On today’s show we talk to Ted Seides. Ted is a graduate of Yale and Harvard university and he comes with multiple decades of experience in finance. For people not familiar with Ted, most might recognize him has the gentlemen that took the opposite side of Warren Buffett’s bet with the hedge fund industry. We talk to Ted about this friendly wager, how it came about, what the results were, and what he thinks about the chances of beating the S&P 500 moving forward. Something else that’s interesting about Ted is that he has extensive experience working for the famous investor, David Swensen. Swensen has been the chief investment officer for Yale’s endowment for decades and his average return for the past 20 years is 25% annually. At the end of the interview we talk to Ted about Swensen’s greatest strengths. We also ask Ted to compare David Swenson and Warren Buffett (who Ted has become friends with through the years).

In this episode, you’ll learn:

  • Why anyone would make an investment bet against Warren Buffett
  • Why Warren Buffett wanted to trade stock tips for a football playbook
  • The untold drawbacks of investing in index funds
  • The simple secrets to legendary investor David Swensen’s outperformance
  • Ask the investors: What is the best approach to teach your kids finance?

Tweet your comments about this episode directly to Preston, Stig, and the rest of The Investor’s Podcast Community using #TIPMoney.

Get The Investor’s Podcast blog posts and podcast episode updates on your Facebook feed by liking We Study Billionaires.

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Podcast Transcript and Summary (automated)

Preston: [00:01:25] All right everyone welcome to the show and we are super pumped to have Ted Seides with us today. And Ted thanks so much for taking time out of your busy day to join us. So Stig’s got the very first question for you Ted. And he’s going to kick it off.

Stig: [00:01:39] So it probably doesn’t seem to be obvious to most investors that you would bet against Warren Buffett in the game of investing. But of course there’s a lot more to it than that. Could you tell us the entire story of what led up to your 10 year cherishable wager with Warren Buffett. Well he was taking the S&P 500 index fund. And you were taking five funds of hedge funds.

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Ted: Sure I guess ten years ago, a little longer probably, in the 2005 annual meeting, Warren had written about the idea that he didn’t think a group of hedge funds could beat the market over time. But a year later I saw a transcript of one of the Q in ways that he had done with a group of college students. And in it one of the students had said I heard you said this that hedge funds couldn’t beat the market. How come no one’s taking you up on it and his response was Well I guess since no one did I must have been right. And I was sitting around my office in the summer of. In. 2007. And. For lots of reasons I’m happy to talk about. It’s. Bell to me like that was just a rare time where he said something. That
: [00:03:07] I just didn’t think was factually correct. So I wrote them a letter. Right an old fashioned guy an old fashioned letter I had heard he is notorious and how he responds to letters and he is. So then where did you go from there Ted.
: [00:03:18] So you got the letter back from Warren.
: [00:03:20] Yeah this would be a fun thing to publish I only going to publish it. But the letter exchange itself is very entertaining because I initially said Hey I heard you said this. I would propose this group of funds and I’m not sure what stakes that you’re proposing for the bet. But I would suggest you know a dinner at Gujarat’s and then he sent something back that was very short and said well it has to be a lot of money and has to be collateralized.
: [00:03:46] And I went back to him and I said wait a minute you’re saying this has to be collateralize. But that just introduces Helper’s to it that it’s not supposed to be about health care. So we went back and forth on that. And then it actually even got into things like well what’s the probability that he won’t be around in 10 years because you know then we have to think about that and I said Yeah but you have a partner Charlie Munger and if you guys are mutually exclusive and how long you’ll be around the odds are very low that one of you won’t be around. So you could just hand it off to him so there’s this long back and forth and eventually we said OK let’s just do this at the time.
: [00:04:20] We haven’t spoken. We haven’t. It was all. Written communications and then and then. We started chatting after that. Dinner. A few times and. One of the funny things about it was that he does and has. Bought companies on. A single sheet of paper as he talks about. But. This. Charitable handshake that
: [00:04:39] Was I ended up being I get 25 page legal contracts. Wow. Why did it end up being such a huge contract. Well a couple of reasons.
: [00:04:46] One is that it’s just not that easy to make a legal bet. And that was how his attorney found this Long Bets foundation that allows for this type of thing to be done in a legal way and then also you have to think about the mechanisms of what can change.
: [00:05:05] All right. So you know the S&P 500 index funds going to be around for 10 years but you don’t know what happens with a group of. Say Funda funds in this case and so. There were some mechanisms if the fund of funds had gone away
: [00:05:18] To just make it so that it was planned in advance. So there are a lot of little things like that that came up. Why it was 25 pages I don’t remember. But it was long. How long did the process take. From the very first letter and also like you signed the papers.
: [00:05:33] You know our letter correspondence happened very quickly.
: [00:05:36] At the time I was very surprised.
: [00:05:38] First I sent them a snail mail letter and then it was e-mail. He doesn’t have an e-mail address which is a funny story in and of itself.
: [00:05:44] But I would say we went back and forth for a few weeks and once we had agreed to what terms were going to be it was probably two months or longer of a legal contract. I think the communication started in the summer of 0 7 and then the bet started January 1 of 0 8 it’s incredible.
: [00:06:03] So talk to us about how things got started. If I remember right you were ahead initially like the first couple of years right Biawak right.
: [00:06:12] So you know the premise or my premise of the bat was actually quite different from his. Because you can make the question.
: [00:06:20] I must be an idiot. Right.
: [00:06:22] Why would you bet against Warren Buffett on anything it has to do with investing and generally speaking that’s right. I’m not taking the other side of his trade which is a totally different situation. But if you looked at history and you look that valuations and there are all kinds of factors you could point to that would have told you that
: [00:06:43] The process was a good one. We now know or at least we’re sure we’ll know in a week and a half that the outcome
: [00:06:48] Wasn’t the one I had anticipated. But. Even today when he talks about that as if it’s a fait accompli that fees would inevitably doom hedge funds to lose this bet. At the time he said he only thought he had a 60 percent chance of winning.
: [00:07:04] Hmm that’s interesting. And you said that Warren Buffett needed to be around 60 percent probability for him winning the bat. What about you. I suppose that you had a different number in mind. So how did you get your own chances of winning about 85 percent. So what we said wow yeah that was based on I mean you could look at two different things you could look at hedge funds. And you could look at the S&P 500. And they are related but they are very much apples and oranges
: [00:07:31] To that point in time if you had looked at data. There had never been a 10 year period when the S&P 500 had beaten. A portfolio of hedge funds
: [00:07:38] Not a long history but 25 or 30 years of history and then you could look at the history of Funda funds at that time. There had never been a 10 year period before this last 10 year period where hedge funds and underperformed the S&P.
: [00:07:51] I know you can’t talk about the actual funds that were in the bank. Is that correct. Correct. Now let me ask you this. Is there a composition of private equity or is it just publicly traded businesses or is it a mix.
: [00:08:05] No they were all hedge fund funds because hedge funds can cover all kinds of things as you’re alluding to. For the most part we’ve picked funds that invest more globally than us but only a long short equity as well. But a big conviction in the bed in the first place was that the S&P 500 was trading at historically high valuation.
: [00:08:29] Hedge fund returns shouldn’t necessarily be driven by valuation. But clearly. If you start. And if you own stocks with a high valuation you end up with a low outcome. And to your point earlier that’s what. Drove this massive outperformance. Of hedge funds from the S&P in the first year of the bet that carried through to four or five years. You know Warren has said in his annual letter that while this was an average period of performance for stock. And it was. Over 10 years
: [00:08:58] History would never have told you that you would have had an historically average performance starting at a historically high valuation. So what happened after or five years when Buffett’s S&P 500 Index Fund to the lead but I’m not sure there was a lot of trouble.
: [00:09:14] The hedge fund performance has been weaker than I would have thought and weaker than history but not because the S&P has done so well.
: [00:09:25] So some of that a big driver of that is the nominal level of interest rates. So. Cash return or the return on your cash balance is a component of a hedge fund return. There’s not a component of the S&P 500 return. And when rates go from say 4 percent at the beginning of the bet to zero. You would expect have a few hundred basis points of lower nominal return.
: [00:09:48] So that’s one big driver. The other big driver I think is just a continued increase in competition in the space. A lot of people ask me if I would take the bet again and my answer has been no. But it’s not because I don’t think that the odds are favorable for the same set of reasons for hedge funds. It’s that I don’t think they’re as favorable.
: [00:10:06] You know if you would have talked to somebody three years after this was put on you would have been like oh man Warren is going to lose big time on this one and the tide really changed there. About halfway point. You know I found it funny whenever he originally was talking this you know when the bet was initially put on and he was way down it was a really quick discussion during the shareholders meeting.
: [00:10:28] But after you got close to this 10 year mark all of a sudden I mean it’s got a full write up and the shareholders letter that sent out I mean a lot of time has he was that’s the coincidence.
: [00:10:41] Well you know I’ll say something that was kind of interesting in the second or third year of the bet Warren had gone through a period of time I think it was a five year period that for the first five year period that Berkshire had underperformed the S&P and he had a quote in one of his annual letters that talked about how they’re starting or ending valuation even for as long as a period of 10 years can dramatically influence the relative results.
: [00:11:09] I used to put that in a presentation that was his concession speech for the bet. Yeah.
: [00:11:14] You know the thing that I think that this has had a huge impact because I mean you can’t talk to anybody that’s a value investor that doesn’t know about this bet. And I think one of the things that we’ve seen is that the bet has really kind of poured more into the ETF side of things. And you know you’re buying an ETF today. It’s just total mindlessness. And I think for the typical investor ETF are a great vehicle for them. But I think for if you’re a hard core value investor and you’re out there looking for picks that are way undervalued I think it’s kind of created a little bit of an opportunity because so many people reference this bet is hey you’re not going to go out there and find an individual pick that’s undervalued and that’s just my personal opinion. I don’t necessarily know that I agree with that. Well I’m curious to hear your thoughts Ted.
: [00:11:59] I think you have separate ETF from index funds. In that context I think that’s right about index funds. Michael Aubusson talks about this that the more money that was naive money that’s moved in index funds. Has left. The rest of the players in the game smarter
: [00:12:16] In general. On average he calls a. Paradox of skill. So the relative competition in markets is higher. Because. So much of the capital that moves into index funds was the money that the smart money was. Kicking off in theory before we asked the audience if they had a few we have a lot of hard core value investors out there so obviously we we’ve got a ton of responses. And one or two of followers bound. He’s asking. You specifically why did you pick
: [00:12:45] On fonts. He’s saying that you get. The fees. It will be harder to beat the market that way. Why did you select this approach. Well you thought process. Sure.
: [00:12:55] Well there are two reasons why one is just logistical which is if you’re making a bet like this the chances of any particular hedge fund lasting 10 years is much lower than the chances of a fund of funds lasting for 10 years.
: [00:13:08] So to do something like this where you’d have to turn over the portfolio a lot was just going to be very challenging.
: [00:13:17] But the real reason I actually initiated it tempting him with underfunds if underfunds outperform the S&P there is no chance that you could come up with an excuse of why hedge funds didn’t have value in the marketplace.
: [00:13:33] So a little ego got into this. I wouldn’t call it ego as much as it was.
: [00:13:40] He made a statement I thought I thought in his statement that he had picked the wrong benchmark. Yeah.
: [00:13:47] So if you had appropriately measured a hedge fund against its relevant market exposures and had an apples to apples comparison and on one side you had a lot of fees and on the other side you know you would expect to lose and you would never make that bet. But that’s not what the that was right. The bet had all kinds of implicit underlying biases. There were biases of the US versus global markets. There was a bias of large cap or small cap all of which most of the time would matter more than the layer of fees. In this particular period large cap us ended up
: [00:14:20] Being the place to be in global markets. And so that was as much of a drivers losing the bet if not more than the fees itself.
: [00:14:29] Now I think what’s really important for people to think about is the time horizon and like maybe if you would slide the time horizon to the left or the right you might get completely different results here or if the Fed wouldn’t have eased for so incredibly long.
: [00:14:43] You might have seen some different results here.
: [00:14:45] And you know people that are making decisions that are completely based off of one data point which is this bad. I think you just got to be careful you got to think a little bit deeper than that and maybe not be so judgmental after just one example.
: [00:14:59] I’ll give you a fun anecdote to that point through this nine years where you know the had one side of the bat was lambasted for every reason you can imagine in the press if you had just switched the benchmark from the S&P 500 to the Morgan Stanley World Index which is probably a closer representation to the types of securities the hedge funds were buying and selling they were almost exactly the same performance. Wow. So just that shift of. S&P to global markets of which S&P is I don’t know I think the numbers about 40 percent
: [00:15:31] Of that global index.
: [00:15:33] Just that shift itself would have completely changed the way people thought about the bet. That’s pretty interesting stuff. So you’ve worked in finance for years. Talk to us about some of your investing experience that you would classify as a highlight. And then also talk to us about what you would consider a huge setback. The balance between those two.
: [00:15:52] You know one of my favorite early highlights in 1994 I was managing Yale’s Bomp portfolio and to go back in history that was a year really through early 1995 where the Fed hiked interest rates. I don’t remember the number of times was six seven eight times. Fed funds went from 3 percent to 6 percent in that period of time and bond funds blew up left and right. I was managing a. Call that an index. Not quite an index tracking but it sort of an index plus portfolio and it had top discipled performance in that ear. It also coincided with the very first time I was in front of Yale’s investment committee and I was sitting and about to give my first important presentation in my career to a bunch of investment luminaries one of whom was Charlie Ellis and Charlie in his attempt to praise us and me for that performance gave me this complete softball question effectively. Do you realize how great this is to be top. You know just being disciplined and doing simple stuff and. I had practiced my. Two and a half minute presentations so many times in my head. I was 24 years old time
: [00:17:07] That I even hear his question. And I completely fumbled that and it turned into this great laughter sort of a great investment success and then a great failure at the same time.
: [00:17:15] If I think about mistakes I would characterize it rather than just one. There are so many that you make. I would characterize them in a few different ways. One is. There is a repeated pattern investing in funds. Of exiting after managers have weak periods of performance. And that happens despite the awareness of performance chasing and I spent a lot of time with my team in the years of protegé looking at the data and then trying to assess why is this happening and what you would find is that similar to investing in a stock.
: [00:17:57] When we invested in a manager we would create qualitative hypothesis. We would lay out risks to try to keep us on track and away from numbers. And what would happen would be that when a manager went through a soft spot of performance. You would look at the risks and say Aha. We knew. This was risky because of these reasons. Therefore the manager isn’t as good as we thought and we would exit. You would never have a period of time where manager had excess. Good performance. And you would look at your hypothesis to say aha we were right. Therefore
: [00:18:26] We might run across these risks and we should exit. I would say there were a lot of decisions where you end up exiting. At the wrong time. And then there are lots of. I mean I remember so many errors of. Omission. Of things where you were looking at or you had a belief. About. Risks in the markets. And didn’t take enough action. And then the manager managers business you really have to be looking out a year year and a half at a time to be able to take action.
: [00:18:53] Interesting. So Ted you really happy that you want to call on the show because we haven’t talked too much about hats fans on the show and it seems like it has you know really gained a lot of popularity I think in numbers of Fownes hit around 2000 had Spawn’s in 2002 and now more than 10000 and even though it seems like the tide has turned over the past few years still a lot more puzzle of type of Berrocal that we’ve seen in the past. What do you think is the main reason for this. And who do you think that has fans really appeals to and you can’t say.
: [00:19:28] Warren BUFFETT Well let me start by giving a little pitch for my own podcast capital allocators because my very first exposure to podcasting I was a guest on Patrick O’Shaughnessy is invest like the best and we did a deep dive on hedge funds and for a whole bunch of reasons.
: [00:19:43] I’m putting that episode on my feed next week and that’s that’s in our discussion of basically past present and future of hedge funds. So to that specific question the number of hedge funds doesn’t matter.
: [00:19:58] It’s a highly concentrated industry. It’s only getting more concentrated. And so when people think about the impact of hedge funds on the market the returns of hedge funds the experience of investors and hedge funds. You’re really only talking about a few hundred large hedge funds. But the reason there are so many at least historically was the compensation structure so lucrative so let’s say you know someone from college who was a very diligent hardworking C minus student and they don’t have a rich uncle but they had a best friend whose cousin’s brother’s sister had a rich uncle and the rich uncle decided to give them 15 or 20 million dollars to play around with because they had a nice smile.
: [00:20:39] Right. So this C minus student. Probably doesn’t have huge earnings potential. But now they have a hedge fund and they’re managing 20 million dollars. Well the typical management fee on that is three hundred thousand dollars. That person. Probably can’t find another job that’s going to pay them three hundred thousand dollars. So that counts as one of your 10000 hedge funds. But. In any. Professional investor. Is not really going to take that fun seriously. And that probably constitutes. Well over half of the 10000
: [00:21:14] When you have your own filter. And it’s based on experience or success. There are many many funds that you would screen out because you just don’t think they can compete with the others that you choose to entrust your capital with.
: [00:21:28] I do think the popularity came about for two reasons one from the individual perspective.
: [00:21:34] You have intellectual flexibility. You have more arrows in your quiver to go long and short from an institutional perspective. You had this period of time from 2000 to 2002 where hedge funds had a trade on particularly long short which was mostly long small value and short highflying growth hedge funds and mass made very good money.
: [00:21:54] When the public equity markets did not so people that are listening to this if you want to listen to that discussion that Ted is talking about with Patrick we’ll have a link to that in our show notes you can listen to that. So Ted I’m curious you know who’s an investor out there that you really admire and more importantly why there’s no one I admire more than my first boss David Swanson at Yale. And
: [00:22:20] It’s for a whole bunch of reasons. The primary reason is who he is. As a person. Absolute legend. He wasn’t a legend when I worked at him. It became a legend after he wrote his book. In 2000. So that was a few years after I had left. He’s an original thinker. In the early 90s or mid 90s short term interest rates were five or six percent. In the Monnerie hedge fund era. We have not seen short term rates at that level. What that means is that if the. Fee structure is let’s call it a one and a half and 20. If you were to
: [00:22:54] Go Long the S&P 500 and short the S&P 500 you would get a short rebate on your cash and you’d be up about three and a half or 4 percent. Why should the investor pain incentive fee for no value add.
: [00:23:06] So in the mid 90s Yale used to impose cost of capital hurdle’s on their hedge fund them and because they created those fee structures with managers that today may be very very well-known successful managers but they were an early investor. They still have those structures in place and as opposed to other people who talk about wanting more favorable fee structures but aren’t disciplined enough to impose a deal would walk away from funds they thought were fabulous that didn’t have the fee structure they wanted.
: [00:23:35] Talk to us more about this. The structure and development. The reason I ask is that you’ve been in this game for a long time and reliving following the different investment funds and how that has changed now over the past decade or even two we’ve seen this giant inflowing apps. Where do you see this fee structure go for each of them and is it really a race to the bottom and how do you really I guess distinguish yourself with the highest quality.
: [00:24:02] Great question. It absolutely is a race to the bottom and it should be the way I’ve always viewed it as any time you look at the Forbes 400 and all the sudden it’s dominated by one industry.
: [00:24:12] Sometime in the next 10 years there are problems in that industry. So that was the case with hedge funds 10 years ago.
: [00:24:18] That is the case with technology today and it’s not that hedge funds are going away or the technology’s going away but something will happen that we can anticipate. So the hedge fund compensation structure got created at a time where hedge funds were a boutique industry and had all kinds of opportunities to extract value from the market. When the market was really dominated by. I would say index funds but long only vehicles that mostly replicated the index. So there were a lot of inefficiencies. As the years have gone on those efficiencies get arbitrage away the opportunities to extract value are harder and harder. And as a result of that the fees inevitably will come down. I don’t think the hedge fund vehicle which is really nothing more than an investment structure that has broader flexibility than call it the traditional vehicles that isn’t them won’t go away nor should it. But the fees will change and come down. What’s happened with an explosion of ETF is it’s changed the definition and understanding of what value add added is. So even ten years ago was the beginning of the bet that I made with Warren if you didn’t pick an index fund and you wanted to express different kind of views in the market from just a portfolio of stocks you had to pick a hedge fund. You had to buy the whole pizza. So the whole explosion of factors
: [00:25:50] Which have been around for a long time.
: [00:25:51] I mean I didn’t quite understand what was happening with factors when it happened and why it mattered because when I worked at Yale Yale’s long only U.S. equity portfolio they chose it to always be systematically long smallcap and value.
: [00:26:05] But when you took factors and then turned them into low cost products then you have to look at what is really value added. Is it just outperforming the market or is it outperforming a factor.
: [00:26:18] So Ted I want to talk more about David Swenson because you know we read about David in the way that he manages Yale’s endowment.
: [00:26:26] I’m curious for a person who actually worked right alongside of him. What would you say are his top three gifts if you will. When you think of the way he analyzes the markets or the way that he assesses taking positions there are probably no different than any other investors.
: [00:26:43] Stocks are his top three gifts are he has an analytical advantage over everyone else. He is just smarter and thinks about the world better and more clearly than everyone else. The second is he has an incredible behavioral temperament for investing. He is a contrarian and has no problem buying in when others don’t. The greatest example of that is he took the helm in 1985 a. He was 31 years old. He had a few years that had fully evolved but one of them had to do with disciplined rebalancing.
: [00:27:21] Two years later he is 33. October 87 comes and the market crashes. And he goes to the committee and he says this is when we buy. Incredible. So not many people can do that in practice. And the third is that he has created an ecosystem around him. He’s gifted. At communicating. And that includes
: [00:27:41] What creates the governance structure. So he’s gifted at communicating with this board he’s gifted at communicating with alumni. He’s gifted at. Communicating with his team. And teaching his principles as to why he was able to write such a. Fantastic book. And you put that together. There just aren’t that many people.
: [00:28:00] So to your first point about him being just analytically smarter than almost anyone you come in contact with. I know some of that’s genetics but you think a lot of it is also that he just reads like crazy.
: [00:28:11] Not for him. I mean I he does read but he’s not Warren Buffett that sits around reading books reading all day every day. So when I was stupid and 27 and I had worked there for five years I kind of implicitly knew that I was working with someone who always had the answer key. So you’re in college and you take a test and there’s an answer key and you get it right or wrong and then you look at the answers and you say oh OK I made this mistake and over a number of years you start to figure out
: [00:28:43] The answers to those questions on that test. When I was 27 and laughed when I didn’t realize. The test changes every couple of years. But David is someone who always has the answer key. KEY just. Figured it out. Independently. On his own. He’s just a brilliant thinker. Yeah I’ve been fortunate to have. Many. Conversations and dinners with Warren and. He can tell you a story about anything
: [00:29:08] About Sports about politics and the way he describes it you just nod your head. It’s just he uses wisdom Seth Klarman this the same way. Seth and David Swanson. Were very close. Way back when. Even before Seth took any outside money. So I had a chance to meet him then. Then yeah I get a chance to see him every now and then. So here’s the next question I got for you Warren Buffett. David Swensen and Seth Klarman walk into a bar. Who’s the smartest. Well like I mean that’s not
: [00:29:39] True. I don’t think he can answer that question.
: [00:29:43] So when you think of those three guys what really stands out when you think Warren Buffett like a one word response what really stands out for each one of them.
: [00:29:51] I think it’s the same things I talked about David. There are three components. One is they just they are that smart analytical edge this is how we think about it and investing. The second is they have incredible temperament for this work. And the third is in each their own way. They have created an investment structure around them that’s conducive to successful long term investing.
: [00:30:15] Do you find Swensson more similar to Buffett or Mongar we’re like mongers like an expert in anything like anything you can talk about Munger and talk were Warren’s more focused on the investing side. What would you say Swensons like he’s in the middle.
: [00:30:30] Well I mean I think certainly in the investment realm but it’s different. So David will have opinions about certain types of companies and industries but he’s never been a stock picker. So he won’t know the intimate details of companies and the history of businesses the way that Warren or Charlie probably would yeah is pristine and is probably closer to Mongar but he’s not as ornery as Charles.
: [00:30:57] Well let me ask you this since you’ve had a couple engagements with Warren. What do you find different on those one on one engagements with Warren than the public typically sees and like a shareholders meeting.
: [00:31:08] His breath is actually with Patrick and Brent be sure he brought them out. We spent 45 minutes talking about college football. Yeah.
: [00:31:17] And Warren could have been a color commentator for Nebraska football and it was while he starts telling it you know I’ll give you an example is just a super fun story.
: [00:31:29] He started telling a story because Patrick went to Notre Dame about a few years ago.
: [00:31:35] There’s a big Notre Dame Nebraska game coming up. And he knew the coach at Notre Dame. And so he had heard that one of the star Notre Dame players I remember who it was. Was. Sort of a budding. Investor and really care spend buster.
: [00:31:48] So he calls the kid up in his dorm room. He says Owens Warren Buffett. Can I talk to who ever was and. It doesn’t really. Pursey thinks his friends are playing a joke and he realizes that Warren Buffett. And he says look I’ve heard it. I’d love to help you out. I want to give you my two favorite stock picks. And the kids all this is you know this is the week before the Nebraska game and it’s like crate. And he says sure just setting the playbook.
: [00:32:13] Oh my god so full of so you think about a story like that.
: [00:32:19] So sports talking about education systems to politics to you name it. He is just so clever and funny and I think that’s the same persona that people see. But I think when you’re with him one on one you realize how earnest it is.
: [00:32:36] That’s incredible. Thank you so much for sharing some of those stories because I know I mean sticking their nose up and I’m sure some of the audience here has to hear some of this stuff. Ted awesome awesome discussion we really enjoyed having you on the show. Please tell people where they can learn more about you. Tell people about your podcast so they can listen to some more of your discussions.
: [00:32:57] Sure. Well I’ve tried to encapsulate. The professional part of my life in one place. And that’s at a website called Capitol allocators podcast. It also has the feed for all the podcast The podcast is called capital allocators and it’s available at iTunes and everywhere else you can find it. And that’s really focused. It’s a certain. Type of investment podcast there’s a lot of CEOs of large pools of capital and in and around the ecosystem
: [00:33:22] Of people who allocate capital. So it’s not a lot of fun to do in about eight months. There’s plenty hours for people to. Go back and listen to if they want. Fantastic. I’ve got one final question for you. Or you go into the Berkshire meeting this year.
: [00:33:34] I need to get my face framed in one more time.
: [00:33:39] So yeah I certainly will be going in May and I’ve really enjoyed it.
: [00:33:44] I’ve done a lot over over many years so I’ll be there.
: [00:33:47] Well you know we take our community out there and hopefully we’ll be able to link up with you at some point over the weekend because I’m sure a lot of our listeners would like to meet you. So people listening to this if you go into the Berkshire meeting with us this May in 2018 you’ll get to meet Ted and here’s some more of these awesome conversations. So Ted thank you so much for taking time out of your busy day to join us today. Thanks Fred thanks. All right. So this is the point in the show where we play a question from the audience and this question comes from James high stake in Preston.
: [00:34:18] You guys are a genius. And thanks so much for the material. I’m James and have a question and it’s not about the markets.
: [00:34:27] I have two Troodon. One Sandia’s 16. And my daughter is 10. Oh. Has some interest in money
: [00:34:34] And my son gets hooked when I try to explain economics to him. My question to you guys is. If you have kids at those ages how would you know you had them say one day they can choose on their own that books. Are kids. Every. Day game. Habits
: [00:34:53] Tasks with rewards that will benefit them. Thank you so much. James. I love this question and I promise you Stig and I are so far from being geniuses we are not even close.
: [00:35:06] My friend where they’re learning with everybody else you know the thing I would tell you that is really really important and my personal opinion is so many people look at the stock market in particular and they think that they’re going to make a ton of money in the stock market they’re going to become rich that way by being some Stock Market Genius.
: [00:35:26] And what I would tell you is to not focus in that area and try to develop that thinking.
: [00:35:32] What I think you need to develop in the kids if they’re interested in money and how finance works and the kind of stuff is you’ve got to really teach them to want to own their own business and create their own product or service and to own that equity. That is what’s really really important. You know whenever I think through the investing equation I always think of it like this I can create my own equity through a product or service that I create to add value to society. Once I make that money I can either reinvest that money into this business or service that I’ve created or I can then take that money if I don’t have any good ideas on how to grow that business. Then when I do is I take that money and I invest it non operationally when I invest that nonoperational in the stock market. So that’s where my money goes where I don’t have any like good ideas that I can do on a micro level. And so I would tell you have them get out there start trying to think of how they can create a product or service around something that they love to do because that’s where they’re really going to add a lot of value to themselves and they’re going to build this base of capital that’s really really hard to do anywhere else on the passive investing side because think about it the market has huge multiples and that means you’re going to get low returns when you employ your capital into publicly traded businesses.
: [00:36:53] You go into the private equity space and you get much better multiples but it takes a lot of money to buy a business and the private equity side. So you really got to kind of start something from the ground up and so whatever you can do to try to develop the entrepreneurial spirit. That’s what I would focus on with your kids and kind of explain to them why that’s important is because man when you’re working for yourself and you’re building equity for yourself there’s nothing else like that. When you’re going out and you’re getting paid. So you’re working for somebody else and they’re paying you 50 K a year you’re building 100 percent of the equity for somebody else. And that makes a big difference in the long run.
: [00:37:30] Yeah I really like your approach about setting up that business. And one thing I would like to add as I think it teaches the children one of the most valuable thing in life that’s how to deal with rejections. If you try to set up your business you know a lot of people would say no. And in a way it’s probably easier for kids to deal with that for a lot of self-conscious adults because they’re used to getting those all the time on the parents to bully. And I think it’s such a valuable thing to I wouldn’t say immune. I don’t know if that is healthy but definitely be able to roll with the punches when it comes to dealing with rejections. And I also think that setting up the business will give you the respect for money. It’s really really hard to teach is something that I think life is the only thing that can teach you. I also think that if your children don’t want to go in that direction then it’s more like a job with the pros and cons that it has. I would like to highlight something like Larry newspapers. It’s not only because it is the most common denominator for jobs that billionaires used to have. Was this tough on Statton itself. But I think it teaches them a lot about being paid by newspaper like you’re not paid by the hour you paid of how efficient you are. And I really like that and I think that’s a good thing to give to the next generation in a very competitive environment.
: [00:39:03] You know delivering newspapers that’s hard work. It’s teaching you the value of like just writ in the hard work.
: [00:39:10] You know it’s hard to find a lot of