Episode #293: Ted Seides, Capital Allocators, “I Want To Compound My Capital…But I Want To Do It Alongside Of People That I Respect And Trust”

Episode #293: Ted Seides, Capital Allocators, “I Want To Compound My Capital…But I Want To Do It Alongside Of People That I Respect And Trust”


Guest: Ted Seides, CFA, is the Founder of Capital Allocators LLC, which he created in 2016 to explore best practices in the asset management industry from the perspective of asset owners, asset managers, and other relevant players. He hosts the Capital Allocators podcast, serves as an advisor to allocators and asset managers, helps asset managers convey their story through private podcasts, and educates investors.  From 2002 to 2015, Ted was a founder of Protégé Partners LLC and served as President and Co-Chief Investment Officer. He’s also the author of Capital Allocators: How the world’s elite money managers lead and invest.

Date Recorded: 2/24/2021     |     Run-Time: 1:15:59

Summary: In today’s episode, we go all the way back to Ted’s early days working under the great David Swensen at Yale to hear what makes him one of the most respected Chief Investment Officer’s in the world. Then we move on to his famous bet with Warren Buffett and hear how the real winner of the bet was the collateral set aside for the duration of the bet.

After touching on what the Chief Investment Officer job entails and sharing the insights he’s learned from speaking with some of the top managers in the world, Ted shares how he invests his own money. We talk about Bill Ackman’s fund, SPACs, and even some crypto.

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Transcript of Episode 293:

Welcome Message: Welcome to “The 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 co-founder 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.

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Meb: What’s up, friends? Great show today. Our guest is the host of one of my favorite investing podcasts and is about to release his second book about how the world’s elite money managers lead and invest. Today’s episode, we go all the way back to our guest’s early days working under the great David Swensen at Yale to hear what makes him one of the most respected chief investment officers in the world. And then we move on to his famous bet with Warren Buffett and who here the real winner of that bet was. And hint, it wasn’t Ted or Warren. After touching on what the chief investment officer job really entails and insights he’s learned from literally speaking with hundreds of the top managers in the world, our guest shares how he invests his own money. We talk about stocks, ETFs, private funds and VC, Bill Ackman’s fund, SPACs, and even some crypto. Please enjoy this episode with the host of the “Capital Allocators” podcast, Ted Seides.

Ted, welcome to the show.

Ted: Thanks, Meb. Great to be here with you.

Meb: Last time I saw you in person, you were hobbling away in rural Pennsylvania, I think. Have you since recovered?

Ted: We were, yeah. Blisters on the seat, yeah, recovered. That was a while back.

Meb: I spent the next day in whatever rural airport that was in Pennsylvania, I can’t remember. I’m not a germophobe, but I try to stay away from those, like, airport massage chairs. That just seems kind of gross to me. Particularly, I was ahead of my time. In COVID, no one would do that, of course. But I think I was with Corey Hoffstein. I think I spent probably an hour and a half in one. I must have spent $30 in quarters. I was so sore. I think that was a long time ago, a lifetime ago. How are you staying sane in COVID? Are you in Connecticut?

Ted: Things have been good. Yeah, at home in Connecticut, just finished, as you talked about, just finished first ski trip with my kids. So we flew somewhere, which is kind of interesting. But yeah, everything’s calm.

Meb: Did you go out west, catch the big snow? There was a big dump last week.

Ted: Yeah. Well, no, we just missed that one. It was two weeks ago. So, yeah, went out to Beaver Creek.

Meb: Oh, beautiful. My crew is in Colorado. This photo, for the YouTubers, no one watches this on video, but the YouTubers, it’s from Colorado, in the Flat Tops Wilderness we took this summer. But we were talking about this before the show started, I bookended COVID. Last stop was Jackson Hole before COVID. Just took my first trip. The world, I think, is ready to get out of the house. My cinema indicators are firing. Ted, you got a new book. What’s the name of it?

Ted: It’s a shocking name given what I’ve been doing. It’s called “Capital Allocators,” subtitle, “How the world’s elite money managers lead and invest.”

Meb: It’s good. My favorite part, oddly enough, is you have a whole bunch of quotes in there, and some of them had me hee-hawing last night. So we’ll include a few of those during our talk. It’s not your first rodeo. You’ve written a book before and been featured in some others. We’re going to do something different today, listeners, and this is going to be really fun. We’re going to talk about how Ted invests his own money. But first, for those who don’t know Ted, we got to hit on a couple of highlights, and the first of which was you arguably have one of the most epic beginning stories out of college, first jobs I’ve probably ever heard. And a secondary question is, why in the world did you ever leave that position? Tell our listeners how you got started out of school.

Ted: So I graduated college in 1992, and for those who don’t know or remember, it was the bottom of a recession, not easy to find jobs. And I did the normal Wall Street stuff and had some interviews. And along the way, I interviewed with David Swensen at Yale. So I had taken a class of his. He used to teach two. I think he still teaches one. And had mentioned that they hire one person a year. And I didn’t know much. I knew I thought stocks were interesting, but I was not a 13-year-old investing in stocks. And did the interviews, got the job, and ended up thinking I’d stay two or three years and go to business school. He was big on the CFA, so I get my CFA, and I did that, but it was just fun. So I ended up staying five years and then leaving to go to business school. So the question is why.

It’s a fair question. There are times where I’ve looked back and wondered that. You know, it was my first job. I didn’t know much else. I would not recommend to people starting their career at the top of the food chain, which is where I was. Didn’t realize that, so I left. But at the time, keep in mind, David had not yet written his book. He is amazing. He’s a brilliant investor. He was an incredible mentor. He was like another father to me. But it felt like I was making a lifelong career decision if I was going to stay. There were no recruiting calls. There were no other endowment investment offices. I think there were no more than a half dozen in the country. And I don’t know and I don’t think there was another junior analyst in the kind of seat I was outside of our office, where there were a few, in the entire country. So it wasn’t like a profession. Now, there are all these investment offices, endowments, and foundations. And so, yeah, the returns were great, and the managers I met were great, but I thought I wanted to pick stocks and just wasn’t the path to do it. So I got into business school and decided to go.

Meb: Plus, it’s the ’90s, right. I mean, the beginning and a long, extended, just monster bull. Thinking back, at that time, the endowments, despite their great performance, probably really didn’t see at least relative halo until arguably the early 2000s. Is that safe to say?

Ted: He was still a famous CIO but not the GOAT CIO, at that point, of the endowment. The difference was where it was portrayed. I told a story that, in the five years I worked at Yale, I think there was one manager of Yale’s who showed up in an article in “The Wall Street Journal” in the five years I was there. That was Jim Chanos at the time. Today, every single day, you can read about a top venture capital firm in “The Wall Street Journal” every single day, money managers every single day. People didn’t even know who the managers were. And so it was just a very, very different time. And so, yeah, Yale’s returns were amazing then in spite of the asset allocation, because you’re in a bull market, and they were diversified away from, call it U.S. public equities. But that was all manager selection, with these just incredible money managers around the world. But within that field, people knew that he was one of the best. Nobody knew outside of it.

Meb: So you make the poor decision to leave. I’m laughing. I mean, your comment about starting at the top of the food chain, I heard a quote today, Charlie Munger is doing his Daily Journal Meeting, 97 years old, and someone asked him like something about the key to happiness. He’s just like, “Have low expectations.” That applies well to everything. Like, starting at the premier institution in the country is tough. All right. So you hop around, you go to Harvard for a little bit, you started Protégé. I want to pause here. I know you’ve told the story 1,000, 10,000 times, and it’s not really, necessarily, I just want the listeners to hear about the bet. But there’s one key part of the bet that I think is so wonderful, and we’ll get to it in a second, and that involves actual, the real technical winner maybe, which was the collateral. Can you give us a real quick summary of the bet?

Ted: Yeah, sure. So the bet, which started, initiated in January 1 of 2008, was a 10-year wager for charity that pitted effectively the S&P 500 against hedge funds. The way it was presented was it was the Vanguard S&P 500 index fund, and our side had picked a portfolio of 5 different hedge fund-of-funds, and there’s a whole bunch of reasons why. But at the time, the S&P 500 was trading at historical highs, interest rates were also at 4% or 5%, so there was no reason why the historical highs might be the case, and hedge funds were doing well. So that was the bet, looked great for about a year and a half, and I don’t know if there was another quarter in the subsequent eight and a half years that hedge funds outperform the market. But the collateral is a really fun story.

So the idea of the bet was that we wanted $1 million to go to charity at the end of 10 years, and we prefunded it and split it, so my partners and I and Warren. And the game theory was if you pledge $1 million and, at the 10 years, you only have 800 there, that just doesn’t look good. And if you pledge $1 million and you have like $1.2 million or $1.3 million, that’s great, but $1 million is $1 million. So we just bought a zero-coupon bond. And the bet got publicized. It’s actually hard to make a charitable wager legally, and his lawyer found this charity called the Long Bets foundation, I think it’s longbets.org, and they post it on the site. And if you’ve read the blog at the time, which is a great stuff about decision-making, what were people thinking at the time, the only thing anybody said about the collateral was how the charities were the losers. Like, “Why would you do that? You know, hedge funds are great.” No, no, the market’s great. Warren Buffett. All right, so January 1, 2008.

So about five years in, I don’t remember exactly when it was, five, six years, and I called Warren one day, and I said, “Hey, do you remember what we did with the collateral?” And he paused for a second, and he just started laughing, because we’ve put it in a zero and then interest rates went to zero. So it was $640,000, Jan. 1 of 2008, and 5 or 6 years later, it had accrued to like $960,000. So we had four years left, and it wasn’t going to make any money. What we were going to do is do a bet within a bet and take the collateral, split it half in Berkshire stock and half in our fund-of-funds, and then have like a bet within the bet. But it turned out that that charitable organization holding the capital was not an accredited investor. So they couldn’t invest in our fund-of-funds, so we just put it in Berkshire stock, and then Warren wrote a put at a million just in case. That was about a month before his first buyback. And over those next couple of years, the market continued. The charity, you know, his charity was…I’m trying to remember what the charity was, some fantastic, you know, charity in Omaha.

Meb: It was like the Boys & Girls Club or something.

Ted: I think it was, something like that. They ended up getting $2.2 million. So it was the single best investment, it was better than the market, it was better than hedge funds, it was one trade five years in, the one thing that no one foresaw, including us, and just goes to show you, you just never know in the market.

Meb: It’s so good. I love it. You still never disclose the funds, right, to my knowledge. All right.

Ted: Yeah. I mean, it didn’t really matter. There was a reason why. One of them was a pseudo-family office, pseudo-fund-of-funds, and they said they would agree to participate on the condition that their name wasn’t disclosed. So we just said we just won’t disclose any of the names.

Meb: As far as the general categories, I mean, obviously, we can all be Monday morning quarterbacks. Is there anything, not specific funds, was there anything about the approach that…because I mean, I imagine there’s been, obviously, rolling time periods if you were to roll that forward every year for the past 20 years, what percentage of the time, I mean, my god, the S&P’s stumped everything at this point, but is there anything you would think about as far as the general allocation or categories? Was it mostly long/short? Was it mostly market neutral?

Ted: I mean, you hit the nail on the head. Ultimately, it didn’t matter, right. It was S&P wins over everything. At the time, so you’re going into this 10-year bet, and Warren’s argument is fees and costs. And that’s right, but that’s right within the contained universe. And the S&P 500’s a contained universe, but what hedge funds are playing isn’t at all. So you could make whatever bet you wanted to. Part of the reason why we picked fund-of-funds was it just looked like an easy bet, just where the market was trading. You would bet on anything else but the S&P at that point in time for 10 years. And so hedge funds seemed just because of anything else. But in the spirit of the bet, we said, “Okay, let’s make long/short equity.” And it was more global than the U.S., which ultimately hurt too. In fact, one of the funny side note to the bet was, had Warren picked the Morgan Stanley world index instead of the S&P 500, the bet would have almost been a wash. S&P is like, U.S. is about 40% of the Morgan Stanley world. Just the difference between the performance of the S&P and the performance of equities around the rest of the world was enough to make up all the noise about hedge fund fees and underperformance of hedge funds, just that difference. So there are a lot of sub things you could do differently. You could think about it in a much more sophisticated way. You could risk adjust it, you could tax adjust it in his favor. None of those things mattered. He sort of said S&P, that’s the bet, you take it or you leave it.

Meb: I would have taken that bet 99 out of 100 times, maybe 100 times, given where markets were, and again, today. The funny thing is we’re spending a little time updating an old book we did on asset allocation, and we published it I think with data up till 2014, walking it through to 2020. It takes asset classes back to the ’70s and all these famous allocations, so Dalio, El-Erian, Swensen, Buffett, permanent portfolio, yadda, all these. Listeners, it’s free to download online. And the takeaway was that almost any of the allocations, and these are buy-and-hold, rebounds, passive allocations, they all did great and all about the same. But the stupid Buffett portfolio, what he says like, as a state or whatever, 90% S&P and 10% T-bills, is like because of this monster run the S&P had, it’s like the winner of all of these, which is so preposterous because I don’t know going forward anyone that would take that massive amount, in my opinion, of risk. But I’m nervous to actually publish the updates because I don’t want people extrapolating that you should just put all your money in the S&P. So almost anything looks worse in comparison.

Ted: Yeah, that’s right. And you know, the S&Ps had a toned dynamic these last dozen years too. We used to laugh at countries like Korea where the index was really just Samsung. Like Samsung stock was 40% of the index. You’d say that wasn’t representative. And now, we’re getting there in the U.S. It’s tech sector, five dominant companies.

Meb: Yeah. Although, potentially, we’re recording this in February 21, I think the winds of change have already started. I feel like there’s a disturbance in the force. I think it happened since last March, you’re starting to see a lot of the dispersion, U.S.-foreign, U.S. dollar value, small-cap, almost everything seems to have reversed. We’ll see. Things change quickly in 2021, but I think we may have reached an inflexion point. Who knows? How many, at this point…so podcasts, we’ll call it 200. And by the way, listeners, if you haven’t checked out Ted’s podcast, it’s on my very short list of favorites. It’s probably the only podcast that really talks to the real money institutions, you know, the 10 billion, the 50 billion, the 100 billion very serious money managers. So podcast, let’s write down 200. Besides that, over your career of the past 20-plus years, how many CIOs do you think you’ve spoken to? Meaning, PMs and CIOs.

Ted: I mean, the years that I was running Protégé, it was the hedge fund-of-funds, those 14 years, we’ve probably met 400 hedge funds a year. And I was probably myself in 200, 250 of those meetings. That’s a lot. There’s a couple of thousand just from that period of time, and I was doing not a lot, a little bit less so in the last few years, and then every conversation you have with people along the way. So yeah, definitely a few thousand.

Meb: So the book is really fun, and it’s a little different than I think what people may expect out of it. And I feel like you could fill up an entire book just on the stories alone, because there’s nothing that the personalities gravitate towards more than the hedge fund world. I mean, I think back to interviewing out of college a couple of hedge funds, and there wasn’t a single normal one. The first one I went to, I think, the PM was in the background shouting for about an hour and a half, and I was like, “This is what this is like. This looks absolutely terrible. This looks like my all-time nightmare.” And I could go on and on and on, so I imagine you have some. But why don’t we start, and feel free to tell any of these stories as we go, why don’t we start with, for the people who are listening who aren’t that familiar with the big money world, what does a CIO do? I feel like they think like it’s Axelrod on “Billions” combined with, I don’t know, Warren Buffett. But really, like, what does the actual role entail for most of these shops?

Ted: I think it helps to start with the perspective that they have when they’re showing up every day. So take your CIO who’s entrusted with managing a big pool of capital, multibillion-dollar pool of capital. Maybe it’s on behalf of an endowment, or a foundation, or a family office, or a pension fund. It doesn’t really matter. And they often don’t have big investment teams, for any reasons why, but they really don’t. And so the question you have to ask is, what are you trying to do with that capital? And how do you want to go about doing it? So generally speaking, it’s not that hard for them to figure out what they want to do. There are some spending needs. It’s basic, figure out what the spending liability structure is and then what your time horizon is, how you want to invest over that time horizon. And then the question is, how do you want to execute that in the best way possible?

And to do that in the market, broadly defined, you have a choice. You can either try to do it yourself, or you can try to find who you think is doing it better than anyone else and partner with them. And there’s clearly cost to that. But when you start getting into the subtle doctrine of diversification and what it really means, and this came from Dave Swensen, when Dave Swensen started at Yale, most of these portfolios looked like 60-40, and 60-40 was like U.S. stocks and bonds, and his first seminal insight was there’s no diversification in that. I mean, there’s some, but there’s only two asset classes. And for most of these pools, they have long duration liabilities, so they’re very equity-centric. And that’s where David’s already. He said, “We’re going to be equity-oriented and diversified. We need to diversify what that equity risk is.” And so he gets a label for saying he loves liquids, so alternatives. That’s true, but what he really did was say, “Well, U.S. equity market risk is not the only equity risk we should be exposed to. Let’s diversify away from that.” It turns, U.S. equity is the most liquid in the world. So by definition, anything else you did was going to be less liquid.

So first thing they do is establish this approach, and let’s say the approach is diversified multi-asset global. Then you have to go about figuring out how you do it. And the way most of these people have chosen to do it is to find managers that are experts in particular areas and then partner with them. So they’ll have portfolios that might be 80 to 100 managers that canvass U.S. equities, international equities, could be fixed income, venture capital, private equity, real estate, real assets, timber assets, energy assets, and then build a portfolio that way. So what they develop the expertise in is structuring a portfolio and identifying that talent and the factors that go into success over time and then partnering with those people and trying to be long term like everybody else does.

Meb: I think most people listening to this, there’s been a pretty big shift, at least in the narrative, I don’t know how much in the actual allocation on the big money side, for this trend towards allocation on a passive, you can call it, but just kind of a buy-and-hold exposure. It doesn’t have to be index market-cap-weighted but just in general versus picking managers. How much of a shift is actually happening in the institutional world? Is it still mostly picking of managers and active within the sort of buckets, or is it an actual real shift occurring?

Ted: It’s not very prevalent in the institutional world and certainly in the people I talk to, and there’s a bunch of reasons why. We all know the arguments for passive management. Let’s just start with rearview looking, like S&P 500’s beaten everything, interest rates have gone to zero, so. And there’s also this notion that it’s always a zero in some game and increased competition and ubiquity of information, all that kind of stuff. The problem is it mostly applies to U.S. equities and fixed income. So even like Charlie Ellis, who I’ve had on my show a couple of times, if you ask him about emerging markets, he would say, “No, no, you don’t want to index in emerging markets.” You’d say, “What about small-cap equities?” He’d say, “No, you don’t want to index in small-cap equities.” And then, “Well, what about Europe?” It’s like, yeah, you know, probably not really Europe. So you certainly can’t index in private equity or venture capital or in real estate. And so the guy who writes the book “The Index Revolution” is sort of saying, if you really want this type of a structured portfolio, you actually can index. So that’s the first reason why they don’t.

The second reason is just this general belief, and to be fair, it’s been the same belief for a decade, but this general belief that markets are priced at levels that, going forward, returns are not going to meet spending obligations. And so, with rates at zero and valuations of, say, the S&P where they are, you just can’t hold that portfolio and expect they’re going to meet your spending needs. You might see a little bit of indexing more of U.S. equities. For a long time, a lot of these pools of capital, the small amounts of fixed income they have, have been very plain-vanilla deflation hedged, kind of indexed, U.S. government-type bond portfolios, but not much else. I think that’s much more a retail, and not just retail but like relatively unsophisticated retail that should be indexing, piling their money from being the real patsies at the poker table just saying, “Okay, we can just sit around with everybody else.”

Meb: Yeah. It feels like so many of these real money institutions, it’s such a difficult task, particularly if you involve a lot of the vested interests. A good example could be, I don’t know, Harvard or CalPERS, where you have alumni, and students, and employees, and future students, and on and on and on, all the various levels of interests, what they want to see transpired, and also varying levels of understanding what’s going on. I remember an article on “The Harvard Crimson” complaining about Harvard’s performance but then, a few months later, complaining about Harvard’s compensation. I know. So it’s like really a difficult, impossible task. Any other thoughts on how that world has evolved or is going to evolve in the coming years before we start to transition to some other topics?

Ted: Yeah. I mean, look, I think it evolves more slowly than anything else, and for good reason, right. These pools of capital are very, very long duration. They shouldn’t be evolving quickly. You do see some incremental changes and enhancements on the margin and probably the most notable with some of the leading edge institutions in the last couple of years. One is a little bit of a movement away from asset allocation, and again, it’s on this concept that, if the asset class buckets aren’t really going to get you there, it’s going to pay to be more opportunistic and to focus on what they perceive their area of expertise is, which has increasingly evolved to manager selection. So you are seeing…so MIT is probably the most pronounced of that where, a bunch of years ago, Seth Alexander put out a piece that said like, “We pay attention to asset allocation for risk purposes, but we are good it as picking managers, and we’re not going to let asset allocation buckets drive our manager selection. We can do overlays. We can do whatever we want for that.” So that’s one.

The other, and you really see this more in Australia and probably most pronounced in New Zealand, with the New Zealand’s Sovereign Wealth Fund, is this sort of notion of investing in factors versus asset classes. And the factors aren’t quality growth, inflation, deflation. People have been, particularly, New Zealand has been really clever about what they think drives returns and how to structure a portfolio. They have a portfolio that has no U.S. equities, because it doesn’t fit into one of their factors for how they’re going to drive returns. But yeah, for the most part, these are very incremental changes. They’re not at all kind of revolutionary changes.

Meb: Thinking about a lot of these institutions, theoretically, they have the single biggest advantage, which you alluded to, being this long-term time horizon that trips up individuals, professional allocators, all the way up to the top. I mean, we see all the academic evidence time and time again. And the simplest way to describe this tug of war is, I’ve done this poll on Twitter, but many others have published similar, I said, “How long would you give a manager underperforming before you fire them?” And I forget what the percent on my Twitter was, but it’s essentially, vast majority, under a couple of years, and 90-some% under 4 years or 5. And then if you look at Vanguard, who’s put out some great research, we’ll put it in the show notes, but saying, even if you look at all the mutual funds in existence for the past 15 years, and even if you look at the ones that survived, and on average, listeners, about half of funds close or merge every 10 years, and then you look at the ones that outperformed, how long are these streaks of underperformance they go through, and it’s like 98% went through a period of, I think, 4 years of underperformance. And so this huge tug of war of this problem that people have, other than theoretical long-term time horizon, which we all should share as a goal, right, everyone says they have that goal, how do you actually think about either allocation, guardrails, or behavioral reasons not to mock that up? That’s like the number one impossible allocators. When do I know this is a bad investment? When do I know that it’s just a bad run?

Ted: Well, let’s start with whatever the base rate or baseline facts are, which is we’re going to mock it up. We know we’re going to mock it up, whether it’s stocks or managers, it doesn’t make that much of a difference. One statistic that I’ve seen in the last year, I think it came from Michael Mauboussin, about stock pickers, it’s also true for manager selectors, which is, generally speaking, people are much better on the buy than the sell. And what’s been tricky that I experienced in my years was, first, you start with the awareness that people chase performance. And so you try to create investment theses and risks that aren’t tied to the things that would give you that behavioral bias against you. So you try to be qualitative instead of quantitative. You might lay out a bunch of theses that could change and risks that could surface to try to stay the course. What you then find is that, invariably, you’re in an investment meeting, and someone’s underperformed, and someone on the team says, “You know what, this manager just isn’t as good as we thought. We had already laid out the risks. The risks played out, so we were right, but they weren’t as good as we thought.” Those conversations always happen after a period of bad performance, and I have yet, with one exception, which I can explain, been in a situation where someone walked into a room and said, “You know, we’ve been investing in this manager for like eight years, and they are killing it. Let’s redeem.”

Meb: Never heard of that in my life.

Ted: Never heard of it. Only time this ever happened, and it happened with me a couple of times, it does happen when you’re invested tactically. So like, when you’re shorting subprime mortgages in ’07 and it plays out, there’s windfall gain and you move on. But that’s not what most of the manager selection opportunities are. So you know going in that there’s just this bias. If someone’s performing well, you’re not going to redeem. And there is some level of turnover. And so you try to be patient. I mean, I got lucky in that I’ve watched this on the other side in my years at Yale. I mean, I don’t know what the average tenure of their manager relationships is today, but I know after like 18 years or 20 years, when David was at Yale, it was like 14 years. And you know you learn a lot in those first couple of years, and you turn over things more than you would. They have been uncanny at staying the course. And at times, knowingly, probably staying too long but very Buffett-like in that way. And I think that that does allow you to avoid some of the behavioral biases. And frankly, there’s movement in private equity, and there’s a lot of market dynamics of why private equity’s been good and why it might be overpriced today.

But one of the things that private equity allows everyone involved to do is get out of their own way. You make the decision once. It doesn’t matter what happens. You, as the chief investment officer, can’t change your mind. Your board can’t tell you to change your mind. The people that own the companies aren’t going to turn around and tell it really quickly. And any investment strategy, if you say, “You know what, no matter what, you’re in this for 10 years,” is going to do a heck of a lot better than engendering all the behavioral biases of the decisions and the mistakes that everyone makes along the way.

Meb: That’s one of the things I’ve changed my mind on in the last decade-plus is the concept of illiquidity being a feature, not a bug, because thinking of so many examples, and not just to the downside, to the upside too, how many people, they had an investment that doubles, they’re like, “Oh my god, amazing,” sell, and then it goes on to 10x or 100x. And we’re not just talking about GameStop or crypto. I mean, we’re talking about all sorts of stocks and investments. People get it when it comes to one investment, which is housing. They can say, “Look, my parents bought this house for 100 grand. Now, it’s a million.” This is why real estate is such a good investment, and on average, usually, it’s not that great of an investment. It’s just that it had the time to compound. What are good sell reasons? For someone who’s allocated for years, what are reasonable ways to think about, “Okay, how should I establish sell rules? What are some of the criteria that are okay?

Ted: Yeah. I mean, one of the fascinating things about the seat is those criteria can involve both the organization and the underlying assets or investment strategies. So you know, at the organizational level, change is always a sign. Some change is natural. Sometimes allocators overemphasize change in an organization. But if you have important people leave, if you have friction dynamics that create…these are organizations and organisms that have to make decisions. And so that’s probably the biggest one. And then you’ll also have strategy levels think markets change, opportunity sets change. And you may have hired a particular manager for an investment strategy that maybe you lose confidence in them in executing that strategy and you still want to be involved in the strategy, or maybe the strategy is no longer attractive for the long term. It can be lots of the little things. I think most of the decisions and changes that get made are very subtle. It’s sort of pattern recognition with a hope and a belief that you’re right and a clear cognizance that you might not be and you’re going to make mistakes.

Meb: How do you kind of think about…I mean, and this is hard to do, harder for everyone I think, not getting caught up in the hot, shiny object of the day, and thinking through an actual long-term allocation.

Ted: Yeah. I mean, it’s a little bit easier in that seat because you don’t really have the pressures, the short-term pressures other people face. So think about the crypto world right now. It’s clearly the hot, shiny object now. Probably was, to some extent, in 2017 as well. There were no institutions that cared in 2017. And now, they’re starting to pay attention. You don’t see a lot of activity. To the extent you do, they’ve probably invested a few years ago in a venture capital fund, because the whole ecosystem feels like a venture capital investment, whether you’re buying Bitcoin or actually investing with Chris Dixon, Andreessen, or something like that.

Meb: And it gives them a little arm’s length career risk. They can say, “Well, it didn’t work out.”

Ted: Yeah. I mean, that’s always the inflexion. So the inflexion in the conversation comes from when people in the boardroom, in the past, would have said, “Well, why would you do that,” to “Why aren’t you doing that?” And I experienced that with hedge funds kind of back in 2002. You went through 2000 to 2002, and hedge funds generally did quite well when the market didn’t. And before then, even though I had had exposure to them a long before Yale, most institutions didn’t. And David Swensen then writes his book. And after that, hedge funds do well, and so now you have, like, real-time market evidence that this thing he was writing about made sense. And right around the time when we started Protégé, you’d go and talk to institutions, and in the boardroom, people would be saying, “Why don’t we have these hedge funds in our portfolio?” Where like three or four years before, with certainty, that same board would have been saying, “Why would we ever do this?”

That’s when those changes happen, and I think we’ll see it in the crypto world, depending on how it evolves over the next couple of years. And it’ll start with Bitcoin, maybe Bitcoin and Ethereum, and somewhere down the line, we’ll see how the whole ecosystem evolves. There isn’t a lot of change, and it’s for the right reasons. Some of it is job risk, but a lot more of it is David Swensen used to come in the office every day and think as if he had a perpetual time horizon. He really did, I mean, and you could feel it. And the number times someone would say, “Ah, they’re so short-term focused.” And that might mean three years. What I’ve learned since is that the long term really is rarely longer than three years and maybe five in some situations. Private equity firms used to own businesses for a long time, and even they only own businesses for that period of time now. So there are very few people like David at Yale that really have the right governance structure in full alignment so that they can think for the really long term even if the pool of capital is going to be around for much longer than the principals and the seats.

Meb: You gave it an example in your book, and I can’t remember if it’s you or one of the allocators, but talking about how someone’s talking to a hedge fund or a PM and saying, “Look, we’re onboard, ready to allocate.” And then you go talk to the board, and the board’s like, “No.” Is that a good thing, good check, bad check, a huge pain in the butt? There are so many cooks in the kitchen, if that’s a way of saying it.

Ted: Yeah. I mean, that’s the biggest challenge and something I didn’t appreciate really until starting the podcast of how big the challenge that is for a lot of CIOs. Part of that was because Yale’s governance structure is really aligned and that doesn’t happen at Yale. But yeah, I gave this story in the book of, and I won’t say the institution, but there’s another Ivy League institution that, for many years, it’s better today, but for many years, it was notorious for bad governance. I never understood what that meant. And I asked one of the former CIOs, how many times when you had an investment recommendation that clearly fit into the policy statement and all that stuff, it fit, what percentage of the time did that get turned down? And he said 60%. Which you’d say, “Wait, didn’t you, like, talk to the board members ahead of time? They knew what was coming.” He said, “Yeah, they would all say great, and then they’d get in the boardroom and fight with each other.”

So that’s an extreme, probably the most extreme example that I know. But the whole structure, right, most investment offices have one of two structures. Either the people in the office are tasked with making those investment decisions, and maybe it’s within bounds of asset allocation, or every decision goes to the board, and the board approves it. Well-functioning organizations, those things are harmonized, and you don’t have a lot of those situations. But it’s a challenge, and the person in the CIO seat has a boss. They might be the CIO of a big pool of capital, but they are reporting to a committee. They are reporting to a committee. They are reporting to a family, whatever it is. And they have to figure out not just what investments should they make but what investments should they make and how do they get those investments approved.

Meb: I think it’s important, and alluding to this importance is under the section on investment frameworks. You weren’t leading with strategy and process, you were leading with governance. And we also talk a lot about investors, and most institutions have this, but almost never does an individual or even a professional financial advisor write down their actual process too, and talk about all of these things, and have a policy portfolio or a whole program put together. And it’s useful to at least think through and then sit down with your family or whatnot. I think there’s probably an opportunity for somebody to build out an education curriculum around this sort of concept and help people. I know some of the big investment managers do this in-house, but I think having it broadly available would probably be helpful. Morningstar talks about it, Christine Benz, but particularly useful. I want to save some time to get down to what we are going to talk about in this podcast to be a little different, but as usual, things go off the rails. All right.

So you’re in the seat of someone who’s spoken to thousands of managers over the years, all the biggest institutions in the world. You’ve seen everything, possibly, that one could see. So this is going to be fun, because we’re going to talk about how does someone in your chair actually put this to work. Ted’s agreed to open his kimono. For the people watching us on video, he’s slowly undressing right now. Just kidding, he’s not. So, Ted, talk to us about how does this actually play out in the Seides allocation. What do you do with your own dinero?

Ted: So pretty interesting, right, in the sense that, for many, many years, I was investing in a certain structure. Yale or Protégé, we’re investing in hedge funds. And then you step out, and you’re on your own, and you say, “Okay, like, what do I want to do?” And I think, to some extent, there was a little bit of initial trial and error, but then I got to a place where I was blending what I know with what I think, like, my own competitive advantages are. So you start with what is the structure of what I want to own, like, what’s the purpose of the money. And for me, it’s like, well, I just want to be casual, positive year-to-year in my life, and then I can invest for some period of time. Though I like liquidity. I believe in the you never know. So I’m not going to take 30%, 40% of my money and put it in private assets that I can’t see for 10 years, just because I just don’t like it. Not my comfort level. It’s not even a risk question. It’s just my comfort level. So you start with that.

And one of the things I talk about a little bit in the book, which is very true of me and everybody else, people come to these seats, my own seat or a CIO seat, with like their own natural habitat. They got trained somewhere, they have some set of beliefs, there’s something they’re more comfortable with. I started in the business following public equity managers and then later in hedge fund. So the public markets are more my domain than the private markets, certainly more in my comfort zone. So when I started out, I was like, “I know all these managers. I know what stocks they own. Like, I’m going to look at 13F. I’m going to buy stocks.” And just like anything else, I was pretty good at buying stuff. This really only goes back five years when I left my old shop. And I was terrible at knowing when to sell. Like, something would wobble around, and I didn’t know anything about it, I wasn’t following the companies.

So I kind of moved away from that. My real sweet spot is investing in managers. And so then the question is, how do I do it? Some in the U.S., some international, some private, pretty straightforward in that respect. And then I kind of break it down and say, “Okay, where do I want to place my bets?” And so I have some money with some managers that I think are just exceptional. Internationally, I invest with WCM out in Laguna, kind of your neck of the woods to some extent. Terrific people. I love their strategy. They’re pretty growth-oriented, so I’m kind of sensitive to that, but I like that. I invest with them in both international and emerging markets. In the U.S., I’ve tended to do stuff myself a little bit. I like things I call manager substitutes, so something that might be available on the public market that is a stock but it looks to me like a manager, like an underwriting manager. So the easiest example is, a couple of years ago, I bought Pershing Holdings when it was at a 25% discount. I actually invested with Bill in the early years, and I know all the strengths and weaknesses. That’s my biggest position in the U.S. I’ve owned Berkshire Hathaway for a long time.

Meb: Can we talk about the Pershing for a second? Because this is a unique investment. And I think I was going to try to listen to their quarterly report this past week, but it was at like 4:00 in the morning, West Coast time. So I didn’t. But this is a unique bird, animal. Could you tell us a little bit about what it is, what they do? Because they had a pretty interesting 2020 as well.

Ted: Yeah, the whole history has been interesting. So Pershing Square, you know, Bill Ackman, and people, everybody knows the name, in…I don’t remember what year it was. The year before Valiant collapsed, so that was probably 2015. So 2014, I’m guessing. I might have the year wrong by one. Bill had a monster year, and he raised, I think it was a $3 billion holding company, listed then in Luxembourg, now it’s also listed in London. And it was effectively the same strategy that he was doing in hedge fund, which is a concentrated activist strategy. He’ll occasionally put hedging type positions on, clearly, occasionally short. I hope he doesn’t do that anymore for his own sake. And the difference with a holding company was a couple of things. The first is it was traded and listed, and he was telling everyone was going to trade in a premium. And like every other listing holding company, it quickly went to a discount. The second is he can put leverage on this strategy, because it is a holding company and there’s about $1 billion of borrowing. I think it’s a $10 billion working cap now. And because of his style of investing, he needs to have less liquid positions. So even a hedge fund, and his hedge fund had very long-dated liquidity, and people could take their money out, and that could prevent you from being activist in something where you want to go on the board and make change. And so he was going to have a larger concentration in the activist positions in that holding company.

So you basically have a concentrated portfolio called 8 to 10, large-cap equity positions run by Bill, the ability to hedge. He also did one thing that hasn’t been materially valuable for the holding company, but he didn’t want to discount the fees, but what he did was he let the holding company have an ownership in his private hedge fund business. I think it was 20% or something like that. So today, his private hedge fund business is probably only $1 billion, $1.5 billion, but the fees on that, some of those fees, would go to reduce the fees in the holding company. He had his problems with Valiant. He had a bad year or two. And in those, now you’re below your high water mark, you’re not paying an incentive fee. So you’ve got a, you know, 1.5% management fee or whatever it is, maybe a little bit less, and it was trading at a 25% discount. And you look at what he owns, they’re all very liquid names that trade in the market. And one of the old ways of thinking about valuing, I did a bunch of work on closed-end funds when I was at Yale that trade at a discount. You could say, “Well, you could go by the stocks, but if you do it through the holding company, you have to pay him management fees.” So you could discount the stream of management fee, and what you end up getting is like a natural 8% to 10% discount based on that stream, but this thing is trading at a 25% discount.

So he’s done really well. And then you have things that happen like last year where, right before COVID, he bought a bunch of credit default swaps, and he basically saved all of the money that he would have lost in the downturn in March and April. Turned around, closed them out, and then just rebought the same names, and he had a 70% year last year. So that’s an example of something I’ll do where, to me, it looks like underwriting a manager, but you know, like I have a high degree of confidence that’s going to be the market over time. So I’d rather own that than the S&P 500.

Meb: There’s a nice couple of extra points, and you hit the nail on the head. I mean, we talked about this during the last crisis. There’s a handful of these foreign listed funds. We talked about a third point during the global financial crisis. They have closed-end fund that traded at a 50% discount in net asset value. And these things happen on occasion, and in the closed-end fund world, you see it as well. And the challenge is, not Bill’s specifically, but to the rest of the closed-end fund space, they traditionally trade at discounts because there are high fees and a lot of them are just a mess. But some of these top tier managers, like Pershing, we were talking about this in March, I mean, I almost never talk about securities, but it was getting a 20%, 30%, I think it hit a 40% discount at one point. And the market wasn’t appreciating, and it didn’t understand that it had the credit default swaps. And Bill, to his discredit or credit, whatever it may have been, you know, he goes on TV and he was talking about it, so like people are even more confused. But, so you get access to a top-tier manager that has the ability, at least, to add things, and I think he’s re-added, I’m not sure, some of the credit default swaps but at a big discount. And that seems like such a no-brainer on the portfolio side. It’s such a big opportunity. There’s one more thing that they’ve been doing, which is they’ve been buying back. A lot of the problem with closed-end funds is you can get it in 20% discount, does no good because it never closes. And there have been a lot of these activist funds who’ve been trying to do this for decades. But Pershing has a feature, and we’ll put a link in the show notes, you guys do your own due diligence, that they’re allowed to buy back their own shares. And I think they’ve spent hundreds of millions, if not more, buying back shares as a natural discount closing mechanism. Anyway, take a look, listeners. We’ll put it in the show note, links.

Ted: So that’s public market exposure. And then, through the podcast, through relationships, I see some interesting stuff in the private markets. And again, my sweet spot tends to be betting on the people more than the asset. So things like I’ve invested with Jason Karp at Human Co. He’s a former hedge fund manager who has a holding company in the health and wellness space, and he’s someone I’ve known for a long time, and he’s just a super, super talented investor. I have invested with Brent Beshore, who is, like, the most popular social media investor, and kind of helped him, and Patrick O’Shaughnessy, structure that first permanent equity fund.

Meb: Brent, by the way, is probably the person that gave me, I’m convinced I had COVID last March. I was hanging out with him in Jackson Hole, the last trip I had. And he’s telling me stories, we’re chatting at the top of the gondola over a drink and listening, and I came back sick as a dog. So, Brent, if you’re listening to this, I’m pretty sure I blame you. Anybody said otherwise, but I don’t care what they say. I’m convinced you gave me COVID last March. Keep going.

Ted: So I’ve got a couple of single asset SPVs with managers I know. One’s a late stage private owned by an old friend of mine, Sean Grogan, who used to run a hedge fund. Another is a gold miner through a fund called Condire Resources, Ryan Schedler, down in Dallas, and just people I’ve known a long time who have their largest position, and they kind of offered up. So I’ve done a little bit of that. My most recent two investments are probably ones I’m most excited about. One’s a private equity fund called Arctos Sports Partners. I’m a sports junkie. I got introduced to the folks at Arctos because people thought they would make a great podcast. And this is probably a year, a year and a half ago, and they hadn’t even raised the first fund. And I was like, “Yeah, no. But maybe.” So this fund is buying minority interests in sports franchises. And the simple story is they are far better businesses than people appreciate, and people, including the minority owners, appreciate.

COVID had some interesting dynamics of forced capital calls to all the people who had vanity minority ownership interest in sports franchise and they’re used to clipping a coupon, they’re now being asked to contribute a capital, particularly in a large market major league baseball. And really, very, very strong team of people doing this. And so I got reintroduced to them. They had raised a billion, on the way to 1.5 billion in the first close. They had done a couple of deals. I started talking to them more and more. They’re not ready to do podcasts for a bunch of reasons. They will, at some point. And I just left after a couple of hours saying, you know, “I get this. I want to invest in this.” And the irony, for me, as a lifelong Yankee fan, is the first deal they did was in Fenway Sports, and my wife got me a Red Sox sweatshirt to wear, which I’ve not yet put on, but I will, at some point. And the other is something I’m doing myself, which is a portfolio of post-IPO, pre-announced SPACs.

Meb: Dig in. What’s the approach there?

Ted: So I started hearing about the Seiko System, along with everybody else, and started paying attention to it a little bit more last year. So the equity sponsor of the SPAC is the ultimately croupier at the poker table. This is the best risk/reward if you can access it, which I only have one tiny position in. Without going into it, people put up a little bit of money for the working capital of a SPAC, which is a blank check company. If they do a deal, that working capital effectively converts into equity, and it’s basically a 10 to 1 risk/reward for them. And they have such strong incentives to do a deal because of that, and they somewhat control it. Right now, the base rate looks like 70%, 80% of what SPACs get a deal bond. So amazing risk/reward.

The next level is the IPO investor, and this is where all the hedge funds are diving into. I don’t have access to these, unfortunately. But here, you’re buying in at, say, $10, and you own a put at $10. And you’re borrowing it next to nothing, so you have a free option. Most of these things trade up anyway because there’s a bunch of reasons why they trade up. One is a lot of them have kind of incorporated an IPO pop, so they’re sort of publicly giving out the IPO pop. Some of it is just froth. People are excited about the kind of late-stage venture into public markets. So amazing investment. I don’t have access to that. So what I’ve been doing is buying them, call it mostly between $10 and $10.60, just to simplify it. So you’re paying a few percent risk if a deal doesn’t get done, with a high belief that a deal will. And then you have a bunch of options. One is you have an option, which has happened a couple of times, where these things just trade up, and you sell out of it. You know what your downside is. Two years from now, you can get out of 10 bucks.

I started doing it in November. There is a lens for me that is helpful, which is because I know so many managers, I can quickly look at sponsors and have a very good sense of if I think they are likely to get a deal done or not. And some of it isn’t that hard, with a little bit of research, you look at it. Sam Zell has a SPAC. Like, I had no idea who started looking. The very best cannabis fund that I know that I had invested in, the family I was also working with, has a SPAC I didn’t even know about, but I found it. And so I know that there’s a lot of reasons why I think those deals are more likely to get done than sort of that very, very high base rate. And so I own probably 20 of them now, and depending on whether it’s a retirement account or a cash account. Fortunately, for this particular strategy, like everybody else, I had a bunch of tax losses I took last year in COVID as I was rotating around stuff. So some of this will be short-term gains, so it’s not great for taxable investors, but I have a nice pocket I can fill with that.

And then in retirement accounts, it’s one way of my expressing like, “I think I can get pretty darn good returns doing this with very, very low risk in a market that feels kind of risky.” And if the market keeps going up, the strategy will work even better. And if it doesn’t, it’ll be fine. So I love that strategy. I’m doing it. There’s more active trading than I’ve ever done in my life. And I think it’ll continue. There’s a whole bunch of reasons why I think the SPAC movement will continue for a long time.

Meb: Yeah. I mean, I think we’re on pace for like 1,000 SPACs this year if we annualized the first month. We’ll see.

Ted: You know, there’s a lot of noise about that. I don’t know how many. There’s probably 400 or 450 now. I asked a dear friend of mine just a couple of days ago how many private equity deals got completed last year, in 2020. And the answer to that is 4,100, which was actually a little bit more than 2019. So to say there’s 400 SPACs that need to get digested in 2 years, alongside all those private equity activity, it’s not necessarily the case at this point in time that they’re going to be the incremental buyer that’s pushing up prices and doing stupid deals. In fact, there have been a few things that I’ve seen that don’t make any sense. Like, SPAC sponsors on their last legs of their two years doing a deal that look like amazing deals at great prices that then trade way up, and you’re like, “Well, why would somebody sell them at those prices?” Well, they knew they had to get a deal. So it’s a really, really interesting space, and it’s just fun to watch it. I have a bunch of friends. I’ve just joined an advisory board of a SPAC now with a guy that I’ve advised for a couple of years. And so there’s a lot of fun stuff going on in that space.

Meb: Yeah. You have a laundry list on both sides. You mentioned the Sam Zells of the world, and you have the A-Rods and the Shaqs and everybody getting involved. It’s fun to see. You know what’s interesting about you talking about your portfolio is that I imagine if some of the investors listening to this were coming into it, knowing your book, your history, they may have thought it’s going to be like, “All right, I have this much in SAC, and Millennium, and KKR,” whatever. But the cool thing is that a lot of your allocations on the funds in the private side, as what you mentioned, is finding brilliant people that you know and letting them run with it, whatever it may be. And it’s a pretty diverse group, and it’s a lot of podcast guests, you know. It’s a lot of people you’ve met in the last five years, honestly. And it skews younger. Is that a reasonable statement?

Ted: So there’s a hybrid of all of that. We’re not going to go over all of it. But the biggest difference between what I’m doing now and what I did in the past is I’m just sharing all of it. So it’s a mix. I mean, I think that a lot of the managers I’ve known over the years I could invest with any time I want, and I’ve been a little bit more…it’s really only been the last year that I’ve kind of more aggressively built out a portfolio. And so, like some of the people you could say, “Yeah, well, Jason Karp’s a podcast guest, and he’s been around the space,” but he was a podcast guest because I knew him from my past life. The Arctos guys, that’s a brand new one, with people I didn’t know and got introduced to. But most of the investments are actually people that I’ve known for a long time. But you’re right about I don’t have investments with, like, the big brand name people. And part of that, for me, there’s an angle on active management, and certainly, this style of active management that I think is completely lost in the active-passive debate, which is the relationship aspect of it. Because I can give money to a manager, and yes, I will get the returns that come from that, but who knows what else is going to happen, both potentially financially and also just in life, right?

There’s so much optionality that comes from having great relationships with people. It’s one of the reasons why it was easy for me to have a bias towards sticking with managers, because I can’t stand ending those relationships with people I respect and think are smart. And I’ll happily, like, take a little bit of a financial hit in the short term if I think it’ll keep going for the long term. So that’s been a big one for me. Like, I’m not that interested in investing with SAC or whatever because there’s no relationship for me there. There may be for…if you’ve got $1 billion to invest there, and I had larger pools of money in the past, you can be a meaningful client and develop those relationships, to the extent that some of it comes in around the podcast. It’s because that’s where I’ve been focusing a chunk of my time in the last couple of years.

Meb: And I think it’s the right way to go about it, and I think, particularly with relationships you have and also the smaller funds, I mean, most of the research generally points to a lot of the…in my opinion, if you’re going to deviate from these broad industries, you want to be weird and different. Otherwise, it’s no point in allocating to something that basically is the S&P. And so strategies or allocations, and we used to run into this when we looked at a lot of the 13F databases, so many funds just were…like the hedge fund hotel names. It’s like, why in the world would you want to be in this name that 1,000 other hedge funds invested in? Which I used to pick a fight with the Goldman VIP list, we’re like, “These are the names of most of the hedge funds.” I’m like, “Why in the world would you ever want to own those?” We joked when they launched it. They were launching it so they could short it to hedge out the most owned names. It doesn’t make any sense, but I think it’s a thoughtful approach. Did you get to allocate? One of my favorite episodes, this UVA guy was the one on the sport. Do you call them ISAs? It’s not ISA, is it?

Ted: I mean, ISA is in the educational world, but it’s the same idea. It’s a share of minority in baseball. His name is Michael Schwimer, Big League Advance. I have told him I want to invest in the next fund. It takes him a number of years to put the money to work. He’s been on the news this week because…I have known players for a few years, but Fernando Tatis was one of his signees, and that only became public because Fernando backed him up when someone else went after him. I don’t remember who it was. There was a lawsuit. Some agent came in after a player had signed this agreement a number of years later and said, “Oh, you shouldn’t pay this guy,” and Tatis backed him up. So it was publicly…somewhere is in the public domain that he had signed a deal with Tatis who just signs big contract. I have not caught up on Michael on the returns, but that initial fund was $25 million. I have no idea. It wasn’t public how much he put in with Tatis, but that investment alone, which is probably a small percentage of the fund, could return the whole fund.

Meb: There are some articles about it this week, but yeah, it’s a fun return. They said it’s something like 30 million. But you know, what they don’t write about is there are probably hundreds of other ballplayers that didn’t make it that thank the Lord for having that money or sharing that risk. I’m a huge ISA guy, so I know. I get people aren’t. But when I heard that episode, I was like, “Oh, this is the coolest idea ever.”

Ted: Yeah, he tells the story great. One of the things I’ve thought about, I don’t know if I’ll end up doing it ever, but I’ve definitely thought about kind of raising an opportunistic fund sometime in the future, more friends and family than big institution again, but just because some of these opportunities are really great, and I see them, and I can get access to some great stuff. Now, the one thing we didn’t talk about, which I don’t think we need to, but I do own a little bit of Bitcoin and Ethereum. And one of my advisees, a former hedge fund manager, just called me last week. We were talking about it, and he was just like, one of the things he always loved about me is that I’m just not dogmatic about what I’ll own. And in a funny way, I don’t need to go through the same case everybody else would, but for me, it’s also tied to people, because I’ve learned about it from having people on the podcast. I just had Chris Dixon on in January. I’m about to do, depending on when this comes out, it might be contiguous, but I’m doing a mini-series on crypto for institutions, which is very different from the deep dive that people will do on crypto. It’s sort of like, what are the institutions thinking, you know, what do they need to know to start to participate in this ecosystem. It’s like a couple, 2%, 3%, depending on going up or down. It’s super interesting just to try and to pay attention to what’s going on in that whole ecosystem and how it’s going to evolve.

Meb: Yeah. It’s interesting because what you’re seeing with Saylor and some of the companies putting the treasury on their balance sheet, we actually tweeted about this over a year ago, we said, “I don’t understand why a company doesn’t just think about putting their balance sheet into crypto.” They become a de facto ETF, because the SEC is not going to approve. And here you are now, MicroStrategy, I think, a $7-billion company with 5 of it in crypto. The corporate balance sheet, I think, is fascinating because it applies to individuals too, and we wrote an article about this with a different variant, which is a lot of people, and you have a very equity-tilted portfolio, a lot of people think that T-bills or bonds are safe. And if you look at after-inflation returns, historically, and volatility, actually, you can demonstrate that a portfolio, in my case, I use the global market portfolio to invest, but almost anything does a better job than T-bills or bonds alone. So they took it to a different conclusion than I would have, but it’s interesting. How do you think about swapping stuff out? So you see a new fund, new idea comes along in a month, you got to something to boot. What are you going to do? How do you think about it?

Ted: I don’t like booting stuff. So part of what happens is, and we don’t really talk about it, between like Pershing and Berkshire, and I’ve owned some Google and Amazon for a couple of years, because I tend to be a little more value-biased in what I like with managers. There’s just some liquid stuff, and part of the reason I like the liquidity is for just that reason. If Schwimer comes and raises his next fund, I want to invest. I got a call last week from a close friend from business school who…he’s just one of those people that money sticks to, and he had a late-stage private deal that he’s putting his mother and brother in. He said, “They can’t afford to lose money in, and this is my chance to make the money.” He’s calling 10 friends. I know the company a little bit, I know he’s deeply involved in it, and I’ll put a little bit of money into that. I want to be able to do that. And so one of the things that gets lost, and it’s very hard if you circle back to the institutions, there’s an opportunity cost to being fully invested, where Seth Klarman has really tried to teach all his clients over the years. He just had so much cash that people don’t get the message. And so whether it’s cash or, for me, this whole SPAC portfolio is great. I have a lot of my liquid portfolio now in the SPAC portfolio. Well, if something great comes up, it’s a low-cost option, I can just turn it around and invest in something. So I always try to keep, let’s call it dry powder that’s in the markets around.

Meb: That’s actually something I’ve changed my mind on in the last 10 years. Dan Egan, over at Betterment, kind of helped pushed me over the edge, which is a concept going back to comments I was making a little bit earlier where investing your cash with the understanding of how you do it will affect the volatility and risk profile and drawdown ends up being a much safer investment or potentially over time, but it has to be liquid. You can’t beat something that’s stuck in 10-year investment or house or something. But not many people do that. I think there’s three of us. I haven’t really talked to anyone else that is that kind of screwy that invests everything.

Ted: Yeah. I mean, look, the other thing that’s kind of wild is that, after all this time, I really don’t have money in hedge funds, and it’s very straightforward. It crushes me because it was relationships with their…I think people I invested with are super, super talented, but it’s tax-inefficient. And what the returns they’re shooting for take away taxes. It’s just not that attractive. And so that’s unfortunate, but by the time I left my old shop, like, 90-plus% of the capital was offshore tax exempt. I mean, hedge funds really aren’t set up very well for taxable investors. So every now and then, something comes up and I get very, very tempted, but I haven’t done it yet.

Meb: Yeah. My listeners are tired of hearing me say this, but if you go back a decade or more, talking about the hedge fund and mutual fund world, and obviously, I’m an ETF visualizer biased, but very simply, for this specific use case of active equities, it’s crazy, and a lot of them have done it. Not as much hedge funds, but a lot of institutions have moved to the ETF structure, because it’s so much of a better widget, but who knows? I can understand why people wouldn’t, particularly if you’re charging performance fees. That’s the big one. You can’t do that in an ETF.

Ted: Yeah. Actually, I shouldn’t say that. I’m about to make my first one, and it strangely is in the fund-of-funds, but it’s purely biotech. So biotech-focused managers, good luck doing that in an ETF, right. You really need specialized expertise, and there’s a huge amount of potential to add value on both sides. So that’s a one-off. I think it’s one that has long, long legs to it.

Meb: I think people would be interested, Ted. You roll out a little Capital Allocators SPV or fund and say, “Look, these are some of the bad ass funds that come across my plate. You guys could invest.” I think people would be interested in that. I think I gave you, by the way, my memory is failing, but we may have talked about this, but if not, this is at least a $10 million idea, maybe 20, in revenue. But over a decade, I’ve been trying to get someone, and there’s only about five people I know that could do it, and you’re one of them, to write a research piece or have a service that simply profiles, you could call it liquid alternatives, you could call it just other. You got your ETF core, fine. But you want these other ideas that profiles, say, once a month, once a quarter. “This quarter, we’re going to profile how to invest in farmland. Next quarter, managed futures. Next quarter, long/short equity. Next quarter, we have a flash report on SPACs.” There’s no one, to my knowledge, that’s doing that, at least for public consumption, that’s decent. We used to call it the liquid alternatives, but it can be the CIO Letter, the Capital Allocators Letter. But how much would people pay for that? I think a lot. Because I talk to people all day long, advisors, individuals, and there’s 10,000 funds out there, many of which are absolute garbage, many of which people don’t understand, the structures, the difference between X and Y. They would love to read that. So hire a team of 10.

Ted: It’s funny. Like, I’m probably naive about that. I would think that that existed, but you’d know better than I would.

Meb: I know the investment research business pretty well. I know a lot of companies that do 10, 100 million-plus in revenue. A lot of them, there’s a pretty wide spectrum of legitimacy and quality, but there’s plenty that are absolutely fantastic, none of which do specifically what I’m talking about. Usually, it’s stock picking. The amount of money Motley Fool must be paying on Instagram to target me specifically on why now is the best time in history to invest, that must be thousands of dollars. I think at this point, they’re slowly just trying to tweak me on their ad budget. But I would love to see it, and I would even love to see it in some of these specific silos. I tweeted yesterday about farmland and got a ton of DMs and emails, and it’s messy. It’s complicated. Anyway, this is for you to do, summertime sabbatical. You need some more work.

A few more questions because I can’t keep you all day. I’d like to. The interesting thing about your allocation and almost the interesting thing about everyone’s allocation, Josh Brown and crew put out a book called “How I Invest My Money,” and if you read that book, all professionals across the board, nobody’s talking about a mean-variance optimizer. They’re not talking about, even a quant like me is not talking about super quanty allocations. It’s often squishy in a way. It’s personal. It applies to different people. And I think that’s interesting takeaway in a world where people would just assume that everyone would be focused on a very specific sort of mindset when it comes to investing. But everyone ends up…I mean, if you put all of our friends in a room, they’d end up with totally different portfolios.

Ted: I’d say yes and no. I mean, let’s take both sides of that. I say yes and no because they do end up with totally different portfolios, and at the core, they’re all like 90-10 or 80-20 portfolios. On the mean-variance optimizer, like, I worked with them in my institutional years, and what you find is there’s a little bit of garbage in, and you know that, and so you take what’s out, and you use it as sort of a guardrail. And if you look at the constraints, so if you have any one of these portfolios, like private equity, if you’re reviewing your asset allocation once a year, let’s say, you know, your private equity allocation is going to determine itself based on the commitments you’ve made and the drawdowns. There’s a bunch of things you can’t control. And that’s true with real estate. It’s true with venture capital. So over a multiyear period, you can get it kind of directionally right. But basically, what would happen is you’d constrain all these things, and you’d throw stocks, bonds, and cash in, and those aren’t that meaningful assets in the scheme of things for this portfolio. So I think the mean-variance optimizer is nice, but it’s a decent input.

After you do it for a while, you realize like, “Look, you’re going to end up at 90-10, 100-0, 80-20, wherever you want,” and then think a little bit about what’s the risk character of the asset to use in to fill that bucket. So I might be 100% equities, but I might be 20%, 25% SPACs now, and that doesn’t have equity risk, doesn’t have equity downside. So you just sort of generally calibrate it, but I agree with you. Like, ultimately, I could just index it. I’m sure that’s like fine. But I invested actively for totally different reasons than my institutional years where the core of it was like, “I’m going to win. Like, I want to outperform an index. I want to outperform now. I want to compound my capital. I don’t care if I beat the index, but I want to do it alongside of people that I respect and trust. And I do believe they’re going to do better, and I just love thinking about it and trying to help them.

I mean, that’s the other thing, is after a quarter-century of experience, one of the managers in my portfolio called me in the fall and had raised an opportunistic fund that has done very, very well, and kind of said, “How should I think about what to do with this now? It was supposed to be a two-year life COVID-bound whatever type fund, it’s really played out. It’s been less than a year. Like, can I talk through it with you?” And just from being around and seeing many, many iterations of that, to be able to just have that, I’m a small LP for him, but to be able to have a value-added conversation and bring that perspective of another adult in the room is just fun for me. It’s just a different way. Like I said earlier, so much of what I’m doing now that’s different from my whole career before is just sharing the information. And I really enjoy that, because it is the institutional world is a lot more opaque than the more public and retail-focused world on the investing side.

Meb: Well, it comes back to the whole concept of why are you investing in the first place, and some of the reasons you mentioned, I think, are spot on. For me, a lot of the private company investing I do is simply to, A, support, but B, also to follow along. It’s like the old managers that would buy one share of stock just to get the annual report, just to kind of keep in the loop of that concept. And some of these strategies and ideas, for me, are so far removed from what I do on a daily basis, and also, it’s the people you love that are great and brilliant at it as well. I think those are all valid ideas that you just don’t get when you go buy one of Vanguard’s death STAR ETFs. I love you, Vanguard. Sorry. A couple of things, all right, so most memorable investment, that’s a biggie, over the past 30 years for you. What pops up?

Ted: There’s one that so dwarfs the others that it’s like it always pops up, which is the Paulson subprime fund. The reasons it pops up are a little bit different, right. So we can say, yes, there’s the best outcome from a mile. I never slept so well in my career. So for the three or four years leading up to that in our fund, we were short high-yield bonds. It didn’t pay off, but we’ve been thinking the credit markets were frothy. We were not along like distressed debt managers or credit managers. So it was expressed in a negative way. And then, when we partnered, knew John Paulson and came in one day with this deck, and it was just like the risk/reward was ridiculous, and it was housing, and we were pretty skeptical. Anyway, we did understand the structured credit waterfalls from the high-yield shorting we were doing. And so it kind of led to that. What happened was you just don’t…I’m writing about this in my weekly for my premium members this week in a little piece called “I Told You So,” which is sort of, how do handle all the naysayers?

So like, how do you handle Jeremy Grantham saying like, “This is the biggest bubble ever,” and Jeff Gundlach talking about we’re going to have a massive wave of high-yield defaults? Because those people are always out there. But having lived through one of those and seeing it, you get this appreciation for how hard it is to spot it. Because once that happened with Paulson, I paid a lot more attention to Peter Schiff saying the world’s going to end again, and again, and again. And you start to realize how many people there are all the time, and it’s really only with hindsight bias that you could say, “I got it right.” But at that point in time, you had a portfolio of risk assets, right. So pre-financial crisis, everything was just humming. Like our business was humming, our returned were humming, and then you find this thing that’s so asymmetric to the downside that you’re like, “Well, if we stop humming, this is probably leading edge,” and it had like an insane, I don’t remember what the number was, 20-to-1 type risk/reward. And you just don’t find those.

And so my partner kept looking for them and looking for them. I was like, “They’re gone. We’re never going to find it again.” But one of the things I found is that when everyone is looking the other way, when these things work, it’s when it’s priced into the market. If volatility is low, that’s a great time to buy put options. We may think the market’s high right now, we could talk about that, but I don’t know what to do about it in terms of making money if it reverses. That’s a little bit of the crypto investment for me, which is like, there’s a case that you could easily understand that all of this money printing is a problem, and maybe this is one little way of protecting some of the capital. I mean, that’s certainly what Michael Saylor is saying. So that was the most memorable. It was clearly, like… Gregory Zuckerman wrote a book called “The Greatest Trade Ever,” it probably was and certainly likely to be my career. And we were the largest day one investors in that fund. It was like 3% of our fund, and I was begging my partner to sell our high yield and put more in it. But I think we risked. It was an 8% negative carry. A lot of people avoided it because of that. It was an 8% negative carry at 3%. We’re paying 25 basis points a year. And over in 2007 and then 2008, we added like 20% to the fund on a 25-basis point position. So in the fund-of-funds too, like, it just doesn’t happen.

Meb: Where are you finding those today, Ted? You got to let us know. We got to sign up for your newsletter, I guess.

Ted: I mean, it’s Bitcoin, right? We’re not going to find those. I mean, I do think if you could find your way into being a SPAC sponsor, I think that’s a 10 to 1. It’s so easy for them to raise money because of the free option they’re giving hedge funds and other IPO investors. So that’s pretty darn interesting. But that’s worked in deal expertise and all that kind of stuff. I don’t really look for those things. I don’t think they exist for the most part.

Meb: What’s your most memorable fund manager meeting? Does anything come to mind?

Ted: Oh, boy.

Meb: While you think about it, there was a quote from your book that I love almost more than anything, which was talking about finding managers. And it says, “Manager skill is rare. It’s really hard to identify in advance. Sometimes it’s hard to identify after the fact.”

Ted: Matt Whineray from New Zealand Super. I mean, there have been so many. I remember some more by…less the meeting itself. Well, I’ll tell you one fun story. This was a very self-deprecating story. So I turned 25 in 1995, and I had a bunch of friends take me out for my birthday. I’m not like a big drinker or anything, but I got pretty lit up and got sick. And I remember like slamming my head in one of those circular metal garbage cans left over from college, and I like ripped over to, you know, whatever. I had a big fat lip. I come into the office kind of hungover the next day, the only time I probably ever did that. And George Rohr was presenting. So George Rohr started a fund called New Century, and at the time, they were buying Russian vouchers. And these were the privatizations in Russia. They were buying these things for pennies on the dollar. Their team included “private security.” They had to have ex-JGB officers because the actual stock ledger was handwritten and people would erase your name and put their…it was just totally, like, old Russia corrupt. One of the most amazing investment stories like ever, and we’re there on the front line. And I remember the meeting, and Seth Alexander of MIT will never let me forget it, because I just kept falling asleep.

Meb: Oh my god. Noticeably falling asleep.

Ted: Oh, yeah. I mean, afterwards, like, Dean Takahashi was like, “Why don’t you just go home?” I had been there for a couple of years, so I had a little bit of street cred there, but that was the most embarrassing. And you know, there are so many. Like, I wrote in this week’s little thing, Jeremy Grantham was one of the first managers I ever met in 1992, at the beginning of a bull market, and he was so pessimistic that I never understood, hey, buy-and-hold, long term, compounding, I’m 22 years old. All I have to do is put my money away because I thought everything was going to roll over. I thought I had just missed the Bull Run. So there are so, so many of those kind of like old stories and more recent stories along the way.

Meb: That’s great. Ted, this has been a blast. I’m looking forward to subscribing to your new research service in fund when you roll it out that I force your hand on, one of these days, please. I want someone to do it. Where do people go to find what you’re up to?

Ted: Yeah, thanks, Meb. So “Capital Allocators” is the podcast, website capitalallocatorspodcast.com. Might be changing that name in the future to capitalallocators.com. I have that URL. But that’s where everything is. Man, it’s fun being here with you, Meb.

Meb: Pick up his book, ladies and gentlemen. Ted, thanks so much for joining us today.

Ted: Thanks, Meb.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love this show, if you hate it, shoot us a message at feedback@themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show, anywhere good podcasts are found. Thanks for listening, friends, and good investing.