Grant Williams in Conversation with Ben Hunt

they happen just as much on each side. But traders-- people who are dealt lots of hands every
day-- they get that because that's the key. It's always edge and odds. And once you wrap your
head around that, it gives you a lot of humility. Or it should.

GW: Well, it should.

BH: It should. It should. And, B, it gives you the sense of, OK, I've got to find a way to-- if I do find
an edge, I've got to find a way that I can play it across lots of hands. And that's so difficult,
particularly for investors because you're typically not dealt a lot of hands. I find this particularly
with value investors. Maybe you'll do a screening. You get a couple of things that look cheap. But
you hone in on them. And again, the way our brains are wired, if we do a lot of work on
something, I bet you're going to like it. It's very rare-- and this is one of the questions I love to ask
of managers. I stole this from another, I think, really great investor, David Salem. And one of the
questions he likes to ask managers is always, give me an example of something you did a lot of
research on and didn't invest in.

So that was what I really got out of graduate school with was this whole idea of understanding
how our games, as humans, how, in a lot of cases, they're dominated by chance. It doesn't mean
you stop looking for the patterns. But you've got to have a lot of humility about these patterns.
You are not going to find that holy, econometric grail, where, oh, my god, I have found the secret
to investing. And let me tell you something else. The other reason I know is you can never find that
is that if it were findable, it would have already been found. And it's finding that other way, then,
that I try to write about in Epsilon Theory.

GW: The irony, to me, is, if, as an investor, you can come to terms with this element of chance,
fortune, whatever you want to call it-- misfortune most of time-- if you can come to terms with that,
it frees you to accept that, you know what? I did do all the work. I did do my work correctly. I
didn't make a dumb mistake. I just got unlucky-- because we tend to curse the investments that we
spend time with and they don't go right. And that doesn't mean it was a dumb decision. It doesn't
mean it was a bad investment. It just means that this thing over here is screwing up for you,
whether it is central banks, or whether it is weather, or whatever it may be. It frees you to actually
say, OK I'm not dumb. It didn't work out. But I don't have to re-examine my process. The process
is fine. I just ran into this.

BH: That's right. And-- not "but," and what I would say is that in our business of providing financial
advice, the advisor can say, well, I was I was giving the right advice. The advisor can be the
portfolio manager, it can be a financial advisor, it can be an RA-- whoever is saying, do this, and
don't do that-- whoever that person is, the way our business is structured is that, well, if you're
lucky in giving bad advice, you can be successful.

GW: Yeah. That's true.

BH: If you are lucky in giving good advice, you will also be successful. If you are unlucky and
giving bad advice, you're out. Thank goodness. But there are two groups here. It's the unlucky-
giving-good-advice group, and the lucky-giving-bad-advice groups that are so pervasive in our

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 Grant Williams in Conversation with Ben Hunt


business. And it lends itself to, that luck is the deciding factor in what sort of advice is given, as
opposed to the quality of the advice. And I get it. That's life. That's human nature and the like. But
it's still a problem.

GW: Yeah, big problem. Big problem.

BH: Still a problem.

GW: So let's move on to part two of the story, which is your software company-- something that
I'm sure a lot of people don't even realize that there is a chapter that says chapter x software
company.

BH: It’s true. So I left graduate school, started teaching. And the aspect of teaching that I loved
was the classroom work. And I loved doing my own kind of research and solving puzzles. But I
always had the entrepreneurial bug. It is a bug. It's not a feature. It's a bug. Anyone who's got the
bug knows what I'm talking about. And so I'd started a company in grad school. And I was a self-
taught programmer, so I started a-- it sounds crazy-- a computer-game company when I had gotten
a tenured spot teaching. And I always did see academia as that way station. And a buddy of
mine had a really interesting idea he was working with. I know it sounds really boring. It was kind
of boring-- construction-equipment rental companies.

And he had an idea of, well, there's a real need here for taking-- and this will be the relevant part
for what I do later-- for taking unstructured data, meaning schematics, pictures of assemblies, and
the like-- schematics of construction equipment, and trying to make that smart-- trying to make it in
electronic form, because the way that way that construction-equipment repair people work-- and I
promise this will be useful too-- they work visually. And what I've learned over the years is that we
all work visually-- that seeing really is believing. But it was so-- I didn't know it at the time. It was so
prominent that I was trying to solve this puzzle, this problem, which was, how do we get this
equipment repaired and back on the roadway or the construction site more quickly?

GW: Yeah, time is money.

BH: Exactly. It really is for these rental companies. Time is totally money. So what I built was a
program that made these paper schematics smart and small, meaning that you would turn them
into vector diagrams-- and this gets a little bit-- it's the difference between a bitmap, where you're
basically--

GW: Oh, I know about vectors. Oh, I know about vectors.

BH: Oh, you know about vectors?

GW: Oh, hell yeah.

BH: Good, good. Good, good, good.

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 Grant Williams in Conversation with Ben Hunt


GW: Infinitely scalable-- those things.

BH: That's right because you're describing, you're representing the object visually as an equation,
as opposed to a collection of dots. And then once you do right and this is, again-- it's a really
powerful thing because then you can attach that piece of code that drew that line to an order-
management system, or an inventory system, or the like. So it was really, I think, powerful,
interesting piece of software we built.

And so I left academia to start this company. I remember we started it right as the NASDAQ
bubble burst. So in March of 2000, we started the company. But we did fine because it was say it
was such a useful thing in a niche market. And this was my first practical experience at taking
unstructured data and turning it into something structured, which I think is, again, what I've really
become consumed by in our world of financial advice, is how do we take the unstructured data
not of [DOGS BARKING] schematics--

OK, guys. That'll do it.

GW: There we go.

BH: Yeah, squirrel alert.

GW: Oh, squirrel alert. Ah, OK.

[LAUGHTER]

BH: How do we take the unstructured data-- not of schematics-- but the structured data of all the
articles we read, and all of the CNBC reports, all the words that we're immersed in-- how do we
apply a structure? How do we see it? How can we see that?

And so this is what my dissertation was on in academia. This is what my software company was
about. We're consumed with what we can measure easily and put into a database, when, at the
same time, there is this enormous world of words, and articles, and what we hear, and what other
people say to us. And this, what you're doing right here-- this is all unstructured data. And is there
a way-- and I think there is-- today, with the technology we have available to us, to actually
measure and visualize that? And the visualization piece, I think, is so important. It's why I'm really
inspired by guys like Ed Tufte. I don't know if you've seen his work. He has written, and gives
talks-- amazing talks and amazing books-- on the visualization of data. It makes such a difference.
It makes such a difference for our human brains to be able to visualize this stuff.

So that software company was that first real application of it for me. It was pretty boring stuff.
And I do have this entrepreneurial bug. The game that was so fascinating for me with the software
company, once I thought I'd figured out the problem of how to take schematics and put them into
this system-- the game of the venture capital was so interesting to me. So for me, it was again, as
always, becoming a series of way stations to play different games. And I'd really like to try to
figure out that game because that was a really cool game. And there's a lot of money involved in

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 Grant Williams in Conversation with Ben Hunt


that. I want to make some money. So let me play that game. And so I did that for a while.And
then one of the early investors in the company was working in public markets. He said, we
worked as director of research of this big, long-only shop. We're thinking about putting together a
long, short book-- internal-employee money. Why don't you come you know learn the ropes of
capital markets, public markets? And so this is 2005. So I'm 40 years old.

GW: Yeah, but you're that 8-year-old kid again with the newspaper, right?

BH: But I'm an eight year old kid again because here it is now, where it's that biggest game in the
world. It's that world of public markets, and the 8-year-old kid looking at the numbers, and
thinking OK, let me try to figure out this game. So I came on it late in life. But it was really where,
like I say, where I started, when I was that eight-year-old kid looking at my grandfather's
newspapers in the business section.

GW: Over the course of the series, I've been struck by how many of my guests talk about
investing as a game because it's exactly how I've always thought of it. That mental challenge is
what attracts a lot of people to finance in the first place. But that game, with its ever-shifting rules,
constantly seems to be actively trying to keep us from winning. To do that, it has to break us, yet
another dynamic Ben was able to understand through the inhabitants of Little River Farm.

BH: So most people think that breaking a horse is-- well, we're all familiar with a bucking bronco.

GW: The westerns.

BH: The westerns, right, where Rowdy Gaines gets on there. And you break the spirit of the horse.
That's what it means. That's not it at all. That's not how you break a Mustang. And I didn't know
either, the process until we adopted this Mustang and until my teenage daughters told me what
this is called. But it's called "negging." And it's negative attention. So here's how it works. The
trainer-- in this case, our 14-year-old daughter-- she sits in the paddock with this wild horse. This
horse has never been touched, never inside, never had a bridle. I mean, you've got to kind of
prod it along to get it onto the train, and onto the trailer, and the light. But it's never been ridden,
for sure. And she just sits there in the middle of the paddock, reading a book, with her back
turned--

GW: To the horse--

BH: To the horse. And the horse comes up and looks around. You turn your back to the horse.
And she was very familiar with this because apparently, this is how--

GW: High school. Is this?

BH: Tweenage, right, right-- where, an example would be, some boy comes up to a girl and says,
oh, you'd look pretty if you cut your hair. If this negative attention. It's an insult. But it's paying
you attention by insulting you or ignoring you-- studiously ignoring you.

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 Grant Williams in Conversation with Ben Hunt

Well, these animals, these horses, are so intelligent. They're like humans in this regard. They're
very social. The wild horse can't stand to be ignored, can't stand to be left alone. And so they will
come up, and they'll get closer and closer. And they will initiate the first contact. They will break
themselves.

GW: Interesting.

BH: And it's so much like humans are. When I think about social media and how we are, in a
sense, brought in to these stories, or political parties, or the like-- we can't help ourselves. I've
often wondered why people write these ferocious you know tweets about the latest thing that
Trump said, or the latest thing that Nancy Pelosi said. And they get the red-state guy who-- not
guys who make Twitter their life, but just kind of random guy who just--

GW: Couldn't help themselves--

BH: Who just can't help themselves, but just write on this stuff. Well, that's like these wild horses.
We break ourselves. And once you start-- this is true for so many of the things, I think, we endure
in our lives, as social animals-- once you start looking for this sort of stuff, you see it everywhere.

GW: Everywhere. Everywhere.

BH: Everywhere, right? So this process of negging, of negative attention, of just turning your back,
and you say, no, no, no. No, I've got something I want to say. I want to participate in this. You
say, OK, we'll let you participate, but on our terms. Here's the bridle. Yeah, bite down on that bit.
Yeah, you can participate. That's how you do with horses. And it's so much more effective than the
brute-force method of, by God, you're going to wear this bit and this bridle. And you're going to
chomp down on this.

GW: You’re bound to my wills—

BH: --force you to do it. That's not how it works. And that's not how it works the way-- I call it the
"nudging state" and the nudging oligarchy-- business interest. They're not shaking you and saying,
thou shalt do this. What you do is you set up a system where we willingly take the bet. And again,
once you start looking for it, you see it everywhere.

GW: So the thing I want to talk about now is Epsilon Theory because having talked about your
background how you came to this, and I guess, how you came to it late, you have this ability to
communicate, but not necessarily about finance, until you of found yourself in that world.

BH: That's right.

GW: Your writing resonates so strongly with me because I identify with the way you see the
world, but not necessarily your world view-- just the way you look at things, and the way you try
and put yourself outside them, and kind of figure out what's going on. But that late arrival to

July 27, 2018 - www.realvision.com