YouSaid · the spoken record

David Salem

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2017-05-23
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2017-05-23
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  1. “and they were running into hydrants and running into telephone poles and running into each other and knocking each other over. And what we found out after the fact is that there had been a rumor circulated that the MetLife, now MetLife, then Pan Am building was going to collapse, as had just happened in Lower Manhattan. And so we saw, I saw on that day, that very memorable day, two extremes of human emotion. Grace under pressure and calmness in the case of Jack Meyer and some others, but most tellingly Jack. And it's utter opposite, which is just complete panic, utter almost animal-like panic. And the juxtaposition of those two made that day for those and other reasons, certainly the most memorable of my career, but to see that extreme of human emotion on the panic side of things and to see the things that people would do reflexively was something, a side I will never forget.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “And we went down to 44th Street. We bought the radios, and we were just standing there. And then we looked to the east towards the then Pan Am building, now the MetLife building. And at some point, and we were there for multiple minutes listening to the radio and just talking, figure out. And we could see some people strolling up Fifth Avenue with soot on their clothes that were coming up from Lower Manhattan even at the time. And I'll never forget this, Patrick, at a certain indistinct moment, we heard this sort of roar coming up from the Pan Am building. And we looked to the east toward it, and there were no exaggeration, at least 150, maybe 200 human beings coming at us as if they were an extraordinarily frightened herd of cattle.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “Graceful under the circumstances. And you can only imagine what was going through his head because, as we discussed earlier, the sort of portable alpha engine at Harvard had a lot of leverage on it. So it could have been quite problematic. In any case, the reason I'm telling the story is because I saw in those instances almost an extreme manifestation of grace under pressure and calmness. At the very same time within not more than an hour, we went down to the sidewalk because in the pre-iPhone days we were in, this was 2001, of course, not 2007 when the iPhone wasn't invented. We all had blackberries, but it was impossible to get information in real time. So I said to Jack, there's an electronic store around the corner. Why don't we go and we'll each get a M. radio for nine bucks and we can listen to different stations to listen to when they're going to open the third Avenue bridge so I can get my car out of the garage and get you back to Boston. So we did.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “Responsible for getting all these people back to where they need to get to. And Jack's running the largest educational endowment in the world, and he's sitting right here, and the world has just changed profoundly. So I felt some obligation to somehow figure out a way to help Jack get back to his desk in Boston. But of course, as you may remember, you couldn't get out in New York. So we were all staying at the Harvard Club, so we adjourned the meeting, and I just said to Jack, I happen to have my car in New York City because I had come down from a home that I owned in New Hampshire. And I said to Jack, I will get you back to Boston. Somehow, some way. And so what we decided, and this is the end of this story, and Jack was unbelievably calm under conditions in which, let's just say some other people in the room weren't so calm, and many, many people, even though we were in Midtown and not in lower Manhattan, so we weren't directly affected by the tragedy, but rather indirectly, people were not displaying universal calmness, to put it that way. But Jack was extraordinarily calm and great.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “It was right here in New York City. And I'm going to tell it because it's a closing compliment that Jack Meyer in particular. We had a TIFF board meeting here at the Harvey Club on 9 11, and so we started promptly at 8 o'clock. And I can't remember the exact timing, but Mike McCaffrey, the head of the Stanford Endowment, pretty new to Stanford at the time, was on the board, had been to some prior meetings, but was late. He wasn't at the table. And we started promptly at maybe 8 o'clock. And it's, whatever the timing was, maybe we started at 9. But he arrived maybe 40 minutes or so late. And when he walked into the room, I was at the head of the table because I was kind of presiding. the then chair of the board was at the opposite end of the table. But I was closest with my back to the door. And he came in. It was just ashen-faced, and he communicated the news of what had happened in Lower Manhattan. So we terminated the meeting immediately. And, you know, I don't know if Jack was sitting right next to me, but he was pretty close by. And I thought to myself, okay, I'm sort of the head of this organization. I'm the CEO. What am I going to do? One thing I thought about among many other things is I'm kind of...”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “Done a fair bit of writing. He just did the one book, Margin of Safety, but I've had the privilege, along with many other people, seeing each of his annual letters along the way, and they're terrific. There as well, a pretty good crash course in capitalism.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “You just go back and read David's annual editor of the Yale community, you know, the Yale Endowment Report and come away with a rather complete education about investing. Oh, they're terrific. They're all in the way. Well, I'm not sure they're all on the website, but a lot of them are on the website. So those are terrific too. But Patrick, we're in a profession where I think there are so many intellectually curious people, some of whom are really quite skilled writers. In my view, we haven't talked about it. We earlier said that I believe that ego and insecurity are synonymous. But I think that clear writing and clear thinking are synonymous. Many people disagree with that, by the way. They think that there are people that can be really, really clear thinkers that just can't write very well. And I think if you give people a pass for maybe some flawed grammar and syntax, I just don't think that's true. I think if you give them a pass and let them engage in some flawed grammar and syntax, really clear think is we'll get good, clear, cogent stuff out on paper as well. Or maybe they'll do it orally. So it's a very, very long list of people you mentioned, Howard Marks earlier. Obviously Seth Clara.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “The one that comes immediately to mind is poor Charlie's almanac by Pete Kaufman, who I do know a little bit personally. And it's just fantastic. It's both fantastically fun, and it's just replete with wisdom. There are some really good, highly curated collections of writings of both Buffett and Munger that have done by serious scholars, not just the annual letters, which are terrific too. And so those would be on a shortlist. I'm not sure that it would make the top three, but they would be there. I can tell you as well to finish the answer, that I dearly wish and hope to someday obtain a complete collection of Peter Bernstein's writings, meaning the letters that he published, Economic and Portfolio Strategy, right? I was a subscriber for years, and then I had the privilege of talking with Peter about many of them. But I wish that I had a complete compilation of that. There are other things that come to mind because you liberated me from the condition and it'd just be a book. So I think...”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “And so the nurses came over and they stripped me. I had a hospital gown, and they stripped me clean. And it took them about 30 seconds. And he took my left arm, which had been covered by the hospital gown, and he turned it over, and he could see my left elbow was completely shattered. It was completely smashed. And he said, well, that's why you can't move your left arm. It has nothing to do with your neck. And that was a telling moment. And now it applies to 2017 and beyond because you think, well, AI and machine learning is going to displace all this knowledge and wisdom and all the jobs are going to go away and there won't ever be a need even in medicine for that accumulated wisdom and that reservoir of experience that caused John Jane that morning surrounded by sumo cum laude graduates of the leading schools and highly selective residency program and one of the leading medical institutions in the world to come in and apply just common sense. They strip them. So I think about that a lot actually in my day job.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “Same team of surgeons headed by John Jane. And he walked into the room and said, and I knew him a little bit socially, and he walked into the room and said, okay, what's up? And the residences and the others who had already looked at me the prior day explained briefly and succinctly to Dr. Jane what was up. David can't move his left arm. He's got some movement of his lower extremities. He broke his neck the x-rays show that what do you think? And John Jane looked at the whole situation and said, you can't move your left arm. And I said, no, I can't move it at all. I have no feeling in it. And he said, strip him.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “We spent the entire night up with me awake, never left the side of my bed, just talking about life, her path, and it was just extraordinarily kind. I don't know how I could have gotten because you can imagine the anxiety. I wasn't sure whether I would ever walk again, but there were signs that I wouldn't ever be able to use my left arm again. So that was extraordinarily kind. If I can just finish the tale, but the very next morning there was a different form of kindness that was professional in its aspect. And I actually think ties into a lot of what's going on in our world today. And that was because as I was sort of bolted the bed and couldn't move my arm because it's a teaching hospital, you know, the head surgeon, John Jane, who ended up six years later almost to the day treating Christopher Reeve for the very same injury, essentially. Christopher, of course, had a different outcome, but it was basically the same.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “And it was very clear my neck had been broken. They x-rayed it right away. It was the top of my neck and the bottom of my skull. And I was sort of bolted to do a bed and they said, you know, keep them under observation. We'll see. We'll all get the whole team in here tomorrow and figure out what we're going to do with this guy. And the entire evening, I was awake. I had a big splitting headache. But I remember very well, and I cannot recall her name, but there was a nurse who I think had been.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  13. “But typed out on an old-fashioned typewriter. And it would be a critique of my immediately prior quarterly letter. Often a page, sometimes a page and a half, never longer, but he took the time to both read and write and to critique. That was both extraordinarily helpful to me, flattering, gratifying, but kind too. He was helping me think about how to think through. And I would say if I could go back and I have most of those letters, of course, they were more critical than complementary. And what greater kindness than to take the time to try to help people get clearer in their thinking. So that was a professional kindness. On a personal note, probably at the very top of my list would be a memorable evening I spent at UVA Medical Center, which was the evening of Memorial Day of 1989. Earlier in the day I had fallen out of a tree and broken my neck. And I was rushed to UVA hospital and I could move my lower limbs. I couldn't move my left arm.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  14. “Everyone does. If you don't mind, again, I'm trying to be brief. I'll separate it. You've got personal kindnesses and professional kindnesses. So overwhelmingly the kindest things that anyone has ever done to me certainly have emanated from my wife and they're private and I won't talk about it. But there's some personal kindnesses I'll come back to. But before I do, I just want to tie back on the professional level. The professional kindness, I think I would cite, was extended by Peter Bernstein himself. As you know, Peter died in 2009. And I don't quite know how he started to get the stuff I was writing at TIFF, but this is one of the most gratifying aspects of my career. And I regard it as truly kind acts plural because it was multiple occasions. I would write quarterly stuff and almost invariably between, say, 1999 and Peter's death in 2009 with a six or seven week lag, I would get a letter from Peter, typically typed out by his lovely wife, Barbara, and signed by Peter, not handwritten.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  15. “You got it, Patrick. That was it. Yeah. And what they said tied in with what they'd written about in advance. It was just a coherent whole.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  16. “The most recent one is fantastic. Yeah, but the original book was just a compilation of letters, some of which were furnished to us in advance of the very meaning that I'm alluding to. So that was really gratifying because the end of the meeting, it was memorable and gratifying because at the end of the meeting I wasn't necessarily sold on them, but I was sort of semi-sold or quasi-sold on it before the meeting commenced because I'd done careful review of their writing. But by the end of the meeting, I was completely sold. And I could see that the consensus of the board was moving in that direction too.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  17. “In and presented to that board, including Jack and David and myself and other people just an incredibly compelling approach to allocating equity capital. It actually ended up in the form of a book by Edmund Chancellor.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  18. “The one that was probably the most gratifying was very early in the formation of TIF, because of the way it was initially structured in buckets, if you will. One of the buckets was international equities. So we were putting together an internationally equity comingle vehicle. And the poster child, the usual suspects in endowments would round up at the time included certainly the capital group on the West Coast. They had 500 portfolio managers and analysts. They were looking at every company in the world. And I said to the board, including Jack and David and some other people that we've talked about, I don't even want to interview them. And they said, well, why is that? And I said, because we don't need to look at every company in the world. We just need to look at a few and have the right culture, the right mindset, and the right capital allocation process. Anyhow, cutting right to the chase, we brought in the three co-founders of Marathon London, which was Jeremy Hosking and Neil Ostra and Bill Era.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  19. “And I took away from it a very important lesson about detecting deception, because there are some tells. And what Lance has engaged in, what he did engage in, in arriving ultimately in his famed interview with Oprah, the path that he took along the way of attacking his enemies and attacking his critics and being so strident and virulent in his condemnation of people that would challenge what he was asserting. You know, we see that behavior in other people. To some extent you saw it in Madoff. You obviously see it in Trump. And it's a very powerful, I think, important life lesson when you're in part my day job as assessing talent and all the things that we've been talking about over the course of this conversation.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  20. “What the hell? And then he taps out a few keys and he goes, Robin Williams. And in that 45-second interval, I knew that my wife was completely right. I had been completely wrong. He was a complete fraud. And why did I deduce that? Because the insecurity that was being telegraphed through that behavior was so stunning and profound that I thought there's no way anyone could have achieved rightly and legitimately what he professes to have achieved and be so utterly lacking in grace.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  21. “Apologizes, Lance is running a little bit late, he's out at the ranch with his kids. He's on his way in. 8.30, 8 45. We order a bottle of wine, maybe a second bottle of wine. And then finally, he says, oh, he's on his way. He just, because everybody's got a blackberry at the time or something. And then we hear a buzz in the restaurant and everybody sort of whips around and the big cheeses arrived. And I'm still thinking I'm going to meet the greatest athlete of all time. And he walks up to the table. He doesn't acknowledge me or my wife. And he sits down and he's glued to his blackberry and he's staring at the screen and without looking up, he goes, Tiger Woods.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  22. “To have a conversation with Lance. Do you want to come with me? And she said, sure. So we went down there together. And what got arranged was a dinner. So I didn't know what to think, but I want to be really clear, and I'll try to come to the end of this tale really, really quickly here. I still had a very favorable view of Lance. I actually thought, as I sat down at the dinner table and he arrived late, which is part of the story here, I thought at that moment I'm about to meet probably the greatest athlete of all time because what he had just done, it was earlier that summer, seven in a row. It's just astounding. I don't know that it would ever be eclipsed. And of course my wife is sitting next to me thinking the guy's a complete fraud. So we're at almost opposite ends of the spectrum. And we sat down for dinner and maybe 8 o'clock. We got picked up by his CEO and it's 8.05, 810, 8.15, Greg Olma.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  23. “Now that Lance is sort of retired, he's going to get, he's really going to throw himself into the philanthropy. We're going to really build it up. The asset base is going to get bigger. And I think you too should meet. And I said, okay, we can do that, of course. They were already a pretty substantial client of TIFF. What he didn't know, Greg Oman, when he placed that call to me, is that my wife, Amory, is a very accomplished athlete and had been an endurance athlete at a pretty high level and very successful. In our very first conversation years earlier, because Lance Armstrong was already on the world radar screen, I think, I don't know exactly how I put the question, but I said, you know, what do you think Alance Armstrong? And she said, he's just a complete fraud and a cheat. And I was stunned. I ended up getting married and we've been married for many years and have children and I think we have a very happy life and a great relationship. But that's how it started. And so roll the clock forward, not a few years. And I said to Amory, I just got invited to go down all.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  24. “The Lance Armstrong story actually ties in, I think, almost directly to some of the conversations we've had about what attributes do you look for and what criteria do you apply in sussing out money managers, for example, or capital allocators generally? And I'm sure all your listeners will recall, as he was marching his way toward riding his way toward seven consecutive wins in the Tour de France, they introduced the yellow bracelets with the Lance Arm Foundation, made a pretty big deal about how he's trying to advance all the good work at the foundation. And Tiff, the investment fund for foundations, for reasons that go beyond the scope of this conversation, was tapped to manage all that money. Not only for the foundation, but for what there was an endowment tied into the foundation. And so when he finished his successful seventh attempt to win the tour, I got a phone call from the then CEO of the foundation down in Austin. And he said,”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  25. “Was early days in the internet, you couldn't Google them and didn't know much about them. I didn't quite know why I was being asked to lunch. In any case, we sat there and about two minutes after I sat down at the table, a young waiter with a heavy Italian accent came over and put a basket of bread on the table, as is the case in many restaurants, including Sarterilla. And Chuck looked up at him. This is the billionaire who wasn't. That's the title of the book about Chuck Feeney by Connor O'Cleary. And he said, what's that? And the waiter, sir. It is bred for the table. And Chuck said, is it free? And the waiter nodded, yes. And he said, okay, you can leave it. That was like the first two minutes of my, what became a multi-year. The process of crossing paths with the billionaire who wasn't.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  26. “Get concessions from governmental entities to do airport DFSs, duty free shops. And so if people knew, then the excess return would have been competed and arbitraged away. But they had to lift the veil when they sold the whole thing to LVMH in the mid-90s when they started arranged a deal. In any case, my quick tale about Chuck Finney is I got asked through an intermediary if I would meet with Chuck in London. And I remember exactly where he took me, took me to lunch at Sarteria, which is right around the corner from Atlantic's offices at 17 Savile Row. I ended up actually moving over there and being based there for a bit for various reasons to go beyond the scope of today's conversation. But they said meet at noon, and nobody has lunch in London at noon. I mean, you start at like one o'clock, and particularly a pretty nice restaurant like Saterilla. But I walked in at noontime, and the place was completely empty, except for an older gentleman sitting at a table with a plastic bag with a bunch of paper stuffed into it. And that was Chuck. I never met him. I'd never seen a picture of him.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  27. “Yeah, no, I can be very brief, actually. So I did have the great privilege, as I think you know, of getting to know Chuck a bit. This is right around the time that duty free shops DFS was sold to LVMH for a big chunk of cash. And years earlier, with the help of a gentleman that I respect hugely who lives right around the corner from here, Harvey Dale, a professor at NYU, they had moved Chuck's interest in DFS into a Bermuda-based foundation. Anyhow, I got to know Chuck, and my favorite tale about Chuck is when I got asked to meet with him. This is when the veil was still lowered on Atlantic, and nobody knew that he was already engaged in very large-scale philanthropy on a completely anonymous basis. That wasn't just because he's shy and self-effacing guy, which he is, as I'll describe in a second. It was also because they didn't want, and I smile when I say this, they didn't want the world to know how profitable DFS was because DFS, the business model was essentially...”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  28. “Me proactively to my partners and I and say, we thought we had this figured out, but we gave it more thought and we don't. And have the courage to say we were wrong, we're going to tack in a different direction or we're going to give you money back at the extreme. So those are things that can be sussed out.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  29. “Yeah, well, I can be very brief about it because we've already talked about it. It's essentially you're looking for a high degree of ethical integrity and a high degree of intellectual integrity. I mean, I could stop right there. But intellectual integrity, the ethical integrity, I think is rather obvious. We've talked about somebody engaging in acts of either omission or commission that seem to be against their short-term economic interest. That's something that you can kind of confirm. You can ask how somebody moved through life. Have they actually consciously and proactively engaged in acts of omission, a commission that would have reduced at least over the short, if not medium term, their income? And that's a good thing. That's a very favorable attribute. I'm not saying it's essential, but it's favorable. But the intellectual integrity manifests itself in the kind of curiosity that we've already described and we've discussed, which is endless questioning. Not only of the people they're interacting with, but of their own premises. And to come back to that,”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  30. “Yeah, and you're focused on the manager as opposed to the underlying companies and securities that they're buying. That's right, yeah.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  31. “But they're just not priced attractively. So we hope to maybe have an opportunity later in my career and in that of my partners to redeploy some money from other pockets of opportunity we're pursuing today or from cash reserves that we're maintaining into US domicile companies. But generally speaking, generally speaking, the prices are unattractively high at present. Fixed income, generally off-putting, certainly the sovereign investment grade, the ongoing effect of Dodd-Frank and other regulatory changes that have created and continue to create some opportunities in credit markets. They're not infinitely scalable. They're on the smaller scale end of things, and they may go away with regulatory reform, but we're doing some of that as well.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  32. “By relatively high economic growth rates at the GDP level and by favorable demography tend to generate, surprisingly perhaps to many people, subpar returns. So you're a value guy, I'm a value guy, we get that. So why would we be chasing return for long-term capital in Asia X-Japan, even ex-China? And it's because I'd say almost notwithstanding the favorable demographics and the relatively favorable debt profile, the prices, the current prices at which interest can be acquired in well-managed businesses where the managements have a sufficient, not perfect, but a sufficient alignment of interest with the outside shareholders. They tend to be family controlled and family dominated. It's not that there aren't many, many, many such companies in the United States. There are. There are many more that are privately traded than publicly traded, but there's some...”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  33. “Thought is, well, Japan is circling the drain demographically debt wise and by every metric that's germane to an outside investor. And we ought not invest in their securities. And by the way, the central bank of Japan owns more than half of all ETFs and they're starting to take a big bite out of the equity market. And I say, I know, I get all that. I've seen all those numbers. But nonetheless, there are pockets of opportunity to get attractive risk adjusted returns. And the Japanese stock market in general and in Japanese domestic facing small caps in particular. So we have some money allocated to that. We also have some money allocated under present conditions to, I'll call it Asia, X-Japan X-China. Here's where a careful study of long-term capital market history will tell you, and my favorite source of this of course is Elroy Dimpson and Marsh and Staunton's book, The Triumph of the Optimists, and all the sequels to it will tell you that high growth economies that are flattered”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  34. “So if you get drawdown specified, you get some clear specification of liquidity constraints, then you can go to work. And in the current environment, I'd say in the main, I find U.S. stocks, publicly traded stocks as a group, to be pretty off-putting. So the work that we do, and it's not at all dissimilar from the work that's still done at GMO, there are many models you can look at and say the projected real return on U.S. stocks over seven and ten plus years is derisory, if not negative, reasonable rates of inflation. So the capital, that's not enough to cause you to give up the optionality of cash and put money to work in a broadly diversified U.S. stock portfolio. But there are pockets of up opportunity elsewhere in the world. The probably the most controversial one that we're funding today is something I already alluded to, which is Japanese stocks. And a lot of outside observers who I think have thought less rigorously about Japan than perhaps should as capital allocators.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  35. “The SP 500 for a younger client, or it's a 60, 40, or 70, 30 portfolio. I think by my lights, the default asset is cash. And in our example, we're starting with all cash, so it's kind of easy. So what would cause you to shift money from cash to a riskier asset? And it would be, of course, depending on your time horizon, if the time horizon is long-term and it's governed by, say, a minus 30 drawdown constraint, that gives you quite a few degrees of freedom, particularly if you've thought carefully about liquidity, because it's not enough to just say we're willing to have a 30% drawdown. You need to be crystal clear up front about what are the liquidity demands on the portfolio under worst-case conditions. This is a big mistake that Harvard made, of course, in 2008 and early 2009.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  36. “Setting, you need to be sensitive to turnover and all returns of, all forms of return slugbage, particularly taxes. So you've got the total return bucket. You may have just one other bucket, which would be hedging, or you may have this third bucket, which is very common in institutional funds and in families of substantial wealth, which would be called the diversifying strategies. So how do you go about building a portfolio, which is your question. So let's just stipulate that the portfolio the day we get involved is all cash. Maybe they sold a family business or it's an inheritance or what have you, because you don't have any legacy managers to deal with. I personally think the soundest process, and I've written about this, and I've done it in a context most recently where I quoted my friend and classmate, Seth Claran. We went to business school together. He said, you know, paraphrasing, there's nothing wrong with holding cash. Cash should be the default asset, not the S&P 500. For a lot of financial advisors, the default asset is either the...”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  37. “On the one here. Absolute return is a term that David Swenson invented, at least the first time I came across. And that's a subsegment within the overall endowment or Yale model mix. But total return strategies, they're actually these days, just to be really clear and precise about it, the norm, increasingly these days is to have three generic buckets. And they are total return, hedging, and diversifying strategies. And what the hell does that mean? And how much overlap is there? And are the actual, because you can have equities. What if you have an equity long short in the diversifying strategies, which you typically do? But those are the three buckets that you tend to see. And I don't have a real big conceptual or intellectual problem with them. I think it's fine. The reason it's fine is because what are the total return assets there for? They're there to generate very attractive long-term returns, particularly in a tax.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  38. “The number of buckets as people recognize that under the conditions that really matter for prudent capital allocation, which are worst case conditions, where you want to look at the outlier events when things start to really correlate, there really aren't 15 different asset classes in the world. There's kind of stuff that's tied to equity beta. There's stuff that's tied to sovereign full faith and credit. And then there are some other flotsam and jetsum lying around like timber.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  39. “Fixed income arbitrage, although it's morphed into other asset classes and subclasses. But essentially it was fixed income arbitrage. And they were doing things back in the day that were very profitable, particularly if you put a lot of leverage on the book. Simple things like on-the-run versus off-the-run treasuries, where you thought there would be over time convergence of the one to the other, very reliably, but other people weren't positioned to borrow a lot of money, put on that trade where you'd of course go long the off the run and short the on the run, waiting for convergence of the two. It could be the 30-year versus the 29 year, the newly issued versus the one that was most recently issued. I'm sure you're familiar with those techniques. And it was extraordinarily profitable, particularly with a lot of leverage in great risk management. That was not being done at Yale. It's never been done at Yale. But over time now, I think you are seeing commendably a shrinking of”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  40. “Outside managers, but doing it internally in the main. And then what really distinguished the Harvard Endowment under Jack's leadership from Yale was this internal alpha engine. And that's what eventually became convexity. So here we are talking in late April of 2017, just last week, the Wall Street Journal published a headline story about what's gone on with convexity. The compression of volatility from central banks, I'm sure you read the article, probably most people who will listen to this podcast read the article and can go back and find it with Google. But that internal engine worked extraordinarily well for many years at Harvard, not only for the reason we already ticked off, which is low financing costs, but because Jack could take a lot of capital within the endowment and essentially spread the alpha.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  41. “Venture is, of course, the best example. Buyouts is another example, but even in the foreign stock arena, even back in the day in the U.S. stock arena. So a wide variety of asset classes and subclasses were the very best managers could transfer wealth from other managers to themselves and their clients. That's dispersion. That's still the case at Yale. And it's something that Jack tried to do. So if I can move from Yale to Harvard, Jack arrived at Harvard. He adopted a policy portfolio, I can't remember how many buckets there were. Bucket sounds like a pejorative, we'll just call them fun segments, less pejorative. There were probably seven, maybe nine. He added timber along the way. He added tips when Uncle Sam started floating tips in January of 97. But Jack had a big internal team, as we discussed several minutes ago, trying to exploit dispersion in each of these asset classes. So they were doing it internally in the main.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  42. “He arrived, and there were two buckets U.S. stocks and U.S. bonds. And by the time we get to 2017, there are more buckets. Although the tendency in the best managed institutional funds these days is to have fewer and fewer buckets. So it's sort of a total return bucket and a hedging bucket. So you may be down to two. And that's because people recognize the growing, if not complete bankruptcy of some of the buckets that have been used in the intervening 30 years. And as you know, in my writings, I've said there are a lot of marketing schemes masquerading as asset classes. There's infrastructure. It's not an asset class. Obviously, hedge funds is not an asset class. It's a contractual arrangement. It's actually a series of contractual arrangements. But there were buckets and they were disciplined approaches to allocating capital. Again, in David's case, it was to pursue opportunities to have a greater degree of illiquidity because it enabled him to put capital into markets where there was a large dispersion of results.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  43. “Sure. And we can do this by sort of a, I'll try to be as brief as possible, kind of a historical review, because I do think the world is radically different in 2017 than it was when either David arrived at Yale in 1985 or Jack arrived at Harvard in 1990. And a lot of the low-hanging fruit and a lot of even the high-hanging fruit has been picked. So I think if Jack were starting a tenure as the head of the Harvard Endowment in 2017, I think the policies and the strategies and the tactics that he would employ, he had a 15-year run at Harvard, so we'll stipulate if he were starting 2017 and he had to think about how am I going to manage it between 2017 and 2032, I think it would look almost nothing like what he actually did. David's approach is morphed too. So hold that thought. But you're starting in 85 and 1990 respectively. And in fact, they had buckets, right? So David's genius, of course, was to say,”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  44. “Diversification is the only rational deployment of our ignorance. How can you summarize what we do better than that? Now that doesn't mean you want to have an overly diversified portfolio. That's my critique of the endowment model. These portfolios are way too costly and complex and opaque. But I think that the kernel of truth in what Peter said is so obvious. And it's not dissimilar from what Howard Marx has advocated over the years. So we just don't know how the future is going to unfold. That doesn't mean that I don't want to ultimately allocate capital to people who've thought rigorously enough things so that they actually have a point of view. But it's a point of view around a broader distribution of outcomes rather than a single scenario. Single scenario thinkers are very dangerous in our businesses, I think you would readily agree.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  45. “Yeah, Howard is a great respect for him, and I try to read carefully what he publishes, his books and his memos and things. And I agree with your assessment of him. And even more helpful mentor to me in this arena of uncertainty was, of course, the late Peter Bernstein. And my sort of single favorite quote about investing comes from Peter, where he said, And this is your point, I think, Patrick. Diversification is the only rational deployment of our ignorance. And I've repeated that over and over and over again. Oh, you're not? No.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  46. “Go back and say not only were they right, but were they right for the right reason? And of course, in our business, you can often be wrong for the right reason because there's no certainty you're dealing with a distribution of probable outcomes, not a single point estimate. And that's another disqualifying attribute, frankly. It's not just an unfavorable attribute in my paper, but a disqualifying attribute when you talk with money managers, whether it's a single asset class focused only on US stocks or multi-asset manager, and all of their observations and comments in the discussion about their current portfolio position seems to be premised on the unfolding of a single scenario, which is sort of not only their base case, but it seems to be their sole case. And I find that extremely off-putting because the world just doesn't work that way.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  47. “Kind of impossible statistically to prove that a winning money manager has been skillful as opposed to merely lucky. And I often scoff at that assertion. I understand statistically why you need a certain number of observations to prove with a certain probability that something is the result of skill rather than luck. We all get that. Somebody can step up into the first at the major leagues and hit a home run. You don't want to extrapolate and say, well, if they have a thousand trips to the plate, they'll have a thousand home runs. So we all get the point. But what if there's an ex-ante explanation written out very carefully ahead of time and says, I'm buying the stock for this reason, here is where I think the upside is, here's where I think the risks are. Let's say that that memo is put in the file in 2003 when the stock is accumulated and it's not a winning stock until 2005 or 2006 or 2015. That memo is timestamped in the file and you can then expose.”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  48. “Looking at individuals, looking at societies, looking at political regimes, their adaptability to change their resilience, and they're constant in the case of individuals and money managers in particular, their constant yearning and appetite for improvement, whether it's improvement in the case of an organization or self-improvement in the case of an individual. I believe maybe overconfidently, maybe arrogantly, that you can determine that through conversation with people. Also, there's a separate little sidebar conversation about the extent to which a capital allocator, I don't want to put myself exclusively in that bucket, but that's certainly the focal point of my professional labors is allocating capital. The extent to which you can rely on the written word to distinguish between luck and skill. So that's an important part of this framework that we've been talking about for the last several minutes, the sort of four-part framework, because people often say,”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  49. “Capable of doing what you think I'm capable of doing. Here's your money back. What higher and sterner test of integrity can there be in a business that's asset, that entails asset-based fees than that? So I don't want to be Pollyanish about it, but I do think you can go back and ask questions. They're not off limits. So, Patrick, tell me, you know, what sports did you engage in? What were you like as a high schooler? How did you choose your major in college? Who were your favorite teachers? How did you decide what your first job would be? What was that like? How did you wind up where you are? And you go back through that career path. And you can, again, highly imperfect pursuit, but try to get Indisha of the conscious pursuit of excellence. And that is the ultimate safeguard, I think, to dialing up the probability of success in a business where if you're discernibly of 50%,”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source

  50. “Do I see evidence that they've consciously pursued excellence in just about everything they've done? And I don't mean karaoke night where they're an amateur. That doesn't matter. But serious professional pursuits. Have they consciously pursued excellence, even if they've never achieved it? Maybe they've had some conspicuous failures. But you can see that the effort was there because the ultimate judge in my judgment Of success for people who are going to be good at doing this is going to be themselves. They're going to look themselves in the mirror, not just at the end of their career, but every day along the way and say, am I doing my best work in the best manner I possibly can. Even to the point of having to go back to the clients and saying, you know, I don't think”

    2017-05-23 · Invest Like the Best · David Salem - The Art of Asset Allocation - [Invest Like the Best, EP.38] · IDENTIFIED FROM THE TRANSCRIPT · source