Speaker 1: Well, Trillions, I'm Joel Webber and I'm Eric call tunis Eric.
Speaker 1: You found someone I think for your book that we
Speaker 1: also invited to come on this week's episode of Trillions.
Speaker 1: Who did you find? Uh? This is an interesting guest. Uh, definitely, UM,
Speaker 1: somebody who some people are going to know, some people won't.
Speaker 1: But his name is Victor Hagani and Joel, as you know,
Speaker 1: I am deep deep in the book project writing about
Speaker 1: Bogel and Vanguard, and I came thanks for taking the
Speaker 1: time to do the podcast look for you anything. But
Speaker 1: I was going through people to interview and I came
Speaker 1: across this article in the Wall Street Journal and it said,
Speaker 1: you know, former long term capital management, you know, now
Speaker 1: an index or. And there's been a couple of cases
Speaker 1: like this of people who go from the active world
Speaker 1: and in long term capital management's case, that's probably is
Speaker 1: active and in hedge fundations you could possibly get right.
Speaker 1: This is a famous hedge fund in the nineties that
Speaker 1: had some of the most brilliant people. Um, and we'll
Speaker 1: go over that a little bit in a minute. But
Speaker 1: he somebody who is now an indexer and has an
Speaker 1: advisor and basically manages money, uh, using low cost, mostly
Speaker 1: Vanguard ETFs, and so I thought, Okay, I wonder what
Speaker 1: what caused this guy to do that? So I interviewed
Speaker 1: him from my book, and I thought, you know, everything
Speaker 1: he's saying was really good material for the podcast. Given
Speaker 1: we talk about e t f s and some of
Speaker 1: his experiences, I think a lot of even you know,
Speaker 1: just regular retail investors will relate to UM. And so
Speaker 1: I thought it'd be interesting to talk about his transition
Speaker 1: and some of the stuff he's thinking about today. His
Speaker 1: firms called ELM Partners, which will discuss with him this time.
Speaker 1: I Triuian victory, Victor, what can of trillians? Thanks for
Speaker 1: joining us. Thanks great to be here. So Eric mentioned
Speaker 1: long term capital management, and I want to talk about that.
Speaker 1: But ELM Partners, it seems like what you're doing now
Speaker 1: is long term capital management. So how did you go
Speaker 1: from from one universe to the other. Well, I guess
Speaker 1: that name was taken, so I had to go with
Speaker 1: something with something different UM. But yeah, so you know
Speaker 1: the trajectory that landed me doing ELM Partners and you know,
Speaker 1: low cost what we call dynamic index investing. You know,
Speaker 1: I started off at Solomon Brothers, in the research department.
Speaker 1: In four I studied finance and econ at college and
Speaker 1: eventually I wound up in the trading on the trading
Speaker 1: desk called the Government Arbitrage Desk run by John Merryweather.
Speaker 1: And then eventually we went off and set up the
Speaker 1: hedge fund ltc M. And I guess the you know,
Speaker 1: the thread that's that's relevant here is that from when
Speaker 1: I started at Solomon, you know, through the end of
Speaker 1: l t c M UM, I never really thought much
Speaker 1: about personal investing, you know. My My focus was on
Speaker 1: trying to generate alpha for our capital provider. So to
Speaker 1: begin with, it was Solomon Brothers the firm, and then
Speaker 1: later on it was all these investors in l t
Speaker 1: c M, mostly institutional investors that would allocate, you know,
Speaker 1: small part of their capital to any given investment like
Speaker 1: l t c M. And it was only after the
Speaker 1: you know, after the crash of ltc M shortly after that,
Speaker 1: that I started to I took a sabbatical in two
Speaker 1: thousand one after sort of the wind up of l
Speaker 1: t c M and the launch of a successor vehicle,
Speaker 1: and it was only then that I started to think
Speaker 1: about what to do with my own savings and I
Speaker 1: wasn't working at that point, and uh, the first thing
Speaker 1: that I did was I looked at what people who
Speaker 1: I really respected we're doing, and I saw that everybody
Speaker 1: that had a good ount of wealth was still chasing
Speaker 1: alpha or not still, but was chasing alpha in one
Speaker 1: form or another private equity, distress, venture deals, angel deals,
Speaker 1: hedge funds, whatever. And I so I went and started
Speaker 1: doing that too, from like two thousand and one until
Speaker 1: I don't know, maybe around two thousand five or six.
Speaker 1: And then I just realized that that wasn't a sensible
Speaker 1: way to manage my family's savings. That an individual investor
Speaker 1: is really different than an institutional investor, and so I
Speaker 1: decided that I wanted to get lower cost, more tax efficient,
Speaker 1: more diversified, long only totally transparent. And I was like, Okay, well,
Speaker 1: now I'm really back to what I was taught when
Speaker 1: I was in college. And it led me to UM
Speaker 1: to deciding to get indexed with with my family's savings.
Speaker 1: And then there was this road from there for about
Speaker 1: five years till two thousand and eleven, when I decided
Speaker 1: to offer it to friends and eventually to UM to
Speaker 1: everybody that that wants to use us UM as a
Speaker 1: low cost manager of of E t F and index
Speaker 1: fund portfolios and talk to us about what you're offering
Speaker 1: is at partners, like what as a individual investor, what
Speaker 1: what should I expect that I couldn't get on my own.
Speaker 1: So the main the main form of the offering is
Speaker 1: that we help you open up an account of Fidelity
Speaker 1: or Schwab and then you put some of your savings
Speaker 1: in there and then we manage that in a portfolio
Speaker 1: of of E t F s. We have two strategies.
Speaker 1: One of them is what we call global balanced, so
Speaker 1: that's a balance between risk assets mostly equities and fixed income,
Speaker 1: and we change the weights over time as the expected
Speaker 1: return of the different asset classes is changing. I mean
Speaker 1: real interest rates go up and down. That's one thing
Speaker 1: that's changing. And also the long term expected return of
Speaker 1: equities is changing over time, as as indicated for one thing,
Speaker 1: by the earnings yield or decichulically adjusted earnings zield of equities.
Speaker 1: And so we are rebalancing the portfolio over time based
Speaker 1: on expected returns, mostly from long term expected returns point
Speaker 1: of view, but also we have a trend component that
Speaker 1: we marry together with that, and we do tax laws harvesting.
Speaker 1: We help people to average into the market if they've
Speaker 1: been in cash for a long time and they don't
Speaker 1: want to make the jump all at one time. And
Speaker 1: we also give advice to people. We help people to
Speaker 1: think about you know, lifetime spending and and how spending
Speaker 1: and investing go together. We help people think about, you know,
Speaker 1: realizing the realization of taxes, um you know, at different times.
Speaker 1: All the different big important financial decisions that people have
Speaker 1: were there if they want to discuss them with us.
Speaker 1: But we just charge twelve basis points is our only
Speaker 1: via basis point a month. And so you know, we're
Speaker 1: not like a concierge service. I mean, we try to
Speaker 1: be really efficient, but we have a you know, relatively
Speaker 1: high minimum. So most of our investors are relatively affluent
Speaker 1: and uh a lot of them are financed people so
Speaker 1: financially sophisticated, and so it works for us that we
Speaker 1: can sort of help them to have a diversified, low
Speaker 1: cost portfolio of et f s and index funds managed
Speaker 1: for them. How many clients do you have, and like
Speaker 1: how much how much which are a U M on
Speaker 1: their behalf? So we have I think we have around
Speaker 1: uh close to four D clients all together, and our
Speaker 1: a U M is we haven't calculated it lately, but
Speaker 1: we think it's probably between one and a quarter and
Speaker 1: one and a half billion right now, something like that. Um.
Speaker 1: You know one of the things that we talked about,
Speaker 1: Victor in my interview with you for my book, and
Speaker 1: I found this really interesting and is I asked you
Speaker 1: what you thought about index funds and Vanguard and Vogel
Speaker 1: when you were at Solomon in the eighties, and I
Speaker 1: gotta think the nineteen eighties, you know, what a what
Speaker 1: a decadent time. It seems almost like thinking about that
Speaker 1: with such a far off thought. But you talked a
Speaker 1: little bit about the concept of indexing being around Solomon.
Speaker 1: Could you go into that a little bit into terms
Speaker 1: of your exposure to the concept of indexing, um, while
Speaker 1: you were at this massive, sort of Wall Street firm. Sure.
Speaker 1: So Solomon was this really interesting synthesis of of of
Speaker 1: academic thinking and sort of rough and tumble street smart
Speaker 1: people as well. And you know that that the idea
Speaker 1: of indexing came out of the modern portfolio theory of
Speaker 1: you know, Marco Witz and Sharp and so on, from
Speaker 1: the nineteen fifties and sixties. And that threat of thought
Speaker 1: also included people that I was working with or people
Speaker 1: that I was working with the people that they had
Speaker 1: trained with. So for instance, you know that Paul Samuelson
Speaker 1: is somebody that Jack Bogel credits with really encouraging him
Speaker 1: to do the the index business and all for index funds.
Speaker 1: And it was a concept that we knew about. Um,
Speaker 1: we had people coming through our firm, uh trying to
Speaker 1: get us interested in sponsoring it. And um, you know,
Speaker 1: even the earliest idea around E t F s was
Speaker 1: something that came through. I remember being in a meeting
Speaker 1: and some guys came through and said they had this
Speaker 1: idea for basically the E t F structure. And you know,
Speaker 1: it wasn't really something that fit with what we were
Speaker 1: doing on the arbitrage desk, but it was something that
Speaker 1: we were aware of and that the and and there
Speaker 1: was also this intersection of the academics that we worked
Speaker 1: with that trained us, that guided us and the beginnings
Speaker 1: of of of indexing. So as I said, you know,
Speaker 1: Paul Samuelston's student was Bob Murton. Bob Murton's students, you know,
Speaker 1: like half a dozen of them were my partners. And
Speaker 1: Bob was a partner UM and and worked, you know,
Speaker 1: consulted at Solomon was a partner at LTC M, you know,
Speaker 1: as well is Myron. And so there was this whole
Speaker 1: you know, legacy of it that was there Solomon Brothers. Um,
Speaker 1: what was it about that place? It seems like it
Speaker 1: was almost like Seattle is to music, Like just all
Speaker 1: these bands coming out of this one small place. Mike Bloomberg,
Speaker 1: our boss, came out of Solomon. Michael Lewis long term capital. Um.
Speaker 1: What was it about that place that produced so many
Speaker 1: people like that? Well? You know, I think that when
Speaker 1: I got out of college, I UM, I got there
Speaker 1: were two job offers that I was thinking about. One
Speaker 1: was JP Morgan and one was Solomon. And I went
Speaker 1: to my dad and I said, what do you think
Speaker 1: I should do? Um? Which one should I take? By
Speaker 1: the way, the one that Solomon is paying, um, I
Speaker 1: don't know, thousand dollars, The one that JP Morgan is
Speaker 1: paying thirty five thousand dollars. That sounds like maybe JP Morrigan,
Speaker 1: JP Morgan. Big. First of all, hold on a second,
Speaker 1: this is right? That was that was decent money back then? Oh, yeah, yeah,
Speaker 1: it was great and so okay, sorry. And by the way,
Speaker 1: at the time, yeah, and Maman had this great training program,
Speaker 1: you know. So I was gonna go there. They were
Speaker 1: gonna train me for like a year there. I was
Speaker 1: going to move all around, et cetera. Was going to
Speaker 1: be this great development of human capital at Solomon Brothers. Um,
Speaker 1: you know, there was gonna be no training. I was
Speaker 1: just gonna hit the I was gonna go into this
Speaker 1: research department and that was and and just start working.
Speaker 1: And my dad said to me, well, you know, if
Speaker 1: you do well, which place will you be able to
Speaker 1: do well faster? And I said, definitely, you know at
Speaker 1: Solomon Brothers, you know, and and and so I took
Speaker 1: the job at Solomon, and Solomon was so flat. Everybody
Speaker 1: knew everybody. The senior people were just incredibly supportive of
Speaker 1: the junior people. I mean, I remember we were short
Speaker 1: on desks and and you know. And so one day
Speaker 1: I come in and and my boss, Bob Coprush says,
Speaker 1: what you know, Marty Leebowitz's secretary is out on maternity leave.
Speaker 1: You're gonna have to use that desk for a while.
Speaker 1: So I was sitting in Marty liebu. It's his secretary's
Speaker 1: desk outside of his office, and you know, people would
Speaker 1: come by, and you know, like I thought that I
Speaker 1: was the replacement secretary, which was fine, you know, could
Speaker 1: you grab some coffee for this meeting or whatever, But
Speaker 1: you know, Marty would come out and just talk to me,
Speaker 1: and and you know, like one night I was hanging
Speaker 1: out doing some work and he comes out and he's
Speaker 1: like looking around for somebody, and I was the only
Speaker 1: one there, and he got me involved in a really
Speaker 1: interesting project because I was the only one. They're sitting
Speaker 1: outside of his office. Do you remember what the project was? Yeah? Yeah.
Speaker 1: He gave me all this data and he said, okay,
Speaker 1: you know see this column here. You know, I want
Speaker 1: you to run some regressions over here and do these
Speaker 1: tests and whatever. So I do it all. I don't
Speaker 1: even know what the data is. And he comes in
Speaker 1: in the morning he says, did you do it? And
Speaker 1: I said yeah, so I give it to him. He
Speaker 1: goes into his office and he comes out smiling and
Speaker 1: he says, this is great. He says, do you know
Speaker 1: what you just did? And I was like, no, I
Speaker 1: really don't, and he said, you just calculated the duration
Speaker 1: of the stock market, and so he he was. He
Speaker 1: wrote a few papers then that was looking at the
Speaker 1: interest rate sensitivity of the stock market, you know, by
Speaker 1: by doing these regressions and saying that you know, at
Speaker 1: this point in time, you know the stock market in
Speaker 1: addition to having all the stock market risk also looks
Speaker 1: like a five year government bond as well. UM. And
Speaker 1: he wrote a bunch of things about you know, thinking
Speaker 1: it was really thinking about the correlation between stocks and bonds.
Speaker 1: And he called it the effective duration of the stock market.
Speaker 1: But you did you did the heavy lifting. No, no,
Speaker 1: it was one night's work. It was it was the
Speaker 1: thought and the question that was important, not the regressions.
Speaker 1: But by the way, well, Joel, can I just digress
Speaker 1: here for a minute. And I told Victor this story.
Speaker 1: His story reminds me of the story that I told him.
Speaker 1: That is also related to just being around when you're
Speaker 1: young and like available. Because when Long Term Capital Management
Speaker 1: UM fell and got bailed out and there was a
Speaker 1: lot of negative media attention, I was working at a
Speaker 1: PR firm, a crisis communication firm, and I just I
Speaker 1: was the guy who could use the video camera because
Speaker 1: none of the old heads could really operate a camera.
Speaker 1: So yeah, it's true. So one of the clients was
Speaker 1: long Term Capital Management, and so John Merryweather and another
Speaker 1: guy Kim Or who it was, but probably come in
Speaker 1: on a Saturday and they're like, hey, can you run
Speaker 1: the camera for this media training? So I got to
Speaker 1: watch him get media trained. And two things I observed.
Speaker 1: One he was not happy. This was not it wasn't
Speaker 1: a fun time for him. I'm sure it was. It was,
Speaker 1: you know, pleasant. I mean, it wasn't like a jerk,
Speaker 1: but he was. He was just very serious. And the
Speaker 1: second was he rolled in with a sweater vest and
Speaker 1: this was the nineties when like everybody wore a suit
Speaker 1: all the time, and I just thought that was pretty badass.
Speaker 1: I don't know, he just seemed like he was over
Speaker 1: the whole suit thing. And I don't know, I kind
Speaker 1: of I kind of was in awe of that. But anyway,
Speaker 1: that was my experience with getting into something at a
Speaker 1: young age, just by like sort of being around So Victor,
Speaker 1: as long as we're talking about Solomon Brothers, Um, you
Speaker 1: know the thing that the book that made made everyone
Speaker 1: you know, understand Solomon Brothers better was Liars Poker obviously
Speaker 1: Michael Lewis's book, and I'm I'm curious, what wasn't in
Speaker 1: Liars Poker that should have been? Boy? Um, she's that's
Speaker 1: such a good question. I think that it did. I
Speaker 1: think it did a really good job of what it was, um,
Speaker 1: you know, trying to do. I mean so, so one
Speaker 1: thing that's really interesting with that book is I remember
Speaker 1: when it came out. When it came out, everybody at
Speaker 1: Solomon Brothers was piste off, you know, really piste off,
Speaker 1: and and then our group in particular was even you
Speaker 1: know more piste off because it really, you know, wrote
Speaker 1: about John having this um apocryphal hand with John good friend,
Speaker 1: you where it's like, you know, no five million, you know,
Speaker 1: I'll only I'll only play one hand for five million,
Speaker 1: which didn't actually happen, but you know, there was a
Speaker 1: bunch of fun things that did happen, and anyway, um,
Speaker 1: you know, so like, um, you know, I don't know,
Speaker 1: twenty five years later and I and I was friendly
Speaker 1: with Michael. We uh we worked together. We also were
Speaker 1: at the London School of Economics, both of us. We
Speaker 1: shared that in common. And so like twenty five years
Speaker 1: later I read the book again and and I just
Speaker 1: couldn't I couldn't reconcile why I was upset about it. Um,
Speaker 1: you know, back when it came out in in the nineties,
Speaker 1: I mean I just thought it was it was so funny.
Speaker 1: It's sort of caught the spirit. It was so positive
Speaker 1: on John and you know, and and all the different people.
Speaker 1: I don't know, it was really really funny, how you know.
Speaker 1: Back in the nineties, you know, like it was all
Speaker 1: about sort of privacy, and you know, it was like
Speaker 1: an invasion of privacy. You know, Michael was there at
Speaker 1: Solomon and he was keeping notes and then he wrote
Speaker 1: this book. But you know, with the passage of time,
Speaker 1: when I look at it, you know, I just say, well,
Speaker 1: he caught something really well. I mean, he's obviously a great,
Speaker 1: great storyteller and writer. And you know, the really ironic
Speaker 1: thing about it, right is how you know, Michael says,
Speaker 1: I wrote that book to try to warn people not
Speaker 1: to join Wall Street, you know, smart young people to
Speaker 1: do something else and not to go to Wall Street.
Speaker 1: And of course you know that that was probably the
Speaker 1: single biggest thing that drew uh talented, smart people to
Speaker 1: Wall Street. So it's kind of really funny it's interesting
Speaker 1: you say that. Um. I have a one of my
Speaker 1: son's friends. His mom is in the financial industry. She's
Speaker 1: moved on, but she first was in the financial industry
Speaker 1: for about, I guess ten fifteen years, and she said
Speaker 1: that book inspired her to take a job on Wall Street.
Speaker 1: And this is sort of like the movie Wall Street.
Speaker 1: I think Oliver Stone's like I tried to write this
Speaker 1: is like Gordon Gecko is a bad guy, but people
Speaker 1: are like, I wanted to be Gordon Gecko. And it's
Speaker 1: interesting how that happens. UM. I also think The Big
Speaker 1: Short inspired a whole generation of top callers and skeptics
Speaker 1: that honestly have probably lost a lot of money. UM.
Speaker 1: I think there's these moments where this is something's immortalized
Speaker 1: and it does attract people, perhaps um in a way
Speaker 1: that isn't what was intended by the art. UM. So
Speaker 1: we're gonna I want to get to ets in a
Speaker 1: minute and ask about the picks. One more thing about
Speaker 1: the old days in long term capital management. And this
Speaker 1: is just something that I guess I'm curious about. When
Speaker 1: you have a lot of chefs in the kitchen, these
Speaker 1: are very smart guys. How does it work? Out like
Speaker 1: what to invest in? Like how is the process of
Speaker 1: an active fund like that um with so many smart
Speaker 1: people or do you develop a system and the system
Speaker 1: kind of rules and the people just add to the system.
Speaker 1: It was. It was a very consensus oriented approach. I
Speaker 1: think some people look back on that and and you know,
Speaker 1: call that one of the problems with with ltc M.
Speaker 1: But um, you know, we we tried to work together
Speaker 1: on the portfolio construction and selection, very all very closely together.
Speaker 1: It was very much a collegial sharing um, consensus oriented
Speaker 1: sort of approach to investing and and sort of risk man.
Speaker 1: You know, we didn't really have a totally separate risk
Speaker 1: management from the portfolio management function. I mean we had risk.
Speaker 1: We had a risk management function, but there was you know,
Speaker 1: overlap in the people and and so on, and so
Speaker 1: we didn't really you know that we didn't really have
Speaker 1: somebody that was sort of you know, like what you
Speaker 1: would think of as a risk manager, where his only
Speaker 1: job is to be the risk manager and to say no, no, no, whatever.
Speaker 1: But those are just sort of red herrings, you know,
Speaker 1: in terms of what caused the failure. I think that
Speaker 1: the the way that most of us feel about it
Speaker 1: today looking back, is that um, having a standalone pool
Speaker 1: of capital doing leveraged relative value trades, it's just not
Speaker 1: a great business model. UM that the better business model
Speaker 1: is that the activity that we did should be done
Speaker 1: within a large organization with lots of capital, where just
Speaker 1: a small amount of the capital is being dedicated to
Speaker 1: these relative value trading strategies. So, you know, ironically, you know,
Speaker 1: I think it should be something that's you know, a city,
Speaker 1: you know where city has you know, a couple billion
Speaker 1: dollars of capital. Doing these sorts of proprietary trading strategies
Speaker 1: within city is fine today, that's that's not legal, or
Speaker 1: it's it's outside of the regulatory remit for banks. But
Speaker 1: but I think that that activity needs to be encased
Speaker 1: in a large pool of capital so that it can
Speaker 1: deal with the periodic shocks that it gets. Um, you know,
Speaker 1: which we've seen over time. You know that we survived
Speaker 1: a bunch of those shocks up till night. We did well,
Speaker 1: you know whatever, but the shock got us. And if
Speaker 1: the shock didn't get us, actually the two thousand and
Speaker 1: eight shock was even better, even bigger, and UM, you know,
Speaker 1: I think that just speaks to you know, a stand
Speaker 1: alone pool of capital relying on the street for financing
Speaker 1: doing this one activity. I think it just doesn't It's
Speaker 1: not a good business model. So I don't think it
Speaker 1: has to do with how we manage the risk. I
Speaker 1: think it just had to do with this activity just
Speaker 1: doesn't make a lot of sense there. And you know,
Speaker 1: and today there's very few dedicated pools of relative value capital.
Speaker 1: And the ones that that do it, you know that
Speaker 1: we're similar to us. The ones that do it are
Speaker 1: are doing it in a very narrow thing, like they're
Speaker 1: doing bonds versus bond futures, you know, and it has
Speaker 1: and it's okay, that thing has a two month that
Speaker 1: has two months to go, and then you're going to
Speaker 1: deliver the bonds or take delivery, and you know, stuff
Speaker 1: like that. People are still doing stand alone, but but
Speaker 1: not sort of the more expansive relative value stuff that
Speaker 1: we were doing with longer horizons. I have one other
Speaker 1: question that can kind of bring us up to present
Speaker 1: day about this. But you know, having lived through long
Speaker 1: term capital management and what happened there recently, Archegos capital
Speaker 1: fell um and this is the Bill Wong implosion twenty
Speaker 1: billion dollars that were wiped out in two days. Just
Speaker 1: curious as somebody who's who has gone through um um
Speaker 1: something like in our newsroom we talked about long term
Speaker 1: capital management as ARCHEGOS was was happening. And what stood
Speaker 1: out to you about ARCHEGOS and what what what what
Speaker 1: what most interested you in that? Um? What most interested
Speaker 1: me in that? Um? You know, I just don't. I don't.
Speaker 1: I don't really know enough about the strategies that that
Speaker 1: they were doing. I mean, I suppose that the thing
Speaker 1: that stands out most to me about both LTCM and
Speaker 1: this situation of ARCHEGOS is that, you know, when you're
Speaker 1: doing leverage strategies, UM, you know, there's always this risk
Speaker 1: that that you lose a lot of money. You know,
Speaker 1: that's just the nature of being in leverage strategies. And
Speaker 1: we know that, and we've always known, you know that
Speaker 1: that financial assets are a fat tailed they're not sort
Speaker 1: you know, it's not sort of some well behaved, UM
Speaker 1: kind of geometric brownie emotion sort of thing. UM. You know,
Speaker 1: it's that that there's an endogenity in other words, right
Speaker 1: that UM, it's not like a physical process where it's
Speaker 1: just determined by the states that it's in. I mean,
Speaker 1: it actually is. It has there's feedback loops and all that.
Speaker 1: So we know that about financial assets. Now the thing
Speaker 1: about l t c M that doesn't get written about
Speaker 1: that much, but I think is actually the signal message
Speaker 1: and importance of l t c M is for me,
Speaker 1: the biggest sort of mistake with l t c M
Speaker 1: is how much of our how much of the partners
Speaker 1: like me, how much of our own capital we had
Speaker 1: invested in our own fund. Now, it seemed like a
Speaker 1: great thing at the time, you know, but I had,
Speaker 1: like I had probably se of my investible assets invested
Speaker 1: in our funds and uh and actually some of that
Speaker 1: I even had averaged. But you know, I still had
Speaker 1: thirty percent of my savings that wasn't in the fund.
Speaker 1: But the seventy percent I had in was even some
Speaker 1: of it was leveraged. And you know, I think that
Speaker 1: it's really hard to justify having that much in your
Speaker 1: own fund, especially when you also own a large part
Speaker 1: of the management company. So you know, if I had
Speaker 1: sent in the fund, but my liquid net worth was
Speaker 1: probably worth less than my ownership interest in LTCM, the
Speaker 1: management company. So really I was sitting there with like
Speaker 1: a nine percent exposure or more of my total net
Speaker 1: worth to the fund. And you know, given the fact
Speaker 1: that we know and we you know, we we were
Speaker 1: aware of this, and we had it built in and
Speaker 1: all that that we could lose a lot of money.
Speaker 1: We knew that we could lose thirty or forty percent
Speaker 1: and basically be out of business. Like we knew that
Speaker 1: that could happen. Um, you know, I was too exposed
Speaker 1: to uh, to my business like that. And that's kind
Speaker 1: of a really big less and from the whole thing.
Speaker 1: And now we look and hear about Bill Huang and Archegos,
Speaker 1: and again we see somebody who has done really well,
Speaker 1: had a lot of wealth and it seems like he
Speaker 1: had we don't really know, but it seems like he
Speaker 1: had most of it, a very large fraction of it,
Speaker 1: you know, being managed and exposed to this leverage. And
Speaker 1: and I think that that's just a really a really
Speaker 1: important lesson for all investors and all actors out there,
Speaker 1: is is how important it is to not put you know,
Speaker 1: I mean, it's just so try to say it this way,
Speaker 1: you know, but um, you know, you you know, really
Speaker 1: smart people can get blinded to this and just have
Speaker 1: too much, you know, in their own cooking, and it's like, oh,
Speaker 1: I want to have all this skin in the game.
Speaker 1: Well that's doesn't you know, it just doesn't make sense.
Speaker 1: And um, you know, I think that's a really good
Speaker 1: lesson from lt CM in particular. You know, the whong thing.
Speaker 1: We don't know enough about it, but ltc M we
Speaker 1: kind of know, you know, we you know, it's it's
Speaker 1: it's more transparent what happened there. That's intra thing because
Speaker 1: the skin of the game gets brought up a lot
Speaker 1: when you're evaluating active funds, and they'll be like, well
Speaker 1: if they don't if they don't have skin in the game,
Speaker 1: don't invest in it. But that's sort of risen up
Speaker 1: the ranks as a criteria. But that's an interesting point
Speaker 1: you make about it. Um, I want to move on
Speaker 1: to the sort of all that is is a very
Speaker 1: unique world. Then you come down to your portfolio today, Um,
Speaker 1: it's it's a lot of Vanguard ETFs. Um. Your biggest
Speaker 1: holding is v t I, which I have always considered
Speaker 1: the perfect ETFs probably the only one I can say
Speaker 1: is flawless because with the securities lending you kind of
Speaker 1: have perfect tracking. It's free exposure to the whole market.
Speaker 1: You just can't really beat that deal. That said, there
Speaker 1: are people who worry the v T I s and
Speaker 1: the v O O s of the world. Sptfs are
Speaker 1: like these giant blobs that are just growing bigger and
Speaker 1: bigger and bigger as more people say the hell with it,
Speaker 1: I'll just index. It's a very logical decision. Um, what
Speaker 1: what are your thoughts on that bigger worry of indexing
Speaker 1: as somebody who holds these kind of e t f um,
Speaker 1: is there some kind of a risk that beta just
Speaker 1: fails for a decade or something? Any take on that? Sure? So,
Speaker 1: you know, there's lots of criticisms of uh, you know,
Speaker 1: of market cap indexing, and um, I think that a
Speaker 1: lot of those criticisms are wide of the mark. Like
Speaker 1: one thing that you hear as well, you know market
Speaker 1: cap indexing is a big momentum machine because you know,
Speaker 1: it makes people invest more in the biggest companies. Well
Speaker 1: that's not true in a number of diff from a
Speaker 1: number of perspectives. That's not true. I mean the first
Speaker 1: thing is that once an index fund owns a certain
Speaker 1: amount of a large company, it doesn't need to buy
Speaker 1: more of it when its price goes up. It just happens.
Speaker 1: It keeps the same number of shares ownership and the
Speaker 1: value of it goes up. So it's not that's not
Speaker 1: momentum trading. You know, when a stock goes up, you
Speaker 1: buy more of it. That's momentum trading, which an index
Speaker 1: fund isn't doing. You know. I think another argument that's
Speaker 1: very enticing on the surface, but I think is logically incorrect,
Speaker 1: is that by definition, people will say a market cap
Speaker 1: weighted index fund overweight it's overvalued companies, and underweight it's
Speaker 1: undervalued companies, and it's a it's a it's it's an
Speaker 1: argument which is subtly but you know, logically incorrect. So
Speaker 1: you know, think of it as like, imagine that the
Speaker 1: market is composed of just two stocks. You know, one
Speaker 1: of them is a two billion dollar stock, the other
Speaker 1: one is a hundred billion dollar stock, and so you
Speaker 1: could be market cap indexed, but you know that the
Speaker 1: fair value of both of those stocks. We we don't
Speaker 1: know what the fair value of both of those stocks is,
Speaker 1: and so you know, a priori to begin with, like
Speaker 1: the fact that one of them is a two hundred
Speaker 1: billion doesn't mean that it's more likely to be overvalued
Speaker 1: versus undervalued. So it might be twenty billion overvalued or
Speaker 1: twenty billion undervalued. That the fact that it's a two
Speaker 1: hundred billion doesn't tell us a priori that it's more
Speaker 1: likely to be over or you're valued. And so I
Speaker 1: think that the logic and that argument of well market
Speaker 1: cap weighted index makes you long the overvalued stocks more,
Speaker 1: you know, is not correct unless you have some way
Speaker 1: of figuring out what fair value is. So like, if
Speaker 1: you if you have some way of beating the market,
Speaker 1: then market cap index you know, it's better to beat
Speaker 1: the market than to do market cap indexing. But you
Speaker 1: can't say that you're agnostic to um to beat you know,
Speaker 1: to U two generating alpha through valuing companies and just
Speaker 1: say that there's an inherent flaw in market cap indexing. No,
Speaker 1: I think that that arguments, um, you know, incorrect. The
Speaker 1: size of indexing. You know, we're nowhere close to the
Speaker 1: size of indexing being a problem in terms of uh,
Speaker 1: you know, liquidity and the amount of active managers out there,
Speaker 1: um you know, I mean there's a bunch of other arguments.
Speaker 1: And other argument is oh, when when somebody moves money
Speaker 1: into an index fund um, you know, they're taking it
Speaker 1: away from active managers and that's making you know, that's
Speaker 1: causing the cheap stocks to get cheaper and the rich
Speaker 1: ones to get richer. Well, active managers taken collectively own
Speaker 1: the market cap index. You know that put them all together.
Speaker 1: So so for one thing, if you're just sort of
Speaker 1: randomly reducing So if somebody has a bunch of active
Speaker 1: managers and he's selling those two then buy an index fund, well,
Speaker 1: he's selling the index to buy the index and just
Speaker 1: getting lower fees. That's one thing that could happen. Or
Speaker 1: maybe he's like, oh, I'm gonna sell my active managers
Speaker 1: that have done really poorly. Well, you know, so now
Speaker 1: we're saying that active managers. You know that that the
Speaker 1: reduction of assets allocated to active managers who have done
Speaker 1: poorly is making the market less efficient. I mean that
Speaker 1: seems that's a bit of a stretch, isn't it. It's like, Okay,
Speaker 1: the guys who have done really poorly are actually the
Speaker 1: really good ones. How do you talk to your clients
Speaker 1: about alpha? I mean, this is you know, when you
Speaker 1: were at long term capital management you're also you have
Speaker 1: clients now who you know are are wealthy and involved
Speaker 1: in the financial industry, and like alpha is the thing
Speaker 1: that everybody you know, it is, It is the pinnacle
Speaker 1: of everything. So how do you how do you talk
Speaker 1: to clients about that? Now, we say to them, when
Speaker 1: when you've given up on alpha, come to us. You
Speaker 1: know that alpha, Alpha is expensive. Alpha is very difficult
Speaker 1: to you know, maybe difficult or near impossible to identify
Speaker 1: based on historical data because you'll never have enough stationary
Speaker 1: data to identify it. And so you know, when you've
Speaker 1: thought about it and you've decided that, um, you know,
Speaker 1: I want I want diversification, i want cost efficiency, i
Speaker 1: want tax efficiency, and I'm kind of willing to give
Speaker 1: up on chasing alpha. Then you know that's now now
Speaker 1: you should decide do you kind of want to do
Speaker 1: it yourself? Do you want some help? Um, you know,
Speaker 1: do you want to free yourself up, or you know,
Speaker 1: do you want to put some of your money, you know,
Speaker 1: into something that's less alpha orient And now we're still dynamic,
Speaker 1: but our dynamic is not chasing alpha. The dynamic is
Speaker 1: just trying to have the appropriate portfolio for the appropriate
Speaker 1: attractiveness of different investments at each point in time. So
Speaker 1: we're not trying to generate alpha. We're just trying to
Speaker 1: have you know, sensible portfolio mixes depending on the investment
Speaker 1: environment for for our investors. I'm looking at this portfolio.
Speaker 1: It's a very it's a robo esque portfolio. And I
Speaker 1: say that as a compliment. It's got very basic, cheap ets,
Speaker 1: little I shares, a little vanguard, maybe a little spider
Speaker 1: here and there. It's just very much like what a
Speaker 1: betterment would use. Your twelve basis points and you do planning,
Speaker 1: is that right? Yes? Yeah, I mean this is part
Speaker 1: of what I'm researching. Also, is the sort of vanguard
Speaker 1: effect that's going to hit the advisory world. And you
Speaker 1: don't hear about that as much. But why did you
Speaker 1: choose twelve? I mean that is really low. It's almost
Speaker 1: like you didn't need to. And are you open two
Speaker 1: outside investor or do you have a cut off with
Speaker 1: how much money you can invest? You talk a little
Speaker 1: bit about the process of that pricing and the future
Speaker 1: plans for the advisory business. Sure, so when when I
Speaker 1: started this at the end of two thousand and eleven, UM,
Speaker 1: you know, the first investors were all a bunch of
Speaker 1: friends of mine and um, and you know, I was
Speaker 1: just I thought that low cost is really important. It's
Speaker 1: like this one thing that we can control. Um, you know,
Speaker 1: as Benjamin Franklin said, um, you know, uh, a penny
Speaker 1: saved is worth two pennies earned. You know, some people
Speaker 1: think that he said a penny saved as a penny earned,
Speaker 1: but actually he said a penny saved is two pennies earned.
Speaker 1: And what he meant by that, I think, uh, you know,
Speaker 1: it's really was was really insightful on on his part.
Speaker 1: Of course, Um, you know is that a penny in
Speaker 1: the bank that you've saved is risk free? Uh two,
Speaker 1: you need to earn two pennies in a risky way
Speaker 1: to be equal to one penny that's risk free. And
Speaker 1: and and actually you know that's modern finance actually tells
Speaker 1: us that's correct. So so anyway, you know, it's focused
Speaker 1: on costs. And I was like, well, it's my friends.
Speaker 1: What fee if if one of the what if one
Speaker 1: of my friends that was going to invest with us,
Speaker 1: if the if the roles were reversed, What what I
Speaker 1: think is like a fee that just wouldn't bother me
Speaker 1: at all, and I would say that's great. And that
Speaker 1: was where the twelve came from. And you know it
Speaker 1: could have been thirteen or eleven, but twelve. There's twelve
Speaker 1: months in the year, so the basis point a month.
Speaker 1: That's that's where it came from. And you know, it
Speaker 1: seemed super super low back in two thousand and eleven.
Speaker 1: You know it's still is low today. But you know,
Speaker 1: the the world is coming to us for sure. Um.
Speaker 1: You know, at the moment, we have this cut off
Speaker 1: of you know, roughly half a million dollars of of
Speaker 1: assets and the family you know, in the family group
Speaker 1: to start with us. But you know, as we get
Speaker 1: more efficient and build more technology, we want to bring
Speaker 1: that minimum down, you know, and make it available to
Speaker 1: anybody that wants to come with us. But you know,
Speaker 1: right now, we can't really be efficient for somebody that
Speaker 1: wants to give us five thousand dollars. We can't be
Speaker 1: efficient for them. You know, we can't do as much
Speaker 1: as we want to do for them. But you know,
Speaker 1: our our investors are all over the place. You know,
Speaker 1: we've got I don't know, a hundred million dollar investor,
Speaker 1: and we've got you know, people that have given us
Speaker 1: three hundred thousand dollars and we waived the five hundred
Speaker 1: for them. You know, we have young people. You know
Speaker 1: mostly it's people that are that kind of look like
Speaker 1: me in terms of age and experience and all that.
Speaker 1: But you know, we have people in their twenties, we
Speaker 1: have people later in life. Um, and you know, we
Speaker 1: just want to keep on helping more people and and
Speaker 1: and using technology to do it. You know, I think
Speaker 1: that's the key thing. Like, we couldn't do this business
Speaker 1: twenty years ago for so many reasons. We couldn't do
Speaker 1: it twenty years ago, but today, you know, it's it's
Speaker 1: you know, all of the different pieces that we need
Speaker 1: are there. You know, all this different kind of outsourcing,
Speaker 1: Fidelity and Schwab being terrific places to have assets, you know, etcetera, etcetera.
Speaker 1: So um, and just real quick final question is, uh,
Speaker 1: when you look at the portfolio, it has a six
Speaker 1: vibe to it. But there's all so some of the
Speaker 1: things in there that you can tell you're you're mixing
Speaker 1: it up a little bit. You've got some gold in there.
Speaker 1: Um and uh, some different international exposures, uh, some different
Speaker 1: this targeted bond exposures how active are you? Do you
Speaker 1: have like a generic sixty forty for the people who
Speaker 1: don't like want any of your of activists, or how
Speaker 1: do you do that in terms of detect how tactical
Speaker 1: to get So are the baseline portfolio that we have,
Speaker 1: which is the portfolio that we start with before we
Speaker 1: overweight or underweight different buckets. You know that that is
Speaker 1: a little bit more granular than just owning a global
Speaker 1: MSCI equity index and an aggregate bond index, you know,
Speaker 1: like for SIVE. So you know, we have a five
Speaker 1: percent bucket for reats in our in our separately managed
Speaker 1: account programs. We actually don't have gold, but we do
Speaker 1: have gold in our in this private fund that we
Speaker 1: started with before. But anyway, um, so you know we
Speaker 1: have reats in there. We have a small bucket for
Speaker 1: muni is in there. We have a bucket for tips
Speaker 1: and nominal bonds and corporate bonds. We kind of have
Speaker 1: broken things up like that, and you know, and we
Speaker 1: get granular in terms of regional equity market. So we
Speaker 1: have you know, us, we have Europe, we have developed
Speaker 1: Asia e M and well then you need Canada to
Speaker 1: fill it all out. Um, and so you know, that's
Speaker 1: our baseline, and then uh, you know, we overweight or
Speaker 1: underweight based on a long term expected return metric mostly
Speaker 1: that's the cyclically adjusted earnings yield, and then a trend
Speaker 1: metric that we put together with that. And um, yeah,
Speaker 1: I mean if somebody says, look, you know, I just
Speaker 1: want you to manage a static portfolio for me, Well,
Speaker 1: first of all, we have this all equity version, which
Speaker 1: is less dynamic because it's always in equities all the time.
Speaker 1: It's just we're changing how much US versus e M
Speaker 1: versus Europe. Um. But we would also do a static
Speaker 1: portfolio for somebody, but we would try to you know,
Speaker 1: we would try to explain to them that we think,
Speaker 1: you know, that just makes less sense than doing something
Speaker 1: that's responsive to the investment environment. So we don't have
Speaker 1: any static portfolios, even though we would be willing to
Speaker 1: do that for people if they wanted it, you know,
Speaker 1: I think that we would tend to encourage them to
Speaker 1: do it on their own. And and um, you know,
Speaker 1: because it's if you're gonna be static, if you're always
Speaker 1: going to be a sixty and you want to do that,
Speaker 1: then you know we'll do it for you. And tax
Speaker 1: loss harvest and all that, no problem. But you know
Speaker 1: you might want to do it yourself too, and um,
Speaker 1: you know, because that's a pretty simple thing to to
Speaker 1: do without needing to put much time into it. How
Speaker 1: much trading are you doing? So we rebalance the R
Speaker 1: S M A portfolios once a week. We rebalance them
Speaker 1: like a quarter of the way to where we ultimately
Speaker 1: would want to be, so we don't generate too much
Speaker 1: turnover um. And you know, we're we've built these systems
Speaker 1: that you know, try to do the minimum number of trades.
Speaker 1: You know, their tax aware, so you know, if you're
Speaker 1: gonna realize a short term gain, you don't do the
Speaker 1: trade normally or whatever. So you know, we we try
Speaker 1: to dampen down the trading that you would get if
Speaker 1: it was just like oh here, here's this dynamic target.
Speaker 1: It's moving around, just moved to it all the time.
Speaker 1: You know, we're kind of moving trying to trying to
Speaker 1: keep up with it, but in a in a low turnover,
Speaker 1: low you know, tax efficient manner. So so Victor, I
Speaker 1: gotta ask you a question that we ask everyone at
Speaker 1: the end of trillions, which is what is your favorite
Speaker 1: E t F ticker? My favorite E t F ticker. Yeah,
Speaker 1: I guess it's uh uh yeah, I guess it's v
Speaker 1: O O. You know, the the you know, the Vanguard
Speaker 1: um SMP five hundred sort of with that nuance of
Speaker 1: you know, of the Roman digits sort of thing. I
Speaker 1: think that's my favorite good job knowing that, by the way,
Speaker 1: that is a I thought you didn't know it. I
Speaker 1: was ready to like just drop that cool factoid, but
Speaker 1: you did. And that's to me, how how did you
Speaker 1: did you just figure that out at face value? Because
Speaker 1: I didn't know it until someone told me at Vanguard.
Speaker 1: I was like, oh, now I get it. I might
Speaker 1: have read it in one of your articles. Eric, I
Speaker 1: don't know where I learned it, but I did not.
Speaker 1: I did not figure that out myself. I read it
Speaker 1: or heard it somewhere. I did not. It didn't hit me.
Speaker 1: It's the most hidden cool ticker of all time, Like,
Speaker 1: because only you have to someone asked to tell you
Speaker 1: about it for you to know about it. Yes, yeah,
Speaker 1: that's what that happened with me for sure. Victor, thanks
Speaker 1: so much for joining us and Trillions. Yeah, sure thing,
Speaker 1: I've been great. Thanks for listening to trillions. Until next
Speaker 1: time you can find us on the Bloomberg terminal, Bloomberg
Speaker 1: dot com, Apple Podcasts, Spotify, and wherever else you like
Speaker 1: to listen. We'd love to hear from you. We're on Twitter,
Speaker 1: I'm at Joe Webber Show, He's at Eric caltur Nois,
Speaker 1: and you can find more about ELM Funds at thumb
Speaker 1: funds dot com. This episode of Trillions was produced by
Speaker 1: Magnus Hendrickson. Francesca Leave is the head of Bloomberg podcast
Speaker 1: Bike h