The Exchanges

Q Why don't we go way back? Your initial backgrounds getting into investing. Vinny, why don't you start?

A I was an accountant first. Got my CPA. Did my two-year stint, and I knew from jump, I did not want to be in the accounting CPA business. So I started looking around, and I was fortunate enough to have a friend that I went to college with, and he hooked me up with Oppenheimer at the time, and a fellow by the name of Steve Eisman. And we interviewed, I think we hit it off considering how long we worked together. And I was initially the junior analyst for Steve covering this wacky world called specialty finance, which was pretty much everything that lent out in markets without a checking account that wasn't regulated. So that's where the whole initial foray of knowing subprime mortgage, credit card businesses and the like started. I worked with him there for four years. I had a brief stint away from him. One starting my own business with two other gentlemen, them working at Keith Bretton Woods after they lost so many people, sadly, after nine-eleven. And then we came back together at a firm called Frontpoint, which is where I've started to really meet Porter Collins.

AI assessment note: “I was an accountant first... hooked me up with Oppenheimer at the time, and... Steve Eisman.”

Q So you mentioned that you knew from the work you were doing, the data, that the subprime two point was coming. We often hear someone somewhere shouting from the rooftops that the sky's about to fall in markets in one way or another. What was it about this trade that allowed you to have so much conviction that it would work?

A It was the underlying work that we were doing, combined with, I think, years of history knowing these management teams, how the industry works, who are the players, and at that time, the primary funding source for all things subprime were securitization, and very few, if any, were actually looking at the data on a monthly basis at that point in time. I remember Oppenheimer paid for a subscription to Moody's. There was one Bloomberg on the floor, So I would be there at night going through and compiling data to take a look at the waterfalls of delinquencies, prepayments, and defaults, and then putting these spreadsheets together. Once you saw the spreadsheets and looked at the waterfall, you realize that there was a problem pretty quickly. And so that was the downfall of subprime one, which was the first call that we made way back in the late nineties, which is a funny time considering that we were in a hyperbole market And Steve and I and Meredith were the only ones shouting, something's really, really wrong. And our stocks were going down while the rest of the world was going up. As we go to subprime two point oh, the big short era, we started tracking and refining our methodology to the point where we were actually looking at underlying, underwriting characteristics for each of the securitizations. We saw massive degradation starting from say, 2004 To say, 2007, you could see …

AI assessment note: “we were actually looking at underlying, underwriting characteristics for each of the securitizations.”

Q So after that period of time, I know the two of you paired up and joined Citadel, and would love to hear what did you learn from being inside that organization in a pod that you didn't know before managing a low net long short fund?

A After I was there, I learned why we had such trouble in early 2016. Pretty quickly. While we were running Frontpoint for the last four or five years, there were these big machines being created, these multi-strats, and this concept of vol targeting, which you learn pretty much immediately once you get there. And for anyone who doesn't know what that is, is that the majority of the capital that is being deployed by these large firms are based somehow, some way from a risk management perspective on the level of volatility that they create. And so as a result, the lower the volatility in the world, the more capital they're deploying. And that was a very interesting concept for us. A concept to that was an eye opening experience. And more importantly, probably now it is dictating a lot of the flows and the performance that we see on a daily basis in markets today. So I don't think I would understand What I'm seeing now, if it wasn't for the fact that we worked at Citadel for a year and a half.

AI assessment note: “this concept of vol targeting, which you learn pretty much immediately once you get there.”

Q What are your thoughts on the banking system?

A It's a loaded question because as Porter said, we've covered the banking system our entire life. We've been investing in the banking system for the latter part of 20 years, and I think we could probably say that we were constructive on the regulated banking system maybe 15% of that time. I think the banking system has long-term cyclical issues. The biggest one being now is that they have a competition problem probably for the first time ever in their existence. Maybe in the seventies they did as well in that we as savers or people who are looking to save their money or park excess money in a bank just kept it there and didn't even really think about it. Forget about the operational accounts, the true mode of the banking system, talking about savings and the like. If you're a corporation and you have excess capital, you're not going to keep it in a bank. You're going to move it to a money market fund. You're going to move it to T-bills because you're getting five percent as opposed to 80 basis points or one percent. It was Jim Bianco or Bob Elliott. I got to give one of the two credit calling it the deposit walk, that deposits are leaving the banking system, and that is truly the moat of the banking system relative to everybody else is that low cost of capital. If that trend continues, the banks have really a funding issue. Over the last three months, it was Chronic, and it was …

AI assessment note: “I think the banking system has long-term cyclical issues.”

Q Then what teaching from your parents, or your mom in this case, has most stayed with you?

A I would actually say the teaching she's giving me right now is staying with me. I don't want to bring the room down. But she's had stage four lung cancer for six years, and various other ailments. And God bless this battle axe of a woman, she keeps going. And she has a will to live like I've never seen. She recently got her latest scans, I was telling Porter, And the tumors are shrinking, and she hasn't had chemotherapy in two years, and she had a bypass in her leg. Sorry, that's a lot for a lot of people, I understand. It makes me so proud of her, and all she wants to do is go to my daughter's graduation, or go somehow, some way, she's going to get there and do it. Just watching her and her will to live is really, for me, it just resonates to me on a daily basis.

AI assessment note: “Just watching her and her will to live is really, for me, it just resonates”

Q So I want to turn to the first chapter of Seawolf. You guys starting your own fun with Danny Moses. What was that startup like?

A Think about working with two of your best friends, starting a business in something now that you have a little bit of experience in. And Ted, you know, because you were interviewing us as an investor, we felt really good about ourselves. We felt confident, but we had no idea whether it was going to work, whether we were going to raise money. And then after you raise money, putting it all together to put a portfolio and put up performance. So it was a An incredible journey. At that time, as you remember, we were a sector fund, so we did solely financial services, and every day you walked into our office was just an incredible day, because you were not only educating yourself, and it was extremely exhilarating from what you were doing for a living, it was completely entertaining from the characters that you worked with.

AI assessment note: “we felt confident, but we had no idea whether it was going to work”

Q Vinny, one of the things you mentioned at the onset with this volatility-based risk management seemed very contrary to how you would think. So the idea is if market vol is muted, you're taking more risk. You guys are kind of natural contrarian investors. What do you think about that risk management discipline today?

A I think it guides us in many respects, but we have to be extremely careful and mindful that it can go materially longer than we think. Let me explain what I mean. If you work at these shops, it took me a while to figure out, but almost all of them Are 90, 95% of the time long short-term momentum, which is in English is long something that is working right now. And when you think why they have to do it, if you're so levered the way they are, the last thing you can be is contrarian because contrarian takes time and their business models don't allow time or risk of loss. It just doesn't work. So if more and more capital is being deployed in these strategies, More and more capital is long, short-term momentum. So therefore, once you think about it that way, it's very easy to see why we're seeing the volatility that we're seeing today, the way we like to manage money. I need significantly more patience and duration of capital in order to achieve my excess returns that we're looking for as a family office.

AI assessment note: “I think it guides us in many respects, but we have to be extremely careful”

Q What are the themes you're most excited about today?

A One of our favorite themes has been and continues to be uranium and nuclear. We found this one early, and I think it was Josh Wolf who said, if they found uranium today and called it something else other than nuclear, I forgot what he called it, elemental power, they would crown this the holy grail, and there would be a massive deployment with ESG backing beyond belief, but it has such a checkered past and such a poor marketing That being said, what we want is clean energy in this world, and we want strong baseload power. Nuclear provides that. They also have technology that allows it to be significantly more safe than all the doomsayers say. So as a result, for me, this has been something that we started deploying really early, about 2020. Other than doing the work to ensure that we are correct, we haven't really even thought about it all that much, other than add on dips. And thankfully, the story, the trends have improved over time. As I say this, I always get mad at myself. It's like Vinny, people are going to look at these charts and say, you idiot, these things have already worked. And they're right. They have. I would not be necessarily deploying additional capital here, but I'm not selling either.

AI assessment note: “One of our favorite themes has been and continues to be uranium and nuclear.”

Q What did you come to in terms of how you wanted to try to go beat the machines?

A Well, the first thing we did was we said to ourselves, who are we? We tend to be value oriented investors. And our view was, shouldn't we expand our pie as to companies that we can invest in? So we decided that we need to be more of generalists, obviously with the core expertise in financial services, but we should be doing things outside the core because if there are opportunities out there, we did not want to be pigeonholed to being fully invested in a sector that might be out of favor. And we had a good feeling that financials were going to be out of favor for quite some time. So we started experimenting being generalist. We also started experimenting with less structure that is typically conducive to institutional capital. We were factor cognizant, but we didn't want to be factor controlled. We didn't really want to talk about nets. We wanted to go where the opportunities were and deploy our capital accordingly. And we did that with our own capital because then you're really only answering to yourself and no one else.

AI assessment note: “So we decided that we need to be more of generalists”