E253: How Great CIOs Think w/Bill Brown

Bill, you've had a prolific career working at the Stern family, which had roughly $10 billion today. You're CIO of a multi-billion dollar family office.
Welcome to the How Invest podcast.

Thanks for having me, David. I'm really thrilled to be here.
So, you started working under Leonard Stern. Tell me about how Leonard Stern was as an investor.

The one that I would take from Leonard, and I think I had mentioned it to you, is

don't confuse activity with progress. And so, that's in a nutshell what I learned from Leonard.

The way Leonard operated was he didn't have a schedule. He kind of walked around the office

day to day to day

and just would stop by and ask you, what are you working on? And then he would, you know, he had this thing where he drank coffee all day

and he would drink a third of a cup of coffee at a time. And he would keep ask his assistant, get me a third of a cup of coffee.

And that was sort of a barometer of how you were doing in that conversation. His assistant probably brewed dozens and dozens of third a cup of coffees a day.

If you got to sort of three, one-third cups, you actually probably spoke for, you know, 45 minutes an hour, and you were giving him what he wanted, which was the important part of the day, the important part of the task.

If he didn't find it interesting, he just kind of moved on. So he was somebody who was very ruthlessly focused on what was important.

And, And, you know, if he wasn't interested in what you were talking about, he would just sort of say, thank you very much and walk away. Like it was very cut and dried.

And so if I had to learn something, you know, from Leonard, it was the way he scheduled himself and the way he just was maniacal about only spending time on things that mattered.

I'll add an adjacent one.

If I had more time, I'd have written a shorter letter. That's another one of my favorites.

And that's basically what Leonard was trying to make you do.

He wanted you to focus,

tell you what was important, and he just would move on.

He wouldn't waste time on things that he didn't think were relevant or important, no matter how important you thought they were. He was very focused on that.

And beyond being high proficient, Leonard was looking to get

to make Indiencratic bets on the best ideas. What he was trying to do is get a pulse of the organization.

And what he, you know, one thing you learn, you know, even in, say, investment banking, which is one of my other backgrounds, is some of the best ideas come from the lowest levels or across the organization.

And you don't want to be one of those CEOs that sort of sits

maybe in like an ivory tower and doesn't, isn't in touch with what's going on.

So if you were like in the military, the general walking the lines and talking to the troops and finding out what's going on and

hearing firsthand, we'll talk about the big short trade in a little bit.

To get him convinced to do that was no easy task. But because he had all these little reps, multiple conversations and debates, he was put on the journey, so to speak.

He wasn't just given the once at the end to make a decision.

Daniel Eckhart has popularized this idea, the founder of Spotify, which is a lot of the alpha comes from people that have low hits rates, basically have a bunch of 10 crazy ideas and two of them end up being brilliant.

Do you think there's friction between having a high hit rate of ideas and having some of the best ideas?

Well, I think what you're talking about is, you know, in baseball terms, batting average versus slugging average. You know, some people,

you know, like Ichiro from the Mariners had a really high batting average and on base, but he didn't hit for power.

And some people are home run hitters and they hit 40 or 50 home runs, but they don't hit for average or get on base.

Not to overemphasize Michael Lewis, who wrote the big short, but he also wrote the book Moneyball.

There's that scene with Brad Pitt where the quant guy is saying, you know, you're not buying players, you're buying runs. And in order to get runs, you need to get on base.

I think you have to know who you are.

Some people are each row and some people are Aaron Judge. You can make money either way.
You got to kind of know who you are.

I do believe that there are these big hits, as you sort of mentioned, you know, maybe once in a lifetime, maybe it happens more than once in a lifetime, hopefully. You have to know who you are.

But I do think you do need to be looking for those things. And, you know, we'll talk about, I've been lucky enough to have, you know, a handful of those things happen.

And there's definitely an open mind that you have to have for those kinds of things. Jeff Bezos uses this analogy as in baseball, you could hit a grand slam.

In business, one time you step up to play and you could score 10,000 runs. This asymmetry makes it very different than baseball.

Yeah, yeah. There's no such thing as winning one at bat and winning the season, so to speak, or winning the World Series or winning multiple seasons is what you're saying.
Yeah, no, absolutely.

That would be very exciting. A very exciting game.
Maybe that you hit it far enough, you just become the World Series champion.

Well, baseball has got an attendance problem, so maybe that would be a good change. So you mentioned some of these big hits that you've had in your career.

Let's start with the big short, arguably one of the most famous trades in

finance history. How did that come about? Back in 2006, the peak of the real estate bubble might have been a year later, you know, 2007, started crashing in that period and really crashed in 08, 09.

So this was early.

And one of the hard things about investing is when you're early, sometimes people say when you're early, you're wrong.

So we were a little bit early, but Eddie had come to me and said, well, one of our managers wants to set up a contract to buy credit default swaps, which essentially would be shorting the subprime real estate market.

And he handed me a newsletter that Jim Grant had written. It's called the Jim Grant Interest Rate Observers.
It's kind of a relatively arcane, boring type.

type newsletter, but he's been doing it for decades and decades, considered an expert in the credit markets. And so that document outlined a particular security that was based on the subprime market.

Some people on this call may not have lived through that as

acutely as I did or others. You know, they were doing things like ninja loans.
What ninja loan means is no income, no job, no assets.

Or they would have something called a liar loan where you could state your income or you could state your net worth and there was no actual

fact checking. And so there was really bonkers stuff going on and people were borrowing money more than 100% of their home.

So, you know, like when you buy a car, sometimes they give you cash back, or you have a credit card cash back. They were giving cash back on homes.

You would buy a home for 100 cents and they'd give you three cents back. You'd get 100%, you'd borrow 103% of the value of the home.
So things were bonkers.

But with a lot of things, you know, they just things go on for longer than you think.

And

this newsletter basically outlined how crazy it was. And the crazy part was these subprime loans were then securitized.
The U.S. market has a very sophisticated securitized market.

And the conforming loans are, you know, Fannie and Freddie

are traded quite deeply. But even the subprime loans were then getting securitized, and then they were rated by the rating agencies, SP, Moody's, et cetera.
And so

this pile of loans would get rated,

and they would rate them AAA, AA, triple B, triple B being the lowest investment grade. And the triple B was 92%

into the stack, so to speak. I don't want to get too detailed, but basically with only 8% protection of the 100.

And so that was the main point, that this didn't make sense.

You know, that's what Jim Grant was saying.

So then the second thing we did, and again, Eddie encouraged me to do this, and similar to his father, he kind of said to me, well, Bill, just go think about this for a few days.

I don't want a quick answer. Investigate it, investigate it.
You know, like, this seems like a really good idea, but like, I don't know. It seems kind of crazy, too, right?

Whether credit default swaps is a new thing, all this stuff, the rating agencies, why shouldn't we trust the rating agencies? They know what they're doing, et cetera.

And so the next person I met was Greg Littman. We had a relationship with Deutsche Bank.
And Greg Littman, as people may or may not know,

was sort of the evangelist of this trade. And

he had believed in this trade. He was the guy.

I don't know if there's a scene in the movie or not, but the myth, the urban myth, was that he would be wearing a t-shirt, those white t-shirts with the black lettering that said, and his t-shirt said, I'm short your house.

You know, and he believed, not so much that he wanted anything negative to happen to people, but he believed this was crazy.

And so he bet his career more or less on it and had a proprietary position on the desk at Deutsche Bank.

But in order to fund that position, because it had negative carry, he had to do these trades to sort of support the trade and keep it on.

And so he was going around and around, meeting with all the hedge fund people and some sophisticated family offices like ourselves

and explaining the trade. And so I met with him and he explained it.

And basically what it came down to is that if housing prices didn't continue to go up, or if they went down by even the smallest amount, these securitizations would be wiped out.

And so just to put some numbers on it, you could buy these contracts and the cost of insurance, so to speak,

depending on which one you bought, you would make 70 to 200 times your money. So it's not 10,000 times your money, but it was a lot.

And you could do it

very easily. There was unlimited supply of these contracts.
They were just issuing them. It was just a piece of paper, a contract between you and somebody else.
And we started doing that.

And then luckily, I think our first trade was in October of 2006. The market started to go our direction.
So we had the benefit, like a lot of people didn't. We had the benefit of not being too early.

And we never really had major losses on the trade. Because what would happen is if the trade went the other way, you would have to post collateral.
And we never really had to post too much.

And then we started winning. And then we continued to do these things.
We became very adept in understanding what the contracts were.

We ended up doing CDS on Bear Stearns, Merrill Lynch, some of the other financial people.

We also did what they called the pigs trade, which was shorting the sovereign debt of Portugal, Italy, Greece, and Spain, which it was a big debt crisis at that time as well.

So it was a big trade, and we probably made triple-digit millions of profit over a course of two or three years. And the only shame of it is we probably should have done more.
You know,

we didn't do enough.

Whether it's the big short, the pigs trade all these trades in retrospect seem very easy but talk about being in the heat of the moment where the market doesn't go with you right away i mean there were a few months where we were losing money um and we had because we weren't the most the biggest person we we had what they call two-way collateral so we had a post collateral i'm sorry one-way collateral we had a post and they didn't have to post so we would have a trade where we were you know the the broker would market um we might not have agreed with the mark, but they would mark it and they would say, send us the money, send us a million dollars, send us two million dollars, whatever it was.

And that felt really bad, but we sized it in an amount, you know, we got a budget from Leonard that was an amount that he was willing to lose, which was actually quite a bit of money at the time.

And so we had that sort of support.

The second thing was the other way, actually, is sometimes when you're winning, my CFO at the time didn't believe in this trade, didn't understand, you know, it started to get these marks going the other way.

And he was in disbelief. He says, well, we made $10 million or whatever we had made.

And he said, so we actually started to get out of some of the trades early just to prove that we were, that it was real. You know, like, is it real? Is the money actually going to come in?

And then the last thing, and interestingly on this trade was we were told up and down, you know, by people like Goldman Sachs and others, hey, you're never going to get paid on this.

You know, they'll come up with some reason not to pay you. These contracts are very complicated.

You're not going to get paid.

And so we probably also, you know, truncated some of our money because when we, you know, instead of making 70 to one, we made 35 to one or 200 to one, we stopped out at 100 to one.

We probably sold a little early because we just wanted to make sure

that it was real. And it isn't always the case that you get paid in the end.
You have to realize the money before you can count it.

One of the complex things about these type of trades is that as a generalist, as a family office, how do you know that you're not the dumbest person in the room?

And how do you know that you know the topic well enough to be able to make these kind of trades?

I think that's a good question. We have this saying, you know, it's not the fool who asks.
In that movie,

Tom Hanks plays that character in the movie Big, and he basically isn't, there's this scene where, you know, there's, there's something that doesn't make sense to him, and he will,

he keeps saying, I don't get it. And then the guy sort of describes it, and he says, yeah, yeah, but I don't get it.
And so I think we're in that camp.

And then I'll give you another favorite punchline of ours is, you know, victory moves from man to man.

And so

I wouldn't say that we're. complete generalists.
There's certainly areas that we don't travel in, but we really focused on being opportunistic and adaptable.

And I think a lot of times when you talk to a hedge fund manager, they'll say something like, you know, I know this stock better than anybody else.

You know, I know the management team and I have the best model. And I actually think that can work against you because you have this sort of confirmation bias.

You have this knowledge base that you have built up in the company and maybe the management team. And, you know, the switching costs are high.
That's not our approach.

You know, and and one of the other things I talked to about is that Seth Karman comment about you know it's it's not that he's so smart it's that he's paying attention to the right areas and I think that's what we try to do we're not trying to be the smartest guy in the room we're just trying to be in the right rooms

and how do you cultivate the right mindset to be just enough insider to see the opportunities and outsider enough to know that conventional thinking is wrong.

We like to think that that we're spending a lot of our time, you know,

having the right friends or the right

peers. One of my neighbors called the other day and asked for a recommendation on a Mason.
I gave her the person that I use. And so the way I look at it is, you know, investing

is more of a team game or can be a team game, particularly on the family office side. And so we're trying to cultivate knowledge.

We're trying to, you know, we're trying to evaluate people and get ideas

from our peers, from our friends. And so why do I, I don't need to come up with every idea, even in the big short example.

That wasn't our idea. It was just that we knew enough people and we were open-minded enough to

lean into the opportunity. Think of different communities as different herds of sheep, pun intended.
And I'm one of the sheep that tries to go into different herds. So I have the Silicon Valley herd.

I have the family office herd. I have the institutional investor herd.

And if you just do nothing else, bring up new ideas between the different herds, you could come up with some really good ideas that sound extremely first principle, but really just taking common sense from one herd and bringing it to another herd.

I'll give you a little bit of, you know, an analog there, which will fit your, what you're saying.

We were relatively early. We weren't super early, but we started investing in 2017.

And we invested with two people. And, you know, and this is a good pattern recognition, I think.
So the two people we invested in, one was sort of like 26 years old.

He had been like a real estate agent who got into crypto, not a financially trained person, you know, just sort of somebody who was, you know, interested in the sector and was integrated, knew a lot about it, but wasn't classically trained, let's just say.

And he was, as I mentioned, you know, mid-20s.

The other guy we invested with was in his 50s and he had been, he had kind of a consumer retail background, then he had gone into venture capital in the consumer space and had been pretty successful in his own right,

but then got the crypto bug himself, you know, early, 2012, 2013. He was one of the earliest investors in Ethereum and other things.

So he had made a lot of money, but he was a completely different guy, right? He was a veteran, maybe not a Wall Street veteran exactly, but sort of a veteran investor, decades of experience.

We invested with both.

But I kind of like the fact that we were getting confirmation of this pattern, this use case from two different people, you know, completely different people.

And so that's a pattern we look for. So kind of what you're saying, we like when there's different people liking something.

There's also people you probably have in your universe who are always pessimist.

There's people who are always optimistic. And you also have to kind of calibrate everything like that.

So, you know, when one of your tech guys calls you up and says, oh, this is the next new thing, they're always saying that, right? And again, I'm not saying they're wrong. Sometimes they're right.

But a lot of times you have to discount those people.

But when you're somebody who's in their 50s or 60s or 70s talks about something that's interesting from a tech point of view, oh, that's interesting. Why that guy never invests in tech?

So when you had a crypto guy in his 50s telling you he was all in,

that was pretty meaningful. On crypto, I had a similar experience where I went out and talked to fund managers and people, and a lot of people were talking about the trade.

They're like, this was was levered, and then you leveraged this and you hedge this, and then you put out this token, you rug pull and all this stuff.

And then I met a manager that explained it in very similar venture capital terms.

I find the best founders early in the space, and I build a portfolio of people that I believe have the distance to create enduring franchises.

And I invested in that guy because it was a venture schema.

Now, I might have been predisposed to think old school into the space, but it's a manager that did well versus sometimes you could get caught on to this hype that this new aspect is completely different and unlike anything else.

But usually there's some aspects of it that and some learnings you could bring from the past.

Yeah, absolutely. And I think one reason why we were able to

in both of those trades, the Big Short or even the crypto, is that the crypto trades were venture investments and people have a different mindset. with venture.

They don't mind losing all their money because there could be a hundred to one, thousand to one.

I i mean one of the trades this guy did was truly uh a thousand to one i mean he he was he was buying solana tokens at pennies and you know that's over two hundred dollars a token right now so but it was money you were prepared to lose and you don't mark to market and that's another you know thing i always tell people um it's like watching water boil it doesn't boil any faster uh and it can make you do you know get upset or you can emotionally impact your your investing if you watch it too closely.

And so sometimes if you sort of set it aside and don't pay attention as much, I think you might do better.

Talk to me about how you avoid the temptation to just be busy and focus on the things that really move the needle. We used to have this term fizzy, and what it stood for was fake busy.

And, you know, people have this false sense that they have a busy schedule. You know, so I have have a lot of people coming from Australia.
I work, you know, for an Australian-based family.

So, a lot of the Australians will come through New York and they'll fill their schedule up. You know, they'll have all these meetings back to back to back to back,

and they think that's productive. And maybe for a one-week trip, that is perfectly fine.
You know, that does kind of make sense. But I ruthlessly try to avoid that myself.

There's a bunch of things that, you know, and I'll mention a few people's names, but you know, there's John Clees, who is the comedian, Monty Python fame, you know, he has this lecture on creativity.

And you can't be creative if you're running around, juggling things,

meeting to meeting. It just doesn't work.
You need to find this sort of quiet space.

There's another guy that I like to read is a guy named Cal Newport. He's a

computer science professor. I mean, he's a little extreme, but he talks about not answering emails, you know, and not picking up the phone and

being kind of turned off, unplugged, people would say. And to some extent, I agree with that.
So I think you have to be

sort of like at Leonard was not tied to a schedule. I don't want people intruding on my time.
I want to be able to have blocks of time to do meaningful, deep work.

And how do you do that? You got to turn your phone off. You got to schedule yourself in a certain way.

You can't have little bits of pieces of time and expect to get things done. You need blocks of time.

So I try, for example, not to have meetings on Friday. You know, I try to have Friday end of the week to kind of get the things done that I haven't been doing all week and for the more immersive

thinking type projects. This idea of conscious procrastinate, procrastinating.

You're procrastinating not because you don't want to face the task, but because it's not the highest value thing you could be doing with your time.

Yeah, absolutely. I mean, I don't know how your schedule is, you know, how do you,

how do you get yourself to be more productive?

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So I don't believe in time management. I believe in energy management.

And the best test for that is most people come home at five o'clock and six o'clock and they spend six to ten doing low value tasks, sitting around the couch.

And the reason is because they've run out of energy, not because they've run out of time. I don't think time is actually the most scarce thing.
I think energy is.

So I try to schedule my day so that the most important tasks are early on. So I'm going after the most important, most creative, most energy-consuming tasks early on.

And then I focus all the admin stuff towards the end of the day, kind of being responding to email and doing all these things.

And I at least try to adjust my high energy with my high-impact tasks because it's hard for me. If I stop answering my emails or responding to my mail, at some point something's going to blow up.

I try to batch that. I also have, I get my mail electronically.
I use a service called Anytime Mailbox and I just check my mail once a week. So there's no reason to check your mail every day.

I've never had an issue. I've been doing this for six, seven years.
I've never had a single issue blow up in my face.

Well, that's kind of directionally what I'm suggesting is that, is that you've almost conditioned your network to know.

you know, like it's not that you're not interested in the meeting or responding. You just respond on your own pace.

And that makes a lot of sense to me.

One of your other mentors, billionaire Seth Klarman, said, we're not that smart. We're just hanging out in the right places.

We touched on it a little bit, but what does it mean to hang out in the right places? And how do you operationalize that as an investment strategy?

There's, you know, a couple of different things. I mean, the punchline there might be.
you know, the old one, location, location, location. You'd rather own

the worst house on the best street than the best house on the worst street. And, you know, like I said earlier, you know, we don't want,

we're not staffed up to be better at some of the, you know, some of the people out there are amazing at analyzing specific companies or in this case, specific houses.

But if you get the zip code right, you'll often do really well. Woody Allen would say, you know, 80% of life is showing up.

And so we just spend our time trying to figure out where the most interesting things are, hang out in the right areas. I'll give you a couple more sort sort of mantras that we have.

We have this saying, don't let the great be the enemy to the good.

And what that means is, you know, you start doing work on something, you get some patterns, it's in the right neighborhood, you don't overthink it.

You know, and often what I've seen people do is they overthink something

and they never buy it, right? Because

they say, oh, this stock is a buy at $40 a share. It gets to $41 and they still don't buy it.
And then, and then that could be a 20-bagger or whatever, so one of the great investments.

They sort of are so sure of themselves. They have this false sense of precision.

We say we want to be vaguely right, then precisely wrong.

You know, things like that.

The other thing, you know, and maybe this is related, is we have the saying, investing is not a game of perfect. And what I mean by that is

that's actually an adaption. There was a book, a golf-related book.
I'm really into golf, but called Golf is Not a Game of Perfect. And if anyone's played golf, you know that it's not an easy sport

and it's a game of inches, but it's the six inches between your ears. It's all mental.
A lot of it's mental.

And then there's bad breaks, there's bad luck, there's wind, there's all sorts of things that can happen. And so you just have to understand that investing is, you're going to make mistakes.

And there's no, there's no, once you sort of forgive yourself for that, I think you actually will do a lot better. And you understand, you know, that

you mentioned earlier, you know, sometimes you have a high slugging percentage. Well, that must mean that you're failing a lot.

And that's perfectly okay.

You mentioned that trade where you think it's worth $40. You don't buy it at 41.

One of the mistakes I've made as an investor over and over is selling too early. It's up, you know, 2X.
You might buy Bitcoin at $40. It goes up to $90.
You think you're a genius.

And then, you know, 10 years later, it's at 125,000.

How do you resist the temptation to crystallize your trade? And

how do you not sell too early?

Well, this might not be a scientific thing,

but we often will sell some, sell half, you know, and, and, and, you know, I think that's something that I learned. You mentioned venture.
I know you spent time with some venture folks.

You know, one thing when you look at the venture market,

there are these periods of time where the window is open.

You know, you could have said 2020, 2021 was one of those times. Maybe we're in one of those times again.
You're actually seeing the animal spirits come back to the public markets.

You're seeing some pretty successful IPOs recently.

But it's not a straight line, these things.

So we do, one thing we do, particularly in the public market, is we set a price target and a return profile,

and we're not afraid to trim, but we're also not afraid to add. And so what we try to do is, is it possible to be adding and trimming and adding and trimming?

Not that we trade every day, but the market's not perfect, as I mentioned before. And so

we will be willing to sell some and keep some, and then with the idea that if it goes back down, we'll buy it again. And we've done that very successfully.
So I think that's a discipline.

If you convince yourself that, hey, I'm going to take some money off the table, but I'm leaving some on the table. And then you're really disciplined about buying it back if it's buyable.

Obviously, the public stuff is more viable than venture.

But the biggest mistake I see on the venture side is not to take a little bit off the table to then enable you to be more patient for the remaining.

That's something I've really changed my thinking over the last 10 years, which is it's all good if every at-bat could be

100x or 1,000x.

But if you don't have that at-bat, if you ruin yourself, you lose the opportunity to make those at-bats, your

expected value is zero. And you'll see people going in and out of industries, in and out of careers, because they forget rule number one, which is stay in the game.
You need those at-bats.

A question, David. I mean, I don't know exactly your portfolio, but you must have things that have stayed longer than you would have originally anticipated.

You know, things that you invested in in 2020, 2021 are still on the board. And I would imagine you're wishing some of that had been monetized so you can do the next thing, whatever that is.

I haven't ran

empirical numbers, and I think that's something that, uh, you something that the mind is probably going to trick you on. But I have had things go both ways.

I sold draft gangs close to the peak, which was my biggest trade.

I also sold Palantir when I thought it was really good, and then it went up another another 5x. I did not see that.
I did not see that coming or Robin Hood as well.

I think the way that I would rephrase what you're saying is that the price of that asymmetry of riding it up is you have to sell, you have to take some off the table, which gives you the staying power to get that asymmetry.

The mistake that I actually made in both of those trades is that I sold all of it. I should have sold.

some of it and let the rest of it ride and kind of avoided this binary thinking because there is that power law and asymmetry, even in the public markets. Mark Andreessen has talked about this.

He believes the best public investors actually run their portfolio like a power law. Something that somebody said to me one time,

there was the

hedge fund manager, Hugh Hendry. I don't know if you remember him.

His firm was called Eclectica.

And he was kind of more of a bearish guy. He was up, I think, 30 or 40% in October of 2008.
I mean, he was perfectly positioned at that point in time.

And we met with him. We never invested with him, but he was a very interesting guy.
And he had worked with a guy named Crispin Odie, who was another famous person out of the UK.

And one of the things that he said that he was taught was Crispin had this line, you know, can you imagine beans in the teens? And what he meant by that was,

you know, this was, I guess, soybeans could go into, you know, $15 a bushel or pound, whatever they're measured in. And they're trading at $2 right now, let's just say.

And but sometimes you have to sort of dream. You know, you have to have this sort of idea that, well, this could happen.

And you as you mentioned, like Palantir went we had an opportunity to buy Palantir privately at $5 a share. Now it's, I think, $200.

I bought in at about $471, I think. Yeah.
So that was probably a similar round. And so it's one of these things where, you know, you have to have an imagination.

Is it possible that defense tech primes

are going to switch from the current four or five of them and switch to the Palantirs and the Andorals and the SpaceXs? Maybe, you know, maybe not. And by the way, you've already seen the move.

I mean, those three companies I mentioned, I think, have a market cap as big as all the traditional primes. If you add up, you know, Lockheed, General Dynamics, et cetera.

So that's already happened, actually.

Even though that 98% of the contracts are still with the original Primes, the incumbents, that move already already happened. Like it just happened in the last

five years.

So things like that happen all over the place. It's like the climate change, you know, say, oh, you know, this is a one-in-a-year storm.

Well, one in a hundred-year storms seem to be happening more and more.

I think these

five-to-one, 10-to-1, 100-to-1 power laws are happening every day,

constantly. And you just have to be

open-minded to find them.

Tell me about Terrace Tower Group. What are you guys focused on today?

We're one of the two co-founders of Westfield. Westfield was founded by Frank Lowy and John Saunders, immigrants

World War II, post-World War II to Australia, basically penniless, partnered together, built a really great real estate franchise. They were partners about 30 years.

Saunders went off on his own, took his side of the assets, founded Terrace Tower, and then he passed away about 10 years later. And so what happened there was his

two daughters owned the business, but they weren't really involved in the business. And so the business was run by a board proxy for a while and then was ultimately taken over by

his son-in-law, Richard Weinberg, who's my CEO and main family principal. And Richard made sort of three important points, and that'll kind of explain, you ask, like, well, what do we do?

Or why do we do it? First thing was, is he didn't want to have the same real estate assets.

So the real estate assets we own are retail and office, which even 15 years ago, and I met Richard 15 years ago, weren't the best.

I mean, they weren't data centers or, you know, industrial logistics or healthcare facilities or whatever other areas you think are the right ones.

Retail in Australia actually is a lot better than the U.S. You're anchored by grocery, which is a 80% duopoly.
There's less square footage for retail by a big margin, things like that.

But it's still not a great, great business. So So he had a view.
He was a real estate by background person, but he had a view that I want to diversify from real estate.

I want to have different assets.

The second thing that he decided, and this sort of, you know, leads to me, the second two things, I guess, was that he wanted to have

an internal team.

He didn't want to just turn the money over. You picked the bank, UBS, Goldman, J.P.
Morgan, et cetera.

He had a view that the Americans had this thing, you know, this family office construct, this sophisticated

idea that you should have your own people.

And

what he meant by that is, you want your own,

somebody who's your fiduciary, sitting on your side of the table, looking out for your best interest.

And too often, and again, I'm not trying to beat up the wealth community, but too often it's a little more one-size-fits-all.

It's suitable, but maybe not perfect. And so he wanted something, because he's a larger family, he wanted a more custom-bespoke model that fit whatever he wanted.

And then the last bit, and this will lead directly to me, was he wanted to be outward-facing. So Australia is a wonderful, wonderful country.

They call it the lucky country. It has

so many positive attributes, but it's 10,000 miles away. You know, it's not exactly the center of financial innovation.
The investable opportunities in Australia are limited.

So he had a view that as the size of wealth that he wanted to be a global investor. And his view, and he spends a lot of time in the U.S., has a residence in the U.S., was that the U.S.

was the best location. We have the best talent.
We have the most innovation.

Despite all the whinging that people do about what's going on in this country, it's still really the best country to be in.

It's still the most opportunistic, entrepreneurial, most depthful investment market in the world. And he wanted to have feet on the street here in New York, here in the States.

He didn't want to be a tourist. A lot of times, when you're overseas, you get the investments that are sort of second, third hand, nobody else wanted, and they kind of fall into your lap.

He wanted to have a better network and more,

you know, first principles, empirical network in the U.S. And so that's kind of how we started.
That was about 15 years ago. We had our first conversation.

We were at that time 100% real estate.

Now we're closing on 50-50.

And I spend my time managing the non-real estate 50.

And that's split

between equity and credit, roughly 60-40.

But

it's not your father's 60-40. It's not the S ⁇ P in the Barclays aggregate.
It's

the The equity is public securities. We manage at this point, majority of it ourselves.
We do have a cadre of outside managers, active managers as well.

And then we do a lot in the private space, private equity, venture, and a lot of directs and other strategic investing. And then on the credit side, it's entirely private credit.

We don't do anything normal. We're not doing high yield.
We're not doing investment grade. We generally don't hold term deposits or things like that.

We have cash around here and there, but we don't do the traditional stuff. So everything we do is very bespoke, very very opportunistic.
And we now have built a team.

We have a 12-person team, 10 of whom are in Sydney. I sit in New York, although I spend about 10 or 11 weeks a year in Sydney right now.
I had the pleasure of having dinner with you.

And Richard, when he was in town,

a lot of people want to have these very different portfolios. How did that happen? How did you go from concept to executing such an idiosyncratic portfolio? And what were some of the roadblocks?

Well, yeah, it's a fair question. It was not

straight line.

Richard and I met in the summer of 2010.

And as I mentioned, we were 100% real estate. So there was definitely an inertia.
And this is true for all families. So anyone who builds a business,

whether that be a private equity business or real estate business, they're always biased to what I'd call bricks and mortar. You know, they want physical things.

They don't trust the ones and the zeros, you know,

or owning fractional things.

And part of it was just convincing just the initial, you know, even the first 25 million or 50 million or whatever it was to go outside of real estate was a big push, big step.

And then initially, we, you know, because of sort of that edict of mistrust, you know, concern about what's going to, you know, some things we don't control, there was this view that we should only do hedge funds because hedge funds theoretically are hedged or are less risky.

Not always the case, but in theory they are.

And so we started out with hedge funds. And so our first investments were in 2011.
Looking back, you probably should have been long only. You know, there was a big run over the last 15 years.

You would have outperformed by being long most of that time.

So that's kind of how it started. And it was bits and pieces.

The way we had another inflection or step function was of change was we had an asset sale in 2018.

Our biggest asset, we sold half of it,

ironically, to the successor company to Westfield. It's a listed REIT in Australia called Center Group.
And we had a big pile of cash. The price was, you know, billion four divided by two.

So, you know, it was north of $700 million.

And we had this big pile of cash. And we said, well, you know, I was given this task of replacing the income of what we had sold.
You know, it's like, well, you owe us this for distributions.

And so that's how we got into private credit. And again, another thing, you know,

I know it's a hot topic, a hotly debated topic right now in private credit, but private credit in 2018, particularly in Australia, was kind of nobody knew about it.

I mean, there is no high-yield market in Australia. There's no syndicated bank loan to speak of market in Australia.
There's some private equity, but not as much.

Most people buy investment-grade bank bonds or some corporate bonds, and there's something called hybrids, which are bank hybrids that are actually being phased out.

But basically, nobody really knew what private credit was in Australia. That's all changed, but back then it was a big push.

So, for the first year, every private credit investment we made, I had to go to the full board, every single one, and that relented.

So, you could see, even now, it looks like pretty nice that we've moved from 100 to 50-50. We do this, this, and this, but it was not a straight line.

And it wasn't without some, you know, we had to prove at each level that we were doing the right things and that we were thinking of the risks in a sensible way.

Going back to 1989 when you started Solomon Brothers and I was four years old,

what's one piece of advice that you would have given yourself

younger, Bill, that would have either accelerated your career or helped you avoid mistakes?

I'll give you some advice that my mother used to give me, which I think is a good one. She had this saying, touch it once.

And, you know, it related to some of the things we talked about, but basically, when you touch something, finish it.

Don't think about it too much. Don't have this sort of switching cost.

You know, you make errors when you have to go back to it and figure out what page you were on. So that's one thing.
There's a cartoon that I've seen in the New York Times.

I forget the person who did it, but it has this little Venn diagram, and it has one circle that says things that matter.

And then the other Venn circle is things you can control. And then the overlap is the things you should focus on.

And again, simple punchline, but so, so important.

And I think if everyone went around asking themselves every day, is this something I can control or impact? And is this something that matters? And if it does both, then do it.

And if it doesn't do both, then don't do it. Obviously, you got to do things that, you know, if you work for somebody or whatever, there's obviously some of those tasks.

But once you have some autonomy and some agency, I think that's the most incredible thing to say. And then I'll just use this, you know, nothing impossible

mantra that we have. So the story was when Saunders came over to Australia, he had this dictionary, an English dictionary.
I don't think he knew English very well.

And he scratched out the word impossible because he obviously was on this journey that was amazing and incredible. But again, I kind of have this thing.

And whether it's from my investment banking days when you were given something that seemed like an impossible task and you had to get it done,

you just don't give up. You got to have a resource and don't question it as quickly because often things are more possible than you can imagine.

The way that operationalize impossible or the creation of new asset classes, I've had the privilege to interview people that literally create new asset classes.

And the best way that that's been articulated is similar to Clean Crinchenson's adoption curve. Look for your true believer.

Look for the early adopters early and keep on messaging your narrative over and over into the market and keep on getting the early adopters, then the early majority, then the late majority.

And eventually the market will coalesce to you and will come around to your style of thinking, but you have to sequence it in such a way that you're hitting the people that are most open to new messages early on.

And that's how you really operationalize Impossible.

Yeah. And I think what we're trying to do, just to dovetail it to what I said earlier, we're trying to meet as many of those people, evangelists, as possible.

And I think our advantage is that, you know, I mean, other than a few people, most people only have one of those in their life. They only do that once.

We have the opportunity, the ideas that we could do it many, many times.

The other thing that I'll just mention something, again, it's a newspaper thing. People don't really read newspapers the same way they used to or at all.

But one of the things I used to do is I used to read the obituaries, you know, when a famous person would pass away and I would read it. And often I was struck by

they were able to accomplish that thing that you knew them for.

It wasn't always at 20 years old, you know, or 25 years old or 30 years old. They, you know, you asked me, what would I give advice? People don't always figure stuff out right away.

So some of the best ideas happened when people were later in life, they had some other career or whatever, and then they went a different direction. It's that perspective

that things can change later and you can make a power law. You know, not everything happens when you're in your 20s.

You know, if you miss it, you could have a power law execution in your 30s or 40s or much later in life.

Not everybody's a freshman dropout from Harvard, although I did just interview one last week, Stephen Wang. On that note, Bill, thanks so much for taking the time.

I know it's very precious and looking forward to continuing this conversation in person very soon. Absolutely.

Thank you so much, David. Thank you.
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