E176: Beyond Harvard: The Financial Crisis Endowments are Facing

Harvard, Yale, and other top endowments are reportedly selling billions of dollars with a B in secondaries.

Why do you think this is happening?

It kind of goes like this, David.

They were getting federal grants at some level, whether it was $50 million or $400 million or whatever.

And so they built entire industries at the universities around these grants.

And so, whether it was a hospital or a research lab or anything else, and they've got buildings and people who are working in these departments.

So, when you suddenly have the prospect of that money being turned off, they can't just shut the buildings down and let all of the people go.

So the university administration turns to the endowment and says, hey, we don't need $10 million a month.

We might need $30 million a month.

And the endowment says, well, we can't do that.

We're not built, you know, to suddenly increase the amount of liquidity that we have.

So we have to sell something.

Easy to sell equities, but that's where they've made a lot of their money in the last few years.

So they turn to private equity, where they may have investments in private or venture that they don't like very much anyway.

And so they're trying to unload that in the secondaries market.

And secondaries have also raised a lot of money, secondary funds.

And so it's sort of a great time for them to accomplish several goals at the same time.

Double click on that.

The smarter secondaries are probably saying to the universities, look, we'll take some of the DREC that you want to get rid of in your portfolio, but we also want this piece over here or this piece over here where we can't get access to that fund and we'd like to have it.

So I think there's a lot of negotiation going on.

It seems like there's a perfect storm.

So the direct impact today is on the federal grants.

You also mentioned the international students paying the higher tuition rates.

There's also this looming tax change for universities.

Is that playing an effect today, or is it just those kind of former two?

Foreign students not showing up in September is a direct and immediate effect.

The government grants could be and in some cases already are a direct and immediate effect.

The taxes are up in the air.

We don't know, but the likelihood is that especially for the largest universities, that the tax rate is going to go up.

So they have to do planning for that because again, that's another little slice of liquidity that they have to come up and plan for.

So it's a real

it's a real push for the universities to do all of this work at the same time as remaining active investors.

And is there game theory to why the larger institutions are trying to preempt the sale of these assets before this tax rate is increased?

Or is it just that they have these fundraising needs?

They have these funding needs today.

Yeah, I don't think, David, that there's

a gaming part to it.

I think there's a couple of different things.

And, you know, on your previous podcast,

particularly the one with John Bowman, which I thought was amazing,

you know, there's a lot of different discussions about liquidity.

Is liquidity a good thing?

Is it a bad thing?

Does it save us from ourselves?

I don't think any of those arguments enter into where we are at the endowment level, university endowment particularly level today.

I think the liquidity is kind of driven by a couple of things.

Maybe they went a little too far into privates anyway.

That's an entirely different discussion about portfolio construction that we can have.

But I think there's that.

I think that not all private equity and venture capital investments have turned out to be exactly what they thought they would be.

And so there's some desire to sell before you get to the seven or 10-year term.

And so I think there's a whole bunch of things working at the same time to get this done.

And

if your thesis is true and that they're using this as an opportunity to perch some of their lower quality managers, why didn't they do this earlier?

Why is there such a bias to re-up in managers?

Is there rationality behind that, or is it more an emotional thing?

I think it's more of an emotional thing.

I wish I could explain the madness of crowds better than I can.

But I think it does, there is a sentiment and that it carries across, in this case, all university university endowments right now where they're saying you know maybe we should really examine our portfolio we should examine what kind of liquidity we have is it wise to carry this this private uh part of the portfolio out to term if we don't have to I mean, in the past, there may have been a couple of secondary players.

I mean, Common Fund has been in secondaries for a long time and got a great group of people working on it there.

But there's been a sudden rush just in the last few years for people to start secondary funds and take this money in.

So I think it is sort of one of these market sentiment things that's hard to explain about exactly why it's happening right now.

You know, that madness of crowds kind of thing.

But I don't think there's anything more to it than that, than this sort of convergence of a whole lot of different things happening that are both.

taking assets out of the portfolios and selling them to new players.

In full transparency, I have somewhat of a bias towards these secondary funds because I love the idea that you can make money on the purchase.

You manage an institutional fund now at the Episcopal Diocese, and you have to manage, you have to allocate your assets.

Tell me about the pros and cons of investing in a secondary spawn.

In my mind, and this isn't me, I forget exactly where it came from, but they're really only two assets, right?

You either own or you have a contract.

So

this is a way to have ownership of identifiable companies that are being sold out of these funds into the secondary market.

So if you're doing a

reasonable valuation, reasonable amount of homework, and you can get this at a discount to current NAV, which is a whole other discussion we can have.

But assuming that you can do those things, then rational investors are going to say, hey, this is a great asset that I can own at a reasonable discount.

And so I can expect this kind of return out of it over this length of time.

That's a good argument to make.

And whether it's true or not, if the message is that one side is a distressed seller and you're a reasonable buyer, then that seems to be a good methodology for investing, especially in my own world.

I like to buy things that are cheap.

Unlike the public market where there's a very smart seller and a very smart buyer, on average, you actually are fulfilling a specific need here with secondaries.

You're providing liquidity to somebody.

So it at least makes sense why there would be alpha in a trade.

Yeah, exactly.

So where does that thesis break down and what are some mistakes that institutional investors make in the secondary market?

It's harder than people think it is.

So

I think you actually have to be able to do the underlying work or trust the people who are doing the underlying work.

because it's like any other asset, except that it's much less followed.

In the public markets, you have analysts from all over the place around the world who are looking at NVIDIA and telling you what the prospects are for that company's growth,

how tariffs affect it,

what new chips are coming out.

Are they as good as the ones previously or the price right?

I mean, there's a ton of information that you can get about public companies and make your own assessments.

In the private markets, it's harder.

There's not as many analysts covering whatever the company is that you're looking at.

The valuations could be harder to do because you have to actually go dig into the books yourselves, or, like I said, trust somebody to do it.

So, there's a lot of work that has to be done in the private markets to assure you that you're getting a good price and that what you're buying and owning is not going to be just a depreciation or depreciating asset that you're going to have to get rid of at some point yourself.

So, I mean, there's a lot of calculations in the private market that I don't think people truly appreciate

that

makes it harder to do.

So you can't just willy-nilly say, I'm going to invest in this secondaries fund or I'm going to buy this slice.

You could do that, but to do it in a way that gives me assurance that I'm not

throwing away my fiduciary duties, then you have to do the homework.

Is secondary investing kind of like investing into the best assets into second through fourth quartile managers?

In other words, if you're large endowments and you need liquidity, you're not going to be selling your Sequoia or your Citadel allocation.

You're going to be selling a second, third tier fund, and presumably there's some good assets in there.

Is that kind of how you describe secondary investing?

It's a great question, a great line of thinking, because you remember I said a few minutes ago that the smartest people in the secondaries world are going to be looking at the portfolio and saying, well, you're offering me these couple of things.

And, you know, that's great.

We can make a discount that I think will make these, you know, the fourth quartile investors at a certain discount, I can take that DREC away from you.

But I also want a slice of your Sequoia or your Citadel or your Kleiner Perkins fund for that I can't get any place else.

So let's, you know, either I'll take less of a discount on the DREC that that you want me to take, or I'll pay a premium to get access to those funds, and then let's agree to a price on the whole package.

I believe those kinds of negotiations are going on.

There's one other thing that I don't want to forget to bring up in here about the secondaries market.

There are, I've not seen this.

for sure, but I have heard the discussions.

So if I'm a university endowment and I've got very sophisticated investors and a team around me to do this, then I don't want to take a risk on the secondary market, and I don't want to have to go through all these negotiations.

So I'm basically going to sell my private equity positions to myself.

So I'm going to take the stuff I don't want, put it into what's called a collateralized fund obligation.

Then I'm going to take the cash out of that to you know to accomplish the liquidity, the same liquidity I'd have if I sold the assets.

I'm going to lever that up.

I'm going to sell the equity in it to UBS or Goldman Sachs or somebody who's going to take the yield and the risk on the equity.

And I'm going to kick the can down the road because I'm going to say that collateralized fund obligation has a life of seven years.

So me and my board and everything, we could all be gone someplace else or retired by this time this CFO comes home.

But it accomplishes a whole lot of things without having to be necessarily public about the sales because we're going to hear about some of these sales in the public and the journalists will decide whether the sales were a good idea or a bad idea for Harvard or Yale or whoever.

This is a way to get around all of that.

Like I said, I've only heard the discussions.

I don't know if anyone has actually done one, but I know it's out there.

So explain, like a third grader, how you would execute a collateral fund obligation.

A very smart third grader.

Yeah, I was going to say, I couldn't have done it in the third grade.

I'm not even sure I can do it now.

So what what you're doing is you're putting together a vehicle in your portfolio.

Now, the CFO has an equity component, which is the cash someone's going to actually give me.

And CFO is collateralized fund obligation, not chief finance.

That's correct.

Yeah.

And the equity carries all of the risk.

You know, if the assets go down, the equity goes down or could even go away.

And this new vehicle, which is called a CFO, is it lending the assets to UBS?

Is it taking out debt against them, or is it actually giving up the upside?

It's giving up the upside more than anything else.

Is that you're

and in return for giving up the upside on those assets, you're receiving cash that you can use in other places.

So it's essentially just like a secondary sale, except that you're doing it within your own portfolio.

So it's a secondary sale without any of the public relations issues that go along with that.

A lot of these endowments are playing these infinite games.

They're literally, Harvard is probably going to be around in 300 years.

So they need to manage their reputation over decades and sometimes centuries.

And this is kind of a way to do that.

There's another problem here, too, that I don't think as investors we typically understand the politics of.

And that's that you

university endowments rely on an estimate of inflows right from alumni and and donors

so they have to protect that image if you want or vehicle if you want that will attract donors to continue to give money to the university and major donors of course are

usually want to have some oversight of how that money is used and so they become on the board you know of the universities and there's a lot of back and forth between the donors and

the university endowment itself.

Not to mention that the students always seem to have, for one reason or another, want to know how the money is being used.

So there's a real

political milieu that you have to sort of think about when you're doing these things and the publicity that could come about as a result.

So it's not as straightforward as just taking money in and trying to maximize the returns for the university.

There's There's a lot of things to think about and a lot of

non-investment related issues to think about.

They're also talking about changes to taxes on charitable giving in general.

And so there are some universities that I've talked to who are also thinking about establishing offshore facilities.

for donors to go into so that they don't have to pay U.S.

taxes or using blocking corporations, which are corporations which are offshore companies where you can donate the money and then they're like investment vehicles themselves.

And so they don't, but U.S.

taxes don't apply to them.

And so it's very odd for universities to have to think about these kinds of things.

But they're, again, they are trying to maximize their returns as any rational sort of investment vehicle and its management would, but they have a lot of things to think through right now.

I got to sit down with Bill Ackman a couple of years ago during the whole Harvard issue with the president.

One of the things that he told me that was very surprising is the corporate governance at Harvard Corporation not only is basically irreplaceable, impossible to fire the board, but also the amount of votes to petition to even get somebody on the lower level kind of advisory board has doubled in the last decade.

And ironically, the reason it's doubled is because of that issue that you said.

Students wanted to

change the investment mandate to not invest into energy.

After that issue, they decided to double it so that they would have more control.

The problem with that is that giving to a university alumni contribution is a voluntary activity.

So, just like with any governance, alumni need to know that their money is going towards something that they believe in, something that they have control over, because it is a marketplace of giving.

You could give to a children's hospital.

you could give towards many great organizations.

So I think the universities need to find a way to balance that kind of governance and the freedom to invest into the things that they believe are best for endowment with making sure that alumni are happy and want to voluntarily contribute.

That's exactly right.

And very well said, David.

And the larger the donor, Bill Eckman in case, the larger the donor, the more control or the more

input that they want to have to how the investments are done.

I've joked for years that it's much easier to change the terminology and the language that you're using in a portfolio than it ever is to change the investment policy guidelines.

So, I also think there's a great deal of time spent thinking about how things will fit into the portfolio so as not to break the mold of the investment policy guidelines.

Because if you open that up, like you said, and it could take years to actually change the investment policy guidelines or the governance

documents for a board, that you might lose that battle.

And over the course of the battle, things could change too.

There are really good reasons not to go down that road to try and change the investment policy guidelines, but just to change the text,

the terminology that we all use for various investments going in.

Like ESG,

and I really kind of hate the three-letter acronyms that we all use in the investment world.

But ESG is basically gone.

No one talks about ESG anymore.

If anything, the language has changed.

So you say sustainability.

And the goals, many of the goals have changed.

Energy, which five years ago everyone was trying to throw out of their portfolio or hide or not talk about, has now morphed into power transmission or energy transition,

is how they talk about it, so that you can try and work some more rational and less emotional bits back into the portfolio.

So language is important.

Language is very important, and especially in contexts where it is the least common denominator where a freshman student can march against investment mandate versus a very sophisticated investment committee, it becomes even more important in those cases.

Yeah.

I think that's right.

I mean, it sort of got swept under the carpet by a bunch of other things, but you know, a couple of years ago, there was a lot of

sturm and drong at Yale because David Swenson was investing in an East Coast natural gas pipeline and actually wanted to continue the pipeline down to where it, beyond Boston, to where it was more useful coming down the East Coast.

And there's still a lot of talk about the pipeline itself as whether it's a good thing or not.

But Yale's money.

was definitely invested in that pipeline and there were a lot of students that were upset about it.

So

it's a real life.

It's a part of reality that you have to deal with these different influence groups as well as trying to be a good investor.

You mentioned David Swenson,

arguably the greatest endowment investor of all time.

He popularized this endowment model.

You believe the Swenson type of investment today is dead.

Why is that?

Dead is a very strong word.

I don't think it's dead.

I think that David Swenson was one of the greatest investors of the last generation.

And there are always new ideas, new investors.

We don't know who's going to be the champion yet of sort of the next generation of investors, but I'm sure there are several out there.

And so I think it's not as much death unless death is a part of evolution.

I think the very simple models of 60-40 or so much in private credit, all of the silos that we were all taught to think about and the kind of diversification and risk and liquidity that we were all taught growing up and the

and the great three-letter

modern portfolio theory and strategic asset allocation, you know, MPT SAA has suddenly become TPA, right?

So that,

and I think it's important.

to know that we are always trying to evolve and find better ways of doing things.

And we also have tools that weren't available 20 and 30 years ago.

I mean, all kinds of tools to use in terms of risk.

And so I think going back to David Swenson and the Yale endowment model, I think it was a

time where there was a need for that kind of evolution.

I think it took in a lot of alternative assets, hedge funds, and global and less and more illiquid investments.

I think that was all a great part of the journey of investing.

I think we've all been through that now and there are new

you know I spoke to you about a new idea that I hear from a lot of younger endowment and foundation investors about how every dollar in the portfolio has to compete with every other dollar.

That it doesn't matter what silo it's in is that you have to think about it.

Is this dollar, you know, what does this dollar spending accompany, what does this unit of spending accomplish for me in the portfolio does it raise my risk does it lower my risk does it increase my liquidity does it lower my liquidity all within a return what's the expected return and then diversification almost comes out of that naturally because when you think across like a spectrum of investing and think about it in that way and part of the problem here too is that they're trying to solve for assets that have become blends between public and private and so it it's more difficult to think about it in terms of silos because silos could lead you to a kind of diversification that looks good on paper and kills you when the market is down.

So

I really think of it as an evolution.

And I think that David Swenson was a huge pillar of that evolution.

But I think we've moved on from that endowment model.

It's interesting.

You mentioned diversification.

You mentioned the three-factor model.

I had Ken French in business school

who created the model with Eugene Fama, who won the Nobel Prize.

And we had an entire class about the declining value of over-diversification.

So, after you get a certain amount of assets, it has such a marginal benefit that you're much better off seeking alpha than further diversification.

The other aspect, which was really interesting and really blew my mind, was I talked to Jackson Craig at HIG Capital, which is a distressed investor.

And one of the ways that they look at diversification is through event-driven versus traditional sectors like geography.

I'll give you a good example.

You could have three different companies in Columbus, Ohio.

You could have an oil rig.

You could have a travel agency.

And you could have a chip semiconductor.

You would be perfectly diversified, even though all of them were in Columbus, Ohio.

And yet you could have companies in completely different industries in completely different geographies that are all driven

based on some kind of derivative like cost of oil, price of gold, price of commodities.

And you could be significantly not diversified, even though one company is in California, one is in New York, and one is in Missouri.

You feel like you're diversified, but once the event triggers,

once there's an event, you quickly see that you actually were not diversified.

So there's this not only too much diversification, but there's also not enough diversification and that people don't critically think about whether they are diversified.

It's a great line of discussion.

And there's entire groups of investors all over the world who are sitting around trying to solve for this problem all the time.

I love the analogy of Columbus because...

The risk there, even if you think you're perfectly diversified, and it's a new risk that people have to think about, is climate change.

So let's say a hurricane comes through and floods everything in Columbus, Ohio.

Your diversification just went out the window because you didn't think about having your diversification in one location and climate change could certainly impact that.

So there are so many aspects to diversification.

And let me do full stop here for a second and have fun with the conversation that we're having.

The only great money that I've made myself and portfolios is through concentration, is that I so believed in a single investment that I put an

over amount on any risk scale into that asset.

And

I forget who it was.

Maybe it was with Jeremy Hare.

You had a discussion about venture capital and why certain venture capitalists work is because they invest before there's an industry.

They invest in a dream.

Before there's even a space.

All the money is made before it's named FinTech, before it's named crypto.

Exactly.

Exactly.

And so I think

there's an element where you have to be willing to take some risk and maybe shift the portfolio to a more concentrated version at some points in time and when you have the belief.

But

it's very, very difficult for big endowments and

where people count on the money, like pension plans and that kind of thing, to think that way because the risk is that if you're wrong, you just lost, you just impaired a significant chunk of your capital and cannot pay out what you were supposed to or needed to.

And that's

an income or an outcome that you can't suffer through.

So then you have to start thinking about, okay, if I don't want to have just one, be invested in one thing,

what do I do to still get my sort of income goals that I have to start with the goal?

All right, here's what I need to do.

I need to hand out 5% or 6% a year on my portfolio.

And how do I set myself up up to do that with as little volatility?

Because that scares people that I can get away with.

And how do I do that within a lowered risk category?

So if any single investment I have fails, that I still can do what I'm supposed to do.

And I think that guideline between concentration and diversification and what

factors affect my diversification and how I think through both geography and asset asset classes and everything else is part of that every dollar competing with every other dollar in the portfolio.

So you're absolutely right and it's not an easy thing to solve for but that's what many smart investors are trying to do all the time is to think that through.

You just have to think about it in terms of where am I going to get the returns?

What do I have to think about to have the smallest amount of volatility, the smallest amount of risk, or an appropriate amount of risk to get to my goal.

And each of us have a little bit different goal in mind and a different risk appetite.

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That's sq u a re dot com slash go slash how i invest run your business smarter with square get started today there's geographic there's stage there's asset i would add the event driven like things that are derivative of certain things that might happen what other ways can you know if you're diversified like what stress tests are you running on your portfolio you know there's a very traditional stress test of like what if rent interest rates go up which there are lots of people who are working on that uh today uh What kind of

or political test?

What if the United States becomes a less attractive place to invest?

Many

endowments that I know and talk to are currently thinking about moving a little bit more money to Europe or moving a little bit more money to Japan

and just having less reliance on returns in the U.S.

because the risk has gone up.

So I think,

and there are all kinds of, I don't want to go down this path maybe right now, but there are all kinds of quant methods.

In fact, your FAMA models and

factor models, there are all kinds of quant ways of running your portfolio through risk models to see what the correlations are like under distress.

And we have some pretty good past events to sort of look at to make those models a little sharper.

The real problem is that

if there's some sort of calamity or let's say another pandemic, it's very hard to find things that are truly diversified when everyone wants to sell anything that they have.

I think part of

the rally in Bitcoin in the last several months is that as US

public equity assets have become less popular and gold has gone up as much as it has is that Bitcoin has been the choice of many more institutional investors as a way to try and find some diversification.

I'm not at all surprised that Bitcoin has gone up as much as it has.

I think it'll probably continue to go up.

But

that's the part of the search for diversification.

And

it's hard to do a stress test that is meaningful, that will

the problem with stress tests is they're informative, but they don't actually change your investment profile.

So it's a nice thing to have, but I don't know any stress test that has ever changed my thinking about how the portfolio should be invested.

It's really much more of a using all of that science and then applying some what people might call art on top of it to arrive at a conclusion.

So it

let me know if there's a stress test out there that will really help you.

to today.

The market is 40, 50% alternative, 50, 60% public.

So it's going to be some platform that combines those that has a good AI back end that could really run those tests.

You know, another way to say what you were saying on the pandemic and COVID is that everything was not diversified versus treasury.

So you have basically treasury assets and non-treasury assets.

And whether it was stock, whether it was crypto, whether it was real estate, it was all a competitor to treasury and everybody was going into treasury, so everything went down.

Another thing that has changed just in the last, I would say, a couple of years,

one of the things that's changed is that cash used to be a drag on the portfolio.

At zero interest rates, you didn't want to carry any cash because it was just a detriment to returns.

That's really changed in the last couple of years because if you push out,

let's say on the

AAA corporate curve, you can get 6%.

it's not, and even in shorter dated stuff, you can get 4.5%.

So

cash, especially if you're worried about

the risk premium in equities right now, then having more cash on hand isn't a bad idea.

And especially because it's no longer a drag to the portfolio, I think there's suddenly much more interest in how cash gets managed in these large portfolios.

There's a quote: now is always the most difficult time to invest.

So people always have an excuse not to invest and to hold in treasuries.

You've had an illustrious career over many decades.

Is there some truth to that?

Is there always a reason not to invest?

Do you just have to kind of hold your nose sometimes and make the best decision versus always being on the sideline?

Yeah, I think one of the hardest things to do in investing, and certainly even though there are days when I think I've learned it and other days where I'm just pounding my head off the desk saying, you fool, you fool, is to try and remove any emotional response to what you're doing.

So once you've got the goal set, once you've got what you think is the right portfolio with each dollar that you've been able to invest in various things,

then I think you have to have a plan about carrying forward.

And that's...

In many places, that's what's been called pacing models, right?

Which is just dollar cost averaging.

So there are are times where, yes, you just have to say, I've had my cash levels are where I want them.

I'm now over my sort of 8% cash holding that I wanted to put in place for this year.

So I need to put that cash to work.

And so where in the portfolio do I want to put it?

And sometimes you're going to be buying

over what you think are overvalued or crowded.

trades because it is a part of your portfolio.

And I don't like momentum investing, but you have to know that there are people out out there who are doing it.

And dollar cost average is a good way to do things.

And it helps remove the emotional response to, gosh, the market's up today or it's been up this week.

Maybe I shouldn't invest in equities.

Or the converse, of course, is, wow, the market really got whacked today.

I should go buy some things because it could get whacked again tomorrow.

It's removing that emotional component to it.

I remember, again, one of your podcasts, it might have been John Bowman again,

talking about how

the illiquidity premium really should be measured by the fact that it keeps you from making stupid decisions.

I believe that.

But I think you have to be able to do that yourself.

And I'm not sure that you should rely on the market being able to do that for you.

There's an episode 166 with Brad Conger, and one of the things that he does during crisis is

he buys put options if the market goes down a lot which allows him to actually earn a yield on doing the policy that he should do anyways so the market is down 30 he should buy those that's stock at that level so he binds his hands and he gets paid to take the right action at that time and i thought that that really blew my mind brad's he's a great investor um and got a great uh team around him so i think

yeah i think having a strategy of what you will do at the highs or the lows or, you know, sort of because it removes, again,

it's an emotional aid to say, gosh, the market's all beaten up and everything.

So I'm going to sell puts here because that's something I can do.

It won't lose me much money if I'm wrong, but has this great yield if I'm right.

And

that tactical

move takes a lot of the emotional pressure off of you because you did something, right?

You just didn't suck your thumb during the crisis.

You actually did something.

And I think that's a good strategy to have.

A lot of people can't really do tactical, so Brad's lucky that way.

But

even having a tactical mindset sometimes, like I said, assuages that emotional pressure that you feel like you should be doing something.

I think there's two things that are very underappreciated.

So a lot of people would say, okay, you're doing all this analysis.

As long as you come to the right decision, you know, that's the most important part.

But actually, the analysis itself has huge benefit because it roots you in your conviction.

There's two types of investors early on in Bitcoin.

Those people that saw their friends buying it and bought it, and those people that fundamentally believed in Bitcoin, there was a huge difference.

You would say, why does it matter?

They hold Bitcoin.

Because the ones that had rooted belief in it held through it or held a lot of it.

And the ones that didn't didn't might have bought at 100 and sold at 140 and thought they were geniuses.

So, this whole process of gaining conviction, although it could be painful and could take a while, is an incredibly valuable part of building a good portfolio because it allows you to take the right behavior at the most difficult time, which I'd say over 90% of investors are not able to do at a minimum.

I really believe that, but I think if you're going to be a professional investor, if you choose to do that as your sort of life's calling,

you cannot do things because it feels right.

You have to do the analysis and have the conviction, as much analysis as you can do and have the conviction.

I think it was Howard Marx that said, you know, we don't make money by what we sell.

We make money by what we hold.

And I think you need to have that kind of conviction.

in everything that you invest in to hold it for the long term.

So I think, yeah, while Bitcoin was was fun and a lot of its, you know, sort of allure came from because young people were holding up their hands and it was sort of a

rebel act, you know, to buy Bitcoin because you couldn't explain it to your parents.

And so, I get all of that.

But I think the real affirmative investors in Bitcoin began to realize, especially when you could

get it held.

at reasonable places like the growth of Coinbase, I think, is really important to the growth of uh

stable coin assets is that you but you've got to really have the conviction that it is a diversifier that it is a place that you would put your money and in essence i'm never going to sell my bitcoin because five years or ten years from now it's going to be worth much more than it is today and i i think you've got to have that kind of conviction in every piece of your portfolio or you should sell it.

You've thought about Bitcoin in the institutional context.

What's the range of how much Bitcoin or crypto an institutional investor should have in their portfolio?

So there was an investor I knew named Wally Stern.

Wally Stern helped to build capital research out in Los Angeles.

And

when I was in my 20s and just out of college, he used to tell me that diversification was the only free lunch.

And that diversification applied across all of your different assets in the portfolio and then sort of full stop, except that you should have 3%

in gold because you could be wrong.

And you had to understand that you could be wrong.

And therefore, you needed some asset that would be hold up or useful to you when all of the paper assets or contracts that you held were gone or

beyond sellable.

And so I think of Bitcoin actually in the same way is that it has some sort of diversification asset.

I may not completely understand it, but

I understand it enough to know that

if you do all the analysis, that it is a reasonable part of diversification in a portfolio.

COVID was really a once-in-a-generation situation where everything was

correlated or

was correlated with each other and against treasuries like we discussed.

I don't think that's typically the case.

Typically, you know, stocks go up, something else goes down.

So, I think people learned the wrong lesson about Bitcoin and certain other assets that everything's correlated.

You might as not well think about diversification.

I think that's the wrong asset.

I think as Bitcoin grows, I see it as inflation hedge and also a hedge against the national debt.

I think that's this ballooning issue.

A lot of people had hope in Doge and Elon and the administration cutting spending, but it seems like that hope is quickly fading away.

So there is no good answer to what are we going to do about national debt.

Not that I've heard of so far.

Yeah, I agree with that.

Part of trying to keep your emotions out of investing is to try and

also

keep your

political beliefs out of investing.

And it's very difficult to do, especially in a place where there are so many channels and so many places for news to come from and that it depending on what kind of news feed you're using how it can affect how you feel about the markets on any individual day so again I think that's why you have to have this discipline of whatever your emotions are telling you is to continue to with the plan and to have a plan for how you're going to invest and

whether you have inflows or whether you're a foundation and don't and so that may have to move things around but you need to have a plan of how you're going to invest and then stick to the plan.

So it

I agree with you that longer term, that there's a

it's easy to say with the right kind of analysis, not even thinking about it politically, but just doing the right kind of analysis, is that we're not going to be able to support at current interest rates and at current growth, we're not going to be able to support a $36 trillion deficit.

So

how we call that back, whether it's raising taxes or cutting services, I don't know.

And just like you said, I've not seen a good plan for it.

But I do think that my appetite for risk is lessened when I look at the analysis that says in 10 years' time, we could have a $36 trillion deficit.

The problem is it's hard to talk about investing without advertly or inadvertently going into politics.

So let's not go there, but let's talk about the different levers

that the country has in dealing with the national debt.

What are all the possible levers that could lead to substantial.

Well, there are the drastic ones.

We could devalue the dollar, right?

Because that would take a huge amount of pressure off, but it would probably devaluing the dollar at some point probably means raising interest rates because people are less inclined to buy U.S.

assets if we're going to devalue the dollar.

Although it fixes the banks, and what does that do?

That decreases the national debt.

So it goes from 36 million to twenty six million yeah but um but

when it once you do d devaluation then you're always going to be suspect forever more to do you lose your brand in the

international market yep so like I said that's an extreme uh ability now cutting services one of the things that I believe is

that there are that there is a lot of waste in in government spending.

How you carve that out and how you actually do it probably starts with a very simple thing.

It doesn't start at the top.

It starts with audits, right?

So there has to be a very strong audit function.

And anybody who runs any kind of investment foundation knows that you have a very strong audit function to make sure that you're adhering to your fiduciary responsibilities and your plan.

So I think there needs to be a strong audit function to figure out how to cut government spending, but it can't be willy-nilly and it can't be done from the top, in my humble opinion.

So that's a longer-term way of cutting the deficit.

That probably has to be met with somehow increasing taxes.

And that's why I think the endowments and foundations, whether they're private or universities or whatever, and charitable giving is going to be scrutinized as a way to raise taxes, find a new revenue stream for the state, local, and federal governments.

So I think there's a combination of things that you can do rather than the drastic things, or the other one could be along with devaluing the dollar, the other one is to let inflation run

because inflation

helps with debtors, right?

So because it cuts the amount that you're in real spending that you're going to put against your debt.

But again, that also eventually ruins a whole lot of good things.

So think there needs to be a combination of looking both at the revenue side and the spending side

so that over a longer term, you can get to a

deficit as a percent of GDP that is a reasonable carry.

Right.

So

I'll tell you, the other thing is, is that people used to argue all the time about Japan being in such huge debt that they could never get out of debt.

The difference in Japan was, and we can talk about Japan for a long time, but

the difference in Japan was that they owned all of their own debt.

So no one could outside, could shake their tree.

We don't own all of our own debt.

The Japanese, I think, own more of it than anybody else, but the Chinese own it, the Saudis own it.

So

there is the ability for outside investors to have a tremendous influence on the direction of interest rates here in the United States.

They didn't have that in Japan.

So it's a different, it's different here about the the amount of debt that we carry to GDP than say it is in Japan.

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Is devaluing the dollar and inflation two sides of the same coin?

In other words, you're spending more to get the less is just a framing?

Yeah, it's just the

inflation is something that you let eat away at it over a long period of time, whereas devaluing the dollar is an instant hit to inflation.

But it accomplishes a lot of things.

It's just a drastic,

in my opinion, a terrible way to do it, but it's possible.

Yeah, one of the things that I hope that the country implements is

governance,

governance controls at Congress.

Every politician essentially has an incentive.

to optimize on their local economy at any cost, even at the cost of of the entire country and to focus on headlines.

And the entire incentive mechanism of how Congress operates and how budgets are made itself is flawed.

I think that's actually the problem.

I do think we have more of a spending problem than a revenue problem.

We're the richest country in the world.

We have pretty high taxes on a relative basis, but we do have a great spending problem.

And it's not, and oftentimes that spending isn't even going to the people that need it.

It's going to these

pork pork bills and these random bridges to nowhere, whatever is the latest project for a rising congressman that he or she wants to kind of stand behind and make a career behind.

So I think there is

a methodology in there to look and evaluate spending and cut out a lot of the waste and programs which we probably got are legacy programs even that we probably got involved with after the war, after World War II, right?

And they've just become legacy programs that need to be reevaluated and the money can be spent in new ways.

And you said the right word and governance around how we do these things.

I mean, for the longest time, even today, I would have said Congress should just go home because they're not doing anything, right?

And so I do think that what you're talking about is that, you know, a Congress, state, local levels really need to think through.

They all need to work together to think this through about here's what we need federal money for.

Here's what we need state money for.

Here's how the federal government should raise money.

Here's how the state government should raise money.

And we need to have this discussion from the local level up to figure out exactly what the right things are to do.

I don't believe that people, many people today are not thinking about the right thing to do.

They're just thinking about winning.

something,

whatever winning means.

Just to double click on what you said, it's not actually that the politicians are dumb.

They're actually incredibly smart.

They just have the wrong incentives.

So they're not optimizing on what's best for the country.

They're optimizing what's best for their career, which you could say you could criticize them for that, or you could actually solve the problem and take away that misalignment.

Yeah, I completely agree that we have put in place terrible incentives for why people become involved in the U.S.

government at almost any level.

And that we need to have much better governance about how people, and I didn't used to be, but I'll tell you the other thing I've now become very strongly in favor of is term limits.

You should donate whatever number of years of your life to public service.

But it should not be something that is a life pursuit.

It's a job.

And

you should be honored to work in that job for six years or whatever it is.

And then

you've done your service, you go back to whatever else.

Because I think

what little I know about Washington is that it becomes an inward-looking fish tank.

We're all looking at it, but it's not looking at us.

It's only looking at itself.

And it's a terrible

thing to try and work through because

we've got the wrong incentives in place.

So I think you're absolutely right.

There's two ways to slice the pie.

One is you could change incentives, and the second, you could change the people that go into politics by taking away the other incentives, which is you shouldn't be able to trade stocks based on insider information, which no other American could do.

You should have term limits, so it shouldn't be a true career option.

And also, I think you should ban people from being able to go to regulatory agencies that they're overseeing.

Yeah, I think.

And this is, by the way, this is Republican, Democrats, Independents.

They all have these same adverse incentives.

And I think it would be bets for the entire country if we just did away with all of those.

You started advocating for less liquidity about 15 years ago at the Episcopal Church, and you started implementing it seven years ago.

Tell me about what it took to get

all the stakeholders comfortable around having less liquidity in your portfolio.

So,

the Diocese and Investment Trust of the Episcopal Church of New York represents about 162 different parishes that are in Manhattan, Westchester, and up the Hudson Valley.

Of course, that represents a lot of people, a lot of parishioners, and many of them have different ideas about investing.

They have different ideas about whether or not they want to be involved with how the money is invested.

And in the state of New York, we have pretty strong fiduciary laws around the people who serve on the boards and on these, you know,

who shepherd these investments.

There was a belief that any given church on any given day might need 100% of liquidity because the

primary asset, even though many parishioners don't think of it this way, the primary asset of these churches, the big traditional churches, are the properties that they own.

We're long real estate in a big way.

So

the theory was that the steeple might fall down or the roof might fall down because many of these churches are more than a century old and they require constant maintenance.

through some good analysis like i said you have to do your homework i actually found out working with a group of people not just me that in 152 years no no one had ever needed 100 liquidity

so i took that message to the boards and said look there's great returns to be had by investing in these different private assets that are available to us.

So it took a while to do the education.

Like I said, it took several years to actually get the board to be comfortable that, first of all, we weren't just shoving money into a black hole or a black box that would never come back to us

and demonstrate that it was a mature industry where you could invest and the returns were often better than what you could get in public equities over a long period of time.

And we had some of the private equity funds and a couple of venture capital funds come in and present themselves.

And they were very sophisticated investors and did a great job of helping educate the board.

And that's how we finally got to make our first private equity and venture capital investments.

Education is important.

Not every investor, especially on these boards,

on most boards.

that I know of, whether it's faith-based boards or endowments and universities,

foundations, there's usually a group of people around the table who actually understand investing and who are sophisticated investors.

There is also a group of people around the table who don't know anything about investing or sort of have ancillary information about investing.

And so I think part of the mission of these boards is to make sure that everyone at the table has a good education and a good background in what's happening with the,

you know, with their fiduciary responsibilities.

So

it takes time, and you have to be willing to invest the time to get the right things done.

I think education and a prepared mind goes hand in hand.

You cannot have a prepared mind.

You can't sit around in a room and say, I will be prepared for the market crash without really understanding portfolio, understanding historic fluctuations, and all these things.

I think they're two sides of the same coin.

And the top investors, they may not even know what the catalyst is, what the next Block Swan event will be, but they cultivate a prepared mind, not just in themselves, but in their organization.

I had the CIO of Calster, Scott Chan, and they had an organization-wide contest where everybody submitted their best trade idea.

And the most, the

idea that won the best trade was actually preparing for the next market correction.

This was like in the early 20s.

And because of that, they were able to take right action during COVID.

They were fully prepared as an organization for that drawdown.

And they were able to not only not take wrong action, but also take advantage of the market dislocation and, you know, take favorable positions in their portfolio.

So I think those two things, although they seem differently, education and a prepared mind, are interrelated.

And I think people think more about, you know, almost like becoming Zen-like and prepared mind, but the best way to actually have a prepared mind is to be educated and to almost like simulate what a difficulty in the market might feel like.

Yeah, David, I love the concept of a prepared mind.

And I think it is an essential part of being

any part of a board that oversees the investments of an endowment or a public pension plan, any of the

anything that's not personal where you bear bear the responsibility for taking care of others, I think having that prepared mind is a really important

part of being at the table.

John, this has been a masterclass in investing.

How should people follow you?

I think best if they want to reach out on LinkedIn is a good place to start.

And then I'm happy to talk to people or meet them.

You know, one of Jeremy Hare's concepts about being a super connector, I'm not a super connector, but I think it's important to talk to people across many different industries.

It's part of that prepared mind bit that we were just talking about.

I think you have to have the ability to meet and talk with lots of people to keep yourself educated.

Thanks for jumping on the podcast and look forward to sitting down in real life soon.

David, this has been fun.

Look forward to it.

Thanks for listening to my conversation.

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