We Study Billionaires - The Investor’s Podcast Network - RWH048: Betting Billions On Outlier Talent w/ Adam Shapiro

Starting point is 00:00:00 You're listening to TIP. Hi there, it's great to be back with you on the richer, wiser, happier podcast. Today, we have a very rare, in-depth interview with an investor named Adam Shapiro. Adam is the managing partner of an investment firm in New York City called East Rock Capital. He oversees about $4 billion in assets on behalf of eight super-rich families. His clients are required to invest a minimum of $100 million just to open an account with Adam's firm. So, as you can imagine, he's managing money for some of the wealthiest, most prominent and most financially savvy people in the world, including an array of billionaires who made their fortunes in businesses like homebuilding and

Starting point is 00:00:42 hedge funds. One reason why I'm fascinated by this conversation is that Adam gives us a very unusual glimpse into one of the most privileged and exclusive realms of the financial universe, namely, the world of family offices. Globally, there are now thousands of family offices with an estimated $10 trillion in assets under management, so these are enormous asset pools. Within this field, Adams firm, Eastroch, has a reputation for exceptional performance, which is built on its expertise in two areas, hedge funds and private equity. Over the last 15 years, Eastrock has outperformed all of the best known and most admired endowments including those run by universities like Carver, Yale, Stanford, Brown, and MIT.

Starting point is 00:01:29 What's the secret of this success? Well, Eastrocks specializes in identifying great fund managers at a sweet spot in their careers when they're still relatively young and hungry. As you'll hear, Adam has thought deeply about the characteristics that winning investors tend to possess. He's also very consciously built a powerful network that helps him to find the rising stars of investing, before their funds get too big and bloated. So in some ways, this episode is really a masterclass on selecting what he calls outlier talent. Among other subjects, we also discuss why Adam is wary of index funds and ETFs

Starting point is 00:02:07 and why he's a huge believer in alternative investments like hedge funds and private equity. We talk about why small funds tend to outperform big funds while incurring less risk. We talk about how regular investors can reduce their risk and position themselves to survive regardless of what happens to the stock market. Adam also explains why some of the most famous and prestigious investment firms may be much riskier than investors realize,

Starting point is 00:02:34 taking on levels of leverage that are, to my mind, pretty terrifying. I hope you enjoy our conversation. Thanks so much for joining us. You're listening to The Richer, Wiser, Happier Podcast, where your host, William Green, interviews the world's greatest investors and explores how to win in markets and life. All right. Hi, folks. I'm absolutely delighted to be here today with Adam Shapiro, who runs an investment firm called Eastrop Capital.

Starting point is 00:03:14 Adam operates in an extremely rarefied part of the investment world, managing billions of dollars for about eight immensely rich families. The minimum investment is $100 million. So these are clients who expect extremely sophisticated investment advice, as you can imagine. So it's great to see you, Adam. Thanks so much for joining us. Well, it's fantastic to be here. Great to see you. You graduated from Yale back in 1995, I think, with a BA and ethics and politics and economics.

Starting point is 00:03:44 And then you went off and studied in Mexico and Argentina. And you ended up with a job investing in a private equity firm in Latin America. And I wanted to start by asking you about that early experience of spending, I think, two and a half years investing in, places like Mexico and Argentina and Brazil and Chile. And what do you learn from it both about what does and mainly it seems what doesn't work in investing? Because it sounds like it was a, it was in some ways a disillusioning experience. Well, that's right. I got very interested in Latin America during a time of grateful. This was early 90s negotiation of NAFTA, Mercosur. Latin America it was going through a period of democratization, of opening up of economies to trade, of privatization,

Starting point is 00:04:37 sort of government, getting its hands out of the economy, hope for much greater efficiency. And I dove into that in my studies on the belief that Latin America was a place where policy change that really mattered was taking place. And the United States, by comparison, seemed a bit boring. You know, candidates seemed more similar. The key issue is being discussed. You know, one side didn't seem that different from the other. Whereas in Latin America, we were talking about huge changes.

Starting point is 00:05:10 And, you know, period of a couple of years, Mexico, I think, privatized 2,000 government-owned companies. And so you're talking about massive wholesale change with a new generation of leaders. And that was very exciting to me as a student. and it convinced me to want to focus on Latin America in my studies and for my senior thesis at Yale and applied and got a Fulbright scholarship to study in Argentina. And that enthusiasm, I guess it was a little slow to wear off. Maybe it should have worn off more quickly because when I was in Argentina on my Fulbright scholarship, that's really when the so-called tequila crisis of 1994 happened.

Starting point is 00:05:51 and I moved down to Buenos Aires. And while there was stability, you know, there were some successes in that the currency was stable. The unemployment rate there had jumped to sort of unconscionable levels. It was depending on how you measured, you know, high teens to low 20s unemployment rate. And so it was already becoming clear that, you know, the dream and the promise, you know, maybe wasn't going to come to fruition. not all hope had been given up, but there were tracks. And then when I left Argentina, I moved back to the United States.

Starting point is 00:06:28 Well, I actually had a personal detour, which was that I believed I would move back to the United States and pursue a PhD in economics and become an economist. And it turned out I enrolled in a PhD program for all of two weeks before realizing it wasn't for me and found myself needing to go find gainful employment. And the place where I was able to do that was at a first. firm, a relatively new investment firm that was making private equity investments in Latin America. And I spent the next three years, which were really the first three years of my professional career, investing in Latin America. And there, you know, not only did the sort of promise of Latin America on a macro base has not really come to fruition. It's sort of, you know, turned worse with the Asian crisis, Russia crisis of the late 90s. But I really discovered that investing in

Starting point is 00:07:18 Latin America was extremely difficult for other reasons. And it took me a while they even have context to understand how much better it was in the United States. And please tell me, I can go through some of the stories that made me realize how difficult things were in Latin America. Tell us a couple of things that are examples of investments that kind of went wrong that give a sense of why it was a bad macro backdrop, why it was difficult in terms of micro risks on the ground, whether it was labor issues or corruption or whatever. What made you come out of Latin America and think, well, A, I don't really want to invest in emerging markets that much for the rest of my career. And B, the U.S. has an extraordinary advantage that I hadn't

Starting point is 00:08:00 sufficiently realized. Yes. And I'm going to say, unfortunately, some negative things. I'll at least start by saying Latin America remains a very important part of my life. My wife is from Mexico City. my children are dual citizens of U.S. and Mexico had and still visit, visited Argentina recently. These are important places to me on a personal level, but on an investment level, we experienced in those investments, you know, I guess exactly the things you would worry about. For example, like we did experience fraud. We experienced fairly blatant fraud where, you know, sort of financial statements said one thing. And based on the financial statements, the company should be wildly profitable.

Starting point is 00:08:44 And yet it was somehow out of money and needed an injection of new capital. There were cases where family-owned companies, this is a little bit flipping, a little bit of a joke people would make, but people used to say families love this private equity thing. It's like debt, but you never have to pay the money back. And the notion that you would buy a minority stake in these companies and you're sort of expected to not really be heard from again and the company would be taking whatever direction the family wanted. But then those families and those companies were operating in tough environments as well, where labor was always tricky, hiring and firing people, finding people with the right skills.

Starting point is 00:09:25 You know, this is Jiglerao into Brazil. And some of this may have changed through the years, but, you know, in those days, you would have all sorts of employee sort of lawsuits and difficulties. you know, you never, of course, never wanted to be in court over anything. You were at the mercy in some cases to local governments and sort of corrupt practices there. And so I guess what I always used to say in summary was if you're going to go to Latin America and make investments and deal with these risks, you know, whether there's fraud, corruption, or just difficulty operating, you know, you should want to be compensated through cheaper valuation. and faster growth rates. And unfortunately, that wasn't what we're finding.

Starting point is 00:10:12 Multibles, you know, valuation multiples were really pretty much in line with the U.S. And there was always a hope for greater growth. But the reality is that Latin America didn't grow. You know, at the time, you could build it up in contrast to Asian countries that were growing very rapidly. Latin American countries weren't really growing rapidly. And they were certainly not growing in a steady way. So, you know, you'd have a crisis every five years.

Starting point is 00:10:36 or so. And so you weren't compensated for all these things that made investing very difficult. And so it was a massively eye-opening event for me when I transitioned my career back to the United States and I sort of saw what was possible investing in the United States, which, you know, therefore to this day, I still believe if there's one concentrated risk I'm willing to take in my investing, it's being overweight the United States because the environment is so extraordinary. It's I think it's probably, you could say, extraordinary across all of history, the opportunity to invest capital and invest in other people's work and ideas and have a true sharing of the fruits of that so that capital gets its share, entrepreneurs, inventors, business builders,

Starting point is 00:11:26 they get their share. And this is a sort of a cooperative relationship that goes on and on and fills the economy and fuels the markets and it just makes it a great place to be. As an Englishman who's ended up in America on and off for the last 30 years, albeit with I guess detours back in England and also detour when I was living in Hong Kong for five years, I feel like a lot of foreigners and probably a lot of Americans are not sufficiently aware of the extraordinary advantages that the US has had economically and as an investment environment. And it's interesting to me when I look at your investment, it seemed to me something like 75% of your investments were domiciled in the US or tied to US business operations.

Starting point is 00:12:10 But at the same time, my sense from talking to you is over the last week or so, is that you feel like there's more risk today in the US than there has been. That there is, without wanting to be over political, there is some danger. I'm wondering how you think about that, the possibility that this beautiful environment for investors may actually become slightly more perilous. I think about it all the time. We talk to our investors about it all the time. We want everybody to understand that we invest in an incredibly diverse way by almost every measure you can't imagine the one thing where we can't say that is the domicile of the businesses. We address the concern about what might happen in the United States through a diversification around the investments that are in the United States. So some, you know, that will do well as the United States does well.

Starting point is 00:13:05 And others are domiciled here, but may do very well even if the country as a whole doesn't do as well. And so we address that the best way we can, which is to that true diversification through, you know, hedges and shorts and things, I will, it was maybe figuring a conversation we're likely to have as we progress in the session. but I remain a true believer in hedge funds, in part because I think having true hedges and true shorts is important. That's part of what protects you from extreme events that someone which I think we're sort of imagining, based on your question, we're imagining what could go wrong. And also through the events you can't imagine, right? There are just things that can happen. And if you are 100% long, whether that's stocks or bonds or anything else, by definition there's nothing in your portfolio. to address that. So I am tempted by your question you get a little bit political. I'm not going to do that.

Starting point is 00:14:04 I do have worries at the same time. The United States has proven incredibly resilient at the same time and has gone through very tough periods, periods that are so tough that on some level, despite a lot of study, it's hard to explain why exactly the United States came to this privileged position. What was that, you know, that mix or that cocktail of stuff of legal foundation? of people and natural resources and size and, you know, all these different things, culture, what created this, you know, this privileged place that we occupy in the world? I think you have reasonable debates about it and not necessarily come to a satisfactory conclusion. We are there. It does seem to be persistent, but yes, I worry about it.

Starting point is 00:14:50 I think one thing, and then we'll change topic, but I think one thing that you have a particular expertise in that I'd love you to give a sort of two-minute. insight into is the degree to which the U.S.'s economic advantage has been built on immigration, because that's such a live political issue and everyone on all sides of the debates seems not really to have a very good understanding of the actual economics of it, the actual realities of it. Can you just give us a little bit of perspective on what your views are, what we should understand if we're actually having a sort of non-dogmatic, unheated view of the realities on this topic?

Starting point is 00:15:27 Yeah, it's a great question. I tend to believe that the benefits of immigration are getting lost in the sort of political dialogue that we all live in now. They're a great exception. So that's not an absolute. There are, look, I speak to people of different political beliefs who happen to have in common, you know, a relatively strong appreciation for the benefits of immigration. And many of them, and I don't disagree. agree with this would say, like, immigration is very important, very powerful, but, you know, it needs to be done an organized way, you know, with rule of law. And, you know, I agree with that as well. But I do think that there's been a, you know, more than I'd like to see a lack of appreciation for the role of immigration, and I can think of it, you know, on two basic fronts, you know, one, just the sheer ambition and entrepreneurial drive and, you know, influx of energy and culture and all the things that, you know, going back decades is really driven, innovation, the United States, entrepreneurship and growth. I think that's one front. And then another front,

Starting point is 00:16:43 you know, has to do more with sort of, I guess, geeky demographics, which is, you know, growth over time is the lifeblood of an economy. And you can break that down to smaller levels. Growth is the lifeblood of a city. I live in a city, New York City that needs population growth for really to thrive as an institution, as a place to live. And that's true at the national level. If you care, which I do, you care about public finance. If you care about debt and deficits, you really ought to be pretty pro-immigration because, you know, what do you do? when you worry about debt to GDP and you worry about Medicare and you worry about all these things. You know, what you want is a large number of workers relative to people who aren't working

Starting point is 00:17:28 and this country is not going to get there on birth rate, right? It's going to have to get there on immigration. And then you can feel that down to whatever sector you're involved with. I happen in my personal life to focus a fair bit on the practice of nursing. And, you know, nursing has been hamilton. hit with, I don't know, you might call it a triple or a quadruple whammy of issues that have made it difficult for people to enter nursing, to stay in nursing, you know, to want to be employed nursing and difficult for health institutions, health systems to maintain nursing staff at the numbers

Starting point is 00:18:06 they want, with the morale they want. And, you know, historically, immigration has been part of the solution when this sort of can balance surfaces in nursing. And My guess is that's true again now for nursing as well as frankly a broader set of healthcare related jobs and that's true of lots of different sectors as well. Thanks. It's a helpful perspective. I was talking to my son, Henry, about this last night. We were talking about the Israel situation, the Gaza situation, and just the degree to which

Starting point is 00:18:38 we need to have more humility in general about trying to understand the issues and be open and curious and not heated in debates about this stuff, that there's a, I keep thinking of that line that I think Sir John Templeton used with his foundation where he said something like the tagline was something like how little we know, how eager to learn. And so I like at some point in these conversations to talk about kind of thorny issues, but in a kind of reasonable and quiet and non-dogmatic way. So thank you for contributing to that general task. My pleasure. I wanted to ask you to go back to your origin story. after the disappointment of spending a couple of years in Latin America and seeing the realities

Starting point is 00:19:21 versus your dreams of what it would be like, you went off to Columbia Business School, and then you spent nearly five years working in the special situations group at Goldman Sachs, which I think was then called the principal finance group. So this was a really interesting period in the markets, right, like 2002 to 2007, when there was just so much opportunity in the wake of the meltdown of the dot-com era and the like. And I wondered if you could give us a sense of what you learned there that became very formative about how to invest, given that you'd sort of seen what you didn't want to do during that period in Latin America. What did you learn at Goldman about how to invest with less risk, greater reward? Sure. I learned a couple of key things. I'll start with the power of sourcing through people. Now, we were doing private investing, right? So our investments in order to find them, you know, you needed teams of people to get out of the building at 85 Broad Street and go find things to buy. And the more you saw, the more likely you were to find some real.

Starting point is 00:20:32 gems. And so Goldman Special Situations had developed and continued to develop as I was there, a network of people, some of which were employed in Goldman Sachs and some were external, who played his very important role of finding things. And one of the main things I was involved in early on was buying portfolios of loans, of collateralized loans and all different types of collateral, but a lot of commercial real estate, a lot of hard assets. aircraft, financial assets like auto loans and credit card receivables. And you know, you don't just look at a Bloomberg screen and decide to buy a hundred commercial real estate loans. You've got to go find them. You've got to go find, you know, owners, whether they're banks or securization

Starting point is 00:21:20 servicers or what have you. You know, go figure out who owns them, who wants to sell them and get yourself in the process and figure out if there's some way to get an advantage in that process. And it would massively eye-opening for me because in part it was such a stark contrast with what I'd be doing before. So investing in Latin America and private equity was a little bit like venture capital investing, make 12 to 15 investments in a couple of years, probably two or three winners and make the whole portfolio. In a lot of cases, you know, you'd sort of look at a situation, project some cash flows

Starting point is 00:21:55 that were real guesses, discount them back at a very, very high rate. you know, let's say 35% and hoped that it sort of worked out. Whereas in contrast, so I view that very much as a very high volatility sort of guessing game, whereas in contrast, early on 2002, 2003, when this market was quite good, we were buying these loan portfolios, and what you could do is just assume the worst pretty much about every single asset in that loan portfolio. And if you assume the worst, all you're surprised. is there going to be the upsides? So you'd have some assets that behave how you thought, which was pretty bad.

Starting point is 00:22:35 And then you had assets that really surprised the upside. And then as a whole, you could project your cash flows at that time to load in mid-teens rates of return. So not shooting for quite as high returns as we were in our Latin American private equity investing, but much more predictable, much safer. And all the surprises made the number higher, not low. lower. And so that was just tremendously eye-opening to me that you could have diversification, you could have collateral, you could have all the surprises working in your favor. And it was just sort of a privilege to be able to invest in something like that. And as soon as I saw that,

Starting point is 00:23:14 I knew, it was almost like my eyes being open to a standard that I didn't know existed. And and I wanted to repeat that. I didn't have to be the same setup necessarily. But, you know, what I sort of decided for my career was I want to invest in things where, where I have the sense it's a privilege to invest in it, its advantage is favorable, and gosh, I want my own money in it. And that's sort of a core belief I go back to over and over and over again of every situation I sort of read from the perspective of do I want my own money in it? And that's also part of the advice I give to younger people is, you know, when you're choosing a job, look at what people are doing. Say, do you want your own money exposed to that?

Starting point is 00:23:58 that's an incredibly telling thing and an important discipline to have is to think that through. And so Goldman was at the place where I first saw these situations where it felt like real privilege to be exposed to it and gosh, I'd like my own money. When I listened to you talking about buying some of these quite difficult assets, I mean, I remember you telling me in a previous conversation, I think you'd been investing in empty offices in Detroit and industrial development assets that had contamination issues. It seems like a lot of what you were doing was simply finding things where you had the

Starting point is 00:24:36 skills to value the asset in a very sophisticated way, however complex they were. And then so in a way the complexity was kind of an advantage. And then you were simply buying them for a lot less than they were worth. And it makes me think of Joe Greenblatt once saying to me that when he tried to reduce down everything that he'd figured out about investing, it was value an asset and buy it for much less. Does it feel like that was in a way the essence of what you were doing underneath all of the complexity? That was in some ways the guiding principle, buy things for much less than that worth. Yes, but with the wrinkle, I would say that you find it and you value it with massive

Starting point is 00:25:22 people levered. I think if you, look, if you rely on your own ability, to find it and value it, you're way behind what you can potentially do. If you can create aligned networks of people who may be in your organization, maybe outside your organization, and you really tap into their networks and their sourcing networks and their expertise.

Starting point is 00:25:48 I guess for me, the vision of really the ultimate way to invest is to have these very aligned networks that every so often produce an opportunity that's just not fair. I can't think of any other way to say it. I feel like this issue of networking is very, very distinctive to you. You've thought about it much more clearly than most investors I know. And I remember reading somewhere, maybe in one of your articles that you've written or maybe one of the reports on your website, you wrote that 95% of investing is sourcing. And so you were very, very conscious about, in a sense, using Goldman Sachs as a

Starting point is 00:26:30 model for how to get external partners who would provide you with incredible opportunities because you could partner with them or they'd find all these hidden gems. But it seemed like in some way you were also trying to upgrade the way they did it and use this building of a network as a very competitive advantage for yourself. Can you talk about how you've done that? What? what you actually very consciously did to create a network that would enable you to source really good ideas, whether it was in private equity or, as we'll talk more about later, in terms of identifying great hedge fund managers. Absolutely.

Starting point is 00:27:08 These are just my ideas. These are, you know, ideas that I think, you know, we as a firm have developed and partners and colleagues have very much been a part of. So just had to hesitate that for a second when he said, that reused the word you and it sounded singular. But I think what we've figured out is that, you know, that Goldman experience was the kernel of an idea that could be done in a much bigger way. And what I mean by that is the Goldman External Network at the time, and maybe quite different now, but the Goldman External Network at the time followed a certain time. It was, you know, the reference, that network

Starting point is 00:27:46 was referred to as the operating partner network. The partners were referred to as operating partners and the idea was that they were sort of boots on the ground who would find things and have local color, but there was still a lot of central control at the Goldman level. And I think what we figured out is that, you know, that's a really good thing. Why not try it on, you know, a greater number of dimensions? And let's not limit ourselves to people of a certain type, but maybe there are other types. And, you know, really the big, I guess the big thing was to really focus on people who external partners who view themselves and identified as investors more so than operating partners, people who we would ultimately give more discretion to.

Starting point is 00:28:30 And we could align, I think this is really a key thing. We could align with their goals in a pretty long-term kind of way, meaning very talented people, especially those a bit earlier in their career, maybe they just left a large investment firm and they're starting something on their own. We could align with them. We could create a partnership that took into account what they were trying to build. Our objective is get exposure to great investments, get exposure to their work product at this moment in their careers when they're incredibly focused, incredibly motivated. They've made a decision to bet on themselves. So how can we get exposure to that work product that we think is very favorable, which will lead to these special, you know, privileged investment moment?

Starting point is 00:29:17 that I prefer to. And at the same time, be very open and explicit that there is a quid pro quo. What we can bring in return is an opportunity to get from that early stage launch level to building something much larger. And so have their objectives and our objectives clearly in mind, clearly stated up front. And I think more than anything, I feel like that's what's worked, is that, But we've been able to help people launching new investment firms. We've been able to help them get to where they envision they might want to be five or ten or 15 years after launching.

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Starting point is 00:34:10 It was interesting to me when I was looking at your firm, eavesdrop capitals core values. There were four values. And a couple of, you know, often when you look at firms' values, they're very repetitive and you feel like it's a little bit fake. And I don't really feel it is in this sense. And one of them, the first one is give first, create value and spread it around.

Starting point is 00:34:30 There will be plenty left over. And the fourth is cherish humans are, our partners, our employees, where a collection of people, our care for each other gives our work meaning. And can you just talk about that idea of when you're building a network, actually focusing on giving and cherishing people rather than just sort of exploiting them and getting them? Because it seems like in a way, there's a sort of enlightened self-interest to the understanding of how you're actually going to build these good partnerships. Yeah, I think if you, the way I think about it is that this is just awful.

Starting point is 00:35:05 natural. There is something we explicitly want to achieve, and there is something that younger investment managers explicitly want to achieve, and they're tremendous overlap between the two. They're very compatible, and so that's a good place to start. And then from there, you know, you do all the work around that to maximize your probability of success. And that means focusing on people. But, you know, that's, and it's not just the people we back, but it's all all the people, you know, in this large, you know, connected web, I think sometimes we call it the constellation, but the people, maybe to back up it and make it a little more tangible, when you think about what it takes to source and evaluate great managers, the number one thing

Starting point is 00:35:55 is knowing high quality people in common. And that may be obvious when you say it, but I actually don't hear people say it that way that often. The most, important asset we have in being able to be really good at sourcing people and valuing people is when those top people walk in our office, there is an awfully good chance that we know many people in common. And why is that? Well, you know, top talent tend to gravitate to each other. People have a certain, like, character, ethics, sense of fairness, citizenship tend to gravitate to each other. And so when you have a real appreciation for people, which, you know, I love that you read those two values and, you know, they're there, those words are there very purposefully, is to convey

Starting point is 00:36:44 that, you know, this is who we are, these are our values, this is what we care about. And what you're going to find is that when you meet people in our orbit, they, you know, they tend to be, they tend to have those characteristics, which is really great talent and really great character. One of the reasons why your firm is interesting and instructive to our listeners and viewers is a big part of the model of your company, Eastrock, is basically to back the star fund managers who've recently launched new investment firms or about to launch a new investment firm. So you've become an expert in identifying what we could describe as outlier talent. And that's something obviously that all of us who are interested in investing,

Starting point is 00:37:27 who aren't just managing our own money solely by picking individual stocks and all like need to figure out how to do. So I wanted to home in a bit more on this whole question of how you identify great investors, because I think it's applicable for all of us. One of the things that's very unusual about what you do is you're not looking to find someone great and then stay with them forever. You're finding this kind of sweet spot as you describe it. Can you explain what it is you're doing there because it's such an unusual insight that's very distinctive to what you do. I think there are two questions in there. So maybe I'll hit them one by one. I think the first thing you cited earlier, that 95% in investing is sourcing. There's obviously some false

Starting point is 00:38:11 precision in that 95%. I'm going to give you another, you know, this one will be 75, 25, and there's a bit of false precision. But 75%, I would say, of identifying a great investor is having data about that investor as opposed to the other 25%, which is, you know, some superior ability of analysis and pattern recognition. And so this comes back to knowing lots of people in common and running a certain process that really on earths that data about the person. So the key to identifying great investor is meeting them as early as you possibly can and we have lots of ways we do that, you know, repeat interactions.

Starting point is 00:38:53 And then, you know, building this whole picture of who they are and what they are, and what their work product has been, and what their style is and what their advantages are. It takes a lot of time, and the bricks that build that all up are mainly supplied by people you know in common. I just can't emphasize that enough. It's, you know,

Starting point is 00:39:11 we've been doing this for close to 18 years and doing it in a very purposeful way, and it's sort of the data about the people that we get through all those interactions and all those common relationships that really make, you know, the rest of it possible, figure out,

Starting point is 00:39:26 You know, you have to answer key questions like, you know, was it the person or was it the firm, right? I've written about how sort of ironically, it's harder to evaluate people from the very best firms because it's a bit more likely that the success was attributable to the firm rather than the person. So figuring out was it the person or was it the firm is incredibly important. Now, why is that so important? There's, you know, there's a bit of research I've written about, which I think, I think, I think it's a pretty brilliant paper, and it uses a large data set to make the argument that on any private investment, any private investment or private equity, the individual

Starting point is 00:40:06 who makes that investment is four times more important in determining the outcome or predicting the outcome of that investment than the firm where they worked. And once you know that, I think, again, it's almost like seeing the world in a slightly different way. You know, all these firms are just collections of people, and, you know, some are true outlier talent and some are not and figuring out which is which is incredibly important because you want to follow you know that 4x talent that person you know who drives those outcomes you want to be there when there's a moment and there often is there's a moment to get very concentrated exposure to their

Starting point is 00:40:44 work product and that's just you know another way of saying at some point they're going to launch their own firm a lot of them and that is a moment when you can get concentrated exposure to their word product And so for people who are looking to find out more about this paper, I'll put it in the show notes. But there's a, there's a paper that Adam cites. Adam writes these very interesting pieces on LinkedIn that I'll link to as well in the show notes. And in one of his pieces, there are about 15 of the pieces so far, which I read all of yesterday. And one of them cites this paper called whom to follow, which analyzes about 4,000 private equity managers and looks at something like 13, 13,000 deals. And it has these interesting findings, like as Adam said, this, this one that when it comes to explain,

Starting point is 00:41:24 explaining differences in private equity performance. The individual who leads a given investment is four times as important as the private equity firm where they work. Another thing that was really interesting in that paper that also is really relevant to you is they said smaller funds to a lot better than larger ones. So a lot of what you seem to be doing is basically going to these firms, you know, these great firms, whether it's, you know, Tiger Management or Black Rock or Blackstone or Bain Capital Goldman or whatever, looking for who's really talented figuring out who's, you know, who's likely to set up their fund, and then really betting on the fact that small funds run by highly talented people

Starting point is 00:42:03 are likely to do well. Is that a fair summary of at least a part of what your strategy is? Yes, etc. On some level, I had Jake this slightly jokingly. You're leaving out the most important part, which is research shows not only that small funds do better, but they're actually safer or they're actually less risky.

Starting point is 00:42:26 And that is the part that is counterintuitive to many people. It's probably the hardest thing to I sort of view myself as someone who's a bit of a champion, vocal champion for smaller funds. And I noticed that

Starting point is 00:42:42 in conversation, if I say smaller funds have higher returns, people kind of nod their heads. They sort of understand intuitively why that might be the case. Then I say, Oh, and by the way, they're less risky. And then the conversation's lost. But it's there in the data, and I do write about that as well.

Starting point is 00:43:01 Is it because they're more discerning that they have fewer deals because they have less assets and they don't have to find so many deals to put their capital to work? What makes these small concentrated funds less risky? Yeah. And what's interesting, it seems to be the case in private equity and hedge funds. So, and those two cases, it would be for different reasons. But yes, smaller funds are choosing from a generally more favorable set. They are doing fewer deals.

Starting point is 00:43:31 So they're spending more time on each deal. You know, younger managers just have more at stake. Those early deals must work. So there's a whole series of factors on the private side. And then on the public side, I tend to think it's, you know, some of those factors. But in addition, it's the nimbleness, you know, when you're a smaller fund. you can get out of the way of a short that's going against you or some trend. You may be caught sort of long value and you should be long growth and everything's going against you.

Starting point is 00:44:02 If you're smaller, you just have greater liquidity. You have a better ability to move things around and get out of the way. But it seems to be the case for public-samp privates. This idea that younger managers are the place to be is really interesting and kind of subversive. And I wanted to unpack it a little bit. You quote in one of your pieces, you said, in normal entrepreneurship, a 60-year-old startup founder has a roughly three times higher chance of creating a valuable business than a 30-year-old founder.

Starting point is 00:44:32 This is based on something that was pointed out by an East Rock Data Science Advisor, Seth Stevens Davidowitz, who also wrote this book, Don't Trust Your Gut. And then you continue, but in investment firms, there is a clear concentration of younger founders. And so this is one of the kind of subversive findings that you've had that actually, instead of betting on grizzle middle-aged people or old people, usually in the investment business, old white people, old white men, you're looking for these young, hungry founders, and then you seem to invest with them typically for about three to five years. Can you explain that? Because it's sort of messes with my head and messes with a lot of the

Starting point is 00:45:16 with the kind of prejudices and orthodox opinion that a lot of people have about how to invest? Sure. It's possible. I feel like sometimes I have to be careful with the vocabulary because young can note something that may be a little too extreme. The key thing is that the firms are young, that they're recently founded by somebody who has a certain profile. And that profile doesn't necessarily have to be, you know, very young and in age and, you know, in years. The key is really that the person is, is very well trained and proven. So, you know, that means they work at an investment firm for 10 or 15 or even 20 years. In private equity, the founders tend to be a bit older, hedge funds a bit younger. But the key is not so much the age of the person.

Starting point is 00:46:10 And it's that they sort of fit a certain profile that, again, they've trained well, they've proven themselves. And then they've decided in a very significant way to bet on themselves and bet on themselves at this particular moment. So there is very significant positive selection. Most of these people are, you know, had really good investment firms and making a lot of money. And so they are walking away from that to start something new.

Starting point is 00:46:40 And it's risky. They're taking a big pay cut. And when you think about alignment, I think alignment of interest is one of the most fascinating topics there is in the world. And alignment is really almost never about, you know, William, you know, I put in a dollar, you put in a dollar, we're 50, 50, and we're aligned. You know, that's almost the worst way to measure alignment. You know, real alignment has a lot to do with what the person is really risking

Starting point is 00:47:06 and what that means to them and, you know, how they're choosing. to create their incentives and their upside and their downside. And so when somebody walks away from a very high-paying job or prestigious job at a great place with great colleagues and lots of comforts to start their own investment, you sort of know that they've given that a lot of thought. And they've picked their moment, right? They sort of know what they're good at. And in general, they're signaling, you know, this thing I do,

Starting point is 00:47:36 whether it's, you know, I invest in, you know, biotech companies or I buy distressed real estate or, you know, whatever it is I'm good at, it's a good moment to do that. People, though, you know, don't tend to start the firm when it's not a great moment to do that. It does happen, of course. But so you have this positive selection of people betting on themselves. And, you know, in terms of our process, it's very important that we don't induce them to leave where they are. So we're, you know, we are not by any stretch trolling around large private equity firms telling people, hey, you know, now's a great time to leave and start up your own shop. They, you know, this whole positive selection that I'm talking about

Starting point is 00:48:18 it all that happens if, you know, the person, the founder is really committed to doing it and they don't really need an outside inducement. They're just, it's something they, you know, feel they need, believe in themselves that they can do, believe it's the right moment. And maybe just summarize, As you were asking me, why do we choose people of this particular profile, which are, you know, skew a bit younger, their founders, so their firms certainly skew younger. Why is that a good place to be? And maybe just to summarize, you know, there's positive selection, or there's strong signal in people leaving high paying jobs to make a bad on themselves and doing it a particular moment

Starting point is 00:48:59 in time. Again, they're going to be pretty strategic in saying, all right, if what I'm good at is buying biotech companies, I'm going to leave and set something up when biotech is cheap and the opportunity set is strong. So there's positive selection that is a good place to start, but certainly not the place to finish. You also, if you're in our position, you need to run a very rigorous process to determine who it is within that group you want to back. And there, I think we've talked a little bit about our process. I'm happy to talk about it more. But once you have that setup of the positive selection, the right moment in time, then you know, you're talking about,

Starting point is 00:49:34 And then you sort of have all things, you know, really going in the right direction. You have somebody who's incredibly motivated to make those early investments work, right? If they don't work, they made a horrible mistake by leaving behind their high-paying job. So there's an incredible focus. They can play in smaller situations as a new firm. You know, they're generally going to be investing in smaller stuff. That tends to be where there's greater inefficiency, opportunity for multiple expansion, all sorts of good things. And so, you know, that's really the theory and the intuition behind it. And then the proof is really in the data, which is we do find, again, back to some of things I've been writing, we do find that smaller funds and smaller deals tend to do better on average and tend to be less risky. And so the intuition seems to really match the results.

Starting point is 00:50:25 And part of the data that this is built on, which I'll also try to remember to include in the show notes, there's a 2019 article. from institutional investor, which talks about a study of, I think, 1,591 funds from 2012 to 2019. They're focused on these early life cycle funds that are less than three years old and how they beat older funds. So there's interesting data here and then also interesting anecdotal evidence. And on the more anecdotal side, you're looking for certain qualities that are likely to lead to success. And you've written about some of them in your piece online. LinkedIn, and I wanted to zero in on a few of them. One of them is just what you call an intrinsic

Starting point is 00:51:11 desire to hustle. Can you talk about that a bit? Because it seems to me, I mean, I remember in my book, I think I wrote at some point, and it sounds so simple and platitudinous, but at some point, I think I realized that at a certain point, the secret to success is nothing more complex than a fervent desire to succeed. It's that just sort of just such hungriended. that you almost couldn't bear to fail. Yeah, I think when people have that, it drives them to an investment type, I guess, an overly simple way where I might define two investment types. They're investment types that are driven by judgment, right?

Starting point is 00:51:53 I see a business. I see a large mode around it, pricing power, you know, opportunity to invest capital into the business, the high rate of return. I sort of make a judgment. This is maybe a company that's up for auction and lots of people know about it, but I see it a different way than others. And that is a perfectly legitimate way to invest. And a lot of people have been very successful at that.

Starting point is 00:52:18 As someone observing the investor, that's much harder to know who's going to be successful, who's going to have better judgment. The other investment type, the one that we gravitate to it and the people we back gravitate, to require this tremendous amount of hustle because, you know, they're more of the hidden variety. And the advantage is not so much that somebody has a judgment that this is a great business for the next 10, 20 years. But it's actually some really simple insight based on better data, right? You know, Seth, you referred to earlier, you know, I think if you were part of this conversation, he would say, you know, between better data and better data analysis, you'll take

Starting point is 00:53:05 better data every time, new data, things, and data that others haven't seen. If you have access to new data, then, you know, you don't have to be the best data scientists in the world to draw a new insight. And this is a little bit the equivalent of that. Some investments, it's very simple to see why they have a certain advantage to them. But finding those investments requires, you know, really the hustle of developing special expertise, special relationships, special ways of sourcing. There's a very nice quote that I wanted to read to our listeners that came from one of your articles where you were talking about this intrinsic desire to hustle and to reject the things that are easily on offer and go find the things that are hidden.

Starting point is 00:53:48 And you wrote, when I worked at Goldman Sachs, a common saying was that there were inside the building people who just picked up the phone when it rang, and outside the building people who hit the streets, turned over rock. built new relationships, recruited talent, and grew their own businesses from that work. This desire to hustle and get outside the building was often the key to finding differentiated investments. And it really reminded me of Peter Lynch's simple insight that he shared with Bill Miller very early in Bill Miller's career where he said, look, there's really just one gear. And Bill was like, you know, can you ever slow down? And he's like, no, not really. You know, at a certain point,

Starting point is 00:54:28 you just have to stop if you can't keep up that pace. Do you think that's more or less true that you just need that intensity? Yes. I guess with a little bit of a caveat, though, and the caveat is, you know, you don't always have to be the person. I guess I'm trying to picture Peter Lynch and his desire to be that person running at that incredibly high gear, you know, sort of forever and ever. And, you know, I think as investors mature, they find, ways to produce a similar work product, you know, through, you know, through strategies.

Starting point is 00:55:05 And again, the best one I can think of is people. I mean, this may sound repetitive. But if you have a great network, you know, great and well-aligned network, then you don't necessarily have to be the one, you know, doing that forever and ever because it's not sustainable for most people. Your question is, has me thinking, I guess, you know, a little bit more on a personal level, But I think I can do this job pretty much forever. I love it.

Starting point is 00:55:32 And I think I work at a pretty high year, but I get so much out of the fact that this aligned network we have creates these special opportunities. So on some level, it's a privileged position where I don't have to, you know, be the one like I was at Goldman Sachs 20 years ago, you know, trying to find, you know, some bank somewhere that'll sell. some long portfolio, right? You find ways to create leverage and then, and then it's more sustainable. I think I was very, very slow in my career to figure out the power of a network. And I think maybe because I was English, I felt sort of embarrassed about the idea that it would seem somehow

Starting point is 00:56:15 exploitative, you know, that people would sort of feel like I was taking advantage. So I often found when a friend of mine became really successful, I would sort of almost like stopped talking to them because I didn't want them to feel like I was exploiting them. I mean, it was so, defeating. And then I look at it increasingly and it's so, it's so helpful that when you're trying to solve any kind of problem, you can go to people you trust who are really smart. And it's just such an incredible shortcut where you don't have to run 120 miles an hour. And I was very struck when I met you, I think, a year or so ago, I think it was because a friend of yours who used to run Lincoln Center and be president of Robin Hood Foundation

Starting point is 00:56:54 and put you in touch with my literary agent, who's an unbelievable literary agent, Jim Levine, who represents all these people like Ray Dalio and Eric Schmidt and Satchin Adela and stuff. And he said, well, you should talk to William. And so we ended up talking about writing and they're like. And it struck me that maybe that's become a real sort of secret weapon for you, this ability to figure out through a, you know, not that I was such a great person to talk to,

Starting point is 00:57:18 but, you know, always to be able to figure out who, who do I trust who's going to be able to put me in touch with someone else who they trust. It's an extraordinary competitive advantage. Oh, I think that's right. On some level, it is what's wonderful about investing as a career, right? I guess when I talk to younger people who are considering investing as a career, one of the things I like to point out is on some level, all knowledge is relevant, you know, and all people are relevant.

Starting point is 00:57:48 So, you know, Charlie Munger, of course, says be a learning machine. And I guess the wrinkle on that I would put is what's great about investing is it's motivation to be a learning machine. You can read anything, history, science, novels, poetry, and it is irrelevant to the art of investing because investing is so broad. It's about patterns. It's about trends. It's about knowledge. And people are just such a huge part of that. And so, you know, the relationships that you end up making and exploring because of these,

Starting point is 00:58:23 this sort of common thing, you know, look, we're all on this journey to learn more about just about everything and be better what we can do. You know, it's a great basis for a lot of important relationships. I think the thing I want to emphasize for our listeners or viewers, again, to cite Charlie Munger, who you just quoted in who I've written about a lot in the past. Charlie said, look, if we have a very simple, this is when I asked him about, you know, what we could learn from him and Warren about how to have a happy life. And he talked about their relationships, not only with each other, but with all of their partners. And he said,

Starting point is 00:59:00 look, we have a really simple rule, which is if you want to have a good partner, be a good partner. And so again, very much like your principle, that you want to think about how you're helping other people and making opportunities for them. And so I think that in a way was the big realization for me, instead of worrying that somehow networking was exploitative and cynical, once you start to invert it and you start to say, well, no, I want to meet all of these people, and I'm going to help them, and I'm going to be generous with them, and not really have such an agenda. It kind of, it becomes a whole different game in a way. Does that resonate at all? Oh, absolutely. I think people in our organization, and I include myself, like we'd

Starting point is 00:59:46 get, like we get a lot of pleasure out of giving people career advice, people who are in larger investment firms and are trying to decide what to do. People are thinking of going into finance and investing. And you can look at that as being sort of long-term greedy in that, you know, we think that comes back to our benefit over time. But that's, what, there's something, intrinsically enjoyable about that along with being, you know, good for business. And so, yeah, you know, give first that whole idea of, you know, give advice, give introductions, give expertise, you know, connect people to expertise. That's a value that, look, I think works really well. I think it's worked well for us. I think it works well for lots of people. Yeah, I think

Starting point is 01:00:30 it's actually one of the great secrets of success, which is why I wanted to pause and dwell on it a bit. I think of Munga saying, I observe what works and doesn't work and why. And this model of actually building relationships built on trust and the like seems, seems absolutely critical. So to go back to this issue of the qualities that you're looking for in potentially great investors or investors who've sort of shown a degree of greatness in companies, but you can't quite tell if it was the company or them until they really get out there and prove themselves at their own firm. You've also written about the importance of grit and resilience, and you've talked about actually liking to look at people who've demonstrated an ability not to give up and to endure hardship.

Starting point is 01:01:18 Can you talk a little bit about that and also this other quality that you've identified, which is just as you put it, a history of calm and productive decisions made while under pressure? Because it seems like that combination of grit and resilience and an ability to be calm, those are huge predictors of success. Yes. I guess the way I would dig into that is to say the key to choosing good investment managers in my mind starts with getting this very detailed picture of who they are and what their body of work has been. And you're looking for, you know, here's where it becomes, again, hopefully you have the data. You have these stories and you have these insights from people observed, you know, observe them in different contexts. And so you can identify things like overcoming, you know, some setback, some difficult moment. You can observe things like, you know, I'm going to veered into a slightly different area, which is back to the, was it the container or was it them?

Starting point is 01:02:23 You can observe literally how they did their investments. You know, there's a whole story behind those investments. How are they found? How are they diligence? What resources were brought to bear? what partners were brought in, how is the investment, you know, sort of sold internally to the organization, you know, how to, you know, how was investment committee convinced of the investment? And by, you know, the more you can get this detailed picture, the more you can, you know,

Starting point is 01:02:52 use some level of common sense and intuition to see, all right, this person really pushed into something new and, you know, founded new resource, didn't rely on the resources that were available in the firm to everybody, but found a new way of doing something. And what ends up happening, you know, I guess this is a little bit of a quirk of what we do, but, you know, we do end up backing people who were less likely to run the firm where they were. You know, they're at a big firm, and they probably do a smaller number of investments per year than average. Their bars higher. They tend to be the people who they bring a deal to committee.

Starting point is 01:03:33 and the conversation is a little bit shorter because everybody knows, you know, that all the work was done the right way. Investment thesis is sort of clear, maybe even obvious. And, you know, the personality types are a little different. You know, they're a little bit more heads down doing their work. Maybe they're off in the corner. Everybody tends to know that what they do is high quality, but they're not necessarily perceived as, you know, the rising star in the organization because what they choose to focus and spend their time on. But again, I don't want to, I'm giving you one sort of pattern I see, but it's also important to remember, you know, that really good investors and really good founders come and

Starting point is 01:04:14 lots of different shapes and sizes. And so I wouldn't want to be too specific about this. The key, again, is just getting this very clear picture of the person and their body of work and their network of relationships. And then, you know, applying this lens that, you know, you're asking about of, you know, have they really been tested? Have they been through hardship? have they set up their life in a way where they can make good decisions, you know, all those sorts

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Starting point is 01:08:12 asking a lot of questions of people who are giving references and your approach to getting references. It's kind of unusual, very idiosyncratic, much more detail than most people's. And you're looking at stuff, like I remember reading one of your pieces where you were talking about gauging what do you call externals, like whether their work life is sheltered or not by a stable family life, financial reserves, hobbies, and community. I thought that's really interesting that you're looking, you're kind of creating this mosaic to see whether this person is likely to be calm, whether they have a stable family, whether they've got these inequalities of grit or intense motivation. It's an unusual process you're going through. Yeah, that's right. And I wouldn't want any of those

Starting point is 01:08:56 seems to sound like absolute. It's like people are complicated and, you know, the way those complexities will come out in different setups, different environments, you know, different organizations, you know, is something you have to be thoughtful about. And, you know, I guess on some level, I'm hesitating a little bit because I don't want, those are important frameworks, the important things to think about, but, you know, you do this for a long time and, you know, if you waited to have every, you know, every box check that you'd like to see, you know, you'd be waiting a long time. So, you know, people are complicated, people are imperfect. You know, what you're looking for is this, you know, the best setup you can find of someone,

Starting point is 01:09:40 you know, who has a proven skill set, you know, proven approach, you know, meet certain criteria as people. And the time is right and the setup is right and all those things. And when you see that all line up, then, you know, that's the moment. You've written, if there's one guiding principle to follow, it would be this. Family office founders should consider it their goal to have talented and trustworthy people of high character in every critical role. And I'm wondering when you're actually trying to assess whether someone is not only talented but trustworthy, what are the sort of things you're looking for that might be tells to see whether someone is likely to deceive you or be overly aggressive or what is it that leads you to.

Starting point is 01:10:25 actually to decide whether someone's a person you can trust. The answer is almost always in, I hate to be repentant, the answer is almost always in, you know, very extensive referencing where you know people in common and therefore the views you're getting are from people who are actually motivated to tell you what's really going on. And then you have to supplement that every way you possibly can,

Starting point is 01:10:52 you know, through research, through your, you know, through your own eyes and ears, but you have to be careful. I think, if anything, in our own early years and in, you know, watching other people, I think people may wait their gut instinct about a person too heavily relative to, again, the references to me are more like our data. And so you look at both, you certainly, you know, take both into consideration. And, you know, I think it's, you know, reasonable people can disagree.

Starting point is 01:11:23 we try to have a very, and do have a very low tolerance for things that, you know, it might be a little bit of smoke that would indicate that there might be an issue because, you know, just the worst thing that can happen to you in our world is, you know, is to end up in a situation of real deception. I wanted to ask you about three specific fund managers who are illustrations of what you do. So one of the, there are a lot of people who we can't really talk about because they run very small fund, and you don't want them to attract a lot of assets or attention and they're like. But three who come to mind, who that would be less for a problem for, I think,

Starting point is 01:12:01 Jonathan Wang from EOS, which invests in hotels, Kanye Hasagawa, who runs a firm called 3D investment partners who invests in Japan, and Tim White, who runs a private equity firm, or June's Point. Can you talk about a couple of them, give a sense of how they illustrate what it is you're looking for in a person? and why the kind of specialty they have, the niches, the edge that you're looking for that they illustrate? Yeah, that's a really good list. I'm going to go on a reverse order. I'll start with Tim White.

Starting point is 01:12:36 So Tim had an extensive and very successful career in private equity. His last job, before he went off on his own, he worked at GSO. He had run their buyout. GSO, even though his man at credit shop had a buyout effort and he ran that before it essentially had to be disbanded because of the acquisition.

Starting point is 01:12:59 JSO was acquired by Blackstone. And so Tim, the list goes back a while, but GSO, Blackstone really wanted to keep him. They offered him, my understanding, he had some very high paying, you know, sort of big name roles and that's just not what he wanted. He is a

Starting point is 01:13:15 buyout guy. He loves buying, you know, he loves smaller buyouts. He loves finding a gem of a business to buy and then bringing in, you know, real value add through a network of operators that are his personal relationships. And he walked away from all the trappings, right, the fancy name, the fancy business card, the big salary, he walked away from that to start his own firm. And he was so committed to that, he did it, without raising any money, he did one investment on his own, which he funded himself. He had had success so he could afford to do that. And just a, it was very clear in our diligence of him,

Starting point is 01:13:59 of what a just high quality person he is, super high integrity, hands-on dedicated diligent. And we knew people in common, again, which is the key to get to a real picture. But another indicator is will people he worked for who don't really have to be quickly responsive to a reference request? And so at the time, I didn't know Bennett Goodman. I know him well now, but I didn't know him then. And I emailed Bennett, who was the G&GSO, founder of GSO, where Tim had worked. And I said, if you have a bit of time, I'd like to come over and talk to you about Tim White. and I think even that's a little bit unusual

Starting point is 01:14:42 right people ask for a call they asked for a back then it wasn't a Zim but they asked for a call and I was clear that I wanted to come meet him in person and I just believe it's much better practice in referencing to try to do things in person and he wrote back, then it wrote back right away

Starting point is 01:14:59 you know never heard me before you know it was sort of like break when can you come and I think I was in his office the next day and it was very clear from that meeting He volunteered some of the things that you'd like to hear based on probing of this is the person I would trust. If I was going away, if I wasn't around, you know, and I needed someone to take care of my money for my family, this is the guy, Tim's the guy.

Starting point is 01:15:27 So that's the level of character and validation from, you know, obviously, a very sophisticated, incredibly successful hedge fund founder who took the time and went out of his way to make these positive comments. That's what you want to hear. Of course, that's almost like the dream. I mean, you know, you hope that that happens more than a few times. And so we went out to be the primary source of capital for the next four investments that Tim made as June's point. So he did one investment with his own money. He did four over several years with ours. It was a very successful relationship and he has gone on to become a very substantial. Dunes Point is now a very substantial profit equity firm, had an excellent second fund and is on their third fund. And, you know, when I mentioned the name, Dunes Point around in the world of buying, you know, sort of middle market

Starting point is 01:16:24 and industrial businesses with a lot of value add, I believe they're one of the most respected names out there. And what about someone like Jonathan Wang, who I think you've known him for a very long time, who is an expert in buying hotels, particularly when they're out of favor and then transforming them. What makes him special and what does he embody that you look for? It seems like part of what you're looking for is a degree of specialization with these people. Like he's got such a weird little niche, right, that nobody else is just not as competitive in certain ways, if I'm understanding correctly. Yeah, we're looking for people who are creating an advantage, you know,

Starting point is 01:17:04 through building some sort of resource or expertise in Jonathan, I think, is a poster child for that. And, you know, even better for us, in some ways, this is as good as it gets. I knew him, you know, going back to working at Goldman together, I knew the quality of his work, his quality as a person. And then I also got to watch, you know, he left Goldman, he went to work at Northwood, which is a real estate private equity firm, highly respected. And he built there this hotel. investing capability and became one of the very few, very, very few real estate private equity firms

Starting point is 01:17:39 that it had its own operating capability with respect to hotels. So there was no need to rely on third party managers of these large brands. What Jonathan built was this ability to really understand hotels up front. So the diligence capability, since he had a real operating team, He knew, he knew exactly how revenue management were. He knew exactly what different cost line items were. And he could build a picture of what would happen if certain levers were pulled with respect to a hotel they acquired. For example, taking a branded hotel and removing a brand and taking an adult independent, he had a lot of expertise around that. And it also, this operating capability gave them early insights on individual markets.

Starting point is 01:18:28 that were poised, you know, for, you know, for an advantageous period. And he did that, you know, sort of most notable with the Florida Keys, had a lot of success in Florida Keys. And he had that success at Northwood and then continued that in his firm Eos. And so you can tell him a huge fan of Jonathan's as a person, as an investor, as a platform builder. And I think what he has is very special, which is this ability to identify value-ed opportunity up front and then execute on that and execute on it very efficiently in terms of getting it done

Starting point is 01:19:05 quickly and well, but also saving his investors money by not paying third parties more than he should. One thing that was surprising to me as I looked at your strategy was that I think at one point you told me that you owned something like 15 to 20 hedge funds plus something like 60 to 80 private equity investments with 30 to 40 sponsors. I'm not sure if those numbers have changed a great deal. The idea of owning 15 to 20 hedge funds is really interesting to me because I remember, for example, Templeton many, many years ago, probably 25 years ago saying to me that the average investor

Starting point is 01:19:40 should own a minimum of five funds, each focused on a different area of the market. And here you are, you're obviously dealing with people who are not the average investor. Your typical client has a minimum of $100 million invested with you. So these tend to be billionaires and multi-billionaires. some of the most prominent families in the world. How do you think of this question of diversification? Because I often am torn personally between the idea of wanting to concentrate enough so that I'm likely to perform well and diversify enough so that I'm likely to survive.

Starting point is 01:20:16 And I'm just wondering how you think about this and how, you know, what kind of lessons there are for the rest of us on this issue of survival through diversification. So you hit, you know, the key point, which is, you know, you want diversification, but not too much, right? If we need diversify too much, you know, if you don't concentrate. And I do think most portfolios in our world tend more towards over diversification rather than under. And I should even define, I guess, what I think our world is, which, you know, I think what I do, what East Rock does, we exist in this, you know, very large arm of the investment world,

Starting point is 01:20:56 but an arm that gets a lot less attention, I think, than hedge funds and private equity funds, which is, you know, we're managers of large asset pools for families. And, you know, that is a whole sort of sector within investing, you know, that involves these OCIO firms and internally managed endowments and family offices. That world of managing large asset pools, I think, frankly, there are a number of things that we as a group can do better. And one of them actually is probably thinking about diversification in, you know, I'll call it in a more advanced or maybe nuanced way. And so first, to your point, I do think we see quite a lot of over-diversification when we can get into the reasons. The key in my mind, and it trumps everything else,

Starting point is 01:21:47 is the type of diversification. The type is incredibly important. You must diversify into situations, that are truly non-correlated with each other. That is what protects you more so than the amount of diversification as not even close. And so that is maybe item one on a fairly long list of why, you know, I believe so strongly in active management as a significant portion of a large asset pool. And I'll just define active management as the combination of private management. investing in all its forms plus absolute return. And hopefully give a really simple reason why that's the case.

Starting point is 01:22:35 If you look at the S&P 500, the vast majority of the components of the S&P 500, overwhelming portion of it, has a beta between 0.5 or 1.5. So those companies, those stocks, they behave together more than they behave differently by a significant amount. To make investments that are truly non-correlated, you really need to be looking, and I'm assuming you really care about this, which I think you should,

Starting point is 01:23:07 you really need to be looking in the world of private investing in an absolute return. And, you know, our hedge fund positions, you know, the betas, you know, the relationship to the S&P 500, they range, you know, from a high, of about 0.5 or 0.6, some of them, down to negative, actually less than zero. And so...

Starting point is 01:23:32 So for the layman like me, who are not good with technical terms, what we're really talking about here is the benefit of reducing your kind of raw market exposure. So if the market gets hit, the S&B 500, for example, you're not totally crushed. So you've pointed out that one of the problems with index funds, is, for example, in 2022, you had a 25% drop, in 2020, a 34% drop. In 2018, a 19% drop in 2007 to 2009, a 55% drop. So what you're getting at is this really fundamental problem that all of us having to deal with as long-term investors, which is how much can you bear to be exposed to that market

Starting point is 01:24:16 risk? How much can you handle? And will you actually be able, as you put it in your writing, to have the iron will to write out those drawdowns. And if you do, it's easier, I mean, I think for some of the people I invest with in my sort of ecosystem who are kind of concentrated, long-only investors, they're people who are very opportunistic during these drawdowns and they can kind of handle it temperamentally. That's a small, it's a small part of the world that can handle that. So I think you're getting at this very fundamental problem that all of us are trying to deal with that's very uncomfortable.

Starting point is 01:24:53 which is how do you reduce your exposure to the market so that you'll survive and not do anything really stupid during those down periods? Yes. So I get the question all the time and it sounds like you engage with this question a lot, which is just, why should I bother with all this active management stuff, private equity, all the liquidity that goes with it, hedge funds that charge big fees, all this stuff? Why should I bother with any of that? Shouldn't I just buy ETFs?

Starting point is 01:25:19 Look at what the S&P 500 is done for the last 10 years, 15 years. pick a number. And I think that there is a very powerful argument for why people should not do, you know, not just kick out alternative investing and think about a public's only strategy. And it really has, you know, a few components. So one is the one you just referred to, which is, you know, there's a bit of research which shows that on average individual investors, you know, investors in my sort of seat managing a large pool of assets, they don't capture the, all return of the market. You know, they buy and sell at the wrong time.

Starting point is 01:25:59 And, you know, the, and that happens for a bunch of reasons. And one, of course, is just the psychological pain of being down massively. At some point, if you're down enough, it's actually irrational even to hold on through that. So, you know, there are behavioral reasons not to only buy, you know, ETFs as a solution. There is a second reason, which is you can buy the wrong ones and be wrong for a really long time. And we all sort of look at the S&P 500 now rate it's been. But, you know, there is certainly no guarantee that the next 10 or 15 or 20 years on any one index you choose will behave that way.

Starting point is 01:26:34 And even in this relatively frothy period, you know, emerging markets, for example, has been a horrible place to be. So if you chose ETS but chose emerging markets, that was rough. And, you know, the third thing in practice, when people do choose to mostly invest in ETS is they tend to spread the ETSs around for just, that reason I mentioned, right? There's a reason people gravitate to a 6040 portfolio, even though it's sort of an antiquated way of thinking. But once you decide you're going to do all public markets, what you tend to do is buy a variety of ETFs and even some fixed income to mute the

Starting point is 01:27:07 volatility, which otherwise might be intolerable. And once you factor in that, you know, those, I guess, those factors, the ETF strategy itself does lose some of its luster relative to, you know, the returns that are available from a more active strategy and of course the large endowments would be the place to see how that can really work to your benefit where you can earn similar if not better returns over a long period of time without falling into into some of those traps. The gold standard of the endowment strategy obviously was always David Swenson at Yale who I think famously made what was it, something like 13.7% for 36 years. I mean an incredible performance. And one of the things you've said about doing when you co-founded Eastrop 16, 17 years

Starting point is 01:28:00 ago, a longer 18 years ago back in 2006, you were setting out to beat the Yale Endowment. And in some ways, part of what you've done that's intellectually very interesting and important is you've kind of created an update in some ways of the Yale model with this East Rock framework. and without wanting to be too specific about your returns, I think it's fair to say that your returns over the last decade and longer have beaten all of the endowments. And so it's an interesting experiment, a sort of ongoing experiment in how to do this in a kind of updated way. Can you talk a little bit about, obviously Swenson made this very important move away from just owning stocks and bonds and the like to investing in alternative assets like hedge funds and private equity and real estate

Starting point is 01:28:48 and all of these other things. So I think there were about eight different asset classes. You've updated this model in certain ways, partly by saying there are things that I'm just going to avoid, that I'm just going to remove. What's the essence of what it is that you've just decided, if you want to build multi-generational wealth as you're doing, you can actually do this better than even the Yale model,

Starting point is 01:29:14 much as the Yale model was very impressive. Yeah, so I find it. It's sort of amazing that pioneering portfolio management, Swenson's book, was written, I think, 24 years ago. And there hasn't been, you know, with apologies to anybody who's written a wonderful book, but there hasn't been a book that I know of in this world of large asset pool management that's really moved the thinking nearly as much as Swenson's book. and I think you can have a fascinating debate about what are the true innovations in Swenson's book and what are maybe less central innovations.

Starting point is 01:29:56 And for example, on some level, I think the notion of a policy portfolio and asset allocation buckets I think is much less important to Swenson's accomplishments. I think what Swenson did was first just simply identify the opportunities that exist, in alternative assets. And then you became really, really good at finding the best managers. And ultimately, succeeding was allocating your human resources to being really good at selecting managers in areas where there was great dispersion between the best manager and the worst manager. And so I think Sonson was incredibly, incredibly good at that. I say all this with hopefully a bit of humility. I know, you know, I met Sonson once and I'm not the world's best two.

Starting point is 01:30:44 of Swenson, by any means, I know a lot of people who work with him and form and know I'm a lot better. But I do think that there is room, significant room, to move the discipline forward, you know, the core tenets of pioneering portfolio management. And I would probably start, and MIT has done this, you know, is really deemphasizing the asset allocation buckets, which I think can be problematic to kind of create a false sense of diversification and it's very difficult to actually define sometimes which bucket different investments should go into. And so I think there's an opportunity to take, you know, the really, you know, key insights

Starting point is 01:31:28 and apply them in a slightly different way. And so I have written another goal proposing, you know, a different portfolio construction framework. Yeah, that revolves around, you know, you start with. focusing on your two key budget that's that you never want to exceed. You never want to exceed your market risk budget for the reasons we just talked about. You know, you never want to be in a position where your market risk exposes you to a drydown that's so painful that you make a really horrible decision at the worst possible time. The other cheap budget is liquidity. So you must,

Starting point is 01:32:00 you know, rule number one for someone in my position never, ever, ever run out of liquidity. And so you want to have a very clear and strict liquidity budget, but you do want to have a very clear and strict liquidity budget, but you do want to use illiquidity as much as possible. So, you know, you budget for the liquidity you need, but not more than that. And you use a liquidity to your advantage. Again, so on some insight there. Where I think that there's real room to move things forward, again, these are some of the things I've written about, like, I think we talked about small managers. Small managers is the only sort of fundamental strategy I know of with clear outperformance over a long period of time. There should be more focused on small managers.

Starting point is 01:32:38 I think there are strategies for avoiding filler in a portfolio that accumulates for a variety of reasons. And again, just one simple one I'll mention. You know, this is part of the problem with large managers. This is large private equity managers tend to do about 20 deals per fund. Small managers tend to do about nine deals per fund. 20 is too many. You will get some filler in there. You'll get some deals that are in there for the wrong reasons.

Starting point is 01:33:03 I won't go into all of it. but if you can have an obsessive focus on avoiding filler, avoiding things that aren't special in the portfolio, and things that linger too long in the portfolio, and I'll do a sidebar on time horizon. You know, a lot's been setting about having a long time horizon, how important that is. And I agree, having the ability to be long term is incredibly important.

Starting point is 01:33:26 But, you know, being long term, saying your long term can lead to, I think, a lack of discipline where things linger in the portfolio too long. and that's equally problematic as being too short term. And then beyond that, I think there are ways to be creative and entrepreneurial in the search for alpha opportunities. And part of that goes back to bringing a more rigorous discipline to sourcing and particularly sourcing of investment managers and diligence of investment managers. And then there are even more slightly tactical things like very little has been written

Starting point is 01:34:03 that I've seen in this world of large full asset management about, I'll say two things. One, selling discipline, you know, so this is back to letting things not linger too long, but, you know, having frameworks for how to redeem, when to redeem, you know, how to cut risk, those are things that I don't see talked about, you know, near as much as perhaps it should be. And then more basic risk management around factor exposures, correlations. These are areas that we're coming out of the age of relying on models that aren't very good like value of risk, but where there's a lot of work to be done, I think, ahead of us to understand risks inherent in portfolios that really have to do with hidden correlations.

Starting point is 01:34:51 This idea of hidden correlations is really important. And as you say, I don't think it's something people really understand that much. And you've written about factor analysis that one of the problems with a lot of our portfolios is that we're unknowingly exposed to a range of different factors. Like, for example, macro trends like interest rates rising or GDP growth changing or commodity prices and like. And I wonder if you could just talk a little more broadly about. If you're a regular investor and you're worrying about your portfolio because you do have a lot of exposure to different factors like interest rates and GDP growth and commodity prices and the like. And you also have a lot of market exposure and you don't have access to these kind of very

Starting point is 01:35:39 esoteric sophisticated tools like the kind of access to private equity deals that Adam has or the ability to invest in long short hedge funds, which I'm wary of anyway, because I, I tend to be worried about shorting, but there are obviously good reasons for that for shorting. There are some justifications for it. What do you do as a regular investor who's trying to protect yourself from the fact that you're overly exposed to the market, overly exposed to different factors that could hit the economy or your portfolio? How do you try to create some degree of resilience in a world where you don't have access to the type of sophisticated vehicles that you have access to?

Starting point is 01:36:25 It's a great question. It's what you just described as a place where I want the world to get better and I don't think it's there. And if I have one big issue, big issue with David Swenson, he said, you know, if you have tons of resources like Yale, you know, you should basically put 70% of your assets in alternatives. If you don't, you should just buy ETFs. The problem is to find ETS exposes you to all those issues we just talked about, psychological, you know, whether you can't the right index, whether you can sort of over-diversify, maybe buy too many bonds, all those things. And, you know, the reality is that private markets, we'll go to hedge funds aside for a second. Private markets is really the one place where you can make investments, you know, I'll call long investments. So you own something, you own a company or an asset cash-oest stream. A long investment that truly has a beta, you know, a non-correlation that might be zero,

Starting point is 01:37:23 might even be negative. I'm thinking of things, you know, that we do, like, you know, buying insurance companies in runoff where the performance of the investment will have nothing to do with the economy, I'll have nothing to do with multiples. We just get cash as, you know, a bunch of policies runoff. Distressed loan portfolios like I used to buy Goldman. These are things that will have very, very little beta. You know, reinsurance side cars, you know, where you sort of get exposure to, you know,

Starting point is 01:37:56 the potential for natural disasters, which I think is an interesting area we've done relatively little of, but it's sort of an example of a situation where a private market could offer you return with effectively zero beta. Maybe a better example, more actionable example for us is buying companies where the business plan is to shrink them very substantially. And by shrinking them, selling assets, freeing out equity capital, distributing money. Again, there's one bank in Germany we invested in that is sort of an example of that where it was a very clean but oversized bank. And so we could buy that bank at a discount to book value, shrink it, free up capital, return money. And again, the performance of that investment

Starting point is 01:38:40 would have absolutely nothing to do with anything else that happened really in the world. there was just a question of could we shrink the bank? These types of opportunities, I find it very frustrating that in sort of the world of retail investing, private wealth, has not found a way to provide access to smaller investors because it leaves me in a very uncomfortable position. I live in a lot of time, which is people ask my advice on how to invest. And I do not believe this wants an advice, which is, If you have resources to alternatives and if you don't buy ETS, there ought to be something better.

Starting point is 01:39:19 I hope to see it. I, you know, maybe in some way we could contribute to it. But, you know, I think that there are some things that are broken about investing for individuals and families. And, you know, that's probably top of the list. I feel like there are some practical things that we can do as regular investors. Like I remember Howard Marks, for example, saying to me when I was interviewing him for my book, just talking about the, he would say, look, the question is, how much do you push the envelope? You know, if you live within your means and you don't use leverage, you know, you don't have,

Starting point is 01:39:54 you know, you don't have a ton of debt, and you invest in a way that you're not going to fall apart psychologically. So it's conservative enough that you'll be okay when the market gets hit. You're more likely to do okay. And I take through practical advice like that really seriously. I remember my friend Ken Schuvenstein, who I wrote about in the book as well, one saying to me that you have to really beware of recurring expenses that you're committed to, that during the good times, you assume it's always going to continue. And so you commit to like a really fancy office, things like that. And I think if there's one smart thing that I've done in recent years, partly because it's such a painful time during 2008, 2009, where my stock portfolio got hit badly,

Starting point is 01:40:41 but I didn't have to sell anything because I didn't have any debt, but also I lost my job at the same time. One thing that I've used the last 12, 13 years for is the market's been really good has just been to reduce my risk in so many ways. So not to have a big mortgage, not, you know, I just bought a new car. I didn't take on any debt to buy the car, you know, just trying to position yourself so that you'll survive. If you really can't reduce your exposure to the market and these various factors like interest rates and the like, Adam can find more nuanced and subtle and sophisticated ways to reduce his exposure to. I think these are really helpful, just general tools. Do you have any thoughts about anything that I just said? Yeah, I think it's advice that's incredibly far to argue with. Yeah, if you can reduce your liability

Starting point is 01:41:31 to reduce your sort of burn rate, you open up opportunities to do a bunch of different things in terms of how you invest. I'm not sure I agree that the conclusion then is, well, then it's sort of okay to just own a bunch of stocks. That's not exactly what you're saying, but I, you know, that advice sounds good as long as you're, you know, happened to be investing in the United States in the last 15 years. But if you're investing in Japan and in the 1980s or lots of different emerging markets almost any time, you know, if that's where you happen to live, again, you know, I think of my wife and her family and her friends in Mexico City. And, you know, you tend to invest in what's around you. And if you put it all in the Mexican stock market, you know, you may not

Starting point is 01:42:16 feel the same way that you're describing. And so it doesn't sort of stop me from believing that there ought to be a way for people to get exposure to high quality, truly non-correlated investments. The investments I'm talking about, they don't take them public, right? Like when you have a bank that's private and the business plan is to shrink, nobody IPOs that, right? That's not available to you on the public market. When you have an insurance company that's been put in a runoff, nobody takes that public, right? So there's this whole trove of things that are just never going to be public. And so finding ways to access that. And, you know, I think there are platforms that are trying, and I certainly don't want to create the impression.

Starting point is 01:43:00 Nobody's trying to do this. It just feels very early that I haven't seen anything yet. that I've been able to really get to know and recommend people that would be a way to get access to the sort of other sort of stuff. I think one thing that's very striking for me over the last couple of weeks when I spent a lot of time researching your approach to investing, is the emphasis on resilience in a multi-generational way that you're trying to set yourself up so that these these ultra rich families are going to be okay, more or less whatever happens. I mean, they're going to be okay, whatever, but, you know, so that they're going to continue to grow their wealth under any circumstances. And one thing that's obviously really central to that is just being very

Starting point is 01:43:45 wary of leverage. And I was really struck by an article that you wrote in 2023, where you talked about, you know, the brilliance of the wonderful Roger Lowenstein book, when Genius failed, which talked about the blow up of long-term capital management. And you talked about funds like Amaranth blowing up back in 2006 and 2008 when Citadel lost 55% and nearly went under. And there was something that was almost kind of buried in the article that I wanted to unburry, which is that you said on December 31st, 2022, these really quite prominent macro or sort of, I guess, multi-asset, multi-strategy hedge funds had an enormous amount of leverage. And you mentioned, for example, Millennium, which I think at the time had $58 billion in assets under management. You said had nominal leverage of 6.8 times.

Starting point is 01:44:38 So in other words, I guess for every, you know, so, you know, their investment exposure is basically six times their net asset value at that point, or 6.8 times. Citadel, which had 52 billion in assets under management, had 6.6 times leverage and 0.72, Steve Cohen's firm, was 5.1 times. that's really interesting to me. And I wonder if you could just unpack that, what you're thinking in terms of the implications of this kind of leverage, whether there's systemic risk or whether it's just a reminder that shareholders should be very careful.

Starting point is 01:45:13 I mean, there's a quote in that article where you say, if the familiarity of the fund name makes you comfortable, don't trust your gut. Can you just talk a little bit about the dangers of leverage and what you're kind of slightly politely drawing our, attention to, and I'm less politely highlighting it? Yeah, absolutely. As a manager of a large asset pool, whether it's a family, endowment, whatever it may be,

Starting point is 01:45:40 you know, you're taking ultimately two kinds of risk. You're taking the risk that you're choosing the right manager, and then you're taking the risk of whatever that manager is doing, and it may work and it may not work. I like to argue that the risk that you're choosing the right manager, that risk is much higher if you can't really point to exactly how it is that manager makes money. You know, there are some managers who do the things, you know, kind of like I described earlier, which in this very careful, fundamental sourcing oriented way, find things that are special that almost anybody could identify as special.

Starting point is 01:46:20 That's, you know, to me, that's a manager who's much easier to evaluate. And then there are managers who are much harder to evaluate, like ones that, you know, run, you know, $58 billion levered six times nominally and probably maybe six times through through other sort of swap type methods and, you know, whatever the numbers are running a lot of leverage. And so, you know, anytime you're investing in something that's a bit of a black box, you don't really know how they make the money and there's a lot of leverage involved. I sort of tend to argue there's more manager risk. There's more risk that you've invested in something that's not what you thought

Starting point is 01:46:56 than it would be otherwise. So you just have to take that into account. People have done wonderfully investing in these firms and I'm not making any specific prediction and I'm not telling anybody they should go and redeem, but I do think that they should assign probably a greater risk to the fact that, you know, the history of black boxes

Starting point is 01:47:16 using a lot of leverage is not a great one. And that's true. In the hedge fund context, it's true. In the investment bank context, it's, you know, leverage is, can be lethal stuff. And so putting a premium on situations where there's good returns to be earned

Starting point is 01:47:32 without leverage is something absolutely worth doing. You spent a lot of time with these ultra wealthy families and I'm wondering when you think about what it is that you've learned from them, not just about how to stay rich, but actually about what we should be optimizing for in our own lives.

Starting point is 01:47:54 What have you seen? seen from actually being up close with people who in so many ways have won the jackpot. And yet they're having to deal with all of the difficulties that come with extreme wealth, all the problems with making sure your kids don't screw up and your grandkids are okay. And people have an appetite to succeed. And they're like, there's a tremendous amount of dysfunction in super rich families. I've spent a lot of time with them over the years as a reporter. What have you learned about what works, what doesn't work, what you,

Starting point is 01:48:25 should optimize for and how that has influenced the way you run your own family run is the wrong word given that your family is probably running you. This is a, you're asking a great and almost age old and very difficult question. I can say you give you a few thoughts, you know, based on some pattern of recognition. I think that certain families in this orbit have a certain vitality to them that I think is driven by a level of sort of engagement and connectedness, you know, connectedness to a community, finding things to engage in that offer corpus. So what allows that to happen? What allows certain families to have this sort of, I guess, vitality, this engagement, this sort of almost

Starting point is 01:49:15 like moving forward kind of dynamism? I can think of, you know, one person I think of was a model for that in my life is Stuart Miller, who I was a role. original founding investor East Rock and is controls one of the largest home builders in the United States. He's co-CEO, you know, a true leader, great business leader, and at the same time, you know, decided to give himself essentially a second full-time job, which is, you know, various roles in the University of Miami community. He's been chairman of the university. He's currently chairman of the health system that comprises a large portion of University of Miami. And, you know, in other ways he's just an incredible advocate and champion for the city of Miami.

Starting point is 01:49:59 And she has that moving forward, dynamism, vitality, all those things that, you know, I think people in that sort of position should aspire to, and which is really not easy. But within that, my job, which is to take care of the investing side of things, is, you know, you could think of it as a as a facilitator. You know, it's certainly not the solution to all these issues we're talking about. But, you know, I guess I would think of the family assets, the protection and the growing of those assets as a facilitator of all these other things that can create a meaningful life for families and get into that position of,

Starting point is 01:50:44 again, of sort of engagement and vitality and purpose. You know, the way families do that will vary, you know, massively. Some will be involved in the investment side of things. Some will not. In my particular case, my job is to make sure that people like Stuart Miller can spend all their time on these things they deeply care about and know that they've made a smart decision with their money, but they don't have to spend a lot of time on it.

Starting point is 01:51:12 And so, you know, the common denominators tend to be, in terms of the investment function supporting the broader goals of the family, I think family members will tend to feel a great deal of responsibility to, you know, the family members around them in future generations. They want to feel like they're doing something smart, something responsible. They certainly don't want the wealth to be, you know, a sort of acrimony. They want everybody to have this opportunity to maintain freedom and bandwidth to focus on the things they really care about. You really want no surprises, right? The key is no emergency family meetings

Starting point is 01:51:52 to realize that something's going to have went wrong. And, you know, one of the trickiest parts is the involvement, right, the family member involvement in the investment function. And the way I think about that is if a family member develops a true interest and true caution and caring for investing, then that is a gift to the whole family. You know, that's not for everybody. In a lot of cases, is one person taking on responsibility, possibly for a broader set of people. And when that happens and it works well, it's an incredible thing. And if nobody does that, there can be a vacuum. It can be co-for-com for sure.

Starting point is 01:52:30 But I guess sort of a long way of saying, you know, what I know about, what I think I can speak about, is how investing function can be the support mechanism for desires, but also these fears. and in this sense of responsibility and wanting to do the right thing. And of course, the math on the flip side is, you know, families don't invest well. There are real consequences to that, unfortunately, right? I mean, the overtime, if you don't invest well,

Starting point is 01:53:00 there's a spend rate, it may be on consumption, it may be on charitable giving, it may be on lots of different things. And, you know, the number of people living off of that body of wealth, it tends to go up and up and up. And so the denominator effect is powerful. And people, I think what can suck vitality is this feeling of moving backwards of we were a, you know, relevant family in a lot of ways. And, you know, now we're now, we sort of move backwards. And, you know, that's, I think the key thing to avoid the investment function again can play a role in that. I wanted to just ask you one thing before I finally let you go, having exhausted your patience here.

Starting point is 01:53:36 You wrote an article that I thought had a lovely title, which was, let there be nothing left to take away, where you talked about something that I wrote about at length in my book, Richel-Wise-Hapier, this whole concept of the art of subtraction. And you talked about creation by subtraction, how there's this CNC machine that carves beautiful objects out of rough metal. and you use this as a way of talking about this idea of how often in life we add stuff, but actually you kind of want to cut things away. And I wonder if you could just talk about just the central importance of this, this really powerful idea of subtracting stuff, both in investing and life,

Starting point is 01:54:18 how you've actually managed to reduce complexity so you have a kind of karma, more balanced life that's actually kind of manageable within the storm of managing a big company and managing all of these assets and raising kids and the like. Yeah, it's a great question. I think maybe I figure it out better on the investment side than on the life side. On the investment side, starting with a framing of there is this thing called filler and it's the enemy that having this mentality that things are trying to get into your portfolio and they're trying to stay in your portfolio and it is your job to not just add great

Starting point is 01:54:55 investments, but keep those things out. And sometimes you have to be really creative to do that. You know, you have to find ways to invest in private investments, for example, you know, perhaps not through the traditional fund context, but find strategies where you can get more concentrated exposure to private investments you think are really good, or invest in ways where you have some influence so that you can force an exit rather than have things hang around too long, or have ways of partnering with managers so that if they drift, for some reason, and they're not hanging around the portfolio simply because there's inertia and, you know, you've been with them for a while and maybe they've made you some money, but maybe they've

Starting point is 01:55:36 changed. And now what they do is sort of become more like filler and you've got to get rid of it. So I think in investing is probably one of the most important things that people should do more than they do, which is vigilant around filler and cutting it out. In life, I'm not sure I have an answer that I have quite as much conviction about. I do notice, and you're a writer and, you know, I'm a fledgling writer, I guess, but there's just absolutely nothing in the world that helps you really sort through your thoughts and take those thoughts and decide which ones are really important and really impactful versus the ones that aren't.

Starting point is 01:56:16 There's just no better way to do it than picture yourself writing about, you know, actually writing about it, and then picturing that writing, being read by thousands of people, who are going to pull calls in it. It's just, it's, I'd say for a blessing that's come more recently that I've been able to carve out room to write things and found some subjects that I'm passionate about to do that. Yeah, I suspect down the road you're going to write that book eventually. I'm pretty sure you will. I think you've figured out some important things about what works and doesn't work.

Starting point is 01:56:50 I don't know, I feel like you're creating kind of some important insights, really. about these issues like reducing complexity, knocking out some of these standard asset classes that people assume have to be there or thinking more about factor risk and survival and the like. So you definitely have important stuff to share. So I'm looking forward to reading more of your writing down the road. And I just really enjoyed getting to learn more about what it is you do. It's a kind of esoteric part of the world. And I didn't know enough about it. So thank you very much. Do you have a last word that you want to share with us?

Starting point is 01:57:28 My pleasure. Well, I appreciate that last comment. Look, I think one thought about that last comment, more people should do it. You know, we, this world of managing large asset pools, you know, I think it is flown under the radar screen relative to hedge fund and private equity funds. It's a great place to work.

Starting point is 01:57:50 And I don't just mean, at Eastrach, I mean, in this discipline, I think that a lot of, exciting things are going to be happening. There are something like $10 trillion in family offices across 10,000 family offices globally. There are three or four billion dollars, a trillion dollars, excuse me, and OCIO firms. This is a large growing sector where things, there's a lot of room to do things better and really distinguish yourself. And I'm sort of excited about it as an area to work in. I'm going to be teaching a class on it in Columbia Business School in the fall. As you know, there's a recent HBS case on my firm, which really gets into this world of large asset pool managers.

Starting point is 01:58:29 And I think it's a fascinating area. And I think it's going to attract great and greater talent over time. And so that's one last plug I'd like to make is consider this sort of sector as a career, because I think it's a great place to be. Excellent. That's a good note on which to end. We'll all be sending you our resumes tomorrow. Thank you so much, Adam. It's been a real delight. I really appreciate it.

Starting point is 01:58:54 Yeah, my pleasure. Thanks. Thanks for having me. Thank you. All right, folks. Thanks so much for tuning into this conversation with Adam Shapiro. If you want to learn more from Adam, it's well with dipping into the 15 or so articles that he's written in his LinkedIn newsletter. I've included a link to the newsletter in the show notes to this episode, along with various other helpful resources, including a really interesting Harvard Business Review case study about East Rock Capital. The case study is titled, Talent is the Best Asset Class.

Starting point is 01:59:26 I'll be back very soon with some more terrific guests, including a fascinating investor named Jay Bowen, who'll talk about how he and his late father beat the market by a mile over the last 50 years. In the meantime, please feel free to follow me on X at William Green 72, and as always, do let me know how you're enjoying the podcast. I'm always delighted to hear from you. Until next time, take you.

Starting point is 01:59:51 good care and stay well. Thank you for listening to TIP. Make sure to follow Richer, Wiser, happier on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting. Thank you.

We Study Billionaires - The Investor’s Podcast Network - RWH048: Betting Billions On Outlier Talent w/ Adam Shapiro

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