The transcript from this week’s, MiB: Tom Wagner, Knighthead Capital Management, is below.
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ANNOUNCER: This is “Masters in Business” with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest, Tom Wagner, co-founder and portfolio manager at Knighthead Capital. They run about $10 billion across all sorts of really fascinating investing lines. Not only do they do distressed investing and deep value investing, but they have an insurance business, they have a sports practice. They really look anywhere and everywhere. Talk about an unconstrained fund that can just find opportunities in all sorts of ways.
Not only do they buy sports teams and have been really pushing the envelope in things like buying soccer clubs in the UK, investing in pickleball in the United States, investing in endurance racing around the world, but they also run a long-short fund and find opportunities in things like Hertz, which was a deep value bankruptcy investment, or PG&E in California post campfire where there was all sorts of regulatory and litigation risk. Just a fascinating approach to understanding value investing, understanding how to allocate Capital and take risks.
I thought this was a fascinating conversation and I think you will also.
With no further ado, my discussion with Knighthead Capital’s Tom Wagner.
Tom Wagner, welcome to Bloomberg.
THOMAS WAGNER, CO-CHAIRMAN AND CO-FOUNDER, KNIGHTHEAD CAPITAL MANAGEMENT LLC: Thank you, Barry. I appreciate being here.
RITHOLTZ: I’m glad to have you. Your background is quite fascinating and I’m just going to do this chronologically otherwise I’ll reveal all of my personal biases. You start out spending five years at Ernst & Young doing hedge fund accounting. Like I didn’t even know that was a thing at E&Y. Tell us a little bit about how you got started.
WAGNER: Yeah, I started as a certified public accountant and one of the early engagements that I was tasked with was in the space of asset management and I recall doing the audit on Jeffrey Vinik’s very first year as a hedge fund manager.
RITHOLTZ: Post-fidelity, post-Magellan fund.
And he had a sizable amount of money under management and hard-closed his vehicle and in his first 14 months, if I remember correctly, his gross return was 120%.
RITHOLTZ: Not too shabby.
WAGNER: Not too bad.
RITHOLTZ: And that’s two and twenty, right? So there’s some upside there.
WAGNER: It was indeed. And I said, “What is this business that this gentleman is in and how do I get involved?”
RITHOLTZ: (LAUGHTER) I am wasting my life as an accountant. I got to see a different… working for the man is no good.
WAGNER: No. I mean, you know, it’s a great — you know doing accounting and being a CPA had its benefits. You learn the language of business and you learn how to operate in a business environment. There are a lot of great takeaways from that experience but I you know at that point in time I think I recognize something else was drawing me.
RITHOLTZ: I got to think 11,000 hedge funds out there, not a lot, are run by somebody who spent a big chunk of time really seeing the ins and outs of hedge fund accounting. I mean you’re a pretty rare bird.
WAGNER: I think that’s probably right. Most guys and gals who get into the business of working at a hedge fund, never mind you know founding and running one, you I think there’s a pretty typical track where they’re finance majors at top schools, they work at an investment bank or an advisory bank, sometimes at a law firm, and then they make their way into the investing realm.
Mine, you know, I started in a much more boring capacity and I ended up in public accounting for a variety of reasons. I started my college career as an engineering major.
RITHOLTZ: Right. As did I. That’s really interesting.
WAGNER: And I got into my junior year and I just really didn’t like it. We had a career day and everybody who came in was miserable in their jobs. And I was like, what am I torturing myself for? My friends are having a blast in college. I’m studying all the time. And I had a bit of an epiphany that perhaps, if I didn’t love it, there was a better path.
And so I switched to accounting because the most successful person I knew directly was my uncle who was a partner in a public accounting firm. And I looked at him and said, “There’s a guy that did well with this. I’ll give it a shot.”
RITHOLTZ: You mentioned business schools. You end up going to Columbia B School. And I know these are two-year programs, but explain to me how during your second year at Columbia, you were also working full-time at Credit Suisse First Boston. How can you juggle both of those?
WAGNER: You know, I think a lot of times in life you’re faced with a situation where If you’re trying to achieve your objective, that you have to find a path irrespective of what sacrifices you have to make to allow you to attain that objective. And you know when I was in business school from 97 to 99, we had kind of a hiccup in the markets in the fall of 98…
RITHOLTZ: Long-term capital management and the Russian default.
WAGNER: Exactly. And it was really a — you know when I was an intern at Credit Suisse. it was a highly volatile environment we were expecting offers in the fall and none were really forthcoming in the areas where I wanted to work which was in in the high-yield department in the sales and trading desk.
And so I had a mentor on the desk who was a few years ahead of me and said why don’t you start coming in and doing research for me on the side, you know, we’ll pay you some nominal sum, I mean, I don’t know, it wasn’t minimum wage, but it wasn’t a lot more than that. And once I was in the door, I was there every moment I wasn’t in class. And so I was doing 30, 40 hours a week on the desk doing research.
One, I needed the money because I was not in a position where I could rely on outside sources for income. And two, it was direct experience. And I was a career-changer. I went back to business school to prosecute my path of moving from public accounting into the capital markets. So I needed the degree, I needed the transition period. And that allowed me the ability to gain a lot of experience directly that I felt I needed to have a leg up and ultimately get a job, which fortunately I did.
RITHOLTZ: Was that at Credit Suisse First Boston? And how long did you stay there?
WAGNER: So I was at Credit Suisse, I guess you could say I started just after my internship finished And I was there until the fall of 2000 when I received a call from somebody at Goldman Sachs on their desk that I had met and cajoled me into coming into interview for a spot on the distressed debt trading desk.
RITHOLTZ: And you had not done distressed debt prior?
WAGNER: No, I was a regular way high yield trader and I was happy at Credit Suisse. I thought I had my own trading book. I was thrilled. I love the team that I worked with there. I mean, really to this day, I remain very friendly with a lot of those folks. I felt very fortunate to be on that team, but two things happened.
One, Credit Suisse bought DLJ…
WAGNER: And I had to interview to keep my job, which thankfully I did. And two, I had an opportunity to meet with the folks at Goldman, and the distressed debt trading desk at Goldman had a particularly colorful lineage. There was a group of people that had had that job and went on to some spectacular success. I mean, the likes of David Tepper and Jon Kolatch and Jon Savitz who was there, the person that hired me. And it was so, it was a really impressive group of people that had run that desk prior to my arrival. And it was very alluring to think about trading in companies that were facing their worst moment.
RITHOLTZ: So I always think of high yield as sort of the precursor to distressed debt. I don’t know if that’s sort of oversimplifying it, but it seems like a lot of what we call high yield and used to call junk, and some of it ends up in, a decent amount of it ends up in the junk drawer. Tell us a little bit about how you see that transition there.
WAGNER: Yeah, most companies that end up in distressed are very levered at the outset, so they have a sub-investment grade or junk or high yield rating, depending on what terminology you want to use. And those are the companies that are most likely to face severe financial stress, because they have the biggest stock of debt. They have the least financial flexibility.
But there are companies– and this was particularly true in the early days of my career — that go from investment grade right into distress. And there are a variety of reasons why that occurred in the early 2000s. But that, for me, was an area where I gained exposure to really marquee companies that were priced as if they were going out of business or would liquidate. And as we all know, most companies that go into bankruptcy don’t liquidate, they don’t go away. They just restructure their balance sheet, and if they’re smart, they restructure their operations as well to fix the issues that ultimately led them getting into bankruptcy.
RITHOLTZ: So you mentioned the era was the early 2000s. What was the fallout from the dot-com implosion? Did this create a target-rich environment or did it just make things more challenging?
WAGNER: Well, here’s the reality of distressed investing. Whenever there’s a period of time in the markets where there’s upheaval, it creates opportunity. And for me, I was not somebody that grew up in a financially comfortable environment. And so I think I was drawn to being involved in companies that were experiencing difficulty.
There’s also the reality of being in that seat on the sell side working for a bank is when the markets are really disrupted is when banks usually lay people off, but not their distress team.
RITHOLTZ: That’s your glory days, right? The worst the economy is.
WAGNER: And no one gets laid off when everything’s going well. So I had a lot of job security. So for my early days, it was a risk averse way of being in the capital markets.
RITHOLTZ: That’s very amusing. How long were you on the desk at Goldman for?
WAGNER: Just under eight years. So I left in early 2008. And my experience there, similar to my experience at Credit Suisse, was really fantastic. And it was driven by the people around me. When we go back and look at the team that we had assembled in the early 2000s in the Goldman Sachs distressed trading desk, an extraordinary number of those folks went on to become partners and founders of very successful multi-billion dollar asset management firms.
It’s a pretty unparalleled track record for a group of professionals that were together at one time. And for me, that was incredibly valuable. I was surrounded by people that were more experienced than I, that were in my mind smarter than I, and were every bit as motivated. And that’s a great environment to become an expert in a particular industry. I’m very, very fortunate to have been able to work in that environment with those people, really enormously talented individuals.
RITHOLTZ: So you’re there for eight years. What stands out as some really interesting trades, some distressed opportunities? What were some of the memorable moments on the Goldman Sachs distressed debt trading desk?
WAGNER: Well, I’ll start with sort of my first impression. I get, Credit Suisse was a hardworking, but also a kind of a collegial, fun-loving group of people. And I get to Goldman, and I was, at that time, I was a subscriber to the, when you’re the junior person on the desk or the institution you were the first one in. So I’d be at my desk at 6:45 in the morning typically.
And I remember the first day I’m there and it’s dark outside because it’s late, it’s mid-fall. And I’m like, wow, it’s really noisy in here. And I look around and 90% of the people are still at their desk at 6:30 at night. And I thought to myself, oh boy, I’m in a different environment.
And people, they worked hard and they worked late. And in positions where you didn’t often see that, meaning a lot of folks on a trading desk get up and walk out 30 minutes, 60 minutes after the markets closed. This was a group of people that were sticking around and continuing to work. And that really resonated with me. I was like, oh my gosh, this is going to be a whole different experience. And I’m in for a ride.
And sure enough, it was. We had a lot of late nights. Equally, I was also trying to become acquainted with the people that were my customers, who are the asset managers, both on mutual funds, insurance companies, hedge funds, private equity firms that were our counterparties. And so I spent a lot of time going out. There was a gentleman who ran sales that literally introduced me to everybody in industry.
And four nights a week, we were out to dinner, entertaining customers, getting to know them, talking about the markets, and that was an incredible education for me.
So in addition to being surrounded by great people who work all day, I’m now out with folks that would become the titans of the credit markets that were in the early days or midway through the founding of their businesses and talking about the markets. It was a really valuable set of experiences for me. So those things definitely stand out. But I think when I think about the markets at that point in time, there are certainly a couple of things that stand out enormously. The biggest, obviously, being 9/11. And we were on the trading floor, and I distinctly recall seeing pieces of paper floating by our window at 85 Broad Street, and then turning to my colleagues, saying, “Some of those pages are singed.” And then we all know what transpired thereafter.
We had, sadly, a front row seat to everything that occurred after the first plane went in. And then the markets afterwards were obviously heavily disrupted. Our country was heavily disrupted. But I remember getting on the phone the first day the markets reopened with the first phone call was from Fidelity. And they said, buyers only today.
WAGNER: Yeah. And it was sort of a theme across the market that really stands out to me even today where, for the first day, nobody was really– unless they had to, no one was selling. And that really, really stands out for me. Because we all lost a lot of friends that day.
And so that was an incredibly memorable moment.
I’d say the other one that really stands out as well was the day that WorldCom fell as a result of a report that was put out on a competing network. And I had been at work early that morning, we traded until normal time, and the news hit just after the close, and I ended up trading until midnight. Went home, slept for a couple of hours, I was back at my seat at like 3:30 or four o’clock in the morning, and I traded that following night until 8.30 in the evening. And it was the most profitable day of trading I’d ever had.
RITHOLTZ: No kidding.
WAGNER: It was the busiest day I’d ever had. It was literally a trading floor with, I don’t know how many hundreds of people. And because of what had happened, the person trading that name became the center of attention. So everyone was looking at whether the price of those WorldCom bonds were going up or down, or who was buying, who was selling, what kind of size was trading. It was an incredibly intense period, but it was probably the most enjoyable 36 hours of my professional career, because it was just so exciting.
RITHOLTZ: You’re in fighter pilot mode.
And you’re not even thinking, you’re just responding to 360 input.
WAGNER: Yeah, constant and my second in command, if you will, on the trading desk, is now a very successful manager of a hedge fund and he and I joke about it to this day and how crazy that day was. And so, that stands out just because of the enormity of the surprise in the market for a single name. You know the bonds in that company fell 50, 60, 70 points depending on which bond flavor it was, meaning which duration bond, instantaneously. And you know you’re talking about wiping out billions and billions of dollars of capital and it was just a huge shock to the market.
So you know those are those are two of many days that really stand out in my mind.
RITHOLTZ: And WorldCom, perhaps different than an Enron or something like that. Clearly valuable assets just I think that was an accounting problem, Bernie Ebbers and Jack Solomon and all that crazy stuff that took place. So you end up — Jack Grubman who was at Solomon right? I think was the acts on that stock. So you’re looking at this saying hey you know at a hundred cents on the dollar these are disasters but at 30 cents on the dollar there’s some real …
WAGNER: 10 cents.
RITHOLTZ: 10 cents.
WAGNER: 10 cents on the dollar are very valuable. The MCI bonds were very valuable. If I remember, they got as low as the 20s or low 30s. And the recoveries were quite high. You know, people say that it was an accounting fraud. It was in the sense that they were misrepresenting the facts, but the information was there. As is the case in many of these situations, if you dug deep enough, you could figure out relatively quickly what was going on.
But there were a lot of companies that were over-levered and perhaps over-promoted, but where there was real underlying value. Enron, as another great example, another huge opportunity at that point in time, less so with some of the telecom names. And so —
WAGNER: Well, you had a lot of businesses, one that stands out, oh, I’m going to blank on the name.
RITHOLTZ: It just gets worse as you get older.
WAGNER: I know, I’m fully aware. It is now, there’s so many hundreds of names banging around in this small brain of mine.
RITHOLTZ: Once that hard drive fills up, the buffer overflows.
WAGNER: Yeah, it’s full. Yeah, something else has to give way. But with a lot of the companies in that time, they were building capacity that was unneeded. Technology was advancing to the point where we didn’t need as much fiber laid.
RITHOLTZ: So you remember Metromedia Fiber and Global Crossing, and they were like thousands of dollars per mile laid and sold for pennies.
WAGNER: Pennies. And you know, Metromedia, great example, they had the valuable assets in the cities.
WAGNER: But they weren’t as valuable as the cost of installation. And it’s one of the reasons why I think in distressed investing, one of the worst mistakes you can make is how much money was spent on the assets that you may be acquiring in distress. It’s irrelevant, it doesn’t matter what was spent.
RITHOLTZ: Right. What is it really worth in market?
WAGNER: Only thing that matters is how much cash flow can generate in the future, that’s it. Any investment, that’s all that matters. And we can, I’m sure we’ll get into some of the other things were doing. But at the end of the day, you want to think about what is the inherent value of this business, meaning how much cash flow can this business generate.
There are different ways to value different businesses. Luxury assets, as an example, are valued very differently than infrastructure assets or boring assets in mining, let’s say, where the risks are very different. But at the end of the day, there’s some basis on how much cash they generate.
RITHOLTZ: Dan Gross wrote a book a couple of years ago called “Pop! Why Bubbles Are Great for the Economy” and his thesis is, yeah, let the VC spend all the money laying this fiber. When that blows up and we buy for pennies on the dollar, in the out decades you get things like YouTube or Facebook or whatever that requires all that bandwidth that no one would want to pay the original money for, but at a thousandth of the price, hey, we’ll take some bandwidth.
WAGNER: Yeah, there’s a lot of examples like that over time. I think there’s one thing as it relates to distressed investing, which is a smaller component of what we do now than it was in the early days. But this has always resonated with me. Credit Suisse had an index for high yield, they had an index for investment grade, loans. One of the indices they had that no one ever really talked about was the distressed debt index. The distressed debt index has a negative long run return.
RITHOLTZ: Interesting. Meaning that the ones that go out of business lose more capital than the ones that recover.
WAGNER: Yeah, or put slightly differently, When a company becomes distressed, let’s say that that’s the line of demarcation, let’s say 70 cents on the dollar on the debt, from that date forward, on average, the ultimate value of that security is lower.
RITHOLTZ: That makes sense.
WAGNER: And what it tells you is that when companies start to run into problems, that isn’t necessarily the low. And there’s two types of businesses that run into distress. There are businesses that are overlevered or mismanaged at a point in time and then there are companies that have a flawed business model or are somehow on the wrong side of secular change. Those last two categories are really dangerous, really dangerous.
RITHOLTZ: Not the first time that someone who’s been on a trading desk has told me that, you know, patience is a key attribute to making these investments. If you jump into a First Republic Bank a little early, well your early is the same as wrong.
WAGNER: Yes, a hundred percent and you know it’s, you know, your total return is what matters and ultimately you know buying right is half of the game. The half that no one ever talks about is selling right, which is why I always tell people come to me and say what’s you know what’s your great idea right now? I’m like I don’t give out ideas and they think that I’m withholding something. I’m not withholding anything, but I got to remember to call you back when it’s time to sell. That’s the hard thing.
So whenever you’re taking a tip from somebody, It’s not just a tip to buy, you need a tip on when to sell and particularly if it’s not your idea, and so I think that’s one of the things that is often lost on the non-professional investing public is buying is half of it and you can buy right?
But I’ve seen lots and lots and lots of examples of buying right where it looks good for a period of time and ultimately fails because you didn’t sell right?
RITHOLTZ: I could not agree more.
It’s so true it’s the cocktail party chatter, is just a lose-lose.
WAGNER: Yeah, there are a few assets that persistently appreciate for a long period of time, you know, the very, very best companies, if you buy them, you know, consistently, you know, this whole idea of, you know, your retirement account, right, where you’re buying every month, that’s great. That will work for you. You’ll earn a very solid return because you’re not selling until you’re presumably much older, but for an idea, trade a moment in time you got to know when to sell.
RITHOLTZ: So here you are on the Goldman distress asset desk working with these future legends, getting a first class education really baptism of fire and then some, what led to the thought to hey maybe it’s time to graduate from Goldman and launch my own fund. How did you get to that point?
WAGNER: You know there are a number of things that occurred. I would say I had another unique advantage, which is that my wife was in the business as well and had an incredibly successful career. And so I always joked that I had a really valuable backstop at home, meaning that I had the ability to take some risk where personal bankruptcy was maybe less likely.
And so that’s a huge advantage and not to be understated. And having somebody in your corner that’s very supportive, whether it’s a spouse or a significant other or friend, parent, whomever, that’s an important element of achieving success in any new venture. But I think a couple of things really stand out to me. One, I was managing or co-managing, I had a co-head of my last business that I ran at Goldman, a team of 21 people, we had about 4 billion in capital across everything that was non-investment grade rated, so all junk rated instruments other than bank loans.
So every bond, CDS contract, convertible bond preferred, equity, kind of the whole gamut was positioned on our one desk. We crossed over between equity and fixed income, which meant I reported to people in both divisions, which was challenging to say the least. But I sat back one day and recognized, well, if I were doing this on my own and I had this many people and I had this much capital, my pay scale would be very different.
RITHOLTZ: (LAUGHTER) Yeah.
WAGNER: And so that’s a pretty significant motivator. And I felt that I would be capable of doing that. So that was one of the big reasons. Secondly, I think I always wanted to be an entrepreneur. I’ve always been a little bit taken with entrepreneurs. I’m fascinated by them. There’s a lot of great entrepreneurs in the world today that are doing amazing things. And I’m always fascinated by how they’ve achieved success, particularly those that I think are really changing the world.
So I think those are the things that push me there. A conversation I had with my dad really stands out in my mind. I was like talking through with him how the fund economics worked and what the upside was. And I’m like, if we raise x dollars of capital and we put up a y return, then pay is z. And here’s all the things that can go right. And he said, “Well, what if it doesn’t go that way?”
And I said, “Well, I get (EXPLETIVE DELETED) off.” I’m like, “What do you mean?” Like, “This is what’s going to happen.” He’s like, “Well, what if it doesn’t?”
And I said, “Well, then everything will fail and I’ll lose some money and I’ll have to go out and find a job, and you know, but that’s okay.” I’m like, “Geez, dad, don’t you think I can do this?” And he said to me, he goes, “I’m not asking you because I don’t think you can do it. I’m asking you to make sure you’ll be okay if it doesn’t.”
And striking moment where I was like, wow, how lucky am I to have a father who didn’t grow up in this industry and certainly wasn’t an expert in it in any way, but was definitely an expert in the things you have to consider. At that time I was married, I had two kids, and I was taking a substantial risk. And he just wanted to be sure that if it didn’t go well, that I’d be all right.
RITHOLTZ: If the worst case scenario is, “Hey, I got to go get another gig at some other firm.” That’s not such a terrible downside.
WAGNER: That’s what I thought the worst case scenario was. Then we get to mid-October 2008 and —
RITHOLTZ: Oh, you launched right into the financial crisis.
WAGNER: We launched right into the disaster. June 2nd, ’08, so we just passed our 15 year anniversary. So we launch and the world comes to an end virtually a few months later.
RITHOLTZ: If only you were investing in distressed assets post ’08, right?
WAGNER: I know, can you imagine? In fact, if I had a little luck.
WAGNER: It was great in that regard, But there was one very scary day, which is the day that Goldman stock saw its kind of all-time post IPO low. And we’re a new fund. We weren’t that large. We had, I think we launched with $413 million in capital. So it was a fine launch. We had a billion and change in commitments a few months earlier before the Bear Stearns unwind.
WAGNER: When it changed the world, we launched with far less than what we thought we’d launch with. And as a result of being new, you know, you don’t have multiple prime brokers, you don’t have multiple relationships. So our only prime was Goldman.
I still had Goldman stock. My wife was a Goldman MD, she had Goldman stock. We both had our cash at Goldman. My funds cash was at Goldman. And it hit me that if Goldman went the way of Lehman, that I would probably, you know, be wiped out.
RITHOLTZ: So I have to focus on this for a second. I’m ready to move into the next conversation, but it’s hard to imagine for the people who were listening who weren’t of age actively trading, working during ’08-’09. It sounds ridiculous today that Goldman would go the way of Lehman Brothers, but in the fall of ’08 that really wasn’t unthinkable.
WAGNER: No, it was, it wasn’t because there was something wrong with Goldman or any other bank. It was just that if confidence failed, it would have been very, very difficult for Goldman or almost any other bank to survive.
And we’ve put in place measures now to help protect against that, but ultimately, no bank is really protected against a fall in confidence. We just built barriers around them to ensure the confidence remains high. And ultimately, that’s what our fractional banking system and ultimately capitalism is based on. And I’m a big believer in it. But for the people out there listening and thinking about this, if you think that going out and starting a hedge fund is a zero risk proposition, you’re just wrong. It’s not.
And if you want to achieve great success, whether it’s in the investing world or the hedge fund world or in any venture, ultimately it’s rare to achieve great success without putting it all on the line. And I didn’t really think I’d put it all on the line, but ultimately I did. And I’ll tell you, it’s really motivating. We did really well in a relative basis in 2008 and exceptionally well in 2009.
And so I think it was incumbent on us to recognize the moment in time we were facing and be willing to take that much risk. It’s sort of like, people today get frustrated when we see great wealth, okay? But you have to stop and think about the risks that were taken to attain that. Perhaps the best example today is Elon Musk who achieved multi-generational wealth and the sale of his first you know his first big win.
WAGNER: In PayPal and then risked every single penny to build ultimate three different companies and whether you give him all the credit or some of the credit is irrelevant, he took the most risk.
RITHOLTZ: He rolled the dice and at one point in time If Tesla hadn’t worked out, he would have been completely busted.
WAGNER: Completely wiped out.
RITHOLTZ: Which is shocking to think about someone having such a massive success and then saying, “No, no, let’s put it all on red and spin the wheel and see what happens.”
WAGNER: An enormous conviction. And I have to say that having done business directly with Elon by way of our investment in Hertz, I have an incredible amount of respect for his conviction as a business person. And I think that’s probably informed some of his views generally. And ultimately, I just believe that that kind of disposition is important in society. And it’s important, particularly in a capitalistic society, to have risk takers and have people that are willing to really stick their necks out.
Because if you don’t take risk, you’re not going to achieve reward. There’s no two ways around it. And you need the incentive structure to be set up such that people are willing to take those risks.
And interestingly, you have a guy in Elon that doesn’t really own anything other than his companies. He is not an acquirer of things. He’s a builder of businesses. And that’s all his focus is. And that, for the markets in general, folks like that are good. They deploy capital. They grow businesses. They create jobs. Ultimately, if you take a step back and think about what he’s doing with his three major companies, it’s pretty astounding.
You know in in Tesla, it’s leading the revolution EVs and we believe enormously in the value of EVs not simply because they’re good environmentally which they are although I think there there’s a there’s a good solid debate around just how beneficial they are environmentally.
RITHOLTZ: Well, the whole minerals, rare earth things and the extraction of those are problematic.
WAGNER: That’s right, and what you do with the batteries at end of life and making sure you recycle them, those things are all incredibly important. And how we generate the electricity that charges vehicles, all of those things need to be considered. But ultimately the cost of running an EV over a long period of time is demonstrably lower than an ICE car, meaning an internal combustion engine.
RITHOLTZ: No doubt about it. And as a car guy, I would be lying if I didn’t say it’s a superior propulsion system when you step on the gas on a high — step on the gas, look at how I stuck with terms, when you mash down the accelerator in an EV, ICE engines just can’t match that and it’s a fraction of the cost. What used to cost a million dollars for a thousand horsepower you could pick up for 20% of that and it’s a shocking change. I give a lot of credit not just to Elon but I’m pretty convinced that Jeff Bezos deserves some credit because after Amazon demolished so much of retail and yeah America was over-retailed in this whole other conversation there. I got the sense that the entire legacy automaker world looked at Elon and said hey we can’t let this guy do to us what Bezos did to retail, we got to step it up.
WAGNER: Absolutely. And I think that look, you’ve got some other great executives, you know, what, what Mary Barra is doing at GM and some of the products they have coming out. Yes, they’re, they’re behind Tesla. I don’t think that I’m saying anything that’s controversial there. They’re spectacular products. I think that Ford is the world’s largest commercial vehicle manufacturer, will find its footing in EVs and come out with some pretty spectacular things.
RITHOLTZ: They’ve been crushing it when you look at not just the Mustang Mach-E, but the F-150 Lightning.
WAGNER: Oh, it’s. ..
RITHOLTZ: Have you driven that pickup?
WAGNER: It’s amazing.
RITHOLTZ: No vehicle that large has any business being that fast. It’s shocking.
WAGNER: It is shocking and you know, I’m Farley’s a big motorsport guy and so I’m I’ve got a you know, soft spot for that and obviously Mary’s, you know move into endurance racing with Cadillac is pretty interesting. So there’s a lot of exciting things going on but I think when you when you look at what you know, Elon did and kind of kicking off that revolution, it’s a good thing for the markets, a good thing for society ultimately. We’ve got some things we need to get right as it relates to power generation, but that’s good.
SpaceX and what that will do …
WAGNER: …for the cost of lift is with this new, the largest rocket, I’m blanking on the name, but that’s going to be an unbelievable reduction in lift costs. I think it’s 90% cheaper than the Apollo program, which is astounding.
And then finally, with the satellite business and what we can do for telecommunications, it’s difficult to assess without getting into a kind of a deep rabbit hole how valuable it is to have thousands of satellites that are really hardened against strategic attacks and can serve the entire planet and provide fast communication and data is an unbelievable resource for humanity.
RITHOLTZ: Yes, especially for the non-industrialized countries that skipped over landlines and stringing copper attached to dead trees and went right to mobile.
RITHOLTZ: This is data, voice, communications no matter where you are on the globe.
WAGNER: It’s amazing and those things, those are going to have an extraordinary impact on humanity. I’m a big believer in the power of humanity when we, you know, provide people with opportunity. I think all things being equal they tend to respond really well.
RITHOLTZ: And we’re recording this at the end of June and the news broke very recently that Tesla cut a deal with GM and Ford to make their massive network of chargers available to GM and Ford EVs, that’s potentially a game changer and it’s potentially a revenue source for Tesla that looks out years and years and years.
WAGNER: Absolutely and what it does is it begins to reduce the range anxiety that people ultimately feel. Look you know one of the things that we looked at at Hertz and I and I have to credit Stephen Scherr, our CEO for being really unbelievable in his pursuit of the objective of electrifying more of the fleet but one of the things that his team looked at was the percentage of trips that are greater than 200 miles and 90…
RITHOLTZ: Single digits? Something like that?
WAGNER: It’s a very low percentage. Most rental days are less than 200 miles. Most rental, total rental experiences over a multi-day period are less than 200 miles. So this idea of range anxiety accounts for a very small percentage of trips that people ultimately take. And as we have access to more charging, and particularly charging in places where cars reside at rest, so restaurants, hotels, office buildings, homes, that’s critically important.
And I think one of the big initiatives that I love that Stephen’s pursuing at Hertz is to bring charging infrastructure into underserved communities. And that’s something that he’s working on with British Petroleum and Uber and state and city municipalities and kind of bringing that opportunity to areas where it’s a little tougher, you know, to have charging infrastructure in the home.
So that’s, you know, all of this is spurned by, you know, the initial foray of Tesla and EVs and then ultimately these other great companies following.
RITHOLTZ: Really quite fascinating. Let’s talk a little bit about investing in sports. Tom Brady?
Tom Brady? How does this happen?
WAGNER: Well, Tom and I have known each other for a long time and we met through some mutual friends and our boys actually, his eldest son and my son were classmates for a number of years together at the school here in New York City. And so we get to know each other and then became friendly and then opportunities arose where we saw some pretty interesting things to do in sport. And if you’re going to invest in sport, why not do it with somebody who has had unparalleled success in sport, not simply in so far as winning or winning percentages or statistics, but in the persistent performance at the highest level over an incredibly long period of time in a sport that is absolutely not known for longevity.
RITHOLTZ: Yeah to say that what’s the average NFL career, three years? Although I think quarterbacks do a little better than that but he played at New England for decades.
WAGNER: Yeah a 23 year career and you know set just about every record that could possibly be set and I think did it in a way that you know left his legacy unlikely to be paralleled and what I mean by that is you know he brought others up. If you look at the performance of his teammates when they were with him vis-a-vis their performance elsewhere or the teams when he was with them versus when he wasn’t, it’s pretty clear that you know he is a key component of success.
So you know we wanted to understand that and tap into it and I think a lot of it has to do with nutrition and recovery and that’s a big area of Tom’s focus and so you know we’ve looked at investments where we can partner together and bring some of that to bear.
Also where we can use his fame as a springboard to bring attention to a sport or an opportunity. So we’ve done a handful of things together and I think there’ll be more to come.
RITHOLTZ: I love the concept of those rare players who make everyone around them better, whether it’s Tom Brady or Michael Jordan or Derek Jeter or going down the list, there’s something really interesting about it. I also love this headline, this Bloomberg headline, “Why a Hedge Fund Manager is Betting on Pickleball with Tom Brady and Former Number One Ranked World Tennis Player Kim Clijsters.”
Tell us about pickleball. I’m a tennis player and I’m terrified of pickleball because I don’t want to affect my swing. Well I don’t think that pickleball would damage in any way your swing. I think what we found interesting about pickleball is the enormous explosion of popularity in the US.
RITHOLTZ: Fastest growing sport in the US.
WAGNER: Fastest growing sport. We liked the idea of a league with teams that are based in or connected to cities. You bring in a tribalism element to it which has proven very successful in sport over the years. We liked, you know, the idea that this would be something that would continue to grow. It’s an early, early stage investment. It was not a particularly large investment, but it was something that we were excited about. And Tom and I have played pickleball and enjoy playing pickleball.
RITHOLTZ: Is he any good?
WAGNER: He’s very good. People forget, by the way, his athleticism. He was a guy that was drafted in two different sports.
WAGNER: And he’s a super competitive human being.
RITHOLTZ: That’s the thing I was thinking of. It’s like Michael Jordan in golf. It doesn’t matter what his skill level is, he is not going to back down.
WAGNER: No, I think there’s a level of, you know, when you run into anybody who’s incredibly successful in a given profession, they tend to be hyper-competitive. And so, you know, I think we saw the demographics and we’re attracted to it and are quite excited about that opportunity. I think there’s a long way to go to get the league to the point where it’s, you know, really connecting on a commercial level. But I, you know, we think that there’s a great tailwind there.
RITHOLTZ: Let’s discuss another sports investment. recording this at the end of June by the time this broadcasts you will have closed the deal to purchase Birmingham City FC in the English Football League. Why a soccer club? What motivates this and why the UK? That seems to be a little off the beaten path.
WAGNER: Well, we were really, really excited about the prospect of investing in Birmingham. There were a few things that drew us to that particular opportunity that were unique to Birmingham. So first it’s England’s second city. We understand it to be the youngest city in Europe. It’s one of the fastest growing cities in in Europe, youngest professional population in Europe, very, very diverse population, and a city that is going through what I would characterize as sort of urban renewal where a lot of investment is coming in alongside you know a lot of new folks that are moving into the city.
And so all of those demographics were really, really interesting to us.
Then you have the named team in the city that had been under-invested in and had gotten a lot of things wrong, in our opinion, in the preceding years.
The fan experience was really subpar and candidly not fair relative to the incredibly passionate fan base that Birmingham City has. We just — you go there and you spend time with these folks and you talk to them, they are just amazing people. And we felt that one, there was an opportunity where we could turn the team around, we can talk a little bit about that, and two, where we could connect with the folks that are so passionate about this and effectively partner with them to make this a much better experience and hopefully a much more successful team.
RITHOLTZ: So let’s talk a little bit about that. What are you guys doing to turn around the team and also to kind of bring the stadium up to speed? It seemed to be a little neglected prior to your investment.
WAGNER: Yeah, for recent past, almost a third of the seats in the stadium were not fit for use because of some structural issues in the stadium. That’s being remediated. The pitch was in disrepair. The concessions, the quality of the seats, the overall look of the stadium, the electronics, Wi-Fi, everything was either not there, not working, or in a state of disrepair.
And so I think improving all of those things and more will really improve the fan experience. And that’s important, right? It’s not simply what’s going on in the pitch, it’s the overall experience, particularly if you’re going with friends or family or what have you.
We need to make that experience commensurate with the legacy of the team.
The second thing is obviously the competitiveness on the field. That is something that is constrained by the English Football League rules, which require that you not spend more than the revenue that you make.
So you can’t just go out and say, “I’m going to spend an ungodly sum of money.”
RITHOLTZ: So wait a sec. So let me get up to speed on this because I don’t know those rules. This isn’t like a salary cap like Major League Baseball has with the penalty if you go over. It’s hey whatever you generate is how much you can spend. You would think people would do whatever they could to get more butts in the seats to generate more revenue.
WAGNER: Yeah you have to have, that’s why I say it has to be a partnership with the fans. You have to create an experience where people want to support the team and then ultimately you have to be prudent in allocating those pounds to the players that will perform in the field. And that’s obviously incumbent on our team to get that right. But it’s not one thing, Barry, it’s everything. We have to work on every element of this and turn around every element of the team. It’s different sponsors, it’s different partners, it’s different oversight, it’s different management, it’s different talent acquisition. All of it has to be changed. And certainly we won’t be able to do that overnight, but we’re going to start the process immediately and get to a place where our hope is to field an immediately competitive team and then ultimately do all of the things that we need to do to make it permanently competitive.
RITHOLTZ: So is this a fun investment or is this, “Hey, we’re looking for this sort of ROI and this sort of return over time.” How do you — because I think of Steve Cohen’s acquisition of New York Mets, which, by the way, you go to Citi Field, the whole experience is next level compared to what it was like in the — I grew up with Shea Stadium and it was a little bit of a sad compared to Yankee Stadium. Now, I don’t know if this has blasted me, City Fields is nicer than the new Yankee Stadium. It’s amazing.
So tell us a little bit about the thought process on this.
WAGNER: Well, I think you’ve touched on something. I grew up outside of Boston and I was a Red Sox supporter and I go to Fenway and that experience in the seventies is very …
RITHOLTZ: Pretty unique.
WAGNER: … different than what you have today.
WAGNER: It’s much better, same stadium, but a much better, much different experience, more engaging for the fans, particularly on the weekends when you have a lot of family activities. And so I think the whole fan engagement needs to change. Some of what we’re doing in Birmingham is bringing in different sponsors that bring an element of cool, for lack of a better word, to the team.
Right? This is a team that should be viewed differently than it has been, we’re trying to demonstrate by way of drawing sponsors in that have never been associated with being attached to a particular sports franchise into the realm to raise the profile.
All of those things matter in the context of helping to improve the overall performance of the team because it helps to improve your overall revenue. So those are all things that we’re working on.
But when you ask the question about prospective returns, look, sports franchises have proven to be pretty consistently appreciating assets over time. There’s a variety of reasons for that. We don’t think that that changes in the near or intermediate term. So from that perspective, we believe there’s a tailwind there.
However, what we see in Birmingham is a unique opportunity to fix some things that have been done incorrectly, to invest appropriately in the infrastructure, and to position the team to achieve the level of success that it had had looking back a couple of decades ago.
If we get all those things right, obviously we’ve created a lot of value for our investors and I think we have the right team of people to help us do that, both internally and externally. So I think our focus in Birmingham is let’s not worry about how much money we make, let’s worry about getting it right, making the right decisions, the success will follow.
And I think that’s the case in any turnaround investment. Don’t say I need to do X so I can make Y in return. Focus on making the changes you need to make to allow the business to be more successful, the returns will follow.
RITHOLTZ: I’m fascinated by the idea of the revenue cap. Does that apply to the team or the stadium? Like if Taylor Swift comes in and does a show and you capture some revenue for hosting that, can you apply that to the team or is that the stadium a separate revenue — its venue?
WAGNER: It’s all part of the calculation. If the two are owned, in the same entity, which ours will be, our stake in the team and our ownership of the stadium, will all be in the same entity. So we’re focused on doing all kinds of things that will lead to additional revenue generation. But taking a step back from that for a moment, it’s about creating a culture of success around that organization. And that goes beyond the bottom line, if you will.
It’s about creating the right types of events that draw the community in. So this becomes a focal point for the community. –
RITHOLTZ: Cultural center.
WAGNER: Cultural center.
WAGNER: And if you think about English football, It is, in many respects, for a substantial part of the population, the cultural hub of the community. And if you can make that a better experience, not just on match day, but beyond that, and bring the community into the organization, now you’ve really started to achieve success.
And one of the things that we love about Birmingham is it sits in the middle of the country. It’ll be the hub of the new high-speed rail system in the sense that 80% of the English population will be within a one hour train ride of Birmingham.
WAGNER: When HS2 or high speed rail two is completed, looking out eight, 10 years from now, that’s an extraordinary thing. Birmingham could end up being a location that folks visit for football matches, concerts, other sporting events, whether it’s football or rugby or what have you, motorsport, There could be a whole series of things that could occur in Birmingham and quite frankly, if not Birmingham, then why anywhere else?
It will be so accessible to so many people, such a huge percentage of the population, that why not make it a center for sport?
RITHOLTZ: How many seats does the stadium hold and how far can that be expanded?
WAGNER: It’s about 29,000.
RITHOLTZ: Oh, so that’s a substantial stadium.
WAGNER: It’s a good size. I think we’ve got to look at the infrastructure there and decide what’s best for the long-term needs of the team and the community. And so, you know, we’re early days and so all those things will be looked at. I think for us, the immediate focus is let’s make this more fun for the fans.
RITHOLTZ: You mentioned motorsports. Again, relatively new breaking news. Ryan Reynolds and Rob McElhaney just bought 25% stake in the Alpine F1 team. Tell us about motorsports, any aspirations in that area?
WAGNER: Well, we have an investment in motorsport. We own a World Endurance Championship racing team. So endurance racing is, I think, 24 hours of Le Mans, 24 hours of Daytona. We have the only private team in the WEC, or World Endurance Championship race this season. That is a series that is run, one race in the US and a series throughout Europe, Middle East and Asia and we’re quite excited about it.
You know, world endurance racing used to be more popular than F1 if you go back into the 60s and 70s and has re-emerged with a new class of hypercars that were introduced and you’ve got all these luxury brands getting into it. So Porsche, which manufactures the car that we’re racing and we’re thrilled to do that.
RITHOLTZ: Dakar 911? Is that the car?
WAGNER: It’s actually a 963 so it’s a purpose-built car for endurance racing. It looks like an F1 car with an enclosure over the driver, because they’re in some cases driving, the team of drivers is driving for 24 hours in any weather condition.
WAGNER: And so Porsche’s involved, we’ve got Ferrari, Lamborghini’s entering next year, BMW is entering next year, Alpines coming in, Cadillac has a very competitive team, Peugeot. So there’s, if you look at all these great manufacturers are getting back into endurance racing, it’s really exciting. And we are tickled to be involved with it. And so we’ve brought in some of our partners. Brady Brand, not surprisingly, is involved with the team. A couple of other companies that we’re invested in, one being Singer Vehicle Design, was responsible for putting together the livery or the paint scheme on the car is a sponsor as well.
So we’re really excited about that. We’re looking at other opportunities in motorsport or expanding our existing investment and trying to think about how it fits within the ecosystem of investments we have in the portfolio. Anything that we do in sport, we try to think about how does it fit within other investments in our longer term thesis around a given industry or sector.
RITHOLTZ: It’s interesting you mentioned the older days of endurance racing. It really was launched as a way for companies to show, look how solidly built and reliable our vehicles are. We can run them flat out. I was just watching something on the Mille Miglia in Italy and I think it was Sterling, I’m trying to remember who set the record over a thousand miles, he averaged a hundred miles per hour, which is insane because you’re just going through towns and that record has never been beat.
But when you do that, and I think that was in a Mercedes back in the 50s or 60s, when you do that, hey, the brand’s reputation for reliability, hard to top. I know Porsche put out this, what was it, it was a Dakar racer, which is based on their actual racing vehicle. And then Lamborghini just took, I think it’s a Huracan that they turned into an off-road vehicle, which looks ridiculous. And of course everything Singer touches is just gorgeous.
So having them do the paint and the interior is, I’m sure that’s going to be spectacular.
WAGNER: No, it’s an area where there’s a distinct business case for the manufacturers to be involved in endurance racing. It does showcase exactly the things that you’re speaking to. Each of these manufacturers is going to develop a motor and a drivetrain. They’re all hybrid cars, which we love. But if you look at the endurance series, you’ve always had GT cars in there, although I think for next year, because of the number of hypercars that will be in the class, races like Le Mans won’t have a GT race at the same time. And it could just be too many of these supercars on the track to do that.
WAGNER: But nonetheless, the expansion to include other luxury brands is really interesting. And I have to say, having attended Le Mans this year, it is an unbelievable event. To have a 24-hour long race, there’s all kinds of things that happen. You’re always going to experience problems. It’s a fascinating thing to watch.
RITHOLTZ: Really quite fascinating.
So let’s talk a little bit about distressed investing. Your firm runs private credit, commercial real estate, long-short real estate, and insurance, as well as an asset management shop, and some of the sports investing we’ve talked about previously. How do all these separate businesses and approaches, do they work together or are they all separately siloed? What’s the, to use a dirty word, synergy between all these different divisions?
WAGNER: I think at our core, we’re value investors. So we’re looking for situations where we believe in virtually any scenario, we have no or a very, very low risk of impairment. Meaning we won’t lose money, that’s the goal.
And whether it’s a turnaround situation or a private loan, or even a private equity situation, or growth capital for a smaller company. In each of those situations, we’re trying to structure the investment where we believe that if our thesis is wrong, that we won’t lose money.
And the way that these all fit together is that the duration of capital that we manage is quite long. So most of our capital is either permanent capital, meaning we are the manager of it forever, or it’s very long dated in the case of a closed end fund, where we have five, seven, or 10 years to invest the capital.
And that affords us an advantage versus a number of other firms in that we can take a long term view, or we can make a commitment that requires a long term time horizon. And there’s a lot of extra return to be had if you’re willing to take a longer view. There’s still a huge premium on liquidity in the market today. There has been since the global financial crisis, I think the premium for illiquidity today is as high as I’ve ever seen in my career.
So I think in those investments, the common thread is value. In our real estate lending business, that’s a function of what we do on behalf of the insurance company that we manage assets for, which is a related entity. And in real estate lending, that’s all about avoiding loss. It’s just super conservative.
RITHOLTZ: Let’s talk about taking a long-term view in the middle of 2021. We’re right in the middle of the pandemic, COVID lockdown, travel and tourism just collapsed. You guys say, “Hey, I know what we should do. Let’s launch a billion and a half dollar fund, a distressed travel and tourism fund with people at Certares Management.” Tell us a little bit about the CK Opportunities Fund.
WAGNER: Well the thought process there on that that fund which is you know closed now was to raise money to pursue opportunities in travel, leisure, and hospitality.
RITHOLTZ: All of which by the way have come back gangbusters.
WAGNER: Most, yes most of it has. Business travel still lagging pretty significantly but certainly personal travel is up dramatically you know even vis-a-vis 2019 and the thesis was you know this isn’t a permanent thing that we were experiencing in 2020, it would be temporary. The challenge was going out and raising capital with two asset managers that hadn’t worked together before and doing that capital raise entirely over Zoom. That was new, but we did. I don’t think we had more than one or two in-person meetings for that capital raise so it was a very interesting time.
RITHOLTZ: Did people say “Tom, what the hell are you doing? You’re nuts, these businesses are …” or did people get it right away?
WAGNER: No, they said you know how do you know it won’t get worse and if it does get worse, you know, we lose money. I think everyone sort of acknowledged that if travel was dead forever, we had much bigger problems.
WAGNER: Right and so the general view was if I’m going to take risk I may as well take it in an area that is more likely than not to rebound and so what was incumbent on us is finding the opportunities where we could say with a straight face we don’t think we can lose money, we think we have lot of upside.
And so that’s what we endeavored to pursue.
RITHOLTZ: So it’s only been two years, is this a seven-year fund or a five-year fund?
WAGNER: Well the goal is to is to have you know begin returning capital in kind of years two and three and ultimately have the average duration of that fund between three and five years.
RITHOLTZ: So to…
WAGNER: Some investments will ultimately go a bit longer, some will hopefully pay out more quickly but with the average sort of in that you know mid-single-digit zip code or less.
RITHOLTZ: So two years post launch, how’s it going?
WAGNER: It’s gone very well. Our returns have been well above what we had, you know, what we had targeted when we spoke with our LPs about it. And so we’re excited. We love the portfolio. We love the forward on the portfolio. Very, very constructive on each of the names in the portfolio. I don’t really regret, you know, any of the investments. I think we’ll have some that are better than others but you know we’re quite excited about it.
RITHOLTZ: Let’s talk about another sort of contrarian distressed investing play. We had this horrific and infamous California fire called the Camp Fire. Soon after PG&E, the giant power provider there, ends up filing for bankruptcy. They were blamed as one of the possible causes of the wildfire. Who looks at that and says, “Hey, this is an amazing opportunity. One of the biggest power producers in the country has gone belly-up. How do I get me some of that?
And did you look at that from the bonds pre-bankruptcy or equity post-bankruptcy?
WAGNER: We looked at it as the equity, a little bit pre-bankruptcy, and then grew our position following the bankruptcy.
And the thesis was that there would be a way to ensure that the victims received fair compensation but still allowed for the equity to have some upside.
And the thesis was let’s strike deals with the victims’ attorneys and let’s strike deals with the regulators and the government and strike deals with the bondholders and move the company through bankruptcy. It’s a very, very contentious negotiation.
RITHOLTZ: I can imagine.
WAGNER: And particularly given that it moved into the spring of 2020. So we were, you know, we were trying to get that restructuring done in the depths of COVID. It ultimately worked. It was a, it was a good investment for us where, you know, we monetized that and redeploy the capital elsewhere.
You know, our goal was, in that case, to sort of fix what we could fix and then and then move on.
And so I think, you know, we’re quite proud of, of the work that went into that and ultimately think that each of the stakeholder groups came away satisfied, or at least that’s what they represented to us.
RITHOLTZ: Let’s talk about another investment that you referenced earlier.
Hertz, a former Fortune 500 company, files for bankruptcy pretty early in the pandemic, May 2020. Subsequently they sell off their fleet of cars because we’re just not getting new cars. What made you think, “Oh, this dumpster fire is a great opportunity?”
WAGNER: Yeah, that one was really predicated on three key tenets. One was that there was an opportunity to electrify a big chunk of the fleet, which required us cutting deals with major OEMs to get access to that supply. The second was in pursuing a new, if you will, line of business for the company in providing cars to ride hail drivers. Then the third would be a more effective way of disposing of the vehicles when you come to the end of their life and that required cutting a deal with Carvana. All of those initiatives are well underway. We’re really happy with all of them.
Our partners, you know, in Carvana and Uber, Tesla, GM, Polestar are all going really, really well. And we have a great leadership team that Stephen Scherr is running that’s doing an exceptional job in prosecuting that business plan.
And so, you know, that was really predicated on those three core tenets.
Now, what happened was a bit of luck. And the luck was that we had a massive chip shortage. And so the price, the new cars became unavailable, used cars rocketed up in value. So we over earned for a period of a couple of years, really were able to de-risk the investment. So, you know, this is all public, our ownership of the company immediately following the IPO was about 37%. We announced a large buyback and today our ownership stands in the high 50s percent, if I remember correctly.
So that’s an ability where we didn’t have to put new dollars to work. We were simply reinvesting the cash flow of the company and all shareholders that held have benefited by owning a larger percentage of the company without having to put any more capital to work.
So, you know, I think, you know, we’re really pleased about the forward on that one. We’re excited about the prospects of the business to continue growing in these new lines of business. And, ultimately I think it will pay enormous dividends.
RITHOLTZ: Let me talk about a space that is a little off the beaten path for you guys. Long, short evergreen fund that just seems so separate and different from what you guys have done with distressed assets?
WAGNER: Yeah, you know, our legacy hedge fund is a long short vehicle. It’s hedged. The rationale there is that not every investor wants a long only set of assets that has more volatility in down markets. So the hedge fund has less volatility but obviously you have a cost of hedging associated with it. And there are certain investors for whom that is exactly the right product.
And so it’s a part of the business that we will always pursue because we can still do some of the same things in the event and long side that we do in our closed-end funds and our permanent capital vehicles but on a more hedged basis.
RITHOLTZ: Really quite fascinating.
So first, you know, we talked a little bit about you being a CPA at Ernst & Young in Massachusetts but I, but I also noticed you were a CPA at one of my favorite places in the world, the Cayman Islands. Was that just to service offshore hedge funds or how did that come about?
WAGNER: It’s a kind of a funny story. I was based out of the Boston office working for Ernst & Young and I came to New York. I shouldn’t say came to New York. I was “asked” quote unquote, meaning I was told …
RITHOLTZ: Got to New York.
WAGNER: Go to New York, work on a project there. that project was at an investment bank and taking a look at their internal controls around derivative products and …
RITHOLTZ: What year was this around?
WAGNER: This would have been 94, 95, in that zip code.
RITHOLTZ: Also derivative products. There still were exits in it back …
WAGNER: Exactly, early, early days and I had had some experience in valuing derivative contracts on an earlier project I worked on so I was sort of a unique individual in the sense that I was a CPA who had some of that experience back then.
And so I came to New York and it was my first exposure to investment banks and trading floor and I walked on to the trading floor and I was like I don’t even know what’s going on here but I have to do this. And I remember walking back down to the room where all the consultants and accountants were and I said what exactly are you doing up there? And the guy explained, you know, sales, trading and I said I need to be a trader that’s what I got to do. And the guy literally burst out laughing.
WAGNER: He’s like, “You’re never going to be a trader on Wall Street.”
RITHOLTZ: That’s hilarious.
WAGNER: “Your background’s all wrong, you’re a CPA. You didn’t go to the right Ivy League school. You didn’t go to an Ivy League school.” And so I met up with a friend and said, “How do I become a trader?” And this person was doing recruiting at one of the big banks and she’s like, “Well, you need some interesting experience. You got to get into a top business school and then you got to do an internship and then you can be a trader.”
And so I’m like, “Oh my gosh, that’s going to take like five years. Okay, I’m going to do that.” So I endeavor to find the right opportunity. So I’m looking around, I can’t really find anything. But I meet a guy in this project who is from our Cayman Islands office. So I go back to Boston, I’m working in the office, and I’ll never forget this. I’m at my parents’ house with their closest friends on a Sunday afternoon and I’m kind of bummed out. And my dad’s best friend looks at me and he goes, “What’s the problem?” And I said, “Well, I’m unhappy with everything in my life right now. Everything sucks.” And he’s like, “Well, what do you want?” I’m like, “Ah, it can’t happen.” He’s like, “No, you have to be able to say it. What do you want?” I said, “Okay, you want to know what I want? I want to make this much money, X dollars. I want to live on the beach, I want to own a boat, and I want to be able to drive a Jeep to work every day. That’s what I want, okay?”
And I was like being the smart ass and young man, and I thought like, you know, there, I kind of told him. And so he just looked at me, he didn’t say anything, and he goes, “Well,” he goes, “That door will be open, or will be presented to you.” He goes, “The question is, do you have the guts to open it?”
WAGNER: And so I was like, what is he talking about, right? And so six months later, the opportunity arose to go to work in the Cayman Islands. And this is pre-internet days.
WAGNER: So I had to go down to the local travel agent and pick up brochures at Cayman Islands just so I have some idea of where it was, what it looked like. Sight unseen, I grabbed my bags, and I literally moved there. And within a month of getting there, I had bought a Jeep to drive to work, I bought a little boat to go around.
RITHOLTZ: No top, right?
WAGNER: No top, yeah.
RITHOLTZ: Just open air.
WAGNER: Except in the summer, it rained all the time.
WAGNER: And I lived on the beach and I had a job that was paying me what I felt was my target pay back when I was a kid. And had I not done that, it wouldn’t have led to me getting the unique experience that ultimately allowed me to get into Columbia Business School. And so it was a life-changing moment. But my dad’s friend was exactly right. That was not an easy door to open because I had to take a leap of faith that was pretty extraordinary back in that time. I literally had no idea. There was no ability to go on and look at TripAdvisor and see, you know, where the restaurants were. I had to go down their site on scene. I had a couple of phone calls with folks that work down there and so it was a life-changing set of experiences for many reasons.
RITHOLTZ: I got so many questions for you. So first, if you didn’t have that conversation with your dad’s friends, when the opportunity came along, might it have passed you by or did his words resonate in your head and you just jumped at it because of that?
WAGNER: They resonated. I mean, you know, I think in life, you know, when you, when I, when I look at those key experiences, like, you know, we spoke earlier about my dad and the question he asked me when I started my hedge fund or my dad’s friend when he challenged me to take the opportunity when it presented himself. And he had no idea what would be presented to me, nor did I at that time. Or looking at my uncle and his success in accounting. You know, those are all small but incredibly important things in the sense that they position you for success.
Now, the question that every young person or person starting out has to ask is, “Are you willing to do what it takes then when you set the path in motion?” The easy part is taking the first step. The hard part is taking the steps in the middle of the night when you’re up late working, you haven’t slept in two days and you’re working on a big project because you’re trying to make a name for yourself, or the things that no one likes to talk about, the missed golf trips with friends, the forgiven vacations, the canceled trips, the missed birthday party for a kid. You know, those are all the little sacrifices we make to achieve some level of success. I think the goal is to minimize those things or to focus your sacrifices in areas that aren’t really that important.
RITHOLTZ: So let me push back a little bit on your characterization of your father’s friend as a small thing. That was a giant attitude shift. That was a philosophical, “Hey, there are opportunities in life that come along and you have to grab the ring when it presents itself and not sort of sit back and say, ‘I’ll wait for the next train to come along.’” That’s a huge philosophical change.
WAGNER: It was a small moment in time and a huge shift in the course of my life.
And you know, I think I was always very motivated to work. I was not always very motivated to study or do homework. But I really liked to work. And I worked a lot in high school. I worked a lot in college. I worked a lot after college and business school. I liked, you know, working. I liked making money, because it afforded me freedoms that I didn’t otherwise have. And so what that question did was cause me to think to myself about what risks I would have to take to get to where I wanted to be. And it was a very important lesson that ultimately resonated when it was time for me to think about starting my own business.
RITHOLTZ: So you were in the Caymans in the mid-90s? For how long were you there?
WAGNER: Two years. And I would say that it sounds better and more exciting in theory than it is in practice.
RITHOLTZ: Come on, is there a better burger in the world than the Sunshine Grill?
WAGNER: No, there were some pretty spectacular places to go there.
WAGNER: And it was enormous fun. You know, you have to kind of settle into whatever routine is best for you. I was, you know, you can only kind of go out every night of the week for so long. And some people, I guess, can do that forever. I was not one of them.
RITHOLTZ: Nobody can do it forever. Eventually it takes a toll, right?
WAGNER: Yeah, but I got really into scuba diving. I got really into martial arts. and those were things that helped me create some balance in my life at that time. Those are things that I don’t still participate in today for a variety of reasons. Showing up to work with cracked ribs is not super comfortable, but I think the ability to branch out and experience and try new things in any, doesn’t matter where you live, those are great things to do.
WAGNER: And living in a place that is very culturally different than what you experience. I was definitively a minority in every way. There were very few Americans there.
RITHOLTZ: A lot of Canadians.
WAGNER: Tons of Canadians, lots of Brits, right? So you, meaning if Brits and colonies —
RITHOLTZ: I mean, it’s a British territory. I think it’s independent, but there were photos of the queen the last time was there.
WAGNER: There’s still a governor there that’s appointed by now the king. And it’s a very interesting, very close ties to the UK. And so it was a really fascinating place, not only to work and to recreate, but also to be part of society. I learned a lot, some incredible lessons taken from my time there. So it was a great two years, and a truly life-changing period for me.
RITHOLTZ: I have a bunch of friends who were in finance and banking from Canada, and they go down there for a spell, and they never leave. So not only is the Grand Caymans the first place I’ve ever had poutine, but hold that aside, over the past 20 years, the island has just completely transformed. You have the Dart family that flip over a styrofoam cup, it says Dart. It’s that family that have just invested literally billions and billions of dollars. The island is practically South Florida. I mean, it’s very modern, very contemporary, and beautiful. And every time I think about buying something down there, it’s an island. It’s the only problem.
So getting anything there, do they still have like a 50% or 100% tax on bringing even like an old clunker jeep, you’re going to pay double the price.
WAGNER: Yes, big, big tax on vehicles there. No income tax though. So for US citizens you have a limit, but in most other countries they’re not taxed in their worldwide income. So if you’re a UK citizen or Australian or South African or Canadian, which constituted a lot of the employees there, you’re earning tax-free income forever.
Now you pay effectively your taxes through consumption taxes.
RITHOLTZ: Plus the stamp tax to purchase property is another thing. Turks and Caicos has a very similar sort of financial setup. By the way, two of the most beautiful areas when you look at whether it’s sailing or snorkeling or scuba diving, second to none, and maybe the Great Barrier Reef is the closest thing.
WAGNER: Cayman’s amazing in that regard. Now what they’ve also done is they’ve worked really hard to build a real financial services sector there. So our insurance company is actually based there. Our employees are there. We have a prime, it’s not a reinsurance subsidiary, it’s a real primary insurer that’s located in the Cayman Island. And we ultimately became comfortable with that jurisdiction because I had contacts there, and we were able to, people I maintained contact with from my time there that gave us great comfort in what they were doing in building out the insurance industry and it’s been a fantastic jurisdiction.
And I always say, when people ask you, your insurance company’s based in the Cayman Islands, I said, listen, if I put a blindfold on you and I take you there and I remove the blindfold outside our office, you will swear you’re on coconut grove.
WAGNER: Like you won’t, for a second, think that you’re not in South Florida and it’s become very much a first world financial hub. And I would not be surprised to see its growth continue unabated for the next couple decades.
RITHOLTZ: First World Healthcare, First World Internet, First World Financials Network. Hard to beat. Since you mentioned the insurance company, I got to ask, you’re running a hedge fund, why an insurance business? Is it the float to play with the way Buffett does with Geico, or how does this interrelate with the rest of the business?
WAGNER: So it’s an annuity business. So unlike property and casualty, where the key is making money by underwriting your risk very, very efficiently and earning a profit on your underwriting. In an annuity business it’s a spread business. So we’re taking capital in, we’re investing it, we owe our annuity holders a fixed return so we have to manage to make a higher return on our diversified pool of assets than what we are required to pay out to the annuity holder. That’s the whole game and that that comports very well with our strategy of deep value investing and looking for opportunities where we can preserve capital, not lose money.
Again, it comes back to that same core thesis. So the draw initially was the duration of the capital. You start an insurance company so long as you maintain control of the assets. They’re effectively permanent assets.
WAGNER: And again, going back to that point about the excess return that you can earn by having long dated capital, it’s really an extraordinary pickup in total yield. And so we, this is the most exciting thing we do that we’re thrilled about it.
RITHOLTZ: I would never have guessed that. I have to ask the obvious question. Since we’ve seen a 500 basis point bump in rates, what do higher rates do for running an insurance book?
WAGNER: Yeah, for the annuity business, it’s the spread between the assets that we’re buying and the annuity rates. So while the annuity rates have gone up by quite a bit, the yield on the assets we’re buying has gone up by slightly more.
So our total return to the equity has increased. So I would say that this environment is just about perfect for the insurance business.
RITHOLTZ: All right, so let’s talk about a different business line that I’m kind of fascinated by. Ever since the pandemic ends, it looks like commercial real estate has been poised on the brink of disaster, especially offices. How do you look at CRE and what sort of opportunities are there in the world of real estate?
WAGNER: Yeah, we will definitely be heavily involved there if the sector or if individual opportunities become distressed. I think we are taking a wait and see and very patient approach right now. We’re trying to sort out what work from home means for demand for office space. It’s just challenging, right? It’s not as if, if people are working three days a week, you still need the same amount of office if they’re all there at the same time.
So what it means is utilization has shifted. We may need to change the way that we use offices. We’re spending a lot of time thinking about that. We need to change the places where we have offices. So we have more people working outside of New York now than ever before. And we’re perfectly comfortable with that. We provide greater flexibility in where people work from. But I think as it relates to CRE, the two big components are answering that first question around aggregate demand.
And then the second is answering questions around, you know, are some cities and jurisdictions poised for more success than others? Will some be more permanently challenged? Those are the big unknowns. You know, we need some real restructuring in some of our major cities to make them attractive for business again.
RITHOLTZ: Yeah, San Francisco and St. Louis stand out as two real basket cases. New York seems to be coming back raises the question of those that if you’re there three days a week can you do the sort of hot desk that allows you to use half the space, “Hey you’re Monday Wednesday Friday, this person is Tuesday Thursday and everybody is in pick a day, Wednesday.”
RITHOLTZ: Do you really need you know a thousand desks for a thousand employees or can you get away with 600 desks/
WAGNER: Well if you have everybody in that one day a week you need the thousand desks the question is do you need as many offices do you miss as many conference rooms, that’s an unknown and I think we’re all, every business, it’s not just the commercial real estate companies that are thinking about it, we’re all thinking about it because either you’re a provider of that capacity or a user of that capacity and both sides of the equation have to make a determination as to what the appropriate level of space is and we’re in that boat with everybody else.
So I think for us in commercial real estate, we haven’t seen any opportunities that have really caught our eye yet, but it’s definitely an area to watch.
RITHOLTZ: Yes, no doubt about it. I’m kind of fascinated that return to office, at least in the metropolitan areas, are 55-60% in the U.S., but Europe is running 90-95%, whether that’s better mass transit, shorter commutes, or smaller houses where you can’t just set up a home office as easily as we do here.
WAGNER: Well, that’s a good point. I think it’s probably a combination of those factors. Also some societal differences as it relates to what’s accepted. I mean if you if you go to London, there are a few things that really stand out. One, that this casual dress is not something that’s been as fully adopted.
RITHOLTZ: Oh really?
WAGNER: No it’s …
RITHOLTZ: I mean just for the record you and I are both in whitish shirts, darker blue blazers, I’m wearing jeans, you’re wearing khakis, but would either of us really ever wear a tie unless we’re presenting at some event where it says “suit and tie”?
WAGNER: Yeah, no, and if you go to London and you’re in the center of London City, you’ll see a lot of people in suits, more than you see in New York. There’s a level of formality perhaps that exists there. It’s also an incredibly vibrant place. The city centers in the UK are, you know, fully back relative to pre-pandemic.
So, you know, we’ve got to think about whether or not we’re doing our broader community a favor or a disservice by not being in our city centers as much as we were pre-pandemic. And that goes beyond simply what’s best for work.
And, you know, can you get the work done? No, it’s can you develop the young talent, right? Are you supporting your metropolitan area, meaning all of those businesses that rely on the people coming in and out. All of these things are really important and you can’t just flip a light switch and make it all change instantaneously. If you’re going to shift the way those things happen you have to plan for it. You have to think about how you’re going to train your young people. You have to think about how businesses can move from city centers out to the local communities where people will spend an increasing period of time.
So I believe that we will see some level of de-urbanization over time.
WAGNER: De-urbanization. And I think it’s, there’s a variety of reasons for it. A lot of it’s based on our views on mobility. I think that, you know, as we see greater levels of automation, as we see greater levels of electrification, which are tied hand-in-hand, it’ll become easier to travel. It’s not as much of a burden. People will be able to live and commute more, particularly if they’re not commuting five days a week. So there’s a lot of big changes that I think will occur over the next 10 or 15 years.
The worst thing we can do is try to force those changes in 12 or 24 months too fast.
RITHOLTZ: Professor Scott Galloway at NYU Stern talks about the disservice we do to the youngest employees who need to come in, learn the ropes, be mentored, actually have some face time. You know, if you’re old folks like us and you’ve been doing this for a number of decades, you don’t have to be in the office five days a week. Two or three days is plenty.
But if you’re early in your career and you talked about what it was like at Credit Suisse and at Goldman, that’s a loss for people who are not there every day.
WAGNER: It’s a massive loss. If you’re learning from your more experienced coworkers and you’re only there three days a week, there’s some, 40% of your time is without the direct contact and so there’s going to be some diminution in your ability to ramp up.
I don’t know whether it’s a 40% or whether it’s a fraction of 40%, but it’s not zero.
It’s a real chunk. It’s a real chunk.
RITHOLTZ: All right, so before we get to our favorite questions, I got to throw you one curve ball. You sit on a number of different boards, including the Board of Trustees at Villanova, but you’re also a board member of the Navy SEAL Foundation. How does this come about? Tell us a little bit about that experience.
WAGNER: Yeah, the last person that I hired at Goldman was a seven-year veteran of the SEAL teams and was one of the early board members at the SEAL Foundation and introduced me to the organization. And so for the last 10, 12 years, I’ve been involved as a supporter and host of their New York City Gala.
And then earlier this year, I was asked to join the board, which is an unbelievable honor. For me, it’s a way to support folks that I have a great deal of respect for, for a whole variety of reasons.
But it was at its core a way for me to get involved with a community that took action following 9/11, which had, as we mentioned earlier, a profound impact on me. And folks that frankly, as I got to know, I came to really like. They’re not what I think the average person views them to be. These are very much the guy next door, that young person that you knew growing up that was kind of always doing the right thing and was very steadfast in their views and unwavering in their commitment.
That seems to be a common thread that I found with some of these men in the teams.
RITHOLTZ: So when I was on the trading desk, the head trader was a former Marine jungle combat instructor. The guy on my left was a SEAL, the guy next to him was a Ranger. So we would go out for drinks afterwards and I could be a wise-ass at a bar because people would look at us and they’d look at me like, “That guy’s a wise-ass, I should slap him.” And then they’d look at either side of me, “Maybe best to not get involved over there.” Yeah, I got away with a lot of stuff, but the word that always stood out is these were just consummate professionals. They had a task to do, they knew how to go about doing it, and there are some fascinating parallels between those services and trading about going in prepared, thinking about plan Bs, being able to make decisions under pressure. It’s really quite fascinating. That must be an amazing experience working with them.
WAGNER: It is, and you know, it’s, it just, that’s the community that I became connected to. There are lots of service members across our different branches that are equally worthy of our respect, and you know, I think it was my way, as I said, of doing something to serve people who so selflessly serve all of us.
RITHOLTZ: Really, really great stuff. So I know I only have you for a finite amount of time. Let’s jump to our favorite questions that we ask all of our guests, starting with, tell us what you’ve been watching or listening to lately. What kept you entertained since the pandemic on either Netflix or Amazon or whatever the fam is enjoying?
WAGNER: Yeah, you know, it’s funny. Of course, a lot of the very popular shows we’ve watched and I think shows like “Ted Lasso” are funny, you know, some good lessons in there. That one’s been very enjoyable. The ones that I’ve watched more recently that I think are great are the prequels to “Yellowstone.”
RITHOLTZ: 1863, is that what it is?
WAGNER: “1883” and —
RITHOLTZ: Early is the same as wrong.
WAGNER: Yes, “1923” I think is the other one. And, you know, I’m a big fan of the American West, the Mountain West, I spend a lot of time in Montana, and so those really resonated with me. And what I liked about the prequels is, while a story told in a Hollywood sense, they give some insight into just how difficult and different time was then, particularly in that part of our country, how hard it was. And I just think the stories are fascinating.
So I’ve really enjoyed those programs and look forward to the next installments coming out.
RITHOLTZ: Sounds like one we should put on our list.
Let’s talk about your early mentors who helped shape your career.
WAGNER: Yeah, you know, I never really had official mentors. It wasn’t really the way the businesses that I operated in worked. But there were people that I was able to observe that had, you know, just had to achieve such incredible success. And we’re so good. And one that really stands out, I think, is David Tepper, who, of all the individuals with whom I interacted over the years, is absolutely the best investor of the bunch.
And two things stand out. One is incredible conviction. And two is ability to take a very complicated situation and distill it down to very simple terms, which is a mark of true genius. And I think his prosecution of his commitment and his strategy, starting in distressed corporate and then a lot of macro type investing in addition to what he does at his core, is incredibly impressive.
And so I think looking at the way that he approached being committed to a position and unwavering in many cases, despite others maybe having a different view is something that I’ve always really respected.
RITHOLTZ: Tepper’s fund is Appaloosa Capital, is that right?
WAGNER: That’s right, yes.
RITHOLTZ: He’s put up pretty amazing numbers.
WAGNER: It’s unbelievable. Unbelievable.
RITHOLTZ: So let’s talk about everybody’s favorite question. Books, what are some of your favorites? What are you reading right now?
WAGNER: So I don’t know how I get into this but right now I’m reading this book called “One Second After” which is about life in the United States, you know, immediately following an EMP or Electromagnetic Pulse Attack. It is a rather disturbing book, but it’s really pretty fascinating. It goes to, you know, some of the risks that we face as a modern society and how quickly things can change if the right set of kind of really negative and horrible circumstances arise.
And I’ve always been sort of fascinated by the risks that we as a modern society face that aren’t often thought about and the ways that we can protect against them. That’s a big one. That and our electoral grid. I think, you know, particularly in our urban areas, we are uniquely exposed to a loss of power.
And so, you know, I think the Koppel book “Lights Out” that was written a while ago is another sort of must read. It’s something that we really should be paying much more attention to. I, you know, there’s a lot of great initiatives that as a country we’re pursuing for noble reasons but my personal view is that the making our electric grid more robust should really be at the top of our list.
RITHOLTZ: There’s some funds in the infrastructure bill that go to hardening the electric grid. I don’t know what your experience was during Sandy in the New York area. We had no electricity for 13 days and when we subsequently moved to a new house that was this close to getting nat gas, as soon as it became available, first thing I did was put in a giant generator and say, “I don’t care what happens. I am never going through that nonsense again.”
RITHOLTZ: And it’s really quite astonishing how frequently a modern society like the US, there’s some website that shows you all of the outages for the electrical grid. It’s kind of creaking and outdated and very vulnerable, not just to hacking, but silly things like trees falling, takes out a whole neighborhood for a week. It’s kind of shocking.
WAGNER: There’s no question that we need to be modernizing our electric distribution system. It’s not just at the industrial scale level, but also right down to the home. So greater levels of battery backup and solar power, but things that are protected against you know small-scale EMP results, which would be like a lightning strike, and large-scale if we ever were attacked, you know it’s a real risk to society.
So I think you know those are those are things that I’ve always been fascinated about, you know big giant problems. You know this is exactly the kind of thing you want to be reading before bed at night. You know but how do we how do we think about those and how should that be worked into our national priorities?
RITHOLTZ: My sister lived in a town that was one of the few rare towns that have underground electrical. What originally started as how do we avoid the visual blight of copper wires strung between dead trees and instead they put it all on the ground and Sandy, I have a vivid recollection of her saying, “It was really inconvenient. The cable went out for a couple hours.” And that was her entire experience. Could be the greatest shower I ever took in my life was the fifth day of, “Gee, this, we’re not getting electricity back anytime soon.”
So, and to move everything on the ground would cost billions, but at the very least to make things a little more resilient and a little more hardened, got to be a top priority.
WAGNER: Yeah, we’re micro generation that’s, you know, smaller scale. It could work as well.
RITHOLTZ: So if you have solar or winds and the ability to store for a couple of days you’re okay even if you lose a…
WAGNER: That’s right yeah it depends on your location so but that you know it’s a big giant investment that we should really take seriously across our country you know, hardening the grid and distributing the power generation you know more solar more renewable all of it.
RITHOLTZ: To circle back to the Caymans or the way I love the way the locals pronounce it, Cayman, is they had this setup where between the local power company, the local government, and the UK government, you could get pretty much 100% funding for solar or they were really big on geothermal that you would drop, sink a geothermal line and you have heat and air conditioning year round at essentially no cost.
WAGNER: That’s right. I’ve always done geo. Solar’s tough in certain jurisdictions, but I think the combination, if you can do combo of solar and geo, you’re really, you’ve got a lot of energy independence and much cleaner. It’s well worth the investment in most places. And particularly in an island where you can put geo in, you’re really just getting down below the coral.
It’s an incredibly efficient way of managing your electric costs.
RITHOLTZ: Yeah, it drops everything in half, and because it’s so expensive to import everything.
WAGNER: Oh, it’s massively expensive.
RITHOLTZ: But they seem to have plenty of sunshine down there.
WAGNER: They do.
RITHOLTZ: I think that’s the big one. So let’s jump to our last two questions that we ask all of our guests, starting with what sort of advice would you give to a recent college grad interested in a career in either investing or distressed assets?
WAGNER: I think irrespective of what you’re looking to do, the advice is the same, which is that make sure you find something that you love. And it sounds so trite, you hear it from everyone, but it really is a critical piece of advice. Investing in distress is not for everyone. It’s not an easy way to make money. There are definitely better ways of doing it. I think if I could tell my kids to go into a type of investing, I’d probably tell them to do VC or something else.
But I do think that you have to ensure that the career you’re pursuing is something that you can be committed to for a long time so that you’re in it long enough to become an expert. I think that’s perhaps the crucial element. If you want to achieve great success, make sure you stay committed to something long enough that you can become an expert in it.
RITHOLTZ: Really interesting. And our final question, what do you know about the world of investing today you wish you knew back in the early 90s when you were first getting started?
WAGNER: Everything. I mean, I wish I knew– gosh, I wish I knew everything. I guess the one– if I could say one big giant lesson that I’ve learned over the years is watch out for secular change. It’s the killer. You can’t be on the wrong side of secular change. So being on the wrong side of secular change is a killer.
One example would be the long-term decline of commodity prices. Over a long period of time, generally speaking, commodity prices are trending down, particularly after adjusting for inflation. And so it’s one of many.
The wrong set of technological change or adoption of new technologies, you’ve got to be really careful about that. And you have to have a thesis that looks out if you’re making a long-term investment. So I think that that’s probably the most important lesson that I learned in my last 30 years or so that wasn’t entirely self-evident when I started.
RITHOLTZ: Really, really very fascinating stuff.
Tom, thank you for being so generous with your time.
We have been speaking with Tom Wagner, co-portfolio manager and co-founder of Knighthead Capital.
If you enjoy this conversation, well, check out any of the previous 500 or so we’ve held over the past eight years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcasts. Sign up for my daily reading list at ritholtz.com. me on Twitter @Ritholtz. Follow all of the fine family of Bloomberg podcasts @Podcast.
I would be remiss if I did not thank the crack team that helps put these conversations together each week. Sara Livesey is my audio engineer. Atika Valbrun is my project manager. Sean Russo is my researcher. Paris Wald is my producer. I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.