by late nineties everyone had
13:04
Speaker 2: been piling in. If you're there a decade before, talk
13:08
Speaker 2: about first movie, Oh my goodness.
13:09
Speaker 1: And hedge funds were the same way. To give you
13:11
Speaker 1: a fun story. We launched Protege Partners in two thousand
13:14
Speaker 1: and two. In that period of time ninety two to two,
13:19
Speaker 1: you really had a golden era of hedge funds in
13:21
Speaker 1: terms of returns.
13:22
Speaker 2: Now, the whole pre financial crisis decade or two, hedge
13:27
Speaker 2: funds crushed crushed it, or at least the top pick
13:30
Speaker 2: a number thirty forty percent less twenty thirty percent.
13:34
Speaker 1: I know. Back then the premier job in asset management
13:37
Speaker 1: was to run Fidelity Magellan. There was no reason to
13:40
Speaker 1: think people would make billions of dollars running hedge funds.
13:43
Speaker 1: It was such a boutique industry. I used to say
13:44
Speaker 1: that the guys who ran hedgehunds were the one who
13:46
Speaker 1: woke up on the wrong side of the bed in
13:48
Speaker 1: the morning and felt like they just had to short
13:50
Speaker 1: because things were going wrong. So when we launched Protege,
13:53
Speaker 1: we had we had a classification of hedge funds and
13:56
Speaker 1: said we're going to not invest in the large ones.
14:00
Speaker 1: In two thousand and two, the bucket of the largest
14:02
Speaker 1: hedge funds was those north of one billion dollars. And
14:06
Speaker 1: then I started reaching out to some of the managers
14:08
Speaker 1: I knew for my time at Yale, and one of
14:10
Speaker 1: them said to me, we're closed. We have a weight list,
14:14
Speaker 1: and I said, what what is that? He said, I
14:15
Speaker 1: don't know. But all of a sudden people have said,
14:18
Speaker 1: why don't you start a wait list?
14:20
Speaker 2: We're at a capacity And that's that.
14:21
Speaker 1: Before two thousand and two, there were no capacity issues
14:25
Speaker 1: with whoever you thought the best hedge funds were.
14:27
Speaker 2: And subsequently there's been some academic research that has implied,
14:32
Speaker 2: I don't want to say you found, but strongly implied
14:36
Speaker 2: that much and again much not most of the alpha
14:40
Speaker 2: is coming from the emerging managers, you know.
14:43
Speaker 1: So that was the premise of the business we started
14:45
Speaker 1: at Protege, and I would tell you that whow true
14:49
Speaker 1: in that academic research, it's all deeply flawed.
14:52
Speaker 2: Well, there's a little hindsight bias built in.
14:55
Speaker 1: Right, there's hindsight bias. The data of the managers you
14:59
Speaker 1: really want to measure isn't included, and.
15:01
Speaker 2: It's all self reported, right.
15:03
Speaker 1: And then I've never seen a study who said that
15:06
Speaker 1: the large managers were anything north of fifty million in
15:10
Speaker 1: assets the large managers. So you look at those studies,
15:13
Speaker 1: they see these small ones are less than five million.
15:16
Speaker 2: Million or billion. Are we talking like that's a typo?
15:19
Speaker 2: It sounds like because do you look at Millennium and
15:22
Speaker 2: Citadel and oak Tree and correct AQR which just had
15:27
Speaker 2: a fantastic year, and Bridgewater We're talking fifty one hundred,
15:32
Speaker 2: one hundred and fifty billion dollars. These are massive pols.
15:34
Speaker 1: The promise the academics should do the research don't have
15:37
Speaker 1: access to the performance data of the funds that matter.
15:41
Speaker 1: None of them are call it asset weighted. And so
15:44
Speaker 1: those studies, while true and while they seem to have
15:48
Speaker 1: an intellectual vigor to them in thought process, they're really
15:54
Speaker 1: not based on anything in the real world of the
15:57
Speaker 1: investment market.
15:58
Speaker 2: So all of this tease up the obvious question, was
16:01
Speaker 2: Warren Buffett right or most people better off in an
16:04
Speaker 2: index fund than playing with an active manager, be it
16:08
Speaker 2: a mutual fund or high fee hedge funds.
16:11
Speaker 1: Yeah, I said back then the bets started in two
16:14
Speaker 1: thousand and seven, and I say today, being in the
16:17
Speaker 1: market and investing in hedge funds is completely apples and oranges.
16:22
Speaker 1: So for a taxable investor, hedge funds generally aren't tax efficient.
16:26
Speaker 1: And when you look at the assets that are invested
16:28
Speaker 1: the three trillion in hedge funds, I would guess that
16:31
Speaker 1: north of ninety percent of that are in institutions that
16:34
Speaker 1: don't pay.
16:34
Speaker 2: Tax, so foundations, endowments.
16:36
Speaker 1: So as an individual it probably doesn't make sense generally speaking.
16:39
Speaker 1: As an institution, it has a very different risk return
16:43
Speaker 1: profile that, when done well, fits in really well with
16:48
Speaker 1: the diversified portfolio that we talked about earlier.
16:51
Speaker 2: You have to tell us how where did the idea
16:54
Speaker 2: come from? How did you reach out to Buffet? And
16:57
Speaker 2: what was his response?
16:58
Speaker 1: Yeah, well, in you have to go back. This is
17:01
Speaker 1: the summer of two thousand and.
17:03
Speaker 2: Seven seven, So let me set the table a little bit. Yeah,
17:06
Speaker 2: the run up in the dot COM's to two thousand,
17:09
Speaker 2: I have a vivid recollection of people saying, ah, Buffet's
17:12
Speaker 2: all these lustes touch right. Then everything implodes and again
17:16
Speaker 2: Buffett is outperforming for a while posts October Lows and
17:22
Speaker 2: two March double bottom, O three the invasion of Iraq.
17:26
Speaker 2: By the time you get to seven, market's up eighty
17:29
Speaker 2: ninety percent from the lows, and housing is just about
17:35
Speaker 2: peaking and things are starting to come apart around then
17:38
Speaker 2: by seven it's pretty clear that the housing bears are
17:42
Speaker 2: are gonna be right.
17:43
Speaker 1: That's right. So I had seen that Warren had made
17:49
Speaker 1: a comment to a bunch of students. So a year
17:52
Speaker 1: or two before that he had written about fees, the
17:56
Speaker 1: head rocks, and the gut rocks, and I guess he
17:59
Speaker 1: had made some throwwake that hedge funds could never beat
18:01
Speaker 1: the market. A student asked him about it, and his
18:04
Speaker 1: response was, well, no one's taken me up on it,
18:06
Speaker 1: so I must be right.
18:07
Speaker 2: Meaning no one's taking me up on his statement. Or
18:10
Speaker 2: did he lay out a challenge.
18:13
Speaker 1: I'm not quite sure because I didn't hear what he
18:15
Speaker 1: originally said, but it came off as it was a
18:18
Speaker 1: form of a challenge. And at the time I was
18:22
Speaker 1: managing proj Partners with a hedge fund of funds. We
18:25
Speaker 1: were short subprime mortgages with John.
18:28
Speaker 2: You were crushing it. Let me say what Your compliance
18:30
Speaker 2: wouldn't allow you to say. You guys were killing it
18:33
Speaker 2: in the mid two thousands.
18:34
Speaker 1: We had a great run. And I read a statement
18:38
Speaker 1: and my thought was, look, he's Warren Buffett, but he
18:41
Speaker 1: just made a really bad bet because for all the
18:44
Speaker 1: reasons you just said, the S and P was trading
18:46
Speaker 1: it all time highs. And let's keep mind interest rates
18:48
Speaker 1: were normalized then and.
18:51
Speaker 2: What mid they had just started going up.
18:54
Speaker 1: Well rates short term rates were four or five six.
18:56
Speaker 2: Pers Okay, so reasonable, right?
18:59
Speaker 1: And I looked at that and said, well, you know
19:04
Speaker 1: you wouldn't want to bet on the market over ten
19:06
Speaker 1: years starting at that point in time. And meanwhile, hedge
19:09
Speaker 1: funds had been cranking along, generating market like returns with
19:13
Speaker 1: a lot less volatility. And so I wrote him a
19:16
Speaker 1: one page letter and mail or hard C. I didn't
19:20
Speaker 1: have his email, so I sent it snail mail, and
19:23
Speaker 1: he sent back through his assistant a PDF with a
19:28
Speaker 1: little chicken scratch response, and I made the letter. I
19:31
Speaker 1: actually put the letter in my first book to describe
19:35
Speaker 1: how you get somebody's attention. And he said, well, it
19:39
Speaker 1: has to be this and that and has to be
19:41
Speaker 1: clatteralized with a letter of credit. And I was like what,
19:44
Speaker 1: And so I sent me another.
19:45
Speaker 2: Specifically the bet. He wanted cash up front credit It's unclear,
19:50
Speaker 2: but he didn't want anybody just sort of, you know,
19:53
Speaker 2: fooling around. He wanted serious.
19:55
Speaker 1: Correct. It felt a little dismissive. So I sent him
19:58
Speaker 1: another one. I said, Okay, fine of you say, and
20:01
Speaker 1: then he's warm Buffett.
20:03
Speaker 2: Why are you gonna argue with him about it? Right?
20:04
Speaker 2: Started the terms great, I'm in Yeah. It started a back.
20:08
Speaker 1: And forth series of letters. It was all written out
20:13
Speaker 1: that was hysterical.
20:14
Speaker 2: But by the way, I just picture I just I
20:17
Speaker 2: just picture this as a sort of sort of a
20:22
Speaker 2: Civil War soldier writing home dearest Martha. I am considering
20:28
Speaker 2: it like in the two thousands, you guys are sending
20:32
Speaker 2: letters back and forth.
20:33
Speaker 1: Yeah, that's right. And it got to the point where
20:37
Speaker 1: there was the potential to do this nonprofit like charitable bet.
20:42
Speaker 2: By the way, I don't even have to ask, but
20:44
Speaker 2: I'm gonna ask. You have all these letters saved framed somewhere,
20:49
Speaker 2: like please tell me you kept ev.
20:51
Speaker 1: It's in a PDF.
20:52
Speaker 2: But I mean the originals, the original so three, four,
20:56
Speaker 2: five times, how many times back.
20:58
Speaker 1: And forth something like that. Yeah, don't remember the exact amount.
21:01
Speaker 1: And I had originally said, hey, let's bet dinner at
21:03
Speaker 1: Gorat's his favorite place. Maybe one hundred thousand dollars your
21:07
Speaker 1: annual salary all that kind of stuff.
21:09
Speaker 2: Oh, no, he wants to step it up.
21:11
Speaker 1: He said that his estate planners would be thought he
21:13
Speaker 1: was nuts anyway for doing something so small. But yeah,
21:16
Speaker 1: So I went and talked to my partners at Protege,
21:20
Speaker 1: Scott Besseno, who now runs a macro hedge fund ransros
21:23
Speaker 1: after for a year my original partner passed by a
21:25
Speaker 1: couple of years ago and said, hey, by the way,
21:27
Speaker 1: I've been corresponding with Warren about there, like what And
21:31
Speaker 1: Scott read the letters and he said, I'll never forget this.
21:34
Speaker 1: He said, huh, it looks like Warren recognizes he's the
21:38
Speaker 1: patsy at the poker table, but he has the most chips, right,
21:43
Speaker 1: Because every time I'd say okay, let's do it this way,
21:45
Speaker 1: there was something back that said, well, it has to
21:47
Speaker 1: be like this, And it got to the point where
21:48
Speaker 1: he said, okay, do we want to do this or not?
21:50
Speaker 1: And then it's actually hard to make a legal bet.
21:54
Speaker 1: It's probably easier now right there, Some betting is legal loss.
21:57
Speaker 1: But then it wasn't. And he found through his lawyer
22:00
Speaker 1: a foundation called the Long Bets. They've been around for
22:04
Speaker 1: a long time that allows you to make charitable bets
22:08
Speaker 1: based on long term educational beliefs. And so that's what
22:12
Speaker 1: we did, and we we find we made it for
22:14
Speaker 1: a million dollars. We split the value, we split the
22:18
Speaker 1: amount and bought a zero coupon bond of the present
22:21
Speaker 1: value upfront, so back in.
22:24
Speaker 2: So ten years in advance with a four or five
22:26
Speaker 2: so ourse like four hundred it.
22:28
Speaker 1: Was six hundred and fifty is put in three twenty
22:31
Speaker 1: five something. Oh really, and then the money would go
22:34
Speaker 1: to the winner's charity at the end of ten.
22:36
Speaker 2: That's a very reasonable bet. That's a very honorable bet
22:40
Speaker 2: because it's not a matter of taking money from one
22:44
Speaker 2: person or another. Both people are kicking money in so technically,
22:49
Speaker 2: and that's probably why it was legal. There's no gambling.
22:52
Speaker 1: And I'll tell you a story that's fun about the
22:54
Speaker 1: communication of it too. So Warren wanted to announce this
22:58
Speaker 1: at his annual meeting every year here and originally I
23:02
Speaker 1: wanted to make it anonymous. So there's a bunch of
23:04
Speaker 1: reasons why it didn't end up being that way.
23:06
Speaker 2: Did he Was he going to have you at the
23:08
Speaker 2: annual meeting? Was that the plan? Or was he just
23:10
Speaker 2: going to announce that was independent.
23:12
Speaker 1: I did go a bunch of years.
23:14
Speaker 2: But I mean on stage to the audience.
23:16
Speaker 1: Oh no, let everybody boo and no, no, no, that
23:19
Speaker 1: was never a part of the plan. Didn't happen. What
23:20
Speaker 1: was interesting was I had said to him, well, let's
23:22
Speaker 1: make this really educational. I'm happy to have you announce
23:25
Speaker 1: the results, but let's only announce the result after a
23:29
Speaker 1: period of time when the markets dropped ten percent, because
23:31
Speaker 1: I think that'll show the value of a hedgemomp portfolio.
23:34
Speaker 2: And what did he say?
23:35
Speaker 1: He said, no, no, this is part of the cat
23:37
Speaker 1: and mouse. No, no, no, I think we need it.
23:39
Speaker 1: Right from the beginning, I was like, yeah, but this
23:41
Speaker 1: isn't a horse race. This is about investing. He said, no, no,
23:43
Speaker 1: I think we needed.
23:43
Speaker 2: It is a horse race because there's a start and
23:46
Speaker 2: a finish.
23:47
Speaker 1: So that's how it came about. It started on January
23:52
Speaker 1: one of two thousand and eight.
23:54
Speaker 2: Great timing for hedge funds. Right, you would.
23:56
Speaker 1: Think, and it played out that way. It took about
24:01
Speaker 1: five years for the market to catch up from that
24:04
Speaker 1: one year of pain, and it wasn't glory days for
24:07
Speaker 1: hedge funds, right. Once Lehman went under, that caused a
24:10
Speaker 1: lot of pain for hedge funds as well.
24:12
Speaker 2: One would have thought they would have seen that writing
24:15
Speaker 2: on the wall. But let's that's that's a topic for
24:18
Speaker 2: another conversation. If you're a long short fund at the
24:21
Speaker 2: very least, and David Einhorn and others very famously was
24:24
Speaker 2: short Lehman Brothers.
24:26
Speaker 1: Yeah, no, you're right about the securities that the challenge is.
24:29
Speaker 1: Unlike the S and P five hundred, hedge funds sit
24:32
Speaker 1: in a box that has underlying credit risk from prime brokers.
24:36
Speaker 1: So the credit markets froze, and that wasn't a question
24:39
Speaker 1: of security prices going down. It's a question of like
24:41
Speaker 1: can you transact? And what is that?
24:43
Speaker 2: My colleague Ben Carlson calls that organizational alpha, and it's
24:47
Speaker 2: a great phrase because suddenly the infrastructure gets creaky and
24:53
Speaker 2: you can't do anything that's right. So fascinating to hear
24:57
Speaker 2: that Buffett is so coy about this, right, tell everybody
25:03
Speaker 2: what the result was ten years later.
25:05
Speaker 1: So after ten years, FED comes in, the market probably
25:08
Speaker 1: generates seventeen to eighteen percent a year for the last
25:10
Speaker 1: nine years, and the SMP five hundred beats the hedge
25:12
Speaker 1: funds by a wide margin.
25:13
Speaker 2: Right, crushes it. And you basically preempted my question, which
25:19
Speaker 2: was why do you think that was?
25:20
Speaker 1: So?
25:20
Speaker 2: Was it the financial crisis? Was it QE, was it ZERP?
25:24
Speaker 2: What was the real reason that the hedge funds just
25:27
Speaker 2: never caught up after a great start.
25:30
Speaker 1: Yeah, well again I would look at it differently. So
25:33
Speaker 1: you have the market which got crushed and then FED
25:36
Speaker 1: comes in, and you end up with seven or eight
25:39
Speaker 1: percent a year, which is a historical average, right, including
25:42
Speaker 1: the biggest crisis since nineteen twenty nine, So you wouldn't
25:45
Speaker 1: expect that ten year period to have a historical average
25:47
Speaker 1: return on the hedge fund side. A couple things happened. First,
25:50
Speaker 1: as you talked about earlier, you had in that decade
25:54
Speaker 1: a lot more competition, You had a lot more money
25:57
Speaker 1: coming in, and I think it's reasonable to think that
26:00
Speaker 1: the alpha pool shrunk, So that's one. The second is structural,
26:05
Speaker 1: which we haven't seen in fifteen years, but we're starting
26:08
Speaker 1: to see now, which is hedge from returns are a
26:11
Speaker 1: direct function of the level of interest rates. Huh, Because
26:15
Speaker 1: when you put out a short position, you get a
26:17
Speaker 1: short rebate, and when the FED brought rates to zero,
26:20
Speaker 1: not only were you not getting a rebate, you were
26:22
Speaker 1: paying to short.
26:23
Speaker 2: You always have to pay to borrow. But usually there's
26:25
Speaker 2: an offset at zero.
26:26
Speaker 1: There's no offset right at five percent. Where we are today,
26:30
Speaker 1: you're probably making three and a half percent a year
26:32
Speaker 1: just for showing up. So there was a structural piece.
26:35
Speaker 1: You think about the difference between zero and three and
26:37
Speaker 1: a half percent, it's actually pretty similar to the difference
26:40
Speaker 1: in what the S and P generated during that period
26:42
Speaker 1: and what hedge fund's generated.
26:44
Speaker 2: So here's the pushback to that. And I think you
26:47
Speaker 2: said it before. You said you wouldn't have expected that
26:51
Speaker 2: there would have been this outsized return following the financial crisis.
26:57
Speaker 2: But that's the whole point of the bet. Managers didn't
27:00
Speaker 2: expect it, and the SMP doesn't care. The SMP rides that,
27:04
Speaker 2: and so the winner was the lack of human judgment
27:09
Speaker 2: by a dumb index as opposed to managers. So I
27:13
Speaker 2: have a very vivid recollection of the financial crisis not
27:17
Speaker 2: just because I was trading around it and more or
27:20
Speaker 2: less got it right, but I was writing a book
27:23
Speaker 2: and publishing it online as I was writing it, researching
27:26
Speaker 2: it online, and the pushback in nine and ten and
27:30
Speaker 2: eleven and twelve to the bullmarket. My philosophy has always been, hey,
27:36
Speaker 2: take a US index, cut it in half. I'm a
27:39
Speaker 2: buyer right there. I don't care what's going on the
27:40
Speaker 2: rest of the world twenty nine, eighty seven, seventy four.
27:47
Speaker 2: Just pick any fifty plus percent number, and certainly two
27:50
Speaker 2: thousand and eight oh nine, a major index gets cut
27:54
Speaker 2: in half, you want to at least put a toe
27:57
Speaker 2: in the water, if not not go large. So that
28:00
Speaker 2: was what was so shocking to me that no one
28:04
Speaker 2: or I shouldn't say that. What was so shocking to
28:06
Speaker 2: me was how much pushback people gave in the early
28:11
Speaker 2: part of the twenty tens following a giant reset, free money,
28:16
Speaker 2: zero cost of capital, some but not a lot of
28:19
Speaker 2: fiscal stimulus. I think a lot of fund managers had
28:26
Speaker 2: I like to call it zero edge. You know that
28:29
Speaker 2: they had a narrative they believed in and no amount
28:32
Speaker 2: of data would change their mind. Is that a fair
28:35
Speaker 2: pushback to this is why the S and P five
28:37
Speaker 2: hundred beat a bunch of hedge fund managers.
28:40
Speaker 1: I think it's always fair to say you believe arry
28:44
Speaker 1: part of your belief systems that a hedge fund is
28:47
Speaker 1: supposed to capture these moves in markets.
28:49
Speaker 2: Some of them, one would think, right.
28:51
Speaker 1: I'm sure some of them did and some of them didn't.
28:53
Speaker 1: So you're talking about an average of a large number.
28:56
Speaker 1: I would say, that's not really part of my belief
28:59
Speaker 1: system of what hedge funds trying to deliver. It's much
29:02
Speaker 1: more about security selection and a relatively static portfolio construction.
29:06
Speaker 1: So I think that argument is very valid. In those
29:09
Speaker 1: couple of years two thousand and nine, twenty ten, probably
29:13
Speaker 1: maybe twenty eleven, which was a tough year for hedgehunts,
29:16
Speaker 1: you still had twenty twelve to two thousand and seventeen
29:19
Speaker 1: to finish the bet, and that was just the market
29:23
Speaker 1: what we've seen in tech stocks. It was just a
29:25
Speaker 1: very very hard index to beat, no matter what you
29:27
Speaker 1: were doing.
29:28
Speaker 2: So here's the lesson I learned from your bet. Because
29:31
Speaker 2: I was very alternatives are too expensive. Everything is pricedy.
29:36
Speaker 2: These guys all eventually underperform. But I've evolved that view
29:40
Speaker 2: over time to hey, if you could get into the top.
29:44
Speaker 2: Deccyle right. I once was speaking somewhere and trashing hedge
29:48
Speaker 2: funds and someone said, I have an allocation that I
29:51
Speaker 2: inherited from my father in d E Shaw. Are you
29:54
Speaker 2: telling me I should sell that? And my answer was
29:55
Speaker 2: absolutely not. If you're in go down the list of
29:59
Speaker 2: the top. I don't know one hundred hedge funds out
30:02
Speaker 2: of eleven thousand. There the alpha generators. The challenge is
30:06
Speaker 2: the median is very different than the experience you had
30:11
Speaker 2: at Yale when there were five hundred hedge funds and
30:14
Speaker 2: five hundred alpha generators.
30:16
Speaker 1: It's much harder with more capital there. But you have
30:19
Speaker 1: to keep in mind that what you see in an
30:21
Speaker 1: index tends to be equal weighted, and the experience of
30:26
Speaker 1: investors is asset weighted by definition. So where institutional investors
30:31
Speaker 1: have their money in hedge funds is with d Shaw,
30:34
Speaker 1: it is with Millennium, it is with Citadel, and these
30:37
Speaker 1: firms have continued to generate call it alpha excess returns,
30:41
Speaker 1: and that's why the assets have stayed in call it
30:45
Speaker 1: the asset class or the strategies. When there's so much
30:47
Speaker 1: scrutiny about oh, the hedge fund index did this. Every
30:51
Speaker 1: hedge fund index is equal weighted, and that is not
30:53
Speaker 1: the experience of investments.
30:55
Speaker 2: I've evolved towards your position because my criticism of the
31:01
Speaker 2: industry turns out to be somebody said to me, you know,
31:05
Speaker 2: you're really criticizing the bottom ninety percent of the industry.
31:09
Speaker 2: I'm like, okay, that's a fair critique of my criticism.
31:13
Speaker 2: If you're in the top ten percent of anything, well,
31:16
Speaker 2: God blessed, stay there.
31:18
Speaker 1: Yeah.
31:18
Speaker 2: But if you're not in one of the better alternatives,
31:23
Speaker 2: what are you paying for? Is really the question. And
31:25
Speaker 2: I think that's the underlying side of the buffet bet.
31:30
Speaker 2: With all the coyness and all his gamesmanship, he wasn't
31:35
Speaker 2: the patsy at the poker table. I think he was
31:38
Speaker 2: just playing a different game and nobody realized it until
31:42
Speaker 2: way afterwards. Think about heading into the financial crisis, the
31:47
Speaker 2: hedge funds should have crushed the S and P five
31:49
Speaker 2: hundred and did for a couple of years, which leads
31:53
Speaker 2: me to this question, at what point were you feeling
31:55
Speaker 2: a little cocky, Hey, I'm gonna eat warm buffet at
31:59
Speaker 2: this like two years, three years in And at what
32:01
Speaker 2: point did you get that sinking feeling his stomach. Son
32:05
Speaker 2: of a bitch, The old man's gonna kick my button,
32:07
Speaker 2: This isn't he?
32:08
Speaker 1: So fourteen months in fourteen months deep into nine where
32:13
Speaker 1: everything hit the fan January February of oh nine, markets
32:16
Speaker 1: down another twenty percent. So fourteen months in the hedgehuns
32:18
Speaker 1: were up by fifty percent.
32:20
Speaker 2: Oh my goodness.
32:21
Speaker 1: And if you would look to historically at hedgephung returns
32:24
Speaker 1: versus the market, there was only a difference of one
32:26
Speaker 1: or two or three percent. Right, this is just giant.
32:30
Speaker 1: In Warren's two thousand and eight annual letter I think
32:34
Speaker 1: it was two thousand and eight, he.
32:36
Speaker 2: Made a statement, meaning the one that came out in
32:38
Speaker 2: early nine, about the previous year.
32:40
Speaker 1: Correct. He made a statement in that letter, really referring
32:44
Speaker 1: to Berkshire having underperformed for the first period of time,
32:47
Speaker 1: that even in periods as long as ten years, your
32:50
Speaker 1: results can be heavily influenced by the starting point or
32:52
Speaker 1: the ending point.
32:53
Speaker 2: Right.
32:53
Speaker 1: And I put that in a presentation I had as
32:56
Speaker 1: he had just given his reason for losing the bet.
33:00
Speaker 2: That the irony is he was hedging the bet. Perhaps
33:04
Speaker 2: that stay perhaps right?
33:05
Speaker 1: So, But even then you know it took five, I
33:10
Speaker 1: don't remember, five or six years for that market to
33:13
Speaker 1: catch up.
33:13
Speaker 2: Wow, one, Well, fifty is a giant head start. Here's
33:18
Speaker 2: a fifty percent head start. You got seven years go.
33:21
Speaker 1: Yeah, Warren used to. He did announce it every year,
33:24
Speaker 1: and what he would do is he would put the
33:25
Speaker 1: results up right before lunch and say, as you can see,
33:28
Speaker 1: I'm losing, let's go to lunch right, wouldn't say anything else.
33:32
Speaker 1: Then the first year the market had tumunably beaten headghrounds,
33:36
Speaker 1: there was like two pages about it in the.
33:38
Speaker 2: Annual Letterious, but that's that's so funny. I had no idea.
33:43
Speaker 2: I followed the bet from a distance, but I had
33:46
Speaker 2: no idea he was doing that at the annual meetings.
33:48
Speaker 2: That's brilliant.
33:48
Speaker 1: The other thing he did that was sort of brilliant
33:50
Speaker 1: was he wrote like two or three pages nine years in.
33:54
Speaker 1: So the bet wasn't over.
33:55
Speaker 2: But it was, for all intents and purposes done.
33:57
Speaker 1: It was with one interesting exception. Yeah, so the name
34:01
Speaker 1: of the five fund of funds we picked has never
34:03
Speaker 1: been won't be disclosed. It doesn't matter did you pick
34:06
Speaker 1: five funds or a fund of funds?
34:08
Speaker 2: So really like twenty funds, twenty five funds, a tall.
34:11
Speaker 1: Many more than that. Right, one of those five was
34:15
Speaker 1: still outperforming the S and P five hundred through eight years.
34:18
Speaker 1: At the end of the ninth year was the very
34:20
Speaker 1: first year that the market had been outperforming all five.
34:23
Speaker 1: But there was still one year left where that one
34:25
Speaker 1: could have caught up. My premise is that Warren caught
34:28
Speaker 1: that one period of time to deliver this whole message
34:31
Speaker 1: about see the market even outperformed every single one of
34:34
Speaker 1: these five fund funds.
34:35
Speaker 2: So this raises an obvious question, and let me throw
34:38
Speaker 2: out a doctoral thesis for anybody who who is looking
34:42
Speaker 2: for one. What would happen if you, with the benefit
34:46
Speaker 2: of hindsight, picked a different time period and a different
34:49
Speaker 2: group of funds. You know, is there an era where
34:53
Speaker 2: you would have won the bet?
34:55
Speaker 1: So every era that you had data, which started in
34:58
Speaker 1: the early nineties until that ten year period, hedge fronts
35:03
Speaker 1: it out perform the market over ten years. I was
35:05
Speaker 1: happy to do it in that ten year period solely
35:07
Speaker 1: because of my view of the market.
35:10
Speaker 2: Plus it was the only ten year period you had
35:13
Speaker 2: at that moment in time. Right, We're going to make
35:15
Speaker 2: a bet saying let's start this ten years from now.
35:18
Speaker 1: That's right. But I didn't have to call him on it,
35:19
Speaker 1: right you just.
35:20
Speaker 2: So that will know you you had to call him
35:24
Speaker 2: on it was. I have to tell you, I think
35:27
Speaker 2: the whole idea is brilliant, not just of him tossing
35:30
Speaker 2: it out there, but you saying, what the hell, let's
35:33
Speaker 2: take warm Buffett up on this bed. At the very least.
35:38
Speaker 2: It's going to be a fascinating decade.
35:39
Speaker 1: And the best part about it is that we used
35:42
Speaker 1: to go out and have dinner with them every year.
35:44
Speaker 2: Come on, so that's worth a million dollars.
35:46
Speaker 1: Yeah, I would go with my partners and I we
35:48
Speaker 1: might bring one of our managers or close three in
35:50
Speaker 1: a quarter.
35:50
Speaker 2: That's worth three and a quarter. Oh my, talk about
35:52
Speaker 2: a bargain.
35:53
Speaker 1: And so all kinds of things came from that. So,
35:56
Speaker 1: for example, one of the people I brought out this
35:59
Speaker 1: guy named Steve. He used to be the strategist Morgan Stanley.
36:02
Speaker 1: He was best friends professionally with Jack Bogle. I bring
36:07
Speaker 1: out Steve, Steve's sister, Warren. Would you ever want to
36:10
Speaker 1: have Jack at your annual meeting? And Warren lit up,
36:13
Speaker 1: He's one of my idols. And that led to Jack
36:16
Speaker 1: being there when Warren announced that Bet was the first
36:20
Speaker 1: time he had ever been at the annual meeting. It
36:21
Speaker 1: was a year or two before he passed away, and
36:23
Speaker 1: Steve brought him there. All came from having dinner with
36:25
Speaker 1: Warren that that one night.
36:26
Speaker 2: When did he pass by? I think it was twenty fifteen, right,
36:29
Speaker 2: so he announced he So when did Warren? Was that
36:33
Speaker 2: an eight or ninety at him at or was it
36:36
Speaker 2: much later?
36:36
Speaker 1: No, it was much later. Yeah, that's much later.
36:38
Speaker 2: Oh so, yeah, it had to be after.
36:40
Speaker 1: Was like right around his ninetieth birthday, I think.
36:42
Speaker 2: Right, And he was still an amazing voice, a little
36:45
Speaker 2: launched over, but powerful and full wits about him. We
36:48
Speaker 2: should all we should all be that shark at his age.
36:52
Speaker 2: So dumb question, but I got to ask. So, of
36:56
Speaker 2: course the firm three hundred and twenty thousand dollars well
37:00
Speaker 2: worth every penny? Or was this like to me? It
37:04
Speaker 2: sounds like the whole thing was spectacular.
37:06
Speaker 1: Yeah. I wouldn't measure it in terms of economic returns
37:09
Speaker 1: like I don't.
37:09
Speaker 2: Know, No, I mean just across the board.
37:11
Speaker 1: Yeah, as an experience and relationships, it was just extraordinary.
37:15
Speaker 1: And Warren is.
37:17
Speaker 2: One of a coun He's just the real deal. Yeah.
37:20
Speaker 1: I mean, he didn't need to have dinner with us ever,
37:24
Speaker 1: and it was just so fun. And the stories that
37:27
Speaker 1: he tells, we hear lots of them, but to hear
37:30
Speaker 1: different ones over and over, investment stories, non investment stories.
37:34
Speaker 1: He really is so extraordinary.
37:36
Speaker 2: So here's a crazy question that again I feel compelled
37:39
Speaker 2: to ask. Is it possible that the guy known as
37:43
Speaker 2: the world's greatest investor? Whether that title is accurate or not,
37:46
Speaker 2: it doesn't matter. Is it possible that he's still underestimated?
37:50
Speaker 2: Because every couple of years people start to come out
37:54
Speaker 2: and say, ah, he's lost his touch. They are not outperforming.
37:57
Speaker 2: But and then he surprises people every decade. This seems
38:01
Speaker 2: to happen.
38:02
Speaker 1: I mean, for him to be underestimated, you'd have to
38:04
Speaker 1: have an assessment of him that is a certain level, right,
38:08
Speaker 1: I think people see him in such high esteem.
38:11
Speaker 2: Some people do. But what I've heard from some folks,
38:16
Speaker 2: some younger quants, well, when you look at the sequence
38:19
Speaker 2: of returns, Buffett did so well in the late sixties
38:21
Speaker 2: and seventies, that's the fourth source of out performance. And
38:25
Speaker 2: what have you done for me lately? And I think
38:27
Speaker 2: they're kind of missing the bigger picture.
38:29
Speaker 1: I agree with you, and you could say the same thing.
38:31
Speaker 1: When we were talking about the Yale model with David Swinston, right,
38:33
Speaker 1: Cliff asked us wrote a piece that said, all Warren
38:35
Speaker 1: did was buy these quality stocks, and if you had
38:37
Speaker 1: replicated that strategy, you could replicate the results, which is
38:39
Speaker 1: absolutely true, except fifty years ago more you had to
38:43
Speaker 1: know to buy the quality.
38:44
Speaker 3: Stock almost sixty years ago. Right, that's crazy. No, I mean,
38:49
Speaker 3: I think that he is that extraordinary and when you know,
38:56
Speaker 3: so fortunate to get to spend a bunch of time
38:58
Speaker 3: with him, he uses wizdo him in everything he says.
39:01
Speaker 3: David Swinson was exactly the same way. And I've only
39:04
Speaker 3: known maybe a handful of people in this in my life.
39:06
Speaker 2: Charlie Munger, I assume is another.
39:08
Speaker 1: One, Charlie. I don't know, Charlie, but of the people
39:10
Speaker 1: that I've known, every word that comes out of Warren's mouth,
39:14
Speaker 1: no matter what subject I talked to him about a
39:17
Speaker 1: Rod signing with the Yankees, everything that comes out of
39:20
Speaker 1: his mouth is just oozing wisdom.
39:23
Speaker 2: That's interesting. You know, there's this wonderful chart on compounding
39:27
Speaker 2: that shows you know, the average person, you're start accumulating
39:31
Speaker 2: a little money in your thirties, your investment window is
39:33
Speaker 2: like forty to sixty eight, So you got, if you're lucky,
39:37
Speaker 2: twenty five thirty years. Buffett has nearly sixty years. And
39:41
Speaker 2: when you see the hockey stick of the compounding effect,
39:45
Speaker 2: it's the last twenty five years that most people don't
39:48
Speaker 2: leave their money working for them. Where he's gone from
39:51
Speaker 2: a billionaire to a deck of billionaire to a multi
39:54
Speaker 2: decad billionaire. That people just don't realize the impact of compounding.
39:59
Speaker 2: And it's not us cash, it's those insight and wisdom
40:03
Speaker 2: seems to just multiply.
40:05
Speaker 1: Yeah, our friend Morgan Housel has written about that in
40:08
Speaker 1: just a beautiful way telling that story, and it's it's time, right,
40:12
Speaker 1: It's both brilliant investing and time.
40:17
Speaker 2: So let's bring this back to the day job, which
40:21
Speaker 2: is allocators. What's the takeaway from the bet for allocators?
40:28
Speaker 1: I don't know if there are many paks.
40:30
Speaker 2: I have my own takeaways, Rich so you're here, which
40:33
Speaker 2: I'll tell you mine you tell me sure.
40:35
Speaker 1: One of them is that time periods really matter for sure, not.
40:40
Speaker 2: Just the specific length of time, but that specific chunk of.
40:44
Speaker 1: It, absolutely right. The other is it was a fascinating
40:48
Speaker 1: exercise to see how the media works. So I'll give
40:54
Speaker 1: you two little stories of that. Carol Loomis wrote a
40:58
Speaker 1: piece about the bet when we launched.
41:00
Speaker 2: It was she eventually writes the biography of Buffett correct
41:05
Speaker 2: Dancing to work or something.
41:06
Speaker 1: Correct, and she wrote about the bet in that as well.
41:09
Speaker 1: Her piece was two pages. I had said to her,
41:12
Speaker 1: how are you you're gonna write an article about this
41:13
Speaker 1: little bet? And it was just so well done.
41:15
Speaker 2: Oh it wasn't a little bet, but go on.
41:18
Speaker 1: At the time it felt that way. Really sure, you.
41:20
Speaker 2: Make it a million dollar bet with Warren Buffett. How
41:23
Speaker 2: on God's green Earth is that a little bet?
41:25
Speaker 1: Well, it might not be a little bet, but I
41:28
Speaker 1: didn't think there was a story of it other than
41:30
Speaker 1: here's the bet.
41:31
Speaker 2: Again. My hindsight bias is like this is this is
41:35
Speaker 2: like the defining moment in your career that colors everything
41:39
Speaker 2: else you do the rest of your life. You're the
41:41
Speaker 2: guy that made the bet with Warren Buffett.
41:43
Speaker 1: I get that that might go on my tombstone, but
41:45
Speaker 1: it certainly didn't feel like it was a defining moment.
41:48
Speaker 2: There's no false humility here, because I could see in
41:51
Speaker 2: your face you're not exaggerating. At the time you felt, Oh,
41:55
Speaker 2: this just a fun little side thing.
41:57
Speaker 1: Yeah, I got a chance to do this thing with Warren.
41:59
Speaker 1: How cool is that it?
42:01
Speaker 2: Okay, I get I guess, I guess history has blown
42:05
Speaker 2: it up into something more than it felt like at
42:08
Speaker 2: the time.
42:09
Speaker 1: Not to me but to others for sure. Okay, So
42:12
Speaker 1: Carol writes this piece and it's brilliantly done, as everything
42:15
Speaker 1: she did was, and then massive amounts of media attached
42:19
Speaker 1: to it.
42:19
Speaker 2: Right, I I vividly remember that what was she forbes?
42:23
Speaker 2: A fortune?
42:24
Speaker 1: Fortune?
42:24
Speaker 2: Fortune?
42:25
Speaker 1: So keep in mind the only definitive information about the
42:28
Speaker 1: bet was in Carol's two page piece, and then every
42:31
Speaker 1: other piece that got riden had factual inaccuracy.
42:34
Speaker 2: Right, it's multiplicity, every copy is that's so that was
42:38
Speaker 2: that was eye opening.
42:39
Speaker 1: The other was there are a whole bunch of different
42:42
Speaker 1: ways you could interpret a stream of returns, so you
42:45
Speaker 1: can say about the bet about any investment manager. And
42:49
Speaker 1: I dissected what had happened in a way that I
42:53
Speaker 1: thought had a lot of merit, things like short rebates,
42:56
Speaker 1: things like choosing the s and p versus a global
42:58
Speaker 1: index all the kinds of things, and I put that.
43:01
Speaker 1: Actually it was in Bloomberg. So here's my first lesson
43:05
Speaker 1: was I didn't know at the time that when you
43:07
Speaker 1: write a piece, you don't control the title of the piece.
43:11
Speaker 2: FYI, editors write the title, the writer writes the body
43:15
Speaker 2: of the work.
43:16
Speaker 1: Correct. So I had written a piece something about nine
43:20
Speaker 1: years in whatever the title came, Why I lost my
43:22
Speaker 1: bet with Warren Buffett.
43:24
Speaker 2: Well, that's clickbait that clickworthy people are.
43:27
Speaker 1: Going to use. The bet wasn't over yet, so it
43:29
Speaker 1: became an interesting, interesting thing, and it also completely changed
43:33
Speaker 1: the tone of what I had written, sure, because it
43:36
Speaker 1: made it look like a series of excuses as opposed
43:38
Speaker 1: to an analysis.
43:39
Speaker 2: There are worse people to lose a bet to than
43:41
Speaker 2: Warren Buffett. What's been the takeaway? What's been the impact
43:46
Speaker 2: on you from that whole delightful sounding experience.
43:50
Speaker 1: Yeah, I haven't really thought about it that much. I mean,
43:53
Speaker 1: for me, the biggest takeaway is the value of relationships
43:58
Speaker 1: and how what a wonderful, full fortunate experience I had
44:02
Speaker 1: to just be able to spend the time with Warren
44:04
Speaker 1: that I did, and to get to know what Todd
44:07
Speaker 1: Combs I had known, and Ted Wessler and Tracy Brick
44:10
Speaker 1: cool when she was there, all coming to these dinners
44:13
Speaker 1: and just having fun talking about investing in markets, and
44:15
Speaker 1: so that for me, that was priceless. We say, what
44:19
Speaker 1: was the price of the bet? Well, it was priceless
44:21
Speaker 1: town to have that time and had a couple of
44:24
Speaker 1: things that Warren and I did together when he was
44:26
Speaker 1: when he was first starting the Giving Pledge, at one
44:29
Speaker 1: point in time, no one was signing up, and he
44:31
Speaker 1: called and said, hey, you know some of these hedge
44:33
Speaker 1: fun guys, is there anyway we can.
44:34
Speaker 2: Round up some round the up. Let's get a few
44:36
Speaker 2: billion dollars in trying to do that.
44:38
Speaker 1: And there were one or two that signed up from
44:39
Speaker 1: that act.
44:39
Speaker 2: Can I Can I tell you something? You make a
44:41
Speaker 2: phone call to someone and say, hey, Warren Buffett asked
44:44
Speaker 2: me to call you. He signed up for the Giving Pledge.
44:46
Speaker 2: You want to make a commitment to donating money. By
44:49
Speaker 2: the way, Leon Cooperman tells a story about going to
44:52
Speaker 2: dinner when he signs up for the Giving Pledge, and
44:55
Speaker 2: it's Buffett, and it's Bill Gates, and it's on and on,
44:59
Speaker 2: and he doesn't at the end of this dinner with
45:01
Speaker 2: twelve people, the newest guy picks up the check and
45:06
Speaker 2: he tells the story. He's like, I'm looking around. Everybody
45:09
Speaker 2: is five, ten, twenty times wealthier than me. I get
45:12
Speaker 2: stuck with the bill and those guys order expensive wine
45:15
Speaker 2: and he tells the story. It's hilarious. Did you manage
45:18
Speaker 2: to intro warrant to a bunch of hedge fun guys?
45:21
Speaker 1: Yeah, there were two that signed on from that, just wonderful.
45:24
Speaker 2: I would think you drop Warren's name. Doors just open
45:27
Speaker 2: up on stuff like that.
45:29
Speaker 1: You know, if you're sitting with the billion dollars, I'm
45:31
Speaker 1: not sure you're giving away half of it just because
45:33
Speaker 1: of warrantony.
45:34
Speaker 2: But some of these guys are given are sitting with
45:36
Speaker 2: a lot more than a billion dollars, and why not?
45:38
Speaker 2: Who cares unless they have their own foundation. I give
45:42
Speaker 2: you a list of thirty billionaires. They all set up
45:44
Speaker 2: their own foundations. It's part of their own tax planning.
45:48
Speaker 2: I like Buffett's idea. I don't need to duplicate all
45:52
Speaker 2: that effort and administrative headache. Let Bill worry about it here, Bill,
45:56
Speaker 2: I'm in for half, so that the two of the
45:59
Speaker 2: well these guys in the world'll turn the Gates Foundation,
46:02
Speaker 2: which really should be called the Gates Buffet Foundation, into
46:05
Speaker 2: this giant what is it, one hundred plus billion dollars
46:09
Speaker 2: now maybe more than that. Just tremendous. So all in all,
46:13
Speaker 2: good experience with Warm Buffett.
46:15
Speaker 1: Everybody wins, especially the charity. I think it was Girls
46:18
Speaker 1: Inc of Omaha. Who there's a side thing which we'll
46:21
Speaker 1: talk about another time, but it ended up being north
46:23
Speaker 1: of two million dollars that went.
46:25
Speaker 2: And what's their budget? Like fraction though, right, it just
46:28
Speaker 2: overwhelmed them. I'm sure that's great. So let's talk about
46:32
Speaker 2: some of your philosophy and your writings. One of my
46:36
Speaker 2: favorite things you wrote in you have a podcast. We'll
46:41
Speaker 2: talk about that in a little bit. You ask all
46:43
Speaker 2: your guests one question about a pet peeve. I love
46:47
Speaker 2: your peeve I don't know, which is one of my
46:50
Speaker 2: favorite peeves. Tell us a little bit about investors who
46:54
Speaker 2: express absolutes in a world of probabilities. Tell us about
47:00
Speaker 2: I don't know.
47:01
Speaker 1: Yeah, Well, I've always viewed investing, as I think everyone
47:05
Speaker 1: properly should is as a probabilistic game. And one of
47:09
Speaker 1: the things that happens when you're a money manager telling
47:12
Speaker 1: stories to raise capital is you need to show conviction.
47:17
Speaker 1: The best ones can blend that conviction with humility. But
47:20
Speaker 1: sometimes you find people that say things it's not just
47:24
Speaker 1: investing in life too, where they're just sure what will
47:28
Speaker 1: happen the outcome of this, that or the other thing,
47:31
Speaker 1: and it just doesn't work that way. And so particularly now,
47:35
Speaker 1: there are so many things that are either common wisdom
47:39
Speaker 1: or that the consensus believes that have nuance to them
47:43
Speaker 1: right where I look at it and say I don't
47:46
Speaker 1: know what the answer is. Now you could put probability
47:48
Speaker 1: weights to it. But I walk through in this piece
47:51
Speaker 1: a couple of different things where I just said, look,
47:54
Speaker 1: I don't know.
47:55
Speaker 2: I love that. By the way, if you're ever on
47:57
Speaker 2: TV and want to make the hosts headach blowed, have
48:01
Speaker 2: them ask you a question. Just say I don't know. Yeah,
48:03
Speaker 2: it doesn't work very They don't know what to do.
48:05
Speaker 2: They look at you like, what do you mean you
48:06
Speaker 2: don't know?
48:06
Speaker 1: It doesn't make for very good TV.
48:09
Speaker 2: It makes for honest TV. But that's a whole other conversation.
48:12
Speaker 2: Since we've been talking about David Swinson, let's talk about
48:15
Speaker 2: don't be so short term. How big a problem is
48:19
Speaker 2: short term ism in investing, be it institutional or individual.
48:23
Speaker 1: Yeah, well, it's a huge problem, and it's an intractable
48:27
Speaker 1: problem because of the way incentive systems work. In the
48:30
Speaker 1: asset management industry, everyone across the food chain of capital
48:35
Speaker 1: is reporting to somebody else, and through that reporting people
48:38
Speaker 1: have to generate performance. And so what's happened over decades
48:43
Speaker 1: is that the holding periods of every type of investment
48:46
Speaker 1: have just gotten shorter and shorter. And the problem with
48:50
Speaker 1: that is there's a cost to it. So there are
48:53
Speaker 1: a lot of situations where investing with a shorter time
48:57
Speaker 1: horizon costs long term returns.
49:01
Speaker 2: Really interesting. There's another quote that I'm fascinated by. Limiting
49:05
Speaker 2: an assessment of returns only to market conditions in the
49:09
Speaker 2: moment fails to consider the wide range of possibilities of
49:14
Speaker 2: what might happen in the future. So that's a very
49:17
Speaker 2: loaded statement. Not only is it filled with concerns of
49:21
Speaker 2: the recency effect, but you're also talking about probabilities of
49:25
Speaker 2: all the range of possible outcomes that there is no
49:30
Speaker 2: yes or no. It's this might happen, that might happen,
49:32
Speaker 2: this might happen. Tell us a little bit about how
49:35
Speaker 2: you came to that, and while being stuck in the
49:38
Speaker 2: moment is so problematic for long term returns.
49:42
Speaker 1: Well, if you look at what happened with SVB, a
49:45
Speaker 1: mismanagement of the balance sheet. So you go back a
49:48
Speaker 1: couple of years and you could say, well, what return
49:51
Speaker 1: is available buying a treasury? And it turned out if
49:57
Speaker 1: you looked at the market at that time, i'll call
50:00
Speaker 1: it one percent five year treasure or ten year treasure.
50:03
Speaker 1: And so you say, well, we need to invest. You know,
50:06
Speaker 1: we are deposits cost less than that, we're going to
50:09
Speaker 1: earn a spread, so we're going to invest at one percent.
50:11
Speaker 1: The problem with that, of course, is that if you
50:13
Speaker 1: said what return is available, let's say over the next
50:16
Speaker 1: ten years, and it was one percent, it turns out
50:18
Speaker 1: you were wrong, because the right thing to do was
50:21
Speaker 1: to sit on cash and wait till rates moved to five.
50:24
Speaker 2: Percent, Especially when the Fed said we're taking rates up
50:27
Speaker 2: aggressively posts you know, late twenty one, early twenty two.
50:32
Speaker 2: It wasn't that they didn't communicate that, correct.
50:35
Speaker 1: So if you look at that over a longer period
50:37
Speaker 1: of time and say, well, my opportunity said, isn't just
50:40
Speaker 1: what's available today. It's what's available today and might be
50:43
Speaker 1: available tomorrow. And I can forego a tiny bit of
50:46
Speaker 1: return in the near term to earn a much higher
50:49
Speaker 1: return at some unknowable time in the future. That could
50:52
Speaker 1: have saved SVB, It could have saved First Republic.
50:55
Speaker 2: So hold the duration risk aside with those two. But
50:59
Speaker 2: just for an investor in treasuries, I know you've done
51:02
Speaker 2: the math before. If you're getting if you're giving up
51:05
Speaker 2: that one percent, big fat yield in twenty nineteen, twenty
51:11
Speaker 2: twenty one, Let's say you give up three years of
51:14
Speaker 2: one percent and get zero, how does the math work
51:17
Speaker 2: over ten over the subsequent couple of years, how would
51:20
Speaker 2: you have done well, You've.
51:21
Speaker 1: Done a lot better. Right to even take a five
51:23
Speaker 1: year period, you go one one one one one or
51:27
Speaker 1: zero zero zero.
51:28
Speaker 2: Five five ahead, they get more way ahead. And so
51:34
Speaker 2: people tend to get stuck in the moment and not
51:37
Speaker 2: think so. My description for that is everybody is dealing
51:42
Speaker 2: with photographs when they should be dealing with a moving
51:45
Speaker 2: a movie or a film. It's hard to pull yourself
51:48
Speaker 2: out of the moment, which is a snapshot, and instead
51:51
Speaker 2: of think over the arc of time, that's a foible
51:55
Speaker 2: of just how human's brains operate, and it infects even
52:00
Speaker 2: professional investors.
52:02
Speaker 1: That's a great analogy. It's also compounded by competition. Oh really,
52:08
Speaker 1: So if you're a money manager and you're sitting on
52:11
Speaker 1: cash and earning zero, let's just simplify the example, and
52:15
Speaker 1: the guy across the street is earning one. For those
52:17
Speaker 1: three years, you're underperforming.
52:19
Speaker 2: Yeah, you're losing. That's where the idea of perpetual capital,
52:25
Speaker 2: which you talked about having a perpetual time horizon, sometimes
52:29
Speaker 2: is more theoretical than realistic because you may not have
52:32
Speaker 2: liabilities for ten twenty years and an ongoing perpetual endowment
52:36
Speaker 2: that never vests, but people still live in the month
52:40
Speaker 2: and the quarter, and who cares about one percent? Well,
52:45
Speaker 2: allocators are going to look at you when you're thinking
52:47
Speaker 2: to joint up for those three years.
52:50
Speaker 1: There are real challenges in the profession of money management.
52:53
Speaker 1: So just take that concept. There's a lot of interest
52:56
Speaker 1: in permanent capital vehicles, and it turns out the permanent
52:59
Speaker 1: capitol vehicle themselves are impermanent. You have closed end funds
53:04
Speaker 1: that trade a discounts that sometimes have shareholder pressure to
53:07
Speaker 1: open end. You have holding company structures that have management changes.
53:12
Speaker 1: And then in the allocator community, these perpetual pools of capital,
53:17
Speaker 1: generally speaking, are run by chief investment officers whose average
53:20
Speaker 1: tenure in the seat is only six years.
53:23
Speaker 2: So not so permanent.
53:24
Speaker 1: Not so permanent after all.
53:26
Speaker 2: I love this quote from a piece you wrote about
53:28
Speaker 2: risk in nineteen ninety eight. You asked fame value investor
53:33
Speaker 2: Michael Price what he learned from investing in Sunbeam Corporation,
53:39
Speaker 2: which was run by chainsaw Al Dunlop and was just
53:43
Speaker 2: rife with accounting fraud the whole thing ultimately collapses. He
53:48
Speaker 2: responds absolutely nothing. So for those of you who are
53:53
Speaker 2: listening on the air, he responds absolutely nothing, with an
53:56
Speaker 2: explot of in the middle, how could you learn nothing
54:00
Speaker 2: from that experience? Tell us about that.
54:02
Speaker 1: The challenge with that is that fraud is fraud. So
54:07
Speaker 1: you're underwriting risks when you invest, and one of those
54:11
Speaker 1: is all the analysis you do isn't real and the
54:15
Speaker 1: problem with it, and you could use it made off
54:17
Speaker 1: as an example, You could use FTX as a recent example,
54:22
Speaker 1: is that for every you know, one or two percent
54:24
Speaker 1: of your analytical time that you're trying to figure out
54:27
Speaker 1: if what you see is real the person committing the
54:31
Speaker 1: fraud of spending one hundred percent of their time staying
54:33
Speaker 1: ahead of you.
54:34
Speaker 2: Right, so you had written you spend ninety nine percent
54:36
Speaker 2: of the time assessing the merits of the deal. What's
54:39
Speaker 2: the valuation? How likely is this going to get all
54:41
Speaker 2: the fundamentals? And maybe you throw one percent at hey,
54:46
Speaker 2: it is what I'm seeing actual? Is there any chance
54:49
Speaker 2: of fraud? And most of the time you're going to
54:51
Speaker 2: say no, of course not burning made off as president
54:54
Speaker 2: of NASDAK. How could this be a fraud? Right that?
54:57
Speaker 2: That's an astonishing admission by price. What's the takeaway for
55:01
Speaker 2: the average investor? Is there something you can do to
55:04
Speaker 2: avoid fraud or is it just forever and always out there.
55:09
Speaker 1: There are lots of risks that are forever and always
55:11
Speaker 1: out there. Fraud is one of them, but you can
55:15
Speaker 1: diversify away from it. So that comes out in position
55:19
Speaker 1: sizing and conviction and just making sure that you're thinking
55:24
Speaker 1: about all the things that could go wrong if you're
55:27
Speaker 1: taking a more concentrated position in something.
55:29
Speaker 2: Huh really interesting. Here's another quote I love. You can't
55:34
Speaker 2: have investment success with a bad governance structure by Karl Sheer,
55:40
Speaker 2: explain what you mean by that? What mean?
55:44
Speaker 1: Yeah, Carl is the chief investment officer or the University
55:46
Speaker 1: of Cincinnati. The allocator pools that have chief investment officers
55:52
Speaker 1: have on top of them a board, maybe it's an
55:55
Speaker 1: investment committee, and that committee often is ultimately responsible for
55:59
Speaker 1: making investment decisions.
56:01
Speaker 2: And these boards they're all filled with humans.
56:04
Speaker 1: Yes, exactly.
56:05
Speaker 2: And that seems to be the underlying problem, isn't it?
56:07
Speaker 1: So everything that any duke talks about in decision making theory.
56:11
Speaker 1: If you can't make a good decision as a board,
56:14
Speaker 1: we'll call that the governance structure. How do actual investment
56:18
Speaker 1: decisions get made? You can't have a good investment process.
56:21
Speaker 2: And she focuses on process over outcomes. You make certain
56:24
Speaker 2: decisions even if it doesn't work out. You got to
56:27
Speaker 2: stay with the high probability. Back to what you said earlier,
56:30
Speaker 2: The high probability decision, even if it's a loser, is
56:35
Speaker 2: better process over the long haul than dumb luck.
56:38
Speaker 1: That wins absolutely right.
56:40
Speaker 2: So the story was that, I think was the Hertford
56:45
Speaker 2: investment Hartford Insurance. Everybody resigns. When they hired Bully and
56:50
Speaker 2: Stanley as the outside advisor. The whole thing was just
56:53
Speaker 2: a debacle what happened there.
56:55
Speaker 1: So it's Hartford Healthcare. David Holgrim is the CIO. I
56:59
Speaker 1: can't say I know exactly what happened on the inside,
57:01
Speaker 1: but they had a team that had delivered a good
57:04
Speaker 1: track record. H I'm assuming there was some friction between
57:07
Speaker 1: that team and the board, and the board hired Morgan
57:11
Speaker 1: Stanley as an OCIO, not only without ever consulting the team,
57:16
Speaker 1: but they had an investment committee of knowledgeable experts other
57:20
Speaker 1: endowment chief investment officers. That investment committee never knew that
57:25
Speaker 1: the board had done a search to replace the investment team.
57:27
Speaker 2: Wow, that seems pretty egregious. Sounds like a bunch of
57:31
Speaker 2: personality conflicts and no organizational alpha. I'm curious, how has
57:38
Speaker 2: that investment pool done since this palace coup.
57:44
Speaker 1: I don't know the answer. It's way too short of
57:46
Speaker 1: a period of time to actually have any assessment. And
57:49
Speaker 1: on top of that, chances are the underlying investments were
57:52
Speaker 1: mostly the same as what they were before on this.
57:55
Speaker 2: So they were inheriting what happened, you know. I'm reminded
57:57
Speaker 2: of what took place at Harvard with Iris Summers. I
58:00
Speaker 2: don't know what was that fifteen years ago, twenty years ago,
58:04
Speaker 2: and they went from an absolute bone crusher, outperformer alpha
58:10
Speaker 2: generator to just stinking up the joint for decades. It's
58:14
Speaker 2: it's hard to look at those changes, which, by the way,
58:18
Speaker 2: didn't come from Summers. It came from an alumni who said,
58:21
Speaker 2: why are we spending all this money? Even though they
58:24
Speaker 2: really were spending not a lot, especially once you looked
58:27
Speaker 2: at the returns. Talk about terrible governance destroying a beautiful, fragile,
58:34
Speaker 2: winning investment team.
58:36
Speaker 1: Yeah, the compensation structures of the largest, most influential pools
58:40
Speaker 1: of the capitol in the United States in particular, are
58:43
Speaker 1: really challenged. Public pension funds that manage hundreds of billion
58:48
Speaker 1: dollars can be manned by professionals that make eighty to
58:51
Speaker 1: one hundred and fifty thousand dollars a year. And you
58:53
Speaker 1: compare that with models that we've seen in Canada and Australia,
58:58
Speaker 1: where the investment professionals on those teams are market competitively compensated,
59:03
Speaker 1: maybe a slight discount to the market.
59:06
Speaker 2: But not like ten percent, not giant exactly right.
59:09
Speaker 1: And in the US, these largest pools of capital might
59:13
Speaker 1: have ninety percent discounts to the market.
59:15
Speaker 2: Really, that's that's unbelievable. Listen, just paying up for something
59:19
Speaker 2: doesn't guarantee that you're going to get the best, But
59:22
Speaker 2: paying a ninety percent discount pretty much guarantees that you're
59:26
Speaker 2: in the bottom let's call it half, I'm being generous,
59:29
Speaker 2: probably quartile that there's you know, it's a market bay system.
59:33
Speaker 2: Don't you want the best people steering your forty two
59:37
Speaker 2: billion dollar endownmen? It just so short sighted. Just goes
59:41
Speaker 2: to show you how important governance is. And since we're
59:46
Speaker 2: talking about governance, let's talk about another thing you had
59:49
Speaker 2: written that I was intrigued by. What's in a name?
59:52
Speaker 2: The problem with ESG. Now we're not talking about wokeism
59:56
Speaker 2: or the political backlash, which is really a partisan political debate.
1:00:02
Speaker 2: What's the problem with ESG as a approach to value
1:00:08
Speaker 2: based investing?
1:00:09
Speaker 1: Yeah, well let's start with the name itself. So EESG became.
1:00:14
Speaker 2: A thing, environmental, social, and governance.
1:00:17
Speaker 1: Three things which may or may not have anything to
1:00:20
Speaker 1: do with each other. Clearly, you can go back and say,
1:00:23
Speaker 1: remember fang and then Fang had two a's and then
1:00:27
Speaker 1: it turned into fan mag. So these names have a
1:00:31
Speaker 1: way of taking off right back in the day brick
1:00:35
Speaker 1: and emerging markets Zil, Russia, India, China. So the problem
1:00:41
Speaker 1: with the SG in its first iteration was that the
1:00:43
Speaker 1: label that everyone ascribed to it wasn't anything anyone could understand.
1:00:48
Speaker 2: So let's track that evolution. This all started with divesting
1:00:53
Speaker 2: South African investments with I think it was Harvard actually
1:00:57
Speaker 2: or Yale was one of the ivys that the student
1:01:00
Speaker 2: population wanted the endowment out of that, which led to
1:01:04
Speaker 2: socially responsible investing, which led to impact investing. Like there
1:01:08
Speaker 2: have been a ton of names, ESG just seems to
1:01:11
Speaker 2: be a catchual umbrella. Yeah, what should it be called?
1:01:15
Speaker 2: Or should it be called anything?
1:01:17
Speaker 1: Well? I think it goes back to what we talked about,
1:01:19
Speaker 1: the onset about beliefs. Each institution has to decide how
1:01:24
Speaker 1: do they want to align their investing with the purpose
1:01:29
Speaker 1: of the institution. What are they trying to solve for?
1:01:31
Speaker 1: So lots of people want to solve for call it
1:01:34
Speaker 1: sustainable investing. What does that mean? I don't know, but
1:01:37
Speaker 1: the idea of an environment that humans can habit for
1:01:43
Speaker 1: centuries seems like that resonates with people, so that that
1:01:46
Speaker 1: leads to one set of sort of investment criteria that
1:01:50
Speaker 1: you can filter into your whole portfolio. The s is
1:01:54
Speaker 1: really about diversity, and that's important to a lot of people.
1:01:58
Speaker 1: It's certainly in financial services recognized now that there are
1:02:01
Speaker 1: all these microaggressions that have been in place for decades.
1:02:03
Speaker 1: I'm not sure how that turned into an investment strategy.
1:02:05
Speaker 2: See, I don't even think of it in those terms.
1:02:07
Speaker 2: I think of it as you want to avoid group think.
1:02:10
Speaker 2: And if everybody went to the same undergrad went to
1:02:12
Speaker 2: the same grad went to the same training program, well
1:02:15
Speaker 2: you're cranking out these automatons that are gonna think, speak,
1:02:19
Speaker 2: and act similarle and so the investment results will be similar,
1:02:23
Speaker 2: therefore subpar. So let's bring in different people from different backgrounds,
1:02:29
Speaker 2: different thought processes, different education, so that there is some
1:02:34
Speaker 2: robust diversity of thought. I just don't like the microaggression thing.
1:02:39
Speaker 2: I could care less about.
1:02:40
Speaker 1: So the challenge is that the academic research shows that
1:02:43
Speaker 1: what you're trying to solve for is cognitive diversity. Yes,
1:02:47
Speaker 1: social diversity is a proxy for cognitive diversity.
1:02:50
Speaker 2: Not a great one, by the way.
1:02:51
Speaker 1: I know. You could have people from all different races
1:02:54
Speaker 1: that think exactly the same way because they were educated
1:02:56
Speaker 1: at the same places. So the question is if you
1:02:59
Speaker 1: care about improving your investment results from cognitive diversity, which
1:03:03
Speaker 1: we can all agree the research shows make sense. Is
1:03:06
Speaker 1: that a thing that you measure, Is that a thing
1:03:09
Speaker 1: that you evaluate? How do you do that? So nobody
1:03:11
Speaker 1: really knows. And then governance, like, I'm not sure I
1:03:15
Speaker 1: know of anyone except for occasionally an activist investor as
1:03:20
Speaker 1: an opportunity set that is pro poor governance.
1:03:24
Speaker 2: Yeah, I can't really hear that anybody has been agitating
1:03:28
Speaker 2: for you need to make your governance worse.
1:03:30
Speaker 1: So what's evolved over the last couple of years is
1:03:32
Speaker 1: starting with Greta Thunberg and then during COVID when ESG
1:03:36
Speaker 1: took on this label, people created a whole bunch of
1:03:38
Speaker 1: products that nobody really understood what they were solving for,
1:03:41
Speaker 1: and so not that surprising. It hasn't really taken off
1:03:45
Speaker 1: in the way that a lot of people predicted four
1:03:47
Speaker 1: or five years.
1:03:48
Speaker 2: But there's a ton of capital that has been allocated
1:03:51
Speaker 2: to So let's work away away from ESG. There are
1:03:55
Speaker 2: impact funds that go out of their way to make
1:03:58
Speaker 2: sure that half of their investments go to companies that
1:04:04
Speaker 2: are either managed by women or people of color, or
1:04:07
Speaker 2: are geographically away from New York, Boston, San Francisco, Silicon
1:04:13
Speaker 2: Valley because the rest of the country has innovations and
1:04:17
Speaker 2: we've been ignoring them. And in fact, the competition in
1:04:21
Speaker 2: San Francisco and Silicon Valley is much more intense than
1:04:26
Speaker 2: Milwaukee or Orlando.
1:04:30
Speaker 1: So I think that's right. The question is what does
1:04:33
Speaker 1: a ton of capital mean, right? And the scheme of things.
1:04:37
Speaker 1: The point I would make is that the amount of
1:04:40
Speaker 1: money that's gone into these different called diversifying strategies is
1:04:44
Speaker 1: much less than people thought it was going to be
1:04:46
Speaker 1: four or five years ago, because it's all under this
1:04:48
Speaker 1: umbrella that each individual organization needs to figure out what
1:04:53
Speaker 1: do they care about and how do they want to
1:04:55
Speaker 1: deploy capital to meet that objective.
1:04:57
Speaker 2: Don't some foundations have a sort of a check approach, Hey,
1:05:01
Speaker 2: we want to give five percent of our alternative assets
1:05:04
Speaker 2: to funds run by women, or funds run by minorities
1:05:08
Speaker 2: or LGBT like down the list as a way of
1:05:13
Speaker 2: providing a little social diversity. But again, the point you
1:05:17
Speaker 2: make is social diversity the same as cognitive diversity. Is
1:05:20
Speaker 2: it a good proxy.
1:05:21
Speaker 1: They absolutely want to do that as long as those
1:05:24
Speaker 1: funds outperform.
1:05:26
Speaker 2: That's really interesting. So once the outperformance stops, we be
1:05:31
Speaker 2: swap managers. Huh, that's really interesting. Last question on ESG,
1:05:37
Speaker 2: certain folks have been saying, hey, you know, it works
1:05:40
Speaker 2: as a pretty good risk management filter. Boards that have
1:05:45
Speaker 2: thirty forty percent women tend not to have the same
1:05:48
Speaker 2: sort of me too problems as a board that's all
1:05:52
Speaker 2: a whole bunch of old white guys. How do you
1:05:55
Speaker 2: respond to this is a risk management filter that allows
1:05:59
Speaker 2: us to wipeify the worst actors in corporate America.
1:06:03
Speaker 1: I think that's a very reasonable way of looking at it. Again,
1:06:07
Speaker 1: depending on your investment strategy. Are we're talking about boards
1:06:10
Speaker 1: of stocks? What about in private markets? What about an
1:06:13
Speaker 1: early stage venture and a hedge fund? Like, there's all
1:06:16
Speaker 1: different ways that you can think about integrating it, And
1:06:20
Speaker 1: just like the problem with SG, there's no one absolute
1:06:23
Speaker 1: solution that works for everything.
1:06:25
Speaker 2: Huh. Really really quite quite fascinating. Let's talk a little
1:06:28
Speaker 2: bit about capital allocators. What made you decide to play
1:06:33
Speaker 2: with this whole podcast? Then?
1:06:36
Speaker 1: Well, I guess I was channeling my inner Bury Ridtholes. Yeah,
1:06:39
Speaker 1: years ago when I left protege A Partners. I wasn't
1:06:43
Speaker 1: sure what I would do, and I had picked up
1:06:45
Speaker 1: a bunch of called it consulting or advisory relationships, and
1:06:49
Speaker 1: I had written that first book about hedge funds, which led.
1:06:51
Speaker 2: Me twenty sixteen.
1:06:52
Speaker 1: In twenty sixteen, which led me to be on a
1:06:55
Speaker 1: couple of podcasts, and I woke up one day and said,
1:06:58
Speaker 1: maybe I'll run around and talk to my old friends.
1:07:00
Speaker 1: I had no idea.
1:07:02
Speaker 2: Dude, you're ruining my secret asself. Well, what the greatest gig,
1:07:06
Speaker 2: the easiest thing in the world, and now everybody's doing it.
1:07:09
Speaker 2: But for a while, you know, it was it was
1:07:12
Speaker 2: my secret little garden that no one knew about.
1:07:14
Speaker 1: And so I did that, and I started a podcast
1:07:18
Speaker 1: called Capital Allocators, and the idea was to be interviewing
1:07:21
Speaker 1: the people and make it be about the people, and
1:07:24
Speaker 1: then of course about investment strategies focused on the allocator
1:07:28
Speaker 1: CIO community and some of their favored money managers.
1:07:32
Speaker 2: And that's a rich, deep pool. People don't realize you
1:07:36
Speaker 2: ever get the question, Hey, are you worried you're gonna
1:07:38
Speaker 2: run out of people? I'm like, no, I got ten
1:07:40
Speaker 2: million people to go. What are you kidding me.
1:07:42
Speaker 1: There's never been a shortage of high quality people to
1:07:45
Speaker 1: have on And so I started that six years ago,
1:07:49
Speaker 1: not knowing certainly, not thinking it would be a business.
1:07:52
Speaker 1: I used to joke, Hey, Barry, we're going to have
1:07:53
Speaker 1: a conversation, share it for free, and just like the
1:07:57
Speaker 1: change bank from Saturday Night Live, we'll make it up
1:07:59
Speaker 1: in volume, right, Like was sort of a dot com
1:08:02
Speaker 1: click business, and I just kept doing it for a
1:08:06
Speaker 1: number of years alongside of these other projects.
1:08:08
Speaker 2: Which, by the way, something like ninety percent of the
1:08:11
Speaker 2: podcasts drop off within a year. They just it's work.
1:08:14
Speaker 2: It's not easy.
1:08:15
Speaker 1: Yeah, it was, but it was just so much fun,
1:08:17
Speaker 1: and it was one of the things that.
1:08:19
Speaker 2: Again you're ruining my mind secret it's endless fun, right,
1:08:23
Speaker 2: I mean, think about, think about I went through the
1:08:26
Speaker 2: list of some of the people you spoke with. You
1:08:28
Speaker 2: could see there is delight in the conversation you have
1:08:32
Speaker 2: with b Yeah. It's a version of what I did
1:08:35
Speaker 2: my whole career, right. I spent time interviewing money managers
1:08:38
Speaker 2: with a very very different output mechanism. So in the past,
1:08:42
Speaker 2: i'd have an interview with a manager and I would
1:08:44
Speaker 2: be evaluating them, and I would mostly say no, but
1:08:47
Speaker 2: you know, sometimes you'd say, oh, what do I think
1:08:49
Speaker 2: of them? And this is just you have the same conversation,
1:08:52
Speaker 2: there's no evaluation. You get to be on everyone's team
1:08:55
Speaker 2: and then you share it with people. And what's happened
1:08:57
Speaker 2: over the years is to become the largest podcast institutional
1:09:00
Speaker 2: investing so that Allocator community listens and people have incredible
1:09:05
Speaker 2: experiences when they come on, and it's just it's just
1:09:09
Speaker 2: so rewarding. It's by far the most rewarding thing I've
1:09:11
Speaker 2: done in my professional career. I say to people, this
1:09:14
Speaker 2: is the most fun I have all week, and they
1:09:16
Speaker 2: look at me, like, wait, what you need to get
1:09:18
Speaker 2: a life? I'm like, no, you don't understand. Is it
1:09:21
Speaker 2: the most fun you have each week? H you speak
1:09:23
Speaker 2: to somebodystely first of all, my dirty little secret, and
1:09:27
Speaker 2: I don't know if this is yours. I don't care
1:09:29
Speaker 2: who's listening. I invite people that I want to sit
1:09:32
Speaker 2: down with for an hour or two and have this conversation.
1:09:35
Speaker 2: If someone listens, great, but I don't care. It's like, no, no,
1:09:39
Speaker 2: I have an audience A one. It's me. It's my
1:09:42
Speaker 2: selfish indulgence. Okay, other people have listened. But when you're
1:09:46
Speaker 2: picking people to invite, how much of it is I
1:09:49
Speaker 2: really want to sit down and talk to that guy
1:09:51
Speaker 2: with that girl.
1:09:52
Speaker 1: That's all of it. I still and always will source
1:09:56
Speaker 1: all the guests myself. We do get a lot of inbounds,
1:09:59
Speaker 1: and we figured out ways of getting more people involved
1:10:03
Speaker 1: that I might not have known about. But it is
1:10:06
Speaker 1: entirely Hey, what do I think is interesting? Who would
1:10:09
Speaker 1: I like to talk to? And you go from there.
1:10:11
Speaker 2: You focus primarily on the institutional side of things. How
1:10:16
Speaker 2: does that translate into who listens? Do you want a
1:10:20
Speaker 2: broader audience or do you like this somewhat narrow but
1:10:24
Speaker 2: incredibly deep and knowledgeable listenership. What led you in that
1:10:29
Speaker 2: direction other than that's the world you came from.
1:10:32
Speaker 1: It's mostly that, And it goes to what you said,
1:10:35
Speaker 1: which is I love having these conversations. And have never
1:10:39
Speaker 1: advertised on the podcast. I'm sorry, I've never advertised for
1:10:43
Speaker 1: the podcast other than a meaning a couple of little experience.
1:10:46
Speaker 2: So do you promote the podcast? How do you other
1:10:49
Speaker 2: than going on other PS podcasts? How do you get
1:10:53
Speaker 2: to the point where people are listening other than the
1:10:56
Speaker 2: circle of institutional allocate?
1:10:58
Speaker 1: Yes, it's been entirely organ We've done a few little
1:11:02
Speaker 1: experiments promoting and advertising, none of it to worked, so
1:11:06
Speaker 1: I've never really cared about it. It's kind of like
1:11:08
Speaker 1: what you said. I didn't think of it as a
1:11:10
Speaker 1: business when I started. I barely do now. And people
1:11:13
Speaker 1: have found it because it added value to their professional careers.
1:11:17
Speaker 1: So most of that audience, I would say, as far
1:11:19
Speaker 1: as we can tell, a little less than half is
1:11:21
Speaker 1: the institutional allocator community, and that spans endowments, foundations where
1:11:26
Speaker 1: I came from. It spans sovereign wealth funds, pension funds.
1:11:29
Speaker 1: Incredibly global and that reach, which I'm sure you know,
1:11:33
Speaker 1: you know it's hilarious. This is so much wider than
1:11:37
Speaker 1: I ever could have imagined existed.
1:11:38
Speaker 2: Because it's total. The Internet is totally global, and I've
1:11:42
Speaker 2: had I'm sure you've had this experience. I've had guests
1:11:45
Speaker 2: say I heard from a kid I went to camp
1:11:47
Speaker 2: with who now runs a fund in Hong Kong. I mean,
1:11:50
Speaker 2: but what, there's nothing local about a podcast. If it's
1:11:55
Speaker 2: on the Internet, it's totally discoverable. I've also had the
1:12:00
Speaker 2: same experience with half. If half are institutional allocators, who's
1:12:04
Speaker 2: the other half.
1:12:06
Speaker 1: Most of it's money managers, so it's most of the
1:12:08
Speaker 1: people in the.
1:12:08
Speaker 2: Care people they're allocating too.
1:12:10
Speaker 1: That's correct. And then there's this other right, so you
1:12:13
Speaker 1: get notes from students from friends who are outside that
1:12:16
Speaker 1: it's just entertainment NBA professors.
1:12:18
Speaker 2: You hear from from professors saying, hey, I love this interview.
1:12:22
Speaker 2: I assigned this to the class.
1:12:24
Speaker 1: Yeah, it's just just fantastic. So that that's one of
1:12:27
Speaker 1: the fun things about it is you just anyone can listen.
1:12:30
Speaker 2: So Curveball question, what's your favorite podcast guest story that
1:12:36
Speaker 2: you can tell publicly? Because we all have great stories,
1:12:40
Speaker 2: some of which not really not really FCC.
1:12:45
Speaker 1: There are one or two of those, but not that many.
1:12:47
Speaker 1: I think I would even go all the way back
1:12:50
Speaker 1: to my very first episode. So it was with Steve Galberth,
1:12:53
Speaker 1: who mentioned earlier with Jack Bogel, and it was just
1:12:57
Speaker 1: this idea. I knew Steve, I knew he had a
1:12:59
Speaker 1: great story, and I sat down and recorded it and
1:13:04
Speaker 1: I couldn't find the recording on the recording device after
1:13:08
Speaker 1: we finished, and it was so good. I just said,
1:13:10
Speaker 1: I can't believe this is I can't wait to share
1:13:12
Speaker 1: this with people. And then I thought that that was
1:13:15
Speaker 1: the end of my podcast career after the first recording,
1:13:18
Speaker 1: and it took a good friend of mine who's a
1:13:21
Speaker 1: technical whiz to figure out which actually wasn't that hard.
1:13:24
Speaker 1: I just didn't know how to do it to extract
1:13:26
Speaker 1: the conversation from the recording device.
1:13:28
Speaker 2: I'm going to share a similar story with you. So
1:13:31
Speaker 2: normally I'm in the Bloomberg studios. I got an engineer,
1:13:35
Speaker 2: I got all the latest equipment. I have the easiest
1:13:38
Speaker 2: gig in podcast. I show up, I said, hey, print
1:13:41
Speaker 2: this out for me. Off we go one About five
1:13:46
Speaker 2: years ago, I'm planning a trip to Silicon Valley. I
1:13:49
Speaker 2: tea up two interviews in a day, Mark Andreason of
1:13:53
Speaker 2: Andres and Horowitz and Nobel Laureate Bill Sharp. And by coincidence,
1:13:58
Speaker 2: I couldn't find a place to the rook towards the
1:14:00
Speaker 2: Bill Sharp interview, and Dreesen said, oh, do it here.
1:14:03
Speaker 2: You could use our pic podcast studios. They were great.
1:14:06
Speaker 2: So I sit down with Bill. So I do Andresen
1:14:08
Speaker 2: in the morning. Right in the afternoon it is Bill Sharp.
1:14:11
Speaker 2: After lunch, I sit down. I have my device, which
1:14:15
Speaker 2: the engineer has taught me forty seven times. How to do,
1:14:19
Speaker 2: and I start the podcast with Bill Sharp, and maybe
1:14:24
Speaker 2: ninety seconds in, I notice I'm not recording, and I
1:14:29
Speaker 2: just to have my stomach sinks and I imagine, like,
1:14:33
Speaker 2: imagine spending an hour and a half with Bill Sharp
1:14:35
Speaker 2: and not having hit record. So I'm like Bill, I'm
1:14:38
Speaker 2: I'm not getting a good audio level. Let me let's
1:14:41
Speaker 2: start this again. So I hit it and now the
1:14:43
Speaker 2: red lights on the view meet is going crazy and
1:14:46
Speaker 2: I could see it's recording. I go, let's start over.
1:14:48
Speaker 2: I think I was you were too soft, and I
1:14:50
Speaker 2: just adjusted and we do the recording. And to me,
1:14:53
Speaker 2: that was the nightmare scenario of missing God Nobel Laurion.
1:14:59
Speaker 2: Imagine that. So you found the gal Brith.
1:15:03
Speaker 1: Found, the recording went out, and the rest is history.
1:15:05
Speaker 2: So that's really interesting. So we only have you for
1:15:08
Speaker 2: so much time, and I appreciate you tolerating my nonsense.
1:15:13
Speaker 2: Let's jump to my favorite questions that I ask all
1:15:16
Speaker 2: of my guests, some of which I think I'm ready
1:15:19
Speaker 2: to retire. Probably the first one I'm ready to retire,
1:15:23
Speaker 2: which is a post lockdown question. I was asking people, Hey,
1:15:27
Speaker 2: what are you streaming? What's keeping you entertained? During lockdown?
1:15:31
Speaker 2: Let's see if you have an answer to that. What
1:15:34
Speaker 2: have you been watching that's interesting?
1:15:37
Speaker 1: Well, I'm a ted Lasso guy and I've watched the
1:15:40
Speaker 1: finale of the last season three times.
1:15:42
Speaker 2: I thought that was unfairly slagged. It was really good.
1:15:46
Speaker 1: It was really good. In addition to that, I had
1:15:50
Speaker 1: on the show last year named Brent Montgomery, and brand's
1:15:53
Speaker 1: a TV producer. He created Pawn Stars and Duck Dynasty.
1:15:57
Speaker 1: His latest show is called The King of Colors, right,
1:16:01
Speaker 1: and it's pawn Stars meet Sports a guy named Ken
1:16:05
Speaker 1: Golden who's one of the largest sports collectibles dealers, and
1:16:09
Speaker 1: it is so so good.
1:16:11
Speaker 2: Do you get into the massive amount of counterfeit crap
1:16:17
Speaker 2: that's in that space at all? Because I would of
1:16:19
Speaker 2: all the junk I buy, sports collectibles is the last
1:16:24
Speaker 2: thing in the world I would ever risk a penny on. Yeah,
1:16:27
Speaker 2: I'm convinced there's some kid, you know, in some sweatshop
1:16:30
Speaker 2: in a basement signing Michael Jordan's name over and over again.
1:16:33
Speaker 1: Yeah, they do show how they go through the authentication process,
1:16:38
Speaker 1: at least with this one very high quality dealer, right.
1:16:42
Speaker 2: I mean, I'm sure there are ways to authenticate it,
1:16:44
Speaker 2: but every time I look at something on eBay, I
1:16:47
Speaker 2: just kind of like, yeah, getting go.
1:16:49
Speaker 1: I mean, this has you know, it has Mike Tyson,
1:16:52
Speaker 1: has all these incredible athletes and entertainers that get involved
1:16:56
Speaker 1: with this guy. It's a fantastic show.
1:16:58
Speaker 2: Really. That sounds really really interesting. Let's talk about books.
1:17:02
Speaker 2: You've written two of them. What are some of the
1:17:04
Speaker 2: favorite books that you've read, and what are you reading
1:17:07
Speaker 2: currently this year.
1:17:10
Speaker 1: The favorite book I've read is Unreasonable Hospitality.
1:17:13
Speaker 2: I just got that book. Somebody recommended it. It looks fascinating.
1:17:18
Speaker 1: It's by Will Goadaro, who's one of the founders of
1:17:20
Speaker 1: eleven Madison, Danny Meyer's partner, and really describes an excruciating,
1:17:27
Speaker 1: thoughtful detail what it takes to be a creative customer,
1:17:32
Speaker 1: customer focused organization. It's a phenomenal book.
1:17:35
Speaker 2: For a long time, eleven Madison was just you know,
1:17:39
Speaker 2: mission and rated everything else. It was, Yes, it was spectacular.
1:17:42
Speaker 1: That's my favorite one this year. The one I've been
1:17:45
Speaker 1: reading most recently, which has been a long project before
1:17:48
Speaker 1: I go to bed, and it's a ten year old
1:17:49
Speaker 1: book is Bill Simmons Book of Basketball.
1:17:52
Speaker 2: Huh.
1:17:53
Speaker 3: So.
1:17:53
Speaker 1: Bill Simmons wrote a book that ranked the top one
1:17:56
Speaker 1: hundred basketball players. It's again ten years ago of all time,
1:18:01
Speaker 1: using both stats and his incredible knowledge and judgment, and
1:18:05
Speaker 1: it is addictive and incredibly fun.
1:18:07
Speaker 2: So spoiler, was it Jordan or Lebron? Who is he?
1:18:10
Speaker 1: I'm only up to twenty five, which is Bill Walton,
1:18:13
Speaker 1: so you know, I don't know yet.
1:18:15
Speaker 2: And you know ten years ago was Curry really on
1:18:20
Speaker 2: the list?
1:18:20
Speaker 1: So early on in the book he had this tiered
1:18:23
Speaker 1: system and he talked about the players that weren't yet
1:18:26
Speaker 1: on it, and Curry was mentioned as one he didn't
1:18:29
Speaker 1: think would get onto the list in a future edition.
1:18:32
Speaker 2: Hilarious, right, and now he's probably top ten. Right for
1:18:36
Speaker 2: a fair fair statement. Last two questions, what sort of
1:18:40
Speaker 2: advice would you give to a recent college graduate interested
1:18:43
Speaker 2: in a career in either alternate investments, allocation, anything finance related?
1:18:49
Speaker 1: Yeah, well, the general mice I give And I heard
1:18:51
Speaker 1: it phrase beautifully by a guy named Eric Resnik, who
1:18:53
Speaker 1: runs the largest private equity firm for travel and leisure,
1:18:56
Speaker 1: was recently on our show. He was told early on
1:19:00
Speaker 1: combined your vocation with your avocation, which is just a
1:19:05
Speaker 1: thoughtful way of saying to what you love. I think
1:19:08
Speaker 1: that's general the problem with finance and alternative investments is
1:19:12
Speaker 1: I would give advice that Howard Marks gives, which is,
1:19:15
Speaker 1: if you want to have a great career in this space,
1:19:18
Speaker 1: start thirty years ago.
1:19:21
Speaker 2: That's great. I love Howard And our final question, what
1:19:24
Speaker 2: do you know about the world of investing today? You
1:19:27
Speaker 2: wish you knew twenty five thirty years ago when you
1:19:30
Speaker 2: were first getting started.
1:19:32
Speaker 1: I think the importance of people. We're talking about governance
1:19:36
Speaker 1: and decision making, and it was something that David Swinson
1:19:39
Speaker 1: taught me early on. But you have to go through
1:19:43
Speaker 1: people in difficult times, experiencing good and bad behavior in
1:19:47
Speaker 1: those times to really understand that ultimately active management is
1:19:52
Speaker 1: a people business. H And yes, you have to have
1:19:55
Speaker 1: all the investment discipline and all the rigor that goes
1:19:57
Speaker 1: into that, but they are human beings that are making decisions,
1:20:00
Speaker 1: and that evaluating people as a frame for how you
1:20:05
Speaker 1: think about where you want to allocate your capitals probably
1:20:07
Speaker 1: the single most important thing you can do.
1:20:09
Speaker 2: Really fascinating stuff. Ted, Thank you for being so generous
1:20:12
Speaker 2: with your time. We have been speaking with Ted Sids.
1:20:15
Speaker 2: He is the founder of Capital Allocator and the author
1:20:19
Speaker 2: of Capital Allocators. How the world's lead money managers Lead
1:20:22
Speaker 2: and Invest and the host of the Capital Allocators podcast.
1:20:27
Speaker 2: If you enjoy this conversation, well, be sure and check
1:20:30
Speaker 2: out any of the previous four hundred and ninety eight
1:20:34
Speaker 2: podcasts we've done over the past eight years. You can
1:20:37
Speaker 2: find those at iTunes, Spotify, YouTube, wherever you find your
1:20:42
Speaker 2: favorite podcast. Sign up for my daily reading list at
1:20:46
Speaker 2: rid Helts dot com. Follow me on What's Left of
1:20:48
Speaker 2: Twitter at ripaults. Follow all of the Bloomberg Family of
1:20:52
Speaker 2: podcasts on Twitter at podcasts. I would be remiss if
1:20:57
Speaker 2: I did not thank the crack team that helps put
1:20:59
Speaker 2: these conversations together each week. Justin Milner is my audio engineer.
1:21:04
Speaker 2: Attika of Albron is my project manager. Sean Russo is
1:21:07
Speaker 2: my head of research. Paris Wald is my producer. I'm
1:21:12
Speaker 2: Barry Rutults. You've been listening to Masters in Business on
1:21:15
Speaker 2: Bloomberg Radio.