Rishi Ganti - Esoteric Assets - [Invest Like the Best, EP.46]

I know firsthand how complex the tech stack is for asset managers, and seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount, and more risk. Ridgeline offers a better way forward, one unified platform that automates away all that complexity across portfolio accounting, reconciliation, reporting, trading, compliance, and more, all at scale. Ridgeline is revolutionizing investment management, helping ambitious firms scale faster, operate smarter, and stay ahead of the curve. See what Ridgeline can unlock for your firm. Schedule a demo at ridgelineapps.com. This podcast is sponsored by CFA Institute, the global association of investment professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals working to build an investment industry where investors' interests come first, financial markets function at their best and economies grow. The Chartered Financial Analyst Credential is the most respected and recognized investment management designation in the world. The views expressed in this podcast do not necessarily represent the views of CFA Institute. Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com. Patrick O'Shaughnessy is a principal and portfolio manager at O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast. Before we begin, there is something else that I want to bring to your attention. I'm working on a new project, codenamed Frontier, and I'd like you to be involved. The honest truth is that I am not yet sure what Frontier will be, other than a means to connect what has become an insane network of smart, interested, and interesting people who can all stand to learn from one another. I aim to bring this universe of learning fiends together and to do so soon. To get involved, you can visit InvestorFieldGuide.com forward slash Frontier.

where you'll have the option to sign up for updates and early access, or even apply to be part of Building Frontier. Whatever this becomes, it's going to accelerate the rate at which we all discover and apply new ideas in investing and beyond. I can't wait to build it together. Now, on to the show. My guest this week is Rishi Ganti, whose resume is bonkers. I'm not sure what to do other than laugh in amazement at his professional credentials. PhD in economics, CFA, CPA, lawyer, speak six languages, and so on. The best part is he isn't lording these credentials over anyone, and in fact, casts some shade on the whole idea of credentials in our conversation. He just did it all because he's a learning fiend. Rishi's core idea about markets is this, avoid markets at all costs. As he explains off the bat, the minute there are multiple buyers for anything, prices get efficient very quickly, and therefore opportunity to find alpha shrinks. Instead, he searches for what he calls esoteric assets, things without a market, orphaned assets that require high human capital and human touch. We explore several interesting examples from charter school financing to factoring receivables for the Vatican. A stark realization I had during the episode is how big the world's asset base is. Almost all of our attention goes to the most highly refined ones, stocks and bonds, but there is a whole other world out there. We explore in great detail. The closing sections of this conversation on what Rishi would do if not investing and his answer for the kindest thing that anyone has done for him were among the best answers that I've heard. Please enjoy this great conversation with Rishi Gandhi. Rishi, thank you very much for doing this with me. This is going to be a very interesting conversation. Largely because I don't know all that much about you and your background. So this will be a couple hours or an hour of discovery for me as much as it is for people listening. A fun place to start would be your overall take on markets. And just that word is an important one for you. But you've got a variety of interesting experiences across sort of the traditional Wall Street circles. But the place that you've ended up is extremely different.

It's actually a category called esoteric assets. So by design, very different. So I'd first love just to hear your very broad take on the very concept of markets and whether or not you like markets. So I think markets are one of the greatest human institutions ever invented. My personal training was in markets. I received a PhD in economics with a specialty in finance. In that era, not to date myself, in the 90s, the number one thing you would do to graduate with a dissertation would be you would try to show that markets weren't efficient. Of course, they are highly efficient. So you would find the smallest of... tremors in the market, the smallest perturbations, we called these anomalies. And I won't tell you I was a poor graduate student. I was paid to attend school and then we were trading on all the anomalies we could discover as we were delivering seminars on them. But bottom line is when I graduated, I had a healthy respect for markets, both in the way that they could change things for the good. And at that point, there were lots of experiments, for example, with markets in carbon trading or other sorts of purposeful markets to help things. as well as a healthy respect for the fact that if you tried to beat a market, you would generally lose. And so I actually entered a world of very mysterious assets, assets that I would later call esoteric assets. Those are non-bid, non-flow, non-market, non-auctioned, non-bid. They are typically one of a kind, orphaned or ignored. And with that, I'll just tell you why I think really attacking a market or having confidence in the face of a market as an investor is an act of hubris for most. So investors are paid very handsomely, 2 and 20 classically in the hedge fund industry, to quote unquote beat the market. But investors are ultimately comparison shoppers.

They try to buy low and sell high or they try to sell high and buy back low if you're in a very liquid market. And that's tough. And that's tough because of something that, you know, Patrick, you and I both learned in our first course of microeconomics, which is a price mechanism. So classically, there'll be a lecture where somebody will bid off a dollar bill. If you're really bold, try 100. Believe me, the result will be the same. And there's some awkwardness in the classroom. Nobody wants to participate in class. But some kid's going to bid 50 cents. Some kid's going to bid 60 cents. And you don't need everybody in the class to participate. You just need these two guys to go at it. And pretty soon that dollar bill is going for 99 cents. But what's alpha? Alpha is that magical substance that everybody in the market wants. It's the only thing that matters for an investor. It's the only thing. Every time we use phrases like risk-adjusted return, abnormal returns, we're really using code phrases for alpha. Alpha is the difference between price and fair value. So if you even have two bidders in a market, you're squeezing out all the alpha that exists. Even worse, I told you the value was a dollar bill because I'm showing you the dollar bill or the hundred. But in the real world, assets have uncertain values. Phenomena like the winner's curse enter. And the asset pricing literature is quite robust in indicating that investment managers, these handsomely paid 2-in-20 comparison shoppers, generally bid $1.02 to $1.12 for these assets. In other words, on a risk-adjusted basis, the asset management industry is a money-losing industry, even when they're up and the returns look good, like they make 20% in a year. They really should have made 25 or 30 on a risk-adjusted basis. And that's because they're fighting the market mechanism. Now, the market mechanism is awesome. It's why, maybe not in your family, because your family seems to be very well pedigreed in finance, but for most of us, our parents and grandparents can buy stocks, for example, in the stock market and get a reasonable price. They're not being hoodwinked by the market. Prices are extremely accurate. You don't have to be on Wall Street week with the late Louis Ruckheiser who would pit monkeys and children against Merrill Lynch analysts and gleefully chortle as these children or monkeys won to understand that markets are generally efficient. So it's a great thing socially. It's a tough thing for an investor, and that's a good thing overall.

There's a great analogy I saw you mention elsewhere about sort of a mountain with rising water. And the bottom of the mountain is sort of the most assets most impacted by markets or maybe most efficient. So this kind of mountain is something that for investors looking to earn, we'll call it true alpha, some sort of return that may be reliable and is not correlated to stocks or bonds or really, really liquid markets. Can you describe sort of the stages of that? of that mountain and that analogy as you see it. And then we'll, I know that esoteric assets sit at the top, but I'm very interested in kind of how you think about each asset class as you move your way up that mountain. Sure. So basically the question is, as that 99 cents goes to the dollar bill, or really that 99 cents becomes a dollar two or a dollar 10, which markets or which kinds of assets are most susceptible to this, which is just a price mechanism. It's just microeconomics one-on-one. And clearly, The assets that are the most susceptible are the most liquid. So those will be currencies or stocks or mortgages, anything that is rapidly traded where information is highly refined and instantaneous. In those areas, what I'll call cheap pattern-seeking agents, they might be computers, they might be offshore people in India or China, or they might just be people doing things at home, will quickly find the right price. And therefore, the $20 bills lying on the sidewalk really aren't there. And so that's the least available. And then as you move up the mountain, you'll see things that are, well, they're still traded. And as long as things are traded, a price mechanism is active. Again, you only need two students in that class to make things work. So you'll enter things that are a little less liquid, like bonds, things that are off, quote unquote, off the run, anything where the phrase off the run enters. But frankly, prices are highly efficient in those sectors as well. Not a lot of $20 bills lying on the ground. I would say the next level are what are so-called niche assets. And what I do is not niche. Niche assets are things that sound cool. They're like rail cars, aircraft leases, music securitizations, drug pharma royalties, tax liens, mechanics liens, litigation finance.

These things all sound awesome. At the cocktail party, you know, if you're trying to buy IBM. Music royalties or something. Right. I'm buying music royalties. I'm definitely the one who's going to be able to command the conversation. But in the end, those are also competed assets. You still have the two students in the room driving up the price on the dollar bill to 99 cents or beyond. The alpha is still being squeezed out. If you're seeing superior returns there, those returns are probably more apparent. than real. There's exposure to very legitimate risk there. As you move up, disintermediation becomes much harder up this mountain. Cheap pattern-seeking agents find it difficult to enter, whether they're computers, people offshore, or just retail investors. Information flow is harder. These will be the high human touch types of activities. M&A, buyouts. And you can even make analogies to certain kinds of human activities as well. These are hard to refine into market contexts where there's just, for better or for worse, some kind of open outcry bid. And finally, you have esoterics. And esoterics are those assets for which somebody is bidding off the dollar bill and the student bids 50 or 60 cents for it, then looks around the room and realizes nobody else showed up to lecture that day. You are the only bidder on the asset. In order to get real alpha, in my opinion, and this, again, I think is robust to criticism because it stems straight from basic microeconomics, you have to avoid a price mechanism. And to avoid a price mechanism, you have to avoid a market. So let's go back to the early days of this discovery. It'll be helpful at this point to give one example. Hopefully we'll give several because I think that's probably the cleanest way to learn sort of this brand of investing. But maybe you could give one of the examples of an esoteric asset from early in this kind of journey of yours. What it was, how you discovered it, why you were at the time the only bidder in the room bidding 50 cents. Let's use an early example to explain kind of this general idea. Okay, sure.

I'll just give you a few examples right off the top. I mean, we've done low-income housing in Peru. We factored receivables at the Vatican. We financed the government of Iceland, and we invented the market for charter school finance in the United States. These are mere examples. But when I first came out of school, I was trained quite broadly in everything from stochastic calculus to law. And I ended up at JP Morgan working for the bank itself on their more exotic assets. That's where they wanted to put me. And sometimes, you know, JP Morgan is a sprawling enterprise. And in the far reaches of that bank, sometimes they will end up one way or another with assets that a regulator will look at and say, hey, look, I don't want you owning that, whatever that is. For example, there could be a tax asset, a piece of intellectual property. that needs to be crystallized, meaning it needs to be sold to take a loss. Maybe J.P. Morgan somehow acquired it at a higher basis, but needed to get rid of it at a lower basis to crystallize a tax loss that would help out J.P. Morgan on their taxes. There's nothing else this asset's going to do for them. Problem is, they can't sell it. They can't sell it because it contains a tax technology or because it has some kind of intellectual property or provides a signal to strategy in other areas. So they can only sell it to one buyer in a confidential transaction. That sale, which will be an arm's length transaction, and this has nothing to do with J.P. Morgan. Large institutions all over the world face similar sorts of problems. The price that this buyer will pay will not reflect any kind of activity in the market, nor will it reflect anything resembling the intrinsic value of the asset or the value to J.P. Morgan. pay some incredibly low price. JP Morgan will take that price in a one-off transaction and crystallize the loss, and it will rebate some of the tax value of that loss to the buyer, essentially for having done a favor. And when I saw that, when I saw that there were assets that were being passed among buyers and sellers that were trading hands,

at prices that had no relationship whatsoever to their intrinsic value due to, let's say, regulatory tax accounting or other rule-based concerns, I realized that there was a much greater world out there than just what is lit up in markets. Now, my vision is much better. I mean, Patrick, you and I are talking in a conference room, and everything here is a non-traded asset. The microphones that we're speaking into, these monitors, the books, this table. The cell phones that we have, all the laptops, these are all non-traded assets. If I were a forced seller, you could not only bid the price, you could bid $3 for everything. This is not a valuation exercise. You don't need to whip out a pen or a pencil. But in addition, you could dictate the terms. You could ask for all the computers to be nicely scrubbed and cleaned and all the books without any marks in them, delivered how you like, and you could have a right of return. That's the world of having no... Competition is almost axiomatic. And so when I was there at JP Morgan, I knew I'd stumbled on something, but I wasn't sure what yet. Mechanizing it was the problem. Given how big this universe that you're playing in is, why is this the first conversation I'm having about it? And why isn't there more big institutional dollar competition? Just given the size of the opportunity set, what are the kind of structural or persistent durable limits that keep competitive forces and markets out. I'm going to surprise you and say I don't really think that there are real barriers to entry aside from the human capital required. For example, when we started Charter School Capital, Charter School Capital just did a couple hundred thousand dollars of receivables in its first year of existence. Today, it does a couple hundred thousand dollars of receivables every business day in what is now a market. that we created of hundreds of millions of dollars. So what's going on is the question. So first, there are two parts to that answer. The first part is, what is the size of what I'll call esoterics? And again, that's just because saying non-bid, non-flow, non-market, non-auction, non-brokered, one of a kind, orphaned or ignored is such a long phrase. I just had to make up a word for it. So taking a step back and thinking a little bit into deep theory here.

We know that the world of non-traded assets simply has to dwarf the world of traded assets. But our attention is exactly the reverse. We spend all of our attention on traded assets. So let me show you both of those principles. In order for an asset to be traded, whether it's a stock, bond, currency, or even something like a venture capital deal, frankly, that's a trade. Because if somebody's raising money in Silicon Valley, a whole bunch of VCs will hear about it, okay? The fact that these are so-called private markets doesn't mean that they're not markets. They are highly, highly competitive markets, even litigation finance. In order for that to happen, the asset has to be very refined. No stock can simply be on the New York Stock Exchange. If you own your little... coffee shop or something. You don't just get to be on the New York Stock Exchange. There's quite a bit of process in order to, quote unquote, go public or to be traded on an exchange. And so the assets that we read about in the newspaper, what do we read about? We read about Janet Yellen. We read about Mario Draghi. We read about student loans. We read about Apple, Uber, Google, Facebook. This is just the tip of the iceberg. We have all this attention there. But the vast world of assets has to be somewhere else because they could never possibly have been so refined. The analogy that I use there is light matter and dark matter. Light matter is what we're concerned about. It's what we can see. If you think about it, 99.9% of your attention is focused on things that are within 100 meters below the ground to about 200 meters above the ground. And that is just a fraction of the matter in the universe. But all of your attention is concerned with that. Isn't that the case? And so physicists say things like, we don't really know, but we calculate that there's 10 times as much dark matter in the universe, stuff we can't see, than stuff we can see. And we're even only concerned with a fraction of what we can see, which is just like a thin sliver on the face of the earth. And that the same thing is true with assets.

So the stuff you read about in the newspaper and all the markets you can see and anything you can pull up on a Bloomberg is just a vanishing fraction of what's really out there. And to work with that, you pay a terrible, terrible price. Now I'm going to lead to my second analogy. And for some reason, it always ends up being Whole Foods, so I'm going to do this. So I eat a lot of fish. And I like buying fish at Whole Foods because the selection is great. It's very convenient. You can pay with your credit card. You can get there with the subway. They'll even give you the cut that you want. And if you know the correct questions to ask, you can get sushi grade. There's a variety. And what happens for all this convenience? Did you get the fish below fair value? No. In fact, you know you got it above fair value because Whole Foods needs to make a profit margin. Or maybe you can argue that's fair value. Compare this with, I don't know, a fisherman. The fisherman just goes out with a boat and a fishing rod and plies his or her trade on the open ocean. And the value of the assets brought back, the fish, will have no logical or necessary relationship to the costs of the enterprise, the boat, the fishing rod, and any permits or licenses that may need to be bought. That doesn't mean that there isn't high human capital involved. It's not easy to sail a boat or to fish or to know the laws regarding the same. or to pull in the fish and keep them fresh. But that's what it takes. And so in one example, the latter one, you have a raw asset. And in the former one, you have a refined asset. In the former one, you can never get alpha. In the latter one, well, maybe you will and maybe you won't. And so those two things are there. Now, you asked the question about barriers, basically barriers to entry. And I work with someone, his name's Brian, and Brian's very, very... He had a perfect SAT score. He went to Wharton. And what did he do? What did this gentleman who had everything open to him do? He did what everybody else does. He went into banking. And so there are these well-trodden, well-paved highways, whether they're stocks, bonds, derivatives, venture capital, private equity, real estate. It doesn't matter what distressed.

Any business you can name is a well-trodden highway, and for some reason, people want to be on the highway. They want to shop at Whole Foods with the credit card and the perfectly wrapped fish that they know is fresh, that they can get into their car, into the subway, and just go home. And so there's something about that there's such a great resistance to being a little bit more like Indiana Jones and venturing off into the world of unstructured data and unstructured assets and to be that fisherman getting the fish out of the ocean. It is a pain. to do that. But the rewards are so great, not just privately, but socially. I mean, charter school capital, for example, and that may be an example we should go through, has done more for charter schools than any Betsy DeVos or any education secretary ever could. When we surface assets into markets, we create value that extends far beyond that which we capture for our investors. Just pause and talk about that for a second so you said surface. service into markets. So let's walk through the charter example, kind of from soup to nuts. So you've said a couple times now that this is sort of a market you helped create or did create. So maybe tell that story as an example of a return opportunity that started as a kind of a pure esoteric asset. Sure. And by the way, I should be a little more humble here and just say that there's a team that did that, led by Stuart Ellis and Brad Coburn. I was very... proud, if anything, to be associated with it and to finance it and to find them and to help get this underway. So what was going on there? So let's talk a little bit about schools, because in order to understand esoterics, you can't speak in generalities. We're going to have to get concrete. So what's interesting about charter schools that most people don't realize is that they're not private schools. They are public schools, and they will be paid by municipalities, including, for example, a state like the state of New York, in order to teach students. They're just alternative public schools. That means that the payments that go to charter schools are essentially municipal obligations. You'll have to check each state as to what the rules are. Let's look at California, which is a state that I'm very familiar with in which we started charter school capital. What's interesting in California is that the schools are actually safer than the bonds. California has a waterfall.

In its constitution, it's a very modern constitution in some ways, and there's a payment waterfall in it, and the teachers made darn sure that schools were the number one payment in California. It pays the schools first, and then it pays the bonds. This means that schools in California are essentially quadruple A. If schools should ever float bonds, they are rated A1 plus P1, and in some sense that rating is too low. Arnold Schwarzenegger was governor. John Chang was a very media-hungry comptroller. John Chang would get up and give speeches as he announced that he would be paying state workers in California in script, in IOUs. He said, well, California will pay you someday. He would say, the only entities that I need to pay are schools. Now, here's the next part that's interesting. Charter schools couldn't borrow for the life of them. So it was interpreted in California and many other states that they weren't violating their obligations to schools by delaying payments to the schools. They just had to make the payment. To my knowledge, that hasn't been tested in court. It may have been tested. But California would say something like, look, that payment you were expecting in June or early July, it's not coming. We're really sorry. It's coming in a couple months. Our state budget turns over in July. New tax revenues will come in. We're just delaying it for a little while. Now, if you're a public school, you might be a little panicked. You call the district office. You speak to the CFO, and she or he says, oh, don't worry. I'm all over it. And that CFO will have called Morgan Stanley. who seems to have a lock on this business, and Morgan Stanley will issue something called an ERAN, an Educational Revenue Anticipation Note. And that bond works just the way you think of it. You pay money for the bond, and that money goes to the school. And then when California gets around to paying, you get that money. Since it's a quadruple-A asset, ERANs are issued at yields in the basis points, and this was true even as Lehman was failing. That's how safe they were. But if you're a charter school, you don't have a phone call to Morgan Stanley.

If you try to approach a bank to get to borrow, the bank will ask, what are your assets? And here's the thing. You don't have any. You don't even own the building that you teach in. You probably rent that building if you're a charter school. You might have a few desks. You don't have any credit history. The bank can't cross-sell you things like auto loans or mortgages. You don't meet any traditional underwriting criteria. And so, frankly, you go bankrupt. Why? Because that check is a lumpy payment. It's a big payment, perhaps. You need it to pay salaries, the rent, utilities, et cetera. And there's no bake sale or whatever charter schools do to raise money in two weeks that can save it. And as a political aside, I will say that probably traditional public schools sort of like that because it's a check on charter school growth. So charter school capital came in and said, well, look, you're getting a payment of, let's call it, $100 in a couple months. We'll pay you $99 for it today. And boom, just like that, the financing problems of charter schools were solved. Charter school capital is absolutely not out there to gouge schools. So the effective rates of interest are very, very favorable to schools. These factored payments last only as long as the payments are. So these are very brief payments. So the financial effect on the school on the downside is minimal. But the fact that the school avoids bankruptcy is incredible. And every time charter school capital enters a new state, they're in 12 now, and they've expanded from attendance receivables, which is the receivable I just described to you, to all sorts of myriad things, school lunches, ESL payments, federal science grants, so-called MCRs, mandatory cost reimbursements, which are things like handicapped access ramps that schools have to build today, but they don't get reimbursed for for a year. These are all very mysterious assets that we were able to unlock for the schools and create a market and basically cause massive charter school growth. In fact, the big CMOs, and CMO in this context means charter management organization. Those are the multi-campus charter schools that really know what they're doing. They're the biggest client. We thought that the unsophisticated schools would be the ones that would use this service the most. Absolutely not. They are the schools that are run by former.

investment bankers at Goldman embarking on their second careers as tycoons, those schools are using charter school capital as a form of acquisition finance. If they have 50 or 100 students waitlisted at their schools, the laws of states are a little bit discriminatory and they work really hard to make sure that a charter school cannot lift those students off the waitlists. For example, a very typical provision that states will have is that a school, if it takes a student off the waitlist, the school must prove that it has been teaching the student for six to nine months before they even get one payment to teach the student. That's a huge working capital outlay initially that a school must make in order to take on a student, and that basically means that the bleed from public schools to charter schools is very slow. Enter charter school capital, charter school capital can walk in and pre-fund all 50 students, and boom, the charter school suddenly has a lot of students. And there's a public school that basically has to increase its performance to compete. This is charter school capital. Today, that market is in the hundreds of millions of dollars. That's what I mean. It was not a market before we entered. It is now. And institutions such as East West Bank, Comerica Bank, and BlackRock have funded it. And it just started out as three men and a dog in a room just like this. That's what I mean by surfacing an asset into a market. And once an asset is in the visibility of a market, I'm not saying that markets treat assets perfectly. There are well-known failures of markets in pricing assets efficiently. But when an asset is not priced at all, the social value pickup by introducing it into a market where at least it could be seen by more traditional sources of capital is immense. And that's what we did for charter schools. So it's a great example of... the requirement to know a world with a ton of detail, right? And you mentioned earlier this phrase of like very high touch, requiring a lot of human capital, domain expertise, etc. So I want to get into more examples like that and start to eke our way into how you build this into an investment strategy, right? Because that's one example. And I think there are within a given fund, or you can tell me, you know, how many individual examples like that, that there are that roll into this kind of total return stream.

That one, though, sounds like a relatively lower total return type strategy. The effective interest paid by the school is relatively low because of the high rating associated with it. But it's back levered. So, for example, financers typically provide us 100% financing. It's a quadruple A asset. So if $100 has to go out to the school, well, it's not our money. We'll get $100 from the bank to do it now. Charged School Capital has done more than $1.5 billion of these assets with essentially zero loss. The banks are not worried. There's been no loss to any investor. The states are still around. So your return on capital is almost arbitrarily high. Yeah, makes sense. So I'd love you to pick another example, maybe an international example, because that's a key flavor to what you do, whether it be in, well, you pick the geography, I'll let you do it. One of the fun factoids about you is that you speak six different languages, I think, which again, back to. high human capital needs, if you're operating in lots of different geographies, that can be a big competitive advantage. So first, maybe tell me what those six are. And then ideally, we'll use one of those six languages as a bridge into an international example. Sure. I'll tell you that, again, I didn't speak these growing up. I did not grow up in Switzerland or anything like that. I grew up on... the south side and the south suburbs of Chicago, where an entirely inappropriate language for this podcast is spoken. But I do speak at a professional level, English, German, Portuguese, Italian, Spanish, and French. And I do work in all of those languages. I'll be in Italy in just a few days. And I'm happy to tell you, for example, about what we do in Italy. So in Italy, somewhat similar to the charter school example, where we're basically... earning something against a sovereign, we're doing that in Italy as well. And just to close off the charter school example, remember, if we make on an IRR basis something like 10% off a school, the actual risk of the payment, the municipal bond risk, is something like 10 basis points. So there's something like...

100 times more alpha in the trade than total risk, right? Because if 10 basis points is risk, and we know that analytically, we're not really guessing because the market has priced it for us in an ERAN. Well, it's hard to explain the other 9.9 points, right? That's clearly abnormal return that can't be ascribed to any systematic factor of risk. And I would argue to you, I would posit to you as a puzzle that it may be alpha, a payment for a service for surfacing this asset into a market. What about Italy? So in Italy, The government is very, very behind on a bunch of payments. Italy is in a very precarious state. And I was actually overjoyed when Mario Draghi became the head of the European Central Bank because Italian bankers are actually very, very smart because they have to do a lot with very little. That country is crippled by a pervasive culture of tax avoidance and what I'll call... black transactions that are never seen. It's not a high transparency culture. And it really falls on the bankers to figure out how to make something out of that mess. The Italian government at all levels, from the national level down to the local level, basically arms its own agencies and citizens. And let me describe how that is. A classic example would be a hospital. A hospital may treat a bunch of patients. And then the hospital will bill the state of Italy. Health care is nationalized there as it is in Canada. And then the hospital won't hear back. No payment will arrive. And this is just my story. I'm not saying it happens this way. But it's something like the hospital billing department calls up the local disbursement authority and says, hey, where's our payment? And the disbursement authority says, what payment? And the hospital says, here's the invoice number. Here's the control number. Here are all the reference data. And the disbursement authority says, oh, that payment. Yeah. Hmm. Well, we're getting to it. By the way, I heard through the grapevine that you might get audited. And that's going to be really painful if you don't have sufficient evidence behind every single patient you've treated. Well, we're going to have to claw back some payments, delay other things. It could lead to other sorts of investigations. It's really painful.

But what we can do for you is if you agree to something like, I don't know, 60% of the payment that you were billing us for, I have a hunch that that audit won't happen and that you'll get the payment in the mail in the next two months. But, you know, up to you. That sort of thing happens in Italy all the time. I'm not going to say whether it's good or bad simply because there are so many dimensions to the moral quandary that Italy is in fiscally that it's really hard to draw a conclusion. Let me just say it's tough. And so in that zone, we have a team that will go in and will pay the hospital much more than it ever would have gotten for that payment. And we'll secure that payment against the state of Italy when in court. OK, it's got to work in court to do this. And we'll make Italy pay on that payment and essentially force Italy to behave. We have factored state payments in Italy to the Vatican, to hospitals, to refugee camps. to fraternal orders, to Catholic fraternal orders, to women's shelters, all keeping them operating. Again, there's a big difference between the total amount that needs to be paid and just to have working capital on time, just like in the charter school example. Look, the schools might not need, for example, the whole $100. $98 or $99 is fine. But if they don't get it, they'll go bankrupt to the glee of the local traditional public school. And so we sort of keep it operating in that. And that's something that happens in Italy. And I want to go into one more thing. You talked about how to make it into something that we can invest in. So there are kind of two modes to go about this. And it took me a while to figure out the right mode. So one mode is we all know proverbially that there shouldn't be $20 bills on the ground. So I want to say if you find. a $20 bill on the ground, or more importantly, if you find, or more appropriately for an analogy, if you find a gold nugget on the ground, what you could do is pick it up and put it in your pocket and you'll be rich for a day, let's say, rich for a day. But at Orthogon, what we don't do that, we've eventually realized we should operate on a meta level, on a meta investment level. So instead what we do is, yeah, we pick up the gold nugget, but then we look around, we say, who owns this land?

We buy all the mineral rights to the land, and we put an expert mining operation on the land, and we will mine that seam until it gives up. So at Orthogon, we're not actually making investments in the sense directly into assets. We're not trying to be those comparison shoppers. We're not trying to be paid for what I call static kinetics, which are just buying low and hoping you sell high or selling high and hoping you buy back low. We are actually building machines. We're building alpha factories. that can mine an opportunity when we see it. And what I like about these factories, whether they're in the US, Charter School Capital, or in Italy, or in any of the other countries that we have, we currently have operations in six countries, is that the physics are different. They are smart bullets. They can think, they can grow, they can react to threats, they can expand it to adjacencies, they can take a peek into the future. So we build these machines to do what we need to do. And I think that's really necessary when you're venturing into territory that people have never seen before. So it's sort of like the joke, like there's never one cockroach in the kitchen that if you see one example of a factoring opportunity. It usually is indicative that if you built one of these so-called machines, you'd be able to effectively harvest the opportunity more systematically in a given space. That's right. And is that what you refer to as sort of a platform? That's what we call a platform. And even more than that opportunity, remember, platforms can learn. They're really alive. Our investment strategy is biological. These platforms can think and grow. And I'm a new father, and it's amazing to see. My daughter, Kahana, learned new things every week. She's at the age where every week it's like we have a different baby, as the wife of a friend of mine likes to say. And the platforms initially will struggle with the asset. You really need high human capital to be applied to something, again, that's never been done before, that's absolutely novel. But after a while, they get it. And not only do they get the asset, they'll get adjacencies. That mine, for example, we don't do mining. It's an analogy. But it may say, well, it's not just gold. There's silver here too. So there can be what I'll call a product adjacency. Or there could be a geographic adjacency. Again, charter school capital started in California but now expanded into 12 states or more than 12 really. So once these machines are created, they can take on a life of their own and they're programmed with genetics.

that caused them to seek alpha pretty relentlessly starting from where they're at. And that also builds in safety as well, again, because they can react to threats. So we create these platforms, and we have six right now in our first fund. And that's pretty healthy because, again, they self-originate. One of the things that I've sort of talked around a little bit is I keep talking in an analogy as if they find the assets, like you find. the gold nugget on the ground. But really, we're in an asset creation business. The asset was submerged, and we pull it out, we refine it, we create it in a manufacturing process, and then we proceed to own it. And that's why there aren't other students in the room bidding on the asset, because we're the one creating the factory for the assets. I don't want to lose something you said earlier, which is this idea that you make the Italian government effectively pay. that it has to hold up in court. So what is it that you or the platform is doing on the ground that's different from what the capabilities of the hospital or the Vatican or whatever the, whatever the example is are capable of themselves? Because I would think that. if it's something that can hold up in court or something that could be fought effectively so that you get $80 instead of $60, that just the hospital would do it or a group of people would get together and kind of hold the government's feet to the fire. So what is you or the representative on the ground doing in the middle that creates that opportunity? This activity is extraordinarily difficult, actually. If you are a hospital and the government is... basically telling you sideways that it's not going to pay. The enforcement action that you would need to undertake on this one-off basis is so gargantuan and requires such a great deal of expertise, you basically need our team. And every time you hire, Patrick, a lawyer or an accountant or you...

go in for a surgical procedure, you are engaging in the same sort of activity. You could perhaps perform the surgery on yourself. I don't know. I can tell you, you are absolutely capable of filing your own tax returns, but at some level of complexity, it's just not prudent to do so, especially if these things happen on a one-off basis. Collecting all of these one-offs together and mechanizing them can be a source of value, and that's what our platforms do. We're not saying that the hospitals... Don't have the wherewithal to do it. But I'm telling you, if you don't know your way around the court, this is particularly true in our Brazil example, which maybe we'll go into also. It's far more cost effective for you to do it with us, I would say. And I think the real issue is we can't find all of the state agencies that are in this kind of predicament. It's really a discovery or a search problem where if they just knew we were out there, we would do it. Very fragmented. Right. Yeah, this theme has come up over and over again to search for fragmented markets for opportunities where there's common themes, but sort of the different agents aren't talking to one another or don't know the other ones exist. And again, this is not even a market. Understood. Right, we're not even there. Understood. Right. So I'd like to use, as you have, use analogies to help people understand this. Would it be fair to... And again, just an analogy, almost think about Orthogon, you and your team as a sort of fund of funds and the platforms as the individual managers, meaning the teams on the six different platforms. first describe what one of those is. Is it an office? Is it a collection of people? Like what goes into that machine, that platform machine? And is that analogy a clean one for understanding kind of what you're doing, which is sitting at the top, allocating your investors' capital kind of into these platforms? I'm assuming they're not like equally weighted, like you're doing, there's some portfolio construction happening here. Is that a fair analogy and maybe use it as a way of describing what a platform looks like? And it's not, but that's a really good.

Really good question. Really good intuition. It shows that you're on the right track. All of the platforms are operational businesses. So we are definitely not a fund to fund that invests in managers. They are we and we are they. There's no separation. So we are more than joined at the hip. We are organically attached. So all of these teams have orthogenetics in them. We are inside of them working their processes. managing the cash. So they are our businesses. You could think of Orthogon a bit as a holding company, but even that is not really accurate as well. So you could just say that Orthogon is a system of sister companies all around the world. So although my background definitely is in asset pricing, we became essentially businessmen. We became industrialists. That's the best way to think about it. People who invest in Orthogon are investing in a collection of operational businesses that we operate in part, and the platforms operate far more than we do, but provide the rest of the management for. Another thing that we tell people is that it's a mistake to consider Orthogon's human capital as just the several people sitting in New York. well over 100 people working for it all around the world. So again, we design businesses. You mentioned both that you're not good at marketing and also that you've deployed a billion dollars into esoteric assets. I guess you didn't mention over what period, but it makes me very curious about scale. So how much, let's say you get a blank check and you have some time to build out more of these platforms. What is kind of the potential scale of this? Is being smaller? an advantage. What might the future of this look like? How competitive is it? Do you know other managers that are doing all esoteric type assets like this, or is it pretty unique? So answering your questions a little in reverse, we know at Orthogon, we don't have competition per se in what we do. If we did, we would know it by now. We don't know of any other manager doing what we're doing. There are certainly other managers that focus on unconventional assets or niche assets, but they're all competed.

In the sense of being pretty strict on looking at non-competed assets, esoterics, one-off, non-bid, non-flow, non-market, non-auction, we're alone. And we've developed dozens of years of human capital in order to do it, to build these machines to attack them. Now, even if there were competition, that would be fine. Because as I said before, remember the light matter, dark matter? Again, for the trillions of dollars in lit market, there must be tens of trillions out there. in unlit spaces. So there's plenty to do. We extend the invitation, but as we go through the jungle or go through the forest truffle hunting, we're not bumping elbows with anyone else truffle hunting either. It's very big. We'd welcome people in. Again, there's a lot that can go wrong. If you're buying a piece of real estate or a stock or a bond, investors, traditional investors, and to me, everybody's a traditional investor, there are lots of things that can go wrong, but actually the number of things that can go wrong are fairly limited. actually in refined assets. In unrefined assets, which is what we deal in, a lot more can go wrong. The problems that we're working on, the puzzles that we're trying to solve have been around for years and years. The Italians, for example, 2009. Mexico, we knew about since 2012. Spain, 2009. Portugal, I'm sorry, Portugal again, 2012. The US, charge school capital, 2008. Brazil, since 2009. I liken it to, let's say you have a forest that you like to take a walk in and you bury your wallet underneath a tree. You could come back four or five years later. I don't know the condition your wallet will be in, but it'll probably still be there. Nobody will have found it. So the scale of this is whatever you think the scale of more traditional markets. And again, I include private equity, venture capital, litigation finance in those, as well as stocks, bonds, and derivatives and currencies. Multiply by 10. Now, on the scale problem, we believe at Orthogon, we philosophize quite a bit, okay? If you don't like getting intellectual, you will not like us at all. We believe we have solved the scale problem at a first order of magnitude because what happens is we create the machine around a given niche, and that becomes the dimension of analysis. What am I saying? For example, if you're a long-short investor,

And you have $100 million. You can pursue lots of potential anomalies that are out there. And there's a good literature. It's a debatable literature, but there's a good literature out there that generally says smaller managers are better and that as managers grow, they enter a zone where, and now we understand this from this podcast, things are more competed. And the more competed something is, the less alpha there is by definition. So you need to stay small in order to maybe see things other people aren't seeing. This kind of rule of thumb, this kind of intuition does not apply to non-market scenarios. Because once you have identified something, think of like venture capital. Once you've identified that people aren't renting out their own homes and you make Airbnb, the scale question kind of disappears and an efficiency question emerges, right? It's different. And so we're in an operational business. So that's what happens. So we will lay down these platforms every single place we can see them. We've raised somewhat more than $100 million, but could easily deploy at this moment twice that amount to platforms that are essentially self-originating. And that's what I would say about scale. I mean, I just want people to... get awake, not just on the investment side, but back to Bryant. When they're coming out of school, you don't have to do sales and trading. You don't have to do investment banking. Just stop and think. Just breathe. Just look around you and try to see the world with new eyes. And you'll see there's a lot more out there than the things that are in the Wall Street Journal. But these paths are so well-trodden. They're so magnetic. It's so hard to get off that highway. But once you have the x-ray goggles on, or rather... you're able to see what we see here at Orthogon on a daily basis, you'll realize the world is so much more vast than what people give it credit for. Maybe the single most recurrent theme, and maybe it's just because of particular activation, and I'm looking for it, so I keep seeing it everywhere. But maybe the most consistent theme in people that I've talked to on the podcast has been this notion of creating or writing your own playbook is almost always the greatest source of edge and happiness.

You mentioned the well-trodden highways, that kind of everyone, the default is to hop on one of these highways, especially for the most talented people, the smartest people, the 1600 SAT people, but that most of the interesting opportunity and potential for discovery exists when you go some completely different direction. It leads to an interesting question, which is, you mentioned a university which didn't invest with you. what are the main reasons you get for people that you've met with potential LPs or investors, providers of capital that don't invest with you? So what are the, you mentioned the one heuristic being, we like to have someone that's more, you know, true on the ground in Brazil. What are the other, what are the other reasons that people, because, because this is in some ways, I talked to a lot of allocators. This is in some ways, sort of the Goldilocks of a true uncorrelated. Literally, the firm is named for orthogonal right angle, right? So truly uncorrelated, differentiated, idiosyncratic type stuff, no systematic risk factors. And that's what everyone says that they want. But people saying they want something and actually putting their money behind it can often be a very different thing. So what do people say to you as a reason if they don't invest with you? So this, the last year. has essentially been my education in what it's like to be exposed to the outside world. I've always been in proprietary contexts. At all of my positions, JP Morgan, HBK, and Two Sigma, there was no contact really with what I would call the outside world. I was working directly for proprietary capital. I understood right away my ideas, even though I keep saying they're in a microeconomics 101 textbook. Guaranteed, if you use main cues, would appear to be radical to most. And some objections, I will say, are reasonably standard. So I'll hear things like, well, we don't invest in a first-time fund. We won't invest in a manager that's below $100 million. We're now above, but that's something I've heard. We won't invest in someone with under a three-year track record.

But in general, when I say the three characteristics, performance characteristics that Orthogon has had over the last really 12 years now and a billion dollars deployed, we've had consistent double-digit returns. That's number one. Number two is we've had no principal losses ever. And number three is we've had orthogonality to the markets that are breathtakingly high orthogonality, low correlations. To use a baseball analogy, that gets everybody on third base looking at home plate because any one of those things is hard to do. Typically, investors cannot get one of the three. They can't get double-digit returns. They can't avoid principal loss, and they can't get orthogonality. But we've consistently gotten three of the three because we're not in markets. That's why. So getting that trifecta is very, very hard. And what happens is that we lose everybody from third base to home plate, partly for some of the objections I just gave you, partly due to actually the expression of heuristics that I find hard to believe exists in the world of professional investing. We've heard people who say, we don't like to invest outside the United States. I actually referred that group to a Wikipedia page on home bias. We've heard an objection where somebody said, well, we need a chase manager. I said, what's a chase manager? And that person said, well, we need a strong number two so that we switch from you to that manager when you start to falter. And you don't have a number two. There's nobody doing what you're doing. You're inventing an asset class. I said, OK, remember the speech on the dollar bill that I gave before? I said, you're guaranteeing if you only invest with number ones that have number twos, you're guaranteeing that you're only investing in assets that are heavily competed. But it's avoiding competition that generates alpha and social value. And there was just dead silence on the phone as that was being processed. So I would say we have those. And then we have a third objection that is very deeply disappointing to me as someone who has a PhD in asset pricing. That's the following. Orthogon, in having no losses in its strategy history, and there is risk in the strategy, clearly indicates that we're not heavily exposed. We can't be heavily exposed at this point. I mean, I think the empirical data is in, the historical record is spoken, to systematic factors of risk.

We're not heavily exposed to equity risks, market risks, rate risks, credit risks, what people would consider to be systematic factors of risk. We are, however, exposed to rather exotic risks, risks like change in law. What happens if California changes its state constitution? What happens if the law changes in Brazil? We're exposed to secrecy risks. To build a platform takes a long, long time. We can be discovered at any point and then there's competition. And by definition, we gain alpha by not competing, right? By avoiding a price mechanism, microeconomics 101. Now, if you're an artificial intelligence robot, you would be overjoyed at that because we know that for any given level of target return, according to modern portfolio theory, an investor should flatten his or her risk surface. That is spread. the risk quanta among as many different dimensions of risk as possible. That's just another way of saying diversification. If you're trying to earn a 15% return and you have a lot of stocks, the last thing you want to do is buy even more stocks. For heaven's sake, figure out another way to make 15. So the fact that Orthogon's risk exposures are utterly different than systematic factors of risk should lead one to invest. And if you're a robot, you would like it. No wonder perhaps that I ended up at Two Sigma. But in fact, I'm actually marketing to human beings and human beings look at those. They understand the track record, but they say, we're just not sure about that. And partly that may be due to institutional reasons. We've been told point blank by endowments that, look, we have our policy portfolio in certain buckets and you're not in one. And I say, is there a bucket for other? And they say, no, we don't have a bucket for other. So these are some objections. We have had a response, obviously. So we have raised over $100 million. And I would say that the biggest responses come from investment managers, from people who run their own money, from people who are GPs in private equity funds or hedge funds, because we get them to third base. And then we tell them, OK, well, here's how we're doing it.

And they take one look at the things that I've told you about, and they say, yeah, that makes sense. We knew you had to be doing something pretty strange in order to get the results, and that sounds good. In fact, one gentleman that we spoke with decided to invest within about two minutes of the phone call, and he is a partner and the general partner of one of the largest private equity funds in the world. And I just rolled off the speech where I said, Real estate, private equity, venture capital, highly competed spaces with very little alpha. And right then he stopped and he said, tell me about it. And he invested. So we do really, at this point in time, attract a very specific kind of investor that's a very sophisticated investor, one that's familiar, you could say, if not explicitly with modern portfolio theory, one who's heavily financially trained and not constrained by a bunch of institutional factors that might make sense in some greater context. but not in the specific one of evaluating Orthogon. We also realize that many people are not paid to take a chance on a totally new strategy, that their upside from that is limited and their downside is career risk versus kind of giving money to Blackstone. You don't get fired for putting money with Blackstone. You could with us. I always ask some version of... each guest's most memorable experience in some context. And as a sort of closeout to this section of the discussion, we'll go to a couple other interesting spots before we finish. Maybe you could tell me the most memorable experience as sort of a final example of one of these esoteric investments. So across the six platforms or really just in general, in the decade plus that you've been doing esoteric asset investments, what's the most memorable sort of individual story or experience that you've had? At my former employer, We used to basically own a bank. That's what I want to call it. It's like a financial institution that provided loans to people who were down on their luck in Poland. And the bank's way of creating value was to hire old ladies, little old ladies, who would then drive around in their cars to the borrowers, knock on the doors.

and make sure that they were going to work. These borrowers were generally underwritten to be healthy people with good heads on their shoulders, but something had gone wrong, a divorce, their mom died, something, and they started drinking. Who knows what it was? And this team of old ladies would go around and make sure that they were living a cleaner life, that they would wake up, and if they were there, she'd wake them up and get them to work. There's a great deal of respect for women of a certain age in Poland. A lot of gravitas, a lot of command. And so they were able to get these people back on track and rehabilitate their lives. Yes, to pay back the loan. But yes, just because that's a good thing to do. And these women really, really enjoyed every moment of what really was tough. I mean, going into those doors is very depressing. And seeing somebody down on their luck. And I'll never forget that. I said, this is what we're creating. This is what we're investing in. And it's a heck of a lot more than just making some return. So yeah, just in telling you this, I'm transported back there and really glad for everyone that we can just pull across the finish line. They don't need to borrow from that bank again. And maybe we kind of set them on a new path. I hope that everyone takes away from this, as I do with most of these conversations, sort of you mentioned the word meta, sort of meta lessons from the particular implementation that each person goes with. And this whole idea of esoteric, which is really like there's no market for it. Other people aren't doing it. There's a low amount of competition. That that strategy is applicable anywhere and everywhere. Maybe the easiest way to do it is just to, as you said, kind of stop and look around. Stop looking to see what other people are doing and instead just look for obvious stuff that maybe can only seem obvious if you sort of have that intellectual isolation or just looking at things from first principles.

I want to then move from that big lesson, which seems obviously to have governed your investment career, to this sort of same meta idea in learning in general. So I was laughing beforehand because you have a ridiculous amount of credentials. So you've got a PhD in economics, CPA, I think CFA, you're a lawyer, the list goes on. What value have you found in all of those things? I think a lot of people that listen have thought about or have already completed. Probably the CFA or the CFP might be the two most common or some sort of graduate degree among listeners out there. And it's something, you know, I'm a highly under-credentialed person. So I've always wondered about sort of the potential value in all of those things. And you're a bit unusual, and I don't want to stereotype, but a bit unusual in that a lot of times you get these sort of career credentialed people that tend to go into academia. But obviously you're much more of a practitioner. Talk about the value of all these different things that you've done. Maybe advice that you might give people considering one or more of these different things since you've seen a lot of different. I don't think I've ever met anyone that has that combination of different credentials. And then we'll use that as a bridge into sort of this method that you have for learning and exploration because I want to talk about that as well. Sure. So, I mean, Patrick, clearly. You're very intellectually curious. You're actually running this podcast, and it's clear from all the ones that I've listened to, and I'm working my way backwards through all of them, that you're a pretty smart individual, you're a very deep thinker, and that you're animated by ideas. That's all there really is to it. I have a number of credentials. A lot of people joke that there would be 20 letters after my name. Take it from a guy who's very well pedigreed. You just don't need that. The value from it is that I enjoy a life that's animated by ideas. I enjoy it in my professional sphere, which is that at Orthogon, we think about thinking. We do that a lot. We're not in a rush to do anything. It's a maker environment. It's very cerebral here. There are no Bloomberg terminals. We spend a lot of time thinking about who we should be, not just what we should do. We train culture formally here.

And on this desk, Dominique is reading Barking Up the Wrong Tree by Eric Barker. We care about what it is to actualize ourselves. And in some sense, Orthogon is an expression of that. So it's a life well lived. I read about the fate of college and its costs. And I hear Bronco has a daughter that's going to school. Everybody's picking their majors. before they enter. And last night, I was watching an episode of Kids on Chopped, which is a cooking competition show. And a girl declared confidently she wanted to be a neurosurgeon. I was not going to become an economist. I fell in love with economics in a classroom when I was presented marginal cost and marginal revenue, a Marshallian analysis. And then I just woke up and realized, wait, wait, that works for everything, right? Like how much I should eat. how much I should sleep versus study, whether I should ask that girl out to the dance or this one. That works for everything, right? I couldn't have had that if I just didn't have an open mind coming in. And I don't know why I had an open mind coming in, by the way, but I just took a course. And that led to an awesome sojourn for me that's really meaningful. And so in a way, I just want to, if I can say anything on this podcast, Just stop the relentless commodification and credentialization of education. Somebody can take a course in Shakespeare, and maybe that doesn't translate into dollars and cents that we can measure, but that person's life is forever enriched from it. I don't know actually where formal education, by the way, is going. I think that... colleges have and universities have a real problem ahead of them. I actually gave a small presentation to Emory University, which is my alma mater, about the fact that I think colleges could easily become ghost towns because information is being liberated, it's being democratized. Yes, there are some things you need to do in person, like if you're in a particle accelerator, okay, or if you're training to be in the opera, yeah, you need other people around you. Otherwise, I think distance learning works. One of the hottest new high schools is Stanford Online High School.

And that high school gets people into all kinds of great institutions of secondary education. So I don't know where that's going, but I'm all for it. I'm against what I've done, which is a ton of formal education. Look, Jack Traynor, how much education did Jack Traynor have? Will any of us ever have the impact on the field or just plain thought that Jack Traynor had? I'm not even sure if he even graduated college. I'm glad to be in the universe of ideas. And I think, Patrick, there are many paths to doing that. And I certainly would not recommend what I did, except that I was force-fed the appreciation of what I'll call abstraction. I think I frustrate people a great deal in Marketing Orthogon or to our investors because I deal at a high level of abstraction. And they want to know what we literally did yesterday. And I think abstraction is greatly underappreciated. especially in the financial disciplines. I think many algorithmic shops like Renaissance, Two Sigma are having... high success because they're able to incorporate abstraction into what they do, not just the practical nuts and bolts of market microstructure. If you had to give a lecture on a topic that you find interesting and you think would make for an interesting seminar, let's say, what would that topic be? I actually had a chance to do something like that for kids at a university, and the topic I would talk about is planning. I think that there is... Underplanning, and I think there's overplanning, and I think that there's room in a life for serendipity, and I think that planning also speaks to something like goals, and I think many people's goals are misplaced. They're chasing money or fortune or ultimately unsatisfying notions of love and discounting courage and truth, and all of these things come into planning. I've lived a very well-planned life.

I could never have accomplished the things that I've done if I hadn't, whether it's paying my way through school or the degrees I earned. I was competitive in three different sports, the languages I've learned, et cetera. And I didn't become a father until I was 45. And that is too late in this world. And I'm overjoyed with the daughter that I have and I hope to have more. And then you have... Guys like Mark Zuckerberg who just, yeah, he ended up at Harvard, so I guess he knew what he was doing in high school. I've taught thousands of Harvard undergraduates. They have a lot of support or a lot of chutzpah or a lot of what it really takes to get where they need to go, even if the help comes from outside. But once there, he really went where, as far as I understand it, he and I did not overlap, where his mind took him and led a relatively unplanned life. And so if I could do something like that, I think people have a love-hate relationship with planning and their to-do list. It can be your ally and it can also be your nemesis. And I feel at this point now, a little later in life, I'm at my eighth level degree of mastery in planning or what I would call beyond planning. And that's what I really talk about. Like not just leading the well-examined life as well as the well-planned one. What's the right dosage? So this is something that I've actually written and thought quite a lot about. And my general take is that large-scale planning, or let's call them big goals, are a massive mistake, that they become self-fulfilling prophecies and are very self-limiting. Meaning, if you set your goal to be whatever, pick your goal, and you're a capable person, there's a good chance you'll get it. But what's interesting to me is the opportunity cost and all the things that may have happened had you not been so relentlessly pursuing some big goal. And very often, those other things, the things you've foregone, due to the big goal are far more interesting and exciting, serendipitous, fun, pick your adjective. So I've read a lot about that, but I also recognize that you need to have things you're trying to achieve, smaller things that you're trying to achieve. And so I guess where I shake out is that you want little tiny goals, repeatable goals maybe, and no really big goals. So the way that this looks for me is like daily practices, like things I want to do every day. And this general idea that I want my means and my end.

to be the same. And I think when the process itself is the goal, then you can have all these kind of crazy, interesting outcomes that may look planned or look amazing from the outside, but we're really just kind of side effects of a process. So where do you fall in that spectrum? Would you agree with me generally that you want no big goals and a lot of small goals? Is there some sort of kind of ratio? What has worked best for you? I think what you just said is one of the best answers. I've heard on this topic. I'm amazed that you have that at such an earlier age in your life. I wish I could have articulated what you just did 10 years ago or something like that. I think you've really hit the nail on the head. I think planning is a tool that is best used when you've achieved some kind of truce with yourself. I think Buddhists have done this best, but it's also understood in cognitive psychotherapy. I think at some point, people really have to step back and take a journey into attachment and to neediness. Because a goal is something that you need. It's something that you want. It engenders all kinds of human desires that ultimately really, I think, lead us astray from what life might be about in its best sense. And so I think it's good to... plan and to do things that you think, at least in the interim, are helpful. Those might be things like exercising or getting a good night's sleep or being an eternal student in reading. But while those things are going on, taking some journey into yourself and trying to suss out or root out where your deep-seated needs are and wants and ask yourself, why are those there? And when you're able to root those out, and I haven't done this, so I'm saying, please do as I say and not as I do. Once you've wrestled with those deeper demons, as again, I think Buddhists have, and I'm no Buddhist, but I understand that I think they have a kind of a lock on this kind of understanding. You will, I believe, emerge from the other side with a kind of transcendence about who you are and why you're here and what your calling is and what life.

as short as it is, is a bit about. And then I think planning will become your ally. I think for me, planning was my ally only through luck and in many ways not so. I wish I perhaps had not spent so much time earning all of those credentials. I don't know if it was some deep-seated insecurity in myself that caused me to do that. I wish... I had not planned myself into doing so many different things. I had three competitive sports careers and instead had taken a step back because when I did that right away, I realized I have a lot to pass on, as do my friends, and I'd love to have a child who could receive that from me. And that kind of epiphany, or even starting Orthogon. is the greatest expression of basically microeconomics 101 that I can think of, which is if you want to have a wedge between price and fair value, you've got to avoid competition. These kinds of awakenings just didn't occur until I really had to wrestle with a bunch of internal demons that I had, and I did that very late in life. So don't let the cart be in front of the horse. Planning comes second. Some level of personal introspection, however you do it, and there are people who have said it much better than I have on how to do that, has to come first. I always close every conversation by asking each guest what the kindest thing that anyone's ever done for them. So what about for you? So for me, I'm actually suspect in even guessing what the kindest thing it would have been. There are so many, and I may not even realize it, which sounds sad, but actually one. moment does come to mind as perhaps the kindest thing that was ever done to me because it actually taught me what kindness was. So I grew up with parents that were very unreliable. That's just a fact of my life, and my friends like to joke that pretty much explains everything in my life, in my adult life. And so when we moved from the south suburbs of Chicago into a solidly middle-class suburb at Wheeling, Illinois,

This is a place where all the roads are twisty and windy and have cul-de-sacs because it's residential. I'd never seen that coming out of a city. And, of course, I was left offended myself whether I was going to school or not or where the bus was, and I had no idea as I walked out the door what even to do. That was my existence. And my mom told me, well, you've got to get yourself to school or whatever. And so I remember just crying because I didn't want to be one of those kids, one of those delinquent kids that we had in Chicago who didn't show up to school on purpose. I actually cared very much about school. It was a refuge for me, and it was a great place to learn. And so I was crying among all these townhouses or whatever, and curvy streets that just led to nowhere, and I didn't know what to do. And I just looked through tear-filled eyes at a house. with a very nice car, by the way. It was like for a lower middle class suburb, this house had a sports car in it. And I knocked on the door and I couldn't have been intelligible. You know, I was bawling. But I asked the lady who appeared, will you please drive me to school? And she said, sure. And she did. And when you're really young, it's like, it's hard to think abstractly about things. You don't really know what honesty is or courage or Or anything. But in that moment, I really knew what kindness was. And a little bit more about, you know, what I had to be as a person. Fantastic. Well, one of the best closing stories I've had so far. I appreciate the honesty and the vulnerability. I appreciate the big overarching lesson throughout. this conversation, which I'll remember as looking for places with less competition, not just because of that, but because in so looking, you're kind of following an inner compass versus a well-trodden highway, as you put it. So I'll remember many lessons, but that will certainly be the one, and your story on kindness won't leave me anytime soon. So thank you. Thanks, Patrick. Thanks for interviewing me. Hey, everyone. Patrick here again.

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