By Ryan Underwood, BA’96
When financial traders talk about buying low and selling high, what they really mean is that they’re looking for an edge, a profitable move that nobody else in the market has discovered.
This is how Warren Buffett made his money. Starting in his mid-20s, Buffett plowed half his net worth into the sleepy insurance industry because he realized companies were sitting on massive piles of cash that could be put to far more productive use. Similarly, Dr. Michael Burry, MD’97, who was the subject of the film and book The Big Short, understood that subprime mortgages were about to collapse in the mid-2000s and amassed financial instruments at bargain prices that ultimately returned more than $800 million.
The tricky part comes not just in discovering these market quirks, but also in being willing to make massive, often counterintuitive bets to prove your hunch. Buffett calls this “the Noah rule”: “Predicting rain doesn’t count. Building arks does.”
Few people embody this principle better than John Arnold, BA’95. A numbers whiz from an early age, Arnold graduated from Vanderbilt in 1995 with degrees in economics and math after just three years, and went on to become one of America’s youngest billionaires when he made the Forbes list at 33 years old.
He began building his fortune as a fresh-out-of-college energy trader at Enron, mastering the complexities of the natural gas market at a time when prices were prone to jarring ups and downs. In 2001, Arnold singlehandedly earned his division $750 million, just as the Houston-based company was being engulfed in the accounting scandal that ultimately brought it down. (It’s been well-established that none of his activities were tied to any of Enron’s wrongdoings.)
After Enron, Arnold continued trading energy commodities through his own hedge fund, Centaurus Advisors, which soon emerged as a leader in the industry. In 2006 he notched gains of 317 percent after studying meteorological and pipeline data to predict that natural gas prices would not spike in the wake of Hurricane Katrina—a contrarian bet that flew in the face of several multibillion-dollar investments.
Arnold attributes his success as a trader to a number of factors, including his Vanderbilt education and the mentoring he received at Enron. “I was relatively skilled in a number of areas that are important in the field: analyzing data, handling stress and remaining calm, maintaining focus and confidence, taking risks, and being willing to admit when I was wrong,” Arnold says in an email exchange with Vanderbilt Magazine.
By 2012, however, facing a raft of new regulations that would curtail his investment activities, Arnold shut down his company. He and his wife, Laura, turned their focus to philanthropy instead, bringing the same data-driven, big-bet mentality John used as a trader to solve some of society’s biggest problems.
“Philanthropy is a huge field with a lot of different models to improve the world,” says Arnold, who, along with Laura, was among the original 40 signatories of The Giving Pledge—a commitment by the world’s wealthiest individuals to dedicate their fortunes to giving back—in 2010, promising to donate at least half their wealth to charity.
The Laura and John Arnold Foundation (LJAF) has identified broad public policy areas like criminal justice, education and health care to focus on, while “igniting a renaissance of new ideas and approaches applied to persistent problems,” as its strategy statement says.
That means the organization is not afraid to make big, but well-researched, gambles on untested initiatives promising to bring about lasting change. The Wall Street Journal has called this the Moneyball approach to giving, alluding to an analytical approach to recruiting up-and-coming baseball players.
“We have a specific focus on trying to improve the evidence base by piloting and rigorously evaluating ideas to improve these fields,” Arnold says. “Our premise is that even small improvements in these massive systems can have significant impacts, making systems more effective and financially sustainable.”
(In addition to their work through the foundation, the Arnolds support a number of institutions and nonprofits, including Vanderbilt. See sidebar below.)
‘THOUGHTFUL FAILURE, FANTASTIC SUCCESS’
Whereas many philanthropies are content to simply write a check for some well-known charity and post photos of the smiling beneficiaries, the LJAF is not afraid to wade into controversial territory. The foundation has committed more than three-quarters of a billion dollars to support work in areas like public pension reform, alternative models of school governance and, most recently, efforts to ensure the integrity of scientific research.
“We’re not looking to create an organization of safe success,” Laura Arnold was quoted as saying in a recent Wired magazine article about the foundation’s work. “We’re looking to create an organization of thoughtful failure and fantastic success.”
Often that means the couple will spend time drilling into the minutiae of a topic, much like John did in his trading days, to better understand what has worked, what hasn’t, and what creative new solutions may be on the horizon.
While the LJAF has a staff of more than 50 people—including Vanderbilt alumni Chris Barbic, BS’92, who received Peabody’s Distinguished Alumnus Award in 2006; Adaeze Ugwu, JD’11; and Ashley Winstead, BA’08—both Laura and John take an active role in the work.
“We are at the office every day, reviewing every grant, working with the team to refine strategy, and thinking about the areas in which philanthropy can be effective,” he says. “I spend much of my day learning about and reviewing new ideas for solving society’s most challenging problems.”
One area of particular interest for the LJAF has been an effort to enhance the quality of scientific research, committing more than $80 million to such efforts. Though it’s impossible to measure the foundation’s direct impact, the issue of research reproducibility—verifying and replicating other scientific studies—has gotten more attention in recent years. As the Wired article in January notes, research journals Science and Nature both have added extra layers of statistical reviews before publishing a study. And the National Institutes of Health now requires a data-sharing plan as part of its grant application.
One major difference between betting on smart opportunities in finance versus philanthropy, Arnold says, is that it’s harder to measure success in his current role. Taking a position as a trader results in concrete gains or losses. Funding experimental reform efforts to solve intractable societal problems doesn’t offer quite the same feedback loop.
“I find many similarities between philanthropy and venture capital. In both you seek to find new ideas, craft a strategic plan, and get comfortable with the team that will execute. And in each, it never plays out exactly as planned,” Arnold says. “Coming from the field of trading, where your profit and loss statement was a continuous scorecard of success, the dearth of hard data on many projects is frustrating.”
Yet, judging from his track record, don’t be surprised if in a few years, Arnold has found a way to convert even that aggravating lack of measuring impact into a revolutionary new way of giving.
$5 Million Arnold Gift Boosts Vanderbilt Public Policy and Quantitative Studies
John Arnold, BA’95, and Laura Arnold announced a $5 million gift in April to bolster public policy and quantitative studies at Vanderbilt’s College of Arts and Science.
The Arnolds previously have supported need-based scholarships at Vanderbilt, endowing the Arnold Family Scholarship in 2005 and the Arnold Scholars Program in 2009. John also served on the university’s Board of Trust and is a current member of the College of Arts and Science Board of Visitors, on which he has served since 2006.
Through their support the Arnolds will strengthen innovative interdisciplinary programs designed to engage students in the study of social trends, governance challenges and policy problems, while at the same time providing them with sophisticated analytical tools offering a wide set of applications.
“We are thrilled to have the Arnolds’ support for these important programs,” says Lauren Benton, dean of the College of Arts and Science and the Nelson O. Tyrone Jr. Professor of History. “Many of our students are seeking ways to integrate civic engagement in their undergraduate studies and to master analytic tools that will help them enter top graduate programs and to get jobs in public policy or in the fast-growing field of big data analysis.”
—ALEXANDRA VALNOSKI