Episode #401: Clay Gardner, Titan – Investment Management Services for The Everyday Investor
Guest: Clayton Gardner is the Co-Founder and Co-CEO of Titan, a retail investment management platform aimed at the new generation of everyday investors.
Date Recorded: 3/8/2022 | Run-Time: 47:50
Summary: In today’s episode, we kick it off with an overview of Titan and the firms’ investment philosophy. Clay touches on some of their different offerings, which now includes crypto. We hear about the company’s content strategy, which help both educate investors and keep them invested in the market during volatile periods. Then we hear what other asset classes Clay is thinking of expanding to in the future.
As we wind down, we hear about the firm’s fundraising history, which includes investments from a16z, Kevin Durant, and Will Smith.
Sponsor: If you’re seeking the less obvious and are curious about the ever-changing world and how it affects investing, The Active Share podcast is for you. Hear thought-provoking conversations with thought leaders, company executives, and William Blair Investment Management’s own analysts and portfolio managers as they share unique perspectives on investing in a world that’s always evolving. Listen to The Active Share on Apple Podcasts, Google Podcasts, Stitcher, Spotify or TuneIn or visit here.
Comments or suggestions? Interested in sponsoring an episode? Email us Feedback@TheMebFaberShow.com
Links from the Episode:
- 0:40 – Sponsor: The Active Share Podcast
- 1:14 – Intro
- 1:54 – Welcome to our guest, Clay Gardner
- 2:30 – Overview of Titan
- 9:57 – Titan’s investment philosophy
- 17:21 – How their investment process has evolved over time
- 21:49 – Clay’s thoughts on hedging
- 27:39 – Clay’s thoughts on the future of Titan
- 30:42 – The profile of the average Titan user
- 40:32 – Fundraising from a16z, Will Smith and Kevin Durant
- 41:30 – The Power Law: Venture Capital and the Making of the New Future
- 43:36 – Clay’s most memorable investment
- 44:25 – Learn more about Clay: titan.com; Twitter
Transcript of Episode 401:
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.
Sponsor Message: What does a two-time World Cup-winning coach, a major league baseball team owner, Top Chef, and a luxury fashion designer have in common? They’ve all been featured on “The Active Share Podcast.” If you’re seeking the less obvious and are curious about the ever-changing world and how it affects investing, “The Active Share Podcast” is for you. Hear thought-provoking conversations with thought leaders, company executives. And William Blair Investment Management’s own analysts and portfolio managers as they share unique perspectives on investing in a world that’s always evolving. Download “The Active Share Podcast” in iTunes, Spotify, Google, Stitcher, and Tunein.
Meb: What’s up, y’all? We got a good show today. Our guest is Clay Gardner, co-founder, and co-CEO of Titan, a retail investment management platform aimed at the new generation of everyday investors. In today’s episode, we kick it off with an overview of Titan and the firm’s investment philosophy. Clay touches on some of the different offerings, which now include crypto. We hear about the company’s content strategy will help both educate investors and keep them invested in the market during volatile periods. Then we hear what other asset classes Clay’s thinking of expanding into the future. As we wind down, we hear about the firm’s fundraising history, which includes investments from a16z, Kevin Durant, and Will Smith. Please enjoy this episode with Titan’s Clay Gardner.
Meb: Clay, welcome to the show.
Clay: Thank you for having me, Meb. Excited to be here.
Meb: Where’s here today?
Clay: So I’m in New York City. We are catching a little bit of spring here.
Meb: Man, I miss it. I need to get to New York. Bryant Park, maybe May. It’s been a couple of years. What’s the vibe? It’s good.
Clay: Things are good. Yeah, they’re starting to get a little bit more reopened. So a lot of the orifices that folks put up as a result of COVID, there’s restaurants have spilled over into the streets, all that good stuff. People are just looking for a reason to get out and have the New York City spring-summer. So looking forward to that.
Meb: Well, I’ll join you here in a few months, we make our way up there. It’s great to have you today, we’re going to talk about all sorts of stuff. But first Titan, tell us what Titan is before we dive in.
Clay: Yeah, I would love to, we like to say we’re building the next Fidelity. And what we mean by that is an investment platform where anyone can basically push a button and get invested with expert managers across over time. Pretty much any asset class, specifically focused on those that historically have not been accessible to retail investors. So we launched in 2018. We started with the bread and butter Reno invest, which is public equities. We eventually expanded into crypto last summer. So today we have four products, we call them products or strategies.
In a couple minutes, you can download the app, like a bank, and get invested across those four strategies, which are managed in-house by our team. And then you’re essentially riding shotgun while your manager calls the shots, buys, sells securities or crypto.
Meb: What’s the origin story behind the name by the way?
Clay: I was sitting at my co-founder Joe’s table in his apartment and it just kind of came to me. I think a lot of people associate the word hedge funds and PE with the word titan. I think it’s like one of the more common if you Google “hedge fund Wall Street Journal” or “hedge fund New York Times”, it’s one of the more commonly cited words in those headlines is “hedge fund titan XYZ buys a $50 million mansion in the Hamptons.”
And so I think Titan for us, one, I think it signals to we’re in battle, sort of fighting against the status quo in terms of legacy money managers. But also Titan is sort of this kind of revered figure of authority and status, whether its financial status or just authority in the world. And I think it touches a nerve for a lot of our investors, who are historically used to not being able to afford to get access to the things that “hedge fund titans” of yesteryear have access to.
Meb: What do you think is the most unique proposition for you guys? Because we’ve had sort of the digital onboarding for individuals, whether it’s a Betterment or Vanguard or Wealthfront with the allocation side. We’ve had private investments over here and areas trying to kind of democratize that. What do you guys see as sort of the main, I don’t know if muscle movement’s the right word, but what’s the big wedge or impact you guys are offering here? Is it the actual offerings themselves? Is it the delivery? Is it all of the above?
Clay: We’ve started with public equities because the core wedge, the core problem we’re solving is people know they should be invested in stocks. But a lot of them don’t have the time, knowledge, or resources to do it themselves. They want more than average. They want more than they believe they would get in a low-cost index fund. But they don’t trust themselves to day trade their savings in Tesla call options on a Robinhood. And so the contrarian idea that Titan was born on was the idea that that market is actually not a niche. It was viewed as a niche and still is by many, but we actually believe it’s a massive market. We think it could be the majority of at least younger generations.
If you deliver the right infrastructure, you build the right tooling for them to realize this doesn’t need to be your parent’s mutual fund, which is a five-letter ticker where you’re looking at a 5-year, 10-year, 3-year performance chart and that’s the product experience. You can be brought along, as managers are going to work, going to bat doing research, identifying securities, with private’s public’s crypto. And so our growth today is at least proven to us that it’s maybe it is a niche to many people, but it’s actually quite a big and fast-growing niche and very lucrative one.
Meb: Tell us a little bit about your base first offerings, in a world where Vanguard is basically you can buy the market cap index for nothing, or close to nothing. I assume you guys, like us, are not charging nothing. So what is it you guys are offering? What are you doing and what’s sort of the framework for how you guys think about these first few strategies?
Clay: We have four products today, three of them are in public equities. We started with the traditional “blue chip,” some companies that are household names, the FANG stocks. We’re huge fans of many of those businesses, and they’re wildly profitable and we think they deserve a slot on the roster of large-cap U.S. equities. There are also some under-the-radar names many people won’t have heard of or own in their self-directed accounts. So we call that Flagship. Titan Flagship is the largest strategy on our platform. It’s been around for a little over four years now.
The strategy was designed, Flagship, with the idea that we can tease out signals to identify great quality compounding businesses, not overpay, and just sort of do nothing. Be smart and tactical with actively managing that, but we’re not reinventing the wheel. It’s just a traditional Warren Buffett, Terry Smith-like framework for identifying great businesses. So that’s Flagship. And that’s what we recommend most of our clients put the majority of their Titan wallet share in today, for a handful of different reasons from a risk tolerance standpoint.
The second is we’ve kind of moved down the market cap spectrum. So we launched a product focused on small-cap equities. The traditional analog is like the Russell 2000 Index, for example. These are like very off-the-beaten-path, under-the-radar companies. Some of the companies we’ve known have been acquired, some have been spin-offs, some have been activist or transformational M&A sorts of stories. So these are where we have an in-house research team that’s actually tactically and actively managing these portfolios. But this is one specifically focused on not devalued, but like off the beaten path, more esoteric securities, roughly 15 to 25 securities. It’s called Opportunities, and it is very opportunistic in nature.
The third we launched was Titan Offshore. Sounds exactly what you think. It’s international securities, primarily through with list equities and ADRs. So we’re not investing in any new offshore markets directly at this time. But it’s a great way for us, we think, to give our clients exposure to international markets where…and I know you’ve been a big proponent. I as well think that a lot of Americans have under-invested in developed and emerging markets. August of last year, in particular, has been rocky. And it’s been a decade period of relative underperformance between developed emerging markets in the U.S. But I think at some point that tide may turn, we want to make sure our clients have exposure there in some form.
And then lastly, is Titan Crypto. This is really exciting. This was not at all something we intended to get into as soon as we did. And I know I’m going to sound like a boomer in the scheme of things when people…I was on Mt. Gox in 2013. I will admit, I was not that early, we were not that early. But candidly, on our roadmap, we weren’t planning on moving into digital assets this soon. It was very much, it was by far the most demanded retail product we’ve ever had.
People were effectively yanking it out of our hands. And so we hired an analyst, built a team around it. And the goal there is essentially blue-chip liquid cryptocurrencies, crypto-assets. So we own Bitcoin, we own ETH, we also own other layer 1 blockchains, and then some more esoteric cryptos. But the goal there is we took what we believe is sort of the S&P equivalent in crypto.
And to your earlier question, like what’s the goal from Titan? The goal is, one, financial outcomes. So like over time, investor on our platform, we believe, for us to deliver value, should over a three to five-plus year rolling basis have gotten more value than they could do, either on their own in their self-directed account, or an average low-cost index fund.
And two, which we’ll probably dig into more, they should feel significantly smarter and more educated on how their capital is invested and why. For example, the Russia Ukraine situation which is happening as we’re doing this interview, people should know exactly how they’re positioned. What is my Russia exposure? How does the U.S. ban on imported oil from Russia affect? What money should I be adding on this volatility? Should I be dollar-cost averaging?
We’ve seen that actually instilling confidence and explaining along the way is actually really important to actually getting the financial value. Like, you have to stay invested to actually reap the returns of the businesses that your manager’s investing in. So I kind of view them as synonymous. A lot of businesses will use content marketing or education as a sort of growth lever IQS or product.
Meb: You guys been at this for what is this four years-ish on the main Flagship? Tell us a little more. So is this a strategy? Like, what sort of turnover does this have? And are you guys…is this is just Clay, waking up in the morning and saying, ‘You know what, I’m the PM and these are all my choices,’ you got a team? And then how do you guys go about making the calls for what goes in, what comes out? For most people, that’s a, as it should be for an active strategy, pretty concentrated portfolio so tell us how you guys put this together.
Clay: It’s definitely concentrated, 15 to 20 securities, generally speaking, we conviction-weight them. So the default for any position size is 5% each or 100% divided by on average 20 positions, we’ll conviction-weight for a few different reasons. One is certain businesses just have a risk-reward prospect that we think smaller size can justify the upside. So, for example, as of this writing, we have a small position in Coinbase in Flagship. For a handful of reasons, we believe it’s both fundamentally cheap and misunderstood. But also we believe if and when we’re right, the upside of that security, even at a 1% position, it deserves a slot in the portfolio. We have other securities like Microsoft or Apple, which are more significantly higher-weight, closer to mid to high single-digit percentage of the portfolio.
But stepping back, I would say it’s very much like the Terry Smith or Buffett-like strategy in that. It’s like three very simple principles, like find great businesses that we believe have entrenched competitive moats, competitive advantages. This is the sort of sleep at night, wake up in 10 years. If the markets closed for 10 years, we won’t bat an eye, feeling great that we would be able to wake up and want to buy this portfolio every single day. And let the business compounding do our work for us. Just make sure we don’t overpay.
And then your question on turnover, the world changes. And so I would draw the line between us and the traditional perception of like a Buffett, I actually don’t believe in buy-and-hold, I believe, buy-and-hold, and I’m not going to say this time is different, four very dangerous words, but this time, it kind of is different. Think about what we’re going through right now, even since November, the general rising rate and growth drawdown we saw and then followed by this geopolitical crisis. There’s plenty of investors who bought and held Microsoft in the early 2000s and it took them 15 years to get back to breakeven, despite it being a great business.
Behind the hood, Meb, what happens is we have a team of roughly 60 analysts. Some of them spent time at private equity funds, family offices, hedge funds, others at sell-side firms for their research, or data analysts. And what we’re trying to do internally is constantly build a backlog of businesses that are on our shopping list at a certain price. So validate these are quality businesses, there’s something special about what they’re doing that can’t be easily replicated.
These are in secularly growing industries or markets, some may be more cyclical, some may be more secular. But generally, these are industries for solving a clear problem. There’s a massive tam for them to penetrate. Management teams with incentives align like, we understand. They’re aligned with shareholders, they have a track record of delivering value, and then a margin of safety.
So we don’t want to pay through the eyeballs for a great business. Because if anything, if the last few months have taught us anything, it’s like I said, you can pay 40 times sales for a great business for a Snowflake or a Datadog, the market is going to punish you during certain environments. You’re going to pay up for that quality, perhaps too much. And so making sure we’re not trying to jump over 20-foot hurdles from a valuation standpoint.
So in terms of turnover, it typically I would say historically, in periods of lower volatility, it’s been only a couple of trades per quarter of those 20 stocks, on average in Flagship. Only a couple changes per quarter. I would say the turnover has been higher of late because we’ve just seen a lot more opportunity. Both to take chips off the table late last year, particularly in the software sector, where I saw so much multiple expansion, as a result of QE, and unprecedented stimulus. And a lot of people paying up possibly way too much for growth.
So it’s a combination of art and science is what I would say. As the PM and CIO, yes, I make the final calls on decisions. And I will oftentimes spitball ideas, businesses I find through my network of founders, companies that have IPO’d. So I’ll be a source of ideas and helping push back and devil’s advocacy and that sort of healthy risk management debate internally. But I have a great team around me that does the hard work that’s reading the case, the cues, that’s talking to management teams, chatting to experts. So I’m standing on the shoulders of giants in many ways and fortunate to have a great team here.
Meb: So how does that team work? You guys do like a daily weekly download meeting where people were pitching stocks? Because a lot of hedge funds have different… I’m not trying to compare you directly to a hedge fund but a lot of active funds have a different process. Sometimes it’s the lone wolf PM, sometimes it’s team, sometimes they do eight-month deep dive, sometimes it’s a committee. Like how do you guys go about actually putting stuff in and pulling stuff out? Is there sort of a framework, which you guys apply for it? Because I assume it’s composite that goes with one portfolio for the Flagship is all the same stocks for all the same clients, right?
Clay: That’s exactly how I think about it. Think about it sort of like a model portfolio. We have 50,000-plus clients, and each of these clients has his or her own SMA or separately managed account. So they have a brokerage account. They can pop in, they can see the securities we hold at the end of every month. Obviously, they’re engaging generally daily, weekly with the app where they can see video updates from our team, tax updates, they can ask questions. There’s community-driven features so you can pop in today and see what questions have been asked by other investors on our platform, upvote, etc. It’s a really cool way to stay informed and engaged.
But in terms of our process, we didn’t really reinvent the wheel here, having spent some time on the buy-side myself. I’ve seen what works, what doesn’t. I think for our temperament and our investment mandate, we do a formal Investment Committee. So every decision has to have a formal memo and model. The memo has to document all the findings of what is typically a two- to three-week research process. I’m generally of the belief of everyone should be macro aware, and try to cross-pollinate and learn and be expanding your circle of competence. We should ideally have some semblance of like a compass for focus. And so that’s what we do internally.
So we have a dedicated analyst who’s focused on consumer and media, a dedicated analyst who’s focused on our investments in software and semiconductors, one dedicated to industrials, and so forth. That’s how they guide their time. So they have a universe of businesses they’re familiar with. They’re constantly trying to expand that, because obviously, there’s new issues, there’s companies IPLA, there’s M&A activity. So constantly trying to build out their shopping lists and then it really just says, ‘Do you belong on the core? Do you belong in the starting five?’ so to speak.
So every analyst is constantly re-underwriting and from their viewpoint, there’s this other name on my shopping list I’ve been doing work on. Is this a higher opportunity cost than the company we already own? Is XYZ Software Company now a better risk-reward after recent market volatility than this existing software name we own? And if so, let me take that to the committee and pitch that change. And so it’s really helping we have a designated devil’s advocate, we’re not a yes-man, or yes-woman type of firm. We want healthy debate, we want to understand the bear case, be able to refute it better than the smartest bear on the street. I think that’s a really wise comment that Charlie Munger made. You should be able to refute your own bull case, better than any other bear, debate against yourself, and still come out feeling excited.
And then my role is really to step in. And then from a risk manager standpoint, I’m being hyper-aware of like, what are our sector overweights or underweights versus the benchmark? What are factors that we may be inadvertently long? Are we super long momentum, are we super short quality, are we short value? And then, that’s where I will kind of take the analysts’ collective wisdom and recommendations and try to size things appropriately. Try to make sure we’re not too far tilted one way or the other. So it’s really healthy process. And we’re obviously learning, we don’t pretend to know all the answers. But so far, it’s worked out really well. And I think it aligns incentives in a really smart way.
Meb: If I remember in years back, I’ve been following you guys for a while, it’s good to see the growth, kudos. And I remember at some point, the process, you guys talked about other parts of the portfolio, whether it’s hedging. We talked about the screening process, and 13F, sort of diligence, and looking to see what some of these other fund managers are doing. How does this process evolve? Has it been consistent this whole time? Are you guys kind of doing the same stuff you’re always doing? Do those still play a role? And then how do you think about kind of incorporating the various pieces of the puzzle over time too?
Clay: I like the phrase or the quip that there’s no original ideas. And the reason I bring that up, Meb, is because in the early days when we were a one-product company, we had Flagship, like our blue-chip strategy, I was the only analyst and PM. I’d one director of research who would help me pull data and build models and so forth. But we were a really lean, firm. And so naturally, when you’re constrained from a resource standpoint, it’s helpful to fish in a pond that you at least no other smart fishermen are heading for. And so 13Fs, as you mentioned, for those who aren’t familiar, 13Fs are just quarterly filings that most hedge funds or RIAs above a certain threshold in the U.S. need to file. And those show all their long holdings, so they don’t show any short holdings or some esoteric securities derivatives aren’t shown.
But if you’re a buy-and-hold investor and a long-term buy-and-hold investor, a 13F is a pretty good proxy for like what you own quarter to quarter or year to year. And so we used those in the early days, just like I did at my past firm at Fairlawn and the fund I was at just after Fairlawn, as a good hunting ground for like what are some interesting ideas. So like, there are plenty of smart people out there, fund managers I admire, investor letters I read. And taking a look and helping use that to inform what the shopping list should be, that’s ultimately what helped us go from, okay, how do we start with 10,000-plus global securities and narrow it to a pool of maybe 100, 200?
So we at least know which rocks are worth turning over. So that informed a lot of our investment process for Flagship to some extent for opportunities in the early days. As we obviously raised a little more venture capital, we’ve really bootstrapped our way and started growing revenue, and got profitable, are we able to build up the team. So we went from just myself and a colleague to now a team of eight investment analysts, hired a research analytics associate from AQR. We built out a data science team internally. And so as a result, we’ve been able to go beyond just 13Fs and be able to fish in many, many different ponds and also access a much broader swath of data.
At the same time, we saw COVID hit in early 2020. And I think we realized that what is a clear, call it the cost side of the cost-benefit of using a 13F strategy. The cost is during periods of exceptionally high volatility, even getting data on a 90-day delay, you’re missing a meaningful picture of what’s going on underneath the surface of these managers. So for example, if you remember, like, COVID really happened in March 2020. We didn’t really start to see the ramifications of how people would react until April, May. People repositioning from the physical out-of-home companies to the work-from-home beneficiaries, the stay-at-home story stocks, like the Pelotons to the … and so forth, you didn’t really capture that in Q1.
And so if you were relying strictly on 13Fs, which again, are only updated as of quarter-end, you’d be looking at a totally different picture. You’d effectively be looking at the world as if COVID had not existed. And you wouldn’t be able to have a clearer, more updated picture of the world until that summer, after which you could argue a lot of the opportunity was capitalized on. So we heard from our client base loud and clear that they wanted us to become more active over time.
And so it was very much a combination of us being able to fish in more ponds and be less resource-constrained, and be more true and tried quality growth investors, not just being wed to one specific source of ideas. But also in many ways clients were like, ‘Guys, we want you to be more tactical. We want you to be able to look at things that maybe other funds aren’t looking at, we want to be able to take advantage intramonth, intraquarter, as opposed to being a “slave” to the process’.
And so it was a combination of push and pull both client-led and internally-led. I think we still got to a really fun place. And really importantly, I think a better place for investors long-term, which is still sticking to the strategy of buying quality compounding businesses, aiming to hold them for a 3 to 5-year horizon. Generally not doing much unless opportunity cost warrants it in our view. But also be able to participate in the volatility and take advantage of dislocations in a way that a truly systematic or perfectly quantitative strategy otherwise wouldn’t be able to do.
Meb: So are you guys still thinking about hedging as well? Or is that less of a role than at prior times?
Clay: No, that’s a good call out. So everything I’ve described so far, you’re spot on, is on the long side. We’re not a long, short firm. But you can say we effectively offer users short exposure because we do hedge. And so I think we chatted about this over the last couple of years, Meb, at different points in time, we don’t currently use leverage outright. So we don’t short futures, we don’t buy put options. So we’re actually not taking specific leverage or shorting securities outright. But I think it’s important to give people a way to reduce beta.
So let me take a recent example, we actually started hedging, we put on inverse ETFs. So basically going along an inverse instrument that moves on a daily basis opposite the market in a one to one way at the end of February 2020. That was, in hindsight, a pretty prescient decision. Heading into one of those, I think it was a 30-plus per cent peak to trough drawdown on the S&P in just a month, we ought to mitigate the degree of that drawdown significantly. I think it was only 70% or 80%, downside capture that our clients had versus had they had been fully invested in the index.
So a case in point of having an active research team be able to monitor. We’re not macro investors but we’re macro aware. And when we get certain data points from our network of folks who have just been over in China for investor day, saying, ‘The world’s about the shutdown’, that set off an alarm bell in our mind, and we said, ‘Okay, we think it would behoove us to put on some universe CTF exposure to reduce market exposure, i.e., beta for clients’.
By the way, we also just did that in January, we put on hedges, which were not on as early January, you put on full hedges, in mid-January, for a handful of different reasons. We saw technically, pretty much any way you look at it, you don’t have individual stock level or on an index level, whether it was the S&P, the Russell, the NASDAQ, things were not looking good. And I’m not a chartist. We’re not technicians by nature. But we do believe like charts ultimately do reflect sentiment in markets. And a lot of times they can be telling you something that you may be missing.
And so a combination of technicals, and also some fundamental data we’ve been tracking led us to believe that, contrary to the typical buy and hold index investors, investors in Titan should have their beta reduced, and they should be ‘hedged’. So it’s something that we’re providing, it’s pretty unique in the overall scheme of investment advisors. This is obviously par for the course in long-short hedge fund land like this is, most long-term investors are outright shorting securities, and maybe they’re shorting futures as well.
Leveling up, I think it’s really exciting to be able to offer something like this to retail investors, especially not taking leverage. There’s anything I think we as a platform learn from the GameStop, AMC era, is that there’s a real cost to shorting securities, it can really take the entire firm down, if not properly managed. So this allows us to hedge for our clients without taking the sorts of risks that could jeopardize them in our business long-term.
Meb: As you think about this macro, we’ve had a ton of macro crosscurrents past few years, is there sort of like a max hedge amount you guys would consider, how do you think about that? Because clients, you got 50,000 people with your cell phone number now, Clay. And I’m joking, maybe it’s just the app, but that’s a lot of investors when the world’s going crazy as it has been the last few years. I mean, it’s kind of always going crazy, of course, but particularly crazy now, is there sort of a framework where you think about that? And how set in stone is it thinking about that sort of picture of hedging because it can be a topic that’s touchy for a lot of people?
Clay: I agree. I think in a dream world, we would be 100% net long 100% of the time. And I think every way you cut it, empirically speaking, you should be invested most of the time. Markets do go up and to the right. We can obviously debate, yes, the historical return the S&P has been, I don’t know, what, 6%, 7%. Is that high? Is that low? From a go-forward basis do we think it’s more like 2% or 3% going forward? We could debate exactly where we shake out. But I think GDP, productivity growth, those sorts of things take global economies up and to the right, and markets tend to follow. So it makes sense why you should be fully invested most of the time.
To that degree, we’ve set sort of a framework in mind from like the macro in a hedging standpoint, where our net long exposure, which is just a fancy way of saying like, for every $100 you have invested, how much are actually outright being exposed to market risk? It should generally be the majority of those $100. So for us, Meb, we ship out to 80% to 100% is sort of the range of net long exposure. I will caveat that we’ve introduced the concept of what we call strategic cash as well.
So it’s really important, I think, for people to realize that cash is an investment decision. It is zero per cent yielding security and I’m being a little bit hyperbolic, 0.004% of whatever your local banks paying you, for all intents and purposes, it’s a zero per cent yielding security, negative in real terms now given where inflation’s heading. It is a choice that you actively make. And we, as an active manager, have added that last couple of years to our toolkit, as a way to reduce market exposure because cash has zero beta.
So with that, as we talk today, Meb, we’re at about 70% long exposure. So for our aggressive clients, we have a 5% hedge of those $100, about $5 are allocated to hedge. For moderate conservative clients, it’s closer to 10% to 20%. But we also are holding cash, because we quite literally, in many of the markets we’re looking at and many sectors, don’t see any opportunities where you’re not overpaying for the quality of growth you’re getting. Or you’re not going down-market and buying “Cheap” securities, but with all sorts of landmines from a competitive dynamics from a secular growth standpoint.
So, in other words, there’s no easy answers in this market, cash can sometimes be the best alternative. It’s a source of dry powder so that if and when we obviously believe when the macro picture improves, we could take advantage of it. So over time, I think we’ll shake out $2 of our $100 a client may have invested with Titan, depending on their risk profile. They’ll see somewhere between $50 to $100 of that 100 be fully at risk in the market. We will never be perfectly market-neutral, nor do I think we should be. We’re not market timers.
Meb: So you guys have been building this platform, 50,000 investors, growing the AUM, look out in the horizon, what’s the future look like for you guys next month, next year, next couple years? Give us a peek behind the curtain, what can we look forward to for Titan and offerings, community, all that good stuff?
Clay: It goes so much further beyond blue-chip equities, mid-cap equities, blue-chip crypto. Things that are on our mind, Meb, private assets, massive, in my mind, a contributor to the wealth divide but also just clearly inaccessible to unaccredited retail investors. Things I’m thinking through from a private asset standpoint, venture. Putting aside the market to market nature of the venture, which I think in and of itself if properly understood, and gauged to someone’s risk profile, investors are human by nature, and seeing scary-looking charts day to day doesn’t do any better for their financial health. I wish markets just closed or a user couldn’t open their app, during periods of volatility, they’d be better off because we’re all human.
That’s one of, I think, the great advantages that the venture community has is there’s definitely volatility in private companies, you just don’t see it every day. Like I know there are companies in the private markets being marked up being marked down every week, every month in terms of their intrinsic value, you just don’t see it as an LP. While I could joke and say that’s negative, I actually think it would be a positive to retail investors.
I think getting exposure to an asset class of private businesses, their early-stage, late-stage venture growth businesses with a proper sizing, again, gauge to their risk profile, so this is not going to be appropriate for everyone. But as long as they understand the risks around liquidity, you’re not going to be able to pull your money out every day, maybe it’s monthly, quarterly, annually, you understand the fees, you understand the risk profile, that’s something that retailers never had access to.
Another big sector is private equity. Real estate is another one. I can also go deep down the crypto rabbit hole of all the interesting things I think are happening from like a staking and lending standpoint. So we have a lot of work to do. It’s not going to be as easy as our first four products. I’ll tell you that much. It’s not going to be as easy as hire a team from our network from buy-side, sell-side analysts, create the strategy, create the research process, and boom, flip a switch on. There’s a lot more infrastructure and tooling that needs to be built. B2B relationships need to be built to achieve some of the stuff I mentioned.
Meb: Do you foresee these being like, are they going to be separate accounts, will they be funds? Because some of these are a lot harder to own with 50,000 people.
Clay: No, I totally agree.
Meb: How do you think about it or you may not know yet? I mean it may be it’s now in the process.
Clay: No. A lot of the hard work we’re doing right now is figuring out what I call fund operations, a lot of that like back-end stuff. Do we need to use SPVs? Do we need to use this interesting closed-end fund structure, like what are the nuts and bolts we need to do on the back end to actually make it possible for a retail unaccredited investor to invest in SpaceX or Stripe? I believe it’s possible, it was a really, really hard problem. This is when you get into like custodial and clearing arrangements, and all sorts of hairy stuff. It’s very, very regulatory intensive, but I think big problems like this are worth solving. Because if you solve it, you’re talking about trillions of dollars of capital that can all of a sudden be unlocked for retail and I think it would generally be a much better world.
Meb: It’s going to be fun to watch. What’s the profile for most of your investors? Has it changed over time, as you’re onboarding a lot of digital native consumers? I assume it skews younger, but you could correct me. And where are you finding most of these friends, is it referrals? Is it through social channels, Super Bowl ads, what?
Clay: It’s funny you mentioned that. We did our first Connected TV campaign, it was at a few East Coast airports on AFC/NFC Championship Sunday. So we actually are testing some bigger bets in terms of out-of-home awareness, but…
Meb: We were joking on Twitter the other day I was like, we tried a couple ads in Barron’s. We’re very curious and like to try things out at small size and always just wondering if anyone actually sees it. So I was like, ‘Does anyone actually see this?’ Everyone is like, ‘No’, but I got one response. I know we got to at least one person. Okay. Well, tell me, TVs and airports?
Clay: Connected TV, it’s fun. I volunteered myself to do the commercial. So starring yours truly, we filmed it in Brooklyn back in June, and it finally went live the last few months.
Meb: Nice.
Clay: No, it’s awesome. I’ve had family friends. I’ve had people I haven’t chatted with since high school ping me on Facebook saying, ‘Hey, Clay, I just saw you. I was watching a show on Hulu and it went to ads and I saw a commercial.’ It was kind of a cool moment. No, but for us core demographic, the mode is 30 to 35. That’s sort of the sweet spot, 30, 35-year-old. I call them mid-career professionals, demographic of these a lot of people from like a career standpoint are in tech, are in finance, consulting, real estate, a lot of founders, entrepreneurs.
So these are people that generally like are really, really good at their craft, but are not good at investing. They wish they were as good at investing as they are in their craft. Maybe you’re a senior engineer, or maybe you work at McKinsey, or maybe you’re a real estate agent. These people who like are really, really good at what they do but they wish that translated to investing. And a lot of them have been spinning their wheels day trading crypto or equities and they’re like, ‘I’m out. I know I need my money invested, but I’m not doing this myself, it’s time to pass this to the experts.’
We’ll also get a lot of folks that come from the traditional like robo-advisory, like taxa world, wanting more. Like look, ‘I have no idea what’s going on, I want to participate and be more active, actively involved. Yes, I would obviously love better than average returns.’ And so we’ll get a lot of the traditional robo and also older money like Legacy, Fidelity, Schwab accounts, moved over to the platform. So it’s a broad swath, we’ll get 20-year-olds, we’ll get 80-year-olds on the platform, it’s really cool to see this appeal to different types.
But I would say people that are in that sweet spot of, ‘I’ve tried a bunch of investing options, I’m not really satisfied with any of them. I’m really good at my craft and aspire for expertise whenever I do, I wish I can also have that for my money’, is sort of like the core problem and consumer-type that we see. Obviously, as we launch more products, and also account types like IRAs, we’ve also seen a really interesting demographic shift. So like we’re seeing people now open accounts for their spouses, or they’re asking us to open custodial accounts for their kids. They’re rolling over old 401(k) money.
So I would say like the next time we chat, Meb, like the consumer type, age, demographic will probably change. And I think one of the challenges of a platform is it’s kind of like what Snapchat did or has been doing. It’s like, do you focus on 20-year-olds for the next 20 years? So today’s 20-year-olds are going to be 30-year-olds in 10 years. Are you always focused on that same young archetype? Or do you grow with your investor base?
That’s sort of an interesting problem and challenge we’re thinking through, I think it’s going to be a little bit of both. I think we need to make sure we’re growing and being smart, thoughtful about adding other account types, features, to make sure people can call Titan a place home for the next 40, 50 years. But we don’t want to be too many things to many people. We have lots of different things we can do. But in terms of where we find that, it’s mostly organic, it’s mostly referrals and that.
Meb: One of the cool parts of building something like you guys have is you now have a wide investor base. And there’s some interesting things you guys I’m sure are thinking about, about incorporating that user base as an asset for the platform too. I’ve seen a lot of interesting whether it’s community feedback involvement. For those who haven’t opened a Titan account, and it’s titan.com through the app or website, explain what the actual user experience on the communication is. Is it mostly video, print, education? You mentioned there’s sort of like a feedback messaging feature and how do you expect that to evolve in the coming short future?
Clay: It really runs the gamut. Our goal is like we have different types of people that are from all walks of life, and have different lifestyles, different routines. So we have people that do the morning commute from Jersey City to Manhattan, or from the East Bay to SF when they want to listen to a podcast on the train, or on the subway or in the car. We have daily audio notes, we call them content franchises. Content franchises are basically we’re trying to build rituals where we can meet customers where they are and meet investors, whatever their routines or habits are, get them the information they need to know from the portfolio managers, the right media, run at the right time. So for those sorts of people, we have a daily, quick minute to two-minute audio note. A little mini podcast they can listen to and get the three things that matter for their portfolio today.
Meb: People listen to that?
Clay: People listen to it, that was one of the most engaged franchises we have. We also have an email form. So we have first thing in your inbox every day it’s a newsletter called ‘Three Things’, the three most salient things we believe you need to know related to the world of business investing and how we’re managing capital.
Meb: It’s funny to think about sort of the behavioral side of that, too, because we’ve put out a lot of content over the years. And I feel like it’s almost a barbell, where there’s the people that want to engage that. But then there’s the other people that are like, ‘I don’t even want to hear about it because I didn’t even know I should be worrying about this’, you know. And so it’s always an interesting touch point on is it too much? Is it too little? And then how do you segment that? Which is the cool part, because if you want it, you can get it but some people may just be like, ‘Dude, leave me alone’. Do you guys do any sort of rocketing on who gets it? Or do they kind of self-select out?
Clay: We’re building a lot more personalization, so you can kind of have like the ‘user’ preferences. Like I wouldn’t say like, we’ve gotten quite a long way with a very half-baked rudimentary approach. When you’re a Titan investor, Titan client, Meb, it’s like all or nothing. You get all the content franchises and you have to…obviously you can go in and pick and choose what you listen to. But we only help curate that.
Like, there’s a ton of opportunity for us to say, you don’t have to even state your preferences. We should Intuit based on your behavior. ‘Oh, Meb hasn’t checked our opening or closing bell audio note, maybe let’s pull that off the home screen.’ De-emphasize that, emphasize something interesting, and news that maybe he is interested in. And then he takes and he clicks and engages with that, we can ask him and we’ll make that part of his habits.
Things that we have learned work really well are video and community-based features. And I think these are like two of the most underpenetrated called mediums in finance, for a handful of reasons. So on video, one, is just historically, has not been very scalable. Like if you think about the traditional money manager RIA, let’s say you have 100 clients, even that is untenable, doing 100 Zoom calls a day, can you imagine? Like there’s a reason I think a lot of advisors go for larger account sizes, and it makes total sense, it’s like the cost to serve an account is effectively the same. And so the smaller the account type, the lower the margins, the more tough for businesses to build. And then you get all sorts of weird incentives.
So I think technology has unlocked the ability for me, for example, as a PM, to build a one-to-many broadcast-type business, where I think if you polled most of our 50,000 users, Meb, I think a lot of them would feel like they know me on a first-name basis. I’ve never met these people, but they see my face, they knew who I am, they affiliate me with a brand or one of the portfolios type. So it’s interesting, as we launch more products, we’re trying to build more brand and personality around each product. So like, for example, Titan Opportunities, in the coming quarters, you’re going to know there’s a person and you’re going to know who that guy or girl is on Opportunities. When you see a video or email or content franchise from that person, you’re going to immediately establish and associate them with a certain part of your wallet.
So I think that’s…we see a lot of engagement, a lot of referrals around that. And it’s also kept people invested during periods of volatility. They’re like, “Oh, my guy or my girl’s taking care of my money. I know I’m in good hands.” And that humanization of what is otherwise is a financial commodity financial product and an app has allowed us to cut through the noise.
And then the other thing is on community. So the other thing you’d see in the app today is called ATA or Ask Titan Anything. This is sort of an internal beta hackathon idea, which was what are all the questions that retail investors could be asking that they don’t have a forum to ask us? Historically, it’s like, if you find a company on Twitter, you can tag them and broadcast to the world and say, “Hey, I have a question.” Whether you’re Cathy Wood or you’re engine number one or any of these managers that have said, “We want to actively engage with retail,” you don’t really have many options. Are you going to write them a post mail letter or are you going to tweet at them? Neither of those are great options.
So we said, well, what if you could literally upload like literally type in tweet form in the Titan app, submit that, it’ll route it to the analyst or the person on Titan’s platform-specific to that security? So if it’s something around booking holdings or something around Twilio, it’ll get routed to the analysts on Titan Flagship.
They have a portal internally where they can go into our internal Titan portal, answer that question, broadcast it out. Not only does that original question asker get an email saying, “Hey, we just answered your question. Click here to see the answer in the app.” But all the other people on our platform accrue value and get education and understanding from something that maybe they won’t even ask in those questions.
And so in a world where a retail investor opens our app and sees, “Oh, man, my portfolio is down 5% today,” typical retail investor behavior is move to cash, sell, make the bleeding stop. Titan investor behavior is, “Oh, right appended to this chart of my money being down 5%, I click an info bubble. It pops to ATA asked by Brian Smith in Georgia, asking precisely why is my money down 5%?” Which an analyst responds and rationale why it’s down and what moves we’re making with your money.
So immediately, not only did you talk them off the ledge, but that experience we’ve created ways so you can share that so you can cross-post on social media, share it to your networks. And to your earlier question, that’s been a big source of referrals in organic growth is people being like, “Wow, not only is my money in good hands, but I have an easy way to share the value I’m getting with my friends and family.”
Meb: It’ll be fun to watch you guys in your journey. Tell us a little bit about you kind of went the VC route, but also raised some money with some interesting names on your cap table. That seems to be something that’s changed over the years, certainly in the last 10 years as this part of the cycle is having some pretty cool investors join in. How was that process? And what are you guys going to spend all that money on?
Clay: I think it will last us a long time, knock on wood. This will last us forever. In the early days, for us, it was very hard to raise money. I talked earlier about like the wedge I described, how many people call it a niche. Because it was such a small niche before Titan really started to grow, we didn’t have investors throwing money at us. In fact, we got told no by over 110 VCs in a row. We had to raise money …
Meb: …110 VCs there is now.
Clay: Yeah, we had to go definitely off the beaten path to even find investor 51. It was not easy.
Meb: Well, you guys ended up with some names that everyone will certainly recognize. I had a fun tweet yesterday, I was trying to poke a little fun at my VC friends because it was in Sebastian Mallaby’s new book on VCs called “The Power Laws.” But there was a quote from Andy Grove, famous Intel lead to John Doerr, where he said, “John, venture capital, that’s not a real job. It’s like being a real estate agent.” I was dying laughing at it. But a great book, by the way, listeners, anyway. Okay, so.
Clay: It’s actually been on my list. Yeah.
Meb: Yeah, it’s fun. I mean, look, for people who are familiar with that world, it’s probably less you could kind of skim it. There are some fun stories in there. For people who are new to VC, it’s a great history. So okay, I interrupted you. Sorry, keep going.
Clay: No worries. So it was not easy to raise money in the early days. But once we found product-market fit, graduate YC, raised our seed round, growth solves all problems. There’s anything I’ve taken away as an entrepreneur, it’s growth solves everything, from hiring, to storytelling, to raising capital, to building new innovative products. So for us, 2020, everyone remembers it as the year of COVID and was a terrible year for a lot of industries, a lot of human life.
The one upshoot of it was I think a lot of investors that otherwise maybe would have waited years to become investors got pulled into the markets, you could say, because they’re sitting at home in their pajamas and casinos or sports betting was closed down. Or you could say it was just there are so much stimulus, so much opportunity to make money. No matter how you cut it, it was a great year for FinTech, in general.
For our space, it was a period of exceptional volatility. And so people wanted a lot of people that were past investors or were DIY investors were like, “I’m out, man, I have no idea what I’m doing. I’m moving money to the experts.” And so when I mentioned we start hedging, and like, really leaned into that part of our value prop, saw a lot of client influx. And like I said, growth solves all problems.
So that year is late 2020 we raised our Series A. That was the first real kind of equity round at Titan, led by General Catalyst, an amazing firm. And we’re rocking, rolling, and then growth solves all problems. It’s like when you’re not looking for money is precisely the time when every investor wants to give you money. And so we’re huge fans of Andreessen Horowitz. Yeah, it’s about 48 hours from the time they reached out to reengage to the time we had nearly $60 million in the bank and raised our Series B.
Meb: What’s been your most memorable investment? You’ve been at a career that preceded Titan but also you said you started buying stocks when you were 12. So anything come to mind?
Clay: It’s not very sexy, but one of the first stocks I bought in the mid-2000s was Google. Yes, it was called Google back then, not Alphabet. There was other bets. It’s just a little search company. I actually I forget how I sourced that. But I held it to 2008 and it wasn’t easy. So that’s probably what comes to mind.
Meb: I used to go to the private Google parties when I was living in Tahoe. In San Francisco I had a few Google roommates at the time. And the amount of sheer money they spent on renting out Lake Tahoe, Squaw and other venues and flying in all the Googlers from all over the world, I should have known. They were just printing tons and tons of money. I should have just bought it and held on to it. The old Peter Lynch style, but anyway. All right, my man, it has been fun. Where do people go if they want to find what you guys are up to, open an account, shoot you some messages, what’s the best place?
Clay: Yeah, the easiest place is titan.com. Super simple. You can learn more about what we’re building, strategies, sign up, super easy, $100 minimum. You can find me on Twitter as well. I don’t tweet often. I like to keep a high signal-to-noise ratio. So hopefully when I do, it’s something reasonably valuable. But I’m on there daily and I respond to DMs and so forth. So virtual clay, @virtualclay is my handle.
Meb: Awesome.
Clay: Yeah, it’s been a pleasure.
Meb: Clay, thanks for joining us.
Clay: Thank you.
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.
