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2:02

Hello,

2:02

I'm Ted Seides and

2:04

this is Capital Allocators.

2:07

This show is an open exploration of

2:09

the people and process behind capital

2:11

allocation. Through conversations

2:14

with leaders in the money game, we

2:16

learn how these holders of the keys to the

2:18

kingdom allocate their time and

2:20

their capital. You can join our mailing

2:23

list and access premium content

2:25

at capitalallocators.com.

2:29

All opinions expressed by Ted and podcast

2:31

guests are solely their own opinions and do not reflect

2:33

the opinion of Capital Allocators or their firms.

2:36

This podcast is for informational purposes only

2:38

and should not be relied upon as a basis for investment

2:40

decisions. Clients of Capital Allocators or

2:43

podcast guests may maintain positions

2:45

and securities discussed on this podcast.

2:48

My

2:48

guests on today's show are Porter Collins

2:51

and Vincent Daniel, founders of

2:53

Seawolf Capital, their family

2:55

office managed as an old school

2:58

hedge fund. Previously, they were two

3:00

of the three members of Steve Eisman's team

3:02

at Frontpoint Capital and found themselves

3:05

in print and on the silver screen as

3:07

protagonists in Michael Lewis's

3:09

The Big Short. Regulations

3:12

prevent us from disclosing investment returns almost

3:14

all the time on the show, but Porter and

3:16

Vinny manage only their own money today

3:18

and are an exception to that rule.

3:21

In the three full years since they started

3:23

managing their own capital, the pair

3:25

is up an extraordinary nine times,

3:28

coming off 169% return in 2022. Our

3:33

conversation covers Porter and Vinny's background,

3:35

the Big Short trade, launch of Seawolf 1.0,

3:39

their short stint at Citadel and lessons

3:42

learned along the way and put to work

3:44

at Seawolf 2.0, their family

3:47

office. We discussed their

3:48

contrarian value investment approach, transition

3:51

from financial sector specialists to

3:54

generalists, investment themes and

3:56

the banking system. We close

3:58

with their perspectives on.

3:59

the hedge fund industry and the future

4:02

of Seawolf.

4:05

Before we get going, I wanted to share the

4:07

opening line humor columnist Calvin

4:09

Trillan offered to my graduation class

4:11

in college. Wear sunscreen.

4:15

There was great wisdom in his comment, well before

4:17

his time in understanding the importance of skin

4:19

protection. But I can't say I followed

4:21

it religiously. If you listened to the introduction

4:24

to my appearance on The Compound and Friends last

4:26

week with Josh Brown and Michael Batnick, you'll

4:28

hear them making fun of my forehead tanline.

4:31

If you want a little laugh, have a look at their YouTube

4:34

channel of the episode to

4:35

see for yourself. It turns

4:37

out, I play a lot of tennis, and wear a

4:39

Roger Federer-like headband to keep the

4:41

sweat out of my eyes. The rest of my

4:43

game may not look much like his, but it's

4:45

possible my forehead tanline does. So

4:48

as you venture out into the summertime weather, I

4:51

encourage you to remember one of the only facts

4:53

I still do from my four years at Yale.

4:56

Wear sunscreen. Thanks so much

4:58

for spreading the word about skin protection and

5:01

where you heard about it. Capital

5:03

allocators.

5:06

Please enjoy my conversation with

5:08

Porter Collins and Vinny Daniel.

5:10

Vinny,

5:12

Porter, good to see you. Great seeing you. Great

5:15

being here. Why don't we go way back? Your

5:17

initial background is getting

5:19

into investing. Vinny, why don't you start?

5:21

I was an accountant first. Got my CPA,

5:24

did my two-year stint, and

5:26

I knew from jump I did not want to be in

5:29

the accounting CPA business. So

5:31

I started looking around, and I was

5:33

fortunate enough to have a friend that

5:35

I went to college with. And he hooked

5:38

me up with Oppenheimer at the time and a

5:40

fellow by the name of Steve Eisman. And

5:42

we interviewed. I think we hit it off, considering

5:45

how long we worked together. And

5:47

I was initially the junior analyst

5:50

for Steve covering this wacky world

5:52

called specialty finance, which was pretty much

5:54

everything that lent

5:56

out in markets without a checking account

5:58

that wasn't regulated. That's where the

6:00

whole initial foray of knowing subprime

6:02

mortgage, credit card businesses, and the like

6:04

started. I worked with him there for four

6:06

years. I had a brief stint away

6:09

from him, one starting my own business

6:11

with two other gentlemen,

6:12

then working at Keith Bretton Woods after

6:15

they lost so many people sadly after

6:17

9-11.

6:18

And then we came back together

6:21

at a firm called Frontpoint, which is where I've started

6:23

to really meet Porter Collins. Porter,

6:26

you want to go back further than that?

6:28

I was an Olympic rower and

6:30

I obviously had no income doing that. And

6:32

so I got a job working

6:35

for a firm called Kamadees Corporation. Kamadees

6:37

Corporation was then bought by Goldman Sachs. And

6:40

I did the two-year analyst program at

6:42

Goldman, which was in Princeton, New Jersey, where

6:44

I was rowing and living. After

6:47

the 2000 Olympics, I knew I wanted to go

6:49

to New York City and

6:50

pounded pavement and knocked on a lot of doors

6:53

and eventually got a job at a

6:55

hedge fund called the Chilton Investment Corporation. I

6:57

was the junior analyst there covering retail

6:59

and consumer mostly. One

7:01

of my bosses left and Richard

7:04

basically came to me and said, well, your family's

7:07

background is in banking. Why don't you go work for Steve?

7:09

And Steve Eisen was the financial services analyst

7:11

there. Steve sat me down,

7:14

had a good long talk. And

7:16

he said, before you even start working for

7:18

me,

7:19

you have to spend five weeks reading,

7:21

knowing about who I am, what I like

7:23

and the books I like. And so I did that

7:25

for a little while and then worked for Steve and

7:27

we left and then started Front Point

7:29

with Vinny. So what did it take to

7:32

go from a college rower to make the Olympics?

7:36

Like short selling, maybe it's the pain aspect

7:39

of rowing that's so comfortable for

7:41

me. What I'm good at is just perseverance

7:45

and hard work and showing up.

7:48

And that's what I've always done and working in a team

7:50

atmosphere. That's my North Star. That's

7:53

what I learned and I trained so well

7:55

on.

7:56

You have ups and downs in this career. And

7:58

after what I went through, nothing was going on. that hard.

8:00

For me, I went to work and I'm

8:02

like, this stuff's easy. That's the background

8:05

that I had and I feel really blessed

8:07

to have had the competitive nature

8:09

that my friends and I were competing for

8:11

the team.

8:12

We bashed our heads in for years

8:15

and markets still bash my head in, but that

8:17

was just second nature to me. So Vinny,

8:19

you think of what Porter accomplished in

8:21

rowing and the Olympics as the epitome of success.

8:24

Your perseverance has been with the Mets

8:27

and the Jets for your whole life. Yes.

8:29

Talk about growing up and

8:31

what those teams meant to you.

8:34

You talk about where you find your

8:36

love and we could talk about being short.

8:38

It's easy sometimes to short

8:40

stocks and bad management teams when you've been dealing

8:43

with bad management teams from a sports

8:45

perspective since the beginning of time. And

8:48

it's again and again and again. And you

8:50

could almost see, oh, here we go again. It's

8:52

going to happen. For me, interestingly

8:55

enough, his perseverance, I think about

8:57

my upbringing. I was not an Olympic rower

8:59

or a two-time Olympic rower, but I grew

9:01

up in a lower middle-class neighborhood in

9:04

Queens. And for

9:06

us, you always knew Manhattan was where

9:09

you needed to be, or at least that's the way I felt.

9:12

And so my whole goal

9:14

was to say, educate yourself

9:16

and get yourself to a place

9:19

where you have the ability to get there

9:22

so you can work and have a good career

9:24

and a great profession. My father died when

9:26

I was very young, when I was seven years old.

9:28

I had a mother who pushed that prospects

9:31

for me from the beginning. So when I think

9:33

about my upbringing aside from just the

9:35

Mets and the Jets, it was not a hard life. It

9:37

was actually a great life, but I know it was

9:39

different than what the lives that you saw on

9:42

the other side of the island in Manhattan.

9:44

Let's talk about front point. Hedge funds in

9:46

the heyday, the nuts. What

9:48

did you guys figure out that

9:51

worked back then for a long short

9:53

equity hedge fund? That really

9:55

was the heyday where longs could work,

9:57

shorts could work, you had more imperfect

9:59

information and if you were the

10:02

first one to get it, you had an edge.

10:04

You could really make money on both the long

10:06

and short side. I know we did that successfully

10:08

a bunch of years before 2006.

10:10

Everyone

10:12

likes to talk about the big short

10:15

trade. We knew this was happening.

10:18

We talked about this for two, three years

10:20

of waiting for this credit cycle to

10:23

happen. It was not a surprise

10:25

to us and we were really ready for it. Vinny

10:28

talks about it. We had a PhD

10:30

in what happened

10:31

prior to Vinny and Steve did in the Subprime

10:34

One. He calls it during the 1998 auto finance scandal. It

10:37

was Subprime One as we call it because that was the initial

10:40

beginning of monoline

10:43

mortgage originators and auto originators

10:45

that use securitization as a financing vehicle.

10:48

For us, being a front point,

10:50

keep in mind that was our first foray on the buy side,

10:53

at least for me. I could speak for myself. I can't speak

10:55

for Steve or you. Second thing was this

10:57

idea of diversification

11:00

and different pods working separately,

11:02

but initially together in a multi-strat

11:05

that would provide, at least in theory,

11:07

diversification for allocation

11:10

of capital for LP investors. That's

11:13

something we learned. We also learned the concept

11:15

of a low net strategy because you had longs

11:17

and shorts and you never wanted to be truly out

11:19

of skis unless a risk manager

11:20

would come. That was compared

11:23

to what we have today from a risk

11:25

management perspective, a bit of Wild Wild West

11:28

because I can imagine if someone took what

11:30

we were doing way back when

11:32

and put it in a millennium slash

11:34

Citadel native IDEO model,

11:36

we'd probably be fired on the spot. Since

11:38

that time, the way I see the evolution of it,

11:41

the risk management level has been refined

11:44

over the past decade or two decades.

11:46

The extent of the risk management that occurred at front point,

11:49

there were two risk managers, lovely guys,

11:51

but the only thing that they really pushed back

11:53

against us

11:54

was on getting into the subprime

11:56

trade because they said, well, you'll never get

11:58

out of this thing. If you're

11:59

right that everything's gone anyway. What are

12:02

you guys doing?

12:03

We of course ignored them and put the trade

12:05

on anyway. The difference when

12:07

you're talking about running a low net

12:10

book but having wild west of

12:12

risk, what did that mean if you looked at the

12:14

exposures that you had?

12:16

We only really looked at net and

12:19

gross exposure. There was none of this factor

12:21

business or native video

12:23

or obviously whether it wasn't the leverage that

12:26

the system has now. We just didn't use a lot

12:28

of leverage.

12:29

Even on one of the things that we got wrong about the subprime

12:32

trade is that we didn't put a lot of leverage on it and

12:34

that's why we made what 200% they

12:37

made a lot more than that. So you mentioned

12:39

that you knew from the

12:41

work you were doing the data that

12:43

the subprime 2.0 was coming.

12:46

We often hear someone somewhere

12:48

shouting from the rooftops that the sky's about

12:50

to fall in markets in one way or another.

12:53

What was it about this trade

12:55

that allowed you to have so much conviction

12:58

that it would work?

13:00

It was the underlying work that we were doing combined

13:03

with

13:04

I think years of history

13:06

knowing these management teams, how

13:08

the industry works, who are the players

13:11

and at that time the primary

13:14

funding source for all things subprime

13:16

were securitization

13:17

and very few if any were actually looking

13:19

at the data on a monthly basis at that point

13:21

in time. I remember Oppenheimer paid for

13:23

a subscription to Moody's. There was one Bloomberg

13:27

on the floor so I would be there

13:29

at night going through and compiling

13:31

data to take a look at the waterfalls of

13:34

delinquencies, prepayments and

13:36

defaults and then putting these

13:39

spreadsheets together. Once

13:40

you saw the spreadsheets and looked at the

13:42

waterfall you realized that there was a problem pretty

13:45

quickly

13:46

and so that was the downfall

13:48

of subprime 1.0 which was the first call that

13:50

we made way back in the late 90s

13:52

which is a funny time considering that we were

13:54

in a hyperbole market

13:56

and Steve and I and Meredith

13:58

were the only ones shouting

13:59

something's really, really wrong. And our stocks

14:02

were going down while the rest of the world was going up.

14:04

As we go to subprime 2.0,

14:06

the big short error, we started tracking

14:09

and refining our methodology

14:11

to the point where we were actually looking at underlying

14:14

underwriting characteristics for each of the securitizations.

14:17

We saw massive degradation

14:19

starting from say 2004 to say 2007.

14:22

You could see

14:24

the difference. It was material.

14:26

So that was when the shouting of the rooftops

14:29

started. We looked

14:31

more like credit analysts than equity analysts.

14:34

And we definitely had a certain bearish

14:36

tint to ourselves. When talking about the book

14:38

Steve made me read when I first joined him,

14:41

one of them was a short history of financial euphoria.

14:44

And he didn't give me a bullish book. So I was screwed

14:46

for the beginning. So that's the lens

14:48

that we looked through. We were waiting

14:51

for this bubble and knew it was coming. So

14:53

I got asked the obligatory question, what's it like

14:55

being characters in a movie?

14:58

When the movie came out, we were like, this is gonna be a horrible

15:00

movie. Who in their right mind is gonna watch this

15:02

thing? But they did it really. The director

15:04

was unbelievable. Then the actors, they

15:07

got the play us was good. And then with

15:09

Vinny.

15:10

I was extremely fortunate that I had Jeremy

15:12

play me. And Jeremy strong succession

15:15

and a host of other things. We knew from jump,

15:17

he was gonna be a star because

15:20

he took so much care

15:22

and pride and work and being me to

15:24

the point where he would call me at night,

15:27

10, 10 30, because I have to talk to you. And I was like, all

15:30

right, he goes, I have a scene

15:31

tomorrow. It's this infamous scene

15:34

where

15:34

you guys are yelling at Lipman

15:37

it in Deutsche bank office.

15:39

And they want you to say something that I know

15:41

you wouldn't say.

15:42

I go, what do they want me to say? They go,

15:45

they said, they want you to say, I'm gonna take

15:47

out my gun and shoot you. I was like, I'd

15:49

never say that. He goes, okay, what would you say?

15:52

And I said, I would intellectually berate him to

15:54

death. And

15:57

he goes, you have to explain to me how. So for about

15:59

four.

15:59

45 minutes,

16:01

I went through my spiel of what I thought. And again, you

16:03

have to teach

16:05

an actor about what is it that you do

16:07

because actors thankfully don't know what

16:09

the hell subprime mortgages and tranches

16:12

and CDS. So you have to teach him that.

16:14

And he fricking nailed it, just absolutely

16:16

nailed it. So everything that I see that

16:18

he's in, I'm not surprised. He's incredible.

16:21

So I want to turn to the first

16:23

chapter of Seawolf. You guys starting

16:26

your own fun with Danny Moses.

16:28

What was that startup like? Think

16:31

about working with two of your best friends,

16:34

starting a business

16:36

in something now that you have a little bit of experience

16:39

in.

16:39

And Ted, you know, because you

16:42

were interviewing us as an investor.

16:44

We felt really good about ourselves. We felt confident,

16:46

but we had no idea whether

16:48

it was going to work, whether we were going to raise money.

16:51

And then after you raise money, putting it

16:53

all together to put a portfolio and put up performance.

16:56

So it was an incredible

16:58

journey

16:59

at that time, as you remember, we were a sector

17:02

fund. So we did solely financial services.

17:05

And

17:06

every day you walked into our office

17:08

was just an incredible day because

17:11

you were not only educating yourself and

17:13

it was extremely exhilarating

17:15

from what you were doing for a living. It was

17:17

completely entertaining

17:19

from the characters that you worked with.

17:22

I think the biggest thing if you think about that

17:24

timeframe is that

17:27

given our history and given what we went through

17:29

and given the colossal changes to the

17:31

system and the near collapse of

17:34

pretty much everything. And I don't think still

17:36

people to this day realize how close the

17:38

system was to utterly failing.

17:40

Going from that and having

17:42

a healthy skepticism to markets

17:45

over the last 15 years, which have been flooded

17:47

by QE. Being a

17:50

sophisticated analytical

17:53

investor to markets flooded

17:55

with QE doesn't quite reconcile.

17:58

From an investor standpoint, it was challenging

18:00

to actually short anything, honestly. And then

18:03

the financial services probably was not that

18:05

well. It wasn't the best sector to be in for

18:07

that timeframe, but from a place

18:09

to work, it was unbelievable.

18:11

So what happened on that journey?

18:13

We had definitely a good couple of years and 2015 was

18:16

a year. The S and P

18:18

was down and we actually had a nice year.

18:20

And at the end of 2015, the

18:23

big short comes out the movie

18:25

and we were riding high. And then

18:27

of course, 2016, the

18:30

markets in January and February

18:32

went straight down and

18:34

then everything went straight up.

18:37

A lot of things that really came together,

18:39

not well for us. We still finished our

18:42

worst year we'd ever had and we were down 8%. And

18:45

we had a very small, tight

18:47

investor base and

18:49

the biggest one pulled and then everyone

18:51

got nervous. And then Danny

18:53

decided to retire and the

18:56

whole thing fell flat. So that was a time

18:58

where we felt so good about the movie coming

19:01

out and things were riding high and then we

19:03

finished the year on such a deflated note

19:05

and we were tired.

19:07

We had fought markets for 17 years

19:10

at this point, collectively together, and

19:12

it needed a time for a refresh recharge.

19:15

And Danny was retiring anyway at that point.

19:17

So after that period of time, I know the two of you paired up

19:20

and joined Citadel

19:21

and would love to hear what did you learn

19:24

from being inside that

19:25

organization in a pod

19:28

that you didn't know before managing a low

19:30

net long short fund. After I

19:32

was there, I learned why

19:35

we had such trouble in early 2016 pretty quickly

19:39

while we were running from point for the last

19:41

four or five years, there were these big

19:43

machines

19:45

being created, these multi strats

19:47

and this concept of vol targeting, which you

19:49

learn pretty much immediately once you

19:51

get there.

19:52

And for anyone who doesn't know what that is,

19:54

is that the majority of the capital

19:57

that is being deployed by these large firms.

20:00

are based somehow, some way from a risk management

20:02

perspective on the level of volatility

20:04

that they create. And so as

20:07

a result,

20:08

the lower the volatility in

20:10

the world, the more capital they're deploying.

20:12

And that was a very interesting

20:15

concept for us. A concept to that

20:17

was an eye-opening experience.

20:19

And more importantly, probably

20:22

now,

20:23

it is dictating a lot of the flows and the

20:25

performance that we see on a daily

20:28

basis in markets today. So

20:30

I don't think I would understand what

20:32

I'm seeing now if it wasn't for the fact that we

20:34

worked at Citadel for a year and a half.

20:37

No one has done it better than Ken Griffin. But

20:39

one of the things that really struck me was that it's

20:42

not investing. There's actually no part

20:44

of investing to it. It's managing

20:47

a bunch of tickers within a risk

20:49

framework. They used to have all

20:51

these dashboards of what your

20:53

portfolio is. And we used to argue

20:56

with the risk manager all the time, well,

20:58

that's just dumb. Why would you do that? They

21:00

were this concept of aging. This

21:03

name has been in the book for eight months.

21:05

You guys have got to sell it. I love this stock. Why

21:07

would I want to sell it? And they're like, well, it's

21:09

just it's gone through the life cycle. Just got

21:11

to kick it out now.

21:12

This doesn't make any sense to me. But anyway, there was

21:15

a lot of things like that. And I think Vin and I

21:17

realized about an hour and a half into

21:19

being there that we were at the wrong place

21:22

for us.

21:22

That's not the right environment.

21:25

We did. We reenacted the scene from

21:27

the big short as we went to the steps of St.

21:29

Patrick's Cathedral and contemplated life

21:32

there. We could have convinced ourselves at

21:34

that point in time to quit day one. And

21:36

we were close. Not super close, but we

21:38

were close. But at that time, we

21:40

were hiring a young team who we are still

21:42

extremely close with.

21:44

And we said, let's make this work. Let's teach

21:46

these kids how to invest. And

21:48

let's learn the system in this model, because

21:51

I actually think it's going to be evaluated

21:53

to us later on in life.

21:55

And it ended in the most elegant way

21:57

it possibly could have, is that they

21:59

shut down the industry. entire business and we

22:01

got to leave with our money. Vinny,

22:03

one of the things you mentioned at the onset with this

22:06

volatility based risk management,

22:08

it seemed very contrary to how you'd think.

22:10

So the idea is

22:12

if market vol is muted, you're

22:14

taking more risk.

22:16

You guys are kind of natural contrarian investors.

22:19

What do you think about that risk

22:21

management discipline today?

22:23

I think it guides us in many respects, but

22:26

we have to be extremely careful and mindful

22:28

that it can go materially

22:30

longer

22:32

than we think. Let me explain what I mean.

22:34

If you work at these shops, it took me a

22:37

while to figure out, but

22:38

almost all of them are 90,

22:43

95% of the time long

22:45

short term momentum, which is in English is

22:47

long something that is working right now. And

22:50

when you think why they have to do it, if you're so

22:52

levered the way they are, the last thing

22:54

you can be is contrarian because

22:57

contrarian takes time and their

22:59

business models don't allow time

23:01

or risk of loss. It just doesn't work.

23:03

So if more and more capital

23:06

is being deployed in these strategies, more

23:08

and more capital is long short term momentum.

23:11

So therefore once you think about

23:13

it that way,

23:14

it's very easy to see why we're seeing

23:17

the volatility that we're seeing today, the

23:19

way we like to manage money. I need significantly

23:22

more patience and duration of capital

23:24

in order to achieve my excess returns

23:26

that we're looking for as a family office.

23:29

We have outsized performance when the VIC spikes.

23:32

We love the messy part of markets.

23:35

It's been a great couple of years. And now we're back

23:37

to VIX 14. This markets are back

23:39

to all time highs, VIX is at all time lows.

23:42

And everyone again wants to be buying stocks, which

23:44

is obviously the wrong answer. When you

23:46

ceremoniously got lucky to be shown the

23:49

door out of Citadel, what did you guys

23:51

decide to do?

23:53

We were so excited. Oh

23:55

my God. It was the funniest

23:57

firing of all time. Cause we were high.

23:59

each other in the middle of the trading

24:02

floor. Well you guys were having fun. I was up in Boston.

24:04

And I remember speaking to him and I was like, look,

24:06

the last thing I want to do is go on a headhunting

24:09

tour

24:10

to go to another vol targeting fund because

24:12

a lot of our friends, they're institutionalized, they

24:14

do it, they're very good at it.

24:16

But it's a way of thinking that Porter and I

24:18

never wanted to get to that level of thinking of

24:20

just pair trading, say Citigroup

24:23

versus Morgan Stanley and pray

24:25

to God. We didn't want to do that. So we said, well,

24:27

what are we going to do? We had to reinvent

24:29

ourselves and how to think about markets and how to

24:32

invest and how to beat these machines. And

24:34

I think it's a real question that a lot of hedge

24:36

funds have to answer.

24:37

And so we've done a good four

24:40

or five years soul searching experiment. I

24:42

think we've done a pretty good job so far. What did you

24:44

come to in terms of how you wanted to try to go

24:47

beat the machines?

24:48

Well, the first thing we did was we said to ourselves, who

24:50

are we? We tend to be value

24:53

oriented investors. And our

24:55

view was, shouldn't we expand our pie as

24:57

to companies that we can invest in? So

25:00

we decided that we need to be more of generalists,

25:02

obviously with the core expertise in financial services,

25:05

but we should be doing things outside the core because

25:08

if there are opportunities out there, we did not want

25:10

to be pigeonholed to being fully

25:12

invested in a sector that might be out of favor.

25:14

And we had a good feeling that financials were going to be out of favor

25:16

for quite some time.

25:18

So we started experimenting being

25:20

generalist. We also started experimenting

25:23

with less structure that

25:26

is typically conducive to institutional

25:28

capital. We were factored cognizant, but we didn't

25:30

want to be factor controlled.

25:33

We didn't really want to talk about nets. We wanted to go where

25:35

the opportunities were and deploy our capital accordingly.

25:38

And we did that with our own capital

25:40

because then you're really only answering to

25:43

yourself and no one else.

25:45

Part of the problem with the hedge fund business as

25:47

of the last 10, 15 years has been the short side

25:50

because not many people have made money on the shorts.

25:52

You have to really look at it as a more targeted approach

25:55

in a normal environment.

25:57

When you were so deep in

25:59

financial. How did you start thinking

26:01

about the process of adding in other

26:03

sectors to become a generalist? Most

26:07

financial services funds

26:09

or people that still do financial services funds,

26:12

they do banks. And as

26:14

long as I've been an investor and doing

26:16

banks, I've hated banks and there's

26:20

been a lot of bad management teams. And so we

26:22

historically for 15, 20 years

26:25

had been short banks, long other parts

26:27

of financial services.

26:29

From that angle, it wasn't all that hard. And

26:31

what we did a lot of is looked

26:33

at companies that financed all different

26:36

types of businesses. So is leasing

26:38

businesses, leasing ships,

26:41

leasing cars.

26:42

So from that angle, we touched a lot of industrials.

26:46

And even in back at Frontpoint, we did a lot of industrials

26:48

and cyclical stuff. Because financial

26:50

services touches so many sectors, you

26:52

had to really learn and be up on a lot of that

26:55

stuff. And so

26:56

it was a natural extension. I think

26:58

it's fair to say Vincent and I are not good

27:00

at is a growth investor.

27:03

So we didn't want to force it

27:05

and change something that we're not really good

27:07

at. That's not my expertise. I can't buy a 35

27:10

times sales business and

27:12

hope it goes to 50. That's just not who

27:14

I am. How do you think about constructing

27:17

your portfolio when you took

27:19

off the shackles of being at a pod shop?

27:22

One of the things that we've always done is identify

27:24

themes.

27:25

And from there, just start compiling

27:27

names and putting together a portfolio like

27:30

that energy. And we learned along

27:31

the way. The way I thought about it initially was

27:34

because we really didn't know what we were doing, for lack

27:36

of a better term, this is just new frontier

27:39

for us.

27:40

How many people are this brutally honest about this? It

27:42

is what it is. I mean, look, that was the beauty

27:45

of it being your own capital because you could

27:47

be brutally honest that we never invested

27:49

in ExxonMobil. We never invested in certain

27:52

names.

27:53

So we started with a little bit of our capital

27:55

with the thought presses that the initial risk management

27:57

perspective was

27:58

take a sliver of your capital.

27:59

capital so you can take on some

28:02

of the risks

28:03

and some of the

28:04

adventures that you guys want to go on in

28:06

terms of investing and then from there figure

28:08

out your style as more of a generalist,

28:11

hopefully that it works and thankfully it did.

28:13

So our initial risk management parameter

28:15

was just sheer size of our total net worth.

28:18

We started from there.

28:19

Then as Porter said that we started to

28:21

realize a lot of themes that fit

28:24

our brain, our contrarian value brains.

28:26

One of probably I

28:27

would say the biggest for us was

28:30

when Exxon got kicked out of the Dow for

28:32

Salesforce.com,

28:34

us schmucks, everybody else in the world

28:37

goes and buys Salesforce.com because it's going

28:39

to be in relative indices and the like. We

28:41

go, let's take a look at Exxon. So we started

28:43

investing in Exxon as a trade

28:45

and started doing the work behind the trade

28:48

and realized that

28:49

this has the potential energy. This

28:52

has the makings to be one of the greater contrarian

28:55

long value trades of our careers

28:57

because this was a sector that

28:59

is desperately needed

29:01

for the world to work more than anyone

29:03

would ever dream or imagine at that time.

29:06

That was left for dead. We did an exercise,

29:08

that's so much fun doing this exercise,

29:10

which was we took

29:12

all the large asset management complexes,

29:15

think Wellington, Fidelity, Newberger,

29:17

you name Capri, you name them and say, okay,

29:20

let's figure out where their largest

29:22

energy exposure is and what number it is in

29:24

their portfolio. Taking old filings

29:27

and you couldn't get an energy name below 50.

29:30

Now this is Exxon, Chevron,

29:33

Shell, BP, massive,

29:35

massive names. Most you would

29:37

get to number 76. So we're like,

29:40

no one owns this. They're cheap. These

29:43

things are deleveraging. If

29:45

X, Y, and Z happens, these things can be moonshots.

29:48

And that was our first foray in

29:50

a big asset allocation to

29:52

something aside from financials and see we'll have

29:54

to point out.

29:55

How did you blend the knowledge

29:58

that you built? about

30:00

risk management and all the risk factors with

30:02

this theme-based approach when

30:04

it came to taking risk and sizing positions.

30:08

That's the easy part. That's the part that you've

30:10

been doing your whole life and trying to

30:12

think about managing position

30:15

sizes, managing inflection

30:18

points and maybe a chart or stuff like that of

30:20

when to add, when to take off, and when

30:22

to trim positions. That part

30:24

for us was like breathing.

30:26

In order to generate the returns you guys have the

30:28

last couple of years on your own capital, you

30:31

had to have a portfolio that looked a lot different from the ones you

30:33

had in the past.

30:34

What does the structure of that portfolio look like

30:36

today? What we are is

30:39

value investors. Even when we were

30:41

doing financial service only, the average

30:43

PE was five. I think

30:45

now our average PE is three. And

30:48

we love finding little gems

30:51

in the middle of nowhere where people don't

30:53

think it can go anywhere.

30:55

And sometimes we like to keep

30:57

it in the portfolio and sit on it and

30:59

you know that there's an inflection point

31:01

coming.

31:02

When that catalyst comes is hard.

31:05

Klarman's book, Margin of Safety, which

31:07

is one of my favorites. That really

31:10

speaks to me in terms of the stock

31:12

doesn't have much downside. Maybe it has 10, 15, 20% downside. But

31:17

if things go right, it can

31:19

be a, I think we had 12-bagger

31:21

last year in some of these names and

31:24

go back to our credit experience. We

31:26

always start with the balance sheet. What does

31:28

the balance sheet look like? How much can

31:30

we lose here?

31:32

What happens if the income

31:34

statement inflex and it all becomes

31:36

circular? Because the income statement inflex,

31:39

the cash flows get better, the debt goes

31:41

down, the cash goes up, then the

31:43

start buying back stock, the share count goes down. And

31:45

that's the iterative nature of the

31:48

stuff that we're looking for.

31:49

I'm again, putting my own capital behind this.

31:51

I sleep super well at night because I know

31:54

that this is not much downside. And

31:56

if something goes right, I think I can make

31:58

a lot of money here. being patient

32:01

and not worrying about, I

32:03

don't know, the market's up 2% today, or I

32:05

just don't worry about that. And you sit around

32:07

and I feel like that's what Buffett does. He

32:10

doesn't worry about day-to-day, he finds good companies,

32:12

he looks for great investments. That's a little

32:14

bit more of what we're doing

32:16

than trying to scout pennies. Because

32:19

we can't beat the machines. You cannot beat

32:21

the Citadel analysts. There's 50 of

32:24

them all looking at the same name and backbook

32:26

behind it, and it's hard to beat that.

32:29

What are the themes you're most excited about today?

32:32

One of our favorite themes

32:33

has been and continues to be

32:36

uranium and nuclear.

32:37

We found this one early,

32:40

and I

32:41

think it was Josh Wolf who said

32:44

if they found uranium today and

32:46

called it something else other than nuclear, I

32:48

forgot what he called elemental power,

32:50

they would

32:51

crown this the holy grail, and there

32:53

would be a massive deployment with ESG

32:56

backing

32:57

beyond belief, but it has such a checkered past

32:59

and such a poor marketing. That being

33:01

said, what we want is clean energy in

33:03

this world and we want strong base-low

33:05

power.

33:06

Nuclear provides that. They also have

33:08

technology that allows it to be significantly

33:11

more safe than all the doomsayers say.

33:13

So as a result, for me, this has been something

33:16

that we

33:16

started deploying really early, about 2020, other

33:20

than doing the work to ensure that we are

33:22

correct.

33:23

We haven't really even thought about it all that much

33:25

other than add-on dips.

33:27

And thankfully, the story, the

33:29

trends have improved

33:31

over time.

33:32

As I say this, I always get mad at myself, it's

33:34

like Vinny, people are gonna look at these charts and say, you

33:37

idiot, these things have already worked, and they're right,

33:39

they have. I would not be necessarily

33:41

deploying additional capital here,

33:43

but I'm not selling either.

33:46

One of the things that looks like

33:48

a short

33:49

but isn't is our long gold

33:52

position. And it sounds

33:54

stupid, but you think about gold as

33:56

an insurance product. If the world goes

33:58

to hell, usually.

33:59

usually gold does very well. And

34:02

then you think about the inflationary environment that we're

34:04

in and we think about what the

34:06

Congress is doing to the balance of the United States.

34:08

We have this asset on our long side,

34:11

but we think about it more as a short

34:13

than a long, if that makes any sense. I

34:16

think you'd have to reimagine how

34:18

to think about things in a new world where

34:20

I'm trying to compete against computers. And

34:23

yes, it sounds crazy, but it's worked pretty

34:25

well. Everyone loses money on shorts

34:27

except for last year,

34:29

but that's a short that I feel pretty

34:31

good about that. I think gold's going to go up over time.

34:33

And if you take a long view of gold

34:36

versus the dollar, it's done very,

34:38

very well. What

34:39

are your thoughts on the banking system?

34:41

It's a loaded question because as Porter

34:43

said, we've covered the banking system our entire

34:45

life. We've been investing in the banking system

34:48

for the latter part of 20 years. And I think we

34:50

could probably say that we were

34:52

constructive on the regulated banking system

34:54

maybe 15% of that time.

34:56

I think the banking system has

34:58

long-term cyclical

35:01

issues.

35:02

The biggest one being now is

35:04

that they have a competition problem, probably

35:06

for the first time ever in their existence,

35:09

maybe in the 70s they did as well,

35:12

in that we as savers

35:14

or people who are looking to save their money or park

35:16

excess money in a bank just kept

35:18

it there and didn't even really think about it. Forget about

35:20

the operational accounts, the true mode of the

35:23

banking system. I'm talking about savings and the like.

35:25

If you're a corporation and you have excess capital,

35:28

you're not going to keep it in a bank. You're

35:31

going to move it to a money market fund.

35:34

You're going to move it to T-bills because you're getting 5%

35:36

as opposed to 80 basis points or 1%.

35:40

It was Jim Bianco or Bob Elliott, I got to give

35:42

one of the two credit calling it the deposit

35:44

walk that deposits are leaving the

35:47

banking system. And that is truly the mode

35:49

of the banking system relative to everybody else

35:52

is that low cost of capital. If that trend

35:54

continues, the banks have

35:57

really a funding issue over

35:59

the last three months.

35:59

was chronic and it was very

36:02

difficult for a handful of banks, but I think for

36:04

the banking system as a whole,

36:06

it's a problem. And so as a result of that, we have

36:08

not been constructive on the banks for

36:11

quite some time.

36:13

That was their only competitive advantage

36:15

was the deposits, because they're certainly not better underwriters.

36:17

And the balance sheets completely controlled

36:20

by the Fed, they can't go to the bathroom without

36:22

asking permission.

36:24

It's a real problem. And

36:25

do I think that more are going to fail? I

36:28

don't know. We saw pretty clearly what

36:30

was happening at First Republic and

36:32

Silicon Valley

36:33

and Signature and Silvergate.

36:35

And we were short all those essentially to zero.

36:39

And we were short them at the highs for the right reasons. And

36:41

it honestly wasn't all that difficult. And

36:44

the guys who were in the know that who've

36:46

been doing this a long time, they were all short them too.

36:49

I don't think it's anything special, but they're just

36:51

the banking system's in a bad place.

36:54

Nothing's going to change until the Fed

36:56

cuts rates 400 basis points. And

36:58

then on the other side of the equation, you

37:00

have, but it's turning out to be the more superior

37:02

business models, which are the publicly traded

37:04

private equity names. Now they have

37:07

their own near-term issues that they have to wrestle with

37:09

in that they were big, big deployers of capital

37:11

over the last two, three years. So we'll see how the

37:13

economy serves to that cohort.

37:16

But in general, it's a better business model.

37:18

Last week, I was watching probably a little bit more

37:20

Bloomberg than I should have. If I heard

37:22

another institution doing direct

37:25

lending as a growth engine

37:27

in a NASA management complex, I was probably going

37:29

to vomit.

37:30

But

37:31

it makes sense because think about the

37:33

statement I'm about to make.

37:34

Regulated banks do not want to make an

37:36

unsecured loan to corporate borrowers. They're

37:39

not allowed to, for the most part. The

37:41

risk weights are too high. So you

37:44

talk about my buddies at ARIES or

37:46

Blackstone or all the newbies that are coming

37:48

on board. Of course they're trying to fill the void.

37:51

ARIES just simply, they're way better

37:53

underwriters than any bank out there. And they have much

37:55

more flexibility. They have everything you

37:58

want. And the banks are just in cement.

37:59

shoes. Where are you seeing the

38:02

next wave of something to

38:04

fall hard in the same way

38:07

that subset of banks that you nailed earlier

38:09

this year?

38:10

What I think we're wrestling with

38:12

right now is that you

38:14

have tech stocks reaching

38:17

to the all-time highs, the Fed on

38:19

its most aggressive hiking campaign ever.

38:21

I realize that they're pausing today and

38:24

towards the end of the hiking cycle.

38:26

But it's hard for me to compute that in my head

38:28

of, again, I'm not really a growth

38:31

investor, but looking at some of this stuff,

38:33

there's nothing attractive to me in some of

38:35

those areas from evaluation perspective.

38:37

But on the other hand, you have a lot of

38:39

what I would call normal industry stocks

38:42

not doing very well. And I think that's more reflective

38:45

of a slower world.

38:47

If you look outside the United States, there's

38:49

a lot of dynamics going on. Look

38:51

at inflation in the UK

38:53

or Australia. It's still super high.

38:56

It's seven, 8%.

38:58

And there's not much growth.

39:00

And then you have countries like Brazil,

39:03

where rates are 14%

39:06

and inflation's falling, and they have fiscal

39:08

surpluses. The world's going through a lot

39:10

of different shifts here, where the United

39:13

States' balance sheet is really,

39:15

really poor. That's

39:17

one of the things I think we're doing is trying to do

39:19

a little bit more investing

39:20

overseas. We've been big holders of

39:23

Petrobras recently, and that's

39:25

one of our better stocks is that selling it again,

39:28

one to two times earnings and giving yourself

39:30

a 20 to 35% dividend

39:33

yield. And people kept on telling me

39:35

that Lulu was going to take all my money. Well, if

39:37

I look recently,

39:39

the UK last year did a profit

39:41

windfall tax of all these

39:44

major oil companies. So tell me, who's

39:46

the communist out there? It's interesting.

39:49

Everyone's like, well, the world's much more civilized. Well,

39:51

that's just not true. The obvious one that

39:53

people talk about all the time, and

39:55

we have some exposure to it is commercial real

39:57

estate,

39:57

particularly office,

39:59

but commercial real estate.

39:59

say in general is challenged.

40:02

In typical real estate fashion, they'll figure it

40:04

out. But nevertheless,

40:06

I think they have to wrestle with a wide bid-ask spread

40:08

given where rates are right now. I

40:10

just feel like a lot of things are mismarked,

40:12

which probably gets back to while I have a tremendous

40:15

affinity for the private equity model. I

40:17

think they have some issues and challenges associated

40:19

with the assets they've deployed over the last two years.

40:22

When you talk about something that concerns you, the bigger

40:24

issue is that I think

40:25

the majority of our issues

40:28

now going forward are in domestic sovereigns.

40:30

Our governments can't seem to

40:33

run fiscally neutral at

40:35

all. And as a result, we've built up

40:38

tremendous amounts of sovereign debt, which

40:40

were, I guess, manageable

40:42

when rates were at zero, where

40:44

rates are not at zero anymore. So as a result,

40:47

there's a tremendous crowding out factor

40:49

that is occurring right now. It's building.

40:52

Anyone we speak to about this, and we

40:54

ask who's going to buy our debt, people just walk

40:56

away and they don't want to talk about it because it's the boogeyman

40:59

in the room that we all know that

41:01

is coming sooner or later. It might be 20 years

41:03

from now, it might be 10, but it doesn't feel like it's that

41:05

far away anymore.

41:07

This is what really concerns me is that

41:10

if all of what we are allegedly

41:12

to do is based upon the risk-free

41:14

rate of return, and the risk-free rate

41:16

of return is an unknowable thing

41:19

because the thing that's dominating the

41:21

risk-free rate of return is running chronic

41:23

fiscal deficit, it screws up my head. And

41:25

it should screw up a lot of other people's heads, but thankfully

41:28

for a lot of other people, they choose to ignore it.

41:30

It's hard to ignore, at least the way my

41:32

brain works. Trey Lockerbie

41:33

What are some of your other favorite themes? Paul Jay

41:35

Porter was just referencing one. Brazil

41:38

is a theme for us. I joke around and

41:40

say, well, think about the country. They're better

41:42

looking than almost every other country in the world.

41:44

It's a country that can feed itself and fuel

41:47

itself and has enough of those two

41:49

commodities to export. They

41:52

run fiscal

41:53

neutral position and the stocks are

41:55

really cheap. And not only that, the other thing

41:57

that I will say, and this is so qualitative,

41:59

I truly love it is of all the

42:02

brick nations,

42:03

I don't remember Brazil ever starting

42:05

a war. So in many respects, investors

42:07

can feel safe not worrying about hostility

42:10

and conflict associated with it. So

42:12

that is one of our bigger themes on the long side

42:15

right now.

42:16

I think one of the things that we look a lot again

42:18

is it balance sheets. And you look across

42:21

the energy spectrum and a lot

42:23

of the old cyclical stocks,

42:25

the balance sheets are really, really good. And they have

42:28

a huge net cash position. And

42:31

as these stocks are out of favor,

42:33

I think you're just gonna see share counts shrink

42:35

a lot.

42:36

When the inflection point does come, with

42:39

the economy in flex or

42:40

we have a super cold winter

42:42

across Europe and the United States and

42:45

energy prices again skyrocket,

42:47

people have forgotten that Putin took away all their natural

42:49

gas and gas prices go up

42:52

and coal prices go up. These stocks

42:54

can be moonshots. That's

42:56

how we own a lot of them. Just being patient

42:58

around when that point is and

43:00

how we think about it. But we're not gonna sell them.

43:03

But is there a near term catalyst? No,

43:06

but again, we're talking about pet peeves. That's always been

43:08

a pet peeve. What's the catalyst? Well,

43:10

if everyone knew the catalyst, is it really a catalyst? I'm

43:12

curious to get your perspective on the

43:15

hedge fund industry.

43:17

Again, going back to when we

43:19

left Citadel and what do we do?

43:22

And you look around the landscape of the hedge fund industry

43:25

and it consists of

43:27

all the big levered funds

43:30

and then a couple of the large hedge

43:32

funds and everybody else in between looks

43:35

like a family office with a couple investors.

43:38

I don't know what.

43:39

I don't think there's any institutional

43:42

appetite for a fund like ours.

43:44

We haven't looked, but I think the world is

43:47

very, very different these days. And I think a lot of

43:49

people are going to an Aries and Apollo

43:51

and stuff like that. And that's where the job market

43:54

is. I think people really are

43:56

looking at

43:57

the equity markets with the...

43:59

zero-day expiration options

44:02

and all these computers.

44:04

Is there a place for humans? You look

44:06

at the passive industry, and the passive industries

44:08

want to guess 60% of all assets

44:11

and then the rest is quants. What

44:14

is the use of a human these days in markets?

44:18

That's my bearish look on the equity

44:20

hedge fund portfolio side. Fixed income

44:22

is a little bit different. I think I've

44:24

said this many times, passive is one of the stupidest

44:26

ideas ever in fixed income. In

44:29

equities, it's worked. I'll just echo a

44:31

sentiment. I think the hedge fund industry

44:33

is dominated by vol targeting more

44:35

of the interesting aspects,

44:37

the action and market reaction

44:39

that it causes as a result of it. I

44:42

don't see it changing anytime soon.

44:45

Those guys have proven that they

44:47

know how to make a dollar for investors with

44:50

very high sharp ratios. But in order

44:52

for it to work, and this comes to another

44:54

cynical part for me, in order for it to work consistently,

44:57

whenever something goes wrong,

44:59

they have to call the bat phone,

45:01

which is the Federal Reserve. I really

45:03

truly believe that they

45:05

are the new shadow banking system,

45:08

that whenever something goes awry,

45:10

there's a reason why Millennium hired

45:12

who they hired, why Citadel hired who they

45:15

hired, to make sure that

45:17

when the calamity occurs,

45:19

they call the Fed for either

45:21

direct QE or clandestine QE.

45:23

That's not a specular, and that's actually what happens. As

45:27

a result, I don't see them going away because

45:29

they're very well connected. What does that leave for

45:31

the rest of us?

45:32

I think the rest of the hedge fund alternative

45:34

industry, nor in private equity for

45:37

a second,

45:38

we have to be smaller,

45:39

more nimble, more patient, and

45:42

we also have to accept to a certain extent

45:44

that volatility is a contract that's going to

45:46

happen as a result of the way you're managing

45:49

money to produce outsized return.

45:51

You're going to have more volatile returns. The

45:53

markets, from what I can tell, has never

45:55

been more mispriced than it is,

45:58

both the long and short, and things go away. go to

46:00

extreme levels. On

46:02

the upside, in terms of where they take

46:05

stocks, when these short squeezes happen,

46:07

before they last a day or two, now

46:09

they go on for six weeks. How the hell

46:12

is the stock still squeezing? What's going on?

46:14

The true value of where Warren

46:16

Buffett or a private equity would come in and pay

46:19

actual physical dollars for some of these stocks

46:22

is 90%

46:23

lower in a lot of different

46:25

cases. But in the case of some

46:27

value stocks, and most value stocks,

46:30

you're really not paying very high multiples

46:32

for any of these companies. I'm pretty excited by

46:34

that. We look around and there's tons

46:36

of value out there.

46:38

When you put together being patient

46:40

around these ideas, having

46:42

a value mindset, and at least willing

46:44

to accept the volatility that comes with

46:47

that, if you painted that in a

46:49

brush that you were reporting to someone

46:51

else what your returns looked like,

46:53

put some numbers around what that

46:55

volatility means in order to achieve what

46:57

you guys have achieved.

47:00

Great example. Last year, we obviously

47:02

were

47:03

pretty decently, plus 150% are a little higher

47:06

than that, but we had a 30% drawdown at

47:08

one point in the year. For us, that's part of

47:10

the game. You just gotta control your leverage

47:12

and accordion that leverage. When you see opportunities,

47:15

you gotta be able to be flexible and

47:18

really pull in the reins

47:20

and do a good job on that. That's the

47:22

critical key to me. The last part Porter said,

47:24

we try to keep it really simple, red light or green light.

47:27

When you're not really seeing anything, when you don't have a tremendous

47:29

opportunities,

47:30

your gross capital deployed probably

47:33

should be very, very light. And so as a

47:35

result of that, you can control the

47:37

risk factors and the volatility that

47:39

you're going to see.

47:41

Vinny used to use this line to the Citadel Risk

47:43

Manager. He goes, I just wanna go home now

47:46

and watch The Price is Right. And the

47:48

guy's like, what are you talking about? He goes, I

47:50

know when I'm over earning in this really tight,

47:52

long, short book, can I just de-gross

47:55

completely? And the guy goes, absolutely not.

47:57

We're gonna give you more capital. He goes, that

47:59

doesn't.

47:59

make any sense. And he goes, yeah, it does.

48:02

We're going to give you more capital. And they whomp on

48:04

our $2 billion on top of you. And you're like,

48:06

I just told you, I'm not of good ideas. I

48:08

want to degross. And they don't let you degross. That's

48:11

the thought process of what did we learn?

48:13

We learned that when VIX falls, they

48:15

regross, they keep on going, which is

48:18

the exact wrong time. And listen, they're

48:20

good at it.

48:21

But a lot of the chasers aren't good

48:23

at it. And not only that, when volatility goes the

48:25

other way, watch out, because wherever

48:27

the short term momentum is,

48:29

you best be sure you're not

48:32

on the wrong side of that, because that mountain

48:34

of capital going against you

48:36

is going to be seismic.

48:39

And that's when we're going to come in with the shorts,

48:42

because we've been waiting and we see that

48:44

they've taken stuff to extremes. We

48:46

know the boat's very one sided and we'll come

48:49

in and that's where we can be more opportunistic shorting

48:51

stocks. What would it take for you

48:53

guys to decide you wanted to bring in outside

48:56

investors?

48:58

This is a four year

49:00

running conversation. And usually

49:02

we end up just mumbling. We've thought

49:04

about it. We've had so much fun. That's

49:07

the thing. We're a very lucky lot and

49:09

we've done very well. But what do you

49:11

solve for at this point in life? We're

49:13

very good friends.

49:15

And we work well together. And yeah,

49:18

we yell at each other about two times a

49:20

year, usually at some sort of inflection

49:22

point, but we have a lot of fun doing it.

49:24

And we enjoy being on

49:27

Twitter and more public

49:30

because we can, because no one else can say anything. And we

49:32

feel like we can speak the truth in a world that's

49:34

full of non truths to just call

49:37

people out and say it like it is. And it's been

49:39

fun for us. But we have spoken to people in

49:41

the past during Seawolf 2.0 and

49:43

saying to them, in many respects, I

49:45

have to underwrite you more than you have to underwrite

49:47

me, because what we're really looking for, to

49:49

answer your question, if we would open up,

49:52

we would really want like-minded

49:54

individuals, investors who

49:56

understand what we're trying to do and are very

49:58

comfortable

49:59

what we are doing. And we would also like

50:02

to make it more of a partnership

50:04

type of process. And what I mean by that

50:07

is

50:07

we love talking to investors. And

50:10

we were speaking to someone the other day and saying,

50:12

please call us on names. We love

50:14

that stuff.

50:15

We love when people challenge us about stuff. We

50:18

want that feedback and a lot of our good friends

50:20

challenge us and we want that type of partner

50:23

where they get just as much out of

50:25

it as we do. And that's really what we're looking for.

50:27

If we found that,

50:28

then we would definitely open up. Would we be large?

50:31

I doubt it. Because I don't think what

50:34

we're doing here is infinitely

50:36

scalable. Whereas I look at what a millennium

50:38

in Citadel have done and I get the scale that

50:40

they run at. And I think it's amazing.

50:42

But the way we like to run money, we can't

50:45

be big. But we can have a few good

50:47

partners that would go on with this

50:49

journey.

50:49

All right, guys. I want to ask you a couple of closing questions before

50:52

we wrap it up.

50:53

Can we make them colorful? You can make them however you

50:55

want. All right. Porter, we'll start with you. What's

50:58

your favorite hobby or activity outside of work and family?

51:01

Well, that's an easy one. I'm obviously

51:03

a rower and exercise

51:06

is a big one for me. Last week, my son and I

51:08

went to a rowing camp together.

51:10

He was going to be a sophomore in high school.

51:12

And I can honestly say it was one of the best weeks

51:14

of my life.

51:16

I think I had more fun than he did. But

51:17

being able to share that with him, being

51:20

outdoors, feeling fit,

51:22

it makes me happy. You mentioned

51:25

this before. I'm a big

51:27

sports fan, professional sports fan. And

51:29

we went through the sad teams that I like.

51:31

I'm also a

51:33

very poor but loving person who

51:35

does fantasy baseball with a bunch of guys from

51:37

Aries who kicked my ass, which is good.

51:39

The last thing I would say, my hobby,

51:42

is that

51:43

I'm getting better at golf. I love it.

51:45

Not that good, but I'm getting better at it. And

51:48

then whenever I drop my son

51:50

off to swim,

51:51

I'm always out there with a gnawing iron or a pitching

51:53

wedge and just practicing and practicing.

51:56

The process of practicing does not bother me one

51:58

iota when I'm golfing.

52:00

Aaron Rodgers? I gotta tell you,

52:02

he's doing a great job embracing New York

52:04

so far. So right now,

52:06

we are, Porter and I were talking about this before.

52:09

Right now we're in our typical Jets honeymoon, which

52:12

is everything feels great

52:16

up until the first game.

52:18

We used to call the Jets Super Bowl was

52:20

the draft every year because they always had a top five

52:22

draft. So it felt pretty good, right? Benny,

52:25

what'd you dream about doing when you were a kid?

52:28

I wanted to be on the mound,

52:30

Che, but

52:32

I also wanted to be general manager of

52:34

the team. Believe it or not, growing

52:36

up in Queens, working on Wall Street was what I wanted

52:38

to do. So I pretty much achieved my

52:40

dream of what I wanted to do. The realistic

52:42

dream. I knew I couldn't throw like good in. So this

52:45

was the realistic dream.

52:46

Porter. I had a 1988

52:49

Olympic hockey team pennant my wall.

52:52

And when the 92 Olympics

52:54

came out, I begged my dad

52:56

to get the Olympic NBC Olympic

52:58

package, the rainbow package. And

53:00

I sat there for two weeks and watched everything.

53:03

And I had no idea that I'd end up

53:05

becoming a Olympic athlete.

53:07

And so it's funny for me

53:09

at age 21, I

53:12

felt like I had experienced everything

53:14

I'd ever wanted in life. So everything else from

53:16

that was gravy.

53:17

Porter, what's your biggest pet peeve? I

53:20

could do a whole podcast on pet peeves.

53:23

So I think it's the shenanigans that's

53:26

going on in corporate America,

53:29

in the investment space, in

53:33

the Fed, in Congress,

53:35

all of it just makes me so frustrated.

53:38

Whether it's stock promoters, whether

53:40

it's pump and dumpers, whether it's

53:43

the shorts that smash these stocks and

53:45

then cover them. Porter and

53:47

I live by

53:49

old school rules of being honest,

53:51

being truthful, being good people.

53:53

And we try to invest that way. And I just feel

53:56

like the rest of the world doesn't invest

53:58

that way anymore. I'm a red-blooded

54:01

American and watching

54:03

what's happening to the U.S.

54:05

balance sheet really disheartening to me. And

54:08

I sit there and I mumble and complain and

54:10

then I mumble, complain at the Fed even

54:12

more. And

54:13

there's a scene from the big short where Libman's

54:16

character asked, how's the angriest hedge fund in

54:18

America? I guess we've been angry for a long

54:20

time. You nailed a lot of what I was going to say.

54:23

I'll just add the grift drives me insane.

54:26

I guess because given the seats that we sit

54:28

in, all of us that we sit in,

54:30

were one or two degrees of separation

54:32

of seeing the grift, how it happens,

54:35

and how the rules of engagement are changed

54:38

to make sure that

54:39

the world is going to work.

54:41

The Silicon Valley bank thing had very

54:43

mixed emotions about how it all went

54:45

down. I get the fact that we

54:48

needed to save all the depositors.

54:50

When you sit in the cheap seats, you could say a lot about what

54:52

you're going to do, but when you're sitting in that seat, it's entirely

54:55

different.

54:56

But the people who got baled out of uninsured

54:58

deposits and the ones who complained

55:00

about the entire banking system in and of itself

55:03

and then were begging and they got bailed out,

55:05

that was a pet peeve of mine that drove me insane.

55:08

If any, what investment mistake have you made that

55:10

you'd never make again?

55:12

If you have a bad management team, just stay away.

55:15

Bet on the jockey, not the horse, right?

55:17

No matter how compelling or evaluation

55:20

is, if you

55:22

don't have the right management team there, chances

55:24

are it's not going to work. And we've had

55:27

one or two examples in prior structures

55:30

where we were just wrong because

55:32

management sucked. In 2016, we

55:35

had a big position in this name that there

55:37

was so much value there and the

55:40

CEO and management just didn't

55:43

execute. And that's the issue with

55:45

value stocks. You need that

55:47

management to execute and to realize

55:49

that value. And that was our mistake and that's

55:51

what drives us crazy. Porter, which

55:54

two people have had the biggest impact on your professional

55:57

life?

55:58

The number one's pretty easy.

56:00

and that's Steve Eisman. Steve

56:03

taught us a lot of what we know and

56:06

he was an unbelievable

56:08

mentor.

56:09

We always said he gave us enough rope

56:11

to hang ourselves or to thrive

56:14

or to thrive. He was

56:16

super generous to us through the years.

56:19

He really acknowledged when you

56:21

did well instead of he could have been

56:23

the guy that said

56:24

no it's all because of me but he

56:26

was never that way. He was extremely generous

56:29

to us

56:30

and he taught us a lot about the business.

56:32

We had some ups and downs but

56:34

overall Steve is just a wonderful

56:36

man. He taught me early on because

56:39

I work with him at Oppenheimer on the sell side, A,

56:41

about the business in and of itself but

56:44

the one thing he did

56:45

I'll never forget. I was six months into

56:47

the business

56:48

and he would take me on his meetings to

56:51

see BSI clients as well as CEOs

56:53

and here I am at that point 24-25

56:55

year old kid sitting there

56:57

and watching the titans of finance

57:00

at that point in time being

57:02

in the middle of this large boardroom CEO

57:04

of American Express and he took me with

57:06

him. He didn't have to do that and he did

57:09

and he kept doing it and then he would allow me to do

57:11

it on my own

57:12

at such a young age. I'm forever

57:14

grateful of what he allowed me to see

57:16

at an early age when I saw it

57:18

and it was all because of him. One

57:20

of the things that Steve did

57:22

and there's really not many other

57:25

people that do this is call out CEOs

57:28

and he did it

57:29

one after the other and he was not afraid

57:31

to do it and everyone around was like yeah

57:33

why did anyone else say anything sooner

57:36

because there's a lot of these bad management

57:38

teams, these crooked management teams.

57:40

There's a subprime finance company that

57:42

was doing really shady tactics to

57:44

screw this consumer

57:46

and Vincent helped as well and

57:48

we got an author to write her out in the

57:50

paper

57:51

and they had to change all

57:53

their tactics and the company eventually folded.

57:55

Steve done a lot of other really good

57:58

things and I wish there was more of that.

57:59

right now. Then what teaching from your parents

58:03

or your mom in this case has most stayed with you?

58:05

I would actually say the teaching she's giving me

58:07

right now

58:08

is staying with me. I don't want to bring the room

58:11

down, but she's had stage

58:13

four lung cancer for six years

58:15

and various other ailments

58:17

and God bless this battle acts of a

58:20

woman she keeps going

58:21

and she has a will to live like

58:23

I've never seen. She recently got

58:26

her latest scans was telling Porter

58:28

and the tumors are shrinking and she hasn't had

58:30

chemotherapy in two years and she had

58:32

a bypass in her leg. Sorry, that's a lot for a

58:34

lot of people. I understand it makes

58:36

me so proud of her and all

58:39

she wants to do is go to my

58:41

daughter's graduation or go somehow,

58:43

someway she's going to get there and do it. Just

58:45

watching her and her will to live is

58:48

really for me,

58:49

it just resonates to me on a daily basis.

58:52

Porter.

58:54

I guess we're both product of strong mothers.

58:56

Both my parents have an incredible work

58:59

ethic and are still working to this day.

59:02

My father was a military guy and

59:04

for him showing up 20 minutes

59:06

early was on time. My mother

59:09

is one of the toughest woman

59:11

you've ever met. She just doesn't take no for

59:13

an answer. She's one of the reasons that I

59:16

got so far in my row and she just, Porter, keep

59:18

going. You can do this, you got this. And so

59:21

I'm incredibly grateful to my parents. All

59:23

right, guys, last one, Porter, we'll start with you. What life lesson

59:25

have you learned that you wish you knew a lot earlier

59:27

in life?

59:29

After the 96 Olympics, we

59:31

got a disappointing fifth and

59:33

my grandfather wrote me a letter and he

59:35

said, Porter, I saw the Olympic motto,

59:37

which talks about life's about

59:39

the journey, not the end result. I remember

59:42

reading the letter. I'm like,

59:43

whatever, he doesn't know what he's talking about.

59:47

And of course he's right. And life's

59:49

about that journey and creating your own failures

59:52

and learning from those failures. And

59:54

it's a process. And not say I enjoy

59:57

the failures of life, but I've learned from them and

59:59

moved on and. and try to adapt, and

1:00:01

luckily I have the will to keep going.

1:00:04

So.

1:00:05

Ben? This is a lesson I learned early on in college,

1:00:07

because I can easily become an introvert

1:00:10

if I truly wanted to.

1:00:12

And I surrounded myself in college

1:00:14

with

1:00:15

a bunch of guys who are not introverts. They're

1:00:17

quite the extroverts. And so as a result,

1:00:20

I found myself going out and socializing

1:00:22

more and more than I ever thought I would

1:00:25

going to college. I knew I had to keep my grades

1:00:27

up. I knew I had to do well, because if I didn't,

1:00:29

I wasn't going to get a job, but that being said,

1:00:32

a lot of them taught me

1:00:34

how to communicate

1:00:35

and how communication

1:00:37

and humor and networking

1:00:40

is extremely important.

1:00:42

So as a result, that was a one life

1:00:44

lesson I learned early on that I still teach to

1:00:46

kids in my alma mater, Binghamton. I was like, guys

1:00:48

and women, you can go and study all

1:00:50

you want,

1:00:51

but

1:00:52

I don't know how to tell you this. Go out to a bar,

1:00:54

meet people, hang out with different people,

1:00:57

and converse with them.

1:00:59

And take their numbers down and stay

1:01:01

in touch with them

1:01:02

and connect and network. And that's the thing that I

1:01:04

think I learned that really helped and rounded

1:01:06

out

1:01:07

probably what is a weakness for me. I

1:01:09

learned early on just watching them

1:01:12

and saying, wow, this shit works. And

1:01:14

so I might not be as good as they are, I know I'm not,

1:01:16

but it definitely works. This has

1:01:19

to rub off on you. Vinny,

1:01:21

Porter, thanks so much for sharing the story.

1:01:24

Awesome, great time. Great seeing you. Thanks

1:01:27

for listening to the show. If you like what

1:01:29

you heard, hop on our website at capitalallocators.com

1:01:32

where you can access past shows, join

1:01:34

our mailing list, and sign up for premium

1:01:37

content. Have a good one and

1:01:39

see you next time.