Subscribe
Share
Share
Embed
A bite sized discussion on timely financial news and investment topics, to help you maximize your net worth and wealth for the next generation with Justin Dyer and Mena Hanna of AWM Capital.
Mena Hanna: This year alone, he was up
four hundred and thirty-nine percent
net, over a seven-month period of time.
Crazy, crazy return until it all changed.
And it all unwinds so much faster.
His fund started at close to a
billion dollars, went all the
way up to forty-five billion.
He was using a ton of leverage.
He was very concentrated.
He knew the right times to get
in, but in a lot of these, call
it, bets that he made, he didn't
get out, and the market changed.
There was a lot of turbulence, especially
in these AI infrastructure names.
When you have turbulence and when
you're borrowing four dollars
for every dollar that you invest,
you have that much leverage.
His fund essentially was forced to
sell to Citadel for a massive discount.
So all of this return, essentially was
wiped out in a matter of three weeks.
Justin Dyer: It's your host, Justin
Dyer, chief investment officer
here at AWM, joined as always by
Mina Hana, our Portfolio Manager
here at AWM.
And
we're gonna
talk a little bit, I guess maybe
about lessons learned from,
a a recent
item,
uh, that was circulating through-
throughout the financial press.
There was
a-- There is a--
a
hedge fund, um,
kinda now infamous hedge fund
called Situational Awareness
based in Silicon Valley
that was
quite
famous
for some pretty
impressive returns.
And
then in the, the not too distant
past, a couple of weeks ago,
uh, it made headlines kind of
for the wrong
reasons.
It was overextended.
It
had borrowed a
bunch of money to place effectively
bets within the financial markets
and, and
got overextended.
and
and essentially what happened was
what, what's called a margin call.
We're not gonna go into
too granular detail about
that
exa-exactly, but
essentially borrowed money,
made investments.
those investments went down in money.
The people that lended the money
said, "Hey, we need our money back."
And there
was a,
a forced sale.
Um,
we talk a lot about that with respect
to permanent impairment of capital.
You don't wanna do that.
But,
um, today we're just gonna
riff
on this general topic of
what do we think about that,
how do
we think about leverage, um,
chasing hot managers, chasing hot stocks,
uh, so on and so forth.
So, uh, really hopefully
interesting conversation.
You'll hear us, uh, dive into today.
It Certainly is an
interesting topic for us,
uh on the
internal side of things.
But without further ado, we'll we'll jump
right into it.
Um,
Mina, may-- You know,
I,
I set up the stage or set the stage
a little bit, but as we always do,
first
principles, what actually,
uh,
what actually happened?
Like, just
give us a little bit more lay of the land.
What, what happened with
Situational Awareness,
Mena Hanna: land.
What, what happened with
situational awareness?
Yeah.
So Situational Awareness, it
actually started off as an essay.
uh, former OpenAI
researcher named Leopold, I won't
even try to pronounce his last name.
Uh- Aschenbrenner ⦠Aschenbrenner.
Um,
yeah, I'm sure
there's there's a
very German way of
pronouncing that one, um, in
a, in
a
in a more precise way.
But he wrote-- In 2024, worked for
OpenAI, wrote this 165-page essay called
Situational
Awareness, which
was
really about the decade
ahead, how he thought AI
was
going to unfold, how he thought
it was going to potentially
impact public markets, the impact,
on,
you know semiconductors,
which we've talked about,
energy
data centers, all of these really
important and hot portions of the market.
Just
Just, it was his thesis
about about all of these,
call it sectors of the market.
This guy's obviously extremely smart.
When he published this, he was 22.
He graduated from Columbia at 19
and was the validic- dictorian.
So
Super
super, smart.
Raised
a
lot of money, raised close
to a billion dollars, and
just
went out, created his hedge
fund, and started investing
and absolutely crushed it.
Fund-- He was
he
was right so many times.
He made the right calls.
He made the right calls entering
into energy, entering into
memory, memory, stocks,
semiconductors at the right times.
It seemed like he had a crystal ball,
and he was doing everything right.
Actually, this year alone, he was up
four hundred and thirty-nine percent net,
um, over over a
seven-month period of time.
Crazy
crazy return until,
you know it
all, it all changed.
Um, and
it all unwinds so much faster.
It can unwind so much faster than,
you know the
the, the come up
can
can actually take.
His fund started at at close to
a billion dollars, went all the
way up to forty-five billion.
He was using a ton of leverage.
He was u-- he was very concentrated.
Um,
he knew, you know
the right times to get in, but
in a lot of these, call it,
bets that he made, he didn't
get out, and the market changed.
There was
a
lot of turbulence, especially in
these AI infrastructure names.
When
you have turbulence and
when you're borrowing,
you
know four dollars for every dollar that
you invest, you have that much leverage.
Uh,
his fund essentially was forced to
sell to Citadel for a massive discount.
So
all
of this return essentially
was wiped out, call it,
in, in, a matter of three weeks.
Um, and yeah,
it's,
it's
pretty, it's
pretty shocking.
Super, super smart guy, but,
uh, it's kinda brings up the lessons of
the past around concentration, leverage,
and potentially not getting out in
time.
Justin Dyer: Yeah.
I, mean, there's, uh, there's
so many- So
much, yeah
I'm like salivating here.
There's so much to dig into, and we're
not gonna d- spend the whole time
on situational awareness.
That's a great example of leverage.
But you, you made the astute
point around knew when to buy,
okay?
Didn't ne-necessarily know when to sell.
Like, Okay If
you're playing the game of timing,
you gotta get two things right:
when do you buy, when do you sell.
Super, super hard, especially
when the behavioral side is,
is, um,
is
kicking in.
You
add on top of that leverage, where
the, the,
vast majority of circumstances
with
respect to investing,
borrowing money to invest
is through something called margin.
And there are things called
margin calls where, hey, when the
person lending you the money wants
their money back, guess what?
You have to do that, and You
have to often fire sale your
assets at prices that you don't
Mena Hanna: that
Justin Dyer: want to actually
do
that with.
Yeah.
So
um, a lot, lot to unpack there.
I
mean, let's maybe go, um, just
kinda down
the,
like-- let's
call-- let's start with the basics,
like the hot then cold type trade.
You can do-- You can apply this to
a manager, so situational awareness.
There
was a, an-another infamous, and
there's
ton
of examples around this where
someone was
outperforming, not due to leverage
necessarily, but that's often in-involved.
But there was a, a famous manager
in a good old-fashioned mutual fund,
Legg Mason, Bill Miller is the,
the guy's name.
He had,
uh famously
outperformed the S&P 500 for
Mena Hanna: 500 for 15
Justin Dyer: 15 straight
years.
Great
run.
You're like, oh, wow, this is actually
persistent
right?
We have seen the-- him do it
again
and again and again.
We we should
expect this
to continue.
That was through 2005,
and
then all of a sudden,
the
uh, GFC hit
through 2000,
uh,
2007, 2008
And guess what?
His outperformance all but was
wiped
out.
And
let's
just talk through
the,
the digestion
of
of strategies like that.
Like,
what does the data say
really?
Or what do we consider when
we're
we're, actually looking to invest
capital for the hundred-year family,
and
what do we want
from
a co-- level of confidence standpoint?
Mena Hanna: Yeah.
when you're thinking
about investing for the
hundred-year family,
you want a strategy that
ideally is
going to be right for a hundred years.
You want something that's durable.
You know, comparing
situational awareness with Berkshire
and and how Warren Buffett runs things.
Like Warren Buffett
buys
and holds businesses that
he wants to hold long term.
There is-- There's no need
for him to get out because
he's
holding something that has
tangible
value, and he thinks will have
value, and he's not just buying,
buying low and selling
high when, when he thinks
it's it's the right time.
There's
definitely
some of that, but that's not the thesis.
That
is sort of how you win over the long term.
If you look at how the US market
has performed, how a lot of
these indices have performed,
they've
performed extremely well
for a hundred years.
There's been times
where they've been cold.
There's been times where
they've been outperformed
by some of these, call it hot managers.
But what you're looking for is a
long-term track record and a reason
to believe that you are going to
have a long-term track record.
If I went to call it the Chase
Center tomorrow, shot around
with Steph Curry, and I hit
five of five of my threes.
He hit two of five,
which, you know, shooting 40%,
that's, that's good.
You know, you're not gonna
Justin Dyer: not gonna get a contract.
Mena Hanna: not getting a contract.
Yeah.
They're not gonna sign me.
They're not gonna give
me Steph Curry's jersey.
They're not gonna put me in the 30 and
be like, "Hey, you're starting tomorrow."
Like,
" Congrats kid."
That
isâ¦
That's-- And unfortunately, that's
actually how financial markets work.
They see someone who's
right in a small sample set.
Sometimes there's skill
associated to that.
Sometimes it's purely luck.
People don't really identify
and distinguish between the two.
And
you you
trust this
manager to
you
know, shoot five of five
in
in an actual game, and it
doesn't end up happening.
I think the Bill Miller story, uh
which you
which you brought up
is is a
great one.
Uh, before the
before the, call, we were talking
about how you, you know, to beat
the S&P 500 for 15 years in a row,
that's a
one in 2.3
million probability.
Like,
the odds are
so
so
low.
But
then the GFC hit.
This guy had a thesis around
investing in financials.
He thought that,
you know, when they
went down by
Justin Dyer: twenty-five
Mena Hanna: 25%, he was a buyer.
He wanted to
buy
buy the dip, um,
and the dip just kept dipping.
So
that's
that's potentially how
these things and how a
strategy that has performed well
can
can
really punch you in the
Justin Dyer: face.
Yeah,
totally.
I-- So you, you mentioned the o-
the one in two point three million
chance of Bill Miller actually doing
that, and that, that was a statistic
calculated, um, by someone who actually
worked at the same firm as him.
And it
just goes to show you
the
the lack
of confidence that you should have
in
chasing,
let's call it, a strategy
of outperformance.
You
also talked about luck versus skill.
Yes, there's
potentially some skill there.
But if you
actually
parse
through the data, kind
of what I'm, what the
and one of the data points is what
I just said, the one in point--
two point three million, uh,
chances.
Uh, it is,
generally
speaking
I
shouldn't generally
speaking, I'm being too kind.
Vast majority of
the time it's due
to luck.
Yeah.
An investor
invested in a theme
that just so happened to do well
at that particular point in time.
Is
that skill?
Is that luck?
There has been some research around that
and it, and it, has shown that the, the
skill part of it is
very, very very
very,
fleeting.
And
then,
you know
let's
give
the benefit of the doubt
if there is some skill?
Because it, that is fleeting
or what the markets are doing,
how the markets are behaving
is relatively fleeting, that
skill can turn against you
pretty dang quickly, right?
So markets just have this really,
I don't know,
unfair
way of working if you
are going to chase fads.
It's
the on-again, off-again
type, uh, or hot or, hot and cold hand.
More often than not,
you
see, You
don't
necessarily
know ahead of time whether
someone's gonna perform
or
not.
It's incredibly difficult
to do that ahead of time.
Then
okay,
someone
got the hot hand,
has
a winning streak.
Everyone's gonna go all in.
People chase those returns.
Happens all the time.
And
maybe it's
the
amount of money
that
that individual is now managing.
They can't actually replicate the
strategy with that amount of money.
Markets
move against them.
w- In the case of Bill Miller.
A-and it
just happens time and time
again
Chasing
fads, Chasing
fads, in stocks, chasing fads in managers
is
not a
high confidence way of building wealth
over the
hundred-year family
journey.
I would also say part of this too is
The
level of return you need
is super important to have
awareness
around.
Yeah, Would it be n- nice to have
what situational awareness did
over a two-year period of time?
One hundred percent.
I'm not gonna deny that.
But the level of risk you're
taking in b- chasing that, first of
Mena Hanna: is
e-exceptionally
Justin Dyer: high.
And in order to have actually realized
those returns, you need to be an
investor on day one where you have no
idea if this guy can really do this
or execute on the strategy or not.
And then lo and behold, once he has
all this money he's now managing,
he
h- gets a margin call
and
and,
um, you know, not
loses it all, but the strategy
really reverses itself.
There's a great,
umâ¦
I shouldn't say great.
There's
a, a
a, Charlie Munger quote.
He's full of,
uh, just little little bits of wisdom.
But
he-- it says, uh, what is it?
"A smart man
can
go broke in,
uh
one of three ways:
uh, liquor
ladies, and leverage."
And then Warren Buffett, who was his
partner, famously quipped the first
two of those w- were only added because
they start with the, the letter L.
And I know, I'm
Mena Hanna: on a
little bit of
a tangent.
No.
Justin Dyer: Yeah E- effectively, leverage
really,
really, really, really
can bite you, um,
as
well.
And so
there's a
number of reasons where
these type of strategies,
um, just don'tâ¦
aren't, aren't, are, are
too good to be true, right?
And if it sounds too good
to be true, guess what?
It
Mena Hanna: these type of strategies, um
just don't--
aren't
aren't, are are too
good to be true, right?
And if
it sounds too good to be true, guess what?
It usually is.
Yeah.
And the leverage piece, you know
you
see that
on the real estate
side A
lot Ton of people just take on a lot of
leverage in real estate to generate a
return that ends up looking attractive.
Sometimes not taking on leverage
in real estate, you know, your
return doesn't actually look, look,
that great.
Now,
it
makes a returnâ¦
It can make a return look better,
can also make a downturn
look a whole lot worse.
so
so
yeah, 100%.
And just to double down on the point
that you made just about investors kind
of flocking
to these managers w-with good performance,
that
is a mistake
just
off the bat, because it is so hard to
distinguish between luck and skill.
But as you said, it also just
typically erodes the ability to
actually capture that excess return.
It's like there's some, some spots,
some beaches that are nice because
there aren't four thousand people there.
If you,
If you, invite a whole city to one
beach in Laguna, one of those coves,
and it's just filled with people,
like that's
not a great experience.
So some of these things only work
and are only good because it's an if
you know
you
know situation,
and
once,
once, it gets crowded,
the
actual benefit gets completely lost,
and it probably is a worse experience
than going to, I don't know, a
n- a normal, more common place.
So
yeah, a
lot of mistakes that are just made,
I would say, intuitively by people
that are returning uh, returns
chasing, people that don't necessarily
know how to distinguish between
luck and skill, and then people that
also are looking very short term and
aren't thinking about
the hundred-year family.
Not a lot of people are thinking about
the hundred-year family or how to be
right for that long-term period of time.
People unfortunately invest
like they play casino
games and, and hope that
this is the time that
they'll, they'll
be right and
they'll make out with, with a profit,
And that's just not what you wanna do.
You wanna be the
casino,
Justin Dyer: not
the
gambler.
Yeah, 100%.
I mean, that's a great
place to, to end, right?
You wanna be the casino, not the gambler.
We wanna have confidence in our ability
to meet priorities, meet what's important
to you, use money as a tool to, to do
so, and not chase hypes, chase fads.
'Cause it really, at the end
of the day, just-- de-- um,
dilutes or, or removes confidence in
our
ability to help you all
meet your priorities and,
and really meet that, that, uh,
100-year family objective that,
that
we all have collectively.
Um, like I said, we'll wrap there.
If you have any thoughts
or questions or additional
Mena Hanna: shoot
us
a text 626-862-0355.
Justin Dyer: And until next
time, own your wealth, make an
impact, and always be a pro.
Thanks for listening.