The transcript from this week’s MIB: Matthew Granade, Point72 Asset Management, is below
You can stream/download the full conversation, including the podcast extras on iTunes, Bloomberg, Overcast, and Stitcher. Our earlier podcasts can all be found at iTunes, Stitcher, Overcast, and Bloomberg.
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This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest. His name is Matthew Granade and he is a senior, god, how do I describe his role? His title really doesn’t do it justice.
His official title is Chief Market Intelligence Officer at Point72, follow the progression that has taken place, Stevie Cowan was running SAC Capital for a long time, that was eventually converted into a family office which was Point72, that reopened to outside investors last year in 2018 and Granade has been working there for a good couple years, previously he was at Bridgewater with Ray Dalio.
You’ll hear all about that during our conversation but more importantly, you’ll hear about the intersection between man and machine between the way models can be used to not only manage assets but improve the entire process along with a variety of big data and other approaches that are really quite fascinating.
If you are at all interested in quantitative investing, machine learning, hedge funds, the state of investing today and what anybody who is pursuing alpha must do to stay current, then you are going to find this to be an absolutely fascinating conversation.
So with no further ado, here is my conversation with Point72’s Matthew Granade.
My extra special guest this week is Matthew Granade, he is the chief market intelligence officer at Point72, that is Stevie Cowan’s new hedge fund, which employs about 1400 people and manages about $13 billion. Point72 asset management was converted into a hedge fund in 2014 and last year it reopened to external investors.
Matthew comes to us by way of Bridgewater Associates, Domino Data Lab and he got his both undergraduate and graduate MBA at Harvard Business School where at undergraduate, he was the president of the Harvard Crimson.
Matthew Granade, welcome to Bloomberg.
MATTHEW GRANADE, CHIEF MARKET INTELLIGENCE OFFICER, POINT72: Thank you for having me.
RITHOLTZ: So let’s start with start with the most unusual thing on your resume, you were president of the Harvard Crimson, not exactly a hotbed of future hedge fund officers, how did that come about, what was an experience like?
GRANADE: Well, a couple of things, you know, in terms of that experience, running a newspaper is one of the most amazing things in the world and I got to run a small one at Harvard but I think it’s just an incredible job because you’re in the middle of so much information, you’re helping shape the debate, you’re investigating things, so many interesting people. Harvard is an awesome place to do that at and so on there are few jobs that I’ve loved as much as I love that one, it was incredible.
How you get that job, and there’s a couple things, one there’s a bit of a path on so it generally is the newsperson, the reporter, so I was a reporter from the first couple years and then I was the head of the – what’s called the central administration beat the covers the president of the University, also kind of a traditional steppingstone, and then there’s a process called the turkey shoot.
The turkey shoot runs for about a month leading up to Thanksgiving really pick the next president and there are all sort of arcane rules but probably the most interesting is that every outgoing member of the paper gets to vote and if more than three disagree, you’re blackballed and so…
RITHOLTZ: Really?
GRANADE: Hold in a sort of you know, sort of in veto mode for as long as that goes and so the deliberations joyride about 16, 18 hours straight…
RITHOLTZ: White smoke…
GRANADE: Exactly, and then there’s a big party and whatever sort of once the sort of unlocking happens, but I had to think six or seven components for the job and you know you have to…
RITHOLTZ: A little politics.
GRANADE: Yes, a little politics, a little message, a little of this and that’s how it works. But it was an amazing opportunity.
RITHOLTZ: So that’s an unusual background as a journalist and someone who’s publishing a paper to really being a data scientist for a financial services shop, how did that career path unwind?
GRANADE: Well, they are probably more similar than you think, because I mean, a lot of it comes down to information, collecting information…
RITHOLTZ: Sure.
GRANADE: … information and so I’ve always been someone who likes to know what’s going on, know what’s going on the world, I like to sort of be ahead of other people and knowing things and so that’s the — that’s the similarity but the you know, but the career arc was I went from college to Mackenzie, I was a business there and then went to business school like you mentioned and then ended up at Bridgewater…
RITHOLTZ: Which is also a fascinating place.
GRANADE: It is a fascinating place, so I was there for six years and it’s a phenomenal place to work.
RITHOLTZ: I’m a big fan of Ray Dalio, I find his philosophy just totally intriguing, I think Bridgewater kind of gets a bad rap, people have called it a cult and have criticized the radical transparency, you survived there for six years, it can’t be all bad, right? It had to be pretty good.
GRANADE: No, it’s not all bad at all, in fact, I think it’s one, you know, as investors go, they are as good as it gets..
RITHOLTZ: Right.
GRANADE: And you know, just phenomenal at it. And look, I think the differences of the culture there get overstated.
RITHOLTZ: Meaning the radical transparency …
GRANADE: Well there’s meaning like how difficult it is, you know, look, I mean, like, everywhere I’ve ever worked Mackenzie, Point72, Domino, Bridgewater, they’ve all been ambitious people who were trying to do the right answer, who wanted to do great things and you know like a core, like that’s a lot of what Bridgewater is about, and Ray and the team there are very thoughtful about ways to introduce her you know, just sort of apply certain ideals of you know what you want to make sure you’re getting the best opinions, right?
And so they are very explicit about who should you listen to about things.
But I see Steve ask that question all the time, you know, and why am I listening to you, you know? I should be listening to this person instead.
And so I think Bridgewater is great at sort of scaling it but I think that the ideas are not quite as radical as the media would want you to believe.
And then that in the transparency, it’s just great, I mean…
RITHOLTZ: I love the idea.
GRANADE: Yes, as you say, it’s a very clean place to live, and the reason it’s a very clean place to live at Bridgewater is just don’t say things behind peoples back you just say things to their face and you’re just sort of…
RITHOLTZ: He writes about that in his first book in a chapter where he describes raise people problem, I mean most founders and chairman don’t spend the chapter describing their own people person, that’s fairly transparent.
GRANADE: Yes, I mean I think that’s fairly transparent and that’s just how you’re expected operate, you know if you’re to say something about Ray, you say it to him and I’ve many stories of saying things to Ray that I think people would find…
(Crosstalk)
RITHOLTZ: Horrifying?
GRANADE: No, not horrifying, they were me being honest and him and I trying to work out differences but the only rule was just don’t say it behind his back and that’s — it’s interesting that that’s considered so radical.
RITHOLTZ: Right.
GRANADE: It’s not that radical.
RITHOLTZ: So now let’s take this forward, you end up at that Point72, your title is chief market intelligence officer, I’ve never even seen CMIO as an abbreviation, what does a CMIO do?
GRANADE: That title was the title I had we got there and I was really focused at that point on proprietary research and so what we mean by that is how do we take datasets or surveys or web scraping or sort of all the different things you can do and make that useful to our portfolio managers and analyst.
Since then, my job has evolved to include a couple other things so I also oversee our central book at this point, which is our sort of systematic best ideas book we have and I also oversee venture capital, and we just haven’t really changed the title.
RITHOLTZ: Quite fascinating. Let’s talk a little bit about big data and machine learning and artificial intelligence, help me make a little sense about those buzzwords which have come in to vote for a while, but your shop has been using these things for quite a while. What’s the state of the industry in terms of machine learning and big data and artificial intelligence?
GRANADE: I think the — the thing to sort of contextualize all those terms and I agree with you, they’re very buzzy, but the way I like to think about it is being — what I call model driven and so you can talk about model driven businesses or model driven processes, and really the idea of a model is it takes in data, it could be big data or it could be not big data. It runs a certain set of logic on that on and then it produces a prediction of some variety and you know basically, it tries to close the loop around that data so that you know, you’re constantly improving the logic or the algorithms. And so Netflix is a model driven business, intelligence (ph) is a model driven business and obviously finance and the hedge funds we are talking about, you know, they are very model driven.
What I would you know — what I would say is that you the state of the industry in that regard is that these techniques are highly, highly relevant to kind of almost everything we’re doing and you know, whether it be extracting signal from datasets or the all the way up to making trading decisions. And so you were investing like a lot of hedge funds, we are investing a lot in you know people with the data science capabilities and with the machine learning capabilities as well.
RITHOLTZ: So Ron Coarse very famously said torture the data long enough and it’ll confess to whatever you want, how do you avoid running into that problem of when you’re building models and putting a ton of different quantitative information into it, how do you avoid that bad outcome of, hey if we back test this enough and we make these tweaks, we can get this to say whatever we want.
GRANADE: Yes, so I think there’s a couple of different ways you do that. I mean one is you want to have a fundamental intuition of some variety around what you’re doing, you know, you’re not just sort of running everything through a machine, some people do but just how I like to do it, and they are just sort of running everything through and sort of seeing, you know, fixing what fits but to your point, something will fit, and it may be a real thing or maybe you know, a very short-lived thing.
And then you know you have to have a lot of discipline in terms of looking at your, it was called out of sample, sorry, in sample, out of sample, and live, and what that basically means is were you allowing yourself to fit the parameters where you are sort of just looking at the results but still in a in a backward looking way, and when you are sort of really trying it out.
And we have very strict rules about how we segment those different things before we start you know using you know, putting money against a certain strategy.
RITHOLTZ: So an out of sample, just to put a little flesh on that, if you’re testing on a large cap US, hey let’s see how this did in the past, let’s see how it does overseas, not just the area you are looking for to see if there is really something to the model, is that a fair descriptor?
GRANADE: Yes, so let’s say you are using you know, credit card data to trade to AAA, or something like that, you know what you would do is you would sort of – you build some rules and you would sort of fit those rules to some set of data, some time period, three or four years, then you would stop fitting the rules and you would sort of look at the next three or four years and sort of see it does that — those two match, do they look the same or is the behavior very different?
And then you would – and then you would basically start running the model live from today and then see again if those matched the other two periods and so you are looking sort of for a consistency across that and if you’re not seeing that, then that’s a good sign that you’re over fitting it.
Also you know, going back to my original point, you want to think about whether or not there’s a real intuition there, you know, should credit card and AAA make sense together, right? It probably does because a lot of people use their credit card at AAA but you know if you were using your credit card to trade GE, you might sort of scratch your head about what you’re doing.
RITHOLTZ: Right, might just be a random correlation as opposed to a real quasi-relationship.
GRANADE: Exactly.
RITHOLTZ: So let’s talk about some of these unusual data sources. I know alternative satellite data is all the rage these days, people are looking at parking lots, how filled they are, they are looking at how deep transport ships are sitting in the water, how far below the waterline they might actually be. How esoteric can we get with these alternative types of data?
GRANADE: Well, I think you can get quite esoteric, I mean I think satellite has been around for a while and to your point, I mean it is very widely used, you know, what we think much more about now is it a much more specific datasets you know, kind of that give you, you know a read into a limited number of tickers, often via some sort of payment system or something like that. And you know I think that we’re just, you know, probably in the third inning of something — or something like that in the data movement in investing.
RITHOLTZ: That’s quite fascinating. So let’s talk a little bit about complexity, you know, we should go back 100 years and just look at Graham and Dodd simple P/E ratio and more expensive stocks over time perform less well and have lower expected returns than less expensive stocks. Are we running the risk of making things too complex, at what point does complexity get outweighed by its own internal complications?
GRANADE: Well, you know, I think this goes back to the point I was making about you know about an intuition and you know, at the end of the day at Point72, we are fundamental investors, and we believe that the companies ultimately trade on how they’re doing as a business and the kind of cash flows they are going to produce. And everything we do, we will use very sophisticated data science to predict a revenue stream or something like that, but we’re at court trying to do something fairly simple, you know, we’re trying to understand what the revenues are, what the costs are, you know, what the growth profile of the earnings are and we never sort of lose that grounding.
And so you know, look, there are a lot of ways to make money in the markets and I’m only – I’m not an expert in a lot of them, I’m only familiar with some of them, but for us, I think that grounding back to pretty simple principles is very important and not something that we lose track of.
RITHOLTZ: It is interesting that you, I think of you guys as a pawnshop but you keep referring to intuition, what’s the intersection like between man and machine? Is it really technology aiding human decision-making or is it mostly, hey, let Skynet make the decisions and we will just see what happens.
GRANADE: So to anything we do, we do a mix of three things, we have a very large discretionary business that is global long-short equity, people driven, its portfolio managers and analysts looking at some subset of the stock universe, meeting with management teams, looking at datasets and then making decisions in a fairly discretionary fashion. We also have a systematic business that’s running on algorithms and then we have a people plus machine business, which is the one that I oversee which is what you call the central book earlier.
Where — what we’re doing there is we’re looking at what the behavior of all the people is as one of the important inputs, but we’re also looking at the datasets and we’re running algorithms to essentially help make decisions out of that. So one way of thinking about it is that historically, Steve had a best ideas book that he ran as a discretionary investor, and over time, we’ve build that up into a systematic best ideas book. B
But a lot of the input of values from discretionary investors and so one of the kind of key questions we’re always asking is what are the people best at what are the machines best at? And our view is that you in terms of really being able to interpret fairly nuanced and complicated situations inside a specific company, the people are still are really, really good.
You know, there’s other things that machines do very, very well, but you know, if you’re going to meet with the management team and interpret a large set of data that has a lot of certain nuance and specifics to it, the people still beat the machines at that, and so we have several hundred people to do that.
RITHOLTZ: Do you see that edge of humans over machines continuing indefinitely or at some point in the future, will smart computers and artificial intelligence be able to do that also?
GRANADE: Well, indefinitely is a very long time, so I’m not going to comment on indefinitely, what I will say is that our thesis as a firm right now over the next call you 7 to 10 years is that is that it is people plus machines and that the people are very good at the nuance situation at the idea generation, at the interpreting the fin data the synthesis and that the machines are very good at conducting — correcting for behavioral bias and portfolio construction and trade execution, and what we’re trying to do is figure out how you marry those two up in a really smart way and that that is essentially the of the next wave of hedge fund, but you know where we are ten or 15 years in terms of what people can do versus machines, I don’t think I can comment on that.
RITHOLTZ: Quite fascinating. Let’s talk about the venture capital work you guys do. What makes you different from traditional VCs?
GRANADE: I think a couple of things make us different than traditional VCs but probably the most important is we are extremely expertise focused in how we are designed. So we have no generalist, we have certain practice areas, right now, we have three different — three to four different practice areas, of all of which are led by people who have worked in that space, invested in that space for quite some time, and kind of one of the standards I use is when portfolio companies are meeting with the investors on our team, do they believe that the person they’re sitting across from is one the world’s leading experts on the area that they’re working in.
So that’s one difference, I think that the other difference I would point to is we’re extremely outbound in how we operate. So one of our challenges was we don’t have a — we don’t have a brand in VC the way a Sequoia does or something like that. And so you know, one of the biggest concerns you got to have in venture investing is adverse selection and you probably don’t want to be taking what is coming through the door. So you know what we focus on is themes that we think are going to be big money makers where we think real change is happening, where technology is driving really important impact, and then we go try to find the companies that we want to invest in and knock on their door.
RITHOLTZ: You are proactively looking.
GRANADE: Extremely proactive.
(Crosstalk)
GRANADE: Almost all of it is an outbound motion, 98% of it and then so those would be the two big differences. I would also say that you know, probably as firms go, our diligence is more intense than a lot of venture firms, I think that comes from Steve. Steve is — one of Steve’s sayings as do the work and you know when we go into an investment committee to talk about something, there’s kind of only one answer which is I did the work, otherwise the meeting is going to end very soon.
And so we hold a pretty high bar in terms of the amount of research we’re going to do when were looking into a company. So those would be the three things I would point to.
RITHOLTZ: So once you decide to make an investment in a startup or an existing company, how actively involved with the corporate management are you, are you guys there giving them advice, assistance or is it more of an arm’s length, here is some money, now go do something great.
GRANADE: It varies, but I would say we’re fairly active, and the reason we end up being active is it goes back to this expertise thing that I was describing which is that you know, because the team is made up of people who are very deep experts, it tends to be that the entrepreneurs want them on the boards because they are very useful and sort of sorting through the strategic questions and knowing where the business should go.
You know, it’s interesting because when we started out, I was actually pretty reluctant to take board seats because I think it can be a bit of a distraction from doing the next investment, but it turned out it was important ask from a lot of our entrepreneurs so we do end up taking a lot of board seats which means we’re pretty involved.
RITHOLTZ: And we talked earlier about the quantitative approach Point72 often employs, how much big data do you bring to bear when trying to make a decision about either an area to invest in or a specific company?
GRANADE: Very little.
RITHOLTZ: Very little.
GRANADE: Very little, you know, part of it is the areas we’re investing in and we’re generally investing in enterprise companies, in their early stage and so, lots of times, they will have three or four customers and there isn’t a whole lot to sort of you know, torture the data for.
It doesn’t mean we don’t do research, we do a tremendous amount of research but it tends to be more interviews with people and you know customer follow-ups with customers and probing on how a certain product works or market sizing exercises or things like that. But we we’ve not brought a lot of the — of the of the big data to bear on venture.
Though I do think you know, in the consumer space, there could be opportunities for that and that might be something we explore down the road.
RITHOLTZ: So this might be a little bit of a weird question, but how challenging is it to manage two distinct businesses with two very different approaches? One is so quantitative and data intensive, the other seems to be a little more intuitive and subjective?
Do you find any sort of when you switch hats, is that a little bit different to get into that — a little bit challenging to get into that different headspace?
GRANADE: I wouldn’t say so, I think the similarity between both of them is that in both cases, we’re very process driven, you know, and the process looks different in each case but I’m a very big believer and think this comes from my Bridgewater training in sort of process over outcomes, and you have to — you have to think ahead of time about how you are going to approach a problem and why that’s going to give you an advantage in your approach.
And on both sides of the business that I’m involved with, you that’s how we how we come at it. And when we have very elaborate sort of pre-designed sort of ways that we’re going to develop algorithms, we have very clear ways that we are going to make investment decisions on the venture side. And so for me as a manager in both of those areas, that’s mainly what I’m trying to do is make sure that process is really solid and that’s the similarity.
RITHOLTZ: How significant portion of the Point72 book are the venture side?
GRANADE: So the venture investments are all Steve’s personal investments.
RITHOLTZ: Not Point72.
GRANADE: It’s not.
Well we use the — Point72 ventures, we use brand…
RITHOLTZ: Right.
GRANADE: But it’s not in the fund. It’s Steve’s personal money.
And it’s not super large, I mean it’s a couple of hundred million.
RITHOLTZ: So now I have to ask the obvious question, if it Steve’s personal money, is there a different thought process in terms of an exit, how does that pressure or how does that structure affect how you approach it or is it just a continuum across everything in his philosophy is the same whether it’s public or private investments?
GRANADE: I think his philosophy is very similar across both, you know, he is an IRR focused investor and he has a hedge fund that does well and produces a good return every year and he expects us to be the same — to bring the same discipline to the private investments.
And so, we think about IRRs, we think about exits, we think we can get cashback out, we think about applying leverage, we think about all these different things but it all comes back to you know, producing a good rate of return and that’s how he thinks about the world.
RITHOLTZ: Quite fascinating. So you mentioned traditional forms of fundamental analysis, what metrics do you find important? Lots of people have talked about price-to-book and then it seemed to have fallen a little bit out-of-favor, other people were looking at various forms of valuation. What’s the most important fundamental approaches that Point72 is considering?
GRANADE: It varies so widely, I mean we’re trading, you know, in the US, we’re trading almost 1,800 names and we also trade in Asia and Europe and so there’s – I can’t give sort of a one-size-fits-all answer to that question, because there is so mo many different sort of subsegments.
RITHOLTZ: So following up on that, you have written that investing changes over time and it’s the role of the portfolio manager to adapt to those changes, how have you seen recent changes in the marketplace and what sort of adaptations do people have to make?
GRANADE: Well, I think it’s some of the things we’re talking about, I think the explosion of big data are what we call alternative data is a big impact, you know, it used to be that most of the investing was a conversation between the investor, the company, and the sell side, and now you know, you have interest, whether it be credit card or geolocation or email receipts or all these different satellite like you’re talking about all these different things that you know, that you can you can bring to bear. So I think that’s a really important trend.
I think the other important trend like we are talking about earlier is people plus machines, you know, what are machines good at versus what are people good at? You know, machine’s quite good at repetitive math and complicated math and you have a lot to bring to bear in terms of port for construction and trading and in those sorts of areas.
So those are probably the two most important trends that we’re seeing and thinking about.
RITHOLTZ: Quite interesting. So you talked earlier about the pursuit of alpha, for a lot of the hedge fund industry, this has been a rough decade. Alpha has been hard to come by, lots and lots of other hedge funds have had a hard time meeting their benchmark. Two questions that come from that, what’s behind lines alpha’s elusiveness these days and what must elusive alpha, I haven’t thought of that previously, and what do active managers have to do to stay relevant and at the top of their game?
GRANADE: You know, Steve always jokes that he’d just like to go back to the 90s, you know when…
RITHOLTZ: It was easy.
GRANADE: When it was a lot easier.
RITHOLTZ: Sure.
GRANADE: And look, I mean you know, success draws competition, that’s just capitalism and I think that you know, I think there’s not a whole lot of mystery to why it’s harder, I think it’s harder mainly because a lot more people are doing it.
And there are certain, I’d say sort of bogeymen in the market, you know, like ETF flows and things like that, the people also talk about, but I think that the core thing that makes alpha partners just the scale at which it all takes place today and I think in terms of maintaining an advantage, you know, I remember the very first time I met Steve, I asked him the question of how he had been able to sustain this fund for so long…
RITHOLTZ: At such a high level.
GRANADE: At such a high level. And he said, well, because I’ve rebuilt it four or five times.
RITHOLTZ: Really.
GRANADE: And you know, and the point he made is that this is just a constantly changing game that’s always attracting competitors and if you think that whatever success you have today is going to be true tomorrow, you are really naïve.
And so you know, there’s – as part of why I like so much about working with him is it’s just a restless synergy to him because he knows that that’s what’s required to continue to survive and so that’s how we approach the firm. We have always – tons of new initiatives and experiments going on and things will succeed or things will fail and we’ll kill them, and things that will succeed will scale but that — but, you know, I think his view and I agree with it is that it’s that activity that’s how you maintain an advantage on that because the business, you know, in three or four years isn’t going to look anything like it does you know, three or four years prior to now.
Michael Mauboussin calls that the paradox of scale that the success of the hedge fund industry and other sectors of finance have attracted so many intelligent and talented people that the easy money has gone away and it has become so much harder.
GRANADE: Right, well, I guess it’s what makes it fun, right? That’s what makes it, you know, the competitive drive in the knowing that the bars is always going up and you know, it’s that challenge that I think draws a lot of people to the industry.
RITHOLTZ: To say the very least.
So look around at some of the other hedge funds out there like DE Shaw or Citadel or Renaissance Technologies, and they were pretty early on to the high-frequency trading and other computer-driven approaches. Is that anything that is in Point72’s field of interest or is that something that they let the computer-driven guys do that, you have your own specific skill set.
GRANADE: So we don’t do any high-frequency trading, we do a fair bit of computer-driven trading in a systematic unit and then in some of the units I have received, they are systematic as well. So driven by computers. But nothing that would constitute high-frequency, certainly an area where a bunch of people made a bunch of money but it wasn’t something that we did.
RITHOLTZ: One of the things I didn’t ask you earlier but is relevant here is the Domino data lab. What was the thinking behind that and how have you used that experience at Bridgewater and in Point72?
GRANADE: And so the thinking behind that, it was really sort of two big ideas. One was that we were moving to a model driven world where, you know, where algorithms that were trained — fed and trained data that made predictions or decisions for businesses that that was going to be a very important thing that took place. And so you are going to see the rise of Netflix and Amazon all these things that I would call model driven businesses.
And then the second sort of big idea was that as that happened, the people who did that work, the data scientist, needed a system of record. So sales people work in Salesforce, HR people work in Workday, there was not an equivalent for data science and so we were building and in our building, the system of record for data scientists, and those were really the two big ideas behind it.
RITHOLTZ: Ad whatever happens at Domino Data Labs? Does it still exist?
GRANADE: That still exists, doing great, and you know, just continues to grow leaps and bound on the board.
RITHOLTZ: Still an independent company.
GRANADE: Still an independent company backed by Sequoia and Coatue …
RITHOLTZ: Really?
GRANADE: Got in early and some others. I think – actually including Bloomberg Beta and you know, it’s been it’s been very successful – and probably one of the most interesting things about it is just the diversity of industries now that are represented in the client base. You know it started out, a lot of finance firms, insurance firms were interested, but now we have everything from retailers, to grocery stores, to automakers, to pharmaceutical makers because you know because basically the thesis we are betting on was that of the world was going to become model driven.
RITHOLTZ: And this is a toolset to help track how effectively you are deploying your model?
GRANADE: It’s a it’s a toolset that you know, basically data scientists build their models using the languages and tools they want in Domino and then Domino revisions those things means they keep track of the data and the code and the results and then you can also publish out, so you can run models from that.
So it’s sort of your central repository or system of record for models.
RITHOLTZ: Quite interesting. And I keep coming back to the idea of man and machine. When you’re evaluating talent, be it a startup management team or a potential hire or a portfolio manager, how much of that is data-driven and how much of that is your own human intuition?
GRANADE: In people processes, you know, look I think there’s still a lot of human intuition into it, we do try to be as rigorous and as systematic as possible, and what I mean by that is we try to start with the job and the outcomes we expect and as you think about those outcomes, what capabilities are required, and as you think about those capabilities, what’s the best way to evaluate those capabilities?
I personally don’t like interviews, I don’t think they’re particularly useful. I think that work samples of projects and these sort of — and more testing and those sorts of things are very valuable. But you know, obviously, there’s also — you do need to meet people and that’s a part of it.
But for us, the hiring process or the evaluation process of people in venture, you know just has a certain methodicalness to it that’s very important.
RL Quite fascinating. We have been speaking with Matthew Granade, he is the chief market intelligence officer at Point72.
If you enjoyed this conversation, well, be sure and come back for the podcast extras where we keep the tape rolling and continue discussing all things quant and hedge fund investing. We love your comments, feedback, and suggestions. You can write to us at MIBPodcast@Bloomberg.net.
Be sure and check out my daily column at Bloomberg.com/opinion.
You can follow me on Twitter @Rithotlz.
I’m Barry Ritholtz, you are listening to Masters in Business on Bloomberg Radio.
(COMMERCIAL BREAK)
RITHOLTZ: Welcome to the podcast. Matthew, thank you so much for doing this.
I have been looking forward to this conversation. I have followed Stevie Cowan’s career from afar for since the 90s and I find him to be an absolutely intriguing individual both as a investor and an art collector and a person who has managed to thrive despite a lot of really fascinating challenges.
So when we first made contact with your office, I was really excited about this, so thank you for doing this.
One of the things we did not get to talk about during the broadcast portion was the op-ed that you and Steve wrote in the Wall Street Journal and “It’s not software is eating the world, it’s models will run the world” tell us a little bit about that.
GRANADE: Yes, so Marc Andreessen wrote a piece several years ago called “Software is eating the world” and it is basically the idea that software is going to change every business, and Steve and I were thinking about kind of what’s the equivalent today because I think that was almost seven or eight years ago.
And you know, the thing that we zeroed in on was this idea that really models were going to change the change the business landscape and you know, the idea of a model, think about Netflix, I think Netflix is a great model driven business where 80% of the content consumption there comes from the recommendation engine, right?
And so basically what they’re — what they’re trying to do is they’re trying to build the best recommender possible, there — you know, you are signing up, they are taking in data about you, your ZIP Code and then they watch everything you do, they watch you know how you what shows do you jump on right away, which shows do you finish, which shows do you not, and that lets them recommended better and better content for you and then basically at the core of their business is this engine that’s building – basically recommending content for you that you are going to enjoy more and more.
And now they’re using that same data and that same approach to build content as well.
So we think about that as a model driven business and it’s a really sort of powerful mode because once you get the loop going where you’re collecting the data and seeing the outcomes that you are driving, you can make the model better and better.
And so you we in the op-ed, what we talk about is some public and some private companies that are model driven and some of the implications of this trend. And so, yes, it was a fun piece to write.
RITHOLTZ: And it’s still available if anybody wants to go see it, “Models will run the world, it’s in the Wall Street Journal” So when you see something like Andreessen’s piece, “Software is eating the world.” I want to say that he’s half right, software had started to eat the world, but we run into problems all the time that software only gets you half the way there and the entire infrastructure of everything from the hardware to the network to everything else that’s involved has to work seamlessly doesn’t quite feel like we’re in the future yet.
How do you – am I overstating that or how do you perceive the world where you know a robot butler doesn’t take you to work each day but it’s not too far off in the future.
GRANADE: I can’t remember who said it, but somebody said “The future is here, it’s just unevenly distributed.”
RITHOLTZ: Right. William Gibson.
GRANADE: Yes, I think there’s a lot of truth to that, you know when you’re in San Francisco and you see the self driving cars that cruise and Google and others are making…
RITHOLTZ: Or Japan for that matter.
GRANADE: That feels very in the future and then you know what you said, you look at some other industries and you sort of scratch your head about, you know …
RITHOLTZ: Why can’t I get a good cell signal in Manhattan, it’s insane.
GRANADE: Exactly, why can’t I maintain the cell signal on the train back to Connecticut.
RITHOLTZ: Right.
GRANADE: But, so I certainly agree that it is unevenly distributed, but you know, there is also a tremendous amount of very exciting things happening to them and then that’s what makes the venture investing so much fun, you know, is seeing all that and being involved in that world.
RITHOLTZ: Having that view of upcoming technologies, how does it affect the way you look at the world of existing public companies?
GRANADE: That’s a great question. Look I think it makes you much more skeptical about their advantages and about the durability of their…
RITHOLTZ: Moats.
GRANADE: Of their “moats” right, and you look at how fast the change has happened in retail and how deep and dramatic some of that took place, you know, and you go back and you look at some of these companies and all the moats they were talking about and the customer loyalty and then poof, you know?
And so one of the things we try to do at Point72 is we try to cross pollinate some of the big thematic learnings from the venture work in with the on it with the public market investors, we had a dinner a few months ago on robotics and we had three or four CEOs of robotics companies and we had our industrial — a couple of our industrials PMs, our healthcare PMs you know and it’s essentially a discussion, you know, exactly along the lines, you said, of how is robotics going – obviously there’s going to be a bunch of private companies that get created but it’s also going to really change, you know in those two areas, a lot of companies as well.
RITHOLTZ: How often do you guys have dinners like that? It sounds like that’s an intriguing evening?
GRANADE: We do them about once a month, we are doing one tonight actually and you know it’s …
RITHOLTZ: What’s the topic tonight?
GRANADE: Tonight, the topic is actually talent evaluation. So Angela Duckworth is going to join …
RITHOLTZ: Wrote the book, “Grit.”
GRANADE: “Grit” yes.
RITHOLTZ: Haven’t gotten to – have you read that yet?
GRANADE: I have read “Grit”?
RITHOLTZ: And how did you like it?
GRANADE: I think it’s great.
RITHOLTZ: It’s been at the top of the number of peoples list for 2018 for quite a while.
GRANADE: I have a you know, I think it’s an interesting way to sort of think about why people are successful also as a parent, it’s something you think a lot about what can you actually teach your kids and you – “Grit” probably at the top my list of things I …
RITHOLTZ: Really?
GRANADE: I want y children to have and to learn. And so we have the rules now about us sticking with things and stuff like that largely because of her book.
RITHOLTZ: That’s quite fascinating.
I could talk about this stuff forever but I know I only have you for a finite amount of time and I wanted to get to my favorite questions. So let me jump right into this. So feel free to answer these as long or as short as you want.
These are pretty straightforward, but they usually are a little insightful into who you are.
Tell us the first car you ever owned, year, make and model.
GRANADE: It was a Volvo S40 2000.
RITHOLTZ: Sort of the two door with the hatchback, is that the one I’m thinking of?
GRANADE: No, it was a four-door.
RITHOLTZ: Four-door, okay.
GRANADE: It was a new model year, so yes, it was a four-door, it was blue.
RITHOLTZ: What’s the most important thing people don’t know about Matthew Granade?
GRANADE: People are usually surprised to learn that I’m from the south, you know having gone to Harvard twice and worked at hedge funds and things like that and my family has been from the south for a very long time.
RITHOLTZ: You have the slightest wisp of an accent but not a heavy…
GRANADE: The slightest wisp and then now you know, and I think it certainly affects my manners and that kind of thing, so…
RITHOLTZ: Are you a courtly Southern Gentleman, is that …
GRANADE: I wouldn’t go that far, but my mom raised me right she would say.
RITHOLTZ: So tell us about some of your early mentors, who were the people who helped guide your career?
GRANADE: So Bo Jones who was publisher of “The Washington Post” even a president of “The Crimson” as well, he — I worked for him for a summer and one of the things — one of the things that probably is most interesting about working for him, one was he and Don Graham and the Graham family in general sort of really understood the ecosystem of their business well ends and how all the parts interconnected and sort of, you know, basically how the subscription revenue you know was important, but you didn’t want to — you wanted to make sure that you kept that price low enough so you have the advertisers and then a very holistic way of thinking about the business.
And then the second thing that I thought they — very principle based leaders, you know, a news room is a place where things can run quite amuck and “The Washington Post” has the backs of their reporters and that was always interesting to watch.
Another would be Tom Barkin, who Tom is now president of the Richmond Fed and on the FOMC at the moment but he was a very senior partner at Mackenzie and one of the people who I worked with the closest and most when I was there right out of college.
And you know, I think the thing Tom taught me was the sort of seeing the essence of a problem you know, when you’re first out of school and you can think of 2000 analyses to do, well, let’s do all of these things and Tom was great at knowing what the right question was to ask and the right one to answer.
RITHOLTZ: So what investors influenced the way you look at markets and your approach to deploying risk capital?
GRANADE: Well, look, I mean it’s really the two I’ve worked closely with, it would be Ray and Steve…
RITHOLTZ: That’s quite a pair of mentors.
GRANADE: (LAUGHTER) Yes it is. And you know, with Ray, I think sort of two big lessons, one is being systematic, being process driven, that you don’t look at outcomes, you look at how you got to those outcomes, and then also being fundamental and as we were talking about earlier in the world of data science, you can torture the data to say anything and so you really have to think about how the world actually works and why what you are finding matters.
And then with Steve, you know, it’s the sort of tenacity to really dig in and do the work, you know, which as I mentioned is one of the things he says over and over, you don’t go talk to Steve about a name or a venture investment or a new strategy without having sort of turned it over a hundred different ways, and his bar for just having you dig deep is very high, and that’s probably the lessons I’ve learned most from those guys.
RITHOLTZ: So we mentioned, “Grit” tell us about some of your favorite books, fiction, nonfiction, finance related, whatever.
GRANADE: Yes, so I mean some of my favorite books of all times was so …
RITHOLTZ: And just so you know, the feedback I get on this question is consistently the most asked about question and people say to me I’m always looking for a well thought out suggestion for a book and it’s my favorite question. You ask people because I’ve created a reading list off of that question, so it’s not just a random “Hey, what are you thinking about?” the books people recommend other people say “He seems like an intelligent guy, I want to read the books that he likes to read.” So I’m just annotating that for you.
GRANADE: So let’s try to do three from fairly diverse areas.
RITHOLTZ: Okay.
GRANADE: So, more finance, data-sciencesy, I love “Superforecasters” which you know, is basically…
RITHOLTZ: Tetlock, right?
GRANADE: Tetlock, which talks about how you, you know, essentially get good predictions and he spent his life studying how you get good predictions and some of the markets, you know, it’s critical.
Then let’s go outside of investing and finance sort of things, one of my favorite sort of historical books is “Wild Swans”.
RITHOLTZ: “Wild Swans”.
GRANADE: “Wild Swans” which chronicles the life of three women in China in the 20th century, I think China’s is such an interesting story because there’s been so much dramatic change and you look at those three lives and you know, one of which is – a fair bit of which has been on the cultural revolution and you sort of think the world you’re living in as the world you are living in and it could just change so dramatically.
RITHOLTZ: I want to make sure I have the right book, “Wild Swans, Three Daughters of China” by Jung Chang, is that it?
GRANADE: Yes, that’s it.
RITHOLTZ: Quite interesting.
GRANADE: And then we’ll go for a classic, I am I love “The Tempest” by Shakespeare and there’s a lot of things that goes on — that go on in that book but that’s where – he wrote it when he was past his prologue which I think is apparently true.
RITHOLTZ: The Past is Prologue could really be the slogan for anybody who creates models.
GRANADE: Yes.
RITHOLTZ: So that works out, that works out pretty well also.
Tell us about a time you failed and what you learned from the experience?
GRANADE: It would have been a bunch, but well, I will do this one, so before we started Domino Data Labs, my cofounders and I, there were two of us, three of us total, all of us from Bridgewater. We started a previous business called Cerebro and Cerebro was in the talent evaluation space and trying to sort of figure out smarter ways to help companies assess their talent.
And we had some great clients in mainly technology firms and we mainly had leaders from the business lines, and so we would sort of do this work, they would love it, and then we would get passed to the recruiting department and the project would just die.
And we did this like over and over and over again we finally realized was — we realized a couple of things, one was that of micro level that the incentives between the recruiters and business people were very different, the recruiters wanted to put people in seats and that the business people wanted to have great people in those seats.
But then more deeply what we learned was we actually had no idea what we’re doing, and that we were really trying to build in a business in an area that we weren’t experts in and that you – starting a business is just so, so, so hard in like a thousand different ways and you know and so you have to have to take advantages where you can and so what we– what we started asking ourselves, what do we actually know about and in those areas, what we actually know about where are the actual problems and that lead us to Domino and the data science space.
RITHOLTZ: So you come from the school of Ray Dalio’s “Use failure as a learning experience to improve your next attempt at whatever it is.”
GRANADE: Oh, absolutely.
RITHOLTZ: So he told me a funny story about the inside of his book with the failure cycle and someone who will remain nameless said to him, “Ray, what sort of signature is that?” they obviously haven’t read the book but quite hilarious.
So tell us what you do for fun when you’re out of the office, what do you do to kick back, relax, have a good time?
GRANADE: I like to cook, and this is like going back to being from South, so my grandmother taught me to cook and so my wife and I will throw parties and will cook in particular fried chicken and things like that, and it’s probably what I enjoy doing?
RITHOLTZ: Do you work off a cookbook or is it all grandma’s recipes?
GRANADE: It’s usually a combination, so I like to kind of mix in some more modern cooking with some of the more traditional recipes, so …
RITHOLTZ: Give us a few dishes.
GRANADE: Well, you know, a traditional dinner party would be you know, fried chicken with macaroni and cheese and biscuits and blueberry cobbler.
RITHOLTZ: So real southern cooking?
GRANADE: Real southern cooking but I will also do, you know, like some molecular gastronomy like a watermelon drop or something.
RITHOLTZ: Right.
GRANADE: So you got to keep it that modern but …
RITHOLTZ: Did you see Nathan Myhrvold gastro cookbook?
GRANADE: I have all those books, yes.
RITHOLTZ: You do? It’s supposed to be a fascinating — have you tried any of those dishes?
GRANADE: So he had so he has is his five volumes — five or six volume set, it’s very intense, completely overwhelming, then he has a home version, which I have, done a couple of things out of the home version …
RITHOLTZ: Do they work?
GRANADE: They work but he is much more serious than I am so , so he’s very intense.
RITHOLTZ: Yes, to say the least.
So what are you most excited about within the financial industry today?
GRANADE: Well, I think the thing that’s — the most interesting question right now is the people plus machine question, you know what are the people at, how do you get the most out of them, how do you think about those capabilities and how do you couple those with what machines are good at?
And I – you know, I think like you said, I think the next generation hedge fund is going to be a mixture of those two things and that’s a really — it’s hard in a lot of ways but it’s a very exciting question.
RITHOLTZ: So a millennial or a recent college grad comes up to you and says they are interested in a career in either investing or quant what sort of career advice would you give them?
GRANADE: I’m not sure it would be so specific to any feel, I mean I think the career advice I would give – and I’m not a huge fan of giving advice but since I’m on the show and on the spot, on what I number one would be – set your goals as preposterously as you can set them, you will continuously surprise yourself and what you can do and I think you know so aim big and dream really big, that would be one.
I think second, is work hard, the you know no one I’ve ever met doesn’t know and no one who I’ve ever worked for you know, Ray, Steve, these guys, none of them are…
RITHOLTZ: Not slackers.
GRANADE: Slackers. Steve starts every — he starts the week on Sunday morning at 7:45 and that’s when — and then he works all day Sunday and he works a fair bit of a Saturday and so I think it would be to set really almost preposterous goals, be willing to work really, really hard, and then I think the third of probably be you know, love what you do, I’ve also never really met someone who is successful who didn’t really love what they did.
And I think you Steve Jobs had something he said I think in the Stanford commencement speech is like if you haven’t found what you love yet, just keep looking, and I think that – I think he’s right, I think all those things are true.
RITHOLTZ: Good advice.
And our final question, what is it that you know about the world of investing today that you wish you knew 20 years or so when you were first getting out of college?
GRANADE: Stay long Microsoft?
(LAUGHTER)
RITHOLTZ: Right. That was a good time to not panic.
(LAUGHTER)
GRANADE: Right, exactly.
RITHOLTZ: But I mean more, as opposed to crystal ball, more process oriented.
GRANADE: I think the – I think one of the most interesting things is just how different – different periods of time will feel and be, on this goes a little bit to what’s past is prologue and using history and things like that, you know, I mean when I graduated from college in 2000, just as the bubble was peaking and the tech bubble and that sort of felt one very — one certain way and then you know you get to 2008 and you’re just a very, very different regime and I think, I think the differences between these regimes and how it’s going to work in these regimes is quite different and you really have to kind of get your head around that and kind of really appreciate that.
RITHOLTZ: Quite fascinating. We have been speaking with Matthew Granade, he is the chief market intelligence officer at Point72 where he also oversees their main book as well as helping to manage their venture capital business.
If you enjoyed this conversation, well, be sure look up an inch or down an inch on Apple iTunes, Overcast, Stitcher, Bloomberg.com wherever finer podcasts are sold and you can see any of the other, let’s call it 240 or so past conversations we have had.
We love your comments, feedback, and suggestions, write to us at MIBPodcast@Bloomberg.net.
I would be remiss if I did not thank the crack staff that helps put this conversation each week, Madena Parwana is my producer slash audio engineer, Taylor Riggs is our Booker, Atika Valbrun is our project manager, Michael Batnick is my head of research. I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.
