Episode #406: Dylan Grice, Calderwood Capital – Popular Delusions, The End of Duration & Esoteric Investment Opportunities

Episode #406: Dylan Grice, Calderwood Capital – Popular Delusions, The End of Duration & Esoteric Investment Opportunities


Guest: Dylan Grice is the co-founder of Calderwood Capital, a hedge fund boutique specializing in orthogonal, niche and capacity-constrained hedge-fund strategies.  He’s also the author of Popular Delusions.

Date Recorded: 4/3/2022     |     Run-Time: 1:03:07

Summary: In today’s episode, we kick it off by talking about the end of duration and the headwinds that long-duration assets like stocks, bonds, private equity and real estate face going forward. That leads us to talk about why Dylan loves the idea of the cockroach portfolio and what a creature that’s survived over 350 million years can teach us about portfolio construction.

As we wind down, we talk about some esoteric strategies, including mortgage prepayments, cat bonds, uranium and energy (both of which he wrote about a few years ago) and even SPACs.

Dylan was kind enough to share a few of his letters from Popular Delusions, so be sure to check the links below:

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 PodcastsGoogle PodcastsStitcherSpotify or TuneIn or visit here.

Comments or suggestions? Interested in sponsoring an episode? Email us colby@cambriainvestments.com

Links from the Episode:

  • 0:40 – Sponsor: The Active Share Podcast
  • 1:14 – Intro
  • 2:12 – Welcome to our guest, Dylan Grice
  • 4:14 – Overview of Calderwood Capital
  • 7:01 – The end of duration
  • 10:40 – The cockroach portfolio
  • 26:44 – Great Good Fortune: How Harvard Makes It’s Money (Vigeland)
  • 27:25 – Unpacking Dylan’s mortgage prepayment strategy
  • 33:39 – Dylan’s thoughts on reinsurance and catastrophe bonds
  • 37:55 – The origination of his thesis on Uranium from a few years ago and where it stands today
  • 42:20 – Dylan’s thoughts on hydro and nuclear
  • 48:47 – Chargers vs. Raiders game
    49:34 – Dylan’s research on the biotech space
  • 53:51 – Dylan’s most memorable investment
  • 59:40 – Learn more about Dylan; calderwoodcapital.com; Twitter


Transcript of Episode 406:  

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Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

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Meb: Hey, friends, we have an awesome show for you today. Our guest is Dylan Grice, one of my absolute favorite market researchers. He’s also the co-founder of Calderwood Capital, a hedge fund boutique specializing in orthogonal, niche, and capacity-constrained hedge fund strategies, aka the weird stuff. He’s also the author of “Popular Delusions,” one of my favorite financial newsletters. In today’s episode, we kick it off by talking about the end of duration and the headwinds that long-duration assets like stocks, bonds, private equity, and real estate face going forward.

That leads us to talk about why Dylan loves the idea of the cockroach portfolio, and what a creature can teach us about portfolio construction. As we wind down, we talked about some esoteric strategies, including mortgage prepayments, CAT bonds, uranium, and energy, both of which he wrote about a few years ago, by the way, and even SPACs. Dylan was kind enough to share a few of his letters from “Popular Delusions,” so be sure to check out the link in the show notes. Please enjoy this episode with Calderwood Capital’s Dylan Grice.

Meb: Dylan, welcome to the show.

Dylan: Thanks very much, man. Great to be here.

Meb: Where do we find you?

Dylan: Right now, we’re in Switzerland, just about an hour outside of Zurich. But we’re here right now, based mainly in the UK, but we kind of spread our time between the two.

Meb: So, I’ve been reading you for a long time, and forever it will be different because I haven’t been listening to you for a long time and now that it’s like changing the Google Maps voice or the Garmin voice like, this isn’t an accent from Ohio in the U.S. And so, I’m now only going to be able to read your writings through the lens of this accent, it’s like it’s a totally different mindset for me. I don’t know if it makes you smarter or less intelligent, but I’m going to…I can’t go back.

Dylan: Well, I mean, I used to go to meetings, my first ever client meetings, my boss at the time, he would only take me up to Scotland of all the clients that we could go to and all the business trips that we could go on. The only one he would take me to for the first three years was Scotland, I was only allowed to see the Scottish clients because they were the only ones who have any chance of understanding me. So, my accent is a bit smoother now, hopefully, you understand a bit more of it.

Meb: Well, that’s some of my people or my heritage. Last time we were travelling over there, I was actually in Ireland but had run into a couple Meb doppelgangers where it was almost like awkward enough for me, I wanted to be like, “Hey, do you see this?” But then I didn’t want to be super creepy because then it’d be like, “Dude, I don’t look like you. What are you talking about? Come on. You’re like a poor man’s me.” I didn’t want to broach the topic but it was so obvious to me, so I love that part of the world.

Dylan: You can definitely pass as a Scot, for sure. You got the top and shirt on.

Meb: My surname Mebane is Scottish people that were living in Ireland, or so I’m told. We can take it back a couple of hundred years, so if you see any Mebane’s over there, you can say, “I know this guy named Meb, we just did a podcast, come listen to it, you can understand half of it.”

Dylan: Even with your accent, yeah.

Meb: All right, so I’ve been reading you for forever, one of my favorite market commentators back to SocGen. You now got the entrepreneurial bug and started up your own gig, Calderwood. Tell me briefly, what are you guys doing over there? I like to tell anyone who starts out as an entrepreneur in a new venture, the very naive optimism of thinking you can start a beautiful new thing. When do you guys get started? What are you guys doing?

Dylan: So, yeah, naive optimism. I mean, we started a couple of years ago, my partner and I. Fundamentally, we’re hedge fund investors. There’s two parts to the business. There’s a hedge fund, which we manage. We set that up about a year ago to we’re now in our second year of running that. We aim for uncorrelated mid to high single-digit, low volatility returns. And we do that with a family office go-anywhere approach. But that’s the kind of hedge fund business. The research business we set up a couple of years ago because it’s easier to set up a research business than a hedge fund business. We write something, we publish a couple of times a month, we really just kind of share some of the stuff that we’re seeing, some of the stuff that we’re doing, investment ideas, ultimately, we’re trying to make our subscribers some money, we try to keep it interesting.

But, you know, it doesn’t make us different. I think it’s kind of unusual for a money manager to be selling research. A lot of money managers write research as a kind of marketing for promotion but I don’t think many of them I aware of actually sell it and charge a subscription fee. But by the same token, I don’t know many research sellers who also run money, run … kind of still attract investment portfolio as we do. So, it doesn’t make us quite an unusual setup, we kind of decided quite early on that the two parts…those two businesses actually, if done properly, can kind of leverage off each other, can bounce off each other quite well. And so far, that’s been our experience.

Meb: And they inform each other, the research and writing sometimes in the effort to go down a rabbit hole on one side or the other, it helps the other side. But on top of that, you then share the research and the publishing and I can’t say how many times I hit “Publish” and get probably more feedback and interesting insight and certainly, trolls and criticism, some good, some bad, but actually sort of like a flywheel of that process. So, why don’t we start…and you guys kind of do this in your writings where you talk about words and actions. Why don’t we start on the research side, and then we’ll kind of move into the fun strategies side? They may blend, they may go back and forth, who knows? But you guys have been putting out some pretty great pieces we read and some, listeners, we’ll put them in the show notes to the extent the crew lets us, there’s a few examples online.

Why don’t we start pretty broad? You guys did a piece a few years ago that I thought was pretty interesting, starting to talk about the death of duration. You talk a little bit about stocks and bonds. I love this description where you were like, “From the 1980s till now, bonds have had better performance than stocks have had during the rest of the period.” I mean, we’re in a world of like zero interest rates, and so telling people that is kind of a crazy takeaway. I’ll pass the mic to you, talk to me a little bit about that piece and kind of how you’re thinking about where we are in the world.

Dylan: I mean, yeah, we call it a golden age, it’s been a golden age for duration and the bond market interest rates have gone from 20% to 0 in effect over a 40-year period. So, as you said, the total return from government bonds over the last 40 years has been higher than the total return to equities in the previous 100 years on an annualized basis. It’s kind of staggering. What’s interesting, I think, I mean, there are a number of reasons for that and I think they’ve been well kind of discussed, the decline in inflation, the decline in inflation expectations, globalization, central bank independence, etc., etc., etc. I think all of these things are kind of interesting. But the most kind of interesting, maybe the most practical dimension to this is that this has happened over four decades. In other words, that’s a full career in finance.

And so, you have had, I think, this phenomenal tailwind and to multiple asset classes. I mean, obviously, corporate bonds and credit markets have had a huge tailwind from the bull market and government bonds, but so have other duration assets. So, real duration assets like equities, private equity or venture equity, arguably, real estate, all of these things have had this enormous kind of tailwind, they’ve had phenomenal bull market returns. And I think first, there are a couple of things that I find very interesting. The first is that people think it’s normal. people think that it’s normal to generate these kind of one-off returns, but they’re actually kind of one-off, you need the interest rates to keep falling to sustain those types of returns.

The second thing is, I think that you get to the kind of destination where it’s difficult to see much more upside in duration, but it’s certainly easy to see an awful lot of downside. So, it’s not necessarily a forecast, “There’s a lot of downsides, the interest rates can go up a lot and therefore, there’s a lot of downside to valuations at these levels,” but as a stress test. So, if you say to yourself, “Well, what happens if interest rates…” I don’t just mean they go up by 1% or 2% one year or in a bad year, I mean, in a few years’ time, they’re at 5% and then a few years after that, they’re at 10%. And a few years after that, they’re at 20%. And who the hell knows whether this is going to stop that type of bear market? What happens then to the valuation of your private equity, your venture equity, your public equity, your corporate bonds, etc., etc., etc.?

And so, what you’re kind of describing when you talk about public equity or private equity or venture equity or real estate, you’re actually talking about pretty much all portfolios. And so, this kind of end of duration bull market, if that bull market turns into a bear market, then pretty much all conventional mainstream portfolios are going to be tossed. So, that was the kind of conclusion. I think the more interesting question is…because I don’t think many people would disagree with that, but the more interesting question is, “Okay, what do you do about it?” And I think that’s where it kind of gets interesting. And actually, that brings us back to why we set Calderwood up in the first place, which is to try and solve that problem.

Meb: All right, well, let’s get the depressing stuff out of the way early. The markets, many traditional performance, something like a US 60/40 but it could even be global, has had a nice run, particularly for the past decade or so but really, for the past three. You talk a lot about cockroaches. You’re quotable, there’s a great quote, and if this isn’t you, you can let us know but we attribute it to you as, “To make good returns in the long run, you need to get to the long run because the law of the jungle dictates that survival takes priority over reproduction.” Survival, we talked a lot about this with startups and fund managers, but also in our world, it’s just like, “You got to stay in the game.” And so, you talked about this resilient portfolio being the cockroach portfolio. Tell us a little bit about what that is and would that be something that you think could survive an environment where the duration bull market maybe not look the same as it has?

Dylan: Yeah, so I think just as a kind of reminder for anyone listening, cockroaches have been around for 350 million years. Everybody hates them, but they’re a remarkably successful species, much more successful than we are, frankly, in terms of longevity. Maybe we will last longer, but I doubt it, they’ll probably outlive us. So, on one level, they are incredibly successful, but they’re not smart, they’re not particularly intelligent, they’re not as smart as we are. They don’t have the trappings of intellectual complexity that we have. They don’t have iPhones and they don’t have nuclear physics and they don’t have … and stuff like that.

They don’t have anything, they’re just actually very, very simple, straightforward creatures, they don’t really know much. And so, the cockroach portfolio is based on that idea. Suppose you didn’t know anything, how would you build a portfolio? You just don’t know anything. Now, on a very fundamental level, if I was to say to you, “Here’s 10 assets,” or actually, “Here’s 4 assets,” but I’m not going to tell you anything about them. I’m not going to tell you what the expected returns are, I’m not going to tell you what their volatility is, what the risk is, I’m not going to tell you how they correlate with…I’m not going to tell you anything, you have zero information other than there are four of them. How do you put together that portfolio? The answer is you just say, “Well, 25% in each one.”

So, if you don’t know anything, that’s your starting point. So, the Calderwood portfolio kind of takes that approach to weighting, what are the asset classes? Well, we don’t want to take any bets on inflation versus deflation, so we have a blend of nominal and real asset. The nominal assets are cash and government bonds or actually bonds and corporate credit as well, the real assets are gold and equities. We also don’t want to take a view on duration. So, we’ve got zero duration, I either go within the cash, and we’ve got long duration, which are the bonds and the equities.

And so, we’ve got every single possible outcome covered with minimal information content, in other words, it’s a know-nothing portfolio, you don’t know anything about anything, and that’s what…you put your portfolio together that way. And what you find is when you run this portfolio and you rebalance it each year, you have a higher Sharpe ratio than the 60/40, a higher Sharpe ratio than the equity portfolio. It’s not done as well as equities during this bull market, but absolutely trounced equities and bonds in the 1970s. It’s robust to different regimes, and like the cockroach, it’s not very clever but it’s incredibly robust and very successful.

This is actually the portfolio…when friends come to me, kind of successful friends that had been kind of lucky enough to have some financial success to make some money, they’re not financial people, they might be kind of tech people or industrialists, restaurant owners or something. They asked me for my advice and this is what I give them, I said, “This is all you need. You can do it with ETFs, you can do it for a few basis points, you just tell your broker to rebalance each year. You don’t need to know anything, it will do better than pretty much 90% of other portfolio solutions out there.”

Meb: The interesting thing about that portfolio is if you model it back in time, as you mentioned, it has a great Sharpe ratio, it’s low volatility, but of all the portfolios you can kind of come up with, it has one of the most consistent per decade returns. So, like you mentioned, there’s portfolios that have done exceptionally well in the last two or three decades, then there’s the ’70s. The ’70s is like you have this environment that’s totally different than the next two. And so, many traditional portfolios, if you just got through the ’70s, it was a compliment.

And so, this portfolio, though, if you look at the lowest volatility of returns per decade, and I think it may have…and I may have to go back and look at this, but maybe one of the few, if not only portfolios that actually had positive real returns in each decade. Now, this is an untraditional portfolio. When you talk to people, you’re like, “Hey, look at this cockroach portfolio,” what is the biggest pushback? Because I have an idea but when people were like, “Oh, no, no, I can’t do that,” what’s the reason why?

Dylan: Because cash doesn’t yield anything, because government bonds and credit don’t yield that because everything is too overvalued. And by the way, these are all true, I wouldn’t argue with any of them. In the late 1970s, you would have looked at the cockroach portfolio and said, “Equities are over, nobody invests in equities anymore, inflation is going to go out of control, the only thing I want to own is gold. Why do I want to put 25% of my portfolio in equities or government bonds? Why do I want to put 25…” And of course, that would have been a very understandable response, you would want to overweight the gold, you would want to overweight the precious metal, you would want to underweight the other stuff.

But it would have been completely wrong. And the point is, this is by construction, a portfolio built using almost no information and no knowledge. And of course, most people, rightly or wrongly think that they do have knowledge because everyone have information. And so, most people, at any point in time, you can show them the historic returns and you can say, “This is kind of what you want,” and they’ll say, “Well, that was really interesting but I don’t think it’s going to work now.”

Meb: Yeah, I mean, like, when I think about it, if I was going to go to a happy hour today, it’s the NCAA championship basketball in the U.S., so Carolina is playing Kansas. And I go to my friends and somebody is like, “Hey, Meb, the game hasn’t started, what’s going on in the markets? What should I do with my portfolio?” And I was like, “You know what? You should put a quarter each in cash, bonds, gold, and stocks.” I guarantee you their first reaction would be, “There is no way I’m putting 25% in gold,” unless the person was, A, Canadian, or B, Australian, so the rest of the world. Normal people, they’ll say, “No way am I going to put that much in gold,” and then B, “There’s no way I’m only putting 25% in stocks.”

But it’s funny because, as you mentioned, a lot of that has to do simply with sentiment and tracking price. And so, we did a Twitter poll and I said, “How much do you have of your portfolio in real assets?” So, that encompasses not just gold but any other commodities and perhaps TIPS or real estate. And the answer was less than 5%, people just don’t have any. And so, depending on what’s going on in the world, obviously, that sentiment changes. But I guarantee you, if you were to go to Switzerland on the slopes and sit on the chairlift and say, “Hey, this is what I think,” my guess is those would be the two things, not enough stocks, way too much gold.

Dylan: Yeah, I think that’s true. I mean, Switzerland is a bit different. Everyone kind of loves gold in Switzerland.

Meb: Yeah, yeah, that’s fair.

Dylan: But yeah, I think also it’s one of the problems when you’re trying to talk to people about what may be a portfolio solution looks like. Because if you just, “What’s your objective? What you’re trying to do?” If you’re trying to maximize your returns from stock, nothing else, you just want to maximize your returns, then it’s kind of hard to argue against equity, really. But who wants to put 100% of their wealth in equities? If you flip that back, “Do you want to put 100%…” In fact, actually, over the last 10 years, they’ve barely had a 20% drawdown. You could leverage it twice, you could leverage your equity, but why don’t you… And obviously, most sensible people would say, “Well, I don’t think that’s very smart.” You say, “Why don’t you put 100% of your equity…of your net worth in equity?” They’ll say, “Well, I don’t want to put 100%.”

So, people already intuitively have this notion that they want a diversified portfolio, they want a portfolio solution. But when you put a portfolio solution in front of them, they kind of…they get drawn towards equities, especially when equities have been on this kind of bull run. I said at the beginning, I think an entire generation or two or three generations who’ve only really known a bull market in duration assets, including equities, and I think history tells you that that is not the kind of standard way things go. So, we use the cockroach almost like this kind of internal benchmark to compare it to what we’re doing in the fund. But we also…you know, we provide a portfolio solution, we believe in them…

Meb: Dylan, I got to interrupt you because this is a poor decision and let me tell you why. If you’ve learned anything about the money management business is you cannot pick a good benchmark. Like, that is a good portfolio, you need to pick something much easier to beat like just T-bills or government bonds. Like, a benchmark like the cockroach portfolio, that’s like a high bar. Like, you need to set something much easier, something simpler. You can’t pick a Sharpe ratio of 50 and above for benchmark, you got to go T-bills. Come on, man.

Dylan: Well, ultimately, we should be able to be a cockroach portfolio, what we do at Calderwood, we should be able to, and the reason for that is because we think we do know something. And so, the returns that we should be able to generate for a balanced portfolio solution, it should be higher. I mean, yes, yes, we could choose…caps is a good benchmark right now, but I think if we’re not beating a kind of cockroach portfolio over a kind of three-year period, then maybe we don’t deserve people’s capital. Maybe we don’t deserve to manage that money.

Meb: Altogether too fair and honest but accurate. I was reading one of your quotes that you kind of just referenced a minute ago when you were talking about this duration, when you said, “What rose furthest in the golden age? Government and corporate bonds. Public equities, private equity, venture, and real estate will fall furthest in its passing.” We’ve seen over the last year despite the fact that market-cap-weighted, particularly with the U.S., has kind of been resilient, but a lot of the froth has started getting woodshedded, whether it’s the SPAC or the expensive names.

We were on Twitter when we said, “This could be one of these scenarios where you blink and a lot of things are down 60%-80%.” But you write about a lot of fun and esoteric ideas…well, what most would consider esoteric, I am attracted to many of the same ones and we’ll touch on a few. But as we start to move away from this tough-to-beat benchmark, this cockroach, into, “Okay, how can we start to add value?” Let’s start to think about it, either you can take this and tee it up as a strategy, a particular idea, something, whether it’s more long term strategic or short term tactical, how do we start to think about how we move away and look different from that portfolio to add some value in the coming years?

Dylan: I mean, the first thing, you have to decide what you want for your portfolio and that’s a function of two things. Frankly, it’s a function of your age. The older you get, the less volatility you want to take, the less risk you want to take. I think everyone kind of knows that. But the second thing is you got to understand…I think the barbell is the right way to think about your portfolio. In very simple terms, there’s going to be two parts of the portfolio, it’s going to be a core part, which is kind of safe and steady and compounding and dependable with kind of hopefully, visible future returns but probably not particularly sexy returns. So, kind of a stable compounder. And then you’ve got the second part of the portfolio would be your more kind of racier stuff, maybe your kind of venture or maybe your crypto, maybe your friend’s restaurant or something like that, I don’t know.

So, you’ve got to decide which part of that barber, which side of the barbell you’re on. And what we do at Calderwood, we’re very much in the kind of core stable return generation part, the kind of dependable return. So, I said, “We aim to generate uncorrelated mid to high single-digit low vol returns.” If people want to go for a 5 or a 10x on their investments, which I think is absolutely fine, that’s a very particular part of your book, that would be more of the kind of venture, riskier stuff. But most people don’t want their entire portfolio to be like that, and so we’re at that more kind of core dependable part. The way you do that, I think, in this environment is I think you have to just understand that to have a stable portfolio return requires a very, very well-diversified portfolio.

And I think that the thing that people maybe don’t usually understand about diversification is that actually, it’s hard, it’s really hard to build a diversified portfolio, it’s not a trivial thing to do. Because if you’re really looking to diversification, if you’re really looking for diversified return streams, what you’re actually seeing is you want your return streams to be fundamentally different from one another. Which means that you’re doing things which are fundamentally different from the main one, which is equities, which means that, well, if you’re fundamentally different, you’re fundamentally contrarian.

So, if you want to build a fundamentally diversified portfolio, you have to be contrarian. We’ve talked already about the problems with 60/40, the problems with the death of duration with interest rates being zero, with expected returns being very low. Everyone’s aware of that. There’s lots of articles you read about how people are dealing with it. What are people using instead of 40? What are people using instead of bonds? And it seems as though what they’re doing is they’re doing private equity, or they’re doing more real estate, right? Or they’re doing more venture.

Meb: Also you just described like half the pension funds in the U.S. over the past four years, where you see this and they’re just like, “You know what? Interest rates are lower, we’re trying to figure out how to continue to get these 8% returns, so we’re just upping the dial on private equity and VC,” which, God bless them if that’s what they’re going to do, but that creates a whole host of challenges in my mind.

Dylan: I agree, I think two very, very obvious ones. The first is that it was certainly a smart thing to be doing that 40 years ago or 30 years ago, it’s not obvious that it’s such a smart thing to be doing it today when all the big private equity founders are multimillionaires and they’re all selling out. The second thing is, again, diversification, what kind of diversification are you actually getting? If you put private equity into our public equity portfolio, you’re not diversified. There’s lots of good reasons for you to invest in private equity, maybe that’s your skill set and maybe that’s the area that you understand, maybe you have some expertise there.

There’s nothing wrong with investing in private equity, but don’t kid yourself by thinking that you’re building a diversified portfolio. And again, maybe you don’t want to diversify, you just want pure equity, you want leveraged equity, and again, that’s fine. But if you genuinely want diversification, if you want some protection against the very real possibility that the party of the last 40 years is over and the next 40 years are going to look different, you’re going to have to basically let go of all of that stuff that has worked so well over the last 40 years and embrace things which are far less conventional.

This is our hunting ground. These highly unconventional, highly unfamiliar asset classes are, I think, where you’re looking at very, very attractive return profiles and more importantly, very, very diverse return streams. Return streams like cryptocurrency arbitrage, reinsurance, litigation, trade finance, synthetic credit and correlation, mortgage derivatives, none of these things really correlate with broader financial conditions. And so, even in this kind of crazy inflated world, you can still absolutely build a diversified portfolio with good stable returns that’s going to be robust, and I think it’s going to be the cockroach.

Meb: So, let’s drill into some of that. I’m going to just make a note, we’ll add this to the show note links because I can’t remember the name of it. But there was a great book that did a history of the Harvard Endowment, but it basically was talking about doing it 70 years ago, like, thinking moving into some of these areas when no one else was doing it versus kind of copying everyone else in kind of the way they’re doing it today and just moving into private equity.

I was going to joke that the real reason all these endowments and pension funds are moving into private equity is because it’s lower volatility than U.S. stocks because you only look once a year. The secret of just 2% volatility is you only open the present once a year. So, you talked about a number of different strategies, a lot of which we’ve never even covered on this podcast, some of which I love and are interesting. I’m going to let you pick, let’s start with one of them and kind of unpack the attractiveness and what it exactly is. I’ll give the mic to you to choose one that’s particularly interesting, weird, different, whatever Dylan’s favorite.

Dylan: Well, one of the ones that I suppose we’ve been quite active on in the last few months in different ways, one would be mortgage pre-payments, which is a very particular feature of the U.S. mortgage market. U.S. mortgage loans have a kind of unusual feature, which is they have this kind of embedded option. When you borrow money from a bank to buy your house, actually, you have that call option. If interest rates come down, i.e., the current price goes up, you can refinance at a cheaper rate because you have the benefit of that optionality, which means that the lender is shortly optioned. Now, obviously, nobody particularly wants to be short options, people don’t like being short options anyway. And so, what Wall Street does, it takes these loans…it takes these mortgage loans off bank balance sheets or from the various originators and then it kind of slices them.

And from these kind of mortgage loans with the embedded option, it basically separates the bond from the option. That’s what the tranching process does, and what you’re left with at the very bottom of these kind of tranche capital structures, you’re left with interest-only bonds, they only pay interest, there’s no principal at all. Which means that if any of the mortgages in that pool get prepaid, the mortgage disappeared, there’s no more interest to be paid, right? So, these interests are only worth a zero, right? So basically, these bonds are highly nonlinear, highly complex, the pure distillation of that optionality that the borrower enjoys but everyone else is desperate to get rid of. Who did it get rid of it to? They got rid of it to a handful of specialist hedge funds.

Now, the interesting thing about that and one of the things we liked about the space is obviously nobody wants to take on that kind of optionality. So, if someone else is going to take it on, they have to get paid for it. So, that’s the first thing, there is a fundamental, identifiable, understandable risk premium that we have been paid to take care. The second thing is actually hedging such a weird bond with very strange characteristics of negative duration, for example, when interest rates go up, some of the prices go through the roof, when interest rates come down, they can go to zero, there’s very, very deeply embedded convexity. It requires a certain amount of expertise to be able to hedge that type of product.

And so, again, you have to get paid for that. When we’re looking at this piece, we’re looking at these managers, what you see as an identifiable risk premium is pure prepayment risk and prepayment risk generally, you know, doesn’t collide with other risks in the book. So, that’s one area that we get to kind of deep dive, we wrote about it in “Popular Delusions.” In “Popular Delusions,” we try to share our thinking, so we write about a lot of the stuff that we’re doing in the fund. By the way, we also write about a lot of stuff that we’re not doing in the fund, we’re just interested. We’ve written about uranium, about oil, about Irish bank, stuff like that, but we’d written a lot about mortgage pre-payments.

Meb: You should have put those in the fund because they both did great.

Dylan: Yeah. I mean, uranium, in particular, has been a fascinating place to be, still is, actually. I mean, yeah, we’ve got a very kind of diverse subscriber base. We have kind of private individuals with high net worth’s, but we also have institutions, hedge funds, allocators, and governments. So, we covered a lot of ground in the research.

Meb: So, you need the Calderwood base, low vol, easy-peasy fund, and then the Popular Delusions banana fund over here, there you go.

Dylan: Yeah. Actually, you’re not the first person to suggest that, a number of people have explicitly said, “Can we have a fund that is focused on some of these kind of more opportunistic ideas?” And the answer is we definitely want to do that but you fight one battle at a time. We’re getting this fund kind of established, we’re getting the research kind of established, but that’s certainly something that we’ve kind of been looking to do probably in a year or two from now.

Meb: And so, winding back to this sort of prepayment trade you’re talking about. I mean, is the only real way to express that is allocating to a fund manager that is specifically targeting that idea? I mean, you can’t really play that through anyway in the public markets, right?

Dylan: Yeah, no, I mean, this is quite esoteric. It’s a fascinating world, but you certainly couldn’t do an ETF in these types of things because there’s just not the right liquidity in the underlying instruments. A lot of these things are marked to model. A lot of these instruments are the instruments that were blamed for…and they’re part of the complex, the mortgage derivative complex that was blamed for blowing up the financial system during the GFC. So, these are not trivial things to be dealing with. And frankly, I certainly wouldn’t blame mortgage derivatives for the GFC but I would blame people who trade in them who didn’t understand them, right? So, people shouldn’t be doing this stuff if they don’t understand it.

As I said, one of our core kind of philosophies really is that just because it’s unfamiliar or just because it’s unconventional doesn’t necessarily make it risky. And when you really, really dig into some of these areas, you surprise yourself, you realize, “Actually, this is okay, this isn’t rocket science.” By the way, some things you dig in and you just say, “I don’t understand this at all,” you wash your hands and move on to the next one. But with mortgage derivatives, I’d say we got comfortable and we got comfortable with the opportunity and we’re very interested in opportunity spreads that balloons. In late 2021, pretty much every single credit spread, corporate spread, sovereign spread was at record heights and it was very difficult to find a market where spreads had really widened.

And the one market where spreads have widened was mortgage prepayments and that’s because during the pandemic, basically, everyone had been…you know, people were sitting at home and suddenly, they had time to do admin. So, suddenly, those kind of prepayment forms that maybe they couldn’t do when they were working in an office, nobody had time to do it. So, suddenly, prepayments went through the roof and a lot of capital got sucked out of the space, the returns were very soggy, quite negative, hence, the spreads are wide. So, it was actually a very opportunistic allocation for us as well.

Meb: I love talking on the show about ideas that we haven’t covered in 400 episodes and that’s certainly one. I think we’ve only talked about reinsurance in like CAT bonds maybe once. And if there was a strategy slash, I don’t even know what to call it, an asset class, that I personally would like to allocate to that I don’t, that falls under this heading of really correlated to nothing but it’s kind of wonky so you got to know what you’re doing but I can’t throw it in an ETF, maybe give us just a kind of brief overview of how you guys think about that space. Are there any particular areas you think are more attractive or scary that people should have avoided?

Dylan: Yeah, I think lots of very interesting things about that space. There’s also a word of caution to kind of go through a couple of those now. So, in terms of an entry-level into the world of unconventional…and by the way, I should also say all we really do is liquid stuff so we don’t do closed-ends. So, we’ve said no to things like theatre royalties, pharmaceutical royalties, precious metal royalties because these things are typically 10-year locks, 15-year locks. Closed-end stock, we’re just not interested in, right? I certainly don’t like to lock my money up for 10 years. So, we like to keep it liquid, maximum liquidity of one year.

So, that is insurance-linked securities, and the different types of insurance-linked securities, CAT bonds would probably be the entry-level because it’s just like ordinary bonds, they pay you a coupon and you get hopped if there’s a default. The difference is that the bonds default when there’s an insurable event, for example, a hurricane or an earthquake. The great thing about that is it’s actually easy to understand the return profile. It’s a bond, that’s all it is. The fundamentals of that bond, they’re very interesting for two reasons. Firstly, the default event does not correlate with defaults, which are caused for economic reasons.

Generally speaking, an earthquake or a hurricane is going to be independent from a financial market collapse. So, you’ve got meteorological risk and you’ve got geological risk, and those two things do not correlate with financial risks. So, that’s already a win, you should already be interested at that point. The second thing is that CAT bonds and actually, just generally, insurance-linked securities, they are on a short duration. They’re priced off LIBOR, so it’s not going to affect income security. Yes, you’re a short vol in a sense, you’re a short weather vol and geological vol, but that vol, like equity volatility, it gets repriced after events. So, if you’re in it for the long haul, you will meet the risk premium for underwriting catastrophe risk.

And something that we like about the space, just like the mortgage prepayment story, when you understand what prepayment risk is, you can see why that industry has to exist, why there has to be a return. Someone somewhere has to be willing to wear that prepayment risk, and if they’re not, there’s no mortgage market. So, it’s absolutely essential, ultimately, that these funds make a good return, make profits. It’s exactly what you see with reinsurance, if you’re underwriting someone’s house being wrecked by a hurricane, obviously, nobody wants that risk on their own balance sheet, so you’re taking it on your balance sheet. So, obviously, you’re going to get paid for that. It’s a very identifiable risk premium, which is absolutely not the equity risk premium.

There’s no duration involved, you’re basically a long floating rate instrument that’s priced off LIBOR, so if interest rates go up, you’re going to make even more of a return. Again, you’re insensitive to any bear market and duration. I think that reinsurance is a great place to kind of dip your toe into unconventional assets. You got to remember, reinsurance markets are older than equity markets. As soon as you had trade, you had people worried about what would happen if they lost the cargo, what would happen if the wagons were attacked by bandits, or if the ships were lost to sea. So, when you see the growth of international trade, which you see like 4,000 years ago, you see the growth of insurance markets. So, insurance predates equity, so there’s nothing actually particularly exotic about it. Once you get into it, you can see, “Actually, yeah, why don’t I have some of that portfolio? That stuff’s easy.”

Meb: Yeah, we got to talk about uranium since we referenced it. Not only that, I think it’s, what, a quadruple? The uranium stocks are a quadruple off the bottom, at least, uranium as well. You know, we wrote about this…my problem is my timing is always horrible. So, I wrote about this back in early 2017, I think. I’m like a fly that just gets attracted to markets that have been completely impaled. And so, going back to our first book, we used to talk about it’s fun to dig around in asset classes or industries either, A, that have super large drawdown, so like 80%-90%, but also it have like multiple down years in a row.

And you’ve seen this a few times where you have an industry in the French-Fama data set that goes down like five years in a row or something where everyone’s just vomited…everyone possible who could own this has now vomited it out. Uranium was certainly fitting this category as were many energy and ag stocks and commodities over the past decade, just a little different talking about that today. But walk us back, what was your thesis for uranium? Was it just hated or was there a fundamental backdrop, and give us an update to today?

Dylan: A bit of both. We kind of first got interested in it around about ’18-’19 and the idea was really twofold. The first was that it was just a very classic bear market in commodities. Commodities as we know are phenomenally volatile, phenomenally cyclical, and we kind of interested in the markets, but the whole Fukushima thing really kind of smashed the uranium mining industry and the nuclear industry more general. And this was coming on the back of just a slow bursting of the commodity bubble. I think at the peak of the commodity bull market, I’d have to go back and check my numbers, but I think kind of 2008-ish, mid-2008, the market cap of the uranium sector was like maybe 150 billion. When we were writing about it in 2019, it was seven.

Meb: Oh, my God.

Dylan: Right? So, that’s kind of interesting already. And obviously, when you actually looked at what the companies were doing, the mining companies, they all cut production. They were all mothballing mines, there was no capital at all going into new projects, it’s quite the opposite. Cameco even mothball their mines to buy in the spot market because Cameco was saying, “Look, we can buy it cheaper than makes sense to sell our stuff in the ground, why would we mine our stuff in the ground and sell it at spot price? Why would we do that? It doesn’t make any sense.” All the kind of soft signals that this was just like a deep bear market with the…there was just wasn’t enough capacity to supply to kind of run rate from the utility. So, that was what kind of got us interested.

The second thing was also as we kind of dug more into the whole energy story and the energy transition story, and we got kind of fun when we’re seeing this in Europe because of the German response to Fukushima. They basically just shut down all their nuclear stations and went renewables, they went into wind and into solar, and it was a total disaster, right? It was actually a joke, it was almost laughable just how comical this was playing out. Electricity prices went through the roof because what they found was solar and wind that this is not reliable and so then you have this intermittency problem.

So, when there was no wind or when there was no sun, Germany was importing its electricity from the grid from France, which is all nuclear. The whole thing was just incredibly short-sighted and I think that you’ve seen the same thing in California. But that’s the narrative in the kind of investment community that nuclear was over because Germany was shutting down their plants and Sweden was shutting down their plants and California was shutting down…you know, etc., etc. Whereas actually, when you look to over in China and in Russia and in India, the pipeline of nuclear power plants is off the charts. There was just huge demand for nuclear.

And by the way, this is before, long before the Russian invasion of Ukraine, long before this sudden need for energy security, long before people would realize that Putin actually not only could he shut off European gas, but he would. And so, I think that this macro, this very favorable macro optionality, if you like, of some kind of nuclear renaissance was kind of icing on the cake. So, the real story was just that you have a commodity market on its knees that was very, very short on capital, and the kind of higher-level story is that if there’s a nuclear renaissance, this stuff just goes crazy and I think that’s probably what you’re now starting to see.

Meb: Well, you certainly had the events of this year starting to refocus everyone’s attention. But it’s interesting, you know, as you talked, I heard you mentioned this in one of your pieces, this concept of narratives and what sticks in people’s brains. People, historically, this concept of nuclear, feels very scary, you hear about the accidents, and you’ve mentioned in your pieces where it’s almost like at the very beginning of the discussion and you say, “Okay, I’m just going to blind these asset classes.” It’s like if you were to do a chart and be like, “All right, I’m going to blind these sources of energy, you know, and the deaths attributable to each,” you had a reference in one of your papers about hydro. Tell us about that. And, like, it’s just funny how the narrative sticks, it’s so weird.

Dylan: I mean, it really is. We start with Chernobyl so you could have a benchmark of the hydro catastrophes, but Chernobyl, the range is from like a few tens of deaths to like 50,000 deaths and nobody really believes that there were only like 20 or 30 deaths caused by Chernobyl, which I think was the original official Russian line. I don’t think anyone really believes it was 50,000 either, the number is probably somewhere between 3,000 and 5,000, which is an absolute disaster, there’s no two ways about it. But if you look at the last hydro disasters, in China, a dam collapsed and 147,000 people died, 147,000.

If you actually go through the kind of list of hydro disasters in China and India, they just dwarf just any reasonable estimate of deaths and accidents that you’ve had from nuclear. I mean, Three Mile Island, no one actually had radioactive poisoning. Fukushima, nobody died of radioactive poisoning, I thought it was just the stampedes to get out that actually kill people, it wasn’t the actual radiation. So, it is a case study and the public perception of risk is one of these kind of puzzling things that the psychology professors analyze, “Why are people so terrified of nuclear given how safe it is?”

The fact is it’s phenomenally safe. Whether or not the nuclear risk is less in the West, I don’t really know, but in terms of uranium, again, it doesn’t matter, because it’s happening in China, India, and Russia regardless. Yeah, so I think the market cap of uranium right now is probably closer to 50 billion, so you’re well off those lows, those bear market lows. But I think that when you’ve had a 10-year bear market, I don’t think that the subsequent bull market is over after a year. So, I think that you’re still kind of in very early innings in that.

Meb: Yeah, I mean, we’ve certainly watched a few of the things you’ve commented on. You were commenting on being bullish oil back before this, it’s always fun to read them sequentially and then find ourselves today. So, we’re sitting here, Q1 2022, there’s been a lot of shifting sands over the past few years, pandemic, wars, my God, I’m ready for just like a quiet quarter, like, just like nothing really happens, surprisingly. What are you thinking about today? What got Dylan scratching his head, chewing on his pencil as he sits in the pub pondering, as you do, a lot of these big topics, but also positioning as we look forward? What’s on your brain?

Dylan: To be honest, I do kind of feel this tension between the pessimism and the optimism. I kind of worry that we’ve kind of entered into this self-reinforcing dynamic where trust is kind of breaking down, people are not really trusting each other. In kind of games theoretical terms, when you play a prisoner’s dilemma, dynamically over time, what you find is that the winning strategy oscillates between cooperation and non-cooperation. So, when you’ve got a kind of population when you simulate these kind of biological games, these kind of reproductive games, what you find is that the optimal strategy for one phase will be that everyone cooperates with each other.

But then as everyone’s cooperating, the incentive to non-cooperative strategies is much higher. So, non-cooperators then began to grow in the population size until eventually, they then dominate the population, the whole population is dominated by non-cooperators. And, of course, if nobody is cooperating, the incentive to cooperate suddenly becomes high again, so the cooperators start to reproduce and then they start to win. So, you have this kind of oscillation between cooperation and non-cooperation. And I think that kind of peak cooperation probably would have been the NASDAQ bubble, you’ve just seen the Berlin wall fall down, you’ve seen the integration of the Soviet states enter the world economy. People talked about the peace dividend in the stock market.

China was coming on stream, India was coming on stream, all the South Americans were coming on stream. We were all friends, we’re all in it together, we’re all the same kind of thing. You had this Washington Consensus where we were all free, we all believed in liberty, we were all going to be democratic, and we would all become capitalists. That was the end of history, that was Fukuyama’s end of history, and that was the kind of cooperative peak, I think. Then you had 9/11 which kind of rudely interrupted it, then you’ve got the GFC, then you’ve got Brexit, and you’ve got Trump, and now you’ve got this war and now you’ve got the Chinese. And by the way, now you’ve got the U.S. blocking Russian reserves, etc., etc. And I just worry that we’re moving into this very distrustful, uncooperative phase, which can get quite nasty.

You know, the 1930s would have been the real trough in that non-cooperative equilibrium. You had blockades, you had sanctions, you had trade wars after the great crash of ’29 and the Great Depression, and globalization just absolutely stopped. That was a real trough. During my career, we’ve gone from the peak and it’s just been a steady decline into this uncooperative phase and I worry about where that ends. I think that’s the kind of bigger picture for me. What do you do about it? As I said, I think what you do about it is you build your own cockroach portfolio, right? You build something that’s going to be robust to different regimes because let’s be honest, none of us really know how it’s going to pan out, none of us really know how markets are going to respond.

I mean, if I told you five years ago, “What’s going to happen is this, there’s going to be a pandemic and there’s going to be a huge war in Europe, potential kind of nuclear escalation,” what do you think the markets are going to do? Likely you would have said, “We’re going to need you all-time highs.” Right? But that’s kind of where we are. I think that we’re not good at making these predictions. Much as we enjoy or much as we may try, we’re just not very good at it. I think the answer is you build a portfolio that doesn’t depend on your ability to make those forecasts, build a portfolio which is going to be robust to your undeniable ignorance.

Meb: I was laughing as you were talking about the prisoner’s dilemma because there was a very real case of that this past year in the United States with an American football game with…I believe it’s the Chargers and Raiders where if they simply tie, both of them would go to the playoffs, but if one of them won, obviously, one would go and the other one wouldn’t. And then it became this fascinating game and in the end, it got even weirder…for listeners, we’ll post a YouTube link to this or maybe some links, where one of the teams, their behavior at the end influenced…because they could have just downed it and tied and been done with it but their behavior influenced what ended up happening and one team won. So, anyway.

Dylan: So, it tipped over from cooperative to non-cooperative.

Meb: Yeah, yeah, it’s a really fun example. Before we let you leave, there’s like a bunch more we could talk about. As it becomes nighttime there, as the sun rises here, one of the topics that was near and dear to my heart for many years that you recently wrote about was biotech stocks. What’s going on there? Are they interesting, not interesting, something you guys are thinking about?

Dylan: I mean, it’s something that we’re exploring right now and it’s one of the things that when you’re writing a bi-monthly piece…so we write our research “Popular Delusions” twice a month. When you have that deadline, you have to kind of write what you’ve got and sometimes you haven’t really formed a conclusion yet. And so, what we decided, again, very early on was that we weren’t going to force a conclusion if we didn’t have one. If we’re not ready, we say, “Well, this is where we are, this is what we think, but we’re going to kind of revisit that.” So, actually, you know, we wrote about carbon markets last year and it was kind of the same. You know, we did the analysis, we did the walk-in, and afterwards, we were like, “Actually, this isn’t very interesting, I don’t think there’s anything to be done here,” but we published it anyway.

So, I think that there’s an element of that with biotech, there’s some really interesting kind of single stock areas. But I think the kind of big picture is you’re actually down on a five-year view when the stock market…I mean, when the S&P is up over five years, it’s got to be 4x or something like that. Biotech is down, you’ve just seen a massive collapse in valuations, a huge withdrawal of capital from the space at a time when things are actually potentially quite promising, they’re making it easier for drugs to get through the regulations, for example. There’s a time when the kind of perception is that it’s too risky to invest, that you’re getting stuff that’s trading at discounted cash.

Now, obviously, some stocks are trading at discounted cash because they’ve got cash bonds and the market is basically saying, “We don’t think you’re going to last two years.” But that’s not necessarily the case. This is a kind of market, I think…and this is where there’s more work to be done. I think if you just ran a screen and said, “Well, I’m going to buy all these kind of stocks trading at discounted cash,” I’m not sure that would necessarily be a great strategy. If you’re willing to do the walk and willing to do the deep dive into the drug pipelines, I think you can find businesses with good prospects also trading at discounted cash. That’s the kind of setup that we like.

I mean, you mentioned SPAC at the beginning of the show and I think that that’s another good example. You’ve seen a swing from delirium last year to just this kind of manic depression. Looking at some of these SPAC prices, some of these SPAC yields, some of these warrant prices, they’re kind of telling you that there’s never going to be a deal. If there is a deal, it’s going to be crap, it’s going to be awful, you don’t want to invest in that stuff and the valuations reflect that pessimism. And actually, in some circumstances, it’s true, but in lots of circumstances, it just doesn’t. You know, there’s some really, really high-quality sponsors in the SPAC market, there’s some really, really high-quality businesses … We’ve actually written quite a lot on the SPACs, this is another area that we’re kind of interested in.

Meb: The biotech, if you look at a couple of ETFs, I think you’re actually going on darn near seven years of no returns, which, like you mentioned, is like a lifetime. It reminds me, we wrote about this…man, when is this? The financial crisis 12 years ago now, where we referenced the very simplistic but thoughtful strategy of John Templeton back in the Great Depression famously in the late ’30s, bought $100 of various stocks trading below $1 on the NYC and American Stock Exchanges, got him a junk pile of 104 companies, 34 of which eventually went bankrupt, and he spent $10 grand, four years later, he quadrupled his money.

Dylan: Yeah, it’s an interesting space. I think I remember Jim Rogers, he kind of founded Quantum with George Soros, and I remember him saying…I mean, was a long time ago, it was during the beginnings of the commodity bull market back in the early 2000s. He said, “The way to summarize my approach to finding interesting investments is I turn the performance charts upside down, that’s what I do.” I think that’s actually kind of hard to argue with. That’s just a great starting filter, “What’s done really, really, really badly?” The inverse is, “What’s done really, really, really well and maybe I don’t want to be doing that?”

Meb: Yeah. As you look back on your career now, what’s been your most memorable trade? Anything come to mind in investment, good, bad, in between?

Dylan: I mean, yeah, all of the above. The most memorable investments are obviously the ones that work out very well. I think one of the things that I love…I mean, who doesn’t, is when you see that cheap optionality. I always kind of feel that you see that most clearly when…again, Jim Rogers said once, he waits until there’s something valuable just sitting in the corner and nobody wants it and he just kind of wanders over and picks it up. And it was kind of real fun when you really, really see something that you feel that nobody else sees. In other words, everyone thinks you’re an idiot and they all know why, they will tell you the 100 reasons why this is the dumbest thing they’ve ever heard, and I think that the best investments I’ve made have been those kind of setups.

One was actually a commodity business, an iron ore miner in the early 2000s. This was when I was a prop trader, it was called Fortescue Metals. Not all of you know that stock, it was founded by a guy called Andrew Forrest. It was a kind of busted junior mining story, really, because the Chinese were supposed to be funding this mine and Andrew Forrest, the entrepreneur, had found a ton of iron ore in Western Australia, the Chinese were going to fund it and then the Chinese changed their mind and pulled out and the stock price just completely crashed. And it was literally trading at a few pence, I think it was trading at 45 cents, Australian cents when we picked it up. It’s one of the biggest iron ore deposits in the world. Why didn’t anyone touch it? Because this guy Andrew Forrest in Australia had a very bad reputation, he was probably too good of a salesman for his own good.

I think 10 years earlier, he’d found this huge nickel deposit, which was generally perceived to be uneconomic but he figured out this new technology for leaching those nickel in an economic way and he raised a ton of money from the financial industry in Australia, a lot of pension funds and endowments. And it turns out this technology didn’t work, so he didn’t get the nickel out of those. Anyway, so, what happened 10 years later when the same guy kind of by himself and said, “Look, I’ve got this iron ore deposit, guys, go fund me,” and the whole community just shunned him, they were not touching him ever again. So, my kind of view was basically that there was this huge commodity bull market, it was a massive iron ore deposit, it wasn’t complex, it wasn’t at all. The reason why no one hadn’t been funded yet was because this guy had a terrible rep in his domestic market, but eventually, it would get funded.

By the way, we were also sent with a bank, so I was kind of trying to save their capital markets there so I say, “Why don’t you just help arrange a $100 million bond for this guy? We will take all the equity and then, you know, the bank will be happy.” They didn’t do that, unfortunately, what they actually did do was shut down the prop trading desk. But I actually had quite a lot of that PA and my father actually had quite a lot of that PA and it went from like 45 cents to, I think, something like $18 after a split, so it’s like 180 … So, that was my first kind of big win really.

Meb: So, you have an open invite as you talk about discarded and hated investments to come back on the show. Anytime you see something that nobody wants to pick up off the floor, you say, “Meb,” text me on my cell and say, “I’m ready to talk about,” whatever it may be, because I love hearing about the hated and discarded. To me, that is usually some pretty fertile ground to be digging around in. I can’t let you go without asking you, you have the world’s smallest bookshelf behind you, what are these five books? Are these the to-do list, or is this a stand for some plants? Or what is this?

Dylan: No, this is…what do we get here? We don’t actually…I’m not usually in this room. So, this is “The Match King,” Ivar Kreuger, “The Match King.” This is Isaacson’s “Innovators,” with that kind of Job. Actually, it’s a fantastic book, and I think very relevant to building a business generally, it’s not just about tech. His point is the innovators…the innovation is a team thing, it’s not just one individual. And typically, you get the visionary and you get the product guy. You get a really good salesperson and you get a really good product person, and you marry those two things together, you’ve got a valuable tech business. I think the same is true in finance. No one’s a one-man show, you’ve always got to marry those two things. Now, this is a classic, “Investing in Insurance Risk.” I’ll send this to you if you want, you get …

Meb: Man, that’s a page-turner right there.

Dylan: And then you probably know this as well, Frank Bitton.

Meb: Yeah, I recognize that publisher style, it makes me nauseous.

Dylan: Yeah, I mean, this is a fantastic one, “Fake Stat” is another one.

Meb: Oh, my God, I’m sorry I asked.

Dylan: Really, I mean, I love Dieter and I love how you can kind of unpack people’s misperceptions and people’s biases, actually, with sometimes quite simple charts, right? So, this yield curve thing is really interesting. Every few years, a yield curve gets interesting because it predicts recession and then everyone gets all excited that it predicts recession because the yield curve just inverted this quarter and that means there’s going to be a recession. You know, it probably does but stocks have had their worst quarter in some time as well and what you find is that the yield curve just doesn’t predict stocks. So, what’s the excitement for us? If we try and predict returns, I don’t think the yield curve actually has kind of too much value. Anyway, the last one, “The Seven Signs of Ethical Collapse.” So, that’s just from my equity days.

Meb: Well, the bookshelf behind me is my wife’s childhood, high school, college bookshelf, so it’s a bunch of like Heidegger and Nietzsche and then various children’s books like on ways animals sleep.

Dylan: Well, listen, there is definitely…I see a space on that bookshelf for “Investing in Insurance Risk.”

Meb: Yeah, exactly.

Dylan: I think that’s what that bookshelf needs.

Meb: Yeah. Tell me a little bit, people want to check out what you’re doing, they want to read your missives, they want to send you a bunch of money, what’s the best places to go?

Dylan: So, I mean, the website is the easiest place to kind of reach out to us or to connect with us. You can subscribe to our research, you can sign up to our kind of mailing list.

Meb: That is calderwoodcapital.com.

Dylan: calderwoodcapital.com. I’m on Twitter, Tim is on Twitter, yeah, so we go through phases of being very active and then not being active. So, sometimes people complain that we don’t tweet enough, but it’s kind of difficult to tweet enough when you’re trying to build a business.

Meb: I hear you, my friend. It’s been a blast. Thanks so much for joining us today.

Dylan: Thanks, man. I really enjoyed it. 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.