Invest Like the Best with Patrick O'Shaughnessy
Graham Duncan - Talent Whisperer - [Invest Like the Best, EP.409]
Tue, 04 Feb 2025
My guest today is Graham Duncan. This conversation will make you think about your life in new ways. This is a two-hour segment of a 4.5-hour interview I did with Graham last year. It stands alone as remarkable, but those who subscribe to Colossus Review will gain access to the full conversation. This will be true in future issues, too. In 2006, in his early 30s, Graham convinced Stuart Miller, CEO of home construction company Lennar, to let him manage $50 million of his family's wealth. A year later, Miller gave him the rest of his capital outside of Lennar. That investment turned into East Rock, where Graham built an incredible investing track record managing billions for a select group of families by focusing on people. Our conversation explores a wide range of topics—from what makes a great investment partnership to the power of positive feedback loops to starting a restaurant. I’m thankful to Graham for showing me the way so many times and for being willing to be so incredibly open in this conversation. Please enjoy this discussion with Graham Duncan. Subscribe to Colossus Review. For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Ramp. Ramp’s mission is to help companies manage their spend in a way that reduces expenses and frees up time for teams to work on more valuable projects. Ramp is the fastest-growing FinTech company in history, and it’s backed by more of my favorite past guests (at least 16 of them!) than probably any other company I’m aware of. Go to Ramp.com/invest to sign up for free and get a $250 welcome bonus. – This episode is brought to you by Ridgeline. Ridgeline has built a complete, real-time, modern operating system for investment managers. It handles trading, portfolio management, compliance, customer reporting, and much more through an all-in-one real-time cloud platform. I think this platform will become the standard for investment managers, and if you run an investing firm, I highly recommend you find time to speak with them. Head to ridgelineapps.com to learn more about the platform. – This episode is brought to you by Alphasense. AlphaSense has completely transformed the research process with cutting-edge AI technology and a vast collection of top-tier, reliable business content. Imagine completing your research five to ten times faster with search that delivers the most relevant results, helping you make high-conviction decisions with confidence. Invest Like the Best listeners can get a free trial now at Alpha-Sense.com/Invest and experience firsthand how AlphaSense and Tegus help you make smarter decisions faster. ----- Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com). Show Notes: (00:00:00) Learn about Ramp, Ridgeline, & Alphasense (00:05:12) Intro to Graham (00:05:54) Launching Colossus Review (00:08:05) The Principal-Agent Dynamic (00:10:47) Navigating Financial Crises (00:13:22) The Right Grip in Investing (00:17:32) Seeding and Investment Strategies (00:21:37) Defining 'Commercial' and Its Implications (00:26:31) The Role of Laziness and Prolific Output (00:28:20) Finding the Right People and Positive Feedback Loops (00:37:21) Navigating Career Transitions and Motivations (00:43:05) Understanding Source Dynamics (00:50:07) Key Criteria for a Great CIO (00:59:43) Structuring Relationships with CIOs (01:03:40) Managing Ambiguity and Protecting Mental Clarity (01:15:09) The Importance of Source in Business (01:17:49) Designing Physical Spaces for Success (01:22:46) Launching a Restaurant: A Casting Exercise (01:30:17) Taking Over and Transforming Existing Ventures (01:33:08) Macro Investing and Adaptability (01:36:06) Hierarchy of Investment Mastery (01:44:10) The Art of Referencing (01:52:08) Formative Experiences and Personal Growth (02:00:12) Building a Business and Taking Risks (02:07:46) The Origin of East Rock
Chapter 1: What is the main theme of Graham Duncan's investment philosophy?
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Chapter 2: How did Graham Duncan's partnership with Stuart Miller evolve?
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Chapter 3: What is the Principal-Agent Dynamic in investing?
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Ridgeline has created a comprehensive cloud platform that handles everything in real time, from trading and portfolio management to compliance and client reporting. It's worth reaching out to Ridgeline to see what the experience can be like with a single platform. Visit RidgelineApps.com to schedule a demo. Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best.
This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com.
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Today's conversation is going to make you think about your life in a variety of new ways. You should listen to it in its entirety. I first met Graham Duncan in 2017 in the offices of East Rock Capital. We had lunch inside of his beautiful library. The food was insanely good. And I remember thinking this person is extraordinarily special.
I'd been a little bit nervous to meet him because his reputation was as the most discerning people picker on Wall Street. In the years since, I've been lucky to grow close to Graham, and there are not many people that have impacted my life and thinking more than he has. He's one of the most generous people I've encountered who has genuinely made me appreciate life in many new ways.
His profile on X reads, compulsively seeking new ways of seeing reality, and that is an understatement. Among the dozens of lessons he's taught me, one stands out as having been the most impactful. He phrases it as a question. What are you most compulsive about? Is it possible to put that at the center of your platform's activity?
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Chapter 4: How do you build effective investment partnerships?
So like if you had a quant guy whose family office needs a family office or wants to partner with somebody or put somebody in the business to run a family office, the underlying agent is going to need to be super mathematical, left hemisphere-y in order to have the principles map of reality overlap enough with the agents that when shit goes down,
it doesn't get wonky because inevitably something's going to go wrong. And it's those moments when it goes wrong that you either get shaken out and there's one family office that famously has gone through like 15 CIOs because of that getting the dynamic wrong.
In the early days, how would you describe that dynamic between you and Stuart personally? What matched? What fit?
Well, one thing was the time horizon. He just, from the beginning, had a very long time horizon. And then he's just a very skilled manager of people. I was listening to Randall Stepman, who was famously Jamie Dimon's coach. And he has this theme of they studied all the best leaders. And
They found there's this quality of the people working for the leader as feeling like the leader's rooting for them. I knew exactly what he meant because I could feel it. That's exactly the vibe Stuart had been giving me and eventually my second partner as well. That feeling of, yeah, I'm rooting for you. First and foremost, like, let's do this. In retrospect, it was kind of crazy, right? Because
I started it in 05, the initial vehicle, which was just a fund of hedge funds. And then Stuart gave me the rest of his capital outside of Lennar in early 2007. And then I convinced Adam Shapiro to leave Goldman. And we started this new venture. And we had exactly a year to do stuff before the great financial crisis hit. And so picture you're him. Stewart. And it's the beginning. 08 is happening.
And you have hired these two kids.
You're like 32 or something?
Yeah, exactly. And you know me pretty well, but not that well. And then all of a sudden, your stock goes down to like, I don't know, three bucks. So close to going bankrupt. And all of a sudden, all your money is with this kid that you don't know that well. Yeah.
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Chapter 5: What defines commercial talent in investment management?
What about on the traditional side? Is Dan a good example?
Yeah. So Dan Sondheim was leaving Viking. I interviewed over the years all these people that worked for Dan. And they were always in such awe of him as a portfolio manager. And I felt like it was them at the expert or professional level relating to him as a master is how I interpreted it at the time. I remember one guy saying Dan would be planning how to get in and get out of a stock business.
six months in advance of buying it. He was planning out the whole arc of, he was very focused on liquidity. And it was this mix of fundamentals and understanding market structure. We had a number of friends in common. And when he left, I feel like there's often within a hedge fund container, there's this dynamic where the founder of the hedge fund is pricing the up-and-comers each year.
And it partly is expressed in terms of how much carry are they going to have the subsequent year. And there've been a number of cases where I'm kind of tracking, did the founder of the thing hit the bid correctly this year or not? And if they didn't,
Opportunity.
And so there was this moment where Dan was ready to go do his own thing. He had enough of his own money. And I aspired to earn the right to a dialogue with him and help him in his hiring. Because we were in touch with so many analysts at any one time, I felt like I was able to calibrate on his taste in analysts and who would be at the right seniority and then help him with that hiring process.
And I think, forget of his initial, I don't know, I'm going to say I could get these numbers wrong. Of his initial 12, maybe four of them were from Patrick and me. And I got to know him very well during that process and saw how he had this very optimal grip. Like he has no defensiveness whatsoever.
If you tell him a new piece of information about him or a process or a person, there's like no ego in it. He'll just drop it with no hesitation. So there were a couple of cases where I gave him feedback on things and the way he took the view, I was like, oh my God, he was such a quiet ego. So focused on being commercial first and ego second. So we ended up being a day one investor in there.
It's had its ups and downs, but I continue to really believe in him as a commercial actor and as a leader of his firm as well.
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Chapter 6: How does one navigate career transitions in finance?
Can you define commercial? It's such an important term in our dialogue over the years. Why is that word so incredibly useful?
So the term originates, Adam used it at Goldman, other people at Goldman, I'd heard it from And it connotes all the cliches, moneymaker. I think what's in there is one way I've ended up defining it is it's the ability and the intent to create more value than you capture. So that would be a kind of abundant version of it.
I feel like there are people who are signaling that they're in a repeat iteration game and they're not going to grab every penny on this transaction because they know that there's a sense of proportion about it somehow. You know, Goldman has that phrase, long-term greedy. It's like, I want to make money, but I'm going to do it with the knowledge that we're going to see each other again.
And that sense of, I'd rather make money than be right is another core tenet of it, where there are people who seem to me to be in the game in order to experience the satisfaction of being right. And that's the primary goal.
And that works some high percentage of the time, but then it can be disastrous, of course, because your ego and your portfolio can get caught up with that goal instead of just making money.
Was there any through line to the mistakes that you made at East Rock? Backing deals, managers, seeds?
There's a great story that Tina Fey has about the only thing she learned from Lorne Michaels. Not the only thing. One important thing she learned at Saturday Night Live that she brought to 30 Rock. was that you need in the writing room, you need the optimal mix of Harvard nerds and Chicago improv.
And I thought that was so profound when applied to investment managers, because I had experienced a lot of both types. And I would say the Chicago improv is pure plasticity, pure flexibility. They will do anything for a laugh to a fault. And the Harvard nerds, in her language, were planning everything out, very high order, very high stability, but not able to improv as much.
Over time, my taste evolved to accommodate more Chicago improv. I was at first attracted to Harvard nerds. Over time, I came to appreciate, Charlie Munger calls it the knack or called it the knack. I remember early on in working with Ted Seides, we were in a meeting with a former Milken credit trader of some sort. And we were sitting in a restaurant in Santa Monica.
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Chapter 7: What are the key criteria for hiring a great Chief Investment Officer?
Yeah, it's figuring out the person in some new field, trying to figure out how. It's like the what's going on here. Like, I can't get over how profound a frame that is. Like, it applies, obviously, at any level to the point where it's so abstract, it may not be useful. But I have this, like, I guess there's hope in there, like optimism that I will find somebody.
The kind of Jeroen Boyd thing of what's the... Pita Schuma.
Yeah. You'll find it. You'll find it.
I definitely have that. I've found the person when I thought there was no one enough times that I'm always like, I have hope. I could go through so many examples of like, are you kidding me? This person exists and they're that obsessed with this crazy thing.
And then I think one key thing that people miss on hiring is you need to understand why it makes sense for the candidate, why the candidate should choose this container and this setup and be rating it like 100 out of 100 if possible. Realistically, it won't be that. I see people make a mistake. It's like I'm hiring. It's like a left hemisphere approach.
It's like I'm hiring this person to do this thing. It's like they're treating it as a machine. But it's so much more complicated than that. If you want the person to thrive and have the energy and then be rooting for them, you need to understand why, from their perspective, this is the right thing for them at this stage of their life with this set of skills.
If you understand that, then it gives the stability to the whole thing.
Maybe it's a great opportunity to talk about the idea of yours that's had the greatest impact on me personally, which is this notion of positive feedback loops, a person's compulsion or bliss or lots of different names for I think probably the same thing. And like the right setup that allows for this unlimited upside. Yeah. And there's lots of dimensions to this.
There's how to help someone find this thing, what the right setup is, how to partner with someone that's doing one of these things. But each of these aspects to me is like, has been in my life an incredible unlock of like self-awareness around what my compulsion is. And then constantly asking that question, not just once, not just at the setup phase, but constantly.
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Chapter 8: How do positive feedback loops influence success?
You're like, oh my God, I like all these people. There's not a bad seat in the house. And I would do business with all these people. There's a level of trust or integrity or something.
Can you talk a little bit more about those events, big and small? I've been a part of that. And it has that incredible effect. If you nail it and you're not compromising in any way about who shows up, whether it's a dinner. You used to do this amazing dinner with dads, investors who were dads, to kind of talk about being a dad. But that was the frame.
And they would be very different people, but they would all be so... Great. And then a much bigger event that's 100 people that somehow also like every conversation is like, holy shit, like who are these people? How did you find all these people? And then that creates like a mystique around you. Like, wait a minute, who are you? Like, how are you doing this?
So say more about the intentionality behind those gatherings. Seems like that is a really important ingredient in the event. Yeah. The recipe of your career.
Yeah. It's creating talent density. And then to your point, it like creates a gravitational force of its own and people end up doing business with each other.
And then it sticks to you somehow.
Sometimes, sometimes not. But what I do, it's just very visceral. It's like if I get stuck sitting next to this person forever. Am I neutral, psyched, or bummed? All psyched. All psyched. And then the result just takes care of itself. I came up with this back when I first started Eastrock as a way to evaluate hedge fund managers. I felt like often...
If we had like 30 people in a room pitching investment ideas, the room knew who the best people were. I'd go in with a thesis on, this guy's the best on special situations. This is the best tech long short guy. And then some percentage of the time, the room agreed with me. But then over the course of several days of thinking, talking, different people would emerge.
If you read the room correctly, the room kind of knows where the pockets of quality are most of the time.
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