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