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Systems architect Ken Griffin, the investor who proves that the house always wins. And he says that the 2008 crisis didn't destroy his reputation, but rather strengthened it. He doesn't learn one thing that is very relevant throughout his professional career, which is that the ECH is not about being right, it's about having the infrastructure that allows him to act before others.
You're the smartest person in the room, you're in the wrong room. Artificial intelligence is going to be a good investor and in my head that answer is absolutely no. He has a saying that goes, "You don't need to be right, you just need to survive when you're wrong." This episode is presented by GBM, invest with purpose.
Welcome to a new episode of The Art of Investing. Today we're going to talk about Ken Griffin, the investor who proves that the house always wins. My dear Comet, how are you? I was always looking forward to your drama. I am the black swan hunter. This, I was going to say the systems architect. The systems architect.
The systems architect. I like the systems architect, my dear Coret. This was Tudor Jones, the black cis hunter, wasn't he? Paul Tudor Jones. Of course, but it also kind of fits Tepper, does n't it? Of course, that too. Well, look, there are 20 of us today, right? Tepper would get the one with the copper eggs, wouldn't he?
Ah, yes, yes, yes, [laughs] yes. TRUE. Like the analogy of the golden eggs, the hen that lays copper eggs. Exo. Exactly. Clearly. But anyway, then I said the systems architect and you said the one who always says the house wins. Ah, the house always wins. Excellent. The casino owner, my dear Comet. Yes, here we are on June 23rd.
Hey, the national team plays tomorrow. The Comet team plays tomorrow. Furthermore, we are at the Guadalajara match. game. We have taken the coolness of Mexico's passion seriously. I want to make a public apology in this episode because I had said, I think in the Meli episode, I said that no way was I going to pay for these tickets, that it seemed like an absurd expense to me.
[laughs] I was fortunate enough to be invited to the first two games, the one at Azteca and the one in Guadalajara. Well, I want friends like yours, I saw, my dear. Yes, one for giving him many greetings, he knows who he is. He gave me the ticket to Guadalajara because of good investment recommendations.
Well, you deserve it, my dear Comet. Yes. And the first time I went with clients to Azteca with GBM clients, and it was also a lot of fun, was n't it? That's excellent, but what energy, right? I mean, yes, impressive. I believe it is there, I tell you that I ask for a public apology because I take back what I said.
I already bought tickets for the round of 16. Okay, my dear. I'm also talking about the matches in Mexico, but what changed? What changed? What changed in you? So, before, what was your perception of football? I didn't remember. I mean, also the fact that you're going to experience a World Cup at 35 years old in Mexico, and I almost cried during both national anthems, the goals, the matches were kind of ugly, especially the second one, right?
But no, the second one was heart-stopping, I mean, the first one was still this first goal. I think there's no better fan than the Mexican one, right? Incredible. Especially in Guadalajara, you know, sometimes I don't like it. In the match against South Africa, they started booing the national team because they're making too many lateral passes.
I know they want a show too, but we're going all in for our team, right? And in Guadalajara it felt fair that there hadn't been any World Cup matches where Mexico could play in Guadalajara. It was the first one and people were overwhelmed. What an excellent experience. And something I am, as they say, intoxicated with faith.
That's great, my dear Comet. How far does Mexico extend? If they make it to the quarterfinals, I think it would be spectacular. Well, if we get to the quarterfinals, let's go there, Miami, I'll invite you, my friend. Yes, but the ticket was also more expensive than expected, so don't go to the markets.
What is true is that he has bet on Mexico in both games, so I have absorbed the blow. A bit of a blow, and besides, you were telling me that you hit a couple of tough parlays that tied Iran and Belgium. Yes, those little parrots are dreamers, but they don't always say it, it's not the same watching a game if you don't have that extra incentive, right?
Yes. Calcutta, the lotteries, all that. Well, indirectly, you know, I had bought the series of matches at the Azteca, so right now in Guadalajara I knew that if Mexico lost against Korea, I was going to have to see Korea against Scotland in those matches, or well, that's a, I mean, you bet that Mexico would pass in first place, no matter what, exactly.
No, there's not much else to it. Good bet. Good bet. Well, you can resell the tickets now, but the thing is, you do n't feel like reselling them anymore. No, man, no, no, no comment. Let's go, let's go with Mexico until death, my dear. And before we even begin, I mean, this is a message that I think is very important, especially for Mexicans: to believe more in the country, in everything we do, including in football, right?
So, what difference does it make? No? Why not? Why not hope that this will continue to work and support our team and, well, I mean, they say bread and circuses, right? It's a distraction, but the truth is, yes, I think it brings people together and I really think it's something that feels beautiful, right?
Of course life is beautiful, especially being Mexican, right? And if you can be proud, wear the shirt. Now I live between a day when I want the World Cup to be over and a day when I want it to never end, because the energy consumed by the adrenaline and the beer one consumes is also tough. It's bad for the health of the World Cup, dude.
No, well, but it's good for faith, as you rightly say, my dear J. Well, let's get down to business now. Besides, the house always wins, right? The casino. Many of the references are... Yes. It's curious that we're talking about soccer because Ken Griffin is very philanthropic and has donated a lot of money to American soccer.
It's an interesting fact I had lying around, I mean, apart from their philanthropy, well, the gringos are more knowledgeable about soccer, right? And also somewhat controversial, isn't it? We'll talk a little about his history later, but let's remember this episode he had a couple of years ago with all the drama that was happening around Robin Hood, from Paintman for Orderflow.
Regarding the issue of Raring Kitty shares, uh, GameStop, etc., which even ended up in hearings, right?, in the United States House of Representatives, and many pointed to this man, Ken Griffin, the founder of Citadel, who had accusations from millions of retail traders who sued him for market manipulation.
Yes, you mentioned it in the Fintex chapter, you told the story. Incredible, isn't it? That it reaches those levels, and well, we'll talk about that too, right? Whether or not there are conflicts of interest should or should not be regulated, but let's talk about the founder because I have something here that I found very interesting, I mean, he was born into a middle-class family in Florida, but at 18 he was already reading convertible bond analyses in his high school library .
In the third year of primary school, I already had a curiosity about stocks. He said this in an interview and I found it very curious that he had been doing this since the third grade of elementary school, 9 years ago. But here's a really good anecdote. At 19, while at Harvard, he asked for an antenna to be installed on the roof of his dorm room to receive real-time quotes.
And there are two lessons in this anecdote. One, his obsession with the speed of data and data. So, he knew there was one Edge and two, because at 19 he was already getting his hands dirty with his own money and his family's money making investments, right? So this struck me as a very interesting symbolism because he graduated from Harvard and had already accumulated $1 million in investment capital.
We're talking about someone who was 21 years old. So either something happened to him when he was very young, or he was very good at trading from a young age, but at 21 he had a million, and making a million back then was like 10 million now. Yes, I think it was enough to have, and it raises four more and with that it starts a little further ahead.
Before that, he has a mentor named Frank Mayor. Here he is hired, or rather, this Frank Mayer is co-founder of Glenwood Partners, a Chicago fund, and he kind of takes him under his wing and gives him his first seed capital after seeing that he was very talented while working with him, right? So that's kind of how Ken Griffy starts, right?
With this advice from his boss, who gives him only one piece of advice, he says, "You have to have multiple strategies if you're going to launch a fund." Because? Because if you diversify, some strategies will work well in certain market scenarios, right? There are others that will do better and that are not correlated with each other.
And from there he began to create this as a system, right? And I think the most important thing is that through this bedroom lesson, where he convinces management to install an antenna and start receiving quotes, he learns something that is very relevant throughout his professional career, and that is that the key is having the infrastructure that allows him to act before others.
And then things aren't a coincidence. He names the company or the fund, quoting it as meaning fortress, impenetrable city. The entire brand is a promise of solidity and of the system it is building. And that's something we need to remember, especially now that we're talking about what happened in 2007-2008, right?
During the great financial crisis. So, from early on, he realizes that having competitive advantages, having information before others, having a technological edge and certain infrastructure, is what will also give him the possibility of consistently winning the market. Clear. And here I also mention the mentor, right?
Here I was 22 years old when Griffin launched this Wellington Financial Group, that's its first name before it became Citadil, with 4.6 million in initial capital. Most of them came from Frank Mayer, but that's also how important the issue of mentors is, isn't it? A mentor who, I mean, I remember, for example, you invested in me during my entrepreneurial stage, and I know that you invest in other entrepreneurs, and I know that, for example, GB has invested in me at different stages, I mean, like, and in other people too, right?
They may no longer work within the same institution, but they trust you, they promote and support your talent, right? I believe GBM itself comes from investments by Roberto Hernández and Alfredo Harp in Alonso and Jorge Rojas, right? So, having mentors who believe in you and put up the money is common in these kinds of stories, right?
Well, it's common, and that's what capital means too, right? Because of course capital allows you to start, but the confidence of having a mentor of that magnitude who helps you and above all gives you the strength to say, "You know what?" I trust you and you're going for capital becomes secondary because you're getting on board with a partner who will be advising you and who is a very valuable partner.
Of course, the famous smart money, right? But I think the topic of mentors is interesting . Well, a lot of times people ask me, "Hey, what books do you read and where do you get your ideas?" In other words, these are questions that I get asked on social media, and I've been lucky enough to have excellent mentors in all the places I 've worked, starting with your boss.
Well, my dad, of course, but if I go to Alta Growth, this, Capital in Private equity, at Le David Cos was an analyst who is now almost a partner, who was one of my first mentors. Then there's a gringo named Jeff Bow, who was Stanford at Leo in GBM, Andrés Masa, Herminio, you, Pedro de Garay, and you continue to run into new mentors in your career, including everyone from GBM, but at Bitso and in other places.
And also, if you surround yourself with people smarter than you, which is one of Ken Griffin's principles, in fact, it's one of his mantras. If you are the smartest person in the room, you are in the wrong room, because your probability of success will increase greatly. So, you should always surround yourself with people smarter than you and try to squeeze the most out of their brains, right?
Then it also happens that you're in a room and you don't talk about more substantial matters, you don't get into more mundane conversations, which is also valid, but if you're in a room and you identify that there's someone who can add value to your life, then you have to use that brain, right? Absolutely, absolutely.
And there's no better way to learn than from people who have already navigated those paths, right? Because many times you think you know it all. Even this idea of being like a bookmart, you know? On a personal level, I would say that the last books, the last books I've read, I 've reread. In other words, they're not new books, but the same books I've been reading for the last few years, because I realize that information for information's sake is useless , right?
I remember very well , I don't know, about 10 years ago, that I set myself the challenge of reading a book a week. I think it's the worst stupidity in the world, because if you 're just filling your head with information, but you're not putting it into practice, it's useless, right? So, it's best to surround yourself with intelligent people who have that experience and who can truly help you overcome the processes you're going through.
There's nothing more valuable than that, and especially that they then have that trust in you, right? Because especially in difficult times, really, really difficult, to pull through because sometimes you're in the hole, and I think there's nothing more comforting and nothing stronger than someone you admire telling you, "You know what?
I believe in you and I know you'll get through this." So, the most important thing we can say is, "Well, you've been a mentor to me in many ways, haven't you? Especially in this investment thing, huh? And you've also made me some money , my dear man." Well, you know how reciprocal it is, right? I owe you a lot from the crypto world, but yes, of course that project has touched on a topic that I find interesting.
Then the most important concepts tend to be repetitive. The other day I even posted the commandments of the art of investing, didn't I? Hey, we have to keep repeating the most important concepts because, however obvious they may be, we forget that diversification is key, that patience will be the main obstacle to getting returns, right?
Conviction isn't something you can borrow, is it? It's possible that investment philosophies don't suit all personalities; that is, the lessons from these giants and titans that we're reading are often very repetitive and are just being presented in different ways, right? But I believe that if you take the large mass and the vast majority agree on the important pillars.
So, having that repetition is important, right? And well, speaking of talent, I think one of Ken Gryf's most important themes is this famous podshop concept, right? This structural innovation basically created an internal dynamic of multi-strategies organized in POTs, which were these semi-autonomous teams with four or five analysts per sector, each with their own portfolio manager and risk limits, right?
And that made them compete, now almost like going back to the World Cup to see who could beat the others, and that's what was driving the portfolio within these teams crazy. Here I have two doubts or two points that I would like to explore further. One, we said, is the systems architect. He 's building a system here, isn't he?
And the system brings two ingredients. One is meritocracy because it incentivizes them very well, and also because of merit, right? In other words, just because a PM has been in the role for 10 years doesn't mean they'll earn more than a PM who has been in it for two. So, there it is , let's see, the one who made the returns stays and right now we're going to talk about the rules of the game, and about surrounding yourself with smarter people and giving them the tools, especially the same technological infrastructure.
He also has an obsession with technology and data. So, here are several system ingredients in this example of pods. One is talent, and putting it to the test. And that's not me, you know, I don't know if I'm more in favor of collaborative or competitive work. Let's see, but let's see which one, which of the two do you choose?
I like to collaborate with people and I like my teams to collaborate. Go. Okay, but you like it, but what works better? It depends on the environment, but when you're with someone who you feel is trying to trip you up, who isn't helping you, who isn't sharing ideas, who isn't giving feedback, well, I feel like I'm in a somewhat toxic environment, right?
Yes. Hostile, not hostile. But maybe that's it, but there are many companies that work like that. Sure, I mean, Bridge Water itself, right? It is said that this radical transparency often even leads to hostilities. Yes. And I think that's where the political aspect comes in too; that is, the institutions are becoming more political, less horizontal, more vertical.
I think you collaborate, I mean, it's better to collaborate and be a team, but a united team, like Spartans, I mean, I take care of you, you take care of me, with values like loyalty and what kind of investor comes to mind when you think about that? Maybe Buffett, right? Maybe Buffett, I mean, Buffett was his partner, he was Charlie Monger and No, right, but at the Berksshire level, uh, do you think he was more collaborative or more competitive?
I'm more collaborative, and maybe one of the more competitive ones, maybe Bridge Water, maybe this one, obviously it quotes, for example, Steve Cohen from Point 72, it's also from this cut of this cut of, let's see, here I remember that scene of the Joker who cuts Villar's stick and throws it at them and says, 'Try outs,' in the Batman scene, he says, like, 'Try outs,' and breaks the stick and throws it, and it's like, 'Let's see, the one who survives is the strongest,' right?
I say that it's also part of biological laws, and I also think it depends on some types of businesses; it's not the same in a sales team as in an engineering team, perhaps. Sure, but in terms of investments, I mean, it's interesting because I certainly believe that what optimizes happiness or well-being is collaboration.
Yes, but what optimizes the return? Perhaps it can be the competitive one. Yes, that's a very good question. I feel that you need a little bit of both. I mean, I feel, for example, that I 'm a superstitious guy who's on the edge of ego, but who suddenly backs down, you know, right? But you are very cooperative and generous, but it kicks you out.
But it has happened to me that suddenly, I don't know, you say things that are even arrogant, right? Since I already screwed you over and suddenly you say, "No, I mean, it wasn't with that intention." No, that's because of cycling, my dear Comet, because of your competitive environment. No, you are a very competitive person, but I think that within that competitiveness you are very collaborative, even within the same teams.
But everyone likes their ideas to be the ones that stick, right? So, you've been involved in that in the world of investments. I mean, you have to fight, right? From investments, but from a corporate perspective, right? But look, in investments, I mean, when you worked at the Hedgefund, well, those are for whoever has the best idea, right?
Because there is limited capital. Yes, yes, but I suffered because, well, putting Herminio is my brother, I mean, you're very fond of him, but there was a bit of a sting, a healthy sting, but a sting nonetheless. The important thing is that it's healthy, right? No, I never tried to trip him up. And you think that in these cultures it's more common to trip people up?
Yes, yes, I think so. I mean, because in the end I say everything, I mean, maybe it also has to do with the compensation scheme, right? I mean, I think there are many variables. We're going there. The rules of the game are interesting. Hey, these guys hire 160 PMS per year, three per week, and they have an impressive turnover rate, right?
Because the rules of the game are clear. As a PIM, if you have a 5% drawdown, they take away half of your money. You have a drawdown of -7 and you and your four analysts are out. So, imagine the level of risk management you have to take. Now, I think that in the long run, I don't know if this will work out too well.
So you make sure the strongest survive, but you ca n't have such a long- term vision, can you? In other words, it's like you 're constantly purging what might work immediately. You're promoting that, and perhaps you're purging the longer-term stuff. I don't know if that might not work, do you? But what they do have is several.
It's interesting. I was wondering how things would be handled on February 13th, wasn't I? When you list Ken Griff's positions and see that 5% is in Taiwan Semiconductors, which I think is a fact, I think it's around there, it means that 15 PMS of the POATs have it equally, one at 20 and one at 1, and that weights the Citadel portfolio, right?
So there's also an issue there of the psychology of crowds, the wisdom of crowds, having very talented people in these sort of siloed teams, right? So, they're like what they call pods, right? But five or six people with their analyst. Now, the other point is that this said it was terrible for the analysts' careers, because imagine, you get a bad PM and you're out in 18 months.
The average time analysts stay there is around 2 years before they rotate. Yes, well, because I say for several reasons, surely because of the dynamics and also because of the stress they experience internally, right? And I think another interesting topic is the strategies of these pods, that is, they are multi-asset.
We'll talk about each of those assets in a moment because they are also held individually, but they are also strategies where they are probably heavily invested. That means they also have a way to withstand many drops, because in recent times a 5% drop in any portfolio is very likely over the course of a year.
Yes of course. No, but perhaps with these structures that are long and short, that can differentiate it. Now, they have equities, they have fixed income, they have macro, commodities, credit, and quantitative easing. Quantitative, yes, quantitative, quantitative strategies, they do more than 5003 tests daily, that is, they also do backtesting regularly and they do measure alpha, which is interesting.
I mean, for those who don't know, in financial jargon there's alpha and beta. Beta is what the market gives you. So, if certain stocks, or rather if the sample of stocks, for example, the Standard 500 or the NASDAQ, whatever, went up in a certain way, and there are stocks that behave in that same magnitude with that same level of risk-adjusted return.
That's called beta. Alpha refers to what is in excess, but it is excess adjusted for risk. Of course, because if all you do is increase the risk, that does n't mean alpha, it just means you're having more risk in the portfolios, and that's difficult to measure, especially in real time, right? And basically I'm saying, it's not very scientific, but if the Standard 500 rose 10% with a volatility of 20%, to put a simple round number, well, that gives you what that alpha and beta parameter could be.
If you had a return, for example, of 20% with an equal risk or volatility of 20%, right? You had more risk comparing apples to apples, you had, I mean, you didn't have the same level of risk, 20 and 20 against a return of 20 and 10, right? So, that's called alpha. Those 10 points you generated are alpha.
Yes. And I'm just saying this to add to what you've said, volatility is what's called risk in this case, right? In other words, if you have a return of 10 that is much more volatile than another similar return of 10, then you assumed more risk, right? You took more risk. You have less alpha. And what he tries to do, and in fact here he follows the advice of his mentor, Frank Mayer, who tells him, "Make a firm that is multi-strategy." So you mention fix macro commodities and quant, right?
This reminded me a lot of my time at the hedge fund with the good Pedro de Garay, Andrés Maay, and Eduardo Martínez del Río. There was a component of the portfolio that was quantitative because those returns were not correlated to the other, more fundamental, long-term part. You follow rules; that is, you set the computer to check if the prices of soybeans, coffee, oil, gold, and silver crossed certain moving averages.
There were rules; it's a system, right? Uh, but this is called trend following, you're following trends and it kicks you out when the trend reverses. In theory, right? In theory. The thing is, like everything else, theory can sometimes fail. There's sleepch, there's this, what is sleepage? Share that with us.
That's when the price of a Claro phone suddenly becomes much more affordable. An asset, bits, and offers are very separate, aren't they? They are very far apart. So, he already beat you by a significant margin, right? Exact. He beat you by a significant margin. Now, this is interesting because it reminds me of King Dalio.
Rey Dalio says, "Find 20 assets that have no correlation with each other and you'll have a very good portfolio that works all-weather through different cycles." So, that works too. I sometimes think that diversifying portfolios is becoming increasingly difficult. Today, 19% of the S&P 500 is semiconductors, and I say 50% is technology; the S&P 500 is more concentrated than ever.
I believe there is also an implicit risk in passive investing. We should try to find uncorrelated sources in our portfolios. Not everything is tech, there's consumer goods, there's health, not everything is stocks, not everything is crypto , there 's real estate, fiber. Fibers, uh, fixed income like that, right?
No, you see, every time, and well, you just gave me an idea because here at Griefing, you invest something in fixed income, yes, my bullets. Well, sure, bullets, but they're short-term fixed income, but I like them more and more, but something long-term, you'd buy, you'd buy 10-year bonds, for example, right now there are some bonds from Médica Sur that pay 10.5%, fixed rate for 5 years.
And what do you think of those? Are they giving you the eye? Yes, yes, it could be like, hey, well, 10 and a half, I mean, that's where the famous arguments start, but the return is in pesos . I say that we'll talk about the exchange rate in some episodes to come, but you can also sell the bond, just like you can sell the stock, I mean, you're not stuck , well, you're not stuck, if rates go down the bond appreciates.
But it's interesting, isn't it? Because when we talk about returns in pesos and dollars, we'll talk about the exchange rate, but a graph came out the other day showing the returns on peso-denominated bonds versus dollar-denominated Treasury Bills, and it blows them out of the water because, apart from the last 10 years, it's been in the same place, the same spot at 1750.
I think conventional wisdom says dollars will always beat pesos, right? That's what I was saying, in the last 10 years since Andrés Manuel came in, the peso has beaten the dollar. The peso has beaten the dollar. Because? Because the exchange rate has remained more or less stable at 17 since it came in until now, where we are at 17 in that 10-year period.
But if you have it in sets, in daily liquidity, well, it has paid you the 8, the 10, the 11 and the dollars below four, right? Yes, yes. Incredible. So that's an important difference, and the thing is to question that. Question when suddenly there are ideas that everyone says, "Oh, no, well it's obvious, keep your money in dollars." Ah, well that's obvious.
I always have money invested in the S&P 500. Ah, well that's obvious. 60 the portfolio 60 40, right? The 60/40 portfolio, but each time it does open my mind a little more to fixed income. When you have a child things change a bit, but hey, you 're maturing, damn it. That 's all. That's all. Okay, but let's get back to the dynamic pods.
Uh, we already talked about that a little. Perhaps it is also worth putting into perspective how the assets under management increased from an incredible $200,000 in 1992 to $2 billion in 1998, $6 billion in 2001, and $21 billion in 2007 at the peak before the crisis. After that it stabilized a bit.
Between 2007 and 2008, it had some declines, obviously due to the stock market. 2015 25 billion dollars, 2024 58 billion dollars, and now more than 67 billion dollars. Yes, yes. 68 billion 19% no to the compound. It's great. Here I would emphasize two things. Okay, let's talk. In 2002, Citadel Securities launched, so we can talk about that.
Then in 2008 it lost 60% and learned a very strong lesson about liquidity. Then we can talk about Securities Quote from 2008 and 2022, which makes a fortune trading precisely because of bond volatility. Do you remember that in 2022, I mean, there was a huge mess where you were even losing money on bonds and stocks ?
So, after COVID, right? Yes. So, as the saying goes, in troubled waters, fishermen profit. He always starts to see opportunities arising from these crises. Well, oil went negative. Negative oil, imagine. I mean, what a crazy time. But anyway , let's talk about the Securities quote, which is actually a market making firm, and I think it's worth discussing the role of market makers.
My comet, do you want to talk about it or what? Yes, so basically what a market maker does is provide liquidity to the market, right? So, I think we talked about it in the Jim Simons episode, they have very, very fast, high-quality infrastructure. In other words, now we're talking about details like the cables themselves, how thick they are, and how much latency they have.
Uh, because I remember the example I used, which is not the same as sending a friend to pick an apple from one tree to return it to another, as sending one on a motorcycle, right? If you send one person on a motorcycle with an apple before the other arrives, the person who arrives on the motorcycle can sell the apple to the other person .
That happens in orders. If you go on foot and send an order and you do n't have the fastest infrastructure, suddenly you place a position and instead of selling it to you for 10 eh00001, they sell it to you for 10.002. And that is, in quotes, arbitrage, it's not arbitrage at all, because if there is a risk, there is an inventory risk, they sometimes have to take inventory, but what they practically do is be light-speed traders, that is, that's the example I give, right?
They start buying and selling very quickly, giving liquidity to the market. That's what Citadel Securities does, isn't it? Now, Citad Security was founded in 2000. 25% of all US operations already have that, meaning one in four operations is giving you the cited liquidity. It has revenues of almost $10 billion and is a massive volume business because you win 51% of the time, lose 49%, and in that 1% where you sell a little more to the other person who wanted to buy from you, you are constantly giving market share to both of you.
And in fact that's where, as a commission to Robin Hood, we were talking about how if Robin Hood doesn't charge you a commission, practically what those small spreads do, the difference between the buy price and the sell price, he takes a little bit, right? The word "commission" isn't used, but they're taking advantage of you.
It's a rebate that pays Robin Hood a quote for passing on that flow, is n't it? Exactly. Exactly. And here are a couple of interesting topics. The term high frequency trading, which is something that is very well known in the financial sector, came internally from, in fact, it was named by a PM who previously studied string theory at Berkeley, so it also comes from the music industry.
I mean, incredible. And well, you already talked a little bit about how those types of brokers make money. There are massive investments in infrastructure, are n't there? And massive, because I remember very well when I was at GBM, proximity issues and all of these, well, the bags and GBM. Do you want to be closer to the literal bag so that the order arrives sooner?
So, GBM had a lot of the infrastructure of many of these American market makers, right? De Virtu, Jane Street, many of them. And the way you had it was that you were very close to the exchange's servers, that is, it was server to server, that is, zero latency. I remember that very well too because, as you say, the motorcycle is the most important thing there, the speed to truly be able to carry out those transactions.
Now I think the most interesting thing about that, even though these two, his quote and the hedge fund, were initially separate entities, is this flywheel that is generated because, of course, you start to have more flow, with that flow you have more data, with that data you have better price models or better analysis models, right?
And with that you have more competitive conditions, right? especially in the market maker arm, and that generates more cash flow, right? So they become winner takes all markets, right? No, because you basically become a natural monopoly, right? As if you were a, I mean, they have very strong network effects and that alone makes the mode start or the competitive sale end up being greater and that's why today a quarter of the United States market goes through a quote from Yes.
And diversifies, right? Because he has two businesses, Hedgefone and Market, that Griffin owns. And I also think it's a competitive advantage, especially for the Hedgefone, right? Based on the data you have, yes. Let's go to 2008 and 2022. In 2008, City T managed 20 billion. And what happens then, and this is important, in crises, the assets, the correlations rise almost to one.
When everything falls into place, everything falls apart, you're not safe. No, it's not like you're saying, "No, in the crisis there won't be any, Walmart won't go under because everyone is buying toilet paper." When there is panic, everything falls apart. So, the correlation—his strategy of trying to have something very uncorrelated—well, it did n't work, and he had to suspend redemptions for his investors, a bit like what Michael Wury does in the movie * The Big Short*, where he says, "They ask for their money back, and he says, 'For your own good, I reserve the right to...
to... to return your money,' right? But he loses 50% in 2008, and in 2009 he has a 60% return, and after that, he did very well. And by 2010, the fund was back at all-time highs, and he says that the 2008 crisis didn't destroy Citadel, but rather toughened it up, right? When the world is falling apart, the people who keep a cool head win." I loved this quote because it speaks to the composure needed in crises and turbulent markets.
You shouldn't catch yourself out when you suddenly feel that... Something's happening that can't adjust your judgment, right? Or cloud your judgment because you have to make decisions calmly, right? In fact, the other day I saw something that I found super interesting, Scaloni, the Italian coach of Argentina.
Oh, right, Italian. Of Argentina, of course. Of Argentina. Yes. They filmed Leonel Scaloni when Messi scored goals and he was like this , he was totally, he didn't celebrate, he didn't celebrate, and it's an exercise in restraining himself, like taking a deep breath and not letting the fan, the fan, get in.
Why? Because, Wali, you have to make tactical adjustments, you have to keep cool, right? You have to keep calm to be able to make good decisions. Exactly. So they were filming him several times and he comes out like this, and there are many coaches who, if you see them like that, hardly even celebrate because it's an exercise that works, right?
That's how you have to be in the markets, like, take a deep breath, what's happening? No, trying to understand the data, the... But I find that thing Ken Griffin did interesting. Later in In 2022, well, it gained a lot, also due to market making, but also because of bond trading, right? There's also the issue of finding a different source of returns in an adverse environment, right?
This was after the pandemic. Another important issue here, I think, is leverage. Ken Griffin is someone who doesn't use leverage much, and many of his positions are highly leveraged, which, obviously, regardless of the possibility of withdrawals, caused those losses, right? And obviously, he also emerged stronger from that, but it wasn't until 2012, from 2008 to 2012, that he recovered that high water mark, right?
And we 've already discussed the high water mark fee, which is basically that these funds often charge fees based on the excess return they generate. But if in a year, like in 2007-2008, for example, you had your last great return and suddenly the portfolio drops 50%, you retain that high water mark.
Up there, you need to recover 100% of the investment portfolio to be able to collect again. And during that time, many funds fail because, of course, maintaining the organization's cost structure for four years without collecting a single peso or a single dollar of carry is very complex. But it also speaks volumes about the strength— again, honoring the word "citadel"—and the resilience of Ken Griffin to overcome that problem, because it's not easy.
Many funds get stuck there and close because the business becomes unviable. Yes, yes. Here I'd like to add a few things. In his philosophy, as we've already discussed, the quant model is a hybrid model where models tell you where to look and humans tell you how much to risk. So, there are models— yes, very powerful ones—and speaking of the system, you take a model, you give it a lot of power, but you also put people behind it to supervise and calibrate it.
That's what I believe is intelligent right now. artificial. We're going to have better judgment because we'll have more information and more analysis available, but you can't remove the judgment part, right? Here, the quant aspect adds something he loves, which is data, and he's constantly looking for alternative data, right?
They use satellites to analyze how many cars enter Walmart parking lots, Chinese oil tankers. How far does the oil brand go? I mean, they send someone to see, like it just came out that they sent someone to the Strait of Hormuz to count how many ships were passing through. They analyze occupancy in amusement parks by cross-referencing the GPS of millions of cell phones and cell phone transmissions to see if Disney is going to have a good season.
They track prices on delivery apps daily, monitoring digital restaurant menus to see if prices are rising due to inflation, and they use the labor market thermometer, right? Employee reviews on Glassdoor, and they're seeing that, for example, if they're hiring a lot of engineers, it means that They fired a lot of people and they're not going to deliver the product on time.
So, that degree of advantage becomes access to data because when you're trading that amount of millions, well, you have that, and that's what the average investor is competing against , right? I think there are good and bad things about it because at that level, in the long term, what difference does it make?
You know, if you're going to trade for the earnings report and you're watching how many cars entered the parking lot of all the Walmarts to see if sales are going to be 6% or 7% higher, well, you're probably not going to make a profit. That's why you have to look at the longer term, right? Because that's going to be irrelevant in a quarter, but if you invest in good companies for those 5 or 10 years, well, you don't need to know how many cars are in the Walmart parking lot, right?
Of course, as an average investor, yes, but that's precisely the edge they have, right? And they're actively trading and they're very active funds, right? And I think Which raises the million-dollar question, right? Is artificial intelligence going to be a good investor? And in my mind, the answer is absolutely no.
I'll tell you why, my dear Comet. Because, in a way, the investment game is a zero-sum game, isn't it? Not a zero-sum game where someone loses and someone else wins, but if we set a benchmark of 500, for someone to beat the PS 500 standard, someone else has to lose to the PS 500 standard, simply by principle.
And what's the question all investors are asking Claudio? How did Pirin beat him? And the data it's trained on is the same. Yes, it's the internet. So it's going to give everyone the same answers. And if it gives everyone the same answers, where do you end up, my dear Comet? In the same place. Yes. So.
And that's why what you were saying at the beginning of the episode is so interesting, because yes, indeed, All investors are variations of certain concepts, but each one has their own special touch, right? K Griffin's special sauce is information. They have a building. I would say information, and architecture, the systems, right?
The technology. The quantum approach is also seen as being like a risk manager. Of course. And the discipline, the risk management, I mean, definitely. Exactly. There are those who are excellent investors in a bull market and there are those who are excellent investors in a bear market. Absolutely. And there are some who are terrible, right?
We also talked about Tiger Global. Tiger Global and down 55% in a year. Market Market. But when they do well, they do very well. When they do well, they do well. So, that's why, that's why investing is an art, and of course, what you can do, if that's the recommendation, if you have an LLM and you want to optimize your investments, you're going to have to choose and you're going to have to say, "Hey, Cloud, please help me follow the principles." Warren Buffett used this information to make this investment decision.
So that will give you a very particular approach, but there is no one size fit, that is, there is no magic formula. Yes. No. And more than asking Claud, which also involves looking at the portfolios, we 've already mentioned that in the 3Fs, right? You're seeing what they're doing, but still, I mean, you're seeing what they're doing, what they're doing three months late.
Three months late, which is a world of difference. Imagine, this one does it in milliseconds and yes, but kind of for Berkshire. Yes of course. And there are some that distribute shares and don't have movements, like Berksshire, this one, even Doroken Miller, I mean, they are somewhat active, but their core positions remain the same, and even if you asked them to make you a portfolio with the largest positions, well, you can't guarantee that you'll have a return above the market, right?
But anyway , I want to get into a controversial topic, my dear Comet, and that is the conflict of interest in the business model, right? Because while the structure of citing him as the fund and citing Securities as a marketer are two distinct and theoretically separate entities, and the Chinese Walls and so on, well, I think it's debatable, even open to criticism, whether these competitive advantages can be generated, right?
Because you're talking about one in four market orders passing through Securities Quote and you have a sister arm that's likely trading using parts of that information. So, that should be allowed, right? It's a very strong competitive sale, isn't it? So, they generate and originate a lot of the data, right?
They know a lot about flows, and this is interesting because we were talking about Reape, remember? We talked to who was Rita Tape's son, Steve Coin. When you understand the flows, uh, the flows in efficient market theory are synonymous with information. Comet, of course. In other words, many times when you want to be involved in that market, you approach the people at the table and say, "Hey, how are you?
Are you buying? Are you selling? What are you doing?" In other words, there's a lot of information within these structures that also allows us to know if there's more supply or more demand, dude. Well, that's also quite sensible, integrating and obviously within organizations, because yes, within there are organizations, the Bside, the Cell Side have Chinese Walls, you can't talk within those organizations, right?
Precisely to safeguard the interests of their various clients . But what I'm saying now is, having those capabilities, especially with what happened in 2021, which was the whole drama with Rorin Kitty and GameStop and so on, and the bankruptcy of Melvin Capital, which I think is fundamental, is that Citadel and Point Saint, Steve Cohen's company, injected $2 billion into Melvin Capital so it wouldn't collapse, and they suspended, for example, the purchase of GameStop shares in Robin Hood.
GameStop was intervened by Citadel Securities, I mean, well, not intervened, but being the main client or the main supplier. So, how do you see that? That mix of... I think there may certainly be a conflict of interest, but I mean, they were investigated and they didn't come out unscathed, totally clean.
Ex. I mean, I think that at that level it's already difficult to know how much, where the line is, I think. So, if you were the regulator, would you allow these sister companies to exist? I mean, I don't know if it can be allowed or not, I mean, I don't know if they can be inhibited. I mean, I know that, for example, in many of them, I mean, this is very well known, but after the 2008 crisis, the prop-ins, that is, the proprietary positions of many of the investment banks, were prohibited; they had to be totally segregated from the operation because precisely after, well, the conflicts of interest that many of these securities and toxic assets were selling, well, I think it's something that doesn't smell good, but that the SEC must have ironed out more.
I mean, I do believe it because those guys are really tough, seriously. Yes, they are tough over there, seriously. Over there, I mean, Insider, I mean, not that they aren't here , it's just that here the market is very small, so it's 30 companies versus 6,000, dude, right? And a lot more wool is being moved.
So the sheriff, the sheriff over there is a dog, I mean, but, well, because there's Virtu, there's Jump Street and many of these, sorry, Jane Street Jump, um, they, what if they also have a hedge arm or more, I mean, is there anyone who can compete with him? Do you know what I believe? The volumes are so large that I think it's too late , I mean, for example, I don't know how tough Edge is, it's 70 billion funds.
As you said, "The C dissolves a lot." Imagine, yes. I mean, I think that at that moment if you say, "Ah, well, the flow of purchases is on Amazon." Yes, I can earn dollars. Exact. No, I mean, not really. Look, a conflict of interest could exist, but it doesn't seem that way to me, and Ken Griefing seems like a guy who always tries to use technology to his advantage, right?
She has always done so and will try to push it as far as the legal framework allows. If he crosses it at some point like in Billions, then he risks being thrown in the tank, right? Or to arrest, I don't know, I don't know who the legal representative is. He must be the one who gets into trouble, right?
No. Either the one who takes the most money from the organization or the one who takes the most money from the organization. Well, and besides, Ken Griffin is now worth more than 50 billion dollars. He personally moved to Miami, just like you. Well, look, citing the weather, the weather did send everyone to Miami, and he was heavily criticized in Chicago because he was a very beloved person in Chicago.
Well, besides, he was also born in Florida, right? And for tax reasons too. Well, that's also within the rules, but apart from that, he's someone who really likes art, he has two Basquats, among other things, this plogo. Yes, art is part of their philanthropy. So let's get on with the lessons and the topic of philanthropy.
Look, I'd just like to say he's done philanthropy; he's donated a lot to Harvard University, the University of Chicago, the Museum of Natural History in New York, the Art Institute of Chicago, US Soccer, and Parkinson's Disease. He has donated more than 2.5 billion to philanthropy, hasn't he? Great, my friend.
So what do you choose? What did you take away from Kriff's episode on the art of investing? Look, I'm sticking with the topic, the quantitative and technological approach; I think it's important. He understood earlier than most that markets are not only driven by narrative, but also by statistical inferences, and that you need to have the best infrastructure.
I think that's a good sign from Harvard's antenna. the quantitative issue and strategies that are not correlated. I like that global and multi-strategy vision with the quantitative approach. Uh, I really like your topic of risk management, I think it's important. We were talking, I don't know, I get asked all day on Instagram, "Okay, I buy mu, sell mu, I mean, Micron, you know." I tell them, "Manage the risk." Do you know what your risk is?
In other words, you know when you feel uncomfortable. If you're really uncomfortable with the position, take out 10% of your position or 20%, right? If it's a portion that, if out of 10,000 pesos you have 1,000, then go beyond it, reduce it to 800 to 600, thus managing the risk. That's risk management, it's not letting profits go, that's managing risk, right?
And I think risk management makes a lot of sense in markets like today's, which are highly concentrated in artificial intelligence and are very volatile. I think I'll take away their whole approach to risk. The theme of resilience and the ability to adapt. I like that he always talks about how in tough times you mustn't lose your composure and coolness when making decisions, and also about people's mentality, right?
In other words, to build highly talented teams and develop that talent. Um, what else before No, I would say three readings I have here from Kengryf. Firstly, I also echo what you say, I believe he is one of the best risk managers in history because of his multi-asset approach, his even systematic internal approach to how these competing pods work, and how he also streams the teams and the risk, right?
I mean, it's like it's distilling the risk in an incredible way. Besides, it has already survived several crises and collapses of many types of assets, and not only survived them, but even learned to capitalize on them. The second is the pragmatic one, which is invented by AWS of liquidity, that is, literally it is a liquidity machine that built this whole layer of infrastructure that makes them work cheaply and quickly and also charges a toll for using this infrastructure that he himself designed.
And lastly, well yes, I'm a little skeptical about these conflicts of interest, knowing that he might be one step ahead of the regulations, right? that maybe they're catching up to him, I mean, they're catching up in the sense that they're catching up with him in the regulations and they're filling in certain gaps in what's coming up , but he's always one step ahead, he's always one step ahead and well, and also on the other side, well, what the philanthropy aspect has helped in many other areas, in the interviews, K Griffin's interviews are great, they're very good, I never miss them, he's a very assertive and very intelligent guy who always has a very interesting opinion about the program in terms of markets.
Right now, with the topic of building systems, it's very important to differentiate. A strategy needs discipline. If you change your strategy every time your mood changes, it's not a strategy. So, we need to have a system, right? I mean, for example, I say, no, I don't like my positions to weigh more than 10%.
There will be an exception to the rule, well yes, and I'm breaking my own system, but I don't like doing it and I do it very rarely, right? But I have my system. My system is, what percentage do I have in cash? What tango, that is , helps you make easier decisions ? Because they're already within parameters, right?
So, the issue of building a system is important. The topic of extraordinary people is obviously very evident everywhere. Uh, the information is earlier and better than everyone else's, and I also really like the topic of emotional strength. He has a saying that goes, "You don't need to be right all the time, you need to survive when you're wrong." That's risk management, isn't it?
That's risk management. In other words , you don't need to be right, you just need to survive, and that's why you should n't gamble. That's why I like the idea of diversification, because if you just sit back and do things, you can become very rich if things go well. Otherwise, well, that's where you might suffer a little, right?
Absolutely. Finally, to sum it all up, my dear Comet, from 4.66 million in capital in 1990 to more than 90.4 billion in net grand profits for investors. The satellite dish on the roof of Cabot House became a part of the nervous system of the markets in the United States . My dear comic. That's how it is.
It also has a quote that I love that says, "Hey, if we're going to eat, someone has to sell." Yes, indeed, and he has already found a way to sell and collect tolls. That's great. Please follow us on The Art of Investing on YouTube, on our Spotify channel, or wherever you listen to the podcast, and please share it so that more people can follow and learn about the art of investing.
My dear Comet, yes, I'm skinny. The opinions expressed in this podcast are solely those of the participants and do not represent the position of any company, institution, or entity with which they are associated. This content is for informational purposes only and should not be interpreted as investment advice or financial advice.
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