TIP170: A BET WITH WARREN BUFFETT

W/ TED SEIDES

24 December 2017

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

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IN THIS EPISODE, YOU’LL LEARN:

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

TRANSCRIPT

Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Preston Pysh  0:02  

Today’s interview is a fun one because we’re talking with our friend Ted Seides. Ted is a graduate of Yale and Harvard University and he comes with multiple decades of experience in finance. For people not familiar with Ted, most might recognize him as the gentleman that took the opposite side of Warren Buffett’s bet with the hedge fund industry. 

In today’s episode, we talked to Ted about his friendly wager with Warren and how it came about what the results were and what he thinks about the chances of beating the S&P 500 moving forward. 

Something else that’s interesting about Ted is that he has extensive experience working for one of the most famous investors, David Swensen who has been the Chief Investment Officer for Yale’s Endowment for decades. He has an average return over the past 20 years of 25% annually. 

At the end of this interview, we talked to Ted about working for Swensen and what his greatest strengths were. We also asked Ted to compare David Swensen to Warren Buffett, who Ted has also become friends with through the past few years. So without further delay, let’s hop to it.

Intro  1:05  

You are listening to The Investor’s Podcast where we study the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected.

Preston Pysh  1:25  

All right, everyone, welcome to the show. We are super pumped to have Ted Seides with us today. Ted, thanks so much for taking time out of your busy day to join us. So Stig’s got the very first question for you, Ted, and he’s gonna kick it off.

Stig Brodersen  1:39  

So it probably doesn’t seem to be obvious to most investors that you would bet against Warren Buffett in the game of investing. But of course, there’s a lot more to it than that. Could you tell us the entire story of what led up to your 10 year charitable wager with Warren Buffett where he was taking the S&P 500 index fund and you were taking 5 funds of hedge funds?

Ted Seides  2:04  

Sure, I guess 10 years ago a little longer, probably in the 2005 annual meeting, Warren had written about the “head rocks” and the Gotrocks. It was really the concept of helpers in the investment industry taking a toll on the people with the money. 

In his meeting, he had made some statement that he didn’t think a group of hedge funds could beat the market over time. However, a year later, I saw a transcript of one of the Q&A’s that he had done with a group of college students. 

In it one of the students had said, “I heard you said this, that hedge funds couldn’t beat the market. How come no one’s taking you up on it?” His response was, “Well, I guess since no one did. I must have been right.”

I was sitting around my office in the summer of, call it 2007. For lots of reasons, I’m happy to talk about It felt to me like that was just a rare time where he said something that I just didn’t think was factually correct. So I wrote him a letter. I wrote an old fashioned letter. I had heard he is notorious and how he responds to letters, and he is.

Preston Pysh  3:15  

So then where did you go from there, Ted? So you got the letter back from Warren?

Ted Seides  3:20  

Yeah, this would be a fun thing to publish. I don’t think I’ll ever publish it. The letter exchange itself is very entertaining because I initially said, “Hey, I heard you said this, I would propose this group of funds, and I’m not sure what stakes that you’re proposing for the bet. But I would suggest a dinner at *inaudible*.”

Then he sent something back that was very short and said, “Well, it has to be a lot of money and has to be collateralized.” 

I went back to him and I said, “Wait a minute, you’re saying this has to be collateralized. But that just introduces helpers to a bet that’s not supposed to be about helper.” 

So we went back and forth on that, then it actually even got into things like, “Well, what’s the probability that he won’t be around in 10 years because we have to think about that?” 

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Then, I said, “Yeah, but you have a partner, Charlie Munger, and if you guys are mutually exclusive, and how long you’ll be around, the odds are very low that one of you won’t be around. So you can just hand it off to him.”

So there’s this long back and forth, and eventually we said, “Okay, let’s just do this.”

At the time, we hadn’t spoken. It was all written communications. Then we started chatting after that at dinner a few times. One of the funny things about it was that he does and has bought companies on a single sheet of paper as he talks about, but this charitable handshake ended up being like a 25-page legal contract.

Preston Pysh  4:42  

Wow. Why did it end up being such a huge contract?

Ted Seides  4:45  

Well, a couple of reasons. One is that it’s just not that easy to make a legal bet. That was how his attorney found this long bets foundation that allows for this type of thing to be done in a legal way. Then, also you have to think about the mechanisms of what can change. 

So the S&P 500 index fund is going to be around for 10 years, but you don’t know what happens with a group of say, “fund of funds”  in this case. There were some mechanisms if the “fund of funds” had gone away, so just make it so that it was planned in advance. So there were a lot of little things like that that came up. Why was it 25 pages? I don’t remember but it was long.

Stig Brodersen  5:27  

How long did the process take from the very first letter and until like you signed the papers?

Ted Seides  5:33  

Our letter correspondence happened very quickly. At the time, I was very surprised. Even at first, I sent him a snail mail letter, and then it was an email. He doesn’t have an email address, which is a funny story in and of itself. 

Though, I would say we went back and forth for a few weeks, and once we had agreed to what the terms were going to be, it was probably two months or longer of a legal contract. I think the communication started in the summer of 2007, then the bet started January 1 of 2008.

Preston Pysh  6:03  

That’s incredible. So talk to us about how things got started. If I remember right, you were ahead initially like the first couple years, right?

Ted Seides  6:11  

By a lot. My premise of the bet was actually quite different from his, because you can make the question like, “I must be an idiot, right? Why would you bet against Warren Buffett on anything that has to do with investing?” 

Generally speaking, that’s right. I’m not taking the other side of his trade, which is a totally different situation. 

However, if you look at history, and you look at valuations, and there’s all kinds of factors, you could point to that. [It] would have told you that the process was a good one. We now know or at least, we’re sure we’ll know in a week and a half, but the outcome wasn’t the one I had anticipated. 

But even today, when he talks about that, as if it’s a fait accompli, that fees would inevitably doom hedge funds to lose this money. At the time he said he only thought he had a 60% chance of winning. 

Preston Pysh  7:04  

That’s interesting.

Stig Brodersen  7:06  

You said that Warren Buffett deemed it to be around 60% probability for him winning the bet. What about you? Like, I suppose that you had a different number in mind. So how did you compute your own chances of winning the bet?

Ted Seides  7:18  

85% of what we said. That was based on when you could look at two different things. You could look at hedge funds, and you could look at the S&P 500. They are related, but they are very much apples and oranges. To that point in time, if you had looked at data, there had never been a 10-year period when the S&P 500 had beaten a portfolio of hedge funds. 

Not a long history, but 25 or 30 years of history, and then you could look at the history of “fund of funds” at that time. There had never been a 10-year period before this last 10-year period where hedge funds had underperformed the S&P. 

Preston Pysh  7:51  

I know you can’t talk about the actual funds that were in the bet. Is that correct? 

Ted Seides  7:56  

Correct. 

Preston Pysh  7:57  

Now, let me ask you this is there a composition of private equity or is it just publicly traded businesses? Or is it a mix?

Ted Seides  8:05  

No, they were all hedge “fund of funds” because hedge funds can cover all kinds of things as you’re alluding to. For the most part, we picked funds that invest more globally than the US, but only in long short equity as well. 

However, a big conviction in the bet in the first place was that the S&P 500 was trading at a historically high valuation. So hedge fund returns shouldn’t necessarily be driven by valuation but clearly, if you start, in you own stocks with a high valuation end up with a low outcome. 

To your point earlier, that’s what drove this massive outperformance of hedge funds from the S&P in the first year that carried through to four or five years. Warren has said in his annual letter that, “Well, this was an average period of performance for stocks, and it was over 10 years.” 

History would never have told you that you would have had an historically average performance starting at a historically high valuation.

Stig Brodersen  9:05  

So what happened after four or five years when Buffett’s S&P 500 index fund took the lead?

Ted Seides  9:12  

Well, I’m not sure there was a lot of trouble. The hedge fund performance has been weaker than I would have thought and weaker than history, but not because the S&P 500 has done so well. So some of that a big driver of that is the nominal level of interest rates. So cash return or the return on your cash balance is a component of a hedge fund return. 

There’s not a component of the S&P 500 return. When rates go from, say, 4% at the beginning of the bet to zero, you would expect to have a few hundred basis points of lower nominal return. So that’s one big driver. 

The other big driver, I think, is just a continued increase in competition in the space. A lot of people have asked me if I would take the bet again, and my answer has been no. But it’s not because I don’t think that the odds are favorable for the same set of reasons for hedge funds. It’s that I don’t think they’re as favorable.

Preston Pysh  10:06  

If you would have talked to somebody three or four years after this was put on, you would have been like, “Oh, man, Warren’s going to lose big time on this one.” Then, the tide really changed. They’re about [a] halfway point. I found it funny when the bet was initially put on, and he was way down.

It was a really quick discussion during the shareholders’ meeting. However, after you got close to this 10 year mark all the sudden, I mean, it’s got a full write up in the shareholders letter that got sent out. I mean, a lot of times spent… Is that a coincidence?

Ted Seides  10:42  

Something that was kind of interesting in the second or third year of the bet, Warren had gone through a period of time. I think it was a 5-year period. It was like the first 5-year period that Berkshire had underperformed the S&P. 

Also, he had a quote in one of his annual letters that talked about how the starting or ending valuation, even for as long as a period of 10 years can dramatically influence the relative results. I used to put that in a presentation. That was his concession speech for the bet. 

Preston Pysh  11:14  

The thing that I think that this has had a huge impact, because I mean, you can’t talk to anybody that’s a value investor that doesn’t know about this bet. I think one of the things that we’ve seen is that the bet has really kind of poured more into the ETF side of things. You’re buying an ETF today, it’s just total mindlessness. I think for the typical investor, ETFs are a great vehicle for them. 

However, I think for if you’re a hardcore value investor, and you’re out there looking for picks that are way undervalued, I think it’s kind of created a little bit of an opportunity because so many people reference this bet is, “Hey, you’re not going to go out there and find an individual pick that’s undervalued.” That’s just my personal opinion. I don’t necessarily know that I agree with that. Well, I’m curious to hear your thoughts, Ted.

Ted Seides  11:58  

Why don’t you have a separate TF from index funds in that context? I think that’s right about index funds. Michael Mauboussin talks about this that the more money that was naive money that’s moved in index funds, has left the rest of the players in the game smarter, in general, on average. He calls it the paradox of skill. 

So the relative competition in markets is higher, because so much of the capital that moves into index funds was the money that the smart money was taking off, in theory before.

Stig Brodersen  12:31  

We asked our audience if they had a question for you. We have a lot of hardcore value investors out there. So obviously, we got a ton of responses. One of our Twitter followers, Brian Clark, he’s asking you specifically, why did you pick the funds? He’s saying that you get the fees. It would be harder to beat the market that way. Why did you select this approach or your thought process behind that?

Ted Seides  12:54  

Sure. Well, there are two reasons why one is just logistical which is if you’re making a bet like this, the chances of any particular hedge fund lasting 10 years is much lower than the chances of a “fund of funds” lasting for 10 years. So to do something like this, where you’d have to turn over the portfolio a lot, was just going to be very challenging. 

However, the real reason I actually initiated it, tempting him with “fund of funds.” If “fund of funds” outperformed the S&P, there is no chance that you could come up with an excuse of why hedge funds didn’t have value in the marketplace.

Preston Pysh  13:33  

So a little ego got into this?

Ted Seides  13:35  

I wouldn’t call it ego. As much as it was… He made a statement. I thought in his statement that he had picked the wrong benchmark. So if you had appropriately measured a hedge fund against its relevant market exposures, and had an apples to apples comparison and on one side. you had a lot of fees and on the other side, you don’t… You would expect to lose and you would never make it that bet.

However, that’s not what the bet was, right? The bet had all kinds of implicit underlying biases, there were biases of the US versus global markets. There’s a bias of large cap versus small cap, all of which most of the time would matter more than the layer of fees. In this particular period, large-cap US ended up being the place to be in global markets. So that was as much of drivers losing the bet, if not more than the fees itself.

Preston Pysh  14:29  

Now, I think what’s really important for people to think about is the time horizon and maybe if you would slide the time horizon to the left or the right, you might get completely different results here. Or if the Fed when the fees are so incredibly long, you might have seen some different results here. 

For people that are making decisions that are completely based off of one data point, which is this bet. I think you just got to be careful. You got to think a little bit deeper than that, and maybe not be so judgmental after just one example. 

Ted Seides  14:59  

I’ll give you a fun anecdote to that point. Through this nine years where the hedge fund side of the bet was lambasted for every reason you could imagine in the press. If you had just switched the benchmark from the S&P 500 to the Morgan Stanley World Index, which is probably a closer representation to the types of securities that hedge funds were buying and selling, they were almost exactly the same performance. 

So just that shift of S&P to global markets, of which S&P is…I don’t know, I think the number is about 40% of that global index. Just that shift itself would have completely changed the way people thought about the bet.

Preston Pysh  15:37  

That’s pretty interesting stuff. So you’ve worked in finance for years. Talk to us about some of your investing experience that you would classify as a highlight, and then also talk to us about what you would consider a huge setback, the balance between those two.

Ted Seides  15:52  

One of my favorite early highlights in 1994, I was managing Yale’s bond portfolio. To go back in history that was a year, really through the early 1995, where the Fed hiked interest rates. I don’t remember the number of times, 6 to 8 times Fed Funds went from 3% to 6% in that period of time. Bond funds blew up left and right. I was managing a, call it, an index. Not quite an index tracking, but it’s sort of an index plus portfolio. 

It had top decile performance and that year, it also coincided with the very first time I was in front of Yale’s Investment Committee. I was sitting in, about to give my first important presentation in my career to a bunch of investment luminaries. One of whom was Charlie Ellis. 

Charlie, in his attempt to praise us and me for that performance, gave me this complete softball question: “Effectively, do you realize how great this is to be top decile? Just being disciplined and doing simple stuff.”

I had practiced my two and a half minute presentation so many times in my head. I was 24 years old [at that] time that I didn’t even hear his question. I completely fumbled it and it turned into this great laughter. So it was sort of a great investment success and then a great failure at the same time. 

If I think about mistakes, I would characterize rather than just one there. There are so many that you make. I would characterize them in a few different ways. One is there’s a repeated pattern investing in funds of exiting after managers have weak periods of performance. That happens, despite the awareness of performance chasing. I spent a lot of time with my team and the years of Protege looking at the data and then trying to assess why is this happening?

What you would find is that similar to investing in the stock when we invest in a manager, we would create a qualitative hypothesis. We would lay out risks to try to keep us on track and away from numbers. 

What would happen would be that when a manager went through a soft spot a performance, you would look at the risks and say, “Aha, we knew that this was risky, because of these reasons. Therefore the managers and as good as we thought, and we would exit.”

You would never have a period of time where a manager had access to good performance, and you would look at your hypothesis and say, “Aha, we were right. Therefore, we might run across these risks, and we should exit.”

I would say there were a lot of decisions where you end up exiting at the wrong time. Then there were lots of I mean… I remember so many errors of omission… Of things where you were looking at or you had a belief about risks in the markets and didn’t take enough action. Then the manager’s business, you really have to be looking at a year, year and a half at a time to be able to take action.

Stig Brodersen  18:53  

Interesting. 

So Ted, we’re really happy that you want to come on the show because we haven’t talked too much about hedge funds on the show. It seems like it has really gained a lot of popularity. I think the numbers have bounced around 2000 hedge funds in 2002, now more than 10,000. 

Even though it seems like the tide has turned over the past few years, [there is] still a lot more popular type of vehicle that we’ve seen in the past. What do you think is the main reason for this? And who do you think that hedge funds really appeal to? You can’t say Warren Buffett.

Ted Seides  19:31  

Well, let me start by giving a little pitch for my own podcast, “Capital Allocators,” because my very first exposure to podcasting, I was a guest on Patrick O’Shaughnessy’s “Invest like the Best,” and we did a deep dive on hedge funds and for a whole bunch of reasons. I’m putting that episode on my feed next week. That’s an hour discussion of basically [the] past, present, and future of hedge funds. 

So to that specific question, the number of hedge funds doesn’t matter. It’s a highly constant traded industry, it’s only getting more concentrated. So when people think about the impact of hedge funds on the market, the returns of hedge funds, the experience of investors and hedge funds, you’re really only talking about a few hundred large hedge funds. 

However, the reason there are so many, at least historically was the compensation structure was so lucrative. So let’s say someone from college, who was a very diligent, hard working C-minus student, and they didn’t have a rich uncle, but they had a best friend whose cousins’ brothers’ sister had a rich uncle. Then the rich uncle decided to give them $15 or $20 million dollars to play around with because they had a nice smile.

So this C-minus student probably doesn’t have huge earnings potential. However, now they have a hedge fund and they’re managing $20 million. Well, the typical management fee on that is $300,000. 

That person probably can’t find another job that’s going to pay them $300,000. So that counts as one of the 10,000 hedge funds, but any professional investor is not really going to take that fund seriously. That probably constitutes well over half of the 10,000. 

When you have your own filter, and it’s based on experience of success… There are many, many funds that you would screen out because you just don’t think they can compete with the others that you choose to entrust your capital with. I do think the popularity came about for two reasons. 

One from the individual perspective, you have intellectual flexibility. You have more arrows in your quiver to go long and short. From an institutional perspective, you had this period of time from 2000 to 2002, where hedge funds had a trade on particularly long short, which was mostly long, small value in short, highflying growth. Hedge funds en masse made very good money when the public equity markets did not.

Preston Pysh  21:57  

So people that are listening to this if you want to listen to the discussion that Ted’s talking about with Patrick, we’ll have a link to that in our show notes, so you can listen to that. So Ted, I’m curious, who’s an investor out there that you really admire? [And] more importantly, why?

Ted Seides  22:14  

There’s no one I admire more than my first boss, David Swensen, at Yale. It’s for a whole bunch of reasons. The primary reason is who he is, as a person. 

Preston Pysh  22:26  

An absolute legend. 

Ted Seides  22:28  

He wasn’t the legend when I worked with him. He became a legend after he wrote his books in 2000. So that was a few years after I had left. He’s an original thinker.

In the early 90s, or mid 90s, short term interest rates were five or 6%. In the modern hedge fund era, we have not seen term rates at that level. What that means is that if the fee structure is, let’s call it a 1 1/2 and 20 if you were to go long the S&P 500 and short the S&P 500, you would get a short rebate on your cash. AYou’d be up about 3.5% or 4%. Why shouldn’t investors pain incentive fees for no value added? 

So in the mid 90s, Yale used to impose cost of capital hurdles on their hedge fund and because they created those fee structures with managers that today may be very, very well known successful managers, but they were an early investor, they still have those structures in place. 

As opposed to other people who talk about wanting more favorable fee structures, but aren’t disciplined enough to impose it yet would walk away from funds, they thought were fabulous, but didn’t have the fee structure they wanted.

Stig Brodersen  23:34  

Talk to us more about this fee structure and development. The reason why I asked is that you’d been in this game for a long time and really been following the different investment bonds and how that has changed. 

Now over the past decade or even two, we’ve seen this giant inflow in ETFs. Where do you see this fee structure go for each of them? And this is really a race to the bottom and how do you really, I guess, distinguish yourself with the higher quality?

Ted Seides  24:02  

Great question. Absolutely it is a race to the bottom. It should be the way. I’ve always viewed it as anytime you look at the Forbes 400, and it all of a sudden it’s dominated by one industry. Some time in the next 10 years there are problems in that industry. 

So that was the case with hedge funds 10 years ago. That is the case with technology today, and it’s not that hedge funds are going away or the technology is going away, but something will happen that we can anticipate. 

So the hedge fund compensation structure got created at a time where hedge funds were a boutique industry and had all kinds of opportunities to extract value from the market. When the market was really dominated by, I would say index funds, but long only vehicles that mostly replicated the index. So there were a lot of inefficiencies. 

As the years have gone on, those efficiencies get arbitraged away. The opportunities to extract value are harder and harder. As a result of that, the fees inevitably will come down. I don’t think the hedge fund vehicle, which is really nothing more than an investment structure that has broader flexibility than call it the traditional vehicles… *inaudible* go away, nor should it, but the fees will change and come down. 

What’s happened with the explosion of ETFs is it’s changed the definition and understanding of what value added is. So even 10 years ago, is the beginning of the bet that I made with Warren. If you didn’t pick an index fund, and you wanted to express different kinds of views in the market from just a portfolio of stocks, you had to pick a hedge fund, you had to buy the whole pizza. 

So the whole explosion of factors, which have been around for a long time, I mean, I didn’t quite understand what was happening with factors when it happened and why it mattered because when I worked at Yale, Yale’s long only US equity portfolio. 

They chose it to always be a systematically long small cap and value. But when you took factors, and then turn them into low cost products, then you have to look at what is really value added. Is it just outperforming the market? Or is it outperforming a factor?

Preston Pysh  26:18  

So, Ted, I want to talk more about David Swensen because we’ve read about David and the way that he manages Yale’s endowment, but I’m curious for a person who actually worked right alongside of him. 

What would you say are his top three gifts, if you will, when you think of the way he analyzes the markets or the way that he assesses taking positions?

Ted Seides  26:40  

They’re probably no different than any other investor in stocks. So his top three gifts are, he has an analytical advantage over everyone else. He is just smarter and thinks about the world better and more clearly than everyone else. The second is he has an incredible behavioral temperament for investing. He is a contrarian and has no problem buying in when others don’t. 

The greatest example of that is he took the helm in 1985 at Yale. He was 31 years old. He had a few views that hadn’t fully evolved, but one of them had to do with disciplined rebalancing. Two years later, he’s 33, October 1987 comes and the market crashes. Then, he goes to the committee and he says, “This is when we buy.” Incredible, right? So not many people can do that in practice. 

The third is that he has created an ecosystem around him. He’s gifted at communicating, and that includes what creates the governance structure. So he’s gifted at communicating with this board. He’s gifted at communicating with alumni. He’s gifted at communicating with his team and teaching his principles. [This] is why he was able to write such a fantastic book. Then you put that together, there just aren’t that many people. 

Preston Pysh  28:00  

So to your first point about him being just analytically smarter than almost anyone you’ve come in contact with. I know some of that’s genetics, but you think a lot of it is also that he just reads like crazy?

Ted Seides  28:11  

Not for him. He does read, but he’s not Warren Buffett that sits around reading books, reading all day, every day. So when I was stupid in 27, and I had worked there for five years, I kind of implicitly knew that I was working with someone who always had the answer key. 

So you’re in college, and you take a test, and there’s an answer key, and you get it right or wrong. Then you look at the answers and you say, oh, okay, I made this mistake. Over a number of years, you start to figure out the answers to those questions on that test. When I was 27 and left, what I didn’t realize was the test changes every couple of years. 

However, David is someone who always has the answer key. He just figures it out independently, on his own. He’s just really a brilliant thinker. I’ve been fortunate to have many conversations and dinners with Warren and he can tell you a story about anything about sports, about politics, and the way he describes it, you just nod your head. It’s just he oozes wisdom. 

Seth Klarman is the same way. Seth and David Swensen were very close way back when, even before Seth took any outside money. So I had a chance to meet him then and I get a chance to see him every now and then.

Preston Pysh  29:28  

So here’s the next question I got for you: Warren Buffett, David Swensen and Seth Klarman walked into a bar. Who’s the smartest?

Ted Seides  29:36  

Well, like, I mean, that’s not… I don’t think anyone can answer that question.

Preston Pysh  29:43  

So when you think of those three guys, what really stands out when you think Warren Buffett, like a one word response, what really stands out for each one of them?

Ted Seides  29:51  

I think it’s the same things I talked about with David. There are three components. One is they just are that smart. Analytical edge is how we think about it in investing. The second is they have incredible temperament for this work. The third is in each their own way they have created an investment structure around them that’s conducive to successful long term investing.

Preston Pysh  30:15  

Do you find Swensen more similar to Buffett or to Munger? Munger is like an expert in anything, like anything you can talk about, Munger can talk. Warren’s more focused on the investing side. What would you say Swensen is like?

Ted Seides  30:29  

He’s in the middle. Well, I mean, I think certainly in the investment realm, but it’s different. So David will have opinions about certain types of companies and industries, but he’s never been the stock picker. So he won’t know the intimate details of companies and the history of businesses the way that Warren or Charlie probably would… is pristine and is probably closer to Munger but he’s not as *inaudible* as Munger.

Preston Pysh  30:57  

Well, let me ask you this since you’ve had a couple engagements with Warren, what do you find different on those one on one engagements with Warren than what the public typically sees go into like a shareholders meeting?

Ted Seides  31:07  

His *inaudible* it’s actually with Patrick and *inaudible*… I brought them out. We spent 45 minutes talking about college football. Warren could have been a color commentator for Nebraska Football. He starts telling [me] that I’ll give you the examples. Just a super fun story. He started telling a story because Patrick went to Notre Dame about this a few years ago. There’s a big Notre Dame, Nebraska game coming up and he knew the coach at Notre Dame. 

So he had heard that one of the star Notre Dame players don’t remember who it was. [It] was sort of a budding investor and first time investor. So he calls the kid up in this dorm room. He says, “Oh, it’s Warren Buffett, can I talk to whoever it was?” 

He doesn’t really… First he thinks his friends are playing a joke and he realizes it’s Warren Buffett and he says, “Look, I’ve heard you’re investing. I’d love to help you out. I want to give you my two favorite stock picks.” And the kids all this is, “This is the week before the Nebraska game and he’s like great. “And he says, “Sure, just send me the playbook.”

He was so full of…So you think about a story like that sort of sports, talking about education systems to politics to you name it. He is just so clever and funny. I think that’s… It’s the same persona that people see. But I think when you’re with him one on one, you realize how earnest it is.

Preston Pysh  32:36  

That’s incredible. Thank you so much for sharing some of those stories because I know… I mean, Stig and I are eating those up, and I’m sure some of the audience are curious to hear some of this stuff. 

Ted, awesome, awesome discussion. We really enjoyed having you on the show. Please tell people where they can learn more about you. Tell people about your podcast so they can listen to some more of your discussions.

Ted Seides  32:56  

Sure. Well, I’ve tried to encapsulate the professional part of my life in one place, and that’s at a website called capitalallocatorspodcast.com. It also has the feed for all the podcasts. The podcast is called Capital Allocators, and it’s available in iTunes and everywhere else so you can find it. That’s really focused… It’s a certain type of investment podcast. 

There’s a lot of CIOs of large pools of capital and in and around the ecosystem of people who allocate capital. So it’s been a lot of fun. [I’ve] been doing it for about 8 months, and there’s plenty of hours for people to go back and listen to if they want.

Preston Pysh  33:30  

Fantastic. I got one final question for you. Are you going to the Berkshire meeting this year?

Ted Seides  33:34  

I need to get my face screened in one more time. I certainly will be going in May. I’ve really enjoyed it. I’ve done it a lot over many years. So I’ll be there.

Preston Pysh  33:47  

Well, you know, we take our community out there and hopefully we’ll be able to link up with you at some point over the weekend, because I’m sure a lot of our listeners would like to meet you. 

So people listening to this, if you’re going to the Berkshire meeting with us this may in 2018, you’ll get to meet Ted. Here’s some more of these awesome conversations. So, Ted, thank you so much for taking time out of your busy day to join us today.

Ted Seides  34:09  

Thanks for asking. Thanks.

Preston Pysh  34:10  

All right. So this is the point in the show where we play a question from the audience and this question comes from James.

James  34:17  

Hi, Stig and Preston, you guys are definitely geniuses. Thanks so much for the material. I’m James and have a question and it’s not about the markets. I have two children. One son is 16 and my daughter is 10. Both show some interest in money, and my son gets hooked when I try to explain economics to him. 

My question to you guys is, “If you have kids, at those ages, how would you nurture them so one day they can choose on their own?” Are there books for kids, every day game, habits, tasks with rewards that will benefit them? Thank you so much,

Preston Pysh  34:59  

James, I love this question and I promise you, Stig and I are so far from being geniuses. We are not even close, my friend. We are there learning with everybody else.

The thing I would tell you that is really, really important in my personal opinion is so many people look at the stock market in particular, and they think that they’re going to make a ton of money in the stock market. They’re going to become rich that way by being some stock market genius. 

What I would tell you is to not focus in that area and try to develop that thinking. What I think you need to develop in the kids, if they’re interested in money and how finance works, that kind of stuff has got to really teach them to want to own their own business and create their own product or service, and to own that equity. That is what’s really, really important. 

Whenever I think through the investing equation, I always think of it like this. I can create my own equity through a product or service that I create that adds value to society. Once I make that money, I can either reinvest that money into this business or service that I’ve created, or I can then take that money if I don’t have any good ideas on how to grow that business. 

Then, what I do is I take that money and I’d invest it non-operationally. When I invest that non-operationally, that’s the stock market. So that’s where my money goes, where I don’t have any good ideas that I can do on a micro level. 

So I would tell you [to] have them get out there. Start trying to think of how they can create a product or service around something that they love to do, because that’s where they’re really going to add a lot of value to themselves, and they’re going to build this base of capital. That’s really, really hard to do anywhere else on the passive investing side, because think about it, the market has huge multiples. 

That means you’re going to get low returns when you employ your capital into publicly traded businesses. You go into the private equity space, and you get much better multiples, but it takes a lot of money to buy a business in the private equity side. So you really got to kind of start something from the ground up. 

And so, whatever you can do to try to develop the entrepreneurial spirit, that’s what I would focus on with your kids and kind of explain to them why that’s important. [It] is because, man, when you’re working for yourself, and you’re building equity for yourself, there’s nothing else like that. 

When you’re going out and you’re getting paid, so you’re working for somebody else. They’re paying you 50K a year. You’re building 100% of the equity for somebody else, and that makes a big difference in the long run.

Stig Brodersen  37:29  

Yeah, I really like your approach about setting up a business. One thing I would like to add as I think it teaches the children one of the most valuable things in life, [and] that’s how to deal with rejections. 

If you try to set up your business, a lot of people would just say no. In a way, it’s probably easier for kids to deal with that than for a lot of self-conscious adults, because they are used to getting no’s all the time from the parents, typically. 

I think it’s such a valuable thing to…I wouldn’t say, [be] immune. I don’t know if that is healthy, but definitely being able to roll with the punches, whenever it comes to dealing with rejections. 

I also think that setting up a business will give you the respect for money. It’s really, really hard to teach something that I think life is the only thing that can teach you. I also think that if your children don’t want to go in that direction, and it’s more like a job with the pros and cons that it has. 

I would like to highlight something like delivering newspapers. It’s not only because it is the most common denominator for jobs that billionaires used to have, which is actually a fun stat in itself, but I think it teaches them a lot about being paid by a newspaper. [It’s] like you’re not paid by the hour. You pay them how efficient you are. I really like that, and I think that’s a good thing to give to the next generation in a very competitive environment.

Preston Pysh  39:03  

You deliver newspapers, that’s hard work. It’s teaching you the value of just grit and hard work. 

Stig Brodersen  39:10  

It’s hard to find a lot of goods. At least for me, it’s hard to find a lot of good resources for children that you ask for. But there is actually this one site. It is called Warren Buffett’s Secret Millionaires’ Club. We will link to this in the show notes. 

This is something that he endorsed. He’d been on the show multiple times, and it’s a series of 26 online short web episodes that teaches children about money. So I think that might be a place to start if I needed to give a hand off to a resource.

Preston Pysh  39:38  

All right, James. So we really appreciate this question and thank you so much for the kind comment for recording your question and going to asktheinvestors.com and recording your question there. We’re going to give you a free subscription to our online course about the intrinsic value and calculating the intrinsic value of a course. 

We have 18 lessons there that Stig and I have prepared and this is on the TIP Academy page on our website. We just want to give that to you to say thanks and we really appreciate everything you do and being active in our community. So, thanks for the fantastic question.

Stig Brodersen  40:09  

That was all Preston and I had for this week’s episode of The Investor’s Podcast. We will see each other again next week. 

Outro  40:16  

Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. 

This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP Network. Written permission must be granted before syndication or rebroadcasting. 

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