Invest Like the Best with Patrick O'Shaughnessy
· Paul Tudor Jones
It also led me ultimately to start one of the first charter schools, in the late nineties. In Bed-Stuy, right next to that spot actually. I started a charter school called the Bed-Stuy Charter School of Excellence. The first one started out as an all-boys school. We named it Excellence because I wanted these boys to know that we were going to demand excellence of them. And we completely, totally crushed it. We hired the absolutely dream team of educators to do it. And within about four or five years, we were number one out of 543 elementary schools in New York City. The point being that you can have all the passion in the world, but you have to have a plan. There has to be a great pedagogy in what it is that you're trying to do when educating a kid. Why is all this relevant? Well, just think about this. So, here was this one simple act of kindness – of this elderly man helping this young child. In that case, a black man helping this young white boy. And so when I saw Harry Reasoner and I saw that elderly man helping those young kids, it was the photo negative of what had happened to me. And I thought, wow. It just was instinctive. The point here is that one simple act of kindness can have waves of betterment. It can be so transformative and so multiplicative. There's no doubt in my mind that 4,000 reps of thanking that elderly man who helped me as a child inspired me when I saw Harry Reasoner interviewing Gene Lang, to emulate that in a sense. I keep thinking how instructive it would be if intentionally, we just all start every day with the goal of one simple act of kindness. It doesn't have to be anything big; it can be something as small as what happened to me when I was three. And look at the possibilities that come from it. Just imagine if 350 million Americans intentionally start out every day for one simple act of kindness. What I will say, particularly to young people that might be listening to this, I'll tell you before 2000 – I would say 2000 was kind of a turning point. All this demonization and criticism, and the attack mode that we seem to be in – it didn't exist. It's not the way, by the way, that this generation that's perpetrating it and promoting it was raised. It's not the way we were raised. It's not the way of the seventies, eighties, nineties, you didn't have these vitriolic attacks. There was a much higher level of civility and respect.
· Paul Tudor Jones, Patrick O'Shaughnessy
And I think down the road, we'll get back to it. So I would just say to young people, you don't have to accept today is what this country historically has been about, because it wasn't that way when I grew up. It certainly wasn't that way, and it's not going to be that way in the future. [00:00:00] S0: Absolutely incredible story. Maybe my favorite version of this answer that I've ever had. First time I've ever done it at the beginning of the episode, which makes it fun too. What was your message in the commencement speech that you ultimately gave? What did you decide was the message to leave them with? [00:00:00] S1: So I got up there and I looked on the dais and I said, “how many – you know, there's like 20 people over 50 or 60 – how many of you remember your college commencement address? None of 'em, not one of 'em could remember. I loved to hunt and fish. So I go through and I talk about just kind of the normal challenges they're gonna face in life. And I also talked about how going through this process, I wanted to make sure I was gonna say something that was memorable. So right there at the end, I said, so whatever you do – and I pulled out my bow and I knocked in the arrow – I said, so whatever you do, aim high and shoot straight. And when I went like this, the whole crowd goes, “whooo”. Aim high and shoot straight. And I had an apple on a table over here and smashed it. [00:00:00] S0: Knocked it. [00:00:00] S1: I don't know whether they still remember or not, but I know when everybody was ducking I thought, oh, they're gonna remember that.
· Paul Tudor Jones, Patrick O'Shaughnessy
[00:00:00] S1: I don't know whether they still remember or not, but I know when everybody was ducking I thought, oh, they're gonna remember that. [00:00:00] S0: Absolutely love it. It's an excuse for me to ask my other question about this difference between investing and trading. So I'd love you to explain the life of a trader in contrast to that of an investor.
· Paul Tudor Jones
[00:00:00] S1: If I just think about when I started – I started in 1976. Inflation was raging. I started on the floor of the commodity pits. Stuff was literally going up and doubling and cutting in half every year. The volatility was insane. To give you an example of how crazy things got, Bunker Hunt was squeezing silver at the time, and he bought about 200 million ounces at an average price of about three and a half bucks. And between 1976 and 1980, we had crazy monetary policy. Inflation started ripping and silver went literally through the roof. Ultimately, I started out on the floor of the cotton exchange. I bought a membership on COMEX, which was the metals exchange at that time. I got in the pit and was executing some orders for them sometimes along the way. And the bottom line was that it was just the most amazing bull run. And I wanna say by like ‘79, silver was around 30 bucks an ounce, and all of a sudden he was worth about five or six billion, which made him worth three times the next closest person in the world. Bunker says, “Well, I think this silver here is the most valuable asset and resource on Earth.” And someone asked him, “What are you gonna do with all that silver?” And he goes, “I'm gonna bury it. I'm gonna bury it. In fact, what I'm gonna do is I'm gonna buy 20 million more ounces, and then I'm gonna bury that too.” So he buys 20 million ounces at 35 bucks. And when that happened, it just, woo-hoo! It just roofed, right. Goes to 50 bucks. So at 50 bucks now, he's worth about 11 billion and he's got a multiple of five or six on the next closest guy. I just couldn't even believe what I had seen and how much money that this guy had made. Anyway, so that was when COMEX decided – the commercials had been just eradicated, because they're sitting there holding physicals and having to put up this margin every day. And their bankers are going, “Yeah, can’t do it.” So anyway, they made it liquidation only. Silver collapsed. It went from 50 bucks to under 10 bucks in the space of about eight weeks. And that had a searing impact on me, to see him go from the richest guy to virtually bankrupt in the short space of six or seven weeks. Right then and there, I would never own anything or trust anything for the rest of my life.
· Paul Tudor Jones
My grandfather, when I was really young, he said, “Son, you're only worth what you can write a check for tomorrow.” That also had a really deep impression on me. So, liquidity's always been something that's been in my DNA as a child, because that was my grandfather's favorite saying all the time. And then also just my early trading days, because in my early trading days I had a $10,000 account. I'd run that thing to a hundred, run it back down to zero. Also living in my early twenties, I had this friend; he was such a character. He could take 2,500 bucks or five grand and run it to 2 million. Of course, the market moves then were crazy like nowhere I'd ever seen. We were brokers at that time at E.F. Hutton. And we called him The Mortician because he'd get an account with 10,000, churn about a hundred thousand dollars in commissions, take it to a million bucks, and then have it in deficit. So you learned that liquidity was really important because the volatility was so huge. We're all living on the edge. So that had a real impact on me, the idea of owning something for the long run was laughable, because look how much money you could make by trading in the short run because the volatility profile was off the chart. One of my mentors who got me into trading was teaching a class on investments at Virginia, and asked me to come be a guest lecturer. And I started in ‘82 and I've been doing it every semester since. I remember one of my favorite stories to tell that class is, I would go through how all the greatest fortunes in the world were made. I'd always ask them, “Who's the richest guy in the world?” Back then, it was Bill Gates and Warren Buffett. How did they get there? And my point to them would be they got there by riding a trend for the long run. And that would be my big lesson to them. I'd always have two or three bullet points. My number one bullet point is you're gonna make your money by riding a trend for the very, very longest time. I said, “There are many different ways to achieve it. You can own a company like Bill Gates or Steve Jobs, whatever. Or you can be like Warren Buffett. You can be one of those value investors who won't spend a nickel.” And I used to just sit there and rail on Warren Buffett year after year after year.
· Paul Tudor Jones
And I would self congratulate myself for trashing him and go, “You know, he just happened to be in the right place at the right time and caught this bull market. If that guy had been in Japan, forget it. Never would've happened. If he’d started in 1989 in the Nikkei, forget it never would've happened. Different story. Right place, right time, bull market genius.” I guess this will be my 50th year. The difference between my trading and investing is if I just take our fund, the BVI fund. For 40 years, it has a minus 0.12 correlation with the S&P 500. So you can see the difference between investing and trading. So 100% of our returns are alpha, a hundred percent. And, I was just thinking, “Oh my God, why couldn't I be Warren Buffett? Just believe in America and when you're down 50%, who cares because America's gonna bring you through.” And not that he doesn't – he works as hard as any human being, but it's that belief system that's so fantastic. As opposed to, I feel like I'm like a right guard, but a right guard in the NFL for 50 years, where I'm just everyday just fighting in the fricking trenches every day. And every time someone says to me, “Gee, I wanna get into trading”, I say “Go into long/short. Go on the equity side. Go do it.” I've always envied that belief system, and it's worked so well for so long. I would have had huge difficulty to have been in Warren's shoes in 2008-9 and have had a 50% drawdown. It would've had a really material impact on me. I don't think I have his calm and patience and fortitude, to be able to do what he does. So anyway, I was listening to the Acquired podcast on Berkshire Hathaway. And for the first time I learned that at nine years old – nine years old – he understood the power of compound interest. And actually, when I listened to that podcast, I just went, “Oh my God, this guy is a genius. And I have been the biggest fool.”