The Stoic Capitalist: How Rational Thinking Creates Success | Robert Rosenkranz

29:36And, you know, there's always going to be a ton of evidence that supports that frame. But there's also going to be a ton of evidence that might go the other way or a ton of evidence that's ambivalent that you can interpret one way or another. And cognitive behavioral therapy cautions you against framing. It cautions you against catastrophizing. And it really asks you to examine the beliefs that are causing you trouble or causing you to make decisions that are just not working out very well for you. So I'd say it's very well aligned with stoicism. I feel, though, like being able to question your assumptions And like, like for instance, let's, you could get addicted to catastrophizing.

30:25Like in every situation you could think, oh no, here we go again. I'm just, the worst thing's going to happen. I'm going to go broke or I'm going to do this or that she's leaving me or whatever. This type of catastrophizing is almost like an addiction. And it feels like it takes a mental sort of muscle to not do that. Like, how do you practice? It's easy to say, okay, this is what you need to do. Stop catastrophizing. But how do you practice that muscle that really pulls you out of this death spiral of catastrophizing or whatever it is you have assumptions about? Well, I think cognitive behavioral therapy is really, I think, a great form of intervention because it's really short.

31:07It's quick. I mean, you can have six or eight sessions with a professional in that field and really make a difference in the way you are thinking about a situation that's really troubling you. A recent example is somebody who works with me who had sort of a very small chance of a malignant cancer, but turned out to be not malignant and kind of okay. but the degree of obsession that he had over this undesired outcome was just so great that it almost made it impossible for him to think about anything else and you know I think that's the sort of thing where you talk to somebody who's a professional about it for six or eight sessions and you can maybe come up with a much better way of you know, coping with an unlikely and undesired outcome and to realize that, you know, all the fear, all the worry, all the anxiety that you're experiencing isn't doing any good anyway.

32:26You know, if you have the bad outcome, you'll deal with it then. But to imagine it and have it poison your life now just is not a very functional choice. But, you know, that's something that I think an effective therapist can get across in, as I say, a half a dozen sessions. It doesn't require a lifetime of examining what you experienced as you had as a kid or different traumas that might have made you who you are along the way. It's pretty straightforward. It's pretty pragmatic. And, you know, I would say, obviously, half of your book is about stoicism. And the other half kind of shows how stoicism interweaves through the various financial decisions you made.

33:13But I would almost call the financial side of your book a textbook on arbitrage. Because you talk about so many different arbitrage situations, whether it's kind of arbitrages on interest rates, arbitrages on capital structure. And I don't mean to get too much into the weeds. and it's kind of helped you, you know, always look for these arbitrages, whatever's going on in the financial markets. Like right now, if someone's young and looking at what big financial trends to sort of get involved in or technologies or whatever, what would you look at? What would you encourage people to look at? Well, I would say that for most of my life, the big rewards were to finance capitalism and today the big rewards I think are to technology and I think that's a good thing for society.

34:07I think the great advances in technology are actually adding more value to the society than the leveraged buyer business for example or the hedge fund business in which people have made fortunes. I think probably the most important technological development of our time or at least in recent times is artificial intelligence. I'm sort of a resolutely techno-optimist type, and I really feel like this is one of the great productivity enhancers that I've seen in my lifetime. It's like we're all going to have a couple of PhD-level personal assistants during every conceivable thing, And I think the outlook for productivity and increases in science and law and practically any field are huge.

34:58And we've yet to even tap the beginning of them. And the systems are proven so rapidly than six months ago versus now. They're dramatic changes. So to me, this is like incredibly important. But if you look at the discourse around it, pretty much dominated by fear. Yes. People are going to lose their jobs, fear that the machines will take over, fear that we'll build things that we can't control, fear that we'll make regulatory mistakes and China won't, It's fear that we weren't regulated enough and these companies all somehow exploit us. I don't know. I mean, the narrative is all around fear and downside, whereas to me, it's an area of just incredible potential contribution team and flourishing.

35:58I agree with you, but sometimes I struggle with answering the people who have these fears. Like, for instance, on the job front, you can always say, well, look, all the typists lost their jobs when typewriters were replaced by computers, which increased productivity quite a bit. Or all the horse, people who rode horse carriages lost their jobs when people started driving cars. Like in almost every decade of the past century, there was the same market. But the AI people say now, okay, but now they're going to be replaced by robots. Like the horse people ended up driving cars. The typists ended up using computers.

36:35But people now say there's no, you know, the people being replaced by AI, like for instance, a designer, a logo designer, AI could do it better. Those people are, there's no other job for them. Those industries are just going to go away. Like, what would you say to that? Well, I think, you know, I mean, it's stoic wisdom to expect change, to accept impermanence and to try to figure out how you can be on the leading edge of change or at least adapt to change. But I would say it really is. I mean, these are legitimate social problems, and they're not new. The globalization created a lot of issues for people.

37:21I mean, you know, 50 years ago, if you were bending metal for a living in Detroit, you were doing pretty damn well. Today, forget it. I mean, you're competing with people who are bending metal in factories in other parts of the world, getting a fifth of what you're getting. And, you know, it's created a lot of despair and a lot of economic dynamism, which, you know, I think is a great thing, but it doesn't benefit everybody equally. And society has not so far shown a real substantively useful way of dealing with people whose jobs have become kind of obsolete. I can imagine thousands of people or millions of people actually drive for a living, drive cars or drive taxis, drive trucks being replaced or needing to retrain.

38:23People who interpret medical history, people who, I mean, I think most work in law firms, a lot of it could be done through AI. So I agree. I think it's going to create a lot of pressures on people to adapt to a different world. And we have not been very successful at figuring out how to help them do that. I mean, with the AI, one thing I think about is always think of the AI as a tool rather than a master. So if you could think about how to do what you currently do using AI as an assistant, think of AI as an assistant, then I think for many jobs that might help people. There's an arbitrage right now where, let's say only 10 % of society uses AI on a regular basis.

39:16So if you're using the AI, you could have a significant benefit in any sort of competition against the people not using AI. We're at an opportunity right now from that. Yeah, no, that's absolutely right. And, you know, I'm not a great expert, but I do. I know the strengths, the weaknesses of Claude and of ChatGPT and of Perplexity and of Gemini. And, you know, I think of it as a huge enhancer to my own productivity. When was I supposed to use AI? What did you use AI for today? um well i think the last thing i did was um i actually announced a uh a venue for um called canyon which is a venue for video art uh that i'm opening in new york on lower east side and i did an ai search of uh display technologies and um like suppliers of video walls basically.

40:23And within five minutes, I had a list of all of the manufacturers in China, which ones had U.S. engineering support, representative pricing, quality of things in terms of their fineness of resolution and refresh rates and so forth. I mean, All the stuff that you would need to trick out a state-of-the-art venue for displaying video art took 10 minutes. I mean, if you hired somebody and they did that report in a month, you'd be pleased. Yeah, I find this to be utterly amazing, and I'm learning every day new things AI can do.

41:29Shifting a little bit, obviously you've seen the U.S. economy in all its forms up and down. You've been involved in investing forever. The state of the U.S. economy now, people always say this time it's different. It never is. But the U.S. obviously is$37 trillion in debt. People are wondering if the dollar is going to remain a reserve currency. Where do you see the U.S. economy going? Well, I mean, I think the worries that you express are quite real. I mean, debt is a much more significant part of the picture than has been historically. Interest on the debt is a much higher percentage of GNP.

42:09So we're pursuing some policies, or I don't know if we're pursuing them, but certainly if we blow up the global trading system and we really take these tariff proposals and implement them to the extreme that some people are advocating, that could be really, really bad. We could have a period of stagflation with relatively high inflation during the closing off of the U.S. to the world economy and relatively stagnant growth. I mean, there was a period we went through in the 1970s. It was pretty terrible. And it would be worse now because interest on the national debt is so much more critical than it was then.

43:04I don't really trade very much in my own account. But the last big trade I put on was effectively assured on U.S. long bonds. because I did feel that there was a risk that we were going to have long-term inflation in this country and higher interest rates that the markets weren't really taking into account. And did you think that we were going to have inflation because essentially that would be the way for the U.S. to pay down its debt is by weakening the value of that debt through inflation? We had a lot going on. I mean, A, politicians don't like to impose taxes. and they don't like to constrain themselves on spending.

43:46So what does that leave? It leaves inflation to bring things into balance. But the other thing is, you know, that tariffs, I'd say, are very inflationary and obstacles to global supply chain, particularly if they're applied in a kind of chaotic fashion, that could drive the cost increases. So you have those two big pro-inflation factors going the other way. It might be AI, might be some productivity enhancements. But to me, the risks of a kind of a high inflation, high interest rate scenario seem more real in what the market seems to be thinking. This tariffs thing is very complicated, obviously.

44:39and it's sort of like the thing you ask five economists, you'll get 27 different opinions on it. Ike, I'm just trying to understand, like when you had Smoot-Hawley, for instance, in 1930, which was a cross-the-board tariff that many people believe caused the Depression. Ultimately, that resulted in deflation. I mean, there was a lot of things that resulted in the deflation of the Depression, but that kicked it off. It seemed the tariffs were deflationary because people would just stop spending money. Or in 2018, with the steel and aluminum tariffs that Trump put on in his first administration, inflation never really got bigger than 2%.

45:15So what makes this time different in terms of inflation with the tariffs? Well, I'm not saying that the tariffs by themselves would drive inflation, but the combination of the tariffs with 6 % GNP, 7 % GNP deficits at a time in the economy where you would ideally expect to see 2%, 3 % deficits, or maybe even not. But that combination is the thing that I think is potentially deadly. That said, I mean, the U.S. economy is still the most innovative, much easier in this country to raise capital for companies with ambitious or interesting plans. I mean, it's hard for me to think of another U.S. stocks are pretty fully priced You know, fundamentally there are only two kinds of financial assets there are stocks and bonds I think I'd rather own stocks Well, I guess that's an interesting question too because I feel like a lot more things are becoming financial assets now So for instance, BlackRock is creating methods for fractionalizing real estate ownership through crypto tokenization.

46:46There's also fractionalizing cash flows from royalty streams, from musicians, and so on. I feel like the world is going to expand the number of financial assets one can invest in. But fundamentally, what are they? I mean, it's just a different way of packaging up. I mean, either they're kind of a debt-like claim or they're an equity-like claim. And, you know, a lot of this, I mean, I would regard the whole private equity area as just private equity is equity. It's maybe equity with less transparency on marks. It's maybe equity with higher fees. It's maybe equity with controlling shareholders, adding more value.

47:31I don't know, but it's equity. And these things that you're talking about are debt. I mean, they're the first claims on some stream of income. There's nothing very magic about any of that. Yeah, so the financial world. Well, and it's interesting because one of your early businesses, you ran a fund of hedge funds, one of the first ones out there, and you discussed your strategies for picking good strategies, like good funds with good strategies. And one thing you said that was very interesting to me was how if they've made their money on a single strategy, you have to question whether they were lucky or not.

48:14Like, did they make their return during a period where that single strategy worked? Like if they started in 2021 and invested in just crypto, obviously they would have worked. but if they started in 2022, they would not have worked. And I wonder if that applies to someone like Warren Buffett, like where he started investing during a time where value investing was very successful. Would you consider him lucky or is there more depth to it? Well, I would say, you know, the chapters in the book that deal with this really are trying to address a more fundamental conundrum, which is past performance, according to the SEC, is not a good predictor of future results.

49:02And the SEC is exactly right. But like, why? Almost every other field, if you're a good basketball player today, you're going to be good tomorrow. If you're a good violinist today, you're going to be good tomorrow. Why is investing this field in which past performance is not a good predictor? And I think one of the challenges which you just talked about is sort of figuring out luck versus skill. I mean, I would put Warren Buffett in the skill cap because he's made a lot of individual decisions about different kinds of companies, and they mostly turned out to be right. But I also caution, I mean, there's another chapter in the book called Behold the Earthlings, which says observe the behavior of market participants and try to look at their behavior with almost the mindset of the man from Mars.

49:56So the idea that, well, value investing is a driver of stock market performance, well, maybe, maybe not. And if you have a huge trend toward indexation, which started in the 1970s, indexation is the opposite, really, of value investing. It's really saying the higher the price of the stock, the bigger a share of the index, and the more of it people are going to want to buy. So, you know, I would say to be a successful investor, you don't want to – you want to really look at the behavior of market participants. Try to look at it without any preconceptions. Be pretentiously sensitive to changes and patterns of behavior that are likely to play out over a long period of time.

50:53And in selecting strategies, the luck from skills is one. Another is the track records are not all created equal. I mean, a lot of track records are just manager marks, which are a lot less persuasive than real active markets price positions at. You're basically taking the manager's word for what his track record has been. So that's right away suspect. There are some strategies that work very well on a small amount of money but are just not very scalable. I mean, that's another reason why past performance might not be much of a guide. or some strategies that will work for long periods of time, but the fact that they're working makes them less attractive.

51:45Take something like junk bond-oriented strategies. They may work for a long period of time, but at the end of a long period of time, bond prices are high, the margins over safer credits are low, The amount of legal protections for investors has been kind of eroded over time. And it's not going to be a happy time to invest. But if the past performance looks horrible, that could be a great time because the bonds are selling at 60, 70 cents on the dollar. And any new issues are going to have much greater protections. And, you know, so there's a classic example of an investing strategy where being a contrarian is going to lead to much, much better decisions than looking at the review nerd with performance.

52:41And I feel like stoicism has helped you kind of take this kind of approach to the markets where not that stoicism is contrarian by nature, but the fact that it does force you to question all the assumptions and not that you're going to be disagreeable either to every single situation. but are these companies going bankrupt or is this strategy great or bad right now? What's really behind this? So it seems like there's a combination of questioning assumptions, reading an enormous amount from various viewpoints to get an overall picture and also accepting the fact that things change, that situations change, that something doesn't necessarily always work forever.

53:26And I think also in there, there's a spark of independence, always figuring out what's an independent or unique viewpoint on what's happening. I think these sort of prongs form the basis of your approach to stoicism. I couldn't say it better myself. It's exactly right. And it's impressive. Again, you've had a vast career, but it's really been not one finance career. You've been involved in lots of different things from managing money to helping companies to philanthropy to all of your different work. And again, I've learned a lot from your book, The Stoic Capitalist. I saw myself in a lot of the bad examples, which is sometimes I catastrophize too easily.

54:11And it is hard to get out of those mindsets. and yet the times when I've been successful is when I sort of ride with the difficulties. And I always try to take the viewpoint that a difficulty, if you lean into it, could turn it into an opportunity. And that's a very useful thing for my career. And it sounds like for you as well. Yeah, absolutely. I mean, that saying that the obstacle is the way is really true. I mean, the obstacle should be, can be, at least a stimulus to creative thinking It can be an exploration of your own resilience as a person. It can be a catalyst for learning new skills or bringing different mindset to bear.

55:02And, you know, if you think of obstacles as learning opportunities, that's a lot more constructive than thinking of them as, oh, I'm frustrated. pattern yeah it's so easy to slip into a pattern like oh this is happening again or why does this always happen to me you know thinking that something is is part of you particularly when it's something you you have no like when you describe the company that made record covers there's some things that are just out of your control who knew the sony walkman was coming and would wipe out the record cover business and you have to kind of be able to roll with the punches a little bit although it's difficult you know i'm just curious does stoicism say anything about how to find purpose in one's life.

55:43Some philosophies do, some philosophies don't. Well, I would say a big part of stoicism and one of the seven aphorisms that I have sort of extracted and write about in the book is act for the benefit of society. And that strikes me as a central ingredient of a well-lived life. It was certainly part of Marcus Aurelius' thought in his meditations, and he views it as the one thing that everybody would kind of agree on as a good value. Now, so I would say acting for the benefit of society is a critical value element here. It doesn't necessarily mean being philanthropic. I mean, I think somebody who builds a major business is acting for the benefit of society.

56:37A successful business is frequently based on some great technological innovation or a better way of using scarce resources or creating a better environment in which your employees can flourish or creating a better solution for your customers. You're adding to society and building most successful businesses. So it doesn't, acting for the benefit of society doesn't necessarily mean giving back, like you've taken something away by building a successful business. But I think in the course of doing that, you are acting for the benefit of society, unless you're doing something, unless the business itself is operating in a way that is kind of problematic in terms of its social input and import.

57:26And I'd regard some of the social media companies, for example, as companies where you could have real debate whether Facebook or the like is really contributing in a positive way to society or not. But that's why we have open to debate. Well, you know, and that's a good point because when, when Facebook started, this was like the, I felt like this was the greatest thing that ever happened to me in my life. Like I was never going to, in my whole life, keep in touch with my friends from the first grade or the second grade. but now kind of casually through Facebook, I can see, oh, my friend from first grade who I haven't spoken to since then, I see his kid won a soccer match last night.

58:15Like it, it makes me happy, like to, to, to kind of almost in a very small thread, keep in touch with people I would never normally keep in touch with. I would have no reason to call these people from my past, but I like that I can keep up to date with all these people I've known through, through the decades. That was a great thing about Facebook for me then. And I, I do believe that message remission has been distorted a little bit, but ultimately I feel like social media is, is a good thing, but I agree too. Some of the conversations can, can get you down a rabbit hole and it's ugly to see what are, what are in those rabbit holes.

58:50Well, the thing that bothers me most is the effect on political discourse. Some people who are getting the news on social media, which includes most younger people, are getting news that is filtered to their interests, which means that they're getting opinion that reinforces their existing opinion. It means they're getting facts that support those opinions. Inconvenient facts never wind up in your feed. Contrary opinions never wind up in your feed. So you've got a degree of polarization in the society where, you know, our political culture is really at risk. And to me, that is the big negative from what I think is an innovation in social media platforms.

59:37I would have said exactly what you said, that they made it so much easier to create communities of common interest. Isn't that a great thing? And it was, but it had unintended consequences, particularly in the nature, in the field of political culture that I think are pretty harmful. So I think it's a real debate. God knows we've had one. It opened the debate many, many times on just this issue. It almost makes me think a good title for a book would be Unintended Consequences. Like all these things that started with, you know, good, well-meaning philosophies that have unintentional negative consequences and are those negative consequences bigger than the initial positive consequences.

1:00:23Like you mentioned a book in the book by this guy who I thought had a great name, Myron Magnet, I think his name was. And he talked about exactly this in a financial or government context. but there's so many different examples, like even Facebook from private industry where there's unintended consequences. And it seems like having a book that's sort of a textbook on all these different unintended consequences might help people exercise that contrarian muscle a little bit. Well, that might be my second book. You go for it. There is a chapter in Stellar Capitalist that kind of explains at least my thinking about how the political culture got as dysfunctional as it is.

1:01:10And a lot of them are exactly based on unintended consequences. So when I was a young man, political candidates were selected in smoke-filled rooms. And those rooms were populated by professional politicians, and they would pick people that they knew to run for offices, and generally they would pick people who were reasonably well qualified. So that became, that's the way the world worked, but it wasn't very democratic and it wasn't very transparent and that has gotten substituted with direct primaries, which seem on the face of it to be more democratic and more transparent. But the combination of direct primaries is where basically the most liberal Democrats and the most conservative Republicans are the people who show up to vote.

1:02:04And then if you combine that with gerrymandering, where 90 % of congressional districts are safe Republican or safe Democrat, you've really disenfranchised the entire political center. The Democrats are very far to the left, so you have possibly a socialist candidate for mayor or beliefs in defunding the police and some sort of global intifada. It's really created extreme outcomes that were completely unintended results. And the book talks about four or five other examples of that. Things seem well-intended, but produce unintended consequences. So maybe you have given me an idea for my next book.

1:02:48You go for it. I'll read it. I'll be the first reader. I'll test read it for you when you're still writing it. So you count on me for that. One final question. I always ask anybody who went to a top Ivy League school in the 50s or early 60s, which is how much time did you work for the CIA? Well, I did not work for the CIA ever, but one of the more influential courses I took was taught by a former station chief in Cambodia.

1:03:24and I was very influential actually. His name was Holt Bradford Westerfield, great CIA man. Yeah. And he invited Alan Dulles to our seminars who would be recruiting people. I never got recruited, but my last roommate was. So yeah, I mean, I think that CIA presence at Yale certainly was there, absolutely. But also just the idea of public service. I mean, Yale really did value that very, very highly. And when I was at Yale, some of the top professors were in government. Jack Kennedy was president. He was hiring people from top university faculties to a degree that was pretty unusual at the time.

1:04:18So, yeah, I mean, I think the elite universities in my day did, I'd say, honor public service in a very constructive way. And they also, I think, to a greater degree than is true today, encouraged intellectual diversity, viewpoint diversity. You could have real debates on campus on damn near anything, and it was okay. And I think one of the challenges we have today is that elite universities have, to some degree, certainly in the humanities departments, become kind of intellectual monocultures that are more telling kids what to think than teaching them how to think. I 100 % agree having just sent a bunch of kids through college and that was definitely true.

1:05:16So look, Robert Rosencrantz, very successful all through your career, but also author of The Stoic Capitalist, Advice for the Exceptionally Ambitious. I really think this is great advice and you show it's not just advice that you've come to at the end of such a successful career, but that all throughout how you applied these ideas and way of thinking to your own success and sometimes failures, how you bounce back from them. Such a valuable book to read. It was a page turner for me. I highly encourage people to read it. And thank you so much for coming on the podcast and answering my questions.

1:05:55I've learned a lot. Well, it was a pleasure to be a guest and I thank you for your very generous appraisal of the book.

1:06:04Thank you.