Episode #386: John Arnold, Arnold Ventures – Why The Biggest Pure Gasoline Dealer Walked Away To Pursue Philanthropy – Meb Faber Analysis

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Episode #386: John Arnold, Arnold Ventures – Why The Greatest Natural Gas Trader Walked Away To Pursue Philanthropy

 

Guest: John Arnold is an American philanthropist and founder of Arnold Ventures. In 2007, Arnold became the youngest billionaire in the U.S. His firm, Centaurus Advisors, LLC, was a Houston-based hedge fund specializing in trading energy products that closed in 2012.

Date Recorded: 1/12/2022     |     Run-Time: 1:12:33


Summary: In today’s episode, we start with John’s rapid rise at Enron and later launching his own fund, Centaurus Advisors, which posted eye-popping returns and led him to become the youngest billionaire in the US in 2007. We talk about the mindset that helped him become a successful trader, and even touch on the time he took the other side of Amaranth Advisors in a famous trade.

Then we hear why, before the age of 40, he decided to wind down his fund, focus solely on philanthropy, and commit to giving away most of his fortune during his lifetime. We talk about some of the problems he’s tackling around public finance, election reform and health care, and hear what has surprised and frustrated him along the way.


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Interested in sponsoring an episode? Email Colby at Colby@cambriainvestments.com

Links from the Episode:

  • 0:40 – Sponsor: Masterworks
  • 1:37 – Intro
  • 2:33 – Welcome to our guest, John Arnold
  • 5:11 – John’s rapid rise at Enron to lead their trading desk at a young age
  • 9:44 – Enron’s 2001 bankrupcy and deciding to start his own firm
  • 12:06 – Launching Centaurus in 2002 with incredible returns out of the gate
  • 14:21 – The state of the energy sector today
  • 19:11 – The famous Centaurus vs. Amaranth saga
  • 22:36 – Deciding to focus solely on philanthropy
  • 30:47 – The state of affairs of public finance
  • 39:15 – How he thinks about retirement; How to Narrow the Wealth and Income Gap (Faber)
  • 40:32 – The problem with the US tax code
  • 46:10 – The issue with donor advised funds
  • 50:59 – The lack of financial education in public school
  • 58:58 – The one problem John wishes he could solve that hasn’t been yet
  • 1:02:01 – Best practices for anyone wanting to get more involved in philanthropy
  • 1:04:14 – His most memorable investment and grant across his career
  • 1:08:43 – Learn more about John; arnoldventures.org; Twitter @johnarnoldfndtn

 

Transcript of Episode 386:

Welcome Message: Welcome to “The Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

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Meb: What’s up everybody, we’ve got a huge episode today. Our guest is arguably the best natural-gas trader of all time and now one of the largest philanthropists in the United States, giving away almost half a billion dollars a year. In today’s episode, we start with our guest’s rapid rise at Enron and later launched his own funds, Centaurus Advisors, which posted eye-popping returns and led him to become the youngest billionaire in the U.S. in 2007. We talked about the mindset that helped him become a successful trader, he’d even touch on the time he took the other side of Amaranth Advisors in a famous trade. Then we hear why before the age of 40 he decided to wind it all down, focus slowly on philanthropy, and commit to giving away most of his fortune during his lifetime. We talk about some of the problems he’s tackling around public finance, election reform, and health care, and hear what has surprised and frustrated him along the way. Please enjoy this fantastic episode with Arnold Ventures’ John Arnold.

Meb: John, welcome to the show.

John: Thanks, great to be here.

Meb: Where do we find you today, H-Town?

John: In H-Town, yes.

Meb: Sweet.

John: Enjoying a nice winter day in H-Town, just that time of year it’s really enjoyable to be here.

Meb: Yeah. Well, I’m in Los Angeles, it’s a balmy 75 I think.

John: Always good to be there.

Meb: Yeah. So, I thought we’d begin…we’re going to solve all the world’s problems the next hour, but we’ll get there eventually, I thought we’d start with a defining moment of your childhood. I’m a couple years younger than you but close, and so a big piece of my childhood was collecting baseball cards, and it sounds like you as well. I wanted to fast forward, it seems like collectibles are having their moment again. My sweetheart mum I think kept all of ours. Unfortunately, we were in like the 80s’ peak of like the huge card inflation boom, so, I think they’re worth nothing. But do you still have any? Do you clear out the inventory?

John: I don’t. For me, it was mostly a business. So, I collected when I was maybe 12, 13-years-old but then my mind quickly went to, “Hey, there’s money to be made here, and people don’t know what they’re doing…” I started doing it late 80s, as you say, kind of right when the boom was starting to take place in sports cards. And it was like some of the markets today, like crypto, where you almost can’t go wrong. Or you couldn’t go wrong up until a couple months ago. And whatever you did you could make money. And so, that kind of was a big draw, “Hey, I can buy this today for a dollar and sell it tomorrow for $2, and that seems fun, and make a little money.”

And one thing really drew on another and kind of, by the time I was 16-17, I was running a pretty big wholesale trading card operation really taking advantage of information asymmetry and geographic arbitrage, some things that kind of turned back up in my career later on.

Meb: Yeah, you know what’s funny is I should’ve gotten your route. I went to sort of illicit trade, I remember selling stink bombs. I would never deploy them but like got in trouble as the distributor in, I think, our middle school for selling those for a higher price. Never lusted after anything, probably, in my childhood as much as that like 87 or 89, I can’t remember, Ken Griffey Jr. Upper Deck card.

John: 89, yeah.

Meb: That was like the defining card I remember. The funny joke we always tell on the show is that my mum, who didn’t collect at all but wanted to be a part of this hanging out with her sons, bought basketball cards, which nobody collected back then, which were totally worthless, but, being from North Carolina, she really loved Michael Jordan. So, her investments are worth more than all of ours combined times 100. So, just goes to show the element of luck. All right, fast forward, college at Vandy, you study math, economics, finish early…and I wanted to jump off here because I think there’s a lot of young people that listen to the show that have a very clearly defined path in their head. And many of us do, or try to, and then life and serendipity has a way of pushing us in our own direction. You ended up back in Texas working for not quite the investment bank you thought of. Tell us a little bit about how you ended up at one of the most famous companies of probably our generation.

John: Yes, I was coming out of Vanderbilt and I wanted to do Wall Street. I was born and raised in Dallas, so, I didn’t really know what Wall Street was. I had read “The Wall Street Journal” every day since I was in high school, I kind of read some of the famous books about wall street, trying to understand it, but it seemed like that’s where the action was. And certainly that’s where the money was, even back then. And so, I wanted to go do that, I wanted to go where the action was.

And I applied to all the big investment banks up in New York. And I didn’t really know the difference between investment banking and trading but it would just, “Get me into one of those investment banks and I want to go understand this stuff and learn it.” And I got rejected from all those jobs.

And so, here I am, coming out of Vandy. And, at the time, Enron was an up and coming company. It didn’t have the name recognition to be able to go recruit at the Ivy League School, so, it found its home at places like Vanderbilt. And so, that was the best job I got to come out of college. And I figured, “I’ll go work there 2 or 3 years, do the analyst program, go back to business school, and then really figure out what industry, what city I want to be in, and really have a better understanding of me, of what kind of opportunities were out there.”

Meb: So, you start at Enron. And it’s a fun story, just about the progression in general, and, in some sort of alternate universe, I guess you’d call it “the metaverse” today, there’s a John that decides to go work in London instead of staying in Texas. And it would be fun to know what that path ends up being had you decided that. But tell us kind of quickly about a little bit of the timeline when you were at Enron.

John: Enron, at the time, was a fairly nascent company with regards to energy trading. So, it had been a big pipeline company, big kind of stodgy mature business pipeline company. But starting in the mid 80s going up to 1992, there was a series of deregulation orders coming down that deregulated the natural gas market. And so, then the question was what happens post 1992 when the big change was that the interstate pipelines could no longer take title to gas?

So, previously, the producer would sell their gas generally to the pipeline, the pipeline would sell it onto its end users. Starting 1992, FERC said, “You can’t do that anymore. It has to be a third-party service.” And so, there’s this new kind of industry that was formed from that, which was the energy merchant, which was, “Go to the producers, buy their gas, then figure out what’s the pricing, what’s the pricing mechanism, what’s the term, how do you handle the volumetric fluctuations, then figure out how to sell it.”

And so, this industry had just been created. I got into Enron at 95, so, again, kind of 3 years into it in a modern industry. And everybody was trying to figure it out. So, a young person coming in, I wasn’t behind the eight ball on this because everybody was trying to figure this out. And that really created an enormous opportunity for the 21-year-old kid coming out, which was the 40-year-old knew the same that the 21-year-old did. And you saw this, the first winner that I was there, winner of 1995-96, when, for the first time, natural gas prices really blew out and, at the time, kind of went from $2 to $4 and you had all this geographic price dispersion that happened. And a lot of money was made, a lot of money was lost. And then the industry came out of that in 1996 really throwing their hands up saying, “We don’t know what natural gas is worth where.” And that’s when I started on the natural gas side. And so, I sat down and it was, “Okay, figure this out,” and here we go.

Meb: So, you did a decent job of figuring it out. By the way, do you still have any Enron schwag, any sweatshirts, any travel bags?

John: I don’t.

Meb: They’re all on eBay now?

John: I have not checked the eBay prices on Enron hats recently.

Meb: We were just cleaning out our house and I had a friend give me a Bear Stearns sweatshirt that I was like trying to decide if I let go or keep. It’s currently in the keep bucket. Okay, so, you kind of take the reins and run with it, develop this into a pretty premier desk, decide to stay in Houston instead of London. Let’s walk quickly through the kind of…in the final days, you decided to start your own shop. Where was this in the timeline? What year has this been, early 2000s?

John: So, I started at Enron in 95, I went to The Natural Gas Group in 96. Enron went bankrupt in December of 2001, so, kind of right after 9/11. And you kind of knew, the last 3 months leading up to that, that something was going to change. At some point, prior to bankruptcy, they started shopping the trading group for a JB partner, ended up doing a deal with UBS where the Enron trading business went to UBS. UBS supplied the balance sheet, Enron supplied the know-how and systems and they were going to do some type of revenue share for that. And I decided that it was time for me to go do my own thing.

I was still very young but I was sitting in the biggest seat in the market even when I was 27-years-old, which was kind of remarkable, especially looking back retrospectively. And I wanted to get out of the big company or at least do my own thing where I had something greater than just my trading desk. And so, I was trying to figure out, “Do I go to a hedge fund? Do I go work at JP Morgan running their energy trading operation? Do I go to BP running their whole natural gas operation?” took some of the opportunities I was looking at and I kind of quickly narrowed down on the hedge-fund side, the economics were just so much better there.

And then the big question was, “Do I go work for somebody or do I start my own thing?” And for what the business I was doing, really the only synergy of going to work somewhere was that they had day-one capital. And at the time I had a lot of people calling me saying, “If you go start your own thing, we’ll back you up.” So, I became convinced or confident that I could get my own day-one capital. And so, why give half the economics to somebody else, given that there really was no synergies in doing it? So, I decided to just go out on my own and own the whole business. And just started hiring people, started relatively small, and just tried to see, “Okay, where does this go?”

Meb: Like Julian Robertson famously said, he’s like, “Advice to a young fund manager is have some great returns early.” So, you had, through skill and luck both, I’m sure, started with a small account. I remember hearing that some of the institutions were a little late in allocating and/or reluctant until the big return showed up, which seems to be the way institutions almost always invest. You started cranking early, like had a pretty sharp run right out of the gate.

John: Yeah. So, when Enron really stopped trading in probably November of 2001, went bankrupt in December, 2001, there were several Enron-lookalike companies, energy merchants that had this trading arm associated with them. And they all started to suffer, and Wall Street kind of stepped back from financing those operations in general. And so, there was a big withdrawal in both the kind of market making, the risk capital, and the speculative trading aspect of the business.

But the need for all three of those things didn’t disappear. There was still a very healthy physical marketplace, there was still gas that needed to be hedged, risks that needed to be managed and warehoused. And so, I came in, started Centaurus Energy in August of 2002. And again, Enron was the first domino but then there was a series of dominoes. And so, the market was just chaos, whenever I started, because there was such a withdrawal of capital from it. But again, the need for capital had maintained. And so, I could sit there and just through market making, some arbitrage, a little bit of speculative position taking make great returns.

Now, starting with what ended up being a very small capital base, for reasons we can get into, but 1st month’s return was 30-something percent, and 2nd month return was 30-something percent, and 3rd month return, again, was 30-something percent. So, after 3 months, now I’m up 100%.

Now, all of a sudden, the people who didn’t show up with their day-one capital, even though they told me that they were going to, now, all of a sudden, they started calling and giving me money. And those returns, kind of those first couple years especially when the market was a mature market but incredibly inefficient…and so, there was a lot of free money for a smart trader to take and then kind of overlay that with some good speculative position taking. And the returns were great.

Meb: I don’t want to jump ahead but I might just for a second. If you look at the markets, you did this very successfully for what, about a decade, is that about right?

John: Yeah. So, I was at Enron for 7 years and then 10 years at Centaurus.

Meb: Centaurus for a decade and very successful probably on the Mount Rushmore of energy traders, for sure. How have those markets evolved even post, quote, “retirement” on the trading side? I think a lot of investors are probably looking at what’s going on in energy markets, it’s been kind of a crazy decade, and also, with energy equities, probably no one sees that more than y’all down in Texas on the sort of the booms and busts for some of these companies. I mean I think we talk about energy stocks, at one point, being almost a third of the S&P and last year hit…or last year, I’m not in 2022 yet, last couple years had a low of like 2% or 3% of the S&P. And then you see what’s going on with nat gas in Europe. But give us kind of a lay of the land of post-retirement energy markets, any thoughts. If John just like turned this podcast mic off and turned on the Bloomberg Terminal, would you be able to crank this thing back up today or is it a totally different world than 10 years ago?

John: I think there are two aspects of it. One is, as a trader where you don’t care if prices are going up or down, you just want volatility and you want inefficiency, I think that still exists, though the markets have tended over time, just like all markets do, towards being more efficient. So, you have to take greater risk to get the same type of return that one used to. And whether that risk return is worth the investment of capital…I think there have been a number of very good shops that have had consistently good returns over the years. So, I think, from a trader’s standpoint, it’s still very interesting.

And then, from the asset standpoint, do you want to invest in EMP stocks? The boom-bust cycle still exists in this industry. And it is such a decentralized industry in that the number of producers that are all responding to the same price signal…and that’s what causes the boom and bust. You have several hundred producers all seeing either high prices or low prices and all responding to that in a generally similar way, which then creates these big boom-and-bust cycles, is still alive. I think that’s been alive in the commodity markets forever and it’s going to be part of the commodity markets probably forever.

And what we’ve had is now 8 years of very low investment in oil and gas. And I think part of it was that there was too much capacity that was built up, in the early part of last decade, in kind of that 2010 to 2015 phase, as everybody was responding to a bullish price signal. And then you get the opposite response, starting in 2014, when prices collapsed in oil. Natural gas has been more up and down since then. But there’s just been no financial returns to the physical investor really since 2014. And really any investment made in the space, kind of, since 2012, 2010 even, unless you got out before 2014, you lost money or didn’t keep pace with the S&P.

So, investors are sitting there saying, “We don’t like this industry longer term, for ESG reasons, and it’s been a lousy return for us for so many years that we don’t want to fund it anymore.” So, now you’re getting…again, everybody responding to that price signal that there’s no capital to invest, that we’ve had relatively low prices bottoming out in 2020. And so, we still have growing demand but where’s the capital?

And that’s what I think is setting up now for this massive bull cycle that’s going to last longer than I think people generally believe. Because the investors, even though they see positive returns today, they don’t want to invest in this business long term. They don’t want to make the investment today that’s going to start flowing with production a couple years from now and count on trying to sell this business 5 or 10 years from now. Because I think, from the investors standpoint, they’re seeing terminal value of oil and gas production as being 0 somewhere in that kind of 10-year time frame. So, why invest in it today?

Meb: Yeah. It’s interesting to watch these cycles, particularly from like the investors standpoint, both retail and institutional alike. I mean back pre-financial crisis is like every conference was about either the BRICS, emerging markets or real assets, and everyone clamoring to start to allocate some of the saviors, the early 2000s portfolios, and then puking them up, you know, a decade later as they kind of didn’t do much and then finding ourselves back in the same place. It’s kind of rinse and repeat in markets.

One or two more questions on kind of this general area and then we’re going to hop. Legend has it you were down on one knee when Brian Hunter called you up from Amaranth, is that a true story, you’re getting ready to propose? What year would this have been, all the volatility excitement going on?

John: So, that was 2006.

Meb: Got it. Tell us a little bit about that time, that’s a pretty famous time on your timeline with the firm. It’s kind of later in the evolution of Centaurus. Is that a true story, down on one knee?

John: Yeah…close. So yeah, I’ve seen a lot in 17 years of trading. One of the things I’d frequently see is that a trader would come in, have some success, and just start trading too big. And after a couple years of success, he gets significant risk capital from his company or his fund and just end up in positions that were too big. And almost without doubt, that person would end up blowing up.

And so, this happened with Brian Hunter who, in 2004-2005, had very good years. He was at a hedge fund that was really an arb hedge fund, doing a lot of convertible bond arb and some of the more traditional hedge-fund strategies, arbitrage strategies. They weren’t known for understanding and managing energy risk. And I think management started to see the numbers that he was putting up and gave him more rope without really understanding the risk he was taking.

And so, he ended up very, very deep in a position that dependent upon having a hurricane, this exogenous event of a hurricane coming and really significantly impacting Gulf of Mexico production. And the whole market was kind of against him on this. He had built it up to such a size and then, as the summer starts to tick through and it’s a slow hurricane season, the position started to decay. And at some point, his management came in and said, “No more. In fact, you got a decreased position,” turns out he wasn’t decreasing the position, may have even been adding to it. And then they get to a point where their clearing firm steps in and says, “The position is too big, you got to get out of it.”

And so, he calls me up one weekend when I’m in New York, getting engaged, get the call and says, “Do you want to buy my book?” And I had a notion about what the size of it was, I had been a counterparty to him on many of the trades, often as a market maker. I had some of the other side of the position, but the whole market had the other side of the position. This kind of told his folklore, that it was Centaurus versus Amaranth. It really wasn’t, it was Amaranth versus everybody. I had a piece of it, everybody had a piece of it. And that weekend he had to show me the position, because I’m bidding on it, and I was flabbergasted by the size of it and that his management would let him get into a position with a position size like that.

And I gave him a price that ended up being, I think, the right price, given where things traded that Monday, whenever the market opened up and had been shopped. His clearing firm ended up taking over the position and liquidating it and the market really just evaporated, that became the natural gas story that led to a lot of regulatory oversight and a lot of headaches for me in the long term.

Meb: Interesting. Let’s start to kick over to where we were heading earlier. As the trading career continued, again, very successful, it seemed like it started to reach a point where your interest started to drift a little bit. And I think many people would look at a fund like yours that has done well and think, “Okay, why would the founder PM decide to totally step away, as opposed to simply take a non-active role or a role where they’re mainly like the business continues but they will step back?” Maybe talk to us a little bit about that and then kind of the evolution to what you guys have really been focused on for this past decade.

John: Sure. I ran Centaurus from 2002 to 2012. The shale boom really started in 2006 or so. I remember, in 2008, sitting there. We would look at investments that were non-financial securities, just kind of physical investments, and so we had people come through the office and we’d get information that way and also made some investments in the space but started to see more and more people pitching shale. And they started bringing the maps and bringing the geology. And it was interesting. And then when the Marcellus started to get pitched, the Marcellus Shale up in Pennsylvania, and you just look at a map of that and see the enormous resource that’s there and that is following the same trajectory as the Fayetteville Shale, the Barnett Shale, that this is going to be game-changing for the industry.

And so, we were able to have kind of catch that correctly, that whole trend of the shale. Oil and gas both peaked right at the end of June, 2008, both for fundamental reasons with the oil and gas industry, just that the shale gas in particular was starting to become significant and surprise the market and its volumes, and then combined with the financial crisis. But we just nailed 2008, as a firm. Got the move up up to $14 in natural gas and then cut the whole move down.

And then 2009 comes and natural gas is very volatile because nobody knows what it’s worth again. It had just been at $14 and now it’s in this massive oversupply. And how long is it going to take for the market to balance out? So, there’s great opportunity. Then 2010 and the market starts to settle down.

And we had had…and the market dynamics up until then was constantly increasing demand and you had to use price in order to allocate. And that led to a lot of the boom-bust cycles and then you shifted to…we had this enormous shale resource and could get as much as we wanted and it was an oversupplied market that was bouncing around marginal cost to produce.

And so, completely different dynamics. The volatility fell out of the market. The opportunity to make a dollar really declined there. And I had just been…2008, best year firm ever had, the fund got up to 6 billion dollars, we were handing money back to investors during this time. As 2010 came, we had handed back half the money, there just wasn’t the opportunity to make good returns on the 6-billion-dollar capital stack. We were going to have to do it again, I’m going to go back to one and a half billion, again there’s wasn’t that opportunity to make money then. And it was hard psychologically that you’re playing with one set of chips and then you’re going to cut those back by 75%.

And this was the only thing I had done in my career. Again, I started when I was 21-years-old in energy trading, I’d been doing it for 17 years. And I just wanted to go do something else. I was emotionally drained, I was tired of going into the office every day, and that same thought process…I wasn’t learning anything new, it was just applying my system to the market. And the returns had come way down. So, it wasn’t fun and I had enough money. I need to be doing things that I want to be doing, things that I enjoy. And coming into the office and staring at the computer screen, watching natural gas is not it anymore.

I personally was so associated with Centaurus, I felt it was important to close this fund. Let me step out a group of employees that took over the systems, took over the systems…I invested with them. And so, they spun out of Centaurus and they’re alive and well today doing great. And so, there was a bit of that but I just needed to step out. And I didn’t really care about holding a piece of it, I wanted to exit the industry with my reputation intact. And that’s what I did.

Meb: So, your interests started to shift from this sort of phase of your life with the fun and everything you’ve done up to this time…I mean and there’s an overlap it sounds like too, you started being interested in some other areas before the fun shut down. But it seemed like a glide path. What was sort of like the crystallizing decision that the Arnold Ventures’ kind of like path would become really the next chapter in your life? Or was there one? Was it sort of like one month at a time, one year at a time, this is kind of where you’ve arrived? Or, at the time, was it like, “You know what, this is what we’re going to do,” you sat down with your wife and said, “let’s chat about this.”?

John: I had always been interested in philanthropy, in the non-profit sector. I had started writing checks maybe when I was 25 or so, getting involved in the charter schools in Houston, got on the board of one, of KIPP Houston. And so, I just kind of started going to some of the education-reform conferences and thinking about this from a systems level thinking. And I was interested in this. We started a foundation, very passive, I just put a bunch of money into a foundation, had one or two employees, and we would kind of write some checks pretty passively.

My wife, at the time, we had met in 2006, got married in 2007, she worked a couple more years, decided to retire from her career as an M&A lawyer and then helped start a EMP company in Houston. She decided to go full time on the foundation. And I would go over there to the foundation’s office after working at Centaurus and go spend an hour or two there in the afternoon.

And I think a couple of things became clear. One was that, if you’re not 100%-focused on the markets, it’s hard to be profitable on it. It’s incredibly competitive space. And so, once my mind started to drift and I wasn’t 100% in there, I wasn’t dreaming about it at night, I wasn’t thinking about it in the shower in the morning, I wasn’t out talking about it with friends at night, then it became harder to be successful. And second was that I became more intellectually interested in the non-profit space than I was in trading energy.

So, by 2012, it was time for me to close up Centaurus. I was just drained. And I had this thing, I had this foundation, I wanted to go spend some time with it and try to figure things out. And one thing led to another, it was like, “Okay, I have this thing I can go do,” and that was important, I’ve seen a lot of people in the industry who got tired, got exhausted, quit, and then they searched for what next and they could never find something that was intellectually stimulating to them and that became very frustrating, but I had this.

And so, with my wife, we put our full-time efforts into, at the time, the Laura and John Arnold Foundation, which has hence become our ventures, in trying to build this really impactful foundation. We work on issues of public policy, viewing policy as a more sustainable, more structural, more scalable solutions, work on some of the most endemic problems that society faces, work in areas like criminal justice, healthcare, public finance, education, research integrity, and trying to figure out what works what doesn’t with social programs. And that’s how I’ve spent every day since 2012.

Meb: Let’s dig in…of those four topics, I feel like we’ll start with public finance, because that’s probably closest to what we talk about on the show and elsewhere, but we’ll get to all of them. What were the red flags, concerns you’ve seen there? Tell us kind of the state of affairs and has it gotten any better in the past decade or is it getting worse?

John: So, that was the second area we started working in. We started with education and then did public finance, which started with public pensions. And so, after 2008, the markets collapsed and then, all of a sudden, you saw the big divide between what was promised to public employees through the pension funds and the assets that were sitting there. And there was a lot of shenanigans that had been happening during the 2000s when market returns were good. And so, politicians started increasing their promises in the future, cities and states have to have a balanced budget each year. But the way that they can get around that is through the public pension system. So, they can increase the promises in the future, which don’t flow through present year cash flow. And instead of giving employees raises that would count against this year’s budget, they just promise more in the future.

So, you saw a lot of that happening in the 2000s, as well as increases in the promises just because the pension funds were flush. And then 2008 happens, markets are down 30%. And, all of a sudden, the expectation is they’re up 8% and they’re down 30% and, so, all of a sudden, there’s this huge fall.

And as we started looking at it, there were fundamental problems with both the funding design, as well as the benefit design. That the pension fund, and hence the municipality or state, was taking all of that market risk. So, we started looking into this and suggesting reforms that would try to stabilize these funds that were very underwater. And the premise was that a state or city needs to ensure that it meets all the promises it’s made to employees to date. For cities and states that are in less bad shape, they can hire new employees at a new system. For cities and states that are in worse shape, you might have to start existing employees have a new system for prospective days of employment. So, maybe they’re 50% on the old system, 50% on the new system. But let’s ensure that these systems meet the promises that have been made to them.

We first started working with Rhode Island. And Gina Raimondo, who is, at the time, treasurer there, it was very interesting working in a heavily unionized state, heavily democratic state that had had massive problems. They had a city, Central Falls, Rhode Island, that had defaulted on its pension system, gone through bankruptcy or effective bankruptcy, and ended up slashing pensions for existing retirees. Which everybody viewed as a horrible outcome, us included.

And so, we started working with her about how do you solidify the system, how do you stabilize the system. And she got reforms passed through the state legislature, and then it was viewed as the third rail for democratic politicians but she actually succeeded and ran for governor and was elected governor, is now part of the cabinet. So, that started kind of a bigger push for us of, “Well, if we can be successful in Rhode Island, maybe we can be successful in a lot of places.”

And then the attacks came. And so, here I was, we were very quiet about what we were doing but people started to figure it out. And I got called lots of names, there were lots of things, accusations thrown at me in particular and at the foundation in general. Being ex Enron at this time, it was very easy for kind of one-liners to come, that, “The ex-Enron exec is trying to destroy the middle class.”

So, this set up this kind of big battle, right, of the entrenched interests versus our group that was the only actor in the system that was trying to enter the debate without a financial incentive. So, we weren’t a politician trying to protect the budget or trying to push out budget gimmicks, we weren’t a union representative who was trying to protect the existing system, but we were providing third-party support, “How do you fix this system?” So, that really became one of the defining factors of the, or issues of the foundation was that we were willing to take on these special interests, we were willing to get our hands dirty, to have our reputation showered on. And that being involved in these debates became a hallmark of the foundation.

Meb: You seem to be equal-opportunity offender everyone from the left, right, in between, up and down. Listeners, if you haven’t seen John’s Twitter account…he doesn’t post that much but it’s a great account. We wrote a paper on pension funds, I mean it’s got to be a decade ago, and our bigger challenge was, look, first principles, the answer is simple, politicians, you got to contribute more to the pension fund and get it fully funded. Problem solved. I’m an engineer, you were a math guy, like there…so, like the bigger problem is like you got to fix the politician problem, which is their incentives of, when they’re in office, is never aligned with the greater good of what they’re trying to solve. And they just kick the can down the road, which sucks.

Now, the interesting part to me is you’ve seen sort of the S&P company pension expectations come down, as interest rates are super low. You’ve seen the state and locals stay fairly elevated in a world of 1% to 2% bond returns. And potentially, we talk about this, but, of course, who knows, stock valuations being, we think, high. If you look a lot of the quant shops, they’re straight up like zero real returns for a decade. A lot of the people would say, “Well, look, you could’ve said this 2-3 years ago, and here we are, you know, we’ve had good returns.” And you start to see some of the funds doing some even weirder stuff. Do you think it takes like some big headline failures before the politicians start to actually initiate some reforms here? Like what do you think it takes, like from someone who’s been involved, how does this eventually resolve itself?

John: It does, it takes those failures. Because, like you said, the politicians have tremendous incentive just to kick the can to the next administration. So, they come in, they talk about it a little bit, but nobody wants to take that fall. And even the reforms that happen tend to be that this city or state will contribute more money in the future. And then, once it gets there, the next guy says, “We’ll push this out a few years so that the next administration can deal with it.”

Because one of the solutions has to be that more money goes into the system. You can talk about benefit design but the funding design needs to change. And ironically, unions were often fighting against increased funding for the pension system because they realized that that would create a political will to make reforms to benefits. That, because if more money had to go into the system, that required either increase in taxes or cuts in service spending by definition, then that was going to create the political will to go try to do something.

And so, one of the things we were pushing for was take your 8% assumed return down to something more reasonable, like 7%. And unions were fighting that because, if you lower the assumed return, then you have to put more money in each year to get the same amount of money at the end. And so, it was really this crazy system where everybody saw what the end result was but all the actors involved were incentivized just keep it going while they’re in charge and let the next generation worry about it.

Meb: If there’s ever been a year where states are flush with cash to probably put into the pension funds, it’s 2022. A lot of these states are just having budget surpluses. And you don’t see medium being like, “You know what? We’re going to get sober, fix this problem.” It seems like it goes the other way, their savior is going to be private equity and magical alpha returns somehow, I don’t know. What about on the private side, you know, the state of retirement in this country? We did a blog post a while back talking about some of these issues with the struggles, the income, wealth gap in the U.S. Is there any way that you think, outside of this sort of traditional pension system, should it be expanded or should there be like a universal government similar to Australia? Like if you could wave your wand, put John in office, what are your thoughts on the general retirement and ways to think about that?

John: So, a typical private-sector employee has a hybrid system. You get social security, which provides your defined benefit, and you have your 401K or IRA, which is your defined-contribution plan. And it gives the person some agency. Right? They can choose how much they want to be saving earlier in life, so, it’s not completely government-controlled. But it does provide a minimum safety net for retirement through social security. Which isn’t very much but it’s that minimal amount.

And so, I think the hybrid system is the right model for public employees as well. It shouldn’t be all defined benefit, shouldn’t be all defined contribution. But if both the employee as well as government share in some of that risk associated with the market, I think that’s a safer more robust system.

Meb: Before we hop, any other thoughts on the public-finance side? I imagine a lot of this bleeds into just general tax policy…or where else? Like are there other areas of the public-finance side that you I think is particularly interesting to chat about?

John: The general-tax make up of this country is interesting. And I think you would never design a system like it is in America if you’re starting from scratch. But, of course, our systems, they never start from scratch, they start with what’s the existing system, where can you make the tweaks. What I found interesting is that you have very bipartisan agreement that you need to broaden the base and lower the rates. And they say that to the press and then they go back behind closed doors and start putting in more tax breaks for special interests.

And so, each year, the tax code gets more complicated and starts incentivizing things that would’ve happened anyway, that maybe make no sense. And then, once they’re there, they become almost impossible to get rid of. And so, you have things like opportunity zones, which I’m very skeptical of that, that’s an efficient way for economic development in lower-income neighborhoods in America. But because the tax code is the easiest thing to do politically, because democrats like it that it’s a way to do social spending and republicans like it because it has the phrase “tax cut” in it, that if you do any type of tax break, you can fund programs.

And so, we have a larger frame of work around try to look at a lot of these breaks that are in the system and do they still make sense and what’s a more efficient way to fund the goals that congress is trying to get at? Now, will we be able to overcome the political roadblocks on this? I don’t know. Again, there’s so much interest in funding through the tax code that has just created this monster that’s very hard to change. It just gets more complicated every year. That’s one effort.

Meb: I imagine the seduction and dream of just scrapping it all and starting from scratch is probably the least likely outcome. If you were to look at the biggest offender, like the worst parts of it, and the main muscle movements on what you could change if you could change something, is there anything that comes to mind?

John: I think when policy people look at the tax code, one of the things that definitely sticks out is the deduction for healthcare. It just incentivizes an increase in spending in healthcare because people aren’t paying it directly, their employers paying it. And any time you have a third-party payer, whether it’s for healthcare or higher ed or for retirement, then you start getting into these funny incentive problems.

And that’s what you see in healthcare where there’s this expectation from an employee of a certain set of benefits that, had that person had to pay for it directly with after-tax dollars, they wouldn’t make the same choices with the money. And so, I get very concerned whenever somebody else is paying for something that you wouldn’t pay for with your own dollars.

I think another question is, again, if you have to raise a certain amount of money to run the government, what is the best way to do it? Do you want to tax the labor? Do you want to tax capital? Do you want to tax estate inheritance? And I think this country has gone to taxing labor more so than capital, more so than inheritances. And I would reverse that. I don’t think taxes on labor should be zero but I think there’s a lot of capital that’s gotten through either with very low taxes or untaxed. And the same with inheritances.

Meb: The inheritance part, it seems like the argument from the people that want to keep it, it seems to move up and down and everything else, is that, while seemingly being a tax that has right intentions, may or may not generate a ton of revenue, is that a reasonable conclusion or is that not accurate?

John: Yeah, there’s an enormous industry of trust and estate lawyers who help you avoid the estate tax. And so, I think there’s a fundamental question about, “Do you want to tax that movement of money from one generation to the next generation?” I think that is a better way to raise money than taxing labor or taxing capital or taxing something else.

So, given that my answer is yes, that I think there is a role for that to help fund federal government, then how do you structure it in a way that it just doesn’t become a joke and doesn’t spur this enormous drain of intellectual capital in this country of lawyers and accountants who try to make sure that people with money don’t have to pay it.

I think there’s an interesting question about whether the tax should come at the estate level or at the inheritance level. Any time you receive money from whether it’s a gift, whether it’s for your labor, whether it’s from capital, you get taxed on that. Except whenever your parents give you money and you don’t get taxed on that as the beneficiary.

And so, I think trying to get rid of the estate tax and do an inheritance tax probably makes more sense. There are some logistical hurdles to be worked out but it’s always been curious to me about why we’re trying to tax the estate level, which you get into all these evaluation concerns. And this is where this whole industry of accountants and lawyers has been created, about how do you have things of value that you can convince the government that they are of lower value? You can get rid of that just by taxing actual dollars that move.

Meb: I’ve heard you comment before, we have an upcoming episode on this general topic on, as we start thinking about the philosophy of giving and incentivizing people to give and being mindful of it, there’s a million different ways to do it. One of the vehicles that sprouted up and is seeing increased interest is the donor-advised fund, something that I think…I don’t know if you’ve been critical of the exact structure but of the general potential knock-on effects it has, maybe talk a little bit about that. Are there any better structures or ways to create that to actually put the money to work?

John: So, when we first started being philanthropic, we set up a private foundation. And then, later on, we set up a donor-advised fund. And today, we use both, they’re both good vehicles. In fact, I think the donor-advised fund is, in many ways and for most people, is a better vehicle. The problem is that private foundations, when they were created through Congress, there was debate about this, about what should society get in return for giving a tax break, that society is, essentially, subsidizing that giving. What should society get in return?

And so, one of the things that came out of that was there’s a minimum 5% distribution a year required for a private foundation. What many people don’t realize is, for donor-advised funds, there is no minimum distribution a year. So, you can have a donor-advised fund, you can fund it today, get the tax break this year, you never have to give away that money. Sometimes, the DAF sponsor will have some type of requirement on you. Oftentimes, they’ll say, “You can’t be dormant for more than X number of years.” But “not being dormant” means you can give $100 away on year 3 and do that again in year 6. And so, there’s this enormous gap between when you, the individual, who’s given money to the donor-advised fund, receives the public subsidy and when the public actually gets any benefit from that.

And so, I’m involved in a coalition now trying to look at those tax rules and say, “Let’s pull that together. If you get the tax deduction this year, there should be some time limit on when that money gets into the community.” It shouldn’t just sit as a wealth-warehousing vehicle, which is what happens some of the time. And there have been some high profile incidences of this happening, oftentimes with very substantial sums where people are contributing the money, they’re getting the tax break, and they just think, “I’ll deal with this later. I don’t want to think about where the money goes now. I’ll deal with it later.” And because there’s no forcing mechanism that requires you to contribute, oftentimes it’ll just stay there. And the money just builds up and then, psychologically, people like to see the money keep compounding. But it’s really doing nothing for the non-profit sector, but that’s what the intent was.

And so, again, there’s kind of a group of tax experts, policy makers who have come together. I’m involved, and there’s a bipartisan legislation sponsored both in the Senate and the House now to try to update and modernize tax rules associated with charitable giving.

Meb: It’s one of those where the devil’s argument…you can see some of the compounder ideas where people are like, “Well, you know what, I’m given 10 million but, if I can compound this at a high rate, maybe that’s going to be 100 million or whatnot and then maybe I’ll have bigger impact,” but it’s the trade-off of the time, value, and money. Like how many charities would prefer that now versus later and how do you align those? It’s an interesting topic.

John: And I think, if you use that argument, you kind of quickly come to the conclusion you should never give the money away because you always think you’re going to make money in the future in the markets. Especially the people who have made very substantial sums have often done that through compounding either as an investor or as a manager of a company. So, they have this track record of doing that, whether that track record will stay in the future or not. Maybe, maybe not. But the individual believes, “I am a good manager of money, therefore, I’m just going to keep it in my account.” But then that money just sits there in perpetuity and never gets out.

And I think there’s a compounding of society’s ills that, if you don’t address the problem today, it’s harder to do it tomorrow. So, while capital compounds, so do the ills of society. And so, there’s a lot of things, address it today, it saves a lot more money in the future.

I think the next generation is going to have a lot of wealthy people who are going to be charitable. They can deal with next generation’s problems but I think it’s better for this generation to be dealing with this generation’s problems rather than even last generation trying to deal with this generation’s problems.

Meb: We could probably spend all day on some of these policy debates and ideas, and there are probably 40 more I’d really like to get to. I had one question that sort of bridges public finance and education. I know education was an early and one of your biggest priorities. One question I had for you, and I don’t know if you’ve ever addressed it or have an opinion on it, but someone who’s come from the finance world, what’s your thoughts on general financial education? Most public schools, the vast majority don’t teach any sort of personal finance or money in schools, is that an impossible goal? Is it something we should be doing? Is there a better private-market solution? How do you think about that? Or is it not a priority?

John: One of the lines of work we have is conducting evaluations of existing programs. So, social programs or things like financial literacy programs, trying to figure out these things that have a theoretical basis. You can tell the stories you just did about the value of that. And so, there have been a number of programs that have been tried in schools. And I think, whenever they go back and evaluate them years later and try to give people tests and quizzes about, “Do you understand compounding of credit card debt?” for instance, those programs generally don’t work. That people want it for the short term but, 5 years in, whenever they’re in that situation where it’s relevant, that they’ve forgotten that information. And so, it’s an enormous topic. I don’t think we’ve figured out yet how do you get people to make better decisions. And I think this is part of the argument for CFPB is that perhaps there’s a role for government to try to make sure that people aren’t making really harmful decisions that are outside these certain guardrails. And I think that’s right.

Meb: Yeah, the challenge I always have, and I go back and forth on this, is the belief that this can be taught. I think that’s noble and everyone wants to believe that, and whether or not it’s true, I mean always default to the evidence. The challenge I always have is is it simply a failure of the approach curriculum/teacher? We had a personal-finance course in high school, not even a course, subset of something else. And that consisted of the stock-market game where you look in the paper and everyone picks a stock, and what does best 3 month wins and gets the best grade. Which, of course, teaches none of the right lessons. I’m hopeful and optimistic on this topic. I think it’s, hopefully, doable, in a way, but again, married with sort of like the point in time education and trying to be mindful of the abuses and predatory nature of our world. Which is significant in personal finance, for sure.

John: Yeah, one of the big disappointments I think in technology has been that there was hope, 10 years ago, that ed tech would really change the fundamental nature of the teacher/student relationship and pedagogy. And there have been a lot of things tried. There’s been some evolution, things are a little bit better, but nobody solved that. And nobody solved how do you teach this concept in a materially better way that materially changes outcomes? How do you teach financial literacy with the curriculum, with a method of delivery that has it so that the person remembers that 5 years later and doesn’t forget it 5 days hence?

Meb: Yeah. The cool thing is there’s certainly a lot of people focused on that problem and a gazillion different business models that are coming at it. It’ll be fun to see. And maybe COVID was an accelerant there, I think it probably will be, you and I look back at it in 5-10 years. From someone who’s been like deeply in this charitable giving world for the past decade, I would love to hear some general takeaways from having made over 1,000 grants, maybe it’s 2,000, you know, on what’s worked, what hasn’t worked. We’ve chatted about a few of the charitable platforms that have somewhat of a quantitative approach, GiveWell and Charity Navigator. I think you mentioned like one of your very first experiences with charitable giving was like the magazine at the supermarket that was like, “Here’s the top charities of the year.” What are some of the main learnings that people can kind of take away and apply, as well as some of the main challenges and things that like really didn’t work that you thought might’ve, and frustrations? All that packaged into one easy softball question.

John: Let me tell you, I think there are a number of similarities with giving and with wealth management. So, there are a number of different models in how someone can choose to invest their own money, depending on their level of knowledge, their amount of time, their interest in it. So, you can go back to the old stock-broker model or you have a wealth-advisor model today. If you have one person who is an expert in this, that that’s their day job, that consults with a number of people and can steer you, hear your goals, and help you find organizations that are good. I think that’s a model that is just really starting to get going in philanthropy, but I found that it’s easier for somebody who it’s not their full-time job, they don’t have the financial expertise, if they have that advisor sitting with them saying, “Here’s the types of products that I think you should invest in.”

And that happens a lot on giving is that there’s an enormous number of people who are very philanthropic in this country but they just don’t know how. They don’t know how to find organizations, they don’t have the time, they don’t have the interest in going and just spending 2 hours with this organization and 2 hours with that organization.

So, I think that model exists. I think the independent, the e-trade for Robin Hood model where you’re out directing your own giving, that exists and is good for some people. I think the emerging model you’re seeing in philanthropy now is that private-equity type model where you say, “I want to invest in this industry and I’m going to go put my money into a pooled vehicle where there are experts that are investing it.

And you’re seeing this now in philanthropy that there’s groups that manage a pooled fund for climate, for instance, or for charter funds or for a number of specific diseases. They say, “I don’t want to go choose what’s my theory of changing climate or where are the levers in climate,” if that’s one’s interest, it’s “I can give money to this fund and they’re going to do it for me.” It separates out that connection with the organization, that a lot of people find appealing, but I think it provides a level of confidence in their giving that you see the same way that provides people with a level of confidence when you give it to KKR to go make decisions for them.

Meb: I don’t know the answer to this with you guys, there’s sort of like the pure grant non-profit model but also there’s a very real world of sort of like venture philanthropy where it’s actually funding start-ups that may be attacking some problems, that may be…do you do both? Is it only focused on one? Are there some areas where it’s more appropriate on each side?

John: Yeah, we do both. We’ve chosen the types of areas that interest us most we call “orphan areas,” that there’s not a lot of philanthropic interest in them today. So, things like probation and parole. How do you improve that system? Or how do you improve a system of how do we price drugs in this country? K-12 governance. Organ donation. So, things that don’t have this robust ecosystem of non-profits.

So, oftentimes, we’ll find people, experts in that area, and go help them start an organization. It might be somebody who is spending 20% of their time in this space but writing really interesting viewpoints of it that we’d like that person…want them to go develop those ideas more, do it in a full-time manner, give them some resources to hire a few people. And so, we’re very involved in the creation of a new non-profit. There are other times when there’s a great organization that’s already there. And I don’t need to go start something new, it’s just give them resources to pursue this further.

Meb: What are John and Laura’s like white whale? This is like a thorn in your side, pain in your a…like if you could just do like one thing, you’re just like, “Son of a bitch, this is the one that just keeps me up at night, wakes up in the morning, drives me nuts, drives me crazy,” what is it?

John: Having non-partisan primaries I think is a great reform. We have this primary system in America today that only the most partisan people or people who are more partisan will show up to vote in primaries. You don’t get many people who are casual, who tend to be more moderates or independents. In many states, they have closed primaries where, if you’re independent, you can’t vote in the primary.

So, there is a greater interest and alignment for the more partisan politicians. So, you end up getting…if here’s the political spectrum, from left to right, you have the left third of it chooses their candidate, the right third of it chooses their candidate. Within those thirds, they tend to be more extreme than even the middle of that third because of who chooses to vote, who chooses to give money. And so, you end up having a more extreme left versus more extreme right in the general election. And when the moderate voter shows up, when the independent voter shows up, there’s no good choice for him. And so, I think Congress ends up being much more partisan than the voters and the electorate is in general. And that leads to all types of problems.

Meb: How do you even solve that? I couldn’t even venture a guess on like what’s the solution to that…

John: There actually is a solution. There are some states that have gone to non-partisan primaries. And the general setup will be non-partisan primary, the top four or five vote getters. In the primary, we’ll then move to the general election, and then you do a ranked-choice vote for those candidates. And so, you get a wider selection of people who get to the general election. And then, by doing ranked choice, you don’t have the spoiler problem that you do in most primaries whenever you have a third-party candidate that comes in. So, you end up with a winner of the election that more closely reflects the electorate and is not from the extremes.

Meb: Anybody doing that fully today?

John: Yeah. So, New York City did this kind of infamously with their mayoral election. Alaska’s doing it at the state level. Maine’s doing it now with ranked-choice voting. And there are a number of states that are considering it.

Meb: Yeah. I mean who’s opposed to that? Is it like both big political parties would be opposed to it or like is it just status-quo way that it is?

John: So, if you think about every existing politician got elected with the current system and they don’t want that system to change, so, you generally have to do this with a voter initiative through the voter proposition initiative. And you can’t do that in all the states. You can do that in like 20 or 25 states where you have to go collect signatures on a petition and get enough of them, which costs millions of dollars to do so, and then get that onto the ballot and let the voters vote for it.

Meb: Are there any sort of like, from someone who’s done this thousands of times, best practices? Like there’s someone in your chair, John, circa 2012, John and Laura entering this period where their focus is shifting to kind of what’s on your mind where you’re like, “Look, I wish I had known this 10 years ago,” or, “here’s like my general template suggestions.” Is there anything that would help people along the way or applies to anyone?

John: I think most people tend to be very passive in their giving. And the model that I see the most is you have all these galas that exist. And it’s, okay, my friend invites me to this gala, they’re hosting it this year, and so I’m going to write a check to them for that organization because they’re my friend. And then whenever the organization that I’m most closely associated with, whenever we have our gala, then I’m going to invite my set of friends and, hopefully, they’ll cut a check.

And you don’t really know what you’re writing the check to. Maybe you learn a little bit about it during the gala, maybe you’re trying to talk to the person next to them, but it’s a very passive way to do anything. I think about that from the investing model, would you ever choose stocks that way? No.

So, what I advise people is you don’t need to solve all the world’s problems. Think about one area where you want to learn more, where you have like realistically the time and resources and ability to really get to understand the problems, get to understand the ideas of how to solve them, figure out who the good organizations are, get involved in one or two organizations in that specific field, and concentrate your giving there. Do it actively, control the process. Don’t just do it on what gala you get invited to next week.

Meb: I think getting from just off zero to one, so many people look at this world and it’s overwhelming. They’re like, “Oh my god, there’s thousands, there’s millions of causes, thousands of charities, how do I pick?” And I think same as anything, like starting a diet or whatever, just like get started and start moving, and that’ll get the momentum and inertia.

We’re going to start to wind down cause I’d love to keep you all day and chat. We didn’t even get to three of the other topics we’re going to talk about. But we’ll have to have you back on in the coming years. This is a two-part question. Everyone else gets this as one part, you’re going to get it in two. What’s been your most memorable trade or investment? And then the Part B will be what’s been your most memorable grant or donation to date? You can answer them in either order but I wanted to give you both so that you didn’t answer both as the same thing. So…

John: Yeah, the most memorable trade was really I think that whole trade of 2008. Where you spent half the year with the markets just going up, it was just a steady move up. And then markets peaked right around July 1st and they just went straight down. And we actually reversed our position, we were long throughout the first 6 months of the year and reversed the position almost at the exact top and then rode the whole thing straight down. And it was the most profitable year we had. It was almost satisfying just because we got it so right and reversing right at the top. We’ll never do that again. If I were in the business still, I wouldn’t do that again. So, that was one that I look back and that was really the peak of my trading career.

In terms of the grants, when we got involved in healthcare, we’ll touch on this a little bit I guess, we approached it from, “How do we reduce costs?” A lot of people focused on, “How do you improve quality and innovation?” and we thought like, “that’s covered. Let’s look at the costs side of things.” Because if you can lower costs, you can increase access, and that improves outcomes. So, we started taking a look at a number of the areas. And the first thing we started working on, about 8 years ago, was drug pricing.

And this is when nobody was talking about drug pricing. There were no commercials about it, like it is today, it wasn’t part of federal legislation, but we had identified this as kind of a deep flaw in the system about how this country prices drugs, that no other country comes close to our system, for a number of reasons. And it was an area like we didn’t know how this was going to change but we just started investing in it. We started getting people to focus on this and write about it and start thinking about, “How do you define the problem? How do you communicate the problem to the public? How do you communicate the problem to policy makers? And then what are ideas about how to create a better system and then start the political fight about it?” that’s gone on for several years now.

And we’re at a point now where we’ve gotten some small wins passed and then we have this major bill as part of the BBB, build back better law, that is a very significant savings that is going to reorient this money in a different manner. You may or may not like how that money is reoriented but it’s a savings of reducing healthcare costs that’s going to improve other areas. And so, I look at that as kind of that full spectrum of what we, as an organization, are trying to do from start with an area that no one’s talking about and seeing it all the way through, and we’re right at the 1-yard line of getting this passed right now.

Meb: What’s going to happen? Are we going to see it through to fruition? The politicians are going to muck this up? What’s your…1-yard line, I come from a long history of Denver Broncos fans, you can never say, “it’s over.” I’ve been on both sides of it but like, as a math guy, we’re going to make it through or what?

John: I imagine a much slimmed down version even from what was last proposed ends up getting passed in 22.

Meb: From someone who’s been deep in the political sausage making, have you come away with this being hopeful, frustrated, a little bit of everything?

John: You have to have patience, you have to be willing to accept less than 100% when you’re doing this stuff. And it’s incredibly frustrating just to watch the special interests fight against the interests of the public. And the levers that they have, that they’ve been giving financially to certain politicians to the ecosystem for so long that you hear certain politicians just recite the talking points of the industry, and it’s really frustrating. You see changes being made behind closed doors, you know how they were made and why they were made, and there’s not a lot you can do about it. So, it’s an incredibly frustrating process but we end up with a bill that’s better than what we are today, at least the drug pricing aspect of the bill. So, I’m hopeful.

Meb: Yeah. John, you’ve been very gracious. I really appreciate you taking time today with this. People who want to find more what your foundation’s up to, Arnold Ventures, the podcast, your fire Twitter account, where do they go? What are the best places?

John: So, Arnold Ventures, we do a weekly newsletter, which I would encourage everybody to sign up for. And then my Twitter account, I’m a little bit more fiery, as you say, gives me a place to vent. As I get frustrated with the political process, I get to go on Twitter and just scream a little bit, like everybody else on Twitter. But it’s a way for me to relax, so, I like it.

Meb: We will add show-note links for all those in the show note, listeners. John thanks so much for joining us today.

John: Thanks for the invite.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at the mebfabershow.com. We love to read the reviews. Please review us on iTunes, subscribe the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.



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