Horse Barn: HVAC, Windsurf, Vanguard

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I'm excited for today's episode.

I'm only really excited to talk about search funds, if I'm being honest.

Because I want to get straight into you, your future as an HVAC technology.

Yeah, who was reading this article as a guide, you know?

Right.

The appeal of the search fund is that, like, who among us hasn't wanted to own a lucrative HVAC business in New Jersey?

Just run into the swamps of New Jersey and get into waste management.

Wait, that's a different thing.

It's a similar thing.

It is similar.

I was talking about

in the Sopranos way.

Yeah, right, right, right, right, right.

Right, right, right.

Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

I'm Matt Levine, and I write the Money Stuff column for Bloomberg Opinion.

And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

Wouldn't that be a great story, though, if you're like some 28-year-old Harvard MBA and you're like, I'm going to start a search fund, and you scour the earth and you send cold emails to a bunch of people, and you end up getting into the waste management business in New Jersey.

And you're like, oh, great, now I can like be my own boss and like run this lucrative business.

And then the mob shows up.

Yeah, surprise.

Yeah, now you have many bosses and they'll kill you.

I had never heard of search funds before.

Really?

I read them at all.

Even as a dedicated money stuff reader, I guess I never absorbed it.

But I was so charmed by this piece.

This is probably the longest article I've read in a long time, but I read it start to finish in Business Insider.

Right.

There's a Business Insider story about search funds.

I love search funds so much because search funds are like: if you get a business degree from a fancy school,

the highest calling could be running a duct cleaning business.

Or I always say pest control.

Like pest control to me is the archetypal search fund.

I don't know if it's actually that common a search fund use, but basically right.

A search fund is like you go to business school, you graduate, you raise a like six or seven figure fund from investors.

The investors, I think, are often like your family, but sometimes are professional investors investors because the returns on search ones are really good.

And then you go out and search for years to find a boring small business whose somewhat aging owner is looking to get out of the business and sell to some young whipper snapper.

And then you buy it and then you run it.

And you use the tips and tricks that you learned in your two years of business school to like optimize it.

And you're like a little private equity kingpin, except instead of being like an associate at a big private equity fund it's just you and instead of like rolling up a giant business you like buy one pest control company and then you run the pest control company it's so good it is so charming and i mean reading this business insider article okay so it's told through the the lens of this man dan schweber i believe his name is and i mean i thought that i deal with a lot of rejection as a journalist being a search fund founder what do you call call them?

Just a search funder?

A searcher.

A searcher?

Being a searcher sounds absolutely grueling in terms of dealing with the word no.

By the end of it, he sent 3,600 initial emails, 375 introductory calls, just 30 intro meetings, and six signed letters of intent.

And this business that he ended up buying, which is an HVAC company, he emailed the guy 12 times, as you pointed out, in your column.

And I don't think I've ever made it to the 12th email.

Like I don't think I've sent 12 emails to the same person pitching them, which is, I don't know, it was inspiring.

It was inspiring on so many different levels, Matt.

How persistence pays off by getting you an HVAC company.

Exactly.

If I just send a dozen emails, maybe I can own an HVAC company.

What I love about it is that

this was a sort of novel idea at some point, you know, 20 years ago.

And it has now really like pervaded the top business schools so that a lot of people are doing this, which means that if you run an HVAC company, you are constantly, constantly getting cold emails from searchers.

And so like, of course you had to email the guy 12 times because the guy was like, ah, more search funds.

Yeah.

It is such an amazing time to be in an unglamorous business because there are so many people with MBAs who want your unglamorous business, right?

A lot of them are searchers, but some of them are like private equity funds doing roll-ups of like pest control or whatever, right?

Like, there are a lot of buyers to choose from if you happen to own an HVAC company.

And I don't know, it's just so strange to me to think, like, you're a plumber, you like work in plumbing for 20 years, you start your own plumbing company, you like go around doing plumbing, and then like you occasionally check your email, and there's like 400 emails from private equity firms and MBAs.

It's just like a strange dynamic.

It's a seller's market.

I wish I had a plumbing company to sell.

Right.

And like, one thing I wondered about is like, if you are a search funder and you buy yourself a plumbing company, in a year, do you flip it to another search funder?

Because the demand keeps growing.

I do want to talk about that, how you exit it as a searcher, but you seemed charmed by particular from getting into the shoes of the man who owned this HVAC company.

The article also got into the shoes of the employees who worked there.

I think that's another interesting level.

Like, okay, the founder and owner of the business is getting a bunch of emails.

How do the employees react when you tell them, this 32-year-old now owns the business and you work for him and he's the CEO and, you know, he's some Harvard MBA?

Okay, here's how I think about this.

I think in the olden days, people would start businesses and they would be like, you know, high school educated, like, you know, they start a business because like they're just scrappy entrepreneurs.

And then they would run the business for a while.

and they'd have employees and they would have like a kid and they'd be like, well, of course the kid is going to take over the family business.

But because they're rich now, instead of like the kid just like, you know, starting at the family business after high school, they send the kid to Harvard Business School.

And the kid gets all these like newfangled business ideas and he comes back at age 28 and he's like, I'm going to take over the family business and run it in a modern way.

And like, you know, that's good, right?

Like you have like the scrappy founder and then you have the next generation is like professional and educated.

But the chain has been broken.

So now like the founder gets rich and the kids are like, well, I don't want to to work at the family HVAC business.

That sounds terrible.

Right.

So the kids go off and like become documentary filmmakers.

And meanwhile, like it's really hard to get into Harvard Business School now.

So you can't just get into Harvard Business School by being the like shiftless child of an HVAC founder.

But all the people in Harvard Business School, you know, there's still a demand for Harvard MBAs to run HVAC companies.

So now instead of it like being the kid of the founder, it's just like some random person who happened to get a Harvard MBA and now wants to run the, you know, HVAC business in Peoria.

So it's disaggregated the like family, you know,

the family heir.

Yeah.

Instead of like the son taking over the family business with his fancy Harvard degree, it's like some random person takes over the family business with his fancy Harvard degree.

But, you know, it's like still kind of the same.

It's like the employees still have to work for a 32-year-old who hasn't worked at HVAC.

You know, it's like it all makes a kind of sense.

It's just become more like coldly logical and market driven.

Something that I kept thinking about while reading this article, for some reason, a meme that keeps popping into my various algorithms is, you know, cartoon guy, hand in his face in the middle of the circle.

And it's like, I meet a girl, her dad owns like a $20 million a year, like waste management company or pest control or something, but he doesn't want to like hand the keys to his ambitious future son-in-law.

And then we stop talking, which it would be a lot funnier if I could show you the meme, but I promise it's funny.

But it kind of reminded me of this.

Sure.

Anyway, I thought also it was interesting, you know, this article described it as a phenomenon happening around like late 20 year old and like graduates in their 30s.

And I think it speaks to something about millennial culture that there is that desire to run into the woods or go to Peoria and run an HVAC company versus

stay in a city and try to climb the corporate ladder.

Like this probably happens with every single generation, but it does feel like it speaks to some sort of disillusionment yeah i mean i don't know you think about like what you can do with your mba right like if you're a sort of corporate type like you can go work in private equity and you can start by building models and doing kind of grunt work and your hope is that in 10 or 15 years you'll be you know kind of leading big deals and sitting on boards of companies and kind of running portfolio companies or

you can just

do deals and run companies yourself immediately with the trade-off being that those companies are small pest control companies in Peoria.

But like, maybe that's a good trade, right?

Like maybe you want that trade, right?

Like I am sure that

in like 10 years, you'll be reading about people who started as search funders and bought like one HVAC company and then bought another HVAC company and then became like billionaire private equity kingpins by like doing roll-ups of their industries.

There's kind of two paths to that.

outcome, right?

There's like the outcome of being a private equity associate and there's the outcome of taking over an HVAC company.

And I bet the second path is more likely to get you to the billionaire kingpin outcome at this point than like being a private equity associate.

Well, I think you have to have

some

ridiculous amount of just self-confidence or

unearned ego to think like, I am going to go in and I am going to CEO this small company like it hasn't been CEO'd before.

Yeah, it's you're like a little bit more confident, a little bit more risk-taking.

You're not like just following the expected prestigious path of going to a private equity firm.

You're like, I'm going to strike it on my own and see what happens.

Well, though, you know, it's interesting because like also in 10 years, this will be such a like well-trodden path.

You know, there'll be like incubators for search funds and like it'll be so standardized that it won't be like particularly entrepreneurial and risky anymore.

But right now, it's still a little entrepreneurial and risky.

So you're saying I should get in now is what I'm hearing.

I don't know.

I was going to say you should have gotten in five years ago.

I have no idea what the market is like.

I think you shouldn't get in in 10 years.

But yeah, get in.

Five years ago,

pandemic.

I think this is great.

I feel like we've had a number of career ideas for each other during the course of this podcast.

But you like taking, you raising money from friends and family to take over an HVAC company.

I like it.

I didn't know that you had such an intense interest in.

HVAC.

Not specifically HVAC.

I know that we're using that.

I think that's a good horseborn, but

Yes, that's the thing.

I don't know if that works.

I think the whole point of this is that you're taking over non-glamorous family businesses from

aging founders who don't want to do it anymore.

Not like

people's delightful lifestyle businesses.

I don't know.

There's plenty of people who would think that a barn is unglamorous.

Do any of them own barns?

No, you're right.

They don't.

That's your problem.

You have to buy the barn from someone who owns the barn.

I don't know.

Reading this, I have like a renewed,

I'm reinvigorated.

And, you know, I thought I wanted to be a podcaster.

I did that.

It's okay.

Sure, right.

I wanted to be a novelist, still working on that.

But I think that what I really want to be is a searcher.

I've always wanted to buy a dressage barn, but now I have a fancy, not yet saturated sort of term to apply to it.

Yeah.

I mean, that is really like the thing about the search funding is like it's given people a set of concepts to sort of standardize and think about and justify this thing of like, I want to buy an existing small business and run it according to my own, you know, ideas.

I think like a while ago, if you were in business school and you're like, I want to run an HVAC company, people would be like.

That's a strange thing to want to do with your Harvard MBA.

Whereas now it's like totally standardized.

I was like, oh, of course, a search fund.

And similarly, I feel like this is going to be like season two of the podcast is going to be, you're going to go to investor meetings.

We're going to record them.

People are going to be like, of course, here's a million dollars.

You're going to,

I think, send out cold emails to every horseborn in America.

At least 12.

At least 12.

If anyone listening right now, you wrote cold email, you'll show up on a horse.

That's true.

I'll ride in and they'll know I'm the real deal.

They won't turn me away.

They say.

Yeah.

That's like one thing in this HVAC article is like, you know, the guy who owned the HVAC company was like, all these search search funders emailed me and I was like, all right, come out.

And they're like, oh, let me check my schedule.

But this guy, the guy who bought the company from him, was like, I'll be there tomorrow.

Right.

You're going to show your enthusiasm by like showing up on a horse.

That's the other thing I found charming is that it's just like old-fashioned sort of, you know, I'm going to come up and meet you in person.

I'm going to shake your hand and I'm going to look you in the eye.

And that has a lot of currency with the people who are selling these unsexy businesses.

Right.

Because these are people who have built businesses over years and they are the owner, but they also like work closely with the employees and they are not just maximizing shareholder value.

And if they were to sell to a private equity firm that laid off all the employees, they'd be sad.

And like they live in the community.

They'd be looked down upon.

So if they can sell to someone who gives them a firm handshake and looks them in the eye and says, I'll take care of your employees, you know, it's a very family business oriented, you know, kind of dealmaking environment.

And you're not just paying the highest price to maximize shareholder value.

You're kind of taking over a business that has ties to your community.

Yeah.

I do want to talk about how Schweber is going to get this big payout that Business Insider says that he's in for.

So, if all of this goes according to plan, he's in for a big payout of the search entrepreneurs who eventually sell their business.

Just under a quarter of them get nothing.

Another 27%

get less than $4 million in equity.

28% get $4 million to $10 million.

The luckiest 18%

get more than $10 million.

So,

you know, after I buy the horse barn, I have to stay there and make it better and grow it.

And then the idea is that I'm going to sell it in like a decade and make a big profit.

I have to imagine some people go into it thinking like, I'm going to make my life in Peoria running an HVAC company.

But, you know, most of them are like business school people and like they're choosing between this and private equity.

And yeah, they want to do a flip, right?

They want to like buy a sleepy family business that isn't, you know, optimizing everything.

And they want to spruce up the financials and maybe do a few like tuck-in acquisitions and then sell it to,

you know, a sort of more scale buyer, sell it to, you know, a private equity roll-up or something for, you know, if you can buy it at like

one times revenue and sell it at, you know, five times revenue, then they, you know, make a lot of money.

And so the investors who

fund it the perturbation.

Or you know, or you retire or something.

I don't know.

Or you become an an investor in search funds.

Sure.

So if you invest in a search fund, you're in it for the long haul.

You're in it until there's a flip.

I don't really know the terms, right?

Like you could imagine the investor just getting a share of the cash flow and being happy with never flipping it.

But no, most of them want to cash out.

And yeah, you're in it for a flip.

And you say the long term.

I don't know what the holding periods are, but like, you know, again, the sort of alternative to this is private equity funds.

And so,

yeah,

you might think, I'm going to take over an HVAC company.

I'm going to learn HVAC.

I'm going to do some deals.

I'm going to spruce things up.

That won't take me more than five years until I can flip the company, right?

Like, it's not necessarily your family business for the rest of your life.

I have to imagine a lot of these fail.

I don't know.

I don't know what fail means.

I mean, right, like probably some of them,

probably some of them, they don't spruce them up and then they get bored and then they're like, all right, we're shutting this down and I'm going back to New York.

But right, like you're taking over like a stable business with customers and you know

like the you're not founding a business right like your downside is not as bad as if you were founding a business from scratch right you know that this company already has a business and customers and you know revenue and employees and

probably in many cases it could operate on its own without much from you.

So you might not be able to do a flip.

You might like get bored and close it down rather than eke out a very small profit for yourself every year, but like you're not going to lose all your money.

Yeah, that's true.

I mean, to your point that they're not founding a brand new business.

I was thinking about this in terms of like, you know, maybe these smart young people with these big degrees, maybe their brainpower would better serve the economy by

putting that towards new ideas.

Why?

Like,

well, that's right.

Degrees are not in astrophysics, right?

They're masters of business administration, right?

They've learned to administer businesses.

I think it's like a really good thing for the economy if like the local sort of mid-sized businesses get really good business administration, right?

If like the Harvard MBAs, instead of just going to work in finance, like actually go and work for real companies that do, you know, HVAC.

This reminded me, I know these people who

There was a bed and breakfast for sale in a small Pennsylvania town, really charming.

And it was an existing business with an existing customer base who they had a lot of repeat customers.

And the owners were retiring and they bought the business and it's going really well.

And those people are named

Bob and Julia.

And Friday is my dad's birthday.

So happy birthday, Dad.

Happy birthday, Bob.

I meant to tell you that I saw someone like

me.

Hold on.

That's you.

Okay.

That is me.

I mean, it's your cat.

It's your

version of Home Studio.

Jesus, catch up.

That sounds terrible.

You need to go to that.

We're keeping all of this up.

It's literally a hairball.

He's fine.

It's fine.

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Windsurf?

Windsurf?

Man.

Yeah.

Buying families.

But not really, not really buying the company.

Well, kind of.

Set the scene.

WinSurf is like an AI coding assistant company.

And

it was in talks to be acquired by OpenAI for a while.

The rumor was that OpenAI was going to pay $3 billion to acquire it, which I think means to acquire it in the normal way, like buy all the stock of the company.

But they couldn't get...

to an agreement on some weird terms, including like sharing the technology with Microsoft.

And so OpenAI walked away, and then Google did this weird deal where it paid $2.4 billion to WinSurf for basically like some, but not all, of WinSurf's employees.

Like basically Google was trying to acquire the top talent from WinSurf to feed into the maw of like having AI researchers do AI at Google.

And

they got like a non-exclusive license to WinSurf's product, but it seemed pretty clear that it was a talent acquisition.

But they didn't buy the company.

They got no stake in the company.

but the shareholders of the company mostly got cashed out like the venture capitalists got paid off for their stock so google paid for the stock of the company but didn't acquire the stock of the company they just got the talent and like left the company on its own and this was kind of a weird outcome in particular for the employees of windsurf who didn't go over to google because they were kind of left in this like company that had some cash and like a business but no more of its founders and was kind of like at loose ends.

And then, like, a couple of days later, Cognition, another AI company, bought the rest of Windsurf for

an unspecified price that, like, might have been just like, here you can have a job.

And so, yeah, that was the deal.

It was like quite controversial.

There's been a lot of deals kind of like this

in the AI space, where

you have very big tech companies that want to pay a very large amount of money for AI talent.

and the top AI talent often has their own startups.

And the startups often have the effect of proving that their founders are good at AI stuff, but do not have products that the big tech companies want.

And historically, the way that ended was the big tech companies would buy this startup, shut down the product that they didn't want, and give the employees jobs.

But that has changed, like that acquihire model has changed.

And I don't quite know why like the leading theory for why it has changed is that in the Biden administration there was a lot of antitrust scrutiny of big tech companies buying even small startups and so

they

stopped doing acqui hires and started doing just hires yeah

but the other thing that is happening is if you're Google or Meta or whoever

It's sort of dawning on you like, well, we don't really have to acquire the company.

We just have to pay the the founders to come work for us.

And we have to pay them a lot because they have the startup, they have equity in the startup.

So, like, they have to give up the equity in the startups.

We have to pay them a lot.

But, like, do we need to acquire all of the employees?

Do we need to pay the VCs the full value of the company?

Or can we just acquire the founders and let the rest go?

So, there's a lot of talk about the social contract of startups and VCs being violated by these deals.

And I feel like so far, actually, the social contract holds up pretty well, where like the VCs who funded Windsurf, you know, they got several times their money, right?

Like they got rewarded for funding Windsurf, even though I think people would say, in a sense, like the product isn't what's making the money.

It's just like the founders are going somewhere else is what's making them the money.

But, you know, and the employees ultimately ended up with jobs, although not at Google.

So like the social contract sort of held, but it's like, it just feels like it's a little bit under pressure where like, you know, the next deal, Google could just be like, we're going to pay the founders, you know, a billion dollars each and we're not going to cash out the VCs.

Yeah.

Reading this

and just thinking about similar circumstances, my thought was, why don't they just try to poach people the normal way?

Like, why is tech this special, weird place where there is aqua hiring?

Like, why can't they just offer the founder?

$100 million or something like that, similar to what Mark Zuckerberg is doing?

Why do we have to go through all the hoops of, you know, buying the company or doing whatever Google just did?

I think that part of it is like you can now pay AI researchers $100 million,

but you can't pay them $500 million because all the other AI researchers would be mad.

And like

if they have a startup that has raised money at a $4 billion valuation and they own whatever,

they own a billion dollars worth of it, right?

You have to lure them away from that startup by giving them a lot of money.

Maybe it's not a billion dollars.

Maybe they don't think it's worth what, you know, what it raised at.

But you have to give them something like a billion dollars.

And

the way to do that is to have some sort of MA-like transaction, right?

Like if you're just saying, I'm going to give you a salary of a billion dollars, that's tough to sell to your other employees.

But if you say, I'm going to do an MA transaction that technically doesn't involve buying any of the company, but like there's a licensing deal and it's like an agreement with Windsurf, then you can do a transaction that effectively gives the founders a billion dollars.

Right.

And so I think that's part of it where like

the going rate for poaching an employee from like

OpenAI to Meta is, you know, $100 million.

But the going rate for poaching a founder of a startup that was valued at a lot of money by a VC, the going rate for that might be billions of dollars.

And the only way to pay that is in something that looks like an MA transaction.

The other thought I had was that there is still some aqua hiring going on.

If you think about the recent example of also meta with scale AI.

No, no, these are all the same thing.

Like these are not quite acquisitions.

Sometimes they're like stake acquisitions, but not 100% acquisitions.

And sometimes they're more like the Windsorf deal where it's like a commercial license and a big payment, but not 100% acquisition.

Yeah.

I was just thinking about the employees who didn't get picked to go to Google, and that's probably a pretty lousy feeling.

But maybe they're happy at cognition.

Yeah, but it's like there's this incredible gold rush for AI and there's incredible variance in people's perceived market value, right?

Like there are people who are, you know, like there are people who are multi-billionaires because they like were in early in AI.

And then there are people who are paid like, you know, $600,000 a year.

And they're like, oh, my God, I'm so poor.

There's a huge range.

And some of that is.

the sort of classic startup, like, were you there at the founding of a hot company?

But some of it is like people's perceived value to the big tech companies where, like, if you are really, really good, a big tech company will pay you

much, much, much more than $100 million if they have to.

And then, if you're less good, it's like, yeah, you're on salary, it's fine.

And where we are in the world right now, I mean, is this uniquely a tech industry phenomenon and specifically an AI industry phenomenon?

Even in tech, people have normal jobs.

Like, this is very localized to AI.

You know, like, there are not these kinds of bidding wars for people who do non-ai tech business

man if i had any practical skills i'd be thinking i need to be an ai person somehow but i think search one founder is probably more realistic looking more horsebone

yeah

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You know who else is in the business of buying up a lot of companies?

Is it the Vanguard group?

It's Vanguard.

They are an index fund company.

All the companies.

As much as Vanguard likes to talk specifically to me and everyone else about their active management ambitions, they are huge.

That means that they own a lot of the shares outstanding of a lot of companies, including companies that you might not expect.

I would expect.

Wait, can I ask you, are they the biggest total stock market index fund?

Oh my God.

I think that's a good idea.

Because Vanguard runs a big SP 500 index fund, and so does everyone else.

But

I definitely own some of the Vanguard Total Stock Market Index Fund, which is not the SP 500.

It's everything, including small companies and including Bitcoin Treasury companies.

I'm trying to find out because I don't want to misquote myself, but I think that the Vanguard Total Stock Market Index Fund is the largest.

I mean, it's in the US.

It's in the trillions.

So I would imagine that that's it.

So when you say Vanguard owns is one of the biggest shareholders of companies, you wouldn't expect.

I would expect them to be the biggest shareholder of every single public company.

That's what I would expect.

And they are.

And they are.

Including Including strategy.

In particular, I'd expect them to be one of the biggest holders of every non-SP 500 company.

Because there are a lot of SP index funds, but like Vanguard is really into total stock market index funds.

But yeah, they're the biggest holder of strategy, microstrategy, now called strategy.

I guess I did not appreciate that strategy isn't in the SP 500, but we're also talking about a non-SP 500 tracking fund because I don't know, it just feels like increasingly the whole world revolves around the S ⁇ P 500.

But the Vanguard Total Stock Market Fund, biggest shareholder of strategy, I say that you might not expect it because

the

personality of Vanguard is an asset manager that is deeply, deeply skeptical/slash repulsed by cryptocurrencies.

I know, but this is the thing about running an index fund.

It's like, it doesn't matter what you think.

You just buy it.

It's like a really good disciplining mechanism, right?

Like, you can sit around and be like, Well, I think this company is overvalued, but it doesn't matter, you have to buy it because you're an index fund manager, and like that's what people are paying you for, and they're not paying you very much, right?

Like, if they're paying you a lot, then you might be like, Well, I'm going to short this company because, like, I think it's overvalued, and I'm you know getting paid a lot for my wisdom.

But they're paying you like two basis points to buy every company, so you buy every company.

It's a really good business.

I love it.

The thing that's slightly different here is that Vanguard obviously has control over what products that it launches.

Yeah, but like it's products or index funds.

I know, I know, but this is a relatively new phenomenon where you have equity companies that just hold Bitcoin.

And you think about like commodities, for example, Vanguard for a long time would not launch a commodities fund.

They're never going to launch their own cryptocurrency fund.

And okay, yes, they're going to buy every single stock out there, but it's a new phenomenon where that means you're also buying crypto indirectly.

Yeah.

One of the things I like about it is that this is a little inside baseball, but not really.

Bloomberg has this like view that you shouldn't own stock in companies that you write about.

So like I don't own stock in

Goldman or Apollo or whatever, but I own index funds and they own stock in those companies.

And so

right.

And like in some ways, it would be weird if I didn't, right?

Like

to me, like I should have my savings in like the global financial portfolio.

And if I owned like all of the stocks except Goldman, then like in theory, that would create a financial bias against Goldman.

I would be like, well, I don't own any of their stock, but I own every other stock.

So I want their stock to go down relative to the rest of the market.

And then crypto is kind of the same, right?

Like, you know, we have like sort of rules that you shouldn't own crypto if you're writing about it.

But like, if I own zero crypto, then I'm sort of biased against crypto, right?

Like, I, you know, I own like all of these stocks and I want the stocks to go up, but I don't want crypto to go up because I don't own any crypto.

But now, because I'm on the Vanguard Total Stock Market Fund, I own some Bitcoin indirectly.

But like I have some exposure to Bitcoin through strategy.

And I think like more generally, like it is good for ordinary investors to be able to get low-cost access to like market cap weighted ownership of like the entire global financial portfolio.

Right.

Like just as like

It's probably good for you to not have to pick which stocks will go up, but just buy all the stocks.

Like you shouldn't even have to to pick which asset classes will go up.

You should be able to be like, I'm going to buy the market, right?

And you can't really do that.

That's not really a thing.

People try, but it's not really a thing because, like, you know, how do you decide how much real estate to have in that?

But by smuggling a little Bitcoin into your total stock market fund, it means you have a little bit closer to exposure to the entire financial portfolio.

And if you don't like crypto, you'll be mad about that.

But if you're buying the total stock market fund, your thesis has to be, I don't know what I want to buy.

I have no strong views about which companies will go up.

So, like, you have some Bitcoin.

Why not?

Yeah.

Occasionally, Tom Keene invites me on radio and just kind of bullies me about crypto for a couple of minutes.

And then I get off air.

Is he pro-oriented?

I would not describe him as pro-crypto.

I'm not surprised.

He famously calls it BitDog.

But in trying to make him care, I have tried to make the case that you should care because it's probably in your retirement account through this sort of indirect exposure.

Like your fortunes in a small way are tied to Bitcoin now.

Right.

I would reverse that.

I would say that like, if you don't have a strong reason to be short crypto, you should be long crypto in proportion to its like weight in like the market.

Right.

And like that weight has gone up a lot in the last 10 years, right?

It's now trillions of dollars.

And if you are just like completely on a blank slate, completely agnostic about everything, like your weight should not be zero.

And now it's in your retirement fund.

Great.

Problem solved.

I'm not saying you should buy crypto, like by all means.

This is not investing advice.

But like, you know, I'm just saying if you have no views, like the default weight in your portfolio for every asset is not zero.

The default weight is like its market weight.

Right.

And so if you're just setting it to defaults, you should have some crypto.

And the way to have some crypto is either like, ah, you go create an account on Coinbase or like you just, you know, own a total stock market index fund that happens happens to have some crypto.

So you're a market cap-weighted guy.

I'm not saying that's the best way to invest.

I'm saying that's the neutral way to invest.

I'm saying that like

anything that you do to deviate from like

the market cap weighted global financial portfolio

should ideally have a reason.

Ideally.

Not that Ideally.

Not that I, you know, follow that.

I'm just, you know, that's a theoretical matter.

Like you should own the market unless you have some reason to think that something else is better.

And that is investment advice.

No.

I mean,

I don't know how you could get sued over that, but no, it's not investment advice.

The Bitcoin Treasury companies are interesting in part because they give you a way to own crypto if your only investment is the total stock market.

But more broadly, they're interesting because they are a way for equity investors to own crypto without owning crypto.

And I think that there's a lot of demand for that.

Some of it is from like Vanguard, right?

Vanguard, which let's hypothesize does not want to own crypto, nonetheless owns a lot of micro strategy.

It's like, that's like a good arbitrage, right?

Like you have like Bitcoin, which like Vanguard doesn't want to buy, and you have micro strategy, which Vanguard, against its will, does want to buy.

And so you can transport Bitcoin into Vanguard and make some money on it.

But more broadly,

I think there's a lot of equity investors who, for one reason or another,

can or want to buy MicroStrategy for Bitcoin exposure, but can't buy like just Bitcoin for Bitcoin exposure.

I get an email from one guy saying, like, my hedge fund,

our prime broker will give us 16 to 1 leverage on MicroStrategy, and they'll give us no leverage on iBit, like the BlackRock Bitcoin ETF, right?

So if you want to get exposure to Bitcoin, getting it in the form of a stock, like a real stock, not an ETF, like a corporate stock, getting it in the form of a corporate stock is in many ways preferable to other forms of owning it.

And that's why, that's part of why the Bitcoin Treasury companies often traded a premium to their underlying Bitcoin, because there's a whole class of investors who can get crypto that way, but can't get it as easily or as efficiently in other forms.

That's really interesting because after the spot Bitcoin ETFs launched, I think a lot of people, perhaps myself, questioned what the use case for microstrategy was.

Yeah.

And the number one answer is index funds.

Vanguard's total stock market fund does not own ETFs.

Yeah.

It owns companies.

And MicroStrategy is still a company, even though it's a pot of Bitcoins.

Like, that's the number one answer.

There are other answers because, like, someone at some prime brokerage is like, we'll give more leverage on corporates than we will on ETFs, even though the corporate is like more volatile than the ETF.

But like, the number one answer is index funds.

And, like, yeah, MicroStrategy is not in the SP 500.

It wants to to be in the S ⁇ P 500.

That's like the next, that's the next frontier.

It did make it into the NASDAQ 100.

Yeah, yeah, and that's a big deal.

Which was, it was somewhat controversial.

Yeah, because like these indexes don't include ETFs.

They don't include investment vehicles with like rare, interesting exceptions, right?

Like

there's like an argument that Berkshire Hathaway is an investment vehicle.

And like, you know, and I don't know if you remember, but friend of the show, Bill Ackman of Perching Square Capital Management,

he found his way into another episode.

When he was, so not the bird, but the actual Bill Ackman.

When he was trying to.

He was a tennis pro.

Yeah.

We haven't even talked about that.

When he was launching his closeddown fund, he was like, it's going to be in the S ⁇ P 500.

It was not going to be in the S ⁇ P 500 because the S ⁇ P 500 does not include closed-down funds, but it does include Berkshire Hathaway because it's not quite a closed-down fund.

It's a company.

And MicroStrategy, same deal, right?

If you're like, I'm going to launch a fund that holds Bitcoin, that will not be in the S ⁇ P 500 or even the NASDAQ 100.

But if you're like, I'm a tech company, I'm going to almost exclusively hold Bitcoin and talk about it a lot, you can be in the S ⁇ P 500, or at least the NASDAQ 100.

And that's different.

Well, that was the controversy around its NASDAQ 100 assumption.

The NASDAQ 100 does not hold financial companies.

And it feels like MicroStrategy, it was MicroStrategy at the time, like...

was sort of grandfathered in because it is nominally still a tech company.

Very nominally.

Yeah.

That's the arbitrage, right?

It's like, we're not a financial company.

We're not an investment company.

We're just a tech company that happens to own $70 billion of Bitcoin.

Yeah.

It's a good trade.

I'm sorry that Bill Ackman caught so many strays at the end of this episode.

It's okay.

I don't think he listened to the end.

I do want to say that, like, when we mentioned last week that we were going to name your bird friend of the show Bill Ackman, we got approximately 20 emails saying of perching square capital management.

Yeah.

A lot of people

did that joke, and we did not, and I'm sorry.

But very clever.

We'll do better next time.

Perching square.

Yeah.

Just learned to perch.

And that was the Money Stuff Podcast.

I'm Matt Livian.

And I'm Katie Greif.

You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com.

And you can find me on Bloomberg TV every day on Open Interest between 9 to 11 a.m.

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We'd love to hear from you.

You can send an email to moneypod at bloomberg.net.

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You can also subscribe to our show wherever you're listening right now and leave us a review.

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The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andam.

Our theme music was composed by Blake Maples and Sage Bauman is Bloomberg's head of podcasts.

Thanks for listening to the Money Stuff Podcast.

We'll be back next week with more stuff.

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