In this special episode, my friend — and fan-favorite guest — Dr. Peter Attia takes the mic as guest host. Peter sits down with legendary trader John Arnold, widely considered the greatest energy trader of all time. Today, through his foundation Arnold Ventures, John applies the same rigorous thinking to some of America’s toughest social challenges — criminal justice reform, healthcare policy, and K-12 education, to name just a few.
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[00:00:00] Start.
[00:05:37] Peter Attia’s intro: who is John Arnold?
[00:08:38] John’s background, upbringing, and early entrepreneurial tendencies.
[00:21:16] John’s time and rise at Enron.
[00:33:40] Characteristics that made John an exceptional natural gas trader and how they translate to his philanthropic work.
[00:41:10] The collapse of Enron.
[00:46:46] The success of John’s hedge fund, and his early interest in philanthropy.
[01:02:03] The infamous 2006 trade that brought down Amaranth Advisors.
[01:08:28] John’s analytical prowess and emphasis on fundamentals.
[01:15:13] The decision to become a full-time philanthropist and the founding of Arnold Ventures.
[01:25:03] Education — John’s quest to fundamentally change K-12 education.
[01:30:36] Strategic philanthropy — preventing problems by attacking root causes and creating structural change.
[01:37:50] The criminal justice system — structural changes needed to address mass incarceration, policing practices, and recidivism.
[01:55:07] Re-imagining prisons to reduce recidivism.
[02:02:27] US health care policy — John’s focus on drug prices, and the severe consequences of not making system changes.
[02:20:00] Climate change — the bipartisan role of John’s foundation.
[02:23:52] Advice for young adults interested in philanthropy.
[02:30:52] Parting thoughts.
“Our philanthropic intent is to give away the vast majority of our money during our lifetime.”
An entrepreneur from a young age
“I ended up spending a couple summers just full time on this baseball card, really geographic arbitrage and information arbitrage, that I would have a sense of who the best buyer was for every product.”
“I was the guy that was trying to get out of there and into the game as quickly as possible. Every day I was at college, it was one less day that I had to be in the game.”
“I found the perfect job for my skill set as my first job. And I think that’s pretty rare, and it happened by accident. I could have very easily ended up a mergers and acquisition investment banker at Merrill Lynch, but I ended up trading commodities at a relative upstart of a company that was just the perfect spot for my skill set.”
“I think it ended up being the downfall of the company as well, as there just wasn’t the controls on people who were given too much responsibility, too much of the company’s balance sheet to use without their adequate controls on it.”
“The stress level was intense. I think I’m very good at handling stress, but the stress level was intense to a point of not being healthy.”
How do many traders destress?
Did John experience an “addiction” to the “high” of trading?
? There’s a saying in the investment world, “Fear and greed drives a lot of price trends in financial assets.”
The confidence spectrum —
How did these traits translate into John’s philanthropy work?
“Everything we’re doing in the foundation is evidence-based, but the evidence is never perfect.”
When did John realize his career at Enron was going to be cut short?
The synergy of market arbitrage plus speculative trading:
The two strands of John’s hedge fund —
1) Providing liquidity and getting paid for the service of warehousing some risks, and
2) Speculative trading – Trying to make a call on where natural gas prices were going next
The moment John realized he’d never have to worry about money again:
When did John first start thinking about philanthropy?
“I always recognized the limited social value of trading. I think there is a need for someone to provide risk warehousing and liquidity to markets, but trying to tell the story about how I was adding value or contributing to society was hard. And that always bothered me.”
When John’s hedge fund started gaining major attention:
John has a “third superpower” — an insatiable, bordering on pathological, obsession for knowing everything
In his trading days…
How did John make up for this informational disadvantage?
“Our advantage was that we’re going to invest in the fundamentals more than anybody else is and then overlay that with some good trading.”
3 main reasons why trading natural gas was “easier” than oil:
1) It was this closed system — the molecules, for the most part, just stayed in North America
2) Deregulation got the pipelines out of the business of trading
3) Twice a year, there was a mechanism to get you back close to fair value
Deciding to focus on philanthropy
“I started thinking more about giving the money away than making more of it. That was really the signal to me that I want to be spending my time on the other side of the table and I’m physically and mentally, emotionally exhausted with trading natural gas.”
A hard decision
“When you’ve been playing in Vegas with the $25 table to go back down to the $5 table. It’s just not as emotionally interesting.”
Summary of factors leading to the shutdown of his hedge fund —
“These things came together and it still took me two years to make that call, that it’s time, it’s time to close this up and go find happiness somewhere else.”
Skills in trading that translated to philanthropy:
1-Emotional temperament — not letting your feelings get in the way of what you’re doing
K-12 education — the first problem the foundation looked at deeply
The questions John had about K-12 education:
“[K-12] is just the most fundamental issue facing long-term health and viability of this country.”
The theory of change that drives John’s work in K-12:
The theory: Strong and robust systems of any kind have the attributes of biological evolution
How challenging is doing this kind of strategic philanthropy?
Example, the topic like preschool:
In every area that John has researched, he finds the same thing —
*One main insight from doing the deep digging:
The question for the foundation became: What’s our role? Where could our dollars be most helpful?
John’s frustration with trying to find the “right program” to fund really led him and the foundation down the path of — How do you change and improve the system and the incentives and the rules of a system rather than what’s the next program we can fund?
When the criminal justice system got on John’s radar:
“There is this natural impatience. But I think we’ve been smart enough to realize that it’s smarter to invest wisely tomorrow than do something that’s unlikely to have an impact today.”
How criminal justice system is broken:
John’s take on how we got to the current state of the criminal just system:
Fast forward to today —
Speculating on what accounted for the reduction is crime starting in the mid-90s
What other factors could have accounted for the reduction in crime if not the increase in incarceration?
Of all the mechanisms or tactics that would lead to an increase in incarceration, which of those were perhaps the most responsible for mass incarceration?
How do we solve this problem?
Is the role for philanthropy to try to address the questions of racism within law enforcement?
For a long time, the focus has been on reducing crime rates with no regard for the secondary effects that the criminal justice system causes on these communities and families
“The nature of prisons has to change. If you wait until the days someone’s released, that’s way too late.”
How is John thinking about health policy in America?
The foundation is focused on creating a more rational system to price pharmaceuticals that —
The political window:
For politicians to consider health care policies —
Peter’s rant on the US health care:
? For more on the health care system and issues with drugs, see Peter’s interviews with Marty Makary and Katherine Eban
Enormous health care spending — how can we change this?
Without the greatest sovereign default on debt, what is it going to take to change this?
The severe consequences of inflation
“I want to help the world, I want to solve problems, but if the answer is just shovel more money at it, that’s not a sustainable answer in my mind.”
John’s foundation is working on: How do we improve the system without spending more money?
Optimistic about the future — Change happens slowly, then very quickly
“You just don’t have that feedback mechanism in this work that you had in the [natural gas] market and the complete opposite end of the spectrum”
John’s high level thoughts on climate change
How will John’s foundation work on climate change?
“Whenever you have that checkbook, people look at you differently, and treat you differently. . .because there is always something that they want funded. . .If somebody’s growing up in their teens and their 20s, and is looked at by the rest of the world as a checkbook first, I think that’s a very damaging way to grow up.”
Advice to young adults with an interest in philanthropy:
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