We Study Billionaires - The Investor’s Podcast Network - TIP170: A Bet with Warren Buffett - Guest Ted Seides (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. So today's interview is a fun one because we're talking with our friend Ted Sides. Ted is a graduate of Yale and Harvard University and he comes with multiple decades of experience in finance. For people not familiar with Ted, most might recognize him as the gentleman that took the opposite side of Warren Buffett's bet with the hedge fund industry. In today's episode, we talked to Ted about his friendly wager with Warren and how it came about what the results were and what he thinks about the chances of beating.

Starting point is 00:00:30 the S&P 500 moving forward. Something else that's interesting about Ted is that he has extensive experience working for one of the most famous investors, David Swinson. Swinson has been the chief investment officer for Yale's endowment for decades and has an average return over the past 20 years of 25% annually. At the end of this interview, we talked to Ted about working for Swinson and what his greatest strengths were. We also asked Ted to compare David Swinson to Warren Buffett, who Ted has also become friends

Starting point is 00:00:58 with through the past few years. So without further delay, let's hop to it. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right, everyone, welcome to the show, and we are super pumped to have Ted Sides here with us today. And Ted, thanks so much for taking time out of your busy day to join us. So Stig's got the very first question for you, Ted, and he's going to kick. it off. So it probably doesn't seem to be obvious to most investors that you would bet against

Starting point is 00:01:45 Warren Buffett in the game of investing. But of course, there's a lot more to it than that. Could you tell us the entire story of what led up to your 10-year charitable wager with Warren Buffett, where he was taking the S&P 500 index fund and you were taking five funds of hedge funds? Sure. I guess 10 years ago, a little longer, probably in the 2005 annual meeting, Warren had written about the head rocks and the got rocks. And it was really the concept of helpers in the investment industry taking a toll on the people with the money. And in his meeting, he had made some statement that he didn't think a group of hedge funds could beat the market over time. But a year later, I saw a transcript of one of the Q&As that he had done with a group of college students.

Starting point is 00:02:37 And in it, one of the students had said, I heard you said this, that hedge funds couldn't beat the market. How come no one's taken you up on it? And his response was, well, I guess since no one did, I must have been right. And I was sitting around my office in the summer of, call it, 2007. And for lots of reasons, I'm happy to talk about, it felt to me like that was just a rare time where he said something that I just didn't think was factually correct. So I wrote him a letter. Write an old fashioned guy, an old fashioned letter. I'd heard he is notorious in how he responds to letters,

Starting point is 00:03:15 and he is. So then where did you go from there, Ted? So you got the letter back from Warren. Yeah, this would be fun thing to publish. I don't think I'll ever publish it, but the letter exchange itself is very entertaining because I initially said, hey, I heard you said this. I would propose this group of funds and I'm not sure what stakes that you're proposing for the bet but I would suggest you know a dinner at gorats and then he sent something back that was very short and said well it has to be a lot of money and it has to be collateralized and I went back to him and I said wait a minute you're saying this has to be collateralized but that just introduces helpers to a bet that's not supposed to be about helpers so we went back and forth on that and then it actually even got into things like

Starting point is 00:04:00 well, what's the probability that he won't be around in 10 years because, you know, then we have to think about that and to which I said, yeah, but you have a partner, Charlie Munger, and if you guys are mutually exclusive and how long you'll be around, the odds are very low, that one of you won't be around. So you can just hand it off to him. So there's just long back and forth. And eventually we said, okay, let's just do this. At the time I had, we haven't spoken. We hadn't, it was all written communications. And then, you know, then we started chatting after that, had dinner a few times. And one of the funny things about it was that, he does and has bought companies on, you know, a single sheet of paper as he talks about. But this

Starting point is 00:04:37 charitable handshake bet was like, ended up being like a 25 page legal contract. Wow. Why did it end up being such a huge contract? Well, a couple of reasons. One is that it's just not that easy to make a legal bet. And that was how his attorney found this long bets foundation that allows for this type of thing to be done in a legal way. And then also you have to think about the mechanisms of what can change. So you know the S&P 500 index fund is going to be around for 10 years, but you don't know what happens with a group of, say, fund of funds in this case. And so there were some mechanisms if the fund of funds had gone away

Starting point is 00:05:17 to just make it so that it was planned in advance. So there are a lot of little things like that that came up. why it was 25 pages, I don't remember, but it was long. How long do the process take from the very first letter and until like you signed the papers? You know, our letter correspondence happened very quickly. At the time, I was very surprised. First, I sent him a snail mail letter and then it was email. He doesn't have an email address, which is a funny story in and of itself.

Starting point is 00:05:44 But I would say we went back and forth for a few weeks. And once we agreed to what the terms were going to be, it was probably two months or long of a legal contract. I think the communication started in the summer of 07, and then the bet started January 1 of 08. That's incredible. So talk to us about how things got started. If I remember, right, you were ahead initially, like the first couple years, right? By a lot, right? So, you know, and the premise or my premise of the bet was actually quite different from his. Because you could make the question, like, I must be an idiot, right? Why would you bet against, Warren Buffett on anything that has to do with investing. In general

Starting point is 00:06:26 speaking, that's right. I'm not taking the other side of his trade, which is a totally different situation. But if you looked at history and you looked at valuations and there are all kinds of factors you could point to that would have told you that the process was a good one. We now know, or at least for sure, we'll know in a week and a half that the outcome wasn't the one I had anticipated. But even today, when he talks about the bet as if it's a fade-a-complete that fees would inevitably doom

Starting point is 00:06:58 hedge funds to lose this bet. At the time, he said he only thought he had a 60% chance of winning. That's interesting. And you said that Warren Buffett deemed it to be around 60% probability for him winning the bet. What about you?

Starting point is 00:07:12 I suppose that you had a different number in mind. So how did you gene your own chances of winning the bet? 85% is what we said. Wow. Yeah, that was based on, And you could look at two different things. You could look at hedge funds and you could look at the S&P 500. And they are related, but they are very much apples and oranges.

Starting point is 00:07:31 To that point in time, if you had looked at data, there had never been a 10-year period when the S&P 500 had beaten a portfolio of hedge funds. Not a long history, but 25 or 30 years of history. And then you could look at the history of fund of funds at that time. There had never been a 10-year period before this last 10-year period where hedge funds had underperformed the S&P. I know you can't talk about. about the actual funds that were in the back. Is that correct, Ted? Correct. Now, let me ask you

Starting point is 00:07:58 this, is there a composition of private equity or is it just publicly traded businesses or is it a mix? No, they were all hedge fund of funds. Because hedge funds can cover all kinds of things, as you're alluding to, for the most part, we picked funds that invest more globally than US, but only in long short equity as well. But a big conviction in the bed in the first place was that the S&P 500 was trading at historically high valuation. So hedge fund returns shouldn't necessarily be driven by valuation. But clearly, if you start and if you own stocks with a high valuation, you end up with a low outcome. And to your point earlier, that's what drove this massive outperformance of hedge funds from the S&P in the first year of the bet that carried three.

Starting point is 00:08:48 true to four or five years. Warren has said in his annual letter that, well, this was an average period of performance for stocks, and it was over 10 years. History would never have told you that you would have had an historically average performance starting at a historically high valuation. So what happened after four or five years when Buffett's S&P 500 index fund took the lead? Well, I'm not sure there was a lot of trouble. The hedge fund performance has been weaker than I would have.

Starting point is 00:09:18 thought and weaker than history, but not because the S&P has done so well. So some of that, a big driver of that is the nominal level of interest rates. So cash return or the return on your cash balance is a component of a hedge fund return. It is not a component of the SMP 500 return. And when rates go from, say, 4% at the beginning of the bet to zero, you would expect to have a few 200 basis points of lower nominal return. So that's one big driver. The other big driver, I think, is just a continued increase in competition in the space. A lot of people have asked me if I would take the bet again. And my answer has been no, but it's not because I don't think that the odds are favorable for the same set of reasons for hedge funds. It's that I don't think they're as favorable.

Starting point is 00:10:06 You know, if you would have talked to somebody three, four years after this was put on, you would have been like, oh man, Warren's going to lose big time on this one. And the tide really changed there at about halfway point. You know, I found it funny whenever he originally was talking this, you know, when the bet was initially put on and he was way down, it was a really quick discussion during the shareholders meeting. But after you got close to this 10-year mark, all of a sudden, I mean, it's got a full write-up in the shareholders letter that sent out.

Starting point is 00:10:35 I mean, a lot of time spent. I think that's a coincidence? Well, I'll say something that was kind of interesting. In the second or third year of the bet, Warren had gone through a period of time. I think it was a five-year period that was like the first five-year period that Berkshire had underperformed the S&P. And he had a quote in one of his annual letters that talked about how the starting or ending valuation, even for as long as a period of 10 years, can dramatically influence

Starting point is 00:11:07 the relative results. I used to put that in a presentation that was his concession speech for the bet. Yeah. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future.

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Starting point is 00:15:23 Back to the show. You know, the thing that I think that this has had a huge impact, because I mean, you can't talk to anybody that's a value investor that doesn't know. about this bet. And I think one of the things that we've seen is that the bet has really kind of poured more into the ETF side of things. And you know, you're buying an ETF today. It's just total mindlessness. And I think for the typical investor, ETFs are a great vehicle for them. But I think for if you're a hardcore value investor and you're out there looking for picks that are way undervalued, I think it's kind of created a little bit of an opportunity

Starting point is 00:15:56 because so many people reference this bet is, hey, you're not going to go out. out there and find an individual pick that's undervalued. And that's just my personal opinion, I don't necessarily know that I agree with that. Well, I'm curious to hear your thoughts, Ted. Well, I think you have to separate ETFs from index funds in that context. I think that's right about index funds. And Michael Mobeson talks about this,

Starting point is 00:16:18 that the more money that was naive money that's moved into index funds has left the rest of the players in the game smarter in general, on average, he calls it the paradox of skill. So the relative competition in markets is higher because so much of the capital that moves into index funds was the money that the smart money was picking off in theory before. We asked our audience if they had a question for you. We have a lot of hardcore value investors out there. So obviously we got a ton of responses. And one of our true of followers by on clock, he's asking you specifically, why did you pick fund of funds?

Starting point is 00:16:57 He's saying that you get double the fees. It would be harder to be the market that way. why did you select this approach? What were you thought process about that? Sure. Well, there are two reasons why. One is just logistical, which is if you're making a bet like this,

Starting point is 00:17:11 the chances of any particular hedge fund lasting 10 years is much lower than the chances of a fund of funds lasting for 10 years. So to do something like this where you'd have to turn over the portfolio a lot was just going to be very challenging. But the real reason I actually initiated it, tempting him with fund of funds.

Starting point is 00:17:33 If fund of funds outperform the S&P, there's no chance that you could come up with an excuse of why hedge funds didn't have value in the marketplace. So a little ego got into this. I wouldn't call it ego as much as it was. He made a statement. I thought in his statement that he had picked the wrong benchmark. Yeah. So if you had appropriately measured head.

Starting point is 00:18:00 hedge fund against its relevant market exposures and had an apples to apples comparison. And on one side, you had a lot of fees. And on the other side, you don't, you would expect to lose and you would never make that bet. But that's not what the bet was, right? The bet had all kinds of implicit underlying biases. There were biases of the U.S. versus global markets. There's a bias of large cap versus small cap, all of which most of the time would matter more than the layer of fees. In this particular period, large cap U.S. ended up being the place to be in global markets. And so that was as much of a driver as losing the bet, if not more, than the fees itself. Now, I think what's really important for people to think about is the time horizon and

Starting point is 00:18:45 like maybe if you would slide the time horizon to the left or the right, you might get completely different results here. Or if the Fed wouldn't have eased for so incredibly long, you might have seen some different results here. And, you know, for people that are making decisions that are completely based off of one data point, which is this bet, I think you just got to be careful. You've got to think a little bit deeper than that and maybe not be so judgmental after just one example. But I'll give you a fun anecdote to that point. Through this nine years where, you know, the hedge fund side of the bet was lambasted for every reason you could imagine in the press, if you had just switched the benchmark from the S&P 500 to the Morgan Stanley World Index,

Starting point is 00:19:25 which is probably a closer representation to the types of securities the hedge funds were buying and selling, they were almost exactly the same performance. Wow. So just that shift of S&P to global markets, of which S&P is, I don't know, I think the number is about 40% of that global index, just that shift itself would have completely changed the way people thought about the bet. That's pretty interesting. stuff. So you've worked in finance for years. Talk to us about some of your investing experience

Starting point is 00:19:54 that you would classify as a highlight, and then also talk to us about what you would consider a huge setback, the balance between those two. You know, one of my favorite early highlights in 1994, I was managing Yale's bomb portfolio. And to go back in history, that was a year really through the early 1995 where the Fed hiked interest rates, I don't remember the number of times, it was six, seven, eight times. Fed funds went from three percent to six percent in that period of time, and bond funds blew up left and right. I was managing a, call it an index, not quite an index tracking, but it's sort of an index plus portfolio. And it had top decile performance in that year. It also coincided with the very first time I was in front of Yale's investment committee.

Starting point is 00:20:43 and I was sitting and about to give my first important presentation in my career to a bunch of investment luminaries, one of whom was Charlie Ellis. And Charlie, in his attempt to praise us and me for that performance, gave me this complete softball question. Effectively, do you realize how great this is to be top desicile, you know, just being disciplined and doing simple stuff? and I had practiced my two and a half minute presentation so many times in my head. I was 24 years old at the time that I didn't even hear his question. And I completely fumbled that and it turned into this great laughter. So it was sort of a great investment success and then a great failure at the same time.

Starting point is 00:21:26 If I think about mistakes, I would characterize, rather than just one, there are so many that you make. I would characterize them in a few different ways. One is there's a repeated pattern investing in funds of exiting after managers have weak periods of performance. And that happens despite the awareness of performance chasing. And I had spent a lot of time with my team in the years of protege looking at the data and then trying to assess why is this happening. And what you would find is that similar to investing in a stock, when we invested in a manager, we would create qualitative hypothesis, we would lay out risks to try to keep us on track and away from numbers. And what would happen would be that when a manager went through a soft spot of performance,

Starting point is 00:22:19 you would look at the risks and say, aha, we knew that this was risky because of these reasons, therefore the manager isn't as good as we thought and we would exit. You would never have a period of time where manager had excess good performance, and you would look at your hypothesis and say, aha, we were right, therefore we might run across these risks and we should exit. I would say there were a lot of decisions where you end up exiting at the wrong time. And then there were lots of, I mean, I remember so many areas of omission, of things where you were looking at or you had a belief about risks in the markets and didn't take enough

Starting point is 00:22:57 action. And then the manager of manager's business, you really have to be looking out a year, year and a half at a time to be able to take action. Interesting. So, Ted, we're really happy that you want to call on the show because we haven't talked too much about heads funds on the show. And it seems like it has really gained a lot of popularity. I think the numbers have found set around 2,000 heads funds in 2002

Starting point is 00:23:21 and now more than 10,000. And even though it seems like the title's turned over the past few years, still a lot more popular type of vehicle that we've seen in the past. what do you think is the main reason for this and who do you think that hedge funds really appeals to? And you can't say Warren Buffett. Well, let me start by giving a little pitch

Starting point is 00:23:43 for my own podcast, Capital Allocators, because my very first exposure to podcasting, I was a guest on Patrick O'Shaughnessy's Invest Like the Best. And we did a deep dive on hedge funds. And for a whole bunch of reasons, I'm putting that episode on my feed next week. Awesome. And that's an hour discussion of basically,

Starting point is 00:24:01 past, present, and future of hedge funds. So to that specific question, the number of hedge funds doesn't matter. It's a highly concentrated industry. It's only getting more concentrated. And so when people think about the impact of hedge funds on the market, the returns of hedge funds, the experience of investors in hedge funds, you're really only talking about a few hundred large hedge funds. But the reason there are so many, at least historically, it was the compensation structure so lucrative. So let's say you know someone from college who was a very diligent, hardworking C-minus student. And they didn't have a rich uncle, but they had a best friend whose cousin's brother's sister had a rich uncle. And the rich uncle decided to give them $15 or $20 million to play around

Starting point is 00:24:47 with because they had a nice smile. Right. So this C-minus student probably doesn't have huge earnings potential. But now they have a hedge fund and they're managing $20 million. Well, the typical management fee on that is $300,000. That person probably can't find another job that's going to pay them $300,000. So that counts as one of your $10,000 hedge funds, but in any professional investor is not really going to take that fund seriously. And that probably constitutes well over half of the $10,000. When you have your own filter and it's based on experience of success, there are many, many funds that you would screen out because you just don't think they can compete with the others that you choose to entrust your capital with. I do think the popularity came about for two reasons. One, from the individual perspective, you have intellectual flexibility,

Starting point is 00:25:46 you have more arrows in your quiver to go long and short. From an institutional perspective, you had this period of time from 2000 to 2002 where hedge funds had a trade on, particularly long short, which was mostly long, small value and short high flying growth. Hedge funds and mass made very good money when the public equity markets did not. So people that are listening to this, if you want to listen to the discussion that Ted's talking about with Patrick, we'll have a link to that in our show notes so you can listen to that. So Ted, I'm curious, you know, who's an investor out there that you really admire and more importantly why? There's no one I admire more than my first boss David Swenson at Yale. And it's for a whole bunch of reasons. The primary reason is who he is

Starting point is 00:26:35 as a person. Legend, absolute legend. He wasn't the legend when I worked at him. He became a legend after he wrote his book in 2000. So that was a few years after I had left. He's an original thinker. In the early 90s, or mid-90s, short-term interest rates were five or six percent. In the modern hedge fund era, we have not seen short-term rates at that level. What that means is that if the fee structure is, let's call it a one and a half and 20, if you were to go long the S&P 500 and short the S&P 500, you would get a short rebate on your cash and you'd be up about three and a half or four percent. Why should an investor pay an incentive fee for no value add? So in the mid-90s, Yale used to impose cost of capital hurdles on their hedge fund then. And because,

Starting point is 00:27:23 they created those fee structures with managers that today may be very, very well-known successful managers, but they were an early investor. They still have those structures in place. And as opposed to other people who talk about wanting more favorable fee structures, but aren't disciplined enough to impose it, Yale would walk away from funds they thought were fabulous that didn't have the fee structure they wanted. Talk to us more about this fee structure and development. The reason why I ask is that you'd been in this game for a long time and really been following. following the different investment funds and how that has changed. And now over the past decade or even two, we've seen this giant inflowing ETFs.

Starting point is 00:28:02 Where do you see this fee structure go for each of them? And is it really a race to the bottom? And how do you really, I guess, distinguish yourself with the higher quality? Great question. It absolutely is a race to the bottom. And it should be. The way I've always viewed it is any time you look at the Forbes 400 and all of a sudden that's dominated by one industry.

Starting point is 00:28:23 Sometime in the next 10 years, there are problems in that industry. So that was the case with hedge funds 10 years ago. That is the case with technology today. And it's not that hedge funds are going away or that technology is going away, but something will happen that we can't anticipate. So the hedge fund compensation structure got created at a time where hedge funds were a boutique industry and had all kinds of opportunities to extract value from the market.

Starting point is 00:28:51 when the market was really dominated by, I wouldn't say index funds, but long-only vehicles that mostly replicated the index. So there were a lot of inefficiencies. As the years have gone on, those efficiencies get arbitraged away. The opportunities to extract value are harder and harder. And as a result of that, the fees inevitably will come down. I don't think the hedge fund vehicle, which is really nothing more than an investment structure that has brought flexibility than call it the traditional vehicles. That isn't and won't go away nor should it, but the fees will change and come down. What's happened with the explosion of ETFs is it's changed the definition and understanding of what value added is. So even 10 years ago, at the beginning

Starting point is 00:29:41 of the bet that I made with Warren, if you didn't pick an index fund and you wanted to express different kind of views in the market from just a portfolio of stocks, you had to pick a hedge fund. You had to buy the whole pizza. So the whole explosion of factors, which have been around for a long time, I mean, I didn't quite understand what was happening with factors when it happened and why it mattered, because when I worked at Yale, Yale's long only U.S. equity portfolio, they chose it to always be systematically long, small cap, and value. but when you took factors and then turned them into low-cost product, then you have to look at

Starting point is 00:30:21 what is really value added. Is it just outperforming the market or is it outperforming a factor? So, Ted, I want to talk more about David Swenson because, you know, we read about David in the way that he manages Yale's endowment, but I'm curious for a person who actually worked right alongside of him, what would you say are his top three gifts, if you will, when you think of the way he analyzes the markets or the way that he assesses taking positions. There are probably no different than any other investor in stock. So his top three gifts are he has an analytical advantage over everyone else. He is just smarter and thinks about the world better and more clearly than everyone else.

Starting point is 00:31:07 The second is he has an incredible behavioral temperament for investing. he is a contrarian and has no problem buying in when others don't. The greatest example of that is he took the helm in 1985 at Yale. He was 31 years old. He had a few views that hadn't fully evolved, but one of them had to do with disciplined rebalancing. Two years later, he's 33. October 87 comes and the market crashes.

Starting point is 00:31:36 And he goes to the committee and he says, this is when we buy. Incredible. So not many people can do that. that in practice. And the third is that he has created an ecosystem around him. He's gifted at communicating. That includes what creates the governance structure. So he's gifted at communicating with his board. He's gifted at communicating with alumni. He's gifted at communicating with his team and teaching his principles is why he was able to write such a fantastic book. And you put that

Starting point is 00:32:07 together. There just aren't that many people. So to your first point about him being just analytically smarter than almost anyone you come in contact with. I know some of that's genetics, but do you think a lot of it is also that he just reads like crazy? Not for him. I mean, he does read, but he's not Warren Buffett that sits around reading books,

Starting point is 00:32:26 reading all day every day. So when I was stupid in 27, and I had worked there for five years, I kind of implicitly knew that I was working with someone who always had the answer key. So you're in college and you take a test, and there's an answer key. And you get it right or wrong, and then you look at the answers

Starting point is 00:32:46 and you say, oh, okay, I made this mistake. And over a number of years, you start to figure out the answers to those questions on that test. When I was 27 and left, what I didn't realize was the test changes every couple of years.

Starting point is 00:33:02 But David is someone who always has the answer key. He just figures it out independently on his own. He's just a brilliant thinker. I've been fortunate to have, you know, many conversations and dinners with Warren. And he can tell you a story about anything, about sports, about politics. And the way he describes it, you just nod your head.

Starting point is 00:33:24 It's just he oozes wisdom. Seth Klarman is the same way. Seth and David Swenson were very close way back when, even before Seth took any outside money. So I had a chance to meet him then. And yeah, I get a chance to see him every now and then. So here's the next question I got for you. Warren Buffett, David Swinson, and Seth Claremont, walk into a bar. Who's the smartest?

Starting point is 00:33:47 Well, look, I mean, that's not. I don't think you can answer that question. So when you think of those three guys, what really stands out when you think Warren Buffett, like a one-word response, what really stands out for each one of them? I think it's the same things I talked about with David. There are three components. One is they just, they are that smart. analytical edge is how we think about it in investing. The second is they have incredible temperament for this work.

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Starting point is 00:37:47 All right. Back to the show. Do you find Swinson more similar to Buffett or to Munger, where Munger is like an expert in anything, like anything you can talk about Munger can talk? where Warren's more focused on the investing side. What would you say Swinson's like? He's in the middle. Huh.

Starting point is 00:38:04 I mean, I think certainly in the investment realm, but it's different. So David will have opinions about certain types of companies and industries, but he's never been a stock picker. So he won't know the intimate details of companies and the history of businesses the way that Warren, where Charlie probably would, is pristine and is probably closer to more. monger, but he's not as ordinary as Charlie. Well, let me ask you this.

Starting point is 00:38:31 Since you've had a couple engagements with Warren, what do you find different on those one-on-one engagements with Warren than what the public typically sees go into like a shareholders meeting? His breadth. It was actually with Patrick and Brent Beshore, I brought them out. We spent 45 minutes talking about college football. Yeah. And Warren could have been a color commentator for Nebraska football.

Starting point is 00:38:56 And it was, he starts telling, you know, I'll give you an example. It's just a super fun story. He started telling a story because Patrick went to Notre Dame about, this is a few years ago, there was a big Notre Dame Nebraska game coming up. And he knew the coach at Notre Dame. And so he had heard that one of the star Notre Dame players, I don't remember who it was, was sort of a budding investor and really curious about investor. So he calls the kid up in his dorm room.

Starting point is 00:39:24 He says, oh, it's Warren Buffett. can I talk to whoever it was? And it doesn't really, first he thinks his friends are playing a joke. And they realize it's Warren Buffett. And he says, look, I've heard really interesting investing. I'd love to help you out. I want to give you my two favorite stock picks. And the kids all, this is, you know, this is the week before the Nebraska game.

Starting point is 00:39:41 And it's like, great. And he says, sure, just send me the playbook. Oh, my God. And he's so full of, so you think about a story like that. So sports talking about education. systems, to politics, to, you name it, he is just so clever and funny. And I think that's, it's the same persona that people see. But I think when you're with them one-on-one, you realize how earnest it is.

Starting point is 00:40:10 That's incredible. Thank you so much for sharing some of those stories because I know, I mean, Stig and I are eating those up. And I'm sure some of the audience are curious to hear some of this stuff. Ted, awesome, awesome discussion. We really enjoyed having you on the show. So please tell people where they can learn more about you. Tell people about your podcast so they can listen to some more of your discussions.

Starting point is 00:40:30 Sure. Well, I've tried to encapsulate the professional part of my life in one place. And that's at a website called Capital Allocators Podcast.com. It also has the feed for all the podcast. The podcast is called Capital Allocators, and it's available at iTunes and everywhere else you can find it. And that's really focused. It's a certain type of investment podcast.

Starting point is 00:40:50 There's a lot of CIOs of large pools of capital and in and around the ecosystem of people who allocate capital. So it's been a lot of fun. I've been doing about eight months and there's plenty of hours for people to go back and listen to if they want. Fantastic. I got one final question for you. Are you going to the Berkshire meeting this year? I need to get my face reamed in one more time. So, yeah, I certainly will be going in May.

Starting point is 00:41:15 And I've really enjoyed it. I've gone a lot over many years. so I'll be there. Well, you know, we take our community out there and hopefully we'll be able to link up with you at some point over the weekend because I'm sure a lot of our listeners would like to meet you. So people listening to this, if you're going to the Berkshire meeting with us this May in 2018,

Starting point is 00:41:34 you'll get to meet Ted and here's some more of these awesome conversations. So Ted, thank you so much for taking time out of your busy day to join us today. Thanks, Preston. Thanks, thank you. All right, so this is the point in the show where we play a question from the audience. And this question comes from James. Hi, stick in Preston. You guys are definitely geniuses and thanks so much for the material. I'm James and have a question and it's not about the markets. I have two children, one son is 16 and my daughter is 10. Both show some interest in money and my son gets hooked when I try to explain economics to him.

Starting point is 00:42:11 My question to you guys is, if you have kids at those ages, how would you nurture them so one day they'll they can share on their own. Are there books for kids, everyday game, habits, tasks with rewards that will benefit them? Thank you so much. James, I love this question. And I promise you, Stig and I are so far from being geniuses. We are not even close, my friend. We're there learning with everybody else.

Starting point is 00:42:43 You know, the thing I would tell you that is really, really important in my personal opinion is so many people look at the stock market in particular, and they think that they're going to make a ton of money in the stock market, and they're going to become rich that way by being some stock market genius. And what I would tell you is to not focus in that area and try to develop that thinking. What I think you need to develop in the kids, if they're interested in money and how finance works and that kind of stuff, is you've got to really teach them to want to own their own business and create their own product or service

Starting point is 00:43:16 and to own that equity. That is what's really, really important. Whenever I think through the investing equation, I always think of it like this. I can create my own equity through a product or service that I create to add value to society. Once I make that money,

Starting point is 00:43:34 I can either reinvest that money into this business or service that I've created, or I can then take that money if I don't have any good ideas on how to grow that business, then what I do is I take that money, is I take that money and I invest it non-operational. When I invest it non-operational, that's the stock market. So that's where my money goes where I don't have any good ideas that I can do on a

Starting point is 00:43:55 micro level. And so I would tell you, have them get out there, start trying to think of how they can create a product or service around something that they love to do because that's where they're really going to add a lot of value to themselves and they're going to build this base of capital that's really, really hard to do anywhere else on the passive investing side. Because think about it. The market has huge multiples. That means you're going to get low returns when you employ your capital into publicly traded businesses. You go into the private equity space and you get much better multiples, but it takes a lot of money to buy a business in the private equity side. So you really got to kind of start something from the ground up. And so whatever you can do to try to develop the

Starting point is 00:44:39 entrepreneurial spirit, that's what I would focus on with your kids and kind of explain to them why that's important is because, man, when you're working for yourself and you're building equity for yourself, there's nothing else like that. But when you're going out and you're getting paid, say you're working for somebody else and they're paying you 50K a year, you're building 100% of the equity for somebody else. And that makes a big difference in the long run. Yeah, I really like your approach about setting out a business. And one thing I would like to add, is I think it teaches the children one of the most valuable thing in life. That's how to deal with rejections.

Starting point is 00:45:18 If you try to set up your business, a lot of people would just say no. And in a way, it's probably easier for kids to deal with that than for a lot of self-conscious adults because they're used to getting those all the time from their parents typically. And I think it's such a valuable thing to, I wouldn't say immune. I don't know if that is healthy, but definitely being able to roll with the punches whenever it comes to dealing with rejections. And I also think that setting of a business will give you the respect for money. It's really, really hard to teach.

Starting point is 00:45:56 It's something that I think life is the only thing that can teach you. I also think that if your children don't want to go in that direction and it's more like the job with the pros and cons that it has, I would like to highlight something like delivering newspapers. It's not only because it is the most common denominator for jobs that billionaires used to have, which is actually a fun stat in itself. But I think it teaches them a lot about being paid by a newspaper. Like, you're not paid by the hour. You pay it up how efficient you are. And I really like that. And I think that's a good thing to give to the next generation in a very competitive environment.

Starting point is 00:46:36 You know, you deliver newspapers. That's hard work. It's teaching you the value of, like, just grit and hard work. You know, it's hard to find a lot of good, at least for me, it's hard to find a lot of good resources for children that you ask for. But there are actually this one side. It's called Juan Buffett's Secret Millionaires Club. We were linked to this in the show note, but this is something that he endorsed, he'd been on the show multiple times. And it's a series of 26 online short web episodes. The teacher. just children about money. So I think that might be a place to start if I needed to give a hand

Starting point is 00:47:10 off to a resource. All right, James. So we really appreciate this question. And thank you so much for the kind comment. For recording your question and go into Asktheinvestors.com and recording your question there, we're going to give you a free subscription to our online course about the intrinsic value in calculating the intrinsic value of a course. We have 18 lessons there that Stig and I have prepared. And this is on the TIP Academy page on our website. site. And we just want to give that to you to say thanks. And we really appreciate everything you do and being active in our community. So thanks for the fantastic question. That was all the press that I had for this week's episode of The Investors Podcast.

Starting point is 00:47:47 We see each other again next week. Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to Asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is

Starting point is 00:48:12 copyrighted by the TIP network. Written permission must be granted before syndication or rebroadcasting.

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