The Pomp Podcast - 324: Former Public Pension Chairman Marc Levine On Investing During The Pension Crisis

Episode Date: June 29, 2020

Marc Levine is the Former Chairman of the Illinois State Board of Investment. He also started Chicago Asset Funding, which navigated the 2008 financial crisis very profitably. In this conversation, we discuss runaway pension liabilities, the disciplined systematic approach Illinois used to go from 3rd quartile of performance to top 8% in 3 years, the importance of overweighting tech and innovation, the index model of pensions, and what it will take to get Bitcoin in every pension portfolio. =============================== Our second sponsor is choice, a new self-directed IRA product that I'm really excited about. If you are listening to this, you are likely part of the 7.1 million bitcoin owners who have retirement accounts with dollars in them, but not bitcoin. I was in that situation too. Now you can actually buy real Bitcoin in your retirement account. I'm talking about owning your private keys and using tax-advantaged dollars to do it too. Absolute game changer. https://www.retirewithchoice.com/pomp  =============================== Pomp writes a daily letter to over 50,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Mark Levine is the former chairman of the Illinois State Board of Investment. He also started Chicago Asset Funding, which navigated the 2008 global financial crisis very profitably. In this conversation, we discuss runaway pension liabilities, the disciplined systematic approach Illinois used to go from third quartile of performance to top 8% in three years, the importance of overweighting tech and innovation, the index model of pensions, and what it will take to get Bitcoin in every pension portfolio.

I really enjoyed this conversation with Mark, and I hope you do as well. Before we get into the episode, though, I want to quickly talk about our sponsors. The first is BlockFi. I'm a really happy user and an investor in the company. They currently have three products. The first allows you to buy and sell cryptocurrencies. The second allows you to deposit crypto and take out a US dollar loan against your collateral. And the third is my favorite product, which allows you to deposit crypto or a stablecoin and earn up to 8.6% interest in an interest-bearing account.

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talking about owning your private keys and using tax tax advantage dollars to do it to absolute game changer. So go check out choice a new self directed IRA product that allows you to buy Bitcoin hold the private keys and use tax advantage dollars to do it. Retire with choice.com slash pomp. Again, retire with choice.com slash pomp. And then lastly, don't forget that I read a daily lettered over 50,000 investors about business technology and finance. I break down complex topics into easy to understand language while sharing my opinion on various aspects of each industry. You can subscribe at pompletter.com. Again, pompletter.com. All right, let's get into this episode with Mark. I hope you guys enjoy it. Anthony Pompliano is a partner at Morgan

Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys, bang, bang. I am super excited to have Mark here today. He's the first person to come on the podcast who's actually sat on the pension side of the table and made all the decisions and kind of looked through everything that we spent a lot of time talking with here. So Mark, thanks so much for doing this.

Thank you for having me, Bob. Yeah. For the like three people who watch this who don't know who you are, let's just start with kind of your background and what did you do before you got to the Board of Investments? Sure, sure, sure. So I come out of the financial world. I, back in 1990, which is literally a lifetime ago. I came out of Kellogg and actually worked for a couple of banks in Chicago that Continental, which is now part of B of A. And I got it very, very early days. Okay. I got into securitization. So the kind of creation of asset-backed securities. And so this is like five years after Luridary invented the mortgage-backed security. So it was

the great, it was the most fun thing in the world because you were like inventing with every deal, you were inventing something. It was really a blast. Pretty quickly, at the time, my boss and later partner figured out that going through the whole process with rating agencies, etc., creating a beautiful investment-grade bond was an enormous amount of work, and then we would double the work and go to investors and actually, frankly, give them all the upside. We actually invented a structure investment vehicle, which were basically initially Merrill and later Solomon, which became Citi, would raise capital for us really off of our credit ratings and our track record as it got built up.

And so we really financed all of our paper through the structure investment vehicle. In about 2004, I started with a new partner, Jim Kostakis. we started Chicago Asset Funding to essentially do the same thing. And, you know, so before we kind of get to 08-09, which was quite an experience, you know, so I invented all sorts of new asset classes in asset security, only because I was kind of the first one doing it, among the first people doing it. One of them, funny enough, was precious metals, which sort of plays a role in your world. Right. And, uh, so I did the first ever securitization of gold, silver, platinum, um, uh, both, uh, you know, kind of the physical metal and, and warehouse receipts and loans

secured by that did feature films and equipment leases, et cetera, et cetera. So, so then you kind of pop up like, Oh, 809 and Chicago said funding's kind of churning along doing fine. That's not so great. Not so bad making a decent living. And, um, and then, you know, the sort of storm came. And the way our vehicle worked is we match funded our assets, which was quite unique, right? Because hedge funds, of course, have like redemption, like, you know, sort of rapid redemption. And, and most structured investment vehicles had a lot of commercial paper funding, like short term, you know, kind of super risky balance sheet. All right. And so we had our capital in, let's call it late 08, lasted through 2012, 2013, which at that time literally was

forever, right? We're talking right after Lehman failed. So that was permanent capital. And what we did was we moved, so we had nice corporate paper. We were able to sell for 97 cents on the dollar, which was gold, right? And we're talking like September, October 2008, right when Lehman's failing. And what we did was we did a few things with the money, but 80 to 90% of what we invested in was a thing called a CLO, which still exists big time today. Actually, it's funny. In fact, my first boss and later partner in securitization invented the CLO back in 1989. Or the way he would describe it, he exported financial disaster to the Japanese by selling them the kind of pieces. But what a CLO is, is a portfolio of senior secured loans, mostly to private equity

owned businesses. And then the funding comes from bonds in different tranches. So maybe the first 60 cents, 70 cents is a triple A, first pay, total money good, no matter, like the world could come to an end. Then you have some mezz pieces, junior capital, and finally some equity. And we did buy some first base but we we bought a heck of a lot of uh of the kind of junior the sort of riskier but with still with lots we didn't buy the equity uh we really couldn't based on our kind of investment guidelines um uh so we had nice capital underneath us portfolio senior secured loans right so right so high yields unsecured high yield can get crushed okay in a like what we're living through with covid we maybe should talk about that a little bit later but um senior secured loans

like so these things initially were buying their 50 you know 50 60 cents later they were like 10 cents there were days pomp where um literally days where wachovia is one of our trading partners would tell me mark you're the only bid in the world for mess yellow paper okay seven cents like and uh right for literally we our view was these are par bonds we're going to get through this the there's a lot of garbage paper out there the mortgage derivative paper was complete garbage and was five cents and deserved to be five cents right it was best kind of six like you could spend five and make six we were spending ten to make a hundred um and and then you know kind of mid oh nine late kind of late second quarter 2009 um i got it kind of handed to him like

Geithner's, you know, those stress tests, if you recall that, that then led to a bunch of, that kind of went on the back of TARP and led to a bunch of equity offerings by all the big banks. That completely reliquified everything in our world, okay? So all the stuff that was getting crushed, not on solvency, but on just illiquidity, all right? just, it's so beautiful. Like the clouds parted and, and our, you know, 10 cent bonds were back to 60 cents like that, you know, like, and all of a sudden it's like, holy shit. Like we, you know, we, and this wasn't a two and 20 vehicle, like we own the equity. So we were making the money and it was just freaking awesome. So, so that's kind of what led me, I know I'm talking at you a lot

here I could you know so to transition now to how I ended up at the pension all right um so I pop out of that whole thing and I I go from a guy making you know 20 30 bips on a few dollars to you know really having some money and um so I kind of wanted to give back and um you know and you sort of want to use your skill set and capabilities to right that's uh the way I think kind of everyone should approach this kind of thing. And, um, so yeah, I met this guy who ended up running for governor and, um, you know, and, uh, and I started actually writing about, so here in Illinois, as you know, and I know we're going to talk quite a bit about the, um, uh, right. We, we have a pension system that on the liability front, okay. Uh, right. Was, you know, all these

promises that could never be kept and is literally just a complete, you know, train wreck that has been in process and very obvious for 25 years. I started writing about that. I did a little bit of TV, which worked out quite well because I kind of got the nerves out in local TV for sort of what happened later on. And then, so Bruce Rauner gets elected governor and he asked me if I want to serve on the pension, which we, of course, chatted about previously. He knew what the answer would be. And, um, so that starts in 2015. So it was really, um, uh, that's kind of how I got started there. And so let's talk about the Illinois pension, because I think that it is used constantly as like the poster child, usually in a, in a negative connotation, uh, especially before you

got there. Right. And so, um, maybe let's just start with how does a pension like that, that is so large. I think it was like 24, $25 billion when, uh, when you were there, how does it get so underfunded? Like what are the structural issues that end up leading to, uh, kind of when you step in and you're like, Hey, we're already underfunded. Like, like we're already here. We got to try and dig ourselves out of this hole, but how does that happen? Okay. Um, so first off, so Illinois has, um, uh, it's three large state pensions at this, sorry, at the state level. Well, then there's a bunch of local pensions. So throughout kind of the government world, like a local police force might have its own

pension. Now, normally with teachers, there's usually a unified pension per state, which is why I think places like Illinois teachers and CalSTRS, which is a California state teacher pension, how they get so freaking enormous. And so what a pension is, is you take money out of the, well, first they're negotiating collective bargaining. the, you'll take money out of a paycheck of a state employee, a teacher, maybe a university worker, and there are some corporate pensions as well, but now they mostly reside in the kind of,

in the, you know, kind of government world. They are, those, the way it should work and the way it really hasn't, you know, maybe it has in certain places, certainly not in Illinois, is then in a methodical way, okay, the state would match that contribution, okay, and that money, so that money is getting collected throughout a career and it gets invested professionally, hopefully. And, and by the way, the problems in pensions really, I would all, I really say this across the country, the problems in pensions really hasn't been on the asset side.

It has not been on the asset side. It's been on the liability side. And here's why there was, there was no connection between the funding that was coming in through the employees and through, and through more importantly, the employers, right? The states and the local, you know, local governments, et cetera, and the benefits that were being promised, they were completely disconnected. So what you had was negotiations, all right, where on one side table, you had union leadership doing exactly what they should be doing.

I don't, I don't quibble at all. They're trying to get as much money as they can for the people they represent. And on the other side, you had buffoons, you know, you had like, come on, dude, have a calculator. later. So no math on one side and perfect math, perfect math on the other side. So what happened was the promises could have never been kept. And then you add on that the tonic, which we're all very familiar with. And this happens big time in Illinois and it has happened to other places. Illinois is a poster child for kind of screwing around with the formulas to fund the pension,

where politicians love spending their budgets, okay, on things for current, you know, kind of current, you know, maybe that, and a lot of good things, transportation, education, please, I mean, things that have to be done and are, you know, necessary and, right, but, so what they would do with these pensions is they'd come up with all kinds of ridiculous excuses to not fund them, and here's the thing, when you, as your viewers know extremely well, when you start compounding, Okay. And you take a holiday in like 1997. All right. 2020 comes along. You're 23. I mean, you compounded that. That's how you end up at 40% funding. And so really what you're talking about here is you've got multiple sources of inflow, right? So you've got the employee's

paycheck. There's a portion of that that's an inflow. The state or the government is supposed to match. In many cases, they either don't fully match or they don't match at all or whatever it so there should be inflow but you're not getting that capital and then once you get the the inflows into uh what i'll just call kind of the asset management pool that asset management pool then is grown through the investments that are made right and so you're you're basically making the argument which i tend to agree with that like step one was we told employees hey you're going to get x but it was impossible to deliver on x and then step two was when we took the employees capital and put it into the pool, the states didn't provide 100% of what they should have

provided. And now you kind of have a double win. So just starting out the pool of capital that the investment team at the pension has is lower than what they should have had. And also the expectations of what they need to deliver are nearly impossible given what the union was able to negotiate. Is that kind of a fair setting of the scenario? That's exactly right. That's exactly right. So you step in and, uh, what was the underfunding status when you took over as a, as the chairman? So under, this will sound better. I really don't deserve the, um, how sort of good this might sound. Although the whole thing is at such a ridiculous level. I came in, it was probably 30%. I ended, it was 40%. Uh, and, um, and, and so the reasons for

that aren't, it's not any magic that I did. I mean, I did, I will say this, when I got there, to take a further step back, the $24 billion that ISB manages now, which is about what it managed a year ago when I left, a little over a year ago. When I got there, we managed $18 billion. So we had a nice four-year run. We didn't do stupid things. And we did some good stuff. And although I think really the great things we did are even more so sort of in the future. We'll talk about kind of rankings and kind of the evidence of the success we had. But the other piece of it is, is that the truth of the matter is that states, Illinois big time, and I'd say states across the country have done a much, much better job. They felt super behind, but they've done a

better job keeping up over the last, let's call it 10 years. Okay. So Illinois, the last, you know, hasn't missed a pension contribution in quite a while. Now, so it's a massive growth. We had, we had, okay, we had at least through running on the treadmill where you sort of hope to stay in the same place. So that, that occurred and that's kind of where we are. Okay. And so what was the actuary rate of return? And for those that don't know, actuary rate of return basically is there's an outside group that comes in and would say, Mark, you, the board, the investment team, you guys need to hit 7% or whatever the number is every year for the next 10, 20 years. And if you do that, we can compound this money at a rate that will make sure we have enough to pay out the

liabilities in the future. What was your guys' actuary rate of return? Okay. So when I took over the rate was eight, the discount rate that was eight and a half percent. All right. When I left, I know it's ridiculous. So when I left, it was, so I used some of the stuff I used to write back, you know, way back in the day, kind of, um, uh, before I ran the pension would be like, come on guys, like that's completely absurd. Like let's at least use six, like the corporate pension plans do. Like, I mean, and by the way, pop the, the biggest joke of this is that, and this is, you know, shame on the accountants. I think big shame on the accounts is that that rate is determined based on an expected rate of return on the assets okay we are at the time right 30 to let's you know

30 to 40 percent funded we don't have assets we don't have assets so we're using a rate of return on assets and we don't have assets and the accountants are okay with this like in fact the accounts force you to do it like i complain and then people say well i mean the accounts this is how accounts tell us to compute you know pension liabilities and and by the way what the that you really hit on the key key point because that discount rate for all the actuarial assumptions and there's plenty of totally goofy ones all right life expectancy they always get wrong they always get wrong because they never assume innovation and people are going to live longer but um but the key variable is always a discount right because what comes out of those collective

bargaining negotiations and contracts is actuaries absolutely can estimate how what the stream of cash flows are required okay and by the way that's so that's a number that i would use i say look you want to discount eight percent that's your freaking business okay i'm not doing that i'm going to just add the cash flows which by the way in illinois is about is between kind of 550 600 billion dollars with about 90 billion dollars set aside okay right now so that's if you just add the cash flows now um right now when they're discounted that's how you end up at 120 billion right? Because that 600 comes down to 320-ish, whatever the number is. And right, so that's, yeah. You said earlier that the pensions have done a good job over the last 10 years.

My first thought is, well, that also happened to nicely coincide with the longest bull market in history. How much of what I will call the structural issues or aspects of the financial system and kind of the inflating through QE, et cetera, of those asset prices over a full decade, do you kind of contribute the fact that pensions have done better at keeping up versus is there some other change that pensions have had in terms of they've gotten smarter or they've changed their strategy? Or is it literally just, hey, we got in the right position and the market kind of carried us from there? No, no, no. So I don't really think it has anything to do on the asset side or inflation of asset prices, which you and I don't, that's one place we won't exactly see eye to eye

because I, you know, I'm not as sort of skeptical evaluations and, but we'll get to that later. Really though, where your question does come into play though, is that you had a, you had a nice economy that kind of just kept chugging along, right? The kind of, you know, was it the sort of work, kind of like a workhorse, right? You never had the beautiful three, 4% growth, but you had nice to steady 2% growth. And so tax revenues grew. And so what governors Quinn, Rauner and now Pritzker all did, you got to sort of tip your hat to them, is, well, you would have liked to see them reform the pension because you can never really catch up. But what they did do was they took kind of all the additional kind of tax revenues, starved the rest of state government,

which may or may not have been a good idea. And probably not. And all that money just got sucked into this freaking big pension hairball, just sucks in everything. And I think that really explains. So I think it was they had the money. Yeah. And so when you stepped in, I actually remember this. There was a huge focus on historically pension managers have essentially gone out, found the best asset managers in the world, and they give them the money. And there's all these questions about fees and structure and risks they're taking and kind of all the things that come with who are we giving our money to and what is the probability that they're going to give us back a great return. You took a very different approach and one that I think now has become

one, replicated in other places, but two, also more and more people are starting to say, wait a second, like that may be something that makes a lot of sense. So let's talk through just kind of at a high level, like what the philosophy of the investment strategy is, and then we can get into some more of the tactical things that you guys did. Awesome. Okay. So here's a philosophy is for starters, so pensions allocate asset, right? We have an asset allocation to exactly what you expect, right? To stocks, bonds, real estate, other, you know, some pensions might have commodities, might have diversifying strategies. I mean, so there's all different things. And then of course there are subclasses within those, okay? Now within, so that's kind

of the top of the stack, let's say, are the asset classes, then sub-asset classes. And then how do get those invested. Most pensions allocate, invest that money, which we'll call allocating, okay? Invest that money through third-party managers. That is smart. That is a smart way to do it, okay? That is smart, if I didn't mention it three times already. You don't want to build some big investment team to be picking stocks, finding private equity investments. God help you. pensions have done all right in direct investing in real estate um and i saw you had a tweet last night somebody wants to talk about real estate absolutely in a little bit um when we're drilling down um they've done okay in that and there's a sort of limited kind of trouble you can get

and let's say with real estate um unless the brother-in-law one of the trustees uh right is a developer and you know you're laughing pal i'm laughing because i've read the stories i know what happens. So, but like when, so when, so when you took over, right, there's 24 or 18 to $24 billion somewhere in there. Uh, you guys are actually not doing well. Third, third percent are quartile of performance. And you basically, from what I understand, walked in and just started saying, look, let's get into kind of a, just start slashing fees, make sure that we're not spending a bunch of money to actually get our capital invested. Um, and then you took this kind of disciplined systematic approach that was really focused on innovation so kind of explain what

that means when you say a disciplined systematic approach with an overweight or focus on kind of technology and innovation got it got it okay so um so the portfolio that i inherited um had two three hundred managers across right so no could you imagine like and by the way it was volunteer um so uh i was willing to really kind of get in i was going to be you know i was soon to be elected chairman and but i mean what are you going to do with two or three hundred manager you can't possibly wrap your arms around it and really we should be focusing on the top of the stack on allocation um and so right away you know i often say i had no preconceived notions on things like hedge funds private equity credit you know opportunistic credit real estate

et cetera. But I did have a preconceived notion that you want to simplify, you want to be able to understand what the hell it is you have, right? You have board meetings quarterly. Maybe you'll have six a year, right? And you got a lot to do in them and you've got a limited staff. So So you want to simplify and it's fine in a million. So I love indexing. I index about half my own assets. The beautiful thing about indexing is once you take that allocation to top of the stack, I was telling you about public market equities, domestic, right? Domestic, internationally, right? if you do index there's nothing to do like you're done you don't need a staff you don't need you know the board doesn't need to discuss it you are going to get the market return right and there's all this attacking of you know that it's you know terrible and you end up owning a bunch of stuff you know i mean look at the assets that to this day are the concentrations in the sp500 so which

again we can get to a little bit later it's like sort of go through your question so so index what What I didn't realize though, is I had no idea, so all pensions, pensions operate around the government, right? They're funded by government, the state pension, which is most of the pension assets. Anytime you have government around, you're going to have politics around. And early on, I got, it's unbelievable, I'm driving somewhere, I get a call and I don't recognize the number, but it's a lobbyist. it's a lobbyist calling me about some manager that they hear that we're going to be, you know,

reducing, shortening the, you know, simplifying the manager roster. And I'm like, do you realize you're calling me is a material piece of data, right? That will support getting rid of your, whoever you're calling me about, please don't tell me the name. Like, are you kidding me? Like, I mean, that happened. And that, by the way, happened more than once. And so I was fortunate in that I had, you know, the governor, governor's staff were super supportive of what kind of whatever it is I did, I think. And so as soon as those calls went in over there, they're like, deal with Mark. yeah it's a brick wall okay and it feels like um as you step in as the chairman like really you said it already right like the goal is do we get the asset allocation right meaning we're going to take 10 put in real estate we're going to put you know 60 in stocks we're going to put in you know here's how we break it down across all the different indices whatever it

ends up being most people will then spend tons and tons of time on well which manager do we select within this bucket. Well, you're basically making the argument for, and you guys did, was you basically said, look, if most of people aren't going to beat the industry benchmark, then why don't we just invest in the industry benchmark? And therefore, yes, there might be one or two people who beat it, but we're going to beat 80, 90% of the managers in this space anyways, by just investing in the benchmark. It's easier. We just buy it. We don't have to go and check on a manager, do all that kind of stuff. And then also it's usually much cheaper on top of that, right? And there's an additional advantage, which is, so the meeting that I was

elected chairman of, we terminated, so there were four managers out of the hundreds that were on watch. So I'm like, surely if we have like 200 managers, we can at least terminate the four that are on watch and have been on watch for a year or more than a year. So sure enough, of course, the media was there and there was articles written later, yada, yada, which I think actually to me They, I think, started out as hippies. I think they made us look terrific. But here's what I noticed, though. So in the investment committee meeting, when we were really getting into the guts of this,

one of the trustees on the other side of the table got pretty pissed of like, you know, we got an RFP for a general consultant, which was kind of part of all of this. And you terminate these matters, like, you know, and got really pissed. And I could say, you know, this is the kind of thing that I think happens over and over, often happens behind closed doors maybe with a staffer okay who needs a board to like that anyway once and sort of people chilled a little bit and then we had board meeting and same kind of you know kind of energy entered the room lots of heat and then and so at one point they the vote was going to be the vote the

vote ended being six to three and eight to one actually on a couple of terminations. So this trustee sits down. It's like, all right, Mark, what are you putting the money into? And I'm like, it's going to be indexed. And all the heat came out of the room. And that's what gave me the idea to write that first Wall Street Journal op-ed. Indexing not only is a terrific way to invest, it also is a beautiful, beautiful governance tool to keep people out of trouble. Okay, like just recently, that North Carolina Senator,

you know, or Georgia, wherever the hell they are. And this has happened kind of over and over where, right? It's like, if you index, no, you really become impenetrable from the peanut gallery

shooting at you. And in this case, where some managers were getting terminated. And by the way, the manager are perfectly good people doing a professional job. I never once suggested

that wasn't the case. And it wasn't the case. They were just kind of a little under their benchmark. At best, they'd be at their benchmark. And I was just trying to simplify things. And that's where it ended up. And so by indexing, you take the insult out of it. And the other piece of this, Tom, is actually, so there's a professor actually, he's at Arizona State, Sunil Wahal, who I've quoted a couple of times in some of my materials, has done great, great academic research, which I kind of got obsessed with on institutional investor decisions

by the way, this is not just pensions, this is endowments, foundations, everyone suffers from this, of you're constantly firing managers and hiring other ones, okay? Flavor of the month, all right? And so it's like beautiful academic research that in like 80, 90% of the cases, the manager you replace that came in is kind of underperforming their benchmark as, you know, within sort of a year or two, and you're just running on a treadmill, you're wasting your time. And I think that maybe it was Nevada is where there was a CIO and he like fired like literally the entire investment staff. And he like put, I don't remember exactly, like 80, 90% of the capital was all in indexes. And then he would just kind of check on it like

once a week. And the article I read kind of made it seem like, you know, he had a pretty easy life, right? He was managing quite a bit of money. So yeah, so I spent some time with him actually at a, we met at a conference and, you know, I gave him the big, you know, fist pump right out of the blocks. And so he's kind of the opposite of, we're very similar, sort of the opposite of me because I'm this kind of wild, you know, I love talking about what I'm doing. He's kind of the shy guy in the back of the room, but the guy is awesome. And so Tim Martin is a reporter for Wall Street Journal who covered pensions and is now in Asia. And he's the guy actually put sort me on the map, and more importantly, the Illinois approach on the map, you know, when he wrote

the article in kind of March, he wrote the, by the way, he's the one who wrote the article you're referring to. So he put me on the map with this article of Mark Levine answering a question for a hedge fund executive at Bordermere last week, why do I need you? And, oh, I don't know if you remember that article, but, right, and so then the full quote there, by the way, was, you know, this hedge fund guy, you know, literally, to one of our board members says, I got the smartest guys in the world. Why would you invest in a brain-dead index fund? I'm like, dude, I got Apple. I got Microsoft. I got Facebook. I got Amazon. I

got Jamie Dimon and Warren Buffett allocating my capital. It's like, why do I need you? So he used wide range. Anyway. And so as part of this, would it be fair to say that pretty much the approach that you've looked at is unless you were able to invest in the top 0.1 of the 0.1 of the 0.1%, there's probably three asset managers in each category. Unless you're an LP in those funds that are the absolute cream of the crop, anything else, you're better off going into the index for all the reasons that you described. It's like there is some 0.1 of 0.1% that is that cream of the crop, everything else indexing, and you're pretty much golden at that point if you get the asset allocation, right? Is that fair? Yes, that is absolutely fair. And the first thing I always

say is, by the way, you're getting some noise out. A little bit, but you're fine. Oh, good. Okay. Okay. Okay. Sorry. So the first thing I always say, Bob, is if all you do is index. There's just nothing wrong with that. And you're probably going to be better off than getting it. In most cases, you're going to be better off. We actually thought that we had an approach. Remember, we're $24 billion. We have access to various resources and had an approach that we believed in, which we'll get to soon, this outsourcing model. But there's nothing wrong with indexing. That's, of course, what Nevada does. They index 90% of portfolio and 10% equity. By the way, when I met him, he's like, I'm not sure about that 10%. But anyway, if I could riff

a bit on public market equity allocation, which is kind of where your question's going, here's kind of the way I see it. I sort of like to break it up into sort of structurally and to me the perfect public market equity portfolio is you start off with a big big honking bunch of index get that you know kind of get that core index and yeah so that you know one thing is you you don't want to screw up so bad right from you know from sort of doing things on the periphery which by the way would include just hiring any active manager um where you end up so far from normal equity returns that it's actually kind of super material to return to the fund, right? So I think you start off with a big chunk of passive no matter what. Then I layer on

top of that kind of three different sort of three areas. First would be factors, right? So Fama French factors, the 1991 paper won Nobel Prize, led to their Nobel Prize, that there are a few factors that are highly predictive of potential outperformance. Now, I don't necessarily believe that those factors are value, low vol, momentum was actually a sixth one, and anyway, small cap. So you can invest in factors actually very, very inexpensively. And by the way, there's ETFs, et cetera, for individual investors. We could pay like two bits to BlackRock or something like that, which is free. And half that goes to the licensing, the other factor.

And so there's two things I like about factors. not to do a ton of, but to maybe do 10, 15%. Number one, it's a nice diversification off of your market cap weighted index, right? So look, there is some truth that the weights at the top of the, you know, the top of the stack of the S&P 500, right, is, you know, now 20, 22%. It's kind of been there in the past. That's okay. All right. But a nice little diversification away from that, which I almost kind of use like sort of a diversification free lunch. The other piece, which maybe you'll get a sort of kick out of, is so board members come onto these boards and they have views. And that's good. There's nothing wrong with having a view. What you want to make sure is

there isn't a view accompanied by a brother-in-law who happens to manage money in a way that is consistent with that view. So factors give a staff and a board a very systematic way to sort of express views so that's fact that's factors chapter you know part two which we did and so i'm going to sort of change the order uh just a bit on how i view it personally um but what we got this the idiosyncratic investing so more kind of private equity style investing there are some guys out there seth carman chris han who and we had some of these guys in our portfolio who are just it's just weird warren buffett back in the day okay i'm as disappointed as everybody believe me with the way things have gone the last particularly that annual meeting this year

but um uh very disappointed but um uh but idiosyncratic investors who don't who are absolutely all they're looking at is absolute return okay and concentrate they will tend to concentrate like crazy chris han which is tci might have two names in his top 50 half his portfolio he does that all the time okay um and so that's something that we did quite a bit of we did that it drifted over to technology which is where innovation uh so the the other piece which we didn't do which had i stayed on which i'd had enough believe me but um the third piece when you're thinking about the structure of a public market equity portfolio is a kind of themes and this is where um we're actually like your interview with kathy woods i just loved um

right so think kathy and that like the this theme of innovation and so that's actually why i invest my own money so i have this theme that i just i happen to believe in that the it departments across the world are going to be completely restructured over the next 10 years they're going to move from on-prem to cloud like it's uh so that's a theme biotech so there's all sorts of different things. And, um, right now a theme is COVID, right? So it's funny. I see like these ETFs with, um, like COVID ETFs, bullshit marketing, pardon my language, where, um, yeah, they're investing in these vaccine manufacturers. No, no, no. A COVID portfolio is cruise lines and real estate. Like, come on guys. So anyway, so that's up to me, a public market portfolio.

And so when you do that, you've got kind of the core in the indexes and then you've got factors you've got the idiosyncratic, and then you've got the themes. One of the big themes that I think you guys did over the four years, and so for people that don't know, is under your guidance and the rest of the board, the pension went from that third quartile to top 8% over kind of the three-year period of all pension performance. So kind of it worked would be the takeaway from that. You guys had an overweight and a focus on technology and innovation. And so maybe kind of talk a little bit about how you kind of arrived at technology and innovation being that uh theme and then what you guys tactically did to get exposure in technology and innovation okay i wish

i could tell you i'm a total genius and right and the staff would like it um what we did was we had so we as i said when we started you know we had actually 80 hedge fund managers when i started and we got rid of almost all of them the ones that survived and really were part of um came through this is actually a pretty decent segue into the outsourcing side of our model so we used a firm called rock creek to pick all of our active managers back in the day later we did an rfp and we added high vista to and by the way the portfolio today is like literally diverse like probably a thousand base points of alpha public market i mean crazy that's how you end up top eight percent last three years, top 3% last year. So the Rock Creek portfolio, and there was a little bit of

nudging from me with the folks over there of, come on, let's concentrate. Like, I don't want you to have 16 managers. That's too narrow, narrow, narrow. And that's where some of these idiosyncratic guys, again, like a TCI, a Parvis, but also some managers. So these are managers that were in our portfolio for quite a while, guys like Tiger Global, KOTU. I wish some firms that I like, like Whale Rock and Sequoia, weren't in there. But we had enough of it that, right, so those guys, they thematically invested in tech, and we sort of watched it and liked it. and it produced terrific returns. And, you know, at the beginning, I'm like cracking jokes. I'm like, oh, you know, thanks for investing in Google for us. Like, I don't think we could

have spotted that one. But the truth of the matter is, it was great that they had these big, big overweights, you know, across technology and in fact, going into small cap as well. Yeah. And so one of the things that's really interesting to me is, and we've talked about a million times on the podcast of just the best performing institutions, whether they're foundations, endowments, pensions, whatever it is, they tend to be overweight innovation like you're talking about here. And normally the way that they're doing that, a little bit of private equity, but really venture capital is where they're finding a lot of that. And you're kind of mentioning it here to the tune of, you know, if you look at Dietrich Foundation, they're like

80, 90%. If you look at something like GMO, I think Jeremy Grantham recently said he's like 70% personal portfolio, venture capital, like such outrageous allocations to the private markets around venture capital that obviously a pension can't go do that. But where do you think about in terms of when you say overweight, like what does that look like? Are we talking 5%, 10%? Are we talking getting to, you know, kind of 20%, 30% in venture capital? Like where do you think for a conservative organization like a pension is actually realistic if they want to be overweight they could get to. Right. So for starters, as far as venture capital goes, you're exactly right that the endowments and Yale, of course, is the poster child of this, right? That, you know,

going back 30, 40 years, right? What happened, I think, I assume was a lot of these venture capital firms were operating with the universities, with like the, you know, the academics at the universities and that drifted over to the endowment. Thank God for those universities. I mean, because right some of these endowments pay right i actually met with um uh with tim sullivan who works for david swenson at yale and um has been with him you know almost from day one right they pay 40 of yale's operating expenses while they're growing 1 billion dollars to 30 billion while they're doing that okay with a lot with a heavy venture capital um so the the problem though which you sort of touched on is that public pensions. So the great venture capital funds

are one of two things. They might be sort of larger guys. And those guys, even a guy who's raising half a billion, billion dollars, he wants to do it $10 million at a time. He doesn't want to be dependent on one source. Okay. So that's number one. So you can't get big dollars out if you can get in. And by the way, we were able to get into some. And the other thing is, again, even the smaller guys right it's the problem is the bite sizes this goes to my point of you got to have a structure you got to be able to manage the damn thing so you can't have 800 different managers um could you do sort of a fund to funds approach that that's not a crazy idea at all um and so where we ended up getting our innovation exposure again not from our necessarily my decision or

but the result of our decisions um we're more in the public market space which by the way there's amazing like it's i don't know that it's any worse i mean the um right if if uh if you're focusing on a micro to small cap um public right public market portfolio on the innovation front makes sense and then i guess one of the things that uh people are paying attention to now and we've had a lot of asset managers come on and talk about it but nobody from the pension side is uh there is complete um structural change manipulation whatever going on in the markets out of necessity. So you get interest rates dropping to zero right through emergency cuts. You get tons of quantitative easing and kind of the, you know, Fed balance sheet expanding at a

very aggressive rate. How does that change the way that pensions think about managing their assets? And part of that ends up, will eventually lead us into the corporate bailouts and who holds the corporate debt and all that kind of stuff. But just from the structural stuff, so interest rates going to zero and tons of money printing, like how does that actually change the way a pension and things about allocating their capital? Okay. So I'm really glad you asked that. The most important thing, I've talked about this so much over the years. The most important thing, frankly, whether you're a pension, an endowment, foundation, frankly, an individual, the way to win at investing is to be a long-term investor. By the way, in this innovation space,

god help you god help you if you think you're gonna like day trade or even have like a one year time horizon because you're gonna get nailed like you could own the best freaking thing in the world but you can get nailed at any time and um i tell people if they've got like a three i view if you have a three-year time horizon that's really not long enough now five year i think is long enough okay but um you know and certainly i prefer like never like imagine that you'll never sell. So I think it's really important for the managers of pension funds, endowments, et cetera, to understand that they are a long-term investor. It's a long game. And what matters in 2020 really isn't that decisive, right? It's the way the world looks

in 2050. And I sort of feel like you have to be optimistic. And I am actually extremely optimistic. And the reason why I'm so happy you asked this is this fixation on, and I'm sure I'm going counter now to many of your guests, this fixation on standard deviation, what a effing joke. What a joke. Standard deviation is your friend as a pension investor. It's your friend. Explain that.

Explain that. Yeah. Explain why that is. Okay. So, and by the way, that entire hedge fund universe, right, sold themselves as a standard, like just horrible. so what standard is it right so value risk standard deviation is your daily fluctuations in a stock price in a bond price in what you know kind of whatever asset is your bitcoin

whatever asset you're talking about okay and um right so what now what the what that volatility first of all there's standard deviation normally is measuring this daily volatility that in you know, right, eight out of every nine quarters is completely irrelevant, okay, and then gets, maybe gets relevant in, like, the quarter we just ended, right, horrible, like, big, big volatility, okay, the stuff that happens day to day is just total noise, and yet it's discussed, right, frankly, I sadly, on places like CNBC and Bloomberg, and right, and across the hedge fund world and in boardrooms. I even think, you know, standard deviation at a time like today, where it's, you know, cranked up big time because massive volatility, right? You have an S&P dropping by

like 37%, then popping back up by like a month down, a month, oh my God. But even that, it'll end up being transitory because it's all about what the earnings are, what the power of the economy and these companies you're investing in are the real estate projects that you build or invest in in 2040 and 2050 okay that's that's the game you're playing right and so this um if i might um riff a bit here hedge funds the reason for hedge funds are volatility dampening right right diversifying strategy it's like and they charge you know charging these ridiculous amounts for no returns and it's all about the standard deviation portfolio it's like so like what are you getting like what the way hedge funds and you know with hedge funds you got to separate them

into the stock pickers and the derivative books um so i'm really talking about the derivative books who have like returns of like one percent right i mean over the last three years five years ten years they're horrible right and um right fees have come down a bit it's like it's still a total waste of time and um right but they have the but they dampen volatility it's like um we have bonds for that there's all sorts of things for that and you know what even if you believe in having a diversifying strategy as like i talked about with factors and the public market public market equity book um you're having a five percent yeah it's like we pay our bond guys like eight basis points like that's what it's worth so if somebody is gonna you know you know it's gonna have a dampen

your volatility, that's, it's not, this is not a two and 25. You pay, you pay big fees, okay, for big returns, right? You actually want volatility. You want what's called tracking error, right? You have, your board better be ready. And as an individual, you better be ready for a really nasty quarter, right? If you have a concentrated portfolio or you have a, that might be concentrated in certain stocks, okay, like TCI, that might be concentrated in a theme, like what ARK, you know, what Cathy does, or what KOTU or Tygo Gold, you know, what those guys do. So, right, so that's, anyway, that's... And what you're basically talking, this is always something that, and we'll talk about Bitcoin here in a second, but like, this is always my point

when it comes to Bitcoin, when people say, oh, Bitcoin's too volatile, right? And I always use kind of two examples. Let's say one, volatility is not a negative thing. You need volatility to drive returns over long periods of time, right? So if something's not volatile, you'll never get to return from it. And yes, it won't go down, but it won't go up either. So volatility isn't necessarily bad. When it goes against you, it's nasty. When it goes with you, then it's your friend. But the example I always go back to is Amazon, right? So people have heard me say this a million times, but Amazon, since it went public for 20-something years, has had a double-digit drawdown every single year. The average intra-year drawdown is over 30%, and it drew down over 90%

one time, but it's one of the best performing stocks over the last 20 years. And so, what I think you're talking about here is, basically, if you have high concentration and there is volatility, the shorter your time frame that you're looking at, the more likely it is you're going to see a bad quarter, a bad week, a bad month, whatever it is. But over long periods of time, if you made the right asset allocation and something is hyper-volatile, you should see a very large appreciation. And it's actually probably likely to be one of your best performers in your portfolio right i agree 100 with every word you just said okay so why why should pensions not put bitcoin in their portfolio what's your thoughts just bitcoin in general and how pensions one are

looking at it right now and two uh either the argument for or against what that looks like putting you know such a hyper volatile asset that is new right it's only 10 years old or so uh into what is normally a pretty conservative asset management environment. Right. All right. So let's carve this up into various parts. Okay. So I do want your audience to know, like, I'm actually a friend in this, although there may be some things I say that aren't exactly what you want to hear. So Bitcoin really isn't ready yet for sure to be a full-blown kind of asset class so almost view it like an assembly line okay uh to get into to be asset class status and i think we're years and years away from that at a public pension at an

endowment and here's why is the first thing that has that that would need to happen and let's leave the merits to the side okay so we'll just talk about bitcoin as a as an investable asset okay which i do believe it is um uh though i don't own any myself so the first thing is um the managers you remember you're hiring managers to make your decisions okay so within the asset classes that you've established and i when i think about it there's sort of several different asset classes you could imagine bitcoin going in um and we'll get to that in just a sec so the way this would work is first, some managers would put some Bitcoin in. It'll need to do well. I mean, unfortunately, like the, this is the way it is, pal. Like if, right, so if a manager puts in some

Bitcoin and it drops by 50%, they're not going to be talking about it. Right. And, and by the way, and I'm okay with, like, I'm totally okay with all that. And right. But so it almost needs to start becoming an interesting story to even just register beyond some manager you happen to have hired who you let do whatever it is they do, invested in it. And I, by the way, I, so I'll tell you this, I'll give you, okay, I'm going to give you a win here, is if a man, if one of our managers had, assuming it was appropriate within their mandate, had invested in something like Bitcoin, I wouldn't have been upset at all. Not at all. I was, hey, dude, it's on you. And by the That's kind of the way you need to operate, right?

I mean, you've got, again, a lot to manage. You can't fix A2. All right, so next up, so we're talking about sort of an assembly line or funnel, whatever you want to call it. The next stage, in my view, would be, does a board actually, right, actually take, let's say, create a sub-asset class? So take one of their categories, and I'll bring up three. as I just sort of throw them at you, and maybe I'm sure you have some views,

create a sub-asset class for whether it's cryptocurrency, digital currency, Bitcoin in particular, right, graduate. That would be a full graduation, okay, from managers happen to do it to actually say, I'm going to do this, okay, I'm going to do this. And the asset classes I think about there, commodities feel good to me, But, of course, the funny thing about Bitcoin is if guys like you are right, and the $7.5 trillion gold asset is ready for this, and you got a 30X of value discrepancy in store of value, it's funny, that I don't think I need to explain to your audience.

Maybe you're kind of innovation buckets, right? So whether that's private or public, maybe an innovation manager, you could see it fitting in there. And then, of course, the last piece is if you have a diversifying strategy, which is where these hedge funds are, you could totally see it fitting in there as well. Yeah. So we went through this exercise. As we were creating a fund, we knew we wanted to go talk to public pensions.

And this whole question of like, they have preset buckets of capital. And if you just walk in and say, hey, we're going to do Bitcoin by itself, basically every single investment team looks around and goes, okay, what bucket should we take capital from if we want to do this, right? It's exactly what you're talking about. And we thought that it's almost like a paralysis by analysis, right? They just will never be able to pick because it could go in either one of the buckets, whatever. So what we decided to do was we actually created a venture capital fund. And then we said, hey, look, we're going to put 70%, 80% of the capital into traditional venture capital investments and equity of companies, blah, blah, whatever.

And then we will have 20% to 30% in Bitcoin as an innovation investment, right? There's no company that owns Bitcoins that can't invest there. We'll just buy Bitcoin and hold it in the fund. And what we found was it had pros and cons. So the pros were now people knew, okay, venture capital fund, I know exactly where my pool of capital for venture capital is. I know how to underwrite this. it looks very similar to other things I've done. Like I don't have to kind of build new muscle

memory, but it brought into question, which was kind of one of the cons and not really a total con, but definitely was an obstacle was people saying, Hey, do I actually want to have an illiquid vehicle that has a liquid investment in it? Right. So do I want a venture capital investment that's got a liquid asset in it? And so it was very funny to kind of see while solving for one thing, you now bring up another question, but you know, obviously we've got the two public pensions in Virginia who kind of came across the line, but they're the only two. So out of the hundreds of pensions in the United States, there's only two. We kind of sit back and think all the time and say, look, is that a win? Or is that you found two very forward-thinking CIOs who kind of

happen to be the tip of the spear, and then everybody else is, it's going to take five years for them to cross the line. Okay, so let me carve that up again. uh first of all i think you've found some innovative thinkers um i think that's what i i think that explains a hundred percent explanation okay yeah for sure you happen to find open-minded people all right um and i'm not casting any dispersions on um everybody else it's hard when you're managing you know a ton of money um to but but here's where i will actually take on some of because the conversations you had, I have, I banged my head against the wall equally on different topics. Um, so for example, like we built a, an 8% allocation to an asset class

called opportunistic credit, uh, where, and there was, we did, there was all this hand wringing of like, what, you know, is it fix it? You know, it's illiquid. Is it fixed income? That's mostly liquid. Is it private equity? It's not equity. I'm like, guys, we're targeting 15% returns. it's unleveraged it's mostly first lean come on like you can't let accountants run the world like let's and i would say that in jahara faraday our wonderful uh cio and now executive director um we're like mark that's just not the way and so she sort of managed me it's funny i'm chairman board and uh but but the accountants sadly do um have enormous power and um and those challenges is also like consultants you know are so so important um in that whole so for what it's

worth by the way is just a quick segue there are many many pensions where consultants consultants might run the pension really where the boards are that and staff are almost kind of just evaluating just really rubber stamping um and uh and and i'm not even saying that's bad okay but it is i mean it's just the way it is um and um but in any event okay every board and And so Warren Buffett attacks, rightfully and hysterically, attacks consultants. You know, he'll talk to, you know, a pension board about, like, why didn't you just simplify your life? And why are you hiring all those consultants? And they nod, nod, nod, and they go, I'm not your consultant.

But consultants, where Buffett's wrong, though, is you need consultants. The board needs consultants to get a piece of paper so that when, you know, right, the media comes, you know, potential litigation, whatever it is, you've got to have that piece of paper. And that is of value. And you're not going to find somebody that wasn't more kind of shake the system up than me. And I believe that. So yeah, and I think Buffett, to your point, I think Buffett is talking specifically about the financial investment perspective. What you're talking about is, that's only one piece of it, because you also kind of have to cover your ass as well to make sure that you've got other people looking at it, right? That's right. So it is total

nonsense and it's i mean it's particularly nonsense in what you what you had where you're trying to go into a private market portfolio and something happens to be more liquid it's like that's a good thing like use your brain a little tiny bit the fact it's liquid if you're targeting it you know if you got targeted returns you got like and um right and look venture capital firms are holding public stocks all the time, right? When post-IPO, they're locked up and sometimes they hold even longer than that, the private equity fund.

So that's complete nonsense. I mean, come on, give me a break there. So yeah, but there is this, right? This, now, so what are the pension funds that invested? Fairfax County Police Pension and the Fairfax County Employee Retirement Pension. Okay, terrific. In Virginia.

So that's good. So now you've got a beachhead. And to your point, they invested in the first fund, and Bitcoin went up almost 100%. So there's a story around, hey, that was actually a pretty good decision that we made. And I think that they already believe, kind of like you do, overweight technology, innovation, private market. There's a kind of a culture of doing that internally. and so again when they first made the investment you know you're talking 20 basis points 30 basis points of the portfolio like literally they've never said this to me right and uh i'm forever

grateful for them but i gotta imagine at some point they were like stop bothering me with you know the 20 the 20 basis point you know problems right i got much bigger things on the horizon not to we'll come back to this in a sec but but i have to use that point as a tangent to um i just you saw the Forbes piece I wrote a few years ago on this topic of, well, you just described 0.3 or 0.4%. That's actually what pension fund boards who meet quarterly, okay, will spend all of their time on is 0.3% of this are totally immaterial. This is why actually we outsource. So the third of our portfolio that we didn't index that were mostly private market assets, but also some public market, as we've discussed with what turned out to be an innovation bias. What we ended up doing

with those guys, because we know that there are two fundamental problems to public pension. There's the risk of political meddling, and there's also this resource constraint that you just can't build some huge team. If you do, they'll all get fired when the next governor's elected or something it just is not a sustainable strategy so my view was let's find two or three great great firms that do this all day long pay them and it's a great the greatest value in the world we pay them a few basis points okay and we end up in also and we're again like i said we're actually top three percent last you know trailing year i mean you know thousands of basis like i should say hundreds of basis points of alpha. Anyway, the 0.3, that's actually the business model pension

runs, which is ridiculous. We can, of course, head back. Let me ask this about Bitcoin. What do you think has to happen? If you had to say, here are the milestones that, for those that don't understand the pension world very well, they've never met with somebody in the pension world, what do you think the milestones are that Bitcoin has to hit in order for pension investors to take it more seriously is how I'll put it. People hate when I say that, but that's essentially what it is. Right now, it's this $150 to $200 billion asset. It makes a lot of noise, but it's pretty small compared to everything else they're looking at. And there's some teams maybe that have started to get up to speed on it, but not a lot. And so what do you think has to happen

in order for it to be taken as kind of a more serious opportunity with the largest capital allocators in the world. Okay, so I'm going to answer that question for how I would look at it, but I kind of think that that would, I think what you'd end up with is once it got adopted, once you had a, let's say a bigger beachhead, what could happen, I mean, and this is what happened within the hedge fund space, which is very, very similar, right, because no one kind of understands what the hell's going on there, is once, is there's a lot of copycat, So once it's accepted, maybe with one of the greats, so that could be a Yale endowment, one of the major endowments, or better, two or three or four or five Texas teachers. I'd like to think Illinois State Board of Investment is be my, right, maybe a state of Wisconsin, whatever, like a sort of respected investor.

okay um so what does it take to get in there right to me is the question right to get that real heavy heavy beachhead um and i thought a little bit about that actually uh just over in fact over the past couple weeks um so these use cases to me to me okay you look at amazon so amazon starts out selling books okay and people make fun of them yeah you're putting like i used to joke it's like jeff you know puts a five dollar bill in the books and sends and sends it to his customers right um and um all right and then went to cds and toys and like and and then like selling right now i think aws might be the most important business in the world right it was right um just kind of kept knocking off use kit like and you all that like all the greats all the greats

did that um and i use bitcoin exactly the same way like so i was watching that um uh the the anderson horwitz uh woman um it's some beautiful 30 minute which god everyone should watch um go through some use cases of like remittances like um remittances and so seeing that like in size you know, diversity, like to me, diversity of usage, right? So, so, so that would be one, right. And, you know, so there's stories that like all the underbanked, right. And so I'm a, I'm a square investor. Um, so I have, I guess, uh, sort of kind of Bitcoin exposure, sort of that way. Uh, uh, the, um, so like having use cases that are really robust, that are, that you have metrics that you can really prove. Okay. You can prove now that the things you've already

knocked off, I'm going to say, I'm saying you as the human Bitcoin, um, uh, what you've already knocked off is you, you do have, I think a really thriving like infrastructure on the technology investment side. That's fabulous, right? Think about actually how stupid is it? Sorry. I'm sorry. I'm getting negative, but how stupid it is that you do have pensions and announcements dying to get into some of these venture capital funds that are making these Bitcoin infrastructure investments, right? That really, if you're a true investor, which I fancy myself as, they're not going to work if Bitcoin doesn't work, okay?

It's just, so you're sort of doing it already, and that's a, but that, my friend, is a good fact, okay? That is a good fact to ultimately get to that kind of case two, let's say, of sub-asset class status. So robust, multiple use cases. I mean, you're talking my language when you say volatility, no sweat, okay? No problem at all. Volatility is what you should expect and is a good thing. You want to get lucky, okay, and have good experiences for people.

um and i i know some people are worried about things um it sounds like this criminal stuff is complete bs uh that that's some kind of concentrated usage um uh the um the way you want to definitely be able to pound like when people bring up this there's a few whales that control this thing and they manipulate the market you got to just be able to beat the crap out of that right you can't have those negative stories that will screw you okay you right you want to you got to get rid of impediments to yes. And, um, and again, just like you did, I think you did a nice job of finding, you got to find a home for it. These are different. You got to make the accounts happy. You got to make the consultants happy. And so does I, hopefully that, no, I think

you nailed it. And I think part of it too, is, um, what we've seen, uh, not in the pension world, but I think in the more like endowment foundation world is there's almost this sense of, uh, this is the ultimate venture bet. It's either worth incredible amounts of money or it's not going to work at all, right? And so if you go to them and you say, hey, take 10% of your assets and go put it in this ecosystem, they're like, get out of my room, right? If you instead say to them, put 50 basis points to 100 basis points in this, and it's going to not only go just into Bitcoin itself, but it's going to go into the ecosystem right there. I think the way that most people are looking at it is over the last five, six years, that has been an incredible investment

because it's appreciated so much. It's been a non-correlated asset, kind of all the things you want in a portfolio. Maybe that continues, maybe it doesn't. But if I put 50 basis points of my assets in and it goes to zero, I'm mad. Rex, I don't want to lose money, but my life's not over. We didn't lose all the money. If that 50 basis points now provides 500 plus basis points of alpha in my portfolio. Now I look like a genius, right? And so I think that it's this really interesting asset that provides a lot of opportunity. But to your point, I do think that it tends to kind of find an audience with people who already have an innovation kind of mindset technology, that type of interest, that's where Bitcoin is really kind of finding the institutional

world yeah and that's really what bitcoin is like it um right i mean that's how bitcoin would become successful is when you write this so i've actually watched your debate with the shift with like this this asinine argument about gold the gold guys are way weirder they're way weirder than you guys okay the gold guy like he's talking about jewelry jewelry it's like seven and a half trillion dollars and you're talking about jewelry like jewelry is pretty but it ain't seven and a half trillion pretty okay and the industrial uses are tiny i mean come on so we already have an example right of why is gold worth what it's worth because it is right because there's enough buyers and sellers on both sides that you're creating diversification right big i mean that's that's

kind of where I go where I keep going is having lots and lots and lots of places to go for liquidity let's say diversity of uses diversity of um right of buyers and sellers and negative and positive it's all sort of beautiful and and for sure it would be idiotic to go in and pitch 10 you know put 10 of an institution in institutional investors money right because think about it they're definitely going to be on the front page of the newspaper okay if they're going to be on the front page when they make the investment god help you if the thing drops by 10 percent like then it's like you're an idiot you threw away the money what's he doing that's it right right so no one's going to do that it's like you walk before you can run

and oh yeah and that's where also that's why i kind of bring up sub asset class is um and by the way you can thrive as a sub asset there's an argument private equity is a sub-asset class of equities um and here they're those guys are doing okay um so uh one percent you could have a one percent allocation um what i kind of like in a sick way is um is this nonsense about paying like for let's think about like diversifying strategies or even commodities that are paying like a two and twenty or one and ten or whatever um bitcoin is something you can get exposure to virtually for free you can just open an account um or you can have a manager like there's so many different ways to do it it's not necessarily

like a promotional vehicle which i hate okay and i think that's um i think that's like quite helpful as i think about i've never really thought about that before so um yeah no i love it the last thing i want to finish up talking about is uh there's pensions across the country that are super underfunded and, you know, I think you nailed it on the head earlier. You can have literally the best investors in the world invest in the capital. It's going to be very difficult, if not impossible to actually get to a fully funded status in the next 10, 15, maybe even 20 years. What, how do you think about, we've now seen a number of calls for government bailouts of the pension system, right? And I've seen a couple of different kind of proposals, if you

or informal proposals as to how it would happen. But the general idea is, hey, the pension doesn't have enough money to pay its liabilities. And therefore, if the airlines are going to get bailouts, and you know, the MTA is going to get bailouts, and basically, the government's just going to become the sugar daddy for a bunch of these different industries. Why not bail out local governments and pensions and state pensions and things like that? Like, how do you just think about that? And do you think that's possible? Like, do you think that actually could happen? i think it will happen um but not exactly the way you're describing or um it'll be the republicans will all call it a bailout and the dems will be pissed about various other things and it's the

only way here's the here's the thing is potholes must be repaired traffic lights and street lights have to work like governments have to operate children need to be educated okay please like so so ultimately they have you could have water whatever waterfall you want okay that's happening first all right by the way bondholders are always going to get screwed um and maybe should be screwed um in the kind of i view the waterfall as being you know that's the potholes and all that that comes first the pensions come second whether you agree or not i'm not saying i i want that i'm just saying that's just the way it is um and then um and then bondholders come third uh the fact the truth is that it's not just illinois that many many many states and on the local level it's even

worse like they had they were even worse at math if that's possible um and so you have these situations where all across the country services are being cut like you're firing active policemen to pay a pension to his dad who was a who was retired 10 years ago it's so stupid and um and right and so there are um so that so somehow that but you do have a contract with these people and they do depend on the pension like i get the other side of the equation too it's not this is not you gotta kind of try to put the politics to the side a little bit to get to a fix and the fix would be um would be reducing pension benefits almost like a sort of a like a pbgc type thing okay where for sure some baseline gets protected the first thirty thousand forty thousand dollars

something right people have to eat and right the i don't i sure as hell wouldn't want to be dependent on a COLA on these 3% raises, which is a big part of how pension, maybe we'll do this again one day. We'll go into really into the freaking weeds on all this stuff. But yeah, certainly pensions that are over $7,500,000, certainly all these raises, I mean, all this stuff, anything that was gimmicky, like the end of career spiking, which we'll talk about maybe on a future show um right that would there's no way you can get uh right washington to to come in for a bailout okay if you're not pounding the you know really pounding this thing so that it's not some freebie and the other thing you'd really have to do is exactly what pbgc does which is you'd have

to like lock the pension down where it's, you know, kind of, it doesn't continue to grow. Stop digging the hole deeper, which is something I used to write and talk about a lot. So you stop digging the hole deeper. You work on the benefit side. The state has to do whatever it was going to do. I mean, you know, it's so stupid. Like we had this pretty good pension reform bill that ended up getting tossed. But naturally, because it's legislators, they cut the pension contributions from the state this back in like 2000 i think 13 or 14 they cut the contribution while they were doing very sensible things kind of around the edges which even some union guys have come to me and said that was actually fair um but and then the illinois supreme court just tossed the

whole thing and we're back to square one which is just absolutely horrible which is why the only so and by the way the way they tossed it and this is a really important fact is that our the illinois state constitution, which was amended after the Beatles broke up. Um, uh, so 1970. Um, so these are, this is not like James Madison and Thomas Jefferson. Okay. These are the state legislators, a bunch of clowns. Okay. Um, anyway, the, um, so the state constitution and many others around the country say pensions can't be diminished or impaired. So they're literally saying that a local school board, okay, this is the magnitude of the problem. A local school board could give a raise to a teacher can pay a superintendent four hundred thousand dollars you've raised your teacher in

their last year to two hundred thousand have one year of bad right and that a legislate state legislature and a governor can't undo what is local it's insane it's even jerry brown former governor of california totally like totally agrees with that so what would so all the things i'm talking about in exchange for federal money. Okay. And I know now you're, I bet your Twitter's going to go nuts on that. But I'm not saying it should be a bailout. I'm just saying a grand bargain of freeze, reduce, fairly, protect. Okay. And in exchange for, right, for some freaking meaningful federal money yeah and part of this is i think that um i go to the mindset of like if i could choose anything don't print any money right don't bail anybody out whatever

but if you're gonna do it right which at this point is a foregone conclusion find a way to give it to the people rather than go stuff it in every corner of the the nooks and crannies of the financial system where you know who knows what the hell happens to it and it feels like a pension, right, is actually a pretty fair way to, and a pretty obvious way to get money into the hands of people who frankly do a job in many cases, right? Whether you're a fireman, a policeman, a teacher, whoever, you've done a job that is essential to society, but doesn't get paid like it is in many cases, right? I 100% agree. What you're really talking is the human side of the equation, where, right, you want to go after the excess, right? Nobody agrees that somebody who

was a teacher for 25 years make an 80K, let's say. Great, fantastic. Then becomes a superintendent for their last five years, makes 400K a year, and now has a $400,000 pension the rest of their life. If you went to a New York Life or Vanguard or somewhere for that annuity, that's a $10, $15 million annuity. No one thinks that's right. But I totally agree with you. Keep it fair. The money's actually going to get pumped. It's so unfair to the policeman or teacher where they're making some normal amount of money. They kind of live their whole life. My mom's a teacher, okay? Long retired now, right? She always knew that pension was there. It was a major part of her decision making and um as your teacher in florida so you shouldn't get sort of the beautiful

pensions that you know you get in kind of other places but it's it's good um so uh so i completely agree and and what i'm saying is so i say these things that ever like everyone hates me like yeah but but i think i want to cut our benefits and then the you know and and you know the republicans are like you want a bailout it's like no something's got to be done yeah and i think that's the key piece right it's like hey what is going on right now is unsustainable obviously and so what you're really almost saying is like what's the saying um a great deal is where both sides walk away feeling like they gave up a little too much yeah and it's like that's actually probably what happens in that scenario right is you know look you're not going to get uh the 100

percent of ridiculous things that you've been promised instead you may only get 85 which by the way, 85% means pretty damn good deal, right? And then also there is some government funding that ends up coming in and kind of making up the difference of whatever needs to be done. And then I think to your point on top of that is if you can also then improve the management of assets, not really by doing crazy things, it's actually by doing really basic things, right? And kind of doing that across the board, you actually might have kind of light at the end tunnel. You may be able to get there or at least get much closer to where you need to be. And it kind of feels a little rational, right? Like it doesn't feel like anything in there is that crazy

in terms of how it would play out. I always say it's like you just want to, this is like running a pension. You just want to make more good decisions than bad ones, right? And you just want to, the thing, the first day I met with the executive director after I was appointed to board, I said, the only thing, the one and only thing I will promise you, I will at all times be massively rational. And that's all we're talking about here. Just be, try to be smart. None of this is actually like super like rocket science, right?

Yeah, absolutely. Listen, I appreciate you taking so much time. This is absolutely amazing. And I think that your track record while there as the chairman was incredible, obviously speaks for itself in terms of going from the third quartile to a top 8%, top 3%. And what if you could leave one piece of advice for investors sitting at home who haven't had the experience you've had kind of managing large capital pools and going across asset allocations? Like, what's the one thing that you've learned over your career that you like? This is the number one piece of advice I'd give to every single investor if I could.

I'd actually keep saying what I was just saying, like, just use your common sense, long term perspective. Don't try it. If you're confused, don't do it. right just use right and um and you're actually going to probably you're going to probably get to a good place if you just use your common sense this is not if some if something sounds super complicated it's probably not great i love that that's such a simple but important piece of advice that i think people would do well listen to that uh i finish up each episode asking two questions. The first is, what is the most important book you've ever read? I'll give you two, if I could. Atlas Shrugged. And I think it was The Making of American

Capitalist, which was Roger Lowenstein's Warren Buffett. Like, look through all the transitory, right? And yeah. I love both of those. And the last question is a little bit more fun, and then you get to ask me a question to end it. But the last question is aliens, believer or non-believer? Wow. Believer. Why? What a great question.

Why a believer? I'm a believer as well, but why? Just mathematics. You multiply something a billion times a billion times a billion times a billion. And at some point there has to be some cell that combined with another cell somewhere, right? Like, uh, we can't be the only ones with these thermal vents or whatever the heck it is. I couldn't agree more. I couldn't agree more. What, uh,

what one question do you have for me to, uh, to finish this up? So yeah, my, my, so my question for you would just be, um, so you, you know, my sort of my Bitcoin point. Um, so I'll go to your, to, you know, sort of your sweet spot is how far do you think we are from really having robust, diversified use cases and real being able to walk into a room with, you know, across the table from an institutional investor and like this, you know, this is real. So I'll give you two answers. One is on the use case side in terms of users themselves. If you go and you look at the adjusted on-chain annual volume so this is basically people using bitcoin on the bitcoin network doesn't include any of the

exchange traded volume and it also accounts for anything where uh it's being used on chain but it goes to like these large exchange wallets or anything like that so it's really trying to get at like true what you and i would consider like users of bitcoin as a medium of exchange if you take that number it is larger on an annual basis than venmo's annual volume and paypal's annual volume, and also Apple Pay. Basically, you have an asset that if it's just a medium of exchange, a currency, it's bigger than many things that you and I probably use on a daily, weekly, or monthly basis in terms of technology that we understand. Now, the big question is, where is that happening? I always joke and I say, look, in the United States,

the dollar-based system works pretty damn well for you and I. I don't have a fear waking up tomorrow that the money's not going to be in the bank or that the dollar is going to fail and drop by 50%. Of course, we're very fortunate in that sense. But there's a lot of people elsewhere in the world that are either worried about somebody seizing their assets, the currency failing, like all this crazy stuff, right. And so I think that actually Bitcoin becomes this like no brainer when you need it, right. And so I recently had a woman come on the podcast, who's a founder in the space and investor, but her family lives in Lebanon. And so right now, the the Lebanon currency. The Lebanese currency has fallen off a cliff, right? And so there's a bunch of capital

controls being put in place. Like literally there's protests in the street. They burnt down banks, like all this stuff. And she's like, look, the conversation throughout the entire country is two things. One, they want dollars, but they can't get them, right? So they understand the quality and the stability of a dollar and everything that comes with it. They just can't get access to it, right? They can't find it. There's a dark market, like all this kind of stuff. It's dangerous to go get it, whatever. So the next thing is like, hey, I got an internet connection? What is this Bitcoin thing? And so it's this weird thing where that's a fringe use case, right? Because there's only so many places in the world where the currency is failing or

there's issues. What I do think will happen over a long period of time, and again, that might be 20 plus years, is every day there's a couple more people that end up opting in, opting in, opting in. Some of them out of necessity, some out of interest or intrigue. So I think that that use case where the volumes and the user base will continue to grow pretty aggressively over the coming years. In terms of walking into the institutional world, there's two things that have surprised me. So I probably last year, I took 120 flights. So I don't know how many meetings I did, but American Airlines said you did 120 flights. So I knew I flew a lot of places, talked to a lot of people. And the two things that surprised me were one, how many CIOs I

talked to at endowments foundations and pensions that held bitcoin uh individually but did not have it in their portfolio uh at work and i would ask them why and they're like well i basically i believe in it i kind of you know speculate a bunch of different things um but there's zero chance i can go to my board right now and have a conversation about bitcoin right so kind of that that kind of cover your ass everything we talked about like that was one piece that surprised me that they had it, but they didn't go to the boards with it. The second thing was, I was surprised at how many CIOs and investment teams were more interested actually in the equity of the infrastructure than the asset itself. And so I, you know, ask them why. And then it made sense of they're like,

look, we've just seen this a million times before. Every time that there's some new thing, when we invest in the infrastructure, we end up making money. And so like, I don't know if this asset, meaning Bitcoin is going to end up being successful or not. But the infrastructure always works for us and that's where we're comfortable. We can cover our ass because we're buying equity in a private company and yada, yada, yada, whatever. I think you make a great point of well, if the infrastructure ends up being valuable, that means that the asset is probably going to be valuable. I don't think that that connection has necessarily been made yet. And so I see a lot of capital flowing into the venture capital firms and things like that.

I don't see, especially the pension level, I don't see a lot of people buying Bitcoin itself, either through managers or directly the kind of shame of that in a way is that um there's then this drag this fee drag right and also some execute and there's boatloads of execution risks right now surely not every bitcoin infrastructure play is going to work i mean more than half them will fail guaranteed right so why not just sort of have the thing itself if that's your thesis cut out the noise and um now again there's nothing wrong i'm afraid there's nothing all wrong with investing in bitcoin infrastructure obviously but i'm saying that it's sort of that's so inconsistent um but you know what it is they have a basket for it the

accountants the damn accountants win again i i couldn't agree more man all right mark listen thank you so much so much for uh for doing this this is fantastic i think people will learn a ton You've got some life experience and career experience there that people just don't get. So we'll have to do this again in the future for sure. Beautiful. Thanks so much for having me. I really, really enjoyed it. Great.