Rick Buhrman & Paul Buser - Find Your X, Nurture Your N - [Invest Like the Best, EP.346]

My guests this week are Rick Buhrman and Paul Buser. Rick and Paul spent over a decade managing the public equity portfolio at Notre Dame’s Endowment before leaving in 2020 to set up a permanent capital vehicle called Sator Grove. As you’ll hear in this conversation, they know, have studied, or have invested with most of the world’s best capital allocators. A few years ago, they also set up a class at Notre Dame for 40 of the college’s brightest students, called Art of Investing. The class is devoted to exploring the joys of compounding and each week, they bring in a world class investor or operator to share in detail how they’ve built their lives, portfolios, and businesses around the principles of compounding. Starting next week, it will be available as a Colossus Podcast so that you too will be able to join their class and learn from the likes of Todd Combs, Andre Perold, Ho Nam and others. I’d encourage you to search Art of Investing in your podcast player and subscribe so you don’t miss the first episode. Now onto my discussion with Rick and Paul. Art of Investing: Trailer For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Tegus. Tegus, the modern research platform for leading investors. Tired of running your own expert calls to get up to speed on a company? Tegus lets you ramp faster and find answers to critical questions more efficiently than any alternative method. The gold standard for research, the Tegus platform delivers unmatched access to timely, qualitative insights through the largest and most differentiated expert call transcript database. With over 60,000 transcripts spanning 22,000 public and private companies, investors can accelerate their fundamental research process by discovering highly-differentiated and reliable insights that can’t be found anywhere else in the market. As a listener, drive your next investment thesis forward with Tegus for free at tegus.co/patrick. ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes (00:02:30) - (First question) - Shifting from Notre Dame to Sator Grove (00:06:20) - An overview of Sator Grove (00:11:39) - Launching in April 2021, they manage $300M for diverse, flexible investments (00:15:47) - Investing in meaningful projects with trust, long-term focus, and high potential (00:25:30) - How Mitch Rales embodies insatiable curiosity and lifelong learning (00:39:33) - Embracing change, adapting, and experimenting for success (00:41:49) - How investors learn from failed companies (00:51:59) - Investment success hinges on talent's judgment, character, adaptability, and trust (00:56:53) - What they found concerning in firms and teams when assessing managers (01:02:16) - Analyzing asset allocation challenges (01:07:39) - Fostering disciplined habits for growth (01:13:06) - The importance of nurturing compounding (01:21:21) - Creating meaningful connections and providing lifelong lessons (01:26:58) - Wisdom from their mentors and its impact on their investing philosophy (01:43:49) - Defining the good life: Quality projects, quality people, and meaningful integration (01:45:29) - The defining moments of their investing careers so far (01:47:59) - The kindest thing anyone has ever done for Rick and Paul

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

  I know firsthand how complex the tech stack is for asset management firms. And seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount and more risk. RidgeLine offers a better way forward. One unified platform that automates away the complexity across portfolio accounting, reconciliation, reporting, trading, compliance and more, all at scale. RidgeLine is revolutionizing investment management, helping ambitious firms scale faster, operate smarter and stay ahead of the curve. See what RidgeLine can unlock for your firm. Schedule a demo at ridgeline.ai.

• 0:35Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts and you can access all our podcasts, including edited transcripts, show notes and other resources to keep learning at joincolossus.com.

• 1:00Speaker 01

  Patrick O'Neal is the CEO and founding partner of Positive Sum and the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum or O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum or O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 1:32Patrick O'Shaughnessy?

  My guests this week are Rick Berman and Paul Buser. Rick and Paul spent over a decade managing the public equity portfolio at Notre Dame's endowment before leaving in 2020 to set up a permanent capital vehicle called Cedar Grove. As you'll hear in this conversation, they know, have studied or have invested with most of the world's best capital allocators. A few years ago, they also set up a class at Notre Dame for 40 of the college's brightest students called The Art of Investing. The class is devoted to exploring the joys of compounding and each week they bring in a world-class investor or operator to share in detail how they've built their lives, portfolios and businesses around the principles of compounding. I've been so enamored by their class that earlier this year, I asked them if they'd open up the class so that more people could benefit from it. I'm delighted to say that

• 2:17Patrick O'Shaughnessy?

  they've agreed and starting next week, it will be available as a podcast so that you too will be able to join their class and learn from the likes of Todd Combs, Andre Perold, Honam, and many others. The trailer is linked to today's show notes and I'd encourage you to search Art of Investing in your podcast player now and subscribe so you do not miss the first episode. Now, onto my great discussion with Rick and Paul.

• 2:41Patrick O'Shaughnessy?

  Gentlemen, where to begin? I think our conversation today is going to be, for the audience, a sort of first and unfair inside look at the world of institutional investing and the alignment of incentives, which I think everyone understands, like the principal agent problem and how pervasive that is in all things, but especially in investing, and how you've thought about what an investment company, firm should look like. And you have a total unfair perspective because you've met all the worlds and worked with all or most of the world's great investment managers. You are one yourself now. I'll obviously tell

• 3:21Patrick O'Shaughnessy?

  the Seder Grove story in some detail. But maybe the fun place to begin for me, because I don't, I don't think I've ever asked you guys this specifically, is to go back to like the moment that comes to mind when you think about your transition between a very long career helping run Notre Dame's endowment to the first days of Seder Grove. And just talk about that phase transition. We were with somebody yesterday that's going through an extreme version of this. I'd love to hear about yours, especially Rick, because I think you said before we hit record that your intention was that you were going to be at this one place at Notre Dame, probably for your whole career, and then things change. And so I just want to zoom in on that moment and have you tell us about what it was like before I get

• 4:04Patrick O'Shaughnessy?

  into all my nitty gritty questions about investing.

• 4:07Speaker 02

  We will do that. I think before doing that, though, I do think it's important to set the context of just how important Notre Dame has been to the two of us and really our story and our friendship, how we see the world, how we think about investing, really all comes back to this connective tissue that is Notre Dame. When I recruited Paul back during the financial crisis, I was just finishing up his dual degree MBA and also getting a degree in public policy. And there was a genuine interest there to explore a variety of disciplines and to continue to learn and grow. And I think both of us, having studied at a number of universities, had a common vision that these major universities,

• 4:49Speaker 02

  the ethos that guided them was very compelling. Most of the people at these universities embrace the concept of lifelong learning. That was the sort of common thread for us that within the context of learning the craft of investing at a world-class institutional investor like the Notre Dame endowment, we were able to seek integration in our lives. And in some ways, the transition, the pivot to building Seder Grove was actually to continue to preserve that first principle of integration.

• 5:21Speaker 03

  Yeah. And if we think back to when this all happened, we were a month into COVID. And there was a moment where we looked at each other and realized that in terms of that integration of investing and teaching, which we have done for 15 years at Notre Dame, that was going to pivot. So there was a moment when we said to each other, well, things change. We had this forever mentality. When we look at our mentors, look at the best investors, look at the best company builders, there's often a moment when things internally or externally change and you need to be ready to pivot. And we were very fortunate to have each other. So I think within 24 hours of a moment when we decided that we needed to

• 6:03Speaker 03

  do this, we called each other and said, are you thinking what I'm thinking? What was really fascinating for us, looking back three years ago on that, was that within a couple of weeks, we wrote the only document we've ever created. It was a five-page memo that outlined our vision for Seder Grove, the values which we want to espouse, and the people we want to do it with. And really, we look back and it was an excuse to formalize a set of friendships and projects that we could work on for decades going forward.

• 6:31Speaker 02

  My favorite part of that story is that it is absolutely correct that Paul and I immediately 100% were aligned and tethered. But I think it was many months after the fact, once we had already gotten Seder Grove going, that I learned that when Paul came back from one of those early outdoor planning sessions, that Molly actually was like, no, I just want to make sure. I mean, I think, you know, I like Rick too and everything, but like, I just want to make sure, is this the guy that you want to be partnering with for the rest of time? And it's a fair question. It's a fair question and it's working out. But it's always good to have a senior analyst in the back, double checking your work.

• 7:07Patrick O'Shaughnessy?

  Maybe just literally describe what Seder Grove is. You guys have been very quiet. No publicity around this. You've done this very quietly. Give me like the quick two-minute rundown on not the why, not the when or how, just what literally it is as an entity, what it does, who the shareholders are, et cetera. I just think before we have our conversation, it's important to like, define this thing because it's a bit unusual and different.

• 7:37Speaker 03

  At a high level, we are a private holding company and we have a balance sheet of about half a billion dollars. We exclusively back company builders and that can be at any stage. I think one important dynamic to mention is that we've got a shareholder base that's made up only of principals. So that means no institutional capital is involved. In our prior lives, we helped to design all kinds of entities and funds around the world. And we settled on a private holding company because in the end, Rick and I were looking for both radical alignment of incentives and we wanted the ability to operate with an unusually long time horizon. A typical business plan for an investment firm probably

• 8:21Speaker 03

  would contemplate how much capital you'd want to raise, but we didn't care if we raised $10 million or $10 billion. The only thing that mattered to us was setting and maintaining a really high bar for the people around us because we knew that these would be the people that were likely going to shape us for the rest of our lives. I actually remember being in Rick's backyard early on and on a whiteboard, we riffed on, say, 50 to 75 names of people we dream of doing things with over the coming decades. And it turned out that many of these people came aboard and they ended up being some of the very best company operators and GPs we had ever come across. So that was a former student, all the way up to some of the very best company builders on earth,

• 9:06Speaker 03

  around 30 GPs that started investment firms that we were close friends with. And they all came in in their own way to buy shares in Seder Grove.

• 9:15Speaker 02

  If you go to our website, the main page says one line, "Seder Grove, a permanent capital investor rooted in love." So let's just for a minute, take that apart. Why is permanent capital so important? In a couple of weeks, we're going to have Todd Combs of Berkshire Hathaway and GEICO teach class. Todd's spoken in our class a handful of times and he's a remarkable human being. The reason that Todd reached out to Charlie, cold called Charlie several times and eventually got him, was because he had just come through the global financial crisis and his hedge fund at the time had done extremely well. But he had come to the realization, and we have heard this time and time again, that the temporal nature of that structure was just not what he wanted.

• 9:56Speaker 02

  His main question that he wanted to discuss with Charlie was, "How do I transition to a permanent capital vehicle?" And so, a lot of the features of Seder Grove may seem unique, but none of them are really novel. We operate with a budget. So does almost every company I've ever come into contact with. A permanent capital holding company. Everybody knows about Berkshire Hathaway. There are obvious reasons why, when Buffett shut down the partnership, he did not just reopen the partnership and he evolved to that model. And so, all we simply said was, "We've never run a permanent capital vehicle before, but these people who are much smarter than us have seemed, at some point in their careers, come to this determination that it's a superior design.

• 10:39Speaker 02

  Why would we not embrace it?" And I think the obvious reason is not to embrace it is because it's less conventional. You worry about how much capital you can raise, how it'll be taken in market. And those were questions we could care less about. Same thing with our shareholders. Our shareholders are co-owners. They're not limited partners. They're not limited in any way. Paul and I and Greg literally pay portions of our own salary. We don't have multiple share classes. We're all in this together. And the construct of our shareholder community, I think of it like the championship little league game when you were little. Who do you want to be at that game? You want your biggest fans. You want your family. You might have that uncle that helped you to learn how to hit a baseball.

• 11:21Speaker 02

  You want people who believe in you, but also maybe people who can give you instruction. And that is really how we've thought about designing this crew of individuals and families. These are people who we just know over time, we're going to learn more and more from them. And at various points, they're going to contribute to the success of Sato Grove. We have some of our shareholders who are world-class in certain disciplines and industries. We lean on them for analysis. We, in some cases, we lean on them to mentor our founders and our CEOs. In some cases, they sit on boards of our companies. But the sense that we wanted to build something that had that same kind of community that we would have wanted to select into if we were looking for that one single investment. It was really just the mindset of what is the investment entity that we want to put all of our capital in? And let's build that.

• 12:06Speaker 02

  That's the permanent capital investor part. The second bit, rooted in love, stems from our first and most fundamental value, which is that love wins. In our careers, we've observed plenty of zero-sum thinking. And while I'm not trying to convince anybody else of anything, we just believe that there has to be another way. And if there isn't, then we need to find another profession. Our conviction here is based on our own experience and through the study of human nature and the history of civilizations. And that's that in the final analysis and with the fullness of time, love is actually the most enduring force in the universe. So in that context, it seems totally sensible to us that a truly long-term approach and philosophy has to be informed and nourished by qualities such as patience, kindness, respect,

• 12:51Speaker 02

  trustworthiness, and perseverance. And in our opinion, anything else would be lunacy. But you can see how the two are tethered. To be rooted in love necessitates an unusually long time horizon and vice versa.

• 13:03Patrick O'Shaughnessy?

  Maybe say just one more click about the particulars. Like, how much did you raise? How many investments have you made so far? Like, I just want to give people a sense of scale and scope.

• 13:12Speaker 03

  We launched officially on April 1st, 2021, with a little over $300 million of capitalization in the permanent capital holding company. What was very important for us was that in the legal documents, in our ethos, in the conversations we have with our shareholders, that we were not bound to any one type of investing. That was actually a big learning from our time at the endowment that there were things that we had experience in and we did know. But if we were building something for decades, that we were going to have to evolve. So we wanted flexibility. What also came out of it day one was a 15 years' worth of investing in a network and some serendipity where,

• 13:52Speaker 03

  very quickly over the course of 2021, our first year, we invested in what we define now as almost three subsidiaries. So one is four de novo companies. Three of those are in vertical market software that we've helped to create, a couple of them in Europe and one here in North America. The fourth platform is Rebuild Manufacturing that Jeff Wilkie, who used to run Amazon, he came out. One of our close friends and collaborators, Will Barker of Camelot Partners, helped to bring us in on day one for Rebuild. We're just so excited about that one in terms of what is possible over the next couple of decades. So we have those four platform companies. Alongside that, we have 10 investments, approximately 10, in private companies. We're minority investors in all of them.

• 14:38Speaker 03

  They range from very early stage up to much more mature growth stage. And then the last bucket is a handful of investment firms. One area in particular is biotech. And we have about 15% of Cetera Grove invested in biotech through to investment partnerships. And we know that that's one area that while we have experience allocating to biotech funds, we are not scientists or medical doctors ourselves. And we want the flexibility, given that this is our family office too, to invest over the long term in biotech. Because we think if you look back 10 to 20 years from now, it will have been an incredibly fruitful area for investment. And we have shareholders that can help with that as well.

• 15:20Speaker 02

  I think one way to think of Seder Grove from an investment lens is we are a friends and family office. If you look at really sophisticated family offices, they don't tend to be as narrow as only direct investors or only fund investors. And that's because oftentimes I think that kind of specialization is more dictated by the market terms. When you're selling an investment product, there's not a lot of clients out there that want you to sort of be able to do almost anything, which is totally understandable and totally why we never have tried to sell Seder Grove to anybody. But if you think about if you were going to establish your family office, which we did, we sold our houses, we downsized our houses. I went from two cars to one car. We liquidated our retirement accounts. I

• 16:02Speaker 02

  had to check with Greg last year whether it was okay if I bought a CD, literally, because there's nothing we do outside of Seder Grove. When you think about it in that context, it would be ridiculous for us to say, okay, we're only going to invest in this particular subset here. At any given time, that would be ridiculous, but particularly if you're thinking about creating a mandate that's going to be lasting for several decades and that's going to allow for the kind of evolution that we hope to have. And so from the outside end, it looks like we do a little bit of a lot of things. One of the learnings, though, I think is just on that entrepreneurial journey, the lessons come quickly. And so we have already evolved tremendously. And I would suspect that what we will see within

• 16:45Speaker 02

  the next three, four, five years is further and further concentration. We have several holdings where a single company is more than 10% of our balance sheet, but we're on our way. And we have a structure that gives enough latitude and enough alignment of interest to hopefully give us a chance to last.

• 17:02Patrick O'Shaughnessy?

  And maybe just say literally what it is that you're looking for across that lineup, whether it's a fund or a new platform you're starting or an existing company in which you're a minority shareholder. What is the common thread? What are you entering into each of those engagements looking for?

• 17:19Speaker 02

  I think at the highest level, almost every investor thinks about, considers risk and return. And so do we. The two additional factors that you see less frequently are the requisite for there to be mutual trust with the key people and unusual duration. And so oftentimes, we encounter investments that have, from our assessment, high potential for very high IRRs, but not clear that they have the potential to be 10-year-plus investments. We recognize those can still be very successful investments for somebody, but they don't fit us. And so when you put those four criteria, risk, return, mutual trust, which by the way, is really hard to achieve with a lot of people. And so,

• 18:01Speaker 02

  and then you add on this duration factor, it's actually a very, very tight funnel, where we're essentially fishing for ideas. It's not a surprise that our largest holdings in particular, generally, we've known that founder CEO for at least 10 years. We have a couple of situations, our very largest positions, like a Sumus Global or Expedition Growth Capital, where we've literally known these people intimately for 20 years. That's the kind of foundation that we feel like is important, based on the kind of investing that we want to achieve. When you look at the actual criteria of the types of companies that we might pursue and those we want it, the way we like to think of it is that every situation that would interest us, we have to think it's both ambitious and edifying.

• 18:45Speaker 02

  And just to be clear, we are not ESG investors or impact investors. But when we say edifying, essentially what we're saying is, time is precious. We only have one life. We only want to work on projects that we care a lot about. And everybody's got different criteria for what is edifying. But again, this is a labor of love. This is the full integration of our everything. Every project just has to matter to us. So therefore, there are certain industries, and I'm not talking about sin stocks or anything. I'm just saying there's massive industries that are very, very attractive to most investors that we don't look at. Gaming, for example. And again, I know you're really into gaming. We don't think that gaming itself is like in any way a negative force in the world. And there's all kinds of really cool applications for how gaming can be, educational, et cetera.

• 19:28Speaker 02

  It just doesn't get us out of bed. We've never looked at a gaming company. The other component to that is just as important, which is ambitious. I mean, if you look at the projects, and this ties a little bit to duration, right? Because most things that have the potential to be very big, require time. Usually more than three to five years. If you look at the underlying ways in which the companies we invest in serve others, there tends to be that sort of missional aspect. Again, Sumus Global, the leading virtual specialty care platform in the world, essentially democratizing access to the world's best doctors for those who would never have that kind of access at the critical moments in their life where the cost and complexity is highest.

• 20:13Speaker 02

  This is an amazing business. We think that the need for that kind of service is universal. And yet, if we win, we know that we're going to impact literally millions of lives in an extremely profound way. That's a perfect investment for Seda Growth. There's also very little traditional venture or private equity capital on the cap table. We have a very close relationship with the team, including a 20-year friendship with the founder. And we have all kinds of ideas for where this might go, with an unlimited time horizon being essential.

• 20:45Speaker 03

  I think there's one structural component to highlight. For instance, in the case of Sumus or a couple of our other biggest holdings. And that is that we don't run a fund and we don't have to raise another fund. We did raise another $125 million in a commitment pool last year to add mostly just to our biggest holdings. We don't have to find any new holdings. We can do a lot this year or we can do nothing. There's constantly new ideas coming our way, but the bar gets ratcheted higher and higher because we don't have to be in a frantic search for something new.

• 21:17Speaker 02

  I think it's important for those who are interested in terms of incentives, because again, most people believe that incentives matter a great deal. Just how do we get paid? We mentioned that we have this operating budget. Essentially, we take salaries as the managers of this entity. We eat our own cooking and we pay for our own meals as shareholders. The way in which we ultimately can earn more shares of the company is through a combination of a multiple on capital and a hard compounding hurdle. So in a sense, we racked our brain for so many years when we were mainly fund investing on what's the right way to pattern incentive fee payouts. And the conclusion we came to was that time was less relevant. It was more about the multiple on capital. Until we double the NAV of our partnership,

• 22:01Speaker 02

  there's nothing beyond our salary that accrues to us. When we double, and then hopefully when we 4X and 8X and 16X, then there is a look back on how fast we have doubled. If that doubling occurs below a 6% hard compounding hurdle, we still don't earn any shares. If it occurs at a faster rate than that 6%, then we have the potential to earn 15% over that 6%. And then that's where the waterfall of shares coming to us that then flows to the foundation, et cetera. I don't know if this is the perfect strategy, but I think it was the best outcome that we could devise to say that both a hurdle rate and a multiple matter, and we want to reflect that in the way in which we're compensated.

• 22:43Patrick O'Shaughnessy?

  When you think of an investor, again, you guys have met everyone. When you think of an investor who is clearly devoted to something greater than themselves, who comes most immediately to mind?

• 22:56Speaker 02

  Oh, there's so many great examples. One, since we're right across the street from the Lone Pine offices, that's certainly worth mentioning is Steve Mandell. For a number of years, going back 12 or 13 years, Paul and I and a few others on the team started this exercise of writing case studies of what we called horses in the GP investing landscape. And this was actually inspired by our close friend Yin Liao, who at the time was actually teaching about compounders like this in his class at Columbia. And it was really looking at firms, people who had compounded at extraordinary rates for at least 12, usually 15 years. And we wanted to understand if we could develop any pattern recognition around that by

• 23:39Speaker 02

  the more academic exercise of actually writing up cases around them. And one of my very first cases that I took on was Lone Pine. And I remember through that, and also because at the time Paul was writing a case study on Julian Robertson and Tiger, we got just extraordinary access to so many people just around that ecosystem, including Julian himself and family members of Julian, Steve certainly, John Griffin, and many others. And I remember Julian telling us a story once about when he was recruiting Steve. And I think initially, correct me if I'm wrong, Paul, but as I recall the story,

• 24:21Speaker 02

  Steve warns Julian that he might want to consider not hiring him because he had other ambitions. I think, for example, he had an ambition to study and write books on consumer businesses. But he was very clear that he had these other passions. And then, of course, anybody who has looked closely at Lone Pine and understands the culture that Steve really built, understands the paradox that was present at all times, which was a founder who essentially was becoming in a way smaller so that others could get bigger, or allowing that humility to create a culture where even though it was all about Steve, it wasn't at all about Steve.

• 25:03Speaker 02

  And every year, we would go to the Lone Pine annual meetings. Unlike almost any other annual meeting that I've ever attended, Steve, in terms of his presentation responsibilities, would just simply present another investment idea right alongside all of the other analysts, really not much more than that. We saw time and time again, just that deep, deep humility. And I think a lot of it was because in his own process of self-actualization, both as an investor and as a person, he was always focused on the bigger picture and some other greater source of motivation.

• 25:37Speaker 03

  A longtime friend, a mentor, author of The Outsiders, Will Thorndike. I had the chance back in business school to spend a year with him, working on a chapter of that book and thinking about what capital allocation means. And at the time, I had no idea I would ever work at an endowment, or that that would ever affect us 15 years in the future. And when we started Seder Grove, Will was right there by our side and prodded us to think about broadening out our network. He brought a gentleman named Mitch Rails, who co-founded Danaher, into our network. And I think as we think about Seder Grove and the types of things we've invested in, the people who are surrounding us as shareholders, we like to think about, and this is what

• 26:19Speaker 03

  we teach to our students too, is everybody can be an investor, everyone has to be, actually. They're looking at investing their time, their resources, their capital. So on this question of what investor out there? Thinks broader than himself, we would put Mitch right at the top of the list. And while he's the chair with his brother of one of the greatest companies in the United States business history, he's actually an investor too. And we've learned what's possible when you match investing, capital allocation and company building into a culture, what's possible, not only for his employees, but all the people they touch with the products they build.

• 26:54Patrick O'Shaughnessy?

  Can you describe the method that you've shared with me that drives him in terms of constant insatiable learning and how often you encounter someone like this that even as they get through their twenties and thirties and forties and fifties, like somehow it accelerates rather than congeals? Because it sounds like he's one of these rare people that I think Danaher's had five completely different chapters in its history, just like some snake shedding its skin and moving on to the next chapter. Maybe just say a bit more about what you've learned watching him. I think he's your largest shareholder too at Sator Grove.

• 27:25Speaker 03

  So Mitch is our largest shareholder and the most active shareholder we have, which we're very grateful for and very surprised about, given all the things he has going on. When he was in our classroom last year, he shared just a fantastic story very early on in the Danaher life, in the first decade. He and his brother had had a lot of success building Danaher from scratch and not even 10 years in, they had this moment where they found the ideal CEO to essentially take their jobs. And they knew they had to do it. Mitch shared with us and our students that it's a really difficult year, but I think it epitomized this mindset that he's going to put the best person in the right place

• 28:09Speaker 03

  to do the job the right way and that he himself in his early thirties was ready to evolve and do its right to compound capital and make Danaher as strong as it can be. You fast forward, it started as a vinyl siding company, then moved into all kinds of filtration diagnostics. They just have done their, the last shedding of the former assets and it's now the world's largest dedicated life science company, which you would never have predicted. Looking back, you can see the golden thread and how it all connects. What we've learned from Mitch is And you often talk, Patrick, about growth without goals. I actually think Mitch is one of the best at creating goals. He's a Jim Collins aficionado, but in the midst of that, he's incredibly open-minded and just seeking the best team and excellence

• 28:54Speaker 03

  in everything while being patient, knowing that over the long term, you compound at 23% for 45 years by doing things in an excellent fashion, but also pivoting, knowing the world is changing and your team is changing.

• 29:08Speaker 02

  I think another gift that Will Thorndike has given us that's worth mentioning is an essay, pattern after talk, that John Gardner gave many decades ago called "The Road to Self Renewal." This has been required reading for our Art of Investing class in five years that we've taught, and it's a document that Paul and I probably read every few months. Anybody that we've shared this with, I think, has had a similar reaction of the impact that it immediately has on them and their thinking. And in that essay, Gardner talks about one of the major pitfalls that we all are at risk of in life, which is to strive to be interesting, when really, the opportunity to live a full, rich life

• 29:52Speaker 02

  is the opposite, is to seek to be interested. And I think all of the greats who have figured out how to continue to compound their knowledge and compound their capital alongside it, have this insatiable curiosity behind them. And it doesn't end when they get out of school. It doesn't end when they make their first $100 million. If anything, it accelerates. Paul and I have this obsession with the people that we spend time from. That's not our idea. When we were building Cedar Grove, one of the most important documents for us was the 1989 shareholder letter for Berkshire Hathaway that Buffett wrote. And in there, he again addresses the learnings of only doing business with people you like, trust,

• 30:36Speaker 02

  and admire. And we really took that to heart, our shareholders. They're only individuals first. We've turned down all institutional capital. But they're all people that we know, like, trust, and admire. And when I think about that concept, we have extended that in every direction we can think of, including cap tables, who's around us in a situation. But I think it's most important for anybody in life, whether you're an investor or not, to appreciate the fact that, over the course of time, You are most likely going to become the product of the five or 10 people that you've most spent time with. And I think that's just a very critical element to this. And

• 31:18Speaker 02

  surrounding ourselves with folks who are, have lived a much longer life than we have, and yet, in many ways, we are struggling to keep up with their curiosity, is an extremely good source of motivation and inspiration.

• 31:30Patrick O'Shaughnessy?

  If you go back to this really interesting exercise of writing cases about investment managers, I'm curious, how many did you write, do you think?

• 31:40Speaker 02

  Probably about 15 or so.

• 31:42Patrick O'Shaughnessy?

  So walk me through the process of producing one of those documents, because many listening will be in the business of either working with LPs that are looking to invest in them, or LPs themselves looking to invest in GPs and managers. And I'm really curious how you refined that craft. On the first one, what you did, and on the 15th one, what you were doing that was different, to learn about a manager and capture what you felt was the essence of what made it go. I'd love to spend a little time on this, because 15 is a lot of investigations, like a formal investigation, to say nothing of the hundreds and thousands that you did without the memos. What was the first one like? What did you literally

• 32:24Patrick O'Shaughnessy?

  do to get the raw material to turn into that case?

• 32:28Speaker 03

  Rick and I have been joking a lot since we've gotten to know you, Patrick. We had to create our own Invest Like the Best before podcasts were around, or before you've gifted this to the world. And there was something about an obsession with getting to the root cause of why a firm could last 10 years, or 15 years, or 20 years.

• 32:49Speaker 02

  And frankly, why more didn't. We met so many talented people, so many people that we would objectively look at and say, I will never be the caliber of investor that that individual is. And yet- Obstacles came in the way of compounding. And so often comes, I think, in that seven to 12 year period. In many respects, the obstacles that can often take firms down, or just lead them down closer toward mediocrity, are not functions of failure, they're functions of success. They're what happens after you have a great three to five year track record.

• 33:21Speaker 03

  That became one of the outputs of every case was, how are they structured? What are the incentive schemes? And we learned a lot about that. And we can come back to that later because that fed so much into our thinking of how we set up Cedar Grove. But just the brass tacks of doing one of these. I had the fortunate and unfortunate background of starting my career at Boston Consulting Group, learned way too much how to build slides. I was the guy tasked with creating the structure. And then they tended to be 150 page PowerPoints where we would go as deep as possible. So for instance, on Tiger with Julian, that was a little bit easier because there are so many Tiger Cubs. And by that point, Grand Cubs. We interviewed as many as we possibly could, took detailed notes.

• 34:06Speaker 03

  We had a group of five or six of us doing this who ran the public side of the Notre Dame Endowment. And we would have weekly meetings on what are we learning? And we did a few at a time. So it took a couple of years to get to the full set of what we called R and D case studies. It would culminate in an interview with the protagonist. And we learned this from our time at Harvard Business School. I learned this working with Will Thorne like on The Outsiders. It was a year's worth of work. And at the end of it, I got one two hour call with the subject of the chapter, Bill Sturitz, which was extraordinary. And we had the model. We knew that's how you had to do it. You had to do your homework. And very quickly, when we got to case three, four, five, commonalities started emerging and that was really powerful. That fed a flywheel into building these.

• 34:50Speaker 03

  It was a lot of work and you needed that output and energy to do that. I think one of the more interesting takeaways at the end of it was, Essentially, all these firms were singular. There were commonalities, but Steve Mandel, or Seth Klarmann, or Ray Dalio, whom we all spent time with on these cases. By the end, you just realize they're extremely special, mixed with maybe a few of these commonalities. I think honestly, that threw us into a tailspin the next few years because we then had to go figure out what our philosophy was. We're going to take those learnings, but this is very difficult to know who the next Steve Mandel is going to be.

• 35:27Patrick O'Shaughnessy?

  Success was idiosyncratic.

• 35:29Speaker 03

  Idiosyncratic.

• 35:30Speaker 02

  I would say two other features of the process that were really important. One was that we tried to create these cases retroactively in real time. In other words, we gave ourselves, the group of colleagues that were working through these cases ultimately together, an opportunity to a different point in the chronology of the firm to make an assessment. What would you have done when Lone Pine first opened back up a year or two after they launched and actually the Nasdaq bubble had not yet bursted? And the concept of shorting these highly valued technology stocks was losing people a lot of money. There was an opportunity to actually double down, triple down on Lone Pine and most didn't. But you would identify those kind of three to five sliding door moments of the firm

• 36:13Speaker 02

  in hindsight and then build the cases around trying to put ourselves in the position of thinking about what we would have needed to know in order to make the right judgment. The other component that I think was really important, in order to do this successfully, it's really important to gain the trust of the protagonist and the people around them that you are going to talk to. Particularly, I think in investing, it's an industry that doesn't lend itself to transparency. In each case, particularly the cases I think that we felt were the most formative for ourselves, it was because for one reason or another, a lot of times not because of anything we did, we were able to gain a certain level of intimacy, access in order to uncover something that otherwise we would have never been able to understand.

• 36:59Speaker 02

  And again, that sounds like a very soft feature, but I think if you're going to try to study the greats, those who are still practicing their craft, obviously the best source is usually the primary source. And accessing those people, these are really busy folks who don't necessarily want a couple of 20 or 30 somethings snorkeling around, you know, trying to figure out an additional layer to the story.

• 37:21Speaker 03

  We made one exception to the 10 year rule and this was for one of our close friends, mentors. We had seen his firm from the beginning, a liaison of Hill House Capital. We think amazing investor based in Asia, now globally. One outcome from that, because I think we did the case technically, it was about 10 years ago, in year seven or eight for him, but we, the returns were extraordinary. What he was building and evolving to, we thought was an amazing case study to learn from. Even to this day, whenever we're with him or his team, they talk about the case study. It's almost in the mindset, and we saw this with so many others, they wanted the learnings from the other cases. Back to this point on obsession with learning, they wanted to learn about themselves, but they were

• 38:03Speaker 03

  so curious about all the other greats. And they knew we were doing this work and for years they would ask, what did you learn from studying all the great investment firms? Because they wanted to benchmark themselves. They wanted to improve and get better. And so we didn't realize that. We didn't know it would have such long legs. But not only did it become part of our mindset to do these cases, which we still try to do, it created a community of the folks that actually care about continuous learning.

• 38:29Speaker 02

  I think Lay is an interesting one, just to sit on the story of Hill House for a second, because I don't think it's a story that's well understood. What we were particularly interested there was there were elements of evolution that were highly, highly unique that Hill House was embarking on. If you think about it, in 2005, when Hill House was first constituted, they were essentially a China only manager and essentially public equity, long only public equity China. Think about what Hill House is today, completely global in nature, invest across all stages. And I think one of the areas that we've learned the most about and have the most interest in is their decision to begin to

• 39:13Speaker 02

  incubate de novo businesses. When they identified what Lay would refer to as a battlefield that was really attractive to him and to the team, and yet there wasn't an obvious public or private target, they began to start building these companies. So that's one thing that we just, that just struck us as fairly unique and we're studying. The other one is their emergence as one of the leading biotech investors, I would say, in the world today. One of the reasons we are so drawn to biotechnology is that the vast majority of world-class investors we've studied, it's the only area they say they will never go because it's too complex. It requires too much specialization. A little

• 39:52Speaker 02

  over 10 years ago, Lei started talking to his LPs about the work that they were doing in studying and researching biotechnology. And for years, he kept saying, "We don't have a single investment here." But Michael Yi, one of the co-founders, became his entire effort for multiple years before they made their first investment. And I think if you look at the first four or five drugs that got CFDA approval in China, Hill House was behind at least three of them. And that was all in a matter of 10 years. And I think we're fascinated by this concept that as human beings, it's very easy for us to overestimate what we can do in shorter time periods, like a month or a year. But we see this all the

• 40:33Speaker 02

  time, that people tend to underestimate what's possible in the course of a decade. I continue to be struck by how exceptional it is that a firm would not step back and begin to cultivate an expertise in an area that has historically been so rich for active management.

• 40:52Patrick O'Shaughnessy?

  If idiosyncrasy ruled the day in these case studies, what were the exceptions? What were some of the commonalities that you saw multiple times across the 15 that you think matter? Where, I love the way Miles Grimshaw from Benchmark talks about the DNA or the genes of a business. Are there any DNA or genes of an investment manager that you think are like, "We want this as part of the recipe here," regardless of whether it's a Chinese manager or a real estate manager, or whatever it is?

• 41:19Speaker 02

  One that comes to mind for me is the tightrope. Walk between maintaining discipline and embracing change. So many of the investors that we've been shaped by and that have found success know that they invest in change, companies that by definition have to change in order to survive and continue to thrive. And yet, we've been struck by how few investment firms themselves go through the process of exploring the changes that they themselves need to embrace. And that could look like a lot of different things. This all comes back to the challenges and the joys of compounding. How do you get to those out years? Those years where the exponential growth really starts to happen? And again, I'm not just talking about capital.

• 42:01Speaker 02

  I'm talking about the compounding that can occur across the human condition. In order to get there, though, in any meaningful amount of time, just requires a tremendous amount of evolution and adaptation. I don't pretend to know exactly why that is, but certainly it does seem like one reason is because the world itself is extremely dynamic. And we ourselves are extremely dynamic. And you put that together and add on any complexity, like a large team that's constantly changing, to be able to keep that going, I think, requires constant tinkering, constant experimentation. And certainly, one of the takeaways for us from the cases that we wrote was, how should we be experimenting?

• 42:45Speaker 02

  Not completely changing our approach or our philosophy, but setting up these small experiments, knowing that most of them are going to fail or that most of them are going to maybe not necessarily result in a dramatic change that we're going to embrace, but that there will inevitably be a few that will emerge that will be highly important for us, given our obsession with duration.

• 43:07Speaker 03

  Two others that come to mind, Patrick, are the great firms build winning teams. They're obsessed with talent. They create cultures where the best people want to be and where great talent is nurtured to become even greater. Tiger, Baopost, Bridgewater, Dynamo down in Brazil, these come to mind. And if you're anywhere near their zip code and your approach to investing and you work there, you can't imagine working anywhere else. The last point I would make is that great firms we studied usually are built by one cult of personality figure. And succession always seemed extremely difficult.

• 43:51Patrick O'Shaughnessy?

  As just a quick aside, I remember from my quantitative days that the most important lesson when doing our version of the same research you were doing on investment managers, we would have this data set and we'd say to analysts, the most important companies in this data set are the ones that are dead, that no longer exist. Because without them, you have this tremendous survivorship bias in the sample. How do you think about survivorship bias? We have, and Will's spent a lot of time talking about some of the all time greats. But what about the Julian Robertsons, the Lezangs that had a similar skillset as those two guys and died? They didn't make it. They failed. They did something wrong. Those lessons to me seem as important, or maybe even more important than what the greats did that led to their success. So when you were studying managers,

• 44:35Patrick O'Shaughnessy?

  how did you think about that? How did you make sure to account for survivorship bias in your study of the ingredients of a great investor?

• 44:43Speaker 03

  The takeaway was it was all the more important to have a mosaic of competitive advantages in a fund. That was the same for our endowment team. And it's the same that we're building at Seder Grove. So 100% luck could come into this. So you raise a fund. And this is actually not that atypical. When markets are frothy, it's a little bit easier to raise a fund. And generally, over the course of time, you probably have the odds stacked against you to survive. Because there may be a downturn after that. You may not perform well. But if you combine team, incentives, a little bit of luck, then I think that you put the odds in your favor. There's obviously a ton of survivorship bias here, but

• 45:26Speaker 03

  maybe that gets back to, and it's something ephemeral. The idiosyncratic nature of these leaders. All these leaders we're talking about, the great investors, go through massive downdrafts, huge macro headwinds, team changes, and there's something about the culture they set that allows them to survive. Maybe at the end of this, our baseline is most investment firms aren't meant to last that long. Now, we were in the public realm for most of our time there, and so there's daily liquidity or monthly liquidity or always pressure from LPs. It almost is bound to lead to most firms heading towards mediocrity or failure.

• 46:08Speaker 03

  Private firms have a little bit of an advantage with 10 and 12-year life funds, but even there, you need some luck early on in your first few years to then go raise the next fund. So I don't know if there's any way to get rid of survivorship buys. Maybe there were 10 others we should have studied, but some unlucky thing happened or a team member left or who knows, maybe a macro headwind got in the way and we used what was in front of us in terms of that sample set.

• 46:34Speaker 02

  We are often struck by just how ever-present the power law is, not just in investing, but all around us. And I remember when that data came out, I think from a faculty member at Arizona State, around the last 100-plus years of US equity market history and that the majority of returns, if not over 100% of returns, had been driven by, I think it was something like four, maybe even less, percent of the stocks that had ever been present during that time. And for years, we had been hearing that that was what venture capital was. And as a result of that power law dynamic, you would have to follow a different process for how to invest, how to evaluate other managers.

• 47:17Speaker 02

  I think there were many folks, and I think we were in that category once too, where you just thought that the public markets were a little more different. There was some kind of more implicit stability. Maybe it's because these companies eventually did mature. And if you were going to be listed in the S and P 500, surely you had to have developed resiliency in a way that would mean that you were safer. And again, over long enough periods of time, most things don't survive. Very important distinction for us that we made shortly into Cedar Grove, and it really came at the nudging of Mitch. One time we were chatting with him and he said, you know, one of our values is that our time horizon is eternity. And that's a little bit of a play on words, but Mitch said, you know, you Catholic boys, your eternity mindset. He said, you know, let me

• 48:01Speaker 02

  just encourage you to consider tweaking that a little bit. And we said, really? What would you suggest? And he said, unlimited. Because sometimes there is a very good reason to move on, say, from an investment. And again, as the data suggests, with enough time, most things will not endure. And you need to be able to spot that. But that led us down to leaning into another, I think, oddity of the two of us and this obsession with the people that we're surrounded by and just this obsession with making sure that in every investment that we make, we have as sound of a shareholder base as possible, that is aligned as possible with what's in the best interests of the company. Now,

• 48:45Speaker 02

  that's very hard to do, obviously in public markets, but certainly also in private markets as well, when oftentimes the story, the fundraising story of a company, is that they are taking capital at different stages from stage-specific investors. As a result, it's totally understandable that orthodoxy would be that you end up with a set of shareholders that all have different interests and time horizons. I think the far more important realization for us was that while all of that matters, what matters most is whether or not there is high degree of mutual trust. Ideally, that is compounding on itself. Because if you are focused on long-duration investing, you are guaranteed to encounter

• 49:28Speaker 02

  hardship in periods that will last several years of poor outcomes. I'm reminded of that article, the super investors of Graham and Doddsville, that just by the definition, if you look at all of these extraordinary public market investors in time, they've all had these kind of 50% plus corrections in their portfolios and have all had three, four, in many cases, five years in a row of underperformance. First of all, if your investor base doesn't have the ability structurally to hold on in those periods, you're dead on arrival. But in addition to that, If there is not a level of mutual trust that's present in goodwill, there's really nothing to fall back on. And particularly in the context of institutional investing, when so much of this is motivated by agency dynamics,

• 50:12Speaker 02

  why would you stick around? We see this time and time again. Maybe it's turnover of a CIO and it has a bunch of different opinions. And therefore the deck is cleared and all of these great investors get redeemed from probably right at the time when they should be being added to. Or there could be a variety of reasons for it. But it's something that I think came up time and time again with these cases where oftentimes that investor, in a way, it wasn't that they did something that existentially took them out of the game from a pure investment standpoint. It was that their house wasn't in order. Maybe their LP base was shaped in a way that was not designed to ultimately last for the long term.

• 50:54Speaker 03

  We then thought about this structurally. So one of the learnings from our case studies was alignment of incentives. And you mentioned survivorship bias. We're talking about power law, why things don't survive. We wanted to put the odds in our favor. And so when we looked at the greatest companies in the world, greatest funds in the world, those that just went back old school and had a budget-based fee. We're the co-CEOs. We design our company to have enough resources to do the job right, but no more. There's a way over very long periods to earn incentive in our company. But I think importantly, we always joke about this and we're very grateful to Molly and Chelsea, our wives, for letting us pay part of our own salaries

• 51:39Speaker 03

  and investing every single cent of our capital into the company. So this is the vehicle that we created to invest our retirement, our kids' college funds, all the stocks that we would have had. We put it all into Cedar Grove. We feel extremely lucky that we, along with the nearly 100 families around us, have a chance to look at things with a multi-decade time horizon. We knew that these dynamics exist, that nothing lasts forever. And we wanted to just nudge the odds in our favor with an extremely aligned structure. That was a huge learning from these case studies and it was an amazing opportunity for us to put our money where our mouth was and actually just live out those values that we had seen.

• 52:24Speaker 03

  Not only we think we are right, but give Seder Grove the best shot to succeed.

• 52:29Speaker 02

  Coming back to one of your initial questions around that pivotal moment for us in beginning Seder Grove, I mean, I think it's important just to reinforce that none of it was premeditated. We had this change that occurred. On the one hand, I think it would seem very strange to outsiders that we looked wholly unprepared for that transition. And there is a degree to which that's correct. On the other hand, the minute that Paul and I got our wits about us and realized that we needed a second act and we needed a plan B, it only took a couple of days for essentially the only document we've ever created, this Jerry Maguire manifesto on Seder Grove to emerge.

• 53:10Speaker 02

  And that is because Seder Grove was never a commercial endeavor. It was the two of us essentially answering the questions, how do we want to spend the rest of our lives and with whom? And by your 40s, I think you're in a pretty good position to address that question. And everything about the structure of Seder Grove, the private holding company, an operating budget rather than a management fee, and the litany of other sort of nuances, none of those are our ideas. It's the alchemy of other people's ideas that we just happened to be studying for the prior 15 years together and never thought that we would have a situation like this to actually build it ourselves. But we look back and feel extremely grateful that none of this was premeditated, at least

• 53:54Speaker 02

  for us in our own journey. It led to a very authentic expression, a manifestation of really the two of us coming together and thinking about hopefully what the next 40 to 50 years looks like.

• 54:06Patrick O'Shaughnessy?

  I'd love to talk a bit about the alignment of compulsion, skill, what you do on a Saturday morning, sort of left to your own devices with the success of the investment platform. I'll use two examples you brought up earlier, Steve Mendel and Julian Robertson. Understanding that Julian started as a cigar butt investor and evolved into this Cedar extraordinaire, but I think there are really good examples of one person and Steve, who is just, you get him going on a retailer or something, you can just feel the intense curiosity and knowledge on his Saturday mornings, probably still, we can see his building from here, he's probably still reading weird esoteric stuff about soul price

• 54:47Patrick O'Shaughnessy?

  or something right now. Clearly like an asset focused investor, passionate asset focused investor. And then Julian, the whole Tiger Cub Network, a very people focused talent spotter. What have you learned about those two camps? And now that you're at Cedar Grove doing both, you're doing asset level investing, you're doing fund and person level investing, what do you think marks the difference between those two things? That's something I've struggled with a lot too, because for sure, like I fall more in the people camp. Obviously you can tell with the podcast and I am not spending my morning in 10 Ks and Qs, but I am obsessive about what makes a person tick. What's their history? What are they going to do in the future? And I'm curious if there's anything notable from the case studies or from your

• 55:29Patrick O'Shaughnessy?

  own experience, how explicitly important you feel this is, that the investor, you in this case, know what makes them good and where their energy naturally comes from, and how they get that to align with the success of the platform that they built?

• 55:44Speaker 02

  Don't trust the two of us. Please, look at the greats again. I mean, you look at Buffett and his evolution and appreciation more and more toward the importance of people and quality. We love Dan Hur's core value that the best team wins. It's just a fact. And so I do think it's important though, to define what you mean by people and talent. And for us, the key inputs to talent are judgment and character. And then you have an individual's capabilities. But what's of far more importance when you're investing for the long term? Is the slope of their capacity to learn, connected to the capabilities they have today. And so when we think about talent, we look for people that we have mutual trust in

• 56:28Speaker 02

  and that we will not be surprised by the way that they behave over the course of 10, 15 years. In fact, we could talk about this. We've led a number of financings, both public and private companies at various stages. We have never written our own term sheet. Every single time we have led a financing, we've had the founder write the term sheet. Because our determination is that if we're going to go into business with this individual, we better trust them enough to come up with the terms of engagement. I think in doing that, we've actually got better pricing quite often. But it's a signal. It's a signal to these people. We're in this alongside you. It's not us versus you. In order to get to that point, I think you really have to have a heavy weight

• 57:11Speaker 02

  on the character portion of that talent equation. We're totally fine being somewhat unique on that. But I think more and more, particularly with the level of investing that we've been doing around vertical market software aggregation, we're getting a lot of software entrepreneurs reaching out to us that seem super compelling, very talented. We just don't know them well enough to do anything with them yet. And so, and it usually is not a very, I think, enjoyable thing for these entrepreneurs to hear that on average are the CEOs and founders we've backed, we've known for eight to 10 years, some cases 20. But the reliance on talent comes from that benefit of having so much time to really understand who these people are,

• 57:55Speaker 02

  what they really want in their lives, what their capabilities are at the age of 25, at the age of 35, 45. Are they still continuing to learn and grow? And it's okay if the answer is no. It just means it's not going to be a fit for us.

• 58:09Patrick O'Shaughnessy?

  When you were looking at managers that were clearly talented, let's isolate a sample here. No doubt they're smart, talented, maybe even potentially great investors. What did you most hate seeing in their firm and them and their teams?

• 58:26Speaker 02

  It was embracing the conventions of the investing industry despite not agreeing with them from a first principles basis. Oftentimes, we would talk to an investor in a certain strategy, say, a fairly simple public strategy focused portfolio, didn't really rely a lot on the need for 30, 40 new names every year. And yet, you could see the evolution of a team growing and getting bigger and other forms of complexity that were finding their way into the organization. And when you would ask the founder about that, oftentimes, the answer is either something

• 59:08Speaker 02

  along the lines of inertia or the sense that some of the decisions with how the firm evolved toward complexity was because that's what oftentimes LPs want to see. Bigger teams, more process, fancier systems. Exactly, exactly. And not appreciating that with all of that complexity begets new challenges. And for me, it was often, the vast majority of these people we knew were more intelligent, certainly than me, maybe not Paul, but it wasn't their investing acumen that was most frequently the reason why you would decide to not invest or to move on from a manager. It was often just, you could see that there was not that integration, that radical integrity

• 59:53Speaker 02

  with the way that they themselves understood the world around them.

• 59:56Speaker 03

  And I think more specifically, let's just take LP bases. Because we were an LP, we knew the good, the bad, and the ugly. And oftentimes, especially with a really talented investor, maybe they had a great pedigree, spinning out of a great firm, they had a lot of work already to do. They were trying to attract talent. They were trying to have the first 10 names in their book. And it was just frustrating all the time to see them then maybe outsource the idea of choosing LPs, hire a giant IR team. You know, when we look back at it, people thought we were nuts when we started Cedar Grove, but. Patrick, you're looking at the whole team. So it was the two of us who started this thing. We've taught hundreds of former students.

• 1:00:40Speaker 03

  We knew what it looked like to build big teams and yet we decided not to. We've made one exception about a year into our firm. Based on a lot of these learnings, we knew that whether it's SEC registration, all kinds of things that need to be done legally, operationally, that we needed a new team member. And we had an N of one, Greg Dugard, who'd been, again, longtime friend for nearly 20 years. It's the constant theme in everything. And day one shareholder. And we made one call and thank God he accepted. I was with you guys on the beach the day before you did this. You prodded us along here on making sure we knew our strengths and our blind spots. And Greg has filled that. And weaknesses in this case. And Greg has been extraordinary, but it's just the three of us now.

• 1:01:25Speaker 02

  I think your exact question was, how is Rick not in jail yet? I will say that I have developed a tremendous amount of empathy for GPs ever since starting our own entrepreneurial journey. And I think also with founders themselves, because one of the things that we've grown to appreciate is the trade offs that come with building. And we kind of simplify it that the entrepreneurial equation is really an exponential increase in existential uncertainty. Most of the time, people who go off and set off to build something, they have found themselves in a place where if they wanted to, they could have a very comfortable niche in a large organization,

• 1:02:09Speaker 02

  get paid extremely well and have their sort of, at least economic lives de-risked. Alongside that, you have not necessarily an inevitability, but certainly in our case, and I think a lot of cases with entrepreneurs, just an immediate decrease in your income. And particularly as, as life goes on and complexity builds and you have a spouse and children, that's a very hard pill to swallow. But what we've also found on the other side of that is the reason that I rarely have encountered an entrepreneur, whoever goes back to working for a large organization. And that is because. On the other side of that equation stands a radical increase in joy and freedom.

• 1:02:51Speaker 02

  I think that that largely has to do with something about the nature of us as humans and our hardwiring to originate something and to be a part of that creative process. Maybe I'm completely wrong about it, but I think that's how Paul and I have felt. And yet, as you move on in your journey as an entrepreneur, everything about the organization falls back on you and managing all of those tensions is extremely difficult, even when this is the only guy I have to manage. To be clear, Greg manages both of us, but I'm much more empathetic to the trade offs that need to occur in the context of a GP than I was, say, five or 10 years ago.

• 1:03:32Patrick O'Shaughnessy?

  What do you think are the ugliest truths about the world of the big complex of LP investors? So if you think about the world's assets they tend to pool, whether that's in huge pensions at the company or state level or at the sovereign wealth level or in very wealthy individuals and families and multifamilies, the world's assets largely, if you just broke them down into a pie chart, tend to coalesce into these big, massive pools of capital. And then the capital is directed by a team, usually agents, not principals. And that's just how it is. It's probably is how it always will be. I'll never forget opening the Wall Street Journal on a train ride one time to read about

• 1:04:14Patrick O'Shaughnessy?

  the guy at the state of Nevada that decided to just put 100% of the assets of the fund into the S and P 500 and just fire everyone and just come in and read the paper every morning and that's all he did. And I thought, oh, my God, somebody broke the seal. Now this is what's going to happen. But clearly, obviously, that didn't happen. So we're in this situation of huge pools of capital, teams of people hired to administer that capital and spread it around. I'd love to just hear like what you view as the problems with that model. Yeah, like I said, the ugliest truths about how capital gets allocated in the world on the back of this tendency of it to pool in these huge places.

• 1:04:49Speaker 02

  I think the first thing to do is just to qualify anything that we're about to say in terms of these ugly truths, because we have a tremendous admiration for the vast majority of our peers in that world, extremely smart people. This has nothing to do with intellect. I think you already hit on it. A lot of this has to do with the agency dynamics and not tending to those agency dynamics. I think one of the ugliest truths about most institutional investors, particularly those who say like an endowment or a foundation are, in theory, said to be multi-generational investors, is the collapsing, the utter collapsing of the time horizon. I mean, if you were to just look at the average holding period of

• 1:05:30Speaker 02

  a manager or of an underlying company by virtue of the kinds of investments that that supposed multi-generational investor makes, I bet it's not very much more than a handful of years. And I just think that that is a massive opportunity loss for those institutions. Again, I don't know whose fault it is per se, but I think that the fact that that has not necessarily been addressed or acknowledged as something that needs to be sort of worked on is a major problem. I think one of the other dynamics that we see often is the over diversification of portfolios, where because maybe on account of the specialization by

• 1:06:11Speaker 02

  asset classes and the creation of a multitude of what essentially can become little fiefdoms, you have an explosion of underlying holdings. Everybody, every team, every individual's got to be having something in the portfolio. I think there's also a over-indexing on sourcing as opposed to other, maybe more passive work that could be extremely valuable for the long-term outcomes of those institutions. It's almost as if the primary way you can be recognized as an investor in a lot of these institutions is to make new investments, which is only good if the current investments you have aren't good. On the flip side of it is when you look at how real wealth accrues, and often this is

• 1:06:56Speaker 02

  in the context of individuals, so frequently it has to do with the opposite of what we're talking about. It has to do with extraordinary concentration, concentration in that which you know extremely well. But there are aspects of the investment industry that stack the deck against the institutional investor even wants to do that. I mean, even if you think about the traditional fund structures, they lend themselves towards selling assets every five or so years at most. And there are folks like Will Thorndike and Honam of Altos and Han Kim and Anthony Lee, who really push back against that and have found creative ways to hold on to really compelling assets for much longer durations. But by and large, there's a sense that that medium term time horizon, that three to five year time horizon

• 1:07:41Speaker 02

  is really what LPs want. They want to get that capital back in their hands, even though they're going to turn around and give it right back to those same investors. They want to touch it for a few minutes and then give it back. And I think you could look at a number of examples of companies, public or private, where initially it seemed like a pretty solid outcome of making three to four times your money. And in just a handful, five, six, seven, eight more years, you realize that that three or four X could have been a 12 or 15 X if the alignment incentives were more accurate. There's all kinds of reasons why the world has settled on these traditional models, but it's kind of the fundamental reason why, even though it seemed, particularly, I think, a couple of years ago, it seemed very odd that we would build a private holding company rather than set

• 1:08:23Speaker 02

  up a more traditional kind of evergreen fund or private equity fund. But a lot of it was just guided by some of these learnings that we'd observed.

• 1:08:31Patrick O'Shaughnessy?

  To sum up, a fascinating set of observations from you both so far. We've got this interesting underlying truth that like, we know that whatever it is, 4% of the world's companies create more than 100% of the world's market cap, and that by definition, to get to that point, takes compounding over many years, decades. And all these agency problems effectively like interrupt compounding unnecessarily, to use Charlie Munger's line. So I want to talk about compounding, like in like a great amount of detail. You used a line earlier, I think you said, compounding across the human condition. You teach a class at Notre Dame called The Art of Investing, but really it's a class about compounding, about the inputs and outputs of that process.

• 1:09:15Patrick O'Shaughnessy?

  So give me your philosophy of compounding. Like, give me the opening spiel you might give your students in the first class every fall about why this concept is so important and why they should take it so seriously. And then we'll pick it apart.

• 1:09:29Speaker 03

  Compounding is actually a really simple equation. You have growth rate on the bottom and then you have an exponent. And you can use either of those to get to a large outcome at the end. Over the course of our careers and our time spent together over the last 20 years, the exponent became way more important. And a lot of our mentors, and you study the greats, Berkshire Hathaway going for 60 years or Danaher going for 45 years, they grow at really high rates. They're the unicorns because they do both. But the exponent is so powerful. And as we started to deconstruct the roadblocks to that, we decided, let's try to unpack the concept of the ubiquity of compounding. So let's think about the fact

• 1:10:14Speaker 03

  that all of us are investors. No matter whether we choose it or not, we're allocating time. We're allocating resources. We're choosing whether to spend time with our family or work or on fitness or all different aspects of our lives. And these are the topics that we feel like are the inputs to compounding that give you a shot to get that exponent to go way further out. The two of us remind each other about it all the time. We decided that we've already been teaching for about 10 years at Notre Dame. About five years ago, we said, let's just make a class about this. Because whether you want to be an investor, you want to run a company, you want to go run a nonprofit, there are universal truths that are really important and they're going to evolve over the course of your life.

• 1:10:59Speaker 03

  So what we try to do in our class is bring together world-class friends, guest speakers that can talk about compounding in various industries, investment firms, all to just try to repeat for ourselves, anything times zero is zero, that if the duration stops, then the whole compounding equation goes back to square one. And so for us, we start with the class just to try to define what these inputs can look like. Before we even get into the output, we'll show them the math on compounding, but it's very important to get to those inputs.

• 1:11:33Speaker 02

  Yeah, on the one hand, it's a very simple equation and yet, on the other hand, it's very difficult to really wrap one's mind around. When we say that compounding is ubiquitous, we mean that it shows up literally everywhere. Most of the time, it doesn't really matter that much to be aware of it initially because there are other forces at play, inertia, or youth, or tailwinds of an integrated industry. But if you are really focused on meaningful duration, one has to get much more active in order to perpetuate that method of compounding. And I'm not a neuroscientist, but think even about the way in which the human brain develops over the course.

• 1:12:17Speaker 02

  My understanding is that it's really over the course of the first 15 to 20 years where most of the development occurs. And often, for those of us who have children, we know that there are certain aspects of their brain that are not anywhere close to fully formed yet, and we need to take that into account in our parenting. What happens in that back end of life? It starts to become much, much more difficult to create new neural pathways, to learn new anything. And yet, there are habits that you can form, disciplines that you can embrace to push back against that and to keep that compounding of knowledge, for example, going. And we were talking last night, all of us know a handful of folks who are in their 80s and 90s, and of course, Charlie Munger, getting very close to, I think, turning 100. And anybody who I speak to, and I think David Senna was recently with him, Paul had dinner

• 1:12:59Speaker 02

  with him last year sometime, everybody's reflection is the same. The guy is as much a learning machine today as he ever was. And it pays to step back and say, why is he so unique in that regard? And why are all these other people? Do they just want to be more curious than others? I think a lot of the times, it comes back to starting with that motivation, but then formulating the disciplines and creating the daily habits that are going to perpetuate compounding. I don't think it's any different when it comes to capital.

• 1:13:27Patrick O'Shaughnessy?

  So when you're teaching this concept, so you've got the number at the bottom, whatever you want to call it, and then you've got the exponent, how long it's going to keep going for. Is most of the class that you're teaching strategies for keeping the exponent alive? In your estimation, having thought about this more than me, and this is not just investing compounding, but any form of compounding, for those listening like, yeah, I want one of those compounding stories and I want to keep it going, like, is that really where you encourage people to focus in on? It's almost more like a negative thing, keep out the things that will destroy the exponent versus nurture something that will enable it?

• 1:14:00Speaker 02

  Yes, and I think a major reason for that is that the vast majority of our students are absolutely incredible. They are currently learning machines who have a tremendous capacity to develop new talents and skills. And so they already have the sort of velocity of growth harnessed. And so when we look at what might be useful for them as they're culminating in their time at Notre Dame, getting ready to graduate college, what kind of lessons can we instill that actually will move the needle in matter is just planting seeds that most of the time only reach their maximum relevance decades later, when the default to turn off the learning switches starts to set in.

• 1:14:45Speaker 02

  And so I think for us, the class that we teach is the class we want to take. We often tell our students that what we're trying to do is build up that capacity in ourselves and in one another to be able to look around life's corners and to recognize that there's something ubiquitous, just innate about investing, about allocation of resources, of time, of energy, and ultimately to of capital, that is fundamental to the human condition, that will ultimately be a major contributing factor to the degree to which you experience the life that you want. And so in a way, we've often joked and have heard this from our students that this class,

• 1:15:30Speaker 02

  even though it says it's the art of investing, it's kind of like the Seinfeld of classes. It's like, it seems like it's a class about nothing. And yet, often, just before we were starting the semester, I have a folder of tons of notes and letters from former students who talk about it being the most transformative class that they've ever taken, both at the university, but also in their lives. I think that is, has nothing to do with the two of us, has everything to do With stepping back and try to help these extremely talented people, connect some of these dots that are going to put them in a position to increase that exponent.

• 1:16:04Speaker 03

  There's a very practical thing we're trying to get done in class two, which I think goes more to the bottom part of the compounding equation. There's a war for talent out there and a lot of our students who are seniors already have signed up to careers. I think people in general are afraid if they go off the usual path. And one of the things that's beautiful about this compounding equation is and when we bring all these guests in, there's so many roads to roam. They don't have to do the usual thing and you're the beneficiary. I know two of our top students the last couple of years, Gabby and Joanna have come to join your team. We also want to show them that you don't have to feel like in terms of that growth or compounding, let's say it's the best investment banker, the best private equity firm, which are great jobs. But if you go a different way, that's more aligned with

• 1:16:48Speaker 03

  your internal wiring and you're compounding in other ways, that at the end, you're going to be as successful or more because it's defined based on who you truly are meant to be.

• 1:16:58Speaker 02

  I think it's important too to frame how the class is taught and why it is so practitioner led. The class that we felt we wanted to take was patterned after some of these remarkable teachers who have come before us. I mean, you think about all the investors that when you ask them about their most important sources of inspiration, if they went to Stanford GSB, it was Jack McDonald, who for a time, I think even Warren and Charlie would take part in teaching that class. For us at Harvard, if you were interested in investing and you went to Harvard in the last 30 or 40 years, you wanted to be in Andre Perold's class. And similarly at Columbia, Bruce Greenwald and all of the amazing practitioners that he bought in to help to round out

• 1:17:44Speaker 02

  a traditional faculty approach, which again, has its value and has its place in our class. But to bring to bear more of this human case study method and practicality because of the far reaching, multidisciplinary approach that upon which we wanted to engage. And so if you look at our class today, there's really three types of faculty. There's the traditional faculty. We actually have Andre. We will teach a class this semester and we're so excited about that. I mean, I don't think either of us have had any more of an inspirational professor, somebody who's just all teacher and also just a world-class investor. Chris Beg, who teaches the famous security analysis at Columbia that Buffett took under Ben Graham many years ago, will also be a guest.

• 1:18:25Speaker 02

  Last year, we had legendary historian and current Notre Dame Provost John McGreevy teach just incredible nuggets on why it is so important to build a historian's toolkit and to have an appreciation for everything that's come before you. And again, we just keep coming back to this kind of importance of studying the greats. That's why it's been so important for us to integrate alongside those traditional faculty, this sort of modern MBA faculty of which you are one, David Senra, what he's doing with Founders Podcast, what Ben and David are doing with Acquired, because you all have become, in our minds, the great historians of entrepreneurship and of company building. And so that's a more relatively new addition to our curriculum,

• 1:19:10Speaker 02

  but we feel it's really important to tether the traditional faculty with the creative case study work that's coming out of the podcasting world. And then finally, we do have these other world-class practitioners. What we focus on there is not to just try to find big-name, super-successful, highest IRR-compounding investors. First and foremost, we want people who really have a desire to teach and who really have a desire to give back specifically in a classroom setting. And secondarily, have something that we think is really compelling to say to young people. And so, over time, we've fashioned the curriculum around those three buckets.

• 1:19:52Speaker 02

  The default that most society will leave you with is the sense that your learning stage is your first 20 to 30 years. There's all these classic frameworks, learn, earn, return, and we just don't fundamentally believe in that. All the people that we admire the most, their stages are to learn, learn some more, keep learning, die at their desk. You have these extraordinary figures. Just a couple of weeks ago, we lost a legendary investor, John Glenn of Glenn Capital, one of the very first investors in the early 1970s in Intel. Since that time, over the last 40-plus years, has built an incredible firm devoted to investing in technology. And we were fortunate enough to get to know John and his son, David.

• 1:20:35Speaker 02

  And I remember when we were starting Seder Grove and spending time sharing with John, on the fifth page of our Jerry Maguire manifesto are all the reasons why you should not invest in Seder Grove. And the first one is that we made the proactive decision that we were going to continue to devote a disproportionate amount of our time to continue to teach. That was always controversial in our prior jobs. It always, to some people, felt counterproductive, unfocused. But I remember John, who had a, I think, 30-year career teaching at Darden as well as GSB, really reinforced to us that there's no better way to continue to grow and learn and become a better investor than to continue alongside that teaching.

• 1:21:16Speaker 02

  And so, again, some of this is just, we want to reinforce around us those voices that are going to encourage us to continue on that growth, on that learning path. Because the default is something utterly different. The default is slow down, easy, back off. You've learned the ability to start doing other things or whatever. And the evidence suggests that the richest, fullest lives are ones that are full to the brim.

• 1:21:41Patrick O'Shaughnessy?

  I love this idea that you could frame so many conversations through the X and the N, the thing that is being multiplied on itself and the N, the duration of the compounding. And that, like you said, the legends figure out both. And that if you compound 1% for 100 years, it's not that interesting. If you compound 10% for 100 years, it's very interesting, and so on. It's really both in that, I'm guessing what the students get out of it is we got to think about both parts of this equation and take them very seriously. But I'm curious, just empirically, like, what has been the most common feedback you've gotten from the students about how they've changed? If you are a student that goes into this class because you're curious and you come out of it,

• 1:22:24Patrick O'Shaughnessy?

  for the students that it most affects or most changes their trajectory, what is that common story? Like, what is this message do to people, young people, that you've seen across five cohorts so far?

• 1:22:37Speaker 03

  The two things that come to mind are one, across 15 classes. And we talked about this the other day when we were teaching. There's going to be a handful of people that you just, you write off. You don't see eye to eye. Maybe it's someone who runs a private equity firm. You just don't care about private equity. But there are going to be a handful that are literally life changing. And by design, the people that come and help teach with us are there because they want to get to know these students. And we encourage everybody to shoot them an email or text or go meet them. It's such a common piece of feedback that we hear time and time again, that someone actually replies or they go see them and it leads to a job or it leads to a mentorship.

• 1:23:18Speaker 03

  And I would say the second thing is that now that we're five years into Art of Investing and 15 years into teaching, we get emails every couple of weeks from somebody tells us that they kept their notes from Art of Investing and that they're in the midst of their first job change, for instance, and that they thought class five gave them the perfect advice to deal with what that looked like. That's really important for us that, like Rick said, some of these lessons that we're trying to get across might only be applicable to your 30-year-old self or your 50-year-old self. And it's just really fun to think about the leverage like you have in the podcasting world, where you can get the message out to a lot of people. And you probably have a range of 70 years of ages of people that listen to Invest Like the Best.

• 1:24:02Speaker 03

  And every episode is going to be listened to differently. People are at their own phase in life. So I think that idea that we're giving the students something permanently to hold on to, so that at the right time it's there and just some very specific mentorships, friendships, and maybe new career ideas.

• 1:24:19Speaker 02

  What I'm sure of is that these students do not need Paul and I to teach them how to discount cash flows. There's a billion different mediums for them to learn how to understand the fundamentals of investing and valuation, et cetera. I think a lot of times they come in thinking, particularly because half of our class comes from outside the business school. These are some of the Notre Dame's very best students. They've all applied into the class, but these are political scientists. They're neuroscientists. They're peace studies majors. We have 20 majors this semester, 44 students. What I think that they need is the same thing that I think I need. I think I need encouragement, direction.

• 1:24:59Speaker 02

  As to the art of what's possible, what is possible in a human life? And specifically, your human life? And to sort of reveal to them that there is so much more out there.

• 1:25:10Patrick O'Shaughnessy?

  Just to inject a healthy dose of FOMO for everyone listening, because I'm so damn excited this USC weekend, I'm going to interview Mitch Trails one day and then Sam Hinkie the next day, who might be the two people that I've studied or encountered that have the most lessons to teach about this long-term thinking, compounding. It's an incredibly powerful format. I can tell everyone listening, I'm excited for it. I can't stop thinking now, you guys are saying this, this simple equation. The phrase in my head is find your X, nurture your N. And probably in that order. The N is irrelevant unless you find the X first. You have to find the thing. And I think that's like an almost emotionally beautiful way of thinking about a life.

• 1:25:51Patrick O'Shaughnessy?

  Mostly emotional for me because of how sad it is that most people never find one, let alone the other. That we talk about life's work or something, that's the X. That's the thing that you can then turn N number of times. But I think nurturing people in that rough direction, helping them nurture the N, is a very noble thing. And I'm just curious, I guess, if there's anything else that comes to mind with that phrase in mind that you've learned about or seen.

• 1:26:18Speaker 03

  There's one other nuance to the X that actually Professor Perold brought up with us, and he's going to talk about this when he comes to class. And it's just the difficulty in focusing on one thing. He comes at it from a much more investing point of view, that if you actually picked, let's say, an amazing company that you thought could compound for 10 or 15 years, if you do the math and you do the X and the N, nobody ever thinks about it this way. But if it is that good, it will become like 90% of your portfolio if everything else falls away. He's going to unpack the compounding equation from that way and a lot of other angles. But for us, we thought it was really profound because it's to this point of finding your X, this is actually really scary.

• 1:27:02Speaker 03

  If you find that one thing, and it's actually the highest potential growth rate for X, and it is aligned with who you are, it becomes who you are. Because if it is that good and you do it long enough, it's the 100%. It drives everything else out, which is beautiful. It's what we're all seeking in life, but it's actually what nobody's seeking because everybody wants diversification and they're afraid to go all in on something. There's all these layers to this equation that we get excited about. Every time we teach this class, we can unpack it.

• 1:27:28Patrick O'Shaughnessy?

  I won't share who told me just because it's a private conversation, but there's this incredible entrepreneur, household CEO name that said to me that the happiest he ever was, was when he removed optionality from his life, when he increased conviction, when he concentrated more. And it's so funny that one of these investing principles is like, oh, you can diversify away all idiosyncratic risk in the portfolio by your 20th holding, free lunch, that diversification is the free lunch in investing, which look mathematically, there's a degree to which that's true, but the lesson here is so contra that. It is focus and concentration and conviction, being all in and actually

• 1:28:13Patrick O'Shaughnessy?

  really risk, real hard risk. I just think that's really interesting. Those are very opposed in my mind. And maybe diversification is the way you stay rich and not get rich or whatever. It's a phenomenal set of ideas. You guys have been lucky to draw, in the Kobe Bryant sense, study all the greats and sort of draw ingredients from each of those and then combine those things into your own recipe. If you're up for it, I would love to do like a speed round on people. Say a name and have you just say briefly what lessons you take from your time with them. This is very selfish. Most of us just haven't or can't spend time with some of these people. So if you don't mind, I'd love to do that. Maybe starting with Chris Hohn, who is someone that investing nerds will know that name

• 1:28:58Patrick O'Shaughnessy?

  for sure, but non-nerds may not. What have you learned from Chris?

• 1:29:01Speaker 02

  Yeah, Chris is somebody who we've not necessarily been particularly close with for many years, but was a great source of inspiration for us when we founded Seder Grove and were thinking about radical integration. And the challenge in front of Paul and I was if we were to envision Seder Grove as essentially our shared family office alongside other families, an obvious output of our time together would be this need to thoughtfully give away capital and pursue charitable endeavors alongside our investing endeavors. And of course, most people understand by the very name of Chris's firm, the Children's

• 1:29:46Speaker 02

  Investment Fund, that he essentially designed

• 1:29:50Speaker 02

  His firm in a way where I think certainly one of the largest economic beneficiaries of it was a foundation that is massive today and focused on children's initiatives around the world. Similarly, Paul and I took that inspiration and in our own way designed a mechanism so that the largest beneficiary of Seder Grove as the way that over time we are able as managers are able to earn a larger share of the company immediately flows to another entity, a foundation that will be established as that capital starts to flow that will be a means for good across children's initiatives, including various education, healthcare, poverty alleviation. And so, again, to my knowledge, there's not

• 1:30:34Speaker 02

  too many people that even though that was probably a good 15 plus years ago that Chris did that, that have been so bold is to tie those two really critical components together of the making and giving away of capital.

• 1:30:47Patrick O'Shaughnessy?

  The next one's a name that comes up all the time. I haven't been lucky to meet this person yet, but it's just like one of these names that people I respect most seem to respect him most, which is Kevin Compton.

• 1:30:57Speaker 02

  I'm very fortunate to have developed a friendship and mentorship with Kevin going back to really my very first day Scott had introduced me to Kevin. He knew that we had a lot in common in our personal lives. And for those who don't know Kevin, he's a remarkable venture investor, former partner of Kleiner Perkins, tremendous technology investor. And Kevin has had this way of speaking truth into my life at those critical moments. It was just over 10 years ago. At that point, Chelsea and I had not had any biological children yet. And she had this crazy idea that we should become foster parents, basically parents to other people's kids. And I understood where she was coming from, but I also thought

• 1:31:39Speaker 02

  it was completely nuts. I already felt like I had enough going on in my professional life. How could I take on that level of responsibility? And Kevin and I were catching up one day on campus and I was telling him all the wonderful things going on at work and teaching and blah, blah, blah. And Kevin just very abruptly said, all of that is great, but what do you Doing for others. And that message just happened to hit me on the same week that Chelsea was really challenged me at the same time. And we went on to have a very rich, although not without difficulty, foster parent experience, welcoming in total eight, eight kids into our home and several of whom we're still extremely involved with.

• 1:32:20Speaker 02

  And similarly, when Paul and I built Seder Grove, when I shared with Kevin what we were doing, he was very quick to acknowledge that actually, in his opinion, some of the giftings and probably my deficiencies lined up a lot more with what he thought a great venture investor looked like, rather than necessarily whatever an allocator was. And in fact, he was exactly right. I mean, neither Paul and I were looking to get into the world of allocators. We didn't really have much context for what even an endowment was. I was studying theology before I came back to Notre Dame. And you were getting ready to get into private equity. And that really gave me the confidence that Kevin gave us that we, in effect,

• 1:33:03Speaker 02

  might have some of the elements to be able to become direct investors ourselves. Certainly propelled, accelerated that path for the both of us.

• 1:33:12Patrick O'Shaughnessy?

  A hard left turn. How about David Robinson?

• 1:33:15Speaker 02

  We've been fortunate to get to know the Robinson family largely because one of David's three children, Corey, attended the University of Notre Dame. He was a football player, captain of the football team, and went on to become student body president. And in my time at Notre Dame, I traveled to one football game with the team. And that was down to play Florida State. Probably Paul's going to know exactly when that game was. Florida State was number one at the time. I think we were somewhere in the top five. It was an extraordinary game. We actually ended up losing the game. What would have been Corey's third touchdown of the game was called back on a very obscure and frankly, in my opinion, incorrect offensive pass interference. And it invited me to come to meet his family and hang out a little bit in, in his hotel room.

• 1:33:59Speaker 02

  And after just 15 or 30 minutes of being exposed to who everybody else refers to as the Admiral, I was in absolute awe of him as a father. The way in which the boys interacted with him at once felt like they were interacting with their best friend, their peer.

• 1:34:21Speaker 02

  And yet also somebody that they absolutely revered. For me, it was probably the strongest aha moment of that is exactly the kind of father that I want to be to my own children. Has nothing to do with investing, despite David Robinson having been a very successful investor also in his own right. And over time, I think, learned a lot from the family. They've actually, David and the boys have actually been guests in Art of Investing. And we've learned lots of other lessons. But for me, it was really, this is the pinnacle of fatherhood.

• 1:34:50Patrick O'Shaughnessy?

  Paul, since you are part of the book, The Outsiders, that almost everyone listening will probably have read or certainly heard of, how about Will Thorndike? What about Will has shaped your thinking and who you are?

• 1:35:02Speaker 03

  I had the extraordinary opportunity to get to know Will back in 2008 on a whim. I actually thought it was a great way to get two semesters worth of credit at Harvard Business School without doing too much work. And I heard about this project that this private equity firm was working on in downtown Boston. From the first moment I met Will, though, I knew for one, it was going to be a heck of a lot of work, the most work I did for any class, and the greatest opportunity to learn from an extraordinary human and compounder of capital. For the whole year, I went every week downtown, met with Will. We would talk about the research for the book. And then interwoven in that was a masterclass on capital allocation. Everybody uses the term, now he's taught the world.

• 1:35:47Speaker 03

  I didn't understand it. And he took an immense amount of research and a complex set of subjects and made them so simple. And if you talk to Will, he's just so approachable and so kind and so wise at the same time. I also learned all the nuances of the good and the bad of private equity and some of Will's frustrations, Husatonic, the firm that he founded, did extraordinarily well, but his secret favorite investments. Where a couple, actually, there was one that was a file storage company that used to be his favorite kind of business. It's just incredibly high margins, 99% revenue retention. Now he's channeled that into vertical market software. But at the time, I learned, well, there actually is a way to own a company in, say, Fund II, and then bring it into Fund III.

• 1:36:32Speaker 03

  And you have to work around the LPs a little bit. Everybody was very happy at the end of the day because there were companies that Husatonic owned for 25 years. And just the multiples on capital were extraordinary. So I think that mix of a guy who went on a 10-year quest to write a book, we've talked all day here about that insatiable curiosity. This is very abnormal for a guy running a super successful private equity firm on the side to mentor 10 business school students over the course of a decade and then write this book. And I mean, it's no wonder that Warren and Charlie wrote about it in their annual letter, and now it's one of these must-have, go-to books. But part of the beauty of that friendship, mentorship that continues to this day, he was one of those

• 1:37:15Speaker 03

  very first calls when we started Seder Grove and influenced us completely on the holding company structure because of his learnings at Husatonic. And that carries forward into what he's doing today at Compounding Labs and elsewhere and what we're doing at Seder Grove.

• 1:37:29Patrick O'Shaughnessy?

  What about Bill Sterrett, the guy that you studied for the book?

• 1:37:32Speaker 03

  I finally had a chance to meet him in person at the first Singleton Foundation event in 2019. That was 10 years after we did the work. And the guy, he's just like so many of the other greats that we talk about, all the frameworks that David Senna talks about with Kobe Bryant. He wasn't a business major. We talk about this a lot in our class with the PLS majors coming in or the theologians, that some of the greatest company builders and those that fit that idiosyncratic mindset that Thorndike opens up the outsiders with, the iconoclasts. He was exactly like that. And he mixed that with simplicity, small team around him, and the ability to pivot and change. I mean,

• 1:38:16Speaker 03

  Ralston Purina owned the St. Louis Blues and a bunch of restaurants in 1980. And then you fast forward and all of a sudden, he's Chair of Herbalife for many years and doing so many things. And all those classic learnings from the people that Will outlines and the things that we're trying to emulate in terms of our own evolution.

• 1:38:35Patrick O'Shaughnessy?

  How about Henry Ellenbogen?

• 1:38:37Speaker 02

  Henry is just a consummate gentleman for those who know him and frankly, a gifted teacher. I think he's taught in Art of Investing every semester that we've taught the class alongside Bob Mylott, the chairman of Booking Holdings, who's a longtime co-conspirator of Henry's in numerous investments. Henry and I became fast friends. We got to know him a little bit while he was at T-Roe, but when he decided to leave and build Durable, we started spending a lot of time together. What I've observed about Henry from a pure investment standpoint is that, gosh, even just the last four or five years, there's been a couple of these sea change moments where the world just shifts. Of course, COVID and then everything that transpired in the last 18 months. And on the one hand, you have a guy who, from an investment philosophy standpoint, is completely committed to the

• 1:39:22Speaker 02

  long term. On the other hand, I'm astonished at how intellectually flexible Henry is and his ability to reassess the situation when the situation needs reassessment. Most investors just tend to be emotive or tend to be locked into one or the other side of that, but he has this beautiful way of when the time calls for it. I've heard the same is true with Steve Mandel, but I've seen it up close here more recently with Henry, and it's something that we've take noted and will absolutely seek to apply in the rest of our careers.

• 1:39:53Patrick O'Shaughnessy?

  You mentioned Scott Malpass earlier, who was the head of the Notre Dame Endowment forever and certainly one of the pioneers of that style of investing. What are the lessons that you remember most from working with him?

• 1:40:03Speaker 02

  We both could say a lot about Scott. He started off as our professors in a class that he taught, and that's probably the first obvious gift, showing us there was value in teaching alongside investing. As Paul said, part of that is, I think, it became this funnel for talent, but I think it was also just part of Scott's missional mindset. And when we built Seder Grove, something that was so critical to us was to reinforce what we were doing with that same missional mindset that we had at Notre Dame, even if something as basic as building in the foundation or focusing only on companies that we found were not only ambitious in nature, but also edifying. If the company wins, the society was going to in some way, big or small, win, not lose. And I think being around Scott,

• 1:40:48Speaker 02

  that was something that has always been infectious about him. And of course, he's become a close friend of us, our families, and very involved in other aspects of our lives, but just a tremendous mentor.

• 1:40:59Patrick O'Shaughnessy?

  Can I push a bit harder on of all those, the two things that really kind of hit me as you're describing them is the example set by David and the question that Kevin asked you, that's all great, but what are you doing for others? Is there anything else I wouldn't know who to ask about, obviously, because I don't know the answer to the question, but are there other moments like those two that either of you can remember across all this great wealth of experience with meeting and studying some of these greats that impacted you in the way that say David did and that Kevin did with that question?

• 1:41:31Speaker 03

  I remember one time we were on a walk with Lay's on of Hill House out at Stanford, and there was a big LP meeting around it, and we had had a habit every time we would go to those of doing a walk with Lay or just having some time to talk about life in general and get his advice. And I remember he had just had a full day with Warren Buffett, and he shared with us this advice that goes back to everything we're talking about around being all in, being focused, that Buffett said he has five people that he calls the one, and that if they call him morning or night before they say anything, he says yes. Then there's this next layer of around 10 people where he needs 20 minutes or half hour. And then there's another layer outside of that.

• 1:42:16Speaker 03

  And Lay has this incredible energy about him, and I think we looked at each other and said, who is our set of one? I mean, maybe, maybe over the course of a career, you could build up to a handful of people that would be that. I mean, we are that for each other, and I think we're constantly seeking that out. As we look at the close to 100 families in Cedar Grove, I think there's varying levels of that with everybody, and we've kind of handpicked this crew so that anytime we all want to answer that call and go all in on each other.

• 1:42:45Speaker 02

  Yeah, for me, there is a subset of investors that we've been fortunate enough to build friendships with that have been really critical in demonstrating to us what real partnership looks like and real friendship looks like. I think about Bob Peck and Andy Rob at FPR Partners, Ben Stein and Zach Sternberg at Spruce House, just these beautiful friendships that have been fused into a Investment partnership can't not mention Bruno Roca and really all of the partners at Dynamo, one of the leading investors over the last thirty or forty years out of Brazil and across Latin America. I think that Paul and I, had we not encountered so many of these individuals who not only were great investors,

• 1:43:29Speaker 02

  but also people that we respected and admired and wanted to emulate, we would have stopped investing a long time ago. Every so often you meet somebody like that, it's so energizing. And I think it's exactly the reason why when we switched to a Plan B and knew that we had to make a pivot a few years ago to build State of Grove. Actually, the first question Paul and I asked one another was, do we want to be investors? Implicit was that we wanted to do something together, but it was not immediately obvious. Without those examples, that we could pursue the good life alongside, hopefully pursuing the lifelong path of trying to self-actualize as investors too, then we would have looked for something else to do.

• 1:44:08Patrick O'Shaughnessy?

  What else is key to know about your definition of the good life?

• 1:44:11Speaker 02

  Okay, this is maybe the most vital question debated over all of recorded human history. And I have nothing novel to add, except maybe just to shine a light on some of what's already been said by some of the world's great teachers. You know, if you look at Plato and Socrates, for example, I think it at least in part had something to do with the pursuit of virtue, which for them essentially came down to knowledge of the good. So that's a combination of epistemology and ethics. Jesus gives us the Beatitudes, which are a bunch of declarations that seem completely upside down about the good or the blessed life, and yet have resonated with more people probably than any other teaching in the last 2,000 years.

• 1:44:55Speaker 02

  And seems to suggest that the life that we all ultimately need is somehow only found in a life with God. Paul in his Letter to the Philippians talks about the concept of kenosis, which is a literal self-emptying for others. Viktor Frankl in Man's Search for Meaning suggests that being human always seems to point to something or someone other than oneself. That the more one forgets himself, actually by giving himself to a cause or to serve another person to love, the more human he is. I think what's critical is that none of them point to a life of ease and all point to a life of devotion and specifically to another centered orientation as being somehow central to the good life.

• 1:45:38Speaker 02

  That we as humans seem to be singular across species in the obvious divergence between this is-ness of things and the aughtness of ourselves. And it seems to be the case that the good life is wrapped up in the mystery of taking steps from the former toward the latter. Some might call this self-actualization. Kevin Kelly was recently on and I really enjoyed his commentary on that. But key is that me achieving my aughtness is somehow tied up in me helping others to achieve their aughtness. And that starts with those closest to me, my wife, children, parents, siblings. But I think it extends to everything I do and everyone that we encounter, including as investors. And this is why we say that Seder Grove is a permanent capital investor rooted in love

• 1:46:23Speaker 02

  because if we can't do this while being rooted in love, then we need to find something else to do. In addition to Gardner's Road to Self Renewal, we always ask our students to read Clay Christensen's How Will You Measure Your Life? And I would highly recommend that to anybody who's interested in this fundamental question and to just going a bit deeper.

• 1:46:40Patrick O'Shaughnessy?

  Setting aside the moment in which Seder Grove was seeded or born, which I know is a great moment, what do you think is the defining moment of your investing careers so far, each of you?

• 1:46:54Speaker 03

  The defining moment has to be around the time that I hit the 10-year mark managing public equities at Notre Dame. At that point, we commissioned a study by Cambridge Associates, which many of your listeners might know is the gold standard in institutional investing benchmarking. And at that point, across all time periods, our long-only public equity portfolio was in the top 5th percentile of returns versus our 100-plus peer institutions. It was the top result on a relative basis across our fund. That was a great moment and to be honest, it didn't always seem like that on the decade-long

• 1:47:35Speaker 03

  ride to get there, where it always seemed like there was volatility every month or every quarter with a manager or a geography or a theme. And over the course of time, as our team gelled, it was incredibly gratifying, even though we focused on the inputs, just to have this checkpoint of an output, to look at how the myriad decisions we had made over years, lots of successes and plenty of mistakes, add up to a track record we could be proud of, of 250 basis points over the world markets, which at times didn't seem like a lot, but in the fullness of time was a lot of value it had and put us right at the top of our peer group. We know that it's a tough go managing billions of dollars in the public markets,

• 1:48:19Speaker 03

  like a lot of other institutional teams have to do. And as we transitioned to the building of Seder Grove, a couple of lessons emerged from that 10-year track record. First, it doesn't hurt to avoid the volatility of public markets at times. I'm getting really sick and tired of the ratio of Rick's hair to my hair continuing to increase throughout the stress of managing through the ups and downs of public markets. And second, it's given us the confidence that as we planted the seeds on several of our decade-long-plus projects at Seder Grove, that we can be patient and we can be confident that when the inputs are right, that over years and decades, in our case, and maybe with a little bit of luck along the way,

• 1:49:04Speaker 03

  that really good outputs have a good shot of happening.

• 1:49:07Speaker 02

  Without question, for me, it's the opportunity to support Sumis. I've talked about the company a little bit already. They're the leading virtual specialty care platform in the world. And I know, like children, we shouldn't have favorites, but I have never cared more for a company and believed more in a mission than I do for Sumis. And I think it stems from my earned secret over the last seven years, just advocating for my son Theo across dozens of specialties and numerous children's hospitals across the United States, always looking for that needle in a haystack expert who could flip the odds in his favor. And just stepping back, within healthcare, of course, every part of the ecosystem plays a vital role, but there's just no question that the cost and the complexity

• 1:49:52Speaker 02

  so often reside within specialty care and that by meeting a patient at their scariest, most vulnerable time... In their health journey and by delivering faster, better access to specialists is one of the greatest services that I think a business can deliver. And Sumis has built a platform of over 5,000 specialists from all the top academic medical centers, channeling this extraordinary group of experts to improve outcomes for patients, working with anyone responsible for helping manage patient populations, including employers, health systems, and also peer-to-peer supporting primary care physicians as they tend to their flock. And how could I not be completely obsessed with this company?

• 1:50:34Speaker 02

  It's a business that delivers just dramatic cost savings, first of all, gives the world's best doctors a marketplace-oriented platform to expand their impact, take on more challenging cases, and get appropriately compensated for their expertise. This is a company that daily drives better patient outcomes and I think some members would even say miracles to patients and to their families. And it's a company that was co-founded and led by one of my very best friends of nearly 20 years, Julian Flannery. We've actually led or co-led the last three financings of the company and I'm honored to serve on their board as their lead investor. It just gives me immense satisfaction to see Sumis flourishing and to witness the tremendous

• 1:51:17Speaker 02

  value that they're creating for so many as they democratize access to the world's top doctors. I'm really especially gratified that the institution I care so much for, that we've talked about, our alma mater, Notre Dame, is a delighted customer. And I just hear stories from campus all the time about the success for patients and the cost savings that are occurring on a regular basis. And I'll just conclude with a shameless plug. If you're an employer, you're a primary care platform, a health system, if you have any hand in caring for employees or patient populations of any kind, trust my completely unbiased opinion as their largest investor and board member and customer. It will be worthwhile for you to at least look into whether Sumis can help you lower

• 1:52:01Speaker 02

  your costs and improve the quality of your healthcare delivery.

• 1:52:06Patrick O'Shaughnessy?

  This has been a fantastic conversation, so interesting in so many different regards. I know we didn't talk a ton about like cash flows and the nitty gritty of-

• 1:52:14Speaker 02

  That's good because I know next to nothing about that topic.

• 1:52:16Patrick O'Shaughnessy?

  I do love the way that you guys have approached your investing careers. What you've taught me is always reinvest your learnings in the things that you're doing. Back to this compounding equation, if you can constantly learn from the best and observe the best and try to incorporate those own lessons in the platform that you're building, I think very good things will happen. Obviously, we're tied at the hips in lots of different ways, so I hope I'm right on that. You know, my traditional closing question for everyone, I get to do it twice. What is the kindest thing that anyone's ever done for you?

• 1:52:44Speaker 02

  All right, I'm going to lay out for you a job description and you're going to tell me if you're interested. What if I told you that you would have the potential to take care of a little person that for the first couple of years was going to spit up on you constantly, periodically go to the bathroom on you? That would eventually graduate to them just yelling at you for absolutely no reason. And then eventually that would become something to the effect of ignoring you and then probably taking a lot of your money. Does that sound interesting to you? You know, welcome to parenting. As I have gotten older and experienced parenting, both as a foster dad and as a father now with three of our biological kids, it's so cliche, but it's impossible for me to think

• 1:53:28Speaker 02

  of anything kinder than the total self-sacrifice that parents make for their children. And by the way, when I say self-sacrifice, just to be clear, I am not talking about not being able to go to Burning Man with my buddies. I really just want to be able to go to the dentist, which I don't think I've done in three or four years, or maybe every once in a while do my own laundry. And so first, just acknowledging my mom and dad, who especially after losing my oldest brother, were able to provide a life for us, an amazing childhood, and poured themselves into us and stayed together the whole time. I think later in life, things have happened where I appreciate more and more just how difficult that was for them. And so I owe them everything. And then, of course-

• 1:54:11Speaker 02

  To Chelsea, who really, we were talking about this last night, I think this is probably the case for all of us, our wives are really the 80% to our 20%. And it's a partnership, and we both contribute, but Chelsea is the one who has really made that total sacrifice for our kids and given me that opportunity to be a dad. And maybe just to close, this is kind of a basket answer, you know, a lot of investors like to build baskets. I think about your definition of life's work. And our oldest son Theo, who just turned seven, spent the first six months of his life in several NICUs. He was eventually helicoptered to Indianapolis at Riley Children's Hospital. And while we were living in that NICU for

• 1:54:53Speaker 02

  almost a half a year, we saw a lot of kids who passed away. Most of those kids were not as sick as Theo was. I don't know exactly why Theo survived, but I know that a major part of how he survived was because for several decades leading up to that moment, numerous nurses, nurse practitioners, respiratory therapists, doctors, surgeons had committed themselves wholeheartedly to mastering their craft. I could give you tons and tons of examples of these people. And I know that in the moment, it wasn't necessarily viewed as kindness. But maybe in some sense, the kindest thing that all of us can do is to pursue something radically that in some ways is in service to others, because you just

• 1:55:35Speaker 02

  don't know how it's going to change the trajectory of human life. And so for all of those medical practitioners, none of whom I'm sure are listening to this, I owe everything to, because they gave me the gift of being Theo's dad.

• 1:55:49Speaker 03

  It's hard to top the miracle of Theo. And we're just so blessed to be surrounded by people that love us. And to Rick's point, that's originally from our parents and our families. And for us, a few years ago, to have this moment

• 1:56:08Speaker 03

  It's a company, but there's a lot more to this. We've talked about the radical integration that Cedar Grove represents. It was instantaneous. It felt like the universal web that connects us all instantly came to support us and to cheer us on when we knew we had to take on a second act. And to the specific people like Molly and Chelsea, who saw us give up free tuition for all of our kids and change our jobs and do all of the practical things and be okay with that, or at least they pretended they were okay with that, to friends, parents, all these mentors and people that we were just so lucky to have in our lives to just see how kind they were instantly and selfless.

• 1:56:52Speaker 03

  It's an embarrassment of riches and we don't take it for granted. We get to hop, skip and jump to work every day. We love what we're doing and we know that life is full of ups and downs and to have this crew around us is just the greatest gift in the world.

• 1:57:06Patrick O'Shaughnessy?

  We are experimenting as a group, three of us, with bringing some of what you guys are bringing to the students to everybody else. More on that to come around the art of investing. But man, well, I remember this conversation for this very simple, beautiful idea that everyone can do. Find the X, nurture the N, do it in the right way. And I hope that those listening are as appreciative as I am of your guys' story and how you've conducted yourselves and how investing could be so much more than assets and returns and multiples on capital and that the ideas that underpin great investing are much more broadly applicable. I think it's a beautiful set of ideas you've shared with us, so thank you so much for your time.

• 1:57:45Speaker 03

  Thanks, Patrick.

• 1:57:47Patrick O'Shaughnessy?

  If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations and more, as well as share the best content we find on the internet every week.