E417: $20B Investor on Risk, Uncertainty & Adaptability

23:34I'm going to start putting a lot more in. That sounds a lot like a minimally viable product or an A-B test. Like you probe, you get feedback and you start to pile into something. And I consider that to be a form of learning, updating that gives you the confidence, maybe before anybody else, to then go bigger. That function of switching the mindset to initially when you're going after uncertainty, You're trying to learn, not optimize. As you learn, you begin to be able to invest much bigger because you've resolved it. And now you're back into the risk world, only you're the only one with the odds.

24:10You're the only one with the advantage because you figured it out first. Sergey Brin used to say that at Google, the number one criteria, whether a project was successful or not, was whether the organization learned. They were just focused on how does Google as an entity get better versus does a specific project, does a specific product, because they understood what they were building. They weren't building product number 79. They were building Google Inc. And if Google Inc. could get better, if employees could get better, downstream of that would be better products. And he was able to make that tradeoff, and they institutionalized that across the entire company.

24:45There are four parts if you're successful at that. One is what I call sensing. So is somebody at the organization coming up with a new idea? So someone has the idea. Then there's communication. They have to be able to communicate and feel comfortable communicating back in to the organization. And there's no fear for saying, I have an idea. It's different. We haven't done it before. And then the organization itself has to update as an organization collectively. And then the organization has to be willing to act and make a change. So it's like four pieces to it. And all of that is about creating an organization that functions adaptively, which you just described.

25:21Google does that. It's all four of those pieces together. I've really been thinking about this philosophically, just going down this rabbit hole on this playing to win versus playing not to lose. And one of my theories is that it's not actually losing money that people are concerned about. You make 10 million profits. You put in$100 ,000 into this project. I don't think people are worried about that. I think people are worried about betting their ego. and their ego being wrong. I think you're right. I talk a lot inside any organization that I've built. This concept of strong opinions, weakly held.

25:54Part of the reason I want to have a name for it is to separate the decision from the ego, right? Someone has asked me, I'm confused. Strong opinion, weakly held. That's an oxymoron. What does that even mean? No, no. The strong opinion is I've thought about lots of possible solutions to this problem. This is the best one I could see right now. I've looked at the facts. I've tried to look at it clearly, not biased. This is what I think is the best path. But I hold it weakly. It's got to get tested in reality. When reality comes, am I holding on to the idea because I came up with it and it's my ego?

26:28Or am I holding on to the process? Meaning that I want everybody in my organization to attach their ego to being adaptive. If you force people to attach their ego to being adaptive, It requires them to want to change their mind if the evidence changes. Otherwise, they're failing to be adaptive. So there's almost a switcheroo going on there where you make the production function adaptability and not about being right. It's all provisional. We have a strategy. It's working. Eventually, it won't work. Eventually, it'll be arved out. Something will change. The regime will shift. If it didn't work that way, why didn't Coke just sit with Coke?

27:06What happened to Diet Coke and Coke Vanilla and Zero Coke? And I mean, they've tried a lot of things. Why did they follow into like snacks? I can think of lots of examples, you know, historically of ego getting in the way of people not only innovating, but not wanting to cannibalize their own business. And then you just wind up having someone else cannibalize it because you were afraid you attached your ego to your business instead of what is it that we're here to do? Not am I right or not? I have a real problem with that around my companies I build. I just want people that are high AQ, and that means there is no ego on a process to get to the right answer more often than not.

27:43Have an ego. On the actual what the right answer is, reality gives you that answer. You're in a possession of an opinion. Reality is in possession of the answer. How did you solve that on Magnetar? Is this primarily a hiring problem, or can you get people to lower their ego in pursuit of excellence? I do think there is something to this sort of natural selection process. We would have very extensive. I'm not going to say here that we're perfect. We hit 100 percent on the hiring. But I do think there's a lot of people selecting similar type of people. You'll hear people talk about hiring people with certain backgrounds.

28:16The original partners, me, Ross and Dave, we're all athletes. I do think as an athlete, there's something a bit unique about this, which is when you go play a sport, you don't get to have one style and you win against every opponent. It doesn't work like that. You will have to adjust depending on your opponent. And so you have to be adaptive. You can train all you want and prepare, but when you get into a situation, it's not always as it was planned. So I think people who have that willingness to say, I don't have the right answer. I want to get the right answer. I also think that over time you get better at interviewing for it and you can start to sort of test whether people, how do you make decisions?

28:56For example, one of the questions I ask a lot is, would you rather be right for the wrong reason or wrong for the right reason? If I started a hedge fund and it was just, I had one huge trade, I made a lot of money. That would be very unsatisfying to me, right? I want to build a business. I don't want to build something. The money comes after building a great business. I don't want to have a great trade and walk home. I didn't leave that. There was no legacy to that. So do you get people like that? Or are you getting people who are, they want to come in, be given capital. They want to make a lot of money and maybe leave.

29:24They don't want to get involved with the rest of the firm. They want more, how do they want to be incentivized? So we created a culture. A lot of the people at the most senior level were not compensated only on what they did, but on the firm as a whole. They carried that same sort of like, we're all winning. It's all a team. We created a very non-siloed firm because we specifically didn't know where the opportunity was going to be, right? If you're constantly looking for some kind of uncertainty, I go back to one of the first big trades we had going into uncertainty was when energy, when a hydraulic fracking and horizontal drilling came about.

29:57That was a lot of coordination between the energy group and the fixed income group. And if I had had either group sitting going, well, I'll work on it, but it's my trade. Nobody would even attempt that with me around. It would not have been a good answer. I had very low tolerance for that. It was, is it right or is it wrong? Is it good for our clients? We're not going to sit before the game's even started and figure out if we win, who gets the attribution. Like, that's not the culture that I'm building. And cultures could be extremely self-reinforcing after a time. So it's easy from employee 100 to employee 101.

30:29But how did you start that culture from the very beginning? That worked a little like the culture at the beginning of Citadel. And the answer part of it is the benefit of like, it was small. I mean, it was a small trading floor. We were all sitting right there. I mean, me, Dave Ross at Magnetar. I mean, go back to Citadel. I mean, Ken, me, James Jay, Dave Bunning. We were the first four partners there. I think I was employee six or seven. I mean, we sat right next to each other. Everything was there being discussed all out. Was there a luck aspect to that where you just found these six really motivated people?

31:00And then you're like, wow, like everybody has these factors. Now let's look for more. I mean, Ken was the one who found all of us. I laugh a little. Look, when I got to Citadel, it was early 94. Ken had been up and running for two or three years. He was out of his dorm room. But he never, prior to that, he had no experience. I came in. I had been six months in investment banking. James Yeh had a PhD in string theory. And Dave Boning was a football player at Harvard. The collective group of us had, I don't know, count the number of months experience. But Ken did a good job of, well, what is it about these people?

31:33What is the character? I would like to think that what he saw was people who think a certain way. It doesn't matter. High IQ people, it's about how they think, not what they know. And I think that that's a really big distinction. What you know is going to get commoditized. I mean, especially now, I mean, knowledge is getting commoditized. We're going to implant IQs at some point. That's why my book is called The Adaptability Quotient. The most important trait coming up, in my opinion, is going to be adaptability. But when I look back at my history of investing, for me, and when I I look around the people that we had at a cultural level, Ken is incredibly adaptable.

32:08I mean, he's incredibly high IQ, but he's incredibly adaptable. And all of those people there were really no ego. We couldn't have an ego. I mean, we didn't know anything. I mean, it was like we literally didn't know anything. It was hard to have an ego at that point. And so I think when we started Magnetar, that group of us, and I remember the early days at Citadel, there was a sticker that we had in all the little pod areas. and the sticker said hubris kills. And it was literally handed out to everybody. And I think the same thing at Magnetar, whether me, Ross, Dave, or all the senior team of people, by the time you're like that, you're interviewing for it, there was a lot of one degree of separation, I'm going to say.

32:49So in the early days of Magnetar, the first 40, 50 people were either people that had left Citadel. I never recruited from Citadel. That was on purpose. I have good relationship with Ken. But there were a large number of ex-Citadel people that originally joined Magnetar. So I knew a lot of the people I had already known. They had either worked under me at Citadel or otherwise. Of the first 50 people, there might have been 40 people that had come from some fabric. I saw what excellence looks like culturally, and it was easier with Magnetar than Citadel. You were basically creating this culture of excellence.

33:26One of the things about Ken I think is highly underrated is his ability to recruit and assess talent. And he talks about it. He goes on interviews and he says the only competitive advantage for Citadel in the long term is talent. Even Renaissance technology, people think about the greatest quant trader of all time. They think their secret algorithm or their model is the thing that actually is alpha, but it's not. It's hiring the PhDs that create the model. Their model is constantly evolving. and talent is one of these things that's not very sexy. It's not very memeable. No one wants to go and tell their friend at a bar, hey, I just heard Ken Griffin really invest in talent.

34:01They wanna say, well, Ken Griffin double shorted this GameStop with a synthetic trade, but that's not actually the source of their alpha. It's one of the reasons why talent is such an underpriced asset. I took support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, man's staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here.

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35:29Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Check out is fast, receipts are instant. Sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are.

35:56In-store, online, on your phone, or even at pop-ups and everything stays synced in real time. You can track sales, manage inventory, book appointments, and see reports instantly whether you're in your shop or on the go. And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing so your best customers keep coming back. And right now you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. That's S-Q-U-A-R-E dot com slash go slash how I invest.

36:25With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, man staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works.

36:52Check out as fast, receipts are instant. Sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are. in-store, online, on your phone, or even at pop-ups and everything stays synced in real time. You could track sales, manage inventory, book appointments, and see reports instantly, whether you're in your shop or on the go. And when you make a sale, you don't have to wait days to get paid.

37:19Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing so your best customers keep coming back. And right now you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. That's S-Q-U-A-R-E.com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. Totally agree with you. And with respect to Canada, there was a recent article, a New York article, and I think I was quoted in the article saying this, which is, of course, ultimately, the trades are the source of the returns.

37:54But he's not building trades. He's building a business that produces with the right people, the cutting edge opportunities with the right portfolios made out of the right trades. It's just Ken's, he's thinking about scale and that back to that zooming out and abstraction levels. And it always starts with the people. And I'm not sure he would say he picks 100 % of the right time. We had a pretty unbelievable group in the early days. But if you talk to Dave and James, just as same as you talk to Ken, and you go back to those days, there was no, I said, no ego because there was none to be had. I mean, none of us were pursuing, oh, we're here, Ken.

38:29Here's our expertise. We can deploy it. We didn't have any expertise. But isn't that part of like the beauty of it is that it matters when I think it matters how you think, not what you think. In a moment now where knowledge is downloadable, like how you answer questions, how do you resolve things, how do you solve problems, how do you go to the cutting edge where things are uncertain and go resolve that. In essence, my book effectively is, hey, AI is going to outperform you in math and coding. But there's a lot of things in life that are not convergent problems where it can test itself whether it's accurate.

39:04It can go test whether the model works or the math works. But when you go into divergent problems, which is how life works, that's where humans are still the best. How do you figure out and resolve the answers to those problems? That goes to how people think. And one of the reasons I wrote the book is, ideally, if you take Ken or you take a lot of people that worked with me, other serial entrepreneurs I know, my hope is that what I did in the book is hand people a guidebook. But this book is what goes on inside the head of those people. This is actually how they go about making decisions, in my opinion.

39:38Earlier on talked about being intense and pushing people. There's a famous Johnny Ive, Steve Jobs dialogue where Johnny Ive comes to Steve Jobs and says, I just think the team's tired and I can't push them. And Steve Jobs tells him how disappointed he is that he didn't realize how vain he was, how vain Johnny Ive and how much he cared about what his employees thought of him. This was like this big learning lesson that so many people don't push their employees, not because they're good people or they're good managers because they're afraid of their employees not liking them. One of the things that I'm working on personally is how do I get the most out of my employees and how do I push people to be their very best even when they may not like me?

40:21What advice would you have for me? If you go back historically and you talk to people, certainly at Magnetar when we grew big, I think there's been times where I've gotten that wrong or people would sit and go, I was too tough. Can you give me an example? Back in the day when I was on trading desks and you have one of the biggest risk-hard portfolios in the world, I mean, individual billion-dollar-plus positions, I always have had this sense of urgency. It's a long process. Mergers take six, nine months. But you have this question of when is there a marginal piece of information? Who's going to get it that says either the deal is going to go through or not?

40:55And I'm not talking about information you're not supposed to get. I'm just talking about building a mosaic and then getting something that you're like, oh, no. So I always had this very intense urgency. And so I would constantly be on the desk talking to people like, did you talk to the CEO about the deal? Yes. Will this new piece of information come out? Call him again. Well, I spoke to him yesterday. You want me to call him again? Yes. I want to know if that changed something. So I would poke people like that. And there was one time where there was a utility merger. And utility mergers did have a habit of breaking a lot because of the impact on consumers and price increases.

41:30And there was a very, very smart investor who's gone on to build a very large hedge fund. And he was the one sort of primary on the deal. And I remember sitting in one of our weekly meetings and we were talking about all the deals and we were going through it and he was describing something and we were like looking at the deal, looking at the spread. And a couple of us who had been around, he was newer, very smart. And we were talking about it and he was sort of describing stuff. And it was almost like, we were like, there's something missing. Like something's not right. Something's not adding up.

42:02And eventually he wound up saying something. And literally two or three of us that had been around a long time are like, deal's going to break. Like, are you serious that someone said that? Okay, this deal's going to break. It was just something somebody said that was just like, what does that mean from all the experience that we had had? And one of the things that I did at that moment was I, of course, it was a lesson. He was younger, whatever. But I think that we had a, he was too slow in communicating the information back. We wound up getting out of the deal. The deal did break. But what I did early on sometimes on the trading desk is when I was angry, not, I wouldn't yell at the person, but I call it like, I don't want to be ad hominem.

42:41It's not about you. I'm not going to attack you, but I'm going to attack the ideas and the importance of sensing a problem and then communicating it quickly and getting that loop going. We were in a big group meeting and I was unhappy with the pace of how we had a big position. It's going to take us a while to get out. Like the sooner we know that, the better. And I think you'll learn later on that you're probably better off like having that discussion with the person outside by themselves instead of in front of everybody. I mean, he learned a lesson and we all learned more in that little process.

43:13It wasn't what I said, I think in that example, it was probably could have had pulled him out sideways separately and just said, let's go through this for a second. This is what I want you to learn from it. I think when you're on the trading floor, there's just this feeling like every second matters and there is no, like, I can't, I don't time to do it really softly. I just have to get this out and like immediately go right now and trade it. So like there's no, I mean, we just wasted 45 minutes. Like I really could have used this. I don't know if the deal is breaking tomorrow or in a week. I think that some of that, there are probably times where I felt when I was younger, this maybe excessive sense of urgency and transparency, no matter where we were and what we were doing.

43:54And I think part of that is because I'm very tough on myself. I mean, everybody who, if you ever ask people, I'm very tough on myself. And you, when you're younger, it's like shrapnel. It just kind of falls around you. And then as you get older, you're like, wait a minute. I don't need to be overly sensitive. I have to communicate. I'm not afraid to tell people and give people feedback. I mean, probably everybody would tell you I'm not afraid of that. The manner and how you do that. And the reason why that lesson matters a lot is if my point to him was, here's how you have to give me information.

44:21If you're too difficult on the person for how they did it, they're just not going to share anything with you in the future. So you've got to be really careful around that. It was an example probably of how I learned over time. You said another way, your intuition on the urgency of the trade was right, but your intuition on the urgency of the communication of feedback. How much of creating a culture of excellence is hiring versus developing, if I gave you 100 points? I'm going to say it's fairly split, but maybe a little more toward hiring. To be honest, I alluded to my parents being psychoanalysts.

44:56And one of the good pieces of advice they gave me early on that I believe, other people might disagree with me, is your character is your character, but you can change your behavior. And so it just becomes really important. I can teach people AQ. I mean, it's why I wrote the book. And I can't teach IQ and EQ, but I haven't found that the best investors are all the highest IQ people. Helps if you have high IQ, but I always say IQ and EQ helps inside a frame. But AQ says, am I even asking the right question? Am I in the right arena at all? If you have an IQ, you sometimes are the most convinced, best at convincing yourself that you're right when the world's changed.

45:31So it can be a detriment. It was a little like that at the example I gave earlier, like I was convinced that I had, I was doing it right, but I wasn't seeing the field for the right way. There's a part of that, which is you really want to find people with the right character. And look, you can interview, you can do lots of things. You can have an extensive process. Sometimes you find out the character wasn't what you thought it was. And I think there's no room in any organization for people's character that is not right. And so I don't think I can teach that. You might then say, okay, so is the rest about training?

46:00And I think it's split. And that is I can teach you knowledge and you can get experience. But you have to come in with this sort of like what we talked earlier, like not ego, a willingness to learn, a willingness to be wrong. There's sort of a certain clay of a person that not just their character, but their character is evidenced in their behavior that they've done well in school. They're probably confident, but they don't come in assuming they know everything, right? Because this is a bad cliche, but it's true, which is if someone comes in and they're a nice person, good character, but they come in and their cup is already full, I have the answers.

46:38There's no room for them to be taught anything. And in an organization, especially around investing, the feedback loops have to be very, very fast. Ken used to say like a very fat pipe. Like you have to be able to communicate very quickly and be like, okay, got it, got it. We gave that example just a second ago of like, it's got to happen pretty quickly sometimes. To the extent that you're with someone and you have to like massage other attributes to eventually get to the learning, that gets very difficult. So I would say it's somewhat more about what they're like, but then there's a lot of room afterward with the right clay.

47:08Like even if somebody doesn't know anything about what they're going to be doing, if they have the right character and some of the right attributes and openness, I think it's very possible to learn the rest. Can you teach drive? I think drive comes from within. I mean, this is a little bit of the psychoanalyst parent in me. I don't think drive comes externally. And if it does come externally, like it can come externally, like I have to appease my parents, eventually it backfires. Matters why you have it. I'm the sun-to-situ psychoanalyst. I've seen one for quite a long time. A lot of drive comes from your early years, and you have to come to grips and try to understand with what drives you.

47:49Incentives are important for behavior, and I may differ with a lot of people around this. I do believe incentives are important, and I've been well compensated, but I never did anything because it was the money. My drive was just a drive to want to ultimately win. It didn't matter whether I was right or wrong. I think that was innate from my childhood. I don't love the idea that somehow this external incentive is going to give you the right kind of drive. That stuff decays over time, or then you make money. Like, people like me and other people, why are we still around? Or you mentioned Cliff earlier.

48:32Like, Why are people around? They have money. Because that's not what's driving them. It's the result of what the drive creates and capability, but it's not why they did it. I don't think Musk is driven by, he's driven by money only so that he can capitalize his next thing that he wants to do. So it's a nice result to have. It's a metric. So I view drive as something that I prefer to find out. And I do when I interview people every time. I want to go back to the beginning, go back to your family, go back to your childhood. I mean, I'm not, I just, I want to understand what motivates, how did they become the people they are?

49:04I want to know the origin story. I always ask that. What are you looking for from their childhood? I'm wanting to understand how much of perspective they had on their own child going through it. And so there's a lot of people that either they've had trauma. I mean, all of us have had trauma, even my kids. I love them. I've got four sons, but invariably I've inflicted some of it. You think you're not when you get older, and then you just do no matter what. But there's something about that abstraction, like are they aware of it? In their childhood, and even if it happened later, I've reflected on it.

49:39I want people who reflect on things. Why? Because it means that they're looking at it from a different angle and remember - They're able to go to their higher level thinking. Exactly. So in my book, AQ, which is Adaptability Quotient, it's a decision-making process. It all starts, there's three phases, metacognition, simulation, and experimentation. What is metacognition? It's the ability to step out and you are now in the frame, right? You are part of the system. So if you can't separate yourself from the system, you don't think you have any biases. The ability as a child to sit and go, I experienced this, but I also saw it and was able to look at it objectively is the beginning of what I call adaptive optics.

50:22Like if everything you see is through your lens and you don't know your lens, everything's distorted. We talked earlier about I've seen something back to the organization. How do I know that your lens is reasonable? Do you know it's distortion? In other words, you can have all the sensing and signal come back into the organization. But if everybody's got all these optical problems, you don't know. Is that reality you're saying or is it some distortion? So I like people. I'm not saying that I have perfect optics. I just have had an entire lifetime with my parents seeing a therapist to at least ask the question.

50:56And sometimes you have a blind spot, of course. But I want people who ask, who understand there's the world as it is and there's my perception of the world. And that first occurs and it's most impactful. Tell me about your childhood and what you thought about your childhood and how you think about the childhood. I think that ability to zoom out is incredibly important. If they haven't done that, then they're willing to hide, not hide on purpose, but hold something back. And that itself is a blind spot. One of the patterns I've seen in some of the most effective people, we talked about half of it, trauma in childhood.

51:31But the second one is actually you have to resolve that trauma at some point because then it becomes what got you there won't get you to the next level. It ends up sabotaging your relationships, your career, and all these things. And it creates this paradox, which is what do you do with your kids? Do you traumatize them and then give them therapy? How do you solve that paradox? Oh, my God. Have you solved it? That's such a good, deep question. I do think that there is that friction, which I'll call trauma. Look, there's real trauma. I didn't have real trauma. Trauma is a loaded term. It's a loaded term.

52:01I mean, some people have had horrible childhoods. When I hear about it or I learn about it, it makes me hurt. I didn't have trauma like I've seen other people had. But everybody has trauma, right? And I've spent decades trying to understand why did I become the way I am? What was I? I think, for example, my dad had a very difficult childhood and it was a very disrupted family. And I think part of what we talked about earlier, my zooming out ability, was that I saw my dad and I was very aware of him and his childhood. And so in some ways, I got to be a child. But in some ways, I tried to not get in trouble as a manner of taking care of him.

52:42There's a caretaking aspect. Yes. And coming to grips with what did that mean for me? How does that change how I interact with people now? And it definitely does. And I notice it. So now I'm going back to your question, like, well, what do you do with your kids? Well, the first natural thing is I don't want to cause trauma to my kids. Why do I want to? But friction that I had in my childhood was part of what made me, I was so system oriented, right? Like a lot of people, your guests, like didn't have to do much for school. School was a system. I figured I had to game the system. And so everything was a model, a model.

53:17I systematize it. And when you were born into, oh, I saw that. The negative of that, and I tell this to people sometimes, unfortunately, if any of my friends are going to listen to this, is sometimes I'm in the moment and sometimes I'm not in the moment. I'm above it. and like I'll be at a dinner with friends and sometimes I'm right there and I'm enjoying it. And sometimes it's like I'm looking down at the dinner and I don't like that. But it's very hard to stop the framing because you have this fiduciary duty to investors and you're in a constant state of observing and framing. Right. And so my point being that if I got that partly from trauma, what do I do with my kids today?

53:54And my I think the answer is, is that this is the irony, irony where I was coming to, which is no matter what you want to do, they're going to suffer some. There is friction there. So it doesn't even matter if you sit out and go, well, maybe I'll just smooth it out for them. I don't want them to have the same thing. Good luck. There's just trauma no matter what you do in any level. You were talking about an example earlier, and I gave you a work example, but let me give you a one quick home example. And that was that I had a son, my third son, and he had said to me and my wife, he's going to take, he was going into high school, he was going to take Accelerated Spanish.

54:27And I was proud and I called my parents and I'm like, yeah, Nick is going to take this Accelerated Spanish. I find out later because I overhear him talking to my wife that he's not taking Accelerated Spanish and that he had heard me talking to my parents and even at the time knew that I was not telling the truth because he, it turns out, even at the time knew he wasn't taking it. In the past, when I was younger, pre-therapy, I would have been really upset. I would have been like, how could you listen to me say something? It was wrong, whatever. I didn't. I stopped. I paused. And a couple of days later, I was driving him back from a sports practice.

55:04And I said to him, you know, Nick, I want you to know that I know you're not taking accelerated Spanish and that you heard me talking to my parents. But I'm not mad at you about that. I'm mad at myself. I'm at it myself because I've obviously done something that made you uncomfortable telling me. And this isn't about you. This is about me. So I want to talk to you about that. How can I fix you being comfortable talking to me? So he had trauma, but that's an example where, well, what was it that he felt uncomfortable talking to me? He told my wife. So I don't want a relationship like that with him.

55:42It doesn't mean I'm not going to be demanding or want him to succeed, but I have to have a relationship for anything to blossom from that. So I guess my answer was, I tried. I'm going to make all these changes. I'm going to do it better. It's not that easy to do that. You asked me what I thought. I'll give you my two cents. I think heavy localized trauma is a solution. So I have my first kid expecting in October. And I'm thinking about how do I take him to third world countries so that he could have eight weeks of a difficult experience so that he could internalize that for the rest of his life.

56:16I'm definitely going to take them into investment banking, which I think is like two years of like military service. I think sports is a great one because you can't shield them from wins and losses. I know in the U.S. now you have participation trophies and all these things. But real sports where there's winners or losers, I think that's a good way to localize the trauma. I also think there's a greater question, which is, should you be optimizing on excellence or do you just optimize on your kids being happy? and not having trauma. That dichotomy is something that I've had a lot of dialogue with my kids about.

56:51Because when they were younger, I would maybe very open, transparent. We traveled all over the world and we'd ask, my oldest son especially would say like, well, at one point I said to him, what do you want? What do you want out of life? What do you want to be? Whatever. And he said, I want to be happy. And I literally, like, I didn't say anything. I went back to my, what do we say to that? Like, how are we going to, what are you going to say? No. And I don't know. I forget how we got it. But at some point later, a year later or something, he's like, I want to be happy. But obviously, like, that doesn't mean, like, do nothing, sit around and be happy just, like, goofing around.

57:25Like, you have to have a family. You have to make money. You have to. So it was like turning into a constrained optimization at some point pretty quickly. This is the advice I've given my kids. And I said, you have to have a passion. I don't care what it's for. You don't have to go into my career. But life without passion is being the keeper of your own decisions. I ended my book at the very, very end. There's a poem at the beginning and a poem at the end. And the poem at the end, Invictus, is sort of, I'm the captain of my fate. It is up to me. And so I can't put something there for you. You have to decide.

57:57But a life without integrity, but also just passionless. So I always have said to the boys, you have to be the best you can be. I've never been number one in anything. I think it's really difficult to be number one in the world at anything. And what I've said to them, I've been very clear expressing to my, we're getting to family now, but my utility curve is the following. I want to be a good father, a good husband, a good friend. I want to be successful at business. I want to be in physical shape. I want to have spiritual or mental. So when I think about it like a trading, the microstructure at any given moment, I might be too much on one, but I'm very aware of that.

58:33But I want to be as best I can across the board. I could have been even better at work and richer. I would have sacrificed something that for me, I was unwilling to do it. I was personally not willing to do it. When you look at times, you know, I was at Citadel, then I left and I did Ironman triathlons. That was like an all-in thing. So I've tried to convey that to them as like, you have to figure out your balance and decide what matters to you. You don't have to meet my utility curve, but it's not enough to have none. It's not enough to have no passion. Kids are also, they observe behavior versus your words.

59:09So a lot of people think, well, this is what I'm going to tell my kids. It's not really how behavior and behavior change works. It's their perception. One of the greatest things you could give your kids is this understanding of self-actualization and the fact that there's ups and downs, but how rewarding it is to just pursue excellence for its own sake. just being excellent at something. It doesn't have to be even for money. One of the things that's really missing in the U.S., and of course, U.S. has it more than almost any other country, but there's a lot of complacency, and this is where the immigrant culture really helps the U.S.

59:44People come in, and they just want to be their best self, and there's a lot of complacency in third, fourth, fifth-generation Americans. I think just teaching your kids, pursuing excellence for its own sake, whether it is running a marathon or whether it's starting a business or whatever it is, that itself is just so rewarding, even if there's a lot of hiccups along the way, and even though it could be challenging. I think that's well put. I think there's one other thing that we didn't talk about that should have added, and that is that I think this is one of the most challenging times to be young.

1:00:17I grew up my formative years, I was born in the 60s, but I was a teenager in the 80s. No wars, no digital. It was an incredible moment. I think great music. That's me personally. But I think now about the environment. And one of the things that I would be remiss if I didn't say is, and it's in my book, I talk a little bit, ironically, there's a pretty well-known sociologist, Pierre Bordeaux, and my mom actually wrote a great paper. And I was writing my book and she shared it with me about psychoanalysis and what this guy had written. But here's what the basic gist is. When I was younger, The ecosystem, the environment was your parents, your teachers.

1:00:55It could be your religious organization, your local street, the neighborhood. That has drastically changed. What Pierre Bordeaux talks about is habitus. It's the environment in which. So now part of the education and growing up your kids are getting is digital. We just didn't have it before. So social media has created part of the environment in which, if you allow your kids to have access, in which they are raised, not by you, but by something else. And I think that what we did in the world, in the U.S. and otherwise, a lot of that was an act of omission. People just started using it. There was no containment of it.

1:01:36A lot of it was driven by engagement. Well, engagement in social media meant the extreme opinions were more engaged, and therefore we polarized people by giving these really wide opinions. That's why we at Northwestern created the Lidowitz Center for Enlightened Disagreement, which is if you actually do the analysis, people think the other side's like this, but they're really not as far apart. Like 3%, right? 3 % from each side are actually crazy, and people think it's like 70%. Exactly. The now what's happening, you know, remember, like algorithms there highlighted the extremes. I call this the double whammy.

1:02:10What's happening now? AI now, you go, you get an answer. What does it give you? The mean. It gives you the best expected answer out of the distribution. So wait a minute. Emotionally, you're getting me charged up by going to the tails. Cognitively, you're giving me the mean. It's also optimizing on your satisfaction, not on the truth. I wrote it into my clawed that it's to basically seek truth and not seek my personal happiness. Yeah, to reprogramming. Yeah, you're programming in. You want to steal, man. Make the best version of the opposite argument for me, which, by the way, is exactly what you're supposed to do.

1:02:49Because what does my book argue? My book argue is you have these two tools. You could use them to augment or atrophy. How do you augment? Give me things I didn't think about. How would I expand the set of possibilities as opposed to going, just give me the answer. Tell me what you think the answer is. What did you that just narrowed the set to one, right? Even back with Google, even if you only went one page deep, you took the information, human information, and you had to synthesize it. AI now synthesizes it and generates. We're now in the post-human only narrative, right? There's going to be way more written material that was not generated by humans now going forward.

1:03:26So back to what are we doing in the environment that the kids are growing up in, I feel like we just went through this 20-year experiment at social media that relates to how kids are raised. Two of my kids were digitally native. Two were not. There's a difference in them, right? Two didn't grow up with a flip-flowns digital on, and two of them grew up with whatever the flavor of the day was on social media. Recognizing the system that you're parenting in matters because there's the part that you can control. And then there's the part that, do you want your kids to use social media by active commission?

1:03:57Here's how you should use it. Here's how I would like to see it used or maybe depending on the age, prevent them or do it. Or do you want them to just use it however they do? And how is social media good? Connect to somebody you didn't know before. Organize a meeting of people and cooperation you couldn't do before. Those all expand the set. But if I turn around and sit and say, instead of a date, swipe left, swipe right. Instead of going out with you, I'll go on a trip and then you thumbs up. We've got this, instead of connection, I gave you attention, the models. It gave me back, supposed to give me back connectivity.

1:04:30But it gives me, we have more loneliness. It gives a very thin version if it's used to atrophy. It gives power if it's used to augment. AI is the same thing. My book is saying, here's how you use it to augment. You got to do some work, but it's an incredibly powerful tool if you do that. You've had one of the most remarkable careers in finance from Citadel to starting your own firm with Magnetar, growing it to$20 billion to now running one of the top single family offices. If you could go back right before you had joined Citadel and give yourself one timeless piece of advice, what would that be?

1:05:02And I know this runs almost counter to the trading side, which is just that is to realize how young you are and that there's time. I think I did maybe growing up in my childhood and trying to appease, and a lot of people who go into the best firms, you know, Citadel was incredible at the time. You're straight age, you do everything right. And there's this fear like, I don't want to get something wrong. I don't want to get something wrong. And Ken was never like that. He didn't stop anybody from making mistakes. It was more in me. And I would say to myself, like measure this over a long period of time.

1:05:37I was not efficient. I was very much sort of everything was perfectionist. And I think as you get older, you realize you would have even better if you could work the same amount. But where do you work, right? I almost just wanted to cover everything because I didn't know what was important or not. I feel like I would have said to myself, absorb a little more about optimization and not so worried about every little thing. Some things, I call them shallow failures. Some things just don't matter. And spending time on that is actually a waste relative to this other thing that you should be spending time on.

1:06:10I wasn't that efficient with my time. I worked a lot trying to do certain things that at the end of the day didn't matter. And then the other thing that I think that was a really important lesson for me was that being fairly academic and then going in and being in risk art and being in market neutral strategies, it is very easy to sit and say, I don't care what happens in the macro world. How do people who are macro traders do it? I don't know. I mean, how many bets do you get to make a year? Like, I don't think I could do that. Or you only get a certain number of bets a year. I was always into this.

1:06:44Let's have thousands and thousands of bet. You know, sharp ratio is edge times the square root of N. It was the long, short equity business I built at Citadel. It was that model. And it takes something like a 2008 where, where and I realize now, just zoom out, when regime changes occur, all that safety you feel in that model that this is how things work doesn't matter. So it doesn't matter if you can predict whether that macro world's going belly up or not. But it has to be in your decision tree with some probability. You don't get to assign it zero. And so the way I phrase it now is I have a reverence now.

1:07:20I lived through the seven rate increases in 94, the LTCM and Russian crisis in 98, 2000, 2000, 2003. And I will say this, all those things, the first 100, I think it was nine plus years, so 108, maybe it was, I think it was nine years, three months. So let's say 111, 110 months. I lost money in five and through all those crises. And so when I got out and I did my Ironmans, I was thinking about Magnetar and we went a slightly different direction focused on uncertainty. But it was pretty easy at that point to go, well, I did pretty well during all those environments. All the models had worked. And then you get to 08 and you're like, sometimes they don't work actually.

1:08:01And that was that perspective. I just didn't have it. I now look back at myself and go, you were indignant. You were like, I'm right. I got all the details. I've got all the math, fresh math major at MIT. And I'm like, I figured this out. And it's like, no, no, you haven't figured it out. I would just want to say, like, have more respect for the market is what tells you you're right or wrong. You don't get to live within a world that it's a boat in the sea and no matter what size the wave is, you're fine. No, that's not how the world works. It goes back to what we've talked about throughout the entire interview, which is have a beginner's mind.

1:08:33No matter how successful and how much validation you get from the market, you have to always go back to this beginner's mind. You said it really well earlier. Everything you think you know is provisional. It's all opinions all the way down. It might be an informed one. It might be working for a while, but it's on loan. It's always on loan. And instead of that being a problem, uncertainty is amazing. Everybody hates it, but uncertainty is possibility. Uncertainty is knowledge. I mean, go back to my nerdy self, like the father of information theory, Claude Shannon, would say, if you come to me and I say what you already know, it's of zero nutritional value.

1:09:11You can't possibly learn from it. If I say stuff that's completely orthogonal to what you think, we may disagree, but it has the most potential energy to convert into something you might update with. Right. If you sit around and go, I can't be updated. I got it. I can't. There's no way to improve in any way. So I just keep thinking about that mental image that when you say to your AI, steel man, tell me the opposite. It's the most possible you can learn. If all it is is a psychophant, you can feel better. But it's like eating bad food. There's no good thing going in you. It's just going to make you sick later because at some point it's going to come back and hurt you.

1:09:53I think that it was true in the math of information theory, and it's true in the world right now. It's just we go into this tribal vertical social media. We try to find people who tell us we're great and we're et cetera. And at the end of the day, like that long term is a massive negative. If you come in every day to learn and have a better model for the world, especially one that's changing this quickly, I consider that to be that's my excitement. Like, what did I snap? Like the matrix. I just got uploaded a new model for that. I get super psyched. I get really excited for that. I like this has been an absolute masterclass.

1:10:25Thanks so much for jumping on. Thank you. Thank you so much for having me. I really enjoyed it. If you enjoyed this conversation and want to hear more conversations with many of the world's leading investors, subscribe below.