75. Translating in LATAM, Risk Through the GFC, and ESOPs with Doug Pugliese

April 26, 2023

75. Translating in LATAM, Risk Through the GFC, and ESOPs with Doug Pugliese
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In this episode, Brock speaks with Doug Pugliese. Doug is a former naval aviator and translator as well as the former managing director at Bear Stearns, where he rode through the dot com bubble and the GFC. Today he is head of 1042 QRP strategies at Alpha Architect. In this conversation we start with a bit about Doug's time in the Navy. Doug was a translator for an admiral and the president of Paraguay in the late 80s. He gives a bit of a history lesson about the US as involvement in South America during that time, and share some photos of him with some very notable figures, including the general who staged a coup and overthrew that President. We also hear what Doug learned about risk in financial markets working through a few of the most notable time periods in financial history. And we also learned about ESOP's or employee stock ownership programs, what they are, why they're important, and what Alpha Architect is doing in this world today.

Episode Resources:

⁠Alpha Architect website⁠


(01:56) - What Doug is most proud of (06:13) - A near aviation mishap landing with a blown engine at night (12:43) - Acting differently in the light of recognizing your own mortality (16:32) - Sharing a few photos from Doug's time in service - first flight at Martha's Vineyard (19:02) - Doug's learning of Spanish early, exchange student, and skills for later in life (30:27) - Translating for an admiral in Paraguay in 1993 (35:15) - The general who staged a coup to overthrow the president of Paraguay (42:42) - South America countries and the future of America (46:48) - Joining the world of finance, leaving the life of riley (01:02:00) - Working at Bear Sterns from the dot com boom & bust through the great financial crisis (01:08:43) - Understanding financial cycles and commonalities between them (01:16:20) - Meeting Wes Gray and joining Alpha Architect (01:23:37) - Head of 1042 Solutions (01:26:37) - ESOPs, what they are and why they're important

The Scuttlebutt Podcast - The podcast for service members and veterans building a life outside the military.

The Scuttlebutt Podcast features discussions on lifestyle, careers, business, and resources for service members. Show host, Brock Briggs, talks with a special guest from the community committed to helping military members build a successful life, inside and outside the service.

Get a weekly episode breakdown, a sneak peek of the next episode and other resources in your inbox for free at ⁠⁠⁠https://scuttlebutt.substack.com/⁠⁠⁠.

Follow along:     • Brock: ⁠⁠⁠@BrockHBriggs⁠⁠⁠         • Instagram: ⁠⁠⁠Scuttlebutt_Podcast ⁠⁠⁠      • Send me an email: ⁠⁠⁠scuttlebuttpod1@gmail.com⁠⁠⁠ • Episodes & transcripts: ⁠⁠⁠Scuttlebuttpodcast.co


Brock Briggs  0:00  

Hello and welcome to the Scuttlebutt podcast, the show for current and former service members looking to make better decisions, think deeper and earn more money. My name is Brock Briggs and each week I do that by bringing you a conversation with a badass veteran at the top of their craft. Today, I'm speaking with Doug Pugliese. Doug is a former naval aviator and translator as well as the former managing director at Bear Stearns, where he rode through the .com bubble and the GFC. 

Today, he is head of 1042 QRP strategies at Alpha Architect. In this conversation, you're going to hear a bit of it all. We start with a bit about Doug's time in the Navy. I mentioned to you, he was a translator. Early in life, he'd learned Spanish, which landed him as a translator for an admiral and the president of Paraguay in the late 80s. He gives a bit of a history lesson about the US’s involvement in South America during that time and shares some photos of him with some very notable figures, including the general who staged a coup and overthrew that president. We also hear what Doug learned about risk in financial markets working through a few of the most notable time periods in financial history. 

And we also learned about ESOP's or employee stock ownership programs, what they are, why they're important and what Alpha Architect is doing in this world today. If you haven't already, a good primer for this conversation is last week's episode with Wes Gray, the CEO of Alpha Architect. We talked about several things discussed in this conversation and would be a great listen to as a primer for it. Don't forget, you can always check out the episode transcripts, the YouTube channel and newsletter where I dive deeper on each episode every week all at scuttlebuttpodcast.co. Enjoy this conversation with Doug Pugliese. 

Brock Briggs 

One of the best places to start with these is find out what you are the most proud of?

Doug Pugliese  2:03  

Well, that's a good question because I guess up until about a year or two ago, I would have probably fed you some stuff about having successfully landed an aircraft on a pitching deck at night, after an engine failure. You know, everyone walking away with their lives, which I was, I think rightfully proud of, or at least not having carried around a bad story from that incident.But I think as I've grown older, my perspective has changed. And I think the real interesting thing for me about life is that as your perspective changes, certain things kind of come into clear focus. 

I'm most proud of my three kids who are now all teenagers that growing up beautifully. They seem to have life by the short hairs, they've got their principal, they're hardworking, they're independent and my wife has just done a great job raising them. They're the kind of combined the right balance of, you know, excelling academically and in athletics and one's captain of a sports team. The other one is working on our third letter of the school year. They're just wonderful kids. And I think that I probably would be remiss if I didn't cite them as the thing that I'm most proud of.

Brock Briggs  3:35  

How much of that do you think is driven by like the change in individual accomplishments and like the value that we put on those in terms of like a setting out for, to kind of achieve this grand set of obstacles and overcoming and whatever to seeing that you have the ability to pass that on to others? This is a conversation that is highly personal, obviously, I got a baby on the way. And there's been all these questions about, you know, legacy and what does that mean? And it kind of has me thinking a lot about this.

Doug Pugliese  4:12  

Well, you know, my first I kind of live by the Socrates law, you know, to do no harm, really, first and foremost and the thing that I've observed as a parent is that it's really easy to screw your kids up. We all kind of pay it forward, right? Whatever we got growing up is kind of the model that we use going forward. And I don't think enough people tell you that I don't think enough people say to you, think about how you grew up and whether or not there were things that you didn't enjoy, that you're now perhaps meeting out on your own kids. So when I think of legacy, I think of just trying to build good people and instilling in them values and really, the ability to be independent and hoping that there's enough raw material. I'm talking about my kids, obviously, but I think we can all think about legacy as the eternality of, it's hard to live forever, right? 

The way we live forever is through our kids. And I think that's the greatest legacy that we leave. If we're lucky enough to leave a legacy in some other way outside of that, then we're truly indeed fortunate.But really, I think, in my case, just trying to grow healthy, balanced kids and thank goodness two people usually undertake that my wife is far more balanced than I am in that regard. And is that a much better job instilling those values. So for me, that's what legacy means. As I get older, of course, I'll probably seek to compound that legacy with things that might be of broader help to the rest of the world. But right now, my focus is really on creating smart, balanced, principled kids. 

Brock Briggs  6:13  

I think that that's an admirable goal. And I hear it from people on this show much more frequently than I think I thought I would. And that's encouraging to me, I think that, as you said, you can't live forever. But the closest way that you can do that is by teaching and embodying the skills and values and all those things that you think are the most important and somebody that will continue to live. And, yeah, it's interesting. Would you mind sharing the story that you alluded to at the beginning? I'd be remiss if I didn't ask the landing on the pitch deck.

Doug Pugliese 6:52  

Oh, you know, aviation is a fraught profession. I was fortunate to be able to pursue naval aviation at a college in the Navy. And I just, you know, eventually, when you get into flight hours, you encounter enough situations where the risks kind of shift out of your favor. And so you have to always stay vigilant. And one evening, we had a night where we were working off the coast of South America in noncombatant, friendly operations, but working out at sea, regardless is always a fraught endeavor and soon had fallen. And we were, as we say, heavy five people on board and lots of fuel. And when we picked up into a hover, the ship typically points into the wind to get ready for aircraft departures like that. 

And so whoever is going to be favored by the wind usually will be the person flying, meaning that if the ship turns one way and the aircraft has wind coming across the deck the other way, the pilot who's going to be taking off is determined by whoever is going to be closest to the ship's superstructure because there's a lot of things that the aircraft can obviously hit. And we're working on small ships like frigates and destroyers. And so that evening, it turned out that one of the components in our aircraft, a fuel injection unit, had been gun decked.

We learned this after the fact. And instead of a gasket in that unit, there was some kind of a cocking glue, who the hell knows what it was, could have been Bondo who knows what was used instead. But those are the kinds of things that cause accidents. And as we're picking up into the hover, my role was to be on the gauges and paying attention to the caution lights. And all the sounds while the other pilot in the other seat was actually tasked with flying off. And, you know, it's funny how training kicks in but I heard it and saw it at the same time to gauge went to zero, the torque gauge went to zero on our rotor system on the right engine, but number two engine, I heard a sound like that, which is the sound you anticipate hearing when a turbine spools down under under load. 

And, you know, just as soon as these things are happening in real time, you're saying things like, number two engine failure, set it down. And that is really the point in time when the aircraft starts losing controllability. And at that point, we were sliding off the deck. So the pilot had just enough time to level the wings and set it down before we flopped into the drink. I don't think it was anything particularly interesting other than the fact that we were three feet closer to the West spot than we could have been if we had been three feet away from the spot, we would have had a swim that night. And probably just as well, since I was on the side that would have gone into the water first. And anyway, just, it's great to have those experiences and to be able to put, but the the right happy ending on it. But that's one of a number of things that happened to you over the course of a career. And that was what I alluded to. 

Brock Briggs  10:26  

It seems interesting, like your point that you made initially about how you're in such a dangerous profession, and it's only as you increase your increasing in skill and ability, but you're also continuing to take chances and there is, you know, a finite amount of times that that can happen. I can't even imagine how scary that would be, like you said even only three feet, but being in an object that is moving, that is that big and heavy, being moved three feet is quite scary with you being in it and it's not moving of your will, that's for sure.

Doug Pugliese  11:03  

Yeah, it's a great experience to be in those situations. You know, there's a lot to the fact that people say, you know, I really feel alive when I'm in those moments. It's certainly proficient where you have lots of opportunity to feel alive. But I think the risks of the profession came home to me one one day when I was I don't mean to go off on a tangent but I was presenting some procedure in our squadrons, regular monthly safety stand down, which is a time when pilots get around in the wardroom and train and I kind of casually asked the question among the wardroom officers there. My fellow pilots in the squadron, how many of you have been in the drink? How many of you have gone into the water? 

And it was a room of about 18 people that day and all but three hands went up, which I was stunned to see. I was stunned to see that virtually everybody in that room had had an opportunity to land. Most of the control seemed but to land in the drink in the ocean, which is just kind of a terrifying thought. When you think of what happens when a ship lands, first of all, it turns upside down and starts to sink. And if you're trying to get out of an aircraft and you've got straps and harnesses and things going on, you're getting caught up in flight controls. You know, that's a pretty scary situation to be in. So I was gratified that everyone had gotten out. Obviously, there's a survivorship bias there, you don't see the people who didn't get out. And there were a number of those in, you know, spirits in the room, but it's really kind of a remarkable eye opening experience when you get that kind of information. 

Brock Briggs  12:43  

Post a story or experience like that. Is there anything that you found yourself doing differently in the day to day? I think probably on a high level, you're thinking about your life as a pilot probably a little bit differently and that sense of mortality and all of that. But is there anything that you've found yourself doing differently in kind of on like a smaller scale?

Doug Pugliese  13:09  

Well, you know, that's a great question. I mean, you have to kind of start off with an understanding that levy wants you in that phase in life when you think yourself to be indestructible, at least in that aviation job. And that's probably like 22 years to 28 years of age, right? That's the age where you think that happens to the other guy, it's not going to happen to me. And they just hope that they can beat into your head and understanding of the importance of learning your procedures, learning your emergency procedures, cold and building competence, so that you don't take that indestructibility notion to an extreme. So I think that trade off is like wakefulness to sleep, right? Your sleep to wakefulness, you're gradually appreciating the risks and learning about them and experiencing them firsthand. And that process is what kind of tempers you as an aviator, hopefully, in time to keep you and your crew safe and enable you to accomplish your mission. 

So that transition, I recall, you know, with the benefit of hindsight occurring, when I was a junior pilot, you know, we would do kind of fun, but probably in retrospect silly things, not things that violated the law unnecessarily, but you know, risks that we could have taken perhaps less than needlessly. Those are the kinds of things you do as you build an understanding of your skills and your aircraft. And I think every parent just has to hope that their kid figures out if they shouldn't do that in time. Yeah, just to answer your question, there's a gradual awareness that occurs. You're not in a toy here being paid to be professional. And yet, you still want to understand the envelope of the aircraft and understand what it can do. And those are all kinds of give and take at aviation careers, you know, let you take.

Brock Briggs  15:15  

I was talking with a guy on a recent episode that was a army Apache pilot and was just talking about how you're fighting so many things as a pilot, you're fighting physics, especially in helicopters, you're doing things that are it's kind of not designed to do that thing doesn't happen occur naturally in nature. And it really takes some crazy experiences to kind of connect the reality with what you kind of know it to be. It's not, you can very quickly get yourself in a bad situation, and the outcomes are pretty devastating.

Doug Pugliese  15:55  

It's true, it's true. The point that I think you've just made about that gentleman, sounds similar parallel to the point that I was making, which is, you have to educate yourself and be educated by your fellow pilots in time to avoid taking those risks too far. You're not there to take those kinds of risks. You're there to take different control risks and accomplish a mission. And so that's why it's interesting balance. But at the same time, you know, people are curious, they want to know what their aircraft and airframes can do. And so there's an element of that that goes on, it's upon.

Brock Briggs  16:32  

You were so kind to share some old photos. And if you're watching this on YouTube, you'll be able to appreciate these. If you're not watching on YouTube, you should be. The link to that is in the show notes. You can check that out. I'm going to tee these up and maybe you can give us a look see on walk us through what we're looking at here. This is a very studly young Doug right here.

Doug Pugliese  16:54  

Yeah, I'm a shadow of my former self.I now fly a desk as you can see, so it's not nearly, I feel like I've fallen a long way. But that was a cross country flight that I took and I managed to find the one instructor at Pensacola, who was from New England. And when I was going through my training phase in Pensacola as a student naval aviator, we have a phase where you have to take the cross country or two or three and I volunteered for a cross country. And I linked up with this gentleman who later became a friend and we went to Martha's Vineyard together. And so that was arriving in Martha's Vineyard. My mother, of course, took that photograph. And this is in the days before digital photography, really. So I don't have too many photos. That's the one that seems to get the most attention. So I thought I'd toss that to you. I apologize if it seems conceited.

Brock Briggs  17:54  

No, no, no. It's a great one. I love it. Yeah, I was actually talking with my wife last night. And I was just like, oh, I'm really excited for this conversation. And I like was showing her the pictures. And she's like, oh, who is this? And I was like, oh, settle down, settle down. 

Doug Pugliese  18:10  

Who's that guy?

Brock Briggs  18:14  

And then this is another great photo. Where was this taken at?

Doug Pugliese  18:18  

This is off the coast of Brazil, I think we were getting ready to fly and the ship was approaching Rio. And so you can see the sun is rising. And so the aircraft sat on the flight deck. And where we got our gear, and you can see in the tops manual and the dash there and the boards and stuff. And I'm just about dash inside and throw on a flight suit. So I could jump in the aircraft and fly that morning. We did most of our flying at night just because that's when you know, we train as we fight. And I think the Navy puts a premium on being adept at flying at night. And so that was kind of a pre dawn flight that was about to take off, probably about 40 minutes. 

Brock Briggs  19:02  

Yeah, that's interesting. And I want to kind of get into a little bit of your background and love to kind of tee up. You were at University of Pennsylvania, from 83 to 88 if I've got that right and then kind of rolling into the Navy immediately after that in aviation. You also studied Spanish literature in college. What was the interest there?

Doug Pugliese  19:27  

Well, so I was fortunate enough to be an exchange student and really took an interest in Spanish. And I realized that it was my ticket out of small town in a sense from a pretty young age. I grew up in a small town in Pennsylvania and my father was overbearing and I always seem to be, you know, reading from his wrath, so I just wanted to leave and I realized that I could be an exchange student, when I was probably a freshman in high school, if I mastered Spanish and my grades were decent and so I applied myself. And it turned out that I had a very strong interest in Spanish. As I learned more, I fell in love with the language. So that experience of learning a language enabled me to travel to Bolivia for a year. I was 15 when I left, 4000 miles away. I got as far away as I could. And it was one of the most formative years of my life. I got to do a lot of wonderful, fun things. 

And I guess it was that interest in that experience and the interests that I was able to cultivate down there that I found myself wanting to pursue in college. I think that experience also enabled me to get into college with the University of Pennsylvania. And I put together what I thought was a curriculum that enabled me to indulge that interest. So I really wanted to understand the culture and the economics of the place where I lived. It was a crazy experience, you know, inflation of 1,000%. And so I put together a double major of Spanish literature. That's what it says on paper and economics. But what I really wanted to do was mailed my interest in Latin American culture, history, literature, language and so forth. And so that's why I studied that.

Brock Briggs  21:33 

I'm guessing it had to do with that background that sets you up as a translator in the Navy.

Doug Pugliese  21:40  

Yes. Sorry. I didn't mean to cut you off. 

Brock Briggs  

No, no, you're good. 

Doug Pugliese 

You know, when I got to college, my old man told me there was no money to pay for it. And so I should probably go and find a scholarship somewhere. So after my freshman year, I applied for an ROTC scholarship and was fortunate enough in those days. Ronald Reagan was building a 600 ship Navy, so I got a scholarship. And as I am, in these early classes of what was called naval science, I encountered a professor named Greg Saul, who flew an aircraft that he said was a model that even though it was an older model, people who flew those aircraft got to typically travel around the South American, this annual South American exercise and I thought to myself, that sounds like right up my alley. 

So based on that, I was fortunate to become an aviator, and then select that aircraft, so that I could take that round, round the continent trip. It's such a crazy harebrained scheme, but it actually came true. And it was on that trip, where I was flying with the various navies of South America. And we were doing, you know, joint exercises together and learning interoperability was on that trip that I found myself frequently attending the same cocktail parties in the evenings that this admiral who ran the whole exercise and ran to South America for the US. I encountered him frequently at those parties. And he pulled me aside one day and said, you know, what the hell are you doing? Why am I always seeing you at these parties, socializing with the very people that I'm trying to get to know here? And I just, I guess I was a bit of abogey vaunt. I probably told him so. And he said, well, I want you to come work for me. And that's really how it happened. It was just a very fortunate encounter that enabled me to make that transition. So

Brock Briggs  23:58  

It's interesting how, like, seemingly fate or kind of a combination of your unique skills and the right opportunity, like what that can lead to on if you're just kind of even if you're not even searching for it. So a kind of luck but a prepared luck almost. 

Doug Pugliese  24:17  

Yeah, it really is. I mean, like, if you were to have the misfortune of reading my high school yearbook, which I don't recommend to anybody because we went to school in central Pennsylvania and there were a lot of a lot of kids who lived on farms or anyway, I don't mean to suggest that anything like that, but it was a very, fairly bland, high school class. But in that yearbook, my objective, my goal was to become an ambassador to Bolivia, the ambassador to Bolivia. I think I'd had a chance to meet him over Christmas when I was down there. And he said to me, look, the military is a great stepping stone. I was a naval officer and so being in the military was a really great way for me to become a Foreign Service Officer. So, you know, that stuck in the back of my mind. 

And when I found myself in the Reserve Officer Training Corps as a naval officer candidate, I wondered whether that was just a possibility. And, and funnily enough, that went full circle. When I worked for this admiral who ran South America, funnily enough, we actually went to Bolivia. And I find myself right back in that ambassador's residence with a drink in my hand talking to 2520 years later, when I would know 10 years later, I was 15 when I was down there and I was probably 23 when I went back as a naval officer. So if you can imagine the things that had to kind of come together, the works of fate that had to align for me to be able to have the experience and enjoy that kind of round trip. It's really it's kind of mind boggling, but it was wonderful, good fortune.

Brock Briggs  26:01  

Mind boggling is a light word for that. That is so strange and interesting, though.

Doug Pugliese 26:08  


Brock Briggs  26:10  

What do you think that you learned from that experience about like preparedness versus luck versus chasing your interests? 

Doug Pugliese 

Yeah, I think that there's just 

Brock Briggs  

There's so many interesting things that people can be into. And I don't know, I didn't grow up with any people nor had the interest in becoming the ambassador of Bolivia, myself. That's incredibly unique. But I think that there

Doug Pugliese  26:36  

It was tongue in cheek, I didn't have any realistic expectation that I would, but

Brock Briggs  26:40  

You could have had. You’re read on the path. Who knows it might be coming.

Doug Pugliese  26:47  

Too old for the Foreign Service now, sadly. So what have I learnt? Well, when you go to a foreign and I'm in a really foreign place, like South America, Bolivia, Bolivia, is, you know, it's the number two poorest country in Latin America. You are shocked into an immersive if you're fortunate, shocked into an immersive experience, where you really learn an awful lot. One of the things I learned was that life is perhaps not valued systemically or institutionally, in the same way we value life in the US, just to kind of put a point on that there were guys standing around with machines on every corner. And I remember one day, I was trying to buy strings for my guitar and I went to a music store, which was inside of a building and I went to the third floor and bought guitar strings and came out into the hallway, I was gonna go downstairs to the street, I noticed there was an elevator. 

So I thought maybe I'll take the elevator. But it was an elevator of an older variety, where the elevator moves inside the shaft and there is just a door preventing you from walking into the shaft when the elevator’s not there, you know, no cage. And I went over to this door which had a window, but the window was missing, it must have broken. And I remember putting my hands on the windowsill and you know, looking down this dark elevator shaft wondering where the elevator was because I had pressed a button and couldn't see anything. And I kind of felt a little cold breeze on the back of my neck. And, you know, it was one of those things instinctively I pulled my head away just in time for the elevator to go by my nose. And I realized my head would have probably been logged off had I stuck it in there much longer. 

And so you know, that's the kind of thing you know, broken empty windowsill in the door for an elevator shaft. That's the kind of thing that would not have happened in the US because we have rules and laws in place to protect people from that. But it's the kind of thing that in South America can happen very easily. And, you know, I remember going out to the street and throwing up realizing that I came pretty close to you know, having my head at the bottom in that elevator shaft. That kind of thing I encountered really everywhere, from road safety to, you know, military demonstrations against the military leadership at the time and economic demonstrations by working people who are suffering from inflation. Those are the kinds of experiences where you realize we do a better job of safeguarding human life up here than they do down there. But that was an important, you know, an important experience and an eye opening one.

Brock Briggs  29:53  

It's very easy to get complacent about how good we have it here. You don't have to go very far in any direction to see that it's, you know, we have plenty of opportunities here to improve. But we also have a lot farther to fall as well. And how should things go in the other direction. I'm going to share my screen again. I want to look through some of these other pictures you shared. And here's some of the backstory on these.

Doug Pugliese  30:27  

Oh, great. Well, we're in Paraguay here. The gentleman on the left is the admiral that I worked for. The second admiral that I worked for. I worked for two admirals in succession down there as an aide and translator and we're in Paraguay in 1993. Meeting with the new president of Paraguay, a guy named Carlos Wasmosy and he was the first democratically elected leader in that country and 30 plus years. You may recall that Paraguay suffered under a military dictatorship from a strong man named General Stroessner. And Stroessner eventually was brought out of office and moved to exile and elections were held. And this gentleman Carlos Wasmosy was elected. And we had a very pleasant interview with him. 

And one of the things we're trying to do in these encounters with government officials is given an understanding of their mindset, what's going on in the country, what they're concerned about. The gentleman who took that photograph might have been, he was in the room. So I don't know if it'd be better if that might have been the council, the general counsel for the embassy down there. But what we're doing is trying to inculcate democratic values. And in that conversation, because it was mostly said to us, you know, I've got a lot on my plate here, you know, it's very difficult steering a country toward democracy when we're so used to dictatorship and factors. 

There's one or more generals in the ranks that I think are keen to see me gone. So it was just a very interesting conversation with the leader of a small South American, landlocked country. And it kind of set up a very interesting visit to Paraguay for us because we then met with other leaders in the country on the military side, who indeed expressed their distrust of this press, this President and all that he stood for and unsure about the path that the country was on and so forth.

Brock Briggs  32:57  

With you in that position, are you kind of taking to be that we're there to put in and support these democratic leaders? Was that kind of the mission? I know a little bit about are involved in Panama in the area down during that time, but would love maybe just kind of your knowledge or an overview about the setup of this situation going into that kind of turbulent time.

Doug Pugliese  33:22  

Yeah, I mean, I was a pretty naive and idealistic person unaware in that instance, right? I'm translating for the two of them, unaware of the kind of machinations that have been going on probably, since time immemorial, by the CIA and other organizations in the US to steer the politics of the continent. There's a great book called Legacy of ashes that I encourage everybody to read because it really is kind of a laundry list of our failures, not just in Latin America, but around the world. But that said, you know, we think we were in our mission there to support democratically elected governments and to encourage good behavior and the US style values. 

And that's the mission that I felt in my heart, day to day working in this role here with this Admiral and nothing that I saw suggested otherwise, I mean, the admiral on many occasions, told me look, we don't want to teach these guys how to storm the government palace. We want to teach these guys how to be in a political military and strengthen the institutions of the continent and to work with us to be better allies. So that was really you know, our mission, frankly. I apologize if I didn't answer your question properly. But I think that was close enough.

Brock Briggs  35:09  

No, that's perfect. This is another picture of you that you shared. What are we looking at here?

Doug Pugliese  35:15  

Yeah, this was dinner. I think it was that same evening. And I'm kind of caught with my mouth open looking off in the distance. But I'm actually again, conversing with the gentleman to my right. So I'm in a white shirt there. And to my right and drab olive green is a general from the Paraguayan military. His name is Lino Oviedo. And beside us, are various members of the embassy staff and defense attache, but across the table from general Oviedo, though, is again, the admiral in plainclothes when we're having dinner. And that general is, of course, I shouldn't say of course, interestingly enough, expressing the views that I mentioned before that, you know, maybe this democratically elected president is off on the wrong foot and, you know, needs to be, you know, needs to be watched carefully. 

Again, distrustful of what was viewed as the wrong path, and you hear these political views in a lot of places. But in a country like Paraguay. When someone in power says, I'm distrustful of the path the government's going on, you know, there's always the possibility that they might do something about it and take matters into their own hands. In fact, that's what general Oviedo did. He has a really interesting biography and he's deceased now, died in a helicopter crash, but not before staging a coup. And not too long after we left, staging a coup and deposing President Wasmosy and it's a really fascinating story. This happened probably 18 months after we were there. He deposed Carlos Wasmosy, declared himself the supreme leader and, you know, engaged in all kinds of quirky authoritarian activities. 

It was interesting that I don't think I'm sharing anything or speaking out of school that I shouldn't. He was ultimately apprehended when he visited the general counsel's office at the USMC and perhaps lured thereby the possibility that he was gaining stature in the eyes of the US but ultimately apprehended and thrown in jail for that coup. In the Office of the General Counsel, the Consul General, excuse me, I keep calling with the General Counsel. He's not a lawyer is a diplomat. Paraguay doesn't write an ambassador. So we have a consul general down there. And, and so it was a really interesting example of how these tensions are working their way through these countries as they try or seek to transition perhaps not successfully, to less authoritarian, more democratic governance.

Brock Briggs  38:31  

Here's one other with him again, I believe.

Doug Pugliese  38:34  

So here's the entire cast of characters. So Paraguayan Navy, which is a funny statement, you can see the officers of the Paraguayan Navy are wearing black. Paraguayan Navy consists of a riverine force. When I say riverine, I mean that they've got a border with Brazil, perhaps one of the world's key smuggling junctures. And so that Paraguayan Navy is tasked with controlling drug interdiction and containing smuggling, I'm not sure that it did a very good job of that, at least at the time, but you see, to my left, in other words, to my right in this image, the gentleman in the suit is the Consul General of the embassy. Two over from him is the admiral and beside the admiral is President Wasmosy and funnily enough second from the right at the end is General Lino Oviedo. All of us posing here for our group photograph during a day of meetings and conversations. 

Brock Briggs  39:42  

So, did you feel weird after the fact like when this coup goes down after the fact where you just like I was just there like, we were literally talking to these people trying to make sure that this didn't happen like that had to be such a weird feeling.

Doug Pugliese  39:59  

Yeah. I had that experience again and again and again. It's just a remarkable thing. I mean, the virtues of a career in the military, if you can make it work or that you can encounter really interesting people in your work. And when I found this article, in the paper, I was still working for this Admiral. This is 1994. When I found this article about General Oviedo, I clipped it out and saved it because I just thought, wow, you know that times are, we live in interesting times. And I just thought this was a really remarkable experience. And again, as I say, this kind of happened in every country in one form or another. Seeing these characters, these were the real life people moving things in these countries. And so invariably, you come into contact with people who are actors. Not the good kind of actor sometimes. 

Brock Briggs  41:09  

Yeah, big time. I think that this really serves to highlight the difficulty of military service when you are maybe not directly connected with the outcome of things. You're kind of filling a role of performing some action. But the outcome, like you're a very, very small piece and even even going up the ranks like you're just a little bit bigger, you're just not as small. And

Doug Pugliese  41:41  

It's insane. What you're talking about is insane when you step back and realize you are the smallest cog in a very big machine. And even as a senior officer, you know, even as a captain, you're still four or five ranks down from the very highest of the military leadership. And that's after an entire 30 year career, you might be a captain. And when I say captain in the Navy, that's an O-6. It's just amazing. How, you know how big these organizations are as you suggest and how small players we really are. And that's under you know, that's of course, an organization that in turn is under civilian leadership so long way from the top. 

But the Navy gives you great experience and great responsibility and it's a wonderful place to get your hands dirty, as I like to think. By the way that that article about Lino Oviedo mentions an interesting fact and that is that Lino Oviedo was responsible for deposing the dictator General Strasner. And he did so by walking into his office with a hand grenade saying I'm going to blow this up if you don't get the hell out of here. So it's crazy, anyway, what happened to Oviedo, he himself while campaigning for president after spending time in jail for his coup attempt, he himself probably was the victim of I would probably say skullduggery when his aircraft crashed and he died. So yeah, but we're just like, like you say, we're just small cogs in a big machine interacting with these important and powerful forces. 

Brock Briggs  43:23  

You don't have to dig too deep into the countries that we've mentioned here or even ancient civilizations about how the struggle for power eventually corrupts. It's either you're going to rule by force and kind of like enslave people or vote for kind of a democratic thing. But there's always this threat of somebody who's more powerful coming in and taking a grenade to the office. I guess, one way to ensure that things change hands right away. But back to kind of what we were saying before about being grateful to live in a place where we have some semblance of structure and law and order. Hearing stuff like that will make you really thankful really quick. 

Doug Pugliese  44:12  

Yeah. Just to that point, I don't mean to again, go off on a tangent, but in the Roman Empire, the city of Rome around the time of the eruption of Pompeii. In Rome, only one in three people was not a slave. Imagine that. Two out of every three people is a slave. I mean, history is just full of violence and oppression and we're living in a very, very gilded golden age of human rights and freedom and who knows if we'll get it right. Or if we'll revert to that, you know, that barbarity. The Romans had a slave revolt to deal with in 79 AD, led by a gladiator And who carried on that slave insurrection for two years. And when the Romans finally put them down, they crucified 10,000 slaves along the Appian Way. So, I mean, we're living in what arguably is a very, very small window of civility in the long course of human history. I just wanted to make that point to you. 

Brock Briggs  45:35  

I agree, do you think that it's realistic for us to expect that we will be able to hold on to this forever? And I don't mean this to be like doomsday ish. Certainly, I am very quick to acknowledge that we've got something very good going on here. And I get frustrated with people that can't accept that we've got problems, but generally very good. But like I was saying, an outlier in a lot of ways when it comes to world history or at least world history that we know. Do you think that that's not long for this world on a long enough horizon?

Doug Pugliese  46:14  

The odds are against it, I think.The one thing we have going for us is, as I alluded earlier, the fact that our path to eternity at least on this earth is through having kids and successive generations. And so we have that one incentive to leave the world a little better place for them.And so maybe that tends to govern some of our worst instincts and our baddest behavior, but there are psychopaths out there who maybe don't feel those compunctions.

Brock Briggs  46:48  

What gets you out of the Navy and pursuing a career in finance? Love to kind of talk about this next stage of your life and kind of how that sets you up into where you're at today. But there's, you kind of live through and work through another turbulent time in the world back on the homefront here that I'd love to get into.

Doug Pugliese  47:10  

Well, I was at a bit of a crossroads, having spent that time working somewhat, the admiral who runs south america is based in Puerto Rico. And I found myself living on a sailboat kind of enjoying the life of Riley, at this point in my career. Spending a lot of time in South America, and doing some fairly rarefied things. And I reflected on my objective, my career objective, which was until that point to be in the Foreign Service. And I think, you know, I think good fortune can be a double edged sword at the time on a bit of a not a bit of a lark, but on a bit of a kind of a belt and suspenders approach, I applied to graduate school. And it was at that point that I was fortunate to receive a scholarship to go to business school and went to NYU. And I almost felt like I couldn't, couldn't turn it down. Business School scholarships don't come to office was a great opportunity. And NYU had a great international business program. 

And I thought maybe instead of the Foreign Service, which felt to me a bit ineffectual, maybe business was the way to get back to South America again. And so I decided to go to NYU, and I resigned my commission or the equivalent of resigning once commission, and went off to business school in New York City. And that was really my departure from the service. You know, the old saw is that you either leave the Navy as an admiral or Lieutenant no four. But in between, it can be rather difficult challenge. You're not senior enough to have a pension in the Navy. And you're not. But you're a little bit too old to kind of start a new career in the sense that most of us thought of a career back then. So I made the decision to take the opportunity and leap out of the Navy. I often look back on that and say, What the hell did I do that, but it was probably the right decision. 

So I went to business school, but it was at business school that I encountered finance, and I really enjoyed finance. I was struck by how much I enjoyed finance and one of the things when you learn about finance that you're exposed to is investment banking. And there was this frenzy of people trying to get investment banking jobs at NYU that I was exposed to, and I you know, I felt like I was I see there was a whirling Phantom. I was curious to know what it was and I was gonna touch my finger to it and so I stepped into the blades and got kind of caught up in it and next thing, you know, I mean and that's where I want to be and all the other interests kind of got pushed aside and it might have been a competitor in me, it might have been, I don't know what it was, might have been kind of caught up in the euphoria of a crowd of smart, ambitious young people seeking their fortune. But that's the track that I got on to. And that's what I pursued.

Brock Briggs  50:30  

Is there anything about that time that maybe spurred the focus or drive of all these people to investment banking? Or was it just a matter of circumstance? And certainly, one thing that I have noticed about hanging around in different circles is, I grew up from a group of people highly unmotivated. And I thought that that was kind of it, and then you start to expand that circle. And, you know, you start looking at more advanced schools and higher performing people. And you see that there, oh, you know, there's, you can be doing, there's always something more that you can be doing, and there are people out there being more aggressive about their career than you ever thought you could be?

Doug Pugliese  51:17  

Yes, for sure. You know, there are people that I've encountered in my career that made me feel as though I was standing still. One of your other guests, Wes Gray is one of those kinds of people, right? Standing still and not really doing much with your life when you consider their trajectory. One of those people in my experience at NYU was a friend, prior army officer named John Nelson. And John said, dude, you gotta wake up. I was fat, dumb and happy, kind of, you know, I'm gonna go back to South America and figure out how to get back down there and do my thing. And John's like, oh, think of the opportunity, though, that you're able to pursue here. And when I spent time with John, I always got the feeling that I was two years or three years behind the curve. John was always on top of things and it was, you know, getting on in the school year, in the spring of, maybe it was even that first semester in the autumn in that first, yeah, is this fall of that first year.

And he said, look, if you want to do investment banking, or you want to have a shot at it, you gotta get your shit together and apply yourself because this process moves fast. And as Ferris Bueller says, you might, you know, you might miss it. Because life moves fast on this, on that career path. And so, you know, following John's advice, I got into this process and tried to get on the list to interview people, different firms. And I feel a little bit like a babe in the woods telling the story. But I remember getting on the Lehman Brothers interview roster that fall and these two people from Lehman Brothers came and sat down with me to interview me. And they were clearly very unimpressed. They were not sure how I had gotten into the room with them. But they kind of peppered me from both sides with questions. 

And I had no idea how to answer those questions like I had not properly understood what I was preparing for when I prepared for that interview. And it was apparent to me that, you know, they didn't even have to say, well, nice chatting with you, but I knew I would never see them again. And it was probably that experience that spurred me on to figure this thing out and get with the program. And, you know, gradually each successive interview that you had to scratch and claw for became better experiences, I kind of got my feet, that that was the process by which I woke up. And there were a few people like John Nelson around me, who helped me to understand that. So, you know, we're fortunate, as you suggested that if we can surround ourselves with good people, we might just keep our head above water and figure things out in time. In my case, that's by the way, in my case, that's a whole career pattern, barely figuring things out in time not to get cold and tossed into the rubble heat.

Brock Briggs  54:28  

Do you think that looking back again, with we're talking a lot of hindsight in this conversation, but with the benefit of that, how different do you think your outcome really would have been had John maybe not intervened in your life in a way that was certainly positive and kind of bucked you up a little bit?

Doug Pugliese  54:49  

Well, yeah, as I think I alluded earlier, you know, one would think getting a scholarship to graduate school is a good thing. But it derailed me though from that very interesting trajectory that I was on toward the Foreign Service. That ambassador in Bolivia said, hey, the military is a great stepping stone for the Foreign Service. And I was really doing well in that career as an aide for this Admiral and as a translator, I was getting all kinds of feedback from the embassies that we were working with, that this was a great path for me, and that I should know I should pursue it, I was getting wonderful feedback about the work I was doing to enable the admiral to be more effective in his job. And I was having career conversations with the attache and the embassy staff in each of these countries is trying to figure out how to do this. And so that scholarship kind of took me off that track. And it derailed that interesting dream of pursuing that Foreign Service career. 

And I kept getting knocked farther and farther away from that track, John was an important element of that. And I don't mean that in a bad way. I could very easily have said, I'm not interested. I'm doing something now. But maybe that's not how, I mean, that's not how my mind or my DNA works. And so I pursued this other thing because people said it was good. And if I just figured it out in time, I might realize that it's a good thing to pursue. And that's kind of how I viewed it. I was able to ultimately to go back and work in South America as an investment banker, but that turned out not to be a great path for a whole host of reasons. But I got pulled off that track. I think things definitely would have been different had I not, you know, kind of fall into that good luck puddle that I encountered. 

Brock Briggs

Did you regret it? The path that you should have taken I guess

Doug Pugliese 

Look, so many things will be different in my life, I might not have met my wife, I might not have had this very interesting and enjoyable career that I now enjoy, and that I now love. It was definitely a hard road to take. And there have been a lot of times that I've regretted it. I've regretted it most because my natural abilities didn't mesh with 50% of the work of being an investment banker. The work of being an investment banker is about almost like being a private in the military, like you are on somebody else's schedule. And you're working and filling your days with really hard, painful work occasionally enjoying things that one is good at the interpersonal side. But you know, I had to train my brain to be newer. And that was a lot of work. 

And I wasn't innumerate but I wasn't so naturally inclined, you know, I've got a brain that is probably as you might imagine, pretty verbal, given my language, interests and skills. So I had to fit into a certain mold that for the first couple of years, when you're in the trenches, doing financial analysis for other people was really challenging. Now, ultimately, I was able to pull out of that trough and become more of a transaction originator in the banking world, where those other skills then came into being. But yeah,so when you can follow your calling and that calling involves, almost by definition, your natural talents, you're always going to be happier.So that's, I think, an important lesson. You know, don't ignore your natural skills don't or you'll suffer. And that was time and again, shared during those interviews. Time and again, people said, this is not a job to follow or to pursue because of the glamor because you will be absolutely miserable. 

What does misery mean? It means sitting at a desk chair at three in the morning with your ass getting hot in the seat while you're trying to make a financial model, balance sheet balance. It means doing comps, all these things happen between midnight and five in the morning, doing comparables analysis late into the night so that someone can get on an airplane at least when you're pretty significant you're getting on the airplane and so that someone can get on an airplane and use the analysis in a conversation with a prospective client. Those are the kinds of analysis has to be right. So those are the kinds of challenges that junior investment bankers face. And if you are not gung ho and facile with these tasks, it will be onerous, painful for you.

Brock Briggs   59:57  

It's so funny, you mentioned it had to like draw some correlations between like investment banking and the military. I find it so funny that they both are very non glamorous jobs and, and what they're offering you in exchange for the the outcome is so like, it doesn't even look equitable, like, especially a bit early years, maybe not, I can't really speak to the officer side of the military, but it's like, hey, come, come join the service. And we're literally going to just work you to the bone. Like, that's what we're here to do. We're here to make your life miserable and uncomfortable. But I don't know about the military necessarily, but the world of finance, you know, they're beating people away. Yeah, come work 60-70 hours a week and they just can't get enough of that. 

Doug Pugliese  1:00:44  

It's insane. 

Brock Briggs 

Love it. 

Doug Pugliese  

It's insane. The military, where I got beaten up pretty badly as we all do. The military is where I learned to endure the pain that I ultimately faced as an investment banker. There's a lot to be said for being thick skinned, and being able to be yelled at in stressful situations. Because the military carries its own interesting stresses, right? There's the stress of high up tempo, being in dangerous situations, risking your life at an activity, whether it's someone shooting at you, I never had your experience of being shot at. 

I always worked during peacetime even though I worked during the first Gulf War. I was always in situations where I was never in harm's way. But I did have enough risk in my life that I understood the stress of getting an aircraft safely back on deck, that stress is different and perhaps less corrosive than the stress and finance of working with other people's money on their timetable. According to the market schedule. That's a different stress. And I think that's a harder stress, funnily enough, risking other people's other people's wealth. So they both have their own stresses. But one is very good preparation, which I think is why there's a lot of military in finance.

Brock Briggs  1:02:00  

You work through a couple of very difficult times in the world of finance. You started in Bear Stearns, I believe in 96 through 2008, both the.com bust and the kind of mid GFC or so. What were I guess what's on our theme of hindsight here? What were your big takeaways from that time as an employee? Talk about maybe risk mitigation and how you maybe have seen the world of finance evolve since that time?

Doug Pugliese  1:02:34  

Now, that's a big question. You might have to remind me of what you just asked me again, if I go off on a tangent.

Brock Briggs  1:02:41  

I couldn’t even repeat it already. So

Doug Pugliese  1:02:44  

Well, so you're right. There were two big events while at Bear Stearns that rocked the global economy. One the first one. So when I got to Bear Stearns, we were in kind of a golden age, we pulled out of the high interest rate environment of the early 80s. And for the last 12 or 15 years, the economy was in this kind of wonderful rolling, gaining momentum, not yet totally leveraged in a world where finance was growing, and it was growing really quickly. And so I found myself the beneficiary of that. I'll be a little bit late to the table. My friends from college were all kind of running Wall Street when I got there. But in my case, I got there and it was kind of a really nice, nice period. While we still had financial upsets like long term capital management and the Asian currency crisis, the Russian currency default, in the late 90s 1998, we still had a relatively smooth ride and finance that started to change in the late 2000s. With the advent of the.com bubble and that was a really tricky time. 

And for me, it was very interesting to talk about risk management. I was privileged at the time to have a turn as a secretary on a committee called the commitment committee at Bear Stearns. The commitment committee was responsible for determining which transactions to get behind as an investment bank and to pursue. They were largely all about financing transactions. And I think that name of that committee stemmed from the days when we were a partnership and we were committing the firm's capital and reputation to these transactions. Of course, most of these firms went to public during this period of time and so they weren't then working with other people's money, OPM. That's a very dangerous concept, by the way, but OPM enabled these firms to grow rather aggressively. Take perhaps more risk. 

And it was in those committee meetings when the old guys who ran the firm and had run the firm for many years, were trying to wrap their arms around what the hell these.com companies were doing and how they were doing it and what their prospects were. And it was fascinating, they would bring the deal team in and present the case for the transaction that was being considered. And then they would bring the analyst, the research analyst in and hear from him or her. And it was, it was fascinating. To see these old guys, I say, look, guys, I'm probably one of these old guys now. But at the time I was, you know, 30 or 32 to see these old guys scratching their head trying to figure out how these business models were going to work, right? There was no money involved at the time, except what was raised from investors. 

The only thing that we were evaluating these companies based on was esoteric, you know, ethereal concepts like eyeballs and clicks and pay, you know, so when you try to make a rational decision about a business's value and an IPO value in a time when there was no historically no basis for doing so, this, these teams were stymied. Now, I don't think it prevented them from getting in the way of their own paychecks. And so they ultimately determined that this was a business that we wanted to pursue. And so time and again, those conversations got a bit easier. But we were leader in the early .com stage financing, IPO financing, that first.com bubble.com 1.0. And so it was a fascinating experience. And of course, all of that stuff came to grief, right? All of those companies with almost very few exceptions, are no longer, you know, on this side of the grass. And I just think that that experience for me was really eye opening. So you ask about risk management. 

On the one hand, and investment bank can cover its risks by, you know, highlighting risks to investors. But the wheels of capitalism turn and someone is going to finance these businesses. And so that became, you know, a systemic process as other firms get into the business and started getting behind those early.com names and taking them public. It was a very fascinating, very fascinating time. I spent most of my career focused on M&A and the chemicals investment banking space. We did a lot of financings for the M&A clients we serve. But it was largely around M&A both for financial sponsors, taking these companies over through private equity investments or through strategic combinations. So as my career advanced, I got away from that fly on the wall experience of seeing these little guys talk about how to, I don't understand this new economy. 

But that was a really interesting and eye opening experience. I managed to avoid losing my job and that experience because it was a very tough time. The recession that ensued in the early 2000s was long and painful. By that time, I had gone to London, where I was starting up an investment banking team focused on chemicals to the European corporate space. So I got removed from that. But during that early period, you know, I was reporting to David Solomon, in fact, who managed was chairman of the command committee and managed 

the investment bank for Bear Stearns at the time with a gentleman, really interesting times.Brock Briggs  1:08:43  

I loosely follow the world of finance and kind of what's happening there and a high level, I have been completely overwhelmed by it after an undergrad in finance and determined that that's maybe not the direction I wanted to go. But still follow along because I think it's interesting and fun. A lot of extrapolation about the more recent years and run up in valuations of these tech companies to the .com. And as somebody who can only like look back in time and try to make some comparisons a fine. It's probably not quite as accurate as maybe somebody who had actually gone through that. Did you find yourself making comparisons over the last couple of years to that time? 

Doug Pugliese  1:09:30  

Well, you know, that old expression that history rhymes is kind of true, right? We're always improving on the old in many respects, but encountering new things. When I didn't even begin to answer the question about the great financial crisis that you asked. I didn't begin to answer the question really about risk management. But as I go through these cycles and I think it's an incredibly valuable, valuable experience to get little gray hair in this business and go through it. These business cycles, one starts to tease out the commonalities. And I think those commonalities are that humans don't change, and human emotions and their ability to be swayed don't change. What changes really are the superficial circumstances? And so yeah, there are a lot of similarities. 

But the similarities aren't in the finance itself. The similarities are in the behavioral aspects of humans, who are undertaking the finance. That once you know, once you come to that conclusion, and I'm not saying anything new here, I mean, our firm is built around, getting the upper hand on behavioral biases. And you can listen to Wes or Cliff or any of the smart quants out there who talk about this stuff. That's the thing that we have to step back and recognize as the constant in this world. And so yeah, when I see and just to pick up on what you said, like if you're not sure what I'm talking about. What I'm talking about is the fact that human beings are driven in finance, at least predominantly by a greed to make money and a fear of losing money. And those tendencies together with some important behavioral biases, like loss aversion, that's huge. And anchoring and extrapolation. Those kinds of tendencies tend to recreate market patterns that are predictable. Timing is hard to predict. So don't interpret what I'm saying to suggest we can time these things. 

But by and large, you can observe patterns, from cycle to cycle. They might be grouped around circumstances that are different, but those patterns are very much part of our human DNA. And they repeat and become predictable. And that's, I think, the fascinating thing about finance. And that's why our firm's mission to educate investors is so important, because the real thing that enables investors to make the right decisions for themselves is to learn about these pitfalls to learn about these behavioral biases. And if you can educate students, practitioners, clients, especially about these pitfalls that our own monkey brains lead us into. They can become better at what they do. So yeah, I saw a lot of things from the.com era repeated in this recent period. I mean, meme stocks are such a fascinating and hard to wrap your head around phenomenon right now. But when you step back and look at it through the lens of behavioral biases, I think it's an entirely understandable process. That's the key message, I think that emerges after a career in finance. It's the human beings that create the patterns that are recognizable, really.

Brock Briggs  1:13:01  

Wes was the first person in the quantitative space that I've ever talked to. And I've done a good amount of reading about it. But I was surprised at how different he pitched quantitative investing to me, as opposed to what I thought it was. I kind of am going in approaching like, and I very systematic rules based investing, and I really kind of was like drawn and I like that. But he pitched it as more of what you said it is that but the reason that we do that is because it's behavioral driven. And we're here to like, take advantage of that in a systematic way. And it's an interesting application of it. And I don't think that that's like at the forefront of hey, this is why we do it this way.

Doug Pugliese  1:13:52  

It's true that once you understand these patterns, you can be systematic, you can show courage, where other people typically from behavioral biases show fear, you can show insight and use evidence-based strategies to overcome some of these interesting phenomenon in behavioral finance. So yeah, it was eye opening to me. I mean, when I encountered Wes, I was not familiar with quant finance. You know, Warren Buffett was my conception of what an investor was, you know, someone who was shrewd and these guys had Bear Stearns that I watched kind of picking over the details of corporate balance sheets and individually understanding each situation. Wes has opened my eyes to a more systematic approach that capitalizes on these shared attributes called factors which define certain types of companies, particularly around notions of valuation and fundamentals and harnessing that to capitalize on a large numbers to make money. 

Whereas Warren Buffett, you know, he crawls over a business, like buying a classic car, right? He wants to understand every aspect of it and see if he can't exert influence to create an opportunity for himself and his shareholders to invest confidences is very different. And I was fascinated by that understanding, building that understanding of what we do at our firm, great education. And once you by the way, once you embrace quantitative finance, you can almost forget about all the bullshit of like what's the Fed gonna do doesn't matter. It matters because regimes change. And you need to be kind of understanding how those regimes change, specifically, if you're in trend following and not looking specifically in price trends. But for us to be able to not really care about what's going on day to day in the markets because the system is based upon these overarching truths that we believe to find behavioral bias. That's a really liberating experience. Anyway, I remember being struck as I was learning about what the firm does. And when it came on board early in, you know, mid 20s 2015-2016 timeframe learning about this.

Brock Briggs  1:16:20  

How exactly did you end up meeting Wes and coming to work at alpha architect?

Doug Pugliese  1:16:25  

Oh, so Wes and I, you know, we share a couple of overlaps. We both attended Penn and obviously, we're veterans together with an interest in finance. And so a mutual acquaintance of ours in the Philadelphia veteran network that we're involved in here, kind of a big informal group of people who know each other said, Hey, Doug, you should meet Wes. You'd like him. And so he connected us. And I reached out and said, hey, Wes, let's get together. And, you know, see what comes of it. So in the first instance, actually a funny story. In the first instance, at the time, he was a professor at Drexel University, teaching business there while he was, you know, building our business on the side. And so he invited me to his office to hang out and get acquainted. So I showed up there one day and he was in one of these old buildings that was probably built 100 years ago and had been chopped up. And so he had this bizarre office that was, like four feet wide and 20 feet long. 

So his office consisted of a long desk and a long bookshelf, right? With one of those kind of doors that fold over. So we're sitting in this kind of awkward space chatting and I'm swapping stories about military and our experiences in the military. And he shared with me that he'd served in Iraq as an Intel officer. And at one point, so you might be interested in my book that I wrote, and I was really impressed, Wes. You wrote a book? Yeah, yeah, I was embedded with the Iraqi forces in a lot of our province and picked a lot of notes and wrote a book about it when I got out, and he lifts this cabinet door, like one of these doors that kind of folds up and slides in. And there's this incredible, you know, four feet of, of shelf space with his book, you know, with the spine of his, you know, 50 copies of his book that he just published. I think it was naval press, and gave me a copy, signed it, you know, semper fi West, it was really very, you know, very interesting for me, and I saw that I was gonna go home and read it and get back to him. And I was grateful and impressed. 

And, but we're still, you know, we're still hanging out, talking and chatting. And, you know, half an hour later, we're talking about finance. And he looks at me kind of like the same way he did earlier in the conversation when he showed me that book, and he said, oh, you might be interested in my other book. And at the stage, I'm like, you've got another book, and he lifts up the shelf above my head. And there's this, you know, four feet of these, of these neatly bound brand new books on the shelf and quantitative finance. Sorry, I don't have a copy of the handout, which I'd show it to you. But it was a book describing his Journey to Understanding value investing and understanding finance. And so again, I walk out with these two books, and I think to myself, you know, here's a guy who's different, clearly different, and I want to understand this job better. And, and who knows, you know, what could come of it? 

So that was probably in 2012-2013. And 2013 maybe and, you know, little later on, I reciprocated and head him over to my offices, and I'm not going to name the firm where I was for reasons that will become obvious, but we're sitting around in this big open space, chatting. I was at a family office at the time, kind of between gigs trying to figure out what's next. And Wes shows up, you know, in shorts and a T shirt and a baseball cap backwards and a backpack. And, you know, everyone's kind of sitting around in business casual. And so I have Wes over and we sit down in this big open space in the midst of the floor of my, you know, this team that I was working with. And we're part of a much larger firm whose primary business in this particular floor space was asset allocation. Like that's where they were focusing their energies.

And I and so Wes looks at me goes, what the hell are all these people do? You know, Wes, he likes a little bit of profanity to spice up his language, which I appreciate. He goes like, what the hell are all these people doing here? So well, you know, we're focused on asset allocation. And I started going down the path of studying studies, you know, 90% of financial returns and investments really are based on asset allocation. We're not so much on stock picking. We farm that out for other people. And Wes is kind of like a big grin on his face. And he's shaking his head and why because it's all bullshit. It's just activity, right? Activity for the sake of appearing to be working. And he said, you can get rid, you can fire all these people and just use a very simple model of asset allocation that would do as well as everybody else here, if not better. And I went, you know, Wes, kind of keep it down here. Yeah, so I was really keen to understand what he meant by that. 

And, you know, I've kind of think of that as the start of a beautiful friendship. We got to know each other and wanted to try to do a lot together because we embraced Wes his view of behavioral biases, that was one overlap that we did have in common with the firm that I work for. So we got to know each other at that period of time. And, you know, Wes asked me, hey, are you gonna hang out in this place the rest of your life and be a one intrapreneur? Or do you want to come and join me and be an entrepreneur? And at the time, I was trying to repair my balance sheet from the financial crisis. So I was a little less averse to starting over again, at the time, that would have meant working in Wess basement, basically, which I ultimately opted to do. But at the time, you know, I politely suggested that I have to think about that. We dated for a long time before we could figure out how to work together. And, you know and he has since won me over to those early viewpoints about wasted space and wasted time. But that was our, you know, our earliest encounter.

Brock Briggs  1:22:55  

In our conversation, we got to talk in a lot about like System 1 and System 2 thinking. He was gonna get me schooled up on a lot of stuff and I could see how he would be persuasive.

Doug Pugliese  1:23:06  

Yeah, he's very persuasive. Like, there's a good reason he's a business school professor because he has a gift, a rare gift, I think, which is the ability to distill very complicated concepts into simple to understand terms. And I just, I love that about him. We hang out together. He's able to educate my kids. My kids love, the guy is like, he is a wonderful explainer. My kids don't want to hear from me, they want to hear from Dr. Wesley Gray. Or Dr. Katie Gray as he says to me, sorry.

Brock Briggs  1:23:37  

No, no, you're good. You have come to take over their business of head of 1042 Solutions. I had to do some reading and a lot of listening to kind of understand what this is. But I'd love to kind of hear about what you do for Alpha Architect now. And, yeah, how, why it's important, I guess, should the listeners care.

Doug Pugliese  1:24:01  

It wasn't the business at the time that I joined. I joined to make this a business. So when I was still a bit old firm. We had a client, Alpha Architect had a client, at the time, who happened to be one of the firm's business partners. Again, David’s no longer with the firm. He went on to do bigger and better things, but the time David's family was going to sell stock in the family business that they owned, which happened to be an ESOP company, a large ESOP company, a $10 billion Philadelphia based ESOP company. People in the industry will probably know who it is, so I'm not going to say who overtly but at the time, Wes together with the team had worked to understand what the opportunity was associated with this interesting thing called a ESOP employee stock ownership plan.

And he had created an interesting strategy that worked for this family, but it wasn't suitable in its form than really for the market, which requires some tweaks to it. So at the time, I was trying to convince the firm that I was at to let me build a business using what I saw as the virtues and the strategy at the firm that I was at. And they not only said no, they said, hell no, go back to your hole. And so I went to Alpha Architect and said, Wes, let's build this business. I have some, I have a vision for this business. And let me build this. And that entailed creating a number of innovations. 

But what we've created is completely new in the employee stock ownership plan space, and I believe what it does is it liberates business owners from the perhaps not so appropriate, not so investor friendly approaches to this investment niche that existed for eons now, in the past. What we've built is really something new. And I think what it does is it creates a more attractive lens for business owners who are evaluating whether to sell their companies to their employees, which I think is, you know, it's a good thing. I get up in the morning thinking that I sleep well at night and I like what I do and it's good for the communities that I work with. 

Brock Briggs  1:26:37  

Back in your interview and 2021 with MEB, you had mentioned that there were around 7000 companies that had ESOP's. I'm not going to hold you to that number nor as to what it is today. But that's just to kind of give maybe some perspective about what it is. Can you maybe explain for the layman here, why a company would have an ESOP and then what gets them in the position of like needing what you guys offer? 

Doug Pugliese  1:27:05  

Oh, yeah, that's a really good question because I think most people's eyes glaze over when they hear the words employee stock ownership and employee stock ownership plans. So you know, I don't know if there are 7000 companies, whenever we come through these periods of cheap money and high m&a activity, you don't know how many new ESOP's get formed versus how many other ones get acquired. But okay, so there's 1000s out there. And every year now, we've seen a growing popularity in this in the last couple of years in this space. So an employee stock ownership plan is a fancy word for a way for business owners to sell their companies to sell their companies, essentially to their employees, without their employees having to put dime of their own money into that transaction. I call it a transaction because that's what it is. 

So a business owner and this might be a business owner who's tried to sell his company in the past to other buyers and failed, might be a business owner who really ideally feels beholden to his employees and wants this to be a way for him to pass on what they've built with him to them as a way of saying, impart thanks. And impart, let's do something that's good for your families and our community. That'll give me a sense of legacy.So what it is, is a qualified plan, a qualified retirement plan, like a 401k. I'm just describing a structure, right? It's a legal structure, it's an entity. But that entity is formed by the business owner, who says to himself in his reasoning, I can sell my company to my competitor. And that's one of the which is going to climb around my company, learn all my trade secrets. 

And then when he buys my company, fires all my employees, I mean, that's like the downside of M&A. Or I can sell my company to my employees and walk away with an attractive payout that is competitive, I would say more competitive or advantageous than a third party sale. And I can do so in a way that metamorphosis is or transforms the ownership of this company for myself to my employees without any of those negative side effects, in fact, with many positive benefits, and so what do I mean? Well, when a business owner sells his company to his employees through an employee stock ownership plan, what he's doing is hiring a team of advisers including a trustee, that trustee is going to be placed in charge of trust that the business owner forms for the purpose of buying his stock from him or her in the business. 

So the business owner is hiring a counterparty to negotiate with him a price a valuation for the stock that he is going or she is going to sell to essentially this trust. This trust is a retirement plan created and within the framework of ERISA to own the shares. And in summary, the benefits to the community are such that Congress wants these types of transactions to happen. Once enough, that with bipartisan support consistently over the decades, they're willing to convey certain benefits to both the business owner for doing this transaction and the company itself after the transaction to make them attractive. What are those benefits? Well, they're predominantly tax benefits, but what they create is an entity then that is employee owned. And employee ownership is an incredibly powerful force of nature. This is not to say communism, right? This is not to say socialism. 

This is to say that we are creating capitalists in each employee and an employee who owns a piece of her business or his business, takes his work home with him, right? Takes his problems home with her. And that way of thinking we call it an ownership culture, that makes them better employees. And that makes that business more competitive, more productive and better able to withstand the vicissitudes of the business cycle. It's a very powerful culture. And it's created by this process through this process that Congress has mandated is good for society. And so business owners benefit in some instances by not having to pay capital gains taxes or deferring them if they choose not to defer them permanently. Companies benefit who do this because the entity itself can become a tax free entity. What do I mean by that? Well, if a business is sold by its owner, to a qualified retirement plan that owns the stock, well, we all knew that qualified retirement plans are essentially tax free entities. 

So if the shares are owned, and this business is held in the form of an S corporation, then profits passed to the shareholder, essentially tax free. So you can appreciate how much more competitive a business can be if all of the cash that would have been paid away or taxed away by authorities, as a C Corp, instead flow to the qualified retirement plan that owns it on behalf of the employees. I hope I haven't abused the trust of your listeners by going down that wormhole. But I think it's important to share that this is a really attractive structure for a business to operate

Brock Briggs  1:32:47  

No, this is good. And this is really interesting. Like all stuff that I didn't know. And I'm like interested to learn more about it. So this is basically the owner not paying tax, when they sell the business to this kind of middle trustee entity and then it's been passed to the employees from there.

Doug Pugliese  1:33:08  

Yes, yes. So the business owner can elect to sell his or her stock in two ways. One is as an S corp. And if the company that is being sold as an S corp, the business owner does have to pay taxes. The company immediately though, it as a tax free entity does not have to pay taxes on any profits that pass to the ESOP plan for the shares that are owned. So that's one attractive way, but I think business owners have come around to the fact that they can have their cake and eat it too if they sell as a C corporation. If a business owner who owns a C corporation sells his or her stock to an ESOP, that business owner doesn't have to pay capital gains taxes on the sale proceeds provided that the business owner complies with the statutes as to the reinvestment of those proceeds in something called qualified replacement property. So that business owner can defer taxes indefinitely, potentially permanently. 

And the entity that buys the trust that buys those shares, that entity can then convert the company to an S corp and be a tax free entity as I described before. It's just the most remarkable and like I was an investment banker, right doing m&a, we never talked about an ESOP. Now, for good reasons, probably because we're dealing with companies that were, you know, large or mega caps, but you couldn't earn a fee. Being an ESOP advisor in my business, you get fired if you talk to someone about an ESOP, whereas in this small private company, and I mean small, like 5 million in value to 500 million in value. It's really a very inexpensive, more so than M&A. And I think most efficient, it is the most efficient transactional structure I've ever seen. And it's wonderful. It's a win-win.

Brock Briggs  1:35:04  

Yeah, it seems like there's a lot of multiple wins there, like you said, you've got the owner of the business is able to kind of cash out in a way that's advantageous to them. They are able to kind of, there's a certain element of wanting to maybe as you get older, you don't want to have all your eggs in one basket, if your entire fate of your retirement is resting on just the company that you've bootstrapped or whatever. So you de risk that event. You also, the ownership culture, like you said, yeah, that literally sounds fantastic.

Doug Pugliese  1:35:38  

Oh, it's huge. And when you think about what you have to go through as an owner to sell a business, to a third party, especially if a third party has a financial spot, like I worked for financial sponsors for a long time, there was a big claim. They are a rapacious group of buyers. And you kind of take your life in your hands negotiating with them. Not to impugn any particular organization, but as a group, they're a very, you know, very self interested organization on behalf of your investors. If you can avoid that process and consider an ESOP. An ESOP is a ready and willing buyer. And you create the sub right, you appoint your counterparty to negotiate with you the sale of your transaction. Now, he's a fiduciary and he's going to represent the interests of the employees in the plan. But it's nothing like the convulsive process one goes through in an M&A transaction, it really is an enlightened way to sell a business.

Brock Briggs  1:36:35  

So then, where do you guys come in? What is it that you guys offer as a service to kind of help with this, facilitate this transaction?

Doug Pugliese  1:36:44  

Right, well, so in order to defer capital gains taxes in a transaction, such as this, a business owner must roll the proceeds from the sale into a certain type of investment, called qualified replacement property. And this is tricky, because it requires selecting securities for which there is imperfect information to form the basis of that selection. For that reason, none of the investment banks wants really to have any part of being on the hook for that selection process. So historically, what they've done is they've gotten a couple of their best clients to issue bonds, that the clients represent meet the needs, under the statutes of this qualified replacement property. So they've pushed that risk off onto corporate clients, corporate clients are like I'm getting a good deal, I'm going to sell a bond to some guy for a below market rate, in order to give them this qualified replacement property. 

The problem with that strategy is that these are unattractive bonds that business owners typically wouldn't buy. Unless they're significantly older or perhaps infirm, they probably wouldn't buy these based on their investment attributes. These are bonds that have one virtue, and that is that you can borrow against them, hopefully, typically. And so buying these bonds gives you the ability to, in our view, perhaps enrich the lenders who will lend you money against those bonds. The sad part about that, though, is you buy these bonds, and then hand them over to the investment bank that essentially sold them to you for the privilege of taking a loan out against those bonds. So you can get access to your postpone a portion of your proceeds, the loan costs more than the bonds yield. So you're always paying out of pocket just to have access to your money into that might happen for the rest of your life. If you're going to defer your taxes permanently, that felt like a difficult situation for our business partner and his family. 

And we certainly understand that. So what we've created required us to go out on a limb and actually make the security selection for clients. And that would never have happened if we hadn't if we hadn't one of our own business partners in the position of meeting this right that was involved 1000 man hours to go through the process of scrubbing the securities to qualify the securities and thank goodness the firm has a technological technological orientation that we are, by and large, a firm of coders and so we were able to automate what was a manually intensive balls ache of a process for our clients now, and that gave us the ability to do this for other clients. So what we're doing now is we're selecting securities in the S&P 500 that qualify for this qualified replacement property treatment and fashioning an index for them to invest that replicate or seeks to replicate I should say, the risk and return attributes of the S&P 500.

Brock Briggs  1:40:05  

If you were to kind of take this situation and zoom out and could you draw me a comparison of like what like that? Maybe we'll play out an example if we can or something like that to compare like, hey, is it pure cost savings? This is what it's going to cost you to do this, and this is what it's gonna cost you guys to kind of highlight that.

Doug Pugliese  1:40:33  

Yeah, I mean, I'd like to be careful here about talking about costs because I'm talking about somebody else's investment product, right? That product is sold with a prospectus. It's sold by people who are typically not fiduciaries in that moment when they're selling that product. And so there are costs associated with that, that are multi-layered. The first obvious cost is that if I'm buying a bond, the bonds are gonna yield something and it’s what it yields competitive or market with what I could be earning on a long term bond that I'm buying. The funny thing about qualified replacement properties, the moment a business owner sells it, he's got to pay capital or she got to pay capital gains taxes that would have been due at the time that the business owner sold their business, right? That's the nature of the tax deferral. I am rolling my proceeds that's why it's called a rollover investment. 

I'm rolling my proceeds from the sale of my stock into an asset that is supposed to have parallel attributes to the stock that I just sold to the employee stock ownership plan and hold that asset. And the moment I sell that asset, by golly, I'm going to be paying capital gains taxes that would have been due at the time of sale and any more that would have accrued during the appreciation of the asset that I now own. So that's a really complicated concept. But what we wanted to do was get out of the world of having to borrow against our own investments just to have access to our money from the sale, so that we could then invest in a more appropriate or a more attractive or a more aligned portfolio, diversified portfolio of assets. We wanted to get away from that thing that we viewed as beneficial to the investment bankers that sold it and perhaps to a smaller subset of business owners who found those attributes attractive. We wanted to provide something that was more akin to an equity oriented investment. 

So your question, though, about stepping back is important because this is complicated stuff. And I haven't done a very good job of demystifying it. I guess if I could say, what are the key attributes? Well, we think that our strategy is very sophisticated and creates a lot more flexibility for clients than the existing strategy does. And we think that those that flexibility gives them a better shot at achieving their goals and making, you know, compounding wealth for themselves. So over time, we think this is a pretty significant difference in outcomes, potentially. And so I'm probably at over myskeetosby through a public forum, talking about what it is we're doing here. But we just think that fundamentally, it's a more investor friendly oriented business. 

Brock Briggs  1:43:27  

No, that's a good to know. And I think that there are many people who run and operate businesses that listen to this show that probably unlikely will be interested in at least hearing more, I should say. If somebody wanted to reach out to you to start up a conversation about this and how it may or may not work with their business and what Alpha Architect can do with them. Where would you want to send people? 

Doug Pugliese  1:43:56  

Well, you can get to us through our website or you know, just email me at doug@alphaarchitect.com. What we typically engage in is an educational process with business owners because this is complex and Congress was rather in artful in constructing and drafting the legislation around employee stock ownership plans. So we've had to, unfortunately, create a solution that shares some of the complexity of the strategies that we think are inferior out there. But that said, a client is best able to make his or her own decisions when she understands all the facts and understands what is being proposed. And too often, we think that process gets pushed back by other formation advisors. 

So if someone were to come to me as happens, you know, every day every week and say, educate me, we would go through a process of describing what the opportunity entails, this interesting legislation, and describing how the the meaningful or I say predominant strategies in the marketplace ours and putting our strategy, how they compare and then hopefully pointing this person or people to some of the formation advisors, ESOP formation advisors that we're aware of out there who do this and do it well and sustainably. It's a very small universe. And it's very easy to be accused of making referrals with the expectation of getting referrals back. We try to look at those advisors who demonstrated independence in the space because we think that's a murky area.

Brock Briggs  1:45:46  

Gotcha. Yeah, it's very, this is a very like, unique niche. And as I was talking with Wes, a few weeks back, he was kind of highlighting some of how you don't really know exactly what the business is going to offer. But as you find unique use cases or like certain things come up and then you say, oh, you know, there's a business around this. There's something we can maybe do at a larger scale there. If one person is experiencing it, then there's likely more than that. 

Doug Pugliese  1:46:20  

Yes and we, you know, we've built quite an interesting business. That process of building this business stems from writing articles about it publishing, as we do with all of our ideas, publishing those ideas. And then, you know, hopefully, in that process, we get an inbound phone call from a few percentage points of the audience out there that come across this research. And that begins that dialogue. That's a really ideal way to build a client relationship a client dialogue, interest on both sides, mutual interest, no pressure. We don't sell what we do, we just expose clients to our thinking and they have to opt in.

Brock Briggs  1:46:59  

I'll be sure to include links to Alpha Architect and all the content you guys put out in the show notes. You guys put out a lot of really good stuff. I’m a very frequent reader of all of it. 

Doug Pugliese  1:47:08  

You’re kind. Thank you!

Brock Briggs  1:47:12  

Doug, I really, really appreciate your time in this conversation today. If you were to sum up the one thing that we could take away and implement into our lives today, what would that be? 

Doug Pugliese  1:47:23  

No, I think it stems from advice that I got early as an investment, sorry, as a business school student, from a mentor who said,whatever your situation, certainly professionally, but whatever that situation may be, always think like an owner. Because it's when you take the perspective of maybe the person who is working is employing you or, you know, the view of the person whose equity is at stake. And whatever that enterprise might be, you'll just make better decisions.And I have found that to be the differentiating factor. We're always trying to differentiate ourselves, I think the air force called it stratify ourselves. Think like an owner. 

And even if you're a cog in the wheel in the military, someone will take notice of the fact that you're making decisions not with a view toward getting through a task, but with a view toward making the organization better and more productive. I think that's a huge that's the best advice I've ever gotten.And interestingly enough, has flown through into my choice of the financial career that I've undertaken here with less than a team. That is that we're trying to promote people who think like owners and promote opportunities where people can think like owners and that is a very powerful force of nature. It's kind of like the power of compounding. It's tremendous. And people who think like an owner just make better decisions through life. I think that would be the one key takeaway over my career. 

Brock Briggs  1:48:58  

That's fantastic. And absolutely great advice. I think that we can all implement that idea a little bit better. Doug, I really appreciate your time. Thank you so much.

Doug Pugliese  1:49:07  

My pleasure, Brock. Thank you for having me on.