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[00:00:00]

So I've always had this view that success is not a straight line up, and if you read the stories of successful people, almost every successful person has had to deal with some degree of hardship. And I've always had the view that how successful you are is really a function of how you deal with failure. And if you deal with failure well and you persist, you have a high probability of being successful. So I've always kind of had that view and then I've had to apply it to myself, certainly a few times.

[00:00:42]

Hello and welcome. I'm Shane Parrish, and you're listening to the Knowledge Project, a podcast dedicated to mastering the best of what other people have already figured out. This podcast and our website, F-stop blog help you better understand yourself and the world around you by exploring the methods, ideas and mental models from some of the most incredible people in the world. If you enjoy this podcast. We've created a premium version that brings you even more. You get an odd free version of the show like you won't hear this.

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You get early access to episodes. You would have heard this last week, transcripts and so much more.

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If you want to learn more now, head on over to F-stop blogs, podcasts, or check out the show notes for a link for about the price of two cups of coffee.

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You can help us before we get to today's show, a disclaimer. You'll see why the disclaimer is necessary after the disclaimer. Shane Parrish is the CEO of Farnam Street Media. All opinions expressed by me and podcast guests are solely their own opinions and do not reflect the opinion of Farnam Street Media or its parent company or its affiliates.

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This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions or anything else. Shane Farnam Street or Friends of Shane may maintain positions and security is discussed in this podcast. Neither Farnam Street nor its affiliates and or subsidiaries warrant completeness or accuracy of the opinions expressed here in, and they should not be relied upon as such. OK, so why is all that necessary? Well, today I'm talking about the legendary investor Bill Ackman.

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Bill is an investor and fund manager, as well as the CEO of Pershing Square Capital Management.

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In this in-depth interview, we're going to talk about what drives him, the lessons he's learned from his parents coming back from failure more than once. Information, consumption and ideas are seeing the role of ETFs facing criticism, nutrition, covid the lessons he tries to teach his kids and, of course, stocks. It's time to listen and learn. The Knowledge Project is sponsored by Medlab for a decade, Medlab has helped some of the world's top companies and entrepreneurs build products that millions of people use every day.

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You probably didn't realize that at the time, but odds are you've used an app that they've helped design or build apps like Slack, Coinbase, Facebook Messenger, Oculus, Lonely Planet and many more Medlab ones to bring their unique design philosophy to your project. Let them take your brainstorm and turn it into the next billion dollar app from ideas sketched on the back of a napkin to a final ship product. Check them out at Medlab Dutko. That's Medlab Dutko.

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And when you get in touch, tell them Shane sent you. This episode has also brought to you by 80-20. 80-20 is a new agency focused on helping great companies move faster without code. The team at 80-20 can build your next app or website in a matter of days, not months. Better yet, they can do it at a fraction of the cost. You walk away with a well-designed, custom tailored solution that you could tweak and maintain all by yourself without the need to hire expensive developers.

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So if you've got an app or website idea or you're just ready for a change of pace from your current agency, let the team at 80-20 show you how no code can accelerate your business. Check them out at 80 20 dot dotting. That's eight zero two zero dot eye and see. Bill, I'm so glad to have you on the show. Well, thanks for having me. What are some of the lessons you learned from your parents?

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It was interesting to speak about my parents because I've been living with them now for I think about six weeks and haven't done that for a good 30 years.

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So it is an interesting time to talk about lessons learned from parents. But my father is I like to describe myself as the most persistent person in America, but actually my father is the most persistent person in America.

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So I certainly live in a home where you learn never to give up on pretty much anything. And so I think that's a big takeaway. And your mom and dad are hardworking, motivated, educated people. High ambitions for their kids. Always talked about setting an example. There are a lot of things my parents learned about philanthropy. I think of philanthropy is something that is not genetic. It is learned and something that my dad reinforced pretty much from the time I was a kid.

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How do you think about the role of giving back? I think the the easiest way to think about it, one of the more influential classes at college, I read John Rawls Theory of Justice, and he talked about, you know, how how should the world be organized? His argument is you should organize the world, not from your perspective, but from the perspective of not knowing where you end up in the genetic lottery and in the geographic lottery. Where are you born?

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In New York City to well-educated parents in an upper middle class home, or are you born in sub-Saharan Africa? And, you know, you don't get to decide where you end up. And in that sort of world, you should design the world from that position to the perspective of not knowing where you're going to end up.

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And I always expected to be successful and I had sort of a business plan. And I said to myself that if I'm very successful, then I'm going to make sure to return the favor. And that's and that's what I've tried to do.

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That's throws the veil of ignorance, right? Yes. And you have been incredibly successful. What drives you?

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I think one of my biggest drivers from the time I was a kid was independent. As much as I love my parents, I did not want to be reliant upon them. So everything from financial independence to the independence to say what I think the independence to live the life I wanted to live. And so that's been a huge driver.

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You've come back from failure or at least the brink of disaster. Twice in your career. You've had to shut down your first fund. And after Valiante, you lost a lot of assets, but it doesn't seem to faze you at all. How does this affect you personally?

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So I've always had this view that success is not a straight line up. And if you read the stories of successful people, almost every successful person has had to deal with some degree of hardship, whether that hardship is a personal hardship, health related hardship for business issue. And I've always had the view that how successful you are is really a function of how you deal with failure. And if you deal with failure well and you persist, you have a high probability of being successful.

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So I've always kind of had that view and then I've had to apply it to myself certainly a few times. And I always like to say that experience is making mistakes and learning from them. And I've had the benefit of having made a lot of mistakes.

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What are some of the lessons that you've drawn from from those experiences?

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You know, it's interesting. In my first fund, I had a partner who remains a very good friend, and the stress of the ending was enough for him that he just didn't want to continue and do it again, where I was excited to kind of rebuild and go forward. And my business plan was just to make a little progress every day. And if you make a little progress every day, eventually that compounded progress will take you out of the hole.

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And what is difficult is you find yourself in a hole, whether it's an investment hole or in your personal life or otherwise. It seems incredibly daunting to get back to, if you will, where you were and you're looking up at this peak where you were before and it's just never going to get there. But if you don't focus on the peak and just focus on one step at a time making progress, eventually as the weeks go by, just make a series of smart, thoughtful decisions, use good judgment to stay healthy.

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Eventually, you climb your way out of the hole.

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Most people look at that peak and then they may, I would say, more emotional and irrational decisions in order to get back. Like, how do you ground yourself in. The moment of the day to day and just getting incrementally better, I think having good friends, being in a loving relationship, having a supportive family and staying healthy, you know, huge believer in exercise, good nutrition, sleep as a way to deal with stress. My first business reversal, if you will, was the most difficult because I hadn't had to experience that before.

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I mean, it's sort of the speech. I give it to business schools. You've got to speak at Harvard Business School and you're in front of an audience of students and they've done top of their class in high school. And they went to a great college and they've done great at summer jobs and they have great recommendations from their teachers and they've never failed. They go to Harvard Business School and then they're about to go out into the real world. And the problem with that approach is the single most important thing you need to understand is how to deal with failure.

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And the vast majority of people who got to Harvard Business School or pick your favorite top business or law school has not had to deal with failure. And that is the determinants, I think, of success. Look at Elon Musk. He's been on the brink of failure however many times. And I think why he's beloved by many, hated perhaps by some. But I really admire the guy in terms of how he's dealt with, you know, near catastrophe.

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And I just think there are many, many examples of people. What does success means? Success means you have a very good ability to deal with inevitable failure of mistakes and life issues that emerge over time.

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What lessons would you give people on how to deal with failure? I mean, it's got to be more complicated than sort of like how do you learn from it?

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Like, do you reflect is there a process that you go through? How do you reset yourself and go forward?

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For me, it is literally just a bit of a plodding one step at a time. We had my sort of life trajectory was did well in high school. I went to college from there. Good work experience. Harvard Business School started my own hedge fund with a partner. We had five years of really incredible success and then some challenges and then success and then challenges. And it's just sort of the rhythm of being a concentrated investor, certainly, and also the rhythm of of life.

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And I just think you just have to stay sane and stay balanced. People have always told me you deal with stress incredibly well. And I think it's really about being healthy, going to the gym, playing sports, you know, having the perspective that comes from spending time with people that you love and going for a walk. During my first most business reversal, I used to go for a walk every night with a good friend around and then we'd go walk to the Hudson River.

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We talk and I was just nice knowing, you know, a supportive friend was looking out for me and wanted me to succeed.

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And nothing as dramatic happened the second time around because, you know, I'm very fortunate in being in a wonderful marriage and relationship, which I think helps enormously and also surrounded by work colleagues that I like and respect and enjoying what I do. And also the kind of reversal we're talking about here is very, very different than the kind of reversal someone experiences for lose their job, loses their job and have no form of economic support, or they have a very, very serious illness that threatens their existence.

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So in my case, done very well. My family is well taken care of. Very nice roof over my head, so to speak. So I don't really view this as anything like the kind of challenges that people deal with when they get cancer, for example, or they have you know, they lose a job that they need for their to support their family, to pay for health care for their kids, that kind of thing. So I just try to keep perspective.

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You do go through a divorce, though, right? Yes.

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I mean, the most challenging moment from a business standpoint was not the most recent challenges. And losing money on a big investment is disappointing. But it happened. It was coterminous with challenges in my and perhaps correlated with challenges in my personal life. It is it can be very distracting to be contemplating whether one should stay married while running a business that requires a lot of judgment and clarity of thinking. And I ultimately made some of failures of judge. And in my business, I am quite sure that the personal challenges I was facing at the same time made things worse, and then I had to deal with the business challenges.

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At the same time, I was in the midst of normal challenges of divorce and resolving things with a former spouse and kids. And so it was it was a challenge.

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You mentioned sleep, exercise, nutrition are really important to you. Can you go into a little bit about your routine and sort of like how you view those things? Sure.

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So on the sleep side have always been a good sleeper. So that that helps. Do you think it is related to, you know, taking care of yourself generally? So I work out pretty intensely, really. I play tennis just in addition to a workout. It allows your mind. It's almost a form of meditation for me in that it completely takes me out of whatever work related issues are on my mind. And then I've learned a lot about nutrition over the last decade or so that I think helped maybe 10 to 15 years.

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And I had a completely, I thought, wrong idea of nutrition, I would say until recently.

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Walk me through that. What do you what do you think now? What I think now is one we start with.

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I think sugar is poison. So minimizing your sugar consumption I think helps tremendously. I also think for me personally, otherwise, I think everyone has different genetic makeup and how they respond to various things. I think I'm better off with kind of a higher fat, higher protein, lower carbohydrate diet. You're eating real foods as opposed to foods that come out.

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Anything that comes out of a package that is processed, I generally avoid so real food, kind of higher fat, avocados, nuts, things like that. But I eat meat and fish and I've really done my best to cut back on sugar consumption and in carbohydrates. And that's served me sort of well. I feel better. I think I think better also able to manage my weight much more effectively. You know, I come from a family where managing your weight is not been an easy thing for my father's side of the family, let's say.

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And I feel like I've finally, finally figured out what the issue is. I'm just at least our genetics. We have a super high sensitivity to sugar intake or carbohydrates.

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Are you have three meals a day kind of guy or you snack all day or have become a bit of an interim faster.

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So I generally don't eat before noon and I usually finish dinner by around 8:00. I'll have nuts for snacks occasionally, but not that's about it.

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And do you have a normal bedtime routine or is it like you go to bed whenever or are you like you start winding down at a certain time?

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Like what does that look like? I read a lot in the evening, spent a lot of time with Nory in the evenings. You occasionally watch a movie, occasionally stay up and watch something interesting, but no formal routine.

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What's the last movie you watch that you loved? I watched a a series on Netflix, a four part series called Unorthodox just in the last couple of nights. I don't watch many Netflix series. I thought it was excellent. It was a very sort of in-depth look at life in the ultra-Orthodox Jewish community, but very well acted in very real.

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I'm curious as to you mentioned reading sort of a lot. And I am curious as to what your information intake looks like. What publications do you read regularly? Books, blogs, specific authors, memos? What does that look like?

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Church. So I read a lot of traditional media sources Wall Street Journal, Financial Times, New York Times, economist Fortune, Forbes, Grant's interest rate Observer and the getting sort of a deeper into coronavirus.

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I started using Twitter actually as a news feed and found it to be very, very helpful and interesting, almost having the experience of reading the news a couple of days before you read the news and the rest of the media, Bloomberg and Bloomberg News, of course. And then I just you know, I go where the you know, the facts sort of take me and then, you know, I don't regularly listen to or read blogs. Although I'm starting to understand the benefits, so I'm a late but sort of recent adopter of finding more interesting curated news sources.

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Is there information you avoid like information that everybody else has? Not really.

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I think it's helpful to have kind of the conventional perspective. And, you know, I don't think we have, you know, have some particular access to some inside secretive news source that's valuable. There are people that I talked to that I talked to for perspective on things like the economy and business, just people in business, leader type people that I respect and compare notes with you. What's really going on in China, that kind of thing that can actually be quite, quite helpful, but you don't get a lot of reading the basic media.

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Financial Times columnist, Atlantic New Yorker, how do you source your investment ideas?

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Like where do the where do the ideas come from? Like how does that process work? Is it you? Is it your team of analysts?

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Is it. Sure. So I would say the early days of Pershing, I would generate the ideas and the team would help me analyze them. And as the business has matured and I really think it's a credit to the team and the maturity of the business, many ideas are sourced by members of the team. And my role over time has become one know, setting the sort of the framework for things that are likely to be interesting, whether in whether something fits within the framework or not.

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And then I'm usually the 20 percent person on every idea. So 80 percent of the work is work led by a two person subset of the investment team and 20 percent of the work, the reading, public filings, conference call transcripts, work that I do, the 80 percent work. A lot of that will involve conversations with experts to understand nature of the businesses. And that's work that's largely done by other members of the team. And then the team overall discusses whether something merits inclusion in the portfolio.

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So some combination of a couple of people who work very, very hard and voted a lot at the last couple of months looking at an idea, one person myself that's spent not nearly as much time but knows enough to be dangerous. And then another call it for members of the team that have not done real work on the idea, but are economically incentivized to make sure that we make the right decision. And that's sort of the composition of how we get to an idea that makes sense.

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Traditionally, you said that you guys do more work on any investments than anybody else, and you know it better than often the people that are running the company. Is there a point where or at what point does that become self reinforcing, like you've done so much work that it's hard to walk away from this? Like how do you build it that into your process?

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Yeah, I don't know if I've ever said that. I don't know for certain do to do more work than anyone else. So I wouldn't I wouldn't say that. But because we manage a very concentrated portfolio, we have the benefit of going very, very deep on something. And we don't need to make a decision. There's no time pressure generally to make a decision. So the benefits of concentration, the benefits of being a long term owner of companies is very simple.

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And we might add one or two new ideas a year, which means we we have the luxury, if you will, of doing more work than many, many other investors. But we only want to do the work that is necessary to determine that an investment makes sense in the portfolio. We don't we don't have some view that we have to exhaustively spend six months in order to make a decision. In fact, if you have to spend a large amount of time and it's not obvious, it's probably not a good investment.

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And we have made investments in some of our most successful investments. The amount of work that was done was in the hours as opposed to even in the days or weeks or months. I mean, the just most recently, our heads that we put on to protect the portfolio. I guess I wasn't specifically doing work on that investment at all, but I was thinking about the ramifications. For example, the coronavirus then came to a conclusion, this is something we want to hedge.

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And then it was really an our discussion among the team before we decided to implement the hedge in that form and in a way, one of our more successful investments. If you look at the the risk versus the reward, the amount of time spent was minimal.

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Can you take me behind the scenes on an investment decision that you've made and sold? So nothing currently in your portfolio? Like what does that process look like to Bill Ackman? How do you think about it? How do you walk through it?

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So it starts with the framework of what we're looking for. So the most important thing for us is that the business quality is extremely high by business quality. I mean, with number one, we want it to be both high quality business and one that we can predict with a very high degree of confidence. So it's it's got to be what we call a simple, predictable, free cash flow generative business. And the reason for that methodology is the value of a financial asset is the present value, the cash that you can take out of it over its life and particularly in a low interest rate environment.

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You need to be able to predict the cash flows for many, many years in order to figure out approximately what the business is worth. And for many companies, we have no idea because the complexity of the business means we don't know what the cash flows will be three years out, let alone years four through 50, which which matter in terms of determining what the business is worth. So we look for sort of simplicity, sort of and then durability and predictability.

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So it's got to fit that screen.

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And we can talk about Starbucks, for example. We made an investment Starbucks a couple of years ago, not quite a couple of years ago, and. What we saw was a simple, predictable, free cash flow business, casual business that we could understand. And so it met the first screen. We think about coffee. People have their coffee habit. Starbucks is built a week, in our view, a very durable franchise. They are in very high returns on every store that they build.

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And it's a it's a habit that people don't like to break, and so we had confidence in the durability and the benefit of the restaurant business is once you understand the economics, one box and then you have a company that's built thousands of boxes over time, it becomes more predictable and easier to understand what that business will look like over a very long period of time. And so Starbucks met the business quality threshold and then the next most relevant consideration is price and price.

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What matters here is that there's a wide gap between price and value. And so once we understood the business and we could model the business, we could look at where it was trading and compare those two. And at the time of our investment, there was uncertainty because the recent same store sales had flattened. And this was a company that had delivered consistent sort of mid single digit same store sales over a very long period of time. And our analysis of the kind of crux of the analysis was, is this a blip?

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Is this an indication of things about to go awry? And that's really where we spent our time.

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So you're looking at Starbucks and then there's millions of people looking at Starbucks. Where does that edge come from?

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I think a big part of the edge comes from we're not going to do a better job predicting next quarters earnings than people who focus on that. And we just don't focus on that at all. What we focus on is what is this business worth over its life? And the the markets generally overreact to short term information and noise because many stocks are traded on the basis of the marginal buyer and seller is a short term investor trying to predict where the stock's going to go up or down on the quarter.

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And we don't spend any time trying to figure that out. And that kind of activity, whether it's driven by quantitative traders or computers or fast, fast money, so to speak, moves securities around occasionally to crazy prices. And Starbucks was trading as if the business had fundamentally changed. And our view is it happened and that the company was taking all the right steps to address some of the performance related issues that they had both in the US, and that they had a lot of opportunity for growth and they were becoming a more focused, better company.

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They were actually taking. Normally we look for great business that had lost its way. We try to figure out what they had done wrong and then we'd recommend a changes after buying a stake in the company.

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That's sort of our core business. But in the case of Starbucks, they were already doing all the things that we would have recommended that they do to fix the problem. And so it was a bit of an activist investment where the management had already become activists in their own company. And so we thought I think a big part of our advantage is we didn't have to think about next quarter earnings. A big part of our competitive advantage today comes from the fact that our capital structure, compared to a typical investment firm, is very different.

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Eighty five percent of our capital is in the US, comes from a public company, and as a result, we have very, very long duration money. And we don't need to worry about this quarter or this year in making decisions. And that, I think, is a huge advantage in a world in which most other investors have. They give their investors either daily or monthly or quarterly liquidity. Having permanency to a very large percentage of our capital base allows us to make very long term decisions and that that time arbitrage is a big part of our vintage.

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Time arbitrage is like a hard one to to go away, because there's always going to be the short term pressure and I like the structural sort of like our approach to addressing that problem.

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How do you see the role of ETFs and index fund investing and how does it impact or affect investors like yourself?

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So the impact on investors who care about governance in particular, sort of activist investors is over time, as index funds effectively come to control corporate America, their vote can be the deciding factor in a contest. And so that's one way that index funds play a major role. The other side of that is index funds are also because of their growing influence under a fair amount of pressure from their shareholders to oversee the businesses that they own. People thought about the index fund investment business as a business almost without governance, where governance was not a focus at all, and then their increasing ownership of corporate America Global Global Securities puts more pressure on them to be thoughtful.

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Now, they don't have the the resources to lead an activist campaign. I think that requires more entrepreneurial type investors. So in a way, there has to be a partnership between activist investors and index funds to make sure that we're governing companies correctly and seen a number of the top firms over time take these issues much more seriously. And and we've had a good experience working with most of these major owners. The problem with the index fund business is it's really a commodity business.

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If you run an S&P five hundred index fund, the only way that you can compete with other S&P five hundred index funds is by lowering your pricing. And the pricing is now in the few basis points. In fact, there are index funds today that charge no fees and it's hard for them to scale up, scale up to have the governance resources necessary to make thoughtful decisions about running businesses. And if you think about it, if you manage ETFs and index funds, you have to vote, call it 10, 15, 20 thousand proxies right around the same time, most annual meetings or call it in the May sort of timeframe.

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So by February, imagine BlackRock gets tens of thousands of proxies in the mail and they have to make a decision on each of them, which directors to vote for, which initiatives to support, which not to support. It's also an possible. Hurdle for them, particularly as their revenues asymptotically or the fees they charge asymptotically go to zero. So that is a problem that needs to be addressed. I made a small investment in a company called Say, which is a business that wants to put the vote back into the hands of the owner.

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And one of the opportunities for a BlackRock to differentiate themselves from, for example, Fidelity or Vanguard is to transfer back the right to vote to the underlying holder in this company, say sort of has a technology that enables that to take place. Now, you wouldn't want a person investing in an S&P five hundred index fund who's got a thousand dollar investment broken up and five hundred two dollar pieces to have to think through five hundred different proxies or you still have the problem.

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But they may have certain principles that they operate under that they would want BlackRock to vote on for them. And this company would enable that to take place. And perhaps there are a few high profile elections, proxy contest, et cetera, with the underlying shareholder would like to vote. That's an interesting potential change in governance.

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Yeah, that sounds like a pretty cool technology. Do you think that we end up with bigger swings as a result of more and more people being invested in index funds, like, do you think the highs are higher and the lows are lower, or do you think it really has no impact? Like, I imagine a lot of people right now are getting their March statement in the mail and looking at that going what just happened to generally ignore the market?

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Yeah, I think the premise of your question is correct. I think if you think about index funds and constant inflows of of money each with each paycheck, when people take a portion, invest in the four four one K, that's been a major support for the stock market and index funds. Really, in a way they take more and more of the float out of a out of a security so the marginal trader can move a stock more because there's less flow.

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Does that makes sense? It's almost like having having index funds as major holders of securities and stable market conditions actually reduces the liquidity of companies. And it means that sort of hedge funds and more active investors who are making day to day buying sell decisions actually push securities around more. Some of the volatility that you've seen I think can be is somewhat due to the fact that there is limited less liquidity in securities today because of the greater percentage of shares that are held by index funds.

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Now, if that were to reverse its index fund performance underperforms active management for a meaningful period of time, you could see, instead of constant additions to the index funds, you could see constant reductions of capital, which would be a big overhang on the securities that are held by index funds. But that trend has sort of continued to be interesting to see what the impact of recent events have on it.

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Who are some of your investing heroes or actually who are some of your heroes? Not investing heroes, but who just generally are some of your heroes? Sure.

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So briefly, on the investment side, you I got into this business because someone tipped me off about Warren Buffett early on. So he's certainly, obviously a hero to investors. I learned a ton from over the course of my career, kind of supportive of me early on, a guy named Joe Steinberg who likes being out of the headlines and his partner in coming round a company called Leucadia National Corp., a very interesting investment firm. I learned a ton over time, but I admire people like Elon Musk.

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I admire people who take on unbelievable challenges and and succeed. The notion of building a car company to compete with the big car companies is something that on its own, I think it's fairly remarkable. And if you want if you do that at a time when you're building a company to launch rockets into space, I think it's even more remarkable is someone I have enormous respect for.

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The world needs more people like Elon. Do you feel do you feel those people are better served in private roles as CEOs or as public company CEOs?

[00:36:06]

You know, I know that Elon Musk has been the ideal public company CEO, I think had a challenging period there with with his tweets. I guess that's why my teams were is a little bit as I've used Twitter a little bit more for the last month or two. But I don't know that look, I think that a lot of companies have stayed private too long. And so I'm actually a fan of the public markets and a fan of public company governance versus the kind of governance that you've seen, certainly in many of the venture backed companies.

[00:36:41]

We were facing perhaps the kind of most public sort of egregious example, but the governance structures of private companies, venture backed businesses, their capital structure is always sort of funky, prefer and slow liquidation preferences. And, you know, I would not rely on the market values of many of these venture backed companies. And I think the soft banks of the world that have allowed them to stay private, I don't think have done them a service.

[00:37:11]

Can you elaborate a little longer or a little more on why they've stayed private too long and what effect or impact that has on capital markets or the company itself?

[00:37:21]

Sure. So there is a certain discipline that comes from being a public company today. Public companies have to report on a quarterly basis. The SEC does a pretty good job and various requirements of the disclosures you need to make. Most companies have adopted a quarterly conference call format where you can ask questions of management. And I think there's a lot of just inherent transparency in that process.

[00:37:44]

And whether you own one share or millions of shares, everyone gets the same information in the private sort of venture backed markets and a relatively small investor in. Startups and I do it for fun and I do it because occasionally I make a good investment and and also it helps me see the future in terms of what potential threats are coming that might disrupt either a business we owned or a business we're looking at. So I do find it to be an interesting thing.

[00:38:13]

But the quality of the information you get, the lack of disclosure, the how these boards sort of operate is far from ideal, particularly when you compare them with their public company equivalents. I mean, we work, I just think with the sort of first opportunity for people really to see what's been going on. But I don't think we work as a typical of many of venture backed companies where the founders become almost godlike figures who were handed control by the venture partners.

[00:38:49]

And they may be talented entrepreneurs and they may have been the right person to start and build a company from scratch. But the business may now be at a stage where it needs more professional management and it can't happen, or it's difficult for that to take place in a in a private context. And so Softbank injecting one hundred billion dollars in marking up the value of companies and giving them capital that they could use to postpone going public. I think it's fundamentally been a disservice to the capital markets and probably to those businesses, because there you cannot public company shareholders for being too short term.

[00:39:31]

But there are real benefits that come from the disclosure and the input that shareholders can bring to kind of a public enterprise.

[00:39:43]

Do you think that these sort of like mark to investment valuations that seem to translate into some form of a public market are realistic, or do you think it's just a game almost like. Yeah.

[00:39:59]

So the problem with many venture funds is because of the life expectancy of many companies, you won't know whether a venture capital firm does well for a decade. And venture capital funds, particularly startup venture funds, tend to be small. And the founder really can't make a living until their first fund starts to generate some realization events, and that can be years out. And so the incentive on the part of many of these sort of earlier stage funds is to have markups in the portfolio because it's a way of showing to your investors that you're making business progress.

[00:40:38]

And I think it does encourage certain kinds of behavior that's not ideal. And a lot of this dynamic between the desire for the early venture fund investors to show a markup to their underlying investors and the desire for a new investor to come in at the lowest possible valuation in the way those issues are generally solved by creating these sort of funky securities that give the later investors preferential rights over the earlier investors. And I think a lot of times those features are not accurately considered and valuing different around A versus round C or D.

[00:41:17]

And so I think there are games that are played that are not ideal and you can't really short them.

[00:41:24]

Right. So talk to me about the role of short selling. Is that good for the world? Is it bad for the world? Is there a line where it becomes you've gone too far or how do you see that?

[00:41:35]

Sure. So I think I think short selling is a essential and generally positive function for markets. I give a lot of credit to the folks at Muddy Waters who have endorsed a meaningful number of fraudulent companies and have yet to find an example of a regulator finding a fraudulent company. It's either a journalist often being fed by a short seller or a short seller that has been is the one to identify fraud because they have a huge economic incentive to define bad companies or certainly fraudulent businesses.

[00:42:08]

So I think that function is a is a great function for the capital markets. And I think if I were running the S.E.C., I would make sure that my enforcement division was talking closely with the best short sellers, hearing their favorite ideas, and that would be the best way for the S.E.C. to uncover fraud. So I think that is a very effective and good thing where the negative is the problem with being a short seller.

[00:42:34]

If you all you do is short stocks, you want your companies to fail no matter what, and some short sellers will take steps to actually cause harm to a business as a goal in order to make their short successful. And so that's where it crosses the line.

[00:42:54]

And I sort of followed the whole I've never been an investor in Tesla long or short. But you do see example again, companies that complain about short sellers. I usually look at those management teams skeptically. But in the case of Tesla, I do think some of the short sellers went beyond the role of identifying overvaluation and in their attempts to actually harm a company. And that's where I think it goes beyond the pale.

[00:43:23]

I want to come back to the Twitter comment about Elon and you. You're both I don't think it's a surprise. You're pretty polarizing when you make comments. They make news. How do you judge that before going on Twitter?

[00:43:36]

I wasn't particularly controversial, I don't think. And the the media was generally pretty supportive until I went public. A short Herbalife and then Herbalife, using their PR machine, has done everything they possibly can or did everything they possibly could to try to discredit me in the press. And what's fascinating to me, actually, if you were to Google now, we have not been sure Herbalife for a very long time. Herbalife is still running a negative campaign about me personally, which I find fairly remarkable.

[00:44:13]

The way you can see this, if you Google my name, if you want to do this right now, what will pop up is an advertisement. And the advertisement is paid for by Herbalife. And it talks about find out how a billionaire funded this this movie called Betting on Zero.

[00:44:34]

Betting on zero. Yeah, it's the first link. What does it say?

[00:44:37]

What's the subtext paid for by a billionaire hedge fund manager?

[00:44:41]

OK, that is entirely false, by the way. My picture comes up. So you see this paid for by billionaire hedge fund managers and you see a picture of me. And any reasonable person would assume that ad that I paid for this movie, betting on zero. The facts are that a documentary and I never heard of called me up one day and said funding this whole Herbalife thing. Fascinating. We love to follow you around. And I met with him and liked him, decided I would trust him.

[00:45:09]

And I thought it would be helpful in getting the story out of the company. And I participated in the film by agreeing to be interviewed a number of times and. Follow me around a number of times, the film was financed by actually a hedge fund manager, not me is this name is escaping me for a moment, but if you Google it, you can find out his name. But I played no role whatsoever in financing, funding, directing.

[00:45:34]

Literally. All I did was appear in the film because he videotaped me at various presentations. But the fact that a public company, registered company continues to put out completely false information about me personally tells you, tells you something so despicable thing was very, very polarizing. People felt that we were way too aggressive in our or some people listed in our sharing our views. But ever since then, I think I've become, even if you will, even more polarizing.

[00:46:04]

But it doesn't affect my thinking in terms of what I say publicly or write publicly or what I say in the letter. Unfortunately, particularly today, the more visible your profile, the more Glovers and haters are going to have. It's just the nature of the beast.

[00:46:20]

But walk me through that a little bit, because you're you know, you seem way more in touch with your emotions than most people, and yet you're putting yourself out there in a way that people love or hate. There doesn't seem to be a lot in the middle. How do you how do you deal with that? Do you just ignore it? Do you even look at it? Do you does it affect you at all?

[00:46:40]

You know, I just found myself recently I was becoming more and more concerned that our government was not taking the coronavirus seriously, gravely concerned a few months ago and took steps both to protect my father, who compromised my family, the firm, our investors with the hedge, etc.. And then I buy, you know, call it mid-March. I said, well, there's just a really straightforward, simple answer. We just need to shut down the country.

[00:47:12]

And once we do that, we can reopen carefully and go back to rebuilding an economy and rebuilding our country. And I kept waiting for the president to go on TV and say, OK, guys, we're shutting down the country. And it wasn't happening. So I figured, OK, that's when I went back to Twitter for the first time and I wrote a tweet saying, look, here's the simple answer. And it went pretty viral. And I got a call from CNBC and said, Would you come on?

[00:47:36]

And I had I had foresworn going on TV for a couple of years, but I thought this issue was important enough that I should make a public case for a country wide shutdown, which I did. And unfortunately, I had a whole bunch of people right after I went on, make the case that I was doing this for some market manipulative reason or to benefit me personally. And so it's frustrating and disappointing, but I still thought it was important to make my case.

[00:48:05]

And I was very happy the next day when California, the first day shut down and the following day when New York State shut down. And then here we are. You know, we can get there the way I expected. I was expecting the president to basically order a country wide shutdown. But living in a federal system with the states make these decisions. I'm happy we finally got there, although it took longer than I would have liked.

[00:48:27]

Let's keep going on this covid theme you disclosed publicly. I don't know what day it was, but it was like March 4th that you had done this through your website that you had put this hedge on.

[00:48:39]

And yeah, that surprised me because nobody nobody noticed. It seemed like everybody was caught up with all this other media. And then you could see through the weeks because you release your weekly NAV on Wednesdays. Right. And you could see through the weeks that your asset value was going up.

[00:48:58]

Well, the market was going down. So clearly they were asymmetric in nature. Yes. And then you went on and you had sold them. What was the timing around that like? I don't quite know what happened, but you went on CNBC and you sort of like said we need to do more. And you were you were where you walk me through that.

[00:49:18]

Yeah. So basically, we put the hedge on in maybe the third week in February. And by March 12th, the hedge had gone from being worth nothing to being worth two point seven dollars billion. And the markets have dropped, I don't know, twenty five percent or so at that point in time. And we said, you know what, we've got this massive decision to hedge, which maybe has the potential to double if the credit spreads widen to where they were during the financial crisis.

[00:49:47]

But if they don't and the government takes the right steps, you know, this hedge could be worth zero in the stock market. Go right back up to where it was. So we made a decision to exit the hedge. And so we started selling the hedge and we started aggressively buying stocks. On the 12th. I went on CNBC at twelve thirty on the eighteenth. And the reason why I know these details is because I wanted to respond to some of my detractors.

[00:50:12]

We've invested two billion, fifty million between March 12. On March 18th at twelve thirty in the stock market, buying additions, adding to our portfolio, buying spree, purchasing Starbucks, we had sold half the hedge for a billion three hundred a little more than half the hedge. Four billion, three hundred million. And so we were three billion three hundred fifty million more long stocks, if you will, than we were on March 11th. And bear in mind, this was a firm with total assets, total equity of about seven and a half billion dollars.

[00:50:46]

So adding three billion dollars of risk. We were much longer than we were even before we had the hedge on.

[00:50:54]

So we were and we had no short positions. That's when I went on TV. So I went on TV to give a very bullish message, which was, look, I think markets are going to soar. We just need to stop. The virus is a really simple solution, stopping the virus. It's locked down the country for 30 days to kill off the virus and carefully continue to practice social distancing. But the stock market's a discounting machine. It will look forward.

[00:51:19]

And as soon as we do this, the markets will recover. And that's why we're buying stocks and that's why we're buying stocks. We've been buying stocks over the last week and we're buying stocks today. And here are the stocks I'm buying. So it's rare that someone goes on TV and makes their case and explains which securities are actually purchasing, which we did. And after I got off, I noticed other commentators coming on and also on Twitter, people saying a bill drove down the market.

[00:51:46]

Know what they forgot was the stock market was already down almost seven percent by the time I went on. Thirty and an hour later, it was down more so simply because the market went down after I spoke didn't mean I caused the market to go down. The market had gone up. I was I was the cause for the market going up. The answer is no. But an hour and a half later, I put out a tweet basically saying, look, making sure people understand my message.

[00:52:11]

Yes. If the government ignores the virus and just allows it to continue to propagate and we don't shut down the country, we're going to end up in a very, very dark place. However, if we shut the country down for 30 days, which is what I expect to happen, we'll kill the virus, markets will recover, and that's why we're buying securities. So it was a bullish message delivered with there is a fork in the road. I know we're going to take the right fork and that's the bet that we're making.

[00:52:35]

But if we don't, it could be bad. But I believe it strongly enough that we've invested three billion dollars in the last week buying stocks.

[00:52:44]

So many questions I have here. I just want to, for the context of listeners, date this interview. It's April 13th. Just so whenever it comes out, people have an idea of when we were recording, why didn't you sell everything instead of the hedge? Why the hedge?

[00:52:58]

So we are a long term investor, so we get to know our companies and their management teams well. We often play a role in putting the CEO in the seat so intimately. We put four directors on the board. We were for the directors when we joined the company and we helped to recruit Brian Nichols to become CEO of the business. And we've been a supportive shareholder of the company. So we still have a director, representative of the firm that sits on that board.

[00:53:26]

So, one, it's not a very supportive thing in the midst of a crisis, two, if you will abandon companies that you've supported and helped build, and that's really true for many of the companies we own. One, I don't love doing that. The second thing is our view was if you looked at what was going on in China, there is a straightforward solution to how to deal with a pandemic. China did it. They've been able to manage their cases and deaths.

[00:53:53]

And again, you have to question some of the data of China. But I don't think the data is materially different from what they've described. Our assumption was the we would, as the virus has made its way west, it's Italy, Spain. Everyone's adopting a shut down approach. I'm sure America is going to get there. And if we do, markets are going to recover. And we own big, you know, somewhat illiquid positions in the companies that we are shareholders because of our degree of concentration.

[00:54:19]

So we could sell everything and then wait for the markets to go down, buy everything back. There's a lot of frictional costs associated with that. What if the stock market doesn't decline as much as we think it might? And what if it declines very briefly and we don't we're not we don't have an opportunity to rebuild stakes in these great businesses on incur a huge amount of tax liabilities because we have big investor gains in the companies that we own. So there are a number of reasons why we just didn't like the idea of selling.

[00:54:48]

And hedging is kind of elegant because if nothing happened, we would have lost very little money. But if what we expected to happen happened, we would the hedge would become very, very valuable. We could cash it in. The more the market went down, the more valuable the hedge becomes. We could cash it in, hopefully at the bottom or as close to the bottom and redeploy the money buying companies that we like. And that's what we chose to do.

[00:55:12]

We would have had better results in the short term. You look at these funds that are dedicated to so-called black swan funds, all they do is put on these kind of hedges waiting for disaster. And some of them are up a thousand percent. Some smaller ones are up a thousand percent. In the last month or so, we would have had extraordinary short term results, but we would have impaired our relationships with companies and management teams. And I think our results, again, over time, even over the course of the next year or two, may be better than they would have been had we tried the alternative approach.

[00:55:49]

So those were some of the thoughts that we had.

[00:55:52]

I appreciate you going into such detail. How did your staff react when you put the hedge on?

[00:55:57]

So actually, the way it came down is I had been getting more and more concerned about the coronavirus and the interestingly, the organization started to think I was losing it. Even some of my friends thought I was overreacting. And that, of course, maybe more concerns, because when people I really respect and like, think I'm being extreme and I think I'm not every day that goes by without our, in effect, shutting down the firm, I felt we were taking more and more risk that maybe that much more concern.

[00:56:32]

And one Sunday night, I think it was maybe the third week in February, I called an investment team conference call, which I very rarely do. And I talk through the economic implications of the virus, which I felt very few people were focused on. And we fairly quickly over the course of the conversation, the team agreed that this was a reasonable probability of the kind of case that I laid out for what would happen. And then we spent the time talking about how we would hedge this, and we kind of came to a group decision that happens to be a really interesting time in which to hedge credit risk because credit is sort of at the tightest or sort of the pricing of credit is at the lowest it's almost ever been.

[00:57:21]

And so it became a relatively easy decision to put on a large hedge because the inherent asymmetry was about the most attractive has never been. And then if we were completely wrong about the economic implications of the virus, it would be of no moment very limited downside compared to assets.

[00:57:39]

I think you only had twenty one million or twenty six million in total invested.

[00:57:44]

Yes, although that really understates it. It's not. Credit default swaps are not like options. So as the CDS contract is a commitment to make payments over time and we at the peak had 70 billion, actually seventy one billion of notional insurance that cost about an average of 70 basis points per annum.

[00:58:07]

So about five hundred million dollars be committed to make five hundred million dollars a year in payments for five years. So that's two and a half billion dollar commitment again for a seven 1/2 billion dollar enterprise. That's not a small number. And that's why it's something that an individual really. Can't do right. Thanks for the CDS contracts generally with individuals, so but the way we thought about the risk is there are two forms of risk. One for risk is just the premium committing to pay.

[00:58:38]

And the moment you unwind the contract, you stop paying the premium. And this was one of the few cases in my life where I had a very negative view on where the stock market would go. And I also had a very good sense of the timing. I had a very, very few back in 07 and before of where things were headed in terms of I thought we could be headed for a credit crisis. I just didn't have a good sense of timing here.

[00:59:03]

I thought the timing was weeks away. And so that made the commitment to make premium payments a much lower risk commitment. We were going to have this thing on for five years, let alone one year. I thought it was worst case we'd be taking off in 90 days. So I thought about that as not a five hundred million year risk, but rather we're going to spend one hundred and twenty five million dollars because it would play out.

[00:59:28]

You would know if you're right in the next sort of 90 days. That's right. And so I viewed as one hundred twenty five million dollars in the context of seven billion, not even two percent of assets. That seemed not to be an unreasonable risk. The other risk was that credit spreads tightened because when you go to unwind, the credit spreads go from an average of 70. Again, it was a mix of both investment grade, but we paid around 50 basis points and a high yield seeds where we paid about three hundred, three hundred and thirty basis points.

[01:00:02]

But the blended average was around 70 basis points and it went from 70 to 50. We could lose about one hundred basis points times the notional amount of the contracts. We could lose a big number. Theoretically, we could lose seven hundred million dollars, which is almost nine percent of all of our assets. But my view was the probability of credit spreads tightening. And again, you have to look it's easiest to look at it by splitting between by blending the cost of high yield and investment grade.

[01:00:33]

It really is misleading. So the investment grade CDs was trading around 50. The previous all time tightest levels were just under 40 basis points. So a 10 basis point tightening. And I could not see a scenario in which the coronavirus would lead to a tightening of credit spreads. And the all time tight levels were achieved at a time that there were artificial subsidies that caused credit to be very tight. There were these things called synthetic CDOs and bond insurers were writing synthetic CDOs, creating this huge supply of cheap, very inexpensive spreads and that that had really gone away during the credit crisis.

[01:01:11]

So I just it was really a one way bet. And the biggest risk was how long we have it on. And we ended up spending twenty seven million in premium because we built a 70 billion dollar CDs position beginning in the third week of February, had completely on by the first few days of March. And we started taking it off March 12 when it hit that two point six dollars billion of value. And it took us, call it 10 days to unwind the whole thing just because of the size of the position, but to the average of the position of very small.

[01:01:46]

So we end up spending very, very little. But it's a little unfair to say we invested twenty seven to make two and half billion, 246.

[01:01:53]

But this is just the headline numbers. I'm glad you explained that behind the scenes. That's really insightful. Thank you. Walk me through some of the economic implications you see today. We can't do this for 18 months. Are we going to enter a depression? Like how do you handicap that? How do you see the risk?

[01:02:10]

So my concern about the virus, I was less concerned about the health implications because I thought it would affect a relatively small percentage of people and for the most part, people who are already sick, although obviously every life is an important life, particularly to the close friends and family. But the economic implications, I thought, could be much more harmful even in the health implications. And that's because the only way to stop a virus is to shut down the economy.

[01:02:41]

And I had never in my lifetime seen what a unintended shutdown of an economy look like. And as that rolls around the globe, what are the implications?

[01:02:51]

But I think the difference between a depression and a intended but short term shutdown, if it's managed correctly, the economic implications are nothing like the Great Depression. So I am not concerned about a Great Depression like event taking place really for a couple of reasons. One, that this is sort of intended somewhat artificial temporary shutdown, not driven by economic reasons, but driven by health related reasons just to stop the spread of the virus. So that's a very important distinction.

[01:03:24]

The other thing is that, Governor. Around the world have taken this incredibly seriously, not just the health implications, but the economic implications and the is basically stepping in to provide economic support to everything from a low wage or unemployed worker to businesses as a bridge to get us through the crisis. And the the bridge doesn't need to last 18 months because the entire globe is basically in shutdown. So I think we can start reopening this country beginning June type timeframe.

[01:03:59]

And the other thing that's going on is you have the entire world working on solutions to the problem. Just yesterday, I read a piece saying there's 70 different vaccine related and therapeutic trials that are underway as we speak. And so you have the world's best global biotechnology pharma companies looking for solutions. And so I think that increases the probability that there's a therapeutic that is available sooner and later and that there's a safe vaccine within a reasonable period of time. So that makes the economic disruption a shorter period of time.

[01:04:37]

The negative, however, is that small businesses that certainly can get destroyed in a several month shutdown and it takes time for them to rebuild. Think the small restaurant, the small corner store. And there is a lot of friction and disruption. But I do think that governments are going to do everything they can and communities to do everything they can to help rebuild. If you think about New York City, I think the moment that people can go out to eat again, going out to eat New York City is sort of part of what it means to live in New York.

[01:05:10]

Restaurants are going to be reopening. I actually had an idea maybe we start a new venture with a private equity fund to back the reopening of restaurants in New York. And you can see that happening in cities around the country. And it could be a good investment and too good for the community. And so I think you're going to see a lot of some combination of for profit and philanthropic related investment to help restart a lot of small businesses. So I don't think it's a as I say, a V shaped recovery.

[01:05:40]

I think it's a little bit slower kind of coming out of this. But there is an end date where we're back to normal, I think within a reasonable period of time and back to normal. Could be a year. It could be it could be 18 months. But there is an end date. Whereas the depression, you go back to the nineteen thirties, it's sort of unending.

[01:06:05]

How does this affect real estate? Because a lot of people aren't paying rent right now. Commercial property values are probably affected. Walk me through how you think of that.

[01:06:14]

Sure. So again, it's a very similar kind of analysis. If you own a street retail in New York City, you're probably not getting rent today. But as soon as your tenants can be open and operating, they'll start paying rent again.

[01:06:28]

I talked to a friend at one of the major real estate private equity firms. And what they're doing is in cases of hardship, they're giving tenants a know up to a several months kind of holiday, kind of a rent holiday where it's really they're deferring the rent. And my guess is they'll end up spreading it out over time to kind of recover what they what they didn't collect, at least for commercial tenants. And maybe they'll give sort of someone lost their job, for example.

[01:06:57]

Maybe they'll give that person a little bit more of a break. You know, again, it's a temporary business disruption and then we grow out of it as opposed to a permanent impairment for the vast majority of the economy.

[01:07:12]

What would cause you to change your mind on that view?

[01:07:16]

Look, the what's permanent what's permanent is we're adding a lot of debt to sovereign governments, and that's a burden that will exist for a long time. So that's a that's a negative. And that that will hold back somewhat the global economy. I guess what would cause me to change that view would be we can't beat back the virus and we're constantly shutting down the globe. And I think the way we solve that issue is really just testing. And there are a lot of testing companies.

[01:07:54]

And just yesterday I learned about this pregnancy test. That's sort of a emergency authorization mode where you can pick your finger and in five minutes find out whether you have antibodies or not. I think once you have something like that, we'll be able to see where the virus is and people can start going back to work. So I just think technology is going to help a lot here. The Google Apple sort of apps that you have on your phone, that combined with testing, hopefully we can start going back to a more normal once the inspiring, I guess, silver lining in this is for the first time ever, we're probably all faced with the same problem.

[01:08:35]

It doesn't matter what country you're in or what race you are or what socioeconomic status you are. The best and the brightest people are gravitating towards working on this.

[01:08:44]

Yeah, I mean, just the economic motives to coming up with a solution. But I would say more importantly, the reputational benefits inure to the person who comes up with the person or company who comes up with the drug. That saves us all with the vaccine. That saves us all. And so I think, you know, I talk a lot to scientists as part of my philanthropic work we're doing. And we had a call with thirty five heads of major institutions and scientific researchers who normally focus on cancer research.

[01:09:19]

And basically all of them have redirected their work to coronavirus. And so you've had this huge migration of talent focused on a global problem. And I'm sure the same thing is true in every country.

[01:09:31]

What industries do you think are going to come out stronger benefit from this Amazon or Amazon? We don't own Amazon, but I do think that, you know, obviously they're going to have the greatest several months in their history. But I do think they're going to change a lot of behavior of people who used to shop in a normal fashion.

[01:09:52]

Obviously, some of these video technology companies, cloud based software companies, will be beneficiaries of this long term, although I will say that pretty much everyone I speak to is completely sick of video conferencing and really would like to get and actually this whole work from home thing is not so great because here I'm talking to from the Den, you know, I'm hearing, you know, quite beautiful. But here my wife and baby in the kitchen, mom and dad, are constantly walking in and out of the room and there is no break.

[01:10:26]

One of the nice things psychologically about going to an office is that you go, you focus, and then when you come home, it's easier to leave it behind. It's much harder to do that when your office phone is in the TV room. So I definitely relate to that.

[01:10:41]

How would you handle the bailouts? Like is there who would get what? And is there a way that you can think of realistically to direct capital to capable hands in a way from just prolonging economic failure? Or is that not the way that you would handle this? Or walk me through that?

[01:10:58]

Look, I think there are businesses that prior to the coronavirus were structurally challenged. I think department stores. So the notion that you'd want to save these businesses, I don't think makes a huge amount of sense to me that it makes sense to take taxpayer money and try to save a otherwise dying business. So think about businesses that are in structural decline. This would likely put them out of business, but I wouldn't spend any of taxpayer resources on them.

[01:11:26]

You know, the way that big companies the only thing that happens when a big company goes through a disruption like this is that the owners and and there isn't, quote unquote, a government bailout, if you will, is that the owners change, right? If you're an airline and you run out of cash, what happens is the bondholders end up becoming converting into equities through some kind of either prepackaged or other restructuring process. The anything the owners and I am receptive to this notion that you have airlines that have spent billions of dollars buying back stock.

[01:12:00]

Why should taxpayers come in, in effect, support the shareholders that were beneficiaries of buybacks and had they retain that capital for a rainy day, they wouldn't need a government bailout. So that's that concept to me makes a lot of sense. And airplanes are not going to stop flying because airlines go bankrupt. What will happen is the the owners of the planes, the lessors of the planes and or the bondholders will end up controlling airline. So if I were making these decisions, I wouldn't have scarce resources I would save the money for.

[01:12:37]

Well, let's put it this way. Any capital that was injected into an airline or another business, the government should earn an adequate return on that capital and get equity upside. The business recovers. I just think that Boeing needs to be saved. Boeing had issues prior to this. Boeing spent many, many tens of billions of dollars on share repurchases. I do think Buffet doesn't want to the government shouldn't come in on terms that are more favorable than where Warren Buffett would provide the company with capital.

[01:13:07]

I guess is I guess is my point. And I respect the CEO of recent CEO of Boeing saying he's not going to take money from the government. And I don't think he should. So I don't think the government should be bailing out companies unless it's done on an arm's length economic terms. It shouldn't be free money by any means. And we shouldn't be afraid to let companies that are over levered, precrisis file for a prepackaged reorganization where the creditors end up owning the equity, that that's how the process is supposed to work.

[01:13:35]

I think it was Mongar, Charlie Munger, who said capitalism without failure is religion, without how he's better with words.

[01:13:41]

And I. But do you think we'll end up going to the Amazon comment for a second? Do you think we'll end up going back to malls or malls? Effectively just dead now. I actually think that people will be that much more desperate for human connection after this experience than they were before and the issue with malls, malls are located at the intersection of very highly trafficked roads.

[01:14:08]

They've got big parking lots. They're big physical pieces of real estate. The problem is that the tenants have not innovated as quickly as the markets have changed. And the result is you have old line department stores that have been around for one hundred years that haven't sufficiently innovated to attract our customers. And I do think that malls for many communities are public gathering places and they just have to have tenants that are interesting enough to inspire people to come together and either shop or be entertained.

[01:14:43]

And I do think that innovation is happening is just not happening as quickly as, you know, the kind of legacy tenants are dying. And so that's why malls are challenged. But I do think that for every community having a place where people can come and gather and have fun and bring their kids, I think is important. And so I think the real estate long term is probably fine. The problem is the capital cost to take an old line, old fashioned shopping mall with Sears and J.C. Penney and Macy's and make it into something that's going to be exciting for the next generation is wasn't contemplated when they put a mortgage on it, and that was equal to 80 percent of its value five years ago.

[01:15:28]

And so, again, you'll see restructurings where the lender to the mall ends up with the asset. Someone entrepreneurial decides, you know what, we don't need this much. Retail will make it a hospital, medical facility, office apartments, and then they'll be this great food court, restaurant, entertainment, movie theater type thing. But I do think people will desperately want to go out to have a drink, go to a cafe, go to a restaurant, go to a movie, be entertained, and they'll be desperate to do it as soon as it's safe to do so.

[01:15:58]

I think one of the byproducts of this is like we feel less like we're part of something than we used to before. We're less attached. We're more attached to our family, but less attached to our community, less attached to our sort of city, less attached to our state or country. In some ways, even though we're all going through this, we're feeling very isolated. Do you think we come out of this on the other side being more prudent financially with leverage?

[01:16:23]

Yes, I do think this is a Depression era moment in the sense psychologically the same way that the generation of people that went through the Depression thought very different about differently about financial leverage than then the generations that came after them. I think the same thing be true here. And I think it would be true for for corporate America. You know, the shareholders are diversified. They generally put pressure on companies to, quote, unquote, optimize their balance sheets.

[01:16:53]

But optimization is generally designed for the short term shareholder who has a diversified portfolio of other such companies. It's not designed for the portfolio of one, i.e., the board and management that oversees that company for the benefit of the employees and the other stakeholders. And I think it does lead to an over leveraging of corporate America. I think every business has to have capital put aside, if you will, for the rainy day and you know, the companies that live on edge to kind of maximize their return on equity and then die.

[01:17:31]

The businesses that will be the shareholders will be hurt the most from this period will be the companies that just were too aggressive in the way they finance themselves going into the crisis. And I think that will cause boards to rethink. Super aggressive capital structures. This is like a dream like opportunity for them in some ways you could say with all that cash and prudent leverage and sort of the ability to take on multiple big elephants, if you will.

[01:18:01]

Exactly. So I think I think Burcher I'm surprised they haven't done anything yet that's visible. But my guess is they've been buying stocks a lot. And actually the big opportunity for Berkshire is Berkshire itself prior to the coronavirus crisis was a cheap stock, low to hundreds in the one eighties. It's a real bargain. And so I would expect Buffett to have a hope that he's purchased a lot of his own shares. And I hope he's deployed capital and other companies as well.

[01:18:35]

Walk me through how you see Berkshire Hathaway, like without hitting price targets or anything. Just walk me through how you see the structure of the company, like how you view it.

[01:18:44]

Sure. So. So Berkshire is really principally insurance company, but half of the called intrinsic value of the business is an insurance company that was built beginning with a company called National Indemnity many, many years ago. That's the first I think I think it was the first insurance company he bought for, whatever, 18 million dollars or something like that in the in the nineteen sixties. And then over time, we built the most profitable, best capitalized, unique business.

[01:19:14]

And for certain kinds of insurance, Berkshire is the only place you can call. And so it's a you know, I don't like to use the word monopoly, but it's a very unique, very profitable business. And he structured it in a way, both legislatively, being a Omaha based insurer where he has the flex. And and in light of the the diversified nature of the overall company that unlike many insurance companies that have to keep their assets in something very close to risk free or very highly rated corporate bonds, the deployers kind of float from the insurance business and allowed to invest in equities.

[01:19:56]

And that's generally an enormous advantage. But in this interest rate environment, an even greater advantage. So you have the obviously the most advantage insurance company in the world that is grown its insurance float over time at a nice higher single digit, something like an eight percent compounded rate over time. And the cost of that insurance float has been has been negative, meaning most insurance companies lose money on insurance and make money and float this interest rate environment. They lose money on insurance and they can earn money on on the last estimate.

[01:20:29]

But Buffett is really making money on both sides. So that's the way someone should really spend a lot of their time if they want to understand the companies. And then in the asset side of the insurance company, really the the equities that you read about Apple and and so on, the rest of Berkshire is a collection of sort of wholly owned or 80 percent owned subsidiaries like the Burlington Northern Railroad, Precision Castparts businesses that Buffett has collected over time for their durability and quality.

[01:21:04]

And it's a mixed bag. The biggest one generally are the highest quality businesses offering a lot of stability.

[01:21:12]

I think the utility energy utility part of his operation, the railroad, a very durable, big, profitable businesses and then businesses he's just collected and held on to over many, many years, some of which have have been great and remain great businesses like CS, Kennedy, others to go back and read the Berkshire Hathaway annual reports. And he was glowing about the World Book, Encyclopedia and other such businesses that have disappeared. Dexter Shoe. He was skipping into work thinking about the next shoe company, the worst investment probably he ever made.

[01:21:49]

So even Mr Buffett makes mistakes, which is instructive in and of itself. The good news is when you buy things as opposed to short things, your mistakes become smaller. It's really some part. Decent chunk of the business is industrial company, small pieces in retail and other smaller manufacturing and other diversified businesses. And the large majority is a kind of unique and extremely profitable insurance business.

[01:22:18]

And do you see this as like a long term holding or as a proxy for cash or how do you think about that?

[01:22:23]

Yeah, you know, I don't I think it's a really cheap, interesting stock run by the best investor in the world. We think Buffett's taken an approach toward really all of his businesses. It's extremely hands off. And that's worked very well for many of those companies, but other parts of the portfolio. In our view, underperform the competition in terms of their profitability or growth, etc., and I think the as the generational change happens at Berkshire, it appears to us the next generation is going to be much more focused on extracting the most from the businesses Berkshire owns.

[01:23:05]

I mean, just looking at the Burlington Northern Railroad know a lot about railroads. By virtue of our experience at Canadian Pacific, it's the largest it should be the most profitable, high margin railroad in the world. And it's not. And I think a bit of that is it's Warren's very kind of his reluctance to get too actively involved with businesses that he owns. But I do think that over time that itself. So you have this very well capitalized company controlled by great investor CEO and a portfolio of businesses, many of which have opportunities for improvement.

[01:23:44]

And I think that's interesting. I don't know how long we're going to own it. We always retain the right if we find something better to do with our money, to sell something we own. But in the meantime, we think if we bought more at lower prices in the last few weeks, what are some of the lessons that you've learned over the years from Warren Buffett and Charlie Munger?

[01:24:01]

So a big part of my education as an investor came from reading everything Buffett's written. Watching you're watching him speak. You came to Harvard Business School and I was a student there. One of the most influential things he said to me. And I say to me, because it was me and the other three people in the audience was. You know, if you want to be successful, all you need to do is look around the room and think about the classmate or classmates you most admire and what qualities they have and just decide to adopt those qualities.

[01:24:39]

And if you do that, your chances of being successful go up enormously. And it was incredible advice. And its basic point was, you know, if you want to play the violin, you know, and you're not Yo-Yo Ma and you haven't practiced your entire life, it's going to be hard to think of the violin tomorrow or cello tomorrow and and be a virtuoso. But character and the qualities that enable you to be successful in business, hard work, discipline, returning phone calls promptly after you receive them, showing up at meetings on time, being honest and straightforward fair mindedness.

[01:25:20]

These are all things you can have. If you don't already have them, you can have them tomorrow. But just deciding that you're going to adopt these characteristics, I thought that was a very powerful thing to say. That was one. And then, you know just how to think about investing in the stock market and all of the the Ben Graham isms that he's reinterpreted and presented all that stuff super helpful and just thinking even the way he built his business over time.

[01:25:48]

Buffett started out in the nineteen fifties as an activist hedge fund manager. You had a partnership. He charged a twenty five percent incentive fee over a six percent return, and he was quite active. He would buy stakes businesses. He would push for liquidations of of companies that had large security portfolios relative to the market value of their of their business. He was really an activist investor. And then 15 years in and one hundred million under management, I think twenty five million of it was his.

[01:26:20]

And he wrote his message a letter and said, OK, you can have all your money back. Or you can have stock in this crappy textile company and I can take stock of the textile company, but I'm going to be a little less motivated than was in the past. I made a lot of money. Markets aren't that attractive. I can't promise anything but happy to have you. If you want to go along, take your money if you if you want your money back and.

[01:26:42]

You know, as I like to say, some number of people here, Larry Tisch, apparently withdrew four hundred thousand dollars back then for the partnership, which today would be Homeland. Four hundred million, probably more, probably four billion. And some people rolled their capital. And what's interesting is Buffett gave up the twenty five percent share of the profits for the right to run what he called a crappy textile company with a 40 million dollar market cap of one hundred thousand dollar salary.

[01:27:10]

But what he got was stability, permanency of capital, and that was not lost on me. And so we've basically, you know, our business plan was basically to do the same thing over time. And we're, you know, largely there today.

[01:27:25]

So, I mean, you're going to waive your fees for putting away the fees.

[01:27:29]

No current plans to do that. Unlike Buffett, who runs really a one person operation and has an accountant and a couple of assistants. The way we built our business is we've hired a lot of super talented, highly compensated people. Actually charging fees enables me to incentivize and pay the people I work with. But yes, Buffett is a better bargain than we are because we do charge a way.

[01:27:59]

I want to get to that in a second. But where do you think Pershing Square will be in 10 years?

[01:28:03]

I think in 10 years, where we now have a pretty clear path, the vast majority of our capital is today. It's eighty five percent. And over time that will be ninety or ninety five or eventually one hundred percent of our capital will be in a public enterprise that we're the largest shareholder of that we own. Twenty two percent of our our public company, Pershing Square Holdings today. And our goal is to compound Pershing Square Holdings at a high rate over a long period of time by investing in the kind of businesses we invest in today and over time will become bigger.

[01:28:36]

Shareholders of these kinds of companies will be a very long duration holder. I think we'll do similar things to the things that we do now and hopefully we'll do them better. But I think I'd love to. In terms of ambition, the goal is to have one of the best investment records ever. Buffett's got a fifty five year or sixty year advantage. And Pershing's been in business for 16 years. So we've got a lot of work to do. How do you do you think you'll ever get into buying complete companies?

[01:29:07]

Yes, I think that's possible. Or at least controlling interest in companies.

[01:29:13]

Bill, what would you do differently if you're running the SEC in detail?

[01:29:17]

I would I would lean on short sellers to be sources to help me determine where my eyes look. I think the SEC is generally got a very, very good job and they have a very difficult job and they have limited resources. So let's let's start there. My one area of disappointment with the S.E.C. having been on very rare occasion short seller, is that how slow it takes the SEC to come to conclusions about companies operating illegally or irresponsibly or fraudulently? I'd like to fix that.

[01:29:50]

Getting back to my Herbalife example, before we went public and said, among other things about Herbalife, that they were operating in China illegally because China does not allow multilevel marketing companies to operate. And they were using but they were using the same compensation scheme, the same methodology that they were doing it in a sort of hidden, misguided way. And they inaccurately described how they were doing this in their public, too. And we made a two hour public presentation about this four years ago, something like that.

[01:30:23]

The company comes out and says Pershing, again, is materially misleading investors, accuses us of all kinds of market manipulation, et cetera, in the last six months. And you can go that Herbalife pated settle with the S.E.C. for twenty million dollars for misleadingly describing their China business and their public filings, because it's actually the compensation scheme is precisely the same and the business model is the same as their core business, the United States. Exactly what we said years ago about the company and my disappointments are one.

[01:30:56]

It took the SEC, however many years to come to the same conclusion that we had identified, and they slap on the wrist with a twenty million dollar fine that investors could ignore. And so, yes, I have been disappointed by Herbalife, by the way, is a pyramid scheme, OK? It's continuing to operate and cause enormous harm. The is actually not that up that much from the price. We sure did. We sure did it at a split adjusted twenty three dollars a share today.

[01:31:21]

It's probably thirty or something like that. So it's not been a great investment for, for anyone if they had, if they had bought the stock when we made our presentation. But I do think it's a company that's causing enormous harm. And the government the FTC launched an investigation shortly after our presentation. It took them a couple of years and they settled with the company with two for two hundred million dollars and let them continue to operate. And now the SEC has slapped Morris again.

[01:31:51]

And it does seem like if you're a well capitalized company backed by a very large shareholder and you got a lot of good lawyers, you can out with the SEC and cause harm. And so that is my biggest frustration with the S.E.C. What would I do differently? I would pay much more careful attention to short sellers and I would work more quickly and be more aggressive companies that are causing causing harm.

[01:32:14]

I like that there's people in you in the world that do this, but I also simultaneously question why you do it, like the return on brain power or energy expended for you is so small. Yes, I, I'm short selling.

[01:32:29]

I forsworn short selling for the reasons you describe the calculus. I think I invented this phrase that you seem to be adopting, but I called it return on invested brain damage.

[01:32:40]

The return on invested brain damage for short selling is is quite challenging and public short selling it is the worst because unfortunately, if you go public and say a company is violating the law, everyone hates you, the shareholders hate you, the management hates the employees hate you, you have no friends. And that's why I view it as a kind of a noble pursuit. And I admire the muddy waters and the Jim Chanos is when they come out with detailed work about problematic businesses.

[01:33:13]

I'm less interested in companies that are overvalued that I don't think does so much service to the world.

[01:33:18]

To point out whether you believe a company is overvalued or not, just systemically like this shouldn't exist.

[01:33:24]

But identifying fraud is a very important thing for markets and short sellers provide a very valuable service. And generally, when there are markets that you can't, short prices get to extremes and investors lose lots of money in the housing market was a market that you could not short until the invention of synthetic CEOs and some. It was really the John Paulson trade, if you will, was he was just going short the housing market and. Housing market was allowed to get to extremes because there were no short sellers and there were no no one had any incentive to blow the whistle on overvaluation.

[01:34:04]

The market you can't short today is basically a difficult issue. Today is the is the venture backed market. And that's why you're you're going to see that's why the works of the world are allowed to happen and billions of dollars of money is wasted. So I do think short sellers performed a very valuable service. Now that I'm fifty three and I just had a baby and you know, and the life's too short kind of point of view, we're done with public short selling.

[01:34:29]

It's just not our thing anymore. But I'm pleased to see other people doing it. I do think it is a public good.

[01:34:35]

Do you think that there's a problem with just large institutions like did the CDC and the fail us in this current pandemic and that the problem is the institutions and not the people? Or how do you think about that?

[01:34:48]

You know, what's interesting about this period is it's really been an education in in the what's good about living in a democracy and what's bad for democracy. So you look at how China now the negatives of China is they are the government officials, the local government officials were too afraid to go public with what was going on or when they did that got whether you were a doctor or a public official, you got shut down by you, by the the system that allowed the virus to propagate to became a serious issue in China.

[01:35:29]

The good news is the dictatorship allowed them to very aggressively shut down the virus.

[01:35:36]

Watch. I've made my public case for a country wide shut down and the president instead sort of allowed the states to take the lead in governor by governor, one by one. We got to almost to the place where we should have. And it took instead of twenty four hours, it's taken, you know, thirty days or forty five days. Had we shut shutdown March one for thirty days, the outcome would have been meaningfully different than starting on March 19th and rolling out over thirty days.

[01:36:09]

And we're not even we're still not in a country wide shut down and the degrees of shutdown are different, different places. So I do think it's it shows that the wonderful things about a democracy and that people are generally not afraid to come public with issues. And we have a very well functioning media that's not afraid to surface. Problems, the the downside is we could not we did not take the extreme measures that China took as quickly as it did, and I wish we had.

[01:36:36]

So that's sort of the up down of it. But the CDC, I think I would have thought they would have taken a much more forward leaning public approach here, and it's just not clear what role the CDC has played. You see the coronavirus team led by the vice president, Dr. Felching, Dr. Burk's, etc., seem like capable people. But the CDC has not been this particularly visible as far as I've seen in making recommendations. Where was the CDC in terms of recommending a national shutdown, etc.

[01:37:12]

? I didn't. I missed it. I didn't see it.

[01:37:15]

Yeah, I think, like the post hoc on this is going to be super interesting in terms of how they look at it. You mentioned you have four kids, I think. Right. And you're you're fifty three. What are the lessons that you have? Quite the Ajram trade. So you go from one to how old's the oldest. Twenty to twenty two. What lessons do you try to teach your kids or instill in your kids.

[01:37:38]

So you know, it's a lot of the obvious ones. Hard work pays off. Education is really important. Treat other people the way you want to be treated yourself. A basic, perhaps somewhat biblical type type things. You know, persistence. We started the interview asking what I learned from my parents. And and both mom and dad are super persistent. And you recognize the wonderful qualities of persistence. And then when you live with your parents for six weeks, you there are sometimes associated with those qualities.

[01:38:12]

But you try to teach your kids about that, try to teach your kids about the value of money and, you know, saving and minimizing waste. And then also more difficult topic is you're trying to teach kids about nutrition. That's a very high risk subject to talk with your guilty pleasure.

[01:38:35]

Do you have chocolate in the house?

[01:38:37]

Yeah, I am a big dark chocolate fan. I like this one. It's called Endangered Species, the eighty eight percent and it's amazing. Eighty eight percent just seems too good to be true. It's sort of very, very good. So I that's definitely on my list.

[01:38:53]

Is my weakness tuning and trying to get some of that. Bill, thank you so much for your time. This has been amazing. Yeah, I enjoyed it. I really appreciate it. You can find show notes on this episode, as well as every other episode at F-stop blog slash podcast, if you find this episode valuable, shared on social media and leave a review to support the podcast, go to F-stop logged membership and join our learning community. You'll get hand edited transcripts of all the podcasts and so much more.

[01:39:30]

Thank you for listening.