Jason Buck - Survive Like A Cockroach
Jason Buck (@JasonMutiny on Twitter), Co Founder and CIO of Mutiny Funds, stopped by for the first in person interview on The Business Brew. Mutiny is releasing the Cockroach Portfolio, a portfolio designed to survive any market conditions. See https://mutinyfund.com/ for details.
In this episode Jason discusses his history as an entrepreneur, which took a hit in the Great Financial Crisis. That event caused Jason to think about whether it was possible to hedge entrepreneurial risk. After years of thought, the Cockroach Portfolio was born. The goal of the Cockroach Portfolio is to keep wealth in all market conditions.
This conversation goes all over the place. We hope you enjoy.
Album art photo taken by Mike Ando.
Thank you to Mathew Passy for the podcast production. You can find Mathew at @MathewPassy on Twitter or at thepodcastconsultant.com
+ Transcript
Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. I'm here with Jason Buck, CIO of the Mutiny Funds with the first in person interview of The Business Brew experience. As a reminder, nothing in this podcast is investment advice. It's for educational purposes only. Any security that we mentioned, is not a buy or sell recommendation and do your own due diligence as always. So, Jason, how you doing?
Jason: Great. I'm excited to be the first time in person, always nervous, because as I listen to your podcasts, you get people to be vulnerable, and I feel you're going to do an extreme job of vulnerability as we're sitting here, three feet apart from each other. It's a little awkward.
Bill: It is a little awkward. I think that we're both going to cry by the end of this if you're okay with that.
Jason: Always.
Bill: It's your typical finance podcast. For those that don't know, we got to know each other because you reached out to me as you realized that I was a mental wreck and tried to help me through some things.
[laughter]
Bill: So, I appreciate that.
Jason: Yeah. I think it was game recognizes game. It was like like recognizes like.
Bill: [laughs] That's right.
Jason: Yeah. You have a bit of the manic energy, and I know exactly what that's like. No, I reached out to because I thought what you were doing was fantastic on your podcast, and it was so unique. Then, mutual friends with Toby and other people, I just thought we'd make the connection.
Bill: Yeah. And then, we found out today that we both eat cold chicken.
Jason: [laughs] Yeah. Over the sink like sociopaths.
[laughter]
Bill: Yes. This is going to be fantastic. Really taking a step back here. You reached out to me, when I was going through some of the stuff that I was internalizing with the idea that I had to monetize the podcast and you had some ideas. Do you want to give people your background if they don't know who you are, and just how you got into the financial world?
Jason: Sure. I think just preternaturally, I'm an entrepreneur since I was a little kid from braiding and selling bracelets in school at 9 or 10 to selling mixtapes as a 12- or 13-year-old or do my own mashups of Yo! MTV Raps and sell them in school. [crosstalk] I know that's after your own heart doing a little hip hop and a little rap back in the day.
Bill: Well, the mixtapes were hot back then.
Jason: Yeah. I was probably the only person in my school, but this was probably even pre that. I was 12, 13. We're talking probably early 90s.
Bill: Yeah.
Jason: I’ll mixtapes in school, but basically I plugged my cassette recorder into my TV-
Bill: Oh, wow.
Jason: -and Yo! MTV Raps would come on at 2:00 in the morning in Michigan. I would set my alarm to get up in the middle night and then I would tape the Yo! MTV raps onto a tape and I had dual cassette players and then I'd burn the mixtapes off of that and I'd sell them in school for five bucks.
Bill: Oh, wow.
Jason: Yeah.
Bill: I like that.
Jason: So, hip hop from back in the day, but you're definitely up on me on modern hip hop.
Bill: Yeah, well, I only know Cal Scruby, and I might even pronounce it Scrooby. I'm sorry, Cal. I know you listen. He needs to come on, man. I want to talk to him. But anyway--
Jason: Always been an entrepreneur, but also as an ambassador. I think it's that stereotypical story. When I was 13 years old, I got my dad to help me buy my first stock. I think it was American Standard, the toilet company.
Bill: Oh, yeah.
Jason: I had read an article that they were putting toilets in China. I was like, “This is a gold mine.”
[laughter]
Bill: Checks out.
Jason: Yeah. A lot of in-depth deep value research. Yeah, I started obviously buying stocks at 13. Later in life at what, 18, 19 was my favorite boom-bust cycle of all time, just like Meb. I love the internet boom and was doing e-trade and all those things and turned a little bit of money into a small fortune at 19 and then lost it subsequently in the next few months. It's always amazing how you can think you're a genius when you hit that rising tide.
Bill: Yeah.
Jason: Went through that as well, and then, later on, started trading up and been trading options for the better part of two decades trading instruments like the VIX for about a decade. But more importantly I said, I was an entrepreneur.
Bill: How do you trade VIX? Are you looking at support and resistance levels?
Jason: No. You don't have that-- because inherently it's mean reverting. What you're really doing, you're trading a relative value like arbitrage trade. You're pairing it against the S&P for the most part.
Bill: Okay.
Jason: So, what you're doing there is you have that inverse correlation.
Bill: Yeah.
Jason: But what you're trying to do a lot of times is you're trying to get the ratios right between VIX and S&P. That way you're capturing the roll yield, because you have the term structure of the VIX futures contracts, which means most of the time you're contango, which means you're rolling down the curve. If you can isolate that roll yield premium, we're trying to reduce the risk of VIX spiking and ripping your face off. You can capture a lot of roll yield premium during a risk-on cycle.
Bill: All right, let's take a step back.
Jason: [laughs] Yeah.
Bill: Explain this like we're talking to a five-year-old. So, VIX is an instrument that captures the volatility in S&P on average-- or doesn't capture but tries to express.
Jason: Yeah, VIX is technically, it's a representation of the options on the S&P 500.
Bill: The implied volatility in the option, right?
Jason: Correct. So, using a strip of options, both puts and calls, that helps you derive the VIX index and it's 30 day forward. It's looking out the next 30 days forward, and that gives you an idea, that's what's creates the VIX index. Now, the problem with the VIX index when people are looking at it, it's colloquially called the fear index. The problem is the VIX index is untradable. To make it tradable, the futures industry created a futures curve for it. You have all of your calendar months and as you move out your calendar months, most of the time, VIX is in contango, meaning the curve is up into the right. So, as you come forward through time, that curve will-- [crosstalk]
Bill: Just real quick, why would that-- I guess that makes sense, because the further out the more uncertain you are, the more fear there should in theory be or more implied volatility there should be in that contract.
Jason: Right. You are pricing on uncertainty.
Bill: Yeah. That makes sense.
Jason: Yeah. As Benoit Mandelbrot called its volatility in the arrow of time. The longer you have a time span, the more volatility you're going to see.
Bill: Yeah, that makes sense. Because your dispersion of outcomes is wider.
Jason: Exactly. Because of that term structure in that contango curve, as you're moving through time, that curve is going to roll down to spot and sometimes--
Bill: Right. Because the time is compressing on some of the implied volatility or rent that you pay in options compresses out.
Jason: Correct. So, if spot is at 15, let's say and then your first month at 17, and then your next month at 19, those are going to roll down to meet spot in basic terms. Now, spot can rise to reach, you're going to have a lot of wonkiness there, but in general, you're going to roll down the curve towards spot and that can build in a roll yield premium.
Bill: The yield, is it similar to a just an individual option where there's a lot of implied volatility bleed in that last month?
Jason: Yeah. It doesn't necessarily accelerate like you would with the theta decay.
Bill: Yeah.
Jason: And option as you're reaching expiration, you get that much more violent theta decay in those last few days for expiration, but now it's more of a steady decline than you’d see in implied volatility in option space.
Bill: Dude, I talked to some people that don't know that much about options, and they'll do weekly calls that expire at the end of the week. It's like you’ve got to pay a lot in rent. If you're listening, and you don't know what we're talking about, the theta decay which is basically the rent that you pay to own an option for a period of time. In the last 15 days of the option, is it? It just burns off crazy. I've heard it described as an ice cube that you're pushing closer and closer to a fire. Far away, the ice cube is not melting quite as much, but as you get close to the fire, it just starts to turn into water quickly.
Jason: Exactly. That's why professionals will roll that farther out from that end-terminus point because if they buy a three-month option, they're likely going to roll it after one month.
Bill: Okay, because you want--
Jason: Yeah. They're only eating that theta for one month, and then they roll it with two months left to expiration, because as you said, as you get closer, it starts to really lessen the price and--"
Bill: If you're long, right?
Jason: Correct.
Bill: Yeah. The pro that selling was trying to sell front month, right?
Jason: Correct. But it's interesting that you leave some of the weeklies is, if you're buying those weeklies, a lot of the GameStop people were YOLOing call options in the last hour-
Bill: Yeah.
Jason: -of trading on a Friday.
Bill: It’s crazy.
Jason: It's definitely rolling-- It's either worth zero or it's worth a ton, but I always think about the people selling that. It's like, “How do you even create a market? How much premium do you want to collect?” That’s why-- [crosstalk]
Bill: Yeah, that makes sense, because somebody is paying two cents and it could end up 10 bucks or whatever. So, you just hit a massive win, right?
Jason: Yeah. That's why we saw implied vols getting into the 400 level, once GameStop started really ripping.
Bill: Hmm. That's interesting. I had a good follow-up, but I lost it. So, we'll continue on your path.
Jason: Yeah.
Bill: We’ll get back to it.
Jason: I'll go back a little bit. Like I said, I was always an entrepreneur and I started a commercial real estate development company in Charleston, South Carolina. Along with developing commercial real estate along that King Street corridor, I'd also owned restaurants and internet service provider, etc. And then the GFC happens in 2007-2008. The macro liquidity environment dried up, and it was extremely painful. I have no qualms about it, just fetal position on the floor, losing money for myself, family, friends, it was the most painful experience I've ever gone through. Just blew up. It was just nightmare was overleveraged into commercial real estate as most commercial real estate developers are, and I just never want to feel that pain again.
Bill: What does that mean, overleveraged? Roughly on a--That would be like 80% levered or-- [crosstalk]
Jason: It's all dependent on your cash flow, right?
Bill: Yeah.
Jason: Here's the problem that I find, and this is what we are trying to solve as well as, is if you're a commercial real estate developer, you’re a lot of times working on projects two to five years out. It's not necessarily your leverage level, it's where your cash flow is, your debt service payments, and where the cycle of each property is. Can you imagine juggling dozens of properties and so sometimes your cash flow’s thin, sometimes it's not, sometimes you're rolling it over, sometimes you have 1031 exchanges. It's not necessarily the leverage level you get from the bank. It's how do you service all of these disparate elements that have different time cycles to them. And that's the problem. If you're doing two to five years out, you really need a low volatility environment. You need the future to look like today. You're implicitly short volatility. Volatility hits the markets, and liquidity dries up globally-
Bill: Then you're screwed.
Jason: -then you're screwed.
Bill: Yeah. You’ve also got a monitor who's building around you, right?
Jason: Oh, yeah.
Bill: The lead times, that's a tough game.
Jason: Yeah, it was a tough game, and I remember-- Specifically, I started seeing in 2007, some cracks in the mortgage market, and I remember, I pulled together five or six of the lot of the older commercial real estate developers. I asked them, I was like, “Are you guys concerned? I'm seeing a few cracks here on the mortgage market that could lead to cascades in what we're doing?” To a man, all of them are like, “No, this time is different.” But I was young, I was in my mid-20s. So, now I've learned that commercial real estate developers are just optimistic perennially. So, that was part of the process. They all thought nothing was going to happen, and obviously, something happened. I think that's part of commercial real estate developers, these things do happen, and then recover from the ashes, and they're just optimistic, and they'll roll the dice again.
Bill: Yeah. Well, it's kind of like stock investors.
Jason: Yeah, or I think about it's a lot of the short volatility guys, how many times can they blow up like LTCM or recently with Archegos, I think that was his third blow up. I heard somebody said it perfectly, it was like, “He needs to go for a fourth, and then he'd be a legend.” Many short vol guys have blown up three times. It's like, “Can you go for four?” Everybody goes, “Okay, you sell volatility for 10 years, you make a ton of money, and then you blow up.” Everybody goes, “Oh, that was a black swan event. Let me give you money again.”
Bill: Yeah.
Jason: It's just insane when you think about it.
Bill: Yeah. No, I've thought about that with the insurance market too, which is not some unique thought. That's short vol, right?
Jason: Yeah, same thing.
Bill: Yeah.
Jason: You're selling volatility. It's the same thing when you're selling options. You're collecting that premium, and then you're hoping nothing bad happens to you.
Bill: Yeah.
Jason: The same thing, yeah, I don't know how you would price selling insurance. I'm sure you study this when you're looking at different stocks to look at whether it's insurance or reinsurance, it's like something could happen, and that whole book goes away. I mean 20, 30 years of profits can go away overnight. That's what we see when we have things Hurricane Katrina, or COVID, or these unexpected events. Especially, if they can lead to a cascade, depending on how diverse their book is, you can lose decades of profits overnight.
Bill: Yeah, and I think the other thing that I've begun to appreciate more as I follow the market longer is, it really sucks when you have to go risk off in your investment book, because of this black swany type event. What I've noticed-- I've only been on the earth for just under four decades, even though I look two, I know.
[laughter]
Bill: There always seems to be a black swan that comes across once a decade. Now, I don't know if that's historically accurate, and that's clearly some recency bias, I guess what I'm saying but--
Jason: It actually comes on historically almost less than a decade. Actually, the anomaly was the last 12 years, that we went 12 years without having a massive selloff. So, that was more of the anomaly but yeah, they're usually every five to seven years. We don't know if people want to blame central banks and liquidity and all those things, but the anomaly has actually been the last 12 years waiting from 2009 to 2020, that was the anomalous period where you didn't have a big crash in between.
Bill: Yeah, I like talking to Corey about how 2017 was an anomaly, but in the right tail, that's something that I haven't-- Whenever I think about financial markets, I'm always focused on left tail risk. But a year where it just continually grinds higher with almost no drawdown, that is a very nominal-- Is that a word? That's what I’m going to use. Whatever, year was an interesting concept. Not earth shattering to most but earth shattering to me.
Jason: Yeah, 2017 was the lowest volatility on record. 2019 was almost right behind that. But that's where you had this just suppressed volatility in the markets grinding higher, and so you have right tail risk that you could buy call options to try to monetize that, but also, if you’re just riding those linear long S&P instruments in those environments is a great place to be. A lot of people would say part of that suppression is that people are selling volatility now in mass quantity. It's part of the financialization. As interest rates have gone down, a lot of real money players are looking for ways to earn that yield. So, they say they're going up the risk curve, and one of the ways they're doing that is selling volatility. They're selling those options, and by selling those options in mass quantities, it almost pins the market sometimes like 2017, 2019, and that really suppresses volatility. But you can only suppress it so long for when it breaks out, then it breaks out even more violently. If you can break through a two standard deviation, you're going to move to five standard deviations really quickly. That's what a lot of people fear now. That's what Corey’s paper was about, it was liquidity cascades. If this thing cascades, it can cascade out of control quickly because it breaks through that mean reversion pinning that's been going on in the markets.
Bill: This is going to sound really dumb, so I apologize. But this selling vol, is that included when you see the leverage levels and markets? Is that included or is that not included when people are calculating leverage levels, do you know?
Jason: What specifically when they're looking at leverage levels-- [crosstalk]
Bill: I don't know. It obviously wouldn't be in margin debt. If people are selling puts to get some float to do something with it, that is leverage. It may be off balance sheet, but there's official-- There's an obligation potentially. I just didn't know if that counts in people's-- when you see some of these studies, I don't know if that counts as leverage in the system or not.
Jason: It usually doesn't, and that's how they hide it, right?
Bill: Yeah.
Jason: But you can figure out the notional level of the derivatives market, but most people aren't--A lot of people are looking at margin debt, and are they levered long S&P beta or something like that.
Bill: Yeah, this would not capture.
Jason: Right. It's just like selling insurance. If you're selling insurance, you know what the premium collected is.
Bill: Yeah.
Jason: But you don't know what's going to happen, if you have a downside event. So, you can't really calculate that. It's a way to hide that, and that's we’re saying, moving out the risk curve and selling vol, it's a way to get it a leveraged bet on earning more yield, and hopefully, you never have to pay the piper. So, it's a way to hide it.
Bill: Or you own lower calls, which is-- or puts rather, if you own lower strike puts, then in theory, that's reinsurance. Then, you have counterparty risk, which is just like reinsurance. Anyway, I digress. Okay, so, where were we? You're a commercial real estate developer.
Jason: Yeah. So, 2007, 2008 happens, and like I said, the pain of that event really drove me to figure out, there has to be a way to hedge entrepreneurial risk, and for these macro liquidity events that we experience, once every 10 years. A lot of people said, “That's impossible.” I was like, “Well, I like things that are really hard. So, let me see if I can figure this out.” Part of that is, if you can hedge your macro liquidity risks, you can be much more-- you can take a lot more idiosyncratic risk as an entrepreneur. You can really believe in yourself and go 100% full force into what you're doing as an entrepreneur, whether that's building a business, or commercial real estate, or whatever it is, if you can hedge out those macro liquidity risks, then you have, to me, a superpower, you have a tremendous advantage. So, I tried to figure that out. I knew how to-- like I said, been trading options, started trading the VIX in 2011, 2012, deeply immersed in those markets, and then around 2014, 2015, I started tracking all the other managers in the volatility space.
Bill: All right, wait. Let's start out how you trade the VIX.
Jason: Yeah.
Bill: You're coming into this because you just-- I'm going to use your term, blew up, not mine. How do you start to think of the VIX, and how do you start to teach yourself how to trade that instrument? That is a very esoteric instrument, right?
Jason: Yeah.
Bill: A lot of pros don't even really understand how to trade the VIX.
Jason: Well, especially back then, it was a very nascent market. What happened was, I became fascinated by Claude Shannon's Demon, which is about rebalancing premium is this, if you had a very volatile instrument, let's say coin flip, and if you got heads, you go up 100%, if you got tails, you go down 50%. So, no matter how many times you flip, you end up at zero, because that's the volatility tax of that return. But what Claude Shannon talked about an MIT lecture, I think, in the 1960s, early 70s was that if you balance that with 50% cash and 50% that coin flip, you could harvest the rebalancing premium. You could harvest that volatility and actually have a positive return, and so you could go up into the right. Every time you'd flip, you'd rebalance the cash. You're capturing so-- what you're doing is you're closing the delta between the arithmetic return and the geometric return even though you'd actually compound at about 12%, if you're just rebalancing to cash. So, that was Shannon's Demon. He gave that in a lecture, and somebody goes, “Well, could you do that in markets?” He's like, “No, because the transaction cost would kill you.”
Bill: Okay, just real quick in the coin flip. I flip tails, I lose 50%.
Jason: Correct.
Bill: Now, I'm 2/3rd cash, 1/3rd long, whatever, my coin flip bet. So, then I just move it to half and half again. Flip again. Okay.
Jason: Then you make 100%.
Bill: Yeah.
Jason: Then you come back up and then you have the same thing. There's plenty of ways you can play with this online to see what that looks like. But you're then turning that volatility tax into a rebalancing premium. It's an interesting way to think about markets in general, and what he's doing is, he's pairing a really volatile instrument with an uncorrelated flat instrument of cash. What's even more interesting is if you pair a very volatile instrument with another volatile instrument, but they're negatively correlated, you can actually do even better. So, this obsessed me. I was trying to figure out instruments like that. And then, I really always liked the futures market, because you have portfolio margin and everything, so you can toggle whatever leverage or volatility you want. I was really just looking for something in two instruments that were inversely correlated, and that's how I stumbled on the S&P index.
Bill: Wow.
Jason: That's where that pairs trade came in as I started figuring out, “Okay, how do I pairs trade this?” Then, at the time--
Bill: Were you just teaching yourself this shit?
Bill: Teaching myself, I already traded a little bit of future, so I had a futures account. I started teaching myself stuff and then it just started hiring--
Bill: Traded a little bit of futures, what do we mean here?
Jason: [laughs]
Bill: Like a contract or you had known how futures work? Futures is easy to get yourself overlevered in.
Jason: Yeah. You have to be very careful about notional value versus margin, which we call performance bond a lot of times in futures, so you have to be very careful in futures, but I was obsessed-- I think I mentioned this before, when we were hanging out another time is that, to me, people either come up reading Warren Buffett, or they come up reading the Market Wizards.
Bill: Yeah, okay.
Jason: I mean, obviously, life's not that simple.
Bill: No, it’s not that simple. That’s it. That’s all you're allowed to read.
Jason: Yeah. So, people are either that value orientated stock buyer, which you fall into, or it's like, the Market Wizards is really about CTAs, commodity trading advisors.
Bill: I don’t know if I do. I do fall into that, but I find myself flirting with non-value concepts.
Jason: You're getting a little promiscuous, but-- [crosstalk]
Bill: Yeah, I'm non-value curious.
Jason: Right. But the idea your baseline philosophy is [crosstalk]
Bill: Yeah. All my big bets are pretty value oriented.
Jason: It's understandable. But what I loved about Market Wizards was, it showed there's so many--
Bill: Can I just-- I’m sorry.
Jason: Okay. Go ahead.
Bill: The reason that I'm intrigued by this other way of thinking is I've just seen it work for a really long time that I think that there's something to it. Whether that's like Soros, whether that's Druckenmiller, whether that's some of the Market Wizards, whether it's David Gardiner, there's just another way that-- I don't know, it's getting to the same place through a different method. It's intriguing to me. There's a part of me that thinks that that is right, if that makes sense. I don't even know how to articulate the word ‘that’ and sometimes I speak very vaguely.
Jason: Right. Hopefully, we'll get there. What do you think is so different about what they do, maybe we could start there?
Bill: My sense is that there's a way of looking at the world where it's like, “Okay, well, this is the way the world is. Not the way it should be in theory.” It tries to exploit the way the world is rather than the way the world should be. I would have loved to watch a young Buffett today, because if you're not buying really cheap businesses at two times earnings, I wonder what he would have been if he started. I have no doubt that his track record would have been absurd, because he's a genius. But the way he got there, I would have liked to see. I don't know how many of the games that he used to play are still just readily available.
Jason: Yeah, markets change, but I do think his superpower is really sticking with this philosophy over the decades, which very few people do. But maybe this will help. I like what you said, is pairing almost the way the world is versus the way the world should be? That's right. The way the world should be is value. The way the world is sometimes trend following momentum, whatever you might call it. That that's what I think was beautiful is, when I would read in the Market Wizards, it was the way the world is. So, you're buying at a high to sell it even higher, or you're selling at a low to sell even lower, and it's the antithesis of value investing, which is a mean reversion trade, and so those are converging trades, and these are divergent trades that the CTAs were doing.
So, the same thing happened to me that when I was reading Market Wizards. I was like, “Okay, this makes money in divergent trades, when we have trends, and they’re hit breaking out to all-time highs, or they're breaking out to all-time lows, and they're just following that trend movement in price. So, they're agnostic.” That was more appealing to me intellectually is complete epistemic humility, wherever it's going, I'm just following the price, but at the same time, I used to question, “Okay, if that works in trending markets, and you get hurt in the mean reverting our value like environment, why wouldn't you pair both of them together?”
Bill: Yeah.
Jason: It's interesting-- We form these religions. Value is going to shit on momentum and growth or trend following, and trend following is going to shit on value. To me, that never made any sense. This is eventually where we get to building portfolios is like, “No, both these things can work, and they work at different times. Once again, almost can be negatively correlated. So, why don't you pair those two strategies together?” When you said--
Bill: I think I have in a way, but you've done it in a much more robust way, because the way that I've done it, at least my perception of what I've done is strictly in equities, and you've done it in many different asset classes.
Jason: And have you though, what I was wondering--
Bill: I don't want to cut you off at this.
Jason: No, no, it's great, because I wonder if a lot of times value investors would then use a momentum overlay, because they don't want to get caught in a value trap, and I'm not sure if you end up in the worst of all worlds then because you almost want value stocks and momentum stocks, and to pair of those together, not overlay a momentum strategy on to a value strategy, or how do you think about it.
Bill: Well, I assure you that Twitter and Spotify are not currently momentum stocks, and I bought them after momentum broke. So, let's say TBD on that. I do think that they're probably, I haven't looked at a trend line, but I'd be pretty shocked if they're below a longer-term trend line. I bet they've pulled back to a longer-term trend line.
Jason: I've always wonder-- I wanted to do an ETF called Shit, because just buy overpriced shit and underpriced shit.
Bill: [laughs]
Jason: So, you have the classic Ben Graham cigar butts, they're just underpriced shit like everybody hates, and then you have stocks that are making all-time highs, that's just overpriced shit, but it’s likely to continue that trend for the next month. So, it's and to pair those two together is just Shit ETF.
Bill: I think that you could sell me the Shit ETF, if we were buying underpriced shit and then expensive and small. I would be long that. Okay, so continue.
Jason: I don't even know where we're-- Oh, we were talking about futures and trading. So, I’ve traded-- I dabbled in trading futures, and that was part of your trading options, futures etc. I'm always interested in esoteric or harder-to-understand markets, and just anything harder is always appealing to me, because I think it's a blue ocean. If it's easy, everybody will do it.
Bill: Yeah.
Jason: So, if you spent a lot more time on something, it’s much more difficult than there's usually far less competition but also sometimes stronger competition, so, it's difficult there. I came to this idea of pairing S&P and VIX. I came to on my own, I found out much later that this is a classic VIX VIX arbitrage trade. But I just found this all on my own research on my computer just in isolation, because I was fascinated by Shannon's Demon, and trying to find negatively correlated assets that could rebalance frequently. Even if I didn't make any money on isolating the role to yield the VIX, it's by rebalancing negatively correlated assets, you can achieve a rebalancing premium. It was more about the mathematical side. I didn't really necessarily care about the instruments. It's like how can I pair these different asset classes and rebound some. It's more like the math of rebalancing that was fascinating to me.
That's what I was doing for a while, and that's how I got into VIX and how I started learning more about the VIX space, the volatility space, long volatility, tail risk, all of these things, and what happened is I certainly have a lot of friends and family going, “I’ve read a Nassim Taleb book or Chris Cole white paper and how do I hedge my portfolio? Like, do you have hundreds of millions of dollars? No, well, there's no options for each group. It was like, as an entrepreneur that starts to eat at you like that, that can't be a possibility. My eventual business partner, Taylor Pearson, and I got together 2017, 2018 talking about these ideas of tail risk and hedging just-- [crosstalk]
Bill: So, you’ve worked on this for seven years?
Jason: We're looking at a combination of probably a decade's worth of work that we're on now.
Bill: But I got to know how you're making money. How are you putting food on the table?
Jason: I was very lucky in that I had a family that cared about me.
Bill: Okay. They're just like, “We're going to take care of Jason while he trades VIX and S&P in uncorrelated ways.”
Jason: Maybe, one day he’ll figure it out.
Bill: Huh.
Jason: I got very lucky in that. Like I said, in 2008, 2009, I blew up, and-- [crosstalk]
Bill: What does that mean to you? Do you have zero at that time?
Jason: Yeah, zero.
Bill: Holy fuck.
Jason: Totally negative. You go from worth and this-- For anybody listening, if you want to learn about net worth, net worth is just a statement on paper.
Bill: Yeah.
Jason: You can't take a net worth statement to Starbucks and get a coffee. I went from millions and millions of dollars in net worth to zero or negative-
Bill: Wow.
Jason: -within months.
Bill: Dude, I told you we're going to cry and this maybe where. What that do to your self-worth?
Jason: Ah, yeah, destroyed it, honestly.
Bill: Yeah, no shit.
Jason: What's even worse, too, is I actually because I knew a little bit about options trading but wasn't as up on complex Greeks. I was actually shorting the banks and mortgage providers and losing money, because trying [crosstalk] paying too much trying to time it perfectly. All of those things that every junior option trader learns, is you really learn about what the Greeks mean.
Bill: Yeah.
Jason: It really matters what price you're paying of implied ball and your theta, etc. To not skirt your point is absolutely devastating, and because you also go through-- I was in my mid-20s, and worth millions of dollars, and everybody starts treating you like you're very smart, successful. So, you start to believe.
Bill: Yeah.
Jason: You are very smart and successful.
Bill: [crosstalk] believe your own shit.
Jason: Yeah, and you're too young, and you don't have any experience, so, you start believing you're a genius. Then, something like that happens, and it's absolutely devastating and extremely destructive to your ego. The worst part is-- the money part absolutely sucks. You lose all your income, there's money for your family and friends that believed in you.
Bill: Yeah.
Jason: Money is just one thing, but it's just the absolute devastation your ego. Everything you thought you were, goes away.
Bill: Yeah.
Jason: It's also a rebuilding process from there. That's also part of the last 10 years, is that rebuilding process, it's like, “What am I good at? What can I do? I never want to feel this pain again.” Because it's that acute.
Bill: Did you wonder whether or not all your success was luck?
Jason: Oh, yeah. Definitely. And you realize it is.
Bill: Ha. But you, you have skills when it comes to the restaurant game. Like we've talked about restaurants, you know how they're supposed to run.
Jason: Yeah, but that's the thing. It doesn't matter how educated or how much level skills you have. It is a rising tide lifts all boats. As long as you have skills and you marry that with a target-rich long GDP environment where everybody's is washing capital, then you can think your genius.
Bill: Yeah, that’s my fucking problem with my results, man. This is why I don't trust myself.
Jason: This is why it keeps you up at night.
Bill: Yeah, 100%, because you could throw darts in this market and make money.
Jason: Right, but you survived Q1 of 2020, and that's--
Bill: Because I had cash.
Jason: Right.
Bill: Yeah. So, maybe I should get cash again, some. It was a fucking life preserver rather than running balls out.
Jason: Right. I just treated it differently. In cash, I look at it as like put options, which is a complex cash position.
Bill: Yeah.
Jason: [crosstalk] As we know, we've talked about it. That's the way I look at it.
Bill: Yeah. You mind expanding on that a little bit?
Jason: Yeah. Part of the idea is I never want to feel that pain again. So, how do you make up for that? I've always been fascinated on how do you manage multigenerational wealth. You and I have actually had a lot of private discussions about this, but I'm a fourth-generation wealth, which means the third generation went through the wealth. So, that has to be part of the reason I've always been obsessed with managing multigenerational wealth. So, that was also what I was working on for the last decade.
Bill: Holy Shit. Hang on. I'm just putting this all in context. So, you’re fourth generation, you watch the third generation blow it? Sorry, to the third generation, but that's what you did. Spade’s a spade, right?
Jason: Yeah.
Jason: Then you make the money back for yourself, and then you blow it.
Jason: Yeah.
Bill: Fuck, that's got to be tough.
Jason: It's tough, but also, at least now, in context in hindsight, and a little bit removed from the pain, you also realize that first generation has to take so much fucking risk to amass that wealth. So, now, we work with a lot of entrepreneurs, and being entrepreneur, you have to take an incredibly concentrated bet. You have to get lucky on your timing. That's how you amass wealth. But then to keep the wealth from outside generations, you have to diversify. That's 180-degree turn from that first-generation entrepreneur.
Bill: But you're trying to in a way solve-- you're almost trying to allow that person that needs to take a ton of risk to diversify some of the macro risk that they're taking, and just allow them to truly bet on what they're saying. I'm just repeating to you, what you said earlier by the way. Huh. Did you think when you lost the money in 2009, did you feel like, “My family is destined to lose something”? Because you watched the generation above you, that ever crossed your mind, like, there's something genetic in me that? Because I worry about that shit with me.
Jason: Yeah. No, I know what you're talking about. I don't know if it's that specific in it. It's hard, honestly, I think it was Adam Smith talked about the vivacity of impressions, and it’s like as soon as something happens, it's very real and tangible to you, and then as time goes on, it almost wears off.
Bill: Yeah.
Jason: Now, you think back and it's almost somebody else. But also, you have to think about-- you really put myself in those shoes is, that fear that you reference-- There was so many fears. Not like that, it's like, “I'm an idiot. I just got lucky. Yeah, my family's doing-- I'm doing because of a decision I made when I was 13 to, I don't know, to run a red light.” You literally go through the deepest, darkest times for years, and also, it's impossible to know that you're in a deep depression. You just think you're normal, but you're ruminating on your thoughts so much that outsiders are worried that you're in depression. Even both my parents who would have discussions of do they need to put me in some facility.
Bill: Huh.
Jason: Because I was like-- like I said, I just blew up trying to figure it all out, going through all of these different fears and dealing with my demons and everything like that, and also being I don't know what to do. That's what I’m saying, I got really lucky.
Bill: You're an introvert too.
Jason: Yeah. Extreme introvert.
Bill: [crosstalk] people may not understand the given act that you do YouTube videos and podcasts all the time. But I suspect that you were dealing with all of this, more or less not alone, but by choice you default to inward, so that doesn't help your brain get out of the negative cycle, I wouldn't think.
Jason: Well, the only thing I did that couldn’t have been right, I didn't talk to anybody for years, honestly. Like years. My poor mother was so kind to me in that way, and so, I have food on the table and everything, but I won't even talk to her. I was just trying to deal with all that stuff, but part of it the way how I would handle it is I just wrote thousands and thousands of pages. So, I thought if I'd get it out of my mind and onto paper, I could attack myself.
Bill: Huh.
Jason: As I would have conversations with myself.
Bill: Did you shred this shit, or do you keep it?
Jason: Yeah.
Bill: Yeah. You’ve got to shred it. [crosstalk] all those like, don't read it later.
Jason: As soon as a notebook filled up, it got thrown away. [laughs]
Bill: Huh. Do you ever regret shredding it? I do think that was, I don't want to say right or wrong, but I would shred it too.
Jason: No, I'm with you now. Now, you look back and go, wow. I would love to read that, but I'm not sure if it would look like the scribblings of the insane. That’s part of like, a lot of the other demons that I was dealing with and you and I haven't talked about this specifically is, almost I’ve felt John Nash, sometimes. One, I'm never as smart as John Nash.
Bill: From A Beautiful Mind?
Jason: From A Beautiful Mind.
Bill: Yeah, man.
Jason: Not that smart, but you start to wonder, the connections I'm seeing when I'm in a heightened state of awareness, as we talked about the hypomaniac’s edge is, are these things real, or is this a delusion?
Bill: Yeah.
Jason: That's part of being slightly manic, is you need that energy to create something beautiful, and to do some really interesting things and come up with new breakthroughs or epiphanies, but at the same time it can be your Achilles heel, because how do you know what you're seeing is reality based?
Bill: Yeah. I think that's been one of the hardest things. I get it particularly when I'm deep researching an idea, and I think things are really clicking, and then I get more amped up, and then I research more, and then sometimes sleep falls by the wayside. Thus far, it has not bit me in the ass. But I also am worried that it's a series of luck. I'm just flipping heads. So, I don't know, that's a very, very-- I don't know, then somebody would say, “Well, you need to have a process. You need to have guardrails around you,” but the other side of that is, well, sometimes process will ruin the creativity that is generating the returns. So, it's a very, very-- I find it to be a tightrope that's very hard to know whether or not I'm walking the correct way, or whether or not I'm just getting lucky. Really, I think I'm closer to reasonably talented, but I don't actually know the answer to that.
Jason: I'm not sure we ever could, but it's also amazing, the best part is, when you start seeing those connections and you start putting these pieces of the puzzle together and you're seeing it and you feel different ways than anybody else has seen it, the high of that, like you said, it's the best high in the world. Then, I think, thankfully, we both have very grounded significant others, and that brings us back down, but also, I don't know how you feel. If my girlfriend says, you're in a manic state or whatever. You don't hear it, though, when you're in a manic state. Then, hopefully, in hindsight, a few days later, you can come back to it. Then, you can parse through what you came within that slightly manic state to find out, okay, there's some good pieces here, and I actually was on to something here in a much more equilibrium state.
Bill: Yeah, it happens to me when I smoke sometimes too.
Jason: [laughs]
Bill: The weed. You know what's helpful for me is having my wife that I can look at her-- and I agree with you, like, when you're in the manic state, but sometimes she can give me a look, and it's like, “Okay. Regardless of whether or not I'm bordering on this creative mind frame, she has the ability to snap me back to Earth,” which is helpful.
Jason: Yeah.
Bill: I don't know what it would be-- if I didn't have her, lord knows.
Jason: Those years of me living alone, that's what it boils down too, but I also just realized we were on a podcast, so I had to put this out there. That was like, I expressed this to you before, I remember over a decade ago, I read a book called The Hypomanic Edge. The idea was that we all have a slight form of mania or slight form of bipolar that was every explorer that ever lived, everybody that moved their family to the new world, every entrepreneur, anybody who has achieved anything has a little bit of hypomania, and you need at least a little bit of a manic state to try to do anything new. Otherwise, you just stay in stasis. I want to bring that up, because it's both helpful in that a lot of us go through this, and yet, especially in finance, we're unwilling to talk about it, because we have to sound so buttoned up and professional and sound like we're extremely rational. That's the hard part too is, both of us are hyperrational people, but then we can go through manic states.
Bill: Am I? [laughs] No. I think-- I don’t know. I think I've trained myself to be more rational than I used to be, for sure.
Jason: But that's creativity, a solid base of creativity is going to have some mania to it.
Bill: Yeah.
Jason: Otherwise, how can you come up with anything new?
Bill: The other thing that I think that must be hard to live with myself, and I suspect you as well, is in order I think to be good at a pursuit that is this hard requires obsession. I don't think that you can just be a halfway crook and get through this.
Jason: Nice reference.
Bill: Yeah. I can't imagine what it's like to live. Same with law. Any of these professions that’s just really, really competitive and intelligent-- You're competing with a bunch of intelligent people, I think obsession is probably one of the key differentiators between those that win and those that don't, and then a fair amount of luck.
Jason: Yeah, not to solipsistically hype up ourselves in our own industry, but let's just be honest, this the highest remunerated industry in the world, so you're going to get the highest level of talent and competition in finance and investing and trading. That's also what appeals to us to his right, is that obsession and I can compete at the highest levels.
Bill: Yeah.
Jason: To compete at the highest levels, you need to be just crazily obsessed with what you're doing.
Bill: Yeah. That's why I have chosen financial entertainment.
Jason: [laughs]
Bill: It's my pursuit of choice, sir. [laughs] I don't disagree with you. All right, where the heck were we? I don't know, this is how this podcast goes though.
Jason: Yeah, I know.
Bill: I'm glad that you forgot that you were on a podcast.
Jason: I did.
Bill: That means I’m doing a decent job.
Jason: Always. Yeah.
Bill: You still haven't cried. We'll get there.
Bill: Yeah.
Bill: All right. You are in 2017.
Jason: Yeah.
Bill: You have this concept, and you meet Taylor.
Jason: Taylor. Taylor--
Bill: My bad. Sorry.
Jason: No, it’s all right. It happens to him all the time. So, Taylor Pearson, I met online through a mutual friend. It was interesting, Taylor's younger than me, and he was talking about at their wedding, 50% of people that he didn’t met online.
Bill: Huh.
Jason: That's just the world we live in now. We came together talking about-- Originally, it was about stable coins. Crypto stable coins in 2017, 2018. They were always interesting to me, and then we ended up talking more about volatility, long volatility tail risk things. Just realized we had very similar ideas about it or similar minds, and we both wanted to protect ourselves and our families moving forwards, how do you, one, protect against entrepreneurial risk? We're saying that entrepreneurial put option or how do you protect multigenerational wealth? How do you build real lasting wealth?
So, we decided to get together as entrepreneurs we could solve this problem, and Taylor was looking at investing in just one long volatility manager, but I tried to show him there's so many path dependencies to sell off that you really need an ensemble approach. But to build an ensemble approach, would require you to be a QEP or QP investor, which is higher than accredited, and would probably cost you $20 to $50 million to put it together. What I'd figured out during that isolation period and everything was that, there's different investing vehicles like commodity pool operations etc., where you could pool investors together, and that commodity pool would qualify for QEP, which a lot of those manager minimums were. So, if you could aggregate--
Bill: What's QEP? What does it stand for?
Jason: Qualified Eligible Participant, and then Qualified Participants, QP. So, you go from accredited which is $200,000 income, a million in assets to QEP is $2 million assets outside your home, but also you have to have two years invested in futures.
Bill: Oh, wow.
Jason: Then QEP is $25-- It just keeps ratcheting up.
Bill: Yeah.
Jason: The reason those are there, this is ridiculous, but any manager that only accepts that higher level of accreditation means the less regulatory burden they have. But they can't advertise, they can't put themselves out as an investment manager, but if they only take QP or QEP--
Bill: Yeah, that makes sense.
Jason: They don't have to do all the--
Bill: I don't know that it makes sense, but it makes sense.
Jason: These are a lot of the logistical issues that I think took years for me to figure out that, this is where the vehicle came in is like, “Okay, if we can aggregate $5 million, we can then put this money into an ensemble of volatility managers, long volatility and tail risk managers, this will protect people's portfolios, and we can start just assessing accredited investors with $100,000 minimum.” As this business works is, if epiphany is about the investing process, and you have to have something novel and unique and you have to be hyperrational about that, but then you have to spend years thinking through all of the different logistical and legal ramifications of the structure you want to build. That's almost just as hard. And then, the third piece is you have to manage the investment business, which is almost harder than managing an investment portfolio.
Bill: Yeah.
Jason: That's the beautiful marriage of Taylor and I is, I've never actually found a partner that I felt like I was on equal footing with necessarily in the past, and then to have somebody that is so complimentary, but we're so different. The things that we do really work together, where it's a 1+1=5 scenario. I just serendipitously lucked into that, and it's almost like we're talking about with our significant other the way, they balance us out, Taylor and I like balance each other out perfectly.
Bill: Well, it wasn't serendipity. It was putting yourself out there, and meeting online, finding somebody. I think that it's a lot of hard work, is how you serendipitously find something.
Jason: Yeah. I guess.
Bill: Shit doesn't just fall out of the sky, man. That's not what it is. Everything that has ever happened to me that's good that I'm like, “Oh, boy, that was a coincidence,” it was all because of hours and hours and hours and hours and hours leading up to that serendipitous event, right?
Jason: Yeah, you put it in the work and you're looking for it. The way I look at it is, whenever you're focused on something you create a monocle that you view the world through. So, whenever anything that comes inside there, you notice. It's when you buy a new car, and you see that car everywhere else, because you have a level of focus. That level of focus brings-- Because otherwise you're getting millions of bits of data coming into your conscious every day, so how do you parse that through? Through hyper focus, you parse out what's important.
Bill: Yeah.
Jason: That's maybe how.
Bill: I think that's right. My serendipitous event was going to Stream Song, I guess it was 2017. I just have a podcast that came out that we talked about it, but it was Connor Leonard and Chris [unintelligible [00:44:53], I hope I didn't butcher your last name, Chris. If I did, my apologies. They put together an event right, and it's like, it took years of doing what-- I was trying to find a solution for myself, so I was probably two years professional at this time. But it took a lot of years of-- When I was at the bank, I remember when I think Tyson bought this meat company. I forget what it was called, but it was packaged meat and the multiple was crazy, and I was like, “Oh, this is stupid.” I was dumb. I didn't understand distribution advantages. I always heard like, “Oh, synergies are overstated. There's no such thing as right revenues.” “No, it turns out there are revenue synergies, you fucking idiot. You just don't know what you're talking about.”
When Buffett says, “Beware of synergies,” that doesn't mean they don't exist. That means beware of them. Don't just accept them on their face. I think it might have been Crave was what they bought, but maybe not. Postmarket, if you’re listen, and shoutout the answer. Anyway, it was just realizing that I was an idiot, and then when they did that event, I said like, “Boy, these are guys that I think are really smart. I'd like to put myself in that kind of a room,” and I think I tried to add some value. I probably took more value than I gave. Hopefully, I'm reciprocating some now. But I don't know, it was one of those things, and it changed my life. Now, my boy, Francisco and Alex, we talk all the time we met there. Connor reached out with some really important advice that I needed to hear at the right time recently. It's just one of those things like, “Oh, well, how do you know these guys?” It takes having the balls to say, “I'll go.” It takes the time to build the network to figure out who's doing stuff like that. It doesn't just happen. So, when you say that you just met him, I don't believe that. I just think maybe it just feels that way.
Jason: Yeah, I wonder too, like, you're saying. You just said, it takes the balls to go or show up, and I think people that aren't extreme introverts, don't realize how much that takes. Sometimes, they have the energy to come to show up to things, but also part of it too, is like I think a lot about it-- it was Seth Godin and I think they said like, “Be so good, they can't ignore you.”
Bill: Yeah.
Jason: That's what I think about too, is, by that hyper focus by the obsession, you get so knowledgeable about something that people can't ignore you. I think that's also what Taylor and I look for is, we come from outside the industry. We didn't go to Ivy League schools. We didn't work at Goldman Sachs. We didn't work at a bank, and we weren't these traditional traders. But if we got so obsessed and so good that people couldn't ignore us, and we build products that people really needed, it's like you will find that audience. So, that's part of that obsessive process too. Like you said, I'm with you, hard work opens up serendipity, but it's how could you ever know?
Bill: Yeah. How did you think through-- You're an entrepreneur. Starting a financial services business or a fund is not exactly the easiest path for an entrepreneur. How do you think through that?
Jason: Part of that was in 2014, 2015, when I was really tracking other volatility managers, is one of the things I stumbled across was a futures platform with RCM Alternatives out of Chicago. RCM Alternatives, these guys that go all the way back to trading on the pit floors and everything, and so they had maybe six pillars to their business, but one of those pillars was data platform for sourcing futures and alternatives managers. I would go on their platform, track all these managers, but then I'd call those guys up asking questions, because they made the mistake of old school, if you call, we will answer on the first ring. So, I would call all the time and just start picking up these guys’ brain. I got to know some of the guys over the years, and so when it was time to set up our fund, I realized we need an institutional backbone. We're not from the industry. That was the smart pairing that we did is almost we joint ventured our back office with RCM Alternatives. Now, we have this structural backbone of a multibillion-dollar firm that's been in the futures and option space for decades. They have 30, 40 people on their team. So, that was the real-- also one of those breakthroughs. Like I said, to build the business requires just as many breakthroughs as building an investment portfolio. So, that was how we built this structural background where we could have an institutional quality product with two guys coming from outside the industry.
Bill: At this stage, to be perfectly clear, your fund to funds, correct?
Jason: Yes.
Bill: Okay. And you have how many managers?
Jason: In the long volatility piece, we have 13 managers. What we did initially is, I was always obsessed with Harry Brownee's Permanent Portfolio. When we're talking about managing multi-generational wealth, Harry Brownee came up with this in the 1970s, his four-quadrant model, and the idea is everything is in four quadrants and on the axes of growth and inflation. So, you either have growth or recession, or you have inflation or deflation, and those are the four quadrants. Harry Browne, when he originally built that in the 70s, he said, “For growth, I use stocks. For recession, I use cash. For inflation, I use gold, and for deflation, I use bonds.” Those were the four-quadrant model. He had them in equal weight, and then just rebalanced with rebalancing bands. That's how he looked at managing multigenerational wealth, and he called it the Permanent Portfolio.
Now, ironically, when Ray Dalio came up with his All-Weather Portfolio, it was basically a copy of the Permanent Portfolio, but he leveraged up the bond side, that was the risk parity, was equal weighting the volatility of the different assets. But he didn't give a lot of homage to Harry Browne. But that's the framework I've always looked at, when you hear the four-quadrant model, a lot of it comes from Harry Browne. When people talk about it today, whether it's on Hedgeye or other places, that four-quadrant model comes from Harry Browne’s Permanent Portfolio. So, that's the way we thought about the markets a lot, but the one piece to me that was missing is as, we become really financialized, and we're talking about derivatives, the rise of derivatives in the last two decades and people moving out that risk curve, is cash to me no longer provide enough ballast to the portfolio in a massive liquidity cascade. So, to me, you need derivatives on the other side to provide, like I said, that convex cash position. So, this is where we thought a modern interpretation of Harry Browne would be global stocks, global bonds, long volatility, and tail risks instead of cash to help balance the portfolio, and then, inflationary times using commodity trading advisors or commodity trend. Those are instead of just gold. These are ways that I'd be-- with Harry Browne, we're alive today, and he had modern tools, you might build it better that way.
So, to build that, the first piece we built was the long volatility interest, because that's by far, the one that retail clients couldn't have access to. So, our families, our in-laws didn't have access to it. Let's build this first. It's really difficult to build. It took us years to put it together. But once we get that built, the second hardest piece was by adding commodity trading advisors, and then it's really easy to add the stocks and bonds. This is what we've been working on. The first thing we offered was this long volatility strategy going on about a year ago, we finally launched, and that provides that ballast to most people that are either long equity beta, or people don't realize as entrepreneurs, they're long equity beta, or long GDP, or long cheap credit, and so that was the entrepreneurial put option is, if entrepreneurs could-- if they had any savings leftover that they couldn't put back in their business, if they hold it long volatility tail risk, and shit hits the fan, liquidity dries up. Now, they've got a bunch of cash. They can either make payroll for extended period of time. They can buy up their competitors for pennies on the dollar, or if they want real estate, they can hopefully buy real estate for pennies on the dollar. To me, that was a superpower for entrepreneurs.
So, we built that piece first, and now we're building what we call our we're about to launch our Cockroach Portfolio, that's all those asset classes I just talked about, global stocks, global bonds, long volatility tail risks, commodity trend advisors, and then we hold the piece of our collateral in segregated gold and bitcoin as well. So, we're just trying to figure out that's the portfolio we believe, that can manage multigenerational wealth, and we call it a Cockroach, because obviously, it's very visceral, but we just want to live forever. We want to outlive whoever's using this vehicle, and then hopefully, it outlives their grandkids as well. So, once again, going back to that, how do you manage to be on that third generation of wealth, we view this as the portfolio to do that.
Bill: I just like to thank you for discussing bitcoin on this podcast, because now the ratings are going to be sweet. Thank you for that.
Jason: Or it's a signifying [unintelligible [00:52:55] out for the market.
Bill: Well, no, we just mentioned it, but that's crack for rating. So, thank you. We'll just say it a couple times, bitcoin, bitcoin, bitcoin. Okay.
Jason: [laughs]
Bill: You mentioned that you get exposure to equities and bonds. How do you get that exposure? I assume equities is like the S&P or something like that. Is that fair?
Jason: Yeah. The hard thing when people are constructing these kinds of portfolios that are a total portfolio solution is retail investors don't have access to leverage our portfolio margin. Leverage is a scary word to most people. A lot of people in our space talk about-- they target portfolio volatility, which means they're using leverage. But what we can do is because we only use the cash-settled futures and options markets, is we use global stock indices and global bond indices under the future space, because we're able to cross margin it with our other managers that are managing long volatility tail risk and also the commodity trend managers. That allows us to then toggle our portfolio leverage to what we want. So, that's how we're labeled to get 2X leverage that way, because when you're trading futures and options, you only have to put up what's called a performance bond or margin to trade those positions. So, they're very capital efficient and cash efficient, and so that's the key that why we set this up as a commodity pool.
Like you said, it's a hedge fund to funds, but it's a commodity pool, because we use that specific vehicle so that we could have access to the futures and options market for that cross-margin ability. That way, you can build this holistic portfolio, but then you can toggle the return to drawdown mix you want. It limits us as far as we're using global stock indices and global bond indices, but it allows us to overlay those with our long volatility and our commodity trend. So, that's the key to it, and then part of that too is normally these managers are holding most of the positions in cash or T-Bills as collateral for those positions, and they're marked to market daily or actually twice a day. But what we can do is as part of that collateral we can hold in segregated gold. We hold 20% of the portfolio in segregated gold and the receipt for that counts as 90% collateral.
Bill: What does that mean, segregated gold?
Jason: You can have segregated gold under your specific auspices in a vault. Sometimes if you put-- [crosstalk]
Bill: Oh, okay. [crosstalk] actually the physical gold that you own or have a claim to.
Jason: Physical gold segregate to-- [crosstalk] and then segregate your claim, because a lot of times it's pooled into a vault. When some investors buy gold in a vault, it's pooled, but you can have it segregated. Basically, your receipt is allocated to that specific gold in that specific vault, and that specific amount is exactly for you. That segregated gold. But what you can do with--
Bill: Bitcoins solves this. No wait, that doesn't apply here.
Jason: We'll get that in there in a second. But suddenly the idea is that the CME and CBOE will use that claim on your segregated gold as collateral. Part of that instead of holding in T-Bills in cash, you can hold part of it and gold as well. So, it's even more capital efficient. Then, we also handle upwards of 5% bitcoin as well. The reason we have the golden bitcoin in there, I think, is interesting. We think about the portfolio a little bit differently. So, we have this very liquid portfolio that's all the world's assets. Global stocks, global bonds, long volatility, and commodity trend. We’re basically buying all the world assets, you're rebalancing frequently, that's an amazing total portfolio solution.
But if we're thinking about multigenerational wealth, it's not your investing or your savings portfolio that usually kills you. It’s things like war, confiscation, diaspora, those are the things that destroy multigenerational wealth. It's the things outside of financial markets or if financial markets completely shut down, these are things we want to segregate a gold or a little bit of bitcoin for, it's that fiat risk of a complete not just devaluation, but just complete decimation of fiat. So, you don't have to hold a large portion once against position sizing, so, if financial markets shut down, if you're at the 20% gold position, it's likely to go at 5x, and you've maintained your purchase power parity. Similarly, with bitcoin, if financial market shut down and bitcoin actually is a solution similar to gold, that 5% position could go up 20x, and you maintain your purchase power parity. So, it's always about position sizing, but it's also thinking about this liquid portfolio that can manage any financial environment, and then what happens if they'll shut down, we want to manage that multigenerational wealth with those fiat hedges of gold and bitcoin.
Bill: That makes sense to me. I don't know that I understand quantifying the upside in the way that you did, but--
Jason: You can’t. It's thumb in the air.
Bill: Yeah, that makes sense. At the end of the day, if financial markets shut down, everyone that's really long financial assets is going to lose relative wealth to the people that don't-
Jason: Right.
Bill: -that I understand. I can get that through my brain. [crosstalk]
Jason: Yeah, exactly.
Bill: Yeah. [crosstalk]
Jason: It's not complete destruction is what it is. Is that upside to 2X, 5X, 10X, 20X? You don't know, but at least you have something that's a real asset--
Bill: Gives you something to sell the go to the people that need liquidity.
Jason: Exactly, and more importantly, especially, the segregated gold, it's not somebody else's liability.
Bill: Yeah.
Jason: You don't have a counterparty risk, besides the vault security, those kinds of things. But it's not like you're worried about a bank's balance sheet in that situation.
Bill: That was something that when you were saying it's a capital-efficient way to do things. I was wondering in my head was, is there counterparty risk that you need to--? I'm sure there is counterparty risk that you need to worry about here, but is that one of the key risks to the vehicle that you run?
Jason: No. We try to mitigate those as much as possible. It's part of being long volatility guys, you always think about your downside risk. You're highly paranoid about everything in markets. This is another reason we specifically chose to build our portfolios in the futures and option space is because those are all cash-settled instruments twice a day, and you have to post that margin for it. So, it's no over the counter trades with investment banks, where you're worried about your counterparty risk in 2008.
Bill: Yeah.
Jason: I have plenty of friends, they made billions for their clients in 2008, but it took them 18 months of legal issues to try to get the bank to pay them back, and it was a fraction of what they actually owed them. So, we tried to avoid all that we're just sticking to the cash-settled futures and options market, so that's one reason why, but other also part of that means we're capacity constrained. Probably can't run much more than a billion or two, because of the cash-settled instruments. So, you'd have to take counterparty risk if you wanted to, but we don't want to do that. Then your concern is, if these counterparties are matching up part of the futures and option spaces, the prime broker is responsible for anybody trading under them in the cash settlement, if somehow, they go bust, then you have the FCM, the futures clearing merchant that’s responsible. If somebody go bust, then the clearing exchange the CME or CBOE is responsible.
So, you had these multiple layers of cash redundancies and responsibilities that are matching up those buyers and sellers, so we're very comfortable. This is why we like to space the most. And then part of that, too, is when we are hiring outside managers, like I said, we run fund to funds is that we get what's called separately managed accounts. So, what that means is they have a power of attorney to trade our account for us what we allocate to them. Part of that is we're able to put electronic brackets around them. Any fat finger issues, if somebody wants to trade 100 contracts, they're only allowed to take 10, it kicks it out. But more importantly, we get to see their trades in real time on a daily basis. So, if we have a long volatility manager that somehow goes rogue and wants to sell volatility, we can see that and we can pull our cash from them that day. This is what helps us eliminate any laid-off risks. We get to see, not only cash settled, we get to see the trades in real time. They're trading it on as a power of attorney. So, we have control over everything. This is why we really built in that space, but then thinking what you're just saying those, where's the counterparty risk is, it's never happened, but what if the CME or CBOE shuts down? What if something cataclysmic happens there? This is why we have segregated gold.
But also, we look for some managers that may have actual counterparty risk with like a Goldman Sachs, etc. and if we take a little bit of that risk with them, it's also a hedge against the liquid markets shutting down. So, it's trying to put all those pieces and those redundancies and that diversification in there and that's what we always fear as long volatility guys are managing multigenerational wealth. We try to think through as many of these things as you can, knowing there's always going to be some sort of surprise. It's also why when we think about allocating to managers, it's always position size is your best due diligence. There's always going to be a new novel way that somebody is going to figure out how to commit fraud, but if they're only 5% of your portfolio, they can't kill you.
Bill: Yeah, that makes sense to me. This is along the lines of Buffett and Munger saying, “Swing big when you swing.” Well, the thing that I've struggled with recently is trying to figure out how much of that I actually believe versus how much of it I want to believe versus how much of it is worth the risk to wealth of doing that? I've always thought of risk as like an S curve, where you can do that, and then you get to this point where, I don't know, let's just say, hypothetically, you've got a wife and three small children and-
Jason: [laughs]
Bill: -you can pay for food and stuff, and the next bet would need to substantially change things. So, de-risk a bit.
Jason: [crosstalk] Marginal utility. Like we said, you have to concentrate to make a massive wealth and then to keep it, you're likely going to need to diversify.
Bill: That's right. Then to risk that safety, you would need a substantial upside for real, which to me, I care about the scorecard, because you and I talk constantly about how I never feel like I am bringing in enough, or have enough, and I'm constantly running against that fear. But on the other hand, I don't need to be the guy that wins the scorecard game. I just want to be the guy that's comfortable.
Jason: But those things are-- as we talked about, those are in opposition to themselves, right?
Bill: Yeah.
Jason: And for your family, you just need the guy to be comfortable and provides for his family. But then your ego wants to be the scorecard guy.
Bill: Yeah. You know what? I'm going to say it's like not-- So, it is ego. You're definitely right. But my ego doesn't want to be the scorecard guy. My ego wants to prove that I'm worthy, which is slightly different. I don't need to be the guy with the biggest house to know that I'm worthy. I do need to be the guy that-- let's say we all die and go look at each other in the eye, the guy that I owe my life to, I want to look at him and have him be like, “All right, you’ve warranted what I worked so hard to have.” That was my grandma's grandpa.
Jason: Mm-hmm.
Bill: So, I just want him to be like, “Yeah, dude. You're my blood.” My dad's grandpa too. That dude was a beast. Their outcome was quite a bit different, which was a function of leverage and growing too much. But I'd like that guy to look at me in the eyes and be like, “All right, you're my blood too.” That's what I want.
Jason: Is there anything-- almost trying is an [unintelligible [01:03:40] we’re talking about serendipity, and actually, I'm going to quote Adam Smith for probably the second time, which is, the idea of, we should exalt the entrepreneur or the investor for rolling the dice. The outcome is unknown. You're working your ass off to figure this stuff out and do your best, but the scorecard is out of your control.
Bill: Yeah, I think that there's some of that. I guess that one of the things that you and I have talked about is, whether or not I'm working my ass off in the right way. That concerns me a lot. We've discussed picking stocks versus having the idea of, “Hey, rather than selling equities to pay your taxes this year and paying more tax on that it could make sense to take out a little bit of margin debt.” Not a lot, folks, but I don't know, whatever your tax bill is, and let Berkshire continue to compound rather than sell those shares, because presumably, you're making more than Libor on Berkshire and if we're only making Libor in equities, we're all fucked. So, who cares? Might as well lever it and enjoy it on the way down.
Jason: Exactly. There's structural opportunities I brought up to is, I always think of equity guys is like M. Night Shyamalan’s The Village right you don't really understand there's a big world out there. So, you could, especially the position sizing I know about your individual trades is, it’s not your whole book. You could still be pairing that with commodity trend or even some put options deep about the money put options in S&P and you're going to compound your wealth, but over the long run, and more importantly, you can sleep at night. But yeah, it's trying to think through the different scenarios outside of equities for trying to manage your wealth over the long term.
I think it's interesting too that I almost feel the opposite of what you're saying about, especially when you're picking stocks. What you're really saying when you're picking stocks, and please correct me if I'm wrong is like, I can predict the future. It's more of a-- It is a, for lack of a better term, it's a form of ego or genius game. I see things that other people don't. I see value here, and it's a matter of time that this terminus endpoint is going to prove that I was right.
Bill: Yeah, I don't know, man. I think it depends, but yes, I think that that's part of the game that people play. Sorry for talking about it again, but whatever, Qurate was not that. Qurate was a structural opportunity. I think some of the smaller names that people find are structural opportunities. Something like Twitter probably is closer to that, thinking that you can out-create the market and being right. But I also am pretty honest about the amount of unknowables in those scenarios.
Jason: I bring that up, because the way I think about it now is we’re retired from the genius game. We can't predict the future, and if I have proper portfolio construction that covers all of the global macro environments, and I rebalance frequently, that it doesn't matter what the future is. My portfolio is going to chug along just fine. I'm not trying to create the best portfolio in the world. I'm not performance chasing, I'm not going to have the best returns, but if I have the least shitty portfolio, and I'll survive, is the whole point of a cockroach. The greatest applause either of us could get is over the decades is survivorship. That's the true way to wealth, or the true way to success is just surviving. So, that's the way I look at is, try to build the least shitty portfolio that can manage any global macro environment, can manage anything uncertain in the future, none of us would have predicted COVID, is, how do you build portfolios that can last and outlast any environment that we find ourselves in? Part of that is, it's a perverse way of ego is to give up your ego predicting the future.
Bill: Yeah, I guess it-- this is my fullest thought on the stock-picking world, at least as I implement it. When I think of where I have made money, Colony, that was a scenario where I understood the pitch that it was way too bombed out, and that was one that had a lot of political stink, a lot of optical debt, a lot of really acquisition that had gone bad. That was a story that I think was really, really tough to get your head around. At the time, it was around two bucks, there's not a lot of reasons for somebody that has a nice life to go out and bet their life on that idea.
But on the other hand, they had recruited a rock star, and he was taking over, and I thought that that political stink was a little bit overly emphasized there. So, that was one. Charter, when I really leaned into the position size, was an acquisition coming-- like pains of acquisition coming to fruition, and I think a lot of hedge funds that are paid on IRR had to liquidated or thought that they were wrong or something like that, so I leaned into that. Qurate, I think everyone that knows that asset had already been burned by it. Even people that I think were sharp either said, “I don't want to touch it again,” or some funds that like the idea that I was talking to said it's too small. They wanted to be in and out in three days, and they just couldn't get there. I think that the big bets that I've made, I'm actually trying to arbitrage other people's career risk. I almost think that's what I've been pretty reasonably good at.
Jason: But let me ask you in a different way, how many positions you ever have on at one time?
Bill: Right now, it's 20. I know that that's probably too many.
Jason: It's not about too many. What I find interesting is, you have 20 positions on. You probably feel the same with the narratives you just told me right now, and about each one of those positions, and then in hindsight, you only have maybe 40% of those positions work out, and then in hindsight, you tell yourself a beautiful narrative of everything you saw that made that actually turn out to be a good bet.
Bill: Ah, I don't know. I think that there's a reasonable argument to be made for what you're saying. I guess that the reason that I think that maybe it's a little bit too many positions is I can't articulate what I'm articulating on all of them. So, maybe I shouldn't hold the ones that are probably closer to consensus.
Jason: But even your high convictions, let's say you took only five or six concentrated positions so that you had high conviction in, not all of them are going to work out.
Bill: No. Well. I'm aware, so far they have. People think that's a dick thing to say. I remember on Value: After Hours, somebody was like, “Oh, yeah, right. You've never had a big miss.” I haven't. Not yet. I'm certain one will happen. It's impossible to play this game and not get it, get hit by a punch. So, the question is, how do you react when you're punched in the mouth? I don't know. I will tell you when Qurate was in process of punching me in the mouth, it wasn't the most fun decision, but at that point, I just bought more because I figured fuck it. My reputations either torched or not.
Jason: Martingale method.
Bill: Yeah, well, what's another percent in here if-- it's not I leaned into it, but I don't know.
Jason: That's my guess is. Part of what I think plagues you at night is the idea of the hindsight is 20/20 narrative. That's part of is, “Am I getting lucky, or am I good?”
Bill: I will tell you. I think what plagues me is, I don't have recurring revenue that comes in. So, the idea of having to kill something every time you want to eat is not fun. Then the idea of am I a product of getting lucky versus being good and I have to kill what I have to eat. That's what plagues me. I don't know how to answer that either, because even where I know I've been dead right, I still don't trust it. There's something in me, that's like I don't know that I was right even though I know I was right, does that make any sense? It's internal. It's a mental talking to yourself.
Jason: So even if your P&L, you've closed it out, and you've made multiple returns, you still question if you're right?
Bill: Yes, sometimes. It's a sick psychological thing.
Jason: In what sense? If you were right, or you got lucky, or--?
Bill: Just like how many other paths of the world could have happened where I wasn't right. There's so much uncertainty out there that even if what was predicted was the outcome, that doesn't mean it was the only possible outcome.
Jason: Yeah. I don't think you can ever get over that.
Bill: Yeah. I know. It sucks. That's why I like financial entertainment so much more as a business.
Jason: Yeah, because you have some control.
Bill: Yeah, that's right. As long as I'm not just an ass, and I can try to get people to cry on the mic, I may get something. [laughs]
Jason: But then also, there's an element of luck, because just like I was saying the rolling of the dice is you don't know how many people are going to subscribe, like, and listen to your podcast.
Bill: Yeah. That's true. I know what [crosstalk] I know is zero pay. [laughs] So, I got that. That's the baseline.
Jason: But people are always like, “What's your goal?” “Oh, I could want, a million listens or download to my podcast a month.” It's like, how are you going to get there? You're still going to do the same things. You're going to put in the work, you're going to publish, and then it's not up to you. It's a lucky roll the dice. You'll catch it when you're saying whether it's bitcoin or whatever, that will grow that. It's a form of luck. You're just laying down bets, and that's what each one of your podcast is. It's a call option on getting lucky and then building that audience.
Bill: Yeah, that's true. The other-- not underdiscussed, because Corey discusses it too often, but the benefit that I get is there's some mental association where people think that because I talk to smart people, I'm smart. So, I appreciate that. But also there's a psychological bias that I exploit to the podcast for sure.
Jason: Exactly. If we're smart by association, that's why I do a YouTube channel with Corey.
Bill: Yeah, that's right.
Jason: I get some of the shine.
Bill: Dude, he's fun to record with. He's a cool guy. I liked his episode a lot. I didn't know how it would be because Toby and I are close. So, I knew that hopping on the mic with Toby would be fine, because we talk. Corey, I hadn't done a real quant interview up to that point. Then, we just got talking-- because we had met at a bar in Chicago once. It was a FinTwit get together, and I knew he was a cool dude and Toby vouched for him. So, I was like, “All right, if you’re cool with Toby, you’re cool with me.” But just chopping it up with him, that dude can talk.
Jason: Yeah. My favorite part is I think that, when they see Corey on his podcast, which he does a tremendous amount of research, and it's really culled down to 40 to 50 minutes of high-quality, high-value quant information. But then it's part of his voice in general too.
Bill: Yeah.
Jason: He's got that deep baritone, he just seems just incredibly smart quanty guy. But behind the scenes, he's going to kill me, but he's very silly.
Bill: Yeah.
Jason: That's what I enjoy, too, and that's what I'm really liking about doing Pirates of Finance with him on YouTube, is bringing out the playful side of Corey, because he's a very playful person. He's ridiculously smart. That's table stakes. That speaks to me volumes that he was willing to do this YouTube channel to be that vulnerable, because he knows he's got table stakes in spades like he's the smartest guy around. He really knows his shit. But also, that allows him to be vulnerable and show a little bit more of his quirky or silly side of his personality, and that's what really comes through on Pirates of Finance. Quite frankly, 90% of that comes from the mind to Corey. I'm just there to--
Bill: For the pretty face?
Jason: Yeah, I was going to say the pretty face, but he's so much more handsome than I am.
Bill: True, he is ridiculously good looking.
Jason: I have never gotten so many DMs about how handsome somebody else is.
Bill: Yeah. That's frustrating for him or for you. But whatever. It's good. You're pretty by association.
Jason: Yeah. I feel that you would hate that one too. It's just like, Corey’s 6’4”, absolutely jacked, incredibly smart, incredibly handsome, and he’s just like, some people just get all the--
Bill: I was like, “What questions do people have?” They were like, “Ask him about his eating regimen.” No. I respect how he looks, but I'm not going to ask the guy about his eating regimen. To be fair, I do understand the question though. If you're healthy and your mind is good, I get it. But it's just that's not. That's not where I'm going to go with most conversations.
Jason: Oh, then, that just led me in another conversation with you. So, we both know that. You work out, you eat healthy, because then healthy body is going to lead to healthy mind. But then, we have to shut off our mind sometimes. So, then you use other things to help shut off your mind. How do you even manage that to manage? I think about every day, I'm just managing my mental health.
Bill: Yeah. I don't know. I can tell you, I think that booze is just toxicity that I allow to enter my body, and I probably should stop. But I've also had a lot of good outcomes that are somewhat indirectly related to booze. So, that's hard to argue that it hasn't been a net benefit to my life. For instance, I probably wouldn't have my wife if we didn't drink.
Jason: [laughs]
Bill: I also would not have ever met Toby. So, it's not that clear to me. Weed is weird, because it's one of the things that allows me to be present. There aren't that many things that I slow down my mind with. Pot does that to me. I don't know. I'm sure meditation would probably be a healthier habit, and I've been working on some mindfulness stuff, for lack of a better term, and that's helped over the last month or so.
Jason: Didn't you say you're using the meditation on the Peloton app or some?
Bill: I have tried that. Actually, Brent Beshore recommended a book to me. It's called-- I think it's The Relentless Elimination of Hurry, and it's a lot more religious than I anticipated that it would be, but the discussion that really resonated with me is had to do with, “Jesus would tell you to love yourself. And in loving yourself, you have to accept both the good parts and the bad parts.” Like loving the bad parts of you is part of actually loving yourself. If you just remove Jesus from the conversation and the religious aspect of the book, there's something beautiful about that, that I think I wasn't-- I don't know. That's helped me a little bit.
The other thing that the book said is like, through the Bible, “The busier and busier that Jesus got, the more he took time away,” and I like the idea of saying, “Okay, the busier and busier you get, the more time you need to make sure that you carve out for yourself.” I think that those are the two big points that I've tried to stick with. Now, my man, Aaron recommended the Sabbath, and I probably need to implement that. I haven't been that great at it, but I have stopped responding to things that I don't want to respond to. For a long time, or for a couple months there, I was in a very reactionary state, and I've taken control of a lot of that. That's helped. I have no idea how the hell we're talking about this or why I'm still talking.
Jason: Well, that's also because I'm in an unusual position to be answering questions instead of asking questions. So, I just wanted to turn the tables a little bit on you. But it reminds me of-- I don't know if we ever talked about it, I was a religious studies major in college.
Bill: Oh, yeah?
Jason: Yeah. So, part of what you're saying is that a lot of people that become atheists or militant atheists, they want to just throw out religion. But what you reference, there's a lot of traditions to religion that we don't realize is a Chesterton's fence that we actually may need. Like things the Sabbath, or any those religious holidays, days off, any fasting rituals, all of those things can be a form of reset that we've learned through thousands of years are good for us.
Bill: Yeah.
Jason: So, it doesn't necessarily, like you said, need to be a God or higher power based or multiple Gods. It's more about the traditions of how to deal with life in general, and that's where things like Sabbath and shutting down are fantastic for.
Bill: Yeah, the problem with religion is not the teachings. It's the people that teach the teachings. It's weird. The only time that I felt a little uncomfortable was around some Southern Baptists in Alabama. When I mentioned that my stepmom was Jewish, and the one told me that she was going to go to hell, I was like, “Okay, that's a bit aggressive.” But outside of that I haven't really been introduced to enough strict religion to have a strong opinion one way or the other. I do think that some of the teachings in this book are great. That's what I will limit the conversation to.
Jason: I wonder about those traditions with good references. One of them I just thought of this as like, the 40-hour workweek, the 9 to 5, that's probably a great structure to have us take time off. But in the modern day and age, we're just working 24/7.
Bill: Yeah. Which can't be good.
Jason: Yeah.
Bill: When we met or when you came up to visit me, and I was in that spot, I was in a bad spot. Not depressed spot, but I was warped mentally. A lot of it was, man, I was trying to get this podcast off the air or off the ground, and I was responding to every tweet that I saw, and it was just so fucking reactionary. I was saying yes to everybody else's podcasts that wanted me to come on and I'm super appreciative that they wanted me to come on, but I think I’m just going to need to be a one-way machine of content at times.
Jason: They're part of that I think though, is just the idea of work-life balance doesn't exist. If you're trying to build something, build something great too, you have to be in yes mode. If you're in yes mode and that's just incredibly overwhelming, [crosstalk] especially personalities like ours sometimes but you have to do that to get to a level where then you can start saying no.
Bill: Yeah.
Jason: That's the trade-off and that's the dichotomy that's hard to deal with, is like, “Okay, I got to be yes mode. I’ve got to be overwhelmed. I’ve got to do everything I can to get this thing to some orbit where then I can start to hit cruise control, start to say no, and start to really cultivate and refine what I'm trying to do.” But it's a nightmare to get there sometimes.
Bill: Yeah. You feel like you're getting close to that with the mutiny fund, or you still on yes mode?
Jason: I was still in yes mode, but I feel the launching of Cockroach is the culmination of, like I said, a decade's worth of work. So, that's very exciting. But also, I feel like I tricked myself too, is like, “Oh, once we get here, it'll be a little bit smoother sailing, and I can relax a little more.” That goes to-- I remember nicely distance running or stuff with my dad, I’d be like, “Just make to the next stop sign.” Then, you get to the stop sign and then make it to the next stop sign or whatever. You just keep tricking yourself. So, I wonder sometimes if at least the way my mind works is part of that entrepreneurial journey is you keep tricking yourself to be like, “I'm working hard now. I'm just saying yes to everything. I'm working 24/7. But then in a year from now, I'll be able to dial it back a little bit.”
Bill: Yeah.
Jason: In a year from now comes and you tell yourself the same lie over and over. I did learn I was talking to a guy that I really enjoyed talking to out at an event in Aspen recently and he said that every year, him and his wife take one to two weeks off just them together.
Bill: Yeah.
Jason: My first inclination was like, “How in the world could we take one or two weeks off? We're both so busy with our businesses,” and that made me go we have to take one or two weeks off away from our business. We're going to try this fall, and you see even the hesitancy in my voice.
Bill: Yeah.
Jason: We're going to try this fall instead of saying we are taking that time off, and that's why I don't know when you're building a business as an entrepreneur in the digital age, can you shut it down for a week or two?
Bill: I'll let you know, because I'm about to shut this down. Not for a long time, but I think for three months or so. I'm going to go away.
Jason: How do you shut your brain down?
Bill: Oh, yeah, I got-- My brain is a mess. It doesn't turn off. To be fair, when I say shut it down, I'm redoing the brand. I like the coffee cup image. I think we've graduated past the coffee cup. So, I got some ideas on that. What do you think of-- So, I think podcast need to be album art, right?
Jason: Yeah. Corey does that.
Bill: The title, right? So, that's what I was going for. But it's a little too pop arty.
Jason: The one you're currently have.
Bill: Yeah.
Jason: Yeah.
Bill: I like it because it's different. You're not going to see anybody else, but that has it. But I like the idea of-- can you recall Jay-Z's Blueprint?
Jason: Yeah.
Bill: You know that album art where he’s smoking the cigar.
Jason: Yeah.
Bill: I like the idea of that.
Jason: Here's the question, though. Is it different enough so--
Bill: Or Ice Cubes, Predator?
Jason: Oh, that's a good one.
Bill: Isn't that but-- Yeah, that is Predator.
Jason: Was it in Nas’ Illmatic?
Bill: To be fair, he's smoking something that I'm not going to be smoking weed on the fucking cover of a finance podcast, but something like that.
Jason: But everything is shown in black and white. Illmatic’s black and white too.
Bill: Ah, well, that's because I have a color filter. Jay-Z’s is blue and white actually.
Jason: Oh, still, yeah. Oh, yeah, he had the hint of blue and like-- [crosstalk]
Bill: I like black and white. I think black and white’s dope.
Jason: But part of that I wonder is, if I put a Tim Ferriss style hat on is, “Do you need a bright bold color that stands out on the title compared to everything else?” But is that how people find you?
Bill: I think everybody else has that.
Jason: Right. There’s something that there's a lot of performative things like Corey and I are dealing with this on YouTube. Everybody on YouTube, especially the hacky personal finance guys, they all have these Home Alone faces, all these faces, right?
Bill: Yeah.
Jason: And everybody goes, “Do you need to make these exaggerated faces, the clicks?” I'm like, “Is that true? Are you reverse engineering this properly?” We don't know that's true, because nobody has the data. So, it's the same thing is like, “Okay, wait. People find your podcast because probably other people tell them to” whatever. So, does your title podcast art aren't really going to matter? Does anybody really see it? What I mean is, you don't need that to grab attention. You might as well make something that you love. It speaks about you, and then they also when they see that, then it could give them a subconscious inclination of the aesthetics of the podcast. I think it's better always to just do what you want. And then, you start chasing that, “Oh, what's going to get the clicks?” That's just seems like a risk of ruin.
Bill: Yeah, no doubt, no doubt. I'm not trying to get the clicks necessarily, but I guess-- My friend is helping me out with the branding, and I think when we started, she was thinking that it would be more of branding a business, I thought of it in that way too. Then, I realized, “No, you’re just branding the host.”
Jason: It's a personal brand.
Bill: Yeah, that's right.
Jason: But what's interesting about that is that everything now was personal brand. We’re not branding a business anymore. People like people, and it doesn't matter if you're a Fortune 100 company. They're following a person. So, everything is a personal brand. It's interesting how people don't realize that I talk to a lot of times, it doesn't matter what-- If you're a bartender, you better build a personal brand, because when they go to hire two people, and this person has 10,000 followers on Instagram, they're going to hire that person. It's completely unfortunate but it's the world we live in now that everybody's a personal brand. So, those that are faster to accept it, I think can work within those confines a little bit better.
Bill: Yeah.
Jason: It's also a scary thought too, and it's a very solipsistic thought that you’re the personal brand, this is going to be built around Bill.
Bill: Yeah, no, it's weird.
Jason: But that's the truth, though. That's just why people listen. They're falling in love with you.
Bill: Shoutout to y'all. Thank you.
[laughter]
Bill: The good news is very few of you will ever love me as much as I do. [laughs] Oh, it's sad because it's true. No, I like it, but I have-- that was something that I had to realize, because I had their mockup, and I was talking to a buddy and he was just like, “This is just wrong. It's got to be about you, because that's what this stuff is.” Going back to, “Can you turn it off?” Part of me is like, “Well, fuck, if I walk away from podcasting for three months, am I just going to disappear forever?” I think probably, one, I'm not as big as I'd like to think I am in the podcast world, and two, the fans will probably be there when I come back.
Jason: Yeah, you’ll the herd down to your true fans, and I think we just have to be ourselves and do what we want to do, and part of it is almost volatility. I think about our minds, the way they work is, even if you shut everything down, it's like squeezing a balloon, just like volatility. You can't suppress it. So, if you take away podcasting from you or whatever, your mind’s going to be working probably overtime on individual equities, or whatever it is. Or you're when you come back, I'm going to read you all the podcasts this way. So, it's not like you're going to-- that's what I’m saying, I don't know how you actually take time off.
Bill: Yeah, that's fair. I think that's right. I'm going to try for the week that we go up to Chicago, I committed to my wife to not do anything. I'm just going to be with the family. So, I'll let you know how that goes. I'm probably going to be texting you, and being, “This is going miserably.”
Jason: [laughs]
Bill: I can't disconnect at all. So, how are you guys marketing Pirates of Finance? Is it all viral?
Jason: Yeah, it's all viral. This is another thing, I think if you’re thinking about podcasting is, at least without our Personal Immunity podcasts and everything, we're putting them on YouTube, too, because you have the searchability there. I think, at least myself, and I've found a lot of younger cohort, also putting a podcast on YouTube, I watch their first few minutes, get people's facial expressions and mannerisms, and then I leave in the corner and I listened to a podcast.
Bill: Yeah.
Jason: So, as far as Pirates of Finance on YouTube, I wouldn't copy what we do, because we're not really doing anything. It's more about virality and then trying to transfer our Twitter audiences over to YouTube. But what's interesting lately as part of our analytics is, people are more finding us out organically on YouTube now, than just driving them from Twitter. It's always trying to find that sweet spot, but also, it goes back to a year and it's almost original conversation is, Corey and I are just going to focus on putting out a piece of content every week for a year, and not worry about anything else as far as audience monetization etc. Just do the work every week, and what happens happens.
Bill: Yeah.
Jason: Unfortunately, you do get caught up into all the analytics, you're hitting refresh all the time. That those of things you can't help yourself. But that's what we were talking about almost monetizing your podcast or whatever. It's just do the work and take for a year or two see, what it turns out, and then you could turn around and monetize things or really dial them in. But you need a compendium of content, I believe. People need to know-- you need to find your voice too, which I think you're great at, and so that those things just take time.
Bill: I agree with that. I guess the tough thing is when you're creating content, it's hard to then like-- Our episode will be almost two hours or whatever, when it's all said and done. The thing that's tough is to then say, okay, well, to take the time to create the clips that show people why they should listen. For instance, my cousin, Derek, I think his episode is a really awesome listen for anyone that's interested in the music industry. The issue-- how these things go, we started talking about, the first 30 minutes was basically him as a magician when he was a kid. I think it's a dope story. But I understand why people that are into investments don't. So, it's driving them to the part of the conversation that I think that they should want.
The other thing that offends me, man, and it's all me. If you've asked me for this, I'm not talking about you. But people are, “I want detailed show notes. I just want to know what I need to know,” and it's like, “Fuck you, man. This is my art.” You get the free stuff for two hours, if you're going to sit down and listen to it. If you want me to save you time or something part of me thinks that should be a premium service. I don't know. I need to think through what this actually is for a little while. And in order to do that, I don't think I can record two a week or one a week or whatever. I just think I need to hit pause for a bit.
Jason: Yeah, I think you could. We can't help because it's our babies, and so we take personal offense to every little slight.
Bill: Yeah.
Jason: But it's always amazes me is if we deal in probabilities, the amount of people that actually comment for things like that versus the actual listens, and the problem is people that love it don't usually comment.
Bill: Yeah.
Jason: That's where the hard part is the feedback we get is very isolated, and it's the extreme minority.
Bill: Well, it’s actually helpful, like I do get it. My buddy, Alex, doesn't listen to this. He's like, “Dude, I don't have enough time in the day.” “Listen.” But I do get it. But it's fine. If you want to know what Derek had to say, it seems to me that some offering that's priced somewhere could save you a fair amount of time, and if it came with some additional access or follow-up questions or whatever or maybe you could ask questions for the episode or whatever, I don't know what it is, but there's some product here that makes sense.
Jason: Maybe. I also just wondered, like, the long tail in general is, people like your particular brand of vodka or they don't. There's so many choices in the market. This is the interesting thing is, is the people say they don't have the time, they literally don't have the time. So, time is our most precious asset, so we're allocating accordingly. If they really valued what you did, that two hours, you'd want it to be four hours. That's the point is. When somebody says, I don't have the time or whatever, they're just saying like, “I don't-- There's another brand of vodka I like better than yours.”
Bill: Yeah, that's fair.
Jason: That's essentially what they're saying, is like, “I have a two-hour allocation. I would rather do it grilling in my backyard or listening to Joe Rogan than listening to you.”
Bill: That is so hurtful.
Jason: Well.
Bill: [laughs]
Jason: But that's the point is don't cater to people that-- they don't want what you're selling.
Bill: Yeah, no, that's fair. Yeah, that is a good point.
Jason: Even the way we treat our hedge fund is, we're trying to fire people right off the jump at the top of the funnel, because if you haven't been searching for exactly what we do, and you're dying for what we're producing, then you're not the client for us. We can't convince you that you need this.
Bill: Yeah.
Jason: The similar thing is like, we'll recommend anybody else out there, because over the long run, neither of us are going to be happy.
Bill: Yeah, that's fair.
Jason: So, it's the same thing. We're just looking for-- out of the seven plus billion people, we're looking for the people that get what we do, and we want to be likeminded people, and it's actually been fantastic for us, because our Rolodex Alphas is in singing, because we have all these great entrepreneurs and everything that invest with us, and so the feedback we get and everything is just-- we have this amazing cohort of likeminded people, but it's also willing to say, we're not the right thing for you. Here's somebody else that probably is.
Bill: Yeah, so, you'll refer a lot out to people?
Jason: Hmm. That's the majority of my time, is referring. 90% time, I'd rather refer somebody else.
Bill: Ah.
Jason: Maybe it's short-term pain, long-term gain, that's the way I look at it is, that's what we're set. We're trying to manage-- At the end of the day, Taylor and I built something that we wanted for ourselves, our families, and our in-laws, and maybe kids or future grandkids. So, we built the exact product we want.
Bill: Yeah.
Jason: If you don't like it, there's millions of other products out there.
Bill: Yeah, Tim Ferriss right here.
Jason: Right. We're going to be in this game for the next five to six decades, hopefully, if we live that long, if I don't get hit by an ice cream truck or same for Taylor's. It’s like this is what we do, and we don't differentiate what we did. This is exactly what we wanted to build. If you like it, great. If you don't like it, great. Here's somebody else that does I think what you like.
Bill: Yeah. That's how I feel about Andrew Walker's podcast. I think he has a very complimentary product to mine. Mine is probably a little bit more entertainment focused. I think if you want stock pitches, you go to his, and I tell people that. It's nice because it's segmented products.
Jason: Yep.
Bill: Yeah. People know what to expect. The nice thing about your approach is, once you find the LP, or how's it start? It would be an LP, right?
Jason: Yeah, that's the easiest way to think about it, yeah.
Bill: Yeah. Once you find that, the probability that the relationship deteriorates is probably quite low, because it's a solid fit at that stage.
Jason: Yeah, we're looking for the solid fit. We also have a lot of education and Taylor's phenomenal at that. So, it's also educating those clients to understand exactly what we do and trying to find that right fit. Then, yeah, we're looking for those long-term relationships. It's hard because it's not as easy as hitting the buy button on an ETF. To onboard into a hedge fund and interact is basically a direct investment to a Delaware LLC, we have people that helped them and hold their hands through that, as far as the customer service side, but that also provides a stickiness long term.
Bill: Yeah.
Jason: So, there's both pros and cons to that stickiness, because also, at the end of the day, a properly built total portfolio is a way of babysitting you doing anything stupid with your money.
Bill: Yeah.
Jason: And that's the problem sometimes if you have that immense liquidity with an ETF--
Bill: Yeah. You can do some dumb.
Jason: Yeah.
Bill: Yeah, no doubt.
Jason: And so, it's a babysitting tax, really.
Bill: Yeah. What is your tax? I was actually just thinking about your fee structure, because the knock-on fund to funds, is that it's hard to outperform when you're doing all the fees.
Jason: It's very expensive. There's no way around that. You get what you pay for. Our sub managers have their fees, and we try to beat them up on those fees, and as AUM grows, we have better negotiating power. They average out to about like 0.8 and 18 to give you an example across the board, but they can all be managing different amounts of money. So, it's how it's structured. Then our overlaying fees are 1 in 10 on top of that.
Bill: Okay.
Jason: Like I said, it's more expensive than what people are used to with an ETF, but also, there's no benchmark. There's no access to a product like this. It's not like you're paying more for us than you would for an ETF benchmark, it just doesn't exist. So, we build out this product, and then more importantly, I was talking about the capital efficiency and stuff earlier is, you don't have to pay for that leverage or anything like a regular broker where you pay 6% to 8% a year, something ridiculous. It's like so all those things, the different structure that rebalancing, all of those things in essence pay for themselves or give you a better product. So, that's really what we're focused on. Build the best product, and if that best product after fees, expenses, bid spreads, slippage, etc. commissions, if after all that, it's still a better product, then that's what we're proud of, and like I said, it's what we invest in. So, that's it. I think the low fee mantra has been great, but I think we're going to start seeing a lot more pushback to that just because you can't get the specialty or the niche products that people would need to be their proper holistic portfolio.
Bill: Yeah. Are you managing to like a Sharpe ratio or a total return, like, how are you thinking about that?
Jason: I hate Sharpe ratio. There's a couple things about that. One, Sharpe ratio is actually built for the portfolio metric. But people have now used it for individual asset classes or individual managers where it's supposed to be about how a portfolio combines, that's your efficient frontier. But you can hide a lot in a Sharpe ratio, because it also equal weights volatility, the upside, downside, etc., and if you actually build a portfolio of a lot of high Sharpe ratio assets, you're really hiding that left tail of that drawdown in a crash [crosstalk]
Bill: Yeah.
Jason: So, what we really focus on is there actually aren't any good metrics. There's not a great benchmark. There's no great analytics. So, you can use things like Sortino ratio that are much more aggregated towards the volatility on the left side, on the left tail than the right than equal weighting, you can use skew metrics of left and right skew. What I try to focus on in a very simple way is MAR ratio. MAR ratio is your long-term compounded return, divided by your worst drawdown. Now, the problem with that though, is it can only really be looked at in hindsight.
Bill: Yeah.
Jason: But to me, my golden heuristic would be five decades from now, I have a MAR ratio of 1. Meaning, let's say that--
Bill: 20% return, 20% drawdown. [crosstalk]
Jason: There's maybe only a handful of people that have ever achieved that over a multidecade period but that is the goal. Whether we hit at all or not, that's what we're shooting for, and this is why we think we look at a very different lens from an entrepreneurial perspective to managing your wealth over multiple generations. We worry about what you can eat. We're an absolute return fund. At the end of the day, we care about return to drawdown metrics. We don't care about volatility. You can't do anything with it. Who cares what your volatility is, if your drawdown 60%?
Bill: Yeah.
Jason: This is what we focus on, is that MAR ratio is we're trying to reduce the drawdown as much as possible, because part of that is, people don't realize the industry has lied to you. It's totally the these are investments. They're really savings. You had something leftover that you had the discipline to save and you actually need those savings to be there in the future when you need them. You didn't probably outpace inflation, but you need them to be there when you need them most. As soon as the industry told you they’re investments, that means they're going to want you to take more risk with them. They're no longer your savings, and this is what you're dealing with as well, you want those savings to be there when you do the most. So, part of that is at the portfolio level, you have to reduce those drawdowns. You want an extremely boring portfolio that can chug along in any macro environment and not burn you. You can't have a 55% drawdown like the S&P, or even your buddy Buffett went through.
Bill: Yeah.
Jason: If you're going in a 55% drawdown, there's likely an absorbing barrier where you've cashed out and then you haven't gotten in on the V shape recovery, or worse, you could have-- a loved one could have some medical expenses or whatever. The problem is, the idea of investments for the long run or invest in stocks for the long run, is that's the idea of it's an ensemble average. Because over the ensemble, over the last 100 years has been up to the right, but each individual's lifetime has seen all kinds of things. Some people have been underwater for 25-year periods. So, it doesn't line up to your actual individual lived experience, and that's why we try to create a very boring portfolio that can manage it in those environments, because you never know when you're going to need those savings most whether it's 1 year from now, 10 years now, or 100 years from now.
Bill: Yeah. No, that makes sense to me. I think that sometimes with someone like Buffett as a teacher, one, he had so much confidence that he'd be able to make it back that he didn't care if he lost 50%, I think, is my perception of what was going on. The other thing is, if you’ve got $50 million and you lose 50%, in Chris Rock's words, “Big deal, you ain't starving.” But you got $50,000 and now you got $25,000, that's a big change.
Jason: Yeah.
Bill: It matters how much wealth you have relative to your burn rate as to how much risk you can take in a drawdown. Not exactly rocket science, but that's how I think of it.
Jason: And to me, I've never understood why if Buffett just had deep out of the money, tail risk puts on the S&P, he would have compounded at an even higher rate and he could have slept at night.
Bill: I think he sleeps okay but yeah, I agree with you. I agree with you.
Jason: In fairness, he admits, he won the ovarian lottery. What are the chances that you rode the largest bull market in world history that coincided perfectly with your investing lifetime?
Bill: Yeah, that's right. Well, dude, I would love to continue this, but we both have time obligations that are about to come up. So, I'd like to spend a little time with you offline before you have to leave, but before we do that, is there anything that we did not touch on?
Jason: I don't think so. We went deep. We went to the [crosstalk]
Bill: You didn’t cry.
Jason: I know. I thought for sure, you'd get me to.
Bill: Well, maybe next time.
Jason: I think you just need to get some lounge chairs in here so I could lay back on your sofa a little bit more. Maybe that's it.
Bill: Dude. I'll tell you what? This office needs a lot of work. I'm looking around and it doesn't look good, but I did just move. So, whatever.
Jason: No, I think there's not much I think else we can touch on. Like I said, we built portfolios for ourselves and if other people like them, great. If you don't like them, there's plenty of directions anyone can go in.
Bill: Yeah, no doubt, and people can find you on Real Vision, on the Twitter machine @JasonMutiny. Where else can people find you? Pirates of Finance on YouTube?
Jason: Yeah, shoutout to Corey and Pirate on Finance on YouTube, and by the way it's finance like Penzance.
Bill: My bad.
Jason: Yeah. If we could just get the world to do that, that'd be happy.
Bill: I went to school in Alabama too. I should know that.
Jason: Yeah. You can find us on mutinyfund.com. On there, my partner, Taylor Pearson, writes tons of great blog articles, white papers, etc., to learn more about what we do. We also do a very niche geeky podcast about volatility with our volatility managers that you can find at mutinyfund.com or Mutiny Investing podcast. It's never going to do 1/10th of the numbers that your podcast does, but it's a very niche audience. And like you said, I’m @JasonMutiny on Twitter, and my partner is @TaylorPearsonMe on Twitter.
Bill: All right, cool, man, and we'll put all that stuff in the show notes. I'm trying to get better at the show notes.
Jason: [unintelligible [01:44:06] going to say, do you have show notes, or you just say that because that's what everybody says?
Bill: No, I have some show notes. I put a little bit of effort into them now. I now put this stuff into-- Milk Video is what I'm using, because I think it's going to help me with some marketing stuff. When I can read the transcript, I can do the show notes. When I have to listen to the show to do the show notes that was a bit inefficient. So, I apologize to the fans that want better show notes. I'm working on it. I have plenty of flaws. That's one of them. So, anyway, thank you for stopping by, sir. We can do this anytime. Just holler.
Jason: Once a week.
Bill: [chuckles] Potentially.
Jason: Therapy session.
Bill: Yeah, that's right. All right, have a good one.
