3 Takeaways - Princeton’s Endowment Manager Andy Golden on Investing Today (#98)

Episode Date: June 21, 2022

The president of Princeton University Investment Company (PRINCO), which manages Princeton’s endowment, talks about investing in today’s world. Andy Golden shares how he selects partners, evaluates investments, and creates a winning environment. PRINCO recently earned nearly a 50% return in a single year. Andy also explores the differences in long term and short term investing and how a ten year time horizon is short term for endowments. PRINCO is one of the highest performing endowments in the world.

Welcome to the Three Takeaways podcast, which features short, memorable conversations with the world's best thinkers, business leaders, writers, politicians, scientists, and other newsmakers. Each episode ends with the three key takeaways that person has learned over their lives and their careers. And now your host and board member of schools at Harvard, Princeton, and Columbia, Lynn Thoman. Hi, everyone. It's Lynn Thoman. Welcome to another episode. Today, I'm excited to be with Andy Golden, president of Princeton University Investment Company, known as PrintCo, which manages Princeton's endowment. PrintCo is one of the highest performing endowments in the world. Last year, it earned a return of nearly 50%. I'm excited to learn Andy's secret sauce. Welcome, Andy, and thanks so much for our conversation

today. Thank you. It's a pleasure to be here. I see your past guests is quite the arc, and I'm sorry that your quality is about to take a nosedive, but no, you're my best. I don't think it's taking a nosedive. Andy, you're quite extraordinary. You've been leading Prinko now for over 25 years. You must love your job. What's the best part of it? Well, that's a great question. I talk about there are four reasons why I love my job.

The first is that the intellectual challenge is really unmatched. We're investing all over the world in all different kinds of asset categories. Our mission is forever. So we have to push ourselves to think long-term, but we recognize the long-term comprises a bunch of short-terms and knowing when to pay attention to the short-term, even in the face of that long term focus, is another fascinating question. It's just stimulating from an intellectual standpoint. Every day is different. What is wonderful about exploring the huge intellectual space that we get to explore is we get to seek truth.

We're called an investment company, but we're actually proud to be university employees. We're part of the university. And so in some sense, we are kind of the client. And so we get to act as if it were our own money. One is the intellectual challenge. I mentioned the kind of seeking truth, which flows into point number two, which is we're given all the tools that we need up and down the governance chain to really compete hard to try and be the best at what we do. So there's a competitive

release. And then the third is pretty obvious that we're mission driven. I mean, we're all here because we care about higher education writ large, and we care about a particular institution of higher education. And so it's quite satisfying to know that our day-to-day work ends up mattering in terms of, you look at over that quarter century, the broadened access, the greater diversity and inclusivity of our students, the excellence in research, and I've lost track of the number of Nobel Prizes that have been won during my tenure here. That's fantastic. And now I will finally get to answer your question. It is really cool that I get to show up at work every day in an office of 45 other people, half of which are focused on the actual investment function and half in creating the conditions that allow us to do

that through operations and technology and such. But we're all motivated by those same things and I love my job because of the people the people at Pranko but also the people at the firms that we partner with where part of our secret sauce has been to really try and create deep meaningful partnerships that are not about client-vendor. It's about how can we work together to make each other better. And so that's the rewarding aspect, perhaps above all the other ones, the first three included. How do you think about investing? Do you start with big themes or do you make a series of big bets, sort of like George Soros's very famous $2 billion bet against the British pound a number of years ago? How do you think about investing?

We start with reminding ourselves what our mission is and what our comparative positioning is. What do we do better than other folks and where are we less advantaged? That gets us to this model of fund to fund of creating a virtual corporation by partnering with these external firms who specialize. When you do that for a while, you realize that maybe it's true in doubles for tennis, certainly true in, marriage, that who you partner with is the top 10 most important things. And so it's bottom-up looking for where there's great talent, and then seeing if you aggregate a portfolio that was built entirely bottom-up like that, and you went with some intuitions about how much to put where, does that get you to a place where your risk and importantly, your opportunity exposures are in a comfortable place?

If you had asked me this question two decades ago, I would have belabored more the process of kind of thinking out a broad ass allocation plan that determined a lot of where we went looking for opportunities. There's less white space today on the investment front than there was back then. And therefore, it's less about what new area, with maybe one possible exception, what new area you're going to explore and more about how do you keep your partnership roster fresh because firms and people go through their own cycles. Now, that being said, we will give ourselves

license to once in a while make an overlay bet. And we've got one of those on now. But the important aspect of that is it's only once in a while. We only want to have a view when the situation is so blazingly obvious that even we can see that there's something amiss here. And so the view that we have on right now, the expression is that we're in an environment that is similar to the bursting of the tech bubble at the turn of the century, more similar to that than other kinds of periods of market turbulence. That's significant because what it means is that this is likely to continue this turbulence, this downward trend for not six months or nine months, like what it's been more recently. This could be two and a half years of sawtooth. And so what we've done is to not disturb the

underlying portfolio as much because the way things are tied up, we do have an overlay market hedge on, which is unusual for us. George Soros did make a ton of money on that famous bet. I think that if you explore the history of the great macro investors, that they tend to make a lot of money in these big fat pitch bets, and then they do less well in between. And so we're saying, why should we compete in that less well in between period when our time is better spent in expanding our advantages in that bottom up in the weeds partnership stuff? You talked about talent. How do you evaluate talent managers and make investment decisions? With great difficulty. One of the reasons why this is so exciting of a job

is it's hard and we don't always get it right. What we're looking for starts out with the most important filter, which may surprise listeners, is most important filter is we're trying to understand the motivations. What we say is we're looking for an alignment of appetites. And I would love if that phrase got some currency. I've got a trademark on it, and it will be another revenue stream for the university. People talk about alignment of interests. But to me, interests are things that can be modified by contracts and by various systems. We're looking at the core and saying, what is this group trying to achieve? How is it trying to achieve it?

So if you look at investment management firms all over the world, you can break them out into two buckets. The much smaller bucket are people who are motivated to win, you know, sense by producing the best possible results to be the best performing manager within a given sector to frankly offer their sources of capital, the best product out there, subject to the constraint of making themselves silly rich. People tend to get attracted to the investment world because they like money, right, to varying degrees. So that's the small bucket. The larger bucket are people who are thinking about how rich can I get? How do I maximize my own wealth or the wealth of the firm subject to producing good enough returns to allow that to happen? And if you can assess what the real motivation is, a lot of other problems down the road can't take care of themselves.

Although I should correct myself because appetites do evolve over time and that's, if you can assess right now what the appetites are, then you have a leg up in continuing to assess it down the road. So I think probably the biggest surprise, a lot of other things people won't be surprised by. I mean, one thing that goes without saying, but probably should be said anyway, is we've got to have a sense of ethics and that's kind of consumed in the appetite structure. The toughest thing maybe to assess, maybe the most important, and that is, what's the real culture of a firm? One of the things I've learned over the years is there are a lot of things that are theoretically good or theoretically bad that become the opposite in the face of a great or a bad culture.

And culture trumps everything. And part of when we say we're good partners, we want to be kind of flexible and not have a bunch of rules or a checklist that people have to, that they'll get screened by. It's more we want to understand, of course, the principles behind those type of things and see if this collection that the firm is offering, is it coherent? Is it cohesive? And does it conform to a reasonable set of principles as opposed to, again, some easily defined metric? Last three years performance, it's a waste of time to consider that. That's a very minor thing. Past performance does not predict the future. Someone's going to flip coins heads 50 times in a row.

How do I know if it's skill or luck? Can you give some specific examples about what kind of advice that you give to your partners? There's micro and a macro. I mean, there's one that we like to talk about where we had noticed a firm that we were day one investors in, in China of all places, has kind of reached the point about 10 years in where some of the founding partners maybe aren't the right team to continue to the next phase. And so we shared that hypothesis and said, but this is such an important decision, you shouldn't take our advice on it. You all should get an organizational coach to really help you diagnose this. But unfortunately, there was no coach like that in China.

So we connected them with a coach that we've used very successfully elsewhere, who's based in Boston, and got the Boston coach to help this China firm with the benefit of a local professor, a business professor who could act as cultural and literal translator in some cases. That can help firms starting up recruit people because we're happy to talk to star candidates and say, no, we're committed to be with this firm. So you may have an offer from a well-established firm, but you also have an offer from this new firm and know that this new firm's got a lot of runway. So you're not taking the risks that you think you're taking. Certainly, we can be helpful in introducing them to other like-minded clients

because it's easier for a firm to move and build a business that exploits our time horizon if other investors also have a similar long time horizon. If you look around the landscape of institutional investors, so many have structural impediments to having their true investment horizon, their true evaluation horizon be anything close to what the theoretical best horizon would be for them. Because if you're long-term oriented, the problem is that so many mechanisms, quarterly board meetings can get in the way. Most people think long-term is 10 years. We talk about the importance of thinking beyond the long-term because, okay, so you have a great 10-year track record, but then what? And we would run the roster very differently. We'd run every decision

very differently if our horizon was as short as 10 years. Because if you think about that, we've got a few more than 65 relationships all over the world, but every class has a top half and a bottom half. Theoretically, it might make sense to shrink that down to 30 or so. But what if that 30, that kind of concentration was not giving you insight into a broad enough group such that if stuff happens in that life cycle, right, now you're left with a group of firms where they've either closed shop or things have evolved in a new way. We need to kind of have rows of shark's teeth in our manager roster in terms of generationally where firms are so that we avoid this risk of getting a very stale portfolio. But again,

if I was just trying to make the best number for 10 years from now, there are some things I wouldn't be spending time on right now because on that horizon, the higher, better use of time would be the focus on a different subset. And the subset that you're focusing on for that very long-term 25-year horizon, is that early stage venture capital or what is it? Well, it's early stage firms and it's across the board. Venture is an interesting one because it does run on an accelerated life cycle in a lot of ways. I wouldn't say it's a union revolution, but we do have young people have an advantage sometimes from a lack of experience.

So they don't know what's not possible. And venture capital can be, should be, needs to be, is about finding great entrepreneurs and a disproportionate share of great entrepreneurs are young than other verticals of knowledge, right? Or of activity. And a venture firm needs to kind of refresh itself a little bit more frequently than, say, Berkshire Hathaway, right, who's done pretty well with some steady hands for a very long period of time. So it is true that in venture, early stages, where we have a disproportionate number of managers, that's also, remember, we can only deploy relatively small amounts of money. So the math works that you need more of those managers in order to get results that will move the needle.

But we're looking for new talent all the time across the portfolio, whether that's stock picking firms that are traditional and just investing long, whether it's long and short, whether it's folks focused on merger arbitrage or distressed security investing, whether it's long and short, whether it's folks focused on merger arbitrage or distressed security investing, whether it's real estate across the entire portfolio, that keeping the portfolio fresh is important. And again, speaks a little bit about exploiting our advantage because since we've seen so many firms grow, that knowledge can be most helpful to firms earlier on. It sounds like your network is critical. Network is everything. The who is everything. And this is where I should throw in the disclaimer of

I have made a career out of taking credit for other people's work. And that's people housed here in Princeton who work in the Franco team, but it's also our manager roster. Without greatness there, there's nothing we can do. And so having the right network of people actually investing matters. You earlier asked about what are we looking for? We expect more than returns from our managers. We expect a lot of intelligence on a lot of different issues. So they're a part of a broader intelligence network, which can be very helpful in assessing different firms at different situations. We're privileged to be in a place where we can aggregate a lot of that information and analysis. Andy, given your very long-term horizon, what do you see ahead?

I've already telegraphed that I think we are just from the financial markets in what could be a big one. People who live on the coast talk about hurricanes in different terms. This could be a really big hurricane because what's going on here is the possibility. And if you've been around for a long time, you have some humility about the way to predict anything. But the possibility that we are going through some major changes in some super cycles, right? And they all seem to be related. For my entire career, for most people's entire career, we've been riding this kind of one direction of interest rates, whether they've been going up and down a little bit or whatever, but it's from Paul Volcker till recently, it's just

been, you could bet it was more likely than not that interest rates five years from now were going to be lower than interest rates today, more often than not. And that's important in something like private equity investing, because that's going to inform the exit multiple. And it's not that you would want to count on that happening, but it's been this tailwind that's made all of us look smarter than we are. Wall Street's saying about confusing brains for a bull market. So we've got that thing of interest rates, which is not unrelated to not a lot of people around who've operated in anything other than very low inflation environments. And that's not just investors, that's company management. And that's been helpful in a lot of ways. It's actually hurt some investment strategies, but still, I think I'd prefer to live in that

environment, low inflation. And then we got globalization, which really ramped up. That's been different over the last 20 years and say the 20 before that, but it really ramped up. It doesn't seem like a good bet that we're going to get more globalized in how we think about things. So how do I think about that? What can I control? What can I control, right? So what I can control is being with really smart partners who do worry a lot about what could be different and so are not going to be overconfident in things like presumptions about exit valuations. I think where this really has meat is to think about what kind of talent

will do better in a different world or state differently and maybe better is this learning thing. Who's going to be able to learn the most quickly in a discombobulating environment. So how we invest is going back to the, are we with the right partners? And if we are, we have a good chance of doing really well. And if we are and we don't do well, I don't know what to do about it. So you got to focus on what you can control, which is maybe that guessing and maybe tuning things, but it's not trying to control the weather. I don't think we have the technology for that yet. How do you think about diversity, equity, and inclusion?

This is actually one of my favorite topics, in part because it's kind of the scales fell from my eyes as to what an important opportunity this is. So several times this conversation, I've talked about how we think we gain an advantage having diversity of thought applied to problems. And diversity of thought is different from EEOC labels of diversity, but they rhyme, right? And so there's been untapped or undertapped talent pools out there. It's true at Prinko, it's true with our managers, and it's true in the investment business. So they've been undertapped, which is, well,

why wouldn't we want to try and tap them? Because it's all about people. And then as a bonus, you get the synergies of having more different ways of thinking around the table. So unlike ESG, where I think there are times when the decision you're making is I'm going to do something, even though it might hurt me economically, this one is we're going to try and get better on this. We've been getting somewhat better. Maybe among the least bad, not despite the economics, but because of the economics, we think we and our managers will first have an offensive advantage that they'll be able to just do better than the rest of the world. And then hopefully the work is the place where it becomes like necessary defense.

If you don't have this, then you have a comparative disadvantage. And again, whether we're talking gender or race or ethnic group or sexual orientation or gender, it's like the more the merrier, right? And people probably listening to this, but they see a picture, they can see that people who look like me, meaning a matinee, idle, handsome, meaning white men have had this kind of protectionism that has had the result of protectionism. It means that there are people who have risen to a higher level than they would have if they had to really compete against the full talent pool. And that's just not good. So how do we think about it is we want to be part of the solution. And we think that in majority cases, the solution is actually pretty easy. That becomes a whole lot easier for a firm to hire someone from a underrepresented group if they already have someone from the underrepresented group.

So we have some big overarching plans and we have some ways to make that easier. But a lot of it is just sitting down and engaging directly with folks. What is the best investment advice that you can offer to our listeners? The best investment advice is buy low and sell high. No, look, in all seriousness, that means that you're buying when everyone else is selling and selling when everyone else is buying. And so to really outperform, you have to be both different from the market and right. And that requires a certain kind of confidence. And just today, one of the interns asked, when you look at a manager, how do you differentiate

between confidence and arrogance? And so great question. Part of my investment advice would be, we have systems set up here to try and mitigate that risk. The structured debates that we have and the culture of being truthful and direct and challenging ideas, we aspire to be an ideatocracy. The best ideas will rise to the top no matter where they come from. And you essentially use a red team, blue team approach. Yeah. Coming out of the global financial crisis, when I was able to crawl out from under my desk, I started to jot down what I thought were the worst decisions I had made as a leader of PRINCO or that PRINCO had made under my leadership. And I began to see this theme of when you get a lot of office politics involved, and I don't mean that as to who's the teacher's pet. I just mean where considerations of, well, the advocate for this idea is we've shot down so many things. We've

got to let this one in because otherwise they're going to be too discouraged. Or me saying, yeah, you know, they don't want to do this. So my colleagues don't want to do this, but I know better because I'm more comfortable taking risk in part because of the seat. I say that I don't have to worry about my career risk the way some of these upcomers do. So that was silly when it was a hub and spokes decision process. So what we've done is, as you say, red team, blue team, where we designate for these major decisions a set of bulls and a set of bears. And they kind of go through some structured arguments as to whether or not the thing before

us is attractive. And that's great for a couple of reasons. One is it gives people license to express what they really think. And two, it forces people to express forcefully things that they don't think so that they develop a muscle of arguing against themselves. Like they come into it thinking, yeah, I really want to be the bull, but I got to be the bear. Well, let me give it my best shot. And then as I learn how to do that, well, I say, well, yeah, boy, nothing is as cleanly obvious as it feels like.

And so there's a kind of learning that goes along there. Andy, before I ask for the three takeaways you'd like to leave the audience with, is there anything else you'd like to mention that you haven't already talked about? I've got a really great family and that's important. Well, my great learnings when I turned 60 was, wow, it feels like I've gotten to a comfortable place.

I only wish I could have been as comfortable 15 years ago. So I'd like to mention to anyone who's listening to this who's 45, act like you're already 60. Andy, what are the three takeaways you'd like to leave the audience with today? We started to go down diversity. This, to me, was a big aha because I described the network gap as being a problem. So I actually have a solution for that, right? That's been working around here. explicitly in decisions about firms, but certainly about recruiting, is to disentangle our summary

views between an evaluation and our confidence in that evaluation. And this actually works even if you're not dealing with diversity, but it's particularly helpful. And I will admit up front that that concept of using these two dimensions is a little bit of a heuristic, meaning I'm kind of saying something that's not exactly true. Those are two different dimensions, but they're not orthogonal. They're correlated. And so it's a little bit harder to decouple them, but pretend that you could decouple them. What happens is it gives you this construct to say, well, I'm going to hire this person who's outside my typical network, but I actually have an intuition that they're as good or better than anyone else I've ever hired. But the issue is I have to admit that I'm less confident in that judgment because

I don't have the multiple corroborating points from within my network. And if you reflect on that, that actually is a risk. So that lower confidence is that you are taking on more risk. And so step one is to admit that. But step two is to recognize that you're getting a benefit from that. So you've got a higher return than you would if you stayed in your own network. The higher return is that you're probably gonna get great talent because your intuition is not that poor. But in addition to that, you're gonna get access to expand your network, get access to an additional network

and you're gonna be able to expand it. The payback is short term, I got the great person. The long term is I've also expanded my network. And so that's a key takeaway is if you're feeling a little deer in the headlights on how to explore these unexplored areas, just maybe some confidence that you can get by saying, oh, wait, I need to fully account for the benefits. By the way, that's not saying that you're not getting the benefit of a great person that you wouldn't have otherwise have gotten, which is a big deal because almost by definition,

top tier talent is rare. So there's that benefit as well. But I'm saying you're getting like a twofer here. Interesting way to think about it. And the other two takeaways? So the other two involve really trying to think through on these horizon things and figuring out when you should pay attention to the short term. And there, the kind of takeaway is you should ask, is it really different this time in terms of the magnitude of the short term? The magnitude that should be attributed to this short-term data point. What do I mean by that? Like at any given point in time, there's something bad going on in the world,

and it can cause people to withdraw and become defensive in portfolio postures. But the question is, is it already in the price? And whether it's already in the price really depends upon how surprising this thing is. And you can't both try and surf these cycles and keep a focus on the long-term. So that's that recurring theme. And then this actually is the newest virus to capture my head. And I had COVID recently, so this really is new. It's fascinating to reflect on the concept of when strengths get to an extreme such that they become weaknesses. You think about Putin, he had the strength of being able to isolate himself and grab absolute power. And that becomes a weakness because he has no one saying you're wrong.

But I see it all the time among me and my colleagues that we kind of come to work. We have a certain image of what we're good at. And then we tend to recognize a situation of, oh, this speaks to my strength. And my strength is distinctive, so I'd better exploit it. But actually, that very phenomenon may cause you to misdiagnose the situation. Fortunately, this is one of the benefits of cognitive diversity, right? We've got some people around who are less good at that. They're saying, well, wait a second, isn't there another way to look at it? Maybe the obvious answer isn't the right one. So maybe we don't have to fire this person.

Maybe we can get a coach, right? Or something like that. Three takeaways. I don't know. Those are three things that interest me at this moment. Andy, this has been great. Thank you so much. Thank you.

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