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