The Exchanges

Q So in a relatively short period of time at a young age, You set out and started Farallon. What was your thinking and decision process to doing that at the time?

A The real question is why would I want to leave Goldman Sachs, which was the premier investment bank in the world, actually. I think that's continued to be true and a place where I think everybody at Goldman, including me, thought that I would make much more money and take much less risk staying where I was. But there were a couple things I wanted to move back to the West Coast, because I'd gone to Stanford, and I was an age to somebody from the West Coast. So there was a huge draw to move West. Bob Rubin, who was the person to whom I had the Personal loyalty had gone from running four people to running half the firm two years later or something was going to be running the whole firm so that my connection to the group was completely different. I didn't realize this at the time either, Ted, so who knew? I think that I was comfortable with the idea that if I was going to fail at Goldman Sachs and do a bad job of investing, they would dump me. If I went out on my own and did a bad job of investing, the investors would dump me. But in one case, I would have a little more control. I felt like I'm going to take the same risk at Goldman. They're still going to dump me if I do a bad job. So I might as well do it on my own behalf. My last year at Goldman Sachs, just to put it in a context of investment, I was running half of the investments for the art group. They paid me one 10th of one…

AI assessment note: “I felt like I'm going to take the same risk at Goldman... might as well do it on my own”

Q It has indeed. And you've been up to a whole bunch of things in the interim, it seems. Tom, why don't we go all the way back to your formative years in the investment business?

A When I went to Stanford Business School, my summer job between the two years of business school was working in an investment firm called General Atlantic. And they were the only investment group, as far as I knew, that was hiring summer people from Stanford Business School. So they had one job and I applied and I got it. And I had previously worked for two years as a mergers and acquisition analyst at Morgan Stanley out of college. And I'd spent one summer working as a research analyst at a investment bank called Kidder Peabody. So I knew the difference between investing and investment banking, and I was very intent on being on the investing side. That was what I was interested in.

AI assessment note: “my summer job between the two years of business school was working in an investment firm”

Q So what was the path to launching a hedge fund back in 86 when you started?

A So first of all, no one did it. No one left Goldman to do that ever. They were furious at me for leaving and really, really, really annoyed. When I asked two different people if they would basically back me with limited partner money, one of them was a firm in San Francisco where the number three person was my old roommate. It's called Hellman and Friedman, and I think they guaranteed me eight million dollars of LP money, and one of my good friends at GA said they would go on the hook for five million dollars of LP money. Hellman and Friedman was on the West Coast. Eight is more than five. It's about as complicated as it was.

AI assessment note: “Hellman and Friedman, and I think they guaranteed me eight million dollars of LP money”

Q So you've been out for 10 years and Fairlawn is still thriving today. There are a lot of firms still led by their founder that may have started around when you did in the business. How did you make that succession work?

A Well, there were a couple things that were true that made it possible. One is I was very clear for years before I left at the end of 2012 that the person who was going to take over was Andrew Spokes. And so that was no surprise to anybody. I said it for eight years beforehand. He was someone who I still have a very close personal relationship with. Still feel as if I understand him intellectually and from the standpoint of integrity. And I was not worried about either. So that is the first step for understanding. And then the real question was, what would the transition look like? Would some people not like to work in a firm where Andrew was going to be the CEO slash CIO? Would some of the people who were our clients feel as if I weren't there, that it would be materially different? And, but they'd all had such a long period of time. Really, we did it for over such a long period of time, Ted, and Andrew's a very articulate, trustworthy person, and I think overall people both inside and outside figured that out so that it wasn't that tumultuous. I don't think they really missed a step, and I don't think it was pretty seamless.

AI assessment note: “I was very clear for years before I left at the end of 2012”

Q So that initial thesis about wanting to do something about this, where did that take you?

A It really evolved because I thought, okay, this is a tech problem. We need to have better technology to do this. And so I, in some sense, invested, in some sense, donated money to different research institutions, basically schools, universities, to do research. So we won in the marketplace so people no longer use destructive machines and lifestyles. I thought it was really a tech problem, and then I really thought it was a understanding problem, and I spent a lot of time doing intentionally nonpartisan efforts at consciousness raising with some very prominent Republicans, including George Shultz and Hank Paulson, and Mike Bloomberg did some stuff, and he's been a Republican as well as an independent and a Democrat. But trying to bring in the business community to say this is not a partisan issue. This is just a challenge for humanity, and so we need to respond as a broad-based group, understanding that, of course, it's a societal problem, but it's also an economic problem in terms of the transition. Nobody wants to go back in a cave and rub two sticks together. How the economy responds and how capitalism and commerce responds is really important, so I wanted to make sure that business people weren't there saying this is all a bunch of Pointy-headed, unrealistic, liberal do-gooders who don't know anything about how the world really works, whereas we, the big boys, we know how th…

AI assessment note: “It really evolved because I thought, okay, this is a tech problem.”

Q What have you found about willingness to put capital behind concepts that everybody nods their head about, about the importance of climate solutions?

A I used to go to Wall Street conferences in 2012, 1314, 15, and say, you need to take climate into account. This is going to change the world. It's going to change the investment world. I was like the two-handed man at the circus. People wanted to hear what I had to say because he's just so weird. We have previously thought that he was remotely intelligent, but I think we can prove to our own satisfaction that that is definitely not true if it ever was. I think now it gets a spectrum, Ted. I'll give you the example. In the United States, if you talk to the huge asset gatherers, the Black Rocks, the Goldmans, if they get a new investment client, so they come in and they're going to have an investment advisor, and they're going to allocate their portfolio, 10% of them want a so-called ESG overlay. In Europe, in Germany, the same number is 90%. So it depends how much from a societal standpoint people have bought into this is a must have. And so we see it in various ways. It's all shades of gray that the people who are like, I absolutely insist on. And I say now, one of the things I say is having a fossil free portfolio, the divestment movement. I say, this is not the time for divest. This is the time for invest. The answer here is Making profitable investments in the transition to make it happen faster and to ride the wave of demand that is that transition. But obviously there are …

AI assessment note: “10% of them want a so-called ESG overlay. In Europe, in Germany, the same number is 90%.”

Q What teaching from your parents has most stayed with you?

A So my parents were ridiculous sticklers for honesty, and were very judgmental about it, so that if you were dishonest with my parents, it was like a life sentence. That was an unforgivable fact. But the other thing that I find in thinking about my parents, especially my mom, she saw something through society's baloney. I said to my mom in 1989, my mother's very religious. So I said, mom, do you believe in the death penalty? And I knew what she was going to say. She was going to say, don't believe in the death penalty because I believe in the sanctity of life and the redemption of the human soul, and that's not a appropriate way for someone who loves God to think. She goes, no, I don't believe in the death penalty. I said, why not? She goes, because I don't think they're guilty. I think that a bunch of those people on death row are innocent, and once you've killed them, then there's no coming back. You've committed murder yourself. As a society. So I'm 100% against the death row. I'm like, mom, they get 17 appeals. It gets litigated and re-litigated. She goes, that's a bunch of baloney. A bunch of the evidence in there is baloney. And they get railroaded, and there are a bunch of people on death row who I'm pretty sure are innocent. I'm thinking, oh man, what a soft-headed, chuckle-headed lady. My mom is dead right. No one was saying, and she did that over and over where she jus…

AI assessment note: “my parents were ridiculous sticklers for honesty, and were very judgmental about it”

Q What'd you learn in those early years on Bob's desk?

A A lot. They had a very strong philosophy about how to think about investing. The Warren Buffettism applied in different ways, but first rule of investing is don't lose money. Second rule of investing is don't forget the first rule. And that had taken them through the seventies, and it really had given them a compound that was really amazing for a lot longer than just the seventies, because that group had been central to Goldman Sachs for a very long time. Bob was a very disciplined, clear, fair boss, best boss I've ever had. Was really exceptional. I think they gave me a very clear sense of how to frame an investment situation, but also how to stay current more broadly. And just think we looked at all kinds of different things and a lot of investing, you know, as reps, how many things do you get to look at and then see what happens? So you can do pattern recognition. So there was a lot of that. I'd worked there for Something like two years and four months, you know, amazing opportunity to learn.

AI assessment note: “they gave me a very clear sense of how to frame an investment situation”

Q So in those early years, what strategy did you set out to do?

A We were doing a lot of arbitrage. I didn't call myself a hedge fund. I thought that a hedge fund was a macro fund. And to this day, a hedge fund is a structure, not a strategy. I think hedge fund in common parlance means financial speculator. And you can throw in rapacious go, go financial speculator if you'd like. That's the implications. What I was doing was something very, very different than that. I was trying to do arbitrage, distress, deep value, things where I felt like we were obeying Warren Buffett's first rule of investing, don't lose money. And so we were looking at things with A very specific outcome in mind over a period of time with an expected return where you're betting on outcomes, not on beta. Our opinion was we should have very, very low beta. It was a very unpopular or little known strategy when we started. Maybe as a result of my big fat mouth, it got to be better known and more popular, which meant that we were always having to innovate new strategies. Because once a financial strategy is known, then people put money into it. And that means there's more on the demand side than there was before. And if it works more, it gets commoditized. And so we were always having to come up with new ideas and new markets and ways of thinking to apply the same approach.

AI assessment note: “We were doing a lot of arbitrage. I was trying to do arbitrage, distress, deep value”

Q What's been your path from then until getting back into the investment business?

A Well, I spent probably 10 months Doing two things. One was running the economic recovery task force for California for Governor Newsom. And at the same time, I was also doing a lot in terms of climate outreach for the Biden campaign. And so I did a bunch on that as well. Between those two things, that was a more than full-time job for 10 months. And when that was over, then I was like, okay, now how can I impact the things I care the most about in a way that I can enjoy? Because if I don't enjoy it, then I probably won't do it that long, and it probably won't be that meaningful in terms of impact, and I feel as if we're at the execution phase of the climate crisis. We've talked about it. We've won the argument. Everybody knows what we have to do, but we actually have to do it, and so I felt like we're not prepared to do it, and I can be as I felt I was in terms of winning the conversation. I can be on the right side of this argument. I can participate in this argument. I can be part of the solution. And that's a meaningful thing for me to do in my estimation and something. I would say to people about what I'm doing now, which is investing in climate solutions, say, if I weren't doing this, I would be eating my heart out because I wanted to do it.

AI assessment note: “Well, I spent probably 10 months Doing two things.”

Q So when you stepped away, did you have a plan at the time?

A No, I had a focus, but not a plan. I felt as if the natural world is deteriorating, and we're going to have to change the way we as a species, we as a country, we as an economy interact with the natural world, and that's going to involve a change in the way that we think about that relationship, and a change in the way that we Build things, use things, a dramatic change in attitude and activity, and that that's going to be a long conversation in America and around the world, and I'd like to be part of the people pushing for a more aggressive, robust, positive response. We have presumably one chance at life, and so I wanted to participate in what I perceived as the overwhelming threat slash opportunity for change.

AI assessment note: “No, I had a focus, but not a plan.”

Q So the investment landscape changed so much from the early years where you were constantly having to find new strategies, and now you've been out of day-to-day investing for 10 years. As you've stepped back in, what have you seen as the most important changes that you've had to make in implementing investing from when you were last at the helm?

A Honestly, Ted, I don't see it as materially different. When I was under the age of 25, I felt that there were an infinite number of people who are very hardworking, very smart, very honest, and very dedicated to the task at hand. As I've gotten older, starting with, say, 26 in one day, it's become clear that that's actually an unusual combination. You don't need to be a magician. You need to be a dedicated, high integrity professional. I'm a real believer. I do think you have to have the intelligence and judgment, but basically the old saying, the harder I work, the luckier I get. You are going to have to do the work so that when the real opportunity arrives, you know, it's the real opportunity. Whereas if you haven't done the work, it's just another opportunity and you don't understand what creates real opportunity. To me, it's can you find, organize, ally yourself with, partner with, team up with those kind of people in a coherent way who can execute a strategy and then have a strategy that makes sense? That hasn't changed.

AI assessment note: “Honestly, Ted, I don't see it as materially different.”

Q There are two things you mentioned at the onset from your past investment experience. I'm really curious how you're applying it to this. The first is the environment we're in. You mentioned in the seventies, there was this period of hyperinflation. We're seeing the beginnings of inflation now. How do you think about the economic environment as it relates to these investment strategies?

A I love to think about the world in terms of alpha and beta. The beta is what you're talking about. How does the impact of all the different macro environmental influences change the returns and how much is determined just by the success or lack of success of the specific company. Beta is always going to move around and we know that there's going to be slower growth out of China, faster growth out of China. There's going to be higher interest rates. There's going to be lower interest rates. There's going to be budget deficits. There's going to be hopefully smaller budget steps. I think that's a law of economics, but I guess we're going to find out if that still holds. But this is about alpha. I was talking about plastics. That has to get solved. Sorry. If you look at the impact of two degrees Celsius, what that even means, these are problems that we cannot allow to fester. They have to get solved. There's a bunch of different ways to solve them, and that's really a question.

AI assessment note: “The beta is what you're talking about... But this is about alpha.”

Q As you're allocating capital to the space, what are the types of opportunities you're looking for?

A There's what needs to be deployed now. So for instance, as an example, let's say you and I own a big multifamily apartment building. Okay. One of the things we can do is change the glass in the windows so that it requires completely different amounts of electricity for heating and cooling. Okay. And the question is, what's the return on that glass? I was reading a story this morning saying that America's use of oil last year Went up .6%, I think, or something very minor. But up, the actual use of gasoline went down and will continue to go down as people transition to electric vehicles and non internal combustion engines. So if that's true, then how is it possible that we're using more oil? And the answer is plastics. Even though we recycle only six percent of our plastics, the use of plastics is exploding. It's especially exploding outside the United States because it's very cheap. There's all kinds of problems with infinite use of plastics. It doesn't biodegrade. We don't recycle it. We stick it into landfills. We send it to other countries who then put it in the ocean. We pay them so we have clean hands, but the result is the same. There's so many answers to that question, but it's going to have to be answered. Now, I can tell you three or four different ways to address that problem, but there's no question that we have to address it.

AI assessment note: “One of the things we can do is change the glass in the windows”