The Exchanges

Q So with that knowledge base of what's happening in the country and those views, what do you do with your personal capital? Are you investing in China? And if so, how?

A Yeah, but not to a huge extent, because the problem with the Chinese capital markets is that they tend to be extraordinarily distorted on both sides. When they're up, they're up way too much. When they're down, they go down way too much. And that's a lot because they're so policy driven. And also because they're so constrained. So in China, basically, if you're a Chinese person, until very recently, you really only had three options for what to do with your money. You could keep it in the bank where by Chinese bank yields are a little bit higher, but still four or five percent is not all that much. Or you could put it into houses. So people who could were buying houses avidly, or you could put it into stocks. And so, when there's only those three investments, and they're all domestic, you can imagine that when times are great, given the fact that there is so much savings, and so few places to put it, you get incredible bubbles in house prices and, and domestic stocks, and when times are terrible, or when government policy is to crack down on excessive speculation, It all goes in the opposite direction, and you know, that, that means if you're a very careful, active investor, you can actually do pretty well, and certainly in a modest part of your portfolio, you should have somebody who's a good China stock picker picking some of the stocks for you, but the beta is so undependabl…

AI assessment note: “Yeah, but not to a huge extent”

Q Zweig has said, you know, the asset management piece might be becoming commoditized. It's the financial planning piece for, for the wealth of us. I know you spent time on both sides of that table, and what are your impressions of, is that right? That some of the goal-based aspects of, of the private wealth side, um, could be applied to the institutional side? And, and is it done better?

A Yeah, I think that's actually a great point, and I think there is a lot that, that, that each side can learn from the other. So, let me give a concrete example. You're right that, especially since the fiduciary rule, you know, there is more, much more focus in the, especially the private wealth business on really having a smart investment plan and also working out objectives and strategies to meet them. I think that, um, you can apply that same kind of thinking in many ways to, um, for example, foundations and endowments and sovereign wealth funds. So here's an example. I'd say most of the, um, endowments I know are laser, laser focused, again, on performance. In that case, they're probably also thinking about risk-adjusted performance, which is good. That's a little bit better, because at least it's looking at both sides of that coin. But what they rarely do is actually link their spending policy And their fundraising policy to that equation. If you think about it, there's a lot of things you can do that are not about either asset allocation or investment implementation that have probably even more impact on the longevity and sustainability of an endowment program. So for example, most endowments don't really think strategically about the kind of Spending that they're doing every year. You can make a decision. You can say, look, there have to be at least, call it, 50% of the e…

AI assessment note: “you can apply that same kind of thinking in many ways to, um, for example, foundations”

Q So how have you sought to navigate this universe, or this is a completely different ecosystem than how you've spent your career previously?

A Yeah, so it does mean basically starting over in that sense, which is really exciting and interesting. The way that made sense to me is to, first of all, become an angel investor, and there are groups that do that. I joined one of them called New York Angels. I think it's really important if you're going to be an angel investor to be in a group for a whole bunch of reasons. One is you're not going to know what you're doing, so at least do it with other people who possibly do know what they're doing. And also, You want to have a critical mass because the people who are entrepreneurs trying to start a company have limited budgets of time, and, and you don't want to abuse it. And if you're in, if you're an audience of one listening to them tell their story, knowing that they're going to have to do the same thing another hundred times to get the money they need to start their company, that, that's really not fair to them. That is, that is creating failure. Whereas if you have a syndicate of, you know, a 150 people in the room, which is about the size of New York Angels, At least that's less inefficient from their point of view. Probably, and also there's some best practices that I think angels can, can help impose on themselves and, and help, you know, with, with the process too, so that it doesn't take too long to do all the due diligence that it takes to go through the process. A…

AI assessment note: “The way that made sense to me is to, first of all, become an angel investor”

Q Yeah. It's a, it's a sobering thought. So where do you see interesting investment opportunities?

A Well, I'm right now focusing on a part of the investing world that I actually had never had the opportunity to look at before, which is startups. And it's very, very interesting for somebody who comes at this from decades of looking at mature companies as a large investor. This is the exact opposite, being an individual investor in tiny little entities that are at the very beginning of their life cycle. I think that Most of the large liquid asset markets in the world are now getting pretty fully priced. I think they're also relatively more efficient than they've been in the past. What I think is, was interesting to me as an investor is, there's a lot of very straightforward structural reasons why startups are not going to be accessible to large institutions ever, and they're also structurally very, very inefficient, and probably always will be. So I think there's a tremendous amount of potential value add if you're an investor and you figure out how to crack that problem. So there, there's always going to be, if you think about the paradox of skill, The things that become well understood will always be less investable, but the things that are hard to access, either because it's infrastructure that everybody's using that has itself got to fly inside, or in the case of, um, of early stage investments, you know, startup companies, they're just so small. And think about this. The a…

AI assessment note: “focusing on a part of the investing world that I actually had never had the opportunity to look at before, which is startups”

Q So do you tend, and as a mentor, are you specifically working with the companies you've invested with?

A No, actually, I'd say it's almost, if anything, the opposite. So now, because I'm an angel and also a mentor, I'm seeing companies, and I'm also bumping into people in other ways, too, and the combination of all that just gives me a non, hopefully non-random sample of all of the ideas that are out there and the potential deals that there are to be done. Um, but it's like anything in an illiquid market, You really don't know, and one of the biggest challenges whenever you're dealing with startups in particular, probably when you're dealing with investments in general, is how do you engineer the playing field so it's slightly tilted in your direction? So you have positive selection as opposed to negative selection bias in your, in, in the non-random subset of the literally thousands and thousands of companies that are being created every year. You're only going to have time. I think probably in a typical week I end up at least learning about maybe a couple dozen companies, probably talking to something per week on the, on the order of, you know, four or five of them, and then selecting maybe in a given week one of those to, to really focus on a little bit of which, who knows, maybe, you know, one out of five or one out of 10 of those will end up being something I'd want to invest in. So there's a very, very sharp funnel, and, and what you hope is that you're, the top of the funne…

AI assessment note: “No, actually, I'd say it's almost, if anything, the opposite.”

Q And was there an early project that you worked on that crystallized that idea? Oh, yeah.

A One of, one of the most interesting ones was working for one of the The biggest tobacco companies in the world, and doing a bunch of research, and then realizing that their strategy, which was to win every single legal case involving lung cancer victims who had been smokers, and part of that strategy was to assert that there was no such thing as an underage smoker. That actually was part of the culture, and it became pretty clear to me that that was not going to work. Sooner or later, It was going to become apparent that that would break down, and that the, the fact that basically the lawyers were running the, the thought process and the strategy for this, these were immense, very profitable companies, was going to become an existential threat. So, I, I made that case, which was extremely unpopular, interestingly, not just with the company, but also with, with, with my bosses at the consulting company. Um, but it, but it was, it was a really good example of how Really getting the strategy right is, first of all, very important, and secondly, much more difficult than you would think if you just read books.

AI assessment note: “One of the most interesting ones was working for one of the biggest tobacco companies”

Q So in this industry, investment management, do we have a crisis approaching?

A The simple answer is yes, because we always do. But I think there's a couple of basic forces that are worth thinking about. The first is, we have had an extended period of enormous amounts of liquidity sloshing around the world, and that's basically been an artifact of excess savings, in my opinion. A lot of it coming from countries like China that have As we discussed earlier, going to be changing structurally, and for that reason, among a few others, you will see an end to this period of abundant liquidity. Going from abundant liquidity to not abundant liquidity has always been traumatic in the capital markets every single time it's happened, and the reason, I think, is that whenever people have a lot of liquidity, think of it as margin of error, They try a bunch of things that they otherwise wouldn't try, and we've had less of that in this cycle than you would have expected because 2008 was such a harsh environment that there was a lot more prudence than you would normally see in a high liquidity environment for a while, but the last few years you've begun to see reversion to form, right? There is a lot more debt being piled up by people who probably will discover that They can't really run a business with that much debt, but the low cost of debt and the easy access to it made it irresistible, and when it turns out that the terms aren't as attractive and they aren't, you kno…

AI assessment note: “The simple answer is yes, because we always do.”

Q So, right, there are only a certain number of models, a certain number of developers. Are there two or three things that you know from having looked at these that you think are a potential flaw that someone will either trip up on or take advantage of if they understand it?

A Uh, yeah. So the first thing I think is that, um, most risk models that exist out there commercially are designed for the marketplace. So they're trying to answer the questions that people are generally asking. And most of those questions are about one of two things. One is the tracking error question we were discussing before. The, you know, how do I look versus my benchmark? And on, on, for that particular question, what you typically find is if you're commercially trying to build a successful risk model, you want to capture the things that people are, are doing in most portfolios most of the time. What I always worry about when you look at those risk models is, okay, well, so what does that mean is being left off the table? What, what's, what's the residual? Most of you people do the opposite. They focus almost all their effort on looking at the systematic factors that the model quote explains, unquote. And they think of that as what the risk in their portfolio is. And that's not, that's not a bad idea, especially if the risks that they're focusing on are actually tightly linked to the way you make your portfolio investments. So if you have an investment process that's focused on those variables, that's a very good thing to be aware of. But if you have an investment process that is really not based on that, And the countries you happen to be in or the sectors you happen to h…

AI assessment note: “So the first thing I think is that, um, most risk models that exist”

Q That's sort of the classic venture capital model. Where do you see interesting investment opportunities?

A One thing I, I started out thinking is maybe I should just focus on FinTech, financial services oriented, um, startups, and then I realized, no, that could be a big mistake because a lot of the most interesting enabling technologies Are not necessarily going to be applied to financial services first, but they may be the things that matter most. So I'm, I'm focusing now on a combination of taking advantage of my subject matter expertise in financial services, where I think I can probably help the startups more, but also looking at startups in other areas that have interesting technologies that might be applicable to a financial service company someday, because I can learn from them. For example, one, one really great area that I think is going to be potentially very important for financial services down the road is the Internet of Things. Essentially, historically, most objects in the world are basically just dumb. Like we're talking into this microphone, but it does its job. It's not aware of anything else apart from the fact that it needs to vibrate as I speak and translate that into something that you can store for the podcast. But sensors are becoming cheaper and cheaper, and connectivity is becoming easier and easier and more and more widespread. It's only a matter of time before almost every object in the world ends up having embedded sensors that are connected to the inte…

AI assessment note: “one really great area that I think is going to be potentially very important... is the Internet of Things”

Q You mentioned best practices, so I'd love to first hear, what are the, what have you learned in this period of time about what some of these important best practices are?

A I think the, the single most important thing is to remember that The odds are really, really long that any given startup will succeed. And so you have to, first of all, have an immense amount of respect for the people who dedicate their life to trying. And recognize, too, that, you know, if you really want to engage with them, hopefully you can provide them resources that are not just financial, but also advice. And that, you know, if you can do that, that can really help them succeed, which is a really good feeling. And it can also be Very rewarding in all kinds of dimensions. You know, you can learn a lot about what's going on in an industry, which is a big motivation for me. You can also learn a lot about people and how they both succeed and also what their key potential derailers might be and how to help them navigate that. And, and also hopefully you can be part of some of the deals that actually work out, which pay for all the ones that don't.

AI assessment note: “provide them resources that are not just financial, but also advice.”

Q who's just talked to recently, talked the paradox of skill, and that active management is getting that much more challenging as a result. But there's also this question of, is it secular or cyclical? And is there a scenario you could think of where the opportunities for active managers get better? And markets that have seemingly gotten increasingly efficient in, in one sense, reverse and become less efficient over time.

A So, yeah, I think that those, those things are definitely good possibilities. Look, I think the paradox of skill is a really interesting thing to think about, that, you know, when I first joined Bernstein, I, I could really feel that one of the things that made Bernstein unique was it had this tremendous investment discipline. It had a view that value investing was really a logical hypothesis to hold about the world, that when Things got terrible for a company or for a whole sector or for a whole country. There were, there were good reasons to believe that markets would overreact, and, you know, it turns out subsequently that we now can explain exactly what those reasons are because it's wired into our brains. You know, anybody who's read Daniel Kahneman's books knows what the answer to that is. At that point, we didn't know why, but we could observe that it happened, and also that it was actually A hard bias to overcome because it was so ingrained, and therefore an organization that was really focused on value investing had to have a strong culture to stick with it at tough times, and a systematic approach, and back then we used the dividend discount model, which was, I think at the time, Bernstein was one of two companies in the entire world that had one, which was basically just a bunch of tools and processes To help overcome all of these innate decision flaws that we have a…

AI assessment note: “yeah, I think that those, those things are definitely good possibilities.”

Q How did that experience inform over the last decade when China has really set its foot onto the world stage in a big way? What did you learn from that experience that might have a different lens than someone who's, say, just been in the U.S. looking at what's happened in China about Their success, and where you think it goes from here.

A Well, um, that's a really interesting question. I, I think so much has changed between what China was then and what it is now that, um, that, that really doesn't tell us so much about China's future necessarily. One of the reasons I was so interested to go to China then too was, my graduate thesis was about how China might have a potential to grow way more than people thought Actually, I wrote two, two VCEs-like things, one which was shorter, about the China famine in 1959, which at the time was not something that people had been talking about, but it was possible to deduce from the data that did exist that a lot of people had actually died and starved to death or died from, most people actually in famines die from other things like disease, and I remember being quite stunned when it turned out, yeah, you could figure out that there had been a famine, because Nobody had told us that when we were studying China, um, and ten million people at least had died, and it turns out it was more than that, but anyway, so that, that, that was interesting, and it gave me sort of a familiarity with Chinese statistics as they really are, as opposed to the ones that, the artificial ones that are public, but then as I started to play more with, you know, what was going on, I, I, I realized you could make some, you could model some possibilities for what China might do economically as a result o…

AI assessment note: “it gave me sort of a familiarity with Chinese statistics as they really are”