Episode 15: Felix Zulauf - Founder of Zulauf Consulting

0:00This week for my 15th episode, I had the privilege of speaking with none other than Felix Zulov, a legendary macro investor and the founder of Zulov. Consulting. With over 40 years in the industry, Felix has earned a reputation as one of the most insightful and influential voices in global markets. He began his career at Swiss Bank and later joined UBS, where he became head of global asset management. In 1990, he launched the Zulal of Asset Management, managing billions of dollars and consistently delivering strong returns. A longtime member of the Barron's Roundtable, Felix is known for his contrarian thinking, global perspective, and ability to anticipate major market shifts.

0:42In this episode, we talk about his early days in banking, starting his own fund, his mental framework, the biggest market calls, and advice for the next generation. I hope you enjoy. Thank you for coming on the podcast, Felix. I really appreciate it. My pleasure, Amir. Thank you for having me. So I want to start at the beginning, your childhood. But what was your childhood like and where did you grow up? I grew up in Switzerland in a middle class family. I had an older sister and we have been a happy family and it was a very happy youth time. We didn't have much, materially speaking, but we were happy and I had good friends and a lot of fun.

1:30And I always had to work hard in the garden of my parents. and for other things. I never got anything for free. I always had to work. So that was my childhood. But it was a very happy one. And during your childhood, did you have any idea of what you wanted to do after college or as a job? Not really. I mean, one of the dreams I had was to become an ice hockey player. and I recall that I think I was seven or eight years old when I wrote on a piece of paper you do not have to look for me I'm on my way to Canada to become an ice hockey player and I put it next to my bed and I went to sleep wanted to get up early and in the morning when I woke up my ma 'am was sitting on my bed and smiling.

2:34And did you think there were any specific experiences during your childhood that really shaped your character or was it all kind of pretty constant? I think I was taught all the good values to be trustworthy, to be credible, to not lie, to be honest, to work hard, to get something and to be kind to other people. The typical classical values of a middle class family in the 1950s. And I want to kind of talk a little about your, move on a little bit to your career. So you've had quite a prolific and long career. And if it's okay, can you take us through your career path? So if I understand correctly, you came out of college and you originally went into commercial banking and then fast forward to today what were the places you went along the way were the job you're the long way where the steps all the way from your first job until now first of all i dropped out of college a year before university i had to repeat a class because school was always easy for me i never had to learn until i missed it you know i had to learn and and it was the time when I was 18, 17, 18 years old, I discovered all the adult life experiences and I was very wild as a young guy.

4:04And so I had to repeat the class and I said, this is an embarrassment. I don't do that. So my parents asked me, requested that I learn a decent job profession. and an uncle of mine told me that he dropped out and he went to a bank and when you go through a bank apprenticeship, you can do everything afterwards. In those years, bank was still a decent job. And so I went to a bank, asked for an apprenticeship, a shortened one, which they granted and banking was pretty boring. I didn't particularly like it until I came in my round from department to department to the investment department where things were moving.

5:00You know, stock prices went up and down and interest rates went up and down. And I asked people for the reasons for these ups and downs. And from all the answers I got, I realized that they had no clue. So I started to read myself. I started with stock market newsletters on the stock market. Then I started to read research, which was not easily available in those years. You know, institutional research came to life only in the very late 60s, early 70s. So that was those years. and so I started to read books and I read books by the truckload. I ate them, so to speak. And then it was clear to me that I wanted to, after the apprenticeship, I wanted to move to the trading department in Zurich, which was another city, which was the center of the Swiss Financial Center.

6:10And I achieved that. And then usually after a while, they send young people to the French-speaking part and then to the English-speaking part to improve your language skills. And I went to Paris, worked for a stockbroker. And when I came back, I went from trading to portfolio management. I requested that. And then I went to the U.S. and I always requested specific training. I didn't just go there and did what they taught me to do. I always specifically requested what to do. For instance, they wanted to send me to the bank branch in New York and that was commercial banking. I said, no, thank you.

7:01And then they said, what do you want? And I said, I put the whole program together for myself. So I wrote letters in the name of the bank, of course, and with the backing of the bank. And they were a great commission generator to all the major research firms. And I requested being trained with Ed Hyman in economics, with Bob Farrell in market strategy, with Stanley Shopcon and Salomon Brothers in equity trading and things like that. So I probably had the best training program in Wall Street ever, you see. And it was like a kid entering the candy store for the first time. And I had a great time.

7:51And many of those people, the legends of Wall Street, so to speak, are still friends of mine when they are still alive. And after that, I went back to Switzerland. And in Switzerland, they gave me a job I didn't like. So I told them, listen, I do not like this job. I should sell Swiss equities to the petrodollar owners. And at that time, Swiss equities, you could sell maybe five names, five of the blue chip names, and that was it. And I said, I don't want to do that. I want to work either if it's only one market, I want to work the U.S. market or I want to work the world, the global markets. and they said, you should be quiet and not always request something because I had an obligation to pay two annual incomes if I left the bank before two years after my return.

8:57And it was sort of blackmailing and so I sold myself to another bank, to UBS. they hired me and paid that money. So they bought me out, so to say. And then I managed the U.S. equity fund and I did very well. And then we had an organizational change and all the money managers had to be analysts at the same time. And I hated to be an analyst. And so the boss of the department said, join me as my assistant and you organize everything in the department and I do the markets and after six and and and and you run the all the international funds yourself those were two or three international funds and after six months we had a discussion and he said listen it turned out completely different you do the investment strategy for the bank and I do the organization running the bank and let's let's keep it that way you do it well so i became the the the author and and speaker for the investment strategy of ubs at the age of i think i was 31 or 32 or something like 31 i believe uh without the university degree which could not happen today anymore.

10:32And it was strange, but it was fantastic. I loved it. And I did a lot of crazy things in the market. And that's why my career went on and on. And then I took over the institutional money management department and so on. So that was my career. And then I realized, of course, that I was a you know I grew up in the trading department so I had an investment mentality with a pronounced trading instinct so to say and when I saw big risks or big opportunities I went extreme in my management because in those years mutual funds and institutional portfolios did not have the same constraints as today. They just said, you do an equity account or you do a mixed account, a balanced account or something, and then you did it.

11:38And I realized that within the constraints of the bank, the supervisors and all that, I didn't like that. They were looking over my shoulders all the time. And when I went crazy, I had a phone call. And I remember a supervisory from the Swiss banking institution called my boss, because I took over a fund for commodity related investments, equities in general, at the peak of the commodity boom in 1980. And I said, oh my gosh, what do I do? So I went to 70 % cash and 30 % in bonds of commodity companies, which was very unusual, of course, and they didn't understand it. And I did things like that all the time.

12:38And this is how I got invited to Barron's Roundtable and things like that. So I didn't like the constraints and that's why after 87 which was the crash of 87 where i sold the all the institutional accounts down to zero equities before it happened i realized that my personality and character and investment style was not suitable for a large organization i had to go on my own to have the freedom to do what I thought was right. And I was always long and short. You know, for my own account, I always traded both sides. So then I set up my own company and with a few accounts, which was difficult. And then after a while, I realized that was too much work for individual accounts.

13:37So I turned everything into a hedge fund. and then a second hedge fund, and then a third hedge fund. And so I grew the company, and we ran long short with some leverage, but not much. We used, perhaps at times, we used 30 % leverage, and that was all. So, but we were long and short. We could go net 100 % short and things like that. So I like that much better, but it's a much more challenging environment. Yeah. And when you were starting Zulaf Asset Management, were there any struggles or obstacles you faced in the beginning? How did you build it into what it was? No, that was difficult because I had no clients.

14:33uh i i was working on the market side and not on the client side and therefore i i mean i knew some clients but um many of those who said they would join when i asked them they didn't show up you see so I had to go out and knock on doors and gather assets. And, you know, I did it in different ways. I did it once. I went to the major institutions that I knew, and there were a few. One gave me$50 million, and the other one gave me$50 million. And so it added up over time. But what brought me forward more quickly was I became a sub-advisor to large organizations. So, for instance, for a large US investment bank that is now a part of a major bank in the US, I managed a fund for European stocks, and I could go long 100 % and hedge 100%, but not short.

15:50and I had to do all the marketing myself. I mean, they supported me, but basically once a year, I went on a round trip around the world to manage all those offices in South America, in the Middle East, in Asia, in all of Europe, et cetera. And I told them how I did it and what I expected. And so in a very short period of time, they expected about 250 million after a year or so and after a year I had 1 billion which in the late 90s was a lot of money so it was fun I liked I liked the traveling I was young I was aggressive I liked learning more about the world and seeing the different places and and I like that it was fun so and you were and you were a trader by training but you kind of had to learn sales once you started your own firm what was if you were to give me and my audience a lesson in if we started our own fund and wanted to get clients what would you say was the most important lesson to get clients to invest in your fund i think you have to be authentic as a person You have to be honest so that the buyer, the potential buyer, sees that he could trust you.

17:26And you have to explain how you do it, the whole process. You have to explain the process, how you do it. And then later on, you have to do according to what you said and you have to explain all your results and what you did right and what you did wrong, particularly what you did wrong. And you have to be very honest about that. And I think if you are humble and you explain your mistakes and that you probably didn't stick to the discipline or you didn't, you did overlook something important, you have to tell them. You have to share that with them, that you come across as the honest guy that you are.

18:14You know, if you try to hide, that doesn't come across very well because people realize it and they see it. And how was the kind of investment approach and market analysis of Zulaf Asset Management different than a lot of the other asset managers out there? and how has it changed from when you founded it up until when you left it and also now into Zulal Consulting? How did your analysis change? I don't think that the general approach has changed much. It is more refined and seasoned as I am. I'm more humble today than I was when I was 35 and probably a little bit less aggressive than I can still be aggressive at times and put on an aggressive trade.

19:12But I do only enter a position when I have a strong conviction. I'm at the age where I do not have to play. I only play when I see that the odds are turning in my favor. Other than that, I leave it. And it's basically a top-down approach. You know, I'm trying to understand the political setup, the zeitgeist, so to speak, and where we are in the pendulum. The pendulum in the zeitgeist goes from the left to the right, etc., from conservative to progressive. And you have to understand where you stand in that swing. and when you understand that you understand the political process and the results of the political process much better and then you analyze the business cycle a classic business cycle analysis and these days you have to understand the distortions to the business cycle due to the growing interventions and manipulations by the authorities so it's not as clean a business cycle as it used to be in the 60s and in the 70s and then from there you deduct you deviate you deviate what it means for interest rates for currencies for capital flows and what it means for bonds and equities and the different sectors whether you want to be in more defensive groups or whether you want to be in more deep cyclical groups and things like that.

21:03And in what currency you want to be, whether you have to hedge the currency or not. And then commodities also. Commodities play an important role. And this is no different than it used to be 40 years ago, but it is more refined. And I think I see more pitfalls than I saw then, which makes the job actually more difficult. As a young, you know, when you have a bull market, you should not use a 60 or 55 year old portfolio manager. because they are conditioned by the previous structural bear market. So what you need then is a young greenhorn guy who wants to be bullish and like a young horse and you can let them go.

22:01And so you have to know where you stand in long cycles and what is requested in terms of abilities, etc. And this is how you manage portfolios. And when looking at the relationship between politics and economics in the markets, which interactions are you most aware of or do you look at the most to kind of monitor? Well, you know, the political factors vary and change. And there are always a few topics that are coming to the surface or are at the surface, and you follow those. Over the last few years, it was the war in Ukraine. You had to understand why there was a war, who provoked it, who attacked, how far they want to go, how it interacts with financial markets, what reasoning or what fallouts it will produce for domestic policies in domestic politics in some countries and things like that.

23:17And nowadays, it's trade. Trade is the most important variable right now. And I think the next one issue will probably be capital flows, because the change in trade by the Trump administration and and and they go back and forth and they change here and there but it's a change and it's a similar change of the magnitude of when the wall in berlin came down or when uh breton woods was terminated or when the gold standard was terminated this change is the end of the World Trade Organization as we knew it. And it is therefore the end of the globalization waves that we have enjoyed over the last 30 years or so.

24:15So it's going to be a very different environment, much more difficult for entrepreneurs and corporations to steer clear. and this will be the most important topic over the next few years. I think it's going to be a few years. And obviously, this is changing as a backlash, the geopolitical order, and it is changing the importance and relevance of the US dollar as a reserve currency. And this is changing capital flows and this capital flow will change in principle the level of interest rates in the US and things like that. You have to understand the interrelationship and what one change means for other items.

25:19And you talked before about being contrarian and making contrarian calls. What's your mental framework or methodology for maintaining conviction in your ideas when it differs from the consensus? When everyone's going one way, you're going another way. How are you confident? How do you stay confident? How do you stay convicted? Well, first of all, I think it's part of your personality. You have to have a strong contrarian gene if you play the cycle, the ups and the downs. and you have to feel comfortable because at the top with a bearish view, you are very lonely. You are very, very lonely and you have virtually nobody to speak to.

26:03And, you know, you have thoughts like, oh, am I the dumbest guy on earth on the planet? Or what's the matter with me? You know, am I wrong? So you have doubts and you have to overcome those doubts. And the best to overcome the doubts is to have a discipline, to have a working discipline. I have a working discipline aside from my day-to-day work. Every weekend, I go through about a thousand charts of money market rates, bond yields, currency rates in all the, let's say, the 30 largest currencies. and I go through the equity indices around the world and the sector indices and then the largest 100 stocks in the US, in Europe and in Asia.

27:09And I check them all technically. I mean, I work a combination of fundamentals to understand the business cycle and where we are. And I use technical analysis to support my analysis or to tell me whether I'm wrong or not. And analyzing the health of the market, the health of a trend, etc. And this discipline that I have been doing for 40 years, since the computer is available, I do this discipline for all these time series on a long-term, medium-term, and short-term basis. And it takes me about five hours every weekend. And that tells me where I might be wrong. I see where the market is doing what I expect it should do.

28:09and I also see where the market is not agreeing with my investment thesis. And then I have to dig where the market does not agree with me. Then I have to dig deeper and go after what could be the problem and why is it not the way I thought it is, etc., etc. And then you go to the ground of the problem. So this is discipline and it's hard work. You know, it's hard work and everything in life. You have to have a certain talent, but you have to have the passion to be able to put up hard work. Yeah, because five hours every weekend is it's a weekend. Five hours every weekend is tough. And it is at this point in your career.

29:00Take us through kind of your day. What a day for you looks like. And also, how do you consume information? How do you get your information? So what newspapers do you read? Do you read magazines? Do you listen to podcasts? What does your information look like and what does your day look like? Okay. Well, I start the day I get up before seven. I then go for a walk, for a fast walk for about 45 minutes to an hour. And then I refresh and have breakfast. and then I go to the office and I arrive at the office at nine or so. And then I read the newspapers. I just glance through and I glance through to see whether there is an article that could be of interest and something that would not fit into my investment thesis.

29:52Something that fits, I do not have to read in depth, you know, but something that doesn't, I have to check. So it's like science, you know, you check and whether it's when it's okay, you go further. And when it's not okay, you have to go back to the drawing board. And I read the usual newspapers, Financial Times, Wall Street Journal. I read the Swiss leading daily I glance through New York Times maybe at times I look at the push news push up news and Bloomberg I go through some Bloomberg reports and then I start working on the trading desk or I write the report and I put together an idea And when I go on the walk in the morning, I either listen to a podcast, to an interesting voice, or I prepare a speech or a report I want to write and sort of put together the structure of what I want to say.

31:10and the same in the afternoon and then there are phone calls and talking to clients, to friends and watching the market and that's it and then go home and I must say in the old days I went home and in the evening I read for another three hours research material I cannot do that anymore I don't have the energy to do that and I realize that it wears me out so I can read for maybe an hour and then I relax I read a book or I watch a movie or I watch a political debate or something like that just to relax and then I go to sleep at midnight. Yeah. And two last questions. So over your entire career, what do you think is the most important investing lesson you've learned?

32:19In one or two sentences, the most important investing lesson you've learned. Never be cocky. Stay humble. You may not know the truth. You may make a mistake. You have to have dog losses in place. you know that's the last thing you you you have a certain procedure but there is a fail-safe top loss that you have to have in place otherwise you know when you lose big it kills you psychologically and then you are mentally off balance and your decision making process your analysis is not as good as if you are mentally balanced. That's why it is important just from a mental standpoint and from a monetary standpoint, if you are in the performance game, which I'm not, not to the same degree.

33:16I am in the performance game for my subscribers, but I'm not in the performance game for the portfolios I manage, which is my my own money um so um when you lose big to make it up is very hard and uh and i had uh you know the probably the biggest loss i uh i ever had was a trade as a as a 30 year old chap when i thought I know it all. And I remember that. And I forgot the stop loss. And I finally killed the position when I was down 50%. So this is a horrible experience. And everybody who speculates in the market to place the market aggressively knows the feeling in your stomach when you're wrong.

34:12And when you begin losing money, when the market turns against you, it's not very pleasant. Yeah. It's not very pleasant. And trying to avoid that as much as possible is a benefit for your life, happiness, and health. Yeah. And final question. We asked all of our guests this. Outside of investing, what is one piece of advice you would give to a high schooler today? Like life advice outside of investing? well try to figure out where your passion is where your interest is where your passion is where your talent is usually where your talent is that's where your passion is and and when you figure that out go for it and with 150 percent because doing something in life that is a passion never feels like work.

35:12It's a great privilege to do something in life that is a passion, your fun part of life, a hobby that is your work. You know, not many can say that, but when you find that, it's a great blessing. It's a great blessing and privilege. Well, that's all for today. Thank you, Felix. I really appreciate you coming on. Thank you for taking the time and I really enjoyed this conversation, so thank you. So did I. Thank you and all the best, Amir. Thank you. Thank you.