This one is jam-packed with a variety of topics which range from structural differences in growth between Europe and the U.S to Joachim's fascinating concept of industry "Cassandras".

Plus, we have even more Free Money to offer, including the usual beloved banter, industry updates, and burning questions from listeners just like you. Tune in to cash out!

We also answer some exciting questions from our lovely listeners, offer gardening tips galore, and share developments both fun and fund-related!

Their experience as an intimacy coordinator gives us some amazing insight into consent and how it applies to the governance and approval we encounter in investment decision making.

Ashby's head explodes multiple times, and we're quite confident yours will too.

Happy New Year from the Free Money Fam!

Ashby's whereabouts on January 6th are also discussed, and if you'd like the answer to that burning question, you'll just have to tune in!

Thanks for joining us - we genuinely appreciate each and every one of you.

We hear from them on why the firm is necessary, how they've gone about trying to access the people they're trying to reach, and then discuss the role they see for Colorful Capital going forward. For a deeper exploration of the topics we discussed and links to various resources mentioned, check out our blog post on this episode.

Don't forget our typical helping of banter - this episode's topics feature new sovereign wealth funds, guns, and a roast of burning man. Ya know, the usual.

It honestly didn't come as a shock to us that modern American accounting practices are deeply rooted in slavery (nothing shocks us anymore). But in order to further wrap our heads around this insane concept, we spent some time chatting with Caitlin Rosenthal, historian of business and slavery.

Join the crew as we discuss what it was like for her coming out at Goldman Sachs, real experiences of what it's like to be trans in finance, and Maeve's expert advice for communicating around innovation in the industry.

We also discuss ancient spreadsheets, whether or not AI will ever have a material impact on institutional investment decisions, and the general vibes this lunar cycle.

Note: This conversation was recorded on September 1st, 2021.

24:59 - Trend #1 - 2022 should be the year when fiduciary investors' commitments to go net-zero and fossil fuel free actually get some teeth.

29:36 - Trend #2 - Robinhood's acquisition of Say Technologies might herald a new era of retail-driven shareholder engagement.

33:01 - Trend #3 - Tools and techniques for facilitating long-termism go mainstream thanks to the Long-Term Stock Exchange, Sequoia Fund, and growing adoption of ESG among long-term investors

36:44 - Trend #4 - Earth gets a black box to trace earth's unfolding climate crisis as it unfolds, recording data that future civilizations can find and learn from about how we reckoned with existential threats.

40:40 - Trend #5 - Investment decision-making shifts formally from a process-based model to a data-driven decision model (and Ashby explains what that means).

46:41 - Trend #6 - Sustainable investing starts getting real (and Sloane explains what that means).

52:30 - HARD THINGS - Sloane and Ashby talk about the challenges they've encountered in their respective projects

1:01:17 - Listener question #1 - Did you change your mind about anything big this year?

1:05:30 - Listener question #2 - What's your favorite desk toy?

1:07:10 - Listener question #3 - If you could go back in time and kill the person who ate and/or had sex with a pangolin to start the pandemic, would you? Nobody would know you did it. 

1:11:02 - THE GARDEN TIP

• His favorite experience leading CFA Institute, which is global beyond simple comprehension.
• How prepared the industry is to navigate the climate transition
• Whether ESG Investing is just a new form of colonialism

We also discussed his outlook for Hong Kong as a financial center and, as always, took questions from listeners.

Also, here are links to She Spends and the Essential Allocator.

We also touch on issues like:

• Ending forced arbitration for sexual harassment, which have historically been left out of the ESG equation.
• Starting a new investment fund as a minority and queer-led firm.
• Why Adasina decided to start an ETF instead of a data company.

After discussing the peculiar difficulties Adasina encountered when starting a new investment firm, Rachel mentioned some allocator-oriented suggestions to make their due diligence process less onerous for startup managers, which are available here: https://www.duediligencecommitment.com/

If you’re new here, thanks for signing up!

If someone sent this your way or you found this post through Twitter or some other channel, be sure to sign up below. We publish most Tuesdays.

And now, a look at the world of impact investing.

Your money does something after you invest it.

What is that, exactly?

At some level, the most salient answer is “produces a financial return.” We tend to structure investment programs around such things, since growth in principal is the primary reason people go to the trouble of investing in the first place.

But it’s not the only thing that matters. Investments are the engine that turns abstract concepts into actual undertakings. And sometimes getting a certain type of enterprise off the ground is what matters most.

That’s where impact investing comes in. Defined as an investment intended to produce a measurable social or environmental impact alongside a financial return, it sounds absolutely wonderful on paper. And that’s kind of the problem. Remember: this is finance we’re talking about, an industry that’s known to exploit good ideas so much that they produce bad outcomes.

What’s to stop someone from saying their initiative produces outstanding social and environmental impact, raising a bunch of capital, and actually producing an outcome more akin to the image above where an asteroid permanently and profoundly restructures earth’s surface?

Third-party verification, we hope. There’s not much of it at present, but a few groups are organizing to give allocators greater transparency into the impact of their allocations. So we reached out to the CEO & Co-founder of one of them, Christina Leijonhufvud, for her take on how the market is evolving.

Her company, BlueMark, is an independent impact verifier. So we asked the natural questions: how exactly does one do that? What elements of impact are even verifiable? Is the issuer-paid research model truly aligned with investor interests? How does one ensure that the investment’s outcomes align with community needs?

This being Free Money, we also answered three questions from listeners. If you’d like to ask one for an upcoming episode, please don’t hesitate to reach out to freemoneypod@gmail.com!

NYC comptroller Scott stringer is facing sharp criticism from progressive democrats for investing in Blackstone PE funds. Has this been an issue in other campaigns? How often? 

JP Morgan is saying that their full year earnings could swing +/- 15 billion based on the effectiveness of govt stimulus. Should we interpret this as posturing? Their bottom line is helped by stimulus, after all. 

Zeisberger et al are arguing that venture capital funds are under-performing because they over-diversify. Is a five position vc fund a workable vehicle? Isn’t it just a co-investment at some point?

Get on the email list at freemoney.substack.com

This is Sloane, and I know because I’m doing it. My consulting business has slowed down dramatically since COVID hit, which means I’ve gone from outright thriving to just surviving.

Please do reach out if you’d like to chat about a project. But it’s not just my story. Everyone seems to have lost something during the pandemic. And the notion that tech companies are thriving under these conditions doesn’t make much in the way of sense.

For instance, the startups Ashby is involved with building have variously had to pivot, shift priorities, and postpone investments. There’s just less money out there to buy data, and now that it’s near impossible to make sales in person that problem is compounded.

None of that shows up in headline unemployment statistics in the United States. These necessarily simplified numbers do not purport to measure underemployment or changes in business’ investment plans, but they do tend to define our perspective of the labor market.

So after a listener wrote in wondering how to get a job at a pension fund, we felt it was important to respond with a big picture perspective. That’s why we called Charles Skorina, a longtime recruiter of investment professionals and observer of hiring trends at endowments, foundations, and public pensions.

After talking about a paper Ashby wrote that examined this from the pension’s perspective, we asked the obvious question: how does one go about getting hired at one of these organizations? And we got an empirical answer, rooted in Charles’ study of the various CIO resumes he’s come across in the course of doing his business. We also looked at how career stage, job history, and the power of example can influence this search process.

You can check out the transcript here or click above to listen in your favorite podcast app.

We also touched on the lovely goods available at the Free Money Atelier. And as usual, we answered questions from listeners:

• You two talk about the rise of ESG investing like it's a good thing. And I'm sure that's overwhelmingly true. But are there any dystopian consequences of esg's growing popularity? This is 2020, after all. 
• The "active ownership" theme is really interesting - how long has it been going on? What's the first action by a long-term investor you're aware of that you would classify as "active ownership"
• The giant "nasdaq whale" that has been hoovering up equity options with a highly unusual appetite was revealed to be... Softbank. Doesn't this prove that asset managers should be more closely regulated? 

The best positioned public schools, parks departments, and police forces are merely contending with unprecedented times.

For most, they are unpredictable as well.

And neither condition is helped by a near-universal problem: there is not enough money.

America’s national government can deficit spend thanks to the Federal Reserve’s money printer, which famously goes “brrrrr.” But forty-six states and the District of Columbia have balanced budget requirements. So in the face of falling tax receipts, each must contend with an unpleasant question: how much spending to cut?

This is a classic no-win scenario.

In a time of economic scarcity, forced austerity is perhaps the worst thing that can happen. Without a spender of last resort, the snowball effects of recession roll on unchecked. And as mentioned earlier, that is bad.

We called Tobias Read for a practitioner view of the crisis. He’s the Treasurer of Oregon State, which means he’s responsible for debt management, economic policy, investment management, and acting as a central banker for the state’s agencies.

We’ve seen requests for state-level aid packages that range from a billion to a trillion dollars, so we started by asking him to clarify what is needed and the creative strategies Oregon has been using to raise funds.

Then, as you might expect, we started talking about pensions.

We went through what the state has done to steer its ~$111 Billion investment portfolio through the COVID crisis, including organizational changes and a potential new emerging manager program.

We also talked about why he hates his Ford Focus and loves #FAnon, the evidence-based conspiracy theory popular among Free Money listeners which involves wide-ranging deep state efforts to design effective policy and serve the interests of ordinary citizens.

You can check out the transcript here or click above to listen in your favorite podcast app.

We also touched on the lovely goods available at the Free Money Atelier. And as usual, we answered questions from listeners:

• I've interviewed at some public pensions over the years, and my impression has been that (at least for mid-career/non-CIO investment positions) there is a pronounced preference for promoting from within. Just curious if this impression is accurate, and if is it another manifestation of the organization-wide risk aversion? What are the characteristics of plans that seem to have a greater willingness to hire from outside the organization?
• There's some contention over whether having operations in the west bank - a contested region claimed by both Israel and Palestine - is an ESG issue. What's your take? 
• The federal reserve has decided to allow inflation to go higher than the fed's 2% target during a boom period, which effectively means rates will be lower for even longer. Would enough inflation effectively solve the student loan and debt crises? 

You might imagine that we have the “invisible hand” of the free market to thank. But in lots of cases, the answer is government-supported research.

Consider your smartphone. It uses technologies like GPS, advanced transistors, active-matrix liquid-crystal displays, voice recognition, and graphical web browsers. All of these began their lives as government projects.

But not all government agencies are natural innovators. Public pensions, which we talk about a lot in these pages, are notoriously stuck in their ways. In fact, Ashby shared at the beginning of this episode that “the only way you get fired from a public pension plan is if you innovate.”

Clearly, this sucks and is bad. Is there any hope for these organizations?

Our guest Tom Kalil offered plenty.

He spent sixteen years at The White House leading science, technology, and innovation oriented policy programs under Presidents Clinton and Obama, and now works as the Chief Innovation Officer at Schmidt Futures, the group led by former Google CEO Eric Schmidt and his wife Wendy.

He shared why he identifies as a Meliorist, talked about various mechanisms the government has employed to boost innovation in the past, and the extent to which the work he and his colleagues did has survived the Trump Administration. You can check out the transcript here or click above to listen in your favorite podcast app.

We also talked about the many delightful things available for sale at the Free Money Atelier. And as usual, we answered questions from listeners:

• Given the rise in "SPAC" issuance, should we expect to see the Free Money podcast float a "blank check" IPO of its own anytime soon?
• Is it true that a pension funding debate plays a significant background role in the ongoing US Post Office debacle?
• It's been a year since that famous/infamous business roundtable statement about the purpose of a corporation. How are firms doing? Is there a meaningful difference between corporate social responsibility and corporate actual responsibility

If you’d like us to answer a question from you on an upcoming show, write to freemoneypod@gmail.com.

Profiting from their exploitation is worse. And unfortunately, it’s relatively easy to do by accident. Take real estate investment as an example: investors who hold a diversified portfolio of Real Estate Investment Trusts (REITs) are likely to hold shares in GEO Group (NYSE: GEO) and CoreCivic (NYSE: CXW).

GEO describes itself as a “global leader in evidence-based rehabilitation.” CoreCivic says it’s a “diversified, government-solutions company with the scale and experience needed to solve tough government challenges in cost-effective ways.” But they both do the same thing: operate prisons for profit. And they’re both members of the Russell 1000 and the S&P 400 Midcap index. Which means you might own them right now.

How many other problematic companies might have snuck into your portfolio? We reached out to Jay Lipman, a co-founder of sustainable asset manager Ethic, to hear more about what’s out there and how to stay away from the worst of it.

Our conversation starts at 11:43 if you’d like to jump right to it, but if you listen to the whole thing you’ll also hear about how Mario Kart almost ended Ashby’s Marriage, Goldman Sachs’ massive $3.9 billion settlement, and what we’re reading to take our minds off of the ongoing collapse of civilization.

Charles Dickens, A Tale of Two Cities

True classics never seem to age.

Think of Pride and Prejudice, The Iliad, and the observation that the general state of things is both bad and good. We also have Macbeth, Jane Eyre, and the assertion that markets hate “uncertainty.” But they have plenty of it now.

Our hope in this episode was to gain an understanding of the American consumer. Which really means the American Debtor. We hear from BCG that Chinese Consumer activity seems to be changed, but recovering. That could inspire some optimism for the future if we didn’t have to balance it with the fact that “it would take something on the order of divine intervention” to quell the rent crisis in New York City.

So we asked an expert to help us sort it out. Perry Rahbar is the founder of dv01, a data startup that offers investors access to accurate loan-level information and the tools to turn that information into investment decisions.

Their latest written take on loan markets in the era of COVID is available here, but it’s worth listening to Perry explain it. He paints a fascinating picture of a marketplace in the midst of profound transition, where upstart online lenders are running circles around their more established competition.

Read on for a few choice quotes after the break.

“If you went back in time and described the scenario that we would encounter through COVID and then asked people what would happen to consumers and how would they respond in their loans, you would have gotten some pretty draconian responses. And I think what we've seen has been surprising to everyone, but then when you step back and think about it you know, it's not that surprising. If you kind of go back to March, people are starting to get tax refunds. All of a sudden COVID happens, and they're locked in their homes. They're not spending money on anything. They get a $1,200 check and then even if they do lose their jobs they're getting these unemployment benefits (15:02)

“Here was a vibrant non-agency market finally that was going to probably pump out $20+ billion in securitizations this year and maybe north of $50 billion next year. And you just saw some of the rule changes from the CFPB around the [Qualified Mortgage] rule and so forth, which would have been another positive tailwind for the market. And then, you know, this whole thing happened.” (29:19)

“We're still spot checking every loan with the servicer. Find a loan. It didn't make a payment, not delinquent, but there's no modification reported. And it's like, it's obvious something happened. I mean, it's just crazy how there's still a lot of auditing and going on. And then you look at the trustee report and we know that number's wrong. And then, you know, but it's just, there's a certain level of apathy when it comes to these markets that have been operating a certain way for so long, no one, no one has that vested interest.” (36:36)

So if you're taking the time to integrate a full understanding of environmental, social, and governance issues in your investments, you will tend to end up with innovative and enduring solutions just by doing the work. So in this episode, we decided to spend some time with a significant, oft-neglected issue: food systems.

We were fortunate to have Ambassador Ertharin Cousin on hand to direct our exploration. Named one of Time Magazine’s 100 most influential people, she was previously Executive Director of the UN World Food Program, which is the world’s largest humanitarian organization. She is also a visiting scholar at Stanford and the Founder/CEO of Food Systems for the Future, which invests in and provides services to market-driven food and infrastructure enterprises to improve nutrition outcomes for low income communities.

We’ve excerpted some of her comments after the message below, but you should really listen to the whole thing.

Here are a few choice excerpts from our conversation. You can also read the whole ai-generated transcript by clicking here.

“Let's look at it from an economic standpoint. FAO estimates that the gross value of agricultural production is over $5 trillion. The World Bank says it's closer to $3.2 trillion. Whichever number, it's a big number. And the world bank also suggests that the system generates two to five times as much value off-farm between farm and consumer as it does on-farm. In the United States for every dollar spent on food by the U S consumer 11 cents, is accounted for in farm activity. And all of the other value is in the middle. So the estimated value of the global food system post farm to consumer is about $8 trillion or 10% of the $80 trillion global economy.” (26:52)

On the types of investments that might be attractive to pension funds:

“We know that we need investment in more foods that will meet cultural demand, but also healthier outcomes for populations. And there we have seen how how plant based proteins coming online have brought in additional have brought in significant revenue to those asset managers who have invested in that space. But those products are not coming online in support of the consumers that we are most concerned about who are most detrimentally impacted by the food system today.” (33:23)

On what individuals can do to address food insecurity:

“Many of your listeners are high net worth individuals, we need their support to invest in organizations like FSF, like Root Capital and Acumen and others who are working to address these challenges with new market based tool that will deliver evidence that is required to grow the agricultural productivity of our food system in a manner that is sustainable. And as I said, not just for the affluent, but for everyone.” (37:10)

We’re told markets are in turmoil. But they’re also just an inch away at all-time highs. Retail investors are racking up triple-digit returns, and seem to be making an attempt at necromancy with the bankrupt husk of Hertz, the rental car market’s onetime global leader.

So we called Marcie Frost. She oversees a team of 2,800 professionals as CEO of CalPERS, the agency charged with managing roughly $400 Billion on behalf of California’s public employees, retirees, and their families.

We’ve highlighted a few of her choice observations below, but you should really listen to the whole thing.

One quick programming note before you do: we’ve partnered with Columbia University’s Center on Sustainable Investment and Beyond Alpha research on a study of the investment industry’s role in meeting the UN Sustainable Development Goals. If you are interested in participating, please fill out this form.

On COVID-related volatility: “Our liquidity position was much better in this pandemic than it was in '08-09. So we didn't have to sell assets to pay benefits. We didn't have to sell assets to make capital calls. And I think even more importantly, we had liquidity that we could actually take advantage of the market dislocation with opportunities, and we were able to do that. So we have to think long-term, we plan on being here for decades, paying benefits out over a member's, lifetime and their beneficiaries' lifetimes.” (11:16)

On operational changes stemming from COVID: “It is likely that, so we will have half of our workforce working remotely from this point on. We don't see a need to carry the cost of having, you know, an office or a workstation or having two sets the desktop computer. If you all having a docking station, there'll be times that we'll need people to come into the office. We'll have hoteling available for those individuals then.” (15:00)

On meeting a 7% return target: “it's a really strange group of expectations that we have, if you will, that it's expected to get the 7% return, we're expected to pay out 24 billion. And while we do that, we want to find opportunities where we can do well while we can also do good for the environment and for governance issues.” (21:00)

On recent pressure from Congress to divest CalPERS’ Chinese investments: “it wasn't any different than any other requests that we get from any other entity. It just happened to be a member of Congress. It happened to be on a television channel and it was done in a really horrific way.” (30:14)

On her career path: “the traditional way is you graduate high school, you go to college, you start working, and then maybe you go in for an advanced degree. I really didn't have the means at the time I, I grew up in a household that didn't have many financial options. I started working right out of high school. I started a family when I was quite young and those were my priorities. And I was able to work my way through these systems, if you will. I started as a typist in October of 1985 and worked my way through until starting here at CalPERS in October of 2016.” (41:38)

A computer-generated transcript of our full conversation is available by clicking here.

As is tradition, we also took questions from listeners at the end of the show. If you have a question, a comment, or just a wry observation, please write us at freemoneypod@gmail.com.

This week, we answered the following:

• A leaked British Petroleum brand document made headlines recently for asking how the company can be more like Greta Thunberg. How can they? 
• Private equity funds are often proud to mention that their investors include police pension funds. Should we expect that to change in the...]]>How have pension funds handled the last few months?

  We’re told markets are in turmoil. But they’re also just an inch away at all-time highs. Retail investors are racking up triple-digit returns, and seem to be making an attempt at necromancy with the bankrupt husk of Hertz, the rental car market’s onetime global leader.

  So we called Marcie Frost. She oversees a team of 2,800 professionals as CEO of CalPERS, the agency charged with managing roughly $400 Billion on behalf of California’s public employees, retirees, and their families.

  We’ve highlighted a few of her choice observations below, but you should really listen to the whole thing.

  One quick programming note before you do: we’ve partnered with Columbia University’s Center on Sustainable Investment and Beyond Alpha research on a study of the investment industry’s role in meeting the UN Sustainable Development Goals. If you are interested in participating, please fill out this form.

  On COVID-related volatility: “Our liquidity position was much better in this pandemic than it was in '08-09. So we didn't have to sell assets to pay benefits. We didn't have to sell assets to make capital calls. And I think even more importantly, we had liquidity that we could actually take advantage of the market dislocation with opportunities, and we were able to do that. So we have to think long-term, we plan on being here for decades, paying benefits out over a member's, lifetime and their beneficiaries' lifetimes.” (11:16)

  On operational changes stemming from COVID: “It is likely that, so we will have half of our workforce working remotely from this point on. We don't see a need to carry the cost of having, you know, an office or a workstation or having two sets the desktop computer. If you all having a docking station, there'll be times that we'll need people to come into the office. We'll have hoteling available for those individuals then.” (15:00)

  On meeting a 7% return target: “it's a really strange group of expectations that we have, if you will, that it's expected to get the 7% return, we're expected to pay out 24 billion. And while we do that, we want to find opportunities where we can do well while we can also do good for the environment and for governance issues.” (21:00)

  On recent pressure from Congress to divest CalPERS’ Chinese investments: “it wasn't any different than any other requests that we get from any other entity. It just happened to be a member of Congress. It happened to be on a television channel and it was done in a really horrific way.” (30:14)

  On her career path: “the traditional way is you graduate high school, you go to college, you start working, and then maybe you go in for an advanced degree. I really didn't have the means at the time I, I grew up in a household that didn't have many financial options. I started working right out of high school. I started a family when I was quite young and those were my priorities. And I was able to work my way through these systems, if you will. I started as a typist in October of 1985 and worked my way through until starting here at CalPERS in October of 2016.” (41:38)

  A computer-generated transcript of our full conversation is available by clicking here.

  As is tradition, we also took questions from listeners at the end of the show. If you have a question, a comment, or just a wry observation, please write us at freemoneypod@gmail.com.

  This week, we answered the following:

  • A leaked British Petroleum brand document made headlines recently for asking how the company can be more like Greta Thunberg. How can they? 
  • Private equity funds are often proud to mention that their investors include police pension funds. Should we expect that to change in the future? 
  • What adjective describes your preferred form of capitalism (I.e, conscious capitalism, Subaru capitalism, Camus capitalism…)
  
  ]]>substack:post:557186Tue, 16 Jun 2020 14:45:00 -080055:43falsefull1111Sloane OrtelBlack Investors Make a Difference to Your Bottom LineBlack lives matter.

  And not just in the abstract. When given the proper space and support, Black investors can materially improve portfolio returns. But that almost never happens. In aggregate, only about 1% of the $70 Trillion managed by professional investors is overseen by minority-owned firms.

  On this episode of Free Money, we were fortunate to speak with Daryn Dodson, a Managing Director at Illumen Capital who knows perhaps more than anyone else what needs to be changed in order to create a more equitable future. We spoke on Friday, June 5th. And because the perspective he shared was so valuable, we decided to dispense with our regular essay and include a transcript of the conversation instead.

  Enjoy!

  Ashby Monk (10:44):

  We were just kind of talking through the issues of the week, obviously a pretty heavy week out there and wanted to connect with somebody who could really explain a couple of things. You know, why the asset owner community isn't doing more to support the managers that are people of color, but even before we get there, how are you doing?

  Daryn Dodson (11:13):

  I am a hosting a group in a conversation of a hundred billion dollars in asset allocators to put a through line from slavery to lynching, to mass incarceration, to tuck that into the asset management overlay so that people can understand how assets got to be so imbalanced and the huge disparities that lead to suboptimal returns for our portfolios. They also violate fiduciary duty. We have about 30 hours of work over the weekend. So

  I just finished the opening session. We offer for a lot of our investors at Illumen Capital something called the Illumen impact experience to bring them together, to put these dots together. So I'm heartened by that work. A lot of this is doing the work to move capital in ways that's optimal as I've worked with Dr. Jennifer Eberhart, and as well as Dr. Ashby monk to hit to work on this paper, uh, with a few other authors, really to prove and show the bias managers of color face as they increase performance, particularly black managers. So after we proved that in a paper and published it, then the question becomes, what do we do about it?

  A lot of people are making statements all over the country around how they value communities of color and black communities. But when you look at their balance sheets, I've been kind of thinking about things like, not public statements, but balance statements and financial statements, and whether those mirror the statements that people are making publicly. So that's something we believe in as a firm at Illumen Capital. It's something that is evidenced in the paper that we published. It's something that we share with our investors, who currently manage over a trillion dollars in capital so that they can begin to apply these ideas to their broader portfolio.

  Sloane Ortel (13:15):

  Let me just hone in on a sub point of that. I think throughout history, whether through red lining or another process, you might want to name, the financial community has been a big player in perpetuating inequality, perpetuating in effect segregation. Is it still...]]>Black lives matter.

  And not just in the abstract. When given the proper space and support, Black investors can materially improve portfolio returns. But that almost never happens. In aggregate, only about 1% of the $70 Trillion managed by professional investors is overseen by minority-owned firms.

  On this episode of Free Money, we were fortunate to speak with Daryn Dodson, a Managing Director at Illumen Capital who knows perhaps more than anyone else what needs to be changed in order to create a more equitable future. We spoke on Friday, June 5th. And because the perspective he shared was so valuable, we decided to dispense with our regular essay and include a transcript of the conversation instead.

  Enjoy!

  Ashby Monk (10:44):

  We were just kind of talking through the issues of the week, obviously a pretty heavy week out there and wanted to connect with somebody who could really explain a couple of things. You know, why the asset owner community isn't doing more to support the managers that are people of color, but even before we get there, how are you doing?

  Daryn Dodson (11:13):

  I am a hosting a group in a conversation of a hundred billion dollars in asset allocators to put a through line from slavery to lynching, to mass incarceration, to tuck that into the asset management overlay so that people can understand how assets got to be so imbalanced and the huge disparities that lead to suboptimal returns for our portfolios. They also violate fiduciary duty. We have about 30 hours of work over the weekend. So

  I just finished the opening session. We offer for a lot of our investors at Illumen Capital something called the Illumen impact experience to bring them together, to put these dots together. So I'm heartened by that work. A lot of this is doing the work to move capital in ways that's optimal as I've worked with Dr. Jennifer Eberhart, and as well as Dr. Ashby monk to hit to work on this paper, uh, with a few other authors, really to prove and show the bias managers of color face as they increase performance, particularly black managers. So after we proved that in a paper and published it, then the question becomes, what do we do about it?

  A lot of people are making statements all over the country around how they value communities of color and black communities. But when you look at their balance sheets, I've been kind of thinking about things like, not public statements, but balance statements and financial statements, and whether those mirror the statements that people are making publicly. So that's something we believe in as a firm at Illumen Capital. It's something that is evidenced in the paper that we published. It's something that we share with our investors, who currently manage over a trillion dollars in capital so that they can begin to apply these ideas to their broader portfolio.

  Sloane Ortel (13:15):

  Let me just hone in on a sub point of that. I think throughout history, whether through red lining or another process, you might want to name, the financial community has been a big player in perpetuating inequality, perpetuating in effect segregation. Is it still happening in your view?

  Daryn Dodson (13:31):

  In terms of my background, I spent three years, with the center for responsible lending and 60 attorneys passing laws to reduce predatory lending. And we also proved through a data-driven hypothesis and execution of $6 billion in loan pools and proof points, the low income women and people of color, particularly black and Latino communities were overcharged for mortgage loans. And we wrote several papers about that back then, that led to the shifting of 18 laws across the country, based on the evidence of the overcharging and taxing of the number one way in which low-income particularly black communities reached the middle class, which is home ownership.

  So systematic overcharging above risk on communities, where when you overlay GIS statistical mapping data with different mortgage databases to prove that indeed banks were overcharging families, mothers, fathers that were black and Latino relative to their white counterparts and their biggest opportunity to create wealth in their life.

  And is it still happening? Part of the reason I went to business school at Stanford business school, it was because I was sick from seeing the practices in the mortgage lending markets. And after working with a team of 60 attorneys to pass national frameworks, watch businesses transform and change those laws back and undercut a lot of the laws that were on the books to protect well income homeowners. So now in this strategy at Illumen capital we invest in 10 private equity funds, systematically require and partner with them to do 10 years of implicit bias reduction work as a part of our investment and unlock the impact and returns within our portfolio is a part of our systemic change. Since the passing of laws do not work to sustain those protections against women and people of color, particularly black people.

  Sloane Ortel (15:32):

  That's fascinating. And in the process of doing that, you must encounter tons of people who come into it thinking they're not racially biased, but yeah, nonetheless, make these racially skewed decisions, whether it's where to get a cup of coffee or who to back, how do you counteract that tangibly?

  Daryn Dodson (15:50):

  Well, I think the most interesting thing is that they don't realize that they're leaving returns on the table. So they may not realize that they're racially biased, but what is the incentive to reduce the bias? One is that you miss the people in the human condition, that maybe are wonderful additions to your life. The other is you missed your fiduciary duty to invest the billion or trillion dollar corpus on behalf of the communities, whether they're pension funds or retirement programs or foundation endowments or family offices or university endowments.

  And I think that there's a long way to go in university endowments and pension funds as Ashby knows, I think better than most in the world And that's part of the reason why we partnered together with Ash and, you know, his incredible work and research cross pension funds. So take a deep look and help them to understand that unless they do the work, we are going to leave money on the table. And not only that they'll sort of undercut the best fund managers that are in their pipeline, through their biases without doing the work.

  Ashby Monk (17:03):

  Yeah. That has been such a rewarding project for me in part, because we've been able to make the case quite clearly, that they're leaving returns on the table. They're not assessing all of the opportunities in the same manner, which means that any bias, we see them investing and we have many biases, right? There's status quo bias, there's geographic bias, home bias. This is a bias that distorts the decision making of investors, asset allocators. We showed that in the PNAS study. And so we can go back to them and say, look, you're leaving money on the table. It's your fiduciary duty now to build processes that reduce this implicit bias so that you can maximize the performance. But Darren, I really want to hear a little bit more about, Illumen loved hearing the kind of prior narrative about your, I didn't actually know that story.

  Sloane Ortel (17:54):

  That was just wild.

  Ashby Monk (17:57):

  That's what sent you to go study with us at Stanford, but what are you doing now with Illumen? I think it's such a compelling story that maybe you could just do, you know, 30, 45 seconds on, on Illumen.

  Daryn Dodson (18:09):

  Sure. Illumen capital is a private equity venture capital fund of funds. We'll select, uh, 10 managers that are working on different themes of transformation within key systemic leverage points within the world. They vary from themes around financial innovation, inclusive financial innovation. I'll just put that in there due to my background and experience in watching the extractive financial innovation, environmental transformation on transit, improve outcomes and health outcomes in communities around the world.

  We also are invested in some of the leading ed tech firms in the world who, of course, if they don't reduce bias, the AI and machine learning the acceleration of algorithms will repeat the same biases that are present in school systems. Many listeners may know that for X amount of black students are currently expelled relative to their white peers within that school system currently in K-8 reading levels, school levels. And if we repeat those biases within the minds of the teachers as we build these technologies, that's a huge challenge for business models because the federal government likes to see things grow in ways that are equitable, but it's also a huge challenge generally for those of us that love equity and justice and inclusion.

  So part of what Illumen Capital has done from inception is it also includes a partnership with Stanford SPARQ and Dr. Jennifer Eberhardt's research center. She's one of the leading thinkers on implicit bias in the world. And in fact, published the book bias, which were included in, and part of the reason why that's so important, it was because that we knew when we went out to, uh, work on the thesis that Ashby and I worked on with Dr. Eberhart found that and on our journey that without a credible backing from a fabulous institution like Stanford, it would be difficult for people to believe something that by definition that they could not see, which is actually what bias is. So we have to make that palpable, tangible, help him to see it, which is the mission of our partnership with Stanford, for finding the tools to reduce bias within the investments that we make.

  Sloane Ortel (20:35):

  I'm just fascinated. It occurs to me that some of our listeners may think that we're talking about essentially a philanthropic activity, even though it's a pure private equity fund of funds. I wonder if you could tell us a story of like, from intervention through to internal rate of return of how this sort of intervention made money?

  Daryn Dodson (20:54):

  Yeah. I think, um, you know, we're, we're, we're two years in right now, so it's quite early, but Hey, you know, some of the early evidences that we've seen managers invest in companies that they wouldn't otherwise have seen without our process, much of the work that we do is confidential. And the reason why that is, is because we believe there's $35 trillion in undervalued assets within the $70 trillion in the asset management business. And because we have a competitive strategy to help people see how those undervalued assets work, we don't reveal kind of the process of reducing bias within our firm to those other than the investors that we have. I think, you know, it'd be like Google putting its algorithm out there and saying, this is our algorithm.

  But let me see if I can help on a, you know, a previous career example, you know, there's a education tech company that's in front of, uh, 90% of all kids in the country. The potential of them to realize what I just said around the 4x expulsion rates of black kids before they begin a strategy to go in and put images in front of kids by translating the New York times wall street journal and other reading material to kids on K through eight level. Imagine if the New York times were translated in front of kids today, and it doesn't take much to imagine how you'd need to filter out the images that could destroy the future imagination and capacity of kids to overcome the images that they're seeing of people that look like them, particularly for black kids as they’re kind of taking in the images across the country and the world.

  So without kind of thinking together around strategies like that the business model breaks because the company is reinforcing biases and instead of unlocking the imagination innovations are the future within the minds children rather than reducing them and allowing that forcing function that we need as a society to take place.

  Ashby Monk (23:00):

  That's great. I might ask another question here on, I think we run this podcast largely because we're trying to talk about, you know, the biggest investors in the world, pension funds, sovereign funds and the system of capitalism that we're all a part of today is increasingly powered by these big longterm investors. They provide the capital to the professional money managers, which in turn provide money to companies and projects that need it. And this chain of intermediaries kind of flows through the entire system.

  And so unraveling all of this is kind of part of what we're trying to do with this podcast. Darren is we're trying to like explain what pension funds and sovereign funds are to the world that, you know, so that they can understand this system of capitalism, what I've noticed and the work that I've done around climate change is that the forest fires in California and the, the fires in Australia, terrible crises have, have forced the trustees of these fiduciary bound investors to start to take climate change seriously.

  Is there a moment now where this is a moment similar to the climate change story, where we can take this terrible tragedy and the protests around the country and bring this issue into the boardroom of the biggest investors on earth and sort of demand that they pay attention?

  Daryn Dodson (24:25):

  Well, I think not only could we, but I think we've gone too far now to turn back from that commitment.

  One of the things that, of the many good things that happened in the civil rights movement, one thing that didn't happen is that the push for optimal asset allocation that would include brilliant black fund managers and latino fund managers, and women, and people of color across the world never happened. And that's the backbone of the muni bonds, you know, across different strategies. It's the backbone of the ways that we fuel ed tech that is proliferating around the world, it's educating all of the students around the world, it's building the infrastructure in ways that systematically leaves out communities. So without a critical analysis of this time around, and this moment in time, that includes the $70 trillion in assets that are the backbone of the global financial markets, we'll never be able to really have black lives matter or other lives matter across the country. Or in the world.

  So I think that, you know, one of the laser focuses of a capitalism mission is to execute on our vision, to invest in the funds, reduce bias, and increase returns, and enable our investors to out compete others by applying similar technology. So if you're at a pension fund and this isn't part of your thinking, I think that you've run the risk of being lifted behind and worse risk of leaving the retirements of so many people. And, you know, some would wonder why pensions underperform relative to what many would expect. And I think this is one of those big reasons. And as I've learned from Ashby relative to the climate movement, although there are lots of really important things to hit right on climate we're actually rather than limiting the total set of investing assets by not including the optimal women and people of color run funds, which are the optimal funds that have traditionally been left out of the analysis.

  And when included in the analysis, these often don't get invested in when we leave them out, we shrink the universe of total potential opportunities. Modern portfolio theory would suggest that is a bad idea. Something is deeply broken in our system. It's something that hurts our returns. It's something that creates systematic bias across many of the asset pools in the world. And, uh, that's not a good thing, whether it's confirmation bias or anchoring bias, as Ashley shared earlier, it's a about looking at the opportunity on the other side of reducing bias, as I mentioned before where we'd be normally distributed, we're underweighted $35 trillion in women and people of color. Let’s put it like that.

  Ashby Monk (27:17):

  I love that you brought that up because it is something I'm constantly reminding folks that unlike the climate change space, where we're in effect, asking people to reduce the size of their portfolio in order to minimize the effects of climate change, racial biases already minimizing the portfolio. And what we're asking you to do is open your eyes to the entire portfolio of investable assets, which it's your duty to do. And so this should be a much easier ask actually of the fiduciary bound investors. We're asking you to consider all the investable universe, which is your duty to do. Thank you for reminding me...]]>substack:post:522361Thu, 11 Jun 2020 17:45:00 -080046:02falsefull1010Black lives matter. And not just in the abstract. When given the proper space and support, Black investors can materially improve portfolio returns. But that almost never happens. In aggregate, only about 1% of the $70 Trillion managed by professional investors is overseen by minority-owned firms. What can we do about this?Sloane OrtelHow Resilience Drives Investment ReturnsGood things are happening even as we endure a global crisis.

  A Mumbai-based startup has successfully reversed the aging process in rats, a previously unthinkable breakthrough.

  A new era in American spaceflight begins tomorrow, when two astronauts travel to the International Space Station onboard a SpaceX Falcon 9 Rocket. It will be the first crewed launch from the US since the shuttle program ended in 2011 and the first time a new type of spacefaring vehicle has carried humans from Cape Canaveral to the heavens since 1981.

  And Blackrock — the world’s most humongous asset manager — reported that the recent downturn in financial markets had only strengthened their conviction in sustainable investing strategies. At this and other firms, Environmental, Social, and Governance (ESG) driven investment strategies are increasingly understood as a source of comparative resilience in portfolios, not just ethically admirable allocations that are “nice to have.”

  This is clearly rad.

  But it also pushes one to wonder about the harbingers of resilience. We wanted to do better than hoping we’d know it when we saw it. So we called Jean Rogers, Chief Resilience officer at the Long-Term Stock Exchange (LTSE) and a founding mother of the global sustainable investing movement.

  As founder and CEO of the Sustainable Accounting Standards Board (SASB), she created industry-specific materiality frameworks that opened the investment profession’s eyes to the promise of ESG investing. And she’s hard at work to compound that contribution.

  In our conversation, she pushed us to see the set of things that matter to a company’s performance as more than just a static list. Conditions change. And circumstances can arise where something “wasn't material for a company one day and now stakeholders are up in arms about it. Now it's a material condition for the company.”

  She recently outlined a framework for this process of transformation in a paper co-authored with Harvard Business School’s George Serafeim which urged investors to understand materiality as a “process of becoming” rather than a “state of being.”

  In our conversation, she outlined five factors analysts can use to assess a company’s capacity for resilience to acute events or exogenous shocks. The first, is "bigness of vision," or:

  The transformative impact of their vision. “Bigness of vision matters because it creates momentum. People — other stakeholders, policy makers, employees, and investors — rally around the company because they want the company to succeed in achieving that big vision. So think of Tesla and its vision not only of producing amazing cars, but transitioning to a renewable infrastructure. That bigness of vision really can carry a company through volatile events and tough times.”

  On inventiveness:

  “That's prolific innovation where you don't have to really worry about your intellectual property much because you're actually confident you're going to produce more. So you don't have to protect it, you can open source it and enable human progress, enable others to build on what you're doing. And you're going to continue to execute because you're investing in innovation and you’ve created a culture of experimentation. Think of Google, which puts a great deal of of its capital expenditures into innovation and long-term strategy. Think of Amazon, which invests more in R&D than...]]>Good things are happening even as we endure a global crisis.

  A Mumbai-based startup has successfully reversed the aging process in rats, a previously unthinkable breakthrough.

  A new era in American spaceflight begins tomorrow, when two astronauts travel to the International Space Station onboard a SpaceX Falcon 9 Rocket. It will be the first crewed launch from the US since the shuttle program ended in 2011 and the first time a new type of spacefaring vehicle has carried humans from Cape Canaveral to the heavens since 1981.

  And Blackrock — the world’s most humongous asset manager — reported that the recent downturn in financial markets had only strengthened their conviction in sustainable investing strategies. At this and other firms, Environmental, Social, and Governance (ESG) driven investment strategies are increasingly understood as a source of comparative resilience in portfolios, not just ethically admirable allocations that are “nice to have.”

  This is clearly rad.

  But it also pushes one to wonder about the harbingers of resilience. We wanted to do better than hoping we’d know it when we saw it. So we called Jean Rogers, Chief Resilience officer at the Long-Term Stock Exchange (LTSE) and a founding mother of the global sustainable investing movement.

  As founder and CEO of the Sustainable Accounting Standards Board (SASB), she created industry-specific materiality frameworks that opened the investment profession’s eyes to the promise of ESG investing. And she’s hard at work to compound that contribution.

  In our conversation, she pushed us to see the set of things that matter to a company’s performance as more than just a static list. Conditions change. And circumstances can arise where something “wasn't material for a company one day and now stakeholders are up in arms about it. Now it's a material condition for the company.”

  She recently outlined a framework for this process of transformation in a paper co-authored with Harvard Business School’s George Serafeim which urged investors to understand materiality as a “process of becoming” rather than a “state of being.”

  In our conversation, she outlined five factors analysts can use to assess a company’s capacity for resilience to acute events or exogenous shocks. The first, is "bigness of vision," or:

  The transformative impact of their vision. “Bigness of vision matters because it creates momentum. People — other stakeholders, policy makers, employees, and investors — rally around the company because they want the company to succeed in achieving that big vision. So think of Tesla and its vision not only of producing amazing cars, but transitioning to a renewable infrastructure. That bigness of vision really can carry a company through volatile events and tough times.”

  On inventiveness:

  “That's prolific innovation where you don't have to really worry about your intellectual property much because you're actually confident you're going to produce more. So you don't have to protect it, you can open source it and enable human progress, enable others to build on what you're doing. And you're going to continue to execute because you're investing in innovation and you’ve created a culture of experimentation. Think of Google, which puts a great deal of of its capital expenditures into innovation and long-term strategy. Think of Amazon, which invests more in R&D than marketing.”

  Culture.

  “It's how you build a company that puts people first. This is a really important aspect which gives you a talent advantage over the long-term.”

  A signal advantage.

  “Being able to read through all these crazy information sources that we all are exposed to now 24/7, and at a corporate level, being able to make sense of and quickly act on it. That is something that companies really have to be built for, to process and act on information really quickly. Think about Square. They're a financial services/mobile payments company, but they have decentralized project teams. They are organized around sourcing really high quality customer feedback through surveys, numerical data, and customer conversations. And they keep their teams at twelve so that they can move really quickly on the information. That's a great example of a company that has a signal advantage.”

  Alignment.

  “Maintaining true alignment with all of their stakeholders is a hard one. This is not only maintaining alignment with your long-term investors, your board, your management, and your employees, but also your customers and other constituents. They all have different priorities. And your job as a company is to think about how you maintain alignment in the face of those differing priorities. We really see this when it's out of whack. Think about Wells Fargo and opening all the fake customer accounts. There's no way if you’d built a culture of alignment you would have any kind of that practice happening. Think about Boeing and putting planes out that you know are unsafe. It's also more subtle things like young companies that are maybe looking for product market fit and they don't quite have the business model worked out. Eventually they're like, wow, we got to make money, we're going to start selling data. And there you go.”

  Considering the framework as a whole, she observed “the interesting thing is that while we saw these attributes to a certain degree in companies that outperform and not at all in the ones that under perform. We actually see them a lot more in private companies. And what I don't know is, is there just a new cohort of young companies now that are coming up where this is more natural way of building a company that’s really different than the companies that are mature and in the public markets who were built with Michael Porter's rivalry model of like, kill or be killed.”

  You can read more about these elements in a Medium post Jean wrote about a month ago. And if you’re interested in the values which underpin them, you might also check out the Long-Term Stock Exchange’s principles.

  As usual, we also answered questions from listeners at the end of the podcast. This week, we discussed:

  • What’s the better disaster risk hedge, gold or bitcoin?
  • How does the pandemic change your view of the active vs. passive debate, if at all?
  • The Patagonia vest used to be a staple of VC wardrobes. Are they still prevalent in the era of quarantine?   

  
  

  If you’re enjoying this podcast or just want to do something nice, please consider leaving us a review on your favorite podcast listening platform.

  ]]>substack:post:490072Tue, 26 May 2020 18:37:00 -080054:21falsefull99Sloane OrtelA Surprising Silver Lining Featuring Tom Baruch of Baruch Future VenturesUnless we recognize “Something has died, and something new is coming after it,” it could take until 2040 before humanity emerges from the aftermath of this pandemic.

  That comes from Tom Baruch, a prolific “clean tech” venture capitalist who has led investments resulting in 18 IPOs and 8 M&A transactions and now operates from his family office, Baruch Future Ventures.

  He was our token optimist on this episode of Free Money, which was recorded on May 15th. But his outlook didn’t take the shape that one might expect. As an introduction, he offered “I believe this is going to last awhile. I don’t see us bouncing back until 2023 or 2024…. I don’t believe that the world [we used to live in] is going to come back.”

  Our mouths hung agape as he talked.

  But then he started describing a future that doesn’t sound so bad. His belief that, thanks to technology, “we’re entering a period of free clean water, free energy, and free protein” is beyond provocative. It brings to mind the world of Star Trek, where scarcity has altogether ceased to exist.

  Tom thinks we can get there soon.

  “People used to think that to really effect the kind of change we’re talking about it’ll take 20 years, you have all these scaling issues. And it’s all true. But now we have tools that we’ve never had before.” That means “It’s not gonna be a 20 year deal. we can do it in 10 years.”

  That sounds pretty good. But of course Tom isn’t saying it’s a guaranteed outcome. What scares him is that “the government - especially our current government - is gonna try and prop up broken old Industries. So we’re not going to add to GNP. That’s the problem. The way to add to GNP is free energy, free food, free water. That way we’ll build a very prosperous society.”

  Tom describes some of what’s needed to accomplish his vision in a recent paper on Medium, but the best way to access his imagination is by listening to this conversation and looking through his portfolio. He blends optimism and pessimism together in a way that can’t help but open your mind.

  We also answered three questions from listeners at the end of the show. This week we discussed:

  • Why exactly is it bad that PE funds don't get marked down during a selloff?
  • CalPERS caught some flak recently for unwinding a tail hedge program literally right before the market fell off a cliff. Was that bad luck or a bad decision?
  • There is a fairly significant movement to cancel rent, which sounds pretty good. Would that create long-term consequences that are actually...bad? 

  
  

  And as a bonus, here’s Sloane’s wipeout compilation from the 2020 ski season, which she mentioned in the introduction.

  ]]>Unless we recognize “Something has died, and something new is coming after it,” it could take until 2040 before humanity emerges from the aftermath of this pandemic.

  That comes from Tom Baruch, a prolific “clean tech” venture capitalist who has led investments resulting in 18 IPOs and 8 M&A transactions and now operates from his family office, Baruch Future Ventures.

  He was our token optimist on this episode of Free Money, which was recorded on May 15th. But his outlook didn’t take the shape that one might expect. As an introduction, he offered “I believe this is going to last awhile. I don’t see us bouncing back until 2023 or 2024…. I don’t believe that the world [we used to live in] is going to come back.”

  Our mouths hung agape as he talked.

  But then he started describing a future that doesn’t sound so bad. His belief that, thanks to technology, “we’re entering a period of free clean water, free energy, and free protein” is beyond provocative. It brings to mind the world of Star Trek, where scarcity has altogether ceased to exist.

  Tom thinks we can get there soon.

  “People used to think that to really effect the kind of change we’re talking about it’ll take 20 years, you have all these scaling issues. And it’s all true. But now we have tools that we’ve never had before.” That means “It’s not gonna be a 20 year deal. we can do it in 10 years.”

  That sounds pretty good. But of course Tom isn’t saying it’s a guaranteed outcome. What scares him is that “the government - especially our current government - is gonna try and prop up broken old Industries. So we’re not going to add to GNP. That’s the problem. The way to add to GNP is free energy, free food, free water. That way we’ll build a very prosperous society.”

  Tom describes some of what’s needed to accomplish his vision in a recent paper on Medium, but the best way to access his imagination is by listening to this conversation and looking through his portfolio. He blends optimism and pessimism together in a way that can’t help but open your mind.

  We also answered three questions from listeners at the end of the show. This week we discussed:

  • Why exactly is it bad that PE funds don't get marked down during a selloff?
  • CalPERS caught some flak recently for unwinding a tail hedge program literally right before the market fell off a cliff. Was that bad luck or a bad decision?
  • There is a fairly significant movement to cancel rent, which sounds pretty good. Would that create long-term consequences that are actually...bad? 

  
  

  And as a bonus, here’s Sloane’s wipeout compilation from the 2020 ski season, which she mentioned in the introduction.

  ]]>substack:post:465187Mon, 18 May 2020 16:26:00 -080047:28falsefull88Unless we recognize “Something has died, and something new is coming after it,” it could take until 2040 before humanity emerges from the aftermath of this pandemic.Sloane OrtelThe Next Wave Could Be a DoozyThere is “a time bomb waiting to go off” in some American states.

  That’s according to Ben Oppenheim, PhD, a computational epidemiologist at Metabiota and our guest on this episode of Free Money. We spoke on the first of May, one day after the United States endured its highest death toll so far in this pandemic. And the outlook isn’t great. The places with growing case counts “have older populations, a lot of preexisting conditions, worse health systems, and more structural barriers to people getting the kind of care they need.”

  He stressed that “my worry is not wave one [of infections], but wave two.” That’s because “we can be successful in the first round, but until we’ve got a vaccine, really good therapeutics, or herd immunity, this thing could come back in a hurry. We’ve seen that in some countries that were initially successful.”

  These events — often thought of as the public health equivalent of a ‘hundred year flood’ — are vastly more likely to occur than people generally think. In fact, this is the third coronavirus outbreak this century. SARS struck in 2003, followed by MERS in 2012.

  So it’s not like this wasn’t on our radar. The chart below comes from a textbook chapter Ben contributed to entitled Pandemics: Risks, Impacts, and Mitigation. It shows estimates of the annual probability that the death toll from an influenza pandemic will exceed a given quantity.

  Note that the x-axis is denominated in millions, which means Metabiota simulations show a roughly 1% annual chance of more than one million dead.

  At one point in our interview, Ben muses about our collective priorities before the pandemic and wonders aloud: “What the hell were we doing?”

  And that’s where we want you to concentrate. This is likely to be the crisis that makes ESG-aware investment processes not just commercially viable, but highly relevant. The Wall Street Journal reported over the weekend that ESG funds protected investors from some losses during the recent selloff, likely because they held fewer investments in energy companies.

  Long term investors, take notice. This is the second historically aberrant natural disaster we’ve endured recently. When we recorded our last episode shortly before New Year’s Eve, much of the west coast had lost power due to widespread wildfires. Integrating ESG processes won’t predict these events, but they will prepare portfolios with an awareness of future risks and promote better corporate citizenship.

  Ben reminds us that “Pandemics are not a health system event…when they hit, they engulf the whole of society.” So the question for you is: can you find your part in creating a better whole?

  We also discussed all of these questions in this week’s Dear Ashby segment:

  • If states do wind up declaring bankruptcy due to the coronavirus, what would happen to state pensions?
  • What have you started doing during lockdown that you plan to continue when life returns to normal? 
  • Because of the pandemic, lots of Americans are making more in unemployment benefits than they typically make in income. How should we be thinking about that?

  
  ]]>There is “a time bomb waiting to go off” in some American states.

  That’s according to Ben Oppenheim, PhD, a computational epidemiologist at Metabiota and our guest on this episode of Free Money. We spoke on the first of May, one day after the United States endured its highest death toll so far in this pandemic. And the outlook isn’t great. The places with growing case counts “have older populations, a lot of preexisting conditions, worse health systems, and more structural barriers to people getting the kind of care they need.”

  He stressed that “my worry is not wave one [of infections], but wave two.” That’s because “we can be successful in the first round, but until we’ve got a vaccine, really good therapeutics, or herd immunity, this thing could come back in a hurry. We’ve seen that in some countries that were initially successful.”

  These events — often thought of as the public health equivalent of a ‘hundred year flood’ — are vastly more likely to occur than people generally think. In fact, this is the third coronavirus outbreak this century. SARS struck in 2003, followed by MERS in 2012.

  So it’s not like this wasn’t on our radar. The chart below comes from a textbook chapter Ben contributed to entitled Pandemics: Risks, Impacts, and Mitigation. It shows estimates of the annual probability that the death toll from an influenza pandemic will exceed a given quantity.

  Note that the x-axis is denominated in millions, which means Metabiota simulations show a roughly 1% annual chance of more than one million dead.

  At one point in our interview, Ben muses about our collective priorities before the pandemic and wonders aloud: “What the hell were we doing?”

  And that’s where we want you to concentrate. This is likely to be the crisis that makes ESG-aware investment processes not just commercially viable, but highly relevant. The Wall Street Journal reported over the weekend that ESG funds protected investors from some losses during the recent selloff, likely because they held fewer investments in energy companies.

  Long term investors, take notice. This is the second historically aberrant natural disaster we’ve endured recently. When we recorded our last episode shortly before New Year’s Eve, much of the west coast had lost power due to widespread wildfires. Integrating ESG processes won’t predict these events, but they will prepare portfolios with an awareness of future risks and promote better corporate citizenship.

  Ben reminds us that “Pandemics are not a health system event…when they hit, they engulf the whole of society.” So the question for you is: can you find your part in creating a better whole?

  We also discussed all of these questions in this week’s Dear Ashby segment:

  • If states do wind up declaring bankruptcy due to the coronavirus, what would happen to state pensions?
  • What have you started doing during lockdown that you plan to continue when life returns to normal? 
  • Because of the pandemic, lots of Americans are making more in unemployment benefits than they typically make in income. How should we be thinking about that?

  
  ]]>substack:post:430023Mon, 04 May 2020 15:11:00 -080048:06falsefull77There is “a time bomb waiting to go off” in some American states. And the outlook isn’t great.Sloane OrtelFive Forces Fighting Free MoneyIt’s the end of the year. What have we spent all of this time talking about?

  Mostly what it means that pension funds, sovereign funds, endowments, and other asset owner institutions collectively manage roughly a third of all the money on earth.

  They tend to be globally diversified and invest with long time horizons, which aligns them with the public interest because they cannot succeed unless human enterprise flourishes around the world. They also provide most of the world’s risk capital, which makes them the base of modern capitalism.

  Our mission at Free Money is to help them find the freedom to properly fulfill their potential, orient their operations toward projects that build collective value, and serve as truly effective stewards of society’s accumulated capital. 

  It’s more profitable to try and extract value from them, so we have plenty of competition. But our greatest enemy is ignorance, not malevolence. So we spent the last episode of the year talking about at least five forces which work together to leave the world’s financial plumbing in thrall to the tyranny of low expectations. 

  We’ll enumerate and examine each in essay form after this quick word from our sponsor.

  Are you aggravated by average? Obsessed with outperforming ordinary? Tired of what's typical?

  You're not alone. Most investors expect exemplary experiences, but reality seldom satisfies. That doesn't have to be true for you! Free Money is pleased to introduce Portable Alpha, a revolutionary sports drink with a propriety mix of caffeine, taurine, and orange.

  Future profits* are assured once we've given you permission to order, and the first serving is free! It will be shipped in a black box with only a few additional fees once you order an additional 127 servings. You'll start performing abnormally once it hits your lips.

  The global supply of Portable Alpha is limited, and Free Money is its exclusive distribution agent. Don't miss your chance to buy it! Click here to sign up for the Free Money email list today.

  *Profits will accrue to Free Money Holdings, a Cayman Islands limited liability company.

  The Influence of Unexamined Norms

  Substantially every form of diversity imaginable is present among institutional investors. They exist in China, California, Canada, Texas, Taiwan, and Tuvalu. Some invest to support educational institutions while others provide insurance or fund members of a certain family. At least one is meant to stabilize the country of Iran.

  With so much inherent difference, we wonder: why do they act so similarly?

  One reason is that they have constraints which vary in their specifics but create similar operating conditions. For instance, they often hold monopolies over the assets they manage, which creates incentives for staff to optimize for not getting fired, rather than what’s best for the organization.

  On top of that, conformity tends to be written into the law in the form of the prudent person rule, which states:

  A fiduciary must discharge his or her duties with the care, skill, prudence and diligence that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character and aims.

  On the surface, this makes a lot of sense. Skill, prudence, and diligence clearly belong inside of an investment decision-making process.

  But imagine trying to apply investment skill while required to mimic a person acting “in a like capacity” at “an enterprise of like character and aims.” What if you are...]]>It’s the end of the year. What have we spent all of this time talking about?

  Mostly what it means that pension funds, sovereign funds, endowments, and other asset owner institutions collectively manage roughly a third of all the money on earth.

  They tend to be globally diversified and invest with long time horizons, which aligns them with the public interest because they cannot succeed unless human enterprise flourishes around the world. They also provide most of the world’s risk capital, which makes them the base of modern capitalism.

  Our mission at Free Money is to help them find the freedom to properly fulfill their potential, orient their operations toward projects that build collective value, and serve as truly effective stewards of society’s accumulated capital. 

  It’s more profitable to try and extract value from them, so we have plenty of competition. But our greatest enemy is ignorance, not malevolence. So we spent the last episode of the year talking about at least five forces which work together to leave the world’s financial plumbing in thrall to the tyranny of low expectations. 

  We’ll enumerate and examine each in essay form after this quick word from our sponsor.

  Are you aggravated by average? Obsessed with outperforming ordinary? Tired of what's typical?

  You're not alone. Most investors expect exemplary experiences, but reality seldom satisfies. That doesn't have to be true for you! Free Money is pleased to introduce Portable Alpha, a revolutionary sports drink with a propriety mix of caffeine, taurine, and orange.

  Future profits* are assured once we've given you permission to order, and the first serving is free! It will be shipped in a black box with only a few additional fees once you order an additional 127 servings. You'll start performing abnormally once it hits your lips.

  The global supply of Portable Alpha is limited, and Free Money is its exclusive distribution agent. Don't miss your chance to buy it! Click here to sign up for the Free Money email list today.

  *Profits will accrue to Free Money Holdings, a Cayman Islands limited liability company.

  The Influence of Unexamined Norms

  Substantially every form of diversity imaginable is present among institutional investors. They exist in China, California, Canada, Texas, Taiwan, and Tuvalu. Some invest to support educational institutions while others provide insurance or fund members of a certain family. At least one is meant to stabilize the country of Iran.

  With so much inherent difference, we wonder: why do they act so similarly?

  One reason is that they have constraints which vary in their specifics but create similar operating conditions. For instance, they often hold monopolies over the assets they manage, which creates incentives for staff to optimize for not getting fired, rather than what’s best for the organization.

  On top of that, conformity tends to be written into the law in the form of the prudent person rule, which states:

  A fiduciary must discharge his or her duties with the care, skill, prudence and diligence that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character and aims.

  On the surface, this makes a lot of sense. Skill, prudence, and diligence clearly belong inside of an investment decision-making process.

  But imagine trying to apply investment skill while required to mimic a person acting “in a like capacity” at “an enterprise of like character and aims.” What if you are able to recognize and access opportunities that your peer group can’t imagine? Are you to forego such opportunities and thereby constrain your ability to access abnormal returns?

  It does not pay to ask such questions in investment committee meetings, which exist to pursue and monitor certain prescribed forms of commerciality. The lie that these normative constraints on capital allocation are innate to all sound investing processes thus impairs every asset owner institution, effectively constraining all capitalist processes by misaligning the risk capital that serves as their feed stock. 

  Recognizing the existence of this lie does not naturally render investment decisions it affects incomplete or invalid, simply influenced by an unacknowledged force altogether different from the “invisible hand” of a “free market” which neither executive leaders nor board-level overseers often contemplate or choose to engage with. Instead, market participants are blinded to alternative investing styles in much the same way that most adults were blinded to queer lifestyles before recent increases in lesbian, gay, bisexual, and transgender visibility. 

  The Pleasant Fiction of Free Markets

  Unlike normative forces, the influence of market forces has been contemplated extensively. Much of this literature makes the case that something called a “free market” determines which goods are bought and sold and the prices at which those transactions take place.

  Leonard E. Read’s essay I, Pencil is a representative entry in this literature. In it, Read tells the story of a simple lead pencil, tracing the many people, processes, and places that play a role in its construction. The pencil itself is presented as a miracle of the market, since it came into being even though no one person in its complex supply chain possesses all the requisite knowledge to make it from scratch.

  Read then contrasts the process which birthed his marvelous pencil with the machinations of government, arguing that any government program inhibits creative energy and introduces unnecessary costs on human enterprise.

  We prefer pens, but agree with Read that the large-scale cooperation required to construct a pencil is pretty cool. However, his assertion that it takes place in a marketplace untouched by government action is categorically false. 34 of of the 50 largest pensions in the United States are linked to government entities, meaning that the pencil factory that serves as the site of his miracle may well be bankrolled by the very same government he wrote the essay to denounce.

  In fact, government funding fuels an increasing share of basic innovation in the United States. The chart below—published in the peer-reviewed journal Science—shows that more than a quarter of U.S. Patents relied on federally supported research, and that corporations are the largest beneficiaries of this support.

  One would hope that the government’s track record spoke for itself after funding the research which led to GPS, airbags, cellular phones, lithium batteries, and the internet. Most traditional investors would have had a hard time funding the long-term fundamental work which birthed each of these technologies since the outcomes of such efforts are inherently unclear.

  With that said, these investments in basic research are crucial, and we believe society should be organizing itself to make more of them. Whether it’s concentrated on curing disease or alleviating the effects of climate change, the government can clearly be an effective supporter of curiosity and creator of capitalist opportunity.

  Individually Rational, Collectively Insane Actions

  To estimate the costs associated with the unstudied norms we discuss in section 1, take a look at the chart in section 2. It should be surprising that corporations own so many of the patents generated by government research, but it probably isn’t to most readers.

  If asset owners were able to take fuller advantage of unconventional opportunities, it’s likely that this chart would look a little different. Think about it: much of this research work takes place at universities, which typically also have endowments. The people pursuing promising cutting-edge research may share a dining hall with the investors tasked with finding compelling investment opportunities.

  Why not invest where they eat?

  Some sophisticated university endowments might already, but for many staff such a suggestion smacks of career risk. If the investment went wrong or simply under performed, they’d face scrutiny and perhaps consequences. So private corporations capture the rewards of this public spending instead.

  If this were the only individually rational, collectively insane behavior in the financial markets, it might not be such a big deal. But it’s far from isolated. At one time, it would have been safe to assume that the corporation that eventually patented these new technologies would be listed on a stock exchange. If that were the case, it would be relatively easy for an investor to share in their prosperity.

  Today that’s not so much the case. There are roughly half as many listed companies today as there were in the late 1990s, and innovative growth companies are staying private longer than ever before. This means institutional investors must compete for access to illiquid, expensive investment vehicles to access opportunities that would have been readily available two decades ago.

  The private equity funds that pensions pay to access previously available investment opportunities provide perfect conditions for collective insanity to flourish further. Though in some cases these firms have historically generated returns through improved governance, modern practice has moved towards more complex practices that arguably increase risk and invite significant conflicts of interest.

  Roughly twenty percent of 484 healthy companies purchased by private equity funds went bankrupt within ten years of the transaction’s close. Roughly thirty-five percent of the funding for such transactions comes from public pension plans. And if recent trends are any indication, that number is only set to grow.

  Institutional Resistance to Innovation

  The organizations which form the base of capitalism—pensions and other asset owners—operate in government contexts. The people in charge of them are necessarily political, which compounds the difficulty of modernizing the way a given pool of capital invests.

  As if it wasn’t hard enough already.

  This means that although many of these enterprises would benefit from streamlining their administrative processes, the energy required to socialize and implement such reforms would be substantial. And rightly so: in many cases, people rely on these organizations to fund their daily lives. They are not the sort of environments where it’s appropriate to “move fast and break things.”

  Fortunately, there are less controversial places to concentrate. There is almost a pre-built consensus for modernizing the technology that these organizations use to make investment decisions, modernize their internal administration, and communicate with beneficiaries.

  Cost savings can be substantial. In Illinois, which will spend 27% of its 2020 budget on meeting pension obligations, some smaller suburban pensions incur more than $2,000 per person in administrative expenses. And that’s before considering what they pay in fees and costs to their investment managers.

  Implementing new technology systems invites these organizations to evaluate and update their governance in a relatively gentle and constructive setting. It also prepares them for added scale, which can substantially reduce the cost of administration (as shown by the McKinsey chart below).

  The report it comes from also indicates that a $1 billion pension fund typically pays fund managers 15% higher fees than a $10 billion fund, meaning that administrative costs aren’t the only place where plans experience increasing returns to scale. If the fund were to grow by two orders of magnitude to $100 billion, investment fees would be expected to come down by 41%.

  Though the fiduciary test we discussed earlier can make paradigm-shifting innovation harder to implement, it does at least keep trustees concentrated on commercial success. This can promote myopia, but also clearly justifies investing in technology and other cost-saving measures which indirectly improve governance and increase innovation.  

  The Low Probability of Positive Change

  To cynics, what we have described is an immutable characteristic of financial capitalism. In those jaundiced eyes, we’re better off hoping for faeries to magic these conditions away than believing we can build momentum for change. 

  After all, history does not appear to be on our side. 

  Thomas Phillipon found that despite the numerous technological advances that happened between 1886 and 2012, financial intermediaries still managed to extract a roughly constant 1.5-2% from the economy.

  Why would we dare believe that anything could change?

  Because it already has. In the same paper, Phillipon shows that the finance industry’s share of total income in the United States has grown roughly fourfold since the end of World War II. 

  That’s because the country’s asset base has grown significantly while the 1.5-2% tolls that banks extract from it have remained the same. And since the industry has consistently captured this extreme amount of value for more than thirty years, we’ve almost accepted it as normal. 

  Almost. 

  Mission-oriented investors forced to pay those fees are wising up, and working together to escape them. We’ve seen asset owners direct intention towards improving their own relationships with intermediaries, reap the benefits, and invite others along the same path. That’s exciting: it means the world’s giant pools of capital are beginning to manifest their power and take charge of their own destiny. It’s happening just in time.

  The threats posed by global challenges like famine, illness, and climate change cloud the future of our species. If we overcome them, it will be because society has managed to evade the strictures we describe in this essay and realign its assets to support and speed human flourishing.

  ]]>substack:post:208942Mon, 30 Dec 2019 16:06:00 -080049:16falsefull66It’s the end of the year. What have we spent all of this time talking about?Sloane OrtelSubmerging Manager ProgramsMany institutional allocators are troubled by the self-evident lack of diversity in investment management. 

  It’s easy to suggest that one fix that: cultivate more diverse talent! Build a more welcoming environment for new funds! But how exactly would one accomplish that? 

  Many pensions made worthy attempts with emerging manager programs, which were meant to support asset managers that did things a little differently. Unfortunately, those different managers were very much the same as others when it comes to delivering lackluster performance. 

  So now they’re canceled. Not everywhere, but at enough pensions that it makes a trend. On this episode of free money, Ashby and I talk about what this means for diversity, inclusion, and innovation in the industry. 

  And as always, we answer the questions on every institutional allocator’s mind. Specifically:

  • Why are “long-run short sellers” worried about GPIF’s move to restrict stock lending? 
  • It’s legal to do anything you want to an opossum in North Carolina from December 29th - January 2nd. What would you do with those five days?

  
  

  Apparently allocators will still consider backing investors who've had trouble with sexual harassment. WTF? But like actually.

  ]]>Many institutional allocators are troubled by the self-evident lack of diversity in investment management. 

  It’s easy to suggest that one fix that: cultivate more diverse talent! Build a more welcoming environment for new funds! But how exactly would one accomplish that? 

  Many pensions made worthy attempts with emerging manager programs, which were meant to support asset managers that did things a little differently. Unfortunately, those different managers were very much the same as others when it comes to delivering lackluster performance. 

  So now they’re canceled. Not everywhere, but at enough pensions that it makes a trend. On this episode of free money, Ashby and I talk about what this means for diversity, inclusion, and innovation in the industry. 

  And as always, we answer the questions on every institutional allocator’s mind. Specifically:

  • Why are “long-run short sellers” worried about GPIF’s move to restrict stock lending? 
  • It’s legal to do anything you want to an opossum in North Carolina from December 29th - January 2nd. What would you do with those five days?

  
  

  Apparently allocators will still consider backing investors who've had trouble with sexual harassment. WTF? But like actually.

  ]]>substack:post:201327Wed, 18 Dec 2019 19:38:00 -080044:39falsefull55Many institutional allocators are troubled by the self-evident lack of diversity in investment management. It’s easy to suggest that one fix that: cultivate more diverse talent! Build a more welcoming environment for new funds! But how exactly would one accomplish that?Sloane OrtelMisogyny and Maple SyrupDoes misogyny cost money? 

  Yes, but not enough.

  Ken Fisher - who runs the eponymous Fisher Investments - has a long history of inappropriate invective. One particular instance earlier this month at an investment conference triggered an outcry and then outflows of about $3 Billion.

  That response took remarkably quick action from the asset owner community. On this podcast, Ashby wondered aloud why these large institutions were quick to respond when a man says bad things, but drag their feet when it comes to deeper issues of racism, climate change, and technological disruption.

  Good questions to ask!

  But I wonder why Fisher doesn’t just lean into sexism. His Camas, WA advisory firm is only about three percent smaller after all of the fallout. I even went ahead and mocked up a new ad campaign featuring the man’s prodigious forehead.

  It could work! Misogynists need money managers too.

  Anyway, we also took questions from listeners. This week we answered:

  • What’s the worst name you’ve ever come across for a financial services firm?
  • What do you believe about investing, but know that you could never prove?
  • What’s the best investment advice you’ve gotten from someone outside the industry?

  
  ]]>Does misogyny cost money? 

  Yes, but not enough.

  Ken Fisher - who runs the eponymous Fisher Investments - has a long history of inappropriate invective. One particular instance earlier this month at an investment conference triggered an outcry and then outflows of about $3 Billion.

  That response took remarkably quick action from the asset owner community. On this podcast, Ashby wondered aloud why these large institutions were quick to respond when a man says bad things, but drag their feet when it comes to deeper issues of racism, climate change, and technological disruption.

  Good questions to ask!

  But I wonder why Fisher doesn’t just lean into sexism. His Camas, WA advisory firm is only about three percent smaller after all of the fallout. I even went ahead and mocked up a new ad campaign featuring the man’s prodigious forehead.

  It could work! Misogynists need money managers too.

  Anyway, we also took questions from listeners. This week we answered:

  • What’s the worst name you’ve ever come across for a financial services firm?
  • What do you believe about investing, but know that you could never prove?
  • What’s the best investment advice you’ve gotten from someone outside the industry?

  
  ]]>substack:post:158406Thu, 31 Oct 2019 15:44:00 -080040:55falsefull44Does misogyny cost money? Yes, but not enough.Sloane OrtelHow to Hedge against the Heterosexual IdeologyCapital markets are an inherently queer place. Securities produce financial returns by manifesting intrinsic value.

  Or as some might say, “living their best life.”

  As America’s leading loft-based finance transsexual, the inherent gayness of creating shareholder returns this way has long been old news to me. But while Ashby and I were discussing queer issues on this latest episode of the Free Money Podcast, he reminded me that some have been working to exclude companies which support (among other things) the “LGBT Lifestyle” from their investment portfolios.

  The Inspire Global Hope ETF (BLES) is perhaps the largest such fund. And with roughly $150MM in assets under management, it’s no behemoth. But with a slightly bigger base of assets, it might form the basis for a poetically beautiful pairs trade. That’s where investors buy one security and bet against another, hoping to profit from the difference between their performance.

  The chart below shows:

  The aforementioned BLES ETF in khaki (the official heterosexual color).

  The LGBT Employment Equality ETF (PRID) in lavender (the official gay color).

  The MSCI ACWI index in black (the official color of benchmarks).

  An investor who bought PRID and bet against BLES at the beginning of 2018 would have captured a 12.7% performance spread before fees and transaction costs. In other words, if this fund gets a little bigger, one could build a business around betting against it.

  Here’s hoping.

  Have a listen to the podcast for some further discussion about queer issues, coming out, and (as always) pensions. And for fun, here’s a picture I took right before coming out two years ago and a selfie I took yesterday. You might say I’ve womanifested some intrinsic value in the meantime.

  ]]>Capital markets are an inherently queer place. Securities produce financial returns by manifesting intrinsic value.

  Or as some might say, “living their best life.”

  As America’s leading loft-based finance transsexual, the inherent gayness of creating shareholder returns this way has long been old news to me. But while Ashby and I were discussing queer issues on this latest episode of the Free Money Podcast, he reminded me that some have been working to exclude companies which support (among other things) the “LGBT Lifestyle” from their investment portfolios.

  The Inspire Global Hope ETF (BLES) is perhaps the largest such fund. And with roughly $150MM in assets under management, it’s no behemoth. But with a slightly bigger base of assets, it might form the basis for a poetically beautiful pairs trade. That’s where investors buy one security and bet against another, hoping to profit from the difference between their performance.

  The chart below shows:

  The aforementioned BLES ETF in khaki (the official heterosexual color).

  The LGBT Employment Equality ETF (PRID) in lavender (the official gay color).

  The MSCI ACWI index in black (the official color of benchmarks).

  An investor who bought PRID and bet against BLES at the beginning of 2018 would have captured a 12.7% performance spread before fees and transaction costs. In other words, if this fund gets a little bigger, one could build a business around betting against it.

  Here’s hoping.

  Have a listen to the podcast for some further discussion about queer issues, coming out, and (as always) pensions. And for fun, here’s a picture I took right before coming out two years ago and a selfie I took yesterday. You might say I’ve womanifested some intrinsic value in the meantime.

  ]]>substack:post:152954Wed, 23 Oct 2019 18:12:00 -080034:52falsefull33Securities produce financial returns by manifesting intrinsic value. Or as some might say, “living their best life.”Sloane OrtelPascal's Wager and the Religion of Climate ChangeFox News host David Webb accused American liberals of “turning climate change into their religion” last week.

  An interesting thought.

  Pascal’s Wager came to mind while Ashby and I were exploring it on the podcast. It’s a 17th century philosophical argument about the existence of god advanced by the French polymath Blaise Pascal. The gist: humans bet with their lives that god either does or does not exist.

  He argued that a rational person should live as though god exists. If they’re wrong, they avoided sin for no reason. But if they’re right, the potential gain (an eternity in heaven) is infinite.

  I think this logic holds for climate change. If we’re wrong and the planet isn’t dying, we’ll have cleaned it up for no reason. A specific loss. But if we’re right, the potential gain is infinite.

  To me, it’s an easy choice.

  Check out the podcast to hear us talk through the logic in more detail. As always, we answered questions from listeners. Write with a question and we’ll answer it in the next episode!

  • HBO’s show succession features a plot line where investors from a Canadian pension fund issued the most creative and aggressive swear words in the entire series. Is this realistic? I thought Canadians were nice. 
  • I saw that someone tweeted candid, negative comments about a startup and caught a lot of flak. Why is outward positivism such an entrenched norm in Silicon Valley?
  • Why do we keep calling it a risk free rate when there is no risk free rate? 

  
  ]]>Fox News host David Webb accused American liberals of “turning climate change into their religion” last week.

  An interesting thought.

  Pascal’s Wager came to mind while Ashby and I were exploring it on the podcast. It’s a 17th century philosophical argument about the existence of god advanced by the French polymath Blaise Pascal. The gist: humans bet with their lives that god either does or does not exist.

  He argued that a rational person should live as though god exists. If they’re wrong, they avoided sin for no reason. But if they’re right, the potential gain (an eternity in heaven) is infinite.

  I think this logic holds for climate change. If we’re wrong and the planet isn’t dying, we’ll have cleaned it up for no reason. A specific loss. But if we’re right, the potential gain is infinite.

  To me, it’s an easy choice.

  Check out the podcast to hear us talk through the logic in more detail. As always, we answered questions from listeners. Write with a question and we’ll answer it in the next episode!

  • HBO’s show succession features a plot line where investors from a Canadian pension fund issued the most creative and aggressive swear words in the entire series. Is this realistic? I thought Canadians were nice. 
  • I saw that someone tweeted candid, negative comments about a startup and caught a lot of flak. Why is outward positivism such an entrenched norm in Silicon Valley?
  • Why do we keep calling it a risk free rate when there is no risk free rate? 

  
  ]]>substack:post:132953Thu, 03 Oct 2019 19:22:00 -080040:34falsefull22A Fox News host accused liberals of "turning climate change into a religion." So what if we have? Sloane and Ashby use 17th century philosophical innovations to explore how society should react.Sloane OrtelRethinking RiskIf financial risk doesn’t confuse you, you’re not paying attention.

  That’s advisable.

  Market minutia gets treated like breaking news around the world, and people listen even though it’s “a tale told by an idiot, full of sound and fury, signifying nothing,” as the late Jack Bogle told me in 2017 (and Shakespeare wrote a few hundred years earlier).

  But the mad moron has a megaphone. Traders listen and then act altogether, which makes them feel like risk exists in two states: on and off.

  It’s not so binary in real life.

  I’ve pasted a slide from Deutsche Bank’s 2019 market outlook below. At first glance, it shows that risk comes in at least thirty flavors. But seventeen of the scary things it lists have happened, and US Equity markets are just a hair’s breadth from all-time-highs.

  So are these things even risks?

  Ashby and I weren’t sure when we sat down to tape the last episode of Free Money, so we decided to phone a friend: Rick Bookstaber. He’s the chief risk officer for the University of California’s investment funds—which oversee roughly $120 billion—and a founder of the financial technology firm Talagent.

  Before that, he developed risk models to assess vulnerabilities and help stabilize the U.S. financial system at the US Treasury after the financial crisis and served as chief risk officer at Bridgewater, Moore Capital, Solomon Brothers, and Morgan Stanley. He also wrote The End of Theory, an in-depth look at how to account for the human complexity of our financial system.

  In other words, we were glad he picked up.

  We talked about how agent-based modeling can be used to build a better picture of what’s happening in the markets and why you’re better off ignoring the ones which most often make headlines, like Brexit and the trade wars.

  Then as always, we took questions from our listeners. Check out the podcast to find out how the office ball pit below featured in our conversation.

  • I am an Indian citizen, but has kept its money in Swiss bank accounts since my grandfather's time. As of this month, government has all my account details. I'm worried they are going to take my money. What can I do?
  • I run a venture-backed startup in Austin, and the firm that led my "A" round is based in China. I love working with them, but worry that the trade war will somehow affect their ability to follow on in later rounds of funding and doom our company. Am I wrong to worry about this? What should I do?
  • I'm a few years out of business school, working at a multinational company that signed onto the Business Roundtable's recent statement about shareholder value. Their words are nice, but nothing seems to have changed. Should I whistleblow? Would anyone care? Would it help?

  
  ]]>If financial risk doesn’t confuse you, you’re not paying attention.

  That’s advisable.

  Market minutia gets treated like breaking news around the world, and people listen even though it’s “a tale told by an idiot, full of sound and fury, signifying nothing,” as the late Jack Bogle told me in 2017 (and Shakespeare wrote a few hundred years earlier).

  But the mad moron has a megaphone. Traders listen and then act altogether, which makes them feel like risk exists in two states: on and off.

  It’s not so binary in real life.

  I’ve pasted a slide from Deutsche Bank’s 2019 market outlook below. At first glance, it shows that risk comes in at least thirty flavors. But seventeen of the scary things it lists have happened, and US Equity markets are just a hair’s breadth from all-time-highs.

  So are these things even risks?

  Ashby and I weren’t sure when we sat down to tape the last episode of Free Money, so we decided to phone a friend: Rick Bookstaber. He’s the chief risk officer for the University of California’s investment funds—which oversee roughly $120 billion—and a founder of the financial technology firm Talagent.

  Before that, he developed risk models to assess vulnerabilities and help stabilize the U.S. financial system at the US Treasury after the financial crisis and served as chief risk officer at Bridgewater, Moore Capital, Solomon Brothers, and Morgan Stanley. He also wrote The End of Theory, an in-depth look at how to account for the human complexity of our financial system.

  In other words, we were glad he picked up.

  We talked about how agent-based modeling can be used to build a better picture of what’s happening in the markets and why you’re better off ignoring the ones which most often make headlines, like Brexit and the trade wars.

  Then as always, we took questions from our listeners. Check out the podcast to find out how the office ball pit below featured in our conversation.

  • I am an Indian citizen, but has kept its money in Swiss bank accounts since my grandfather's time. As of this month, government has all my account details. I'm worried they are going to take my money. What can I do?
  • I run a venture-backed startup in Austin, and the firm that led my "A" round is based in China. I love working with them, but worry that the trade war will somehow affect their ability to follow on in later rounds of funding and doom our company. Am I wrong to worry about this? What should I do?
  • I'm a few years out of business school, working at a multinational company that signed onto the Business Roundtable's recent statement about shareholder value. Their words are nice, but nothing seems to have changed. Should I whistleblow? Would anyone care? Would it help?

  
  ]]>substack:post:118907Tue, 10 Sep 2019 17:53:00 -080034:29falsefull11Risk isn't rational, but in some cases it is predictable. In this episode, Sloane and Ashby explore agent-based financial models with Rick Bookstaber, Chief Risk Officer of the University of California's $120 billion endowment.Sloane Ortel