Behind the Scenes of a High Net Worth Investor ft. Tad Fallows

[00:00:07] Tad

Risk and volatility are not synonyms for each other. I’m a big fan of Warren Buffett. I think one of the things he talks about is that permanent capital impairment is loss, but if I buy at 10, it goes down to 5 and goes up to 20, I never actually lost money along the way. It was only if I sold at 5 that I lost money. Now that people don’t care about volatility, seeing it as not quite the same thing as risk. It’s not like gambling where you just can go up or down.

[00:00:34] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

Before we begin today’s conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also understand that there’s a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions.

Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:30] Niels

For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary investors from all around the world. In this series, I have invited one of them, namely, Alan Dunne to host a series of in-depth conversations on the topic of what it takes to be a world-class allocator.

In today’s world, portfolio construction is fast moving to the top of the agenda of many investors as they try to analyze and understand the riskiness of their portfolios. With ever-increasing uncertainty around the globe, being well-diversified across many different strategies and themes in your portfolio can mean the difference between ruin and survival when the next crises emerge.

The aim of these conversations is to try and understand the experiences that have influenced these highly specialized allocators and the processes they follow to harness the best returns for their clients so that we can all become better-informed investors. With that, please welcome Alan Dunne.

[00:02:34] Alan

Thanks for that introduction, Niels. Today, I’m delighted to be joined by Tad Fallows. Tad is MD of Long Angle. Long Angle is a private digital community of highly successful young entrepreneurs and executives. The community is comprised of high-net-worth millennials and Gen Xers around the world, about 3000 members across 45 countries with a collective AUM of $30 billion.

Prior to starting Long Angle, Tad founded a SaaS company which he successfully exited. Prior to that, he was at McKinsey for a number of years. Tad, it’s great to have you with us. How are you doing?

[00:03:08] Tad

Thank you so much for having me here, Alan. I’m thrilled to be here. Doing very well.

[00:03:12] Alan

Good stuff. Well, I gave a bit of a sense of your background and it is different to a lot of the other kind of asset allocation guests that we’ve had on, but I think it’s a very interesting background and it’s a very interesting community you’re involved in. So maybe give us a sense on how you got involved in- yeah, I guess your overall journey to Long Angle.

[00:03:32] Tad

It’s a great question. Really excited to be here. I love the podcast. In the question of my investment journey or allocation journey, first exposure was probably when I was about eight years old. This one really hit me because it was my grandparents who what they did for both my brother and I is my grandfather had been an entrepreneur and then a lifetime investor. And so they set up trial stock accounts for each of my brother and I where they would put in a few dollars each month and we’d research the stocks and they’d enter it in their ledger book. It was late ’80s, so before a lot of electronic tools that we have today, but got us excited about that process.

My grandmother actually just passed away two days ago. She was 102 and had a very full life. I think she left a lot of legacies but that was certainly one of getting my brother and I very interested in business and investing. We both went on to become entrepreneurs ourselves. I think that interest in companies continued throughout life. Whether it was in high school, I preferred during the summers to start companies with my friends rather than having to get a traditional job of working at the grocery store. And then as you said, after college, I went on to work at McKinsey before starting a SaaS company.

So I always had a lot of interest in businesses and how companies made money, and I would say hobbyist investing along the way, trying to translate some of that to buying public equities here and there. I think probably the biggest thing that gave to my investing perspective was really seeing at least public equities as ownership shares in companies rather than as ticker symbols with prices on them.

My perspective is that is actually critical to long-term success in investing because when you see prices drop 50%, I don’t know if it’s Warren Buffett or someone like that who said it’s the only store where when they put on a 50% off sale, everybody runs out, and then when prices go up, everybody piles in. So I think if you can keep that mindset of seeing them as buying companies and not pieces of paper leads to more success in the long run.

But then I think the biggest step change in terms of really focusing a lot of my time or majority of my focus on portfolio allocation and beyond just public equities to really the whole suite of portfolio allocation was probably when I had that liquidity event from the software company that you mentioned. As you said, I’d been at McKinsey for a few years and then spent about 10 years bootstrapping a software company focused on universities and hospitals. Got it to about 75 employees and then sold it to a strategic acquirer.

That process meant I made very little money throughout my career and then on one day basically got deferred compensation for the last 10 years. At that point, I also had a little more free time to focus on my personal finances no longer running a company. As I looked at all the different things I could spend my time trying to optimize, whether it was getting your 401Ks and retirement plans right, or killing recurring subscriptions, or credit cards, or any of those sort of things, and then compare that the impact of if I get asset allocation and I get an extra 1% return here, that is going to swamp anything else I could possibly do.

I can be sloppy about how often I go out to dinner or any of those things if I’m actually successful at getting portfolio allocation correctly. So I really did a deep dive on that. I think for a lot of people when they go through a liquidity event, it then becomes moving into wealth preservation mode. Perhaps because of some combination of my age being in my late 30s when that happened, as well as the lifetime experience in business and investing, it wasn’t so much that my risk appetite went down a lot.

I’ve been through market cycles like 2001 and 2008 with at least modest exposure. So I knew that both those downturns do and, and that they are good buying opportunities, and that I was personality wise capable of staying invested through those. I didn’t need to go to just serve a traditional 60/40 portfolio. So I was much more interested in maximizing returns, but also in options where you can mute the volatility without sacrificing long-term returns.

I think probably the really clarifying moment for me came when I interviewed a number of wealth managers after the liquidity event as I thought about working with one of them and outsourcing that effort. A super sharp guy, and actually, a pretty good friend of mine, his pitch was basically, “Hey, what we do is we can bring you half of the market return for a quarter of the volatility, so double the Sharpe ratio.”

My response to him was, “Okay, if you can do that Sharpe ratio, I want four times the return for twice the volatility. I’m not using the money for 30 years. What I care about is the final destination and I don’t really care that much about the path to get there.” I think he basically looked at me like I’d use foul language at that point. And I realized, okay, I’m not a good fit for this. I need to personally get deep and focus on understanding the asset allocation deeply.

That was I think closely involved to starting Long Angle. So what that was is, as I mentioned with the liquidity event, it was a fairly abrupt introduction to a lot of the more esoteric high net worth questions where as someone who was a personal finance hobbyist could understand a lot of these things around setting up 529 plans or 401K plans or low-cost ETFs and that sort of thing.

But when you get into these questions of private equity and private credit or estate taxes or things like that, trust structures, there was a lot less information out there. And so I wanted to do a deep dive on that and basically wanted to make sure I was getting that information from people who were first-person in the same situation and not trying to sell each other anything. So my co-founder of my last company and I worked together to set this up.

What we started was just putting together a group of about a dozen other entrepreneurs or hedge fund managers who were in a similar situation financially to speak openly about what they were doing on any of those topics. It turned out that need was a lot more broadly felt. As you mentioned, over the past three years, we’ve grown to about 3000 members, still in that same demographic of mostly very high net worth, mostly under 50.

As I mentioned, more geographies and more professional backgrounds, although entrepreneurs probably being the single biggest background along with things like finance and technology. So there’s a number of parts to that, whether that is online discussions of people talking about whether they’re the more quantitative questions around asset allocation and tax optimization, or the more qualitative questions around, hey, how do I take advantage of this wealth to give my children opportunities without spoiling them or undermine their ability to succeed on their own merits, as well as a number of in-person events, webinar meetups, peer advisory groups and things like that.

But one significant aspect of this, not necessarily initially but emerged over time, was around alternative asset deals, both analysis and then syndication to get access to and discounts on alternative asset deals. So where we have gotten to this point is that we basically look at probably 50 or 100 deals a year. The mechanism there is that from across our membership, there are a whole lot of people who either have had success with particular managers or know these people from their professional careers and suggest, hey, this could be an interesting fund for us to look at.

We have a few people on our team do the initial level of analysis on them, looking at things like track record, fee structure, tax structure, idiosyncratic risk, correlation, etc., to get down to the handful each month that we think are promising. And then for those actually put together a member deal team of a handful of members who really know that particular asset class very well, whether that is upstream oil and gas production, medical office roll ups, private credit, real estate, any of the above, and do a deep dive on it.

And then about once a month, there’s one that that the expert deal team people, who work in that industry, really like lot. And then from that, we basically do a syndicated investment opportunity across the community where we say we can then negotiate with the GP and say, if we’re writing, rather than individually someone writing $100,000 check, collectively writing a $10 million check. Sometimes that’s access, sometimes that’s discounts, sometimes it’s both of the above.

So that whole process, being closely involved there, has really turbocharged my learning about a wide variety of asset classes and being aware of one’s I just had no idea existed before things maybe like search funds or whiskey aging, or getting much more nuanced understanding of what are the economic drivers and the return drivers on specific asset classes that I may be vaguely aware of and maybe in some cases even dabbled in without really understanding what the fundamental drivers of performance were.

[00:12:38] Alan

Okay, great. Well, that’s a very comprehensive overview. It’s interesting you touched on being in your late 30s, not wanting that kind of quarter to vol, and half the return type risk-reward profile. Would you say that’s pretty representative of the risk appetite of most of your peers within Long Angle?

[00:13:02] Tad

It’s a great question. I wouldn’t claim to speak for everybody. Of course, like any group of 3000 people, you’ll have a dispersion of opinions. I would say though that people, on average, tend toward the higher end of the risk spectrum. One thing that we do is we run an asset allocation survey every year where we ask all of our members across maybe 60 different categories how do you allocate your portfolio, then we gather that data, we synthesize it. We actually publish it on our website.

So it’s not something we’re charging for or keeping secret but it’s just something that we think is very interesting. But the outcome of that is, on a mean basis, only about 14% of total net worth is in either cash or bonds, more than half of it being in equities, whether that’s public equity or private equity, and the rest in real estate or other alternatives.

So I think that 14% cash and bond allocation I’m pretty sure is lower than the traditional advice for those low-risk asset classes. I think there’s two ways generically the one could talk about it if you’re a situation where you have more money than you’re likely to consume in your lifetime. You can either say, “Hey, I’ve got plenty of money. I don’t need to take any risk. I can just put it all in municipal bonds and withdrawal half a percent a year and I’m fine.”

Or you can say, “I’ve got a lot of money. I can afford a lot of volatility. So why would I spend the next 50 years with my money sitting there in municipal bonds and just being eaten away by inflation? Why don’t I just put it all in the assets with the highest expected returns? In over 50 years, my actual returns are going to tend toward the median and I’ll end up with 10 times as much money I can either donate to charity, leave to my heirs, make an impact with.”

I think they’re both very logically consistent and valid perspectives. I would say, as I said, most members probably tend toward the higher return. I think part of it is that I was going to say they’re high risk, high return. I think there’s a perspective, which I certainly share my myself and it probably goes with a number of our members, that risk and volatility are not synonyms for each other.

I think volatility is helpful where you can run lots of analysis on it. You have modern portfolio theory, you have Sharpe ratios, you can calculate Monte Carlo scenarios. But it’s not really the same thing as risk. I’m big fan of Warren Buffett, and I think one of the things he’s talked about is that permanent capital impairment is loss, but if I buy at 10, it goes down to 5 and goes up to 20, I never actually lost money along the way. It was only if I sold at 5 that I lost money. Not that people don’t care about volatility, but seeing it is not quite the same thing as risk. It’s not like gambling where you just can go up or down.

[00:15:45] Alan

I hear you. A couple of points on that. Would you say it’s probably the age profile or is it the fact that these are entrepreneurs who have probably made the wealth themselves? Is it a function of these people have grown up in a great period to be an investor in the United States that they haven’t seen, well, okay, you had the financial crisis, but things came through it.

Are all of those relevant in terms of, I suppose, building this risk profile of the people, of your members?

[00:16:16] Tad

I think it’s a great question. Again, without speaking for every individual person, I can look at the statistics and I can say age has some but a pretty mild impact. If I bucket our members into broad groups of those maybe under 40, 40 to 50, and more than 50, the folks in the over 50 group, rather than having 15% in stocks and bonds, they’ve got 20%. So slightly less aggressive, but still significantly more similar than different.

I think that probably the key drivers across there are a few things. One is you mentioned first generation versus second or third generation wealth. I think that is a major driver of things. Our community is probably 95%, 98% first generation wealth creators, but we do have a handful of people who are G-2 or G-3 or more from their families, and they’re actually some of my favorite members.

They bring very sophisticated perspectives and there are certain things that you learn, especially perhaps around raising kids were having been through it yourself on the other side, you have a strong perspective on what works and what doesn’t. But I do think there tends to be significantly more risk appetite with a person who says, “Hey, I worked really hard, I made $20 million, I sure don’t want to lose it. But if I did, I’m not really worried about what’s going to happen tomorrow. I know I’m capable of generating wealth and I can probably roll up my sleeves and do it again.”

Versus I think if I inherited $100 million, there’s probably some obligation here to pass it on to the next generation and not be the guy who screwed it up and broke the chain there. I think also probably just less control or less direct control where if you start and sell your company, then you’ve got the cash in your personal bank account, you probably should do things for estate planning and liability protection to put it into various trusts but you don’t have to.

Whereas if you inherit that money, it’s often different things in different pots where you have different decision rights over them. So I think that’s a little bit of it. And then maybe the last thing also is, aside from the question of whether you generated this wealth and had comfort in the ability to redo that if you had to, I think there’s just having operated a business for a long time in many cases or maybe being a senior executive or working in finance, feeling a real understanding of what kind of those economic drivers there are.

And so gain, as I mentioned for myself, seeing a lot of these equity-like positions as ownership stakes as opposed to just numbers and ticker symbols, I think feeling more comfort with that allocation. Probably unanswerable what you’re saying about how much is just personal experience bias. As you said, there have been drawdowns like 2001 and 2007 or COVID, but COVID is probably the best example where things just bounced back so fast.

I can tell you that I stayed fully invested and did some buying in 2001, 2008, but those didn’t test patience and faith the way that say 1968 to ’82, something like that, where the market basically stayed flat for 15 years, or in Japan, we reached the all-time high for the Nikkei. I actually lived there when I was about seven years old and I think the market is in the same place there as it was when I was seven. So I’m sure there’s a bit of that, especially if you look at tech stocks where a significant number of our members are either tech entrepreneurs or your early employees at a public tech company.

I think when I looked at it last, over the last 10 years, the Dow Jones tech index has averaged over 20% IRR. It is correct that equities overperform over the long run, but probably not to the degree that they have for the last 30 years.

[00:19:55] Alan

Obviously, when you had your wealth event and your liquidity event, you took the time to consider what to do going forward. As you say, you spoke to wealth management firms. Outside of that vol profile, when you looked at the offering, obviously you concluded that you could do something better yourselves. Was it just the greater access to deals, private markets, all of that, that you felt that you were better served going your own route than going the traditional route with a bulge bracket wealth manager?

[00:20:28] Tad

Another great question. I would say honestly for me, a big part of it was the cost structure, where when you, let’s say, you’ve got $100,000 and you’re paying 1%. Okay, I’m paying $1,000 a year for this advice. That advice certainly costs money and requires expertise and is going to help me out. Of course, when you have a bigger portfolio, those numbers are going to go down, but they don’t go down as far or as fast as it feels like they ought to.

So if you’re talking about let’s say a $20 million portfolio and you’re talking about 75 basis points on that, that’s $150,000 a year all post-tax money. So that’s $300,000 a year of pre-tax money. It just feels like an awfully big number one where you’re saying, “Is my time really that valuable or can I invest some of my time to figure this out myself?” So I think a bit of it is just the size of the numbers there.

I think I would probably be speaking for my general membership when I say that this legacy of focusing on AUM-based fee structures as opposed to hourly fee structures like most other professional services where people say, “Hey, I’m happy to pay my lawyer $1,000 an hour. I can pay my wealth manager $1,000 an hour. My lawyer doesn’t demand a cut of every deal that he writes the documents for.” So there’s probably a bit of that.

As you get higher in the assets under management, it becomes also a lot broader spectrum of services that could be defined as for example family office or wealth management, where it’s not just portfolio allocation but things like legal services, you can get into tax services and to bill pay services, property management services, etc.

I think a lot of those are things that I personally and a lot of members find interesting in saying, hey, probably the portfolio allocation is the single piece that people feel the most comfort and the most interest in keeping control over. But a lot of those ancillary services, either for a lack of interest or lack of expertise, a lack of time, would be much more interested in outsourcing.

I think it probably also lastly comes down to personal interest where I, personally, have an appetite and find this stuff interesting to work on. If I passed away early, I would certainly advise my wife to find a wealth manager to help her with it. Not at all for lack of expertise. She is much smarter than I am and happens to work in banking, but she just doesn’t find this stuff particularly interesting.

So I’ll give her the check in every few months or every year about how we’re doing so she stays fully informed but just wouldn’t want to do it yourself. So I think there’s also an element of having the same kind of people who would personally want to become a wealth manager for other people, they’re going to probably want to manage their own portfolio because they just have an appetite for learning about it.

[00:23:13] Alan

Makes sense. Picking up on some of the points you made around the asset allocation certification survey, it sounded like broadly about 50 odd percent equities, 14% I think you said in cash bonds, and a balance of 50/35/15 I guess, which is kind of an interesting- 35% in real estate and alternatives. Is that right?

[00:23:37] Tad

It was more than half in equities. It’s actually more like 55% or 60% in equities, so not quite as heavy. Under 30% real estate, probably 25% to 30% in real estate. And that’s split maybe half and half between equity in your primary residence and in investment real estate. I know there’s a debate about whether primary residences should be considered part of net worth or not, but as we look at it, just say, hey, what’s your total equity, you could sell your house and downsize if you want to, so it is an asset that you own.

Actually interesting there, just on some kind of interesting observations that came out of that study which are a little different than you might expect, on primary residence it’s interesting that you see, pretty consistently, up to about $25 million of net worth, that people have about 20% of their portfolio in equity in their primary residence. I would have expected a lot steeper curve of people with say 5 million to have a much bigger amount than people 25 million. But it’s much closer to flat than you expect.

When you get deeper into the ultra-high net worth territory of 50 or 100 million of course, that percentage of that and your primary residence does go down fairly steeply. What’s interesting on the risk/reward that we found there, or risk volatility and return appetite, is that while there’s much less allocation of cash and bonds, there is also much less debt than you’d probably expect.

We ask people, okay, how much leverage do you have? Is it on mortgages, on investment properties or residences or portfolio lines of credit and that sort of thing. The majority of members, well more than half of them, had less than 10% of their net worth in debt, including real estate debt. Almost half of them actually didn’t even carry a mortgage either because they didn’t own a home, or in most cases, because they owned a home and didn’t want to put any debt on it.

So it’s the flip side of the capital I have to invest, I’m going to invest it aggressively but not lever up so that I’m not at risk of a capital call or some disaster scenario. Again, logic, and actually, it does not apply to myself. I have a lot more aggressive approach to leverage than our average member. So I’m not going to say that’s the only right way to do it. But I certainly see the reasons behind it.

Other things that might be a little surprising, one is there’s a larger allocation to private equity than you might expect, where on average, it’s about 16%, and then as you get into the ultra-high net worth territory, about 25% of people’s net worth is tied up in private equity. That’s probably a combination of legacy shares in businesses they start where if I start something that goes public or maybe I sell it to a private equity acquirer but I roll part of my ownership stake into that, you just accumulate those assets as well as people intentionally allocating fresh capital to them.

The last one that’s interesting is actually a lot less allocation to individual public equities than you’d expect. It’s only about maybe 5% of people’s portfolio in individual stock names. I’m going to go heavy on Apple or Amazon or Nvidia or what have you. The very large majority of that public equity exposure is in funds of various sorts as opposed to individual stock picking, which I think is a good and responsible idea.

I’m impressed because I always find it more interesting to pick an individual stock than I do to pick a mutual fund, but that is how people are voting with their wallets.

[00:26:58] Alan

Interesting. I’m surprised. I would have thought there would be tech-heavy stock portfolios, but interesting that they are widely diversified. And also the lack of debt is interesting too because I was going to raise that in relation to the global financial crisis. Obviously, that’s when people get into trouble refinancing real estate deals, etc. So all very sensible you’d have to say.

In terms of that interest in the private markets, obviously, a higher exposure to private equity. Within privates, I think you’ve touched on search funds very briefly. That’s something I’m not as familiar with, but maybe talk about some of the private market exposures that you see people invested in.

[00:27:44] Tad

Yeah. So as you know, private markets and alternative assets, it’s kind of like a fractal where the more you look at it, the more sub-niches and genres are there. But I can talk about some of the ones that both I’ve found interesting and I think a lot of our members tend to be attracted to. So within private equity, I would say it’s a good asset class overall. Certainly, if you look at the long-term track record, you get I would say on average, greater than public equity returns.

Whether you have greater or less volatility, that’s probably really in the eye of the beholder. I think KKR will tell you it’s less volatility. I personally believe a lot of that is just driven by the lack of price discovery where public markets are marking every single day and so you get emotion coming into it. Whereas if a big PE fund just asked to get an accountant to give you a NAV statement every year, it’s going to look much more smooth. Again, not necessarily a bad thing. It prevents panic selling. But I think the volatility, in my opinion, is probably more just a reflection of low liquidity.

But that said, I think good returns in private equity. And then the subset of private equity that I think I’ve seen a lot of interest in, especially lately, but just in general, is on the smaller side. Because I think you can really get a few tailwinds in your favor if you’re looking at buying companies with even maybe as small as 1 million or 2 million or 5 million of EBIT, where you get, generically, a private equity company will want to do some at least modest things with leverage to enhance returns. They’ll generically want to improve operations and then run a good exit process to increase their multiple. Basically, on all three of those, you have more potential to do it on a very small scale. I’ll start with multiple arbitrage.

A lot of investors are probably aware, if you’re buying things at 2 or 3 million of EBIT, of course, it depends on the interest industry, but in any industry, you will have a lower EBIT multiple than if you are buying things at 10 or 20 or 50 million of EBIT. So if you can buy let’s say a company with 2.5 million of earnings at five times revenue, and then you are able through good operations to grow that to 10 million of earnings, well, you’ve gotten 4x your earnings there, but you can probably move that 5 million to maybe 8 million.

So now you paid 12.5 million to buy it and then you sell it for 80 million. Some of that was driven by improving the operations, but some of that was just driven by multiple arbitrage. So I think those strategies can either be done by your small-cap or micro-cap private equity firms, or they can be done by search funds, as you mentioned. In some ways, these are just two things along the same spectrum.

What a search fund is, happy to kind of go into little detail there because at least I was not very aware of it until I got much deeper into this. Generically, it means that there is someone who is a recently minted MBA grad or maybe a couple of them, often from a top business school, I think Harvard and Stanford were traditionally two hotbeds of this. It’s probably gotten a little bit more democratized, but not a great deal more democratized in recent years.

But those people will say, hey, I want to spend the next one to two years looking for a great company to buy, typically in the same range I was talking about there of maybe 1 to 5 million of EBIT. I’m a new MBA grad so I don’t have $10 million sitting around to buy this company. I don’t even maybe have a quarter million dollars sitting around to fund myself in the meantime. But I will go to a funder there, and there’s people who are often previous searchers themselves, or it’s become a little bit more institutionalized with some institutional capital, but still quite small.

But they will say, all right, I will give you Alan $50,000 for the next two years to cover your bills while you’re doing this and four buddies of mine are going to do the same, so you’ve got your quarter million dollars here. And what we get in return, there’s a few things but basically, we get right of first return. If you find a company to invest in, at that point, I can just say, “Hey, good job of giving me my money back, I’m not interested.”

Or more often, “Yes, I now want to write a million dollar check to get in at 10% or 20% ownership on this opportunity here,” and then it has exactly those dynamics I talked about where typically by buying a small company, you both have multiple arbitrage. You also typically will have on average more opportunities to improve the operations. If you’re a huge PE firm buying a publicly-listed company, of course, things can be improved.

But if I’m buying a million-dollar profit company from the founder who maybe is making enough money and is not squeezing every nickel out of operations, there can be some more low-hanging fruits to improve there and maybe you’ll do a bit of roll up of acquiring complementary or competitive businesses to achieve that critical mass. But what the economic outcomes have been over the last 30 to 40 years when this model has existed is returns in the mid-30s IRR consistently, year after year there.

Stanford University, if you Google the Stanford search fund study, you’ll see they’re the gold standard of research on this. That’s not just driven by the top two or three company outliers of dragging up the whole average. I spoke with one person who’s a full-time investor in this. He basically equates it to venture type returns with private equity type risks. So you can get those 5 to 10x returns with some frequency but with much fewer of the catastrophic losses than you’d get by being an angel investor.

So that’s an example of an asset class that I didn’t know about. Very interesting within private equity because of those reasons I spoke about. I think the challenge there is really around getting access, where if you look worldwide in this asset class, you’re probably talking about maybe a billion dollars of AUM here. So just trivial, and if you’re running the CalPERS fund, there’s probably really not much that you can do with this asset class because it just can’t absorb enough capital.

But if you’re an individual investor, of course, that’s more money than most of us have and so it can accept as much as you’re willing to allocate to it. But the challenge again being getting access. There are generically two ways to do it. You can either be a professor at Harvard or Stanford Business School or be a former searcher yourself and be plugged into that network and just get the call, get opportunities to join the board, get opportunities to invest. That’s not me. It’s probably not you.

The other thing that has evolved probably over the last maybe 20 years is there’s a handful of sponsors who were those individuals themselves and then basically have begun to syndicate those opportunities. So again, they’re typically running small funds of maybe 50, 150 million kind of funds, where they’ll spread it across maybe 30 of these search fund opportunities. Even getting access, identifying those good sponsors, gaining access to them is more complex than in some other asset classes.

We have done a number of our syndicated deals through Long Angle investing in these because it’s just a very interesting risk-return category. We have a number of former searchers as members who are able to get their advice and their introduction so you sort of get in with some of the better sponsors there.

[00:35:02] Alan

Makes sense. Sounds fantastic. We all like the sound of those VC-type returns with less risk. I suppose I have a couple of questions. One would be it does sound like there’s an element of a structural element to that, multiple arbitrage as you describe it, presumably because at higher levels of EBITA, there’s more capital that’s interested, that’s where it arises. Taking maybe a more, not skeptical – that may be a bit strong, but playing devil’s advocate, how much of these returns are a function of the markets we’ve been in? Obviously, it’s been a fantastic environment for this type of risk, private equity, low bond yields, rising equities, etc. Do you still see these type of opportunities as being resilient to a changed macro environment looking ahead?

[00:35:52] Tad

Yeah, I would say for search funds in particular, I think so. I wouldn’t say that to all. I think there certainly are some asset classes that are much more sensitive to that. If you look at venture for example, they have had a lot of challenges recently. I was actually speaking with a friend of mine about this and he was expressing his skepticism on the theory that high interest rates are really going to crush venture. It just seemed too cute of a narrative.

But I do think there actually is a real mechanism there where if you look at something like Google or Facebook or Amazon, their future returns really are discounted as interest rates go up five fold. That really does discount the value of earnings 30 years from now to probably a more realistic number. And then that translates through, as you’re saying, to the amount that venture capitalists as they look at investing in their next lotto ticket here. Okay, if this is successful, now I’m going to market to my public comps and my potential upside has gone down a lot. So I certainly think that there are ones.

If I look at search funds in particular, just as an example, I don’t think that they are particularly sensitive to this I’d say for a couple of reasons. One is just that if you look at things like the Stanford data over the last 40 years, there have been a few different market cycles there and you’ve seen these returns be a lot more consistent than different. A second is that the drivers of return, at least in that case, are not particularly sensitive to whether the tech market is up or down.

So again, if you think about the drivers of return being first, we’re going to improve the operations of this company and drive EBIT. Second, we’re going to get a higher multiple. And then third, we are going to run probably a more professional exit process of working with a banker and having things more cleaned up than when we bought it. None of those are really sensitive… You could argue the EBIT multiple is sensitive to the economic environment, but I think still, no matter how bad the economy, you’re always going to get a better multiple on a larger company than a smaller company. Again, that’s across any industry, any company, as you’re saying, your big institutional capital does not want to buy something that has a million dollars of EBIT. They want to buy into something with $100 million of EBIT, or a billion of EBIT, and so you’re always going to get a bigger multiple on the higher ones. Also, I think you have to look at the level of debt involved and leverage involved with a particular asset class.

If I were to look at what people are investing in more today than they were three years ago, and I think probably highly correlated with that, what has a better setup today than it does three years ago? Probably the biggest thing is what is the amount of impact of leverage on an asset class. So, if I look today at real estate, I know myself personally and our community overall has very muted appetite for real estate with interest rates having gone up so much and you really have not seen cap rates move to the same degree of interest rates. You just get this bid-ask spread or you have rational actors on each side.

You have the rational seller who’s saying, “Well, my interest rates are locked in at 3%, so I’m not going to sell to make the numbers work for you at 8%. And the rational buyer says, “Well, I have to borrow at 8% so I don’t care what your interest rate is.” And so where you ended up is just a lack of transaction volume with everyone acting rationally there.

Whereas if you look three years ago, again, speaking in combination and personally, if I look at the community, I was very much all in on real estate and actually made a very big purchase about three years ago where I probably put maybe 40% or 50% of my net worth into a particular real estate deal because I just said, “Hey, look, I can lock in 30-year debt at 2.5% here. Inflation is already above 2.5% and it’s clearly going higher just if you look at government spending and the size of deficits we’re running and a bunch of other factors.”

So I had confidence in the micro market and the economics of that deal. But I’m not comfortable making a large allocation, as I did three years ago, where I would not make that today. I think the flip side of stuff that becomes more attractive in a high-rate environment would probably be something like either general bonds or maybe if you look more on the alternative side, things like private credit which is typically priced at a premium to the underlying risk-free interest rate.

Today, I think there’s a lot of interesting private credit opportunities in the 10% to 12% range, and if you’re able to really do deeper research and roll up your sleeves and find some niche opportunities probably more in the mid high teens in terms of relatively low risk private credit, those are just better returns and I think were available a few years ago and a lower interest rate world.

[00:40:20] Alan

Makes sense. Curious to get your thoughts. One of the things that comes up strongly when I’m talking to investors but also macro commentators is the shift in the macro environment. Obviously, we’re talking about higher rates. We’ve had higher inflation. But looking ahead, there are certain structural themes, deglobalization, decarbonization, rising geopolitical risk, greater defense spending.

All of these themes shape a narrative that the world that we live in is going to be different in the next 10 years. Possibly higher inflation may be more favorable for things like commodities, for mining, for materials, all of that. Are they themes that you find resonate with your community? Are they more driven by things like the same industries that they have been looking at for the last number of years except that you’ve got these higher yields in things like private credit? Are they motivated by those big-picture structural themes would you say?

[00:41:21] Tad

I think on average, people are probably more interested in the micro than the macro, where you say, hey, if I can find the next Nvidia, it doesn’t really matter what’s happening to the market. A company that is picking up 50% market share every year and has great margins is going to thrive in any economy. That’s probably your general venture capital thesis is that they can outgrow the economy. But it doesn’t only apply to venture of course by any means, where, again, if you look at private equity and firms that specialize in some cleanups and turnarounds or roll-up strategies, the interest in the micro.

I think generically, if I were to look at what a lot of people really like to invest in, it’s probably ones where the underlying return and economic drivers are really pretty transparent and pretty easy to understand. That doesn’t have to be, giving some examples, one more private equity world. If I were to give a totally different and non-equity type investment but again with at least an economic driver that you can understand, I’d look at something like spirits and whiskey aging.

That’s another asset class I’d never heard of before but your listeners might find interesting, where the generic dynamic in that market is that for, I’ll look at Kentucky bourbon in the US which is one that I’ve looked at more closely. For the last couple of decades, you had a dynamic where you can basically buy newly distilled into the barrel whiskey for about $1,000 a barrel, and then the market price for five-year-old whiskey is about $3,000 a barrel.

You have seen this consistent premium aging curve there. Again, that’s not necessarily an economic driver. You’re not doing anything with that barrel. You actually never even take possession of it. You just get a certificate that says you own this barrel that’s sitting in a warehouse in Kentucky somewhere. It’s licensed and bonded and insured. You can go touch it if you want to, but you don’t ever have to do anything with it. But the economic driver is basically this age premium.

I think part of what’s behind that, there’s a few things there. But if you think generically, let’s say that you want to go start Alan’s whiskey brand and you need 5-year-old whiskey forward or 10-year-old whiskey, you could say, hey, I want to start that company in 5 or 10 years and so I’m going to go there trying to open a factory and distill my whiskey, but you’re not going to do that.

What you’re going to do is you’re going to say I need to go source 5 or 10-year old whiskey, and the only place you can do that is from somebody who has been invested or sitting on it for the last five years. So you sort of are getting paid to do maybe the patient, less sexy part of the value chain there and you don’t have to build a brand, you’re just sort of waiting to be the seller there.

Another thing that just serves as an example of how some of these niche ones have very different risk-return profiles, often what you think in looking at something like this, you say, hey, is this a bubble? I’m not going to drink 1000 barrels of whiskey, so I don’t want to end up owning them, and anything with that kind of return profile seems too good to be true. You can’t put up 40% IRRs year after year without you know flooding the market. So you say, okay, I’m really worried about a bubble here.

But then at least if you look at the supply side of the bubble, you can say, okay, I don’t really care if people are building factories or not. The only whiskey that can exist five years from now as five-year-old whiskey is whiskey that’s already in a barrel today. So if I know it exists today, it does not matter how much other people start distilling two years from now. When I get to five years from now, the stuff they distill today is not going to be a competitor with me.

You still have risks of course. There it becomes more of a demand side risk where if China or France or some other country puts a big tariff on it or if preferences change, you certainly can see demand side shocks. But at least it’s just interesting there’s examples where there you have perfect protection from a supply bubble because it’s a known supply.

[00:45:09] Alan

It sounds like you’re trying to identify more inefficiencies, structural risk premia that exists for various institutional or structural reasons and taking advantage of that more so than anticipating structural demand shifts. Is that fair to say?

[00:45:29] Tad

Yeah, I think that’s right. Part of that is probably modesty of saying, hey, none of us have better information than the world at large about what’s going to happen with the Ukraine war, what’s going to happen with China. Efficient market theory says that is all baked into the price and while markets aren’t totally efficient, I wouldn’t pretend that I’m going to do a better job than the research desk at Goldman Sachs of determining how those macro drivers are going to evolve.

So yeah, I think probably people feeling like the place where they really can get better information and better analysis is on the smaller and niche things where if I’m looking at a fund that has $75 million in total, I’m not competing against Goldman Sachs or CalPERS or the investment fund of Norway about whether I put my dollars there because it’s just too small for any of them, but it’s worth my time to research. That means that there are worse deals available as well.

I think if you look generically at public markets, my personal perspective is if you have the combination of liquidity and price discovery and government regulation, you’re protected on a lot of fronts. Basically, if you just get a dartboard and buy 50 stocks, you’re pretty much going to track the index plus or minus a few. Whereas if you take that approach in private markets, you’re pretty certain to trail the index.

So on the good side, you have the opportunity to the upside to outperform. But on the downside, if you’re not willing or able to roll up your sleeves and get that information edge, you’re probably going to underperform and then better off avoiding entirely.

[00:47:05] Alan

Picking up a couple of things you haven’t talked about, hedge funds is one. It doesn’t really fit within what we’re talking about. Often with people who come from real businesses where they’ve made money from buying and selling goods or services, the whole hedge fund world, particularly if it’s in things like derivatives, can seem like a foreign world. Is it that reason or is it because they’re seen as more portfolio management tools? Why would you say that it sounds like less interested in things like hedge funds?

[00:47:45] Tad

I think hedge funds in particular are interesting. I would say there’s probably a bit if I’m being fair to the asset class of recency bias, where if you look over the past 10 or 20 years, public markets, as you said, have performed so well, and their drawdown periods have been relatively brief. Then it’s like, why would I put money into a hedge fund? I’m going to get lower returns, I’m going to pay higher fees, and I don’t really have a problem with volatility in the first place. It’s a bad solution to a problem that doesn’t exist.

But that would probably look different in an environment that either was much more volatile or where the trend was not so much up into the right for public equities. So I think I’d probably want to be fair to them that in a different environment, they’d probably be more interesting. I think however, this is not unique just to our community. I think if you look in general, a lot of hedge funds have struggled to raise and struggle to keep their AUM probably because a lot of investors have that same perspective of this is a very expensive product, its average expected returns are not that high. So, really, what’s the sales pitch in that?

I think it probably is around liquidity and muted volatility and that sort of thing. But, again, maybe that will change with a different economic environment, maybe it won’t. But I think it’s just if you look at that high level of costs and risks and tax treatment, etc.- I wouldn’t say everyone. Of course, if people who run Renaissance Medallion are listening to this, I want to invest and I would like allocation tomorrow.

So your best ones are always going to have a lot of interest. I always think hedge fund in general is a very broad, that can really mean just an active long-only fund, or it can be totally market-neutral, but what you and I are probably implying by hedge fund.

[00:49:34] Alan

Obviously, hedge funds have become a lot more institutional. I suppose they have marketed themselves more to large institutions over time, and that’s reflected in maybe lower vol in some strategies, etc. Historically, if we went back 20 or 30 years, global macro hedge funds would have been more return-seeking, higher vol. Even from our space, things like trend following, some managers still stick to that kind of higher vol approach.

Presumably, that could be of interest to some people if they were shooting for higher returns. But then you might have challenges around understanding the strategy. Is that fair to say?

[00:50:13] Tad

Yeah, I do think that’s fair to say. If I look at trend following in particular, that’s one that just speaking for myself, I have a lot of interest in. I think the holy grail of investing is saying, hey, I want to get the expected return of my highest risk, highest volatility asset, but then I want to find 20 of those that are totally uncorrelated and so I will get exactly that super high return every year with no volatility.

While of course that doesn’t exist, I think something like trend following is interesting because it does have (and I’m telling you what you already know) typical returns like you’d expect in public equities and imperfect correlation. I don’t know if it’s negative correlation or just closer to zero correlation, but imperfect correlation there. So, at the highest level, that’s a great place to put a lot of your money.

I think the reason that probably our community in general we haven’t done any syndicated investments into that, probably a couple. One is I think I haven’t figured out a way that we can add alpha and say, hey, if you want this, you can just go buy it from a trend following company. Our diligence isn’t necessarily going to add that much to the process. But then probably more so that it does have a little bit of that black box sense of, hey, I love what I got out of this box, but I’m not really sure the underlying economic drivers of how those returns were generated, and that’s probably just a person to person thing.

But I think there are some people who feel like, hey, the way I tried to talk through here’s how a search fund makes money or here’s how a whiskey fund makes money. If you said, here’s how a trend following fund makes money, at least I probably could not articulate it in a way that didn’t involve numbers and ratios, and that kind of thing. I would struggle to put it into plain English. That said, I personally probably have appetite to do that more than your typical person. There’s only a certain degree to which you’ll argue with success and that just seems like a good thing to put money into.

I know last year was a very good year for trend following and helped. I think my understanding is this year to date has also been based on the reports I’ve seen an extremely good period. So that’s nice to see. So yeah, I like it for those reasons.

[00:52:28] Alan

Normally, a group of entrepreneurs, maybe with tech backgrounds, you would associate a heavy interest in crypto, but again, you haven’t mentioned that. What are the thoughts on crypto?

[00:52:39] Tad

Another one you might say is angel investing. Maybe I’ll just take the angel investing one first because that might seem like the most obvious one for a group of maybe 40% of people who have started and sold companies to say, well, are they going to do a lot of angel? I think the generic answer is yes, they do a lot of angel. The reason that I have not spoken about it much is probably two things.

One is, my perspective is that angel and venture, it’s funny, that’s often the first alternative that people go into. But it’s also like jumping into the deep end. That is not the kiddie pool of alternatives. It has the longest time horizons where 10 years would not be a surprising amount of time to be illiquid. It has the least predictability. It’s just a blind pool. I have no idea what these guys are going to invest in. It has the least ability to measure the track record of the sponsor you’re investing with.

I could put my money with Sequoia or General Catalyst and I know these guys have been very successful historically and had great returns and I’d probably be excited to do it, but really, I have no idea what they’ve been doing for the last 10 years. I just know that 20 and 30 years ago, those guys who probably retired who worked at Sequoia did really well, but the person who’s making those decisions today, there just hasn’t been enough time to prove it.

So I think venture and Angel tend to be two of the hardest and of course has the highest volatility in the most reliance on just a handful of good performers to drive the whole portfolio. So that’s one. The other reason is that a lot of the things that we tend to spend our time on are ones where we feel like we can really add value by digging into the particular asset class, separating the good sponsors from the bad sponsors, negotiating fee structures, negotiating access.

If you look at individual angel deals, I probably see 10 of them a day, have a ton of deal flow there. But to me, frankly, they all look good, and I know that they can’t all be good. And so figuring out, well, do we have some way of adding alpha or adding value relative to 20 different incubators out there in the 50 different angel groups, we haven’t really identified it yet so we have not put a lot of time into that. It doesn’t mean it’s bad asset class. It’s just probably were not set up to add a ton of value.

If you look at crypto, yeah, a really interesting question. In general, I’d say there is broad-based but pretty modest exposure. So probably about 40% of our members hold some crypto in their portfolio, but it’s on average and a mean probably about 2% of the portfolio allocation. Maybe today with the run up, call it 2.5% or 3%, but not a huge fraction of the portfolio.

Of course, there are a handful of people who made tens, maybe even hundreds of millions of dollars in crypto in some cases because they are true believers and took a second mortgage on the house and went all into it. In other cases, just hey, I read this interesting white paper so I put 1000 bucks in and then I woke up 10 years later and looked at my hard drive and realized I had a ton of money, both lucky and good there.

One thing that’s interesting though is those folks who have made a huge fraction of their wealth in crypto, in general, they are not true believers. I think they say, hey, this is a very interesting financial instrument, but it’s the opposite of what I talk about with public equities. Most of them would say, I don’t really own anything fundamentally here. This is a ticker symbol and a price, and so it has very interesting trading characteristics.

But in, say, the recent market where it’s been going up, it’s not that they’ve been selling entirely, but they’ve been pretty disciplined about diversifying into these other real asset classes whether that’s real estate or private equity or private credit or what have you, and diversifying their wealth. I think probably, still believing in the long term, the trend is probably up into the right for crypto.

I or the royal we say it’s probably more likely that Bitcoin hits 100,000 then it goes to zero, or at least hits 100,000 before it goes to zero. So we’re not saying that’s not going to keep going up, but again, not drinking the Kool-Aid and not trying to become overallocated to it.

[00:56:31] Alan

Just a couple of other things conscious of time. Obviously, you’re looking at a wide different variety of opportunities. Obviously, you get presented with lots of ideas. Do you kind of brainstorm? How do you think about what things to prioritize or how do you generate ideas about where to look for opportunities?

[00:56:52] Tad

Yeah, really good question. I would say one thing that we do not do is we’re not anyone’s wealth manager. So I’m not saying hey, Alan, your portfolio should be 25% PE and 25% private credit and 10% venture. People have too many different needs and that’s not what we’re set up to do. So what we try and do is say, hey, over the course of a year, let’s say we’re doing 10 to 15 deals, we want to bring a variety of deals there.

If you’re already in two search funds, it’s a great asset class, but going to a third search fund is not really going to add that much. You should just allocate as much as you want to the two best sponsors, and the same thing for real estate, for private credit, for whiskey aging, crypto, etc. So we try and, over the course of the year, bring a couple best in class across a broad variety of asset classes.

I know that when we bring a deal that’s swinging for the fences of okay, this one delivered their 35% last year, that’s going to get more interest than we bring, hey, here’s a bit of a eat your vegetables infrastructure fund at 10% or 11%. It’s going to attract fewer dollars, but we nevertheless try and intentionally bring a wide variety of things so that when people who are trying to build a complete portfolio, they can say, I know where I’m under allocated in my portfolio. So, when I see an opportunity, I really like I’m going to go deeper into that asset class there. I would say that’s generically.

A couple of other things. One is trying to spend time looking for those niche things, like whiskey aging I gave you example for there. So, we’ve spent a lot of time I’d say recently looking for good oil and gas opportunities, upstream development. Not that I’m saying that should be a huge part of somebody’s portfolio. But again, it just has different return dynamics. It has had, at least in recent years, extraordinarily good returns.

Of course, you can’t guarantee that those are going to continue, but at least like trend following, it has historic equity-like returns with less than perfect correlation. So the kind of thing that you would want to get access to, and like everything that has its own unique dynamics in that case probably driven by a lot of institutional capital not being able to participate there which drives up the return for those who can participate. So looking for that breadth of opportunities.

A third thing would probably be being cognizant of the macro environment. You mentioned interest rates. I already talked about how probably no to real estate, yes to private credit. I think another thing that has been pretty attractive recently, it’s possible that this opportunity will go away in the future if markets remain relatively stable. But recently, secondary shares have been something that we’ve had a lot of interest in.

Basically, what a secondary share is, is maybe I’ve been in some venture capital fund for the last 10 years and I just need liquidity and those companies aren’t yet going public, you can step in, say, hey, I will buy your portfolio at 70 cents on the dollar. So you get an instant bump in your returns, presuming that you believe in the value of the underlying NAV. I’d say you can have secondary shares in almost any asset class.

One that’s been very interesting for us recently is actually real estate secondary shares, where of course, we are not alone in having a lack of interest in owning real estate at the moment and getting in there. But what that’s meant is that there are some funds that have been able to get access or buy in with some of the best sponsors, very blue-chip names.

We invested in one about a year and a half ago, and as I’ve been following their progress, they’ve been buying positions at not 70 cents on the dollar but like 70% discounts. So they’re buying at 30 and 40 cents on the dollar into these real estate funds. As bad as the damage has been in office and maybe the demand is permanently impaired, I don’t really believe that the values have gone down 70% in the real estate sector.

Secondaries also have these other dynamics of if you’re just trying to close out your fund, and you have a 1% position left, you don’t really care about maximizing your value in that 1% position. You just want to get the thing closed and so you’re willing to sell it at a 50% discount even if you could save money by holding on for another year. So anyway, I’d say secondary shares are one, an example of maybe being opportunistic to what the market environment looks like.

And then there’s always just a bit of opportunistic of, again, there are certain managers who, if they ever open a fund again or if we can ever get access, you’re just going to want to jump on it regardless of the macro environment because you know that that is a proven winner and one that over the long term is going to perform well. So when you have the opportunity, you got to go for it.

[01:01:30] Alan

Okay, good stuff. Just before we wrap up, we always want to get people’s advice or suggestions. Particularly from your perspective, you were obviously in business and then migrated into being a heavier focus on asset allocation investing. As you went through that process, what were the things you read that you found pretty informative, or what advice would you give to people who want to get more proficient at investing and finding opportunities in markets and more broadly?

[01:02:05] Tad

Excellent question. I would say, I was doing some reflecting on what are my best investments and least successful investments and I had probably two takeaways from that. I would say, on the least successful investments, it’s complementing all this quantitative analysis that we’ve just been talking about with more trust and intuition on people who, hey, all the numbers seem to work, the logic seems to work, but my gut is telling me there’s something off of this guy.

Either it’s too good to be true, he’s throwing around terms that I don’t really understand. He’s not answering. I’m asking questions and they’re kind of getting brushed off as, hey, I don’t have time to answer that question, I’ve got to focus on the operations sort of thing. Of course, some of those ones where your intuition tells you it’s a bad deal working out to be fine.

But I can’t think of many bad deals we’ve done where I didn’t have some of that gut intuition of like something feels off here and you sort of say, Hey, I’m going to trust my head and not my gut here. I’m going to go forward with it because it seems like a good deal. So I’d say that’s one thing that we’ve been trying to do is do all of the your rigorous numbers, but also just do a gut check of, are we nervous about writing this check? Does something feel a little bit off?

The other one would probably be, on the more positive side of the good deals, I would say position sizing, particularly being more aggressive when you have high conviction. I can give you two examples, one where I was aggressive, one where I wasn’t. About 10 years ago, I had super high conviction on Apple. As I looked at it, I said, okay, if we back out their cash position, they’re trading at three to four times cash flow. I think they’ve got great products. I think they’re going to continue to do well, but I don’t have to believe that.

All I have to believe is they’re going to stay in business like they are today for three more years. So can they make it to 2017 without blowing up? That seemed like okay, almost certainly. They’d never have to innovate. They don’t even have to come out with a new version of the iPhone. They can just keep doing the same thing for a couple of years and I’ve guaranteed my downside. So I had super high conviction.

Of course, that position that I bought then is up 1,000% probably since I bought it, but I only put in maybe $10,000. So, okay, it’s great. It’s nice to get 10x on $10,000, but it’s not a life changing outcome. If I had really said, hey, I spent my time doing my research, I’ve got conviction, I should have put in $100,000 or a million dollars, if I’d had the money at the time, but really put the courage behind it, which I didn’t. And so the fact that I had that insight wasn’t particularly valuable.

The flip side is where I did put the money behind is I said- about three years ago during COVID, I found this real estate opportunity. It was in a town called Santa Barbara which is in southern California. I happened to know because I have a lot of family there and I own some property in Southern California, that the other markets in Southern California like Orange County and Los Angeles had gone up.

They probably doubled in value over the last 10 years, but for reasons that just did not seem logical to me, Santa Barbara was just trading the same price that it was 10 years ago. Then you combine that with, okay, I can borrow at 2.5% and inflation is already higher than 2.5% and certainly going higher. And then this particular property, I just understand the dynamics of it, I’ve spoken a number of brokers, they think it could rent out for this much.

So I really did my research. I had conviction that this one is a quote “can’t lose”. Of course, nothing’s “can’t lose”, but I really liked the risk return skew on it. So at that point, I put half my net worth in and just saying, I’m going to go all in on this, and that turned out super well. So I think being willing to make big bets when the setup seems good for you. Again, that’s probably around understanding the particular micros of that deal as opposed to am I going to put a big bet on iron ore today because I think China’s going to come back. I don’t really know anything anybody else doesn’t know about that.

So those would be the tactical things. In terms of reading or books that I found valuable, probably the single best one really was Warren Buffett’s. I’ve read probably every annual letter that he’s written there. He very much has the that perspective of I am buying companies, I’m not buying pieces of paper here. A funny, great writer, and of course just deep insights on what the economic drivers are. He’s far smarter than either of us. But I think a lot of wisdom that you can pick up from those.

This is not going to be for your institutional endowment manager, But for those who are more individuals who are looking either to be a better client of a wealth manager and understand what they’re buying or who don’t want to have a wealth manager and want to be able to do it themselves, I think that both Dave Swensen, who was the longtime, extremely successful endowment manager at Yale, and Jack Bogle, who started Vanguard, they both had books calling called “Pioneering Portfolio Management” and “Common Sense Investing” that are great at just laying out, hey, here’s what basic asset allocation, diversification looks like, here’s key asset classes, here’s how to think about expenses, how think about taxes, etc. So I think those are really valuable books.

[01:07:07] Alan

Won’t disagree with any of that. Some great suggestions there. Tad, thanks very much for coming on today. It’s been a really great insight and tremendous conversation. So, thank you very much.

To all our listeners, make sure to follow Tad’s work because as you can tell from today’s conversation, it’s an uncertain and changing financial landscape, but there are plenty of opportunities out there. From all of us here at Top Traders Unplugged, thanks for tuning in, and we’ll be back soon with more exciting episodes.

[01:07:35] Ending

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