From Wall Street to Crypto: Tom Lee’s Investing Journey

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1:40Hi, everyone. I'm Raoul Pal, the CEO and co-founder of Real Vision. Here at Real Vision, we're committed to give you the best knowledge, tools, and network to help you succeed in your financial future. If you're enjoying this podcast, please take a moment to give it a five-star rating. It truly helps us continue to bring top-tier content. Thank you so much. Hi, I'm Raoul Pal, and welcome to my show, The Journeyman, where we go on that journey to the exploration of the nexus of macro crypto in the exponential age of technology. Today, we bring it all together with somebody that I've known for a long time.

2:18I've never actually interviewed, and I've been really looking forward to doing this. Somebody who brings these three themes together and also the investability side. And that's why I want to speak to Tom Lee. Tom has a great history and a great track record in investing in exponential technologies, including crypto, and using a macro framework to understand them. So I thought he'd be a perfect guest for you guys and myself to learn from. So let's sit down with Tom Lee and see what we've got to learn about where this is all going. Join me, Raoul Powell, as I go on a journey of discovery through the macro, crypto and exponential age landscapes.

2:58In The Journeyman, I talk to the smartest people in the world so we can all become smarter together.

3:07I always like to give people a bit of your journey. How did you get to where you are today? Where did you start your career? Give us some of the insights of where you came from to today and how you've kind of formed your thinking en route, because we all change how we look at the world as we go on. So I'd love to hear some of that. I've been interested in stocks my entire life. So as a youngster, I was one of those kids that did like to read the newspaper and check the price tables in the Detroit Free Press. Hi, Raoul here. Listen, I think we've got until 2030 before the economic singularity arrives.

3:48Now, it might not be the exact date, but it's around then. So we have about six years to figure out how to unfuck our future. I've put together a report to help you called Prepare for 2030. It's going to help you take the first steps in that journey to make sure you're secure past 2030. So just click on the link below and start your journey now. The Detroit Free Press, that's not the normal place to start. Yeah. And so after high school, I went to the University of Pennsylvania Wharton. and studied finance because I was quite interested in business and ended up in New York. My first job on Wall Street was at Kidder Peabody, which is an old boutique investment bank.

4:38At the time, it was owned by GE. I was assigned to focus on the wireless industry, which in the early 90s was in its infancy. I was a very junior analyst, a junior what they call research associate. And the industry only had 34 million cell phones globally at the time. Wow. And of course, as you know, it's grown parabolically to almost... Actually, I did the last check. There's actually more cell phones today than humans. Yeah. So the penetration is over 100%. That was a really helpful industry to do stocks because, one, it was an industry that consumed a lot of capital. They were borrowing money.

5:26The carriers I covered had to borrow money to build networks. And then until they had enough users on the network, they actually didn't make money. And it was a hyper-competitive business. So I learned a lot about just some of the rules about investing, such as growth isn't the same as profits because these companies didn't necessarily make money. And yet the stocks actually had value. So it wasn't as if you had to stick with the rules of like earnings is the reason the stock has value because the carriers themselves had spectrum, which was a hidden asset. and then they had the recurring value of their customers.

6:07Subscriber value really was a newer concept in the 90s because besides the cable industry, there really wasn't much in the way of subscription businesses. So the idea of lifetime revenue per sub, none of these were actually concepts yet. But those were the hidden assets. And one of the things I learned during wireless was really two things that I think were very formative. And the simpler realization was that you could really understand what the stocks would do if you followed what the bonds were going to do. So I was at Kidder first, but then I moved to Solomon Smith Barney, and they had a very big high-yield trading desk.

6:49And that's really where I learned so much about the levels of bonds. And so I knew wireless stocks were in trouble when their bonds were trading below 80. and if their bank debt was below 80, basically, you're going to go bankrupt. But actually, a lot of times the bonds would begin to recover and the stocks wouldn't move because, as you know, equity markets often have their own view about a company's prospects that are separate from the bonds. And so when the bonds recovered and the stocks hadn't, that was always a really big tactical opportunity for us. And so I had made some very famous bottom calls for the wireless stocks because I had seen pronounced recoveries in the bond prices that weren't reflected in the stock prices.

7:34But I think the second, maybe more important thing I learned was the bias of age, that I was in my 20s covering wireless. And actually, I became a senior analyst at age 24. So by age 24, I was actually covering my own stocks. And I had a lot of optimism about wireless because I saw how much my friends were using it to communicate. In the 90s, we all had to use pay phones and answer machines, but when you had a cell phone, you could suddenly call each other. And so it seemed very revolutionary to me. Whereas a lot of our clients who were in their 40s and 50s thought of wireless as a yuppie toy.

8:15And so they viewed wireless as simply something that the landline companies, business wireline or long distance would use to protect their existing businesses. so they didn't see wireless as actually a replacement or supplanting landline. They saw it as a way to protect landline. And that also gave us a lot of opportunity because, you know, of course, the world flipped. It must have been 2000 or so. The number of cell phones exceeded the number of landlines. So it took, you know, eight years, but then the crossover happened. And so that made me realize the world of new opportunity and technology cannot be viewed through the eyes of old people because older americans are tend to favor incumbency and you know of course that's actually very true to crypto because i saw a lot of the echoes of crypto uh in the 2017 period that looked a lot like wireless you know the the idea of adoption was it the realization that you had that these things had network effects that these were kind of metcalfe's law-based networks.

9:25And why was that different to the landline business, which didn't seem to have, or was it still valued in the same way on network effects? Or was it more just straightforward cash flows? Well, the landline business was very mature in the 90s. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus500 Futures, you can trade crypto without the hassle of opening a wallet. With just a few clicks, you can register and start practicing with their free and unlimited demo. See a trading opportunity? You'll be able to trade it in just two clicks. Feel ready? You can move to real money with as little as$100 once your account is approved.

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10:40So penetration was already 100%. And so I think that landline in the burgeoning era, so that would have been like the turn of the 1900s when they were originally laying the cables, was very much a network effects business. Because that landline business was hyper competitive. Because what people were doing in the 1900s was they were laying copper fiber to homes and they were getting contracts with cities to actually put lines in the cities, you know, on these poles. But believe it or not, they weren't monopoly locations. So there were tons and tons of what they call regional operating companies.

11:25And so, even by the 90s, there were still maybe 12 regional telephone companies on top of the bells that were spun out of AT &T, which became a monopoly provider in that early 1900s period. So telephony itself was actually the Wild West in the beginning. And there was this pricing regime called intralata calling. So phone calls, so if you weren't growing up in the States, you won't know this, but like even in the 90s and 80s, if you were calling your friend who lived one lata over, he might only be like literally a five minute drive, but he was in what they call a lata area. It was charged as a long distance call.

12:14So local phone calls were literally based on a lata, what they call intralata calling and interlata was whenever you crossed the lata, which could just be like 10 miles away or could be 30 miles away. You don't have any idea. And of course, cellular compressed all that because cellular suddenly said, like, why should we even charge the difference between local and long distance? So we're now in the early 2000s. You've seen the explosion of mobiles. You've now seen mobile flip over. What's next for you? That was a very successful period for us at covering the wireless industry because it really blossomed from the 90s all the way to the mid-2000s.

12:52But by 2007... Before we do that, we've got the overbuild that happened in the fiber business in the 99, 2000. Let's talk a bit about that because that was obviously a fascinating period that we may or may not be repeating some of the AI stuff right now as well. Yeah, that was a magical time. You're right. And in fact, it wasn't really looking back, It started in 96, and it lasted all the way through 2000. So there were 48 months or four years where anything related to the growth of internet and mobile, and on top of that, of course, there was the emerging market story because they were building communications networks globally, meant everything was going to the moon.

13:41I remember that period, but it was really an extended period where if you found a stock and it could be a random name, but it was doing something interesting, it could go up five times or 10 times in a few months. And I remember that at the time I was at Smith Barney, our salespeople were getting so accustomed to stocks having 300 % upside that if you had a buy recommendation on a stock that only had 20 % upside, they'd be like, come on, Tom, what kind of stock is this? I can make 20 % in a week. And I remembered Smith Barney, we'd have this equity capital markets meeting and trading meeting weekly.

14:27And we would really talk about market behavior. And Smith Barney was unique because they had a very big retail operation on top of institutional. But every time there was a market drawdown, we would hear from the ECM desk and the trading desks how much retail came in and bought that dip. So it was a market where investors were buying the market steadily. And it, of course, did ascend eventually parabolically. And people were using margin debt very aggressively. I remembered many stories from Smith Barney about people who, instead of getting mortgages, were just taking margin loans to buy a house.

15:05And, of course, the stock that they owned would go up. So then the house was free. So that did create a really reinforced period that I think resulted in a bubble. And as much as people kind of harken back and say they've seen it again, in the equity world, it has not been as pervasive. And it's been much shorter. And many people have been too quick to call the top. you know one of the things that happened in that late 90s period and i and you know this is that it destroyed value investors like that was foster freeze um and some other big macro hedge funds tiger julian yeah yeah so i don't want to mention tiger but yes like they famously really got steamrolled because that style of investing value was really getting crushed by momentum and the the reallocation it was really boomer capital into the stock market um and then of course it ran out of steam um i i think that that will happen again um but to me people who are saying today is a bubble is are calling the top so quickly because it was really four years you know i mean that's a long time like that's someone starting their career and making managing director or whatever you know i mean like it's a long time that this bubble uh was really being created in the 90s and how did you then navigate so post bubble we then get the rise of social media and web 2 essentially and all of that how did you how was that lens for you were you still looking at that where were you still at smith barney or i was at jb morgan at the time so i joined jb morgan in uh 1999.

17:00And I was the head of telecom research. I was brought in. And that was very, the post 2000 period was really interesting for, and you're hitting on it, because the bubble burst, and it was a terrible, you know, two year drawdown, maybe almost three years. But two really interesting things happened. One was value stocks actually ascended. So there was an ascent of a new class of stocks that really did well. But then in the middle of the center of where the bubble burst, where huge deflation took place, because all of a sudden fiber prices deflated and service and provisioning prices collapsed, that a new class of tech stocks emerged as winners.

17:53You know, and it was the Ebays and the Expedias because all of a sudden their business models worked because fiber became cheap. And like, yeah, so you had high gross margin businesses. And actually, the winners of the post-internet bubble collapse were internet companies, basically. And that was because all of the capital costs had been written down to essentially zero for the fiber optic network. So now it wasn't a high cost to run an internet business. That's right. And I'm sure you remember in that period, because I was still doing telecom, people said there's so much dark fiber, we're never going to use it.

18:29They said there's unlimited fiber capacity. So people were just giving it away. And of course, now, of course, we've used up all the fiber capacity. And actually, in wireless, wireless had a huge collapse too. But it was a reset of the industry because those stocks ended up providing and producing huge returns for investors as well. So that was after the 3G overbuild, I guess. Well, it wasn't so much of an overbuild as an overcost, because I think it was the UK that first auctioned it off. And then everybody followed suit in Europe, and it basically bankrupted the whole industry. Correct. That's right.

19:11Yeah, wireless, you know, the US government got pretty wise to trying to monetize spectrum. There were really many famous stories in the 90s because I was covering the carriers where I was sent to like an Ohio town. OK, so I'm working for a Solomon Brothers. They're like, can you meet this dentist? And I would go to this town in Ohio. And he, this dentist in the 90s, got a cellular license through lottery. He just applied for it and got it. And he put some towers and was collecting roaming revenues. but he was actually the richest man in the, almost in the entire state, maybe at least in the town, because he was making like something like two or$3 million a month from like a handful of towers.

19:55And he was, he wanted to sell it and these were actually quite valuable. And, you know, the carriers would buy them or, and of course he was fabulously wealthy with all the cash he had just earned over those years. And so the U S realized they don't want to necessarily give the away in lottery and they began to auction them and i'm gonna get the number wrong but i think that they've had like 36 auctions or something since and uh and i keep in touch with some of the people who bought some of the original spectrum wireless spectrum actually has been a very profitable strategy so like it's almost like if someone bought in these auctions and held the annualized return um on the subsequent secondary trades has actually been double digits so um and then there's a very famous sale that was straight path um at &t ended up buying straight path they actually owned a lot of millimeter spectrum millimeter wave spectrum and it was i think it was original windstar but a straight path emerged spun out of us ld and it was like a three dollar stock i remember meeting with them and this is not this is past the cellular era this is probably 2018 and it was a three dollar stock but they owned all its millimeter wave and they talked about how this could be valuable for 5g at &t bought that same company for 240 dollars a share i think maybe like 12 months later so so spectrum has only gone in value gone up in value i've got a great story about um the 3g license auction in the uk and one of the greatest hedge fund investors have ever seen was Lewis Bacon.

21:35I don't know if you obviously knew North Capital, right? So Lewis came on to me the moment the auction came out, because it was like a holy shit moment, because I can't remember how much above estimates, but it was wildly above. And he immediately realized that every European government was going to do the same thing, because this was free money, and that the phone companies were already quite a lot in debt anyway and this was going to become a big issue and he came on to me when i was a goldman and said right i want to short the telcos i mean it was literally within 10 minutes of this and i said well there's no real way of doing he said i want to short the whole sector so at the time there was the dow jones euro stocks um um telco sector so i said okay let's do let's create a swaps market which didn't exist you couldn't trade sectors in europe so i had to build the whole sector derivative trading market in europe based on lewis bacon's trade he sold half a billion dollars in an hour and um it was a fantastic trade because it all collapsed obviously that's almost like the same as tobacco companies having to do a liability burden oh that's right yeah yeah yeah because it carries of course would need have future demands for spectrum yeah so okay so now we're in the mid we're sort of well we've got 2008 to get through as well so how did you navigate that well by then my role had morphed at jp morgan so in 2007 in 2004 jp morgan asked me to take on a second role there so i was um doing wireless carrier research.

23:18But then I also became their head of small and mid-cap strategy. And that was like a bit of a coaching job because they had a lot of young analysts. So I was teaching them stock picking. Just because I, like wireless really lent itself to stock picking because the industry grew exponentially, yet the stocks were very cyclical. So it was really a way to, you know, I always had to understand sentiment. But the second reason I think they gave me that job was during this, the tumult post.com bubble, a lot of wireless carriers were going bankrupt. And I had to work with our DIP lending desk. The DIP lending desk is the desk JP Morgan uses whenever there's distress.

24:08And so they provide financing either in a distress moment or when they're bankrupt. And it actually is one of the most profitable businesses because that's really when they have an edge. And some of the carriers like Leap Wireless fell into dip lending trading. And Jerry Madigan was the trader at the time. He was buying the Leap Wireless bonds and he was buying them at 16 cents. And he started to ask me all these questions about wireless. And we went through and he realized that the spectrum itself may be money good. So he was able to turn that into a LEAP prepackaged reorganization. LEAP, he was paid 127 on his 16.

24:57So he made the firm several hundred million dollars on a trade that should have just, he was just thinking was originally a scalp. And he became a managing director very young. But it inspired me because at that, Around that same time, Eddie Lampert was doing stuff with Sears and then Kmart. And so I realized that there was a lot to this idea that things that were in bankruptcy might actually have value if you could sort of find the right opportunity. So I asked J.P. Morgan if I could write a larger piece. And they had just opened this office in Mumbai, which is a research office of really talented Indians out of Mumbai, but they weren't being utilized.

25:47And so I had them comb through, I think like 4 ,000 bankruptcy filings since the 70s. And we put together all this analysis. And then we wrote a report called The Chapter After Chapter 11, which looked at whether or not money was made on stocks that emerged from bankruptcy. And it turns out like under the right conditions, I don't remember the report. We listed six things that if they happen, then there's a higher probability that you can actually buy the stock as it emerges or you could even buy the stock that never got cancelled like american airlines was one subsequent example like where the equity wasn't cancelled and that became a very popular report because it was a way for people to speculate on something that people weren't previously speculating on so it almost created a new class yeah new class and so that is why they asked me to do small mid-cap research because this was you know there were metals you And there was a lot of hedge funds starting in that space as well.

26:46Yes, that's right. And there were a lot of interesting things, like Imperial Sugar, I remember. Anyway, so I did that for a while. And then in late 07, they asked me if I wanted to take over the role of head of strategy because Abhijit Chakaborty, who was the JPMorgan strategy at the time, had moved to Morgan Stanley. And so that's when they asked me to take on the broader macro role. And at the time, I was actually very skeptical because I was a stock analyst my entire career. So I'm used to going through 10Ks, calling companies, doing roadshows, and really thinking of the world as the bottoms up of companies.

27:32And then they asked me to do something that's very macro. And I always thought strategists really never knew what they were talking about. so um and us macro guys never thought you guys did yeah that's right and so uh i said i would do it and it took me a while to figure it out because you know going from stocks to looking at the market it's a very different skill set because there's no edge you know at least i felt i had edge when i covered companies because i could you know have my own sources do my own channel checks. You can't really do that with equities. But I did that. And I would say it wasn't a great experience because that's really like when the bear market started.

28:16But we found our footing because in 2008, we wrote this report, which was called Guide to stock bottoms part one. And we still get requests for it these days because what we did was we looked at every major bear market since 19, I don't remember, 1918 or something. And we had detailed two things. One was that almost every major bear market is a retracement of the prior bull market. So it's not about time. It's about how much you unwind of the prior gains. And if we took 1929, the Great Depression, or the 74 bear market, those were 125 % retracements of the prior bull. So you have to go unwind the entire gain and then go down even more.

29:11But just using those two prior bear markets, we said the bottom would be 670 to 720 on the S &P. It was what, 666 or something? Yeah, 666. Yeah. And then there's a time, like the bear is a ratio of the prior bull. So the bottom would be, the latest we said would be July 09. So that was our first sort of conclusion. Second conclusion was we listed, and this was kind of just more simple. We took like seven metrics that you saw before bottom and the order. And it was like things like the ISM and employment. But we basically point out that like employment doesn't recover till after the bear market bottom.

29:53So things that happened before bottom have nothing to do with fundamentals. And so we published that report in 08, but then on like February 20th, the S &P fell below whatever the minimum threshold, like it fell to 7.10 or something in February or not. So we turned bullish, which was of course too early because then it went down all the way to 6.66. But it was close enough to the bottom that that actually really gave us a lot of visibility at JP Morgan because we were really one of the first people to actually believe the market had already bottomed in 09. Even as you remember, during the GFC, people thought there was so much ghost inventory that housing wouldn't recover for decades.

30:42And we were in a new normal because rates were so low. But actually, we were just arguing that this would look like a typical bull market recovery. And in retrospect, it was. Yeah, that caught me wildly offside. I mean, I got 2008 really right, 2007 really right. 2009, I just kind of emotionally overrode my business cycle models. by thinking there was a further overhang of debt deflation that was going to. And, you know, even though the ISM was picking up, all of the forward-looking indicators were picking up, a lot of people got caught offside because they got so emotionally charged by what just happened.

31:18Correct. Whether you made money or lost money, kind of caught people out in 2009. Yeah. I mean, something that I kind of remember from that period, and I don't know if you can relate, but I was an equity person my entire career. But in 2008, JP Morgan essentially got taken over by the bond side of the business. So, you know, like our, and they were, these guys were amazing. I wished I understood what they were saying in 07 because Eric Beinstein and Peter Cuvetti and Chris Flanagan were all panicked and freaking out in 07. And so, you know, you obviously caught it, right? I didn't really know how to interpret what they were saying.

31:58But of course, a huge disaster unfolded. But what was interesting is that in 09, the firm was really controlled by the bond side of the business, which had a very structurally negative view about the prospects for a recovery, which of course was good for the bond side of the business anyways. and um so i i think that the stock market got taken over by the bond market basically or macro and and that made people structurally bearish for much of that recovery because the equity investor got wiped out that very episode and then because most of us have been around for 2001 and won then missed all of the tech boom that then happened yeah because they kind of couldn't believe it could happen and it did and then amazon was trading at a p of 800 and everyone's like what the fuck is this and everybody missed it because everyone's so macro focused and just didn't see it yeah yeah that's right so you know it probably helped that i had a technology background.