Alexa Binns 00:12
We are speaking with Chris Schelling, Director of private investments at Caprock. Caprock is a multifamily office with more than 8 billion assets under management with a focus on private market investments and impact investing. To date, Chris has met with over 4000 managers across hedge funds, real estate, private equity, you name it, and allocated roughly 7 billion. That’s all generating top tier returns. What’s especially interesting about Chris is he has a degree in psychology and business. And so he’s an expert at incorporating insights from behavioral finance into investment decision making. We’re very much looking forward to hearing your unique perspective. Thank you, Chris.

Chris Schelling 00:55
Well, thank you for the very kind introduction, looking forward to chatting.

Alexa Binns 01:01
Well, given that you have run the gamut investing across all these asset classes. What do you like about ventures in particular?

Chris Schelling 01:10
Well, I actually think it’s kind of similar to the things that I like about alternatives in general. So kind of like, my ethos, what I look for an alternative investment strategies, private equity, is kind of like this tip of the spear of like, creative destruction of capitalism, right. It’s like innovation. It’s like disrupting incumbents, you know, new things that actually have a reason to exist. And obviously, if you see, that’s, that’s what it is, I mean, it is the, you know, innovation kind of economy, it’s very focused on technology, and biotechnology and things like that, but you’re coming up with things that have a reason to exist, that are disrupting, you know, often legacy and compensate, maybe shouldn’t exist anymore. And so that’s probably what I would highlight is the thing that I like most about it, but it’s not completely different than, you know, hedge fund strategies that do things that are esoteric, and off the run and create value make unique markets more efficient. That’s what kind of gets me excited.

Alexa Binns 02:10
Is there anything you don’t like about venture?

Chris Schelling 02:15
Well, it’s longer than other private markets. I mean, that’s, you know, that increases risk. And that increases concern for clients that see it sitting there for longer and wish that they could have their money back. That’s probably one of the big downsides.

Earnest Sweat 02:31
Just taking a step back, what drew you to this role at Caprock.

Chris Schelling 02:39
So, you know, I spent almost 10 years in the institutional world, which is where those big numbers came from. And there was a lot of great stuff from that. I mean, you did good things, you worked with good people, you helped solve societal problems. But there was a scale that was kind of necessary to participate in like alternatives, the way that like my experience led me to so it’s something that I wanted to, to kind of find in the wealth channel. There’s lots of trends in individual investing. And you know, the rise of the independent adviser, generational transition of wealth, just the growth of alternatives. So that was like, big things that I wanted to be a part of. But I’ve experienced where you’re subscale as a firm, and it’s harder to deploy. And, frankly, Caprock, being in private markets for the better part of, you know, 1819 years, that are big adopters of it like it’s, it’s, it’s at scale, because we’re eight and a half billion, and we got 3 billion in nav and private markets, but clients, advisors, they’re just used to it. And so while I like talking about it, and sort of, you know, being an advocate for private markets, I didn’t want to have to be in a position where I was trying to convert non believers, but I was rather preaching to the choir. And so I think Caprock has all these tailwinds for success and have a really great position kind of in the market where with the right clients, kind of this, you know, we’re multifamily office, but we target kind of, you know, $20 to $50 million clients that I think are the most underserved, and that can benefit from aggregated scale, kind of with disaggregated portfolios, if that makes sense.

Earnest Sweat 04:25
Curious on just like the family, you know, multifamily offices, and the composition. Historically, kind of what kind of demographics all in the US all in one region, just curious to give us detail on that. Yeah, I

Chris Schelling 04:42
mean, predominantly we think about our clients as like you said that kind of $30 to $50, but obviously bigger and some smaller. They’re generally first generation wealth creators. They may actually have a family office set up and some of our clients are legitimate Family Offices. Some are just families that are big enough that they have complicated balance sheets. So they’ll have multiple states, multiple trusts, multiple different LLCs. Oftentimes their GPS themselves. So we have a good amount of clients from that demographic. We have clients from the entertainment industry, athletes, some corporate executives, and so we can actually help them to manage concentrated stock positions. And we’re in I think, the right markets. I mean, Austin is where I’m located. It’s a great place to be, but we have offices in Newport Beach, Seattle, Boise, Park City, San Jose, New York City and are looking at other kinds of similar markets.

Alexa Binns 05:42
What’s the advice to allocators? Maybe we’ve got high net worth individuals listening on how to appropriately participate in alts. It’s such a shiny, shiny, sexy object. And on the flip side, you could say, it takes a lot of time. You know, you’re paying managers, maybe just set it and forget it. And yeah, yeah, if you’re thinking about your own personal wealth.

Chris Schelling 06:17
So I think, you know, the argument for allocating to a private markets, let’s just stay with that as that alternatives is that you should be earning and access to public markets period, we talked about, you know, venture locking up your capital for longer periods, while you should be doing that, for 3x 5x, you know, returns in excess of what you can get from public stocks. So that’s the reason and I think the evidence is pretty compelling that you can, but you definitely need to be able to do it well, because then you shouldn’t do it at all. So you know, the long term trends are real clear institutions have done more and more of it, like endowments, foundations, pensions, etc. Even the big scale family offices, like, you know, Milken, EMCOM, ascade, will it, they’re run like an asset management firm with half of their money in private markets. And because they’re earning excess returns there. So my advice to like individuals thinking about shiny alternatives is, if you can’t do it, right, don’t do it. That’s a totally reasonable conclusion. Stay liquid, stay simple. But if you can find an advisor or a partner that’s got demonstrated experience, competency, and consistent excess returns, that they can generate, that’s a very attractive addition to your portfolio. I mean, I have an outsize position of my liquid net worth invested in private markets very close to all of it.

Earnest Sweat 07:40
Same here, I really love your point that if you’re not going to do it, right, you shouldn’t do it. And it reminds me of data that escapes me where it came from, but seeing just all the private asset classes, and they’re kind of standard deviation of where the ranges of where they landed. And you’ll see like private equity is a little bit more bracketed. And then real estate was here, and then Publics and then venture would just be off the screen right on where it was. So like, I think you’re totally right on that. Now, when people have ideas like, what they kind of want to invest in, or maybe they’ve read up on some things, or seen some articles, does it change and how do you all advise those families?

Chris Schelling 08:26
So I’d see yes, and no, like, I’m going to be a little controversial here. Like, there’s the, you know, when you’ve seen one family office, you’ve seen one family office, and that’s kind of true, but the flip side is like, we’re not all snowflakes, like, I’m not that special. Everyone’s dealing with the same things, right? You have the same set of challenges. It’s like you need income, you need capital appreciation, you have taxes, you have multi generations, you have different pools of capital, you have liquidity constraints, risk constraints. And so to a certain extent, there’s like, five, six levers where you make all those Levers is a unique point, but like they’re all the same levers, everyone’s dealing with the same problems. And so I think the benefit of a multifamily office is that you have the scale to kind of solve for those different levers but then you can give those tools to clients. That’s really the pitch. It’s like okay, let us help you understand these big important things translate, you know, real world goals to investment objectives and then go deploy that portfolio in a consistent and repeatable manner any

Alexa Binns 09:33
considerations for managers who are looking to work with multifamily offices?

Chris Schelling 09:47
I’ll then I’ll speak out the other side of my mouth, I will say, you know, multifamily offices are not also one thing and I mean, it’s really a spectrum you’ve got, you know, sort of mass affluent RAS you have wealth managers High Net Worth ultra high net worth As multifamily office, where you fall kind of. I mean, it’s determined by the type of clients that you have and the service you have and the resources you deploy towards private markets. For GPS wanting to work with us in particular, I mean, we have an open door policy, like we try to look at everything, we have to be prudent with our limited investment team resources. So we can’t meet with everybody. But I mean, I’m getting, you know, 50, probably inbound emails a day trying to look at as many decks as I can and take, you know, 200 meetings to 250 meetings annually. So we’re in the market, we’re looking at everything. We don’t have time to respond with a real fulsome reply to everyone if you’re not a fit. And so don’t expect that, but you know, try to do some homework ahead of time and figure out what the clients look like? You know, where do you fit in? What’s the portfolio kind of deployed into? Yeah, so do some homework, I would say ahead of time, and then they’re not all the same. Some people have, you know, a lot of line items and concentrated portfolios we invest out of fund to funds will invest directly on the balance sheet. Everyone’s got kind of a slightly different implementation model. Have

Earnest Sweat 11:17
you ever gotten a lead of a fund manager from one of your clients,

Chris Schelling 11:22
We have GPS for our clients, so in a lot of cases, we will have met the GP, we will have underwritten them invested into their fund. And then over time, they’ll come to see kind of the level of work that we do and our other services, and then they’ll become a client. And so yeah, we have a lot of inbound references from existing relationships. I mean, if I were to just say sourcing, there’s really like three legs to that stool, there’s just unsolicited, inbound, high volume, honestly, low quality, right, then there’s referrals and referrals are medium volume, kind of medium quality. And then there’s probably the best, which are targeted outbound or direct relationships where we already know that we’ve invested or it’s another investor that we know really well, that says, like, all these guys are the best, like we’re exchanging notes, you need an intro, I’m happy to make an intro. Those are lower volume, but generally very high quality,

Alexa Binns 12:18
it would be remiss not to get to ask you about behavioral finance. We’ve written a ton on this topic. It’s hard to even pick there’s so many interesting arguments you’ve made. But when you think about where we’re headed into right now, 2024 Are there any things top of mind from you, your thought leadership on behavioral finance?

Chris Schelling 12:44
So behavioral finance, it’s, it’s super important. Honestly, market behavior is Participant behavior, which is just people like we can, we kind of apply this overly quantitative lens to a lot of stuff in finance, a lot of it’s driven from physical science, which is, you know, physics, which is chemistry, right, where things are fixed relationships, and they hold all the time. That’s not the case, in finance, which we see in the data, like you’ll see relationships that are lead and lag, and they might flip sometimes. And so something that was a leading indicator no longer leads, it begins to trail relationships between variables change, because the market learns and adapts. Professor Lowe wrote a book called adaptive market hypothesis. And I find, I mean, George Soros calls it reflexivity, which is just a different word, but it’s that the market learns and adapts. And some things become self fulfilling prophecies. So I think like, that’s a huge insight to gain on how markets work is that things aren’t always fixed. You just deal with tendencies. So you learn to stop making projections, and you start thinking in ranges and like what’s likely to happen? Well, maybe it won’t. That could have just been a random draw. Or maybe you were wrong. But you have to start thinking through things in probabilities. So I think there’s a lot of applications to that for manager due diligence, which is really where, like, I’ve spent a lot of my time understanding how to expect or set expectations around GP behavior. And then there’s just market behavior, which I’ve come to realize, like I have no particular insights in understanding that JP Morgan, James Pierpont Morgan duck, JP Morgan, like one of his best quotes, he’s asked, What do you think the market is going to do? And he says, markets fluctuate. And I kind of think like, that’s, that’s kind of where we’re at, right? You should have a core strategic allocation in public markets and you should have a core strategic allocation and private markets, you can maybe be, you know, opportunistic, around the edges, but in VC and PE and private credit, like you should just be deploying, I mean, if I were to put on my macro hat again, speak out the other side of my mouth. I think right now it’s probably a decent time to be looking at private credit, right because you’ve got spreads relatively wide your base rates have moved up substantially, maybe off the highs a little bit. But you’re still talking about, you know, Sofer plus five and a quarter, which is a lot more than it was just a few years ago. And the flip side is, you know, equity valuations in private markets have come down, VC valuations have come down. And so if you’re lending into those companies, you’re doing it at a higher rate on lower valuations, right? Higher, higher yields lower LTVs. So I think new money is put into private credit and a whole bunch of strategies like direct lending, I mean, you’ve got venture debt, you’ve got special situations, specialty finance, all kinds of things. So we’re spending some time on that right now. I think that’s a big opportunity,

Earnest Sweat 15:39
Chris, that the concepts of behavioral finance, first of all, are very sobering. And it makes a lot of sense. And make this job as an allocator, or a fund manager, both exciting and frustrating, too. But with your kind of behavioral finance hat on, what does that say to you? Like, how does that guide your, you know, due diligence on fund managers? And what does that say to pattern recognition?

Chris Schelling 16:17
Yeah, it’s back to its back to tendencies, right probabilities, statistics, what we do is probabilistic, there’s no future facts. It’s trying to set a realistic set of expectations. I had a friend once tell me, success in manager selection is ensuring that outcomes meet expectations, which Okay, kind of seems maybe trite, but it’s a little bit more profound. If you start thinking about it. There’s two elements to that : there’s the outcome, but they’re setting your expectations. And so if they don’t meet each other, either the manager didn’t do what he was supposed to do, or you set expectations wrong. So I think one of the first things is, alright, what do we have a tendency to do, we overestimate good things, we underestimate bad things. We’re optimistic you can look at this. across everything in finance, you can see people underestimate drawdown risk, people overestimate earnings expectations, CEOs overestimate revenue growth. In pension land, which is where I come from, returns are overestimated actuarial payroll growth is overestimated. How soon employees will retire is underestimated. they retire sooner and how long they live mortality that’s generally underestimated. So all the expenses are underestimated. All the pros are or return streams are overestimated. So like, that’s the first thing that you should realize, which just then means be conservative in how you underwrite. So I like looking at, just use a VC firm that’s fun to write fund one was 3x, pre fund track record was also 3x. Like just assume less, right? Like, it sounds kind of simple. They’ll meet your cost of capital, and you have a good chance of them actually beating that going forward. So I think that’s one of the first things: just be very conservative, build in margins of safety everywhere, and realize that you have biases, I mean, there’s, there are innumerable biases, and we can walk through them all. But they’ve been, you know, written to death. Just being aware of them, doesn’t like offsetting them. So you have to take intentional acts to kind of mitigate them. And check yourself to be rigorously and intellectually honest. One of my favorite colleagues was a person I worked with at a pension who’s consistently been the one individual to point out where I’m wrong. And he’s always been right. So it’s like, I love that I love when someone says, Hey, I think you got this math wrong, or your spreadsheet isn’t working, right? Because I want to catch the mistakes. So I think I’ve tried to do that consistently. And I would advise people, like, just be aware of all your blind spots, and that effort of trying to overcome them, not going to be perfect, but it will, like improve your results.

Earnest Sweat 18:55
Now we’re gonna take a quick break to speak with our sponsor.

Alexa Binns 18:59
On the show today, we have industry expert and sponsor Martin Armstrong, founder of Armstrong International, the global executive search firm specializing in financial services. Thank you, Martin, for partnering on the show. With your incredible network, you also connect great managers with limited partners. What do you think about matching team talent to capital?

Martin Armstrong 19:23
That’s what I think is the most important thing? You know, I think it’s everything. And you know, I think it obviously depends upon the capital. You know, if I was looking at venture, one of the things that I find a lot within venture companies is that there’s not a there’s not enough focus spent upon the quality of the management team, you know, and if you think about any startup or any growth business, you’re talking about, you know, 100 or 200 decisions a month, you know, that somebody’s making on the fly all the time. And money’s, you know, money’s going Behind those decisions and those judgments, so it would help to have people, you know, making those decisions, who you really have done your homework on. And, you know, sometimes I talk to investors, and they seem to be too focused on the idea and not focused enough on the management team. You know, I think that that’s something that we try to encourage our clients to do is to really, really think about what the qualities are that they want for this particular business, and whether the people who are in that business have those qualities.

Alexa Binns 20:35
Oh, that’s fascinating. There are definitely parallels when, when we’re vetting individual companies as well, that I think a lot of people are obsessed with product, and haven’t really ironed out their ops, and they’re just not frankly suited to be a particularly successful business person, even though they are building something quite exceptional. Yeah, that’s interesting. Yeah,

Martin Armstrong 20:56
I think so. And the other thing I would say is that in a lot of a lot of startups that we come across, there’s a creative person. And there’s a, there’s a, there’s an organized person, right. So, you know, if you take something like Airbnb, you had, you know, a creative guy, and you had an organized finance guy. And we see that a lot. And when there’s a problem, very often, the venture firm fires the creative person, because they’re not speaking the same language that the finance or or business person is speaking. And very often, it’s the creative person who’s who’s coming up with the angles to make the business more, take it to create opportunities for the business. So, again, you know, when we talk to LPs and VCs, we’re trying to tell them to think more deeply about what qualities both parties or all parties are bringing to the table. And you know, what it is you want from those people in terms of delivering the strategy, the strategy that you’re investing in.

Alexa Binns 21:56
And, and from, from your bird’s eye view, anything else that you think would be helpful for this audience to hear or better understand?

Martin Armstrong 22:07
Listen, I care about one thing, and one thing only, it’s the meaning of my life is talent, okay, I’m interested in who is talented, and who is not talented, and how talent can be brought to bear to deliver exceptional returns, that’s what I’m into. And that’s all I care about. And I find that when I come across people who care about that, too, they end up making a lot of money. And, but there are too many people in the investment business, who don’t care deeply enough about talent. And that is, you know, that is really how I feel. And I would like to get to a place where, you know, people recognize the power of the human condition, and how, what it can deliver, you know, humanity is a river. And, you know, society has moved by that river. And it’s an incredible thing. And the finance world has the ability to fund and support that river in a way that is going to change the world. And that’s what I love about talent. And that’s what I hope happens in the future. Thank

Alexa Binns 24:30
Martin, you are such a wealth of knowledge and super connector in that ecosystem. Thank you. For folks who are interested in getting in touch with Armstrong International. Feel free to email QB at ArmstrongInt.com. And now back to our LP interview.

Earnest Sweat 27:25
You’ve joined the advisory board and your advisory board member of the Alternative Investment Management Association, which is an organization that has such a value is such a valuable advocate for VCs and allocators alike. I’m just curious what inspired you to get involved in that organization.

Chris Schelling 27:44
Now, I was actually fortunate to be invited to the global advice, investor board by adven Galperin, who’s the chairman of the board, he’s also the CEO of PSP, public sector, pension Canada. Edward read my book, and actually reached out to me and said, You know, I’d love to have you participate, and we’d love to have your kind of insights on this board. So yeah, I was excited about joining, if you look at the composition of the board, they’re sort of, you know, one of these things is not like the others. And there’s, there’s people like Edward and there’s people from Temasek and GIC, and ADIA, and, you know, see PIB and massive state plans that are allocating massive amounts of dollars. And so what I get from it is I’m able to hear the insights of some of the biggest invest allocators across alternatives globally, and, you know, hopefully contribute a little bit of value to my own. I think it’s interesting. Aima is really, you know, an advocate for, like you said VCs, GPS, hedge funds, private equity people, and what good is there is to help ensure that the kind of LP perspective is incorporated to what they do. And so I definitely want to be an LP advocate. I’m active in the kya Association, which is purely LP focused, and it’s a very strong advocate for investor rights. I think by being involved in AMA, I can kind of bring that perspective to the GPS, who then of course, go advocate for their views to regulatory bodies and industry bodies. It’s such, but they can at least hear our inputs on those topics, what what are

Alexa Binns 29:26
some of those topics that the Board of AI is addressing for LPS?

Chris Schelling 29:31
I mean, it is everything the board meets monthly, and it is all over the calendar because we try to accommodate time zones from like I said, the Far East to San Francisco, and we will talk about just whatever kind of the topic, digital or private credit has been a recent one. A lot of the time it’s, you know, alignment of interest. It’s the rise of private equity, secondaries and continuation vehicles are those things of those things in alignment of interest are they Conflict, are they a little bit of both? So we’ll talk about those types of topics. And it’s really one big conversation per month. So usually there’s a survey and then those results are presented to aim a leadership so that they can have the input of the leading global lps on how they think about designing things. So I find it to be super, I mean, super helpful, like you’re dealing with, literally some of the best alts allocators in the world. Chris,

Earnest Sweat 30:31
We have a number of our audience allocators whether they’re experienced or early in their career. Could you speak to why getting involved in these organizations, as well as networking with other allocators has been valuable in your career? Yeah,

Chris Schelling 30:49
I mean, it’s, it’s about learning, building your brand and building your network, what I’ve kind of come to realize is that there’s, we do a lot, but it’s distills down to three things, you connect ideas with ideas, you connect people with people, and then you connect people with ideas, right. And as I think you get more experienced in your career, what you start to do is connect people with ideas more, right, so not just necessarily people with people, which is kind of more like the sales job. And it’s explicit networking, or ideas with ideas, it’s, it’s always interesting to learn something else. And while there’s an application over here, but as you get more advanced in your career, what you want to do is find the right idea for the right people. And that’s how you can really bring a TON TON of value. So like Kaya, a big supporter of Kaya, I think they’ve done a great job educating investors and alternatives and again, being advocates for investor rights. But I’ve met a lot of great people through the Kaya. And it’s not just on the institutional side anymore, a lot of those people are moving like myself to the kind of wealth management multifamily office community. And they’re looking at the same things, right, they’re thinking about the same things. They’re literally investing in the same funds reading the same sets of docs and trying to figure out the same kind of problems. And so to the extent that many people out there have done and seen more than you don’t see more than me, I want to try to leverage that knowledge and would definitely encourage people to go participate in those types of communities. Chris,

Earnest Sweat 32:16
Is there the trend that you just mentioned, of the kind of family offices and multifamily offices becoming more and more institutionalized? Because they’re getting talent from the kind of institutional kind of old guard of employees? What do you see? Like? How is that going to impact private investments in venture in the next 10 years?

Chris Schelling 32:38
There’s the simple answers, there’s trillions of dollars, that’s going to come into the asset classes. And it’s going to be huge. What happened 20 years ago in hedge funds, and even PE is probably going to happen again. So institutions came into hedge funds. And, you know, they went from trillion dollars, three or $4 trillion. At the same time, like returns kind of went away to at least the classical sort of arbitrage hedge fund strategies, and only had to do is just look at, right, look at the spreads, you just had to look at the returns, you just look at the assets under management, it was very clear, massive pensions put trillions to work. And the landscape changed, competitive dynamics changed. Private, private markets are a little different in that they’re multiples the size of listed capital markets. Right. So there’s, there’s something like 4000 publicly traded companies, it’s, it’s it’s 55 trillion worth of capitalization and private markets, there’s, you know, US Census Bureau says there’s 7.7 million companies in the US with at least one employee, and there’s hundreds of 1000s with at least, you know, 10 million worth of revenue. And so you’ve got just a bigger and deeper pool that can absorb this capital, but the capital is going to come and it will have changed, I think one of the big changes is just this continued bifurcation of the markets, the bigger gonna get bigger. And you’re going to have a lot of small boutiques that keep spinning up a lot of funds, one, two and three. And so there’s an opportunity to find, you know, the new VC that was trained up at a prior shop has a track record, you can diligence, it knows what they’re doing is not a new team, right? A new firm may be coming together, but it’s not a new team. And that’s a place of the market that I like to participate in. I think where it’s gonna get hard for GPS is just kind of that No Man’s Land in between, you know, you’re just a generalist fan kind of trying to be a billion or on the PE side trying to be three 4 billion. That’s where you’re going to see and you’re seeing consolidation and people kind of deciding do we want to scale and become a platform with lots of products? Or do we want to kind of stay niche and remain that sort of boutique? You know, kind of artists and approach or artists of approach to investing.

Alexa Binns 34:55
And, and what’s what’s your argument so well, What’s behind your strategy of looking at those 123 bullets,

Chris Schelling 35:03
There’s not one size fits all, there’s reasons why both are winning. Again, I’ve been in the bigger allocator seat, and I had to cut 50 million minimum kinds of check sizes. And we had, you know, a billion dollar strategic kind of relationship with a big platform firm, because we were able to access a bunch and get a lot of work together at a really good cost of capital, that is a really attractive fee. So that’s why those platforms are winning. We may be a scaled provider, but we can still do $5 million checks, we can do $25 million dollar checks. And for certain managers, we can scale to 100 million dollar position sizes. So we have the flexibility to kind of participate where it makes sense. And I’d say when you want highest returns right back to that illiquidity premium, you find it generally in those newer managers, smaller managers niche, your strategies, funds, one, two, and three, I think the data is pretty clear about that. You still, you have to be able to pick, right, because, again, back to the dispersion of return, if you get it right, you can get it really white, if you can get it wrong, you get really wrong. But that in and of itself is evidence of return to superior decision making. And so that’s where I want to spend my time trying to make decisions.

Alexa Binns 36:17
Are some of those term negotiations from your life in the pension world coming in handy now?

Chris Schelling 36:24
Yes, and no, right? Some are inapplicable. Like I don’t have a $100 million hammer that I can hit them with right in the door and say, these are our terms. But absolutely, knowing what to look for understanding, you know, fee offsets and digging through the data and seeing, you know, what’s included in expenses that they can expense to the fund what’s not, and all sorts of those things? I would say we’re pretty rigorous on that. And I think GPS, you know, respect that respect and LP that’s not really a pushover, so. But you know, I’ve said this before internally, and like we start with finding the best managers first and then trying to get an attractive price, and then enter the market. You don’t want to focus on discounters first, because then you’re getting adverse selection bias.

Earnest Sweat 37:20
I assume from all of our discussions today, Chris, I’ll know your answer. But just curious, over this last kind of 10 years. And Ron, have you made any adjustments as your criteria for fund managers change?

Chris Schelling 37:36
What definitely changes? You know, one of my theories is that you have to be constantly learning, like I said, you have to be reflective and sort of, because the markets are adapting. And so I like to try to build a learning process around due diligence. What are other people doing that I could incorporate? what’s working, what’s not working, do pre mortems, and post mortems. So I’d say just the big picture in general is just harder, it’s gotten longer, right? DBQ doesn’t get shorter, right? Because everything that was added, is still in there. And then they put new stuff in. And so every year, it’s just getting longer and longer. I think that I’ve focused more on behavior and ways to sort of put data around it. You know, one of my early insights after meeting a lot of funds was that you just have a tendency to like people more after you meet him face to face. So you know, maybe 10 funds, you’re like, Oh, I like I kind of like that. And they’re smart. Oh, I kind of like, and then you walk away and you go, Wait a minute, it’s maybe not a pattern, there’s probably a pattern here. And so what can I do to put in place to kind of offset that, that bias? And it was like, alright, ways to quantify behavior, ways to quantify decision making, ways to quantify aptitude and things like that. So, yeah, there’s some tools that I think I’ve put in and learned over time that helped to do that. And, yeah, we’ll continue to kind of beef it up. Because that’s the whole name of the game. I had a GP who says, I have to get better faster than the market gets more competitive. And I kind of think that that’s my job to just be on the other side of the table.

Alexa Binns 39:09
And anything else, we should ask you what you were thinking, Oh, this audience, this is something that would be fun to share with them.

Chris Schelling 39:16
Fun to share, boy, I don’t know.

Earnest Sweat 39:19
Or depressing the share? Well, maybe.

Chris Schelling 39:21
Okay, so here’s a fun fact. I guess I started. My undergrad was in behavioral psychology. I wanted to go into law enforcement, right and started my career as a private security officer and actually a private, registered private detective in the state of Illinois, not a private investigator. Pis can carry guns, that’s a much more rigorous process. But I was a private, a private detective. And part of what I did was to serve documents to people who had cup court cases, just to find them. And you had to actually affirmatively identify that it was you know, Joe, hey, Joe. Okay, here, here’s your doc. And once you did that you could collect a $6 fee. And this was a long time ago. If you didn’t, you couldn’t, you didn’t get paid. So I was out there being what I thought was really, you know, really disciplined, really committed to doing a good job. And half the time they say, Oh, I’m not Joe, I’m Bill and you’re like, Okay, come on, man. But, okay, I can’t count it as a SERP. After doing this and beating my head against a brick wall for, you know, a couple of weeks and like, how do you make any money and, you know, take a gas and 12 hours a day, I mean, 18 bucks. I talked to the guy at the firm who was cranking out like, 20 a day, I’m like, Alright, learn, right, he’s doing a better job. Turns out, he didn’t do anything. He just went to the first address on the thing and just threw it on the ground. He was done. So I’m like, Ah, incentives really matter. I get that perverse incentives can be a big problem. So yeah, I don’t know if it’s a fun fact, or a lesson learned. But you know, something that stuck with me?

40:59
Absolutely. No, who got served that day? Who knows whose young?

Chris Schelling 41:04
But I also learned like, you remember the show cops, right? Yeah. They’re always grabbing these guys. And they’re like, You got a warrant? Or you got this? And like, I didn’t know about that. And like, well, that’s why because nobody’s getting served. Like the only people that stay doing this job. They’re just throwing it in the garbage. And then they’re collecting their money. Yeah. So I opted out of that and said, Let’s go better. Let’s go find some of this better aligned.

Earnest Sweat 41:25
That’s amazing. It’s also I’m sure those skills of like, trying to find people it gives you like, you have to use that same skill.

Chris Schelling 41:34
There’s something yeah, there is a little skip tracing. There’s a little digging into people’s backgrounds.

Alexa Binns 41:42
Absolutely. Well, such a pleasure, Chris, thank you for spending so much time with us.

Chris Schelling 41:45
Now, thank you again for having me. Really enjoy the conversation, guys.

Earnest Sweat 41:48
Thanks, Chris.

Alexa Binns 41:51
See you later, Allocator!