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Twitter: @LynAldenContact

Disclaimer: I write and podcast for entertainment purposes only. This is not investment advice.

We talked about breathwork and its benefits and risks (including Wim Hof), ‘state over story’ and the ability to change the state of your own nervous system, Jonny’s own journey, the $55,000 he spent exploring various modalities and experiences to find the most impactful ideas (including super interesting stuff like darkness meditation), emotional debt, repressed anger, and men’s work.

In the context of a breathwork journey, incomplete reflexes will rise to the surface and they will be felt. The body will move in a certain way, and then there'll be relaxation. It's almost like layers of an onion that keep on unpeeling. The more we become comfortable with feeling the full spectrum of emotions, the more that these deeper pieces start to arise.

We tend to focus on the outer journey, the how of success. How to spot opportunities, how to invest, how to build a business. Mastering the inner journey is equally important: both understanding your why and having the tools and practices to master the stress and setbacks along the way. That’s one of the lessons of the maze. Remember: great investors are survivors and experts at cultivating resilience.

We have what I think of as this Cartesian hangover, almost going back to Descartes, of this mind-body dualism. I think the rational brain, the intellect, the kind of left-hemispheric way of perceiving the world has been very prioritized and almost worshiped in our culture.

Controlling your mind, mastering your mind, mindfulness, all of these things have been really, really emphasized. I think what is starting to happen is the pendulum swinging back to, ‘oh no, there is no actual distinction between the brain and the nervous system.’

Quotes that stuck with me:

There is no now. Everything is history. … There is no other guide to the future.

You don't have to have the passion before you have the idea. The idea gives you the passion. Oh great, this is what I'm gonna do.

How do you judge an idea when you have it? Is it based on real knowledge and experience? Real pieces of the puzzle. That's how you judge.

The moment you step into the battle, you forget everything. Meaning that you let your brain make the correct connections. That's the presence of mind, where your mind is clear. In martial arts, it's very fast, but it's really the same idea. It's to clear your mind and let your brain make its own connections, according to the situation and the circumstances.

A lot of people think Henry Ford invented the assembly line. He did not. The assembly line was invented a hundred years before, at the start of the Industrial Revolution. He invented a certain kind of assembly line, meaning he put together the old assembly line with something new.

I like to distinguish the natural flash of insight … Steve Jobs was good at it. He'd search and search and search and then something would strike him. I don't know if you know about the origin of Starbucks. Howard Schultz was working for a coffee company, high quality coffee, where you fill up your bag and take the coffee beans home. He goes to Milan for the first time in his life and he sees the coffee bar and he says, oh, okay, well we should clearly convert all our stores into that.

I had the pleasure of chatting with Jared Dillian, author of The Daily Dirtnap and We're Gonna Get Those B******s, about his new book Those B******s. Years ago, I read his book Street Freak and I fondly remembered his wit, candor, depth of introspection, and keen eye for the antics of markets.

Those B******s is a collection of Jared’s essays on life, death, meaning, friendship, marriage, luck, ambition, suicide, and much in between (including a few great bits on markets and finance). It’s refreshingly honest and fun and led to a lot of reflection.

In our conversation we touched on writing and finding your voice, escaping the caterpillar pillar, how markets are ruled by fear, being the guy who knows a guy, mental health and the power of writing, making meaningful memories, the right temperament for markets, why people don’t change, and why you should ask people if they are lucky.

A few highlights from the conversation:

A lot of people think that markets sort of oscillate between fear and greed, right? But it really isn't fear and greed. It's fear and fear. It's all fear, right? Greed is fear of not getting something that you want. So working in the markets is, if you have any background in psychology, it's a very depressing place because the markets are filled with fearful people, like acting based on fear. But the thing is that it's very predictable. People behave in very predictable ways. So that's been my thesis about markets all along.

I like to know lots and lots of people. Now, having a newsletter has been the perfect way to do that because a lot of times if I have a question about like air conditioning, I can put it in my newsletter and I get 20 responses. I know somebody who owns an HVAC company. I know people in all different kinds of industries and if I ever need help, I can reach out to them. I like to call that having a big world. I like to have a big world. I like to know lots of people. That's just my personal philosophy.

I learned that people had similar experiences, they just would never talk about it. There are things you cannot talk about in polite conversation, but you can do it with words, you can do it on the page and you can bring people into this world. And that's the magic of it. My Substack is like a safe space for people to read this stuff and think about these issues, really the only place you can talk about 'em is with a therapist or something like that.

The top five memories piece came from the show Lost. There's a character named Charlie and he has a premonition that he's going to die. He knows exactly when it's going to happen. And so he sits down and he starts thinking of his top five memories of all time.

And it got me thinking like, that's actually a really good exercise. Like what are your top five memories of all time? I think one of mine was marching band in high school. One of mine was DJing. Really your goal in life should be to make more of those top five memories and keep doing that over and over again.

I had a trade that made 15 million bucks. That was a great trade. But it doesn't make my list of top five memories, because top five memories are about relationships and achievement and things like that. Lehman was a great place to work, but ultimately that's not what we're here on earth for.

I had the pleasure of chatting with Jared Dillian, author of The Daily Dirtnap and We're Gonna Get Those B******s, about his new book Those B******s. Years ago, I read his book Street Freak and I fondly remembered his wit, candor, depth of introspection, and keen eye for the antics of markets.

Those B******s is a collection of Jared’s essays on life, death, meaning, friendship, marriage, luck, ambition, suicide, and much in between (including a few great bits on markets and finance). It’s refreshingly honest and fun and led to a lot of reflection. For a taste of Jared’s writing check out his excellent recent essay People Don't Change:

People don’t change, until they do. What has to happen is that person has to hit bottom. Bottoms vary for different people—people with a high bottom get to keep their jobs and spouses. People with a low bottom have to lose everything before they learn.

In our conversation we touched on writing and finding your voice, escaping the caterpillar pillar, how markets are ruled by fear, being the guy who knows a guy, mental health and the power of writing, making meaningful memories, the right temperament for markets, why people don’t change, and why you should ask people if they are lucky.

Enjoy,

Frederik

You can listen to our conversation on Spotify, Apple, anchor (and via RSS).

A few highlights from the conversation:

A lot of people think that markets sort of oscillate between fear and greed, right? But it really isn't fear and greed. It's fear and fear. It's all fear, right? Greed is fear of not getting something that you want. So working in the markets is, if you have any background in psychology, it's a very depressing place because the markets are filled with fearful people, like acting based on fear.

But the thing is that it's very predictable. People behave in very predictable ways. So that's been my thesis about markets all along.

I like to know lots and lots of people. Now, having a newsletter has been the perfect way to do that because a lot of times if I have a question about like air conditioning, I can put it in my newsletter and I get 20 responses. I know somebody who owns an HVAC company. I know people in all different kinds of industries and if I ever need help, I can reach out to them. I like to call that having a big world. I like to have a big world. I like to know lots of people. That's just my personal philosophy.

I learned that people had similar experiences, they just would never talk about it. There are things you cannot talk about in polite conversation, but you can do it with words, you can do it on the page and you can bring people into this world. And that's the magic of it. My Substack is like a safe space for people to read this stuff and think about these issues, really the only place you can talk about 'em is with a therapist or something like that.

The ‘top five memories’ piece came from the show Lost. There's a character named Charlie and he has a premonition that he's going to die. He knows exactly when it's going to happen. And so he sits down and he starts thinking of his top five memories of all time.

And it got me thinking like, that's actually a really good exercise. Like what are your top five memories of all time? I think one of mine was marching band in high school. One of mine was DJing. Really your goal in life should be to make more of those top five memories and keep doing that over and over again.

I had a trade that made 15 million bucks. That was a great trade. But it doesn't make my list of top five memories, because top five memories are about relationships and achievement and things like that. Lehman was a great place to work, but ultimately that's not what we're here on earth for.

A few quotes from Those B******s:

As a trader you must have the memory of a goldfish. You f**k something up, you clean up the mess, and move onto the next trade. There is always another trade.

This is something they teach professional athletes. It was said that Derek Jeter was the best at doing this- he did not dwell in the past. He had absolutely no memory, and was out there hacking at his next time up at the plate. We all have slumps. It's about your ability to shake it off, rub some dirt on it, and get back in the game.

If you are to be successful, pray that it happens very slowly. Peaking early isn't just true in high school--it's broadly true throughout life. You see this a lot on Wall Street. Good performance is difficult to sustain over any period of time. Early success leads to hubris which leads to mistakes.

After a few successively smaller fund launches, you end up as a CFP in Evanston, Illinois. I was 34 years old at Lehman Brothers and still a vice president. A 34-year-old VP. Many people are surprised to hear that. Well, most of the guys I worked with are now selling insurance.

I'm not a snob and I don't look down on people, but I did resent people dumber than me getting paid more for work that required less technical sophistication. But as time has gone by, I've learned ... that a bonus has practically zero correlation with performance. Once you learn that, life gets a lot easier.

Finance is depraved. The further away it gets in the rear-view mirror, the worse it looks. I like investing. I like the intellectual challenge, I like taking risk- but I am allergic to b******t. And there is more b******t than ever on Wall Street.

I like to say that when you work in finance, you understand how the world works. The average person sees used car prices rising, and has no idea why. The financier knows. You become conversant in politics, geopolitics, raw materials production, trade, the FDA approval process, venture capital, private equity, and many other things. In short, you become much more worldly. A kid from Staten Island can get hired on a desk and within a few years, acquire enough sophistication to carry on an intelligent conversation with most world leaders.

DISCLAIMER. I write and podcast for entertainment purposes only. None of this is investment advice and any information contained in my work should not be relied on to make investment decisions. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions.

Drew and I talked about Meta, Constellation, Floor & Decor, Restoration Hardware, and his research and writing process. I will share excerpts from the conversation and Drew's work on the substack.

Drew Cohen writes at Speedwell Research and is a Portfolio Manager at Davidson Kahn Capital Management. Prior to Davidson Kahn, Drew was at Capital Group, where he helped managed $5B+ of AUM. Prior to his role at Capital Group, he worked at Goldman Sachs in New York in their Global Investment Research division.

I’m usually skeptical of fiction involving financial markets. To make it thrilling and get life and death stakes, the genre typically blends with crime or conspiracy. Which means you need an engaging writer who knows both worlds well enough and doesn’t turn the financial combatants into caricatures.

But there are surprises. During my recent trip, I churned through Master, Minion by Paul Podolsky who also writes the Things I Didn’t Learn in School Substack. Master, Minion is a fast-paced and thought-provoking thriller at the intersection of financial markets, geopolitics, and intelligence agencies. Paul started his career in Russia, worked on Wall Street for 20+ years, most of that time at Bridgewater, and spent a lot of time in China as well. He brought all of that to bear in the book.

The story weaves together hot spots from Moscow to Hong Kong and, yes, Boston, with a wonderful depth of detail and cultural observation. Paul’s depiction of the “verbal kung fu” and politics in his fictional hedge fund is priceless. But his real strength is to paint compelling characters ensnared in their respective systems of money and power.

After reading his book and Substack, I reached out to Paul and am excited to share our conversation.

If you can just take one thought with you this Sunday, consider his metaphor for life, the flow and the eddies. The eddies being the loops in which can get stuck in without being aware of it. When I asked him about it, I realized he was the living embodiment of the lessons from Tim Urban’s The Tail End:

One of the reasons I left Bridgewater when I was 52, I calculated how many months I was gonna live. I literally looked at an actuarial table. I think when I left Bridgewater, I had 384 months to live, statistically speaking. And there's a pretty wide range around that, if it's an individual.

I thought about that. These 384 months are gonna come. There's nothing I can do. That is just the flow. How do I stay in that for myself? It's very hard to see, at least it was very hard for me when I was young. You have to listen carefully. What is that real thing that works for you?

There's a period of time where I had no money and I had a young family. Money really, really made a difference, to try to make a comfortable tent, if you will, to sort of shelter them. But a little bit like you, I was thinking inside, this isn't the primary thing that motivates me. If I've got a million bucks now, if next year I have a million dollars and a hundred thousand, and the year after that I have a million dollars and two hundred thousand, that does not actually motivate me. And those months are going by. It's going 383 and 382 and 381… There are eddies that you could get stuck at in life.

We talked about Paul’s journey to writing, his book, intrigue and investing in emerging markets, understanding Russia, and much more. You can find a few quotes below. I hope you’ll enjoy the conversation. I certainly did and look forward to reading more of Paul’s work in the future.

You can listen to this conversation on Spotify, Apple, YouTube, anchor, and via RSS.

The information in these posts and on this website is not and should not be construed as investment advice.

The paradox of writing fiction

The strange thing about fiction is, there's a weird paradox. On the one hand, you're making stuff up. On the other hand, it's sometimes easier to say something true by making something up.

In the real world, you never quite know what other people are thinking. You have a hypothesis. Fiction allows you to create a bunch of characters and imagine their interior world, which is where so much of the mystery and the richness of life is.

A few quotes that stuck from the book (no spoilers):

Working at a hedge fund:

Everyone understood the Boss had money, they, the hangers-on, me included, wanted that money and we all tried to destroy each other to get it. If [the CIA] was a team, this was Lord of the Flies.

The Boss said he liked disagreement, but almost everybody was too scared to disagree.

Understanding certain emerging markets:

The idea that the state itself was criminal was something Americans had trouble getting their mind around. But the Boss might understand. In the Boss’s mind, there were predators and prey, and he had dedicated his life to joining the ranks of the predators. Wealth was a precondition.

Institutions are people:

But the Fed is people and people are wired the same everywhere—ambitious, striving for greatness, prone to error, guilt-ridden.

Great investors understand impermanence:

Most people tend to look at what they are growing up in and think that it is normal, he said. To them it is normal that the US is the richest country. Normal that China is poor. Normal that Black people are poor and white people are rich. But the reality is, things change. Nothing is stable.

Magic in markets:

The signaling felt like primates establishing hierarchy. While the central bankers had the magical power to make the economy expand or contract, the investors had the magical power to become rich.

Some things I learned from Paul during our conversation:

The magic of writing

You spend a lot of time alone trying to … write the b******t out of an idea. Then you put the story out there and you get what I describe as pings from the universe. The story connects with somebody and you get this response back. It's kind of a magical process that you've created something.

The medieval is alive and well in Russia

The final thing which helped me understand [Russia] is it is medieval, in all that sense. If you think about the picture in your mind about the way Europe was working in the 14th and 15th century. There is a king. You pay tithes. There is palace intrigue. People are poisoned. You could end up in prison for no reason. Rule of law grew out of all of that, but that world is still alive and well in parts of the world. It's a very bizarre thing that a place with a space station that could do complicated computer programs has the medieval in it, but it's there.

And what you're looking at in Ukraine right now is exactly that. It's a land grab for disobeying the emperor or the czar or whatever you call it. And the punishment is death.

The traps of life

There's a quote at the beginning of the book from Chekhov, I should grab the copy off my desk, but basically that ‘life is a vexatious trap.’ And I thought that was actually unbelievably powerful. You see these traps recreated in many different forms. I just think they're more virulent in those other cultures.

Wall Street has that. Money on Wall Street has an addictive character. And people are willing to put up with a lot to endure that. They have these jobs that pay huge amounts of money, but many of them don't involve that much talent. Being a person like the Boss is a different type of thing. You know, a sort of character who can see the future. That's slightly different. And so some of the characters I was trying to get out of the hedge fund are people that are getting these insanely big salaries. Like the chief trader there. And they have this constant insecurity and they're stuck in this system where they love the money, but they don't have the talent to do something outside of that. And so that's that master minion relationship.

And then the secret police in places like Russia or China, they're so corrupt. And I saw this firsthand with families. It's unbelievable that there is no escape. One of the characters actually wants to be a reformer and non-corrupt. And there are people who you will meet in these places there. But corruption has sort of infected his family. He's basically on the payroll of his father-in-law who is tied to all these nefarious things. And that repeats again and again and again and again. You can't extract yourself from it.

Great portfolio managers as artists

I think really exceptional portfolio managers can look at something that's today and imagine a radically different set of circumstances. And their mind works a little bit like a kaleidoscope. In other words, they're staring at the world and they keep shifting the kaleidoscope and it's literally changing every single day.

And they're imagining what that future is. But some of those things are radically different than what we're living through right now. And those are the people that correctly call stock market bubble tops and crises and things. It's a weird thing. There is an element to it that I think is quite artistic. If you think about artists that create stuff that seems really out there initially, but then 10, 20, 30, 40 years later, people are like, this is the most beautiful thing ever done. They're doing the exact same thing. They're imagining a set of pictures in our head that are gonna resonate

“If I can’t understand something, I remove it from my portfolio.”

I saw what was going on in Ukraine. I said, this seems crazy. But what do you do if all of a sudden, the risk of your position has expanded more than what you'd anticipated? You take less risk. I called up all my contacts in Russia and everybody said, he is bluffing. There's no way he's gonna do this. And then I took less risk. And then as we got closer to it, I said, listen, I cannot predict this. I just closed all my positions in ‘21. And the minute he invaded, I closed all my positions in China.

My thought being, listen, if Putin is crazy enough to do this in Ukraine, who's to say that Xi can't do this in Taiwan. I certainly can't. From an investor standpoint, there's other ways of making money. If I can't understand something, I just remove it from my portfolio. And that's one of the reasons I love liquid markets.

Stories and understanding people

People think in stories. Numbers are really important for measuring stuff. But the way people think is in stories. And stories are about feelings and emotions. And the feelings and emotions are relatively limited in number. People have been telling stories for thousands of years and they revolve really around a couple of themes.

Escape, which this book is about, is one of them, and a couple of primal emotions. So to make a story resonate with people, you need to be in that zone for it to work. And so when I'm writing either a non-fiction piece or a fiction piece, one of the things I really try to do, which has taken me years to get to, is just listen: what am I feeling right now? Where is that coming from?

And when I was writing Master Minion, I was imagining, what is going to irritate each one of these people? What's gonna scare each one of them? What do they really want? And you have to be, to make the scenes come alive, you have to be very locked-in, just the way you would be in a business meeting. If you're somebody who's good in a corporation, you have a very rich understanding of everybody around the table, what they want. And when you're writing a book, you're doing the same thing. It's just all the characters are in your head.

George Soros on Putin

I had the occasion a few times in my life to speak with Soros. I spoke with him in, I believe it was January of 2000, two weeks after Putin. Putin came to power December 31st, 1999 if my memory's right. So I asked him, I said, you know, what do you make of Russia's new president?

And he just looked at me and he said, ‘not to be trusted'.’ That was all he said. And that was an example of somebody way out ahead. I mean, think of what came next.

Too much money (or being around it) can make you crazy

There's a little bit of me in every single character, truth be told. Even the diabolical ones. They say, write what you know, and each one of those people draws on strains of yourself.

I think that money can make you crazy. It's a very strange thing. We need money. I've been in very limited circumstances. It's unpleasant, But it's also true that money, too much money, is not good for you. It's a little bit like food.

When you were asking those questions, I was imagining how different it is in another industry. Imagine you're sitting around the table with Tim Cook and he's making 80 million or whatever. And you're the guy that's making a million bucks. Now a million bucks puts you in the top 0.1% of salaries. And you're sitting next to him and you're like, but this guy's not that much smarter than me. He's earning 80 million. I guarantee you there's somebody in that room thinking that way, cause people are people.

A few months ago, I had the pleasure of interviewing David Senra, host of the Founders podcast. David is incredibly high energy and authentic about what he does. You think Mohnish Pabrai takes the idea of cloning seriously? Here’s David:

I can live the rest of my entire life never having one original idea. As long as I’ve mastered the handful of ideas that I see as recurring themes in the history of entrepreneurship, I will live a fantastic life. Because it's not only knowing this stuff, but also actually applying them.

To paraphrase Bruce Lee, fear not the man who has read 10,000 books once but rather the man who has re-read the best ones over and over. Or, in David’s case, the man who does both.

David sticks to Munger’s maxim of taking a simple idea and taking it seriously:

The greatest entrepreneurs had one idea. They built everything around that one idea. There might be things that spawn off of that idea later on. There are other businesses that can grow out of that, other business lines, other products. But fundamentally, they start with an idea.

In David’s case it’s podcasting and a vein of high quality information that he mines and converts into an attractive product. Actually, it’s a combination of two big ideas: a big wave to surf (podcasting) and a big insight about David himself (love of reading and learning, ability to go deep in one area without burning out).

I hope you enjoy the conversation and pick up some valuable ideas from his entrepreneurial heroes (and villains…).

Reading a book is a movie for the mind. It's impossible to read a life story of an interesting person and not be involved emotionally. You're with them in their ups and downs. It's a predictable human reaction that you put yourself in their shoes.

You can listen to this conversation on Spotify, Apple, anchor (and via RSS) or find a full transcript at Compound.

If you’re looking for an all-in-one solution to manage your personal finances, Compound can help (disclosures).

A few things I learned from David:

Building a company can require an illogical amount of persistence.

James Dyson "has 14 years of struggle. He builds 5,127 prototypes. He mortgaged his house. Some days, after doing all these experiments, he's climbing into bed at night covered in dust, crying at how painful what he's trying to do. It's 14 years and 5,127 prototypes before he has a vacuum of his own design, that he owns completely, that he could start selling to the public.

We know at year 14 he's going to have success. What about year three? What if he stopped right here? That makes perfect sense. This is why it's so difficult. It is the logical decision. He should have stopped there, but he didn't.

The founder is the guardian of the company's soul.

I covered the biography of this guy named Sidney Harman. If you ever get into a luxury car, you'll see speakers that say Harman Kardon. He winds up writing this fantastic autobiography. He's 80 or 90 years old when he's writing it. It's called Mind Your Own Business. In that biography he's distilling 50 years. We haven't even been alive for 50 years. This dude had been trying to build companies, successful and unsuccessful for 50 years. Imagine what he knows.

He gave the best description of what I feel is the founder’s role. The founder is the guardian of the company's soul.

You cannot be the guardian of your company unless you love it. Edwin Land, Enzo Ferrari, and Steve Jobs, they talk about their products the way you would describe your lover. It's not the same as, I made a toaster, here's the toaster. No, they describe it like they're in love with what they've done.

No one would have known Walt Disney's name if he’d started Disney and sold it five years later.

There is this weird mind virus. I have an idea, I'm going to start up, I'm going to scale up, I'm going to sell, and then I'm going to do that over and over again. Inevitably, the question is who are the entrepreneurs you look up to? Who are your entrepreneur heroes? And they start listing off people that literally worked in the same company forever. I don't understand. Are you learning from these people or not? Because no one would have known Walt Disney's name if he started Disney and sold it five years later. No one would know Job’s name if he just got kicked out of Apple and then disappeared.

The value of compounding knowledge.

An investor understands the power of compounding. Knowledge compounds, too. Imagine going back and trying to talk to Warren Buffett about everything he knew at 35 compared to what Warren Buffett knew at 80. That's not the same person. I've read 272 biographies of entrepreneurs so far. I have a unique set of knowledge there. It's going to pale in comparison to what I will know two decades from now or three decades from now.

Studying the birth of industries.

Henry Ford had an idea. I want to build an easy, reliable car that the average person working at Ford can actually afford. That was unheard of. … Edison says something that changes Ford’s life. He says, that’s it, young man, you have it, keep at it. So, the next 5-10 years of struggle, he remembers what Edison said and it helped him. That's how Ford approached it. That's his idea. …

Billy Durant had built this vertically integrated carriage company for horses. He … went and bought a bunch of other carriage brands, and put them under one umbrella. The exact same playbook at the early days of GM. …

Henry Leland worked for Samuel Colt. The ideas that he learned in the mass production of firearms, he then shows up in Detroit and starts applying them to automobiles. When Henry Ford has a question, he goes to see Henry Leland. He is the wise old counsel with a lot more life experience.”

On founders and culture.

Whoever you are and whatever is important to you, put that into your company. Don't shy away from the eccentric part of your personality because your personality is the foundation and the beginning culture of the company.

The downside of intense focus and dedication.

The people that get really good at what they're doing don't allow themselves to think or do much of anything else.

Jony Ive, who worked very closely with Steve Jobs, was talking about one of the main lessons from Steve Jobs. He's saying, “Steve was the most remarkably focused person I have ever met in my life.” Jony works with Steve almost every day. This guy who is having lunch with him damn near every day says he is the most focused person in his life. That should tell you to do an audit of your life. Am I focused?

But also:

It's safe to assume that every single person I have read about is smarter than I am. Yet you see all these smart-driven people make mistakes. They usually over optimize their professional life to the detriment of everything else. They destroy their personal lives. They destroy their health.

Time is the best filter.

I love this idea. It’s somewhat analogous to Buffett’s insistence on a track record, on data with which to judge a person. Decisions made over time inevitably reveal character.

I don't read a story and say that person's dead, I have nothing to worry about. No, that personality type was alive then, they're alive today, they will be alive in the future. Human nature is constant. … When I come across somebody that’s completely ruthless. The minute you stop being useful, they will discard you. This is a problem that appears over and over again.

What is your solution, David? The solution I’ve come up with for my life is avoidance. I don't want to partner with you. I don't want to chase money with you. I don't want to be friends with you. … I am very selective about who I spend time with. I only have one good filter for this. I think there might only be one good filter. That is time. Time is the best filter.

A few months ago, I finally had the chance to record a conversation with Josh Wolfe of Lux Capital. This was published at Compound (I also previously profiled Josh).

Josh has been a frequent podcast guest and I did a lot of prep work to find questions he hadn’t tackled yet. As a result, I think it’s a timeless conversation with the exception of a brief discussion of the macro cycle (Josh and Lux were bearish and cautious before markets turned down).

Josh and his partners were young with an unconventional background when they bootstrapped Lux. With little capital under management they earned additional cash flow through a research business.

We sold [the report] for $4,750 bucks a copy, sold a few 100 of them and helped keep our little business alive. I got access to all these famous CEOs and VCs. Vinod Khosla was one of the first VCs to buy it. And I was like, Okay, I'll sell it to you, but only if I can come and meet you. So I went out to Sand Hill Road and I remember his office, I remember viscerally what it looked like, it was the first major billionaire VC I met.

I absolutely loved his comments about using doubt as motivation and fuel.

Anybody that doesn't believe in you, either you let that bring you down, or it becomes fuel. To this day, we like to say that we believe before others understand. Because there really is something powerful, just psychologically, of believing in somebody.

I would be on a run on a treadmill, and I'd be getting tired. And I would imagine some of these heroes cheering me on. ‘You can do it, come on.’ I have ghost images of these individuals to cheer me on. Peter and I would find strength in the people that didn't think we were going to make it and felt really motivated to prove correct the people who did.

It’s also a framework he uses to assess founders. Chips on shoulders put chips in pockets as he likes to say.

The best entrepreneurs we see are the ones who are so obsessed to prove other people wrong who don't think this is possible. That to me feels honest.

It feels petty, but it's real.

I also admired Josh’s focus on his family. It’s easy to neglect that if you’re highly competitive.

Being with my kids is just the great salve. … Family stuff for me is very cathartic. Whatever is going on, I could be negotiating a big financing. And my little guy who's six is like, Dad, I can't get the screw into this thing and that is more important. Getting the screw into the little toy is more important at that moment. That to me is a big thing.

Thank you for listening and happy holidays🎄🕎

‍You can listen to this conversation on Spotify, Apple, anchor (and via RSS) or find a full transcript at Compound.

If you’re looking for an all-in-one solution to manage your personal finances, Compound can help (disclosures).

A few things I learned from Josh:

Why does a VC spend so much time on macro?

Ignorance of the macro is no virtue. … We're trying to get a palpable sense for what massive currents are shaping the environment. … The number one determinant of future returns is never the hockey stick curve that some consultant or bank or optimistic entrepreneur shows. It's how much capital is going into a sector when capital is abundant.

Lessons from living through two cycles.

There are lots of differences, but the market sentiment similarities make me think that we're in Q3 of 2000. You're going through the Kubler-Ross five stages of grief … Markets have to go through that, both individually as investors, and then collectively. That's our guiding playbook at the moment.

Use your struggles to grow and build intrinsic motivation.

Almost every step of the way, there was some moment when we were running out of cash. I still remember the people that told me no for $250,000 checks or dragged me for six months doing diligence on data that didn't even exist to tell us that they were writing a $100k check. That was a formative thing because it shaped the kind of people that we want it to be when we pay it forward. You need struggle and you need people that doubt you so that you can prove them wrong.

Networking at the beginning of your career.

I remember I wanted to get in touch with some famous investor. I was like, You'd be doing me the biggest favor if you can introduce me to him. And he was like, stop, right there, stop. I thought I insulted him. Maybe this ask crossed the line?

And he's like, Do you believe in yourself and what you're doing? And I was like, Yeah. And he's like, Do you think anybody else knows what you know in this particular field? I'm, like, No, I feel like I'm one of the best. He's like, so who's doing who the favor? It was a little bit of a mindset switch, even if you're slightly deceiving yourself to get over that absence of confidence.

And the same way that when there's a task that you don't want to do, thinking, I get to do this, because you could be dying tomorrow, versus I have to do it. That was a real confidence booster. Not arrogance but, I'm doing these people a favor by both showing interest and wanting to connect. But also because I have something of value.

Building an enduring partnership.

We studied why firms split. One of them was geographic and one of them was sector. … Avoid sector silos so you don't get a coup, which is what happened at firms like Greylock and Matrix and Venrock. One partner became the dominant player and said, okay, we're shutting down that other office. So everybody here is a generalist.

I feel like presence is really important for the sustenance and sustainability of a culture. Like any system, things fall apart. Entropy is the norm. You need to put energy into a system to prevent entropy. That's true of human relationships.

‍‘Crazy’ founders.

I don't mind if they say the crazy thing. I don't mind if they have an ambition that borders on delusions of grandeur. I just want them to be honest.

Becoming a better storyteller.

If you take a technological view of this, language is a form of code, just like law is a form of code. And just like code and software can influence machines, I am influenced by language, I'm influenced by a beautiful quote. I'm influenced by a great scene of dialogue. I just wanted to be better at that.

Invest in having time, memories, experiences (and assets).

I'd say we're relatively conservative. I don't care about boats, or cars, or watches or material possessions. I like vacation indulgence and we invest a lot in our kids’ education. I really value time and moments and memories and experiences. Wherever money can help to create that, that's what we invest in.

‍

A few months ago I had the pleasure of interviewing Patrick O’Shaughnesssy, the prolific host of Invest Like The Best, as part of my work for Compound.

We started our conversation on the topic of David Senra, host of the amazing Founders podcast, who had just joined Patrick’s Colossus podcasting platform. David is one of the most focused people I know. Patrick one other hand is prolific but involved in a variety of efforts. Aside from podcasting, there is his venture capital firm Positive Sum, he is the CEO of O’Shaugnessy Asset Management, and he co-hosts Capital Camp.

“Having a singular goal that's far in the future, that kind of crowds out serendipity and discovery along the way, is just not my style.”

I was very interested in finding the unifying themes and the philosophy behind his work. Curiosity is a big driver for Patrick.

“The reason I started my podcast was that I was frustrated by how imprecise even the best book on a topic was, as it related to my specific questions and curiosities. When I went to the world's best expert on whatever, I got exactly what I wanted quickly, with higher impact. I think if you wanted to learn about anything in the world, you'd be far better off, if you could get access to them, spending time with the world's leading thinkers on it and asking them questions directly, than by reading the five or 10 best books on that topic.”

If Patrick is a fox, his mission is to find hedgehogs whose knowledge he can tap into.

“It turns out that a podcast (a media business) and an investing firm are two really great things to have when your game is people-centric. Your game is effectively searching for interesting people. Being able to interview them and or invest in them are kind of the two most fun things to be honest with you. It's a great way for me to have a world around my interests. And in our investing activity, this is something we explicitly look for, we call it world building.”

On the topic of David and Founders, Patrick hit the nail on the head. It’s electrifying to meet someone on a mission.

“You find these people that are on one of these scent trails and will stop at nothing to stay on the trail. It's infectious. You finish a conversation with him, and you want to run harder at whatever it is you're running at.”

‍You can listen to our conversation on Spotify, Apple, anchor (and via RSS) or find a full transcript at Compound (part I, part II).

If you’re looking for an all-in-one solution to manage your personal finances, Compound can help (disclosures).

A few things I learned from Patrick:

Follow authentic curiosity and joy.

“I don't know if there's a trick here. What you get on my podcast is just me. It's not a character I'm playing, it's just me, and that's a very sustainable strategy.”

“I expect to do very well in the things that I do, not because I want some achievement badge, but because the process of doing that is joyful to me.”

Conversation as a game.

“To me, conversation is kind of like a game. I'm always interested in how much more interesting I can make a conversation that I'm in. I don't do small talk well. If I'm at a party, I'm always interested in how interesting something could get relative to the baseline.”

Eastern philosophy as an operating system for life.

“If you put a lot out there for others, with no expectation of a selfish return, you end up actually getting more than if you didn't do that. It's a strange worldview, because it's not a business school case study. The inputs and the outputs don't connect via some formula. You have no idea how it's going to come back to you.

It is my form of faith. If I do this, it will come back. I have no idea how, but it will, and that's been my experience too. But if you were just trying to approach something strategically, irrationally, you would never behave this way because you can never tie the input to the output.” 

On working with founders.

“Investors, I think, mistake a founder's desire for their capital for a founder’s desire for them, and all the things that come with them."

“My experience is that founders want the capital to fuel their business, and they want someone that they can have as a confidant, that they can trust, that they can call when needed. But they don't want a steady stream of ideas and advice. The classic one is, have you seen this competitor yet? Some large percent of texts from VCs to founders is like the website of a competitor. What I think we can do is ask really good questions, the theme in my life, and not mistake what a customer actually wants from us for what we think they want.”

The good life.

“I optimize for learning, I optimize for freedom of time, to be with my family, especially. Learning, reading, talking to people, spending time with people, moving in the woods, ideally, or outside somewhere on the water somewhere with my family and my friends.

Everyone has something they love, or a set of things they love, but very few people really work to protect those things. And to structure their life so that they get as much of the things they love, and get joy from as they can.”

Growth without goals, the guiding philosophy behind Colossus.

See also Patrick’s essay on the topic.

“I'm not striving towards some end state for Colossus. Big, hairy, audacious goals may work some of the time, I'm actually very suspicious of them. I actually think most of the time they're very bad.”

“I'm incredibly high energy in some regards and I'm incredibly lazy in other regards, which I think is an asset of mine. I think it's good to be lazy in certain ways. My instinct is always that there's something that needs doing that's important, but that I don't want to do. Build infrastructure around it, build systems around it, hire people, hire contractors, create a repeatable system for something that's valuable, but boring to me, and it's usually not boring to someone else.”

“How do we find as many hosts that we can serve, me being the first. And what can we arm them with to reach a bigger audience and do a better job, and extract as much interesting knowledge as possible? The mindset doesn't need to be any more complicated than that. That will lead us in really interesting directions.”

Disclaimer: The information contained in this summary has been prepared solely for informational purposes and is not an offer to sell or purchase or a solicitation of an offer to sell or purchase any interests or shares in any of the funds managed by Prime Macaya Capital Management LP.  Any such offer will be made only pursuant to an offering memorandum and the documents relating thereto describing such securities (the “Offering Documents”) and to which prospective investors are referred.  This summary is subject to and qualified in its entirety by reference to the Offering Documents.  An investment in those funds carries certain risks, including the risk of loss of principal.    While all the information prepared in this presentation is believed to be accurate, Prime Macaya Capital Management LP makes no express warranty as to the completeness or accuracy nor can it accept responsibility for errors, appearing in the presentation.  Other events which were not taken into account may occur and may significantly affect the returns or performance of the fund.  Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. This summary is provided to you on a confidential basis and is intended solely for the use of the person to whom it is provided.  It may not be modified, reproduced or redistributed in whole or in part without the prior written consent of Prime Macaya Capital Management LP.

The following is my conversation with Adam Mead, author of The Complete Financial History of Berkshire Hathaway. We talked about conglomerates, early entrepreneurial experiments at Berkshire, the lean years in the insurance business, managing the company as an informed observer, and returns on his acquisitions.

As to finding another Berkshire, Adam was skeptical:

“I'll never say never, but it would be highly unlikely to find another [Berkshire Hathaway]. You have a Lollapalooza, to use a Charlie Munger term, starting when they're able to shoot fish in a barrel.”

You can listen to this conversation on Spotify, Apple, anchor (and via RSS).

Disclaimer: I write and podcast for entertainment purposes only. This commentary reflects the personal opinions of myself and my guest. This is not investment advice.

Acquisitions: going-in returns vs. reinvestment

This is another chart from the book worth highlighting. Berkshire was not built on finding extreme outlier deals. Much depended on how capital was reinvested subsequently (whether in organic growth, further acquisitions, or public markets) and, of course, cheap leverage from insurance float.

From the book: “In Berkshire’s early years, good companies were available for bargain prices. It bought the Illinois National Bank & Trust Company and The Buffalo News at book value, and the discarded Scott Fetzer and Fechheimer at premiums that still produced going-in pre-tax returns in the mid-20% range.

Generally, the better the business was, the higher its price (as represented by purchase multiple paid compared to the company’s underlying value). The return on capital of the underlying businesses (the company-level return) ranges widely.

See’s was one of Berkshire’s earliest purchases and was made when markets were not as efficient. The low Scott Fetzer and Fechheimer purchase multiples reflected that Berkshire could act as a safe port amid the leverage buyout storm of the mid-1980s.

By contrast, Lubrizol and Heinz were excellent companies earning great returns on capital, but the price Berkshire paid reflected the market’s correct appraisal of that fact.”

(I didn’t see it specified on the page but I think the numbers refer to return on equity and price/book).

From the conversation: “You have this dynamic in the early days of finding really good businesses like See’s and having a pretty modest multiple. Good businesses at really good prices. Then you have the later days of buying really good or pretty good businesses at higher multiples because the market's just gotten efficient over time. But you still have the dynamic of reinvestment going on.

Let's just use a plain example. If you had a business earning 30% on capital and you paid two times that capital, your going in return would be 30 divided by two, 15%. The important part is, if that business can grow, you don't have to reinvest at 2x the capital, you get to reinvest at 1x. That marginal capital gets, in this example, reinvested at 30%. That drags up your going in return over time. But I think Buffet's very clear in pointing out that you can't pay too much for growth. You can't have a going-in return of 2-3%, even if it grows enormously. The time value of money just destroys any kind of return that you have.

I think he always looks for the good business and then he has a secondary analysis of what are the reinvestment opportunities. And he's fine, as long as the purchase price reflects it, he's fine taking the dividends and finding another place for them. And if the business can reinvest that capital, let's do that. That plays out in the extreme case of the energy business, where you're still getting, in many cases, 11-12% regulated return, which is nothing to sneeze at.”

Conglomerates before Berkshire

“The first sort of real conglomerate was American Home Products in the late 1930s. I do have some of those Moody’s reports on my website.

They weren't crooks. I think that can kind of be misconstrued. These guys weren't the Enrons of their day trying to just put something over on investors. But they strayed a little bit in terms of messing around with the accounting or saying, gee, the market's valuing our conglomerate at 20 times earnings or 15 times earnings, and we're gonna buy this other company at five or six times earnings. And I can buy anything that I want as long as it's less than my P/E. And it's gonna magically transform my conglomerate into something better. Now the problem with that is it ignored the underlying economics.”

Control vs. delegation

“I think this whole idea of extreme delegation comes from the fact that Buffet and Monger started as stock pickers. What is the difference between owning a 5% position and owning a hundred percent position? You have the ability to direct the actions of that company. But should you? Berkshire was being almost agnostic in the sense of ownership level. We're still gonna let that manager run his or her business. We're only attracted to businesses that are good anyways. So why would we go in and meddle?”

“You don't just have delegation just shy of abdication. It's hands-off in the sense of not meddling, but you still have an informed observer. That is the key. Buffet's getting fed this river of data coming into Omaha. And I think he communicates his thinking to managers through his questions. Okay, let's be a little bit more aggressive in trying to price the product because we think we have pricing power.”

“Buffet writes a letter to Chuck Huggins [at See’s Candy] and says, I just went out and I saw this one store and our candy was sitting next to Russell Stover, and it was kind of a mess. Let's use these psychological tricks to keep our candy front of mind and make it have apparent scarcity. I mean, that's Buffet the entrepreneur, that's Buffet the manager.”

Buffett’s early days at Berkshire

“He began in 1965 at Berkshire Hathaway. He lived in Omaha and a guy like that, so attuned to business, is going to just be curious about all these businesses around him. Well, one of them was National Indemnity. This was the real first big deal of Berkshire Hathaway, 1967. He bought National Indemnity and its sister company, National Fire and Marine for $8.6 million. In hindsight, he said he would've been better off buying that in an entity outside of Berkshire Hathaway.

So it was sort of a mistake on his part to bring the legacy Berkshire Hathaway shareholders along with him. He just used it as his vehicle and the rest is history. That was the first transformative deal based. That gave Buffet not only a platform to invest the float, which was almost $20 million. Jack Ringwalt, the manager of that business, showed him that you can [underwrite] any risk as long as it's priced appropriately.”

The lean years in insurance

Another takeaway from both the letters and Adam’s book is the number of years that parts of the insurance struggled. Early expansion efforts weren’t always successful. And in the early 80s the competitive environment was very challenging. While the long-term cost compares favorably to even government debt, shareholders had to maintain conviction for a long time.

“You have Buffet taking this idea that insurance can be a very good business, just trying to see what works. Let's scale this thing, right? … Some of these ultimately failed. This is experimentation and you have to see what works. Different markets operate differently. That was the 1970s, this period of let's build this thing.

From 1982 to 1992, they lost $522 million from underwriting alone. Now, it sounds like a lot, and it was, but the insurance business overall was profitable because of the investment income. There was a period, National Indemnity saw its premiums decline from the mid eighties to the late nineties. Something like $350 million to $50 million. Just an extreme decline. That's a long time.”

“This is the nature of what we do. It's the intersection of business and people and psychology and sociology and numbers. There's a lot of stuff that's always going on that makes sure you never have the game beat, never.”

This past June I had the opportunity to interview Michael Mauboussin. I tremendously enjoyed this conversation and I believe it captures Michael’s deep curiosity and passion about investing, business, the research process, and being a multi-disciplinary learner.

At the time I published a full transcript at Compound. I am happy that I can now share the audio version.

I assume many of you are familiar with his work. For an easy introduction check out this 2021 profile. Another excellent piece is his Reflections on the Ten Attributes of Great Investors which incorporates many of his key frameworks. And be sure to check out his new website with a library of his collected writings.

If you’re looking for an all-in-one solution to manage your personal finances, Compound can help. The firm can help diversify concentrated stock positions, optimize company equity, plan asset allocation, and more. You can sign up for access here.

For more information, please check out further disclosures here.

“Most investors act as if their task is to figure out a stock’s value and then to compare that value to the price. Our approach reverses this mindset. We start with the only thing we know for sure — the price — and then assess what has to happen to realize an attractive return. … The most important question in investing is what is discounted, or put slightly differently, what are the expectations embedded in the valuation?”

The below are some of my favorite highlights.

You can listen to the conversation on Spotify, Apple, at anchor, and via RSS or find a full transcript at Compound.

Druckenmiller, Soros, and position sizing

* “When you observe very successful people over very long periods of time in these probabilistic fields, they tend to have certain attributes that are worth all of us paying attention to.”

* “Here we have George Soros and Stanley Druckenmiller, two legendary investors, who say that [position sizing] is the main thing that drives their returns and results over a long period of time. Whereas we look at the real world, we find that most people don't create a lot of value from sizing and it's all security selection. The question is can we bring those things together to some degree?”

Analysts and portfolio managers:

* “A very good portfolio manager will be able to focus on the two or three issues that matter most for a particular company. And they're very good at identifying those and honing in on those.”

* “There was a letter from Seth Klarman at Baupost to his shareholders. He said, we aspire to the idea that if you lifted the roof off our organization and peered in and saw our investors operating, that they would be doing precisely what you thought they would be doing, given what we've said, we're going to do. It's this idea of congruence.”

Holding Amazon for two decades

* “I first learned about this company from Bill Gurley who at the time was part of the underwriting team at Deutsche Bank who did the IPO. Bill just said, you should meet these guys because the way they think about things, even though this is a completely nascent industry doing, completely different stuff, the language they're using is the language you're going to be familiar with.

* “In the late 1990s, I met Jeff Bezos and Joy Covy, the CFO. … Joy would just say to me, we’re big fans of Warren Buffett and Charlie Munger. We think about return on capital. We think long term. We're making investments that appear to be bad, but when you pencil out the numbers, we think we're going to generate really attractive returns. I bought into that.”

* “I was very influenced by a wonderful book by Carlota Perez that came out probably in the early 2000s where she talks about the interplay between technological revolutions and financial capital, one of the points she made was, it's often the case that the hard work happened after the financial bust.”

On feedback, learning, and teams of superforecaster (aka investors)

* “In every domain elite performers tend to practice. Every sports team practices, every musician practices, every comedian practices. What is practice in investment management? How much time should we be allocating to that?”

* “The investment management industry is an industry that draws a lot of really smart people. It's a very competitive, interesting field. It's remarkable in the sense that feedback is very difficult to attain. In the long run it's portfolio performance and so on. But in the short run it's very, very difficult to do.”

* “There's a distinction between intelligence quotient and rationality quotient, which is the ability to make good decisions. Along with some of his colleagues he developed a specific test to measure rationality. And if you look at the subcomponents of that test, it seems really consistent with what we would care about as investors. “

* “When I say elite teams, or when Tetlock talked about elite teams, this elite teams in superforecasting. So these are the best of the forecasters working together. There are three important things. How big should it be? How do we compose the team? The third and final piece is how you manage the group. And this is usually where the mistakes happen.”

Lessons for operators from his book Expectations Investing.

* “Executives of public companies in particular should absolutely understand the expectations priced into their stock. The first reason is that if they believe something that the market doesn't seem to be pricing in, they have a communication opportunity.”

* “Very few executives really understand how capital markets work. This is almost like our analyst portfolio manager conversation. When you get to that seat, all of a sudden you have responsibilities and skills that become important that you may not have ever dealt with before.”

* “Understanding what has to happen for today's price to make sense is just such a fundamentally attractive proposition. And then evaluating whether you think that those growth rates in sales and profit margins and capital intensity and return on in capital that's implied, whether those things are plausible or not, it just makes enormous sense as an approach.”

Thank you, Michael!

“To be a great teacher, an effective teacher, it's about being a great student, a great learner yourself. I think that comes through if you're doing it well.”

Disclaimer: The information contained in this summary has been prepared solely for informational purposes and is not an offer to sell or purchase or a solicitation of an offer to sell or purchase any interests or shares in any of the funds managed by Prime Macaya Capital Management LP.  Any such offer will be made only pursuant to an offering memorandum and the documents relating thereto describing such securities (the “Offering Documents”) and to which prospective investors are referred.  This summary is subject to and qualified in its entirety by reference to the Offering Documents.  An investment in those funds carries certain risks, including the risk of loss of principal.    While all the information prepared in this presentation is believed to be accurate, Prime Macaya Capital Management LP makes no express warranty as to the completeness or accuracy nor can it accept responsibility for errors, appearing in the presentation.  Other events which were not taken into account may occur and may significantly affect the returns or performance of the fund.  Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur.  This summary is provided to you on a confidential basis and is intended solely for the use of the person to whom it is provided.  It may not be modified, reproduced or redistributed in whole or in part without the prior written consent of Prime Macaya Capital Management LP.

Hi everyone,

I am a big fan Marc Rubinstein and his Net Interest substack and was very excited to finally record a conversation with him. Marc previously covered financials and fintech as a research analyst and hedge fund investor and now shares his takes on the sector with his readers on a weekly basis. It’s a very well written and insightful lens on a fascinating corner of the market.

I spent the first couple of years of my career as an analyst at Macquarie Group dealing with financials - with leasing and lending companies which we acquired for my employer’s balance sheet. My view has been shaped by this early period of bargain hunting and I later struggled with fintech companies and their valuations. As Marc explains, financials are a unique sector with its own rules and heuristics where growth can be treacherous and the balance sheet is of supreme importance.

It can be especially tricky to tell apart secular change from the credit cycle. As Jim Chanos said last week on Odd Lots, “every down cycle since ‘98 has seen those companies blow up, because it turns out they didn't have a better mousetrap. They just had the credit cycle at their back.”

Marc and I talked about banks, fintech, the importance of incentives and culture, payments, the need to watch regulators, private equity and how alternative asset managers have been picking up business from investment banks, and the danger of relying on the view of CEOs too far removed from the risk.

I’m going to share a few of my favorite writings by Marc followed by show notes. I hope you enjoy the conversation.

Disclaimer: I write and podcast for entertainment purposes only. This commentary reflects a personal opinion, is not investment advice, and should not be relied on to make investment decisions. The views reflected in this commentary are subject to change at any time without notice. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions.

Why learn about financials?

For a start, there’s something exclusive about them. There are some industries on which everyone has a view. Supermarkets for example, or consumer tech. Financials isn’t one of those industries…

Second, financials are everywhere. Even companies that on the face of it aren’t, can be financial companies in disguise.

The third aspect of financials that makes them especially compelling is they’re a great metaphor for the world around us. The financial system operates as a complex adaptive system. It consists of a network of banks and other financial institutions each of which operate according to their own incentives.

Dotcom 2.0 (online brokers, asset managers, Silicon Valley Bank):

I actually remember where I was the day the dot-com bubble burst. It was March 2000 and I was sitting in a newly-opened branch of Starbucks near my home in London, reading a copy of the Financial Times. …

Commodities trading. In commodity trading, there are three ways to make money:

Geographic arbitrage. Unlike financial markets, where pricing relationships are normally stable across regions, proximity to a product in the physical trading world can have a big impact on pricing. Commodity trading firms can leverage logistical capabilities to source product in one location and deliver in another, taking advantage of pricing differences between the two.

Product arbitrage. Pricing differences exist between different blends, grades or types of the same commodity. There are over 160 tradable crude oil products with many different refined products and numerous end-users with highly specific requirements. By changing the form of the commodity, traders can lock in a profit.

Time arbitrage. Over the long term, supply and demand tend to find a balance but, on shorter term horizons, they can remain out of sync. Trading firms can take advantage by storing commodities when supply is unusually high and drawing down inventories when demand is unusually high.

What Sort of a Business is Investment Banking?

For investment banks, risk management is their business. If they take risk, match risk and source risk, they can’t outsource the management of that to a chief risk officer; it’s the job of the frontline staff. How that all hangs together – how the incentives of staff are reconciled with the health of the firm comes down to the culture of the firm. And culture takes a long time to build, longer than most participants in fast-moving markets have the energy to invest.

Buffett’s Banks

Financial companies have a tradition of courting disaster, and Buffett’s names are no exception

This is not by Marc but a related idea worth keeping in the back of our head: Aswath Damodaran recently discussed how in countries with sustained high inflation “every company becomes a financial service company, because they discover it's easier to run a bank on the side and lend money out short term than it is to build factories or toll roads.”

Show notes

* Marc’s experience during the dotcom crash, when being a stock analyst “was kind of the coolest job you could have”

* “These cycles are a feature of history, financial services companies sit at the heart of that. One way of thinking about a financial company is like a platform that is an intermediary. It intermediates supply and demand. But because incentives are such that the financial services company makes more money through volume, be that credit volume, be that trading volume, they're incentivized to create additional supply.”

* Institutions adapting to the last down cycle:

* (Druckenmiller talked about this at the Ira Sohn conference.)

* [11] “That's a really good heuristic. Regulators and all market participants have a tendency to fight the last battle. They'll create a framework which will make the last battle less likely, but such is the nature of markets problems will emerge elsewhere. Looking at financials you can see that. 2000, 2001, 2002, we saw a corporate credit downturn triggered by fallen angels in credit markets and a number of banks, JP Morgan being one, suffered materially from corporate credit losses. The banks that suffered the most in that cycle, rough rule of thumb, suffered the least in the financial crisis. JP Morgan outperformed in that crisis.”

* Parallels to the 1994 bond market massacre:

* [14] “One precedent for what's going on in markets right now, really sharp hikes in interest rates, was February 1994 when Allen Greenspan hiked rates. It was a complete surprise to the markets and brokers, dealers, and banks weren't able to position for it. It's a reason why the Fed, highly topical, is very anxious not to deliver surprises".”

* The growth conundrum:

* [17] “I'm not a fan of growth. Any finance analyst is rightly wary of growth. Growth can be very, very cheaply manufactured, you're giving away money. What's more important than the volume of that is the pricing. And you don't have visibility on the pricing of that until further down the line.”

* Hidden financials:

* [25] “I talk about various reasons why financials are interesting. One of them is that many companies are financials in disguise. There's the famous Enron conference call back in 2001, Jeff Skilling calls the analyst an a*****e for asking, he says, ‘you're the only financial institution that doesn't publish its balance sheets.’ And the focal point of that in the market is oh, wow. Jeff Skilling called the analyst names. To me it’s, hang on a sec, no one actually realized that Enron was a financial company.”

* GE Capital, growth, and private equity:

* [31] “The yardstick for success at GE parent company was EPS growth. And GE Capital was a huge contributor towards that. Growth at a financial services company is not the way to track it. The model hasn't gone away, it's gone into private hands. Apollo is trying to recreate GE capital in its own terms.”

* “They've filled a vacuum that was left when investment banks … they're not as powerful anymore. Private equity is a small part of what they do, the alternative managers, they now fill that vacuum … and they do a lot of the activities that investment banks historically used to do.”

* Measuring success and competition:

* “Like all sectors, you're looking ultimately for a return on invested capital that exceeds a certain hurdle rate, that reflects a willingness to return capital to shareholders.”

* [36] “Competition is really damaging in financial services marketplace. Unlike antitrust policy makers, financial regulators don't promote competition. Some of the most successful banking systems globally, from a regulator’s perspective, that have not suffered a financial crisis, have been some of the most concentrated banking systems. Canada is a very good example. In Ireland today, there are only two banks as a response to the financial crisis.”

* “When looking at risk at banks and in financial services, you are looking for banks that aren't trying to over compete.”

* Looking at financials as an investor:

* [40] “One of the reasons why I think the finance sector is so attractive is that you have all the characteristics in there. There's growth, there is value, here's momentum. All kind of factors that apply elsewhere apply within financial services.”

* “It's not a complex sector and we haven't talked about that yet, but something worth mentioning is that complexity is a feature to run away from.”

* “There's no intellectual property, there is a commodity component really to it. Therefore banks often layer on complexity. Run away from that.”

* “Look first and foremost at the balance sheet. Understand the balance sheet. Because of that it's helps to be quite close to credit markets.”

* [45] “We had a global mandate and I think that's hugely powerful to be able to see patterns across borders. Banks and financials are quite local because they are regulated on a local basis. The products themselves culturally tend to be quite local. A mortgage in the US is nothing like a mortgage in Germany. The products are quite different, but market cycles and human behavior and competitive dynamics being the same, seeing patterns across countries is hugely powerful.”

* “The lesson from China with Alipay is that when non-bank, financials get to a certain size, regulators will come in. Another tool of the financial analyst is to stay close, to watch what regulators are doing hugely. That’s hugely important.”

* Payments

* [53] “Historically payments were almost a byproduct of banking. Banking was deposit taking fundamentally and because the liquidity sat at the bank, banks offered payments mechanisms. Increasingly, we're seeing that turned on its head and payments is becoming kind of the X of the relationship because of the data it throws off and the frequency.”

* Fintech and customer engagement;

* Robin hood is that actually

* [54] “One of the reasons why I'm a bit cautious on business models like Robinhood is that to do finance well, engagement is a negative. You don't want your customer, objectively an investor, shouldn't be looking two hours a day on their portfolio. And yet they're incentivized to, to create that. There's a massive misalignment here between good investment practice and what these companies are aligned to do.”

* “The problem with insurtech, a lot of insurance companies went public in 2020-2021, and they've performed very badly because it's a product customers only buy once a year. The inverse happens. There's no way really to create engagement. Payments is the sweet spot payments. There is a frequency of use that's not in conflict with good practice from the consumer's perspective. Companies offering payments are able to pick up data and that's hugely powerful when it then comes to credit underwriting.”

* Which CEOs does he follow closely?

* [59] “Jamie Dimon is very good. He's been around for a long time. Blackstone, whether it's Schwartzman or John Gray. Very insightful. And Marc Rowan at Apollo has a great understanding of financial services.”

* The concept of the L6:

* “I'm halfway through Michael Lewis's book on the pandemic, Premonition. I wasn't going to because in my view any book written about the pandemic was too soon. But I saw him being interviewed and it was pretty compelling.

He makes this really interesting point about what he calls L6, stands for level six in an organization. He says, if you want to understand anything, then go six levels down in an organization. At that level you'll find the person who understands what it is you're looking at. And he said it was true in finance in particular … So I think a lot of CEOs don't necessarily know what's going on.”

We talked about banks, fintech, the importance of incentives and culture, payments, the need to watch regulators, how alternative asset managers have been picking up business from investment banks, and the danger of relying on the view of CEOs too far removed from the risk.

You can find show notes on the substack.

I’m happy to share my conversation with my friend Nick Maggiulli who writes the excellent personal finance blog Of Dollars and Data. Nick just came out with his first book: Just Keep Buying: Proven Ways To Save Money And Build Your Wealth. Nick combines his empirical research with a personal perspective and I really like that he distills the work down into rules that are effective yet pragmatic. His advice is free from some of the guilt-driven personal finance drivel (save on avocado toast to get wealthy..).

We talked about the book, his writing process, the optimal level of fame, and why he thinks people should not pick stocks themselves.

You can listen to the conversation on your podcast player of choice: Spotify, Apple, at anchor, and via RSS.

“Fear has a far greater grasp on human action than the impressive weight of historical evidence.” Jeremy Siegel

“You have to keep reminding yourself of that quote. It's my favorite investment quote because it's the only thing that keeps me from letting my behavior take over from my logic.” Nick Maggiulli

Some highlights from the conversation:

Nick’s argument against stock picking: how do you know whether you’re good at it? It takes too long to establish a track record that is meaningful:

“Imagine you're trying to get in shape. … You go to the gym for three months, see no difference. Go to the gym for six months, one year, no difference. Then, all of a sudden, you lose 10 pounds. .. No one would do it. With diet and exercise, you start seeing results within a few months. But with stock picking … after one year, no way. … I think it can take a decade or longer. And this is obviously debated in the literature. … How do you know when a factor is dead? It can take you 20 years.

It takes roughly the same amount of time to figure up a manager's really good … Let's just say you did it for 10 years. … My whole life's changed. Five years ago, I just started blogging. I didn't have a book. Imagine I have to do this again and only then would I know if I have skill. After 10 years, oh, actually I shouldn't be doing this.”

Income vs. expenses and guilt-free saving and investing:

“I do these like simulations and say, Hey, if this person is on a steady state of retirement and they get this raise, if they save at least half of it, they're usually good to go. It's about reducing guilt. It's okay to spend a little bit of money. … Cutting spending is not a way to raise wealth in the long run. You can do it in the short term, but the only sustainable path out is I've seen based on the data is raising our income.

Everyone was like, you got to cut your lattes. You're just gonna feel miserable and hate it and guilt yourself. And you're going to end up giving up or you're gonna feel like s**t. I'm saying that the way out is raising her income and there's a way to do it. It just takes a lot of work, but it's the only sustainable path out.”

Nick’s writing process:

“I used to have a bunch of drafts which you can imagine as different pots sitting on the stove. Some have just ingredients, there's no heat on them. Some are kind of just simmering. Some are ready to take off, ready to serve. Sometimes I have nothing going and I just have to come up with something. It varies every week. Last week I wrote about inflation, why I think people are thinking about inflation incorrectly. I had this epiphany where I thought about it like, is that true?

I said, oh, that's actually not true. Let's just write about that and see how it does. I like to reframe common things. A lot of stuff logically makes sense and then you run the numbers and you go, ah, that doesn't make sense as much as I thought it would have. A lot of things we just assume to be true and you ask, is that actually true?”

Intuition backed by data:

“I think there's a lot of people that have really good intuition, but they can't explain why it's true. So I ran the numbers and was like, Hey, this person who everyone is saying is dumb … yes, some of the things he said were a little silly, but I think his intuition was a lot stronger and more intelligent.”

I’m happy to share my conversation with my friend Nick Maggiulli who writes the excellent personal finance blog Of Dollars and Data. Nick just came out with his first book: Just Keep Buying: Proven Ways To Save Money And Build Your Wealth. He uniquely combines his data-driven research with a personal perspective and I really like that he distills the work down into rules that are effective yet pragmatic. His advice is free from some of the guilt-driven personal finance drivel (save on avocado toast to get wealthy..). We talked about the book, his writing process, the optimal level of fame, and why he thinks people should not pick stocks themselves.

“Fear has a far greater grasp on human action than the impressive weight of historical evidence.” Jeremy Siegel “You have to keep reminding yourself of that quote. It's my favorite investment quote, because it's the only thing that keeps me from letting my behavior take over from my logic.” Nick Maggiulli

I’m excited to share my second conversation with Sebastian Mallaby. Last time, we discussed his book More Money Than God. A quote from that conversation stuck with me:

“The key was to do an unreasonable amount of preparation work. It shows you're serious and not wasting people's time by asking the obvious questions.”

This time, we discussed The Power Law (see my write-up) in which he tackled the history of venture capital. The two worlds make for an interesting contrast: venture capitalists, networkers by nature, are more willing to meet and chat. But they’re also natural storytellers which presents a challenge in the search for truth.

In his book, Mallaby tried to disentangle luck and skill in venture investing, how to build winning and lasting cultures, and the importance of VCs for Silicon Valley. I had a lot of fun digging into these questions with him. I hope you enjoy the conversation. You can listen to it on your podcast player of choice: Spotify, Apple, at anchor, and via RSS.

You can also add the Substack podcast feed to your podcasting player with the link on the bottom-right of the player.

While individually “the story of every bet can seem to hinge on serendipity,” he argues that over the long run, “the best venture capitalists consciously create their luck.” The best “work systematically to boost the odds that serendipity will strike repeatedly.” A History of Systematic Serendipity and Grand Slams

“The great challenge at venture partnerships is that the principals must refrain from killing each other.” Michael Moritz

“When people write about the venture business, they’re always writing about the startups we back. They never write about the most important investment we make, which is in the business.” Michael Moritz.

"The fast moving of ideas, people and money until they reached their optimal use, that’s what made Silicon Valley worked. That’s what made innovation turbocharged. "But where did that fast circulation come from, and my argument is it comes from venture capitalists."

Some highlights from the conversation:

* Sequoia:

* “It took a year or two of networking to break into the cathedral. But once I was in they are very thoughtful people. … They explained to me how they thought about behavioral biases in decision-making. … For example, we know that we anchor on past decisions. When a VC decides not to invest in a startup at the Series A stage, it's quite difficult to change your mind at the Series B. … it's painful to pay much more … because we were wrong the first time. They kind put that on the table and said, we’re probably anchoring, we're probably turning things down at Series B. From now on anybody who argues against the Series B investment is going to be subjected to cross examination - are you sure you're not anchoring?”

* Strategy buckets in venture vs. hedge funds:

* “Having written More Money Than God I was keen to put these different companies in buckets. I would see two different venture investors who had invested in the same company. I would try to find out … the contrasting mindsets. … People tend to have a few different stories going on in their head at once when they invest. It's not like you go with one chain of logic but not the other one. In venture capital, the distinctions people make are more around stage. Are you a seed investor, a series A investor, a growth investor. They might make distinctions by geography and they might make distinctions by sector.

* But the mental approach, they say things like, some people want to bet on the size of the market and other people really want to bet on the type of founder they are backing. When I stress tested that kind of theory, I found it was normally not true.

* Google had a strong position at series A because it had a working product which already had better search results than rivals. [Sequoia and Kleiner Perkins shared the round.] You had a natural experiment. The two were doing the same investment: did they have a different logic? And I came to the view that they had a subtly different logic. Kleiner Perkins was more a believer in technical breakthroughs, a product that was 10x better. I think that reflected the fact that both the dominant partners, John Doerr and Vinod Khosla were engineers by training. When they backed Google, I think they really believed the fact that the product was better was a huge deal. And therefore it justified a high valuation. I think Michael Moritz, who invested for Sequoia, came at it with a slightly different mindset. He also could see the product was much better. But I think he also thought of the Google investment in terms of the media side that he came out of himself. He said he made he invested in Google to look after Yahoo. He'd already invested in Yahoo. Yahoo had a popular web portal at the time. Part of him thought that Google could be the search engine in the top right-hand corner of the Yahoo site, a very valuable utility.”

* Identifying founders:

* “[At Accel] the idea was that when you saw a new technological wave coming, you would prepare your mind for what was going to happen. You would think through the potential businesses that would logically have to be created. … different types of business would logically have different types of founders.

When you were building capital-intensive hardware you wanted somebody who was really responsible and deliberate and a good engineer and was not going to make the mistake of spending large amounts of capital on a manufacturing operation until they really got the design.

* But when you were doing software, 10 or 20 years later … much more cheaply than a hardware product. The right approach is to move fast and break things. When Mark said that about Facebook, it wasn't some sort of t-shirt slogan.

It was the logical implication of a world where software businesses were dominant. At software you do A/B testing. You put things in the market and … see which one goes better. The barrier to putting it into the market is so low, that's the best way to figure out product market fit. Therefore in a software world, a young founder who is brash and moves quickly and doesn't care about being responsible is perfectly fine.”

* Asset manager franchise value:

* “If you can create a machine, a system that can survive a change of staff and pretty much function the same way, then you've got something with franchise value. Also if you've got predictable revenue streams. … Private equity is so large that simply the management fee is attractive for the public markets. And there are fairly formulaic things that you do both in evaluating the deal and then adding value afterwards. Um, not to say they're simple because they could involve quite complex, say data science around improving the pricing strategy of the portfolio company after you've bought it. It's not simple, but it's formulaic.

Hedge funds, when it comes to discretionary trading are simply not like that. There's a funny story in More Money than God about Paul Tudor Jones who tried to systematize this macro trading, had somebody to sit right next to him and watch his moves and … and take those insights and put them into an algorithm and do systematic trading. It just didn't work at all. … The exception in hedge fund space is algorithmic trading, where … concentrating market share in a few hands, those guys possibly could go public one day.”

* Are VCs important?

* “When I looked carefully and in detail at the history of Silicon Valley, I came away with a view that they were extremely important. People would say it's about Stanford. … But it just is wrong. MIT was a stronger engineering school in the sixties and seventies when this whole story began. … Then there was another story about defense contracts being the explanation for the origin of Silicon Valley. And yes, there were defense dollars being spent on semiconductors … but there were more defense dollars being spent on the military industrial complex centered on MIT and the Boston area. …

* Another more persuasive story is about non-compete contracts. California has a special provision in the law that says you can't prevent your employee from quitting your company and joining a startup. And that's important to the startup ecosystem. I take that seriously. … When you look through these different variables, it turns out that venture capital really was the key thing that made Northern California special. That particular sort of risk friendly version of venture capital that was very hands-on and willing to back entrepreneurs even if they didn't necessarily have all the pieces they needed to make a startup function. ….

* And so in this way, the act of entrepreneurship, which is scary and risky, is a bit de-risked by venture capital. Venture capital is a machine for manufacturing courage. That's extremely important to understanding how Silicon Valley grew up.”

Disclaimer: I write and podcast for entertainment purposes only. This is not investment advice. I am not your fiduciary or advisor. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions.

I’m excited to share my second conversation with Sebastian Mallaby. Last time, we discussed his book More Money Than God. A quote from that conversation stuck with me:

“The key was to do an unreasonable amount of preparation work. It shows you're serious and not wasting people's time by asking the obvious questions."

This time, we discussed The Power Law (see my write-up) in which he tackled the history of venture capital. The two worlds make for an interesting contrast: venture capitalists, networkers by nature, are more willing to meet and chat. But they’re also natural storytellers which presents a challenge in the search for truth. In his book, Mallaby tried to disentangle luck and skill in venture investing, how to build winning and lasting cultures, and the importance of VCs for silicon valley.

And while he admits that individually “the story of every bet can seem to hinge on serendipity,” he argues that over the long run, “the best venture capitalists consciously create their luck.” Individual venture capitalists can “can stumble sideways into fortunes” and at times it seems like luck beats diligence and foresight. The best however, “work systematically to boost the odds that serendipity will strike repeatedly.”

“The great challenge at venture partnerships is that the principals must refrain from killing each other.” Michael Moritz

“When people write about the venture business, they’re always writing about the startups we back. They never write about the most important investment we make, which is in the business.” Michael Moritz.

"The fast moving of ideas, people and money until they reached their optimal use, that’s what made Silicon Valley worked. That’s what made innovation turbocharged. "But where did that fast circulation come from, and my argument is it comes from venture capitalists."

I had a lot of fun digging into these questions with him. I hope you enjoy the conversation.

I’m excited to share my conversation with Mary Childs, author of The Bond King (and co-host at Planet Money) on the rise and fall of legendary bond manager Bill Gross.

You can listen to this conversation on your podcast player of choice: Spotify, Apple, at anchor, and via RSS.

You can also add the Substack podcast feed to your favorite podcasting app via the link on the bottom-right of the player. I didn’t realize this until Liberty showed me🙏 (except Spotify doesn’t allow RSS importing😪).

Mary and I talked about Bill’s breakfast habits (did low blood sugars end his career?!), his card counting days, the culture of paranoia at PIMCO, how he combined multiple sources of edge into “structural alpha” for long-term outperformance, the difficulty for a founder to leave their firm, Bill’s desire for fame, and how emotions ultimately got in the way of investing.

I really enjoyed the book and was struck by the combination of structural factors that Gross used to build his track record (early in new products and going outside the benchmark, selling volatility, being creative with cash equivalents, figuring out how to use leverage in the mutual fund). His big picture calls are interesting but the record seems mixed.

If you’re interested in Bill’s perspective, he recently appeared on this podcast. I liked how he framed what made a great bond manager: "One third mathematician, one third economist, one third horse trader. That certainly worked for me."

It seems that at some point after the financial crisis he got stuck in bearish thinking. As his track record and public image took some hits, his behavior became more erratic and even belligerent towards the new generation of portfolio managers at PIMCO. The story illustrates how contentious the transition from founder to institutional money management firm can be.

A few notes and quotes:

Bill got started card counting in Vegas:

"You have to have that gambling instinct. This business, if it's done properly, isn't gambling. But it entails some of the gambler's spirit.

Vegas taught me that I could beat the system with a combination of hard work, ideas that no one has thought of yet, and the ability to tolerate a constant routine that to many people seems monotonous. But to me, it's the most exciting thing in the world."

Perseverance:

“My life’s plan has always been to outlive and outlast ’em. To persist. To persevere. To land on my feet, keep on running, and never stop.

Excellence for most of us blossoms and flourishes for only a brief flicker of time. Either because of human frailty, maturation, or simple outright exhaustion, it’s difficult to perform at a crescendo for an extended period. Very few stay at the top for very long.”

The culture of anxiety at PIMCO:

For a Pimco trader, a day could easily be derailed by accidentally looking up from the screens and—disaster!—making fleeting eye contact with Bill Gross. No matter how well you were doing, it wasn’t good enough. Do more, better. Your ass was always on the line.

He tested them constantly. He used to pace the trade floor, quizzing underlings … What mattered was “owning” the risk. It was yours now. Defend it. What did you think and what were your justifications, with fresh data points and prices?

On the pain of being early in a trade (in this case bearish too early before 2007/2008):

"Every investor has an alarm clock. I wish I could get up at 6 every morning and time things just right. I probably get up at 4:30."

Some highlights from the conversation:

Opening the door to a story:

“If you're staring at a closed door … you just have to come up with a little piece of information to get that person to open that door, to crack it open. A little piece of gossip, a story that everyone's talking about. In and of itself that gossip is useless to you as a journalist, of course. But you can asking somebody, Hey, I keep hearing this ridiculous story. You have a little nugget of truth in there. You don't know what it is yet. … A lot of people want to help you understand and don't want to see the story misrepresented.”

Traits of a founder:

“The things that make someone capable of achieving the track record that Bill Gross did, building the kind of firm that Bill Gross was a part of, those personality traits are: you're going to be exacting. You're going to be really intense and focused. You're going to be a perfectionist, a micromanager. You're going to keep a really tight grip. These things, generally speaking help contribute to the success of the firm.

… For the most part, these are things you see very frequently among founders, and also that toxic culture that can often come along with some of those traits. Those traits also make it very difficult, if not impossible, to have a graceful transition away from that founder. Because the minute they start to loosen their grip, they freak out. … The tight grip is who they are. This firm is who they are.”

Being the house:

“Bill gross learned from Ed Thorp’s book called Beat the Dealer that you can count cards. … I think that this sensibility of both understanding the math but also feeling the pace of the table and knowing when you have that edge and when you don't, and also watching all the people around you who have no edge whatsoever and who were just flopping around taking dumb chances. All of that helped to inform how he approached the market and who he saw as his competitors. His competitors, aren't the dumb people doing the dumb stuff. His competitor is the market, is the dealer.

This shows up when PIMCO figured out that the US government wasn't going to let certain institutions fail in the financial crisis. That there was going to be a government backstop … If I know that the US government is the house, I'm going to be the house, I'm going to try to align my own interests. … The point was to do what the government's going to do, but do it first: buy what they're going to buy and then sell it to them or ride that wave as the news of their purchase causes the price of those assets to soar. And that's exactly what happened.”

Becoming number one over time:

“Ben Trotsky, this hilarious person who managed the junk fund in nineties, said, I want to be the best bond manager over a 10 year period. He ran a bunch of simulations. And every time he found that if you want to be the best manager over 10 years, you got to not be the best manager in any given year. If you're the best manager in one year, you probably took too much risk. You probably did something … that was not that informed of a risk. And you just got lucky. You're doing something that could blow you out. So the idea is to be in the top decile, top quartile, and just outlast everybody else who is taking too much risk trying to be number one.”

Emotion:

“What happened to Bill at Janus was he needed to prove to PIMCO that they had made the wrong choice by ousting him. This is a little my overlay. He told anyone who would ask that he was obsessively checking every day his performance against PIMCO’s. My read of that is that he was not emotionless. He was locked in this dynamic with PIMCO that became more his obsessive focus than pure performance. … I think he allowed emotion to cloud his investing.”

Disclaimer: I write and podcast for entertainment purposes only. This is not investment advice. I am not your fiduciary or advisor. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions.

Mary and I talked about Bill’s breakfast habits (did low blood sugars end his career?!), his card counting days, the culture of paranoia at PIMCO, how he combined multiple sources of edge into “structural alpha” for long-term outperformance, the difficulty for a founder to leave their firm, Bill’s desire for fame, and how emotions ultimately got in the way of investing.

Some highlights from the conversation:

Opening the door to a story: “If you're staring at a closed door … you just have to come up with a little piece of information to get that person to open that door, to crack it open. A little piece of gossip, a story that everyone's talking about. In and of itself that gossip is useless to you as a journalist, of course. But you can asking somebody, Hey, I keep hearing this ridiculous story. You have a little nugget of truth in there. You don't know what it is yet. … A lot of people want to help you understand and don't want to see the story misrepresented.”

Traits of a founder: “The things that make someone capable of achieving the track record that Bill Gross did, building the kind of firm that Bill Gross was a part of, those personality traits are: you're going to be exacting. You're going to be really intense and focused. You're going to be a perfectionist, a micromanager. You're going to keep a really tight grip. These things, generally speaking help contribute to the success of the firm. … For the most part, these are things you see very frequently among founders, and also that toxic culture that can often come along with some of those traits. Those traits also make it very difficult, if not impossible, to have a graceful transition away from that founder. Because the minute they start to loosen their grip, they freak out. … The tight grip is who they are. This firm is who they are.” 

Being the house: “Bill gross learned from Ed Thorp’s book called Beat the Dealer that you can count cards. … I think that this sensibility of both understanding the math but also feeling the pace of the table and knowing when you have that edge and when you don't, and also watching all the people around you who have no edge whatsoever and who were just flopping around taking dumb chances. All of that helped to inform how he approached the market and who he saw as his competitors. His competitors, aren't the dumb people doing the dumb stuff. His competitor is the market, is the dealer.

This shows up when PIMCO figured out that the US government wasn't going to let certain institutions fail in the financial crisis. That there was going to be a government backstop … If I know that the US government is the house, I'm going to be the house, I'm going to try to align my own interests. … The point was to do what the government's going to do, but do it first: buy what they're going to buy and then sell it to them or ride that wave as the news of their purchase causes the price of those assets to soar. And that's exactly what happened.”

I’m excited to share my conversation with Max Frumes, co-author of The Casesar’s Palace Coup (with Sujeet Indap). I’m a big fan of the book and previously shared some notes on Twitter. It’s a deep dive into the buyout and bankruptcy of casino giant Caesar’s Entertainment and the slugfest between investors like Apollo, Oaktree, Appaloosa, GSO, Elliott, and some of the nation’s most expensive law firms.

It’s a great introduction into the world of distressed investing and the prevailing culture. I’ve written previously about how distressed credit is a “knife fight over a limited number of slices” which shapes a scarcity mindset. The book illustrates the intense negotiations and explains the “creditor on creditor violence” that can take place (a recent example is Wesco).

Max and I discussed how to break down such a complex story, explored key turning points, discussed the culture among distressed investors, what makes distressed investors successful, why there was no long-term damage for Apollo, how other investors were actually inspired by their moves, and how the space has changed in general.

A key takeaway for me was that the participants in this game are very smart, creative, ruthless, and extremely competitive. This is a complex and difficult game to play and one should consider very carefully whether to enter the competition.

I hope you enjoy the conversation. You can listen to it at: Spotify, Apple, at anchor, and via RSS.

Marc Rowan, CEO of Apollo about the demise of Drexel:

“You want chaos, things to be shaken up, the system to be brought down and built up again. When you think the world is coming to an end, that is the time to build a career and build the next great fortune.”

A few quotes from the conversation:

* “It is a very rich, fascinating industry because it is a combination of chess and poker, depending on what stage a restructuring is at.”

* “Each of these firms does have their own personality. We go into detail about the origins of Apollo which was the most interesting because it was defined by brilliance and impunity, willing to push the bounds to the very edge of what is what's permissible under the law, under the credit docs. And that does go back to Mike Milken’s firm Drexel Burnham. That's where Leon Black was one of the senior directors at the time it went bankrupt.”

* “Firms who are the most successful in this industry are those who have expert knowledge and a good handle on the legal aspect, understanding valuation, and then the industry knowledge itself mixed with understanding game theory. Some people are more savvy with the press. Some people are more savvy with the orchestration of creditor or organization. Some people are more willing to be an iconoclast and go against the grain.”

* “Ultimately the examiners reports said they had actual and constructive fraudulent conveyance claims against and corporate governance claims … a lot of them were simply because the creditors did not have independent directors during the time these decisions … where there's conflicts of interest. It seemed like the private equity sponsor was basically controlling everything. … So the lesson wasn't, maybe we shouldn't do those things. The lesson was let's put some independent directors in there.”

Disclaimer: I write and podcast for entertainment purposes only. This is not investment advice. I am not your fiduciary or advisor. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions.

It’s a great introduction into the world of distressed investing and the prevailing culture. I’ve written previously about how distressed credit is a “knife fight over a limited number of slices” which shapes a scarcity mindset. The book illustrates the intense negotiations and explains the “creditor on creditor violence” that can take place (a recent example is Wesco).

Max and I discussed how to break down such a complex story, explored key turning points, discussed the culture among distressed investors, what makes distressed investors successful, why there was no long-term damage for Apollo, how other investors were actually inspired by their moves, and how the space has changed in general.

A key takeaway for me was that the participants in this game are very smart, creative, ruthless, and extremely competitive. This is a complex and difficult game to play and one should consider very carefully whether to enter the competition.

A few quotes from the conversation:

• “It is a very rich, fascinating industry because it is a combination of chess and poker, depending on what stage a restructuring is at.”


• “Each of these firms does have their own personality. We go into detail about the origins of Apollo which was the most interesting because it was defined by brilliance and impunity, willing to push the bounds to the very edge of what is what's permissible under the law, under the credit docs. And that does go back to Mike Milken’s firm Drexel Burnham. That's where Leon Black was one of the senior directors at the time it went bankrupt.”


• “Firms who are the most successful in this industry are those who have expert knowledge and a good handle on the legal aspect, understanding valuation, and then the industry knowledge itself mixed with understanding game theory. Some people are more savvy with the press. Some people are more savvy with the orchestration of creditor or organization. Some people are more willing to be an iconoclast and go against the grain.”


• “Ultimately the examiners reports said they had actual and constructive fraudulent conveyance claims against and corporate governance claims … a lot of them were simply because the creditors did not have independent directors during the time these decisions … where there's conflicts of interest. It seemed like the private equity sponsor was basically controlling everything. … So the lesson wasn't, maybe we shouldn't do those things. The lesson was let's put some independent directors in there.”

I’m happy to share my conversation with Evan Tindell of Bireme Capital. I’ve enjoyed Evan’s thoughtful letters over the past couple of years and it was time to talk about this approach to investing. We dove into Evan’s background as a poker player, how he looks to exploit biases in his investment process, and how he navigated the ‘20-’21 bubble in growth stocks as a short-seller and value-oriented investor.

If you’re interested in his work, check out his three letters with thoughts on the bubble (part I - birth, part II - anatomy, part III - apex -“We believe inflation is likely to be the catalyst that ultimately pops the everything bubble” from 2Q21).

Books mentioned: The Theory of Poker by David Sklansky.

I hope you enjoy the conversation as much as I did. You can listen to it on: Spotify, Apple, at anchor, and via RSS.

Through Evan I also found this interesting research paper on poker players as investors: “our findings suggest that skilled poker players are, on average, better fund managers.”

“Extant academic work shows that winning poker players are more patient and less susceptible to behavioral biases such as the disposition effect … “patience is rewarded” among winning poker players, and these players tend to avoid “overweight[ing] frequent small gains vis-à-vis occasional large losses.”

However, it’s not as simple as picking a prominent poker player and hedge fund manager. It seems that after winning public tournaments, these managers take in more capital which leads to a decline in alpha. 🤷‍♀️

The smart bet seems to be to pick someone good at poker but under the radar and not playing tournaments.

Disclaimer: I write for entertainment purposes only. This is not investment advice. I am not your fiduciary or advisor. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions.

Some favorite quotes

* “What poker teaches you is how to think rationally in the face of that incomplete information. You always have to be updating your model based on the new information. Whereas in chess you know exactly what's going on and the pieces are fixed on the board. In poker, you never really know what's going on. One thing that I think is interesting to take away from poker is you can never actually be totally sure if you had the right strategy at all.”

* “Over time, you have to capitalize on their mistakes essentially. It's a little bit more clear in poker. You're sitting right across the table from someone. You can just see that they're calling pre-flop with 37 off-suit and you just have to punish it by waiting until you have pocket tens and then raising a lot before the flop. It's a little bit more clear in poker that I see what exactly you're punishing. Obviously in investing, people don't think about this really, but any alpha that you are generating relative to the overall market is coming out of someone else's like negative alpha.”

* “Availability bias, the way we look for that is stocks that have done poorly where there’s an obvious newsworthy story, some type of like legal or regulatory action or some reputational thing that happens. That's one reason I have enjoyed digging into some of these Chinese stocks, because there's an obvious story about why the stocks are falling, having to do with regulation. And it's not directly related to the business doing. So that's the key, those are the kind of stories where I say, okay, there's this story about why people are selling the stock. It's not directly related to the business. Let me go do some research to try to figure out if it will end up affecting the business in the long-term. … Those situations are obviously very rare. Most of the time the problems that the market sees are roughly correct.”

* “A number of times I've gotten ideas from following a competitor of my current company and they did something or they merged with another company or, I have a list of, uh, of companies that I'm following. The way I describe it is I'm constantly updating my notes on all those companies until something just hits me over the head.”

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I’m very excited to share with you my conversation with Jimmy Soni. We discussed the many lessons from his new book The Founders about the origins of Paypal. I had an absolute blast and would highly recommend the book if you’re interested in business, technology, startups, and examples of company culture

I hope you enjoy the conversation as much as I did. You can listen to it at: Spotify, Apple, at anchor, and via RSS.

Disclaimer: I write for entertainment purposes only. This is not investment advice. I am not your fiduciary or advisor. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions.

💡You could be sponsoring conversations like this one if you’re looking to reach 8,700+ thoughtful investors and many more readers on Twitter.

A few favorite quotes:

“I told Peter, look, there was a year and a half of history here that no one's documented. And I anticipate that if I went back and looked, there'll be even more. And then I think the thing that clinched it, as I said something like, look, I see this in my eyes as like Lord of the Rings, but set in Silicon Valley. And I think that's what got to him. Like, he like laughed. Even after that he had a bunch of really good questions for me, he like pushed back on the notion and the notion of the book, but then agreed to essentially what he agreed to was like I'll sit for interviews with you.”

“It's important that you had an inaugural CEO on the x.com side like Elon, an inaugural CEO, like Peter on the Cofinity side and an inaugural CTO in Max Levchin. Because the three of them are not going to hire people who cannot operate at the level that they operate. Not in the same ways. But part of what I discovered in, in researching this story is the high bar that was placed on aggressiveness hard work, intellect, puzzle, solving a kind of disposition to want to find the answer right, as opposed to leaning on experience.

And so you, you have three leaders who do set the tone for their respective organizations. But let me be clear though, that doesn't mean that they're hiring just lookalike people, right? There are plenty of people in this story who don't, who don't, um, there's a lot of heterodoxy. There's a lot of like differences and differences of opinion too, that come out in pretty profound ways.

But it does mean that when you are trying to recruit, you know, Peter is biased in the direction of like intelligent, interesting people. Max, when it comes to engineering, like he, he knows his stuff and is hiring people who are at his level as well. And so you don't, you know, I found again and again, that actually the company had remarkably low turnover for over it's four years.”

“The reason that Max and Peter and their sort of side of the company clashed with, uh, Elon is because of a difference of founder vision. It wasn't, it wasn't personal. It was Elon wanted to build X dot com into a financial services Superstore. The other side of the company felt like that's a big vision at a hard time, we're running out of money because of fraud. And because we have, you know, overhead and we're doing bonuses, we don't have much money left.

The market's cratering, uh, $12.5 million burn rate against 60 million or so in funding is only going to last you X amount of time. And it's not gonna last you long enough to do the financial services superstore. Peter acknowledged to me, he said, you know, you do have to give credit to Elon for having the biggest vision of what the company could have become, meaning that if the role, if the situation were different and maybe there were a longer runway, or there were some other dynamics that worked in their favor that maybe, maybe you could have turned that vision into a reality.”

“Big takeaway number three, and this is maybe the hardest one to get right, you, you need people who come from very different perspectives and you need them to be able to respectfully disagree with you with each other at a very high level. I read so much like of the internal email and documents and things that were shared with me. And I can tell you that, like, this was not a place for the faint of heart. It was a place with really high IQ points and a lot of just like very intense battling over ideas, building a team that has the capacity to do that strikes me as one of the hardest things to do in business, because it requires a few things.

One, you have to be courageous enough to walk into a room with David Sacks and tell him that he's wrong, which is not easy. Right. As played back to me by multiple employees, that's not easy. The second is you have to actually think very hard about what the right answer is in a given context, not what you think about the person presenting the idea, right?

So you have to have to think about like the idea itself. Not like I don't like Joe. Right. I have to think about Joe's idea. And then the third thing is you have to do this, despite the fact that the person that you're talking to might be a subordinate or might be three levels above you, meaning it has to be done in some way, irrespective of hierarchy.”

Questions and time stamps:

* [Time] – Question

* [00:01:00]: Introduction, how did Jimmy find the story and go about the research process?

* [00:17:00]: Paypal’s unique team and recruiting.

* [00:24:00]: Paypal’s journey of pivoting and iterating the product and business model.

* [00:34:00]: Culture of truth-seeking and debate, workaholism, “Paypal PTSD.”

* [00:42:00]: Paypal’s three leadership coups.

* [00:49:00]: Risk-mitigation and timing were key to survival.

* [00:57:00]: What were the lessons for the Paypal diaspora?

* [01:061:00]: Culture of ownership and giving people a lot of responsibility quickly.

Enjoyed this piece? Please let me know by hitting the ❤ button. It makes my day to see whether my readers like the content (it really does!) Thank you!

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I’m very excited to share my conversation with Jimmy Soni, the author The Founders: The Story of Paypal.

• [00:01:00]: Introduction, how did Jimmy find the story and go about the research process?


• [00:17:00]: Paypal’s unique team and recruiting.


• [00:24:00]: Paypal’s journey of pivoting and iterating the product and business model.


• [00:34:00]: Culture of truth-seeking and debate, workaholism, “Paypal PTSD.”


• [00:42:00]: Paypal’s three leadership coups.


• [00:49:00]: Risk-mitigation and timing were key to survival.


• [00:57:00]: What were the lessons for the Paypal diaspora?


• [01:061:00]: Culture of ownership and giving people a lot of responsibility quickly.

A few highlights:

• Will is fairly bearish on the current setup of a stable, globalized world. He believes we’re moving from a highly integrated world to a multi-polar one in which “spheres of influence” play a much greater role and affect commodities and trade. Energy and food are example sectors in which nations will increasingly to protect their own interests and create resilience.


• “What comes next is going to be very different from the past 30 years. And it’s going to be very good, I think, for real assets and natural resources.”


• “We're gonna see a fundamental re-working of trade flows along different geopolitical lines.”


• Political acumen will become more important for management teams. (An anecdote from Disney on its philosophy operating abroad: “We always ask, ‘how does it reflect on the Mouse?’”)


• The collapse of the USSR led to a decline in Russia’s industrial capacity relative to its commodity production, leaving global commodity markets well supplied. That stability has come to an end.


• Europe’s decarbonatization efforts could go into overdrive and lead to attractive long-term opportunities among utilities and industrials.


• Will doesn’t believe he can forecast commodity cycles but his best guess is that we’re in the "first third."

Today I’m happy to share a conversation and written Q&A with Will Thomson and Chip Russell of Massif Capital, a long-short fund in real assets, and particularly the “sectors most important to a low carbon economy: Energy, Basic Materials and Industrials.”

I’ve long enjoyed their letters and white papers and used the Q&A to learn more about their process and worldview. With Russia’s invasion of Ukraine I thought it was a good time to also catch up with Will and discuss how they navigate this environment (Will’s baby daughter was also present for the first half of the conversation and happily commented at times😉 ).

A few highlights from the conversation:

* Will is fairly bearish on the current setup of a stable, globalized world. He believes we’re moving from a highly integrated world to a multi-polar one in which “spheres of influence” play a much greater role and affect commodities and trade. Energy and food are examples where nations will increasingly to protect their own interests and create resilience.

* “What comes next is going to be very different from the past 30 years. And it’s going to be very good, I think, for real assets and natural resources.”

* “We're gonna see a fundamental re-working of trade flows along different geopolitical lines.”

* Political acumen will become more important for management teams. (An anecdote from Disney on its philosophy operating abroad: “We always ask, ‘how does it reflect on the Mouse?’”)

* The collapse of the USSR led to a decline in Russia’s industrial capacity but not in its commodity production, leaving global commodity markets well supplied. That stability has come to an end.

* Europe’s decarbonatization efforts could go into overdrive and lead to attractive long-term opportunities among utilities and industrials.

* Will doesn’t believe he can forecast commodity cycles but his best guess is that we’re in the “first third,” meaning quite early still.

For more reading: Will’s SumZero panel on energy, his conversation with Bill Brewster, and Massif’s Q4 letter:

“We believe we may be at the precipice of a global energy crisis” and “waves of sectoral inflation rippling through the economy appear likely.”

I hope you enjoy the conversation and Q&A.

Disclaimer: I write for entertainment purposes only. This is not investment advice. I am not your fiduciary or advisor. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions.

💡You could be sponsoring posts like this one if you’re looking to reach 8,400+ thoughtful investors and many more readers on Twitter.

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A few favorite quotes:

* “Roughly 55% of the world’s GDP rests within the vertical value chains of the related companies we focus on. We like the term ecosystem as it captures a flow-based mentality rather than static industry silos. Within ecosystems, resources are continually moving from one use to another use or reuse. Our focus aims to study, value, and capitalize on that flow of material through the economy up until it transitions into the hands of consumer-facing businesses.”

* “We feel like our ability to evaluate a management team’s ability to complete a project is stronger than our ability to predict commodity prices. Importantly, we are not naïve to think that we can completely isolate commodity price exposure, but we think about it as a potential option (do we have headwinds/tailwinds) as opposed to the main drive of an investment thesis in the mining sector.”

* “If we zoom out, we tend to think about return drivers, or opportunities, in basic materials coming from: a) resource to reserve conversions – the ability for a firm to grow production and convert geological promise to reserves and ultimately cash; b) counter cyclical and capital constrained metals – focusing on supply side analysis and industry capital flows to hunt for opportunities in capital starved sectors; and c) asymmetric demand – which ties back to many of the inputs needed for electrification at scale to occur.”

* “For energy investments, we often look for a disconnect between returns on capital and cash flow generation. Cyclical troughs are often characterized by firms with low returns relative to their invested capital. Strong free cash flow generation during these periods can protect a firm’s balance sheet while also providing healthy dividends to investors. As a cycle turns, returns on capital increase, typically followed by a pivot in investor sentiment and an increase in capital flows.”

Q&A With Massif Capital

(Bold highlights by me.)

Q: Will and Chip, thank you so much for agreeing to this Q&A and congratulations on launching your new fund! Tell me a little about your background and the history of Massif Capital.

Certainly. Massif Capital was started in the summer of 2016. Will Thomson, who was working as portfolio manager of credit and political risk insurance products at a Lloyd’s of London syndicate, saw an opportunity to start a public equity investment firm that focused on similar “real asset” businesses. Prior to managing a credit risk portfolio, Will was a strategic and economic adviser to NATO/ISAF in Afghanistan.

I joined Massif full time on January 1, 2018. Prior to Massif, I worked with several startup battery technology firms, building out business development and corporate strategy teams. My background is in energy economics, primarily working in consulting before earning a graduate degree in environmental engineering.

From day 1, we were cognizant that it was important for us to build a track-record and base of investors that could hopefully grow into a more mature pooled vehicle structure that we could then bring to a wider, institutional, capital base. This drove our decision to manage separately managed accounts for the first five years. Just recently, we have converted over into a fund structure following a seed investment in 2021.

It is worth touching on our core philosophy of our firm. We are striving to be an investment partnership, not a fund business. As we note in our pitch deck, institutionalization has driven growth in overhead, growth in overhead has driven a systemic need to increase AUM. The business of institutionalized hedge funds is not generating a superior investment return, it is generating fee income. At Massif, we are really focused on investment returns, not fee income. This may sound cliché, but many decisions we make tie back directly to this belief. For instance, some of our share classes have a declining management fee structure as the AUM of the business grows.

Q: I enjoyed your recent paper on the Advantages of the Real Asset Ecosystem. Can you outline how you define your universe and why you think it is interesting for investors who may be focused on more exciting sectors like technology or consumer?

We invest in three broad verticals: energy, materials and industrials. We are geographically agnostic, and have a minimum market capitalization requirement of $200 million USD. We typically describe our investable universe as the “Real Asset Ecosystem” because we find it conveys a richer and more substantive picture of our opportunity set. As we note in the paper, there is sometimes confusion around the economic breadth of our addressable universe. It is not a niche portfolio. Roughly 55% of the world’s GDP rests within the vertical value chains of the related companies we focus on. We like the term ecosystem as it captures a flow-based mentality rather than static industry silos. Within ecosystems, resources are continually moving from one use to another use or reuse. Our focus aims to study, value, and capitalize on that flow of material through the economy up until it transitions into the hands of consumer-facing businesses.

We think this space is interesting today for a number of reasons, principally because the global transition to a low-carbon economy is going to create a wide range of asset mispricings that we think is a fruitful stomping ground for active management. These areas of opportunity come from several directions. For example, growth and innovation in capital intensive businesses will surprise to the upside. CATL, the Chinese battery manufacturing company, is likely the fastest growing ten-year-old company ever, at scale. It’s top line is growing twice as fast as any technology company in their equivalent 10th year, off of a revenue base that is only surpassed by Google. We think this data point is a preview of what the next decade may be defined by.

The space also is seeing an unprecedented policy coordination that we think will unfortunately give rise to a significant amount of capital misallocation. That misallocation will manifest itself in both persistent material scarcity (which we are seeing previews of today), which may re-define commodity price characteristics, and also faster cycles of capital formation and destruction.

Q: You mentioned in conversation with Bill Brewster that you’re not looking to make bets on the prices of commodities. What kinds of situations do you look for and how do you think about return drivers in the portfolio?

It depends. With respect to your reference on commodities, we often like to look for pre-production opportunities if we are going to invest in the metals & mining sub-sector. In doing so, the most important question for an investment becomes: can the management team effectively bring production capacity to the market, not, do I think the commodity they produce is undervalued and will appreciate.

There are a couple reasons for this. First, there are plenty of ways to invest to get exposure to broad commodity price movement. If an investor is bullish commodities (or natural resources), it does not make sense for them to pay an active manager a management fee if they have numerous index/ETF products that can capture that viewpoint. There is a broader point here about the portfolio at large and not paying for beta (however an allocator wants to measure that), but that is a slightly different topic.

Second, we feel like our ability to evaluate a management team’s ability to complete a project is stronger than our ability to predict commodity prices. Importantly, we are not naïve to think that we can completely isolate commodity price exposure, but we think about it as a potential option (do we have headwinds/tailwinds) as opposed to the main drive of an investment thesis in the mining sector. Our investment in copper producer Ivanhoe Mines is up close to 300% over the same time period that copper has appreciated ~80%. In part because our investment was made prior to the company bringing close to half a million tonnes of copper into production.

If we zoom out, we tend to think about return drivers, or opportunities, in basic materials coming from: a) resource to reserve conversions – the ability for a firm to grow production and convert geological promise to reserves and ultimately cash; b) counter cyclical and capital constrained metals – focusing on supply side analysis and industry capital flows to hunt for opportunities in capital starved sectors; and c) asymmetric demand – which ties back to many of the inputs needed for electrification at scale to occur.

For businesses fortunate enough to be endowed with resources that can enable large scale decarbonization, management teams must push towards maximizing environmental sustainability per unit of growth output. Our investment in Altius Minerals (ALS) in the spring of 2020 exhibits many of these traits. ALS is a diversified royalty & streaming company. The firm assembles prospective geological real estate in periods of market stress that they later sell to junior miners in return for equities stacks and underlying royalties. Countercyclical capital allocation is a pillar to their business model, not just a catchphrase. Earnings generated from prospect generation are recirculated into the exploration business to acquire third party royalties that augment the internally generated royalties held by the business. The geological ‘flywheel’ often creates royalties at zero cost for the future benefit of shareholders. The portfolio of royalties is almost exclusively base metals (which differentiates themselves from their listed peers who focus on precious metals). Lastly, the company has created - and now owns a majority stake in - the first ever renewable energy royalty business that was created from recycling coal royalties that were winding down off their books. The business is incredibly capital efficient.

For energy investments, we often look for a disconnect between returns on capital and cash flow generation. Cyclical troughs are often characterized by firms with low returns relative to their invested capital. Strong free cash flow generation during these periods can protect a firm’s balance sheet while also providing healthy dividends to investors. As a cycle turns, returns on capital increase, typically followed by a pivot in investor sentiment and an increase in capital flows. Our investment in Equinor ASA in the summer of 2020 is a good example. Our investment in the business was on the heels of an historic down move in oil prices and extreme economic uncertainty given the volatile COVID19 situation at the time. EQNR was trading at a >15% free cash flow yield, was paying a 6% dividend and was growing production, and earnings at 3% a year. Leading into 2020, EQNR utilized a downturn in oil prices from 2014-2018 to become more efficient, spending 30% less on operating expenses per barrel of oil production. Furthermore, EQNR at the time, and still today, plans to grow their renewable portfolio base by 10x, a ~30% CAGR, over the next six years. Lastly, their large reservoir of oil production off the Norwegian Continental Shelf has some of the lowest energy intensity per barrel of oil anywhere in the world. EQNR is up 160% and we still believe it has room to grow.

For industrial business we often focus on economic scarcity – investing in companies that produce goods that have a very specific purpose and are difficult to duplicate. The industrial complex is where we will often find more of our compounding type opportunities. Here, we focus particularly on a firm’s ability to maintain and grow gross earnings power per share over time. We also are beginning to find divergent market prices, and opportunities, from intra-industry differences in management teams flexibility (or willingness) to engage in strategic reorientation to tackle decarbonization. Some are forced out of necessity, some are pursuing opportunities they see and some are choosing to sit on the sidelines. They won’t all be correct.

We are not investors in the business, but we wrote an article on ArcelorMittal (MT) in 2020, that walked through the ramifications of the costs associated with the European Union’s carbon goal. The article explores not only the ramifications on MT’s unit economics, but also the downstream effects on the cost of steel and the geographic competitiveness of European exports. A strategic reorientation may be possible for a company like MT, but it might cost them 4x their market cap in CAPEX, a 50-80% increase in production costs and € 200 billion in supporting clean energy infrastructure elsewhere in the economy.

Lastly, independent of sector specific sign-posts, we sometimes find opportunities that are market structure related. We are growing increasingly cognizant of the marginal buyer and seller of securities that we are evaluating and, of greater interest, forced buyers and forced sellers. For example, some smaller companies that may be experiencing a rapid change in growth (warranted or otherwise), may find themselves in an index that increases the capital flow into (and out of) their business by an order of magnitude difference.

Q: Do you believe the portfolio will act as an inflation hedge?

We do not build the portfolio to act as an inflation hedge. Insofar as we have built a portfolio that has a collection of businesses that are further upstream of alternative portfolio’s, it’s very possible that we outperform on a relative basis during inflation periods. This argument however is about as loose as the term inflation itself. It’s entirely dependent on the type of inflation, the causes of inflation and the period of time the price pressures may be exerting themselves on businesses and consumers.

Q: What do you think investors misunderstand about your space?

We think there is an underappreciation for the heterogeneity in the space. “Cyclicality” is a good example. Some sub-sectors are cyclical, some are not. Those that are, can be on very different timelines and can impact things like margins and operating leverage in very different ways. Moreover, in industries that are experiencing fundamental change, the predisposition to assert cyclicality, in part relies on some form of mean reverting tendency (observed historically) that may not hold in the future. In fact, one of the ways in which you can define and/or measure “fundamental change” is to test for the breakdown in those historical relationships.

Importantly, there is always a ‘secular’ trend that some cyclical trend may oscillate around. For ‘cyclical’ equities, it is often a function of ‘what trend matters on the margin’. Most ‘cyclical’ equities find themselves on a secular growth trend pattern that is +/- 4%. On a short time horizon, effectively flat. So cyclicality matters. The secular (long term) trend may change though, making the cyclical movements around that trend less impactful. 

Electrification may be a good example. Annual rates of growth in electric demand are quite muted, given their close tie to productive labor rates and demographics. Over the last 15+ years, total electric demand has actually fallen due to energy efficiency measures and hardware in many developed nations. Looking ahead, electrification (as a broader strategy for decarbonization), may lead to a 50% increase in power demand by 2030, moving from 20% of primary energy consumption today to 50% of primary energy consumption. That rate of change has potentially profound implications on both what electrification is replacing as a primary energy source and the industrial complex that needs to scale to allow for electrification to scale to that degree.

Q: You’ve written extensively about the transition to a low-carbon economy and the massive investment required. In your latest letter you wrote that we “may be at the precipice of a global energy crisis” and that the “structural undertones that are defining this energy crisis will persist.” Can you explain how this transition is different from historical ones? What kind of opportunities do you think it creates for investors in public markets?

With regards to the differences, we outline three big ones in our 4th quarter letter:

* The current transition is both a replacement transition and an additive transition. Historically, energy transitions have been primarily additive.

* It is the first transition to move down the energy density ladder rather than up. This also means it is the first transition to move from lower capital intensity energy processes to higher capital-intensive processes.

* Lastly, it is a timed transition. It is a transition we have chosen to undertake now and a transition we have decided needs to be completed within a particular time horizon. All previous transitions have been untimed, organic, and unplanned.

The best way to perhaps summarize the potential opportunity set is to point out the (perhaps simple) observation that this is having (and will continue to have) profound implications on industries that most investors have never seen change. The implications for public equity investing is interesting. For example: an industrial company might be worth the free cash flow it can produce, discounted back to the present at some rate, with a terminal value that is pretty closely tied to say GDP. Granted, an unknown number, but a pretty tight band around say 0-4%. Almost no option value in the future – demographics and labor productivity do not have fast changing expectations. The unit economics have effectively zero expectation to change, and the pricing multiple on earnings is both low and not going to deviate too far from its sub-industry and competitors. It’s not terribly interesting, and the whole “game” is really just a function of, can I get it for a decent price

In this hypothetical example, what happens if the market for the product is expected to 10x in a decade? What happens if there is an expectation for a carbon price? All of a sudden, an investor has an entirely different set of questions now to ask. First, do I really think the product is going to see a 10x increase in a decade? It doesn't matter what the number is, the point is the range of expectation of future market size is dramatically higher than when it was tied to GDP/demographics. Second, if I do, clearly there is a new buyer in the market – at scale – do they have different specifications for the product based on their need? If yes, are we going to see new competitive advantages take hold? Do the unit economics of the business change if my feedstock is suddenly 3x the cost from a policy driven mandate? If the business has the flexibility and balance sheet, can it change geographies to alter its energy cost? If the end market for my product is new, can I provide new services to my buyers? If my buyers are in a different industry, with different unit economics, has my pricing power now changed? What type of company does the public equity market think I am now considering I may be selling to new customers, growing at different rates, have changed my unit economics and the range of possible outcomes for my addressable market in a decade from now has tripled?

To echo sentiments made in previous questions, we find the space to be rich with optionality. Disruption is quite literally the stated goal of policy makers.

Q: What would be an example of a company or industry in which the market is suddenly expanding? And if this is driven by public policy, won’t the market either quickly reflect this new expectation or will capital compete away any excess return?

Lithium is a good example. Prior to 2014, Lithium was primarily used in the pharmaceutical industry. From 2014-2019, demand for Lithium doubled, with EV penetration growing to only ~2% of the market. Lithium supply needs to roughly triple to meet mid-century forecasted demand. The rationale to bring new lithium supply to market, at scale, prior to 2014 was probably not a great investment thesis. Two years ago, we made an investment in a pre-production mining firm, Lithium Americas (LAC), that we think is going to be a top tiered producer by the end of the decade with annual production on par with Albermarle Corp (ALB), a company that, at the time, had a market capitalization 15x that of LAC. 

On this issue of public policy and forward expectations, yes, it is possible that new expectations are priced in immediately. It does not suggest that the new expectations are correct. There is a wide range of future outcomes here, and the notion that capital intensive industries are getting differing sets of future expectations more frequently, lends itself to more (efficient or inefficient) price discovery as policy, new technologies and/or the consumer zeitgeist of the day changes. That pace of changing expectations is not something the resource industry, for instance, is accustomed to. 

A good example is hydrogen. From 2018-2020, public company’s use of the phrase “green hydrogen” (in all public filings), increased 400%. We wrote a blog about this in June of 2020, which can be found here. The issue at hand here is that while hydrogen will play a role in decarbonization, it will not be a solution for every problem people have claimed it might solve. Knowing where the gap is between the two requires an understanding of hydrogen. For a period of time in 2020 and 2021, companies that had a hydrogen segment saw immediate re-ratings. The effect was so strong that companies that had zero hydrogen in their business models began talking about their hydrogen plans as a response function to what they saw in the market. 

You could argue that expectations were priced in. You could also argue that a majority of the pricing was based on inaccurate market size assumptions, market fit assumptions, time to build scenarios and completely unknown unit economics. Insofar as there are companies that develop the technical competence and market demand for their product, capital will indeed likely be competed away with excess returns, but with a significant time lag. 

Q: Can you talk about a couple of ideas that recently made it into the portfolio and why you think they are compelling?

Certainly. We initiated a position in RWE in 2021, a full investment report can be found here. In short, RWE just completed a major asset swap with E.ON that cemented the firm’s transition from a carbon intensive, fully integrated utility, to a top three renewable power producer in Europe. Pre-swap, RWE used Innogy’s dividends to pay for loss-making nuclear and coal mines. Any excess FCF from the core business, when it occurred, was paid out as dividends. This business model was based on a free cash flow maximization strategy that depended on the firm running existing thermal coal assets as efficiently as possible and with the lowest possible maintenance CapEx. Capital appreciation potential was limited; growth potential was tied to European electricity demand. Via the asset swap, RWE traded Innogy sourced financial cash flows for renewables generated operating cash flows. We believe the swap primed RWE for further growth inside and outside core markets, an equity driver not previously present. We do not believe this transition is being reflected in the equity price of the firm.

Q: What has been your experience running your own firm so far? What does a typical day look like? What takes up most of your time?

It has been humbling and rewarding. The dynamism in markets is, in part, what makes it so fascinating to be a part of; an ever-evolving system that you’re trying to wrestle with. Building a business feels similar – the freedom and responsibility of your own decision making is a double-edged sword.

We have had a slightly abnormal few weeks leading up to our fund close, but typical days are almost exclusively focused on studying businesses. I would say 50% of our time is spent reading and writing, 25% spent talking to companies, industry contacts, market participants and 25% building out new models and processes; either coding or internal processes by which we review research and edit internal databases.

Q: How do you think about gaining an edge as a small shop in a complex and global market?

I’m reminded of an interview of Steve Martin by Charlie Rose (15+ years ago I believe), where he said something to the effect of: “be so good they can’t ignore you”.

I think that’s an important point for young/aspiring asset managers to be cognizant of. This is a very competitive industry, and one where absent some strand of that unrelenting, almost unbashful, drive to be very, very good at what you do, it will be hard to persist.

“So good” of course can come in, and perhaps needs to come in, lots of different flavors. Maximizing returns is certainly one of the optimization functions, but we think a lot about how we can be better at communication with our investors, how we can build a business that inspires people to want to work here, how we can contribute more thoughtfully to research efforts in our fields of study.

It’s an excellent question. I would say the most important thing is to recognize that edge is both one of the most important things to figure out and that it is likely to be an ever elusive, moving target. Persistence in the pursuit of edge, wherever that may be, is our job.

Q: Which CEOs, investors, or publications do you follow closely in your space?

For those interested in studying energy transitions, we would recommend consulting the work of Thunder Said Energy. It is highly pragmatic and breaks down the world of complex energy systems into bite size research pieces. It is an excellent launching pad for those constantly returning to the question of: “how does this technology work?” or “can I get a straight answer on the physical, unit economics, of this energy process?”. It is a research solution set to the problem of industrial literacy that we contend is a major problem in society today. As a motivation to dive into the work of Thunder Said Energy, we would encourage readers to browse the Roots of Progress platform which outlines this theory nicely. 

Q: What is your vision for Massif? What would you like your firm to look like in the long-term?

Our goal over the next several years is to diversify our fund offerings in an effort to reach a broader and more diverse investor base. This may include an extension into private markets for earlier stage technology investments, as well as public equity retail product.  

Thank you so much for taking the time! Where can investors learn more about you?

Our website is a good repository of all of our published material. We also have a small, but increasingly active presence on Twitter at @MassifCap.

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I’m very excited to share with you all a conversation with my friend Dan McMurtrie of Tyro Partners. The entire interview is about a topic that I believe is under-discussed but of vital importance to any investor: resilience and recovery when dealing with sustained pressure and stress. I believe this is crucial to longevity in investing.

A number of great investors have commented or hinted at the mental and physical strain from a combination of market volatility and personal or business issues. Many retired because they were simply too exhausted and burned out to continue.

You can find detailed show notes, examples, and a transcript on my substack - neckar.substack.com.

"The goal of investing under stress is serenity. If you can, in times of extreme stress, get your life to be mundane that's a victory."

"You'll hear a lot of managers say, Hey, I bought the market in the financial crisis, but they're probably not going to get on TV and say, and I threw up in the trashcan for it.”

"When things go wrong, you're short a put on your own time.”

"Think about it like a team, like a sports team. We need to have players who can execute plays at all times. And in order to have people who can execute plays at all times, some people have to have some Gatorade on the bench and let's just accept that and engineer around it.”

[00:01:00]: Introduction. Why is resilience important?

[00:07:00]: Where to find good advice? How to broach the subject?

[00:20:00]: What are the different dimensions in which this matters (i.e. individual vs. team)?

[00:37:00]: Which non-investment areas offer useful insights?

[00:50:00]: What are specific best practices? Are these idiosyncratic or are there universal themes?

Hello everyone.

I’m very excited to share with you all a conversation with my friend Dan McMurtrie of Tyro Partners. The entire interview is about a topic that I believe is under-discussed but of vital importance to any investor: resilience and recovery when dealing with sustained pressure and stress. I believe mastering this challenge is crucial to longevity in investing.

A number of great investors have commented or hinted at the mental and physical strain from a combination of market volatility and personal or business issues. Many retired because they were simply too exhausted and burned out to continue. I will share a few examples below to illustrate the point.

However, I also believe that the topic is uncomfortable to discuss for many professional investors. It requires an openness that could be interpreted as weakness by peers, LPs, and other stakeholders. For that reason I am especially grateful to Dan for sharing his perspective.

Dan credited a mutual friend of ours, Alix Pasquet of Prime Macaya Capital, as a “mentor, great friend, cherished collaborator, and invaluable teacher” on this subject and many others. I look forward to recording a conversation with Alix as well.

I hope you find this conversation as insightful and valuable as I did.

You can listen to it at: Spotify, Apple, at anchor, and via RSS.

I will also send out a full transcript to premium subscribers.

Why this matters.

George Soros on the stress of managing his fund before hiring portfolio managers to do it for him:

“It turned into an internal conflict where I felt the Fund was an organism, a parasite, sucking my blood and draining my energy. I asked myself, who is more important, the Fund or me? Is the Fund a vehicle for my success, or am I the slave of my Fund?” Soros on Soros

Peter Lynch retired early, at age 46 in 1990, and openly discussed his workaholism and the toll it took on his family life:

Early in his career, Bill Miller asked Lynch for advice. Lynch told him that the investment business is so rewarding financially and intellectually that it attracts an overabundance of intelligent people. “The only way you can beat them is to outwork them,” said Lynch, “because nobody is just so much smarter than the next person.” Lynch told Miller that he stayed ahead of the pack by reading investment research while he carpooled to the office at 6:30 a.m., working after dinner and on weekends, and taking no vacations for years. When Miller asked if it was possible to slow down as you got older, Lynch replied, “No. In this business, there are only two gears: overdrive and stop.” Richer, Wiser Happier

In a profile in Financial World, months before he announced his early retirement:

“I've worked every Saturday for seven or eight years - I mean seven in the morning. In the last six months I've started working some Sunday mornings at home. … I haven’t gone to a Celtics game in five years. … You think I enjoy coming in here on Saturday mornings? Don’t you think I’d rather be playing with my kids or doing something with my wife?”

From a Barron’s piece covering his retirement announcement:

“It's like - one hot fudge sundae is great, two are okay and five just makes you sick. I love this job. I love outside activities. I love my family. There's just too much of it.”

Stanley Druckenmiller looking back at the moment he bought back into technology stocks at the top of the dotcom bubble, a bet that led to his departure from Quantum shortly thereafter (and a story I will discuss in greater detail in my profile on him):

“You ask me what I learned - I didn't learn anything.  I already knew I wasn't supposed to do that. I was just an emotional basket case and could not help myself.” Speech at the Lost Tree Club

Julian Robertson also retired near the top of the dotcom bubble:

“One former cub recalls that when he joined Tiger in the 1980s, he admired how Robertson rarely worked on Fridays and took plenty of time off to spend with his family at their home in the Hamptons. ‘He had a good lifestyle,’ the former cub remembers. But as the fund and the company grew larger in the 1990s, he says, Robertson ‘started working like a dog.’”

Institutional Investor: Do you ever regret that you decided to close down your funds?

“I really don't. I can't do this forever. I'm not on the phone for an hour early in the morning from New Zealand [his second home]. I just couldn't wake up at age 95 worrying about my partners' money. I love my life so much now. In hindsight, I might have been better off closing two years earlier.” The Tiger in Winter

Scott Bessent on investors flailing under pressure (losing their “distance” as Dan might describe it):

"George [Soros] wasn’t bothered when people started losing money, but he was always worried they weren’t feeling the pain because it was his money and not theirs. If people managing his money were down and he saw their trades getting bigger, he’d pull the money immediately. If the manager was down and their trading volume picked up dramatically, he’d pull it. The worst thing you can do when you’re having a hard time is flail. In trading, when there is nothing to do, the best thing to do is nothing.” Inside the House of Money

Paul Tudor Jones on the impact of divorce:

“Like, one of my No. 1 rules as an investor is as soon as my manager, if I find out that manager is going through divorce, redeem immediately.  Because the emotional distraction that comes from divorce is so overwhelming. The idea that you could think straight for 60 seconds and be able to make a rational decision is impossible, particularly when their kids are involved. You can automatically subtract 10 to 20% from any manager if he is going through divorce.”

“We find that marriages and divorces are associated with significantly lower fund alpha, during the six–month period surrounding and the two-year period after the event.” Limited Attention, Marital Events, and Hedge Funds

Bill Miller on working through a severe drawdown during the financial crisis, as recounted in Richer, Wiser, Happier:

“Miller … describes himself as “very emotionless.” When stocks sink, his default mode is to remain calm and cheerful, actively welcoming the opportunity to profit from other investors’ emotional disarray. But the pressure was so unrelenting during the [financial] crisis that he gained forty pounds. “When I get stressed, I eat or drink,” he confesses. “I wasn’t about to eat salmon and broccoli every night and drink mineral water. … There’s only so much pain I can take, and I drew the line there.”

Paul Tudor Jones risk control memorandum to his traders from 1994:

“When a trader draws down from peak, a series of proactive pre-determined measures will be implemented to assist the trader in regaining profitable form. A self-evaluation process will be required … Additionally, drawdowns will be accompanied by reduction in trading size, trading for liquidation only, and vacations.”

💡 You could be sponsoring posts like this one if you are looking to reach 8,400+ thoughtful investors and many more readers on Twitter.

A few of my favorite quotes:

* “You'll hear a lot of managers say, Hey, I bought the market in the financial crisis, but they're probably not going to get on TV and say, and I threw up in the trashcan for it.”

* “Nobody wants to admit that a physical problem could inhibit a firm because the firm is supposed to have process and procedure and all of these things. But the issue is when everybody in the farm is facing these same stresses at the same time, all of a sudden you have individual capacity decline and simultaneously you start to have more committee effects where people start making lowest, common denominator decisions, and people start looking for plausible deniability, or they start looking for cover for the decisions.”

* “I operate on what I call the ‘yes principle.’ Your day is a series of things you said yes to. I said, yes, to getting on this call. I said, yes, to reading an email earlier. I said yes, to responding to that email. I said, yes, this, this this. The things I'm saying no to, they don't really exist from a certain perspective.”

* “When things go wrong, you're short a put on your own time.”

* “Think about it like a team, like a sports team. We need to have players who can execute plays at all times. And in order to have people who can execute plays at all times, some people have to have some Gatorade on the bench and let's just accept that and engineer around it.”

* “One of the things that I've talked to you about is when I studied really great investors people who have outside track records of 20 or 30 or 40 years plus there is a habit of, I’d be slightly hyperbolic to call it laziness, but I think about it as a certain sort of tactical laziness. So it's really more an economy, an economy of motion where a lot of them have this ability to sort of calmly sit and observe and not expend very much energy for long periods of time. And then strike very aggressively at a certain point in time. It’s not that they're doing nothing during the observation periods. They're just slowly accumulating information and observations and they're gaming things out in their head, but really, really low sort of metabolic clip. And it reminds me a lot of looking at any real large, physically large predator in the animal kingdom. They all like just don't move for a lot of time.”

* “So many of these people who are great investors, you know, there's a lot of investors who had great track records and then there's a big crisis or something like that. And they do well in it. But at the end that the other side of the crisis, that's when they hang up the gloves, they go, look, I just can't anymore. I'm toast. There's a real cost to be paid for this.”

* “I think a lot of people are very angry at themselves and angry at others because they miss something or because somebody else had to trade on that they make money on, you have to detach yourself from that. Because as long as you're festering on the Fed or the growth guys or the commodity guy, whatever it is, as long as you have of somebody you think you're fighting against in markets, you're, you're not seeing things clearly, you know, your brain is reformatting all the information to that. And that's something that really a lot of people fall prey to is they create a nemesis in the markets and under times of stress.”

Books and coaches mentioned:

* The Intelligence Trap, David Robson

* The Score Takes Care of Itself, Bill Walsh

* How Champions Think, Bob Rotella

* The Money Game, Adam Smith

* Education of a Coach (about Bill Belichick), David Halberstam

* The Art of Learning, Josh Waitzkin

Questions, time stamps, and highlights:

* [Time] – [Question]

* [00:01:00]: Introduction. Why is resilience important?

* “A lot of people can look good for one to three years, maybe five years. But the number of people who can really continue to perform for 5, 10, 20 years is fractions of that. And so many people who are genuinely brilliant and great across the board, they simply burn out in a way they can't recover from. This has been the end of so many careers it's just, they get into a position where almost they can't function. And if you talk to anybody who has serious experience in money management, they've seen this happen or they've experienced it.”

* "What almost no one in the market right now has experienced is an extended period of pain. And, you know, there's a lot of evidence across over fields that isolated periods of stress impact, and individual very differently than extended periods of stress. Extended periods of stress start to wreak havoc on your neurology, your hormone system, everything about how your mind and body function are damaged there."

* [00:07:00]: Where to find good advice? How to broach the subject?

* “It's not about how you function most of the time is how you function in the 10ish percent of time when things are bad, it's kind of the same thing in relationships, in other areas of your life. Most people are fine most of the time. The question is how are they when things get bad.”

* “A lot of times you have to go through some of those periods in order to sort of unlock those conversations with other people. I think it's, it's not that people don't want to impart that wisdom to you. If you're a younger person, it's just that their brain blocks that information from them as well.”

* “A lot of times when the market's crashing, people are also getting divorced people whose kids are having behavioral problems at school. All these other things are happening. And what happens there is that the way the firm and the portfolio manager and everybody around the ecosystem, the LP, et cetera, the way everybody was interacting and acting within themselves and acting with other people, all of a sudden stops working. … These periods of extreme stress that come along where a lot of things you take for granted on a given day stop working and the decision-making ability of the firm, not the quality, but the ability to make decisions, collapses.”

* [00:20:00]: What are the different dimensions in which this matters (i.e. individual vs. team)?

* “I operate on what I call the ‘yes principle,’ which I think, like at the end of your life or at the end of your day, really, not need to get morbid about it. At the end of your day, your day is a series of things you said yes to. I said, yes, to getting on this call. I said, yes, to reading an email earlier. I said yes, to responding to that email. I said, yes, this, this this. The things I'm saying no to, I'm not, they don't really exist from a certain perspective. It's just the things that I am saying yes to passively or actively. And so I think you have to begin with looking at what are the things you want to be accomplishing and you want to be doing.”

* “When things go wrong, you're short a put on your own time. So there are certain types of investments where if something goes wrong or the thing is down, you go, okay, maybe I need to spend an hour rechecking something, or maybe it's a buying opportunity, something like that.

But there's other things where if you wake up and it's down 20% or something. It probably means something really serious has changed. You may have to go have an analyst or yourself go spend tens or hundreds of hours re-underwriting whatever, but you're gonna have to do that at a time of stress at a point when the, when the forward returns of everything else are going up.”

* “And so you need to be thinking about under the position of stress. Do you want your investment team running the exact same process or do you want to simplify it? So one of the things we try to do is at the portfolio level, we want to ensure that in times of stress, the portfolio structure is simpler and that the liquidity is higher, which are two constraints we're imposing ourselves on ourselves in normal times that benefit us in stressful times. But also in the investment process, we actually have a dashboard that shows the entire investment process as a manufacturing process. And I can click one button and it will make 75% of the projects disappear because they are not relevant.”

* “I also want to make sure that in the investment process that we really trim down to having people do things that they're already very skilled at, that they can almost, you know, in, in the military and athletics, you want to get, you want to get most movements down to where people can do them without thinking. And so it's the same thing really here with investing. It’s I want to give people more time to sleep, more time to have good meals, like feel physically comfortable. And I want them to do things they are very practiced at under times of stress.”

* “Think about it like a team, like a sports team. We need to have players who can execute plays at all times. And in order to have people who can execute plays [00:35:00] at all times, some people have to have some Gatorade on the bench and let's just accept that and engineer around it.”

* [00:37:00]: Which non-investment areas offer useful insights?

* BUD/S training: “Even in the most harsh military environment, in a training context that I'm aware of, probably their worst, but it's the one that's famous. The constraint that everyone leans on is the human reality of eating food. And I think that's a powerful lesson in, in really everything is that there are bedrock realities that you just have to admit and work around.”

* “You know, one of the things that happens sometimes the day traders and prop traders is they, they can't sleep because they're having adrenal burnout from the stress of trading, all day. And that's just absolutely horrible for your performance. So you need to monitor those things and you need to monitor them without judging them. And then you need to look at, okay, first let's, you know, let's do triage. You go home, you sleep, you eat, you know, and very important you do not threaten anybody's role with anything that you're doing this. And then later you can go in, you can look at how we're gonna prevent that from happening. And usually it's just earlier response.”

* “You had a few bad beats at a table. I mean, I used to live in Vegas and I played cards professionally for a while. And you know, when you're getting, when you have a couple bad beats and you're just pissed off about it and you're tired and you know, you want to beat that guy cause he's gotten two crazy bad beats on you in a row.

* You know, the younger man says, I gotta take that guy's head off and more experienced player says, I'm going to go I'm going to go hop on the stationary bike for 20 minutes and then I'm going to go take a nap and then I'm gonna have a nice salad. And then I'm going to go to a different casino and sit down at a table in there and then I'm gonna play there against completed. And you have to lose the pride of wanting to beat that guy. And you have to let go of the anger of what happened and you have to forgive yourself and you have, you have to have a show. You have to be like a goldfish. It always comes back to Ted Lasso.”

* [00:50:00]: What are specific best practices? Are these idiosyncratic or are there universal themes?

* “I break all this stuff down into kind of three categories: ritual, rhythm and distance.”

* Sleep, diet, exercise

* “I really like lifting. I find that for me, personally, lifting heavy weights makes me feel much better. It's what I call a Keystone behavior. I always look for behaviors where if I do this one thing, the probability of my other behaviors being good increases. So if I lift heavy weights, even if I go on for 20 minutes, I sleep much better. I feel much better just walking around. You know, it improves my hormones and things like that. According to my blood tests it makes me want to eat healthier things

So it's kind of addictive in a good way there. So if you can find something like that, that kind of is a Keystone behavior that sort of holds all the other good behaviors in place.”

* “Exercise is good. And specifically anything that’s elevating your heart rate for a period of time, especially when you're very stressed. I think if you've been in markets, you've been in the PM seat, you've felt the, as a Matthew McConaughey put it in Wolf of Wall Street, the above the neck mustard s**t where it just you're sitting in a desk and nothing's happening and you feel your entire body's like feels compressed intense and it's almost like a heat throughout your body where you just feel very uncomfortable and nothing's happened. And it's just the stress building up of your brain, responding to all these stimuli. And the only way I've found to just short-circuit that is to go, just hop on an elliptical or whatever, and just get your heart rate up to, I don't know, 130, 150, whatever your level is for your age and health and whatnot. You know, for 15 or 20 minutes and it is amazing. Like, there'll be, you'll put on some music. You like, you just sit there, retarded, put an audio book, whatever, 20 minutes and your emotional state will completely reset. And it's a superpower.”

* “Rhythm is how all these things are mixing together and you should be able to notice, like we track every product, every he's working on what people are doing, and you can kind of see when things are humming.

What you notice when you have a significant market drawdown or some other problem is you'll notice the rhythm of the firm become disrupted. And so we can see that and you can see that in email traffic, you can see it in like the messages people are sending around. You can see it and how people are posting updates on their ideas, things like that. Like you can, you can also just feel it like, and the other thing is, as a leader of a firm, if you're not in a good place, your ability to sort of feel the force in your own firm is diminished.”

* “There’s this concept in grappling or boxing or any like martial arts of distance.”

* “There's kind of a metaphor or something there about, you know, when you're really engaged with an individual project or when somebody is really obsessed with one particular problem, that same thing happens where it starts to, you know, it's kind of you stare into the abyss and the abyss stares into you. Where it starts to dominate that person's mind and all of a sudden they become blind to everything else. And then their, their flexibility decline similar to being in a clench in a, in a combat sport. Versus, you know, if you're the coach standing on the sideline of the ring, you look at the guy and you go, obviously he just needs to step to the left and he could just do this movement win. But the guy in the, in as close to it can't see. And it's not just that you literally can't have the perception, but it's also that your body and your mind are adapting to that closeness.”

* “When that when you have a crisis or you have some crazy thing that goes down, there's a lot of people who make money in the crisis, or maybe immediately after. And then they're just kind of different people. And after that, and they can't adapt anymore, like, they've become so hardened by this extreme stress. Like a lot of people I think disrespect it and they say, oh, that guy's stupid. Or he can't adapt. It's not what happened. What happened is these, these guys neurologically went through something that most people can't even conceive of.

And you know, it doesn't mean their decision making was correct or a wrong, but you know, what, what happens to their body and their minds going through? I mean, I can't imagine being somebody who shorted the housing bubble in size, who was being ridiculed for three years like that is, you know, so terrible from a neurological standpoint.”

* “Where you are today is irrelevant. The only thing that matters is the change. The rate of change over time, you cannot control where you are today because that already, right now already have. So only you have to focus on is just, you have to immediately make the changes so that tomorrow is better and tomorrow is better and so on. And once you start inserting the ritual you can start to build a rhythm around it. And once you build a rhythm around it, then you can start to look at, okay, how are we monitoring the distance and the team.”

* “And so the goal, this is another money game line is the goal of investing under stress is serenity. The goal is if, if you can, in times of extreme stress, get your life to be mundane. That's a victory. That's perfection. That's where we're going.”

Enjoyed this piece? Please let me know by hitting the ❤ button. It makes my day to see whether my readers like the content (it really does!) Thank you!

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A number of great investors have commented or hinted at the mental and physical strain from a combination of market volatility and personal or business issues. Many retired because they were simply too exhausted and burned out to continue.

You can find detailed show notes, examples, and a transcript on my substack - neckar.substack.com.

"The goal of investing under stress is serenity. If you can, in times of extreme stress, get your life to be mundane that's a victory."

"You'll hear a lot of managers say, Hey, I bought the market in the financial crisis, but they're probably not going to get on TV and say, and I threw up in the trashcan for it.”

"When things go wrong, you're short a put on your own time.”

"Think about it like a team, like a sports team. We need to have players who can execute plays at all times. And in order to have people who can execute plays at all times, some people have to have some Gatorade on the bench and let's just accept that and engineer around it.”

[00:01:00]: Introduction. Why is resilience important?

[00:07:00]: Where to find good advice? How to broach the subject?

[00:20:00]: What are the different dimensions in which this matters (i.e. individual vs. team)?

[00:37:00]: Which non-investment areas offer useful insights?

[00:50:00]: What are specific best practices? Are these idiosyncratic or are there universal themes?

Another week has gone by and the war in Ukraine continues. It feels self-indulgent to even write about investing from the comfort of a safe and warm home. Last weekend, I went to Washington Square Park to a demonstration. It wasn’t as big a crowd as I had expected. Some Ukrainian friends went to Washington DC. Many more are active on Instagram, venting their anger, sharing their fears, and raising donations.

As I experience the war through the “reality tunnel” of social media, I constantly have to remind myself that that the sheer quantity of attention-grabbing information is not equivalent to getting a high quality picture. It’s Kahneman’s “what you see is all there is” bias (or availability heuristic?). If my Twitter feed is filled with follies and fumbles by the Russian military (like busted tires, columns stuck in the mud or out of fuel, abandoned vehicles being lit on fire, even the paratroopers not living up to expectations), and yet they’re advancing, then I’m probably getting a biased picture.

We’re witnessing what it’s like to disconnect a modern economy from the rest of the world. Garry Kasparov called it the “technological stone age.” Axios had a list of companies withdrawing and the number of global brands participating seems unprecedented? You can find anecdotal evidence of the impact all over Twitter (helpful thread). For example: without Apple Pay and Google Pay you need cash and paper tickets.

Marc Rubinstein wrote about the ongoing financial warfare: “as a means of inflicting economic pain, targeting the banking system is a good place to aim. The world learned that accidentally during the global financial crisis, and many European countries learned it again several years later.” With payment flows disconnected and trading on Moscow’s exchange halted, Russian stocks crashed in London. There was an offer for Sberbank at stock at literally $0.00. Though I started getting confused when I saw the steep sell-off in Russian energy names.

I was also astonished to discover that I own some 150 shares of Yandex in my personal account. As I looked at the stock, its price frozen, I faintly remembered thoughts like “oh, the Google of Russia, probably oversold, and surely Putin wouldn’t risk his economy on some absurd 20th century invasion.” It’s the kind of braindead trade - no, strike that, mindless gamble - that I unfortunately do from time to time. It was also a mistake that my mind apparently quickly dumped into the memory hole to protect my self image.. Talk about someone studying experts only to act like a complete amateur. It is my hope that by writing about it - by creating a kind of public shaming - I will finally rid myself of this behavior. And I will let Peter Lynch remind us all why compulsive bottom-fishing is treacherous:

I was still confused about the price action in Russian stocks and the Russian ETF, RSX, which seemed to trade at a big premium to its NAV. I turned to Dave Nadig (Chief Investment Officer and Director of Research at ETF Trends) who has written about exactly this issue (and who also appeared on Infinite Loops).

I hope you enjoy our brief conversation around this topic. For more context and charts check out Dave’s writing and Twitter feed (Eric Balchunas is also good and of course Matt Levine has written about the issue as well).

A few key takeaways:

* There’s precedent in an ETF’s liquid underlying assets turning illiquid (or a permanent liquidity mismatch such as with junk bonds). The local stock exchange being closed is merely a special case. However, there are few precedents for the uncertainty around Russia given the small number of modern pariah states - think Iran, Cuba, North Korea.

* Stock prices collapsing has a lot to do with the uncertainty around the status of the depositary receipts traded abroad. Gazprom’s assets are valuable. It’s equity is probably valuable. But depositary receipts owned by foreigners may or may not be valuable in the future. As Mark Gutman put it: “The value of a piece of paper that gives you rights to nothing is zero.”

* With the underlying market closed, the ETF becomes a proxy for price discovery. But once the creation of new shares is suspended, it becomes disconnected from the value of the underlying, essentially like a close-end fund that can trade at a premium or discount to NAV.

* The removal of Russian shares from emerging market indices (and therefore ETFs) at a price “at a price that is effectively zero” was particularly puzzling to me and Dave walked me through the process. Personally, I think these have at least some option value and it’s going to be interesting to see if at some point in the future we’ll hear about a creative trade.

Meanwhile, Russian traders are left with what the Germans call Galgenhumor or gallows humor:

“Dear stock market, you were close to us, you were interesting, rest in peace dear comrade.”

Personally, I’m encouraged to see that the West is getting serious chasing down the oligarchs. Even Germany seized a $600 million yacht. (Although I’m not quite sure about the legal backdrop of seizing private property of people loosely affiliated with a hostile regime? If someone has a good background piece, I’d be interested). My hope is that pressure on Russia’s elite could become Putin’s undoing (and I could really use more hope when some people are talking about a 10 percent chance of the world ending).

Still, it’s worth considering the long-term implications and downside of economic warfare. Russia is going to move closer to China (worst case: a nuclear-armed vassal state?). The world will experience more sustained inflation in energy and food. And it saddens me to think that there are likely a great many people in Russia who don’t support the war but can’t risk jail or beatings to protest. Who will be fed propaganda and be censored in their speech. Feelings of hostility and bitterness among average people will get entrenched as the hearts harden.

Men in my family fought and died in the German armed forces during WW2. My surviving grandparents, now in their late 80s, were children when the war ended and vividly remember the bombings, artillery shelling, and tense final days of fighting and surrender. These memories never leave. It’s haunting to think that new ones much like them are being created as I write this. I hope this will be the last time I write about the war, but I doubt it.

Stanley Druckenmiller interview with The Hustle in 2021:

On the biggest risks to the equity market:

Stanley Druckenmiller: Without a doubt: inflation strong enough that the Fed responds to it. No doubt about it. This bubble has gone long enough and it’s extended enough that the minute they start tightening, the equity market should go down a lot. 

Particularly with so much of the cap weighted in growth stocks, which would be hit the worst. And our central case is that inflation occurs, but we’re open-minded to something like ‘07-’08 when you never really got to the inflation because the bubble popped. So, inflation never got to the manifestation stage. 

This week

* Letters: Dan McMurtrie on regime change

* War Trades

* Pod: Eric Mandelblatt of Soroban

* Twitter Snacks: Greenblatt, Buffett, Steinberg, Paul Tudor Jones, James Clear

Disclaimer: I write for entertainment purposes only. This is not investment advice. I am are not your fiduciary or advisor. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions.

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Letters: Dan McMurtrie of Tyro Capital on regime change

I was planning to highlight the backlog of letters and write-ups this week. In the interest of time I’m going to excerpt just one. Also, be sure to check Dan’s recent podcast.

“After seeing government responses to COVID in 2020, markets began to price in (1) unlimited and (2) effective support from both (1) monetary and (2) fiscal policy. Astronomically high multiples could be mathematically justified under those assumptions, particularly given the demonstrated willingness to directly fund consumer spending under adverse circumstances. … But with inflation rearing its head, those things are off the table, and the market has to price in a massive, top-down regime shift so long as that is the case.

Regime shifts are rarely smooth, as market participants (many of whom are leveraged) are forced to rotate their portfolios and recalibrate to different market and policy conditions.

This is difficult psychologically and mechanically – when is the last time a current portfolio manager had to deal with a serious bout of inflation?

The lack of policy optionality as well as private sector response capability – both of which were able to handle severe risks during 2020 – means the potential severity of both known and unknown risks in the future is amplified. Thus, there is relatively less margin for error in the world right now, and the result is a repricing of assets to reflect that. We think this makes sense. No one wants to be punched in the face, but it is a far more serious matter if your blood cannot clot.”

War Trades

We’re trained to think of the stock market as long-term wealth compounding machine. All we have to do is endure an occasional bear market. But war and regime change can destroy an enormous amount of wealth. Source: Credit Suisse Global Investment Returns Yearbook 2015

War and political upheaval also occasionally lead to unique trades. I collected a few examples in this thread, from Templeton to Baruch, Keynes, and Rothschild. If you know of other examples, would love a comment or email/DM.

Pod: Eric Mandelblatt of Soroban

On Invest Like the Best (my notes on Twitter)

This was recorded before the invasion of Ukraine and the spikes in many commodities and related stocks. It’s a very engaging deep dive that connects the big theme of decarbonization with existing structural imbalances and an analysis (or pitch) of specific businesses - US railroads and Alcoa. Could this episode simultaneously be an indicator of a long-term opportunity and a short-term signal for caution? We’re a long way from late 2020, when investors didn’t want to touch energy and materials with a ten foot pole.

“The royalty company sitting on top of this resurgence of industrial production ... the picks and shovels way to get leverage is the US railroads. … What are the businesses we'd be comfortable buying a 100-year bond from? Because it's almost the definition of incumbency, barriers to entry longevity. The railroads are my number one. They have 100-year bonds that yield 4% today.”

“Almost every market we're looking at is in deep structural undersupply. In some commodities we're seeing spiking demand. It's a backdrop I've never witnessed during my career.”

Twitter Snacks

Buffett in 2010 on Pricing Power (Financial Crisis Inquiry Commission)

“The single-most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference.”

The example was Moody’s:

“They have done very well in terms of huge returns on tangible assets, almost infinite. And they have –- they have grown along with the business that generally the capital markets became more active and all that. So in the end –- and then raised prices –- we’re both — we’re a customer of Moody’s, too, so I see this from both sides, and -– we’re an unwilling customer, but we’re a customer nevertheless. And what I see as a customer is reflected in what’s happened in their financial record.”

Interestingly, when asked about management he punted, explaining that outstanding management was not necessary to make this a great investment.

“I knew nothing about the management of Moody’s. The –- I’ve also said many times in reports and elsewhere that when a management with reputation for brilliance gets hooked up with a business with a reputation for bad economics, it’s the reputation of the business that remains intact.

If you’ve got a good enough business, if you have a monopoly newspaper, if you have a network television station — I’m talking of the past — you know, your idiot nephew could run it. And if you’ve got a really good business, it doesn’t make any difference. I mean, it makes some difference maybe in capital allocation or something of the sort, but the extraordinary business does not require good management.”

But notice that he quickly corrected himself: “I’m talking of the past.”

Speaking of Buffett: thread with lessons from 50 years of shareholder letters.

How to navigate big regime shifts like Paul Tudor Jones? “Don’t be a hero. Don’t have an ego.”

Remember your competition (via Ian Cassel):

This one hit home. I have an issue with clutter and letting go. I look around and there are too many stacks of books, piles of notes, and long lists of what I want to do. It becomes a distraction from being fully present and focusing on one important thing right now.

“Look around your environment. Rather than seeing items as objects, see them as magnets for your attention. Each object gently pulls a certain amount of your attention toward it. Whenever you discard something, the tug of that object is released. You get some attention back.”

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“For better or worse we’re a herd leader. We’re at the front of the pack. We're one of the first movers. First movers are interesting; you get to the good grass first, or sometimes the lion eats you."

"In the outside world, I’m that easygoing person. But if I’m on the field, I wanna win. And we win a lot.”

Sections:

• Growing up in Pittsburgh


• Republic Steel


• The Goldman Setback


• The Horse Leaves the Barn


• Emerging Market Adventures


• Dotcom Distress


• The Delphi Distraction


• The Crisis Hits


• Inflection


• Epilogue

Lessons:

• Don’t do it for money alone.


• Lazy competitive.


• Be smart enough to get lucky.


• Find your own style.


• Ahead of the herd.


• But don't bet the firm.


• Bouncing back in life and markets.


• Unemotional under pressure.


• Staying nimble.


• Optimists win in the long run.


• Keep having fun.

Today I’m joined by my dear friend Tom Morgan for a wide-ranging conversation around finding flow, recognizing resonance, the idea of moloch and slack, prophets and truth in the modern world, embodiment, and connecting mind and heart. Tom is one of my favorite writers and idea synthesizers. You can find his work at the KCP Group and on Twitter.

It was a deeply personal conversation because I struggle with a lot of these questions as I’m trying to navigate this new stage of my life. You can tell from the way I wrestled to formulate some of the questions. So, don’t hold it against Tom that we spent a lot of time on ideas such as following your curiosity, being vulnerable, and navigating personal crises.

I hope you find the conversation as interesting as I did. Tom managed to articulate his mission in life towards the end. So it was definitely worth it.

Listen to this episode on: Spotify, Apple, at anchor, via RSS.

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A few of my favorite quotes:

The tension between following your curiosity and the friction of giving up your position:

* “I've noticed that when people stop getting interested in things, it is a signal that there's no more growth left for them in a topic, and they need to move on either professionally or personally onto a different thing. But because the frictions are so great, particularly in finance, people cannot move to a different thing. But your interests and what you're gripped by, and what you're passionate about are much more significant in terms of directing your future growth.”

Find the intersection of what you’re uniquely good at and what the world needs:

* “It's about what you can do plus what the world needs. And you, you can't neglect either of those things because it's a conversation, right? Your flow with the world, you have to be open to feedback from the world.”

The obsession with finding meaning in work:

* “This ruined my life. This whole idea ruined my life decisively for very many years. …. I left Wall Street in I think 2017, started my crisis. And I said that for my second act, it needed to be something meaningful. … All of it was based on what I wanted to do, which was help people in stuck spots. … But every time I tried to do something, the door would slam shut in a really like devastating way. Things would not work out for me. And I was also not intrinsically interested in any of these avenues. I was just telling myself I was because they were meaningful. So I was saying, this is meaningful because obviously it's meaningful to be a social worker, but it wasn't actually interesting. … And it was only when after a series of like catastrophic failures, so massive, massive depression, that I basically gave up and started just doing things for intrinsic benefit and intrinsic pleasure that my employers found me and this role found me in the last year of my life has been an expressively fun, challenging.”

Leaving the local peak of a fitness landscape to (maybe) find your way to a higher one:

* “The point of any organism is to get to the highest global peak. But what happens is you can get to the top of a smaller peak and then get stuck there repeating the same behavior. And so what you then have to do is go back down into a valley so that you can explore an adjacent and potentially higher peak. What takes you back down is never going to be rationality, and it's never going to be competitive and competitiveness. It's never going to be anything that took you up to the top. It's going to have to be something radically different, which is why all turning points work irrational, and all or moves involve the sacrifice of something that was very important to you getting up there, most often money or prestige or status. All of the things that are holding you in a typically the stuff that got you up to the top.”

The modern predator’s tools are language and abstraction:

* “The thing about voices that is very interesting is the conceptualization from McGilchrist that the left hemisphere has language. And sexy language, right? Good syntax, really articulate words. And because those are the things that we use to manipulate the world, like a predator, the predators tools in the modern era are language, right? Because it gives us power. Conceptualization, abstractions, give us power. And you know, the bargain you make to moloch, who is the Canaanite got of child sacrifices, throw whatever whatever you value most onto the furnace and I will grant you power. And whatever you value most often is, your time, right? You will sit there in an office dying in return for your salary, right? And it, that literally is the sacrifice that you choose to make. But that voice often is very loud and incredibly rational and persuasive and articulate.”

Rough transcript.

Show Notes:

* [00:01:00] – [First question] – Integrating wisdom from successful investors.

* "Gurus and Pickleball."

* “You watch the whole like information sphere discard that person because they got into a topic that was unacceptable or they did something that was unacceptable and they just basically get wholesale canceled. And whenever I see that now, I'm just like, oh, you're not exercising discernment. You don't have enough self-confidence to say. There's something in here that's valuable and there's something in here that's idiotic. And I'm actually able to determine what those things are. And I don't need someone else to tell me what that is because, you know, as we both know on Wall Street, negativity sells better and sound smarter.”

* [00:04:00] Believability and understanding what makes people successful.

* “A lesson I wish I’d learned much earlier in life is that a lot of people are not always believable in the same domains that they think they are.” "Articulate & Incompetent."

* “You get into this really weird situation where the luck skill continuum and the ability to give retroactive explanations gets blended and I guess results are the ultimate arbiter, but I think it's one of the great problems in investing.”

* [00:07:00] Tom’s background

* [00:10:00] Finding resonance, how to decide what ideas to pursue.

* Iain McGilchrist: The Matter With Things

* “Our exploratory attention is a better guide of our future growth than our narrow attention. I was in Newark Airport in the security line. And I heard this podcast and the speaker just says, Carl Jung, had this idea that your future self directed your interests in the present to guide your growth. And I was like, well, that sounds mental, but it's also kind of interesting. And at least without believing sort of the present and future aspect to it, it is fairly well known that your right hemisphere is taking in about a million times more information, maybe a trillion times more information than your left hemisphere. It directs your attention towards what you should be paying attention to next. And I believe that we feel the direction that we should be going in next as resonance.

* “If you regard the information landscape as sort of this three-dimensional field around us, we should be navigating that gradient based on how interested we are in topics around us. … One thing that becomes directly relevant to people in finance is that in my own experience and subsequently, I've noticed that when people stop getting interested in things, it is signaled that there's no more growth left for them in a topic, and they need to move on either professionally or personally onto a different thing. But because the frictions are so great, particularly in finance, people cannot move to a different thing, but your interests and what you're gripped by, and what you're passionate about are much more significant in terms of directing your future growth. And so that's like, that's almost a meta comment because that's, that idea was resonant to me. And also it has directed my future growth in a lot of very strange ways.”

* [00:15:00] Moloch and slack, motivations.

* Meditations on Moloch

* “Anytime you target something implicit for its own enjoyment, things go really well. Your life unfolds in this beautiful synchronistic way, but everything has to be done for implicit enjoyment.”

* “When you're exactly on your flow, you move at the same speed as the world. So it feels like time is not passing because you're moving at the same speed as the world. If you're out of your flow time, feels like it's grinding, right? … And there's all these really weird accounts of how that feels the most desirable thing is to be like exactly on the center line. And almost everyone knows when they're on the center line because they just have this intrinsic feeling of meaningfulness, which we describe as the flow state.”

* “The Shaman is a guy in a community, you can use, you know, hero, prophet, comedian, visionary entrepreneur for the same time. And it's someone who uses the flow state to go into a different experience outside of their existing paradigm and see something else. The shaman would get themselves into a trance state and they would experience the world from above and it would give them a completely new framing on an issue, but then they could come back and speak to the rest of that tribe in a way that would heal them and reorient them back in the right direction.”

* “The thing that kind of blew me away, because I'd never thought of it this way is people that spend more time in flow are more likely to have insights that allow them to reorient their life in the right direction.

So Vervaeke says like the more time you spend in flow, the more of an insight cascade you have, right? The more insights you have, the better you are at calibrating your life towards that meaningful thing.”

* [00:22:00] Danger of optimizing life for flow.

* Soul (Pixar)

* “Here's the area of lost souls, the people that haven't found meaning in life. But also people that get addicted to flow get lost in here as well. Right? The people that spend all of their time in the zone and it just bliss junkies. Just chasing it. And at the end of the movie, he has this, this peak experience performing jazz, and he walks out and there's Dorothy Williams, this jazz singer, who's recruited him off the street to have his like life-changing moment. And he says, well, what happens next?

And she says, well, we come back and do it tomorrow.”

* [00:26:00] Do you have to find fulfilment and flow in your work (always)?

* “This ruined my life. This whole idea ruined my life decisively for very many years, which was that basically I had an intellectual understanding of all of these things, but my intellectual understanding got in my way

I left Wall Street in I think 2017. Started my crisis. And I said that for my second act, it needed to be something meaningful. … All of it was based on what I wanted to do, which was help people in stuck spots. … But every time I tried to do something. The door would slam shut in a really like devastating way. Things would not work out for me. And I was also not intrinsically interested in any of these avenues. I was just telling myself I was because they were meaningful. So I was saying, this is meaningful because obviously it's meaningful to be a social worker, but it wasn't actually interesting. … And it was only when after a series of like catastrophic failures, so massive, massive depression, that I basically gave up and started just doing things for intrinsic benefit and intrinsic pleasure that my employers found me and this role found me in the last year of my life has been an expressively fun, challenging.”

* [00:30:00] Finding the match between interest and what the world needs.

* “It's about what you can do plus what the world needs. And you, you can't neglect either of those things because it's a, it's a conversation, right? Your flow with the world, you have to be open to feedback from the world.”

* “And that is the biggest conceptualization that I think is missing from Western culture is that requires vulnerability and an openness to feedback, but also an awareness to the synchronicities and coincidences that are going to show you that you're going in the right direction.”

* “The way that I see my niche, which is still evolving. And I don't think I've mastered it, is sort of finding perennial concepts and relating them back to investing, you know, building this Trojan horse from rationality to spirituality.”

* [00:35:00] Finding important ideas that recur across domains and selling research to hedge funds.

* “You get 50 to a hundred emails every morning from your analyst team.

And then you have to call your clients and relay the most important insights from those 50 or a hundred emails, knowing that everyone else on the street is doing the same thing at the same time. So it has to be relevant to your clients. It has to be what the world needs, right? Like it is sort of weirdly it's coming to me now. It is kind of this Taoists combination, right? It has to be what they need and it has to be what you're interested in.”

* “And then after the crisis I'd moved to sort of a more synthesis stage. Get all the ingredients that I've assembled from my career to date and from inhaling the internet. And I'm trying to synthesize them all into something that communicates something of reasonably lasting value.

Because if you're just talking about market moves that week, that's a massively commoditized piece of information that I'm not very good at it. So it's sort of leaning into what I felt I was good at, which was pattern recognition, but all pattern recognition is fundamentally creative.”

* “The act of synthesis is fundamentally creative. You're bringing something new into the world that was not there before, because it's a completely new combination of ideas and the world will respond to that if it's useful.”

* [00:39:00] Identifying high-ROI information.

* “The best sales situation is when you're selling something, you know, is true, you know, your client needs and you know, will add value to them. Then it is the best job in the world because your conscious and your unconscious are aligned. The worst job in the world is when you have no alignment with what yourself. You know, the other person doesn't want it, you're completely out of integrity and it will eat your soul.”

* “So when I heard the analyst speak and I knew what the analysts was saying was true or likely to be profitable or wildly different from what everyone else was saying in the market. I had enough reps that I could pick that up and communicate it. And I'm not saying it was right. I'm not even saying it was always true. It just has a higher return than other things.”

* [00:42:00] Recognizing when someone is in resonance.

* “If you lie there’s this momentary, microscopic dissonance either in your voice or in the way that you're behaving with other people. And by contrast, when someone is completely embodied, you can just hear it.”

* “There's this crazy idea that when you're hearing a prophet or a shaman speak the truth to you, it snaps you back to that frequency, right?

It snaps you back to the truth rapidly and that can heal you. And that's something that Joseph Campbell talked about that took me years to understand, which was that myths were there to harmonize the mind and body, which could, you could see this as the left and right hemisphere.

And it's this really weird idea that I couldn't contextualize for a really, really long time, but it's basically this idea that if you, if you're told a story that reflects the outside world or reflects your own reality accurately, it brings you back into harmony with the outside world. And we can get stuck off in our heads in all these abstract concepts that have no bearing towards the truth. And we can tell ourselves stories about ourselves that aren't true at all. And it takes someone coming back to us and telling us the truth, however unpalatable that is, that will snap us back to that frequency.”

* [00:47:00] Where to find mechanisms for truth.

* “I think a lot of us do not have harmonious relationships between our heads and our heart. And often I think of the distance between our head and our heart as the mile of crap that Andy Dufresne has to swim through in the Shawshank redemption, it's all our traumas, all of our protections, all the things that prevent us from seeing the world clearly.

But every time I see like a massive debate. Like spring up around cancellation of people or misinformation or disinformation. All I think of is that this would not be a problem if most people would, were much more grounded in their own bodies and able to determine for themselves what they felt was true.”

* [00:52:00] Finding aha moments.

* “For me, the boundary period between waking and sleeping. So at night I had no productivity at all, but what I do is I now assemble the ingredients. I'm like, here are the things that I would like answers to.

And I think it was Edison who said, never go to sleep without a request to your unconscious. And then I'll wake up in the morning, often, incredibly annoying the earlier like 5:00 AM and have a bunch of solutions, all of which seem completely obvious at the same time. And so there are things that you can kind of program.”

* “But the, the irony of slack and the Greeks called is Kronos time and Kairos time and Kronos time is moloch, which also, ironically is the other name for moloch in these traditions, Saturn, Kronos and Moloch, they've all been equivalently the same God, the God of time. And then there's Kairos time, which is sort of the inspiration time, which you just can't control when it comes. You can create the kind of circumstances where it shows up, but you can't force it to show up. Cause it just, it just doesn't play by the same rules.”

* “And the thing that I think is, is most neglected in our circle and really is I think really quite important is the idea that nothing, nothing will emerge into a space that's full, nothing grows into a space, nothing. You know, if the womb is full, a baby will not grow into it. Right. But that space is often created by a breakage, by a vulnerability. And a lot of people who I talk, I tell about my story. They're like, wow, you lived through, you know, two years of constant suicidal ideation. You must be so resilient now. And I'm like, absolutely not. I am not resilient at all. I am much more vulnerable than I ever was and I feel the world much more keenly than I ever did.”

* “And I think a big reason for my crisis was having a son, something I haven't contextualized. Right. But when you have a child, you make a bargain in that your life is going to be destroyed if that child, that child dies right. You, you, will, you will mourn that child with the same intensity with which he loved them. You create a spot of vulnerability in yourself that would actually ruin your life. Right. And that, that is the shadow side of the love that you feel for that person. And so like, when you think about the slack in your day, that slack has to include some kind of conception of vulnerability.”

* [00:58:00] Vulnerability and authenticity on the internet.

* [01:01:00] Dealing with envy (but poorly articulated). Opening yourself to feedback.

* “When you're chasing something intrinsic, you'll never get bored of it because you're on the path. You'll never get bored and you'll get rewarded for it one way or another. But again, like it's the nuance that it has to be something that the world needs, right? Like if I was, if there were no constraints on my process, every article I wrote, I wrote would be like a million times more pretentious even than what I write now.”

* [01:05:00] Finding role models, being discerning.

* “That is again the same principle, which is that you never, ever, ever, ever worship the prophet. Right. Think about all the times that human has put themselves at the apex of a system and how utterly catastrophic it's been almost every single time.”

* “Think about your, your own parents, right? You go through this stage of like unquestionable adulation. Then when you're a teenager, you're like, oh my God, they're the dumbest people in the world. And then you just learn to integrate the best and worst of them.”

* [01:08:00] How does Tom think about his own mission?

* “I woke up two days ago and realized what I wanted to do in my life. And I think this wonderful poem from David Whyte where talks about like the, the point where you meet the world is actually pretty small.

And most people get blinded by the fact that it's pretty large and they got an infinite number of options. But the thing that you can do, that's uniquely yours, that the world needs is actually a pretty small point. You just need to find it. And I say, just finding it's like the hardest thing in the world.”

* “Because often it just, it involves destroying yourself to find it right. Oh, he's destroying the ego, right? Letting that unconscious charisma flow through, you often have to get the ego out of the way and it kills you. Right? At least that was certainly my experience. Right. What I want to do with my life is help people out of moloch into slack. Help people out of stuck places and into a different stage where they can get themselves out. Because I saw the wasted human potential. I saw from people at the top of their fitness landscape, just going around in infinite loops that couldn't get themselves out because they didn't know how to trust and trust their hearts effectively.”

* “You actually realize that is sort of the meaning of life, which has helped help people find their way out of this kind of egoic, very abstracted form of existence into something where they can finally co-create and I believe that's the purpose of every human life. And in fact that is right-left-right. So right left right, certainly McGilchrist thinks that you take information in from the outside world on the right hemisphere. You cut it up into categories on the left, and then you place it back into its global context with the right hemisphere again. So he says, you listen to a piece of music, you learn the notes and then you play it creatively and intuitively that's literally how you learn anything. That's the definition of intuition. You take, you attend 3000 management meetings. You unconsciously work out where all the patterns are. And then you gain this intuitive ability to determine what's true when you're interacting with another person, but it's also in this sort of weird fractal sense, the trajectory of a human life that we go through this stage, where we're uncritically in the farmers' children, we're completely in the moment.”

* [01:13:00] Leaving the local peak of a fitness landscape is scary as hell.

* “What happens when you're at the top of the landscape, but as it did for me was your unconscious starts to give you signals. You want to get out, but because our culture disregards them. And because of the terror that involves, I started getting all these psychosomatic illnesses that were unsolvable, but then the reason why they were unsolvable was because I needed to actually move. Right. Like I needed to move away from the thing that was stressing me. What it was is often listening to a couple of things and reading a couple of things that, cause that tiny little mind fracture where you're like, ah, s**t, that's true. And that's true and it's gonna, and it's gonna break something open and when you hear it, you follow it because you just know it's true.”

* “The point of any organism is to get to the highest global peak. But what happens is you can get to the top of a smaller peak and then get stuck there repeating the same behavior. And so what you then have to do is go back down into a valley so that you can explore an adjacent and potentially higher peak. But the problem is you can tell is, is if it's moloch, that takes you up to the top of the peak, the evolution of cooperation that we understand as you know, nature red in tooth and claw.

What takes you back down is never going to be rationality, and it's never going to be competitive and competitiveness. It's never going to be anything that took you up to the top. It's going to have to be something radically different, which is why all turning points work irrational, and all or moves involve the sacrifice of something that was very important to you getting up there most often money, right? Or prestige or status. Right? All of the things that are holding you in a typically the stuff that got you up to the top.”

* “You turn into sort of this unformed human being that, hates himself, and everyone hates with the dead soulless eyes. Or you sacrifice everything and take enormous risks and risks, but it actually doesn't work out, but to explore the adjacent possible, right. And to follow the voice that's telling you that it's time to move.”

* “The thing about voices that is very interesting is the conceptualization from McGilchrist that the left hemisphere has language. And sexy language, right? Good syntax, really articulate words. And because those are the things that we use to manipulate the world, like a predator, the predators tools in the modern era are language, right? Because it gives us power which is really interesting. Conceptualization abstractions, give us power, abstractions of moloch. And you know, the bargain you make to moloch, who is the Canaanite god of child sacrifices, throw whatever you want on there, through whatever you value most onto the furnace and I will grant you power. And whatever you value most often is, your time, right? You will sit there in an office dying in return for your salary, right? And it, that literally is the sacrifice that you choose to make. But that voice often is very loud and incredibly rational and persuasive and articulate.”

* “You have this conceptualization of the voice of conscience, which often is like a physical sensation because your right-hand spirit is also connected to your heart center and is connected to your body in a different way. And then you'll start to get signals from your body and this tiny little voice that nags at you being like you're in the wrong place, you're in the wrong place. It's very easy for the, for the voice, with a million times less information to be like, here are these incredibly well-rehearsed rationalizations for why you should, why you should not do that, which is another reason why these slack practices are useful, because anything that puts you in your body gives you a, just a higher probability of getting clear signals.”

Enjoyed this piece? Please let me know by hitting the ❤ button. It makes my day to see whether my readers like the content (it really does!) Thank you!

If you enjoy my work, please consider sharing it with friends who might be interested.🙏

It was a deeply personal conversation because I struggle with a lot of these questions as I’m trying to navigate this new stage of my life. You can tell from the way I struggled to formulate some of the questions. So, don’t hold it against Tom that we spent a lot of time on ideas such as following your curiosity, being vulnerable, and navigating personal crises.

I hope you find the conversation as interesting as I did. Tom managed to articulate his mission in life towards the end. So it was definitely worth it.

You can find full show notes on my substack.

I’m very excited to share my conversation with Rob Wertheimer of Melius Research and one of the co-authors of Lessons from the Titans (my notes)

I really enjoyed digging into the book’s big themes around the culture and business systems of some of the most successful industrial companies. Rob shared his lessons on finding other compounders, evaluating leaders, digging into incentive structures, touring factories, and the best research note he ever wrote - but never published.

I hope you’ll enjoy this conversation as much as I did!

Rob is a Founding Partner, Director of Research, and the lead research analyst for the global machinery sector with additional coverage responsibilities in industrial tech. Rob was the lead machinery analyst at Barclays, Vertical Research, and Morgan Stanley, and began his career in the Peace Corps in Niger, West Africa.

Listen to this episode on:

* Spotify

* Apple

* RSS

* And at anchor.

I also have a very rough transcript for this one.

Disclaimer: this podcast is for entertainment purposes only and not investment advice. It does not constitute an offer to sell or the solicitation of an offer to buy any securities mentioned or discussed. Seek your own financial, tax, legal, accounting, or other advisor’s advice before making any investment decisions. Do you own work. I am are not your fiduciary or advisor.

Today's post is sponsored by Tegus. Tegus is an on-demand digital research platform on which investors share their expert calls. Their library currently has some 23,000+ calls covering many public and private companies and it's growing every day. It's a beautiful business model (I wish I was an investor!) and I could see it scaling up to cover any company and industry you can imagine. I think of it as being able to tap into a library of conversations between industry insiders. I'd encourage you to check it out - they offer free trials.

Show Notes:

* [Minute 1] Question: Background on Melius.

* [2] Question: Key themes/takeaways from the book.

* “The reasons for failure and the formulas for success haven’t really changed at all. Whether it be 1950, 1980, or 2020, they are pretty much exactly the same.”

* “The truth is that their secrets are hardly secrets at all—continuous improvement, rigorous benchmarking, disciplined investment, principled leadership, solid business systems

* [3] Question: Assessing culture as an outsider.

* “Does it drive your daily actions?”

* “Danaher or Ingersoll Rand they'll do weekly meetings where you have a weekly meeting, you have like 20 minutes, you get two minutes to state your problem a minute to ask for feedback, you move on. That's an example of a daily or a weekly feedback loop that comes around. I think the best cultures have that sort of process ingrained in them.”

* [5] Question: Importance of leadership.

* “You make either a good allocation to capital or poor ones. And obviously that drives a ton of shareholder value differentiation, but there's also need for sustained commitment to a system. You can see lots of management teams that have sort of laid out goals, but if you don't get everybody motivated and incentivized the right way, then they can fade away.”

* [6] Question: what are you paying attention to to see whether culture is changing or whether the arrogance is creeping in?

* “The value gets created everyday throughout. And so, you know, if you have a culture that's spending too much time on big ideas and not enough time on generating the cash that, that allows you the flexibility to do things, if you have a culture that's veered into being a little bit PowerPoint-focused, if it's projecting yourself internally focused as opposed to executing on the daily task that can be a real red flag.”

* [9] Question: Have you seen aspects of great culture that are universal or is it very specific to the company? How much room is there for bringing in ideas from the outside?

* “Having clear goals, having reinforcement loops and having the ability to course correct is universal. One of the points we try to make in the book, a lot of these companies have been innovative and a lot of companies have created categories. How do you analyze caterpillar? Well, I don't look at them as the best bulldozer, and they do, but, but they might not have the best in everything. The competitive advantage doesn't always last on innovation, but it does last on getting everything, fixed, getting everything right.”

* [11] Question: “Undisciplined operations don’t work” - elaborate on this.

* “What do you look for when you go in a factory? Well, it's not actually all that hard. You walk into the factory, you see if the sight lines are clear, if there's a bunch of inventory stacked up and piled up there, that's something wrong.

That's waste. That's confusion. That's a disruption. You look to see that there an employee sort of idea board, and that there's lots of ideas flowing through because workers are the ones who see problems and they surface them. Right? So that's a mechanism for surfacing problems.”

* “I went to a mining facility once, and they're these little disks that were used for smoothing or buffing the metal. And they just did a simple thing, a shadow board. It's called you paint on a, you know, on a cardboard wall. Like here's a picture of the disc. So when you're done with it, you stack it here. They found like 70 of these things, you know, they found like a million dollars of equipment. There's a picture of the broom there to hang the broom up. Right. So very, very simple things.”

* “The essence of lean is stop and fix, get things, right. Surface problems. And that's a factory floor issue. But as we kind of talked about earlier, that applies to the whole company as well. If you see a problem, you can fix it. If you don't see it, then it grows.”

* [15] Question: How do you weight insights from site visit in your assessment of a company?

* “It's critical. And honestly, I missed it. I was a pretty new analyst on Caterpillar. When I saw some of these issues, I think I saw three or four factories in the first year, the first 18 months. And one of these visits I walked down and there's there's bins, just bins of things, labeled rework. I was like, what's rework. Well, it didn't come out right the first time. So we're going to do it again, you know? And, you know what I did, I kept writing about the end markets cause that's what I understood at that time. I kept writing about, oh, I think mining's going to be good or bad. I thought oh, well, this doesn't feel great, but I haven't seen that many factories and probably they'll fix it. And in fact that was a, you know, it was a terrible sign. Caterpillar was struggling with production not with the equipment quality, the equipment still great, but they weren't able to crank up production.

* “That was actually a huge problem, a huge cultural problem, business system problem. And managers and leaders fixed it. But as I mentioned earlier, sometimes Lean takes a while. So if you've got a workforce who isn't used to it, it might take me five years to get the new system in.”

* [17] Question: If it’s so useful why wouldn’t everyone do Lean?

* “One answer to your question is continuous improvement is a compounding process, right? And Danaher is maybe the ultimate example of that, but you fix something that gets better and then you fix something else and it gets better and you keep going.”

* “It takes a very serious commitment from senior management and it takes years, you know, maybe it takes five years to get everything kind of, you know, where everybody knows that their first job is to stop and fix. The first job is to reduce, you know, inefficiency. It can be tempting to say, well, let's just buy a few hundred extra hoses and just have them there, you know?”

* [19] Question: Implementing Lean - like Danaher’s visual management.

* “It's not rocket science, right. But it is hard to do.”

* “Very easy stuff, but in our day-to-day it can be hard to stop and focus on process.”

* [20] Question: Is there a disconnect between analysts and management?

* “You know, my job is a tricky one. You have to be arrogant enough to have an opinion, and humble enough to to know you're probably wrong most of the time, you know, close to half the time.”

* [22] Question: Forecasting volatile markets.

* “A lot of people in this job like thinking about things. So you get a lot of data points. You'd like to think about it. And some of the cultural stuff is harder to think about.”

* “Melius uses two year forward price targets. Partly as a mental trick to try and get yourself to focus. Partly because these things show up more over time, right.”

* “If you're trying to forecast a quarter, okay. You can say, well, what was, you know, what was demand of iPhone shipped this quarter or something.

But if you're trying to focus on how Apple created value over the last 10 years, I mean, it's innovation and supply chain, you know? So those two things, you know then they switch and relative performance as your timeframe goes out longer.”

* [24] Question: What have you observed in terms of what people do well or poorly with, with incentivizing the organization?

* “If you have all your incentives structured around raising margin, that might be a phenomenal thing if you're underperforming, if your margins are low. Let's work on pricing, let's work on factory efficiency and et cetera. Eventually that playbook may come to an end. And if you're a person who's grown up in that system and you step into a leadership role it's hard to say to wall street to say all the analysts, you know what, they, we're just going to stop all that, you know, and we're gonna do something else entirely, right? Because investors invest on a certain expectation of future earnings and anything that changes.”

* John Deere: “Under the current CEO, John May, they basically shifted their strategy. I think with the endorsement of the prior CEO as well, but they had tried to be a global manufacturer who was leading in all sizes of tractors and they started to look around and they said, well, the technology is changing so fast that we can actually create more value by focusing on large, we're going to try and serve all our customers. We're going to focus on investing in large farms where we can do autonomous tractors, or we can do, you know, actually they're, they're doing AI pattern recognition.”

* “One company I follow United Rentals where incentives were a huge portion of the transformation. So they had different branch managers. Let's say, let's say you're a local McDonald's and you're incentivized on beating out the McDonald's down the road. That's kind of crazy. Right. And so, you know, one of the things that, one of the very simple, the powerful changes made it United rentals under a new CEO was let's shift the compensation to focus on regional or district results rather than on your own.”

* “And that's a capital intensive industry. So let's charge people for the capital. You know, if you want to buy 10 more pieces of equipment to rent, [00:27:00] you know, that that's part of your compensation. You have to make a return on that. Bizarrely it had not necessarily been that way before.”

* [29] Question: What metrics to track?

* “Danaher and Roper they do the same thing, a very simple sort of cash return on cash invested. It's simplicity again, right. You know, if you have hundreds of metrics, it's hard to track them. It's hard to know where you're supposed to be doing.”

* [30] Question: Assessing new CEOs.

* “This is one of the great things about being in this industry is you get a chance to meet a lot of different management teams and you'll probably be wrong about many, but you at least have a basis on which to sort of judge.”

* [32] Question: Trade-off of having access to CEOs: gaining insight vs. being subjected to selling.

* [34] Question: Assessing big decisions like M&A.

* “The ones that have gone wrong. And I write about a couple of them, you know, and again, a self-critical way, I thought the mining market would do X and it did Y so if you're basing an acquisition off of that, that can be very challenging.

Versus if you're saying, hey, you know, I took the margins from 7% to 21% because of these processes and this company doesn't have this culture of process. And we can approve them. Then you're making more of a bet on your internal capabilities. So at least in our world that a lot of value has been created by the quote unquote compounders, like Roper like Danaher or like TransDigm. And they're able to use that to make relatively small bets that play to their strengths and they all have different strengths, let's say, but they all have a systematic way of approaching that strength or consistent way of approaching that strength.”

* “If you look at Dave Cote, again at Honeywell, I believe you mentioned in his book that, you know, one of his jobs is try and create enough space for him to just sit and read and think … just finding time because being a CEO is a massively difficult job.”

* [37] Question: Tell me everything you know about compounders, basically.

* “They get their margins flowing, their cashflow going. They have often a fairly diverse set of businesses and they find it relatively easy to find new opportunities where they buy them and they, they run the same playbook again. So you buy a company, the margins are 10% and you bring them up to 20. All of a sudden that's generating cash. And as you do that more and more, your base gets bigger and you can compound it and ever accelerating rate. It's exponential growth. You know, an exponential growth is maybe slow at first and then very, very powerful over time.”

* “I cover a few in Ametek and IDEXX, which do niche, industrial applications, Ingersoll, Rand. I think there's going to be a wonderful compounder over time that has a great system. So it's huge value creation and it's steady and it's repeatable.”

* “And that's part of the idea of the book. We know what happens after innovation matures, you know, fades, it's culture, execution, and some of these things we've been talking about. So the answer is there's amazingly fruitful avenues for capital deployment. Cause not everybody has gotten these lessons and the lessons sounds simple, but they're not easy to execute always consistently.”

* [40] Question: Evaluating compounders early on.

* “There are companies that put up what he called a movie set. You know, it looks like lean. It looks like, you know a functioning system.

And obviously they're trying, it's not meant to be, but it's not there.”

* “You watch those metrics very closely. You see the steadiness, another answer to your question is what's the input, you know, so, you know, what are the daily management processes that you're doing? What are the daily cultural attributes of your company that are, that are there, right?”

* [43] Question: Examples where it doesn’t work?

* “Illinois tool works had a decentralized system. … And in roughly 2006, seven, they had, I think 550 business units. And the idea was, you know, every business units can do a deal every year or every four years or whatever, and we'll compound it in a way, right. … I actually did a note that I didn't publish. That was one of my best notes ever, and I didn't publish it because I went back. I was like, all right, let's show how … each of those little divisions can do a deal every year and how that can drive compounding growth. I did the analysis and it looked like, well, gosh, actually it looks like they do a couple of big deals here and there.”

* [46] Question: Value of CFOs.

* “Sometimes we think a high-quality CFO can be, you know, under-priced in some ways. … we found that the CFO role can be going to be dramatically important.”

* [49] Question: Managing relationships with companies.

* “If you're an analyst and your job is to not just say, okay, that looks good, you know, but to actually create some value. There can be a desire to say something interesting, intriguing, provoking, different, right. To push them. And when that's done best, it's, you know, you're right. But I've spoken of arrogance before. I mean if you're covering Caterpillar and you have toured seven factories, but that's not that many, do you really say their production system is totally hosed? You know, is that right? Would that have been the right call for me?”

* [52] Question: Smooth vs. volatile earnings.

* “The CFO of Danaher's gave us this, the lesson, like, how do you think about volatile business as well? Let's say you buy something and revenues fall 20% and you apply all these fixes and you're, you know, you're applying maybe fixes for a down cycle. It'd be different for a steady business. And eventually you, you know, you get it back up and revenues, bounce back cause they're cyclical. And then now they're at 110% of where they were the effort and the lost time and compounding that you've lost during those two years of down cycle. Versus if it had just grown five percentage and you improve everything and then you've created cashflow and you can compound it. You've lost time and you've lost energy. … I think Warren Buffett has said, I'd rather have a, I don't want to misquote, a volatile 25% return than a steady 10. I think Danaher might say, well, we can do a lot with a steady 10. You know, we can sort of crank that through and compound it, whereas a volatile 20 or a volatile 15 or whatever the break point would be less valuable.”

* [52] Question: Evaluating long-term investments and R&D.

Enjoyed this piece? Please let me know by hitting the ❤ button. It makes my day to see if my readers like the content (it really does!) Thank you!

If you enjoy my work, please consider sharing it with friends who might be interested.🙏

I really enjoyed digging into the book’s big themes around the culture, business systems, and leadership of some of the most successful industrial companies. Rob shared his lessons on finding other compounders, evaluating leaders, digging into incentive structures, touring factories, and the best research note he ever wrote - but never published.

Show notes, quotes, and transcript on neckar.substack.com.

“You know, my job is a tricky one. You have to be arrogant enough to have an opinion, and humble enough to know you're probably wrong most of the time.”

“It's all about how you gain control over your mind. It's all an inside job.”

Hello everyone.

I’m very excited to share my conversation with William Green (@williamgreen72), the author of RICHER, WISER, HAPPIER: How the World's Greatest Investors Win in Markets and Life. It’s one of my favorite investment books this year because it is about so much more than just investing. William called it a “stealth spiritual book” and I have big sticker on my copy: “This is not a book about investing.”

This conversation was a about William’s own journey and setbacks, his search for worldly wisdom in everything from Zen Buddhism to Stoicism to the Kabbalah, and the many lessons he learned from great investors. It was the perfect conversation to bookend the year and provided me with a ton of ideas to reflect on over the holidays. I hope you will find it as valuable as I did.

Also, William is working on his own podcast (he mentioned it towards the end of our conversation) for which I’m very excited. Keep an eye out for that, I’m sure he’ll have some amazing guests and deep conversations.

You can find the transcript here. It took a lot of time to clean up the automated transcript and I hope that going forward I’ll be able to pay someone to do that work. However, this also means that the transcript is only going to be available for premium subscribers. You can still find the highlights and timestamps below.

Today's post is sponsored by Tegus. Tegus is an on-demand digital research platform on which investors share their expert calls. Their library currently has some 23,000+ calls covering many public and private companies and it's growing every day. It's a beautiful business model (I wish I was an investor!) and I could see it scaling up to cover any company and industry you can imagine. I think of it as being able to tap into a library of conversations between industry insiders. For example, I recently read Michael Bloomberg's biography and am working on a piece about his origin story. What better way to find more info about the company than to jump through hundreds of expert call transcripts (thanks to their elegant search function)? I'd encourage you to check it out - they offer free trials.

Disclaimer: this podcast is for entertainment purposes only and not investment advice. It does not constitute an offer to sell or the solicitation of an offer to buy any securities mentioned or discussed. Seek your own financial, tax, legal, accounting, or other advisor’s advice before making any investment decisions. Do you own work! I am are not your fiduciary or advisor.

Highlights:

* 2.00: Introduction, William’s journey to the book.

* "This is not an investment book"

* 3.00: “You can see within investing this exquisite complexity of life, all of the ways in which we're living in this murky place, where we don't know much, and we can't tell what the future holds. And yet we somehow have to try to make decisions.”

* “Great investors  … they’re tremendous pragmatists. And it struck me. I started to think of them as practical philosophers.”

* 6.00: “I was working on the last part of the book. Just as COVID was turning our lives upside down. And it gave me an intense sense of my own mortality. And I started to think, well, let me at least leave one thing in my life that's worthwhile. … So there's a sort of grandiosity to the ambition of it where I'm actually trying to create something that will help readers and also at the same time, help myself.”

* 7.00: William’s study of everything from Zen Buddhism to the Stoics to the Kabbalah. “Tell me about what you're reading and why and how it's influenced your life?”

* "I dip into the Zohar almost every day"

* “I put in that sentence in the book and nobody has ever asked me about it.”

* 10.00: “It's really a coded story about how do you get out of the dungeon when you're stuck, when you feel like you're going nowhere in your life, when you're lost, how do you get out of the dungeon? … And so it becomes a story about consciousness and how could he be free? While he was stuck in jail.

* 11.00: “What they would say is this isn't about a fight that you have every generation with the Amalekites, this tribe that the Israelites fought with 4,000 years ago or whatever it was. It's about this war of consciousness with your own doubt. And so if you read the old Testament, literally, you just think it's kind of this meaningless story about fighting the Amalekites. But if you read it in this sense of it's all really about a path of consciousness.”

* 12.00: “When I study things like Tibetan Buddhism, which I also find exquisitely beautiful or stoicism, which I found very helpful, I see this tremendous overlap. It's really all about consciousness. It's about how do you gain control of your inner landscape? How do you gain control of your mind? And, and so I think in the epilogue, I quote this great line from the poet Milton, who was blind, who was saying that the mind can make a hell of heaven or heaven of hell.”

* 14.00: Sir John Templeton. “I failed to understand that what he was saying is no, no, you have to, you have to win this inner game in order to have a happy and successful life.”

* 17.00: Tsoknyi Rinpoche, handshake practice.

* 20.00: Jason Karp. “That disconnect between his effort and his performance was torture.”

* 22.00: “The inner game of writing or investing is dealing with these fears, your anxiety, your desire to be respected, to have honor all of this stuff. It's your ability to deal with setbacks, your sense that however hard you work, sometimes it just doesn't work out.”

* 24.00: Sometimes life has to burn down?

* “We can get subtly misaligned and feel that we're going in the wrong direction, but you keep going. Sometimes you need it all to fall apart in a fairly dramatic way, whether it's a marriage or a job health, a career or reputation, you kinda need it to collapse.”

* William’s own setback and dealing with being laid off during the financial crisis.

* 27.00: “One of the things that I liked about studying Kabbalah actually is that they, as I understood it, they would say if you don't believe that there's water, if you just think it's all random and that stuff just happens and it's unfair and is chaotic, you've actually created that reality because if consciousness is everything you see, the world is just chaos and disorder. But if you think there's order and there's something for you to learn and that everything is there for you to grow, then you create that reality. And it reminds me a bit, there's a beautiful [00:28:00] line from Einstein where he said, you can either live as if everything is a miracle or as if nothing is a miracle.”

* “If you look at the things you've gone through, whether it's breakdowns of relationships or breakdowns of career, or existential angst, which I've had tons of over the years and you think, ‘God it all lead to these extraordinary things,’ that's a totally different attitude and different framing than if you say, ‘God things never work out for me.’”

* 29.00: “There's an extraordinary story where the temple, which was supposed to be the holiest place in the world in Jerusalem, burned down and rabbi Akiva, as he's watching, he starts dancing. And so that's an extraordinary thing.

If you think of that triumph over sadness, uncertainty, fear about what's gonna happen.”

* 31.00: How did he pick the subjects and ideas of the book?

* "One idiosyncrasy of this book is that I’ve focused almost exclusively on investors whom I like and admire." (“I’m particularly drawn to those with wisdom, insights, and virtues that extend beyond an exceptional talent for making money.”)

* 37.00: Bill Miller

* 40.00: “And so I saw Bill dealing with this very painful staff in a really honest and honorable way. And he would say well he didn't realize how catastrophically wrong I could be because he said when you've been right, right, right. For all of those years, you said, even though theoretically, you know, that you need to be humble, you actually start to believe that you know what you're talking about.”

* 43.00: “I write at some point in that epilogue, I say there is as great honor in the simple virtue of perseverance. And I don't say that lightly. I think that really deeply, I mean, there's something, one of the things about writing is that when, when you really simplify and distill things, you're always worried that people will see how banal your mind is and how trivial you are.

* But, actually truth is pretty simple, I think. And so for me, when I'm condensing it down to that, I mean, I said there are two great lessons for me from Miller's Miller's downfall and recovery, because his recovery has been equally spectacular. One of them is about the simple virtue of perseverance and [00:44:00] one of them is everyone suffers.”

* 46.00: “Life as a series of adversities that give you an opportunity either to behave well or badly” (Munger)

* 48.00: How do I regain sort of control or semblance of control of, of the inner game or if my mind? Is reading enough?

* 51.00: vice admiral Stockdale,

* 53.00: “I used to be immensely impressed with the beauty of Miller's mind. When I was first writing about him in my twenties, there was something really wonderful about the fact that he was just so darn smart, just brilliant mind and brilliant moneymaker and gambler who outwitted everyone else.

And gradually as I got older, I realized that actually what I admired most was his extraordinary resilience. And the fact that when faced with this incredible setback, he handled it just incredibly well. And, and there was a moment that I, I don't think I write about in the book where I was in his garden of his home in, in Maryland. … And he was living in a way that was deeply aligned with who he is. And he would show up for work every day and in jeans and a black t-shirt. … And I said to him, it's really amazing, it's kind of like Miller Unbound.

You don't take orders from anyone. You're in control of your time, your [00:55:00] schedule, everything. And he's like, yeah, that's the best. And I, could just see that there was this kind of personal victory of this guy who is now 70, 71 who'd come through this storm and realigned himself afterwards in a way that was deeply true to who he is in all of his glorious idiosyncrasy.”

* 58.00: “And, and so I'm not super impressed just with the ability to make money and not live a more thoughtful life. I think I was more impressed with that when I was younger. I liked that aspect of the [00:58:00] game of just being able to outwit the crowd. There's something about that, that I found very, very appealing.”

* 59.00: What is it like to write about people who are very successful financially? Is there a downside (envy)?

* “Why their lives resonated with me, whether it was a Bill Miller or a Nick Sleep, or a Monish Pabrai or Charlie Munger, in some ways they were all outsiders who had diverged from the crowd. And they were thinking in a very, in a very free way, they were questioning conventional opinion and they had constructed their lives in a way that was very true to who they are. So that resonated deeply with me because I could see that I was also an outsider who at least in my own mind who didn't naturally want to go with the crowd.”

* Ed Thorp, Monish Pabrai, Irving Kahn

* 1.03.00: The value of freedom and independence.

* “I remember at one point working on a project with someone I really disliked who was kind of a bully and threatened me at one point and Monish said to me, you know, if you had had a bit more money, you just would have walked away and said, you know, f**k you. And, and I realized that was true.”

* “It's been clarifying to me too, to know that being aligned with who you are in a deep sense is, is a very important thing. That that's the goal. It's the independence. It's not, it's not the number of zeroes in your [01:06:00] account. It's actually living in a way that's true to who you are.”

* 1.11.00: Self awareness and lessons for non-professional investors. “Stumbling” into the right strategy.

* From the book: Nick Sleep: "as luck would have it, he had stumbled into a field that perfectly suited his idiosyncratic mind."

* "It also helps if, like Marks and Price, you stumble into an opportunity that happens to suit your talents and temperament."

* Eveillard: "He had the good fortune to stumble upon Graham’s value-oriented principles, which gave him an analytical edge."

* 1.17.00: “Mohnish is optimized, as he once put it to me for the game of investing. He is very rational. He plays the odds. He loves playing, playing blackjack and poker and things like that for money. I mean, he figured out a card counting technique, basically. But he said it's incredibly slow and boring. But that he has the patience for, I can't play games. I find games incredibly tedious, even something like Scrabble, [01:17:00] which I should love as a word person. I'm too impatient for it. And so I have to accept the fact that I'm just not optimized to play the game of sitting in a room reading annual reports and occasionally finding a mispriced gamble, like a Munger does. That just doesn't suit my temperament. And so I have to outsource stock picking to other investors who are better suited for it. And so I think just that self-awareness of saying, am I playing a game, the plays to my strengths, my talents, and my interests.”

* 1.20.00: Writing a substack vs. a book.

* “And I would work 70, 80 hours a week, very consistently. It was a young man's game. It was very intense. And I think I was good at my job, but I don't think [01:22:00] probably ultimately it really suited my talents and, and it may be. Getting laid off, I'm being forced to, to figure out what should I be doing?

Actually set me on a path of writing books. That's much better suited to who I am. And I love writing books. I always adored books. I love the feel of books. And I love podcasts. I love the fact that you can, you can sit and just have a thoughtful conversation. And so those are very idiosyncratic reactions and choices.”

* “I write about it very briefly with a guy Mike Zapata who was in seal team six, which is the unit that, that famously killed Osama bin Laden. And he ended up setting up a hedge fund and he said to me yeah, there are three things that are important to me. He said God, family and fund in that, in that order.

And he said, even this conversation that you and I are having it's a little bit outside that. And he said, that's okay. But he said, I just need to know that I need to keep coming back to God, family and fund. I, that was really helpful. And there was something, something kind of wonderfully tactless and lacking in terms of [01:25:00] EQ that he told me that.”

* 1.29.00: Ed Thorp, Irving Kahn

* 1.31.00: “And you look at Ed Thorp and he said, when I asked him about what he regretted in his life, he said I don't regret any of the principled decisions that I made. That's a really interesting comment. So then you think, ah, looking back in his 80s, he's really happy about the principled decisions he made, even when they worked against him, even when he made less money.”

If you enjoy my work, please consider sharing it with friends who might be interested. It would mean a lot to me and help me make this my life’s mission. 🙏

This conversation was a about William’s own journey, his search for worldly wisdom in everything from Zen Buddhism to Stoicism to the Kabbalah, and the many lessons he learned from great investors. You can find the full highlights and a full transcript on my substack. 

Highlights:

2.00: Introduction, William’s journey to the book.

7.00: William’s study of everything from Zen Buddhism to the Stoics to the Kabbalah. “Tell me about what you're reading and why and how it's influenced your life?”

"I dip into the Zohar almost every day"

24.00: Sometimes life has to burn down?

“We can get subtly misaligned and feel that we're going in the wrong direction, but you keep going. Sometimes you need it all to fall apart in a fairly dramatic way, whether it's a marriage or a job health, a career or reputation, you kinda need it to collapse.”

William’s own setback and dealing with being laid off during the financial crisis.

31.00: How did he pick the subjects and ideas of the book?

"One idiosyncrasy of this book is that I’ve focused almost exclusively on investors whom I like and admire."

43.00: “I write at some point in that epilogue, I say there is as great honor in the simple virtue of perseverance. And I don't say that lightly. I think that really deeply, I mean, there's something, one of the things about writing is that when, when you really simplify and distill things, you're always worried that people will see how banal your mind is and how trivial you are.

But, actually truth is pretty simple, I think. And so for me, when I'm condensing it down to that, I mean, I said there are two great lessons for me from Miller's Miller's downfall and recovery, because his recovery has been equally spectacular. One of them is about the simple virtue of perseverance and [00:44:00] one of them is everyone suffers.”

48.00: How do I regain sort of control or semblance of control of, of the inner game or if my mind? Is reading enough?

58.00: “And, and so I'm not super impressed just with the ability to make money and not live a more thoughtful life. I think I was more impressed with that when I was younger. I liked that aspect of the [00:58:00] game of just being able to outwit the crowd. There's something about that, that I found very, very appealing.”

59.00: What is it like to write about people who are very successful financially? Is there a downside (envy)?

“Why their lives resonated with me, whether it was a Bill Miller or a Nick Sleep, or a Monish Pabrai or Charlie Munger, in some ways they were all outsiders who had diverged from the crowd. And they were thinking in a very, in a very free way, they were questioning conventional opinion and they had constructed their lives in a way that was very true to who they are. So that resonated deeply with me because I could see that I was also an outsider who at least in my own mind who didn't naturally want to go with the crowd.”

1.11.00: Self awareness and lessons for non-professional investors. “Stumbling” into the right strategy.

1.20.00: Writing a substack vs. a book.

This is a companion piece to my writeups of Kerkorian's story (part I, part II). Kirk Kerkorian was a self-made billionaire, aviator, entrepreneur, casino developer, and investor. It's one of my favorite rags-to-riches stories.

“Desire is a contract that you make with yourself to be unhappy until you get what you want.” –Naval

I’m very excited to share my conversation with Sebastian Mallaby, the Paul A. Volcker senior fellow for international economics at the Council on Foreign Relations and author of several books including More Money Than Good, The Man Who Knew: The Life & Times of Alan Greenspan, as well as an upcoming book about the history of venture capital (The Power Law). I’m a big fan of More Money Than Good and tweeted about the gems in its footnotes. This conversation was an absolute treat and I hope you will enjoy it as much as I did.

You can access it here: Spotify, Apple, Google, RSS, anchor.

I’m still learning about editing the audio files and dealing with all the logistics. Happy about any feedback🙏

Disclaimer: this podcast is for entertainment purposes only. It does not constitute an offer to sell or the solicitation of an offer to buy any securities mentioned or discussed. Seek your financial, tax, legal, accounting, or other advisor’s advice before making any investment decisions. Do you own work. I am are not your fiduciary or advisor.

Conversation highlights:

* 2:00: Sebastian’s journey to the book and topic (hedge funds, also Alan Greenspan)

* 5:15: How to gain access and build trust.

* “The key was to do an unreasonable amount of preparation work.”

* “You win people's respect by doing a ton of homework. It shows that you're serious and you're not wasting people's time by asking the obvious questions.”

* 7:44: How to decide what questions to ask?

* “What you really want to know from them is specifically what their thought process was around a particular important or interesting trade. How did they make the call? How did they develop conviction? How did they hold onto the position during the inevitable hiccups and adversity? So it's that reconstruction of the case study.”

* “I often show up with very detailed notes where I've reconstructed a timeline. And I'm able to say that, ‘I know from your investor letter that in this month you made a profit on dollar/yen. I know that dollar/yen had a big move on the 15th and 16th of that month. … I really tried to kind of prompt them as much as possible.”

* 11:00: Where to look for information? “The answer is you've got to look everywhere.”

* 12:20: Finding memos in which Greenspan “described the creation of the Federal Reserve as one of the historic disasters in U.S. history.”

* 15:00: George Soros who joked "I can only remember the future."

* “When you ask him about the past, he's not much help.”

* Learning the division of labor in the Soros team and the Thai Bhat trade.

* 20:00: “The culture within an investment company matters almost as much as the analysis that the company does of the market or of the trade.”

* 21:00: The Korean bank trade.

* “On the walls of these offices they have these tombstone announcements, underwriting such and such deals. And he sees that these Korean financial institutions announcing in these framed plaques on their walls, that they've done these financings for Thai real estate companies. And of course he knows, because he was there, that all these real estate companies are bust, they’re gone, finished.”

* 23:00: “The South Korean reserves are fictitious, the government is lying. And when you see that as a currency trader, you know that if you go short the currency, they're not going to have the reserves to defend it, and you're going to win. It will be the Sterling trade all over again.”

* 27:00: Different cultures and investment styles, contrasting Soros, Druckenmiller and Robertson.

* 31:30: Culture at Tiger and the Tiger cubs.

* “That's sort of the DNA of Tiger, as far as I understand it today, that you've got people who don't mind hustling, who don't mind getting on a plane, flying to another country, meeting the manager, and building a very personal network. And that continues to generate good returns.”

* 34:00: Julian Robertson outgrowing his original strategy and the loss of “supercharged incentives.”

* “The other thing that went wrong for junior Robertson in the late nineties was that he had diversified out of stocks and into macro. He was doing currency trades and he had a dollar/yen bet. They went extremely wrong and that was the beginning of his losses. When he also got hit by the NASDAQ bubble, it was sort of a double whammy.”

* “It's not so much that people can't adapt over time. I think they actually can. It's more that when you diversify from one type of hedge fund strategy into another one, that's the risk. It's the mission creep thing.”

* “It's that supercharging of incentives that really focuses the mind and makes people perform at their best.”

* 39:30: Can investors evolve and adapt?

* “Sometimes the competitive advantage of a hedge fund manager is precisely the ability to adapt. George Soros used to say, ‘I don't play the game. I look for changes in the rules of the game.’”

* 42:00: Mindset and personality.

* “The value investing mindset almost disqualified Robertson from mastering macro.”

* “I think a big thing that people don't necessarily understand when they're outside the hedge fund world is that it's not just about being right in trading. It's about the sizing of the trade and the fact that you can be wrong more often than are right, but if you size those bets when you were right bigger, you will still make money. And that I think is sort of like the key insight about someone. Paul Tudor Jones.”

* 47:45: Understanding Paul Tudor Jones.

* “Genius does not always understand itself.” Vic Braden

* 49:00: Jones tried to replicate his system with a quant.

* 52:00: The Lehman Brothers 2008 trade.

* 55:00: “If you see that same 50:50 chance in the way that a trader like Paul Tudor Jones does, then you realize that the Hank Paulson view was crazy. And it's crazy because in a world where there's a 50% shot that it would be a flat outcome for Wall Street, but then a 50% shot that [the market] will tank, every sensible macro trader with a Paul Tudor Jones mindset will be massively short because you can't lose. It's an asymmetric bet. If you perceived their symmetry, then in a way it's no longer 50:50, it's like a hundred percent it’s going down.”

* 56:50: Jones’s process and his ‘market scripts.’

* “Sometimes causation in human actions works in a weird way.”

* “I remember him saying this to me when I went to see him. Sitting in the evening when the markets were closed and thinking through what might happen the next day, thinking about the different scenarios that could arise, thinking what he would do. If option A was to transpire, he would do trades one and two. If option B happened, he would do something else. And he kind of thinks through all these things through in advance and that quiet reflection when the markets are closed makes his faster when the markets are open. Cause he's kind of been there in his head.”

* 59:45: Reflecting on the industry and book from today’s perspective, a decade later.

* 1:03: Rise of quantitative trading.

* “Because of those high barriers to entry, you tend to get these concentrated pools of excellence in a few big quant shops and the survival rates for quants are higher. So this all changes the game. It's less of a kind of Darwinian competitive adaptive ecosystem, which is what I saw in the discretionary trading world.”

* “On the other hand, human traders are good at interpreting the arrival of new paradigms. What does it mean for markets when you have a pandemic or what does it mean for markets when you have a pandemic and then an unprecedented fiscal and monetary stimulus. And so this is like when you have unknown territory and the past patterns in markets won't necessarily repeat themselves. You need people who look into the future. You don't need machines to look into the data from the past.”

* 1:08: Sebastian's upcoming book, The Power Law.

If you enjoy my work, please consider sharing it with friends who might be interested. It would mean a lot to me and help me turn this into a sustainable effort. 🙏

Disclaimer: this podcast is for entertainment purposes only. It does not constitute an offer to sell or the solicitation of an offer to buy any securities mentioned or discussed. Seek your financial, tax, legal, accounting, or other advisor’s advice before making any investment decisions. Do you own work. I am are not your fiduciary or advisor.

Conversation highlights:

• 2:00: Sebastian’s journey to the book and topic (hedge funds, also Alan Greenspan)


• 5:15: How to gain access and build trust.


• “The key was to do an unreasonable amount of preparation work.”


• “You win people's respect by doing a ton of homework. It shows that you're serious and you're not wasting people's time by asking the obvious questions.”


• 7:44: How to decide what questions to ask?


• “What you really want to know from them is specifically what their thought process was around a particular important or interesting trade. How did they make the call? How did they develop conviction? How did they hold onto the position during the inevitable hiccups and adversity? So it's that reconstruction of the case study.”


• 11:00: Where to look for information? “The answer is you've got to look everywhere.”


• 12:20: Finding memos in which Greenspan “described the creation of the Federal Reserve as one of the historic disasters in U.S. history.”


• 15:00: George Soros who joked "I can only remember the future."


• Learning the division of labor in the Soros team and the Thai Bhat trade.


• 20:00: “The culture within an investment company matters almost as much as the analysis that the company does of the market or of the trade.”


• 21:00: The Korean bank trade.


• 27:00: Different cultures and investment styles, contrasting Soros, Druckenmiller and Robertson.


• 31:30: Culture at Tiger and the Tiger cubs.


• 34:00: Julian Robertson outgrowing his original strategy and the loss of “supercharged incentives.”


• 39:30: Can investors evolve and adapt?


• 42:00: Mindset and personality.


• 47:45: Understanding Paul Tudor Jones.


• “Genius does not always understand itself.” Vic Braden


• 49:00: Jones tried to replicate his system with a quant.


• 52:00: The Lehman Brothers 2008 trade.


• 56:50: Jones’s process and his ‘market scripts.’


• “Sometimes causation in human actions works in a weird way.”


• 59:45: Reflecting on the industry and book from today’s perspective, a decade later.


• 1:03: Rise of quantitative trading.


• 1:08: Sebastian's upcoming book, The Power Law.

Hello everyone.

I am so happy to share my conversation with Dominique Mielle (@DominiqueMielle), author of Damsel in Distressed. Dominique was a partner and senior portfolio manager at Canyon Partners, one of the largest distressed and credit hedge funds.

We talked about her experience during the telecom bust, the airline bankruptcies, and the financial crisis, how to deal with losses and stress, distressed as a chess game, the difference between generalist and sector specialist models, how to pitch and build an asset management business (she built Canyon’s loans securitization business after the crisis), and the hedge fund industry in general. I had a lot of fun and learned a lot during our chat and I hope you enjoy it as well.

I realize listening in the substack can be a bit cumbersome and spent a day setting up additional channels. I might also add audio versions of my longer pieces there if that’s of interest (someone told me yesterday that they listened to all of Packy McCormick’s writing on Spotify🤔).

* Spotify

* Apple/iTunes

* I also submitted it to Google but apparently it takes a few days to be processed or approved😪

* RSS feed

I’m still learning about editing the audio files and dealing with all the logistics of these conversations. Happy to hear any feedback in the comments or via email or Twitter DM🙏

We talked about:

* 3:00: The WorldCom bond trade.

* 6:30: Dealing with a losing investment.

* 9:00: Importance of expertise and networks in distressed investing. Distressed investing as a game of chess.

* “Skill in distressed is to be able to think about different scenarios and to anticipate what the adversary is going to do with his pieces.”

* 11:40: Distressed investing as an apprenticeship business.

* 14:15: Generalist vs. sector specialist model.

* 17:30: Hertz bankruptcy.

* 20:40: Airline bankruptcy investing and Equipment Trust Certificates.

* 28:00: How distressed investing changed over the past decades. “It's more competitive. It's harder to to beat the market. It requires a lot of expertise, a lot of conviction. A lot of creativity maybe more than before.”

* 32:00: Navigating the financial crisis in 2008

* 35:00: Mental resilience and losses.

* 38:00: Losses are unavoidable.

* 39:20: The business of investing: building a CLO business, raising capital.

* 40:59: Pitching, fundraising.

* 45:00: Women in hedge funds. “In 20 years, I only met one other female partner who was doing distressed. And she's a friend of mine.”

* 48:30: Implications of hedge funds as a mature industry.

* 51:25: Pitching and communicating ideas.

* 53:45: Managing a team of analysts.

Enjoyed this piece? Let me know by hitting the ❤ like button.👇 Thank you!

If you enjoy my work, please consider sharing it with friends who might be interested. It would mean a lot to me to reach (and teach) more people. 🙏

• 3:00: The WorldCom bond trade.


• 6:30: Dealing with a losing investment.


• 9:00: Importance of expertise and networks in distressed investing. Distressed investing as a game of chess.


• 11:40: Distressed investing as an apprenticeship business.


• 14:15: Generalist vs. sector specialist model.


• 17:30: Hertz bankruptcy.


• 20:40: Airline bankruptcy investing and Equipment Trust Certificates.


• 28:00: How distressed investing changed over the past decades.


• 32:00: Navigating the financial crisis in 2008


• 35:00: Mental resilience and losses.


• 38:00: Losses are unavoidable.


• 39:20: The business of investing: building a CLO business, raising capital.


• 40:59: Pitching, fundraising.


• 45:00: Women in hedge funds. “In 20 years, I only met one other female partner who was doing distressed. And she's a friend of mine.”


• 48:30: Implications of hedge funds as a mature industry.


• 51:25: Pitching and communicating ideas.


• 53:45: Managing a team of analysts.

This is my conversation with David Clarke who spent many years researching Floyd Odlum’s story. You can find an outline of his work and efforts here.

I own a pdf copy of his work and was blown away by the amount of information that David unearthed. While still incomplete, it was a pleasure to dig into the book and I look forward to the day when I can buy a printed copy. In the meantime, it is possible to contact David about purchasing the pdf at davidclarke56@hotmail.com.

I asked David about how he found the story, his research process, what he uncovered that was different from the official narrative, and how Odlum rose and fell.

Unfortunately, we had a few glitches with Zoom. I did my best to clean up the audio but there are still a few fragments here and there. Nevertheless, I hope you enjoy the conversation as much as I did.

Enjoyed this piece? Let me know by hitting the ❤ like button.👇 Thank you!😉