Asset Allocation | Bitcoin & Crypto
This is an edited transcript of our webinar episode with Mark Yusko is the Founder, CEO and Chief Investment Officer of Morgan Creek Capital Management, published 14 January 2022. Prior to forming Morgan Creek in 2004, Mark was President, Chief Investment Officer and Founder of UNC Management Company, the Endowment investment office for the University of North Carolina at Chapel Hill, from 1998 to 2004. In the podcast we discuss, the importance of the asset allocation decision rather than trading, how to manage risk, understanding the crypto revolution and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.
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This is an edited transcript of our podcast episode with Mark Yusko published on 14 January 2022. He is the Founder, CEO and Chief Investment Officer of Morgan Creek Capital Management. Prior to forming Morgan Creek in 2004, Mark was President, Chief Investment Officer and Founder of UNC Management Company, the Endowment investment office for the University of North Carolina at Chapel Hill, from 1998 to 2004. In the podcast we discuss, the importance of the asset allocation decision rather than trading, how to manage risk, understanding the crypto revolution and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.
Welcome to Macro Hive conversations with Bilal Hafeez. Macro Hive brings you the best analysis to successfully invest in markets from crypto to equities, to bonds.
Markets are grappling with the prospect of four Fed hikes in 2022, equity markets have been weak as a result. So, the question is whether this will be a mini correction, like the ones we saw last year. Or is this the beginning of a much larger 20% or more drop? We feature an article on the Macro Hive site that answers this question. We also set back and review a new academic paper that identifies what drives stock prices. It’s quite amazing how much simple noise drives them. Dominique also gives her take on the Feds and make sure to read her update. And then on the crypto side, we look at on chain analytics and flows to see whether the picture for Ethereum is turning bullish or not. As a member of Macro Hive, you can get access to all of our investment research, our webinars, podcast, transcripts, and our members Slack room, where you can interact with a Macro Hive research team and other members, all hours of the day. You can sign up to become a member by going to MacroHive.com. A membership costs the same as a few weekly cappuccinos. So go to MacroHive.com and sign up there. And if you are a professional or institutional investor, we have a more high-octane product that features all of my views, model portfolio, trade ideas, machine learning models, and much, much more. Hit me up on Bloomberg or email me on firstname.lastname@example.org to find out more.
Now onto this episode’s guest, Mark Yusko. Mark is the founder CEO and CIO of Morgan Creek Capital Management. Prior to forming Morgan Creek in 2004, Mark was the President, CIO and founder of UNC Management Company. The Endowment Investment Office for the University of North Carolina from 1998 to 2004. And then until 1998, Mark was the Senior Investment Director for the University of Notre Dame, Investment Office, where he joined as the Assistant Investment Officer in October of 1993. Mark is also the President and Chairman of the Investment Committee of the Hesburgh-Yusko Scholars Foundation at the University of Notre Dame and President and Head of the Investment Committee of the Morgan Creek Foundation. Now onto my interview.
So, welcome Mark. It’s great to have you on the podcast. I’ve been looking forward to this conversation.
Mark Yusko (00:02:18):
Bilal, thanks for having me and I am very excited as well. I love conversations, particularly conversations with people with a global perspective and a macro perspective. So very excited about this.
Bilal Hafeez (00:02:27):
Great. And before we go into the meat of our discussion, I always like to get the origin story of the guests. So, it’d be great, if you could just tell us something about your background, where you went to university? What did you study? Was it inevitable you would end up in finance and just something about the steps you’ve taken all the way to Morgan Creek.
Mark Yusko (00:02:44):
I appreciate the question. I do the same thing when I’m talking to people. I love origin stories and I’ll try to give the short version, although I’ll warn you, I don’t do short well. But the shortest version I can give is I grew up on the left coast up in Seattle. I moved around a lot in high school, ended up at University of Notre Dame. Went there, sight unseen, but my life is just a series of happy accidents. Others would say divine intervention whatever, but I always say happy accidents. And so, I went there not knowing anything about it. Fell in love, actually went to be an architect. I thought I was going to be… Almost old enough to remember a show called, The Brady Bunch. The show about, two families that got together. I wanted to be Mr. Brady. He was an architect. I thought it was the coolest job ever. I lasted about a week. I did my first project. Put it up on the board. The professor comes in and says, “Just misses, B minus.” And what do you mean, just misses. What’s wrong with it? He says, “I don’t know, just misses.” Like, “No, I need feedback.” And that’s when I learned I’m not a subjective person. I’m an objective person. I needed real feedback. So I tried engineering because that’s what my dad wanted me to do. Hated that. And then I had a girlfriend that said, “Hey, why don’t you do what you like?” I’m like, “Oh, there’s a novel concept.” So, I studied biology and chemistry was pre-med, thought I was going to be a doctor, worked in the emergency department for two summers but I couldn’t answer the question on the med school app.” Why do you want to be a doctor?” Like, “I don’t know. Because I want to drive a Porsche and work eight days a month in their emergency department. I don’t know.” So, I didn’t go to med school when you are… It’s 1985, you graduate with a pre-med degree. There are two jobs. You can be a consultant or a pharmaceutical sales rep. I am not 6’4″ and handsome so not going to be pharmaceutical sales rep. So, got a job as a consultant. The partner said, “You know, you don’t have any business classes, so why don’t you go to business school, then come back and we’ll hire you.” So I applied, got into Chicago, fortunately, went to Chicago and then graduated. Didn’t go back to consulting. I took the first job that was offered, which was an insurance company. And long story short, the guy who was doing investments retired. That’s how I got into investing. And so I managed bonds and then took off for a firm called Discipline Investment Advisors run by two professors at Northwestern. And we were the first quant shop. We had a billion dollars back when a billion dollars was a lot of money. And we ran computer tapes back before PCs on the VAX mainframe computer at Northwestern and we had an arbitrage. We got the tape on day one from… Because we were the first client of Compustat. And then it would go out snail mail to the rest of the world. So, we had a four day head start to run these screens and buy stocks. And we bought low price to bookstocks, and my boss used to say he invented low price to book investing and then Gene Fama and Ken French came along and inverted the ratio to book to market and they won the Nobel prize and he’s still pissed. So, I did that, and then I got the call. So, I got the call to go back to the alma mater, went back to Notre Dame. Didn’t know anything about endowment management. I thought picking stocks was all there was, that was investing. What I realised very quickly is had very little to do with investing.
The importance of the asset allocation decision rather than trading
Asset allocation is what drives investing. Are you in stocks? Are you in bonds? Are you in currencies, you in commodities? Are you in derivatives? Are you in international? Are you in emerging markets? Are you in venture capital? And so, learn the craft at Notre Dame then had the chance to come down here to North Carolina, to run the endowment here. Did that from ’98 to ’04 and then left to form Morgan Creek and the Morgan Creek story. I’m sure we’ll talk about over time, but that’s how I ended up here.
Bilal Hafeez (00:06:12):
And that’s a great story. And maybe we could use some of that as a starting point. On the endowment model, that’s been quite popularised by Swensen and so on.
Mark Yusko (00:06:23):
Yeah, David Swensen, God rests his soul. I always say the endowment model’s a little… I don’t know, arrogance is the wrong word, pretentious maybe. It’s not just endowments, it’s every intelligent, large pool of capital. Whether it’s big family offices, big sovereign wealth, big pension funds. There are plenty of big pools of capital that don’t run intelligent strategies, plenty of them. But there are a whole bunch that do, and to call it the endowment model is, I always thought it was a little pretentious. But the model is real. The model of value bias, an equity focus and I don’t mean equity stocks, I mean equity. So private equity, real estate equity, commodity equity, broad-based equity. So an ownership as opposed to a lender. So, equity over fixed income and then a focus on the illiquidity premium. There’re only four risks you can take in the whole world, and they require risk. We take no risk. We get the risk free rate. We basically make zero and real terms are negative right now. And we have to take credit risk, can buy a bond. Equity risk, by an equity. Illiquidity risk by something that’s illiquid that we can’t sell tomorrow or use structure leverage. Those are the four risks and how you take those risks in a portfolio really matters. And the endowments in the big pools of capital figured out that they have a permanent time horizon. Multi-generational family, long duration pension assets, endowments foundations that live forever. And so the average investor has a finite lifespan. Look at a biotech to try to fix that, but we all have a finite life span. So we’re going to need our capital at some point. So we will pay other investors with longer duration time horizons for the privilege of liquidity, and taking that illiquidity provides you a premium return and it’s a pure arbitrage. Time arbitrage. It’s probably the best arbitrage there is. And if you look at the best investors, David Swensen at all, they have the highest waiting in venture capital, which is the best form. I think of private investing because you’re investing in innovation as an asset class. Four asset classes, stocks, bonds, currencies, commodities. I will argue there’s a fifth called innovation, because innovation creates the other four. Without innovation, without new businesses, without new company formation and without new technological formation, we don’t get the opportunity to build companies, to issue bonds, to denominate things in currencies and harvest commodities.
Mark Yusko (00:08:48):
So that innovation is accessed best through venture capital.
The investment value of ownership
Bilal Hafeez (00:08:52):
And so, when you have say a pension funds, say there’s a big sort of pension crisis all over the world in terms of liabilities and so on. How would you go about, structuring the portfolio then? Would you skew everything towards VC/PE and illiquid assets? Obviously, you need to balance the risks here and there’s valuation concerns as well.
Mark Yusko (00:09:10):
I’ll tell a funny story and I won’t name names, but a pension fund. Large fund that we know. And I was at this meeting and they were presenting all the numbers and their trailing tenure number was 5.8%, trailing tenure number 5.8%. And they put all the numbers to different asset classes, and I think bonds over that period were five, equities were like 6.8, private equity was 11, other things, real estate was something. And they actually came in and said, “I’ve got a solution. We’re going to lower our actuary assumed rate from 7.5 to 7.” And I raised my hand and I’m like, “No, we made 5.8 and there’s no number on your table except private that beats 7.” And you have 1% allocation of private. And I’m like, “Oh.” Then the consultant got really mad. He says, “That’s so insulting to this board.” I’m like, “No, it’s not insulting. It’s math.” 11 is better than seven, 6.8 is less than 7. 5 is less than 7. So you can mix up 5 and 6.8 any way you want. 90, 10, 80, 20, 20, 80, any way you want. You get less than 7. And so, if your goal is to make 7, you’ve got to take advantage of the illiquidity premium, and so the pension crisis is self-inflicted. The problem is my opinion. Groups make bad decisions. There’s a great line that an investment committee should be an odd number and three is too many. And groups, the bigger they are, the worse. The less experience they are, the worse. And so, if you think about pension boards, they tend to be mostly appointees with very little experience or representatives like teachers and policemen environment. And they’re great people, but they really be on the board of a pension trying to manage the assets. I don’t know, maybe some, but the reality is… Barton Biggs, famous Strategist at Morgan Stanley, wrote this great thing. I think ’95 or ’96 called Group Stick. And it’s the best two pages ever on why these groups make bad decisions. And it’s because, it’s more important to stay a member of the group than to say what you think. Because if you say something, that’s against the consensus, which is the only way you make real money. You might be ostracised, you might be kicked to all the group and you don’t want that to happen. So, I think the pension crisis is self-inflicted, too much reliance on fixed income and in a world of basically zero interest rates globally. And negative in some places, where you’re sitting and all over Europe, it’s negative or in Japan. The U.S., you might be able to get 1.5%. Maybe you can go out to high yield bonds at 4% like there’s nothing high, about 4%. And with inflation running, maybe 3%, 4%. You’re really not making any money. So far too much in bonds, too much in traditional equities. Not enough in private, not enough in things like private. And look, this is not all pensions. There are plenty of good pensions that are well run that have done really well. One of our biggest clients and she’s had the best performing pension over the last few years. She’s got 2% of her portfolio in blockchain related asset. Now she’s one of very few that bought into innovation as an asset class venture capital exposure to blockchain technology, but it’s paid off very nicely for her.
The problem with the 60:40 model and the coming debt default
Bilal Hafeez (00:12:25):
And then what do you think about the classic 60:40, obviously over the last 20, 30. Has its done very well. And as a result, that seems to be a benchmark of sorts everyone refers to and-
Mark Yusko (00:12:35):
It was, past tense, a great strategy because we had a 35-year bull market and bond and long duration assets. The longer the duration do better as interest rates fall. Now we’re at interesting conundrum that we’re in this box, I talk about it all the time. I tweet it, #FedInABox. Everyone says, “Oh, Fed’s going to raise interest rates. They’re going to take.” No, they’re not. They can’t. Governments in the West cannot afford higher interest rates. They have too much debt. They could not refinance it at higher rates. No one will buy their bonds as is. So who buys it? The Central Banks. And so, what we’re headed for, the U.K. popularised it in the 1840s, is a debt Jubilee. The only way out is the Central Bank buys all the bonds. Japan’s the furthest ahead. They’re like it’s 75%. Europe’s right behind and then we’re the least. But eventually, Central Bank owns all the bonds and then they just cancel, and they start over. And it’s what they did in the U.K. in the 1840s. Everyone had tally sticks. If you were a big financier, you had this big old thing of sticks and literally, you and I took a stick, we break it in half, we carve a notch and that’s how we know how much money you owe me, or I owe you. And these tally sticks were representative of debt and all great empires, focus on debt. And then they become over indebted, and they collapse. And so, what the U.K. did is they said, “Right, we’re going to ban tally sticks. We’re going to erase all the debt. We’re going to start over.” So they collected all the tally sticks. They put them in the furnace in parliament and they burned parliament down. And that was an accident, they didn’t mean to do that. But they started over, and they adopted dual entry accounting that they borrowed from Medici’s. And they started off on the pound sterling standard and became the envy of the world. The sun never sat on the British empire. And from the 1850s through 1920-ish, it was awesome. And then what happened? They invaded Mesopotamia and curb a bunch of debt. The pound sterling collapsed. The dollar ascended. Bretton Woods happened. We became the superpower. And now we invaded coincidentally Mesopotamia and curb a bunch of debt. The dollar collapsed. And now the Chinese are ascending and a longer story for another day. But that’s again, a long-winded way of saying that the debt challenge is real, and that 40% allocation of bonds was, was past tense. A really interesting idea. But the problem today is, it was a good idea at the beginning of that period, because there was no debt because post the depression. There’s a whole generation of people in Europe and America swore off debt. Debt was evil. You didn’t own a credit card. You paid off your house. You had a mortgage burning party. Debt was evil. Today, the more debt you have the better. In fact, I talk about this all the time. I say, “What is this?” “Oh, it’s a credit card.” “No, it’s not. It’s a debt card.” If it was called a debt card, how much would we use it? Wouldn’t use it very much. If you have a big line of credit, you’re considered a big person. If you have a lot of debt, you go to debtor’s prison. So, it’s the same thing. And yet, for whatever reason we popularise this idea, and so now we have companies that have massive debt. We have governments with massive debt. We have individuals with massive debt and buying debt when there’s lots of it is really bad, because there’s a high likelihood some of it’s going to default. And so, at these levels of interest rates, only three things can happen. You can buy your 10-year treasury at 1.8% and it can mature, and you make 1.8%. Inflation probably averages higher than that, so you lose money relatively bad, but not horrible. You could buy it 1.8% and rates could go negative, like in Europe. You’d actually make a nice return. Okay, that’s a decent outcome. Or you could buy it at 1.8% and rates go up and you could lose a lot of money like 20%, 30%. Two out of those three scenarios are bad. So, debt here is a really bad risk rewards. It’s got terrible asymmetry. And so, I take it one step further. You look at retirement accounts, 401(k)s, 403(b)s, the average retirement account. If you look at the average investor, they have all this money in bonds. To me, I actually think it should be against the law and I’m not joking. I’m not being hyperbolic. I’m prone to hyperbole, but this is real. I think it should be against the law. 401(k), if you’re 25 to 65, it should be against the law to own bonds. You should be forced to own and you get to choose which one, but equities, real estate, commodities, private equity, venture capital, but you can’t actually access most of those assets in a 401k because why? Well, because the mutual funds who wrote the laws by paying money to the lobbyists, want you to own their bond funds where they can take a fee and you feel safe. The worst are these things GICs, a guaranteed investment contract issued by insurance companies. So all we’ll pay you 3% or 4%, which by the way, after inflation, you’re losing money. Oh, but we take 3% or 4% in fees, but we don’t tell you that. That should be illegal. And we should be forcing money into innovation and wealth creation and venture capital.
How to manage risk
Bilal Hafeez (00:17:44):
I mean, how do you manage the risk then in a portfolio?
Mark Yusko (00:17:48):
Position sizing and diversification, a 100% one venture deal, incredibly risky. I backed Bilal Ink, it might go to the moon, it might go to zero. But if I back you and your partner, Andrew, and my cousin and my friend and my coworkers and I have a broad portfolio, yes, a whole bunch of those venture deals are going to zero. But the ones that don’t, that become Amazon or Microsoft or Google. Back in 1996, I was at Notre Dame, and we invested in this little company that no one had heard of at the time called Sequoia, which is amazing because now they’re a brand name and everybody knows Sequoia. Michael Moritz had not done a deal yet. He had just been hired and we gave them money. And Michael and Don Valentine put a little bit of money in this company called Google, which at the time myself included and we thought that was stupid. There are 20 search engines. This was number 21. It’s a stupid name. Now it’s a verb. Why do we need another search engine. Ask Jeeves was just fine. Web Crawler, AltaVista, all perfectly fine. Oh no, they weren’t. We didn’t understand what indexation was. It was an entirely new technology that made everything better. And now it’s become one of those valuable networks in the world. And so, we put in half a million bucks into that company and it went to 200 million. So, we could have a whole bunch of write-offs and it would be no problem. And that’s the nature of venture capital. It’s all driven by power law. You want zeros. If you invest in venture capital and you have no write-offs, you’re not doing it right, because you’re not taking the right level of risk to get those 10 baggers, those 20 baggers, those 50 baggers or a hundred baggers. One of my best investments I’ve made is kind of funny and ironic is a company called Beyond Meat. We did a venture capital fund a decade ago. We did a co-investment alongside Kleiner Perkins in this fake meat company. And I remember trying the product the first time. It was like, “Oh, this is horrible.” I mean like bad mouth feel terrible. Today, it’s actually decent. Now I wouldn’t eat it because it is full seed oils, but a lot of people do. We put in 3 million bucks and took out 150 million. That’s really good. That’s innovation. They created something using extruded pea protein to create something that vegetarians and vegans can consume that has the mouth feel of meat and that’s pretty cool. So, innovation drives success. But to your point, any single deal is risky. Any small portfolio deals is risky, but if you have multiple geographies, if I have some venture in Europe and some venture in Asia, some venture in China, some venture in the U.S. and multiple firms, I do Kleiner, and Sequoia and Excel and maybe True Ventures and maybe Founders Fund. And then, within that, I have a portfolio of lots of companies. And so I have hundreds of underlying companies like buying an index fund of venture capital. Yes, some of them go away, but the ones that don’t go away become amazed. The other thing that’s awesome is it protects you from yourself. So here’s what I mean. Amazon has been a public company for 24 years, it’s up a lot in that 24 years. Compounded over a hundred percent a year for 24 years. How many people bought Amazon on day 1, 24 years ago and held it to today. There’s five, Jeff, his mom, his dad, his ex-wife and Bill Miller. That’s it. Now maybe there’s more than that I don’t know, but I know of those five. And there are millions of people who’ve bought Amazon at different times, but why did no one buy it and hold it that whole period? Because the volatility. It’s had a double digit drawdown every single year, including this year, every year, double digit drawdown, average 31% peak-to-trough. On average, five times more than 50%. twice more than 90%, people can’t handle that kind of volatility. And so, they shy away from it. And so they sell at the wrong time, so when it went down 90% in 2001, you should have actually been running toward it, not away from it. I said, think about humans and I’m one and I’m an investor and I’m guilty of this too. We do two things extraordinarily well, we buy what we wish we would’ve bought and we sell we’re about to need. And we are spectacular at it. Look at the chart of the last 17 years of equities, for the last 16, the last 17 years, the net inflow and outflow of equities basically flat. Last year, massive inflow into equity index funds, highest in history. Why? Because the market went up and we buy what we wish we would’ve bought, at the bottom, at the COVID lockdown in May of 2020, but no one did, they were selling.
Bilal Hafeez (00:22:33):
And on the issue of drawdowns, one of the things, the challenges is if you are experiencing a drawdown with like 30%, 40%, 50% in a given investment, it’s hard to stomach that. So what types of steps do you take to hold onto that investment.
Mark Yusko (00:22:47):
The biggest one is position sizing. Never have individual positions that will cause you so much stress that you’ll be pushed to act at the wrong time. So, I’m a huge believer in super diversification. Now some would say, but Mark, you also say, and I do say this, that concentration makes you rich, diversification keeps you rich. So, and what I mean by that is if you look at every great fortune in history created from concentration. Concentrated stock position, concentrated real estate position, concentrated business ownership, all of them. Now what we don’t hear about are the ones that went to zero. For every Steve Jobs, all I created in the garage, there were 99 other companies creating garages that went away, but history’s written by the winners and we idolised the winners. And so, if you’re young and you have a good job and good income, think of that as fixed income. Yeah. I would take a lot of risk. I would take concentrated bets in things that you believe in. And it’s my pinned tweet on Twitter, “The greatest wealth is created by investing in something you believe in before others even understand.” And you’ll be mocked and ridiculed for your non-consensus action, but it’s worth it. And that’s how to measure the quality of an idea, is by the quality of the opposition. So, the fact that the big banks think Bitcoin is a bad idea, means it’s an all awesome idea. The fact that the big telecommunications companies thought the internet was a bad idea, meant it was a great idea. The fact that the big television companies thought cable TV was a bad idea, meant it was a great idea. The fact that the cable TV companies thought that streaming was a bad idea, meant it was a good idea. And so, I tweeted this out the other day, there was a great line from the London Post in 1865, that was quoting the head of Western Union in the U.S., saying that, “Well-informed people know it’s impossible to transmit voice over wires.” Well-informed. And why did he say that? Because he was the incumbent. And this new Alexander Graham Bell dude was going to disrupt an entire business because voice over copper was a big deal. But voice over internet protocol was bigger and value over internet protocol, which is what cryptocurrency and blockchain is all about is bigger still. And it’s these technological innovations that drive wealth creation. So for me, 58 years old, I want to have a portfolio that’s super diversified with big moonshot, the Beyond Meats and the Bitcoins and the other things that if I do well, it’s awesome. But if I have some that go to zero, it doesn’t really hurt me. If I were 28, I’d have a very different portfolio, I’d have a little more concentrated. I would spend a lot more time focused on the emerging technologies and I would buy them and I would put them in a box and I wouldn’t look at them and I would just forget about it. And I would do it such that it would be money that I didn’t need in the short run, because if you’re risking that money, you will make bad decisions. If you need the money to make rent, you shouldn’t be speculating in venture capital and equities. If you need the money to buy a house, you shouldn’t be speculating where you could impair the value. If it’s long duration assets for retirement, for college, for your grandkids. Yeah, you should, I believe. Be as far out on the risk spectrum as possible, but in a diversified fashion, unless again, if you have superior knowledge. My son works at Snowflake and he has a very overweight position in Snowflake and it’s worked out really well for him. But even he, is now diversifying into other assets, he bought a house and he bought some Bitcoin, he’s bought some other things, but he has special knowledge because he works for one of the most innovative companies on the planet right now.
Innovation as an asset class
Bilal Hafeez (00:26:38):
Yeah. And you’ve mentioned Blockchain and Bitcoin. So I have to… we have to talk a bit more about that. What’s your view on the crypto space? Just sort standing back, obviously initially it was a very niche sector, but over the past 12 to 18 months, it seems to really enter the mainstream. Institutional investors are buying it or looking to buy it. It’s in the conversation everywhere. You see billboards mentioning crypto. So, it’s entered the mainstream. And so what your view of crypto in general and where it fit in a portfolio.
Mark Yusko (00:27:06):
As you probably guessed, I’m going to give you a wishy-washy kind of half answer. It’s the greatest wealth creation opportunity I’m going to see in my lifetime. It will create more wealth than the internet. It’ll create more wealth than the mobile net. It is the greatest innovation of this century. Value over internet protocol is the greatest innovation of this century. And that’s a big call because there’s probably going to be some other great stuff that’s invented. But I believe that and we’re in the Macro Hive having this conversation, and this is the biggest Macro opportunity. Again, I’m going to see in my lifetime, because it’s a coalescence of all the Macro events preceding it, that led to the creation of this incredible technology. And what cryptocurrency is and what blockchain technology is an evolution of technology. Again, Charles Darwin was right. Adapt or die. And if you look at technology over time, there’s this 14-year cycle and why it’s 14 years. There’s some different reasons. And it really has to do with young people. They’re the most innovative because they don’t know what they don’t know. So, they try things that they just don’t know that they can’t do that. And Marc Andreesen, 19 years old when he invented the browser, okay, pretty good. Larry and Sergey in their 20s when they redefine search. And so, young people create stuff. Sam Bankman-Fried, he’s not even 30 yet. So, innovators tend to be young, and they follow this cycle. So in 1954 we had the mainframe, 1968 the microchip, 1982 the personal computer. I grew up in Seattle. I joke many of my friends don’t work, because they went to work for Microsoft. I wasn’t smart enough to do that. I always defend myself saying if you’ve seen the picture, the original Microsoft 11, you wouldn’t blame me. They were kind of rough looking. Bill Gates looked kind of scary. Actually, still looks kind of scary, but he’s way more successful than me I shouldn’t make fun of him, but that picture’s really kind of interesting. And Steve Bahmer’s mom famously quipped. She was quoting the DEC CEO. “Honey, why would you work for that company?” No one would want on a computer in their house. Well, why did the DEC CEO say that? Well, because he ran Digital Equipment Corp and they made mainframes and mainframes wouldn’t fit in the house. Popular Mechanics said that someday they could envision a time when computers might weigh less than 3000 pounds. This weighs less than 3000 pounds. And it’s 100 times more powerful than my first computer from 1981. So the key is, if you think about that cycle, the personal computer was pretty good. Steve Bahmer has 18 billion reasons. He was right, mom was wrong. Then 1996, the Internet, we invested in eBay. I remember my board saying, “Why would you invest in an online garage sale company?” Maybe it’ll be bigger than that, maybe. We invested in Yahoo. She would say, “That’s a stupid name.” I don’t disagree. But it was a pretty important company at the time. We invested in Google. And so, investing in infrastructure around these technological innovation waves is big. 2010, the mobile net, comes along. And I remember being back in Seattle at Craig Macau’s house, famous pioneer in mobile technology. And I remember our cellular technology, wasn’t called mobile back then cellular. And I remember asking this family office guy, “You know, I think the mobile net, will be as big as the internet.” Like Mark, “You kidding me, ask me if they want a computer.” Like “Yeah, whatever, ask them if they want a phone.” Say, “Oh, you have two. I don’t need another one.” Yeah. The mobile net is going to be bigger than the internet. And it is. And if you think about web one, which was the personal computer. And if you think of parabolic curve, so the area under the curve on the left-hand side, that’s web one, that’s Cisco, Microsoft, Intel. It’s a lot of wealth. Doesn’t look like much, because it’s parallel to the X axis. Then you go to the knee of the curve, that’s web two, that’s what we’re living in now. And that is Alibaba and Netflix and Apple, more wealth. Trillion-dollar companies. Now we’re going to web three, which is where we go parallel to the Y axis. How big is that area out of the curve? Big. So why is that bigger? Well, the mobile net was big because what the internet did is it made information bidirectional. Go back to the history of time. Information was unidirectional, the church controlled the information, and you would come to church once a week and they would tell you what to think. They would give you your information. Then the printing press busted that monopoly. Because now, if you could read, you could print stuff, and you could distribute it and you could read it to people, or they could read it themselves and information became more disseminated. So, then the state took over, or how the state takes over. Well, the state controlled the media. And so, they spread information through the media and then the internet busted that monopoly. I use the example of the Argentinian election. If I want to know about the Argentinian elections, I do not wait for a reporter to fly to Buenos Aires, to write a story, to send back to her editor in New York. And two days later get the story. I go on Twitter, to Periscope, and I watch somebody live streaming, a bunch of people standing in the rain for hours, chanting Macri’s name. He’s going to win. So, that’s better and it democratised access to information. And so the entire media industry changed. The entire commerce industry changed because of the internet. Well now, fast forward another 14 years to 2024, which still two years from now, we get the Trustnet. Well, what’s the Trustnet. We go from the internet to the mobile net. So the internet made information bidirectional. The mobile net made it ubiquitous. The Trustnet makes value bidirectional. Because here’s the amazing thing. If I want to send you a dollar or a quid, if I want to send you a quid. I have to have a bank account. You have to have a bank account. So, I can send you value now because Satoshi, whoever he, she, they are, created the ability to have a scarce asset in the digital world. And the best way to think about this is music. So, in the olden days again, before you were, you’re not super young, but I’m old. So I had record albums. I had black vinyl discs that I put on a turntable and I made music. Well then, the MP3 came along. Michael Dell invented the MP3, not Steve Jobs, but he didn’t have a good form factor, Jobs did so the iPod became huge. But Michael Dell, had this innovation that I had this little stick and I could make an electronic copy of a song. Now here’s the cool part, if I had a copy of the song, I could send it to you and you could listen. That’s good for me. Good for you. You don’t care if it’s the original, plays just as well. But the music industry did not like that. Because they wanted you to have your own original. So what they do? Well, we had a hierarchical world and a hierarchical structure, Napster. So one CEO, one home office, you arrest the CEO and blow up the server. End of Napster. So government could still control because there are hierarch. Now in a decentralised world, digital scarcity matters. So, if I had a dollar and I’m going to make an electronic copy and send it to you, I’ve just committed fraud. But if I have a dollar and I digitise it, I make it unique and scarce, which is what Satoshi did. Now I can send that to you and we don’t need a bank to be the trusted third party. We have a computer network with nodes all over the world that said, “Yep, Mark has a Bitcoin.” He sent it to Bilal, and now Bilal has it. Good. Permanent, immutable public, everyone can see it, no questions and that is trust. That is public trust. And I don’t have to worry about a banker spoofing us. I don’t have to worry about someone making an accounting entry in the back office of a bank. It’s in real time, permanent immutable, that is better technology. And that ability to have any asset, any stock, any bond, any currency, every commodity, every piece of art, every private business, every everything will be fungible tokens. I don’t like NFTs because now people think it’s JPEGs. NFTs are everything. Everything will be an NFT, but I think of it as digital property rights, every property will be digital, it’ll trade 24/7 ubiquitously around the world and that’s big. It’s 700 trillion with a t and trillion has lost all semblance of understanding. People throw the trillion word around a lot, but a trillion, will you and I would sit here on this in the Hive for 31,710 years spending a dollar a second. That’s a trillion. 31,710 years be most unpleasant. We’d have a lot of takeout, but that’s a big number. So 700 trillion global assets are going to end up on blockchains all around the world, digitised and you and I will be able to interact in that world. And so we are going to recreate all of financial service in new technology. One of the misnomers of the last couple decades is FinTech, because there’s no tech. You basically took businesses out of banks like lending or custody and put them online into websites, but we’re still using the swift system and the same payment rails, PayPal and Venmo, aren’t new tech. They’re just a cool UI to get the transfer of cash out of the bank or Starbucks card. We move money through a Visa card, actually don’t move the money, we just move an accounting entry onto this account, and then they transfer the money over to Starbucks and they earn float and then we get our points and they collect our data and modify.
Understanding the crypto revolution
Bilal Hafeez (00:36:49):
It’s a really compelling argument you make with blockchain and crypto. And the one thing I’ve been struggling a bit with, is this whole idea of decentralisation versus centralisation. Because obviously when there’s new technology, especially technology, initially it starts kind of decentralised and there’s utopia type thing and then it centralises very quickly. And then you have the usual authoritarian and hierarchical structures take over. So even say with the internet, when it first started, you could have your own server in your house and someone else could have their own server and its ear to ear. And in that way sort of decentralised, but very quickly became apparent that people actually didn’t want to have their own servers. And so, it got centralised and central servers and the cloud and then suddenly everything gets centralised. And my kind of question, with really blockchain and everything is are we going to follow the same path where ultimately everything just centralises in the end because people just prefer that user experience. And if you look at many of the crypto exchanges and so on, many of the most successful ones are centralised. So do you think there’s a risk here that in the end we move toward centralisation and the established system just co-ops all of this and it doesn’t realise it’s true potential?
Mark Yusko (00:37:56):
Look, it’s a really important insight, and an important point. In that transitions, always start from the fringe. I say, my job was to go hang out with the bad guys, throughout my whole career, I hang out with the bad guys. Who are the first users of cellular phones and pagers? Drug dealers. Who are the first users of the internet? Porn. Okay. What about, cryptocurrency? Drug dealers. Okay. Why? Because they’re locked out of the centralised authority that you talk about. If you’re a drug dealer, you can’t have a bank account. Well I got to figure out how to get paid so I’ll figure out other ways. I’ll use a pager to go meet somebody and do a drop off of a Sacco cash. So I’ll still get paid by a bank account but I can’t have a bank account, or if you’re a cannabis dealer, you can’t have a bank account, which is ridiculous. So what do I do? I use crypto, perfectly fine. So, as we transition, you’re right, it gets sucked down into the middle. So the internet became very accepted. Now the thing is, the internet is not fully centralised. Remember, there’s a great clip of Bill Gates, again, he’s always everywhere, on David Letterman, talking about, “No, you don’t want the internet. You want the Microsoft intranet.” No, we don’t, Bill. We do not want your centralised system. We want a diversified system of multiple servers. Now to your point, I don’t want to run my own ISP. I Don’t want to run my own server. I’m willing to give up some semblance of centralisation, so that I can have a decentralised access to information. Like I said, I can go see using the internet using TCP IP. I can go see that person Periscoping in Argentina in real time, even though there’s elements of centralisation. No question. When we start talking about money, it gets a little bit different, because what the internet did, is it started with this explosion like the Big Bang. And then, it kind of came in and now there’s like five companies. The FANGMAN stocks and they own everybody’s eyeballs. And now, that’s true centralization. What decentralised technology does, and this is what blockchain technology does. That is misunderstood a little bit. What blockchain does, it allows true decentralisation in the sense that I don’t have to have a centralised authority, own everything. So think about content creator, when people post pictures on Facebook, what happens? It drives traffic. Maybe only a few people, maybe your friends, maybe your family, if you’re popular, or you do something scandalous or risque, you can get a lot of viewers, but who benefits from that? Do you benefit from that? No. Zuck benefits from that because they’re monetising that traffic. Well in a decentralised world, a creator can now create art, music, scandally clad pictures, Whatever you want. Guys and gals doesn’t have to be just gals. Anyone who wants to do whatever they want, but now you can monetise that traffic. And look, we were big investors in all the ride sharing companies. Uber, Lyft, Kuaidi, which became DiDi, Ola, Grab, made lots of money for investors. Love them, great technology. But now, every time I get in a Lyft, I think why is it that someone who wrote code 10 years ago gets 30% of the money that I should be giving to the driver? Because the driver’s doing the work and the technology certainly deserves to get paid, but 30% probably the wrong number. So how about a decentralised version where the owners are the riders and the users so that 30% doesn’t go to a centralised user. It comes to all of us or another one. My son finally broke us down. He’s 11. He broke us down. He got Fortnite for his birthday on Saturday. And Fortnite run by Epic Games right here in North Carolina. They have a billion dollars of revenue a year, because people like my son play a free game, it’s free. But he keeps asking me for money to buy V bucks, like real money to buy V bucks so he can buy a skin or a gun or whatever. Okay. So they make a billion dollars. Well, who makes a billion dollar? Well, they, make a billion dollars. What if you could play the game and as you became really good, if you were ninja, you’re getting 500 million people watching you play Fortnite. And he did find a way to monetise it. But what if instead of Epic making all the money, what if the gamers made the money? And that is play to earn, Axie Infinity, blockchain related games, and I believe and there was somebody I can’t remember who said it, but someone said yesterday that five years from now, that’s all there will be. There won’t be centralised games anymore. There’ll be only blockchain oriented games where they’re fully decentralised and they’re owned by the users. And that’s pretty cool.
How to pick the right crypto markets and avoid Ponzi schemes and Mark’s favourite coins/tokens
Bilal Hafeez (00:42:51):
Yeah. And in terms of tokens and coins, do you have a view on different coins right now? We, at Macro Hive, we’ve been tracking. What we’ve done is we’ve created kind of indices for different themes within crypto, just to help us decipher. So smart contract, L1, L2 type coins, Metaverse, DeFi and so on. And you start to see their behave slightly differently. So you’ll seeing some, discrimination that’s occurring across the coins and tokens, which is important for maturing market. I mean, how do you look at some of these big ones? The smart contract side, L1 battle of against Ethereum and Metaverse and Defi.
Mark Yusko (00:43:23):
The most important thing to understand is that concept of the Big Bang and then the collapse back to gravity. So in any innovation, you’re going to have tonnes. At the turn of the century in America, there are 300 car company. The largest was American electric vehicle company. We had electric cars in 1903. It was the biggest car company in America. The car got 46 miles to a charge. Elon Musk did not invent electric vehicles, but it got put out of business by Henry Ford. He did some stuff and basically put them out of business and everybody else. And now there are three major car companies in America. So we had the explosion and then we had the contraction. Think about phone companies. There were dozens of phone companies, and now we got two or three. And there were dozens or thousands of banks. And now we got four. So you get that explosion and contraction. And the same thing is true here is there are thousands of coins, tokens. Now everyone talks about crypto, they’re not. Cryptocurrencies, there’s only about a dozen. Like Bitcoin, Ethereum, Zcash, Dash, and a cryptocurrency is something that is a medium exchange or store value. It is a use case of blockchain technology, whether it’s a layer one or layer two, it’s a finite set. Then you have utility tokens. Utility tokens are maybe the worst thing ever. It was the whole ICO boom. They give you no claim on cash flows, no equity ownership. They’re not debt. They’re basically literal utility. I start a mark token. I sell them to you. You give me money. I go build a Chuck E. Cheese. I give you mark tokens and say, “Go knock yourself out, play the games.” But what you should have done is said, “No, I want half your equity and I’m giving you the money and you’re going to build it.” I want equity. I want to share in the future purchase of Mark E tokens, to play games like Dave & Buster’s. But utility tokens, 99% of them are going to zero. And there’s all kinds of them, and they’re bad, but 1%-
Bilal Hafeez (00:45:21):
So does things like those coin and these meme coins and things like that.
Mark Yusko (00:45:25):
… Oh, we’ll get to that one. That’s the worst of the worst. Total ripoff Ponzi scheme are the worst of the worst, but there are actual utility tokens that they’re trying to build something. They’re trying to build a Chuck E. Cheese knockoff, or they’re trying to build a community. But 99% of pre-seed stage venture capital deals, go to zero. And that’s all they are. They’re pre-seed stage venture capital deals in a crowdsource model. Then you’ve got the other L1, so at Bitcoin, which started as peer-to-peer cash is now digital gold. You had Ethereum come along and say, it’s not fast enough, it’s not it. Because in computing you can have fast or secure. Never both. So, if you’re super-fast like Visa, you’re not very secure. People have to get new Visa numbers all the time because of fraud and data leaks. If you’re super secure like Bitcoin, never had a fraudulent transaction in 13 years, not one. Think about that. Not one, how many really smart people have tried to hack into Bitcoin, thousands, millions, I don’t know, a big number. Not one fraudulent transaction in 13 years, most secure, but it’s slow. So it can’t be used as a primary, medium of exchange as cash. What it can be is a base layer protocol to power web three. So if you go back to the internet, there were 80 protocols. We had this explosion of protocols in the 60s and 70s and 80s, and this guy Vint Cerf invented TCP IP. And Vint, not a rich guy. He is done fine, but he’s not a rich guy. He invented the internet for God’s sake. No, he didn’t. He invented the protocol that then Tim Berners-Lee came along and he invented the internet. He wrote a webpage, the first one, 9500 lines of code, and he created the first webpage. That made TCP IP the choice to be the base layer for the internet. On top of that, we have FTP for files, SMTP for email, HTTP for websites and WWW. ties it all together. So of the 80 protocols, now we have five, just like 8,000 banks to four. So we had this consolidation. So now fast forward, Bitcoin comes along. Well Bitcoin, is like this base layer technology and we can build things on top of it and we will. Then we have file coin, which does basically what FTP does. Now, SMTP, HTTP. I don’t know. Is that Polkadot, is it Cosmos, is it Solana, is it Avalanche? I’ll duke it out. Maybe we have three or four. I don’t know. But then on top we have Ethereum, which is kind of like the WWW.. It’s the thing that people build on top, that creates this network. And so Ethereum, Vital created a faster, better system, and then people build apps on top of Ethereum. Same way people build apps on top of the worldwide web. That’s what the web is. It’s a series of apps and interactive, connected or connected sites. So going forward, we’re going to have these other L1s, whatever they are and we’re big believers in Solana. We love Avalanche. I like Polkadot, I think Cosmos could be well, I’m not a real big fan of Cardano, but there are going to be some big winners in that space I already have been.
Bilal Hafeez (00:48:43):
And just that on that Cardano, why are you less of a fan of Cardano?
Mark Yusko (00:48:47):
Just developer activity. I’m a big believer that, the way to judge a project is not by the price and not by how popular it is, but by the developer activity. If there’s developer activity, Remember we live in an open source world where developers don’t really get paid per se. They can get paid in other ways, but they’re doing it for the love of building and the more developers the better. And that’s why Dogecoin and Shiba I think are, to me, they’re everything that’s wrong with the markets today. The markets are broken and that we’ve turned investing into gambling and speculating and that’s wrong. And Shiba and Doge are jokes literally. Jokes, they’re forks of forks. There’s no developer activity. There’s no use case. It is pure Ponzi. The only way out is if someone else comes in and look the big whales, the Cubans and the Elon Musk, they said, “Oh, look, we own this. It should go up.” And then my guess is they don’t own it anymore. I can’t prove that whatever, but my guess is they don’t own it anymore. And they sold to the poor unsuspecting people. And look, both of those are worthless. They’re going to zero, but there are lots of things like Bitcoin, like Ethereum, like Avalanche, like Solana, one inch protocol we love, which is a deck of decks.
Bilal Hafeez (00:50:08):
And so how would you go about investing in crypto then to have this portfolio diversification. So you mentioned a bunch of coins and tokens now, which will sound reasonable. Do you just pick 10 or 20 and go along those, is that the best way of doing this?
Mark Yusko (00:50:21):
So the way we invest. So we run a venture fund that does 70% in equity of businesses that provide infrastructure to crypto. Then we invest 30% in the liquid protocols. And the way we invest is we don’t trade. There are lots of good traders out there, I think the average crypto hedge fund last year was up 214% so they had a great year, be wary this year, but they had a great year last year. And the reality is that we don’t trade. So, in our first fund, in 2018, we bought Bitcoin because we thought it was a series B. We thought it had a hundred X upside from there. We bought Ethereum, which we thought was a series A, which thought had more than a hundred X upside from there. And then we ended up buying a little bit of Solana and something called The Graph. Those were like pre-seed deals. They easily could have gone to zero, but they didn’t and they went up thousands of times. So then we did a fund too in 2020, and we actually made a mistake. We bet big on Bitcoin, which we thought was like a series C. We didn’t do as much in Ethereum and we missed Defi, and that was because of lots of different things in, and, we all make mistakes. But DeFi to me is a huge opportunity in that we’re taking TradFi and back to the point you made about centralised. So we have TradFi, banks, insurance companies, asset management firms, and ultimately all that’s going to be DeFi. Every derivative will not have any people involved. It’ll all be smart contracts, makes perfect sense. If you get lost, do you ask someone for directions? No. You look at Google Maps or Apple Maps, because we trust code. Because the problem in the south where I live, you’d ask for directions, it’d say, “Oh, go to where the Oak Tree was and take a left, then go where the general store was and take it right?” Like I don’t know where that is, so that’s not helping me. And so we can trust code more than humans. So derivatives and all that stuff I think ends up there. Lending ends up there like Aave and Compound and Maker and things like that, saving money market accounts. But my dad never going to hold his own key. 83 years old, loves his Bitcoin. Not going to hold his own keys. He’s going to be in a centralised company like Coinbase or BlockFi or Celsius, great businesses. We’re investors in both Coinbase and BlockFi and love these businesses. They are just financial services companies. They are centralised and that’s okay with me. For the average person who isn’t fascicle enough to go post directly on Aave and lend that way, I do it and I think I’m pretty into it. Even I don’t really do it as well as I probably should. I know some people who are really, really good, but even there I should probably have… And I do have some of my money at Coinbase. I take a measurable stuff. I’ll transfer money to somebody and say, “Oh, I didn’t know you had that much money.” “That’s not my wallet, you idiot. That’s a Coinbase wallet.” And like, “What do you use Coinbase for?” But for the stuff that I need to pay for things that I need to invest in, in real time, I like Coinbase.
Bilal Hafeez (00:53:19):
And you mentioned 70% with funds in infrastructure related-
Mark Yusko (00:53:22):
70% in equity, Gemini, Coinbase, BlockFi, Figure, and we own the equity of the business. Then 30% is in the tokens and within the tokens in fund three, we own one inch. We haven’t bought Bitcoin yet because I think it may go lower before it goes higher. Same thing with Ethereum, we’ll have more DeFi protocols, more play to earn protocols, more Metaverse protocols. We’ll have a diversified portfolio, call it 20 to 25 tokens that we think have, 10X, 20X type potential, but not overnight. And this is one of the things that bothers me about crypto, is everybody’s like, “Oh, if it doesn’t go up a 100% in a week, then it’s no good.” No, I think Bitcoin goes up five times from here over the next five years. I don’t think it happens tomorrow. And I think it might go lower before it goes higher. So I said the other day, I think we’re in the bear market phase. “Oh, I can’t believe you’re abandoning.” I’m not abandoning anything. It’s a cyclical business. We got to get leverage out of the system. There’s still too much leverage. There’s still people that are using too much leverage in an 80 vol asset that needs to go away. And we need more adoption. We have 260 million odd people who know what we’re talking about. We need a billion, we need 2 billion. And you know, I did this thing called, The Coins Podcast and it’s a video podcast, 10 episodes, kind of like a crime drama, and I was involved in kind of couple other early episodes. And it’s all about the next billion. It’s trying to get the average person who didn’t watch Mr. Robot. If you watched Mr. Robot, which is amazing. Too much gratuitous sex, too much gratuitous violence, too much gratuitous drug use, if I made me squeamish to watch a bunch of it. But the acting is brilliant and the writing is absolutely brilliant. And the storyline, if you watch that, when it came out four years ago, you’d be a really rich person because you would’ve bought a lot of crypto, because they make the case for why crypto’s better than JP Morgan coin and white Bitcoin and decentralisation matters in a really weird… But most people are going to watch that because it was pretty violent and gory and tough to watch. But coins is much more calm and much more sedate and it’s trying to bring that next billion people into the market.
Favourite equity sectors and bonds for 2022
Bilal Hafeez (00:55:36):
And in terms of trade value, equity markets in general, are there any themes you’re playing this year or any sectors or companies you particularly like?
Mark Yusko (00:55:43):
You know, I had an interesting conversation yesterday. I was writing an article and the year end, or year ahead article, what would you do? And because Macro is so messed up, we have manipulated interest rates all around the world. We have QE Infinity. We got the Yen being crushed. We got, loose Lagarde just crushing the euro. And then we got Jay “The Pusher” Powell, it’s amazing. When Jerome Powell got his first appoint, he was buttoned up and there was, he was a Hawk. Remember he was pictured as this Hawk. And then he became Jay, J-A-Y, “The Dove.” Now he’s just the letter “J” with a backpack full of steroid shots that he’s pushing on the corner. And so we got the pushers out there trying to overstimulate the economy and like any good addict, the longer you go, the more stimulus you need to get the same effect. So, that’s the problem of addiction. And so we’re at that weird macro phase where the base effect from the COVID lockdowns is wearing off. So we’re not going to have these big GDP numbers. We’re not going to have big earnings numbers and all that’s going to roll over. We’re going to go back to trend GDP, sub 2%. We’re going to go back to trend earnings growth. Apple, love the product, hate the stock. “How can you hate the stock? It’s done so great.” I’m like, “Yeah, it has.” And here’s why, because people don’t do math. So they add the same net income last year, roughly almost exactly as 2015. “Oh no, no. Mark, the earnings per share is way up.” Of course, it is, because they bought back shares, but that’s a distinction without a difference. If the revenue, I mean the earnings, the net earnings are the same. The net earnings are the same. There was no growth. So why would you pay 30 times for a company that’s not growing? And so, the illusion of growth through financial engineering has been rampant. And that was the whole tax act, the Trump deal, where he cut corporate taxes with the quid pro quo that you buy back share so Warren Buffett could make a bunch of money. And Warren’s a genius and he makes that happen, so good for him. But the real problem is as this money illusion wears off, nominal prices of stocks today are high. But if we denominate not in a ship coin, the U.S. Dollar, toilet paper, and we denominate in gold, real money, U.S. stocks are unchanged since 1996. People say, “Oh, that’s not right.” Like just do the math, because we’ve devalued the currency and globally, we’re devaluing the currency. So, I went back in this interview yesterday to the All Weather Portfolio. Bridgewater All Weather or the permanent portfolio that Ray stole, borrowed that came up before him. And it’s basically got four quadrant stocks, bonds, currencies, commodities. For my currency bucket, I would own no Western currencies, no dollar, no Euro, no Yen, I’d own cryptocurrency. And I would buy Bitcoin and Ethereum at a discount using the Grayscale Trust, because I can buy Bitcoin for 79 cents on the dollar and Ethereum for 85 cents on the dollar. That seems like a really good plan. Now, will those discounts ever close? Maybe not, but that’s a downside protection for me, if I can buy a dollar for 79 cents, that’s pretty good and I think the upside of the crypto’s long term is really high. For my commodity portion. I would own gold, gold miners and base metals so GDX, GLD, DBB. For the equity portion, I think basic equities are way overvalued. There’re two sectors I like. One is oil. So oil producers XOP and Fang, my thing is Fang, DiamondBank energy is going to outperform #Fang, Facebook, Amazon, Netflix, Google this year and I don’t think it’ll be close. Now it beat them last year too, but no one’s talking about it. So, Oil beat tech last year by a lot. And if you went back a year ago, no one would’ve predicted that. Well, we talked about it. We did it, but very few people were talking about. Then the other thing I like is Chinese tech. So KWEB, so if you buy KWEB you get 10 cent, Alibaba, Pinduoduo, Matewan and JD, I think that portfolio was going to crush it. It’s already crushing it this year because China is playing a different game. Everyone thinks they’re losing, they’re winning. That’s the only currency that went up last year, the Renminbi everything else, devalued against it. So, they’re winning in spades and yes, they did something I believe stupid by destroying the equity of the education companies, which freaked out the rest of the world. But I think, again, it’s they’re playing a different game. They play not chess while we’re playing checkers, they play go. And they are thinking way ahead, and they’re trying to move their companies back to Hong Kong and Shanghai to be listed and get them off the New York Stock Exchange and bring those big companies back. And I think they’ll do that at a big discount, you’ll make a lot of money. Go back and look at Wooshi, which was NASDAQ listed company. They re-listed back in China, went up tenfold because they re-listed at an undervalued level. I think the same thing will happen with DiDi and others. And then for my bond portfolio, I would own no traditional bonds, but I would own bonds substitutes. So business development companies, I think it’s BDC, which is the Barings Business Development Company and it’s 8% yield. And then MLPs, AMLP, which has an 8% yield. And then we are actually coming out with an arbitrage portfolio that uses SPACs as the basis for arbitrage. And we think we can make high single digits. That’ll be called CSH and that’ll come out February 1st.
Learning from star investors
Bilal Hafeez (01:01:11):
Great. That’s great, great insights. Then now I do want to sort of round off the conversation with a few personal questions. You know, one I like to ask everyone is what’s the best investment advice you’ve ever received from anyone?
Mark Yusko (01:01:19):
Losers, average losers and winners press winner. I’ve been very lucky. I had a mentor, Julian Robertson for a couple decades. He’s a North Carolina grad. He took me under his wing for whatever reason, treated me like a prince and was just great to me. And one of the best investors in history and he is the greatest identifier and trainer of talent, the world’s ever seen. I think of all the people that used to work for him, they managed 10% of all the long short equity money in the world. Just incredible. And they’re amazing. And I interviewed all these guys over the years, like 30 plus of them and said, “What made Julian great?” And they said he had an uncanny ability to double up. He would never double down. If something went in against him, he would say, “We’re wrong, admit, you’re wrong. Take the loss and live to fight another day.” He said, when he was right and things were going his way, he had an uncanny ability to double up to press the winner. And I think that’s definitely the best advice I ever got.
Bilal Hafeez (01:02:20):
And that’s great. That’s really great. Great insight there. The other question then, obviously clearly very knowledgeable. And do you have any productivity hacks? How do you keep on top of everything? What’s your thing, do you have a system or anything?
Mark Yusko (01:02:31):
Yeah, it’s very sad. I am the least productive person on the planet. Have to ask my wife. I really am. I have a lot of energy and I have a lot of interest and I think I work hard, but I like to play hard. I like to take time off, but I’m actually really not. I suck, as a technical term. On email, people hate me because I don’t want to answer emails. I’m actually decent on Twitter. I actually answer my DMs and things like that. And I’m a horrible procrastinator. I mean I live by the mantra MWE, minimum wasted effort. I don’t do anything until it’s due. So, I’m like the worst person to ask that question except, I would say the one thing that I would say, I do a decent job of, is I study other people that I admire by reading about them. John wouldn’t talked about this. He said, “One of the best ways to get better is to have mentors.” He said, “You don’t have to have a physical mentor.” You can read a book about Mother Teresa and learn about her and she can be a mentor and he would read lots and lots of books about other people to get better. And I do think that helps. So I tend to, read about, and I actually used to write about great investors. So I wrote these long letters and did lots of research about Sir John Templeton, and about Julian Robertson about George Soros. I could go on for an hour, literally just quoting Soros and the genius behind the man. Now, I don’t particularly like him actually, I think he’s kind of dodgy, but to use a British word. But I think he’s a genius. I think he’s one of the greatest investors of our age. And I learned a lot about how to think… Like his great lines is, “Never try to predict the future.” That’s silly. It’s not a point. You have to think in scenario probability, weighted scenarios. So as much as I believe that Bitcoin is the future of money, I have to have a probability that it’s not. And I have to have a probability that governments try really hard to make it illegal, which we’ve seen some examples of. So I have to think about those scenarios. I guess the only other one would be sleep, which sounds silly, but we all fool ourselves into thinking that we can get by on less sleep. You can’t. And the quality of sleep is better than the quantity actually. And how do you get good quality sleep? Be a good decider. Every day, I stole this from a guru a number of years ago. Every day you have a hundred decision and you have to decide. From what colour shirt do I wear really easy. Not people decide, but you have to make decision. What I have for breakfast or not have breakfast. But every day you got a hundred, and the better you are at ticking those off and making decisions, the better you’ll sleep. The reason people don’t sleep is they get into bed and their mind is racing on all the things they didn’t decide on that they put off. And so while I put off projects and I’m bad at that, I do a pretty good job of when I hit the pillow, I am out. Because I’ve made the decisions and that decision could be, I’m going to deal with it tomorrow, but that is a decision. And so being a decider, I think is a good productivity hack.
Books that influenced Mark
The Alchemist (Coelho) and The Tao Jones Averages (Goodspeed)
Bilal Hafeez (01:05:39):
And that’s great. And you mentioned books. So final question here, what book or books have influenced you the most?
Mark Yusko (01:05:44):
Yeah, there’s a decent number. I don’t read as much as I should. I joke my wife reads more in a month than I’ve read my whole life. In fact, I usually do these for my home office and it’s literally just this bookshelf and everybody says, “Oh, those are your books.” Like, “No, they’re my wife’s.” But the most impactful book in my life and I recommend it all the time is The Alchemist, so amazing, Paulo Coelho’s. It’s the personal legend is real and we all need to find ours and we all need to think introspectively about what we’re here for. What is our purpose? So that was the most impactful. The best investment book I’ve ever read is The Tao Jones Averages. And Tao is T-A-O, written by Bennett Goodspeed. You can’t get it new. You got to buy it on Amazon used. It’s maybe the best book I’ve ever seen on thinking. And what it talks about is you have to use your whole brain. And most of us particularly guys, tend to be very left-brained, right-handed, analytical. We drive looking in the rear view mirror, looking at the data. The problem is if the road turns you go off the cliff. Women on the other hand, tend to be a little more right, brained, a little more creative. They call women’s intuition for a reason. And what he talks about is that you need a balance. You need to use both sides of your brain. You need to have this whole brain approach, and he weaves in Tao philosophy and it’s interesting. I had this cool experience. So I got invited the 10 year anniversary of 9/11. So in 2011, I got invited to go see the Dalai Lama. And I was like, “Okay. Great.” And I said, “Yes.” And then something came up and it was over a weekend, and so I was having dinner with the fam and my son, who’s now 31, who was eight at the time said, or nine said, “Hey dad, when are you going to see the Dalai Lama?” Like, “Oh, I had to cancel.” “Dad, you have to go.” Like “How do you even know who the Dai Lama is? You’re in fifth grade or fourth grade.” He says, “Dad, he’s the second most recognised person on the planet behind the Pope, you have to go.” Like, “How do you know this?” He said, “Well, our teacher last year said she didn’t want us.” He was in Catholic school, said, “I almost just learn about Catholicism. So I’m going to teach you about Judaism, Buddhism, Confucianism, and Islam.” And it’s really cool. Buddhism is a philosophy. So I can be Catholic and Buddhist. And I started reading some of the stuff from the Dalai Lama. I’m like, “Who are you? And what have you done with my son?” And I’m like, “Okay, I’m going.” And I went and it was a life changer. The guy was absolutely hypnotic. And he gave this talk and he gave this healing address for 9/11. And there were 10,000 people there, and there were people standing in their head doing yoga and all captains of industry. And it was just amazing. And then he had this tent set up and the host had this tent setup and he answered question and he would get these questions like from the head of, AT&T. And he would read the question. And it’s so funny. So, he’s sitting in this chair with these two big body guards behind him in their robes, and he would read the question and he’d say, “That is such an important question. I couldn’t possibly have the answer.” And then like a laser beam, he would give the perfect answer, as if he’d known that person, his whole life. And I’m talking to the host after it’s like, “How. How did he do that?” Meditation, says he meditates 8 to 10 hours a day. “Okay, well, I can’t do that.” And so I had gone with this friend, who’s Indian and came back and his dad said, “What did you think?” And we said, “Oh my gosh, it was so amazing.” He says, “All right. So, are you going to start meditate?” And his dad, 75 years old looks like he’s 40. Just this amazing guy, meditates two hours a day. And my friend says, “Dad, I don’t have two hours a day.” He says, “Then do 10 minutes.” I have 10 minutes. And I’m still not great at it. I try. I don’t do it every day but the clarity of thought that comes from spending some time in meditation is unbelievable. And if you look at many successful people, whether it’s Ray Dalio or others, they talk about this and there is something to it. There’s a reason that’s been going on for generations, and so this idea of ancient philosophies, if you want to know anything about leadership, don’t read leadership books, read Cicero and Socrates. It’s all the same. All of it. It’s the same.
One of my favourite lines, I have it on my desk over there is from Seneca The Younger and it says, “Failure changes for the better, success for the worst.” And our society’s exact opposite. We don’t allow people to say it. We don’t let things go under. We don’t let businesses fail. We don’t let people fail. If your son or daughter comes home with four A’s and a D, what do we all do? “Oh my gosh, we get a tutor.” And we spend how much or all their time on the D. What should we do? Drop the class with the D and spend all your time on the four A, that’s what you’re good at. You don’t have to be good at everything. And it’s this whole idea that failure is good. And Will Smith, I’ll leave with this, Will Smith, great guy spoke once and I was just hypnotised by him. And he said, this one line that I remember, “Fail fast and fail forward.” Fail fast and fail forward. And then as Michael Steinhardt, had some, “Make all your mistakes when you’re young, when it doesn’t cost you much.” And so don’t be afraid of failure. Don’t be afraid of make a mistake. Don’t be afraid of taking risk. When you’re young, that’s when you should do that. That’s when you should make all these decisions and you should take these risks. So it’s the long answer to the question, what book.
Bilal Hafeez (01:10:43):
No, it’s a great answer. And I’m going to get my kids to listen to this part of the podcast, just to get them inspired by this. It’s been great speaking to you, and hopefully we’ll be able to stay in touch. And if people did want to follow you, what’s the best way for them to do that.
Mark Yusko (01:10:55):
So @markyusko on Twitter. And I’m on there way too much, as my wife says. Our website is Morgancreekcap, C-A-P.com And we have some, letters and stuff that we posted over the years. We have a YouTube channel. So, if you type in, Around the World with Yusko, into YouTube, it’ll pop up. And there’s, channel’s got all of our old presentations. We do one every week on different topics. And then if you Google, Morgan Creek quarterly letters, you’ll find some letters. And I don’t mean this in an modest way. I actually really like it. I really like the letter I wrote on George Soros, the one on John Templeton, the one on Seth Klarman, and the one on Julian Robertson. Those four letters are… They’re long, they’re between 1680 pages, but they’re really instructed because we dive deeply into some of the greatest investment minds ever. And they’re very accessible because they provide all these quotes. So basically what I do is I take a quote and then I analyse what I think they mean by it and give a bunch of life lessons so I think those are interesting things.
Bilal Hafeez (01:12:00):
That’s great. I’ll include those actually those articles on the show notes. So with that, thanks a lot. It’s great having you on.
Mark Yusko (01:12:06):
Thanks a lot. Thanks for having me at the Hive, and I wish you all the best for the new year.
Bilal Hafeez (01:12:10):
Thanks for listening to the episode. Please subscribe to the podcast show on Apple, Spotify. Already listen to podcast, leave a five-star rating and a nice comment and let other people know about the show. We’d be super grateful. Also, sign up to become a member of Macro Hive at Macrohive.com, we’ll be back soon. So, tune in then.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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