Graham Duncan - 人才低语者 - [Invest Like the Best，第409期]

I know firsthand how complex the tech stack is for asset management firms, 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 the 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 ridgeline.ai.

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, stories, and strategies that will help you better invest both your time and your money. Invest Like The Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com.

Patrick O'Shaughnessy is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions, and do not reflect the opinion of Positive Sum. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, visit psum.vc.

Today's conversation is going to make you think about your life in a variety of new ways. I first met Graham Duncan in 2017 in the offices of East Rock Capital. We had lunch inside his beautiful library. The food was insanely good, and I remember thinking, “This person is extraordinarily special.”

I'd been a little nervous to meet him because his reputation was as the most discerning people picker on Wall Street. In the years since, I've been lucky to grow close to Graham, and there aren't many people who have impacted my life and thinking more than he has. He's one of the most generous people I've encountered and has genuinely made me appreciate life in many new ways. His profile on X reads, “Compulsively seeking new ways of seeing reality,” and that is an understatement.

Among the dozens of lessons he's taught me, one stands out as having been the most impactful. He phrases it as a question: What are you most compulsive about? Is it possible to put that at the center of your platform's activity? Anyone who knows me knows I'm obsessed with the concept of finding and pursuing one's life's work. It is Graham, as much as anyone else, to whom I owe the impetus for my own quest to find mine.

As you'll hear, because he has studied people more than anyone I know, he's the perfect guide for helping each of us think about ourselves in new and interesting ways. Graham is also fond of saying that talent is the best asset class. This is my obsession, too. I want to spend my time finding the best people in the world, learning their life stories, and sharing them with you all.

Last year, we decided that it was time to build a new publication at Colossus that allowed us to go even deeper into life stories, which we are calling Colossus Review. It's a quarterly print, digital, and audio publication that profiles the people, investors and founders that we respect most. We're launching it formally today, and to see more, you can click the link in the show notes or go to joincolossus.com/subscribe. When we were starting it, there was no doubt who we should put on the first cover. Graham himself embodies the work we hope to do, finding and enabling extraordinary people. He's the perfect teacher for those interested in this pursuit.

This is a 2-hour segment of a 4.5-hour interview I did with Graham last year. It stands alone as remarkable, but those that subscribe to Colossus Review will also gain access to the full conversation. This will be true for future issues too. Graham built an incredible investing track record while managing billions for a select group of families. He did it by focusing on and backing people. Our conversation explores a vast range of topics, from what makes a great investment partnership to the power of positive feedback to starting a restaurant. We discuss what he's learned about building trust, creating sustainable relationships, and identifying talent. I'm so excited for this new effort from Colossus and so proud of what the team has put together for you all. I'm so thankful to Graham for showing me the way so many times and for being willing to be so incredibly open in this conversation. I hope it impacts you as much as it did me. Graham built an incredible investing track record while managing billions for a select group of families. He did it by focusing on and backing people. Our conversation explores a vast range of topics, from what makes a great investment partnership to the power of positive feedback to starting a restaurant. We discuss what he's learned about building trust, creating sustainable relationships, and identifying talent. I'm so thankful to Graham for showing me the way so many times and for being willing to be so incredibly open in this conversation. I hope it impacts you as much as it did me.

1. The Principal Agent Problem

I was thinking of the Stewart quote: People make money like pros and then manage it like amateurs. How many people like that do I know who want an amazing setup but somehow don't have it, or are in one of these mills that seems nice and probably feels nice, but under the hood, it's like there's nothing actually going on? It's like a normal financial advisor with better trappings or something. Why aren't there more setups like what you had with Stewart? Why is it the exception that proves the rule?

I think it's a principal-agent thing. There's a paradoxical thing where, if you're the principal and you treat the agent like an agent, then they become an agent. It's a very subtle energetic thing where you have to have this vibe of, “Let's make money together.”

What happens is that somebody who's commercial wants more control over their life than most principals will give them. So when the principal tries to bring an A player inside the boundary of their firm, quote unquote, it's not unleashing the commercial activity of the agent.

I think the fact that Stewart Miller let me set up my own company was possibly path-dependent. He initially gave me a smaller amount of money, $50 million, and I ran that for a year and built trust. If it hadn't been like that, it's possible the market construct would have been just to run my family office, but it would have been my thing, and it wouldn't have unleashed what it ended up unleashing.

It also has to be consistent with their existing aesthetic, I think. If you had a quant guy whose family office needs a family office, or wants to partner with somebody, or put somebody into business to run a family office, that underlying agent is going to need to be supermathematical, left-hemisphere-y, in order to have the principal's map of reality overlap enough with the agent's that, when shit goes down, it doesn't get wonky. Inevitably, something's going to go wrong, and it's in those moments that you get shaken out. There's one family office that famously has gone through 15 CIOs because of getting the dynamic wrong.

In the early days, how would you describe that dynamic between you and Stewart personally? What matched? What fit?

One thing was the time horizon. He just, from the beginning, had a very long time horizon. And then he's a very skilled manager of people.

I was listening to Randall Stutman, who was famously Jamie Dimon's coach, and he has this theme: They studied all the best leaders and found that the people working for the leader feel like the leader is rooting for them. I knew exactly what he meant because I could feel it. That's exactly the vibe Stewart had been giving me, and eventually my second partner as well. It was that feeling of, “Yeah, I'm rooting for you first and foremost. Let's do this.”

In retrospect, it was crazy, right? I started it in 2005. The initial vehicle was just a fund of hedge funds, and then Stewart gave me the rest of his capital outside of Lennar in early 2007. I convinced Adam Shapiro to leave Goldman, and we started this new venture. We had exactly a year to do stuff before the Great Financial Crisis hit.

So picture that you're Stewart. It's the beginning of 2008, and you have hired these 2 kids.

You're, like, 32 or something?

Yeah, exactly. You know me pretty well, but not that well. Then, all of a sudden, your stock goes from the highs down to $3, so close to going bankrupt. And all of a sudden, all your money is with this kid that you don't know that well.

There's a scene that I talk about in one of my essays. He and his leadership team at Lennar were going around trying to raise money at the bottom, and he came and noticed that Adam and I were depressed. We were down 12% at the time, but we had anticipated some elements of the Great Financial Crisis and thought we'd be flat or up, and we weren't, so we were sad and mopey.

He said to us, “You guys, what the hell do you think? I knew we were at risk of losing money. You don't see me moping around.”

There's something about his physicality. He was jaunty. It was totally what I imagine a SEAL team captain is like: just going down. He's so funny.

Turned on. Yeah.

He turned it on and started cracking jokes left and right. There was no identity as a billionaire or as a rich guy, just pure: “This is a game. We're playing a game. It just got interesting.”

Yeah, straighten your back out.

Yes, exactly. There's something about that vibe: We're doing this together, we're grown-ups, we're taking risk, and I know shit could go bad. I think the answer to your earlier question is that the principal has to set this condition where it's okay for the agent to make mistakes, and there's a lightness to it. Otherwise, the agent, depending on their own risk tolerance, may not take enough risk.

The difference between managing your own money and managing the optics of something can get so huge based on one word from the principal.

Is this a good example, do you think, of your notion of the right grip? I know it’s an unusual application of the idea, but his grip on the overall situation, where a lot is handed to you.

Yeah.

Maybe explain that whole grip thing. I love—

Yeah.

—this analogy.

Yeah. I came—I guess it was literal. I rowed a lot in high school and a bit in college. When you’re holding the oar, there’s a tendency to really grip it, in which case your forearm tightens up and you’re muscling it, versus a version where your grip is paradoxical. It’s both solid and loose.

Mm-hmm.

If you catch a crab, which is when the blade goes under the water, you can get thrown into the water if you’re not careful. In that case, you need to be able to let go of the oar; otherwise, you’re going in the water.

So there’s this tight-but-loose grip that I started noticing. When I speak to certain people, if someone’s ideological about the thing they’re discussing, they’re subtly conveying to you that it’s not up for grabs. It’s not debatable. They’re not looking for your input on it.

So you’re asking, is that the way Stewart was relating to this situation? Yeah. He had a light grip on it. I remember telling him at one point that JPMorgan was at the bottom in ’08, and people were buying gold and really ready for physical gold. He cracked a joke: “Yeah, I can just see myself—Graham, you’re going to buy me a bunch of gold, and then I’m going to be dragging this bag along the street with my brother-in-law. And whether you’re going to drive the car—give me a fucking break.”

This whole thing is—life is absurd. This whole thing—capitalism—is a construct. We’re playing this game somehow. But the humor is embedded in the light grip, I feel like, in those situations. You’re conveying to somebody else, “We’re going to do the best we can here, and who the hell knows what’s going to happen?”

2. East Rock Unconstrained

One of the things you’ll often hear if you ask around about East Rock is that it feels like such an organic development of a platform that is very unusual in the sense that it could and did lots of different things, with lots of different structures and lots of different kinds of managers, and was fundamentally unconstrained in what it did.

I’ve seen you say before, in simplest terms, that the idea is to find the best investors in the world and then make great investments with them. There are 2 key parts to that, and obviously we’ll spend lots of time digging into both. Is that a fair summation of the vision of East Rock: find and partner with the great investors of the world? Is the platform really just a natural outcome of this very simple goal, and we shouldn’t study the platform itself too much? Is that the right way to think about it?

Yeah, I think it was downstream of an understanding that Stuart and I had: the goal is to make money and not lose too much. It sounds so simple, but it’s actually, of course, super complicated because of principal-agent dynamics.

I didn’t feel like I had a comparative advantage in picking stocks or doing any number of other styles of investment. So for me, that was my comparative advantage. I think now that Adam is running the platform, he has a different comparative advantage, and it’ll morph over time.

3. Backing Scarce Talent

Jesse Beiruti from IA Ventures said something really interesting to me. He said, “You have to decide probably whether the kind of capital you want to provide is unique, singular, or not,” meaning if you didn’t provide this capital to the person, they probably wouldn’t be able to get it otherwise, versus winning access to the consensus best new thing, where if your capital didn’t go there, surely other capital would. But your advantage is that you’re accessing a scarce supply.

I thought about that vis-à-vis you, and it seems like you did both. You were often a day-one investor, not a seeder, in people like Dan Sundheim who were leaving and were just incredible investors, and there’s somewhat of a limited supply. In the 8 seed deals that you did, I think basically all of them, or most of them, worked out really, really well. By definition, that’s more of the former. If they’re willing to give up economics, it means something.

I’d love to explore one example of each. You could pick a seed deal, or you could pick an investment you made that wasn’t a seed deal and a manager. We could also talk about a direct deal. But, going back to just understanding what you’re doing and what’s going on around one of these stories, I’d love to do one of each if you’re game.

On the seeding, I feel like the process is: can we set the table in a way, on terms that the market will agree with, when it’s unclear whether the manager would have gotten those terms without us? That could be a lockup of capital, a fee, or something else.

I always tried to hold myself to the standard of, “I would invest in this manager even if I didn’t have seed economics.” I would just do it smaller. I would take less risk, and I wouldn’t wear any reputational risk. I feel like that’s one key distinction—not just looking for seed deals, but holding yourself to the same bar of, “I would just size it smaller,” and I wouldn’t shape it. That kept us, I think, out of a fair amount of trouble.

What about on the traditional side? Is Dan a good example?

Yeah. So Dan Sundheim was leaving Viking. Over the years, I interviewed all these people who worked for Dan, and they were always in such awe of him as a portfolio manager. I felt like it was them, at the expert or professional level, relating to him as a master. That’s how I interpreted it at the time.

I remember one guy saying Dan would be planning how to get in and get out of a stock 6 months in advance of buying it. He was planning out the whole arc of it. He was very focused on liquidity, and it was this mix of fundamentals and understanding market structure.

We had a number of friends in common, and when he left, I feel like within a hedge fund container, there’s often this dynamic where the founder of the hedge fund is pricing the up-and-comers each year. It’s partly expressed in terms of how much carry they’re going to have the subsequent year. There have been a number of cases where I’m tracking whether the founder of the thing hit the bid correctly that year or not. And if they didn’t—

Opportunity.

Yes. So there was this moment where Dan was ready to go do his own thing. He had enough of his own money, and I aspired to earn the right to a dialogue with him and help him in his hiring because we were in touch with so many analysts at any one time. I felt like I was able to calibrate on his taste in analysts, who would be at the right seniority, and then help him with that hiring process.

I could get these numbers wrong, but of his initial 12, maybe 4 of them were from Patrick and me. I got to know him very well during that process and saw how he had this very optimal grip. He has no defensiveness whatsoever. If you tell him a new piece of information about himself, a process, or a person, there’s no ego in it. He’ll just drop it with no hesitation.

There were a couple of cases where I gave him feedback on things, and the way he took the feedback, I was like, “Oh my God, he’s such a quiet ego.” He was so focused on being commercial first and ego second. So we ended up being a day-one investor in the firm. It’s had its ups and downs, but I continue to really believe in him as a commercial actor and as a leader of his firm as well.

Can you define “commercial”? It’s such an important term in our dialogue—

Yeah.

—over the years. Why is that word so incredibly useful?

The term originates with Adam. Adam used it at Goldman, and I’d heard other people at Goldman use it. It connotes all the clichés: moneymaker. One way I’ve ended up defining it is as the ability and the intent to create more value than you capture. That would be a kind of abundant version of it.

I feel like there are people who are signaling that they’re in a repeat-iteration game, and they’re not going to grab every penny on this transaction because they know that there’s a sense of proportion about it somehow. Goldman has that phrase, “long-term greedy.” It’s like, “I want to make money, but I’m going to do it with the knowledge that we’re going to see each other again.”

That sense of “I’d rather make money than be right” is another core tenet of it. There are people who seem to me to be in the game in order to experience the satisfaction of being right, and that’s the primary goal. That works a high percentage of the time, but then it can be disastrous, of course, because your ego and your portfolio can get caught up with that goal instead of just making money.

Was there any through line to the mistakes that you made at East Rock—backing deals, managers, or seeds?

There’s a great story that Tina Fey tells about the only thing she learned from Lorne Michaels—not the only thing, but one important thing she learned at Saturday Night Live that she brought to 30 Rock. In the writing room, you need the optimal mix of Harvard nerds and Chicago improv.

I thought that was so profound when applied to investment managers because I had experienced a lot of both types. I would say the Chicago improv is pure plasticity, pure flexibility. They will do anything for a laugh, to a fault.

And the Harvard nerds, in her language, were planning everything out—very high order, very high stability—but not able to improvise as much. Over time, my taste evolved to accommodate more Chicago improv. I was at first attracted to Harvard nerds. Over time, I came to appreciate what Charlie Munger called the knack.

I remember early on, working with Ted Seides, we were in a meeting with a former Milken credit trader of some sort. We were sitting in a restaurant in Santa Monica, and he turned to me at one point, put his hand on my arm, and said, “Money’s like water. All you have to do is learn to turn on the faucet, see?” I thought I was in some sort of David Mamet movie or something. But he’s right.

There is this wu wei way—not forcing it, working with. There’s a coach I like and follow online named Joe Hudson, and he had this line: “Where does the water wanna flow downhill?” Working with, not forcing it, working with what already wants to happen—that, I feel like, is in there: lack of stuckness. It’s a pragmatism that, at the end of the day, rules over other facets of investing.

When you think about the moment at which you were at East Rock and the platform was humming the most, I love that Josh Waitzkin idea that not just a career, but life, is this opportunity for self-expression. I’m curious where, if anywhere, it wasn’t that. I know East Rock was a great vehicle for self-expression for you, and we could talk about lots of ways that was true.

If you think about it and had that blank sheet of paper—Josh always talks about going into the cave with a blank sheet of paper to come up with a new platform—is there anything different that you would do to better have a vehicle for self-expression than what played out with East Rock?

Not really. For that chapter of my life, it was pretty amazing and ideal and fit. It really felt like Stuart provided a playing field with no constraints, but you had to earn the right to go anywhere.

If I were doing it again, I could picture finding somebody, being purely opportunistic, and fitting the current opportunity set to the risk tolerance of the principal. I could picture trying to seed somebody with $1 billion if I had that level of confidence in them and if I felt like the principal could have that level of confidence because it’s the same aesthetic or the same map of reality.

But if you can eliminate the optics and the desire to look like you’ve added value as the agent, and make it as pure an expression of, “This is genuinely what I would do with every single dollar if it were my money,” I feel like there’s such leverage to that. I would fit it to the risk appetite and the trust level with another principal.

But as I’ve said before, I think I’m pretty lazy, and it’s a curse and a gift. The gift side of it is that I have no desire to work for work’s sake.

Hmm.

Zero.

Hmm.

Negative.

Is there a chance you’re actually not lazy, and you’re just applying that? You’re lazy about taking action or hitting the hammer, whatever analogy you want to use. But it seems to me—I was thinking about the word prolific. You’ve written 7 very well-read posts ever. Not exactly prolific in your writing output, but extremely high impact.

I always wonder: What are you prolific at? It seems like you’ve read everything. You’ve met everyone. There is some unit for which you are prolific, and maybe it’s not output. But it’s your own format of thing.

Yeah.

Patrick O’Shaughnessy

So do you think that’s right? That you’re not lazy? You’re maybe lazy from the outside looking in or something, but I don’t know. It just seems like you’re always deeply tapped in, and that’s not—

That’s not lazy.

Patrick O’Shaughnessy

—lazy.

Yeah. Yeah, I think that’s a good catch.

Patrick O’Shaughnessy

It’s like we were joking: What was the nickname? It was something like Leverage Lion. I was talking to Boyd because lions, when you watch them for long periods, basically do nothing. Then they’re just ferocious around opportunity, and the intensity level is just—I mean, you can feel it in your chest when you’re there in Africa.

And leverage, because with you, I always think of that joke of the guy that charges $1,000: $999 is for knowing where to hit, and $1 is for hitting it. That’s sort of it. A lot of it can be boiled down to a handful of really great decisions that were carefully considered, obviously.

But to make those good decisions, you do need to be prolific in some sense. You need to have seen the 1,000 things you don’t do.

Yeah.

Patrick O’Shaughnessy

And that’s far from lazy.

Yeah. Yeah. My appetite for finding the best person in the world to do the thing instead of me doing it is almost infinite.

Patrick O’Shaughnessy

Yes.

That applies to literally everything—

Patrick O’Shaughnessy

Yeah.

—including managing money, right?

Patrick O’Shaughnessy

Yeah. Yeah. Say a little bit more about that. What is it about that process that’s energizing to you? Is it figuring out the person? Is it something else? Is it excellence?

Yeah, it’s figuring out the person in some new field, trying to figure out how. It’s like the question, “What’s going on here?” I can’t get over how profound a frame that is. It applies, obviously, at any level, to the point where it’s so abstract it may not be useful.

But I have this, I guess, hope in there—this optimism that I will find somebody. It’s the kind of thing you and Boyd say: “What’s the—”

Patrick O’Shaughnessy

Kita chama.

Yeah.

Patrick O’Shaughnessy

We’ll find it.

We’ll find it.

Patrick O’Shaughnessy

We’ll find it.

I definitely have that. I’ve found the person when I thought there was no one enough times that I’m always thinking, “I have hope.” I’ve gone through so many examples of, “Are you kidding me? This person exists, and they’re that obsessed with this crazy thing?”

One key thing that people miss in hiring is that you need to understand why it makes sense for the candidate, why the candidate should choose this container and this setup, and be rating it 100 out of 100 if possible. Realistically, it won’t be that.

I see people make a mistake. It’s a left-hemisphere approach: “I’m hiring this person to do this thing.” They’re treating it as a machine. But it’s so much more complicated than that. If you want the person to thrive and have the energy, and then be rooting for them, you need to understand why, from their perspective, this is the right thing for them at this stage of their life with this set of skills. If you understand that, then it gives stability to the whole thing.

4. Finding Your Compulsion

Patrick O’Shaughnessy

Maybe it’s a great opportunity to talk about the idea of yours that’s had the greatest impact on me personally, which is this notion of positive feedback loops—a person’s compulsion or bliss, or lots of different names for, I think, probably the same thing—and the right setup that allows for this unlimited upside.

There are lots of dimensions to this. There’s how to help someone find this thing, what the right setup is, and how to partner with someone who’s doing one of these things. But each of these aspects, to me, has been an incredible unlock of self-awareness around what my compulsion is, and then constantly asking that question—not just once, not just at the setup phase, but constantly: Is this thing wrapped around my compulsion, or has it bled into normalness?

You’ve done this more than anyone I know, and thought about it more than anyone I know. How does someone start to track that potential compulsion in themselves? What does it look like from the outside? What kind of questions do you get people to ask of themselves?

One aspect is that I have this analogy of a river with 2 banks: one is order, and the other is chaos. You start off your career closer to order, and sometimes you swim closer to chaos over time. It’s a developmentally appropriate stage of being an intern and learning a craft and apprenticing and all that stuff, where you’re often not really in touch with what you actually want. You’re just playing the game the way other people have defined it.

If you’re talking to a 22-year-old, they’ve been on the playing field less time, and so they don’t know what they actually want. They’re socialized, in Kegan’s language. There are all these things they’re subject to that they can’t see. Partly, the hero’s journey—or pick your metaphor—is about listening to what the world wants from you and what you actually want, and then looking for that intersection.

The questions I ask sometimes are: What are you compulsive about? I noticed it for myself. I could surf LinkedIn. I don’t know what my appetite would be. I could probably do it for 3 or 4 hours.

Patrick O’Shaughnessy

Oh, my God.

Which is—

Patrick O’Shaughnessy

I don’t think I’ve ever surfed LinkedIn.

Boring. For most people, it would be very boring. I like looking at their picture. I feel like someone’s self-selected photo is so crazily high signal. If somebody chose that photo to represent themselves, they’re saying, “There’s something of my essence that I want to have be my essence that’s in this photo.”

Then matching it up with my impression of what life has done to them, what they’ve done to life in the photo, and then matching it to the resume, I can literally do that. What’s the thing you do that other people kind of make fun of you for? I feel a little embarrassed that I can do that somehow. It feels, weirdly, tactical and kind of boring.

But on some level, I just enjoy seeing that dance of what somebody wanted and then what the world wanted from them. And then, in places other than “What are you compulsive about?”, there’s that question: Have you felt a moment of ignition where you saw somebody else and said, “I want to be that”? I read that in The Talent Code. Have you read The Talent Code?

Patrick O’Shaughnessy

Yeah. You sent it to me.

Yeah. I read that in The Talent Code. I was like, “Oh, shit, I totally had that.” I had that twice. I had that when I was in eighth grade, when I was rowing. It was the sixth time I had gone rowing, and there was a senior and a junior, a guy and a woman, who were tall—he was handsome, and she was beautiful—and they just had such presence and mastery of rowing. They had both won national championships. I was in eighth grade at the time, and I was like, “Oh, all I have to do is row 4 hours a day, and I can be that? Done.”

Patrick O’Shaughnessy

Wow.

And then I didn’t look back because it was so embodied, and it was also a recognition that I have enough overlap with them that I can do this. It’s not completely random. But then that feels like a viable path. It’s not that reliable a question, actually. A lot of people will either fake it, or they don’t recognize those moments. It’s a subtle thing to catch.

But Tim Gallwey, the The Inner Game of Tennis guy, has this line: “Desire wants what it wants.” I think it’s so profound. From schools, parents, and peers, we cover up what the desire actually wants, and getting in tune with it is so powerful. Hopefully, that happens to somebody in their 20s or 30s from a career perspective. When it does click, you can hear it in their voice. You can hear it in the way they create language to capture the things they’ve seen. Yeah.

Patrick O’Shaughnessy

What was your second moment of ignition?

I was working at a fund of funds. Dan Stern, who you may have met, used to run Reservoir. The way these mutual friends described him and then his activity, which was so people-focused within investments, I was like, “Oh, that’s my own orientation toward this. There’s a path here to being an effective investor by selecting people and having very high situational awareness about how to set up the right platform for them.” I thought, “You know what? I’ve never met him, but I could just tell, based on the friends we had in common and how effective he’d been, that, oh, that’s a thing. I want to be that.”

Patrick O’Shaughnessy

Was he the most prolific, famous seeder at the time?

Yeah.

Patrick O’Shaughnessy

And what was your sense of what made him so good at that?

Well, I think he apprenticed under Richard Rainwater, and Rainwater had this feel for—

Patrick O’Shaughnessy

The Platonic ideal of this concept.

Yeah. And then you could just tell from the people he had seeded that there was a consistency to his taste.

In seeding, there’s massive adverse selection, of course. In general, somebody who has pulled out enough money from the market should have enough money to put themselves into business. So you have to understand why you’re so lucky if you’re catching them. I generally like catching people super young. It’s like a company going IPO: There’s just not that much information yet about them, and so it makes sense that there’d be inefficiency.

But then, other times, another pattern I liked a lot was someone’s former boss damning them either with faint praise or not even with faint praise. It’s a huge structural inefficiency because if you’re the guy running the platform and your star guy leaves, and you sponsor him and promote him too much, you create an incentive for everybody else to do that. So I really like hair on a former situation, specifically where I know the former PM, and I have a feel for why they might be a little sociopathic about it.

Mm.

Fair enough. I see what you’re doing. I’ve been on so many counseling calls with people thinking of leaving a thing. At any one time, I have 5 to 20 conversations going with somebody who’s thinking of leaving a thing. And the level of fear about how the source—the primary person of their existing platform—is going to relate to them is so consistent, so high, and correct.

Yeah.

Of course. Is there anything you hear on those calls? I have a lot of those too. I’m fascinated by this category of call.

I love it.

The want-to-leaver. What are some common observations on those calls, something you would hear where you’re like, “Nope, not ready”? What are the piles you sort people into on those calls?

Well, one is that it’s very easy to define almost everything you’re thinking of doing in reaction to your current container. The genesis, in part, I think, of Josh Waitzkin’s cave process is that that’s not a healthy way to start a new thing. You can’t do it in reaction. You can do it somewhat in reaction to the old thing because that informs your map of reality and what you want to change.

Psychologists divide things into approach motivation and avoidance motivation. It ends up being too much avoidance motivation somehow. There’s this negativity baked into the DNA of the thing if you allow too much of that. So I feel like that’s one thing. It’s easy to be too cute about that. You don’t want to overweight that when someone’s talking, but I feel like, over time, they need to get to the point where they’re articulating a proactive vision, not just, “My job sucks.”

There’s a category where it’s like, “My friends have all started funds,” or they’ve all started whatever the thing is. They’re all starting… You get this in Silicon Valley right now, where—

The memetic kind of thing.

Yeah.

Yeah.

I’m a founder. Are you not a founder yet? The founder thing is totally in this category, and it’s so distinctive to my ear because I’ve just spent more time on it in the last couple of years, and the Silicon Valley version of it is so distinctive: Founder, capital F.

So there’s a version of it where someone is just frustrated with their current construct. The core motivation is, “I want to create a new job for myself,” and I think that’s not a great way to start a new thing. It needs to be slightly bigger than that, I think.

And then, at the highest level, what they want is to be priced by the market—in a hedge fund context, or it probably applies to startups too—as in, what will VCs price me plus this opportunity at from a seed round or Series A valuation? I often think of it as a pricing exercise.

A guy who runs an enormous fund—I was talking with him recently—is debating whether to stay at this enormous fund. And the question he’s really asking is, “If I launch my own fund, am I raising $1 billion or am I raising $5 billion?” It’s a great question, and I think there’s an answer to that based on, okay, how long have you been there? Do you have a standalone track record? It’s answerable. Does that square with your—

A hundred percent.

It’s like—

I’ve never heard it put that way. It’s so resonant.

Yeah.

What’s my price?

What’s my price? And that should change over time. I remember there was a guy running a regional office for a really large hedge fund and thinking that if we had been able to spring him, he would’ve raised $500 million to $1 billion, and we ideally would’ve seeded him, but quite possibly he wouldn’t have needed it.

But then he ended up running, call it, a $10 billion-plus fund. I was thinking, “Oh, that’s a very interesting spread.” Outside this container, the market as a whole would price him at $500 million to $1 billion. He’s running a $12 billion-plus fund. The founder of that firm who made that decision—that’s that guy’s arb. That’s the bet, and it ended up being the correct bet. I didn’t necessarily see it at the time. I was thinking, “Whoa, that’s a huge spread,” and if he went outside, it would be so much smaller.

It’s so interesting how it’s turtles all the way down. If you hear Founders Fund GPs talk about what they do, it’s the same. They want the hair. They want any deal heat, and they’re gone because the price is wrong.

And it raises an interesting question about seeding, which is, if it has to overcome this adverse selection problem and it has this juiciness to it, I feel like every investor ever has had some period where they’re thinking, “We should do seeding because you’re putting LP dollars in, so whatever. The downside is they’re a really bad investor, and I get GP economics on the other side,” and it just seems like this money machine.

But obviously it hasn’t been. You’re probably the best seeder ever. There aren’t 10 other great seeders. The model itself seems so sexy and alluring, but there’s this adverse selection problem.

Adverse selection. I remember we were so careful about this, and my partners who now run East Rock continue to be careful about this. If you have, at all, the mentality of “I need to put assets out,” it completely screws up the dynamic. I wouldn’t trust myself if I had—

Here, they seed funds?

Yes. If I had $2 billion burning a hole in my pocket and I needed to seed.

Important point.

The other thing people do, I’ve noticed this. I was talking with a guy—I won’t use the name of the fund—but he was at a very prestigious fund, and somebody called him and offered him a big seed. It was a big seed, call it, $200 million. My hypothesis, I remember talking to him, was that if the guy hadn’t called and given him the $200 million, he wouldn’t have come up with it on his own.

5. The Source Of The Thing

We've talked before about source dynamics. WorkWithSource.com is a collection of information on this concept that I'm obsessed with. The argument is from Peter Koenig, who looked at several hundred startups in Europe and found that even when there were co-founders, there was really one person who took the first risk, even if that was calling the other co-founder.

You have to be really careful about that first risk, who's taking it, and why they're taking it. I remember meeting with a quant fund, and when I pulled the thread on the origin story, there was something about the energetic of the guy running the quant fund: he was relating to it as a job and not his thing. That's so weird. Then I pulled the thread, and it emerged that it had happened to him. He'd been sitting at a fancy firm, and a friend of his had said, “Let's do this thing.”

The source dynamics were screwed up from the start. Peter Koenig has this argument that all organizational dysfunction can be traced back to disagreements about who is source, or to the actual source playing small or not fully owning being the source of the thing. That totally fit my sample of hedge funds, where our friend Diana Chapman has this analogy: the chick needs to peck through the eggshell and develop its strength through the pecking in order to make it once it's outside. If you break the shell for them, they will die. If you mess with the origin in any subtle way, it can affect the entire trajectory of the thing in ways you wouldn't think.

Does that mean you don't think of yourself as a seeder? That just happened to be the right—

Yeah.

—expression 8 times or whatever, however many it was.

Yeah. Kind of up one level, looking to back people and fit their circumstance, and they were going to do the thing anyway.

It's so interesting that working with source thing is just true. If you go read it and you have a high end of investors or companies or founders or whatever, you just see it everywhere. Are there other aspects of your obsession with that, and how you suss it out when you're trying to identify what the source is for any given person?

In this language, I often think of it as: Who is the source, and are they owning it? You see it a lot in succession. One of the arguments in this literature is that heading off source is extremely subtle and hard to do.

You see it in the dynamics between co-founders. Is there resentment on the part of the co-founder who's not source toward source because they don't want to be in that role? I feel like I see that a lot. Eighty percent of the time, that's held in check, but then conditions can change, and it's not held in check anymore. They can go through a difficult period, or extreme success can also lead to it.

Bringing it back to something very tangible, which is this interesting matching exercise between investors that might want to run money for a family or a set of families and someone who's commercial and talented enough that it would make sense to give them some of your money: Why is there not a YC for that kind of person, or even a YC for investors? Why, if I'm new billionaire X who wants some great setup, is there not a demo day where I can meet highly talented, ambitious, hungry—

Yeah.

—low-ego, commercial—

Well, one thing is, I wonder if it's because of the skill set. The skill set at the highest level is managing risk and being pragmatic and commercial, I think. In general, those people tend to be older.

I think giving a bunch of money to a kid, if you're running a family office, needs to be done in a way that there's room for them to screw up. The people who I think would be good at managing a family office have taken risks with their own capital and other people's capital before. Ideally, they don't have an identity as a specific thing. They have an identity as being a moneymaker, but not as a specific thing.

Their EQ and social intelligence are high enough that, when they're talking with other people—Rainwater is the gold standard on this—they're okay expressing a bet through other people. I feel like that's a distinct skill set. Retired hedge fund managers who were pretty high-EQ are probably a pretty good pool. If you could make it feel like it's their money, either lend them money or have them put half their net worth in and leverage it some way to make it feel as though they're doing it.

So there's no IC because it's the inverse of companies. You want young people with raw potential who are going to go figure out some new thing.

Yeah.

Whereas on the investing side, you want the grizzled, experienced veteran on average.

On average, yeah.

Not always.

Yeah.

You don't need a big selection mechanism. You just know who these people might be. It's a small pool, and they're not applying to it. They're not going to apply.

Yeah. And that's why setting it up—figuring out why they're available—is important. People screw up and think it's just a role they're going to hire for. No, it's not. It's up one level, or by definition, if the person's good, it needs to be a tricky setup.

It really is kind of a paradox that you're stuck in. You really have to want—back to Stewart's line—“Make it like a pro, manage it like an amateur.” You really want, and need, to want to manage it like a pro.

Yeah.

And the BATNA is iconic.

Yeah.

Or Jordan Park or something. They're not going to fuck it up.

Yeah.

They're going to do a fine job.

Yeah.

It's going to be beta.

Yeah.

And it's going to feel nice.

Yeah.

So be it. You have to deeply want something better than that—

Yeah.

—to find that great CIO.

Yeah. Your ego needs to be able to take somebody else having the successes and failures around it, I think. If not, then if you want to be pretty involved, or you have an identity because “I made a bunch of money and blah blah blah, and I want to keep making money and blah blah blah, and now I want you to do it for me,” anybody commercial who's sitting in the front seat now has somebody telling them how to drive in the back seat. Unless the person in the back seat is extremely skilled, it's going to screw up the incentives of the whole thing.

There are 3 criteria that you've written about. If you were hiring a CIO for yourself or your family office or something, you've laid them out, and I'd love to go through each one and what you mean by each. The first one is that there has to be evidence they have good taste in people. Taste is a fun and funny word to try to define, and it's very hard to define. What's your definition of it? What do you mean by that, and why is that one of the 3 key criteria you think?

I would say it's good taste in people from the perspective of the principal.

It's not an absolute thing.

Yeah. It needs to overlap; otherwise, they're not going to trust the agent's judgments, and vice versa.

Practically speaking, if you're the principal, basically saying, “Tell me who you like,” and then meeting all those people, and if you like all those people, that's probably a good sign.

Yeah. I guess an example is the group of people around the Collison brothers. I feel like it's very distinctive. It's kind of nerdy and also—

Alpha nerds.

Yes. Right? It's a very specific aesthetic. Patrick's got these public policy interests, and Tyler Cowen and that whole crew—it's a very specific aesthetic. By signaling it to the world, they attract more of it.

Did that happen at East Rock? Was there this gravity that got created as you partnered with and backed people? Was the marginal one always a little bit easier than the last one because of the gravity and the reputation that you had built?

Yeah. I would host these events, and people would come to the event. Then you'd see that one guy who runs a large investment firm in San Francisco had come to one, and he said, “Oh...” He sent me a note afterward saying, “Graham, you've restored my faith in humanity,” which was such a high compliment. He was referring to the fact that it was like being at a really good wedding. You're like, “Oh, my God. I like all these people.” There's not a bad seat in the house, and I would do business with all these people. There's a level of trust or integrity or something.

Can you talk a little bit more about those events, big and small? I've been a part of that, and it has that incredible effect if you nail it and you're not compromising in any way about who shows up, whether it's a dinner. You used to do this amazing dinner with dads—investors who are dads—to talk about being a dad, but that was the frame. They would be very different people, but they would all be so great.

Then a much bigger event that's 100 people somehow also has every conversation like, “Holy shit. Who are these people? How did you find all these people?” That creates a mystique around you. “Wait a minute. Who are you? How are you doing this?” So say more about the intentionality behind those gatherings. It seems like that is a really important ingredient in the—

Yeah. It's like—

Yeah. It's creating talent density, and then, to your point, it creates a gravitational force of its own, and people end up doing business with each other, and then it—

Sticks to you somehow.

Sometimes. Sometimes not. But what I do is very visceral. It's like, if I get stuck sitting next to this person, am I neutral, psyched, or bummed?

Hmm.

And I try to have—

All psyched.

All psyched. Then the result just takes care of itself. I came up with this back when I first started East Rock as a way to evaluate hedge fund managers. I felt like, often, if we had 30 people in a room pitching investment ideas, the room knew who the best people were. I'd go in with a thesis: "This guy's the best on special situations. This is the best tech long-short guy." Some percentage of the time, the room agreed with me, but over the course of several days of talking, different people would emerge.

If you read the room correctly, the room kind of knows where the pockets of quality are most of the time.

Can you tell the story of working with the guys who started Paradigm?

Charlie Songhurst, who I think I introduced you to.

You did. You sat me next to him at an East Rock event, and I remember coming up to you afterward and saying, "What the fuck? How does a guy like that exist? How does everyone in the world not know this guy exists?" So unbelievably talented, smart, and amazing.

He had left Microsoft, and he was trying to figure out what to do next. I remember counseling him at the time. He said he really appreciated that I wasn't trying to fit him into existing concepts, but was just trying to figure out what was best for him. His appreciation of my doing that made it obvious to me, and I try to do it with other people.

He had been at an East Rock event, a hedge fund gathering we had, and had touted Bitcoin back when it was probably 6 months before we ended up buying it. We bought a small amount at $300 a coin, and then it proceeded to go up quite a bit. I was trying to figure out what to do with the position, whether it was real, and how to think about it. So I went to a crypto conference.

I've noticed this thing. I don't know if AI is like this now or not, but when you have a new field, it tends to attract the people who are available to be in that new field. That's often unemployed people or people who are so Chicago-improv'd that they're switching what they're doing and chasing the next thing. It can be aesthetically distracting when there's a new thing because the people who've gotten in there first are scrappy but also fly-by-night in this way, and crypto is like that.

I went to this conference, and I experienced a lot of the people as not like that line from Succession: "They are not serious people." Then I came across this woman who was running crypto for Facebook at the time. I was in a room of 300 people, and I just followed her because I noticed that the room seemed to know that she was among the most credible people in the room. If I just sat near her, there was interesting incoming.

Matt Wong was at Sequoia at the time, and he came in. Then I thought, "You know what? Actually, I'm going to follow him." I became his wingman, and it turned out in retrospect that he and Fred Ehrsam were debating whether to work together and had gone on this trip partly to figure that out. I ended up having a road trip. I drove the 2 of them to the airport, and we spent a bunch of time together.

I was struck by—I experienced them both as commercial actors that I would back, field agnostic. I would bet on them individually and as partners, regardless of what they were pursuing. I ended up interviewing CFOs for them. I like to interview team members for people because I can often add value that way, I understand how they're approaching everything, and I learn a lot about it.

I happened to have just read the description of Enneagram 1 on the morning that I interviewed this endowment person whom they were interviewing as a CFO. She and I had this amazing, deep conversation, and I realized, "Oh, my God. She's an Enneagram 1." I said to Fred and Matt, "I think she's an amazing hire. She's going to bring institutional credibility into the inside of the firm. The shadow side, the 1 catch, is she's going to have this slight vibe of, 'You're trying to get away with something.'"

I said, "Particularly Fred, she's going to have this vibe of, 'You're kind of getting away with something. Why are you being that way?' If you take that personally, you're going to end up firing her. But if you don't, she's going to be amazing." Matt recently sent me, I think, that email recapping that she's ended up becoming their CFO. She's amazing. She totally built their firm. She's their 3rd partner.

Because I was there with her before, it's like she and I share this. I noticed this recently when visiting somewhere else where I'd helped recruit a lot of people: You're sharing the before-and-after reality with somebody, and you're on the same journey in this camaraderie-like way. I've seen them go from nothing to—I think they manage $10 billion today. To their credit, they've consistently invested in crypto and put real money to work at multiple bottoms because of their long-term belief in it and the quality of their decision-making. I've had a front-row seat to that, and that's been really fun.

I realized that earlier we talked a lot about identifying the person who is maybe entering into their positive feedback loop, compulsion platform, whatever you want to call it. What we didn't talk about, which seems really important for the prospective CIO hire, whatever, doing this job in general, is the act of, once you've identified them, structuring the relationship with them in such a way that everyone makes money together, to use your language.

What was that process consistently like? Sometimes it was seeding, sometimes it was an LP investment, and sometimes it was a direct deal. Maybe bring us into the room on what those processes tended to be like and what you learned about doing that second half so well—not just finding, but then ultimately consummating.

Well, I think it's part of the pricing, right? You think of somebody like Musk. The terms of Musk's xAI fundraise, I presume, are egregious, quote-unquote, from an investor's perspective. They have no control. They have no transparency, whatever, right? So that's the market pricing the fact that he's highly credible.

When you're pricing the talent, what you're pricing is the degree of autonomy, transparency, the fees, and the duration of the capital. All those things are about what feels reasonable, given where this person is in life, what their track record is, your assessment of their competence, and all of that. The way I ended up doing it was to ask: If I were them at this stage, with this track record and this set of relationships, would I feel like this is a fair deal, or would I feel exploited?

If I felt exploited, I'd try to dial it back a little bit so that it didn't feel exploitative. Sometimes I would get it wrong, of course, but I feel like that part of pricing—

Pricing talent.

Pricing talent. It's how much money, and with what constraints on the activity. What are your decision rights, and how often are we going to check back in? Then I think there's a way to do it if you're the principal. There's a way to do it where, even though you formally have these rights, you're doing it with a very light touch. You can make the experience feel like a much more open field, depending on the tone of the people with whom you've struck the deal.

The 2nd thing on this categorical list, which I love so much, is a quiet ego. Why those 2 words?

Back to that part about identity. If you're the principal, you need an agent who can make money through other people and not care—be indifferent about whether it's, quote, "yours" or somebody else's. It's just, net of fees, how much money did you make?

I feel like I observed that a lot of people who allocate money to underlying GPs actually would prefer to be the underlying GP from a power, identity, and experience perspective. You, the principal, should just want to make money. It's not all the identity claims about who did what or whatever.

So many people are not good at making money through other people. They can do the analysis themselves, but they actually can't. It's like the stage of a portfolio manager's development where, if they've been a stock picker and then move to being a portfolio manager, they need to own a stock that is actually their analyst's favorite idea, and they aren't as deep on it as the analyst. That's a really big moment of transition, and a lot of people cannot make that transition.

It's the equivalent transition, I feel like, in the family office CIO role, where I think the ideal is just agnosticism and enough self-awareness to know where you have comparative advantage, but also an ability to interview other people and appreciate them for who they are and what they're doing, without any need to make it your own somehow.

The 3rd of those criteria is that they be conservative by nature. That one kind of stood out to me as interesting.

You need somebody who knows what it's like to lose money and cares in their bones about never selling puts or never doing something that could take you out of the game. People do weird shit, and part of the trust is a conservatism of, "Yeah, I'll let some things go."

You want the agent to view the money as though it's theirs, and there's a price for that, which is, ideally, they've got enough money that they've already found a way to relate to money that way, or they're just innately conservative.

That's what I was trying to capture.

6. Starting From Ambiguity

On the topic of investment platforms, just like hiring a CIO, you've got some of these great questions that you encourage people to ask themselves. I'd love to go not through all of them, but through a few of the ones that stood out to me. I think people who listen to and read what we're going to produce here—some huge portion of them—are in that funny category of working at an investment firm and wondering, “Do I have what it takes to launch my own thing?”

The first question you pose, or encourage people to pose, is whether or not they can manage the ambiguity of this new thing. Can you explain what you mean by that ambiguity, and where you've seen that sink people or be a hurdle that's harder than people might perceive from the outside looking in?

There's a guy who has a quote, and I'm blanking on the guy's name: “The job of the leader is to define reality on the way in and thank them on the way out.” I think that's so profound because it speaks to how each container is a different reality. I've been thinking lately about how you've heard of Gell-Mann amnesia.

Yeah, Gell-Mann amnesia.

You're reading an article about a subject you know about, and you're like, “Oh my God, the reporter doesn't know what they're talking about.” Then you turn the page and assume the next article accurately captures reality. I've been thinking that I have that, and most people have that, about moving from one container to another. You're like, “Oh, this one is so idiosyncratic based on the source and the way the leader defined reality on the way in. I'm going to go to this next one, but that won't be the case of the next one. It'll be, quote, ‘normal.’”

No. Every single one is so weird and idiosyncratic. The older you get, the more your ability to transition between containers gets compromised, because either you've grown up in one container or your willingness to put up with somebody else's frame on reality diminishes.

I think the ambiguity that I was referring to when somebody's starting something new is just that the act of defining reality is a creative act. But while you're doing it, it feels super slippery and amorphous. It's like, “I don't know if I'm going to get the investors. I don't know if I'm going to get the team.” You're holding so many 33% probability things at once that it's very taxing.

If you haven't run something yourself before, you're not used to having everything be up for grabs. I feel like when you're starting something new, you're sitting there on Monday morning—hopefully you have an office. If you don't have an office, you're sitting at a Starbucks, and you're like—the sheer—

Holy shit.

The lack of structure. Right? You move from order to chaos.

Yeah.

There's no order. The only order comes from you asserting reality, and if you haven't done it before, it can feel fake and disorienting. You can have vertigo. You can be like, “Oh my God, what did I just do?”

So what is it? It's getting comfortable with that level of uncertainty. There's also this subtle thing where I'm actually working with somebody right now who's doing this very masterfully. You have to pretend it's more certain than it is because your pretending makes it so. But there's something slightly intellectually dishonest about that, and it's particularly hard for hedge fund managers because many of them are default skeptical. They're likely to see the downside and the risk and call bullshit on things.

If you're in that mode and yet your own thing feels like bullshit to you, it's not going to work. You've got to thread the needle: It's real enough. I'm going to find the thing that's real enough to me that I'm willing to put a stake in, while at the same time having a sense of humor about it.

My favorite ever line on this came from someone I know, Henry Schuck from ZoomInfo. They've had a fascinating M&A story with that business and how it got pieced together, and he did it all. Talk about asserting reality.

On his first big acquisition, he was flying somewhere, and he said, “I remember sitting on this flight and having this thought: ‘I'm playing pretend business.’”

That's exactly it.

This is like, what the fuck is going on? This is so weird. I'm going to buy a multihundred-million-dollar company? What? My job is to pretend like this is normal. I'm playing pretend business. I'm in my pretend suit.

I thought that was so funny, but also, to the wrong person, terrifying. It relates to the second question from that list that I love, which is protecting the climate in your skull. It seems like that's the skill that allows you to do the first one well.

Yeah.

How have you seen people do that really well or poorly—protecting the climate in their skull? I love that visual.

It's related to the idea in the investment world, but maybe it applies to founders too: The main asset is your future decisions. When you're moving from the container you were in before, and the way reality was defined, into this new ambiguous setting, if in the transition you're now sitting next to somebody—

I use the example in the piece of how often younger hedge fund managers will hire a more seasoned CFO. But the CFO is taking risk that, almost by definition, if they're a CFO and grew up in the accounting profession, is more risk than they actually feel comfortable taking. Their risk aversion and slight skepticism about you, the portfolio manager, can enter your confidence when your fund is down 10%.

You're less senior, your own chip stack is smaller, and you're sitting there while the guy next to you, in his body language and in his questions, is conveying anxiety and fear. Those are very contagious emotions. You want to be very pristine, particularly early on as you're holding the ambiguity and trying to assert reality, about the energy of the people around you and whether they believe in you.

You need some skepticism in there, of course. You don't want to go off a cliff because you're sizing something too big or, in some other way, haven't taken input. But you're managing your own psychology, and I think one of the best ways to do that is to manage the inputs.

It could mean turning down an investor where the check size is really good, but they're actually kind of an asshole and they're going to call you weekly. They signed up for your liquidity terms, but they've never signed up for a fund with those liquidity terms before. They actually like quarterly liquidity, and in all these ways, they're faster-twitch than you are. You sold them on your strategy.

The expectations you have with your team and with your investors have to be so pristine and so well managed, or you don't protect the climate in the skull.

What role does a partner or partners play in this? Picking a partner.

Yeah, it plays a big role, of course, and it's back to the source point. You want them senior enough that you find them credible, and they find you credible, and you've had enough time together. But then, depending on the construct, you hopefully want them to be game for, at the end of the day, being on your ship.

The challenge becomes if they actually wanted to do their own thing, or they think they should be the PM, or they should be co-PM, or all of those. You're capturing somebody who's extremely talented on their path. Do they believe in you, and do they agree with how you price them? You don't want somebody who thinks they should have 40% when you gave them 10%. That's just in the water all the time.

If they wanted 40%, maybe they actually wanted 50%, and if you could hold it for a couple of years and then they go off and do their own thing, that's great. But that can screw up the energy of the system.

It's also why, in those settings, if your partner has experienced failure in some form or done it themselves and knows how hard it is, they're pricing it correctly. Because if they think it's easy, then they should fucking go do it. If they think it's too hard, they're probably not going to join you. It has to be right in that sweet spot.

I'm thinking of this in personality terms, depending on how you're wired and how they're wired. You need to understand how those two are going to go together, just like they would in a marriage. Because if they're truly your business partner, I think David Senra picked out that amazing Zelle quote: “A partner is somebody who shares the same level of risk that you do.” I thought that was so profound. That was such a good catch of his.

That is a partner. You're in this new thing, and if it goes down, it has real-world implications for your family—for where your kids are going to go to school and where you're going to live. And yet I think most of the time, those systems benefit from the fact that, at the end of the day, the buck stops with one person. They are going to make a call, and everybody needs to be okay with that.

It's interesting. It's a calibration for the would-be partner on whether or not they could be resentful in the case of success. If it works, what are the odds they're going to be like, “Ugh, you know, that was more me than I got credit for,” or something like that?

Your interesting point is that if they've tried and failed, they'll better understand how hard it is and price themselves better. So it's both. You want self-awareness on pricing and fairness on pricing, or something like that.

Yeah. Having it be dynamic over time, of course, to accommodate the shifting system.

There’s a quant fund I’m obsessed with—the culture—and I probably shouldn’t get into the specifics of it, but they have a very dynamic comp system in a way that gives rise to the culture. I think there are ways to be creative about how equity changes over time, how carry changes over time, that allow for meritocracy and for change. People tend to do the same self-expression thing in the comp system, and how value will change over time, I think, is a fertile area as you’re setting up something new.

It seems like so much of what you write about is related to periods of transition. You want to start an investment platform. You want to set up a family office. You’re trying to hire someone. You seem always to be keyed in on phase changes. What is it about transitions that fascinates you so much?

It’s the question of what’s going on here. What’s going on here in this new setup, and can I or anybody else describe it in a way that’s useful to you, truly understanding the structure of what’s going on here? If you have humility about it and realize the things you can’t see, then if you read the right thing or hear the right person talking at the exact right moment, there’s such leverage to that moment.

Josh Waitzkin has this language of firewalking somebody else’s mistakes. Can you burn in someone else’s mistakes or not? It’s really hard to do because it’s obviously not visceral to you the way it was to them. But are there ways to inform your own compass in whatever period or rite of passage you’re going through that make you better at it or somehow improve your ability to do it? I just think there’s extra leverage around those.

I’m curious what those mistakes were that you made entrepreneurially that you kind of referred to earlier, that maybe fall in this category of if someone else heard this, they might avoid doing it.

A huge percentage of them are source-related. Knowing when you are source and when you’re not is such a valuable thing.

The first business I started with a professor of mine out of Yale, Richard Medley, he was source on that. But I was running the business. He wasn’t really a business guy. I was a beneficiary of his poor judgment about people, which extended to me. So he let this 21-year-old run this thing in this completely inappropriate way. I had massive imposter syndrome at the time. I had 30 people working for me.

Oh, wow. I don’t think I knew that.

Yeah. It built a big business. So if I were replaying that, there were moments at which, in retrospect, I was frustrated with him as source. Back then, I saw it as, “I’m producing the Richard Medley Show.” But the moments when I didn’t want to produce the Richard Medley Show and wanted to produce the Graham Show, they were frustrating, and he and I had conflict in a way that was extra. It was, “No, I’m not source here. This is the Richard Show.”

At the end of the day, everyone, including me, needs to understand that the buck stops with him, and he started it. Over time, we tried to grow it off of him. But knowing source is super powerful: Am I source? I think in some ways at East Rock, I didn’t fully own source at times, as an example.

Mm-hmm.

And my partner, Adam Shapiro, has become—you know, I kind of handed source off to him, and now it’s very coherent, is my sense. He’s a great investor, and people in East Rock and the clients are living within Adam Shapiro’s world.

I’m helping an entrepreneur right now who I think is at risk of not fully owning source. It’s something that Enneagram Threes and Nines in particular, I think, are subject to, where you can be so adaptable and pragmatic that you write yourself out of the narrative. At the end of the day, I’ll take care of my own needs, I’m going to take care of everybody else’s needs, and I’ll do anything to make this thing work.

There’s a very fine line between being flexible and adaptable and allowing your own creative voice—what’s coming through you, the reason you started the thing in the first place. It’s why so many things do not work. At the end of the day, you need to be comfortable with the power dynamic of who is source. One tiny crimp in that hose and all sorts of weird shit happens. If it’s clean, if everybody in a system says, “Yeah, this guy’s source, and I want to live in this reality,” it has such a healthy vibe to it.

I’d love to understand your view on physical spaces. The East Rock office just has this—someone texted me recently that it was the best office that he had ever been in in New York. Your attention to physical spaces is very notable. It’s one of the most reliable things about you: wherever I show up, it’s going to have a specific feel to it. What’s behind all that? What is it about physical spaces that obviously intrigues you?

It affects my mood when I’m in the space. Obviously, light and ceilings and all of that art, all of that kind of stuff. But one of the things about the East Rock office that I was focused on is that I wanted a lot of extra space.

I feel like one thing that people with capital should do more is provide physical space for up-and-comers. It’s such an easy arb. Richard Rainwater did that. I think Barry Sternlich camped maybe in Dan Stern and Reservoir’s space as he was starting Starwood.

There’s value in holding a physical space and covering the overhead of that. That’s what a certain set of people are lacking. You want to pay their overhead and collect them, so that ideally they find things to do together, and you find things to do with them.

So we have a café at East Rock with a great chef for some of the same reasons you do it here. It creates more of a restaurant—or not quite a club, but just a vibe of—

So welcoming.

Yeah.

Food is so welcoming.

Yeah.

Good food.

Yeah.

And a community table.

Yeah, exactly.

7. Leaving East Rock Well

When you’re making a major decision, let’s say leaving East Rock, what process do you put yourself through as you analyze your own transitions? What do you do? What do you think about? Let me reframe it differently: Why did you leave East Rock?

In January 2020, I had moved to Santa Barbara right before COVID, and I realized that there was enough of a difference in management style between my partner Adam and myself that it was incoherent to have me trying to input my claim to source from the West Coast. He’s an amazing investor. He has such a different style from me. When we were in the same office, it worked. When I was on the West Coast, the people who worked for us were getting confused. This is no longer coherent.

So I decided, you know what? At the highest level, what I’m really good at is finding somebody who’s better than I am at doing a thing. I realized Adam’s better at running East Rock than I am. I’m not that great a manager of people. I love coaching people. I love having a sense of abundance. I love setting people free. I’m not that good a manager of people.

If anything, not being that good a manager of people is in part why I have to be so good at hiring, because I don’t have the attention span—or the desire—to stay in their business if they’re not doing the thing they should do. So I decided, you know what? I found somebody who’s better than I am at running East Rock, and he should take it and make it his own and turn it into the next era.

I always thought that there was this concept of a third-culture kid, which I learned about from an Israeli friend of mine who grew up in Puerto Rico. His Indian girlfriend said, “You’re a third-culture kid, which is such a great mix.” I guess the concept is when you grow up in a place that’s not your family’s home culture. A lot of military brats are like this, and a lot of immigrants are like this, where you never quite feel like somewhere is home.

When I had grown up, my parents were hippies, started a nonprofit in Kentucky, and I grew up in Kentucky. I was homeschooled, and we were so different from everybody else. It was like I was growing up in a foreign country. In retrospect, it felt incoherent to me. I had no alternative basis other than the fact that we seemed very different.

I moved to New Hampshire when I was 14, and that immediately felt much more coherent. My dad had grown up in Boston. My mom grew up in Santa Barbara and on the West Coast. When we moved in January 2020 to Santa Barbara, it felt like home in a way that I thought it never would as a third-culture kid.

One of the things about third-culture kids is that nowhere ever feels like home. They always feel like an outsider. They always feel like they’re visitors. So one way I made the decision was, this feels like home, I don’t want to leave, and whatever I do next, I want to use this as the base and travel from here.

That is ultimately how I made the decision, and it feels like it’s worn well. I miss the team, I miss the clients, I miss being in New York and the flow of it. But then I almost feel slightly smug saying this out loud: on a 100-point scale, my life satisfaction is like a 98 or 99. I’m saying this in the spirit of recognizing how fragile it is, how quickly it could change.

8. Building A Neighborhood Restaurant

So you’re living on the West Coast now. I want to capture a sort of vignette of you with an idea of something you want to create and the process by which you then go about creating it. You do more upfront work than anyone else, and you’re willing to put a tremendous amount—enough to frankly exhaust and extinguish most other people—into getting the original setup right.

For some reason, the restaurant one is so simple and tangible. I also love restaurants. Maybe you could just tell that whole story, from start to finish. What did you identify? What did you want to do? What have you done so far?

I had heard Danny Meyer say on maybe a podcast with Tim that there are some spaces—restaurant spaces, potential restaurant spaces—that if you gave them to him for free, he wouldn’t start a restaurant there.

That totally clicked because I'd been keeping an eye out opportunistically in Santa Barbara and specifically in Montecito for a restaurant spot, and it constantly felt like I was forcing it. So a spot came up that has such good feng shui. It's like your car wants to go there. It's the center of this particular part of town, and I instantly knew, "Oh, if that were available, I would be drawn to go there myself all the time." Of course, I knew nothing about restaurants, but I figured it was a casting exercise, just like most other things. So I was like, "Okay, so I need to find a chef."

And the other thought I had was that the percentage of mind share that Chez Panisse has in Berkeley... If I lived in Berkeley, being able to walk to Chez Panisse and having that one woman in a house totally disproportionately impacts that whole place's sense of itself. There's such leverage to a really good culinary—and more than culinary, just neighborhood—experience. I aspired to bring that in some way to Santa Barbara and Montecito.

This restaurant spot came up. It ended up taking about a year to get the lease. It ended up being a sublease, but a long one. Then I started trying to figure out what distinguished different chefs, and I interviewed a ton of chefs. The reality is that for a chef to get leverage, they need to open multiple locations and then, most often, not be in the original location. So I had several potential licensing deals with very fancy chefs, because everybody seemed to agree, once I had this lease, that this was an amazing lease.

But I realized there's something about when you're in a restaurant and the chef is there versus—

Jean-Georges, number 10.

Yeah, yeah. It just feels different, and it doesn't feel like a neighborhood place. I wanted this to feel like a neighborhood place. I kept looking for either someone younger—this was going to be their first breakout restaurant—or someone for whom it made sense that they would actually be in the restaurant.

I interviewed a ton of chefs, and one of the co-founders of BlackRock, Keith Anderson, owns a restaurant called Community Table in Litchfield County. I was speaking to him for a reference on a chef who had worked at Community Table back when he started it. That chef, Joel Vieland, we ultimately hired.

I'm super excited he's moving to Santa Barbara in July, and then we're going to open this restaurant. But there's a dynamic between the general manager and the chef that is very delicate, because one runs the front of the house and one runs the back of the house. One theme among people who own restaurants is that chefs are artists. They're only going to last 3 to 5 years. So you actually want the stability of the general manager and having it be an experience first and the food second.

I wrestled for a while with that trade-off and ultimately decided I didn't want that trade-off, and I was going to try to—well, we'll see whether it works—try to have it both ways. But I had interviewed this particular chef early in the process, and Joel was so knowledgeable and wise about the business without being cynical. I interviewed so many chefs who were burned out. This was probably a particularly post-COVID experience. They had gotten slightly cynical and felt victimized about the profession and how restaurants fared during COVID. Joel didn't have that.

He's an Enneagram 6, which my wife is, and is the loyal skeptic. If you were going to have a headline, it would be, "Winter is coming." There's this underlying fear to it, but there's an excellence. The fear coexists with this excellence and judgment.

Our general manager, I'd known her for a while. She grew up in the business; her parents ran a restaurant in Santa Barbara. Her name is Jane, and she's an Enneagram 8. I have a working theory that 8s and 6s do really well together. The 8s provide stability. The 6s are loyal, but also skeptical in a great way and alive in their decision-making.

So I ended up thinking, I introduced the two of them. At one point, Joel did not want to be the general manager. He knew in his old restaurant that, at one point, he'd had to act as general manager, and he hated it. It's a little bit like if you've had a failure, it's actually better sometimes because somebody prices themselves correctly. He prices the value of the general manager, in my view, correctly.

Oh, interesting.

And values it.

I feel like there's a good chance it'll be a very long-term thing for that reason. The other element in Santa Barbara is that the housing is so expensive. A couple of years ago, when I started this project, I knew that the toughest thing, if I was going to recruit somebody from outside Santa Barbara, would be housing. The biggest carrot I could provide somebody would be a great housing setup.

I also wanted the feel of the restaurant to be of somebody from that neighborhood, not somebody who's commuting an hour in to serve somebody else, but somebody who's grounded in that community. So I had bought what, at the time, was the cheapest house in Montecito and redid it. It's right near a great public school, and it's a 3-minute walk to the restaurant.

I was able to get him. The reason I'm so lucky here, and the reason I know it's a good setup for him, is that he's going to live in this house. His kid's going to go to the school. He's going to walk to the restaurant. All those elements came together.

The final one was that I was debating whether to have a ton of investors in it and pass the hat to the community or keep it simple and fund it myself. I ended up finding a friend who's a partner at Sequoia, Bryan Schreier, who, with his wife, has a real interest in hospitality and has done other projects like this. They met Joel and Jane. We're extremely excited about it.

9. The Talent That Endures

It seems to me like this is just something you do all the time. I like the idea of a casting exercise. I don't think I've ever heard you use that specific terminology for it, but you are a casting director in so many ways. That is one angle to understand you: the world's best casting director or something.

Another great example of this is Sohn, where Sohn predated you. How many years have you run it now?

6.

Okay. So what was it like to take over something that had its own shtick and gestalt, which is literally just a casting exercise and certainly suits you? The same questions as with the restaurant: Talk me through something that you didn't start in this case, but have made more your own—what you get out of it and what the process is like behind the scenes.

You're right. It is that. A casting exercise is so compact. This year we had 32 speakers, so it was 32 choices that I made together with Paulino Lopez and a number of other friends on the host committee. One of the East Rock team, Brian Waterhouse, did Next Wave, which is how I started with Sohn 10 years ago.

I see it as: Is the person a credible threat at saying something interesting? If I saw them on the agenda and I already knew who they were-ish, is that when I'm going to go take a call or not? I try to have none of those breaks if I can. Then, a little bit like what we were talking about on the retreats, if I were sitting next to them, would I feel engaged?

In terms of making it my own, Doug Hirsch, who started it, who is source, and whose big insight was to make it all actionable investment ideas and to hold the line on not having panels—I feel like that's one of the things that distinguishes it. At various points I wanted to bring in people like Patrick Collison or other tech people where there wasn't really an actionable idea, but I just give myself a small budget of those at a given conference.

This year, my friend Boykin Curry came up with the idea of this lightning round, where we did a series of 5-minute talks that I thought really complemented the longer format quite well. I think we'll double down on that next year.

It seems like an interesting annual exercise in figuring out who has it, who the main characters of the moment are, which is a fascinating exercise, a fascinating check-in. It makes me wonder about your thoughts on who somehow finds a way to maintain that over a long period of time.

Tepper is someone you've written about who is very quiet and doesn't show up in the press very often. But my sense is he's been it, or has had it, for just an insanely long period. I don't know how many I could rattle off like that. It's quite rare, and there's a handful. Any observations on the people who somehow have it every year, year in and year out, over time?

Yeah. Well, macro, of course—Druckenmiller also comes to mind, and Soros in his day had a long duration. There's something about macro where you're opportunistic enough to shift to the style of what's making money in that period. You could do long-short; you can do distressed. You're not a hammer looking for a nail. So I feel that provides some duration.

I do think, in general, that if you've made a lot of money and your ego and identity are starting to solidify, the financial markets are such a good feedback mechanism to make you constantly learn. If you're going to choose one profession to grow old in, to maintain intellectual and cognitive flexibility and responsiveness rather than hardening, I feel like the financial markets are pretty good, because you'll just lose all your money if you get too ideological or start drinking your own Kool-Aid.

And so I feel like Tepper and Druckenmiller are both good examples of people who are forced to constantly engage with new ideas and young people, and move with each chapter in the markets. So, yeah, there's something in that.

There's a category of investor—I won't name them, but everyone can imagine them—who nailed doing one thing really well. They rode one specific wave. They invested in one specific kind of business model or something like that. None of that stuff lasts forever.

Yeah.

And so maybe macro is unique and ultra-flexible, and maybe Buffett's the ultimate expression of this: shedding his skin however many times to adapt to a new style.

Yeah.

But maybe love of the game and a broad purview are the 2 ingredients.

Yeah. Love of the game. Humility, and bordering on paranoia that you're missing the thing that's now happening, so that you maintain an extremely high level of open-mindedness. I feel like there's a form where, when something works, you've got all these LinkedIn posts from people who are on the edge of a thing.

I thought Daniel Gross's interview with Eric Steinberger was super interesting this year because Eric is neck-deep in the AI world and, from my perception, maybe at the blue-chip end of the pool. How he makes sense of reality is so different from mine. Daniel was trying to act as a translational layer between—

He even said that as he was doing it: “Let me translate for the…”

Yeah. He was doing such a good job of it, and it was still hard. But the fact that in that world there's this idea of, “I want to be in the room when AGI happens,” and there are, I don't know, 5 to 10 places that are in the hunt for that, and they're paranoid they'll be in the wrong room, is such an interesting perspective. Maybe that's not the right frame, but the fact that that's a dominant frame totally strikes me.

I'm curious, as I think about that hierarchy of yours—I think it's apprentice, expert, professional, master, steward—what is the difference between professional and master? What happens in that gap? How many masters are there?

Maybe there are 10 to 20, 10 to 30. I assume there are a bunch who are just managing their own money, and I know a number of those. I bet I'm missing a couple.

What's the distinction? The distinction is a shift to thinking of it as becoming a source, maybe, of your own style of investing, is how I think about it. Those portfolio managers will have had influences before them that leave their mark, but it's about coming into their own and not playing the game the way other people have played it, but truly playing it in their idiosyncratic way.

I'm trying to think of an example beyond Tepper. Tepper's such a good one because he's in the public domain, and I don't actually know him, so I'm not violating any confidentiality. I do think there's a consistency to what I think of as that master level, where their identity is up one level: “I'm a moneymaker,” not “I'm a portfolio manager who invests in this sector.” I think that shift is one elemental piece.

How many stewards are there, do you think, at any given time?

Yeah, also a handful. I think of John Arnold as working on the machinery—you know, the plumbing of the country—in public policy right now in a way that's consistent with that. He's not in financial markets per se, but he seems to be heavily engaged.

I felt like Bill Gates, controversy aside—I don't know if you think of him as a founder-investor—at the beginning of COVID, he was acting that way. He was caring genuinely for the system more than his own interests. I feel like Mitt Romney is in that category right now, as a former investor, his politics aside, from my perspective and from afar, seems to care about the system itself.

When Druckenmiller is concerned about the debt and playing the role of a modern bond vigilante, that's him saying, “Guys, I see this. We've got to be careful here.”

I'm curious whether there's more or less capacity for investing masters today than there used to be. I guess it's kind of a question about market efficiency and what you think about markets, and whether or not it's going to attract great talent in the way it has in the past. As a profession, do you feel like it's as potentially rewarding and exciting for a 22-year-old as it was 30 years ago?

I think if you define it at the right level, it is, which is back to the point that maybe startup founders versus hedge fund managers and private equity managers is a tricky distinction. Think of AI coming onto the scene and how much disruption that'll cause in investing, but also how many new opportunities it'll create. Maybe it'll be a startup founder who's organized as a company that ends up making the most money.

I was talking with someone who's deep in the AI world recently, and they're paranoid that there may already be AI at scale in markets. I thought it was such an interesting idea. Even if they're wrong, it's the kind of thing that's going to happen sooner than you think, and then weird stuff is going to happen.

I think, existential questions about AI and how it'll reshape the world aside, it'll morph, and commercial, pragmatic, aggressive, humble people will continue to thrive in the system—

Mm-hmm.

But it may take lots of different forms.

Are there traits in investors that you think matter more in 2024 than they did in 2004?

It would basically be the same: decisiveness, being open-minded with a point of view. At a high level, that's the same. There are moments, like 2008 and 2009, where you're on the field and the game itself changes in these structural ways. People who can handle being comfortable with that level of change—“No, you thought you had cash in a bank, actually you don't. Oh, yes, you do. No, you don't”—those sorts of movements of the game.

I remember at the time, there were several managers who I would not have guessed felt wronged by it. They were short, and when the SEC banned short selling, there was one guy in particular who just felt like that wasn't fair. It felt like the sentence underlying everything he said was, “That's not fair.” And that's a version of trying to be right rather than making money. Like, what? Nothing's fair. It's not fair that you have a gazillion dollars and you're managing a hedge fund. What?

So I feel like if you told me there was some shift—I don't know what it would be—in the game itself over the next 5 to 10 years, it would be useful to be so opportunistic and so flexible that you're fine with that and flow with it rather than getting stuck. It matters more during periods of punctuated equilibrium.

Does AI scare you? What do you think about it? It's freaking me out lately, to be honest.

Scared and excited at the same time. Munger spoke at Sohn Australia a year before he died, and he had this amazingly poignant thing where he said, “I was talking with Warren this morning, and we were both saying, if we could just watch what happens the next 30 years.” And then he said, “Not even participate, just watch.”

Beautiful.

Oh, yeah. I oscillate back and forth between fear around how my kids will navigate that reality, and how we as a society will navigate it, and then Tyler Cowen's frame: number 1, it's happening no matter what.

Yeah.

So get over it. And number 2, it's the return of history. There have been other eras that felt like this, and so that's how I try to rationalize it.

What would surprise people the most who aren't in the world of what I'll call the very high end of the investment game, where you have very talented, very smart, very aggressive investors vying for edge, vying for talent, vying for whatever funds from LPs? What would surprise people about the way that world works, having probably interacted with it as much or more than anyone?

One thing is just the path dependence of it. You happen to have launched in a period where, in your first year, you made either good returns or bad returns, and then we tell all these stories after the fact.

I remember there was Cliff Asness of AQR. There was another manager who launched at the exact same time, with a very similar pedigree.

Yeah, I know who you're talking about.

And it didn't work. I remember one story about that: maybe they launched 2 months apart or something, or there was some—

There was a difference in their initial returns, yeah.

Yeah, and then that led to these crazy differences that we have all these stories about after the fact. I think there's a path dependence, an arbitrariness, and a luck component that we, in retrospect, tell stories about as skill and other things. Of course, real life is both, and it's messy, but that's one.

There's a lesson there: work really hard to start hot. Set a higher bar for that first deal.

Yeah, and have a feel for where you are in the cycle, obviously. That requires a macro judgment that most people wouldn't have or that may not be available in any given period.

Can we talk about referencing a little bit?

Yeah.

I don't think I knew that you were willing to troll LinkedIn as much as you were. You're certainly willing to do more referencing in pursuit of finding the perfect person to lead the thing. What have you learned about this art? And I would call it an art.

It feels like it’s a common thing to say now, “I’d rather reference than interview.” It’s become a popular idea to do referencing. But 99 times out of 100, when I see people reference, they do 3 references: 3 customer calls, 3 prior bosses, or something. I think that is very different from the way that you’ve done it.

So how have you done it? I would actually love to hear the story of how you came to this. What was the origin story of you doing referencing? I don’t think I’ve ever asked you that. Why do you find it so valuable?

Well, the origin story is that I worked for Ted Seides, who had learned it from the Yale Investment Office. Their emphasis on it and their professionalism around it was my window into that. It was like, “Oh, it’s not quite true.”

When I met Ted, I had started a reference-oriented business and was pitching him as a client, and then I ended up joining him. So I was already onto it, but he was so good at it that I felt like I learned a lot from, in effect, the Yale endowment lineage of references. They were maniacal about it—they’d track down college roommates and that sort of thing.

Then I wrote that piece, “What’s Going On Here with This Human?,” partly to put myself back into that mood. I reread it before I do references because it captures a mood. I’m trying to get myself back into the mood of holding onto the humility about how much you can see and how much you know at that moment, and then enjoying the process of figuring them out together with other people.

There’s also, at this point, the felt experience of finding it so accurate. I can often find in the reference something that is highly relevant to what ends up happening later and how I end up experiencing that person. I’ve just seen the power of it. I do believe that there’s signal in there. It’s not 100%, but it’s 75%.

Just to make sure I understand that point, which I hadn’t thought of before: it’s not just about making a decision to hire them or whatever. It’s actually improving the chances of working well with them—

Yes, exactly.

—after the decision. I’ve seen you write about a couple of goals that you have in a reference process. I think one of them is understanding the elephants in the room. Explain that process, and a couple of other things I’ll ask about, too.

I like Jonathan Haidt’s metaphor of the elephant and the rider, which he says he came to on a psychedelic trip. It resonates because both when you’re interviewing a candidate and when you’re doing references, there’s some percentage of the time where you’re interviewing the rider. His idea is that they’re two separate—I guess it could be just the ego and the unconscious, but it feels like it’s more than that.

You have to distinguish between what somebody’s saying, how self-aware they are, and whether they’re speaking for just the rider or for the rider and the elephant. An example would be that everybody knows you need to be, quote, “highly conscientious and detail-oriented” in most professions, on most things. But the reality is that some people aren’t, and understanding, in a reference process, the implications of where they are on that—and the implications for that given role—ends up being super important.

How do you get at the elephant?

You get at the elephant because it’s the pattern of behavior over time that you’re hearing from multiple people in different contexts.

Past performance is indicative of—

Yeah.

—future results.

Well, and it’s like past—

Past behavior is—

Yes.

—indicative of future behavior.

Past behavior as experienced by multiple agents on the field over time, in similar contexts.

How would you describe your own personal elephant?

My wife knows my elephant well. People I’ve worked with—Waitekin knows my elephant well. It would come out in adjectives from them. I’m extremely comfortable with ambiguity, and so I like to hold— I think one of the characters in Shōgun apparently does this. I just started watching it, but—

It’s really good.

Toranaga just—

Yes.

—holds.

Totally.

To the point where everybody else is losing their minds. I’ll notice it when I’m working with somebody else on a reference process or on a given human decision, and I’m like, “I feel no need to make up my mind.” There’s all this evidence on both sides on X. It would be useful to make up my mind. It’s like, “I’ll just keep eating the grass over here, and then I’ll go over here.” It can be maddening for people who are working with me.

It’s like you’re the ultimate open-loop person.

Yeah.

A closed loop is like, “What’s the thing that needs doing? Get it done as fast as possible,” versus delaying—

Yes.

—the need to make a decision, keeping options open as long as possible.

Yeah. That probably makes me frustrating to work with at times. But then I think friends would say that I can act very decisively, much faster than they would think, when it lines up.

In addition to the elephant concept, you talk about this in this whole category of seeing reality clearly—through understanding, through references, through trying to understand a person in a situation. You talk about seeing your own reflection in the window. What does that mean?

It’s a metaphor that Sam Harris uses when you’re trying to get someone to understand the nondual perspective. His point is just that if you and I were looking out this window and there was a very strong reflection, and you were focused on the building outside, using language to get you to see the reflection would be very hard.

I like it in the hiring context because I think many people are blind to the way that they’re creating the interaction themselves with the other person. The example I use in my essay is that if you’re interviewing somebody and you’re nervous and holding your breath yourself, often they will start to do that, and then you experience them as nervous. But actually, you were the prime mover on that.

That’s why references—using the interview as just one piece—are important. What’s so hard is that the interview is so vivid in your mind, and you’re inclined to really weight it. But the reality is that if you can do really good references, then you can control for the fact that you’ve created the other person.

The last of these goals, if you will, from this great, amazing piece is seeing the water, which I think is a David Foster Wallace reference, I’m guessing. Describe that last goal in the process of trying to understand what’s going on with the person.

We’ve talked earlier about containers and how different the reality is in each container, and I think of the water as making sense of reality based on their lived experience within a given field and within a given company. You don’t want to take somebody out of water that’s working really well and just assume it applies somewhere else.

If you were working at Goldman Sachs in the 1990s, there was a certain way of doing business that, if you took somebody who was extremely commercial and extremely successful and put them in a different firm with a different style of doing business, they could be seen as super sharp-elbowed or super something. You have to be conscious of how different it is moving from container to container. They aren’t necessarily aware; they will not control for that themselves, so you have to control for it.

10. Touching Excellence Early

When we were sitting by the beach last time I was out in Montecito with Boyd and a few others, you were telling us some of these amazing early formative-experience stories. We talked about one, which was this moment of ignition: seeing the senior rowers and thinking, “If I work hard, I could be that.”

I’d love to hear a few more of what you could think of as the formative experiences of your life, at any stage. It can be investing, it can be rowing, it can be anything that you feel like were pivotal moments of growth for you, or just formative in the way that you think about or have experienced the world.

The rowing one is a great one because I can’t remember how many championships you won. A lot.

Yeah, 9.

Yeah. An unbelievable amount of success tasted early, which is an interesting thing. People taste excellence—

Touch it.

—in their own lives at different times.

I feel like that’s something I aspire to for my kids, because I feel that experience for me locked in this sense of my identity: I can outwork other people if I just try hard enough. So when I subsequently hit challenges, like having launched East Rock a year before the Great Financial Crisis, I had this underlying confidence that it could only get so bad somehow, because I can always fall back on working hard. I’ve seen it before, so it’s tangible in this way. I believe it in my bones.

I feel like that underlying confidence that I’ll figure it out, when a kid has that or a grown-up has that, allows you to operate from integrity in periods where it’s stressful.

I would love to hear more about the rowing because, obviously, it was formative, but it’s also such an interesting contrast of, I think, a little bit of identification for you as being somewhat lazy, but so much evidence to the contrary in some of your formative experiences—your willingness to work extremely hard.

What was it about rowing? The physicality of it? Was it the pain? I've never rowed in my life. What did you learn there in that space that you worked your way into?

There's a lot of pain tolerance. The races, depending on how fast you row, are 2,000 meters in a single. You'll do it between 7 and 8 minutes. So that's a length, but it's not a sprint and it's not a marathon. You're producing an incredible amount of lactic acid.

It's like running the mile.

Yeah. There's a threshold of, “Okay, I've got to get used to the pain and be okay with that.” There was also a big difference between—I at first won a couple of national championships in the double—and it was striking how different it is to be out on the water with just one other person compared to being by yourself out there, and how there's nowhere to hide.

I feel like I learned partly just a training mindset. I was fortunate in that the club I worked at was mainly training national team members, adult national team members. So we had fancy boats, and we were videotaped in every practice. You'd go home and watch video and constantly work on your technique.

That training mentality that my friend Josh Waitzkin is very focused on applying to any profession today—the confidence that the investment in the training pays off—was one thing I learned. You could always tweak it a little bit and make it slightly better. My dad always said I was very coachable, which I think is true, so I was able to evolve my technique pretty effectively and pretty quickly because I just wanted to win. I didn't experience much friction.

Did anything formative happen to you at Yale?

One was just the experience of being with so many ambitious, smart people. It kind of blew my mind. My freshman year, I was in a program called Directed Studies. You had to apply to get in, and it was 60 kids. You had full professors teaching you classics.

I was in this philosophy class. Out of the 60 kids, 7 of them were from St. Ann's, the school in Brooklyn. I'd gone to public school in New Hampshire, and 2 of the St. Ann's kids were reading Plato in the Greek. At first, I mistook one of them for the TA. I remember calling my parents and saying, “I don't think I'm going to make it. Definitely in Directed Studies, and maybe at Yale, if this is what the standard is.”

The other thing was that you were writing a paper a week.

God.

It was intense. They called it “Directed Suicide” at the time. I'm sure that's no longer allowed as a term. But I was at that guy George's wedding 15 years later, and I was sitting at a round table where it was all Directed Studies alumni. Somebody else told that exact story. It turned out half the table had called their parents complaining that George was reading Plato in the Greek.

Because of George.

So making it through that—and over the course of the year, I got better at writing because of the paper a week, and I got my footing and decided I could make it—the confidence that built felt formative.

Then sophomore year, I read a paper by a professor which implied that he was going to roll out this application of his political philosophy to a bunch of different domains. I remember sitting there thinking, “Oh, that's going to require a lot of work. I wonder if he needs help and if that's an opportunity to apprentice under him.” His name was Ian Shapiro.

I emailed him at 11:00 p.m. at night, and he emailed right back and said, “Yeah, actually, I do need people for exactly that project.” He and I grew very close over the subsequent 2 or 3 years, and I did a ton of research and learned a standard of research from him.

I think that sense of taking initiative and being—if you're just reading things that are in the public domain, can you intuit what the next thing is from that?

Talk about the partnership that budded and what you did with him.

He ended up writing a book, and I built—with my dad's help at the time—a huge Lotus Notes database of all the literature around workplace democracy. He ended up using a bunch of the things I had found and credited me in his book, and he became a real mentor.

He's South African. He and I are still in touch, and it was an intellectual touchstone of quality that I could measure somehow.

Did it have a similar vibe of touching excellence that the rowing did?

Mm-hmm.

The intellectual version?

Yeah. Exactly. People were doing a thing at a standard I was not aware was a thing.

Huh. It makes me think of Teller's thing about the competitive advantage of having seen true excellence. How excellent an example someone has seen is a really important factor about somebody, because that's the standard that gets set. And, of course, he saw it for Elon at his right hip for 6 years.

Yeah.

So he's maybe arguably the best at this.

Yeah. It's that belief in what's possible, right? Sometimes I would interview analysts who I realized were not calibrated on what excellence was. They had been at mediocre banks and mediocre hedge funds, and they thought they knew the territory, but I was experiencing them as not. So, yeah, I think it's super profound.

Seek excellence early.

Yeah.

Not just watching, but helping or doing. Touching.

There's a great moment in an interview with—what's Serena Williams's husband's name?

The Reddit guy.

Yeah. He talks about dating her and thinking he was kind of a tech guy in scope. He thought he knew what hard work was, and he thought he knew what training hard was, so he was kind of macho about it.

Then, as he started to date her, he was like, “Oh my God. The number of hours a day, the sheer intensity—it's at just a whole other level of what Serena does than what I thought was possible.” I remember thinking, “Oh, he's capturing exactly that moment when you see a person do a thing. They're bringing something to it.”

What happened after Yale?

Ian Shapiro, this professor, had done his PhD at Yale in the—I guess in the '80s—together with a guy named Richard Medley, who dropped out of his PhD program and went on to work for Soros, becoming a partner at Soros and his in-house political intelligence guy.

I remember there was this moment when I was sitting in my room senior year. I had already selected all my classes, and Ian Shapiro emailed me that there was this interesting visiting professor and that I should check out his class. Actually, I gave him grief for this later. He didn't pound the table on it, but he was like, “You might want to check it out.”

I was in my gym clothes, and the class was in about an hour. I remember thinking, “Okay, do I go to the gym, or do I play out this option?” Thank God I played out the option, because I went to that class. I was like, “Oh my God, this guy is in...” It was a moment of ignition. This guy was in a world that was extremely interesting to me: financial markets meeting politics. I didn't even know this was a thing.

It was a very small class, and over the course of it, he offered me a job starting a company with him after graduation, which I ended up doing.

Describe the company.

Larry Summers called us a private-sector CIA. I felt like I built a business a little bit around a Tom Friedman-like character who was very good at narrating what was going on and had a feel for how events might unfold. He was a really good writer.

So we had, in essence, a newsletter business. At first, we tried different business models, but I was out cold-calling people, trying to sell them these services. I think we were charging $400 a month. I wasn't getting any meetings.

On a lark, I decided to try saying, “Actually, we charge $20,000 a month.” All of a sudden, I got 5 meetings right in a row because they were like, “Who the hell has the balls to—”

Twenty grand worth of stuff a month.

Eventually, we charged even more than that. We built a big business.

I remember I started to develop a feel for how information leaks through a system. We were trying to track what was going on in 1997 and 1998 around the Russian emerging-markets crisis. What you're trying to do is find people who are in the rooms where stuff is going down and are willing to talk to you. It's like an intelligence operation.

You're trying to figure out whether, when somebody's telling you something—and they could be a journalist, a professor, or a former central bank official—they're overstating what they know or telling you exactly what they know. There's an incentive to overstate it.

I realized I was good at finding people who were a credible threat to have access to an information stream that was relevant to a given thing. In the Russian case, I found a woman who was a documentary filmmaker who just had bizarrely high-signal reads of what was going down. I later—I think I found out there was an 80% chance, in retrospect, that she was sleeping with the finance minister at the time.

But whatever it was, it was very high-signal and bizarrely accurate. We had hundreds of stringers, in effect, and we were able to publish things that were more hunches than a normal newspaper would have at the time.

What was graduation like from that business? What happened? What was the transition to the next thing?

We had the opportunity to sell it to one large news organization.

The professor ultimately didn’t want to sell it to them. I asked him to buy me out at that multiple, which he did. They ended up selling to the Financial Times a couple of years later. I was producing someone else’s show, and I wouldn’t have had the language for it at the time, but I wanted to try being the source and having my thing be at the center of it. I tried to start several businesses. They were failures.

It was like a wilderness period?

A wilderness period. I remember somebody giving me grief for how many different email addresses I had, and that really stung at the time. I was like, “Oh, yeah, he’s right.”

Fuck.

I’ve had four email addresses in two years, and he was giving me shit about that.

So then bring us home. From that wilderness period, I guess, is there any other meta-lesson from just wandering and trying to find the thing?

I think one would be just patience and not over-waiting. If you’re doing that at what Bob Kegan would call the socialized stage of your life, where you’re really focused on the approval of other people, where you are in the system, and being, quote, “relevant,” you’ve got to make that as objective as you can and not let it freak you out. Tom Morgan did this five-minute talk at Sohn. Have you watched it?

That was great.

Isn’t it great? He closes with one of your favorite quotes, I think, from Joseph Campbell: “Follow your bliss.” There’s a follow-your-bliss element to it and trusting the universe that if you get in touch with the thing you’re compulsive about and that you love, the world will come to you. It’s a trust fall, and it’s hard.

I remember during that period thinking, “I’m very interested in people and information networks. There’s an element of almost being an anthropologist.” I remember thinking, “How does that fit in?” I had that ignition around Dan Stern that we talked about, who had run Reservoir. That was one compass point through that period.

One thing I think a lot about is in that swim—to use your river analogy—after a long enough, hard swim, you swim to the other side. If I think about my own life, not having come from crazy amounts of financial success or whatever early on, I had enough support that I could keep swimming longer. The sort of nepotism of having worked for my dad and knowing that he probably wouldn’t fire me was such an unfair advantage—

Mm-hmm.

—that I could swim longer without swimming to the other bank. I couldn’t have taken as much risk. There’s this great quote, and I want to find it and read it exactly right: “Only those who will risk going too far can possibly find out how far one can go.”

Yeah.

Does that feel like that wilderness thing?

Yeah.

Is it related?

Yeah. The tolerance for ambiguity, the willingness to take risks, and the willingness not to play on somebody else’s board. But I think you’re right that it’s a nice image: You try chaos, and then you go back to order as a default, and then you try chaos. It’s a repeat-iteration game.

There’s a quote I love from Michael Singer, who’s a spiritual teacher of sorts, and he says, “Eventually, you will see that in the way of the Tao, you’re not going to wake up, see what to do, and then go do it. In the Tao, you are blind, and you have to learn how to be blind. You can never see where the Tao is going. You can only be there with it.” I think there’s something like that. The tolerance to be blind and not know, and just experiment and figure something out, is very hard to do at any stage of life, but particularly when your rent is due, you have a family, or you have financial obligations. So that is in that same zip code.

We talked a little bit about the origin story of East Rock itself, starting with, I think, $50 million from Stewart and then growing from there. Maybe tell just a quick version of that origin story and what was going on in your head—what your source was, what your vision was, what you wanted to accomplish, and how it came together.

I had been working with one of the co-founders of Greenlight, Jeff Kezwin, running a fund of hedge funds and doing some seeding, keeping an eye out for how to be the source on something myself, and got an introduction to someone who was advising the Miller family. I wanted that sense of selecting people and empowering them. I had observed that a lot of fund-of-funds people and endowment allocators had this scarcity mindset, were very focused on fees, felt like they would be taken advantage of, and were kind of disgruntled all the time.

I thought there was an opportunity to approach it as being on the same side of the table: Let’s take risks together, let’s make money together, and let’s have that be the overall gestalt of the place. Adam Shapiro had been a year ahead of me at Yale, and we’d talked about working together over the years. He was in the special situations group at Goldman.

I remember thinking—actually, Vinod Khosla has this line that if you could hire somebody that your anchor client could not hire themselves for some reason but is blown away by, try to do that. I remember thinking, “Oh, I did that.” It turned out Adam and Stuart knew people in common and had been involved in similar deals. Adam had done a lot of real estate, and they had a similar enough overlap in sensibility that it ended up being an amazing hire. It was more than a hire. He ended up being co-founder and co-CIO with me, and then we built a great business.

Can I ask about Josh’s, for me, very beautiful visual exercise of going into this cave and bringing with you a stack of blank pieces of paper or something, and really trying to separate your attachment to the prior conditioning and experience? On a blank piece of paper, write the perfect setup for yourself and then come out of that cave. I don’t know. I just love that. I just love that idea, especially around transitions.

If you were to think about going into a cave and I constrained you with, “I want you to come out and describe the perfect setup,” and when I think of the word setup, I think of you. There’s no one better at designing a setup for, yet again, managing your own and someone else’s money. Tell me what you see on that piece of paper.

I think it’s somebody who’s got a similar taste in people to mine, or whose taste in people I can sense, and it’s a subset of mine. I can constrain the things we invest in to that. Then there’s the ability to hunt for opportunity in an extremely opportunistic, unconstrained way, where, because I have so much money at risk, there’s this mutual trust and credibility, and it overlaps with how they’re already inclined to manage money.

There are no style points. The gap between principal and agent is so thin. That’s what I would aspire to. The total amount of money provides leverage so that you can play interesting games, find interesting people, and have it be worth their time.

At this stage, I want a license to hunt big game. I already have some big opportunities in mind, and my own chip stack is not quite big enough to close those deals. But if somebody shares my taste and my map of reality and says, “Oh, yeah, you’re right,” then that would feel very satisfying. The ease of it is a quality of it.

One last quote. This is you: “Whatever a human being desires for themselves will not come about exactly as they first imagined it or first laid it out in their minds. What always happens is the meeting between what you desire from your world and what the world desires of you. It’s this frontier where you overhear yourself and you overhear the world, and that frontier is the only place where things are real, in which you just try to keep an integrity and groundedness while keeping your eyes and voice dedicated toward the horizon that you’re going to or the horizon in another person that you’re meeting.” Can you talk about that intersection—desire and what the world desires of you?

In terms of applying it to me, I feel like at this stage I’m very open to what the world wants. Rather than trying to assert reality, I’m letting it unfold and trying to surrender a little bit and see what comes in.

I think I can be of service in putting 2 people together—all the source dynamics we’ve talked about—or finding the right fit for somebody at that stage of life. I really like giving high-context advice when there’s a lot at stake, whether that’s picking a business partner, picking an investor, or picking a spouse. I think picking a nanny is oddly high stakes, and I really care about it on behalf of that person’s kid.

I think around that I can act as a sounding board for people and hold the complexity of the decision they’re trying to make. If I’ve met the person they’re trying to decide about, I can sometimes give them a feel for unexpected positives and unexpected negatives that they may not have seen yet.

When I do these gatherings, sometimes I’ll have people go around and say, “Call me if you need help with X.” People answer that at such different conceptual levels. It’s a little bit like the criteria question of what criteria you would use to hire somebody. People answer it at such different conceptual levels.

One famous hedge-fund health-care guy said, “If you or any of your family members get sick, call me and I’ll help you find blah, blah, blah.” It was such a beautiful sentiment. That is his highest use. He does know that the energy in the room radically shifted when he said that. From then on, the offerings were much more high-level and generous in this beautiful way.

My current formulation of that would be that if you have an extremely high-stakes decision that involves a person, and you're agonizing about it, and there's a lot of leverage to the situation, I just enjoy that inherently.

The big meta lesson that I would take away from reading everything you've written, spending a lot of time with you, and learning from you is that there probably is a path or a theme for everybody that, if they were to get closer to it, on it, or in it, both their lives and the lives around them would materially improve.

I entirely credit you with a lot of how I've thought about structuring my life, and very specifically with being honest with myself about what I can outwork other people doing, and then trying my best—and I'm still not perfect by any means—to build my professional life and personal life around those things. I've experienced personally the power of taking that simple idea seriously.

And I am incredibly grateful that you've taken the time, both personally between the two of us and also at scale, to take great care and time. I've seen drafts of your writing, and you're painstaking. You take great care to get it right. I hope you know the impact that it's had. I'm sure that if I called around—which I might do for fun—and asked a lot of very impressive people the same question, they would say something similar. So I hope you feel that.

Thank you. That means a lot.

Because it really—Munger said, "Take a simple, great idea and take it seriously." Different people have said it in different ways, but for whatever reason, the way you've said it got to me. I appreciate all the time, all the amazing lessons, and all the amazing fun. You know what I'm going to ask at the end. What is the kindest thing that anyone's ever done for you?

I'm going to answer that professionally because it's more useful. In an absolute sense, it's obviously my parents and the way they raised me. In a professional setting, the level of risk that Stuart Miller took in trusting this kid to manage his money, then navigating the financial crisis together, and this feeling of him rooting for me all the way through—I would put that in that category.

I've never really had a boss. I started that company with a professor. I've done all these things, but I've had one or two bosses, and it didn't go that well. Like I'm not a—

Not really an employee kind of guy.

I don't know why, but that feeling when Randall Stutman said, "That's the mark of a good leader," I aspire to take that feeling. I hope maybe partly what you just said is you feeling me rooting for you.

Always.

I feel like I felt that, and so I know it. Then I can pass it along, and the gift keeps on moving in that way. That's how I would answer that.

If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.