Negotiating To Win: Lessons From David Miller

Hello my friends, and welcome to another exciting episode of Negotiate Anything. This show is produced by the American Negotiation Institute and with over 5 million downloads and listeners in over 180 countries, listeners just like you have made this the number one negotiation podcast in the world. Hi, my name is Kwame Christian and I am the founder and CEO of the American Negotiation Institute here at A&I we believe that the best things in life are on the other side of difficult conversations and we are passionate about providing you with the best content that will help you to make your difficult conversations easier, both at work and at home. Lastly, I want to remind you that we offer consulting and conduct trainings both virtually and in person all around the world. Our focus is in three main areas. First, negotiation and conflict resolution. Second, leadership and lastly, diversity, equity and inclusion. Check the link in the description below to learn more about how we could work with you and your team. And now, without further ado, let's jump into the interview.

Foreign David, thanks for joining us today.

Awesome to be here.

Yeah man, we are excited to have you. And how would you get us started? By telling us a little bit about yourself and what you do.

Yeah, so you know, my name's David Miller, originally from Michigan, and what I do on a day to day basis is I partnered with a person, his name's Jerry Slajji. And we started a company back in 2006. It's called Catalyst Mutual Funds. And what we want to do is we wanted to make available to your average everyday retail investor some of the strategies of the best hedge funds in the world. So you have some funds out there that have had phenomenal results. Whether they're from a firm like Bridgewater by Ray Dalio or Millennium from Israel Englander or Renaissance. There's a lot of great hedge funds out there. And what they have in common is they use pretty sophisticated strategies and they've had some great returns. The problem for them as it comes to your everyday investor is everyday investors can't invest in a lot of these firms. If you're looking to be an investor in Bridgewater, even if you are a billionaire, for them, that's not enough. Their minimum is 5 billion. So a lot of them just don't want to deal with smaller retail investors. And what you get is a lot of mediocre products where people complain that these products haven't beat the S&P 500. And what I want to do is find the best of breed managers that were the absolute best of what they do and see how we could partner with them to Create products that we can make available to retail investors, but that had that commonality that those funds like a Bridgewater or Millennium or Renaissance had in that their best of class products, they consistently beat their indices. And that there's a real value proposition above and beyond, you know, kind of hugging mediocrity. You know, it's become a really big thing these days that you should just index funds, you should benchmark, you should just go out and buy everything. And that means that you should put in zero effort and make no effort whatsoever to beat mediocrity. And we don't think you should set the bar there. We think it's possible to do better than mediocrity, and we think it's worth the effort and tried to build a firm that's committed to following through on that effort.

I love this, David, and I think the work that you're doing is so important because I only have $4 billion and I don't know where to put it.

So we might be able to help you out.

No, this is great. And listen, you are very humble, my friend, because, yes, you started a great fund, but also you've recently won an award, right?

Yeah. So. Well, we actually have a number of funds. We've got about 20 funds now at Catalyst. But, yeah, the one you're referring to in particular, it's the Catalyst Systematic Alpha Fund. It's Ticker atrfx, and we recently won an award from Lipper. It was for being the best absolute return category fund for the past five years and three years. So, yeah, we're proud of that. And fortunately, that fund's been doing what it's supposed to.

This is great. And congratulations, because that is a significant accomplishment and a testament to everything that you and your team has put together.

Yeah, absolutely. Thank you.

Yeah. And what I want to do with this episode, David, is I want to turn this into a bit of a case study, because, like I said, you've been very successful. But I know on the pathway, on the journey, it required a lot of communication, a lot of negotiations, and a lot of conflict resolution. And so I'd love to just have you tell that story of some of the difficult conversations that paved the way to the success you're experiencing now with that fundamental.

Sure. So where we originally got started with the business, and, you know, I actually took this class when I was doing my MBA at a University of Michigan in negotiations, and they had this concept called the Batna. So the. The idea there is you want to find the best alternative to a negotiated agreement for Both parties and figure out we need something that's definitely better than that for everybody. We want to find something that's a win, win, win. We don't just want one party to get the great end of the stick, another party loses, but rather, how do we create a much better end solution where everybody's happy at the end of the day? Because if everybody's happy, I think that's where you get the most success. You know, there's never been a product that I'm aware of where, you know, people sometimes poo poo on billionaires and. But I've never heard about too many billionaires that didn't create something that people find absolutely amazing. You know, if you look at like a Walt Disney just bringing so much happiness into the world, or you know, like a Steve Jobs, people might say he was a jerk. Yeah, maybe he was to some individual people, but he's brought a lot of people iPhones that they wouldn't even consider a secondary alternative, that they're just so thrilled with what they're getting from those products. Or, you know, I had the pleasure to meet Elon Musk once and he's certainly a unique personality. Some people love him, some people aren't so crazy. But you know, if you ever try 0 to 60 in a Tesla, you certainly see that there's something unique to what he's built that nobody was right about to do if it weren't for, you know, some of these types of individuals. So. So that's really what we're trying to do is frankly, avoid the conflict by creating solutions that would just make everyone happy. So that's kind of the goal that I've been striving for.

Yeah, it makes sense. And I think that's, it's such a great strategy too, because we understand conflict is always going to be part of the process. But if we craft things the right way, we can avoid unnecessary conflict during the process. And the only way you can do that effectively is if you are really in tune with the people who are going to be part of the process. So the people on your team, your clients or potential clients down the road too. And so as you were kind of mapping things out, what did you do to gather information for you to create this strategy to avoid some of those conflicts down the road?

Sure. So I was kind of presented with a couple conflicting pieces of data. So I did my undergrad at University of Pennsylvania and came across this guy named Jack Bogle, and he was speaking at a conference that they were holding at Penn. And Jack Bogle is a really big believer in index funds. He believes that you should be very committed to creating a good solution for investors and that most people don't beat the S&P 500. And what I wanted to figure out is, so why is that really the case? Why is it that people aren't able to beat the S&P 500? And what I found was that there was a select class of people that were able to beat the S&P 500, but it was because they were approaching things in a different way. But there are also a lot of funds that were just very expensive that tended to systematically perform just like the S&P 500, minus their fees. And what I really wanted to figure out is how do you deliver on that class of products that just far and away better, where the end investor gets a better return, the people managing the money make good money, and the end result is that everyone should be happier with those investments. And frankly, what we found is that you have to do things differently. And one of the things that we found was people were not diversifying their investments the right way. So that was really what. What led me to launch this particular fund called the Catalyst Systematic Alpha Fund. Because what we found is people just kind of misunderstood what diversification means. A lot of people thought that, you know, it means owning 40 stocks as opposed to 5 or 500 stocks as opposed to 40. But, you know, the reality is it doesn't really matter whether you own 40 stocks or 500 stocks. You basically get the same return. Because if you make 400 different bets on the same team, you're not going to get a very different result than if you make 500 different bets on the same team. The real thing is you need some diversification in your risk exposure. And that's really what gets you the benefits of diversification. Because what I was studying was another guy named Harry Markowitz, and he won the Nobel Prize in economics back in 1990 for something that he called the only free lunch in finance. And that was diversification. But the diversification he was referring to wasn't the diversification that many people commonly understood it to be just owning a whole bunch of different stocks or even just owning stocks and bonds, but something that another billionaire popularized. The guy who's actually made more money for investors than any other investor who runs a fund of all time, and his name happens to be Ray Dalio, and saw some of the merits of what he was doing and wanted to figure out how I could get some of the merits of his real diversification. Into a mutual fund wrapper. Because what he taught was that there is this concept and it would never get past a football coach. You know, you'd never have a football coach that would go to their team and say, you know what? Go out and play an amazing offense. But you don't have to worry about defense at all. As long as you play an amazing offense, you'll win the game. And the reality is, if you just played an amazing offense, sure you would win more points, but than if you played a great offense and a great defense. But the reality is you'd get scored on far more and you'd win far fewer games. And if it was really that easy, you know, if this was such amazing advice in football, you could go out and completely dominate if everybody was just playing offense and you played offense and defense. And yet, even though that analogy sounds kind of ridiculous when it comes to football or basketball or something like that for that matter, it's actually that obvious when it comes to investing is that everybody's out there just playing offense. And when you look at almost every mutual fund, they're all doing really well in bull markets and they're all doing really badly in bear markets. They're all just playing offense. But what if you had a strategy that was a good offensive strategy, you don't want to forget about offense, and you paired that with another strategy that was a great defensive strategy, but that defensive strategy was just as good as something like the S P500. Not any better, not any worse, not nothing ingenious here. But it had the opposite return profile, Meaning it did really well in bear markets and it made break even type results, lost a little bit of money, made a little bit of money in bull markets, and you married them together. If you could do something like that, you could make far more money on the top end, but you would lose far less because your two strategies would naturally hedge one another out. And if you just kind of applied those concepts and did some real diversification, you should be able to get a much better result. You know, nothing against Jack Bogle. If you're just going to play offense, there's a good argument that maybe you should just track the S and P. But if you're willing to do what you know, they proved in 1990 that, you know, one Harry Markowitz, that Nobel Prize, that you could play offense and defense and just do a heck of a lot better, why not do that? That was really kind of what led me down this path.

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Right back after this.

I think that's brilliant. It makes a lot of sense. And I think sometimes the sign of a brilliant insight is that it looks obvious in hindsight. And I think when it comes to these types of discoveries, sometimes it can be really tough to get other people on board because like you said, people are misunderstanding diversification and a lot of people are savvy investors, and a lot of people fancy themselves to be savvy investors. And so they might be a little bit skeptical. You're saying I don't understand diversification. This is different from the way that everybody else is doing that. How did you have those conversations with people to get them to feel comfortable trying something new?

Well, first off, I talked to a lot of people and they had kind of had that same experience. They had had the experience that they tried to beat the S&P 500 and didn't work and was trying to understand what that experience was that they had in common and why it didn't work and the commonality that I was finding when I spoke with all these people, I spoke with hundreds of financial advisors and a lot of them had kind of given up and they had embraced indexing or mediocrity because they found it was really hard to beat the average. So then the question is, why is it so hard to beat the average, Tom and what I found was there is this other aspect that made it really hard to beat the average is that if you looked at the stocks, that one, it wasn't picking an above average stock that won. If you looked at your average stock, it did far worse than the S&P 500. If you picked a bunch of mediocre stocks, it wasn't that you got the returns of the S&P 500, it was that you got a return that was fraction of the returns of the S&P 500. And the reason for that was if you looked at Just a couple dozen companies. If you did not own those companies, they were responsible for almost all the returns of the S&P 500. And what you look at is if you owned Apple, you know, 20 years ago you had over 100x return. If you just owned Apple and you held Apple, if you owned Amazon and you held Amazon, you were going to get a hundred x return. Now the question then is, why was it so hard to just go out and own Amazon and or own Apple 20 years ago and aging myself a bit here, But I remember 20 years ago, why it was so hard is that I remember talking to a bunch of my buddies 20 years ago and Amazon was down over 90% 20 years ago from its highs back in 2000. People were concerned whether the company was going to run out of money. Jeff Bezos basically said his strategy was to keep losing money for quite a long time in the hopes of making a lot of money. Yeah, maybe he proved himself right. But if you trust a lot of people and say, yeah, I'm going to make a lot of money in the future, but I've been losing money for quite a long time now, that may not be the greatest path. It would have worked if it was Jeff Bezos, but most people don't turn out to be Jeff Bezos. Similar thing. If you looked at Apple 20 years ago, the iPhone didn't exist, the ipod didn't exist. If you used Apple computers, they kind of sucked and they were really expensive. So it was pretty tough to predict that these types of things were going to happen. So it was a pretty good argument that, you know, if you just owned all the stocks, well, you were inevitably going to own some Amazon and you're going to own some Apple, you'd own some Nvidia, all these companies that did phenomenally well. But there wasn't a clear reason you were going to own those companies 20 years ago if you weren't trying to do what everybody else did. And, you know, frankly, part of what I realized was I probably wasn't going to pick those either. So if I was going to try to beat the S&P 500, I was going to have to try to pick a different approach that wouldn't rely on me picking those companies that were going to be the next Apple or the next Amazon. So that kind of forced me down a bit of a different path.

Yeah. Oh, that's so fascinating. And I love the question that you pose to why is it so hard to beat the average too? Because one of the best things that you can do when it comes to some of the difficult conversations, questions are very persuasive. But sometimes the most persuasive questions are the ones where the person doesn't readily have an answer available. Because I would imagine if you were asking that question to certain people, they might really struggle with that and say, well, I have no idea. And sometimes that is what triggers the requisite humility for them to be a better listener in those conversations, too, when they realize I don't have the answer, but maybe David does.

Yeah, that's certainly part of what I realized. I didn't have the answers. But you can always go out there and try to stand on the shoulders of giants. If you just try to find what Nobel Prize winners and billionaires did historically and copy a lot of their best thinking and hopefully skip some of their mistakes, but just try to find what it is that made things work for them that they did differently.

Yeah. And I'm assuming, correct me if I'm wrong, but I'm sure as you were telling people about the new fund, you. You mentioned Markowitz and Dalio in the, in the process too, right?

Sure, yeah, of course. Only issue was none of them really cared what I was saying when they were looking at my performance and they saw the fund was brand new and we had no track record. Now that it beat the S and P on the past year to date, one year, three year, and five year rule. Maybe now it's a little easier if it's top 1% of the category for all those periods. But, you know, in the beginning, nobody really cared what I said either because, you know, didn't have any track record to prove that there was really something to it.

Right. And nothing, nothing succeeds like success.

Right.

Okay, cool. Well, we have this hypothesis and you tested it, and the experiment's going well. And I think at the beginning, too, when you're, when you're trying something new, it can give people a sense of security to know that you're basing this on something that is tried and true. So Ray Dalio, everybody. Everybody knows Ray Dalio. And then everybody knows the Nobel Prize too. And so you're basing this hypothesis on some really respected sources, which makes what you're doing a little bit more persuasive and easier to buy in.

Yeah, that's certainly the idea there. And the more I found that I could kind of take myself out of the equation so that I didn't have to rely on my making the right decisions, but finding the right people who'd done really well historically, you know, if you. You look at the people who've been winning for a long time, it's a lot easier to identify Michael Jordan than it is to be a Michael Jordan. It's a lot easier to, you know, go out there and see what Ray Dalio did and emulate what he did, rather than going out and trying to be Ray Dalio. So what I found was that if I wanted to emulate the success of the best investors, there was an easier way to do it. And it was to partner with an organization that had the capacity to do things that some of these best hedge funds had the capacity to do. Like what was it that a Millennium or a Deeshaw or a Bridgewater was capable of that me, David Miller, one guy sitting at his computer, maybe wasn't so capable of? And what I found was that they had a lot of staff, and that staff had a lot of experience, and a lot of them had PhDs in finance. A lot of them had specialties in how to trade things like interest rate futures or oil futures or things of that nature, currency futures, that for one person. There's no one person who knows how to do all those things. So I met up with the group at BNP Paribas. They're the third largest bank in the world, largest bank in France. And there's a unique thing about French people, and it's that a lot of them really like to be quants. They're some of the best quants in the world. I'm not sure why there's so Many great French PhD math quants out there, but that's really what they like to do. And Barrett, BNP had built this suite of products that they could offer that were best in class. Strategies for trading currencies, for trading commodities, for trading equities, for trading fixed income. Things that I didn't necessarily have those specialties in. So I went to their quant strategies team, they have a couple dozen PhDs in both math and finance, and said, okay, you have some great strategies in fixed income. You have some great strategies and currencies, you have some great equity strategies. How about you bundle together all your best strategies, do exactly what array Dalio was saying you should do in terms of how to create a truly diversified portfolio. Match that up with the theoretical academic work that a Harry Markowitz did and package it all together. Put together offensive strategies and defensive strategies that both work, but put them all into one package for me so I don't have to figure out how to trade currencies, how to trade commodities, how to Trade all these equity strategies individually and how about you do it for me? And we'll offer that as a product through our team of salespeople, where, you know, we've got 50 salespeople. And if we can use the brain power of a large organization like a BNP Parabol to create that type of product, well, then I don't have to rely on my intuition being right. I just have to hope that all of these masters that have proven themselves over time got it right. And if we can put their collective wisdom together, we should be able to make something that that's a lot better, that can deliver what retail investors have generally been missing out on.

This is fascinating, David, because essentially what you're describing is a partnership of sorts with BNB Paribas, right?

That's right, yep.

And that's massive. That is a massive deal. And for me, that's intriguing. And of course, I'm not asking you to divulge any confidential information, but can you tell us about like the negotiation process with them, like what strategies you use to get them on board?

Sure. So the strategies that. Well, the reason they wanted to come on board was BNP Paribas is a large bank, but they don't have an asset management arm in the United States. Their asset management arm is in France. And they wanted to distribute their products in the United States or at least distribute their strategies, but they didn't necessarily want to recreate a new asset management army organization. And prior to launching this fund called the, the Catalyst Systematic Alpha Fund, we had launched another fund in partnership with a firm called Milburn. Now Milburn is a futures oriented trading shop. They're based in New York. And we found they had a phenomenal product. Same idea here. I wasn't necessarily trying to figure out what can David Miller do, but I was trying to find one of the best funds in the world. And Milburn had a phenomenal track record. They launched this product in a hedge fund form, although it only had about $40 million in it, but it had a great track record. It was up a little over 10% annualized since they launched it, which was better than S and P by a couple percent. And yet when you looked at that strategy that they had, they saw that it was up in 2000 when the s, P was down a lot, it was up in 2001 when the S and P was down a lot, it was up in 2002 when the S and P was down a lot, it was up in 2008 when the S and P was down A lot. And in 2022, obviously, this was before 2022, but it was also up that year. So we had gone out and taken their $40 million product, which we partnered with them on, got it in front of all the financial advisors that we could, through our team of salespeople, and had raised several billion dollars for their funds. So because we had had that track record of success BMP was interested in seeing. Okay, well, I think we've got some great strategies here as well. How can we work with catalysts to get those distributed to retail investors through someone who specializes in these types of strategies and has had a track record of success? And they saw that there was the possibility for that because of the history of what we'd done in that partnership with Milburn and what our salespeople had been able to do in. In raising money for that fund. And, you know, the customers in that fund had been quite happy. So it seemed like that could be. Be a good partnership for us here as well with bnp.

Brilliant. Brilliant. I think that it's. It's the perfect example of. Let's go way, way back to the beginning of the conversation to the win win that you were talking about, because you. You set yourself up in. In a great position for that negotiation with BNP Paribas because of your track record of success. And then when you came to them, this was a complete value add. You complimented what they did exceptionally well. You both brought value to the table. There weren't many competing interests that threatened the deal. You still got it through. And it's an example of a win win where both parties can get more of what they want just by collaboratively working together.

Yep. Yep. Exactly. That's always what we're trying to do. Something. Something that works for everybody. It's got to. Otherwise, if it doesn't work for everybody, it doesn't tend to work very well for anybody.

Exactly, Exactly. No, David, this is exceptional. I really appreciate this. And I know the listeners really would appreciate the strategy, too, because you can see really clearly how negotiation was a major part of your success, even if it's not because you're in the finance world. It's not like on a neon sign where it's like, this is the number one thing that you do, but it is a critical aspect of what you do in order for you to be successful in all elements of the business. So I just appreciate you sharing these stories.

Well, I think also what makes it easier for us in terms of negotiations is, you know, we're in the business of Creating products. We're creating things from scratch. We're trying to go from 0 to 1. If you're like in the mergers and acquisitions business and you're trying to buy a business, you got a bit of a zero sum negotiation. If you're trying to buy a house, you got a bit of a zero sum negotiation. And you know, anything that you're getting paying less to that homeowner, the buyer gets something different. Now, I mean, there's ways that you can try to accomplish other people's interests. Like what if you can help them get better mortgage terms or the closing terms that they're looking for, or find them a broker that'll take less on the fee on that. But at the end of the day, some negotiations are kind of more zero sum negotiations where they're pretty tough, frankly. I like trying to avoid those as much as possible and focus my career on things where this thing either works for everybody or if it doesn't work, nobody really loses in a big way. Yeah, maybe we spent some time and effort, but nobody's taking that financial loss. Nobody has to be the one left holding the bag.

Agreed. And I'm the same way. I think life is a lot more fun that way when it comes to those types of negotiations because you come together. Hey, can we make this happen? Yes. Cool. No, that's fine. At least in the process, we strengthen relationships and learn every single time you can move forward, even if you're not ultimately closing the deal just because. Because of the relationship building process and the information gathering process as well.

Totally.

David, this was exceptional. I really appreciate this. And before you go, let the listeners know again about your company, about the fund and how they can get in touch with you.

Yeah, so my name is David Miller. Funds that we're talking about today is called the Catalyst Systematic Alpha Fund. The ticker symbol for it, if you look it up, is atrfx. So Apple Tom. R as in Robert, F as in Frank, X as in X Ray. You can look us up@catalystmf.com or catalystmutualfunds.com they'll get you to the the same place. And you know, our contact info is available on the website if you have any questions that come up.

Love it. And everybody, we're going to have links in the description of the episode. David, really appreciate it, my friend. Thanks for joining us.

Oh, thank you.

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