Something is different here that it just marked a watershed. I mean, never before in history had governments deliberately kind of shut down their economies and shocked them back to life again, unprecedented in the history of capitalism in my view. Andjust thinking about that and the easy way to graph it is just that the government spending on that ‘shocking things back to life’ led to government expenditure versus GDP in the United States at the same level as World War II.
And it just got me thinking like, well, you know, maybe World War II was a time when you would collect your thoughts and just do a portfolio review. So, maybe this is a good time for that. Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more.
Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level. Beforewe begin today's conversation, remember to keep two things in mind. All the discussion we'll have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance.
Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions. Here's your host, veteran hedge fund manager Niels Kaastrup-Larsen. Welcome and welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective.
This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle. Wewant to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macro-driven world may look like. We want to explore their perspectives on a host of game changing issues and hopefully dig out nuances in their work through meaningful conversations.
Pleaseenjoy today's episode hosted by Alan Dunne. Thanks for that introduction, Niels. Today I'm delighted to be joined by Mark Haefele. Mark is CIO of Global Wealth Management at UBS. In his role, Mark oversees $4 trillion in assets for UBS and the clients and directly manages $350 billion of assets. He is also the author of a new book just out called the New Rules of Investing. Mark, great to have you with us today. Lookingforward to speaking to you. How are you?
Alan, it is so great to be here. I do have a little bit of a cold, if my voice is a little raspy. And I hate to do this, but you said it was $350, which that's probably what my friends think I should be managing. But there was a billion in there, so, yeah. Yes, sorry, of course, in the excitement of such big numbers, I managed to leave out the billion. But yeah, we're talking about big numbers here.
So,you've got a very interesting seat and very much looking forward to hearing what you have to say. But we always like to kick off by getting a sense of how our guests got interested in economics and investing in the first place. So where did you pick up an interest in economics and investing? Sure, so, let me give you the overall picture first and then I'll double back a little bit.
So, the way I often tell the story to myself is that before I was 25, I wanted to be in the army and found myself jumping out of planes. And then I quit that. Andbefore, you know, I would also then wanted to be a mountain guide and found myself on a summit ridge of Mount McKinley, the highest mountain in Alaska. And then I quit that. Before I was 30, I was on the faculty at Harvard, and I quit that. Before I was 35, I was a partner in Tiger Cub Hedge Fund. And I quit that.
And then I joined UBS 14 years ago. Isayit that way not to say, wow, look at all the great stuff I did, but more because it’s pretty clear I had no idea what I was doing and there was no plan. And this is no teleology on the path. I actually got interested in finance my first day in graduate school. Inthe dormitory, I met two people. I met my future wife, and I met my future hedge fund partner, this brilliant guy, Lawrence Cam, who wanted to find a cure for AIDS.
I think he was 18 at the time and he was trading stocks on the side and he really started teaching me. And what a fantastic and momentous day that was. Good stuff. Well, that's certainly an interesting start to your career. As we mentioned, it's a big role. Obviously, UBS has a big presence in global wealth management and you and your team are overseeing the whole investment process. So, give us a sense of what's involved in your job. Obviously, you've got wealthy clients.
Maybe there are some kind of pseudo institutions you're managing money for as well. But, give us a sense of what that looks like for yourself. Sure. I mean, my role, I, I run the investment process. I'm the chair of the Investment committee for UBS Wealth Management. And I'm also an executive on the wealth management executive committee. So, you know, I have a variety of roles from working on the investment policy and choosing the investments.
I also oversee many of the teams that make selections of securities and funds for our platform. And then I have a management role on the management team directing the business. And then of course, I get to talk to the media and to see clients and really spend time with them, helping them understand their portfolios better and the markets better. And yeah, those are the main things that I would say keep me busy. Very good.
Well, as I say, you've written a new book recently called the New Rules of Investing. So, I think that's a good jumping off point. Imean,good to get a sense of why you wrote it, why now. I mean, who you're aiming it at and what's the key message you're trying to deliver. Yeah. So, I would say at a high level, the book tries to make three points or explore three questions. How do you make money today in markets? How do you hold on to the money that you've made?
And then once you've made it, what are our top clients, our billionaire influential clients, when they really have it together, what are they doing with the money that gives them satisfaction? And those are drawn from real stories from our clients around the world that I've been meeting with and develop relationships with. So,those are the three overarching themes in the book.
And I'd say driven by, you know, first my experience, how I've found investing has changed over the past almost 30 years that I've been doing this. The second, you know, when I, when I was in college, learning about investing, taking some finance courses, behavioral investing hasn't been, hadn't been invented yet.
But in my current job, it's just such an important part of everything we do that I wanted to kind of bridge the gap from my practical experience maybe to some of the more theory and investing for people. Andthen the third point is kind of the rise of impact investing among very savvy, sophisticated, intelligent and wealthy investors as kind of a future.
And that means using your balance sheet not just to, you know, not just giving away income, or money that you have, but using your balance sheet to make investments that catalyze change. Okay, very interesting. And I know in your book you draw the distinction between managing your wealth versus managing your investments, which I thought was an interesting topic in Itself. So, whether now is the right time to touch on that or not. But it did strike me as very interesting.
I mean, what do you mean by that? And what's the kind of big insight on that? Yeah, I mean, you know, I came from what I consider to be a very middle-class background. You know, I was the first person in my mother's family to go to college. And to spend time with our billionaires and things, you know, some of them have a very different mindset in some ways. I think in other ways, that we'll maybe talk about, you know, people of all stripes have some of the same, perhaps, money issues and things.
Butyou know, I always tell the story, we'll be at a dinner and invariably, it's, well, would you like chocolate ice cream or vanilla ice cream with your dessert? They'll just say, why not both? You know, it's a good management principle as well, never use an ‘or’ if you can use an ‘and’. Andyou know, that got me thinking about kind of differences and maybe a mindset of abundance. And it just kind of kept coming through in the difference.
WhenI started out, it was really about just thinking about maybe my brokerage account and just increasing the number as a sole measure of what I'm doing, the sole purpose. And these clients who are really kind of, I would say, living better, more holistic lives are really thinking about money as a tool in creating the life that they want. Andwealth, it's not only a high-class problem.
But I try to explain why there are ways that we use to try and make it, to bring it down, whatever that number is, where you say, oh, someday I'll be wealthy and happy, and I'll manage my wealth to try and bring it down and make it more about today. Because I do think there is this distinction about seeing the role for money in your life versus just being focused on one single number and increasing it. Yeah, okay, interesting.
Well, you mentioned how the investing world has changed over the last 30 years. And reading through the book, I mean, that comes through in a number of different kinds of ways. But maybe to touch on that, I mean, what do you think has changed? Obviously,there's been many structural changes in terms of passive investing and then, you know, the market microstructure. But from a practical perspective, in terms of what matters for investors, what would you say are the key changes?
Well, I mean, Alan, you've been doing this for many years and I'd be curious to hear how you think about it. But absolutely, the passive active is part of it but, I think, number one for me, so why now with the book? Ithink,first I had this amazing artist novelist, best-selling author Richard Morais, who wrote the Hundred Foot Journey, which is turned into the movie with Helen Mirren in it – a great film that I loved.
Andhe had been an editor at Barons and he came up to me, you know, one day and said, basically he said, I don't know why, but I want to write a book with you on investing. I said, why me? He's like, I don't know exactly why, but I just think you have a perspective or whatever. I put it off for a year, said no, don't want to do it, don't want to do it.
Butthen after the pandemic, you know, I knew with the pandemic it was, I mean we all know it was a massive change, but I tried to think about that something is different here, that it just marked a watershed. Never before in history had governments deliberately kind of shut down their economies and shocked them back to life again. Unprecedented in the history of capitalism, in my view.
Andjust thinking about that and the easy way to graph it is just that the government spending, on that shocking things back to life, led to government expenditure versus GDP in the United States at the same level as World War II. Andit just got me thinking like, well, you know, Maybe World War II was a time when you would collect your thoughts and just do a portfolio review. So, maybe this is a good time for that. And you know, that got me thinking.
Andreally, I think for me the biggest change is just the role of government in finance. And you know, when I started it was value investing. I was majoring in history and reading about dead people 10 hours a day in the library. To switch to 10Ks and 10Qs and sift through those was like exciting. So, I could really do that. And it was really Buffett style value investing. But I just don't feel that is there… Ithinkthere are people who can do that and be very effective, but they're very few.
And for the average investor, that's not really what they should be focused on. They should be focused on what the government is spending money on. What are the big problems that equal big money and then follow the big money. I think that, for me, is the way I framed that part of the book. Absolutely.
And as you say, it's been, I suppose, a structural shift in terms of the size of the deficits that we're seeing in kind of non-recessionary times, 6% to 7% deficit in the US even with the economy close to full employment. Imean,in your book you also kind of trace the evolution of that kind of government intervention in the economy over the last number of decades and you talk about some of the unintended consequences of previous interventions.
In that sense, do you see where we are now as obviously the culmination of kind of previous crises and reactions to crises, et cetera, or is it very much a response to that COVID episode that you talked about? Well, thank you for your close read. And look, you know, I have a history background and so I did want to kind of trace the evolution of government intervention. For me, the financial crisis, which I lived through and traded through, I think was a watershed moment.
Thisbook is designed for a wider audience to really understand what a watershed moment, the changes that were wrought in the financial crisis, were and are for today. The role of the Federal Reserve buying risk assets and what that has meant for people who have capital and hold financial portfolios. Andthere's no going back to the kind of free markets where the Fed was very hesitant to being involved.
I mean, in the pandemic, they rolled out everything they had done in the financial crisis in about three days. Andif you didn't understand that, or when Mario Draghi said we're going to do whatever it takes, and have that knowledge of what that meant after the financial crisis, those were big things that really mattered to investing. And so, I wanted to alert a broader audience to these kind of forces because, not to pick on Warren Buffett, who's a hero and Charlie Munger – heroes.
But there are all these books, you know, ‘you're going to be a stock picker,’ and you know, your micro is going to get run over by your macro, in my view, in this world today. Obviously, a key argument and listening to you now is this point about what the government is doing, what the governments are spending their money on. I mean, coupled with that, you do outline five structural trends that the global economy, which will, I think will be reasonably familiar to a lot of people.
I mean, they are the 5Ds. Maybequickly, if you want to give us your perspective as to how that fits in with that kind of focus on the role of government. Yeah, so, the five Ds are debt, deglobalization, demographics, decarbonization and digitalization. And you know, I would flip this. The way I would think about this is flip it to the other side of this, not from the theory, but to meeting with clients. And why have 5Ds? And why explain it this way?
Afterthe pandemic, and particularly after the war in Ukraine, when I'm meeting with clients, there's a level of anxiety, even almost, I mean, in many cases, physical fear that is not a mindset that is conducive to really having a great discussion about their investment portfolio or the world. And fair enough, because there are all these massive changes and massive forces going on.
Andso, the 5Ds are our attempt to kind of say, okay, let's take all these fears out there and put them in some very large buckets so we can start to work on them individually as issues that are likely to impact their portfolio, both potentially for the good or the bad, depending on how they orient themselves. And then, you know, the book goes through kind of each of these topics and how we're positioned for them. Andagain, it's the theory versus the practice. Because.
I'll just give one example on debt, you know, it's like, well, you borrow $200 from the bank, it's your problem. But you borrow several trillion, maybe it's the bank's problem. And what I mean by this is, you know, we've seen if interest rates get too high, you can get financial repression. And so, then interest rates could be brought down abnormally low, and the economy stimulated, and maybe be more inflationary. And that's not, you know… People say, oh, there's too much debt.
I'm going to hoard money under my mattress. Well,if interest rates get suppressed, and the economy is running hot, and there's inflation, you probably want to own actually maybe a stock portfolio and other diversified assets. So that's where I think just the experience of practical investing in this new world changes a little bit how you should be thinking about your money.
Okay. AndI mean, you've got these structural trends, which, I mean, even those trends themselves, their impact can be debated somewhat. I mean, in terms of like, demographics, for example, some people see it as obviously inflationary, maybe fewer workers and rising healthcare spending. Others point to Japan and say, no, it's going to be more of a deflationary force. So,there’s arguments for both sides equally.
You know, debt is generally seen as a bias towards higher inflation as central banks have tried to erode that debt. But equally, you know, if it gets too great, you could have debt deflation. Imean,is it that this is your view that these are just structural trends that kind of frame the landscape as opposed to be able to say categorically, okay, taking these together, this is what the next kind of 10 years is going to broadly look like from a macro perspective? Is that it?
It's everything all together all at once, maybe. I don't know. I mean, it's a couple things. First,it's a way to frame a discussion, but also it does inform our investing every day because I think, you know, you can't have analysis paralysis. Is demographics inflationary or deflationary? I don't know the answer to that. Butwhat I do know, for example, is that the population of developing nations is getting simultaneously older and richer, and people don't like to die or be in pain.
And those countries spend about half the amount per capita that the developed countries do. So,then it's a question of, okay, how am I going to invest in healthcare? Because there is a tailwind where the amount of investing and money spent and money made in health care probably has a tailwind that is going to help the growth of that sector or theme be higher than that of global GDP for a very extended period of time. So, that's the way we try to apply these things in a, in a broad sense.
Yeah, that makes sense. So,I mean, are you saying then, you know, the typical textbook argument would be, also don't focus on stock selection, it's hard to beat the market. Focus on asset allocation, have a broad portfolio. Imean,is that still valid or are you saying, well, maybe focus less on that and focus more on what are the structural trends driven by government spending? What I'm saying is it's really, really hard not to just try to pick stocks and focus on things.
It's really hard to do asset allocation. Most people don't do it. So, it is what you should do. But let's also understand why people have so much trouble doing it. Andthat's a lot of what, you know… Because I've been in all these client meetings and you know, with people who are billionaires and they could be obsessed with one or two stocks, or one or two commodity prices. And you know, I'm saying to myself, of course I want to help them, but I also ask them, like, is this the best use?
It'sfine if this is your hobby, you know, straight up, this is what you love. But it doesn't seem to be giving you a lot of joy. So, is there a different way of thinking about this that might lead to better returns, be more efficient for you and you know, rethink things. AndI think, in the vast majority of cases, if you can successfully reframe that into an asset allocation discussion, it's the most important thing people can do for their portfolio.
Going back to what we're saying about the role of government, so you're kind of framing certain structural trends that we're seeing, such as the demographics, as you're saying, and aging populations, decarbonization, et cetera. You’re saying, I mean, I guess in simple terms, these are the big challenges of the era that we live in, and governments are actively responding.
So, these are the most important tailwinds to have at your back when you're kind of thinking about constructing a portfolio at this moment in time. Isthat fair to say? Exactly. Big problems are big money. And it's not me who's picking these problems. I'm just looking where the governments are, you know, putting their money, where companies are putting their money. And it sounds simple, but for some reason we want to make investing complex and we want to make it exciting.
Andthat's a big part of the book is like looking at that as well. And if you were, I mean, obviously you talked about your kind of interest in history. If we were to go back 30 years ago, I mean, was it the same kind of… Was that lens still appropriate back then or is it just something at this moment in time, do you think? Or is this, it's always a good way to think about the investing problem? I think it's really changed.
So, you know, if you go back to Long Term Capital was after the dot com bubble, which was a fun thing to live through. So, if you really want to date me. But know Long Term Capital did not really involve government funds being used. And it was really the… And remember, when we started in the great financial crisis, it was the Fed saying we couldn't bail out Lehman Brothers. The market was kind of betting like, well, you know, they will do something. They said we didn't have the authority.
And that led to the TARP and things, right? And then it got to, we'll do it to Mario Draghi. So, it was never use government money to we, i.e. the government, will do whatever it takes in a fairly short order. So,that is a massive shift that, in my view, cannot be unwound. And it's also supported, you know, just one example politically. I mean, the Democratic Party in the United States was the party that was, in many cases, kind of, well, in some cases just flat out anti banks.
Imean,we had very prominent economists arguing for the nationalization of the banks in the financial crisis. The Obama administration went the other way and actually bought equity in private banks. And after that both parties were all in private banks in the United States. Bythe way, compared to what's gone on in Europe, where they didn't recapitalize the banking system and growth rates remain much lower - great move from a GDP perspective.
But, as I learn every time I go up to Davos, and I was just up there yesterday, increasingly people around the world care about things besides what goes into a GDP number. Turns out the externalities are many more than economists tend to write about in their textbooks. Okay, interesting. We might come back to that to get your perspective on Davos and what was said there. ButI mean, you're talking about the general trend of kind of government, I suppose, intervention or government spending.
I mean, are you also including, I suppose, the central bank as a lever of government in that, or is that…? Absolutely, yeah. And obviously we've seen, you know, going back to the ‘87 crash, I think was probably the first time we had big intervention and then we've had the development of the Greenspan push. And then as you say, you know, very active intervention in the financial crisis. Andeverything that was done in the financial crisis was done again during COVID and more.
So, it seems to be like an escalating trend. So,is it kind of reasonable for investors to assume that then, in the event of crises, that the central banks will always ride to the rescue in the form of very stimulative, aggressive monetary support? And is that thinking of an inherent put, is that arguably valid from investors? I mean, I have to be somewhat, a little bit careful when you're talking about a moral hazard here. Will it be forever and ever that you can just, you know, buy every dip?
Obviously, no, that's not what I'm saying. ButI think that the reaction function to a serious financial crisis, well, it's only gone one way, which is greater intervention. There are historians, you know, Michel Foucault, writing about the plague and medieval France and basically demonstrating what Rahm Emanuel said, which is never waste a crisis to... I'll add the second part.
I don't know if Ron Emanuel said it, but, you know, ‘never waste a crisis to increase and assert government authority’. Youknow, there is a line there. This is not me making this up. You can just see it in the Fed's balance sheet. Right. So, that is a significant real trend that I don't think is reversible, certainly, anytime soon. Yeah, okay, fair enough.
Imean,one of the things that we saw obviously during COVID was, you know, the resurgence, or I suppose after COVID, the resurgence of inflation for the first time in many decades, I guess. So, the levels of inflation that we saw were, you know, at the levels probably since the early 1980s. Andobviously, inflation proofing portfolios is particularly important, I guess in private wealth. It's important for all portfolios.
Didthat experience, was it something you had anticipated or was it a wakeup call or was also that a kind of a signal to you that, yes, this is a very different environment relative to what we'd seen for the last 10 years. And, are we likely to see these kind of episodes more often or is there a greater risk, at least, of them more often in the coming years?
So, I'm going to answer this question in a little bit of a cheeky fashion and say that I'm a mindless empiricist in that, you know, I'm not going to say that I knew that on this day inflation is going to reassert itself because I didn't. Again, with this book, I'm not trying to say we have a crystal ball and we know how to solve everything. I think we have a good record and things but, you know, that's not the point. The point is kind of looking at these larger forces.
WhatI would say is that economists don't know, really, what drives inflation. And they're still debating today. It’s very hot news. Almost every day there's a new article. What percentage of the resurgence of inflation has to do with government stimulus? What has to do with the supply chain changes around the pandemic, what's the X factor, all these things. Butbeing a portfolio manager, it's like, it's fine if you want to publish research on what we do. I think we publish great stuff on that.
But you can't have analysis paralysis. Every day, it’s like I’ve got a button in the meeting - very interesting - buy, sell, hold, what are we doing today? And that's the most important thing. WhatI would say about the broader question, and the asset allocation, is that throughout history inflation, it's not a magic bullet, but it's the way things go. Because as you build up debts, a little bit of inflation, it's not bad, and people don't feel it.
It's a tax, but it's one that people don't realize. It kind of creeps up on them. Andof course, the current system, where we have these money market funds in the United States and we have people with mortgages and the current system, the biggest thing the Fed is afraid of is deflation, because the current system does not really work in deflation.
Comeup with a policy that is going to push us into deflation or might push us into deflation, or one that might push us towards inflation, they're going to go with the inflation one. And so that is a bias. And I think that impacts your asset allocation. Andover the longer term, I think it means a larger allocation to stocks. Which of the major, very simply bonds are stocks, stocks have a better chance of generating positive real returns in a moderately inflationary environment.
Yeah, absolutely. So, I mean, as you say, that's a pretty important starting point from an asset allocation perspective. Wherewe are in a world at the moment, in the big trends that we see in terms of investing and asset allocation, et cetera, the growth of private markets has probably been one of the biggest trends we've seen in the last number of years. I mean, how do you think about that? Iknowseparately you think in terms of different buckets for when advising clients.
So, I guess is it the liquidity perspective is important in determining whether private or public markets are… Give us your thoughts on the importance and where they fit in in terms of private markets. So private markets are very important to diversified portfolios for several reasons. First, the fundamental principle of a diversified portfolio is diversifying across assets. And increasingly, private assets are growing in overall market share of investable things.
You know, more and more companies are staying private. So,if you want to get access to the equity universe, you have to increasingly have a portion of your portfolio, say in private equity. And we see it diversifying returns, both actually and then also, from a behavioral perspective, private investments are not mark to market every day. So,it psychologically damps down the volatility. I know some of the people who are dedicated to your podcast are rolling their eyes.
You know, it's like, come on. But I'm telling you, you know, my role dealing with real people and real investments, from billionaires to college kids, not everybody is as disciplined as Warren Buffett in eliminating the emotional highs and lows from daily volatility, that's just a fact. So that's another consideration. Thenthere are, I think, two other elements. So, our big investment themes are the demographics, which is basically around health care, decarbonization, which is broad.
But you think about it now, it's not just about having cleaner air or the government policy, but it's also becoming a security issue. And then the largest theme is digitization. You know, AI is the poster child for that. So,if you look at, say, AI and power generation, some of the best opportunities there are probably on the private side and maybe even, you know, private credit side. And so, our investors want access to that.
Now,the other dimension that you brought in is that it's not just like buying a stock and a bond because you don't have daily liquidity. And so, we work with our clients to help them understand how to mentally bucket their portfolios to think about what is the right allocation of less liquid investments for them. On the whole point of, I suppose, the merits of kind of the structural trends and capitalizing on those.
And it is very intuitively appealing, and I'm sure resonates very quickly with your investors. You know, anybody who picks up the newspaper is aware of AI and the trend of digitalization and demographics, et cetera. Nowsometimes with these kind of thematic offerings, banks will have a thematic product or whatever. It seemed to be timed just at the point where the interest in these trends is so great. But the stocks have already got richly valued.
And then there's ultimately disappointment because you pay too much. So,the structural trend might be correct. And obviously the classic example would be, say, with the Internet stocks. And the Internet did prove to be transformational, but some of them, you know, pets.com didn't survive and Amazon did. So, you know, Amazon was a good investment. Sohow do you, obviously, is that an area where security selection is important?
How do you, for the average investor who wants to participate in the trends, who believes that your approach is right, but is worried that, hey, I could be just jumping in at the peak of the local euphoria, even if it's going to be a trend for the next 20 years? Well, I mean, there are several elements to what you said that I have to unpack a little bit.
Sofirst of all, you know, if you look at the Internet bubble, if you say, one of the ways we got started, that I wanted to launch a hedge fund with Lawrence, was that he was shorting Netscape successfully. And this is like ‘95, ‘96. And I'm saying to myself, okay, this Internet boom is amazing, but we've been making money on the short side in this boom and someday this thing is going to blow and then we're going to, you know, really make money. So, we had a business model that worked before.
Youknow, as I detail in the book, it wasn't all that easy to get started, and I got a lot of lumps that now I call experience and wisdom and gray hairs that help me in my job every day managing risk. But I think, you know, if you go ‘95 to 2001, that was over pretty quick. And these broader trends, you know, demographics, digitization, decarbonization are not five-year trends. So,I draw that distinction.
I know the Internet is not a five-year trend, but you know, at some point valuations do matter. So, it's a mosaic picture. ButI think, first of all, I do think these are broader trends than one specific thing. You could say, is AI in a bubble?
So tactically, in the 350 billion that we're actively managing or the 4 trillion we're advising on, we would say that AI is still probably at the beginning, if it was the beginning of the bubble, end of the bubble, we would say more at the beginning as a tactical exposure, could that, short term, have volatility? Absolutely. But you know, these longer term trends, we do think they're longer term trends.
Andif you do invest at the wrong time, and most people do (that's a whole other part of the book - why do people always invest at the wrong time?), we hope that you, in many cases, have got a coach, i.e. an advisor who's saying, okay, put some in now.
This may have some volatility, but if you believe in this longer term trend and you follow what we say about our three Ls, our three investment buckets, you have some cash on the sidelines so that you have a kind of predatory mindset and you know what you want to buy if you get the sell-off. Soagain, these are the managing your wealth. These are your kind of how things have changed. These are the asset allocation.
This is our way of investing that I think, for most people, works so much better than, I'm a genius, I'm going to time this perfectly and not top tick the market. When you look at all these charts and it's human nature, oh my gosh, look at all these poor people who top ticked it. I mean, you've alluded to some of the behavioral challenges a few times and I guess, you know, you're dealing with a lot of investors and I know my own experience working with different types of investors.
You get to see the biases maybe more clearly in other people than are maybe obvious in yourself. ButI mean, you've got a whole section, I think, devoted to money issues in the book. So, I guess the behavioral challenges are multifaceted, I guess. So it maybe useful to hear what do you think or how do you kind of think about the behavioral challenges of managing for the client themselves, I guess, managing their portfolio? Yeah. So, I think the big one that I alluded to is bucketing your wealth.
Liquidity, longevity and legacy. These are mental buckets. Ibringthis one up because when I first heard about this, I thought it was silly and because I studied economics, I’ve traded, run a hedge fund, and I know that money is fungible. And pulling from one mental bucket into another is silly and it all adds up to the same asset allocation. Butyou know, talking to my family, my wife or my father, wow.
Made this huge difference in how they thought about things and it just made my life so much easier. So, I said, okay, they're onto something here. And, it's really, you know, go on as much as you want about it. It's very detailed. I thought it was detailed in the book, but that's what we were asked. Youknow, there was a kind of asking, what is it you guys really do?
But the one, the liquidity one, and just this idea of figuring out, doing the hard work of saying, you know, what do I need to sleep at night? Isit three years of cash flow, or five years of cash flow? It makes such a difference for people because they almost feel like they're underinvested and it switches their mind so that when there is a sell-off, they resist the temptation to pull out of investing because they have to save their husband their capital.
It's actually like, okay, now I can put that money to work. That darn advisor was too conservative on me, now I can jump in. Andof course, that is the biggest difference that people can make in their returns, not just in one cycle, but in many. And of course it's a lot easier to live life thinking, I can't wait for some market volatility versus thinking, oh my gosh, if the market sells off, I'm going to push my retirement back.
So that to me is the biggest kind of behavioral switch that I think most investors can benefit from. So, it's having the liquidity element boxed away and then you're able to take sufficient risk with the other components. Is that it? Yes. I mean, you know, it's more to it. Andyou know, I recognize that I’m American by birth, and you know, half of Americans are arguably living paycheck to paycheck.
But I think the first thing about that is realizing how painful that is and that there is another way to live. Andyou know, of course to help people who really want to get away from that. But you know, there are many people who are quite wealthy and have quite good incomes, but feel that way still. And you know, for whatever reason, it may be a numbers thing, it might just be an emotional thing, that's something else you got to get at that I talk about in the book.
Butjust getting away from that kind of scarcity mindset to an abundance mindset. That sounds a little fruity maybe, but you know, I've been doing this long enough. It comes up even with billionaires who've mastered elements of it, that that mindset is so important. Mindset,you know, you talk to any sports person, how do you win? It's, I've done everything else, but if you don't have the mindset.
And there are some other examples of some of the great traders in the world that are in the book that focus on this topic. Okay, interesting. Imean,obviously you also mentioned a bit earlier about the example of the client really zeroing in on maybe one or two stocks that are underperforming in the portfolio and not kind of taking the big picture. View. So,I guess that's another behavioral challenge that you see.
And then another one that you come across, from my perspective as somebody who's involved in the alternative space and the hedge fund space, often you'll try and position, say, diversifying strategies like hedge funds as something that are good for your portfolio in case we see more volatile times at some point. Butit can be a struggle for people if the S&P is doing 25% per annum and a hedge fund is kind of up 3% or 5% in a year like that, are these the kinds of challenges you face as well?
And how do you help clients to overcome just always thinking about the recent environment and taking a more bigger picture perspective? Yeah, you know, I, I mean, as, you know, as a practitioner doing this, and I'll say, there's no one answer. And very often we're able to help clients with the many, many… You know, UBS has been doing this for 160 years. Thereare a lot of hacks that we've come up with, with our institutional memory. But I'll give one example that really always sticks with me.
Outin the Middle east, a wealthy family, very strong relationship with us on multiple fronts - banking, wealth management, asset management, all philanthropy. And one of the younger generation, I mean over 40, his own account, exactly what you're saying, has his view on the asset classes that he has to invest in and he's trying to beat his benchmark, S&P 500, fine, whatever it is. Andthen he had kids, twin boys, and, you know, no problem - asset allocation, rebalance the portfolio.
When something goes up, rebalance it. You know, just model. AndI'm saying when we talk about your portfolio, your body language, the way you talk about it, the focus is totally different than when you talk about your kids. You know, I'm thinking in the back of my mind, money's fungible. Yeah, you know, for me it's that this is my portfolio and it's like it was about him, his identity. Whereas for his kids, he's like, well, my kids are young and I know it's long term and we'll roll with it.
And you know, if you have an asset allocation and you rebalance it, that's how you get the best returns over time. Just like two different sides of the brain. And so, that always sticks with me as like half the battle here is mental. Andpeople can know it, but they don't feel it. Yeah, I hear you. I guess people invest for all kinds of different reasons. I mean, you know, for a lot of people, they might have their pension or 401k or whatever it is, and that could be their biggest asset.
And they might have a brokerage account that might be a fraction of that. AndI'm guessing, I know my own, so I'd probably pay a lot more attention to a smaller portfolio because it's active, whereas the pension just sits there and it's in equities. I mean, I guess people are getting more than just the monetary value-added investment experience. I mean, some people - It's entertainment, maybe it's a rush for some people, even though it shouldn't be.
But, I mean, would you have that observation too, that people are looking for different things from investing? Absolutely. And whatever it is that you're trying to get from it, or get from it, you got to get it out on the table before you make your trade. Because staring at you, on the other side of that bid/ask spread, is the smartest person in the world or the smartest, fastest computer in the world. Andthey know their hangups, they know what they're bringing to the table.
They know what they had for breakfast and what their blood sugar is and what time of day they make the best decisions. And if you don't know why you're there and what's on the table with you, you're not going to succeed. Andso, all of that matters and unpacking all of that.
Andthat's why it was very painful for me to write parts of this book because I try to give practical examples of putting it all out on the table, which I had to do and which started coming out, remembering things from when I was a kid about money and lessons I had learned that really mattered and influenced the way I think about things and living through this with clients. And, I always, in these meetings, sometimes it's true, we cry together in these meetings.
AndI think, you know, it comes back to, I think it was Eisenhower who said, people don't care how much you know until they know how much you care. And that just has a resonance again. You can read all the investment books in the world, but the practice of it is so much different. Obviously, kind of a big focus is on things like the legacy and also impact in investing, kind of much more longer term themes.
Once you've kind of got beyond the basics of having your portfolio set up for your immediate needs or even for your family's needs. I mean, obviously this sounds like something for billionaires, but do you think there's something in this for all investors? I do for a couple of reasons. Firstof all, I think, why not today invest in things, why not use your balance sheet that you have to invest in maybe these longer trends, but to do well and do good, if that's possible.
I want it, you know, you want it, everybody wants it. So,that is a trend that's out there, and it's now mostly available to the wealthy and those who have strong banking relationships. But it is coming because it's augmented product to put it in business school terms. And so, I think that is a trend. Butthe why of it, you know, why? Why do these people, many of them very successful, get just a second charge out of life? Maybe it's their second act.
Maybe it's just something they do their whole life. The value they get from kind of seeing their investments do good for society is doing well. I think it is a durable trend. And, we're trying to make that available to more investors for very positive reasons. So, I think it's out there. Butthe other reason is, even if you don't feel you're there yet, it's asking yourself why am I not there yet? You know, could I do 1%?
Becauseasking yourself these questions helps you understand better your relationship to money, how you think about money versus wealth versus what is enough, all these questions. So that's where I find it very valuable to talk to all investors about these topics. And obviously we've had a trend of ESG that has kind of grown very quickly and has gone into a retreat, a little bit, kind of frustration with it in some parts.
I mean, what are the practical kind of ideas, from an impact investing perspective, that are maybe not captured or that are different from ESG? The ESG trend, obviously, whenever I hear that word now, something I've always worried about, and we see is greenwashing, and that has become increasingly a governmental fear that things are getting labeled a certain way and not really delivering on that. And these terms have become loaded, the ESG or sustainability and things.
Andso, I think we were pioneers in some of these things and offering some funds. I'vekind of deliberately sidestepped that by using this impact term and saying, using your investments to seek your own definition of returns on two different balance sheets - your standard balance sheet and your social good balance sheet. Andthat's different, right.
It's ,again, right now it's very often people make these investments for themselves and say, okay, look, if I take this dollar and I buy some green bond that a magnificent seven company is going to use to buy solar panels versus something else, how much impact is that dollar going to have versus if I take equity in a small company that's building water pumps or off grid solar panels for villages in Africa. Maybe I check in and even just like them on social media or become an advisor.
Youknow, that dollar just goes so much further. And so, I think, again, some of it is just a shift in mindset and understanding that gives people other benefits. So,that's the direction I went with it because you know, greenwashing can exist, does exist. Investors, rightly, in the United States, I think they need to know their investment professionals are investing for what they signed up for.
Fiduciaries need to focus on return and risk reward, not categories that the investor doesn't know about. So,I fully acknowledge all these things and think this debate has to go on. But again, okay, that's a lovely debate, but no analysis paralysis. What do I buy, sell and hold? Very good. I'm just conscious of time. And you did mention that you were at Davos this week and have been there in previous years.
It does feel we're at a particular moment in time, maybe in history, particularly with US/European relationships and US relations with everywhere. Butfrom a European perspective, I’m particularly interested, how would you characterize the mood? Are you thinking now about any structural trend that is emerging or accelerating based on what you're hearing this week? Yeah, so, I’ve been going to Davos for probably 14 years. It's always interesting.
It's always interesting what industry or region takes up, buys up, or rents the most space and throws the most parties. That's a gauge that people look at. So, you know, the Mideast had a lot of real estate. Crypto was less than in than in past years, maybe. AI, obviously was increasingly important.
Wehad a, a dinner and I was saying, look, I was scrolling through the apps of major, at least one major publication looking for articles on Davos, but it was all President Trump, President Trump, President Trump. I saw an article on AI. But then a couple hours later, President Trump made an announcement on AI. So, it was back to President Trump. Andthat was really a huge focus.
So, I'd say the top two things were the Trump administration, what they're going to do, how they're going to do it, and AI. There’sa lot of optimism, frankly, about the Trump administration for many quarters, but obviously for Europe, this being in Europe, how to navigate that relationship, concern about Europe and its prospects. Maybe around the German election, all issues that came up. ButI think for me, the biggest takeaway was so many companies are seeing efficiency gains with AI already.
One manager was saying he just polled his own employees around how much they thought their work had improved. Youknow, efficiency gains they got from just the AI that they deployed last year. I don't know if he was surprised. I don't know that he would admit being surprised, but it was 15%. Youthink about, that's already now. And things continue to advance. So again, that's an anecdote. But what we see is in the CapEx spend, the focus on AI continues.
And I think that adds to our comfort around the way we've been investing with AI. Okay, very good. The other thing that we always like to ask our guests is any advice for maybe younger people coming into the markets and developing a career? Obviously,you've written a book recently, so you've imparted a lot of advice already in that. But even within the book, I know you, you reference a lot of great books as well.
So,I mean, if you wanted to sum up, if people are starting their careers or more generally, the most important advice for learning about investing, learning about macro and managing your own portfolios, what would be your top tips? I mean, my top tip is you're not Warren Buffett. There are very few people who will be Warren Buffett, and you don't really even want to be Warren Buffett. That's okay. Thereare still plenty of finance careers and things. You know, find your own way.
The advice I always give people is the old advice, be able, affable, and available. Maybethe shorthand version of that was, you know, half a life is showing up. But that seems to be a great way to get kind of mid-level in your career and then we can talk about what happens from there. That's a separate discussion, but for young people, that's my advice. Very good. Well, Mark, I appreciate you coming on today. It's fascinating to get your insights and best of luck with the book.
I'm sure it's going to be a success as well. So,check it out. It's The New Rules Of Investing and you can follow Mark's work. I think he's a regular poster on LinkedIn as well. So,from all of us here on Top Traders Unplugged, stay tuned and we'll be back soon with more content. Thanks for listening to Top Traders Unplugged.
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