Episode #372: Chas Cocke, LB Partners, “There Are Lots of Great Businesses…The Hard Part Is Finding Them At A Really Good Price”

Episode #372: Chas Cocke, LB Partners, “There Are Lots of Great Businesses…The Hard Part Is Finding Them At A Really Good Price”

 

Guest: Chas Cocke is the founder and CIO at LB Partners. Previously, Chas was one of the founding Partners of Investure and led various aspects of its business since its inception. Prior to Investure, Chas was an Investment Analyst for the University of Virginia Investment Management Company (UVIMCO), where he helped select hedge funds and public equity investments.

Date Recorded: 11/10/2021     |   Run-Time: 1:17:05

Summary: In today’s episode, we begin by discussing Chas’ time at Investure and what it was like to work with the top money managers in the world. He covers some trends he sees in the institutional and hedge fund space around both fees and the convergence of public and private markets.

Then we get into Chas’ newest venture, which, as he puts it, will invest in anything, anywhere, unconstrained. We get into its unique structure and talk some of the areas he’s already put money to work. We even discuss his partnership with this coming Wednesday’s guest to launch the IO Digital Infrastructure ETF, ticker BYTE.

Sponsor: Public.com is an investing platform that helps people become better investors. On Public, ownership unlocks an experience of content and education, contextual to your portfolio, created by a million+ strong community of investors, creators and analysts. Start investing with as little as $1 and get a free slice of stock up to $50 when you sign up today at public.com/faber.

Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159

Interested in sponsoring an episode? Email Justin at jb@cambriainvestments.com

Links from the Episode:

  • 0:00 – Sponsor: Public.com
  • 0:50 – Intro
  • 1:42 – Welcome to our guest, Chas Cocke
  • 6:34 – Leaving Investure after a 16 year run to pursue a new path
  • 9:10 – Some takeaways from working with hundreds (or thousands) of managers at Investure
  • 12:09 – How to distinguish between poor management and just brief underperformance
  • 17:32 – Thoughts on current trends in the institutional space
  • 21:47 – Did Investure focus on unique investments or finding unique investors?
    26:11 – More thoughts on institutions and endowments
  • 27:46 – Sponsor: Public.com
  • 29:01 – Starting LB Partners
  • 33:44 – How many names Chas tends to have in a portfolio
  • 42:31 – Chas’ framework and process for finding stocks
  • 46:02 – Chas’ bull case for Twitter
  • 54:17 – Building their funds with global allocation and exposure
  • 55:38 – Massive growth opportunities globally for ideas North America can take for granted
  • 56:48 – Episode #57: Radio Show: 17 Different Million-Dollar Fintech Ideas
  • 59:36 – Going viral with his anonymous Twitter account
  • 1:05:45 – Plans for making more ETFs in the future
  • 1:10:04 – His involvement with a dog food company in Europe
  • 1:11:28 – Chas’ most memorable investment he’s made in his career
  • 1:13:32 – Learn more about Chas; Twitter @iodigitalindex; BYTE

 

Transcript of Episode 372:

Sponsor Message: Today’s episode is sponsored by public.com. Visit public.com/faber and get a free slice of stock or ETF up to 50 bucks when you join today. I’ll tell you why later in the episode.

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.

Meb: What’s up everybody? Today we have one of the best shows of the year with one of my oldest friends in our industry. Our guest is the founder of LB Partners, a firm he started last year to invest over a generational horizon. He’s previously one of the founding partners of Investure, a firm that started the outsourced CIO model that’s popular today. In today’s show, our guest begins by discussing his time at Investure, what it was like to work with some of the top money managers in the world. He covers some trends he sees in the institutional and hedge fund space around both fees and convergence of public and private markets. Then we get into his newest venture, which as he puts it will invest in anything anywhere unconstrained. We get into its unique structure and talk some of the areas he’s already put money to work. We even discuss his partnership with an upcoming guest to talk the IO digital infrastructure ETF, ticker symbol BYTE. Please enjoy this episode with LB Partners’ Chas Cocke. Chas, welcome to the show.

Chas: Good to be here. How are you?

Meb: Beautiful background. For the listeners who can’t see this, now watching this on YouTube, Chas is one of my oldest friends in the fin twit world, dating back to the 1990s.

Chas: Oh, yes ’96.

Meb: My goodness, you’re old, but he’s representing with a double Virginia outfit today.

Chas: Today is opening day of UVA basketball season, as you know, recent national champs.

Meb: One of my biggest whiffs as an investor on the startup side has been these platforms. So I was just down at a conference at Acre Trader. There’s others like Masterworks we profiled, but Stock X was another one listeners had heard that I bought my most expensive pair of shoes was Virginia Nike Dunk champs and Nike dropped that immediately sold out because all the friggin sneakerheads bought them. But I only justified being able to buy them for 250 or whatever they were on the app. Six months later, I was like, “These have to go down. No one’s going to buy these because they’re Denver Bronco colors too.” So I get some good use out of those at least. I’ll give us the Hoos preview.

Chas: Returning the backcourt and a whole new frontcourt. So we lost a huge amount of our scoring and rebounding. However, preseason top 25. And I think if your MVP is your coach, you’re sort of always in it. And I think that’s kind of the bat on UVA is that we’re a developmental program, where we’ve taken a bunch of three-star players and turned them into career NBA players. And so excitement is in the air. The leaves are turning and the JPJ Arena is lighting up tonight.

Meb: Awesome. Well, I look forward to getting back. And like you said, top 25 because I think we’re literally ranked 25. So I knew you before you were this big deal as a Virginia fellow co-ed running around town. You started out your career at UVA, right? You did a couple of hops before going down the entrepreneur fun rabbit hole, right?

Chas: Some listeners may like to know, Meb and I were on the same hall of our first-year dorm at UVA. And so, we’ve been friends ever since. And I’m crushing him in fantasy football this year.

Meb: You know, let’s talk about why do you think that someone who is a professed quant and likes numbers is so bad? This has been going on like 20 years and the only person who’s never won a championship is me.

Chas: It could dumpster fire as you personally know. I don’t want to speak to your investment acumen.

Meb: I need to outsource it. I need to get some sort of quant program to just whir in the background. It’s too efficient now. People can just log in and they say, “Here’s your expected points.” It’s been indexed at this point. Now it’s just randomness.

Chas: Yeah, there’s also a motivation factor where you’ve got to be working the waiver wires and all that, and you and I have bigger things going on.

Meb: You say that now as I finally have a decent team. I think I’m leading my division. All right, you and I graduated, at arguably the worst time to graduate other than probably the financial crisis. Somebody who graduated in ’08. I mean, it was like the absolute peak of the bubble and then just it’s slowly crashing as we went out to get jobs in the world. Where was your first stop?

Chas: So I was in San Francisco at Thomas Weisel Partners, which was really a bubble bank, and it was the investment banking job that I was dying to get. And as soon as I got there, its best days were behind it. I like to think it was not me. And then I transferred to New York in 2001, ended up getting laid off after September 11th. So I was really timing things well but ended up getting another investment banking job before ultimately getting a gig at UVA’s endowment in the fall of 2002. And I would say, that’s probably the most useful starting point for my career because for the next 17 years, I was more on that institutional endowment management side. So I worked for UVA’s endowment for a little over a year, and then somehow lucked my way into getting to help found what really began the outsourced CIO movement. We started a firm called Investure, which is the investment office for a number of college endowments, charitable foundations, so Middlebury College, Juilliard, the Carnegie Endowment for International Peace, right? These kind of mid to large size endowments, where they’re probably just below the size of wanting to build their own investment office, but big enough where the endowment is one of their most important assets. So, we really built a consortium of a dozen-plus of those types of institutions. So I help found Investure and help lead it for 16 years. And I left the end of 2019, to do what I’m doing now, which we’ll talk about in a second. But today, Investure, I think has about 15 clients and $18 or $20 billion, and really is the gold standard of the outsourced CIO business model.

Meb: Entering the workforce and that sort of Internet winter, and then man, 16 years at Investure, when you made that announcement, everybody probably looked around was like, “Why? What are you thinking, you’re in such a good place?” So what were you thinking?

Chas: I had such an incredible set up with wonderful partners who were super supportive. So going way back, I helped lead our entire public investments effort, amongst other things while we were there. And so, anything that wasn’t venture or private equity was going to fall under my purview. And for my last five or six years there, I really built out our direct investment effort. My passion is looking at businesses and trying to understand what they look like, five, six years from now. And so, I was able to scratch that itch a lot talking to some of the best investors in the world. If you go on Twitter, you’ll see the Nomad guys, Nick and Zach. They’re very popular and have written incredible letters. Wonderful, guys. We were their largest LP. So we were an LP there from before they even had $100 million. And I think we’re about a third of their capital. So it’s wonderful, you get to hear their thinking, bounce ideas off of them, learn from them. And then for the last five or six years, I was at Investure, was really trying to help build something that looked more like them, looked more like the manager. And ultimately, for me to really pursue that in an unconstrained way, I was going to have to leave and do it in my own vision. And my partners didn’t want me to go, but they were also incredibly supportive. And you get to a place in life where things have gone well enough and the question is, are you ready to commit for the next 10 years, which is what I think I needed to do if I was going to stay at Investure. And if not, I’d really be cheating these people and these institutions who put so much into me that I felt like if I’m going to do this, I really need to do it now. And so I did. I left at the end of 2019 to start my own investment partnership that’s really built around my capital. And honestly, it’s a go anywhere, do anything, invest the money, as if it’s just mine… And in order to do that, there’s a lot of structural choices you have to make, but really, it was to go pursue a passion.

Meb: We’ll talk about that really bad decision here in a minute. Just kidding. We bemoan the life of the entrepreneur and fund manager often here on this program. So we’ll talk about that. But first, before we leave Investure and sort of those ideas, what are some of the takeaways from working there? You probably talked to hundreds, thousands of managers over that period, all walks of life. I think the majority was probably in your focus and correct me if I’m wrong in sort of the long-short equity world, but it could have been everything. I don’t know, private equity. You can give us the overview. What are some of the takeaways for somebody who was doing that for a decade across numerous cycles? Any thoughts for us?

Chas: Yeah, I think one is that is ultimately a bet on people. And if you kind of take an institutional portfolio or even private wealth management portfolio, and you kind of split it out into this asset allocation framework, that’s guiding how all the dollars flow down coming from the top, and then how those dollars get allocated within those buckets that’s coming up from the bottom based on idea quality. And if you’re in that seat, idea quality is really people quality. And so our view was, in order to really generate differentiated returns, we needed to be your earliest and best partner. And so, I said, “Hey, with Nomad, we were a third of their capital and with them from before they are $100 million.” And with lots of other today large, prominent funds, we were the first dollar in the door. And my view was, if you’re sitting in that seat, you have presentations coming across your desk every day, from funds that are launching, funds that are raising. And I used to joke that once the presentation has been overseen and helped be crafted by Goldman Sachs, who’s going to be their prime broker, it was too late. So you could see their fingerprints, or Morgan Stanley, I’m just using Goldman as a placeholder, you can see their fingerprints the moment the presentation showed up. And so I viewed our job as get there before them and help protect these incredible investors from the corrupting influence of Wall Street. The prime broker might say, “Well, you know, what’s really selling right now? Market neutral.” So you really need to run market neutral. And the person’s vision is, well, yeah, but I think a five-plus year investment time horizon. That doesn’t really work well with market neutral.

Okay, well, immediately, compromises start getting made, our goal was, you’ve got to get there early and protect the manager from those compromises. Let them express their vision. And I think that really worked well. So you don’t see Investure show up that often in an already established large fund management, nothing wrong with those. And our hope is that some of our managers become those over time. But ultimately, it really is a bet on people. And we think we can identify people before they have an easily underwritable track record. And that was where we spent a ton of our time. In order to do that, you’ve got to be able to walk side by side with them and talk about how they actually invest because everything else is hypothetical at that point.

Meb: Here’s the hardest part, I think for someone in your shoes back then. And this is a task that as a quant, I don’t necessarily envy because I think it’s hard, which is you make this allocation. It’s a great manager. Let’s say they have a few good years of performance, you understand their process. How do you generally think about the relationship? How long of a leash do they have? Is it subjective? Like, how do you deal with that whole lens? Which to me seems like one of the biggest challenges of being a big institution is how do you distinguish when it’s time to let them go or time to double down in having a rough patch.

Chas: It’s amazing how you start to notice all the weaknesses in process when performance is bad. I mean that in the lighthearted sense of you’re right, nothing makes you more attuned than the vicissitudes of performance. And those cannot help but drive your attention.

Meb: I used to love saying this, no one ever calls me up and is like, “Meb, this fund is just not performing as expected. It is having way better performance than we would expect it to have. So we’re going to sell it.” That’s literally never been said in history. It’s only the opposite, this sucks. It’s worse than expected. You’re fired. Never do they say it’s too good, which theoretically, they should say.

Chas: Yeah, I would say first, Adam Basher, the leash is long. Ultimately, all good process should show up in returns, especially if you’re dealing with concentrated long-term oriented investors, the volume of swings that they’re taking is small enough that the performance side remains pretty random for a long time. And so, the things that we’re going to be looking for there are, have they grown into a business? And it could be AUM. It could be people. Buffett says assets are the enemy of performance and always used to say, this thing single most correlated with asset growth is people growth. And it wouldn’t shock me if people are really the enemy of performance. If you are underwriting a great PM and she then goes out and over the next five years, hires seven senior analysts and then each senior analyst wants to have one or two junior analysts under them, in the end, what you’ve now underwritten has changed. So, instead of making a bet on that person, you’re making a bet that that person is able to then assess all the people under her. So that’s the kind of drift that we’re looking for. And I think, in our ideal world, where they are from day one through some success level, and then we view it as sort of handing the baton off. Like, okay, well now you have $5 billion, you’ve become a little more institutionalized, you might be a better fit for somebody else. And those don’t tend to be performance-oriented terminations. That’s more like a conversation that’s ongoing about, what are you trying to get out of this? How hungry are you? The fire is still in the belly. And those are nuanced and you can only tease those out when you spend a lot of time with a lot of people in and around that ecosystem. So that’s on the one end. And that’s kind of a happy parting place.

And the other is what you’re talking about, which is things aren’t going well and there’s a reflexivity to it. So as things aren’t going well, they lose a team member, because the team member is not going to be able to get paid for a while, and then they lose a team member and a big client leaves because the big client starts to get worried you risk entering this negative cycle. Our hope at Investure was we can be big enough that if we decide to fix this problem, we can. We could put another $100 million in and help stabilize, which sometimes we do. And other times, it’s, you know what? This is a little bit hard and you got to move on. And other times, it’s, hey, we’re just going to watch.

You mentioned the financial crisis earlier. In the midst of the financial crisis and I won’t name names, but one of the people who today is one of the top five most successful investors in the world and at that time also was fairly successful, we were a day one investor. We were on their LP committee, so kind of on a small coterie of people who provide advice in kind of an official way on behalf of all the investors in the fund. And we watched them grow from 700 million to 20 billion at the end of ’07, and then lose 50% by performance, and effectively had another 50% of their capital put in for redemption. So, go from 20 to 10 and you’re going from 10 to 5 by redemptions. And our view, though, was that ultimately, the person running this was someone that we were still willing to bet on. And so we had a conversation with him about that, this would be in maybe April of ’09, to just back from the bottom and our conversation was… And actually, these are his words now, “If you stay with me in this,” which we just told him we were more likely to stay, “I’ll do it if it’s just you and me. I’m not going anywhere. I’m going to make this work and I plan to win.” And so in that instance, we didn’t add but we stuck. And that turned into a homerun decision.

Meb: I thought it was going to be Paulson at first, but I’m not sure who it is now.

Chas: Definitely not Paulson. I’ll tell you offline.

Meb: That was going to be my guess, but not so much. You’ve kind of been at the helm of a pretty transformative period in this world, not just in institutional management, but traditional hedge funds and alternatives. There are certain categories where it’s just been a graveyard. I think all of our friends that are short-sellers if they’re still around, they have grey hair, no hair if they’re not totally extinct.

Chas: They’re doing personal seed investing on the side these days.

Meb: The Death Star of 60/40 is just totally mauled. Everything in the U.S. for the past decade and anything looks paltry by comparison. What are some of the trends in that universe that you kind of saw or see or as you look to the future of the big-money institutional management? We had the recent passing of arguably the GOAT, David Swensen, this past year. Are there any just broad observations you have about that space? Is 2 and 20 dying? Is the hedge fund structure just obsolete or do you think it’s just more of this is just the cycles we’re going through?

Chas: A couple of points jump out, one, I think, on the public side, so-called hedge funds and one and only 2 and 20 never really existed. That’s not to say there weren’t people that charged 2 and 20 but that was never an industry standard. All that said, I think even 1.5 or 1 and 20 is going the way of the dodo. Ultimately, I think a greater sense of alignment where management fees increasingly are being pushed to focus and cover costs plus a little, you’re seeing more hurdle rates, more clawbacks less than 20. So I think something like 1 and 15 over a cash hurdle is much more common now than it was then. And I think that pressure on fees in order to generate net returns is going to persist. I mean, we used to say, one of the advantages of being an early investor is you can have those conversations. So that would be a big focus area for us. The most certain return we can generate is to get the fees down. If we can take it from 1.5 to 1, we just made 50 basis points in perpetuity. And if we can make it more aligned, either an incentive fee is an incentive or it’s not. So we would come to a manager and say, “You’re telling us you invest with a three to five-year timeline and yet you take your incentive fee every year. So how come just because the Earth makes a trip around the sun, you get to pull the cash register? Why aren’t we aligning it with a three to five-year investment time horizon? Well, those conversations I think, are increasingly common. And you’re seeing more back end loaded carry and incentive. So that’s why I think fees are coming down. I think flexibility is increasing. So you’re seeing more of the D1s and Tiger global to invest across public, private, long, short, even within private, venture, growth equity. And then I think the third thing that connects to both of those is a belief that has been true over the last decade, and I think people believe will be true over the next decade, that an increasing portion of the investable universe, and therefore, the return set is going to come outside of public markets.

So whether that’s venture or buyout, the securitization, so to speak, of non-public assets, is a huge trend that I don’t think anyone believes is going to stop. And so all the big endowments, of course, are hand over fist, making new commitments to venture. And at the same time, they have already huge venture allocations. And so, when you see some of the returns of this past fiscal year ended June 30th, where some of the best endowments were plus 50, plus 60, I think top quartile was probably in the high 30s if I had to guess, that is venture and China, and long-only tech and big allocations to it. And it’s the widest dispersion I think I’ve ever seen between the quartiles. I haven’t seen the final numbers. It wouldn’t surprise me if there’s a lot of endowments that are in the 20s. And then you’ve got a lot in the 40s and 50s. That’s 30 points. Difference is the complete game changer to those institutions.

Meb: You and I were talking offline about this. And I was trying to think in my head as I think about some of these allocations, I was like, I wonder why some of these endowments that are so focused on venture don’t just look, we’re just going to do this and then we’ll maybe hedge it. We’ll use some futures or options to hedge out some of the beta risk but this is clearly our giant alpha add, theoretically, for some of them that just do such a great job. Yale famously has 2% in publicly traded equities. There’s obviously the beta elsewhere. Did you guys do anything super weird at Investure like investing in a startup manager who was doing trailer parks in Kansas or crypto lending because when I think of a lot of the endowments and allocations, always thinking, all right, I want someone who’s doing something where no one else is fishing sort of idea, was that like a focus or was it more just finding the people who can find the right places to fish?

Chas: It’s more people-driven but, of course, you know, the view was, if you can find in A opportunity set, then a B team will be fine. And maybe your point about U.S. public markets, that actually might be a B opportunity set, in which case, you’ve got to have the A team. And so that sort of spectrum of trade-offs of quality of opportunity versus quality of people, that’s one of the more challenging things there in that whole industry, real assets, and then just this black hole of returns in big institutions for a long time, oil and gas, minerals and mining, a lot of commercial real estate has been really ugly. And one of the investments that we made and I was a big fan of was co-investing in a direct acquisition of the development stage goldmine. And at some point, we had to mitigate the migratory path of birds. And then at another point, we actually had a wolverine that caused problems in the equipment by eating some of the electrical stuff when it wasn’t plugged in and destroyed… You just find yourself in these situations where there’s got to be an easier way to make money than this.

Meb: I was just at this Farmland Investing Conference in Arkansas, Bentonville, which, by the way, listeners, reminds you, there’s enormous amounts of money everywhere. That’s the home of Walmart. Bentonville, amazing town. My God there’s only like 60,000 people, what a cool spot. But I started off talking to this room of incredibly wealthy farmers. And I was like, “Look, farmland is my nightmare investment.” And everyone’s kind of like, “Well, that’s a weird thing to say at a Farmland Investment Company.” I go, “I put it right up there with being a landlord. You got to deal with black mold and someone calling you about the toilet broke and there’s poop everywhere,” yada, yada on and on. Farmland is just a nightmare headache. Now that’s partially why in that world you want some experts or want to outsource it. So for me, I’m like, “Yeah, I want someone else to do this.” But I put real estate in that category. It’s just like a huge headache for me. So listening to you guys talk about wolverines mucking up the equipment makes me smile and laugh because there’s certain investments, like, no matter how attractive I’m not going to be operating it. I want somebody else to do it and good on them because there’s an enormous amount of frustration arbitrage in running that damn thing. Huge headache.

Chas: I totally agree. And if you go back up to the asset allocation side of the process, that whole question around inflation and truly diversified asset classes, that is one of the stickiest wickets in that whole space. I mean, basically every dollar you put into that, unless it was in like multifamily apartments, has just been an underperformer for over a decade. It’s been just absolutely brutal. And I think the appetite at most institutions for putting that next dollar to work is effectively zero, both because it’s not once bitten, twice shy, it’s like thrice bitten, 10 times shy, A, and then you’ve done all the ESG headwinds. And then frankly, even on the real estate side, I think people had this view that at a minimum, at least, it’s a low vol asset class, from an uncertainty perspective, you could look into the future and imagine a fairly narrow band of what your cash flows might look like over the next decade. And even that, with work from home and questions around travel, it’s all changed, e-commerce. So I think that whole asset class and how to solve for that is a big question for anyone doing an asset allocation process.

Meb: As we start to jump over to LB, any other thoughts on this space before we leave?

Chas: From an LP’s perspective, especially high-end foundations and endowments where you are almost all in alternatives, I think if you’re managing $10 billion, for instance, it’s very reasonable that you can have years where the fees that you’re paying out are $500 million. And I think an existential question as some of these endowments grow to be 20, 30, 40, 50 plus billion dollars is, how long are you going to outsource it? If you were to recapture that $500 million, how much would it cost you to build it yourself in a world-class manner? I don’t think a lot of the institutions are really built with that mindset that we can do it. So there’s a huge cultural challenge. But the amount of capital that is leaking out to fees is so huge, that it is begging somebody to figure that out.

Meb: Well, Chas, I don’t know if this is intentional or not, but you are the perfect lead gen. I’ll give our listeners an update, I humorously jokingly or maybe not applied for CalPERS CIO position about a year ago and they kept ignoring me. So I kept just hammering them on Twitter, until eventually the search committee emailed me last week and they’re like, “Okay, Meb, enough’s enough. We’re declining, still, you know, you’re in the no bucket.”

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Meb: Let’s actually talk about what we started to talk about today, which is you started your own fund, LB Partners. Tell us what that stands for. And you kind of have two funds, I think one is the majority focus. Tell us about the structure. And then we’ll dive into your process and what the hell you’re up to with some of these crazy stocks you’re buying.

Chas: So that’s what LB Partners stands for. My explicit intention, which is violated by being on your podcast was to have a profile that was completely out of the line of sight and to pick a name that would go in one ear and out the other and have absolutely zero resonance and mean nothing to anyone, just a couple of letters would seem to accomplish that on the one hand, and on the other hand, be something that is incredibly meaningful to me and kind of evokes something that I cherish. And LB does exactly that for me and without getting too much into the details there, it reminds that whatever I’ve managed to accomplish in life, I started in an advantaged position. And if I have any opportunity in life to sort of hand an advantage position to other people, whether it’s my family or those unrelated or even those unseen to me, that that’s a worthy goal and keep your eyes on the prize.

Meb: So it stands for Love Broncos.

Chas: That’s exactly what it stands for.

Meb: Chas is a Redskins fan and we just played both quite struggling franchises. Love the booty.

Chas: Long bonds is what it is.

Meb; Long bonds.

Chas: Yeah.

Meb: Talk about a trade that would just tweak everyone is our friend Colin Roche was talking about this on Twitter today’s, like bonds go back to zero. You want to see some people implode that would certainly be one of them. The fund is a little bit different in its structure, thoughtfully so, but also, in some ways, not that different. I think part of that harkens back to the Warren Buffett early partnership concept. So, walk us through what the structure is and then we’ll talk about framework thesis, all that?

Chas: So my basic goal was, how do I create something that is exciting for me to go to work for every day? And that is really built around exactly how I want to invest my money with as little friction as possible. So I think of it as… and you’re right, we have these two primary vehicles. One, we call rule one, which is about that first rule of investing. Don’t lose money. Second rule, see rule one. And so that really is an income-oriented defensive strategy. And my mindset there was if I could fill up a sleeve with income-producing assets, such that the income off of that covered everything I need in my life, then actually everything else I have, I can play offence with. And so everything else I have is in the second vehicle, which we call day zero. And that is where I spend most of my time. That’s where most of our capital is. And the goal of that is generational compounding. So if we’re thinking in 20, 30, 40 years from now, what are the steps we have to take to maximize generational compounding? Well, as you extend the time horizon far enough, one thing that’s worth keeping in mind is that risk matters. To maximize returns over one year, you might want to be very speculative, but maximize returns over 40 years, speculation actually starts to cost you if it’s poorly calibrated. And so it is about maximizing generational returns. And we do that by trying to use a few of the advantages that I think still exist in markets, one, certainly is duration. I used to say we serve perpetual institutions, at Investure, right, so your college endowment, hopefully, is going to be around 500 years from now. But even a perpetual institution happens to be staffed by human beings and human beings operate on the same schedule, no matter what institution is behind them. So our goal is to create something that can look a little bit beyond what a normal time horizon is and take advantage of that.

I think another area that is hard to capture systematically or quant is probably transitions, businesses that are going to look really different in the future than they do today. Again, I think that’s intersecting a couple of things that are hard for quant and systematic strategies to pick up. So, we’re looking for great businesses that can take us on a 20-year ride. And the real question is, how do you find them when they’re not priced for it already? There’s lots of great businesses that we all know. The hard part is finding them at a really good price. And so, our effort is really built around that.

Meb: What does the portfolio end up looking like? Do you have 100 names? I know the answer to this but tell the listener.

Chas: It’s about too concentrated and too diversified. It pisses off everybody. The top handful of positions are very chunky. We have 10s, and 15s, and 20s. And so the top 10 positions might be 80% of capital. And then we’ll also have a long tail of stuff where it either serves a specific purpose in the portfolio or work early in our research or I started buying and that sort of ran away and it becomes something you don’t get rid of. We probably have 40 positions in there, but it’s going to be 10 that really matter. And I kind of skipped right by this. One of the things that duration affords is the ability to go illiquid. And again, if you’re picturing, hey, I just want to invest my own money, nobody’s going to come say, “Okay, well, here’s what you’re allowed to do. And here’s what you’re not allowed to do.” It’s going to be, if I can understand it, and I think I can make money doing it. I’ll do it. So we own a seed-stage investment in a business that is now venture-backed and then we own growth equity investment in a skincare, cosmetics business, private business.

Meb: It’s a blackhead peeler, right? It’s like better than Biore.

Chas: Yeah, exactly. It’s called blemishes, Meb, not blackheads. Get your Mighty Patches on Amazon right now. They work. They’re amazing. They’re these tiny little circles that you wear overnight on your face.

Meb: It’s an overnight thing. interesting. All right.

Chas: A box of them, which might have 20 or 40. And it will be 10 bucks. It’s not too expensive. And they make translucent ones that you can put on and wear during the day.

Meb: There you go. You still can’t help yourself and you got to throw some shorts in there. Right?

Chas: Yeah.

Meb: Is that like the 10% Robinhood gambling portfolio for you or is this a big portion? Are you like 50% short?

Chas: It truly is anything anywhere unconstrained. So you’re right, I will occasionally short, I think it’s a very difficult business, so to speak. So our shorting as far as single stock shorts go, it is very exceptions based. And then we might have some index type shorts that, in essence, fund some longs. But the real juice is going to be the things that we own long, whether they’re public or private. That’s going to be what generates our returns, shorts, and other idiosyncratic investments that are not just great businesses that we want to own for years. Those are almost a byproduct of the process of looking for the great longs. So, in March of last year, in the teeth of the crisis, mortgage rates were getting killed because the mortgage market was completely dislocated and then levered seven to one. And so even a 2% loss in their mortgage portfolio can be a huge loss on a levered basis for them. And so a lot of those were facing what looked like maybe existential risk. I didn’t own any going into that. But almost every mortgage REIT, as you probably know, has preferred equities that are attached to it that are basically inducements for retail capital to like a replacement for bonds, right. And it’s, hey, come buy this 7% yield and we’ll give you a senior to the equity but your junior actually, is all that leverage that they have. And a lot of mortgage REIT preferred’s, which have a par value of 25 and maybe a 7% coupon cratered to 10. So they’re trading at 40% of par. And now that 7% coupon is worth 20 running. That’s not a great business, clearly. But you can now isolate a bet and say, “Look, we have a binary outcome. These go bankrupt, we’re maybe in trouble, maybe not. It depends on how the liquidation goes, but the only bet we have to make is are they going bankrupt? Because if they don’t go bankrupt, we’re going back to par. And a par is a 2.5X return plus a 20% running coupon.

So if that takes two years, that’s triple. So at some point, in March of 2020, the Treasury came in and the Fed came in both with separate programs targeted at stabilizing the mortgage market, basically drew a circle around it and said, “We’re not letting it go under.” You could go buy those preferred for months afterwards at huge discounts to par. So that’s the kind of thing where it happens almost by accident, as you’re hunting around looking for great businesses because there were also great businesses on sale at that time. But if you think you can isolate a 3X and you don’t have to take huge risk to do it, we’re not going to frown on good money. And so, we do that kind of stuff, too.

Meb: That’s a great example, before we leave the shorts question, from your seat when you are doing this for years at Investure, how many of the managers that actually shorted would you consider to be good at it? Meaning, how many were long-short guys saying, “Hey, I stay in long-short, and we say we add alpha in the short but in reality, it just helps dampen the risk in the drawdowns or is it most of them were pretty good or is it just only the crazy ones are good at it?

Chas: So I would say at Investure, the people that we hired to do it were very, very good, world-class.

Meb; Did they just short or did they do both?

Chas: No, we did almost no just shorting strategies. That is really, really hard. To be fair, I think most of the world’s best short-sellers are not doing short only. They’re doing long-short. And even there, some of the people who I think most highly have really adapted to where short-selling became more of the rifle shot. And it was a core part of their hunt. But they weren’t going to feel compelled to always have on a full-size short book. So when you and I graduated college in 2000, the best job in the world with the most flexibility in the world was to go to a hedge fund, to something that looked like a tiger, a tiger cub. How flexible was it? You could go long and short, twice as many things. And the way they ran their portfolios was they might run 150% long and 100% short. And that was all the time. So 2.5X gross leverage but only 0.5X net leverage. And so in theory had the best of both worlds but keep in mind that, at that point, what were interest rates in 2000? Probably, let’s call it 5. And it wasn’t a very competitive environment for borrow.

So, you could go borrow shares. And what happens when you borrow it? As your listeners know, they immediately sell it and you have an obligation to buy back the shares but you get cash when the shares get old. And that cash, which I just said, they’d be 150 long and 100 short. So they’d have $100 in cash, earnings 5%. So, right out of the gate, they’re up 5% on the year, if nothing else changes, gross. And then to the extent, the shorts go down, and the longs go up, you kind of make this big spread over time. But today, that 5% is 0.25, maybe 0.0, depending on your prime broker. And you might have to pay to borrow those shorts. So, let’s just say that’s a 1% or 2%, blended cost. You just lost six, seven points of return that was just booked at the beginning of the year. That’s become a much, much worse business.

Meb: I love to say this about my manage futures guys that go long and short. I say the beauty of that is you get to make money on both. But the downside is you also have twice as many chances to be wrong. So, you get both sides that wrong, particularly if it’s actually the same trade, a lot of people go long something, short something where you’re just expressing the same view twice, well, then it looks like a 250% leverage. It works both ways. it could work out great. It could work out terrible. You’ve made a name for yourself by digesting and describing the inner plumbing of how financial markets and particularly hedge funds and markets work. I think that’s a great description because people overlook that. There’s like, wow, hedge funds suck. But you look at, well, there’s also this really kind of dorky, simple arithmetic, that actually is another pretty big factor that many don’t talk about. A lot of people know, but many wouldn’t.

Chas: Yeah, anyone who’s involved is acutely aware of it, it has a huge impact on the attractiveness of that as a strategy. And so, it’s just much less attractive. A lot of the people I know who are great short-sellers have effectively switched from being whatever, 150 long, 100 short, to something like 80 to 120 long in a very concentrated long portfolio, and 10 to 50 short in very punctuated fashion to target-rich environment, they’ll size it up, and they might add a little long exposure but it’s really shifted.

Meb: What’s the framework for how you find these stocks? Feel free, we can go down the case study route if you want to talk about a couple of them. One had a pretty big announcement today, which I’m still not sure what the actual announcement is. I’m trying to find out. How do you arrive at this final portfolio that’s pretty concentrated? The way I want to see it, if I’m allocating an active manager, I want them to have heavy in their best ideas, which it seems like you do. I’ve followed them, but I’ll let you pick some of these, just kind of work through your process and how it illustrates what you’re thinking and the bets you’re making.

Chas: Sure. I’ll give you two examples of large positions that we have. So, one, which I’m guessing you’re referring to announcement today is Twitter. Right? So that’s a very mainstream business, obviously. And it has been kind of the redheaded stepchild of the big tech players always trying to keep up with the Facebooks and the Googles of the world, really flailing on execution over and over again, over the last six, seven years. And frankly, when it IPO’d, they came out at a very high valuation. When we were talking earlier about how performance causes people to perceive businesses in certain ways. Twitter basically gave itself a giant perception headwind for a long time because it has had to earn its way into a multiple that was just too high when it came public seven years ago. And now, it’s a business that has really undergone transformation. So, I can dig into the details but I think if you step back and think like why does this shift what we’re doing, if you want to own a business for the next 10, 20 years, the ability for business to generate excess cash flow, the ability to align yourself with the trends of the world, those are really big pieces. And I think Twitter sort of checks the boxes on all those and is undergoing this transformation where it’s switching from a 280 character microblogging service into really the place for the creator economy to exist. And whether that’s you as a creator hosting podcast and building a fin twit following, or that somebody who is an author and writes books, that whole spectrum, they live and breathe on Twitter. And I would argue in the past, you have gotten more from Twitter than Twitter has gotten from you. I think Twitter kind of likes it that way but they’re figuring out that there’s a lot more they can get from you without you feeling like they’re taking. And that creates a huge landscape for increased ARPU that they’re going to pursue. And as part of that, I think they believe they’re going to be able to pay creators quite a bit to produce on their platform, which will drive more engagement into the platform, right?

So the more Meb is tweeting, or the more a famous author is engaging on the platform, the more all their followers also want to engage. And increasingly, if you follow tech, or crypto, or investing, it is the place where news happens. And so, it is becoming the Bloomberg of news. If you need to discover it right now, you kind of have to be on Twitter. And Twitter is finally getting its act together. I think Mark Zuckerberg famously called it, the clown car that drove into a gold mine. And I think today, we’re starting to see real mining equipment put into place.

Meb: So if you look at Twitter’s history, I think you had a really great point, it reminds me a lot of the great tech companies of when we graduated university. So late ’90s, you had these great companies, Microsoft, Cisco, whatever, and they were just too expensive. And they went certain amount of period sideways or maybe it looked like a saucer. And then eventually, Microsoft now back to I think the world’s most valuable company, a couple of trill. And so, Twitter, I was looking at the chart, so let’s call it a 40 something billion market cap, like you mentioned, same price back in 2013. I feel like the narrative, obviously, the world’s a lot different than eight years ago. On most TV or new shows and they straight up have your Twitter handle in the screenshot, so things have changed quite a bit. The biggest criticism you traditionally hear, which is ironic, because they’re rolling something out today, is Twitter’s is not delivering enough new features, or there’s a lot of things that participants want. Like, what’s the future look like? If you walk this out, one, three, five years, what’s the bull case? How do they get to this sort of 10X valuation from here? What is the path forward for them?

Chas: Yeah, reputation trails reality. So, in Twitter’s case, reality is if you go back a year, they still basically were a 280 character microblog. Since then, in just the past 12 months, they’ve rolled out Twitter Spaces, which is an audio forum that competes with Clubhouse. Today, as you mentioned, they rolled out actually a consumer subscription product called Twitter Blue, which is a news aggregator. So it’ll give you free access to Washington Post articles, etc., ad-free news inside that. They’ve rolled out Twitter for Professionals just beginning. So you can imagine trying to create e-commerce inside Twitter. So if you’re a small business, can you, over time, link in a Shopify type experience inside Twitter? They’ve rolled out communities, which is like Reddit and Discord. So that’s a topic-focused way of experiencing Twitter, where the only thing you’ll see in your timeline when you’re in a community. So, an example could be talked about Nike. It could be like shoe drop community, right? All you want to see is stuff about that. You go into that and then you go back out into your timeline. So, they’ve rolled out probably six or seven major product enhancements. They’ve improved their ad platform. It’s become much more feature-rich. they’ve allowed for longer video to be on it. Twitter Spaces, the audio platform, they’ve just enabled recording, which means that that is now going to be effectively proprietary live podcasts. They get recorded and searchable on Twitter, and I think becomes a wedge for it to become actually an audio platform. So, I want to go listen to a Twitter Space that Meb hosted with me, and then why can’t they also pull in all Meb’s other podcasts? So, the question there is, can they grow engagement? They’ve always had billions of users who visit in a given month but the reality is they only have 220 million really passionate, monetizable daily users. Monetizable means they can deliver you an ad, which really means that you’re logged in.

And so the opportunity there is to take that huge top of funnel. As you said, you go on CNN, you go on any news website, and they’re basically advertising for Twitter for free on it. They’re driving engagement to tweets in their articles. Then they take that huge top of funnel and close the bottom of the funnel, give you more reasons to stay there and be logged in and they’ve laid out a roadmap of growing their daily users, their monetizable daily users by 50% over the next couple of years, growing revenue per user as they do that. And I think it’s pretty easy to think if you start multiplying one thing times another thing and they’re both big, you can get really big overall revenue growth. And there’s no reason to believe this is not totally secular. Twitter’s done a terrible job with their advertising in the past, right? It’s just been brand advertising. It feels very non-targeted. I go on Twitter and get ads for like Arby’s, and I’ve never eaten at Arby’s.

Meb: Come on, you’ve never eaten at Arbys, Chas? Come on.

Chas: They got the meats. Not because I look down on it, I’ve just never had the opportunity.

Meb: This is like my mother-in-law claims she’s never had a doughnut in her life. And I’m like, “There’s no way you’ve never had a doughnut.” You don’t have to lie about this, Chas. Like, no one’s judging you. You were like four years old, your parents weren’t… You didn’t want to get some Arby’s sauce.

Chas: My mom had a bad experience with Arby’s when I was a kid. She poisoned the water for me. But yeah, so I think that surface area for the ways they can both engage and monetize, those are both growing right now. And it is finally a business with real direction that has attacked together, but to your point, is valued exactly like it was in 2013. And so, a lot has changed. I think there’s a lot of reason to be optimistic but it’s still not a low multiple stock. It’s not going to screen as devalue. My largest position screens very much as devalue. It’s a business MoneyGram. It’s more of a small-cap, not an investment recommendation, not liquid. But that’s a business where the CFO on their third-quarter call a week ago said they’re going to do 100 million of free cash flow and it has a $500 million market cap, right? And so you say, “Okay, well, that must be a dying business, walking into a Walmart with cash and trying to send it to your grandma in Mexico.” And as I said, I think transitions are one of the things that are maybe most underappreciated systematically. While it’s got this fair to call it a melt the ice cube core business it’s built an incredible FinTech digital transfer business. That is one of the largest in the world. It looks just like pure-play Silicon Valley competitors, in some of which have come public in the last month. There’s a business called Remitly, which trades at 10 times revenue. That business is exactly the same, almost the same size as MoneyGram’s online business. And MoneyGram trades at less than one times revenue. If you put 10 times revenue just on the digital business, which I’m not saying you should do, that would be a 4X in the stock.

Meb: We’re in a world of half the startups I see now, people were like, 20, 30 times… My eyeballs were just exploding. But 10 used to be for the longest time on these SaaS businesses in that world and now it’s just like sky’s the limit. I’m looking at this chart got destroyed in 2017, ’18, that it had a nice little pace. And it seems to be moving up before going down a little bit now. But I wonder how much of the business is the name that sounds so antiquated, right? It’s like MoneyGram, it sounds like something from the ’70s.

Chas: It sounds like someone ringing your doorbell wearing a uniform with envelopes of cash.

Meb: Here’s what they do, Chas, here’s your unlock, just send them a letter and say, my one suggestion, I heard this from a brilliant podcaster, we’re going to change our name to MoneyCoin? Already, that’s like a 10X market cap right there.

Chas: It’s funny people will say crypto is going to replace that, right? El Salvador has adopted Bitcoin as its currency. And why will you ever need MoneyGram? And mind you, exact same business that’s digital trades at 10 times sales. So they would be impacted in the same way. But ultimately, if you live in Mexico, or El Salvador, or Pakistan, and you receive a digital remittance, you need to spend cash. And MoneyGram is the off-ramp. And actually, one of the things that they and their competitors are doing is starting to partner with digital money businesses, right? So, it’s very easy to imagine a world where someday Coinbase says, “Hey, we’re going to partner with MoneyGram, or Western Union, or someone else. And if you want to transfer money to someone in El Salvador, you can, and then they can use MoneyGram as the off-ramp.” And so kind of the MoneyGram as a service offering, where it’s an API integration, and by the way, they already have that. That’s a big business for them.

Meb: What’s the geography? Is it mostly here? Is it all over the world? Is it Mexico?

Chas: It’s global. It’s in 170 countries. Obviously, the send countries are more concentrated. So you’re going to have Western Europe and the U.S. and some other countries be big sends. And then the receiving countries are generally going to be the less rich countries in the world, somebody who’s sending money back to a family member in a developing market. But when you start to think about all the different combinations, and permutations, and all the regulatory framework that sits for each pair, when the U.S. sending Mexico is a different regulatory environment than England sending to Mexico, which is different than Mexico sending to Australia, all of that adds a huge amount of compliance, complexity to it. And so they’re very difficult businesses to recreate and as they’re becoming More SaaS-like, where you’re a deep-sea relationship with them where you download the MoneyGram app. They’re actually cutting Walmart out of the picture. In the past, you had to go into Walmart, and that meant Walmart got paid. Well, now, if I send money digitally to someone who receives in a bank account in Mexico, it costs less than 1% for that transaction. It’s not a high cost send the way it used to be. So they’ve become very modern businesses and that part of their business is growing very rapidly. So that’s the kind of thing we look for.

Meb: This is a good example, for the like the discretionary people out there. There’s a certain element of seeing things that you’re not the use case for. And so most Americans probably don’t interact with this product. But the rest of the world is enormous and probably an enormous amount of growth in a lot of these countries, Africa is a giant one?

Chas: The whole remittance industry globally is a $700 billion value transfer. And most of that is done via high-cost walk-in methods. And as it switches more and more to kind of a digital future, there’s a handful of companies like MoneyGram that are really well-positioned to capture that. So that’s one where I think the view of it is melting ice cube but the reality is, you’ve got this kind of declining business on the one hand and this growing FinTech inside of it, on the other hand, and as you get to the other side of that transformation, the business is going to look really different than it does today. Higher margins, closer to its customer, more scale, growth. I mentioned we do publics, we do privates and I have tons of ideas for starting businesses.

Meb: Awesome. I was laughing because some of the Twitter features, I looked it up, we did this old article called $17 million FinTech ideas. I think it’s from like eight years ago but Twitter’s adopting a few of them today. Finally, some of this curation with the news story ideas. Can I hear a terrible idea or two? Because there’s some that I really want to fund but going back to our real estate discussion, want nothing to do with actually running.

Chas: I can’t give you my very best idea, which at some point, I’m going to have to hire an operating CEO. It’s so good. I’ll tell it to you offline. You’re going to want to invest in it 100%. But I think I mentioned to you I’m coming into your industry. I actually started an ETF index business And we launched our first index, which has been licensed by the Roundhill guys. And so the ticker on that is BYTE, B-Y-T-E. And it is trying to do exactly what you and I have been talking about for the last hour. It is focused purely on global digital infrastructure. So digital infrastructure is if you step back and say, “Hey, tonight, I want to Netflix and chill,” The question is, how does the movie you want to watch get from Netflix in Seattle to your screen in your hand in front of that beautiful mountain picture that you’re sitting at? And that whole journey is across digital infrastructure. Fiber, data centres, powers, last-mile fixed-line infrastructure, that, to me is the real asset of the 21st century. It actually is real estate. It is growing rapidly. They trade at attractive valuations compared to a lot of traditional real estate. And they have very long-term recurring sticky revenue and high cash flows. And so honest to God, Meb, I think I mentioned this to you like four or five years ago and you’re like, “Yeah, it sounds like a good idea but I like surfing, I’m busy.

Meb: The Roundhill guys are the perfect guys for this. We actually have them coming up on an upcoming episode. So love the guys, they do that thematic space. I think thoughtfully, I have great respect for people who just pay homage to the ticker game and they have some of the best. They got NERDs, you mentioned BYTE. They got MVP. They got META, DEEP, which is another fin twit Toby helps him out with but if I was them, I’d reach out to Facebook and be like, “Yo, we got the META ticker, how about you just invest in our company and we’ll give you this ticker or how about you just buy this ticker?” What’s it worth to Facebook, 50 million? They got MVRS or whatever they have is a terrible ticker. So, Roundhill, this is going to be your giant payday. You got to talk to Mark.

Chas: And Byte, B-Y-T-E, that’s the parent company of TikTok.

Meb: Yeah, again, you don’t even need to actually have an ETF company. This should just be like a domain squatting company that actually kind of has ETFs. And then we’ll get these giant companies to invest as venture investors. What’s funny, listeners, and Chas may make me delete this. So, we’ll see if it makes it into the episode, Chas, a while back a couple of years ago was like, “Yo, Meb. I’m going to start tweeting.” And I’m like, “Well, that’s dumb. It’s a cesspool. You’ll just go down this.” He was like, “Well, like check it out stock, yada, yada. But by the way, I’m smart. So I’m going to be anonymous.” And I say, “Well, that’s good because the very best and very worst accounts are anonymous.” And then I forget about it. I follow Chas. Fast forward like a year later, this anonymous account has this totally viral tweet, goes absolutely viral and I follow this account, I’m like, “Who the hell is this?” So I go to message the account to say something to them about something, and I’m like, “This is you?” I had 100% forgot that you were behind this account. And so like came full circle watching, like all my friends on Twitter interact with you and I’m like, “Who’s this asshole?” Oh, wait, it’s one of my oldest friends.

Chas: One of the most bizarre weekend experiences. I think I hit send on a tweet on like Friday at 4:00. And the next morning I woke up, I think I went to sleep with 300 followers from my very light tweeting. And the next morning I woke up with 4,000. And by Monday, I had over 10,000.

Meb: Usually that happens on the opposite side where somebody is just getting cancelled and tweets something idiotic, and then they wake up to the other side of the notification.

Chas: Whatever the opposite of cancelled was, that’s what was happening to my Twitter account. Funny enough… So I mentioned people get more value out of Twitter than Twitter ever get from them. I was listening to a Twitter Space, and Will Hershey, one of the two founders of Roundhill was talking on it and he goes, “Yeah, people pitch me ETF ideas all the time.” I’m sure this happens to you too, Meb. Like people are like, “I’ve got an idea.” And he said if you ever have one, feel free to send it over the transom. So the one that I had mentioned to you, I DM’d this guy. So my anonymous account, DMs Will and says, “I’ve got this idea for you know, this index that I want to create and I wonder if you’d be interested in helping me think about what that could look like in an effective way.” And he said, “Yeah, that seems like an incredible idea,” when I described it to him, “we’d be interested maybe in licensing it from you, if you ever do build it,” and yada, yada, yada. And here we are. So I kind of stumbled backwards into your business. NERD ETF, I think just listed less than two weeks ago.

Meb: Awesome. Well, I’m excited to see it move. Give us the quick, how do you construct the portfolio? Is it market cap-weighted? Do you do some sort of active management? Like, how do you guys put together a portfolio? How many names you’ve got? What’s the deal?

Chas: It’s 40 businesses. And our thought really is, look, if you have a real asset allocation and you’re an institution, I wanted to create something that I would have wanted in your issues. There are some great digital infrastructure, private equity managers, DigitalBridge and Stone Peak, but there are not any, in my opinion, high-quality digital infrastructure ETFs. There’s a couple that tried but they mix in a whole bunch of crap. And to my viewers, I want to create the index that I would have wanted in those shoes. It is not actively managed from the standpoint of us making portfolio picks. We systematize the process that focuses on three things, growth, soundness, and value. Growth, obviously, this is a secular growing industry. We want to make sure to capture that. Soundness is really safety. So it is a reflection of size, balance sheet health, etc. And then value is a small factor in it but it allows us to go in twice a year, rebalance to kind of re-optimize the portfolio toward where we think the best opportunities are. It’s global, so no less than 65% in the U.S. But the other 35% really is everything from Thailand to Australia, to Spain, really hard to replicate as an individual. So we think the index provides really differentiated value, giving you exposure to the growth and digitization of everything. And if you’re like me and you think that trend of the last 50 years is also going to be the trend of the next 50 years, it becomes really tempting to say, “Well, I want to figure out, is Facebook going to be Google, Twitter, or is Dogecoin going to be Shiba Inu, or is Disney plus going to be Netflix? And instead our view was what tech? Just bet on the trend. And the trend requires that you go across our highways and you rent our data centres, and you consume across our pipes. So we grow automatically with it. So that’s really it is highly recurring, inflation resistant, diversified, global, the real estate of the 21st century.

Meb: Well, I like it’s global too. To me, that’s a thoughtful idea. And I love these stories. I’m sure it’ll be a fin twit success story, but having these ideas come from anywhere. And we’ve seen this happen over and over the beauty of the not just ETF but asset management businesses, as you know, is scale is limitless, really. The sky’s the limit on where it gets to be. It’s like a totally fine business until it turns into the best business in the world at scale. The question, of course, is getting there.

Chas: Yeah. And then from the perspective of my LB Partners, my view is, if I’m going to do something like this, I want it to be a win for my partners. So I’m actually giving an interest in my index business to my fund so that as the assets grow, my LPs win automatically with it. And then personally, I love the index. So literally every day, I’m buying bits of their ETF.

Meb: Here’s the great arb, listeners, is you subscribe to Chas’s fund. Are you open right now? Because you periodically been closed. Are you guys currently open?

Chas: I’m mostly closed, and certainly I’m not marketing on here.

Meb: Tell Chas if you send Meb in the subject line, he may let you in. But here’s the play, here’s the arb, put a ton of money in Chas’ fund, and then also wait a month and then put a ton of money into Byte. And then you just get the equity pop. I think that’s a brilliant institutional play.

Chas: It’s like an activist investment into my fund.

Meb: Yeah. And then you take over Chas’s fund and then sell the META ticker to Mark and then just keep going down the value chain. That’s fun, man. You got any other crazy ETF ideas to fall through after this or are you just going to do an activist campaign on Twitter and take over as CEO?

Chas: So, I do have some others but I’m focused on this one first. It’s one of those things that sort of deserves a place I think in my portfolio. So my assumption has always been, if I can build things that I love, then maybe some other people will be interested in them too. So we’re staying focused on Byte for the moment.

Meb: I’m biased. That’s kind of what we do. I think that’s the thoughtful way to build the long-term survivors. I don’t know what the attrition rate in hedge funds, it’s probably worse, but the average mutual fund attrition over 10 years is half disappear, which is astonishing if you think about it. Mutual funds, theoretically are entire organizations, whereas hedge funds are often singular personalities, whatnot. But 50% attrition is enormous. But to me, coming up with an idea like this where there’s a runway into the future, I think is really the only way to go about it. Chasing the hot dog is a lot harder.

Chas: Yeah, I started it as I think a lot of ETFs out there are dessert or appetizers. Nothing wrong with those. They’re great. But I was looking for something to be the center of the plate entrée, where this can be the robust freight train that sort of pulls you through and then other people can serve those more niche things. But this is a really core offering.

Meb; What else, man. We’ve kept you here for a long time. Anything else on your brain as we wind down 2021? I mean, you launched your fund into the teeth of it. I mean, this is up there with financial crisis. You’re like pandemic recovery. What’s the future hold for you? Do you get any employees, you hiring? What’s the story?

Chas: So I had a COO, I put together this job description and wrote up, here’s what I think you should do. And he came back and he was like, “I think I understand. So my job is really do everything Chas doesn’t want to do.” I was like, “Oh, that’s the most efficient and accurate job description of all time.” He’s great, Rich. He is tremendous. And he’s so much more organized than me and does all the things that I would be a disaster at doing. He’s perfect at that. But my view has been, it’s easier to add complexity than subtract it. So, I didn’t want to go hire an investment team, until I really understood what are the places where I could use help, if any? Because I’m doing this because I love it. So I didn’t want to immediately start to have a big team and all that. Today, if I think about like where I might be interested in hiring someone, I do think a lot about the fact that there’s been probably 500 IPOs between SPAC and regular way IPOs in the past year. And it’s way too much for me to look at and do the other thing. It would be interesting, potentially, to get a junior person to come in. And their whole first year would be to just go through every stack and every IPO, and just help us sort of filter them in a certain way that I have in mind. So we’ll see.

Meb: That sounds like a miserable job, listeners.

Chas: I think it would be an incredible job as an aside.

Meb: If you want to go through SPAC prospectuses for a year.

Chas: You don’t need the prospectus because there are sources that have all the SPAC deals in them.

Meb: You take the job, then you figure out how to outsource the job to a third person, in which case you just look brilliant while actually not doing any work. I applaud that concept. If I was an enterprising young person, I think that’s the way to go about it. The SPAC is interesting. We’ve done a fair amount of podcasts on the SPAC ARB and investing and ins and outs of that

Chas: I had one that hit today, Meb.

Meb; Oh, today?

Chas: Yeah, today. And I’m invested in HUGS, which is Union Square Hospitality Group. Danny Meyer is the founder of Shake Shack and other things. He is a sponsor of Hugs. And they’re doing a really odd structure, but ultimately ends up in the same place where they’re actually being acquired by Panera at Panera’s IPO and the exchange is the SPAC owners are going to be given shares of Panera at Panera’s IPO press. So it’s a way to get in before the pop, so to speak. So the IPO actually becomes the pipe. Danny Meyer’s goes on board of Panera and the SPAC owners end up with some minority of it, but Panera ends up at SPAC cash and regular way IPO. It’s fascinating.

Meb: You’re involved in another merger sort of drama, is that completed and folded over the years? Was it the dog food company in Europe?

Chas: It’s Zooplus of Europe and it is ongoing. And you’re right, that’s a deal where twice now, we’ve had European businesses where an offer was made at a nice premium, but not at a price I was excited about. But in both cases, our trading price traded straight through the offer price, which is an almost ideal setup, if you have a long term timeframe because let’s just say in the case of Zooplus, I think effectively, it was trading at 320 euros a share and a 370 euro offer was made, and the stock immediately traded to 380, which means no one is going to tender their shares. If you would tender at 370, you’d rather just sell to somebody else in the market at 380. And then that person will never tender that 370. So it sort of builds a natural resistance to tendering, which begs for a topping bid. And if things go wrong, you’d go from 380 to 370, so you lose like 2%. But if things go well, you get a topping bid that comes in at 420, 440, 450, which has been what’s happened with Zooplus. A bidding war has occurred around that and it still trades above the last offer. So we’re waiting. We’ll see. But those are exciting. It’s fun.

Meb: What’s been your most memorable investment thus far in this journey? Anything pop out?

Chas: Yeah, I mean, I mentioned the preferreds, those were just fascinating. We have had these two acquisitions, both of which turned into resistance wars. And then I would say, MoneyGram has been quite the journey where we’re up on that. But I think when we first bought this time last year in the fours, it’s been as high as 12, then gone back to 7, then went back to 12, and back into the 5s. So it’s the single most volatile business I may have ever owned. Certainly, some of the meme stocks are as volatile as this but it’s just incredible. And I would say it’s driven by exactly what I was describing, which is this process of transformation. I think transformation lends itself to incredible volatility because you’re probably switching owner basis, but you’re also completely shifting perception. And there are times during that journey where one perception’s dominating the other. And then if you add some leverage to it and small-cap equity to it, like you get all these flows that are happening. So that’s just been completely fascinating. When the business has executed brilliantly, the stock has done, fine. But the journey has been as peak and valleyed as you can possibly imagine.

Meb: Is it a short candidate or people even care about it?

Chas: I think it would be a pretty dangerous short. I think it’s more in the…

Meb: Are people shorting it currently? Is there short interest?

Chas: Not really. It’s come through a really significant balance sheet restructuring that has made it much healthier. And I would say today, it’s not so much that it’s a short candidate as much as I think a lot of people view it as a legacy business melting ice cube in a world of FinTechs and DeFi. And so that it’s a natural loser, and they’re not really looking through the brand, like you described, and noticing, wow, it’s built a $250 million run rate revenue FinTech business inside itself. And we’ll see what happens when the world catches on to that.

Meb: Chas, this has been a whirlwind already. We’ll have to get you back on soon. Where do people go if they want to write you a big fat check, if they want to talk terrible ETF ideas, if they want to propose some Twitter features, what’s the best place?

Chas: We remain pretty under the radar. So I don’t think I even have a website for my LB Partners stuff. And I’m certainly not giving that email out. But if you want to follow, we have a Twitter handle for our IO Digital Index. It is @Iodigitalindex. If you were to search the hashtag, B-Y-T-E, you’ll almost certainly find it, Byte. And if you can find by anon account, come along and follow, and we’ll that just stay a little cookie trail that people can hunt down.

Meb: There you go. If you know, you know. Don’t dox him, listeners. Keep it to yourself. Chas, has been a blast. Thanks so much for joining us today.

Chas: You’re the best, Meb.

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 feedback 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.

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