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Create wealth by being an early investor in innovation

#crypto #bitcoin

If you’d prefer to listen to the entire episode, please do so - it’s an informative podcast and Mark was in excellent form. Hosted by Andy Pickering, Andy conducted an insightful and entertaining interview - and we’re publishing an edited version of the conversation below.

Mark Yusko is the CEO of Morgan Creek Capital. Mark is one of the most insightful investors and most articulate Bitcoin bulls on the planet. Mark’s investment thesis is the greatest wealth is created by being an early investor in innovation. Mark says that making that investment often requires believing in something before the majority of people understand it. Sound familiar?

Andy Pickering: Mark, you've had a long and successful career as an investor. As a deployer of capital, you've been at the edge of institutional investing for decades. You were an early champion of alternative assets. And in fact, your tagline is alternative thinking about investments, what do you mean by alternative?

Mark Yusko: The reason our tagline says alternative thinking about investments is that I got tired of this idea that alternative investments should be a small part of your portfolio. And so we said, all right, let's think alternatively about how we invest. And let's start from the premise that the very best in every business migrate to where they can make the most money. And so if you think about the legal structure around alternative investments, they tended to be more favorable. So people left the traditional asset world and went into these alternative structures. And started managing capital. So we have built portfolios for clients over the years that we thought gave people the highest likelihood of a better or superior return.

Andy: One of your big investment themes is investing in innovation. Why is it important to invest in innovation?

Mark: All great wealth in the world came from concentrated bets on a technology or business or real estate or similar. Successful concentrated bets generate superior wealth long-term. Innovation has evolved around technology and particularly computing technology over the last 70 plus years. We can trace it back to the beginnings of computing in 1954 with the mainframe era, and then 14 years later in 1968 or the microchip era, and 14 years later it’s 1982 and the personal computer, and 14 years later it was 1996 with the internet, and 14 years later it was 2010 and the mobile era. Now we're coming up to 2024 for what I call the trust net or the internet of value.

Why is it always 14 years? I don't have a good explanation for that other than innovation tends to be driven by young people. Also, it has to do with s-curve adoption rates. It takes time for people to actually adopt new technology because they're afraid of it at first.

These examples represent extraordinary opportunities to build incredible wealth if you had the willingness to step away from the herd and invest in something new. The greatest wealth is created by investing in something that you believe in before others even understand it.

Andy: You've begun exploring the digital asset class, you founded Morgan Creek Digital Assets and you've gone in with an incredible amount of conviction. In fact, you've been prepared to put your reputation on the line by going out into the media and flying the flag as a major Bitcoin bull. So tell me how strong is your conviction in Bitcoin and the digital asset class?

Mark: I travel all around the world and talk to the smartest investors in the world. And I've learned from them and one of the things that they all shared was an incredible ability to gain conviction on an idea and what separated the top investors from the rest was their uncanny ability to press their winners.

I've always believed that you need very high conviction to succeed as an investor. How do you get high conviction? You have to do the work and that gives you an edge. A better model or better process. You can have an information edge when you can have access to information, better relationships with smarter people. It might be a processing edge, faster computers or you could have moved your supercomputer closer to the exchange so you can trade faster than others. Conviction comes from having one of those edges.

Andy: Speaking of technology revolutions what people don't understand is these revolutions start slowly and they begin to pick up speed and you hinted at this before when you mentioned the s-curve, but what happens is exponential growth, that's how networks grow. One of my favorite books is Ray Kurzweil’s The Singularity is Near in which Kurzweil maps out this possible path to the future where somewhere around the year 2045 that's when the AI takes over and humans get left behind. It's called a singularity because our small human brains can't comprehend the possibilities. The way we get there is Kurzweil’s idea of the law of accelerating returns. The idea is a wide range of evolutionary systems, computer chip capacity and especially technology networks, they tend to increase exponentially, but the human brain is organic and it's not wired to understand exponential growth...

Mark: I think you bring up so many incredibly important points, and this is the essence of why the average investor misses so many great opportunities because humans function on a linear plane. I can ask somebody what's 2 times 2 and they can immediately say four but if I say, what is 17 times 23, they can't do it and that's been proven to be the limit of human intelligence, we need a calculator to do that. So when you start talking about nonlinear logarithmic parabolas and exponential growth rates in biology, we’re not geared for it.

An s-curve is how all new ideas or new technologies are introduced and ultimately adopted into society. You start with the originators and then you've got the early adopters and then the early majority, then you get the majority and then you get the late majority. It took a hundred years for radio to follow that s-curve and it took 40 years for television. It took 10 years for cell phones. And now, you know here we are a couple of years into people starting to adopt Bitcoin. Why is it that we can't process exponential growth? Well, that's just the limitations of the human brain. Why is it that all things grow in this exponential way? That is just biology. Think about a virus or Aspen trees in an Aspen Grove or fish populations. They grow slowly at first. But then they start to grow fast and they start to grow really fast and they start to grow really, really fast.

Andy: Indeed, it’s all about network effects. I like this idea that the true miracle of Bitcoin is that it was able to survive its early fragile years and was able to move from 0.04 cents to one dollar and reach a critical mass where network effects started to kick in and that was the hard part right? The subsequent moves from $1 to $10 to $100 to $1,000 and $10,000 and beyond are simply the normal growth of a network as the network's effects develop over time...

Mark: There's this thing called Metcalfe's Law. Networks are different than other types of technology - a connected set of devices becomes a network and networks grow according to this exponential curve. If you take the ten biggest stocks in the world today - five of them are networks. They're not truly hierarchical companies. They are networks and their value is derived from their user base. Cryptocurrencies and particularly Bitcoin are great examples of this. The problem is the price differs from the value pretty much all of the time like a pendulum. How long is the pendulum in the middle? Almost never, it's on one extreme or the other. So when people are fearful it's way below fair value. When they're greedy, it's way above fair value. As an investor, one way to think about it is, buy it, tuck it in a drawer, and don't look at it. That's what people should have done with Amazon stock. People forget that Amazon, every year in the last 20 years, had a double-digit drawdown. So the reason nobody's held it for 20 years is they get shaken out by the volatility.

Now the volatility wasn't a bad thing. The downside volatility was bad, but the upside volatility was much higher than the downside volatility. So the positive outcome was hundreds of times your money had you just held on.

Andy: You’ve been making the case for why institutional investors need to get off zero and allocate towards crypto assets. You meet these institutions and you pitch them on why crypto represents the single most compelling investment opportunity in a generation. What do you tell them?

Mark: If you go back through any of the alternative investment phases, you know, 30 years ago hedge funds were taboo because that's where all the bad guys were and now hedge funds are part of everybody's portfolio. There's always this resistance to the new idea. And what happens later is people look back and say ‘oh if you don't have those things you're not a good fiduciary.’

And so what we're predicting is that 10 years from now people will look back and say you were a bad fiduciary if you have zero exposure to crypto assets. So our whole campaign to get off zero is to say look zero is the wrong number. I'm not going to tell you what the right number is for you, I can make an argument for 1% 3% 5% or 10% but zero is the wrong number.

Andy: Bill Gates famously said, “we tend to overestimate what we can accomplish in two years and underestimate what we can accomplish in ten years.” What does the blockchain space look like in ten years time?

Mark: One of my favorite quotes, from one of my favorite people. I think Bill is an inspirational businessman and leader and what he's doing with the Gates Foundation today is otherworldly in terms of its impact on the globe. I think the next ten years are going to be truly unbelievable. Blockchain technology will be the operating system of the internet of value, so we’ll see full adoption of blockchain as an operating system. Secondly, we’ll see a significant movement of assets around the world into hard money or Bitcoin. Thirdly we will see the creation of some of the largest valued companies in the world. So I'll go on record and say I think we'll see the first trillion-dollar company formed from blockchain. And I think we'll see the first 10 trillion-dollar company provide some of the infrastructure around this business.

Andy: Have you seen the Bill Gates documentary on Netflix? It's a three-part documentary that covers Bill's life and the three big challenges he has taken on - eradicating polio, building toilets in the third world and creating safe nuclear power. Bill is best mates with Warren Buffett, Warren turns up in the documentary and they're playing bridge in Omaha. Dressed very casually Warren is eating a cheeseburger and there's a Diet Coke in every single shot. Why is Warren Buffett so shameless?

Mark: Warren is pretty amazing and I think shameless is such a great word. Contrary to his perception, Warren is not the aw-shucks country guy who grew up in Omaha with a rags-to-riches story. His dad was one of the most powerful Congressman for a long time. He's very well-connected in DC. He gets the call from Government, he’s paid lots of lobbying dollars to make sure he gets the call from Bank of America when they need liquidity. So the aw-shucks stuff is kind of silly. Is Warren a great stock picker? Not really. He is a genius at creating a business structure that means he doesn't pay any taxes, he’s deferred all of his taxes because of the structure and that is genius. He's a genius for using insurance which has negative costs of capital for borrowed money. Policyholders give you their money to use until they have claims. So you get paid to use other people's money to invest and then he buys low volatility commodity companies that pay dividends. Like Coca-Cola and he levers those up through a tax-deferred vehicle and it's a great investment.

So look absolute genius but not a stock picker. He cultivates this aw-shucks persona because it works and it makes people not pay attention to the fact that he can block pipelines from being created because he owns the railroads that carry the oil and when those oil tankers explode and cause fires and hazardous chemical spills nobody blames Warren.

Listen to the full interview with Mark Yusko here.



Andy Pickering, Khareem Sudlow