A Framework for Investment Success (w/ Raoul Pal & Dylan Grice)
RAOUL PAL: Dylan Grice, finally we get you back. You're one of the first people we ever had on Real Vision. Everyone's like, oh my God, he's the smartest man in the world. Then you went undercover, and nobody's ever seen you again. Tell us, give people a bit of background about you, where you've come from and what you're doing now. It's been a really interesting journey. DYLAN GRICE: Background from beginning when? I'm speaking to you hear from Switzerland. I've been over here for the last six or seven years. I left SocGen, where I've been a strategist on the sell side and banking. I've enjoyed that very much. It was great fun, but I think I needed to be doing, and not just talking. I had an opportunity to do that. I had an opportunity to come to Switzerland and really help out with a family office here, one of the largest family offices in Europe, a company called Calibrium based in Zurich, and they really wanted some help building what was initially an equity business, but eventually became the multi-asset and liquid allocation so I helped to build that, to establish that to really embed the investment philosophy that went into the investment decision making. RAOUL PAL: How was that journey? Because that's a big journey of discovery from the strategist side to now helping evolve a big family office and then evolve your skill set at the same time. DYLAN GRICE: I started out, very beginning of my career, I started out as an economist. I did economics undergrad, I did economics post grad. My ambition in life was to be an economist. That's very sad. Well, that's all I wanted to do. I know it's funny. It's funny and everything out of, but it's true. I love the idea of trying to figure out where, actually why some countries were poorer, and some countries are rich. Some people were poorer. Some people were rich. This was something that was very interesting to me as a young adult, and so economics is a way to try and better understand that. I just ended up, I was at the LSE, everyone at the LSE was applying for jobs in banking. I didn't know what an investment bank was. I honestly thought it was basically, when you go in a bank and you would cash a cheque and there would be someone behind the glass. I thought it was something like that, but they were all banks. Anyway, without really knowing what bank was, I thought I would apply for banks anyway, which I did. Got a job as an economist and ended up thinking, well, this is actually better than doing a PhD because I'll [indiscernible] economics, and I'll get paid much better. That was my thinking. What I rapidly figured out, it's not that I figured out how to do economics, I figured out that economics was practically useless. Theoretical economics, for all practical intents as useless, I really, really believe that. You go from trying to predict the economy to trying to predict unemployment to trying to predict markets and this is just much more difficult and frankly, much more interesting. I went from economics to property then. I was a property trader for some time, addressing and buying on the equity desk. That was a lot of fun too. I unfortunately shut that down, which is when Albert hired me, it's all jam. I went from my whole career had really been I started out as an economist then went to be a property trader, then went back to being a strategist, so there's oscillation between thinking and doing, thinking and doing. Then on equilibrium, it was lots of doing, but there wasn't much-- there was a lot of things but there wasn't so much writing or speaking. Actually, it wasn't such a big shift to go from a strategist to actually help them to bear with that framework for multi-asset allocation, it wasn't such a big difference. There's not as big a difference as it might sound. RAOUL PAL: Then you were running a portfolio there? DYLAN GRICE: Yeah. Well, certainly, the first few years, actually I built the equity business in [indiscernible]. We're a family office, so obviously, we weren't pitching for money, but I built the team, hired the team, hired a couple of analysts, manage the portfolio, but it wasn't so much-- the thing that I always said to the guys at Calibrium was-- one of the things that interests me is actually in building a process, building an architecture for thinking correctly about investing, is this a good investment hypothesis? What makes a good investment hypothesis? How do we know that the investment hypothesis is wrong? How do we size positions? This was the commitment that I made really was I'll build you a team and build you up a framework if you like. It doesn't really need me to run it. If I get hit by a bus, then you can still keep cranking the handle, you've still got the philosophy is very firmly embedded. That's what I went there to do. That was fundamentally just equities. We started out with an equity portfolio. That went quite well. We then designed another equity mandate, it's a little bit different but that also went quite well, with the same team. From there, there were a couple changes at the firm, but I ended up being asked to do what we've done for the equity team for the overall liquids team. Rather than being a stock picker, which is effectively what we're doing, we were now making allocation decisions. How much between equities versus credit, versus rates, versus precious metals, et cetera, et cetera, et cetera. This played into something that I'm very interested in, which is that, I think that even though domains are very different, so an equity guy might think that the skill set is very different from a credit guy who might think that the skill set is very different from a macro guy, or even from a quant guy. On one level, yes, the skill sets are very different but on a more fundamental level, the principle is the same. The principles are always the same. The principles are, do I understand what's going on? Given this radical uncertainty, do I actually understand what's going on? Do I understand well enough to know when the odds are in my favor? Do I understand well enough to know when I've made a mistake? These are the fundamentals of any investment and so applying those fundamentals to an equity team wasn't actually so different to applying it to a multi-asset class team. RAOUL PAL: Now, you also build the whole philosophy around how you think about investing. You've spent a lot of time thinking about stuff and how, because you've now built a new business, so talk a little bit about that. Then your philosophy about what you're trying to achieve now, because I think it's very interesting when you and I caught up recently. DYLAN GRICE: Of course, we started Calderwood Capital at the back end of last year. The idea is that it will really be there'll be two parts of the business. One part is the research side. The other part will be a fund management side. Fund management's a much more difficult business to get up and running than research and so we got research went live last year, and that we published in a monthly newsletter, a relaunch of The Popular Delusions, which is what I used to write at SocGen. Obviously, it's come on a little bit in those years because I've had this family office experience and this family office background, it's really had a very big effect on the way I see things really. The Popular Delusions is partly influenced maybe by the practicalities of actually, how do you actually invest? You may have a view on what's going to happen to the world, you might have a view on what's going to happen to central banks, or the next election or all of these things, but how do you actually build a portfolio? It's not just what's the trade, it's where do I put this in the portfolio? How do I put it in the portfolio? How do I size this in the portfolio? These are more practical questions that interests me and that's what the research business is really about. It's really about trying to tackle those questions. RAOUL PAL: You also come with a specific deep value framework as well? DYLAN GRICE: Well, yes. I think a valuation framework, yes. I think when you see deep value, then it has certain connotations. I think people think that it means that you won't buy anything that has a PE of more than five. I'm like no, it's not actually what is, but valuation is absolutely completely very, very value oriented. I don't know how else to think about investing, if you're not actually thinking about the expected returns. Yes, we absolutely bring that to add to the research, but as I said on the website, we are in the process of building an asset management business. The stuff that goes into the research is these are these are practical questions that we ourselves are trying to answer. These are questions that we ourselves are wrestling with, and because these are things that ultimately will end up in the portfolio or ultimately will influence the portfolio in the asset management business.