[00:02:46] Intro: You’re listening to the Richer, Wiser, Happier podcast, where your host William Green interviews the world’s greatest investors and explores how to win in markets and life.

[00:03:06] William Green: All right. Hi folks. I’m absolutely delighted to be here today with Adam Shapiro, who runs an investment firm called East Rock Capital. Adam operates in an extremely rarefied part of the investment world, managing billions of dollars for about eight immensely rich families. The minimum investment is a hundred million dollars. So these are clients who expect extremely sophisticated investment advice, as you can imagine. So it’s great to see you, Adam. Thanks so much for joining us.

[00:03:34] Adam Shapiro: Well, it’s fantastic to be here. Great to see you, William.

[00:03:37] William Green: You graduated from Yale back in 1995, I think, with a BA in ethics and politics and economics and then you went off and studied in Mexico and Argentina, and you ended up with a job investing in a private equity firm in Latin America. And I wanted to start by asking you about that early experience of spending, I think, two and a half years investing in places like Mexico and Argentina and Brazil and Chile, and what you learned from it, both about what does and mainly, it seems, what doesn’t work in investing, because it sounds like it was a, it was in some ways a disillusioning experience.

[00:04:16] Adam Shapiro: Well, that’s right. I got very interested in Latin America during a time of grateful. This was early 90s negotiation of NAFTA, Mercosur, Latin America was going through a period of democratization of opening up of economies to trade, of privatization, sort of government getting its hands out of the economy, hope for much greater efficiency, and I dove into that in my studies on the belief that Latin America was a place where policy change that really mattered was taking place.

[00:04:53] Adam Shapiro: And the United States by comparison seemed a bit boring. Candidates seemed more similar. The key issues being discussed, one side didn’t seem that different from the other. Whereas in Latin America, we were talking about huge changes in a period of a couple of years, Mexico, I think privatized 2000 government owned companies.

[00:05:15] Adam Shapiro: And so you’re talking about massive wholesale change with a new generation of leaders. And that was very exciting to me. As a student, and it convinced me to want to focus on Latin America in my studies and for my senior thesis at Yale and applied and got a Fulbright scholarship to study in Argentina.

[00:05:34] Adam Shapiro: And that enthusiasm, I guess it was a little slow to wear off. Maybe it should have worn off, more quickly because when I was in Argentina on my Fulbright scholarship, that’s really when the so called tequila crisis of 1994 happened and I moved down to Buenos Aires. And while there was stability, there were some successes in that the currency was stable.

[00:05:58] Adam Shapiro: The unemployment rate there had jumped to sort of unconscionable levels. It was depending on how you measured, high teens to low twenties unemployment rate. And so it was already becoming clear that, the dream and the promise, maybe wasn’t going to come to fruition. Not all hope had been given up, but there were tracks.

[00:06:19] Adam Shapiro: And then, when I left Argentina, I moved back to the United States. Well, I actually had a personal detour, which was that I believed I would move back to the United States and pursue a PhD in economics and become an economist. And it turned out I enrolled in a PhD program for all of two weeks before realizing it wasn’t for me.

[00:06:39] Adam Shapiro: And I found myself needing to go find gainful employment and the place where I was able to do that was at a firm, in a relatively new investment firm that was making private equity investments in Latin America. And I spent the next three years, which were really the first three years of my professional career, investing in Latin America.

[00:06:56] Adam Shapiro: And there, not only did the sort of promise of Latin America on a macro base has not really come to fruition. It’s sort of turned worse with the Asian crisis, Russia crisis of the late nineties. But I really discovered that investing in Latin America was extremely difficult for other reasons and it took me a while to even have context. To understand how much better it was in the United States. And please tell me I can go through some of the stories that made me realize how difficult things were in Latin America.

[00:07:29] William Green: Tell us a couple of things that are examples of investments that kind of went wrong, that give a sense of why it was a bad macro backdrop, why it was difficult in terms of micro risks on the ground, whether it’s labor issues or corruption or whatever.

[00:07:42] William Green: What made you come out of Latin America and think, well, a, I don’t really want to invest in emerging markets that much for the rest of my career. And B, the US has an extraordinary advantage that I hadn’t sufficiently realized.

[00:07:58] Adam Shapiro: Yes, and I’m going to say unfortunately, some negative things. I’ll at least start by saying Latin America remains a very important part of my life.

[00:08:06] Adam Shapiro: My wife is from Mexico City. My children are dual citizens of U. S. and Mexico, and still visit, visited Argentina recently. These are important places to me on a personal level, but on an investment level, we experienced in those investments, I guess exactly the things you would worry about. For example, we did experience fraud.

[00:08:28] Adam Shapiro: We experienced, fairly blatant fraud where, sort of financial statements said one thing and based on the financial statements, the company should be wildly profitable. And yet it was somehow out of money and needed an injection of new capital. There were cases where family owned companies This is a little bit flippant, a little bit of a joke people would make, but people used to say families love this private equity thing.

[00:08:54] Adam Shapiro: It’s like debt, but you never have to pay the money back. And the notion that you would buy a minority stake in these companies and you’re sort of expected to not really be heard from again. And the company would be taking whatever direction the family wanted. But then those families and those companies were operating in tough environments as well, where labor was always tricky, hiring and firing people, finding people with the right skills.

[00:09:18] Adam Shapiro: This is Jacob relevant to Brazil. And some of this may have changed through the years, but, in those days, you would have all sorts of employee sort of lawsuits and difficulties. You never, of course, never wanted to be in court over anything. You were at the mercy in some cases to local governments.

[00:09:37] Adam Shapiro: And sort of corrupt practices there. And so I guess what I used to say in summary was, if you’re going to go to Latin America and make investments and deal with these risks, whether it’s fraud, corruption, or just difficulty operating, you should want to be compensated through cheaper valuations and faster growth rates.

[00:10:00] Adam Shapiro: And unfortunately, that wasn’t what we’re finding. Multiples, valuation multiples. We’re really pretty much in line with the U. S. and always, there was always a hope for greater growth, but the reality is that Latin America didn’t grow, at the time you can hold it up in contrast to Asian countries that were growing very rapidly.

[00:10:19] Adam Shapiro: Latin American countries weren’t really growing rapidly. And they were certainly not growing in a steady way. So, you’d have a crisis every five years or so. And so you weren’t compensated for all these things that made investing very difficult. And so it was a massively eye-opening event for me when I transitioned my career back to the United States.

[00:10:40] Adam Shapiro: And I sort of. Saw what possible investing in the United States was, which, therefore to this day, I still believe if there’s one concentrated risk, I’m willing to take in my investing, it’s being overweight the United States because the environment is so extraordinary. I think it’s probably, you could say extraordinary across all of history, the opportunity to invest capital.

[00:11:03] Adam Shapiro: And invest in other people’s work and ideas and have a true sharing of the fruits of that. So that capital gets its share, entrepreneurs, inventors, business builders, they get their share. And this is a sort of a cooperative relationship that goes on and on and fills the economy and feels the markets and it just makes it a great place to be.

[00:11:26] William Green: As an Englishman. Who’s ended up. In America on and off for the last 30 years, albeit with a, I guess, detours back in England and also detour when I was living in Hong Kong for five years, I feel like a lot of foreigners and probably a lot of Americans are not sufficiently aware of the extraordinary advantages that the U.S. has had economically and as an investment environment. It’s interesting to me when I look at your investments, it seemed to me something like 75 percent of your investments were domiciled in the U.S. or tied to U.S. business operations. But at the same time, my sense from talking to you is Yeah, over the last week or so is that you feel like there’s more risk today in the U.S. than there has been that there is without wanting to be over political, there is some danger. I’m wondering how you think about that, the possibility that this beautiful environment for investors may actually become slightly more perilous.

[00:12:22] Adam Shapiro: I think about it all the time. We talk to our investors about it all the time. We want everybody to understand that we invest in an incredibly diverse way by almost every measure. You can imagine the 1 thing where we can’t say that is the domicile of the businesses. We address the concern about what might happen in the United States. Through a diversification around the investments that are in the United States.

[00:12:50] Adam Shapiro: So some, that will do well as the United States does well, and others are domiciled here, but may do very well, even if the country as a whole doesn’t do as well. And so we address that. The best way we can, which is to that true diversification through, hedges and shorts and things I will, there’s maybe figuring a conversation we’re likely to have as we progress in the session, but you know, I remain a true believer in hedge funds in part because I think having true hedges and true shorts is important.

[00:13:26] Adam Shapiro: That’s part of what protects you from extreme events. That some of which I think we’re sort of imagining, based on your question, we’re imagining what could go wrong and also through the events you can imagine, right? There are just things that can happen. And if you are 100 percent along, whether that’s stocks or bonds or anything else, by definition, there’s nothing in your portfolio to address that.

[00:13:48] Adam Shapiro: So I am tempted by your question to get a little bit political. I’m not going to do that. I do have worries at the same time, the United States has proven incredibly resilient at the same time and has gone through very tough periods. Periods that are so tough that, on some level it, despite a lot of study, it’s hard to explain why exactly the United States came to this privileged position.

[00:14:10] Adam Shapiro: What was that, that mix or that cocktail of stuff? of legal foundation of people and natural resources and size and, all these different things, culture, what created this, this privileged place that we occupy in the world. I think you can have reasonable debates about it and not necessarily come to a satisfactory conclusion. We are there. It does seem to be persistent, but yes, I worry about it.

[00:14:36] William Green: I think one thing, and then we’ll change topic, but I think one thing, you have a particular expertise in that I’d love you to give a two minute insight into is the degree to which the U. S.’ economic advantage has been built on immigration, because that’s such a live political issue and everyone on all sides of the debate, seem to not have a good understanding to the actual economics of it, the actual realities of it. Can you just give us a little bit of perspective on what your views are, what we should understand if we’re actually having a sort of non-dogmatic, unheated view of the realities on this topic?

[00:15:14] Adam Shapiro: Yeah, it’s a great question. I tend to believe that the benefits of immigration are getting lost in the sort of political dialogue that we all live in now. They’re a great exception, so that’s not an absolute. There are, look, I speak to people of different political beliefs. Who happen to have in common, a relatively strong appreciation for the benefits of immigration. And many of them, and I don’t disagree with this, would say like immigration is more important, very powerful, but it needs to be done in an organized way with rule of law.

[00:15:53] Adam Shapiro: And I agree with that as well but I do say that there’s been a more than I’d like to see a lack of appreciation for the role of immigration. And I can think of it on 2 basic fronts. One, just the sheer ambition and entrepreneurial drive and, influx of energy and culture and all the things that, going back decades is really driven, innovation in the United States, entrepreneurship and growth.

[00:16:21] Adam Shapiro: I think that’s one front and then another front, it has to do more with sort of, I guess, geeky demographics, which is, growth over time is the lifeblood of an economy and you can break that down to smaller levels. Growth is a lifeblood of a city. I live in a city in New York City that needs population growth for it really to thrive as an institution as a place to live and that’s true at the national level.

[00:16:47] Adam Shapiro: If you care, which I do, you care about public finance. If you care about it. Debt and deficits, you really ought to be pretty pro-immigration because, what do you do when, you worry about debt to GDP and you worry about Medicare and you worry about all these things. What you want is a large number of workers relative to people who aren’t working and this country’s not going to get there on birth rate, right?

[00:17:10] Adam Shapiro: It’s going to have to get there on immigration. And then you can feel that down to Whatever sector you’re involved with, I happen in my personal life to focus a fair bit on the practice of nursing. And, nursing has been hit with, I don’t know, you might call it a triple or a quadruple whammy of issues that have made it difficult.

[00:17:33] Adam Shapiro: For people to enter nursing to stay in nursing, to want to be employed, nursing and difficult for health institutions, health systems to maintain nursing staff at the numbers they want with the morale they want. And, historically, immigration has been part of the solution when this sort of in balance surfaces in nursing, and my guess is that’s true again now. For nursing as well as. Frankly, a broader set of healthcare related jobs and, and that should have lots of different sectors as well.

[00:18:05] William Green: Thanks it’s a helpful perspective. I was talking to my son, Henry, about this last night, just that we were talking about the Israel situation, the Gaza situation, and just the degree to which we need to have more humility in general about trying to understand the issues and be open and curious and not heated in.

[00:18:22] William Green: In debates about this stuff that there’s a, I keep thinking of that line that I think Sir John Templeton used with his foundation where he said something like, the tagline was something like, how little we know, how eager to learn. And so I, I like at some point in these conversations to talk about kind of thorny issues, but in a kind of reasonable and quiet and non-dogmatic way. So thank you for, contributing to that general task.

[00:18:46] Adam Shapiro: My pleasure.

[00:18:47] William Green: I wanted to ask you to go back to your origin story after the disappointment of spending a couple of years in Latin America and seeing the realities versus your dreams of what it would be like, you went off to Columbia Business School and then you spent nearly five years working in the special situations group at Goldman Sachs, which I think was then called the principal finance group.

[00:19:09] William Green: So this was a really interesting period in the markets right like 2002 to 2007 when there was just so much opportunity in the wake of the meltdown of the dot com era and the like. And I wondered if you could give us a sense of what you learned there that became very formative about how to invest given that you’d sort of seen what you didn’t want to do during that period in Latin America. What did you learn at Goldman about how to invest with less risk, greater reward?

[00:19:39] Adam Shapiro: Sure, I learned a couple of key things. I’ll start with the power of sourcing through people. Now we were doing private investing, right? So our investments in order to find them You know, you needed teams of people to get out of the building at 85 Broad Street and go find things to buy.

[00:20:01] Adam Shapiro: And the more you saw, the more likely you were to find some real gems. And so Goldman Special Situations had developed and continued to develop as I was there, a network of people, some of which were employed at Goldman Sachs and some were external, who played a very important role of Finding things and one of the main things I was involved in early on was buying portfolios of loans of collateralized loans and all different types of collateral, but a lot of commercial real estate, a lot of hard assets, aircraft, financial assets, like, auto loans and credit card receivables and you don’t just look at a Bloomberg screen and decide to buy 100 commercial real estate loans. You’ve got to go find them. You’ve got to go find, owners, whether they’re banks or securitization services or what have you, go figure out loans and wants to sell them and get yourself in the process and.

[00:20:57] Adam Shapiro: Figure out if there’s some way to get in and manage in that process. And it would massively eye opening for me because in part, it was such a stark contrast of what I’d been doing before. Right? So investing in Latin American private equity was a little bit like venture capital investing, make 12 to 15 investments in a couple of years, probably 2 or 3 winners and make the whole portfolio.

[00:21:20] Adam Shapiro: In a lot of cases, you’d sort of look at a situation, project some cash flows that were real guesses, discount them back at a very high rate, let’s say 35 percent and hope that it sort of worked out. Whereas in contrast, so I view that very much as a very high volatility sort of guessing game.

[00:21:39] Adam Shapiro: Whereas in contrast, early on, 2002, 2003, when this market was quite good, we were buying these loan portfolios. And what you could do is just assume the worst pretty much about every single asset in that loan portfolio. And if you assume the worst, all your surprises are going to be the upside.

[00:22:00] Adam Shapiro: So you’d have some assets that behave how you thought, which was pretty bad. And then you had assets that really surprised the upside. And then as a whole, you could project your cash flows at that time too low to mid-teens rates of return. So not shooting for quite as high returns as we were in our Latin American private equity investing, but much more predictable, much safer.

[00:22:26] Adam Shapiro: And all the surprises made the number higher, not lower. And so that was just tremendously eye opening to me that you could have diversification, you could have collateral, you could have all the surprises working in your shaver. And it was just sort of a privilege to be able to invest in something like that.

[00:22:41] Adam Shapiro: And as soon as I saw that, I knew, I guess it was almost like my eyes being open to a standard that I didn’t know existed. And I wanted to repeat that it didn’t have to be the same setup necessarily, but. What I sort of decided for my career was I want to invest in things where I have the sense it’s a privilege to invest in it.

[00:23:00] Adam Shapiro: Its advantage is favorable and gosh, I want my own money in it. And that’s sort of a core belief I go back to over and over again of every situation I sort of read from the perspective of do I want my own money in it? And that’s also part of the advice I give to younger people is. When you’re choosing a job, looking what people are doing, say, do you want your own money exposed to that?

[00:23:25] Adam Shapiro: That’s a, that’s an incredibly telling thing and an important discipline to have is to think that through. And so Goldman was that place where I first saw these situations where it felt like real privilege to be exposed to it. And gosh, I’d like my own money.

[00:23:41] William Green: When I listen to you talking about buying some of these quite difficult assets, I mean, I remember you telling me in a previous conversation, I think you’d been investing in empty offices in Detroit and industrial development assets that had contamination issues.

[00:23:55] William Green: It seems like a lot of what you were doing was simply finding things where you had the skills to Value the asset in a very sophisticated way, however complex they were. And then so in a way, the complexity was kind of an advantage. And then you were simply buying them for a lot less than they were worth.

[00:24:16] William Green: And it’s, it makes me think of Joe Greenblatt once saying to me that when he tried to reduce down everything that he’d figured out about investing, it was value an asset and buy it for much less. Does it feel like that was, in a way, the essence of what you were doing, underneath all of the complexity that was, in some ways, the guiding principle, buy things for much less than they’re worth?

[00:24:41] Adam Shapiro: Yes, but with the wrinkle, I would say that you find it and you value it with massive people leverage. I think if you, look, if you rely on your own ability to find it and value it, you’re way behind what you can potentially do. If you can create aligned networks of people who may be in your organization, may be outside your organization, and you really tap into their networks and their sourcing networks and their expertise.

[00:25:14] Adam Shapiro: I guess for me, the vision of really the ultimate way to invest is to have these very aligned networks that every so often produce an opportunity that’s just not fair. I can’t think of any other way to say it.

[00:25:31] William Green: I feel like this issue of networking is very distinctive to you, you’ve thought about it much more clearly than most investors I know, and I remember reading somewhere, maybe in one of your articles that you’ve written, or maybe one of the reports on your website, you wrote that 95 percent of investing is sourcing.

[00:25:50] William Green: And so you were very conscious about, in a sense, using Goldman Sachs as a model for how to get external partners who would provide you with incredible opportunities because you could partner with them, or they’d find all these hidden gems, but it seemed like in some way you were also trying to upgrade the way they did it and use it this building of a network as a very competitive advantage for yourself. Can you talk about how you’ve done that? What you actually very consciously did to create a network that would enable you to source really good ideas, whether it was in private equity or as we’ll talk more about later in terms of identifying great hedge fund managers.

[00:26:32] Adam Shapiro: Absolutely. These aren’t just my ideas. These are ideas that I think, we as a firm have developed and partners and colleagues have very much been a part of. So just had to hesitate there for a second. When you said that we use the word you and it sounded singular, but I think what we’ve, I think what we figured out is that it’s a good question.

[00:26:50] Adam Shapiro: That Goldman experience was the kernel of an idea that could be done in a much bigger way. And what I mean by that is the Goldman external network at the time, and maybe quite different now, but the Goldman external network at the time followed a certain type. It was You know, the reference that network was referred to as the operating partner network.

[00:27:12] Adam Shapiro: The partners were referred to as operating partners. And the idea was that they were sort of boots on the ground who would find things and have local color, but there was still a lot of central control at the Goldman level. And I think what we figured out is that that’s a really good thing.

[00:27:29] Adam Shapiro: Why not try on, a greater number of dimensions. And then let’s not limit ourselves to people of a certain type, but maybe there are other types and, really the big, I guess the big thing was to really focus on people who external partners who viewed themselves and identified as investors more so than operating partners, people who we would ultimately, give more discretion to.

[00:27:52] Adam Shapiro: And we could align. I think that’s really a key thing. We can align with their goals in a pretty long term kind of way, meaning very talented people, especially those a bit earlier in their career. Maybe they just left a large investment firm. They’re starting something on their own. We could align with them.

[00:28:11] Adam Shapiro: We could create a partnership that took into account what they were trying to build. Our objective is get exposure to great investments, get exposure to their work product at this moment in their careers when they’re incredibly focused, incredibly motivated, they’ve made the decision to bet on themselves.

[00:28:30] Adam Shapiro: So how can we get exposure to that work product that we think is very favorable? Which will lead to these special, privilege investment moments that I referred to. And at the same time, be very open and explicit that there is a quid pro quo. What we can bring in return is an opportunity to get from that, early stage launch level to building something much larger.

[00:28:56] Adam Shapiro: And so how, their objectives and our objectives, clearly in mind, clearly stated up front. And I think more than anything, that’s, I feel like that’s what’s worked is that we’ve been able to help people launch a new investment firms. We’ve been able to help them, get to where they envision, they might want to be five or 10 or 15 years after launching.

[00:29:18] William Green: It was interesting to me when I was looking at your firm, East Rock Capital’s core values, there were four values and a couple of, often when you look at firms values, they’re very repetitive and then you feel like it’s a little bit fake and I don’t really feel it is in this sense. And one of them, the first one is give first, create value and spread it around, there will be plenty left over.

[00:29:39] William Green: And the fourth is cherish humans, our clients, our partners, our employees, we’re a collection of people, our care for each other, it gives our work meaning, and can you just talk about that idea of when you’re building a network, actually focusing on giving and cherishing people rather than just sort of exploiting them and getting them, because it seems like in a way, there’s a sort of enlightened self-interest to the understanding of how you’re actually going to build these good partnerships.

[00:30:07] Adam Shapiro: Yeah, I think if you, the way I think about it is that this is just awfully natural. There is something we explicitly want to achieve. And there is something that younger investment managers explicitly want to achieve. And there are tremendous overlap between the two. They’re very compatible and so that’s a good place to start.

[00:30:28] Adam Shapiro: And then from there, you do all the work around that to maximize your probability of success. And that means focusing on people, but you know, that’s, and it’s not just the people we dock, but it’s all of the people. In this large, connected web, I think sometimes we call it the constellation, but the people maybe to back up and make it a little more tangible when you think about what it takes to source and evaluate great managers.

[00:30:58] Adam Shapiro: The number one thing is knowing high quality people in common, and that may sound obvious when you say it, but I actually don’t hear people say it that way that often. The most important asset we have in being able to be really good at sourcing people and valuing people is when those top people walk in our office, there is an awfully good chance.

[00:31:21] Adam Shapiro: That we know many people in common. And why is that? Well, top talent tend to gravitate to each other. People of a certain, like, character, ethics, sense of fairness, citizenship, tend to gravitate to each other. And so, when you have, A real appreciation for people, which, I love that you read those 2 values and, they’re there.

[00:31:44] Adam Shapiro: Those words are there very purposefully is to convey that, this is who we are. These are our values. This is what we care about. And what you’re going to find is that when you meet people. In our orbit, they, they tend to be, they tend to have those characteristics, which is really great talent and really great character.

[00:32:03] William Green: One of the reasons why your firm is interesting and instructive to our listeners and viewers is the, a big part of the model of your company East Rock is basically to back the staff fund managers who’ve recently launched new investment firms or about to launch a new investment firm. So you’ve become an expert in identifying what we could describe as outlier talent.

[00:32:27] William Green: And that’s something obviously that all of us who are interested in investing who aren’t just managing our own money solely by picking individual stocks and the like need to figure out how to do. So I wanted to home in a bit more on this whole question of how you identify great investors, because I think it’s applicable for all of us.

[00:32:45] William Green: One of the things that’s very unusual about what you do is you’re not looking to find someone great and then stay with them forever, you’re finding this kind of sweet spot as you describe it. Can you explain what it is you’re doing there? Because it’s such an unusual insight that’s very distinctive to what you do.

[00:33:05] Adam Shapiro: I think there are two questions in there, so maybe I’ll hit them one by one. I think the first thing you recited earlier, that 95 percent investing is sourcing, there’s obviously some False precision and that 95 percent I’m going to give you another, this one will be 7525 and there’s a bit of false precision, but 75 percent I would say of identifying great investor is having data about that investor as opposed to the other 25%, which is some superior ability of analysis and pattern recognition. And so this comes back to knowing lots of people in common and running a certain process that really unearths that data about the person. So the key to identifying a great investor is meeting them as early as you possibly can and we have lots of ways.

[00:33:50] Adam Shapiro: We do that, repeat interactions and then, building this whole picture of who they are and what their work product has been, what their style is and what their advantages are. That takes a lot of time. And the bricks that build that all up are mainly supplied by people, in common.

[00:34:08] Adam Shapiro: So I just can’t emphasize that enough. We’ve been doing this for close to 18 years and doing it in a very purposeful way, and it’s sort of the data about the people that we get through all those interactions and all those common relationships. That really make, the rest of it possible, figuring out, you have to answer key questions like, was it the person or was it the firm?

[00:34:31] Adam Shapiro: Right. I’ve written about how sort of ironically, it’s harder to evaluate people from the very best firms because it’s a bit more likely that the success was attributable to the firm rather than the person. So figuring out was it the person or was it the firm is incredibly important. Now, why is that so important?

[00:34:51] Adam Shapiro: There’s, there’s a bit of research I’ve written about, which I think is a pretty brilliant paper, and it uses a large data set to make the argument that on any private investment, private equity, the individual who makes that investment is four times more important in determining the outcome or predicting the outcome of that investment than the firm where they worked.

[00:35:11] Adam Shapiro: And once you know that I think again, it’s almost like seeing the world in a slightly different way. All these firms are just collections of people. And some are true outlaw talent and some are not. And figuring out which is incredibly important because you want to follow, that Forex talent, that person who drives those outcomes, you want to be there when there’s a moment and there often is there’s a moment to get very concentrated exposure to their work product.

[00:35:41] Adam Shapiro: And that’s just another way of saying, at some point, they’re going to launch their own firm. A lot of them, and that is a moment when you can get concentrated exposure to their word product, and so [Crosstalk].

[00:35:50] William Green: For people who are looking to find out more about this paper, I’ll put it in the show notes. But there’s a paper that Adam cites. Adam writes these very interesting pieces on LinkedIn that I’ll link to as well in the show notes. And in one of his pieces, there are about 15 of the pieces so far, which I read all of yesterday. And one of them cites this paper called Whom to Follow, which analyzes about 4, 000 private equity managers and looks at something like 13, 000 deals.

[00:36:15] William Green: And it has these interesting findings, like as Adam said, this one, that when it comes to explaining differences in private equity performance, the individual who leads a given investment is four times as important as the private equity firm where they work. Another thing that was really interesting in that paper that also is really relevant to you is they said smaller funds do a lot better than larger ones.

[00:36:34] William Green: So a lot of what you seem to be doing is basically going to these firms, these great firms, whether it’s, Tiger Management or Blackrock or Blackstone or Bain Capital, Goldman or whatever. Looking for who’s really talented, figuring out who’s, who’s likely to set up their fund, and then really betting on the fact that small funds run by highly talented people are likely to do well. Is that a fair summary of at least a part of what your strategy is?

[00:37:03] Adam Shapiro: Yes. On some level, I take this slightly jokingly, you’re leaving out the most important part. Which is, research shows not only that small funds do better, but they’re actually safer because they’re actually less risky. And that is the part that is counterintuitive to many people.

[00:37:24] Adam Shapiro: It’s probably the hardest thing. I sort of view myself as someone who’s a, a bit of a champion, vocal champion for smaller funds. And I noticed that in conversation, if I say smaller funds have higher returns, people kind of nod their heads. They sort of understand intuitively why that might be the case. Then I say, oh, and by the way, they’re less risky and then I didn’t, then the conversation’s lost, but it’s there in the data and I do write about that as well.

[00:37:53] William Green: Is it because they’re more discerning that they have fewer deals because they have less assets and they don’t have to find so many deals to put their capital to work? What makes these small, concentrated funds less risky?

[00:38:06] Adam Shapiro: Yeah. And what’s interesting, it seems to be the case in private equity and hedge funds. So, and those two cases, it would be for different reasons, but yes, smaller funds are choosing from a generally more, more favorable set. They are doing fewer deals.

[00:38:22] Adam Shapiro: So they’re spending more time on each deal, younger managers just have more at stake. Those early deals must work. So there’s a whole series of factors on the private side. And then on the public side, I tend to think it’s You know, some of those factors, but in addition, it’s the nimbleness.

[00:38:38] Adam Shapiro: When you’re a smaller fund, you can get out of the way of, a short that’s going against you. Or some trend, you may be caught sort of long value and you should be long growth and everything’s going against you. If you’re smaller, you just have greater liquidity, you have a better ability to move things around and get out of the way but it seems to be the case for public side and privates.

[00:39:01] William Green: This idea that younger managers are the place to be is really interesting and kind of subversive, and I wanted to unpack it a little bit. You quote in one of your pieces, you said, in normal entrepreneurship, a 60 year old startup founder has a roughly three times higher chance of creating a valuable business than a 30 year old founder.

[00:39:20] William Green: This is based on something that was pointed out by an East Rock data scientist, science advisor, Seth Stevens Davidovits, who Also at this book, don’t trust your gut. And then you continue. But in investment firms, there is a clear concentration of younger founders. And so this is one of the kind of subversive findings that you’ve had that actually, instead of betting on grizzle, middle aged people, or old people, usually in the investment business, old white people, old white men, you’re looking for these young, hungry founders, and then you seem to invest with typically for about three to five years.

[00:39:56] William Green: Can you explain that? Because it’s sort of, it sort of messes with my head and messes with a lot of the, with the kind of prejudices and orthodox opinion that a lot of people have about how to invest.

[00:40:08] Adam Shapiro: Sure. It’s possible. I feel like sometimes I have to be careful with the vocabulary because young can denote something that may be a little too extreme.

[00:40:19] Adam Shapiro: The key thing is that the firms are young, that they’re recently founded by somebody who has a certain profile, and that profile doesn’t necessarily have to be, very young in age and, in years. The key is really that the person is very well trained and proven. So, that means they work at an investment firm for 10 or 15 or even 20 years in private equity.

[00:40:45] Adam Shapiro: The founders tend to be a bit older hedge funds a bit younger, but the key is not so much the age of the person. It’s that they sort of fit a certain profile that again, they’ve trained well, they’ve proven themselves and then they’ve decided that in a very significant way to bet on themselves and bet on themselves at this particular moment.

[00:41:09] Adam Shapiro: So there is very significant positive selection. Most of these people are at really good investment firms and making a lot of money. And so they are walking away from that to start something new and it’s risky. They’re taking a big pay cut. And, when you think about alignment, I look, I think alignment of interest is one of the most fascinating topics there is in the world.

[00:41:32] Adam Shapiro: And alignment is really almost never about, William, I put in a dollar, you put in a dollar, we’re 50, 50, and we’re aligned. That’s almost the worst way to measure alignment. Real alignment has a lot to do with what the person is really risking and what that means to them and, how they’re choosing to create their, their incentives and their upside and their downside.

[00:41:53] Adam Shapiro: And so when somebody walks away from a very high paying job or prestigious job at a great place with great colleagues and lots of comforts to start their own investment, you sort of know that they’ve given that a lot of thought and they’ve picked their moment, right? They sort of know what they’re good at.

[00:42:10] Adam Shapiro: And in general, they’re signaling, this thing I do, whether it’s, I invest in biotech companies or I buy distressed real estate or, whatever it is I’m good at, it’s a good moment to do that. People don’t, don’t tend to start the firm. When it’s not a great moment to do that, it does happen, of course, but so you have this positive selection of people betting on themselves.

[00:42:35] Adam Shapiro: And, in terms of our process, it’s very important that we don’t induce them to leave where they are. So we’re, we are not by any stretch trolling around large private equity firms, telling people, hey, now’s a great time to leave and start up your own shop. They, this whole positive selection that I’m talking about, it only happens if.

[00:42:54] Adam Shapiro: The person, the founder is really committed to doing it and they don’t really need an outside inducement. They’re just, it’s something they, feel they need, believe in themselves that they can do, believe it’s the right moment. And maybe to summarize, you were asking me, why, why do we choose?

[00:43:13] Adam Shapiro: People of this particular profile, which are, skew a bit younger, their founders, so their firms certainly skew younger. Why is that a good place to be? And maybe just to summarize, there’s positive selection or there’s strong signal and people leaving high paying jobs to make a bet on themselves and doing it a particular moment in time.

[00:43:32] Adam Shapiro: Again, they’re going to be pretty strategic and saying, all right, if what I’m good at is buying biotech companies. I’m going to leave and set something up when biotech is cheap and the opportunity set is strong. So, there’s positive selection. That is a good place to start, but certainly not the place to finish.

[00:43:48] Adam Shapiro: You also, if you’re in our position, you need to run, very rigorous process to determine who it is within that group you want to back. And, and there, I think we’ve talked a little bit about our process. I’m happy to talk about it more, but once you have that set up of the positive selection, the right moment in time, then you sort of have all things, really going in the right direction.

[00:44:11] Adam Shapiro: You have somebody who’s incredibly motivated to make those early investments work. Right. If they don’t work, they made a horrible mistake by leaving behind their high paying job. So there’s incredible focus. They can play in smaller situations. It’s a new firm, they’re generally going to be investing in smaller stuff that tends to be where there’s greater inefficiency, opportunity for multiple expansion, all sorts of good things.

[00:44:35] Adam Shapiro: And so, that’s really the theory and the intuition behind it. And then the proof is really in the data, which is we do find again, back to some of the things I’ve been writing, we do find that smaller funds and smaller deals tend to do better on average and tend to be less risky and so the intuition seems to really match the results.

[00:44:56] William Green: And part of the data that this is built on, which I’ll also try to remember to include in the show notes, there’s a 2019 article from institutional investor, which talks about a study of, I think, 1, 591 funds from 2012 to 2019. The focus on these early life cycle funds that are less than three years old and how they beat older funds.

[00:45:18] William Green: So there’s interesting data here. And then also Interesting anecdotal evidence and on the more anecdotal side, you’re looking for certain qualities that are likely to lead to success and you’ve written about some of them in your piece on LinkedIn and I wanted to zero in on a few of them. One of them is just what you call an intrinsic desire to hustle. Can you talk about that a bit? Because it seems to me, I mean, I remember in my book, I think I wrote at some point and it sounds so simple and platitudinous, but at some point, I, I think I, I realized that at a certain point, the secret to success is nothing more complex than a fervent desire to succeed. It’s that just sort of just such hunger that you almost couldn’t bear to fail.

[00:46:07] Adam Shapiro: Yeah, I think when people have that, it drives them to an investment type, I guess, an overly simple way where I might define two investment types there. The investment types that are driven by judgment, right? I see a business.

[00:46:24] Adam Shapiro: I see a lot of motor rounded pricing power. Opportunity to invest capital into the business at a high rate of return. I sort of make a judgment. This is. Maybe a company that’s up for auction and lots of people know about it, but I see it a different way than others. And that is a perfectly legitimate way to invest.

[00:46:44] Adam Shapiro: And a lot of people have been very successful at that. As someone observing the investor, that’s much harder to know who’s going to be successful, who’s going to have better judgment. The other investment type, the one that we gravitate to and the people we back gravitate to require this tremendous amount of hustle because, they’re more of the hidden variety and the advantage is not so much that somebody has a judgment that this is a great business for the next 10, 20 years.

[00:47:16] Adam Shapiro: But it’s actually some really simple insight based on better data, right? Seth, you referred to earlier. I think if you were part of this conversation, he would say, between better data and better data analysis, you’ll take better data every time new data, things can data that others haven’t seen.

[00:47:36] Adam Shapiro: If you have access to new data, then, you don’t have to be the best data scientist in the world to draw a new insight. And this is a little bit the equivalent of that. Some investments, it’s very simple to see why they have a certain advantage to them, but finding those investments requires, really that the hustle of developing special expertise, special relationships, special ways of sourcing.

[00:48:03] William Green: There’s a very nice quote that I wanted to read to our listeners that came from one of your articles where you were talking about this intrinsic desire to hustle and to reject the things that are easily on offer and go find the things that are hidden and you wrote, when I worked at Goldman Sachs, a common saying was that there were inside the building people who just picked up the phone when it rang and outside the building people who hit the streets, turned over rocks, built new relationships, recruited talent and grew their own businesses from that work.

[00:48:29] William Green: This desire to hustle and get outside the building Was often the key to finding differentiated investments and it really reminded me of Peter Lynch’s simple insight that he shared with Bill Miller very early in Bill Miller’s career where he said, look, there’s really just one gear and Bill was like, can you ever slow down? And he’s like, no, not really. At a certain point, you just have to stop if you can’t keep up that pace. Do you think that’s more or less true that you just need that intensity?

[00:48:59] Adam Shapiro: Yes, I guess with a little bit of a caveat though, and the caveat is, you don’t always have to be the person, I guess I’m trying to picture Peter Lynch and his desire to be that person running at that incredibly high gear, sort of forever and ever.

[00:49:15] Adam Shapiro: And, I think as investors mature, they find ways to produce a similar work product. Through, through strategies. And again, the best one I can think of is people. I mean, this may sound repetitive, but if you have a great network, great and well aligned network, then you don’t necessarily have to be the one doing that forever and ever because it’s not sustainable for most people.

[00:49:43] Adam Shapiro: Your question is, has me thinking, I guess. A little bit more on a personal level, but I think I can do this job pretty much forever. I love it. And I think I work at a, at a pretty high year, but I get so much out of the fact that this aligned network we have creates these special opportunities.

[00:50:03] Adam Shapiro: So on some level, I’m, it’s a privileged position where I don’t have to be the one, like I was at Goldman Sachs 20 years ago, trying to find. Some bank somewhere that’ll sell some long portfolio, right? It’s a, you find ways to create leverage and then it’s more sustainable.

[00:50:22] William Green: I think I was very slow in my career to figure out the power of a network and I think maybe because I was English, I felt sort of embarrassed about the idea that it would seem somehow exploitative, that people would sort of feel like I was taking advantage. So I often found when a friend of mine became really successful, I would sort of almost like stop talking to them because I didn’t want them to feel like I was exploiting them.

[00:50:43] William Green: I mean, it was so self-defeating. And then I look at it increasingly and it’s so helpful that when you’re trying to solve any kind of problem, you can go to people you trust who are really smart. And it’s just such an incredible shortcut where you don’t have to run 120 miles an hour and I was very struck when I met you, I think a year or so ago, I think it was because a friend of yours who used to run Lincoln Center and be president of the Robin Hood Foundation put you in touch with my literary agent, who’s an unbelievable literary agent, Jim Levine, who represents all these people, like Ray Dalio and Eric Schmidt and Satya Nadella and stuff. And he said, well, you should talk to William. And so we ended up talking about writing and the like. And it struck me that maybe that’s become a real sort of secret weapon for you, this ability to figure out not that I was such a great person to talk to, but, always to be able to figure out who do I trust who’s going to be able to put me in touch with someone else who they trust to the extraordinary competitive advantage.

[00:51:41] Adam Shapiro: Oh, I think that’s right. It’s, on some level, it is what’s wonderful about investing as a career, right? Is, and I guess when I talk to younger people who are considering investing as a career, one of the things I like to point out is on some level, all knowledge is relevant. And all people are relevant.

[00:51:59] Adam Shapiro: So, Charlie Munger, of course, says be a learning machine. And I guess the wrinkle on that I would put is what’s great about investing it’s is motivation to be a learning machine. You can read anything, history, science, novels, poetry, and it is relevant to the art of investing because investing is so broad.

[00:52:22] Adam Shapiro: It’s about. Patterns. It’s about trends. It’s about knowledge and people are just such a huge part of that. And so, the relationships that you end up making and exploring because of these, this sort of common data, look, we’re all on this journey to learn more about just about everything and be better at what we do. You and so it’s a great basis for a lot of important relationships.

[00:52:47] William Green: I think the thing I want to emphasize for our listeners or viewers. Again, to cite Charlie Munger, who you just quoted, who I’ve written about a lot in the past, Charlie said, look, if we have a very simple, this is when I asked him about, how, what we could learn from him and Warren about how to have a happy life, and he talked about their relationships, not only with each other, but with all of their partners.

[00:53:09] William Green: And he said, look, we have a really simple rule, which is if you want to have a good partner, be a good partner. And so, again, very much like your principle that you want to think about how you’re helping other people and making opportunities for them and so I think that in a way was the big realization for me.

[00:53:27] William Green: Instead of worrying that somehow networking was exploitative and cynical, once you start to invert it and you start to say, well, no, I want to meet all of these people, I’m going to help them and I’m going to be generous with them. And not really have such an agenda. It kind of, it becomes a whole different game in a way. Does that resonate at all?

[00:53:48] Adam Shapiro: Oh, absolutely. I think people in our organization, and I include myself, but we get. We get a lot of pleasure out of giving people career advice. People who are in larger investment firms and are trying to decide what to do. People are thinking of going into finance and investing and you can look at that as being sort of long term greedy in that, we think that comes back to our benefit over time, but that’s what there’s something to it.

[00:54:14] Adam Shapiro: Yeah. Intrinsically enjoyable about that along with being good for business. And so, yeah, give first that whole idea of, give advice, give introductions, give expertise, connect people to expertise. And that’s a value that, look, I think works really well. I guess it worked well for us. I think it works well for lots of people.

[00:54:36] William Green: Yeah, I think it’s actually one of the great secrets of success, which is why I wanted to pause and dwell on it a bit. I think of manga saying I, I observe what works and doesn’t work and why, and this model of actually building relationships built on trust and the like seems absolutely critical.

[00:54:53] William Green: So to go back to this issue of the qualities that you’re looking for in potentially great investors. You’ve sort of shown a degree of greatness in companies, but you can’t quite tell if it was the company or them until they really get out there and prove themselves at their own firm.

[00:55:09] William Green: You’ve also written about the importance of grit and resilience, and you’ve talked about actually liking to look at people who’ve, demonstrated an ability not to give up and to endure hardship. Can you talk a little bit about that? And also this other quality that you’ve identified, which is just a, as you put it, a history of calm and productive decisions made while under pressure. Cause it seems like that combination of grit and resilience and an ability to be calm. Those are huge predictors of success.

[00:55:41] Adam Shapiro: Yes. I guess the way I would dig into that is to say the key to choosing good investment managers in my mind starts with Getting this very detailed picture of who they are and what their body of work has been and you’re looking for, here’s where it becomes again.

[00:56:03] Adam Shapiro: Hopefully you have the data. You have these stories and you have these insights from people observed, observe them in different contexts. And so you can identify things like overcoming. Some setbacks, some difficult moment, you can observe things like, and I’m going to veer into a slightly different area, which is back to the, was it the container or was it them?

[00:56:27] Adam Shapiro: You can observe. Literally how they did their investments work, there’s a whole story behind those investments. How are they found? How are they diligence? What resources were brought to bear? What partners were brought in? How is the investment sort of sold internally to the organization?

[00:56:45] Adam Shapiro: How is investment committee convinced of the investment and by the more you can get this detailed picture, the more you can. Use some level of common sense and intuition to see, all right, this person really pushed into something new and, found a new resource, didn’t rely on the resources that were available in the firm to everybody, but found a new way of doing something.

[00:57:10] Adam Shapiro: And what ends up happening, I guess this is a little bit of a quirk of what we do, but Yeah, we do end up backing people who were less likely to run the firm where they were, they’re at a big firm and they probably do a smaller number of investments per year than average their bars higher.

[00:57:32] Adam Shapiro: They tend to be the people who they bring and deal the committee and the conversation is a little bit shorter because everybody knows that all the work was done the right way. Investment thesis is sort of clear, maybe even obvious. And the personality types are a little different and they’re a little bit more heads down doing their work.

[00:57:52] Adam Shapiro: Maybe they’re off in the corner. Everybody. Tends to know that what they do is high quality, but they’re not necessarily perceived as. Yeah, the rising star in the organization, because what they choose to focus and spend their time on. But again, I don’t want to I’m giving you 1. Sort of pattern I see, but it’s also important to remember, that really good investors around good founders come in lots of different shapes and sizes.

[00:58:17] Adam Shapiro: And so I wouldn’t want to be too specific about this. The key again, is getting this very clear picture of the person and their body of work and their network of relationships. And then, applying this lens that, you’re asking about of, have they really been tested? Have they been through hardship? Have they set up their life in a way? Or they can make good decisions, all those sorts of things. And then you start to know it, when you see it.

[00:58:41] William Green: It’s interesting to me because there’s, I mean, obviously you’re very data driven, but there is an almost journalistic side to what you’re doing, where you’re asking a lot of questions of people who are giving references and your approach to getting references is kind of unusual, very idiosyncratic, much more detailed than most people’s.

[00:58:58] William Green: And you’re looking at stuff, like I remember reading one of your pieces where you were talking about gauging What do you call externals, like whether their work life is sheltered or not by a stable family life, financial reserves, hobbies, and community? I thought that was really interesting that you’re looking You’re kind of creating this mosaic to see whether this person is likely to be calm, whether they have a stable family, whether they’ve got these inequalities of grit or intense motivation. It’s an unusual process you’re going through.

[00:59:30] Adam Shapiro: Yeah, that’s right. And I wouldn’t want any of those things to sound like absolutes. Like, people are complicated and, the way those complexities all come out. In different setups, different environments, different organizations, it’s something you have to be thoughtful about.

[00:59:45] Adam Shapiro: And, I guess on some level, I’m hesitating a little bit because I don’t want, those are important frameworks, the important things to think about, but, you do this for a long time and, if you waited to have every, every box check that you’d like to see, Yeah, you’d be waiting a long time.

[01:00:02] Adam Shapiro: So, people are complicated. People are imperfect. What you’re looking for is this, the best setup you can find of someone, who has a proven skill set, proven approach, meet certain criteria as people. And the time is right and the setup is right and all those things and when you see that all line up, then yeah, that’s the moment.

[01:00:23] William Green: You’ve written, if there’s one guiding principle to follow, it would be this family office founders should consider it their goal to have talented and trustworthy people of high character in every critical role. And I’m wondering when you’re actually trying to assess whether someone is not only talented, but trustworthy, what are the sort of things you’re looking for that might be tells to see whether someone is likely to deceive you or be overly aggressive or what is it that leads you actually to decide whether someone’s a person you can trust.

[01:00:58] Adam Shapiro: The answer is almost always in, I hate to be repetitive, the answer is almost always in, very extensive referencing where you know people in common and therefore the views, you’re getting are from people who are actually motivated to tell you what’s really going on. And then you have to supplement that every way you possibly can, through research, through your, through your own eyes and ears, but you have to be careful. I think if anything, in our own early years and in, watching other people, I think people may weigh their gut instinct about a person too heavily relative to, again, the references to me are more like hard data.

[01:01:40] Adam Shapiro: And so you look at both, you certainly, take both into consideration. And I think it’s, reasonable people can disagree. We try to have a very and do have a very low tolerance for things that. Yeah, it might be a little bit of smoke that would indicate that there might be an issue because, the just the worst thing that can happen to you in our world is, is to end up in a situation of real deception.

[01:02:06] William Green: I wanted to ask you about 3 specific fund managers who are illustrations of what you do. So one of the, there are a lot of people who we can’t really talk about because they run very small funds and you don’t want them to attract a lot of assets or attention and the like. But three who come to mind who that would be less of a problem for, I think, are Jonathan Wang from EOS, which invests in hotels, Kanye Hasegawa, who runs a firm called 3D Investment Partners, who invests in Japan, and Tim White, who runs a private equity firm called Dunes Point. Can you talk about a couple of them, give a sense of how they illustrate what it is you’re looking for in a person? Why? The kind of specialty they have, the niches, the edge that you’re looking for that they illustrate.

[01:02:55] Adam Shapiro: Yeah, that’s a really good list. I’m going to go in reverse order. I’ll start with Tim White. So, Tim had an extensive and very successful career in private equity. His last job before he went off on his own, he worked at GSO. He had run their buyout, GSO, even though it was mainly a credit shop, had a buyout. Effort and he ran that before it essentially had to be disbanded because of the acquisition just so it was acquired by Blackstone.

[01:03:24] Adam Shapiro: And so Tim, this goes back a while, but GSL, Blackstone really wanted to keep him. They offered him, my understanding is some very high paying, sort of big name roles. And that’s just not what he wanted. He is a buyout guy. He loves buying, he loves smaller buyouts. He loves finding a general of a business to buy and then, bringing in, real value add through a network of operators that are his personal relationships.

[01:03:54] Adam Shapiro: And he walked away from all the trappings, right? The fancy name, the fancy business card. He walked away from that to start his own firm and he was so committed to that he did it without raising any money. He did one investment on his own, which he funded himself. He had success so he could afford to do that.

[01:04:16] Adam Shapiro: And just, it was very clear in our diligence of him of what a just. high quality person he is, super high integrity, hands on, dedicated, diligent, and we knew people in common again, which is the key to get to a real picture. But another indicator is, will people he worked for, who don’t really have to, be quickly responsive to a reference request.

[01:04:42] Adam Shapiro: And so, at the time, I didn’t know Bennett Goodman. I know him well now, but I didn’t know him then. And, and I emailed Bennett, who was the G in GSO, founder of GSO, where Tim had worked. And I said, if you have a bit of time, I’d like to come over and talk to you about Tim White. And I think even that’s a little bit unusual, right?

[01:05:02] Adam Shapiro: People ask for a call, they ask for, back then it wasn’t a Zoom, but they asked for a call. And I was clear that I wanted to come meet him in person. And I just believe it’s much better practice and referencing to try to do things in person. And he wrote back right away, never heard of me before, Bray, when can you come?

[01:05:20] Adam Shapiro: And I think I was in his office the next day. And it was very clear from that meeting. He volunteered some of the things. That you’d like to hear based on probing of this is the person I would trust if I was going away, if I wasn’t around, and I needed someone to take care of my money for my family.

[01:05:39] Adam Shapiro: This is the guy Tim’s the guy. So that’s the level of character. And validation from, obviously a very sophisticated, incredibly successful hedge fund founder who took the time and went out of his way to make these positive comments. And so that’s what you want to hear. Cause that’s almost like the dream.

[01:05:56] Adam Shapiro: I mean, you hope that happens, more than a few times. And, so we went on to be the primary source of capital for the next four investments that Tim made as Dunes Point, so he did one investment with his own money, did four over several years with ours. It was a very successful relationship and he has gone on, to become a very substantial, Dunes Point is now a very substantial profit equity firm, had an excellent second fund and is on their third fund.

[01:06:25] Adam Shapiro: And when I mentioned the name Dunes Point around, In the world of buying, sort of middle market industrial businesses with a lot of value add, I believe they’re one of the most respected names out there.

[01:06:38] William Green: And what about someone like Jonathan Wang, who I think you’ve known him for a very long time, who is an expert in buying hotels, particularly when they’re out of favor and then transforming them. What makes him special and what does he embody that you look for? Because it seems like part of what you’re looking for is a degree of specialization with these people. Like, he’s got such a weird little niche, right, that nobody else, I mean, it’s just not as competitive in certain ways, if I’m understanding correctly.

[01:07:07] Adam Shapiro: Yeah, we’re looking for people who are creating an advantage, through building some sort of resource or expertise. And Jonathan, I think, is a poster child for that. And, even better for us, in some ways, this is as good as it gets. I knew him, going back to working at Goldman together, I knew the quality of his work, his quality as a person.

[01:07:29] Adam Shapiro: And then I also got to watch, he left Goldman, he went to work at Northwood, which is a real estate private equity firm, highly respected. And he built there this hotel investing capability and became one of the very few, very few real estate private equity firms that had its own operating capability with respect to hotels.

[01:07:48] Adam Shapiro: So there was no need to rely on third party managers of these large brands. What Jonathan built was this ability to really understand hotels up front, so the diligence capability, since he had a real operating team, he knew, like, he knew exactly how, revenue management will work.

[01:08:08] Adam Shapiro: He knew exactly what different cost line items were. And he could build a picture of what would happen, if certain levers were pulled with respect to a hotel they acquired. For example, taking a branded hotel and removing the brand and taking a hotel independent, he had a lot of expertise around that.

[01:08:26] Adam Shapiro: And it also, this operating capability gave him early insights on, individual markets that were poised for an advantageous period and he did that. Sort of most notable with the Florida Keys had a lot of success in Florida Keys and he had that success at Northwood and then continued that in his firm Eos and so you can tell I’m a huge fan of Jonathan’s as a person as an investor as a platform builder And I think what he has is very special which is this ability to identify Value added opportunity up front and then execute on that And executed on it very efficiently in terms of getting it done quickly and well, but also saving his investors’ money by not paying third parties more than he should.

[01:09:15] William Green: One thing that was surprising to me as I looked at your strategy. I think at one point you told me that you own something like 15 to 20 hedge funds plus something like 60 to 80 private equity investments with 30 to 40 sponsors. I’m not sure if those numbers have changed a great deal. The idea of owning 15 to 20 hedge funds is really interesting to me because I remember, for example, Templeton many years ago, probably 25 years ago, saying to me that the average investor should own a minimum of five funds, each focused on a different area of the market.

[01:09:46] William Green: And here you are, you’re obviously dealing with people who are not the average investor, your typical client has a minimum of a hundred million dollars invested with you. These tend to be billionaires and multibillionaires. Some of the most prominent families in the world.

[01:09:51] William Green: How do you think of this question of diversification, because I often am torn personally between the idea of wanting to concentrate enough so that I’m likely to perform well and diversify enough so that I’m likely to survive. And I’m just wondering how you. How you think about this and how, what kind of lessons are off for the rest of us on this issue of survival through diversification.

[01:10:27] Adam Shapiro: So, you hit, the key point, which is, you want diversification, but not too much, right? If you need to diversify too much, if you don’t concentrate and I do think most portfolios. in our world tend more towards over diversification rather than under. And I should even define, I guess, what I think our role is, which, I think what I do at East Rock does, we exist in this, very large arm of the investment world, but an arm that gets a lot less attention, I think, than hedge funds and private equity funds, which is, we’re managers of large asset pools.

[01:11:02] Adam Shapiro: For families and, that is a whole sort of sector within investing that involves these firms and internally managed endowments and family offices, that world of managing large asset pools. I think, frankly, there are a number of things that we, as a group can do better. And 1 of them actually is probably.

[01:11:24] Adam Shapiro: Thinking about diversification in, I’ll call it a more advanced or maybe nuanced way. And so, of course, to your point, I do think we see quite a lot of over diversification. We can get into the reasons. The key in my mind, and it trumps everything else, is the type of diversification.

[01:11:46] Adam Shapiro: The type is incredibly important. You must diversify into situations that are truly non correlated with each other. That is what protects you more so than the amount of diversification. And so that is maybe item one on a fairly long list. Of why, I believe so strongly in active management as a significant portion of a large asset pool, and I’ll just define active management as the combination of private investing in all its forms, plus absolute return and hopefully give a really simple reason why that’s the case.

[01:12:30] Adam Shapiro: But if you look at the S&P 500, the vast majority of the components of the S&P 500, overwhelming portion of it, has a beta between 0. 5 and 1. 5. So those companies, those stocks, they behave together more than they behave differently by a significant amount. To make investments. That are truly non correlated, you really need to be looking, and I’m assuming you really care about this, which I think you should, you really need to be looking in the world of private investing in an absolute return and, our hedge fund positions, the betas, the relationship to the S& P 500, they range, from a high of about 6, some of them, down to negative, actually less than zero.

[01:13:21] William Green: And so for the layman like me who are not good with technical terms, what we’re really talking about here is the benefit of reducing your kind of raw market exposure. So, so if the market gets hit the S and P 500, for example, you’re not totally crushed. So you’ve pointed out that one of the problems with index funds is for example, in 2022, you had a 25 percent draw in 2020, a 34 percent draw.

[01:13:49] William Green: In 2018, a 19 percent drop in 2007 to 2009, a 55 percent drop. So what you’re getting at is this really fundamental problem that all of us having to deal with as long term investors, which is how much can you bear to be exposed to that market risk? How much can you handle? And will you actually be able, as you put it in your writing, to have the iron will to ride out those drawdowns?

[01:14:13] William Green: And if you do, it’s easier, I mean, I think for some of the people I invest with and in, in my sort of ecosystem who are kind of concentrated, long only, Investors that people who are very opportunistic during these drawdowns and they can kind of handle it temperamentally that’s a small it’s a small part of the world that can handle that I think you’re getting at this very fundamental problem that all of us are trying to deal with this very uncomfortable which is how do you reduce your exposure to the market so that you’ll survive and not do anything really stupid during those down periods.

[01:14:50] Adam Shapiro: Yes, so I get the question all the time, and it sounds like you engage with this question a lot, which is just, why should I bother with all this active management stuff, private equity, all the illiquidity that goes with it, hedge funds that charge big fees, all this stuff, why should I bother with any of that, shouldn’t I just buy ETFs, look at what the S& P 500 has done for the last 10 years, 15 years, pick a number, and I think that there is A very powerful argument for why people should not do not just kick out alternative investing and think about a public’s only strategy.

[01:15:25] Adam Shapiro: And it really has a few components. So 1 is the 1 you just referred to, which is, there’s. There are a bit of research which shows that on average, individual investors, investors in my sort of seat, managing a large pool of assets, they don’t capture the whole return of the market, they buy and sell at the wrong time.

[01:15:45] Adam Shapiro: And the, and that happens for a bunch of reasons. And 1 of them, of course, is just the psychological pain of being down massively at some point. If you’re down enough, it’s actually irrational. Even to hold on through that. So. There are behavioral reasons not to only buy ETFs as a solution.

[01:16:02] Adam Shapiro: There is a second reason, which is you can buy the wrong ones and be wrong for a really long time. And we all sort of look at the S& P 500 and how great it’s been. But, there, there is certainly no guarantee that the next 10 or 15 or 20 years on any one index you choose will behave that way. And even in this relatively frothy period, emerging markets, for example, has been a horrible place to be.

[01:16:25] Adam Shapiro: So if you chose ETS, but chose emerging markets, that was rough. And the 3rd thing in practice, when people do choose to mostly invest in ETFs is they tend to spread the ETFs around for just that reason I mentioned, right? There’s a reason people gravitate to a 60 40 portfolio, even though it’s sort of an antiquated way of thinking, but once you decide you’re going to do all public markets, what you tend to do is buy a variety of ETFs and even some fixed income to meet the volatility, which otherwise might be intolerable.

[01:16:53] Adam Shapiro: And once you factor in it, those, I guess those factors, the ETF strategy itself does lose some of its luster relative to, the returns that are available from a more active strategy. And, of course, the large endowments would be the place to see how that can really work to your benefit, where you can earn similar, if not better returns over a long period of time, without falling into some of those traps.

[01:17:20] William Green: The gold standard of the endowment strategy, obviously, was always David Swenson at Yale, who I think famously made, what was it, something like 13. 7 percent for something like 36 years. I mean, an incredible performance. And one of the things you said about doing when you co-founded East Rock 16, 17 years ago, longer, 18 years ago, back in 2006, Was you were setting out to beat the Yale endowment and in some ways part of what you’ve done.

[01:17:51] William Green: That’s intellectually very interesting and important is you’ve kind of created an update in some ways of the Yale model with this East Rock framework and without wanting to be too specific about your returns. I think it’s fair to say that your returns over the last decade and longer have beaten all of the endowments.

[01:18:10] William Green: And so it’s an interesting experiment, sort of ongoing experiment in how to do this in a kind of updated way. Can you talk a little bit about obviously Swenson Made this very important move away from just owning stocks and bonds and the like to investing in alternative assets like hedge funds and private equity and real estate and all of these other things.

[01:18:30] William Green: So I think there were about eight different asset classes. You’ve updated this model in certain ways, partly by saying there are things that I’m just going to avoid that I’m just going to remove. What’s the essence of what it is that you’ve just decided if you want to build multi-generational wealth as you’re doing, you can actually do this better than even the Yale model, much as the Yale model was very impressive.

[01:18:57] Adam Shapiro: Yeah, so I find it sort of amazing that Pioneering Portfolio Management, Svensson’s book, was written, I think, 24 years ago, and there hasn’t been, apologies to anybody who’s written a wonderful book, but there hasn’t been a book that I know of in this world of large asset pool management that’s been published.

[01:19:19] Adam Shapiro: Really move the thinking nearly as much as Swenson’s book. And I think you can have a fascinating debate about what are the true innovations in Swenson’s book and what are maybe less central innovations. And for example, I, on some level, I think the notion of a policy portfolio and asset allocation buckets.

[01:19:42] Adam Shapiro: I think it’s much less important to Swenson’s accomplishments. I think what Swenson did was first just simply identify the opportunities that existed in alternative assets and then he became really good at finding the best managers and ultimately. Succeeding was allocating your human resources to being really good at selecting managers in areas where there was great dispersion between the best manager and the worst manager.

[01:20:11] Adam Shapiro: And so I think Samson was incredibly good at that. I say all this with hopefully a bit of humility. I know, I met Swenson once and I’m not the world’s best student of Swenson. By any means, I know a lot of people who were with him and for him and know him a lot better. But I do think that there is room, significant room, to move the discipline forward, the core tenets of pioneering portfolio management.

[01:20:36] Adam Shapiro: And I would probably start, and MIT has done this, is really deemphasizing the asset allocation buckets. Which I think can be problematic to sort of create a false sense of diversification and is very difficult to actually define sometimes which bucket different investments should go into.

[01:20:58] Adam Shapiro: And so I think there’s an opportunity to take, the really. Key insights and apply them in a slightly different way. And so I have written an article proposing, a different construction framework. Yeah, that revolves around, you start with focusing on your 2 key budget and say, you never want to exceed.

[01:21:17] Adam Shapiro: You never want to exceed your market risk budget for the reasons we just talked about, you never want to be in a position where your market risk exposes you to a drawdown that’s so painful that you make a really horrible decision at the worst possible time. The other key budget is liquidity.

[01:21:31] Adam Shapiro: So you must, rule number one for someone in my position, never, ever run out of liquidity. And so you want to have a very clear and strict liquidity budget, but you do want to use illiquidity as much as possible. So, you budget for the liquidity you need, but not more than that. And you use illiquidity to your advantage.

[01:21:50] Adam Shapiro: Again, some insight there where I think there’s real room to move things forward. Again, these are some of the things I’ve written about, like, I think we talked about small managers is the only. Sort of fundamental strategy I know of with clear out performance over a long period of time.

[01:22:07] Adam Shapiro: There should be more focus on small managers. I think there are strategies for avoiding filler in a portfolio that accumulates for a variety of reasons. And again, just 1 simple 1 I’ll mention. This is part of the problem with large managers is large private equity managers tend to do about 20 deals per fund.

[01:22:27] Adam Shapiro: Small managers tend to do about 9 deals per fund. 20 is too many. You will get some filler in there. You’ll get some deals that are in there for the wrong reasons. I won’t go into all of it, but if you can have an obsessive focus on Avoiding filler, avoiding things that aren’t special in the portfolio and things that linger too long in the portfolio, and I’ll do a sidebar on time horizon.

[01:22:48] Adam Shapiro: A lot’s been said about having a long time horizon, how important that is. And I agree, having the ability to be long term is incredibly important. But, being long term, staying long term can lead to, I think, A lack of discipline where things linger in the portfolio too long. And that’s equally problematic as being too short term.

[01:23:07] Adam Shapiro: And so, and then beyond that, I think, there are ways to be creative and entrepreneurial in the search for alpha opportunities. And part of that goes back to bringing a more rigorous discipline to sourcing and dig a sourcing of investment managers and diligence and investment managers. And then there are even more slightly tactical things like.

[01:23:30] Adam Shapiro: Very little has been written that I’ve seen in this world of large pool asset management about, I’ll say two things. One, selling discipline. This is back to letting things not linger too long, but having frameworks for how to redeem, when to redeem, how to cut risk. Those are things that I don’t see talked about, near as much as perhaps it should be.

[01:23:55] Adam Shapiro: And then more basic risk management around Factor exposures, correlations, these are areas that we’re coming out of the age of, we’re relying on models that aren’t very good, like value risk, but where, there’s a lot of work to be done, I think, ahead of us to understand risks, inheriting portfolios that really have to do with hidden correlations.

[01:24:20] William Green: This idea of hidden correlations is really important and as you say, I don’t think it’s something people really understand that much and you’ve written about factor analysis that one of the problems with a lot of our portfolios is that we’re unknowingly Exposed to a range of different factors, like, for example, macro trends like interest rates rising or GDP growth changing or commodity prices and the like, and I wonder if you could just talk a little more broadly about if you’re a regular investor and you’re worrying about your portfolio because you do have a lot of exposure to different factors like interest rates and GDP growth and commodity prices and the like.

[01:25:03] William Green: And you also have a lot of market exposure and you don’t have access to these kind of very esoteric, sophisticated tools like the kind of access to private equity deals that Adam has, or the ability to invest in long, short hedge funds, which I’m wary of anyway, because I tend to be worried about shorting, but you know, there are obviously good reasons for that for shorting.

[01:25:24] William Green: There are some justifications for it. What do you do as a regular investor who’s trying to protect yourself from the fact that you’re overly exposed to the market, overly exposed to different factors that could hit the economy or your portfolio. How do you try to create some degree of resilience in a world where you don’t have access to the type of sophisticated vehicles that you have access to?

[01:25:50] Adam Shapiro: It’s a great question. It’s what you just described as a place where I want the world to get better. And I don’t think it’s there. And if I have one big issue in David Swensen, he said, if you have tons of resources like Yale, you should basically put 70 percent of your assets.

[01:26:06] Adam Shapiro: And alternatives, if you don’t, you should just buy ETFs. The problem is just buying ETFs exposes you to all those issues we just talked about, psychological, whether you can write index, whether you serve over diversify, maybe buy too many bonds, all those things. And, the reality is that private markets, we’ll go hedge funds aside for a second, private markets is really the one place.

[01:26:30] Adam Shapiro: Or you can make investments, are called long investments. So you own something you own a company or an asset cash flow stream, a long investment that truly has a beta. A non-correlation that might be 0 might even be negative. I’m thinking of things that we do like. Buying insurance companies in runoff where the performance of the investment will have nothing to do with the economy.

[01:26:55] Adam Shapiro: I’ll have nothing to do with multiples. We just get cash as a bunch of policies runoff distress loan portfolios. Like, I used to buy a Goldman. These are things. That will have very little beta, reinsurance side cars, where you sort of get exposure to, the potential for natural disasters, which I think is an interesting area.

[01:27:19] Adam Shapiro: We’ve done relatively little of, but it’s sort of an example of a situation where a private market could offer you a return with effectively zero beta, maybe a better example, more actionable example for us is buying companies where the business plan is to shrink down very substantially and by shrinking them, selling assets, freeing up equity capital, distributing money again, there’s 1 bank in Germany we invested in.

[01:27:47] Adam Shapiro: That is sort of an example of that, where it was a very clean but oversized bank. And so we could buy that bank at a discount to book value, shrink it, free up capital, return money. And again, the performance of that investment would have absolutely nothing to do with anything else that happened really in the world.

[01:28:02] Adam Shapiro: There was just a question of, could we shrink the bank? These types of opportunities, I, look, I find it very frustrating That is sort of the world of retail investing. Private wealth has not found a way to provide access to smaller investors because it leaves. It leaves me in a very uncomfortable position.

[01:28:25] Adam Shapiro: I live in all the time, which is people ask. My advice on how to invest, and I do not believe this one’s some advice, which is if you have resources to alternatives, and if you don’t buy ETS, there ought to be something better. I hope to see it. I, maybe in some way we could contribute to it, but I think that there are some things that are broken about investing for individuals and families and, that’s probably top of the list.

[01:28:49] William Green: I feel like there are some practical things that we can do as regular investors. Like, I remember Howard Marks, for example, saying to me when I was interviewing him for my book, just talking about the, he would say, look, the question is how much do you push the envelope?

[01:29:04] William Green: If you live within your means and you don’t use leverage and you don’t have, you don’t have a ton of debt and you invest in a way that you’re not going to fall apart psychologically. So it’s conservative enough that you’ll be okay when the market gets hit, you’re more likely to do okay, and I take sort of practical advice like that really seriously, like I remember my friend Ken Schubenstein’s, who I wrote about in the book as well, once saying to me that you have to really beware of recurring expenses that you’re committed to that during the good times you assume it’s always going to continue and so you commit to like a really fancy office, things like that, and I think if there’s one smart thing that I’ve done in recent years, partly because such a painful time during 2008,2009 where I, my stock portfolio got hit badly, but I didn’t have to sell anything.

[01:29:57] William Green: Cause I didn’t have any debt, but also, I lost my job at the same time. One thing that I’ve used the last, 12, 13 years for is the market’s been really good. It’s just been to reduce my risk in so many ways. So not to have a big mortgage, not, I just bought a new car. I didn’t take on any debt to buy the car, just trying to position yourself so that you’ll survive.

[01:30:16] William Green: If you really can’t reduce your exposure to the market, and these various factors like interest rates and the like that Adam can find more nuanced and subtle and sophisticated ways to reduce his exposure to I think these are really helpful. Just general tools. Do you have any thoughts about anything that I just said?

[01:30:37] Adam Shapiro: Yeah, I think it’s advice. It’s incredibly hard to argue with. Yeah, if you can reduce your liability to reduce your sort of burn rate, you open up opportunities to do. A bunch of different things in terms of how you invest. I’m not sure. I agree that the conclusion that is, well, then it’s sort of okay to just on a bunch of stocks.

[01:30:58] Adam Shapiro: That’s not exactly what you’re saying, but I, that advice sounds good as long as you’re, happen to be investing in the United States in the last 15 years. But if you’re investing in Japan and in the 1980s, or. Okay. Lots of different emerging markets almost any time, if that’s where you happen to live again, I think of my wife and her family and her friends in Mexico City and they you tend to invest in what’s around you and if you put it all in the Mexican stock market, you may not feel the same way that you’re describing and so it doesn’t sort of stop me from believing That there ought to be a way for people to get exposure to high quality, truly non correlated investments.

[01:31:41] Adam Shapiro: The investments I’m talking about, they don’t take them public, right? Like when you have a bank that’s private and the business plan is to shrink, nobody IPOs that, right? That’s not available to you on the public market. When you have an insurance company that’s been put in runoff, nobody takes that public, right?

[01:31:56] Adam Shapiro: So there’s this whole trove of things that are just never going to be public and so finding ways to access that and I think there are platforms that are trying and I certainly don’t want to create the impression. Nobody’s trying to do this. It just feels very early that I haven’t seen anything yet that I’ve been able to really get to know and recommend people. That would be a way to get access to the sort of other sort of stuff.

[01:32:22] William Green: I think one thing that’s very striking for me over the last couple of weeks when I spent a lot of time researching your approach to investing is the emphasis on resilience in a multi-generational way that you’re trying to set yourself up so that these ultra rich families are going to be okay more or less whatever happens.

[01:32:42] William Green: I mean, they’re going to be okay, whatever, but you know, so that they’re going to continue to grow their wealth. under any circumstances. And one thing that’s obviously really central to that is just being very wary of leverage. And I was really struck by an article that you wrote in 2023, where you talked about, the brilliance of the wonderful Roger Lowenstein book when genius failed, which talked about the blow up of long term capital management.

[01:33:06] William Green: And you talked about funds like Amaranth blowing up back in 2006. And 2008 when Citadel lost 55 percent and nearly went under and there was something that was almost kind of buried in the article that I wanted to unbury, which is that you said on December 31st, 2022, these really quite prominent Macro, or sort of, I guess, multi asset, multi strategy hedge funds had an enormous amount of leverage, and you mentioned, for example, Millennium, which I think at the time had 58 billion dollars in assets under management, you said had nominal leverage of 6.8 times, so in other words, I guess for every, so, their investment exposure is basically six times that net asset value at that point. Well, 6. 8 times Citadel, which had 52 billion in assets on a management had 6. 6 times leverage and 0. 72 Steve Cohen’s firm was 5. 1 times. That’s really interesting to me and I wonder if you could just unpack that, what you’re thinking in terms of the implications of this kind of leverage, whether there’s systemic risk or whether it’s just a reminder that shareholders should be very careful, I mean there’s a quote in that article where you say, if the familiarity of the fund name makes you comfortable, don’t trust your gut.

[01:34:23] William Green: Can you just talk a little bit about the dangers of leverage and what you’re kind of slightly politely. Drawing our attention to, and I’m less politely, highlighting it.

[01:34:36] Adam Shapiro: Yeah, absolutely. As a manager of a large asset pool, whether it’s a family endowment, whatever it may be, you’re taking ultimately two kinds of risk.

[01:34:46] Adam Shapiro: You’re taking the risk that you’re choosing the right manager, and then you’re taking the risk of whatever that manager is doing, and it may work and it may not work. I like to argue that the risk that you’re choosing the right manager, that risk is much higher if you can’t. Really point to exactly how it is that manager makes money, there are some managers who do the things, kind of like I described earlier, which in this very careful, fundamental sourcing oriented way, find things that are special that almost anybody could identify as special.

[01:35:21] Adam Shapiro: That’s, to me, that’s a manager who’s much easier to evaluate. And then there are managers who are much harder to evaluate, like ones that, run, 58 billion, levered six times nominally, and probably maybe six times through, through other sort of swap type methods, or whatever the numbers are running a lot of leverage.

[01:35:42] Adam Shapiro: And so, anytime you’re investing in something that’s a bit of a black box, you don’t really know how they make the money, and there’s a lot of leverage involved. I sort of tend to argue there’s more manager risk. There’s more risk that you’ve invested in something that’s not what you thought.

[01:35:57] Adam Shapiro: Then it would be otherwise. So you just have to take that into account. People have done wonderfully investing in these firms and I’m not making any specific prediction and I’m not telling anybody they should go and redeem, but I do think that they should assign probably a greater risk to the fact that, the history of black boxes using a lot of leverage is not a great one.

[01:36:18] Adam Shapiro: And that’s true in the hedge fund context. It’s true in the investment bank context. It’s You know, leverage is can be lethal stuff. And so putting a premium on situations where there’s good returns to be earned without leverage is something absolutely worth doing.

[01:36:35] William Green: You spent a lot of time with these ultra wealthy families. And I’m wondering when you think about what it is that you’ve learned from them, not just about how to stay rich, but actually about what we should be optimizing for in our own lives. What have you seen from actually being up close with people who in so many ways have won the jackpot and yet they’re having to deal with all of the difficulties that come with extreme wealth, all the problems with it.

[01:37:05] William Green: Making sure your kids don’t screw up and your grandkids are okay and people have an appetite to succeed and the like. There’s a tremendous amount of dysfunction in super rich families. I’ve spent a lot of time with them over the years as a reporter. What have you learned about what works, what doesn’t work, what you should optimize for and how that has influenced the way you run your own family. Run is the wrong word, given that your family is probably running you.

[01:37:33] Adam Shapiro: This is a, you’re asking a great and almost age old and very difficult question. I guess I’ll give you a few thoughts, based on some pattern recognition. I think that certain families in this orbit have a certain vitality to them that I think is driven by a level of engagement and connectedness.

[01:37:57] Adam Shapiro: Connectedness to a community, finding things to engage in that offer purpose. So what allows that to happen? What allows certain families to have this sort of, I guess, vitality, this engagement, this sort of almost like moving forward kind of dynamism. I can think of one person I think of who is a model for that in my life is Stuart Miller, who was the original founding investor in East Rock.

[01:38:23] Adam Shapiro: And is, controls one of the largest home builders in the United States. He’s co CEO, a true leader, a great business leader, and at the same time, decided to give himself essentially a second full time job, which is, various roles in the University of Miami community. He’s been chairman of the university, is currently chairman of the health system that he’s comprises a large portion of University of Miami.

[01:38:48] Adam Shapiro: And, in other ways, he’s just an incredible advocate and champion for the city of Miami. And she has that moving forward dynamism, vitality, all those things that, I think people in that sort of position should aspire to, and which is really not easy. But within that, my job, which is to take care of the investing side of things.

[01:39:13] Adam Shapiro: Is, you could think of it as a facilitator, it’s certainly not. The solution to all these issues we’re talking about, but I guess I would think of the family assets. The protection and the growing of those assets. As a facilitator of all these other things that can create a meaningful life for families and get into that position of.

[01:39:37] Adam Shapiro: Again, I’m sort of engagement and vitality and purpose. The way families do that will vary, massively. Some will be involved in the investment side of things. Some will not in my particular case, my job. Is to make sure that people like Stuart Miller and spend all their time on these things they deeply care about and know that they’ve made a smart decision with their money and, but they don’t have to spend a lot of time on it.

[01:40:04] Adam Shapiro: And so, the common denominators tend to be in terms of the investment function, supporting the broader goals of the family. I think family members will tend to feel. A great deal of responsibility to, the family members around them and future generations. They want to feel like they’re doing something smart, something responsible.

[01:40:24] Adam Shapiro: They certainly don’t want the wealth to be, a source of acrimony. They want everybody to have this opportunity to maintain freedom and bandwidth to focus on the things they really care about. You really want no surprises. The key is no emergency family meetings. Realize that something’s going to have been went wrong and one of the trickiest parts is the involvement, right?

[01:40:49] Adam Shapiro: The family member involvement. In the investment function, and the way I think about that is if a family member develops a true interest and true passion and caring for investing, then that is a gift to the whole family. Yeah, that’s not for everybody. In a lot of cases, it’s 1 person taking on responsibility, possibly for a broader set of people.

[01:41:11] Adam Shapiro: And when that happens, and it works well, it’s an incredible thing. And if nobody does that there, there can be a vacuum that can be overcome for sure. I guess sort of a long way of saying, what I know about what I think I can speak about is how investing function can be the support mechanism for desires, but also these fears and, in the sense of responsibility and wanting to do the right thing and of course, the math on the flip side is.

[01:41:40] Adam Shapiro: Families don’t invest well, there are real consequences to that, unfortunately, right? I mean, the overtime, if you don’t invest well, there’s a spend rate, it may be on consumption, it may be on charitable giving, it may be on lots of different things. And the number of people living off of that body of wealth, it tends to go up and up.

[01:42:00] Adam Shapiro: And so the denominator effect is powerful. And if people, I think what can suck vitality is this feeling of moving backwards of we were a relevant family in a lot of ways and, now we’re now we sort of know backwards and, that’s I think the key thing to avoiding the investment function again can play a role in that.

[01:42:18] William Green: I wanted to just ask you one thing before I finally let you go, having exhausted your patience here. You wrote an article that I thought had a lovely title, which was let there be nothing left to take away where you talked about something that I wrote about at length and in my book, richer, wiser, happier, this whole concept of the art of subtraction.

[01:42:37] William Green: And you talked about creation by subtraction, how there’s this CNC machine that carves beautiful objects out of rough metal, and you used this as a way of talking about this idea of How often in life we add stuff, but actually you kind of want to cut things away. And I wondered if you could just talk about just the central importance of this really powerful idea of subtracting stuff, both in investing and life, How you actually managed to reduce complexity so you have a kind of karma more balance life that’s actually kind of manageable within the storm of managing a big company and managing all of these assets and raising kids and the like.

[01:43:16] Adam Shapiro: Yeah, it’s a great question. I think maybe I figured it out better on the investment side than on the life side. On the investment side, starting with a framing of there is this thing called filler and it’s the enemy that, you know, that having this mentality that things are trying to get into your portfolio and they’re trying to stay in your portfolio and it is your job to, not just add great investments, but keep those things out.

[01:43:41] Adam Shapiro: And sometimes you have to be really creative to do that. You have to find ways to invest in private investments, for example. Perhaps not through the traditional fund context, but find strategies where you can get more concentrated exposure to private investments you think are really good or invest in ways where you have some influence so that you can force an exit rather than have things hang around too long or have ways of partnering with managers so that if they drift, for some reason, they’re not hanging around the portfolio.

[01:44:12] Adam Shapiro: Simply because there’s inertia and you’ve been with him for a while and maybe they’ve made you some money, but maybe they’ve changed. And now what they do is sort of become more like filler and you’ve got to get rid of it. So I think in investing is probably 1 of the most important things.

[01:44:27] Adam Shapiro: That people should do more than they do, which is vigilant around filler and cutting it out in life. I’m not sure I have an answer that I have quite as much conviction about. I do notice and you’re a writer and, I’m a fledgling writer, I guess, but there’s just absolutely nothing in the world that helps you really sort through your thoughts.

[01:44:50] Adam Shapiro: And take those thoughts and decide which ones are really important and really impactful versus the ones that aren’t, there’s just no better way to do it than picture yourself writing about, actually writing about it and then picturing that writing being read by thousands of people who are going to poke holes in it.

[01:45:09] Adam Shapiro: It’s just. It’s I’d say sort of a blessing that’s come more recently that I’ve been able to carve out room to write things and found some subjects that I’m passionate about to do that.

[01:45:21] William Green: Yeah, I suspect down the road you’re going to write that book eventually. I’m pretty sure you will. I think you figured out some important things about what works and doesn’t work. I don’t know. I feel like you’re creating kind of some important insights really about these issues like, like reducing complexity, knocking out some of these, standard asset classes that people assume have to be there or thinking more about factor risk and survival and the like.

[01:45:45] William Green: So you definitely have important stuff to share. So yeah. I’m looking forward to reading more of your writing down the road and I just really enjoyed, getting to learn more about what it is you do. It’s a kind of esoteric part of the world and, I didn’t know enough about it. So thank you very much. Do you have a last word that you want to share with us?

[01:46:04] Adam Shapiro: My pleasure. I appreciate that last comment. Look, I think, one thought about that last point, more people should do it. We, this world of managing lowered asset pools, I think it is flown under the radar screen relative to hedge funds and private equity funds.

[01:46:20] Adam Shapiro: It’s a great place to work. And I don’t just mean at East Rock. I mean, in this discipline, I think that a lot of exciting things are going to be happening. There are something like 10 trillion in Family offices across 10, 000 family offices. Globally, there are 3 or 4 billion dollars trillion dollars. Excuse me.

[01:46:38] Adam Shapiro: And oh, CIO firms. This is a large growing sector where things there’s a lot of room to do things better and really distinguish yourself. And I’m sort of excited about it as a, as an area to work in. I’m going to be teaching a class on in Columbia business school in the fall. As there’s a recent HBS case on my firm, which really gets into this world of large asset pool managers, and I think it’s a fascinating area, and I think it’s going to attract greater and greater talent over time, and so that’s one, one last plug I’d like to make is, consider this sort of sector as a career, because I think it’s a great place to be.

[01:47:16] William Green: Excellent. That’s a good note on which to end. We’ll all be sending you our resumes tomorrow. Thank you so much, Adam. It’s been a real delight. I really appreciate it.

[01:47:25] Adam Shapiro: My pleasure. Thanks for having me.

[01:47:27] William Green: Thank you.

[01:47:28] William Green: All right, folks. Thanks so much for tuning into this conversation with Adam Shapiro.

[01:47:33] William Green: If you want to learn more from Adam, it’s well worth dipping into the 15 or so articles that he’s written in his LinkedIn newsletter. I’ve included a link to the newsletter in the show notes to this episode, along with various other helpful resources, including a really interesting Harvard Business Review case study about East Rock Capital.

[01:47:52] William Green: The case study is titled talent is the best asset class. I’ll be back very soon with some more terrific guests, including a fascinating investor named Jay Bowen, who’ll talk about how he and his late father beat the market by a mile over the last 50 years. In the meantime, please feel free to follow me on X @William Green72.

[01:48:14] William Green: And as always, do let me know how you’re enjoying the podcast. I’m always delighted to hear from you. Until next time, take good care and stay well.

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