Investment Opportunities in Bitcoin & Tech’s Global Spread (w/ John Burbank and Mike Green)


Michael Green: John Burbank. Incredibly excited
to have you on camera. We’ve talked to a lot
of times in the past but this is the first
time we’ve been able to do so in public. John
Burbank: It’s been a while, too. Michael Green:
It has been a while. We actually have not
chatted all that much. A lot has changed for
you personally, and also for the industry.
We’ve talked a little bit about this in the
past in terms of the dynamic and change. You
were one of the early individuals to bring
your hedge fund’s focus onto the commodity
space. You and I met fairly early on. You
were very focused at that time on the emergence
of China, the demand for commodities, and
the 1998 through 2007, 2008 era. Even as late
as 2011, we talked about. You switched really
dramatically. I’d just be interested to understand
what the thought process was that brought
that to your attention and then caused you
to switch a little bit. Maybe you could talk
with us about that. John Burbank: What I learned
with markets is that price is could be misleading
or could be telling. You to go to figure out
which it is. In 2011, after being invested
for 10 years in energy, and 8 years in mining–
gold, I’ve been invested in for 9 years–
I had this weird experience where the three
commodities I was long all went up, but the
equities associated with those commodities
all were down. Like, gold was up 17% in 2011
and they gold equities were down 17%. Just
didn’t make any sense. The top, I remember,
was, I think, when Osama bin Laden was killed,
I believe. I also remember reading a Wine
Spectator. I think the top in Bordeaux prices
was April 2011. But what happened was there
was a top in things associate with growth.
I guess you could say there was a risk that
was removed. But the spot commodity actually
acted quite differently from the equities.
The equities were discounting the future or
perceptions of the future. It was almost like
Chinese were sellers in 2011 or something,
but the market didn’t know. Anyway, after
10 years in evaluating post-crisis what the
macro situation was, and how much growth could
we really get out of the world– Europe was
a challenge– I just came to the conclusion
we weren’t going to get enough growth in the
world. Not enough to support it. And actually,
I should trust the equities and not the commodities
that I was long. If you’re long a commodity
equity, you’re really long the commodity equity.
You know? You think you’re long the commodity,
but you’re really long the pricing, and liquidity,
and the equities. It was very difficult. I
sold every position I had except for 2. One
was a refiner and one was a specialty chemical
company that got acquired a few years later.
I just got out. It was a real aboutface. My
team thought I was crazy. I think it was partly
a right brain moment. I didn’t know that I
was right, but I thought there was a good
chance I could be, and I had to re-evaluate
the world. So that’s what I did. And by the
beginning of 2012, I came up with a different
conception of how I should be oriented. Because
I’m always looking for what is going to be
different five years from now. It’s just the
way it works. Markets are totally repriced
five years later. I thought this was the end
of an era– 10 years for me– of being invested
in commodities. That’s where I got to a belief
that human capital was what one should be
long and I was just the opposite of commodity.
Michael Green: It’s actually difficult to
convey to people how hard that is for a professional
investor. Particularly somebody who had the
industry footprint as yourself. Right? Your
clients had heard for years about how commodities
were an under-appreciated investment, that
the dollar was a problem, that China was going
to grow to the moon, et cetera. As you mentioned
your team probably resisted quite strongly.
You probably built a team that had mining
experts, and very little of the way of human
capital. It’s a remarkable change. And it
also creates conditions in which, paradoxically,
from an institutional standpoint, it creates
a tremendous amount of uncertainty. I mean,
you must have receive not just pushback from
your team, but your investors probably said
quite sharply, what are you doing? gold is
at all time highs, and oil is back above $100
a barrel. These stocks are incredibly cheap
if you think of them as investing in the commodities.
Am I incorrect in that assumption, or was
that was something you really faced? John
Burbank: It’s true, but this is a left brain
and right brain activity. Your right brain
is spotting patterns, using intuition, and
sort of animal senses. Your left brain is
logic, and the lawyer, and the accountant.
I think I have a good mix of the two. I find
that too many people in investing and finance
who are left brain focused and can miss signals.
I don’t know. It wasn’t easy. I didn’t actually
have an answer for what should I be doing.
But a couple of months later, not that I knew
I was right, but I was like, I think the structure
of technology– for being surrounded by it
here and investing in some of it at that point–
I thought the structure of technology– which
does not mean revert, right? It’s a very fast
changing thing with a lot of nonlinear outcomes–
I thought the structure of technology was
favoring the highest quality human capital,
which is essentially the opposite of commodity.
The opposite of lowest cost available commodity.
By thinking about that and being around it
here, and knowing that the cost of creating
technology was just getting cheaper and cheaper,
I came to the conception that maybe the surprise
is how much more valuable the A-students in
the class is. Really, you should just be be
long the A-students in the class, and short
the rest of the class. It doesn’t matter.
Whereas commodities, you’re looking for that
something needed that has a very low cost,
and is cheap to transfer but doesn’t actually
require tremendous ongoing sophistication.
That was like a set of ideas and thoughts
that had sort of evolved and emerged. Then
I realized I was by selling, I was making
way for it. The biggest problem was that I
ran diverse sectors, and I had many different
teams. I didn’t decide to abandon the mining
team and abandon the energy team. Energy peaked
last in 2014. But anyway, I do know that markets
every five years look completely different
than they did 5 years before, and security
prices move so much that it’s always this
new recognition of change. And I focus on
change. That’s the thing that is dependable,
but it happens in different ways, in different
areas. It wasn’t until the beginning of 2013
that growth really took off. That’s when tech
really started to do better, I’d say. It wasn’t
so clear that tech was absolutely the thing
to do, I think. Michael Green: Well, it definitely
wasn’t. You mentioned something that I think
very few people are able to articulate as
well as you just did, which is that technology
does not mean reverting. You and I both came
of age you know bracketed on either side by
a technology bubble. Right? The ’96 to 2000
time period, you and I both looked at that—
John Burbank: It makes you think it means
reverting. Michael Green: Yeah. The assumption
was valuation is what matters. If we look
at things like mining companies, they were
deeply neglected, and therefore they are of
value. Right? John Burbank: And they were,
but mainly because of 20 years since the top.
And China was coming and people didn’t know,
is what ending up happening. And the dollar
got cheaper and was also a place to avoid
the carnage of 2000s. Michael Green: Yeah,
I think that’s absolutely correct. I think
what we’ve paradoxically seen is that value
is actually now had its longest run of under-performance
It had a very brief window, basically from
2000 through 2006, in which it made up a lot
of lost ground. But if you actually look at
that approach to investing, it’s been an unmitigated
disaster for the past 30 years. It always
sounds far more rational. Who wouldn’t be
pro-value? Who wants to be the momentum guy?
That makes you sound like a moron. But really,
there is something deeply insightful about
that idea that mean reversion is kind of silly,
and the idea that energy, as expressed by
petroleum or other sources, is going to be
as large a component of our purchasing basket
as it was historically. It’s very hard for
people who made a lot of money and who built
up a notable reputation on that basis. You
mentioned you made this transition and you
didn’t abandon your team. Your mining team,
et cetera. You were 100% right. But what challenges
did that create for you organizationally?
How do you think about that transition, that
decision not to just wipe the board and move
on in a different direction? John Burbank:
Well, part of it was you can always be short
things that you were long but you do also
need your team to believe in these things.
Again, I had this idea that this is was potentially
a big transition. So I started to do that.
Be short commodities, instead of long, and
see them as a hedge to things with growth
and more human capital. Running a diverse
funds where you want the VOL to be relatively
low, it’s hard to– and we had limits on how
much we can put in any one sector. I actually
had risk-based imposed limits on where we
could put capital. I would have been better
off retrospectively saying, this is my belief,
and when I validate this hypothesis, I’m just
going to go focus on this and forget the other
stuff. I believe that’s the right thing now
because I think, and what I’ve noticed for
a long time, is although the economic growth
may be OK– and right now it’s good, but I
don’t expect it to be that great– the change
is actually increasing regardless of economic
growth. Because, structurally, as tech advances,
it releases new information. In fact, the
new information growth is tremendous. And
that new information, therefore creates realities
and recognitions that you didn’t have before.
And so, it changes people’s behaviors. I think
now, I would’ve been better off saying– when
I really got to believe this was the case
in 2012– I’m just going to focus on this
because that would increase my chances of
understanding it and getting a return from
it. But it would have added to my risk level,
and it would have been a meaningful change.
What I did personally was essentially start
investing much more heavily with my own capital
to test this hypothesis. I had a belief that
San Francisco real estate was going to really,
really well. I was the biggest bull that I
knew because I thought human capital is what
really meant the most, and the density of
human capital. Human capital basically attracts
other human capital. I thought, I’m going
to test this with my own capital and not diversify,
and get more feedback, more information, and
see how it went. It did go well. I didn’t
put a huge amount of time into it, but I tested
it my own personal capital. Essentially, what
I’m doing now is essentially saying, I am
not going to allow the drag of things that
are not interesting or that fit my hypothesis
slow me down. I’m actually going to focus
my attention– which is limited, like everyone’s–
on what I think is going to be the next 5
years. I learned I actually would have been
better off abandoning more and betting on
this belief. Or at least, working as hard
as I could to validate the hypothesis. Even
though I know people want to put you in a
box. They want you to do something repeatable.
They don’t really want you to diverged from
that. But markets change. They learn. They
reprice. And then, the world is actually a
different place 5 years later. 10 years later.
Globalization has created a different place.
Tech’s a different place. The thing that absolutely
threw me out of this was Central Banking.
Central Banking essentially created a non-mean
reverting supply of liquidity, which you could
say removed a certain prudency of those who
are looking for changes of liquidity that
create changes of price, and desire to be
aggressive, or conservative, as a mean reverting
thing, and allowed, in a way, this progress
towards this ever-increasing tech-enabled
future to happen even faster. The human limitations
of not wanting to prevent that made me think,
I’m not going to subject my career and capital,
and investors capital, to getting that behavior
correct when this trend in tech is only getting
more powerful. I find it now hard to have
a discussion about almost anything without
including technology as part of it. Michael
Green: Why don’t we do that, then? Let’s wrap
that up. You’ve now chosen to move basically
to a private office. You don’t accept outside
capital anymore? John Burbank: Not completely.
Michael Green: OK. John Burbank: We have one
fund, special opportunities fund, that is
running, and we started 2 crypto funds Jan.
1. A crypto-dedicated fund. I do not manage
it, but my team does. And a fund to fund,
much in the way fund to funds operated in
the rise of hedge funds 20 to 30 years ago.
We started doing that. They’re all crypto
funds. I can do, and I did, crypto in the
special opportunities fund. We bought Bitcoin
about a year ago. But that is more of a traditional
fund. Michael Green: The special opportunities
fund. Does that have an evergreen focus, or
is there a particular area that you’re focused
on? You’ve been very vocal about Saudi Arabia.
John Burbank: The biggest weight is in Saudi.
About 2/3 of the NAV is in Saudi equities
that are now gaining interest among international
investors. We’re waiting next month see if
MCI will include it, tell the market that
they’re going to make it part of the index
in the future. The FTSE has already done that.
That’ll be a big moment for that. But I also
have some tech exposure. I have some crypto
exposure. I actually do have some mining exposure,
because it’s sort of events, and I think it’s
kind of mispriced. But my orientation really
is around when the Saudi trade is over, meaning
when it’s now part of what everyone owns,
and it’s been repriced, it will lose a lot
of appeal for me in terms of owning the equities.
Saudi as a society that’s changing, as it’s
liberalizing, as it’s letting in the world,
bringing in the world, the speed of which
I think that’s going to happen– that is remaining.
I’m engaged in that in a variety of ways.
Michael Green: That’s an area that you and
I share an interest in, and I would argue
for somewhat similar reasons. The irony as
you talk about this is that organizations
like FTSE, and MSCI, and the growth of passive
investing, and the growth of modern portfolio
theory allocation methodologies have basically
forced an increasing portion of the capital
globally into following the lead that’s created
by the FTSEs and the MSCI, basically. If something
is included in the index, it can have an extraordinary
impact in terms of the liquidity that flows
into a previously illiquid market. John Burbank:
Our data said that the year leading up to
the inclusion, the passive inclusion was over
50%. For every instance, on average, there
was over a 50% return. Not all the returns
are positive, but the point is the anticipation
of all that future liquidity leads to a lot
of new capital, and that’s what’s starting
to happen in Saudi just this year. I think
we have a really good next 12 to 18 months
ahead of us, and it is fortunately combined
with oil being a lot higher than people expected.
The sentiment around Saudi and understanding
is growing, which is helping, obviously, the
allocation of capital from organizations that
are now, I could say, not interested in risk
taking, or are less interested in active management.
This is a very active management situation.
Michael Green: You mentioned mining and you
mentioned that there’s some unique catalysts
there. You want to talk about that for a second?
John Burbank: What’s interesting in mining
is the increasing intensity of certain metals.
In electric vehicles, or iPhones, or this
increasingly electronic future. So there’s
actually not very much communication, or not
so much between the tech guys and the mining
guys. These the two opposite ends of the spectrum.
You take something like cobalt which is just
going up and on the right, there are interesting
situations that one can you invest in with
high expected returns. Even copper. We think
copper, the intensity copper relative to the
supply the known supply of copper means copper
is actually do pretty well if you wait. It’s
easier to, with a capacity-constrained industry
like mining, it’s easier to get that down
when you realize there’s a demand driver that’s
independent, somewhat, of the economy that
makes it worth doing. Mining seems to be an
asset class that is losing investors. We can
find things where we think it could go up
3x or 5x if it’s priced how we think. It’s
volatile, you have to wait, it’s a commodity.
But that adds interest. I think what I’ve
decided to do in this fund is to abandon trying
to limit risk. The answer, at least for me
in public managed funds is to size up what
I think are superior risk rewards and hold
them, and have a diverse enough group where
I’m OK and unhedged enough. Which means I
don’t really have to be so hedged if I own
Saudi, and some mining, and some tech, where
I don’t really care so much what happens in
the market every day. I think that’s a definite
way of achieving better returns, but it is
embracing more volatility. I’ve left the game
of trying to create alpha and diminish VOL
for short duration jobs and incentives. That’s
definitely what I’ve left. Saudi is unusual
because very few people own it. Eventually,
everyone’s going to own it. It’s a predictable
amount of money that it’s going to have to
buy all these stocks that I own. I understand
better than the market, I think. That’s a
special case. And it’s not really correlated
to a whole lot else in the portfolio. That’s
how I think about it logically now. But the
real story, in my opinion, is how technology
is affecting the big parts of the economy,
and the big sectors. That, I think, is the
big– that’s my hypothesis for 5 years from
now. We look back and say, I can’t believe
how much technology affected finance. I can’t
believe how much it has affected the auto
sector, or education, or construction, or
really big parts of the economy that just
haven’t changed that much. Health care is
going to take longer. Health care is ultimately
the greatest good and will change a lot, but
it actually is starting from a deeply non
information tech place. in my opinion. The
provision of health care. So it’s going to
take longer. Michael Green: I would agree
with that. You talked about the human capital
aspect, and you also talked about commodities.
You identified a few areas of commodities
where you remain focused. I think what people
broadly, from my perspective, under appreciate
about the commodity cycle that we encounter
was that the conditions were set in place
by the lack of investment for the 20 years
before that. And so, when we closed up the
capacity it’s very easily explainable, if
you look at it in hindsight, and say, well
we had significant excess capacity that emerged
in the 1970s, early 1980s. As China emerged
as a consumer, that capacity utilization tightened
up. By the time you and I came on the scene
in the early 2000s, that capacity was such
that we were rapidly drawing down inventories
and creating a condition in which you needed
to allocate the scarce resource on the basis
of price. Things like copper or cobalt– you
highlight the electric vehicle dynamic. I
mean cobalt is primarily used in the cathodes
if I understand the chemistry correctly. The
contribution to an electric vehicle in terms
of the price of cobalt is immaterial. You
will choose to steal that cobalt price from
somebody else by raising the price that you’re
offering for it. That shows up as profits
and future investment in additional mining.
The other side of that is something that is
deeply under-appreciated. BHP and Rio used
to have these charts that showed the copper
utilization or the iron utilization per capita
for China versus the US, Korea, et cetera.
Those who remain super bullish, those in 2011
and 2012, would point to those charts and
say, we’ve got all this demand ahead of us.
But there’s a competing force, which is technology.
Technology figures out how to use less cobalt
or finds a substitute for cobalt, or find
a substitute for the first one that really
began to tumble, which was nickel, if you
remember. Nickel, the Chinese figured out
that you didn’t need to use nearly as much
in terms of the raw material. You could create
this bastardize thing called “nicro pig.”
They lowered the price from $20,000 a ton
to $7,000 a ton. It’s just interesting to
see somebody who grasped that the two can
be related. That commodity is not all about
metal bending, and caterpillar tractors, et
cetera. It’s also about this idea that technology
is proceeding apace and raising the value
with which those commodities can be used.
John Burbank: I always try to understand,
what is the biggest picture, the most important
macro change? I guess I’d say I believe we’re
operating on legacy platforms throughout our
society that we’ve gotten used to or have
changed incrementally in our last 20, 30 years.
But I have this feeling we’re in the last
days. Meaning there’s another 3, 5, 7 years
of these platforms. And then we’re moving
to totally different platforms. It’s like
it’s like a platform shift in technology,
like from mainframe, to client server, to
cloud. Or whatever. It’s very important. This
is my hypothesis for what is the big shift.
That now we’re ready psychologically, and
we’ve been trained as consumers. We’re ready
to actually adopt broadly, to change platforms
in all these big sectors. Because the consumer
internet companies are the biggest companies,
but it’s not like they– I mean, e-commerce
is changing retail slowly over time. But it’s
not like they took over massive industries
to be tech industries. It’s like they created–
the consumers bought in and they enable this
exchange of value and then vivality and dominance.
But now that the consumer and internet companies
are the five biggest companies in the world,
or whatever they are, it’s hard for anyone
to argue that tech is not essential and it’s
the future. But it’s those consumer internet
franchises that are those companies. I believe
that we’re globally ready to now change. The
risk has been reduced. Among my private investing
in some of these big, old sectors that haven’t
changed very much, I’m putting a lot of time
into crypto and blockchain as the tech change
in finance. Finance is essentially bigger
than health care. It could be measured as
being bigger than health care as a percent
of GDP. It’s hard for me to not want to put
time into that to test this hypothesis there.
I do not think crypto is in isolation. Actually,
I think crypto is way more believable and
understandable than autonomous driving. Conceptually,
the idea that we’re not going to drive our
car and we’re going to be safer is way harder
than the idea of digital currency. Michael
Green: It’s interesting when you talk about
crypto and you refer to it as digital currency.
Because I think that’s certainly the image
that most people have of crypto, is Bitcoin.
Which has certainly proven to be a profitable
investment for many who’ve been involved with
it, Ethereum even more. I had somebody explain
crypto to me in a really interesting concept,
which is that it creates the potential for
scarcity in digital assets. John Burbank:
OK it’s true. Michael Green: We’re all seeing
this. We’re seeing paywalls begin to emerge.
We’re seeing less free content be available
on the consumer web. But for the first time,
you’re creating the conditions that actually
allow you to truly have micro-transactions,
as something that is not advertising supported,
which is basically a spray and pray sort of
approach. You have the potential to create
scarcity in digital assets. It is very compelling
to me from that standpoint. The idea that
it’s like currencies strikes me as a little
difficult. John Burbank: It’s going to be
a lot of different things, I guess. I think
instead of arguing about what it is, or what
it isn’t, I’m saying I think the willingness
to change to a new platform is underrated.
What I’m saying is, most of these industries
involve some sort of regulatory agreement
and a corporate initiative. What’s fascinating
to me– instead of arguing about the technical
merits, or it is or it isn’t whatever– what’s
fascinating to me as a global investor, but
based here in a tech center for the last 25
years, is the parallel development of crypto
around the world, what I see as the recognition
on a regular basis. It’s multi-jurisdictional
and essentially competitive. Meaning everyone’s
trying to figure it out together. And even
though there’s such a limited exposure in
terms of assets or utility, the awareness
is extraordinary. I don’t know what to compare
it to. It’s still really early, and it’s young.
it’s not mature. It can’t actually do what
it’s going to be able to do. But it’s that
cultural shift to it, to be willing and interested
to adopt. You’re seeing it. Obviously, you
saw it initially with individuals. Fringe,
and retail, and whatever. But it’s now a regulatory
must-do everywhere in the world. The buy-in
from corporates, the increasing buy-in around
the world, is extraordinary. And it’s such
immature technology. It tells me that we’re
at a different stage culturally and globally,
simultaneously. I’m betting that you want
to leave. You do not want to own value. We’re
leaving these systems. We’re going to. Technology
is only taking on more and more, and yet it’s
both less accessible and more accessible.
It’s less accessible– it’s harder to understand.
It’s hard to understand innovative technology
analytically. But it’s more accessible because
it’s affecting more of your life, and you’re
accepting it as affecting more of your life,
which is why this autonomous driving, as we
move to these different stages of autonomous
driving, that would have been unthinkable
just a few years ago. It’s still hard to believe
but you know we’re going there. I guess I
think this is on a nonlinear path of only
more changes happening sooner. As a macro
thinker, not a technologist, I find the power
of that and the externalities of that, and
the unintended consequence of that, really
fascinating. It makes me want to put a lot
of my attention into it to see what that means,
and see what it affects other things. I can
say that as an individual, a consumer has
limited ability to actually be involved in
these new platforms in a meaningful way. I
know with genomics, you can go to 23AndMe,
and a few other companies, and get some genomic
data on your own, but you can’t your doctor
treat you that way. It’s not ready to do that.
So you can participate, but it’s of limited
value. But with crypto, I have this hypothesis
that people are able to buy it, to touch it,
to look at it, to participate in it. And it’s
not only for that in itself. It’s like the
most accessible thing of technology affecting
big industries. It’s liquid. People can learn
from it. I’d also say because it’s liquid,
I think there’s more information that’s being
passed around the world in this sector than
anything else. It makes sense. Because instead
of it being private companies in a certain
region, like Silicon Valley, where it’s hard
for the rest of world to see– it’s hard for
me to see into China without actually being
involved in China– because it’s liquid, I
think there’s a lot of information being passed
around about what works and what doesn’t.
These new organisms are being introduced into
this ecosystem where you get to see what works
and what doesn’t. And It’s changing as I’m
spending time in it. I’m seeing it change,
and I’m just getting ready for these kinds
of changes to be throughout our economy. The
desire to change is growing is what I’m saying.
I’m finding it harder to invest fully in the
stock market. Because the stock market actually
doesn’t get so many of those companies, and
just betting on losers is hard in a ever-growing
Central Bank-driven world. Crypto is actually
a way of participating in leading edge technology,
and so I’m doing that. To do it for itself,
to understand it, as well as part of a broader
participation in these platform shifts. Michael
Green: It’s interesting hearing hearing you
talk about crypto, and doing it both eloquently
and passionately. I’m a Silicon Valley native.
I actually grew up here when it was still
called Santa Clara Valley, and had a front
row seat to the early home computer environment.
I wouldn’t even call it the PC movement. Where
you had TRS-80s and VIC-20s and Sinclair 4k
machines, et cetera. And before that, even
the hobbyists. The Steve Jobs and the Steve
Wozniak’s of the world. And it was similar
in a lot of ways. Where you couldn’t actually
do anything with these things, but it was
participatory. The technology was rude enough
and open enough that lots of different people
could do stuff. Now, paradoxically, that also
gave me a front row seat to when all that
crashed in ’84, ’85 ’86. Which occurred alongside
the introduction of the IBM PC. Most of the
world looks at that as if that was the nascent
founding and that’s where the revolution started.
But ironically, that was where a wave broke
and crashed. There were lots of competing
technologies, and lots of competing ideas
that suddenly were ossified. This is the standard,
and this is how it goes. John Burbank: Think
about how much riskier it was to invest in
stuff back then. Michael Green: It was extraordinarily
risky. People forget. Intel has obviously
changed today, but it was roughly the time
where Intel lost the memory market to the
Japanese. That was the real loss there. And
everybody was convinced that Fujitsu was going
to dominate the multiprocessor in the future.
Didn’t work out quite that way. It was much,
much riskier. Very similar. Huge interest,
and within the community that I grew up in,
a huge bubble that was created. But then it
crashed on a standardization. Is there anything
out there that you see in crypto that’s similar
to that standardization moment where people
suddenly say, aha, this is actually the useful
variant? It could be Ethereum. That would
effectively make Vitalik Buterin the king
of the world. John Burbank: It seems to be
there’s the store of value, use case, which
is Bitcoin and a few others. That is as old
a problem as anything. Gold has served a purpose
there. There’s payments, and there’s a few
different competing– and that’s farther behind.
But that is a real benefit, because there’s
a lot of friction in payments in our society.
It really feels incredibly expensive to have
a Visa transaction. And then, there’s the
smart contracts. The technology. What technology
will things run on. There’s growing competition
there. I have a hard time dismissing the store
of value. I think there’s a reason Bitcoin
was the first thing that was done, and has
been safe, I guess. A safe bet. I think it’s
still early, and there’s a lot of lessons
in the tech world of what ends up winning.
it’s like, where do the developers go. A lot
of people are making bets on where to put
their attention and time. Who adopts. Who
gets market adoption. It’s so early there.
And then later, applications. It still feels
like it’s really early. But as I said, I think
because these things are liquid and price
changes is comprehensible to everyone in the
world, and it potentially changes their behavior
of where they’re going to put time and what
they’re going to change, I have a view that
it’s going to accelerate the transfer of knowledge
to what is actually winning formulas, and
will lead to either magnificent results. Ethereum
is probably the most spectacular single investment
that I’ve ever seen in my life, and I didn’t
get a whole lot of it in my portfolio. Had
I actually just started a year earlier in
this universe, I could have had a much greater
return. But I’m just saying, this is a platform
shift that will grow with time. And it’s hard
to understand. I don’t have to understand
it. I’m learning what the properties, are
and what are the potential ramifications.
And then, what are the effects of it as it
changes other things, and what is the effect
of block chain. But I’m looking at it in the
context of, this is just one sector. One tech
breakthrough that’s changing one area, and
it’s really early. The same can be said autonomous
driving in auto. The same could be said of
genomics in health care which is actually
the most incredible. Knowing your personal
genome and being treated about that. It’s
just mind boggling that it can be delivered
to you for less than $100. A negligible a
of money. That’s incredible. But the health
care system is not ready to do that. My pattern
recognition is that we’re just on legacy platforms.
We’re waiting. I think the culture is ready
to change. Let’s just use crypto. It’s in
finance, yes. It is in and of itself. But
it’s also representative and the most accessible
of all the new technology platforms for consumers.
And it’s happening and it’s accessible around
the world at the same time. I think Asians
are culturally taking to it much better, or
faster than we are in the West. I’m ready
for big changes in security tokens, for instance.
But I don’t need to be precise. With the duration,
you don’t need to be as precise as you do
in managing low-balled public market funds.
I do think this is the big trend. I’m looking
for something that is bigger than this. Maybe
I’ll be wrong. Maybe it’s going to take longer
for these shifts to happen. But as I put in
the time, I just think this is representative
of a bigger perception change around the world.
And now, I think the risk is not doing. The
corporate risk is not adopting and getting
closer to this. Take blockchain. That’s my
perception in regulatory, as much as China
has stopped it temporarily, the risk is you
ban it, and then your human capital goes and
builds systems in other places. Other jurisdictions.
That’s my view. That’s a pretty big thing.
Michael Green: I would agree with that. Again,
you mentioned before that the right brain
is a pattern recognition tool, and the left
brain is working on something very, very differently.
One of the challenges I think that people
have when you have this type of innovation,
and I certainly struggle with it, is that
you want to draw the historical analogy. When
you hear smart contracts, you’re like, oh,
OK, they’re going replace lawyers in the negotiation
of your mortgage. Or they’re going to replace
lawyers in the negotiation of large scale
M&A. The irony is that large scale M&A has
solutions that are incredibly expensive, but
as a fraction of the total purchase price,
it’s relatively small. What tends to happen
when you have that type of technology emerge
is that contracts proliferate. You engage
in contracts. A smart contract enters into
something that you never thought of before.
A magazine subscription is technically a contract.
It’s not worth litigating on either side,
but it’s certainly one way of dealing with
it. And as we moved into the internet era–
and I don’t mean to stick on the advertising
example– but as we moved into the internet
era, a magazine subscription was not something
that anyone was going to litigate with you
about, did you improperly access my website.
And so, you chose the next best choice. Which
is, well, we’ll just make it available to
everybody, and we’ll do so by advertising.
Then the advertising networks exploded in
value. If you move into something like smart
contracts, where I can actually re-enter into
a magazine contract, that may be very real
risk for some of these technology leaders
that you were highlighting before. John Burbank:
You can only see so much of the picture. It’s
a a Polaroid. It’s changing in front of your
eyes, but it’s still very fuzzy. Do you have
to wait until it’s a full on, perfect, as
good as it’s going to get picture before you
say, OK, I’m going to participate? Invest?
Learn? Or do you say, OK I’ve seen enough
to say the probability is that it’s going
to turn into a picture that I like, and others
will see it, and others will follow, and adoption
will happen. With crypto, I see it’s changing
finance and startups. I see public companies
looking at it. I see all these potential securities
that could be security tokens that wouldn’t
be public companies, but have benefits to
create holders of these. There’s a reason
why it should be liquid. More liquid than
it is. I guess I’d say that I’ve seen enough.
I’m putting time in to say, I think this will
develop into something much more meaningful.
Seeing what it’s going to become before the
market is 101 in investing. It’s like, oh,
my god. You should invest in this company,
this asset class, this place, this whatever.
Again, I’m using this as partly the most liquid
and the most, I think, globally interesting
right now. It’s like the Vanguard of what’s
happening in every old sector. Finance is
a big one. And so I’m looking at it like,
it’s not only for what it is and what it will
become. The adoption is also a cultural- – that
rate is also helping me see the rate of change
in many other things. Those are the things
that aren’t very liquid, and may involve more
gatekeepers, like in health care. It’s starting
in finance. It’ll end in commerce for a lot
of this. It will be very, very volatile. There
will be lots of losers, but there will also
be, I think, more enormous winners in the
asset class than anywhere else. I think. And
I think, if I’m right, that being liquid and
being globally developed at the same time
is going to compress the time it takes to
actually get from, oh, my gosh, what is this?
To, oh, that’s the solution for some protocol
need, or horizontal need, or whatever. If
that’s correct, then actually, the chance
of appreciation is higher here than in most
other asset classes. Even though it’s already
risen. A lot of it’s already risen so much.
It’s hard to keep up with. It’s very hard.
it’s so much to keep up with. But by putting
time into it, I feel like I’m putting time
into the main change happening in society.
I’m expecting, 5 years from now, we’ll be
surprised how much we were willing to shift
our behavior, because others were willing
to shift their behavior. Because we’ve had
the iPhone for 11 years and social media for
whatever. 15 years, or whatever it’s been.
Longer. I think we all were trained. We were
socialized. We can’t imagine not having our
phones. We can’t imagine not having our platforms
that we depend on. And now, I think we’re,
in groups, going to make the corporates change,
and the regulatory bodies change. I just think
we just weren’t ready to change this way.
Maybe I’m going to be wrong by a few years,
but maybe not. If you think that, what do
you do? What is the best way to take advantage
of it, is my question? is it through traditional
equities? It’s hard to get there at this valuation.
With the uncertainties of central banking,
with the lack of leading edge early-stage
technology, because companies just don’t go
public that often. Particularly, if they’re
not dependable. Dependably growing. So anyway,
this led me to want to spend a lot more time
in what are fringe markets, like crypto, or
in private markets, like venture. And yet,
I find that it’s just growing. I’m finding
China is a totally separate market from the
US now, and to access that you have to go
through a different path. But I don’t know
anything bigger than this. I wish I had understood
what Central Banking was really going to mean
to asset prices. I had hypothesized that could
happen. But I just didn’t bet on it happening.
This, I’m betting my attention, and professional
time, and personal capital. If I’m right,
then it will grow into an institutional thing.
Everything we’re doing at Passport on the
crypto side is an institutional– we’re trying
to be the most institutional, sophisticated
partner to the ecosystem, but also investor
for institutions when they ever decide to
invest. Right now, family offices want to
invest and almost no one else does. We’ll
see. We’ll see. I think it’s going to change
faster. But this is me learning what I think
is important. But I’m not an expert evaluator
of technology either. Michael Green: You mentioned
this interesting dichotomy that exists. Where,
paradoxically, markets are at all time highs.
And yet, as you point out, many of the platforms
on which valuations are built, or on which
business models are built, you think are going
to change with relative rapidity. If we’re
looking at 5 to 6 years, the competitive advantage
period for many of these corporations that
enjoy very robust valuations are very much
at risk. Segue for a second. How do you reconcile
that? And secondly, you’ve offered a very
clear articulation of the challenges that
you had in making the transition within the
public markets, and you’re much more interested,
and you’ve been extraordinarily successful
on the private side. What do you think is
the core challenge that the traditional hedge
fund manager is facing, or that the industry
is facing, in terms of alpha generation? Why
do you think it’s changing? Why do you think
it’s been so difficult? John Burbank: I like
to say that I want to invest in things that
have never happened before, and I look for
the things that haven’t happened before, because
that’s not going to be priced correctly. I
guess, what wasn’t priced correctly was the
absolute continuation in growth of liquidity.
I’d say also, at least for the S&P, tech is
taking on more and more in leading tech companies,
which are not very sensitive to the economy,
I’d say. Also, I guess if I had to use a positive,
non-rigged system view, I’d say that if globalization–
but then, really, tech– is generating more
and more information that’s usable, you could
say that is actually being pulled into corporates
in the US and the developed world. Increasingly
to their benefit in one way or another. Making
them more efficient. The lack of recession,
or recession qualities, the lack of liquidity
drain, and this slow increasing of ability
to make use of not only tax advantages, but
data, leave me to think, OK. Until it cracks,
who knows where it goes? The problem is I
just can’t depend on my analysis of central
bankers. When they will or won’t. Like, the
Fed not hiking last meeting. I don’t understand
that. But that’s the hazard you have. It’s
a binary bet. They either do tighten more
in the market things, and things go down.
Or they don’t, and those same things go up,
and you have short duration capital. You have
one result or the other. It’s very hard. I
decided I do not want the outcome of my bets
to be dependent on getting the central banks
right. No matter how much time I’ve put into
it. Yes, it may be the tightening here is
going to lead to 20%, 25% lower, but I’m not
counting on that. I’m really not. I do think
that the increasing amounts of data, and the
availability of opportunity, and the growth
of tech, and higher margin businesses, is
just going to keep going. But I’m also captivated
by these platform shifts that you can’t access
through public equities. I want to be closer
to that. I want to understand them. If I put
all my time into trading public equities,
I’m starving myself of understanding these
other things. I decided that it is changing,
and I can understand some reasons But some,
maybe I can’t. I’m going to back away from
that and adopt other means. Ultimately, a
high return on capital with a longer duration
is what you seek as an investor. So I’m seeking
those things where I can get that, and get
that transfer of information to my head to
understand, oh, this is the way it’s going.
Maybe I’d do other things with that. But attention
is a big concern of mine. You know, we all
have the same amount of attention basically.
The inertia of you get paid for doing jobs
and things seems to be losing value in financial
markets. I think taking them to 0 is part
of the process to grow your attention in the
places that are uncertain, but are going to
be, in the future, very impactful. That’s
what I’m doing with crypto. I’m not saying
I can out-analyze these things. I’m saying,
I think this is the liquid tip of a massive
platform shift that we’re doing. Yet, it’s
really early, so I don’t want to challenge
it too much. An analogy I use is, you don’t
evaluate kids on what they can do right now.
You’re evaluating early technologies and young
people with what you think their capabilities
are later. Or athletes, or whatever. It’s
relative to the norm, and relative to expectations.
So, I’d say with the crypto and blockchain,
it’s just so sudden, that our attention is
there. It’s too early to actually accomplish
the things that you think they can, just like
young people can’t accomplish what they can
accomplish when they’re 25, or 35. If you
could, you’d definitely want to bet on the
best soccer player, and bet on the best you
know “mathlete,” or the best whatever. The
best piano player. This human capital is also
taking society, a society that’s willing to
be taken, to places it didn’t think it was
going to go. It’s hard for me to consider
a bigger trend than that as an investor. Michael
Green: Areas that you and I very deeply agree
are in the primacy of human capital, and on
the importance of that. One of the things
I would point out that I think this is a fascinating
little tidbit is right about the time that
you were talking about your epiphany in 2011
is the date, that much of the research in
China indicates that their labor force began
to contract. John Burbank: Oh. That’s right.
Michael Green: It’s a very intuitive– obviously,
you weren’t looking at that data. But for
me, that was certainly something I was monitoring
quite closely. The minute you exhausted that
huge excess labor supply, suddenly the value
of human capital began to rise. You saw this,
I would argue, across the world. It was camouflaged
in a lot of ways. You had models like Uber,
et cetera, that were brought in when human
capital was in surplus in 2008. But things
began to change rapidly, and today you’re
seeing the lowest unemployment rates we’ve
seen in a long time across the developed world.
Those who can efficiently utilize human capital
are really in a much stronger position than
those who are struggling. John Burbank: I’m
also seeing that other parts of America are
now learning. They’re changing. They’re adopting
more of what’s made Silicon Valley or the
west coast do so well. The attention is on
what has worked and how things are changing.
I’m just prepared for 5 years from now. We’ll
look back and say, oh, my god, can you believe
you didn’t invest, or you didn’t do these
things that were emerging? I want to be involved
in those thing, even though there’s uncertainties,
because I want to learn these essential truths
of, oh gosh, this is what’s going to happen.
Therefore, I can put capital again in that
asset class, that company, that place, that
whatever. Weirdly, I think leaving the stock
market more alone than I did is actually part
of the answer to get over the inertia of attention
and obligation on a fiduciary basis, and to
put more attention into these emerging platforms
that will really change our lives. I don’t
know when that’s going to end. Michael Green:
I don’t think it’s ever going to end. But
again, it’s a fascinating contrast. Because
if you think about what you’re saying, you’re
saying all that we know is about to change
radically. John Burbank: We didn’t have the
information. Michael Green: We didn’t have
the information. But paradoxically, particularly
in the markets– and this is where I spend
100% of my time right now– more capital than
ever before, and by orders of magnitude, is
actually now managed on the basis of what
happened in the past and what we can derive
from empirical finance. The Shiller Nobel
Prize in 2013. If we look at the history–
Eugene Fama also benefited from this. The
factor-based investing. If we just look at
what happened to the past history in terms
of price action, we can divine the future.
And that’s how 65- plus% of the market is
in these types of strategies. In my opinion,
you are very correctly articulating that what’s
happening in price right now is a distraction.
Increasingly, it is disassociating itself
from what that forward trajectory is going
to look like. It’s amazing to hear somebody
with your stature and your experience being
able to articulate that in terms of the focus
and saying, I needed to put that aside, and
now I’m looking at what’s going forward. John
Burbank: If central banks weren’t part of
the equation, it would a lot more interesting.
Because there would be the normal feedback
loop of millions of people and hundreds of
thousands of businesses making decisions that
have a normal, seasonal quality to it. It’s
felt like we’re living in a very balmy– we’re
not in a four season world now in the markets.
We’re in San Diego. They’re just keeping the
temperature pretty good. I think it’s because
they realize that they can’t create inflation
as easily as they thought. That was just not
in their models. So they’re finding, oh my
god, I can put a lot more liquidity and compensate
for this, and it’s not actually causing bad
things. know there’s some inflation. I don’t
think it’s going to last a long time. I could
be wrong. Demographically, I don’t think that’s
the case. Technology is a deflationary force.
I just think that’s not the biggest thing.
We’re in this era. We’re not in a previous
era. We’re not in the Warren Buffet time of
buying consumer stocks. We’re not in the beginning
of the internet era. We’re not in the crisis
era. We’re not even 5 years ago, before consumer
internet franchises were repriced. We’re in
this era. What should we do with our time
now? How should we benefit intellectually
and financially from what’s going to happen
the next five years? That’s what I’m trying
to pay attention to, and I think everyone
should try to pay attention. It’s just that
in this case abandoning what pays you current
income may be part of the solution to reprice
your own attention to something that doesn’t
seem like it’s that hopeful. It’s a lot like
leaving your corporate job and start doing
a startup, actually. It’s the same kind of
thing. But if you’re right, then that’s where
the money is. That’s where everyone is going
to be well-served for it. I think it’s going
to all happen sooner than you think, because
of the structural reality of tech, and the
release of all this information, and the cultural
willingness, I think, to go to the next platform.
That’s what I think. That’s, I think, where
we are. Michael Green: You bring up 5 years,
you bring willingness. I don’t want it to
be 5 years, but hopefully you’re willing to
sit down in the interim, and we can follow
up on some of these themes and see how it’s
developing. John Burbank: Great Michael Green:
John, thank you again. John Burbank: Thanks.

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