Bloomberg Wealth: John Arnold

So I was always interested in business and always interested in trying to make a dollar. My parents used to ask me, what do I want to be when I grow up? And I said, I want to be a millionaire when I'm 30.

And they said, No, that's not a job. What do you want to be? There's a confidence level that's required to say the market's wrong because the market's usually right.

But there requires to be humility of saying, sometimes I'm wrong and the market's right. When people talk about legends in the finance world, they're talking about investors like John Arnold, famous for running a book that raked in hundreds of millions of dollars as a natural gas trader at Enron. Arnold earned a reputation as something of a whiz kid in the volatile energy markets, given his runaway success before he turned 30.

I started getting a lot of calls from people saying that Enron went down. There must be a lot of opportunity in this space. Can we invest with you?

The native Texan learned how to capitalize on the markets at a young age when he traded baseball cards in the early days of the Internet. I could see hockey cards are more valuable and New York than they are in Houston or Dallas. And so I can buy them here, send them up there.

And you know, there's a geographic arbitrage. He graduated Vanderbilt a year ahead of schedule and started working at Enron, eager to make a name for himself in the business world. They called me right before I graduated and said, hey, we've had a couple of people leave our oil trading group.

If you can start immediately, you can get in there. And I said, Well, I graduate in two weeks. Then you got the weekend.

I'll be there 17 days after Enron. He struck out on his own with Centaurus Capital, an energy focused hedge fund that boasted compounded annual returns north of 100%. But after ten years running, Centaurus Arnold retired.

Yeah, it had been the only thing I had done professionally, so I started when I was 21 years old. I was now 38. My life had changed since then.

Arnold has kept busy. He joined the board of Mirror, Lending his energy expertise to help address big challenges like the data center infrastructure needed to meet the growing demands of artificial intelligence. And then there's this philanthropy.

John and his wife, Laura are prolific philanthropists. Together, they run Arnold Ventures, a 100 person philanthropic firm that does work in areas like higher education and criminal justice. We wanted to do this while we were living.

We think that part of the role of philanthropy is to be on the cutting edge, is to take risks that either the private sector or government is either not willing or incentivized to take. John Arnold is one of the legendary natural gas traders in our country's history and also a legendary philanthropist. So, John, can you tell us how you became such a famous trader in the energy world as it math?

Is it hard work? What is it it takes to be a great trader? I think at least for my style of trading, you know, there was a number of characteristics that I thought were important.

One was having this right balance between confidence and humility. All right. There's a confidence level that's required to say the market's wrong because the market's usually right.

Right. But there requires to be humility of saying sometimes I'm wrong and the market's right. And if you don't get those in balance, then you know you're going to blow up very quickly.

I think another trait from good traders is almost this detachment from emotions. And so there's this phrase that fear and greed determine markets. And those are two very strong emotions.

And I've seen traders who, when they're in that high stress period, either because of fear or greed, they change their their pattern. They change their process. And so I hit, for better or worse, I think I'm classified by being able to be too detached from my emotions.

You're from where? Originally from Dallas. Dallas.

Okay. And your parents did. What were they?

Energy traders or. No, No. Corporate lawyer.

My father and my mother was a teacher turned accountant. And as a boy, you traded baseball cards? Yeah.

So I was always interested in business and always interested in trying to make a dollar. And so, you know, the baseball card craze. And it coincided whenever I was in my mid-teens and a 14, 15, 16.

All right. So you went to Vanderbilt. Were you a baseball trade trader there or were you doing energy trading on the side or what would you do at Vanderbilt that distinguished you?

Yeah. So I was again, like I viewed school as a means to an end. And so I wanted to get out early.

And so I said my first semester freshman year, I'm looking through the handbook and I'm like, looking at the rules on graduation. If you have 120 credits, you can graduate. So, hey, I can do this in three years.

I want to go into the game and the game is business. What did your parents say? Oh, they loved it because that was a year less that they had to pay for time.

All right. So, God, I hope my kids do that. So Vanderbilt is in Tennessee.

So did you want to stay in Tennessee or do you want to go back to Texas? So you're coming from Dallas. I mean, maybe go back a little bit here.

But my parents used to ask me, what do I want to be when I grow up? And I said, I want to be a millionaire when I'm 30. And they said, no, that's not a job.

Right. What do you want to be like? I don't know.

But I want to get to be a millionaire when I'm 30. And in 1989. I'm 15 years old and Liar's Poker comes out.

And this is a very famous book. It tells the story of eighties Wall Street through the lens of Solow, Salomon Brothers Bond trading desk. And, you know, this is like the first introduction I have to what Wall Street is reading this book.

I'm like, that's where the game is. It's like the Willie Sutton line about why do you rob banks is because that's where the money is. Well, why you want to go work at a bank because that's where the money is in 1995.

I didn't get the Wall Street job as the closest thing I got was a job at Enron, which was I was developing this merchant bank around the natural gas industry, which was in a very interesting time in the mid-nineties. And I said, Oh, that's the closest thing I got. I go do that for a couple of years in Houston and go back to business school and figure out what I want to do.

Okay. So you joined Enron, which was then a hot energy company. It was traditional energy company, then became kind of a trading energy company so that somebody teach you natural gas or to you say, I want to get into natural gas.

How did you get into that late seventies? As many other industries in America were getting deregulated Their airlines, the banks, the telecom. They started doing natural gas as well.

And so 78 until 92, there was a series of deregulatory orders that came out that kind of separated the business and it made the pipelines the natural monopoly highly regulated. But the pipelines were not allowed to take title or to get to gas anymore. And so you had these producers here, you had the end users here, and somebody had to put them together.

And you need that bank to be the intermediary. It's the same thing that Enron did starting in 1990, and they actually called it a gas bank. And so this was trying to bring some order to this market that had just been a spot market, had kind of no derivatives, no swaps, no no forward curve to indicate, you know, to producers or to end users how to change behavior.

And so I got put into that division, which was kind of the trading and marketing side of derivatives, naturally. So you started doing that. At what point after you started doing that, you realize, Hey, I'm pretty good at this or This isn't as hard as they told me it was going to be.

So I got really lucky. I was yeah, I was not supposed as a coming out as an undergrad. I was not supposed to go straight to the trading floor.

And so I got into the oil trading group and I was supposed to do this kind of this traditional investment banking rotation of every six months you change jobs. And I got on the trading floor and they kind of just said, you're home here. They were going to move you to natural gas and you went to natural gas after about nine months and then just never did another rotation and stayed there.

Okay. So you left. Enron goes under big scandal.

You have nothing to do with that. But you set up your own shop and you're going to do natural gas trading, as we talked about. And at what point did people start saying, hey, this guy is really good, I want to give him some money?

And did you go on the road to raise money or just came in over the transom? So this was a really fascinating story because, you know, at the time when Enron went down, Enron was the largest natural gas trader. I was the head trader at Enron.

And so I had a very big reputation in the business. New York Times wrote a story an early 2002, talking about the amount of money that my trading book had made in 2001, which was in excess of $600 million. And so, you know, all of a sudden, it kind of validated me externally.

And so I started getting a lot of calls from people saying Enron went down. There must be a lot of opportunity in this space. Can we invest with you?

And second quarter of 2000 to, you know, there's starts to be a new scandal hitting the papers on Enron almost every week, including on the power trading side. And so, yeah, that was a very different operation than what I was doing, but it was close enough to where all the potential investors kind of, you know, stop calling me back, all right. Because they don't know what's going on.

They don't know if my track record was real or not. They don't know if I'm going to be tied up in court proceedings, you know, for years. And so what I ended up getting started in the summer of 2002 or I had 8 million of $8 million, three investors, one of which was me.

All right. She went forward. Presumably it went well from the start.

Yep. And you did it for how many years before you said I've had enough. So that was ten years.

Ten years to 12. So if I had invested with you, which I wish I had at the beginning of your firm, what kind of rate of return would I've had over that ten year period of time? So we compounded over ten years over 100% a year on average.

100% a year. Yeah. So a year we had we had some years that were 300% had had one year that was pretty much flat.

But on on average 2% a year. That's that's pretty unusual. I mean, okay.

Wow. Okay. I guess you didn't have to go out and raise money.

People just throw money in the transom. Okay. So rarely do people, as I mentioned earlier, walk away from 100% annualized rates of return.

The generally people say, you know, I really am a genius and maybe I'll let other people share in my genius and I'll build a $100 billion organization. But you just said I've had enough of this. There was a lot of things that were happening.

My personal situation had changed. I got married, I started having kids. We had this fledging foundation.

The markets had changed. So, you know, Shell Gas really, really got started 2007, 2008. And so you had a market that had had been characterized by increasing demand and higher cost of production and having to use price in order to allocate the scarce resource and creating these very large booms and busts prior to the shale gas revolution, to being one where it was kind of in perpetual oversupply and kind of bouncing around marginal cost of produce.

And as a trader, this is fantastic. If you're on the right side, this is very boring. The amount of infrastructure that's required to run the data centers for AI is immense and the industry is under a real challenge, is putting tremendous challenge upon the utility industry and the electric industry in general.

So you have another new career, which is being a board member of a very famous company. You've been elected to the metal board. It used to be known as Facebook, and obviously it's more than Facebook.

So how did that come about? Did you know Mark Zuckerberg or did you he invest in your fund and he really like the returns? Or how did you come about?

Are you a tech person as well? I am not a tech person, which made the invitation even that much more surprising. But I had known Mark a little bit, had spent some time with him and and knew Mark Andreasen, who is the longest standing external board member on media as well.

And I think they were looking for somebody who had some energy expertise. The amount of infrastructure that's required to run the data centers for AI is immense, and the industry is under a real challenge, is putting tremendous challenge upon the utility industry and the electric industry in general. But the the tech platform companies that are involved in AI are really struggling with this, I think.

And my background in public policy is an asset to them. And then my background as an investor is helpful. So do you think AI and the related kinds of things that are come about because of that are going to force our energy system to produce more energy that is really good than is good for the environment?

Or are you worried about the ability to keep up with the energy demands that tech is producing? Electricity demand is this tension between rising efficiencies on one side and rising GDP on the other. Right.

And so for the past 15 years, from the mid 2000 to about 2022, in the United States, lows very much canceled themselves out. And you saw flat electricity demand. But that's all changing and started in 2022.

And I think there were three issues. One was this growth in data center that's largely being driven by AI. Second is the reshoring of manufacturing, and the third is the electrification of everything.

And so thinking about EVs. And so that's putting real strain on the system with this increase in low growth that's now combined with this next tranche of intermittent resource coming on the wind and solar coming onto the system and utilities having to try to balance those resources. They're also being asked to decrease emissions in general.

And then fourth, there's a lot of pressure on affordability today with all the pressure from inflation. And so I've said that, you know, a utility could do. Of those for which they're being faced with all four of them almost every utility in America today, they could do one or two very easily.

I think they can probably do three trying to do all four at the same time and maintain this grid and maintain the reliability and affordability that Americans demand is enormously challenging. So let's talk about energy. General.

I know you're a natural gas trader, but you obviously follow the energy markets. So just in case I wanted to put a trade on tomorrow, should I assume oil prices are going up or going down? No comment.

No comment. All right. Well, let me ask you this.

Do you think that it is realistic to think that we can get out of carbon in. Our lifetime in the sense that we get down to a so-called neutrality position and we really are not adding more carbon to the atmosphere. Is that going to take 100 years, 50 years?

Is that realistic or is carbon so cheap and efficient and inefficient that we really are never going to replace it in our lifetimes? Yeah, so it's very clear and I think almost everybody acknowledges now that. That the global warming that's happening is affected by man, is affected by increasing of carbon in the atmosphere, and that there are significant negative effects associated with global warming.

So now the question is kind of like what's the what's the prognostication of being able to meaningfully address it? And it's incredibly hard. The energy system is characterized by very long lived assets.

So if you think about tech, you usually keep your your cell phone for three, four or five years and then you throw it away and get a new one. You know, looking at software updates almost constantly. But when you have a you know, if you build a new gas generation plant or cogeneration plant today, it's can last 50 years.

And I think people have looked at the growth of EV cells and say, hey, look, it's doubling every year. It's, you know, 15% this year and is going to keep going up without sitting down and doing the math of, okay, what does that mean for internal combustion engines that are on the road five years from now, ten years from now, 30 years from now? And that's why this problem is so difficult, is that you not only have to build new stuff to meet growth and energy demand, which is linked to GDP growth, but then you also have to replace this enormous stock of energy assets.

So, okay, so if you were called by the president of the United States. Yes. And said, John, you really know a lot about energy.

I'm looking for a secretary of energy. Would you ever go in and be secretary of energy or something like that? I don't think I am.

My skill sets best utilized to within government. All right. Suppose somebody came to you and said you are a well-known person who's got some money.

Texas as a person likes entrepreneurs. Well, you should run for governor or senator. Would you ever consider that still within government?

No. All right. Okay.

So you're not going to have it be even worse in an elected position. I can tell a story about how there's kind of social value in trading and somebody needs to price and manage risk. And that is a socially valuable job.

It's kind of, you know, you kind of have to squint in order to believe that. So at a relatively young age, you made a lot of money by normal human standards. And usually when people make a lot of money, they keep trying to make it and make it.

But at a relatively young age, you are the signer of the Giving Pledge, which says you're going to give away half of your money, our net worth from your death or during your lifetime. Why did you decide at such an early age to commit to giving away so much of your money? And why did you actually start giving away gigantic amounts when you're so young?

Usually people wait till they're 60, 70, 80. Yeah. I had started getting interested in philanthropy when I was about 25 and I had this job, which, you know, I can tell a story about how there's kind of social value in treating somebody needs to price and manage risk, and that is a socially valuable job, kind of, you know, you kind of have to squint in order to believe that.

And and, you know, I can squint a little bit, but I knew like, okay, like I'm making a lot of money over here. I want to do something good with it on the side. And I started getting involved in in public charter schools in Houston, which was kind of a one of the focal points of the charter school movement early in the in time.

And I was getting more and more interested in that and starting to think about how can you have two schools that are serving the same demographic, getting very different results. And so, you know, I started getting deeper and deeper into the ED reform circles. And then along that time I got married, my wife, you know, started thinking, you know, join me with that.

We built this little fledgling foundation. We both had day jobs and were kind of doing that for maybe an hour a day. She had the courage to leave her full time career.

She was an M&A lawyer as her to her training and left that first and to go full time on the foundation. And I started getting drawn more and more into it. But I think the question is like, why give early?

And I think we had the benefit of of seeing case studies of, you know, there's been 100 years of large philanthropy in this country. There's been more than 100 years of and of large wealth in this country. And so thinking about, you know, does it make sense for us to give the money to our kids and does it meet the goals that we have for our kids to to give them a pile of money, especially if they know that that pile of money is coming relatively early?

And we decided that they're looking at case studies. Sometimes that goes well, but oftentimes it doesn't. And so we didn't want to do that.

And then also looked at the case studies of legacy foundations. And so a lot of people I guess the the nature of wealth had changed a lot from this generation versus previous generations. Previous generations.

It was often through an industrial business or some type of retail business where your wealth was tied up in a stock and it was hard to sell while you were living or you didn't want to sell while you're living. And so a lot of those decisions were made at death and in the will. And so oftentimes it be set up as that start this foundation whenever we die and have, you know, a friend or maybe a daughter or son manage it.

And we looked at those types of legacy foundations and, you know, found a bunch of flaws with them. And so we wanted to do this while we were living. We think that part of the role of philanthropy is to be on the cutting edge, is to take risks that either the private sector or government is either not willing or incentivized to take.

And so that's it's easier to do that as principals and to take those risks than it is with hired staff after your death. But sometimes when people are ready to get married, they might say to their prospective spouse, you know, I'm going to have a good life for you, or I'm a big house, or I bought some artwork. We'll have planes or have country homes.

But did you say, I'm going to give away all this money? And was that a big appeal to say to your bride, Hey, guess what? I'm going to give away all this money?

So don't we got some of that stuff, though. Okay. All right.

All right. Okay. All right.

So she was okay. We're not giving it all. Going to give it all away.

Okay. All right. Okay.

So you have three children. You and your wife have three children. And are they very young or how old?

All teenagers. And do they listen to you? Whenever I'm giving them stuff, they're very they're very attentive.

So what's easier? Trading energy futures in natural gas or being a parent, Trading for sure.