← How I Invest with David Weisburd
How I Invest with David Weisburd
E176: Beyond Harvard: The Financial Crisis Endowments are Facing
00:58:00
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- [00:00]
A
Harvard, Yale and other top endowments.
- [00:02]
B
Some asset that would be hold up or useful to you when all of the paper assets or contracts that you held were gone or beyond sellable. And so I think of Bitcoin actually in the same way is that it has some sort of diversification asset. I may not completely understand it, but I understand it enough to know that if you do all the analysis that it is a reasonable part of diversification in a portfolio.
- [00:36]
A
Covid was really a once in a generation situation where everything was correlated or was correlated with each other and against Treasuries like we discussed. I don't think that's typically the case. Typically stocks go up, something else goes down. So I think people learned the wrong lesson about Bitcoin and certain other assets that everything's correlated. You might as not well think about diversification. I think that's the wrong asset. I think as Bitcoin grows, I see it as inflation hedge and also a hedge against the national debt. I think that's this ballooning issue. A lot of people had hope and Doge and Elon and the administration cutting funding, but it seems that hope is quickly fading away. So there is no good answer to what are we going to do about national debt? Not that I've heard of so far.
- [01:28]
B
Yeah, I agree with that. Part of trying to keep your emotions out of investing is to try and also keep your political beliefs out of investing. And it's very difficult to do, especially in a place where there are so many channels and so many places for news to come from and that depending on what kind of news feed you're using, how it can affect how you feel about the markets on any individual day. So again, I think that's why you have to have this discipline of whatever your emotions are telling you is to continue to with the plan and to have a plan for how you're going to invest and whether you have inflows or whether you're a foundation and don't. And so I may have to move things around, but you need to have a plan of how you're going to invest and then stick to the plan. So it. I agree with you that longer term that there's a. It's easy to say with the right kind of analysis, not even thinking about it politically, but just doing the right kind of analysis is that we're not going to be able to support at current interest rates and at current growth, we're not going to be able to support a $36 trillion deficit. So how we claw that back, whether it's raising taxes or cutting services, I don't know. And just like you said, I've not seen a good plan for it. But I do think that my appetite for risk is lessened when I look at the analysis that says in 10 years time we could have a $36 trillion deficit.
- [03:09]
A
The problem is it's hard to talk about investing without advertently or inadvertently going into politics. So let's not go there. But let's talk about the different levers that the country has in dealing with the national debt. What are all the possible levers that could lead to substantial.
- [03:26]
B
Well, there are the drastic ones. We could devalue the dollar. Right. Because that would take a huge amount of pressure off. But it would probably. Devaluing the dollar at some point probably means raising interest rates because people are less inclined to buy U.S. assets. If we're going to devalue the dollar, although it fixes.
- [03:43]
A
And what does that do? That decreases the national debt. So it goes from 36 million to 26 million.
- [03:50]
B
Yeah, but once you do devaluation, then you're always going to be suspect forevermore.
- [04:00]
A
To do you lose your brand in the international market.
- [04:04]
B
Yep. So like I said, that's an extreme ability. Now, cutting services, one of the things that I believe is that there are that there is a lot of waste in government spending. How you carve that out and how you actually do it probably starts with a very simple thing. It doesn't start at the top. It starts with audits. Right. So there has to be a very strong audit function. Anybody who runs any kind of investment foundation knows that you have a very strong audit function to make sure that you're adhering to your fiduciary responsibilities and your plan. So I think there needs to be strong audit function to figure out how to cut government spending. But it can't be willy nilly and it can't be done from the top in my humble opinion. So that's a longer term way of cutting the deficit that probably has to be met with somehow increasing taxes. And that's why I think the endowments and foundations, whether they're private or universities or whatever and charitable giving is going to be scrutinized as a way to raise taxes, find a new revenue stream for the state, local and federal governments. So I think there's a combination of things that you can do rather than the drastic things or the other one could be along with devaluing the dollar. The other one is to let inflation run because inflation helps with debtors. Right. So because it cuts the amount that you're in real spending that you're going to put against your debt. But again, that also eventually ruins a whole lot of good things. So I think there needs to be a combination of looking both at the revenue side and the spending side so that over a longer term you can get to a deficit as a percent of gdp. That is a reasonable carry. Right. So I'll tell you the other thing is, is that people used to argue all the time about Japan being in such huge debt that they could never get out of debt. The difference in Japan was, and we can talk about Japan for a long time, but the, the difference in Japan was, is that they owned all of their own debt so no one could outside could shake their tree. We don't own all of our own debt. The Japanese, I think, own more of it than anybody else. But the Chinese own it, the Saudis own it. So there is the ability for outside investors to have a tremendous influence on the direction of interest rates here in the United States. They didn't have that in Japan. So it's a different, it's different here about the amount of debt that we carry to GDP than say it is in Japan.
- [06:52]
A
Thank you for listening. To join our community and to make sure you do not miss any future episodes, please click the follow button above to subscribe. Is devaluing the dollar and inflation two sides of the same coin? In other words, you're spending more to get the less. It's just a framing.
- [07:07]
B
Yeah, it's just that the inflation is something that you let eat away at it over a long period of time, whereas devaluing the dollar is an instant hit to inflation, but it accomplishes a lot of things. It's just a drastic, in my opinion, a terrible way to do it, but it's possible.
- [07:28]
A
One of the things I hope that the country implements is, is governance, governance controls. At Congress, every politician essentially has incentive to optimize on their local economy at any cost, even at the cost of the entire country. And to focus on headlines and the entire incentive mechanism of how Congress operates and how budgets are made itself is flawed. I think that's actually the problem. I do think we have more of a spending problem than a revenue problem. We're the richest country in the world. We have pretty high taxes on a relative basis. But we do have a great spending problem. And it's not, and oftentimes that spending isn't even going to the people that need it. It's going to these pork bills and these random bridges to Nowhere, whatever, is the latest project for a rising congressman that. That he or she wants to kind of stand behind and make a career behind.
- [08:30]
B
So I think there is a methodology in there to look.
- [08:35]
A
And we're seeing.
- [08:36]
B
Yeah, I.
- [08:37]
A
And this is, by the way, this is Republican, Democrats, Independents, they all have these same adverse incentives. And I think it would be best for the entire country if we just did away with all of those. You started advocating for less liquidity about 15 years ago at the Episcopal Church, and you started implementing it seven years ago. Tell me about what it took to get all the stakeholders comfortable around having less liquidity in your portfolio.
- [09:06]
B
So the Diocesan Investment Trust of the Episcopal Church of New York represents about 162 different parishes that are in Manhattan, Westchester, and up the Hudson Valley. Of course, that represents a lot of people, a lot of parishioners, and many of them have different ideas about investing. They have different ideas about whether or not they want to be involved with how the money is invested. And in the state of New York, we have pretty strong fiduciary laws around the people who serve on the boards and on these, you know, who shepherd these investments. There was a belief that any given church on any given day might need 100% of liquidity, because the primary asset, even though many parishioners don't think of it this way, the primary asset of these churches, big traditional churches, are the properties that they own, right? We're long real estate in a big way. So the theory was, is that the steeple might fall down or the roof might fall down, because many of these churches are more than a century old and they require constant maintenance through some good analysis. Like I said, you have to do your homework. I actually found out, working with a group of people, not just me, that in 152 years, no one had ever needed 100% liquidity. So I took that message to the boards and said, look, there's great returns to be had by investing in these different private assets that are available to us. So it took a while to do the education. Like I said, it took several years to actually get the board to be comfortable that, first of all, we weren't just shoving money into a black hole or a black box that would never come back to us and demonstrate that it was a mature industry where you could invest and the returns were often better than what you could get in public equities over a long period of time. And we had some of the private equity funds and a couple of venture capital funds come in and present themselves, and they were Very sophisticated investors and did a great job of helping educate the board. And that's how we finally got to make our first private equity and venture capital investments. Education is important. It's, you know, not every investor, especially on these boards, on most boards that I know of, whether it's faith based boards or endowments and universities foundations, there's usually a group of people around the table who actually understand investing and who are sophisticated investors. There is also a group of people around the table who don't know anything about investing or sort of have ancillary information about investing. And so I think part of the mission of these boards is to make sure that everyone at the table has a good education and a good background in what's happening with the, you know, with their fiduciary responsibilities. So it takes time and you have to be willing to invest the time to get the right things done.
- [12:32]
A
I think education and a prepared mind goes hand in hand. You cannot have a prepared mind. You can't sit around in a room and say, I will be prepared for the market crash without really understanding portfolio, understanding historic flow fluctuations and all these things. I think they're two sides of the same coin. And the top investors, they may not even know what the catalyst is, what the next block swan event will be, but they cultivate a prepare mind not just in themselves, but in their organization. I had the CIO of CalSTR, Scott Chan and they had an organization wide contest where everybody submitted their best trade idea. And the most the. The idea that won the best trade was actually preparing for the next market correction. This was like in the early 20s. And because of that they were able to take right action during COVID They were fully prepared as an organization for that drawdown and they were able to not only not take wrong action, but also take advantage of the market dislocation and, you know, take favorable positions in their portfolio. So I think those two things, although they seem differently, education and a prepared mind are interrelated. And I think people think more about, you know, almost like becoming Zen, like in prepared mind. But the best way to actually have a prepared mind is to be educated and to almost like simulate what a difficulty in the market might feel like.
- [14:02]
B
Yeah, David, I love the concept of a prepared mind and I think it is an essential part of, of being any part of a board that oversees the investments of an endowment or a public pension plan. Any of the. Anything that's not personal, where you bear the responsibility for taking care of others. I think having that prepared mind is a really important part of being at the table.
- [14:33]
A
John this has been a masterclass in investing. How should people follow you?
- [14:37]
B
I think best if they want to reach out on LinkedIn is a good place to start and then I'm happy to talk to people or meet them. One of Jeremy Hare's concepts about being a super connector. I'm not a super connector but I think it's important to talk to people across many different industries. It's part of that prepared mind bit that we were just talking about. I think you have to have the ability to meet and talk with lots of people to keep yourself educated.
- [15:07]
A
Thanks for jumping on the podcast and look forward to sitting down in real life soon.
- [15:11]
B
David this has been fun. Look forward to it.
- [15:14]
A
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