We Study Billionaires - The Investor’s Podcast Network - RWH071: Risk, Ruin, Reinvention & Resilience w/ Victor Haghani

Episode Date: August 9, 2026

In this episode, William Green speaks with Victor Haghani, founder & CIO of Elm Wealth & author of The Missing Billionaires: A Guide to Making Better Financial Decisions. Victor’s journey is among the most remarkable & instructive in modern investment history. As one of the founders of Long-Term Capital Management, he experienced dazzling success & devastating failure. Today, he oversees billions of dollars using a low-cost, diversified, index-driven strategy that reflects hard-won lessons about resilience, humility, simplicity & risk management. IN THIS EPISODE YOU’LL LEARN: (00:00:00) Intro(00:04:17) How Victor Haghani’s tumultuous family history shaped him.(00:14:02) What he learned as a star trader on Salomon’s famed arbitrage desk.(00:22:56) How he honed his skills by playing high-stakes games of Liar’s Poker.(00:30:35) How Long-Term Capital Management hit the jackpot—for a while.(00:46:04) How Russia’s default in 1998 sparked a cascading disaster.(00:49:18) Why he defends the fund’s enormous appetite for leverage & risk.(00:52:20) What he views as the real lessons of the fund’s collapse.(00:58:21) How the concept of expected utility can improve our financial decisions.(01:11:09) Why he fell out of love with exotica like private equity & hedge funds.(01:13:22) What troubles him about the traditional, static approach to indexing.(01:18:52) Why he favors a “dynamic asset allocation” based on risks & rewards.(01:27:21) How his firm’s current allocations reflect a wary view of US equities.(01:40:45) What he’s learned about overcoming adversity & finding happiness. Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Inquire about William Green’s ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Richer, Wiser, Happier Masterclass⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Victor Haghani’s investment firm, Elm Wealth. Victor Haghani & James White’s book “The Missing Billionaires.” Michael Lewis’ book, “Liar’s Poker.” Roger Lowenstein’s book, “When Genius Failed.” Daniel Gilbert’s book, “Stumbling on Happiness.” Viktor Frankl’s book, “Man’s Search for Meaning.” William Green’s book, “Richer, Wiser, Happier” – read the reviews of this book. Follow William Green on X. Related ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠books⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ mentioned in the podcast. Ad-free episodes on our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses through ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS  Support our free podcast by supporting our sponsors: Plaud Plus500 Netsuite Scribe References to any third-party products, services, or advertisers do not constitute endorsements, and The Investor’s Podcast Network is not responsible for any claims made by them. Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. 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. This show is not investment advice, is intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your host, William Green. Hi there, this is William Green, host of the Richer Wiser Happier Podcast. Before I welcome today's very special guest, I wanted to share some news that I'm really excited about.

Later this year, I'll launch a new Richer Wiser Happier Masterclass for a small, very intimate group of 22 people who'd like to study with me over the course of a year. We'll meet once a month over Zoom to discuss the most important themes in my book, Richer Wiser Happier, and I'll also talk about how my thinking on. these subjects continues to evolve, drawing on lessons from hundreds of hours of interviews that I've conducted with many of the world's greatest investors. Members of the Masterclass group will also be invited to join me, two unique in-person events, starting with a two-day gathering in New York later this fall. My goal in forming the Masterclass is to create a year-long journey of exploration

for people who are deeply interested in building lives that are truly richer, wiser, and happier. If this idea appeals to you, please email my friend and fellow podcast host Kyle Greve, who's in charge of the wait list, and he can share details with you about prices and dates and the like. His email address is Kyle, that's K-Y-L-E, at the Investorspodcast.com. I should also mention this will be the third year in a row that I've hosted a richer, wise, a happier masterclass. The first two groups included an amazingly accomplished selection of people from many countries around. the world, including some hugely successful hedge fund and mutual fund managers, various asset allocators, wealth advisors, managers of family offices, a management consultant, a doctor, several CEOs and entrepreneurs, and a renowned physicist turned quant fund manager. Part of the beauty of the

master class lies in the very strong relationships forged between its members, many of whom have become really good friends. If you like the idea of studying with me and this extraordinary group of keen investors and passionate learners, please email Kyle at the Investorspodcast.com. And if the stars align, I'd love to see you later this year when the masterclass begins. Thanks so much. And now on with the show. Hi, folks, it's a great pleasure to welcome today's guest, Victor Hagani. Victor is the founder and chief investment officer of a firm called Elm Wealth, which he

established, I think, in 2011, which manages billions of dollars in an extremely thoughtful way and at an exceptionally low cost. He's also the co-author of a very thought-provoking book that I just finished reading last night, titled The Missing Billionaires, which is a guide to making better financial decisions, and he's authored a lot of academic papers about the art of investing. But that brief introduction doesn't really begin to convey why I'm so excited to be chatting with Victor today. He's an unusually brilliant thinker who has also had an astonishing range of experiences in his four decades or so as a professional investor. That includes the giddy highs and devastating lows of co-founding a famous hedge fund long-term capital management,

which racked up fabulous returns and then collapsed in 1998. Since then, Victor has thought very deeply about what works and doesn't work in investing, and I think we can all learn a great deal from his unusually rich and colorful journey, which has led him to a series of very important insights about how to build long-term wealth. So welcome, Victor. It's lovely to see you. Thanks so much for joining us. Thank you so much. What a lovely introduction. Thank you, William. Thanks. We'll see how it goes from here, but I'm really, really excited to see you.

I hope that wasn't the high point. Yeah, from here on in, it's downhill. I wanted to start by asking you about your family background and how it shaped the person you'd become. And I was struck when I read the dedication of your book to your family. You wrote to my mother and father, Lucille and Musa for their love and for bringing me into the world at the best possible time to my three children, Josh Chess and Mark for giving meaning to everything I do and to my wife, Celeste, for your love and boundless understanding. Can you start by telling us a little bit about your parents and also about what do you mean when you said that they brought you into the world

at the best possible time? Sure. So first, just by way of background, I was born in New York. My dad came to America from Iran. He was Iranian Jewish, born in Tehran. And he came to America in 1941, met my mom in 1956 or so, and I was born in 1962. My parents, unfortunately, didn't stay married for long. My mom was, my mom is, she's still alive, she's 92. We'll probably talk about her at some point. And she was an opera singer. She was quite young. There was a big age difference between them. She was born into an Ashkenazi family. Both of her parents had been born in the States, but I believe all of her grandparents were born back in Eastern Europe. So, you know, I kind of lived between these two worlds or more worlds than that, probably. There was also the outside world away from

family. I lived in New York City for a while. I lived in upstate, the upstate New York area around Port Jervis and Mouta Morris, which is where I met my wife when she was just six years old. I was best friends with her older brother, Jeff. But when I was 14 or so, I moved to Iran with my father, I didn't really speak Farsi at that time because I had just been brought up in the States, but my ear was attuned to it. So I learned it pretty quickly. And we lived in Iran for two and a half years until the revolution came. And then we were kind of nomadic for a little while until finally I got back into school in London, finished up my school and wound up going to the London School of Economics after taking another year to do my A levels there. You know, my dad was business,

businessman and hard worker, entrepreneurial, and, you know, he had these ups and downs. And he had his biggest up in the mid-70s where he really found financial success. He was super happy about everything, move back to Iran, and really kind of focused his investing in wealth in Iran, where returns on everything were great, interest rates. There were high real interest rates and, you know, investments and land and everything were doing great. And when the revolution came, he really lost most of his wealth at that time, not everything but a lot. And it was really devastating for him. By the time the revolution came, he was in his late 60s. And, you know, he lived a happy life after that, but it did really hurt to have been so successful and then to lose

it all there. After Iran, we wound up in London, where I went to the London School of Economics, as I said. And then from there, I wound up with a job in New York and the research department of Solomon Brothers. And, um, well, we'll get that. Let's pause here. We have lots to discuss. But no, I'm really curious. I mean, part of what fascinates me about your father's story in some way,

Musa, I was reading an obituary of his the other day as I fell down the rabbit hole doing my research. And I was really struck that he had spent part of his career, I think, at the Anglo-Iranian oil company, which I think became BP eventually. And then, you know, does lots of stuff like bringing, bringing companies. companies into Iran as part of that modernization drive under the Shah. And then when the revolution comes in 1979, you guys have to leave. And so I'm really curious how that experience of geopolitical turbulence, displacement, uncertainty kind of shaped you, because it's striking to me as I think

it'll become clear in our conversation that your whole career really has been about dealing with risk and uncertainty, which obviously are different things as well discussed. But how did that experience affect you, just going through in such a visceral personal way, this kind of family trajectory where you see that everything can change. Nothing is really stable. Everything is impermanent. Yeah, well, I think first of all, just living in different places kind of makes you feel a bit of an outsider everywhere. I mean, I'm born in America, my mom's American. You know, I should feel, you know, fully American, but somehow living abroad for so long, you know, just gives you this feeling of not really belonging anywhere so strongly and being able to, or just having this

perspective of a bit of an outsider at all times. Sometimes I wonder whether, you know, this is like the central thing that accounts for, you know, so much of the contributions, the intellectual contributions of certain cultures where, you know, they've lived as outsiders inside of other host cultures and societies. But, yeah, I mean, I think that I was very very much. I was very, very shaped by that experience and kind of feeling that, you know, anything is possible. But also, I think that, you know, having a father that was born in Iran where child mortality at the turn of the 20th century in Iran was astronomical, you know, infant mortality was too, but child mortality was like, I've read it was like 30 percent. You know, there's a 30 percent chance you wouldn't

make it to five or 10 years old, a child, you know, including infant mortality. mortality. And, you know, my father just had this incredible appreciation for technological progress and the progress in standard of living and education. And that really carried over to me. I mean, it was almost like my father was one and a half generations before me, you know, because when I was born, he was already 50 years old, which is, you know, at that time, it was old. these days, you know, being, you know, 50 is the new 40, I guess, but not for my dad. And yeah, I think that I just really had this feeling all along that what an amazing place to be born into, to be born into America, to be born at this time, you know, post all of this

cataclysmic 20th century tragedy. And I feel that way, although I do feel that my children are born into an even better time, you know, slightly, but better. You know, I'm optimistic about their future too. So yeah, I think, you know, shaped in those different ways by my parents, both of them. I'm curious how going through that kind of turbulence as a family shaped your attitude to money, because I think, I mean, you mentioned at one point in the book, The Missing Billioners, you talk about money as a safeguard against financial misfortune. And I'm, you know, I come from a somewhat, well, I guess more like your mother's family, you know, a family of Ashkenazi Jews who came from Russia, Poland, and Ukraine. And I sort of, I feel like we were always having to get by on

our wits, our family, you know, as outsiders like you end up money in some way, you know, in some ways it was a path to security. To some degree, it was probably a status symbol. To some degree, it was a way to live in comfort. To some degree, it was, you know, about giving money away so that you could lift up other people. And you write a lot about utility in the book, as we'll discuss later. Like, you know, what did money mean to you, given that, you know, you were about to embark on an entire career devoted to building wealth? Well, my father used to say that used to say two things about money that stuck with me. One was, he said, it's harder to hold on to money than to make money. And it didn't make sense to me to begin with, but looking back

now, it certainly does. And that also applied to my father's financial ups and downs. And the other thing that my dad would say very often is that, you know, it's very hard to cut your spending, to cut your standard of living, to cut your consumption. It's much easier to increase it, but you know, you don't want to go too far with your spending when times are good because times won't always be good and you need to be able to cut back too and you want to be really flexible and just realize how painful it is to have to, you know, backtrack on your standard of living. I think that as I was in my teenage years, you know, I wasn't thinking about money much. We were living in Iran. You know, it was pretty comfy altogether. We had cook. We had a housekeeper.

We lived in a nice place. You know, everything was hunky dory. And I wasn't thinking about much other than really just being a happy teenager and doing all the fun things that happened there. But once the revolution happened and all of a sudden I turned up in London and I had missed about six months of my junior year of high school. And I was back in school and I was like, uh-oh, feet to the fire here. Like, there's no, I can't depend on, uh, on my dad's good graces. Why, I got to do something here. I better really turn up the heat. And, you know, like from that moment onwards, I kind of felt this, um, this, this need or this fear and anxiety, you know, that really drove me to study really hard, to work really hard, to be really focused. And I didn't know where I was going to go,

but I just kind of felt like I had to do well at whatever I was doing at that time. And, you know, that was really from that revolution, from that change of setting. You know, it really lit a fire under me that wouldn't have been there, you know, without it. I grew up with my father always saying to me, you know, I read when I turned 18, she said, enjoy it because it's downhill all the way from here. And there was always this sense, you know, I guess we would always quote that poem from Yates, you know, things fall apart. The center cannot hold. And so I think I had that same sense of sort of fear and anxiety of like, I live in a very unstable world and I got to really watch out. And so I, I think it wasn't a great recipe for happiness and stability and calm, but it definitely lit a fire

under us, I suspect. Yeah. Yes. So you then get into LSC and you started to, and you started the economics and finance, I think. And then you go to Salman Brothers, where you stayed from, I think, 1984 to 1993. And you start off, you joined the bond research team, I think probably in about 1984 when you were about 22. And then you move not long afterwards to Salman Brothers trading floor in 1986, I think, when you were about 24. So you were the most junior trader on the government arbitrage desk. I want to talk about that experience in some detail, because it was an extraordinary place and an extraordinary group of incredibly talented investors. What do you think Solomon saw in you? I mean, in terms of the qualities that you actually

started the investment game with, I'm assuming you were extremely mathematical. Like, what were they looking at and thinking, oh, here's somebody we can make something out of? Gosh, I don't know, but we'd have to ask some of the people that were my mentors and sponsors at Solomon, I went into this research group, and well, so let me take one step back. So here I was graduating from the LSC and I had done really well at the LSC. And I just kind of thought that, well, if you do really well at a good university, you're going to get a job. Well, that wasn't the way it was, you know, that first of all, I kind of came to investment banking late because I was planning on going, you know, trying to get a master's in computer science. But I didn't get into any graduate

programs to do that in the States. And so all of a sudden I was like, well, what am I going to do? And a friend of mine said, you should look into this merchant banking, which eventually led to the U.S. firms that were much better places to go at that time than the British merchant banks. So I wound up in this research department at Solomon, having faced a choice between, I wound up with two offers, well, three offers in total. One was S.G. Warburg, which, you know, involved a secondment to Indonesia or something to get started. And that wasn't what I was looking for. But Solomon and J.P. Morgan offered me jobs in New York. And I didn't know which one to take, but I asked my dad, and I told him that J.P. Morgan, I think, was paying like $40,000 and was going to put me through,

you know, a very full training program. And Solomon was going to pay me like $30,000. And I was going to go work and research without any training. And my dad said to me, well, if you do well, in which place do you think you could, you know, rise faster, do well faster, get more responsibility more quickly. And I was like, well, I think it's Solomon Brothers. I mean, that the distance between my boss and the CEO is like two steps or something. And, you know, at JP Morgan, it's much more of a bureaucracy. I'll get this training, you know, et cetera. I'll get rotated around all these things. And he said, well, go to Solomon Brothers. Don't worry about the lower starting salary. And so I got there and that's exactly what it was like. It's such a flat organization. My boss, Bob Koppres, worked for

Marty Liebowicz, who reported to John Goodfriend, more or less. And that was it. And, you know, as soon as I was there, I met Marty. I met not long after, you know, I met the president and the CEO. I mean, they would come and say hello to the young people. And they, instead of going through the training class, Bob had me teach the training class, you know, some mathy, not very important stuff about day counts or whatever. But, you know, it was just a fantastic environment to grow and flourish. I actually, you know, here's, we used to put out these research pieces. Here's one from 1986 when I was still in bond portfolio analysis that I did with Bob. And then Bob even let us, you know, do our own pieces. You know, I think, I don't know, if this one was done just by us or maybe

also Bob was involved. But we used to publish these things, you know, that we're like explaining to Solomon's clients, how did these different derivatives work, how did bond futures work, you know, how did all these newfangled derivatives function? And so I was really surprised when the trading floor invited me to join the arbitrage desk. It was really an amazing, you know, like, I didn't even know how coveted that kind of promotion or move was until afterwards. And people, you know, were congratulating me and so on on moving from research where I was really happy out to trading. I think I was, you know, I'd worked hard. I think that I had a lot of curiosity that in addition to the work that I was doing for Bob. I would sort of get involved in other projects with other people.

I was collaborative. I loved working with other people and always realized that we could do more in teams together. And I think that it was sort of this, there was, there was this movement of taking people out of quantitative research and putting them on the trading floor that was happening. You know, I wasn't an isolated case. People had made that move before me and some people, you know, afterwards as well. And if you think about a kind of emblematic trade that you guys would do that was very successful in those years, that sort of shows, you know, whether it's one of these convergence trades where you would be long one security and short another, or whatever it was, something that embodies what it was that you were doing that way of making money, what would be a good

example of the type of money-making approach that you guys figured out? Because it was a hugely successful team, right, the arbitrage team? Yes, yes. Well, I think that one trade that comes to mind that was early, I think there's a better trade that was a little bit later, but one of the earliest things, you know, that I was involved in on the desk that was, you know, the desk was already doing. It wasn't my idea, but it was a great trade. And it really kind of shows a little bit about how everything worked together.

So first of all, you know, that on the run bonds tended to be expensive to off the run bonds. So when I joined the desk, you know, there were these, I don't know, nine and seven eights coupon 30-year bonds that were pretty expensive. There were cheaper bonds, you know, with similar cash flow characteristics that were shorter maturity. Some of them were callable, but the call was way out of the money. And so one trade you could do is you could short on the run bonds and buy similar off-the-run bonds. And that was like a good trade. But the reason that was a good trade. One of the main reasons that was a good trade is because we had a financing desk that could borrow those on the run bonds fairly cheaply and with a fairly good degree of confidence that you

could continue to borrow them, that you wouldn't get the bonds to borrow taken away from you. So that was like the first thing that was like a good trade that you could do. But we didn't stop there. We said, well, interestingly, this off the run bond is one of the cheapest to deliver bonds into the bond futures contract, and the 30-year bond futures contract was cheap relative to that off-the-run bond. So let's replace the off-the-run bond with a long position in bond futures. Okay, so now we've got bond futures against this on-the-run bond. So we've linked together two trades, that each trade itself had a good edge to it, was a good trade. Then we noticed just another interesting relative value trade, which was that options on bond futures traded at

a much higher volatility than over-the-counter options on individual bonds. The reason for that was that there were many insurance companies and other institutional pools of capital that just love to sell calls on their portfolio of bonds, and they wanted to sell calls on actual bonds that they own, not on bond futures. And these over-the-counter options on individual bonds, you know, we're trading over-the-counter. They weren't trading on an exchange. So being at Solomon brothers, we got access to bid on those. And so there was a trading desk that could bid on those, but we were the arbitrage desk, we could pay a little bit more or give a little bit of VIG to the trading desk and buy those options ourselves. So now we had layered on another trade, you know,

which was long, this cheaper volatility of off-the-run bonds and short the higher volatility of bond futures. And so we had this whole, you know, three-layered trade that we were running that had, you know, really fantastic characteristics and returns, you know, over time. But it required, you know, a fair amount of management also. We had to keep delta hedging. So the size of the trade would change over time. And there weren't that many people that wanted to string those things together or that could string the things together because it might be that, you know, there was one desk that was trading the basis and another desk that was trading on the runs off the runs and another desk that was trading, you know, over-the-counter options at other firms. But at Solomon, it was kind of

we were small, we were pragmatic, and they allowed us to span those different things. Now, you know, there were a few different trades that we did like that that were even more complicated. But, you know, that was kind of really emblematic of what we were doing because, you know, I think one of the really cool things about it was that we were able to trade with clients, right? So if we had been a hedge fund at that time, we wouldn't have access to the client flows. We wouldn't have access to the repo desk of Solomon Brothers, you know, that had access to thousands of institutional clients holding bonds all around the country. I think another thing that that group, the fixed income arbitrage group in the 80s,

who was particularly famous for obviously was playing liar's poker, the game that Michael Louis, who is a contemporary of yours for a brief time, wrote about it in his first book. And you you write a bonus chapter in your book that I very much enjoyed reading also about playing Lys Poker. Tell us what the game was and why in some ways it was kind of helpful in terms of sharpening your trading skills. Sure. So Lire's Poker is a game that you play, originally was played with dollar bills or any kind of U.S. currency. There's a lot. eight digits on each dollar bill, on each bill of currency of any denomination today. And the idea is that you bid on how many of a particular digit you think there are among everybody in the game.

And if you're challenged by the people all over the way around, then you count up how many of the digit there are. And if there was equal to or greater than the number of digits that you thought that you bid, then you win and everybody pays you a unit, whatever you're playing for, $20, $50, whatever. It sounds like you guys often were playing for tens of thousands of dollars in the end. Well, the normal stakes, you know, were like $50 to $100. And then what would happen is we had all these kind of doublings and progressive things that would make particular hands bigger.

So, you know, there was like these that first of all, if you bid sixes, you would win double, but you would only lose single. If you bid a number that was three more than the number of players, so if you made a bid of seven of a kind and you were four people playing, that would be a double. If we were sixes, it could be a quadruple. And we had all these crazy things. But we mostly played the game.

I think we played the game really for two reasons. One was, it was a lot of fun. It was just great fun. The second one was, I think that it kind of helped us to like to not, be frenetic traders, you know, that the management was like, take it easy, guys. You don't need to trade all the time. Just do the good trades. You know, don't get carried away here. And it kind of allowed us to like have an outlet for, oh, you know, we're into, you know, that we were just, they didn't want us to just run all around markets doing all kinds of things. I think that was

another reason. And I guess there was a little bit of a vetting, you know, a little bit of a vetting thing too, you know, where it was be like, you know, you would just kind of get a feeling for, for how sensibly people played and so on. You know, there was a little bit of that. But I think that the lessons of the game, like we weren't playing it for the lessons, but looking back on it, there were good lessons. And I think as we write in the book, in the bonus chapter,

you know, that with the benefit of hindsight, and remember that back then, like, we didn't know anything about Connemann and Tversky and behavioral things and all of that. Like, we were just kind of figuring things out as we went. But looking back on it and with the, with the sort of the context and the paradigms of behavioral economics, there was a lot of really great, great, you know, lessons in the game, actually that we benefited from without really

fully appreciating them at the time. There's that famous story that I guess Michael Lewis writes about where John Goffran, the CEO says to John Merriweather, your future boss, you know, they should play a game for a million dollars. And he quotes Merriweather saying, no, John, if we're going to play for those kind of numbers, I'd rather play for real money, $10 million, no tears. I have no idea if that's purely apocryphal or not. What do you think? Did it actually happen? I think it's apocryphal, yeah. I mean, it's a great story. It's also a great teaching moment, too, in our missing billionaires book. We talk about why it is that that kind of would have made sense and, you know, to do, you know, in a normal way that's sort of throwing that

degree of the cost of risk onto things was like a good way of making it not happen, you know, that John Meriwether, you know, wouldn't have wanted to play for a million. And like, this was a good, instead of saying, I don't want to play for a million by saying that, which I don't think happened, but, you know, it would have been, it would have been really smart. And it's something that John easily could have done and it would have all been in good fun with them. So in some ways, the game was a great example of how to think about probabilities. how to make decisions sensibly under uncertainty, how to avoid things like taking huge losses, you know, not to worry about how people viewed you and not let that kind of skew your judgment.

But in some ways, I think it also probably when I read about it, and I see that you guys were often playing till midnight and the like, it also gives me a sense that you guys were just like rampant gamblers. You just loved speculating. And I have this kind of image whether unfair or not. And it's not meant it as a criticism, just that the culture of that group at Salomon was sort of infused with this kind of love of betting, of gambling, of speculation, of calculating odds. Is that fair to say?

I think the attraction was to the edge because, you know, people didn't make large bets on speculative non-edge gambles. So, you know, like, I mean, sure, you know, people will. go to Vegas and play craps and make or lose money and they knew there was a negative edge. And it was just for amusement, but relatively small relative to their wealth. But when it came to investing for the firm or investing for themselves, you know, that people really were willing to take risk when there was a very, you know, observable, measurable edge that was involved. And so, you know, it was interesting that we, you know, on our desk, we didn't speculate on whether

bonds were going to go up or down or, you know, that we just, you know, that we didn't have this kind of, you know, speculative feel like, what's going to be the employment report tomorrow? Let's bet on the employment report. No, it was like, we don't know what it's going to be, you know, could be anything and the market could do anything depending on what it is. You know, we were really just looking for these places where we felt that we really had, you know, edge. And then, you know, we felt that the right thing. And then we sort of put on these hats and it was like, okay, well, here's this edge. Solomon Brothers has all this capital.

You know, what's the right amount to bet? And that's kind of how we were. I think that the game was just like so much fun and, you know, there was so much camaraderie. It kind of went like that. Yeah, we would play until midnight from time to time. And it was also interesting that, you know, we really kind of stuck mostly to Liars poker and didn't go that much into poker.

And part of that was this kind of edge thing. again, that we knew that there were really good poker players around that would just, you know, take our money. And, uh, and you know, it was like much more, it was like the whole Liars poker thing was like a much more level playing field, you know, or even where because it was like our game, we sort of had an advantage, you know. And so I think that there was like part of playing the game was that, yeah, you know, this is our game and people would come from around the trading floor, you know, and they would be at a little bit of a disadvantage, and that was good. But like when, like, when Bob Merton would turn up, who was a, who like almost came close to solving the

game of poker, it was like, gosh, I don't want to play with him. And we'd play with him a little bit, but we'd all kind of keep folding. And, you know, it's like, no, no, we don't want to. So, you know, we all knew how to play poker, but we didn't play a lot of poker because we knew that we weren't there, you know, in terms of level against some of the other poker players. Let's take a quick break and hear from today's sponsors. One part of being an investor that I don't think it's enough attention is how hard it can be to continue to improve as an investment researcher. And for myself, I often find that when I finish a great conversation with some industry expert or fund manager, my head is full of ideas. But by the time I sit down to write it all up, half of them are already gone.

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Built for every industry, ready for every boardroom, netsuite. Dot A.I. slash TIP. All right. Back to the show. So my sense, if I have the chronology, right, is you come out of this kind of swashbuckling, very close unit at Salman, and on. on the, I guess the day you left in 1993, the story goes, you, you won the biggest hand and,

and this five figure victory. So, so that I thought it was, I actually thought it was a setup, you know, like I thought they were just going to say, ha ha, you know, yeah, you know, you didn't win that, you know, we just all said that we had this number of sixes or whatever. It was just too, it was, it would be thrown out of a plot, you know, because it was just too unlikely. Yeah, it's really nice. So, yeah, it's like, it's like a, it's like a cinematic. story. And I also read somewhere maybe in Bloomberg that there was a standing ovation when they heard the news that you were going to long-term capital management. So you sort of leave on this high as this very talented young star. You go join this group at long-term capital management

as one of the co-founding partners. And so I think you were the youngest partner. You're about 32 years old. Can you give us a sense when you, I mean, to set the scene, because we'll talk a bit about long-term capital management because it's so rich in in lessons and and also because you're very unusual in having talked about it from the inside which most of most of the co-founders haven't done so set the scene and tell us like who some of the players were I mean you mentioned people like Merton I mean there were two Nobel Prize winning economists subsequently give us a sense of what an extraordinary group of people this was going to play this game in a way in some ways that they'd already done very successfully at Salomon for many years. So I guess when I joined,

John had been working on this project for a while along with Bob Merton and Eric Rosenfeld was the first person to leave our group, I believe. And then John also had a friend Jim McEntee, who's passed away now that was working with him on it. And lots of investors were out there trying to cajole John into starting a hedge fund rather than coming back to Solomon Brothers. others. And I had just gotten married in January of 93 and took a longish honeymoon and came back and was working. And I just kind of felt like, you know, it wasn't as much fun as it had been with, you know, the top people having left, good friend, Strauss, John Meriwether, they were all not at Solomon anymore. Warren Buffett was kind of calling the shots and there was a new CEO and

and so on. And I don't know, it kind of was, you know, I was newly married. I kind of felt like I had, you know, achieved financial freedom at a young age. And so I really was like, I think that I'd like to take a break in any case. So I wasn't even like leaving to join John and Eric and so on. I was really leaving to maybe start a new chapter. And, you know, going back for a second, going all the way back to my dad, you know, I think that there's this, there's this tradition out there in societies like where my dad came from and my mom's family too, where, you know, like a life well spent is kind of achieving financial freedom, financial independence, financial success, and then, you know, spending the rest of your life learning and studying and being with your

family. And that kind of rubric or that game plan was somewhere in my head that the idea is to like whoever dies with the most money wins. Like I, that was never, you know, in my head, even from a young age. And I kind of had this idea like, wow, I don't know how this happened that, that I got all this well, I mean, it doesn't make any sense to me that I got paid all of this money. It makes no sense at all. But, you know, here I am. I've got to, you know, let me try to take a step back and make sense of all of this. And so really, I made this decision to stop. And then once I was outside, to really think about, I mean, I guess I kind of knew that I was going to rejoin with John and Eric and so on. But I wasn't, you know, when I walked off that trading floor, it was more like I've got newly married,

I've got a young wife. I want to figure things out, you know, what I want to do from here. You know, maybe I kind of knew what I was going to do, but I was, I was still felt a little bit undecided on that. And then, you know, John, I mean, John is just, you know, everybody that's worked with and for John, you know, loves him. He's like just such a warm and positive person that once I fell in again with John and Eric and Bob and some of the others, you know, it was like, this is going to be great. This is going to be so much fun. And then, you know, more of the people, you know, Larry Hillebrand left Solomon after I did and a few others. And, you know, we started to get this team of partners together and it was fantastic. It was just all so exciting. Myron Scholes, I don't remember exactly when he was involved.

Maybe he was even involved when I, before I was, I don't remember so much. But yeah, it was just kind of magical. And for people who don't remember, I mean, Maron Scholls is from the Black Shoals formula, right? I mean, these were some of the most brilliant minds in the investment. Well, some people call it Black Shoals Merton, you know, because Bob also kind of solved it around the same time. I think it's more commonly known as the Black Shoals option formula. But, yeah, Bob and Myron and then Fisher Black who passed away, you know, all, all, were the creators and Fisher would have had his Nobel Prize too, along with Bob and Myron at that time.

So the fund gets off to an unbelievable start, right? My sense is that you guys never lost money for two months in a row through the end of 1997 and it averaged on like 31.2% a year for those first four years. And it grows big, right? So it's like this kind of, I mean, I remember the economist writing about you being a sort of a superstar trader at, you know, the hottest hedge fund in the world. world, right? So there was sort of golden period. Before we get to when things go wrong, can you give us a sense again, as we did with Salomon Brothers, a sense of a sort of quintessential emblematic trade? I mean, I went back last night and I was rereading some of the Roger Lewenstein book on long-term capital management, which I'm sure you have some differences with. But he was talking

about things like your enormous Italy trade or the trade you did with Royal Dutch and its English cousin shell. Can you talk about things like that that give a sense of how you guys were racking up extraordinary returns, but also in some ways how subsequently you would look back and think actually the position sizing was all wrong or the diversification didn't really work? Start to give us a sense of both the glory and the peril of what you were doing. Sure. So first of all, you know, the returns were. were just much higher than we expected or anticipated. And the reason for that was that anything that we started to do just started to converge so quickly. And I think it was partly due to our own

success, you know, and that everybody could see what we were doing. When we were at Solomon Brothers, you know, we were trading with clients. We were trading through the government bond desks, you know, that we had, Solomon Brothers had seats on the exchanges. You know, like we could do so much of our activity globally at Solomon Brothers without people really knowing what we were doing or knowing how much money we were making, even, you know, etc. Whereas here it was like it was all out in the open. And as we were doing different trades, they were converging so fast that we were getting these really high returns and higher than we expected. And the opportunity set really did feel like it was declining over those years. You know, in terms of an interesting trade to talk about,

I guess, you know, we could talk about the Italy trade. You brought that up. So again, you know, there were these different layers to the trade. So first of all, you know, Italian government bonds, you could buy Italian government bonds and swap them and have a carry of like 100 basis points. In other words, they were trading on a swap basis at, you know, well over, LIBOR plus 120 basis points or something like that. And these are like, you know, eight year bonds. So that's a really good amount of carry to be getting, and if the spreads widened out, you would still break even if they didn't widen out too fast. What was that coming from? Well, we weren't sure what it was coming from. It was partly coming from the fact that there had been a 12.5% withholding tax on Italian government

fixed rate bonds, but also it might have been coming from people being worried that Italy might default on its debt. So, you know, we started off doing some of that trade. And we thought, gosh, we don't really want to be taking a lot of credit risk. Like, what do we know about Italian credit? Like, we don't want to sink the whole fund if Italy defaults on their bonds. And of course, Italy had a debt to GDP of over 100 and was growing. It was before there was some greater discipline that came later. So then we saw that, well, you know, like one thing we could do is we could buy credit insurance on these.

But, you know, we looked at who we would be buying the credit insurance from. and they didn't feel like they'd be able to pay off if things went bad. So we said, okay, well, we're going to limit the size of this position pretty dramatically. But then we saw that there was another kind of Italian bond called CCTs. And CCTs was a floating rate Italian bond, and they paid a coupon that was equal to the Italian Treasury bill rate plus 100 basis points on top of that. And now we were thinking, well, these are. cheaper than doing these swaps on fixed rate bonds, you know, maybe what we should do is actually

go along these CCTs and then go short Italian government bonds, fixed rate bonds, and do the swap in the other direction so that we actually would have some spread and we would be fully hedged to Italian credit as long as if there were a default that the Italian government treated the CCT bond the same as these fixed rate bonds. And then we did that for a while. while and we were like, gosh, this kind of feels okay, but it's still, maybe we could come up with something better. And then finally we said, you know what, maybe we can just take these CCTs to other people and see if other investors want to buy the CCTs swapped into like LIBOR plus 100, but then we keep the swap. And now we have a swap that we're going to receive treasury bills plus 100

and pay, you know, LIBOR plus 50 or whatever. I forget exactly what it was, but that this was like, We wound up with a positive carry trade with no credit risk at the end of the whole thing. And, you know, that was going really well until it wasn't. But, you know, that was, you know, I think that was a great trade. It kind of showed, I think it's an exemplar of kind of that we were thinking about tail risk, that we were thinking about credit risk, that we were, you know, very concerned about it and wanted to have limits on it. And, you know, that was, you know, that was kind of a trade that really was very attractive. And it wound up being a trade that helped to complete markets, because people weren't doing these CCT versus these Treasury Bill versus LIBOR swaps, which

let other people get into a nice asset swap position if they liked Italian credit. So, you know, that was kind of something that we were doing that was a little bit creative. You know, we had, you know, Italians working for us in London. We had connections into the Italian treasury. Like, we kind of did a lot of homework on Italy. We weren't, you know, I mean, we probably weren't as knowledgeable as, you know, as, as other trading houses, you know, like Solomon Brothers might have had, you know, more connections into Italy, just given it was a much larger organization. But, but that's how we approached that. And it was kind of, you know, typical iconic trade that we were doing. Again, with this whole layering, you know, trying to like find, you know, different trades

that layer, that kind of made sense on top of each other. You've written so much, as we'll talk about later, about the importance of position sizing. And one of the obvious criticisms of long-term capital management is that the scale of these bets, even when they were really smart bets and when they would eventually be proven to be smart, was just so enormous. And it's, it's one of the things that keeps coming up in Roger Lowenstein's account in his book, when genius failed. And he was saying that someone complained that if Italy had gone bust, you know, you would have lost basically half of the funds capital. I don't know if that's true. He was talking about the Royal Dutch bet, you know,

with Royal Dutch and Shell. And he said basically you were betting something like $2.3 billion or half of it on Shell and the other half short on Royal Dutch betting that the spread would contract. And Lernstein writes, Hagani struck a gargantuan trade with borrowed money and then suggest that, as he puts it, Hagani was beginning to believe in his own invincibility, and Hagani felt he could never lose, and he pushed and pushed his partners until he got his way. And he kind of describes you as sort of an infant, taribre, and mercurial, and how you, you know, for years ever since your success at Salomon, you've been kind of pushing colleagues to double and quadruple their positions. And I'm just wondering if you think that's sort of fair in retrospect,

or, you know, if there was hubris because you were so good at what you were doing, or, you know, if it was sort of the recklessness of you, or if you actually think he's wrong. And sorry, I'm not trying to be rude by quoting this to you. I think they're really interesting questions about position sizing and sort of, you know, as you said later, you know, at what point, even really good investments turn out to be bad investments because you just have them at too much scale. Right. So, you know, in terms of. In terms of the book, I mean, the book was written shortly after 1998. He didn't talk to any of us. I don't know who he talked to, but he didn't talk to any of the, you know, he didn't talk to me. He didn't talk to any of, you know, my partners that I, that I know of. And one of the things about LTCM is we operated on a consensus basis, you know, we had a portfolio management committee, a risk management committee, an executive committee. We had these committees and basically John would only approve things where there was a plurality of people that were in favor of different things. So,

you know, it wasn't like I was running my own books. I mean, I take responsibility for lots and lots of losses in 1998. But I think that Lowenstein, you know, A, created a lot more kind of, you know, drama and personality than there probably was. That's my opinion, but I don't know. I mean, I don't know, maybe other people feel differently. But I think the really important, thing here is that I don't think that our positions were too large. I don't think that they were like obviously too large in any ex ante kind of metric. You know, that ex post, it's like easy to say, oh, there was just so much leverage and so on. And I think that even in his book, you know, that he talks about, you know, what was the leverage that we had, you know, after we had lost 80%

of our capital. Well, after we lost 80% of our capital, our leverage was roughly would have been five times as big for the same position sizes. We had cut positions, but, or maybe he was even looking at what was our leverage when the consortium of banks bought out the fund at down 90%. Well, it was, you know, it was 10 times bigger than it was before we lost 90%, you know, and then with some adjustment for the positions that we had cut by then. But the risk taking that we were, were taking on and off balance sheet was pretty similar to the risk taking that was happening at other institutions around the street, whether it was Goldman Sachs, whether it was City, whether it was Morgan Stanley, the daily variability of returns, you know, the percentage of open

interest that we had, you know, all of those things I think were pretty reasonable. And I think that he kind of misses what were the more interesting lessons from LTCM. And, you know, I don't criticize him. I think it was really hard to understand. I didn't know, you know, when I, if you want to know what I think are some of the main lessons from the whole thing, you know, I mean, I wasn't thinking about them this way, maybe until 2010. So, you know, it takes a long time for, to, to gain perspective on things. You know, and I think that that book, you know, was just written way too soon, was written, you know, without being able to talk to a lot of people, but mostly was just written way too soon to be able to get any sort of wisdom out of the events.

One of the things that, you know, if you could help me unpack some of this, because I think there are really, really valuable lessons here. And you've thought so deeply about the lessons and you have an inside viewpoint that's unique. I'm thinking, first, as we go through some of the lessons, think about the Russian default, right? And, you know, that I guess triggered in many ways a lot of the problems that led to the 90% or so loss in 1998. Tell us about that and how in some ways it's just a reminder that weird and wild stuff happens, just as like your family getting kicked out of having to flee from Iran because of a revolution. Like it seems to me there's some, I'm having trouble articulating it,

but there's something kind of very, very important here about the intrinsic uncertainty of life that that default shows you. How do you think about that? Yeah, well, first of all, I think, you know, we had spent time in Russia. We were thinking, you know, we were thinking about what trades to do there. And, you know, the trades that we had in Russia were, we hoped, were hedged in terms of Russian credit, that we weren't investing in Russia with the feeling that Russia was not going to default. Unfortunately, they defaulted in a way that was surprising to many observers. They defaulted on domestic debt and they didn't default on foreign debt, you know, which felt like they defaulted on ruble debt. They didn't default on dollar debt. And that was pretty unusual because they could create rubles, but they were going to run out of dollars to pay the dollar debt. Ultimately, they never defaulted on the dollar debt, which is fantastic, even though their bonds traded down 90% to like 10 cents on the dollar. So that happened. We realized that was a possibility. We didn't have very large positions in Russia. We didn't

lose a lot of money on Russia, but the Russian default was the spark that set off this huge risk-off move all around the financial system. So the Russian default had everybody pulling back balance sheet, pulling back other trades, and that's where we had our major losses. And then we had extra losses from once it became clear that we were in trouble, then our position started to lose more money because people kind of realized that these positions were likely to get liquidated, you know, in the near term. And so they got pushed further. So, yeah, I guess that's, you know, how I would describe the Russian default in terms of the cascading events. I often, you know, because I'm a warrior, I often worry about what you describe as these low

probability high consequence events in your book. And, you know, as you mentioned there, you know, there are pandemics, there are depressions, there are wars. you know, obviously countless other things, revolutions, decisions by government to nationalize industries and the like. And you talk in the book about, you know, you remind us that there was a 90% drop in the U.S. market from 1929 to 1932, plus six other episodes in which investors lost 40 to 50% two since the turn of the millennium. Then you talk about the 22% daily, you know, one day plunge in 1987. You talk about the fact that the Russian and Chinese market didn't survive in the first half of the 20th century. And so I'm just wondering, you know, now with your

sort of sense of history and having gone through these kind of cataclysmic situations, like how you think about positioning ourselves as investors just to make sure that we survive these low probability events. You know, I think that it's probably a good time to, you know, to talk about there being a really big difference between LTCM and personal financial decision making. And I think that really that it's important to kind of make that dichotomy and not to mix the two things together. So, you know, think of LTCM as a pool of capital where many investors all over the world are allocating a small amount of their wealth to trying to do fixed income and other kinds of relative value trades with lots of leverage where the trades that they're doing have a positive edge. They hope they're going to work out. they feel like really good trades, but they're using a lot of leverage. And because there's a lot of

leverage, there's a real possibility of getting wiped out or having very severe existential losses to the fund. Well, running that business seems fine, you know, that you're running the business on behalf of a bunch of institutional investors that are giving you 1% of their capital. They know that they could lose 1% of their capital. They're hoping that they get 10 years of 10% returns over the risk-free rate, you know, whatever. And so, you know, that's where I say that the positions that LTCM was running were not irresponsibly large. There was not too much leverage. They were reasonable relative to the context of the markets and the world at that time. Ex post, they lost a lot of money. And, you know, of course, they were too big from that.

point of view, if they had been smaller, they would have lost less money. But I think that you make investment decisions and those investment decisions, I think, were defensible. You know, that's where I think that sort of the narrative that came out, you know, wasn't really the right set of lessons. Like, it's okay to run capital with leverage, trying to make good returns for investors that are devoting a small amount of their capital to that. The systemic problems of LTCM, you know, had to do with the fact that turned out that everybody else had on similar positions to LTCM. Goldman had position sizes that were four times bigger than LTCM's positions in certain of the big positions. You know, all of the different shops had many of these same positions on. In fact,

it's probably the case that liquidation within city group of the arbitrage desks kind of set off the widening of all the spreads that ultimately, you know, resulted in the distress and crisis of late 98. So when it comes to personal financial decision making, you just don't want to use leverage. You just don't want to be in a situation where you're going to lose all of your money and go bankrupt. You know, you want to do everything that you can to minimize those chances. and so, you know, reducing concentration, you know, trying to maximize diversification, not using leverage, you know, those are really important things when it comes to personal financial decision-making. And, you know, LTCM is a different business model, is a, you know, is a different kind of thing than personal financial

decision-making. And, you know, I think one of the big, one of the big lessons I think that people should take from LTCM is how was it that I had so much my money invested in LTCM. Well, that doesn't really get covered by Roger Lowenstein. He was, you know, he was ignorant of that, of that idea or that thought. Another really interesting aspect of the whole thing is how we made this decision in 1997 to try to go private, you know, sending so much investor capital back, trying to go private and trying to get over the hump to where, you know, we could, you know, where we could mostly have the capital, you know, behind the trades. And I think that was a fateful decision. I think probably on an ex ante basis, we should have reached a different decision. You know, we didn't. You know, I think that's, I think

those are kind of the really interesting things. I think the question of running capital in such a transparent way that depends on all of the dealers and all of the brokers and banks, you know, rather than running it inside of an institution is another good question. You know, should hedge fund, should leverage hedge fund activities be in these big independent pools of capital? Well, the record is showing, well, it's works pretty well. It's been working pretty well for the last 25 years. But, you know, I would say that running relative value leveraged pools of capital, that way is probably not a great business model compared to those pools of capital being inside of larger activities, larger organizations. You know, maybe the pod shops are good examples

of where they've really managed to get a lot more diversification, where they have relative value trading, they have macro trading. I don't know what goes on exactly in the pod shops, but I think those are the more, you know, interesting lessons about LTCM. And I think that, you know, nobody wants to write a book today, but today the book would be really different than what Lowenstein wrote, you know, where he was just rushing it to press as fast as he possibly could, you know, is like, this is the big story. I got to get this book out right away. And, you know, I think that it's, you know, it's interesting, interesting, but I don't think it really harvests the most valuable lessons, which as I say, I think have taken time to become more apparent. I don't think I could have written a better

book than him at the time. Yeah, I mean, it's a good book in some ways. And in some ways, it's become a classic because it's a good reminder that however smart we are, the markets are kind of wild and that things can go wrong. And so I think it's a useful morality tale. I mean, I keep coming back. I think I quote this at the start of one of the chapters in my book that I love that quote from GK. Chesterton, I think it was, where he talks about, yeah, here it is. He says, the real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality, yet it is a trap for logicians.

It looks just a little more mathematical and regular than it is. Its exactitude is obvious, but its inexactitude is hidden. Its wildness lies in weight. And I love that, right? I mean, it's such a humbling reminder that, like, however smart you guys were. I mean, you guys are incredibly smart. And you were doing this very logical thing where you're sort of playing these bets as things converge. But there's a wildness that lies in weight.

And so I think it's, I don't know, does that quote resonate for you as deeply as it does for me? Very much so, yes. Go back a minute to this question of the lesson you've shared before about how much you should have invested or shouldn't have invested. Because I think it gets one of the themes that I found most helpful about your book, which is a theme I wrestle with the whole time, which is how much we should be exposed to certain bets. You know, whether it's, and we'll get to this more as we talk about Elm, you know, this whole question of how you think through your allocation. And so I'm curious what you learned about the question you raised of how much skin in the game is right for you. Yeah, well, in I think it's chapter eight of our book, you know, we go into this in great detail. And I think that I didn't do a very good analysis, you know, in the 90s when I was at LTCM.

I think that, you know, it was fair to say that LTCM investing in it looked really attractive. But, you know, I just wound up with an inappropriate amount of exposure. You know, that's where there was a mistake, not the position sizing of LTCM itself, but in my exposure to LTCM, you know, I feel that, you know, I easily could have realized that I was just taking too much risk of too big of a loss. And, you know, I think part of it was that I was just thinking about how much I had invested in the fund, you know, which was, you know, somewhere, I had somewhere around 80% of my family's liquid net worth. invested in the fund and, you know, I kind of thought maybe that's okay, you know, to have 20% that wasn't. But I didn't also account for the fact that that I owned a lot of the management company or I owned, you know, a fair share of it. You know, we were a bunch of partners, but that was really valuable too. And if if the fund went down, the management company was going to go to zero and the management company was pretty valuable before all of those things happened. And then also,

I had human capital, you know, that I had earning potential that I was getting paid to work at LTCM. If I left LTCM, I could have gotten, you know, if LTCM continued to be successful, but for some reason I wanted to do something else, I could have gotten a very high paying job outside of LTCM. And my human capital was also going to be really connected to the success of LTCM. So, you know, putting all those things together, I look back and can do some kind of quantitative, expected utility analysis and find that, you know, I really should have been thinking more about, you know, maybe having 50% of my wealth in LTCM in the fund or even less than that, perhaps. And so, you know, I think that kind of thinking, thinking really deeply and broadly about how

much skin to have in your own game is a really valuable lesson for everybody, you know, for, not for everybody, for many people that face that choice. You know, it could be working at Anthropic, you know, it could be working at SpaceX or it could be working at a hedge fund, you know, whatever, or a private equity firm. You know, I think those less. lessons are valuable for everybody. And I think that we can make better decisions ex ante by really being thoughtful about the cost of risk. You mentioned just now this concept of expected utility. And, you know, obviously for some of our listeners who are much more economically oriented than I am, they'll know a lot about this already. And there's a beautiful quote you have, I think,

in the book, that the notion of expected utility, you quote Daniel Kahneman saying that John von Neumann's expected utility hypothesis is to this day the most important theory in the social sciences. This is such an important concept and it's something that I think a lot of us, myself included, have never really got our heads around. Can you explain it and why it's so important as a framework for making financial decisions, you know, to be guided by this concept of expected utility? And if you could explain it in a way that a nine-year-old English literature a student would understand that would be very kind and compassionate of you. So decisions are choices, you know, that when we're making a decision, we're making a choice

between different alternatives. And we need to be able to rank those alternatives in a sensible way. So we need to have some kind of an objective function, some kind of a criterion that allows us to rank different outcomes relative to each other. Now, in financial decisions, you know, we're normally thinking about uncertainty of outcomes, gambles, we could call them. And the question is, you know, how should we rank different gambles against each other? You know, what's a better gamble? What's the worst gamble? You know, sometimes it's really obvious. You know, one gamble can look better than another gamble. You know, it's just clearly dominated, right? So if I said to you, you have a choice. I'm going to flip a 50-50 coin. If it comes up heads, you know, your wealth is

going to go up by 20% if it comes up tails, your wealth is going to go down by 10%. That's one gamble. And then another gamble is the same, except you only make 15% if you get heads. Well, clearly, you know, making 20% heads with the same amount of loss as dominant. We don't really need anything too complicated to measure that. But what if I said to you, you know, that in one flip of the coin, you know, in one case, you're going to lose 10%. If you get heads, you're going to make 20%. That's one gamble of your whole wealth. And here's another gamble. And here's another gamble. where if it comes up tails, you lose 20%, okay? But instead of making 20%, you're going to make 42%. So you get a little bit more than double the profit. You get double the loss. It's still 50-50.

Which one do you prefer? Well, how would you compare those two things to each other? Well, you would say, gosh, you know, if I do that second flip, I have a higher expected payout, right? My expected payout is, you know, a 50% chance of increasing my wealth by 42%, a 50% chance of losing 10%, so I, sorry, losing 20%. So that's, what is that? That's an 11% expected gain, right? 50 of one versus 50 of the other. That's an 11% expected increase of my wealth. And in the first case, it's just a 5% expected gain in my wealth. And you might say, oh, well, maybe I should, um, should I go? with the one that has the higher expected gain, the higher expected amount of money? Well, maybe not. You know, maybe I just don't want to lose 20 percent. Or maybe I do want to do that. But we could

certainly go to an extreme of how about 50 percent chance I lose all my money and a 50 percent chance I double my money. Do you want to do that bet? You know, it's like, well, no, now you've got to the point where I just don't want to lose all my money. I don't want a 50 percent chance of losing all my money. So clearly we need some other metric or objective function besides expected value, that whatever has the higher expected value can't always be the better thing to do. And this idea of how to have a better objective function goes all the way back like 400 years to Daniel Bernoulli in Italy in Switzerland. And I won't go into that, you know, but that's really where the idea had its origin and then, you know, it kept developing on and off and eventually got really solidified

by von Neumann-Morganstern in their famous treaties on games and probabilities that they wrote in the 40s. But the basic idea is that what we really are trying to maximize isn't our expected wealth. It's our expected happiness, our expected welfare. And the more money that we have, the happier that we probably are, but that happiness is not going up linearly. it's going up slowly and more slowly, the more wealth we have. So the first million dollars makes us real happy. The next million dollars after that makes us, you know, taking us from one to two million dollars of wealth makes us really happy too, but not quite as much as that first million. And the next million that takes us to three million less so. And every million

still makes us happier, probably, but it is slower and slower rate of increase. And so So that gives us the objective function, this utility or this happiness curve, where we can map wealth or money into happiness or utility, and then try to maximize the expected utility that we get from gambles. And that will allow us to rank different risk-taking gambles, different investments versus each other. That's what all that expected utility is. And I think that that quote from Connemon is amazing, you know, that I think it's true. I think that it's like one of the most important insights that we have in economic thinking is that what we want to maximize is our expected utility. And it doesn't just apply in money. It applies in all kinds of decisions. You know,

I think that, you know, when scholars think about the First World War, they're like, well, how did we get into that mess? You know, how did they, how did the decision? makers make that mess? And it was like, well, probably what happened, it seems, you know, from historical record is there was a great focus on the most likely outcome, that the most likely outcome was going to be short, the different sides each thought they were going to win, but it was going to be short. And if they didn't win, they weren't going to be much worse off than they were to begin with. But that there was this tail event of a multi-year, multi-million loss of life war that was there and was a low,

probability, they saw it as a low probability, but it was such a big consequence that if they had been thinking about an objective function that was concave in that way, where this tail, left-hand tail thing was so negative that maybe they would have come to a different decision rather than like perhaps focusing on the central case, the most likely case. Let's take a quick break and hear from today's sponsors. Curious about online trading, but haven't taken the first step yet. You're not alone. And Plus 500 Futures is a great place to start. The futures markets are moving fast, and with plus 500, you can explore popular assets like oil, gold, S&P 500, Bitcoin, and more. From crypto

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net suite.aI slash tip. All right, back to the show. How is this insight in some ways shaped your life and your approach to investing? Because it sounds like once in a while we figure something out that becomes so profoundly important that it ends up kind of pervading everything we do. And I see it running through the book.

And I'm not sure I've really got my head totally around it. I mean, I can see you saying, you know, good decisions are those that maximize expected utility and you'll talk about, you know, how you shouldn't be position sizing with the objective of maximizing expected wealth, but should be guided by expected utility. So I can see it's running through your investment decisions about position sizing, but it feels much more profound and pervasive for you, this concept. I think the fact that risk has a cost because we get marginally less benefit from more than how much it hurts to have less,

that I think that coming to terms with the fact that risk has a cost and that we need to build that cost into our decisions is important. I think it has a lot of impact in my financial decision making. You know, it probably doesn't come that much into my day-to-day decision-making. You know, what am I going to have to eat or am I going to go for a run or, you know, those things. But it comes into play in my decision-making. If I were younger, it would come more into play because we have more consequential decisions when we're younger. We have these career decisions. We have these decisions about partners.

We have really big, big, bigger decisions when we're younger than when we're maybe in our 60s. It's one of the, I think it's one idea that has shaped my thinking. I think it's one thing, you know, that separates 63-year-old me from 25-year-old me. I mean, I learned about utility and university, but it didn't. I rediscovered it. you know, it's something that I had to rediscover and see its relevance. I mean, it was kind of poohed a bit back then, you know, it's just being so subjective and, you know, unusable and so on. And it kind of also got, I mean, the whole idea of utility was somewhat held back by its conflation with

utilitarianism, which is quite a different thing, you know, the idea that we could make social choice decisions by adding up different people's utility, which is a fairly discredited political theory. But, you know, I think there are other really big ideas that probably shape my day-to-day existence more than expected utility, but expected utility is up there. And I think it's just absolutely critical in any discussion of good personal financial decision-making. If I think about, you know, the main principles of good financial decision-making, you know, putting a cost on risk into your decisions, you know, having a cost on risk is like present in almost everything, you know, that it's present in buy versus rent. Buy versus rent isn't just about, you know, where am I going to wind up with more

money at the end? You know, there's a risk component to buying versus renting also. Questions of paying fees and taxes, you know, risk is very central there. Should I realize a capital gain to get to a better portfolio where I have less risk? Or should I try to defer the capital gain, but take more risk? So I have to put a cost on risk for that. How much should I invest in the stock market, very much a question of not as much as I can possibly get, because at some point, that's too much risk. You know, I want to get the right amount of exposure to assets that have a risk premium. So it is really central, but, you know, I think away from my financial life and trying to help people with their financial decisions, it comes into play a bit, but yeah.

Tell us, Victor, about your journey after long-term capital management, because you've described it as a kind of 10-year sabbatical you took after you left in 1999 and before you set up Elm. But actually, your investing journey is really fascinating and instructive then. I wondered if you could talk about the sort of arc that took you through, as you put it before, trying to be David Swenson after leaving long-term capital to where you are with Elm. Because I think there are so many lessons for us, as you kind of, as you sort of nursed your wounds after a long-term capital, you kind of, like, it was such a cataclysm that it kind of, it gave you this opportunity to go back and think about really how you wanted to play this

game in a more resilient way. And so I'm really interested in the journey that you took. Well, you know, I had this, I made this really intentional decision to spend 10 years at home, you know, being a father, being a present husband and doing fun things and re-educating myself, or educating myself, I should say, just trying to become educated by reading more and learning more broadly than where I was. And so I had in mind, you know, about 10 years, my eldest child was six years old, seven years old at the time. And I was like, okay, when he goes off to university, I had three children, when he goes off to university, maybe I'll be able to start working again. And I'll probably be doing something in business. And, you know, you don't, you know, it's not like I was a professional athlete

where I was atrophying. You know, I kind of felt like I would stay about as valid. valuable as a worker 10 years hence as I was then. So, yeah, I had this idea of a 10-year sabbatical. I had enough wealth left over from LTCM, thankfully, to not have to work. And I just said to myself, the only thing, I want to do something different when I start working again, it just can't be proprietary trading at a bank, it can't be working at a hedge fund. It has to be something different. And so there were like different parts of my life over those 10 years. There was looking for what I was going to do next. So I was trying out. different possible professions. I was looking into becoming an arbitrator, which I really love the

idea of arbitration. I found that I didn't have enough legal training to do that successfully. I got involved in Lloyd's of London. I thought maybe I could get into property and casualty ensuring. That seems really interesting. And Buffett certainly seems to think it's a great thing. So I tried out a bunch of different things. That was like one part of my life. One part of my life was, you know, being, you know, just enjoying life, enjoying my children, learning how to fly, fishing in Alaska, you know, getting, you know, just doing really fun things with my kids all the time, reading and learning. And then this other part of my life was like, okay, well, you know, now I better start thinking about what I'm going to do with my family's savings.

Like, when I was at Solomon, I was too young and they took half my comp and put it into Solomon stock. I didn't think about investing. Then at LTCM, unfortunately, I didn't think about investing enough, I put so much into LTCM and the rest was like just in safe assets and some real estate. And now I felt like I really needed to think about personal investing. And so on that journey, the first thing I did is I looked around at people I respected and emulated what they were doing, which is they were, you know, a lot of people were being mini David Swenson's, you know, following the Yale model, hedge funds, private equity, venture capital, some angel investing, hedge fund investing. And, you know, I felt like I could do that because I kind of knew that,

New the players, knew the strategies, knew the industry, had probably enough wealth to be able to get into some of these different vehicles. And I started to do that and, you know, did that for a number of years. I guess I did that until around 2006 or so. And it was kind of wearing on me. It was taking a lot of time. I was getting a lot of papers piled up on my desk. I was on too many calls. I was filling out too many subscription and redemption forms all the time. And then I had this conversation with my accountant, David, where I was like, David, my taxes seem so high. I don't get it. You know, like I haven't made that much money this year. Why are, why, why does it look like I have this like 50% tax rate? And we started to go through the different investments that I had. And I realized that

a lot of these alternatives for an individual U.S. taxpayer were super tax inefficient, that there would be fees that I couldn't deduct against the income. You know, there were just miscellaneous itemized deductions that you couldn't take away from income that you were getting. There were short-term capital gains. There were all kinds of things. You know, it's like, wow, this is this, this is crazy. I can't, these investments don't have a high enough return to get over the hurdle of their fees and of this tax inefficiency.

And I think that was like this aha moment where I was like, gosh, he just taking up so much of my life. It's so tax inefficient. I got to get back to what I learned at university and become, you know, an investor in the market portfolio. And that started this journey of, okay, I'm going to. going to start moving to index funds. That was, you know, I haven't made any private equity or hedge fund or alternative investments since 2007, I don't think. And pretty much, you know, I've, away from

supporting some of my kids' ventures here and there a little bit, you know, I've been an index investor. But once I started to invest in index funds, I realized there were still a couple more questions to answer, you know, how much to have of U.S. versus non-U.S. equities, how much equities to have in total. You know, I was shaped by living through the Japan bubble of the late 80s. And it's like, gosh, I don't want to just be so passive that one day I wake up and 60% of my portfolio is Japanese stocks trading at 100 PE. And also, by that time, I had lived through the TMT.com era as well. And it's like, I don't want to have, you know, the same equity exposure when tips are yielding 4% and the earnings yield on the whole equity market is three and a half percent. I want to have very little equities at that

time. And so this led to this idea of trying to combine the best features of passive index investing, low cost, diversification, liquidity, transparency, with a few of the ideas of active investing, being focused on long-term valuations, being focused on risk, momentum, being a proxy for risk, but taking some of the best ideas from active investing so that I could be eyes open to this index investing, to this harvesting, hopefully, of risk premium over time. And I felt that I could have more exposure to equities on average if I was managing that exposure up and down than if I just had to commit to some number today, like I'll be 55% in equities forever, just felt like a weird thing to do to just say, I'm going to be, no matter what's happening in the world, I'll always have

55% in equities or 75% in equities just felt so wrong and counter, counter rational, counter theory that just is like, well, yeah, stock investing can be passive. I want to own the market portfolio of stocks. I don't want to be a stock picker. But asset allocation can never be passive. It always is a decision of where on that capital asset pricing line do you want to be. Do you want to be 100% in equities, 120, 40. And that goes all the way back to the 1950s. It's not a new insight. It's always been the case that asset allocation, how much to have in risky assets versus safe assets, is a dynamic thing that expected returns, risk, change over time. Maybe your risk aversion changes over time as you lose money and you get closer to a subsistence level of wealth and

income. Maybe you become more risk averse. So all those things, you know, came to play for me in in going this way and ultimately it led to the founding of Elm in 2011 because a bunch of friends were saying, you know, this seems like a good way to manage that low cost public market exposure. You know, most of my friends were still doing private investing in alternatives, but they had some public market exposure and they were happy for me to help manage that. And that really led to Elm and led to our low fees because it was like, I thought to myself, if the shoe were on the other foot and I was going to one of my friends to manage some money for me, what would a fee level that would just be a non-issue, you know? And I was like, well, 12 basis points,

one basis point a month. That seems low enough that nobody should care. And indeed, nobody has cared. If anything, people say your fees are too low, how are you going to stay in business to keep managing my money? It's kind of remarkable. I mean, it's wonderfully fair. And it's sort of, in some ways, part of what's interesting is so the opposite extreme of long-term capital management, right where it was 2% a year and 25% of the profits as an incentive. fee. And so, you know, this conversion to index funds is really, really interesting. But I want to, I mean, I wrestle with this a lot. I write about this in my book, right? That there's a part of me that, you know, was converted by interviewing Jack Bogle many, many years ago and, you know, him talking to me about how difficult it is for active managers to outperform. And then there's a part of me where because I interview a lot of great investors and have done it for the last 30 years, I'm so seduced by the possibility of beating the market. And so I sort of have this schizophrenic approach where I kind of half indexed. I always tend to index my wife and kids money because I don't think they should suffer for my delusion.

And then my own approach is sort of a slightly schizophrenic mix of indexing and then owning very concentrated long-only funds run by friends who I trust who own like nine stocks or 10 stocks, something like that. Sort of more the Buffett Munger approach. But I sort of wrestle with how best to do this. And I mean, one of the things that I've often, you know, for many years, all I did was I would just split the money equally, the indexing money between Vanguard total stock market index fund and Vanguard total international stock index fund. And I'm like, okay, done. And then at a certain point, I started also in certain accounts to buy the Vanguard Life Strategy Growth Fund because I was like, that's so cool. This is like Vogel said to me, you should, the simplest thing on earth is just own one fund. And it would be an index fund that's a balanced fund that owns. some bonds, some U.S. bonds, some U.S. stocks and some foreign bonds, some foreign stocks. And I love the simplicity of that. And then I see your approach, which is like a different way of kind of cracking this indexing idea with a sort of dynamic asset allocation. Why is your approach smarter than the fixed allocation or, you know, say, you know, that Vanguard Life Strategy Growth Fund, which just

has 20% in bonds, more or less, like, forever? unpack that for me, because I love the idea that you've sort of, after all these years, applying your brilliant, very mathematical gameplay as mine to this game, you've found a way of indexing, but you've given it a little twist to improve it. Sure. So first of all, I would say that, you know, once somebody kind of sets up a static portfolio that makes sense for them in the near and medium term, you know, that's pretty good. You know, I mean, that what we're doing with dynamic asset allocation, you know, I think has two benefits relative to that. But, you know, overall, you know, I think that you're 90% of the way

to what we're doing if you just do the static indexing and you're comfortable with it. You know, first of all, you know, what we're doing is we're saying that, or we're recognizing that asset allocation should always be a function of what's the expected return of the risky assets in the portfolio relative to the safe assets, how risky are they? And what's your level of risk aversion? Now, your level of risk aversion is probably a constant through time. But the riskiness of the market changes. Sometimes we're in a very high risk environment. Other times, you know, it's very peaceful and tranquil. And both the expected return of stocks and the risk-free interest rate are both changing over time. You know, we can just look and see the changes in the

the long-term real interest rate, tips have been at minus 1% a little while ago, and now they're at 2.5%. So to think that the risk premium, the long-term expected risk premium is not changing, would be unusual for people to really believe that. And I think most people feel that the expected return of equities relative to safe assets is something that varies over time. Sometimes it's better, sometimes it's worse. And so it's only logical that your asset allocation should change. I mean, If you were betting on a coin and I said to you, how much of your wealth do you want to bet on this coin? It's got a 60% chance of coming up heads. And you say, oh, I would like to bet 10% of my wealth on that. And say, okay, fine. And you do that for a while. You get a few flips.

And then I come back and I say, okay, William, sorry. I'm changing the coin now. Now this coin just has a 55% chance of landing on heads. Well, it just wouldn't make sense to keep betting 10%. In fact, what would make sense would be to bet 5% of your wealth because now, the edge is half as big as it was when you were betting 10% of your wealth that you thought was the optimal amount to bet. So changing your asset allocation with changes in risk premium and with changes in risk just as makes complete logical sense. How is it different? I mean, this is something I wrestle with a lot when I'm trying to explain your approach to friends mind who manage money and just do it with index funds or just just do it with dimensional funds, for example, that have

factors. Like, how is what you're doing different than market timing? Because there are times where when I've had a fixed allocation in index funds, I think it's allowed me to own things that I couldn't bear to own if I exercised my own judgment because I'd be like, oh my God, I got way too much of these super overpriced stocks and I would avoid them. And actually, I had exposure to some of the best stocks of the last few years that I wouldn't have had if I had been making my own judgments. And so I'm wondering like how you, you know, sort of the problem that Joe Greenblatt identified when people started to kind of manage money for themselves using his, his kind of really rational systems, and they would just sort of sabotage themselves. I don't know if I'm articulating this well,

but I know you understand my question better than I can ask it. Yeah. So, you know, so I guess the the question is, you know, what do we mean by market timing? You know, I think that's, you know, really at the heart of the question. I think that, you know, in general, what people mean by market timing is making short-term trading decisions that are based on an attempt to predict near-term market price movements. That's not what we do at Elm. That's not the approach that I just described in terms of using a long-term expected return for stocks relative to a safe asset and the level of risk. Now, we're changing the asset allocation over time, but we're responding to these long-term observable metrics rather than making short-term price predictions based on what we think

the next employment report is going to be or what the next thing that the Fed is going to do. And so, you know, I think that market timing, as people think about it, is like trying to beat the market through a market inefficiency to generate, generating returns through outsmarting the market, getting ahead of the market. We're just trying to have an asset allocation that is responding, to what the market is offering in terms of return and risk at each point in time. So at some level, you're kind of looking at these things and you're saying, oh, you know, what Elm is doing is changing its asset allocation. What market timers are doing is they're changing their asset allocation.

So these two things must be the same. But there are many things that kind of look the same, you know, that look the same, you know, from some vantage point, but, you know, are totally different in terms of how they operate, what the assumptions are, what the rationale is. And this is a case where I think that they're really different. As I say, market timing is a very specific kind of approach to investing. And that's not what we're doing at Elm. I hope that I've been able to explain that.

Yeah, it feels similar as I was kind of trying to get the nuance right at my own head in preparing it. It feels similar in some ways to what Howard Marks talks about when he's discussing recalibration, that, you know, and he would sometimes quote Peter Bernstein saying the market's not a very accommodating machine. It won't provide high returns just because you need them. And so there's this sense that you're changing the way, the speed that you drive depending on the conditions. Is it foggy? Is it people being too reckless out there? So, I mean, it makes a lot of sense to me, and I think this has been part of my worry about indexing for all of the years that I've been doing it,

is that, and maybe part of the reason why I couldn't be all in is that I started investing in the late 90s where you saw people going absolutely nuts. And you were like, well, I don't want to have all my money and the stuff that's going nuts, you know. And so, I mean, intellectually, just the idea of recalibrating based on the conditions that you see out there seems wise to me. Yeah. I mean, you know, I mean, not to stretch the analogy too far of what I was trying to say is like you walk into a casino and you see two people sitting at a blackjack table and you say, gosh, it looks like those two people are both playing blackjack. They're both gambling in a casino. But it turns out that one of them, you know, is a card counter and is, you know, varying their

bets, you know, in a way to try to take advantage of when there's an advantage to the players. And the other person is, you know, drinking some Manhattan's and, you know, is just playing around and putting money down and betting. And so they look like they're doing the same thing. But the one is really just having fun in the casino and enjoying himself and he's got negative odds. I'm not saying that market timing has negative odds or whatever, but I'm just saying like they look like they're doing the same thing, but they're being driven that when we think of one versus the other, they're really in two different activities. And so to the extent that what we mean by market timing or when people say market timing, what they mean, because market timing is like a pejorative,

that it's like, oh, that's market timing. We know that market timing doesn't work. And I think that market timing is really hard. It's really hard to know what the Fed is going to do next and what the reaction of the market's going to be to what the Fed does next or what the employment report is going to come out at and what's the market reaction going to be. That's really, really hard. And I think that market timing justifiably, people are skeptical of it as an investment approach. But, you know, what we're doing, I think, makes a lot of logical sense to most people. And that's why people come to us. They, what we're doing kind of resonates as being sensible. And, you know, I think that when somebody says, oh, well, isn't that just market timing? That's really what somebody is saying,

who it's not resonating with. If it, you know, when they look at it and they're like, oh, well, that's market timing. You know, they haven't dug deep enough or it just doesn't resonate. It just, to them, it just looks the same as the other thing. I get it. But, you know, I think that that's the response that we have to it. Yeah, I think it's not an accusation. I'm making it's more a matter of like clarifying the nuance here because it is, it is different, but it's a sort of kissing cousin. Tell us about the,

well, I don't know, is the, you know, is the card counter a kissing cousin of the guy that's drinking the Manhattan's and playing blackjack? Yeah, I mean, they're both sitting next to each other, but I don't, I don't think they would think of themselves as being terribly related. Yeah. And again, you know, I don't mean to say that one is negative, but, you know, But that's more what it's like. So I don't know about the kissing cousin thing. I mean, they look the same. They look the same. And I think it really pays to try to understand what the difference is.

Talk to us about the LMETF, which is a really, really interesting product, partly because it's also very good value, not quite as cheap as the separate accounts, but it's that you run. But it's something like 0.24% a year. I mean, really low management fee to get this approach to dynamic asset allocation. Can you talk about the current posture as a sort of as a way of giving us a sense of how these various principles work, you know, what you're doing in terms of the baselines, the targets, using Cape ratios, international diversification momentum. Like, how are all the kind of principles that you've come to embodied in a sort of tangible way with what you're doing with the ETF? Sure. So, yep, we have this ELMETF. It's on the New York Stock Exchange. And, uh,

Ticker is ELM and also the website is elmfunds.com to get more information about it. And the ETF has about 600, just under $600 million in it. And as you said, the expense ratio is 24 basis points. But that 24 actually includes the six basis points or so of the average expense ratio of the ETFs that we hold because the ELM ETF invests in other low-cost ETFs that have about a five or six basis point average expense ratio. So the full charge of kind of the management fee to compare with our separately managed accounts, you know, it's 12 and the separately managed accounts here.

It's more like 18. And so that's a high level picture of it. In terms of asset allocation, the ETF has a baseline of 75% in equities, roughly 40% U.S. equities in the baseline, and 35% non-U.S. equities roughly. And, you know, looking at the asset allocation today, it's about 15% underweight U.S. equities. So instead of 45%, we're at about 30%. It's about 14% overweight non-US assets, so about 34 instead of 30%. And then that leaves it about 10% overweight fixed income, which is split between Treasury

Bills, tips, and an aggregate bond index, but mostly at the moment in Treasury bills. The way that we arrive at the asset allocation is, I was saying, looking at two signals or two metrics for every asset class, the first one is, what is the expected return relative to safe assets for the asset class? That's the long-term expected return of U.S. equities relative to a comparable U.S. Treasury. So when we look at U.S. equities, we say, oh, wow, the earnings yield, the cyclically adjusted earnings yield of U.S. equities is around three. just over 3%, 3 and a quarter or so. Ten-year tips are around 2 in a quarter. So it looks like

you're only getting about a 1% higher expected return from owning U.S. equities than you would get from owning tips. Now, maybe that's underestimating the risk premium. But when we look around at other observers from Goldman Sachs to research affiliates to Vanguard to BlackRock, et cetera, you know, that more or less, that is the consensus is that the long-term expectations. expected return of U.S. equities is relatively low compared to long-term real rates of tips and so on. So that's one metric, and that is what leads us to be underweight U.S. equities. The other metric and leads us to be a little bit overweight, non-U.S. equities because in those markets, earnings yields are quite a bit higher. P.E.s are quite a bit lower

in non-U.S. markets compared to U.S. markets. And then we take account of risk. are we in a high risk or a low risk environment? Our proxy for risk, we use one year trailing moving average momentum as a proxy for risk. You know, we could have used other things. That's just what we've been using and we like it. It's a longer discussion, you know, why that as opposed to using option implied volatility. But anyway, we like it. And it's about, it tends to give you a very similar signal most of the time.

And based on that, we're in a low risk environment pretty much across the board, U.S. and non-U.S. equity. So that moves us to have more of those equity markets. And so we're not that underweight U.S. equities and we're a little bit overweight non-U.S. equities. And that takes us to today's asset allocation. Now, if markets drift downwards over time, that risk metric is going to go into a high-risk state and then we'll have a lot less equities. We're pretty far away from it today, but we can get there pretty quickly. And then we would have a lot less exposure. and maybe that would be the beginning of a turning market or maybe the market would go back up.

And then we'd be back in a low risk environment and we'd add and we'd wish that we hadn't reduced, but we'll add and go back to where we are because it's just a fully rules-based, you know, automated, transparent system. And that's consistent with the fees that we charge. You know, we're not sitting around trying to read the tea leaves. We're just trying to apply some really sensible, logical criteria to the asset allocation. I guess as I think about the connection to what Howard would talk about, it's sort of recalibrating based on the conditions, adapting to the conditions rather than making an active prediction about which direction it's going to go. Is that a fair nuance?

I think it is. I mean, I think that Howard Marks is very much driven by what the opportunity set looks like. And, you know, when, you know, as he likes to say, you know, in 2008, they saw tremendous expected returns and they allocated a lot of capital and turned out great. And when expected returns look really low, they're happy to not allocate capital. In his case, he's looking at, you know, they're able to kind of look at relatively senior parts of capital structures and see what they're offering. You know, maybe in their business, there's even a greater ability to estimate long-term expected returns and they have a great expertise at it. So, you know, I think that's, you know, that, that, you know, what Oak Tree does and what Howard and Bruce and so on have done is very much a

dynamic asset allocation driven by, you know, what's the, what is the return to risk ratio look like on the, on their domain of expertise of investing in, you know, very often, you know, senior secured or senior types of claims on, on big, good businesses, you know, so yeah, they, they've done great and that's exactly what they do. You know, it's, it's expensive and hard, and it requires a lot of expertise and it requires people that can read covenants and understand them and have deep legal experience. And so they have to charge a pretty high fee and it tends to be pretty tax inefficient for individual investors, for taxable investors. But you know, it's a fantastic product for their investor base of mostly non-taxable institutional money. So, you know, it's been fantastic.

When you think about the different ways that you can create a better mouse trap using, index funds, you look at something like dimensional funds, right, where they have factors like tilting things towards small companies or cheaply valued stocks based on low price to book or more profitable companies, for example, or positive momentum or low historical volatility or whatever, all of these things that people like David Booth, that dimensional funds has done or that Cliff Asniz has explored. What do you think of those strategies? I know it's a big question, but like when you think of the kind of dynamic asset allocation strategy that you've used or the use of factors like that, what just made you think, no, I don't really want to bother with those sort of factors.

I'm not totally convinced. Well, for those factors to work, you need somebody to be losing money. And not only do you need somebody else to be losing money relative to you making money, but you also need to make like extra money to cover the extra risk, you know, because there's extra risk in non-fully diversified portfolios. So, you know, we have, you know, what's called Sharps Arithmetic that I'm sure many of your listeners know about or John Bogle reframed it as the cost matters hypothesis, which is that, you know, all actively managed portfolios, all portfolios that diverge from the market portfolio. When you add them up together, they have to give you the market

return less fees. And so the first thing is that if you're running these different factors, that it's zero sum against somebody else. So there has to be somebody else on the other side that's like, oh, gosh, you know, either I have some kind of weird risk, I have some particular risk preferences that make it okay for me to be losing money by taking the other side of these trades that dimensional or AQR is doing, or they just don't realize that they're losing money. They're either, you know, doing it rationally or irrationally, one of the two, fine. But also, there's this risk corollary to Sharps arithmetic, there's the risk matters hypothesis, too, which is that, you know, all of the actively managed portfolios, all non-market portfolios when grouped together,

have an average risk level, which is greater than the market risk level. So not only is there this, the fact that it's all zero sum, not only is there the fact that the fees tend to be higher on this kind of investment activity and the transactions cost tend to be higher, but also there's a risk component too. And so when we put all those things, together were like, eh, probably not worth it, that these things definitely existed, you know, these premiums certainly existed in the past that we're not questioning the fact that over the last hundred years, you know, owning low price to book was a great thing to do. And, you know, all of these, you know, all of these different factors that have been found have been great

over the last hundred years. But how are they going to be, you know, in the future? I don't know. I mean, I think that for us, it's just not worth it. You know, we just don't see it as particularly being worth it to do it. We're not like super negative on it. People do it. It's fine. But, you know, it didn't really, it didn't get over our bar of just simplicity, broad diversification. You know, another problem with this stuff is that when it doesn't work, that people just tend to exit.

So, you know, it might make a lot of sense. Even if it makes sense in the long term, if your investors are just going to give up the goat on it and be like, oh, gosh, this value stuff has lost money for five years. What are you guys? Crazy? You know, and then they're out and then value comes roaring back over the next three years. Like, you haven't really done your investors as service by, you know, drawing them into that, you know, just knowing that people, you know, generally will flee these types of exposures when they go through a period of multiple years that are bad. So we just felt like, you know, let's keep it simple. there's enough diversification in our portfolio. Let's not assume that there's going to be other people

that we can find to be on the other side of these trades that are, you know, willing or unknowingly losing money. You know, and there's also this risk dimension and fees and so on. So that's where we are. Before I let you go, Victor, I want to get a sense from you as you look back now. I guess, did you say you're 63 now? 64, actually. I might have said 63 in a moment of in a moment of optimism. Yeah. When you look back now on this kind of really amazing journey you've been on that we've described over the last hour and a half or so, like, are you sort of glad you went through those periods of turmoil and it was kind of a really important part of you becoming the person you are today? Or, I mean, are there great benefits to have gone through it? Or could you have

learned those lessons a different way? Or like, what's your perspective on how it's helped you or how it's made the right tougher or what you've just learned from dealing with that kind of adversity along the way. Well, you know, I guess in looking at the past, you know, it's like, well, if I get another run through the whole thing, you know, so much could be different. And right now, you know, I feel very happy with the way my life is, with my relationships, with my children, wife, friends, all of that. And so, you know, I wouldn't want to go back and take another stab at, you know, I wouldn't want to just restart the clock. If I could selectively change things, you know, like I could change one thing but not change

anything else, you know, sure. I mean, I think that I would certainly want, I would have loved it if somebody would give me the missing billionaires book when I was starting off in Wall Street instead of giving me reminiscences of a stock operator, which I didn't really ever figure out the meaning of at all. What do you think it actually would have changed? Like if you really, I mean, would you just not have been optimizing for? for sort of maximizing your wealth, what would you have done differently if you?

Yeah, well, I think the whole LTCM experience would have been different if I just came into it, you know, with a greater appreciation of maximizing expected utility, et cetera. You know, I think that, you know, even if the decisions LTCM made were the same, you know, my decisions would have been different. But I don't know. It doesn't really, you know, it's not at the top of my list for my wishes. Like my, at the top of my list for, for what I wish, you know, what I wish is not like, oh, I wish that LTCM had gone differently. Like, that's not really super high on things that I would want to change. You know, like I would have liked to get, you know, another five, five years with my dad.

Like, that would have been really good, you know, so if I, if the genie comes and was going to give me some stuff, you know, I kind of feel like I'm happy with the way things are now. I feel like I've learned a lot. I don't know if I would have learned the same things from reading a book. you know, probably would have been reading a book and having somebody hit me over the head with the book. You know, it's not just enough. It's not just enough for somebody to hand you the book. They really have to tell you, you know, you better take this to heart. You know, I've, I, I, um, so, uh, yeah, I mean, I think it's been, I'm happy with, uh, with the journey. I kind of hope that I haven't

hurt or disadvantaged too many people over my years. And, uh, yeah. Do you have advice for people dealing with tremendous adversity? Because you saw your father who obviously dealt with adversity, but also in many ways had a very blessed life. You've dealt with adversity, but also have had a very blessed life. Like what, I mean, if you were to share, I don't know if you were spiritual, if you were philosophical, if there was stuff that you learned from your father that helped you get through.

Like, what advice would you share that we can draw on when it's our turn in the going through the ringer? You know, I think there's two places that I go to, two books or two thinkers that I think about in terms of adversity. The first one is the book by Daniel Gilbert called Stumbling on Happiness. I highly recommend everybody to read it. I think it's fantastic. And, you know, the basic thesis there is that we generally get through most things and reset to our kind of normal level of happiness for most things. And it's an excellent book.

And I think that it's stood the test of time well. The other book that I would recommend a much heavier but much more inspiring read is A Man's Search for Meaning by Victor Frankel, where he speaks of the meaning of our search for meaning that we can find meaning in three different ways according to him and his experience. One is by being in a flow state. So he was early to the flow state before Mihail, Chixent Mihail. And I think that's a really good insight. We can also find meaning in loving and giving to other people. But the really unusual insight from the book is that also through suffering, we can find meaning. And, you know, Victor Frankel talks about his own personal experiences with how he dealt with adversity, tremendous adversity and suffering, but found that there was meaning and there was meaning for him in that. And so, you know, I think that's the Victor ankle is really heavy and maybe that's too heavy. Maybe that's too much, you know, that's what

you need to do when you get too much adversity. But for the normal kind of adversity, like losing a lot of your money and a hedge fund kind of adversity, you can just go to Daniel Gilbert for advice on that, which is you're going to get back to your kind of normal level of happiness pretty quickly from something that's, you know, didn't exactly go the way you wanted it to go. Yeah. So anyway, those are the two things that I would think about. But the main one is, you know, time heals all wounds, which is more the Daniel Gilbert perspective. And so true.

Have you found that to be the case? Like, like when you look back, I found, you know, because I went through a sort of brutal period when I was about 40 when the financial crisis happened. I got laid off at Time magazine. And I like kind of, I don't know, it's just, there was also, I mean, I think part of what's difficult is that you have a sense of shame. you know, because I'd been editing the international editions of time and suddenly you're like, oh my God, you know, like I failed and I wasn't really used to failing at stuff. Yeah, yeah. And failing very publicly. And you, you know, as I was reading your story this week, I mean, I think part of what was so difficult was you were failing so publicly,

you guys who had always succeeded. And I was kind of wondering like, I mean, this is something I talked to Bill Miller a lot about after the global financial crisis, you know, the sense of like having to deal with, you know, he was talking about the pain of more than 100 people losing their jobs because of the mistake that he'd made and, you know, losing shareholders money. And I was sort of surprised when I said to him, you know, you know, does it feel less painful now? And he's like, no, the pain's just as alive. And I suspect all these years later, if I asked him again, I think it probably has gone to some degree. So I'm wondering like how, you know, that's, yeah, that's, that's strange. You know, I think that, I think that, I mean, I don't know how you feel. I,

I think it took 10 years. Just two or three, just two or three days ago, I'm in England supporter, having lived there so long, two or three days ago, we had to watch England suffer that defeat. And that night, I was so upset, you know, I felt, I just was so disappointed. I felt bad for, uh, for the players, for the fans, for my, and all of that. And already, you know, like, I'm getting over it really, really fast. And I talked to my son who's a big supporter and he's like, I'm over it already, dad. I'm okay. And, you know, I think that it's, yeah, I think that the Bill Miller story is strange. You know, it's just, it's just strange. You know, I don't think that that that does not seem to be the empirical evidence, you know, and that's why I say, you know, have a read of the Dan Gilbert book.

You know, there's just a lot, there's a lot of evidence that we kind of get that the time heals all wounds. I mean, I can still remember when my father passed away what that felt like. And I have not felt that, I have not felt that for years. You know, he passed away, getting close to 30 years ago and is completely transformed my, how I feel when I think about my father. But, you know, I can remember what it was like, you know, in the first few months after he passed away, even though he was pretty, pretty old and it lived a wonderful life. You know, it was very painful. Yeah. So, yeah, I, yeah, I do think that, as I say, time, time is the, time is the salve for for most things it seems anyway maybe some people are different you know

maybe we're not we're not all wired exactly the same but for most people it does seem like that's the case from what I've from my experience and from what I've read I hope you think in some ways the key is just sort of perseverance that that if you just keep plugging away you know that in some way if you're willing if you're willing to take that that beating sooner or later you know the good times will pass but the bad times will pass as well. And so if you can kind of, as my friend Matt McClannon would say, you know, the key is to survive the dips. Is that sort of in some ways the moral?

I guess so. Yeah. Yeah. I think, you know, just getting that, you know, just getting that longer term vision, you know, of seeing what what your future self is going to be like. For me, you know, whenever something is making me unhappy, I say to him, I get a parking ticket and I'm like, well, as soon as I've paid it, it's going to start driveting. I'm just not going to be upset about this the day after tomorrow. I won't even remember this the day

after tomorrow. And by thinking about myself in two days hence, I can stop worrying about it today because I know where I'm going to be. And I can just put that aside and move my mind onto something else. So, you know, I guess, you know, I don't know that what I'm saying, you know, pertains to the deepest, darkest moments of despair in a person's life. And I think that when we talk about depression and clinical depression. You know, this is a pathology and it's not what I'm talking about. But, you know, for most cases in more normally functioning people, I do think, I hope that's the way that we're mostly built and wired. Yeah. And it's hard to, it's hard to say about other, you know, it's hard to know how other people experience life's ups and downs too. And you said that

you were going to tell us something about your mother and Lucille, who sounds extraordinary. And so before I let you go. Share with us one important lesson from your mother to, because we've heard a lot about your father and she was obviously remarkable too. Yeah. Well, yeah, I think the most remarkable thing about my mother is that she says that these are the happiest years of her life. She's 92 and she says she's happier than she's ever been. And I went online to find out, you know, just how unusual this is. And actually, it's not that unusual that for, people that are getting older, quite, quite old, you know, after 90 years or whatever, late 80s, that for people that are not kind of having an acute and chronic pain and suffering from a

health point of view, which my mom doesn't have, that very often, you know, they do report as being the happiest years of their life. And it's wonderful that that's how my mom feels. When she says it to me, I don't question her. I embrace it and I love it. And yeah, she's having some really good years right now, and I hope they continue. But it's wonderful to see that and to think about aging and potentially replicating that, you know, too, if possible. But yeah, that's something about my own. That's not what I was going to say about my mom earlier, but that's a better thing to say about my mom right now. Yeah, it's a good note, and I was happy to see that one of your kids has actually named

her business after your mother, right? Yeah, yeah. My daughter named her her business that's trying to make a better for you nutritional drink for elderly people. She's named it Lucille after her grandmother. My mom is having this moment of fame as people buy the drink and as my daughter markets. That is wonderful. That's really good. Well, we just provided free advertising for it. And so the Higani tribe fights on another generation will endure and thrive. So it's been a great pleasure chatting to you, which I've really enjoyed it. And it's, I can't believe how long we've been talking, it just has gone by so quickly. It's really been very, very enjoyable. I'm a very verbose man, so, but it's, it's, it's, it's been great. I don't think that's where, I don't think that's

where the fault is. It's over here, but anyway. It's been a real pleasure and, and I hope we'll get to meet in New York or London before too long. It'd be great to, great to see you. Thanks so much. Take, take good care. Thanks for listening to TIP. Follow richer, wiser, happier on your favorite podcast app, and visit the Investorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice. The content is impersonal and does not consider your objectives, financial situation or needs. Investing involves risk, including possible loss of principle, and past performance is not a guarantee of future results.

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