We Study Billionaires - The Investor’s Podcast Network - TIP265: Mark Yusko - The Endowment Model of Investing (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we have an incredible guest that's a household name for anybody in finance, and that's Mr. Mark Yusko. Mark has an incredible background managing the endowments of the University of North Carolina and Notre Dame. And as you'll learn in the episode, he had quite the track record while managing such huge sums of money for those universities. Additionally, Mark has founded and run his own firm for the past 15 years. That's Morgan Creek Capital Management, where he still manages billions of dollars. for other clients. And so without further delay, here's our interview with the thoughtful

Starting point is 00:00:34 Mark Yusko. 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. Hey, everyone, welcome to the Investors podcast. I'm your host, Preston Pish, and as always, I'm accompanied by my co-host, Stig Broderson. And like we said in the introduction, We have Mr. Mark Yusko with us today. And Mark, let me start by saying, why did we wait so long to do this discussion?

Starting point is 00:01:17 I've been following your Twitter for years at this point. And we talk on Twitter from time to time. And I'm just excited that we're finally doing this. And all I can say is thanks for making time and coming on the show today. I have been following you as well. And I am really excited about the conversation tonight. So, Mark, I want to start off just where are you? started in the investment world because, I mean, you have this incredible story of, you started off

Starting point is 00:01:46 at Notre Dame, right? And you're there as the senior investment director. But then you transitioned over to North Carolina. And this is when North Carolina was at the 84th percentile for the management of their endowment, right? Wow, you're good. And you have all the stats. That's impressive. And so, well, this is, this is really impressive stuff. And I want people to, to hear this because I've never heard an interview where anyone has ever said this. And so I've done a little homework. I've dug into some of your background. And so this endowment started off at the 84th percentile in North Carolina when you showed up and you showed up there in 1998. And within the, what was it, you were the top five percentile of endowments in that short period of time that you were there. And you

Starting point is 00:02:35 You were the guy in charge. You were the head guy running the endowment at North Carolina. This is crazy. So I guess my first question for you is that just does not happen by chance to step into an organization and then to be able to turn around the track record and that speed. So my first question for you is, who are you learning from? Because you just don't get that good. So what were you learning?

Starting point is 00:02:59 And I would assume that this was all picked up whenever you were there at Notre Dame. It's such a great question. not where I thought you were going to go at all. And I love the insight of the question. You know, it's interesting. I'll back up just a little bit to go forward in the sense that, you know, I say my life is a series of happy accidents. You know, I didn't go to school to study business and investing. I actually went to school to be an architect. That only lasted one semester. I didn't love it. Then I did engineering for three semesters because that's what dad wanted me to do. I didn't love that either. So I had a girlfriend at the time, she said, why don't you do what you want to do?

Starting point is 00:03:33 novel concept. Okay, so I really like biology and chemistry, really thought I wanted to be a doctor. And what's interesting is I look back now, and that biology and chemistry training, I actually think is the perfect training to be an investor, particularly a value investor. And that theme of value will go through this whole time we're together. And so, you know, I graduated, I decided not to go to med school. Back then, you know, I'm an old guy, so back then you could still go to business school right out of undergrad because it's like they try to trap you into the PhD program. Took one class with Gene Phama, said, that's not happening. So I just studied and got my MBA. Took the first job offered, went to work for an insurance company. If I was a resume inflator,

Starting point is 00:04:21 I'd say I was an M&A analyst. I'm not a resume inflator, so I was a business analyst. I did spreadsheets because there were no such thing as spreadsheets before I started. And then Lotus 1,2, three came along. The first happy accident was the guy who was doing investments retired. And my boss said, hey, why don't you take over the portfolio? And it was pretty simple portfolio. It was fixed income. And so I learned bonds. And then I got a call to go work for an equity firm. I worked for this firm called Disciplined Investment Advisors. And the great thing about that, it was a value equity shop, one of the first quantitative shops, two professors out of Northwestern, and they basically taught me the meaning of value. And they taught me about quantitative investing. And they taught me about this

Starting point is 00:05:02 process of, they had a coffee mug. And it said, invest without emotion. And it was really all about focusing on making decisions based on processes and valuation, rather than how you feel about something or get excited about something. And to your point, I learned from a couple of things. I learned one from a firm called Cambridge Associates. So Cambridge Associates was our consultant. They had these great white papers on every topic you can imagine under the sun, and I just devoured them. They also had an annual gathering once a year, and they'd get all the chief investment officers together and the head of the Harvard endowment, Jack Meyer. He kind of took me under his wing and really taught me a lot about investing. And Scott and I were, you know, we're a year apart. And so we were

Starting point is 00:05:47 learning this together and we're this great leader at the top of the endowment, Bob Wilmuth. And he basically said, all right, guys, you're two young guys. You want to, you know, bring us into the age of endowment investing in this Cambridge model or this endowment model. Go for it. And so we really dove in and we visited with the guys at Stanford and they taught us about venture capital. We visited with the guys at Harvard and Yale and they taught us about hedge funds and, you know, more esoteric strategies. So, So that's when I got my first kind of exposure to, again, a concept we'll probably talk a lot about today, which is innovation as an asset class. So as much as I'm a value guy at heart,

Starting point is 00:06:28 I learned very quickly that the biggest returns and what really separated the best endowments, the Yale's, the Prinsons, the Stanfords, the Harvards from everybody else was they had these big portfolios of innovation and venture capital. So recruiter called, phone rang, said there's a job in North Carolina. To your original question, the key about North Carolina was they were in the 84th percentile. They were one of the worst performing endowments in the country. It was white paper, right? It was a great opportunity to go in there and take all the things that I had learned, you know, going around with the best endowments in the world and help them. I came in and I said, all right, we're going to have a process. We're going to have discipline. We're going to have this

Starting point is 00:07:09 value bias. We're going to focus on innovation. We're going to put some hedging into the portfolio. And there are a lot of interesting things along that process, but it was the basketball analogy. You know, the first year, everything we did was a reverse tomahawk slam. You know, we looked like Michael Jordan. We didn't even have to do anything hard to look really good. It was about putting in process, about having a discipline of rebalancing, about focusing on buying what went on sale, selling what was expensive. So we just did a little bit better with process. Second year had to take layup still pretty easy. Maybe we hired some really good managers. Maybe we started to do a little bit more esoteric strategies beyond just the basics.

Starting point is 00:07:53 Third year had to take a free throw. And that third year, it's interesting, that was the year, you remember back when Y2K was coming along and everybody was worried that Y2K was going to shut down the world. And the Fed was worried about it. And the Fed put half a trillion. back when half a trillion was a lot of money. I think they've done that in the last couple of weeks in the repo market. But half a trillion dollars was a really big deal. And the markets went crazy up in the fourth quarter of 99. And it just didn't feel right to me. And so we start talking to our venture capitalists and we started talking to some of the stuff that was going on and we got to start getting these distributions, these investments we'd made a couple years ago. And what was

Starting point is 00:08:38 interesting is we had this one investment. It was a company called Art Technology Group. And all they did is help companies change their name to dot com. That's it. Nothing special. But this company had gone public and it went public. We went in at 50 cents and gone public at four or five dollars and had run to $104. This was better than beyond meat. I mean, this thing was unbelievable. And they distributed the stock. The venture capitalists distributed the stock. It's a venture fund up in Boston. And I called up and I said, hey, Bob, what should I do? He says, well, I'm an insider, so I can't really say anything. But I can say two things. Revenues of six million, market cap, six billion. And there was silence. And he said, Mark, are you there? I'm like, yeah, yeah, I got to go. I got to go. So, so, so, so. And we saw. We soul. Now, here's the funny part, right? The stock went down to four. So it went down 96%. Now, think, at four, it still would have been an eight-bagger, which is still a pretty good outcome. But we ended up making 200 times our money, which was really good. And again, it goes to this

Starting point is 00:09:54 discipline of saying, something doesn't feel right, something doesn't look right. Let's take action. Let's rebalance. Let's take our profits and not get greedy. So fourth year, had to start taking jump shots, starting to get a little harder to add value. And that was 2001. If remember 2001, things are starting to get ugly, right? We had the recession that nobody knew about. Markets are starting to fall. They were down double digits by the end of the year. And about, I guess, nine or 12 months earlier, I'd had a really funny experience where I went into the board meeting and I said, all right, guys, yeah, we've made lots of money in 99, 2000, the first quarter. So let's buy some hedge funds. You know, we've got these good relationships.

Starting point is 00:10:36 Julian Robertson is a grad of UNC, and he'll let us have a big position in his fund, and we can add some of these other guys, and the chancellor says, well, Mark, that's going to be a problem. Because the board banned hedge funds. What do you mean they banned them? And they had voted to ban them because they read an article in 1996 called The Fall, The Wizard, that Julian had lost his touch, because he was down 9% when the market was up, and they thought hedge funds were bad. That's where all the bad guys were. What was interesting about it is they said, all right, fine. We don't have any hedge funds. We'll have long short equity, enhanced fixed income. Believe it or not, we went to 60, 60% in hedged funds. I was at to add the D at the end, so they actually hedged.

Starting point is 00:11:18 2000 to 2002, the whole market was down about 50-something percent when we were flat. So that movement of such a big portion of our assets into hedged strategies is really the thing that propelled us to the top of the league tables. And it was that discipline of saying that, you know, something doesn't feel right. And I'll give you an example. So when we first recommended putting money into hedge funds back in 2000, so a year before they owe one period, my board chair says, what are you talking about? Why would we take money away from our best performing funds? I said, well, because they've gone up a lot. And we're way overweight long only. And our policy says we should rebalance. And they're like, no, no, no, these are our best managers. We should press the bet. And I said, well, yeah,

Starting point is 00:12:06 but discipline usually makes sense. And just, again, something didn't feel right. Look, it took a whole year before we got to 2001 where things started to really get ugly, but they did. So, Mark, I love talking about these historical points in time. Well, you had this intuition what was happening, and you were processing so much information at the time. You know, I really love this story about the $6 million. revenue company valued at $6 billion. But was it conversations like that that make your skin tingle or was it more systematic, quantitative facts like in a very deal curve or similar, that really made you take a different position in the market than most people?

Starting point is 00:12:48 Again, such a great question. And I love the word intuition, too, because Michael Steinhardt talks about this. He says, you know, intuition is just the supercomputer in your brain that's always on and processing all that information. And you're, Absolutely right. There were lots of macro indicators, right? We had the inversion of the yield curve. We had the first quarter, 01, things kind of turned negative. But that was ex post, the intuitive feeling of 2000 itself. So kind of first quarter 2000. And it's interesting, you know, we didn't have the inverted yield curve yet. We really weren't seeing much slowdown. It really had to do more with valuation. We were reaching valuation peaks, which we'd never seen before. Worse,

Starting point is 00:13:31 in 1929. And there were other things that were happening. As I said, there was the reversal of all that liquidity in the fourth quarter of 99. They were sucking that back out in the first quarter. So you saw a little bit of quantitative data on liquidity. And I'm a big believer that liquidity drives markets. That's one of the things we should all really focus on. And I sat in Julie Robertson's office and listened to him tell me why he was in the highest cash level. he had ever had. Or I, you know, we did a conference call with Paul Tudor Jones, and he talked about why he was raising, you know, his cash levels. Or, you know, you talk to a venture capitalist out in Silicon Valley, I'll give you another one. So we went out to Silicon Valley. And it's probably January,

Starting point is 00:14:17 February of 2000. I met with 40 venture capital funds. And I asked them all different questions, but I asked them all one similar question. I said, what is it that makes venture great? and only two, only two firms out of 40 said, oh, it's the entrepreneurs. Every other one said, oh, it's us. It's us venture capitalist. And only benchmark in Sequoia, who are two of the greatest of all time, said, oh, it's definitely the entrepreneurs. And that arrogance and that ego was just so, in fact, there was another one. There was a better one. I had gone on record, again, anecdotally saying that I just didn't think, that a billion dollars raised for a venture fund made sense. And mostly great venture funds were

Starting point is 00:15:07 100 million, 200 million. And a billion just seemed like a lot. So this venture capitalist comes out to North Carolina, we're having dinner. And he says, you know, Mark, I'm so sick of hearing you talk about, you know, a billion dollars is too much. You know, we're not raising a billion. I said, John, 960 million is a billion. Okay. So that's the first problem. And then he says, but look, I've done the math. And at 800 million, I make more off management fees than I do off carry. And I looked at my partner. I said, did he just say that out loud? Then believe it or not, he says, and look, let's face it, this is a game of enriching the general partner, not the limited partner. And I just went, oh, m. Now, if you go to Silicon Valley and you meet with this

Starting point is 00:15:48 particular firm, they'll say they threw me out of their fund. I actually know the real story. But the funny part, I'll tell a not so nice story of myself. I might have done a little happy dance, only a little one, only a little one, when they lost 85% of their client's money. Because it was just ridiculous. And I feel badly for those clients, but I feel badly that people gave this guy money, given how arrogant he was. So here's the thing. Today, I feel some of these same feelings.

Starting point is 00:16:17 Yeah. The arrogance, the abuse, the expenditures, the funky deals, the valuations, you know, the vision fund numbers. I mean, it feels very similar. 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've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every

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Starting point is 00:20:38 Back to the show. So, Mark, you talk about the endowment model. We never talked about this before here on the show. Could you please explain what it is and then maybe later we can go into some of the finer details of it? It's a value-oriented strategy. So you to buy things with a margin of safety. So kind of Seth Clarmine-esque at Bowpost. It has to do with a very disciplined approach to an investment policy. So again, David talks about this

Starting point is 00:21:07 in his book and I've talked about it in different ways over the years is that there's nothing wrong inherently with market timing. People don't like it, but there's nothing inherently wrong with it. You just have to understand what it is. Market timing is where you move your portfolio away from a strategic target. And rebalancing is when you move the portfolio back toward the strategic target. But market timing sometimes is not necessarily a bad thing. It's just, it's an overt bet that you want to make. And I would say there are sins, I'm a good Catholic boy, there's sins of omission and sins of commission. You know, just know the difference. You know, one you do actively, and one just kind of sneaks up on you. The other part of the endowment model that's important is

Starting point is 00:21:52 endowments, like foundations, pension funds, and multi-generational families of means, have a long time horizon. And so time horizon arbitrage is at the root of the endowment model. And if you look at endowments, they tend to have a much higher weighting in private investments, private equity, private real estate, private energy, private debt. And that's because it takes advantage of the illiquidity premium. And if you think about investing, in investing, they're only four ways that we can make money. If we stay in the risk-free rate, if we stay in cash, we get the risk-free rate, we make no real return above inflation. It's not a very good outcome. Then we have to choose to take one of four risks. We can take credit risk. You can buy a bond. We can take equity risk.

Starting point is 00:22:37 We can buy stocks. We can take illiquidity risk. We can buy private investments where we lock our money up and can't get access to it. Or we can use structure, just a fancy term for leverage. And so if you look at an endowment, they say, well, bonds, let's just look at bonds for a second. Bonds normally earn a 2% real return, meaning 2% above the risk-free rate. If I have to spend 5% real, 5% above the risk-free rate, bonds aren't really going to help me that much. So I'm not going to have very many of them. Equities make 7% above the risk-free rate long-term. So that sounds pretty good.

Starting point is 00:23:14 I'll have some of those. Private investments make another. 5% above equities. So you get 12% above the risk-free rate. That's better. So they tend to have more private equity instead of public equity, more private real estate instead of public real estate, more private venture capital and private debt. And so the last thing that differentiates, I said, this is what differentiates the really truly great ones, the Yale's, the Prince of Stanford, the Notre Dame, the Dukes, the UNCs, is this relentless focus on innovation. And I actually think innovation might be another asset class. There's only four asset classes, stocks, bonds, currencies,

Starting point is 00:23:52 commodities. Maybe innovation could be a fifth one. Now you can say, well, no, really it just expresses itself in stocks or currencies or commodities or something. But I think if you have a relentless focus on getting in front of innovation, you end up with superior returns. And when you look at the very best performing funds, they have very high weighting in venture capital. capital and things that really get out in front of these long-term secular trends in innovation. That's a little longer than the thumbnail sketch of the endowment model, but value bias, disciplined approach to strategic policy, this taking advantage of the illiquidity premium, and relentless overweight in innovation.

Starting point is 00:24:38 So it's fascinating that you're talking about this premium. And if I was going to just simplify that even more for the general listener, what Mark's really getting at is in the private sector, you might only have five people competing for the price or bidding the price of something higher, whereas in the public markets, you have literally thousands of people that are all participating in that market, and therefore they can bid the price a whole lot higher, which is detrimental to your yield that you can expect. So understanding that the private sector has less participants that are bidding that price higher, you can typically get a higher discount rate or a higher return on your capital that way.

Starting point is 00:25:17 And so I would be curious to hear your thoughts on what's happening right now because we're seeing the whole we work, IPO failure. And it's almost like you're seeing that illiquidity premium that has been so easy for people to capture over the last 10 years starting to show a lot of weaknesses as these companies are trying to go public. Is that something that you think is just an anomaly, something that's just happening right now, or is this something that you think is much bigger that's kind of shaking out in the coming three to four years? No, look, I think it's, again, a really great insight. And it's the result of the QE era and the free money era. And what the free money era has done is it's destroyed price discovery,

Starting point is 00:26:08 It's destroyed allocation of capital. It's given us all this misallocation of capital. And what it really changed was the ability for capitalism to function as a clearing mechanism for bad companies. So companies that shouldn't exist have existed for too long, and it makes it really hard to compete. So one way that these companies felt that they could out-compete, these companies, that they shouldn't have to compete with was to accumulate huge pools of cash through the, I'm not called quasi-private markets, because I'll debate one semantic thing with you, Preston, that I think is really important here, which is, if you think back to the glory days of venture capital and, you know, the great stories of, you know, Amazon when I raised $60 million of venture,

Starting point is 00:27:04 I think it was or something like that. And, you know, it's created as hundreds of billions of dollars a cap is companies didn't stay private a long time. They didn't stay in this kind of no man's land or purgatory. They raised some capital. They executed and they went public. And the good ones were successful, the bad ones went away. They went bankrupt and they went away. Now we live in this world of participation trophies where everybody gets to stay alive because money is free. And on top of that, Because there's so much wealth that's accumulated at the top of the pyramid, all these sovereign wealth funds and all these big corporations have all this cash, burn a hole in their pockets. They're willing to pay, I believe, ridiculous valuations just to get exposure to these

Starting point is 00:27:57 companies they think are going to be dominant. And I think part of the problem that happened here, just like in 2000, was, look, there are places. of examples of companies that should and do fantastic moats and fantastic excess valuations. But then there's a whole bunch of other companies that don't have as a protective moat around their business model. They actually have proven that they don't know how to make money. Ultimately, a company has to make money for its shareholders, or at least pretend to. So I think it's a long way of saying that we work and some of these other things, these companies should have been public four or five years ago. This environment of QE world of wash and money allowed them to stay private and collect these big sums

Starting point is 00:28:48 of capital from desperate organizations that bonds didn't give them any yield and stocks weren't making them any money. And so they just, they say, oh, this is a great story and this can grow to the, you know, to the sky. Well, yes and no. There are certain companies, networks, most of them, companies like Amazon or Facebook or Google that warrant higher than average multiples and higher than average valuations. But then there are some of these other businesses, and I'll lump kind of cloud computing in here. I'll lump, you know, the WeWork stuff. People were ascribing competitive advantages to businesses where no competitive advantages exist. And WeWork is the poster trial for that. Yeah, it's like they reverse engineer their valuation. I mean, we were originally

Starting point is 00:29:38 argued that they were worth $47 billion. And it was just some of the most unrealistic assumptions we heard from an IPO in a very long time. The market said no. And now they came up with probably less unrealistic, but still unrealistic assumptions of how they in time can justify a valuation of $10 to $12 billion, but they just need that valuation right now, just in case. Valuation is a really funny thing, particularly when the herd gets involved, because the herd and herd animals, they like the comfort of the herd. I saw this crazy thing. So we have this unique family, we have two older kids, and we have an eight-year-old. So he's keeping me young, and we're watching a Netflix show the other day, and it was about social media. And it was really wild.

Starting point is 00:30:34 They showed a picture of a kitten and a picture of a kangaroo. And they said, which one do people like? And everybody picked the kitten. And then they said, okay, we're going to make one small change. And they made the one small change and everybody liked the kangaroo. And like, do you know what the small change was. I didn't see it. It didn't look like the pictures changed at all. All they changed was in the first one, the kitten had 2.5 million likes and the kangaroo had 13. In the second time, the kitten had 13 likes and the kangaroo had 2.5 million. They were looking at the number of likes and said, oh, if everyone likes it, I like it. And that's how these bubbles are created. And that's where we are today.

Starting point is 00:31:17 And it takes someone, the intrepid young boy, to say, wait a minute, he's not wearing any clothes, guys. It's funny. We had a conversation with, I'm sure you're familiar with Robert Chaldeany. And so I was talking to Robert and, you know, how he has his, I think it's seven different influential tactics that can be used against a person or you can use it in your favor or try to figure out if somebody's using them against you. but the one, I said, so if you could only pick one that is the most influential, which one is it? And he said, he thought about it for a while and he says, I ought to be honest with you. If I had to pick, I think they're all very influential, but he said social proof would probably be the strongest one today, which goes exactly with what you're saying. Wow. Investing social proof is maybe market

Starting point is 00:32:05 cap. It's the WeWorks now going to, you know, these big, large investment companies and them taking a huge stake because all these other smart venture capital has bid the price into the billions. So, hey, let's keep this train rolling, right? It's the social proof of previous funding rounds that just, it's crazy. Social proof is absolutely what this is about. You're exactly right. And it also is this never-ending narrative of, oh, well, you know, we're a tech company. Okay, what does that, what does that even mean? You know, technology is pretty definable thing, right? There's information technology and there's military technology. I mean, that technology is pretty tangible. And so when you, when you take a real estate business and you say it's a tech company,

Starting point is 00:32:58 or you take a car company like Tesla, my other favorite, not so much, and you call it a software company. People get caught up in this social pressure. If other people think it's worth this, then it must be worth this. No, no, value. This goes again, back to the endowment model. Value is definable. In everything we do, in everything we look at, value is definable. Assets may be above fair value for a very long time. I'm saying that at some point, we will hit fair value. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance,

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Starting point is 00:36:49 All right, back to the show. So, Mark, I really love that you say this, and I think this is the perfect segue into the next section here in the show, because you're on the record for saying that portfolio construction is the most overlooked activity, while security selection is the most overvalued activity.

Starting point is 00:37:10 I love how this is just so counterintuitive to what most investors think. Could you please elaborate on that? This is great. I never get these questions. Look, I think a lot about this. And I've said for years that, you know, there's four steps in investing. There's asset allocation, stocks, bonds, currencies, commodities, you know, which geography do we want to be in, U.S., Europe, emerging markets? And I think that drives the bulk of returns. Then there is manager selection. Am I going to do it myself? Am I going to

Starting point is 00:37:43 pick securities myself? I'm going to outsource it to you. Am I going to go find another manager? So manager selection, second most important. Then the third is portfolio construction. And interestingly, this gets overlooked because most people, if you're going to, let's say you do, you say, okay, I got my asset allocation, I want 50% in equities, and I'm going to put these 10 managers, I'm going to give them 5% each, equal weight. Well, okay, that's one way to do it. But what if one guy was really, really way better than the others. So you wanted to give them 50% and everybody else five. I mean, you could do that too. So that portfolio construction, how you allocate amongst the managers really does matter and how you rebalance and how you construct a portfolio across the different

Starting point is 00:38:32 asset classes and across the different managers. And then the last thing is security selection. Should I own Ford or GM? And the reality is, eh, I don't want to own either one relative to international car makers, Chinese car makers, maybe, that have an advantage just in demographics. So it's only about 15.15% of total return comes from the actual physical security. If you believe that Brinson B. Bauer, it says, oh, but that's not what they really meant. I'm like, well, it's actually anecdotally what I found over the years is if I look at where the returns come from, they come from, do we make a good decision on stocks versus bonds, you know, Japan versus Europe versus U.S.

Starting point is 00:39:15 Those things really drive. Everyone gets so focused. I was that way. I told you, I started a bond firm, then I went to the equity firm, and when I decided to leave to go to Notre Dame, I thought I was going to miss picking stocks and bonds. I was a stock picker.

Starting point is 00:39:32 I was a big man, you're not going to get my CFA and all this. And then when I got to Notre Dame, I was like, wait a second. Jack Meyer's not talking about stocks. David Swenson is not talking about stocks. You know, Harry Turner's not talking about stocks. He's talking about, you know, venture capital and innovation. And David's talking about international investing and venture capital and Jack Myers talking about arbitrage. And those aren't, you know, Ford versus GM decisions. And ultimately, I've come a long way on this to say that if you think about investing, people will pay a lot of money for some reason for security selection. They'll pay very little for asset allocation. even though we know that's what drives returns. They also don't spend any time thinking about how to allocate between and amongst the different sectors, segments, geographies, and managers that they hire.

Starting point is 00:40:26 And so I think if you're more deliberate, more disciplined, if you are disciplined in investing, if you take the emotion out and you follow a strategic plan and you are disciplined in your rebalancing, and you're disciplined in your allocation process, and you focus on people, like you said, character. I mean, I don't care how smart someone is. If they're a jerk, I just have no time for them. And so if you find people of character, if you find people of integrity, they will do the right thing, particularly when it's hard to do the right thing.

Starting point is 00:40:57 And then you'll get good results. I mean, if you're a jerk, you're selfish, which means you care about yourself and you don't care about others. And so you're going to make selfish decisions, opposed to the people that you're, you're you're entrusting with you're not being a fiduciary at that point. It goes back to the guy that you were saying, you know, he's running around with a billion dollar fund and he's telling you it's all about the general partners and not the limited partners. Exactly. It's kind of like, all right, well. Yeah, now we know where you stand. Now we, now we know where to go. Yeah. The good news is we can

Starting point is 00:41:27 avoid that. It's like seeing the landmine before we step on it. I'm just, I really enjoyed this. And I can't thank you enough for making time out of your busy day to come on the show. It really means a lot to me. Hey, where can people find you on Twitter? Give me a handoff to where the time. I'm at Mark Uisko, M-A-R-K-Y-U-S-K-O on Twitter. Morgan Creek Cap C-A-P-C-A-P-com is our website, and we've got some stuff on there. And we do a lot of different things at Morgan Creek. We focus on the private markets a lot.

Starting point is 00:41:58 We have a new fund focused on China growth equity. Nobody wants to talk about China these days except us. Again, really enjoyed this time together, and hopefully we'll get to do it some other time soon. Absolutely, Mark. Thank you so much. All right. So at this point in time, time we'll play a question from the audience. And this question comes from Alison. Hi, Preston and Stig. My name is Allison, and I'm contacting you from Perth, Australia. I recently discovered your podcast because I read Preston's book, Warren Buffett's three favorite books explained and I absolutely loved it. I suddenly realized that maybe I can understand some of

Starting point is 00:42:31 this investing stuff. And then I started listening to the podcast and now I'm totally hooked. Next step is to put my money where my mouth is. I have two questions for you if that's okay. First question. Sadly, I've only started thinking about all of this stuff at the grand old age of 43. I'm now really worried that I've left it too late and I'm not going to be able to see the fruits of my investing until I'm way past the age when I want to retire, which is going to be sometime in the next 10 years. Can you give me any advice? Have I left it too late to be a value investor? Do I need to change my strategy at all for investing my savings? Second question is more positive. Now that I have finally started thinking about this stuff, I can't stop thinking about it. And as I've

Starting point is 00:43:08 started telling my girlfriends about you guys and everything I'm reading, I realize that many of them aren't really thinking about these things either. As a result, I'm thinking about doing the financial equivalent of a book club for me and my girlfriends, where we can get together over a glass of wine and learned about being money smart, not just about investing, but other matters such as tax as well. Do you have any tips for me about how to do this successfully? For example, what topics should I plan for my first get-togethers, and how can I make sure that everyone feels it is useful for them? Thanks so much for your help. Best wishes, Alison. So, no, Alison, you're definitely not too old to become a value investor. I don't think you can be

Starting point is 00:43:47 too old to start investing. But I do think you have lost some, but far from all of your most valuable asset, namely time to accumulate and compound your net worth. Therefore, if you do plan to retire within the next 10 years, I don't think value investing is the right way to do it. At least if you don't have any meaningful savings, it's going to be very hard to retire. But you can say that about any investing strategy, really. You might already have done some of the math and said that with what you can put aside every month over the next 10 years and compounded, for instance, six, eight, or 10%, or whatever kind of percentages you use annually for your portfolio, you just won't get to that amount where you can retire. So now you have multiple options. For instance, you can say that

Starting point is 00:44:38 since you can't retire, it's not worth investing anyway, which would be a horrible decision to make for obvious reasons. You might also have done some of the masks and think, well, I probably just need to take bigger risks and I need to speculate. But not really to bet against you, but the most likely result of that decision is that you will lose all of your money. And have the mind set of you'll need to make it or break it within five or ten years, it's going to be so hard because it requires a lot of luck but also specialized knowledge. It could be starting your own scalable company. But if you plan to focus on listed security, which is what most value investors are probably thinking about doing, again, depending on how much you can invest,

Starting point is 00:45:24 you'll probably need something like 50% annual return, perhaps even more, which is close to been impossible and it would require so much leverage and risk-taking for you in the time to come that it would basically be the same as going down to the local casino and play the roulette. So my best piece of advice for you would be continue with value investing and while you won't likely retire the next 10 years, if you do make sound decisions, not only will you have compounding net worth and on your way to retire eventually, but while you wait for that, your nest deck can provide you with many advantages. It might be you can now afford to take a lower paying job that you're more passionate about or working a few hours at your current job. And then really to your other

Starting point is 00:46:11 question about your meeting up with your girlfriends and talking about investing over a glass of wine, which sounds like an absolutely amazing idea. If you do that, I probably wouldn't start at all with value investing and not go into detail with stock investing in the very beginning. I think for the first few meanings, simply focus on getting the right mindset for the group. For you having read Preston's book and for you to listen to our podcast, you already have the mindset of an investor. And the next step for you is to start investing, as you also mentioned there in your question. But I really don't think you should jump the gun with your friends.

Starting point is 00:46:49 And I'm likely the worst salesperson in the world whenever I say this, but perhaps you shouldn't ask them to listen to our podcast or you shouldn't ask them to read in our investing books or investing books in general. I think it starts before that and you need to help your friends getting the right mindset about personal finance before they can think about investing. For instance, a very easy and approachable book to start reading and it would just take your friends in the afternoon to go through it would be Rich Dad Podad. And just be warned. The Rich Dad that Robert Chirozaki, the author is referring to, he doesn't really exist. and he unfortunately fails to mention that,

Starting point is 00:47:30 but the key takeaways from that book would just really change the way you think about money. If you read it together with your friends, you have the same reference point and learn the very basics of an investing mindset in probably one of the most approachable books you can find out there. And there would just be some pointers

Starting point is 00:47:50 that would just be so helpful for your friends in the states that they're in. Having money worked for you instead of working for money. It's a concept that I guess for most listeners listen to this podcast is very basic, but most people don't think that way. By reading the book, you also get the mindset of thinking about tax, which you also mentioned there in your question. For instance, when or should you set up in LLC for tax reasons? Another thing would be something like a house doesn't have to be an asset. It can be, for instance, renter property that you own would be an

Starting point is 00:48:23 asset. But I would imagine that perhaps you and perhaps you and your friends might be paying down on a mortgage and use that equity as your pension. And there's nothing wrong with that, but you also need to understand the shortcomings of that strategy. And you best do that by thinking like an investor. So again, if you focus on discounted cash flows, specific and value investing, or anything like that, you will lose your friends before you even get started. Have the mindset first about investing and then talk and think about which types of assets are right for you and why. You cannot do it the other way around. Alison, it's really great to hear from you and thank you so much for being a part of our

Starting point is 00:49:04 community. It really means a lot to us. So I'd like to tell you, just like Stig, it's never too late to apply the lessons of proper asset valuation. Whether it's too late or not, really isn't an important question because I would argue that it's more about making the transition to simply use the methodology and the thought process as soon as you. you can. When a person approaches the ownership of any investment, whether it's operational or non-operational-owned, through the lens of profits and price, everything seems to be managed much more appropriately. So what I would tell you for your meet-up with your friends is a little bit different advice than Stig, and maybe you can kind of combine both of them there, is a puzzle

Starting point is 00:49:44 that I like to always ask people who I know are just getting into value investing and and finance, and the riddle or the puzzle kind of goes like this. Ask them what they would do if they had, if they could buy a money machine. Say, I have a money machine. I would sell it to you, and it produces, you know, it prints money. And even though it is forged, forgery or forge money, you can actually spend this money that the money machine produces. So ask them, how much are you willing to buy that money machine for. And just listen to the responses and you'll get some really colorful responses. Some people would say, well, I'd pay anything for that. And you get some people that say, I'd pay a million dollars for that. But what you're really looking for in this interaction with

Starting point is 00:50:32 people is you're trying to get at the root of price compared to profit or dividends that are being produced. So when a person says, well, I don't know what I would pay. The next question you need to bring to them is, well, you should be asking me how much money does the machine print annually? Each year, how much does that money machine produce? And so then give them a really small number, say, well, the money machine produces $1,000 a year. That's all the more it can print. That's just the speed that the money machine produces and you can't make it go any faster. And then the conversation becomes much more interesting when you frame it that way, because now they've got to make a decision as to how much money they're willing to pay for something that only produces $1,000 a year.

Starting point is 00:51:17 So when you compare this to stock investing, you can see how there's a correlation here by looking at the earnings per share that a stock is producing. So you can name companies like Google or Amazon, these companies that have just enormous brand power that would be viewed the same way as like a money machine in many people's eyes. And what it forces people to do is they have to step back from the qualitative features of hearing money machine and now they have to do a little bit of mathematics behind the discussion. So for the example of a money machine that can print $1,000 a year, if you're going to pay, let's just say you're going to pay $100,000 for that money machine, well, now you know you're

Starting point is 00:51:58 only making a 1% return by paying $100,000 for something that only makes $1,000 a year. And that's where the conversation really becomes a lot of fun and people can then, and you can immediately make the translation and the jump to stock investing with your friends. So I would propose something fun like that to really kind of capture their interest and then combine that with a book recommendation kind of like what Stig provided. And I think it can really kind of get people excited and it generates a really fun conversation. All right. So Allison, for asking such a great question, we have an online course called our intrinsic value

Starting point is 00:52:33 course that we're going to give you completely for free. Additionally, we have a filtering and momentum tool, which we call TIP Finance. We're going to give you a year-long subscription to TIP Finance completely for free. Leave us a question at Asktheinvestors.com. That's Asktheinvesters.com. If you're interested in these tools, simply go to our website, Theinvestorspodcast.com, and you can see right there in our top level navigation, there's links to TIP finance and also the TIP Academy where you'd find the intrinsic value course.

Starting point is 00:53:03 All right, guys. That was all that pressed on my hat for this week. episode of The Investors Podcast. We see you till I again next week. Thank you for listening to TIP. To access our show notes, courses or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or rebroadcasting.

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