Podcast Summary
Managing vast wealth: Identifying great fund managers and building a powerful network can lead to exceptional performance in hedge funds and private equity. Small funds tend to outperform big funds with less risk.
Managing vast wealth requires exceptional expertise and a deep understanding of the market. Adam Shapiro, who runs East Rock Capital, manages billions of dollars for some of the world's wealthiest families, and his firm, Eastrock, has a reputation for exceptional performance in hedge funds and private equity. Shapiro's success is built on identifying great fund managers at the right stage in their careers and building a powerful network to find rising stars. He is wary of index funds and ETFs and is a huge believer in alternative investments like hedge funds and private equity. Small funds tend to outperform big funds while incurring less risk. However, Shapiro's early experience investing in Latin America was a disillusioning one, marked by fraud, family interference, and difficult labor and corruption issues. Despite its personal significance, he came to realize that investing in the US offered significant advantages.
US Investment Environment and Immigration: The US's legal foundation, size, culture, diverse population, and immigration contribute to its extraordinary investment environment, driving innovation, entrepreneurship, and economic growth.
The United States offers an extraordinary investment environment due to its legal foundation, size, culture, and diverse population, which has driven innovation, entrepreneurship, and economic growth. Immigration has played a significant role in this, bringing ambition, entrepreneurial drive, energy, culture, and a large workforce to the country. Despite concerns about potential risks, the benefits of immigration and the US's economic advantages continue to make it an attractive place for investment. It's crucial to appreciate the realities of immigration's impact on the economy and approach the topic with an open and curious mindset.
Networking and sourcing through people: Building a network of people, both within and outside an organization, is crucial for successful investing. 95% of investing is sourcing, and leveraging others' expertise and networks can lead to finding hidden gems and investing in complex assets for less than their worth.
The power of networking and sourcing through people is a crucial aspect of successful investing. This lesson was learned by the speaker during their time at Goldman Sachs, where they discovered the importance of building a network of people, both within and outside the organization, to find investment opportunities. Instead of relying solely on their own abilities, they recognized the value of leveraging others' expertise and networks. This approach led to finding hidden gems and investing in complex assets for much less than their worth. The speaker believes that 95% of investing is sourcing, and they used Goldman Sachs as a model to build a competitive advantage by partnering with external networks to uncover great opportunities.
Business Partnerships: Focus on giving and cherishing people in business partnerships to align objectives and provide opportunities for growth, leading to a mutually beneficial and lasting relationship.
Building meaningful partnerships in business can be achieved by focusing on giving and cherishing people rather than exploiting them. East Rock Capital, a firm that specializes in backing early-career investment managers, has found success by aligning objectives and providing opportunities for growth. By prioritizing relationships and identifying compatible goals, businesses can maximize their chances of success while creating a network of high-quality talent. This approach not only benefits the business but also the individuals involved, leading to a mutually beneficial and lasting partnership.
Identifying great investors: Meeting investors early and building a comprehensive picture of them is crucial. Small funds run by talented individuals often perform better and are less risky. Look for individuals with rigorous training, proven track record, and significant risk-taking to start their own firm, ensuring alignment of interests.
Identifying great investors is primarily about data and relationships. Meeting investors early and building a comprehensive picture of them is crucial, as individual investors have a significant impact on investment outcomes compared to the firms they work for. Small funds run by talented individuals often perform better and are less risky. Contrary to popular belief, younger, well-trained and proven investment firm founders are worth investing in, regardless of their age. The key is finding individuals who have undergone rigorous training, proven themselves, and are taking a significant risk to start their own firm. Alignment of interests is also essential, as it ensures that the interests of the investor and the investor's clients are aligned.
Investor Selection: Successful investors are highly motivated, strategic, and committed individuals who leave high-paying jobs to focus on their craft, resulting in a positive selection process that leads to highly focused, experienced, and driven individuals.
Successful investors are those who are motivated, strategic, and committed to their craft. They leave high-paying jobs at the right moment, signaling their strong belief in their abilities and the potential of their investment areas. This positive selection process results in individuals who are highly focused, experienced, and driven to succeed. The hustle and intrinsic desire to succeed play a significant role in identifying differentiated investments and creating value. While constant high gear intensity may not be sustainable for everyone, building a strong network and leveraging it effectively can help maintain a high level of productivity and success in the investment industry.
Networking and relationships: Form genuine connections through networking, help others and make meaningful relationships for personal and professional growth. Identify successful investors by their resilience, grit, and ability to make calm decisions under pressure.
Building a strong network and forming genuine, trusting relationships can be a powerful tool for personal and professional growth. It's important to view networking as a way to help others and make meaningful connections, rather than a cynical or exploitative pursuit. Good investors, or those who have shown greatness in their companies, can often be identified by their resilience, grit, and ability to make calm, productive decisions under pressure. These qualities, along with a detailed understanding of their body of work and relationships, are crucial in choosing successful investment managers.
Investment Teams and Advisors: Having the right team and advisors is crucial in investing, whether in Bitcoin, real estate, or starting a business. Extensive referencing and research are essential to ensure trustworthiness and high character.
When it comes to investing, whether in Bitcoin, real estate, or starting a business, it's crucial to have the right team and advisors to guide you. Sound Advisory offers expertise in Bitcoin security and traditional finance to help navigate the complexities of self-custody solutions, while BAM Capital focuses on hassle-free real estate investments with a strong emphasis on risk management and value appreciation. Shopify serves as a turnkey solution for entrepreneurs looking to start and grow their businesses. When assessing potential team members or fund managers, extensive referencing and research are essential to ensure trustworthiness and high character. Tim White, a private equity fund manager, illustrates this principle by demonstrating a commitment to finding undervalued businesses and adding value through personal relationships, even if it meant starting his own firm without external funding.
Expert relationships: Building relationships with experts with unique expertise and proven track records can lead to successful investments. Diversification is important, but focusing on non-correlated investments can reduce market exposure and protect against large market drops.
Successful investing involves building relationships with experts who have unique expertise and a proven track record. The example given is the relationship between a sophisticated hedge fund founder, Tim, and an investment firm, East Rock. Tim's character and success in managing investments made him a trusted choice for East Rock to invest in his firm, Dunes Point. Another expert, Jonathan Wang, was also highlighted for his expertise in buying and transforming hotels. East Rock's strategy includes investing in a diversified portfolio of hedge funds and private equity firms, but not to the point of over-diversification. Instead, they focus on investing in situations that are truly non-correlated, such as private investments and absolute return strategies, to reduce market exposure and protect against large market drops.
ETF vs Active Management: ETFs may not provide the best long-term returns compared to actively managed strategies, individual investors often underperform the market due to emotional biases and market timing mistakes, and a purely ETF strategy may lead to lower returns compared to a more focused, actively managed strategy with alternative assets like private equity and hedge funds.
While ETFs can be an attractive investment option due to their low fees and ease of access, they may not provide the best returns over the long term compared to actively managed strategies, such as private equity and hedge funds. Individual investors often underperform the market due to emotional biases and market timing mistakes, and even if they choose the right ETFs, there's no guarantee they will outperform over long periods. Furthermore, when investors opt for a purely ETF strategy, they often end up holding a diversified portfolio of ETFs and fixed income, which can lead to lower returns compared to a more focused, actively managed strategy. The Yale endowment model, which includes alternative assets like private equity and hedge funds, has historically outperformed a purely ETF strategy. The key to success in asset management is identifying opportunities in alternative assets and finding the best managers to allocate resources to. Moving forward, there's an opportunity to refine the asset management discipline by de-emphasizing asset allocation buckets and focusing on key insights, such as market risk budgets, liquidity management, and avoiding filler in a portfolio.
Managing individual investor risk: Regular investors can reduce risk by living within means, reducing liabilities, and avoiding recurring expenses, but may need to explore private markets or innovative investment platforms for truly non-correlated investments
Individual investors face unique challenges in creating resilience in their portfolios, especially when it comes to managing exposure to various factors like interest rates and market volatility. While sophisticated investors have access to private markets and alternative investments, regular investors can adopt practical strategies to reduce risk. These include living within means, reducing liabilities, and avoiding recurring expenses. However, it's important to note that these strategies may not be enough in all markets and investment environments. Therefore, there is a need for more accessible and effective ways for individual investors to gain exposure to high-quality, truly non-correlated investments. This could involve exploring private market opportunities or seeking out innovative investment platforms that can help bridge the gap. Ultimately, the goal is to empower individual investors with the tools they need to build more robust and diversified portfolios that can weather various economic conditions.
Leverage and Resilience: Ultra-wealthy families prioritize resilience by avoiding excessive leverage and engaging in meaningful activities, as leveraged investments pose risks and can distract from family's vital pursuits.
Ultra-wealthy families prioritize resilience by being cautious about leverage and engaging in activities that offer purpose and vitality. The emphasis on resilience is crucial for the continuity of their wealth across generations. Leverage, when used excessively, can pose significant risks, as demonstrated by the blow-ups of prominent hedge funds. Families should be wary of investing in "black box" strategies with high leverage, as there is a higher risk of manager failure. Engagement in community, education, and other meaningful pursuits can contribute to the vitality and engagement of wealthy families. The role of the investment function is to facilitate these pursuits by ensuring the protection and growth of family assets, allowing family members to focus on what they deeply care about.
Investing and life responsibilities: Neglecting investing can lead to decreased wealth and a sense of moving backwards. Vigilantly manage 'filler' in investments and practice subtraction in both investing and life. Writing about complex ideas can help clarify thoughts and make important decisions.
Investing functions as a support mechanism for desires and responsibilities, but neglecting it can lead to negative consequences such as a decrease in wealth and a sense of moving backwards. Adam Shapiro emphasized the importance of vigilantly managing "filler" in investments and advocated for the art of subtraction in both investing and life. He shared that writing about complex ideas helps clarify thoughts and make important decisions. In the world of managing large asset pools, Shapiro sees great potential for growth and innovation, encouraging listeners to consider it as a career. Overall, Shapiro's insights offer valuable perspectives on managing wealth, reducing complexity, and the importance of staying focused and vigilant.