Lee Ainslie - Hedge Fund Maverick - [Invest Like the Best, EP. 341]

24:20There are so many sell-side reports. You could use the internet for days and days and days. There are podcasts like this. There's a lot of discussion about stocks on TV. It's a very different world. So some of the basics, back to your question, I think are still present. Can you have meaningful dialogues with customers, with competitors, with suppliers? Can you triangulate what you're hearing from a company. This is more challenging these days than it used to be, thanks to RegFT. But we like to talk to several different members of management, look for consistency of answers. We like to talk to the same members of management over time, look for consistency of answers.

24:58But now we also have data that helps support what we're trying to understand in terms of business trends. So we first went down the path of investing and trying to develop a quantitative research effort in 2006, which is still a really important part of what we do. But in 2015, we turned that talent to focus on alternative data. And can we recognize, or do you want to call them alpha signals or KPIs? Are there ways of tracking different elements of a business through data? That's not perfect, but it gives us some greater clarity. And after working on this for almost eight years now, we can touch every single industry in which we invest in terms of using all that to give us some insights.

25:38Now, to be clear, in certain industries, it's far more effective than it is in others, but yet it helps us have an indication of different trends and all that gives us a slight edge. How do you think about the different edge that you can source from? You talked about informational already and how that's evolved. There's analytical, there's behavioral, there's a couple of different ways that you can have a persistent edge. How do you answer that question for Maverick itself, the business? How do you get and maintain an edge versus your competitors when the world is so competitive and full of information and fast and connected and all these things?

26:15It seems like a daunting task. So how do you think as the architect of this system, back to your system engineering days, about that edge inside the investment business itself? I've always felt investing is really a matter of doing everything you can to slightly improve your odds. In other words, you're not going to find this magic algorithm or magic bullet no one else has thought of and aha, I've got this huge advantage now no one else has. But it's, can we do a slightly better job of gathering information? Can we do a slightly better job of interpreting information? Can we do a slightly better job thinking about risk?

26:50And all those little slightly betters, I think, add up to be our core advantage. So just to give some examples, we simply only have three to five investment positions per investment professional. I think you'll find that ratio is a fraction of what you'll see elsewhere. So right there where we're talking about a level of due diligence, it's quite unusual. You combine that with the fact that we have much longer holding periods than most long short funds. On the long side, we average 17 months. On the short side, it's 13 months. So people focus on fewer, fewer positions and yet interacting with those management teams for a longer period of time helps us not only improve our understanding of that business, but again, developing real dialogues with those that can give us insights into that business, competitors, suppliers, customers.

27:35We use quantitative research in several ways. Every portion of the investment cycle is informed by quant at Maverick. And then even outside of all that, over the years, we used to hire people to go count cars in parking lots. Now we do that by using satellite imagery. Remember one company in particular, which was extremely successful short, ordered something from them once a week, only so we could look at the PO number, which told us how many POs they had processed in the past week. There are all these things we've done to try to have a slight advantage in our objective. And I can't say we've always fulfilled it, but the objective has always been to never be at an informational disadvantage to another public investor.

28:16Because our depth of resources, because how long we hold positions, There's really no excuse for that to happen. Now, it does, obviously, but to me, that's one of our most important differentiating advantages. I combine that with the depth and experience of the team. So the entire investment team is 29 individuals. On average, they have 14 years of experience. Importantly, 10 of those 14 years have been within Maverick. It's a team that has worked together for a long time. And if you look at our six senior decision makers at Maverick, 21 years to experience, 16 of those years within Maverick. So it's that talent, that experience combined with a better set of tools and hopefully a better set of information than our competitors that leads to what we hope ends up being superior results.

29:03You said earlier in the Oracle example that a lesson you learned early in technology was that you tend towards standards. And once someone achieves that default mode, if you will, the power that the business generates is enormous, as Oracle did. Are there other features like that that did or still always get your attention as it relates to an individual business, features of a business that are not sufficient to buy the stock or belong in the stock, but just get your attention in a unique way? I think there's one magic bullet, but there's several different aspects that can be very helpful. One is to really understand secular trends.

29:38Where is the world headed and who's going to win and who's going to lose. Not that you can't have a great investment without that secular trend, but it's a tailwind. So again, it improves the odds if they have that tailwind at their back and for short, but then that headwind in their face. Thinking about competitive advantages, so we spend a lot of time within industries trying to understand the competitive positioning among different companies. We spend, I think, much more time than most folks as we're looking at companies, looking at the quality of management teams and not just what they say.

30:10One of the things I concluded a long time ago, almost anyone who's the CEO of a large public company, it's pretty darn impressive in that 45-minute interview. And they're smart enough to know what answers you want to hear. They won't be dishonest, but they will certainly shape their answers to make it close to what you want to hear. So for us, it's much more important to judge actions. What decisions did they make and how those decisions turn out over time? And then, as I mentioned earlier, going back and comparing what they say they're going to do versus what they end up actually doing. So I think all those things do help you have a better perspective.

30:46When I say outstanding management team and you think across your whole career studying management teams, is there an example that just flashes to mind? Ed Breen at a couple of different stops, cleaning up the Tyco being the most impressive. But he's a guy that's had several situations where he took Apollo crap and turned into something which was very rewarding for shareholders. And you look at what Satya has done at Microsoft. It's just pretty amazing. And you don't want to argue Jeff Bezos, the Amazon, et cetera, et cetera. But I point to Microsoft just because where that business was headed per conventional wisdom and where it is, or not even where it is today, where it was just in two years, really shows the power of a CEO.

31:29What was Ed Breen's method since he was able to do it multiple times? What was his operating style that unlocked that value? That's a great question I should ask him next time I see him. I would argue something along the lines of brutal honesty. He was very willing to take, I don't care what we've done, why we've done it, let's start from scratch. In Maverick, we call this the fresh sheet of paper exercise. as it applies to Maverick, we've always had the philosophy, if we were given this amount of money to invest today, how would we invest it? If we didn't have any investments, have a fresh sheet of paper, what are we going to do?

32:03Okay, so why is our actual portfolio different than that? That's the ideal portfolio. Let's move the actual to the ideal. And I think Ed's always had the same approach when it comes to business. What are my set of businesses? What should be my set of businesses? Where is your opportunity improvement? Where is your not opportunity improvement? And all the obvious things as well in terms of cost controls, motivating people, rewarding shareholders, using the balance sheet more efficiently, et cetera, et cetera. But not many people have had that kind of impact in three different industries that it has.

32:35What did you learn from sole price? I don't know where you got that quote. And this applies to Maverick, but also applies to other businesses. So everyone's heard of Costco, but unfortunately, Price Club is not as well known as used to be. Price Club is actually the first warehouse business. So both Sam's Club and Costco copied Price Club. Price Club was eventually bought by Costco. While Price Club is a great name in terms of it conveys what the retailers trying to do, it's also the name of the founder. It was founded by the name Saul Price. And one of my favorite business quotes from Saul Price was, the intelligent loss of business.

33:11Now, what he was referring to is, let's have a really limited skew count so we can excel on the few skews from buying such force. We have great pricing. We'll be able to advertise them, push them, give them the end caps. We're going to excel on these small number of things and not clutter our buying or the consumer's mentality with all these different options. That's something we thought about a lot in Maverick. It was corny, but in 1995, I wrote to myself our long-term strategic plan. And I basically laid out by 2000, by 2005, by 2010, what I wanted Maverick to look like. And it was essentially based on, we're going to start a new fund every X years.

33:50We need to raise X assets. How many people you have to hire? The new funds were Maverick Credit, Maverick Currency, Maverick whatever. But somewhere between 1995 and 2000, I started adopting that mentality. Wait a minute. We know we're really, really good at picking stocks. We know we're good at investing in equities. I don't know if we would be as good at these other things. Let's focus our resources on where we know we can excel. And I think that principle has really served us and our investors well. The sole price impact on a hedge fund. Really cool. If you think about the second part of the job, so obviously you need to pick great companies and invest in them, table stakes.

34:29I think people probably have a hard time that don't do this for a living, understanding how challenging it could be to take, even if you've got a bunch of great ideas, and building a really good portfolio from them. What lessons have you learned there over the years about doing that really well? And here we We could talk about the role that quant plays. We could talk just in general about how you think about risk in a portfolio context, not just risk in an individual investment context. Talk us through the lessons of portfolio construction and risk. So at Maverick, at least, every message we make is driven on a bottom-up basis.

35:02It is in the portfolio because our team's concluded it is one of the very best uses of capital. But then we look at that collection of different ideas to see where portfolio ends up from a risk perspective. And this really started up until 2011. We thought about risk. We thought about our net exposure or beta adjusted net exposure. And then in August of 2011, when treasuries were downgraded, our portfolio went sideways. It performed much worse than you would have thought possible simply looking at those rather basic measures. And it became very clear to me that our approach to thinking about risk was not sufficiently sophisticated.

35:40There There are some important things at work we just weren't thinking about. As I mentioned earlier, by then we had a quant team that had been at Maverick for five years who had a lot of different tools at their disposal. And we tried to take, again, a fresh sheet of paper, a completely different approach to understanding the risk of our portfolio. We could make this the entire podcast, so I won't try to get too detailed. But now we look at everything such as our factor biases, how that compares to our history, how that compares to the market, how that compares to other funds, a lot of tools to help us understand whether those biases are likely to be productive or unproductive, a lot of things looking at risk appetites and likely that those risk appetites are changing, indicators of what's happening in the economy in real time, which ends up being 90 % plus correlated GDP.

36:27So it's a real time look at GDP. A lot of work on other hedge funds, our position and whether we share position that may be not productive going forward. And the tweaks we've made out of that, it's not that often. Again, usually we rely upon what we're getting from bottom-up perspective. But when we have, whether it's a factor or regional exposure that we think may not be productive going forward, we're very proactive in controlling that. And I do think that's led to a risk or a volatility profile that we're proud of. There's a spectrum here coming from the quant world. At one end of the spectrum, you could say, okay, just give me your ideas.

37:03Maybe this is more like the platform approach, Citadel, Millennium, and others. Give me the ideas. And then the portfolio construction is basically going to be quantitative. It's just going to be rules-based. And on the other end, of course, would be like no rigor around factor exposures or whatever. Where do you think of Maverick as sitting on that spectrum and that slider? The extent to which it's not entirely rules-based and there's still, at the end of the day, judgment, position sizing, position selection, and so on, how and when does that play a role and you don't just purely hand it off to a machine?

37:33So nothing is purely handed off to a machine. As an example, part of what quant does for us is come up with recommended position sizes that looks at a lot of fundamental data that comes from our team, no one else has, but also looks at a lot of off the shelf, pretty typical quant factors, looks at odds of success, looks at transaction costs, et cetera, etc., etc., and makes a recommendation from the machine point of view, this position should have 2.8 % of capital. The portfolio management team looks at that. We especially pay attention to big outliers, but human judgment is going to have the final decision just because, as you understand, there's a fundamental weakness in quant and that it doesn't really look forward.

38:15You could argue it looks at sell-aside estimates for revenues and earnings, etc., etc. Gives us some glimpse of the world looking forward, but it certainly doesn't understand changes in secular trends or changes in strategic positioning. It certainly doesn't understand there's a new management team that's going to do wonderful things, or there's a new management team that we don't have confidence in. Since we're fundamental investors, it's really important to us that all final decisions are made by humans, but hopefully we're making more consistent, more accurate, more informed decisions by using quant as a tool to support our decision-making process.

38:52What are the hardest parts about that aspect of the job? What recurrent thing that you have to face down provides the most challenge when making portfolio construction decisions? Well, we're very fortunate in that almost all the senior people at Maverick started at Maverick. And you saw that in the stats about how long people have been at Maverick. But every one of our sector heads started a year or two after college. They'd grown up in Maverick. If you were to bring in a successful investor from another long, short firm who's five plus years into his career, he would think he landed on Mars. You're making me do what?

39:30So for a model for income statement, cashflow, balance sheet, every element is picked up by our quant systems. Therefore, it has to be entered in a pretty particular way. One of the things the quad's going to do is it's going to screen your model. Hmm. You think revenue growth is going to be 14 %? Could be. But that would be a two standard deviation difference from historical. Or you think incremental operative margins are going to be X. You think whatever metric there is, they're all screened against history. Not that they're wrong, but let's just recognize that's unusual. And let's debate why you have an assumption that outlies what you would expect in history here.

40:08Also not do it just for assistry, but versus a sublicide. Often, yeah, that's why we own that stock. Exactly. I get that. But let's make sure we recognize that merits discussion. So it helps us be, again, certainly more efficient, hopefully more accurate investors. But those things are head scratching at first for people that didn't grow up in Maverick. It's just a lot of work, like anything. Well, they get the lot of work part. They may not always get the incremental value part. When it comes to the third leg of the stool, the notion of building the business, if you were addressing an audience of people that were all about to embark on that journey, let's say starting asset managers or hedge funds or whatever, investment firms of different types, what would you say have been the most surprising challenges that they might then face in their journey to create their own business that maybe you didn't expect going in, but were really important challenges to building a good, enduring investment business?

41:02I'll answer it in real time rather than 1993 time because the world has just changed so much. There weren't a lot of long, short funds. You had two hedge funds, probably had 60%, 70 % market share of the hedge fund space. We have a little seeding business where we've helped start funds that are starting up and give them a lot of advice, a little bit of capital, and hopefully a sample of approval with our brand. It's hard. I've been surprised by there's an escape velocity where you have to be at least$100 million, if not more like$250 million, to even get meetings, no matter how good your numbers are.

41:38Secondly, having solid risk-adjusted returns does not do you any good. You need to stand out, which I've concluded to stand out means you got to take a lot of risk. If you're starting out, you better have numbers at two or three years into it are pretty eye-popping. That's hard. So the challenges of starting a small firm today, now don't get me wrong, there will be another David Einhorn, started with virtually no money, did quite well year after year after year, and it finally became a real big business. It's just the odds of it happening are much smaller today than they used to be. And the enduring piece of advice I give everyone is you've got to make sure that everything you do represents integrity and represents your ability to do what you say you're going to do because you won't get a lot of second chances in those regards.

42:29Fascinating comment that great risk-adjusted returns is maybe necessary, but not a sufficient story to build an investing business. One of the things that's been really interesting in the world of hedge funds has been the role that rates have played just historically, whether it's related to the short rebate or other aspects of portfolio construction. How do you think about the role that zero interest rates for so long in the post-financial crisis period played in the attractiveness of the opportunity set for this long-short style of investing. I'm amazed how often the higher rates are good for hedge funds because short rebates are higher.

43:05Okay, true, but that's just a very tiny part of the story. So the HFRI long-short index, which is the most comprehensive hedge fund index, started in 1990. If you go back from 1990 and look at how hedge funds, again, not Maverick, just the average long short fund did when rates were over 2.5 % versus under 2.5%, there's some interesting data. Now, first of all, people may forget, but that's about 50-50. In other words, since 1990, the Fed funds rates went over 2.5%, 47 % of the time. So it's a healthy sample set. When rates are over 2.5%, on average, hedge funds have outperformed the markets by 6.5%, driven by 12 % alpha.

43:45Under 2.5%, they've underperformed by 4 % on the back of less than 1 % of alpha. So clearly, higher rates is a more productive environment. Rebates playing a tiny role in that. I think what people forget, especially now, as I sit on a few different investment committees, I can promise you the world hates long-short equity, and with good reason. So the underperformance over the last 12 years since the financial crisis, and then what really was nailed in the coffin last year, a lot of funds were down more than the market, even though net exposure was well under 100%. And I think people are missing that we are now in a different world and likely to be in a different world.

44:23And so if you use that 2.5 % benchmark and you just look at futures curves, the market is essentially predicting that Fed funds will be between 3.7 % and 5.5 % for the next five years. So nowhere near 2.5%, which I think is a fair way of saying we're likely to be over that 2.5%. And what's also interesting about the over and under 2.5 % is you just look at the rate of returns of the equity markets, it's not that different. When rates have been under 2.5 annualized, it's 9 % for the equity markets over 9.7%. So in terms of just looking at equity returns, those worlds don't look too different. But again, something else is going on if you think about the stats I mentioned earlier.

45:02I compare it to you have two swimmers, one slightly better than the other, and they're racing downstream. Well, the delta between how they finish is not going to be that big. Okay, now I'll turn them around. Now they're going to swim upstream. Now we're going to separate the men from the boys. Now you're going to more clearly see who that stronger swimmer is. And I think the same is true for companies when they're operating in different capital costs. So when capital is essentially free, it's harder to understand which company is making better decisions than the other because every use of capital is a good decision.

45:36Who cares if I had a small return? The investment was zero. In a higher cost of capital world, well, wait a minute, my cost of capital is 5 % and I only got a 6 % return. That's a problem versus my competitor who got the 14 % return. And so over time, higher cost of capital, I think, becomes that more demeaning environment that helps separate stronger companies from weaker companies. One way to look at that is, again, thank you, Quant team. We look at a lot of these things, but just the correlation between revenue beat and misses and subsequent stock reaction. And so this is reported revenues versus sell set expectations.

46:14They beat, does the stock go up? They miss, the stock go down. That correlation for the first six months of this year was as high as it's ever been going back 20 some years, which is as far back as we can track the data. And if you do look at other periods, which had those strong starts, 96 and 99, it wasn't a hot six months, which then mean revert it. In each case, that was the beginning of very strong periods of returns. And then again, to me, not the driver, but it's worth noting on the short rebate side. So when you short a stock, you borrow it, you sell it. But when you sell it, you get a pile of cash.

46:49That cash pays an interest rate, what's deducted from that rate is what you pay to borrow a stock. So our net is the highest it's been in 20 some years. A, the interest rate is higher than it's been a long time. But B, and this is a whole different discussion, what we're being charged to borrow is about the lowest it's ever been because competition on the short side is about as low as it's ever been as so many people have given up on shorts. So I don't think people fully appreciate how anomalous and how challenging the free cost of capital world we've been living in for 12 years was to all fundamental investors.

47:27When you have stocks that are driven by, what did the Fed say last night, not how was earnings, that's challenging for a fundamental investor. But I think we're back in the world, which is more normal, again, thinking about rates, long-term average is 4.6%. So the sale over two and a half is nothing crazy. But we can have rates sustained at more typical levels or even anything less than free money, it should be a very, very productive environment for fundamental investors. How do you make sure that your team is best positioned for that whole opportunity setup? So if you're right, and the current is now headwind or swimming upstream, sorry, don't mean to script the analogy, and the strength of the swimmer, your team, is now going to get magnified.

48:09How do you make sure that's the case? Because you're also swimming against other great swimmers. In this case, there's lots of now, probably versus when you started, incredibly well-trained, really smart investors with incredible access to data and information. So yes, the absolute story is clear cut as you just laid it out. But what about the relative story of like, okay, but the maverick sector PM still has to outdo other great investors out there that are pricing the same securities? Not to brag, but when you look at how the average hedge fund in different regimes, we did substantially better during all those regimes.

48:45And the real question is, how do we keep that up? I go back to, and I'm sorry to be a little repetitive, but back to the fact we have so much more focus on every individual investment, given how few we have per person and given our holding periods. I don't think many other fundamental firms had developed what we've developed both on the quant side, alternative data side. And the other piece, and this has really been particularly helpful recently, where we have a significant advantage is the fact we've been investing in private companies back to 1994. We made that a more segregated focus back in 04 and ended up, because we had so much success, we've made all those investments within the hedge funds.

49:23A few of them worked out so well. By 2014, we concluded too much of the hedge fund capital was essentially locked up in these private investments, and that forced us to launch a new entity altogether, Maverick Ventures. We have learned so much over the years from those activities, from talking to private companies, some which we invested in, some which we haven't, but had dialogues that influenced our thinking on disruption, on secular trends that had huge impacts on public companies. That why the ventures business has become a very successful business in its own right, there's also extraordinary value just into what we're learning through those efforts day in and day out.

50:04Can you let us behind that curtain a little bit? So you're making these private investments, which means you're in the flow of founders and new companies and, like you said, disruptive innovation. How does that actually manifest? What are some examples, let's say, in the last 10 years that you've been doing this, where you saw something on the private markets and that gave you some window into, again, back to your notion of improving odds, what might happen to public market companies? Just give us a felt sense of what that's like. I'll give you an old one and a new one. So years ago, probably 15 years ago, We invested in a company called Core Valve, which would put new valves in your heart, but was the first company to figure out how you can then size the valve perfectly to fit what you're trying to replace, as opposed to a doctor taking their best guess from looking images and then sewing it to get it as close as they could.

50:56This is a perfect fit that was done while it was being put in your heart. And as it became clear, wow, this is really going to work. Huh. How's that going to impact that people are making the old valves? So one, that led to a great private investment and two, it led to two pretty good shorts as well. Most recently, AI has just been a great example of where the public side and the private side have been of a tremendous benefit to each other. So just to give a little history, we invested in Sam Altman's first company, Looped, back in 2011 when he was at Stanford. Sam ended up moving over to Y Combinator, a very successful seeding platform, and he brought us in as one of the early investors.

51:34So we've had a long history with Sam. And as part of that, our ventures team had a very early look at ChatGPT. And like most of us, they went, holy cow, this is something different. What does this mean? Where is this going? And started making sure the public team was aware of what the world was about to be aware of in a few months. And we concluded pretty early on that the bottleneck to a lot of this would be GPUs and video chips. And as we started having more discussions in 2022, one of the leading LLM developers, told us, yeah, our total compute budget in 22 is 10 million. This year, it's going to be 100 million, and in 24, it'd be a billion.

52:14Huh, that's a pretty quick ramp. One of the lessons of investing around mobile and the iPhone was, it's great, there's not a lot of phones. Let's start thinking about what's inside those phones. Likewise, you just don't pick up an NVIDIA GPU chip and ask it to do AI. There are a lot of things that surround that to make that work. And we're talking to a lot of those vendors. Yeah, there's actually an order out there. It's da-da-da-da-da. Huh. Well, that'd be like half their revenues next year. Are you sure? So it became very clear to us late 22 that there was going to be a wild supply demand mismatch for GPUs.

52:47So we started thinking about the ramifications on the public side. Likewise, you think about the last 10, 15 years, most technology investors have been really focused on software for good reason. And semis got thought of as commoditized. It's very cyclical. When a reality over the last 10 years, the number of semiconductor companies is slightly over a billion dollars, is slightly down on the software side that's more than doubled. And yet collective market cap of those semiconductor companies has grown fivefold and margins have almost doubled. So it's not what people have thought about semis in a classical fashion.

53:20So in this new world where, wow, the bottleneck's going to be NVIDIA chips and other type forms of compute power. Let's go figure that out. Even large, long, short funds are scrambling to try to hire semi-people. I guarantee you virtually no one in the venture world has semiconductor expertise. But we do. Andrew Homan, who leads our technology efforts, has been at Maverick actually a little bit over 19 years now. We first bought NVIDIA back in 2004. I mean, this is a company we've known well for a long time. And as the ventures team is starting to meet with some of these companies on the STEMI side to bring in Andrew, who's been investing in the STEMI for 27 years and knows all the management teams on a first-name basis.

53:58We were able to make some decisions that I think other firms just didn't have the knowledge and experience to make. Those have already worked out pretty well. So our venture team and private teams are in meetings together all the time. Andrew, the guy that runs technology on the public side, meets with the entire venture team once a week, all just making sure, what did you hear this week? What did you learn? And I'll say there's sometimes a venture team doesn't understand this turnover nugget that, oh, wow, really? Because they don't understand the ramifications for bigger companies. And likewise, bringing Andrew's relationships and his experience to bear on these small private companies, not only is it helping us make better decisions, but it's helping us win the deals.

54:41Wow, here's someone that actually knows a lot. Oh, and you know that guy and that guy? It's a unique period, this whole different line of discussion, but this kind of disruption historically creates great opportunities. I want to come back to that disruption point, but make sure I squeeze the last little bit out of the semis example, because I think it's a great one. Semis obviously became uninteresting to lots of hedge funds and long-short managers, therefore everyone left. There was no expertise. But when you dig into why they're interesting in terms of the moats around the business, it's not that hard.

55:10Dig into TSMC or NVIDIA, it's pretty clear why they're good businesses. It's easy to say that now in summer of 23, of course. But when you think about software, that same question for software businesses, do you think it's as easy? The narrative has been that software business is the best business in the world, super high margins, high retention, can grow them cost effectively, and so on. Obviously, there's some great public software businesses. But do you think they're as defensible as some of these semi-stories that you've spent decades watching unfold and grow? I think it's a really interesting point in time.

55:43So software is king, software eats the world, you know, all these phrases proved to be very true. If you look over the last dozen, 15 years, software businesses gained tremendous market cap, garnered tremendous amount of value add, et cetera, et cetera. But you need to think about what drove that. And to me, it's a few different issues. A, not very capital intensive. B, switching costs. If I walk into Maverick and say, hey guys, it's already Monday, we're not gonna use Excel, we're gonna use Google Documents or whatever. there being a form. Network effect. There's a reason we use Instagram and not something that no one's ever heard of because your friends aren't on that one.

56:20Just the value of having a better mousetrap. There's a reason you don't use AltaVista or Yahoo to search because Google came up with a better solution that everyone gravitated towards and it virtually cost us why. And then just critical mass. Well, AI turns a lot of that on its head. So the infrastructure cost you now sky high. Again, talking to private companies, a different one, but another very large company, said, you know, we're just finally starting our heads around that we look at our cost structure. It's not going to be 90 % labor and 10 % infrastructure costs. It's going to be the opposite.

56:54Our entire everything we do, Microsoft just put in their annual report a material risk they may not get enough access to GPG chips to maintain their competitive positioning. That's an interesting line item. So the low-cap X rules, mind you, switching costs. Who cares what AI engine you're talking to? ChatGBT obviously is amazing, but Anthropic, probably the number two player, just released Claude 2. There's a lot of things where it blows ChatGBT away. ChatGBT does some things better as well, but there's more than one of these. There is no user interface. You just type in your question or talk to it.

57:30I don't have to be retrained. I can use either one. Network effect. Some would argue, well, ChatGBT is going to get smarter and smarter of all the more and more questions. but you don't want chat gbt to be taking in your knowledge you don't want your knowledge to be accessible by the public number one number two chat gdp doesn't want to be driven by people putting in garbage so i don't think there's gonna be a huge network effect and finally in terms of better mousetrap doesn't really matter for 99 of use cases for an ai engine what was robert brefford's best movie you can get a pretty similar answer if you're slightly different who cares or write me a poem about this oak conference table and the style of Robert Frost.

58:14They'll be slightly different, but they'll all be good enough. Now, gee, please read my radiology report. Okay, maybe I want the best one now. But for most things you're going to use it for, if one's slightly better, you're not going to be able to tell, so we need to discern them. So I think, and I went back to the last decade, how semiconductor margins almost doubled. At the same time, sulfur margins have already been degrading. They're 29 % down to about 24 % today. I think that may continue. I think the ability for software companies to maintain their moats, if you will, will become more and more challenging.

58:48Not that they still won't be great businesses for a long time. Going back to what we talked about earlier, technology tends towards standards, which is a memo I wrote back in 91. I think it's been a pretty useful paradigm as we think about technology. I'm not sure that's true anymore. Is that the key idea to understand the standards idea around investing through periods of disruptive innovation? You mentioned the iPhone. It's discrete. It's not continuous. The thing didn't exist and then it existed. It became the dominant platform and everyone builds on it and all this stuff happens. And obviously investing in companies around that platform change led to a lot of fortunes.

59:24You all of a sudden enable companies to exist that couldn't before. What are those lessons? Is it the standards thing? Is it something else? How do you think about if we're faced with another one here today, right now, what are the key things you're telling your team? This is what you need to know from what we've learned from history. Well, unfortunately, I'm old enough that I've been through a few of these. That's why I'm asking you. I first met Michael Dell, probably in 91. We're both in our mid-20s and saw what the PC revolution did to DEC, IBM, et cetera. First met Jeff Bezos in 98. Amazon had a$400 million market cap.

1:00:00And AltaVista was a much bigger company back then. Then of course, we saw mobile and the rise of Apple, cloud computing, software as a service, and a few of these disruptive technological changes. Maybe you could argue internet's going to be as big in hindsight, but I really think AI would be bigger than any of those. And so we try to look back at all those and see what lessons we can learn and hopefully we can avoid some mistakes as well. And I'd say it's really twofold in our mind to recognize that these disruptions create winners and huge losers. And in AI, we have some ideas. I still think it's a little early.

1:00:36It's not as obvious. Number two, don't forget about the peripheral players. A little while ago, we were talking about when we were thinking about the GPUs, what other components are needed to make those GPUs work. So we'll just take Apple and the iPhone, as well as Apple stock did, they're actually, in terms of percentage gains, some of their component suppliers did even better being along for the ride. But you look at their competitors. So 2007, the iPhone comes out, both Apple and BlackBerry or RIM have about a$70 billion market cap. Year one, RIM actually goes up over Apple, doesn't have great security.

1:01:12Oh my God, who wants to type on a flat screen? Give me my keyboard. But after about 2008, it became pretty clear where it was headed. You go to 2012, Nokia's gone from 100 billion market cap to 10. BlackBerry went from 70, then 80 to 3. And Apple went to 600, and now it's 3 trillion. But the winners aren't just going to have a bad quarter. It's going to be much more extensive and last longer. So as we think about this world of AI, identifying winners and losers, identifying the peripheral plays, if you will, the secondary effects is something we've been really focused on since late last year. I think being ahead of the curve helped us a little bit.

1:01:52And again, that was thanks to our private team. And in the private world, as you can guess, there are so many talented people on so much money trying to chase after different ideas. And I think a lot of our competitors, frankly, don't have the background to really evaluate those officialized holes. What has been your personal strategy for staying up to speed on an increasing pace change of innovation in all these different fields? You mentioned Sam Altman, and I wonder if part of this is just get aligned with the right people, because so often, Sam's a good example, Elon's an example, the most talented people are actually now doing multiple things across multiple technology fields.

1:02:32So is it people-centric? Is it something different? I'm even curious, are there specific things you read or conferences you go to or like literal actions that you feel have most contributed to staying up to speed in, again, a world that's drinking from a fire hose all the time? Absolutely. Personal relationships are really important. For all the bad press, deservedly so, that San Francisco gets. First quarter of this year, there was twice as much money, BC money, invested in companies based in San Francisco than the rest of the United States combined. And that's still where it's at. And I think AI actually is going to make that even more true.

1:03:09And so yes, to have relationships with people that are thought leaders and also who attract a lot of talent around them is very helpful. You start the question personally, I'm very fortunate in that I work with extraordinarily talented people that will give me synthesis of things they've read, things they've heard. We really should focus on this one, whether it's a sell-side report or magazine article, et cetera. But it's a challenge. We haven't really talked about analysts and developing analysts, but one of the most common reasons a person on paper that should be a home run doesn't really make in our world is because up through being an investment banker, college, et cetera, they lived in a task-oriented world.

1:03:52Write this paper, turn it in, take this task, great. Build this PowerPoint presentation, build the Excel model, yes, sir, what's next? And we've thrown them into our world. There is no what's next. It's every second, every day. You got new things floating around and you're never finished. You never can say, hey, I talked to every single customer, every single supplier and every single competitor and every single employee. I'm not, it just is not possible. And so your questions are really critical on how do you make the right decisions to use your time as reductively as possible to stay on top.

1:04:25And that's everything from being pointed in the right direction to having a nose of what's going to be important, not important, to have experience. I've read every time I read something or listen to this podcast, it's really been useful. Let's do more of those. But I think it's a really challenging question these days. You say a bit about the topic of money. We're an industry that's funny. It's literally the product is turning money into more money. It's the scoreboard. It's a motivator. It's compensation. It's a key part of what drives the ecosystem of talented investors. And I'm trying not to get too specific with my question and start by just asking, what have you learned about money?

1:05:00Making a lot of it, being in an industry that's so focused on it as a thing. What big lessons have you taken away on a strange topic when you step back and think about it? It's officially the most open question I've ever gotten in my life. Congratulations. So as relates to Maverick, and it goes back to who we're trying to attract, we try to make sure people are focused on the net present value of their economics over the next five, 10 years. And did you have the opportunity to make more money somewhere next year? Yeah, probably, but think it through. And that becomes or counters some of the platform type businesses.

1:05:35For whatever reason, our first law at Tiger, and it's true at Maverick as well, when there's more money at stake, the more people care about it, even though on absolute terms, wait a minute, you should be able to make more money at stake. be the happiest guy on the earth. And when things are tough and there's not a lot of money because we didn't have a good year, people don't get us concerned. People are always more concerned about how they're compensated on a relative basis, not relative to the value they added, relative to what their friend made, whether that friend works at Maverick, works at a different firm.

1:06:04And I get that. It's - Human nature. Well, it's one measure of status, if you will, and I may more need to agree. and again going back to being fair and make sure we have this balance of a team orientation and meritocracy. I work really hard maybe not in any one year but if I look one of the things we do do we have four different metrics that we track that drive the compensation decisions and we look how each team does in each of those metrics on the trailing five years three years in one year and I also have a lot of different metrics regarding how a team got compensated in different ways. Over time, which team got compensated the most and which team had the best metrics should be highly aligned during not doing my job.

1:06:46And at Maverick, that's been true. Just a long time ago, at Tiger, there were times that people would, after they got their comp, go on the next day and say, I don't think it's really fair. I think I deserve this. Here's why and the systems back there aren't that great. And every now and then that worked. Oh, you got my money. But once the word got around, you felt like an idiot if you didn't go back to Nashville. And about year two at Maverick had someone do that. And I held a firm-wide meeting the next day and say, look, there is someone here who's asked me to review their conversation. I just want everybody to know the policy.

1:07:16I'm happy to review it. I can promise you it will not go up. Some chance it will go down. But if you'd like me to review it, feel free to come to my office. We'll talk about it. That set the tone. No more reviews after that. Because I've worked really hard, to be fair. As you think back on your career, I'm always interested in zooming really far in on the building blocks that make up the story. If you think about the most important individual conversation that you had in Maverick's whole history, what comes to mind? So I mentioned earlier that the first handful of people that joined were all people I'd known for a while.

1:07:52And I mentioned one was someone I'd go into business school with, there's a guy named Steve Kapp. So after business school, Steve worked for a public company briefly and then started his own hedge fund. I went to Tiger. And when I decided that, gee, there's a chance I'm really going to leave Tiger because this is a very interesting opportunity, I also decided, no, I shouldn't just, if I'm going to do this, let's make sure I understand all my options. And the only other thing I seriously considered was partnering with Steve and his hedge fund has some success, but purely driven by him, as I recognize, because I was helping him out in certain things.

1:08:25And Steve and I have always liked each other a lot. But at that time, what he and I were thinking about didn't really compare well to what this family's offering me, so we decided not to work together. You fast forward a few years, four years, yes, but now Mavericks has some success. It's become much larger. His fund is doing fine, but not nearly as large. He has some frustrations in his position, and we were comparing notes one day, and I said, maybe you should come work here, and we've always wanted to work together. Because, yeah, I would be interested in talking about that. So he came down to Dallas, wives seem to go look at houses or meet them for dinner.

1:08:58We started about 9 a.m. Now it's 6.30. We're supposed to meet our wives. And the whole day we've talked about what a fair economic arrangement would be. And of course, there are all these different, how about we grow at this and returns in this? Well, we're smaller. We're going to grow faster. And we spent all the two reasonable, logical people who had shared objective of getting that Venn diagram to overlap. And then we got to leave in five minutes. We've got nowhere. We don't even have a rough idea. And he finally just says, I tell you what, if you can promise me you'll be fair, I'm in. And we shook hands, didn't have a contract for years.

1:09:32Then some general counsel said, no, everybody has set the contracts. Eventually we did. And we've lived off that handshake for now 20 some years. He's still there. Oh, yeah. And still a very important partner. He's semi-retired, but any project where I need someone I trust who's super smart and will dive in deep. I call Steve and it's taken care of. And to me, the conversation has always been the back of my head because it's just the way you hope anyone who does know you, now worked at Maverick for five or six years, can just say, hey, it's going to be okay. I can't tell you what the numbers are, just it's going to be okay.

1:10:10And I feel responsibility to earn that trust. And I think it's a good reminder of how important that is. Power of a handshake. Pretty amazing Amazing story. Handshakes from work. Long-term partnership. I'd love to talk about the episode in 2011 when you made the decision to start the transition towards not being the sole decision maker at the top of the investment process anymore, having a co-CIO and then a CIO as part of Maverick. And I want to really dig in on the story because when you study investment firms, the number one killer is succession, that it's really hard. Often there's a very talented, very tenacious, very entrepreneurial investor that starts the business.

1:10:51And then when they go to hand it off to a second generation, it just fails for whatever reason. It just happens over and over again in our industry. So how did you manage that? And I'm curious about why you did it, how you did it, how it's gone. This whole process of starting to share some of the responsibilities in the portfolio specifically is fascinating to me. So I'd love to hear the story. Well, as we mentioned earlier, there was this recognition that I had three different jobs and I wasn't doing any one of them as well as I would hope to do them. To really excel at that role, I do think takes an almost 24-7 dedication.

1:11:24It certainly takes a level of commitment and energy because again, it's a very, very, very competitive world. And I was getting to the point where I was not as intellectually interested in stocks as I had been earlier in my life. I was getting to the point where I missed not seeing my kids and starting to recognize, wow, they're not going me kids a whole lot longer. And then when it became evident through performance that I was not doing either of those, well, not the three, but day-day stock picking or portfolio management risk control, particularly on either side, that to me was, okay, now it's really time.

1:12:01And it's a little bit different than that. It wasn't panning down to the next generation because the senior team, I was just a few years older than, so like they were 15, 20 years younger. So it was more of a sideways thing, if you will, and in part driven by, so Tiger, by contrast, there was Julian Robertson, there was everyone else beneath him beating him ideas. He said, yes, now. We, from the very beginning, back to that team-oriented culture, were much more five individuals working together to come with the best decisions we could. And I was the leader of that five, but I was a member of the five, not the boss of the five.

1:12:34And so in that way, it wasn't as a dramatic change. and the person, and now we've had more of the changes, but as someone that was living, breathing, waking up at 3 a.m. to see what happened in Japan, just couldn't let it go the way I used to be. And so allowing myself to get more focused on the business and especially on risk management portfolio and develop some of the tools that we still have in place today, I really do think it worked out well for our investors, which is the most important test of all. And then almost three years ago, We went with a co-CIO structure and Ben Silver and David Tickajinsky have led her fundamental efforts ever since.

1:13:12It's interesting because they have slightly different investment styles, certainly different areas of expertise. And bringing both of their strengths together has really created a yin-yang type dynamic that I think has been really, really effective. What advice would you give to those facing down that same challenge for how to affect that and not trigger those landmines that seem to lay all in and around this process? Well, as I've mentioned to you at lunch, I did consult with a few people that I really respected who've been through similar transitions, Seth Korman, Sandra Ruckamore, the list goes on.

1:13:47And they all had different perspectives, but one that was probably most influential to me withstands the point that if you're going to give someone the responsibility and the authority, you have to really give it to them. You can't say, usually you make decisions every now and then, I'm going to come and overrule you, but it will be fine. Don't worry about it. One, the odds are you'll probably make a worse decision, not a better decision because you're not as close to it. But even if your decision was aggro, say even slightly better, just the demotivating impact of being in charge, but not quite being in charge, has a real stiffened cost.

1:14:21So we had a year where that transition is to where a gradual and then it did get to the point that I would still give advice and coach, but I also made it very, very clear to everyone that, hey, on the day-to-day investing, I do not have final say unless it involved risk. So I had final say of a risk and I thought a position was just too big, I would take it down, but not because I didn't think it was a great investment, more because I thought it contributed to our risk profile in a way that was inappropriate. you. If we zoom back to today, so we're in the summer of 2023, and you just surveyed the landscape of long-short equity, the whole industry, you said it based on your experience on investment committees, you can promise.

1:15:01It's not necessarily a popular camp given performance over the last 12 years. How do you see the landscape and where there's opportunity, especially given the presence of Citadel, of Millennium, of Baliasne, these firms that have seemed to create a better mousetrap? If you just look at the raw output of these insanely sophisticated risk systems, plus leverage, plus talented stock pickers, it seems to be a pretty productive model. How does a traditional investor or hedge fund manager compete against the gravitational force that is these new models in the longshore industry today? I'll touch on the first part of the question first, the frustration with longshore equity.

1:15:41One thing I did not point out, but I think says it all in a nutshell. If you look at the correlation between the HFRI launch rate index and the equity markets on a trailing three-year basis, back in 98, 25 years ago, it was under 30%. Today, it's 70. It peaked at 90 two years ago. Well, 90 % correlation, why am I paying hedge fund fees? I'm just getting beta. Even at 70, I'll just brag at Maverick, it's been in the teens. So we've not gone down that path. And so going back to senior investment committees, this is noticed. And the way we got there, shorting was really tough through this world of crazy monetary easing, fiscal stimulus, et cetera, et cetera.

1:16:22And so many funds answer one, let's just take up net exposure, do less of the shorting stuff. Number two, I can use S &P puts or short futures to create my short exposure. The catch is that doesn't generate alpha by definition. And by the way, most of your sophisticated investors could do that themselves. They don't need to pay you to do that for them. Or ETFs, okay, maybe slightly better, but not nearly as good as researching every single stock in that ETF and making your own conclusions, how they should be weighted, et cetera, et cetera. So people slowly but surely gave up on shorting, especially after January 21, Wall Street bets.

1:16:55That's when a lot of people say, okay, I just totally gave up. Forget it. It's torpedoing firms. Ridiculous. So the longshore profile has looked more and more like the beta profile. no wonder people have sort of given up. You're right in that world, the platform, guys, whatever you want to call them, that the very successful Millennium Citadels have generated a different return profile in a very different way. So every little pond has extraordinarily tightly controlled parameters on not just exposure, but different factors, et cetera. Those are then collected. They typically have a center book, which they have their own algorithms to pick off the best of the best and upsize those.

1:17:34And then they have leverage, which all works because that had very strict control. Where I think the flip side is, again, if we're back in a world where fundamental stock picking is more productive, that model I would argue is going to have a harder and a harder time keeping up. Just because when you put together all these collective books, well, you've got a lot of things long and short at the same time. Now, they're smart enough from a transactional point of view to pair those, But nevertheless, collectively, you don't have your very best on each side. Leverage is important, especially helpful in a low-volve world.

1:18:10Higher-volve world, higher-cost world. Leverage has different implications. And those places are hard places to work. And turnovers are higher there than elsewhere. I have huge respect for Ken Gricman, considering him a friend. I get what they built, who can't but be tremendously impressed with what they built. but it's just the person that we're asking, joining Maverick, that's not typically the experience they're looking for. So you look at the last 10 years, they've won, no question. I hope that the next 10 years, and I think the next 10 years may paint a different story. How do you think about the next 10 years for Maverick specifically?

1:18:45What trends will continue from the firm's past? What do you hope breaks with the trend line and goes a different direction? How do you think about the vision for the business? I'm not asking you to redo your vision questing that you gave up because it's all price. But in the next 10 years, what do you think the direction of the firm will be? So I think one of the mentalities that's really served us well over time is the desire to continuously improve. What can we do better this year? Whether it's part of the investment process or data gathering or managing people, interacting with our investors, how can we do it better?

1:19:20and you need to balance that with consistency. Investors don't want to hear, aha, we decided we're going to invest in used cars because it's a great opportunity. And so if you think about that, we described early in the conversation that day one, the concept of being long and short within every region, within every industry which we invest and now factors take care of that, definitely hadn't changed. Our average net exposure, average gross exposure, average industry weighting, all very consistent with them for 30 years. But within that, our ability to execute on those objectives of preserving growing capital and developing reputation has improved radically.

1:19:56There's so many things we're doing today that you wouldn't even dream to be possible 20 years ago. So back to your question, I think in 10 years, not just for Maverick, for many places, AI's going to play a really big role. There are already ways we're using it, both in the back office and the front office, that already have been minor step function improvements. And it's in the very early days. So back on that business plan where we do all these different things, one of the reasons we decided just focus on equities is I believe even back then, it would be the most impervious to computers, to machine learning, to AI, whatever you want to call it.

1:20:30Because we're in the bottom spectrum of the cap table, therefore the most sensitive to decisions humans make. And it will happen eventually, I guess, but it's going to be a very long time before any AI engine can evaluate a person, their intentions, their integrity, as well as we can. And for equities, it's still management, management, management. So while I do think we'll become more proficient, more productive, et cetera, we will continue to focus on where we think we can excel. And that is understanding the value of businesses run by humans. If you were throwing a dinner and the goal is just maximum interesting, stimulating conversation, what three other investors would you invite to the dinner?

1:21:13Recognizing that there's a lot more than three that I'm sure would be great, but just for fun. Let's say, well, I'm a little biased, but Jimmy would be top of the list just because I love the opportunity to have another conversation with him, period. You got to put Warren Buffett on the list. Not that I agree with everything he says, but he also is so amusing, so he makes for a fun dinner. What do you disagree with most of what he says? Well, a couple of things, but he really, and understanding the logic, likes to argue that high turnovers, evil, mutual funds are always over time going to underperform the equity markets because they pay commissions, taxes, da-da-da-da.

1:21:50And I could make a compelling argument just looking at Maverick data that the degree to which we have outperformed the markets for a long period of time now, and we're doing that, we do pay commissions, so it's after commission costs and even after our fees. more than compensate for the incremental taxes. So if he's right, if you're just going to invest in indices, but there are, in the science of Maverick, there are a lot of firms that have added enough value to more than compensate for those costs, but tried to have that discussion one time with him. He wasn't really - Wasn't having it. Actually, my best conversation with Warren Buffett, who I've met several times and probably went, he never had much interest.

1:22:27And he came up to me one time and said, oh, hey, are we still having that? As he's talking, I'm so excited he's talking to me. I realized he thinks he's talking to someone else. Mr. Buffett actually liaises, oh, rightly. He just walked away. See ya. So that's why I invited him to dinner, gave him to finally talk to me. And the third, probably Jim Simons, started Renaissance. And I do know Jim a little bit, and he's a fascinating guy that I think has impacted our world more than most people recognize through his extraordinary philanthropy. Private, but he certainly is not very public about it, But I think very few people really have an understanding of the dollar amounts that he's been supporting.

1:23:06Causes are important to him for decades. And he was really, in my mind, the pioneer of quant investing. And likewise, A.W. Jones, pioneer of long-short investing. But I've read everything he's ever written or written about. So I don't think I've learned as much from A.W. Just zooming to today and very much a selfish question. And we've talked a lot about the importance of great management behind teams and some historical examples. If you had to go study three active managers, CEOs, what have you, any three that come to mind as ones that you think would be fruitful to go study how they're operating their business today?

1:23:42So fruitful in terms of becoming a better investor. I mentioned it earlier, but I do think the turnaround of Microsoft is something that I can't remember a good parallel, not just in terms of, hey, operating results are better, but completely new strategic focus, complete change in leadership style. So Sadi would definitely be on the list. Andrew Jassy, I don't know well, been met a few times. Again, very different than Jeff Bezos. Almost like a Tim Cook to Steve Jobs, but highly competent and this beloved within Amazon. Beloved. He does this cool thing on the first day of March Madness, which is a Thursday where there's so many games being played.

1:24:24He invites over 200 different Amazon employees to watch basketball all day long until the very last game. So meaning out there, it starts at 9 a.m. or something. And for number three, probably Ed Brehina. I hate to be repetitive. I know we've already talked about him, but again, it's just someone I've held in such high regard. And even when he's been in situations that people thought were pretty hopeless, he's shown the power of management. We talked at lunch about basketball, a shared passion of ours. Who's your favorite basketball player ever and why? Well, this is a wimpy answer, so I apologize.

1:24:56But I would say Michael Jordan in large part, because my dad played basketball at Carolina, so I grew up a huge basketball fan and very partial to Carolina. Even to the point my first year at UVA, I was pulling for Carolina against UVA, which did not cope very well with my friends. Actually, that was the last dance show, got my kids to recognize, wow, maybe he was as good as LeBron. What do you know? And my favorite set of all time to be both leading scorer and defensive player of the year in the same year is something you have to admire and respect. Yeah. The idea of basketball you mentioned earlier as this team game that nonetheless, obviously superstars matter a lot, but without the team, it's just not going to happen and not going to work.

1:25:36As you think about teamwork going forward with your team, anything else that you would leave people with thinking about as they cultivate their cultures and teams inside of investing orgs that we haven't talked about that you think is critical to Mavericks stitching? The obvious, make sure it was being treated fairly and respected. We've worked really hard to try to have a culture of what we call constructive debate. We want to be friendly, we want to be a good team. Doesn't mean you're not going to tell someone they're wrong. Now, you can say it politely, you can say it's a jerk, we prefer it politely.

1:26:10But again, one of our phrases, if you're only telling me things I already know, if you're agreeing with me on everything, you're serving of no value. You're not helping me in any way, shape, or form. Maybe just, oh yeah, I think so too. So we want people to be motivated to have differentiated perspectives. Sometimes even it's just to be thought-provoking, but that's an important part of teamwork working effectively. And then finally, we've always had the approach, once you're on our team, you better be ready to start. Yes, if you're a brand new analyst and first year or two, we're going to be asked to do a lot of models and you're going to support the people above you.

1:26:47But if you've been a member for like six months and you haven't come up with a potentially interesting investment idea, you're on the wrong path because that is your job. And we'd rather you have something that has to be thoughtful, even if we disagree, but we'd rather have those wheels turning and you're showing us that, hey, I'm thinking about these things and here's some potential ideas. Didn't that tell you to learn? When we hire some super talented person that has a little too much confidence, we always hope his first idea is a disaster, just of a way of making sure people understand just how hard this job is and let's all have seemingly mill because we have a very difficult job.

1:27:21Since you're doing it to each other all day long for so long now, what are the components of a great investment pitch? I haven't changed that much. So we have a version of a slide deck we put together back in 94. And one of the slides was what we look for in investment company fundamentals, competitive positioning, quality management, different valuation metrics, et cetera. And over the years, it's different marketing people have been involved and different senior people. It's been tweaked this, this, and that. But you'd be shocked by how similar it is. And part of this, we were talking earlier about why so many folks have done well with Tiger.

1:27:58I think most folks coming out with Tiger would give you a pretty similar list of what we're looking for. And people, not too off track, but they're less so now. There's a period of time like, oh, all the Tiger folks talk all the time. Just copy each other's positions. Look at the 13 Fs. In reality, we hardly, at least me, I mean, I've talked to a couple, but one based on we talk to each other is based on we're looking for the same qualities and we're identifying the same companies. This is a strange question, but what do you think the hardest question, but still good question is that anyone could ask you?

1:28:28Hardest, but good question. That's not fair because then you're going to ask it. Maybe. I don't know the answer, but the hardest question I partner with is how do you raise your children in a way that when you look back on your deathbed, you're really proud of them. What are some things that you think might be true as an answer to that? Again, typical me, I try to research a lot of different things. When I recognize that my children are likely to grow up with more fortune and more comfort than I had, that concerned me. So I spent a lot of time with people I knew that kids were old enough, they had their head screwed on straight and despite having some success, et cetera.

1:29:07And I've had probably a half dozen in different conversations thinking I was going to find, aha, here's a magic algorithm. Everyone had completely different opinions. And the only one that was pretty common throughout, now my kids are adults, so this doesn't really apply, but spend a lot of time with your kids. Someone said, everybody talks about quality time. I don't know what that means. What matters is quantity of time. Just be with them. Discuss the meaning of life or watch TV. It doesn't matter. just be with them. So I think there's importance to that. And clearly, the example you set, so of course, with regards to integrity and ethics, but also with regards to work, there's a downside that I wasn't a very present parent through some critical years, but there's the upside is my kids think it's the normal thing to do to work their butt off.

1:29:55They both work their butts off. And I think that is largely from learning from example. And then lastly, learning from example in terms of a healthy marriage and healthy dialogue and healthy arguments and all that. But like all these things, kids learn by watching more than do by listening. In bringing work to them, was there anything that you did understanding that kids are going to go their own way? You're going to be interested in what you do or not some percent of the time. And a lot of that's baked into their DNA probably. But is there anything that you look back on and think, oh, that was pretty good.

1:30:24It was a good strategy for telling my kids about what I do or involving them in some way. Certainly something I'm thinking a lot about. My kids are nine and seven, so they're beginning to ask those questions and be interested or not. I'm curious if there's anything you did that you think was especially good. Well, we always, and this is obviously not a unique idea, but when it came to allowance, a third was money that they could spend however they wanted, a third went into philanthropy, and a third was savings. And on the philanthropic part, we would sit down at your end and their allowance go up and down depending on behavior and whatnot, count up how much they had and make them make the decision of where it's going to go.

1:31:01and sometimes just things I thought weren't that great, but they weren't bad and that's what was important to them. And then the savings part could be just let it sit there and I think I gave them a really high rate, like 20 % or something just so they could clearly see compounding the value of that. Or they could pick a stock and I would guide them and give them a list of stocks they could pick from. And my older son was less interested in that last piece and my younger son was extremely interested in that last piece. So my goal was to get them exposure and as they move forward their life, let them understand where their interests and passions are.

1:31:35But by at least exposing them, it opened up the avenue as a potential passion. Again, my younger one works at a venture capital firm and thinks about all things investing all the time. My older son works in an environmental consulting firm and cares about the environment. We didn't talk earlier about Maverick Ventures and your point about your son just reminds me to ask the question. Apart from the obvious advantage of information learned through that effort being very positively impactful on the public equity portfolio, anything else that you think is really important about having started that inside of Maverick, especially given our discussion that you didn't want to start seven different business lines, credit and all this other stuff?

1:32:15Say a little bit more about the Maverick Ventures experience. So we first made a private investment back in 94. For their first decade, and this was within the hedge funds. It was done on a very opportunistic, sort of sporadic basis. If something came our way, we'd look at it and say, if it was interesting or not. And after a decade of that, we already concluded that we had learned a lot that, again, was very helpful to decisions we were making in the public markets. But I also recognized that the returns were okay. They weren't great. But most importantly, to really add value, you needed the expertise and experience to help these companies be successful.

1:32:53And as public equity investors, we pick up the phone and buy the stock and pick up the phone and sell the stock and occasionally tell management what we think, and they usually don't listen to us. But this was a very different responsibility to help these small companies be successful. So we concluded if we were going to continue making such investments that we needed to bring in that expertise, David Singer started three different companies. All three went public. We invested in two of them. And I think Dave was at the point that he was looking for had changed in his responsibilities. So we convinced David to come join us late 2004.

1:33:25Fast forward 10 years, we'd had a lot of success under his leadership to the point, some of the investments have become quite large. We concluded we had a larger percentage of hedge fund capital in illiquid privates and was appropriate. Started Maverick Ventures so we can continue to make those investments, but have a different pool of investors to support that. That in itself has become a great business thanks to the leadership of David and other members of his team. To your point, it's continued to be just invaluable in terms of not only what we learned, but what we can bring to bear on the private side.

1:34:01And it's also fun. As a matter of fact, I think one of the risks, one of the disadvantages, if you will, is you have to every now and then remind a member of the public team, I'm glad you're really jazzed up about that$5 million dollar private investment, but you do have this multi-hundred million dollar investment over here that I also need you to focus on. I haven't had too many of those conversations, but - It's funny how that happens. It really does happen. But if you're thinking you can really help influence a company to the next level of success, dealing with a management team that really is interested in your input, it's just a different experience than we have on the public side.

1:34:36Leo, this has been really fun. It's been so fun spending a day with you, learning about the history of the business with you and with your team. I always ask the same traditional closing question in all these conversations. What's the kindest thing that anyone's ever done for you? So having listened to a few of your podcasts, I had the suspicion that I may get this question. And so you think about different things like my parents teach me the importance of integrity or the electoral science professor who made me retake an exam because he thought I didn't do a very good job in the first one. And I finally realized there's nicest and kindness that are connected.

1:35:08And so the nicest thing that ever happened to me. I don't even know the person's name. But whoever was director of admissions at the Stanford Business School in the late 80s and did not let me in was the nicest thing that ever happened to me. The kindness, thanks to that, was going to the University of North Carolina. I was asked to work with the board on something. Julian Robertson was on that board. We started talking stocks all the time. Going back to Jordan, it was just like talking basketball Michael Jordan in my mind. And I was on my way to go work at Goldman Sachs and Al the Blue, he asked me if I would consider working at Tiger.

1:35:43And I consider it the kindness because I didn't really realize at the time. But once I was at Tiger and saw the other people they were bringing in and how smart and talented and driven they were, I recognized that I didn't really fit the mold. I didn't go to Harvard Business School. Obviously, I didn't go to Stanford. I didn't go to Ivy League College. I didn't play Division I sport. But what I think Julian did see is I had real passion for socks. And to me, again, I didn't realize at the time, it was so kind of him to give me that chance. Wonderful way to close. Lee, thank you so much for your time.

1:36:16Thank you. Enjoy the conversation. If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.