The transcript from this week’s, MiB: Ted Seides, Capital Allocators, is below.
You can stream and download our full conversation, including any podcast extras, on iTunes, Spotify, Stitcher, Google, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.
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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, once again, I am fortunate to have another extra special guest. Ted Seides has a fascinating career in allocating capital, both on an institutional basis and as an academic, theoretical, philosophical approach. Perhaps he is best known for a bet he made on a Lark with this guy named Warren Buffett, which we spend a lot of time talking about, really a hilarious and amazing conversation about this delightful experience he had.
But he spent most of his career allocating capital to various hedge funds, private equity, venture, etc. First working for David Swensen at Yale and then later at Protégé Partners and now talks about the philosophy and art and science of allocation at Capital Allocators. I found our discussion to be an absolute joy and I think you will.
Also, with no further ado, my conversation with Ted Seides of Capital Allocators.
TED SEIDES, FOUNDER, CAPITAL ALLOCATORS LLC: Thanks, Barry. Great to be here with you. That is quite a CV I stumbled through. Let’s talk a little bit about your alternative investments career. How did you get started in this space?
I got lucky in the sense that when I was an undergraduate at Yale, I took a class with David Swensen.
RITHOLTZ: God. I’m just so jealous at that sentence right then and there.
SEIDES: Yeah. I didn’t know a whole lot about markets or stocks. I had a mild passing interest in it, but he mentioned in this class that they hired one person a year. And so alongside of Wall Street recruiting in my senior year, I interviewed at the Yale Investments Office and was fortunate to get that job and violated the two principles I had at the time, which was I wanted to be in a training program and I wanted to leave New Haven.
RITHOLTZ: And so you stayed in New Haven and did not enter a training program, although arguably working under Swenson is its own sort of training program, isn’t it?
SEIDES: Of course it was. But who knew at the time? This was back in 1992. So that was my initial foray into the investment business.
RITHOLTZ: So you graduate cum laude from Yale, you end up going to Harvard Business School. Tell us a little bit about how that led you to working with some of the managers that worked with the Yale Endowment.
SEIDES: Sure. Well, I spent five years working for David and learned just a tremendous amount.
RITHOLTZ: That was really your MBA right there.
SEIDES: That was my true investment MBA. David didn’t want me to go to business school. He said, “You’re not going to learn anything about investing. You just stay here for a couple more years.” But I really had an interest in trying to work directly in markets.
And so my summer job at business school, I worked for a hedge fund that Yale had money with. And that was the summer of ’98. They were value-long, growth-short when Amazon went from $40 to $260 the same summer. Phenomenal firm.
RITHOLTZ: Did long-term capital management impact them at all?
SEIDES: No, not while I was there. I was there during the summer.
RITHOLTZ: So a few months later, yeah.
SEIDES: A few months later. And then when I came out, I felt like I wanted to learn more about business analysis compared to stocks, even though that was my passion for stocks. So I worked at a private equity firm, that middle market private equity firm Yale had money with. And then I got wooed by a friend from business school to a larger one. And those were my kind of three formative experiences in direct investing.
RITHOLTZ: Hedge fund, private equity, and Yale endowment, right?
SEIDES: Yeah.
RITHOLTZ: That’s a hell of a list. Are you still working with any of the managers at Yale or is that along the —
SEIDES: No, I mean, I left Yale 25 years ago. So it was a little bit in the distant past.
RITHOLTZ: So it’s funny because for a while, what we were calling the Yale model, really the genius of David Swensen, was that he was so early to alternatives when they were small, they were mostly outperformers, there was a lot of alpha generation, not a giant pond to fish in, and the Yale model did spectacularly. What’s the driver for endowment, if not underperformance, well, certainly worse performance than we saw in the ’80s, ’90s, and early 2000s.
SEIDES: Yeah, I mean, the only caveat I would give to what you said is I’m not sure if you measured it properly, the performance is worse.
RITHOLTZ: Oh no, it’s much worse.
SEIDES: It’s lower. It’s lower.
RITHOLTZ: Okay, that’s fair.
SEIDES: But market returns across —
RITHOLTZ: The past decade, 2010 to 2020, we were what? 14, 15% a year?
SEIDES: If the S&P is your benchmark, which it isn’t for these pools of capital.
RITHOLTZ: What should be their benchmark? That’s a very, by the way, very fair point. You’re a global investor. Maybe the S&P isn’t the best bet.
SEIDES: Yeah, that’s right. I mean, one of the early innovative beliefs that David Swensen had was that if you’re managing a pool of capital for what’s effectively a perpetual time horizon.
RITHOLTZ: Infinite, right?
SEIDES: You want thoughtful diversification. So if you start with the S&P 500 or in this case stocks and bonds, you only have two asset classes, right. And the question was if you can find other areas of investment that can generate the types of returns you need for your liability stream, diversification becomes the free lunch.
So the proper benchmark for those pools has to look a little bit like the underlying assets they’re investing in.
RITHOLTZ: Fair enough. So what do you use for a benchmark? Now keep in mind, let’s talk about what David invested in as an example. So of course there were stocks and bonds, but there was real estate. There were commodities before anybody had any idea. Wait, timber? Why are we investing in timber? And then there was venture capital and private credit and hedge funds.
So how do you create a benchmark for an allocation that looks nothing like a 60/40 allocation?
SEIDES: Well, you have to think about what you’re trying to measure. So one reasonable benchmark, as you said, could be a 60/40 or a 70/30. That’s a really easy portfolio to create. And for sure, over the last 10, 15 years, it’s been hard to beat.
Over a longer period of time, maybe not so much.
If you look at the types of assets that Yale invests in, you can create a benchmark for each pool. That allows you to do two things. It allows you to understand, generally speaking, what is a reasonable beta for that whole portfolio. The other thing it allows you to do is to benchmark your ability to select managers that outperform both in each areas and across the sleeve.
So you can imagine in real estate, there is a net lease real estate index you could use. You can also use a REIT index, though it’s not the same in private markets.
RITHOLTZ: Right.
SEIDES: There are pure benchmarks in venture capital and private equity that you can use, and then you can aggregate those across the asset classes to get a benchmark for the pool as a whole.
RITHOLTZ: Really intriguing. So the two issues that have changed since the heyday of the Yale model, one is everybody’s imitating the Yale model. So the first question is, does that create challenges for an allocator that wants to follow the Yale model? It’s no longer, “Hey, I got this whole field to myself. I got 500 other endowments, foundations, institutions trying to play in — trying to fish in this pond.”
SEIDES: Yeah, it absolutely does. And I think when you think through the Yale model, it helps to understand what David was thinking as opposed to what you put a label on Yale model and what that means.
One of David’s brilliance was he started everything with first principles. What makes sense? What set of beliefs do you have about the world and investing? And then how do you go about applying that with extreme discipline?
He kind of wrote about that in his book and people look at that and say, “Oh, I can replicate that.” But most people have trouble having their own beliefs and then sticking to them when rubber meets the road in terms of execution.
The other piece of it that David had that no one really could replicate is this deep belief in continuous improvement and incredible vision to see both big opportunities, like you could think about hedge funds way back when, and then also small opportunities. So he thought about fees 35, 40 years ago before anyone else, and when you could do something about it.
RITHOLTZ: It was him and Jack Bogle, that was pretty much it.
SEIDES: Yeah.
RITHOLTZ: Thinking about fees. The downside of this is, and I’m going to channel Jim Chanos, who said of Kynikos Associates famous short seller, he said, “In the ’80s, there was 500 hedge funds. They all generated alpha. Now there’s 11,000 hedge funds and 500 are generating alpha.” So the other challenge is how do you choose from the pool of 11,000 hedge funds and 10,000 venture funds and God knows how many private equity funds and private credit funds, making the choice within the allocation seems to have become a whole lot more difficult, more complex and even if you find a fund manager you really like, you’re now competing with other LPs to put your billion dollars there.
SEIDES: Yeah, that’s absolutely right and depending on the asset class, there are different set of lenses. But just to use that example in long short equity investing, the first question you have to ask is, is that a place you want to be anymore?
RITHOLTZ: Right.
SEIDES: Because it is a much tougher game, particularly adding value on the short side than it used to be.
RITHOLTZ: Shorting has always been hard. There’s this myth that people put out a short position and then talk it down and just count the money. It’s much harder than that.
SEIDES: Yes. So I think selecting managers in any asset class has that two pieces. So one is going back to David’s first principles, what do you believe about what type of manager should outperform? There are some people who think fundamental discretionary investing with people who know their business is better than anyone else is the right way to do it.
There are other people that think, “No, you need to be large and systematic like Citadel or Millennium.” There’s no right or wrong, but you have to follow your own set of beliefs for what you think will work for your pool.
The other piece of it, say in something like venture capital, which you mentioned, access really matters.
RITHOLTZ: Right.
SEIDES: And that’s where you could look at a Yale and say they had a first mover advantage 30 years ago. They are already in the top tier venture managers who don’t take money from anybody else. And there are a lot of investors say that I have on the podcast that say, “If we can’t get into those top venture,” you don’t have an allocation to venture, you have a group of managers. And you take what you can get, but you don’t extend beyond what you believe are the very top tier because the dispersion returns in that asset class is really wide and you only want to be in, say, that top core top.
RITHOLTZ: So we’ll circle back to this podcast thing you referenced later because I’m interested in that. But I love the idea of the first mover advantage.
When you think about the Yale model, when Swensen was first allocating to these other asset types, commodities, lands, alternatives, it was the Wild West. It was wide open. How much of an advantage did he have being a pioneer in those spaces? The old joke is, “Yeah, yeah, the second mouse gets the cheese.” In this case, it looks like the first mouse got the cheese.
SEIDES: Yeah, it was shooting fish in a barrel.
RITHOLTZ: Really?
SEIDES: When I worked at Yale, the hardest part of the game was understanding that the game was getting played, knowing where to go to access it, and then on top of that, having your board approval to let you do it.
So to give you some examples of that, I joined Yale in ’92, David was there in ’85.
RITHOLTZ: Right.
SEIDES: There were some venture investments when they got there. It wasn’t a full thing, but they loved it. They quickly understood the potential for that.
RITHOLTZ: Who, the board?
SEIDES: No, Yale, David and Dean Takashi, the team at Yale.
RITHOLTZ: But did the oversight, the governance get it?
SEIDES: They were already in place. They really did.
RITHOLTZ: Okay.
SEIDES: And that’s a huge aspect of Yale’s success.
RITHOLTZ: No doubt about it.
SEIDES: The success of that governance. So they then had time to go to Silicon Valley to meet with the people, to see over a decade who was good and who wasn’t, to ask questions and to make mistakes. That’s a huge first mover advantage.
By the time I got there in ’92, they had a great venture portfolio and almost nobody else even understood what venture capital was.
RITHOLTZ: It was just starting to ramp up ’93, ’94, ’95, and by late ’90s, everyone had been piling in. If you’re there a decade before, talk about first mover. Oh my goodness.
SEIDES: And hedge funds were the same way. To give you a fun story, we launched Protégé Partners in 2002. In that period of time, ’92 to ’02, you really had a golden era of hedge funds in terms of returns.
RITHOLTZ: The whole pre-financial crisis decade or two, hedge funds crushed-crushed it. Or at least the top, pick a number, 30, 40%. Less, 20, 30%?
SEIDES: I know back then, the premier job in asset management was to run Fidelity Magellan. There was no reason to think people would make billions of dollars running hedge funds. It was such a boutique industry. I used to say that the guys who ran hedge funds were the one who woke up on the wrong side of the bed in the morning and felt like they just had to short because things were going wrong.
RITHOLTZ: (LAUGH)
SEIDES: So when we launched Protégé, we had a classification of hedge funds and said we’re going to not invest in the large ones. And in 2002, the bucket of the largest hedge funds was those north of $1 billion.
RITHOLTZ: Right.
SEIDES: And then I started reaching out to some of the managers I knew from my time at Yale, and one of them said to me, “We’re closed. We have a wait list.” And I said, “What is that?” He said, “I don’t know.” But all of a sudden, people have said, “Why don’t you start a wait list?”
RITHOLTZ: We’re at a capacity and that’s that.
SEIDES: Before 2002, there were no capacity issues with whoever you thought the best hedge funds were.
RITHOLTZ: And subsequently, there’s been some academic research that has implied, I don’t want to say found, but strongly implied that much, and again, much not most, of the alpha is coming from the emerging managers.
SEIDES: So that was the premise of the business we started at Protege. And I would tell you that while true that academic research, it’s all deeply flawed. All of this.
RITHOLTZ: Well, there’s a little hindsight bias built in, right?
SEIDES: There’s hindsight bias. The data of the managers you really want to measure isn’t included in that.
RITHOLTZ: It’s all self-reported, right?
SEIDES: And then I’ve never seen a study who said that the large managers were anything north of 50 million in assets, the large managers.
RITHOLTZ: What?
SEIDES: So you look at those studies, they say the small ones are less than 5 million.
RITHOLTZ: Million or billion? Are we talking about the- a typo, it sounds like. Because if you look at Millennium and Citadel and Oak Tree and AQR, which just had a fantastic year, and Bridgewater, we’re talking 50, 100, 150 billion dollars. These are massive pools of capital.
SEIDES: The problem is the academics who do the research don’t have access to the performance data of the funds that matter.
RITHOLTZ: Right.
SEIDES: None of them are, call it, asset weighted. And so those studies, while true, And while they seem to have an intellectual vigor to them in thought process, they’re really not based on anything in the real world of the investment market.
RITHOLTZ: So all of this tees up the obvious question. Was Warren Buffett right? Are most people better off in an index fund than playing with an active manager, be it mutual fund or high fee hedge funds?
SEIDES: John Yeah, I said back then, the bet started in 2007 and I say today, being in the market and investing in hedge funds is completely apples and oranges. So for a taxable investor, hedge funds generally aren’t tax efficient. And when you look at the assets that are invested, the three trillion in hedge funds, I would guess that north of 90% of that are in institutions that don’t pay taxes.
RITHOLTZ: David So foundations, endowments.
SEIDES: So as an individual, it probably doesn’t make sense, generally speaking.
As an institution, it has a very different risk return profile that when done well, fits in really well with the diversified portfolio that we’ve talked about earlier.
RITHOLTZ: You have to tell us, where did the idea come from? How did you reach out to Buffett? And what was his response?
SEIDES: Yeah. Well, and you have to go back. This is the summer of 2007.
RITHOLTZ: 2007. So, let me set the table a little bit. You had the run up in the dot coms to 2000. I have a vivid recollection of people saying, “Ah, Buffett’s old. He’s lost his touch,” right? Then everything implodes and again, Buffett is outperforming for a while. Post October lows in ’02, March double bottom ’03, the invasion of Iraq. By the time you get to ’07, market’s up 80, 90% from the lows and housing is just about peaking and things are starting to come apart around then. By ’07, it’s pretty clear that the housing bears are going to be right.
SEIDES: That’s right. So I had seen that Warren had made a comment to a bunch of students. A year or two before that, he had written about fees, the had rocks and the got rocks. And I guess he had made some throwaway comment that hedge funds could never beat the market. A student asked him about it and his response was, “Well, no one’s taken me up on it, so I must be right.”
RITHOLTZ: Meaning no one’s taken me up on his statement or did he lay out a challenge?
SEIDES: I’m not quite sure because I didn’t hear what he originally said, but it came off as it was a form of a challenge. And at the time, I was managing Protege Partners as a hedge fund of funds. We were short subprime mortgages with John Paulson.
RITHOLTZ: You were crushing it. Let me say what your compliance wouldn’t allow you to say. You guys were killing it in the mid 2000s.
SEIDES: Yeah, we had a great run. And I read a statement and my thought was, “Look, he’s Warren Buffett, but he just made a really bad bet.”
RITHOLTZ: (LAUGH)
SEIDES: Because for all the reasons you just said, the S&P was trading at all-time highs.
RITHOLTZ: Right.
SEIDES: Let’s keep in mind interest rates were normalized then. And —
RITHOLTZ: What? They had just started going up.
SEIDES: Well, rates, short-term rates were four or five, six percent. I don’t remember the number. Okay, so reasonable, right? Yeah. And I looked at that and said, “Well, you wouldn’t want to bet on the market over 10 years starting at that point in time.” Meanwhile, hedge funds had been cranking along generating market-like returns with a lot less volatility. And so I wrote him a one page letter.
RITHOLTZ: Email or hard copy?
SEIDES: I didn’t have his email. So I sent it snail mail. And he sent back through his assistant a PDF with a little chicken scratch response. And I made the letter, I actually put the letter in my first book to describe how you get somebody’s attention. And he said, “Well, it has to be this and that “and it has to be collateralized with a letter of credit.” And I was like, “What?” And so I sent him another one.
RITHOLTZ: Specifically the bet, he wanted cash upfront, letter of credit.
SEIDES: Yeah, it was unclear.
RITHOLTZ: But he didn’t want anybody just sort of fooling around. He wanted serious.
SEIDES: Correct. It felt a little dismissive, so I sent him another one. I said, “Okay, fine.”
RITHOLTZ: Whatever you say, I’m in.
SEIDES: Whatever you say, let’s do it. And then it–
RITHOLTZ: He’s Warren Buffett. Why are you going to argue with him about it, right? What are the terms? Great, I’m in.
SEIDES: Yeah, it started a back and forth series of letters, it was all written out, that was hysterical.
RITHOLTZ: By the way, I just picture this as a sort of a civil war soldier writing home, dearest Martha, I am considering, like in the 2000s, you guys were sending letters back and forth.
SEIDES: Yeah, that’s right. And it got to the point where there was the potential to do this nonprofit, like charitable bet.
RITHOLTZ: By the way, I don’t even have to ask, but I’m going to ask, you have all these letters saved, framed somewhere, like, please tell me you kept everything.
SEIDES: It’s in a PDF.
RITHOLTZ: Okay. But I mean the originals, just the original. So three, four, five times, how many times back and forth?
SEIDES: Something like that. I don’t remember the exact amount. And I had originally said, hey, let’s bet dinner at Gorat’s, his favorite place, maybe $100,000, your annual salary, all that kind of stuff.
RITHOLTZ: Oh no, he wants to step it up.
SEIDES: He said that his estate planners would be, thought he was nuts anyway for doing something so small, but yeah. So I went and talked to my partners at Protégé, Scott Bessent, who now runs a macro hedge fund, ran Soros after for a year, my original partner passed away a couple years ago, and said, “Hey, by the way, “I’ve been corresponding with Warren about this.” Like, what? And Scott read the letters, and he said, “I’ll never forget this.” He said, “Huh, it looks like Warren recognizes “he’s the patsy at the poker table, but he has the most chips.”
RITHOLTZ: Right.
SEIDES: Because every time I’d say, okay, let’s do it this way, there was something back that said, well, it has to be like this. And it got to the point where he said, okay, do we want to do this or not? And then it’s actually hard to make a legal bet. It’s probably easier now, right? Some betting is a legalist, but then it wasn’t. And he found, through his lawyer, a foundation called the Long Bets Foundation.
RITHOLTZ: Sure, they’ve been around for a long time.
SEIDES: That allows you to make charitable bets based on long-term educational beliefs. And so that’s what we did. And we made it for a million dollars. We split the amount and bought a zero coupon bond of the present value upfront. So back in 2007.
RITHOLTZ: So 10 years in advance with a four or five, so what, it was like 400,000?
SEIDES: It was 650, so we just put in 325 or something.
RITHOLTZ: Oh, really?
SEIDES: And then the money would go to the winner’s charity at the end of 10 years.
RITHOLTZ: That’s a very reasonable bet. That’s a very honorable bet because it’s not a matter of taking money from one person or another. Both people are kicking money in. So technically, and that’s probably why it was legal, there’s no gambling involved.
SEIDES: And I’ll tell you a story that’s fun about the communication of it too. So Warren wanted to announce this at his annual meeting every year. And originally I wanted to make it anonymous and there’s a bunch of reasons why it didn’t end up being that way.
RITHOLTZ: Did he, was he going to have you at the annual meeting? Was that the plan or was he just going to announce it?
SEIDES: I was independent. I did go a bunch of years and-
RITHOLTZ: But I mean on stage to the audience.
SEIDES: Oh no.
RITHOLTZ: Let everybody boo and hiss.
SEIDES: No, no, no. That was never part of the plan, didn’t happen. What was interesting was I had said to him, “Well, let’s make this really educational. I’m happy to have you announce the results, but let’s only announce the results after a period of time when the markets drop 10% because I think that’ll show the value of a hedge fund portfolio.”
RITHOLTZ: And what did he say?
SEIDES: He said, “No, no, this is part of the cat and mouse.” He said, “No, no, no, I think we need to announce it at the annual meeting.”
RITHOLTZ: Right from the beginning.
SEIDES: I was like, “Yeah, but this isn’t a horse race. This is about investing.”
He said, “No, no, I think we need to do it that way.”
RITHOLTZ: It is a horse race because there’s a start and a finish.
SEIDES: That’s right. So that’s how it came about. It started on January 1 of 2008.
RITHOLTZ: Great timing for hedge funds, right? You would think.
SEIDES: And it played out that way. It took about five years for the market to catch up from that one year of pain. And it wasn’t glory days for hedge funds, right? Once Lehman went under, that caused a lot of pain for hedge funds as well.
RITHOLTZ: One would have thought they would have seen that writing on the wall, but that’s a topic for another conversation.
SEIDES: Yes.
RITHOLTZ: If you’re a long short fund at the very least, and David Einhorn and others very famously were short Lehman Brothers.
SEIDES: No, you’re right about the securities. The challenge is unlike the S&P 500, hedge funds sit in a box that has underlying credit risk from prime brokers. So the credit markets froze.
RITHOLTZ: And that was problematic.
SEIDES: It wasn’t a question of security prices going down, it’s a question of like, can you transact? And what does that mean?
RITHOLTZ: My colleague, Ben Carlson, calls that organizational alpha. And it’s a great phrase because suddenly the infrastructure gets creaky and you can’t do anything.
SEIDES: That’s right.
RITHOLTZ: So fascinating to hear that Buffett is so coy about this, right? Tell everybody what the result was 10 years later.
SEIDES: So it’s after 10 years, Fed comes in, the market probably generates 17, 18% a year for the last nine years, and the S&P 500 beats the hedge funds by a wide margin.
RITHOLTZ: Right, crushes it, and you basically preempted my question, which was, why do you think that was so? Was it the financial crisis? Was it QE? Was it ZURP? What was the real reason that the hedge funds just never caught up after a great start?
SEIDES: Yeah. Well, again, I would look at it differently. So you have the market, which got crushed, and then Fed comes in and you end up with seven or 8% a year, which is a historical average.
RITHOLTZ: Right.
SEIDES: Including the biggest crisis since 1929. So you wouldn’t expect that 10 year period to have a historical average return. On the hedge fund side, a couple of things happen. First, as you talked about earlier, you had in that decade a lot more competition. It had a lot more money coming in and I think it’s reasonable to think that the alpha pool shrunk. So, that’s one.
The second is structural, which we haven’t seen in 15 years, but we’re starting to see now, which is hedge fund returns are a direct function of the level of interest rates. Because when you put out a short position, you get a short rebate. And when the Fed brought rates to zero, not only were you not getting a rebate, you were paying too short.
RITHOLTZ: You always have to pay to borrow, but usually there’s an offset. At zero, there’s no offset.
SEIDES: Right. At 5% where we are today, you’re probably making 3.5% a year just for showing up.
So there was a structural piece. You think about the difference between zero and 3.5%. It’s actually pretty similar to the difference in what the S&P generated during that period and what hedge funds generate.
RITHOLTZ: So here’s the pushback to that. And I think you said it before. You said you wouldn’t have expected that there would have been this outsized return following the financial crisis, but that’s the whole point of the bet.
Managers didn’t expect it and the S&P doesn’t care. The S&P rides that and so the winner was the lack of human judgment by a dumb index as opposed to managers. So I have a very vivid recollection of the financial crisis, not just because I was trading around it and more or less got it right, but I was writing a book and publishing it online as I was writing it, researching it online.
And the pushback in ’09 and ’10 and ’11 and ’12 to the bull market, my philosophy has always been, “Hey, take a US index, cut it in half. I’m a buyer right there. I don’t care what’s going on in the rest of the world.” 29, 87, 74, just pick any 50 plus percent number and certainly 2000 and ’08, ’09, a major index gets cut in half. You want to at least put a toe in the water, if not go large.
So that was what was so shocking to me that no one, or I shouldn’t say that, what was so shocking to me was how much pushback people gave in the early part of the 2010s following a giant reset, free money, zero cost of capital, some but not a lot of fiscal stimulus. I think a lot of fund managers had, I like to call it, zero edge. You know, that they had a narrative they believed in and no amount of data would change their mind. Is that a fair pushback to this is why the S&P 500 beat a bunch of hedge fund managers?
SEIDES: I think it’s always fair to say you believe, Barry, part of your belief system is that a hedge fund is supposed to capture these moves in markets.
RITHOLTZ: Some of them, one would think, right?
SEIDES: I’m sure some of them did and some of them didn’t. So you’re talking about an average of a large number.
RITHOLTZ: Sure.
SEIDES: I would say that’s not really part of my belief system of what a hedge fund is trying to deliver. It’s much more about security selection and a relatively static portfolio construction. So I think that argument is very valid in those couple of years, 2009, 2010 probably, maybe 2011, which was a tough year for hedge funds.
You still had 2012 to 2017 to finish the bet.
RITHOLTZ: Right.
SEIDES: And that was just the market, what we’ve seen in tech stocks. It was just a very, very hard index to beat, no matter what you were doing.
RITHOLTZ: So here’s the lesson I learned from your bet, because I was very, alternatives are too expensive, everything is pricey, these guys all eventually underperform. But I’ve evolved that view over time to, “Hey, if you could get into the top decile.” Right? I once was speaking somewhere and trashing hedge funds and someone said, “I have an allocation that I inherited from my father in D.E. Shaw. Are you telling me I should sell that?”
And my answer was, “Absolutely not.” If you’re in, go down the list of the top, I don’t know, 100 hedge funds out of 11,000, the alpha generators, the challenge is the median is very different than the experience you had at Yale when there were 500 hedge funds and 500 alpha generators.
SEIDES: Yeah, it’s much harder with more capital there.
But you have to keep in mind that what you see in an index tends to be equal weighted. the experience of investors is asset weighted by definition.
So where institutional investors have their money in hedge funds is with D.E. Shaw. It is with Millennium. It is with Citadel. And these firms have continued to generate, call it alpha, excess returns. And that’s why the assets have stayed in, call it the asset class or the strategies, when there’s so much scrutiny about, “Oh, the hedge fund index did this.” Every hedge fund index is equal weighted and that is not the experience of investors.
RITHOLTZ: I’ve evolved towards your position because my criticism of the industry turns out to be somebody said to me, “You know, you’re really criticizing the bottom 90% of the industry.” I’m like, okay, that’s a fair critique of my criticism. If you’re in the top 10% of anything, Well, God bless, stay there. But if you’re not in one of the better alternatives, what are you paying for is really the question. And I think that’s the underlying side of the Buffett bet with all the coyness and all his gamesmanship. He wasn’t the patsy at the poker table. I think he was just playing a different game and nobody realized it until way afterwards.
Think about heading into the financial crisis, the hedge funds should have crushed the S&P 500 and did for a couple of years, which leads me to this question. At what point were you feeling a little cocky? Hey, I’m going to beat Warren Buffett at this like two years, three years in? And at what point did you get that sinking feeling in your stomach? Son of a bitch, the old man’s going to kick my butt in this, isn’t he?
SEIDES: So 14 months in. 14 months in.
RITHOLTZ: Deep into ’09 where everything hit the fan.
SEIDES: January, February of ’09, markets were down another 20%. So 14 months in, the hedge funds were up by 50%.
RITHOLTZ: Oh my goodness.
SEIDES: And if you had looked historically at hedge fund returns versus the market, there was only a difference of one or two or three percent a year.
RITHOLTZ: Right, this is just giant.
SEIDES: In Warren’s 2008 annual letter, I think it was 2008, he made a statement.
RITHOLTZ: Meaning the one that came out in early ’09 about the previous year.
SEIDES: Correct. He made a statement in that letter really referring to Berkshire having underperformed for the first period of time, that even in periods as long as 10 years, your results can be heavily influenced by the starting point or the ending point.
RITHOLTZ: Right.
SEIDES: And I put that in a presentation I had as he had just given his reason for losing the bet.
RITHOLTZ: Right. The irony is he was hedging the bet at that stage.
SEIDES: Perhaps.
RITHOLTZ: Right.
SEIDES: But even then, it took five, I don’t remember, five or six years for the market to catch up. Once it did-
RITHOLTZ: Well, 50% is a giant head start. Here’s a 50% head start you got seven years ago.
SEIDES: Yeah. Warren, he did announce it every year. And what he would do is he would put the results up right before lunch and say, “As you can see, I’m losing. Let’s go to lunch.”
RITHOLTZ: Right. (LAUGHTER).
SEIDES: Wouldn’t say anything else. Then the first year, the market had cumulatively beaten hedge funds. There was like two pages about it in the annual letter.
RITHOLTZ: Oh my God, that’s hilarious. That’s so funny. I had no idea. I followed the bet from a distance, but I had no idea he was doing that at the annual meetings. That’s brilliant.
SEIDES: The other thing he did that was sort of brilliant was he wrote like two or three pages nine years in. So the bet wasn’t over.
RITHOLTZ: But it was for all intents and purposes done.
SEIDES: It was with one interesting exception.
RITHOLTZ: Yeah.
SEIDES: So the name of the five fund of funds we picked has never been and won’t be disclosed. It doesn’t matter.
RITHOLTZ: Did you pick five funds or —
SEIDES: Five fund of funds.
RITHOLTZ: So really like 20 funds, 25 funds all told.
SEIDES: Many more than that.
RITHOLTZ: Right.
SEIDES: One of those five was still outperforming the S&P 500 through eight years. At the end of the ninth year was the very first year that the market had been outperforming all five, but there was still one year left where that one could have caught up.
RITHOLTZ: Right,
SEIDES: My premise is that Warren caught that one period of time to deliver this whole message about see the market even outperformed every single one of these five fund funds.
RITHOLTZ: So this raises an obvious question and let me throw out a doctoral thesis for anybody who is looking for one. What would happen if you with the benefit of hindsight picked a different time period and a different group of funds? Is there an era where you would have won the bet?
SEIDES: So every era that you had data, which started in the early 90s until that 10-year period, hedge funds had outperformed the market over 10 years. I was happy to do it in that 10-year period solely because of my view of the market.
RITHOLTZ: Plus it was the only 10-year period you had at that moment in time, right? You weren’t going to make a bet saying, “Let’s start this 10 years from now.”
SEIDES: That’s right. But I didn’t have to call them on it.
RITHOLTZ: So that was a — you had to call him on it.
SEIDES: (LAUGH)
RITHOLTZ: I have to tell you, I think the whole idea is brilliant, not just of him tossing it out there, but you saying, “What the hell? Let’s take Warren Buffett up on this bet. At the very least, it’s going to be a fascinating decade.”
SEIDES: And the best part about it is that we used to go out and have dinner with him every year.
RITHOLTZ: Come on. That’s worth a million dollars.
SEIDES: Yeah, I would go with my partners and I, we might bring one of our managers or close friends.
RITHOLTZ: Three and a quarter. That is worth three and a quarter, oh my, talk about a bargain.
SEIDES: And so all kinds of things came from that. So for example, one of the people I brought out was a guy named Steve Galbraith. He used to be the head strategist at Morgan Stanley.
RITHOLTZ: Sure.
SEIDES: He was best friends professionally with Jack Bogle. I bring out Steve. Steve says to Warren, “Would you ever want to have Jack at your annual meeting?” And Warren lit up. He’s one of my idols. And that led to Jack being there when Warren announced the bet. It was the first time he had ever been at the annual meeting. It was a year or two before he passed away. And so you brought him there all came from having dinner with Warren that, that one night.
RITHOLTZ: When did he pass? I think it was 2015. Right.
So, so he announced he, so when did Warren was that in 08 or 09 he had him at, at, or was it much later?
SEIDES: No, it was much later.
RITHOLTZ: Yeah.
SEIDES: It was much later.
RITHOLTZ: Oh, so yeah. It had to be after a couple of —
SEIDES: It was like right around his 90th birthday, I think.
RITHOLTZ: Right. And he was still an amazing voice, a little hunched over, but powerful and full wits about him. We should all be that sharp at his age.
So, dumb question, but I got to ask. So, it cost the firm $320,000, well worth every penny? Or was this a, like, to me it sounds like the whole thing was spectacular.
SEIDES: Yeah, I wouldn’t measure it in terms of economic returns. Like, I don’t think that —
RITHOLTZ: No, no, I mean just across the board.
SEIDES: Yeah, as an experience and relationships, it was just extraordinary. And Warren is —
RITHOLTZ: One of a kind.
SEIDES: He’s just the real deal.
RITHOLTZ: Yes.
SEIDES: He didn’t need to have dinner with us ever. And it was just so fun. And the stories that he tells, we hear lots of them, but to hear different ones over and over, investment stories, non-investment stories, he really is so extraordinary.
RITHOLTZ: So here’s a crazy question that, again, I feel compelled to ask. Is it possible that the guy known as the world’s greatest investor, whether that title is accurate or not, it doesn’t matter. Is it possible that he’s still underestimated? Because every couple of years, people start to come out and say, “Ah, he’s lost his touch, they’re not outperforming.” And then he surprises people. Every decade, this seems to happen.
SEIDES: I mean, for him to be underestimated, you’d have to have an assessment of him that is a certain level, right? I think people see him in such high esteem.
RITHOLTZ: Some people do, but what I’ve heard from some folks, some younger quants. Well when you look at the sequence of returns, Buffett did so well in the late 60s and 70s, that’s the source of outperformance and what have you done for me lately? And I think they’re kind of missing the bigger picture.
SEIDES: Yeah, I agree with you. And you could say the same thing when we were talking about the Yale motto with David Swenson, right? Cliff Asness wrote a piece that said all Warren did was buy these quality stocks and if you had replicated that strategy, you could replicate the results, which is absolutely true. Except 50 years ago, you had to know to buy the quality stocks. That was the brilliant stuff.
RITHOLTZ: Almost 60 years ago, right? That’s the crazy part.
SEIDES: No, I mean, I think that he is that extraordinary. And when you’re so fortunate to get to spend a bunch of time with him, he oozes wisdom in everything he says. David Swenson was exactly the same way. And I’ve only known maybe a handful of people in this in my life.
RITHOLTZ: Charlie Munger, I assume, is another one.
SEIDES: I don’t know Charlie, but of the people that I’ve known, every word that comes out of Warren’s mouth, no matter what subject, I talked to him about A-Rod signing with the Yankees. Everything that comes out of his mouth is just oozing wisdom.
RITHOLTZ: That’s interesting. You know, there’s this wonderful chart on compounding that shows, you know, the average person, you start accumulating a little money in your 30s, your investment window is like 40 to 68. So you got, if you’re lucky, 25, 30 years.
Buffett has nearly 60 years, And when you see the hockey stick of the compounding effect, it’s the last 25 years that most people don’t leave their money working for them, where he’s gone from a billionaire to a decabillionaire to a multi-deca billionaire, that people just don’t realize the impact of compounding. And it’s not just cash, it’s those insight and wisdom seems to just multiply.
SEIDES: Yeah, our friend Morgan Housel has written about that in just a beautiful way telling that story. And it’s time, right? It’s both brilliant investing and time.
RITHOLTZ: So let’s bring this back to the day job, which is allocators. What’s the takeaway from the bet for allocators?
SEIDES: I don’t know if there are many. I have my own takeaways.
RITHOLTZ: So you’re here. I’ll tell you mine. You tell me yours.
SEIDES: Sure. One of them is that time periods really matter.
RITHOLTZ: For sure.
Not just the specific length of time, but that specific chunk of time.
SEIDES: Absolutely right. The other is, it was a fascinating exercise to see how the media works.
So I’ll give you two little stories of that. Carol Loomis wrote a piece about the bet when we launched it. It was brilliant.
RITHOLTZ: She eventually writes the biography of Buffett, “Dancing to Work” or something like that.
SEIDES: Correct. And she wrote the bet in that as well. Her piece was two pages. I had said to her, “How are you — you’re going to write an article about this little bet?” And it was just so well done.
RITHOLTZ: Oh, it wasn’t a little bet, but go on.
SEIDES: At the time it felt that way.
RITHOLTZ: Really?
SEIDES: Sure.
RITHOLTZ: You’re making a million dollar bet with Warren Buffett. How on God’s green earth is that a little bet?
SEIDES: Well, it might not be a little bet, but I didn’t think there was a story of it other than here’s the bet.
RITHOLTZ: And again, my hindsight bias is like, this is like the defining moment in your career that colors everything else you do the rest of your life. You’re the guy that made the bet with Warren Buffett.
SEIDES: Yeah, I get that that might go on my tombstone, but it certainly didn’t feel like it was a defining moment.
RITHOLTZ: There’s no false humility here, because I could see in your face, you’re not exaggerating. At the time you felt, oh, this is just a fun little side thing.
SEIDES: Yeah, I get a chance to do this thing with Warren. How cool is that?
RITHOLTZ: Yeah.
SEIDES: That was it.
RITHOLTZ: Okay, I guess history has blown it up into something more than it felt like at the time?
SEIDES: Not to me, but to others for sure.
RITHOLTZ: Okay.
SEIDES: So Carol writes this piece and it’s brilliantly done as everything she did was. And then massive amounts of media attached to it.
RITHOLTZ: Right, I vividly remember that. Was she Forbes or Fortune?
SEIDES: Fortune.
RITHOLTZ: Fortune.
SEIDES: So keep in mind the only definitive information about the bet was in Carol’s two page piece.
RITHOLTZ: And then?
SEIDES: Every other piece that got written had factual inaccuracies.
RITHOLTZ: Right. It’s multiplicity. Every copy is worse than the previous one. That’s like playing telephone.
SEIDES: So that was eye-opening. The other was, there are a whole bunch of different ways you could interpret a stream of returns. They could say about the bet, about any investment manager. And I dissected what had happened in a way that I thought had a lot of merit. Things like short rebates, things like choosing the S&P versus a global index, all different kinds of things. And I put that actually, it was in Bloomberg. So here is my first lesson was I didn’t know at the time that when you write a piece you don’t control the title of the piece.
RITHOLTZ: FYI editors write the title the writer writes the body of the work.
SEIDES: Correct. So I had written a piece something about nine years in whatever the title came “Why I lost my bet with Warren Buffett.”
RITHOLTZ: Well that’s clickbait that’s click worthy people are going to use that.
SEIDES: But the bet wasn’t over yet so it became an interesting thing. It also completely changed the tone of what I had written. Because it made it look like a series of excuses as opposed to an analysis.
RITHOLTZ: There are worse people to lose a bet to than Warren Buffett. What’s been the takeaway? What’s been the impact on you from that whole delightful sounding experience?
SEIDES: Yeah. I haven’t really thought about it that much. I mean, for me, the biggest takeaway is the value of relationships. And how what a wonderful, fortunate experience I had to just be able to spend the time with Warren that I did. And to get to know, well, Todd Combs I had known, and Ted Weschler, and Tracy Britt Cool when she was there, all coming to these dinners, and just having fun talking about investing in markets.
And so that, for me, that was priceless. You say, “What was the price of the bet?” Well, it was priceless to have that time and had a couple of things that Warren and I did together when he was first starting The Giving Pledge. At one point in time, no one was signing up and he called and said, “Hey, you know some of these hedge fund guys. Is there any way we can round them up?”
RITHOLTZ: Round up some people? Let’s get a few billion dollars in the pot.
SEIDES: And trying to do that and there were one or two that signed up from that effort.
RITHOLTZ: Can I tell you something? You make a phone call to someone and say, “Hey, Warren Buffett asked me to call you. He signed up for The Giving Pledge. You want to make a commitment to donating money?” By the way, Leon Cooperman tells a story about going to dinner when he signs up for The Giving Pledge and it’s Buffett and it’s Bill Gates and it’s on and on. And he doesn’t know at the end of this dinner with 12 people, the newest guy picks up the check and he tells the story. He’s like, I’m looking around. Everybody is five, 10, 20 times wealthier than me. I get stuck with the bill and those guys order expensive wine.
And he tells the story. It’s hilarious. Did you manage to intro Warren to a bunch of hedge fund guys?
SEIDES: Yeah, there were two that signed on from that, which was just wonderful.
RITHOLTZ: I would think you drop Warren’s name, doors just open up on stuff like that.
SEIDES: You know, if you’re sitting with a billion dollars, I’m not sure you’re giving away half of it just because of Warren’s name.
RITHOLTZ: But some of these guys are sitting with a lot more than a billion dollars, and why not? Who cares? Unless they have their own foundation. I could give you a list of 30 billionaires. They all set up their own foundations. It’s part of their own tax planning. I like Buffett’s idea. I don’t need to duplicate all that effort and administrative headache. Let Bill worry about it. “Here, Bill, I’m in for half.”
So the two of the wealthiest guys in the world turned the Gates Foundation, which really should be called the Gates-Buffett Foundation, into this giant, what is it, $100 plus billion now? Maybe more than that. Just tremendous. So all in all, good experience with Warren Buffett.
SEIDES: Everybody wins, especially the charity. I think it was Girls Inc of Omaha, who is a side thing, which we’ll talk about another time, but it ended up being north of $2 million. Right. That went.
RITHOLTZ: Right. And what’s their budget like a fraction of it, right? It just overwhelmed them. I’m sure. That’s great.
So let’s talk about some of your philosophy and your writings. One of my favorite things you wrote in — you have a podcast. We’ll talk about that in a little bit. You ask all your guests one question about a pet peeve. I love your peeve, I don’t know, which is one of my favorite peeves. Tell us a little bit about investors who express absolutes in a world of probabilities.
Tell us about the peeve, I don’t know.
SEIDES: Yeah. Well, I’ve always viewed investing as I think everyone properly should as a probabilistic game and one of the things that happens when you’re a money manager telling stories to raise capital is you need to show conviction. The best ones can blend that conviction with humility but sometimes you find people that say things, it’s not just investing in life too, where they’re just sure what will happen, the outcome of this, that or the other thing and it just doesn’t work that way.
And so, particularly now, there are so many things that are either common wisdom or that the consensus believes that have nuance to them.
RITHOLTZ: Right.
SEIDES: Where I look at it and say, “I don’t know what the answer is.” Now you could put probability weights to it, but I walk through in this piece a couple of different things where I just said, “Look, I don’t know.”
RITHOLTZ: I love that. By the way, if you’re ever on TV and want to make the hosts’ head explode, have them ask you a question, just say, “I don’t know.”
SEIDES: It doesn’t work very well.
RITHOLTZ: They don’t know what to do. They look at you like, “What do you mean you don’t know?”
SEIDES: It doesn’t make for very good TV.
RITHOLTZ: It makes for honest TV, but that’s a whole other conversation. Since we’ve been talking about David Swensen, let’s talk about don’t be so short term. How big a problem is short termism in investing, be it institutional or individual?
SEIDES: Yeah, well, it’s a huge problem and it’s an intractable problem because of the way incentive systems work in the asset management industry, everyone across the food chain of capital is reporting to somebody else.
And through that reporting, people have to generate performance. And so what’s happened over decades is that the holding periods of every type of investment have just gotten shorter and shorter. And the problem with that is there’s a cost to it.
So there are a lot of situations where investing with a shorter time horizon costs long-term returns.
RITHOLTZ: Really interesting. There’s another quote that I’m fascinated by. “Limiting an assessment of returns only to marking conditions in the moment fails to consider the wide range of possibilities of what might happen in the future.” So that’s a very loaded statement.
Not only is it filled with concerns of the recency effect, but you’re also talking about probabilities of all the range of possible outcomes that there is no yes or no. It’s this might happen, that might happen, this might happen. Tell us a little bit about how you came to that and while being stuck in the moment is so problematic for long-term returns.
SEIDES: Well, if you look at what happened with SVB, a mismanagement of the balance sheet. So you go back a couple of years and you could say, “Well, what return is available buying a treasury?” And it turned out, if you looked at the market at that time, it was, I’ll call it 1%, five-year treasury or 10-year treasury. So you say, “Well, we need to invest. We are deposits cost less than that. We’re going to earn a spread, so we’re going to invest at 1%.”
The problem with that, of course, is that if you said, “What return is available” let’s say over the next 10 years and it was 1%, it turns out you were wrong because the right thing to do was to sit on cash and wait till rates moved to 5%.
RITHOLTZ: Especially when the Fed said, “We’re taking rates up aggressively post late ’21, early ’22.” It wasn’t that they didn’t communicate that.
SEIDES: Correct. So if you look at that over a longer period of time and say, “Well, my opportunity set isn’t just what’s available today. It’s what’s available today and might be available tomorrow and I can forego a tiny bit of return in the near term, turn a much higher return at some unknowable time in the future.” That could have saved SVB. It could have saved First Republic.
RITHOLTZ: So hold the duration risk aside with those two, but just for an investor in treasuries, I know you’ve done the math before. If you’re giving up that 1% big fat yield in 2019, 2021, let’s say you give up three years of 1% and get zero, how does the math work over the subsequent couple of years? How would you have done?
SEIDES: Well, you’ve done a lot better, right? So even take a five-year period. You go one, one, one, one, one, or zero, zero, zero, five, five.
RITHOLTZ: Way ahead.
SEIDES: You get more.
RITHOLTZ: Right. You are way ahead.
So people tend to get stuck in the moment and not think. So my description for that is everybody is dealing with photographs when they should be dealing with a movie or a film.
It’s hard to pull yourself out of the moment, which is a snapshot, and instead think over the arc of time. That’s a foible of just how humans’ brains operate and it infects even professional investors.
SEIDES: That’s a great analogy. It’s also compounded by competition.
RITHOLTZ: Oh, really?
SEIDES: So if you’re a money manager and you’re sitting on cash and earning zero, let’s just simplify the example, and the guy across the street is earning one, for those three years, you’re underperforming.
RITHOLTZ: Yeah, you’re losing cash. That’s where the idea of perpetual capital, which you talked about having a perpetual time horizon sometimes is more theoretical than realistic because you may not have liabilities for 10, 20 years and an ongoing perpetual endowment that never vests, but people still live in the month and the quarter and who cares about 1%?
Well allocators are going to look at you and you’re stinking to join up for those three years.
SEIDES: There are real challenges in the profession of money management. So just take that concept, right? There’s a lot of interest in permanent capital vehicles. And it turns out the permanent capital vehicles themselves are impermanent.
RITHOLTZ: Right.
SEIDES: You have closed-end funds that trade at discounts that sometimes have shareholder pressure to open end. You have holding company structures that have management changes. And then in the allocator community, these perpetual pools of capital, generally speaking, are run by chief investment officers whose average tenure in the seat is only six years.
RITHOLTZ: So not so permanent.
SEIDES: Not so permanent after all.
RITHOLTZ: I love this quote from a piece you wrote about risk. In 1998, you asked famed value investor Michael Price what he learned from investing in Sunbeam Corporation, which was run by Chainsaw Al Dunlap and was just rife with accounting fraud. The whole thing ultimately collapses. He responds…
SEIDES: “Absolutely (EXPLETIVE BLEEPED) nothing.”
RITHOLTZ: So for those of you who are listening on the air, he responds, “Absolutely nothing,” with an expletive in the middle. How could you learn nothing from that experience? Tell us about that.
SEIDES: The challenge with that is that fraud is fraud. So you’re underwriting risks when you invest. And one of those is all the analysis you do isn’t real. And the problem with it, and you could use Madoff as an example, you could use FTX a recent example, is that for every 1% or 2% of your analytical time that you’re trying to figure out if what you see is real, the person committing the fraud is spending 100% of their time staying ahead of you.
RITHOLTZ: Right. So you had written, you spend 99% of the time assessing the merits of the deal. What’s the valuation? How likely is this going to — all the fundamentals. And maybe you throw 1% at, “Hey, is what I’m seeing actual? Is there any chance of fraud?” And most of the time you’re going to say, “No, of course not. Bernie Madoff is president of NASDAQ. How could this be a fraud?” Right. That’s an astonishing admission by Price. What’s the takeaway for the average investor? Is there something you can do to avoid fraud or is it just forever and always out there?
SEIDES: There are lots of risks that are forever and always out there. Fraud is one of them, but you can diversify away from it. So that comes out in position sizing and conviction and just making sure that you’re thinking about all the things that could go wrong if you’re taking a more concentrated position in something.
RITHOLTZ: Really interesting. Here’s another quote I love. “You can’t have investment success with a bad governance structure” by Karl Scheer. Explain what you mean by that or what Karl means by that.
SEIDES: Yeah, Karl is the Chief Investment Officer at the University of Cincinnati. The allocator pools that have Chief Investment Officers have on top of them a board. Maybe it’s an investment committee. And that committee often is ultimately responsible for making investment decisions.
RITHOLTZ: And these boards, they’re all filled with humans.
SEIDES: Yes, exactly.
RITHOLTZ: And that seems to be the underlying problem, isn’t it?
SEIDES: So everything that Annie Duke talks about in decision-making theory, if you can’t make a good decision as a board. We’ll call that the governance structure. How do actual investment decisions get made? You can’t have a good investment process.
RITHOLTZ: And she focuses on process over outcomes. You make certain decisions, even if it doesn’t work out, you got to stay with the high probability, it’s back to what you said earlier, the high probability decision, even if it’s a loser, is better process over the long haul than dumb luck that wins.
SEIDES: Absolutely right.
RITHOLTZ: So the story was that, I think it was the Hartford investment, Hartford Insurance. Everybody resigns when they hired Morgan Stanley as the outside advisor. The whole thing was just a debacle. What happened there?
SEIDES: So it’s Hartford HealthCare. David Holmgren is the CIO.
I can’t say I know exactly what happened on the inside, but they had a team that had delivered a good track record. I’m assuming there was some friction between that team and the board, and the board hired Morgan Stanley is an OCIO, not only without ever consulting the team, but they had an investment committee of knowledgeable experts, other endowment chief investment officers. That investment committee never knew that the board had done a search to replace the investment team.
RITHOLTZ: Wow. That seems pretty egregious. Sounds like a bunch of personality conflicts and no organizational alpha. I’m curious how has that investment pool done since this palace coup?
SEIDES: I don’t know the answer. It’s way too short of a period of time to actually have any assessment.
RITHOLTZ: Right, right.
SEIDES: And on top of that, chances are the underlying investments were mostly the same as what they were before on the team.
RITHOLTZ: So they were inheriting what happened. You know, I’m reminded of what took place at Harvard with Larry Summers, I don’t know, what was that, 15 years ago, 20 years ago? And they went from an absolute bone crusher, outperformer, alpha generator to just stinking up the joint for decades. It’s hard to look at those changes, which by the way, didn’t come from Summers. It came from an alumni who said, “Why are we spending all this money?” Even though they really were spending not a lot, especially once you looked at the returns. Talk about terrible governance destroying a beautiful, fragile, winning investment team.
SEIDES: Yeah. The compensation structures of the largest, most influential pools of the capital in the United States in particular are really challenged. Public pension funds that manage hundreds of billion dollars can be manned by professionals that make $80 to $150,000 a year. And you compare that with models that we’ve seen in Canada and Australia where the investment professionals on those teams are market competitively compensated, maybe a slight discount to the market.
RITHOLTZ: But not like 10%, not giant.
SEIDES: Exactly right. And in the US, these largest pools of capital might have 90% discounts to the market.
RITHOLTZ: Really? That’s unbelievable. Listen, just paying up for something doesn’t guarantee that you’re going to get the best, but paying a 90% discount pretty much guarantees that you’re in the bottom, let’s call it half, I’m being generous, probably quartile, that there’s, you know, it’s a market-based system. Don’t you want the best people steering your $42 billion endowment? It’s just so short-sighted.
Just goes to show you how important governance is. And since we’re talking about governance, let’s talk about another thing you had written that I was intrigued by. “What’s in a name, the problem with ESG?” Now, we’re not talking about wokeism or the political backlash, which is really a partisan political debate, what’s the problem with ESG as a approach to value-based investing?
SEIDES: Yeah. Well, let’s start with the name itself. So ESG became a thing.
RITHOLTZ: Environmental, social, and governance.
SEIDES: Three things which may or may not have anything to do with each other.
RITHOLTZ: Clearly.
SEIDES: You can go back and say, “Remember FANG?” And then Fang had two A’s, and then it turned into FANMAG. So these names have a way of taking off. Back in the day —
RITHOLTZ: BRIC, remember BRIC.
SEIDES: BRIC and emerging markets, Brazil, Russia, India, China. So the problem with ESG in its first iteration was that the label that everyone ascribed to it wasn’t anything anyone could understand.
RITHOLTZ: So let’s track that evolution. This all started with divesting South African investments with, I think it was Harvard actually, or Yale was one of the Ivies that the student population wanted the endowment out of that, which led to socially responsible investing, which led to impact investing. Like there have been a ton of names. ESG just seems to be a catch all umbrella.
What should it be called or should it be called anything?
SEIDES: Well, I think it goes back to what we talked about at the onset about beliefs. Each institution has to decide how do they want to align their investing with the purpose of the institution? What are they trying to solve for? So lots of people want to solve for, call it sustainable investing. What does that mean? I don’t know. But the idea of an environment that humans can habit for centuries, seems like that resonates with people. So that leads to one set of sort of investment criteria that you could filter into your whole portfolio.
The S is really about diversity and that’s important to a lot of people. Certainly in financial services, we recognize now that there are all these microaggressions that have been in place for decades. I’m not sure how that turns into an investment strategy.
RITHOLTZ: See, I don’t even think of it in those terms. I think of it as you want to avoid groupthink and if everybody went to the same undergrad, went to the same grad, went to the same training program, well, you’re cranking out these automatons that are going to think, speak, and act similarly, and so the investment results will be similar, therefore subpar, so let’s bring in different people from different backgrounds, different thought processes, different education, so that there is some robust diversity of thought.
I just don’t, like the microaggression thing, I could care less about.
SEIDES: So the challenge is that the academic research shows that what you’re trying to solve for is cognitive diversity.
RITHOLTZ: Yes.
SEIDES: Social diversity is a proxy for cognitive diversity.
RITHOLTZ: Not a great one.
SEIDES: By the way, no, you could have people from all different races that think exactly the same way because they were educated at the same places.
RITHOLTZ: Right.
SEIDES: So the question is, if you care about improving your investment results from cognitive diversity, which we can all agree the research shows makes sense, is that a thing that you measure? Is that a thing that you evaluate? Like, how do you do that? So nobody really knows. And then governance, like, I’m not sure I know of anyone, except for occasionally an activist investor as an opportunity set that is pro-poor governance.
RITHOLTZ: Yeah, I can’t really hear that anybody has been agitating for, “You need to make your governance worse.”
SEIDES: So what’s evolved over the last couple of years is, starting with sort of Greta Thunberg, and then during COVID, when ESG took on this label, people created a whole bunch of products that nobody really understood what they were solving for. And so not that surprising, it hasn’t really taken off in the way that a lot of people predicted four or five years ago.
RITHOLTZ: But there’s a ton of capital that has been allocated to, so let’s work our way away from ESG. There are impact funds that go out of their way to make sure that half of their investments go to companies that are either managed by women or people of color, or are geographically away from New York, Boston, San Francisco, Silicon Valley, because the rest of the country has innovations and we’ve been ignoring them.
And in fact, the competition in San Francisco and Silicon Valley is much more intense than Milwaukee or Orlando.
SEIDES: So I think that’s right. The question is, what does a ton of capital mean? Right, in the scheme of things, The point I would make is that the amount of money that’s gone into these different called diversifying strategies is much less than people thought it was going to be four or five years ago because it’s all under this umbrella that each individual organization needs to figure out what do they care about and how do they want to deploy capital to meet that objective.
RITHOLTZ: Don’t some foundations have a sort of a checkbox approach? Hey, we want to give 5% of our alternative assets to funds run by women or funds run by minorities or LGBT, like down the list as a way of providing a little social diversity.
But again, the point you make is, is social diversity the same as cognitive diversity? Is it a good proxy?
SEIDES: They absolutely want to do that as long as those funds outperform.
RITHOLTZ: That’s really interesting. So once the outperformance stops, we swap managers. That’s really interesting.
Last question on ESG, certain folks have been saying, “Hey, you know, it works as a pretty good risk management filter. Boards that have 30, 40% women tend not to have the same sort of Me Too problems as a board that’s all a whole bunch of old white guys. How do you respond to this is a risk management filter that allows us to identify the worst actors in corporate America?
SEIDES: I think that’s a very reasonable way of looking at it. Again, depending on your investment strategy, are we talking about boards of stocks? What about in private markets? What about an early stage venture and a hedge fund? Like there’s all different ways that you can think about integrating it and just like the problem with ESG, there’s no one absolute solution that works for everything.
RITHOLTZ: Really quite fascinating.
Let’s talk a little bit about capital allocators. What made you decide to play with this whole podcast thing?
SEIDES: Well, I guess I was channeling my inner Barry Ritholtz some years ago. When I left Protege Partners, I wasn’t sure what I would do, and I had picked up a bunch of, call it consulting or advisory relationships. And I had written that first book about hedge funds, which led me-
RITHOLTZ: In 2016, right?
SEIDES: In 2016.
RITHOLTZ: Yeah.
SEIDES: Which led me to be on a couple of podcasts. And I woke up one day and said, “Huh, maybe I’ll run around and talk to my old friends.” I had no idea.
RITHOLTZ: Dude, you’re ruining my secret. It’s the greatest gig, the easiest thing in the world, and now everybody’s doing it. But for a while, it was my secret little garden that no one knew about.
SEIDES: And so I did that and I started a podcast called “Capital Allocators” and the idea was to be interviewing the people and make it be about the people, and then of course about investment strategies focused on the allocator CIO community and some of their favored money managers.
RITHOLTZ: And that’s a rich, deep pool. People don’t realize, you ever get the question, “Hey, are you worried you’re going to run out of people?” I’m like, “No, I got 10 million people to go. What, are you kidding me?”
SEIDES: There’s never been a shortage of high quality people to have on. And so I started that six years ago, not knowing, certainly not thinking it would be a business. I used to joke, hey, Barry, we’re going to have a conversation. Share it for free.” And just like the change bank from “Saturday Night Live, “We’ll make it up in volume.
RITHOLTZ: Right, right.
SEIDES: Like it was sort of a dot-com click business. And I just kept doing it for a number of years alongside of these other projects.
RITHOLTZ: Which, by the way, something like 90% of the podcasts drop off within a year. They just, it’s work, it’s not easy.
SEIDES: Yeah, but it was just so much fun. And it was one of the things that —
RITHOLTZ: Again, you’re ruining my secret. It’s endless fun, right? I mean, think about, I went through the list of some of the people you spoke with. You could see there is delight in the conversation you have with people.
SEIDES: Yeah. It’s a version of what I did my whole career, right? I spent time interviewing money managers with a very, very different output mechanism. So in the past, I’d have an interview with a manager and I would be evaluating them and I would mostly say no, but sometimes you’d say, “Oh, what do I think of them?” And this is just, you have the same conversation. There’s no evaluation. You get to be on everyone’s team and then you share it with people. And what’s happened over the years is it’s become the largest podcast in institutional investing.
So that allocator community listens and people have incredible experiences when they come on. And it’s just so rewarding. It’s by far the most rewarding thing I’ve done in my professional career.
RITHOLTZ: I say to people, “This is the most fun I have all week.” And they look at me like, “Wait, what? You need to get a life.” I’m like, “No, you don’t understand.”
SEIDES: (LAUGH)
RITHOLTZ: Is it the most fun you have each week when you speak to somebody?
SEIDES: Absolutely.
RITHOLTZ: But first of all, my dirty little secret, and I don’t know if this is yours, I don’t care who’s listening. I invite people that I want to sit down with for an hour or two and have this conversation. If someone listens, great, but I don’t care. Yeah. It’s like, “No, no, I have an audience of one. It’s me. It’s my selfish indulgence.” “Oh, okay, other people have listened.” But when you’re picking people who invite, how much of it is, “Oh, I really want to sit down and talk to that guy or that girl.”
SEIDES: That’s all of it. I still and always will source all the guests myself.
We do get a lot of inbounds and we figured out ways of getting more people involved that I might not have known about. But it is entirely, “Hey, what do I think is interesting? “Who would I like to talk to?” And you go from there.
RITHOLTZ: You focus primarily on the institutional side of things. How does that translate into who listens? Do you want a broader audience or do you like this somewhat narrow but incredibly deep and knowledgeable listenership?
What led you in that direction other than that’s the world you came from?
SEIDES: It’s mostly that and it goes to what you said, which is I love having these conversations and have never advertised on the podcast. I’m sorry, I’ve never advertised for the podcast other than a couple little experiments.
RITHOLTZ: So do you promote the podcast? Other than going on other people’s podcasts, how do you get to the point where people are listening other than the circle of institutional allocators?
SEIDES: It’s been entirely organic. We’ve done a few little experiments, promoting and advertising, none of it’s worked. So I’ve never really cared about it. It is kind of like what you said. I didn’t think of it as a business when I started. I barely do now. And people have found it because it added value to their professional careers.
So most of that audience, I would say, as far as we can tell, a little less than half is the institutional allocator community. And that spans endowments, foundations. Where I came from, it spans sovereign wealth funds, pension funds, incredibly global. And that reach, which I’m sure you know –
RITHOLTZ: It’s hilarious.
SEIDES: It’s so much wider than I ever could have imagined existed.
RITHOLTZ: Because the internet is totally global and I’m sure you’ve had this experience. I’ve had guests say, I heard from a kid I went to camp with who now runs a fund in Hong Kong. I mean, but there’s nothing local about a podcast. If it’s on the internet, it’s totally discoverable. I’ve also had the same experience with half. If half are institutional allocators, who’s the other half?
SEIDES: Most of it’s money managers. So it’s most of the people in the community.
RITHOLTZ: The people they’re allocating to.
SEIDES: That’s correct. And then there’s this other, right? So you get notes from students, from friends who are outside. It’s just entertainment.
RITHOLTZ: MBA professors, you hear from professors saying, “Hey, I love this interview. “I assigned this to the class.”
SEIDES: Yeah, it’s just fantastic.
So that’s one of the fun things about it is you just, anyone can listen.
RITHOLTZ: So curve ball question. What’s your favorite podcast guest story that you can tell publicly? Because we all have great stories, some of which not really FCC approved.
SEIDES: There are one or two of those, but not that many. I think I would even go all the way back to my very first episode. So it was with Steve Galbraith, who we mentioned earlier with Jack Bogle. And it was just this idea, I knew Steve, I knew he had a great story, and I sat down and recorded it. And I couldn’t find the recording on the recording device after we finished.
RITHOLTZ: (LAUGH)
SEIDES: And it was so good, I just said, I can’t wait to share this with people. And then I thought that that was the end of my podcast career after the first recording. And it took a good friend of mine, who’s a technical whiz to figure out, which actually wasn’t that hard, I just didn’t know how to do it, to extract the conversation from the recording device.
RITHOLTZ: I’m going to share a similar story with you. So normally I’m in the Bloomberg studios. I got an engineer, I got all the latest equipment. I have the easiest gig in podcast. I show up, I said, “Hey, print this out for me, off we go.” One about five years ago, I’m planning a trip to Silicon Valley. I tee up two interviews in a day, Mark Andreessen of Andreessen Horowitz and Nobel Laureate Bill Sharpe. And by coincidence, I couldn’t find a place to record the Bill Sharp interview, Andreessen said, “Oh, do it here. “You could use our podcast studios.” They were great. So I sit down with Bill, so I do Andreessen in the morning, right? In the afternoon is Bill Sharp, after lunch. I sit down, I have my device, which the engineer has taught me 47 times how to do, and I start the podcast with Bill Sharp, and maybe 90 seconds in, I notice I’m not recording.
And I just have my stomach sinks. And I imagine spending an hour and a half with Bill Sharp and not having it record. So I’m like, “Bill, I’m not getting a good audio level. “Let’s start this again.” So I hit it and now the red light’s on, the view meter’s going crazy, and I could see it’s recording. I go, “Let’s start over. “I think you were too soft.” And I just adjust it and we do the recording. And to me, that was the nightmare scenario of missing, God, Nobel Laureate, imagine that. So you found the Galbraith…
SEIDES: Found the recording, went out, and the rest is history.
RITHOLTZ: So that’s really interesting. So we only have you for so much time, and I appreciate you tolerating my nonsense.
Let’s jump to my favorite questions that I ask all of my guests, some of which I think I’m ready to retire. Probably the first one I’m ready to retire, which is a post-lockdown question. I was asking people, hey, what are you streaming? What’s keeping you entertained during lockdown?
Let’s see if you have an answer to that. What have you been watching that’s interesting?
SEIDES: Well, I’m a Ted Lasso guy, and I’ve watched the finale of the last season three times.
RITHOLTZ: I thought that was unfairly slagged. It was really good.
SEIDES: It was really good. So in addition to that, I had on the show last year a guy named Brent Montgomery, and Brent’s a TV producer. He created Pawn Stars and Duck Dynasty. His latest show is called The King of Collectibles.
RITHOLTZ: Right.
SEIDES: And it’s Pawn Stars meets sports. The guy named Ken Golden, who’s one of the largest sports collectibles dealers.
RITHOLTZ: Right.
SEIDES: And it is so, so good.
RITHOLTZ: Do you get into the massive amount of counterfeit crap that’s in that space at all? Because I would, of all the junk I buy, sports collectibles is the last thing in the world I would ever risk a penny on. I’m convinced there’s some kid in some sweatshop in a basement signing Michael Jordan’s name over and over again.
SEIDES: Yeah, they do show how they go through the authentication process, at least with this one very high quality dealer.
RITHOLTZ: Right, I mean, I’m sure there are ways to authenticate it, but every time I look at something on eBay, I just kind of like look it and go, no way.
SEIDES: This has, you know, it has Mike Tyson on it, it has all these incredible athletes and entertainers that get involved with this guy. It’s a fantastic show.
RITHOLTZ: Really, that sounds really, really interesting.
Let’s talk about books. You’ve written two of them. What are some of the favorite books that you’ve read and what are you reading currently?
SEIDES: This year, the favorite book I’ve read is “Unreasonable Hospitality.”
RITHOLTZ: I just got that book. Somebody recommended it. It looks fascinating.
SEIDES: It’s by Will Guidara, who’s one of the founders of Eleven Madison, Danny Meyer’s partner, and really describes in excruciating, thoughtful detail what it takes to be a creative customer, a customer-focused organization. It’s a phenomenal book.
RITHOLTZ: For a long time, Eleven Madison was just, you know, Michelin rated, everything else. It was spectacular.
SEIDES: So that’s my favorite one this year. The one I’ve been reading most recently, which has been a long project before I go to bed, and it’s a 10-year-old book, is Bill Simmons’ “Book of Basketball.”
So Bill Simmons wrote a book that ranked the top 100 basketball players, as again, 10 years ago, of all time, using both stats and his incredible knowledge and judgment, and it is addictive and incredibly fun.
RITHOLTZ: So spoiler, was it Jordan or LeBron? Who does he rank as number one?
SEIDES: I’m only up to 25, which is Bill Walton.
RITHOLTZ: So you don’t know.
SEIDES: I don’t know yet.
RITHOLTZ: And you know, 10 years ago, was Curry really on the list?
SEIDES: So early on in the book, he had this tiered system and he talked about the players that weren’t yet on it. And Curry was mentioned as one he didn’t think would get onto the list in a future edition.
RITHOLTZ: Hilarious, right? And now he’s probably top 10, right? Is that a fair statement?
Last two questions. What sort of advice would you give to a recent college graduate interested in a career in either alternative investments, allocation, anything finance related?
SEIDES: Well, the general advice I give, and I heard it phrased beautifully by a guy named Eric Resnick, who runs the largest private equity firm for travel and leisure, was recently on our show. He was told early on, combine your vocation with your avocation, which is just a thoughtful way of saying, do what you love.
I think that’s general.
The problem with finance and alternative investments I would give advice that Howard Marks gives, which is if you want to have a great career in this space, start 30 years ago.
RITHOLTZ: That’s great. I love Howard.
And our final question, what do you know about the world of investing today? You wish you knew 25, 30 years ago when you were first getting started.
SEIDES: I think the importance of people. We’re talking about governance and decision-making and it was something that David Swensen taught me early on. But you have to go through people in difficult times, experiencing good and bad behavior in those times to really understand that ultimately active management is a people business.
And yes, you have to have all the investment discipline and all the rigor that goes into that, but they are human beings that are making decisions and that evaluating people as a frame for how you think about where you want to allocate your capital is probably the single most important thing you can do.
RITHOLTZ: Really fascinating stuff, Ted. Thank you for being so generous with your time.
We have been speaking with Ted Seides. He is the founder of Capital Allocator and the author of “Capital Allocators, How the World’s Elite Money Managers Lead and Invest” and the host of the “Capital Allocators” podcast.
If you enjoy this conversation, well, be sure and check out any of the previous 498 podcasts we’ve done over the past eight years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcast. Sign up for my daily reading list at ritholtz.com. Follow me on what’s left of Twitter @ritholz. Follow all of the Bloomberg family of podcasts on Twitter @podcast.
I would be remiss if I did not thank the crack team that that helps put these conversations together each week, Justin Milner is my audio engineer. Atika Valbrun is my project manager. Sean Russo is my head of research. Paris Wald is my producer. I’m Barry Ritholtz. You’ve been listening to “Masters in Business” on Bloomberg Radio.
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