It wasn’t easy.
I didn’t actually have an answer for what
should I be doing.
But a couple months later, I came up with
a, not that I knew it was right, but was like
I think the structure of technology being
surrounded by it here and investing in some
of it at that point, I thought the structure
of technology, which does not mean revert,
it’s like a very fast changing thing with
a lot of non-linear outcomes, I thought the
structure of technology was favoring the highest
quality, human capital, which is essentially
the opposite of commodity.
In 2011, after being invested over 10 years
in, 10 years in energy and eight years in
Gold, I’ve been invested for nine years.
I had this weird experience where the three
commodities I was long all went up, but the
equities associated with those commodities,
all were down.
Like gold was up 17% in 2011, and the gold
equities were down 17%.
Just don’t make any sense.
And the top I remember, was I think Osama
bin Laden was killed, I believe.
And I also remember reading a Wine Spectator,
I think the top in Bordeaux prices was April
of 2011.
But what happened was, there was a top in
sort of things associated with growth.
And I guess you could say there was a risk
that was removed.
But the spot commodity actually acted quite
differently from the equities.
And equities were discounting the future or
perceptions of the future, it was almost like
Chinese were sellers in 2011 or something,
but the market didn’t know.
And anyway, but after 10 years and evaluating
postcrisis what the macro situation was and
how much growth could we really get out of
the world, Europe was a challenge.
I just came to the conclusion, we weren’t
going to get enough growth in the world.
Not enough to support it.
And actually, I should trust the equities
and not the commodities that I was long.
If you’re long in on commodity equity, you’re
really long with commodity equity, you know?
You think you’re long with commodity, but
you’re really long the pricing and liquidity
in the equities.
And it was very difficult.
I sold every position I had, except for two.
One was a refiner and one was a specialty
chemical company, got acquired a few years
But I just got out.
And I took a real about-face, and my team
thought I was kind of crazy.
And as I think of, it was probably a right
brain moment.
I didn’t know that I was right, but I thought
there was a good chance I could be, and I
had to re-evaluate the world.
And so that’s I did.
And by the beginning 2012, I came up with
a different conception of how I should be
Because I’m always looking for what is going
to be different five years from now.
It’s just the way it works.
It’s like the markets are totally repriced
five years later.
And I thought this was the end of an era.
10 years for me of being invested in commodities.
And so that’s where I got to a belief that
human capital was what one should be long.
And I was just the opposite of commodity.
It’s actually, I mean it’s difficult to convey
to people how hard that is for a professional
investor, particularly somebody who had the
industry footprint as yourself, right.
I mean, your clients had heard for years.
How commodities were an under-appreciated
The dollar was a problem.
That China was going to go to the moon, et
And as you mentioned, your team probably resisted
quite strongly.
And probably built a team that had mining
experts and very little a human capital.
And so that was, it’s a remarkable change.
And it also creates conditions in which paradoxically,
from an institutional standpoint, it creates
a tremendous amount of uncertainty.
You must have received not just pushback from
your team, but your investors probably said
quite sharply, what are you doing?
I mean, gold is, gold is at all time highs.
And oil is back to above $100 a barrel.
And these stocks are incredibly cheap.
If you think of them as investing in the commodities.
Am I incorrect in that assumption?
Or was that something you really faced?
: It’s true.
But this is a left brain and right brain activity.
Your right brain is spotting patterns, and
using intuition and sort of animal senses.
And your left brain is logic and the lawyer
and the accountant and I find that, I think
I have a good mix of the two.
And I find that too many people in investing
and finance who are left brain focused and
can miss signals.
But I don’t know, it wasn’t easy.
I didn’t actually have an answer for what
should I be doing.
But a couple months later, I came up with
a, not that I thought I knew I was right,
but it’s like I think that the structure of
technology being surrounded by it here and
investing in some of it at that point, I thought
the structure of technology, which does not
mean revert, it’s like a very fast changing
thing with a lot of non-linear outcomes, I
thought the structure of technology was favoring
the most, the highest quality, human capital,
which is essentially the opposite of commodity,
the opposite of lowest cost available commodity.
And by thinking about that, and being around
it here, and knowing that the cost of creating
technology was just getting cheaper and cheaper,
I came to conception that maybe the surprise
is how valuable, how much more valuable the
best, the A students in the classes, is what
I said, that really should just belong to
A students in the class and short the rest
of class, it doesn’t matter.
Whereas commodities, you’re looking for that
something needed that has a very below cost
and is cheap to transfer.
But doesn’t actually require tremendous ongoing
So that was like a set of ideas and thoughts
that had sort of evolved and emerged.
And then I realized by selling, I was making
way for it.
The biggest problem was that I ran a diverse
sectors and had many different teams.
And I didn’t decide to abandon the mining
team and abandon the energy team.
Energy peaked last in 2014.
But anyway, but I do know that markets every
five years look completely different than
they did five years before.
And security prices move so much, that it’s
always this new recognition of change.
And I focus on change.
That’s the thing that is dependable.
But it happens in different ways in different
It was until 2013, the beginning 2013, that
growth really took off.
And then that’s when tech really started to
do better, I’d say.
It wasn’t so clear that tech was absolutely
the thing to do I think.
Well, it definitely wasn’t.
You mentioned something that I think very
few people are able to articulate as well
as you just did, which is that technology
does not mean reverting.
And so you and I both came of age bracketed
on either side by technology bubble.
So the ’96 to 2000 time period.
You and I both looked at that.
Makes you think it’s been reverting, but that
Yeah, I mean, the assumption was, OK, valuation
is what matters.
And if we look at things like mining companies,
they were deeply neglected, and therefore
they are value.
And they were, but mainly because of 20 years
since the top and China was coming and people
didn’t know is what ended up happening.
And the dollar got cheaper, and was also place
to avoid the carnage of
Oh, the tech—
Yeah, the 2000s.
Yeah, I think that’s absolutely correct.
And I think that’s what we’ve paradoxically
seen, is that value has actually now had its
longest run of underperformance.
It had a very brief window basically from
2000 through 2006, in which it made up a lot
of lost ground.
But if you actually look at that approach
to investing, it’s been an unmitigated disaster.
For the past 30 years.
And it always sounds far more rational.
I mean, who wouldn’t be pro value?
I mean, who wants to be the momentum guy.
That makes you sound like a moron.
But really, there is, there’s something deeply
insightful about that idea that mean reversion
is kind of silly, and the idea that energy
is expressed by a petroleum or other sources
is going to be as large of a purchase component
of our purchasing basket as it was historically.
It’s very hard for people who made a lot of
money and who built up a notable reputation
on that basis.
So you mentioned you made this transition
and you didn’t abandon your teams, your mining
team, et cetera.
And you were 100% right.
But what challenges did that create for you
I mean, how do you think about that transition
decision not to just wipe the board and move
on in a different direction?
Well, part of it was you can always be short
things that you were long.
But you do also need your team to believe
in these things.
And again, I had this belief idea that this
potentially a big transition.
And so I started to do that, be short commodities
instead of long.
And see them as a hedge to things with growth
and more human capital.
But running a diverse funds where you want
the vol to be relatively low, it’s hard to,
, you have limits on how much you, we had
limits on how much we could put in any one
So I actually had no risk base imposed limits
on where we could put capital.
And I would have been better off retrospectively
saying this is my belief.
And when I validate this hypothesis, I’m just
going to go focus on this.
And forget the other stuff.
I believe that’s the right thing now, because,
I think, what I’ve noticed for a long time
is, although the economic growth may be OK,
and right now it’s good, but I don’t expect
it to be that great.
The change, the change is actually increasing,
regardless of economic growth, because structurally,
as tech advances, it releases new information.
In fact, the new information growth is tremendous.
And that new information therefore, eliminates,
creates realities and recognitions that you
didn’t have before.
And so it changes people’s behaviors.
So I think now I would’ve been better off
saying I’m going to go with, when I really
got to believe this was the case in 2012,
I’m just going to focus on this, because that
would increase my chances of understanding
it and getting return from it.
But it would have added to my risk level.
And it would have been a meaningful change.
And so what I did personally, was essentially
start investing much more heavily with my
own capital to test this hypothesis.
And I had a belief that San Francisco real
estate was going to do really, really well.
I was the biggest bull that I knew.
Because I thought human capital is what really
meant the most, and the density of human capital.
Human capital basically attracts other human
capital And I thought, so I’m going to test
this with my own capital and not diversify,
and get more feedback, more information and
see how it went.
And so it did go well.
I didn’t put a huge amount of time into it,
but I tested it with my human capital, my
own personal capital.
And essentially, what I’m doing now, is essentially
saying, I am not going to allow the drag of
things that are not interesting or that fit
my hypothesis slow me down.
I’m actually going to focus my attention,
which is limited like everyone’s, on what
I think about the hypothesis, of what I think
is going to be the next five years.
And so I learned I actually would have been
better off abandoning more and betting on
this belief, at least working as hard as I
could to validate the hypothesis.
And even though I know people want to put
you in a box, they want you to do something
repeatable, they don’t really want you to
diverge from that.
But markets change.
They learn, they learn, they reprice, and
then the world is actually a different place
five years later, 10 years later.
And tech is a, globalization has created a
different place, tech’s a different place.
The thing that absolutely threw me out of
this, was central banking.
Central banking essentially created a non
mean reverting supply of liquidity, which
you could say removed a certain prudency of
those who are looking for change in liquidity
that create change in the price, and the desire
to be aggressive or conservative as a mean
reverting thing.
And allowed, in a way, this progress towards
this ever increasing tech-enabled future to
happen even faster.
And so the limitations, the human limitations
of not wanting to prevent that made me think,
I’m not going to subject my career and capital,
investors’ capital to getting that behavior
correct, when this trend in tech is only getting
more powerful.
I find it now hard to have a discussion about
almost anything without including technology
as part of it.