For me, the best part of my Real Vision journey has been the chance to refine my own investment
framework through a series of conversations with brilliant investors in every corner of
the globe.
In this series, I want to try and continue my education by digging deeper into the lives
and careers of my guests to try and learn how they think.
I want to understand the experiences that have shaped them, the failures they've bounced
back from, and the lessons that those failures have taught them.
And I want to break down the success to find out what sets them apart.
I'm not looking for trade ideas, or guesses about an unknowable future, but rather knowledge
accumulated over the course of careers to try and make me a better investor.
And I want to share those conversations with you.
Investing savings is an exercise in trust.
We pick managers we believe will maximize our returns, and then we trust them to make
decisions on our behalf that can change the course of our lives.
The relationship between a wealth manager and his or her client is the very bedrock
of the investment industry.
But over the years that relationship has changed as markets have moved from the analog world
to the digital.
With such a crucial relationship being so dependent upon trust between the two sides.
And with one side, the manager, necessarily having a big advantage in terms of understanding
and experience, it seems dangerous to allow the communication between the two to diminish.
That however is exactly what has happened as investing becomes increasingly more skewed
towards passive and the reduction of fees, and traditional wealth managers are crowded
out by machines.
Today, I'm traveling to Bellevue, Washington to talk with a dear friend about the importance
of this shift to both sides, and to try and understand not only what the new landscape
looks like, but also how each of the parties involved can better deal with the transition.
So please join me for a conversation with David Hay.
David, thank you so much for having us out here.
There's a lot of stuff to talk about today.
And it's a conversation that you and I have had in private many, many times.
And it always gets me thinking, and I always think to myself, you know what?
This is a conversation that a lot of people should be having.
So thanks for having us.
It's a privilege, and I would explain about my voice.
Do you remember the old Robin Hood movie with Errol Flynn, one of the classics?
So I'm like Friar Tuck.
That's me.
Friar Tuck.
Eugene Pallette.
I've got the the Eugene Pallette voice today.
Well, hopefully the people can understand what you're saying.
Maybe we'll subtitle it for anyone that's struggling.
Well, what I want to talk about is managing money, and specifically, the relationship
and the dynamic between investors and managers, because it's something that's at the very
heart of finance.
It's something at the very heart of everybody's personal decisions.
And it's a dynamic that's constantly shifting, and it seems to me, and it's felt to me in
the last several years that it's shifting for the first time in a very secular way.
It seems to be moving to be much more challenging.
So we'll talk about the current environment and the challenges that a manager like you
faces later, but I want to start with your beginnings in the industry, not so much yours
because people have seen you on Real Vision before, and they kind of know your story.
But let's go back and talk about the wealth management industry some 40 odd years ago,
if we can.
Sure.
It was totally different, as you know.
I mean, index funds were almost a non-event.
And brokers were the dominant force in the investment world, commission based, you know,
not fee based.
So that was the first big paradigm shift away from commissions to fees, and maybe that was
the precursor to eventually going to passive.
Maybe not.
That's a whole different story.
But certainly, the client-advisor relationship I think was much tighter back then.
And the reason is, if you think about it, with the brokerage model, every trade involved
a conversation, you know, you don't have conversations with your clients, except maybe quarterly
or yearly review.
So there's not nearly the dialogue that there used to be.
And that's good in some ways.
It certainly makes you more efficient as a money manager, but then I do think the client
loses the allegiance and fidelity to the advisor.
So that's, I think, a really huge change that's happened.
But when you came into the business, you know, you're a young guy.
How did you-- what was your introduction to the business?
What were the kind of early lessons that you were taught by the mentors or the peers that
you had around you?
What?
The tor-mentors?
The tor-mentors, yeah, exactly right.
That's one of those.
There was a guy named Leroy Gross, long gone, and he was from Reynolds Securities.
I was with Dean Witter, and they just merged with Reynolds, and he was like their number
one producer.
And I mean, he was your classic, southern, could sell, you know, Bibles door to door,
and he got us up on stage in front of our training class and had us do our pitch to
him.
And I was terrified because he just-- he looked scary.
And like, his whole thing was-- this was late '70s.
This was a time of a lot of stress in the financial markets, very depressed valuations,
interest rates were going ballistic.
So he said, but you got to be bullish on something, even if you're bearish or bullish.
And I said, what do you mean?
He said, well, be bullish on puts.
So I remember, I did a two-pronged pitch to him.
One was on General Motors puts, because he thought GM was going to get whacked going
into a recession and then by Philip Morris.
It was like a paired trade.
He blew them both out of the water, mostly because my presentation.
But I learned a lot from him.
He was a-- you know, I think all of us did.
I mean, we went out and had a deal with real clients, real prospects.
They seemed easy after that.
Right.
Well, you know, that time is interesting because it was a period of stress, and I think I've
long been a believer that the time you enter this business, colors your perspective for
your entire career.
I think if you enter a raging bull market, you tend to have to very quickly jump in and
just go with the tide, and that changes your perspective.
You know, very early my career, we went through the '87 crash.
So in some ways, it was the best lesson for me.
And in some ways, it was the worst.
So just talk about, you know, your early-- how you had to kind of develop that mindset
to keep up with these guys.
That's a very good point.
I think that's true.
I think that we are indoctrinated by that early experience.
And in my case, it was interest rates exploding, stocks tending to be, you know, on the downside,
getting very, very cheap, and seven times earnings on the S&P by the early '80s.
So I guess I've always had a little bit of a tough time with the valuations that we've
gotten in later days where they're just off the charts valuations we've never seen before
really, across the broad market.
So I think that's very true.
I think that's something we all have to guard against, for sure.
And what were the conversations like with clients back then?
Because I presume there was a lot of fear.
And, you know, as a manager, you kind of-- that's your worst enemy.
You don't want people, either customers or yourself, making emotional decisions.
You've got to try and keep calm about this.
What were the conversations?
What was the dynamic between the manager and the client back then?