Victor Haghani | Missing Billionaires, An Ode To Jim Simons & Top To Bottom Index Investing

✍︎: The Curious Worldview Newsletter - the ultimate compliment to the podcast...

• Bill Browder
• Nassim Taleb

Follow me on Instagram - @ryanfhogg

This is an interview with Victor Haghani who is among many other things… the Co-Founder of LTCM (long term capital management), the Founder of Elm Wealth and the author of Missing Billionaires.

In this interview we focused on Victor himself... his experiences at Solomon in the 80s and a brush with Bill Browder (who by the way was recently knighted), comments on Jim Simons and Nassim Taleb, an incredible moment of serendipity that would have changed his life forever and ultimately an exploration of Victor's worldview...

• 00:00 – Who Is Victor Haghani
• 01:40 - 1997 Nobel Prize & Stockholm
• 07:47 - Solomon Brothers & Bill Browder Anecdote
• 16:15 - 10 Year Sabbatical
• 24:42 - Jim Simons
• 30:49 - Missing Billionaires & Ergodicity
• 52:40 - Baggage We Are Carrying Around From Our Evolutionary Past
• 1:00:40 - Nassim Taleb
• 1:04:40 - Potentially A Confrontational Question
• 1:11:40 - Michael Burry Index Bubble Theory
• 1:18:26 - An Incredible Moment Of Serendipity & Why Victor's Bullish On UK

🍻☕: https://www.buymeacoffee.com/ryanhogg

Transcript

SPEAKER_01 0:00

This is an interview with Victor Haghani, who is among many other things the co-founder of LTCM, Long-Term Capital Management, the co-author of a book, Missing Billionaires, and as well the founder of Elm Wealth. There is obviously many other things that scatter his resume. But what does stand out there is the LTCM co-foundership, which we touched upon very briefly here, but my hope is to down the line sit down with Victor in person at another point and do a dedicated interview on this particular period of his life. Because in this interview, however, we instead focus on Victor himself, his experiences at Solomon in the 80s, a brush with Bill Browder, who, by the way, was recently knighted, Victor's comments on Jim Simons, who recently passed away, and then as well Nasim Taleb. His opinion on Michael Berry's Index Bubble Theory, Victor's book, Missing Billionaires, an incredible moment of serendipity that would have changed his life forever. And ultimately, uh, this is just an interview which is an exploration of Victor's worldview. If this is your first time listening to the show, then do peruse the backlog. At almost 200 interviews, some of the people mentioned in this chat are previous guests as well. Pump a five-star review into whichever algorithm you are consuming this podcast on. Spotify is a piece of cake, it's just one or two clicks, Apple is a little bit more difficult. And as well, click on the top link to get into my email list, where you can expect an occasional email either behind the scenes of a particular episode or some other material I've written or I'm thinking about. And with absolutely no further ado, here is the wonderfully optimistic and brilliant Victor Haghani. Victor, you were just telling me about uh your attendance at the Nobel Prize of 1997. Could you say a little bit more about that?

SPEAKER_00 1:49

Yeah, well, we were talking about Stockholm, and I had one of my best uh short city visits uh to Stockholm in 1997. My wife and I went there to celebrate with two of my partners that were getting the Nobel Prize in Economic Sciences for that year, Bob Merton and Myron Scholes. And uh we didn't, we they didn't have tickets for all of us to go to the ceremony, but we were there for dinners and uh and just hanging out. And um yeah, I I had I just loved Stockholm uh so much. I had been there before for business, but not just for fun, and being there with my wife was great. We had so much delicious herring of all kinds, and then when I was when I went back to London, I was trying to keep my herring consumption up, but I couldn't find any good herring. And a Swedish friend of mine explained it to me that the uh that the Swedes keep the really good herring for the local consumption. I also went for one of my best city runs of of all time. I mean, it was just absolutely gorgeous going for like a five-mile run around Stockholm. So yeah, I've I've I always wanted to get back, um, which I I haven't done. I've uh done some traveling around uh the Norwegian coast, but yeah, I'd love to get back to Stockholm and anyway, great memories of it.

SPEAKER_01 3:05

Yeah, that's that's glorious. I mean, maybe you could get Nikolai Tangen to invite you to an NBIM conference since you're doing uh a lot of these public lectures now. That'd be a great excuse to be brought over back to Scandinavia.

SPEAKER_00 3:18

Yeah, yeah, I should I should send him a few copies of our book.

SPEAKER_01 3:22

Um and uh what was it the prize was for, your two colleagues?

SPEAKER_00 3:28

Uh primarily it was for um the options for for the options pricing formula, the black shoals, Fisher Black had passed away by then. Um but some people call it the Black Shoals Merton model, although you know the main paper that came out was um the Fisher Black Myron Scholes paper. But you know, so they primarily won it for the option pricing uh um uh formula or discovery or framework. But you know, it was much broader than that, and and both of them, you know, were very, very productive uh researchers and academics. Um yeah, we'll talk more about Bob in particular, I'm sure, on the podcast.

SPEAKER_01 4:10

And so they have phenomenal mathematical chops.

SPEAKER_00 4:14

Yeah, absolutely, yeah. Yeah, I mean they were well Bob Bob was one of these people that they that that they referred to as the rocket scientist because he was out at um um he was out at Caltech and and he was a and and studying like the mathematics of controlling missiles and projectiles. And those control mathematics, those mathematics of control, were what he brought to finance. And um he he and others, but you know, there really was this connection to rocket science in the early days of finance. Uh over time, uh over time, like everything that they figured out using kind of rocket science math was uh turned out to be much simpler than that, and that you could have shown and proven the same things in much easier ways. But to begin with, they they brought some really heavy-duty math into these finance problems. Finance is so much simpler than that, but that was what they, you know, in the beginning, that's what they had to do. And and uh, you know, when you go back and look at those papers, it's just incredible what they um, you know, the machinery that they brought to them to it.

SPEAKER_01 5:25

It's unbelievable, eh? Maybe they were sort of foundational for the technology we have now with the Iron Dome in Israel, where you can uh intercept a missile.

SPEAKER_00 5:34

Well, they no, they didn't make real contributions to the math. They learned the math and then they opted and then they came into finance where everything was easier. So I mean they're brilliant, brilliant, but I wouldn't say that they made big contribu. I mean, for for almost uh very very few of the people that made big contributions to finance made any contributions to math.

SPEAKER_01 5:59

So then um for these two uh men to be your colleagues, assumes you also have extraordinary mathematical chops. Is this really your core skill that you've brought to your various um career postings over the years?

SPEAKER_00 6:13

Oh no, I mean I'm I'm you know uh no, I don't have I don't I don't have those uh you know super strong mathematical skills. I have decent intuition, and I think that what I've um excelled at over time is is taking complicated ideas and making them more accessible um to a broader range of people, whether that was within investment banking, hedge funds, and then you know, more recently, um, you know, within wealth management and and um and and uh just financial literacy in general. So I mean I I can get I can understand the music of the I can appreciate the music of the math, but I am not a um a composer. So a communicator. Yes, I think so. I think that would be a fair representation of my skills.

SPEAKER_01 7:04

No, not not to not to belittle it all. Without the communication, you don't have anything, right?

SPEAKER_00 7:09

Yeah, no, it's good. And um, yeah, I mean I you know that that uh I wouldn't claim that I've really uh you know invented very much, you know, it's it's just all taking uh you know working in collaboration with others and taking what others have uh have done and saying that makes a lot of sense. You know, why are people not thinking about things as much that way? And oh, it's because it's so abstract or so complicated. Let's find ways of making these ideas more resonant with people.

SPEAKER_01 7:39

Was that also core to the work you were doing at Solomon back in the beginning of your career?

SPEAKER_00 7:44

I I think it was, yeah. I think that uh, you know, there the audience was the management of Solomon Brothers. So uh, in order for us to be able to do the trading that we were doing, we needed to make management comfortable that what we were doing made sense. And so, you know, there were no black boxes, you know, it was like, okay, this is why we're doing this or that, and how we're thinking about how to size it, and so on. And so, yeah, I think a lot of what we did at Solomon um was you know uh making the firm comfortable and committing capital to the anomalies that that we were seeing at the time. And and and of course, you know, the management was extremely receptive and open-minded and uh and had a risk-taking um um uh character to it.

SPEAKER_01 8:34

Did you work alongside Bill Browder um at Solomon?

SPEAKER_00 8:38

I I met him a few times back in Solomon days, and then I met him uh much later on in uh in in London again. And actually, if if we have time for a funny story a little bit. Of course we do, yeah. So uh so I was uh with a friend of mine, we ran a book club in London for many years, where um the only thing was that any book that we were gonna talk about over dinner, we had to make sure that the author would be willing to come. So we would invite authors, and we had some great authors over the years, amazing dinners, and talking to these authors about their books. And so the idea came up to to invite Bill Browder for uh to talk about Red Notice. And uh, and actually the place that we used to do these dinners mostly was on Kensington uh on uh Ken High Street, no, on um sorry, on uh Kensington Church Street up at the top, this Kensington Place fish restaurant, and we had this room in the back that had a big window that was open to the street, right? So, anyway, we were going about doing this, and then um, you know, I met I went over to Bill's office in Mayfair and talked to him about it and so on. And when I was looking at him, I was like, you know, he looked, we looked a little bit like each other. And then I was like, and then I thought about it some more, and I was like, geez, I don't want to have Bill for dinner with a whole bunch of us with a big picture window, and some guy got so anyway, I won't say more than that, but we wound up um you know uh not going forward with him as a guest uh out of fear, out of out of being chickens ourselves. But anyway, um he's a cool guy.

SPEAKER_01 10:17

Oh, that that's a shame. I mean, if we ever uh if you ever revitalize that book club, I'm sure Bill would be a very, very happy and willing guest.

SPEAKER_00 10:25

Yeah, yeah, no, he's I yeah, much much safer like this.

SPEAKER_01 10:31

I mean, so you must have a pretty deep interest in broader literature than if you're hosting a book club yourself, not exclusively finance books. Is that a fair assumption?

SPEAKER_00 10:42

Yes, uh um, well, actually, uh yes, uh definitely. And um in in in my life, um, you know, until uh I was around 40, um, you know, I just hadn't read very very broadly. I was like this very narrow reader. Um, you know, I'd been, you know, had a had a fun childhood that didn't involve too much books, and then I was working and didn't involve too much books, but then I took a sabbatical from the age of about 40 to 50, and one of the big things that I wanted to do in those years was to really catch up on you know my basic um, you know, uh, you know, reading and familiarity with some of the great works. So, you know, I still, you know, just given that I got such a late start, you know, I wouldn't I would not say that I'm very literary, but I I've made an effort to catch up and um and I thank uh Audible and everybody that's been involved in audiobooks for making that happen. Uh, because you know, in the last uh I don't know, 10 or 15 years, probably 90% of the books I've read or 80% have been uh while walking my dog or doing long drives and things like that. Yeah, same.

SPEAKER_01 11:53

Yeah, it's um give us a sense for some of the other authors that you managed to coerce into a dinner.

SPEAKER_00 12:00

Oh wow. Well, let's see. Our first our um um our first one was the author of uh of Legionnaire, uh Simon, what was his name? Uh um the he's this English um English guy that uh that when he was very young went off and joined the French Foreign Legion. And it's a terrific book. I mean, it's so uh it's so exciting, it's so strange in a way, you know, that this that he would do this, and he wound up in Algeria and it was gruesome. And then you know his life went on from there, and and uh and he wound up being like the president or something, or the CEO maybe of Hutcheson Wampoa, really a cool guy, Simon.

SPEAKER_01 12:43

Um is he still alive?

SPEAKER_00 12:45

He I think he is, yeah, yeah. He's very very fit. He's probably around 80 or so, great guy. That was one of our first William McCaskill come in uh early on, you know, on effect, you know, in the early days of effective altruism. But yeah, what the I think maybe our second author that we had was Rory Stewart. And Rory at that time was um was like uh teaching maybe at Yale or Harvard, you know, he wasn't into politics at all. Uh or maybe he had just, yeah, I guess he had just come back from that governorship that he had in southern Iraq. But he had written the book about walking all across uh the uh the near and Middle East, you know, phenomenal guy. And then we all became really friendly with him. A couple of the members of the book club wound up working on his staff actually when he was in uh parliament and so on and in the cabinet. So Rory was another good one. Um, we had uh um uh Ridley, uh Matt Ridley came in. Um, you know, he was he was great. Oh, we had so many, we had so many really, really good ones over the years. Um yeah, it was it was a great book club, and uh and then COVID put a stop to it, and now we're getting started again. Um, although I'm not in London, but my my friend Alan Shaffrin is running it, is running it now. And actually, the restart of our book club in London, Alan invited me to be the guest author. And so we had uh we got the book club restarted a few months ago when I was visiting London, and uh very kindly I I was um both a member and also the guest author, which was really fun.

SPEAKER_01 14:20

Uh do you have to be a high net worth individual to qualify for access to this book club?

SPEAKER_00 14:25

No, not at all. Just you know, just be you know, just in the circle of friends somehow. So it's uh it's it's not super diverse, but it's got a bit of diversity, and and we tend to invite the authors back as well if they want to come and join. So every once in a while an author has come, a previous author has come back to the book club.

SPEAKER_01 14:44

The value of that network um presumably would be uh just immense, essentially. And I'm not talking about a financial value, just the value of knowing people that are in either doing interesting things or in interesting places. Do you ever consider the value of your own network over the course of your entire career? Having as we started with guests with Nobel Prize winners to now this big book club and many other things in between. Um trying to make a broader point on just how important the uh network is that you accrue over a lifetime.

SPEAKER_00 15:22

Yeah, I mean, my goodness, my my friends, colleagues, people I've met have enriched my life so much. I mean, I can't imagine uh, you know, what my life would be devoid of those relationships. Yeah, absolutely. I mean, I think, you know, in some ways, everything that I am is a result of all of these uh friendships, relationships, mentoring, uh, and even and even chance, even chance, um uh you know, random acts of uh of generosity along the way that I can think of. I mean, it's been you know, I'm I'm sure you know so many of our lives are like that.

SPEAKER_01 15:59

You know, I teed you up about questions on serendipity earlier, so bear that in mind as we get further down. But the type of serendipity that can come from your network, you know, is truly life-altering at times.

SPEAKER_00 16:10

Yes, absolutely.

SPEAKER_01 16:11

Yeah. So you took this epic 10-year sabbatical. I would love to understand more why you decided to do that, because um presumably that decade in your 40s and 50s can be some of the most um um valuable years to either accrue wealth or just really double down on all the good work you've done in the decades before. But by stepping away, it seems there was quite a large opportunity cost there. So I'd just love to understand more your decision behind deciding to take 10 years off versus just going into something else.

SPEAKER_00 16:47

So, first of all, you know, what happened was so I was a partner of LTCM. LTCM failed. I stayed around for a while to liquidate uh the um to to to wind down LTCM on behalf of this 14-bank consortium and then to help my partners get started with a new venture. Um and uh so so it was around 2000, a couple years after uh the collapse of LTCM, and uh our office was in Conduit Street, I lived in Kensington, and I rode my bike back and forth to work most days. Like that was what I what I would do. So one day um I'm I'm leaving work and uh you know it's around, I don't know, 6 30 or so, something like that. And uh and I take my bicycle and I go to the lift and I press the button. You know, we were on the second floor, I think. I press the button, I see the lift is up, both lifts are up on the seventh floor. And and I just immediately was like, oh my god, I don't want to wait for that. So I opened up the stairwell door, took my bicycle, and ran down the stairs. And as I'm running down the stairs with my bicycle on my shoulder, I was thinking, gosh, I could fall and really hurt myself here. What am I doing? What why why am I so impatient to get down that I can't wait for the elevator? And um, and it just all of a sudden it just occurred to me that the reason I'm rushing is because I want to be home. I want to be home with my kids. I had three ha I have and had three kids at that point and a loving wife, and I wanted to be home. And I was like, well, if I want to be home, why am I here? And all of a sudden, it was like a light went off that yeah, I like my work, but I really love my family and want to spend more time with my family. And I'm racing to almost breaking my neck to leave the office and ride my bike home. And uh, and so that at that moment I was like, okay, I'm gonna stop working. So once I decided to stop working, then this idea of the long-term sabbatical came. And realizing that I was uh that my whatever I would do in the future, I was going to be a businessman. That I don't think that um I don't think that business acumen uh decays that much as we get older. You know, I think that a 50-year-old businessman can be you know as good as a 40-year-old, as a 60-year-old. It's not like being a musician or I don't know, or or lots of, you know, there are lots of things where I think that yeah, your productivity does go down. And sure, I was gonna give up something then then, but I didn't think I was giving up that much. And I said, okay, I'm gonna take a 10-year break until my two younger kids are at university, and then I'll start working again. And I filled those 10 years with uh with you know, it was it was just uh one it was wonderful, you know, it was a wonderful 10 years of uh of doing so many of the things that I dreamt about doing, uh, you know, particularly spending a lot of time with my kids, which was which was really great. Um but yeah, it was it was it was terrific.

SPEAKER_01 19:51

So up until this point, you presumably worked insane hours, huge, hugely ambitious, surrounded by a lot of ambitious people as well. I I just would like to understand more. You know, it gets maybe six months into this sabbatical, you're reading all the books you want, you're spending loads of time with your kids, but you know, surely there hits a Wednesday, there's nothing on the calendar, and you start thinking, okay, you know, let's start doing something again. The fact that that extended for ten years, I uh just find particularly interesting. Not exactly sure why, but just do. Yeah.

SPEAKER_00 20:26

Well, uh uh so in the beginning, it's just it's just intense excitement for the first few years. And by the end, you know, by the end of the 10 years, you know, you're you know that that uh that that bucket list, you know, you've you've checked off a bunch of different things, and um and it is you know, it is decaying like that. So by the you know, as I got into the second half of it, the excitement of like, oh my goodness, I'm not working, I can do anything, and I'm doing anything and everything. So in the beginning, it's just it's it's it's wonderful, you know, in the first those first few years. And you know, in addition to being with the kids all the time, I learned how to fly. Um and I did a lot of I did a lot of uh flying of small planes and got my instrument rating and all that. I did a lot of climbing, hiking, skiing, a lot of outdoors things, a lot of physical things. Um, and I and I did a lot of learning. I picked up a bunch of languages which now have sort of drifted away from me. But yeah, it was just so much fun uh in that beginning, in that beginning part. And uh yeah, I think the 10 years, you know, I sort of had this idea of 10 years, um, you know, the kids going off to university. Our youngest was still um you know, was still at home when I started working again. But yeah, it was it was it was great. And you just I just got into that mode, and there's just never there's just never enough time, you know, uh in our lives. So I I never felt uh, oh, I've got to fill up time. You know, there was just never enough time for what I wanted to do. Days, yeah, there's just so little time.

SPEAKER_01 22:02

Oh, it's it's it's incredible. Was there a sense as well of say burnout or trauma that really put you off business for a while because of the end of LTCM?

SPEAKER_00 22:15

Well, there that uh there were two kinds of uh kind of bur uh burnout, I would say. The f the first was that I was like, okay, I don't want to do this hedge fund thing anymore. I want to have a, I want to move, or I don't want to do proprietary trading, I don't want to be spending my time trying to beat the market, whether it's working at a bank or working at a hedge fund. So I made that decision that I had had enough of it, and and you know, I'd been doing it for long enough where I felt that I wasn't learning uh, you know, so much anymore that it wasn't, you know, that I was I was uh on a flatter part of the learning curve. So that I realized at the time. But I never thought of myself as uh being stressed uh at work, um, which I think is really, really typical of a of a you know, this is a really typical thing. It's not just me. I didn't think I was stressed, you know, I I didn't think that I was uh that that that I was under pressure, but when the pressure was relieved, I noticed it. It was like, wait a second, you know, everything about me feels better. I don't feel tired anymore. Um my body just responded like oh my, you know, I just had this feeling of well-being in every aspect of health. Um and uh and I realized that you know that I was under a lot of stress, that I didn't know it at the time. But when it was relieved, then I could really tell. And I think a lot of people are like that, that we don't feel that you know that we're just comfortable, like comfortable with stress, but uh but it's having an effect on us. And so um, yeah, that was so in both of those senses. I mean, in the one sense, I realized I was burned out from thinking about the bond basis. I mean, I can't believe the bond basis is still a big deal out there, bond futures versus bond basis. Um that was one of the first things I worked on in 1984 when I came to Solomon and research, and I and we were still working on it, you know, whatever, uh uh, you know, 20 years later. It was like, okay, enough. Um, but yeah, this other part was uh was more of a rev of a revelation to me, and I've heard it from a lot of other people.

SPEAKER_01 24:26

Has that stress returned to your life now you're back in the dirty world of business?

SPEAKER_00 24:31

No, no, definitely not. No, I chose a business that would be pretty stress-free.

SPEAKER_01 24:37

Well, um, you mentioned earlier the stress of constantly trying to beat the market. Speaking of beating the market, uh Jim Simons died over the weekend. Could could you explain to the audience who he was?

SPEAKER_00 24:47

Uh sure. Uh Jim Simons, uh, you know, I think he's best known for being the founder of uh Renaissance Technologies. People call it Rentech. Um the uh there was a great book uh written by Greg Zuckerman about his life recently, called, I think it's called The Man Who Solved the Markets. Um and um you know I think that Jim is known for three or four things. You know, one is this he founded Rentech, which eventually has become perhaps the greatest uh investment return machine uh that anybody is uh that that has ever been. I mean, there's a few contenders uh that would vie with him, but you know, they've gone on you know for like 20, 25 years or thive years or so, they've made 30% a year uh on on their money with almost never uh never a losing year, very few losing months or whatever. And it's a team of a few hundred brilliant people uh that have kind of figured out how to suck money out of the markets um consistently, it seems. So Jim was known for that, but he also had a very distinguished career as a mathematician. And when I was saying earlier that there's very few people in finance that really, or there are very few people at a very successful level in finance um who have made big contributions to mathematics, you know, Jim is is is an exception to that. I mean, he really had an amazing uh career in in math. Uh the third thing that he's known for is being a uh tremendous philanthropist. Um and the fourth thing that he's known for is for being a pretty uh uh you know, like a very warm, kind person, you know, helping a lot of people at the individual level as well. So yeah, he was, I guess, in his mid-80s, 84, maybe, I think he was, which was is that right, 84? Yeah, that's the age my dad passed away to was 84, kind of a magic number. Uh 86. Oh, sorry, 86. So yeah, he made it a few years more. Um and uh yeah, so anyway, yeah, quite a uh you know, quite a legendary figure that uh um you know will be will be missed.

SPEAKER_01 27:03

You mentioned there were a few contenders um that potentially have returned more money over time than Rentech. Who would they be?

SPEAKER_00 27:12

Well, uh obviously the first name that comes to mind that that uh that that's more on people's mind than Jim Simons and Rentec is Warren Buffett. And so I think if we were like, okay, well, how much excess return in dollars have has anybody made? You know, I'm sure that uh um you know that Buffett would would stand taller than Jim Simons because he's got started so much earlier. So very a very, very, very different approach, you know, where Warren Buffett is all about finding the intrinsic value and you know, looking for great businesses at fair prices, and Jim Simons was looking for hidden patterns in short-term price movement. So totally at different ends of the spectrum there. Um, you know, but but other other very uh you know respected and and great investors out there, you know, or groups of people, you know, you have the D.E. Shaw group, David Shaw, um, you know, there's Citadel that got a later start, Ken Griffin. I mean, they had a big hiccup uh, you know, at one point in their in their track record that these others haven't. And then there's a bunch of ones that are not very well known and probably prefer to to stay that way, you know, a few friends here and there. And every once in a while you hear about people uh that I've never heard of, and they're like, oh yeah, they've been doing this for 20 years, you know, making 30% a year, and now they're supporting uh uh climate change policies with their with their uh profits.

SPEAKER_01 28:35

Could you go a little bit deeper into that? What would be some names of people we've never heard of? Not individuals necessarily, but maybe the um organizations that they run.

SPEAKER_00 28:46

Well, you know, I think um, you know, one that's um I I think people have have uh heard about it more and more is you know is is PDT um process driven trading that's been founded by Pete Muller. I mean, he's really um you know got a uh um you know has a has a wonderful story of um uh you know uh getting started in finance and keeping but but really keeping uh interested and involved in music. And uh and he's had these two uh pretty remarkable careers. One as as a uh finance uh person, Morgan well um um Ed Barra to begin with, and then Morgan Stanley, and then his own firm PDT, uh, and also you know as a pretty accomplished uh musician as well, and uh just an all-around really nice guy. You know, Princeton Newport, you know, is another one. Um you know, Ed Thorpe, um and uh and his you know track record over over the years is uh you know is pretty amazing as well. Um the um uh there's you know other people in Southern California, uh there's Fred Taylor who's run um you know a pretty um a pretty successful uh systematic trading shop. Uh you know, two Sigmas, another one that had a a really great run, a little bit uh you know, a little bit less so uh recently. So you know, there's a bunch up there.

SPEAKER_01 30:14

And um in your life, did you ever have any interactions with Jim Simons?

SPEAKER_00 30:18

No, no, I never did. I've I've you know met some people that worked with him that were all very impressive, but no, not Jim. A few of my friends uh serve on this Math for Math for America board, which was one of his uh big philanthropies. Um so have some friends who knew him well and really liked him a lot.

SPEAKER_01 30:38

All right, Victor. Well, we're 30 minutes in. Haven't gotten to the first question yet, but it's gonna be uh a a dramatic tangent into missing billionaires. And so the book opens with an archetypal example of failed money management, which is the Vanderbilt Fortune. Uh, at the time was the largest in the world and was totally squandered in just a few generations because the inherited wealth took too many risks that exposed them to zero too many times. Um, and this is just as asking you as a way to explain the ergodicity in economics, or at least the ergodicity in your thinking of long-term uh money management, why it's relevant to the Missing Billionaires thesis. I want to tell this anecdote of ergodicity from Luca Delana's book as a way to bring it up. Okay. So his cousin was an extremely good skier from a very young age, and he made it to the junior world championships, and he was in fact the fastest on the mountain. He was the best prospect uh Italian young skier, but he took really big risks. So he was always the fastest, but he ended up getting injured too many times, and therefore didn't have the longevity in his skiing career. And therefore, the lesson here is that the best skiers in the world are not necessarily the fastest, but those who finish the race the most times. And so the longer you're in the game, the more refined your skiing gets, and the less injured you are, the more time you spend on the mountain, the more competitions you can compete in. Therefore, in the case of competitive skiing, and at least from what I could understand from Missing Billionaires, is that performance is subordinate to survival.

SPEAKER_00 32:10

So, yeah, um, yeah, thanks for mentioning that book. I I I picked up a copy of it on Kindle over the weekend and and uh enjoyed reading it. Um so uh so first of all, uh, you know, in terms of that um you know uh story from Luca, uh, you know, it's it's a great example, and and uh you can see that you know figuring out um you know how many uh competitions you're gonna win given that you might have a stop out with um with an injury is not trivial. And and uh you know, but but it's clear, but the intuition for why the expected number of wins um is not just equal to the probability of winning times the number of times you race because you might get stopped out with an injury early on. But one thing that's interesting, right, is if if you had a really big population of skiers, right, then the best skier would be the one who um had the highest probability of winning and happened to not get injured over that whole uh thing. So it just depends on how big your population is. If you have a big enough population, the best skier is going to be the one who has the highest probability of winning uh the races and happens to be lucky enough to have survived all of those injuries. And the reason that I bring that up is that um, you know, what we see in terms of the richest, you know, maybe some of the wealthiest people in the world uh today are those who um happen to not have had the um the the you know that um career-stopping injury. And you know, the one that really comes to mind is is Elon Musk, where you know he is uh just taking an enormous amount of risk, an enormous amount of um consequential risk, you know, and uh but you know somehow he's survived all of that and you know has had skill and luck and everything all together, and so he winds up being one of the uh richest people in the world. And you know, a number of those people that are in that top in those top spots are people that have taken an awful lot of risk and it's worked out for them. Um, you know, there are some of them, you know, such as uh Bill Gates. You know, Bill Gates would be the richest person in the world today if he didn't, if he hadn't diversified away from his Microsoft holdings, I believe. Um but it was sensible for him to do that, especially considering uh that uh the destination for his wealth was largely going to be uh philanthropic, and he had to think about uh the importance of um uh of stewarding that capital for his philanthropic goals. It belonged effectively to other people who really needed the money, and he couldn't just um you know take uh huge risks with a small edge. Now, the counterexample to Elon Musk, I think, uh a counterexample in terms of outcome, but doing the same thing is um is Sam Bankman-Fried, where he said, Okay, I just want to maximize my expected wealth. You know, he was uh many times questioned and quoted on that, and he's like, I just want to maximize my expected value. I don't, I'm not maximizing my risk-adjusted wealth. I'm trying to maximize my expected wealth. And, you know, in general, when you're trying to maximize your expected wealth, it's going to end badly because the the road to maximizing your expected wealth is to maximize your expected return, not to maximize sort of your the growth of your wealth or your risk-adjusted wealth, you know, as um, you know, in this ergodicity economics um uh um literature, you know, they're talking about how uh risk eats, you know, in these call them non-ergodic processes or just compound, you know, to call them compound processes, right? In compound processes, risk eats return, and it eats return exponentially as you take more risk. So uh, you know, like if you're you know, which is very simple to see, if you make 50% one year and you lose 50% the next year, you're not back where you started, you're 25% lower. And that's the basic insight of risk um being a drag on compound returns, which is what's important to us. If you make 50% and lose 50%, you might say, my average return was zero, and that's right, your average annual return or arithmetic return is zero, but you lost 25% or 12% per annum, you lost because of that excessive volatility.

SPEAKER_01 36:59

The point being that remaining in the game is actually the sort of most important variable. The more times you expose yourself to the risk of zero, that will eventually catch up to you. There are maybe some of you lucky exceptions, but the great majority.

SPEAKER_00 37:15

And well, yeah, even and even uh, you know, remember that if you lose uh you know if you lose 80% of your wealth, that you need to make five times your wealth to get back to the same place. So it's not just about zero, it's also about you know just you know consequential losses to your to your wealth.

SPEAKER_01 37:32

There's a great anecdote from uh uh you brought up Elon Musk from his life when he had all of his money. He obviously just is a hundred percent all in risk on, risk on, risk on, double down, double down, double down. When Tesla was in dire straits, SpaceX was in dire straits, and a quote from the Walter Isaacson book was basically he can decide to give bay uh food to one of his children, so the chance for it survives, or half to each for the chance that both of them die. Um he took the risk with both, obviously, and he came in money at the very last minute, and that managed to get Tesla, I think, maybe six months more cash, and anyway, the rest is history. Now he's one of the most influential people on the planet, let alone his wealth. But why is this lesson relevant to missing billionaire?

SPEAKER_00 38:24

You know, in our in our book, we talk about how uh remarkable it is that uh that there are so few or or no billionaires today that can trace their wealth back to the early uh 1900s. Um and it's remarkable because it's been such a wonderful investment environment, and you would expect that some people would beat the market while others might not, and some people would have fewer offspring, and some people, you know, all there's just a lot of reasons why we should be seeing a bunch of them, but we see virtually none. Uh and um and so as we were digging into that, it's like, well, what are the headwinds that uh that investors face and that would have affected these families? And sure, you could be spending too much. There are taxes, there are fees, there are all these things, but taking all of those different things into account really doesn't explain their near uh total absence from today's ranks of the wealthy. And what we started to realize is that there's also this risk explanation where these families uh tended to have concentrated holdings in certain industries, in certain stocks. You know, in the case of the Vanderbilt, it was railroads. Um, and they just exposed themselves to a lot of extra idiosyncratic, non-recoverable types of risks, which over the period of a hundred years or 120 years, those are gonna come home to roost at different times. And especially if you combine taking quite a lot of risk in your investment portfolio with following a spending policy that is not that has no risk in it. In other words, that you're kind of following like just a fixed spending policy where your spending doesn't go up or down with your wealth, um, but you're locked into like a um a fixed and growing spending policy, that that creates like a leverage effect on the riskiness of your investment portfolio. And when you put those two things together, you know, it tends to be pretty catastrophic. And so um, yeah, I mean, I could, you know, I I like this sort of toy example where you say, imagine that you know that you can invest in a portfolio which is gonna give you a return of 5% above inflation and after taxes, and uh, but it's it's a concentrated portfolio and a handful of stocks. So the volatility of the portfolio is 30% a year. It goes up or down 30% a year. So you say, okay, uh, you know, I have you know $10 million or whatever, and uh I'm retired now, and I'm gonna spend uh 4% of that. I'm gonna spend uh $400,000 a year, let's say, um, because I should be able to support that over time. Um and I'm gonna let that grow with inflation because my return is uh is a 5% above inflation. And the question is, you know, after 25 years, what's the most likely amount of wealth that that person or family is gonna have? And the answer is zero. Um, you know, that even though the return, the expected return is 5% and you're spending just 4% of that starting wealth, that all that risk and all that fixedness to your spending drives the median um your median wealth down uh to zero. So there's over a 50% chance that you have zero wealth uh at the end of 25 years, meaning you've run out at 25 years or sooner, which is remarkable. Um and um, you know, as the horizon gets longer, you get counterintuitive as well.

SPEAKER_01 42:07

Pardon? Counterintuitive as well.

SPEAKER_00 42:09

Yeah, I think it is kind of counterintuitive because we don't think, you know, we think about that 5% return, but we don't think about what does that mean for a geometric return, right? But you can see it because if so it's like one year you make 35% on your money, the next year you lose 25%. Well, that averages to 5% plus per year. But if you go up by 35 and down by 25, that actually brings you pretty close to where you started. But you spent, but you spent 8% of your wealth 4% a year for the two years.

SPEAKER_01 42:41

So what's the solution to that problem then?

SPEAKER_00 42:44

The solution is to uh is to be mindful of the risk that you're taking, to to uh to think about what's the right amount of risk to take given the expected return of your investment portfolio, and to tie your spending uh to that your spending and investing have to be tied together, that they can't be these separate things. That if you really can't take any variability in your spending, well, then you can't take any variability in your investing, if that's really the case. You know, we we think that for you know wealthy people that's not the case, but they do need to realize that um their spending does need to be variable as well to an extent. Um so be just being really mindful about risk and what's the appropriate amount of risk to take, given uh the attractiveness of your investment portfolio or your or your investment ideas, is really critical. You know, that it's not about maximizing expected return, it's about maximizing uh risk adjusted return, or you know, in the more abstract statement of the problem, it's about maximizing your discounted expected lifetime utility. That's really the ultimate objective.

SPEAKER_01 44:01

Amazing. Is there a problem with thinking about expected returns? The difference between the expectations of you projecting into the future what I should get versus the hardcore reality that we don't know what's going to happen tomorrow.

SPEAKER_00 44:18

Yeah. A lot of people will say, well, to make the right decisions, you're saying that I need to know the expected return of these investments and I need to know their riskiness, or what's the I need to know the distribution of outcomes. And who knows what the distribution of outcomes really is. And of course we don't. You know, that we have there's uncertainty about our estimate of the distribution of outcomes. We don't know exactly what the expected return of the stock market is. There's some true expected return, there's some true distribution, but we can't observe that. So we have to estimate that. And then people say, well, but your estimation is just an estimate. It's not the truth. It's an estimate. And isn't that a problem? And it turns out that it is and it isn't. Um mostly it isn't a problem, that uh um that uncertainty around our estimates is something that we can model and see what it does to those estimates, uh, sorry, to the decisions that are optimal for us. And what we find in general in most cases, and we talk about it in the book somewhat, is that the uncertainty around our estimates for the kind of financial decisions that are most applicable to most people are not that consequential. And there's this great, you know, to really illustrate this idea about uncertainty, sort of this uncertainty versus risk. Um, there was this great experiment done by Daniel Ellsberg, a Columbia professor, who also happened to be um the uh uh the guy at the center of these Vietnam documents. I don't know if you ever read about he released a bunch of um of Pentagon papers um about the Vietnam War and how poorly the uh the policymakers and the government thought the war was going, but they were hiding it from the public. So he released classified documents to the press back in the 60s, and he was tried for treason and would have died and would have been executed, but he was acquitted. So he's like one of these, you know, a relatively early case of um letting the, you know, that we we have more recent cases of this, but he was back then. But then he also had this career as a Columbia professor. And anyway, he did this experiment trying to show how we think about risk versus uncertainty. And what he's what the experiment was is this he says, imagine uh that uh I'm gonna let you play a game. I have an urn filled with a hundred balls, and fifty of them are red, fifty of them are black. You reach in there, if you pick out a red ball, I'm gonna give you a hundred dollars. So that's choice A. Choice B is here's a hundred urns. I'm gonna show you a hundred urns, and the urns have uh a mixture, have a um an unknown mixture of balls from one red to not, or from zero red to a hundred black, or they could have uh hundred red and zero black and anything in between. But I'll tell you that you know, on average across all of these hundred urns, there's a 50-50, uh there's um, you know, five thousand red balls and five thousand uh um black balls. But none of these urns are probably gonna have, or just a few of these urns might have 50 red and 50 black. So you could choose an urn and then reach into the urn, pull out a ball, and if it's red, you get $100. So those are your two choices. Game A is you pick from this urn that's 50-50. Choice B is you pick an urn and then you reach into the urn and pick it out. And what he found was you know that most people preferred to pick from the urn that they knew was a 50-50 chance of being a red ball. Well, mathematically, I can show, or we can show, or you can see when you think about it for a few minutes, that both games have a 50% chance of giving you a red ball. So, sure, people might be averse to the ambiguity or the uncertainty of the distribution, right? Once you pick that urn, you don't know the distribution anymore, really. Um but it's the same thing. And of course, we can modify the game to get to the result that we want, where if we say, okay, now you're you pick one or the other and you get to pick 10 balls out of it, right? Then the the uh the urn with fifth with that you know has 50-50 red and black is the less risky option, but you don't need to bring ambiguity into it. It's just like, okay, if I pick one of these other urns, now I'm gonna be picking from an urn that I and I'm gonna pick 10 balls from it, you know, this repeated aspect. So um, you know, I think that uh I think that we shouldn't cop out from, you know, we need to know, we need to have an estimate. If we're going to invest, we need to know the expected return and the risk of the things that we're thinking about investing in. We can't, there's no other, there's no alternative to that. We can't say, you know, I'm agnostic about the return of the stock market. I have no idea what the stock market's gonna return, and yet I want to put 70% of my money into it. Like that doesn't make any logical sense. You can't say that. Now you could say, my estimate of the stock market's return is what it returned over the last hundred years. And I would say to that, that's a weird way to make that estimate. I think it's a very poor way to make that estimate, looking at the last hundred years to estimate the next 20 or 30 years. I don't think that makes sense with regard to the stock market, no more than it would make sense with regard to buying a bond. You know, it's like I'm buying a bond today, uh, maybe it has a 5% yield, and I say, oh, what if bonds returned over the last hundred years? Oh, they returned 7%. So I buy this bond and I say, oh, if I hold it to maturity, my expectation is to make 7%, because the last hundred years has been seven percent. But no, I know that the yield of the bond is five percent. So I know if I hold it to maturity, I'll make five percent. And but we do need these estimates of expected return and risk. Otherwise, we can't make rational decisions at all.

SPEAKER_01 50:40

Amazing uh experiment. Could you just drive home? Because I'm not sure if I quite caught it, what the the lesson is from that experiment.

SPEAKER_00 50:48

I think the lesson from the experiment is that people uh that people uh behaviorally that we don't like ambiguity, uh, but that when you do the math, very often the ambiguity is not affecting the right choice to make. So ambiguity bothers us uh as humans, but when we think it through rationally, we can see that um that if if the the fact that we don't know that the stock market, we don't know the true expected return of the stock market. So you say to me, Vic, what do you think is the expected return of the global stock market? And I say, well, I think the global stock market has uh an expected long-term real return of 5% above inflation. That's my expectation. And then uh and then you say, how certain are you of that? And I say, well, yeah, I mean, I don't know the true expected return. Maybe it's six percent, maybe it's four percent, maybe it's six and a half percent. I don't know. There's I have a distribution around the expected return of the stock market. So then you say, well, then how can you make a decision about how much to invest in stocks? And I say, well, my estimate really is is the most important thing, and I can also model that uncertainty around my estimate and all the risk of the stock market. Now, the risk of the stock market is much greater than the risk of my estimate of the expected return. But as long as my estimate is unbiased, I can more or less, you know, it turns out that in many cases I can use that or use something close to that for the estimate, but it doesn't stop me. I can recognize that uncertainty and uh in my estimate and make a rational decision. It doesn't stop me short. If somebody says, oh, your estimate is 5%, but it could be 6%, and I'm like, yeah, it could be 6%, but my estimate is five, and it could be six, it could be four, and I can figure out what that means for what's a rational amount to invest in the stock market if I know the risk as well of the stock market or have an estimate for that.

SPEAKER_01 52:50

I love these um social experiments which explain our behavior, which can then be extrapolated through to how we invest our money and take risks more generally. You write in the book that um we carry around baggage from our evolutionary past, and then you make a lot of references to um Cunnerman and Tversky, uh, among others. So, what are some of the fun examples of this baggage that we're carrying around from our evolutionary past?

SPEAKER_00 53:18

Gosh, I don't know. I don't know how many of them are really fun. I mean, some of them are funny.

SPEAKER_01 53:23

Uh devastating, rather, is maybe a better way to put it.

SPEAKER_00 53:26

But yeah, I mean, some some of the fun, I think some of the fun ones are, you know, um, you know, these uh like I I you know I've always loved the one. It doesn't have much to do with investing, but I love the one, you know, where you have the arrow where you know the uh the end of the arrow is either closed or is either closed or open, and the length of the line looks different, you know, as you're looking at it, and that's kind of just a fun optical illusion.

SPEAKER_01 53:49

But I think that the I think that our biggest some that are specifically extrapolatable to investing.

SPEAKER_00 53:55

Yes, absolutely. So, you know, I think that the um the the the mother, the sort of the mother of all things that hurt us, I think, as investors, is our tendency to extrapolate um to make conclusions from a very small amount of uh of data or information. And um and so, you know, which leads to return chasing, which leads to just very unrealistic expectations of future returns and risk on you know when we're thinking about different investments. And you know, one uh survey that we did or an experiment that we ran uh a while ago is we asked a couple hundred people this question. We said, imagine there are two coins. One of them is a fair coin with a 50-50 chance of landing on heads, and the other one is a biased weighted coin that if you flip it, it has a 60% chance of landing on heads and 40% on tails. And so here are these two coins. I'm sure here you go, but you don't know which one is which, okay? So you can go I'm going to let you flip both of them as many times as you would like. Uh, and of course, after a certain number of flips, um, you're going to conclude that the one that landed on heads more is the one that uh is the biased coin towards heads. And so the question that we asked these people is we said, how many times do you need to flip these coins? What's the minimum number of times that you need to flip these coins that you want in order to be 95% confident that uh you're choosing the right coin, you're choosing that you're distinguishing correctly between the coins. Now, right to begin with, you have a 50% chance if you just randomly said, I don't need to flip them, I think this is the weighted coin, you have a 50% chance of getting the right one, because there's two coins and one of them is that. So, how many times do you need to flip to get from 50% up to a 95% confidence? So we asked around 200 people. These are, you know, sort of generally quantitative, mathy people, and we said to them, please just tell us what you think. Don't code it up or don't try to calculate it. Just tell us what you think. And uh and a lot of people guessed, you know, like 10 to 20 flips would be enough. I think the average number, the median number was around 15 that people guessed. Uh the average number was higher because some people guessed a lot higher. So the average was around a 30 or so. But the answer is 141. Wow. And and it's it's shocking. Like for me, uh, you know, I'm not saying that I would have guessed, I I would not have guessed. When I heard when I heard a version of this problem and we turned it into this one, you know, I I was also astounded at that intuition, you know, that the it was counterintuitive to me. So it takes a really long time to, you know, that even if you have something that's as stable as these two coins, let alone the track record of investors, that um that it takes a really, really long time to distinguish uh skill from luck, or to distinguish you know, a good investment from a mediocre investment, um, you know, much, much longer. And actually that choosing of the 50-50 versus 60-40 is not that different from what you might find if you were trying to compare a passive in an investment in an index fund versus an investment with a stock picking active mutual fund manager. That, you know, sort of that edge of, you know, that if that mutual fund manager had the edge, you know, that's about the amount of edge that you would expect per year, would be like a a sharp of 0.2 or something like that, a 60-40 uh sort of edge in terms of outperforming the market every year. And people just extrapolate, you know, we are hardwired to extrapolate from um you know uh from the short uh short data sets that uh that aren't even stable. You know, the coins are stable, the you know, people's track records are not stable, the world is changing, they're changing, you know, all of that. So, you know, extrapolation I think is a big one. Another the second one I would mention, and uh, you know, there's so many of them, but the second really big one, you know, is just this um overconfidence in our own abilities, right? Like we can we can recognize that uh that uh that we know we can recognize that on average um stock pickers can't beat the market as a mathematical identity, but it's like but but somehow we will, you know, that we can recognize it as it applies on average to the whole market, but you know, we're exceptional, um, and and we're gonna beat the market. So, you know, I think those are the two uh sort of behavioral biases of the hundreds cataloged that really stand out to me as the two biggest.

SPEAKER_01 58:50

Could you help me understand the practical application of that um first example with a 50% and 60% coin um for someone who is interested in managing their money? What is that what is the practical lesson from that example?

SPEAKER_00 59:06

I think the practical ex the practical example there, uh sorry, the practical application is that when making your investment decisions, that you cannot rely on what has happened over the last one year, five years, or ten years to uh to make your decisions. You know, that you can't extrapolate out, that that is far too little data in almost all cases to uh to extrapolate into the future for how that investment is going to perform and what you should invest in. And so, you know, investors who um invest in things and then they say, well, how is it done over the last two years? I'm gonna get rid of my uh losing managers and put more money with the people who have done well over the last two years. There's just no statistical significance. There's no statistical power, virtually no statistical power in the last two years of returns for people to make those kinds of decisions. And so you really have to be forward-looking in your assessment of uh of investment alternatives and what's uh what's attractive and and not. And you know, and and this very concept is uh you know, is like emphasized, you know, whenever Warren Buffett talks about investing, he's always emphasizing, you know, we always we cannot invest based on looking through the rear view mirror. That uh, you know, he doesn't go into the lack of statistical power of small samples, but it's it's the same thing. We cannot invest based on looking in the rear view mirror. We have to be looking forward and relying on our estimates of um of how um of how the world works and and and how things will evolve in the future and making um you know estimates in that way.

SPEAKER_01 1:00:58

Someone who thinks similarly along these lines, or at least also applies these social experiments to investing in his writing, is uh Nasim Taleb in his five-part Inserto series. Um I just wonder whether he's informed your worldview at all.

SPEAKER_00 1:01:15

You know, I've I've enjoyed his his uh books, um, and um, you know, I've been to some of his lectures and I've had uh dinner with him at least once that I can remember, and he's uh he's lovely in person. Um the um, you know, I think that um I think that his sort of iconoclas uh his his you know he's he's so iconoclastic or he's so he just wants, you know, he kind of wants to tear down um the um he wants to tear down the conventional academic uh appro approach to choice theory and so on, that I think that, or at least historically he's he's been more that way. And I think that there's a lot that we can draw upon from um you know the last 50 years of advances in um uh in academic finance. You know, and I think that his uh you know that I think that the idea of like, you know, let's all of that is bunk and uh we need to start over again, you know, and and um, you know, I I so I you know I think that um I've enjoyed and learned uh and and taken good lessons from his writing. Um but I think that he's a little bit too extreme in terms of uh um you know saying that uh you know modern finance is all bunk and and the creators of it should go to jail. You know, like I think that's you know, I don't know, maybe I think that's probably just uh for dramatic effect on his part. Absolutely. But still, you know, I just I think that there's an awful lot um that's really valuable in modern finance, and you know, modern finance has always uh recognized that um that we're building, you know, that that we're building models which are not the same as reality, you know, that when we use certain kinds of distributions to to explore different ideas, we're not saying that those distributions of outcomes are real are the real distributions. We know that financial assets have fat tails. You know, we know um you know we know that markets don't behave uh you know in a in a perfect you know sort of random walk diffusion. And and and the um and academics have been writing about that from the very beginning. So, you know, I I think that um uh yeah, you know great great contributions, but uh you know, he hasn't uh you know I I think that he would say that um you know that I'm part of the problem.

SPEAKER_01 1:03:47

No, I'm I I'm sorry, I'm sorry if that put you on the spot or anything like that. It wasn't a loaded question.

SPEAKER_00 1:03:53

But he's you know he's he's he's brilliant, and uh, you know, as I say, you know, I I um you know I've I've really enjoyed uh I I mean I've enjoyed reading, listening to him, yeah, and even on the one occasion when we had dinner together, he was absolutely lovely and charming, and uh yeah, there's he has a lot to teach us all.

SPEAKER_01 1:04:11

Victor, just um one more question to uh at least Missing Billionaires and L Wealth related, and then uh there's a few questions that I try to ask every guest who appears on the podcast. But um to the audience, uh Missing Billionaires is available. I got it on audiobooks.com. It's also an Audible, it's on Kindle, it's it's everywhere.

SPEAKER_00 1:04:31

Yeah, oh and I yeah, I narrated the uh the audio version as well. So exactly.

SPEAKER_01 1:04:37

So if you like these dulcet tones, there's uh 11 hours more for you there. Um but this maybe is more of a loaded question, but I think a good way to finish off this topic. Um what are you doing at our wealth and as well the philosophy that's informed by missing billionaires, that's more sophisticated than if I just put my money in various indexes that tracked the top hundred companies around the world and kept it there for 50 years?

SPEAKER_00 1:05:08

So um, you know, the idea of the book, what we're talking about in the book, is that in making our investment decisions and our spending decisions over our lifetimes, that we need to base them upon uh the expected return, the expected risk, you know, maybe more broadly, the full expected distribution of outcomes for different investments that we um that that we have access to, and that we have to make our decisions that are maximizing our personal objective function, which we call a utility function, a happiness function, where that explicitly recognizes that the more wealth that we have or the more spending that we do, that the increasing benefit to us is declining, that there's a diminishing marginal uh happiness. Or utility from every extra dollar we spend or every extra dollar of wealth that we have. So that's the basis of the book and the ideas in there. And at Elm Wealth, we try to apply those to managing our clients' investment portfolios. And so we believe that once a client sort of establishes their degree of risk aversion and what their utility curve might look like, and we can help them with that and with some simple questions. That then when the expected return of the public markets is higher than in a baseline case, then we allocate more to those buckets of risk assets, more to US equities and European equities and so on, and vice versa less when the expected return relative to safe assets is lower. And we also do the same thing with regard to risk because it's not just about expected return, it's also about risk. And so the riskier that markets are, the less that we allocate to them, and vice versa when they're less risky and there's less uncertainty. So, you know, early in the pandemic, when the markets were going absolutely crazy and there was tremendous uncertainty about where the world was going, we reduced exposure to risky assets, even though they had already gone down. And then later that year, when things settled down and there was a lot less uncertainty about where we were going and what this pandemic looked like, we increased exposure again. And and that helped people felt a lot more comfortable knowing that somebody was doing that for them than if they just had kept a fixed percentage in the market through that whole time. Because they might not have been able to keep a fixed percentage in the market. They might have uh panicked, they might have felt that this can't make sense to keep my 70%, and then they reduce down to 20% in equities, and then they pat themselves on the back because that was a good, you know, we did the same thing, you know, the market kept going down. And so they pat themselves on the back that that was a good decision, and it was a good decision because the market was riskier, and so it made sense to reduce exposure. But then they might not have had a disciplined, um, you know, preconceived approach to putting the money back into the market. So we know lots of people that got out of the market in early 2020 and haven't really gotten back in because it went up so much in late 2020, and they didn't have like this disciplined approach to navigate getting back in. Sometimes getting out is the easier decision and the more um clear one than you know getting back in as the market is going up. So we manage uh we basically manage client portfolios in indexes dynamically. We call it dynamic index investing, and we actually even have a trademark for that because nobody else is doing that. And we think it's better than keeping a static allocation to equities over time. But you know, having said that, we think that if you can keep a static allocation to equities that's kind of right for you, and sometimes the expected returns and riskiness of the market will tell you that you should have more and sometimes less. But you just say, no, I'm just gonna keep to this because it's simple and this is what I want to do, that that's still a really good thing to do. That's better than the third alternative, which is just to, you know, willy-nilly do all kinds of things uh, you know, as your um sort of subjective assessment um guides you. So I think a static asset allocation is still good, but we do a dynamic asset allocation. We also customize portfolios. So if a client wanted us to manage a more static portfolio for them, we could do that. Or, you know, we manage, but most of what we do is manage these dynamically, which gives people a feeling that somebody is navigating the ship, you know, that we're not just like floating down this river, hopefully, and not hitting uh you know, not hitting the the uh sides or getting beached along the way or or breaking our hull. Um it's nice to know that somebody is steering it. You know, I think people like that. And so that's that's what we do at Elm. And um, yeah, it's it resonates with a lot of people, not everybody.

SPEAKER_01 1:10:15

So it's exclusively indexes because they have lower risk, as we've said before, but then you are and your team are actively going into and out of them according to the market, therefore hopefully offering a higher return had you just held it in that one index for a 20-year period.

SPEAKER_00 1:10:34

Right, right. And you know, as as Benjamin Franklin actually did say, uh, a penny saved is two pennies earned, uh, which talks about, you know, which speaks to the fact that two pennies earned in a risky way is the same as one penny saved in a risk-free way. And so, you know, we're very, very focused on costs. That's why we use these very low-cost index funds to get our exposures for our clients. And we also charge a really low fee. We charge 12 basis points for what we do, which is the lowest fee of any wealth advisor that we're aware of that's independent. I mean, you know, uh, you know, like uh Fidelity or Schwab charge zero, but then they put you only into their products. But for any independent wealth advisor, you know, I think that our 12 basis points is about as low as anything that we've seen from from others. And and that's because we do things algorithmically, we use, you know, and we're just dedicated to low cost. We think that's the low-hanging fruit that everybody should uh should harvest is uh is is keeping your costs really low.

SPEAKER_01 1:11:38

What do you make of I don't know what this guy's reputation is amongst professionals like yourselves, but Michael Berry came out with um this theory or this assumption, I'm not sure, but that they're because of the extreme amount of wealth in these indexes, they're actually subversively supporting inefficient businesses that would otherwise um be more picked off by the market because say if there's an index of a hundred stocks and it's really only five or six of them that move the price of that index, then there's 95 guys kind of freeloading. That's his theory. I don't know if there's any sense to it, but just what do you make of it?

SPEAKER_00 1:12:20

Well, there's so much criticism of uh of index funds, of market cap-weighted index funds. So there's Michael Berry, there's Michael Green, there's David Einhorn recently, there's, you know, and it goes the list goes on and on and on of people criticizing index funds for, I mean, I forget the the firm. There was this one one writer a few years ago who said um index funds are worse than Marxism uh and they're destroying capitalism. And you know, I just I just not surprisingly, all of these um uh critiques are coming from people who are active investors of one form or the other. Um and I think they're just completely wide of the mark uh in general. You know, I think that um index funds um, if anything, are making the market more efficient because the people that are investing in index funds would have been otherwise are the people that were the least informed doing the weirdest things and padding the pockets of the smart active investors the most. So when David Einhorn says, geez, these index funds are terrible because uh it makes it so much harder for us to make money at my hedge fund. It's like, what? You know, that what are you you I mean, how how can that stand, you know, how can he be interviewed and that stand somehow as a comment? Like the market is less efficient because it's harder for us to make money. Um that that uh you know, wow. So anyway, the the markets um there's so many people, the preponderance of capital out there is active money by far. And even if the market were 100% owned by index funds, active managers could still be making their bets on companies overvalued and undervalued through long, short um hedge fund portfolios. So we're I mean, we're nowhere clear, we're nowhere close to that. Um, but you know, I think that almost all of the criticisms of hedge funds of almost all of the criticisms of uh market cap-weighted index funds are are pretty wide of the mark, uh save, you know, one I think one criticism that that warrants um consideration and and uh solutions and so on, is just that um you know, to the extent that index fund managers um uh are having a lot of uh uh governance control of companies, that we need to think about that. We need to do something about that. You know, I don't like the idea of Larry Fink uh you know getting to vote 15% of the stock of all companies out there or 25%, you know, if it grew or whatever. Like there needs to be something figured out with regard to governance because you know it just doesn't make sense for um these index fund sponsors to have so much governance uh uh control over so many of uh over all of the companies in the economy. There needs to be some something done around that in some way. Uh I mean corporate governance in general is is kind of a bit of a of a of a mess in general, it doesn't work very well even without those issues of concentration. But you know, I think these arguments of index funds are making the markets less efficient. I mean, another argument that people have made is oh, index funds invest are always overinvested in overvalued companies. Well, hold on. If the idea of investing in an index fund is that you don't know which are the overvalued companies, then you can't say that index funds uh invest more heavily in the overvalued companies because you don't know which ones they are. If there's a presumption there that you know which are the overvalued companies, that you believe that the overvalued companies are the ones with the highest market cap, you think those are the overvalued ones. Well, if you believe that, you shouldn't be in an index fund to begin with. You should be expressing that view through your stock picking. But to say that there's like this fundamental flaw in index funds because they they are overweight, overvalued companies is kind of missing the whole logic that we don't know which are the overvalued companies to begin with. You know, otherwise you would be trying to take advantage of that. So you can't go to somebody who says, I don't know which are the overvalued companies and say, well, you shouldn't invest in an index fund because it's going to be overweight, the overvalued ones. And you're like, you know, how can you say you can't say that if you don't know? So that's that's an argument that is also out there. So I I think you know that um I haven't heard an argument against um a really valid argument against index funds. I mean, there's another argument which I think is correct, you know, which is that inclusions and exclusions on of it of companies into and out of the indexes can hurt the returns of the of those index funds. But that is only, in my opinion, that's only in the case of index funds that are not broad enough. So if you have an index fund which is the top hundred companies, sure, the hundredth company is a huge company, and when that go comes out or goes into the index, people are going to be gaming that. So the S P 500 or the OEX, you know, those indexes with 100 or 500 members. I don't like those. But we have indexes that have 4,000 stocks in them when the smallest companies are so small that them going in and out has no effect on uh um, you know, on returns. So, you know, I think those things are solvable. Those are good problems that people have pointed out and people have made a lot of money from the inclusion-exclusion game to the detriment of SP 500 holders um in general. But um, you know, those things are all things that we can deal with by constructing better indices which have been done.

SPEAKER_01 1:18:17

Well said, mate. Uh very interesting. We got two more for you, Victor. The first being, um, what is the role that serendipity has played in your life?

SPEAKER_00 1:18:28

Um everything, you know, like um, you know, from from uh being born uh in America uh to two loving parents, um, even though they got they they they didn't love each other, but they loved uh they loved me and my sister. Um to you know being born in 1962, you know, that was a really good vintage. Um but yeah, I mean the number the uh that that um the number of uh uh of of decisions that I've made that have really impacted my life have been so few, and so much has been uh sort of the luck and environment and and uh and serendipitous things that have that have come along. Um you know, one one in particular that uh you know, just one of the greatest moments of serendipity in my life, uh actually, which wasn't to do with career or anything like that, um my family was on a, I was on a hiking, I took my family on a hiking trip in this very desolate uh mountain lake area in the wind rivers in Wyoming. Very like there's nobody goes there. It's a beautiful but remote place. And we were camping on a lake, and uh one day I decided with my son, with my youngest son, who was about uh uh maybe five years old, that we were gonna go and hike along the um the shoreline of the lake. And we were hiking along, and at one point we had to go up a little bit, and there were some kind of cliffs, and we had to go, it was steep, so we went up a little bit and we were sort of shimmying across, and it was a little bit scary, and all of a sudden he lost his grip and his footing, this five-year-old son of mine, and he starts to just slide and tumble down, uh, you know, like a 30, 40-foot cliff face that was then uh going to uh go another 20, 30 feet into the lake. And um, and I'm just watching him, just absolutely terrified. And as he goes as he's getting to this crux point, I see that there's three hikers down there. We hadn't seen anybody for for like the four days that we were up there, and one of them takes a few steps forward and stops him and catches Mark, my son. And you know, to this day, I just I mean, my whole our whole life would have been different potentially if not for that, you know. And and uh, you know, I we went we went back, I was just absolutely uh shattered emotionally um you know through the whole thing. So yeah, I mean, yeah, it's just uh yeah, I mean, we have to recognize our so so much of that stuff in our in our lives, um, and so little is what we really we we do our best, you know, with how we manage our day-to-day, but ultimately there's that and that's an incredible story.

SPEAKER_01 1:21:22

Maybe one time out of ten million on that exact moment in such a desolate area as someone's walking along.

SPEAKER_00 1:21:30

Yeah, it was incredible.

SPEAKER_01 1:21:32

Yeah, I mean, how do you even how do you make sense of that? Are you just a lucky person? Or like how do you make sense of that? That's that's kind of wild. It's an extremely good story.

SPEAKER_00 1:21:43

Yeah, no, I think I have been a very, very lucky person for sure, you know. Absolutely.

SPEAKER_01 1:21:48

Wow. Um, one more moment of maybe forced serendipity projecting from my end, but you were the co-founder of LTCM, uh, which at the time was maybe the most prestigious hedge fund in the world, um, at 31 years old. So uh was there serendipity in your trajectory to get there?

SPEAKER_00 1:22:09

Absolutely there was, yeah. I mean, I um, you know, winding up uh winding up getting a job at Solomon Brothers uh from London. I was in London, and the uh the head of this research group in New York uh you know interviewed me and gave me a job all the way from London. I came over. He was a great mentor, Bob Coprash is his name. Uh, you know, he uh wanted all the people that worked for him to get exposure and to uh you know he we were all working for him, but he raised all of us up. So then his trading desk, uh the government arbitrage desk, became aware of the research that I was doing in that group as a young person. They pulled me out. Yeah, I mean the whole thing was was kind of remarkable um how it all went along and um yeah.

SPEAKER_01 1:22:57

Did you ever did you feel uh any imposter syndrome at the time when you were a 31-year-old co-founder, alongside Nobel laureates uh raising so much money, deploying so much money?

SPEAKER_00 1:23:08

Oh, absolutely, yeah, yeah, yeah, yeah. No, it was uh yeah, but so I mean, I think um the majority of us felt that way. Uh, but yes, it was it was very it was very common. The majority or or many of us, many of us talked about have talked about it over the years. Um, you know, one of my best friends who I started with at Solomon right at the same time was gone on to have a great career beyond Solomon and eventually in venture capital. Um, you know, we'd laugh about it all the time. You know, he's he I think he may have stopped feeling that way now. I mean, it's at some point I think that imposter syndrome is replaced with an appreciation of luck, you know, for for many people. You know, for me, um, yeah, instead of feeling like an imposter, I just feel incredibly lucky, you know, that that things kind of worked out luckily for me. Nice. So those are very related, you know. Um, but yeah, yeah, that imposter syndrome. Yeah, my uh I uh you you hear about it a lot, it's a real thing. It's it's very common.

SPEAKER_01 1:24:13

That's um that sense of gratitude and optimism, it really shines through in everything that I've um consumed of you, all the media. So it's a great trait. Thank you. Finally, Victor, last question. Um one I've asked hundreds of people now. I'm very interested to see considering your I think investors have as rounded a world view just in terms of how the world works as really anyone else, bar a number of academics where it's a there it's explicit job, because you have to have a sense for how everything is interconnected as best you can. But that means you're consuming so much stuff and etc. So that for that reason I think you're particularly well suited for this question. But um what is a country that you're particularly bullish on? Ooh, and why?

SPEAKER_00 1:25:06

Wow. Um I'm gonna say it. I'm gonna yeah, I've got it, I've got my one. Um I am really bullish on the UK. Um and uh and I think I think that uh that the UK has so much to offer the world. Um and um, you know, it just can't get out of its way at the moment and for a period of time. So, you know, it's a mess. It's an absolute mess. But it has um you know it has so much to offer the world, and it is fundamentally a tolerant place. It's a place where um freedom and and the democratic ideals and you know individualism is so so deeply rooted. Um I, you know, so and and it's in such a bad place, right? So like I could be optimistic on other places, but they're doing really well right now. Um you know, I think as soon as the UK decides that they want to really do well again, um that uh there is there it's just gonna be on fire. I think it's one of the most desirable places to live, one of the most desirable places to bring up a family. Um you know, London is London is this combination of New York, Washington, and Boston, right? It's the center of the government, it's the center of business, the center of finance, and it's the center of uh of academic uh thought, you know, all wrapped into one you know place. So yeah, it's having a really, really hard time right now, but um yeah, it's gonna be great. So yeah. You caught me on that one. Yeah, that was that was a good one.

SPEAKER_01 1:27:02

It's funny you say when they want to do great. I mean, I'm sure they very much want to do great, and obviously Brexit was a great self-inflicted wound. But um what are maybe beyond just your aspirations for the country, do you have any indicators for what might give you the sense that the Great Britain has a or the Great Britain, that the United Kingdom has a very bullish future ahead of it?

SPEAKER_00 1:27:30

Oh, that's that's also, yeah, you had me scared there with a really tough one, but no, I think I have my answer to that anyway, which is um it when it when it decides that it wants to be open to um uh when it wants to be open to people coming in again, when it wants to, when it wants to bring in the best, what when it wants to attract the best people in the world that want to go there and to be open, to be this open society that's taking all kinds of people in from the rest of the world. When it gets over this misconception of immigration being a zero sum game. It's not. It's a terrible misconception that immigration is well, sorry, that the job, that the jobs and the economy is like somehow zero sum that an immigrant comes in and somebody immigrates and takes somebody else's job. And that's the end of the story. I mean, immigration, you know, done the right way, you know, is is is the greatest asset that a country can have. If you are a country that everybody wants to go to, that is a tremendous asset, and you need to recognize that and uh and embrace that. And right now the UK is is not doing that. So when as soon as that happens, you know, we're gonna we're gonna get there as well. Um you know, I think another more minor one is rational taxation. You know, I think that you know, if they rationalize taxation, like you know, the stamp, you know, the 20% stamp effectively a 20% stamp on expensive homes in London is ridiculous. You know, I remember when France had that and everybody was laughing at France for having it, although in France when they had that stamp tax, you know, 30 years ago, everybody would get around it. And then you know, in the UK, they say we can't get around it, but uh then nobody's trading, you know, that uh which is you know, anyway, that's you know, just there's like some really dumb taxation things going on in the UK. Um but away from but I just think this openness that I don't want to dilute my first one. My first one is really high. The second one is is is much smaller one.

SPEAKER_01 1:29:42

All right, Victor. Well, um thank you so much for one being very generous with your time and also two offering up some really, really interesting personal anecdotes, but then as well uh things that you've researched for the book and and for your work. Really appreciate it.

SPEAKER_00 1:29:57

Oh, thanks so much, Ryan. I really enjoyed our conversation and uh I'm really looking forward to meeting in person, hopefully in London in uh in June.