Invest Like the Best with Patrick O'Shaughnessy
· 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.”
· Patrick O'Shaughnessy, Paul Tudor Jones
[00:00:00] S0: Trashing him. [00:00:00] S1: I've always wanted to write a book called ‘What I Realize Now’, which would go through the successes and mistakes of beliefs that I've had in my lifetime. What I realize now is what an idiot I was. That guy is a flipping genius, because he understood the power of compound interest, which I somehow managed – brilliantly – to avoid my entire career. He understood it at nine. He went out at 17, went to Columbia, and sought out Benjamin Graham. What a genius. Now the great thing from that podcast is that he was also so smart that he partnered with Charlie Munger. And Charlie was clearly, clearly a tremendous genius in his own right. Because whereas Warren would buy 50 cent dollars, Charlie understood the power of compounding for companies that were growing all the time. And I think the two of them together – man, what a combination. But anyway, Warren, if you happen to hear this, I'm deeply apologetic. You are the OG of compound interest and, I wish I was one-tenth as smart as you are. [00:00:00] S0: Didn't you talk to him about what he thought about AI soon thereafter, when we first talked about it? What was that conversation like?
· Paul Tudor Jones
[00:00:00] S1: You cannot be a trader, investor, whatever term we use, and not be a really good risk manager. Anyone that's really succeeded in investing or trading is first and foremost a great risk manager. And I went to a conference about 18 months ago, and I just was so alarmed by what I heard. And then I mentioned it on CNBC, and he watches CNBC every day and he sent me a note and said, “I agree with you a hundred percent, but the genie’s out of the bottle. I don't know if we can get it back in.” I think he's completely on board with the belief that we have some real threats from AI. The problem with AI is that the news – in the last 12 hours, the news that keeps coming out is just more disturbing. The biggest problem with AI is that if you think about the way AI is being practiced and deployed right now, it's the build-break-iterate model. Build it, break it, fix it, and iterate. That's been the invention model since the beginning of man. Build, break, iterate. But we've never been in a situation where the tail of could be hundreds of millions, if not billions of lives. What’s so scary, when I was at this conference, which was only about 35 or 40 people, with one modeler from the four biggest model companies. When I was able to ask them pointedly, “How do you think that AI safety gets resolved?” Pretty much the consensus answer is, “I think we'll finally do something about it when 50 or 100 million people die in an accident.” It's crazy. My big problems with AI are that one, there's no plebiscite on this. There's no vote. There's no way for the public to say yay or nay on the pace. And that's the way that most innovation occurs. Again, this one has a tail event on it that's so large. I go back to when the nuclear bomb was dropped, 18 months later, our Congress and our administration was smart enough and forward-thinking to create the Atomic Energy Commission to begin to try to regulate something that had huge tails. Here we are, we're three years in and regulate, what are you talking about? If there ever was a leadership position that needs to be taken by any president, it's on AI regulation right now. Not just the United States, but convening with China, with all the other purveyors, to make sure that we don't do something that has catastrophic consequences. And that's just on the safety side. Not even what's gonna happen to social disruption.