E221: From Citadel to Family Office CIO: Sid Malhotra’s Investment Lessons

So you work at a single family office.

Tell me a little bit about Cactus Capital.

We are a single family office, which means that we manage capital for one family.

We have no external clients.

And I'd say in terms of my responsibility as the chief investment officer, my team and I are solely focused on investing day in, day out.

There's no marketing, raising of assets.

Our interests are fully aligned with the family, and we're trying to be stewards of capital for one single family.

One of the things that I think Cactus got really well is incentivizing everybody within the family office to think long term.

Tell me about how they accomplish this.

So when we set up the structure, I actually believe myself that it's critical to have alignment between the investment team and the family.

So there's a few ways we do that.

You know, the easiest one is maybe investment philosophy and mandate.

But beyond that, we want to avoid principal agency issues, which come up a lot in finance and investing.

And so one way we do that is

a portion of the investment team's compensation every year is tied to performance of the portfolio, both over recent periods and longer periods.

So that really helps incentivize us as an investment team to think long-term.

But secondly, the investment team has capital invested alongside the family in the entire portfolio.

So that really gives us additional skin in the game where if things go well, the investment team benefits through

good compensation, but then also a return on their investment.

If things don't go well,

compensation isn't as good as you'd want it to be, and your investment goes south.

And so there's a really good alignment there in terms of aligning the interests of the investment team with the family.

And that really makes us think long-term and not think short-term and avoid noise and really invest for the long term.

It's something that's so obvious and common in nearly every asset class on the planet, whether public or private.

And yet, in family offices, oftentimes this is an exception.

Why do you believe that's the case?

I think, particularly at single-family offices

where I work currently and in my prior firm, because it's, again, one family that you're serving.

And so there's no other parties you're sort of trying to appease or make happy.

And again, you're not marketing what you do or your performance to other folks.

That's basically irrelevant at a single family office.

It does not apply.

And then the flip side is you're at the whim of one family in that if they're not doing what they want, you're probably not going to survive in that seat for long term.

And so that is a very good governor and governance mechanism.

Whereas, if you have multiple investors, you don't have to always make them all happy.

You probably just have to make the majority of them happy.

You probably want to make them all happy, but you don't need to necessarily, especially if you're fundraising, because if certain investors don't like you, you can try to find other investors.

That concept doesn't apply to a single-family office.

You're all in with the family, and you got to make it work.

And tell me about the trade-offs of having your own capital and investing on behalf of the principal versus some other multifamily offices where they have maybe some of the patriarch's capital to start, but they also raise capital from other family offices.

There's definitely trade-offs, and I think both approaches are very valid and serve different purposes.

I think once a family gets to a certain critical mass of investable assets, a single family office makes a lot more sense because that way the family has control over you know effectively all the investments.

There's no other incentives at play, whether it's other families that want something else and there's one firm trying to cater to everyone and maybe meeting their needs or maybe not really meeting all their needs, but sort of meeting their needs.

The second thing is as a single family office, we don't have a business, right?

And so we don't have business goals or objectives versus a third-party firm that has their own objectives and goals aside from what their clients objectives and goals are, right?

And sometimes those can be in harmony, but many times they can

be conflicting or not be fully aligned.

And so, by being at a single-family office, you sort of put all that stuff to the side because it doesn't apply.

And it's just a lot easier, I think, to have better alignment with the single-family.

They have control over everything that's going on.

You're sort of serving them, if you will, versus a variety of different clients.

And then the other thing is it's easier to sort of

meet the demands or unique requirements of a family under a single-family office umbrella than a multifamily office umbrella.

Because, again, your singular focus is just on that one family and doing what they want and what's right for them, not catering to a variety of different people.

So it's just a different construct.

They're both very, very valid and have different pros and cons.

A lot of people talk about the quote-unquote strategic nature of taking capital from family offices.

Double-click on how family offices can be strategic versus endowments, pension funds, and foundations.

I think there's a few ways family offices can be strategic.

You know, one is if the family has a background or expertise in a certain sector or type of company, that can be very much a value add relative to some of those other institutions you mentioned where they have talented investment teams, but there's maybe no in-house expertise in running a manufacturing business.

If you're looking at a manufacturing deal, for example, right?

Or if you're looking at sort of a tech platform and it's a tech entrepreneur who has expertise in that end market, they could add a lot more value than just a typical investor that's just sort of, you know, doing due diligence and writing a check.

So you can definitely be strategic from that way.

The other way is connections and just introductions.

If you know people in the industry or that can tangentially help the company or an investment or a firm.

That also, I think, is a way that family offices can be a little bit more strategic than many other types of investors.

Or again, they have the investment team, but they don't have the Rolodex of a very successful family that has, you know, lots of experience doing something very well.

And then the last thing I would say is, you know, I do believe that many family offices have a longer time horizon than some endowments and foundations because some of them are really trying to be multi-generational in nature

and they're not as concerned about what performance might look like on an investment in the short term because the family really understands this is truly meant to be long term, whereas those incentives may be a little bit different at some of these other types of investment firms you're talking about.

Yeah, I see a lot of the value for family offices are the zero-to-one decisions that institutional investors can't make or choose not to make.

For example, they could invest into crypto before it was fully regulatory approved.

They could warehouse opportunities.

They could backstop opportunities for people that don't have funds.

They could seed new opportunities with managers that are going into these new asset classes or new variations on their asset class.

I think that could be extremely strategic.

And also that it's one of those areas where the family office could get outsized returns.

Maybe they get co-invest.

but also it's extremely valuable beyond just the check for the managers.

It allows them to expand their business dramatically.

I would agree with all that.

It's interesting that we're talking about strategic family offices.

The two most strategic family offices that typically come to mind, at least the slightly less secretive ones, are MSD Capital and Pritzker Group.

You were at Pritzker Group previously.

What were your main learnings and takeaways from the Pritzker Group?

It was a great experience.

I was there for a bit over six years.

I think the biggest takeaway for me was that family had the DNA of owning a lot of businesses in the past and a lot of them had a manufacturing bent to them as well as some real estate assets.

So it really gave me an appreciation of just the legacy of

a family and the wealth that's been created through it and keeping a business throughout time and shepherding it.

And related to that, to the prior topic we were talking about, just all the expertise you might have in those sectors,

contacts you may have in relationships, and those can be very, very value-add when folks like myself on the investment team are trying to make investments or add value to partners that we're looking to invest alongside.

So, I think that was very, very interesting and eye-opening since that was the first time I worked at a family office.

And my prior firms were also amazing experiences, but we really didn't have that strategic angle.

or that legacy of owning businesses over time and just a collective wisdom that sort of comes with it.

Today, at Cactus, you're really focused on absolute returns versus relative returns.

What do you mean when you say that you focus on absolute returns?

The way I define it is, you know, trying to generate a positive return regardless of market conditions or market performance or outcome.

It sounds great, but it's hard to actually achieve.

What that means is we're trying to generate a positive return every year, even if markets are flat, down, or up a lot, right?

We're trying to just compound the family's capital over a long period of time by having an absolute return mindset versus just thinking about trying to outperform a benchmark by a little bit.

It's great to outperform a benchmark when it's down, but we would prefer not to lose money and hopefully make money in those scenarios where the market's down.

So it's a little bit of a different mindset where we're trying to, again, compound capital over time.

And I think the best way to do that is, you know, one, don't lose money, right?

Easier said than done.

And then as Warren Buffett would say, rule two is don't forget rule number one.

And then rule three, I would add, is take prudent risk.

So you got to take risks in this business.

That's what it's all about.

And there will be losses at time, but we're really trying to minimize losses.

and you know have a high bagging average of singles and doubles versus trying to have a high slugging percentage because a lot of those at-bats are not going to be successful so double click on your criteria for how you decide whether you want to make an investment in a manager.

For us, the way we think about investing is really two ways.

You know, it's bottomed up, right?

The manager is just compelling in terms of what they're looking to do.

They're best in class.

And so there's obviously demonstrated investment capability there and we believe it's best in class.

However, we also need to be

pretty positive on the opportunity set.

You can be the best investor, but if the opportunity set's not that great, it's probably not going to be a best fit for us.

We need to have conviction in the opportunity set, or at least not have a neutral, it's a negative view on the opportunity set.

So that's also really important to us.

A few other things I think go without saying are your alignment of interests with the manager.

If it's a third-party manager we're partnering with, we want them to have skin of the game.

We want them to be a true partner and think of us as partners.

And again, try to avoid those principal agency issues that can come up as an LP investing alongside the GP.

Rahul Mugdahl, previous guest, talks about these two different ways to go about asset allocation, the jigsaw puzzle, which is putting together a portfolio that works great together.

And the second one is a treasure hunt, finding the best possible investments.

And maybe they're not fully diversified at

every step of the way, but you're basically getting the best returns.

How would you categorize your investment style and why invest in that manner?

I'm a big fan of Rahul.

He's great.

I'd say our approach is a little bit of a combination of both.

What we've really been doing for the last decade or so is analogous to the total portfolio approach.

We were sort of doing it without even knowing this was the turn forward.

And so, what that really means is whenever we're looking at an investment, we're always cognizant of the macro environment.

The macro environment, from our perspective, needs to be at least neutral to benign for the strategy.

If it's not interesting, we're not going to just push or fill an allocation like some other groups might do that employ what's called strategic asset allocation which kind of says you know fill these asset class buckets and you know don't necessarily worry about the macro environment or what's going on because this is your policy portfolio or we don't really take that mindset you know everything we do we need to be positive just from a top-down perspective

or at least not negative so I think that's one thing and so there's definitely certain risk exposures we want to have in the portfolio at all periods of time but at any other period of time for day to day, we're just looking for the best opportunities out there on an absolute return basis, risk-adjusted reward basis, or thirdly, there might be a theme or a particular exposure we want to add to the portfolio at that point in time.

So, that approach is more sort of like a top-down, thematic approach, and then the prior is more bottoms-up.

We come across an interesting investment or an interesting manager, and we think it's worth spending time on.

So, I'd say our approach is a little bit of a blend of both, but it's probably best summarized these days as the total portfolio approach.

Last time we chatted, we had this interesting conversation about what you do in a market sell-off.

The most extreme in the last couple of decades was the global financial crisis.

How do you prepare for the next market correction,

and what do you ideally want to do when that happens?

First of all, it'd be nice to know when the next correction is going to be.

It seems like they get shorter and shorter

more recently over time.

The way we sort of prepare is, you know, we always like to have some dry powder.

And so what that means is you may have, you know, cash on the sidelines or some investments that are fairly safe that you could liquidate at hopefully market value and then redeploy into assets that are much cheaper or dislocated or on sale, however you want to put it.

So there's sort of that.

We always have dry powder in case something happens that's unexpected.

And when there is a market sell-off, particularly if it's something dramatic or something where we think it's ominous and something worse is on the horizon, I sort of have a three-pronged metro checklist.

The first is you know think about defending the portfolio.

So what does that mean?

Looking at all our exposures at a high level and then every single investment and thinking is there anything here we should be selling just given what's going on in the market, especially if there's an economic or macroeconomic regime shift that we think may be happening.

The second is is if we can't sell something or don't want to, can we hedge out some exposure that we think is on the horizon in the near term, which allows us to keep that investment, but we effectively hedge out any negative implications that could come to that investment due to the concerns that the market is perceiving or that we're perceiving

or

perceiving to get worse over time.

And then the third thing is really playing offense.

Let's see if there's anything interesting to buy.

Again, not because we're short-term traders, but because we're actually long-term and we believe in mean reversion for a lot of asset classes, and things typically get oversold in the short term.

And so we'll look and see if there's interesting things to buy where we believe the downside is fairly protected and there is upside.

And it's just a matter of how long it takes for these assets or investments to recover.

You mentioned that you like to keep money in dry powder.

Is that in treasuries or are there ways to earn a higher return in your dry powder capital?

There probably are higher ways to earn a return on your dry capital, but I would say we are fairly conservative.

And so we will invest, at least at the moment, in

three to six to nine-month T-bills, just depending on what yields are and our view on what the Fed might be doing.

From our perspective, we want cash to maintain its value, and we want to be able to liquidate cash at the value it's held at in order to buy dislocated assets.

We don't want to take a loss on cash or potentially have, if it's a mutual fund or something along those lines, like a gate or some sort of issue like that, come as a surprise because that really would be a tragedy from my perspective.

Because why are we holding the dry power then if we can't access it?

And so we really deploy a very conservative practice these days of investing in T-bills that may change in the future as the Fed continues to cut rates.

But the nice thing about holding T-bills is, you know, today you're making 4.3%, which, you know, isn't anything heroic.

It is above core CPI, so there is a nice real return to it.

If something bad were to happen in markets, particularly equity markets, what typically happens is the yield on those T-bills compresses because the market believes the Fed's gonna cut rates in advance of them doing so.

And so it's kind of nice because you're able to exit these T-bills at what you're carrying them at on your balance sheet and sometimes even at a profit because as the yield compresses, the market value goes up.

And so you actually pull forward that return you were holding for.

And so, we've had several successful experiences doing that in the past, and that's kind of a little bit of a bonus to holding T-bills.

That's not why we do it, but it's kind of nice knowing you're going to get the value of it, and sometimes you'll get more than what you're holding it for, or things get really, really bad, and you can buy cheaper assets with certainty.

One of the issues that investors find in basically waiting for market correction: one is there could be a compounding negative effect of keeping money in cash.

So over 10 years, that might be a delta of 300, 400 basis points on an equivalent diversified portfolio.

So at that point, two things happen.

One is you need to now have a 50, 70% discount just to break even on these undervalued assets.

And then also, that doesn't price in the behavioral finance aspect of taking right action when there's blood on the streets, which is extremely difficult.

How do you reconcile that with kind of

those two factors?

To address the first issue, so for us, today from our perspective, most assets are fairly valued to fully valued.

And so

to elaborate, we'll hold maybe more cash in an environment like today where assets are

fairly valued to fully value from our perspective.

We're fully aware that the path of least resistance is up into the right for all assets.

Assets have positive expected values, so they should go up into the right.

However, I'd say we aren't really incentivized to chase markets in the short term, just going back to our long-term investment approach and trying not to lose money over time and make money.

The second thing is the behavioral financing is definitely a very real phenomenon in this business.

Everyone says, you know, they're going to be greedy when people are fearful.

And it doesn't really turn out to be the case because, one, people don't have capital to invest.

And then, two, they get really, really scared or they think there's going to be a better buying opportunity, right?

So,

you know, I think from our perspective and then the family's background, you know, we're very comfortable buying into sell-offs.

The biggest issue is no one rings the bell at the bottom, right?

And then no one gets it on the top.

And so, the biggest issue has actually been these sell-offs have not been as prolonged as you would hope.

Sometimes you'll build your full position, but

we do like sell-offs because we do believe over time

things do revert back to normal, whether it's through government intervention or Federal Reserve intervention.

And so

long-winded way of saying, you know, we are prepared to invest when things get ugly.

Let's say there's a sell-off going on.

Are you dollar cost averaging on the way down?

Is that how you operationalize your strategy?

That's the ideal setup.

It's, again,

I think that's the prudent way to do it because you just never know where the bottom is going to be.

And so the framework I have is sort of if you want to invest, let's just say a million dollars, just think of it as like maybe three tranches, or maybe you can do two, four or five, just depending on the situation.

And so you kind of want to dollar average down and say, you know, look, I've got three times to buy this thing.

If there's a very sharp sell-off, like the market's down like 25%, we're like, all right, maybe I'm going to put four-fifths of it in right now or 100% because that's a pretty big sell-off.

But if it's like a 5% sell-off, maybe you only put in a much smaller amount, right?

So we kind of keep in mind how significant the sell-off is and how much worse it could get.

And then again, where are assets trading at that new sell-off level?

Are things still kind of frothy or are they actually fair value or cheap?

We're kind of try to keep a multi-factorial model in our head as we sort of think about this.

I'm not as heroic as you guys.

So

my version of this that I picked up from institutional investors is when there's a sell-off like the global financial crisis, crisis, typically what happens is obviously equities sell off.

Let's call it 15, 20, 25%, but the real opportunity is actually on the relative opportunity in the illiquids in the private.

So those might sell off 35, 40, 50%.

So my plan for the next crisis is underweight or sell off some of my public securities and put those into illiquid.

So go illiquid at the time that everybody else does not want to be illiquid because essentially the drop has already happened.

That's my less heroic version of that.

That's a totally valid approach.

But again, I think to do that on the public side, you have to have securities that hopefully don't go down a lot in value because this concept of loss aversion kicks in where people don't want to sell their losers, even if they can buy other things that are cheaper because they're like, oh, I just lost 20% on my SP portfolio, for example.

I guess I could buy something at like a 25% discount.

It's not that big.

This 20% should come back.

So I totally agree with what you're saying, but I think for a lot of folks, there's this concept of cognitive dissonance where your brain is kind of thinking two different things and they're competing.

And sometimes it just leads to no action, unfortunately.

I love this idea of pretending your private holdings don't change every day, and just pretending it only changes once a quarter is actually very appealing to the brain.

But that's essentially what people do is they'll look at venture capital positions and they'll look at their public positions.

They'll say, well, my publics are down 20%.

And then this is cognitive distance.

Obviously, you know that the venture is probably down 35, 40%, but a lot of people don't internalize it or choose not to internalize it.

I think you're 100% accurate on that point.

Cliff Asmus, who I know you've had on here before,

great investor, very well spoken on this topic of

volatility laundering and private markets.

And basically what he's trying to say is, to your point, there's typically only four performance measurement dates for privates, right?

So that makes it a lot less volatile than the SP that maybe trades 250 days a year.

And then privates, you buy things at cost and they typically get marked up.

So there's really just like a lot of upside volatility and not much downside volatility.

So I think what you're saying is totally true.

But it is interesting because one has to ask in today's environment, what are a lot of these private assets worth?

Just given there haven't been many markdowns and a lot of things were bought at much higher valuations in the private market and even though public markets are at a new high, it seems like private markets, multiples, are not at a new high for most assets.

I reframe all these difficult things as different sources of alpha.

It might be difficult to do a lot of work on NASA class.

That's time alpha.

It might be difficult to structure the right deal.

That's structural alpha.

It might be difficult to do the right action.

You know, that's essentially patience or patience alpha or behavioral alpha.

So you can reframe all these very very difficult things.

And I think one of the most interesting approaches to this was I had the CIO of Calister, Scott Chan.

They had this contest within Calisters to see who had the best idea.

I believe this was 2019, if I have my year correct.

And the person that won was the best idea was how to prepare for the next downturn and how to create a ready mind for the next crisis.

So they kind of ran these essentially like war games on what to do and what strategy to do.

and they talked about it while things were calm and while things were fine and lo and behold there's a crisis and they were able to execute that strategy so a lot of this is actually

pre-planning and almost like

it's almost like a form of exposure therapy to the crisis that may be upcoming.

So there's a lot of behavioral finance.

A lot of people discount behavioral finance as a soft thing.

But when you look at people's returns and behaviors, especially if you assume that the market is mostly efficient, sometimes those behavioral financial returns are the true returns, are the real returns of the market.

I would fully agree with that.

At the end of the day, even as humans get more sophisticated investing, we are still human, and

there are these behavioral heuristics that just don't go away, loss aversion and all these other things that

are just innate to humans.

No matter how smart we are or sophisticated or how much older we get, these things kind of creep back in most people's minds.

One of the most interesting and impressive cultures in all of finance is Citadel.

You got a chance to work there in the beginning of your career.

What lessons did you take from being at Citadel?

Yeah, I was very fortunate to work at Citadel.

I think there's a few takeaways from working there.

One was there's a lot of ways to obviously make money, and that became very apparent to me back then that some of them can be very, very simple, such as picking good stocks and shorting bad stocks.

And then other ways to make money are extremely complex and involve exotic options and all this sort of stuff.

And it's not that one is better than the other.

I actually think having all of them, if you can understand them, is great because you're building a diversified portfolio of different return drivers and different investments that are uncorrelated with one another.

So it really gave me an appreciation to dig in and embrace complex and exotic options.

Whereas I think a lot of people sometimes will get afraid of headline risks or just think it's too complicated.

So that was one thing.

The other thing that it really opened my eyes to was just thinking outside of the box.

And what does that mean in this context?

The group I was a part of was on the credit team called Capital Structure Analysis.

And basically, what we were doing was analyzing companies fundamentally, but then all the securities in the capital structure, your bonds, stocks, and then helping analyze derivatives as well.

And so what that really taught me was in my role today, if, for example, we want to place a positive

view on energy, right, a thematic view,

instead of just thinking of it in a singular way to do it, we'll sort of break down all the walls and be very open-minded.

And what does that mean?

We'll look across public markets, private markets, and within both those markets, equity investments, credit investments.

If there's something else out there, we'll look at that as well.

We basically come up with a bigger matrix of options to express an idea versus just being very singular or siloed and and thinking, okay, I'm a public equity person.

I want to put on a positive energy view.

I just have to be long energy stocks.

Like that's not always the best way to do it.

And so I think what Citadel taught me was just a framework of just thinking holistically and being flexible in your mindset and trying to find the best way to express a view or investment from twofolds.

You know, an absolute return perspective, but then also risk-reward perspective.

Risk-reward sort of meaning two things.

You know, one,

maybe you can't use much money or any money, and there's a great upside, or two, maybe you can lose money, but the upside is so significant that on a probably weighted basis, and if you size it appropriately, it's compelling.

So this experience at Citadel was very, very enlightening and

definitely made me a better investor.

You're now on the LP side, and I'm sure you take a look at a lot of these multi-strat firms like Citadel that have many different strategies.

From the LP seat, what's the appeal to multi-strat public equity firms versus like very niche best-in-class players?

So I think the appeal is multifold.

They're not relying on one key PM or team, right?

There's a lot of different

teams you're betting on, and they're all generally pretty high quality.

And so there's a lot of benefits that come from that one.

Those teams are all investing in different sectors, and maybe they have different strategies to what they do, even if they're in the same sector.

And so you're diversifying your return stream as an LP by being invested in those multi-strategy funds.

And then two, if one team leaves, even if they're an all-star team, hopefully there's a bunch of other A teams there and B teams that are rising to be A teams.

And so the investment still can stand as a sound investment.

Whereas in some of these single team funds, which have their merits as well, these are some of the risks that come with it.

It's sort of the flip side, right?

So I don't think one approach is better than the other, but you can argue with these multi-strats,

a lot of the risks associated with one specific team are diversified away.

Obviously, there's also cons that multi-strats bring to the table that you don't have with more single-team firms.

Part of the pitch is that as markets change, they could invest or divest from some of their strategies more or less.

They still try to be diversified.

Do you buy that?

And did you see that from the inside?

I definitely buy that.

That's another really big positive attribute of multi-strats.

They can definitely allocate capital to teams that have the best opportunity set at any given point in time and maybe rein in capital from teams where the opportunity set is maybe not as compelling.

So they can definitely do that.

The other thing is for certain strategies that kind of ebb and flow, you know, such as risk arbitrage or merger arbitrage or capital market events, you know,

it's hard to sometimes be in a fund that maybe only does that because it's typically feast or famine for capital markets, right?

In 22 and even

in 23 and 24, you know, capital markets are kind of closed.

And so investing in a firm that just does that can be quite challenging just because there's not a lot of opportunity.

And some of these multi-strats, they can sort of toggle down the exposure and then when things are interesting, ramp up the exposure.

So, they really can be opportunistic in terms of capitalizing on the opportunities out there and allocating investors' capital to those best opportunities and teams executing on it.

Yeah, they're not wedded to a specific narrative.

If you're only growth equity or venture capital or public equity, you're always going to be spinning the next narrative to sell to LPs.

But here, they have the choice to basically allocate among the public markets.

So, they don't have to spin a narrative that they don't believe in, but they could just reallocate.

That's right.

The flip side is you know, some of these firms are maybe a little bit too ruthless in firing teams, right?

Sometimes maybe they should hold on to certain teams, but I generally would agree with that comment

in that you know they should be agnostic if they're doing their job well in terms of what the portfolio is invested in at any given point in time.

It should be the best opportunity set out there and the best teams within those opportunity sets.

Cactus, you guys are obviously a taxable entity.

How does that change how you build your portfolio?

Yeah, it's a great question.

So, you know, obviously with private investments,

the tax profile there is pretty favorable.

Since most investments are held for multiple years, you typically get long-term capital gains there.

So that's sort of easy to address.

But it definitely becomes more challenging when we're looking at investments that have a higher tax burden on them, either because it's a short-term hold period or there's maybe a higher turnover associated with the underlying investment.

The way we sort of think about it is those investments should, you know, hopefully offer a pretty compelling return.

Just on an absolute return basis, right?

The return needs to be interesting enough to pay the higher tax.

And so if you think about it, going back to the multi-strat, if we're investing in a multi-strack, the way I sort of think about it is the higher tax given that they're generating maybe a lot of ordinary income is an additional fee you're paying right and so if they're providing a return stream to you that's uncorrelated to markets and hopefully uncorrelated to other risk exposures in your portfolio, I think most investors would say we're willing to pay a higher fee for that.

And part of that higher fee discussion, I would argue, is higher taxes as well.

Obviously, the return is so has to be compelling on an after-tax basis, but I sort of think about it two ways.

The return has to be interesting, but if they're also bringing to me a differentiated return stream or something that's uncorrelated to other investments,

I would make the argument that it's probably okay to play a higher tax burden burden for that because they're not just doing a claim to

strategy that everyone else is doing where taxes might be lower, such as private equity, right?

A lot of people are doing that.

If you're doing something very niche that has ordinary income, but it's uncorrelated markets, I would argue it deserves higher fees, and one of those fees is a higher tax rate.

Yeah, you see many different extremes around taxes.

You see some people that just pretend they don't exist and just invest as if everything has its own taxable.

That's kind of one extreme.

And then the other extreme is you have people holding 99% of their assets in one single stock because they don't want to pay the tax.

They're letting the tax tail wag the investment.

And obviously it could be, could end disastrously and has ended disastrously for many.

I would 100% agree.

I guess another way to sort of think about it is if you're trying to build a diversified portfolio, which is what we're doing, we're truly trying to build a diversified portfolio, the tax attributes of your investments are probably going to be diversified as well, right?

Just because they're going to be different investments.

If you're really looking to optimize for taxes, it really makes it challenging to truly be diversified.

You might be diversified on paper, but when there's a sell-off, or if you think about it from a risk-lens perspective, you may actually be a lot less diversified than you originally thought.

If you could go back to 2007 when you graduated from the Fable

Booth School of Business, and you could give yourself just one

timeless piece of advice that would have helped you accelerate your career or avoid some mistakes.

What would that piece of advice be?

One thing that comes to mind that I've really started to appreciate more

recently over the last maybe decade or so is just the network I've built

in the investment world.

Some folks do similar investments to us, some people do stuff that's totally different, but they're very, very helpful.

And I think coming out of business school, it's really easy to sort of just be fixated on your career, and that's obviously very, very important.

But, you know, I think, you know, thinking about just expanding your network even then while focusing on your individual career is something that, you know, everyone should really think about.

I think you start to realize, or I did, the value of my network and relationships later on in life.

And so it's great to have them now, but it would have been amazing to have this network.

in 2007.

Obviously, from a practical perspective, that would have been harder to achieve, but probably putting in more concerted effort coming out of business school to meet more people, to build a network versus just working long hours.

It is important to get out of the office, not just to have fun and some balance, but to meet other folks, to get other perspectives.

Some of them may agree with you, others may not.

And I think when you graduate business school, a lot of people are just heads down, focused on their job, working long, and maybe not as focused on that as they should be

right out of school.

I think about it as kind of a bar-belled approach.

I've learned kind of both lessons, obviously, to dig into the network.

That's why I do the podcast, so that I could meet people at scale, provide value at scale.

The second one, I'm reminded because I just got married, is just keep those relationships, the purely the relationships I could never end up in business, but how valuable those are over the decades and how those

personal relationships really compound as well and how they're irreplaceable.

Definitely.

Well, Sid, this has been absolutely a masterclass.

Thanks for jumping on the podcast and look forward to the friendship and continuing conversation live.

Thanks, Sabin.

Really appreciate it.

And I look forward to the next one.

Thank you, Sid.

Thanks for listening to my conversation.

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