E176: Beyond Harvard: The Financial Crisis Endowments are Facing

John Trammell has been on the front lines of institutional investing for decades. He’s managed capital for some of the largest families and organizations in the world—from family offices to the Episcopal Church—and in this episode, he explains the seismic shifts happening in the world of endowment and foundation investing. We talk about secondaries, collateralized fund obligations (CFOs), the future of Bitcoin in institutional portfolios, and why concentration—not diversification—created most of the great fortunes. This is one of the deepest conversations I’ve had on how the smartest long-term investors are thinking today.

Episode Transcript

(00:00):
Harvard, Yale, and other top endowments arereportedly selling billions of dollars with a b

(00:04):
in secondaries.
Why do you think this is happening?
It kinda goes like this, David.
They they were getting federal grants at somelevel, whether it was 50,000,000 or 400,000,000
or whatever.
And so they built entire industries at theuniversities around these grants.
And so whether it was a hospital or a researchlab or anything else, and they've got buildings

(00:26):
and people who are working in thesedepartments.
So when you suddenly have the prospect of thatmoney being turned off, they can't just shut
the buildings down and let all of the peoplego.
So the university administration turns to theendowment and says, hey, we don't need
$10,000,000 a month.
We might need $30,000,000 a month.
And the endowment says, well, we can't do that.

(00:49):
We're not built, you know, to suddenly increasethe amount of liquidity that we have.
So we have to sell something.
Easy to sell equities, but that's where they'vemade a lot of their money in the last few
years.
So they turn to private equity where they mayhave investments in private or venture that
they don't like very much anyway.

(01:10):
And so they're trying to unload that in thesecondaries market.
And secondaries have also raised a lot ofmoney, secondary funds.
And so it's sort of a great time for them toaccomplish several goals at the same time.
Double click on that.
They're the smarter secondaries are probablysaying to universities, look, we'll take some
of the dreck that you want to get rid of inyour portfolio.

(01:31):
But we also want this piece over here or thispiece over here where we can't get access to
that fund and we'd like to have it.
So I think there's a lot of negotiation goingon.
It seems like there's a perfect storm.
So the direct impact today is on the federalgrants.
You also mentioned the international studentspaying the higher tuition rates.

(01:52):
There's also this looming tax change foruniversities.
Is that playing in effect today or is it justthose kind of former two?
Foreign students not showing up in September isa direct and immediate effect.
The government grants could be and in somecases already are a direct and immediate
effect.
The taxes are up in the air.

(02:13):
We don't know.
But the likelihood is that especially for thelargest universities, that the tax rate is
going to go up.
So they have to do planning for that because,again, that's another little slice of liquidity
that they have to come up and plan for.
So it's a real it's a real push for theuniversities to do all of this work at the same

(02:35):
time as remaining investors.
And is there a game theory to why the largerinstitutions are trying to preempt the sale of
these assets before this tax rate is increased?
Or is it just that they have these fundraisingneeds?
They have these funding needs today?
Yeah.
I don't don't think, David, that there's a agaming part to it.

(02:57):
I think there's a couple of different things.
And, you know, on your previous podcasts,particularly the one with John Bowman, which I
thought was amazing.
You know, there's a lot of differentdiscussions about liquidity.
Is liquidity a good thing?
Is it a bad thing?
Does it save us from ourselves?
I don't think any of those arguments enter intowhere we are at the endowment level, university

(03:21):
endowment particularly level today.
I think the liquidity is kind of driven by acouple of things.
Maybe they went a little too far into privatesanyway.
That's an entirely different discussion aboutportfolio construction that we can have.
But I think there's that.
I think that not all private equity and venturecapital investments have turned out to be

(03:44):
exactly what they thought they would be.
And so there's some desire to sell before youget to the seven or ten year term.
And so I think there's a whole bunch of thingsworking at the same time to get this done.
And if your thesis is true and that they'reusing this as an opportunity to purge some of

(04:05):
their lower quality managers, why didn't theydo this earlier?
Why is there such a bias to re up in managers?
Is there a rationality behind that or is itmore an emotional thing?
I think it's more of an emotional thing.
I wish I could explain the madness of crowdsbetter than I can.
But I think it does.

(04:25):
There is a sentiment and that it carriesacross, in this case, all university endowments
right now where they're saying, you know, maybewe should really examine our portfolio.
We should examine what kind of liquidity wehave.
Is it wise to carry this private part of theportfolio out to term if we don't have to?

(04:45):
I mean, in the past, there may have been acouple of secondary players.
I mean, Common Fund has been in secondaries fora long time and got a great group of people
working on it there.
But there's been a sudden rush just in the lastfew years for people to start secondary funds
and take this money in.
So I think it is sort of one of these marketsentiment things.

(05:06):
It's hard to explain about exactly why it'shappening right now.
You know, that madness of crowds kind of thing.
But I don't think there's anything more to itthan that, than this sort of convergence of a
whole lot of different things happening thatare both both taking assets out of the
portfolios and selling them to new players.

(05:26):
In full transparency, have somewhat of a biastowards these secondary funds because I love
the idea that you can make money on thepurchase.
You manage an institutional fund now at theEpiscopal Diocese, and you have to manage, you
have to allocate your assets.
Tell me about the pros and cons of investing ina secondary fund.
In my mind, and this isn't me, I forget exactlywhere it came from, but they're really only two

(05:50):
assets, right?
You either own or you have a contract.
So this is a way to have ownership ofidentifiable companies that are being sold out
of these funds into the secondary market.
So if you're doing a reasonable valuation,reasonable amount of homework, and you can get

(06:12):
this at a discount to current NAV, which is awhole another discussion we can have.
But assuming that you can do those things, thenrational investors are going to say, hey, this
is a great asset that I can own at a reasonablediscount.
And so I can expect this kind of return out ofit over this length of time.

(06:33):
That's a good argument to make.
And whether it's true or not, if the message isthat one side is a distressed seller and you're
a reasonable buyer, then that seems to be agood methodology for investing, especially in
my own world.
I like to buy things that are cheap.

(06:54):
Unlike the public market where there's a verysmart seller and a very smart buyer, on
average, you actually are fulfilling a specificneed here with secondaries.
You're providing liquidity to somebody.
So it at least makes sense why there would bealpha in a trade.
Yeah, exactly.
So where does that thesis break down and whatare some mistakes that institutional investors

(07:14):
make in the secondary market?
It's harder than people think it is.
So think you actually have to be able to do theunderlying work or trust the people who are
doing the underlying work, because it's likeany other asset, except that it's much less
followed.
In the public markets, you have analysts fromall over the place around the world who are
looking at Nvidia and telling you what theprospects are for that company's growth.

(07:38):
You know, how tariffs affected, you know, whatnew chips are coming out.
Are they as good as the ones previously or theprice right?
I mean, there's a ton of information that youcan get about public companies and make your
own assessments.
In the private markets, it's harder.
There's not as many analysts covering whateverthat company is that you're looking at.

(07:58):
The valuations could be harder to do becauseyou have to actually go dig into the books
yourselves or, like I said, trust somebody todo it.
So there's a lot of work that has to be done inthe private markets to assure you that you're
getting a good price and that what you'rebuying and owning is not going to be just a
depreciation or depreciating asset that you'regoing to have to get rid of at some point

(08:23):
yourself.
So, I mean, there's a lot of calculations inthe private market that I don't think people
truly appreciate that makes it harder to do.
So you can't just willy nilly say, I'm going toinvest in this secondary fund or I'm going to
buy this slice.
You could do that.
But to do it in a way that gives me assurancethat I'm not throwing away my fiduciary duties,

(08:52):
then you have to do the homework.
Is secondary investing kind of like investinginto the best assets into second through fourth
quartile managers.
In other words, if you're large endowments andyou need liquidity, you're not going to be
selling your Sequoia or your Citadelallocation, you're going to be selling a

(09:13):
second, third tier fund.
And presumably there's some good assets inthere.
Is that kind of how you describe secondaryinvesting?
It's a great question, a great line ofthinking, because you remember I said a few
minutes ago that the smartest people in thesecondaries world are going to be looking at
the portfolio and saying, well, you're offeringme these couple of of things.

(09:35):
You know, that's great.
We can make a discount that I think will makethese, you know, the fourth quartile investors
at a certain discount, I can take that directaway from you.
But I also want a slice of your Sequoia or yourCitadel or your Kleiner Perkins Fund for that I
can't get any place else.

(09:55):
So let's, you know, either I'll take less of adiscount on the direct that you want me to
take, or I'll pay a premium to get access tothose funds.
And then let's agree to a price on the wholepackage.
I believe those kinds of negotiations are goingon.
There's one other thing that I don't want toforget to bring up in here about the

(10:16):
secondaries market.
I've not seen this for sure, but I have heardthe discussions.
So if I'm a university endowment and I've gotvery sophisticated investors and a team around
me to do this, then I don't want to take a riskon the secondary market, and I don't want to
have to go through all these negotiations.
So I'm basically going to sell my privateequity positions to myself.

(10:40):
So
I'm going
to take the stuff I don't want, put it intowhat's called a collateralized fund obligation.
Then I'm going to take the cash out of that to,you know, to accomplish the liquidity, the same
liquidity I'd have if I sold the assets.
I'm going to lever that up.
I'm going to sell the equity in it to UBS orGoldman Sachs or somebody who's going to take
the yield and the risk on the equity.

(11:03):
And I'm going to kick the can down the roadbecause I'm going to say that collateralized
fund obligation has a life of seven years.
So me and my board and everything goes, wecould all be gone someplace else or retired by
this time this CFO comes home.
But it accomplishes a whole lot of thingswithout having to be necessarily public about

(11:24):
the sales because we're gonna hear about someof these sales in the public, and the
journalists will decide whether the sales werea good idea or a bad idea for Harvard or Yale
or whoever.
This is a way to get around all of that.
Like I said, I've only heard the discussions.
I don't know if anyone has actually done one,but I know it's out there.
So explain like a third grader how you wouldexecute a collateral fund obligation.

(11:50):
A very smart third grader.
Yeah.
I was gonna say I couldn't have done it in thethird grade.
The I'm not even sure I can do it now.
The so what you're doing is you're puttingtogether a vehicle in your portfolio.
Now, the CFO has an equity component, which isthe cash someone's going to actually give me.

(12:11):
And CFO is collateralized fund obligation, notchief funding.
That's correct.
Yeah.
Yeah.
And the equity carries all of the risk.
You know, if the assets go down, the equitygoes down or could even go away.
And this new vehicle, which is called the CFO,is it lending the assets to UBS?
Is it taking out debt against them or is itactually giving up the upside?

(12:33):
It's giving up the upside more than anythingelse is that you're and in return for giving up
the upside on those assets, you're receivingcash that you can use in other places.
So it's essentially just like a secondary sale,except that you're doing it within your own
portfolio.

(12:54):
So it's a secondary sale without any of thepublic relations issues that that go along
with this.
A lot of these endowments are playing theseinfinite games, they're literally Harvard is
probably going be around in three hundredyears, so they need to manage their reputation
over decades and sometimes centuries.
And this is kind of a way to do that.

(13:16):
There's another problem here too, that I don'tthink as investors we typically understand the
politics of.
And that's that you university endowments relyon an estimate of inflows, right, from alumni
and donors.
So they have to protect that image, if youwant, or vehicle, if you want, that will

(13:42):
attract donors to continue to give money to theuniversity.
And major donors, of course, are usually wantto have some oversight of how that money is
used.
And so they become on the board, you know, ofthe universities.
And there's a lot of back and forth between thedonors and and the university endowment itself.

(14:04):
Not to mention that the students always seem tohave, for one reason or another, want to know
how the money is being used.
So there's a real, you know, political milieuthat you have to sort of think about when
you're doing these things and the publicitythat could come about as a result.
So it's not as straightforward as just takingmoney in and trying to maximize the returns for

(14:28):
the university.
There's a lot of things to think about and alot of non investment related issues to think
about.
They're also talking about changes to taxes oncharitable giving in general.
And so there are some universities that I'vetalked to who are also thinking about
establishing offshore facilities for donors togo into so that they don't have to pay US taxes

(14:54):
or using blocking corporations, which arecorporations which are offshore companies where
you can donate the money and then they're likeinvestment vehicles themselves.
And so they don't.
But US taxes don't apply to them.
And so it's very odd for universities to haveto think about these kinds of things.

(15:15):
But they're again, they are trying to maximizetheir returns as any rational sort of
investment vehicle and its management would,but they have a lot of things to think through
right now.
I I got to sit down with Bill Ackman a coupleyears ago during the whole Harvard issue with
with the president.
One of the things that he told me that was verysurprising is the corporate governance at

(15:38):
Harvard Corporation, only is basicallyirreplaceable, impossible to fire the board,
but also the amount of votes to petition toeven get somebody on the lower level kind of
advisory board has doubled in the last decade.
And ironically, the reason it's doubled isbecause of that issue.

(15:59):
They said students wanted to change theinvestment mandate to not invest into energy.
After that issue, they decided to double it sothat they would have more control.
The problem with that is that giving touniversity alumni contribution is a voluntary
activity.
So just like with any governance, alumni needto know that their money is going towards

(16:22):
something that they believe in, something thatthey have control over because it is a
marketplace of giving.
You could give to children's hospital, youcould give towards many great organizations.
So I think the universities need to find a wayto balance that kind of governance and the
freedom to invest into the things that theybelieve are best for endowment with making sure

(16:45):
that alumni are happy and want to voluntarilycontribute.
That's exactly right and very well said, David.
The and and the larger the donor, Bill Ackermancase, the larger the donor, the more control or
the more input that they want to have to howthe investments are done.
I've joked for years that it's much easier tochange the terminology and the language that

(17:09):
you're using in a portfolio than it ever is tochange the investment policy guidelines.
So I also think there's a great deal of timespent thinking about how things will fit into
the portfolio so as not to break the mold ofthe investment policy guidelines.
Because if you open that up, like you said, andit could take years to actually change the

(17:29):
investment policy guidelines or the governancedocuments for a board that you might lose that
battle.
And over the course of the battle, things couldchange too.
There are really good reasons not to go downthat road to try and change the investment
policy guidelines, but just to change the text,the terminology that we all use for various

(17:50):
investments going in like ESG.
And I really kind of hate the three letteracronyms that we all use in the investment
world.
But ESG is basically gone.
No one talks about ESG anymore.
If anything, the language has changed.
So you say sustainability and and the goals,many of the goals have changed energy, which

(18:14):
five years ago everyone was trying to throw outof their portfolio or hide or not talk about,
has now morphed into power transmission orenergy transition is how they talk about it so
that you can try and work some more rationaland less emotional bits back into the
portfolio.
So language is important.

(18:35):
Language is very important.
And especially in contexts where it is theleast common denominator where a freshman
student can march against investment mandateversus a very sophisticated investment
committee, it becomes even more important inthose cases.
Yeah, I think that's right.
Mean, it it sort of got swept under the carpetby a bunch of other things.

(18:58):
But, you know, a couple of years ago, there wasa lot of, Sturm and Drong at Yale because,
David Swinson was investing in our East Coast,natural gas pipeline and actually wanted to
continue the pipeline down to where beyondBoston to where it was more useful coming down
the East Coast.
And there's still a lot of talk about thepipeline itself as whether it's a good thing or

(19:19):
not.
But Yale's money was definitely invested inthat pipeline, and there were a lot of students
that were upset about it.
So it's a real it's a real life.
It's it's a part of reality that you have todeal with these different influence groups as
well as trying to be a good investor.
You mentioned David Swenson, arguably thegreatest endowment investor of all time.

(19:44):
He popularized this endowment model.
You believe the Swenson type of investmenttoday is dead.
Why is that?
Dead's a very strong word.
I don't think it's dead.
I think that David Swenson was one of thegreatest investors of the last generation.
And there are always new ideas, new investors.

(20:08):
We don't know who's going to be the championyet of sort of the next generation of
investors, but I'm sure there are several outthere.
And so I think it's not as much death unlessdeath is a part of evolution.
I think the very simple models of sixtyforty orso much in private credit, all of the silos

(20:28):
that we were all taught to think about and thekind diversification and risk and liquidity
that we were all taught growing up and the youknow, the great three letter, you know, modern
portfolio theory and strategic assetallocation, MPT SAA has suddenly become TPA.

(20:50):
Right.
And I think it's important to know that we arealways trying to evolve and find better ways of
doing things.
And we also have tools that weren't availabletwenty and thirty years ago.
I mean, all kinds of tools to use in terms ofrisk.
And so I think going back to David Swenson andthe Yale and Dalit model, I think it was a time

(21:16):
where there was a need for that kind ofevolution.
I think it took in a lot of alternative assets,hedge funds and global and less and more
illiquid investments.
I think that was all a great part of thejourney of investing.
I think we've all been through that now.
There are new I spoke to you about a new ideathat I hear from a lot of younger endowment and

(21:42):
foundation investors about how every dollar inthe portfolio has to compete with every other
dollar, that it doesn't matter what silo it'sin, is that you have to think about it.
Is this dollar, you know, what does this dollarspending comp?
What does this unit of spending accomplish forme in the portfolio?
Does it raise my risk?
Does it lower my risk?

(22:03):
Does it increase my liquidity?
Does it lower my liquidity?
All within a return of what's the expectedreturn?
And then diversification almost comes out ofthat naturally, because when you think across
like a spectrum of investing and think about itin that way.
And part of the problem here, too, is thatthey're trying to solve for assets that have

(22:25):
become blends between public and private.
And so it's more difficult to think about it interms of silos, because silos could lead you to
a kind of diversification that looks good onpaper and kills you when the market is down.
So it I really think of it as an evolution.
I think that David Swenson was a huge pillar ofthat evolution.

(22:50):
But I think we've moved on from that endowmentmodel.
It's interesting you mentioned diversification.
You mentioned the three factor model.
I had Ken French in business school, whocreated the model with Eugene Fama, who won the
Nobel Prize.
And we had an entire class about the decliningvalue of over diversification.
So after you get a certain amount of assets, ithas such a marginal benefit that you're much

(23:14):
better off seeking alpha than than furtherdiversification.
The other aspect, which was really interestingand really blew my mind, was I talked to
Jackson Craig at HIG Capital, which is adistressed investor.
And one of the ways that they look atdiversification is through event driven versus
traditional sectors like geography.

(23:35):
I'll give you a good example.
You could have three different companies inColumbus, Ohio, you could have an oil rig, you
could have a travel agency, and you could havea chip semiconductor.
You would be perfectly diversified, even thoughall of them were in Columbus, Ohio.
And yet you could have companies in completelydifferent industries and completely different

(24:00):
geographies that are all driven based are basedsome kind of derivative, like cost of oil,
price of gold, price of commodities, and theyyou could be significantly not diversified,
even though one company is in California, oneis in New York, and one is in Missouri.
You feel like you're diversified, but once theevent triggers once once there's an event, you

(24:27):
quickly see that you actually were notdiversified.
So there's this not only too muchdiversification, but there's also not enough
diversification that people don't criticallythink about whether they are diversified.
It's a great line of discussion.
And then there's entire groups of investors allover the world who are sitting around trying to
solve for this problem all the time.
I love the analogy of Columbus because the riskthere, even if you think you're perfectly

(24:52):
diversified and it's a new risk that peoplehave to think about, is climate change.
So let's say a hurricane comes through andfloods everything in Columbus, Ohio, your
diversification just went out the windowbecause you didn't think about having your
diversification in one location and climatechange could certainly impact that.
So there are so many aspects todiversification.

(25:14):
And let me do full stop here for a second andhave fun with the conversation that we're
having.
The only great money that I've made myself andportfolios is through concentration, is that I
so believed in a single investment that I putan over amount on any risk scale into that

(25:35):
asset.
And I forget who it was.
Maybe it was with Jeremy Hare.
You had a discussion about venture capital andwhy certain venture capitalists work is because
they invest before there's an industry.
They invest in a dream.
Before there's even a space.
All the money is made before it's namedfintech, before it's named crypto.
Exactly.

(25:56):
Exactly.
And so I think there's an element where youhave to be willing to take some risk and maybe
shift the portfolio to a more concentratedversion at some points in time and when you
have the belief.
But it's very, very difficult for bigendowments and where people count on the money

(26:18):
like pension plans and that kind of thing tothink that way, because the risk is that if
you're wrong, you just lost, just impaired asignificant chunk of your capital and cannot
pay out what you were supposed to or needed to.
And that's an income or an outcome that youcan't suffer through.

(26:39):
So then you have to start thinking about, okay,if I don't want to have just one be invested in
one thing, what do I do to still get my sort ofincome goals that I have to start with the
goal?
Alright, here's what I need to do.
I need to hand out 5% or 6% a year on myportfolio.
And how do I set myself up to do that with aslittle volatility?

(27:03):
Because that scares people that I can get awaywith.
And how do I do that within a lowered riskcategory?
So if I any single investment I have fails,that I still can do what I'm supposed to do.
And I think that guideline betweenconcentration and diversification and what
factors affect my diversification and how Ithink through both geography and asset classes

(27:30):
and everything else is part of that everydollar competing with every other dollar in the
portfolio.
So you're absolutely right.
And it is not an easy thing to solve for, butthat's what many smart investors are trying to
do all the time is to think that through.
You just have to think about it in terms ofwhere am I going to get the returns?

(27:50):
What do I have to think about to have thesmallest amount of volatility, the smallest
amount of risk or an appropriate amount of riskto get to my goal?
And each of us have a little bit different goalin mind and a different risk appetite.
So there's geographic, there's stage, there'sasset, I would add the event driven, things

(28:12):
that are derivative of certain things thatmight happen.
What other ways can you know if you'rediversified?
Like what stress tests are you running on yourportfolio?
You know, there's a very traditional stresstest of like what if interest rates go up,
which there are lots of people who are workingon that today.
What kind of political test?

(28:35):
What if The United States becomes a lessattractive place to invest?
Many endowments that I know and talk to arecurrently thinking about moving a little bit
more money to Europe or moving a little bitmore money to Japan and just having less
reliance on returns in The US because the riskhas gone up.

(28:57):
So I think and there are all kinds of I don'twant to go down this path maybe right now, but
there are all kinds of quant methods.
In fact, your pharma models and factor models,are all kinds of quant ways of running your
portfolio through risk models to see what thecorrelations are like under distress.

(29:23):
And we have some pretty good past events tosort of look at to make those models a little
sharper.
The real problem is, is that if if there's somesort of calamity or let's say another pandemic,
it's very hard to find things that are trulydiversified when everyone wants to sell

(29:44):
anything that they have.
I think part of the rally in Bitcoin in thelast several months is that as US public equity
assets have become less popular and gold hasgone up as much as it has, is that Bitcoin has
been the choice of many more institutionalinvestors as a way to try and find some

(30:08):
diversification.
I'm not at all surprised that Bitcoin has goneup as much as it has.
I think it'll probably continue to go up.
But that's the part of the search fordiversification.
And it's hard to do a stress test that ismeaningful.
Problem with stress tests is they'reinformative, but they don't actually change

(30:31):
your investment profile.
So it's a nice thing to have, but I don't knowany stress test that has ever changed my
thinking about how the portfolio should beinvested.
It's really much more of a using all of thatscience and then applying some what people
might call art on top of it to to arrive at aconclusion.

(30:53):
So it let me know if there's a stress test outthere that will really help you.
Today, the market is 50% alternative, 60%public.
So it's going to be some platform that combinesthose that has a good AI back end that could
really run those tests.
You know, another way to say what you weresaying on the pandemic and COVID is that

(31:17):
everything was not diversified versus treasury.
So you have basically treasury assets and nontreasury assets.
And whether it was stock, whether it wascrypto, whether it was real estate, it was all
a competitor to treasury and everybody wasgoing into treasury.
So everything went down.
Another thing that has changed just in thelast, I would say, couple of years, one of the

(31:38):
things that's changed is that cash used to be adrag on the portfolio.
At zero interest rates, you didn't want tocarry any cash because it was just a detriment
to returns.
That's really changed in the last couple ofyears because if you push out, let's say, on
the AAA corporate curve, you can get 6%.

(31:59):
And even in shorter dated stuff, can get 4.5%.
So cash, especially if you're worried about therisk premium in equities right now, then having
more cash on hand isn't a bad idea.
And especially because it's no longer a drag tothe to the portfolio, I think there's suddenly

(32:21):
much more interest in how cash gets managed inthese large portfolios.
There's a quote, now is always the mostdifficult time to invest.
So people always have an excuse not to investand to hold in treasuries.
You've had an illustrious career over manydecades.
Is that is there some truth to that?

(32:43):
Is there always a reason not to invest?
Do you just have to kind of hold your nosesometimes and make the best decision versus
always being on the sideline?
Yeah, I think one of the hardest things to doin investing, and certainly even though there
are days when I think I've learned it and otherdays where I'm just pounding my head off the
desk saying, you fool, you fool, is to try andremove any emotional response to what you're

(33:06):
doing.
So once you've got the goal set, once you'vegot what you think is the right portfolio with
each dollar that you've been able to invest invarious things, then I think you have to have a
plan about carrying forward.
And that's in many places, that's what's beencalled pacing models, right?
Which is just dollar cost averaging.

(33:28):
So there are times where, yes, you just have tosay, I've had my cash levels are where I want
them.
I'm now over my sort of 8% cash holding that Iwanted to put in place for this year.
So I need to put that cash to work.
And so where in the portfolio do I want to putit?
And sometimes you're gonna be buying over whatyou think are overvalued or crowded trades

(33:51):
because it is a part of your portfolio.
And I don't like momentum investing, but youhave to know that there are people out there
who are doing it and that so and dollar costaveraging is a good way to do things.
And it it helps remove the emotional responseto, gosh, the market's up today or it's been up
this week.
Maybe I shouldn't invest in equities.

(34:13):
Or the converse, of course, is, wow, the marketreally got whacked today.
I I should go buy some things because it couldget whacked again tomorrow.
So it's removing that emotional component toit.
I remember again, one of your podcasts, itmight have been John Bowman again talking about
how the illiquidity premium really should bemeasured on by the fact that it keeps you from

(34:38):
making stupid decisions.
Yeah, I I believe that.
And so but I think you have to be able to dothat yourself.
And I'm not sure that you should rely on themarket being able to do that for you.
There's an episode one sixty six with BradConger.
And one of the things that he does duringcrisis is is he buys he buys put options if the

(35:00):
market goes down a lot, which allows him toactually earn a yield on doing the policy that
he should do anyways.
So the market is down 30%.
He should buy those that stock at that level.
So he binds his hands, and he gets paid to takethe right action at that time.
I thought that that really blew my mind.
Brad's he's a great investor and got a greatteam around him.

(35:26):
So I think yeah.
I think having a strategy of what you will doat the highs or the lows or, you know, sort of
because it it removes again, it's an emotionalaid to say, gosh, the market's all beaten up
and everything.
So I'm gonna sell puts here because that'ssomething I can do.
It won't lose me much money if I'm wrong, buthas this great yield if I'm right.

(35:49):
And it that that tactical move takes a lot ofthe emotional pressure off of you because you
did something, right?
You just didn't suck your thumb during crisis.
You actually did something.
And I think that's a good strategy to have.
A lot of people can't really do tactical, soBrad's lucky that way.

(36:12):
But even having a tactical mindset sometimes,like I said, assuages that emotional pressure
that you feel like you should be doingsomething.
I think there's two things that are veryunderappreciated.
So a lot of people would say, okay, you'redoing all this analysis, as long as you come to
the right decision, you know, that that's themost important part.

(36:35):
But actually the analysis itself has hugebenefit because it roots you in your
conviction.
There's two types of investors early onBitcoin, those people that saw their friends
buying it and bought it, those people thatfundamentally believed in Bitcoin, there was a
huge difference.
You would say, why does it matter they hold bitBitcoin?
Because the ones that had rooted belief in itheld through it or held a lot of it, and the

(36:58):
ones that didn't might have bought out a 100and sold out a 140 and thought they were
geniuses.
So this whole process of gaining conviction,although it could be painful and could take a
while is incredibly valuable part of building agood portfolio because it allows you to take
the right behavior at the most difficult time,which I'd say over 90% of investors are not

(37:20):
able to do at a minimum.
I really believe that.
But I think if you're going to be aprofessional investor, if you choose to do that
as your sort of life's calling, you cannot dothings because it feels right.
You have to do the analysis and have theconviction.
As much analysis you can do and have theconviction.

(37:41):
I think it was Howard Marks that said, youknow, we don't make money by what we sell.
We make money by what we hold.
And I think you need to have that kind ofconviction in everything that you invest in to
hold it for the long term.
So I think, yeah, while Bitcoin was fun and alot of its, you know, sort of allure came from

(38:02):
because young people were holding up theirhands and it was sort of a rebel act, you know,
to buy bitcoin because you couldn't explain itto your parents.
And so I get all of that.
But I think the real affirmative investors inbitcoin began to realize, especially when you
could get it held at reasonable places like thegrowth of Coinbase, I think is really important

(38:29):
to the growth of stablecoin assets is that youbut you've got to really have the conviction
that it is a diversifier, that it is a placethat you would put your money in.
In essence, I'm never going to sell my Bitcoinbecause five years or ten years from now, it's
going to be worth much more than it is today.
And I think you've got to have that kind ofconviction in every piece of your portfolio or

(38:53):
you should sell it.
You've thought about Bitcoin in theinstitutional context.
What's the range of how much Bitcoin or cryptoan institutional investor should have in their
portfolio?
So there was an investor I knew named WallyStern.
Wally Stern helped to build capital researchout in Los Angeles.

(39:16):
And when I was in my twenties and just out ofcollege, he used to tell me that
diversification was the only free lunch andthat diversification applied across all of your
different assets in the portfolio and then sortof full stop, except that you should have 3% in

(39:37):
gold because you could be wrong.
And you had to understand that you could bewrong and therefore you needed some asset that
would be hold up or useful to you when all ofthe paper assets or contracts that you held
were gone or beyond sellable.
And so I think of Bitcoin actually in the sameway is that it has some sort of diversification

(40:03):
asset.
I may not completely understand it, but Iunderstand it enough to know that if you do all
the analysis, that it is a reasonable part ofdiversification in a portfolio.
COVID was really once in a generation situationwhere everything was correlated or was was

(40:26):
correlated with each other and againsttreasuries like we discussed.
I don't think that's typically the case.
Typically, you know, stocks go up, somethingelse goes down.
So I think people learn the wrong lesson aboutBitcoin and certain other assets that they're
everything's correlating.
You might as well think about diversification.
I think that's the wrong asset.
I think as Bitcoin grows, I see it as inflationhedge and also a hedge against the national

(40:51):
debt.
I think that's this this ballooning issue.
Yeah.
A lot of people had hope in Doge and and Elonand the administration cutting spending, but it
seems like that hope is quickly fading away.
So there is no good answer to what are we gonnado about national debt.
Not that that not that I've heard of so far.
Yeah.
I agree with that.

(41:11):
I'm I you know, it you know, part of trying tokeep your emotions out of investing is to try
and also keep your political beliefs out ofinvesting.
And it's very difficult to do, especially in ain a place where there are so many channels and
so many places for news to come from.

(41:33):
And that depending on what kind of news feedyou're using, how it can affect how you feel
about the markets on any individual day.
So again, I think that's why you have to havethis discipline of whatever your emotions are
telling you is to continue to with the plan andto have a plan for how you're going to invest
and whether you have inflows or whether you'rea foundation and don't.

(41:56):
And so I may have to move things around, Butyou need to have a plan of how you're going to
invest and then stick to the plan.
So I agree with you that that longer term, thatthere's a it's easy to say with the right kind
of analysis, not even thinking about itpolitically, but just doing the right kind of

(42:18):
analysis is that we're not going to be able tosupport at current interest rates and at
current growth.
We're not going to be able to support a$36,000,000,000,000 deficit.
So I how we call that back, whether it'sraising taxes or cutting services, I don't
know.
And like it just like you said, I've not seen agood plan for it.

(42:39):
But I do think that my appetite for risk islessened when I look at the analysis that says
in ten years time, we could have a$36,000,000,000,000 deficit.
It's the problem is it's hard to talk aboutinvesting without advertently or inadvertently
going into politics.
So let's not go there.
But let's talk about the different levers thatthe country has in dealing with the national

(43:03):
debt.
What are all the all the possible levers thatcould lead to substantial?
Well, there are the drastic ones.
We could devalue the dollar.
Right?
Because that would take a huge amount ofpressure off, but it would probably devaluing
the dollar at some point probably means raisinginterest rates because people are less inclined
to buy US assets if we're going to devalue thedollar.

(43:24):
Although it fixes
And what does that do?
That decreases the national debt.
So it goes from 36,000,000 to 26,000,000.
Yeah.
But once you do devaluation, then you're alwaysgoing to be suspect forevermore
to do You lose your brand in the You lose yourinternational market.

(43:45):
Yep.
So like I said, that's an extreme ability.
Now, cutting services, one of the things that Ibelieve is that there is a lot of waste in
government spending.
How you carve that out and how you actually doit probably starts with a very simple thing.

(44:06):
It doesn't start at the top.
It starts with audits.
Right?
So there has to be a very strong auditfunction.
Anybody who runs any kind of investmentfoundation knows that you have a very strong
audit function to make sure that you'readhering to your fiduciary responsibilities and
your plan.
So I think there needs to be a strong auditfunction to figure out how to cut government

(44:30):
spending, but it can't be willy nilly and itcan't be done from the top, in my humble
opinion.
So that's a longer term way of cutting thedeficit.
That probably has to be met with somehowincreasing taxes.
And that's why I think the endowments andfoundations, whether they're private or
universities or whatever, and charitable givingis going to be scrutinized as a way to raise

(44:56):
taxes, find a new revenue stream for the state,local and federal governments.
So I think there's a combination of things thatyou can do rather than the drastic things or
the other one could be along with devaluing thedollar.
The other one is to let inflation run becauseinflation helps with debtors.

(45:18):
Right.
So because it cuts the amount that you're inreal spending that you're going to put against
your debt.
But again, that also eventually ruins a wholelot of good things.
So I think there needs to be a combination oflooking both at the revenue side and the
spending side so that over a longer term, canget to a deficit as a percent of GDP that is a

(45:44):
reasonable carry.
Right?
So I'll tell you, the other thing is thatpeople used to argue all the time about Japan
being in such huge debt that they could neverget out of debt.
The difference in Japan was, and we can talkabout Japan for a long time, but the difference
in Japan was that they owned all of their owndebt.

(46:06):
So no one could shake their tree.
We don't own all of our own debt.
The Japanese, I think, own more of it thananybody else, but the Chinese own it.
The Saudis own it.
So there is the ability for outside investorsto have tremendous influence on the direction
of interest rates here in The United States.
They didn't have that in Japan.
So it's a different it's different here aboutthe amount of debt that we carry to GDP than

(46:32):
say it is in Japan.
Thank you for listening.
To join our community and to make sure you donot miss any future episodes, please click the
follow button above to subscribe.
Is devaluing the dollar and inflation two sidesof the same coin?
In other words, you're spending more to get theless.
It's just a framing.
Yeah, it's just that the inflation is somethingthat you let eat away at it over a long period

(46:56):
of time, whereas devaluing the dollar is aninstant hit to inflation.
But it accomplishes a lot of things.
It's just a drastic, you know, in my opinion, aterrible way to do it, but it's possible.
Yeah.
One of the things I hope that the countryimplements is governance, governance controls

(47:18):
at Congress.
Every politician is essentially has incentiveto optimize on their local economy at any cost,
even at the cost of the entire country and tofocus on headlines and the entire incentive
mechanism of how Congress operates and howbudgets are made itself is flawed.

(47:39):
I think that's actually the problem.
I do think we have more of a spending problemthan a revenue problem.
We're the richest country in the world.
We have pretty high taxes on a relative basis,but we do have a great spending problem.
And it's not in oftentimes, that spending isn'teven going to the people that need it.
It's going to these pork bills and these randombridges to nowhere, whatever is the latest

(48:04):
project for a rising congressman that he or shewants to kind of stand behind and and make a
career behind?
So I think there is a methodology in there tolook and evaluate spending and cut out a lot of
the waste and programs which we probably gotour legacy programs even that we probably got

(48:24):
involved with after the war, after World Wartwo.
Right?
And they've just become legacy programs thatneed to be reevaluated and the money can be
spent in new ways.
And you said the right word and governancearound how we do these things.
I mean, for the longest time, even today, Iwould have said Congress should just go home
because they're not doing anything.

(48:46):
Right?
And so I do think that what you're talkingabout is that, you know, a Congress, state,
local levels really need to think through.
They all need to work together to think thisthrough about here's what we need federal money
for.
Here's what we need a state money for.
Here's how the federal government should raisemoney.
Here's how the state government should raisemoney.

(49:06):
And we need to have this discussion from thelocal level up to figure out exactly what the
right things are to do.
I don't believe that people, many people todayare not thinking about the right thing to do.
They're just thinking about winning something,whatever winning means.
Just to double click on what you said, it's notactually that the politicians are dumb.

(49:30):
They're actually incredibly smart.
They just have the wrong incentives.
So they're not optimizing on what's best forthe country.
They're optimizing what's best for theircareer, which you could say you could criticize
them for that, or you could actually solve theproblem and take away that misalignment.
Yeah.
I completely agree that we have put in placeterrible incentives for why people become

(49:50):
involved in, the US government at at almost anylevel, and that we need to have much better
governance about how people and I didn't usedto be, but I'll tell you the other thing I'm
now become very strongly in favor of is termlimits.
You should donate whatever number of years ofyour life to public service.

(50:11):
And but it should not be something that is alife pursuit.
It's a job.
And you've been you should be honored to workin that job for six years or whatever it is.
And then you've done your service.
You go back to whatever else.
Because I think what little I know aboutWashington is that it becomes an inward looking

(50:32):
fish tank.
We're all looking at it, but it's not lookingat us.
It's only looking at itself.
And it's a terrible thing to try and workthrough because of the we've got the wrong
incentives in place.
So I think you're absolutely
There's two ways to slice the pie.
One is you could change incentives, and thesecond, you could change the people that go

(50:53):
into politics by taking away the otherincentives, which is you shouldn't be able to
trade stocks based on insider information,which no other American could do.
You should have term limits, so it shouldn't bea a true career option.
And also, I think you should ban people frombeing able to go to regulatory agencies that
they're overseeing.
Yeah.
I

(51:13):
And this is, by the way, this is Republican,Democrats, independents.
They all have these same adverse incentives,and I think it would be bets for the entire
country if we just did away with all of those.
You started advocating for less liquidity aboutfifteen years ago at the Episcopal Church, and
you started implementing it seven years ago.

(51:33):
Tell me about what it took to get all thestakeholders comfortable around having less
liquidity in your portfolio.
So the Diocesan Investment Trust of theEpiscopal Church of New York represents about
162 different parishes that are in Manhattan,Westchester and up the Hudson Valley.

(51:58):
Of course, that represents a lot of people, lotof parishioners, and many of them have
different ideas about investing.
They have different ideas about whether or notthey wanna be involved with how the money is
invested.
And in the state of New York, we have prettystrong fiduciary laws around the people who
serve on the boards and on these, you know, whoshepherd these investments.

(52:24):
There was a belief that any given church on anygiven day might need 100% of liquidity because
the primary asset, even though manyparishioners don't think of it this way, the
primary asset of these churches, bigtraditional churches, are the properties that
they own.
Right?

(52:44):
We're long real estate in a big way.
So the theory was is that the steeple mightfall down or the roof might fall down because
many of these churches are more than a centuryold and they require constant maintenance.
Through some good analysis, like I said, youhave to do your homework.
I actually found out working with a group ofpeople, not just me, that in one hundred and

(53:08):
fifty two years, no one had ever needed 100liquidity.
So, I took that message to the boards and said,look, there's great returns to be had by
investing in these different private assetsthat are available to us.
So it took a while to do the education.

(53:29):
Like I said, it took several years to actuallyget the board to be comfortable that first of
all, we weren't just shoving money into a blackhole or a black box that would never come back
to us and demonstrate that it was a matureindustry where you could invest and the returns
were often better than what you could get inpublic equities over a long period of time.

(53:51):
And we had some of the private equity funds anda couple of venture capital funds come in and
present themselves.
And they were very sophisticated investors anddid a great job of helping educate the board.
And that's how we finally got to make our firstprivate equity and venture capital investments.

(54:13):
Education is important.
It's, you know, not every investor, especiallyon these boards.
On most boards that I know of, whether it'sfaith based boards or endowments in
universities, foundations, there's usually agroup of people around the table who actually
understand investing and who are sophisticatedinvestors.

(54:36):
There is also a group of people around thetable who don't know anything about investing
or sort of have ancillary information aboutinvesting.
And so I think part of the mission of theseboards is to make sure that everyone at the
table has a good education and a goodbackground in what's happening with you know,

(54:58):
with their fiduciary responsibilities.
So it takes time and you have to be willing toinvest the time to get the right things done.
I think education and a prepared mind goes handin hand.
You cannot have a prepared mind.
You can't sit around in a room and say, I willbe prepared for the market crash without really

(55:19):
understanding portfolio, understanding historicfluctuations, all these things.
I think they're two sides of the same coin.
And the top investors, they may not not evenknow what the catalyst is, what the next Block
Swan event will be, but they cultivate aprepare mind not just in themselves, but in
their organization.
I had the CIO of CalSTRS, Scott Chan, and theyhad an organization wide contest where

(55:44):
everybody submitted their best trade idea.
And the most the the idea that won the besttrade was actually preparing for the next
market correction.
This was like in the early twenties.
And because of that, they were able to takeright action during COVID.
They were fully prepared as an organization forthat drawdown, and they were able to not only

(56:05):
not take wrong action, but also take advantageof the market dislocation and, you know, take
favorable positions in their portfolio.
So I think those two things, although they seemdifferently, education and a prepared mind are
interrelated.
And I think people think more about, you know,almost like becoming zen like in prepared mind,

(56:29):
but the best way to actually have a preparedmind is to be educated and to almost like
simulate what a difficulty in the market mightfeel like.
Yeah, David, I love the concept of a preparedmind.
And I think it is an essential part of beingany part of a board that oversees the

(56:51):
investments of an endowment or a public pensionplan, anything that's not personal where you
bear the responsibility for taking care ofothers, I think having that prepared mind is a
really important part of being at the table.
John, this has been a masterclass in investing.
How should people follow you?

(57:13):
I think best if they want to reach out onLinkedIn is a good place to start.
And then I'm happy talk to people or meet them.
Know, one of Jeremy Hare's concepts about beinga super connector.
I'm not a super connector, but I think it'simportant to talk to people across many
different industries.

(57:34):
It's part of that prepared mind a bit that wewere just talking about.
I think you have to have the ability to meetand talk with lots of people to keep yourself
educated.
Thanks for jumping on the podcast and lookforward to sitting down in real life soon.
David, this has been fun.
Look forward to
it.
Thanks for listening to my conversation.
If you enjoyed this episode, please share witha friend.
This helps us grow.

(57:54):
Also provides the very best feedback when wereview the episode's analytics.
Thank you for your support.