← How I Invest with David Weisburd
How I Invest with David Weisburd
E113: Christopher Zook: Playing to Win- Lessons learned from scaling CAZ Investments to $8B and Building a Winning Culture
00:53:13
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- [00:00]
A
Alongside Arctos, you own a piece of the Los Angeles Dodgers, the Golden State warriors, and Liverpool, among others. Why are you investing into sports franchises?
- [00:08]
B
If you want a live event that sports. The only way to do that currently is through professional sports. That is a massive sea change, and it means that those who have the content are able to set effectively the rates that they want. From an advertising perspective, when you own a NFL team, a baseball team, a basketball team, a hockey team, you own your 1/30 or 132nd of the entire league. And in the case of the NFL, just the distribution from the league itself is over $400 million a year. Just because you own 1/32, you could lose every single game. But if you own 1 32nd, you're going to get that $400 million check.
- [00:40]
A
Christopher, I've been excited to chat. Welcome to the podcast.
- [00:42]
B
Thank you for having me. I really appreciate it.
- [00:44]
A
Thank you for jumping on. Christopher, you own a piece of Los Angeles Dodgers, Golden State warriors, and Liverpool, among others, alongside Arctos. Why are you investing into sports franchises?
- [00:54]
B
You know, it's funny because everybody asks me why we're doing sports, and they assume it's because it's cool and it's fun and it's really neat to talk about, and it is cool and it is fun and it is really neat to talk about. But that's not actually why we're involved in sports. Candidly, I didn't realize that we had a team in the World Series in the Dodgers until literally somebody told me that we did. Because I don't follow sports that much. I'm gonna take one step back to go two steps forward. So we're a very, very thematic investment firm. That's the way we're wired. That's the way we've always been. And so the theme that we're focused on in this situation is the change of consumer behavior. Sports, specifically cord cutting and the moving from cable and broadcast to streaming services has created a huge problem for advertisers because the fact that they can't reach their audience, because most people aren't going to watch a commercial unless they just don't have a choice. And that's almost only with a live event. So in 2005, as an example, 13 of the top 100 live events were sports. Last year, it was 97 of the top 100 events were live sports. Live, you know, were sporting events. That is a massive sea change. And it means that those who have the content are able to set effectively the rates that they want from an advertising perspective. Perspective that feeds into the business model. Well, if you want a live event that sports. The only way to do that currently is through professional sports. And so that's why we're involved in professional sports. It is an irrefutable trend. It's an irrefutable tailwind. And we love what is happening in the overall, you know, theme that we're involved in.
- [02:13]
A
How did you get involved in all these sports teams and how do these opportunities present themselves?
- [02:17]
B
So we have some great partners, and we. We're very open to partnering with everybody who's doing something in sports. It's pretty much not a week that goes by right now that we do not hear about something. You. It's pretty logical. We allocate very large amounts of capital. People want our capital, therefore they show us what we're interested in. We have told the world this is our one of our major themes. And so therefore they want to help us invest in that theme, Whether it be a transaction that they're working on privately or they have a fund that obviously is investing in that particular sector, they obviously are going to bring it to us. And that's how we really got involved, because we saw the trend of cord cutting. And whenever we see a theme, we go really deep into our knowledge and understanding of all the key players in that particular theme. Then we try to determine, best we can is what's the best risk reward way to take advantage of that. And that ultimately led us, in this case, to sports. We kind of put the word out, and then, you know, Arctos was the first group that was involved in being able to get permission to own professional sports teams in multiple leagues as a private equity firm. That happened with baseball, then happened with hockey, it happened with basketball, et cetera. And then most recently, obviously, the NFL is permissioned to few firms to be able to participate in the NFL in a very limited way. And we're still working on the rules. We don't know exactly what those are going to be yet, but they're taking shape very quickly. And so pretty much all of the major sports franchises now are accessible to private equity in the right situation, without conflicts, et cetera. And we're just really excited about being able to participate in all of the above.
- [03:51]
A
A lot of critics would say that owning sports franchises relies on the grade of fools theory that somebody will pay more money for it. How do you underwrite a sports franchise?
- [03:59]
B
You know, I would agree with that statement 20 years ago. I would probably even agree with that statement 10 years ago. And I was the greatest skeptic by far. Yeah, everybody that we've invested with in sports will tell you the same thing. Christopher was the greatest skeptic that they had to deal with. It took 18 months from start of our diligence to deciding that we were going to get involved because of that skepticism. I always thought it was just a trophy asset, no pun intended, but that just people wanted to own it because it was something they could brag about. And for a long time that was kind of true. What has changed is the business models of these businesses where they have raving fans, otherwise known as fanatics, fans that are generational. Had a great conversation actually with Sam from Fenway Sports Group, that is, you know, the Boston Red Sox, et cetera. One of the things when they're deciding what they're going to invest in, they literally ask the owners of a stadium, how many people want to have their ashes sprinkled on your stadium? That is a raving fan, that is a fanatic, that is multi generational. So that is why it made sense to understand it because of cord cutting. But it made more sense because the durability and the consistency of the revenue models. This is what really got me across the finish line in especially in North America. When you own a NFL team, a baseball team, a basketball team, hockey team, you own your 1/30 or 132nd of the entire league. And in the case of the NFL, this is public knowledge that literally just the distribution from the league itself is over $400 million a year. Just because you own 132nd, you could lose every single game. But if you own 132nd, you're going to get that $400 million check. That's a nice head start. So the underwriting question that you ask is most of these businesses are underwritten like any other. What is their growth rate? What is their durability? The great thing about these businesses in North America is that it is a legal monopoly. So you can really know the durability of the revenues are going to come from the league itself, they're going to come from the sponsorships, and then they're also going to come from the fan experience. And you have to do a good job in all of the above. But when you think about the naming rights on a stadium, that may be a 10 year contract or even a 20, your contract, you're going to get that payment no matter what. If you own a piece like the Golden State warriors, the suites there, last I heard there's like a two year waiting list to be able to get into buy a suite at a very healthy price. So you have these very durable and resilient revenues that are much less vulnerable to economic swings. So we look at all of the above. But when you look at metrics, just to answer your question as specifically as I can, most of these trade as a multiple of revenue. Certainly the cash flow underneath it is going to be factored into that. You're going to look at the DCF on it. But a lot of people don't realize that you actually, if you're a taxable investor, can not always, but can sometimes get actual tax benefits from the ownership of that. Maybe they own real estate, you can appreciate that, or maybe there's some goodwill that they can amortize. So there's lots of other ways to generate returns. As long as you do a good job, take great care of your players, take great care of your fans, you do a wonderful job. It's a fantastic business that is evolving quickly because of what's happening from the theme of cord cutting and the ability to really capture more and more of the fan experience. And I could literally talk about this for the entire time, but I'm not going to. But what I will tell you, that is the thing people do not understand enough is how the fan experience is changing. So right now there's technology out there where I have a 2 year old grandson. When he's, you know, 8 or 9 or 10 years old, I'm sure he's going to have a favorite team. And I literally will be able to on my phone, if I buy a subscription to something, I'll be able to put his face and his name on the jersey of the quarterback who's playing the game. That's going to be a lot of fun to watch him just get all excited to see, oh my goodness, look at why I threw a touchdown. So being able to have that kind of fan engagement is just going to increase, obviously advertising revenue, it's going to increase subscription revenue and it's going to be able to take that content that is virtually impossible to replicate and is a monopoly and deliver that in a new and advanced way to the audience. All of that is why we get very excited about sports. And all of that goes into the underwriting.
- [08:00]
A
You wrote the holy grail of investing with Tony Robb. I'm about halfway through. And you've interviewed some of the top investors in the world. What are some common themes among these top investors that you've observed?
- [08:12]
B
One of the things we really did when we chose the folks, many of whom we own stakes in their firms or we've invested with them, we know them very well, is these are people that are focused on adding value. You know, obviously the world of private equity has had its ups and its downs over time from a reputational standpoint, you know, barbarians at the gate and all of those kinds of things. And you know, people just trying to strip out the value and lay off all these people and then make money from that. Okay, there are still some firms that do that, but they're very, very rare. When you look at the people that we interviewed for the book, they are business builders or they're value creators in whatever way that might be, whether it be private credit, obviously is different than private equity. But what we loved about this group is how they are passionate about how do we not only deliver great returns for the investors that give them capital, but also how can they grow businesses, grow jobs, increase the value of these companies and in most cases add significant value to society as well because of the way that they're growing these companies and obviously driving the economy. That was a key theme for us, is that these people are passionate about truly adding value, which ultimately leads to adding alpha and not just being beta. Right? There's nothing wrong with beta, but if you're going to invest in somebody for alpha, you got to know how they're going to create it. The other thing that is most consistent, as we, you know, we interviewed these folks, they all have very consistent playbooks. What is their differentiating factor? What is their unique value proposition? Why is it that they're really better than anyone else? Whether you talk at Robert Smith, you know, an enterprise software, you talk about Ramsey Musalam, you know, at Veritas, and dealing with government related type businesses, you know, all of them, across every spectrum, they have a repeatable process, which is why they've had persistent returns. And then the last thing that I'll say that really was a thread that intertwined among all of them is that they are so very, very focused on culture and developing their team into what is the best version of themselves and really building that in such a way that is sustainable not just for one generation, but for two generations, three generations of their businesses. And those are all really critical things that we believe people need to focus on as investors as well.
- [10:24]
A
So you have their systems, you have their culture, what parts of their businesses are compounding, what's becoming stronger over time and what stays the same.
- [10:32]
B
You know, success leaves clues, I'll quote Tony in that regard. Most of these firms the compounding effect comes from just having more reps. You know, it's something to where if somebody has done, you know, I use Michael Reese at Dial as an example. Now, Blue Owl, if you've done three GP stake transactions, you've got three reps. If you've done 60, you get a lot more reps and you've seen all the various things that could potentially trip you up or that you may have just, oops, we, we did okay, but we kind of missed that. We need to watch for that next time. So the compounding effect of being able to truly see where the puck is going, to use the sports analogy, and to anticipate that just comes with time and it comes with persistence of seeing a lot of different environments, but also being able to endure lots of different, you know, settings, economies, cycles. In business or in just the economy in general, that is where I see the most compounding effect occur. And the other thing that cannot be lost is the compounding of personnel. When you have a great reputation, when you have a great track record, people want to work for that business. You become the de facto first place if somebody wants to be in a particular sector. If you want to be in oil and gas, you're going to want to work for nCap or Quantum. Two people we interviewed for the book, Bob Zorich, Will Van Loe. You want to work for those two firms. They have proven how strong they are and how somebody can develop in a great system. It's no different than sports. Everybody wants to play for the best team. Well, if you've got a great team, people are going to want to play for you. And if you are able to attract great talent, you have a chance to continue to be able to win in the future.
- [12:06]
A
When you look across these managers, you're also invested in dozens of other managers. You see these two conflicting factors. One is the growth of how much money they have to invest aum. The other one is their skill and their compounding of skills. What's the sweet spot in terms of where. Where do you want to be investing in a manager's career?
- [12:23]
B
That's an interesting question because I'm going to answer it in two different directions. So, as most people know, we're one of the largest, if not the largest, investor in GP stakes in the world. We have over 95 different firms that we own stakes in everything from the Vistas, the end caps, the Quantums, the Golubs, some of the very best brands in all of the world. But we also own stakes in firms that people have never heard of that, are much more younger in their life cycle as a business, if you will, or they're in the middle market. The answer as a general partner is you want to own growing businesses. You know, it's Tony says this all the time. Was you, would you rather pay the 2 and 20 or would you rather receive the 2 and 20? Well, I kind of prefer to receive the 2 and 20 by owning stakes in these various businesses and those that invest, obviously you're paying those fees and that carry. So growth is what is the driver there. When you're an investor as an lp, you kind of got to put a different hat on. And that doesn't mean that somebody can't raise a $20 billion fund like one firm is doing right now and deliver great results. In some ways it's kind of helpful. In some ways it's hurtful. It depends on the strategy. And there are definitely strategies that don't deserve or should not have as much capital deployed as people are trying to raise funds to invest in that strategy. That is where we get really concerned as an lp investing with somebody who just because they can raise more money, even though it's not great for the strategy. So there's all kinds of data about how first time funds tend to outperform later stage funds or more mature funds. Well, at the same time there's massive amounts of dispersion. So for the audience here, career risk is a much bigger deal if you go into an early stage manager. But you also may be a hero because you deliver much stronger results. And the reasons are logical. If somebody's first fund, they know it has to work. They will not get a second opportunity if that first one is not great. So you really have to look at it across the strategy. And what we try to do is being thematic. Look for the theme what's the best risk reward? And then what is the very best way to do that? If it's a smaller niche opportunity, well then you want a smaller niche type manager. If it is something that is a broad based theme that you probably want to be with the 800 pound gorilla who has the ability to own that market and to dominate that market. That is another thing that is a little bit unusual about us and it ties to your question. We love sector specialization. The more refined someone's approach is, the better we believe. Not always, but in most cases they have an information advantage, they have a deal flow advantage, they have a diligencing advantage, they have the ability to know where all the moving parts are. So we love Investing across the entire landscape. But if I'm a gp, obviously it's much more about the growth of the business. If I'm an lp, you know, we're investing in a fund right Now. It's a $400 million fund. They will not raise another fund in the future and more than maybe 450 because they know the strategy must stay small to deliver the results. And they are much more about the 20 than they are about the two. And so you got to know as an, as an investor, you have to know what is their true motivation. Is it the 2 or is it the 20?
- [15:21]
A
Is that a common theme that you see among the asset managers that scale, that they started out very specialist and became very good at one thing or do they start and multiple strategies?
- [15:31]
B
There's definitely both. I would say that more often than not, firms have had one very specific niche that they're really, really good at maximizing and then they broaden. HIG is another firm that we own a stake in. They're a great example of a firm that is relatively small funds across all of their different verticals. But they have added lots and lots of verticals. So they have grown dramatically, I think from 13 billion to 50 billion, if I remember the numbers correct, since we took our state in that situation. They didn't do it by just raising a bigger fund, a bigger fund and a bigger fund and a bigger fund. They went horizontally. And then you have other firms like Avista, because I mentioned them before, where they have grown by getting bigger and bigger funds. And then they'll roll out a middle, you know, a mid sized strategy, then they have a small cap strategy and then they have a credit strategy and all these other things. So they're diversifying, but it's all about enterprise software. So they have not deviated from that. And there's no, neither one of them is wrong or right. What I will tell you as an investor, what matters the most is what can be most commonly repeated, most easily repeated, what is going to be most persistent. That's the key word that I tell our team when we're coaching our team. It's about persistency. And there is a big difference between consistency and persistency in at least our mind. Some people might disagree with that.
- [16:42]
A
But for us, one historical, one forward.
- [16:45]
B
Looking a little bit, phrase it slightly differently. What I would say is persistency is you have done the same thing in the same way and gotten consistent results as opposed to consistency just means your numbers have been good over a long period of time. Okay. And again Some people would disagree with that definition. That's what it is for us and it works for us. But to me, if somebody has had great results, but one day they were, you know, buying apples, and the next day they were buying oranges, but they got, you know, 20% compounded annually over both apples and oranges. Well, that's not bad, and that is consistency. But I don't know what the next one's going to be when they buy pears, are they going to get the same 20% or not, as opposed to somebody's like, we buy apples, we do apples, and we don't do anything but apples. And that's all we do. And we've delivered consistent results. Well, that's persistency in our definition.
- [17:29]
A
You want returns on a risk adjusted basis. You want somebody doing something unspectacular in a spectacular fashion, something that you could reliably rely on them for. You have, from what I understand, one of the top track records on the downside. Only 4% of your deals have ever lost money. At the same time, you're investing into pretty innovative businesses and business models. How do you have such a low hit rate when it comes to investing?
- [17:55]
B
The good news is that the batting average is so high because of the fact that we are unwavering in our focus on the downside. And a lot of other people may say something similar to this, but this is literally the way every single conversation starts in our organization. What's the worst case scenario? If we can live with that, the upside will take care of itself and we will dive into every single possible thing. How can this go wrong? How could we be wrong in our assumptions? How could somebody do us wrong? Right? That's the nicest way I can say of putting it that way, you know, how can something happen that we just completely didn't expect, right? What will happen to our investment if that were to occur? We tend to stay away from very highly leveraged strategies because of that fear about the unknown. There was a tremendous number of great businesses that were destroyed because of just over leverage, even though the businesses didn't necessarily get hurt that bad. Leverage cuts both ways. It can drive a lot of returns, but it also can create a tremendous amount of problems in our situation. We focus so much on that downside that it means that we're going to just not be surprised most of the time. Again, the world will change everybody's perception and surprise you at some times, right? Everyone will be surprised at different points. What I will say is that it's really, really rare in the 4% of times where we have lost money or we are underwater at this time, and that's to define that for the audience. Real quickly, it's 96% of all investments we've made in the private markets over 24 years are either a realized gain or an unrealized gain as we sit here today. And we're very proud of that batting average, but we're not surprised. Why? When something doesn't go according to plan, and it doesn't mean we're not afraid of, you know, we're totally afraid of risk. We will take risk, but if we know zero is a real possibility, we better make sure that we're going to get the upside to pay for it, because we want as much positive asymmetry as we can. Most of the time, if we feel like we got 20 to 50% of downside, we want to make sure that we're at least five times that. You know, three to five times is kind of our minimum threshold, depending on the probability, adjusted outcome of how accurate that forecast is going to be and how much we can really protect ourselves on the downside. You know, that is, to me, the. Where everybody should start the conversation. But every single person who comes in, we look at 1500 investments a year. Every single person that comes in wants to tell us about all the upside case, and we have to reprogram them to say, look, I don't want to care about your. I don't care about your upside case. I want to look at your downside case. I want to know if you've done all the work. And if somebody says, well, we don't think that could happen. Huh? Bye. Thank you very much. We'll be the fastest no in the West. If somebody says no, we absolutely, positively know that this can happen. Here's why. Here's why. We're, you know, we don't think it's going to happen, but here's what we're doing to mitigate that risk if it were to happen. Now you've got our attention. You know, when we shorted subprime with John Paulson in 2007, 2008, everybody knows what John did made $20 billion for investors in a short period of time. We were a small piece of that. But what John does not get enough credit for is how little risk we actually took compared to what people saw in the Big Short, which is a fantastic movie. We did not have that kind of downside mathematically. We basically could not have lost more than 20% of our money, no matter how wrong we were. And yet we had the opportunity to make five, six, seven, ten times our money. That is the positive asymmetry that we'd love to find again. Doesn't happen very often, but that's the way that we focus on it. And what I would encourage everybody who's an investor to think about, unpack the.
- [21:07]
A
Details of the trade reference and the big short the movie, tell me about how it was structured.
- [21:13]
B
So I'll take one step back to go two steps forward. I'll use that again because I do think it's really helpful. We're thematic. So here was the theme. We believe the housing bubble was going to burst. I was totally convinced that that was going to happen. And I had no idea how to short a house. I'd had money with John Paulson personally for, at that time, almost 13 years. And when he told us what he was doing on the housing market to take advantage of that bubble bursting, we were completely, you know, bought in. It took us about 45 days to figure out what the heck he was Talking about with CDOs and CDO squareds and all those other kinds of things. But once we understood it and we saw how he was approaching it, it was such a unique model. And so we absolutely went all in, so to speak, on taking advantage of what we thought was just a no brainer of a theme. There's only a few times in people's career that you look back and go, okay, this is a no brainer. The tech bubble of 99, you know, the SPAC bubble of 2021, obviously, you know, buying at the bottom in 2009, there are very few times and you have to make sure you maximize returns during those periods of dislocation, upside and downside. So what John did, which was very well articulated in the book, it's a wonderful book called the Greatest Trade Ever. And it's specifically about John Paulson, which is why it wasn't really referenced in the book because Michael Lewis knew there already been a book written about John. But so that trade was effectively buying puts on mortgages. I'm going to be overly simplistic in my explanation here, but buying puts on mortgages, well, if you buy a put on any asset, security, currency, whatever, the most you can lose is the premium that you put out. So there were more details behind the scenes that I would let John explain if he wanted to share that publicly. But if you buy a put on a mortgage when it's trading at 100 and it goes to zero, you make a lot of money. And if you buy a put on a mortgage that nobody thinks is possibly going to go bankrupt, you can buy that premium that put for very, very, very little. So overly simplistic. In one particular trade with a very high profile name that went to zero, we literally put up less than one quarter of 1% to buy that effectively put cds technically and literally it turned into a $90 gain. 25 cents, $90. That's the kind of magnitude. But that's why we had so much downside protection. Because if all you're doing is you can lose your puts, the premium on the puts, well, you know what your downside is as opposed to people that short a stock and you know, somebody shorts Nvidia at 300 and watches it go to 800, that's a really, really painful ride. In our particular case, we obviously just bought puts on those mortgages, made a tremendous amount of money and really used it as a hedge and a protection against the rest of our portfolio that we felt confident was going to get hurt if the housing bubble burst.
- [23:40]
A
And that trade with John Paulson really put you guys on the map.
- [23:43]
B
It was definitely a seminal moment. I mean it was something that very few people had the courage to go against what appeared to be an irrefutable trend. I cannot tell you how many people told me, oh, you don't understand. Housing prices never go down. Is that true? No. So therefore it was so much convincing and obviously what John did, which has been documented and it was really well done in the big short is it you find the Fulcrum security which for us in our particular case it was the triple B's and some of the double B's, a few single A's. But that's where the really dramatic default rate assumptions of the world were totally wrong. Nobody believed that the waterfall to get really wonky for a second that the waterfall of defaults would get to such an extreme that those Triple Bs would be impaired. Well, they were also very inexpensive to buy puts on those securities CDSs in because of that perception, which was completely wrong. And so during the GFC they obviously had a much larger default rate occur. And so those securities were completely blown out because of the way the waterfalls worked.
- [24:44]
A
And the trade was essentially a first principles trade. You were just not allowing the market to gaslight you into false assumptions.
- [24:51]
B
It's hard and I love the way that you put that because most of the time and SPAC bubble of 21 just as a perfect example, these assumptions that these businesses were going to grow forever and ever and ever. Amen. And never have, you know, reality matter to them. I mean, everyone can go to our website and you can read every single quarterly letter that I've ever written going back all the way to 2001. And if you go back and you read the third quarter of 2021 letter, I use Rivian as a perfect example. I think Rivian makes an amazing product. I think it's a cool, cool automobile. But I also saw that at one point Rivian was trading for more than all of the other auto manufacturers combined, with the exception of Tesla. That was absurd, that point in the company's life cycle. So I used it as the quote unquote poster child of the excess of the bubble of 2021. And so no, we were not willing to let people gaslight us, to use your term, to believe that their assumptions that the wonderful words. It's different this time. Okay? Most of the time it's not. There are some rare exceptions, but that's something to where my spidey sense just goes off the charts when everybody says, Christopher, you don't understand. It's just different this time. You know, I'm not an old man, but people sometimes want to think, oh, you just don't get it. No, no. I got it in 1999 when we shorted the Internet bubble. I got it in 2002 when we bought everything post the recession of 2001. 2002, we absolutely made a ton of money from buying stuff. We don't mind risk, we do mind doing things that just are not smart.
- [26:14]
A
Hey, we'll be right back after a word from our sponsor. Our sponsor for today's episode is Carta, the end to end accounting platform purposely built for fund CFOs. For the first time ever, private fund operators can leverage their very own bespoke software that's designed from the ground up to bring their whole portfolio together. This enables formations, transactions and distributions to flow seamlessly and accurately to limited partners. The end result is a remarkably fast and precise platform that empowers better strategic decision making and delivers transformational insights on demand. Come see the new standard and private fund management@zcarta.com 10xpod. That's z carta.com 10xpod. You've had some very interesting trades and themes that you uncovered historically. What's the theme or asset that you're really excited about today that seems non obvious to others?
- [27:02]
B
Non obvious is the key term there. I knew exactly what I was going to say until you said that little nugget there so great question in that regard. The theme that I think people do understand that they don't appreciate enough is professional sports. And we will go well beyond professional sports. We're working on multiple things in college athletics as well, which is a completely unique new situation for the first time in history in college. So there's lots of things around sports. I don't think people fully appreciate how dramatic cord cutting has changed the way the business models of these live event teams, the live event businesses have had their models changed by cord cutting in a positive way. So I don't think that's fully appreciated. I also don't think everybody says they understand the growth of private assets and that more and more people are going to be investing in alts that I don't think people fully appreciate how much it is because when you look at wealth, and some people get this, when you look at just high net worth investors compared to institutions, the amount of money they have exposure to alternative investments is literally so small, some reports say as little as 1, other reports say as much as 3%. Okay. But it's 1 to 3. It's somewhere in there compared to institutions that might have 20 to 30 or endowments that might have 50. So the amount of growth there is something I don't think fully is appreciated by the marketplace, obviously by the owner of the firms, you know, a part owner of the firms that are managing those assets. Obviously that gives us tremendous opportunity to benefit from that tailwind of growth of private assets. The other thing I don't think people are to the point of your question that they're fully appreciating is what is happening in the world of military readiness. This is an area that, yes, because of Ukraine, it got more attention. Yes, because of what's going on in the, you know, discussion around Taiwan and what's happened in the Middle East. It has gotten more discussion, but not enough. The vast majority of the military's military powers around the world, they are still using 1980s, 1990s technology. They have not fully embraced what, what tech, what AI, what machine learning, what just new types of software have the ability to do to protect people and to ultimately reduce the risk of loss of life in a military environment. So everything from new types of defense weaponry, obviously the Iron Dome's gotten all the attention over the last year around Israel. There are so many examples of where technology is being used in a way to reduce the risk of loss of life, to be able to be much more efficient, much more effective and to where you can have a more significant deterrence because of an advanced technology skill set. Okay. Or tech stack, if you want to call it that. There's so much happening here in the United States right now that most people had no idea is happening about everything. From the way that we're, you know, protecting our soldiers, the way that we're able to, you know, protect our key infrastructure. That's nobody knows about it. They just know about the big planes and the big boat boats. What's happening on autonomous right now, what's happening in drones, what's happening in software is phenomenal for the benefit of the United States. And I think it's going to be a big beneficiary to a lot of our allies around the world.
- [29:59]
A
You're famous in the industry for having a very strong culture. Tell me about the cast culture.
- [30:04]
B
Thank you for that. I appreciate it. The culture for us is we're a Wall street firm. We just happen to be based in Houston, Texas. But we are going to be the very best that we can be, and we're not going to ever just accept mediocrity. Our core quarterly theme this quarter is a quote that usually is attributed to St. Jerome. Good, better, best. Never let it rest until your good is better and your better is best. That is the way that we operate every single day. We want to be the very, very best that we can be. And we've done our annual 360s for a long time. And the thing that makes me more proud every single year is that we believe collectively as a group that our greatest promises. And I'll talk about our promises in a second. But our greatest, biggest strength is the two promises of we will put our partners first, make raving fans of our investors, and that we will exhibit a higher standard of work ethic. Those three. Those are the three consistently. And if somebody puts their investors first, if somebody makes them a raving fan and works their butts off, good things are going to happen. So we do have a culture built around those concepts, and we use our principles, which are all on our website. You can go read them. They're more outward, facing, facing. But then internally, we have our promises, and our promises are the way that we agree with each other, that we're going to engage. They're going to be things like do with excellence. I will do the right thing at the right time in the right way. I will avoid the source. I will avoid gossip and go directly to the source. You know, I will exhibit a higher standard of work ethic. I will think outside the box. I will see the forest not the trees. Every single one of our team goes through something we call Cass University. And literally for the first 30 days of their employment, some people three weeks, some people five weeks, depending on the role, they are literally not allowed to go into the whirlwind. Their job is to understand what we do, how we do it, and just be a student. That's hard if somebody's in the middle of the whirlwind, because the whirlwind will eat that well intentioned time. So we have our promises. We literally quarterly, every single quarter, we will grade people on how they're doing compared to our promises. And by the way, we all fail. We can all do better, but we are going to strive for excellence in every one of those promises. And if we treat each other that way, and we treat our investors that way, and our partners that we invest with, honorably, with respect, being above board in everything that we do, and at the same time be wickedly smart and determined to be the very best, we're usually going to have good results.
- [32:23]
A
I don't think there's a single CEO in the country that doesn't want to have an excellent culture. Talk to me about how you enforce that and what tools do you use in order to create this excellent culture.
- [32:32]
B
It's something to where we have borrowed, adapted, adopted from so many different places, what we consider to be best practices. Again, Tony's quote, success leaves clues. So when you talk about the book Good to Great, the four disciplines of execution, you know, the, all the various books out there, the one thing I mean, I could literally go down, an entire list of books that we have every single person on our team read. That's part of what Cash University is all about. They have a fixed reading list. They must absolutely read those. They then provide a one page summary of not just what the book says, because we already know what the book says. What did they take away from it? What did they, you know, think about how they would maybe suggest that we think about things differently or what does it actually mean to them about what they can practically do to utilize that to be successful in their role. But one of the key takeaways is every single person that has ever been in management and leadership and been successful about it will say the same thing. You must say the same thing over and over and over and over and over and over again and never waver again. Another great quote out there. People will get whatever level that they expect. Okay? People will get whatever they tolerate. There's another way that people will say that, right? I coached High school football for four years. I played football in college. What I can tell you is that every single coach is going to repeat themselves to where they can literally repeat it in their head while they're sleeping. It's just ingrained there, but every single player is going to also know that. And we utilize so much from the coaching world world to be able to do what we do at cas. I mean, as a great example, if I was walking down the Galleria Mall here in Houston and I saw one of my former players who hasn't played for me for 25 years, and I literally just yelled at the top of my voice, what happens to tall trees? He would literally, without even thinking about it, say they get cut down because he knows in practice he heard it every single day. If you play football and you're standing straight up, somebody's going to knock you on your butt. So it is very critical that you have a low base, a low center of gravity, so if you get hit from one side or the other, you're not going to get knocked over. What happens to tall trees? They get cut down. Most of the people that listen to this podcast will remember that a year from now. So you must have sayings that people will understand. In football, fast hands equals fast feet, right? Low man wins. You know, whatever it may be, you're going to be able to remember that. So if we say over and over to our team, we will do with excellence, then if somebody does something that's not great, one of their peers will go to them. And this is the key. The very best teams of any type are not managed by their coach. They're managing themselves. And it's that peer to peer accountability. Somebody looks over and says, you know, you know, by the way, that's not done with excellence. We can do better than that. Let's, let's, let's try it again. That is how we're able to build a culture to where people know what the rules of engagement are. They understand the terminology. They're all singing from the same hymnal or playing for the same playbook, whatever illustration you want to use reviews. And they're able to hold each other to account. And then we have very, very consistent regular checks. A lot of firms do annual reviews. I get it. I understand why we have for years done quarterly reviews, because I don't want primacy and recency to be the impact on that annual review. If you do it in December, you're going to remember what happened in November. Really, really well. You're not going to remember what happened in January? Very well. As opposed to if you do it in April, you're going to remember what happened in January, February and March, a lot more than you will know nine months later. So we want that constant feedback. We want it to be immediate. We want to avoid gossip, which for us is not like, I can't believe he's wearing those shoes. It's, you know, why do we do it this way? If somebody cannot control the decision that you're asking about, you're talking to the wrong person. If somebody doesn't understand why the drapes are a certain way, or why the video was done a certain way, or why the presentation looks a certain way, go to the source, ask that person, they may have a really good answer, maybe that you have a better suggestion. That's great. That's where dialogue comes from. But being able to have peer to peer accountability, consistent rhythm. I actually love it. There's a book that we use called Traction by Gina Wickman. Very, very impactful on our business. So I love their illustration. You know, everybody's familiar with, you know, the heartbeat, right? It goes like this, it goes up and it comes down, it goes like this and it goes up and it goes down. And of course, what happens in somebody when they're working out really, really hard, it's very, very, very, very quick, right? We want our meeting cadence to be the same way. We have a weekly cadence, we have a monthly cadence, we have a quarterly cadence, we have an annual cadence. Because if we as a organization are beating faster, we're going to get more stuff done. And that ultimately is what drives success in any business of any type in our industry or any other is the more consistent we are and the faster that we pulse, the more stuff we're going to get accomplished. And then the last thing I would say regarding that is that it's so much the teaching and the intentionality of that teaching. Using the word coaching again. So in football, you want to train somebody on your, on your offense how to run a new play. The first thing that you do is you show them on a chalkboard or a whiteboard what's supposed to happen. This person blocks this person, this person runs this way, blocks this person, you show it to them. Then in a perfect world, you show them a video of somebody executing that exact play very successfully. A college, an NFL team, whatever. Then what you're going to do is you're going to go to the field, you're going to walk through it one step at a time, literally step, step, step. And you Coach every single step until it's perfect. Then what you do is you jog through it. Then what you do is you run through it, then you come back and you put a defense in front of them and you step, step, step, then you jog through it, then you run through it, then you put the pads on and you go full speed and everything. Obviously you find out what didn't work right, so then you coach and you correct. That is what needs to happen in any business. And we try to take that approach in all of the coaching that we do with our team.
- [38:06]
A
What is the difference between good managing and good coaching?
- [38:09]
B
I love the question because of the fact that most people think they're the same thing. They're not. Not at all. Management is somebody doing what they're supposed to be doing, when they're supposed to be doing, and how they're supposed to be doing it. That is managing. Coaching is truly running side by side with them the best you can and helping them become the best version of themselves. What I will tell you as a coach, there were many times that I would literally get down in, you know, on the offensive line and I would show somebody the first step where hand placement should be exactly how you get, you know, through to the second level, whatever it may be. I would actually do that with him. That is coaching. Management is going to be okay. I'm grading you on the film and you didn't do as well. Well, that's still part of coaching. But management is going to be, you know, is somebody doing the ICMMO the way they're supposed to? Are they asking the right questions and are they doing, you know, if they're in a capital formation, are they making the calls, are they having the meetings, are they doing the follow up? All of that stuff can be managing many times just by looking. Just like in football, a film, right? You look at their statistics, you look at everything in the CRM, you see are they doing what they're supposed to be doing? And sometimes you have to come alongside them and say, okay, here's the things we got to get better at and here's an improvement plan. But coaching is actually shoulder to shoulder. I'm helping you be the best version of yourself.
- [39:26]
A
For a CEO that wants to build a great culture, what's the percentage of turnover that they should expect? In the early years?
- [39:34]
B
It's totally dependent on the industry and the type of people. Obviously, the younger someone is, the more turnover is just natural because of the fact that they're trying to figure out what they want to do, and they're going to go potentially to try multiple things, and that's fine. So that turnover percentage is going to be higher than somebody who's 15, 25 years. What I can tell you, if you're trying to reverse the culture, you're going to have to break a lot of glass. You're going to truly have to potentially do a complete metamorphosis of your organization. If your culture is bad, those same people are not likely going to be the strong culture that you want. You may have to part ways with a lot of really good people. And, you know, it's something to where that's unfortunate, but that is the reality. It's one of the things that makes certain people really good at turnaround situations is they're able to go into circumstances where they're able to say, look, you know, I think these are all good people, but they're the wrong people or they're in the wrong seats on the bus. And that's the other thing I think more than anything else we've done well is we've done our best. We obviously don't get it right every time, but we try to get people in the seat on the bus that's going to give them the best opportunity to be fulfilled. Because people who enjoy what they do are more likely to work harder at it. They're more likely to be good at it, and they're more likely to be, you know, happy about it. You can take somebody who's the best bean counter in the world, but they have a massive need for variety. And you put them in the corner and say, hey, you're going to count beans all day long. They'll be good at it, but they're not going to be happy. So probably one of the biggest changes for us was about a decade ago when we really started learning enough about people using a lot of Tony, you know, coaching and materials and other firms as well to be able to say, okay, is this going to be something people enjoy doing every day? They feel fulfilled by it, it meets who they are, then they're likely to be very, very good. And so any CEO who wants that great culture, you need to understand who your team is right now, what makes them tick, and if they're in the wrong seat on the bus, move them to a different seat. But if they're a cultural cancer, get them off the bus as fast as you can. People ask me all the time, what's the greatest mistake that I've made in the career? And obviously over 24 running this business. I've made a lot of mistakes. The greatest mistake by far is early on, I hired very quickly and I fired very slowly. Right. That was devastating to the organization. What we learned the hard way was hiring very slowly and firing very quickly. If somebody's not a fit, everybody knows they're not a fit. We just made a mistake. It does happen. Somebody was a chameleon during the interview process. It happens. Just move them off the bus as quickly as you can. It's one of the, you know, books out there, Delivering Happiness. They actually, at Zappos, they would offer somebody money after they finished training to leave.
- [42:03]
A
Have you ever thought about doing that?
- [42:05]
B
So we do kind of the same thing. We have. You know, we learned a lot from Delivering Happiness book about, you know, trying to make sure people are out of the whirlwind. That's a big part of where Chaos University comes from, along with a lot of other books. But at the end of that period, we do have a speed bump, and we're going to decide collectively, arm in arm, we're going to go to the other side of the speed bump. We're going to get feedback from everybody that's involved in their teaching and their coaching. And if we all look at each other, go, wrong seat, we're going to try a different seat. Or if they say this is just somebody's not a fit for our buck bus, we will. We will move them on, Move them off the bus for sure. We've. We don't want to ever do that, but it's better for them to not be in a position they're not happy with for a couple of years and then move on. Let them move on with their life. And more importantly, don't damage the culture.
- [42:45]
A
That's one of the hidden reasons why the Delivering Happiness works. Because somebody that doesn't want to be in a culture, they might themselves have a friction of quitting. So you're also enabling them to find a place that they belong in. How much damage could a single employee bring to organization?
- [42:59]
B
A lot. Lot. I mean, it's hard to define, but someone can literally destroy your culture if they're a big enough cancer in that culture. Most of the time, you know, if it's a really good culture, the other people will identify that person. They will either coach them up or they'll coach them out. And that is a way that we really tell our folks, is that, you know, as we've grown so fast, it's really, really hard to know for sure. And we do our best, but we're going to make mistakes. And it's not just leadership who needs to decide that person's not a fit. If five or six like this happened recently, you know, to where five or six people come and say, I'm not sure if you're aware. It's another great thing about quarterly reviews, because you can have those things more, you know, more frequently to be able to get that feedback. You know, just say, look, this person is not working out and they're actually starting to become a distraction for everybody. We just need to let them go because it's not fair to the rest of the team that's busting their hump and trying to be excellent in all we do to have this person who's just kind of okay with mediocrity and just doesn't get it and don't want to work that hard. Again, we made a mistake in hiring, so that's shame on us. We're not going to duplicate that mistake or compound that mistake sake by leaving them on the bus. We need to coach them up and we need to coach them out.
- [44:06]
A
The quarterly reviews are allowing you to triangulate feedback on a single employee, which both leads to better decision making as well as empowering you as a leader.
- [44:15]
B
Correct. And we have lots and lots of other tools that we use throughout the year, including our annual 360, which is exhausting but incredibly valuable every single year. I spend so much of my life focused on those 360s, I'm like, is this really worth it? And every time I finish those, I'm like, oh, my gosh, that was so worth it. Because we identify very objectively where people are strong, where people. That's another one of our promises. Embrace our strengths, design around our weaknesses. Every one of us have a superpower and every one of us have a kryptonite. We need to know what our superpower is, and we need to make sure we don't get close to the kryptonite. So therefore, we can design around it if we know. And we have constant feedback from the individual as well as obviously their peers as well as their supervisor and the other people that they engage with across the organization. And going back to the culture question, it has to be not just little silos of capital. Formation is great and investor relations is great. It's got to be. We're all great because we're all working together, rowing the boat in the same direction, and everybody is pulling in sequence. I use a lot of sports analogy.
- [45:14]
A
And it even starts in the recruiting process. Right. You have sign you have opt in to your culture at a pretty early stage.
- [45:20]
B
Correct. And if somebody is not going to be successful in our culture, they don't feel like they embrace our culture, that's fine. Our culture is not a perfect fit for everybody. And if somebody doesn't fit our culture, it's not going to be good for them, it's not going to be good for us. So let's make sure we identify it early. Let's be very transparent about it. Let's be very honest about it. I mean, obviously, Bridgewater for decades has had one of the most unique and extreme cultures, but yet it was massively successful for them. Well, people knew when you went to work for Bridgewater, that's what you were going to get. And if you didn't know that, you just weren't paying attention attention. In our world, obviously it's not as extreme culture as many of the things that they have done there. But we do have what we do. And if people don't like the way that we do things, the way that we market, the way that we approach things, the way we invest, that's okay. What we do is not perfect, but it is proven. And if somebody's not willing to buy into that, this is proven. And it's been successful for 24 years, made a lot of mistakes along the way, and we tried to learn from them. That is, you know, literally another one of our promises is that, you know, recognize our mistakes, own our mistakes and grow from them. So that is part of it. We're not going to be perfect, but if somebody knows we're striving for excellence and this is the way we go about doing it and they opt into it, they should have a lot of fun, make a heck of a lot of money, and most importantly, deliver great results for the investors that invest with us.
- [46:36]
A
As your profile in the industry has grown and across the world, you now have a book with Tony Robbins. How do you make sure that you're getting the feedback from, from the organization that you need to be a better leader?
- [46:44]
B
The 360s are there. I get reviewed just like everybody else does, and it's sometimes really painful. But we embrace a culture of healthy conflict. Another promise, right? If people are not willing to tell me what I'm not doing, well, I can't grow. There's not a single football player. And again, I'll use football because that was my sport. There's not a single football player who's like, I don't want anybody to tell me how I can Be better. If they are that way, then they're not going to be successful. They may be gifted beyond belief, but they're never going to reach the full potential. Potential. If somebody is like, I know I'm really good at what I do, but I need to be coached. I need to get better, I need to practice, I need to improve, I need to get more and more reps. You know, again, that's a beautiful thing about this day and age. And you know, every single coach has said this. Most people have never played football, have never heard it. But the eye in the sky don't lie. Right? The film will tell you exactly what you thought you did on that play. I didn't step with the wrong foot, coach. Honest. I really, really didn't. Okay, well, the eye on this guy don't lie. We'll see. Most of the time, they start at the wrong foot, which is why they got knocked on their butt. So that is, for us, the same thing here. Every speech that I make, every podcast that I do, I want the team to critique me and tell me what I can do better, how I can improve. And we want to have everybody in the organization take the same approach, to rehearse, to work together, to be able to role play whatever the case might be, even for our investment team. We just came back from New York and we were with meetings. We want them to role play. Okay, if you were leading that meeting, meeting, what questions would you ask? Where would you dig? How would you try to define or identify what it is or the key strengths and weaknesses of that organization? We want them to do that with each other and do that with reps that are consistent and private. So when the bullets start flying in the real world that they know how to handle it. That is what excellence is. And that's why we want everybody all the way from the top of the organization to the newest people in the organization to be able to truly get that feedback which comes from embracing cultural healthy conflict and elevate our teammates and help them grow another one of our promises. That is what we want. And if they do it, everybody wins and everybody makes more money and everybody has more fulfillment because of that constant feedback across the organization.
- [48:47]
A
Culture, like reputation, there's always a stated culture and an actual culture. And when those kind of come together, it's a beautiful thing. You're lobbying with Tony Robbins Congress in order to expand access to alternatives to the masses. Tell me a little bit about that.
- [49:02]
B
We're very excited about the progress that we've. We're making earlier this year the House of Representatives passed in an overwhelming fashion. You know, I can't remember the exact count was but called 378 out of 435 people voted for legislation that would allow investors of any income level, of any net worth level to be able to take a test. The SEC would create the test and then if they pass that test, they can become an accredited investor that enables them to have access to things that they currently are not allowed to invest in. The government of the United States or any country should not tell people what they can and cannot invest in. That is not freedom. At the same time, people need to know what they're doing. So I fully support that. There needs to be a level of knowledge for people to invest in things that are a little bit harder to understand. It's one thing to go out and buy Apple stock. A lot of people that buy Apple stock that don't understand that it actually can go down and go up. Right? But if they are willing to sit and take a test to become accredited, they should be able to invest in anything. That some very, very rich person that happened to inherit a lot of money but doesn't have a clue. And there's obviously a lot of people that do have a clue, but there's, we all know people that have inherited a bunch of money, you don't have a clue. They can invest anything they want. But yet this person that's really, really smart, intelligent, but has chosen to work for charity or has chosen to be a teacher, or has chosen to do some other very worthy profession, they're not allowed to invest. That's not right. I mean one of our former Fed chairs, literally when they took over as Fed Chair, they were not an accredited investor. That's insane. They were the most powerful monetary person in the world, yet they could not invest in other things that some others could do and things that other people could do. So in his case, he then never made enough money because he was an academic. But once he became Fed Chair, he obviously made enough money he could be an accredited investor at that point. Well, there's no, there should not be an arbitrary dollar amount. So the good news is that it passed the House. It's been in the Senate for a while. Governor, excuse me, Senator 10 Scott just actually filed along with basically the entire Senate Finance Committee a new legislation that will be kind of a sister legislation to this. What we're really hopeful is that before year end, regardless of who wins the election, that during the session between the election and the next inauguration, that the Senate will pass. The House will reconcile with them. They'll get it to the President's desk and the president will sign it. To allow people to actually have the opportunity to be able to take the test, to be able to invest as an accredited investor and to be able to have at least the opportunity to be able to invest in things that potentially could get them a higher return in many cases, less risk.
- [51:28]
A
How should people keep in contact with you and learn more about CAS and everything that you're working on?
- [51:33]
B
So CasInvestments.com is the website, it's very user friendly. We can, you can reach us, reach our team. You can look at a lot of the things, things that we're involved in right now. But certainly we also are on LinkedIn and on Twitter so people can follow us there. We're much More active on LinkedIn as well as obviously our website is where there's just a tremendous amount of information, both educational and informational on that site.
- [51:56]
A
And also make sure to check out this book. I'm halfway through it. It's really good. It's. It's both accessible as well as a lot of the endowments and pensions. Will enjoy reading, reading it as well. And thank you Christopher for taking the time.
- [52:09]
B
Well, I appreciate it very much. The one thing about the book that I'll say before we close is that we wrote it intentionally to where people that are very, very sophisticated will get a lot out of it and those that are brand new. One things I'm most proud of, New York Times number one bestseller. That's great, I love that. But what I'm most proud of is how many times I hear about adults, parents that are buying copies and giving it to their children because it is understandable for a young person. But it also is very interesting. Interesting for somebody that is, you know, an advanced person in the world of finance and for everyone in our industry. Reading the interviews in the back, the second half with some of the top investors of our time, not just today but of all time is something that everybody will get value from. So thank you for that.
- [52:50]
A
I really enjoyed and speak speaking I'm looking out the back. You got Ray Dalio recommending it Carl Icahn. So you're in good, great company.
- [52:59]
B
Thank you very much much this has been fun.
- [53:00]
A
Thank you Christopher. Thank you for listening. The 10X Capital podcast now receives more than 170 thousand downloads per month. If you are interested in sponsoring please email me at David at 10x capital combination.