Trey Lockerbie (03:28):
You just touched on how his approach was very much based around finding managers underneath him, which I know it’s the same career path you’ve now taken. What was the key principle you took as far as approaching allocating to different managers?

Ted Seides (03:44):
It starts with the seat, the particular seat or the particular pool of capital. If you think about a seat like Yale, or any other endowment or foundation or pension fund, in the institutional market, there are large dollars at work, but they tend not to be very highly resourced teams. You don’t have 200 investment professionals. Even at Yale, which is one of the bigger ones, there might be 20. They’re trying to cover the world across asset classes. You could think about different ways you might want to pursue that. One is you could say, “Okay, we’ll have one person focused on being the best US equity stock picker, and let’s have another person just focused on emerging market equities, and another in venture capital, and another leveraged buyouts. Oh, by the way, and another in China.”

Ted Seides (04:28):
Then you have to say, “Are each of those people going to be able to compete with the entire rest of the world? Or is the person sitting in New Haven picking stocks in China going to be able to compete with someone on the ground who has a full team of people in Asia?” Probably not. So one of those first premises is rather than try to compete with the very best people in the world across disciplines, go try to find them. Develop expertise in how you find them, how you partner with them, how you structure those partnerships, and that was a particular style of investing that David pursued and that I learned from an early age. It is very different, the science part of it. The art is probably more similar.

Ted Seides (05:06):
The science of that compared to the science of doing stock research is completely different. But they’re both viable. They’re both disciplines that work. It’s just a question of how you want to pursue it. For me, personally, I thought when I left I wanted to pick stocks, and I did that for a little while. What I found was I didn’t enjoy the business analysis as much as I enjoyed the strategy and the assessment of people that went into picking managers, and so I went back to that after a few years.

Trey Lockerbie (05:34):
Having spent so much time around David, what would you say his superpower is?

Ted Seides (05:39):
All the great investors that lead the way, there are a lot that follow and do their own thing, have this interesting hybrid of an independent streak and just intelligence of being able to see around corners. David is all of that. He has incredible temperament in his investing, incredible ability to show up every day with a perpetual time horizon and act accordingly, which very few people can do. He more than almost anyone else that I’ve ever met … The only other person that was close was his longtime number two, Dean Takahashi. They could just sit down with a money manager in any strategy in any asset class, and see right through them to the underlying assets they owned, and have a view on whether that portfolio was likely to do well and fit in with the strategy.

Ted Seides (06:27):
They’re just exceptionally talented people and investors. He’s sort of the classic five tool player. He’s clearly a great writer and a communicator, he’s a great thinker, and he just is one of these people that can think through what the next important aspect of their investment program is. Maybe that’s a strategy, maybe it’s a particular set of assets, maybe it’s something in structure, maybe it’s something in style, but he always had the next thing to focus on that became important that would drive returns.

Trey Lockerbie (06:59):
Well, one thing I learned out of your new book is that it seems that everyone has a boss, right? Even CIOs, they seem to be somewhat constrained by the boards that they report to, and even I’m sure David is even no exception. I’m curious, who is really at the top of the allocator food chain?

Ted Seides (07:18):
The CIO of an end owner of capital is probably as close as you can come. The top of the food chain is always the person who owns the money. If it is a very wealthy individual, they don’t really have to report to anybody. But on the institutional side, the CIOs are very close to the top. But invariably, it’s not their money. It may be the institution’s money, so they’ll be reporting to someone that is a committee or a board that will ultimately be responsible for the performance of the assets, even more than the CIO. So in the Yale’s case, just to use that example, Yale has an investment committee which is a subset of the Yale Corporation, and in fact, the investment committee makes every investment decision.

Ted Seides (08:01):
David and his team make recommendations to that committee, but the committee is responsible for the decisions. In that particular case, after 35 years of the best performance in the world, it’s highly likely that the committee would agree with all of David’s recommendations. But he’s earned that trust over a long period of time. It’s more common that a CIO will have a lot of say, but there’ll be a fair amount of back and forth between them and the members of the committee in the process of getting to an investment decision, sometimes even at the manager level.

Trey Lockerbie (08:33):
The last question I’ll ask about David is just around his coaching style, because I know you’ve also taken this role as a coach and leader and mentor. I imagine when you’re allocating to different managers, that’s a big part of the job and the superpower that comes with it. Did you take anything away from his style, and did it affect the way you operate today?

Ted Seides (08:52):
I mean, I hope I took every little bit that I could in five years. The way David operated, there wasn’t training. It was all by osmosis, and it’s a small team. There were a couple different things that would happen. One is you’d be in meetings with him, you’d see what questions he would, ask how he would ask them. Then all the investment recommendations got written up in very long, very detailed memos, and he edited every word of every memo. I learned to write from David, not at college, and I probably wrote 1,000 pages of memos in five years for the Investment Committee.

Ted Seides (09:25):
I think all of those disciplines go into an environment where you can’t help but learn what he’s teaching. The other thing I would say about him that’s different from others is he’s very black and white in how he thinks. He really does make the decisions of what gets recommended. It’s not a group decision process, and he happens to be right almost all the time. If you were someone that were the 51% right, it might be hard to figure out what’s the process that’s going into that decision. But you see this repeated pattern of great thought processes and great ideas, and so [inaudible 00:09:57] just an incredible place to learn because you can suck all that up before you really … for me, before I really had any opinions of my own.

Trey Lockerbie (10:05):
Well, you recently interviewed my buddies Alex and Damian from ERIS. Damien highlighted that Ray Dalio’s edge was only about 55% to 60%, and that probably Buffett was very similar. I don’t know about David. It sounds like he might even be better than that. But given that investing is all about having an edge, and that these guys are obviously superstars and the best in the world, what chance do us as mere mortals, as retail investors, have to compete?

Ted Seides (10:33):
Well, I don’t think you want to compete on the same playing grounds. A big part of the Yale’s edge independent of David, or what David’s built for Yale, it comes from a network of relationships that are very hard, if not impossible, to replicate. You can think about investing with the best venture capitalists in the world, the benchmark capitals of the world, the sequoias of the world. I can’t do that, you can’t do that. Yale can do that, and they’ll do that as much as they can. I think what you can take away from it is not so much exactly how he does it, but what are the some of the inputs that are repeatable for any investment process?

Ted Seides (11:06):
Those include being very rigorous about what you’re trying to accomplish, what the purpose is of your capital, understanding what your own biases are that you bring to the table, and then being very disciplined and consistent in exercising that set of beliefs towards investing. That can be very, very different for different people and individuals. But the structure of how you go about it and the consistency that you stay to that structure, ultimately is a lot more important sometimes than the individual decision of should I buy that stock or this other stock? There are lessons in how David invests at Yale that are very broadly applicable. Competing with them on their playing field is not one of them.

Trey Lockerbie (11:46):
Well, speaking of sticking with a certain style, you also highlight in the book that a traditional 60-40 portfolio of stocks and bonds is really unlikely to keep up with spending needs. Should the retail investor reconsider that type of structure for their own portfolio, and is there something they can adopt from the CIO playbook?

Ted Seides (12:05):
I think so. I’m not big on making market predictions because I believe very, very deeply that nobody knows what will happen in markets, good or bad. But there are times where, generally speaking, you could look out and say, “How are assets priced to deliver over a long period of time?” We happen to be at one of those times. It’s not hard to look at the 10 year now rising to the lofty rate of one and a half percent, and say, “You have to be kidding yourself if you think you’re going to make more than one and a half percent over the next 10 years.” It’s possible. Now rates could go down, they could go to zero, and you could get capital appreciation just like we’ve had for the last 30 years.

Ted Seides (12:40):
But that doesn’t seem likely. Stocks trading where they are, you can make all kinds of case for what you want about technology stocks and new paradigms, and we’ve seen all that before. But the pricing of stocks, particularly after the stimulus, is high. Generally speaking, you could invert the price of a stock to an earnings yield and think about what the growth of the economy is going to be on top of that, and you get to a number that is not that high. If you have just sort of common sense and you look at that, and you say well … Particularly for institutions. Institution’s a good proxy for individuals, that there is some rate of return that people need to meet their spending needs.

Ted Seides (13:18):
That’s more defined for institutions often than individuals in absence of a good financial planner and a whole path that brings them to where they need to go. But no matter who you are, it’s unlikely that investing so that you can make 3% or 4% is going to get people growth, the growth that they want in their portfolios. That lends itself to asking the question, what else should you do? There are lots of opportunities, increasingly so, to diversify away from US stocks and US bonds that are reasonable and available to individuals that didn’t used to be in the past, right? We have this proliferation of ETFs, so people can make whatever sub market bet that they want to in a cost efficient way if they don’t want to pick stocks.

Ted Seides (13:59):
We have the whole cryptocurrency ecosystem, and that’s an interesting possibility of a way to hedge against fiat money debasement. Harder to access the private markets for sure. But even then, you have public companies like Blackstone and KKR, and you can own a piece of the business in addition to what they’re doing. You have hedge funds like Pershing Square and Third Point that have listed vehicles that trade in discount in Europe. There are ways of getting access to high quality opportunities that are somewhat similar to what some of the institutions do and definitely diversify away from just owning the market.

Trey Lockerbie (14:36):
One thing I think that particularly lacks in retail investment is risk management. So talk to us a little bit why you think risk management is as much art as it is science.

Ted Seides (14:50):
My favorite line about risk comes from the late Peter Bernstein, the brilliant economist, and Peter used to say risk means we don’t know what will happen. If you really internalize that, it’s pretty profound because it’s not saying, “Hey, yeah, we don’t know what’s going to happen.” But what he used to say on top of that is, “We don’t know what will happen. Even if we think we do, the probability distribution of outcomes is really wide.” In any investment strategy, you could think about what could go wrong, and then you know that the thing that’s likely to go wrong, you haven’t thought of yet. Maybe it was knowable and you didn’t get there, or maybe it just wasn’t knowable.

Ted Seides (15:28):
Part of the idea of risk management is to have a deep understanding of how much can you lose and still stay in the game, and not get shaken out of the position or the posturing that you have that’s likely to reach your long term objectives. That sounds super simple. I just went through this example two weeks ago. I own a portfolio of SPACs in the public market, and that’s a whole investment thesis I could work through. It has a very finite known downside. These things have $10 of cash sitting in a trust. Yet, when the portfolio SPACs as a group traded off about 20%, I didn’t have SPACs that were more than call it $10 and 60 cents. But when that 10.60 went down to 10 across the board, I even felt myself with butterflies in my stomach saying, “Well, maybe I was wrong. Maybe this is bad investment. I shouldn’t have done this. Oh, by the way, I took more risk by owning some warrants while those things really got killed.”

Ted Seides (16:18):
That was a tiny tremor after a long period in markets of muted volatility and everything seems great. Now I know. I’ve read all the books about behavioral finance. I’ve talked to a lot of the experts. It still happens to me. That real question of how do you prepare for the time when risk plays out? Now risk is not upside. People call that performance. Upside volatility. It’s hard, and it’s behavioral and emotionally based, and we’re all wired to get shaken out of the position. You have to live through that a number of times to understand what is your “risk tolerance,” which then determines how much risk you have in place in any given portfolio. We can read all this. Howard Marks writes brilliantly about this, about cycles.

Ted Seides (17:01):
We know this and greed and fear, and all of that’s true. It’s completely different from the moment when it affects you, and that’s what every individual has to figure out for themselves. So that, why they’re investing, the purpose of that capital, what they’re trying to grow that money to over time doesn’t get affected by that one moment when they shouldn’t be touching anything. Or as I like to say, that moment where you have to remind yourself, don’t just do something, sit there.

Trey Lockerbie (17:25):
I love that quote. On the flip side of that, obviously these money managers are not immune to this bias, either. As you just highlighted there, so if I’m a retail investor and I say, “You know what? I actually just want someone else to manage this, but know that they’re susceptible. What have you seen be put in place to help manage that for allocators?

Ted Seides (17:45):
In the book I’ve just written, it’s called Capital Allocators, there’s a chapter on decision making processes that comes from some of the conversations I’ve had on my podcast with people like Annie Duke, the former professional poker player, and Michael Moebius, and the great strategist, and there’s a bunch of tools, knowing that our behavior will get in the way, that you can try to put in place to make it a little bit less bad. Most of those have to do with being in a decision making group where people hold each other accountable. There are lots of things I walked through in that chapter about how do you structure that group? How does that group conduct themselves? How should they be thinking? All of those things go into setting up processes to try to mitigate the risk that you won’t individually just react on your emotions at the wrong time.

Trey Lockerbie (18:31):
At what stage, maybe it’s a certain amount of capital or what have you, should an individual consider investing in something like a hedge fund? Which you know all about, you’ve written the book on it.

Ted Seides (18:42):
Well, I am now an individual investor. For 20 years, I was not. I was an institutional investor, mostly overseeing non taxable money. With one exception that I’ll describe, I do not invest in hedge funds because they are relatively tax inefficient, and I don’t think that in most instances hedge funds will let me get to what I’m trying to achieve with the capital. The exception to that are in retirement accounts. I am on the cusp of making my first hedge fund investment in five years. It is in a portfolio of biotech related hedge funds, but it’s in a retirement account so I don’t have to worry about the tax consequences.

Trey Lockerbie (19:16):
Interesting. How available are hedge funds to retail investors in your opinion?

Ted Seides (19:22):
They’re not particularly available, and certainly not the ones you’d likely have one access to. There are some alternative. They call them liquid alternative products that are okay. Blackstone has one that’s a fund of funds. But what I would tell you from looking at that and knowing that organization, which is they’re really quite good at investing in hedge funds and are the largest in the world, what they’re able to put in that liquid product is not the best stuff. The place where you can get around it, I had mentioned earlier, there are certain hedge fund managers who have listed vehicles.

Ted Seides (19:52):
Mostly not in the US, but Bill Ackman. My largest holding is Pershing Square Holdings, which is Bill Ackman’s fund with some leverage because he doesn’t have to worry about liquidity trading at a discount, and he buys back shares. I mean, it’s a very attractive, broad opportunity. There are some, but for every bill, there are 40 or 50 other incredibly talented hedge funds that, generally speaking, individual investors do not have access to. That’s okay. There’s a large world of investment opportunities. They don’t need to access everything.

Trey Lockerbie (20:22):
It’s interesting. I noticed that Seth Klarman also holds a large position of Pershing Square. Even someone as established as he is is investing in bill. Very cool. I just want to touch on the hedge fund fees involved. I love this quote in your book by Rahul Moodgal that says, “If you pay peanuts, you get monkeys.” What level of fees though, do you consider to be appropriate?

Ted Seides (20:44):
I don’t think you can answer the question. I think that every investment in a fund is driven by net returns, and some of the best performing vehicles in the world that we would all chomp at the bit to have access to if we could have the highest fees of anything. So think about the Renaissance Medallion Fund that seems like it’s a money printing machine. The last time Renaissance had outside money, they charged 5% of assets and 44% of performance. Is that worth it? Absolutely. Right, they were still compounding in the high 20s net of those fees. You could say the same thing for Benchmark, the venture capital firm. I’m not sure what their fees are, but it’s probably two or two and a half and somewhere between 20 and 30.

Ted Seides (21:22):
But you’d pay it all day long if you could have access. By the way, if we were able to give money to those organizations today, there’s no guarantee that they’d compound the way they have in the past. So we have a belief. We are investing in a story based on the past that they’ll continue to do what they did in the past, and that’s what all of investing in managers is. You’re trying to figure out an unknowable future, and it’s based on a story that you’ve made up, a narrative in Bob Shiller’s words, an economic narrative of what you think will happen. It’s very easy to say, “Oh, I know, I’m paying those fees, and those fees are too high,” but if you can’t access that opportunity any other way, and you have a sense of what you think that manager will deliver net of those fees, you may well be willing to pay it.

Ted Seides (22:05):
The market tells you right now, for any particular manager, because they’re different, what the fee is. It’s a matching of supply and demand. One of the funny things I found in my hedge fund years is that you’d have a lot of institutions that would give lip service to fees being too high, and would go as far as to bring other institutions together to write papers, like white papers, saying, “This is what we think the optimal fee structure should be.” Then they would go around that group and go invest in the next new hot fund that had none of the terms that they had espoused as the “right” thing to do. There is no consortium that could say we think fees are too high or they’re lower. It really is a question of how much people are willing to pay to access certain talent. The market tells you what those rates are at any point in time, and they can change. But by and large, hedge fund portfolios have delivered on expectations for the institutions that have invested in.

Trey Lockerbie (22:59):
You highlight another interesting quote from Michael [inaudible 00:23:01] in your new book that says there are limits to value investing, Ben Graham got crushed in the Depression. He just couldn’t resist the values. He went in early and got destroyed. Is the takeaway here that an investor needs to be more dynamic in their approach? And if so, how do you know when you’re evolving as opposed to just performance chasing?

Ted Seides (23:21):
I think the message in that is that the classic Keynes line, the market can stay irrational longer than you can stay solvent. Many people, including Dave Swensen, are dyed in the wool value investors. They have a belief, and these days it’s more well articulated based on behavior and why value stocks are systematically cheaper. You can look past history and say value outperforms. What you find, though, is that except for the rare instances where you’re dealing with the ultimate asset owner, or someone like David who effectively speaks for the asset owner, almost everyone, including institutions, don’t have an infinite time horizon to be in their own seat.

Ted Seides (24:02):
As Andy golden said, who’s the head of Princeton’s Endowment on my podcast, “To finish first, you first have to finish.” The lesson of what Michael was talking about with Ben Graham is that value can be out of favor for so long that even if you’re right over 20 years, if you only have 10, it doesn’t matter. It’s one of the big lessons that I took away from my own investing and what I did for my clients in my years of Protege that was different from Yale, which is I always preferred balance on style. In any way that I felt like there was some belief that could go wrong, even if you were ultimately right, for longer than was comfortable for your clients because your risk tolerance [inaudible 00:24:43] risk tolerance isn’t my own risk tolerance when I’m managing money for other people.

Ted Seides (24:46):
It’s the [inaudible 00:24:47] of mine and my clients. Value investing may work over the long term, but you could look at what’s happening right now to AQR, is they’re bleeding assets because they’ve been wrong or their style has been out of favor for too long for their clients to withstand it. That’s my takeaway from that, isn’t so much about performance chasing, it’s really more about understanding that investing isn’t just what do you do with the money? It’s what do you do with the money, who are you doing it for, and how are all of those people responding to results?

Trey Lockerbie (25:21):
You point out in your book this moneyball approach that shaped the industry, especially in recent years. Buffett has been making this analogy for decades referencing the Ted Williams book, The Science of Hitting. How can an independent investor determine their sweet spot?

Ted Seides (25:37):
I think it comes from the experience of figuring out what works for any individual. I can just give you my example, coming out of institutional investing, investing on my own, there are a lot of things I thought would work. So for many, many years, when I was managing outside capital, I couldn’t pick stocks. We did not allow it because we were concerned about potential conflicts, even though we were picking portfolios of managers. When I left for the first time in 15 years, I could pick stocks again, and I knew a lot of great managers and I knew some of their positions. I said, “This is amazing.” I’d watch, and if something sold off, I would buy it. But I never knew enough to know when to sell it.

Ted Seides (26:16):
What I learned quickly was, as soon as there was a tremor, I would get nervous. I quickly changed that strategy, and over time for me got back to saying, “You know what? My real comfort zone where I know I’m a good investor is when I’m investing in a fund, and I know why I’m there and I know what the signposts start to make changes, and that’s my sweet spot. For somebody else, it could be a value type situation. It could be a stock that they know people who own it, and it gets beaten up, and they love buying it when it gets beaten up. For other people, it could be momentum investing. It could be GameStop on Reddit. That could work for someone as long as they understand that that is the pitch that they’re hitting.

Ted Seides (26:53):
In the analogy you used, Ted Williams had a particular spot. He had mapped this out in the strike zone. I don’t remember what it was, but I feel like it was high in the strike zone. But somebody else might be a low ball hitter. Someone might be an inside ball hitter, someone might ball out over the plate. People just have to figure out for themselves, it’s a big investment universe, what is it that works for them, and then just have the discipline to stick to it.

Trey Lockerbie (27:17):
And wait for that fat pitch, as Warren likes to say, right? Speaking of moneyball, I love the quote from Ben Reiter in your book that says, “We are taught to think that numbers are far superior to human intuition, but that humans can detect things that numbers can’t describe. Try to get the best of both man and machine.” It’s more of the machine part, I think I’m really interested in, how we can incorporate more of that into our own investment processes.

Ted Seides (27:43):
Where I’ve seen a lot of investment managers go wrong is not so much in the stock selection, and certainly not in the buying of positions. It’s in the way they construct portfolios, and that is more of a science than an art. There’s some element of art. There’s only really two ways that that makes sense. One is that people believe they’re stock pickers, and they don’t necessarily believe in their own ability to weight positions, and so they just equally weight their portfolios. Maybe they rebalance every so often, and they let things go. The other is people that weight their positions based on their conviction. What I found over the years is when that’s not measured and people haven’t determined that they in fact do add value from weighting their positions based on their conviction, they often don’t.

Ted Seides (28:26):
They often would have been better off just equally weighting positions. There’s a lot of reasons why or hypotheses why you could make that case, or if people don’t know positions equally, their attention drifts in different ways. Stock prices move around, and it’s a multivariate equation to optimize what you think your price target and downside would be as stocks are moving around. But when portfolio managers, either from conviction weighting, or equal weighting, flutter back and forth, they end up losing a lot of money relative to their own ideas generation because of the lack of rigor in their portfolio construction. That’s one of the ways you’ve seen the science come into investing.

Ted Seides (29:02):
You see it most pronounced in certain hedge funds, particularly the platform multi manager hedge funds, places like Citadel and Point72 and Millennium that are very rigorous about portfolio construction and risk management. What they’re trying to do is get the stock selection alpha, or the ability of their portfolio managers to pick good stocks over what’s available over the market to allow that to speak and not let portfolio construction get in the way. But certainly when you talk to individual investors, they don’t often think nearly as deeply about their portfolio construction as they do about their individual positions.

Trey Lockerbie (29:35):
Well, all these quotes I’ve been referencing so far are from your new book, Capital Allocators, and it’s a great book. I would highly recommend it. But I did also touch on the fact that you wrote the book on hedge funds as well, but it has another great name called So You Want to Start a Hedge Fund. I think a lot of our listeners probably have at least thought about starting a hedge fund, myself included, right? Can you distill down to us the premise of that book and what drove you to write it?

Ted Seides (30:00):
To my years of Protege Partners, Protege was a hedge fund to funds that invested in early stage funds and also seeded new funds. I spent 14 years regularly evaluating and investing in startup hedge funds. What I found from doing that was that there was a series of mistakes that portfolio managers consistently make, but they never know they’re making it because it’s always the first time for them. I put that all in the book. There are a couple takeaways. I think it’s that people just need to first understand what they’re going into as a relates to a business and in an industry that they’re entering. Particularly with equity related managers, it always surprised me how rarely someone who says, “Oh, I want to go start a hedge fund,” and in that hedge fund, they’re going to analyze stocks and buy some to go long and short others, they haven’t really for a second thought about what is the hedge fund industry?

Ted Seides (30:56):
What is the structure of the industry? Is this a good business? What is my place in it? What is my competitive advantage? Would I go long my stock or would I go short buy stock? Some of the people who read that book said, “Oh boy, this is pretty sobering,” So some of what’s happened over the years is that the industry matured, and in any industry that matures, there’s much less of a demand for new products, and you get more concentrated. So the bigger hedge funds get bigger, and it gets harder and harder for a new product to come in because there isn’t necessarily that much differentiation.

Ted Seides (31:29):
It is a difficult landscape to enter, and part of the reason I wrote the book was in spite of that, it’s an incredible adventure for someone who is deeply passionate about investing and wants to give it a shot, as long as they understand the base rate and the challenges and the difficult probability of success. But to do it and to succeed, you don’t really have a lot of degrees of freedom. You really have to do things the right way. Some of those lessons can be taught quite easily. I took 25 or 30 of those stories from actual hedge funds, put them into a bunch of case studies, and put it together in a book that’s now, I guess, five years ago.

Trey Lockerbie (32:08):
Well, Ted, last time you were on our show, we talked about your infamous bet with Warren Buffett, and you’re never going to live this down, right? But long story short is that you lost the bet, but it’s interesting to note that you would have made the same decisions looking back, I’ve heard you say. Essentially the bet was a basket of hedge funds versus the S&P 500 over a decade. If you want to learn more about the bet and Ted’s experience, you can definitely go back and check out episode 170 where he highlights it in detail. We’re not going to go through the whole story here. But what I’m curious about is that since the S&P performance was essentially tied to the Feds intervention, I’m wondering why the hedge funds didn’t benefit in the same way. Of course, by definition, they’re hedge funds, they’re hedging [inaudible 00:32:56] right. But why didn’t they also get a boost from that?

Ted Seides (33:01):
Well, let’s start with that premise. If the premise is right, which I would agree with, that the Fed coming in in 2009 strongly boosted the market, flooded capital into the market. So the S&P had a big run. The question is, why didn’t hedge funds benefit as much? I think you hit the nail on the head, which is by definition, hedge funds are hedged. So the degree of risk, the degree of market exposure that they would have to those rising markets is much less than the S&P. So it’s not that they didn’t benefit. In fact, they did. After a difficult 2008 for the market, and certainly for hedge funds to a lesser extent, both recovered, and that was part of it. There are a bunch of other interesting dynamics as well, which is, you could make the case that it wasn’t just the Fed, it was central banks around the world to some extent that lowered rates, and so all equity markets went up.

Ted Seides (33:46):
But it turned out that if the benchmark for the bet was the Morgan Stanley World Index instead of the S&P 500, the bet would have been pretty much a wash, and that’s in spite of a pretty challenging performance for a bunch of reasons from hedge funds, definitely disappointing relative to expectations, including mine. But just the gap in the S&P from markets around the world was so wide during those call it eight and a half years after mid ’09, that that in and of itself was a big determinant in the bet. The hedge funds invested globally, so you did have exposure, that underlying market exposure was much more global than the S&P 500.

Trey Lockerbie (34:23):
Well, regardless, one of the biggest winnings it seems like, from this bet, was that you’ve got to spend a lot of time with Warren. I know that when I had dinner with Warren once, I had prepared one question in advance, and I think I blew it looking back. It was something about the efficient market hypothesis and whether value investing is still relevant and something he’s probably been asked 100 times. But I’m curious, when you walked into that room, thinking about … about to sit down with him, had you prepared a question of your own?

Ted Seides (34:53):
The first time I sat down with him, I hadn’t. I had some ideas of things I wanted to talk about, most of which were non investing, and we got to those. But I will tell you a story that echoes yours. A number of years ago, I brought Patrick O’Shaughnessy and Brent Beshore out with me, and we had dinner with Warren and Todd Combs. I think Tracy Britt may have been there as well. Tracy Britt Cool. Before we went to the dinner, Brent had a list of questions, and he said, “Okay. Well, we’re going to have dinner. It’s really your dinner, let’s make sure that I’m not going to monopolize this time.” Patrick had a few questions, and I said to Brent, “You better pick one or two because you don’t want to get frustrated.”

Ted Seides (35:31):
We went into that dinner, and I remember going to the bathroom. When I came back, there was this full on conversation about Notre Dame football, and then it went into something else. You could see, after about a half hour, Brent’s ears were sort of smoking because he wasn’t remotely close to being around the subject matter where he was going to ask us questions. He eventually did get to it, and it was terrific. But I would agree with you, Warren is so … He’s such a polymath. He’s so entertaining to be around. Yeah, you can go in and ask the questions you want. But I always find conversations are much more enjoyable when they’re somewhat free flowing, and they go wherever they go.

Trey Lockerbie (36:08):
I’m just curious, after all of those experiences, is there a longer lasting impression that he’s made on you or something that you could really grab onto?

Ted Seides (36:17):
I think there are a lot of little nuggets here. So much of what he says is in the public domain, and so there are little stories and you pick up more anecdotes than lessons, I think, privately. The biggest takeaway I had from when I first met him, and then it’s been consistent all the way through, is that he’s the real deal. What I mean by that is, we all know he’s compounded capital in an incredible way, but he really is a humble, Midwestern guy, and remarkably humble for what he’s accomplished.

Ted Seides (36:46):
He’s put himself out in public to teach people. Over the years, we’ve all seen critics say, “Oh, he’s hypocritical because he’s investing in energy, but saying that the environment should be cleaner.” Whatever. Whatever it is. There’s always a litany of things where people come down on him. Life isn’t so clear cut ever, it’s never so clean. But what I would say from having spent a fair amount of time with him is he really is the person that he presents. He’s just a wonderful, brilliant human being.

Trey Lockerbie (37:20):
Well, one reason I was especially excited to ask you that question was because you’ve made a career in allocating capital to money managers, right? So you are, of anyone I know, very attuned to what makes a great manager. You’ve interviewed hundreds, if not thousands, of people to manage money. You have probably picked up on the characteristics that makes a good manager, I imagine. So did you see any of those same things in Warren or did Warren have anything else that you’ve now applied to your hiring process?

Ted Seides (37:52):
I was former of the former. When I first met him, I was so pissed off that I hadn’t met him 20 or 30 years before, because it was completely obvious to me after two hours, I’ve said this in the past, that from being in the business, there are a number of people I’ve met who have gone on to become billionaires. He’s one of the very, very few that have a high degree of confidence that you could put him with next to no money alone in a room, and sometime later, might be 20 years, but sometime later, he’d be a billionaire. Again, he would do it in a completely different way. But he has this combination of an incredible mind and a drive that he probably hides from the public.

Ted Seides (38:32):
But I was stunned when I first met him of how much everything he thinks about and cares about is that company and compounding capital. Set aside his family. Does he care about his family? Absolutely. Is he interested in talking about his family? Not at all. Is it because he’s hiding them from the public? Not at all. He just cares about the business. So he has that deep, single minded passion, and you can just see it in his mental acuity and flexibility that if he wasn’t doing this, he would do something else. The stories he tells about his early business ventures, well before he was an investor, from a little, little kid, when first they bought a gas station and he was pumping gas, and he learned about pricing.

Ted Seides (39:13):
Then he bought gumball machines when they were inside of barber shops and had the mob come after him, and all these crazy things. You could just see he was just a natural entrepreneur. Yeah. I mean, it’s not easy to pick someone who you think will be a phenomenal money manager over time. Most won’t, right? Just by the probabilities and base rates. But he was one of the very few people I’ve met that you could tell that he would just figure it out.

Trey Lockerbie (39:43):
Ted, the last thing I want to talk about is coaching and leading because you’ve made this career out of investing in people and these managers that you’re allocating to. How much of your career Have you found yourself being a coach or a mentor?

Ted Seides (39:58):
Increasingly so, I would say. My time managing money, yes, you’re managing money, you’re investing in managers, and you’re partnering with those managers. As you gain experience, oftentimes, I would try to be helpful in different ways. Sometimes you’d see that in portfolios, sometimes you’d see it in iterations of what happens inside businesses. When I stepped away from that, you don’t lose that experience. It’s taken me a number of years to even explain to the people that I work with, ahead of time, what it is that I do, until my wife who’s not in the business said to me one day, “I just heard you talk to them, and that didn’t …” I’d tell people, “Well, I understand how the business works. I understand how investing works, I understand how the two work together, and I think I can help.”

Ted Seides (40:41):
She said, “Why don’t you just tell people you’re going to help them make more money?” That became how I described what I do. It’s not money because everyone’s greedy and they want to make more money, but it’s fun making more money. I just have enough experience in around investment organizations that whether it’s how people are thinking about just as simple as their marketing and business development, to are they making mistakes on their portfolio, are they making mistakes with their team, I’ve just seen enough iterations of people making mistakes that I have a pretty good sense in real time if something doesn’t seem right. It’s just fun to be able to share that, and I do it from time to time.

Ted Seides (41:16):
I don’t really deal with startups anymore, going back to what we were talking about with people wanting to start hedge funds, and the reason is it’s just too hard. I can’t do anything about the fact that the industry as a whole doesn’t have a large demand for new funds. I can’t help people get through that chicken and egg game. I do tend to work with a little bit more established funds. But no, they’re not mega funds. A couple $100 million under management or more, and it’s a lot of fun.

Trey Lockerbie (41:41):
In a career that’s defined by such quantitative outputs, as investing is, how do you measure effort versus outcome?

Ted Seides (41:50):
Well, I’d refer to as process over outcome. Effort is certainly part of the process, but sometimes the best inputs are not from the most effort, right? People say they get their best ideas in the shower or something like that, and it doesn’t mean that because they’re working harder in that moment. Assessing process is incredibly important, and it starts with an articulation, which again I have a whole chapter in the book about this, about what is that process? It’s not rocket science, what it is. How do people find their investment ideas? How does a CIO find their investment ideas? If you talk to enough of them, you realize there’s a pretty set way that they go about prioritizing what comes in the door.

Ted Seides (42:27):
How do they go through that process before they’re interviewing managers of what they’re going to learn, and what do they know? What are they trying to find out? What kinds of questions do they ask in those meetings? What kind of work do they do afterwards? How do they monitor the managers that are in their portfolios? I’ve dedicated a whole chapter to how does that whole investment process work? All of that has to do with the process. There is a part of the process that comes from thinking about the outputs of the managers you invest in and the quantitative assessments that go into that and the qualitative assessments that go into that, and what’s important. That’s a big part of how I spent two decades investing. I tried to share some of that in the book, and it’s not easy to distill in quick answer.

Trey Lockerbie (43:15):
Well, you’ve definitely outlined an amazing playbook in your new book about hiring especially, and you list a few questions that I would like to ask you. You can either answer them yourself, or I would also be interested in hearing the best answer you’ve heard from managers you’ve hired. The first one is, how do you position size?

Ted Seides (43:36):
Yeah. We touched on this earlier. I think that there’s really only two ways, equal weight and conviction weight. I just tell people, if you’re going to conviction weigh positions, make sure you’re measuring your ability to add value relative to equally weighting positions.

Trey Lockerbie (43:49):
Next up is how do you decide when to sell?

Ted Seides (43:54):
There have been studies recently that I’ve read that said that generally speaking, active managers are quite good at buying out a lot of value in their buys, but they detract value in selling. There aren’t a lot of people that articulate it well. One of those is a guy named Richard Lawrence, who I’ve had on my show twice. Richard runs, probably six or $7 billion in Asian equities, long only Asian equities, fairly concentrated portfolio. He has, of one of his many investment tools, a framework for thinking about selling that I think is spot on. He describes his five different reasons to sell.

Ted Seides (44:26):
One is you recognize you made a mistake, made a mistake in your process, in your investment thesis, and if that happens, sell immediately. The second is rebalancing. Within a portfolio when stocks move up relative to each other, you can trim and there’s a bit of a selling there, and you can add value over time. If those stocks relative to each other, have some volatility. The third is competition for capital, that his portfolio is only 20 or 25 names. If you find the 26th name, and it’s better than what you have, that’s a reason to sell something in your portfolio. The fourth is a change in outlook. That could mean an outlook for the company. Your investment thesis has just changed.

Ted Seides (45:01):
You don’t think that prospects for that company, or my case, that investment manager, are as strong as they were when you made the investment, then you sell. The last, which I think [inaudible 00:45:09] Richard on is the most controversial, which he refers to as you get tomorrow’s price today. The reason I think it’s controversial is that in his investment style, which is longterm compounding, sometimes it’s okay to hold on to things that have gotten ahead of themselves because you might not be right, because it might run higher, or because it might not go anywhere, but the company may compound into that valuation over a period of time. It’s a very subjective measure of when do you sell just because the stock feels expensive to you.

Ted Seides (45:40):
I know most value investors make the exact same mistake of selling too early. For years and years and years, I would push them and say, Well, why? Why don’t you hand off the decision to your trader and just tell them, “Don’t sell less than this,” and make more money along the way? Generally speaking, people who are value investors really, really struggle with that key component, which is what happens when a stock is running and gets to your price target?

Trey Lockerbie (46:05):
Yeah. I think I heard recently Charlie Munger say something to the effect of one of the biggest offenses value investing is disrupting the compounding involved. That speaks to that. Love that answer. All right. Next one is, what is your favorite idea today?

Ted Seides (46:21):
My favorite idea, I own a portfolio of post-IPO pre-announced merger SPACs, trading around $10 these days, really right around $10. I love it because you can’t really lose money. The way that SPACs work, if the sponsor doesn’t go out and conduct a deal, you get your $10 back. You know your downside is $10, you know your cost of capital is basically zero, interest rates are close to zero, and you have all kinds of interesting optionality on the upside. They could go out and do a deal that you think is really attractive, and you can continue on a company.

Ted Seides (46:54):
They could do a deal that you don’t think is attractive, but other people do and the stock pops, and you can get paid that way. Sometimes the stock moves because of the democratization of the IPO pop. This is a form of a private company going public, and sometimes just on the announcement, the stock will pop 10% or 15%, because it’s undervalued. All of those ways, you can try to capture a little bit of value. I’m doing a whole bunch of lather, rinse, repeat on that portfolio as deals get announced, and it’s a really fun area to watch.

Trey Lockerbie (47:26):
It’s definitely an exciting area to watch. That’s a very interesting perspective that I haven’t heard yet. Fascinating. The last one is how do you define risk? Is it simply that you just don’t know what you’re doing, or do you define it some other way?

Ted Seides (47:40):
I define risk, not as you don’t know what you’re doing, but you don’t know what will happen. Everything about risk goes into what will happen on the downside, how can we lose money? People can try to map out and think through all the different ways that they might, but it usually is the thing that we don’t know ahead of time that plays out. I don’t know of anyone before last December for the forward thinking people that knew a pandemic was going to come and the markets would go down 20%?

Ted Seides (48:08):
I don’t view risk as oh, the market popped back up, therefore that wasn’t a risk. Lots of things can happen and do happen that we never anticipate, and the probability distribution of outcomes is much wider than the one outcome that we see. That to me is risk, is really having a deep appreciation that we really don’t know what’s going to happen, and so you need to prepare accordingly.

Trey Lockerbie (48:32):
Ted, I love your podcast, Capital Allocators, and I suggest everyone go and follow and subscribe to that feed. You’ve interviewed some of the best names in the industry and captured a lot of value and wisdom and knowledge from them that you’ve put into your new book, Capital Allocators. I am curious, if you could recommend one episode from your podcast for a new listener which one would it be?

Ted Seides (48:56):
It’s very hard to choose among your 200 children. But unnamed too, if I were picking a single episode that I think, with great consistency, people have learned a lot from it would be the first one that I did with Annie Duke. So in and around when she released her book, Thinking in Bets. I’ve done four or five with Annie, but that first one was just amazing. If there’s a second one they should listen to it will be the one that comes out on March 22 when I get a chance to describe my book. Patrick O’Shaughnessy agreed to interview me for my podcast. That would be it.

Trey Lockerbie (49:34):
Love it. All right. Well, the book is Capital Allocators: How the World’s Elite Money Managers Lead and Invest, and I really enjoyed the book. I found that there were a lot of applicable takeaways for, not only CIOs, but CEOs or anyone in business really. It’s a great lesson on people, on leadership, on management, and investing. Ted, with that, I wanted to give you a chance to hand off to the audience where they can find your books and any other endeavors you’re working on.

Ted Seides (50:02):
Thanks so much, Trey. This has been really fun. It’s fun to be on the other side of the mic. Well, my website is capitalallocatorspodcast.com. Or if you forget that, I think capitalallocators.com goes right to it. That lays out pretty much everything that’s going on the podcast, a bunch of activities around it. I also am on Twitter and LinkedIn, and tend to post the episodes with some quotes on there. For people who are really interested, we have premium content available as well that they can access from the website.

Trey Lockerbie (50:32):
Well, Ted, I have to thank you again for coming on the show. Really enjoyed it, and I hope we get to do it again sometime soon.

Ted Seides (50:38):
That sounds great. Thanks, Trey.

Trey Lockerbie (50:40):
All right, everybody. That’s all we had for you this week. If you’re loving the show, don’t forget to subscribe to the feed in your app so you get these episodes automatically every week. While you’re at it, go check out theinvestorspodcast.com, and be sure to look into our TIP Finance tool. This is the dream tool I’ve been looking for for years, and it’s finally available on our website. Incredibly intuitive and a real game changer. Lastly, don’t forget to follow me on Twitter, @TreyLockerbie. Give me a shout, give me some feedback, and let’s be friends. All right. With that, we’ll see you again next week.

Outro (51:15):
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