Stock Market Survival w/ Anthony Scaramucci (WSB373)

Great to be here, Trey. Thanks for having me on.

With already establishing that you're a nice person, right? Because you could have said Mooch, you're like mayhem from Allstate. You crashed through the window, you roll on the floor, but somehow you still manage to get up. You could have started like that. It sort of made me feel warm and like, it was building my self-esteem.

First of all, it's very flattering. Thank you. The kids in my neighborhood were as smart as anybody else. If their dad was putting in sheetrock or the dad was a plumber, or like my dad was a crane operator, it didn't mean the kids were stupid or the family was stupid, it had to do with limitations of society where you're born, the hustle of trying to make your ends meet. In my dad's case, I would probably say his mistake that he made is when he got out of the army, rather than accept the GI Bill because he already had a kid, he felt pressured to go right to work. He may have been better. I don't know if you ever played the game of life, where you spin the wheel, you can make a choice to go to college. It takes longer, you make more money, or you can go directly to work, you make less money. But it doesn't mean people are necessarily dumber. I used to tell people in my law school class, kids in my neighbor are as smart as you, and in some cases, probably smarter, but they didn't have the guidance. When you talk about nature versus nurture, my mother's a lefty. She's 84. She got trained by nuns and her mother to write right-handed because if you were a lefty back in the day and you were Catholic and you grew up in this superstitious Italian family, they would teach you how to write right-handed. But my mom, she can do the math in her head. And when she reads something, she never forgets it. So, I guess what I'm saying is, is that there's a lot of stereotypes that we need to scrape away in our society. There are so many people out there that are incredibly smart and gifted, but just for a couple of breaks, a couple of opportunities in some diligence, and to your point, persistence. When you're getting beaten up or destroyed, you got to get up and move. You can't sit there and have any feelings of self-victimization or self-pity. For me, my parents said, you're going to go to college. I thought I was going to go to the local college. My father came home from work one day, turned to my older brother and me, he said, "You're going to Tufts." And then he said, "It's spelled T-O-U-G-H-S." My brother was like, okay. He looked up in the Barron's phone book. Like the directory of colleges. He opened up the book and he said, "Dad, it's spelled T-U-F-T-S. I think it's somebody's last name. And by the way, it's most selective. We're not going there. I don't know what you're talking about." But my dad was working hang trucks as a dispatcher at the time. He started as a crane operator, was weighing trucks, and there was a guy named Billy Tommaso, who's now deceased, may his soul rest in peace, but he told my father that he went to Tufts and that he would get me and my brother an interview there and he would help us get in there. What my father also didn't understand at the time was that it was $24,000 a year. It's probably 70 or 80 today. But back then, it was a private school, still is, and it was very expensive. My brother went, I followed him there, and we were hustling there. We were delivering pizzas, selling t-shirts. I was working in the economics department as a research assistant while I was going to school because I didn't really have the money. And then my dad got me a union job, which is why I have tinnitus, by the way, because this is a mess, everybody out there with your ear pods, lower the volume because you're going to end up with tinnitus. You're not going to like the tinnitus when you get to my age, but I was working on a construction site without the hearing protection every summer to get myself through school. I'm probably being too long-winded, but I think there's three things I would say. Number one, nature versus nurture. There's a lot of people that are very smart, but they don't have the nurturing trajectory. Number two, if you're getting your ass kicked somewhere in your life, shut up, don't be a victim. Get up and get going. And number three, take joy in wherever you are. Can't live like some of these people live. I mean, I'm surrounded by like some miserable millionaires. You're studying billionaires, but I got to tell you, I got friends of mine worth a hundred million dollars. They're upset that they're not worth 2 billion. Are you out of your mind? The fact that you're living on planet earth with that kind of money in our society with this level of freedom and opportunity, you should be very happy. So, you have to always have a good perspective.

Yeah, look, I probably am that, but I mean, I never really got myself heavily invested in any specific political party or ideology. I would be somebody ... I used to tell people, it's not really about left or right. It's sort of about right or wrong. My oldest son just graduated from Stanford Business School. He's probably your age. He's like, "Dad, you're killing me because you were with Trump and the Democrats hated your guts, and now you left Trump, so now the Republicans hate your guts, and the Democrats will never accept you because you were with Trump. You're killing my networking opportunities." This kid said to me. I'm like, all right, well, maybe I'm getting closer to the truth. There are elements of what Trump was saying that people do need to listen to. They will hate me for saying that, but they do. And there are obviously elements of what he was saying that was absolutely borderline criminal and traitorous, but there's a struggle going on in society today. The family I grew up in, that you've referenced, was an aspirational blue-collar family. My dad was making enough money, where Trey, I didn't grow up poor. I grew up decidedly in the middle class. I would never dishonor my pops by telling you I grew up poor. Did not grow up poor. We had plenty of macaroni. We had air conditioning. We used to put the air conditioners in the windows on Memorial Day. We had to take them out of the windows on Labor Day. That was my father's orders. We cut and landscaped our own lawn. And we shared a bicycle. I shared a room with my brother, but we were not poor by any means. That very same family today though, would be poor, because my dad's job, if it was still available, then probably eliminated by the forces of automation, globalization, and the way we do things differently 40 years later. But that very same job, if available, would be down about 26%, 27% in real wages. So, he would be on the poverty line or close to it. He would probably need an EBT card to help out his family. You can hate Trump, but let me tell you, those families that were aspirational blue-collar families that have transformed into economically desperational ones over 40 years, that's something that elites should wake up to. That's something our public servers should wake up to. We have to fix that. Otherwise, there'll be more anxiety, more anger, more angst than wicked politicians will take advantage of.

Well, first of all, I love Joel. He lives in my hometown. He lives on the water in my hometown. He's a brilliant investor, and his book started the little book series. So, John Wiley asked Joel to write the book, the little book, I think, on value investing, I think it's called. It's a brilliant book. I think it's in five or six different additions now, and a result of which it sparked the little book series. I'm very proud to be a part of that series, but Joel is the patriarch of that series and the best seller in that series. But I would say that, similar to Joel, although I probably made a step further along what people call GARP investing, which has growth at a reasonable price to growth investing. That's not to say growth at any price, but just understanding macroeconomic trends and growth or stocks that sort of track the arc of Metcalfe's law. Robert Metcalfe, about 40 years ago, 1981, said, you can measure intrinsically the value of something if it has exponential growth. It could be a phone system. It could be a network switching capability where you're selling network switches like Cisco did. It could be a retail network like Amazon. It could be an information and search network like Google, and that you may not actually see it in the earnings or the operating statement, but you will eventually see it if you've got the growth trajectory right. Of course, that was the case in Amazon as an example. Yes, I would say that I'm a disciple of the Greenblatt-Buffett school of investing, but I think I've evolved to recognize that the world is moving so quickly that we have to take an exponential mindset if we want to keep pace with the world. And that augers things like Bitcoin, which I believe is a robust growing monetary network. It's Facebook, those stocks, people say, oh, they're too expensive, but you know what? If they're growing like that, you will eventually be able to justify the price that you pay.

Well, what happened, and I said this in the book, I wrote it in 2012, nine years ago, is the monetary policy distorted the gestalt in the hedge fund community. How can I say this? If I'm going to lower rates, rates are interest rates or the financial gravity of assets. If you lower the rates, the prices are going to go up. If you raise the rates because of the way a dividend discount model works, the prices are going to go down. They were experimenting with quantitative easing back then, and we lowered the rates, and I said, this is going to be a problem for the hedge fund industry because they're in price discovery, they're doing Joel Greenblatt like work, where they're analyzing a specific company, they're saying, okay, that company's going to grow faster than the street thinks. It's going to be worth more. That company is growing slower or it has inferior fundamentals, it's going to be worthless. So, you would get long that one, short the other one, and you'd hope that pairing would lead to a great result. Then yeah, the monetary policy. Monetary policy, it's the rising tide, it's lifting all boats. So, your long, so you could be a great long picker. Let's say the market's up 10, you're up 16, but now you've got shorts on the market's up 10, but your shorts are going up. Maybe they only went up six. If you marry the two, you're up 10. You're in line with the market, or in some cases, you're below the market, and that's more or less what happened to the hedge fund industry. If I added a chapter to the book, I would say what I'm saying to myself, what I'm saying to my hedge fund managers that we have in our portfolio, we have to adapt, we have to be a Swiss army knife. Maybe you came into the game with a machete and you were doing a great job. You may need a pen knife now. You may need a corkscrew. You may need something different or what's going on in the world today. I will say this to you, which I absolutely believe the 60/40 portfolio for the individual is over. You've had 41 years of ridiculous interest rate activity in the bond market, which has forced the bonds through these exponential prices. And they may continue. You may get negative rates, but if you're getting negative raise, it's also telling you that there's something sluggish about the overall growth in a society, so I hope that doesn't happen. But to me, I think you got to be in a combination of things, but growth would be the most important of those things as it relates to what's going on right now.

Well, we're no longer in the seeding business because we've gotten to be such scale that I've got to be able to put $100, $200, $300 million to work. You really can't do that at hedge fund seeds. Because one of the things you have to be careful of is you don't want to be too much of the assets of the fund manager. But when I was seeding, there was something that I was looking for always, that Simon Cowell would call the X factor. Simon Cowell would tell you, it's not enough to be a singer or a great songwriter. Are you going to chew through this? I'm talking to you from a Macintosh hard top computer. Am I willing to chew through this computer and eat the glass of this computer to be successful? That's rare. I mean, that's rare in every industry. So, yes, good analytics, reasonably common. Good judgment on stocks, reasonably common, but the person has to run a business, the person has to understand the regulatory environment they're in. The person has to hire and train and motivate people and set an ethos for the culture of the organization. Those are all those X factor things, but I can tell, and I think it could be related to my upbringing, I can tell right away when I'm in the presence of somebody that's not taking no, and it's a low entitlement person. A person that I'm listening to who may have a really good pedigree. They could've come from a wealthy family. Doesn't matter, but they are like, hey, you know what? I'm not taking no for an answer and I'm going to figure this out. The Melvin Capital Guys are like that. If you look at the Melvin Capital Guys, they got their asses handed to them in the first half of 2021. I'm a long-term believer in those guys. I think those guys are going to come back and revert mean reversion, and they're going to do phenomenally well because they are hell-bent on success. I believe you can have setbacks. I think that you also want to be with people that are comfortable with setbacks. I've had more than my share of setbacks. I got miserably fired from the White House. I was fired once and then rehired into Goldman Sachs. I got crushed in the 1998 long-term Long-Term Capital Management ruble crisis. I got my face blown off in 2008. March of 2020, during the pandemic, I was in a price shock on my fixed income portfolio. I've had my share of disappointment and I've had my share of losses. But as long as I'm breathing, I don't think it's a good idea to bet against me, because I'm coming back at you with all guns a blazing. Also, if I'm dead, you're probably going to want to cremate somebody like me, because if I'm dead, I'm going to still try to figure out a way to crawl my way out of the goddamn casket. That's the thing I'm looking for in these people. And it's something that, I don't necessarily know if you can train somebody for that, but you can see it in them if they have it.

There are 34 managers in that fund. We're tracking 1200 managers here with our research team. We have a proprietary database that we built, which has a lot of qualitative and quantitative analytics to it. We call it HFAN, which is Hedge Fund Access Network. I would say there are a hundred managers that we've written reports on, which we're doing full due diligence onsite meetings, going over their portfolio rigorously. Of the 34 that are in our fund, we require full transparency into the portfolio with confidentiality. But if you're a fund manager, we want a direct feed from your prime broker. I hate to say this, but I will say it, everybody's guilty until we prove them innocent. That's how you avoid the Madoffs of the world, or you avoid people who are nefarious. By the way, I'm not saying that I have a perfect record on that, but we're pretty close to perfect. We got caught in one guy's fund, where he was misallocating resources and was ... Ultimately, he went to jail. Now, we got almost all of our money back from it, thank God, because we have very good systems in place to protect ourselves. But I will say this to you, you have to be that way in our industry. The American court system should be innocent until proven guilty, but at SkyBridge, to get our money, you're guilty until we prove you innocent. So, those are background checks. That's a rigorous analysis of what you're doing, and is there any mission creep or discipline creep? Don't tell me that you're buying and selling natural gas, and then I look in the portfolio, you've got navel oranges in the portfolio. I can't stomach stuff like that. We're pretty ruthless about firing people who we think are off message or are doing something that we think is not consistent with what their original strategy was. Now, having said that, we're also very long-term in orientation. If you've had a tumble, we're probably adding capital to you if we think that you've been consistent with what you're doing and how you're doing it because we know that, that's a short-term, likely a technical dislocation than anything that you're doing fundamentally.

I think it's almost like a barbell. I think they have to have growth stocks and dividend-yielding stocks as a bigger proportion of what used to be a 60/40 portfolio less than bonds. If you came to me and you said, here's a hundred cents, Anthony, what would I do with a hundred cents? I would tell you, well, you got to have 5 cents in venture and probably three to 5 cents in privates. You've got to have 5 cents in digital currencies. That's 15. You probably have to have 20 in the bond market somewhere, but mostly safe stuff, liquid stuff. And then the rest of it, I would put in the stock market. But a component of that would be in higher-yielding, sort of blue-chip defensive names, and then I would leave a good portion of the portfolio, 30% or 40% of that portfolio, tilted towards growth because, in this type of interest rate environment, I think that's actually ironically the most protective. If we were talking in the 1990s, remember when the hard to believe we're a 6%, 7%, 8%, 9%, you would want to have a different portfolio architected, but today, and where rates are likely going to be over the next two years because of the COVID-19 pandemic, the deficit spending, you have full negative rates now on the yield curve in Germany. The sovereign bonds of the German government are in a negative yield position. The US is in a negative position in real terms. So, if you have a 120, 10-year bond, if you factor in the current inflation, and we can debate whether the inflation is transitory or not, but if you're buying that bond with a 120 basis point annual yield, and you've got even two or 3% inflation, you're in a negative territory from a real perspective. To me, I would be very cautious in the bond market right now.

Yeah. Well, to me, again, the space reserved for digital currencies and cash, that's sort of like, I said 5%. You could have a little bit in cash, but I don't ever really keep a lot of cash, frankly. I'm usually fully invested. The stock market is liquid enough where if I've got to get access to it, I'll take it there. I'm not a big believer in cash by the way, because we're printing a lot of it, man. We're making ... cash is not like real estate. You know how they say, oh, buy real estate. They don't make it anymore. Well, let me tell you something, they're making cash every day. You've got a 31% increase in M two year over year $469 billion of new money was printed in the first five months of 2021. You're in a situation now where, whether you like it or not, you've been taxed. If you own dollar-denominated assets, they have stolen or taken some of that away from you. Just think of it in terms of purchasing power. If I've got 8% transitory inflation, that means that the hundred dollars that I had last year are only buying me $92 worth of goods and services this year. That's a theft, that's taxed. Your central bank has ironically taxed you, and they've done it in that silent sort of away. I would rather put that stuff into assets. Well, let me really put it into perspective for you because we're about to celebrate the 50th anniversary of the unpegging of the US dollar from gold. Oh, that's August 15th, 1971, Richard Nixon said, "We're no longer living up to the Bretton Woods agreement and we're going to let our currency float. It's Fiat currency." In that period of time, you had an ounce of gold, you could purchase it for $35. Today, that ounce of gold is $1,600 or $1,700. Some of that's down as a result of Bitcoin, I'm happy to talk about that. But at $1,600, you crushed the dollar 97.5%. $2.50 in 1971 has a hundred dollars of purchasing power in 2021. Now, I can repeat that for dramatic effect, but you get the point that I'm making. I think I'm well versed to speak about this because I grew up in a blue-collar family, and I can tell you, if you're a wage earner and that's happening, you get destroyed. The wages have never caught up over the last 50 years. But if you're an asset holder, you're actually okay because that Hampton's piece of real estate that Calvin Klein bought in 1987 on the ocean for $3.6 million is worth 85 million today. You see what's happening? Somebody said to me, if your used cars are going for prices that are higher than when they were new, my cousin has a pickup truck that he purchased four years ago for $32,000. He has 39,000 miles on it. He can sell that truck today for $32,000. Some of that is a shortage related to the delivery of these trucks and some of that is related to inflation.

It's a very good question. I don't honestly know. I would like to tell you that I'm a Washington guru. I think the only thing I learned in Washington was stay out of Washington. I think that's the only thing I got out of my experience there. It's a very difficult group of people. I tell my Wall Street friends, you guys think you're killers and attack dogs, you guys are a bunch of babies compared to these people in Washington. I want you to imagine the worst possible person on Wall Street, that's like the Eagle Scout or the vicar of Washington. To me, I'm not a big believer in these people. I think they're very disingenuous, and I think that they are very self-serving. they're not into protecting or serving the American people. They are more into the preservation of their own power. What I would say is that it seems like the document is going to be okay from a crypto perspective because of the lobbying. And that's the great irony. There's a very powerful decentralized army of Bitcoiners. There are over 46 million of them in the US, and they are responding to what they see as something negative or bad for crypto by inundating Washington with legions, tens of thousands of calls. I think we're going to be okay.

Really good question. If you'd had asked me that question at the beginning of the year, I would have said this, 2021, was going to be the year of institutional adoption of Bitcoin. I got that wrong, frankly. There's been no institutional adoption of Bitcoin. I heard Larry Fink speaking on CNBC Squawk Box a few months ago. He said, "No, we have no very little interest in Bitcoin." They may be own a small piece of it, but he's like, we have no interest. I was like, well, he is 100% right. I do not see institutions own it. Are there a few smart people? Yes. Ray Dalio, a skeptic on Bitcoin, learned about Bitcoin, bought Bitcoin. Dan Lowe bought Bitcoin. Steve Cohen bought Bitcoin. Paul Tudor Jones, Stanley Druckenmiller, all bought Bitcoin. These are some of the smartest investors in the world are in the Bitcoin space. So, we're in it obviously. I made that decision with my team back in October, November of last year, which was reasonably well-timed, at least at current prices. Anything can happen in the Bitcoin world, so I'm not sitting here patting myself on the back as much as I am just analyzing things. But it may not be for a couple of years, frankly. I think that Bitcoin, with 125 million users, I thought it would be institutionally acceptable, but maybe Bitcoin needs 350 million users, which is a couple of years out. But if Cathie Wood is right, I believe she will be by 2025, if there are a billion users of Bitcoin, I think the institutions will have absolutely no choice, but to be in the space. It's one of these weird things people will say to me, well, it's not worth anything. I laugh, I said, well, this money in my pocket, that's worth anything? No, come on. You know it's not worth anything. But I can hand it to somebody for pizza. I can hand it to somebody for a good or service. The reason why it's worth something is they trust that they can hand it to somebody else. Once you get that, you recognize, wow, we've got a network, a very robust network of people that are transacting. So, the perception of value becomes real, and the reality of that value grows exponentially, and before you know it, Bitcoin, it actually can't be corrupted. We can make these. We're making them all day in this country. All-day, we're printing these Italian singles, but you can't make any more Bitcoin. You're sort of stuck with the 21 million of them. We probably have 3-ish million of them that have disappeared. I'm a big believer in looking at the future the way it is and the way it's going to be, as opposed to it should've, or it shouldn't be this way, and blah, blah. When Charlie Munger, who's one of my intellectual mentors, is saying, it's the worst thing that's happened to civilization. He's the guy that tells you to learn the other guy's argument better than your own. How could he say that? He's got to do more homework.

I know they had one really big warper, went down 90%, and Barron said Amazon.bomb, and they said that the company was no longer going to exist.

I think it's an interesting question. What I would say to you is, what's going to have a billion-plus dollars of revenue and impact a billion people? Let's take a look, take a step back. Something like Uber would do that. Something like an ESG company that's environmentally sound, that's helping to convert carbon into other atmospheric properties would do something like that. There could be a meteor mining company at some point that launches itself into space and captures one of these meteors and brings back a quadrillion dollars worth of resources. It's not just going to be a technology company. It could be a healthcare company. What Moderna has done, and if you look at their earnings recently, they had done something that we would have said was a miracle a hundred years ago. They had figured out, through CRISPR technology, that there is literally a software sequencing of the chemistry of your body. So, they can use the technology known as CRISPR to splice and dice and create memory, MRNA, that your cells can actually learn from, which can change the landscape of how your cells protect themselves. Unfortunately, because this stuff is so startling, there's a lot of misinformation out there and there's a lot of foreign powers like Russia, etc, really trying to divide the country and spew all this vaccine misinformation and falsehoods, but that's an amazing technology. That's a company and there are advances being made in that thread, that biotechnological thread, which will be life-extending, but also unicorn-like, an exponential pursuant to Metcalfe's law. They're making whey-based protein out of plants now. There's a company called a Perfect Day, that could be another unicorn, because if we're moving away from the animal kingdom, but we're going to have the same texture and flavor, it's going to be better for the environment, better for mankind, better for your heart and your circulatory system to eat less animal fat, but yet you're going to experience the same sort of taste profile and the same nutrient benefits without the downside, well, I think there are exponential options for a company like that.