GP/LP setup: contribute 25%+ of capital so that he can negotiate with himself as the GP to the primary LP. Leads to budget-based structure with larger carry (30%) vs. fee-driven model.
Repetitive Compulsion: describes the pattern whereby people endlessly repeat patterns of behavior which were difficult or distressing in earlier life
'the patient does not remember anything of what he has forgotten and repressed, he acts it out, without, of course, knowing that he is repeating it ... For instance, the patient does not say that he remembers that he used to be defiant and critical toward his parents' authority; instead, he behaves in that way to the doctor'. Freud
Wanted to build Berkshire 2.0. Was always ambition.
Buffett used capital to accelerate his worldview — e.g. American exceptionalism, American GDP, belief in American consumer and American economy. Voting with dollars that were critical infrastructure for the American middle class.
Would like to re-imagine what that means for 2020 - 2070. "How can I use my capital to...":
- Accelerate my version of what ideas are really critical
- Define what American exceptionalism should mean
- Close the inequality gap
- Drive a renaissance in the American middle class
Studying capitalism over hundreds of years and
Foundations + charitable investing are outcropping of Western guilt — much giving in non-Western societies is anonymous. Skeptical of most foundations.
Most true innovation in the next 50 years will be technological in nature, with resources that have for-profit incentives, so need to develop through for-profit structures.
Will compound through for-profit structures that can aggregate human capital, social capital, political capital and intellectual capital to solve problems.
Part 1: Build an economic engine that predictably compounds book value (money in = money out at predictable ROR)
- Prong 1: buy or build private businesses — compound at c. 40% annually
- Prong 2: public investing — IPO 2.0 (SPACs), suite of ETFs, etc.
- Prong 3: experimental bets — crypto, emerging managers program
Part 2: "Top Co" sweeps in all profits and allocates (a la Berkshire head office) — needs to go public so others have opportunity to benefit from owning a piece of it
Emerging manager program ("how do we predictably return 20-30% every year?")
- Manger concentration (e.g. style box mandate) always drives decaying returns. Either surface area of skill becomes rigid and fixed and so you force them to go outside of their sweet spot, or worse, they become risk averse because they have not refined their own psychological biases (repetitive compulsions).
- Best way to mitigate this risk is to always be onboarding new folks who don't come with this baggage. So maybe the best way to run $500B at high rates of return is to have 500 people each running $1B.
- This program is the grist for the mill, with meaningful incentives
Emerging Manager Applications: 350 applications in 1 week; about 100 are very compelling; "the kinds of people we would want to see succeed in the world". The hard part will be how do we pick — will do so for diverse ways of thinking. People who can see others psychological patterns and biases and see negative compulsions in each other.
Proposition to Emerging Managers from Social Capital: (1) order mgmt infra, prime brokerage infra, legal infra, compliance infra..."turn key to run capital". (2) Educational framework (see above); teach-ins, learning sessions, idea dinners, to learn cycle of investing in a safe way/space. (3) Comp model that makes it hard to decide whether to scale — up to $50M take 30% of profits with no hurdle. Over $50M impose hurdle, with economic indifference between $50M and $150M AUM. (figure out where in the distribution you want to be...scale is not default option). (4) give you an audited track record — seed + fundraise etc. together.
Social Capital is running a best ideas book on top of emerging managers. Also gets opportunity to identify talent + learn from talent. Starting in US Equities because it has clear guardrails and fast cycle time (a few years).
All companies are the same (2 day old or 200 year old), but the weights are different. Only a few of them matter:
- Product-Market fit
- Integrity of Management
- Headwinds or Tailwinds — biggest risk in the business (of managers)
- Political Infanticide (level of dysfunction) — Glassdoor, how politically correct, etc.
High scores on 1-3 and low on 4 is important at any stage.
Will always be a dynamic where a small percentage of stocks generate the overwhelming majority of returns — hence EM's are "pickers", and this is what is needed in the market to win. Looking for 10% of companies that produce 90% of the returns.
Incredibly opportunities abound in a world of 0 rates because it forces you to have a very unique viewpoint on future returns. Easier when risk-free rate is 6-10% because can be lazy...find obviously cash-flowing businesses and trade them against the risk-free rate. When rates are 0 time horizons are infinite...there are so many businesses that are relatively worthless. Forced to understand technology more (which is about the compounding rate of its ability e.g. how is OKTA compound the rate of its SSO platform?) How fast is Atlassian's open-source architecture generating scale? Forces an extreme amount of creativity that isn't required when risk free rates are high.
Biggest differentiator for EMs: building a community + get an audited track record.
3 business lines ready for prime time at Top Co:
- Climate change — crucial
- Education — we're going to rip the band-aid off an move to a more ROI-oriented way of valuing education
- ...This will also happen in Healthcare
Process:
- Social Capital generates 30-40% returns YOY
- Profits flow to Top Co
- Top Co allocates to business lines that advance a worldview that it believes in. Example: disrupting utilities e.g. residential solar + residential storage + software for individual to understand energy generation and economic value and contribute back into the grid...this will incinerate $1T of power infrastructure (PG&E is the tip of the iceberg...incredible bankruptcies including associated debt). This will happen in 1-3 years. Battery storage and resi solar are meh businesses...want to own the software layer.
2005 - 2011 in those six years critical ingredient technologies - OS's of the future - hit critical scale: AWS, iOS, Android, which enabled the next decade of innovation.
We are at a similar point in biotech now. e.g. we are seeing improvements in delivery mechanisms (carti), implementation mechanisms (crispr) — set us up for a renaissance in biotech. Looking to own critical resources for this future.
Lots of work — most of it is thinking. Team is small. 5 partners at work + partner at home. Total Social Capital office is 30 people, optimized for a-political and super high integrity. Also have partners (e.g. Hedosophia...)
Catching personal insecurities driving bad business decisions is the single biggest thing. Fixing that leak is a superpower.
Creating non-zero-sum outcomes is healthy — to aggregate a group of people committed to the same philosophies and objectives.
Daily habits: family breakfast + lunch + dinner. Exercise.
Pet peeve: people hate in others what they hate in themselves — can uncover why you dislike someone.
Life lesson he wishes he knew earlier: Everything comes from your psychological preparedness. All of your psychological peaks and troughs come from your childhood. If you have a barren toolbox you will not be prepared (and therapy is not a stigma...it is immensely powerful)