WEBVTT - SBF's Love of Risk 0:00:13.880 --> 0:00:17.280 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.320 --> 0:00:19.360 My name is Mike Reagan. I'm a senior editor of 0:00:19.440 --> 0:00:23.200 Bloomberg Vldonna hik Across asset reporter with Bloomberg, and this 0:00:23.239 --> 0:00:25.880 week on the show, well, as you know, we love 0:00:25.960 --> 0:00:29.560 to talk about crazy market stories on this show, and 0:00:30.160 --> 0:00:32.240 this year is almost over. But I think it's pretty 0:00:32.280 --> 0:00:34.600 safe to say that the collapse of f t X 0:00:34.680 --> 0:00:37.519 and the rest of Sam bankman Fried's crypto empire was 0:00:37.560 --> 0:00:41.360 the craziest thing any of us saw this year. And 0:00:41.400 --> 0:00:43.680 of course it will take many months, maybe years, to 0:00:43.720 --> 0:00:46.920 sort out exactly what caused this mess. But we're going 0:00:46.960 --> 0:00:49.840 to talk to one chief investment officer who has taken 0:00:49.840 --> 0:00:53.800 a sort of philosophical look at spfs tolerance for risk 0:00:54.320 --> 0:00:58.800 and how unusually high it was. But first, vil Donna, 0:00:59.160 --> 0:01:03.320 it's almost years. Do you have any resolutions? I didn't 0:01:03.400 --> 0:01:07.000 until you just asked me. I guess, And now you're 0:01:07.040 --> 0:01:10.800 coming up with the best resolutions yet. Well, we know 0:01:10.920 --> 0:01:13.679 that I belong to a lot of book clubs that 0:01:13.760 --> 0:01:17.080 I'm not inviting you too, So my girlfriend next year 0:01:17.080 --> 0:01:20.160 will read more books and join more book clubs that 0:01:20.280 --> 0:01:24.679 I will not invite me to Yeah, that's really just targeted. 0:01:25.280 --> 0:01:28.119 Want to be part of them? Targeted? You would probably 0:01:28.120 --> 0:01:30.160 say no anyway, And then I don't know what books 0:01:30.160 --> 0:01:33.920 are you reading right now? I'm reading a crime book. 0:01:34.360 --> 0:01:37.400 I like crime books. Yeah, it's called Lush Life. Lush Life. Yeah, 0:01:37.480 --> 0:01:40.040 it's very good. Actually I think maybe the guy had 0:01:40.080 --> 0:01:42.440 something to do with the wire. So a lot of 0:01:42.480 --> 0:01:51.120 the dialogue is like very lingo, like Richard, Alright, what's yours? Oh, 0:01:51.280 --> 0:01:53.920 I resolve. I'm going to ask all of our guests, 0:01:54.120 --> 0:01:59.080 um much more complicated questions like fifty part questions. Questions 0:01:59.400 --> 0:02:01.840 are you starting like I've I've been letting them off 0:02:01.840 --> 0:02:04.960 easy with just the twelve part questions? Are you starting 0:02:04.960 --> 0:02:07.720 with today's guests? We'll see, we'll see. Bring him. Who 0:02:07.760 --> 0:02:10.640 are we talking today? It's Victor Hagani. He's the founder 0:02:10.639 --> 0:02:13.320 and chief investment officer of ELM Wealth, which is an 0:02:13.320 --> 0:02:15.600 index wealth manager. Thank you so much for coming back 0:02:15.600 --> 0:02:18.520 on the podcast. Great to be back again, and I 0:02:18.560 --> 0:02:22.280 hope you're ready for Mike's Mike's multipart question. Let's do 0:02:22.360 --> 0:02:26.000 my best. So I know you so you actually joined 0:02:26.080 --> 0:02:28.480 us on the podcast earlier this year, so thank you 0:02:28.560 --> 0:02:31.720 for coming back, but maybe just as a little recap, 0:02:31.760 --> 0:02:33.920 you can just tell us a bit about ELM and 0:02:34.120 --> 0:02:37.480 what you guys do. Sure. My story is that I 0:02:37.520 --> 0:02:40.840 started off working in at Solomon Brothers in research in 0:02:42.080 --> 0:02:45.000 eventually was a founding partner of l T c M. 0:02:45.840 --> 0:02:48.960 And after the collapse of l T c M, I 0:02:49.040 --> 0:02:51.079 stayed around for a little while to help with the 0:02:51.160 --> 0:02:54.000 unwinding of positions and and help my partners get a 0:02:54.000 --> 0:02:57.679 new venture started. And then I took a long sabbatical 0:02:58.600 --> 0:03:02.720 of ten years starting from my late thirties and UM 0:03:03.280 --> 0:03:05.400 and I emerged from that sort of with a back 0:03:05.400 --> 0:03:08.920 to basics idea of how I wanted to invest for 0:03:09.040 --> 0:03:12.000 my own family, and that led to the creation of 0:03:12.480 --> 0:03:16.280 a wealth management wealth advisory firm that would share a 0:03:16.320 --> 0:03:21.480 low cost, globally diversified, dynamic index investing type of approach 0:03:22.320 --> 0:03:25.040 with anybody that that wanted to get involved. And so 0:03:25.280 --> 0:03:29.280 I've been UM running ELM Wealth for eleven years. Will 0:03:29.320 --> 0:03:32.239 have a partner who's become the CEO, James White and 0:03:32.440 --> 0:03:35.480 uh and we do the My favorite part of the 0:03:35.520 --> 0:03:38.960 whole thing, besides helping our investors, is doing research and 0:03:39.000 --> 0:03:41.760 having a platform to write about different things going on 0:03:41.840 --> 0:03:45.120 and I guess one of our our articles caught your attentions, 0:03:45.160 --> 0:03:49.880 and hence I'm here all of your articles cut thanks 0:03:50.840 --> 0:03:57.040 the ten Uere sabbatical cat. Actually, how do I sign up? Well, 0:03:57.320 --> 0:04:00.400 kind of you've got to uh, don't don't want to 0:04:00.400 --> 0:04:04.000 do it the way that I did it, But it 0:04:04.120 --> 0:04:06.400 was one of the best things in my life for sure, 0:04:06.400 --> 0:04:09.920 and especially my my kids were all young and I 0:04:09.960 --> 0:04:12.400 was young, and it was just a great thing that 0:04:12.400 --> 0:04:13.840 that I did. But I don't think I would have 0:04:13.920 --> 0:04:18.000 done it had LTCM not UM failed. So you want 0:04:18.040 --> 0:04:19.800 to go there, you have it, kept working those eighty 0:04:19.800 --> 0:04:23.080 hour weeks and grinding it out. Well, let's talk about 0:04:23.160 --> 0:04:26.839 that piece you wrote. Vildon and I were both talking 0:04:26.839 --> 0:04:29.239 about it is because it's I love it when people 0:04:29.240 --> 0:04:32.120 take this sort of more philosophical, sort of thirty thou 0:04:32.440 --> 0:04:36.360 view of stories like this rather than you know, picking 0:04:36.360 --> 0:04:38.159 apart the weeds, because I think there's a lot to 0:04:38.200 --> 0:04:41.320 be learned from that sort of approach. And and this, 0:04:41.480 --> 0:04:45.040 this one's called a missing piece of the SPF puzzle. 0:04:45.160 --> 0:04:47.760 And you talk about UM what you call the classic 0:04:47.960 --> 0:04:52.080 theory of choice under uncertainty. Talk to us about what 0:04:52.240 --> 0:04:55.240 that means and how it plays out in real life 0:04:55.279 --> 0:04:58.160 and investing. Sure, so you know, and I mean some 0:04:58.200 --> 0:05:02.560 people think that the that the start of financial decision 0:05:02.600 --> 0:05:07.240 making was around three hundred years ago when Daniel Bernoulli 0:05:07.880 --> 0:05:11.120 uh and and some of his family and friends were 0:05:11.160 --> 0:05:14.839 debating the St. Petersburg Paradox. It's a game where the 0:05:14.920 --> 0:05:19.480 expected value of the game is infinite. But anybody that 0:05:19.640 --> 0:05:22.240 takes a look at it would would uh, you know, 0:05:22.279 --> 0:05:24.480 would say, well, okay, it has an infinite expected value, 0:05:24.520 --> 0:05:26.440 but I don't think i'd pay more than you know, 0:05:26.520 --> 0:05:28.520 ten dollars to play it. And the way that the 0:05:28.560 --> 0:05:32.599 game would work is or works, is that you flip 0:05:32.600 --> 0:05:37.159 a coin and you your payoff is the number of 0:05:37.720 --> 0:05:40.520 heads that you get in a row is well two 0:05:40.560 --> 0:05:42.760 to the number of heads that you get in a row. 0:05:42.839 --> 0:05:45.680 So if you flip one head and then the next 0:05:45.680 --> 0:05:47.320 one is tail, that's one head in a row and 0:05:47.360 --> 0:05:50.040 you get paid two dollars. And then if you've flipped 0:05:50.400 --> 0:05:52.360 you know, three heads in a row, that would be 0:05:52.960 --> 0:05:55.320 uh you know, eight eight dollars that you would get 0:05:55.440 --> 0:05:59.080 And so you could see that the probability of that 0:05:59.120 --> 0:06:03.039 occurrence is the reciprocal of the payoff, and so the 0:06:03.080 --> 0:06:06.280 expected value is infinite, but you're not going to get 0:06:06.320 --> 0:06:08.080 a hundred heads in a row that would give you 0:06:08.120 --> 0:06:11.440 a massive payoff. And people realize that and they say, well, okay, 0:06:11.480 --> 0:06:13.839 you know that I'll play this game, but I wouldn't 0:06:13.880 --> 0:06:16.800 pay an infinite amount for it. And so bernow Lli 0:06:17.240 --> 0:06:20.520 thought about, well, how can we reconcile that? It seems 0:06:20.560 --> 0:06:23.280 like you know what's going on here, and he realized 0:06:23.760 --> 0:06:28.320 and put forward the idea that the marginal benefit that 0:06:28.360 --> 0:06:31.000 we get from more and more wealth goes down with 0:06:31.120 --> 0:06:34.520 each additional unit of wealth, this idea of the decreasing 0:06:34.720 --> 0:06:38.680 marginal utility of wealth, and he modeled that in a 0:06:38.800 --> 0:06:41.839 very simple way. He said, well, what if my you 0:06:42.000 --> 0:06:44.159 the utility that I get from wealth is equal to 0:06:44.240 --> 0:06:47.200 the natural log of wealth. That's just one function which 0:06:47.240 --> 0:06:50.479 goes up, but it goes up at a decreasing pace. 0:06:51.080 --> 0:06:54.880 Then you get a solution to the St. Petersburg valuation, 0:06:54.920 --> 0:06:56.960 you know, which is I'd pay a tiny bit of 0:06:56.960 --> 0:06:59.840 of my wealth to play it. But it really took 0:07:00.000 --> 0:07:04.560 off again in the nineteen forties when uh John von Neumann, 0:07:04.560 --> 0:07:08.720 the polymath, and the economist Oscar Morgenstern came together and 0:07:08.720 --> 0:07:13.440 wrote a book that put forward a logically reasoned proposition 0:07:13.480 --> 0:07:17.080 that if we maximize our expected utility, that that tells 0:07:17.160 --> 0:07:20.080 us the right decisions to make under uncertainty. And that's 0:07:20.120 --> 0:07:23.360 really the beginning of this classic theory of choice. You know, 0:07:23.400 --> 0:07:26.000 I think most people feel that way, and economists have 0:07:26.040 --> 0:07:28.400 it developed that and brought it up to now and 0:07:28.400 --> 0:07:31.600 and basically, we don't need a fancy theory to know 0:07:31.880 --> 0:07:35.080 that when we're faced with some coin flips that we 0:07:35.080 --> 0:07:36.720 don't want to bet, even if the odds are in 0:07:36.720 --> 0:07:38.360 our favor, that we don't want to bet all of 0:07:38.400 --> 0:07:41.520 our wealth on heads coming up each time, even if 0:07:41.560 --> 0:07:43.720 heads has a sixty percent chance of coming up. It's 0:07:43.800 --> 0:07:47.600 like some biased coin thought experiment. And so, you know, 0:07:47.640 --> 0:07:50.880 what's what's really interesting in this whole SPF case is 0:07:50.920 --> 0:07:53.480 that he was sort of on record on a number 0:07:53.480 --> 0:07:57.400 of occasions of saying that that his conclusion was that 0:07:57.480 --> 0:07:59.760 he should make decisions as if as though he had 0:07:59.800 --> 0:08:06.480 no risk aversion basically maximizing the expected value of his choices, 0:08:06.840 --> 0:08:09.120 you know, making a choice that would maximize the expected 0:08:09.200 --> 0:08:11.880 value of his wealth, which he intended to give away. 0:08:12.000 --> 0:08:16.640 He said, rather than trying to maximize this this expected utility. 0:08:17.240 --> 0:08:19.440 Have you ever encountered anyone I mean, maybe if your 0:08:19.480 --> 0:08:21.160 goal is to make a lot of money and give 0:08:21.200 --> 0:08:23.400 it away, is the only only chance you have that 0:08:23.480 --> 0:08:25.400 kind of risk color and says, have you ever encountered 0:08:25.440 --> 0:08:28.840 anyone with that sort of blinders onto risk? Like he 0:08:28.960 --> 0:08:31.480 is sort of hinted at no, Although I I have 0:08:31.800 --> 0:08:35.520 heard some people say that their approach to making decisions 0:08:35.600 --> 0:08:37.800 under uncertainty is to take a certain amount of their 0:08:37.800 --> 0:08:40.200 money and put it aside and treasury bills, and that's 0:08:40.240 --> 0:08:43.440 safe and if they lost everything else, they would be 0:08:43.480 --> 0:08:45.440 really happy that they had that, and then to be 0:08:45.559 --> 0:08:49.960 really aggressive with risk with that discretionary amount that they 0:08:50.000 --> 0:08:53.520 had above what they put away. But when you but 0:08:53.520 --> 0:08:57.400 but when I've met a few of these people in conversations, 0:08:57.400 --> 0:09:00.560 we've talked about it that when I really analyzed decisions 0:09:00.600 --> 0:09:03.319 that they were making with that discretionary capital, they were 0:09:03.360 --> 0:09:07.840 nowhere near risk neutral. It was just their way of of, uh, 0:09:08.000 --> 0:09:10.960 sort of thinking about things. But they still were sort 0:09:10.960 --> 0:09:14.200 of had a normal level of risk aversion. And it's interesting, 0:09:14.200 --> 0:09:17.199 I mean that in practice people have not used this 0:09:17.280 --> 0:09:19.920 expected utility theory very much. It's not used much in 0:09:19.960 --> 0:09:23.360 the financial planning industry, for instance. Uh and and one 0:09:23.360 --> 0:09:25.800 of the criticisms is, oh, it's really hard for people 0:09:25.880 --> 0:09:30.960 to calibrate or to express their utility function. But actually, 0:09:30.960 --> 0:09:32.920 what we've found is that when we talk to people 0:09:32.960 --> 0:09:37.080 about risk taking and you know, expected compensation for taking risk, 0:09:37.520 --> 0:09:40.960 that people fall into a reasonable kind of range of 0:09:41.080 --> 0:09:44.360 risk aversion that most people seem to be and you know, 0:09:44.400 --> 0:09:48.240 we don't really see this incredibly high risk aversion where 0:09:48.240 --> 0:09:50.040 people don't want to take any risk in the face 0:09:50.120 --> 0:09:54.760 of nice opportunities, or even more rare than high risk 0:09:54.800 --> 0:09:57.280 aversion is this super low risk aversion where it's like 0:09:57.320 --> 0:10:03.600 just let me, you know, I think, although you know, 0:10:03.640 --> 0:10:07.120 I guess that a gambling addiction in some ways, right 0:10:07.320 --> 0:10:10.280 is you know, I'm not really talking about pathological conditions. 0:10:10.280 --> 0:10:12.640 I mean, if you have a gambling addiction, you know, 0:10:12.720 --> 0:10:15.120 that's a different story, I guess. And you know, maybe 0:10:15.200 --> 0:10:18.800 those people are characterized by having a risk seeking they 0:10:18.800 --> 0:10:23.440 don't generally rise to the level of you know, owner 0:10:23.520 --> 0:10:27.720 and CEO of a major financial for billion dollars or something. 0:10:28.720 --> 0:10:30.960 So had you been thinking about this all along? Because 0:10:31.000 --> 0:10:33.920 he has been very media friendly, not just recently obviously 0:10:33.960 --> 0:10:36.680 after the fallout, but all along he had been sort 0:10:36.679 --> 0:10:38.959 of out and about talking to people about you know, 0:10:39.120 --> 0:10:41.920 him wanting to give away his wealth and his very 0:10:41.960 --> 0:10:46.040 low risk conversion a little bit um. So actually the 0:10:46.679 --> 0:10:49.800 place where I came across expected value being used in 0:10:49.840 --> 0:10:52.000 a way that I thought wasn't quite right was was 0:10:52.040 --> 0:10:55.840 actually in some of this effective altruism literature. There's this 0:10:55.880 --> 0:10:59.000 one discussion that I read about three or four years 0:10:59.040 --> 0:11:02.360 ago where there was an argument that that we should 0:11:02.360 --> 0:11:05.280 all vote, not because we have a civic duty to 0:11:05.360 --> 0:11:08.400 do so, but actually that if you think that your 0:11:08.480 --> 0:11:11.680 vote has this tiny, tiny chance of making a difference 0:11:11.720 --> 0:11:14.360 in the outcome of the election, that if you think 0:11:14.400 --> 0:11:17.280 that the election of the people in the policies that 0:11:17.360 --> 0:11:21.040 you support would make hundreds of billions or trillions of 0:11:21.040 --> 0:11:24.360 dollars of difference to the world, then you should just 0:11:24.480 --> 0:11:27.760 vote based on that small probability. Because the expected value 0:11:27.760 --> 0:11:31.200 of your vote, the small probability times as big outcome 0:11:31.320 --> 0:11:33.360 is a really is a big positive number, and you 0:11:33.400 --> 0:11:35.520 should that should motivate you to get out of bed 0:11:35.559 --> 0:11:38.600 and go vote. And so that's using expected value for 0:11:38.679 --> 0:11:42.120 a lottery like payout. I think that analysis is not 0:11:42.320 --> 0:11:44.800 quite correct. You know, I think that that huge payout 0:11:44.800 --> 0:11:47.120 that you would get, which you would automatically be giving 0:11:47.160 --> 0:11:49.600 to charity because it wouldn't actually come to you, uh, 0:11:49.720 --> 0:11:52.400 needs to be discounted by the fact that you have 0:11:52.559 --> 0:11:56.679 a marginal decreasing utility of of of wealth even when 0:11:56.679 --> 0:11:58.320 you're giving it away, you know. And I think that's 0:11:58.679 --> 0:12:01.600 kind of really an interesting part of the SPF case 0:12:01.840 --> 0:12:04.600 right now, Victory, I wonder if you think back to 0:12:05.400 --> 0:12:08.079 uh the long term capital management days, and boy, I 0:12:08.080 --> 0:12:10.560 guess it's almost twenty five years now since uh, since 0:12:10.559 --> 0:12:13.560 all that happened, um, you know, And if you were 0:12:13.600 --> 0:12:16.160 to make a Venn diagram of F t X and 0:12:16.360 --> 0:12:19.520 l t c M, is there are there any overlaps there? 0:12:19.720 --> 0:12:23.439 And one thing I'm thinking of is I would guess 0:12:23.440 --> 0:12:25.120 and correct me if I'm wrong, But I would guess. 0:12:25.120 --> 0:12:27.839 If you asked everyone involved at l T c M 0:12:28.440 --> 0:12:30.840 back then are you taking too much risk? The answer 0:12:30.840 --> 0:12:33.959 would beat no, we're not. You know, we're not taking 0:12:34.000 --> 0:12:37.640 on too much risk. It's just our positions got so big, right, 0:12:37.720 --> 0:12:40.480 and and that was really what led to the trouble. 0:12:40.640 --> 0:12:43.280 And at FT actually have this scenario where they have 0:12:43.400 --> 0:12:46.880 this massive position in this coin they invented themselves the 0:12:46.920 --> 0:12:49.520 f t T token, where they're also the big whale 0:12:49.679 --> 0:12:53.120 in in that position of that asset. But I don't know, 0:12:53.280 --> 0:12:55.720 is are there any sort of overlaps of the two 0:12:55.880 --> 0:12:59.160 that spring come on from from your experience at l 0:12:59.200 --> 0:13:01.560 T c M And you're, uh, what you've been able 0:13:01.600 --> 0:13:04.120 to observe with f t X. Well, first, you know, 0:13:04.160 --> 0:13:06.840 as you said earlier, we don't really know exactly what 0:13:07.080 --> 0:13:09.040 happened at f t X. I mean, one thing that 0:13:09.160 --> 0:13:13.120 seems to be the case is that Alameda had bad 0:13:13.160 --> 0:13:15.560 trading results at some point and lost seems to have 0:13:15.600 --> 0:13:17.720 lost a lot of money. The one thing that we 0:13:17.760 --> 0:13:20.959 know is that that SPF was out there saying that 0:13:21.040 --> 0:13:23.080 he was you know, that he was in favor of 0:13:23.120 --> 0:13:26.640 making decisions with a very low or no risk aversion 0:13:26.840 --> 0:13:30.760 at all. So you know, at LTCM, we we were 0:13:31.200 --> 0:13:34.920 risk averse. We were uh, we were not thinking too 0:13:35.040 --> 0:13:38.120 we were not looking to maximize expected value, but we 0:13:38.120 --> 0:13:42.120 were looking to maximize risk adjusted return. And so that's 0:13:42.200 --> 0:13:44.599 that's a difference. But you know what I what I 0:13:44.600 --> 0:13:47.920 would say is that you know, investing involves two types 0:13:47.960 --> 0:13:51.680 of decisions, right, one of them is find the good investments. 0:13:51.720 --> 0:13:53.720 Find the things that are that you think are gonna 0:13:53.920 --> 0:13:57.760 give a good return, a good risk adjusted return, and uh, 0:13:57.800 --> 0:13:59.800 and try to buy those things and find the other 0:13:59.840 --> 0:14:02.120 things things if if you're running along short find things 0:14:02.120 --> 0:14:04.280 that aren't good and sell those or go short those 0:14:04.360 --> 0:14:07.320 or whatever. So that's the part of the process that's 0:14:07.360 --> 0:14:12.640 identifying and evaluating different assets and different investments, and and 0:14:12.679 --> 0:14:17.080 that's really where almost all of the attention of people 0:14:17.200 --> 0:14:19.840 goes and uh. And but there's this other decision that 0:14:19.840 --> 0:14:21.760 we have to make, which is how big. Once we've 0:14:22.240 --> 0:14:25.400 figured out the the what are the good and bad things, 0:14:25.440 --> 0:14:27.880 then we need to figure out how much of those 0:14:27.920 --> 0:14:30.400 trades do I want to put on? And especially if 0:14:30.400 --> 0:14:33.680 we can use leverage or options or derivatives. Uh. You know, 0:14:33.720 --> 0:14:35.560 we have quite a lot of flexibility in terms of 0:14:35.600 --> 0:14:37.160 how much of them we can buy and sell. We 0:14:37.200 --> 0:14:39.960 may not be constrained by just how much capital we 0:14:40.000 --> 0:14:42.600 have to invest, but we could own more, go short 0:14:42.680 --> 0:14:46.880 or whatever. And that sizing decision doesn't get as much attention, 0:14:47.360 --> 0:14:51.200 doesn't get a lot of treatment in universities and finance 0:14:51.240 --> 0:14:55.280 programs and so on. And yet that's the one that's 0:14:55.280 --> 0:14:58.200 more critical because if you even if you can find 0:14:58.240 --> 0:15:00.680 the right investments, but you do them and too large 0:15:00.680 --> 0:15:04.320 a size, that can end in failure. Whereas actually, if 0:15:04.320 --> 0:15:07.320 you find the wrong investments but you size them correctly, 0:15:07.760 --> 0:15:10.680 it's not a happy outcome for you, but it's survivable 0:15:10.800 --> 0:15:13.720 and you go on and you have enough capital to 0:15:13.800 --> 0:15:16.840 spend or to support yourself or whatever. So, you know, 0:15:16.880 --> 0:15:20.800 I think that it seems likely that Alameda took too 0:15:20.880 --> 0:15:24.880 much risk that guided by this principle of maximizing expected 0:15:24.960 --> 0:15:28.720 value coming from the top or the the owner. Um. However, 0:15:28.720 --> 0:15:31.480 he came to that decision which we'll talk about more um, 0:15:31.560 --> 0:15:33.720 and he took too much risk, and the result was 0:15:33.760 --> 0:15:36.480 that they lost money. I think at LTCM, you know, 0:15:36.560 --> 0:15:40.760 inadvertently we wound up with positions that were too big 0:15:40.840 --> 0:15:45.160 that that they wound up getting themselves sort of related 0:15:45.200 --> 0:15:48.080 to each other just by the fact that we own them. Right, 0:15:48.120 --> 0:15:50.640 So when as soon as we got into trouble and 0:15:50.720 --> 0:15:53.560 artificial correlation almost just from yeah, I mean, there were 0:15:53.640 --> 0:15:56.760 there were some you know, deeper, deeper reasons for them 0:15:56.800 --> 0:15:59.000 to be correlated in some cases, but in many cases, 0:15:59.080 --> 0:16:01.760 you know, they would have been going in the opposite direction, 0:16:02.400 --> 0:16:06.240 and they got correlated because we own them. And but anyway, 0:16:06.240 --> 0:16:08.240 it was it was too much risk. You know, I 0:16:08.240 --> 0:16:10.920 don't think there's any disputing that. So I think that's, 0:16:10.960 --> 0:16:13.480 you know, a parallel, but I would say mostly that 0:16:13.640 --> 0:16:15.520 it's you know, I don't that that. I think that 0:16:15.640 --> 0:16:19.840 mostly they're sort of separate circles. And you know, in 0:16:19.880 --> 0:16:22.840 particular this, you know, our approach was, you know, to 0:16:22.880 --> 0:16:25.840 be very aware of risk and you know sometimes you 0:16:25.840 --> 0:16:28.160 you you don't get it right, and uh, you know, 0:16:28.200 --> 0:16:32.720 as opposed to a policy of maximizing expected value, which 0:16:33.000 --> 0:16:34.920 you know, which I think is what was going on there. 0:16:41.600 --> 0:16:44.000 So let's talk a little bit more about how SPF 0:16:44.040 --> 0:16:47.320 al Amida f t X all of this actually happened. 0:16:47.320 --> 0:16:49.720 Because in your note you have this amazing sentence it says, 0:16:50.240 --> 0:16:54.400 when spfs stated preferences encountered the real world, it results 0:16:54.400 --> 0:16:58.000 in almost surely going bust at some point, and pretty 0:16:58.080 --> 0:17:01.680 quickly for someone who knows their way around financial markets. Yeah, 0:17:01.760 --> 0:17:04.560 so I think a great example to just just to 0:17:04.640 --> 0:17:06.879 work through a little bit. As you know. At one point, 0:17:07.000 --> 0:17:11.159 SPF has a Twitter thread where he says, if I 0:17:11.200 --> 0:17:15.200 were faced with an opportunity that had a ten percent 0:17:15.320 --> 0:17:18.400 chance of a big payoff and a nine chance of 0:17:18.960 --> 0:17:22.000 going to zero. Well, he said, I wouldn't invest a 0:17:22.040 --> 0:17:26.560 hundred percent of my capital in that one trade, because um, 0:17:26.600 --> 0:17:28.520 you know, I'd like to be able to do it 0:17:28.560 --> 0:17:32.480 again afterwards, find another one like that afterwards. Uh, but 0:17:32.800 --> 0:17:35.800 I would put like fifty of my capital into that. 0:17:36.160 --> 0:17:39.119 And that's very very risk tolerant. That's not quite going 0:17:39.200 --> 0:17:41.520 all the way to his stated preference of being risk 0:17:41.560 --> 0:17:44.879 neutral and trying to maximize expected value, but that's really 0:17:44.960 --> 0:17:48.959 being you know, extremely risk tolerant. And so from that 0:17:49.080 --> 0:17:50.800 you could sort of say, well, what if he found 0:17:50.960 --> 0:17:54.199 five of these to do in a row. Well, you know, 0:17:54.200 --> 0:17:56.159 if he did five of them in a row, his 0:17:56.320 --> 0:18:00.600 probability of of losing five times in a row, you know, 0:18:00.640 --> 0:18:02.800 fifty percent of his money five times in a row, 0:18:02.800 --> 0:18:06.399 which would leave him without in a five percent loss, 0:18:06.840 --> 0:18:08.760 you know, would be probably over fifty you know, close 0:18:08.800 --> 0:18:11.800 to in that ballpark, right, you know, ten percent chance 0:18:12.119 --> 0:18:14.600 of that happening every time. So you can kind of 0:18:14.640 --> 0:18:17.480 see how it. You know, even in a world where 0:18:17.480 --> 0:18:19.960 you could find some amazing you know, which I don't 0:18:20.000 --> 0:18:23.320 think exists. I've never seen an investment opportunity that has 0:18:23.320 --> 0:18:25.879 a ten percent chance of making a thousand times my 0:18:25.920 --> 0:18:28.600 wealth or something like that. I've never come across that, 0:18:28.720 --> 0:18:31.879 never seen it. But even if you could find those things, 0:18:32.000 --> 0:18:34.680 if you bet in that way, you have a very 0:18:34.760 --> 0:18:38.560 very high probability of of losing you know, all of 0:18:38.600 --> 0:18:41.680 your money. Um, you know, Victor, I'm smiling here because 0:18:41.720 --> 0:18:45.359 I'm thinking of the clients of partners out there listening 0:18:45.359 --> 0:18:47.119 to this and going on, bullie, Victor, what has he 0:18:47.200 --> 0:18:49.119 got my go what's he got me into crypto and 0:18:49.240 --> 0:18:52.120 coin flips and talking about losing all my money once? 0:18:52.160 --> 0:18:54.720 But so let's pivot it to to what's really in 0:18:54.760 --> 0:18:57.920 your wheelhouse here, and that's that's those boring old regular markets. 0:18:58.040 --> 0:19:01.800 And you know, we talked about how uh, sort of 0:19:02.400 --> 0:19:04.959 having no limit for your risk colorance can cause these 0:19:04.960 --> 0:19:07.920 spectacular blow ups. I do feel like for the average 0:19:08.320 --> 0:19:10.960 Joe investor, whether it's a four O one care and 0:19:11.040 --> 0:19:13.320 I R or or you know, your your your basic 0:19:13.359 --> 0:19:17.919 nest egg investor, that maybe having too much fear of 0:19:18.000 --> 0:19:22.200 risk is a bigger issue and and not sort of uh, 0:19:22.320 --> 0:19:24.640 you know, being willing to take on risk. And I'm 0:19:24.680 --> 0:19:26.879 thinking this, especially after the year that we've had in 0:19:26.880 --> 0:19:29.400 the stock market and the bond market for that matter. Um, 0:19:29.480 --> 0:19:30.720 you know, the year is not over yet, but I 0:19:30.720 --> 0:19:32.760 think it's a safe bet to say that we're going 0:19:32.840 --> 0:19:35.080 to close on a you know, a down year in 0:19:35.080 --> 0:19:37.679 the in the equity market, it's pretty rare to have 0:19:37.800 --> 0:19:40.280 two down years in a row. I think the dot 0:19:40.320 --> 0:19:45.000 com collapse was one, Uh, nineteen seventies, I think was 0:19:45.040 --> 0:19:48.080 the last time before that. Is that too simplistic of 0:19:48.119 --> 0:19:51.760 a view of the equity market right now to assume 0:19:51.800 --> 0:19:54.359 that you can't have two down years in a row? Um, 0:19:54.520 --> 0:19:57.440 we're you know, is that is that an enticing entry 0:19:57.480 --> 0:19:59.320 point to you? And what you know, what would you 0:19:59.359 --> 0:20:01.560 call what we saw a client who called you up 0:20:01.560 --> 0:20:04.600 and was asking you what to do here on January one? 0:20:04.720 --> 0:20:07.199 When it's time to think about the next year. So 0:20:07.240 --> 0:20:09.439 the way that we like to look at it is 0:20:09.800 --> 0:20:11.440 the way that we like to look at investing is 0:20:11.480 --> 0:20:15.280 really thinking that the main risky asset that investors have 0:20:15.359 --> 0:20:20.600 access to is diversified portfolios of global equities, US equities 0:20:20.640 --> 0:20:23.679 and non US equities and the low risk things that 0:20:23.720 --> 0:20:26.320 they want to come that we should compare those expected 0:20:26.359 --> 0:20:29.680 returns to our government bonds. You know, I would say, 0:20:29.680 --> 0:20:33.120 in particular, for long term investors, it would be tips 0:20:33.240 --> 0:20:39.080 inflation protected bonds giving a long term real yield in 0:20:39.240 --> 0:20:43.640 excess of inflation or below inflation of their yielding Yeah, 0:20:43.920 --> 0:20:47.240 back to positive thankfully, you know, or treasury bills or 0:20:47.320 --> 0:20:49.680 government bonds whatever. But you know, that's sort of your 0:20:49.840 --> 0:20:52.760 your low risk alternative. So we need to look at 0:20:52.760 --> 0:20:56.080 equities relative to the low risk alternative because it's an 0:20:56.080 --> 0:20:58.639 either or thing that either we have more equities or 0:20:58.640 --> 0:21:00.960 we have more safe assets. And so when we look 0:21:01.000 --> 0:21:04.320 at that today, let's say we look at tips today, 0:21:04.359 --> 0:21:06.800 So long term tips are yielding about one point two 0:21:06.800 --> 0:21:10.200 percent in that ballpark, uh, much higher than they were 0:21:10.760 --> 0:21:14.359 a year ago when the negatives the real yield, So 0:21:14.520 --> 0:21:16.160 they would so if you bought them, they would give 0:21:16.200 --> 0:21:18.879 you uh. And also pre tax they would give you 0:21:19.200 --> 0:21:22.080 one point two percent above whatever inflation turned out to be. 0:21:22.160 --> 0:21:25.000 So in this past year, when CPI inflation ran at 0:21:25.040 --> 0:21:27.800 eight percent, they actually were giving you they would give 0:21:27.840 --> 0:21:29.600 you a nine point two percent return if we got 0:21:29.600 --> 0:21:32.760 another eight percent of inflation ahead of us. And then 0:21:32.800 --> 0:21:35.639