(Ep.42) The Acquirers Podcast: Mark Yusko – Endowment Value, Endowment Model, Value Investing, Crypto And Bitcoin

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In this episode of The Acquirer’s Podcast Tobias chats with Mark Yusko. He’s the Founder, CEO, and Chief Investment Officer of Morgan Creek Capital Management, an asset manager with $2 billion under management. During the interview Mark provided some great insights into:

  • Before Fama And French There Was Bill Breed and Eugene Lerner
  • When You Feel Really Alone On A Stock Idea, You’re Usually Right!
  • How Does The Endowment Model (Of Investing) Work?
  • Market Timing Works When You Have An Edge
  • Working With Julian Robertson – Double Up, Not Down!
  • How To Turn $100,000 Into $20 Million
  • Finding Investing Opportunities – Hear About It Once – Remember It, Hear About It Twice – Write It Down, Hear About It Three Times – Do Something!
  • An Investor’s Gut Biome Is Smarter Than Their Brain
  • Alternative ‘Thinking’ About Investing
  • Bitcoin – Investors Should Be Aware That There’s A Big Difference Between Magic Internet Money And The Infrastructure Around Blockchain Technology

You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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Full Transcript

Tobias Carlisle: When you’re ready sir.

Mark Yusko: Okay, ready.

Tobias Carlisle: Hi, I’m Tobias Carlisle, this is The Acquirers Podcast. My special guest today is Mark Yusko. He’s the founder, managing director, and chief investment officer of Morgan Creek, an asset manager with $2 billion under management. We’re going to talk to him about value investing, crypto, the markets, right after this.

Speaker 3: Tobias Carlisle is the founder and principal of Acquirers Funds. For regulatory reasons he will not discuss any of the Acquirers Funds on this podcast. All opinions expressed by podcast participants are solely their own, and do not reflect the opinion of Acquirers Funds or affiliates. For more information, visit acquirersfunds.com.

Tobias Carlisle: Hi Mark, how are you?

Mark Yusko: Hey good Toby, doing great. Thanks for having me on.

Tobias Carlisle: My absolute pleasure. Thanks so much for giving us the time. I’ve been aware of your presence through Twitter for a long time. I think I’m simpatico with many of your views, so I’m really looking forward to this discussion. I think what I’d really like to know, how did you get started? You went to Notre Dame, and then you did your MBA at Chicago. Did you work in-between or did you go straight from-

Mark Yusko: No, no, I’m one of those rare guys, and I don’t recommend it actually, that went straight out of undergrad to business school. Which really is not the way to do it, but it worked for me. And the quick background story I always say my life is just a series of happy accidents. I actually went to Notre Dame to be an architect, I thought I wanted to be Mr. Brady from The Brady Bunch, and didn’t like it. Tried engineering, didn’t like that. Then I had a girlfriend she said, “Why don’t you do what you like to do?” I’m like that’s a novel concept. So I tried science, I really loved it. Thought I wanted to be a doctor, but decided very late not to go to med school.

Mark Yusko: And turns out if you’re graduating with a premed degree and you decide not to go to med school there just aren’t a lot of jobs. So you can either be a consultant or a pharmaceutical sales rep, and I’m not 6’4 and handsome, so pharmaceutical sales rep was out. So I was going to go work for this consulting firm and they said, “Well you haven’t taken any business classes, so why don’t you apply to a business school. And if you can get into a good one, why don’t you go?” And the thing about Chicago is they’re smart, they know that no one whose ever worked is actually going to go back and do a PhD. So they were trying to get people into their PhD program, so they let people out of undergrad in. They put you in a class with Gene Fama and after about three classes I’m like, “Oh there’s no way going to PhD.” So, I had-

Tobias Carlisle: You weren’t persuaded to be an efficient markets guy?

Mark Yusko: Not at all. In fact, we’ll get to that. I think the markets are quite inefficient, I think valuations today are a good example of that. But I had a lot of great classes with a lot of great professors, two Nobel Laureate’s, which is pretty amazing. But I loved the experience, but I didn’t know what I wanted to do and I didn’t have any good coaching. And everyone else was getting jobs on Wall Street and I didn’t even really know what that was. And I got this offer from a firm in Chicago that did insurance, my wife had a job as a reinsurance company in Chicago. I thought, “Oh that’s perfect, we’ll both be in insurance.” And about a year in the guy who was doing investments retired, and that was my happy accident number one.

Mark Yusko: And the boss said, “Hey why don’t you take over?” And we did fixed income investing, and I like to say I hired Dan Fuss before he was famous, famous manager at Loomis Sales. And we managed a little bit in-house and we outsourced a little bit. But then I got exposure to kind of value, I went to work for these two guys, they were Northwestern Profs. And they were the original value investors, I mean it’s actually an amazing thing. Gene Fama gets all the credit with Ken French for book to market, and the guys I worked for, Bill Breed and Gene Learner, used to just seethe. They’re like, “We invented low price to book investing. We were patient zero, we were customer number one of compustat.” And they used to get the tape back when there were no personal computers, imagine that doing investing without computers. And they would go to the Vacs computer at night at Northwestern and spin this tape and run screens on low price to book.

Tobias Carlisle: Wow.

Mark Yusko: And it generated thousands of basis points of alpha, but they were selling these screen to Merrill Lynch, and big brokerage firms on the street, making nice money in addition to their salaries from Northwestern. And they had this four day lead, because back then it was snail mail. So they’d get the tape, they’d pick it up in Chicago, and it would go out in the mail to everybody else, and they had a four day lead. So, one of their clients finally said, “You’d make a lot more money if you managed money.” And so they said, “Okay let’s do that.” So they were the first kind of university professor spin out, they formed a firm called Disciplined Investment Advisors, still a great name. And my big thing was we had these coffee mugs that said, “Invest without emotion.”

Tobias Carlisle: I love that.

Mark Yusko: And that was a really big key for me in terms of setting up my life in investing, is this idea that discipline matters. That you got to take the emotion out, that there should be a process, and you should have a value bias. And to make a long story short, we got a billion dollars back when a billion dollars was a lot of money. And I got the call, and for those who are college football fans they’ll know this guy Lou Holtz, he was a coach at Minnesota, and he had a lifetime contract unless Notre Dame called. And Notre Dame called, and so he went to Notre Dame, had a great career, we won national championship.

Mark Yusko: And I would have stayed at Discipline forever, we had a billion dollars, there were five of us. Now they didn’t pay the young guys anything, but eventually. And I got the call, I got the call from Alma Mater at Notre Dame, they wanted somebody to come back and help manage the endowment. And I decided I wanted to do that more than work in Chicago, and I went back. And it was really a life changer in the sense that-

Tobias Carlisle: So that’s 1993?

Mark Yusko: Yes, exactly.

Tobias Carlisle: You go to Notre Dame. What’s the difference between working at Disciplined where you’re … that’s essentially a value investment, a quantitative value investment firm. But then you go to Notre Dame, and you can’t run that as an equity only strategy, right? So you had a little bit of a background in bonds, you’d done some equities, now you’ve got a different model. So what did you do to run that?

Mark Yusko: Look it’s such a great question, and it’s really that transition that was so funny for me at the time, because I didn’t know what an endowment really was. I knew that universities had them, but I didn’t really understand what they were. And the big thing for me was I thought picking stocks and bonds was all there was, because that’s all I knew. And I thought quantitative was all there was, because that’s all I knew. And I remember asking one of our … why don’t we do a hedge fund strategy? Now we had this model, it picks the great longs, and on the value side. So why don’t we just do the inverse, and if we pick undervalued companies why don’t we short the overvalued companies?

Mark Yusko: And he said, “Look it’s hard enough to be right once and pay two commissions. Why would I want to try to be right twice and pay four commissions?” That stuck with me, even though I’m a big hedge fund guy. So I realized that I was totally wrong, which happens a lot actually, just ask my wife. I was totally wrong that I thought investing was all about picking stocks and bonds. And really that’s the smallest piece of investing, it’s on 15% of returns long-term. Most of the return, kind of 85% of the return, come from the other three sectors, which are asset allocation, so am I in stocks, am I in bonds, am I in commodities, am I in currencies, am I geographically diversified? Am I in Japan, or the US, or Europe, or emerging markets?

Mark Yusko: And then there’s portfolio manager selection, so which manager am I going to use? If I decide I’m going to be in equity, and then I decide I’m going to be in value equity, well which manager do I pick? I mean there are a lot of good ones, a lot of less good ones. But then even more important that nobody talks about, is portfolio construction. Let’s say you run a value shop, I run a value shop, do we give 50% each? Or do we give more to Toby because he’s a better manager than Mark? Or do we go find a third one and give them a third each? That really matters. And so I got this exposure to asset classes being the most important thing.

Mark Yusko: And perfect example is when I got to Notre Dame we were stocks and bonds like everybody else, in fact the way the endowment was allocated before Scott Malpass got there, the guy who was my boss. He said that we had a priest and he basically would go to New York and whoever gave them the best dinner and movie tickets, or Broadway tickets, they’d get the biggest allocation. And that was totally logical back then, I mean it seemed like a good plan because basically endowments were in stocks and bonds. And then this guy David Swenson and Cambridge Associates in Boston came along, with Jack Meyer at Harvard. And kind of between the three of them, they kind of changed the model to say let’s focus on asset allocation, let’s make sure we get into the cheapest asset classes. And then let’s focus on finding the very best of the very best managers, and then let them pick stocks. Ford or GM is less important than Tata Motors versus US auto makers. But let’s let a company decide which ones.

Mark Yusko: But back to that point about what I really had the ah-ha moment, was we go to present, it’s 1993 real estate has just gotten crushed after the 91 recession. And there was this guy Barry Sternlicht, billionaire now, but back then he was not a billionaire. In fact back then he was being blamed for being the guy who made the mistake in the spreadsheet that took down JBL Investments in Chicago, or JMB Investments, JMB. And silly right, but someone had to be blamed, so they might as well blame the young guy. And long story short, he came out and said, “As a value guy at heart, there’s really deep value out there in real estate today and nobody wants to talk about it.” And that’s one of my big takeaways, and I know you’ve talked a lot about this on the podcast, which is when you feel alone, like desperately all alone in an idea, you’re usually right. That’s usually a really good time to make money.

Mark Yusko: And when you are out amongst the crowd, and everybody’s having a party, and everybody’s slapping you on the back telling you how smart you are, you’re probably going to lose a lot of money. So nobody was telling Barry how smart he was in 1993. And we were fortunate enough to invest in Starwood and things did really well. And fast-forward a couple years there’s this firm that-

Tobias Carlisle: Just before you go on, what is the endowment model, that’s the … what is the insight, the key insight, to the endowment model? Is it getting as many different assets, uncorrelated assets, as you possibly can? Is that the endowment model, or what is it?

Mark Yusko: Well again, really important it goes a little bit back to Chicago and Markowitz investment theory. And look Markowitz was right, I have a shirt that says that, a friend of mine bought it for me. Because here Markowitz won the Nobel Prize for this construct that when you take uncorrelated assets … risky, when you put them together the portfolio is less risky. And it makes no sense when you think about it, how could I take bonds, which seem to be low risk, and add stocks which are risky, and the risk goes down? Add hedge funds, risk goes down. Add venture capital, risk goes down. And so that was the first takeaway, that one Markowitz was right, that diversification works.

Mark Yusko: But to your point, or to your question which again is a really insightful question, it’s not just maximizing the number of diversifying and uncorrelated assets, it’s really about how you move between and among those assets in a disciplined fashion. And so one basic example of that is you have to have a strategic investment policy. A policy that drives your long-term asset allocation. Now people talk about market timing all the time and they say, “Oh it’s evil and you should never do it.” No, not true at all. If you have edge, if you have information edge, or analytical edge, or process edge, and you have a better set of information and facts than someone else, you should definitely bet away from your strategic policy and you should bet with the trend.

Mark Yusko: And you should try to capture a bigger portion of those gains to be had as something goes from undervalued back to fairly valued or fairly valued to over valued. Because that pendulum is going to swing over time. And so part of the endowment model is having this willing to say look market timing in and of itself isn’t bad, that’s just a movement away from your strategic target, it has to be intentional. And I always say as a good Catholic boy, sins of omission are bad, sins of commission are forgivable. If you don’t know you’re doing something wrong, that’s bad. But if you decide and it turns out bad, that’s okay because you made a decision. And so rebalancing back to your strategic policy is moving back toward that target.

Mark Yusko: And so both are a form of market timing, people think rebalancing is good, but think market timing is bad, well that’s just silly. You’re taking profits from one and you’re allocating to cheap assets in another. If you think about if you got a super cheap asset and you want to overweight that asset, well that’s market timing, but why is that bad? That’s what we should do, we should buy things when they’re cheap. And if we have a really overvalued asset, and we want to rebalance away from it, that’s market timing, but why is that bad? Just makes no sense to me.

Mark Yusko: So those are the two elements of the endowment model. So one is yes a broad base of uncorrelated assets is superior. Two is having a strategic policy and a discipline. But the third and then there’s four points, the third is a value bias. And a value bias you talked about it on the podcast with lots of guests, Seth Clarman says it, it is a little bit genetic, you either have it or you don’t. And it’s not always a good thing, there are plenty of times where it can hurt you because you can’t participate in a crazy upside move of some crazy growth stock that you can’t understand the value. So it’s not always a good thing. But there is a value bias into the endowment model.

Mark Yusko: And then the fourth piece of it is a huge biased to the illiquidity premium. So having an over weight to private equity, private real estate, private energy, private debt, venture capital growth equity. Things that take advantage of the third risk. I always say there are only four risks that you can take in the whole world, if you take no risk you stay in cash, you get the risk free rate, hence the name. You can take credit risk, can buy a bond. You can take equity risk, you can buy a stock. You can take illiquidity risk, you can buy a private asset instead of a public asset. And you can use structure, fancy term for leverage. Those are the only four risks that exist in the world.

Mark Yusko: Now you can combine them in lots of different ways to make lots of different investment choices, but those are the only four risks. And you have to take risk in order to make return, and that’s how it works.

Tobias Carlisle: Endowments are uniquely or rarely positioned because they have such a long timeframe, so the illiquidity is something that you can factor that into what you’re doing and take advantage of that risk.

Mark Yusko: Well you know what’s great about that and what’s really kind of funny, many many people have that similar advantage because if you’re in your 20’s or your 30’s and you’re saving for retirement, investing for retirement, you’re not going to touch that money for decades, 40, 50, 60, 70, 80 years in some cases. So you should think like an endowment. In fact I always say, I get in trouble with this, but I say it should be against the law. Literally there should be a law that makes it against the law … if you’re under 60 years of age. Because you can’t touch the money, and it makes no sense because every day you’re in cash or bonds you’re losing to inflation. So you should be forced to take advantage of illiquidity premium when you’re young, and that’s when you should be taking the risk. But most young people, because they don’t think about this, they don’t study it, it’s not their primary thing that makes them their money, it’s not their career, they underinvest in those years where everything’s working in your favor in terms of compounding.

Tobias Carlisle: So 93 to 98 you’re at Notre Dame, you develop this endowment model and then this is after you’ve had the call to go to your Alma Mater, and I can see you’ve got the fighting Irish poster just over your shoulder there.

Mark Yusko: Yeah, behind me. Yeah.

Tobias Carlisle: Then University of North Carolina Chapel Hill calls and what do they say?

Mark Yusko: Well it’s actually funny. So I was the number two guy at Notre Dame, I was always going to be the number two guy, Scott’s a year older than me, we lived in the same dorm, had the same major. He’s never going to leave, but I was happy being number two. I was at the Alma Mater. But the wife was a little less happy, turns out North Carolina is a little nicer place than South Bend. So North Carolina calls and says, “Hey we’re interested in you being the CIO.”

Mark Yusko: And I said, “Hey hun, there’s a job in North Carolina.” She says, “Take it.” I said, “Don’t you want to know what it is?” She said, “No, I just want to live in North Carolina.” She was right, so 21 years ago we came down here and we’ve loved it. I mean it’s just amazing. And the best part about it actually was UNC was so broken when I got here that it was just easy to look good. Like if you’re going to go some place it’s better to go some place that’s not perfect, because then you can look really smart. I use the basketball analogy-

Tobias Carlisle: That’s the deep value guy in you.

Mark Yusko: Exactly again deep value. My first year everything we did we looked Tomahawk slam dunk, second year free throws, third year … I mean second year layups, third year free throws, fourth year had to take a jump shot. It wasn’t even until year five we had to do anything hard and take a three pointer. And again, it was because they didn’t have a discipline, they didn’t have an investment policy, they were run by a part-time board, they didn’t have staff. They didn’t think strategically, they didn’t have a value bias, they didn’t take advantage of the liquidity premium. So all the things that I had inculcated from my time at Notre Dame and working with Cambridge, and being fortunate enough to have Jack Meyer as a mentor from Harvard. I’ve been very lucky.

Mark Yusko: It’s interesting, I’ve been incredibly blessed in my life to have just unbelievable mentors. And it’s not like they spent an hour a week talking to me, but they spent some time helping me. And I also paid attention to what they did. So I watched what they did, and I learned from them, and I had an open mic to them. Again, I didn’t abuse it. So Jack Meyer was a great mentor, Julian Robertson when I got to UNC was a fantastic mentor. I mean there aren’t words to describe how great that was. And again, it’s not a lot of time, it’s just there’s a lot of value in what little time you can get.

Mark Yusko: And so the best advice I always give young people is ask because people want to be mentors. “Oh that person is too busy,” just ask because they can say no, but they might say yes. So that mentorship was really important in helping again hone and develop the value bias. I came to North Carolina, really easy to look good because it was broken. But you also had this guy Julian who I was able to dive deeply into building a relationship, and maybe one of the greatest value investors ever. And that’s not an over exaggeration, look I’m prone to hyperbole, as most people know, but that’s not hyperbolic. I mean the guy is one of the truly great value investors of our age. And the other thing that he I think is … there are no peers of him is in the identification, training, and backing of talent.

Mark Yusko: I mean if you look at the people that have worked for him over the years, and now manage money, most of it with a value biased, not all of it, but most of it. They are some of the greatest managers ever in the business.

Tobias Carlisle: These are the tiger cubs that you’re referring to from Julian’s tiger cubs. Without disclosing any confidences, what did Julian teach you, what did you learn?

Mark Yusko: Yeah, so I mean Julian’s the best. So one of the things that’s really important is don’t fudge the numbers. So he’d come up and he’d ask somebody, “So tell me about this.” And he would immediately tell when the person was bull shitting … [inaudible 00:22:27] and he’s like, “Hey stop, never fudge the numbers. Just say Julian, I don’t have the number, I’ll get it and I’ll come back to you.” So don’t extrapolate, don’t interpolate, only evaluate the real data.

Mark Yusko: And there’s a great line from Seth Clarman about the same thing, he said one day at a meeting to a group of analysts, he said, “So what do we know about this company?” And this one analyst says, “Well I think,” he says, “Stop. I didn’t ask you what you think, I don’t care what you think, don’t ever think. I want to know what we know. What is factual. I don’t want your interpretation, I want facts.” And that’s really important. So don’t fudge the numbers, one of the really important things.

Mark Yusko: Second, never double down, always double up. And here’s the interesting thing, so most people think if you’ve done the work and you buy something and it goes against you, you should buy more. And what Julian would say is no, we’re just wrong. Made a mistake and the market’s right, the market’s … this goes back to the efficient markets. It’s not that the market’s always efficient, but when it’s telling you you’re wrong you should listen to it. And there’s the famous picture of Paul Tudor Jones in his dorm room with the losers average losers sign. And it’s interesting, so I’ve had this gift, and it’s really a gift, that I’ve been able to interview pretty much every person that worked for Julian that formed their own fund.

Mark Yusko: And I have these notebooks, I could probably turn it into a book someday. But I have these notebooks of notes from all these guys saying, “What did you learn working for Julian? What did you learn working at Tiger? What did you learn in separating, and leaving, and starting your own firm?” And without fail they all have different things like, “What made Julian great?” “Well he was super competitive, one of the most competitive person they’ve ever met.” Someone else says, “He’s the most honest person in the world, dishonesty is just not allowed.” And this is a guy who went through customs once with a pair of shoes on that he forgot to declare and he sent a check the next day. Most people lie, forget sending a check.

Mark Yusko: But every single person I ever interviewed said he had an uncanny ability to double up. Now most people would say, “Well wait a minute, that’s not a value investor.” Well think about it, is it or is it not? So what he’s saying is when he had edge, when he had knowledge about an area, an asset, a company and they made an investment and now the market is coming around to your view, rather than do what most human beings do, which is pull their flowers. They’re so happy to have a win they take profits. He’s like, “Well let’s buy more because it’s working.” And there’s the simple statement of let’s do more of what’s working and less of what’s not. Most of us don’t do that, we do more of what’s not working and less of what’s working, which is why the average person underperforms.

Tobias Carlisle: Right.

Mark Yusko: But he had that ability. So I am still not good at it, because I have such a deep value bias in me that when things start to get frothy, I just don’t have the ability to double up. A great example would be in real time AMD, I had great insight because of our move into block chain and crypto a couple of years ago that AMD was one of the companies making GPU’s. It was clearly a deep, deep value when it got down to single digits. And so I bought it, and great so it goes up, and then it gets to 30 bucks this year and I’m like, “Okay it’s just way over valued. The price to book’s crazy and I just can’t take it anymore,” and I sold. Well now it’s to 45.

Mark Yusko: It’s probably a short here, but that’s not the point. The point is that I didn’t have the guts to double up the same way that he would. Now that’s unique, and there are only one or two of him in the world, so that’s probably why they’re really good at it.

Tobias Carlisle: Let me take you back a little bit. So you start at UNC Chapel Hill 1998, you have this value bias, but you’re going into a really tough time for value investors, so how did you manage through that period?

Mark Yusko: Such a great question, I love talking about this period because you’re right when I got there everything that I believed in my core was going against me. Everything, because this was the midcycle rebound from 95, and things were starting to get really frothy. And then I get there in … which they were worried about Y2K pumped half-a-trillion, back when half-a-trillion was a lot of money, half-a-trillion dollars into the economy to try to combat Y2K. And we had this year long explosion from kind of October 98 to October 99. And basically everything that I believed in from a value investor perspective was just out the window. Now I will give myself a little bit of credit because I was willing to let some winners run, and we had allocated money to Nicholas Applegate, great growth firm, to a firm called Oxley in Boston, great international growth firm. And they were crushing it. I mean the fourth quarter of 99, our portfolio, our domestic equity portfolio, was up 40 percent, 4-0.

Tobias Carlisle: That’s a good quarter.

Mark Yusko: Three months, right? And we got way out of whack with our investment policies. So February board meeting and I go into the board and I say, “All right guys we need to rebalance. Things are looking really pricey,” this was kind of right before the March super peak and I was starting to feel a little nervous. And we had made a ton of money in venture capital, I mean a ton of money. And started to get distributions and I’ll tell you about on ein a little bit. But I said, “We got to rebalance.” And my board chair says, “Mark you’re out of your mind, these are our best managers. We’re not going to take money from them.” I said, “But our policy says we have to go from 37 back to 30 because we’re overweight.” And he says, “Well we’re the board, and you’re the one that made up this policy.

Mark Yusko: In fact, we don’t like the word policy, we want you to change that word to guideline.” I’m like, “Come on.” He’s like, “No I’m serious.” So they made me change it to guideline, I couldn’t sell anything. And so the market starts to roll over in March, I come back in May and they’re like, “Okay fine, you can go to the top end of the range but these are our best managers, no more.” By September they’re like, “Get this shit out of here, and oh by the way change that word back to policy.” And so back to disciplined investment advisors, that discipline of over riding the emotion of hey these are our best managers, hey trees are going to grow to the sky.

Mark Yusko: And where I really got my conviction on why we needed to get hedged and why we transitioned from basically long only at the end of 99 to 60, 6-0 percent, in hedge funds by 2002, which I’ll talk about in a second, was because of this one incident with a distribution. So we had made an investment in this venture capital fund in Boston. They invested in a bunch of companies, but one of the companies they did was Art Technology Group. Art Technology was literally the consulting company that helped companies change their names to .com. And as soon as you changed your name to .com, it went up a lot. So this stock went public, went up 200x.

Tobias Carlisle: Wow.

Mark Yusko: So our cost was 50 cents, stock was trading at 100. And we get distributed shares after the lock up, and I call the guy, the chair of the venture capital fund and said, “What should I do?” He says, “Well Mark I’m an insider so I can’t really talk, but I can say two things. Revenue’s six million, market cap six billion.” And I was silent for a second, he says, “Mark are you still there?” I’m like, “Yeah, I got to go. I got to go. Sell, sell, sell, somebody sell this.” And here’s the crazy thing, stock went to four, it went down 96%, at four it still would have been an eight bagger.

Tobias Carlisle: Still would have been a great return.

Mark Yusko: Venture capital investment, right, but we got out at 100, so we made 200 times our money, which I haven’t done very many times in my life. It wasn’t a lot of money.

Tobias Carlisle: You only need a couple of those.

Mark Yusko: Yeah, we turned 100,000 into 20 million for the university, so that was good. But it made me realize how quickly we need to change. So I go to that September board meeting and say, “We need to put a bunch of money in hedge funds,” and the chancellor says, “Well that’s going to be a problem.” And I said, “Well why’s that?” He says, “Well we banned hedge funds a few years ago.” “What do you mean you banned them?” “Well there’s this nasty article about Julian in Business Week and they banned hedge funds.” I said, “All right fine, we’ll have no hedge funds. We’ll have long short equity, opportunistic equity, absolute return, and enhanced fixed income.” And he says, “That’s just nomenclature, right?” And I said, “Yep.” He said, “Good as long as we’re clear.”

Mark Yusko: So we did put 60% of the fund in hedge funds, and that was to get protective. And so from 2000 to 2002 market fell 53% peak to trough, and remember that was when we had the green span put, so the market couldn’t go down … [inaudible 00:32:31] had no sells. 100% buy ratings, no one thought you could ever lose money. If you held those four stocks for the last 20 years your return is negative. Microsoft’s done well, the other three are still down. And Howard Marks has a great line about this, one of the great value investors of all time has a great line, he says, “There’s no investment good enough that you can’t screw up by paying too much.” And the inverse is true, “There’s no investment bad enough that you can’t fix with a low price.” There is a price for everything.

Tobias Carlisle: Right.

Mark Yusko: And so we got hedged, we were able to be flat from 2000 to 2002, which I’m not going to break my arm patting myself on the back for not making money, but we didn’t lose any money. And one of my favorite again value guys, Roy Neuberger, founder of the Neuberger and Berman. He went in the office every day until he was 94, it’s one of my goals, and managed his own money until he was 101, second goal, and he finally passed at 105. So pretty good life, and said there were only three rules to managing money. Rule number one, don’t lose money, rule number two, don’t lose money, rule number three, don’t forget the first two rules.

Mark Yusko: So as a value biased person, I’ve at least come to appreciate my blind spot on growth and momentum, and I’m still pretty bad at it but I’m not as bad as I used to be. But I really do still think that you make the most money if you allocate to areas when they’re really, really cheap. And so maybe one story from 98 when I first started, because I think it’s applicable right now in real time. So in 1998 I get to North Carolina, we have no investment policy, we basically have stocks and bonds. We have no hedge funds, no private, no real estate, no energy. And I had this rule if I hear it once I remember it, if I hear it twice I write it down, if I hear it three times I do something about it.

Tobias Carlisle: I love that.

Mark Yusko: And so I saw this cover on The Economist saying that the world was a wash in oil. There was the ruffnecks covered in oil. And in the article it said oil was 11, it was going to five, and some day oil would be free. That just doesn’t sound right, it sounds like it costs money to get it out of the ground, so free sounds like the wrong price, but okay fine. But I remembered it. Two weeks later I saw Richard Rainwater on the cover of Business Week and it said he was naked long 900 million dollars to oil futures. I’m like ding, ding, ding, tore that out, put it out on my desk, wrote it down. Two weeks after that three guys trained by Richard came into my office in Chapel Hill and said, “Hey we’re raising natural gas partners to go invest in energy, and don’t you want to invest?” And I said, “Yes.”

Mark Yusko: So got to do something about it, go to the board meeting, say, “All right I want to invest with these guys. I want to put 1% with NGP, I want to put 5% in energy.” My board chair says, “Mark that’s the dumbest idea ever.”

Tobias Carlisle: It’s going to zero.

Mark Yusko: “But if you really want to do it, okay.” And I’m like, “Okay great.” And he calls me in the chancellors office after and he says, “Mark when I say that’s the dumbest idea I ever heard, that’s what I meant, the other stuff was just to be nice.” So chancellor has this great line he says, “Well Max if we’re not going to take his ideas we should just fire him right now, but you know he’s only been here a couple months so we should probably try a couple ideas and then if they don’t work we can fire him.” I’m like, “I’m standing right here.” So they didn’t fire me, they let me do the 5%. That 5% generated 25% of the endowments returns the next 10 years.

Tobias Carlisle: Wow.

Mark Yusko: Not because I’m a genius, I’m not a genius, it’s because Richard Rainwater’s a genius, Natural Gas Partners guys are genius’s, Boone Pickens was a genius. All these guys were buying what was on sale, and so I feel like we’re there in energy again. Nobody wants to be in energy, energy is 4% of the S&P. I was just at an annual meeting yesterday, no two days ago, and the firm does financial services and energy. It’s so bad that their LP’s are forcing them to divide the fund into two funds. And I went to the energy breakout and I’m not exaggerating, there were 200 people at this meeting for the general meeting, in the energy breakout other than people that work at the firm and their portfolio company CEO’s, there were five people, five.

Mark Yusko: So I think this is that time where you’ve got to buy what’s on sale, you’ve got to do what’s hard, which is in life if you do what’s hard it’s better than do what’s easy. And you got to step up and really look. Now it’s dangerous because there are a bunch of companies that literally are going to go do zero because they have too much debt, but there’s a bunch of really good companies with really good assets. And despite what [inaudible 00:37:33] cars next year and there are not going to be a million robotaxi’s driving around next year. And oil and gas is going to be a big part of our economy globally for the next 100 years or so. So I feel-

Tobias Carlisle: Yeah, I couldn’t agree with you more there.

Mark Yusko: Yeah.

Tobias Carlisle: There’s two things that I just want to ask you how you resolve the conflict between on one hand rebalancing and getting back to where you need to be according to your guidelines or your policy. And then Julian’s double up when you have something moving together. So how do you resolve that tension between those two?

Mark Yusko: That’s the genius of Julian, right? I mean I think in everything we do whether it be when is the right time to buy a cheap asset, when to catch the falling knife versus when is the time to sell an over appreciated asset. Look, I’m on record and everybody likes to tease me on Twitter about it, I’m on record saying a year ago in October that I thought the market would fall 40, 4-0, percent. And everybody said, “Oh but it’s up 24% this year.” I’m like, “Yeah back up three months boys and girls, we’re up five, we’re up five. Not 35, not 55, we’re up five. And if we go back another year to January 2018, now it’s almost two years we’re up about seven, which is about three percent a year.” So that’s not really that great, bonds are actually outperforming, and TLT is outperforming by a lot.

Tobias Carlisle: Right.

Mark Yusko: But it is a very big challenge to say was that the right time to want to get hedged? And I had this one guy on Twitter who was really busting on me say, “You’ve been negative all year and look how great this year’s been.” I said, “Okay, but you make the assumption that because I was negative on one asset that I haven’t done anything, or I just got short that one asset.” In fact what I did is I sold the S&P and I bought a diversified basket of six things, I bought some Bitcoin, I bought a proxy for mining, which was AMD. I bought what we have our fund called the digital asset index fund, which is a basket of the top 10 cyptos. I bought some TLT and I bought our hedged equity fund, and I bought our merging markets fund. And that basket of six things is actually up 51% and the S&P is up 25. So I feel pretty good.

Tobias Carlisle: It worked out.

Mark Yusko: Yeah, I’m an idiot for not buying the S&P, but I feel less of an idiot because I bought other stuff that I thought had better value. So the specifically answer your question, which is a really, really important question, is how do you balance between that tension, that creative tension or that intellectual tension between rebalancing and letting your winners run. I think it really is, that’s the gut feel of investing. And I’ve read this great book and I share it with everybody called The Tao Jones Averages, and Tao is spelled T-A-O, and it’s a mix of Ancient Chinese philosophy and investing. And basically what it talks about is most guys, which are most investment people unfortunately, we need more women in the business, but most guys tend to be very analytical, very right-handed, very left-brained, very backward looking, driving with the rear-view mirror.

Mark Yusko: And that tends to work in most situations, but it works very, very poorly at inflection points, particularly inflection points at the top because you drive right off the cliff and lose a lot of money, like 2000, or 2008, or right like I think now. It also talks about most women actually are more left-handed, or creative, or right-brained. And what you should really be is whole-brained, you should use both sides of your brain and you should have a little balance. And so I think you have to have that whole-brained balance of trusting your intuition, that’s super computer in your gut.

Mark Yusko: They say the gut biome is smarter than our brain, has more synapses and all that good stuff. And there’s a reason you feel sick to your stomach when you’re about to make a great investment. And there’s a reason you feel euphoric when you’re about to make a really bad investment. Because your gut is taking all this stimuli and when you’re making a really bad investment decision, which is investing in a peak or selling at the bottom, everyone’s telling you how smart you are because everyone else is doing it. And that’s why look over the last 20 years just crazy stat, if you just bought and held stocks you made eight, bought and held bonds you made six, if you had a diversified portfolio you made seven, average investor made three-and-a-half. [inaudible 00:42:34] that’s not what they do.

Mark Yusko: Human beings buy what we wish we would have bought, and we sell what we’re about to need. So we come late to the party, and then we sell after it goes down, and then we buy what we wish we would have bought, and we sell after it goes down. And so having the ability to step back and say, “Okay I will have a disciplined process of rebalancing, but not to a point.” What I do is I have a range around my strategic target. So if my target is 25, I might have a range of 15 to 35. And when you get to 35, you start to rebalance. Maybe don’t go all the way back to 25 right away, but you at least get back under the 35. And then if things get really egregious, you go back to 25. And if things get really really egregious, you might even under weight.

Mark Yusko: And so that comes from pattern recognition, but having some discipline process that forces that first step, because it’s always easier to make the second step. If I cut from 37 to 35, go from 35 to 33, or 33 to 32 is a lot easier. If I just let the 37 run, and then it goes to 34 I’m like, “Oh well if I can just get back to 37 then I’ll get out.” And then it goes to 31, and now you’re losing money as opposed to being in control. And I think that’s where the average person gets hurt.

Tobias Carlisle: I love that. I want to talk to you about Morgan Creek Digital, but first we need to talk about Morgan Creek itself. So you launched that in 2004, what’s the philosophy at Morgan Creek and how do you express that philosophy?

Mark Yusko: Yeah, so we’re really a pretty simple firm, so we’re a registered investment advisor, and we do both advisory as well as a little asset management. And the idea was to bring that endowment model of investing to other investors, our tag line is alternative thinking about investing. People like to talk about alternative investments, always say alternative to what? You have stocks, you have bonds, you have currencies, and you have commodities, that’s it there’s nothing else. Well what about hedge funds? Well you own stocks, you own bonds, you own currencies, you own commodities. No different than if it’s in a mutual fund, or a private partnership, or a separate account. A hedge fund is just a legal strategy. Well what about private equity, I own common stock, preferred stock, or a convertible bond.

Mark Yusko: Okay, what about real estate? I own equity of the deal, the debt of the deal, or the land, the commodity. What about derivatives? Well, okay derivatives derive their value from stocks, bonds, currencies, commodities, so ultimately driven by one of those four things. So there are no such thing as alternative investments. There’s alternative ways of thinking, and to us that is one having a value bias, two embracing the liquidity premium, three having discipline, four making sure that you do the work to get access to the best and brightest, and follow the talent. Because the talent will always lead you to the best investment opportunities. And I have no pride of authorship, I’ll copy from the best of them. Picasso said, “Good artists borrow, great artists steal.” But I will steal from the best of them, and I say I have the best job in the world. I get paid to travel around the world and talk to the smartest people in the world about investing, how awesome is that?

Tobias Carlisle: It sounds pretty good.

Mark Yusko: It’s just awesome. And actually Twitter makes it even easier. Good example, so I spoke to a big bank had their annual meeting in Greece and they had 300 of their clients and they invited me to come over and Nile Ferguson was there, and a couple others. And someone saw that I actually got there through a crazy flight, I landed at 4:00 in the morning. I took a selfie of myself with the clock saying 4:00 and no one else in the airport. And three different people in Athens saw that tweet and said, “Hey you’re in town let’s get together.” And so I got to spend three hours with some amazing investors that gave me really, really interesting insights on what’s going on in Greece. And most people don’t know Greece is the fastest growing economy in the EU today.

Tobias Carlisle: I did not know that.

Mark Yusko: And the only thing better than that was four years ago right when the Greek crisis was at its crescendo, I was actually on vacation and I tweeted a picture that I was in Athens. And a guy said, “Hey you’re in town, you want to meet the president of the biggest bank in Greece?” I’m like, “Yes, I’ll hit that bid.” And within two hours I was in the bank president’s office and it was me, himself, two armed guards, and that was it. And after an hour-and-a-half I said, “I got to go, the boat’s leaving for the cruise,” because he would have talked to me all day because he had nothing else to do because the banks were closed.

Mark Yusko: But my favorite part of the story is I had this crazy idea that obviously start up companies in industries where there are lots of liabilities pretty cool, like a start up insurance company, or a start up tobacco company would be really cool. But a start up bank in Greece I thought would be pretty cool because you have no NPL’s. And I thought he’d [inaudible 00:47:31] great idea. In fact, I know where we can get a license and we’d only need about $10 million in capital. I said, “Did you just say we like you and me?” He’s like, “Oh hell yeah, I only make $300,000 because we’re 60% owned by the government. I’d love to work for a private company, let’s do it.” So my wife wasn’t into that one, so we didn’t move to Greece. But it probably would have been a good investment.

Tobias Carlisle: Could have been nice. So tell us about Morgan Creek Digital.

Mark Yusko: Yep.

Tobias Carlisle: Where did the idea come from and what is it?

Mark Yusko: So to finish the thought on Morgan Creek, so we start off advising families, institutions, and then we created fund to fund businesses, manager to manager businesses, then we started going coinvestments, then we started doing direct investments and special purpose vehicles. And today the bulk of our business is private investments around fund to funds, coinvestments and these special purpose vehicles. Like the latest one is we’re doing a special purpose vehicle for Draft Kings, we do individual deals. And then six years ago, I’ll go all the way back to go forward.

Mark Yusko: So six years ago Dan Moorehead, a guy who spun out of Tiger, we were his first institutional money, I’ve known Dan for 25 years, he worked for Julian. He decided to start a fund 14 years ago, we backed him, six years ago out in California he says, “I’m shutting down the fund, giving back a billion dollars, and I’m going to start two funds. One in Bitcoin, one in crypto infrastructure.” And obviously I was not dealing drugs on Silk Road, I was not a cryptography student, so I didn’t really understand Bitcoin back then. But I did understand picks and shovels. And if you’re going to do infrastructure of a new asset class I want to be there. So we put a little money in Dan’s fund, it’s up 10x, that’s great. First of my many bad decisions, I should have done a Bitcoin fund, that’s up 140 times.

Tobias Carlisle: Wow.

Mark Yusko: Didn’t do it. So fast forward a couple of years, I write about Bitcoin situation, clients say we’ll fire you if you don’t stop talking about magic internet money, go back to talking about real stuff. That’s a really radical reaction, but okay. In fact the next paragraph was about Saudi Equities, and they had no problem with that, but they had a problem with Bitcoin. Bitcoin’s been a way better investment than Saudi Equities over the last five years. So fast forward another couple of years we’re investing in a special purpose vehicle for Lyft, we’ve done a lot of ride sharing, we did Uber, we did Lyft, we did DiDi, we did Quadi, we did Grab, we did Ola. So we did a lot, and we’re in Lyft, and Pomp and Jason Williams, Anthony Pompliano and Jason Williams run Full Tilt, so we coinvested together in Lyft. We met for 20 minutes, I didn’t think anything of it.

Mark Yusko: Then actually podcasts, I love podcasts, I heard Pomp on Patrick O’Shaughnessy’s podcast, I’m like sounds pretty smart for a young guy I should meet him. So I met him for breakfast, hour turns into three hours, three hours turns into six hours. Then we meet the next day, and within a week we’re like, “We got to work together.” So we set up two years ago a subsidiary of Morgan Creek Capital, called Morgan Creek Digital Assets. And then we launched a fund a year ago to invest in infrastructure around block chain technology and crypto. And we invested that, raised $40 million, invested that, now we just did our first close for our second fund, out raising about 250 million and did a close on 60 million here recently.

Tobias Carlisle: Congrats.

Mark Yusko: Thanks.

Tobias Carlisle: And so one of the more visible parts of Morgan Creek Digital is the index.

Mark Yusko: Yes.

Tobias Carlisle: Can you tell us a little bit about the index?

Mark Yusko: Yeah, so we went down the picks and shovels route and said look if you think about institutions, the great wall of money as I like to call it, they’re not going to go speculate in crypto right away. What they’re going to do is they’re going to want to own picks and shovels and infrastructure, just like back in the internet. You invested in Yahoo, and Google, and you didn’t necessarily speculate in little internet companies, but you want to do the infrastructure. I think the same thing can be true here. So we raised a venture capital fund to invest in infrastructure.

Mark Yusko: But while we were out on the road talking to people they said, “Well yeah, but I might want to put a little bit in crypto itself, particularly Bitcoin, you guys talk about how Bitcoin is one of the most important computer networks in the world, the only way you can own it is through the protocol.” It’s like Amazon is a network, Facebook is a network, if you want to own those networks you own own the corporate entity. Bitcoin is a network, the only way to own it is to actually own the protocol itself, and that’s the difference between the internet age, all the value went to the application developers not the protocol developers. Tim Berners Lee invented the internet, not a rich guy.

Tobias Carlisle: [inaudible 00:52:12].

Mark Yusko: [inaudible 00:52:12], that’s true. He’s amazing, he’s amazing and he’s working on something in crypto that might make him a really rick guy. But amazing, amazing guy. 30 years ago wrote the first web page, now we have 1.7 billion globally. So it’s a big deal. But Krugman said it would never be more important than the fact … [inaudible 00:52:35]. So here we are at block chain technology and a couple big institutions said, “You know if you guys had an index fund where we didn’t have to really think about it, we might be interested.” So we went out and one of our investments was with a firm called Bitwise, an asset management firm, and we said, “Hey could we cobrand an index fund?” So what we want it to be, and it’s very arrogant I know, but got to shoot high to maybe do well, is we want to be the S&P 500 of crypto.

Mark Yusko: Well what does that mean? It doesn’t mean we want to be the S&P 500, it means we want to do what they do. So what did they do? They said all right we’re going to have an index, and there are a lot of indexes, thousands of thousands of indexes. In fact, there are more indexes than stocks. But there’s only one S&P 500. Why? Because they said we want to have 85% of the market cap of the industry, we only want to include liquid names, so they don’t allow closely held companies. Like Tesla should be in based on size, but it’s not because it’s too much owned by Elon. And then we as a committee are going to decide what companies represent American enterprise.

Mark Yusko: So they kick out GE and they put in Twitter, interesting move, that’s been pretty decretive actually. But when they kicked out Woolworth and put in Yahoo, that one didn’t work out so well. So they’re not perfect, but the committee runs it. So we set up the same process, we have a committee, we picked the top 10 crypto that are liquid. So we have the top 10 excluding XRP and Steller, because they’re too closely held by the foundation and those people are really mad at us, but it’s nothing against them. It’s just we have to have a process. So that digital asset index fund is a pretty cool thing because it lets people just have passive exposure to the market cap of the industry as it grows. You can get it as a credit investor, small investment minimum. And we started to see some people get interested in it.

Tobias Carlisle: That’s fantastic. I want to be sensitive to your time.

Mark Yusko: I could talk all afternoon, I love talking about value, I love talking about the things you want to talk about because one you’ve done great prep, two you’ve got lots of interesting topics that you want to dive into. So I could probably talk for too long, but then people get bored and they turn us off.

Tobias Carlisle: Well I really do appreciate the time Mark. If folks want to get in contact with you, you’re a great Twitter follow, what’s your Twitter handle?

Mark Yusko: So just @MarkYusko, M-A-R-K-Y-U-S-K-O. And we have a website morgancreekcap.com. And there’s lots of resources out there. We actually have a pretty cool YouTube channel it’s called Around the World with Yusko. So if you just type my name into YouTube it’ll come up. And what we do there is once a month we do something called Around the World with Yusko. And it’s called Around the World with Yusko not because I’m an egomaniac, but we had a marketing guy, we used to do a lot with Merrill Lynch, and there was this marketing guy and we wanted to originally call it the Morgan Creek Capital Update.

Mark Yusko: And he said, “No, no one wants to talk to Morgan Creek Capital, they want to talk to a human being.” So he said, “We’re going to call it Around the World with Yusko, and it’s going to be like a call in radio show. And it was awesome, we did it for about six or seven years, and it turns out people do want to talk to human beings. So we do a similar thing, it’s not a call in show but it’s a once a month webinar, and we do lots of different topics. Recently we did crypto, but we’ve done China, we’ve done oil, we’ve done value investing, we’ve done all kinds of stuff. And those presentations are up on the YouTube channel if people want to get to them.

Tobias Carlisle: That sounds great, I’ll check that out. And Morgan Creek Digital for the index, where do folks go?

Mark Yusko: Yes, so then if you come to Morgan Creek Cap, two things will pop up, one will be all of our resources and the other will be a landing page for the digital asset index fund, and that takes you to Bitwise out in San Francisco to buy the fund directly. And that’s pretty cool because you can do it literally directly online, it’s really quick. We’re not quite where we should be, which is literally through facial recognition and block chain identification, we don’t have to submit utility bills and all that other crap, but we’ll get there eventually, and hopefully we’ll invest in some of the companies that make that happen.

Tobias Carlisle: It’s absolutely fascinating, Mark Yusko thank you very much.

Mark Yusko: Thanks Toby, love to be with you this afternoon. And again love the show, and love to talk value with people who understand hashtag the value of value.

Tobias Carlisle: That’s very good, thank you.

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