WEBVTT - Jeffrey Sherman on a Mathematician's Journey Into Finance 0:00:02.400 --> 0:00:06.760 Bloomberg Audio Studios, Podcasts, radio news. 0:00:09.560 --> 0:00:16.000 This is Master's in Business with Barry Ridholds on Bloomberg Radio. 0:00:16.320 --> 0:00:19.840 This week on the podcast what Can I Say? Funny story. 0:00:19.920 --> 0:00:24.760 Jeffrey Sherman, He's been on the podcast before. I've had 0:00:25.000 --> 0:00:29.000 been on his podcast, The Sherman Show before. The very 0:00:29.320 --> 0:00:33.959 first Masters in Business broadcast was just about a decade. 0:00:33.560 --> 0:00:35.520 Ago, and that was his boss. 0:00:35.280 --> 0:00:40.120 Jeffrey Gunlock, founder of Double Line Capital, back in July 0:00:40.320 --> 0:00:45.200 twenty fourteen. So he just flew in late yesterday. The 0:00:45.400 --> 0:00:47.839 calendar was a little tight. They got here a little late. 0:00:47.880 --> 0:00:51.199 They had to leave a little early. I apologize in 0:00:51.280 --> 0:00:54.720 advance if it sounds like I'm jumping in trying to 0:00:54.720 --> 0:00:57.840 get to the next question. I have pages and pages 0:00:57.880 --> 0:01:00.320 of topics to talk to him about. I had a 0:01:00.440 --> 0:01:03.560 very limited amount of time to get to it. So 0:01:03.600 --> 0:01:06.840 if it sounds like I am leaping into push him forwards, 0:01:07.319 --> 0:01:10.880 I am. He was super generous with his time. He 0:01:10.959 --> 0:01:14.200 was supposed to leave about twenty five minutes to go 0:01:14.280 --> 0:01:18.440 to his next appointment, but we just kept going. There 0:01:18.480 --> 0:01:23.320 are few people who understand both fixed income and equity 0:01:23.400 --> 0:01:28.480 investment and quantitative strategies to each better. Than Jeffrey Sherman. 0:01:28.640 --> 0:01:31.800 He really is one of the most knowledgeable people in 0:01:31.840 --> 0:01:35.600 this space, and not just knowledgeable in the abstract, but 0:01:36.160 --> 0:01:39.640 helping to oversee just about one hundred billion dollars in 0:01:39.720 --> 0:01:44.480 client assets. Really just a tour to forced discussion. I 0:01:44.640 --> 0:01:49.480 find his take very insightful, very refreshing. I love the 0:01:49.520 --> 0:01:53.160 approach of just throwing everything out the window and going 0:01:53.200 --> 0:01:55.120 back to first principles on occasion. 0:01:55.760 --> 0:01:57.240 Double Line is known for that. 0:01:58.080 --> 0:02:02.600 Just a delightful conversation, so informative, with no further ado. 0:02:03.000 --> 0:02:08.880 My discussion with Jeffrey Sherman, Double Lines Deputy Chief Investment Officer. 0:02:09.120 --> 0:02:11.120 Thanks, Barry, it's good to be back. It's good to 0:02:11.160 --> 0:02:11.600 have you. 0:02:11.680 --> 0:02:14.120 So, you know, the last time we spoke, we were 0:02:14.160 --> 0:02:18.080 really talking about funds and bonds and really got into 0:02:18.120 --> 0:02:20.800 the minutia. But I want to roll back a little 0:02:20.800 --> 0:02:24.320 bit and talk about your background, which is really kind 0:02:24.320 --> 0:02:30.480 of interesting. Undergraduate applied mathematics, master's degree in financial engineering, 0:02:30.880 --> 0:02:34.960 a little bit of teaching. What was the original career plan? 0:02:35.040 --> 0:02:39.200 What were you thinking so prior to going to graduate school, 0:02:39.320 --> 0:02:42.560 I was looking at becoming a teacher. Everybody told me 0:02:42.840 --> 0:02:45.280 that if you get a degree in mathematics the world's 0:02:45.280 --> 0:02:48.840 your oyster. And I didn't really see it, to be honest, 0:02:49.400 --> 0:02:52.640 originally really because I started off in what was the 0:02:52.680 --> 0:02:56.959 discipline of pure mathematics. So pure mathematics for the uninitiated, 0:02:57.160 --> 0:03:01.040 is essentially proving everything you've already learned, and so you 0:03:01.120 --> 0:03:02.800 go back and you have to go back to the 0:03:02.840 --> 0:03:05.280 basics and the principles, and it's just a lot of 0:03:05.320 --> 0:03:08.400 logic at the end of the day, and trying to 0:03:08.400 --> 0:03:11.800 make that connection to how to be employed very difficult 0:03:12.200 --> 0:03:15.639 for especially for like a nineteen twenty year old who 0:03:15.800 --> 0:03:17.639 has no clue what's out there in the world. 0:03:17.720 --> 0:03:21.280 And it's like studying philosophy. You could be philosophy professor, 0:03:21.320 --> 0:03:22.400 but that's pretty much it. 0:03:22.320 --> 0:03:24.920 Right, But also like there's a lot of overlap between 0:03:24.960 --> 0:03:27.880 philosophy and a pure mathematician as well. And again it 0:03:27.880 --> 0:03:31.080 comes down to logic and you know, the deduction of arguments. 0:03:31.200 --> 0:03:34.160 But you moved to applied mathematics, I did, and I 0:03:34.240 --> 0:03:37.680 did looking for something different, and I just didn't see 0:03:37.760 --> 0:03:41.080 much there. And further to that, I was on the 0:03:41.160 --> 0:03:43.680 track to become a teacher, so I was I thought, 0:03:43.760 --> 0:03:45.760 you know, hey, I'll be a high school baseball coach, 0:03:45.840 --> 0:03:49.360 high school teacher seems interesting, and I have to thank 0:03:49.520 --> 0:03:54.240 the university for forcing us to go actually sit in classrooms. 0:03:54.680 --> 0:03:58.360 And so I don't mean attending class for your own education, 0:03:58.720 --> 0:04:00.480 but I meant if you want to teach, you have 0:04:00.520 --> 0:04:01.680 to go to the local. 0:04:01.440 --> 0:04:04.080 School or did a course, watch a teacher do what 0:04:04.080 --> 0:04:06.800 you're studying to do, and say, hey, is this for me? Yeah? 0:04:06.880 --> 0:04:11.920 And I realized the repetition, the redundancy, also the lunacy 0:04:12.000 --> 0:04:15.920 of trying to babysit teenagers, and so I was very 0:04:15.920 --> 0:04:17.719 turned off by it. And so that was actually the 0:04:17.760 --> 0:04:21.000 transition to to applied mathematics to try to find a 0:04:21.040 --> 0:04:24.560 different career. And what they don't tell you about applied 0:04:24.600 --> 0:04:27.440 mathematics is you can apply it to things, but it's 0:04:27.520 --> 0:04:32.159 not blatantly obvious what said application is. And so effectively, 0:04:32.600 --> 0:04:35.320 by the time I became a senior, I didn't really 0:04:35.360 --> 0:04:37.719 know what I wanted to do, and time was rolling 0:04:37.760 --> 0:04:40.479 around and I really hadn't applied for a job. So 0:04:40.600 --> 0:04:43.120 the natural thing was, well, let's just stay in academia, 0:04:43.520 --> 0:04:46.280 and so that's what I did. I actually started off 0:04:46.279 --> 0:04:49.560 into PhD and applied mathematics, and I like to say, 0:04:49.600 --> 0:04:53.039 I'm a dropout. I didn't really see the path of 0:04:53.120 --> 0:04:56.719 becoming a professor at the kind of the university level, 0:04:57.080 --> 0:04:59.760 because again, I still felt there was that redundancy and 0:05:00.120 --> 0:05:02.799 it just didn't it didn't seem to, you know, elicit 0:05:02.880 --> 0:05:03.960 some spark inside of me. 0:05:04.200 --> 0:05:06.880 So, how do you go from a PhD program to 0:05:07.320 --> 0:05:08.440 financial engineering? 0:05:08.520 --> 0:05:11.920 Gusty, Well, what it was was, so, as I said, 0:05:11.920 --> 0:05:16.640 with applications, there's many applications of math, and the usually 0:05:16.640 --> 0:05:19.640 obvious one is physics. And I really hated physics. I 0:05:19.800 --> 0:05:23.120 never really liked physics, and it was just something that 0:05:23.160 --> 0:05:25.080 didn't intrigue me. So I spent a lot of time 0:05:25.160 --> 0:05:29.840 in probability and statistics, which probability is very wonky statistic 0:05:30.000 --> 0:05:32.640 people think they're the same, they're not really completely different, 0:05:32.920 --> 0:05:36.520 absolutely different fields. But I'd done a lot of econometrics 0:05:36.560 --> 0:05:39.680 and things like that, and so from the standpoint of statistics, 0:05:40.320 --> 0:05:43.080 that was one of my specialties, in addition to calculus, 0:05:43.120 --> 0:05:45.520 and so really I was focused on applied during the 0:05:45.800 --> 0:05:50.120 run of differential equations and calculus based stuff. And at 0:05:50.160 --> 0:05:52.760 the time, this was the late nineties, obviously quants were 0:05:52.839 --> 0:05:55.720 becoming bigger and bigger. Part of the financial industry, and 0:05:55.800 --> 0:05:58.680 so there was starting to become these programs on like 0:05:58.760 --> 0:06:01.840 financial math more applied. Usually it's like a you know, 0:06:02.160 --> 0:06:04.760 a University of Chicago, which again I didn't have a 0:06:04.800 --> 0:06:08.000 lot of exposure to these, you know, prestigious universities and 0:06:08.000 --> 0:06:09.800 didn't know about a lot of this, and so I 0:06:09.839 --> 0:06:11.760 was looking like a Carnegie mellon the likes. They ended 0:06:11.800 --> 0:06:13.680 up going back to a school in la called Clermont 0:06:14.440 --> 0:06:16.680 and they had a financial engineering program there, and so 0:06:17.160 --> 0:06:20.000 I was always concerned, well, I haven't studied accounting finance 0:06:20.040 --> 0:06:23.159 over the time, and the advisor there gave me some 0:06:23.200 --> 0:06:26.560 great advice, and we can teach mathematicians finance, we can't 0:06:26.560 --> 0:06:31.320 always teach finance majors math. And so it's so true. 0:06:32.320 --> 0:06:35.040 There is something about it. It's an easier transition. I 0:06:35.240 --> 0:06:38.480 won't say you can't teach them, it's just the finance 0:06:38.600 --> 0:06:40.760 was a lot easier when you've studied a lot of 0:06:40.760 --> 0:06:43.640 math for a long time and the applications were absolutely 0:06:44.000 --> 0:06:44.920 directly applicable. 0:06:45.240 --> 0:06:48.160 It seems that some people are math people and some 0:06:48.200 --> 0:06:51.320 people are not. And you know, if it comes to 0:06:51.360 --> 0:06:54.120 you naturally, you don't understand why other people don't get 0:06:54.160 --> 0:06:57.479 the fundamental like it. There's an internal logic that makes 0:06:57.480 --> 0:06:59.839 so much sense if you're one of those people, and 0:07:00.000 --> 0:07:02.840 if you're not, you know, it's Greek too. 0:07:03.279 --> 0:07:05.760 And also it was something that I was always kind 0:07:05.800 --> 0:07:09.080 of gifted with. Right, the math came easier. The reason 0:07:09.120 --> 0:07:11.600 I became a math major berry is that I actually 0:07:11.800 --> 0:07:14.600 disliked reading by the time I got to college. And 0:07:14.640 --> 0:07:18.000 it was really and obviously, think about it, finance never 0:07:18.040 --> 0:07:19.800 have to read, right, we don't have to read anything 0:07:19.800 --> 0:07:23.200 in there. But I was actually floored by when I 0:07:23.240 --> 0:07:26.320 got my first job as an intern and the amount 0:07:26.360 --> 0:07:28.240 of reading that I had to do in a given day. 0:07:28.560 --> 0:07:31.239 And I was like, wow, you know, I chose math 0:07:31.320 --> 0:07:34.520 because it was very simple. It came natural. It was like, 0:07:35.240 --> 0:07:36.680 you know, you read a couple of pages, you do 0:07:36.720 --> 0:07:38.880 some problems, it's over. I don't have to read, you know, 0:07:39.160 --> 0:07:42.720 hundreds of pages of a novel. But very quickly I 0:07:42.800 --> 0:07:45.880 learned that you definitely have to read day and day out. 0:07:45.920 --> 0:07:51.520 And a poorly written novel with a terrible narrative, plot structure, 0:07:51.560 --> 0:07:53.480 and awful characters. 0:07:53.120 --> 0:07:56.920 Right, that's finance in a nutshell, right, So so definitely, 0:07:57.280 --> 0:07:59.720 you know, again that's just being young and naive as well, 0:07:59.760 --> 0:08:02.760 But you know, you should always gravitate to some of 0:08:02.800 --> 0:08:05.400 your internal skill set, and that's what I did. But 0:08:06.040 --> 0:08:08.000 I think the people who told me that you can 0:08:08.040 --> 0:08:10.840 always do stuff with the math degree, but I also 0:08:11.080 --> 0:08:13.720 really cursed them for a while not tell me what 0:08:13.760 --> 0:08:16.200 that exactly was. And by the way, when I heard 0:08:16.320 --> 0:08:18.560 you can become an engineer, I never wanted to drive 0:08:18.600 --> 0:08:21.000 a train, right, and so no one ever told me 0:08:21.040 --> 0:08:24.120 what an engineer was actually doing. Is that the definition 0:08:24.280 --> 0:08:27.400 engineer is using math to solve problems exactly right, real 0:08:27.440 --> 0:08:30.520 world problems. And so I don't know if financial engineering 0:08:30.720 --> 0:08:32.440 holds up as well, because I don't know if there 0:08:32.440 --> 0:08:34.839 are the real world problems, but I definitely know there 0:08:34.840 --> 0:08:36.680 are problems there and there are things we can help 0:08:36.920 --> 0:08:38.560 in the world by doingthing. 0:08:38.240 --> 0:08:41.559 You mentioned you were an intern. Where did you start 0:08:41.600 --> 0:08:44.720 your internship? And wasn't in the World Definance? 0:08:44.800 --> 0:08:49.320 It was? It was so when I was in the 0:08:49.320 --> 0:08:52.880 master's program require an internship as part of it, and 0:08:53.120 --> 0:08:55.400 I got it. Trust come to the West, so tcw oh, 0:08:55.480 --> 0:08:57.920 and so that was your first job. My first job 0:08:58.000 --> 0:09:00.600 was there, and I've worked with the same crew effectively 0:09:00.640 --> 0:09:03.520 ever since. So that was in. That was in two 0:09:03.520 --> 0:09:07.920 thousand and one, early then, and then ultimately you know, 0:09:07.960 --> 0:09:10.160 I've been working with the same team around me for 0:09:10.200 --> 0:09:11.600 about twenty five years. Now. 0:09:11.600 --> 0:09:14.640 That's amazing. How did you bump into some kid named 0:09:14.679 --> 0:09:15.840 Jeff Gunlock though. 0:09:15.760 --> 0:09:17.520 Well he was he was a lot older than me, 0:09:17.600 --> 0:09:19.360 you know, he was not a kid at the time too, 0:09:19.440 --> 0:09:22.400 but he definitely had GRAVI toss around the firm. And 0:09:22.840 --> 0:09:25.480 I think there's something about finance too that you get 0:09:25.520 --> 0:09:30.560 defined into your roles as a function of essentially your 0:09:30.720 --> 0:09:33.120 entry point in the industry. And so I've noticed that 0:09:33.440 --> 0:09:36.200 me coming in two thousand and one, think about it 0:09:36.320 --> 0:09:38.120 not really a great equity market. 0:09:37.880 --> 0:09:39.719 Dot com implosion, right, I mean in. 0:09:39.679 --> 0:09:41.480 The middle of it, obviously we had nine to eleven. 0:09:41.559 --> 0:09:43.480 You had all kinds of crazy stuff that happened in 0:09:43.480 --> 0:09:47.600 the world. And so I've noticed that the people that 0:09:47.760 --> 0:09:49.960 came a few years after me tend to be more 0:09:50.040 --> 0:09:52.520 risk takers right where we were a little bit more 0:09:52.640 --> 0:09:54.800 risk verse. I think there's this anchoring of when you 0:09:54.840 --> 0:09:58.160 start one's career sometimes of how you get into a 0:09:58.200 --> 0:09:59.800 side of the business. Now, obviously we can read a 0:09:59.800 --> 0:10:02.520 fi in ourselves, right, but I do think that there 0:10:02.559 --> 0:10:05.280 is something to be said about that. So again, this 0:10:05.440 --> 0:10:07.680 is a world where interest rates. You know, you got 0:10:07.679 --> 0:10:10.800 paid unlike the last time we were here talking right 0:10:11.040 --> 0:10:13.679 when we had that financial true financial repression for like 0:10:13.720 --> 0:10:17.439 twelve years, and so there was something that was interesting 0:10:17.440 --> 0:10:20.960 about it. And inherently it's more mathematical nature. And so 0:10:22.520 --> 0:10:25.480 as I was doing like risk analytics and working to 0:10:25.480 --> 0:10:27.679 help support some of the marketing staff and do that, 0:10:28.679 --> 0:10:30.960 you know, I gravitated to that side of the business 0:10:31.000 --> 0:10:33.000 a little bit. So my goal was to work for 0:10:33.080 --> 0:10:36.400 mister Gunlog. I did not on day one, but I 0:10:36.440 --> 0:10:38.680 always felt that like there was something in there, just 0:10:38.720 --> 0:10:41.440 analyzing returns, looking at the history, looking at the team, 0:10:41.920 --> 0:10:44.040 and my goal was to try to get on that team, 0:10:44.040 --> 0:10:45.840 and effectively I did so. 0:10:46.120 --> 0:10:49.800 Just a little bit of a trivia footnote the very 0:10:49.840 --> 0:10:54.120 first Masters in Business that was broadcast just about ten 0:10:54.280 --> 0:10:59.320 years ago, July twenty fourteen, episode number one. Jeffrey Gunlock, 0:10:59.440 --> 0:11:03.040 double long capital. That's right, So you really really I 0:11:03.360 --> 0:11:05.960 owe him a special debt of gratitude. 0:11:06.320 --> 0:11:10.120 So so I do too, very yeah. So he still 0:11:10.120 --> 0:11:12.720 writes my paychecks today, signs that right, Yeah. Yeah. 0:11:12.840 --> 0:11:15.959 At TCW, you're at the Trust Company of the West. 0:11:16.200 --> 0:11:19.840 You're senior vice president, You're a portfolio manager, you're a 0:11:19.920 --> 0:11:23.640 quantitative analyst. It sounds like you're wearing a lot of 0:11:23.640 --> 0:11:27.400 different hats. Are these sequential positions or were these all 0:11:27.440 --> 0:11:27.800 at once? 0:11:27.880 --> 0:11:30.200 Yeah, No, it's sequential. You know, I started as a 0:11:30.240 --> 0:11:32.480 quant and then you know, you get these corporate titles 0:11:32.520 --> 0:11:36.199 as things go along. But ultimately, you know, I liked 0:11:36.240 --> 0:11:39.800 being on the fortflow management side and so devising strategies, 0:11:40.160 --> 0:11:43.280 coming up with ideas and trying to figure out different 0:11:43.280 --> 0:11:45.880 ways to execute them. That was always of interest, and 0:11:45.920 --> 0:11:49.200 so I worked a lot on the asslecation side. And 0:11:49.280 --> 0:11:52.360 so I've had a lot of roles throughout my career, 0:11:52.440 --> 0:11:55.120 even though it's it's very narrow team right Instead, I've 0:11:55.120 --> 0:11:57.600 worked at the same folks forever. You know, I've trafficked 0:11:57.600 --> 0:11:59.440 in a lot of markets. I mean, at one point 0:11:59.480 --> 0:12:01.920 I worked for a guy that wrote a very similar 0:12:01.960 --> 0:12:05.400 piece on commodities, and so we created commodity products. We 0:12:05.520 --> 0:12:07.920 ran those for a few years. Again, as I said, 0:12:08.000 --> 0:12:11.000 we've worked in at allocation. I've helped build a lot 0:12:11.040 --> 0:12:13.760 of our quantitative strategies. We run at double line as well, 0:12:13.800 --> 0:12:16.160 and so it's not just me. I have a good 0:12:16.160 --> 0:12:18.200 team around me too, and so I've always been able 0:12:18.200 --> 0:12:21.840 to surround myself with people who can think about these 0:12:21.880 --> 0:12:24.400 ideas and I are really kind of big picture folks, 0:12:25.000 --> 0:12:27.160 but it can also get into the minutia. And so 0:12:28.040 --> 0:12:32.160 not shockingly, I like quants, right, I feel like we vibe, 0:12:32.520 --> 0:12:34.839 you know, we can we can get together. But I 0:12:35.360 --> 0:12:37.800 like the way that the quants think, you know. And 0:12:37.840 --> 0:12:41.440 so I've never I struggled when I took the CFA exam, 0:12:41.559 --> 0:12:44.200 not not with the whole curriculum, but obviously the accounting. 0:12:44.800 --> 0:12:47.080 I mean, I have a degree in financial engineering and 0:12:47.120 --> 0:12:51.040 I took one accounting course, right, and so the statement 0:12:51.080 --> 0:12:54.199 analysis never made sense to me. It still doesn't, you know. 0:12:54.200 --> 0:12:56.840 Well, it doesn't have the same internal logic, the same 0:12:57.120 --> 0:13:01.480 You can't arrive mathematical rationality where you just have to 0:13:01.559 --> 0:13:04.800 start with a basic premise and so much things can 0:13:04.840 --> 0:13:09.720 be derived logically from that starting point. This is just rules, 0:13:09.760 --> 0:13:13.720 and it's just especially if you're a left brain person, 0:13:13.760 --> 0:13:17.120 the right brain stuff and vice versa. So you mentioned 0:13:17.160 --> 0:13:21.760 financial repression, You and the rest of the qants in 0:13:21.840 --> 0:13:25.640 your core group, including Gunlock, decide to stand up your 0:13:25.640 --> 0:13:29.120 own firm in two thousand and nine. It's pretty much 0:13:29.640 --> 0:13:32.800 in the midst of people. The worst of the market 0:13:32.840 --> 0:13:36.400 I think was somewhat behind us, but still people were 0:13:36.400 --> 0:13:39.520 shell shocked. What was it like standing up a new 0:13:39.600 --> 0:13:43.319 firm right in the financial crisis, right in the midst 0:13:43.320 --> 0:13:46.400 of nine with the Fed every week it seemed like 0:13:46.400 --> 0:13:49.640 there was a different new credit line, a different new 0:13:49.640 --> 0:13:52.680 way to unfreeze. What was going on in the credit markets? 0:13:52.679 --> 0:13:53.680 Tell us about that period. 0:13:53.840 --> 0:13:57.559 Yeah, well, actually the bulk of that period transpired at TCW, 0:13:57.760 --> 0:14:02.120 so the eight sure, but even in nine, even though 0:14:02.200 --> 0:14:04.760 nine there was there was still this was kind of 0:14:04.800 --> 0:14:06.520 the bounce back. As we all know. The lows were 0:14:06.520 --> 0:14:09.880 in March of nine. But what you found was that 0:14:10.080 --> 0:14:13.560 in we left in December of nine. At that point 0:14:13.679 --> 0:14:17.160 things were starting to have more clarity. Now massive uncertainty 0:14:17.200 --> 0:14:20.120 in the world, and there's the old adage that investors 0:14:20.120 --> 0:14:22.760 fight the last war. They're still fighting the last one 0:14:22.960 --> 0:14:26.760 right every time, right, And so trying to show people 0:14:26.840 --> 0:14:30.240 this idea that you know, investing in these mortgages that 0:14:30.480 --> 0:14:33.600 did go down fifty or sixty percent, that there was 0:14:33.920 --> 0:14:37.680 significant upside in this and really limited downside, and so 0:14:38.120 --> 0:14:41.680 there was something special about that time as well, where 0:14:41.880 --> 0:14:46.480 the opportunity set was extremely obvious. But it's never obvious. 0:14:46.600 --> 0:14:50.560 Right at the time, it wasn't obvious. We thought it 0:14:50.600 --> 0:14:53.600 was obvious. Looking back with hindsight, it was the best 0:14:53.600 --> 0:14:54.760 time to make money and fixation. 0:14:54.760 --> 0:14:58.440 Can I tell you something about obvious so we full disclosure. 0:14:58.480 --> 0:15:02.320 We used to own the way back in nine, ten, eleven, twelve, 0:15:02.680 --> 0:15:08.560 the Double Line mortgage backed portfolio, and it was obvious 0:15:08.720 --> 0:15:13.760 that hey, you're buying these deeply distressed mortgages with an 0:15:13.760 --> 0:15:18.520 implicit federal guarantee. How are you not gonna outperform plain 0:15:18.640 --> 0:15:22.520 vanilla mortgages and that product for I want to say, 0:15:22.560 --> 0:15:25.440 like the next seven eight years until you just couldn't 0:15:25.480 --> 0:15:27.680 buy any more mortgage. They just weren't available. 0:15:27.720 --> 0:15:30.840 They weren't They weren't available at those prices anymore. Anyone 0:15:30.840 --> 0:15:32.400 says when you buy them at par it's a lot 0:15:32.400 --> 0:15:34.760 different than buying them it's fifty, right, But. 0:15:34.640 --> 0:15:39.480 That that fund just destroyed old commerce for years and 0:15:39.560 --> 0:15:41.880 years and years. Am I overstating that? No? 0:15:42.120 --> 0:15:44.880 I mean, look, anybody who was in the space did similar, 0:15:45.040 --> 0:15:45.920 right as long as you. 0:15:45.920 --> 0:15:49.360 Had any guys were very aggressive, very early, and I 0:15:49.400 --> 0:15:52.040 want to say seventy five eighty five percent of the 0:15:52.040 --> 0:15:54.640 portfolio at least in the beginning was mortgage back. 0:15:54.680 --> 0:15:56.720 So no, it was almost one hundred how real at 0:15:56.760 --> 0:15:59.920 the time, very early on, because it was blatantly obvious 0:16:00.120 --> 0:16:02.720 that you had two sides of the markets. You had 0:16:02.760 --> 0:16:05.480 the government guaranteed side, which gave you interest rate risk, 0:16:05.600 --> 0:16:07.560 and you had this stuff that was so bombed out 0:16:07.840 --> 0:16:10.800 it had zero exposure to interest rate exposure. It was 0:16:10.880 --> 0:16:13.840 all about the credit. And as we said, you know, 0:16:13.880 --> 0:16:16.680 investors fighting the last war were saying, well, they went 0:16:16.720 --> 0:16:19.440 down to fifty, they must be going to twenty five, right, 0:16:19.760 --> 0:16:21.920 So where you just say, hey, I'm buying you know, 0:16:22.000 --> 0:16:25.480 wells Fargo's shelf paper with six coupons. Now, if you 0:16:25.480 --> 0:16:27.680 buy an asset with a six cupon at fifty cents 0:16:27.680 --> 0:16:29.800 on the dollar, and let's just think you think you're 0:16:29.800 --> 0:16:32.640 getting par back, that thing has an IRR like close 0:16:32.680 --> 0:16:36.680 to thirty, right, And that math probably doesn't jump out 0:16:36.680 --> 0:16:38.920 to a lot of people, but just think of current yield. 0:16:39.040 --> 0:16:41.560 It's got six you divided by fifty, that's a twelve 0:16:41.640 --> 0:16:44.040 current yield. That's the cash flow. Now you have to 0:16:44.160 --> 0:16:46.960 assume some losses and what we were doing was just running 0:16:47.000 --> 0:16:50.400 these bonds to like draconian scenarios where the world's ending 0:16:51.240 --> 0:16:53.320 if how these bonds are still profit and they don't 0:16:53.360 --> 0:16:56.040 break But they don't they don't, they don't lose money, 0:16:56.120 --> 0:16:59.200 especially at fifty cents on dollars. But the biggest challenge 0:16:59.200 --> 0:17:01.760 Barier that a lot of it investors had would say, well, 0:17:02.080 --> 0:17:04.040 you're buying this but and we tell them, look, we 0:17:04.080 --> 0:17:05.800 think we're going to get seventy five cents on the 0:17:05.840 --> 0:17:08.399 dollar back, Well, why the hell would you buy this bond? 0:17:10.080 --> 0:17:12.280 It doesn't Yeah, But but people don't think that way. 0:17:12.320 --> 0:17:14.000 They're like, but you're not going to get par back. 0:17:14.040 --> 0:17:15.720 And by the way, if you don't get par back, 0:17:16.200 --> 0:17:19.119 these bonds go deeper default in a range agency model. 0:17:19.160 --> 0:17:22.000 But who cares. But see, but that's not the mentality 0:17:22.119 --> 0:17:22.320 of it. 0:17:22.359 --> 0:17:24.800 And that was an unconstrained fund, right. It wasn't like 0:17:24.840 --> 0:17:27.720 we have to buy conforming fanning in front. 0:17:27.760 --> 0:17:30.600 It's like it was. It was all written in their perspectives. 0:17:30.640 --> 0:17:32.840 And by the way, the nice thing about starting a 0:17:32.840 --> 0:17:35.400 new firm is you can write perspectives the way you want. 0:17:35.520 --> 0:17:37.720 No legacy paper, no god, but you. 0:17:37.680 --> 0:17:39.240 Don't have to do it. You don't need a proxy 0:17:39.320 --> 0:17:40.879 for it. You say, this is how we want to 0:17:40.960 --> 0:17:44.040 run the portfolios. And so it was a great time. 0:17:45.200 --> 0:17:47.520 I would I advise people, you know, five years ago 0:17:47.640 --> 0:17:49.640 or six years ago to set up a bond shop. No, 0:17:50.240 --> 0:17:52.919 but at the time it was it was just everything 0:17:52.960 --> 0:17:55.080 was kind of in our favor. And the thing I 0:17:55.119 --> 0:17:57.439 remember is that the day we launched that total return 0:17:57.480 --> 0:18:00.080 fund at double on, it was actually April sixth of 0:18:00.080 --> 0:18:02.520 of twenty ten. The flash crash. 0:18:02.600 --> 0:18:04.640 Right around the flash it was a little bit. 0:18:04.560 --> 0:18:08.640 Prior to that, but why, yeah, that was later on. Yeah, 0:18:09.040 --> 0:18:11.200 I don't know exactly the day, but it was definitely later. 0:18:11.640 --> 0:18:13.920 But why I remember that is I used to tell 0:18:13.920 --> 0:18:16.159 people that was the last time we saw four percent tenure. 0:18:16.840 --> 0:18:19.359 That day that we launched that fun it was a 0:18:19.400 --> 0:18:22.760 four percent tenure and it took us until twenty twenty 0:18:22.760 --> 0:18:23.760 two to get back to that. 0:18:23.800 --> 0:18:26.320 Like, hey, what's it doesn't twice between friends? 0:18:26.600 --> 0:18:27.480 It's so funny. 0:18:27.880 --> 0:18:31.439 You specifically said what a great time it was in 0:18:31.760 --> 0:18:34.080 nine to launch a firm, to launch a fun I 0:18:34.200 --> 0:18:38.160 have a vivid recollection of walking into my training room 0:18:38.680 --> 0:18:44.080 in eight oh nine and just channeling DeValve from Apocalypse Now. 0:18:44.000 --> 0:18:46.160 Remember that, Charlie, don't surf the thing. 0:18:46.200 --> 0:18:51.000 At one point, he turns to Martin Sheen says, you know, son, 0:18:51.160 --> 0:18:54.199 someday this war is going to end with this bittersweet 0:18:54.200 --> 0:18:57.720 wistfulness like this is the time. You have to just 0:18:57.840 --> 0:19:00.879 recognize it. And I always thought it was much more 0:19:01.000 --> 0:19:06.160 applicable to markets than to war, because hey, when it's 0:19:06.400 --> 0:19:08.439 just a hell out there and there's blood on in 0:19:08.480 --> 0:19:11.600 the streets, that's when the greatest opportunities come. 0:19:11.760 --> 0:19:15.120 It really is. And unfortunately war never ends, as we know, right, 0:19:15.359 --> 0:19:18.399 we continue to see that left and right. But definitely 0:19:18.680 --> 0:19:21.760 markets are cyclical in nature. And you know, it's the 0:19:21.760 --> 0:19:24.720 same thing when valuation gets out of control too. It 0:19:24.760 --> 0:19:27.040 will come home to roost at some point. But doesn't 0:19:27.080 --> 0:19:29.919 mean the valuation can't get worse, right, it can't go higher. 0:19:30.320 --> 0:19:33.000 And so what you have to you have to realize 0:19:33.040 --> 0:19:35.199 is that you've got to stick to principles, you've got 0:19:35.240 --> 0:19:38.480 to think through things, and you know, regimes change, but 0:19:38.520 --> 0:19:41.359 they don't change that much, right, And so what I 0:19:41.640 --> 0:19:44.320 think in that is that if once you start hearing 0:19:44.480 --> 0:19:48.399 this time is different, this is the new era. Typically 0:19:48.680 --> 0:19:52.240 those things are the signs of excess in the market. 0:19:52.600 --> 0:19:54.560 And look, I think that we've been through one of 0:19:54.600 --> 0:19:57.879 those recently as well. I think we've had some accesses 0:19:57.880 --> 0:19:58.480 out there. 0:19:58.359 --> 0:20:00.679 On the fixed income shid or on the equ on 0:20:00.760 --> 0:20:01.639 both both. 0:20:01.760 --> 0:20:06.200 And so, look, corporate spreads are tight today, valuations are tight. 0:20:06.200 --> 0:20:09.720 They're tight for a reason. But it doesn't you know, Look, 0:20:09.760 --> 0:20:12.720 corporate bonds being a little bit over value doesn't mean 0:20:13.000 --> 0:20:15.120 they're going to crash, doesn't mean you're going to lose 0:20:15.160 --> 0:20:17.800 half your money. But the problem is in some equity 0:20:17.840 --> 0:20:20.560 markets you can have that experience right now. Granted, bonds 0:20:20.600 --> 0:20:23.320 had a significant draw down as we all saw in 0:20:23.359 --> 0:20:27.520 twenty two, but from the standpoint of thinking about valuation, 0:20:28.040 --> 0:20:31.080 you know, credit spreads are not really reflecting much of 0:20:31.080 --> 0:20:34.119 a default premium today, and I think that's reflective of 0:20:34.160 --> 0:20:36.760 the economy. I think that's reflective of kind of where 0:20:36.800 --> 0:20:39.879