In this episode, the ReSolve team is joined by Jason Buck, co-founder and CIO of Mutiny Funds, to delve into a range of topics, from the concept of ergodicity, portfolio construction, and the importance of diversification in investing. They also discuss the intricacies of the capital efficiency and tax implications of various investment strategies.

Topics Discussed

• Jason Buck's explanation of ergodic and non-ergodic concepts using the analogy of Russian Roulette

• The importance of understanding expected value in portfolio construction

• The role of offense plus defense in winning investing championships

• The concept of capital efficiency in using leverage and its implications for investment strategies

• The tax implications of Return Stacking and how to navigate them

• The significance of broad diversification in investment strategies

• The impact of different market conditions on the performance of long volatility managers

• The importance of maintaining line items in the portfolio for risk protection

This episode provides valuable insights into the complexities of investment strategies, portfolio construction, and the importance of diversification, and is a must-listen for anyone interested in understanding the nuances of investing and portfolio management.

This is "ReSolve's Riffs" – published on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick, and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management Inc.

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association ("NFA"). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.

I realized I didn't really define ergodic

2

and non-ergodic quite clearly.

3

The easiest way we think about it

that's very visceral is, if you

4

think about Russian roulette, right?

5

Would you rather be one of six people

playing Russian roulette or would you

6

rather play Russian roulette six times

in a row, That's the difference between

7

an ensemble and an individual path.

8

if I offer you a million bucks to

play Russian roulette once, you

9

shouldn't do it, but you're probably,

you might think about taking it.

10

But if I gave you a million dollars,

but you got to do all six of the

11

same, like in succession, you're

not going to take that shot.

12

So that's the difference between,

that means it's non-ergodic when

13

your individual path dependency is

different from the ensemble average.

14

Rodrigo Gordillo: all right.

15

All right.

16

Welcome everybody to another

episode of Resolve Riffs.

17

And this time we have the one and

only Jason Buck, CIO of Mutiny

18

Funds and co founder of Mutiny

Funds, uh, master of all trades.

19

He is a galaxy brain that we always

tap into whenever we have any

20

thoughts on pretty much everything.

21

But today we're going to focus

a little bit on, um, our area of

22

expertise, which is investing.

23

Jason, it's been a long time, man.

24

How you been?

25

Not necessary, sure.

26

We can go, we can go Bitcoin if you want.

27

Jason Buck: I thought we were going to

talk about, I thought I was here to talk

28

about Keto, VO2 Max, that sort of thing.

29

And apparently you guys shop at the

same, couch outlet for the color of

30

your guys couches in the background

31

Rodrigo Gordillo: don't get

me started on that, but yes.

32

Jason Buck: Not probably not a lot of

33

Adam Butler: but we will not get into.

34

Rodrigo Gordillo: How you been Jason?

35

Jason Buck: Couldn't be better.

36

I actually,

37

uhhh I didn't mention it while we

were off I was actually last week I

38

was, I don't know if either of you

listen David Senra an event really

39

cool to meet, you know, a hundred

other great entrepreneurss that are

40

big fans of the podcast and everybody

was kind of doing their own thing.

41

It was nice.

42

Cause like David had vetted them.

43

So it's on kind of a high from that.

44

And then kind of crashing over the

weekend after all those intense talks.

45

So it reminded me of like some of those.

46

the collective events or real vision

blacklist where you're in those

47

intense conversations like 24/7,

which is, it's really exciting, but

48

really exhausting at the same time.

49

Rodrigo Gordillo: Oh

yeah, day one is amazing.

50

Day two is pretty good.

51

Day three, you're like, how

do I hide in the corner?

52

Yeah, I remember those.

53

it is, uh, draining, right?

54

and you're sitting around people that

aren't just first derivative thinkers.

55

They're second and third

derivative thinkers.

56

So you can't just, go at it half assed.

57

You have to, be fully engaged

in those conversations.

58

Oh,

59

Jason Buck: joy of the privilege that

we're in positions in a lot of times,

60

whether it's in hedge funds room or

with other entrepreneurs, I love being

61

in those rooms where like you have to

really mind your P's and Q's, you know,

62

like when we're sitting around having

a beer with like the in laws or, you

63

know, You know, some of your buddies,

you're just kind of shooting the shit.

64

You could throw out some macro

opinion or some political opinion

65

and everybody just lets it fly.

66

But in those rooms, somebody's

like, excuse me, I happen to be

67

an expert on that, and then they

deep dive and just crush you.

68

And so I always love being

in those kinds of rooms.

69

Rodrigo Gordillo: the worst feeling

is a head tilt as you're delivering

70

something with a guy that, you

know, brilliant in that space.

71

You're like, Oh, here it comes.

72

Jason Buck: exactly.

73

Rodrigo Gordillo: comes.

74

Yeah.

75

Well, it's almost like every day

with Butler and Philbrick, honestly.

76

Jason Buck: Well, that's why, as you

know, before I said, I was raising

77

the cauldron of, of Gen X, just

beating the crap out of each other

78

growing up verbally and physically,

so I'm well used to the Kumite.

79

Rodrigo Gordillo: Indeed.

80

So what, what have you

been working on these days?

81

Cause I think.

82

You know, honestly, Jason, since the

day I've met you, we've always basically

83

said the same thing in different ways

when it comes to the investment side.

84

but, uh, you know, I was reading one

of your ahhh blog posts recently that I

85

thought was quite insightful in terms of

trying to explain, I guess, ergodicity.

86

But, why don't you walk us through

the, the Herschel Walker analogy

87

that you guys wrote up recently?

88

Jason Buck: Yeah, this is a great essay

written up by my partner, Taylor Pearson.

89

but the thing like you're, that.

90

Rodrigo's alluding to, we talk about

ergodicity a lot, and, you know, it's

91

just a fancy word for sequencing risk

or path risk, right, that we've kind of

92

always heard about before, but we try

to attack it in many different ways.

93

And, you know, a lot of times people use

sports analogies, but, Herschel Walker was

94

actually the, the Herschel Walker trade

was known as the great train robbery.

95

Now, I know Philbrick's not on here.

96

You guys aren't big, you

know, American football fans.

97

But basically in the eighties

and nineties, uh, Herschel

98

Walker was a great running back.

99

And when Herschel Walker first

came out, he went, he was

100

drafted by the Dallas Cowboys.

101

And, you know, over his lifetime

achievements, you know, he's

102

got hall of fame numbers.

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He put like up over, I think

like 8, 000 rushing yards, close

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to like 5, 000 receiving yards.

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And this was a time when, running

backs didn't do really do receiving.

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So he was really this multi

tool player that people thought

107

was a true game changer.

108

I think he had about 61 touchdowns ish.

109

So, you know, he plays for

Dallas for like three years is

110

absolutely crushing it.

111

And the Minnesota Vikings think,

we need to get Herschel Walker.

112

This one player is going to change

the fate of our organization.

113

And now we're going to

win some Super Bowls.

114

So in the trade for Herschel Walker,

the Dallas Cowboys received, if I recall

115

correctly, eight draft picks and five

players for one player in Herschel Walker.

116

And it was like three first

round draft picks, like three

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second round draft picks.

118

It was pretty insane.

119

So Minnesota Vikings get Herschel Walker.

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turns out the kind of top ticked

him, you know, unfortunately for him.

121

And after three years, they traded

him on, I believe to the Eagles and

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then they traded him on the Giants.

123

So it was kind of like, kind of, you

know, he put up those great numbers the

124

first year and then, and kind of like

languished a little bit after that.

125

And they call it the great train robbery

because of the amount of players that

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Dallas got, but more importantly, they

went out right in that next draft and they

127

got people, players like Emmitt Smith.

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And they were able to, this is

129

And then the early to mid nineties,

the Dallas Cowboys used those trades

130

to build a team that won three Super

Bowls in the early to mid nineties.

131

So that's why it's called

the great trade robbery.

132

Cause it was the most lopsided trade in

history, basically one player for eight

133

and, and Dallas was able to win three

Super Bowls while the Minnesota Vikings

134

were not able to pull it off at all.

135

So it was just an example of, just,

we started the beginning of this,

136

you know, referencing being in these

rooms at global macro events or

137

entrepreneur events and everything.

138

And you guys have seen it a million times.

139

Everybody's like, what's your number

one trade, you know, whether it's the

140

zone conference, whatever everyone

wants to know, what's your number

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one trade, what's your number one

asset class, you know, show me how

142

to make a fortune off of one trade.

143

And as I know, you guys

don't think that way either.

144

You know, we think, thinking teams or

ensembles or portfolio construction,

145

because it's more important.

146

Like what if you're wrong?

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And it's more of the average.

148

return across that team than any

individual trade or individual

149

strategy or individual player.

150

But it's a, it's a mistake that we

see time and time and time again.

151

And, you know, we could use millions

of different sports analogies.

152

Like I've been working with, on the

idea of Tour de France, which may be

153

more in your, either you guys cyclists,

I know you're swimmers, not cyclists.

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Rodrigo Gordillo: no other stuff,

runner, you know, Gaelic football.

155

But that's not,

156

Adam Butler: I feel like, we

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Rodrigo Gordillo: I know of it.

158

I followed enough of it to

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Jason Buck: yeah, yeah, you

could, you could track it.

160

I mean, you know, I know you'd love

to, you know, put on those uniforms

161

and get in your full spandex, you

know, and that way you could be a

162

team billboard like the rest of them.

163

Yeah, exactly.

164

Adam Butler: mind.

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My own bedroom.

166

Okay.

167

Jason Buck: just a, it's a, it's

a dress up for all these rich guys

168

to pretend like they're cyclists

with their big beer bellies.

169

It's great.

170

and I'm sure you guys have seen

this stuff about, you know,

171

bone density and everything.

172

It's like being in space or something.

173

It's a terrible way to get exercise.

174

Plus you end up like a T Rex.

175

Anyway, the

176

Rodrigo Gordillo: Check, check, check.

177

We can talk about, you

want to talk about that?

178

You want to do a half

an hour detour on that?

179

Jason Buck: Absolutely.

180

That's, I thought we

were here for VO2 Max.

181

So there's 21 stages

of the Tour de France.

182

What's very interesting is the yellow

jersey winner, the overall category

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winner, a lot of times may not win

any stage or just a few stages, but

184

it's the person with basically the

best time or the best average speed

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over those 21 stages or 21 days.

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Lately, now they're up to 42

kilometers an hour, which I

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believe about 26 miles an hour.

188

It's kind of the average speed

to win the Tour de France.

189

And during even that time, there's

been two guys that won the Tour de

190

France that didn't even hold the yellow

jersey at all to the very last day.

191

So once again, it's

about your average time.

192

And if you think about Tour

de France, you have the.

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flats for time trials.

194

You've got a little bit of

hilly things for sprints.

195

You've got the mountains of the climbers

and there's different jerseys, whether

196

it's polka dot green jersey, white jersey

for people that can win those stages.

197

Because as a overall winner, you

have to be well rounded, right?

198

You have to not lag too far behind

on those sprints, not lag too

199

far behind on those mountains.

200

Make sure your team can really put

up great numbers in that time trial.

201

So you have the ability to, once again,

it's your average ensemble through time.

202

You know, it's that multiplicative process

that we always talk about day by day.

203

How can you do multiply by the

next day, multiply by the next day.

204

and that what ends up with your

Tour de France winner, and you

205

don't have to be really outstanding

at any one particular side.

206

And then it's fractal in nature too,

because you have a team with you.

207

All these domestiques are the ones that

are trying to, you know, maybe, Yeah, you

208

can, you can ride behind them to get a

little bit of a windbreak, to kind of rest

209

during those tough times, pull you ahead.

210

They can chase that Peloton down for you.

211

There's a lot of things that are

going in that fractal nature of

212

everything we talk about with

ensemble approaches to investing.

213

you know, it just takes time and

that multiplicative effect to

214

really win that championship.

215

And we view the same thing, you know, when

it comes to investing, it's offense plus

216

defense wins, investing championships for

217

Rodrigo Gordillo: And I think that's

a key point here because we talk a

218

lot these days about line item risk.

219

And if you think about each one of

those teammates within the Tour de

220

France, when you actually, there's

a great, I think it's on Netflix,

221

but they follow the Spanish team

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Jason Buck: Yep.

223

Rodrigo Gordillo: talk about how they're,

Dealing with the different stages

224

and how important it is to have your

anchorman to be able to be at the top.

225

When you have your lead guy exhaust

himself in the previous run.

226

I mean, it takes a few

days to recover from that.

227

Your hemoglobin count and

all that, technical stuff.

228

But the point is that you are going

to be a loser after being a big winner

229

necessarily, physiologically, and you

need your number two and, your other.

230

Players to play integral roles.

231

And if you are a typical investor and

you're looking at these, these cyclists

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and deciding whether to invest quote

unquote, in them at any given time,

233

you might be calling the best cyclist.

234

If you see them underperform on the

third, piece of that tour, right?

235

So this is what we see all the time.

236

You see the idea of an

ensemble makes sense.

237

Then you put the ensemble and you get each

individual item, each individual name.

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They have a poor period.

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You call the worst performing.

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You get more money the best performing and

it just creates a lopsided distribution.

241

And it's a problem.

242

and yeah, I think your sport analogies,

both of them, you know, bring light, try

243

to say the same thing in different ways

that, the real goal here is to minimize

244

the team's distribution of outcomes

and maximize the chances of success.

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So I love that, um, that cycling analogy

246

Adam Butler: Chris Cole had a really

good, similar analogy to that.

247

Rodman in the role that he played

with the Bulls for so many years.

248

and I just love how it highlights that

you can have a player who is just so

249

unbelievably potentiated or synergizes

so beautifully with a certain group

250

of people that, all compliment that

player in different ways, or that player

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compliments them in different ways.

252

Together, they are much, much bigger

than any of them would be if they

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were to, be a diaspora that all

went to join other teams, right?

254

Together, they are something much

larger than the sum of the individuals.

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And I don't know the Tour de France

nearly as well, but I imagine that entire

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team is what wins the championship.

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It's not the guy who passes

the, end line first, right?

258

And similar with, Dennis Rodman, clearly

a very, niche player had a very specific

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role that he played on the team.

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He got rebounds and he kicked it back

out to provide new scoring opportunities

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for the other members of the team.

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He didn't score much on his own.

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he didn't have a lot of, you know,

he's a pretty good defenseman in

264

general, but didn't have a lot

of great offensive, qualities.

265

but without him, they would have

had far fewer opportunities for the

266

other members of the team to score.

267

And, you know, if you look at your

portfolio in the same way, you can't

268

really in any way, determine the

value of any of the constituents of

269

the portfolio outside of the context

of the portfolio as a whole, right?

270

I think that's very, very challenging

for many people to recognize and it

271

makes the decision making hard because

now you're making decisions in a

272

multidimensional context, not in the

context of, is this manager good or bad?

273

Okay.

274

Rodrigo Gordillo: and what's challenging.

275

And I'll ask you a question here.

276

Jason in, in my experience anyway.

277

When you talk to people about

the different components.

278

And then you let them see those

different components in their portfolio.

279

They have a tough time with it.

280

And we often get questions like, why

don't you guys just wrap it all up in

281

a single, like a one shot solution?

282

And I would say, because then

nobody understands what's going on.

283

That, nobody wants the

one and done solution.

284

Because it's really, you want to know

what's going on underneath the hood

285

and it's so non correlated to S& P 500.

286

So you straddle that.

287

You talk a lot about diversity of

strategies, diversity of managers, but you

288

have a lot of one, one and done solutions.

289

how do you, how do you think

about that problem with investors?

290

Jason Buck: Yeah, it's the thing

that, as a group, we've been talking

291

about for a lot of years now.

292

and so like, Adam was saying, like

with Dennis Rodman, if you're looking

293

for players that score, right, you're

never going to pick a Dennis Rodman.

294

But if you look at his offensive rebounds

specifically, and then you look at Scottie

295

Pippen and Michael Jordan scoring, it's

much higher with Rodman on the court.

296

And similarly, like soccer, like,

Liverpool got great because they,

297

they got Alisson as a goalkeeper and

then Virgil van Dijk as their sweeper.

298

And now they could go all out

high octane offense and then

299

they start winning championships.

300

Cause it's that, that combination, but,

a lot of people have read Dalio and

301

that 16 uncorrelated return streams.

302

but as we've always talked about

a million times, especially,

303

it's not just uncorrelated.

304

If you can get negatively correlated

return streams, that's incredibly

305

accretive to the portfolio over time.

306

Now, individually, if you look at that

snapshot and that negative line item risk

307

of, say, tail risk hedging protection, it

looks like a terrible negative line item.

308

You know, we've talked about how do you

get over that, hurdle in many different

309

ways and whether that's, you know,

zigzag, zog, like we've talked about,

310

you guys talked about skis and bikes was,

you know, I always bring up your guys's

311

great example from back in the day.

312

you know, it's, how do

you put those together?

313

So the way, you know, like you said, I

think about it is, if anybody wants to see

314

our line items, we're full open Komodo.

315

I like to show all that stuff.

316

But more importantly, you

have to get investors buy in.

317

And so you have to meet

them where they're at.

318

And so part of that is we started at a

very high level, just offense and defense.

319

So we describe offensive assets

as everything that people know.

320

That's like long GDP from stocks,

bonds, private equity, VC, real estate.

321

All of those things are

offensive assets in our mind.

322

We then like to pair those with

defensive assets, like long volatility,

323

tail risk, commodity trend following,

gold, maybe even cryptocurrency.

324

We can argue about that later.

325

Other people can argue about that.

326

Um, but the idea is like, you

need to pair offense plus defense.

327

So that's the way we started about, and

then other ways of thinking offense,

328

defense, if you want to get more

sophisticated is implicit short volatility

329

trades versus long volatility trades

or breakout versus mean reversion.

330

And it's about pairing those kinds

of things together and how the, The

331

portfolio compound through time.

332

So we'd like to put together tons

and tons of lineups to get that

333

uncorrelated issue and that negative

correlation, but it really basically

334

boils down to offense plus defense,

And that's what we kind of paired

335

together in our cockroach portfolio.

336

And then like you're saying, Rodrigo,

we allow people to pick, you know,

337

if they just want the defensive

assets that fine, if they just want

338

the long volatility, that's fine.

339

If they just want the

commodity trend, that's fine.

340

But then within that, our Mandelbrot

and fractals, we'd like to Then

341

use ensemble approaches to even

those different asset classes.

342

So we're just trying to get that

broad diversification because we

343

don't believe we have a crystal

ball that can predict the future.

344

So I think it's a combination of both

it's, you know, to get the emotional

345

buy in and we've talked about this many

times when you're dealing with clients.

346

If you can't get that elevator

pitch emotional buy in, to offense

347

plus defense, then all your

line item risk doesn't matter.

348

And so you are right.

349

I think if you could package it up

into a, a one product fits all or total

350

portfolio solution, I think people do

a lot better just seeing that total

351

portfolio solution and their, their, let's

call it their monthly returns on that.

352

Then they would see in the line items.

353

Cause like you said, then

they're going to nitpick those.

354

I know Rodrigo, you're intimately

familiar with , there was a, famous

355

tail risk manager that they developed a

product in Canada that added tail risk.

356

And during the good times,

people had hated seeing those

357

negative line items on there.

358

And I think it closed down

after like three or four years.

359

So it wasn't even, didn't even

get a chance to live through

360

the first like black swan event.

361

so it's really about.

362

I hate to be, it sounds pedantic to

say it's a, form of babysitter tax,

363

but by combining those things into

a total portfolio solution and just

364

getting your clients to hold those,

it's much better to figure out a

365

way for them to hold those defensive

assets so they will be protected.

366

And those things can kind of jump

out of the curtain when they need

367

them most, either during, a liquidity

cascade, TM to Corey Hoffstein on that.

368

Or, you know, like inflationary

environments where you need those

369

commodity trend followers or some

sort of, fiat, default diaspora

370

valuation where you need those gold

or potentially cryptocurrencies.

371

So it's about combining those in

a way that people need the most.

372

But then if people do want a deep

dive, we're more than happy to

373

show them all the line items.

374

Rodrigo Gordillo: So in the mutiny

fund, you would allow people to

375

understand what they're holding.

376

And I guess that's interesting because I

wonder if that's behaviorally different.

377

The idea that, Hey, we, you can look

through the window, but you can't touch.

378

Right.

379

This is not your portfolio.

380

You can look through the window

and be like, it's your portfolio.

381

And you can be like, yeah, I,

this is all generally good, but

382

can you take that one item out?

383

Like, if you can't do that because

you're in a pooled fund, yeah.

384

Look all, look through

the window all you want.

385

I am not, I am not selling that fund

manager that is down three years in a row.

386

Jason Buck: Right.

387

It's, yeah, so it's not a, and sorry,

Adam, I'll let you go, but it's, yeah,

388

it's not a choose your own adventure.

389

Yeah.

390

We don't let you mix and match

kind of in the portfolio.

391

You get what you get.

392

And I, I steer 99 percent of

our clients to the cockroach

393

portfolio because it's just better

for them to hold that longterm.

394

They're much more likely to hold it

with all those asset classes in there.

395

and then quite frankly, you know, there's.

396

10, 000 hedge funds out there and

even more, ETFs and mutual funds.

397

If you don't like, our particular brand

of putting those together, there's

398

plenty of other options for you.

399

So it's like, you can get any

color, model T Ford, as long

400

as it's black kind of thing.

401

And that's the way we

do the cockroach run.

402

Sorry, Adam, go ahead.

403

Save me from myself.

404

Adam Butler: was, I was just going to

say that It is funny there's so much

405

advantage to wrapping all these line

items up into a single, return stream.

406

And then, of course, clients

always want to look under the hood.

407

And there is some benefit because

usually if you've done it properly,

408

you've got Something that you can point

to or that they can point to that is

409

working, so there's going to be some

equities in the portfolio, equities are

410

rallying, you can kind of say, well,

I mean, you own some equities, right?

411

You're not all entirely equities.

412

So at this point in time, you're,

you're dragging a little bit relative

413

to some arbitrary benchmark, but

there's something there, the line item

414

there that's, it's delivering this

excitement that you're hoping for.

415

And then there's these other line

items that are not shining right now.

416

But that we expect to shine under

different market conditions.

417

And so they can, you know, they've

got something to root for, even while

418

they're enjoying the slow and steady

rise of of the diversified portfolio.

419

Jason Buck: Um, know, educate our

clients that like, there's always a

420

part of the portfolio that probably

makes you want to throw up, that all the

421

news media is telling you not to own.

422

You know, we've talked about this a

million times, but bonds the last few

423

years, nobody wanted to own bonds, right?

424

But it's part of a broader

diversified portfolio.

425

And quite frankly, if all your asset

classes are up and to the right, you

426

don't have broad diversification, you

need something you hate in that portfolio.

427

So it's really about.

428

Educating clients, making sure

you find the right clients.

429

And I think that's the more

interesting piece to what we all do

430

is trying to find your tribe, right?

431

And I, I spent a lot of my time trying

to fire clients as they come in,

432

because if they're hot money and they're

looking for the hottest thing, they're

433

just not the right clients for us.

434

We just have, Very different time horizon

and perspectives, and that's fine.

435

I'm happy to pass them along that

some may be a good fit for them.

436

But a lot of times, you know, most

of the time we're not a good fit.

437

So, it behooves us to spend our

time on the clients that have been

438

searching for what we do, have tried

to build themselves, are looking

439

for a solution like what we have.

440

and that understand that broad

diversification means, if

441

you're benchmarking to 60, 40.

442

which is an arbitrary benchmark,

you know, you can be above or below

443

that given any month, quarter, year.

444

And then like you're alluding to Adam,

as, as we all know too well, it's

445

great that like, especially this year,

you know, each month is different.

446

Like, one month, stocks are up and

you're like cheering and then you

447

rebalance at the beginning of the

month and then bonds are up, stocks

448

are down, you know, commodity trends

going up and down, you know, and you're

449

getting this broad diversification.

450

And then even more granular

than that, you know, we, we use

451

global stocks and global bonds.

452

And quite frankly, it's been a

pretty shitty 10 year run for

453

like, for global diversification.

454

But we just feel that's the

right thing to do long term.

455

Rodrigo Gordillo: Yeah.

456

And I tend to speak about these

strategies, these all weather, all terrain

457

strategies, cockroach strategy as multiple

pistons in a motor, that you want to have,

458

because they're going to move up and down

in different times and different ways,

459

but if you have them in balance, you're

going to have a well, well balanced motor.

460

And oftentimes I think people

think non correlation means, well,

461

each one of these is going to have

negative correlation to each other.

462

So when most definitely there's going

to be, you're going to have your, non

463

equity bond exposures be completely

non correlated and always making money.

464

But there is no, even at any given day,

any given month, you can see a possibility

465

if you have eight different pistons of

seven out of eight of them being down, Or

466

if you just think of the major components

of a risk parity portfolio or the all

467

terrain portfolio, which includes trend

following that we've written about.

468

You know, you have 2022 where you

see, let's say equity bonds, two

469

pistons down trend and commodities,

two pistons up making a zero return.

470

And that being a great year for a

cockroach type portfolio, right?

471

Like you didn't lose 25%.

472

And then the next year, the

two that went down, went up.

473

And the other two that went up, went down.

474

And you're, ish, like flat ish.

475

You're offsetting each other.

476

This can happen for a prolonged period

of time in an all terrain portfolio.

477

Um, but I just think it's, I wonder

whether the nomenclature, like

478

cockroach better than all terrain or

all weather, because it feels like

479

cockroaches is about not dying and all

terrain is about winning all the time.

480

And I think that's where

the disappointment comes.

481

have you found, in the last couple of

years has been one of those periods

482

where half the pistons have been

down and the other half have been up.

483

have you had difficult conversations about

the resilience of a strategy like this?

484

Jason Buck: Yeah, I think you're

always going to have those difficult

485

conversations in the interim, Because

it's hard, as you know, in this industry,

486

we can only get a 20-30 year back test

and, back tests are caveat emptor,

487

and you know, future performance is

not indicative of past returns, right?

488

Unless, to me, you build really broadly

diversified portfolios like we all do.

489

Then you can have a better intuition

pump that this is a little more

490

accurate than probably just a

singular short vol strategy, right?

491

Like it just hasn't seen the blow up yet.

492

So that gives me at least some

confidence in, in what we do.

493

by the way, I realized I

didn't, really define ergodic

494

and non-ergodic quite clearly.

495

The easiest way we think about it

that's very visceral is, if you think

496

about Russian roulette, Would you

rather be one of six people playing

497

Russian roulette or would you rather

play Russian roulette six times in

498

a row, That's the difference between

an ensemble and an individual path.

499

Rodrigo Gordillo: Wait, wait a minute.

500

That's so good.

501

That's

502

Jason Buck: Yeah.

503

so , ergodic system is where the

504

Rodrigo Gordillo: it out to people.

505

Jason Buck: Yes.

506

The ensemble is the same.

507

Exactly.

508

Exactly.

509

Like if I if I offer you a million

bucks to play Russian roulette once, You

510

shouldn't do it, but you're probably,

you might think about taking it.

511

Rodrigo Gordillo: Depends

on how desperate you are.

512

You might do it, family's hungry.

513

Maybe it's like, you know,

it's a period of starvation.

514

Everybody's trying to get

along and have some fun.

515

If I die, if I get it,

my family's set for life.

516

I might take that one shot.

517

Jason Buck: right.

518

But if I give you

519

Rodrigo Gordillo: often

to do all six barrels?

520

Jason Buck: exactly, but if I gave you

a million dollars, but you got to do

521

all six of the same, like in succession,

you're not going to take that shot.

522

So that's the difference between

that means it's non-ergodic when

523

your individual path dependency is

different from the ensemble average.

524

And this is where I think.

525

Expected value gets people caught

up a lot of times, and they don't

526

think about expected value in a

portfolio construction construct.

527

And so, you know, that's why we

think about most of our life.

528

The more interesting things

in our life are non ergodics.

529

So that's the way we try to think about,

you know, hedging out some of that risk

530

and trying to have those tighter bands

of Expected value and probabilities

531

multiplied together, over the longer

term through broad diversification,

532

like we were saying with backtests,

you can have a better, hope for that.

533

But yes, I think in, to answer your

question, people have questions all

534

the time, like people question why we

held bonds for a long time, you know?

535

And like we said, maybe, you know, one

day the bonds will come back, maybe they

536

won't, we just don't know when, people,

hate having long volatility and tail

537

risk until they really, really need it.

538

Then they love having it, you know,

I'm sure when, when stocks, you know,

539

eventually tank off, people are going to

hate owning stocks, and then commodity

540

trend comes and goes out of fashion,

so these are the kind of life we all,

541

we chose to live is, uh, we like to

beat our heads against the wall with

542

this broad diversification, but, I

think more importantly for all of us,

543

it's not, there's no way for us to even

think or live any other way, right?

544

That's the way we think about the future

because I don't have a crystal ball.

545

I can't predict the future.

546

If I could, you know, then I would

be able to pick what, tell you what

547

asset class is going to do great

over the next six months, but I

548

don't think anybody possibly can.

549

And so that's why the other client,

primarily clients we work with are a lot

550

of entrepreneurs, 25 to 45 that sold their

business, had their first liquidity event.

551

And like, I always try to tell

them is like, you had to take

552

enormously concentrated risk and

you had to get enormously lucky

553

to make that kind of wealth.

554

Now to keep it, you're going to need

broad, broad, broad diversification

555

to preserve and keep that wealth.

556

And for a lot of people, that's

very difficult 180 to make.

557

So going back to your thing about

explaining what we do or trying to get

558

it across to clients, I think it's more

important to get this simple things right.

559

Make it very simple about broad

diversification preserves wealth, about

560

offense plus defense preserves wealth.

561

Those sorts of things.

562

If you can't get that, it doesn't

matter about the line items.

563

It really doesn't.

564

Rodrigo Gordillo: So this is, I had

an interesting discussion with a very

565

wealthy individual who I like, I'm

going to use that analogy actually.

566

Like you played roulette, you played

it once though, and you got lucky.

567

And if they had a couple of failed

attempts, like you played, you got shot

568

once your wallet was dead and you had to

come back to life in order to play again.

569

But now we want to have a more

consistent rate of return.

570

But I was, I was talking to this.

571

Very wealthy single family office

and discussing this concept

572

of you don't want to lose it.

573

Now his view was, Oh no, I have

enough to live off of no matter what.

574

Like I don't need hundreds

of millions of dollars.

575

So with what I have left, I

should go balls to the wall.

576

What do you guys think about,

how do you respond to that?

577

and I, I, what, if you're actually

giving proper advice to somebody

578

who's got 200 million and that

person lives off of $500,000 a year.

579

What's the better advice there?

580

Is it to keep it or

581

Jason Buck: I'm gonna, I'm gonna,

582

Rodrigo Gordillo: all in?

583

Jason Buck: I'm gonna jump in before Adam.

584

I was about to say, now that you

put a figure on, I was about to say,

585

I do know a guy that has a billion

dollars in T bills and lives in Puerto

586

Rico and no taxes on those T bills.

587

So he can live off of that.

588

And he's got plenty more on the other

side for him to go balls to the wall.

589

So it really depends on scale.

590

That's what, it was a Danny Kahneman, you

know, utility theory, utility maximize.

591

It really matters, you know, what your,

what your nut is, what are your living

592

expenses, all those sorts of things.

593

So I can't really say what somebody

else should do, but what I do think is

594

interesting that nobody brings up is

going back to these naming conventions.

595

I like, we use cockroach.

596

You guys use all terrain,

Ray Dalio used all weather.

597

By the way, you crushed it

with the return stacking.

598

I think you got to work

on the all terrain.

599

So by the way, nobody, everybody

told me not to call it cockroach.

600

Everybody's like, don't do that.

601

Nobody's, everybody's

going to hate that name.

602

And I'm like, will you remember it?

603

Cause we know how many people have these

terrible names, like three letter acronyms

604

that we can't remember any of them.

605

But it's just about, like

you said, survive anything.

606

You'll remember it.

607

Those sorts of things.

608

But getting back to,

what you can live off of.

609

Oh, when Harry Brown came up with

his permanent portfolio, which I

610

think all of us are doing a somewhat

derivation of, cause Harry Brown kind

611

of came up with a four quadrant model

612

Rodrigo Gordillo: With what you

could invest in at the time, yeah.

613

Jason Buck: Right.

614

At the time, the 1970s, he came up

with the four quadrant model that

615

we always talk about on the accesses

of, inflation and growth and, kind

616

of how that Venn diagram overlaps.

617

But what people forget is Harry

Brown also has variable portfolio.

618

So he's incredibly smart.

619

He said, look, put 80 to 90 percent

of your assets in this permanent

620

portfolio that can kind of, uh, you

trundle along in any macro environment.

621

And then he's like, I know you're a

human being, so you're going to want to

622

take flyers on, you know, specificity

or like things that you think will, are

623

going to take off an individual bets.

624

And so that's your variable

portfolio is like 10 to 20%.

625

Of like your fund money, but

you can't replenish it from

626

your permanent portfolio.

627

But I think that was a really interesting

thing that never gets brought up.

628

People bring up Harry Brown's permanent

portfolio, but they didn't bring up

629

the variable portfolio where he really

took into account human psychology and

630

our ability to want to bet, to want

to tell our neighbors about our wins.

631

Now conveniently we forget to tell

them about our losses, but that's

632

how we like to, live in every

day in the, in the real world.

633

Sorry, Adam, your, take

should, can they take

634

Rodrigo Gordillo: are your

635

Adam Butler: Whenever, whenever

someone asks a question like that,

636

I always think of, the movie Heat.

637

Remember Waingro in the movie Heat, right?

638

And, but she, not Pacino, De

Niro's character says, You know,

639

you've got plenty put away.

640

You don't need this job.

641

I recommend you, step back and, you know,

he considers for a second, he says, you

642

know, for me, the action is the juice.

643

And, I think that for some guys.

644

The action is the juice, right?

645

Like, it's not about putting money away.

646

It's not about having a safety

net for future generations.

647

It's not about, wanting to give

it away to, causes you believe in.

648

It is the action is the juice, right?

649

So it's going to really depend

from person to person, what they

650

want to do with that wealth.

651

Rodrigo Gordillo: But from an intellectual

perspective, sorry, Jason, go ahead.

652

Jason Buck: no, I was going to say

you guys are trend aficionados.

653

So, you may remember like the old Ed

Sakota quote that like everybody gets

654

what they want out of the markets and

most people want the juice, right?

655

Like, it's just like betting on

the ponies or whatever it is.

656

Everybody wants some juice.

657

And, there's another great movie that

you've guys seen The Gambler with

658

Mark Wahlberg and that he's like,

659

Adam Butler: years ago.

660

Well,

661

Jason Buck: I can't

remember the exact numbers.

662

Like anybody gets up two to 5

million, you know what you do?

663

You buy a house with a 50 year roof on

it, you pay it off free and clear, you

664

buy a Japanese shitbox car, and that's

your fortress of fucking solitude.

665

And you put like a million

dollars in T bills.

666

And he's like, any idiot that doesn't

get that fortress of solitude before

667

he wants the juice, that guy's a moron.

668

Rodrigo Gordillo: well look, the way I

see it, that's a, I love that by the way.

669

but I think.

670

Everybody wants the juice, but do

you also have to take the risk?

671

Adam Butler: I don't think

everybody wants the juice.

672

You know, I think lots of people don't.

673

Rodrigo Gordillo: people that tell me that

where they say, look, I got X, I want to

674

go for, I want to maximize my returns.

675

They're not really willing to put

in hundreds of millions of dollars

676

into a single small cap company.

677

There's what they're saying is I

want to put it in all equities.

678

All right.

679

They're put it or private equity.

680

Mostly private credit, like they like

the idea maybe of being in the insider.

681

But what bothers me about that concept

when we're, let's, let's set the table.

682

We're talking about people who are still

investing in equities that on average

683

will have a volatility of 15, 20%.

684

If you're doing privates, maybe in

reality, your volatility is 20-25

685

percent that you're still better off

with a well diversified portfolio.

686

If you have access to cheap leverage to

get you to that same level of risk, right?

687

If the sharp ratio of an equity

portfolio going back to the, 100

688

years is 25 to 30 basis points, right?

689

So if you're taking 20 units of risk,

you're going to get six units of return,

690

according, if that math is correct, right?

691

If I can put together a portfolio

that gives you 60, units, 60 sharp

692

points, then you're going to get the

same return for half the volatility.

693

Why wouldn't you take that bet every day?

694

If you can indeed get access to

enough leverage to get you there.

695

And I think you can be most people at

that level will be able to can, and

696

nobody's walking them through that.

697

I just don't think it exists.

698

It's, it's, there's just no,

there's no reason not to do that.

699

If

700

Adam Butler: I don't know, because I

mean, you and I have observed this For

701

many years that we'll go through the

presentation on diversification means

702

diversity plus balance, go through

the different economic regimes, go

703

through how the different assets

and strategies are fundamentally

704

designed to respond in different

ways that are highly complimentary.

705

Everyone's nodding through

each of these slides.

706

They're, just is the most

obvious thing in the world.

707

Once you show it to them.

708

And at the end of the Conversation when

it's time to, you know, okay, great.

709

how should we move forward on this?

710

Well, you know, I'll get back to

you because the reality is there's

711

a number of different objectives

that they're trying to meet.

712

One of them is, well, I don't want

to look silly and do something that's

713

different than my friends because

this might not work out or what my

714

friends are doing might work out

way better than anybody anticipates.

715

Now I'm way behind.

716

I want stuff to be able to talk about

with my friends at, at dinner parties.

717

I personally really

like, um, Stock picking.

718

I got really excited about new

fundamental trends and love the

719

excitement of being part of that.

720

Like there's just all these

different dimensions of objectives

721

for participating in markets.

722

I'm going to go out and say probably a

minority fraction of those motivations

723

have anything to do with wealth

maximization or utility maximization.

724

You know, most of them are

driven by the limbic system.

725

They're often very status oriented.

726

And, you know, while stuff makes

sense to the, prefrontal cortex,

727

all the rest of their brain is, is.

728

Totally asleep as you're going through

all this and getting the nods, you know?

729

Rodrigo Gordillo: it's the uh,

Meb Faber hoops, always tapping

730

hoops and saying, Hey, whenever

you're ready, fire everybody.

731

We can just do the ETF portfolio.

732

That's basically 99 percent

correlated to yours, but without

733

all the employees and the fees.

734

I love that.

735

He applied

736

Adam Butler: it's like I'm going to

come back to this once I've tried

737

and failed at everything else.

738

But you know, I've got to try

and fail at everything else

739

Rodrigo Gordillo: You know, what, what's

the motivation for hoops to continue to

740

do not pay attention to Meb's, suggestion.

741

Jason Buck: we love complexity.

742

But also like, as, as I told Adam

once, you never go full quant . Like,

743

Rodrigo, you never go full rational

when you're trying to do sales, right?

744

You're trying to show these rational

layouts and this is what you

745

guys do all so well, but people

buy into emotionality, right?

746

And it's, it's not really sexy and

it's not really that emotional.

747

And that's maybe when it comes to, closing

the sales, it's difficult, when you're

748

doing something so different, right?

749

Like, so if everybody else is like

doing 64, like Adam said, and all

750

their neighbors are trying to,

whatever they're doing, or, you You

751

know, chasing these different real

estate deals, whatever, they want

752

to be like their neighbors, right?

753

They, they like to keep up with the

Joneses or be similar to have, or like

754

you said, to have something to talk about.

755

Not a lot of people are necessarily, just

as disagreeable as Adam and I are, right?

756

Like they like to agree with their

friends and neighbors and have,

757

have fun conversations and, not

say, excuse me, excuse me.

758

I have a, you know, be that turd in

the punch bowl at all the parties.

759

So I think, I think

that's a big part of it.

760

I think the other thing is if.

761

You know, somebody's got that kind of

money, like we said, that concentration

762

risk, if they can sock away, even it's

only 10 million dollars into something

763

that's much safer, whether that's T bills

or some sort of permanent portfolio style

764

product, then they can take that risk.

765

Like, so for a lot of things

wrong with Elon Musk, one of

766

the things I do appreciate is

that he's still going for it.

767

Like I can understand some

people like it's great.

768

A lot of people make a bunch of money

and then they get ultra conservative

769

and they get ultra scared of losing it.

770

And that's why I think even more so,

like when we were growing up, people

771

were just living truth profligate, right?

772

Like, especially the wall street was

known as greed is good, all that stuff.

773

It's interesting to me that, What is it?

774

Bill Perkins book, Die With

Zero is becoming more popular.

775

As people in our industry and

people in all the industries

776

are just hoarding money because

everybody's so afraid of losing it.

777

You almost have a different

problem these days.

778

And then quite frankly, like

you said, what would you do

779

if somebody made 200 million?

780

The whole point is the three of us

here talking don't have 200 million.

781

This is why we're on a podcast talking.

782

This is why we have products to sell.

783

We're trying to get there.

784

So I, you know, somebody with 200

million is not going to listen to you.

785

For the most part.

786

Unless, like Adam said, they went up

200 million, they lost 200 million,

787

now they built back up another 100 or

200 million, they got the scar tissue,

788

then now they go, yeah, maybe I should

be a little more circumspect about it.

789

But if it's their first go

around, it's not really likely.

790

Rodrigo Gordillo: Yeah.

791

Adam Butler: I also think there's a,

an actualization component too, right?

792

Like you reach a certain wealth

threshold and it's not about, can

793

I secure a future for my family.

794

can I secure, you know,

wealth security for me?

795

it's how can I put a dent

in the universe, right?

796

It's I want to, I want to, I want

to find meaning with my wealth.

797

I want to invest in projects that are

going to make the world better or, be

798

exciting in some other way that, that

is, adding in some positive some way to.

799

To the world, there's something

about all weather or cockroach or

800

whatever, which is retrenching, right?

801

It's, it's a defensive

attitude to the world.

802

And I, obviously I personally espouse

that, people should take a meaningful

803

chunk of their wealth and, commit it

to that kind of strategy, because.

804

You do want to truncate that really awful

negative potential downside of bankruptcy

805

with, no optionality on getting out of it

or your family, your family's destitute.

806

You've got all these future

liabilities for your children, etc.

807

Right?

808

Like there's, there's a certain amount

you want to protect, but once you've

809

reached a point where you can protect

that, I definitely get the idea of

810

wanting to project your will on the

world to create positive, some outcomes.

811

And to use your wealth

for good in that way.

812

Rodrigo Gordillo: again, I know you're

playing devil's advocate here, right?

813

But you can create a well

diversified portfolio.

814

That creates 2x the wealth

or half the volatility

815

Adam Butler: But it's not the

816

Rodrigo Gordillo: and then use that.

817

Adam Butler: to say, right?

818

And I don't, I think we're really,

I mean, we're not really arguing.

819

I'm just saying, yes, if wealth

maximization is your only objective,

820

there are ways to do that, that are more

efficient than most people choose, but

821

most people with that level of wealth,

their objective is not really wealth

822

maximization, it's self actualization

823

Jason Buck: Yeah, I think Adam's saying

824

Adam Butler: they're projecting

their will on the world.

825

Jason Buck: Yeah, he's saying

something incredibly prescient.

826

I wouldn't say it's more like Defensive.

827

The way I think about it is

like, we have a, an, I don't know

828

philosophy right about the future.

829

And if you don't know, you should really

require a broad diversification and at a

830

cocktail party, it's great to know things.

831

It's great to talk about the future and

the perversity of the worlds we live

832

in whenever we're at these events or

speaking on stage, et cetera, at any

833

of these global macro events, it's,

everybody's telling me about the future.

834

Tell me what they know, you

know, throw that out there.

835

And then I'm just standing

there going, I don't know.

836

I don't, I really don't know.

837

I don't, I don't have a crystal ball.

838

And like, that's not sexy.

839

Like you're saying, it's not like

you can call it self actualization.

840

You can call it make a

dent in the universe.

841

It's just not sexy.

842

Right.

843

There's just like, nobody likes the

person that just says, I don't know.

844

Our entire society and culture

is built on knowing things.

845

And in school, you raise

your hand and get called on.

846

You're supposed to know things.

847

You can't tell the teacher, I don't know.

848

It's indoctrinated from a young age.

849

And we've had the

perspective, I don't know.

850

And that's a very hard thing to live

with because it's just, it's not cool.

851

Adam Butler: I just think also that

what's missing and, you know, Rod,

852

we've spent a fair amount of time on

this over the last few years, but a

853

lot of people, as you say, they gain

wealth through concentrated positions.

854

Maybe.

855

You know, they were one of the early

people at NVIDIA or Meta or Google or

856

Microsoft, or, you know, any number of a

thousand other companies that have, that

857

have done well, have generated wealth

for more than just the founder over the

858

years, they've got, they're sitting on

a concentrated position that came out of

859

that and, they want to continue to bet

on it, or they don't want to maybe face

860

the tax consequences of disposition,

or there's a number of reasons why.

861

Somebody might maintain that.

862

Maybe they're not allowed to sell it

for a term, but they're not aware of

863

the fact that they can, pledge some of

the value of that large concentrated

864

position to collateralize an allocation

to other positions that may offset.

865

Some of the volatility or risk of

catastrophic loss on that catastrophic,

866

Rodrigo Gordillo: like a

diversified future strategy on top.

867

Adam Butler: So you've got a couple

of big positions in Google or NVIDIA

868

or whatever, and you want to hold them

because you, you really believe that in

869

AI and the future of these companies,

et cetera, that's great, but it doesn't

870

need to be the only thing you own.

871

You can have that, maintain that bet, and

then just, You know, deposit those at,

872

interactive brokers or something and have

somebody run a managed futures mandate

873

on top of that, just use those stocks to

collateralize that strategy or any other

874

kind of strategy, like a tail hedging

strategy or what have you, for example,

875

maybe your, AI bets are going to pay off,

but the U S economy is going to go through

876

a major, recession or, liquidity crunch.

877

And your, bet on AI is right, but the

US, but, but the global economy implodes.

878

And so there's just things that you can

do to diversify while maintaining most

879

of the actualization of that concentrated

bet that you really want to make.

880

Jason Buck: Yeah, I want to touch on

two things that you said there, Adam,

881

but I'll also get to like, is going

back to Rodrigo's previous question

882

is , a lot of times we deal with a

lot of people coming out of like the

883

e commerce space and everything and

they go, I know things or whatever.

884

And like people have gal man amnesia and

they go, I, sold products on Amazon FBA.

885

I understand Amazon.

886

I go, really?

887

tell me who the CFO is.

888

Right.

889

They have no idea, Like, so they're

doubling down on their risk or their

890

exposure to Amazon by buying Amazon stock.

891

And I personally believe, and this

has been the hardest thing to maybe

892

get any sort of following with, or

get any sort of foothold is that

893

entrepreneurs, business owners should

actually not hold any offensive assets.

894

They should only hold defensive

assets because if you're

895

buying, you know, stocks, bonds,

private equity, private credit.

896

VC, real estate, you're just doubling

down on your long GDP exposure.

897

you're doubling down and hopefully

volatility doesn't hit the markets.

898

You're just doubling down

that, that credit and liquidity

899

is awash in the future.

900

And so you're really just really

double or triple or quadrupling your

901

exposure to that sort of environment.

902

And that's where you get hurt the most.

903

so we always think about what we

do as like an entrepreneurial.

904

hedge, but that's, really hard

for people to gain traction on.

905

But going back to then Adam's point that

I think the two interesting things for

906

us to talk about in that vein that I'm

curious about how you guys work around

907

is one, our mutual buddy, Corey Hofstein

was on my friend, Bill Brewster's

908

podcast the other day, and he was talking

about the capital efficiency, which

909

Adam was just kind of referring to.

910

But what I think that's missing a lot

of times people hear, you know, Through

911

return stacking, you're adding leverage.

912

But what they don't realize is

there's not that deterministic

913

payment schedule that you get in

leverage in anything else, right?

914

Like if I buy a house or commercial

property, every month that's called the

915

15th, that debt service payment's due.

916

Every month on the 15th, right?

917

And if I don't have the cash flow that

times perfectly with that 15th, I might

918

miss a payment and now I'm in default.

919

If you're trading futures and options

and you're getting that, financing

920

cost, which is like roughly about

the three month T bill rate, it's

921

baked into the term structure.

922

And you can go long or short

depending on that term structure.

923

And I don't think it's talked about

enough that that is a huge difference.

924

in using capital efficiency or leverage.

925

If you don't have a deterministic

payment schedule on like the 15th

926

of the month, that's where you can

truly get into trouble with leverage.

927

And I'm just wondering if you,

if you guys have thought about

928

different ways of talking about that.

929

And then we get into

the second one as well.

930

Rodrigo Gordillo: I have some thoughts

about different aspects of the leverage

931

side of things, but in terms of the

non deterministic, the fact that, you

932

know, the pricing can go up and down,

I don't know, Adam, if you have any.

933

Thoughts on it.

934

Adam Butler: No, I mean, my, my

big question is always, for most

935

people, they, they're experienced

with that as real estate.

936

And the challenge is that that bad on real

estate has for the most part paid off.

937

I mean, I think it would be

really useful for you to share.

938

I know you've done this on occasion

but share, your experience.

939

I just think like the hardest

conversations to have are with people

940

who have gotten very wealthy with real

estate portfolios, They literally are

941

like impossible to shake free of their

belief that real estate is the way, right?

942

And like leveraged real

estate especially is.

943

Is really the way, for the most part,

Rodrigo and I don't even bother.

944

Oh, you got wealthy in real estate.

945

Gotcha.

946

I don't really have anything

to say for you at all.

947

the entrepreneur has a similar

bias, For reasons that we've sort of

948

touched on, but the entrepreneur wants

to invest in other entrepreneurs.

949

Like if they've gotten wealthy,

I don't want to diversify.

950

I want to bet on other entrepreneurs.

951

I understand what it's

like to be an entrepreneur.

952

I believe that, I

understand entrepreneurship.

953

I can identify other people who are

likely to be successful entrepreneurs.

954

Why would I do this, diversify into

this thing when I've got this gift?

955

So those two types of individuals, I

feel like they're never going to get.

956

What we're trying to say and

nothing we can say to them will

957

overcome their lived experience.

958

Jason Buck: Yeah.

959

As, as Rodrigo used to always ask

me, like you're in the Bay area.

960

Why don't you go down and talk to

those VCs about like tail risk hedging,

961

long volatility and commodity trend.

962

Cause it's the perfect compliment for VC.

963

And I'm like, have you ever talked to VC?

964

They're not interested at all.

965

It's just YOLO it and then,

you know, keep YOLOing and keep

966

YOLOing until you can't anymore.

967

And then you, you raise

another fund, but that's fine.

968

Like to your point about Adam, about

commercial real estate, that's,

969

what I have a background in and

at best, commercial real estate is

970

unbelievable tax helpful in America.

971

You know, let's, let's You

know, X, the rest of the world.

972

Unbelievable tax alpha that I

don't think people truly understand

973

or fully take advantage of.

974

And that's more important than

anything else, is the tax alpha of

975

being a real estate professional.

976

And then in the best case scenario, you

977

So you're constantly rolling

properties and refinancing properties

978

to never have a tax consequence.

979

And then next thing you know, you've built

up this, 100 million cage around yourself.

980

Where, yeah, you could tap the liquidity

through refinancing and everything, but

981

now you still have those deterministic

payments like we were talking about.

982

And can you service those over time,

especially if something bad happens and

983

people don't realize how much of real

estate is just floating rate debt, right?

984

Like you can't really get more

than five to 10 year terms and

985

it's usually floating rate debt.

986

So it makes it incredibly

difficult, especially to service

987

the cap rates where they are.

988

And then Adam, you asked me to talk

about, so actually somebody just

989

asked me at this event in Austin was

interesting, they were, they asked me

990

if I was over levered in real estate.

991

And I was like, So I was a commercial

real estate developer in Charleston,

992

South Carolina, going into 2007, 2008,

the great financial crisis and end up

993

blowing up for lack of a better term.

994

but then the question

about, was I over levered?

995

I said yes and no, in a way, obviously

real estate requires leverage, right?

996

Like you, you don't, Put 30 percent

down in cash, the bank finances

997

the rest, but it's not necessarily

the leverage that kills you.

998

It's the time horizons and the

granularity of those investments.

999

So if I'm building out real estate

developments that take two, three, four,

00:45:58,012 --> 00:46:01,832

five years to come to fruition, I need

the environment to stay low volatility.

00:46:02,142 --> 00:46:05,182

If low volatility or rates pick up

over that time horizon and people

00:46:05,182 --> 00:46:08,612

can't close on, let's say, I'm flipping

condo units or whatever, then I get

00:46:08,612 --> 00:46:10,132

crushed and I can't make my payments.

00:46:10,402 --> 00:46:13,522

So it's not necessarily the leverage

that's the issue in real estate.

00:46:13,752 --> 00:46:17,492

It's those deterministic payment

schedules and giving the global macro

00:46:17,492 --> 00:46:18,942

environment and a liquidity crunch.

00:46:18,962 --> 00:46:19,942

Can you roll over that debt?

00:46:19,942 --> 00:46:21,082

Can you refinance that debt?

00:46:21,252 --> 00:46:22,822

Or can you make your payments on time?

00:46:23,062 --> 00:46:25,242

So that gets back to what I was

saying about what's beautiful

00:46:25,312 --> 00:46:26,932

about managed futures or options.

00:46:27,382 --> 00:46:29,972

Is you don't have to necessarily

worry about that payment schedule.

00:46:29,972 --> 00:46:32,792

It's baked into the term structure of

the instruments that you're trading.

00:46:33,682 --> 00:46:33,902

Rodrigo Gordillo: Yeah.

00:46:33,902 --> 00:46:34,732

You're, you're trading.

00:46:35,217 --> 00:46:38,967

Adam Butler: carry unless you're earning

expected positive carry and in other

00:46:38,967 --> 00:46:40,647

dimensions from the trade, right?

00:46:41,052 --> 00:46:41,312

Rodrigo Gordillo: Yeah.

00:46:41,352 --> 00:46:45,202

It's the, for those who don't

understand it, a futures contract,

00:46:45,402 --> 00:46:50,012

you're getting the price movement of

the excess returns above cash, right?

00:46:50,012 --> 00:46:53,962

So it's what you're trading is already

stripped out from the cost of borrow.

00:46:54,342 --> 00:47:00,485

So if I were to put up a treasury, the,

Price return of the 10 year treasury index

00:47:00,525 --> 00:47:02,975

fully paid up like an actual bond return.

00:47:03,455 --> 00:47:08,025

And I would have put up a treasury

futures contract, a roll, kind of

00:47:08,025 --> 00:47:10,655

stitched together roll yield just

to compare what you'd find is a

00:47:10,655 --> 00:47:12,085

big gap between one and the other.

00:47:12,485 --> 00:47:15,285

I think oftentimes when I say,

listen, I'm buying a 10 year

00:47:15,285 --> 00:47:16,345

treasury futures contract.

00:47:16,665 --> 00:47:17,165

Okay, great.

00:47:17,165 --> 00:47:19,125

So we're going to get 10

year treasury returns.

00:47:19,700 --> 00:47:19,970

No, no, no.

00:47:20,000 --> 00:47:22,560

You're going to get 10 year treasury

returns minus the cost of borrow.

00:47:23,027 --> 00:47:25,327

And what you trade is the excess returns.

00:47:25,947 --> 00:47:29,357

And as a long short futures manager,

you know, you have the benefit of being

00:47:29,357 --> 00:47:31,997

able to trade that line long or short.

00:47:32,417 --> 00:47:36,694

If it's, there seems to be some sort

of expectation of continued cost

00:47:36,694 --> 00:47:40,484

of borrow and treasuries are going

down more aggressively, then you can

00:47:40,504 --> 00:47:42,414

play that by going short that thing.

00:47:42,634 --> 00:47:42,894

Right?

00:47:42,894 --> 00:47:47,987

So when we talk about overlays and we talk

about the benefits of future strategies,

00:47:48,377 --> 00:47:52,977

you know, the reason that when we talk

between us, between one CTA shop and

00:47:52,977 --> 00:47:55,024

another, we always talk excess returns.

00:47:55,024 --> 00:47:56,614

We don't talk about total returns.

00:47:57,044 --> 00:47:58,154

So what does that mean?

00:47:58,154 --> 00:48:03,254

If, you've had 4 percent annualized excess

returns, that's what you're stacking.

00:48:03,254 --> 00:48:05,477

That's, that's already taken

into account to borrow.

00:48:05,517 --> 00:48:07,357

So when people ask me, like, are

you sure you're gonna be able to

00:48:07,357 --> 00:48:10,080

outperform the cost of borrow long term?

00:48:10,080 --> 00:48:11,090

I'm like, well, every.

00:48:11,234 --> 00:48:16,434

CTA manager that you know that survived

has had to overcome that cost of borrow.

00:48:16,844 --> 00:48:18,254

It does a good job at doing that.

00:48:18,254 --> 00:48:20,884

So you're really just stacking

that little juice on top

00:48:21,064 --> 00:48:22,374

regardless of what the borrow is.

00:48:22,734 --> 00:48:27,274

And you've seen the benefits

of that in periods where rates

00:48:27,274 --> 00:48:28,324

were really, really high.

00:48:28,334 --> 00:48:31,834

You've seen CTAs provide positive

outcomes above the rate of cash

00:48:31,834 --> 00:48:35,464

and you've seen them do it when

rates of borrow were low, right?

00:48:35,464 --> 00:48:37,407

So, that's a nuanced.

00:48:37,662 --> 00:48:41,649

Part of the discussion that few people

really truly understand at this point.

00:48:41,879 --> 00:48:42,229

Jason Buck: And, even,

00:48:42,259 --> 00:48:43,112

Rodrigo Gordillo: uh, Go ahead.

00:48:43,389 --> 00:48:45,349

Jason Buck: I was going to say even

better, what you guys are hinting

00:48:45,349 --> 00:48:48,069

at is that borrow rate is like

close to a bank lending rate, right?

00:48:48,069 --> 00:48:51,249

It's like that roughly the three month

T bill trade track tracks over time.

00:48:51,249 --> 00:48:53,339

So more importantly, I think

Corey is kind of alluding in this

00:48:53,349 --> 00:48:54,999

podcast on the previous podcast.

00:48:55,029 --> 00:48:56,289

I don't think he can necessarily say it.

00:48:56,299 --> 00:48:57,499

I mean, might want to timestamp.

00:48:57,519 --> 00:49:00,509

I'll say this and you guys can tell

me if it's, regulatorily viable.

00:49:00,784 --> 00:49:03,614

But what I think is fascinating that

I always think about if you want to

00:49:03,614 --> 00:49:06,884

replicate, you know, and we'll, I

want to get more into tax consequences

00:49:06,884 --> 00:49:09,724

of like a real estate really is a

tax alpha, as I explained to you, so

00:49:09,724 --> 00:49:11,844

you have to fully understand the tax

alpha you're getting in real estate.

00:49:12,214 --> 00:49:14,314

But what's interesting with your

guys products, like if you're a

00:49:14,314 --> 00:49:17,394

return stacking stocks and bonds, and

let's say I want to build a 50, 50

00:49:17,394 --> 00:49:18,694

portfolio stocks and bonds, right.

00:49:18,924 --> 00:49:22,774

I can get much more capital efficiency out

of your guys products and I can allocate.

00:49:22,984 --> 00:49:25,784

Let's say I'm sitting, we'll make the

math simple, even though good luck finding

00:49:25,784 --> 00:49:28,274

houses for these prices, but let's just

say I have a million dollars, right?

00:49:28,284 --> 00:49:30,844

And I want a million dollar

portfolio of stocks and bonds.

00:49:30,874 --> 00:49:34,674

Well, I can put up 500, 000 into

products similar to what you guys run.

00:49:34,864 --> 00:49:36,774

And then I'm sitting on 500, 000 in cash.

00:49:37,094 --> 00:49:39,574

And for that leverage to get my

notional value of that million

00:49:39,574 --> 00:49:42,344

dollars of 50, 50 stocks and bonds,

like we said, I'm borrowing now

00:49:42,374 --> 00:49:43,464

at the three month T bill rate.

00:49:43,784 --> 00:49:46,594

Now people are used to going to their

brokerage, like Schwab and borrowing.

00:49:46,594 --> 00:49:48,214

And right now that's what, 10, 12%.

00:49:48,214 --> 00:49:48,944

It's pretty insane.

00:49:49,224 --> 00:49:52,364

The best one is interactive brokers

are passed through SOFR at size, but.

00:49:52,474 --> 00:49:53,604

You know, you're getting closer there.

00:49:53,614 --> 00:49:56,644

So I can borrow then at the T

bill rate, and then I can use

00:49:56,644 --> 00:49:58,414

that 500, 000 cash leftover.

00:49:58,434 --> 00:50:01,754

I can go buy my house cash if I

could find a house for 500, 000.

00:50:01,754 --> 00:50:02,834

Let's just make that assumption.

00:50:03,284 --> 00:50:06,964

And then more importantly, I can

then pay myself back like a loan.

00:50:07,004 --> 00:50:09,884

I can now be my own bank

and provide my own mortgage.

00:50:10,074 --> 00:50:11,514

Pay myself back plus interest.

00:50:11,644 --> 00:50:15,054

None of these are taxable consequences,

and it's a way to use that capital

00:50:15,054 --> 00:50:18,884

efficiency to be my own bank and not

be giving that VIG to the bank where

00:50:18,894 --> 00:50:22,314

over time I may be paying double or

triple the actual value of my house by

00:50:22,314 --> 00:50:23,874

financing that mortgage through a bank.

00:50:24,419 --> 00:50:27,079

Rodrigo Gordillo: Yeah, that use

case is, it's just about borrow.

00:50:27,079 --> 00:50:29,609

What, what, where, how can you find

the cheapest borrow on the planet?

00:50:30,132 --> 00:50:32,935

Okay, so if you want to find the

cheapest borrow on the planet, you go

00:50:32,935 --> 00:50:38,502

where the vast majority of the world,

the capital world goes to in order to

00:50:38,502 --> 00:50:43,172

achieve that without having to physically

go out to five, seven banks, say, hey,

00:50:43,422 --> 00:50:44,992

I need a hundred million dollar loan.

00:50:45,582 --> 00:50:48,692

Who I want you all to bid on it

and give me the cheapest price.

00:50:48,692 --> 00:50:48,912

Okay.

00:50:48,912 --> 00:50:51,932

Which is, I got to do paperwork

with that bank and then that's

00:50:51,932 --> 00:50:53,562

on how it's done at that level.

00:50:53,572 --> 00:50:56,992

At that level, what you do is you say,

I'm going to go to a futures con, I

00:50:56,992 --> 00:51:00,612

need to borrow, treasuries, five year

treasuries, 10 year treasuries, I'm going

00:51:00,612 --> 00:51:05,692

to go to the futures market because if

I, if there's a futures contract that is

00:51:05,692 --> 00:51:09,682

charging me more than the cheapest bank

will charge me, there's an arbitrage

00:51:09,712 --> 00:51:13,672

there, there is somebody that's going

to be willing to take out that loan and

00:51:13,672 --> 00:51:17,112

then, you know, Place the, the shorting

position on the futures contract.

00:51:17,112 --> 00:51:20,292

And then that futures contract

goes in line with market,

00:51:20,382 --> 00:51:21,412

the margin of the market.

00:51:21,432 --> 00:51:25,762

So when we think about derivatives

contracts, the reason they're so valuable

00:51:25,792 --> 00:51:28,462

is that you are getting the same rate.

00:51:29,545 --> 00:51:33,125

The same rate of borrow as

you, as an institution would.

00:51:33,125 --> 00:51:33,855

Let me say that again.

00:51:34,815 --> 00:51:40,345

You now with, with products out

there in the U S and Canada that have

00:51:40,345 --> 00:51:44,605

these derivatives inside these, these

stacking inside, you can now get the

00:51:44,605 --> 00:51:46,989

same borrow as an institution gets.

00:51:47,524 --> 00:51:50,094

I mean, that alone is mind blowing, right?

00:51:50,094 --> 00:51:54,180

And yes, there are portfolio

construction use cases for that.

00:51:54,180 --> 00:51:58,410

But like you said, Jason, there's also

a very interesting use case of, hey,

00:51:58,410 --> 00:51:59,620

I have a million dollar portfolio.

00:51:59,650 --> 00:52:03,837

I want to stay in the market and I

want a mortgage and I want a house.

00:52:03,907 --> 00:52:07,997

how do I get exposure to real estate

in a city that I like and also get

00:52:07,997 --> 00:52:10,297

exposure to markets and do it cheaply?

00:52:10,297 --> 00:52:14,207

Well, the cheapest way to do it is if you

can get a futures contract type of borrow,

00:52:14,867 --> 00:52:16,707

Jason Buck: And then it takes

a long at that notional value,

00:52:16,707 --> 00:52:19,197

which is the most important thing,

because you're not selling off

00:52:19,197 --> 00:52:20,427

your portfolio to buy those assets.

00:52:20,427 --> 00:52:21,907

You're still maintaining

that notional level.

00:52:21,907 --> 00:52:23,937

Let's say an example, I

use that a million dollars.

00:52:23,947 --> 00:52:24,577

Similarly.

00:52:24,887 --> 00:52:27,797

The way I think about it, what we do

as an entrepreneurial hedge, if I want

00:52:27,797 --> 00:52:30,697

to maintain my notional at, let's say

a million dollars, but I have a, I

00:52:30,697 --> 00:52:34,137

have a creative entrepreneurial idea,

but as we all know, business is very

00:52:34,137 --> 00:52:35,837

risky and it's most likely to fail.

00:52:35,987 --> 00:52:38,857

But if I carve off 10 percent of

that, what we call portable alpha

00:52:38,857 --> 00:52:41,667

or capital efficiency, and I put

a hundred thousand dollars in this

00:52:41,667 --> 00:52:45,517

business, but I'm maintaining my

portfolio value of that million dollars.

00:52:45,722 --> 00:52:48,572

Let's say I blow through all that

100, 000 on that, on that business.

00:52:48,572 --> 00:52:49,522

I thought would succeed.

00:52:49,722 --> 00:52:51,892

Well, it's not going to hopefully

take me too long to make up for that

00:52:51,892 --> 00:52:54,552

because I'm trudging along at that

notional value of that 1 million.

00:52:55,132 --> 00:52:57,732

And that's why I think about what we

do much more as like an entrepreneurial

00:52:57,732 --> 00:53:01,542

hedge, because I know how difficult

entrepreneurism is, or like buying

00:53:01,542 --> 00:53:04,826

properties, et cetera, like all

these things are inherently difficult

00:53:04,826 --> 00:53:07,466

and you inherently can't see the

black swans in the future, or you

00:53:07,466 --> 00:53:08,576

can't see where your risk lies.

00:53:08,886 --> 00:53:10,986

So how do I, how do I reduce that risk?

00:53:10,986 --> 00:53:12,526

How do I hedge away a lot of that risk?

00:53:12,826 --> 00:53:15,486

And I think there's much more interesting

things with the products we all create

00:53:15,736 --> 00:53:17,676

to hedge a lot of entrepreneurial risk.

00:53:18,016 --> 00:53:20,696

And then maybe, especially if you're

raising capital from friends, family,

00:53:20,696 --> 00:53:23,466

outside sources, having a bunch of

better fiduciary responsibility,

00:53:23,466 --> 00:53:26,396

you may need to raise more

capital to maybe hedge that risk.

00:53:26,396 --> 00:53:28,906

Like we used to, it's very similar

to, um, they're starting to come back,

00:53:28,906 --> 00:53:30,546

thankfully, like zero coupon bonds, right?

00:53:30,941 --> 00:53:34,171

Principle protected strategies where at

least you got returned that principle

00:53:34,411 --> 00:53:37,601

and you could use the the delta between

what you needed to post for that 10

00:53:37,601 --> 00:53:41,141

year, you know, zero coupon bond now

and use that for more risky investments.

00:53:41,361 --> 00:53:43,851

So it's about those things like I

think it's a little bit better maybe

00:53:43,851 --> 00:53:46,471

than than principle protection because

You know, you can hopefully make a

00:53:46,471 --> 00:53:49,411

return over time, given that 10 year

time horizon that you may outpace

00:53:49,421 --> 00:53:52,811

that zero coupon bond and maybe not

miss out on the inflationary prints.

00:53:53,171 --> 00:53:56,551

But I think it's a very interesting

way of looking at either housing or

00:53:56,561 --> 00:54:00,181

entrepreneurship to use the ideas

from return stacking or capital