Making Mistakes – Josh Steiner (EP.502)

Josh Steiner is a polymath of the New York and D. C. power corridors across government, media, and finance, and co-author of From Mistakes to Meaning: Owning Your Past So It Doesn't Own You. Josh rose to national prominence as the youngest-ever Chief of Staff at the U. S. Treasury in the Clinton administration, where he made a high-profile mistake he unpacks in the book. He pivoted to finance as a media investment banker and co-founder of private equity firm Quadrangle Group in 2000, worked as an operator at Bloomberg in the 2010s, has served on Yale's Investment Committee for nearly a decade, and five years ago returned to private equity as co-founder of SSW Partners managing capital for a few families. Our conversation focuses on mistakes, quite a contrast from other discussions on the podcast. We kick it off with Josh's big mistake at Treasury and analyze the nature of mistakes and what happened to Josh. We then turn to his mistakes in investing across deals, managing an investment business, managing people, and serving on Investment Committees. We close with frameworks to avoid mistakes and with Josh turning the table on me to discuss an impactful mistake I made that I've never discussed before. Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (⁠ https://thepodcastconsultant.com/https://thepodcastconsultant.com https://thepodcastconsultant.com/⁠ https://thepodcastconsultant.com/)

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

• 0:00Speaker 00

  Most decisions that we make involve both a desire to approach something and a desire to avoid that very thing itself. We're not anxious about things that we have no desire to do. No one feels particularly anxious about falling into a pit full of vipers because you don't really face that as a possibility. You might well feel anxious if you're at your child's birthday party and they're going off and they're passing pets around and one of which is a giant snake. Suddenly you feel anxious about that snake even though you didn't feel anxious about that pit full of them. In investing, there's a recognition that almost every compelling investment has an approach avoidance capacity. It's that willingness to understand what is

• 0:41Speaker 00

  compelling about it and what is making us fearful. Not in a binary sense. It's the word and not but. That's why when we're looking at investment, I don't like risks and attractions. These things aren't diametrically opposed. A more effective tool is to say, what do you have to believe to be true in order to be attracted to this? We are trying to be attracted. To be investors, we have to put money to work. Just thinking about the risk is ineffective.

• 1:14Ted Seides?

  I'm Ted Seides and this is Capital Allocators. My guest on today's show is Josh Steiner, a polymath of the New York and DC power corridors across government, media, and finance, and co-author of From Mistakes to Meaning: Owning Your Past So It Doesn't Own You. Josh rose to national prominence as the youngest ever chief of staff at the US Treasury in the Clinton administration, where he made a high-profile mistake he unpacks in the book. He pivoted to finance as a media investment banker and co-founder of private equity firm Quadrangle Group in 2000, worked as an operator at Bloomberg in the 2010s, has served on Yale's

• 1:59Ted Seides?

  Investment Committee for nearly a decade, and five years ago returned to private equity as co-founder of SSW Partners, managing capital for a few families. Our conversation focuses on mistakes, quite a contrast from other discussions on the podcast.

• 2:17Ted Seides?

  We kick it off with Josh's big mistake at Treasury and analyze the nature of mistakes and what happened to Josh. We then turn to his mistakes in investing across deals, managing an investment business, managing people, and serving on investment committees. We close with frameworks to avoid mistakes and with Josh turning the table on me to discuss an impactful mistake I made that I've never discussed before.

• 2:45Ted Seides?

  Before we get going, I recently did something I almost never do. I went to the beach for the afternoon, sat and read. A full Florida beach afternoon, chair, umbrella, sunscreen, the whole production. The beach is awesome and Florida is really awesome this time of year. But my time in Florida is more like adult summer camp. Tennis, golf, biking, walking, lots of activities. Sitting for a few hours just isn't part of my routine. Now, the flip side is an afternoon reading about investing in the sunshine is, as Will Ferrell put it in the movie Old School, glorious. It left me wondering why it was the first time I'd done it this year. And that got me thinking, there are people in

• 3:30Ted Seides?

  your life who haven't listened to this podcast for the same reason I haven't sat my butt in a beach chair. They're too busy, too scheduled, and too focused on priorities to sit still for an episode. What they may not realize is over 500 conversations with the best capital allocators in the world are waiting for them while they're on the go, during a commute, a workout, or even a beach chair with nowhere to be. My guess is you know who that person is. So why not send them an episode of Capital Allocators or a link to our best of playlists on Spotify? Consider it your good deed before Memorial Day officially kicks off beach season. Thanks so much for spreading the word.

• 4:12Ted Seides?

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• 4:57Ted Seides?

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• 5:42Ted Seides?

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• 6:28Ted Seides?

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• 6:51Ted Seides?

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• 7:34Ted Seides?

  Please enjoy my conversation with Josh Steiner.

• 7:39Ted Seides?

  Josh, thanks so much for doing this.

• 7:40Speaker 00

  My pleasure. Thanks for inviting me.

• 7:42Ted Seides?

  So we're going to talk a bunch about mistakes. And I thought maybe the best way to dive in might be The initial mistake that led to you writing this book with Michael in your early days of Treasury.

• 7:54Speaker 00

  First of all, I love the idea that you have all these incredible investors on your podcast and you talk to them about their marvelous accomplishments. And with me, it's only going to be mistakes.

• 8:04Speaker 00

  In 1993, I went down to Washington to work on the Clinton transition, had the good fortune of ultimately going to Treasury first to work for Roger Altman, who was Deputy Secretary, to be a special assistant, shortly thereafter, six or eight months into the term, to become Chief of Staff for Lloyd Benson. Lloyd Benson was one of the icons of that great generation. The guy had been a World War II bomber pilot, a member of Congress, a CEO, a senator, a presidential candidate. Then he became Secretary of Treasury for Bill Clinton. At the age of 27, I became Chief of Staff to 72 year old Lloyd Benson, a man of just impeccable case dignity character.

• 8:49Speaker 00

  What 's also mostly happily forgotten was the first term of President Clinton was marred by a series of scandals, the most notable of which was Whitewater. Whitewater was this little unimportant real estate transaction in Arkansas that ultimately led to the president ' s impeachment. In addition to being a real estate transaction, it also involved a bank, which became insolvent, got taken over by the RTC, the Resolution Trust Corporation, which were part of Treasury. Roger, who was the deputy secretary, also became acting head of the RTC. It was a question about whether he was going to stay involved in that investigation. An independent counsel got appointed.

• 9:31Speaker 00

  When that happened, all of us at Treasury got subpoenaed for all of our records. When you get subpoenaed, you get a piece of paper from the Justice Department, and it said you have to turn over all of your official documents. That seemed pretty straightforward. You also have to turn over any personal papers that might in any way relate to the Whitewater investigation. Long pause. My heart sinks. I think to myself, well, I keep a personal diary. I wondered whether I had actually written anything about Whitewater in that personal diary. There ' s a passing reference to any personal letters as well. So I go home that night, I get out my diary, and I realize that alas, yes, I had written about Whitewater in my personal diary, so I have to turn that over.

• 10:16Speaker 00

  I had also written letters to my then girlfriend, now wife, in which I had referenced the Whitewater matter. Those things get turned over to the investigators. I ultimately have to testify in Congress before the House and the Senate and the grand jury. In both the House and the Senate, they read out portions of my diary about Whitewater. Then they ask me whether they were accurate. For anyone who ' s ever kept a journal or a diary or written a letter to her girlfriend, You're not trying to provide a verbatim account of what happened. You're trying to write impressionistically. And in my case, I had kept a diary when I had traveled through Asia years before and begun the practice, and it was very impressionistic. Now, I was in a pickle.

• 11:01Speaker 00

  I had a senator reading something from my diary, something I myself had written, to be clear. What I had written didn't completely comport with what I remembered because it wasn't an attempt to write a verbatim account. So I had a choice. I could either say, yes, Senator, that's exactly correct, or I could correct what I had written myself. Neither of those options were particularly good. I felt it important to try to tell the truth. I needed to correct what I had written myself, which understandably gave people the impression that I had either lied to my diary or I was lying to them then. It was front page news. It was deeply embarrassing. I offered then Secretary Benson my resignation. He kindly didn't accept it. These things blow over. It was a super painful event that happened early in my career.

• 11:47Speaker 00

  When did you start trying to understand what drove the decisions you made in that moment?

• 11:54Speaker 00

  Not until years later. I grew up in New England, where the key phrase is repress for success. I went off to boarding school at the age of 14. If you do that at an early age, you view emotions as something that get in the way of coping. The way you cope is by playing sports and studying harder and pretending that no one has the capacity to hurt you or upset you. I carried that forward. After Whitewater and after my diary got exposed to the world, I used that same technique. Littered for years later. If anyone ever wanted to talk to me about Whitewater, I would make a joke or I would brush it off. I just wouldn't explore it. I wasn't willing to talk about it. I really didn't even think about it. In fact, if the word diary came up in an article, I quickly moved past that article

• 12:37Speaker 00

  for fear that they would mention my diary as an exemplar of what you should not do. Fast forward 2020, COVID hits. All of us, I think, are going through a period of contemplation. We're seeing the impact of this public health crisis on people's lives. Could it happen to me? Should I be looking backwards and trying to resolve some things I've left unresolved? Also, what can I learn from the past and ensure, hopefully, that the years to come are spent in a healthier, both mental and physical way? I realized that I had made this really bad mistake. I had gone through this quite embarrassing episode in my life. I had never confronted it. I'd never really tried to unpack what happened. I went to my friend Michael Litten, the co-author of this book.

• 13:22Speaker 00

  And I said to him, "Michael, you made a really bad mistake, which you'll never talk about. And whenever I try to raise it with you, you blow me off. It annoys me when you blow me off." It took me a minute to realize that the reason it annoyed me so much is he was manifesting the exact same behavior that I was. I said to him, "We really should try to understand why we made these mistakes and stop preventing ourselves from exploring them. Stop giving them an agency over our past." Our expectation was that we would find a really good book about mistakes. When you go into a bookstore, you go on Amazon, there's so many great books about success. There are books about entrepreneurial success, scientific success, government success. There are also good books about failure.

• 14:05Speaker 00

  "Shachleton Goes to Antarctica and Doesn't Succeed," "Apollo 13." There wasn't a book about the kinds of mistakes that we all make in our daily life that lead to embarrassment and shame. So we set out to write the book. Initially, just to try to explore our own mistakes, we ended up interviewing a lot of other people about theirs.

• 14:24Ted Seides?

  How do you distinguish between a mistake and a failure?

• 14:30Speaker 00

  When you read a news story, those words are almost always used interchangeably. In the first paragraph, it will say, "Dad, you made a terrible mistake." And then in two paragraphs, it will say, "Well, the failure you made was this." Amusingly, when we've gone off and given talks about this book, often the title of the talk will be "Steiner and Litten to Talk About Failures." I'm like, "No, no, no, no, no. We're not talking about failures. We're talking about mistakes." We had to really figure out our difference, and our definition is as follows. We think of failures and success as siblings. In both a failure and a success, People come together. They have an ambition. They make a plan. They're trying to achieve something worthwhile.

• 15:13Speaker 00

  That's why we say it's a successful marriage, but we also say marriages fail. Both cases, people come together. Their plan is to lead a healthy and happy lives together till death do them part. But in one case, it doesn't work out. That's a failure. In the other case, it does. It's a success. A mistake is very different. A mistake is a decision that you make almost always by yourself, where you're not aware of your surroundings or your emotional state, and it leads to regret. There's no planning. It's a decision you make without self-awareness. That's very different from a failure, which involves careful planning and cooperation. Failure almost always leads to lessons, which people take away from them. Success always leads to a sense of accomplishment.

• 15:56Speaker 00

  Mistakes, we generally shove under the rug and hope people never see and we never want to discuss. Why do you think that is? Because of the embarrassment and shame. Society, especially here in the United States, is awesome about failure. We really admire entrepreneurs who pick themselves off off of the ground. You and I both know investors who were unsuccessful in their first fund, dissolved it, went to work from somewhere else, came back and did it a second time and have been successful. We admire the persistence and their willingness to plan more carefully the second time and to go off and try to achieve that big ambition. In the case of mistakes,

• 16:37Speaker 00

  the embarrassment leads us to want to hide the mistake itself and then what drove us to make it. We also think that mistakes generally reveal an aspect of our personalities that we may not like. The effort to explore the mistake can be very painful for people because that exploration may help you discover something that you don't find super attractive and that you don't really want to reveal to yourself, let alone to someone else. When you talk to people about the mistakes in the book, what are some of the common threads? You saw that might be slightly different from your mistake. When we started this process, we started making lists of mistakes.

• 17:20Speaker 00

  We thought we were going to organize this book around types of mistakes. And you mind immediately begins rushing through all of them. For those of you can't see a Ted smiling even because I'm sure he's thinking about all the types of mistakes it has made. In fact, we should probably talk about that now that I think about it. And we're going to get there. And now that I consider it, we're not going to let you off the hook. But your mind immediately goes, and the easiest way to think about it, the seven deadly sins. Greed, lust, there are all these different motivations that lead people to make mistakes. The more we made those lists, the harder it was to categorize them. And the list just got longer and longer and longer. We realized that we needed a different kind of help. We didn't need ethical help, which is a religious help, which is how we generally thought about mistakes.

• 18:04Speaker 00

  What we needed was psychological help. We ended up partnering with this fantastic professor from Johns Hopkins, a woman named Alison Papadakis, who helped us think about it. Working with her, the common thread throughout was this idea of a schema. Schemas are mental templates, which allow us to process. They're as simple as the following. You walk into an elevator and if you're by yourself, you stand wherever you want. If they're two people, you stand on opposite sides. If they're four, you go into the corners. Imagine you didn't have that schema in your mind about where you're supposed to stand in an elevator. Or worse still, the person who came in with you didn't have it. They stood right next to you in the elevator. It would be deeply uncomfortable, but they're creepy.

• 18:46Speaker 00

  Schemas help us process the world without having to reconsider it each time. There's a lot of research behind this. These mental templates are incredibly helpful. Going back to my mistake, my mental template was repressed for success. There's no question, it served me well. It allowed me to process going through high school, playing sports, going to college, going into the investing world and having relatively difficult jobs. What it didn't help me do was process this hard event, this bad mistake that I had made. When your schema works, it's an incredible. Incredibly powerful shortcut. When you misapply it to a situation, it can lead to a whole new form of mistake. That's what happened in my case. All the people we interviewed,

• 19:29Speaker 00

  Malcolm Gladwell, Irv Gotti, Michael Govan, Joanna Coles, they all told us about mistakes. In almost each instance, it revealed some schema that they had been carrying around with them, some hidden aspect of their personality, which they hadn't previously understood.

• 19:45Ted Seides?

  As you work through your mistake, how did you go about unpacking what that schema was?

• 19:52Speaker 00

  You used exactly the right word, which is unpack. We think of these things as like Russian nesting dolls. You have to keep lifting it up and lifting it up. For both Michael and me, when we started talking about it, we were nowhere close to the real mistake until we'd gone through it several times. We wrote draft after draft of our own mistake, pushed each other and said, wait a minute, there's something else I think is going on here. Was it just your poor decision-making process? Or was it just the fact that you were testifying before Congress and you were a young person? We didn't have a framework for thinking about mistakes. And one of the things we figured out was that each mistake is a free act play. There's act one, and that's where your schemas are generally developed, either it's in your childhood or in early professional experience.

• 20:36Speaker 00

  You form a way of looking at the world. Act two is when you make the mistake itself. You make a decision, probably without self-awareness about your emotional state or your context. And then act three is how do you deal with it? Do you go off and offer apologies to people you've hurt? Do you forgive yourself? Do you process your mistake? When I thought about my mistake, I was super focused on act two. Why it had been so stupid to keep that diary? I didn't think about what had happened in act one. Either the fact that I had kept a diary in a different context and it had been fine. And I certainly didn't think about this whole idea of repress for success. The result of that is I made a whole new mistake in act three. Not dealing with it, not talking about it, keeping it inside me

• 21:20Speaker 00

  long after everyone else had forgotten about it.

• 21:23Ted Seides?

  Where did you see the schema that you had developed that led to that mistake come into investment?

• 21:30Speaker 00

  My wife, who's Austin May, was Beck's. She's a nonprofit litigator for many years and then became a nonprofit mediator. One of the things that she did is she got trained as a mediator was understanding how to listen to people more effectively and have more open communication. A recognition that people's emotions and their schemas come into what seemingly are straightforward decision making. The expression that she uses, "It's never about the toaster." She works with low-income couples who are trying to separate or get divorced. They will agree on everything. They will agree on child support and on custody. Suddenly, they're having a fight about a toaster. Turns out that the husband's aunt had given them that toaster.

• 22:15Speaker 00

  The wife felt that that aunt was always disrespectful to her. She wants the toaster as a way of proving to her husband that that aunt was vicious and the husband wants the toaster. Has nothing to do about the toaster and everything to do with family dynamics. Because I had spent so much of my life trying to repress the emotional side of what I did, my belief in hyper rationality, I didn't appreciate that a lot of investing does need to reflect underlying emotions. It needs to reflect the personalities and characters of the CEOs that you're backing. It needs to reflect the fact that consumers aren't entirely rational actors either. The way they're going to interact with your products may not be based exclusively on a set of rational decision making.

• 23:01Speaker 00

  A recognition that your colleagues and partners have their own motivations and ways of thinking about the world. In order to create an effective environment where you can make excellent investment judgments, you have to be willing to acknowledge that their personalities and emotions are playing a factor too. I didn't see that part of the world as clearly as I should.

• 23:20Ted Seides?

  If you pull the thread of that mistake, why don't you take me back to one of the first big investment mistakes you made?

• 23:27Speaker 00

  When we started Quadrangle in 2000, it was right after the internet bubble had busted. Three of us, Steve Ratner, Peter Zersky and I worked together in M and A and our fourth partner, David Tanner, had a distinguished private equity background. We all knew each other really well. That was part of the thesis, that we didn't want to start a firm with people we didn't know. It's very different to go from investment banking into investing. Brian Roberts, who was the CEO of Comcast, still a controlling shareholder, said to us, "I'm so glad you guys are doing this because you're finally in a business where you can actually keep score." His point was, it's fine to give advice. When you're in the investing business, you know whether you're in fact producing returns. We raised a billion dollars, primarily on the back of Steve's reputation, certainly much more than my own.

• 24:12Speaker 00

  Then we got to work. The first deal I worked on was a company called Pathfire, based in Atlanta, Georgia. It had a terrific premise and a really disappointing result.

• 24:24Ted Seides?

  What was the mistake?

• 24:25Speaker 00

  There were a bunch of mistakes. Some of them had to do with knowing what you know and knowing what you don't know. In the case of Pathfire, the premise behind it was terrific. It's hard to imagine, in today's digital world, in 2000, most television stations were still inserting ads using videocassettes. The way the business worked, someone wanted to run a national ad, you sent out video consents to all the national affiliates. There's a control room which is inserting these consents in at the right time and you're hoping it all meshes up. It was incredibly inefficient. It prevented both the advertisers and the television companies from updating regularly, from improving their performance. Pathfire had a simple and clever idea. Let's just distribute those ads digitally. It sounds obvious.

• 25:08Speaker 00

  What we didn't appreciate is how conservative some businesses actually are. And I use that in the lowercase meaning of the word conservative. Imagine you're the chief engineer at the network affiliate in Cleveland. You're not very incentivized for improving the efficiency of your station. You're certainly not incentivized if you're able to run the newest Add the fastest, you're highly disincentivized to make any mistake. The mistake for them would be if that technology breaks and the ad doesn't run at the right moment, or you run the wrong ad, they want to stick with the technology that works. Pathfire showed up and said, great news. Here's what we'll do. You don't have to worry about the video cassettes. All you have to do is install this new equipment.

• 25:51Speaker 00

  By the way, the insertion process is going to change. You have to train some techs differently. The stations all looked at them and said, not my problem. The mistake was underestimating the hesitancy of people who are running mission critical roles to change the way they do business. There was another mistake. We were impatient. We felt the heat of having raised the money and then not gotten it to work. Fortunately, it was a small investment. We probably got back half of that investment. We didn't lose all the investors' money, but it was my first deal and it was not a good one.

• 26:24Ted Seides?

  What would you have done differently?

• 26:26Speaker 00

  Investment committees, in my experience, are very good about talking about the specifics of this underlying investment. Here's this company. What do we think its cash flow characteristics are? What's the competition like? We're much less adept at discussing what's going on in the firm or what's going on in the individuals' investing process that might lead to a less good outcome. If in the beginning of Quadrangle, we had had open conversations about the fact that we were all feeling pressure to invest. If we had open conversations about the difference between growth investing and more traditional buyout investing, as well as discussions about very specific investments, we would have made mistakes for sure.

• 27:10Speaker 00

  We would have been open about the fact that we were all feeling pressures that might have led us to make decisions that we regret.

• 27:18Ted Seides?

  How do you distinguish between a mistake, in this case, a bad outcome, from a process mistake?

• 27:25Speaker 00

  Bob Rubin has a great line, which is you should never judge a decision by its outcome. Bob, when I worked for him in Washington, was awesome at this. Sometimes to the point where his staff would be unbelievably frustrated. Someone would come to him and say, you know, Mr. Secretary, there's a following decision that we have to make. He'd say, okay, when do I need to make that decision by? They'd say, two weeks from Tuesday, and he'd say terrific. There would be 19 meetings between the moment he learned he had to make that decision and two weeks from Tuesday. His view was you had an obligation to keep gathering facts to debate the issues. Bob was excellent at empowering everyone in the room who had expertise to speak up. He wanted to hear from everybody. He would just wait and he would gather more information.

• 28:09Speaker 00

  Once he made a decision, if he felt that he had run a process where he was able to avail himself of all the available information, he didn't look backward. That's very different, however, than if you make a decision and you didn't do that. You didn't avail yourself of all the information that you could. That's a process failure. Some decisions are mistakes because of bad process. Some decisions don't turn out well. That doesn't necessarily mean you ran a bad process.

• 28:34Ted Seides?

  What's an example of something where you might look at it as a mistake, even though there was a good outcome?

• 28:40Speaker 00

  We invested in distressed debt as well as doing regular way private equity. There are times when, within the private equity context, we were able to invest in the debt of a company, often a company that where we had looked at acquiring the equity. And LBO would have gotten done. We didn't win that process, went to a higher bidder. Couple of years went by. Business may not have been doing as well as they want, and we were able to buy the debt on attractive terms. Occasionally, that debt would move in our favor more rapidly than we had assumed it would, often for reasons that had nothing to do with our basic investment judgment. The best example would be a change in the interest rate environment. I'm not an investor who would make an investment decision based on the macro environment.

• 29:25Speaker 00

  The macro environment can move, sometimes in your favor, sometimes against you. When it moves in your favor, you shouldn't be patting yourself on the back unless that was an explicit part of your investment judgment. That just wasn't the case sometimes.

• 29:37Ted Seides?

  How do you think that? Shaped how you thought about investing when your first deal didn't work out?

• 29:44Speaker 00

  Made me risk averse. I've thought about the kinds of deals to which I'm most attracted. I'm attracted to deals which have a disproportionate emphasis on protecting your downside. I'm a less good growth investor as it relates to managing other people's money than I am looking at risk adjusted returns. Many of the deals that have worked out best for the firms in which I've led are ones which had very attractive risk adjusted returns because there was some embedded downside protection.

• 30:13Ted Seides?

  There's a dynamic you intimated that there's a difference when you're managing money for other people and your own. Now, for the last bunch of years, you've mostly been managing your own. What's different in trying to make good decisions and make fewer mistakes? When it's your own money or there's a very few number of people you're serving compared to, say, quadrangle, regular private equity business?

• 30:35Speaker 00

  We've been doing both. At SSW, we have committed capital from a series of families. That committed capital is what allows us to have a team and to go off and look for large transactions. Simultaneously, over the last couple of years, I've been investing out of my P A in everything from companies in the A I world to the Paris basketball team, where my partner Eric Schwartz, who's the majority owner and I own, and created a team over the last seven years. It's a pretty binary choice when you're managing anyone other's money. I don't care if it's your mother's, your cousins, a few families, or large amounts of institutional capital. As soon as you're a fiduciary for anybody else, the standard is entirely different and the process you have to use is entirely different.

• 31:18Speaker 00

  I think it's appropriate, maybe foolish, but I don't feel guilty about the fact that on occasion someone will call me up, they're working on an investment, they see a company they think is appealing. The conversation lasts about seven minutes. I make a commitment. Happily, it's money that is my own and my family's. I have a fiduciary duty to no one but ourselves. If it feels like a plausible opportunity, if it's something about which I'm very curious, it will lead to other opportunities. I don't feel compelled to run and Extensive diligence process, it may be unwise not to do that. I certainly don't feel any compunction. As soon as you're managing money on behalf of anybody else, it's a totally different ballgame. You have an obligation to go off and run a completely different process,

• 32:03Speaker 00

  one of real diligence, understanding the structure, protecting yourself on the downside if you can, reading the legal documents carefully, getting the best advice you can. It's a very different process.

• 32:14Ted Seides?

  There are a lot of people who say if they're managing only their own money, they actually do better than if they're managing capital for other people because of the institutional constraints that might be put on them and running a fund for multiple constituents. Have you thought about that aspect of having a more limited group of investors to serve?

• 32:33Speaker 00

  The question that I would be asking myself is alignment. What are you trying to achieve? If you're working with a group of institutional investors or families and there's really clear alignment about the objective, the opportunity to be as successful is every bit as great as if you're investing on your own behalf. The problem comes when firms are neither as transparent as they should be about alignment or fundamentally structured in ways that don't allow for that alignment. Having seen so many of these firms over the years and been involved in a number of them, that's the most important question. Can you look your partners in the eye and say, your incentives and my incentives, your objectives and my objectives are as closely aligned as possible?

• 33:17Speaker 00

  If the objective on your behalf is to have long duration capital that is compounding over an extended period of time, and I, as the GP, are willing to put a lot of my own capital to achieve that. And we recognize that we may not have the liquidity that we want when we want it, that you're not going to change your mind and suddenly come to me and ask for your money on short notice, that I have the flexibility to ride through cycles in really high quality business. That's terrific alignment. My guess is you can achieve really good returns. The problem comes when well intentioned people either change their mind or aren't as transparent as they should be about their objectives. And that leads to a misalignment. That's often the problem.

• 33:59Ted Seides?

  If you go back to your quadrangle years, when you're serving a bunch of different LPs, they don't all have the same objectives. How do you tease out the alignment in the traditional fund structure?

• 34:12Speaker 00

  We saw that most acutely during the great financial crisis. Many of us, myself included, thought that period of time in oh seven, oh eight, oh nine was one of the most compelling opportunities to invest in generations. You saw assets trading at really depressed values. You were able to buy credit instrument, which were providing equity type returns, notwithstanding the fact that they were very senior in the capital stack. At the same time, there were a number of RLPs who were focused almost exclusively on liquidity. They wanted their assets returned to them as quickly as they could, and they didn't want to be making new commitments. There were other LPs who saw the opportunity similarly to the way we did and said, yes, please, why aren't you drawing more capital and going out and doing it?

• 34:54Speaker 00

  It is unquestionably a problem in that overwhelmingly positive construct of private equity and hedge funds, that you are going to find LPs who have divergent views. It's understandable. They represent different kinds of institutions. They've made different choices. We had LPs who had made very, very significant commitments to illiquid assets going into the great financial crisis and felt very constrained from a liquidity perspective. And we saw other ones who had reserved a lot of capital and were looking to take advantage of the downturn. What we tried to do was to remember what we had said to them when we started, what commitments we had made to them and what commitments we felt that they had made to us. Went back and reviewed the marketing materials and our offering prospectuses and what we'd said to them.

• 35:39Speaker 00

  We tried not to be too buffeted by that change in the environment. If we allowed ourselves to do that, then we were going to be constantly trying to solve for the person who complained the loudest. And that didn't seem fair to the people who made commitments under different circumstances.

• 35:54Ted Seides?

  In those years at Quadrangle, you think back to running a team. What were some of the most important mistakes you made?

• 36:02Speaker 00

  I've thought a lot about the difference between what looks like a really good manager, someone who reviews people carefully, has a careful compensation plan, who is clear in the feedback and still not do the thing that ultimately I didn't do as well as I wish I had. And that I now view as one of the characteristics of a really good manager. When I go off and interview management teams, I'm thinking about making an investment in that company. One of the questions that I like to ask is how many direct reports you have? The manager, the CEO, or the CFO will say, well, I have six. I say terrific. Why don't you walk me through those five or six? Tell me the career aspirations of each of those individuals.

• 36:46Speaker 00

  Tell me what she wants to do next in her life. What job is she trying to get to? Where is she going from here? The vast majority of the time, if you talk to a CEO, and she can tell you what the career aspirations of her five or six direct reports are, the likelihood that she's a really good manager of those people is quite high. The mistake that I made at Quadrangle was not understanding that it wasn't enough to put in place those good structures and those good processes. I don't think I invested enough time into the people with whom I was working, understanding what they were trying to achieve, spending enough time making sure that I, as their colleague, in some cases their boss, was helping them achieve those aspirations.

• 37:28Ted Seides?

  How do you use that lens? And have that permeate an investment organization? And what that investment organization is trying to achieve?

• 37:37Speaker 00

  These are human capital businesses. If you don't have the financial capital, you can't start one of these businesses. And you can have the financial capital. And if you don't have great human capital, you're going to be unsuccessful. One of the mistakes I see investment firms making is not understanding how the career aspirations of the people who work there shape the investment strategy. I'll give you an example. You can start with a relatively small firm, two partners, spin off from someplace, or start their own firm, and they have a couple of people working for them. They raise a fund, and that fund does well. And then they raise a second fund, and that fund's doing okay. Those people who they hired six or seven, eight years ago, understandably, would like to take on more responsibility. And perhaps they'd like to get paid a little more as well. How do you solve for that?

• 38:22Speaker 00

  One of a couple of ways. You raise a larger fund. That allows you to pay them more. Great. Often you see people opening other offices. Why is that? Well, sometimes the investment strategy drives them to thinking, I really need to be on the West Coast as well as the East Coast, or I need to understand or see opportunities in Europe as well as the United States. It's often driven at times by the fact that you have more junior colleagues who would like to take on more responsibility. You think about geographic growth and you think about AUM growth. Sometimes they can serve firms incredibly well. There are definitely times where both forms of growth can dilute the returns and lead to a drift in strategy relative to what made the firm successful initially.

• 39:04Speaker 00

  That's driven by the fact that you had people who wanted to grow their careers, but there hadn't been an honest conversation about whether, in fact, that desire to grow their careers was consistent with what you were trying to achieve for your investors. What really helps is transparency and honesty. Explaining to people, this is what we are and this is what we aren't. We think we can help you build a really interesting career, a satisfying one where you take on more responsibility, do even better financially. It's going to be within the constraints of what we think will drive great returns. We're not going to compromise those great returns in order to satisfy your career aspirations.

• 39:43Ted Seides?

  What are some of the other mistakes that you see investment organizations make?

• 39:48Speaker 00

  The vast majority of firms that I see and my friends are running are highly successful. I'm not going to be in the business of criticizing my peers. Almost all universally of whom have been more successful than I have. So close, you almost got me, but I'm not going to do it.

• 40:02Ted Seides?

  These days, among other things you've done, you've served on Yale's Investment Committee. I'd love to ask, when you take all of those dynamics and put them at a committee level, what do you see playing out?

• 40:14Speaker 00

  I was fortunate to work with David. He was the OG as it relates to this business. He was very generous to me in a whole variety of respects, including putting me on that committee. I'm grateful for it because I learned a lot from him. I learned a lot from the quality of the people that he was able to recruit and retain. It's really astonishing. The people who went off and left Yale and became the CIOs at other major endowments. And it's just an incredible track record. And the team that's there today, led by Matt Mendelson, is fantastic. Almost all the senior leadership was hired by David and mentored by David. David was the master at portfolio theory, thinking about the efficient frontier and thinking about risk-adjusted returns.

• 40:57Speaker 00

  I don't think people fully appreciate how adept he was and how much he cared about the people with whom he worked. People sometimes think that those individuals exclusively learned the technique from David, but it went far beyond that. It was the mentorship and the values that he instilled in those teams that made him so distinguished.

• 41:18Ted Seides?

  Bring that to your seat today at the Investment Committee. Maybe mistakes that you've made sitting on an Investment Committee.

• 41:24Speaker 00

  Happily, the Investment Committee limits the voice and role of people like me, which accounts for why that it's been so successful. One of the things I had to learn is, in its most formal sense, the delegation of authority. What really are the decisions that the executive team should be making? What are the ones that should be reserved for a committee or a board? I'm on the Yale Corporation and the issue is the same there as well. I don't think I always find that line perfectly. It's one of the things I've continued to try to improve, which is the recognition that in the case of the endowment, you have Matt Mendelson, who's a fantastic investor and a very good leader, respecting his role, recognizing that there's a committee placed and structured for a reason.

• 42:09Speaker 00

  That committee has a set of obligations and duties to Yale. And finding the ability to respect Matt's role, to encourage it, to provide him the independence and leeway that is appropriate for a CIO, at the same time continuing to exercise our fiduciary duty. That's a hard one to navigate. The best boards manage that probably as well as anything. We think of fiduciary duty, our most important duty is choosing that leader, whether it's the president of Yale or the CIO, then helping to set the strategy and then holding that individual accountable for executing on the strategy. The place where a lot of boards run into trouble is overstepping

• 42:51Speaker 00

  as it relates to not respecting the role of the executive or deferring too much. I'm constantly trying to be both respectful of the individuals who are doing their jobs and then remembering what my own fiduciary duties are as a board member. I'm quite sure that I do not always get it right.

• 43:08Ted Seides?

  How about other leadership mistakes you've made?

• 43:11Speaker 00

  I spent a lot of time on the investing side and then I took a sabbatical, moved with my family to India. I came back and I thought I was going to go off and buy a business and try to run a business as opposed to investing in businesses. Instead of doing that, I went to work at Bloomberg, partly because I had such respect for Mike and partly Dan Drach, who was running the business at the time. There were a bunch of businesses that they had either bought or built, which were underperforming. I went to work on the parts of Bloomberg where they had been disappointed in the results. I went into that having managed investment firms before and having been on the boards of very large companies. I had never managed thousands of employees before. It was a very different challenge than what I had taken on.

• 43:51Speaker 00

  After probably the first six, eight months or so, Dan and I were sitting down and talking about how I was doing. We had put through a number of good changes and the team was growing in ways they hadn't before. Dan said to me, you're doing great. We're happy to have you here. We appreciate the intensity and the drive and the directness you bring to this. The people on your team do not feel like they know you. They don't really understand what's motivating you. I would encourage you to try to be. A little bit more open. For a lot of my career, I had been hard to get things done. I had been focused. I had been trying, in the case in the investment business, to drive great returns.

• 44:33Speaker 00

  In the case of what we were doing at Bloomberg to improve the operations. I don't think I appreciated the extent to which to be an effective leader requires a level of transparency, not only about what you think about the business, but also what you feel, how you are relating to the people around you, expressing disappointment and excitement, allowing my underlying ambitions, both for the business and for the people, to come out more clearly. Led me to have much more honest and open conversations with people than I had before. It was clearly something that had been lacking in my leadership style. And I'm very grateful for Dan's willingness to confront me with it directly.

• 45:10Ted Seides?

  I'm sure these days, in and around the book, you get asked, how does someone get better at recognizing mistakes before they happen? What are some of the frameworks for people that want to make fewer mistakes?

• 45:22Speaker 00

  One of the ones I find most effectively is going topsy-turvy. And this is the moment. One of the things that has been most satisfying has been the opportunity for people to think and reflect on their own mistakes. Mike and I wrote this book in the hope that if we spoke openly about our mistakes and then encouraged other people in the book to talk about theirs, we would effectively give people permission to talk about theirs. And so, Ted.

• 45:50Ted Seides?

  I'm going to go to one that relates to what you just said. I am driving to New Haven to join David for a hockey game and poker. Two years out of business school. I had worked for him for five years. It was about four years later. David, when I worked there, was not only my greatest mentor, but also like a father. Part fraternal, part paternal relationship. I think he had that with a lot of people that he mentored. He also was someone who, when you were on the team, it was white. And when you were off the team, it was black. He hadn't want me to leave to go to business school. So in those four years, I occupied an unusual gray role.

• 46:35Ted Seides?

  There were times where I wasn't sure where I stood with him, which was very painful for me. And then there were times where things seemed like they were great. I left. After business school, I joined a manager Yale had money with, and I was back on the team. This was a point in time where I had just started a hedge fund of funds, which was very black in his eyes, was not something he thought well of. I went there and very much felt like I was back on the team. Kim Sargent was there, the late Randy Kim, Seth Alexander. We were all there that night. Somewhere along the way, I made a comment to David in very much the jocular way we would in the office. Oh, I bet our fund's going to beat Yale's hedge fund portfolio because we're doing all these neat things with smaller managers. Maybe he should think of investing.

• 47:20Ted Seides?

  That was not something that you said to David. I didn't know this till many years later, as Randy Kim, who told me that that day, for many years, I became back on the out with David, probably for just having said that. I think I understand some of why it happened, but it was a big mistake.

• 47:39Speaker 00

  First of all, thank you. You've had a very successful career in all sorts of ways. David is such a legend in our business that telling a story where you don't look flattering, you acknowledge that it had a real consequence in terms of your personal relationship with him, somewhere between fraternal and paternal, also professionally. No one wants to be on the outs with someone as influential as David was. So, thank you for doing that. That was generous of you. You've given some thought as to why you did it. What do you think the reasons are?

• 48:09Ted Seides?

  I always wanted to be on his team. When I was in the office, there was a way of relating to him. It worked for me. Some of that was that jocularity. We'd make these side bets. I would always lose them. Keen and Dean Takashi won every bet they ever made. That was part of it. The bigger problem was when I suggested he might want to think of investing. I knew that was something he would never do. I deeply understood how Yale invested, and it wasn't that. At the time, I had started a partnership with someone who had been quite successful. He had nudged me, you're going up there. Everything to him was a transaction. It wasn't a value that I held. It was certainly a value that he had held. I felt like I had to do that, coming from a people-pleasing upbringing.

• 48:54Ted Seides?

  Trying to please everyone at the same time when they conflicted was not something I had wrestled with before. It still is difficult for me to understand where should my loyalty have lied.

• 49:06Ted Seides?

  David made many people's careers. He could have made mine had he chose to. After that day, he decidedly chose not to. I wasn't true to myself and my instincts of what the right way to behave was. I just followed the lead of someone telling me what to do, which also comes from deep in my childhood.

• 49:27Speaker 00

  You asked a question earlier, which is, what techniques have we used? If we had been doing this in the context of the book, I would have asked you a whole series of follow-up questions in fairness to you. Since we did tee this up before, you had said I was allowed to ask you one, which I just did, and not more. It's very hard for people to talk about their mistakes. One of the things that we tried to do, would be careful about, was allowing them to go at their own pace. When you and I spoke before, it was clear that it's something that you hadn't done on this podcast before, and it wasn't something that you intuitively felt was an obvious thing to do. If this was ever something you wanted to explore, this isn't the moment to go deep. You have to start someplace. The mistake you described is very powerful because it cuts across all aspects of your life.

• 50:12Speaker 00

  I can hear that in your voice, the way you talk about where your career has gone, you talked about a personal relationship with David, you talked about the people-pleasing aspect of your childhood. There are some things which are probably less emotionally fraught, but might be very relevant, which is, you were at a hockey game. That context is a very specific context, which may or may not have been the right place to speak to David. Maybe you were trying to signal something, maybe you weren't. There are a lot of avenues that one would want to explore to understand this. The thing that we try to do, and we try to do consistently, both when we're interviewing people for the book and subsequently, is to say you don't have to do it all at once. Just the act of your willingness to do it was very generous.

• 50:56Ted Seides?

  I appreciate it. Of course, you have me wanting to go deeper, and we will, but just not today.

• 51:02Ted Seides?

  Let's say you're making an investment decision. There's a lot of people talk about getting the group of people together, getting all the information on the table that's common in modern decision-making theory. Wondering if there's anything else that you uncovered from doing this work that would help people make better decisions?

• 51:18Speaker 00

  One of the things that I liked about talking to people about the book is a recognition that different things resonate with different people. I'll give you a couple, and the answer may be none of these resonate, but maybe one of them does. In the 19th century, Jeremy Bentham goes off, the father of utilitarianism, and comes up with the concept that everything is pain or pleasure. Those are the two things. We're motivated by the avoidance of pain and the desire for pleasure. We should judge decisions based on the net effect of those. How much pleasure are you providing relative to the pain that you might be causing? That binary approach is echoed a little bit when you think about fear and greed in the investing world. People think to themselves, am I greedy? Am I going to go for it? Am I fearful? And am I going to avoid it?

• 52:02Speaker 00

  In the 20th century, there was a concept that came along which worked somewhat better. That's the theory of approach avoidance. Most decisions that we make involve both a desire to approach something and a desire to avoid that very thing itself. If you think about it within the context of travel, many people are curious about going to an exotic location. Let's just pick something which isn't so exotic anymore, but Japan. They love the food, they're intrigued by the history. Then they see a picture of the Japanese subway system. They think to themselves, there's no way I'm going to Japan. It's completely intimidating. I don't understand a word of the language. I'm going to get lost. They both have a desire to approach it. They're curious about it, and they're hesitant. They want to avoid it.

• 52:46Speaker 00

  Anxiety is caused when you want to do something, but you're fearful of it. We're not anxious about things that we have no desire to do. No one feels particularly anxious about falling into a pit full of vipers because you don't really face that as a possibility. You might well feel anxious if you're at your child's birthday party, and they're going off and they're passing pets around, and one of which is a giant snake. Suddenly, you feel anxious about that. That snake, even though you didn't feel anxious about that pit full of them. In investing, there's a recognition that almost every compelling investment has an approach avoidance capacity. It's that willingness to understand what is compelling about it and what is making us fearful. Not in a binary sense. It's the word and not but.

• 53:31Speaker 00

  That's why when we're looking at investment, I don't like risks and attractions. These things aren't diametrically opposed. A more effective tool is to say, what do you have to believe to be true in order to be attracted to this? We are trying to be attracted. To be investors, we have to put money to work. Just thinking about the risk is ineffective.

• 53:52Ted Seides?

  Wondering if there are any other lenses on making investment decisions that you've picked up from the work in this book?

• 53:58Speaker 00

  There's one I like also, which is called the wise mind. Over the last 20, 30 years, there's been a change in a whole bunch of psychological literature, starting a little bit earlier than that on something called cognitive behavioral therapy. For many years, we thought of therapy that it was all about the why. Why did you make this decision? What is it about your childhood? Why do you feel that way? And that's incredibly powerful. That's the basis for a lot of psychoanalysis and for talk therapy. Cognitive behavioral therapy, and then ultimately dialectical behavioral therapy, is a recognition that we are going to have these feelings. We need the tools to deal with them. It's trying to provide the tools to help us manage our anxiety, our fears.

• 54:39Speaker 00

  Coming out of DBT is a recognition that the best decisions are made was known as the wise mind. A recognition that we need to use both our rational and our emotional minds to make a decision. In some ways, you can think of this in the sort of Kahneman fashion of system one and system two thinking. Wise mind is a little bit easier to appreciate. We go into any investment with our rational mind. We think we're rational actors. We want to apply that rational prism to the information in front of us. If we don't remember that we're also driven by emotion, either our attraction to a particular business because we think it's interesting, or an old schema where we made a previous investment that makes us fearful of that, we're unlikely to make as good investment decisions.

• 55:24Speaker 00

  I try as best I can, not always with perfect effect, to keep that wise mind in place, both my rational and in my emotional mind when I'm looking at an opportunity.

• 55:33Ted Seides?

  What's happened since the book came out?

• 55:35Speaker 00

  International fame, Ted.

• 55:38Speaker 00

  You know, it's very embarrassing. I can't go through an airport and everyone just stopping me, children running up to me on the street. The most satisfying part about this book is without a doubt, as an example, your willingness to talk about your mistake. Michael and I have been fortunate to go on a whole variety of television, The Good Morning America, Morning Joe, and then also spoken out at Microsoft, for example, or at the New Orleans Book Festival. After each of those things, the thing that has had the greatest impact on me is people's willingness to come up to me and say, "Thank you, and by the way, I made this mistake." Complete strangers who have revealed the most remarkable stories about their lives. Some of them had to do with very serious mistakes, which we don't really cover in

• 56:19Speaker 00

  the book, issues around substance abuse or their involvement in the criminal justice system, some of them very personal. I was up at my old high school, and then I met with a lot of students afterward. The number of students who came up to me one-on-one, waited in line and said, "This friend hurt me," or "I hurt my friend. What do you think about this?" or "How do I go about and cope with it?" It was a recognition that most of us don't have the opportunity to work on these big monumental failures. We all make mistakes. The book has given people permission to talk about it and then some tools to deal with them more effectively.

• 56:54Ted Seides?

  Josh, before I let you go, I want to ask you a couple of fun closing questions.

• 56:59Speaker 00

  Do I get to decide if they're fun, or that's your definition?

• 57:01Ted Seides?

  It's my definition. It probably doesn't have to do with mistakes. You're off the hook. Before we get to the closing questions, I want to tell you about one of our strategic investments. We've made a few, and each are working on a product or service we think will be valuable to our community. One is OldWell Labs, or OWL. OWL is the very best software I've seen for allocators to find and track managers, and I've seen a lot of them. Trust me, it'll be worth the look. There's a link in the show notes so you can learn more. And here are those closing questions. What's your favorite hobby or activity outside of work and family?

• 57:36Speaker 00

  I love to hike. I am a happier person when I spend more time in nature. And it doesn't have to be in the Tetons or the Dolomites or Fiji. It can be going for a walk in Central Park when we're at our house on Martha's Vineyard and going for walks in some of the preserves there. There's a lot of evidence that spending time in nature is good for your mind. Certainly, I think, good for your soul. I'm definitely the beneficiary when I'm able to do it.

• 58:02Ted Seides?

  What was your first paid job and what'd you learn from it?

• 58:05Speaker 00

  I grew up in Cambridge, Massachusetts. As a result of climate change, we don't remember this. There used to be a lot of snow. Shoveling snow was incredibly lucrative. I lived in a neighborhood where there were a number of older residents. I would be up early before school. I would go knock on their door, ring their bell, and ask them if they wanted their sidewalk and driveway shoveled. You could make what felt like an enormous amount of money before school even started, let alone if there was a snow day. It reminded me that being outdoors and doing hard work could be very satisfying. I felt wealthy at the time, and I don't think they were paying me that much, but it was terrific.

• 58:43Ted Seides?

  What's your biggest pet peeve?

• 58:44Speaker 00

  Hypocrisy. I'm a believer that the things that bother you most than other people, the things that bother you about myself. I try really not to be hypocritical. I find it annoying when people say one thing and then do the other. As I've gotten older, I hope that I've gotten much less judgmental about a whole variety of things and probably more judgmental about hypocrisy.

• 59:07Ted Seides?

  What life lesson have you learned that you wish you knew a lot earlier in life?

• 59:11Speaker 00

  There's a difference between being polite and being kind. I grew up in a household where my parents certainly were both. I probably picked up too much on the politeness as opposed to the kindness. I've always been pretty well-mannered. I could have afforded to be kinder over the years, and I'm working on that.

• 59:29Ted Seides?

  All right, Josh, last one. If the next five years are a chapter in your life, what's that chapter about?

• 59:34Speaker 00

  Curiosity. There are a lot of things I'm eager to learn. And happily, our current firm is organized in a way where I've got terrific colleagues and great partners, been able to make some compelling investments. And it also affords me the opportunity to explore some other things which I haven't had a chance to do before. The next five years are going to be about curiosity.

• 59:55Ted Seides?

  Josh, thanks so much for doing this. Really appreciate your willingness to talk about mistakes.

• 1:00:00Speaker 00

  Thank you for having me.

• 1:00:02Ted Seides?

  Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com where you can access past shows, join our mailing list, and sign up for premium content. Have a good one and see you next time.

• 1:00:17Speaker 02

  All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast.