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When you have the chance to spend an hour with Jim O’Shaughnessy, you grab it with both hands. Most of us feel like we know him personally based on his thoughtful opinions and Twitter acumen (@JPOSHAUGHNESSY). But Jim is obviously more than just memes and GIFS. Jim is the Principal, Chairman and Co-Chief Investment Officer, Portfolio Manager of O’Shaughnessy Asset Management (“OSAM“). He is a four-time author including the seminal investing book “What Works on Wall Street” and hosts the INFINITE LOOPS PODCAST with Jamie Catherwood.

I knew about a decent amount about his career and what his company does. However, Jim is a Renaissance Man and a perpetual student who’s mind can’t get enough. I wanted to get behind his thinking as he made the move from a once mighty investment bank to starting (and building) his own firm. How does someone with ferocious curiosity make joint decisions with family, with colleagues. How did he use his own attributes and processes that helped him build a successful business to help him build a successful family with his wife and kids? Finally, how does someone like Jim think about the inclusion of the family in his business? Who is going to run the business as he has gets older? Finally, how did he get to the ultimate decision of handing the reigns of the firm to his son, Patrick?

I hope you enjoy this episode. This is the story family businesses should hear. While the road is littered with family businesses left in tatters due to dysfunction, Jim talks about some of things that worked for him and his family.

I include our outline below, but beware. We veer away from the script early and often. Amazingly, by the time we are done we cover many of the questions I had.

Ownership and Operational Succession

• What does OSAM do?
• Background on your expertise- Take us through
• Development of the Company
• What is the company focusing on now?
  • CANVAS
  • Positive Sum
  • Invest Like The Best / Infinite Loops
  • Capital Camp

Managing Transition

• You’re 60 now! 
• What has been your thought process about where the company is?  And where it’s going to be?
• It seems like you embrace younger people –
  • What does this do for you? Energy, new ideas?
  • How have you
• At what point did you start to think about the company with you not at the helm?
  • How have you dealt with your other kids on the participation of the business?
    • Did they self-select in or out?
    • Skills?
    • How do you reconcile what you think vs what they want to do?
  • How is your wife’s input on your decision-making?
  • When did Patrick start looking ready to take on the roles that he’s taking?
  • How have you handled it when someone disappoints another?
  • How do big decisions get made at the company?
  • What does a conflict look like?  Who holds the tie-breaker vote?
  • Do you have a board?  Formal or informal?
• One of your most endearing traits is your open-mindedness.  How do you get to say no?
• Managing portfolios vs Managing the Business
  • What are you good at?
  • What are you bad at?
• Twinges of mortality- what do you want your legacy to be when you look back on life?
  • What are the values that you want your kids and grandkids to have?
  • What have been the challenges there?  How do you get your kids to communicate about the issues related to the business and their roles in it?
  • How have you involved spouses in family decisions?
• Whom do you go to help you think through the role of the business in the family?
  • Friends, colleagues, professional advisors?
  • How do you think about the ownership of the company going forward?
• What do you see as the biggest challenge in managing the transition of the company and your role in it going forward?

Fun Questions:

• What haven’t you achieved yet that you would like to?
• What does an average Tuesday look like for you?
• Three people (excluding family) alive or dead that you would invite to dinner.

I also went ahead and got a loose transcription for those who want to read the proceedings. This is a new one feature, so bear with me!

Transcription

FR: Welcome back to the “Wealth Actually” Podcast. I’m Frazer Rice. Today, we’re joined by Jim O’Shaughnessy. He is an elder statesman on financial Twitter, but more importantly, he’s the Principal, Chairman and Co-Chief Investment Officer and portfolio manager af O’Shaughnessy asset management. He’s also a four-time author, including the seminal work, “What Works on Wall Street”.

Jim, welcome aboard.

JOS: Well, thanks for having me. I’m delighted to be here.

FR: It’s a treat for me, I’ve been following you on Twitter for a while now, and you’re one of the major voices of reason in a chaotic platform.

JOS: It’s my niche.

FR: (Laughter) Perfect!

I know you get a lot of questions about your investing style and how you manage assets and things like that, but one thing that I don’t think people know about and that I’m interested in is how you grow your business and how you think about transitioning your business to the next generation and running it, once you think about retiring, which… Given your energy and the way you go about things… That’s probably going to be in about 55 years or so. But at the same time, as you and I both know there are lots of factors to consider both with the business and the people that you employ and your customers, etcetera, to make sure that you have a tidy transition. I thought it would be interesting to hear a little bit about that from you.

JOS: Sure, O’Shaughnessy Asset Management was a group spun out of Bear Stearns where I had been the Director of systematic equity for several years, we came to a very amicable agreement with our friends at bear, some people might sneak her at that, but it’s actually true. We took a lot of time because people don’t really understand that Wall Street is kind of a small place, and you really don’t wanna burn any bridges, and so we spend a lot of time getting that negotiated and then unfortunately prepare Stearns, we had the financial crisis and it kinda looked like we knew ahead of time, we certainly did not know ahead of time, it was just pure dumb luck that asset management is… Our primary business is long world equities using entirely quantitative investment methodologies to select securities, so basically, when people say, Well, what’s a normal day like at Sam? If a normal day at a traditional shop is people talking to the CEO and trying to calculate discounted cash flows and checking on competitors, etcetera, our team’s normal day is spent doing quantitative research. We take that very, very seriously. It’s something that I believe must be continual because we can never stop learning, things evolve.

So if you looked at our models when we formed OSM and 07, you looked at them today, you’d see foundationally, they’re the same in terms of the underlying definitions of factors, the groups of factors, etcetera. I think we’ve gotten significantly better through our research at getting to the real kind of numbers that are going to have the highest chance for us to succeed, in addition to long world equities. Mostly us, I should say, we are a sub-advisor to the Royal Bank of Canada, the asset management arm up there, where we run portfolios mutual funds under the ocean sea bus name, and I’m delighted to say that’s been a partnership that we have had since 1998. I believe.

Wonderful, wonderful people. We always say, even though the people have turned over and the CEO is much different now than it was in 97. when we struck the deal, same kind of people, they are a delight to work with their people of their word. I often say that if Harvard wants to do a case study on a successful partnership, they should look at that because it’s one of those things where everyone performs like they say they’re gonna perform well.

FR: And that sounds like an interesting example as you look toward your organization, you’ve got a nice experience from a business partner as to how things not only should run currently, but how you want them to look culturally going forward so that you’re building… You’re not just building the blueprint for the house, that you’re building the house, and then as things change and modify, you’re able to sort of adapt to different conditions…

JOS: Absolutely, it’s always been great for us to have the resources of a much larger organization that we can just paint and we say, What do you think about this? What do you think about this? And they’ve been very, very helpful in that regard. Disclosure, they also own 10% of OSA.

But being just a straight plain vanilla long equity asset manager was never even in my first iteration of this, which was a OSAM back in 1987, I always wanted to have a firm that offered not just long equities, but other types of things opportunistically, as we found them, I’d like to tell you about two. The first is what we call canvas, and there’s a great hero quote that says, The world is but a canvas for your imagination. And essentially, that’s what Canvas is, but for asset management, my son essentially came up with this idea after becoming CEO and taking a look at what… I tried to do something very similar with a company called Napoli in 1999, which was the first online investment advisor, but I’ve always been a tech, I love technology.

So when we spun out and we had the global financial crisis, I looked at my people and I said, Well, my guess is we’re probably not going to sell too many long only equity portfolios over the next couple of years, let’s retain clients, but let’s spend this time to build the absolute best technology that we can… And we did, I still remember the day and my son came into my office and he’s like, then we built the Death Star to kill a mouse. And by that, even as you might imagine, we have a ton of data that is pretty expensive from a variety of data providers, but that’s not all we have, we have hooks into all the custodians, we have very sophisticated software for cleaning data, etcetera. And he said, I like this idea of letting advisors, because right now, we work exclusively with financial advisors.

FR: the RIA community and others…

JOS: Right, correct, yes. And what we saw coming was a desire for not only flexibility, but for the advisor to fully express their clients desires, what they like, what they didn’t like, and frankly, in packaged products, you really can’t do that, not really…

FR: I was gonna say, one of the interesting things about it, and I ran through the Canvas demo in a past life, and I’ve sort of really focused on it, it really takes that behavioral finance component of customization of the client experience and translate it to the implementation of investment advice, that to me is what works if you’re a Google employee and you’ve got 90% of your net worth in the stock, you don’t wanna see Google show up in your investment implementation, and when you get packaged materials, essentially, you’re gonna get that overlap whether you want it or not, or if you’re afraid of international stocks, and that’s part of your behavioral hard-wiring, and it’s gonna take a long time for your financial advisor to undo that, that’s the way to step in and customize what’s happening in a way that, on the desktop, it makes it work? To me, what I liked about it was the idea that it’s sort of… For lack of long-term sort of active management 2.0, there’s sort of active management across the index and defeating the index to the extent you can on its own merits, but then there’s applying active management to the individual and their behavioral finance attributes.

JOS: No question. And if you ever need another job, please give me a call or doing a very good job describing that… Yeah, essentially, what we want it to provide advisors with was a tool, as you say, that they could address the concentrated stock issue, packaged products can’t do that.

Address tax alpha, you can consistently over a market, generate just through tax management, you can generate about 70 basis points of actual return for the client, now that’s an estimate, and it will be different with every client sector immunization. So let’s stay with the Google employee. Let’s say that he’s an active investor in other tech ventures or she… She might come in and say, You know what? No. Exposure to the tech sector. I’ve got that covered over here, we can do that for them.

We can also do direct indexing in a way that allows you to throw out stocks that you really don’t like or add stocks you love, we will tell you what the back test… That implications of that would be… So we don’t watch going in blind, and we don’t want you saying, Hey, yeah, I want this past of penny stocks in there as well, but we have the ability to show you everything that you might be thinking about ahead of time, and then as you say, get to customization. It’s a breeze with the canvas platform.

And importantly, it’s ESG. Your way, not our way. It is what OSAM thinks ESG should be. It’s what you think ESG should be, for example. So I have two daughters, whom I love very much, and I grew up with four sisters. Well, guess what? I would like to see more women in C-Suites or on boards. And because of the programs that we have available to us, our list didn’t exist above… I don’t know, I think we did this 10 months ago, but one didn’t exist, and we told one of our machine learning guys, Hey, we need a list showing two or more and C-Suites are on the board.

“When do you need that by? When do you think you can happen for us? We can get it this afternoon.

So literally, you can come in and drill down on any of your passions, everyone is different, everyone has different things that they’re passionate about, so we try to remain absolutely neutral, because if you followed some of the other things that I write about on Twitter, I’m obsessed with words and labels, and some people read them one way and other people read them another way, and sometimes that gets lost in translation here, if you want a specific portfolio that even if it looks odd to us means something to you…

We can pretty much effectuate that in the portfolio that we designed for you, so we think we’re trying to go pretty slowly with Canvas, because another thing, as Patrick, as the sort of King of financial podcasting has access to a ton of the brightest minds, and some of the best advice we got was from those minds saying, pick 10 great clients originally, and then don’t take any more until you’ve made those 10… Absolutely delighted. Boy, has that worked well.

FR: Great advice. It reduces the data flow of a huge release and having 50% of the people who are mad at everything coming at you, and at the same time, it’s enough of a sample that you aren’t basing your whole company on one person’s experience or two people’s experience that may not scale, essentially.

Exactly, and we also picked very different style advisors for the 10, we wanted to get input from as many different kind of view points, if you will, that we find an asset management, but it also led to an initiative that we have unveiled just a bit ago, which is a venture capital arm called Positive Sum, that had its own box on my first little outline of what I wanted an asset management company to look like, but I didn’t wanna just “do one”, I wanted to wait for an opportunity to present itself where we could actually add significant value through relationships, through insights, etcetera, and Patrick with invest like the best and his other endeavors, has put together an unbelievable group of not only VCs, but business people, CEOS, founders, etcetera, and we’ve gotten a unique insight into what we think, and obviously venture capital is risky, everyone knows that, but we’re gonna be doing mostly around style investing, and importantly, we have been doing it through OSAM as family partners, Patrick and myself.

Doing the analysis since 07, so we’re not new with this, we’ve been doing it with our own money, we’re putting our own money in positive some, because another one of our beliefs is we should be parties with you, I mean, you might have less money in than we do or more money than we do, but we want exposure not only to the long only portfolios, but to anything we offer, we are super excited about the opportunities with positive some, because the network effect there is really, really quite strong. That’s another thing that we’re doing right now. The third thing would be, we’re learning a lot, and VC fits into this.

But we’re learning a lot more about private markets because private markets are becoming more and more important, so for right now, we’ve done that through an investment with a guy of the name of Brent Beshore, which is private equity, but it’s not private equity, it’s so much… So not private equity, we called it… Or he called it permanent equity. Our goals are very different than a traditional private equity there to work with founders, they are to keep them around, and essentially what we’re looking for is a collection of businesses private that just throw off a tremendous amount of cash flow that gets returned to the investors on an annual basis.

FR: So in an era with negative interest rates, we think things like that might be very interesting to the group of investors that we serve, so as we’re sort of canvassing, not to sort of throw the pun out there too quickly, but the overall landscape of your holdings and the business itself, you’ve got Patrick involved, you’ve got an interesting sort of subset to which I wanna focus on a little bit too, which reminds me a lot of Josh Brown and Barry Ritholtz’s ideas about having a media component which helps fuel not only the sales funnel, but the information funnel upon which you make decisions, which my guess is, is that you had that in the back of your mind somewhere as your career developed, but you wanted to implement it into your business overall, and then through Patrick and maybe through other people. You’re taking these ideas in and you’ve got the people to implement it beyond that, which you can do managing portfolios, good analysis or is it… Am I strained a little bit?

JOS: Actually, a very good analysis. I joke that you can have the absolute best investment process in the world, and if nobody knows who you are and nobody knows what you’re saying, nobody’s gonna give you any money. So if you watched my career, I did a tremendous amount of traditional media in the late 1990s, early 2000s, when Marques was still alive, I co-hosted Squawk Box with him almost every other week, you had three hours back then, and you could get into really in-depth conversations and I did a lot of print media, I did a lot of… In addition to CNBC, we would do Bloomberg, we would do all that sort of thing, so we always understood the importance of having a voice, in addition to having a voice, you get to hear good feedback that sometimes is critical, you get to hear people say, I really like your idea about that, but I kind of think you’re off-base or off sides on this one. What do you say about that? And through that kind of constant iteration, our motto at the firm is learn, build, share, repeat, so it’s a continual circle and you can’t get feedback without the share component.

Before What Works on Wall Street was published, I had an offer from a very large investment bank to… They wanted to buy my company, but their provision was, I may not publish what works on Wall Street, they wanted it to be proprietary, it ended up being a no-go, and one of the main reasons for that was, I passionately believe that you can have the best process in the world, and you’re still gonna have 80% of the people looking at you and saying, You’re an idiot. I don’t want that. And so I believe passionately in the power of ideas and the power to create better and better processes and better and better portfolio techniques, etcetera, that are in better companies through this ongoing process of sort of learning in public, you’re at when you do that. Because people might be on charitable, you have to have thick skin.

Let’s put it that way. And I’ve been doing this for a long, long time, and I’ve gone from genius to idiot, genius to idiot so many times that it simply doesn’t bother me anymore as part of the market cycle, and so you have to have a thick skin, but if you do, the feedback is essential and amazing, and you also get access to a group of people, Patrick, in particular with invest like the best, but also me with infinite loops, we have two very different audiences and want different things from the podcast, but I’m a big believer. The more interesting people you talk to, guess what, you’re gonna learn more and more interesting things and a lot more when you’re not talking to anybody.

FR: And to be cavalier, you become more interesting yourself, all of those ideas just… They fire different synapses and antiennae, I think it creates big pockets of creativity that fuel… The next thing, My hypothesis is that through your media exposure early on, in addition to what you were doing, that’s what you’re able to see around the corner a little bit and say When 2008 happens, you’re saying, You know what, we’ve gotta build another mouse trap here, because this game may be over and quantitative analysis, we may not be able to compete with Jim Simons and the Wang super computer over here and the Cray Super Computer over there, but we’ve gotta find something else that to me is where… In your podcast, you call it infinite loops, that’s how you break them, is you bring other people on and listen, like the Borg in Star Trek, assimilate all of that and then make it your own and move forward.

JOS: Absolutely, you’ve nailed it.

We are always searching for new and better ideas, we find that you’ve got to be what I would call radically open-minded, and by that I’ve done some threads on Twitter, there’s another thing I did all traditional media for the majority of my career, and then I started noticing something I started noticing that social media was becoming more and more important. Primarily, I think… And I’m specifically talking about Twitter here, it is a two-way conversation. It is not one-to many, it is often one-to-one, one-to-many or many to one. I still believe, and people tease me about this because there’s a lot of nonsense on Twitter, but I believe that Twitter has the capability of being the world’s first successful distributed intelligence network, and if you curate your feed…

FR: Well, and you get the right people engaged in the conversation.

JOS: My word, I mean, I have learned… For example, we have a research partner program, and we have what I would call one of the brightest minds working in finance today as a research partner, and guess what, he’s anonymous on Twitter and he doesn’t work in finance, and yet we vet all of his papers and their goals, we have the opportunity through these connections that we set up, both through podcasts and through Twitter and other social media, to the top of our funnel is huge, but we’re selective ’cause we can be… I’ll give another example.

So I’ve been toying with some hypotheses about using large data sets and machine learning to identify things that traditional quant can’t identify, and we have a couple of machine learning experts also as research assistants who literally we could not hire.

They retired from huge tech companies, they’re young people, they can only coach their kids soccer team for so long, and the thing that I find about these people that is very similar, is there graciously curious, and when you get that kind of mind and say, Hey, you wanna check out this data set, and they see this last series of data, they get very, very excited.

So we’ve been able to understand the evolution, or at least what we look at as the evolution of media and dealing with other experts with the public, with clients, with our employees through these methodologies, and the results have been nothing short of staggering to me, at least, Jesse Livermore would be the name of our writer who… That’s his pseudonym, but we’ve had PhDs in Quantitative Economics and Finance say, You gotta tell us who this guy is!

FR: Nothing wrong with your anonymous secret weapon in the back, right.

JOS: So yeah, we definitely believe that the world is changing, we believe that we want to be a leader in that change as opposed a… That isn’t the way that’s done here, but you can’t have any sacred cows if you want to be that, so you can’t have me saying, But no, you’ve always gotta use this factor… No, no, you don’t.

FR: No, Jeff Bezos is looking for your sacred cow Curran, you hold on to it too long and you just set yourself up for the car accident that you can’t see…

JOS: Without a doubt, without a doubt.

I was taught something by my grandfather, I was the youngest grandchild or grandson, I had a cousin who was the youngest granddaughter, a few months younger than I was, but I had the good fortune of living in the same town as he… And he was a very successful man, and one of the first things that he taught me about… What is this thing he called pre-meditation, you could kinda say it’s a mind manticore system, in which you think about, Okay, so what do I want? And then you vector out everything you can think of and you write it down… I find that very important, the writing aspect, because if you can’t clearly express yourself in writing, you don’t know what you think, that’s a rather out their opinion, but I just believe it. Again, for books, I believe very deeply in that if I had some information that I thought could level the playing field, let’s learn… Let’s build that out. So what were some Wall Street now… And it’s fourth addition.

Let’s share the number of papers, the number of people who have called me with good advice on, Hey, did you ever think about doing it this way, who had read what works on Wall Street, you just open up the tents, and as long as you are incredibly open minded, which a lot of people, unfortunately are not, and that’s why I always write about a lot, the most successful people I’ve ever met in my life, with just a few exceptions, have had not big egos, they have been very, very… If anything, they were just curious, they were almost like my six-year-old grandson, Why papa? Why papa? Why papa? And I love it, and I just love learning when you’re like that, like finds like those are the kind of people that I have the great privilege and happy fortune to deal with.

FR: I hate to use “age” in a public forum, that’s the fastest way to get a drink in your face or get your eye poked in, but you’re 60 now, and as you look at your business and you look at the values, and I hate to call it methodologies, but the concepts that help build it and that you’ve instilled in Patrick and your employees. How do you look at the business? Now, you’ve gotta feel good about where it is, you have to feel really good about its trajectory and the different things that you’re trying, and it sounds like your energy comes through, it sounds like it’s a great encapsulation of what is inside you… How did you get to that point in terms of including Patrick in it, and maybe talk a little bit about his development and how he came on board and how that worked with the rest of the family, because in my world, there are many extremely successful businesses that maybe are at this stage that you’re in right now, but the family dynamic or the lack of communication between siblings or baggage or different issues out there, create significant road blocks, and it sounds like you’ve got some of that figured out, I don’t know things perfect, but how did you get to that point and how did you sort of either build the team around you to help you push through the values and the guiding principles, how did you communicate that to the people around you? Not just your family, but your employees, your vendors, your customers, etcetera, so that they felt good about the transition… That you feel so good about.

JOS: Sure, so I had the great good fortune of growing up in a family business, my grandfather was very successful in the oil business, did very, very well, I’m incredibly proud of him. He gave away 95% of his net worth during his own lifetime, he was doing what buffeted gates are doing, but he was doing it about 60 years ago, but I was pressured by my uncle who I loved, and he loved me to work for the family business and he wasn’t subtle about it, and I was very patient with him, and he was very patient with me, to be fair, and I finally convinced him that the oil business was just something I was not interested in, but I was super interested in the stock market and the investment world, and finally I got a smile out of him at dinner and he’s like, Well, you are persistent, and so my guess is you’re gonna do well in that… Of the world.

But one of the things that taught me was that I was never going to even suggest as my children were growing up, that they should show and the interest in what I did for a living, I did that because I had seen other cousins who weren’t as persistent as me end up working for the family business, not being terribly happy about it, and I just saw it, well, I was a very lucky guy to learn this lesson early… Literally, I don’t think Patrick read “What Works on Wall Street” until he was out of college, to be honest, but he graduated from Notre Dame with a degree in Philosophy… And a lot of people will kind of sneaker at that.

FR: Not me, I think it’s one of the best degrees you could have if you wanna be a good thinker, the mark of intelligence has two different types of thought over around the same concept at the same time and to be able to wrestle with both sides of them without injuring yourself…

JOS: Exactly, and I was a huge fan of philosophy and I read a lot of it, even though my degree is in Economics, I love history, I love philosophy, and so we would have great conversations. Anyway, he came to me after graduating and said, Hey, could I be an intern at OSAM? And I’m like, Sure, do you wanna be? And he goes, Yeah, I read what works, I read how to retire rich. I’m pretty interested in this and I’m like, Okay, sure, you can be an intern, but here’s the deal, you are not gonna report to me, You’re gonna report to this person who was like several layers removed from me, and you have an expiration date, which is January of next year, and he was deal. And so, about four weeks into his internship, the guy who was working for was the Director of Research, and he came in to my office and said, Hey, Jim… Yeah, I think part is the only intern we’re not paying, and I think the only reason we’re not paying him is because he’s your son and he goes… I think he’s super valuable, and I really think that you need to pay him, and I was like, Okay, so we did it… Go forward. another month and a half, close to two months. Getting closer to that January deadline, the president of my company, Chris Lovelace, came in with the Director of Research, sat down and said, Jim, we have to hire a Patrick.

I’m like, Okay, well, tell him you want… And he goes, ’cause we don’t know what it is. It might be genes, but this guy, he just gets quant, I just totally gets it and can articulate it in a manner that is amazing, so we hired him, but not… The advice came from my colleagues, it was not me saying we were gonna hire a Patrick, it was quite the opposite, and I did that intentionally because I wanted my colleagues to be his champion. I didn’t wanna be his champion, I was delighted that he was interested in the business, and I was delighted that he was as good at it as he was, but I felt with him being championed by his colleagues bosses at the time, they would look at him in a very different manner than if I had simply installed him because that would be an anathema to my way of doing something.

FR: And then there was the great test… And the great test, I mentioned RBC earlier.

So one of the things that’s marvelous about the folks up at RBC is the stereotypical Canadian is very nice and polite, and they are, but they’re also… No bullshit. In other words, if somebody is not up to snuff, you’re gonna get the call and you’re gonna be told that this person is not up to snuff, and so there was a week-long presentation series that one of my senior guys was supposed to do, and he got ill, so I got a call from the president of RBC Asset Management. Now, this is several years into Patrick working with OSA, and he goes, I think it’s time for you to send Patrick up here. And I’m like, Okay, knowing that that could be a very high-risk endeavor because they’re very, very high standards at RBC.

I was on pins and needles. I did not call Patrick or bug him, I left him alone. And the senior guy was traveling with, and I didn’t speak for the whole week, was killing me, but I kept silent sitting Indian-style and… No question, no question.

And so anyway, finally when Patrick got back, I was like, Well, so how to go? And Patrick looked at me, he goes, I think it went well.

I’m like…

FR: Okay, you’ll find out quickly.

JOS: I will… And so I called the folks up at RBC and the head of asset management said, I have two things to tell you a gym, we thought he knocked the ball out of the park, and secondly, and this is not meant as an insult to you, but we want you to know how Ile think of him. We think when he matures and is that his best… He’s gonna be better than you at this. And to me, that was like, That’s the best thing you can hear… Exactly. It was music to my ears. Concurrent with this going on, I was the Chairman of the Chamber of Music Society of Lincoln Center.

We had had a situation where we had the same chairman for a long, long time.

I loved chamber music, I love Lincoln Center. But when asked whether I would succeed him, I was not reticent. But I said, Okay, I will, but I have two conditions.

The first is, we have to have a succession plan in place before you announced that I’m the new chair, and the second thing is it’s gotta be a woman, because after all, Alice Tully was the first chair and the last female chair, which to me was absurd, and I said, Oh, and final thing, I’m terminating myself, because If I can’t accomplish in the next five to six years what you want me to accomplish, I failed, and you’ll wanna replace me. And so everyone agreed, and we explained to the community to our funders, to the musicians, to everyone who had a stake in the outcome of CMS remaining sort of the global leader in chamber music, everyone thought that that was a great plan, and it led to other conversations with colleagues of mine, both at OSM, but also on the board of CMS, and one fellow was a very high ranking executive at a Fortune 500 company, and he was saying to me, man, if we would only do that, if we would only have that kind of clarity around, who is going to succeed? whom and why? That would be a great help.

So at that time, I started thinking about Patrick as the next CEO, and I tested that with my president, who has been with me since 1997. I tested that with another colleague, my director of sales, who has been with me since 1997, obviously long tenured, I respect the hell out of both of these guys, talked to my head trader, She was like, “Duh!”, but I really solicited their opinions, honestly, with that back pocket information that I got from a highly reliable resource in RBC, it was agreed that I was going to accelerate naming Patrick CEO to January of 2018.

FR: You had it easy!

JOS: I did, I really did because another one of my core attributes is that I’m really lazy.

FR: Quick question, did you take the idea to a kitchen cabinet sort of outside the business world, you lawyers or friends who were entrepreneurs and things like that…

JOS: Yes, yes, I did. Two friends and lawyers in particular, but the lawyers I brought it to were good friends and had been for a long time, wide experience, and he seen lots of in so many of these things gets screwed up, and so when we decided to accelerate his position as being elevated to CEO. We also decided that for the first six months, even though he was gonna be the CEO in name, I was still gonna be shadowing him, if you will, and Patrick and I are very, very lucky in that in addition to loving one another, we are very similar in our outlooks for how to run a business, how to treat people, you had mentioned you were kind enough to send some questions in advance, which we’ve only covered a few, which I love by the way, ’cause I’m really good extemporaneous, and when you want to script me, I’m like “GRRRRRR”

FR: Let it flow, man, because that’s where the insight comes out.

So anyway, one of the things that really was something that I passionately believe in and have all my life is I love young minds, and that isn’t meant as any kind of discriminatory statement against guys like me or 60… ’cause I think I’ve got a pretty good mind too, but if you know history, if you know when mathematical breakthroughs were made, if you know when physics and physical things were made apparent… One of the things that you just can’t get away from is that for the most part, these people had their best ideas when they were… Let’s call it under 45. and the enthusiasm, as well as the idea of… We had lived through a paradigm shift, so as you mentioned, I’m 60, I was an early adopter. I had one of the first membership IDs that CompuServe… I had the much covenant two-digit was like 74113, most have had three or four digits, I had two and that showed up, I was like one of the first guys, but their generation were true natives of this new digital environment, it’s hard to translate that into… Perfect examples. But it’s kind of like the fish who doesn’t understand water, because he lived in water all of his life, and he doesn’t have to say, Oh, what is this object? Dad, I don’t understand it. It’s part of them. And so the technology, the ability to manipulate code, all of those things were things that came very naturally to younger people, now I have senior people were working for me in their 50s and they do great jobs, so we’re not discriminating on age here. I don’t want anyone to get that impression ’cause I’ve had for me, I guess, but the point is, I want it to maximize the potential for Patrick to be able to do really interesting and business-changing things sooner rather than later.

FR: What happens when the two of you disagree? It must happen. And have you disagreed on any major strategic issues, or is it something where the two of you think so similarly, in many ways, you kind of arrive at the same decision at the same time, and it works, but I am interested in how the two of you resolve conflict to the extent it ever exist…

JOS: Sure, so very low conflict relationship between Patrick and myself, primarily because that’s the way I raised him and people would say, Hey, your kids all turned out great. What do you do? And I said, my wife and I talked about it at length, and we came up with a single line, the single line is, we want to raise great adults, and if you wanna raise great adults, that precludes all sorts of behaviors that parents engage in all the time, it precludes me saying, Because I’m your father, and I said So, it precludes me from saying, because you live under my house and my rules, it encourages Patrick, I want… It comes to me, I wanna do this. I think you shouldn’t do that. Give me some reasons, if the reasons aren’t good enough, I would say go back and think of some more, and he would come back and have a very well-reasoned argument at a very young age, so that kind of worked into the way we deal with one another, now, so we have different skill sets, were very symbolic in terms of vision, where we see things going, we couldn’t agree more closely on that in a little more theoretical than Patrick is.

One of the things I’ve been working on right now is, I’ve always said that markets are complex adaptive systems with feedback loops, the reason they work so well is that for the most part, they are heterogeneous, in other words, people have different opinions, you might sell me apple and I’m buying Apple, but we could both be right, you could be selling it for a reason… That makes sense. I could be buying it for a reason that makes sense, Mark, it’s clear that way, and price is discovered, however, during certain periods in the market, usually in kind of a black swan type way or a bubble or a bus, what happens or information cascades take over.

We as human beings are very mimetic creatures, in other words, we copy other people, and we could do a three-hour podcast on my thoughts on that, I’ve been studying it like mad, forever.

Suffice it to say, we’re very mimetic when information cascades happen, they cause people to become very homogeneous about their ideas, we all have the same… All thinking the same thing.

So it’s been one of my goals to look for a quantitative signal, the place I think I’m gonna find it is in these massive data sets that we’ve been retaining from social media, from news from a variety of sources, and we’re not trying to predict a black one by the way, because by its very definition, you can’t predict a black swan, all we’re looking for is confirmation that one has occurred, so this is a much more complex topic than you might think it is at first blush, and I love thinking about things like that.

I love thinking about, Oh, if I had my way… What would I have… Well, I would have quantitative confirmations of these black ones because in my DNA, I’m such a quant, for example, during the real estate bubble, I would still a very stern… I was wanting to repair starts telling anyone to listen to me… Short your house. Short your house. But because I was such a quant and because I only invest in things that I offered to the public, I didn’t do anything about it. Patrick is extremely good at the very practical aspects of A, B and C, he’s very good at looking at understanding total addressable markets. The point being, we complement one another quite well, because when we’re looking at, say, I mentioned that once family partners has done venture investing since 07, A lot of those deals were sourced by Patrick, but then it was me doing the deep dive and asking the types of questions that might not naturally occur to Patrick, so I think that we’re incredibly symbolic, we have never had a major disagreement on minor disagreements, it depends on who it means more to… To be really honest, if I have a minor disagreement with Patrick, but he feels very passionately about something, and Patrick wins because he feels strongly about it, he expresses himself quite clearly and well to me, vice versa. So if we’re in something where we’re changing a model or whatever, one of the only things that I will never allow as the chairman and founder is we will never emotionally override any of our models ever. And I have a near 30-year track record of that. And we had a guy come from the old Leman brothers who were… He was a consultant, and he was a consultant to Quan as IT managers, and he told us, and this was in 09, that fully 64% of the quant managers he covered overrode their models emotionally.

FR: That’s not quant anymore.

JOS: No, exactly, exactly right. What I said was, they have no track record, all of their previous track record was negated because the only way they got that past track record was having the emotional fortitude to… Again, behavioral biases.

So I wrote a funny thing for a friend of mine, it was like… He was writing about behavioral biases, and it was like the question was, what is your biggest behavioral biased? And he did this for a lot of people, What is your biggest behavior bias and how do you solve it? And I wrote, my biggest behavioral bias is being a human being, I saw it by being a quant…

FR: Let me steer you in one direction here, ’cause I don’t wanna keep you from dinner, it’s actually it’s getting later than we thought, but… I appreciate it.

JOS: Well, this is fine.

FR: This is fun. I could talk to you for probably three hours- torrents of wisdom. Your wife and daughters, how did they witness all of this and were there any issues… Everything you described, it’s actually couldn’t go any smoother, frankly, but issues with your daughters and the path that they took? And your wife, you’re communicating with her as to the direction of the company and involving one child maybe at the exclusion of the other two, were there patterns of unfairness that you were worried about? How did you broach that with everybody from a communication standpoint?

JOS I was very explicit with my daughters when I asked them the question, Are you interested in working for OSA, because if you are, you can… But here’s the process that you’re gonna be put under just like your brother, and you might get mad at me because the people who are telling me what they think of you might not think are the best… I don’t know, I think you are, but I’m your dad. And I was very blessed with the good fortune of having two daughters who had zero interest in asset management, my middle daughter cake has just published a marvelous middle grade fiction book, which is doing very, very well. She’s an author, already has a two-book deal, it looks like she’s going to be very successful in her chosen career.

My youngest daughter, Lal, is a stand-up comedian, which I love. Because boy, if I want to know any of my shortcomings, she wants brings them out to me, but we also… When we formed OSAM family partners, each of the children have an equal stake in OSAM family partners, so none of them feel left out if Patrick succeeds wildly as CEO and ultimately when I’m shuffled off this mortal coil as Chair and running the place.

They will have benefited from that almost as equally with Patrick himself, he’s gonna do a little bit better obviously because he will potentially own a little more the securities or the private securities, but both of my daughters and my wife were like, You mean… “Okay, so we are equal partners in OSAM? . Family partners?” Yes, you are.

“So that means we benefit, if we get this great investment, we are Pari Passu?”…

And they were fantastic.

“This is great, we’re not interested, thank you for offering the opportunity to us, but we’re just not interested.”

My wife actually worked with me for many years in the first iteration of OSAM capital management, I have never taken a major decision without an in-depth discussion with her about it. I’m very lucky, she edited all my books, graduated Summa Cum Laude in journalism, and is an enormously talented person… She has her own book coming out of New York street photography, so she is a Professional Street photographer in New York City. Aperture, which is considered probably one of the best publishers for that genre, is publishing the book.

So we have this happy coincidence where we all had really different interests, except for Patrick and me, which we had the deep interest in investing, but I love art, I’m an art collector, so I love looking and helping my wife with selecting photos that are gonna go into the book or not, she… So this is my opinion, just a way, the same way I solicit her opinion on things that we’re doing as a sanity check, if nothing else, and so we have been extraordinarily blessed.

FR: Just to sort of push in the level of communication that you have with your family, it strikes me as something, it’s many notches above what I hear on a frequent basis with many families, and so I would put that down as one of the main sources of your success in communicating and sort of transmitting the values that you wanted to and creating those decision-making processes to push not only your company forward… But your family forward now.

JOS: I feel good about that, it’s something that I think is much more rare than you would think, and I’m sure we both have many cautionary tales that are around us on that front, where people don’t… Or financial conditions are hidden, or what people wanna do is hidden, and they’re not encouraged to sort of strike out on their own.

FR: The part I would sort of score for a lot of my listeners is that the importance of communication, how you do it, how you build the honesty around the process by which decisions are made and by Which life events are sort of brought to the floor. That’s huge, because if you have that, if it goes on communicated, that’s where the baggage starts piling up, and that’s where it leads to conflict, and conflict leads to, in my opinion, the expensive awful word litigation, where people try to resolve bruised feelings, either through money or elsewhere, it’s just a difficult stop.

JOS: I could not agree more and I… Again, listen, Frazer, I won the cosmic lottery because I have had the wonderful good fortune of not only having these three great kids, I love all three of my in-laws or soon to be in-laws, and we were talking about it, I was with Patrick for dinner the other night, and we were kinda looking at each other and we both kind of said, Do you realize how rare this is, and I do think, Look, maybe it’s ’cause we’re Irish… I don’t know, we don’t have a hard time having hard conversations, and we don’t have a hard time being very honest in a way that never, ever strays into, I’m going to make my love for you, conditional, I’m going to make the money you might receive from me conditional, I took all of that out of my hands when I did OSAM family partners, and I did it intentionally because I had seen as people on… No doubt, you’ve worked with and seen… I had seen so many parents using money as a weapon and using other tactics to get compliance.

Look, I don’t have a political home, because if you went through all of my politics, you’d say you’re left winger, then you heard the economic ones, you’re all right wing or what I am is fiercely anti-authoritarian, and I’ve read the dial all my life, the day Jen and I read the Stoics, and they really formed my character, and so if you understand ahead of time, Oh, that might be a problem if you try to use money as a weapon. Oh, that might be a big problem if you withhold love and make it conditional. So we were just very, very lucky to have our kids turn out like that as Well, look, we encourage each other endlessly, I can’t wait for… My wife is like, “you’re gonna be the best salesman for my book ever, and you just not do it quite yet”, and same with my daughter and my other daughter who is doing so well in stand-up comedy and Patrick, it’s… Again, I think your insight is the takeaway here though, I think if you wanna learn anything from this, learn that real honest communication in an ongoing manner solves a lot of problems before they can even occur, and that’s one of the things that we found works very very well, that’s the way we run the company. It’s the way we deal with our colleagues, we have a fairly diversified group of members, it’s an LLC, so we don’t call them shareholders are called members in our senior ranks, everyone is a principal member, and so we’re trying to understand the best way to do these great things and have a lot of fun.

That’s important too, but also do well for our clients. At the end of the day, one of the nicest compliments I ever got in my life was when I was up in Canada. And I gave a speech to a big group and it was a client, so it was customers of the bank, and two people came up to me afterwards once said… I just wanted to say to you, You bought my cottage, they called cabins attitudes up there, and another one said, my kids went through school at McGill, no debt, because we were invested with you. You can make a huge difference in people’s life. Does that mean you’re always gonna do well now, you’ve gotta take the times when you’re gonna do very poorly and get them to understand, yeah, we’re under-performing. Here is why again, don’t hide. One other rule we had for everyone or OSAM is you don’t have to talk endlessly to clients when we’re doing really, really well, you must talk endlessly to clients if we’re doing really, really poorly, and back to communication, this is not rocket science, and yet it has certainly put us in a good place in the world…

FR: Well, let’s tie it up there, I’ve diverted you from the evening here, one last fun question, three people living or dead, who do you have to dinner? And where would you like to have dinner with?

JOS: Those three, I would love to have dinner at my favorite restaurant in New York that is no longer open, Gotham Bar and Grill, and I would like to have Richard firemen, one of my heroes who worked on the Manhattan Project was an unbelievable character. He was the guy who figured out the Challenger why it exploded and did so quite simply by taking the O-ring material and putting it in ice and it dissolved great showman, Walt Whitman, the poet Madman, but visionary in terms of when he wrote… I wonder what he’d be today, I’d probably be a rapper! and ClaudeShannon, who’s finally getting some attention from people… Without ClaudeShannon, we’re not doing this.

Without Claude Shannon, there are no iPhones. He’s the father of information theory, and he’s the guy who named it bit and bike, he’s also a Metis character. There’s a wonderful movie about him, I think on Amazon Prime Netflix called a “Bit Player”, and there’s a great book about him that I have up on Twitter, and I couldn’t believe that people didn’t know everything about Claude Shannon He invented the modern world, and yet people are just learning about them now, so those would be my three.

FR: That is a really interesting trifecta there, Jim, thank you very much for taking the time. Everyone on Twitter learns a lot from you, and hopefully my listeners are going to learn a little bit about what makes your successful business tick and some of the lessons really in communication, because I think you’ve done a lot there that I think a lot of people could take from… So appreciate it, and thank you very much.

JOS: Thank you.

OUTRO.

Thank you for listening to this episode of Wealth Actually hosted by Frazer rice, author of the book, “Wealth Actually” and a leading private wealth manager.

Head on over to WEALTHACTUALLY.COM, or you can subscribe to this podcast. Get your own copy of the Wealth Actually book and connect with phrase directly. We’ll see you next time on “Wealth Actually”.