[REPLAY] André Perold – Academic Practitioner (EP.02)

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This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of hidden book investments may maintain positions and securities or managers discussed on his podcast. I guess on today's show is Andre Perold. For those who know Andre, he needs no introduction. Andre is the chief investment officer and co-managing partner at High Vista Strategies, where for the last dozen years he has sat at the helm of a now $3 billion fund that takes a multi-assac-class endowment-like approach emphasizing broad diversification and risk management.

Over this period, Andre has definitively rebuffed the cliche that those who can't do teach. You see, in his prior career, he spent over 30 years teaching at the Harvard Business School, where he is the George Gunn professor of finance and banking emeritus. Andre had a distinguished career teaching investment management at Harvard and is a legendary master of the case study classroom. Just about everyone in the investment profession, Harvard Business School on the resume once took a seat in his classroom. Andre received numerous awards for teaching excellence, including being voted the school's most outstanding professor in a business week student survey.

While at Harvard, Andre authored and co-authored 27 articles and financial journals, two books, and over 100 case studies, all relating to investment management, capital markets, and the financial system. He literally chronicled the development of modern finance as it occurred through his work at Harvard Business School. To give you a sense, some of my favorites among his collection of case studies includes, in 1994, Black Scholes Pricing for the HP-12C Calculator, in 1990, the RJR Navisco, LBO. In 1994, bankers trust derivatives. In 1996, private equity in Russia. In 1998, the Vanguard Group. In 1999, a series on long-term capital management.

In 2007, before the financial crisis, a case on leveraged loans. And over the last decade, faces on the Notre Dame and Harvard Endowments. Among his directorships and trustee roles over the years, Andre is currently a board member at the Vanguard Group. In this episode, we spent the first 11 and a half minutes talking about teaching at Harvard, and then turned to the practice of investing. The active versus passive debate, a risk-based approach to asset allocation, and what makes investing so hard.

I found it fascinating hearing how Andre takes all of his academic experience and knowledge and applies it to the practice of investing at high vista. His wisdom and clarity of thought are second to none, and his soothing South African accent only adds to the alert. If you like the show, please subscribe on iTunes and maybe even write a review. You'll help others discover the podcast, and I thank you for it. And with that, I bring you my conversation with Andre Perold.

How did you first get interested in investing? I sort of got into investing in a variety of ways. There were two essential aspects to it. One was I was always interested in probability and statistics. I was always trying to figure out odds, and investing is very much a game of odds. We were always trying to handicap outcomes, and so that was one side of it.

Another side of it is I grew up in a family that had no money, and my parents figured out how to make everything, how to knit and sew and carpentry, and there was nothing we'd made out of toys. From an early age, I did that myself, and I was always interested in how things worked. And that extended over time to how the world works. And investing is the best way, or a fantastic way to think about how the world works. And so the combination of probability and statistics on the one hand, and a deep interest in how the world works, combines to make investing a lot of fun.

What was the most rewarding thing for you about teaching? So I would say in academia, teaching is one of the great privileges in life. I think being able to have a place of honor where you're in front of a large group of very talented, or doesn't matter if they talented enough, students, and being able to engage them. That's a side conversation. I think it's a privilege to be able to teach, and I find for me teaching in the classroom is one part of teaching, but we're always teaching.

We're always helping other people. If you're selling your teaching, teaching shows up in everything you do. But I found teaching, besides helping others, it was very much a way to understand things. So I always love to teach things, to teach about things I didn't really understand. Because if you can't explain something, you don't really understand it.

And so for me, teaching was a way to learn. I taught myself finance. I taught myself a million things by just going into the classroom and trying to figure it out in the class with students. And that's one of the greatest fun things to do. You started teaching at Harvard Business School at the age of 27, right?

Yes. What was the average age of the students at the time? About the same. So go back to what was that like the first year? It was the blind leading the blind. Let's start there.

When you walk into a Harvard Business School classroom, it's as intimidating as hell. And yet there's a sense that we're all in this to learn. It was nerve-wracking. I got students would come and see me. One in particular came to see me midway through the course to tell me what an absolutely terrible teacher I was.

And the nice thing is by the end of the semester, we learned to like each other and they actually really liked it. And I think that's just because they sort of appreciated that I was trying. And over time, you don't have to do it. You don't have to do it. And you sort of grow into it.

What does it take to be a good master of the classroom? Look, I think it takes humility, self-awareness. I think it's very interpersonal. You need to understand what they are thinking and struggling with. You need to think of ways to get people to see things.

And so I would always spend a lot of time thinking about what questions I wanted to ask. Questions that if I ask them, they could struggle with that question, that single question for a long time, and it would shed a lot of light on something. You know, sometimes a very simple question like what is a PE ratio and what do you do with it? Sounds easy. You can look it up in textbooks, but in fact when you peel away the layers of the onion, it's very deep and you can get into any aspect of it.

So I think that's one, another one is you really have to be willing to challenge your audience and make them think. I vividly remember doing that. You have to make them think and they respect that. They really respect that. And when they come to class knowing they're going to be challenged, they prepare that much more.

They are deathly afraid of being embarrassed in front of their peers. And so when you do that, it's sort of a win-win-win. It just works. Were you teaching investing from the beginning of investment management straight through? Or did you evolve into that?

I evolved into it. So my training was in a field called operations research. It wasn't finance. We just sort of the math of doing stuff in business, scheduling and various things like that. And so I taught a course called manager economics, which was about decision trees and statistics and game theory.

But I was fascinated by investing and asked if they let me teach something I didn't know anything about and they did. And I taught myself. How many years was that to your tenure? Three years, two years ago. You certainly have taught lots of investment managers, hedge fund managers, probably lots of people in private equity as well.

Let's start with what were the characteristics that you found of good students in your classroom? Was there a correlation with success and understanding, investing investment management in the classroom and what people did later in their lives? Look, the good students are good students in any setting. They're curious. They work hard. They go beyond what they're asked to do.

At Harvard Business School, we demand that people are active learners. And so it's not enough to parrot something. You've got to think hard about what's going on. In so many cases, the good students would draw upon their own experiences and bring it into the classroom and be very reflective about what they were learning and seeing and hearing. And the good students were ones that moved the ball in the conversation.

They weren't just trying to make a point. They would understand what we were all struggling with and would help us along. Even good didn't mean you knew what was going on, but just being unafraid to ask even a dumb question that would actually help us all learn. Those were the good students. And a lot of them did fabulously in the real world thereafter.

These are personality traits that are pretty powerful in many settings. Harvard Business School, like anything else, is a business. And I'm curious if there are any parallels of some of the challenges that a school faces that a student who goes through wouldn't really understand. But what actually happens in a school that makes it successful? Look, the first, the single most important thing about Harvard Business School is that Harvard Business School knows who it is.

It's grounded in practice. It cares about active learning in the classroom. It's not about lecturing. It's not about being extremely esoteric. And Harvard Business School is excellent at that. To pull it off, you need to attract and train faculty who can do it.

It's very hard to do because when you're the only school doing it, when you're doing something very unique, it requires a heroic effort all the time to make sure that you can actually pull it off. And it's a little bit like a religion where you're always fighting to keep the flock coming to church and the same thing here. And I think Harvard Business School is extremely good at doing that. So one of the things that Harvard Business School professors often have advisory consulting projects to be active in the real world, as you said, and one of yours has been a long time association with Vanguard. Today, and we'll certainly spend a lot more time talking about this, you are an active manager.

And Vanguard has a lot of active products, particularly well known for passive management. It seems that active versus passive is on a lot of people's minds these days. And I was wondering if you could weigh in, given that you're so much deeper in the actual practice of what Vanguard does and understand it so much more than most. And yet you also are an active manager, investing in active managers. How do you feel about all of this?

So look, I think the first thing to say is Vanguard, as you just said, has a lot of active product. A very significant part of our AUM is in actively managed funds. Equities, various kinds of fixed income, things like that. Vanguard is known for indexing, but it's the key to understand it's also doing so at very low cost. And so they ring costs out of the system in a very efficient way.

And the combination of products that perform as advertised, so when you track an index, you track the index at a low cost, is a very powerful idea that gives them a huge advantage. Indexing, the way I think about indexing is it's very simple. You either do or don't have an edge in investing. And each of us, most people have no edge ever in investing. And some people have an edge some of the time.

And the key is to know when do you have an edge and when do you not? You may have an edge at a particular point in time, because you know something about something you're very familiar or expert in a certain area that happens to be right. For investing, you may have an industry expertise or something or knowledge about something where you can take advantage of it. I think some people think they have an edge all the time. That's a big mistake.

And most people have no edge at any point in time. And so the way I think about is when you do have an edge, by all means try and take advantage of it. The edge might be also knowing a certain manager is very good. You know, I was giving my other who actually may have an edge and pay them a fee for it. But most people don't.

And if you don't have an edge, you should probably index. It still doesn't answer the question of how you invest because you have to decide how to allocate your assets across different areas. But as a way of executing, well, indexing is very good for folks who don't have an edge. At high vista, we do that all the time. When we don't have an edge somewhere and don't see opportunities, we'll totally buy indices as a placeholder until we do.

Warren Buffett, I think, said it very nicely. He said when dumb money acknowledges its limitations, it ceases to be dumb. And so folks who index, at least they'll track the index and not be taken advantage of. And that's a very powerful thing to understand. So now, I guess, 13 years ago, you started Hives to Strategies.

What was the light bulb that went off in your head that said, hey, I got to go do this? So I had spent my academic life thinking about many aspects of investing, about asset allocation, about trying to outperform thinking about where you could get an edge, understanding the business of hedge funds and other investment firms. And in questions like currency hedging, questions like how do you minimize execution costs, questions about how do you reshape the probability distribution, all sorts of questions relating to just about every facet of investing. And how do you do securities lending and why would you do it and when.

And having studied all that, when the idea of Hives to came along, the idea being to invest in a single fund, in everything and everything, anything that moved, the way the large endowment stood, it's called unfettered investing. It just really appealed to me because I could draw on everything I'd studied until then, including risk management and all those kinds of things. And what are your core beliefs about investing? Everyone who has an approach to allocating capital has to start with the philosophy. What is yours?

Look, I think at high best, though, we think about two things. One is we think about how do we, where and how can we outperform by finding extraordinary managers to give money to, where and how can we outperform by doing things in-house that are fairly simple strategies where we may be able to earn an extra return without being too clever. Think of all of that is how do you execute on trying to earn alpha in the area and then combine that with sort of trying to think pretty deeply about risk and be very deliberate about the risks we are taking and try and manage to those risk targets that we set for ourselves. And so has that started the one fund? Does that start with a certain type of asset allocation?

It's not so the level of risk that we want to take and we try and quantify what that risk is. Risk to us is at the level of a portfolio, what is the probability of losing x dollars over a period of time, something like a year or, you know, and then try and quantify those risks based on how we're invested. And the world is a very dynamic place and as risks evolve in the markets, it was pretty risky time in the world. In a way, it's a lot calmer time in the world today. And you think very differently about risk when you're in different kinds of market environments and trying to be very cognizant of those environments and reflect that in the portfolio as we think about risk is pretty important.

So a lot of people, if you think about how Warren Buffett might talk about risk, the time horizon really impacts what that means to say you're going to lose money over a specified period of time. When you set that up for high vista, is that tied to the business and therefore the liquidity that you provide your investors as the metric of risk? Absolutely. I think we all have to understand that our capital is from a given source at any point in time, any firm has capital from some source. And capital often moves for good reasons and sometimes for not so good reasons. The good reasons are people need to spend, they want to buy a house, they want to buy something, make a capital investment, and they need the money and those are good reasons.

The less good reasons are when people are afraid, they suddenly get very euphoric and optimistic about markets and want to chase returns and they move around for psychological reasons that sometimes are not so good. So one has to understand your client base, you always want to educate your client base as to what you do and keep the clients confident that the kinds of things you're trying to do for them are really in their best interests. But it isn't always the case. Warren Buffett has the absolutely wonderful benefit that he has permanent capital and it completely changes what he can do because he has permanent capital than any other investor can do who does not have permanent capital. Risk, if you're measuring it in the markets, commonly volatility, lots of investors think that's not a great metric of risk and yet I'm not sure if you're trying to calculate risks across different asset classes, what else you would use.

How do you think about that? So we've done a lot of research on risk at the portfolio level versus at the individual security level. And I think the first thing to say is at the individual security level, volatility need not be a good measure of risk at all. A strategy that sells options and has limited upside and big downside, you're not going to detect that from volatility statistics. Examples might be credit investments that give you a small, nice return for a long time and then suddenly blow up.

I think at the portfolio level, if you're diversified, your biggest exposures are to the broad markets, usually the equity markets exposure to the equity markets is your biggest investment. And there there's very strong evidence that when things are volatile, the risk of a big drawdown is much higher than when things are calm. They're after. So usually volatility is associated with times of stress, that's correct. But what happens, what is so striking is that once you have volatility, it tends to continue.

And if things are volatile today, the risk of a big drawdown are much higher tomorrow than if things are not volatile today. A very simple idea. It's very effective. We use that idea as part of what we do. There are related ideas that go with that, ideas like correlation, how are things moving together?

How are they moving together today? Maybe versus, it could be different from how they may have moved together in the past. The idea of correlation, the idea of volatility as a predictive risk, these are all very useful concepts that work at the portfolio level, they may or may not be helpful. A lot of that, those metrics are tied to public markets. Volatility doesn't matter if someone's investing in private equity and giving them their money for 10 years.

So how do you balance the public market where you can measure those risks and investments in private markets where you're setting it and forgetting it for a while? So I think one has to think of illiquid investments as risky in many ways. So something can be illiquid, yet the underlying assets could be in public instruments. For example, a hedge fund with long dated lockups is an example of an illiquid asset, your investment in the hedge fund, but the underlying is liquid. So you can get a sense for the risk of your investment with that hedge fund, but the fact is there are other factors that affect the risk of the hedge fund.

Their clients may suddenly want to redeem, or the person may want to change their mind as to what they really want to do. There's a variety of risks that could occur. There could be a ban on short selling like we saw in 2008. You've got to think about all of those risks, even though the underlying assets are liquid. Then of course there are assets that are illiquid, inherently liquid, such as in private equity, private loans, private many things.

And there you need to understand you're making a bet that something will work over a long period of time. And a lot of things have to go right for those things to work over a long period of time. They may seem great today, but when you make a long dated commitment, you're assuming that things will be in place for the duration. And at the very least, there's an opportunity cost. You can't change your mind very easily. The world is very dynamic and changes, and you may find that you're stuck.

And it's pretty costly that you tie your hands. On the other hand, often you tie your hands and you get handsomely rewarded for that, and you always have to balance those two concerns. This is ultimately a people business. You've worked with lots of people over the years. How do you get inside the heads of the people you're thinking of investing in to really get comfort that you're ready to commit capital to them?

So that's a really hard question. I think talent, identifying talent is really hard. Sometimes you know this talent. You know they're exactly what you want, but they're so good you can't get in. So the issue is, the hardest cases are usually the ones where someone will take your money. You always have to ask why you're so lucky. But they'll take your money. You think they're very talented, but you have to convince yourself.

But it's not just talent. It's, are they talented? What is the opportunity that they're pursuing? Is that opportunity still in place? Do they have a team that can execute?

Remember this talent is also running a business. Are they good business managers? They have to worry about their clients and keep them happy. They need to attract a talent to work for them and mentor and keep those folks happy. And you're asking an awful lot of somebody. So you need multifaceted talent, at the very least, where you're making a commitment to them. I would say it's pretty hard.

It's pretty hard. After the fact it's of course always easy. But there are a lot of folks who are on paper, extraordinary talented, who end up not performing so well after the fact as we all know. So you need to make judgments. I think the ability to judge people is an essential skill that one needs and it's very hard.

Everything seems like it's hard today. Markets, you talk to people, everybody says markets are expensive. Asset classes are expensive. You are tasked with making money for your clients. Where are you seeing opportunities? So let's understand why it's hard. It's hard because the world's competitive. It's also hard because the world doesn't stand still.

And so the industry is always evolving. If you have a good idea, the odds are high. Others have that same idea. So I think investing is always hard. It's harder than you think. It's the same as any other aspect of business. If you try and compete as a firm, it doesn't matter who you are, this competition, it's seldom easy.

And so I would just say this idea that there are times when it's easy and there are times that it's hard. No, I think it's hard all the time. I think in today's world, I think it is hard. It's hard to see anything obvious. Equity markets are high. It's hard to sort of have a belief that equity market returns will be fantastic over the next ten years.

I think we sort of think about it in sort of long two dimensions. One is there's a very dynamic aspect to the world. And it may be that there may not be great places to put money today, but they will be in the future and you need to prepare yourself for those instances. So we think of managers who have flexible mandates, for example, as being a prime candidate for folks we want to partner with. Folks that are prepared for things, being prepared takes work. Being prepared and not investing is very hard because it looks like you're not doing anything.

But the fact is you need to be good enough to guess where the opportunities might be and then the minute they occur you have to jump and pounce on them. So finding firms that are good at that is one of the things that we were always looking for. On the basis that the world's very dynamic and the day you buy is when you make your money, not the day you sell. And being ready for those buying opportunities is sort of critical. That's one kind. The other kind is looking for niches where specialists can outperform.

And just thinking about very niche off the run areas, example might be direct lending for example. The lending space is interesting because banks have excellent vests, swaths of the lending space. And I think there's money to be made there. And there are other areas, niche areas that are a little off the run where you find a team that can do well. And then you just have to keep reaffirming A, that it's the right team and B, that the opportunity set is still there.

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And I think there are ways to make money there too. Are there any particular issues that you're excited about today? I think, you know, I think if you look at areas like biotech, there are a lot of smaller biotech companies that are not well understood at all. People love it. It's sort of faddish and people chase things based on psychology. It's a particularly nice area to be able to try and play that game.

I think smaller banks are in areas where you see they just not very glamorous kinds of things. And you just need to go from one to the next and try to understand what they're doing. But there's just a very broad range of these small cap activism is another one where these are, again, off the run things. They're not buying the large caps and doing things like that. Although the large caps themselves are not all of them are that expensive.

And they're opportunities that seems there as well. So you and your team spend all this time exploring these niches, trying to find these great opportunities, you're hunting where other people aren't. And at the same time, the studies I'll say that asset allocation drives returns. So if you step back from the biotech investing, the small cap banks, small cap activism, the banks, what does your overall asset allocation look like today? And does it jive with sort of how much time do you spend at that level as opposed to really looking at the underneath the corners to execute as well as you can?

Look, I think of it very differently. I would say, I think there's a bit of a false dichotomy that people draw between what's more important, manager selection or asset allocation. So let me first say, if you're selecting managers who can't outperform, then it's a problem. You should just index and be done. And then it's all about asset allocation.

If you can find managers who can add a lot of alpha, it changes the game completely. And then it's a function of how many of those do you have. If you have all your money split between three managers who are very active in what they do, but really good, I think it's all about managers. And I think so, if you're highly diversified across managers, it's a different story than most of what they do cancels out and you're left with beta risk, which is about asset allocation. We sort of think about it as look, finding alpha is, alpha is scarce.

Finding alpha is hard. And you need to find it where it is. You find alpha most of the time where there are dislocations, where there are capital shortages in the world. You don't find alpha all the time on the corner of Fifth Avenue and 47th. It just doesn't sit there all the time. You may occasionally, but it doesn't sit there all the time.

So you need to go where it is. And it may be it's there in Japan. It may be there. It's there in the stress investing. It may be it's in some place and you need to go there.

So our view is alpha. The pursuit of alpha is always opportunistic. And you must go where it is, not where you'd like it to be conveniently. When you find it, invest in it, unless there's some reason it doesn't make sense. And that always leaves you with an idiosyncratic set of managers and idiosyncratic exposures to the broad markets, because each place you find, each pond you find has its own set of exposures to the broad markets.

So you can get pretty lopsided exposures if you follow money opportunistically, if you follow the opportunities where they are. And so our view is look for the opportunities where they are and then true up the exposures you get so that your overall exposures make sense. So how much U.S. equity exposure am I getting by virtue of these terrific opportunities? And if it's less than I would like, add to it, perhaps in a passive way. And if it's more than I really want, I can hedge it out.

And that bounds is that sort of there's ranges that you're comfortable with. That's where the risk target really matters. So we are very risk conscious and a portion of our capitals in a very low risk fund. And they're the ranges are much lower for equity exposure than they would be in a high risk version. So we set those based on a broad sense of risk and just depends on the risk target.

I found in my time at protege that when you're looking for the great opportunities, you like your team who's out talking to people to also be looking at. But I also found there was a lot more art than science into being able to spot what is a great opportunity. And that takes a lot of experience and you only have them to bandwidth. How do you try to get the people on your team to be looking opportunistically across around the world? Look, I think it's hard and it's easy. The easy part is it's amazing the inbound traffic.

When you have money, people want to talk to you. It's shocking that when we have money, people want to talk to us. And so the issue is you are chasing down a whole range of things. Often there are opportunities you can't find the team. Often there are opportunities and you can find the team, but the terms don't work.

It's too long a lock up or it's too expensive along some dimensions. Sometimes it's too expensive because it taxes. And so even though you might see something, you don't have a way to execute on it. And we work hard to try and find ways to execute. Sometimes they ways to execute through derivatives or some other way of doing something or create a sort of an LP friendly structure that sort of helps.

But I think in each case, one just has to, this is where being an investor really helps. And having an investment mindset where you have to put yourself in the shoes of the folks making these investments and ask yourself if you were doing these, would you see it the same way and it's very much the same kind of work that someone would do is actually doing it and making those investment decisions. So we all learned from our mistakes. Can you talk about what you've learned in the spirit of time of the last decade that's different from what you thought investment firms did or had to do to execute well when you were teaching and studying firms? I think the biggest lesson has been that the world is extremely competitive.

And that competitiveness is not something you see until later in a given area. So you think you found something, you think you're the first to see it or maybe the second or the third, and you realize later that you were just one of many and it's already competed away before you can actually take advantage of it. It's so surprising to see after the fact how things almost always don't work out nearly as well as you thought they did before the fact, you're always disappointed. It's a bit like golf. You're always disappointed. You hope springs eternal.

Go outside and start. It goes both ways because I remember being involved in the subprime short. And it was a perfect trade. And you looked at it and you mapped it out and you said, boy, if this goes as we think, we're going to pay 8% and we're going to make 10 times our money. And then it worked.

And one of the things you saw afterwards with some of the people who were in that trade without pointing to any particular manager is they almost changed the way they thought. They did something that was perfect. And then they proceeded to search for the next thing that was perfect. And if it wasn't the big grand slam home run, they couldn't do it the same way anymore. Look, I couldn't agree more. And what that says is that there's a huge amount of luck in our business.

So subprime worked in two ways. One, it was just a good trade where if housing did badly, you could do well. What I don't think people understood at the time was it was also a huge macro trade. It was a hedge on your overall portfolio. The benefits of being short subprime were extraordinary at the time.

The other thing is, I think timing really mattered. We did subprime and it really worked well for us. Our predecessors in the trade, meaning others in the industry who tried it earlier, did not do so well. And some got shut down because they were too early. Read Michael Lewis's big short and it's all in there.

And I think people don't understand the role of luck is huge. And I think we in the industry and society at large celebrate as skill, what really is luck, often not always. And when you're lucky, you can be lucky and come across like a genius. And the mistake we make as investors is to assume it was skill and not luck. Well, not correctly or sufficiently adjusting for the fact that there's a lot of luck in this business and in investing.

And that's really hard to sort out. So subprime is a great example of trying to parse that out. I think a lot about the question of luck and skill and when you're investing in managers, things change inside the organization. I remember leaving business school and going to work for a manager that Yale had money with. And so my prior training taught me that anybody Yale had money with was a superstore.

And it was a great story. It was a small leverage bio-shop. And I went there the first day. I was the first associate they ever hired. And there were four or five partners. And the first week, I had one or two of the partners were in the office.

The other guys weren't. And then the next week there was a different guy in the office. And the third week the other guys were in the office. And it took me until the fourth week to realize that that was happening because they hated each other. And then my big lesson was, wow, the people at Yale had no idea this was going on.

And they had entrusted their money with them. How do you, over time when you have a relationship with a manager, their life circumstances change? And this business, their wealth changes. How do you stay in touch with them enough to detect if what was, let's say, skill or luck turns into something else because the person changes or their temperament changes or their motivation changes? Again, a great question. I think the way we think about it is first investing with a manager is it's only the starting point for the relationship.

It's really about partnership that you want to give folks money that you can be in constant dialogue with and learn from. And hopefully you can be of help to them as well. Those are the best. So when you have a real relationship with a firm where you're always talking about various things, they get to know you pretty well, but you get to know them pretty well. And I think when you have that kind of relationship, it's a lot easier to get a sense for what is the cadence of the firm? How is it changing?

You can look at what they own. You just get it. You can better interpret the things that you're seeing in their portfolios as to how they got into the portfolio in the first place and who might be driving decisions. And I think that's helpful. Nothing's perfect in this world. But I think that's absolutely one way to think about it.

There's a lot of talk today about fees across active management. How have you thought about it differently in your relationships with your managers if you have in the last couple of years before that and what if anything are you doing differently? So look, I think the first thing to say about fees is we always think of the returns we're getting from our managers' native fees. Very simply. If they can generate great returns native fees, so be it. And if they can't, that's a problem.

And so that's the starting point. All else equal, obviously we would prefer lower fees if all else is equal. The question is, is all else equal? I think the answer often is no. For the kinds of skill we're looking for, you need talent.

So the idea that you can generate high alpha for low fees I think is a complete misnomer. Very hard to do. I think I can see how there are certain firms where the fee levels are needed to be high or maybe are egregiously high and it wipes out the value they can add and you just don't need to invest with them. That's very easy. But when you find true talent, you got to pay them. And I think you're kidding yourself if you think you can get the combination of extraordinary performance and talent for very low fees.

I don't see how that works. What are you concerned most about in the capital markets today? It's crowded. I think it's crowded. A lot of money chasing seems like fewer opportunities. You need to go further and further afield to find things.

So for example, as I said earlier, we're looking to give folks more specialized mandates in areas. But you have to go further afield to find those. When you do go further afield for those, do you find you tend to gravitate to smaller cap and less liquid necessarily? I think a lot of the time it is that because that's where it's harder to put money to work. But you also find there smaller firms. They're not well known.

You need to better understand the people. You're often one of a very small number of investors with that firm. And you just can't take these notes of things as safety numbers where you can hope and rely on other people doing the work. You have to absolutely earn work and have confidence that you can identify these things. I think it's crowded.

I do worry a lot about the political system today. I do worry about protectionism. I do worry about the freedom of the press. Things that go well beyond investing. But I think these things all hang together.

The economy seems to be doing fine, but evaluations are high. And so the question always is, evaluations are high. And so the question is, is there high because things are going to be great? And that would be awesome. But you always have to worry they may be high because there's a little more exuberance in the market today than is justified by the fundamentals.

And someone has to be cautious and be always be prepared for downturns. But part of being prepared for downturn is thinking about where will there be opportunities and having dry powder to put to work on those days? You know, I guess we all hope that we're going to be able to make America great again. But at the same time, the political, the populism, everything you mentioned, it's hard not to wake up some days and sort of be worried that the world we're looking at for the next, I don't know, 10, 20 years is so different and a lot less comfortable than the world we've been living in. Or maybe that we in the financial markets were a little bit blind to what the rest of the country was really feeling all along.

How do you take that awareness and apply it certainly in your investment portfolios, but also in how you think about both the business and investing and then in life? Look, I think in life, the hardest question is we all know how this could evolve. We can all see the beginnings of authoritarianism, nationalism, economic nationalism, and we all know where that could lead. And there I worry about, you know, it may not be in my lifetime, but in my kid's lifetime, and I worry a lot about that. I think for investing, I think one has to take the view that good things can happen.

Certainly I see a lot of good things that could happen. If society has, and today we have extraordinary ability to make good things happen if we would just work together. And so there's upside and we may come to our senses and things could be fantastic. But I think the tail risks are high today. I think one has to think about tail risk. Small probability but big impact events, including I would say, I think whatever probability you put on having a major war in the world, I think it's always been small in recent years, but however small it is, it's probably double that small, still small, but maybe a little bigger than it was before.

It's a tail risk. It's something we need to think about and just be a little more conscious of as we make investment decisions. At the end of these podcasts, I always try to ask some fun closing questions. My first question, what was your favorite sports moment as a participant or an observer? I think you should know I'd love to play golf. I'm a golf nut.

Apparently you have a great short game. Is that right? I'll let others be the judge of that. But every now and then I'm able to really score. A lot of the time it's useless, but every now and then I can really score.

And those have been, and I've had a couple of fantastic rounds. And those you never forget. Those are very special and last forever in your mind. So one of those was at the Masters and that was your favorite moment. One of those was at the Masters and you can never forget playing Augusta and having a good time.

How about recommending a recent book, TV show or podcast that you've enjoyed? So I love Michael Lewis' writings. I think he's someone who thinks about the world in a way that is very unique. He has a way of seeing through what's really going on and developing a framework. So I like all his books. The one I think is most profound is Moneyball.

I think it's not that recent, but it's an example of how he wrote about applying techniques of investing to talent management and finding great players on a team. And it extends to so many aspects of life. It's just love a guy. What is your favorite thing to do that is a complete waste of time? Back to golf. I love. I'm always struggling. As any golfer knows it's a struggle. And putting often just doesn't work.

I will go and research new putters, find new putters, and find the problem is the six inches between the ears, not the putter, and talk about a waste of time. That's what it is. But it's great fun. Where do you say Magician and not the wand? Exactly. Exactly.

What do you know today that you wish you knew ten years ago? Well, obviously I'd like to know we're markets have gone. That's always nice to know. There's a movie. There's a movie. That's a back to the future. I think so.

Exactly. I think in the last ten years if you think what's happened we've had a terrible year and a bit during the financial crisis. We're extraordinary things happen far beyond anything we could imagine. And then likewise we've had a recovery in the markets that's been unbelievable, including U.S. equities in particular.

I wish I'd known then how bad it could be, but also how resilient the will could be and how we've come back. So things like that. But that's always in hindsight. That's always easy to think back what you'd like to know. You are now 110 years old. You are sitting in your rocking chair, which is your favorite passion at the time.

What advice would you give yourself looking back at your life today? You mean what advice would I give myself for the next phase in my life starting now? Correct. And I would say firstly I think the beauty of life is there's no such thing as being too old. I think there's no such thing as retirement. I think you should never retire.

There's no such thing as think small. You should always think big. You should always try and have an impact. And think about what can you do to have an impact, have energy, I think basic things like the power of networking. It's critical to do anything in this world without you have to be able to network well.

And you can never rest on an old network. You have to keep refreshing, replenishing, and that takes hard work. It's all about relationships. And I would say those things never get old. They never stop.

And those are the things that make life interesting, work life interesting, and just keep doing them. You realize as you get older that life's about family, family, family. Never forget that. And I think we talked about luck. Luck really matters.

So if you can make your luck, you're that much better off. And it's a version of you can't win the lottery if you don't buy a lottery ticket. You've got to find ways to make luck for yourself. Are you recommending buying lottery tickets or just trying to clarify that? So I think you should always be taking risks. You want to manage your risks, but you want to take risks.

Because good things happen when you take risks. Not crazy risks. I'm not saying not be prudent, but you want to take risks. If you don't take risks, risk taking risks is interesting. You learn. It's exciting. It works.

If you thought about it, then you always have a chance when you do that. Fantastic. Andrze, this is so much fun. Thanks for doing this. Thanks, Dave. Appreciate it.

Thanks for listening to this episode. I hope you found a nugget or two to take away and apply in your investing and your life. If you've liked what you've heard, please write a review on iTunes or Google Play to help others find out about the show. Have a good one and see you next time.