Transcript – Investor Spotlight: Driehaus Capital – Investing in Emerging Markets and The Great Pendulum Shift with Howie Schwab, Lead Portfolio Manager for Emerging Markets Growth

Please enjoy this transcript of my conversation with Howie Schwab, Lead Portfolio Manager for Emerging Markets Growth at Driehaus Capital.
Last updated
May 11, 2022
20
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Howie Schwab has appeared as a guest contributor on Bloomberg TV and was featured in the Barron’s Emerging Markets Roundtable.
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Please enjoy this transcript of my conversation with Howie Schwab, Lead Portfolio Manager for Emerging Markets Growth at Driehaus Capital. Transcripts for other episodes can be found here

“I think it's true everywhere, but data shows it's particularly true in emerging markets, which is that the persistence of risk is generally higher than the persistence of return.” – Howie Schwab

Howie Schwab is the lead portfolio manager for the Emerging Markets Growth strategy at Driehaus Capital. He is also a portfolio manager for the Emerging Markets Small Cap Equity and Emerging Markets Opportunities strategies, and he has also served as co-portfolio manager for the Driehaus International Small Cap Growth strategy.



Transcript – Investor Spotlight: Driehaus Capital – Investing in Emerging Markets and The Great Pendulum Shift with Howie Schwab, Lead Portfolio Manager for Emerging Markets Growth

Daniel Scrivner (00:00:06):

Hello, and welcome to another episode of our Investor Spotlight Series, where we dig into the ideas, frameworks, and strategies of the world's best investors. I'm Daniel Scrivner, and on the show today I'm joined by Howie Schwab, who manages more than five billion in emerging market growth funds for Driehaus, which is based in Chicago, and it's where Howie has worked for the last 20 years. At Driehaus, Howie is the lead portfolio manager for the Emerging Markets Growth Strategy, and he's a portfolio manager for the Emerging Markets Small Cap Equity and Emerging Markets Opportunity Strategies funds. I've learned an enormous amount from Howie, both as an investor and a macro thinker, since I first met him, and I am beyond thrilled to have him on the show to share what he's learned managing many of the world's best performing emerging market funds over the last 20 years.

Daniel Scrivner (00:00:53):

In our conversation, we go deep on what it's like to invest in emerging markets in countries around the world, including the good, the bad, and the ugly; the biggest lessons that Howie has learned over the last 20 years, including some incredible stories from investing in China and Russia; we talk through Driehaus's unique culture and why they're so focused on the behavioral and macro aspects of investing; and we spend a lot of time talking through Howie's research that he's pulled together over the last five years that lays out why we're in the middle of a massive pendulum shift away from capital and toward labor, and how demographics and politics are a part of this story; and what it all means, in terms of new investment opportunities over the next 10+ years. If you are an investor or investment manager and are interested in global investing, this interview is filled with incredible ideas and lessons learned.

Daniel Scrivner (00:01:42):

You can find the notes and transcript for this episode at outlieracademy.com/104. You can learn more about Driehaus online at driehaus.com. That's D-R-I-E-H-A-U-S.com, and you can also follow Driehaus on Twitter @DriehausCapital. With that, here's my conversation with Howie Schwab of Driehaus Capital Management.

Daniel Scrivner (00:02:04):

Howie, this interview has been a long time coming. We've talked about it for quite a while, so thank you so much for making time and for coming on. I'm thrilled to have you on.

Howie Schwab (00:02:11):

Yeah, no, thank you. We've been thinking about doing this for some time, and I am looking forward to the time together.

Daniel Scrivner (00:02:20):

I think everyone will realize why it took us so long to schedule this, once we get into the meat of this interview and talk about all the research you've been pulling together for a long time. I want to jump right in, because there's a ton to cover. Can you start by just giving everyone a quick sketch of your background?

Howie Schwab (00:02:34):

Sure. I am currently overseeing Emerging Markets in the Emerging Markets Team for Driehaus Capital Management in Chicago. Amazingly, joined the firm over 20 years ago to work initially with Richard Driehaus, who was a pioneer of growth and earnings acceleration-oriented investing.

Howie Schwab (00:02:56):

At the time of joining the firm, Richard had just been anointed one of Barron's Top 20 Investors for the preceding century, so it was a unique opportunity. I was excited to join the firm. Part of my role with Richard was helping him pivot more aggressively into international and kind of ex-U.S. markets, which was an area of interest to me.

Howie Schwab (00:03:24):

Ultimately, in those first few years, we created what is today the international small cap growth strategy for Driehaus. In 2007, my predecessor on the emerging markets strategy announced that he would be departing the firm, and so we had roughly a six- to 12-month transition, where I was selected to oversee the emerging markets group and the associated strategies, which put me in line to navigate emerging markets and global markets for the first time in that area during 2008, which was fascinating, excruciating, and entertaining all at once, and ever since have been primarily focused on emerging markets, but we may talk about this further, and myself and my co-portfolio manager, we've also been responsible for spearheading global macro research and investing at Driehaus, integrating that, and incorporating elements of macro investing further into a bottom-up/growth-oriented approach. Again, if you wish to talk about that, we can do so.

Daniel Scrivner (00:04:37):

I'd love to talk about what you alluded to at the beginning, which was joining the firm right when Richard was getting ready to pivot to focus more on global equities and emerging markets because, arguably, the last 20 years have to have been... A lot has happened in emerging markets and in the globe, but it's also, I think, arguably, that was an incredibly astute call at the time. Share a little bit about why he was thinking about doing that, and some of the rationale or what he was seeing that made him think that was the right thing to do.

Howie Schwab (00:05:08):

Sure. I mean, I think it's a critical lesson that Richard even instilled within me that he really is ultra-competitive, which, for better or worse, is a personality trait that I share. He was very much against becoming complacent, so because I joined the firm in 2001... Driehaus is a smaller cap oriented growth shop, had a phenomenal run in the late '90s, and I think Richard, at that point, was, A, looking to diversify a bit, given the amount of wealth he had accumulated, both personally and at the firm level, and also he was observing some of the emerging trends that we could see globally, in particular in China's entering into the WTO, and some of the associated growth and demographic tailwinds that were likely to drive the international parts of the market.

Howie Schwab (00:06:04):

I remember, specifically, Richard sort of characterizing the materializing setup in emerging markets, specifically, as somewhat akin to what he had witnessed in the 1970s, which is really when he sort of came to prominence, managing the U.S. micro and small caps. I think the growth opportunities, the dispersion of opportunities, not to mention the fact that many of these growth business models, in his mind, and I think correctly so, were essentially replicated in emerging markets from models that we were already familiar with from the U.S. In many ways, as we now know, whether commodity consumption or consumerism in the emerging markets were following a pretty well telegraphed trajectory, and I think Richard felt that we could latch onto that cleanly.

Daniel Scrivner (00:06:52):

I want to talk for a second about what it means to invest in emerging markets because I think, one, for anyone who maybe focuses more on U.S. equities, there's a lot of things that are unique about emerging markets, and so I want to try to string together a few questions and see if you can talk a little bit about what attracted you initially to investing globally and investing in emerging markets. Then, if you could just share what is different about investing in emerging markets and what the experience is like, and we'll get into, in a second... You have amazing stories of obviously some key moments in time, but just at a high level to talk about that.

Howie Schwab (00:07:28):

Sure, so more nuances than perhaps I anticipated, and so there's been a lot of learning lessons along the way. I think two main factors stand out: One, the way that these international and emerging markets value capital markets, in terms of litmus tests of the economy's health, or here in the U.S. where we have presidential elections, where the presidents are lauding the stock market's performance as some measurement of success, that really isn't always the case in emerging markets. I think there you encounter much more populism, much more fiscalism. Obviously, corruption is much higher, and so, in some ways, the risks of impairment and drawdowns are greater, and that's sort of an element of how we manage money is being more attuned to those risks and understanding the need to sidestep those altogether.

Howie Schwab (00:08:23):

I think, relatedly, macro investing... I mean, as I mentioned, we felt like macro investing was paramount in trying to navigate emerging markets, but also we could see these trends globally, which is why we really enhanced our macro capabilities, including adding one of the portfolio managers over a decade ago. Understanding how macro policy impacts bottom-up fundamentals, risk premia, is really important.

Howie Schwab (00:08:52):

I think if you look at, arguably, what has been the largest driver of asset returns in the U.S. over the past decade, this kind of exorbitant privilege that people talk about with the U.S. dollar, and what that enables the Federal Reserve and our policymakers to do, in terms of buffering and stabilizing asset prices, the emerging markets generally are not equipped with similar capabilities, so countries, like Turkey or like Brazil, would like to cut interest rates aggressively and drive up asset prices, but the reality is that the release valves in emerging markets are far... There's far more pressure built up beneath those, at least for the time being.

Howie Schwab (00:09:34):

What we see is Turkish equities rally, but the currency depreciates by 30 or 40% over the same time, or sovereign debt rates explode higher as a country like the U.S. has been able, thus far, to sort of circumvent that. I think those are crucial. I think, similarly, understanding who's sort of on sides with various government entities. It's not universal, but in a majority of those markets, it's important to understand which companies are on sides with the prevailing government, as opposed to the opposition government, and that, additionally, is complex, as well.

Howie Schwab (00:10:15):

I think those elements really do stand out. I think the growth... There's a growth dynamic, which does differentiate emerging markets. I think you have to keep in mind that, again, somewhat differentiated from the United States, when countries grow, there does come sort of a precipice, where too much growth or too much success can place you onto the government's radar, and oftentimes it's more innocent, in terms of paid taxation will go up or you need to do a bit more to contribute to the social well-being of the country. In other instances, like we saw last year with the Chinese tutoring companies, it can be something altogether more detrimental.

Daniel Scrivner (00:10:58):

I'll try to maybe distill down some of what I heard there, in terms of how that might influence your process and approach, and I'd love for you to kind of push back on that and add to it. It sounds like, if I'm getting it right, you're still doing obviously bottom-up fundamental analysis on a bunch of companies, but that is then heavily clouded by a bunch of top-down things that you have to try to suss out and understand, and that's everything from the political environment to the, yeah I guess, just the macro environment to, I guess, specific roles, specific concerns at that country level, and so you're still doing a lot of fundamental analysis, but it sounds like you're probably spending just as much, if not more, time trying to read the tea leaves and understand the top-down picture. Am I kind of getting that right?

Howie Schwab (00:11:43):

Yeah, I think that's a fair summation of what I was trying to say. Yeah, I think clearly we are researching companies and conducting a fair amount of fundamental, bottom-up research, but when we talk with clients, we're pretty transparent about that there are three pillars to how we approach emerging markets, and overlaying a healthy dose of macro research as well as behavioral finance is critical, I think, more so even in emerging markets where volatility has generally trended two to five times higher than that of what we see in the U.S.

Daniel Scrivner (00:12:20):

Yeah, it's fascinating. You touched on two things there that I want to talk about, because they relate specifically to Driehaus and some of the culture aspects that are somewhat unique. You and I have talked about this at length, and I think both of these are fascinating, because I wouldn't have intuitively known them from the outside looking in, but obviously talking with you and talking about how they manifest itself at the company has been fascinating. Those are a behavioral focus, but specifically this idea that markets are living organisms and that that should drive a lot of your process and approach, and then separately, and maybe complementary to that, is a focus on macro. That's something that I find it difficult to approach the markets from a macro perspective. I think some of that's just wiring. Talk a little bit about how the behavioral piece shows up at Driehaus and how you guys approach macro.

Howie Schwab (00:13:13):

Yeah, sure. I think you touched upon this, but with a behavioral approach, yeah, there is a belief that markets are living organisms, as you have alluded to. The way I would describe it simplistically is that headlines and sound bites and research reports, for lack of a better word, can be sort of cheap, where you're not necessarily having to deposit your own funds, which is far different from the market where, in order to make an impact, you actually have to open the wallet and invest capital, and that's the only way to move stock prices up or down.

Howie Schwab (00:13:48):

I think, well, if you have a very long-term time horizon, it's highly likely that fundamentals and stock prices should correlate. I mean, I'm talking 12 to 20 years plus. The reality, and we've seen this over the past decade I think, sort of almost magnified, is that stock prices and fundamentals can deviate for certain reasons.

Howie Schwab (00:14:11):

I think even going back to 2008 and 2009, we've talked about this before, had you simply been wise enough to understand what it was the Fed was, in fact, aiming to do, which essentially, by their own admission, was to push people down the risk curve, they made it clear to all of us, although we couldn't all see it at that time, that they wanted to basically push people into riskier assets, into longer duration assets. Theoretically, if you had simply interpreted that and allocated all of your capital in that direction and gone on vacation for the next 12 years and come back, whether you were straight long or had gone long, those assets, and essentially short, the antithesis of that, you would've come back to an amazing gain without having basically lifted a finger in 10 years.

Howie Schwab (00:15:00):

I think there's that. There's also, harking back to quotes from somebody like Stan Druckenmiller, who is the investor I respect most in the world, just given his track record and his very logical, straightforward approach, but I think he has always talked about that it's really liquidity that drives markets, and guys like Ray Dalio have touched upon similar characteristics, so I think we look at it that way.

Howie Schwab (00:15:25):

I think, also, going back to sort of observing the market, and I did have a good relationship with someone who worked very closely with Stan, and I may have shared this with you, but in my early years, and to be honest, I was a bit apprehensive about disclosing that we used things like technical analysis and behavioral finance, because there was this perception that you needed to have CFAs and MBAs and that things of this nature were more voodoo. Then I was having dinner with this particular individual, and I was talking to him a bit about technical analysis, and he piped up and said, "Well, of course, that's all Stan does all day every day is..." just what I was describing, looking for divergences or looking for areas of prioritization, where the market is either really rewarding a company or an industry that's delivering and/or, in terms of divergences, and this was sort of the case with Russian oil stocks late last year. We kind of asked ourselves, why is the oil price rising? Why are global oil equities rising? Yet, Russian equities and Russian oil companies really weren't responding.

Howie Schwab (00:16:30):

The reality is that there's always smarter people in the market than you, and I'm sure smarter people had made a bet or had deciphered whatever was happening in the Russia-Ukraine situation, and so a flag like that can really help, from a divergence perspective. We talk a lot about optimization, as well, so if we have two different companies, who have identified the bottom-up catalysts and triggers, and they're related industries or similar business models, and each of those companies is, let's say, achieving the catalysts that we've outlined successfully, we would anticipate a certain performance profile.

Howie Schwab (00:17:09):

If one of those companies is fulfilling those criteria and one of the companies is not fulfilling those criteria, we'll optimize and simply shift into the company where, not only do we think we understand the business case, but also we understand why the stock price is moving and, not to keep belaboring this, but it's not something that I was involved with directly, but had we been involved in a situation like Enron, where I think it was like 64 of 65 analysts had a buy rating, and all of Wall Street was hoodwinked, it would've been something similar, where we would've outlined catalysts and even had we been bullish on the stock with these kind of persistent, like, "Hey, they're meeting all their fundamental bogeys, and yet the stock just isn't reacting well, and something's not right," I think at that point the ideal, you optimize and move into a company where maybe you have similar higher convictions, but also the stock price is reacting.

Howie Schwab (00:18:01):

Those are all examples of thinking. I think there's really well-known biases, and guys like Michael Mauboussin have talked about this, but specifically we focus on anchoring and also recency biases. What we talk a lot about in our philosophies is identifying second derivative change in earnings and flexion points, and so, oftentimes, yeah, it's people who are anchored to past views or trying to incorporate prior data and extrapolate that forward. That works sometimes, but oftentimes, as we know, those trends break. I think, in the last 12 months, we may be amidst a pretty serious regime shift, and a lot of investors in hedge funds, as you and I have talked about, have struggled mightily with that, because the old rules aren't really applying right now. Yeah, the reality is that, as much as people may want to exist in a confined laboratory, the market just is not a confined laboratory, and I think it's important to appreciate that.

Daniel Scrivner (00:19:03):

Yeah. I mean, you touched on multiple things there that I think are unique about investing and what make it so challenging and so fulfilling, especially for competitive people. I love the example you shared of doing bottoms-up analysis on similar companies, and then using technical analysis, I guess, to validate that what you thought was happening is happening, and if it's not, and if there's divergence among a couple of different companies, going with the one that's moving in the pattern that you understand, that makes sense to you, that you underwrote.

Daniel Scrivner (00:19:30):

You also talked about just this idea of being hoodwinked. I think it reminds me of some of the comments you made earlier in the interview, just around the challenges of emerging market investing, where you're investing in markets, in systems, in countries that are relatively younger and relatively underdeveloped. Part of that is, I think, you could, I don't know, maybe call it fake it until you make it. Some of it's outright fraud, obviously, but there's this sense of companies are, emerging companies, in particular, are trying to tell a very compelling story, and having to really push back on that and make sure that that's real. Can you give an example from your experience? I know you've had many in China, Turkey, Russia. Can you give us a specific example of feeling like you were being hoodwinked and what you ended up doing in that scenario, whether you invested or didn't invest or got out?

Howie Schwab (00:20:22):

Yeah, no, that's a good question. Yeah, there definitely have been cases of this. The way we've approached this is that, I mean, if you are being hoodwinked, it's very difficult to ascertain that through even a company site visit, so we talk a lot about patterns, which is looking at whether it's sectors or areas or countries, patterns of companies that simply are more prone to this. I think a couple examples spring to mind where we either avoided the area or avoided the sector.

Howie Schwab (00:20:52):

There was a period of several years where Chinese companies that were listing in Singapore, I think they were [inaudible 00:20:58] red chips at the time. There's an extremely high hit rate of frauds that were occurring in those listed companies, and so, while a handful did come to market in Singapore that seemed interesting to us fundamentally, our hurdle rate there for risk tolerance was much, much higher and, had the stock been listed elsewhere, we may have decided to invest, but given the pattern and, again, that risk of impairment, we decided... We opted out, essentially, of investing. That's also a term we use, and I think it's true everywhere, but data shows it's particularly true in emerging markets, which is that the persistence of risk is generally higher than the persistence of return.

Howie Schwab (00:21:39):

I think, oftentimes, and I'm hopeful that U.S. investors aren't receiving a rude awakening to this, but people forget that investing is... You're acquiring risk when you invest. You're not acquiring certainty, which is, I think, what people have come down to, but back to examples, I think a couple other areas.

Howie Schwab (00:21:57):

Yeah, the Sino-Forest was a really well-documented fraud in China. I think, again, we were not involved, but whenever we looked at any sort of agriculture or resource company in China, that where a large part of their value or growth was coming from tangible assets like forestry, acreage, or agricultural produce, animals, things of that nature, we've also really been quick to discount. Yeah, I think there's those areas. There's also, to be frank, discussions you're having with, for example, when we used to meet with Russian companies, where it was almost. We were having discussions where, essentially, it was almost like open kimono, that they were hoodwinking you, and it was just sort of a matter of doing business, because I think that's what's always a bit shocking initially is that, in a lot of these countries, corruption is tolerated to a certain extent.

Howie Schwab (00:22:52):

I remember, there was a CEO of a large, U.S., multinational that you would recognize, where they conducted business in Mexico. I remember him describing to me a certain financial kind of department they had, which, or classification they had, which was basically for paying bribes, because that's just part of doing business in Mexico. There've definitely been those situations in the past, and a lot of that, as much as people may want to believe that you can be an expert, you've had some really good investors, who have been duped on frauds in the past.

Howie Schwab (00:23:25):

Our view is sort of a combination, again, of those patterns. Obviously, we are meeting with these companies, and you're trying to use intuition, but lastly, I think, also going back to behavioral finance and looking for divergences in several cases. Reacting quickly when stock prices start to veer away from fundamentals has helped us. We recognize, in emerging markets, the need to be much more nimble, so that's just a few of the examples.

Daniel Scrivner (00:23:53):

Yeah. It's fascinating. I'm going to steal... I love that quote, "The persistence of risk is higher than the persistence of return," because I think it's a very, very graceful way to say that.

Howie Schwab (00:24:04):

Yeah, and to be fair, I may have borrowed that from a paper somewhere else, so just full disclosure.

Daniel Scrivner (00:24:12):

That's okay. That's okay. You're just passing it on, just passing it. I want to now shift and get into the meat of what I think we're going to talk about today, which is, you've been putting together this, I don't even know, 20+ page PDF that we've talked about and gone over quite a few times, that you've just called Pendulum Shift. It's basically a culmination of an enormous amount of research, charts, data points, that you've been putting together into a narrative around where we've been and where we're going. I think it's fascinating, and there's a bunch of conclusions and ideas that I want to talk about.

Daniel Scrivner (00:24:42):

I just want to start first with just this simple question. How long have you been doing this research, and what was the impetus to put this together in the first place?

Howie Schwab (00:24:51):

Yeah, so I think, I mean, it's been almost four years. In reality, the impetus started over a decade ago, when we created this sort of macro portfolio management role. We had the view, and I think emerging markets were much earlier in the process, that macro was going to play an increasingly significant role in markets. I think, looking at some of these key aspects, like particularly, the financialization of our economy, which we will talk about quite a bit, I'm sure, it just sort of led me to that, and so, I think, after we'd created the macro role, for the next several years, I was aware of that cognizance, the reasons for creating the role in the first place were materializing kind of in spades and, I would say, surpassing our expectations of how quickly macro was coming to the fore.

Howie Schwab (00:25:36):

As I continued to read these different anecdotes and studies that substantiated what we were thinking, I just began to just sort of cut and paste them. You've seen some of the preliminary versions of this paper, which were very scattered. It was very loosely structured, but as I pasted more and more of these, and even now, to this day, when I go back and review some of the data, it's sort of breathtaking what you see evolving.

Howie Schwab (00:26:04):

That was kind of the impetus. It just sort of morphed from what we were seeing on the macro side, to then seeing both evidence financially and also kind of qualitatively and quantitatively, that sort of confirmed what we were thinking, and I really wanted to get those views down, but also begin to try and identify what I thought were several of the key drivers or takeaways affiliated with that.

Daniel Scrivner (00:26:27):

I want to, well, we'll start to get into some of the pieces there around financialization, debt rising in equality, generational shifts, but I think it would be helpful for everybody to just start super high level. Can you just share kind of a snapshot of the takeaway in terms of where we've been and what's played out over the last, say, 10-20 years?

Howie Schwab (00:26:48):

Yeah, I think, and this is still the issue, I think, with what the classrooms teach, as well, there's still a really... The majority of investors want to believe that GDP and economic growth and company fundamentals are the predominant driver of stocks. Again, depending on your time horizon, I'm not here to really dispute that or challenge, but I think there's ample evidence that's shown that, because of what policymakers have done, and something happened, I have yet to really put my finger on it... Maybe if we ruminate and have idea, something happened between the late '70s and early '80s. Maybe it was Volcker sort of marking the peak of inflation combativeness, and then Reaganomics in the '80s were ushering in this massive hysteria on Wall Street, but that's the point at which you just see a lot of these financial ratios move higher.

Howie Schwab (00:27:45):

I think you and I have talked about this, but there are two studies that I cite. I'm sorry. I'm going to read these, just to make sure I have the numbers correct, but Merrill Lynch did a study not too long ago, and again I have all the inputs, but where they estimated that corporate earnings accounted for 50% of equity market returns prior to the GFC and have accounted for only 21% of equity market returns since the GFC, so over the last 13 years. In the same study, they conclude that the changes to the Fed balance sheet have explained 52% of market returns during that same period, whereas they were much lower before, but either way, they're essentially asserting that more than half of your equity market returns, to some level, are coming from macro.

Howie Schwab (00:28:29):

There's another group in New York, which I like, if you're familiar with Empirical Partners, and they really just focus on data crunching and their third party objective, no affiliated brokerage. They did a similar study, which showed that between 1950 and 1980, nearly 100% of real returns stemmed from growth rates in the real economy, but going back to that 1980 chasm, from 1980 onwards, the performance of the economy has explained less than a quarter of market returns, based on their data, so we've seen more issues-

Daniel Scrivner (00:29:02):

That's just incredible.

Howie Schwab (00:29:02):

Yeah, it is, but it is incredible, and it's something where finance professors or economists... Of course, they huff and puff quite a bit if you raise this issue, but the reality is there's data to support this, as well. I think we feel it viscerally, but I think there is data out there that substantiates this.

Daniel Scrivner (00:29:20):

Mm-hmm, so to maybe recap that and try to put it in a couple of different buckets, so if you go back to the period between the '70s and the '80s, you see this massive shift, and the shift moved into much more financialization driven returns, which obviously causes ballooning debt, and so we have this financialization and debt piece. We obviously then, and you cover this a lot in the paper, which I love, which is what does that create? Obviously, what that creates is the rising inequality that just now seems to have reached a fever pitch and is something that's being discussed really heavily. Talk about that, because I think that there's plenty of people talking about that connection. I still think it's probably under-discussed, and I think what's fascinating, that you've covered in detail, is what does that mean, and what is that going to suggest the future starts to look like with generational shifts, and people that have felt this inequality, this lack of opportunity starting to come to an age where they can vote and control much more of the U.S. elections?

Howie Schwab (00:30:16):

Yeah, so we're really getting into the crux of it. I'll try to cover quite a bit of ground here, but definitely stop me. Yeah, I think this is what we're seeing now, that this reliance on leverage and this reliance on asset prices, which has really taken hold over the past 40 years, it's really eroded the value of money. Again, I think this began in sort of 1980, but you've had different iterative stages, primarily depending on the central banker in charge.

Howie Schwab (00:30:46):

In this recent book, The Lords of Easy Money, there's a passage where they talk about how, with the dotcom bust, the Feds were justified cutting rates aggressively as a means of enhancing availability of housing to get a lower income strata, and here we are 22 years later, and they've essentially achieved the exact opposite, and that's because incentivizing demand didn't really help the supply side of the equation.

Howie Schwab (00:31:15):

Again, I don't want to read too many numbers, but even when I say different iterations, I think COVID sort of marked almost like a euphoric blow-off, and again, this is a statistic that is mind-blowing to me, but from the onset of COVID through two months ago, we saw $30 trillion in global monetary and fiscal stimulus that was created, which led to $60 trillion of gains in financial assets. As we both know, the majority of that matriculated to the wealthy and just sort of extended a problem that was there. You and I had this discussion, which I'm not sure if it's a good parallel, but it's like when university Greek systems kind of got themselves in trouble with each successive decade. It started as a, I don't know, innocent toga party. It turns into something worse, and then the new president doesn't... They won't get voted in if he takes that away, so they have it, and it becomes even worse. Each person's kind of painted themselves into a different corner.

Daniel Scrivner (00:32:16):

Yeah, and it becomes more normalized over time, because people just accept that that's acceptable behavior.

Howie Schwab (00:32:22):

Yeah, exactly, and so that's... I know it's... You'll feel sympathetic for Powell, because financial assets today are over 300% of our global GDP, and that ratio was 90%, 30 years ago. Also, during that same period, U.S. debt has grown 30X and now surpasses 30 trillion. I think, really importantly, U.S. household wealth per GDP is now 590%, which is essentially double where it was 30 years ago, but, as we both know, that has really been unequally distributed, and now you have this savings glut, which a lot of economic studies are demonstrating that that has sort of this distorted impact on the economy.

Howie Schwab (00:33:07):

Yeah, I think you look at these numbers, and you look at the fact that, whereas between that 1950 to 1980 period, we acquired about 1.75 units of debt per each unit of GDP, that number today is 5X. Equities now, yeah well, I'm not sure as of today, but as of like three months ago, for the first time in 40 years, equities have become American households' largest, basically, source of wealth. Yeah, you can see this economy that's very... It's asset-owner heavy. It's capital-owner heavy, and it's sort of labor light.

Howie Schwab (00:33:43):

Yeah, I think there will be a reaction to that, and I think we've seen already groups like the Business Roundtable, who have come out in the past three years and shifted their ethos to favoring stakeholders, rather than shareholders. I think things like ESG, as well, are favoring this, and now we're beginning to see the upshot of this on the wave side, as well. I think the last thing... Again, sorry to throw just so much data at you, but it I think helps paint a picture. Family income, in real terms, is about 200% higher than it was in 1950 for the 95th percentile or the 5% wealthiest Americans, whereas it's flat for the bottom 20th percentile during that same time.

Howie Schwab (00:34:25):

How we reconcile this is going to be difficult. I think, going back to your demographics question, probably the most worrisome, or one of the most worrisome aspects, to me, is that every generation born from 1950 and beyond, you've seen their forward outlook, or their forward real income wage potential be somewhere between slightly to just significantly lower than their parents' generation. Up until the '50s and '60s, people who were being born in those generations, it had been the opposite, where in America, each successive generation sort of had a brighter outlook, so I think we'll have to combat that.

Howie Schwab (00:35:05):

Just a couple more, just because I think they are really meaningful, I mean, if they want financial assets and what's happening even recently, home values have appreciated by 120% between 1965 and today. Incomes have increased by 19% over that same time, and corporate buybacks in the last 15 years in the U.S. have totaled 7.6 trillion, whereas wages have risen by 4.6 trillion. My dad's an attorney, so maybe he'll be upset with me, but I don't think it's coincidental, because I'm really, again, grappling with what changed in the '70s and '80s, and the number of lawyers per 1000 people was about one per 1000 in 1970, two by 1980, and it's about four and a half today, so you've seen a nearly, almost 450% increase in lawyers. I think that goes along with, again, that this sort of privileged class has been able to sort of seize the day.

Howie Schwab (00:35:55):

I know people love Warren Buffett, and I keep stepping in hot water, probably, on this interview, but I think his whole mantra of asset-light investing and low overhead, and I think those things contributed to, along with China's entering into the WTO and outsourcing to companies that really were focusing on profit margins and earnings per share at the expense of workers, or what would be considered asset heavy, and so, yeah, that will get us into this demographic discussion, for sure.

Daniel Scrivner (00:36:24):

Yeah. No, it's fascinating. I mean, the piece there of, it sounds like, obviously, capitalism won over the period from the '80s through today. The top 5% definitely won. Then the stats around the remaining 95% are just absolutely staggering, to go that period of time and have flat, and consecutively flat to negative outlooks, which obviously, that cannot... I think, just thinking rationally, it would seem that that cannot continue forever. That certainly has a breaking point.

Daniel Scrivner (00:36:52):

I want to just talk about one thing. I want to go back to one thing we discussed there, and then we'll pop back over and talk about some of the demographics, but I want to talk about debt, because I think I want to get your thoughts around, obviously, when you share some of those stats, I think you shared something like 1.75 debt needed to generate one unit of GDP, to five units of debt needed to generate one unit of GDP today. I'm sure people look at that, obviously it's backward looking. When you just say those stats, it sounds like, oh my, wow. It's basically gone up 10X, or not quite 10X. I guess, what, 3X, 3.5X, something like that, over that period, but I'm sure there are people that also argue there's no reason this can stop. What's your take on, can this continue? How big can this become? Or are we really at a tipping point? How do you think about that? How do you feel about that?

Howie Schwab (00:37:40):

That's like the primary question to be asking. I always have to emphasize that the point of my conclusion isn't doomsday, the world is going to end. I think financial repression is going to persist with us for a long time. I do think, ultimately, that inflation has been proven as the way out, not maybe the inflation that we are experiencing now, but the inflation in terms of the debt burden that we have, and I think even in terms of how do we handle these sort of inequality issues? Unleashing more populism, more fiscalism, and somehow getting that velocity of money back up is important. I don't think that we'll tolerate a return to the sort of disinflationary period that we've seen in the past 25 or 30 years, because politically, that's becoming less palatable.

Howie Schwab (00:38:35):

We started to talk about demographics, but I do think it's 2030, roughly, where the Gen-X, Gen-Y, Gen-Z percentage of the population that will be voting surpasses the older generations, specifically the Boomers. I think by 2039 or 2040, they'll account for almost two thirds of the voting population, so I think we'll see very different views come in.

Howie Schwab (00:39:01):

I think, even beyond just what debt has created, the CBO, I think, earlier this year, gave their, or maybe last year, gave their projection for the next decade, which they have to do, and I think their forecast was for $4.6 trillion in just interest debt payments that our country has over the ensuing decade through 2031, so it must've been 2021. However, they kind of then had a scale and walked through what would happen at different interest rate levels. At 100 basis points higher, the seven-year average interest rate, relative to what they were projecting, which is essentially where the market is today, that number jumps to $7.8 trillion. That's $3.2 trillion greater, which by the way, $7.8 trillion is higher than our entire debt level in 2005.

Howie Schwab (00:39:53):

When you see these numbers, and again, this is just different iterations of people painting themselves into corners, as we've discussed, I think, as a country, shorter term horizons, instant gratification, and a lot of that is politics and the fact that people run on two- or four-year terms, so the easiest thing to do is produce handouts or freebies or just punish someone else. I think inflating our way out is the only way, because I admire what Powell and the Fed now seems to be doing, but the idea that we can go on any significant austerity initiative, to me, seems pretty unlikely. Again, I think as the demographics do shift towards the younger cohorts, and you see this, I know this will probably change over time, but if you look at their values as of at least today, you see with each younger generation, they value capitalism and democracy less. They value heavier state intervention and more community-oriented approaches more.

Howie Schwab (00:40:54):

Of course, we're getting further and further away from people who have actually seen the illnesses of communism, so yeah, I do think, over time, those younger generations, as they tend to do, they may migrate a bit more conservatively from the views that they have, they hold, today. I mean, I think in the last presidential election, there was a survey of New York City private school seniors, who you assume are privileged, and I think it was Bernie and Elizabeth Warren received like 90% or 80% of the vote, and candidates like Trump received zero, so I think that will shift a bit.

Howie Schwab (00:41:28):

I think the last thing I would just add, which I think is a really interesting read across for just how the political parties will behave is that it's really the Hispanic-speaking population that is going to grow. It's also positive, in a way, that the U.S., the demographics for in the U.S., assuming immigration is allowed to flourish, is actually quite healthy, relative to the rest of the world. But if you look at the trajectory between now and 2040, sorry, by 2040, Hispanics are expected to account for 80% of our overall population growth. I want to make sure I have this right, but Gen-Z will be the first cohort with a non-Hispanic white minority in the U.S.

Howie Schwab (00:42:13):

We're still a relatively young country, but the composition is definitely shifting, and I do think the Hispanic vote is going to be a significant swing factor in how these things play out. I have views on both sides. I think there's a prevailing view that the democrats are still the party of the Hispanic population, and then I have a number of friends in Florida, who are Cubans, where they talk about how much they detest communism, and they're very conservative in their views, and so I think those are interesting nuances to how this plays out. Sorry, I was rambling a bit.

Daniel Scrivner (00:42:48):

No, no, that was... I mean, it's all, I think, fascinating. I want to talk about inflation for a second because, obviously, that's a core piece of what we're discussing here is you basically get yourself into a massive debt bubble by doing all this monetary policy and financialization over the last, what, 40 years. Then you have a debt bubble, interest. Inflation can, on the one hand, dictate the interest rate, but it, on the other hand, inflation can also basically help get rid of that debt.

Daniel Scrivner (00:43:21):

I want to talk about inflation because it's a key piece of what you're discussing, and my take on it is, even the word, I think, sounds relatively positive. What's really happening when inflation is doing its work is money's getting debased, but debased sounds much worse than inflation, which sounds relatively positive, like, oh, our portfolios are inflating. Maybe my bank accounts inflating. That's not really what's happening. I want to, one, I guess, just get your thoughts on how inflation impacts the 5% and the 95%, because I think that's also a really important piece, where just... I guess, what I would add to that really quickly to kind of tee it off is what I commonly hear discussed is inflation's bad for everybody, but the wealthy will do relatively fine because they hold equities. They hold things that will relatively hold their value against inflation. That's not true for the majority of the population that doesn't have a lot of assets and relies on income that's not moving, that inflation is now biting into, so talk about how that plays into this picture of where we're going and some of the issues around inequality.

Howie Schwab (00:44:23):

You've kind of summarized it quite well. I think, for us, it's really interesting to watch this through a quasi-EM prism because in EM, where the depth of capital, and again its levers that can be pulled behind the curtain, are for more restrictive, we have already seen this sort of play out in different levels, but I think, yeah, clearly, the way this inflation is playing out, and I think subsequently why the Fed is so aggressively trying to jawbone rates higher at this point is because they absolutely have to quell animal spirits, because animal spirits and inflation expectations are just as important for them. In the past, we've always talked about signaling as the Fed would try to achieve their goals without having to actually implement the policy. I think someone, an economist I know, had mentioned that the Fed had spent the last 10 years always conjuring up excuses for retaining easier policy than they should have, and in the past six months, it's completely reversed where they're now coming up with their excuses even when the market is signaling, hey, policy error potentially ahead.

Howie Schwab (00:45:32):

Powell has to back off because, to your point, they're trying to address this sort of unequal impact, which will be really difficult. I mean, Miami's probably not a fair example, but it's... Arguably, they've been the largest beneficiary of whatever, paper, wealth accumulation, the crypto wealth, grift, whatever you want to call it, and even January, in the most recent, housing prices there were up 28% year over year and rents are up 56% in two years. That's going to be an issue now because, while the Fed's hiking rates, again they haven't addressed the housing supply issue, so we've discussed this.

Howie Schwab (00:46:15):

First time buyers, their monthly payment has just doubled in a couple of months, which is precluding them from entering the market as maybe they had anticipated just three or four months ago, which means they're required to continue to rent or, I guess, worst case, to live with your parents, but the rental rates are soaring as well, because it's the same issue. I mean, I can't validate this, but I've seen it in a couple of different journals. I've read that financial institutions or entities are now controlling about 25% of our housing, our real estate stock in this country, so again, this is like 40 years buildup where it does impact them, and I think obviously fuel prices and food prices and all these other associated things impact them unless we see real wages increase to a point or unless we see, I think Musk or whoever it was that has predicted this in the past, as well, but a universal basic income, which comes in.

Howie Schwab (00:47:13):

I love capitalism. It's great. I do think, unfortunately, it's been a bit hijacked, and I kind of go back to the lobbyist or the lawyer figures earlier, which has sort of created different loopholes, and that's problematic, but you almost have to kind of see how it plays out. I think addressing that will require, to me, a more populist tilt, however this is going to be addressed. I'm sorry. What I meant to say, too, is unfortunately, the private sector, not unfortunately, but the private sector is just always much, much more nimble, and arguably much smarter than the public sector.

Howie Schwab (00:47:47):

I think you could speak to tech much more than I could, but I think even looking at in the past 40 years, areas where the government sort of intervened in theory to try and help the lower incomes, primarily education and health care, with subsidies and these plans, and what's happened is that those are probably the two most explosive. I mean, those areas have experienced inflation for decades, and I think now, just what was happening there is kind of matriculating across different sectors. I don't know if I have a great answer, but I agree with you, and I think, I guess the answer is that as the voting demographic transitions, I think the votes are more... We're seeing this already a bit with the AOCs and Elizabeth Warrens. Those people are becoming, I think, increasingly mainstream, and so I would anticipate in the next 10 to 20 years that there's going to be a large part of the population that, unless things get recalibrated, are going to vote for a more socialist leaning candidate.

Howie Schwab (00:48:50):

That would just be my... That's how our democracy typically works, right? If all these data... I think the statistics are almost irrefutable, but if 70, 80, 90% of your voting population essentially is losing on a relative basis, they should theoretically vote for change.

Daniel Scrivner (00:49:09):

Mm-hmm, yeah, it's interesting. I mean, what immediately comes to mind when you talk about that shift is something like canceling student debt, which, from my perspective, feels to almost have reached a fever pitch, and yet, from the data that you're saying, it's like, no, maybe not. Maybe it's actually where it's going to continue to become a bigger and more vocal issue for the next 10 years, and it's going to be something that we're going to address in 2030, once this demographic shift starts to happen. Anyway, so it's just fascinating to kind of zoom this, what we've been discussing, down into a single topic like that and use it as a lens to look at how that might play out.

Daniel Scrivner (00:49:41):

I want to talk next about conclusions, and specifically conclusions for investors at large. This isn't advice. I think what this is is... One of the things I thought was fascinating is, clearly, when you talk about financialization, you talk about this euphoric release valve that happened in 2020-2021, specifically 2021, at least from my personal perspective. As we've also talked about, then we've seen a, almost a whiplash of a regime shift over the last six months, which I think has taken a lot of people by surprise.

Daniel Scrivner (00:50:15):

You and I have had the discussion of that that is a uniquely difficult part of investing, specifically in public markets, is you have your kind of strategy. You have your tactics. Then you also have this regime that plays a role, and when that changes as dramatically as it has, and what we're talking about there is a shift from long duration, kind of unprofitable but high upside stocks and equities in companies into now people are basically discounting all of those and saying, "No, let's go for more of the sure thing." That has a bunch of implications, so I just want to ask the question. What are your conclusions about where people should be investing and where people should be looking, going forward? Basically, what is no longer working?

Howie Schwab (00:51:00):

Yeah, well, I think, I mean, you and I have had extensive conversations. Just the catch phrase is labor versus capital, but, and I would borrow this from a firm in London that employs as capital cycle investing, where they more so focus on supply than demand.

Howie Schwab (00:51:18):

Yeah, I think buying... I think you want to buy real assets. I do think, yeah, it's not a knock on tech, for example, but during this financialization period where interest rates have dropped consistently and stimulus has grown, I think obviously technology's going to be a critical part of the future. It's been from a golden age, if you wanted to emulate these models of attracting traffic and top line growth with minimal worries about earnings or how to fund that growth through your own internal cash flows. I think, so if we're in a regime shift, we've reached the end of this secular bond bull market, which by the way doesn't mean that we may not go sideways for years. I'm not convinced that rates are going to be at 10 because, per the earlier data, I think that breaks the system, so you'll see repression. You'll see things like yield curve control, but I think the government recognizes that they can't allow markets to really operate freely.

Howie Schwab (00:52:16):

Again, I want to veer away from saying it's doomsday. I think they will... More inflation probably makes sense. That's the surest way to debt monetization, but I think, going back to why we would assert that macro is really important, and this again sort of links with how EM has worked more frequently than [inaudible 00:52:39] in the past. I think, understanding these policy dynamics and policy shifts will be important, whether it's infrastructure programs or how the U.S. goes about reshoring everything from drug APIs, where during COVID we realized that 80 to 90% of our supply of APIs was coming from China, and that seemed pretty irresponsible.

Howie Schwab (00:52:59):

Yeah, I'm from the Midwest, and I think just strong cases we've discussed, that the Midwest ends up potentially being a big beneficiary, in terms of politically, I think, to win swing votes where somebody would want to reshore the votes and then not to mention the climate change dynamics we've talked about.

Howie Schwab (00:53:20):

I think relatedly to macro thematic investing, which I know you are very involved within, I feel like people's... These style boxes or risk assessments of investing, yeah, I think that's become a bit archaic. Yeah, I don't really understand why people are so obsessed with growth versus value. I think, thematically, you can capture both of those, and you're seeing that right now, but again, thinking about things holistically, COVID sort of turbocharged the digitization of everything and front-loaded a lot of demand. Meanwhile, I saw this stat this morning from one of my analysts, jobs in the oil industry are down by a third since 2019 alone, whereas, actually, overall job creation is net positive in the U.S. That, and behavioral biases like ESG, yeah, there's no incentive.

Howie Schwab (00:54:12):

I think that leads you sort of to real assets. One in particular that we've talked about is water. Again, there's tons of amazing statistics on water, but I feel a bit like it's the boiling frog and people see Lake Powell and they see what's happening in the Colorado River, and it feeds so many of these states.

Howie Schwab (00:54:33):

Again, I just want to make sure I have the statistics right, but fresh water usage is up by 600% globally in the last 100 years. If you look forward, 70% of these hydrogen electrolysers and water's really important for green energy, 70% of those projects will be located in water stressed areas. Agricultural water withdrawals are going to increase 45% between 2010 and 2030. We're halfway through, and every week, from my friend, Drew, I receive a heat map and a drought heat map of Texas and New Mexico and Colorado. Now we have fire warnings today, once again. Pretty much, it's a weekly occurrence.

Howie Schwab (00:55:14):

I think, looking for places that have water, there's... The demand for water only continues to increase and yet, globally, and again we've seen this in a lot of the EM countries where literally people are deprived of water, and there isn't the infrastructure, so I think, yeah, looking at those assets, I think new energy and green tech will continue to coexist because it's an issue that we absolutely have to resolve.

Howie Schwab (00:55:38):

Then, I guess, just lastly, I would mention that volatility... Yeah, I think we've become used to volatility. Volatility's been suppressed in tandem with interest rates and sort of this great financialization over the last 40 years. I think that's contributed. I think investors are going to have wakeup calls with this notion that passive investing is... They're just going to focus on saving 10 basis points in fees because passive investments, of course, will outperform in an area where the central bankers ensure that asset prices do nothing but go up, especially on a risk adjusted basis, but that's worrisome to me. I mean, Vanguard, as of... I think Vanguard owns over 5% float in 100% of the S&P 500 stocks, and so I think we've created systemic risks there, as well, which... We've also done that at the same time we've minimized the depth of liquidity because of policies that came out of '08-'09, where there's far fewer prop desks and banks that can provide liquidity when periods are strained, so I think that.

Howie Schwab (00:56:42):

Then, lastly, to the demographics we've talked about a bit, so I think having a view on how that demographic shift, which to me appears pretty significant and dynamic in the next five to 15 years. How that's going to play out is, I think, really important if you want to have an investment strategy. Globalization, I think, is going in reverse, so whether it's infrastructure or other ways to play reshoring, I think we're clearly moving into an area of regionalism as opposed to globalism. It's not... I don't think globalization is completely finished, but our view is there's going to be more of a China centric sphere and a U.S./North American continent oriented sphere, as well. For better or probably for worse, tying in with those themes, I think defense spending is structurally going to move higher. I think that's both traditional defense, and you and I had this conversation last year, which I wish we could've acted on, where I was trying to figure out ways to isolate just the actual defense companies and remove the commercial airline companies from the ETFs, but also I think areas like cybersecurity will continue to be important, as well.

Howie Schwab (00:57:53):

I think it's... Again, I just, the thing I want to make sure I'm emphasizing is it's not like the end of the world, but I think the crux... If I had to summarize everything, it's I think 40 years of policy distortions and manipulation have created an investment environment that, psychologically and behaviorally, it's just really hard to understand how much we take these inputs and variables for granted. I think what it comes down to is whether you own certain growth equities, technology companies, venture capital, PE, real estate. People are extraordinarily exposed to long duration assets, and the correlations I'm sure they're seeing in the last six months, as happens in all markets when things break, the correlations [inaudible 00:58:37], so I would encourage people to diversify or hedge themselves some way, if you agree with the conclusions here.

Howie Schwab (00:58:45):

Then too, I just think finally, if you think about that globalization, just how you want to interact, invest locally, invest globally, and I think when you think about... I don't mean that just countries, but I think in terms of the politics as well, if you are a real estate investor, and if you agree with, I guess, my views of the political transition, I think increasingly there needs to be an awareness of the political orientation of parties in certain states or municipalities, and you could speak to this better than I could, but in California I think you're seeing this, where I'm talking to commercial real estate and other real estate investors, who are moving out of the state, either because essentially they're sort of being penalized, partly because there is this sort of populist shift, whereas obviously Florida has been boom times because they've ostensibly taken the opposite tack.

Howie Schwab (00:59:41):

I think there's going to be more of that. What we've witnessed in emerging markets, where it's this, you really have to understand the granular politics, I think you're going to see that's kind of in a theater coming to you. I think the last thing I would just mention is I'm not in the camp of, hey, the dollars days are done, but you mentioned this earlier, and I think if you look at the policies needed to resolve a lot of these issues, and in my view, our politicians always take the easiest way out, I think if push comes to shove, sacrificing the U.S. dollar, debasing the dollar, that's a trade-off that the majority of people would happily take.

Howie Schwab (01:00:18):

I think if you think about the voting population, as well, where as you mentioned earlier, I really don't think that 80% of the country has a significant international investment presence, so while we're seeing maybe the impact on exports and the supply chain issues, I think if the U.S. can do things like make ourselves self-sufficient in energy, relative to the rest of the world, or somehow harness what, for now, is a large advantage in fresh water, I think the currency is an easy release valve that we can use to generate sort of a quasi-EM solution to the problem. Yeah, so I'll stop there. I think those were... Hopefully, that's what you were looking for.

Daniel Scrivner (01:01:02):

No, this... I mean, it's been a fascinating, amazing... I think we've been covering this now for maybe 30 minutes, something like that.

Daniel Scrivner (01:01:09):

For everyone listening, I know we've thrown an enormous amount of stats and figures and different points of view, different themes and trends at you, but I think... Howie, thank you so much, again, for coming on and sharing this, because just to go back to... For me, the way I would summarize all this is I think it's all in the name of the paper that you put together, which is just Pendulum Shift. It's this idea that, it's almost literally right now in time, we're making our way through a door, and the last 40 years are basically what came before, and the next 15-20 years, and I think, as you laid out, I think five to 15 seems somewhat dramatic, in terms of the changes that are going to happen at the demographic level, at the financialization level, at the debt level is just staggering.

Daniel Scrivner (01:01:54):

I think it's, hopefully, this has been for everyone listening what it's been for me, which is just an enormous wealth of things to think about, to consider, as I'm, one, interpreting the news and I think trying to watch how things continue to play out, and two, how I'm thinking about where I should be investing, how I'm thinking about that stuff. Thank you so much for sharing that, Howie.

Daniel Scrivner (01:02:14):

I want to end with just talking a little bit about advice for investors. This is... You've worked at Driehaus for the last 20+ years. You manage more than five billion in capital today. You've done that in enormously, what I would describe as enormously challenging markets. It's almost like, if we were playing a video game, if you choose to invest in EM, it's like you crank up the difficulty score. Rather than playing the easy game, you play the difficult game. I think you have a wealth of wisdom to share. What do you credit with your success, and what is some of your advice, just very generally, for other investors?

Howie Schwab (01:02:53):

I mean, I think being open-minded and malleable is truly important. Again, I think particularly in investing, people want to have these models or these philosophies that are concrete and tried and true. The reality, if you really gauge the history of our industry, whether it's LTCM or others, is there's a periodic occurrence of companies that are on top of the world and they're geniuses and then five or 10 years later, they're completely obsolete. I think given, in my views, what we've talked about in the latter half of this interview, if you believe the world is changing, it's really important.

Howie Schwab (01:03:36):

I mean, I went to a liberal arts university, so I just believe liberal arts and the ability to construct arguments and think about things critically and reach conclusions, but also, as Druckenmiller always talked about, as well, the ability to adapt and change is important. What's the quote? "Strong convictions held loosely," something along those lines? I think being competitive, at least if you want to be in the professional investment game, again in terms of quotes that I find interesting, Richard Reyes, one of my favorite quotes of his was you just say, "Hey, if you don't want to win, don't worry. You won't." I think there's a lot of truth to that, where it's you've got to get the elbow grease, and you have to be both competitive and I think psychologically a little bit off to be a great investor, because essentially you're going up against extremely smart people with firmly held and generally pretty well-substantiated opinions, and the ability to have conviction in the face of that is really challenging.

Howie Schwab (01:04:44):

Yeah, I think those are probably the big ones. I think the last thing, and kind of going back to another Druckenmiller, but he talks a lot about how the best investment managers he's ever met are hyper-fixated on their failures and sort of come with a healthy dose of humility. There's so many arrogant people in this industry, and so I think if you are competitive and if your true interest really is being the best investor rather than the paycheck or the number of houses you can acquire, something along those lines, I think that... I mean that's, I'd like to think, how I am. The successes are great, but the pain... It's like the emotions of loss versus winning. The emotion, that intensity I get from losing or failure is significantly more than my successes. I think you sort of need to have that mindset in order to persist in this industry for a long time.

Howie Schwab (01:05:41):

I think those are probably the key things I would mention. I think, lastly, something I realized belatedly, and you've been helpful in this, too, is casting as wide of a net as possible and really building out your network. I mean, some advice I even give particularly to young college graduates is that I'm just blown away by how much great content there is available for free now through newsletters and podcasts such as this and conferences that are available on YouTube. There's an abundance of knowledge that wasn't available 20 years ago, so I think capitalizing on that and exploiting that is beneficial, as well.

Daniel Scrivner (01:06:29):

No, I couldn't agree more, especially with your last point, which leads to another maybe piece of advice, which is get good at setting aside time to actually do deep research, because I think that that's something that I find difficult. If it's true that there's amazing information that's free, even just if you just locked yourself in a room and you only had access to YouTube, the amount of amazing talks, whether it's Google talks or investment talks or Berkshire Hathaway meetings or whatever it is that's on YouTube, is just absolutely staggering.

Howie Schwab (01:06:59):

You've made me think of another quote someone had, which I agree with, and another lesson I wish I had learned early on, which was, I think the way he put it was, "Leave time for creative tinkering." I think, too, oftentimes, even now, I find myself absorbing the headlines and all the day-to-day volatility, and as I know you've excelled that, and then stepping away and allowing yourself that ability to sort of have that creative autonomy is really critical.

Howie Schwab (01:07:29):

Along the same lines, I would say, just as a lesson, in terms of there is all this available content, which is tremendous, but also something I'm still working on but really failed that in my first 10 years of investing was not reading a balance, sort of eating a balanced diet of who you're reading and listening to. I know you and I have talked about this, but particularly coming out of school, I mean, the most bearish, world is going to end doomsdayers, they were always the most fascinating, and they always had the most compelling arguments, and 20 years later, they're the most wrong, so read them, but then try and find someone equally positive, so that you can interpret for yourself what the logical path forward is, based on your own interpretation.

Daniel Scrivner (01:08:14):

Yeah, so well said. I was just going to give a specific example that you and I have been chatting about recently on the tinkering side, which is one tool we've been playing with, partially for fun, partially just because it's new and it's really unique, is Composer, which you can find at composer.trade. It's fun for anyone that's interested in investing. I highly encourage you to check it out, just because it's a very different modality or user interface to use.

Daniel Scrivner (01:08:38):

You can effectively construct portfolios. You can do it. It almost feels more like code, although it all happens in a graphical user interface. Yeah, I would just say, for me, allowing myself the freedom to find something cool and actually allow myself to play with it, I don't have to cross a bar that I'm committing to this. I'm allowing myself to just freely play with it and see what I learn for it, I think, has been enormously valuable, so yeah, huge plus one for tinkering.

Howie Schwab (01:09:05):

Yeah, agreed. Agreed.

Daniel Scrivner (01:09:06):

Well, thank you so much for joining me, Howie. This has been so much fun. For anyone listening that wants to learn more about Driehaus, you can find them online at driehaus.com. That's D-R-I-E-H-A-U-S.com. You can also follow with them on Twitter @DriehausCapital. Thank you so much, Howie. It's been amazing.

Howie Schwab (01:09:23):

Yeah, Daniel, thanks. This was fun. I appreciate it.

Daniel Scrivner (01:09:27):

Thank you so much for listening. You can find the show notes and transcript for this episode at outlieracademy.com/104, that's 104. At outlieracademy.com, you can also find more incredible interviews with investors like Joey Krug of Pantera Capital, James Currier of NFX, Simon Mikhailovich at Bullion Reserve, and Dan Roller of Maran Capital Management. You can now also find all of our interviews on YouTube at youtube.com/outlieracademy. On our channel, you'll find all of our full-length interviews, as well as our favorite short clips from every episode, including this one, so make sure to subscribe to get notified whenever we share new videos each week.

Daniel Scrivner (01:10:05):

If you haven't already, follow us on Twitter, Instagram, and LinkedIn @outlieracademy. Thank you so much for listening. We'll see you right here next week on Outlier Academy.




On Outlier Academy, Daniel Scrivner explores the tactics, routines, and habits of world-class performers working at the edge—in business, investing, entertainment, and more. In each episode, he decodes what they've mastered and what they've learned along the way. Start learning from the world’s best today. 

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Daniel Scrivner and Mighty Publishing LLC own the copyright in and to all content in and transcripts of the Outlier Academy podcast, with all rights reserved, including Daniel’s right of publicity.

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