No More Hustleporn: Ken Griffin hired a private jet to interview people at Enron when it filed for bankruptcy
We pulled out the best insights from Ken Griffin's recent interview with Dean Kerwin Charles at Yale School of Management. Transcription and light editing by Anthropic's Claude, curation by Yiren Lu :-)
Highlights
And with that as a vantage point, I started Citadel effectively right out of college. I joined a firm in Chicago that gave me capital to manage. We had a very simple understanding. If I did well, I'd raise money from outside investors, I'd start a formal firm. Things didn't go so well, I'd go back to graduate school. That was the deal.
And I went to Chicago because the two partners that ran the firm that backed me, the partner in New York, was like central casting Wall Street. And the partner in Chicago was like your high school physics teacher, really plain-spoken, brilliant, engaging. And I felt that he would care about my career.
And I think it's really important, as you step into the journey out of business school, where are you going to find people that are going to take a vested interest in how you do? Because so much of your career will come down to mentorship and apprenticeship.
Now, one might just conclude, well, wait a second. Ken starts this firm by himself with one person as his mentor. How does that really work? One of the great parts of American culture is the willingness of people intergenerationally to give to those who are younger.
So my mentors were the traders and salespeople on Wall Street or the members that ran stock loan departments. I mean, you have no idea how many hours a day I spent on the phone like a sponge learning about finance from those with 15, 20, 25, 30 years of experience. Terry O'Connor, Merrill Lynch, Boston, 617-350-5811. And I could go to Maryland's offices, and you can't do it these days because of compliance rules, but I could go there at the end of my school day and stay till midnight. They didn't care. Like, use the Bloombergs, read the Value Lines, read the research. We are going to help you learn more.
And that's a part of the American culture that you have to absolutely avail yourself while you're still young. Take advantage of all the people in whatever firm you join and in whatever community you're part of to learn from those who simply have more years of experience. Make the most of that.
As an acquaintance of mine who started one of the most successful Internet companies of all time put it, your great entrepreneurs have the right toolkit to solve a problem of that particular moment in time.
So for me, that toolkit was an understanding of software engineering, an understanding of mathematics, a background in economics, a passion for finance, and a belief that you could use quantitative analytics to have a competitive advantage in the financial markets. And believe it or not, in the 1980s, that was still a reasonably novel thought.
Ken Griffin: Well, there's a little saying I like: history is written by the winners. The wonderful history of Citadel is how we are the most profitable hedge fund of all time. The chapter of how we were on the verge of going out of business in 2008 is not even a footnote in that book. That's a very important note. It has not all been an easy march to success. I think I have the interesting position in life where my team has probably lost more money than perhaps any other firm in existence. We just happen to have made more money than almost any other firm in existence. What everyone talks about is the net result. There are years where our losses are hundreds of billions of dollars. The numbers are too big and incomprehensible.
Number one, all my losses are my tuition. I have the most expensive education in American history, and a number of my colleagues have educations that are becoming competitively expensive. It's very important that in some sense, you have to have a moment of levity. If every time you lost money, you just got depressed and angry and couldn't deal with it, you'd have a very short career. So you need to be able to take a step back and say, "It's a tuition bill. I paid it." This doesn't mean that you don't think long and hard about what went wrong, but you have to keep it in perspective.
In 2008, that tuition bill almost became getting expelled from school because we lost half of our equity in 16 weeks in a firm that had never had a double-digit drawdown in 20 years. The only reason we survived, and there are a number of reasons, but the main reason is that when Long Term Capital failed in 1998, I went and met with senior people who worked at Long Term Capital. Why? I wanted to understand how a firm that loses 90% of its equity in a levered financial services industry still stays in business. If you ask me, that's one of the greatest accomplishments of all time. They lost 90% of their equity before losing control of their business in a levered financial services company. Much of what we learned from how they survived was fundamentally existentially important to our ability to withstand the turmoil of 2008.
There's a very important lesson here: not only do you want to learn from your mistakes, you really want to learn from the other guy's mistakes. They're much cheaper tuition bills. Over my lifetime, I've spent a lot of time at the proverbial scene of accidents where other firms have gone awry. When Enron filed for bankruptcy, I chartered a Gulfstream jet, put 16 people on it to Houston, and all we did was interview people at Enron for several days to understand what worked, what didn't work, how they made money, how they ran the business, what the competitive advantages were. I hired the entire leadership of the quantitative research effort at Enron. UBS bought the business except for the research team. We've made $30 billion in commodities since then. UBS shut the business down. That's about being on the ground. That's about understanding where the business created value. That's about extracting the right people from that moment in time and surrounding them with the right leadership team, investment professionals, and software engineers to build what is today one of the most important commodities businesses in the world.
Full Transcript
Kerwin Charles: Hi, everyone. Thanks so much for coming. I want to welcome our students here, our faculty and staff. I know we have other distinguished guests in the audience, including the president, for what I am confident will be a fun and informative discussion with Ken Griffin.
Let me jump right into it. Ken is the founder and CEO of Citadel, one of the world's largest alternative investment firms, which he launched in 1990, building on an interest in investing that began in his dorm room sophomore year of college. He is also the non-executive chairman at Citadel Securities, which is now one of the world's leading market makers. It's an entity he and his partners established in 2002.
Additionally, Ken is an active philanthropist and civic leader, having given more than $1.5 billion to expand access to high-quality education at every level, advance medical research, and enhance our cities and communities. Ken, welcome. Thanks so much for coming. We're excited to have you with us today.
Kerwin Charles: Ken, before we get going, when we do these conversations, we like to spend a few moments talking about the early stages, both because there is great information there and because at the very early stages of the Ken Griffin journey, you would have been closer in age and experience to the persons in the audience. So I'm going to begin with an origins question.
Shortly after college, you started Citadel, and Citadel was recently named the most profitable hedge fund of all time. Now talk to me about the driving force of starting your career with a decision to build your own firm. There's risk-taking there, a certain amount of self-confidence, uncertainty. Talk to us about that.
Ken Griffin: I think you put as many questions into one question as you could possibly do. So let's break this down into a couple of different conversations, if that's okay.
The first is, and I tell this to everybody, you should be risk-seeking at this point in your life. At this point in your life, in all likelihood, you'll have the least amount of responsibilities that you'll have at any point in your life. This is a great moment to think about pursuing opportunities that have the maximal personal interest, opportunity to learn, opportunity to make a difference. There will come a time where it's going to be harder to take risks.
Our parents get older, we have children. Life changes. Right here, right now, You should absolutely be thinking about what are the high-risk opportunities that you pursue that you will have the greatest experience with? And either those opportunities don't work out, what you will learn from that journey you will take on to everything else that you do in life.
And with that as a vantage point, I started Citadel effectively right out of college. I joined a firm in Chicago that gave me capital to manage. We had a very simple understanding. If I did well, I'd raise money from outside investors, I'd start a formal firm. Things didn't go so well, I'd go back to graduate school. That was the deal.
And I went to Chicago because the two partners that ran the firm that backed me, the partner in New York, was like central casting Wall Street. And the partner in Chicago was like your high school physics teacher, really plain-spoken, brilliant, engaging. And I felt that he would care about my career.
And I think it's really important, as you step into the journey out of business school, where are you going to find people that are going to take a vested interest in how you do? Because so much of your career will come down to mentorship and apprenticeship.
Now, one might just conclude, well, wait a second. Ken starts this firm by himself with one person as his mentor. How does that really work? One of the great parts of American culture is the willingness of people intergenerationally to give to those who are younger.
So my mentors were the traders and salespeople on Wall Street or the members that ran stock loan departments. I mean, you have no idea how many hours a day I spent on the phone like a sponge learning about finance from those with 15, 20, 25, 30 years of experience. Terry O'Connor, Merrill Lynch, Boston, 617-350-5811. And I could go to Maryland's offices, and you can't do it these days because of compliance rules, but I could go there at the end of my school day and stay till midnight. They didn't care. Like, use the Bloombergs, read the Value Lines, read the research. We are going to help you learn more.
And that's a part of the American culture that you have to absolutely avail yourself while you're still young. Take advantage of all the people in whatever firm you join and in whatever community you're part of to learn from those who simply have more years of experience. Make the most of that.
So now, how did I end up being an entrepreneur? And let's be clear, I ended up being successful. And those don't always go hand in hand. And I'm very appreciative of the fact that we've had a remarkable outcome.
As an acquaintance of mine who started one of the most successful Internet companies of all time put it, your great entrepreneurs have the right toolkit to solve a problem of that particular moment in time.
So for me, that toolkit was an understanding of software engineering, an understanding of mathematics, a background in economics, a passion for finance, and a belief that you could use quantitative analytics to have a competitive advantage in the financial markets. And believe it or not, in the 1980s, that was still a reasonably novel thought.
In fact, one of my earliest hires was a Russian rocket scientist. And one of my friends in Wall Street called me up and literally said, like, you're not trying to put man on the moon, you're trying to make money. And I'm like, no, I believe that this is the future, that those firms that can price derivatives analytically are going to have a real advantage.
Now, he was a partner at one of the most successful investment banks that no longer exists. And we're at Citadel today as one of the largest market makers in the world. So I had the right toolkit at the right moment in time, and I think my friend's really right.
It's thinking about what tools that you have that at this moment unlock problems that just simply didn't exist before. Now, everything we did back in the early nineties, you could take a few courses in quantitative finance here at Yale. You'd know, everything we did it is completely commoditized. I mean, that's just a profound fact.
And all the hard problems that we solved analytically on computers and thought about how to make this work are like on internet sites these days. I mean, the world has just leaped forward that fast that a huge competitive edge in 1990 is just trivial today. That's how fast progress has been in finance.
Now, the fortuitous part of the story is that over the last 30 years we've radically improved our business and transformed what we do and how we do things. We continue to build our competitive advantages in the various businesses in which we choose to compete. And that's the essence of running a business. How do you build your competitive moat?
So for us, think of it simply put. We trade financial assets. That involves a research process. We need to understand what moves the prices of assets more thoughtfully and more quickly than our competitors. And then trading is simply how we monetize our research. The glory is in the research. Trading is the monetization of the research.
Kerwin K. Charles: You are one of the country's most well-known citizens, most famous, most successful. There's a sense when one meets such a person that they haven't had challenges because they are shielded from them. The conversation surrounds places where you've had outsized success. However, it cannot be true that along your path, you didn't encounter challenges, difficulties, or even failures. Even failures. I want to know about that for a bit. I want to know about your failures, your most significant challenge, what it was, how you overcame it, and what advice you might have for all those in the room who will encounter challenges and failures as they proceed along their professional path.
Ken Griffin: Well, there's a little saying I like: history is written by the winners. The wonderful history of Citadel is how we are the most profitable hedge fund of all time. The chapter of how we were on the verge of going out of business in 2008 is not even a footnote in that book. That's a very important note. It has not all been an easy march to success. I think I have the interesting position in life where my team has probably lost more money than perhaps any other firm in existence. We just happen to have made more money than almost any other firm in existence. What everyone talks about is the net result. There are years where our losses are hundreds of billions of dollars. The numbers are too big and incomprehensible.
Number one, all my losses are my tuition. I have the most expensive education in American history, and a number of my colleagues have educations that are becoming competitively expensive. It's very important that in some sense, you have to have a moment of levity. If every time you lost money, you just got depressed and angry and couldn't deal with it, you'd have a very short career. So you need to be able to take a step back and say, "It's a tuition bill. I paid it." This doesn't mean that you don't think long and hard about what went wrong, but you have to keep it in perspective.
In 2008, that tuition bill almost became getting expelled from school because we lost half of our equity in 16 weeks in a firm that had never had a double-digit drawdown in 20 years. The only reason we survived, and there are a number of reasons, but the main reason is that when Long Term Capital failed in 1998, I went and met with senior people who worked at Long Term Capital. Why? I wanted to understand how a firm that loses 90% of its equity in a levered financial services industry still stays in business. If you ask me, that's one of the greatest accomplishments of all time. They lost 90% of their equity before losing control of their business in a levered financial services company. Much of what we learned from how they survived was fundamentally existentially important to our ability to withstand the turmoil of 2008.
There's a very important lesson here: not only do you want to learn from your mistakes, you really want to learn from the other guy's mistakes. They're much cheaper tuition bills. Over my lifetime, I've spent a lot of time at the proverbial scene of accidents where other firms have gone awry. When Enron filed for bankruptcy, I chartered a Gulfstream jet, put 16 people on it to Houston, and all we did was interview people at Enron for several days to understand what worked, what didn't work, how they made money, how they ran the business, what the competitive advantages were. I hired the entire leadership of the quantitative research effort at Enron. UBS bought the business except for the research team. We've made $30 billion in commodities since then. UBS shut the business down. That's about being on the ground. That's about understanding where the business created value. That's about extracting the right people from that moment in time and surrounding them with the right leadership team, investment professionals, and software engineers to build what is today one of the most important commodities businesses in the world.
Going back to our 2008 experience, the first point is, when you are walking through hell, just put one foot in front of the other. Keep going. Literally, I was just praying that we would find our way out of that fire. I called Lloyd Blankfein, who ran Goldman Sachs at the time, and said, "Lloyd, when is this going to end?" He said, "A forest fire ends when there's nothing left to burn." That wasn't making me feel any better. We never gave up during that time. By "we," I really mean the entire leadership team.
Think about who around you is in a functional state of mind. In a moment like that, some people in a crisis cease to function. Others shine. Make sure you're pushing decision making to those mentally in the game in the right way, because for some, it's their first adversity. It's like the proverbial deer in the headlights. To be clear, there were days in 2008 I felt a bit like the deer in the headlights. I was fortunate to have partners around me for whom those were good days with good decisions, and we would change roles over those 16 weeks. Who you surround yourself with matters because when you surround yourself with the right team, you will buttress each other on your darkest days in an important way.
Kerwin K. Charles: You said to put one foot in front of the other. Is perseverance something with which we are inherently endowed? Is it something that can be acquired or learned? If it is the latter, what advice would you have about its development?
Ken Griffin: I believe it's both. There's no doubt across individuals that there's a varying capacity to deal with stress. Some people struggle with stress. Others prosper under stress, and there are different kinds of stressors. My biggest stressor is me. I'm always trying to figure out how I can do better and be better. I may be demanding of the people who work for me, but I'm no less demanding of myself.
You need to know what your stressors are and how that fits into your choice of career and how you interact with others. For most, the hardest stress is that relating to events outside of their control. For others, the most difficult stress is that which they impose on themselves.
You need to understand what your stressors are and how you deal with that stress. Resilience goes hand in hand with grit and perseverance. Going through a difficult time and seeing you're able to do that strengthens you for the next time. One of my top guys, when he was first in a management role and somebody who worked for him would quit, would be devastated, questioning if he was up for the job. Now, ten years later, somebody quits, and he's bothered but not dysfunctional. You see people grow over time.
Now, here's the great part of that story: when he's not so anxious about what people who work for him might do (like leave), he's a much better manager. When you're confident you'll be able to move on without someone on your team, you can really coach them, give direct feedback, give responsibility, and give space to succeed or fail. Ironically, a really good manager is not anxious about whether a given person on their team will leave.
This doesn't mean they don't care about the person, but they've elevated themselves to bring out the best in that person.
Kerwin K. Charles: I read that Citadel Commodities hired a meteorology firm to predict thunderstorms and cyclones, which seems to me a hugely unusual use of technology for a trading firm. Why would you do such a thing?
Ken Griffin: The press takes great liberty with what they write, and that's a much better story than the real story. The real story is we acquired a competitor called Cumulus. The people who ran Cumulus made a huge commitment to understanding weather forecasting and ran one of the world's top meteorology efforts outside of the European Union's own multi-government effort, which is probably the best in the world. Europeans have beaten the U.S. in weather forecasting.
In trading commodities, for example, power, we care deeply about cloud cover, wind, temperature, and we care deeply in a small number of geographies. It doesn't matter what the temperature is in the middle of Wyoming; there's no energy demand. But we really care about wind and cloud cover in Germany where renewables are such an important part of the landscape.
Over the years, we've made a huge investment in improving our ability to forecast the weather in environments like that and, of equal importance, have a reasonable distribution of weather forecasts so we can understand the distribution of outcomes. When you find yourself in the risk-taking seat, it will not be a black and white, good decision. It will be a decision with an upside, downside, and you want to always think in distributional terms, whether buying a stock or building
Kerwin K. Charles: That's tremendous. So we have about ten minutes or so for questions.
Audience Member 1: Hi, Ken. Thank you so much for sharing your experiences. We've learned about the importance of balancing the present and the future. Peter Drucker has been known to say the CEO decides on the balance between yield from the present activities and investment in an unknown, unknowable and highly uncertain future. It's a judgment rather than a decision based on facts. At what point do you feel you were able to develop that ability to comfortably make those judgments? Was it just time or was there something in particular that helped you get there quantity of decisions made?
Ken Griffin: To be clear, the more decisions of a similar nature you can make, the better at those decisions you become. So when we think about business activities far away from our core, I get much more anxious, like much more anxious. And decisions within our core I think we make pretty easily and pretty fluidly. So it's repetition of that type of decision. You start to learn what should I ask? What do I need to know? So on and so forth. It's repetition. It's like being an athlete. Reps matter.
Audience Member 2: Thank you very much. I have a question about the emerging technologies. So I believe before AI we have the previous big topic was crypto, right? And crypto was created for the purpose of decentralization of value. But in recent years we see the applications of crypto seems to be deviating from the original purpose. If you look at like FTX, NFTs, something seems to have gone wrong in that case. So I believe as an investor, can you have the ability to influence how these technologies develop and being replicated in our world? To some extent. So what do you think is the reason for something that went wrong with crypto? And do you think the same would happen to the next big technology such as AI? And how do we prevent that from happening?
Ken Griffin: That's a great question. So let's be clear. Every emergent technology has a moment of hype. That's the nature of the beast. It's new, it's flashy, we get excited about it. And blockchain which underlies cryptocurrencies was a really interesting engineering feat. How do you create the ability to have a decentralized, trusted network? The problem is it's been a bit of a solution in search of a problem. Visa, Mastercard, cash works pretty well. And Bitcoin, ironically, has very high transaction costs. It's not cheap to use Bitcoin to pay for anything. And then who deals with fraud prevention and other issues that go in day to day life? I think Bitcoin is an interesting case study. Blockchain is really cool technology. People wanted to find a solution or a problem to solve with that technology, and we just haven't found that problem yet. It just doesn't exist. The other great irony is that crypto has demonstrated that people actually care about having regulated financial institutions. FTX is a case in point.
AI, there will be a lot of hype. There will be some really interesting wins that come out of the current generation of AI. And to be clear, the current generation of AI is an extension of machine learning, which really hit the world with TensorFlow, about nine years ago. TensorFlow, which Google developed, has had huge impacts on our economy already, often subtle, often. underappreciated. For example, when you call Amazon, there's an ML model that routes your call to the right person to deal with you based upon what you ordered, when you ordered it, and the probability that that is the reason you're calling them. So just think about the efficiency in their call center.
Interviewer: I get that it's legal, but is it moral?
Ken Griffin: It's absolutely moral, because the trading activity that we do in the market increases liquidity. By increasing liquidity, you bring down the cost of capital for corporate America. I'll give you a very simple thing to think about. Mutual fund managers, institutional money managers, when they think about how big of a position to own in a company, they think about days of traded volume. I'll own three days of traded volume. I'll own five days of traded volume. It's used as a proxy, a shorthand for how difficult it is to get into or out of a position. And everybody thinks about liquidity and values liquidity.
So the quote high frequency traders, let's be clear, those are modern day market makers. We compete aggressively with each other about where we believe price should be. That creates trading volume. That creates liquidity for real money players, your capital research, your Fidelity, your T rowb Price to rebalance their portfolio. And this really matters when companies go to raise capital, because if a stock is liquid, it's very easy to get a spot secondary done to raise money. A stock that's illiquid, good luck. You're not getting that deal done.
So if you ask me if it's moral, not only is it moral, it's actually incredibly positive for society that we have one of the deepest, most liquid capital markets in the world. Let's tie that all the way back to the people in this room. When you've got a successful startup, an idea like, I'm going to go make this happen, you're going to have to convince venture capitalists to give you that check. If they believe they can go public with your idea, you're going to get that check. But if our public markets aren't liquid, if capital cannot be raised, you won't get the check from the VC firm to run your business. It's not going to happen.
It's one very large flywheel virtuous circle that makes capitalism work in America. It works in the equity market, it works in the debt market. Let's give you the counterfactual. Look at Europe - phenomenally good schools, well educated population, their capital market's much smaller than ours, as a percent of total economic activity. The corporate debt market in Europe, in the United States, 80% of all corporate debts provided by capital markets. In Europe, it's 20%. Capital markets, 80%. Banks, high yield finance, drexel, so on and so forth. The origin story of that.
All right, name ten startups of note in Europe over the last 25 years. Like, you can name a few, but it's hard. In the United States, I could just sit up here and just name one after another. Our capital markets are an incredibly important part, makes our economy work. And that ability to have liquidity, which is created by today's modern market makers, is an important, integral part of this entire system that makes the United States the leader in the world in new corporate formation, innovation, and the great success stories from Google to Apple that at best are often copied around the world. But they were ideas born here.
Great question. Thank you so much for your time today. Really appreciate it.