Founder of Elm Wealth | ex-Salomon Brothers MD | ex-LTCM partner
Victor Haghani started his career in 1984 at Salomon Brothers, where he became an MD in the bond arbitrage group run by John Meriwether. Victor was a co-founding partner of LTCM. In 2011, Victor founded Elm Wealth to help clients, including his own family, manage and preserve their wealth with a thoughtful, research-based, and cost-effective approach that covers not just investment management but also broader decisions about wealth and finances.
In his TEDx talk, Where Are All the Billionaires and Why Should We Care? Victor shares his unique perspective on active versus passive investing. Victor has been a prolific contributor to the academic and practitioner finance literature. He is a co-author of the book, The Missing Billionaires: A Guide to Better Financial Decisions, which has just been released and is available on amazon and most other book sellers.
We talk about Victor’s childhood, upbringing, and fascinating career. He shares his thoughts about managing his own wealth, and what he learned in the process. We focus on the missing billionaires as he calls them in his Ted talk and his book – given the fortunes that existed a hundred years ago, we should have many more billionaire inheritors and we don’t – it’s the ages old challenges of staying rich, and keeping a multi-generational fortune. We discuss position sizing, and asset allocation, how much should be invested in stocks. Victor shares some surprising learnings from a coin flipping competition study.
Stay tuned until the end if your are curious to hear Victor share a story of his very last Liar’s Poker hand at Salomon brothers…
https://www.amazon.com/Missing-Billionaires-Better-Financial-Decisions/dp/1119747910/
www.elmwealth.com
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AI-generated transcript below, it may contain errors.
[00:00:00] Bogumil: Well, hi, hello, Victor. How are you? Nice to see you.
[00:00:03] Victor Haghani: Thank you very much. Thanks for having me on your
[00:00:05] Bogumil: show. Well, as you know, I'm a big fan of your book, The Missing Billionaires. Uh, at Seacard Associates, we manage family fortunes. And I've learned over the years, 20 years already that The fact that a family fortune lasts over multiple generations is more of an exception than a rule.
And I'm sure we'll dive in deeper into the topic, given the research that you've done. But before we get there, I always like to start those conversations with the very beginning. And I'm curious to hear about Victor, if you indulge me. And I'm curious about your childhood and upbringing and how you think that time shaped your interests and led you to a career you've been on.
[00:00:47] Victor Haghani: Sure. So, um, well, I was born in New York City. My mother is American. She was born in the States, but my dad was born in Iran. He's from there, was from there. And, um, and so I started to grow. I grew up in New York City to begin with. And then, uh, I lived in, um, on the Delaware River in upstate New York, near Port Jervis and Matamoros in Pennsylvania.
And then when I was about 13 or 14, I moved to Iran. My dad wanted to move back there and, um, show us what, show myself and my sister what Iran was, was like. So we lived there for a while, planning to live there longer, but the revolution intervened in 1978. So at the end of 78, my family left Iran. And we wound up relocating to London, uh, really because my dad thought we'd be going back to Iran any day.
So we were staying a little bit closer and didn't resettle back in the States, so we made a life in London. I went, I finished up high school there, and then I wound up going to the London School of Economics. And, uh, and after that, I got a job, uh, at Salomon Brothers, uh, back in New York in bond portfolio analysis.
Uh, Bob Koprash offered me a job, and, uh, so I moved back to the States and started working at Salomon Brothers. Within a couple of years, I was invited to join the arbitrage desk run by John Merriweather on the trading floor. Uh, and, uh, and then, uh, from there, uh, when my partners, or my colleagues, uh, were setting up LTCM, uh, I left Salomon Brothers, it was also at the time I got married, so I had a long honeymoon and a bit of a break, and, uh, and I joined as a founding partner of LTCM, wound up, uh, moving to London and getting our London office started, and then was partners with, um, um, and, uh, um, With Hans Hofschmidt there running the office, uh, and then after the collapse of LTCM, I stayed on for a while to help with the startup of a successor fund called JWM Partners, uh, but I really wanted to take a break from, uh, From this sort of active, uh, active, um, alpha generation.
So, I think it was around 2001 or so, I, I took, uh, an extended sabbatical that went on for 10 years, uh, until I started Elm Wealth in, uh, at the end of 2011. Although it had been brewing for a while, so, um, I'd been, I'd been working on that. It was really sort of, um, You know, and I think we're going to talk about this a lot, uh, today, um, you know, after I stopped working at, at LTCM and the hedge fund in the hedge fund world, uh, I, for the first time, I realized that I needed to, uh, think about investing for my family.
And, you know, it's quite amazing to think that I was working in finance for 20 years or so. And, uh, and never really thought much about what I was doing with my family's savings with my savings. So I started to give that a lot more thought. And I started off doing what I saw a lot of other, uh, you know, people like me doing, you know, that had a.
Decent net worth and we're financially sophisticated, which was sort of chasing alpha doing private equity and venture and angel investing and doing different trades and investing in hedge funds. And, uh, and one day I just woke up and I was, and I said to myself, why am I doing this is taking so much of my time.
I don't really have an edge. It's super tax inefficient for an individual investor like me, you know, why am I not doing what I was taught to do, you know, in everything that I learned about finance and modern finance, which is, you know, sort of invest in the market portfolio. Keep your costs low, keep your diversification high, keep your taxes, uh, you know, as low as they can be and that got me into indexing, you know, I started to just move every, you know, whatever, whatever I could get out of the active alternative world and into.
Index funds at Vanguard. I just started to do that. And as I started to do that, I realized that there was still some questions, though, that were really central and important to answer that index thing. You can't just say I'm going to index and and that tells you what to do. You know, you can't say, okay.
I'm going to, I want to get my costs down, taxes efficient, get diversified, I'm going to invest in index funds, well, you have to decide how much U. S. equities do you want, how much non U. S., how much equities do you want overall, how much fixed income, what fixed income, and, uh, and as I started to talk to my friends and colleagues, uh, former colleagues about that, I realized that, um, those were pretty important questions to answer, uh, there were questions.
You know, different answers were possible, but I came up with a set that I liked. Um, and as I thought through it and, and did research about how I wanted to invest, um, my friends said to me, well, if you do this in a systematic. Proper way as a, as a business, we would like you to invest some of our money too.
And that was the birth of Elm wealth. So it kind of came out of how I was investing for myself. And, um, so Elm wealth is about 12 years old. Uh, it's what I've been doing for the last dozen years. And, uh, my partner. Uh, and Elm's CEO, James White, who's a bit younger than me, is running it on the founder and CIO and get to, uh, be in this beautiful Jackson Hole place, um, you know, uh, working with him and, uh.
And, and yeah, that's most of the story. I guess I should also say that in this sort of 10 year period from 2001 until 2011, it was a wonderful period of time for me spending time with my young children, um, you know, doing a bunch of things from a life, a life sort of bucket list of things we talked about learning to fly.
That's when I learned to fly and did a lot of aviation, a lot of fishing, a lot of skiing, a lot of mountain climbing, and a lot of, um, Reading, uh, and, and, uh, a lot of reading and a lot of thinking and a lot of, uh, spending time with my family, which was wonderful. So that's kind of my life story to date.
[00:06:49] Bogumil: That's quite a story. And we'll come back to different parts of it throughout the conversation, but. What I like a lot is that you started with what worked for you in the investment world and you realized that that could resonate with more people. And I think it's a beautiful way to approach the investment philosophy in general.
If it's good for you, it might be appealing to other people. There is a bit of a challenge when you manage your own money. Then you manage family money and then you manage other people money. Other people money is, The dynamic evolves and changes, and you have to take into account their emotions and their concerns.
I'm curious how you think about it, because you have such a deep understanding of the world of finance and building something for yourself. A lot of questions you already answered for yourself, but when you have somebody coming in from outside, you have to walk them through, I'm guessing what you find in your book, Missing Billionaires, a whole path or why are you doing and why are you doing it this way?
[00:07:46] Victor Haghani: Yes, I mean, uh, you know, it's been an amazing, uh, journey of learning, uh, you know, working and talking with other people as they, uh, as they think about using us to help with managing some of their wealth. You know, there's just so many different perspectives that people have, um, but, you know, in our case, I think that there's a real.
Uh, very strong selection bias that, uh, you know, that we're not out there trying to convince people to, uh, to use elm wealth and to invest with us. So it's kind of by the time most people come to us and want to have a conversation, they know what we do, where we're coming from, how we invest , then, you know, I shouldn't expect, um, a lot of alpha, you know, I shouldn't expect, uh, you know, a tremendous amount of, you know, deep, deep financial planning, you know, I shouldn't expect, you know, concierge services or whatever. So, you know, I think that, you know, we wind up having.
You know, pretty smooth conversations with most people that that come to us, but, uh, there's a lot of deep, uh, deep topics that we get into with them. You know how much risk is right for each investor. So we sort of have a, you know, our default settings for our programs are, you know, 70.
Um, but, you know, each person that comes to us, we have a discussion with them. Would you like us to manage that with a lower level of equity exposure or a higher as our baseline? Because we do dynamic asset allocation, so the baseline is just our starting point, and then we might be over or under depending on market conditions, but setting that baseline for them and, and, um, you know, making sure that it makes sense for them in terms of their long term, Uh, spending preferences, you know, and how comfortable are they, you know, one of the things we'll talk about later, I'm sure is that, um, if you're going to take risk in your investment portfolio, you better be willing to take risk on your spending.
You know, that, that if you, if you can't, if you just cannot reduce, if you cannot reduce your spending at all, then, um, you know, it's dangerous to take risk in your investment portfolio, trying to get higher returns. You know that if you just can't change your spending, it's I think that's very dangerous.
And that's I think a really important thing that we talked to our investors about and they and they have to realize that and accept that, you know, if they want to have, you know, risk in their portfolios, which they all do with us, you know, we don't have any investors that are, you know, fully in tips or T bills.
The way we
[00:10:21] Bogumil: look at it at C Card, we say that the capital that we manage is the capital that the clients don't immediately need, but also the capital they can't afford to lose. And it allows us to take a longer term view, and as you mentioned, their life situations and spending goes up, so if you can consider this capital as truly invested for the long run, it creates more opportunities and allows us to take a whole different view.
And if it's money that might be needed within a year or two, that's a very different discussion. I want to talk to you about the missing billionaires in your book. And you gave a talk about it, a TED talk that I listened to, which I thought was wonderful. The reason I'm especially curious about it is that I've worked with families that have Fortunes for many generations.
And I wrote a book, money, life, family, where I studied stories of families around the world that managed to keep their wealth over multiple generations. And it's more of an exception than a rule. And you make a fascinating point and I'll let you share the story, how looking at the number of millionaires that we had in the U S a hundred years ago, we should have a lot more billionaires with inherited wealth among us today.
But we don't. What happened?
[00:11:33] Victor Haghani: Well, you know, we, um, you know, we don't really know what happened. So that's right. I mean, you laid it out very succinctly there that, you know, looking at census data from 1900, um, you know, there were 4, 000 millionaires. There were probably a thousand of them that had four or 5 million or more.
And, you know, those families just making some, you know, basic general assumptions about investment performance and, uh, And the growth of their families and paying taxes and spending some of their money each year that, you know, there should be thousands of billionaires today. Uh, that are descended from those families from 1900.
But when we look on the Forbes billionaire list, we struggled to find even one that ties back there. I mean, I'm sure there are some and some families, but you know, there's very few compared to The thousands and thousands that there should be and within there, you know, there's all kinds of really conservative assumptions and our little toy analysis, you know, we assume that that nobody has earned any money, you know, that nobody from those families has earned any money, you know, in their in their lives, nobody, you know, got a job that they could spend from and we assume that, you know, that families didn't do any inter that wealthy families didn't intermarry, which, of course, you know, they, they did very much.
Yeah. Yeah. You know back over time, um, but we don't know we don't know what happened exactly, you know We don't you know that we can look at a few families that are uh, Where there's enough written about them to have some idea like the vanderbilts or the asters Or actually, I just read a book recently, uh about the montgomery scott family by janny scott.
Um, a book called beneficiary, which was a a really wonderful read Very poignant as well. So what we do know, right, is that, uh, it's been an amazing investment environment over this 120 years. So it's not that, you know, it was a poor investment environment and, you know, and that, um. Shipwrecked these these families, uh, you know, we took account of of taxes and spending, you know We have some idea of how much charitable spending very wealthy families do and that doesn't account for much I mean, there's some headline, you know big philanthropic gifts that have happened historically, but you know Even today when people are probably more Philanthropically oriented than they were back then, um, you know, we calculate that in the top 0.
1 percent of, of, uh, wealth or income that people are giving away on average, uh, you know, less than half a percent of their wealth each year. And, of course, there's a lot of families that are giving less and some families are giving more. So, you know, the charity doesn't explain it. So what does explain it?
And, uh. We think, you know, our sort of hypothesis is that, um, that it's that fundamentally it's, uh, decisions about risk where people either took too little risk and so it didn't participate in the growth of, uh, the economy of productivity of the equity market, uh, or that they took too much risk, um, by being, you know, mostly by being concentrated in certain, um, You know, stocks and portfolios and that that too much risk really put a dent into, uh, the compound return of their wealth, uh, and at the same time that they followed spending policies that that compounded the dent in the compounding that, you know, by by following a spending policy where they were either spending, uh, where they set the spending level a little bit too high.
Or, uh, and, or that it was too inflexible that the combination of too much risk and, uh, an inflexible or too high spending, um, you know, just just would dissipate wealth, uh, you know, very. Um, you know, in a very strong manner, but over a long period of time, it's not something that you notice. And, you know, to a 5 year horizon, to a 5 year horizon, you know, that it's, it's kind of, there's so much noise that you don't notice it.
But, you know, over 30 or 40 years. You know, that kind of too much risk with a poor, poorly chosen spending policy will really deplete wealth and we can, you know, we could do some talk about some numerical examples, but you know, I think that's, that's our hypothesis as to what's going on and it's, and it's kind of subtle enough that is, you know, we think it's a good explanation and we can talk a little bit more about, you know, this idea of volatility drag and, um, you know, like some, some good examples about how that hurts compound returns.
Thank you.
[00:16:14] Bogumil: I like that and it's a fascinating phenomenon because you feel like with so much wealth, you should stay at the top for a long period of time, but with excessive spending and chasing higher returns, you can get in trouble. On the spending side, I had Nikki Woodard on the show, who is a historian and who studied the families of the great depression, who.
were millionaires at the time. And we were talking about what their life was like when the country was in big trouble, but there were people with millions who made it just fine for that period. And one of the challenges she mentions that resonates with me and rhymes with what you say is that people would move from a hundred or a 10 million household to a million dollar household, given that the money got divided among kids, but they would want to have the spending that they had in their parents household, which was Much wealthier and keeping up with a much higher spending while your available capital was much smaller was a shortcut to trouble within a generation.
I'm curious to hear about coin flipping. You spent quite a bit of time in your book about, uh, talking about a coin flipping competition. And it, what I walked away with is that he can teach us. It can teach us a lot about the stock market. And about the bets and the sizes, and I'm thinking about position sizes, but also equity exposure.
Can you share as much as you can in a short way, because it's quite a competition that you describe over many pages. What is it all about and what can we learn from flipping coins?
[00:17:44] Victor Haghani: Well, we sort of had, so the book, uh, our, our book is primarily about sizing decisions, you know, how much risk to take, how much, once I've identified what I want to invest in, how much should I invest in that?
And also sizing with regard to spending and, and, uh, tax decisions, you know, and other, and other things too. But it's basically the book is about the sizing. The how much question when it comes to our financial decisions rather than the what question and we suspected that, um, you know, we suspected that people in general are are not very well trained or haven't thought about the sizing so much.
And, you know, we, we sort of had this idea from thinking about, you know, what are the things that people are taught in finance programs in, uh, you know, informal training and universities or. Uh, you know, when they come into the financial world of banking or investment advisory, and so we decided to run an experiment where, um, we gave, uh, participants, uh, 25 and let them and allow them to flip a, uh, an electronically programmed coin that we told them had a 60 percent and, um, And it, and it did have, you know, we programmed it that way too.
There wasn't any trick there and they could bet, uh, for a half an hour and however much money they grew their 25 to, we would pay that to them at the end of the half an hour, uh, you know, the people could, you know, if you flip quickly, you could flip 300 times. You know, it was quite easy to flip over a hundred times, you know as well and um, And we were curious what strategies people would use Well what we found was and these were all pretty financially sophisticated people I mean a bunch of them were in finance programs masters uh of finance programs at universities and and about a third of them were Actually working in finance.
We're young analysts people working in quantitative finance um You know, what we found is that they didn't really have any idea, you know, how to, how to play this game in a, in a reasonable way or how to think about scaling risk or sizing their, their bets. Um, and, uh, you know, but meanwhile, you know, there's quite a big literature on, on the whole thing, you know, from the gambling literature as well as from the finance literature, uh, and, and the simple.
Kind of approach that people should take in a situation like that is to come up with a fraction of their bankroll or a fraction of their wealth to bet on each flip, um, and kind of keep that fraction the same and then think about what size that fraction should be, um, you know, to, uh, you know, to, to maximize the compound return or, or just to get something that's kind of reasonable.
And so, you know, I think that it should be pretty clear to people that, like, if you're betting. Okay. Thank you. Half of your wealth if you chose to bet 50 percent of your wealth on each flip that that would be too much because you could kind of see that if you won one one flip, you know, in your 25 went up by 50%.
Now you had 37 and a half dollars. But then if you lost the next flip betting 50%, you would be down to just, um. You know, whatever 18. 75. And so, you know, you won one and lost one and you're way below your starting point, you know, you're 25 percent below your starting point. So, even though there's a 60 percent chance of winning betting 50 percent and getting, you know, 60, 60 percent of the time heads and 40 percent tails, you'd wind up with less money.
So, you know, like 50 percent would be the wrong fraction to bet. And something in the 10 to 20 percent range would be pretty reasonable, like betting 1 percent of the 25, you know, should seem way too small, or even 5%. But nobody really, uh, nobody gravitated towards that way of betting. And so it really gave us this idea that, uh, or some confirmation that there was...
Um, value to be had in trying to talk to people about that sizing and getting some of the, you know, gambling and, uh, and, and finance literature and ideas and insights in front of people, um, you know, that the 60 40 60 40 coin flip has a sharp ratio of 0. 2. You have an expected gain of. 0. 2 and a standard deviation of about one.
So it has a sharp, you know, one flip of the coin has a sharp ratio of expected return over risk of 0. 2. And, um, you know, the stock market, you know, people will disagree. I mean, at each point in time, the stock market has a different expected return and risk. But on average, you know, I think people would say that the stock market has a sharp ratio, maybe of something a little bit higher than 0.
2, maybe 0. 3. And so. Uh, you know, so flipping the coin is not that different than investing in the stock market. Like, in the book, we talk about each one of these 60 40 biased coin flips is kind of like investing in the stock market for six months. Uh, and so, you know, we can draw some parallels in thinking about sizing, um, and risk and reward and so on.
Of course, you know, there's a lot of differences between coin flips and investing in the stock market. For one, you know, with the coin flip, we know what the odds are. We don't really know what the odds are always with the stock market.
[00:22:55] Bogumil: To me, the fascinating part was that some people lost money in this competition.
They walked away with nothing, if I remember right.
[00:23:03] Victor Haghani: Well, I think 40%, something like, uh, well, 20, over 20 percent of the people wound up going to zero. Uh, but then there was also like another, uh, uh, large fraction that wound up with less than 25 and, uh, and very few people got to our 250 cap, like 20 percent only got to the cap that we set at 250.
Whereas following a strategy of betting 10 to 20 percent each time on your flips would have given you over a 95 percent chance of reaching the
[00:23:35] Bogumil: 250. So the biggest mistake in my mind was betting too much.
[00:23:41] Victor Haghani: I think betting too much, doubling down, you know, a lot of people bet on tails at different times, they just felt that.
Uh, after three or four heads, they were sure the next one was going to be tails. Um, so, you know, but yeah, I think, you know, almost anything you could think of, I mean, some people just bet a dollar every time, you know, they just went for a constant, uh, absolute, uh, you know, betting amount. Um, so, you know, there were lots, lots of different ways to do things, uh, in a sub, there were lots of ways to do things sub optimally.
Just a few ways to be optimal
[00:24:14] Bogumil: and a lot of the participants who are sophisticated people that took finance courses and math courses. Yeah,
[00:24:20] Victor Haghani: it's fascinating. Yeah. Yeah. Yeah. I'm sure we would have had an even crazier result if we just sort of had people randomly, you know, just randomly chosen in the population playing it.
Yeah. So
[00:24:32] Bogumil: related to that, you write in your book about the equity exposure and, you know, this, the, this idea of going into the market and out of the market. And we noticed that usually investors do it at the wrong time when they feel comfortable, when the market is rising, they want to go in when the market is going down and the economy, the news is really bad.
They want to go out. Zigzag the wrong way. That's, that's my observation most of the time, but you have some interesting ideas about a static and a dynamic allocation to equities. And you have some, uh, tips and ideas and advice how to look at it in a different way. Can you, can you share. Sure.
[00:25:10] Victor Haghani: Um, you know, I think that, that, that, uh, you know, market timing is certainly a pejorative, uh, term, uh, applied to, you know, uh, you know, the practice of changing your asset allocation, uh, over time, you know, it's, it's, um, you know, it completely makes sense though, if you think about, uh, The expected if you think that the expected return of the stock market relative to safe assets is changing over time, and if you think that the riskiness of the stock market.
Is different at different times, then you should want to change your your bet size, right? If I said to you, uh, here's a coin that's got a 60 40 60 percent chance of landing on heads, you would want to bet a certain amount. But if I said, here's a coin that has an 80 percent chance of landing on heads, you would want to bet more and a different amount.
And so to the extent that with the stock market, we can. Have a reasonable estimate of the long term expected return of the stock market relative to safe assets. Uh, and if we can have some idea of whether we're in a risky or or a less risky environment, those things should, uh, drive us to, uh, to change our asset allocation over time.
But in this very systematic expected return and risk based way, so it's not, it's not going to tell you that, um. Uh, that you should ever get, you know, well, in general, you know, that you should ever get completely out of the market or that you should leverage, you know, three times or whatever, or buy zero day options, you know, you know, to get 100 times leverage on your wealth.
Um, you know, it's, it's a more, uh, it's a, it's a less dramatic changing, uh, an adjustment of your asset allocation over time. And, uh, and we think it makes sense, you know, historically, uh, you know, I mean, we don't have, even though we have, you know, whatever, 120 years of U. S. history, you know, I don't think that's so much to go on, but historically, at least it does show that that that was a good way to approach asset allocation historically.
Uh, you know, I wouldn't I don't base it on the fact, you know, I think this is just a rational way of doing it and it's comforting to know that historically it worked. Also, I wouldn't say that because it worked historically. 1 should do it. It's more like if it makes logical, rational sense to you, then 1 should consider doing it.
So, um, you know, it's a, you know, there's, um. There's just, uh, so much bad experience with people doing very subjective and dramatic asset allocation and and sort of as as you describe. I think what happens is that people, uh, people often increase their exposure and decrease their exposure at the right time.
What gets missed very often. I think. Is, uh, is also the reducing and the increasing after you've decreased or increased, right? So, um, you know, I think that what often happens is that, you know, the, the market starts going down, we're in this riskier environment. People decide I want to reduce my exposure to stock and that might be quite a rational, good thing to do.
But then they don't really have like a good systematic way of getting back into the market. You know, now you get to a point where expected returns are higher. Uh, the risk premium expected risk premium is a bit higher. The market is settled down. It's not in such a risky kind of, um, uh, mode and, and, you know, at that point, you should get invested and maybe be overweight.
But, you know, I think that when you're doing it subjectively, it's a little bit hard to do that in the same, you know, the market's going up. It's kind of things are calm. Risk is low. The expected return is good. The market's performing well. Well, at some point, you know, so you've increased your exposure and you're quite happy with it.
But at some point, you've got to be, you have to have some rules that get you to decrease your exposure after that too. So you, you know, that, that, um, you know, just buying when it's going up and selling when it's going down, you need a little bit more than that. You know, you need. The other two pieces of it, you know, that, okay, I need to reduce sometimes, you know, in this, you know, after being overweight and I need to increase after being underweight and not to do it, uh, too, too slowly.
So there's a very, there's a very thin line between return chasing, which hurts returns, and trend following or momentum based investing, which seems to increase the quality of returns. And there's a pretty fine line between those two things that are, that are quite different in terms of outcome.
[00:29:43] Bogumil: So a static approach, even the 60, 40, that's been studied and researched from, from what I read in your book, it's a decent approach, but you can make it better by adjusting it through the cycle.
And you look at the earnings yield and you look at the risk free rate and you compare the two and you have some interesting observations. But what really caught my attention was that there was a period in time and it was the internet bubble late nineties. Where the rule of thumb that you use in the book implies that it would be a good time to be out of equities.
Tell me about it because as somebody that manages money for other people, I think it's the hardest thing to convince people to do it, to completely get out of the market. As much as it might be easier to say that we should be a hundred percent invested, but to say at any point, we should be completely out of the market.
I think there's a big career risk behind that kind of statement.
[00:30:36] Victor Haghani: Yes. Um, yeah, I think that is, uh, you know, that, that, um, maybe being out of the market completely, you know, could be perhaps putting a little too much weight onto the signals, but it was a pretty remarkable moment in time when, uh, when equities had an earnings yield of around 4 percent or even a little bit lower than that, uh, you know, we, we were at the end of a, of a pretty long and dramatic bull market.
Uh, so the cyclically adjusted earnings yield was under 4 percent for U. S. and global equities, and, you know, that is like a decent, you know, you can sort of see why that earnings yield, um, is there is, is, is a reasonable, uh, Estimate of, um, of the long term real return that you might expect to make from owning equities.
Uh, you know, you're, you're, you're sort of, that's what you're, uh, you're buying those earnings at that, at that multiple. And as long as companies would be able to maintain that level of earnings in an inflation adjusted basis. Um, in the long term, uh, without paying, uh, you know, if they were able to, um, uh, to do that, paying out all of the earnings as they went along, then that would be a reasonable estimate.
And historically, we see that it is, you know, there's a lot of logical reasons to, to believe that's the case. So at that time, okay, equities are offering like a. Under 4 percent long term expected real return, but you could buy inflation protected 30 year bonds from the U. S. Government that we're offering around 4 percent also.
And so, you know, why would you want to take equity risk if you were going to expect to get the same long term real return from equities as you could get from tips now, if you reduced your equity holdings to zero and put all of your money in 30 year tips. That turned out to be a wonderful decision, uh, and, and you were sort of vindicated in that after two or three years, um, however, you know, it's, if, if you had, uh, used those metrics to make your decision, but instead of putting your money into tips, you put your money into T bills, you know, it would have been a less good outcome because you wouldn't have participated in the yield poll.
Uh, and the price of tips and their yield dropping over those next couple of years from, you know, 4 percent down to like 2%, you know, is almost a, uh, for long term tips, it was close to a doubling in their value or a little bit less than that. So, um, yeah, I think it, you know, made sense, you know, I think going all the way to zero.
Um, you know, maybe it would have been too dramatic, uh, for most people, uh, but anyway, just reducing your equity exposure dramatically, you know, probably made sense at that time. And, uh, and here we are today, by the way, um, where, you know, the earnings yield on U. S. equities, not, not global equities, but with U.
S. equities, the earnings yield, uh, you know, we're under 4%, uh, Uh, and tips are offering over 2%. So this expected risk premium between US equities and, and tips is under 2%. You know, somewhere in the one and a half to 2% range, which is as low as it's been. Uh, I, I think it got this low back in 2007, and then again, you know, going all the way back to 2000.
But the. Compensation that you're expecting to get from U. S. equities right now, relative to their risk on a long term basis is not great. I mean, we are in this sort of lower risk environment. Momentum is positive. Risk is, you know, expected volatility is relatively low. But just from a long term risk premium perspective, you know that, uh, you know, owning less than your baseline amount of U.
S. equities probably makes
[00:34:25] Bogumil: sense. You ask this question in the book that I highlighted, and that's related to what you were just sharing. The question is what risk free inflation protected after tax return would you be willing to accept on the totality of your wealth for the rest of your life in order to completely forever forego any other investment opportunity?
And it made me pause because it's a bigger question, right? It's a, it's a one decision forever. You know what the terms are. What's the number? And you asked people about that, and they came up with a range of numbers. What's the number
[00:35:00] Victor Haghani: that you usually hear? Yeah, so, uh, yeah, we did a survey of a bunch of our friends and clients of ElmWealth.
Um, it's, I think it's such an interesting, uh, you know, good, good question. Um, so. You know, I think that the answer to that question will be different, you know, depending on the environment that we're in. So it's important to also say when we were doing the survey. What was that environment that we were in back back then?
I think that, uh, the real yield on tips was between 1 and 2 percent and, uh, and equities the earnings yield on equities on global equities was 5 or 6%. I think something roughly like that. So, um, you know, a little bit. It was a. Yeah, it was, it was a similar, not, not quite, but a similar environment to where we are today, except that today U.
S. equities are a little bit, are offering a little bit less relative to where they were back then. But for global investors, for people investing in the U. S. and non U. S., it was kind of similar. And, um, Yeah. So for us and for us, taxable investors, um, you know, I think that the most common answer was, uh, was around 2%.
In other words, that, uh, that they would forego if they could get if they knew that they could invest all of their money and earn 2 percent above inflation, risk free forever. And after tax, uh, that they would forego all other investment opportunities for for the rest of their lives. And, um, uh, uh, and the range of answers, you know, was was not as wide as we thought it would be that that, you know, I think there was, uh, that we asked.
Maybe 50 to 100 people. And there was only one person, I think that answered that gave an answer of above 4%. Um, so there was, he was a, he was a hedge fund manager that had been on a real role earning very high returns. So he said 8%. But away from that person, everybody else was sort of in this range of 0 to 4%, I would say, averaging and the median around 2%.
And, you know, there were a fair number of people that just said, if I could get. If I could just break even with inflation, um, after tax and risk free, that I would give up all other investing. And, uh, yeah, it's such, it's such an interesting question. It really ties into this very central idea of, uh, thinking about risk adjusted returns.
That when we think about investing in risky assets that we kind of want to get back to some idea of what's the risk adjusted return that, um, that that that our portfolio is giving us and to answer the question of risk adjusted return, we have to bring in the concept of expected utility, um, you know, a mapping of our wealth or our spending from dollars into sort of how much satisfaction or happiness Uh, or utility, uh, it's, it's giving us and, and, and that adjustment, you know, takes us from just raw expected return to risk adjusted return more, more on that in the
[00:38:12] Bogumil: book.
And I love that transition because I was going to ask you about gummy bears and you have this story that made me smile, how the first gummy bear gives us a lot more. Whatever you call it, happiness, satisfaction, then the 10th for the hundredth. Can you talk about that? And do you think money and wealth works the same way that we really think that the hundredth million is not as valuable to us as the first one?
You would think that's the case, but is it really?
[00:38:41] Victor Haghani: Well, you know, look, it's, I mean, people can have, uh, you know, this is just a question of preferences. It's not wrong. You know, it's not wrong for somebody to have, uh, You know, it's sort of an increasing enjoyment from each additional gummy bear. It's kind of, you know, in general, when we see that, when we see that it's unusual, um, you know, some addictive behaviors could be like that.
It's it's not normally what we see, and it's not a self regulating sort of process to the extent people would behave that way. So, um. You know, we think that most people when they express their preferences do have this decreasing marginal utility of wealth or of spending. It makes sense. Um, you know, we think that we see it in a lot of, uh, things that people do in decisions they make.
Um, but it's not a requirement. People could have different, uh. Uh, different preferences, you know, you wouldn't, uh, you know, to the extent that somebody had preferences, which, uh, favored more well, you know, that, that felt that more and more wealth was giving them more and more utility, that person would be risk seeking and such a person, if they existed, that was risk seeking generally wouldn't, um, if they really made their investment decisions.
In line with those preferences, uh, they would go broke with a high probability, you know, very quickly, you know, not, not necessarily, but they would, you know, they would be happy to take, uh, risks. Uh, they would take risks that had no compensation because it would be increasing their utility. They would be willing to bet all of their wealth on a 50, 50 coin flip because they're risk seeking.
So we, you know, we don't, those people might be out there. Uh, but, you know, we're not, you know, that in terms of coming up with a way of. Uh, thinking about things for most people, you know, I think that we can set that aside as, um, um, you know, as more pathological, uh, behavior or preferences.
[00:40:37] Bogumil: So related to that, I'm curious about losses and you write how we perceive losses and gains in a different way.
And it's a theme that I've seen in many different places, but you really have to pause and think about it because we think that a dollar gain or a dollar loss. It's the same thing, but it's not. We perceive the two experiences in a completely different way. Can you talk about that? I thought it was really interesting as a way of looking at risk.
Sure.
[00:41:03] Victor Haghani: Well, it goes back to the gummy bears or to, or to wealth. I mean that. This, this sort of concave curve of when we map our wealth into our utility, uh, you know, means that, uh, a loss, you know, that if we have, if we have decreasing marginal utility of wealth as we have more wealth, we also have this, um, uh, you know, increasing, uh, marginal decline in our, in our happiness as our wealth or our spending goes down.
You know, we have, you know, preferences are often represented by a smooth concave function where, you know, here's our starting wealth and it's concave below us and it's concave above as well. And, um, and this idea that we are risk averse because of that, because our preferences with regard to wealth are concave that, um, we have, you know, that our whole over the whole range of, uh, that matters.
Um, that we have a decreasing marginal utility of wealth makes us risk averse and this is, uh, this is classic, uh, theory going back to Daniel Bernoulli in the 1700s and, and, uh, and all the way up till today now, all of a sudden we got, uh, you know, a, a modification to that theory by Kahneman and Tversky, which they believe.
Thank you. Which unfortunately they named, uh, you know, loss aversion and prospect theory, and it just is so confusing because it's kind of like a lot of people who have read that this literature, thinking fast, thinking slow, they think, oh, that Kahneman and Tversky, uh. Have figured out that we're averse to losses that they discovered loss aversion.
Well, no, no, no, this is 400 years of 400 years of thinking about how people make decisions under uncertainty recognizes that people are naturally risk averse on of Kahneman and Tversky.
Is kind of looking at some really weird anomalous behavior with regard to very small gambles and is just in my mind just confuses the matter when it comes to making a good financial decisions, you know that that loss aversion that the behavioral economics take on utility functions is interesting, you know, maybe it's how people often do approach smaller gambles.
But, you know, it's not really, you know, I don't think that we need, we need those theories to think about how to make better financial decisions, um, uh, you know, using, um, using preferences and aversion to losses, et cetera.
[00:43:42] Bogumil: It makes you think that there are certain risks that even the richest people cannot afford to take.
That's how I think of it. And one of them would be a permanent loss of all or of a substantial portion of their wealth. And it's a loss that's very hard to recover from, if not impossible. I had Luca Delana on the show who writes about game overs and do overs. I don't know if you're familiar with his work, but.
He talks about how we think about different games and, and he talks about the Russian roulette and then gambling and other life situations where we take on bigger risks than we think that could completely derail us and not allow us to participate in the game of life or in the game of money, if we're talking about investing, which brings me to a more personal question.
If you indulge me, I'm curious about your career as a hedge fund operator. And you share a personal story, what you learned from risks that you, you took on, whether you were aware of it or not at the time, you can share how much you want, but I'm curious about that experience where, uh, LTCM had serious trouble and it affected you on a personal level and affected your personal wealth as well.
[00:44:53] Victor Haghani: Sure. Um, so I was the founding partner of LTCM. And, uh, you know, of course, you know, with with almost any kind of investment business, the idea of having some skin in the game is important, especially when you're starting. So, um, so when we got started at LTCM, all the partners invested a substantial amount of their savings also into the fund as a moving partner.
Because we thought it was a good investment. And also that was, you know, useful, um, in raising money to have some skin in the game. But over time, as, as LTCM did, well, you know, we had a lot more flexibility to think about just how much of our liquid assets we wanted to invest in the fund. Uh, and, um, you know, I realized now, uh, you know, looking back on that, that I didn't really have a, uh, you know, a full.
Sensible framework for thinking about that question. You know, I wound up making my decision in in a way that I would say doesn't stand up that well, uh, as a, um, as a way to make these decisions. The way I made my decision was like, I said, okay, um. No matter how attractive an investment opportunity is I want to keep some amount of wealth on the side so that if everything goes wrong, I'll still be okay.
And then, uh, and then with the money that I want to put into this attractive investment, you know, I would like to, I would even be willing to be leveraged, you know, into that attractive investment. And so, you know, you could think of that approach as kind of saying, well, I'm going to be completely risk averse with regard to, say, 20 percent of my wealth, and then I'm going to be risk neutral with this other 80 percent of my wealth.
And, you know, I think that it at least gave me an answer of what I wanted to do at the time, but I don't think it's really a good framework because I don't think that I was risk I know that I was not really risk averse with regard to The other 80 percent of my wealth. And so in the book in chapter eight, we go into more detail on how one could take this expected utility approach or the vet sizing that we talked about with coin flips, et cetera, how you could take that approach and apply it, you know, with some assumptions, important assumptions into.
Um, you know, the situation of a partner like me deciding how much to have in his own investment fund and, uh, you know, so I think that LTCM is just this, you know, sort of wonderful case study, um, of exactly what we're talking about in the book, where it's like, you have to make investing involves two decisions, finding good investments, identifying the, uh, the what to invest in, um, And then making a sizing decision after you've identified what you think is attractive and that it is possible and LTCM is this.
Is this, is this, uh, perfect illustration of this that you can get the first part right. So LTCM had trades on which people generally believe were good trades. We believed were good trades and ultimately made a lot of money after the collapse of LTCM. Those trades. We're good trades, you know, so we think that we identified good trades, but we had the sizing wrong.
And so you can have good trades, but if you get the sizing wrong, you can lose everything and making the sizing decision, the really critical one to get right. Because if you have bad investments, like if you've identified investments that aren't good, but you have the sizing, right, you know, you, you live through that and you go on and you have another opportunity to find attractive investments.
Uh, so. You know, that sizing decision is so critical to get right. Um, and, um, uh, you know, not only in a situation where there's lots of leverage, like as an LTCM, where sizing was even of more importance or more critical, uh, but in, uh, you know, in lots of other situations, you know, it's, it's, it really is critical also, although it might play out over a longer period of
[00:48:53] Bogumil: time.
So what I'm hearing is when you participate in any game, whether it's the coin flipping or. Investing. There might be a scenario when one of the outcomes is A, is a total ze zero or close to a total zero, and being aware of managing that kind of a risk and with the betting of the coin flipping. What I'm learning from your book is that if you manage the sizes of the bets in a wise way, the odds of ending up with a total zero.
It's very unlikely or not possible. I think that's something that is very eye opening because we don't see it free with each of the coin flips because we lost only 10 percent or 20 percent of what we have. But if you bet long enough, you could end up with a scenario that is not acceptable. That's what I'm hearing.
If, if I'm hearing you're right.
[00:49:47] Victor Haghani: Well, I think that if you're, you know, that if you have a 6040 coin and you're betting 10 percent of your wealth on each coin flip, uh, you know, that the, that the probability that you even lose 50 percent of your wealth is, is exceedingly small. The chance that you lose 80 percent is infinitesimal, you know, even just an 80 percent drawdown, you know, flipping a 6040 coin.
Betting 10 percent each time is, is, is a really, really tiny probability. Um, but yes, I mean, what you really want to do in investing, uh, you know, is to, is to, well, is to realize that, you know, if you lose 50 percent to get back to where you were, you need to make 100%. Uh, you really need to focus on, um, you know, not allowing, you know, well, to do your best to not allow, you know, losses of greater than 50 percent to, uh, to hit your, to hit your wealth.
And so, you know, thinking about tail probabilities, I mean, it's not always possible, you know, there are things that are, uh, you know, there might just be some, you know, large macro things that we're all exposed to that could really have a terrible impact on everybody, but to the best of our ability, I think, you know, uh, avoiding.
Uh, you know, avoiding taking a lot of risks that could wind up, you know, seeing our portfolio down 50 percent is the good way of thinking about it. So, you know, for an investor to have 100 percent of their money in Apple, well, clearly the probability that Apple goes down 50% Is, is very substantial.
There's no, no doubt about it. I mean, we could look at the options market, et cetera, and see that, you know, that for sure Apple could go down 50%. I mean, you know, it's less than a two. It's less than it's less than two standard deviations in just one year, let alone say, I'm going to be an Apple. You know, I think Apple is the best and that's all I'm going to do or having all your money in Berkshire Hathaway even, um, Is, uh, is, is, is too much risk in my opinion.
Um, so, you know, you don't, it doesn't have to be an LTCM situation where there's a lot of leverage involved, et cetera, you know, it can just be taking a lot of idiosyncratic risks by having a concentrated stock portfolio can also really hurt your compound returns.
[00:52:00] Bogumil: I agree. Yeah. That's a, that's a big point and a big lesson behind it.
There's a framework that you propose that I really like about the lifetime of spending and investing. And you ask a question that really made me pause. You talk about a situation where, how would you decide if you were to live forever? Immortality, which is actually a topic that came up in my conversations in this podcast quite a few times.
How would you make life decisions and investment decisions if you were to live forever? And it's really interesting how people think about it, but you propose some ideas around an endowment, how endowment manage money. So they'd never run out. So they do live forever. Humans don't, at least not yet. It makes you think harder about how you will spend money and how you will invest money, which goes back to the early conversation.
A family fortune in an ideal situation is meant to last. Forever, never to be depleted. Can you talk about that lifetime of, of investing and spending? How do we think about it the right way?
[00:53:00] Victor Haghani: So sure. I mean, I think, uh, I mean, obviously, you know, uh, even endowments don't have an infinite life, but you know, for very, very long term, uh, Pools of capital that are, you know, I mean, we have to realize that the, uh, that ultimately the purpose of any capital is to is to spend it.
You know that that capital we can spend it on ourselves. We can spend it on others, but just the counting the counting of wealth doesn't really count in my mind as a, as a, as a use of, of, uh, capital and savings. So, so the framework of, uh, the, the long term, Okay. Framework for financial decision making is making decisions that maximize.
That maximizes your lifetime. Uh, the lifetime expected utility of spending and actually a little bit more formally. It's maximizing the discounted lifetime expected utility of spending. So what we can think of is. Uh, that we want to have a spending policy where we could look at each year. We think about, uh, how much money we can spend, we spend in that year.
We get the utility of that using our utility function, this concave thing. So we, we, um, convert the spending amount into a utility number. We get the expectation of that, you know, over all the different things that could happen. And then we also discount that with some time preference back to today. You know, we don't, you know, might be that some people don't have a time preference, but in general, we think that the people in most institutions have some time preference that spending a dollar today is better than spending an inflation adjusted dollar 100 years from now.
So that's the setup of the problem. And when you set it up like that, um, then you can say, well, what is, you know, for a given. Uh, for a given risky portfolio, what is a spending policy that optimizes that, uh, that some, the sum of the discounted expected utility of spending, um, that, that, uh, that I can. You know that I that I have from that spending policy and we search over all different spending policies to find the one that maximizes that.
So that's the problem. And when you do that, you know, under some simplifying assumptions, um, what you find is a very simple formula. And the formula is, um, that the amount that you should spend is equal to. Um, the risk adjusted return on your capital, uh, the risk adjusted return that you're expecting to make on your capital, your expected risk adjusted return, um, minus, um, uh, minus your risk adjusted return minus your time preference, both divided by your degree of risk aversion.
Now, okay, you know, it's a little bit hard to visualize that, but it's a pretty simple formula altogether. And let's just, you know, run a number through it for a second. So let's say. Uh, that, um, you know what? So what's a reasonable risk adjusted return for an investor today? Well, you know, uh, we know that, uh, you know, we know that tips are yielding around 2%.
So we know that if we just invested in tips, we'd get 2%. But let's say we decide we want to have, you know, 60 or 70 percent in equities because, you know, equities has higher expected return. Let's say we expect an extra 5 percent from from equities. Well, that's the expected return is 5 percent on a 5 percent extra return on 60 percent of our portfolio, but we need to convert.
That 5 percent expected return into a risk adjusted return. And in the book, we go into why, in general, just having it is a good approximation. So the risk adjusted equity return is an extra 2. 5 percent on 60 percent of our portfolio. So that gives us, uh, uh, what does that give us? Um, an extra 1. 5%. So let's say that our risk adjusted return is this 1.
5 percent from equities, 2 percent from tips. You know, let's say we're going to ignore taxes for this case. Uh, so that's a 3. 5%. Risk adjusted return on our portfolio. Okay. So now I'm saying that the optimal spending is 3. 5%. That's the first part of the equation. 3. 5%. And then minus. And then we have 3. 5 percent minus your time preference.
So let's say you have time preference. Of 2 2 percent you know that you discount future spending by 2%. So you have 3. 5 minus 2. That's 1. 5 percent and then divided by your degree of risk aversion. Let's use a number of 2 again. All of this is more explained in the book. Let's use a number of 2. So you're making a pretty small reduction because you're taking 3.
5 minus 2. That's 1. 5 divided by 2. So that's 0. 75. So we're taking. 3. 5 minus 0. 75, which takes us down to 2. 75. So we would say that this optimal long term spending rate is call it, let's call it 2. 5 percent just to keep a round number in mind. So we're saying the optimal spending policy would be to spend 2.
5 percent of your wealth. Uh, 2. 5 percent per year. Over the very, very long term and what's interesting there really is just how the expected return on your portfolio is quite a bit higher than that. You know, the expected return on your portfolio is like 5 percent but we're saying the optimal spending is just 2.
5%. 5%. Why don't I just spend 5 percent a year? That's my expected return on my portfolio. And what we would show is that if you did that. That the most likely outcome for your portfolio is that the value would be decreasing, uh, over time, that the most likely or median, the median outcome of your portfolio is drifting down with time, uh, you know, even though the expected value of it is staying constant, the median is going down, and we kind of care about the median, uh, but from first principles, we Can derive this long term spending rate of around 2.
5%. And of course, you know, for taxable investors, it's quite a bit lower than that. Um, you know, because we did all of that without taking account of taxes, taxes. It hurts that risk adjusted return quite a bit. It makes me think of... So spending, you know, one, one to two percent of your wealth, you know, is probably more like a long term sustainable spending rate.
Now, if you have a finite life or whatever, then you, you know, you know, okay, then this one percent or two percent number that we're talking about should be used to sort of annuitize your spending and say, okay, well, you know, I, I should be spending down some of my capital too, and so you would spend more.
Uh, you know, given a finite life or some finite horizon, or maybe you just care about your life, your wife's life, and your kids lives, and that gives you, you know, again, a finite horizon where, um, you would spend more
[01:00:16] Bogumil: in general. It makes me think of the 4 percent rule or 25 years of annual spending. Which is a formula that a lot of people quote, and it's been studied and researched and over a certain period of time, apparently it has worked that you would not have depleted your capital had you had a 4 percent rule.
And obviously in the last few decades, we had zero interest rates. And now we have 5 percent short term interest rates, wide range and different expectations in terms of equity. So I think it can be influenced by the time that you study, but it's, it's really interesting to have that kind of a baseline to realize what's the number.
What amount can I take out, whether it's an endowment or a family fortune without the risk of depleting it ever, or as you mentioned, in a generation or two, or maybe even in three or four, what's the number and always remember what kind of context we're operating in, what's the risk free rate available at the time and what's the Different investments.
What do they offer? What can we expect from them? Given the starting point for this whole conversation, there, there is a story that you shared towards the end of your book that I want to come back to. And it loops back to some of the topics we talked about. You share a story of your last hand of liars poker at Salomon and you say, you don't remember your first, but you remember the last.
I'm very curious to hear more.
[01:01:42] Victor Haghani: Well. Yeah, it was it was, uh, I, I really, I really thought it was just such a, uh, uh, um. A, um, serendipitous kind of outcome, uh, where I just, I almost felt like it had been orchestrated to make my exit from the trading floor, uh, you know, to be more sweet than, than otherwise, but, um, yeah, I mean, well, for one thing, it was interesting that when I started, uh, at Solomon, when I started out on the trading floor and started to play liar's poker in 1986 or so, um, uh, you know, the, uh, I mean, I'm sure my first hand that I played, I was very nervous and I'm sure I lost or didn't win, but, uh, but we were playing for much smaller stakes also, and the stakes kind of escalated over the time that, uh, that, that we were there.
But, uh, yeah, I mean, sometimes, uh, you know, that, that, um, randomness, you know, I think one of the lessons there is that randomness. Uh, which I'm sure it was just a random outcome that I won on my last hand, won a big hand on my last hand on the trading floor. That, that randomness often just feels so non-random to us, I guess is one, is one thing to take away from all that.
Uh, but yeah, that was a, that was a, uh, a really fun way to, uh, to cap my
[01:03:02] Bogumil: years at Solomon Brothers. And then you hint that you didn't play again, and you were not playing it with your colleagues at L T C M and. Why not? And had that had any impact on, on the work and the results? You have some thoughts in the book, but I'll let you share.
[01:03:21] Victor Haghani: Well, yeah, I mean, uh, yeah, it was interesting, you know, that we, we used to play a lot when we were at Salomon, you know, after the trading day was over. Um, you know, as sort of a way of people unwinding and having fun together and so on. Uh, but at L T C M, we, uh, for whatever reason, we, we kind of stopped, uh, playing.
We played much, much less. And, um, you know, I think that, you know, in some ways that, uh, that having our own fund and, um, you know, being. You know, more in the public eye and all of those things just, uh, was, you know, more serious, you know, that we, I don't know, we, we, uh, we, I guess we just had less time. Uh, we had less time, there was more to do, uh, things were more serious and, and it was, and, and, you know, it was kind of less fun, you know, we just had more fun, I think.
Being a little bit younger, being at Solomon, being in that whole setting on the trading floor with so many other people around, um, you know, it was just, uh, it was, it was just a, um, a more, uh, more enjoyable and free spirited atmosphere than, you know, once we, uh, You know, God got to doing our own business at LTCM.
So, yeah, I did. I did wonder whether, um, you know, there was there were some really nice benefits to that camaraderie and, uh, and light heartedness that we had at Solomon that, uh, that somehow got a little bit lost when we went to LTCM.
[01:04:53] Bogumil: Do you think that game Liar's Poker at the end of the day was a refresher in how bets work?
A refresher in the coin flipping lessons that we started with today?
[01:05:04] Victor Haghani: I, I do think it had those values because, you know, in, I mean, that, that in making good financial decisions. Um, you have to think probabilistically that you can't think about just the central case or a base case. You have to think about the whole distribution of outcomes.
Um, and of course, in making financial in making good financial decisions, there's another step, which is that your objective function has to. Uh, take account of this marginal decreasing utility of wealth. Whereas if you're playing liar's poker with a small amount of your wealth, you're really kind of focused on, uh, just the expectations, but being comfortable with probabilities.
Or thinking probabilistically is probably the, the most difficult part of making good financial decisions, you know, not letting your decision get wedded to, uh, to a base case, for instance, or a worst case for that matter. Um, you know, thinking, thinking about a weighted, a weighted outcome, probabilistically weighted outcome.
And I think that, you know, Liar's Poker was great for that, you know, it really made you think probabilistically.
[01:06:14] Bogumil: For some reason, it made me think of the idea of getting rich and staying rich. And just thinking about our conversation and, and I see it with quite a few of our newer clients that join us, they might have taken big risks starting a new business or focusing on one career and getting a big windfall one time, but then to transition your mindset to actually staying rich from here, it's a different set of risks.
It's a different, it's usually not a single investment, but portfolio of investments, but there's this sweet spot, a moment when. The person realizes it's a different path now than the path they were on. And the utility that you talk about once you have a head start, you use the word in your book that the billionaires or millionaires that you talk about have a head start, and it's so easy to lose that head start if you don't transition to a whole different mindset of what kind of risks are you willing to accept now given That you do have that head start with you today.
That's what I'm hearing.
[01:07:17] Victor Haghani: Yeah. Yeah. Well, and I think that transition is really difficult for, for people that have, uh, taken a lot of risk and, and been really successful with those risks, had really good outcomes. You know, making that transition is really, really difficult. I think most people probably, uh, you know, many, many people don't make it.
But, um, but those are very, you know, at the same time, like, you know, those are very few people. And, uh, you know, for most people, you know, building wealth, building retirement wealth is kind of, you know, uh, you know, as you know, can be something that they're really doing consistently, you know, for most people, right.
It's, it's okay. I've got my job. I'm doing, I'm saving as much as I can save, you know, towards the future. I'm investing wisely diversified. You know, sensible and they're sort of they don't need to make a transition. You know, they're just they could be following that from their from their 20s or early 30s, you know, on through.
But I agree with you that, you know, the people, um, you know, that wind up with, uh, you know, somehow one way or the other, really hitting a home run by taking, you know, that involved a lot of risk. Um, you know, I think those people, you know, face this challenge of a transition that's difficult.
[01:08:30] Bogumil: Before I ask you the last question I have for you, I was thinking about a lifetime of contributions and a lifetime of distributions, and I wrote an article about it, how it's the two situations that you described.
Somebody with a family fortune possibly faces a lifetime of distributions. They'll be living off of the capital that's been. Created in the previous lifetime or lifetimes, and it's a whole different level of responsibility from day one. You have to think about this capital and how you're going to invest it for the next few decades.
And hopefully you have the right advisors around you. Somebody with a lifetime of contributions has a chance to learn with small mistakes, putting away. A hundred dollars or a thousand dollars regularly, and then they can fine tune it and they can think about the allocation and how much in equities and so on and get comfortable with it.
But they really have decades to grow wealth the way you describe through saving and building a nest egg, but at very different mindset and a different level. Of immediately needed responsibility when you're sitting in front of a family fortune or a windfall that happened to you at a given point in time, Victor, I feel like you've lived many lifetimes and reading your book and talking to you today, you know, between Salomon, LTCM and the ventures that follow and what you're doing today.
So I'm curious about your definition of success on a personal and professional level. How do you think about it?
[01:09:49] Victor Haghani: you know, when I reflect on my life, that, uh, you know, up, up till now, um, you know, I think that I've just been the, the beneficiary of, of so many gifts from, uh, from so many people being born at a good time, in a good place, um, you know, having, having loving parents, having, Um, you know, colleagues and bosses and teachers and mentors that have, uh, that have helped me so much.
And, you know, and friends and strangers that have, you know, intervened in my life in different ways, uh, you know, that have had really good outcomes. So, you know, I think that. That I want to give back also. I mean, I want to feel that, um, that I also have helped other people, um, you know, in, in their lives.
And so I guess, you know, just thinking about this give and take, um, uh, you know, I, I'm definitely in, in a deficit still, but I'm, you know, I'm not that old. And I kind of hope that by the end of my life that, um. You know, that I, that I feel that, uh, you know, I've, I've given, uh, you know, I've given as much or more as I've been the recipient of, so, yeah, you know, it's hard, it's very hard to tally that up in any quantitative way, uh, you know, but, uh, you know, being a good, a good husband, a good father, you know, are, are important, you know, can be important contributions, um, and, um You know, being a good friend and, and just, you know, trying to help people in different ways.
Um, you know, and, and trying to get that balance, you know, more into the, um, into the black and away from the red, I think for me is, is how I would try to tally it up.
[01:11:27] Bogumil: Yeah. It's a beautiful way to put it. Victor, thank you so much for today. I learned a lot. I highly recommend your book, the missing billionaires, a guide to better financial decisions.
I learned a lot from it and I've read. Many books out there before I felt like it brought together a lot of ideas that I might have been sort of familiar with, but you really highlighted and brought it all in one place and created a framework, multiple frameworks to think about investing, saving, spending, and how we can just tweak our decisions and make them work better for us, whether we're starting off with a big family fortune or with the first hundred dollars that we decide to invest.
So thank you so much for today.
[01:12:08] Victor Haghani: Thank you for having me. I really enjoyed our conversation. It was great.
