Animal Spirits Podcast - Talk Your Book: Invest like a Hedge Fund with Titan

Episode Date: August 19, 2019

On today’s animal Spirits Talk Your Book, Michael and Ben talk to Clay Gardner of titan invest. Titan is on a mission to democratize hedge fund investing. Go to titanvest.com for more information. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Titan. Go to your app store on your phone. Search for Titan. Download their app where they have a ton of research. You can sign up. It's a really great app. We're going to get into more of it today with the founder, but check out Titan on your app store. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Batnik and Ben Carlson work for Ritt Holtz Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions.

Clients of Ritthold's wealth management may maintain positions in the securities discussed in this podcast. I just want to say one thing before we get started. We're going to keep this interest short because we spoke for a while with Clay. I am very surprised that more companies haven't done what they're doing. I don't know how much money is in betterment and wealth front and personal capital, but I know it's many, many, many billions. I would guess between three of them, most positive it's in hundreds of billions. Tidant, as far as I know, is the only, I'm using like air quotes, automated, because it's not automated,

but app for young people that's active management. That's not just index funds. Well, the other thing I think that they provide that a lot of the other places don't provide is education. We've talked a lot about how we want that education piece to be there. Maybe some people are never going to use it. But I think there's a lot of people who can help. And the fact that they're making an effort to do way more on the research and education side, I think I would love to see more of that at places. Yeah.

Now, here is our interview with co-founder, co-CEO of Titan Clay Gardner. We are joined today by Titan's co-founder. co-CEo and co-founder, Clay Gardner. Clay, thanks for coming back on today. For sure. Thank you guys for having me. All right. A good way to start this, I think, is to contrast you with other asset managers that are

in the same sort of umbrella as you. So the difference between you and the other investment platforms, I think, is that they came to this, the betterments, the wealth funds of the world. They came to this through a technological automation lens. I think Silicon Valley people, you come at this from a different background, active management, you have a finance background. Why don't you just give a brief history of how Titan's birth differs from some of your competitors? Yeah, it's a great question. We're going to actively manage platform. So that's probably the clearest distinction. So the traditional

global advisors or automated investing platforms are passive, low cost index and ETF fund focused. Titan is in actively managed platform. So my background is you start off on the buy side in private equity. I spent about three to three to four years in public equities, helped start a fund at Blackstone, and my background is an active manager. I mean, hedge funds, private equity venture, they're all active asset classes. There's generally a manager on behalf of GP and LPs that are trying to outperform some benchmark. So Titan is set up in a similar way. We're actually not a fund. So we're in a citizen-investment advisor, but people that join Titan's platform have their own separately managed account, and we actively manage that account. And unlike those passive platforms, where the goal is

not really outperformance. I mean, I think by definition, the goal is market average performance and they're trying to differentiate on things like taxless harvesting and other things that, if I'm being totally honest, I think are relative commodities that will trend to essentially free overtime. I think actively management is where there is ostensibly opportunities for outperformance and just participation in engagement. And we see from our clients that, especially the younger demographics, they want to engage, they want to participate much more actively than all of those passive platforms. You guys obviously planned ahead for this, but have you been surprised by the retail trading boom that we've seen in the last 12 months or so, 14 months,

where it does seem like it's mostly younger people have just taken a liking to the more active style of investing. Yeah, I've definitely been surprised by how many people, how quickly they have adopted active platforms. I guess the jury's still out. If I'm being completely, you know, actually honest on how much of that is sticky, especially on the do-it-yourself brokerages, right? Like a lot of these platforms, just the behavior that I see is not.

not very different than what I see the few times I've gone to Vegas in a casino. So, I mean, and there's also a lot more things that have become investable, but if I'm also being honest, I'm not sure how many of them should be investable or even if I would consider them investing. I'm not going to throw names around, but I've seen people trying to democratize art and sneakers and wine and whiskey. Those things are fun, but, and I've seen people talk about historical hot performance versus the S&P. I'm not sure if I totally buy that, but I would say I'm definitely surprised by how many people are looking to financial markets for, and I I think they're almost exuding a behavior that seems like it's more of a social status game

as opposed to I'm optimizing for better returns. I mean, this is just like, and you've seen this with the NFT boom as well, right? I think people just want to participate and feel like they get to be part of a conversation. Doge coin is like another case in point, right? I don't think anyone would regard this is like long term investing, but I definitely think a lot of this will be sticky and a lot of it won't. So Ben has a theory that actually the rise in Robin Hood traders, let's call them, is bad for active management because why would you pay somebody to do it when you can do it on your own? Now, caveat, from March to March, like 97% of stocks and the Russell 3000 were up, inarguably, just based on stock price action, the easiest 12-month

period ever. I know it wasn't easy, but basically you couldn't miss. It was like shooting fish in a barrel. So I was surprised to see that Betterment actually raised like a ton of accounts in this over the last year because you would think that everybody's just doing it on their own. So Ben's theory is that people are going to do it on their own. It will be good for indexes because they're going to sort of leave indexes on the one hand and they're going to pick the stocks on the other hand. I'm guessing you don't buy that, but I'd like to hear your take. It's interesting.

I think these market shocks generally are going to be better for fintech platforms. And I think it's because you're just getting more money off the sidelines that was sitting in cash. So I generally think it's better for people to be investing dollars than all as equal, cash that could be invested, ostensibly. They have savings. They have a rating day fund. Then it's sitting in cash. But I think your mental model for that arc is actually pretty accurate. It's like they go from cash to chasing, you know, participating in this phomo, right? And a lot of people got involved late last year earlier this year, like classically near the peak. And then they get blown out. And then the question is, well, where do they go? I think a lot of them are going to pass the platforms.

And you see that in the account openings that you mentioned. A lot of them are also saying, well, I learned a lot about myself by participating actively, not just picking stocks, but I actually like following these companies and being in the know, so to speak. And we're seeing a lot of those clients come to a platform like tight. That's a really good point that we, I don't think we've touched on it off, Michael, is going from cash to at least something. And so because we've been trying to look at the pros and cons of all this retail trading room and figuring out, you know, how much of it is good, how much of it is bad. But I do agree with your point. At least people, more people are investing now. We're seeing people open of accounts. And the fact that FinTech has

come in and made it easier to open those accounts is certainly a net positive where it's getting people off the sidelines and at least doing something with their money instead of just sitting there in cash and worrying about what's going to happen with that money. Yeah, more mortgage accounts is better than less. Clay, you strike me as like sort of a whiz kid. I don't know how old you are, but were you picking stocks as a teenager? I was a teenager in the early 2000s and my parents opened a custodial account from you and I was 12. I think I had shares of like, I think it was America Moval. Do you remember that? America Mobile, the Carlos Slim Company, the Salcom company, and then I was like, oh, this guy's really smart. And so I bought some Petrobras. So you'd answer

your question, yes, I was picking stocks. I was a teenager. I thought I was a genius. I thought I was a waste kid. You know, I was really just writing beta in the energy markets, if you remember oil prices, and like from 2003 to 2007. And then, and then I got to Penn, 2008, fall and blew myself up and you know learned a hard lesson like the path to riches is not blindly listening following kramer picks on mad money but yeah so i was a to your earlier point i was a good case and point of someone who got who made those mistakes early with small dollar amounts so you know that's what i hope comes out of all this i hope that people dip their toes call it what it is speculating or actively trading is for a small percentage of my wallet and that at least

opens them up to the idea of investing much sooner than they would. Whether they go active, whether they go passive, I think we would all agree it's better than over time. In a given year, yes, it may be bad for them that they're actively DIY trading. But over the course of five, 10, 20 years, it hopefully starts to compound in their favor. We want to get into some of your strategies and stock picks and all that stuff in a minute. But one of the things that always struck me about your platform when we first learned about it is the research component. And you have this app and you are providing feedback and trying to educate people. And that's what I think is missing from a lot of these platforms is the education component. And it's not even

making people better investors themselves. Sometimes it's just helping the communication helps people stay invested. So how has that component changed for you? And I know you were doing videos on the apps and it's a really cool interface, but how has that changed over time with you in terms of feedback you've gotten or things you've changed or updated on that on the research side of things? Yeah, that's a really good point. I mean, over time, what I've learned is to kind of rewrite the rules from what I've learned from the by-side. So I came from a world of writing or helping write 20-page quarterly letters to LPs, right? And if when they swing by the office, they're a big pension or endowment fund. So you take the meeting begrudgingly and you, hey, well, you're

top three long, your top three shorts. How do you explain this underperformance or overperformance? And like, that's the investor experience. You quote Socrates. Duh. You quote Socrates. Yeah, exactly. Exactly. You got to, you have to quote some medieval warrior, some ancient proverb to explain the performance and and so on. What I learned coming to Titan is, by the way, the first several quarters, we did exactly that. I was like, oh, this is a no-brainer. Like, elite hedge funds do it. Retail will love it. What you realize is after the first two paragraphs, they log off. The average attention span on a mobile app, I think is something like 17 seconds, the average session. So that model clearly will not work. And so what we started doing is we started,

okay, let's collapse the 20-page PDF into a one or two-page memo. Let's collapse the 30-minute podcast, not that we do them very often, into a one or two minute audio note. And we also built stuff internally, like on the engineering side. So we built native video. If you go in the app right now, we have actually this thing called magic moment onboarding internally. And it's effectively almost like masterclass meets Instagram stories from your money manager. And we just did that in terms of onboarding. People understand how our strategies work, but we're going to be rolling that out across every time we initiate a new position or size up or size down and make a trade. So we're basically focused on how do you make money management come to life. And if an investor

stop by your office and just sat and shadowed while analysts did work and an investment committee was in session, how would that experience look and kind of bringing retail to that front row, we call it court site seats. And that's been super exciting. And how we measure that is we kind of look cycle to cycle or I guess in this case, you know, correction to correction. We look at monthly month over month churn in both clients and dollars. And what we've seen is our month month over month, sure, and even in big corrections like the one in COVID, our month-to-month client retention is over 99% and our asset retention is well in excess of 100% and those metrics having getting better point to point. So we're basically saying like all else equal. And we looked

at it both in times where Titan's underperformed an index that was up and when both the market and tighten are down. So it's like, is Titan losing as a value proposition or is everyone losing? So we try to be really actually, intellectual, honest about it. And we've seen those metrics continue to get better as we build product. So it's pretty exciting. I mean, to your point, on how far we've come, you know, we just hired two analysts today. So it's been a pretty lean investment team. We just hired two people that came from respectively, the buy side and the south side. So I think we're just at the tip of the iceberg, but it's honestly kind of shocking to me that more money managers haven't done it. I mean, Kathy Wood, I'm not going to go into it.

She gets a lot of flack, right, for her investment performance and, you know, chasing beta and charging 75 basis points. Regardless of what you think about her investment acumen, she's a wizard with media and what her team has done, right? And she's clearly used it to grow a business. And by the I think all is equal. She probably has made her clients more money. I'm just guessing. Having done, built that media platform than if she had just spun up an ETF and then a black box. And I think that's good for everyone. And looking at your holdings, which we'll get into it, it looks to me like you're, at least in the flagship, large growth. It's certainly large, around $500 billion. The growth will get into that. But okay, so you own the fan mag stocks. But in addition, you own MasterCard. Viz and Schwab, which I think is interesting, considering that you have so much talk about defy coming in, disrupting finance, building the next layer, or even replacing the incumbent institutions. What's your take on defy, traditional finance? Like, where do we go from here? DFI is really interesting. I feel like the way it'll play out. So I talk a little bit about

what I think about DFI as a value prop. I think the way it'll play out is ultimately a buy versus a bill type of situation. The one thing that these incumbents have going for them, whether you believe defy or not, is like the rails are built and man, are they fast? I mean, Visa and MasterCard off the top of my head, I believe it's something like in the order of several thousand, if not several tens of thousands of transactions they can process per second. I think Ethereum is on the order of like 10 transactions per second.

So you're talking about many orders of magnitude more efficient. But that being said, it's about the rate of change, right? And I think the rate of change and the pace of development and interest in DFI, is growing so quickly that you know you can wake up overnight and that could all change but I think the reason that we own those in spite of our belief that defy will be huge I don't think those are opposing views necessarily and I can talk a little bit by the way about how we're thinking about crypto because we're definitely exploring that pretty deeply as an investment product but I think I think it's the type of industry where the rails are built the transaction processing is so good

and the secular tailwinds are so strong I don't think it needs to be an either-or decision I would rather own those kind of secular compounders in size and then start to gain some exposure to defy and just monitor and have sort of signposts for what I think the tipping point could be. But if I'm being totally honest, I don't think we're anywhere close to a tipping point where I would say like those moats are going to start to be eroded to make us rethink having a 5% weight in each of those those payments names. Okay. As a good podcast host, the light just went off and I have to ask you about crypto now since

you teed it up for us. So what are you guys thinking about this space? You're trying to get into it possibly thinking about developing strategies. Where are you at? I'm going to pull the classic, I can't devolve too much card, other than I think the ship has sailed on people calling it, I mean, well, there's some people, for example, on Twitter that still call it a Ponzi scheme in it. It kind of irks me, but to each his own. I think we've crossed the chasm, at which point it goes from being a career risk to own it as an institutional allocator to a career risk not owning it. And what that means for flows and supply demand is going to be really interesting. So in other words, I think it's worth having some non-zero exposure for a certain type of client. So the way that we'll ultimately approach this problem is it's not going to be everyone owning it, or at least our recommendation that everyone owns it. And it's certainly not going to be a significant portion of your portfolio.

And that's just because, you know, at some point, an 80% drawdown actually does massively hurt your compound return. But, you know, I have, you know, my friend runs a company called Bitwise and, you know, Bitwise is building the Vanguard for Crypto and they've done to back tests. And I would say back test is back test. But I think there's a case where you can add a non-zero amount of crypto, call it whatever you pick your poison, 50, 50, 50, Bitcoin, ETH, 70, 30, Bitcoin, Bitcoin, And over time, maybe a long, a little bit of the long tail of defy tokens like compound maker

where I think there's really interesting stuff going on. And even on any three-year rolling basis have maybe flat to up IRAs and a positive sharp ratio kind of implication. So in other words, I think it's a healthy addition to many portfolios in a reasonably small size. It kind of gives you a toll hold to at least start to monitor this space. So that's what we're thinking about it, at least. I said that you guys are growth a, but one group of names that's a, conspicuously absent from the flagship are the 2020 winners. Zoom, Teledoc, Spotify. You in Shopify, I believe, right? We do. Okay. No Snap, no Twitter, no unity, no snowflake. None of those 90x sales names. Why did you avoid those? Yeah, it's a good question. I would say at the end of the

day, over time, ultimately things trade on free cash flow. So I like to at least have a line of sight to that free cash flow margin being positive. So at least adjust to me. It's not a crazy moonshot pipe dream. You know, some of the names you mentioned, I'm not admittedly not super close on. But, you know, something like Twitter, for example, that's an activist turnaround story. I think that's a monetization story that I would almost put in a completely different camp. But to your point on like the cloud names, you know, Shopify, you know, they're growing, I think, in the 30, 40% range top line for the next year, and they have a 20% plus free cash flow margin.

So, I mean, you know, penciled that up for a few more years and assumed some more margin leverage to the upside. This thing could trade at like 40, 50 times for free cash flow and I think has a more resilient mode than I can't think of anyone else doing that in e-commerce enablement. So, yeah, like I said, we're looking for either established or emerging compounders with, you know, the rule of 40 is sort of a good rule of thumb, you know, top-minds and free cash flow margin.

So rule of 40 is you're looking at essentially top-and-a-termary. top line growth plus the free cash flow margin. And it's kind of trying to put together the two pieces of the puzzle I just mentioned. So top line growth as a indicator that you're in a secular really growing business with hopefully some semblance of like market share gains. So some competitive advantage with a sustainable business model as identified by, you know, a free cash flow margin. So a company growing 20% top line with 20% free cashional margin will meet that. Yeah, there's companies out there that are growing top line 50, 60% with negative free cashel margins. Trade desk, is that one of them? I don't know if they're growing quite that

quickly. But we'll get into the growth sell-off. So let's put a pin in that. But the biggest winner in your flagship fund is PayPal. So obviously, you're very familiar with financials. PayPal. I already mentioned MasterCard, Visa, and Schwab. One thing that sticks out that's not included in the group is Square. I'm sure you've looked at that. I'd be curious to hear your thoughts what's going on there. And it's a crypto plate potentially. So why not Square? Yeah. I mean, Square was one of the biggest misses I've ever made, bar none. Yeah, I just missed it. it's always screened too expensive. What's funny about Square is the single reason you would have bought Square, in my opinion, as a rational fundamental investor in spite of it always screening

expensive is because the essence of what makes Square potentially very not expensive over time is so core to my business, which is customer acquisition cost. That's what's so funny. So putting aside the crypto thing for a second, Square has the lowest. It is insane. I think they pay something like $5 paid. That's not even like blended organic plus paid. I think it's something like five or $10 paid customer acquisition costs for a customer they're getting an engine ecosystem and earning spreads and they're making interchange fee and it's just insane and the amount of ways they can monetize relative to the cost to acquire. So in other words, they just built an insane mousetrap. And a mouse trap honestly hasn't changed that much. They built a lot of like backward

integrations and compatibility and the user onboarding is insanely sleek and fast. But that was obvious several years ago. So in other words, in a new life, how would I have avoided that mistake? I probably would have been a more fervent user of the product and actually seeing like, what the hell is this all about? Like, why are people so bullish on Square? The product is just so good. It's that simple. And if you can underwrite that cack for the next three, five, 10 years, the stock gets really

cheap really quickly. And by the way, they really haven't spent much money in marketing. That's the amazing thing. So Square is something that's, it's, you know, I feel like everyone has those misses. Like, you know, Buffett talks about it that, you know, the thing traded a half a turn of a multiple higher than I wanted to. And the thing compounded like 20% for 50 years. And Buffer was famously like good friends with Bill Gates for 30 years and never owned

Microsoft. So he certainly had some misses as well. You keep talking about like screeners and quantitative stuff. Does that override the qualitative or is that like how does the qualitative part factor into your portfolio? It's the most important thing. I'd say qualitative research is 80 or 90% of what we do. That 10 or 20% though, like that 10 to 20% if you don't get it right is is how you get hit in the face with like a 50% drawdown. Like I feel like all these growth and momentum bros, so to speak, you know, that we're pumping a lot of these stocks in January or February are down 50, 60, 70%, not because they were wrong of the qualitative, but because they were just overlooking the valuation.

It was like almost like there's no price too high to pay for this amazing business. Like this compounder. And yet that's wrong. So I would guess, well, maybe it's not wrong. The question is what's your time horizon, right? If you buy something, it's an amazing business. It draws down 50%. And then it goes on to compound 20%.

a year for a decade, but you can actually earn above market return on that, right? But I think a lot of these people that are buying these stocks are not playing that game. So that small quantitative component kept you out of a lot of these because, for example, right now, as of right now, the NASDAQ 100 is down like 4% or something off the highs. It's getting hit pretty good today. But then like the ARC fund is down 30 something percent. And then, yeah, like you said, a lot of these companies could be down 40, 50, 60 percent from their highs, which is kind of crazy. So you think a lot of that, those screeners at the first step, at least kept you out of some because they were just way too expensive for you to really develop position in.

Yeah, you know, if you just, you pencil out the math on like, what do you need to believe to make money? You're just pensions out so many optimistic things. It was just insane to me. Like, you're penciling out accelerating top line growth in multiple expansion in some cases. And I feel like a lot of people, they want to believe, like, again, there's a little bit of that fomo that seeps in. They won't admit it, but they're trying to justify or build assumptions in to justify while they're buying the stock. And I'm not going to say arcs the ultimate poster child for this, but some of the models I look at,

I'm like, that is, I wouldn't call that a margin of safety that you're penciling in there. So squares something where I thought the margin of safety wasn't as large as I would have liked. And the business has just shown that like, yeah, we're going to grow at such a fast clip and the cack's going to be so sustainably low

that yeah, your 90 times sales is going to look like 10 times sales or whatever. Your 100 times is going to look like 20 times in just a few years. So the trade desk, which I spoke about earlier, they just reported earnings. They beat, by the way, and the stock's down 25% because they didn't beat by enough and, you know, whatever else. But this is already in trend.

This is already in motion where these growth stocks were selling off. Like Ben said, with the market, the S&P, the down at all time high, even the NASDAQ, it's just 2% off the high. But if you look at some of the high flyers, I mean, there's a lot of damage. All the 2,020 winners are cut in half or worse. What do you think is going on here? Do you think it's a combination of a fear of rising rates and maybe inflation? Do you think it is just simply investors were paying too much and they just went over the line?

Or is it maybe that like why go to Mars for growth when companies right here on Earth, some of the industrial value energy names, materials, what have you, when they're delivering double-digit growth? What do you think is going on? Why are tech names under pressure? I'm forgetting. What's the saying? The cure for high prices is high prices, I think is the saying. I've lived through a few of these and it's never obvious. It's never obvious at the outset. It's always quote unquote obvious in hindsight. So I would be probably trying to, if I'm being honest, justify why these things are down. What I can say looking at the data is that the high growth. I mean, there's a guy, I think he's now at Altimeter. His name is Jammin Ball. I don't know if you follow his stuff. He puts out a newsletter called Clouded Judgment. should definitely subscribe to it. It's great. He basically puts out a weekly newsletter and he talks about some of the NTM kind of EV to revenue multiples for some of these cloud stocks. And he buckets them high growth, medium growth, low growth. And basically after this 30, 40%

drawdown you've seen in like the ARC funds, like we're still 30, 40% above multiples pre-COVID. The average cloud company traded, I think, at 10 times forward revenue and we're at 13, 14 times still. So yeah. Now, the question is like what set that off? Because that was obvious. It was obvious that we were trading above the average multiples in February. Zoom was bigger than Exxon. 100%. And it was obvious. So the question is like, what changed? Well, people were justifying why multiples would remain high. And it was generally boiled down to some macro view, whether they wanted to admit it or not, generally related to inflation and interest rates. And then, yeah,

the 10 year yield spiked. And then people said, oh, inflation, it's a real thing. And then yelling and Powell came out and said, oh, it's not a real thing. It's transitory. And so you basically had all the telta signs needed to convince yourself 10, 20% down to just buy the dip. Because you had the quote unquote decision maker saying it was transitory and that you're still telling yourself that same fundamental story when names are at 30 times sales. And now they are at 20 times. But if you're just looking at the data, you can make the same arguments a month from now and we could be 50% lower and still not that cheap. So what was the catalyst? I think it was something macro related. But again, people are always looking for a reason it feels like to justify why names are moving down

word. I like to think that it's just a cleaning out of a lot of this retail froth. It's funny. It's not even just the cloud names. Like the SPACs are just getting hammered. Some clients have asked us like, hey, what do you guys think? Like, why have SPAC volumes dried up? I'm like, same reason, right? It's reflexive. Things are really popular until they're not. And then all in a one fell swoop. Holy cow. Virgin Galactic. One of Tramoth SPACs got as high as 63. Now it's 18. open door was as high as 39 now at 16 man a lot of destruction here spiak which is i guess the et f is in a 30 plus percent drawdown so this is the point we say it's a stock pickers market but how did you all make it through when we had actually had the crash and everything so the

s&p was down 33 or 34 percent did you make a ton of moves at that point did you kind of just hold firm and keep your positions we were adding like what was your strategy during the bare market? So we didn't make any position changes, like single name stock changes. We were really fortunate, one of my closest friends, my old roommate actually, who's been at, works at a large tiger-esque fun. I can't say which fun, but he had just come back from China in mid-February. He just on a series of management meetings in China.

And he came in and did a Titan talk. We hold these Titan talks every once a month on Friday. It's like a lunch and learn kind of session. We bring someone from the by side or who's a product manager or an engineer to teach us something. And we had my friend in and he was basically like, get out of anything, China and watch out. We basically, that was February 26 or 27th. We moved the whole company to remote work the next day. And we put hedges on immediately for clients. So we took between 5 and 20 percent of everyone's net asset to type and put an inverse S&P hedge on. And yeah, so as a result,

I think we had something in like the high teens, the low 20s drawdown relative to low 30s, the S&P. So it wasn't like we were sitting here like Bill Ackman, like up whatever, thousand percent on our hedges. That was never the intent. The intent was to hopefully protect against potential volatility that this really smart, high believability score friend was telling me about. And hopefully that keeps our clients in the game, which is what this is all about not to make a quick buck. And it did. How do you figure out when to take that hedge off though? Because that's when, when stocks are down to 30 percent. Remember everyone at the time was saying, okay, I'm a buyer when stocks are around 50 percent because it's obviously going to happen.

the economy is shut down. So how do you make that decision to then take them off? Because when stocks are getting crushed day after day, it feels like you feel very secure having things hedged, whether you're in cash or shorting or whatever it is. Yep. I was going to be my next point, which is I'm never the type to state what weren't right and not what went wrong. So fast forwarding basically a year since then, we kept our hedges on essentially all of 2020. So the hedge went from a really nice tailwind and protection to a net headwind. Now, our strategies were up between like 45 and 60% last year. So, you know, fortunately, the longs outperformed that that net headwind from the hedge. But, you know, to your point, every single reason to keep the hedge on

in place was pretty much true up until recently, I think. And like, we just took them off about a month ago, those hedges for reasons I could talk a little bit about. But, you know, at the end of the day, no one saw this coming. And everyone can say in hindsight, you know, oh, it was no brainer, like unprecedented Fed and monetary and fiscal stimulus. Of course, it was not at, all the case that the Fed would do anything to prop up markets. And you had plenty of other data points to suggest that this game would end badly and it was not over. Whether you look at the Spanish flu or the H1N1 virus, you know, there tends to be a second, sometimes even a third wave. And from the data on file that we can track, generally economies roll over as a result. So by the way,

we did have that second wave in the winter, but markets didn't care. So we were right. I like to think on the economic impact. Well, we'll see right on how we thought. that the fundamental story would play out and just dead wrong on the technicals. And, you know, that's one thing that would we learn from that. We kind of, I think internally, we've learned to sort of trust technicals a little bit more. Technicals can kind of start to signal things that retail investors and like the markets fundamentals only catch up to later. And, you know, you can drive yourself crazy, trying to look at charts and like, you know, head and shoulders, whatnot. I don't believe in a lot of that stuff. But I do believe that flows and sentiment and stuff can help you

time a little bit better. And I think we potentially overstayed a welcome a little bit on the hedges. But you're exactly right then. Like the real benefit to that, I'm not looking at it like what is the sharp ratio benefit that we gain month over a month. I'm looking at like how many clients went to cash and missed the entire thing. And I'm proud to say that it was almost, almost none, like a tiny minority. So let's talk about like turnover inside of your portfolio because PayPal, you're up over 200%. So obviously you have. the ability to ride winners, which I found personally to be incredibly difficult. What does turnover look like qualitatively? Like, how do you know when the time to hop off

PayPal is? Like, when do you say, like, all right, it's been a good run? How does that work? It's probably the single hardest thing in investing, at least for me. What's the thing that Munger and Buffett like to say? We're great at buying. We're not good at selling because it's knowable, right? Like the buy is knowable. You know your floor is zero because you don't take leverage, you know, there's a cash flow margin of safety. There's really no, no quote-unquote margin of safety on the upside, especially if you're right on the buy, you're right on the business. So yeah, most of my biggest, most of my losers, so to speak, were arrows over not omission, but commission where I sold too soon. Now, there have been names where we did sell too soon.

So, you know, PayPal was not the cherry pick, but PayPal was one that we, you know, that we've held on to and it's been solid. There's been names why we sold and we're kicking ourselves. Moody's is a great example. Moody's is a triple, I think, since we sold it. And nothing about the business has changed. And it's just hell that's multiple. Let me pull on that threat if you don't mind. So I know I'm asking you, and you can get back to, you can get back to selling. I just want to make the point because I was going to ask you, and I mean this in a no disrespect way, but why would somebody use Titan instead of using something like the Ross 1,000 growth or NASAC 100? Because it seems to be just a large cap, $500 billion market cap, you know, mostly growth names. But you just spoke

about Moody's, which I don't think anybody would think of Moody's as like a high growth type of business. So maybe just talk about that too. Yeah, it's a great question. And it's maybe as a corollary, one question we get occasionally is like, why not use the NASDAQ as the benchmark, like, or why not use the Russell 2000 growth index as the opportunities benchmark instead of just the Russell? The reason is because, you know, unlike, let me just give an example like an arc where that's like, we invest solely in disruptive innovation. Our tagline is not we invest solely in tech stocks. The goal is we have a benchmark, we have a mandate, we have a universe. We typically define that as a certain market cap, a certain geography, and a certain flavor of a certain flavor. In the case

of our equity strategies, garp flavor, generally speaking, quality growth. But we look everywhere for quality growth. And there is, we own trans time. We've owned some, you know, Moody's analytics type of names. And so we want to make sure that we're nimble enough to be able to adapt with whichever way the wind blows. Because look, at the end of the day, like we're looking at some health care stuff, like names like Thermo Fisher. And there's a world in which we do have a three to five year period where growth under performs value. And I do, by the way, I do think there's quality non-tech businesses, even though basically everything's becoming tech enabled. There are some businesses that we're not to find as technology that I think are really good businesses. So they're

not all cyclical trash. But the more statistical answer I would give you, Michael, is like look at our beta. We have a sub one beta over the last three years for flagship. That's first the S&P, not even the NASDAQ. So, you know, if you look at the arc beta, just as a corollary, I think it's well into the 1.4, 1.5 range. So it's just not statistically true to say that we're taking more risk, even though it feels that way or it looks that way, if you define risk as technology. What if growth does enter some sort of temporary winter where it goes through to five years?

Can you ever see yourself owning like a material stock if it's more just like multiple expansion as opposed to like real growth or like talk about that? I would say I've been trained as an investor to generally look. I mean, if it's not growing five or 10% organically, a lot has to go right to your point on multiple expansion to just generally outperform like a, you know, an SEP of 100 or like a NASDAQ index fund. So it's really hard to find materials names growing like five to 10% organically. You can find them growing that on the up cycle, but through the cycle really tough. There are exceptions. Like there's some like some of these auto auction houses are really interesting. Some of the,

the there's like, yes, there's some healthcare tech stuff that's really interesting. So I would say like there's things on the picks and shovels as opposed to the actual gold, like the, you know, if you're going hunting for gold, we'd rather own the picks and shovels. We say that all the time. So I do think there's ways to own non-tech businesses, but I wouldn't want to own necessarily the commodity. I think I've never been good at like playing the cycle. I worked in private equity where like we specialize in energy and healthcare and been so right on the thesis and just gotten burned because oil prices fall or reimbursement rates crater. So never say never, but, you know, Yeah, the sort of stuff that we're looking at, by the way, I mean, not to anchor too much to

this last few months rip for value. There's definitely some interesting things on the more industrialism material side in aerospace as well. So, and that's why we want to have, we talk to our clients. If we made the benchmark the NASDAQ, now I'm being disingenuous. If I go own translime or if I go own one of these names. So at the end of the day, the S&P is the lazy person's alternative. That is, that is best encapsulates American business better than I can think to do otherwise. On the other side of that, last summer you guys launched your Titan Opportunities Fund, which is small and mid-cap, and it's much smaller because your average market cap is $9 billion versus $500 billion for the flagship fund. How does that differ? Is the universe greater? Is it easier

to find growth opportunities there? How is that different than your flagship fund? So we think about flagship as large cap, call them established compounders. So established meaning we would generally, I think, all coalesce around agreeing around that they have an economic moat. So we define that as 10 billion plus market cap and U.S. domicile companies. Opportunities we launched in August 2020. And the goal there was one, I think people are, I've been, you know, rightfully so or maybe luckily so, but way over indexed to large cap U.S. equities, large cap growth specifically. By the way, that's been an amazing place to be. And if you just parked all your money in the QQQQQ, you look like a genius. But as my friends like

Dan Rasmussen would say, there's plenty of data to suggest that small and midcaps are significantly undervalued. And we saw that. So our clients asked us about small midcap exposure and we just saw the data at the time. So we launched that strategy. It was both a allocation decision and just to bottoms up, we saw a lot of interesting stuff in small midcap land. So we define that probably a little bit different than most people. Like we go all the way up to 10 billion of market cap. By the way, there's a couple of exceptions, names that have doubled or tripled for us and now are their 20, 30 billion dollar market cap. And there's a few names like Roku that we've owned in spite of that being a little bit above that special. But I would best characterize

opportunities as emerging compounders. So they're not yet necessarily absolutely pound the table, like wide establish economic moch. They're still in the phase where they're probably under-earning. So they screen expensive on a EV to sales basis or they're not super liquid. And that's the opportunity. So opportunities are names where if our cards are played well and we look out three to five years and we're right on the thesis, this is like a flagship contender. That's kind of how we think about opportunities. So we had companies like Collectors Universe. That was like a couple hundred million dollar market cap card memorabilia authentication company all the way up to a Roku or a crowd strike where it's in the 20, 30 billion plus market cap range. Clay, what's the most

important piece of feedback that you've heard from your clients? I think being intellectually honest and explaining things is more important necessarily than the day-to-day performance. That's the most counterintuitive thing, I think. Like people really undersell. the retail investor. And for good reason. Like, they think they're just true dumb money and that they don't have the capability to understand or even the desire to understand companies beyond the ticker. Honestly, I think it's largely a function of the tools they've been given. Like, even rewind to the mutual fund experience of the last 30 years, it really hasn't changed. The mutual fund user experience for retail is no different than buying a stock in, like, Robin Hood,

or E-Trade. It's like you see a four or five, well, the difference is that there's one more letter on the ticker. That's it. You see a chart. You see a three to five. You're backward looking track record. You see a morning star rating and people buy on the basis of that and there's little to know investor communication. Maybe you get a once a year prospectus in the mail from your mutual fund company and it's like a 90 pager and you're going to use it as campfire fuel. And so that's still the experience from these managed fund products, again, with a couple of exceptions of folks that have used Twitter and other platforms. So our clients have told us keep doing what you're doing on that front, give us more, more variety, short form,

medium form, long form. A lot of people have been pushing us through a podcast ironically. And the goal is not just like nice to have like fun entertainment. There's definitely a little bit of that. But the goal is it keeps us more accountable as investors. And it keeps investors invested longer because I understand what they own. And by the way, part and parcel with that is like owning up when you're wrong. Like generally every quarter or every couple of quarters, we do an email to clients called retro on our losers. And we just look back at a loser. either a name that we sold too soon or a name that we overstayed a welcome on. And like that sort of stuff adds up.

And like, again, going back to quarterly letters, most managers don't do that or they only do it when they've had massive up months, right, where they can kind of hide under the guise of their gains to like, you know, start to admit a couple of their losers so they can keep LPs business. But yeah, I think wrapping up, I think like retail investors have been undersold. People have assumed that they won't read, that they won't understand a thesis. And yeah, the reality is if I throw them a 20 page quarterly letter with the, bunch of macro charts, it may go away over their head. But that's one of the competitive

advantages I think that we're building is like we're bringing people on board from the buy side and the sell side to manage money at Titan who are incredibly good at distilling a thesis on an industrial's name or some commodities play into a one or two paragraph thesis that my grandmother can understand. And that is that is a superpower by the way. That's not easy to do. That's why by the by the way, some of the best investors are great writers. It's Einhorn. say what you will by Einhorn. It guy is an incredible writer, Dan Lowe, Buffett himself, obviously. And so, yeah, I think communication is what I would articulate is like the biggest thing

we've learned from clients. And in times of underperformance, that matters even more. Anything else you guys are working on that you can tell us about that is going to be made public? I can tell you philosophically what we're thinking about without indulging too much about it. I think there's a huge opportunity in private placements and private assets. I think people have people being like entrepreneurs in this. space have leaped a little bit too far into, let's jump into alternatives that no one

is investing in and democratize those for retail, whether it be old school, classic cars or sneakers or wine. I think the elephant in the room is like, look at the $4 trillion in hedge funds, look at the whatever X trillion dollars in private equity. Look at the Y trillion dollars in VC. Why not figure out that problem? That's the problem. The guy next door who's contributing to the wealth gap is not investing in art. Sorry, like not investing in sneakers. He or she is investing in things that are already, you know, liquid or unliquid, but they're established today. Yeah, there's a lot of complex regulatory and compliance reasons why you can't get into them. But that's the sort of problem that's right for us to solve. You know, people thought that this current

structure with Titan was impossible. It's not impossible. We're just, we're not a fund. We don't take carry. We set up a platform of SMAs. So yeah, you can build the same hedge fund like experience without having to have a lot of that same overhead. And I think you could run that similar playbook, frankly, in private placements, whether you're buying entire companies or you're getting people into the series A, series B rounds of, you know, I don't know, X, Y, Z startup. Obviously, there's an adverse selection problem there. So that's the one really important thing about private assets.

You don't have the benefit of the market to decide what's a stupid asset and what's a great asset, right? You only know that in hindsight. And if you commit too much of your capital, you die. And so regardless of where you believe Nicola is a fraud or Neo is a fraud or it's an amazing company, you should buy the SPAC in, the market's going to make that known, I think, relatively quickly. You know, a lot of these platforms trying to democratize venture investments, startup investments. A lot of the stuff I see in these platforms is not a not a great business or at least it's not clear to me why it's a good business. And so to get people into something, that's great.

It's great for a step. But I think there's a big, there's a large white space for an authority. in those asset classes. And so just like Bridgewater started and I think he started in was a, I think we started, Ray started in fixed income in the 80s. He was basically, or I think it was commodities, actually futures. He started training futures and that was a specialty. And now you look at Bridgewater and they're everywhere. I think, I think private assets is a huge space. So whether that takes the form of something like Titan Ventures or Titan private equity or what have you is still TBD, but that's a much more interesting space to me than going and trying to make some

inanimate object investable. You know, and if you want to be the next day to ALEO, you can start now by just creating your own LinkedIn blog because he has that. There you go. I agree with you on the venture private equity. I've said that to Michael before. I can't believe someone hasn't tried to get into that space

with how big it is and how much demand there would be. Totally agree there. Yeah. Awesome. That's a good place to leave it. Clay, thanks so much for coming on. We appreciate you taking the time. Of course.

Great to be here. Thank you, guys. Thank you. Thank you.