Ted Seides, Capital Allocators – I Want To Compound My Capital…But I Want To Do It Alongside Of People That I Respect And Trust | #293

Episode Summary

Executive Summary: In this episode of the MedFavor Show, host Meb Faber interviews Ted Seides, host of the Capital Allocators podcast and author of a new book on elite money managers. Seides shares his journey from working under David Swensen at Yale to his famous bet with Warren Buffett, revealing the real winner was the charity due to a clever collateral investment. He discusses the role of a CIO, the challenges of long-term investing, and how he personally invests his own money, including in SPACs, Bitcoin, and manager-based strategies. The conversation emphasizes the importance of relationships, patience, and avoiding behavioral biases in investing.

Main Topics: Early Career and the Yale Experience (Priority: 4/5): Seides recounts starting his career under David Swensen at Yale, learning the importance of diversification and long-term thinking. He explains why he left despite the ideal position, citing the lack of a clear career path in endowment investing at the time. The Buffett Bet and Its Aftermath (Priority: 5/5): Seides details the famous 10-year bet between Warren Buffett and hedge funds, highlighting how the collateral was invested in a zero-coupon bond and later Berkshire stock, ultimately benefiting the charity more than either side. He notes that the S&P 500's outperformance was largely due to U.S. equity dominance. The Role of a Chief Investment Officer (CIO) (Priority: 4/5): Seides explains the CIO's job: managing large pools of capital with long-term horizons, diversifying across asset classes, and selecting external managers. He emphasizes the challenge of governance and the need to align investment decisions with board expectations. Behavioral Biases and Long-Term Investing (Priority: 5/5): The discussion covers how investors often chase performance and struggle to hold onto underperforming managers. Seides advocates for patience, qualitative analysis, and the benefits of illiquidity to avoid short-term decision-making. Personal Investment Strategy of Ted Seides (Priority: 5/5): Seides shares his personal portfolio, which includes investments in Pershing Square (at a discount), Berkshire Hathaway, SPACs, Bitcoin, and private funds like Arctos Sports Partners. He focuses on manager selection and relationships over pure indexing. SPACs and Alternative Investments (Priority: 3/5): Seides explains his strategy of buying SPACs near their $10 floor, viewing them as low-risk options with upside potential. He also discusses investments in sports franchises and other niche opportunities. Lessons from the Paulson Subprime Trade (Priority: 4/5): Seides recalls the most memorable investment of his career: the Paulson subprime fund, which had a 20-to-1 risk-reward ratio. He reflects on the difficulty of identifying such asymmetric opportunities and the importance of being contrarian.

Key Arguments: The real winner of the Buffett bet was the charity, thanks to the collateral being invested in Berkshire stock, which outperformed both the S&P 500 and hedge funds. Long-term investing is hindered by behavioral biases; most investors redeem managers after short periods of underperformance, despite evidence that top managers often go through multi-year slumps. Illiquidity can be a feature, not a bug, as it forces investors to stay the course and avoid emotional decisions. Personal investing should leverage one's unique advantages, such as relationships and expertise, rather than following generic models. SPACs near their $10 floor offer a low-risk way to gain upside exposure, especially when sponsors have strong track records. Manager selection is more art than science, requiring qualitative judgment and a focus on people over past performance.

Data Points: Cropland loss per minute: 4.8 acres - Between 1997 and 2022, cropland was lost to urbanization at this rate. Minimum investment for AcreTrader farmland: $15,000 - AcreTrader provides passive access to farmland investments. Average tenure of Yale's manager relationships: 14 years - Under David Swensen, Yale held managers for an average of 14 years. Percentage of SPACs that complete a deal: 70-80% - Base rate for SPACs getting a deal done. Discount on Pershing Square shares: 25% - Seides bought Pershing Square at a 25% discount to net asset value. Return from Paulson subprime fund: 20% of fund value from a 3% position - The Paulson trade added 20% to the fund of funds' returns. Number of private equity deals in 2020: 4,100 - Slightly more than in 2019, indicating continued activity.

Pivotal Quotes: "The real winner of the bet was the charity, because we put the collateral in Berkshire stock and it ended up being $2.2 million." — Ted Seides: Discussing the outcome of the Buffett bet and how the collateral investment outperformed. "Manager skill is rare. It's really hard to identify in advance. Sometimes it's hard to identify after the fact." — Ted Seides (quoting from his book): Highlighting the difficulty of selecting top money managers. "I don't need to go through the same case everybody else would, but for me, it's also tied to people because I've learned about it from having people on the podcast." — Ted Seides: Explaining his rationale for investing in Bitcoin and Ethereum based on relationships and learning from podcast guests.

Implications: For investors, the key takeaway is to focus on long-term horizons, avoid performance chasing, and leverage personal relationships and expertise. The rise of SPACs and alternative assets offers new opportunities, but requires careful due diligence. Institutions should prioritize governance and patience to overcome behavioral biases.