Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Paul Tudor Jones, Patrick O'Shaughnessy
Matt Shumer came out with a very lengthy essay on how the two new models that were released six days ago are going to be so unbelievably disruptive to the workforce. So, the news in my mind keeps getting more alarming. I can tell you, if this was anything to do inside Tudor, this thing would've been so contained so long ago. I mean, that's what a good risk manager does. And yet there's zero risk management here. [00:00:00] S0: To your point about great investors and traders are great risk managers, in the face of AI, how do you think about this exogenous variable lurking?
· Paul Tudor Jones
[00:00:00] S1: The one thing that I think should be part of this next election – the simplest, most important thing that we can do is we can demand that at all AI is watermarked. That's the single most transformative thing that we could possibly do for the country, for the world. Make it a felony. If someone knowingly violates that three times, then put them in jail. I want to know what's authentically human and what's not. And when that happens – talk about restoring trust in the country, which I think is one of the biggest problems. I would say two times since this year began, I've had very serious people call up and say, “Did you see XYZ?” And of course it turned out to be a deepfake. I think just so we can get back to some truth and honor and normal discourse, I think we've gotta do that. And the reason why it's so important is, if I go back to that conference 18 months ago, I would say a significant portion of the scientists there envision a future where humanity is going to have a chip in our brain that's going to allow us to access so much knowledge, power, et cetera. So I'm just kind of looking down the road and thinking, “Okay, we really need to know what we're reading, what we're looking at.” Because again, that group, without having any feedback from the rest of America, thinks that a blended human with the machine is perfectly acceptable, is the future, should have inalienable rights. For me, I don't think that's the case. I'd vote no. I think most humans would vote no.