Ted Seides – Unlocking Investment Wisdom (EP.352)

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2:31Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at CapitalAllocators .com. All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

3:11Clients of capital allocators or podcast guests may maintain positions and securities discussed on this podcast. Happy Thanksgiving to everyone. For a little turkey treat, today's show has me on the other side of the mic. Sarah Samuels, the head of manager research at Powerhouse Consultant NEPC and a past guest on the show, is also the board chair of the CFA Society in Boston. She's created a podcast series for the society called Pull Up a Chair, and I was honored to be her inaugural guest. We recorded live in Wellington Management's headquarters earlier this month in front of a crowd that included Tim McCusker, the CIO at NEPC, and Gene Hines, the CEO of Wellington, and both past guests on the show.

4:00Sarah drew out some personal anecdotes about my investment career and a look at the business around capital allocators. At the end, I offer up a pitch for a children's book, Sarah wrote, that will release in April called Braving Your Savings. Keep your eye out for it in the coming months. Before we get going, we're hosting our fifth cohort of Capital Allocators University in New York City on February 22nd. CAU is designed for allocators with 5 to 15 years of experience to connect with each other and learn critical frameworks to help advance their careers. Rahul Moodgal and I will be joined by a few past guests on the show for a day filled with presentations about skills, Q &A, and small group discussions.

4:48For those who have attended one of the first four cohorts, we're now ready for you to return for a second semester too. Spots are limited, so hop on the website and register today. Thanks so much for spreading the word about Capital Allocators University. Please enjoy my turn on the other side of the mic with Sarah Samuels. Ted, you've got a fantastic career, most recently as the founder of Capital Allocators, which has millions of downloads. You have interviewed best -in -class investors. You have them tell their stories. You founded a hedge fund of fund called Protege. you made a major bet with Warren Buffett.

5:31Lost a major bet. And you were trained under David Swenson. Not too many of us can compete with this amazing background. And we can't wait to hear more about your story. You're usually behind the mic on the other side, and now you get to talk about yourself. Maybe if we could just go back to the early days, could you tell us a little bit about how you grew up and a foundational experience that formed who you are. Sure. My parents were not business people. My father was a doctor, actually a psychiatrist, which we can talk about at length. And my mother was a preschool teacher and administrator.

6:06There was money management in the family. My mother's younger brother passed away a couple years ago, this guy named Jim Rothenberg, who used to run Capital Group. So I knew about stocks, but we were an East Coast family. He was West Coast. So I never really spent a lot of time understanding anything about it. But my father used to watch the predecessor to CNBC, which was CNN, FN, and there were just tickers. And he would take out the newspaper and follow the stock. So I was interested in that, but I literally knew nothing about what it meant. And took some economics classes in college. One of them was a 250 -person seminar taught by this guy, David Swenson.

6:44And he mentioned that they hired one person a year, and that was my junior year. So my senior year, I applied and it was Wall Street stuff. And I graduated in 1992. So you're coming out of the recession. I just had the Goldman Sachs Global Investment Banking Analyst class in 1992 was 18 people. So it wasn't easy to get those kinds of jobs. In earnest, I didn't try that hard because all I ever heard about those jobs was how people worked all the time and were miserable. And then alongside it, there was this thing I'd heard about and I interviewed, and that was the first job offer I had. I didn't really understand a whole lot about it, except I really liked the people I interviewed with.

7:22And that was the beginning of my career. Okay. So you started your career at the Yale Investment Office. I did. That was my first job right out of college. Tell us a little bit about what that was like. It was amazing. So I was there from 1992 to 1997. And the reason those years are relevant is David didn't write his seminal book until 2000. He had joined in 1985, and after seven years, the portfolio really had taken shape in his image. And it was a new field. There were probably half a dozen professional endowment foundation investment offices in the entire country. There were probably a dozen pools of capital like that in the world.

8:03I didn't know that at the time because I didn't know anything. I just got to learn everything you could learn about investing from someone who was one of, if not the master in the business. And I also got to work with just an incredible group of people, both personally and professionally. So it was almost like the best family office you could imagine, but you're just showing up and winning every day. And at that point in time, it was easy to see why you were winning because David had such a clear way of thinking and it made so much sense. And yet nobody else was doing it. So year after year, you could win.

8:38And it was just a phenomenal place to be. What's an example of one of those easy wins or in hindsight, easy wins? Yeah. So back then, all the hedge funds that existed, Andy Golden, who later left and about to retire from Princeton, he managed what we call the absolute return portfolio. And all the hedge funds were on one sheet of paper and a little bit on the backside of the sheet. The game about trying to earn, call it an equity -like expected return with less risk than the equity markets, was only understanding the game was being played. There was no capital introduction on Wall Street. You had to know that existed, and then you had to have the governance structure that allowed you to go and do something that was different from what other people were doing.

9:22One of the stories I like to tell about that was three or four years after I was there, David and Dean Takashi went to New York for a set of meetings, and they came back, and they said, I can't believe this guy was managing a billion dollars, and we've never heard of him before. And his name was Louis Bacon. He was running more capital. And that was what it was like. Another example of that was the venture capital world, which has really driven a lot of the high -end endowment returns for decades. Back then, you had plenty of time to figure out who the best venture capitalists were. Other people weren't looking.

9:56These managers weren't closed. And Yale made a whole bunch of venture investments when David and Dean first got there because they thought it was a great area. Some of those were great. Some of them were terrible, but they weren't who the great people were. And they probably had 10 years to build a venture portfolio before there were capacity considerations. So those are the types of things that just by being there earlier than everybody else, there was a material advantage in being able to build relationships with great managers. I'd love to come back to the Yale model a little later in our discussion and maybe continue along your journey.

10:29You talked a little bit when we were prepping about some early lessons that you learned. especially through your interview rounds at Goldman Sachs. I mentioned that my uncle was running Capital Group. From whatever reason in my family, I grew up thinking I had to do everything by myself. And the idea of asking for help for anything was anathema to me. So I managed to go through Goldman Sachs into the final rounds of interviews and of not getting an offer, which is probably a driver of why I ended up at Yale. But I didn't think for a second to call my uncle and say, hey, do you happen to know anyone at Goldman Sachs?

11:03that might have helped. As it turned out, the capital was one of their largest clients at the time. So there was a huge lesson in that, that I really didn't internalize until probably 15 years ago of the importance of being willing to ask for help. You hear about it now in decision -making theory, which has really only taken off and certainly since I started the podcast and really with Annie Duke's work, not behavioral economics, but what to do about it. And the idea of having diverse opinions in a room and getting to good decisions wasn't something that was like part of my understanding and mindset growing up.

11:38Okay, great. So we were also just chatting about the things that we wish our parents had taught us and maybe realizing that they don't have all the information. So any advice that you have for people to expand their horizons and average tribe? I'll tell that quick story because I think it's a fun one. A dear friend of mine, And there's a psychologist in Pittsburgh, his name is Michael Mervash. And I've been involved in an experience he created called the Hero's Journey Foundation. And Michael was telling me this story that said, think about you're with your father and you walk down a riverbank and you approach a bridge and you say to him, hey, dad, let's cross the bridge.

12:18And he turns back and he says, what's a bridge? And it was this eye -opening thing that there are so many little things in your life that you wish your parents had taught you. And at some point in time, you get to that. and you realize they didn't teach you because no one taught them. And so we all have these gaps of knowledge and information. And that it comes back to this idea of being willing to ask for help, not feeling like you have to do everything on your own and the power of that. And it's still, by the way, it's still a struggle for me. I do it a lot more than I used to, but my instinct is to just go figure everything out on my own.

12:50Okay. So let's keep going with your career. What happened after you? So I came here and went to business school at Harvard. It was an interesting decision point because I loved what I did. From an intellectual perspective, I understood a lot about investing, but there wasn't thought that was a career. As I mentioned, there weren't any other opportunities. And David really liked keeping things quiet and insular. So you didn't build a network. And yet every money manager I met had gone to Harvard Business School, gone to Stanford Business School, whatever it was. And I had the opportunity to go to Harvard and I jumped at it.

13:22So I came up here, absolutely loved it, and then thought I wanted to pick stocks. I took a summer job with one of Yale's managers. It was the summer of 98. They were value long and high -flying bad businesses called dot -coms short. Amazon went from 40 to 260 the summer I worked for them, and they were short. It was an interesting time. I then went back to school and thought I wanted to dive in and understand businesses better and worked for a little private equity firm that Yale had money with. Learned that sometimes what you're on the outside, even if you're Yale, is very different from what you're on the inside.

13:55Joined another firm that a friend of mine from business school had brought me to, J .H. Whitney. And after a couple of years of feeling like I was not getting it, decided to go back to the manager side, manager selection. And that's when you founded Persia. What happened around then was David had written his book. And I had this obscure background from my five years there through business school a couple of years later. And all of a sudden, people started calling me, offering me jobs. And that was one of the signs that was like, maybe this is a better path for me. A lot of them were early fund to funds.

14:27And it was clear to me that people just wanted to monetize my resume. So I said, well, if I have an opportunity to do that for myself, I might as well try. And had connected a guy named Dan Stern, who had run the Ziff family office and the Reservoir Capital. And he was trying to put together an asset management firm. He was also involved in seeding, which I was really interested in because I love being closer to managers. And for a bunch of reasons, didn't end up doing it with Dan, but he had introduced me to guy Jeff Tarrant. And Jeff and I partnered and created what became Protégé Partners. Great.

14:57And from there, you had an opportunity to rethink what it is that you wanted to do, and fate stepped in and helped you find your way to capital allocators. There's a lot of steps along the way. Protégé was a 14 -year run. I would say that the insight of what do I want to do started around then. I missed an opportunity when I was at business school to take a class that would help you understand your career because I assumed I was way above that. Pretty stupid. But I had read the book, What Calls Your Parachute? And my bubbles were investing sports in people. And that was what led me to go back to picking managers because I was like, what better way can you put that together?

15:39When I left Protege, which was a combination like anything of internal reasons and external environment. I had no idea what I wanted to do. I thought I wanted to go back to multi -asset investing, probably in a nonprofit. But I found I was stuck between a CIO seat and a deputy CIO seat. So my friends, my peers were all CIOs. None of them would hire me as a deputy because they're like, you're at least as good as I am. And then everything had gone through recruiter. Dave Barrett, who's the lead recruiter for Endowments Foundations, is a good friend of mine. And Dave is like, yeah, you'll never get a job.

16:11because hedge funds in 2016 was the beginning of scrutiny. It has like, no, people want private equity. You're a hedge fund guy. I was like, okay. So I did a bunch of consulting and advisory gigs. I had written a book on startup hedge funds and I had appeared on a couple of podcasts from that. And I woke up one day and thought, huh, like I'd love to go run around and talk to my old endowment friends. And that became the bidding in the podcast. And from there, you've interviewed hundreds of people, managers and allocators and others, similar to what you were doing in your seat, evaluating hedge funds.

16:45So capital allocators, can you tell us a little bit about the components of this business that you've built? I wish I could remember who said this to me because it was such a great line, but there's two types of entrepreneurs. They're the ones you think about who have an idea and drive at it, right? They go get money from venture capitalists. They're going to change the world. And then there's the others where life just happens to them. I'm definitely in that latter camp. I used to describe what I was doing as the most reluctant entrepreneur in the world. I was looking for jobs. Tim, please, any PC needs someone like me.

17:17But I started this thing on the side. And I have an executive coach who happens to be my business school roommate. And a couple of years ago, he said, you're trying so hard to figure out what you want to do. Sometimes you just have to say, what's the world asking of you? And I just kept finding, I'd go talk to people about investing and doing it. All anyone wanted to talk to me about was the podcast. Now, the problem with the podcast as a business is it reminded me of the early days of the internet. And I would describe it as this. Here's the business, Sarah. You and I are going to have a conversation.

17:48We're going to share it for free, but we'll make it up in volume. The math of that doesn't make for a great business. So I never thought it could possibly be a business. And then after a couple of years, I had a bunch of other projects I was working on. And when the largest of those fell away, an advertiser called. It was Northern Trust. And they said, hey, do you take advertisers on your show? And I was like, yes, we do. And so that became what looked like a stream of a business. And about three years ago, I leaned into that. Now, it's not a great business. It's certainly not an asset management business.

18:23and it took a couple of years to figure out what's really happening. Why are people engaging and what can you do around that? I've learned that when I chase money, I do a really bad job. There are people who are incredible at commercializing things and that's just not me. So when I pursue my interests in investing intellectually, connecting people, like I describe myself now as a nonprofit investment banker, I just love doing it. And so then things come out of that. So as an example, money managers love coming on the show and they reach out almost as much as if you were at NEPC with trillion dollars at your behest, because why do they want to come on the show?

19:05It's turned out that over the years, it's by far the largest audience of institutional investors. So there's no better place that money manager can come. And they come on and really great things happen for them almost universally. There's obviously some selection on my part that goes into that. So the question becomes, does the listener really care if there's economic value created if I take a small sliver of that? And so the answer turned out when you experimented it was no. So a year ago, we started a sponsored insight series and the pitch became really easy, which is I source all the guests, you've reached out to me.

19:40So if you want to come on the show, you can sponsor a show. And that became a great monetization. and use case for the podcast. So we did that for the first time in spades this year. We call it the Sponsored Insights Series. We'll do 17 of them. And 15 are out. And all 15 have profusely thanked us for letting them come on the show, which my wife says to me, people are thanking you for paying you money, which is pretty cool when you're in that situation. So that was one. The other thing that happens is lots of people assume that because I interview you and Tim, that I know exactly what NEPC is doing with all their money.

20:17Now, clearly I don't, but there are a lot of situations where because you have this network effect of people that are listening, I don't have to know if you can bring the right people together. So we started doing summits this year. There was always convening power around the podcast, but I hate conferences. Yesterday I went to the Boston Investment Conference to benefit Boston Children's and the content was as good as anything I could imagine, but I promise you twice I did fall asleep listening. I just think it's impossible to go and listen to other people talk for five or six hours. I didn't want to do that.

20:52I only wanted to do an event that I wanted to go to start from finish. To do that, it's got to be fully participatory. And the benefit of it is you're bringing the people together and they can find each other. And so that became a business, but it wasn't so much because, oh, I want to be in the events business. In fact, I want to be in the events profession. You think about the difference between the business of investing and the profession of investing, I want to have the best of it. I don't care if it is maximizing the economics, but that's what's happened. And now there's an event business.

21:20There's the podcast, which is a business. I still advise a few managers every now and then. And it's the same kind of thing, just people that I think I can help strategically. And it's a lot of fun to do that. So for a person who had this belief that they could do it all on their own, you've really turned it around and are bringing people together all the time. To be fair, the inflection point in capital allocators as a business started when I hired a few people. And then it accelerated when I started forming partnerships with some other organizations. There's no way three of us, which is what it is, could do an event on our own.

21:52And so it shows, again, the power of not trying to do everything on your own. Yes. Okay. So tell us about Warren Buffett. How did you enter this bet with him? And what was at stake? So Warren's a gentleman in Omaha. huh? So in the summer of 2000, Warren always met students and he had said something a year or two before. It was the first time he was talking about fees and investment management. And he referred to the had rocks and the got rocks, meaning if the clients are the people who had the rocks and the money managers, the people who got the rocks and that the rocks transferred over. And so he was on his pulpit talking about fees.

22:32And I had seen a transcript of him talking to a group of students who apparently he had said something about hedge funds could never beat the market. And a student asked him about that. And he said, no one took me up on it. I must have been right. And so meanwhile, we had been doing very well in our fund. And I thought what he said was a little just too simple to be right. And so I sent him a one -page letter in the mail that was a little cheeky. I reprinted it in my first book to just show how you capture someone's attention. And then he responded. I'd heard he was legendary in how he responded to things.

23:08So I was curious about that, but that was about it. We went back and forth and it turned into this nonprofit that effectively hedge funds against the market. So he picked the Vanguard S &P 500 index fund. We picked five fund of funds for 10 years for a million dollars for charity. The bet started in January 1 of 2008. Big part of the reason why I was comfortable making the bet was because the market was trading in historical high valuations. When that happens, you don't expect the next 10 years will be good. Hedge funds do their own thing. You'd bet against anything but the S &P at that point in time, which that ended up being right at least for a couple of years.

23:43Hedge funds were the thing I understood. So that was the bet. And after 14 months, so February of 2009, hedge funds were up by 50%. The difference in those two return streams, if you look back over the past 10 or 15 years, was never more than 2 % or 3 % a year. And by all intents and purposes, the bet was over after 14 months. It turned out that wasn't the case. Fed came in and I don't think the hedge funds had another positive year since. So Warren won the bet by all. And then he let everybody know. Yeah, that's really fun. Okay, help us think through, we're coming back to the Yale model and your overall investment philosophy.