The Exchanges

Q As you went through school, what led you into finance?

A It was complete coincidence. In college, the most important thing to me by far was rock climbing. I became more serious about my grades, but rock climbing dominated my life. My plan was I'm going to go climb. The best seasons to climb are fall and spring because the rock's not too hot. If it's too cold, you can't grip it. If it's too hot, it's slippery. So spring and fall are when you really want to climb. And I was going to climb full time, spring and the fall. I was going to be a ski bum in the winter. I ski bummed at the gold miner's daughter at Ulta. I was such a screw up. I went there with a bunch of kids from Dartmouth. Everybody else got rapidly promoted. I stayed at the most junior level of housekeeper the whole time. I was the guy who had to clean the toilets because I'm a little absent-minded. I was going to be ski bum in the winter, work on a river in the summer, climb, live out of the back of a pickup truck, try and write a novel, maybe write something about history, be a wildlife photographer. I was into photography at one point. You could save enough money working as a ski bomber on a river to support yourself in those shoulder seasons. A lot of people do it. My parents were like, this is an amazing plan. We've never asked you for anything, but just do one professional internship. The only internship I could get was in finance here in Boston, working for Donaldson…

AI assessment note: “The only internship I could get was in finance here in Boston”

Q I'm dying to know, what were you like as a kid?

A I was very competitive, but I was terrible at sports. Pick laughs for every team, always. I was very into Dungeons & Dragons, like I remember a signature... Honor was being appointed the dungeon master by the outgoing dungeon master. He was going to his freshman year of high school, and I was in fifth grade. I was just so proud to be the youngest dungeon master. I was always into history, the news, current events. I loved military history, loved playing chess, loved playing this game, Stratego. I remember how bad I felt the first time I beat my dad at both Stratego and chess. I wasn't particularly social until I got to high school. Then I became very social. That served me well. When I got to college, people were going crazy because it was the first time they'd gone to a big party. And I was like, wow, I was doing this stuff when I was a freshman in high school. Maybe I'll go crack open a book at a library. Had a pretty free-range childhood. Was able to do what I wanted in the summers. I was very lucky. I grew up relatively privileged. My parents gave me an unlimited book budget. As a family, we'd go to bookstores every two weeks, and we'd spend hours there, and I'd stack books up. Also, there wasn't a lot of structure to my summers. I spent most of the summers at my grandparents' house in the Texas Hill Country, which was an incredible experience growing up with all my cousins…

AI assessment note: “I was very competitive, but I was terrible at sports. Pick laughs for every team”

Q As you were exposed to all this, what became the investment philosophy that matches your own disposition?

A A few things. Steve Weimer, Steve's approach was to always do the work himself, to not rely on the analyst. Rather than expect the analyst to deliver ideas and alpha for you, to go understand the company really well, to go to every analyst day, to go to every relevant trade show, to do your own legwork, to read every relevant transcript. That was most formative for me. Because what helps me be rational when I am wrong is feeling like I have a high knowledge level on the company. I'm wrong a lot. This is a humbling business. When I am wrong and it's because of something I hadn't considered or a risk I was unaware of, that made it hard for me to be rational. But when the stock went down and it was a risk I had considered, stocks always go down more than you expect, It was much easier for me to be rational and make high quality decisions when I'm wrong, which I think is a lot of what being an investor comes down to. That's very important. And as a result of that, I didn't care whether the analysts at Fidelity got their stocks right or wrong. It was utterly immaterial to how I evaluated analysts. There's an analyst, he consistently had some of the worst stock picking metrics in the department. But I made a vast amount of money with that guy because he always laid out all of the facts, even importantly, the ones that suggested his rating might be wrong, and he would always lay out v…

AI assessment note: “Steve's approach was to always do the work himself, to not rely on the analyst.”

Q What were some of the things that you learned about how to interview analysts well to get at good outcomes?

A Point number one, when I started, I thought there was way too big of a bias for people who'd played college sports or been a fighter pilot in the Navy, and I was like, hey, we need to have room for a violinist. In today's world, actually having played sports is an advantage or done anything where there's objective outcomes. For a lot of children, they've lived in a world of participation trophies and great inflation. They haven't been confronted with losing, with an empirical reality where they're wronged. Having participated in a competitive endeavor is now more important to me than it was. Having a tremendous amount of passion and curiosity is important, and again, I think investing is interesting enough that you can take somebody who has a demonstrated history of competitive success, hard work, passion, curiosity, and a lot of those people will succeed in investing because it is so inherently interesting. I was a little less sensitive to experience, but then a lot of it is, I would always ask people, tell me about some times when you were really wrong, and how you made a decision. And then I would ask everyone, tell me what your favorite class was, and the three most interesting things you learned in it. And if you didn't have a good answer to that, you probably weren't that passionate. And even though I was an indifferent student, there were some classes that I was passiona…

AI assessment note: “I would always ask people, tell me about some times when you were really wrong”

Q So let's turn over to the private side. You talked initially about the synergies across public and private investing. Where have you found that to be particularly relevant?

A It's always been relevant, but I think it's paramount in AI. One of the benefits of being a crossover investor is, theoretically, if any company is good enough to go public, you should have had a decent amount of exposure to it as a private investor. You should have a familiarity with the business. You've probably met with a company a few times. You've probably done a lot of due diligence on them, maybe if you're conflicted out because you're in a competitor. When a company goes public, instead of starting from scratch with the S-One or the Testing the Waters meeting, you might have Three to five years of history already. It's funny that some investors have an idea that you can do 90 days of work on a business and really understand it. I don't think it's possible. For me, to really understand a business, I need years of history, in some case decades, to see how the business and the management team have responded to challenges, how they have overcome adversity, how they've adapted to changes. It's really hard to do 90 days of intensive work and have a deep, thoughtful opinion On a business that gives you at least the knowledge level of the conviction I need to have one of those big conviction adjusted attractive risk rewards.

AI assessment note: “It's always been relevant, but I think it's paramount in AI.”

Q How have you thought about competing for deals in the private markets?

A A lot of this comes from my friend Antonio Gracias. You want to be a repeat player in life with people, with institutions, with everything. In public equities, relationships are important. Come very close to a lot of my peers. But in privates, people really remember how you behave when the chips are down. If you approach venture with the goal of, I want to be a repeat player with everyone I encounter. Every partner at a venture firm, they're like a client. We need to take care of them. We want to have a repeated relationship with them over time. With founders, I want to generate references. So there's founders who we've passed multiple times on them. But I still talk to them every six to nine months. Viewing venture has a business where relationships are very important. Being a repeat player is important. Doing what you say you're going to do is important. All of this sounds easy, but I don't know how many people actually do it. And it's a big advantage. If the people around the table trust each other, you can get a deal done really quickly and fairly. And those references are so important. Having CEOs who are willing to drop everything to give you a reference for a new founder, that's essential.

AI assessment note: “If the people around the table trust each other, you can get a deal done”

Q After a discussion on thinking about portfolio and construction and risk in the public markets, I'm curious, How you go about thinking about putting a portfolio together in your private market strategies?

A It takes time to get to know someone. The way we try to manage risk in the private portfolio is when possible, we start with a small check. Or have a long duration relationship with someone. And it goes back to, it's really hard to make a high quality decision with 60 to 90 days of diligence. So the way we try to manage risk is by making sure that our larger positions in private companies are ones where we've had a long duration relationship with whether it's the CEO, some of the investors. That approach has served us well. There is more bad behavior in private markets than I think people realize. FTX, it's very public, but these companies, they're not filing always audited financials. They don't have the controls. Particularly when something starts to go bad, there's a lot of bad behavior that can be really damaging, and then there's bad behavior when a deal goes south by other investors. That bad behavior costs you a lot of money, and the way to avoid that is to take your time getting to know people. And only make a really large bet. Once you have a history with a person in a company, do they do what they say they're going to do? Are they honest? Do they behave honorably? Are they as relationship and repeat oriented as I am? My rule is trust, but verify. I will bounce the ball to anyone once. Then if I like them, I'll bounce the ball one more time. And if the ball doesn't com…

AI assessment note: “The way we try to manage risk in the private portfolio is when possible, we start with a small check.”

Q era, asset and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. What are some of the other things that you brought to Atreides from your experience of Fidelity and how you wanted to build the firm?

A I wanted it to be a place where I do think investing is a search for truth and truth alpha generation is. Truth comes out through discourse and discussion. You become friends with people you work with and you don't want to make an analyst look bad in front of the portfolio manager. So I wanted it to be important for the analysts To argue with each other in a constructive, respectful way, and to tell me I was wrong. Those are the most important things to me, is I wanted it to be a place where debate was really encouraged. People understood that I genuinely liked being told that I was wrong. So I did a lot of that, tried to lead by example. Anytime somebody tells me I'm wrong, wow, thank you, let's talk about that more. I wanted to really incentivize people to not seek out confirmatory information, so instead of having an investment thesis, we have an investment hypothesis, thesis being a literal statement of belief, and if you state a belief, as a human, you become attached to it, whereas a hypothesis is quantitatively falsifiable, and you're attempting to falsify it all the time, and I think that's an important distinction, because everyone here always looking to falsify our hypotheses, A lot of being a successful investor, you have to find an investment philosophy that fits your own emotional makeup, and then you always have to find the right balance, to quote Michael Steinhar…

AI assessment note: “I wanted it to be a place where debate was really encouraged.”

Q A lot of venture firms are more resourced to try to create operational value add. In a world where you're not trying to compete on depth of resources applied to the businesses you're backing, what is it that's causing these CEOs to want to give you those recommendations to others?

A Giving them good, honest feedback, and having that good, honest feedback be proven correct. That's one aspect. Being a crossover firm is powerful. Being able to say to a founder, I never have to sell your stock to get paid. That's so powerful. If you execute, I can hold you forever. And then being really honest with the founders, if you execute, I'm going to try and be very helpful to you for future capital formation. And if you don't execute, I'm going to be there to catch you. That's probably a different deal, but it's a fair deal. When you're in that position, you can do a lot of things. People really remember if you do those things. That just goes to being a repeat player and not optimizing for a single interaction or a single transaction. If you recap someone and you do it in a fair way, also you do it in a fair way to the existing shareholders who maybe can't participate. People remember that and appreciate that. The golden rule is powerful. Treat others the way you want to be treated. For whatever reason, not a lot of people live that, but particularly in venture.

AI assessment note: “Giving them good, honest feedback, and having that good, honest feedback be proven correct.”

Q Thema. For all the private equity managers out there, Thema uses AI to help map the landscape and source private businesses. It's incredible what a well-designed AI tool can do to accelerate the discovery of businesses in private markets. There's a link in the show notes so you can learn more. And here are those closing questions. What's one thing most people don't know about you that you find interesting?

A Geez, well, I've done a lot of these at this point, Ted. I'm pretty open. I'm probably a bigger NFL fan than anyone knows. I'm an extremely competitive fantasy football player, and I should actually say fantasy football is probably the only thing other than investing that I'm good at. I've won my leagues at a statistically improbable rate, and that's because fantasy football and investing, they're fundamentally the exact same thing. You have to have a differential opinion. If you just draft everybody where their ADV is, you're never gonna win. You have to understand, wow, the reason this running back wasn't good is the offensive line was better. They're changing to a different system, and they've upgraded the left guard, and I actually think he's gonna be good. I think I'm probably a much bigger NFL fan and bigger fantasy football, more competitive player than possible. All proceeds go to charity. I've also become a college football fan because of my wife, Becky. It's a Big Penn State family. I have not missed a Penn State game in many years. And I do like Penn State. They don't have the names. It's all about the team. I think that's cool.

AI assessment note: “I'm probably a bigger NFL fan than anyone knows. I'm an extremely competitive fantasy”

Q So in those three examples, there are threads of growth investing versus value. Joel Tillinghast is the value guy you're pitching getting out of a value stock. There's threads of value wanting to double down late. Where did you see yourself on the stylistic spectrum in addition to wanting to know the companies really well?

A At the end of the day, everything is downstream of value. It's not this great value versus growth debate. This is something that's often misunderstood. When a growth investor owns something at 60 times earnings, it's not like they believe in the greater fool theory. Instead, what you think is that in three years, or maybe five years, it's a high-quality business, and on your numbers out that far, it's at eight times earnings, and it should probably be valued at 25. So it's a triple. Growth investors tend to have more out of consensus estimates. Warren Buffett's famous statement is the price you pay determines your return. I would modify that and say the price you pay determines your return for a given business outcome. That's a very important modification. If you're paying 40 times earnings, And the company is actually going to compound their earnings at a high rate over time, which is possible with a lot of these great growth stocks where they have low margins because they've been investing. And then you go into a period where the revenue growth maybe slows a little, but the operating margins explode. But I don't know a single growth investor with good numbers who isn't extremely sensitive to valuation. John Hempton's a famous value guy, short seller. He wrote this thing about an investment memo. It should be eight to 10 pages. Valuation should be two sentences at the end. It'…

AI assessment note: “At the end of the day, everything is downstream of value.”

Q How do you think of the concept of an edge on a name or knowing something that other people don't?

A Idea generation and edge are the concepts that I struggle the most with. None of this is to compare myself to Michael Jordan. But if you watch The Last Dance, or you read any histories of the Bulls, Jerry Krause, who was the GM, after their second to last championship, said, listen, players don't win championships. Organizations do. He went on to say, it's not just Michael and Scotty and Dennis Rodman. It's the way we scout players. It's the way we draft players. It's the way we evaluate players and trade for them. It's the training facilities we have. It's the offense we have. Tex Winter's triangle offense. It's a system. We have an organizational edge. Well, after Michael Jordan left, they never won another championship. That is a truth that a lot of allocators struggle with because it feels safe and good to say, oh, wow, there's a process, and it's repeatable. By the way, you have to have a process, and you have to have the process that works for you, but any process that's repeatable that generates significant alpha, it's a very competitive world. It's going to quickly be armed away. In fundamental investing, any process-driven advantage just isn't going to last. So where does the repeatable performance come from? I would just submit that any investment organization, no matter how big, there's somewhere between two and 10 people, and if you took those people out, and the or…

AI assessment note: “In fundamental investing, any process-driven advantage just isn't going to last.”

Q If you bring all of those insights, the ideas, the team together, ultimately comes into the construction of a portfolio. Let's talk about the liquid side for now. How did you think about building a portfolio at Atreides that had shorts that you weren't involved with at Fidelity, and a bunch of different levers that go into driving returns?

A The only thing everybody who ran a hedge fund said to me, and these are hedge fund luminaries, is listen, Gavin, you are going to hear from every allocator that shorting stocks is very different from a long only, and you should be cautious and learn to short. So it is super important that you ignore them. There's no difference except for the risk, but the same principles apply. If you're good at buying stocks, you're going to be good at shorting stocks. Now, you have to understand the risk differently, but That was the second thing. I've had such a lucky career. I was so lucky to be assigned small and mid-cap semis in the year 2000. Another really lucky thing that happened to me, I took over my first fund, I think I was 25 years old. I went down 700 basis points relative in my first month. It's a lot. I'm like, oh my god, I clearly have no idea what I am doing. Fidelity had just hired a team of quantitative researchers. There was a lot of skepticism back then about the quants. And they asked to schedule a meeting with me. And these are like people with PhDs. And they say all this stuff to me about how to think about risk and construct a portfolio and size decisions and selection for sizing. And I was like, oh my God, this is awesome. And I was like, well, when is the next time I can meet with you guys? They're like, well, to be honest, not many people want to meet with us. So w…

AI assessment note: “There's no difference except for the risk, but the same principles apply.”

Q Where did that land you in terms of the gross net exposures that you like running?

A If you're going to run a high gross, the most essential thing that you have to manage is basis risk. Basis risk is when your longs and your shorts are not correlated. So quantitatively, if you're a hedge fund and you run a levered long book and a net exposure over zero, the most important factor for your returns is long short spread. You can generate an immense amount of long short spread by being long names that are uncorrelated. You can't be long a stock like GM and be short Tesla. From a quantitative perspective, that makes no sense. If you're long growth and short value, that's equally painful. If you're long value and short growth, that means you're just levered value. If you're long growth and short value, you're just levered growth. So if we're going to run with a high gross, it was important to me to try and generate long short spread. In stocks that were quantitatively and fundamentally similar. If you do that, you can lever that up, and then that's how you get a sharp ratio that's ahead of the index. That's a hedge fund.

AI assessment note: “If we're going to run with a high gross, it was important to me”