Episode #257: Marc Levine, “A Lot Of Times, If You Could Just Make Fewer Bad Decisions…That’s How You Win”
Guest: Marc Levine is the former chairman of the Illinois State Board of Investment. He was a pioneer in the asset-backed securities industry with transactions including the first-ever securitization of precious metals. Marc was the founding principal of Chicago Asset Funding LLC, a AAA-rated structured finance investment firm that in 2009 was one of the market’s largest investors in junior collateralized loan obligations. Prior to that Marc ran similar vehicles for ABN AMRO and Continental Bank in Chicago and began his career in auditing and consulting at KPMG.
Date Recorded: 9/23/2020
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Summary: In episode 257 we welcome our guest, Marc Levine. In today’s episode, we’re approaching investing from the institutional, pension side of things.
We talk to Marc about his role at ISBI. When he was there, there were 80 or so hedge funds in the portfolio. He discusses the mood in the boardroom when he made the decision to fire the vast majority of them and index the portfolio instead.
We get into his interesting way of thinking of investors in the context of a ‘Tribal’ model, and why he feels investors should honor all 4 tribes. We even get his thoughts on 13F investing.
All this and more in episode 257 with Marc Levine.
Links from the Episode:
- 0:40 – Intro
- 1:33 – Welcome to our guest, Marc Levine
- 4:17 – Comic Wars: Marvel’s Battle For Survival (Raviv)
- 4:52 – Marc’s time at Illinois State Board of Investment (ISBI)
- 7:40 – State of pension funds today
- 9:40 – ISBI investment philosophy
- 13:11 – Implementing portfolio changes
- 21:18 – Mindset behind the different funds and the fees they incur
- 23:50 – Where Are the Customers’ Yachts?: or A Good Hard Look at Wall Street (Schwed, Arno, Zweig)
- 26:54 – Shareholder Yield A Better Approach to Dividend Investing (Faber)
- 28:10 – Where it might be worth paying up for strategies
- 33:30 – The Tribal Model
- 41:14 – Why Illinois Got Out of the Hedges (Levine)
- 45:30 – Creating an investing checklist and how to cover your bases
- 50:35 – Why your investing plan can and should be simple
- 54:23 – Why pensions tend to over complicate their portfolios
- 58:46 – Being overly focused on beating the averages
- 1:03:40 – Investing off 13F’s and the biotech sector
- 1:10.26 – ‘I Can’t Believe I’m Saying This, But I’m Passing on Seth Klarman’ (Institutional Investor)
- 1:13:07 – Replicating other’s investing strategies
- 1:17:38 – Measuring success of investors and the time horizons we use
- 1:22:10 – Long-term investing structures
- 1:24:21 – Commentary: A better split for pension funds (Levine)
- 1:25:30 – The Meb Faber Show Podcast – Episode #101: Paul Merriman, “The People That Have Come Out Ahead Are the People Who Have Put Their Trust in the System Over the Long-Term”
- 1:26:30 – What Marc is excited about for the future
- 1:33:01 – Most memorable investment
- 1:35:13 – Connect with Marc: levineratio.com, Twitter @marclevine63
Transcript of Episode 257:
Welcome Message: Welcome to Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the cofounder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: What’s up, friends? We’ve got a real money show for you today. What’s real money? That’s institutions that manage over 10 billion dollars. Our guest is the former Chairman of the Illinois State Board of Investment, where during his tenure, he made a mark with a firm stance on high fee investment managers and the shift to indexing. In today’s episode, we’re approaching investing from the institutional pension fund side of things. We talk to our guest about his role at ISBI. When he joined, there were over 80 hedge funds in the portfolio, and he discusses the mood in the boardroom after he made the decision to fire most of them and index the portfolio instead. We get into his interesting way of thinking about investors in the context of a tribal model and why he thinks investors should honour all four tribes. We even get his thoughts on who his favourite 13 F managers are. Please enjoy this episode, with Marc Levine. Marc, welcome to the show.
Marc: Thanks for having me. Great to be here.
Meb: Where do we find you?
Marc: I’m in Wilmette, Illinois, which is the North Shore of Chicago, about 20 minutes north, beautiful day, and a pretty nice summer, coming to a close.
Meb: So, it’s going to be a lot of fun. I’m going to do my best to find some areas of disagreement. I know we’re going to have a lot of Venn diagram overlapping views, but we’ll get into all of that. You come from, I don’t want to say a traditional finance background. And you are a Gator, did some time at Kellogg, had some time with some credit. But why don’t you give me just a super, super quick, one minute overview leading into your time at ISBI and what is an ISBI, and we’ll use that as a jumping off point to talk about all the good stuff I got planned.
Marc: Sure, sure. So I grew up in Miami, went to the University of Florida, as you said. Accountant back in the ’80s at KPMG, and came up, actually came here to go to Kellogg and then left, not that that was necessarily the plan. A couple of Chicago banks in the ’90s, Continental which became B of A and then Chicago Corp, which became ABN AMRO got into structure finance, very, very early days, not long after Lou Ranieri invented the word, investment security and had just a ball with that throughout the ’90s. Actually, and the LO’s. So, developed, actually invented, a structure investment vehicle, that the unique factor was match funded. Did that actually back in ’01, I’m sorry, ’91, ’92. So, a long, long, long time ago and that was a nice life. I made a, you know, few basis points, a few dollars of assets and our business model really was originating and structuring aspect securities, getting them rated and then using guys like Citi Bank, previously Solomon Brothers, Merrill Lynch to raise capital for us. ’08 and ’09, we had beautiful assets. We had mostly four year money, which was forever, in late ’08, and really used that to kill. And moved the portfolio to CLOs, I don’t know how familiar you or your viewers are with that and mostly, like Mez CLO paper, right? Portfolios with senior [inaudible 00:03:42] loans, mostly private equity owned businesses, and felt to me like this stuff was trading, 40 cents, later 10 cents, didn’t feel so good, for stuff you bought at 40, but they felt like bar bonds all the time to me, and sure enough, in like 10, even kind of the second half of 2009, reinflated beautiful. And so since then, I’ve been trying to find what I’m going to do with the rest of my life.
Meb: It’s funny you talk about that sort of credit world. I mean, I remember reading these sort of old school books on bankruptcy investing banking and there’s one, I’ll pull it up because I can’t remember the name of it, but it details sort of the fight for Marvel, which is now this massive business. But back in the day, involving Carl Icahn, and all these other players, and to me, that’s always seemed such a, one, fascinating/complicating world. I mean, my God, you talk about alpha and these people that read like these thousand of pages of legal documents, but also so much work when you’re talking about these distressed securities. All right. So, I will see if I can find that while you talk. All right. So after that, it led into the runway to ISBI. Tell us what ISBI was, and your motivation for joining that organization.
Marc: Okay. So what ISBI is the Illinois State Board of Investment. It’s actually the, it’s the pension system for Illinois State Employees, Legislators and Judges. So it’s one of the three primary public pension plans in the State of Illinois, right along, the other two are Illinois Teachers and State University workers. So back in like 2011, ’12, I was trying to figure out sort of the next thing I was going to do with my life, and I think, one of the things I want to do is kind of give back a little bit. So, I sort of felt like what I’d done with my life to that point is explain very complex financial structures to CFOs and Treasurers and sometimes CEOs and boards, and try to simplify, and really thinking about it, what a pension system is, is a very complex financial structure. And I’m like, geez, maybe I can use my skills of simplifying to talk to media and legislators, and I did. And it was kind of great. I met a gazillion people and including the guy who actually became governor and, a guy named Bruce Rauner, who was actually chairman of a large-ish private equity firm in Chicago and decided to run for governor, God knows why. Anyway, he gets elected governor in ’14 and asks me to chair the Illinois State Board of Investment. And as far as a couple facts of what that is, when I got there, it was a 14 billion dollar defined benefit plan, so a pool of assets with contractual liabilities, and also a 4 billion dollar, 401K style government there’s different legislation, but 401K style plan. So, it’s governed by a nine member board. These are not shrinking violets on this board. They are, like the State Treasurer, and in fact, many state employee pension systems across the country have a sole trustee of State Treasurers. But he’s on our board, and actually, a pretty decent guy. And there’s a comptroller and senate majority leader, appeals court judge, and then as well as five governor appointees. So that’s the structure of the board.
Meb: By the way, a quick aside, listeners, the name of that book was Comic Wars, which only gets three stars on Amazon, but I thought it was excellent, anyway. So Marc, you joined this challenging environment of dealing with a real money institution, listeners describe that as pension fund, endowment, sovereigns, any of these big pools of capital with 10 billion plus, some of them are 100 billion plus, but really, serious big money. And, challenging, not just from a portfolio standpoint, from a many different involved parties standpoint, whether like if you’re an endowment, it’s alumni, it’s current students, it’s faculty. It’s people managing the portfolio, all of these, just different. Give us a, super quick overview of how you see the state of pension funds today. Illinois certainly gets to be one that’s in the news a lot, any time the topic comes up, and we’ll use that as kind of a jumping off point for how you approached your role and how you thought about it. Mics to you.
Marc: My role is purely on the investment side. So, the way pension funds work across the country, you’ve got legislators negotiating with union leaders, etc. in collective bargaining settings to set the liabilities, and then the assets are normally managed. We’re very typical. Usually, there’s a board. Sometimes it’s just a sole trustee, a staff. We’re probably one of the 20 largest in the country. It’s exactly what you think. You look at sort of the population of each state, that’s how big each, right? California’s the biggest. On the investment side, there’s a couple of severe, big time challenges with public pensions. Every official investor will have their own unique challenges, and you have to sort of manage assets within the reality that you live in. What I learned over let’s call it the first couple years is that the two primary challenges that our public pension has number one you have it is attached to the government. So you absolutely have the risk of political meddling, of patronage, of kind of that whole world. I’m not saying it happens everywhere. I think that’s a risk that people don’t really give enough time to kind of thinking about . The other one, that I think everybody is very well aware of, which is that government organizations tend to be under resourced. And you never end up paying your people quite as much as they can make in the private sector and you always have the risk of being you know front page of Cranes, for any sort of action. It could be you stayed in a Marriott that had a hot tub in it or something. It’s ridiculous. Those are really the two key challenges and that’s what I try to sort of deal with you right in investing.
Meb: So, you show up, day one, and the portfolio looks different today than it did then. Talk to us a little bit about your philosophy of putting together a portfolio. You can give us a tour of the asset allocation, or just how you think about, and then also the challenges of actually implementing those changes too.
Marc: I didn’t really come with any particular preconceived notions on this asset class or that asset class or hedge funds or private equity, that sort of thing but I do…I am who I am and I had a philosophy of simplification of the whole world of finance, hence remember I come out of structure finance, right? So where, we basically our industry is blowing up the world by just over complicating things where no one understood what the hell was going on, right with any of these securities. So, for me, the first thing we could do was shovel out the complexity that was totally unnecessary. So, in my own portfolio, I index well over half of my own assets in fact, while I was chairman I actually indexed all of them. I didn’t want any depth to deal with perceptions of conflict that sort of thing. But I’m a believer in indexing big time and I have been for 25 years. So when you think about what a pension is, we have an asset allocation, and we implement the allocation by usually, by hiring managers in each asset. So at the highest level stocks, bonds, real estate, and then sub asset classes under there, and you can end up with hundreds and hundreds, literally hundreds of hundreds of managers. And the beautiful thing about indexing is you actually skip that second step, and whatever you decide in your asset allocation that’s what you get. And there’s nothing to do, and you don’t need a staff. The risk of political meddling goes away, almost completely right because the meddling is the money. Right? The investment management fees become a goodie available for patronage, becomes a honeypot. So by having a very, very, very low fee right, we paid like less than a basis point for as a serious investor, is of course it’s retail investors like four basis points. I would say indexing is free, right? You pay clerical costs. You’re not paying fancy managers who end up owning basketball teams, football teams, etc. So you kind of cut out that cost. But it’s a beautiful thing in a pension setting, because of those two massive limitations you have. So that’s kind of the baggage that I brought and that was, so there’s really a bias, particularly the first year to shorten the roster, the manager roster fire managers, which is its own thing and we can certainly get into that, and do some indexing so that we can start to think. We can then start saying, geez, how can we maybe make this thing. great?
Meb: A lot of listeners will probably be, we used to talk about this and this concept of a zero budget portfolio, where so many investors have this just mess of seven different brokerage accounts and 100 holdings and 20 different funds. They have large cap growth, large cap value, large cap blend, large cap whatever, you know and you ask them what they end up having and most investors just like I have no idea. And we say, a good starting point is just come up with a blank piece of paper, write down what your ideal looks like and if it’s, you know, extremely different, there’s a big problem. And so the problem with a lot of these legacy allocations, they’re so complicated. There’s just like a gazillion managers and it’s nearly impossible even with the best software on the planet, to really know kind of what’s even happening. You’ll talk to, I forget what CalPERS had, the amount of like private equity managers they own it was like half the industry. Alright, so talk to me about kind of, we see kind of some of the problems and the asset classes. How did you kind of go about implementing those changes? Also, was it challenging? Was there a lot of pushback, or people like, you know what Marc? Have at it.
Marc: So at first it was extremely challenging. There was just a…Right, we’re in the political world, and you’ve got a governor, a Republican governor who put me on the board, nothing I’m talking about here is a Republican. It’s not republican to index or write, or not like a hedge fund, because they don’t make money for you. It’s not republican or democrat, but politician…Yeah sometimes, when you’re a hammer, everything looks like a nail. And so initially there was some mistrust. And, here I come.
Marc: Now board elected me as chairman. In September of, 2015 eight months after I joined the board, we have elections every two years, sort of, that’s the way the bylaws work. I wanted to sort of make a statement that day and so the statement was look, we got hundreds of managers four of them are on watch. They’re in like large cap, just as you were describing. There were eight large cap stock domestic and our 17th International small cap, like whatever. There was, you know, obviously negative out, yeah, there were not any benchmarks. Surely, we can do this. And there was a lot of heat on it. Big time. We’re firing floor managers. A couple of them were raised in Chicago. The media shows up in a meeting. Actually it’s funny, they wrote what I think they thought were gotcha pieces that I thought were just terrific. So there was a lot of heat in that room. And then as…It’s funny. Once the votes were going to be the votes with the nine member board, and I had talked to enough people I knew where everyone was and it was going to be six to three because I talked to the other eight. So, on determinations and one of the guys who was really the hottest, finally sits down after this debate and says, “All right, Marc. Who are your guys?” Right? Which is the way…He’s not wrong to think that way. So it’s like, you’re getting rid our guys who are your guys, that wasn’t language, but that was certainly that it’s going to be indexed and all the heat came out of the room. Because indexing, you actually took the insult out. Number one, right? If you fire manager it’s insulting to that but right, these were actually terrific managers who were firing, they just didn’t work for this philosophy that I was bringing to the table that a majority of the board agreed with. So you take the insult out and then there’s no goodies to be going, you know, to the other side. It really was quite helpful. So that was a major, major accomplishment, even though I was only four managers, we actually ended up firing 100, okay? Now we actually changed. General consultants in the pension world, often have a lot of power, where there’s a very important use of general consultants and then there’s I think in it, I use an excessive use. The use that’s essential, is that board members need a piece of paper, right, that’s a sort of CYA on decisions that you make, whether that’s asset allocation or managers who hire and fire. It’s just very helpful to have, okay, to have an outsider, giving you a sheet of paper, whether it’s a media attack or potential litigation, whatever it is. Exactly that sort of thing.
Often, these general consultants end up be sort of almost being used as battering rams on this, this side of the deal. Anyway, we replaced the old with those, with another one. We wanted somebody had a blank sheet of paper, as you call us with zero budgeting. Zero Based asset allocation, exactly. That was the key, and that consultant who’d been there for 12 years probably wasn’t the best guy to have a blank sheet, right? So, we’d like…He’d write a three x overweight to small cap maybe, maybe gee somebody should have mentioned that to us for six months we were on the board. We shouldn’t have to find out ourselves, you know, yada yada yada. Anyway, so we did asset allocation and then, of course, very quickly, what I suspected we’d find we did find which was these things called hedge funds, that, for ISBI were, 88 hedge funds. Okay? That were nearly all of the called long short or long only type variety, so stock pickers, not a lot of the derivative guys who I think are actually far worse, and we should talk about that at some point. Those guys, they really find the suckers. But, we looked at it and of course, they had pulled off the most incredible magic trick of all time, which is they pick stocks but they don’t get benchmarked against stock market indices. They get benchmarked against a thing that is a stock market index, minus 2 and 20, called the HFRI. Okay? The HFRI is stock markets, minus 2 and 20. So that’s, I mean, it’s good work if you can get it. That’s not what we’re going to do. We’re going to benchmark them, they pick stocks, we got a benchmark for you. It’s called the stock market. Okay? So once you did that with 750 bips of negative alpha, which was all the 2 and 20 nonsense, we didn’t go from 10 to…So we had a 10% allocation at the time, which was called a billion and a half dollars. We didn’t go from 10 to zero, we went from 10 to 3. Well, actually, a couple of board members were like, geez, it’s a long way to zero. I’m like, okay, fine. Let’s go to three. I’ll take half a look every day of the week. I’m really happy that we did that, because there actually were some terrific managers inside of the portfolio.
So out of these 80 hedge fund managers, by the way, what a classic way of I’m sure this is something that you’re very familiar, kind of in your line of work, investors, always end up diversifying away from their best ideas, right. Always. Which is frankly, one of the reasons why 2 and 20 makes no sense. I’m just diversifying away from you anyway. You’re not that important to me. So boy, this better be a fair deal for you and for me. Anyway, affiliate managers, had actually generated, had generated some alpha. They tended to be part of, we use…I’m sorry, ISBI had used a fund of fund structure, and there is nothing wrong with that. That gets beaten up to death, right? Double fees, blah, blah…There is nothing wrong with that at all. So I am not a disbeliever in that. Not one bit. I actually believe that the second piece of our primary philosophy which got developed and kind of years before, were outsourcing selection of active managers. Anyway, so Firm Rock Creek had a bunch of manager who they had for like 10 years. They’d see terrific, like performance guys, like GCI which is Chris Hahn, who’s kind of had to like 22 after fees and a couple guys who, what we started to realize that there was a biased right to innovation. So guys like Tiger Global and Code 2. So we end up keeping a few. Then I started getting some publicity. I’ll tell you what, if you want to get on TV, fire a hedge fund. CNBC loves that stuff. The way to describe all of that is I’d sort of come in and they’d be like, hey, what are you working on? I’d be like, oh it’s awesome. We just hired like BlackRock and we’re gonna diversify. We have some diversity in public stocks, with some factors. Yeah, yeah, yeah, yeah, yeah. We just want to get some fresh hedge funds. Like yeah, we fired the actor, right? Which we did.
The beautiful thing, pension funds managed by boards… Endowment intimidation is no different. You have quarterly meetings and it was a very nice cadence, to restructure the portfolio. About six months later we even we, as I said, we had a $4 billion DC plan, a defined contribution plan 401k style, and that had like, okay. So, that was 18 different managers. We got participants select, and you know, inevitably what happens in these super complicated, DC, by the way, 18’s not bad, I mean, it’s often like 100. And what inevitably happens is, I like this one and this one, and they end up like half small cap and half international or emerging markets. It’s ridiculous. If I had my way, there would have been one choice which would have been a lifecycle type structure. Like, what we ended up doing, we went from 18 to seven and we got rid of all active management. It’s like, why do we need? We could…It’s funny. As a board member, we could actually be sued, if somebody picked an active manager they picked a bad stock. I mean, why do we need that? So, a lot of stuff like that, we ended up as I said, we got rid of another board manager and we fired like two and a half billion dollars of managers. We just really culled the portfolio down and simplified like crazy during those first couple years.
Meb: So there’s a lot to dive into here. I think one of the things that you mentioned that I would love to hear you say a little more about, because I think it’s probably non consensus is, you mentioned fund funds, the role they play, you have listeners who would say, okay, hedge funds is high bar to a 20. Fund of funds, you’re going to layer in another fee. How do those two jive? So talk to me a little bit about that whole philosophy and your kind of mindset behind that.
Marc: Absolutely. You get market returns from indexing. So, that’s free. That’s, as we discussed earlier, that’s clerical costs. That’s a perfect implementation of your asset allocation. Where we ended up was about two thirds our portfolio ended up being indexed, right, so passively managed a perfect implementation. But our view was, look there’s private market assets, which we believed, not for diversification sake, and we should chat about that a little bit, that’s the whole kind of BS world of trying to reduce your daily standard deviation like that’s worth it, like worth anything. So there’s lots of interesting private market assets, of course, like things like real estate, opportunistic real estate. As you were talking about, distress credit, private equity, and there are a few managers. They may concentrate on a few stocks. They may concentrate on a theme. They tend to be private equity type mindset, but who can kill. Okay? It’s really hard to figure out who the hell those people are, and you know if you’re a pension fund employee staffer sitting in an office in Butte, Montana, or you know Provo, wherever the hell you are, the likelihood, and even frankly Chicago, Illinois, okay, the likelihood of you tripping over somebody who could actually add value…If you’re not going to add value there’s no reason for you. We could get invested by index. So it’s special to find somebody who should manage assets for you that aren’t going to be indexed. It’s really hard to do and it’s really, really hard to do in a pension setting, where you have all this risk of political meddling. 2 and 20 is juicy. And you’re thinking about patronage? Okay. And I’m not suggesting this happened at ISBI. To my knowledge, it didn’t, okay. But that’s a juicy amount of money, and it happens all over the country, all the time.
Meb: Well, and interrupt you real quick, you made a comment earlier about buying sports teams and, you know, recent news on Steve Cohen and buying the Mets, and all these other fund managers. It goes back to the old book, where are the customers yachts? You know it’s like all these hedge fund managers…I have a friend who described as a compensation scheme masquerading as an asset class, which I thought was a pretty humorous description. But okay, keep going, keep going.
Marc: That’s exactly right. So, the likelihood you’re going to get it right, is, is very tough to do. There is nothing wrong with indexing your entire portfolio. Nothing at all. Probably is better. You know agrees with me, by the way? David Swensen. Okay, Yale University endowment took it from a billion to 30 billion while he was paying 40% of the operating expenses of the university. Okay? Over the last 30 years. Right, he agrees. Warren Buffett agrees with me. Is it safe to be 90% index, S&P 500, 10% treasuries for that free efficient frontier free lunch? Anyway, so nothing wrong with indexing everything. We decided not to take that approach, but the decision was, look. Can we find some special people who all they do is pick managers? We’ll pay him 30 or 40 basis points. So for your viewers listeners, you know point two and 20 is 2%, 200 basis points, okay? On fee on assets and then 20% of all the money you make. Not the alpha, all the money. Okay, it’s insanity, paying somebody to me three tenths four tenths of a percent, half a percent to select, or maybe giving them a cut of upside, at very, very little fee, but they do all the work. You’ve outsourced all the work. Who cares about the work? All you care about is results. Okay. It’s the only thing that matters, which is index. So that’s the way we decided to go. We had terrific experience with this firm, Rock Creek. Ended up doing an RFP, and hiring another firm, HighVista.
We ended up using, sort of three or four firms, to that’s what I call an outsourcing. And there’s different models for that, right. There’s OCIO, okay, which is a very normal model where you hire somebody like a HighVista, Rock Creek, couple dozen others, [inaudible 00:25:54] firm in San Francisco to act for them. They do everything. We didn’t want the everything part, we want to just the value add. And fund to funds is a really interesting way. It’s kind of the same concept. So to me, the stakes are very high, very hard to do. Not only at logic, but put one more layer on it, one more layer which is, I pay somebody 2 and 20. I pay a private equity firm or a hedge fund 2 and 20 okay, and I sometimes I know hedge funds fees have gone down or whatever, am I actually okay? And then I benchmark them, right so i don’t buy this nonsense H over I crap, or your private equity is historically horribly benchmarked, where you and I know it’s leveraged small cap, and there’s fairly simple ways to benchmark that. But pay somebody 2 and 20, okay, now, what’s leftover for me? Well, you know, if it’s one basis point, I mean, that’s not a fair deal. Like, you sit down at the table and I have the money and you have the talent, I feel like I should get at least half. And I’m measuring my half from alpha. So it’s really hard to do, right? It’s hard to create alpha in the first place, hard to find the manner. It’s very very challenging, and so I think having an expert is a really good idea. Pay the money, and if it doesn’t work just index everything.
Meb: I had a couple memories as you were talking. Way back in my first book, I remember you were talking about ABN AMRO, and they used to write all these research reports about the foreign listed hedge funds, these fund to funds that would be traded on exchanges in Amsterdam and London. Ironically, a lot of the fund managers were from Chicago. So, Chicago for a long time was a big fund to funds, I mean, Grocer, and all these names, and the listed funds, never became anything that big in the US. You’ve had a couple, greenlight and third point have sort of done it a little bit, and they’re insurance wrappers. You mentioned Ackman, he has one but it’s again in Europe. It just flooded back some memories of that whole space that I’ll have to update and see how many are still it’s still in business. The 2010s was kind of a graveyard for hedge funds, so I imagine, not that many but it brought back a lot of fun memories. A lot of those funds in ’08, , and we actually wrote about it this year when it was happening to Ackman, his foreign listed fund got to like a 40% discount to nav at one point. Anyway, that’s a whole different probably podcast. So, okay, what areas if you had to say okay look, we’re gonna index, all these certain things, you mentioned, private equity buyouts as a strategy that could almost be public markets, what areas, do you think are most optimal for simple description would be alpha, or ways that you think it’s worth paying up for, for strategies or active bets or any just general philosophy about that in general?
Marc: First thing I’d say, actually, is in like public markets, okay, there are…You can actually index alpha strategies to a certain extent. Like for example, in my indexing in my personal portfolio. I get nervous all the time, but I have been a believer in kind of these mega cap growth things, like that sort of Amazon, the big five. It just seems like sort of sucking all the world in. And so, I view it as indexing that part of my not huge but not small either, I mean well over 10%, of my personal assets, I put in in something called MGK, which is just like the QQQ. But it’s really still indexing. I paid four basic points to Vanguard, and I get double weigh, like the like the large, the large caps in the SP 500 aren’t quite big enough I need to have extra but that’s what I do. So there’s things you can do, very low, and you should always, I think, look to that first. Are there ways I can express views right with, inexpensively, and maybe systematically. So maybe I’m a deep value guy. What I’m describing here is I have a bias towards innovation, even though I’m more genetically disposed to deep value. There’s a bunch of asset classes, and I’ll get to the sort of high conviction in just a sec, that make a lot of sense but don’t make a lot of sense to index. So like a fixed income treasury bond, you might as well pay Vanguard a couple of bips and take it away. We end up paying, and this is one of the things I use big time on hedge funds, through attacking the derivative book hedge funds, but like in core fixed income where you know you’re buying of course, some corporate bonds, and maybe some mortgage backs and some treasuries, blah, blah, blah, but when you pay a guy like eight basis points 10 basis points, and he you find somebody who’s got some good judgment… Actually, so I had about a year before he died, I had my like life’s dream. I got to meet John Bogle. And one of the things I said, picture this. And he said this one thing that one thing that sort of surprised me and stuck with me. He said, I just wanted to give investors a good deal. He didn’t care about passive active. Actually, he didn’t care. He had no dogma, so nicely, Morgan Houser, in his new book, he was like, ” I fear a little bit that the indexers are getting a little too dogmatic.” Anyway, so dogma’s bad. In any case, so in the real estate world, okay, you sort of almost have both versions and so I, I’ll segue, actually into the actual your question. Sorry to dance around so much. So core real estate is kind of a vanilla product and there’s guys like Prudential and JP Morgan etc. These like massive massive farms. They buy the big office buildings downtown, Denver, Chicago, New York, wherever, so there’s that, and that can’t be indexed. That’s an illiquid asset, that’s a private asset. There’s actually a few bips of illiquidity premium. Very, very well worth it, and you pay these guys like 60 basis points. It’s perfectly fair deal, seven days…A perfectly good deal. That makes a lot of sense.
Okay. So now, the segue. If you’re looking at Real Estate, well, the same thing if you’re on a fixed income and private equity kinda sorta. By the way, ISBI is the number one pension fund in America, in private equity, and I’ll tell you how we do that in just a sec. I think you’ll get a laugh. But in some non core real estate, like opportunistic real estate, now there’s some juice, right? So, that’s different. That’ll be like a fixer upper. That might be a development. That might be an office building that had no tenants, okay? That might be a hotel that has no occupants. That’s all sorts of different things. That might be a distressed mortgage, by the way, which might be perfectly good building. So we actually ended up having about half of our real estate assets, in, right? And that, I love that, and that you’ll pay. Look, you’ll pay money for that. There’s just an enormous amount of work, okay? Like to have lawyers…Like if you’re like a lead, you know, creditor, that’s where it’s okay. I think it’s okay to pay fees, as long as it’s fair. You’re doing something for the money, you’re finding assets. I can’t just hit a button on a screen and own. That makes a lot of sense. Credit kind of, same thing it’s like your distress credit might make sense and all that kind of stuff. And private equity, if you think about it. Now, private equity, what you want to watch out for, we’re number one in the country? Okay? Is we have this outsourced model so we use it for Hamilton Lane. They’re terrific. They’re in Philadelphia, public company. We got a load of clients across the US, right they know everybody in the get invested. It’s good, okay. But the secret is, that I that I said to them, I’m like, Don’t use your imagination, okay, on what this guy thinks or that guy thinks or what would make Mark happier what would make Jim happier what would make Sherry happy, don’t do that. Just use your best judgment and do the best you can, and we’re number one. A lot of times you could just make fewer bad decisions, okay, and that’s how you win.
Meb: What’s the tribal model?
Marc: That’s a fresh topic. What gave me the idea for this, was…I think I’ll write an op ed for this or something. Now, I’m a blogger and all this stuff, so I never thought about Bitcoin in my life. And like what bugs me about this thing, like I am and I never owned any. I bought a few tiny. There’s something super weird about this thing. And that’s how I came up with the tribal law. So, my experiences over the last call 20-30 years, not just his ISBI experience, but that there’s really kind of four tribes of investing, and I think you could almost put everybody in one of them. And then there’s you could be in a couple of them. But, so I noticed you on the very left on the left there the guys who predicted 20 of the last one…Forecast 20 in the last one recession. There’s the Perma Bears. That’s the hedge fund world. That’s everything in life is about minimizing your standard deviation, there’s always a problem around the corner. There isn’t a Silicon Valley that’s developing all this innovation right and sequencing DNA and restructuring IT departments until you know from on prem to cloud. There’s not an Amazon that’s creating an old e commerce. That doesn’t exist everything’s terrible. The Federal Reserve is the most powerful entity that ever lived, and all is bad. And right now they are selling to people in institutions all over the world. We called it in February. We got out. It’s like, what they’re neglecting to mention, is they got out 20 other times in less than a year. And missed all the beauty, because equities are beautiful over a long period of time, as you well know. I suspect listeners to your show understand that very well, that as long as you don’t have a short time horizon, standard deviation, daily fluctuations are completely irrelevant. By the way, I banged my head against the wall for four years, in this pension world because that’s normal. Like, oh my god but it’s risky. It’s like, the only thing they care about is 2040. You’re investing in 2018, 2020. If you think you can figure out 2021, best of luck, pal. Okay? It’s about what is the world going to look like? And then you can really make money. So the Perma Bears are the first tribe.
Then there’s what I call sort of deep values. These are the guys who discount cash flow. They love General Motors at five times earnings they…They’re really good at math. They refuse to buy a stock that’s a multiple revenue. Unfortunately, and it’s Amazon, because Bezos refuses, like it’s like, I’m not…I’m going to reinvest every dollar because why do I want to get 40 cents the government? That’s kind of a dogmatic, silly thing. But having said that, you know, people often ask, I’m sure they ask you daily, how similar are we to like 99-2000, because it does feel very bubbly when you got like a snowflake IPO, that’s a multiple of three times, assumes revenue multiple, right? So not only do you, we’re not now on multiples of revenues, we’re on multiples of the highest multiples of revenue, right. So, I’m not crazy. I sort of understand the world. And the thing about, particularly, this deep value tribe, that they don’t really care much about Federal Reserve. And they’re not pessimist…Kind of neither pessimistic, or optimistic, but they love discounting cash flow. So they love to…They see what they, you know, kind of what’s in those last four or five years. Like, it’s too murky out there. They might be right, okay? And a lot of times, I am they. I like aircraft leasing. I mean, when I can get an aircraft 30% of book. I’ll do that. Okay. So the one thing I think today that’s very similar to 99 2000, I think that the tech stocks and we’ll get to that, that’s the fourth tribe, that what you have now, you had complete fraud in 99, 2000, of like page views and things like valuation metrics, complete nonsense. Where now you have great great companies that arguably are ridiculously overvalued. Maybe they’re overvalued, maybe their not. Amazon and things, of course, was not overvalued or last 20 years, and neither was sales force, and neither were a lot of guys. But what is, I think very similar, and those guys, the deep value tribe, which by the way, is a lot of like, pension funds. A lot of their money managers tend to be these deep value guys, that stuff feels so cheap. I mean that stuff, it’s like Delta Airlines or hotel company or cruise line I can get like at a, I mean, my God, like Boeing I can get three times their 2018 earnings. Do I really think when things, ultimately normalize, whether it’s three years, five years, 10 years…So there feels to me like there’s revenue. So anyway, so that’s that tribe.
So then there’s the indexers. You see, by the way, how pessimistic forecasting 20 of the last one recessions, some of them would understand the deep value guys. You can also see how some of the deep value guys could understand the index. So the indexers are generally optimistic but not wild eyed. Couldn’t care less about the Fed, believe the world is going to be better. And, but the one flaw, the one dogmatic flaw the indexers have is, I’m sure you’ve heard this a bunch of times, when you see $1 bill on the ground, the efficient markets universe shadow indexer guy okay, Marc Levine, is gonna say that dollars not actually…Don’t pick it up. It’s not there, it’s an illusion. Because somebody would have picked it up. Sometimes people actually don’t pick up the damn dollars. All right? And then the fourth tribe are the innovators. So the Utopian, right…I kind of feel…So to get this whole thing back to how I kind of had the idea for this way of looking at the investment world, is Bitcoin, are the Perma Bears. And the innovators, nuts, the guys would never touch each other, and frankly I think maybe, like truly dislike each other, like personally. They’re different religions, and yet it’s funny in Bitcoin, you have legitimate viewpoints that this thing could 40 x on the fact that is so much better than gold, and you know, that it’s transportable, divisible, blah, blah, blah. Gold, is the asset of the Perma Bears. So, anyway, that’s a long answer.
Meb: Man there’s a lot in here that I love. The interesting thing about the crypto argument is people always assume it’s either gonna, it’s not 40 x by the way, they either say it’s going 100 X or zero. And I love talking on Twitter. I’m like, why can’t it just be flat? Why can’t it just go up 2% or down 2% or go nowhere? Why does it have to be this binary outcome, where there’s only two states. Anyway, this may be, I think, one of the most important things we talked about today, and listeners, I want you to be honest with yourselves and think what silo do you put yourself in? Because I often say that anytime you self identify with a label, now it can be perma bear, it can be crypto bull, it can be Tesla bull or bear, whatever it may be, dividend guy, indexer, Republican or Democrat. We won’t even bring religion into this but we could immediately your IQ goes down 30 points, because you shut all the doors on possible open mindedness to the world, and there’s probably nothing that gets people into more trouble than having a close minded approach to the world of investing. Because like you mentioned, it’s a weird world we live in. I mean 2020, my God, you’ve had the fastest from all time highs to bear market, and then the fastest ever from bear market all time highs. You have oil futures trading negative. You have half the sovereigns in the world being negative. So to not least be somewhat open minded, it’s, I feel like a huge handicap. I don’t know if you have anything to add. But I think what you talked about just now, this tribal mindset is more important than almost anything else, because people end up shutting themselves off from all the possibilities of what’s going on in the world.
Marc: My best friend, Dave Rapaport, has a word has a money management firm, and it’s an indexer. I sometimes worry that he, and he’s actually been my editor actually and all the stuff I’ve written, that he’s the one who did…I came up in the click. So I had this classic Wall Street Journal hedge fund piece of why Illinois fired its hedge funds. I wrote that the reason why hedge funds not a diversifier is that our bonds do that, and like, I own Procter & Gamble products. I know my kids are gonna brush their teeth tonight. And what I wrote was, I don’t have a clue about that long euro short yen trade, and Dave’s the one who said, na, na, na, long lumber, short sugar. The poetry, the Bob Dylan. Anyway, so I test dogma on him. And I get…We can all get dogmatic. Like I said, I’ve spent times in my life…So I’ve listened to your podcast with Tom. Where you really got me mad was you were describing, sort of the early days. It’s like, I know my own limitations. I know I get scared, I get happy, I get, I get… I’m going to make all these terrible mistakes and so that’s what I had to build around. And I think that’s the key to everything. You are not there. Okay. During good times. You learn negative lessons. You get all kinds of terrible habits. Markets can only go up. I’m gonna actually margin my public market equities to fund my capital calls for private equity. That’s what you’d learn. Stupid. Nothing dumber. That’s where actually, horror comes, right? But of course, redemptions, yada. It’s in the horror of like Feb, March, 2020, Feb March 09, September, October ’08, 2002. Everyone thinks it was 911. It was actually more of the Enron, right? The nasty, nasty, like S&P drops like 50%, oh my god. Like, that’s when you learn, how much pain can I take? And so, what is my right? How much untouchable asset…Like, am I okay whether 60/40, 80/20, 100/zero, whatever the hell it’s gonna be, okay? That’s the only thing that matters. Like, how much… There’s a certain amount of pain I simply cannot take, and I will sell my stocks, at S&P 2200. Okay, I’ll do it. I know I’ll do it, because you know what? Guess what? The S&P went to 660, not that long ago. Okay, so your imagination can run wild, right. So now I’ll get back to the question, which is thou shalt honor, even though I disagree with them on almost everything, thou shalt honor the Perma Bears. That every once in a while, you need a Perma Bear, right? You need to have a little fear. Okay. You don’t want to live your life in fear but you need to have a little fear.
So for me, and I’ll make the second part shorter. I’m an indexer, I love though, I’m an 80/20 guy. Okay, so I think I’ll rebalance next time market gets like crushed, and I’m selling my 80/20, 70//30, I think I’ll bounce back to 80/20. You never know. Another thing that I know is if I start picking stocks for biasing as I was talking earlier in the QQQ or MGK, and large cap, right, I want to invest in the theme of biotech or theme of cloud, I know myself. And if the market is doing well and I’m losing money doing very well, and I don’t care within 5-10%, and I’m losing money, I’m gonna like to start to really feel horrible. For that reason I want to have a big hunk of index as a ballast, okay? That I have plenty room to play. And the other thing though, so that’s the index. I think it’s insane for anyone to not respect indexers. Okay, to say, it’s all bad, you’re un-American. Go away. I think that’s more stupid than kind of anything. But in my stock selection, I didn’t really implement this although I would have, actually, had I thought about it, I would have backed a pension fund. I like having some, even though I’m more of an innovation guy, that’s definitely more my concentrations, cloud, you know, Amazon, blah blah blah, CrowdStrike etc. I want to have some deep value to just, there’s certainly not going to be the same if I have a conviction on one side, but I want to honor all four tribes. Because again, remember I said to you about 10 minutes ago, I’m really confident about a lot of things I believe in. I look at it like, if I can buy stocks like General Motors at five times, or Air Cap at 30% of book and Boeing at three times 2018 earnings, but I’m Mr. Innovation, like I am, I’m living my freakin Amazon ride, like having just a little, like those days when it’s the opposite, I’d like to feel a little good so thou shalt honor the deep value tribe as well.
Meb: All right. So we’re working on you starting a whole blog post slash white paper. This is gonna end up being a book by the end of the podcast, but here’s an idea, and I think this is actually rooted not just in very real psychology, but also the best possible behavior. So, you can come up with an optimal portfolio based on whomever, what tribe you may be in. Until you go through all the possible outcomes, that portfolio, as we all know, is going to be incredibly difficult. So the first thing that people can do is at least write it down. As misguided as a lot of the real money institutions are, at least at their core, and I put indexers in the same camp, they have a policy portfolio. Meaning they have, here’s generally, our rules of what we’re going to do, and how, okay. So 90% of investors we talked to, don’t even have that. They’re just shooting from the hip, play it by ear, here’s what I do. I have it in my mind but it’s not written down. We used to give speeches and I stopped because it was embarrassing where we would ask the audience, say, raise your hand if you have a written investing plan. And no one ever does. So here’s the idea we’re getting to, is almost like you have an investment checklist and I think that’s actually kind of easy, but then you go through all the possible outcomes of what a behavioral checklist may be like. So, all right, I got index in my core that checks the fundamental ballast of low costs, global portfolio, whatever it may be, with all your little tweaks. Alright so, second maybe I want to check off my FOMO bucket, and so I’m going to have a little bit in crypto. Now, next I’m going to check off my value in. So I’m either gonna have factor tills or active managers. Next I’m going to check off my behavioral tendency, because I’m an emotional wreck that if the market goes down X amount so maybe I buy some Taylor. Whatever you just keep going down the list until you have something. It’s not bulletproof but at least covers all of the psychological problems that I feel like people don’t talk that much about in investing. You end up in one of the four camps instead of all four camps, or at least a tiny smidgen of each.
Marc: The most important thing you could do whether an institution or human being, probably more important is flipping frankly, even though it’s as you say, institutions are pretty good at writing down a statement and actually living by it. So I’ve trashed pension funds a lot in this conversation, by the way, endowments and foundations are no better. Okay, they have their own idiosyncrasies of who made the big donation and put their guy on and did whatever games end up occurring there. For an institution, I have never really thought this before, for an institution, making a change is actually kind of difficult. To actually change your allocation to going from a policy of I’m 55% stocks, 35% bonds,20% real estate whatever they really are. Okay, and then I have these ranges and to actually vary from that, it would be bad governance to say that’s not a poor decision. That staff implement everything with it. Right, it’s actually kind of hard to do. So if you wait…So, Donald Trump gives an insane speech where like, I’m keeping the Europeans out instead of being empathetic to everybody, because he had a conversation with his son in law earlier they didn’t want to go to market the next day stock market drops by second most ever. And then, and then that goes up it goes back down, and the stock market actually closes, okay, because it’s down so much. Insanity, like level of volatility and fear. That’s the day you need the rules. That’s the day that you want to be slow, because you’re scared out of your mind. I mean, it’s, everyone is.
And so that’s where having that set allocation and set kind of rebalancing right of, I’m an 80/ 20 and if I get less than 75 or more than 85 I’ll rebalance halfway, you know, whatever it is. Those are the days, don’t panic. And that’s what else asset allocation is all about. I have a quick story before…Actually, it’s funny, on written investment policy. Most pension funds, and ours was no different, have these like hundreds of pages, of like, written investment policy. And we say, I did in public, like if you want somebody to not understand what your investment policy is, make it 100 pages. That’s a great idea. And so one of the things we did actually in year three, was all the stuff we’re talking about here, asset allocation and rebalancing and the view on indexing and like this outsourced model and all that all that kind of stuff, this concept that market timing doesn’t work, which is kind of what we’re talking about, as well as the sort of subtext of a lot of what we’re talking about. We ended up with just took a blank sheet of paper, and wrote a four page. ISBI has a four page written investment policy. And now, we’re having 130,000 beneficiaries. That’s something people can understand, right? So good to make an under…Right? Which it wasn’t really your question but it struck a nerve with me.
Meb: Well let me jump in and then we’ll come back. You know, when we wrote about, I write yearly about my own investing plan less that people need to like follow along or voyeur more, just to be like look, here’s a framework for how I do it. And you can dunk on it or whatever it may be, but it sounds pretty complicated, but at its core it’s we joke, it goes back to the Talmud portfolio from 2000 years ago which is a third stocks or business, a third sort of cash/reserves, a third real assets, which is a pretty darn hard benchmark to beat. But again, that four pages we always tell investors, listening, like having a written investing plan, it could be half a page even. It could be one line. It could be like, you know what? I do 60/40. I rebalance once a year. God bless you. Like that’s it. Like it doesn’t have to be. People assume that it has to be super complicated, but it really doesn’t.
Marc: No, this entire industry, the financial and investment industry does its best to overcomplicate everything and confuse everybody. It ends up being very transactional and would you know, we talked a bit about. At the end of the day it’s really the most important thing is, I want to get as much of the equity experience, and two thirds of your assets, right, real assets and equities are, you’re not that’s not weird, what you just described. Two thirds, one third, like I may think I…You know, when I say equity or real estate and the equity type risks. The most important thing is, it’s all about behavior. It’s like how, when the horror, like we all would love, okay, during these tenures. But we know. The Perma Bears don’t, but the rest of us, I think know, that nine out of every 10 year, four of every five, for sure, nine out of 10 probably, years are really good. And it’s great and you’re an idiot to not put 100 percent of your money in stocks. Okay, stocks real estate, equity leverage. But then, my god help you. Okay, God help you on those days when the market is getting crushed, okay, and you’re sitting on the end of the bed staring at the wall, and all my money, no matter how rich I am, or poor I am, like how you’re gonna behave on that day, because as you and I assume a lot of your listeners know, all the best days in the stock market, all of them come at maximum fear. You have to be invested on those days. You absolutely positively have to be invested on the hardest days, ever. It has to be invested, when the S&P is jacking through the roof, right? We just experienced a bunch of that, March, April…The Perma Bears are like this is crazy, that’s crazy, that’s crazy. Guess what? Sorry, I have money, you don’t. So it’s not crazy. It happens every single time.
So it’s all about dealing with that pain. That’s why you’re not an idiot to have…I’m not an idiot to have 20% and maybe it should be 30, I don’t know. I know I behaved when I didn’t have 20% I didn’t like it. So I am in an 80/20 guy. Maybe I’m actually a 70/30 guy. Maybe I’ll learn that when the market’s fresh and I am 70. And I don’t rebalance. I don’t have the guts to rebalance. So, it’s all kind of what works and in the end it really doesn’t matter that much. The most important thing, of course, is just staying in the game and not getting blown out. Whether that’s doing stupid things, again, funding our capitals with margin, or just margining your equities generally. If you do it right, and they do all the kind of stupid things you do in those markets not rebalancing as you say as an 80/20 guy, and it drifts up, right, as the stock rising, going up, up, up, up, up. And then, not being able to kind of deal. And also, by the way, if you can’t sleep at night, you might do really stupid things. So that could even affect your real life. That to me is the key to everything.
Meb: We often send people, they’re always asking me, well Meb, where should I go for a framework on policy portfolios or how to think about it? And Morningstar has done a bunch, but they tend to be pretty detailed. It’s almost like there should be, listeners if you do this, let me know, almost like a drop down menu, where you could just go through answer like 20 questions and it’ll spit out your Vanguard digital advisor plus FOMO Coinbase account plus, yada yada. Maybe it’ll be the tribal checklist. I had a joke, Marc, it’s not really a joke. I’m serious, but everyone thinks it’s a joke, where I tweeted, maybe a couple years ago, and this was aimed at the unneeded complexity and it goes along with so much of the drama and challenges of many of the real world institutions. CalPERS continually gets sort of my ire, just because of how sympathetic I am to actually the challenges of managing that organization. And you’ve seen 2020 alone, how the CIO I think is already out, all the drama with their tail risk, yada yada. And I had a tweet that goes something along the lines of, it was like, hey institutions, I’m more than happy to be your outsourced CIO, and once a year I’ll buy a basket of ETFs, we’ll have a board meeting. You can pay me in pale ales. I said, or IPA. I’ve gone off IPAs. I’m convinced they just give me the worst hangover so I’m back down to pilsners and pale ales. And we’ll call it a day. And people just hated it but I’ve actually had a few institutions reach out, humorously enough, but my idea, long winded idea for you, should be almost like Marc, the pension fund doctor. They could like hire you, say come in and clean up this mess, give them a full proctology exam, and like because so many we see and not even big money institutions, there’s plenty across the board, there’s such a mess. This isn’t really a question it’s a lead in and then I’ll eventually ask the question in a second. Go ahead.
Marc: So a lot of that of course is the politicization, the politics that end up around. And here’s the thing that I liked took me a long time to learn this, okay. This question comes up like, it came up all the time, and I had no clue what the answer was. Like, why isn’t there more indexing? Not to index it all, but why not index more of it? So, if you index, 10% of your stocks or 30 if you index 20%, why not index 40%? That kind of thing. And I figured out why. So I spent actually a short eight month stint on the board, not as a chair, but the board of Illinois teachers because I chairing SBA, the governor asked me to go there and I actually got a lot done. It was quite great. In fact, I got the board, there actually to agree to not pick managers so the staff picked managers. We didn’t go all the way to outsourcing, but I felt that was a huge victory to not have a bunch of teachers and a bunch of political people like picking managers based on 30 minutes. That’s insane. And then also, yeah, I met a lot of people I went to a few conferences etc. etc. And what I realized is that there’s real career risk to a CIO to index. It is actually real. And it’s the question like, what’s most important to a person who is CIO of x institution? Most people say, maximum returns at a minimum risk level. They want to keep their job. And the problem with indexing is when you first index I think you get a lot of attaboys and pat’s on the back it’s like, thanks for saving the money and then it does better and then, frankly, then it could grow. Like, I always wanted to I want to make sure we were indexing every single asset class across our books, so that the active managers were naked. I wanted them to be naked. I’m comparing them to the one basis point guy. But as that kind of evolves if you think about this, it’s like, geez, why do we need you? Like, it’s so easy, we could meet once a year, and that is the problem.
Marc Levine, okay, thinks that is the problem, that a smart CIO is looking forward in time and saying geez yeah, I’m gonna get a lot of pat’s on the…People are gonna like me now, I’m doing something smart, it’s in the news, it’s great, blah, blah, blah. It’s gonna be great. And by the way, it’s gonna be the best thing we can do the beneficiaries, which [inaudible 00:58:58]. The only thing we should care about frankly. But at some point, it’s gonna be geez, like we’re not talking about anything, we’re not… And that’s…
Meb: It’s hard for me, though, to envision the world not going that way. Though, the beauty of the internet is it’s a giant disinfectant, and look, I think going back 10, 20, 30 years, you had the Harvard’s of the prior century and then the Yale’s of this century, particularly in the early, you know, developing a model that if done correctly, and everyone is on board has the possibility to succeed. But you mentioned this career risk to be different, to outperform the average. And let’s be clear the average global index portfolio is going to beat most, probably.
Meb: To beat that, you have to be super weird and different, and being super weird and different and concentrated like Yale is, Yale has like, I forget what it is, it’s like 6% in traditional US stocks and bonds. To be concentrated and outperform, you have to be weird and different. Weird and different for career wise, you have to outperform, but many years, probably half, probably entire decades, you won’t. And even Yale, I think, Swenson is probably got the longest lease of anyone on the planet, but there comes a time when it goes 1, 3, 5, 7 how many ever years where the faculty…I mean, you saw what happened with Harvard, right? I mean Harvard has been one of the best performing endowments ever. In this decade, it’s, I don’t want to say, blown up, but completely the structure, there’s massive fractures and rifts and everything, so it’s hard. And it’s almost like what you see with CalPERS, almost like an unwinnable structure and part of it is the time horizon, which is really hard anyway. Any thoughts?
Marc: No, for sure I got big thoughts on that, I think. So, I’m indexer, and because I was chairman of the pension fund I got to meet all these people and have conversations, not unlike this one, and your different points of view. So, I was talking to the team at S&P, and I’m like, what do you guys think? Like, why did this, like…It’s so insane that investing is the only activity anyone can think of where the less work you do, the better you are. Actually, work is bad. Work detracts from the result. Not doing anything, always, almost 90% of the time, outperforms flexing. I know that you people written books and I’m sure you’ve had this topic multiple times on your show, that if you think back like 4 years ago there was a lot of output to be had. And there are people here like computers and the internet and all this information, which is no doubt is a huge part of the ease of information. I think a huge part of it also is that every year these MBA like these business schools, crank out another like 5000, 10,000, people into the investing world, and everything is just so commoditized. It just makes it impossible. And of course, the other thing is that when you look at like outperformance, it’s such a pleasure to have conversation, to be able to get into the sort of things like…Like a great, supposedly great manager, takes like…So, Dan Loeb, who was a terrific manager, when we got we got rid of him not anything he did just, it was just when we fired just about everybody. And right now I was on CNBC and they’re like, Dude like he’s 2 x S&P. It was of course four minutes long. So, I’m thanking you for the certain podcast format, so there is no opportunity. So the thing about even a great…Dan Lowe is a great investor. He is a great investor. Look at what Dan Loeb’s done, though.
When he managed $100 million, $200 million, even a billion dollars, he was small cap, right, he was, this was in the early 2000s he was small cap, like companies that didn’t have all these resources and McKinsey and whatever the hell it is lately, right? And it was kind of real, because all of his alpha actually came from that time and so if you actually…And then, of course, inevitably, what happens when you crush the S&P is then you’re overwhelmed with money and unless you’re dumb, you can do math, it’s like wow, two. I don’t need 20, 2 is really good. Like, right, as long as I’m okay, right, I can do 2% on 10 billion instead of making 2 and 20 on 1 billion, but now I can’t invest in those same companies because I have so much money. And nobody does this like dollar weighted, you have to dollar weight the returns. You can’t just say it over this time period when you made this much, when you match this money, you made this alpha. So there’s all these challenges, out in the world. And it’s really tricky. It’s really tricky. This is why I actually tend to agree with you that really the world should be certainly much more indexed than it is and right eventually you get to more…you’re right. We’re not at the equilibrium point, not by a longshot.
Meb: You mentioned Loeb, and this might be a fun segue, to being super weird and different over time. Before we started hitting the record button, we were rapping a little bit about stock pickers and 13 F’s, which interestingly enough is the government or SEC is thinking about changing the rules a little bit. We’ll see if they do. Talk to me a little bit about your thoughts there.
Marc: Yes, so I’ve kind of gotten fixated on that and it’s something I talk about in running sort of my own family office and originally I’m thinking about like biotech, and there’s a few just terrific biotech’s out there. And it’s a super unique thing right, where whatever the algorithms, etc., the endless source of MBAs that have come into the investing world. Biotech is strange, right. It’s a different kind of mindset, too. It’s not the stuff we all learned in Business School.
Meb: Right. You can’t screen for balance sheet and income statement necessarily for biotech’s.
Marc: There is no revenue. There’s a molecule somewhere, that might not even be in clinical trials yet. But there are a few managers, right, that have proven over a long, long, time, that they do this they do really, really well. And so that’s the way I did my own personal biotech investment. I just sort of saw what they did, and I also did it in a very anecdotal way, which is usually the way 13 F’s kind of, you know, sort of operate. With people who use 13 Fs, like, oh, Buffett bought, sold Delta Airlines and he just bought Snowflake, I’ll do that. That’s typically the approach of 13 F’s. And I tried to be a little more methodical, but not very much. Anyway I do a lot, you know, to tech investing. I don’t have super high conviction and, I think, Amazon gives me a lot of kind of downside protection business model wise, but there’s some guys in tech. So, 13 F’s were really informing and a lot of days I wake up like geez I can do this necessarily every day. But I’m like, geez, maybe I ought to just do what freaking Wellrock and Sequoia, a few others, the great great public market tech investors who totally understand what’s going on the private markets, which is where these like up and commer small cap guys can get really sideswiped. And then the other interesting thing, we did kind of a tiny, tiny bit of this at ISBI, tiny, of right…There’s some guys out there do this kind of professionally, but very, I don’t think particularly well. To me the perfect portfolio, I don’t know that you have, most individual investors, most institutions, don’t have $20 billion, don’t have access to it. And frankly, the ones that do, actually need this more. If I go about productizing, what I did at ISBI, which by the way, I said, number one priority, top 10% pension fund top, you know, you know, like top decile in the last three years in different asset classes which are very important to look at the separate asset classes because a lot of risk in one, your asset allocation and look like you’re better than you are. But very like well performing companies. Geez, if you just index, and then do some weird stuff on the margin, be focused about it, to me innovation is sort of where like potential alpha is. That there’s this strangeness about biotech strength.
There’s a lot of strangers about tech where these companies…We were joking before the podcast started, that a company like Snowflake, right, is now…You know, we were talking about with the value guys, now, it’s not enough now to be valued, like Zoom is like a multiple, like 30 times revenue now, stocks are gonna be multiple, a multiple of Zoom. A multiple of the highest multiple rate. But I’m not so… Everyone is really, really stupid to invest in Snowflake. Really, really stupid to invest in Shopify. Really, really stupid to invest in Amazon over the last few years, I don’t think so. So, it’s different. It’s not the metrics that we all learn. So all this information that’s going into the stock prices, that’s making indexing dominant, right, making deep values so hard, I feel it. So now, with partner we’re sort of screwing around with, geez, how do we make a product out of this and we’re thinking about, there’s a lot to this, right? Because it only changed every quarter, which is wonderful. And in some quarters, you know the gray matters don’t do anything. And of course, this only makes sense with bio hold matters. By the way, great investment. This is a misconception of the whole world, that the great investor, and the reason why the 13 F strategy wouldn’t work, is that great investors are geniuses, they’re wizards. They market. They get market timing right. The great investors don’t market time. The great investors buy great businesses and, and actually hold them. Chris Hahn would not be part of the strategy like this but a great, great deep value guy. Seth Klarman another great deep value guy. And those are TCI Valposter there. Chris Hahn has owned Charter Communications forever. And I had jokes like, geez, can I just take the stock tip, it’s like, but again, then the yields more so, I’m like, innovation and 13 F, buy and hold, I think is a really great… Like I think that’s the diversifier and potential alpha in a public markets stock portfolio. That’s where we ended up at ISBI, which ended up being like a top decile public stock fund. I don’t think you lose money by missing some of the private asset class.
Meb: Even if you do miss a little bit, you are also missing something more significant which is the fees they charge, and two and 20 is a big hurdle. We’ve actually talked to and I’m not going to name names because they probably wouldn’t like it. I’ve talked to many, many, over a dozen institutions family offices over the years that run 13 F strategies in house. And they say look, we looked at allocating to XYZ, and we just end up buying what they buy. And the initial reaction from a lot of people that we’ve gotten over the years is somewhat negative. They’re like, oh my gosh you’re just stealing their ideas. And I say, no, no. These managers should be sending me bottles of champagne. And yet, I’ve yet to get any from the hedge fund managers. And they say, why? You’re buying their names and they don’t get to charge you any fees, and I say yeah, but by definition, because of the 45 day delay on the 13th F, no matter what I will be buying what they’re selling now. Turns out I don’t think it has much benefit, because as you mentioned the timing is actually not that important. But I said, at least it gives them a floor. But still no bottles of champagne. Hedge fund managers, you can send me some Dom anytime you want but I think there’s so much merit to the 13 F strategy. I think it, A, it could be run systematically or B, for a lot of people just serve as an initial screen. Say, hey, I want some new biotech ideas to research. You mentioned Seth Klarman, which is humorous, because Institutional Investor just came out with an article where they said basically like the Buffett late 90s he’s lost his touch, people are redeeming. And I always love looking at the Klarman 13 Fs, because it’s a laundry list of stocks I’ve never heard of. You look at a lot of hedge fund managers, this is like the hedge fund hotel, they all own the same 10 names. But Klarman, universally, I’m like I’ve never heard of half these companies. Anyway, I love doing it. I haven’t spent as much time in it as much as I used to. Biotech is a particularly interesting place to do it, I think almost more than anywhere.
Marc: Yeah, 2 and 20 is a big, big budget to spend on being late to the train. There’s a lot, that’s a lot of money. And by the way, some of these are more than 2 and 20 if you can believe that. So, you are going to let…Right, there is the lag right that they buy and sell during the 90 of the quarter and then, so on average, let’s say that’s the middle day of the quarter. So you’re getting the information 90 days later. So this won’t work for a trader. But market timing doesn’t work. So, great investors aren’t market timing. Obviously there’s some investors that are, who knows what the hell it is they do. Renaissance, Citadel, Millennium. I mean you can count on a couple, on two hands. Like, there’s not a lot of those guys, okay. 13 F does not work at all with those guys. And I think 13 F still…A buddy of mine, actually, I’m thinking about this also in like secured lending, which is a lot tougher to do. But, it’s really a true statement that kind of stuck with me a bit. What you got to worry about with these strategies is that the information rapidly becomes noise. And that’s I think, where a lot of people have gone wrong. As soon as you use or widen too much, or you’re gonna end up diversifying your way right back. Yeah, like you’ve seen an Animal House where right where Tom Hulse gets walked right back. He gets to meet some of the fraternity brothers and gets right back to the nerds on the stairs. You’re gonna meet the cool guys, and then you kind of keep going, going, going and now, I’m stuck in this crappy place that I started in. Anyway, so to me, it feels like the productization of what I did at ISBI, which was really successful. And it does feel, I think as long as you kind of do it, purposeful and systematically. And like I was saying earlier, like the things like you know, thinking through how much do I care about just the individual weights, or the overlap, or just the presence of a name, or if somebody owns more than 10%, which actually by the way means they’re required to use a form of course. One last thing before I shut up here is, there is this feeling. I don’t have it and you don’t have it. This feeling of like, oh, you’re copying. It’s like, I don’t see how…So, the SEC for 45 years has required funds that have over 100 million dollars in assets to report this. And for longer than that, but not twice as long, I don’t think, maybe though, the SEC has required companies to issue 10Ks 10 Q’s. And like, I don’t understand the SEC requires public information and everybody…Like you are a bad investor, if you don’t use everything of all the tools that are available to you.
Meb: The thing I always laughed about was, look, the rules are what they are. Disclosures are what they are, and if you want to ostrich put your head in the sand, that’s fine. You don’t have to look but it seems silly not to take advantage of all the possible information out there. And in the same bucket is insider buying and selling and everything else. So I want to make two quick points that I think are funny and instructive. One is that there are a number, and it is not insignificant, where if you track a fund manager through 13 F holdings, that strategy outperforms the underlying fund, because of two reasons. One is the massive 2 and 20 fee, and two is that some portfolio managers, as you mentioned the timing is actually negative alpha, right? Like when they get in and out, now they can be optimal. But the fee is a big one. And then second, you’re talking about managers that aren’t ideal, and obviously the macro and maybe market neutral guys because the shorts don’t show up, obviously anyone who’s doing derivatives and CTAs, but humorously enough, some of the frauds. We used to look at a couple of the funds, way back in the day, and two come to mind, where the 13 F did massively massively worse than the disclosed performance, and we start to scratch our head because I chat with all my hedge fund buddies, which I used to do a lot more than I do today. Because they would always say, Meb, I’d say list your top ten funds, that if you could follow and invest in stock funds, what were they? And one that always came up was Galleon, which ended up being a fraud, and the other one which wasn’t but, you know, got into quite a bit of scrutiny, books written about it now he’s buying the Mets, I won’t say who it is, but that was also a terrible one to follow. Now, they traded a lot but so did Galleon, but even showing the returns versus a benchmark was just absolutely atrocious. Anyway, so it can give you some insight as well to actually kind of what they’re up to.
Marc: So like I said, where I started with this was on biotech. To me it was, I don’t know where you’d begin to start. And on the tech side I originally started with it just sort of informing decisions as you’re talking, which is great. I mean that’s a, I think a great thing to do. There’s, I do think, so I feel like if I was sitting in my chair at ISBI, if somebody came in to talk to me about, like this feels kind of great to me, as long as it’s like systematic have something like sort of somebody else do it, keep track of it it’s obviously not a 2 and 20 product, it’s just not that kind of thing. The other funny thing we didn’t talk about this. Most of these matters are closed. Even if you could invest, right, even if you knew the you know, GP and you know, call him up, even if you could, you can’t, because they’re closed. And if anything, you know, a lot of these managers…I mean once these managers become multimillionaires, which, of course, great ones do because that’s, I mean the carry on huge huge money, right? And it almost drips into almost family offices and they really want to get money back. So they can really manage the money, kind of optimally, right. It’s actually the guys who can’t perform well who live on the two and, you know, kind of, not the 20. There’s other noise I mean. You know, for example, like, you know, where being late is harmful, like a you know an IPO, where you know some of the some, some great managers who are late stage private market where it’s really just they…They’re public market managers, but they know the company’s gonna go public, and it’s a way to get a bunch of shares. And Snowflake is a great example ever of that. Where right snowflake is the hardest 13 F. I spoke with somebody and we’re having this conversation, and it’s a week after literally the hardest 13 F quandary you could ever have which is that the you know the great managers who were in snowflake private, and then it comes in and you have a two x pop on the IPO. It’s like, what the hell do I do now?
So that’s where I get a systematic approach and you got to have kind of grown ups at the table to really do it correctly.
Meb: I hesitate to almost introduce this comment, because we’re getting to be Joe Roganesque long on this podcast, so let’s start to…I knew this was gonna happen because we have so much to talk about but the example, we used to always give that I think illustrates a lot of the challenges of not just 13 F’s but money management in general, is if you replicate what Buffett’s done and say just take his top 10 stock picks, rebalance when they’re public quarterly, it gives you, approximately the same performance as Berkshire. I think it’s actually a little bit higher, but going back to like 2000, he stomped most mutual funds on the planet, but much of the outperformance came in the internet bubble aftermath. And whatever your alpha concentrated manager may be, in this illustration stocks, they go through these periods of not just one or two or three years, often sometimes it’s more than that five or 10, and under performance or versus a certain benchmark value, obviously has been one that’s really struggled this past decade, and yet still be potentially valid as a manager. So many institutions, academic research shows, and individuals obviously lumped in this, they want to measure people on a quarter, a year at the most, maybe three, if you’re super rigorous but almost never more than that. How is that something that as investors we can deal with? Is it something we can deal with or is it just an insurmountable, impossible problem?
Marc: So that’s the hardest thing in the world, right? It’s not possible. So one of the op eds I did that Bloomberg actually carried was actually on this topic that again, not…I feel like I’m picking on the institutions, who do a lot right. Okay? But one of the things they don’t do right is, it’s always flavor of the month and they’re always like firing this guy because they had a bad year, they had a bad three years, and hiring the next guy. This is why I think indexing is brilliant to fix it. Actually there’s this professor at Arizona State who did some great great research. He actually reached out to me later, and I actually referenced him in a couple articles. And it’s actually funny. There’s so much academic research like the Miller, Modigliani all that style, Gene Fama, etc. All that stuff which, again, there’s like one really, as Gene Fama says, there’s one great investing idea a decade, renders three great marketing ideas a week. One of my all time favorite lines. To me that’s such a challenge and it’s like the hardest thing. So now, like me as a human being, right, where I have this innovation bias. I discount cash flows I love, you know, but like we’re value. And again, where I almost feel like it’s a that feels like March 2000 to me right now, right, that feels March 2000. It feels like when my buddy, Dave Rapaport, who left me a voicemail, on March 10, 2000, unbelievable. Union Carbide, Bank of America, Goodyear, like, literally March 10, NASDAQ 5000. And he was at Sanford Bernstein at the time which is deep value manager. Like you scratch your head, and you know, Snowflake had 100 times revenue and Google felt like almost like a value stock at 20 times or 30 times earnings. And like all this you know, Visa, at 35 times whatever the hell. Like, you know, there’s these things these poor ugly stepchildren who’ve been left behind, right, and have horrible tenure track record. What was it, Josh Brown, who’s like one of my favorites, it’s like, dude, they got terrible 40 year track record. Like, how long before value like value doesn’t work. But yet, when you ask me the question, I swear to you about, like when you ask me the question, it’s like I do not feel comfortable saying value is dead, and I’m not an idiot, to not be backing up the truck. When I can get amazing companies like General Motors at five times, Boeing at three times, like, cruise lines two or three times, and even away from COVID, you know stuff. I mean, General Motors, I’d argue, is probably helped by COVID. But banks at eight times, and the big, beautiful banks and energy companies and it’s the hardest thing in the world, right? It’s the hardest thing in the world. Which is also I think why thou shalt honor all four tribes. Because the value guys are like one day we’ll discount cash flows.
Meb: I think it’s a great framework. I’m looking forward to your article that you’re going to write. We’ve now forced you, publicly shamed you, into writing this concept. And there are certain structures that I think people behave better in. We’ve seen where they’re like the target date funds. People mentally, I think, view those as long term investments. Obviously, the pensions they’re locked into. I would like to see more innovation in sort of super low cost personal pensions sort of concepts annuities in that ballpark. Problem with annuities is they tend to cost an arm and a leg, but I think there’s some hopefully some listeners out there working on this problem. We’ve talked about some of our ideas in sort of this investment lockbox approach where you’re sort of locked in for 10, 20, 30, 40 years, and then it allows you to do some of these tilts and calibrations that you’re talking about where you can over rebalance to things that look totally crazy but the structure…People love to talk about having a long term horizon, but don’t behave like it. And to trying to align the structure with that sort of mental concept. I love the idea, there’s just not a whole lot out there yet, that looks great. Because people can just click and sell everything today or tomorrow, and that’s usually not advantageous.
Marc: Right now you’re Robin Hood they’re like clicking on options and leverage. Yeah, which are wildly levered on wildly volatile times five. It’s crazy. That sort of gave me this thought that’s so counterintuitive. So, private equity. Actually, isn’t this super great asset because if you read what pension funds inevitably did was they buy the high yield bonds that are garbage. Actually, riskier than typical SP 500 stock as it sits by more debt, so complete garbage. And they buy a lot and their LPs and the two and 20 private equity funds, and they’d just be better off owning the whole cap stack in a small cap version. They actually would have done better. But even private equity firms that do well it’s like, so one of the smartest guys I know, said yeah, hedge funds put all their money in private equity. And I know he thinks like I do, and in fact he also has the second step of the thing I joke, that I call the Levine ratio, which actually PNI published a piece I did, of you know, net alpha over gross alpha. It’s like this needs to be a fair pie split. Private equity dies on that hill, okay. Right, if it’s good returns but the other guy’s again buying sports teams, and I’m getting a few bips, and it’s like, it should all be P and E. And it’s for the reason you said it’s like, because when you invest in private equity you actually can’t sell. When you’re…So, I talk about the morning, the horror morning, when the stock market closed up, but what about the board meeting, the Zoom board meeting because we’re all inside, right, when all the trustees come together and they’re scared out of their minds and it’s like, there was all this private equity, it’s dumb reason to pay two and 20 to somebody, okay, but it’s actually got some validity of the values of locking the thing away. And my god, so if you could basically 40 bips or 70 bips, whatever, just don’t…I say this to my wife. I say, don’t let me out. Don’t let me near a keyboard. Okay?
Meb: Some enterprising, more innovative listeners could figure this out. There’s an old podcast we did with Paul Merriman, where he gives each of his kids 10 grand when they’re born, grandkids, puts it into a Vanguard index variable annuity, but then wraps it in a trust, so they can’t touch it for 50 years. So by the time they’ve retired that 10 grand if you compound at 10% but I’m just doing the math to make it easy, is worth a million dollars. Now, how many people are willing to lock something up for that long? Of course, they’re not, but that concept, there is some more there, there. Like the benefit to the investor is in many ways a feature not a bug, the lockup. The benefit to the manager of the private equity is locked up for two and 20 for 10 years because by the time people find out if they did anything good, they’re either like you mentioned, they did great, or they did terrible, in which case they’re out of business. There’s no career risk, anyway. We’ve got to start to wind down, because otherwise we’ll just keep you all day we’ll just have to have you back. This has been one of my favorite podcasts and the longer ones usually are. So we’ll end with sort of two final ideas or concepts. One, it’s 2020. We’ve seen a lot of weird shit this year. This past decade. Not just in the real world, but in financial markets, we alluded to a few early. And we still got three months ago, so who knows, but futures trading negative. We’ve had gold at all time highs we got interest rates at near zero in the US and negative elsewhere. As you look to the horizon, and you can take this in any direction you choose, and think about A, either the asset management industry, the real asset money management space, so opportunities of funds investing in a world of zero percent interest rates. The future of this whole space, I’m going to give you a blank canvas. Anything have you excited, super worried, on your brain that you’re thinking about? Anything come to mind?
Marc: Well, two things. We’ve talked a lot about the 13 F. So, that, I’m really excited that that has kind of the perfect second equity asset, so that’s why it gets sort of systematic. So, the 60/40 portfolio that we all, just rolls off our tongue like nothing, which is great…60/40 is great. 60 percent stocks, 40 percent bonds. Lock it away. Rebalance once a year, once a quarter, whatever the hell it is you do. Stick to it. Index, whatever. Do, you know, this much percent domestic, international, emerging markets, treasuries, corporates, blah, blah. Do not call high yield bond, is riskier than equities. Had to get that in. So the future of the 60/40, when you sit down at a computer or your phone and you look at the ETFs, the annuity, right, the B and D, you look at the ETFs of all bonds or annuities, or corporates, again, staying away from that total garbage of high yield, which is not even, 4, 5, to 7. I feel like I would always tell my dad, if you’re getting like a 4% to 5% yield, what about, if you gave them a dollar and they gave you back five cents, what about the 95 cents that they’ll have? I’d worry about that, dad.
So, in a world of no yield, what the hell is it that you do? And it’s, you know, 60/40 grew out of a time when, you know, 5%, 6%, 7%, maybe even 3% or 2-and-a-half-percent treasuries, pick up a 100 bips and spread on a single A corporate bond or mortgage backed security. Squeak out with 4% or 5%, maybe. And that was…We are in that. Blows my mind, where we are, because I don’t want to buy a bond. And I argue with my own good friends, who I respect. Smart guys, brilliant guys. I’m like, geez, 60/40 feels right when bonds have a yield. But if bonds don’t have a yield, first of all, it might as well just be cash. Because cash has no yield and bonds have no yield and now you don’t have a risk of punch bowl being taken away. I’ve spent a little time with that tribe. So, cash is, I guess, a bigger out, right? Because the value, that part of the portfolio can’t get you any money now, so now it’s just pure ballast. It’s pure, I’m not jumping out the window, right, when the S&P drops like 80 percent in a day. The day after Donald Trump and his son in law had a conversation not to…because they didn’t want to split the stock market. I’m not a Trump hater at all. I just think it’s really funny that was the reason. Your point, son, what the hell do you do when value has a 40 year track record of getting its ass kicked by growth and getting annihilated, the trailing kind of tenure. Right, this is another, this is like a mega question, isn’t it?
Meb: What’s the answer? What does one do? I don’t know.
Marc: I think, you probably have more equity…The classic 60/40 is more like 65/35 or 70/30 or some other number, that’s higher than 60, because I don’t have yield anymore, in my bonds. And I think it’s not bonds. I think it’s mostly cash and maybe a tiny bit of bonds, per a purely bizarre negative interval or whatever the hell. So I think 60/40, again, what the hell do I know. Okay. So I feel like a more kind of a risk type guy, so I’m 80/20. But to me, the question is like what we know is this. We know that 100/0 is kind of stupid, because even Warren Buffet’s estate is 90/10. We learned in investing 101, free lunch is sufficient frontier, slap 10 percent treasuries. What you gain, you’re not losing so much.
Meb: Right, so…
Marc: No one should be less than 90/10. And so, that’s okay but I want to have some ballast, and 10 doesn’t play it. Like, so that’s to me, I don’t know. Maybe it’s 70/30, 75/25, two thirds, one third, as you are. Maybe you’re like the genius out of everybody. And two thirds, one third ballast, right? Like one third cash, I can buy groceries with. I can sleep at night. Maybe that. But I think 60/40 doesn’t feel like a keeper. Because, I don’t know. When is this thing going to end? Like this is not some temporary…right? We’ve been living with it for ten years. Yeah, we’ve been living with a form of it for ten years.
Meb: I was going to say, we need to dust off your old securitization chops and start applying that to new, modern day, asset classes, like sneakers. I was laughing a bunch of these sort of modern platforms, but that’s the old fart in me, compared to the younger generation. Because I was really tempted, Nike introduced a special, they call it, on the dunk champion, high top, or whatever it was, but it was in my alma mater, Virginia colors, special release, limited edition, and sure enough, all the speculators bought them, and the only way you could buy them is on the stock ex and other exchanges where they’re $250 each. Listeners, I’m not going to disclose if I bought a pair or not, but I joked with you before the show, the only benefit of this pandemic is that UVA has been champions for two years now. But alternate, there are some…and we can do this next podcast, there’s some alternate, sort of interesting ideas of finding yield in all together different ways, potentially in this decade than in the past which was government bonds. One of my oldest, of course, just because my background is farmland, which has been kind of garbage the last five years, but incredible the last 10 or 20, but that’s a multi hundred year old idea. All right, Marc. We’ve got to start winding down some time, otherwise, I’m going to keep you all day. Question we ask all of our podcast guests, most memorable investment, personal or professional, good or bad. Anything come to mind?
Marc: In you know, first quarter of 2009, our book is badly underwater. I joke sometimes, my partners are kind of hiding under the desk. Kind of sort of, but sometimes I hide under my desk, too. So there is a Babson is a…Babson is a terrific lend…Like it’s so boring. Senior secured lending, underlying CLO’s, Babson is kind of as boring as you get. And there’s a single A Babson CLO. So, you knew it was going to be a super clean portfolio, and it was on offer for like, 8/6. At our view, these are par bonds. There’s a 12 x on…lots of ways to go in. So, if your listeners don’t know, so, in a CLO, there’s a lot of like equity, there’s credit enhancement. So, there’s a portfolio with CLOs, but then there’s different classes of securities. We were not on the bottom, lots of guys underneath us and lots on top of us. But, we waited until something was 80 cents instead of 70 cents, because there are like…You could get a zero. Okay? So, because there’s guys on top. Okay. So it’s like… This is the best bond I ever bought. And this was like good size, like 12 million bucks and it was on offer for like 8 cents and Wachovia was our counter party and I’m like, 7 and a half. Right? And then we didn’t hear back that day. Then the next morning, they came back and settled. And the whole night, I’m like, what an idiot. Like, it’s a gorgeous piece of paper. It’s almost like, you can’t help yourself. Right, so even Mr. Index it, I can’t help but like… And then we have to protect ourselves from stupid stuff. We got the bond, right, and then we made a gazillion dollars, and yada yada. But it’s still a funny story, though.
Meb: That’s great. I have some similar stories about being a cheap bastard, but it was…I’m saying that lovingly, by the way. That’s a compliment. But it has to do with surfboards on Craigslist, so, another story for another day. Marc, it’s been a blast. Where do people find out? They want to read more about what your thoughts are. Where do they go?
Marc: So, I’ve got… So I put all my media stuff, I should put this on there as well, levineratio.com. I know that I update it occasionally. That’s all my old bids, you know, Wall Street Journal, etc. my CBC schtick and things like this. And I started to tweet, this is how I sort of came across you and Pop, which has been a blast just kind of dabbling, so, anyway, maybe you’ll read.
Meb: We’ll add it to the show notes. Don’t worry.
Marc: Yeah. So I’m around, and I’ve got to point out, before we end, I think that if there’s anybody in the country who is rooting for the Nuggets, right, it’s like what’s kind of wrong with you? This isn’t like good versus evil. I’d like to think, my Miami Heat are kind of the savior of Miami, and they’re the kind of team that you don’t know the players on the team. And so, we’re over here. We’re rooting for you. Unless they play in the final.
Meb: By the time this comes out, there will probably be a resolution to that, so fingers crossed. Hopefully, we will be blessed and both teams will make it to the finals. We’ll see. Marc, thanks so much for joining us today.
Marc: Thanks a lot, man. Thanks for having me.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us firstname.lastname@example.org. We love to read the reviews. Please review us on iTunes and subscribe to the show, anywhere good podcasts are found. My current favorite is Breaker. Thanks for listening, friends, and good investing.