David Salem - Investment Wisdom from the Owner's Box (EP.409)

23:50He was for a long time the chair of the Yale Investment Committee when David was the CIO. And I saw him in the same capacity at the Whitehead Institute at MIT, where Tiff was when Charlie took over his chair. He called me and said, look, I want to keep this really, really simple. I don't think committees are very good at anything. So I'm going to take the marketable portion and send it out to my friends on the West Coast at Capital. He ended up writing a book about capital. And what I'd really like to do, David, is to take the rest of the portfolio, 35%, 40%, and just turn it over to TIFF. And you do hedge funds, and you do private, and you do a lot of other things.

24:21But it's going to be subject to a couple of inviolable conditions. One is I want you to be at every committee meeting. And when you come into the room, I want to make sure that you never talk about performance because we only have a finite number of minutes. All I want you to talk about is process. You can talk about people because they will inevitably, probably more than one time in our overlapping tenor, you managing the money for Whitehead and me chairing the committee, you're going to hit a brick wall. You're going to crack up. And I want the committee to understand at that point that that mistake is the result of a sound process.

24:50Good, hardworking people trying to do good things. It's almost like an airbag. The accident will happen, but the airbag is to have that understanding so you can avoid what? The cardinal state of investing is, of course, to get into a position where you're either an involuntary buyer or an involuntary seller. That's for sure. And you want to avoid that. But the broader cardinal sin of investing is to just bail out of an otherwise sound winning investment strategy at an inopportune time. As you look back to your tenure at TIFF, what were some of the biggest investment lessons that you learned that you hadn't known when you started in the role?

25:26Not rank ordered. The immense value and utility, practical and psychological, of having cash in any portfolio you're managing. What you learned over the years is that it actually has a utility that goes way beyond its obvious help in meeting unexpected redemptions. Psychologically, it frees you up. And Buffett, more than any other actor in my lifetime, has proven the value because you can seize an opportunity that others may not be positioned to seize. Second major lesson, this would actually be number one on the list. As an outsider, you can never really know in a manner that really counts what's going on in an organization of which you're not a full -time employee.

26:07The germaneness of that to selecting and evaluating and managing external managers is rather obvious, but it goes beyond that to understanding, oh, I think I understand the pressures to which one of my key deputies is subject on the home front, but you don't really. Okay, that's fine, David. That's a rather obvious observation. But what have you done with it over the years? And what I've done with it in allocating, frankly, either human or financial capital is to just think about the broadest plausible range of outcomes that I can. You look at an organization. You look at GMO when I joined it.

26:40Everything's firing on all cylinders. The returns are great. They're growing. The sun is shining. You get in there and after a week or two, you realize that founding partners don't even talk to each other. Jeremy could get along. just fine with Ike and Dick, but it drove him batty and it was distracting him from other things. And I don't mean to overstate that problem because looking back now, that was many years ago, it's generally a happy tale. And similarly, I don't think outsiders, even our board members, some board members I was engaging with on an almost daily basis and others were just coming once a quarter for a board meeting and helping guide, supervise, oversee, and maybe on occasion trying to reverse decisions that management, that would be me and my team, are making without really understanding.

27:21I don't think there was anyone on the board who was managing money subject to daily redemption. Any other big ones? The crucial importance, at least in my judgment and experience, of not only making sure that every single meeting starts and if it has a specified ending, ends on time. No exceptions, not even 90 seconds. And not just because it's an efficient use of people's time. If somebody's busy and the meeting's starting at 9 a .m. and they show up at 8 -59 -59. That's perfectly fine by me. What's not fine is if they show up at 9 -05 and I've taken the first five minutes as CEO. All right, these are the really important decisions we're going to discuss today or the issues.

27:58Here's why we have them on the agenda. Here's why we sent you the materials in advance. We're ready to go. And somebody walks in at the end of that. I don't really want to hear from them. And I learned years later that Amazon was doing this and it was helpful verification of something I arrived at independently with far less perfectly than Jeff Bezos and his team ever did. But the famous Amazon six -page memo, you go into a meeting and you basically ensure that everyone around the table who is going to have the privilege of opening their mouths and saying something during the meeting has done the homework.

28:29At Amazon, you would walk in and you'd have study hall. I couldn't really do that with David Swenson and Jack Meyer and say, now sit there for 45 minutes. I want to make sure everybody's read the briefing book. But Charlie would tell me he would set aside not just a weekend, but a long weekend, meaning three days, just to get through the binder before the Yale investment committees. Those are the kind of board members you want to have. You really don't want people around the board of the committee table that aren't committed to doing that kind of homework. At some point in time, as the founder of TIFF, you stepped away.

28:59And we'd love to get your thoughts on that dynamic of the founder stepping away from an investment organization that continues on. Very bittersweet. I think I did it very, very well, almost as well as one could do it. And I think it was the biggest mistake of my life. I haven't told that to many people. And that's because even though I really enjoy what I've done since then, the degree of gratification doesn't approach the gratification I had getting up every morning and going to work for the voluntary organizations for whom TIF was exclusively managing money. That and just the intellectual challenge of growing, of having to do all the dynamism.

29:33That said, I'll just describe how I did it and let other people decide whether I did it right or not. Number one, I gave the board a lot of advance notice, 18 months. And by the way, I said, I'm going to be gone by the end of September of 2010. This is an early 2009. But if you want me to leave sooner, just tell me and I'll go find something to do. I ended up staying. I made it very clear that while I wanted to be involved in the choice of my successor, I didn't have to be. and the committee would probably best advise. Maybe I interview the person at the very end of the process that they deem a finalist and maybe three finalists.

30:05But I thought it was very, very important for reasons that as parents, you and I both know, if you let the kids choose what flavor ice cream, they're going to enjoy it a lot more if you dictate from on high. I wanted to be hands -off in that manner. And then I just prepared everything. I got the deputies fully equipped to not only make decisions without my direct intervention or involvement, but to be equipped to then brief whoever was coming in to fill my role. And then I made it clear to the outside world that once I'm gone, I am truly gone. I think that on balance is a good idea. I think that's been true of the CEOs or CIOs that I've been able to observe.

30:39When they step back, they really do step back. Or if they want to, and it has to be very carefully sculpted, I think, they can step into an advisory role. I've interacted a little bit with Howard Marks over the years. I definitely admire him from afar. I think he has an ongoing role at Oaktree, but I don't even know what his title is any longer. So I'd love to hear about what you've learned in the 14 years since about investing and maybe through a couple of different lenses. I'm particularly curious about the time you spent with Ben Hunt and learning about storytelling and how you've applied that to your lens of investing.

31:15There's great irony there. I really admire Ben and Rusty and admire what they're doing. And it's not an easy road that they've marched down, particularly with what they're doing today, trying to persuade people that no, narratives really do drive markets. You were kind enough to come over and do it in our studios here at Hedgeye. And one important reason why I'm here, Ted, this is the great irony, is that this organization is basically doing deep dive research on both macro and sectors. It's as narrative free as any organization I know in the world. It is of substantial scale doing what we do.

31:42Well, is that a complete rejection of the work that you did with Ben? It's not at all. Because what Ben is trying to do is essentially with his focus on narratives is pay proper homage to and heed to the maximum profitable extent the important notion that narratives really do drive markets. It is almost always the case that price drives narrative, not the other way around. So there's a certain narrative about Elon Musk these days. It's a multi -pronged narrative. But I assure you that the narratives that are swirling on Elon Musk, particularly the favorable ones, would not be swirling and would not be of the character that they are if he weren't one of the wealthiest people in the world.

32:20that price has driven the stock, which drove the narrative in a reflexive George Soros -like fashion. So I became enamored of what Ben was doing just because I thought it was just intellectually really intriguing. And I had the great luxury for the time that I was working very closely with Ben of really steeping myself in that. And then I took my work with Ben in a different direction that is more properly an answer to the question that you just put to me. What did I learn during the time between TIFF and when I joined Hedgeye on a full -time basis. Yes, narratives drive markets, but I also learned the crucial importance, if you're going to focus on those kinds of things, that Ben has been particularly good at highlighting, that you need to listen to the market.

33:00And what does that mean? I think a lot of people that are only casually familiar with Hedgeye, and certainly with our founder, Keith McCullough, will hear things coming out of his mouth, or they'll read things that he's written and say, well, that's arrogant. How can they possibly claim that they know that. You can't time that market. You can't do that. You can't do that in a repeatable, disciplined manner. If you actually take the time, roll up your sleeves and understand it, you'll find that I think it's the ultimate act of humility because most of those messages and conclusions, all of which are data and not narrative -driven, are humble acts and statements.

33:34All we're doing is listening to the market in many, many different ways. We're looking at cash flows. We're looking at fundamentals. We're trying to organize them in a coherent way. It gives ourselves, as allocators of our own capital, and you, our clients, some of the biggest hedge funds in the world, to help us separate wheat from chaff, noise from signal, in a very humble way, saying you need to do a better job of listening to markets. The decade between my leaving TIFF and my joining Hedgeye had certain distinctive attributes. A certain corner of the global capital market was attracting an increasing amount of money.

34:08You need to listen to that and understand the perils of trying to buck or getting in front of that freight train and understand what opportunities might be spawned by the dominant flow toward that particular asset class or more properly regarded as a subclass. It's the polar opposite of the LBJ or Jeremy Grantham approach to absorbing information by talking. It's listening. As you've seen these different disciplines, the discipline of trying to understand the listening of storytelling, the macro and trading of markets, how have you brought that into the original way that you had invested in, say, a multi -manager, multi -asset approach and use these different tools to enhance more traditional asset allocation multi -manager approach?

34:51I grabbed the low -hanging fruit first. When you think about any investment program, whether it's endowment management, a family office, a sovereign wealth fund, a DB plan, the defined benefit plan. You've got policy, strategy, and tactics. The low -hanging fruit I'm alluding to are the tactics. So I started to get enamored of hedge -eye, which is a combination of fundamental bottom -up work and quantitative work. Some would call it quantum -end. And I started to see if I was involved in stewarding a pot of money and there was, as there always should be, a rebalancing discipline. Is the rebalancing discipline sensible, optimal, and sensitive to the fact that the market is telling you things if you would just shut up and listen.

35:28So I started changing tactics. And I started to see, wait a minute, this is actually working. This could help me not only with the decisions that I don't enjoy making, but I need to make. When do I put incoming cash to work? If I have a standing redemption request that's six weeks or six months away, how do I start to plan for it? Should I sell now? Should I wait to the last minute? And then you start to work up that hierarchy of tactics, strategy, policy. It starts to permeate what I was doing with strategic asset allocation. And now I've taken it to the level of investment policymaking. Most of the investment policymaking stuff that we're doing around here is stuff that I brought with me, the lessons that I learned, a lot of painful lessons along the way, where there's a really crucially important overlap on the tactical and the strategic level.

36:10And again, it's an essential part of the culture here is that we always think about risk first and then return, never the other way around. And I think I've listened to every one of the podcasts that you've ever done. Maybe I've missed a few. If you were to, in my view, put together a catalog of what are the most commonly voiced lessons of the really savvy people, present company excluded, you've had on the pod. It's risk first. One way or another, they don't maybe use those exact words, but they always think about risk first and then return. So when you do tactical work, strategic work, or even investment policymaking, you're thinking about risk first and then return, not the other way around.

36:45I've really stuck my neck out. It's probably been with respect to my very strongly held view about the prudential or non -prudential aspects of deploying money in China. And there's an opposite side of that coin now, the opportunities in Japan. But it's really a risk -first and risk -centric approach. I was thinking a lot. I had to in my prior capacities about whether and to what extent capital for which I was serving as a fiduciary should be invested in the companies domiciled in China. And I decided the right number was zero. And there were times in my career where that's been very painful, at least in the relative return sense, because there have been times in my career where China has outperformed other markets, but I believe in it emphatically.

37:26It's driven by risk and a consideration of what is the full range of plausible outcomes. And when I look at China, I do think there's a worrisomely high probability that investments in there could go to zero, even if only temporarily. One of the things you learn when you're in an allocator or a CIOC for many years is you learn not only the wisdom, I would say the essential character of thinking about second and lower order effects when conducting due diligence, but maybe even more importantly, you think before you write out a check or make a commitment, either to a new hire on your team or a new manager or existing manager that you might be thinking about upsizing, you think about when things go wrong, what will be the second and lower order effects if they do go wrong.

38:09And I think some investors, myself happily excluded, learned this when Russia invaded for the second time, we'll say in 2022, as opposed to the first time in 2014. And what happened to the GMO investments in unbelievably cheap Russian energy stocks? Well, they went to zero. Well, David, it was a trivial fraction of the portfolios. Yes, it was. But how much time and attention at the senior management level had to be spent figuring out what to say, monitoring, how do we value those investments? How do we explain it? It's an incredible distraction. And you need to think about that up front. And that is one important reason among many others why I continue to maintain that I think from a tactical and a strategic point of view, but most emphatically from a policy point of view, the prudent allocation to stocks of companies domiciled in China is zero.

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39:45Learn more at srsaquium .com. That's S -R -S -A -C -Q -U -I -O -M .com. And now, back to the show. Let's turn to some of these views. You mentioned at the onset, the environment over the last 40 years likely to have changed quite dramatically from what we might see going forward. I'd love to dive in a little more on your thoughts on China and Japan. Well, I do regard them as opposite sides of the same coin because I do think that what unfolded in Japan from its peak at the end of 1989 until just a few years ago, maybe we can give your friend, Mr. Buffett, credit for ringing the bell on this when he made the investments in the five trading companies, but that was a very long and prolonged bear market.

40:27So those conditions were, I think, for mostly the wrong reasons, pushing capital out of Japan. And I think for a lot of investors that pride themselves on being truly globalized, starting with China's admission to WTO in 2000, one of the great policy mistakes I think this country has ever made, it was clear that that was the bright, shiny object that people wanted to pile into. So the great flood of capital to China, which we would say objectively today, is reversing. Certainly, there's not a lot of money flowing, and FDI is way, way down. And I think a lot of people, if you could give them truth serum, CIOs of all the major institutional funds around the world, the top 1 ,000, if you could just pull one lever, what would it be?

41:03Get rid of all my China at the current mark. They could probably get rid of it at a massive markdown, but they'd like to be done with it for the reasons I just talked about. It's an incredible distraction. So as the money got hoovered into China, a lot of it left Japan. They are, I think, emphatically and unarguably opposite sides of the same coin in a very important geopolitical and military sense. Our alliance with Japan in a military and geopolitical sense is vastly underestimated, to a lesser extent with the Philippines, but emphatically with Japan. That giant sucking sound you heard for almost three decades of capital leaving Japan was both human and financial capital.

41:40And the Japan story is a bottom -up story. It's a story of companies that I think, not in every case, because there are a lot of very overvalued securities in Japan, but in many, many cases, the Japanese managements have perhaps only recently gotten religion that the company should be managed for their shareholders. With a broad view of shareholders, it looks over a multi -generation time period, as opposed to, say, a different view of the shareholder base, what's called the stakeholder base, that looks at things like ESG. This is a bottom -up, company -by -company, transformation of certain Japanese corporations so that they can be deploying capital in a manner that will eventually redound to the benefit of their outside shareholders.

42:20It's a real sea change. It's partly animated by a generational shift where a lot of people that were trained and lived through the prior years and they learned because of what happened in the 90s and the first decade of this century, they learned that the massive importance of liquidity in cash and a new generation is taking over. I regard the perils in China, Ted, as not bottom up. There's a lot that you can look at in China and say, wow, they're really smart, hardworking, they're entrepreneurial. But the concern I have about China is very much top down. Now, let me cycle back to Japan. The peril in Japan is not that there'll be a reversal of the bottom -up trends that I cataloged that are so attractive, but that somehow, someway, they will snatch defeat from the jaws of victory by doing things at the top -down level that screw things up that are going on right at the bottom -up level.

43:04I don't think that's going to happen. My great and good friend, Andrew McDermott, who I've worked with very closely over the years, has said he's growing increasingly concerned because there's a massive buildup of dry powder, private equity, targeted, in some cases, specifically for Japan. And his concern is a lot of still low -hanging fruit that he wants to own public companies are to get snatched up by the private equity guys. And the alpha will flow mostly into those pockets. And it pains him and it pains me. It's kind of a peeve, if you will. The institutions don't say, why don't we just cut out the middleman, maybe find a public securities manager and just buy the public company and get the re -rating that way instead of paying somebody $2 .20 to participate in the re -rating.

43:43So that calls to my answer you mentioned about private markets. which is a lot to discuss. Would love to open it up and have you dive in wherever you'd like. So one of my great Ps is the extent to which people in our profession overgeneralize. So people will say to me, maybe cocktails or something, and they sort of know what I do for a living. What do you think of private equity? It's like saying, what do you think of the runners in the New York City Marathon? Well, there are some that are going to run in six hours, barely make it, and there are some that are going to run in almost two hours. Which ones are you asking about?

44:10So don't force me as a professional to engage in overgeneralization. But now I will answer the question. What do I think of private equity right here? I think it's just demonstrably true, Ted. You know this. You've just written a book about it. Private companies are a superior way to compound capital relative to public. It's just that they're not as scalable. And there's a certain unfairness to letting only the rich invest in private companies. That gets into accreditation requirement. But private enterprises, yes, it's a very sound model. It's just obvious and tautologically true. The problem I see with the private investment industry very broadly defined, it's taken inherently sound ways of compounding capital with risk, whether it's venture, buyout, infrastructure, real estate, you go on right on down the list, overgeneralizing here, and put flawed structures on top of those sound enterprises.

44:56You got continuation funds. Well, that's a really good idea because if you have a really good company, you really know it well, and you've been on the board, maybe you helped start it as a VC, you just want to ride it all the way into the sunset. But I'm a little bit more skeptical than that. They're being created today because the model of a finite life fund doesn't really fit the economy as a whole. Are there aspects of the model, we'll call it the business model of private investing, that in my mind don't comport well with the underlying engines of growth that generate wealth over time? So that's a very broad generalization.

45:27I do continue to believe emphatically that private equity investing, as is true of any otherwise sound form of investing that maybe gets overdone and overcrowded, it will be around forever. It's just a question of boiling off the overfunding and moving it essentially into what I call strong hands and strong structures. You can make an argument, by the way, that continuation funds are exactly that. Typically, if you're an LP, you get to opt out of it. You get cashed out to the extent the money's around, and the people that want to stay on can continue. That's where we get continuation fund. That's moving assets from weaker hands into stronger ones.

46:02As a quick aside, it sounds like a non sequitur. That is precisely what happened on August 5th, when you had what? The yen carry trade collapse? What was happening in those 24 hours? You're watching money move from weaker hands into relatively stronger ones. And I think that will continue to happen in private equity. I listened to your excellent one with Jace Albee, who runs Texas Teachers. He's the CIO. And you listen to him and you think, these are the strong hands. This guy's really impressive. And all credit to him for doing what he's doing. Those are strong hands. And I think eventually that's where the industry broadly defined, certainly the venture corner of it, started in the institutional sense.

46:39Who were the original institutional investors in venture? It was Harvard and Yale, Stanford to lesser extent, some very wealthy families. Those were very strong hands. Now we have a lot of newcomers and weak hands and it needs to be a shakeout of some kind. If you had the chance to redesign the structure that was wrapped around the private equity activity to allow the compounding of capital, knowing the constraints that, say, an LP has for liquidity, a GP has for capital availability, how would you go about designing it? I've actually had that opportunity on several occasions, and I've had some success, not complete and unqualified success, in getting what I thought were some of the very best people in the business to adopt variants of the model.

47:17I take no credit whatsoever from what I'm about to say. The model is the General Atlantic business model. General Atlantic, that now massive global private equity firm, began its life as a folder in the file cabinet of the Bermuda -based Atlantic Foundation, later doing business as the Atlantic Philanthropies. And when Ed Cohen and Steve Denning persuaded Chuck Feeney to give a little bit of the Bermuda -based foundation's money to them so they could go out and make inopportune investments in Winchester disk drives and other things in the early 80s, they adopted a business model for private equity investing that was very distinctive.

47:49It was not a fund model. So it was basically based on a multi -year commitment from each LP. For years and years, it was just the foundation when I arrived on the scene. And as you know, I was on the investment committee for 16 years, starting from when they sold DFS, duty -free shoppers, to LVMH, and the foundation's assets exploded in size, the liquid assets. They already had a lot of money. They had an annual conversation with Steve, Bill Ford, and other leaders at General Atlantic. And then they could draw down the money pursuant to those constraints because you don't have a finite life. You don't have a finite life fund.

48:21You can hold something as long as you want. And there's no continuation fund exercise. They also had something at the back end, which I think is quite important, which has been a career -long peeve as well, which was always a general Atlantic. It's cash in, cash out. And you go to one of your favorite venture firms. If I'm a client, particularly a very valued client, I can say, could you please send me all the data? The MOIC, the multiple of invested capital, the DPI, the distributions. I want to see everything, the IRRs. The IRR in particular is the product of, okay, we've invested in company A, we distributed the shares of distribution in kind to our LPs, and we computed our IRR based on the market value of those on the day that we made the distribution.

48:59But there's often, not always, but often massive slippage between cup and lip. The institutional investor, what do we do with it? Do we hold it? Do we sell it? Do we sell it in six weeks? That's actually, by the way, where a lot of the tools and techniques we have at Hedgeye can be extreme. That's really tactical stuff. But a lot of LPs of longstanding relationships going 30, 40 years back to the firms that are still on the short list of what are the best VC firms in the world have gotten returns that are quite a bit south of the IRRs that reported in those manager records. So the GA model, I think, is at the very least the least worst model I've ever seen.

49:33Very few managers that I've talked to about it have had the energy and, frankly, courage to adopt it. But it really does merit careful study because I think it's the right way to do it. You touched earlier on ESG. Thoughts on ESG. Well, I would point to Jace, actually. He used the term in his conversation with you. We are strict fiduciaries. That means something in an ESG context. I think many people in our business find it rather off -putting. Oh, that's an uppity Texan saying, we don't care about the climate or the environment. No. Listen to Jace. Listen to what he says. They're just being really rigorous.

50:06And I think you have to do this to do investing well. List risk parameters. We're going to maximize our return over fill -in the time period, rolling seven - and 10 -year periods without incurring drawdowns, exceeding blank percent. And then as a secondary objective, we're going to try to keep pace with outperform a defined peer group. Maybe it's Yale and they use another group of universities. That's a careful rank ordering of risk parameters. Well, you get back to ESG, which was the main thread. How do you rank order things? And that's where it becomes hugely problematic. And if I can say so, and forgive me, but I think there are some very conspicuous visible actors running some of the largest asset management firms in the world that a few years ago started to exalt and extol the virtues of ESG to an extent that even at the time, some of us could say, wait a minute, wait a minute, slow down.

50:53You're not going to be able to do that in a rigorous way and still adhere to your basic fiduciary duty. Now they've backed off from it, but I think it was evident at the time that this really difficult balancing, rank ordering of goals and constraints is particularly challenging in the ESG arena. Partly, of course, because the S in particular, and even to some extent the G, social and governance, in many contexts is not very susceptible of quantification. I'd love to ask how you apply the many years of learnings to something new. Easy examples of that might be digital assets, blockchain technology, AI, different things that are the new kid on the block.

51:31In my own experience, there's only one way to do it, which is to roll up your sleeves and give up your nights and weekends. And it's mostly reading. I'll give you two examples, one more distant and another more current, which is digital assets, it's crypto. But I got wind of the fact through my late great friend, Dave Middleman, who was working for Jack at the time at Harvard Management. He had the privilege of serving on the Treasury Advisory Committee. And we knew each other. He was a Middlebury grad. He was on the board. And I got wind of the fact that the Treasury was seriously considering launching tips.

51:58I started getting more and more into the weeds in my conversations with Dave. And I said, so I know how the inflation adjustment works. And the French have had them and the Brits have them. But what are you going to do about deflation? If we get an extended deflation, If I buy it, the par is 100 and the price level goes down 20%, do I get paid off at 80? And he said, no, they don't think that's going to sell very well. So they're going to give you par. I said, so wait a minute. If I get a major inflation, I get the inflation indexing of both the coupon and the principal. That's great. But if we get the converse, this is really asymmetric, Dave.

52:28And he said, yeah, I think that's what they're going to do. And I'm writing TIFF at the time and I'm putting together a policy portfolio for the multi -asset fund. And by then it was several billions of dollars and serious money for the endowed charities, but also serious money for the staff, myself included, because we had bonuses tied to the outperformance of the policy portfolio. Job number one was to make sure the policy portfolio was as responsive to the needs of the participating charities as possible. So I just did an enormous amount of homework. And I ended up writing a long essay and we published it in the fall of 96, before they ever issued one.

52:59And then Dave called me one day and said, all right, back up to Chuck because they're going to have the first auction. One of the biggest mistakes in my life was to buy a big slug early on, because you may know they opened at 3 .6 real and they traded down in price and up in yield because the NASDAQ was soaring right through early 2000. So the real yield went from 3 .6 to 4 .3. And if you held them, it was really painful. So what did we do? When we got to 4 .3, we doubled down because we had, as a team, myself in particular, had spent an enormous amount of time studying and writing it up, that may be the longest due diligence memo I ever did.

53:32On digital assets, I first got intrigued by it because I watched something with Vitalik about Ethereum. And I thought, wait a minute, this is going to be a relatively painless way to exchange and transfer value of anything that's susceptible of tokenization. I better learn about it. And I went way down the rabbit hole. Came out generally skeptical of Bitcoin and really, really bullish on the longer term, potential for the Ethereum network as a technology to help people transfer things of value in coming decades and beyond. I still am very bullish about that. That's very separate from buying ETH, the token, as an investment.

54:08I actually think, and this is a completely unoriginal thought, and I'll end my answer about digital, otherwise known as crypto, with this, but the unoriginal thought is that ETH has certain properties that could, over the fullness of time, make it what some call a triple point asset. So you obviously have, because it's a proof of stake network, you have the staking yield. That's a good thing. You also need to actually use ETH to transact on the Ethereum network, which makes a commodity like moving a train from Boston to New York. You need a commodity called essentially diesel fuel. That's what ETH is to move stuff around the Ethereum network.

54:42And if those two things take hold to a sufficient extent, because you have built in scarcity, because you're burning ETH all the time, you have the potential in long -term to become a store of value. So I'm still very, very bullish on ETH long -term, more for the transactional character of it. If you circle around all of your experiences around committees, what have you seen that works? Hard work and a focus on the particular. So hard work and particulars are opposite sides at the same point. If you do enough hard work as an investor, you're probably going to get into the particulars. Not that the really big picture generalities can't help you avoid a drawdown or help you make a lot of money.

55:19If you only gave me a minute, which I've just taken to answer that question, that would be my two -part answer. And what are the aspects of the hard work and the particulars that make an investment committee function well? There's almost nothing that makes a committee qua committee function well. I fully appreciate that there are investment committees of any money management firm that have a regular Monday meeting of the committee, and they function beautifully. What's the best performing investment committee of all time? It was two guys that lived 1 ,800 miles apart, one in Omaha and one in Pasadena, and they seem to function pretty well.

55:47What makes investment committees? I did a talk a couple years ago. It's probably the favorite talk I ever crafted and delivered called imperfect practice makes imperfect, colon, investment committees at work. So conceding that there are exceptions that prove every rule, what do committees do? Logically, they meet on a part -time basis in an environment where consensus comes first. That is the worst possible environment for investment decision -making, bar none. So that doesn't work. What makes a committee work? Well, I would say first and foremost is crafting. This is where Charlie was great, Charlie Ellis.

56:20Craft the mandate of the committee in a manner that doesn't cause it or compel it to function like most committees. Maybe it's giving guidance. Maybe it's just asking the right questions. It's certainly doing compensation. It's helping the CEO pick a team and motivate and incentivize them. But the classic investment committee tends to be quite dysfunctional. But now a lot of committee -like behavior that goes on, it's true throughout the industry. It's people that are engaged in the vetting of decisions and the making of decisions that aren't really bolted to their chair, that really understand the particulars and have a distinct and sustainable edge in doing so.

56:52And there is no shortcut to doing that. The industry itself, no matter where you look, has had this incredible run in the 40 years since you made the contrarian decision to get involved. As you look out over the next 5, 10, 20 years. What are the aspects of asset management as an industry that you think are clear in terms of where the trends are going? Well, I think because I believe that many corners of it, with very conspicuous exceptions like Japan, we have excess financialization, certainly in the United States, and an overpopulation of the industry. So I'm afraid I can't be very upbeat about that.

57:28What I would say is that on the upbeat note, I do think I'm a huge fan of Dr. King. He said from the speech that he gave in the National Cathedral a few days before he died, the arc of the moral universe is long and bends towards justice. The arc of commerce, in my words, is long and eventually bends towards transparency, ease of use, and particularly in money management, but elsewhere like Amazon, shared economies of scale. Transparency, ease of use, shared economies of scale. So if you're running or working at an asset management shop today, particularly here in our overcrowded market, but anywhere in the world, I think it behooves you to ask yourself, are we positioned properly for increasingly intense demand on transparency, ease of use, and shared economies of scale?

58:13There's a less polite way of saying shared economies of scale. It's massive compression of fees, the opacity of a lot of the fees that have been charged. And I think you're generally a fan and a supporter of private equity. And so am I. And notwithstanding that, if there had been perfect transparency of a lot of those fees, ex -ante, before the LPs that are involved who are now bemoaning bitterly what they signed up for, if there had been perfect transparency rather than an opacity, I think the industry would have evolved in a different manner. And I think ease of use relates in part to the optimal funding model.

58:46Put yourself on the LP side. You lifted, I think, the famous Takahashi model at Yale. It was the idea that as we got to the end of the late 1990s, we wanted to be, quote, fully invested in private stuff. And the money was coming back so quickly that we decided to do what? Overfund it so that when the massive liquidity comes back, we could still stay near our target rate. It didn't work out very well, at least temporarily. So there are a lot of things that are going on in the industry today that because of the paucity of distributions and the fact that you're getting to the point where I heard Hugh MacArthur the other day say, You've got 28 ,000 companies held by private equity firms worldwide, and $3 trillion is the number that Hugh used the other day.

59:23More than half have been in the portfolios for more than four years and 25 % more than six years. Not exactly consistent with the funding model that a lot of institutions use to size their commitments. So we're probably not even in the third inning in terms of the pain that's going to be incurred by the folks who are not on the right side of those trends, transparency, ease of use, and shared economies of scale. And David, I want to turn to a couple of closing questions. But before that, through this long career, I'd just love to ask you about a few of the most notable moments and maybe start with what's been the most gratifying experience you've had in your career.

59:59It's the obverse of the most taxing or stressful day. Can I do the taxing one first? Sure. That was in February of 08. I can't remember the exact day. We had started in late 06 and seriously in 07 over the very vocal, strenuous objections of members of the board at TIFF to do some hedging in the portfolios with options, with puts, and talk about writing a long due diligence memo. I wrote like seven of them. And why would we buy puts? Partly because VIX was low double digits sinking occasionally into the eight and nine category. So the insurance was cheap. But what we were seeing is a lot of the hedge fund exposure we had with the beta was creeping up.

1:00:31And I got more and more worried that we're going to violate the implicit or explicit promise we'd made to the endowed charities for whom we were managing money. Roll the clock forward throughout most of 07 and right into 08, this put program that I had brilliantly added to the mix over the board's basic objection was losing a lot of money, a lot. And we came to the you -know -what moment in February of 2008. I happened to be in California, and Nina Chirago and Mike Costa, co -heads of the Absolute Return Program, where the bulk of this activity was occurring. And we were on the phone for three or four hours.

1:00:59I basically said at the end of it, okay, you guys, this is a career -defining decision. We're either going to double down or we're going to go back to the board with our tails between our legs and said, we can't afford to do this anymore because we were burning premium. We doubled down. And that was incredibly stressful. Roll the clock forward. It was November 20th. It was the day that the VIX peaked. The only way we got the board to buy into the program was to set up a matrix that said price of the S &P, these were all out of the money, long dated S &P puts. And we had price on one side of the matrix and implied vol on the other.

1:01:26And it was a rigorous framework. And we promised the board that whenever we got to one of those trigger points, a given box, we would sell 6 % or whatever the number was of the puts. And the extreme corner was vol shoots up to 60, 70, 80, and the S &P collapses. Well, we get to November 20th and the matrix is screaming at us, get rid of all the puts. That was really gratifying. And it may well be the same, but how about the most memorable day? I'd have to go back to my GMO days. It had to be either August 2nd or August 3rd of 1990. And I'm working very closely with Jeremy and we're already doing some asset allocation work.

1:01:59And what happened? Saddam invades Kuwait. And I remember I was in my office, Jeremy walks in, I think he called in Forrest Berkley, great guy, and maybe Chris Darnell and a few other key members of the team. He goes, all right, markets cratering, equity markets were in a free fall. And Jeremy posed a whole series of questions. I didn't have, Ted, a clue where Kuwait was, let alone a coherent or intelligent or even half -informed answer. I couldn't even form questions to rebut Jeremy's questions. And that's because there was no Bloomberg. We barely had computer technology. I didn't have access to anything.

1:02:29And I think about that in answer to your question, a memorable day. And I think about how different the world is today. If you were to walk out of this room and just go 10 feet. You could hit buttons here where you could answer certainly with GPT to just about any question. So that was a particularly memorable day to me in hindsight, because what did we then do in light of all those boundary conditions? We did nothing. And what happened? The market went down pretty steeply, and then we did nothing, and we did nothing, and we did nothing. And then the market came roaring back. By the way, the same thing happened on a much more minute scale, certainly geopolitically in early August of this year.

1:03:03So often inaction trumps action, But that's not why I told that story. I told that story because of the stunning contrast between the ready availability of information, some of which is overkill today versus what we had that. All right, Dave, time for a couple of closing questions. What is your favorite hobby or activity outside of work and family? I think if you asked any of my colleagues, so that's obvious, Salem, that's running. He runs like twice a day, but that's not really my hobby. I wish my wife was sitting next to me. It's true for her too. Their hobby is eating ice cream. And the reason I run twice a day, typically, is so I can eat the ice cream.

1:03:38Amory, who, as you know, is a world -class athlete, if she was sitting here, she's insane. The reason she still runs 80, 90 miles a week is so she can eat unlimited quantities of good food, including ice cream. What's one fact that most people don't know about you? I'm pretty sure most people would not know that I'm one of the very few people in the world who has survived a so -called hangman's fracture without paralysis. And that happened to me and Memorial Day of 1989. I'm a massive fan of Friday Night Lights. I think it's like the best TV series ever. And in season one, when QB1, Jason Street gets hit, and those early scenes where he's in the hospital, they're screwing bolts into his head.

1:04:12You can see that depression in my forehead. And the other side, that's from a halo vest that I had put on me that day when I broke my neck. And for a few days, they thought I was going to be paralyzed, and I came out of it. And it was a life -changing event, as you can well imagine, in at least two respects. One, made me a less patient person because you realize how brief and fleeting and how quickly life could end. But then paradoxically, because of exactly what happened in that moment, I think I'm really not afraid to die a very sudden death. I've been through that once. I did get knocked unconscious instantly.

1:04:44And trust me, it's over really quickly. Not that I'll seek it out, but I, in a way, seek out that form of ending, then a slow grind. Anyhow, most people don't know that I went through that. Which two people have had the biggest impact on your professional life? I would certainly cite Larry Landry because of the leash that he gave me at a very young age. But the second would, of course, be Jack. I talk about Swenson all the time. And if you said three, he'd be on the short list. But Larry did something very wise. Because I was a young, untried pup, I had a lot of energy and passion for investing.

1:05:12He said, David, look, we're going to give you a whole bunch of money. And my career is on the line here. And I want, among other boundary conditions, I want you to promise me that when you start to build out the board, I'll help you do it. I want one of the early nominees, we'll approve him, to be a CEO. I want that man or woman to have a CEO experience because you're going to make a lot of mistakes. And I want them to have the candor to come to you and say, look, David, you made that mistake. Maybe I saw it coming. Maybe I didn't. But here's what I would suggest you think about. And that should never happen again.

1:05:41So I said, Larry, I got it. I think I got just the right guy. And Jack had more or less recently arrived at Harvard to be the CEO of Harvard Management Company. So he was both CIO and CEO. And I went to Jack and said, would you serve in this role? And he did. And I like to say sometimes smilingly, 120 % of the success I had at TIFF was attributable to my board members. You do the math. What's the best advice you've ever received? Can I answer with the best advice I ever got that I rejected? Sure. It came from Swenson, actually. David just called me one day and said, look, I have some advice for you.

1:06:15There's this job that's open and I'm involved in the search and I want you to jump into the search and I want you to take the job. And for various reasons, I've extended in some heated conversation with David, I said, no, I can't do that. And he essentially never talked to me again. And that was probably really good advice in hindsight. I know the job, I know the institution, I know how it's unfolded. Probably one of the biggest mistakes I ever made, maybe second to leaving TIFF, was to not do that. So that was great advice that I rejected. On a happier note, certainly Larry's, It wasn't really advice so much as a command.

1:06:47I advise you to get a CEO to be on the board, and it should be someone of the character that I described. All right, David, last one. What life lesson have you learned that you wish you knew a lot earlier in life? I love it when you put this question to people. I've thought about it a lot. So first, I'm going to say one of my favorite movies of all time. It's Cool Running about the Jamaican bobsled team. And the protagonist was John Candy, the disgraced athlete who doped and got caught. And in that movie, there's one of the great lines. if you're not happy without the gold medal, you won't be happy with it.

1:07:17And I think about that all the time about my own life path and what I choose to do and choose consciously not to do. I think about it with respect to the people I choose to spend my time with. Do they seem like people who are happy without the gold medal? If not, eventually they'll probably become really unpleasant people to spend time with. And I also think about it in something that suffuses the whole conversation, which is this idea of really hard work. So you look at people around the world and you think, okay, who are the people that really, truly love what they do? This is crucial, even if they don't like what they're doing.

1:07:50And my favorite example, Ted, is Kali Yastrzemski, because he never got the gold medal. He got all kinds of individual accolades, but he never got a ring. But he used to say all the time that he loved playing baseball, but he never liked it. He never enjoyed it. It was hard work all the time. And I feel that way about investing too. So the life lesson is choose to do something where if you never even earn the gold medal, you'll still have a fun, pleasant, and productive path along the way. We almost made it all the way through without talking about the Red Sox. I knew that wouldn't happen. Thanks so much for sharing your wisdom experience.

1:08:24It's my great pleasure, Ted. It's an honor. Thanks for listening to the show. To learn more, hop on our website at capitalallocators .com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.