The Exchanges

Q I think I'd be remiss, you know, you mentioned a conversation we had with Warren Buffett about the Tufts endowment. What did he say?

A That was awesome. So first of all, I didn't even realize this. You may have remembered it. Warren actually ran the Grinnell Endowment. So as kind of a nightline, you know, because his day job wasn't interesting enough, the president of Grinnell actually asked him to run the endowment. I think this may have been the late sixties, early seventies. And he told the most amazing story because we were asking him, if you'll remember over the dinner, You know, if you were given to become chair of the Tufts endowment or investment committee, what would you do? The lesson he told me is keep the committee small, ideally a size of one, two can be a crowd. And I thought that was classic Buffettism. But then he kind of talked about how he invested and he said, look, Steve, the thing you got to remember is you should invest it as if it were your own money. And then he told us how with Grinnell, he put like a third of the endowment into TV stations. And he did it on a highly levered basis, so they put in, like, five million dollars of equity to make a seventy million dollar investment, and it was like a ten-bagger. Today, Grinnell, its endowment per student is one of the highest in the country, and that's because the decisions Buffett made, whatever, 50 years ago.

AI assessment note: “The lesson he told me is keep the committee small, ideally a size of one”

Q And so that formative shot at Wall Street, um, how did you get there? And, and talk a little bit about your formative training, which, you know, we've spoken about.

A So, pure nepotism. Um, my, my brother, who is clearly the smart one in the family, I mean, he graduated the highest honors from Brown in mathematical economics, Very smart guy. Went through the Chase training program. This was back in the day when the big banks had very large and long training programs. He did quite well. And, ah, I interviewed and they figured, well, he can't, you know, if he's half as good as his brother, he'll get the job. And so I went through the training program. And I'm telling you, Ted, this was, it was gold dust. I mean, it was like a mini MBA. They spent a full year. They taught you accounting. I had never had accounting. You did all these case studies. You spent an immense amount of time on credit. So it was like a full year going through it. And it was the single best preparation you could have. And then from there, and we've talked about this in the past, I had just a dream job at a young age. I was probably 23. Chase had this program called Credit Audit, and basically what it was, was a group of SWOT analysts, 23 to 26 year olds, who would be tasked with flying all over the world to do analyses of the bank's troubled loan portfolio. And so you'd fly in, and so I'd spend a month in Indonesia, a month in Chile, Argentina, all over the world, and you'd be kind of parachuted in and expected to analyze these really screwed up credits and come back with…

AI assessment note: “So, pure nepotism. Um, my, my brother... Went through the Chase training program.”

Q minority. And you see, uh, There's a very, whether it's game theory or just behavior, there's a reason why, right? Because there's this sort of virtuous or vicious circle that comes from you write something nice about the company. Hey, is P&G going to invite you if you wrote the buy report or the sell report? And it goes on and on. Was Bernstein different from that in some way?

A It was. We were, we were vastly different. So my initial launch report, I had more sells than buys, which was unheard of on Wall Street. And the reason we could do it is we didn't have any corporate finance arm. So they had an investment arm. They had no, they had no traditional underwriting arm. And so at some point we took pride in it, and it was our point of differentiation. And what I found, Ted, is the better managements, and I'm not saying by any means a lot of them, but the better managements did want to hear the negative scenario. Like, as a portfolio manager, I don't want my analysts coming in telling me nothing but the good news. I know the good news. That's why we, that's why we own this stock. Tell me where we're going to be wrong, you know, and so I'll never forget it. Ken Wolf was the CEO of Hershey. He's a fellow Yale guy, actually played football at Yale, and Ken was the CEO of Hershey, and I put a sell on Hershey because it was preposterously valued, and I thought they were going to have issues in and around some stuff Nestle was doing. And I invited him, Bernstein had a big conference every year, and the IR guy didn't want Ken to go, because he said, he's not being supportive. And Ken said, hell no, I'm going. I'll never forget that, because he was such a stand-up guy, and he said, look, if he's right, he's right, and if we can prove him wrong, we should. But …

AI assessment note: “It was. We were, we were vastly different.”

Q And what, and what are those outsourcing pieces?

A One is a CFO. Which is someone who will write the checks, keep the electricity going, things like that. But a couple other things we've looked at. We were actually currently working with a group of Indian analysts where it's an outsource effort where we have very, we give them very specific marching orders. If we want you to look at this company this way, could you do the work for us? Do a deep dive on it. These are the parameters we want you to do. And 24 hours later, you get back a file and you go at it. I'll give you a couple examples. So we're looking at DISH again, which is Charlie Ergen's thing, and we wanted them to do a true deep dive on the spectrum assets. It's pretty arcane stuff, you know, there's a lot of nuance to it, and we basically said, hey, go at it, and they put together really high quality work.

AI assessment note: “One is a CFO... working with a group of Indian analysts where it's an outsource effort”

Q All right, Steve, in the last year, I've adjusted the closing questions that I've asked, and some of them are the same, and we're not going to do those again, but there are a couple that I want to shoot your way that I didn't ask you the first time around. So the first is, what teaching from your parents has most stayed with you?

A Without question, philanthropy. And not money. It's, it's be an engaged citizen. Both of my parents, it was unacceptable to sit on your ass. Like, we were so. Those are two different lessons. I know, I know. But, you know, it, as you know, my dad passed a couple years back, and, and in hindsight, you know, I never, while he was alive, was as effusive as I should have been about What a good citizen he was. You know, he chaired the Chamber of Commerce up in Providence. He chaired the United Way. My mom has always been incredibly active in the arts and things like that, and it wasn't chest beating. It wasn't, you're going to do this. It's leading by example. I saw them do this, and it's interesting when we talk to our kids now, because they're in their twenties, And they're just starting to articulate that. Like, hey, you guys actually do a lot, and there's no better feeling.

AI assessment note: “Without question, philanthropy. And not money. It's, it's be an engaged citizen.”

Q the board of trustees at Tufts, the board of a large family office, Said Holdings, the board of Success Academy, board of directors in Narragansett Brewing, the board of Pazina Investment Management, two fintech companies, Equity Data Sciences and Lightkeeper, used to be on the board of the Constitution Center in Philly, also did some time with Treasury and Office of Financial Research, How do you think about your time?

A Yeah, it's funny. So my partner and wife made a pointed observation to me last year, like, how do you think about your time? And so I actually went through and kind of looked at the time spent on the different boards, and it's considerable. I probably spent as much as a third of my business time on boards last year. Now, there's an ebb and a flow to it, Ted. So for instance, with Tufts, a board asked me to do kind of a full diagnostic on our endowment. At Tufts. And so that ended up being, in fact, that's where we had our Omaha experience where you took me out to meet Warren and I asked him about endowment management. And so that was a flow, if you will, where there was an immense amount of time where I was spending hours on end meeting with industry folks and so on and so forth. With Success Academy, we've been embarking on a private real estate Effort. That's taken an immense amount of time. And then for other things, like the Pazina board, that's been much more steady, Eddie, where it's a very predictable thing. It's actually not a huge amount of time, but it's done very, very efficiently, and I get as much out of that as I give. So each one will have its own kind of pace to it, and what you'll find is, in and around crises, or in and around forks in the road for the organizations, that's when you really end up having a time sink. The other observation I'd have is different …

AI assessment note: “I probably spent as much as a third of my business time on boards”

Q And so how does the board work with, it's the family, it's their money, it's the father, the son. What's your role in that context?

A So it's interesting. Many of the board members were more directly tied up with Mr. Said Wafiq, and so they knew Wafiq from the early days, and so they'll be septuagenarians, octogenarians, and we'll have known him. I'm kind of in between. I'm somewhat between Halid, the son, and Wafiq. So to some extent, I view myself as a bridge between the generations, where I hopefully can have an equally sound dialogue with both of them. But to make no mistake about it, it is challenging, because at the end of the day, it is their money, but you're still a fiduciary. And so you do have to push back, and I found the more productive meetings are the ones where you say no. You say, look, I don't think this is what we should be doing. So one of the things we introduced, for instance, with Said Holdings is we wanted to introduce kind of a living will, meaning what, how are we going to behave in the next downturn? And actually map out kind of a game plan. Okay. Because it's inevitably going to come. And so this is hopefully going to take away some of the tension you'd have in the moment. So things like that, I think allow you to get away from some of the day to day tension you may have in dealing with someone where, because money is deeply personal, right? He's made all this money. He's had all this success, but if you can kind of map it out, Strategically and analytically and systematically, I t…

AI assessment note: “I view myself as a bridge between the generations”

Q Another fire sale in the wrong way, apparently. In the process of owning that team, and we've talked some, you know, about Moneyball, and I know you had done some work to try to figure out how do you apply those strategies to soccer? What'd you learn?

A Well, we learned a couple things. One, the traditional UK management are just against it. So, one of the things we did, much like Moneyball, where they figured out things like stolen bases were overrated, walks We're underrated. We did a lot of analysis on, you know, what ends up contributing to, to great teams. And a couple things, some of them are fairly obvious, but, uh, the two most prominent features were time of possession. So if you control the ball, you tend to win. And secondly, shots on goal. So just shoot the damn ball. It's kind of like investing. Too many people are striving for perfection. You gotta take some shots on goal a little bit, and so, uh, the, um, those were the two, uh, kind of analytic things we learned, and so we incorporated into the team, and the team did get better, but most interestingly is soccer, like American football, is very much a team sport, meaning you're much better off spending incremental money on the 1514, 13th And obviously, 12th, 11th player, the people coming off the bench and the less good players than paying a ton of dough for a Wayne Rooney or a Ronaldo or one of these stars, because their incremental ability to influence the outcome is actually relatively low. So it's total contrast to like American basketball, where if you have a stud like LeBron James, you almost can't pay him enough. Whereas in these more team oriented games,…

AI assessment note: “the two most prominent features were time of possession... And secondly, shots on goal.”

Q There's a lot we could talk about investing. I think we may want to start with one of our shared passions of sports. Somehow in your life, you found your way into owning a piece of a European soccer team, European football. Why don't you tell the story of how that came about?

A Well, one of my buddies actually from, I went through the Chase training program with one of my dear buddies from, he's a fellow Rhode Islander, and he, he actually has turned His passion into his business, and he buys and sells effectively minor league baseball teams. And it was, it was actually at one point was a very inefficient market, Ted. It was unlike the majors, which really are trading off egos and big price tags. It was an inefficient market. So he came to me with this wonderful value proposition. There was a club called the Darby County Rams. And he said, Steve, in the UK, what happens is if you're in the Effectively, the major leagues, and your team stinks, you get sent down to the minors as a team. And the economics of it can be actually catastrophic, because you go from the big leagues where you're getting all these sponsorships, and AIG sponsoring you, and you're selling out, and you have TV contracts, and so it's worth a multi, multi, multi million. And when you get what's known as relegated, it results in a huge diminution value. And so, like, as with a stock, and as a value guy, as you well know, we look at this and say this is a gift. We're like, we're basically buying this team because the seller panicked. He saw the future cash flows of this team imploding, and he said, I'm out of here, and we basically bought the team for what we thought, ah, was the value…

AI assessment note: “So he came to me with this wonderful value proposition. There was a club”

Q one of the things we've seen on the, uh, particularly endowment investment committees the last couple of years is, is a lot of turnover of CIOs. And it's nobody, I don't know, nobody knows from the outside. Is that a reflection of some interim period of suboptimal performance or you haven't had that at Tufts? Um, what are the dynamics that allow stability between the board and the investment team?

A So in large part, It's the administrations, and by that I mean the president and typically the executive vice president will typically be a chief operating officer equivalent in a corporate context, really having a very strong interest in the success and continuity of the endowment. What you tend to find, and I did a lot of this as part of my due diligence, is when you have a lack of connectivity there, you typically have turnover. Because there's not a true understanding of what's going on at the endowment level, and oftentimes it's not, it's not unsurprising, Ted, because oftentimes you'll have these institutions run by the classic liberal arts guy or gal. They'll view finance kind of as this weird secret sauce. What value can I add? And so they tend to suffer from benign neglect.

AI assessment note: “when you have a lack of connectivity there, you typically have turnover.”

Q What are you seeing now in the markets?

A You know, the, the, The frustrating part of it is you're still getting, we've still been in a market where it's a highly, highly momentum charge market. So if you look at the factor returns to value versus the factor returns momentum, they're about as divergent as they've been since the tech bubble. And so that is the, the frustrating part. The good part is we're finally getting some volatility back in the market, and you're finally being able to add some pretty decent alpha on the short side, where companies that are, you know, either in bad financial position or, you know, woefully out of step with their product mix are getting whacked if they're missing, and people are starting to uncover that. So the good news is you are just, it feels as if the kind of monolithic march up Of 2017 is coming a little bit to an end. Uh, and then the other good news is valuation spreads in the market are wide again, and so that should lead to very robust returns for active management.

AI assessment note: “we've still been in a market where it's a highly, highly momentum charge market.”

Q So you've spent a lot of time at Maverick. You had your own fund. You have well-resourced hedge fund with lots of internal analysts, very smart people. You have what you can afford on your own. Now you've got Indian outsourcing. What do you think the analytics of companies in the financial industry looks like five or 10 years from now?

A Boy, I mean, everyone seems to believe It's all about artificial intelligence and counting the number of cars in Walmart parking lots and things like that. And look, Ted, you know, I, I'm just a Luddite. I'm sure it's just, but I, I have to believe I, I still prefer what Todd and Warren and Ted do, which is kind of the three of them have very little incremental analytical, analytical resources. They're trying to find good undervalued businesses and just own them for a long time. But I'm, I'm swimming against the current here, Ted, because all the, the dough seems to be moving more towards quant, more towards artificial intelligence, more towards data scraping, all these kinds of things. And I just think that's a tough game to win. It's kind of like an arms race. And some folks can do it. I think at the end of the day, it comes back to judgment.

AI assessment note: “all the, the dough seems to be moving more towards quant, more towards artificial intelligence”

Q Would you say, did that come from some particular type of analytics you were doing? Or is it your writing style? Was it a combination?

A I think it's a combination. Like if, you know, A tree falls in the woods. If you can't write, if you can't communicate in this industry, you're going to have a hard time in any larger institution. So there was a degree of Catchiness to what I'd write, but the thing that was great about Bernstein is they, they didn't encourage you to, but they certainly allowed you to fail. So in other words, a big part of their ethos was, you're gonna be wrong. You gotta take risks. If you're just gonna have the mean view on everything, you're gonna get a mean outcome, except when you add in fees, you're gonna underperform. And so Look, you can't be provocative for provocative sake, but I do think one of the things they were pretty good at is saying, hey, you know what? Think outside of what is currently the zeitgeist. Think about where things could evolve to. So one of my early pieces was on the cereal industry and how The pricing structure had to collapse because of the margin structure had run up too high. They were engaging in all kinds of couponing and things like that, discounting. So things like that, whereas the conventional wisdom was, this is the single greatest business ever. It's a consumer staple, blah, blah, blah. And so I think it was that Ted, it's like, okay, take a risk.

AI assessment note: “I think it's a combination.”

Q From your experiences, can you talk a little bit about the inside baseball of kind of capital allocation at that allocator level, and what are the things that you feel like work, and what are the things that you get frustrated and say, why are we also chasing returns when everybody knows that that's not what we're supposed to do?

A The latter thing is the most challenging, because even in a situation with Tufts or a family office where work Quasi-permanent capital. Even we do focus how the court ought. And we also have endowment envy. And not so much on the investment committee at Tufts, but if you think about stakeholders, they, oh, how did Amherst do? How did Williams do? How did, you know, the other NESCAC guys do? And it's a natural question as opposed to how are we doing versus what Tufts needs? And as we've talked about this before, but, you know, Tufts is unfortunately quite under endowed versus its peers. So we're probably, uh, Only 10% of 10 to 13% of the university's operating budget, whereas a Harvard or Yale would be a third. So that gives you a, and so in theory, we could actually take more risk, because day to day, we're not as important to the university's P&L, if you will. And yet that's a tough thing to kind of marshal through the various stakeholders. With this family office, It's been some of the same in the sense that we could take, it truly is permanent capital, and they don't even really need a dividend of any note, right? So it's almost even better, and yet it still creeps into our discussions, and so I just think that, I don't know how some of these other folks deal with it, um, but I just think it's a natural outgrowth of the business, um, And it's a fresh, I'm, I'm disappointed i…

AI assessment note: “The latter thing is the most challenging, because even in a situation with Tufts”

Q more availability of data, unlimited amount of data, you've had the large quantitative hedge funds have done really well in a period of time where most haven't. What do you think the limit is of this? If we look out 10 years, how much can computers replace what are today sort of people in research analytics and stock selection decisions and improving behavior? Where do you think this can go?

A See, I think we're, and this is a self-interested comment, I think we have to be naturally nearer to the end of it than the start of it, A, because it's on everybody's mind and everyone's talking about it, but, and intellectually, what I would argue is, You know, the overall industry, as Vanguard has shown, had a massive fee problem. In aggregate, the industry is doomed to underperform by the extent of its fees. With the hedge fund side of the equation, because the fees were higher, it would be that much more magnified. And so, again, maybe I'm naive, and I'm asserting this. There's no analytic proof behind it. But I come back to Omaha, Where they have, like, friggin' 20 people in the home office, right? And you know it better than anyone. And, and, and if you, one of my students, Todd Combs, actually works with, uh, Mr. Buffett, and he said it's, you know, we do it the old-fashioned way. We look through, we read through the documents. Now, they have a unique structure, an investor base, and things like that, but I think at the end of the day, judgment will rule. You just don't want to go into battle unarmed. And so I think where the big data stuff can help you is helping you systematize your decisions. But I'm not a believer that the computers are going to take over the world. And in fact, I think it's dangerous because I think, you know, you saw little snippets of it with the…

AI assessment note: “I'm not a believer that the computers are going to take over the world.”

Q And is there a way for a university or a foundation to pull that off?

A It's harder. Maybe a foundation with a university. I think there's so many stakeholders. It's really, really tough. I mean, the main thing I've taken away from the Tufts experience is I had massively underestimated the complexity of a university. And it's really interesting. So you see it inevitably when you have a new board member come on who's a titan of industry. So at Tufts, we had a bunch of, you know, CEO of Pfizer, Bristol, DuPont, and a bunch of Wall Street clowns like myself. And you all come on the board and you're like, oh, why can't you just fire all these people? And then, you know, like the academics were like, um, have you ever heard of tenure? You know, and so, and then you start thinking about like community relationships. Right? So Tufts is actually in about seven different cities. We're in Medford, we're in Somerville, Boston, Grafton, which is where the vet school is, and those types of relationships. And then you have the student relationships, and then you have the alumni relationships, and it's like, oh my gosh, they are so much more complex. And, and then, you know, getting into pricing. So we had a, we had a meeting about two weeks back on this. You know, everyone's like, oh, College prices are just way, way too high. Everyone's charging 70 K a year. It's all, it's running amok. It's all crazy, blah, blah, blah, blah, blah. List price is almost complete…

AI assessment note: “It's harder. Maybe a foundation with a university. I think there's so many stakeholders.”