1
00:00:00,080 --> 00:00:06,080
Speaker 1: M. This is Mesters in Business with very Renaults on

2
00:00:06,240 --> 00:00:10,040
Speaker 1: Bluebird Radio. This week on the podcast, I have an

3
00:00:10,039 --> 00:00:13,400
Speaker 1: extra special guest. His name is Rob or Not and

4
00:00:13,480 --> 00:00:17,200
Speaker 1: he is the chairman and founder of Research Affiliates, a

5
00:00:17,320 --> 00:00:21,880
Speaker 1: firm who essentially patented the concept of fundamental index thing

6
00:00:21,920 --> 00:00:25,599
Speaker 1: pretty much they invented it. And uh, I know Rob

7
00:00:25,640 --> 00:00:27,240
Speaker 1: for a good couple of years. He was on the

8
00:00:27,280 --> 00:00:32,760
Speaker 1: show in and his office just cranks out so many

9
00:00:32,880 --> 00:00:38,320
Speaker 1: fascinating research pieces, hence the name Research Affiliates. That you know,

10
00:00:38,400 --> 00:00:40,720
Speaker 1: after you read the third or fourth thing from somebody

11
00:00:40,760 --> 00:00:43,000
Speaker 1: in a couple of months, it's like, damn, I gotta

12
00:00:43,000 --> 00:00:45,520
Speaker 1: get robbed back on. This is some really interesting things.

13
00:00:46,080 --> 00:00:50,120
Speaker 1: We went deep into the woods on electric vehicles in

14
00:00:50,159 --> 00:00:54,080
Speaker 1: Tesla and we talked about what makes a big market

15
00:00:54,120 --> 00:00:57,440
Speaker 1: delusion when an entire sector, not just a company, a

16
00:00:57,440 --> 00:01:02,000
Speaker 1: whole sector runs amuck. We talked about everything really, from

17
00:01:02,000 --> 00:01:06,080
Speaker 1: E s G to bitcoin to value. I thought it

18
00:01:06,120 --> 00:01:09,880
Speaker 1: was really intriguing if you're at all interested in fundamental

19
00:01:09,920 --> 00:01:14,399
Speaker 1: indexing or smart beta, if you're interested in where alpha

20
00:01:14,480 --> 00:01:19,120
Speaker 1: comes from and what the sources of various value and

21
00:01:19,280 --> 00:01:22,440
Speaker 1: other types of factor premiums are, then you're going to

22
00:01:22,520 --> 00:01:26,560
Speaker 1: find this to be absolutely fascinating. So, with no further ado,

23
00:01:26,959 --> 00:01:33,319
Speaker 1: my conversation with Research Affiliates Rob are Not. This is

24
00:01:33,480 --> 00:01:38,959
Speaker 1: mesters in Business with very renaults on Bluebird Radio. My

25
00:01:39,120 --> 00:01:42,320
Speaker 1: special guest this week is Rob are Not. He is

26
00:01:42,480 --> 00:01:46,560
Speaker 1: the founder and chairman of Research Affiliates, a firm that

27
00:01:46,600 --> 00:01:52,320
Speaker 1: has created and patented a methodology for creating indexes based

28
00:01:52,400 --> 00:01:57,040
Speaker 1: on fundamental metrics instead of the traditional market cap waiting.

29
00:01:57,800 --> 00:02:01,560
Speaker 1: Various asset managers are unning over a hundred and sixty

30
00:02:01,640 --> 00:02:07,200
Speaker 1: billion dollars using strategies developed by Research Affiliates. Rob is

31
00:02:07,240 --> 00:02:11,600
Speaker 1: the author of over a hundred academic papers, seven of

32
00:02:11,639 --> 00:02:15,680
Speaker 1: which one Graham and Dodge Scrolls and Awards. He is

33
00:02:15,680 --> 00:02:18,760
Speaker 1: the co author of the book The Fundamental Index A

34
00:02:18,760 --> 00:02:23,000
Speaker 1: Better Way to Invest. Rob are Not, welcome to Bloomberg.

35
00:02:23,600 --> 00:02:26,400
Speaker 1: Thank you so much. It's a privilege. Well, it's pleasure

36
00:02:26,400 --> 00:02:28,360
Speaker 1: to have you back. There's so much to go over

37
00:02:28,400 --> 00:02:30,480
Speaker 1: since the last time we had you on the show

38
00:02:31,000 --> 00:02:34,840
Speaker 1: about three years ago. Let's just start out with Research

39
00:02:34,880 --> 00:02:39,640
Speaker 1: Affiliates or or Raphaels as I know it. Um, you

40
00:02:39,639 --> 00:02:43,720
Speaker 1: guys don't manage assets directly, but advise on over a

41
00:02:43,760 --> 00:02:47,040
Speaker 1: hundred and sixty billion dollars in assets, explained to the

42
00:02:47,120 --> 00:02:53,559
Speaker 1: listeners how that process works well. We want to focus

43
00:02:53,720 --> 00:02:57,480
Speaker 1: on our area of competitive advantage, and that is in

44
00:02:57,720 --> 00:03:05,760
Speaker 1: doing research and develop investment strategies, in carrying out um

45
00:03:05,880 --> 00:03:12,360
Speaker 1: UH and exploring potentially disruptive ideas for the investment management community.

46
00:03:13,240 --> 00:03:18,000
Speaker 1: UM to run an asset management firm also typically means

47
00:03:18,360 --> 00:03:25,680
Speaker 1: UM call center, means portfolio accounting, it means UM trading desk,

48
00:03:26,880 --> 00:03:30,560
Speaker 1: trade reconciliation departments, and the list goes on and on

49
00:03:30,600 --> 00:03:33,080
Speaker 1: and on. So the last time I ran an asset

50
00:03:33,120 --> 00:03:37,080
Speaker 1: management firm first quadrant back in two thousand four, we

51
00:03:37,120 --> 00:03:40,640
Speaker 1: had about twenty people and a roughly twelve were in research.

52
00:03:41,160 --> 00:03:45,240
Speaker 1: Here we've got about eighty people and roughly half of

53
00:03:45,320 --> 00:03:49,200
Speaker 1: them are in research. So we're able to concentrate our

54
00:03:49,240 --> 00:03:53,240
Speaker 1: attention on our area of competitive advantage while at the

55
00:03:53,280 --> 00:04:01,160
Speaker 1: same time using affiliates external distribution partners to handle distribution

56
00:04:01,200 --> 00:04:06,880
Speaker 1: and quiet relationships. And so basically they view us as

57
00:04:07,440 --> 00:04:10,800
Speaker 1: an extension of their R and D capabilities. UH. Certainly,

58
00:04:10,840 --> 00:04:13,560
Speaker 1: they're not going to replace their R and D efforts,

59
00:04:13,600 --> 00:04:17,200
Speaker 1: but if our ideas are complementary, then we're an extension

60
00:04:17,240 --> 00:04:20,840
Speaker 1: of that and we view them as our distribution channel.

61
00:04:21,320 --> 00:04:26,560
Speaker 1: Let's talk about one of the strongest research ideas and

62
00:04:26,640 --> 00:04:30,440
Speaker 1: strategies that you and your farm are behind. And and

63
00:04:30,480 --> 00:04:34,200
Speaker 1: that's the basic concept that hey, we're doing this index

64
00:04:34,279 --> 00:04:37,440
Speaker 1: waiting thing all wrong. Instead of doing it based on

65
00:04:38,279 --> 00:04:41,520
Speaker 1: market cap or the size of the company, it's instead

66
00:04:42,120 --> 00:04:46,240
Speaker 1: it should be based on fundamental metrics like revenues or profits.

67
00:04:46,560 --> 00:04:50,359
Speaker 1: Explain why that's a better approach. Thank you for asking that.

68
00:04:50,480 --> 00:04:52,880
Speaker 1: A lot of the attention in the world of so

69
00:04:52,960 --> 00:04:59,120
Speaker 1: called smart beta is on formula based techniques for investing,

70
00:04:59,680 --> 00:05:04,200
Speaker 1: and the umbrella terms smart beta began as a focus

71
00:05:04,279 --> 00:05:08,400
Speaker 1: on strategies that no longer weight companies in direct proportion

72
00:05:08,480 --> 00:05:10,920
Speaker 1: to their price, which is what cap Waiting does, and

73
00:05:11,000 --> 00:05:15,800
Speaker 1: it's cap Waiting's heel Achilles heel um uh. If you

74
00:05:15,880 --> 00:05:19,720
Speaker 1: wait companies in proportion to the their price, than any

75
00:05:19,760 --> 00:05:23,440
Speaker 1: company that's above its eventual fair value and destined to

76
00:05:23,560 --> 00:05:28,479
Speaker 1: underperform will have a current weight that's too high, and

77
00:05:28,600 --> 00:05:32,000
Speaker 1: any company that's cheap and destined to outperform will have

78
00:05:32,080 --> 00:05:34,839
Speaker 1: a current weight in the portfolio that's too low. So

79
00:05:34,880 --> 00:05:37,479
Speaker 1: you're gonna be overweight the overvalued and underweight the undervalue

80
00:05:37,800 --> 00:05:40,760
Speaker 1: even though you don't know which ones are which, which

81
00:05:40,839 --> 00:05:45,400
Speaker 1: is an interesting nuance UM. But the term smart beta

82
00:05:45,480 --> 00:05:50,839
Speaker 1: has since been broadened to embrace factor investing, and basically

83
00:05:50,920 --> 00:05:55,719
Speaker 1: anything that uses a formula, even momentum investing, is called

84
00:05:55,720 --> 00:05:59,200
Speaker 1: smart beta, although it's the antithesis of the original definition.

85
00:06:00,160 --> 00:06:03,200
Speaker 1: UH Fundamental Index was an idea that we came up

86
00:06:03,279 --> 00:06:06,960
Speaker 1: within two thousand three in the aftermath of the bursting

87
00:06:07,000 --> 00:06:10,159
Speaker 1: of the tech bubble. A dear friend of mine who

88
00:06:10,240 --> 00:06:13,479
Speaker 1: was on the board of the New York State Pension

89
00:06:13,560 --> 00:06:18,119
Speaker 1: and was founding president of Common Fund, which manages commit

90
00:06:18,920 --> 00:06:26,080
Speaker 1: Um university endowments. He was horrified at the amount of

91
00:06:26,120 --> 00:06:31,040
Speaker 1: money that was lost by major pension funds by investing

92
00:06:31,040 --> 00:06:35,159
Speaker 1: in cap weighted indexes. As the tech bubble burst. Four

93
00:06:35,240 --> 00:06:42,719
Speaker 1: percent of the portfolio UM invested UH in the largest

94
00:06:42,800 --> 00:06:48,400
Speaker 1: market cap company at the time UM Cisco, and Cisco

95
00:06:48,520 --> 00:06:52,720
Speaker 1: subsequently went down. Something like so there went if you

96
00:06:52,800 --> 00:06:55,440
Speaker 1: had four percent in it, there went three point six

97
00:06:55,480 --> 00:06:59,720
Speaker 1: percent of your money and one single stock, okay, UH.

98
00:07:00,040 --> 00:07:03,239
Speaker 1: He challenged us to think about better ways to invest,

99
00:07:03,560 --> 00:07:07,880
Speaker 1: and we came up with the idea, an idea I

100
00:07:07,880 --> 00:07:11,440
Speaker 1: had been playing around with for a few years. Why

101
00:07:11,480 --> 00:07:14,120
Speaker 1: on earth do you want to invest in proportion to

102
00:07:14,400 --> 00:07:18,880
Speaker 1: market capitalization, which means that the more expensive the company is,

103
00:07:18,880 --> 00:07:22,520
Speaker 1: the more heaviest weight in the portfolio. Why not wait

104
00:07:22,680 --> 00:07:27,840
Speaker 1: companies in accordance with sales, or with profits, or with

105
00:07:27,960 --> 00:07:30,680
Speaker 1: book value, or or even with a number of employees.

106
00:07:31,440 --> 00:07:35,920
Speaker 1: So UM, we went back and tested the idea first,

107
00:07:35,920 --> 00:07:39,320
Speaker 1: starting with sales and book value and going back thirty

108
00:07:39,320 --> 00:07:43,480
Speaker 1: plus years. We found that if you chose the thousand

109
00:07:43,600 --> 00:07:47,720
Speaker 1: largest businesses in the US based on their sales and

110
00:07:47,840 --> 00:07:52,040
Speaker 1: wasted them by their sales, that you wound up two

111
00:07:52,040 --> 00:07:53,760
Speaker 1: and a half percent a year better off than with

112
00:07:53,840 --> 00:07:58,400
Speaker 1: cap weighted indexing. And we tested it with book value,

113
00:07:58,400 --> 00:08:02,760
Speaker 1: We tested it with offits, with cash flow, with EBA, duh,

114
00:08:02,880 --> 00:08:08,520
Speaker 1: with number of employees. UM, and everything we tested had

115
00:08:08,560 --> 00:08:10,160
Speaker 1: one and a half to two and a half percent

116
00:08:10,240 --> 00:08:13,040
Speaker 1: access return. So that was our first a ha moment

117
00:08:13,320 --> 00:08:18,440
Speaker 1: that oh, it doesn't matter what measure you're using. What

118
00:08:18,520 --> 00:08:22,840
Speaker 1: matters is whether the measure incorporates price, because if the

119
00:08:22,920 --> 00:08:28,480
Speaker 1: price is too high, then any any waiting scheme will

120
00:08:28,480 --> 00:08:30,680
Speaker 1: do better. You could use darts, or you could base

121
00:08:30,720 --> 00:08:32,760
Speaker 1: it on the number of executives who like to have

122
00:08:32,840 --> 00:08:37,160
Speaker 1: a mustache or whatever. Um and you're still breaking the

123
00:08:37,200 --> 00:08:39,400
Speaker 1: link with price, and you're still going to add one

124
00:08:39,440 --> 00:08:41,880
Speaker 1: and a half to two and a half percent a year. Cool.

125
00:08:42,920 --> 00:08:45,680
Speaker 1: And so we developed the idea of Fundamental Index, which

126
00:08:45,720 --> 00:08:49,440
Speaker 1: has become a very important part of our business. It's

127
00:08:50,520 --> 00:08:54,199
Speaker 1: over a hundred forty billion in assets now and it's

128
00:08:54,280 --> 00:09:00,440
Speaker 1: under licensed to other distribution partners Pimco, Schwab, investc Amura,

129
00:09:00,640 --> 00:09:04,000
Speaker 1: and the list goes on and on. We have at

130
00:09:04,080 --> 00:09:07,280
Speaker 1: least eight part distribution partners with at least ten billion

131
00:09:07,320 --> 00:09:14,560
Speaker 1: each managed using our ideas. So what is cool about

132
00:09:14,640 --> 00:09:19,520
Speaker 1: Fundamental Index is that you're earning a profit based on

133
00:09:19,720 --> 00:09:25,160
Speaker 1: two things. First, the obvious one a value tilt. If

134
00:09:26,720 --> 00:09:30,640
Speaker 1: growth stock is priced at lofty multiples to fundamentals, then

135
00:09:30,720 --> 00:09:34,360
Speaker 1: you're rewaiting those stocks down to their economic footprint, the

136
00:09:34,440 --> 00:09:37,720
Speaker 1: size of the business. And if a stock is trading

137
00:09:37,720 --> 00:09:40,040
Speaker 1: at deep discounts, you're rewaiting it up. So you have

138
00:09:40,120 --> 00:09:43,640
Speaker 1: a stark value tilt all the time, and value investing

139
00:09:43,760 --> 00:09:47,480
Speaker 1: usually wins. But it turns out that's not the dominant

140
00:09:47,840 --> 00:09:50,880
Speaker 1: source of incremental return. It turns out that the dominant

141
00:09:50,880 --> 00:09:54,920
Speaker 1: source of access return is a rebalancing discipline. If a

142
00:09:55,040 --> 00:10:01,359
Speaker 1: stock soars and the fundamentals don't, then RAFI. The fundamental

143
00:10:01,400 --> 00:10:05,440
Speaker 1: index will say, thank you for those lovely games. Let's

144
00:10:05,559 --> 00:10:10,320
Speaker 1: rewait this investment down to its economic footprint. And if

145
00:10:10,320 --> 00:10:15,120
Speaker 1: it's company tumbles and its fundamentals don't, rathey will say, oh,

146
00:10:15,160 --> 00:10:18,200
Speaker 1: thanks for the lovely discount. Let's rewait you back up

147
00:10:18,320 --> 00:10:21,800
Speaker 1: to your economic footprint. So, since the market is constantly

148
00:10:21,920 --> 00:10:25,240
Speaker 1: changing its mind as to how much a company is worth,

149
00:10:25,920 --> 00:10:32,600
Speaker 1: you're constantly rebalancing contratrating against the market's most extravagant bets,

150
00:10:33,120 --> 00:10:37,280
Speaker 1: and your biggest bets will be on the companies where

151
00:10:37,280 --> 00:10:40,040
Speaker 1: the market is making the biggest bet. In the opposite direction,

152
00:10:40,440 --> 00:10:44,920
Speaker 1: the companies that have soared the most. Game Stop swared

153
00:10:45,200 --> 00:10:50,120
Speaker 1: tremendously this quarter on top of an already stupendous rise

154
00:10:50,120 --> 00:10:53,400
Speaker 1: in two thousand twenty. So you'd look at that and say,

155
00:10:53,440 --> 00:10:56,720
Speaker 1: if you owned it, which we did, we owned it

156
00:10:56,800 --> 00:11:00,400
Speaker 1: as a value investment with a cost bay syst of

157
00:11:00,400 --> 00:11:04,680
Speaker 1: around a little under four bucks share. If you owned it,

158
00:11:04,720 --> 00:11:08,360
Speaker 1: you'd say, thanks for this great gain. The underlying fundamentals

159
00:11:08,440 --> 00:11:12,880
Speaker 1: haven't changed. Let's take some profits and rebalance that rebalancing

160
00:11:12,920 --> 00:11:16,880
Speaker 1: alpha is the dominant engine for incremental return, and that

161
00:11:17,080 --> 00:11:21,800
Speaker 1: is not true of most of the strategies that currently

162
00:11:22,440 --> 00:11:26,920
Speaker 1: carry the smart beta label. That's interesting that the pushback

163
00:11:27,080 --> 00:11:32,760
Speaker 1: I've heard from the traditional market cap weighted index ers

164
00:11:32,920 --> 00:11:37,040
Speaker 1: are on the on the one hand, you're selling stocks

165
00:11:37,040 --> 00:11:41,360
Speaker 1: that have rallied and very well may continue to rally.

166
00:11:41,480 --> 00:11:45,559
Speaker 1: If if you're rebalancing away from Amazon or Apple anytime

167
00:11:45,600 --> 00:11:48,120
Speaker 1: over the past I don't know, twelve years, you know

168
00:11:48,280 --> 00:11:51,040
Speaker 1: you saw the stock go higher. And on the other hands,

169
00:11:51,600 --> 00:11:55,480
Speaker 1: on the cheap ends, you have a tendency to buy

170
00:11:55,760 --> 00:11:59,680
Speaker 1: into the value traps, things that look cheap because they're

171
00:11:59,720 --> 00:12:03,000
Speaker 1: in a spensive and still have revenues but aren't. What's

172
00:12:03,040 --> 00:12:08,480
Speaker 1: the counter to that critique? That critique is absolutely correct.

173
00:12:09,480 --> 00:12:15,760
Speaker 1: M Here's the deal, though, for every Amazon, there is UM,

174
00:12:15,800 --> 00:12:22,559
Speaker 1: a company that is perceived as a disruptor that subsequently

175
00:12:22,600 --> 00:12:28,600
Speaker 1: gets disrupted UM. Apple has been hugely successful in contratrating

176
00:12:28,679 --> 00:12:32,120
Speaker 1: out of Apple has not been a good thing. But

177
00:12:32,480 --> 00:12:38,720
Speaker 1: who came before Apple? UM? BlackBerry Palm. Palm was dominating

178
00:12:38,720 --> 00:12:43,920
Speaker 1: the world of handheld communication devices back in the year

179
00:12:43,960 --> 00:12:46,920
Speaker 1: two thousand when it was spun off from three com

180
00:12:46,920 --> 00:12:50,120
Speaker 1: it's spun off at evaluation briefly greater than General Motors

181
00:12:51,920 --> 00:12:54,440
Speaker 1: at the time of the spinoff. It was spun off

182
00:12:54,440 --> 00:12:58,200
Speaker 1: from three com at a total market value larger than

183
00:12:58,280 --> 00:13:02,559
Speaker 1: three comes market value before of the spinoff. Isn't that interesting?

184
00:13:03,400 --> 00:13:09,880
Speaker 1: And um, of course it went to zero and BlackBerry

185
00:13:10,120 --> 00:13:14,839
Speaker 1: disrupted Palms business. And then no sooner was BlackBerry dominance

186
00:13:14,840 --> 00:13:19,360
Speaker 1: and world straddling on handheld communication devices than Apple came

187
00:13:19,360 --> 00:13:21,640
Speaker 1: along with the iPhone and said hey, hey, this is

188
00:13:21,679 --> 00:13:25,040
Speaker 1: a whole lot better, and so did the marketplace. So

189
00:13:25,240 --> 00:13:29,200
Speaker 1: disruptors do get disrupted. And yes, we missed the boat

190
00:13:30,080 --> 00:13:35,480
Speaker 1: on highly successful companies that go from strength to strength

191
00:13:35,520 --> 00:13:41,320
Speaker 1: to strength until they don't. And on the down side,

192
00:13:41,679 --> 00:13:45,720
Speaker 1: you do have value traps, you'll rebalance into them in

193
00:13:45,840 --> 00:13:47,920
Speaker 1: theory all the way to zero, which is one reason

194
00:13:48,000 --> 00:13:53,520
Speaker 1: you absolutely do not want to rebalance a fundamental index

195
00:13:53,600 --> 00:13:57,520
Speaker 1: strategy daily, because then you'll just buy into the value

196
00:13:57,520 --> 00:14:01,600
Speaker 1: traps all the way to zero. So there's two broad

197
00:14:01,720 --> 00:14:05,640
Speaker 1: flavors of fundamental index. One rebalances annually, the other does

198
00:14:05,840 --> 00:14:09,560
Speaker 1: what's called quarterly staggered rebalancing, which means every quarter you

199
00:14:09,640 --> 00:14:11,840
Speaker 1: move one fourth of the way to your target weight.

200
00:14:12,480 --> 00:14:14,640
Speaker 1: That way, you're going to be hurt by value traps

201
00:14:14,679 --> 00:14:20,320
Speaker 1: only modestly, only occasionally. And for every value trap there

202
00:14:20,360 --> 00:14:25,960
Speaker 1: are several companies that look cheap and in fact are

203
00:14:26,680 --> 00:14:30,560
Speaker 1: so case in point two thousand nine trough of the

204
00:14:30,560 --> 00:14:35,360
Speaker 1: financial crisis that the March two thousand nine rebalancing that

205
00:14:35,440 --> 00:14:40,520
Speaker 1: took place in Fundamental Index um UH. We rebalanced to

206
00:14:40,560 --> 00:14:43,880
Speaker 1: the economic footprint of businesses b of A and City.

207
00:14:43,920 --> 00:14:48,320
Speaker 1: We're both um priced at a fraction of a percent

208
00:14:48,400 --> 00:14:51,720
Speaker 1: of the market, and yet both of them were about

209
00:14:51,760 --> 00:14:56,680
Speaker 1: two of the US economy measured in terms of of revenues, profits,

210
00:14:56,720 --> 00:15:01,120
Speaker 1: book value, dividends and so forth. General Motors was about

211
00:15:01,120 --> 00:15:03,520
Speaker 1: one percent of the economy and a tenth percent of

212
00:15:03,560 --> 00:15:07,160
Speaker 1: the market. So we rebalanced into all three. We rebalanced

213
00:15:07,160 --> 00:15:09,240
Speaker 1: back up to a one percent WAIT and GM and

214
00:15:09,280 --> 00:15:13,440
Speaker 1: two percent each for the A in City and GM

215
00:15:13,480 --> 00:15:17,160
Speaker 1: went to zero. In the next quarter went bust value trap.

216
00:15:17,360 --> 00:15:20,440
Speaker 1: There went one percent of our portfolio. The two percent

217
00:15:20,560 --> 00:15:24,480
Speaker 1: each in the of A in City tripled, so you

218
00:15:24,520 --> 00:15:27,840
Speaker 1: wound up going from two to six in two stocks

219
00:15:27,920 --> 00:15:30,720
Speaker 1: and from one to zero in a third stock. So

220
00:15:30,920 --> 00:15:34,640
Speaker 1: the beauty of Fundamental Index is not that it has

221
00:15:34,680 --> 00:15:38,200
Speaker 1: any special insights into what the fair value of a

222
00:15:38,320 --> 00:15:42,280
Speaker 1: company is, but that it contra trades against the market's

223
00:15:42,320 --> 00:15:46,520
Speaker 1: most extravagant bets, which often in the long run turn

224
00:15:46,560 --> 00:15:50,480
Speaker 1: out to be wrong. People love to buy growth stocks

225
00:15:50,480 --> 00:15:53,240
Speaker 1: because they've got a great, great story, But the right

226
00:15:53,320 --> 00:15:58,200
Speaker 1: question to ask is not is this company a great company?

227
00:15:58,240 --> 00:16:01,800
Speaker 1: If it's a growth stock, of course it's a great company.

228
00:16:02,120 --> 00:16:05,440
Speaker 1: The question is how much good news is there in

229
00:16:05,480 --> 00:16:08,640
Speaker 1: the future for this business that isn't already in the

230
00:16:08,720 --> 00:16:15,120
Speaker 1: consensus opinion and already in the current price. Is there

231
00:16:15,160 --> 00:16:19,640
Speaker 1: more likely to be downside surprise growth that is less

232
00:16:19,640 --> 00:16:27,640
Speaker 1: extravagant than expected um, or upside surprise where lofty expectations

233
00:16:27,640 --> 00:16:31,400
Speaker 1: are actually exceeded. Amazon is a beautiful example of a

234
00:16:31,440 --> 00:16:35,000
Speaker 1: case where lofty expectations have been exceeded again and again

235
00:16:35,040 --> 00:16:39,160
Speaker 1: and again, and at some point they won't be But

236
00:16:40,040 --> 00:16:43,800
Speaker 1: who knows when it's a brilliantly run company with a

237
00:16:43,840 --> 00:16:48,160
Speaker 1: brilliant product that is disrupting vast squaws of industry um.

238
00:16:48,600 --> 00:16:51,760
Speaker 1: Kudos to Bezos and his team, But the price of

239
00:16:51,760 --> 00:16:55,280
Speaker 1: the stock reflects an expectation that the growth of the

240
00:16:55,400 --> 00:16:57,960
Speaker 1: last decade will persist in the next decade and that's

241
00:16:57,960 --> 00:17:02,240
Speaker 1: a little dangerous. So you guys actually received a patent

242
00:17:02,400 --> 00:17:08,280
Speaker 1: for this methodology of selecting securities and creating indexes. Um.

243
00:17:08,359 --> 00:17:11,000
Speaker 1: Why a patent? What does that do for the firm?

244
00:17:11,080 --> 00:17:16,080
Speaker 1: It's really kind of fascinating to see a financial methodology

245
00:17:16,119 --> 00:17:21,360
Speaker 1: actually awarded a patent. Well, method patents are not new.

246
00:17:21,440 --> 00:17:26,280
Speaker 1: They've been around for decades. UM. Uh early days of patents,

247
00:17:26,320 --> 00:17:28,000
Speaker 1: it had to be something you could hold in your

248
00:17:28,040 --> 00:17:34,119
Speaker 1: hand to be patented. UM. But over time, with the

249
00:17:34,200 --> 00:17:40,040
Speaker 1: advent of computers and so forth. UM, the notion of

250
00:17:40,359 --> 00:17:48,960
Speaker 1: method patents applied to UH, software methods, computer software methods, UH,

251
00:17:49,000 --> 00:17:53,600
Speaker 1: even business methods if they were truly unique, truly different,

252
00:17:54,040 --> 00:17:59,320
Speaker 1: and truly disruptive to an industry. Um, why shouldn't it

253
00:17:59,359 --> 00:18:04,240
Speaker 1: be patent to Now? The issue that I think bears

254
00:18:04,280 --> 00:18:07,640
Speaker 1: mentioned is we could be in the business of product

255
00:18:07,680 --> 00:18:13,200
Speaker 1: innovation or in the business of patent litigation. UH which

256
00:18:13,240 --> 00:18:16,760
Speaker 1: expertise do we have? The former not the latter. So

257
00:18:17,040 --> 00:18:19,520
Speaker 1: I view the patents really as a stake in the

258
00:18:19,600 --> 00:18:24,080
Speaker 1: ground to say to the financial services community, Hey, this

259
00:18:24,200 --> 00:18:29,399
Speaker 1: is our idea, please respect it. Please UM license from

260
00:18:29,520 --> 00:18:32,720
Speaker 1: us at modest fees if you want to use this idea,

261
00:18:34,200 --> 00:18:37,200
Speaker 1: work around the patent if you want to explore something

262
00:18:37,320 --> 00:18:42,160
Speaker 1: similar but different. Competition is a great thing, UM, And

263
00:18:42,200 --> 00:18:45,680
Speaker 1: what we've found is the financial services community as a

264
00:18:45,720 --> 00:18:52,280
Speaker 1: whole lot more um, honest, and has more integrity than

265
00:18:52,400 --> 00:18:57,080
Speaker 1: its reputation. A few bad eggs in the financial services

266
00:18:57,119 --> 00:19:00,960
Speaker 1: community tarnish the reputation of the whole community. So what

267
00:19:01,000 --> 00:19:03,199
Speaker 1: we found is that there have been a handful of

268
00:19:03,240 --> 00:19:08,680
Speaker 1: cases where somebody just took the idea and ran with it,

269
00:19:09,320 --> 00:19:13,000
Speaker 1: and the vast majority of folks in the financial services community,

270
00:19:13,040 --> 00:19:15,199
Speaker 1: if they liked the idea, they'll come to us and

271
00:19:15,240 --> 00:19:19,120
Speaker 1: say we'd like to license it. And if they don't

272
00:19:19,119 --> 00:19:20,920
Speaker 1: like the idea, they don't have to use it. So

273
00:19:21,560 --> 00:19:25,240
Speaker 1: the patent is not so much a basis for going

274
00:19:25,320 --> 00:19:29,200
Speaker 1: after people. It is a basis for saying, hey, please

275
00:19:29,240 --> 00:19:35,000
Speaker 1: respect our space. Speaking for credit for respecting intellectual property.

276
00:19:35,320 --> 00:19:39,480
Speaker 1: For a long time, I've heard you credited with creating

277
00:19:39,520 --> 00:19:44,400
Speaker 1: the phrase smart data, UM, but you've described that as

278
00:19:44,800 --> 00:19:49,280
Speaker 1: more something you've popularized and created. Give us a quick

279
00:19:49,760 --> 00:19:54,200
Speaker 1: explanation of that. Sure, there's a consulting firm that works

280
00:19:54,240 --> 00:19:56,560
Speaker 1: with some of the largest pension funds in the world

281
00:19:56,680 --> 00:20:02,280
Speaker 1: called Towers Watson their London an office. UM coined the

282
00:20:02,280 --> 00:20:07,440
Speaker 1: expression smart beta, and the idea was not that cap

283
00:20:07,480 --> 00:20:12,199
Speaker 1: weighted index funds were stupid beta. The idea was that, um,

284
00:20:12,960 --> 00:20:17,680
Speaker 1: the cap weighted index funds were a neutral form of beta.

285
00:20:17,720 --> 00:20:23,280
Speaker 1: They called it bulk beta um UM. And the stupid

286
00:20:23,320 --> 00:20:27,239
Speaker 1: beta is those who chase fads and load up just

287
00:20:27,400 --> 00:20:30,560
Speaker 1: on whatever's gone up the most. And the phrase smart

288
00:20:30,640 --> 00:20:34,399
Speaker 1: beta was attached initially just as strategies that broke the

289
00:20:34,440 --> 00:20:39,200
Speaker 1: link with price, that would trim a stock if it's

290
00:20:39,240 --> 00:20:44,680
Speaker 1: price went up and all else remained unchanged UM and

291
00:20:44,760 --> 00:20:47,959
Speaker 1: so that included equal weighting equal waiting. Is about as

292
00:20:48,000 --> 00:20:50,480
Speaker 1: simple as strategy as you can imagine. How could it

293
00:20:50,520 --> 00:20:54,560
Speaker 1: be smart? Well, it's smart because it has embedded rebalancing,

294
00:20:54,640 --> 00:20:57,880
Speaker 1: although it does have a profound small cap tilt that

295
00:20:58,040 --> 00:21:02,240
Speaker 1: makes it less liquid and more expensive to trade. Fundamental

296
00:21:02,280 --> 00:21:07,560
Speaker 1: index was the inspiration for the term smart beta, but

297
00:21:08,160 --> 00:21:11,280
Speaker 1: I never invented the term. I liked it. I thought

298
00:21:11,600 --> 00:21:15,280
Speaker 1: that's a clever way to label it. And then pretty

299
00:21:15,280 --> 00:21:17,480
Speaker 1: soon everybody under the sun was saying, oh, we do

300
00:21:17,600 --> 00:21:23,840
Speaker 1: smart beta. You had index calculators saying, hey, our growth

301
00:21:23,880 --> 00:21:27,560
Speaker 1: and value indexes are both smart beta. No, they're both

302
00:21:27,560 --> 00:21:31,560
Speaker 1: tied to the price of the stock. They're still cap weighted. Um.

303
00:21:31,640 --> 00:21:37,359
Speaker 1: You had factor investors saying our value factor is smart beta. Well,

304
00:21:37,400 --> 00:21:41,560
Speaker 1: that's true because it does contratrade. Our momentum factor is

305
00:21:41,600 --> 00:21:44,720
Speaker 1: smart beta. No, that chases whatever has gone up the most.

306
00:21:45,680 --> 00:21:48,320
Speaker 1: Our quality factor is smart data. No, that's going to

307
00:21:48,440 --> 00:21:51,960
Speaker 1: load up on whatever is expensive. Also, so you had

308
00:21:52,320 --> 00:21:58,040
Speaker 1: lots of organizations embrace the phrase because the phrase itself sells.

309
00:21:58,119 --> 00:22:02,960
Speaker 1: It helps selling product. So I like the expression smart data,

310
00:22:03,560 --> 00:22:07,160
Speaker 1: but I like its original definition. And if smart beta

311
00:22:07,200 --> 00:22:10,960
Speaker 1: is applied to everything under the sun, smart ideas and

312
00:22:11,040 --> 00:22:13,679
Speaker 1: stupid ideas, then the term ceases to mean anything. And

313
00:22:13,680 --> 00:22:16,120
Speaker 1: I think that's where we are now. Rob you wrote

314
00:22:16,119 --> 00:22:19,879
Speaker 1: a really fascinating peace with your team titled Big Market

315
00:22:19,920 --> 00:22:25,320
Speaker 1: Delusions Electric Vehicles. I want to start with your definition

316
00:22:25,800 --> 00:22:29,760
Speaker 1: of quote big market delusion. That's when all the firms

317
00:22:29,840 --> 00:22:35,040
Speaker 1: in an evolving industry rise together even though their competitors,

318
00:22:35,040 --> 00:22:39,000
Speaker 1: and ultimately some will win and some will lose. Why

319
00:22:39,040 --> 00:22:41,720
Speaker 1: does it not make sense for investors to just own

320
00:22:41,840 --> 00:22:45,240
Speaker 1: all of the basket of everybody in that space and

321
00:22:45,720 --> 00:22:48,440
Speaker 1: eventually the market will self correct. The winners and the

322
00:22:48,480 --> 00:22:54,240
Speaker 1: all outweigh the losers. Well, that is the basic definition

323
00:22:54,280 --> 00:22:58,919
Speaker 1: of diversification. And it makes sense unless all of the

324
00:22:58,960 --> 00:23:01,560
Speaker 1: firms in the industry are priced as if they will

325
00:23:01,640 --> 00:23:09,040
Speaker 1: be outlier winners, because they won't. Um If if a

326
00:23:09,240 --> 00:23:13,160
Speaker 1: company is priced as if it will achieve stupendous success,

327
00:23:13,200 --> 00:23:17,440
Speaker 1: and it achieves its stupendous success, wonderful you did find

328
00:23:17,720 --> 00:23:21,200
Speaker 1: you didn't get hurt by that. If five companies are

329
00:23:21,200 --> 00:23:23,840
Speaker 1: all priced as if they're going to be stupendous successes

330
00:23:23,880 --> 00:23:26,720
Speaker 1: and you know that only one or two of them will,

331
00:23:27,960 --> 00:23:31,760
Speaker 1: then you've just bought a basket that collectively is destined

332
00:23:31,800 --> 00:23:36,240
Speaker 1: to perform badly. The guy who coined the term big

333
00:23:36,280 --> 00:23:40,560
Speaker 1: market delusion is Brad Cornell, past professor at U C

334
00:23:40,680 --> 00:23:44,520
Speaker 1: l A and at cal Tech, and uh, it's an

335
00:23:44,520 --> 00:23:47,320
Speaker 1: idea that's been around, but it's a great term to

336
00:23:47,560 --> 00:23:50,879
Speaker 1: capture the concept. Back at the peak of the tech bubble,

337
00:23:50,920 --> 00:23:54,200
Speaker 1: there were several of us, me Cliff Fastness, and probably

338
00:23:54,280 --> 00:23:56,840
Speaker 1: dozens of others who pointed out that not all the

339
00:23:56,880 --> 00:24:00,280
Speaker 1: tech companies will win, and they're all priced as if

340
00:24:00,280 --> 00:24:04,440
Speaker 1: they will all win, so as a segment, they were

341
00:24:04,480 --> 00:24:08,159
Speaker 1: collectively extravagantly overpriced. You can even have it on the

342
00:24:08,200 --> 00:24:12,199
Speaker 1: other side and anti bubble like at the trough of

343
00:24:12,240 --> 00:24:17,480
Speaker 1: the financial crisis, financial services companies were all priced based

344
00:24:17,520 --> 00:24:22,320
Speaker 1: on the perceived risk of bankruptcy, and so they were

345
00:24:22,359 --> 00:24:26,359
Speaker 1: priced as a call option on future survival. And yet

346
00:24:27,320 --> 00:24:31,800
Speaker 1: with each company that failed that went out of business,

347
00:24:32,240 --> 00:24:34,920
Speaker 1: the landscape was now cleared for the others to earn

348
00:24:35,040 --> 00:24:39,719
Speaker 1: outsize profits in the subsequent economic rebounds. So big market

349
00:24:39,760 --> 00:24:43,320
Speaker 1: delusion can play out in both directions. We singled out

350
00:24:43,359 --> 00:24:49,280
Speaker 1: electric vehicles because at their peak during this last quarter,

351
00:24:50,200 --> 00:24:54,840
Speaker 1: Tesla was priced at thirty four times its annual run

352
00:24:54,920 --> 00:25:00,480
Speaker 1: rate sales UM. Now there's eight companies around the world

353
00:25:00,760 --> 00:25:06,520
Speaker 1: that specialized in electric vehicles. Tesla was the second cheapest

354
00:25:06,720 --> 00:25:11,280
Speaker 1: of the eight in terms of measured market value to

355
00:25:11,480 --> 00:25:16,760
Speaker 1: prior year revenues. Thirty four times sales was second cheapest

356
00:25:16,840 --> 00:25:20,840
Speaker 1: on the list. The others were ranged from uh The

357
00:25:20,880 --> 00:25:25,800
Speaker 1: others ranged from about twenty times sales to literally ten

358
00:25:25,880 --> 00:25:31,320
Speaker 1: thousand times sales. So when you have those kinds of valuations,

359
00:25:32,200 --> 00:25:38,280
Speaker 1: the winners might might be worth their valuations, but the

360
00:25:38,359 --> 00:25:42,200
Speaker 1: losers most assuredly won't. And that's the nature of big

361
00:25:42,240 --> 00:25:46,080
Speaker 1: market delusion. I have no idea if Tesla will be

362
00:25:46,160 --> 00:25:51,359
Speaker 1: worth its current price. I very much doubt it. But

363
00:25:51,480 --> 00:25:55,680
Speaker 1: I have absolute confidence that the collective e V market

364
00:25:56,200 --> 00:25:59,400
Speaker 1: is not worth its current price. Well, I know they've

365
00:25:59,400 --> 00:26:05,639
Speaker 1: had offense pastic run ending um the in the research piece,

366
00:26:05,680 --> 00:26:09,160
Speaker 1: you use January thirty one of this year to show

367
00:26:09,200 --> 00:26:13,360
Speaker 1: how far all of these companies have have come. Um,

368
00:26:13,680 --> 00:26:17,120
Speaker 1: are they remotely like? I'm thinking of the old days

369
00:26:17,160 --> 00:26:21,040
Speaker 1: of biotech, where it was impossible to come up with

370
00:26:21,600 --> 00:26:26,359
Speaker 1: evaluation because it was so binary. You would end up with, Hey,

371
00:26:26,480 --> 00:26:30,520
Speaker 1: either this company develops a molecule that does what it's

372
00:26:30,560 --> 00:26:34,240
Speaker 1: supposed to and then becomes a stupendent success, or it

373
00:26:34,320 --> 00:26:38,000
Speaker 1: doesn't and it's a zero. Or should we be looking

374
00:26:38,040 --> 00:26:40,680
Speaker 1: at these e V companies the same way. Either they're

375
00:26:40,680 --> 00:26:43,600
Speaker 1: gonna put out a successful car and that's what jump

376
00:26:43,640 --> 00:26:47,199
Speaker 1: starts them, or they're just expensive R and D shops

377
00:26:47,240 --> 00:26:51,720
Speaker 1: for now and perhaps might be worth nothing. Well, the

378
00:26:52,119 --> 00:26:55,080
Speaker 1: correct way to do the kind of analysis you're talking

379
00:26:55,119 --> 00:27:01,240
Speaker 1: about is, if this company produces a disruptive product that

380
00:27:01,440 --> 00:27:04,320
Speaker 1: massively changes the industry, what's it going to be worth

381
00:27:05,080 --> 00:27:08,120
Speaker 1: and what are the odds that this will happen with

382
00:27:08,200 --> 00:27:11,520
Speaker 1: this company as the dominant winner. The missing piece in

383
00:27:11,560 --> 00:27:15,880
Speaker 1: a market. Big market delusion is that latter piece. If

384
00:27:16,000 --> 00:27:19,720
Speaker 1: all of them are priced as if they have the

385
00:27:19,760 --> 00:27:24,680
Speaker 1: potential to be massive successes, then you have a problem.

386
00:27:24,760 --> 00:27:29,879
Speaker 1: And that's that's the issue we're dealing with Tesla. Is

387
00:27:30,400 --> 00:27:33,880
Speaker 1: it is its current valuation too high or is it

388
00:27:33,960 --> 00:27:36,200
Speaker 1: in bubble territory. One of the things that I think

389
00:27:36,280 --> 00:27:40,359
Speaker 1: is interesting is everyone band these around the word bubble

390
00:27:41,240 --> 00:27:45,240
Speaker 1: as if it has some clear meaning, and it doesn't.

391
00:27:46,160 --> 00:27:49,840
Speaker 1: Usually it's used in retrospect after a bubble has burst.

392
00:27:50,720 --> 00:27:53,960
Speaker 1: So we came up with a definition back in two

393
00:27:54,000 --> 00:27:56,639
Speaker 1: thousand eighteen we that we think can be used in

394
00:27:56,680 --> 00:28:02,240
Speaker 1: real time. And that definition is very simple. Um, if

395
00:28:02,280 --> 00:28:06,159
Speaker 1: you're using a discounted cash flow model, you would have

396
00:28:06,240 --> 00:28:10,800
Speaker 1: to make implausible assumptions about future growth to justify the

397
00:28:10,840 --> 00:28:16,359
Speaker 1: current price. And second part of the definition just as important, Um,

398
00:28:16,480 --> 00:28:21,080
Speaker 1: the marginal buyer has no interest in valuation models. Let's

399
00:28:21,080 --> 00:28:25,399
Speaker 1: take Tesla as an example. We UH did a piece

400
00:28:25,440 --> 00:28:28,880
Speaker 1: on Tesla last December as it was on its way

401
00:28:28,920 --> 00:28:33,240
Speaker 1: into the SMP, and we had done an analysis where

402
00:28:33,240 --> 00:28:37,480
Speaker 1: we assumed, let's let's say Tesla's book of business at

403
00:28:37,520 --> 00:28:41,480
Speaker 1: sales grow fifty percent a year for the next ten years. Now,

404
00:28:41,560 --> 00:28:45,240
Speaker 1: how plausible is that. Well, Amazon, the big winner of

405
00:28:45,280 --> 00:28:48,960
Speaker 1: the two thousand tens, grew six percent a year over

406
00:28:49,000 --> 00:28:54,920
Speaker 1: the decade ended two thousand twenty a year. That's enough

407
00:28:54,960 --> 00:28:57,959
Speaker 1: to make a company eleven times as large in just

408
00:28:58,120 --> 00:29:01,760
Speaker 1: ten years. Fifty sent a year makes a company fifty

409
00:29:01,800 --> 00:29:06,000
Speaker 1: five times as large. So tacitly, we were assuming that

410
00:29:06,800 --> 00:29:10,960
Speaker 1: Tesla would be five times as successful as Amazon over

411
00:29:11,000 --> 00:29:15,479
Speaker 1: the coming decade versus Amazon over the last decade. All right,

412
00:29:15,600 --> 00:29:21,840
Speaker 1: that's a pretty darned extravagant assumption. We then said, let's

413
00:29:21,920 --> 00:29:27,600
Speaker 1: us further assume that Tesla is has a an after

414
00:29:27,720 --> 00:29:32,200
Speaker 1: tax profit margin ten years from now. That is, that

415
00:29:32,320 --> 00:29:36,360
Speaker 1: matches the highest after tax profit margin of any automaker

416
00:29:37,280 --> 00:29:39,880
Speaker 1: in the world in the last decade. Well, there was

417
00:29:39,920 --> 00:29:45,040
Speaker 1: one year when Toyota hit a ten after tax profit margin.

418
00:29:45,600 --> 00:29:52,080
Speaker 1: So let's assume gross profit margin. Um well, that's pretty

419
00:29:52,080 --> 00:29:56,960
Speaker 1: good profits. If you discounted that back to current prices,

420
00:29:57,080 --> 00:30:00,920
Speaker 1: you could justify a price of fos tequ was twice that.

421
00:30:01,560 --> 00:30:06,600
Speaker 1: So that's an example of um uh using a definition

422
00:30:06,680 --> 00:30:09,880
Speaker 1: of bubble to test it in real time. Now, con

423
00:30:10,080 --> 00:30:20,320
Speaker 1: Tesla wind up using other markets to justify the current price. Perhaps,

424
00:30:20,360 --> 00:30:24,680
Speaker 1: but you're really dealing with some pretty extravagant assumptions. And

425
00:30:24,880 --> 00:30:28,400
Speaker 1: the point of big market delusion wasn't that Tesla is

426
00:30:28,440 --> 00:30:31,440
Speaker 1: a bubble poised to crash. I do think Tesla is

427
00:30:31,440 --> 00:30:36,640
Speaker 1: an extravagantly overpriced company that will investors will be very

428
00:30:36,720 --> 00:30:40,360
Speaker 1: lucky to have positive return over the next ten to

429
00:30:40,400 --> 00:30:45,720
Speaker 1: twenty years, very lucky indeed. But the point of big

430
00:30:45,760 --> 00:30:49,960
Speaker 1: market delusion is um if you look at the electric

431
00:30:50,040 --> 00:30:54,200
Speaker 1: vehicle industry in aggregate, it's worth about eight percent as

432
00:30:54,320 --> 00:30:59,120
Speaker 1: much as all other vehicle makers combined. And oh, by

433
00:30:59,160 --> 00:31:02,360
Speaker 1: the way, over half of all electric vehicles are made

434
00:31:02,400 --> 00:31:07,160
Speaker 1: by those other existing players who make conventional cars and

435
00:31:07,280 --> 00:31:13,320
Speaker 1: electric cars. So the e V specialists comprise less than

436
00:31:13,440 --> 00:31:18,120
Speaker 1: half of the EV market and have total valuation very

437
00:31:18,200 --> 00:31:21,760
Speaker 1: nearly that of companies that collectively produced nearly a hundred

438
00:31:21,840 --> 00:31:25,600
Speaker 1: times as many vehicles, a hundred times as many vehicles.

439
00:31:25,600 --> 00:31:30,680
Speaker 1: You know what's so fascinating about that is how, after

440
00:31:30,800 --> 00:31:38,120
Speaker 1: really taking their time, the traditional internal combustion engine car

441
00:31:38,160 --> 00:31:42,560
Speaker 1: manufacturers have really ramped up their e V game. I

442
00:31:42,640 --> 00:31:45,120
Speaker 1: had Afford Mustang for a week. I got to play

443
00:31:45,200 --> 00:31:49,760
Speaker 1: with really a very nice, very well made car, good looking,

444
00:31:49,960 --> 00:31:53,960
Speaker 1: very high quality, surprisingly high quality UM and in many

445
00:31:54,000 --> 00:31:59,240
Speaker 1: ways way superior to not the software of Tesla, just

446
00:31:59,400 --> 00:32:03,760
Speaker 1: the physical vehicle. The new Volkswagen I D four is

447
00:32:03,760 --> 00:32:07,680
Speaker 1: getting really good reviews were and that's before we start

448
00:32:07,760 --> 00:32:11,680
Speaker 1: talking about what's coming out of Mercedes and an Audi.

449
00:32:11,800 --> 00:32:15,800
Speaker 1: Audi has a run of um RS cars that are

450
00:32:16,960 --> 00:32:20,080
Speaker 1: very competitive, the same with the Porsche take in turbo

451
00:32:20,200 --> 00:32:23,560
Speaker 1: as fast as cars that cost ten times as much.

452
00:32:24,120 --> 00:32:28,080
Speaker 1: So I know the e V manufacturers are all battling

453
00:32:28,120 --> 00:32:31,840
Speaker 1: amongst themselves, but there's a really strong case to be

454
00:32:31,960 --> 00:32:36,520
Speaker 1: made that the future of electric vehicles is coming from

455
00:32:36,560 --> 00:32:41,920
Speaker 1: the internal combustion group. I think that's exactly right UM

456
00:32:42,040 --> 00:32:46,479
Speaker 1: when Volkswagen our Toyota decide, well, Toyota has been a

457
00:32:46,480 --> 00:32:52,320
Speaker 1: pioneer UM in hybrid technology, which by definition means they've

458
00:32:52,320 --> 00:32:57,959
Speaker 1: been a pioneer in electric vehicle technology UM for longer

459
00:32:58,000 --> 00:33:02,040
Speaker 1: than Tesla has been in existence. So nobody's gonna deny

460
00:33:02,160 --> 00:33:07,000
Speaker 1: that Tesla has been a massive disruptor, that Tesla has

461
00:33:07,400 --> 00:33:11,720
Speaker 1: a big head start, and that Tesla has a surprisingly

462
00:33:11,760 --> 00:33:17,840
Speaker 1: good product for a newbie automaker. But when Toyota decides

463
00:33:17,880 --> 00:33:25,760
Speaker 1: to spend more on electric vehicle um uh innovation, then

464
00:33:25,840 --> 00:33:31,000
Speaker 1: Tesla could plausibly take in as gross revenues over the

465
00:33:31,080 --> 00:33:34,520
Speaker 1: coming three to five years and to do that every year.

466
00:33:35,440 --> 00:33:39,160
Speaker 1: Um okay, Tesla is going to have some serious competition.

467
00:33:40,240 --> 00:33:46,400
Speaker 1: So um. The whole notion of big market delusion is

468
00:33:46,480 --> 00:33:51,440
Speaker 1: that people look at disruptors and say, these disruptors have

469
00:33:51,600 --> 00:33:55,640
Speaker 1: the future in their sights, they know what's coming, their

470
00:33:55,680 --> 00:33:59,880
Speaker 1: position for it beautifully, and they overlook the fact that

471
00:34:00,000 --> 00:34:03,200
Speaker 1: disruptors get disrupted. It happens again and again and again.

472
00:34:03,600 --> 00:34:06,160
Speaker 1: There's no doubt Tesla has a lead in things like

473
00:34:06,640 --> 00:34:11,520
Speaker 1: over the air updates and autonomous driving and the supercharging network.

474
00:34:11,719 --> 00:34:16,800
Speaker 1: But you already see companies like Lucid, which their new vehicle,

475
00:34:16,880 --> 00:34:21,240
Speaker 1: the Air is coming out later this year, much longer range,

476
00:34:21,480 --> 00:34:27,480
Speaker 1: much smaller electric motor. It's a midsize car on the outside,

477
00:34:27,520 --> 00:34:31,279
Speaker 1: and the inside it's a full sized vehicle. Because they

478
00:34:31,280 --> 00:34:35,400
Speaker 1: were able to miniaturize so many components. They really brought

479
00:34:36,120 --> 00:34:40,279
Speaker 1: um a lot of impressive technology to the game, disrupting

480
00:34:40,280 --> 00:34:44,839
Speaker 1: the disruptors. What does history tell us that's like? So

481
00:34:44,920 --> 00:34:48,480
Speaker 1: you mentioned phones. What about other things like PCs or

482
00:34:48,560 --> 00:34:54,680
Speaker 1: televisions or railroads? Is that historically consistent? The disruptive technologies

483
00:34:54,719 --> 00:34:59,240
Speaker 1: themselves eventually gets disrupted. Oh, that happens again and again

484
00:34:59,280 --> 00:35:02,239
Speaker 1: in industry after industry. It's hard to It's hard to

485
00:35:02,239 --> 00:35:08,400
Speaker 1: come up with any industry where the disruptors weren't ultimately

486
00:35:08,800 --> 00:35:13,440
Speaker 1: displaced by new disruptors. I mean, how many search engines

487
00:35:13,480 --> 00:35:18,799
Speaker 1: did Google displace UM in its rise to to dominance

488
00:35:18,840 --> 00:35:24,000
Speaker 1: of the search engine space? I read one study that

489
00:35:24,040 --> 00:35:28,279
Speaker 1: said there were twenty six search engines that came and

490
00:35:28,320 --> 00:35:34,720
Speaker 1: went with Google as the ultimate survivor. Will somebody disrupt Google?

491
00:35:35,560 --> 00:35:40,160
Speaker 1: Who knows? UM? Is it priced to allow for the

492
00:35:40,239 --> 00:35:44,040
Speaker 1: possibility that a disruptor will knock them from their perch. No,

493
00:35:44,200 --> 00:35:48,920
Speaker 1: it's priced for the um expectation that that can't possibly happen,

494
00:35:49,640 --> 00:35:53,000
Speaker 1: and and it could happen. UM. This is this is

495
00:35:53,040 --> 00:35:57,120
Speaker 1: the achilles heel of growth and momentum investing that UH

496
00:35:57,680 --> 00:36:01,439
Speaker 1: disruptors do get disrupted. I recall a couple of years

497
00:36:01,480 --> 00:36:04,799
Speaker 1: ago you had done a study about the additions and

498
00:36:05,040 --> 00:36:09,799
Speaker 1: deletions to various indexes, And it turns out, especially with

499
00:36:09,840 --> 00:36:14,279
Speaker 1: the SMP five hundred. The companies that get added underperformed

500
00:36:14,280 --> 00:36:18,560
Speaker 1: the companies they replace, and in Tesla's case, that would

501
00:36:18,560 --> 00:36:23,480
Speaker 1: be Apartment Investment and Management. Uh, you guys are forecasting

502
00:36:23,520 --> 00:36:27,600
Speaker 1: that this is going to outperform Tesla over the next one, five,

503
00:36:27,719 --> 00:36:31,080
Speaker 1: ten years. What what do those numbers look like historically

504
00:36:31,239 --> 00:36:36,239
Speaker 1: for additions and deletions. Well, just to be clear, we

505
00:36:36,320 --> 00:36:45,200
Speaker 1: aren't forecasting that um uh that uh Tesla will underperform

506
00:36:45,840 --> 00:36:50,760
Speaker 1: a I VUM by two thousand basis points. Were observing

507
00:36:50,840 --> 00:36:54,640
Speaker 1: that historically that's been the norm, and so that's a

508
00:36:54,680 --> 00:36:59,719
Speaker 1: little bit different. But um, the norm is that the

509
00:37:00,000 --> 00:37:04,080
Speaker 1: companies that are added to the S and P five

510
00:37:04,200 --> 00:37:09,840
Speaker 1: hundred underperformed by about two in the subsequent twelve months

511
00:37:09,880 --> 00:37:14,960
Speaker 1: after they're added. Companies that are added and are already

512
00:37:14,960 --> 00:37:18,120
Speaker 1: in the top one hundred by the time they're added

513
00:37:19,160 --> 00:37:25,880
Speaker 1: underperformed by about seven over the coming year. Now, no

514
00:37:26,000 --> 00:37:30,120
Speaker 1: company other than Tesla has ever been added which ranked

515
00:37:30,120 --> 00:37:33,799
Speaker 1: in the top ten the day it was added. Um,

516
00:37:34,080 --> 00:37:38,319
Speaker 1: and so one would assume, extrapolating from history, that its

517
00:37:38,440 --> 00:37:40,880
Speaker 1: performance in the first year would be expected to be

518
00:37:41,000 --> 00:37:45,600
Speaker 1: negative to an extent that's larger than those historic norms.

519
00:37:45,640 --> 00:37:48,680
Speaker 1: The Companies that are dropped, on the other hand, usually

520
00:37:48,680 --> 00:37:52,040
Speaker 1: are small, thinly traded, ill liquid, and they just get

521
00:37:52,080 --> 00:37:56,240
Speaker 1: clawbered as they get removed. But they're underlying fundamentals usually

522
00:37:57,160 --> 00:38:01,840
Speaker 1: are mediocre. That's why they're dropped, fully reflected in the

523
00:38:01,920 --> 00:38:06,600
Speaker 1: price before they're dropped, and bludging down to unreasonable levels

524
00:38:06,640 --> 00:38:09,920
Speaker 1: on the way out. And the result is the companies

525
00:38:09,960 --> 00:38:12,960
Speaker 1: that are dropped from the SMP UH. And here we're

526
00:38:12,960 --> 00:38:16,120
Speaker 1: excluding corporate actions. A company that's dropped from the SMP

527
00:38:16,280 --> 00:38:21,200
Speaker 1: because it doesn't exist anymore doesn't count. But discretionary deletions

528
00:38:21,280 --> 00:38:26,480
Speaker 1: like apartment investment in Management on average historically beat the

529
00:38:26,680 --> 00:38:30,600
Speaker 1: SMP by over two thousand basis points UH in the

530
00:38:30,640 --> 00:38:33,800
Speaker 1: first year after they're deleted. So that would suggest to

531
00:38:34,400 --> 00:38:39,920
Speaker 1: us that based on history, Apartment Investment and Management would

532
00:38:39,960 --> 00:38:44,520
Speaker 1: be expected to beat Tesla by maybe thirty percentage points

533
00:38:44,520 --> 00:38:48,280
Speaker 1: in the first year after the change was made. Tesla's

534
00:38:48,360 --> 00:38:52,080
Speaker 1: kind of a special case because everyone knew that SMP

535
00:38:52,239 --> 00:38:55,480
Speaker 1: was going to have to add Tesla, and the Investment

536
00:38:55,480 --> 00:38:59,600
Speaker 1: Committee of SMP just basically said, hey, we've got a rule.

537
00:38:59,640 --> 00:39:02,680
Speaker 1: If you don't have profits for the last four quarters,

538
00:39:03,000 --> 00:39:07,480
Speaker 1: we're not going to add you. And so in March

539
00:39:08,200 --> 00:39:13,520
Speaker 1: of two thousand and twenty, I remember seeing speculation in

540
00:39:13,560 --> 00:39:18,560
Speaker 1: the media that if the first quarter was profitable, Tesla

541
00:39:18,600 --> 00:39:24,319
Speaker 1: would finally have four consecutive positive quarters UM and the

542
00:39:24,440 --> 00:39:27,080
Speaker 1: S and P would have no choice but to add them,

543
00:39:27,120 --> 00:39:29,680
Speaker 1: and that set Tesla off on a on a tear.

544
00:39:30,400 --> 00:39:33,800
Speaker 1: So Tesla was up I think the number was six

545
00:39:33,880 --> 00:39:41,040
Speaker 1: or seven hundred from its March lows until the decision

546
00:39:41,200 --> 00:39:45,800
Speaker 1: was announced in November to add them uh and then

547
00:39:45,880 --> 00:39:50,600
Speaker 1: up another or more from the announcement date to the

548
00:39:50,680 --> 00:39:55,480
Speaker 1: actual inclusion in the index. Just astounding numbers because Tesla

549
00:39:55,680 --> 00:40:00,359
Speaker 1: was a big company, big market cap company, and so

550
00:40:00,400 --> 00:40:03,799
Speaker 1: the addition to the SMP meant that the market the

551
00:40:03,960 --> 00:40:07,480
Speaker 1: index funds would have to buy upwards of two hundred

552
00:40:07,600 --> 00:40:11,120
Speaker 1: billion dollars worth of the stock on that same day.

553
00:40:11,760 --> 00:40:17,480
Speaker 1: And of course it's not that anyone didn't anticipate that

554
00:40:17,560 --> 00:40:20,560
Speaker 1: hedge funds would load up on it in anticipation of

555
00:40:20,600 --> 00:40:25,200
Speaker 1: flipping it to the index funds, and of course they did. UM.

556
00:40:25,520 --> 00:40:30,200
Speaker 1: So additions and deletions to indexes have their own special

557
00:40:30,320 --> 00:40:36,839
Speaker 1: characteristics and are very much disrupted. Continue to be amazed

558
00:40:37,040 --> 00:40:40,240
Speaker 1: that academia hues to the notion that markets are efficient.

559
00:40:41,160 --> 00:40:44,840
Speaker 1: Has anyone thought to put a long short fund together

560
00:40:45,360 --> 00:40:49,120
Speaker 1: of these additions and deletions. It sounds like that's a

561
00:40:49,160 --> 00:40:54,040
Speaker 1: potential alpha generator. I think it's a potential alpha generator.

562
00:40:54,120 --> 00:40:58,880
Speaker 1: It's going to be a very niche oriented strategy because

563
00:40:58,960 --> 00:41:01,920
Speaker 1: let's say there's let's say there's twenty changes in the

564
00:41:01,960 --> 00:41:06,800
Speaker 1: index in a given year, You're gonna go long twenty

565
00:41:06,920 --> 00:41:11,760
Speaker 1: very illiquid stocks just before they're dropped UM and short

566
00:41:12,200 --> 00:41:18,840
Speaker 1: twenty very liquid, very popular stocks, uh, just as they

567
00:41:19,040 --> 00:41:22,560
Speaker 1: get at it. So you're gonna wind up UM having

568
00:41:22,600 --> 00:41:25,000
Speaker 1: a big short on large cap stocks and a big

569
00:41:25,040 --> 00:41:29,320
Speaker 1: long on small cap stocks, a big short on growth stocks,

570
00:41:29,320 --> 00:41:32,800
Speaker 1: a big long on value stocks, and a big short

571
00:41:32,960 --> 00:41:36,759
Speaker 1: on highly liquid stocks, and big long on highly illiquid

572
00:41:36,800 --> 00:41:42,200
Speaker 1: stocks in a lumpy, concentrated portfolio. So I think as

573
00:41:42,360 --> 00:41:44,640
Speaker 1: part of a broad strategy it would be a fun

574
00:41:44,719 --> 00:41:49,239
Speaker 1: thing to put together. As a standalone strategy, I think

575
00:41:49,280 --> 00:41:53,040
Speaker 1: it would have a little too much risk for the

576
00:41:53,080 --> 00:41:56,520
Speaker 1: tastes of most investors, to say the least. So let's

577
00:41:56,520 --> 00:41:59,320
Speaker 1: talk a little bit about value. You wrote an interesting

578
00:41:59,440 --> 00:42:03,839
Speaker 1: piece with your team titled Reports of Values. Death may

579
00:42:03,880 --> 00:42:11,200
Speaker 1: be greatly exaggerated tell us about why value ain't dead yet. Well,

580
00:42:11,200 --> 00:42:15,680
Speaker 1: whenever anything in the finance world is called dead, chances

581
00:42:15,719 --> 00:42:19,880
Speaker 1: are it's it's about to come back to life. However,

582
00:42:19,920 --> 00:42:22,480
Speaker 1: I would say that we've been hearing reports of values

583
00:42:22,560 --> 00:42:25,759
Speaker 1: death for three or four years now, and so it

584
00:42:25,960 --> 00:42:30,640
Speaker 1: sure took a long time to begin its recovery. UM.

585
00:42:30,680 --> 00:42:35,840
Speaker 1: The narrative is growth stocks are better. Growth have better

586
00:42:35,920 --> 00:42:39,160
Speaker 1: growth and better profit margins than they used to. Value

587
00:42:39,200 --> 00:42:42,880
Speaker 1: stocks are more disrupted, and disruptors are getting better and

588
00:42:42,960 --> 00:42:49,400
Speaker 1: faster at disrupting and just demolishing vast slaws of business UM,

589
00:42:49,480 --> 00:42:54,120
Speaker 1: and so values really had its day and is not

590
00:42:54,320 --> 00:43:02,319
Speaker 1: coming back. Well, why would value fail again? The narrative

591
00:43:02,960 --> 00:43:06,479
Speaker 1: fills in the details. One of the core engines for

592
00:43:06,640 --> 00:43:10,520
Speaker 1: the value factor is migration. A company that's in the

593
00:43:10,600 --> 00:43:16,400
Speaker 1: growth segment falls out of favor, tumbles invaluation multiples, pulling

594
00:43:16,480 --> 00:43:19,080
Speaker 1: down the performance of the growth portfolio, and then it's

595
00:43:19,120 --> 00:43:24,279
Speaker 1: kicked out and replaced with a new high flyer. UM.

596
00:43:24,440 --> 00:43:28,960
Speaker 1: A company is um on the values side turns out

597
00:43:29,040 --> 00:43:32,320
Speaker 1: not to be facing as severe headwinds as people feared,

598
00:43:32,719 --> 00:43:35,680
Speaker 1: so it's valuation multiple sore, and then it's replaced with

599
00:43:35,760 --> 00:43:40,719
Speaker 1: a new, deeply unloved value company. So you get this

600
00:43:40,960 --> 00:43:46,520
Speaker 1: constant rotation for growth, underperforming out for value, outperform, and out,

601
00:43:47,440 --> 00:43:52,319
Speaker 1: and that's the dominant engine for the value factor. It's

602
00:43:52,400 --> 00:43:56,320
Speaker 1: largely offset but not entirely offset by the main profit

603
00:43:56,360 --> 00:43:59,720
Speaker 1: engine for growth, which is the companies are growing faster,

604
00:44:00,000 --> 00:44:02,799
Speaker 1: they're more profitable, they're better companies. Of course they are.

605
00:44:02,880 --> 00:44:07,000
Speaker 1: That's why they have the higher multiples. And so if

606
00:44:07,239 --> 00:44:12,960
Speaker 1: in an efficient market, the benefit of growth should pretty

607
00:44:13,040 --> 00:44:18,680
Speaker 1: much exactly offset the benefits for value from its migration

608
00:44:18,760 --> 00:44:26,480
Speaker 1: from its rotation. Now the narrative is um that that

609
00:44:26,600 --> 00:44:30,240
Speaker 1: rotation is slowing and the difference in quality between growth

610
00:44:30,239 --> 00:44:34,040
Speaker 1: and value stocks has widened. There's truth in that narrative.

611
00:44:34,080 --> 00:44:38,640
Speaker 1: There's truth and most narratives. The migration has been slowing,

612
00:44:38,800 --> 00:44:44,200
Speaker 1: but not by much. The differential in profit margins for

613
00:44:44,400 --> 00:44:48,319
Speaker 1: growth versus value has widened, but not by much. And

614
00:44:48,520 --> 00:44:53,000
Speaker 1: so one of the shocking findings was that during the

615
00:44:53,000 --> 00:44:57,560
Speaker 1: worst period for value investing in history, a period of

616
00:44:57,600 --> 00:45:02,040
Speaker 1: time when if you're using price to book to define value,

617
00:45:03,400 --> 00:45:09,680
Speaker 1: value underperformed growth by fifty nine percentage points over a

618
00:45:09,760 --> 00:45:14,960
Speaker 1: thirteen year span, just horrific underperformance. How much of that

619
00:45:15,080 --> 00:45:18,800
Speaker 1: came from value falling out of favor and becoming cheaper

620
00:45:19,160 --> 00:45:23,319
Speaker 1: relative to growth. Well, it turns out well over the

621
00:45:23,360 --> 00:45:29,319
Speaker 1: under performance was value getting cheaper, not value companies under performing.

622
00:45:30,480 --> 00:45:33,560
Speaker 1: So what we found was that the relative cheapness of

623
00:45:33,640 --> 00:45:37,320
Speaker 1: value went from being one fourth as expensive as value

624
00:45:37,400 --> 00:45:41,320
Speaker 1: as growth to one twelfth is expensive in that thirteen

625
00:45:41,400 --> 00:45:47,840
Speaker 1: year span. That means that value cheapness fell by sixty

626
00:45:47,920 --> 00:45:54,400
Speaker 1: seven percent while its performance fell by Okay, that sounds

627
00:45:54,440 --> 00:45:57,440
Speaker 1: like a subtle nuance, but what it means is that

628
00:45:57,480 --> 00:46:00,959
Speaker 1: if the relative valuation hadn't moved, value would have beak

629
00:46:01,040 --> 00:46:04,440
Speaker 1: growth again in the last thirteen years and again in

630
00:46:04,480 --> 00:46:09,240
Speaker 1: the last three years during the really dreadful meltdown for value.

631
00:46:09,920 --> 00:46:12,680
Speaker 1: If you've got a stock that has fallen by sixty

632
00:46:12,760 --> 00:46:16,560
Speaker 1: or fifty or six, but it's pe ratio has fallen

633
00:46:16,560 --> 00:46:19,759
Speaker 1: by sixty or sevent do you look at that and say,

634
00:46:19,760 --> 00:46:21,399
Speaker 1: get me out of here, I can't stand the pain.

635
00:46:21,480 --> 00:46:24,640
Speaker 1: Or do you look at that and say, I can't

636
00:46:24,719 --> 00:46:27,439
Speaker 1: believe it's this cheap, Let me buy it. I leaned

637
00:46:27,440 --> 00:46:31,600
Speaker 1: towards the latter interpretation. Now, the second nuance in the

638
00:46:31,640 --> 00:46:34,839
Speaker 1: paper that I think is very important is that price

639
00:46:34,920 --> 00:46:38,480
Speaker 1: to book is the worst measure for defining value. If

640
00:46:38,480 --> 00:46:41,200
Speaker 1: you use price earnings ratios, the peak wasn't back in

641
00:46:41,280 --> 00:46:44,800
Speaker 1: two thousand seven. The peak was in two thousand fourteen.

642
00:46:45,520 --> 00:46:50,000
Speaker 1: If you use price to sales, it was two thousand seventeen.

643
00:46:50,400 --> 00:46:54,520
Speaker 1: If you use fundamental index to cap weight our strategy,

644
00:46:54,920 --> 00:46:58,520
Speaker 1: it was two thousand seventeen. It makes a big difference

645
00:46:58,560 --> 00:47:00,879
Speaker 1: between whether you've got a thirteen and a half year

646
00:47:00,960 --> 00:47:04,000
Speaker 1: dry spell where values underperforming and a three and a

647
00:47:04,040 --> 00:47:07,759
Speaker 1: half year dry spell. The former is really hard to

648
00:47:07,800 --> 00:47:11,120
Speaker 1: stay the course. The latter is less. So so I

649
00:47:11,200 --> 00:47:15,760
Speaker 1: look at UH price to book as a terrible measure,

650
00:47:15,880 --> 00:47:19,640
Speaker 1: and we, in fact, in that same paper dive into

651
00:47:19,719 --> 00:47:24,000
Speaker 1: that and show that price to book that book value

652
00:47:24,000 --> 00:47:28,919
Speaker 1: itself misses all the intangibles we've heard. We've all heard

653
00:47:28,920 --> 00:47:31,040
Speaker 1: the cliche that our assets go up and down in

654
00:47:31,080 --> 00:47:34,480
Speaker 1: the elevator every day. Well, that is true of bigger

655
00:47:34,520 --> 00:47:38,200
Speaker 1: and bigger swaws of the US economy or the world economy.

656
00:47:38,520 --> 00:47:42,600
Speaker 1: Then used to be the case. So we found that intangibles, Uh,

657
00:47:43,080 --> 00:47:48,120
Speaker 1: we're about as large as tangible book value fifty years ago,

658
00:47:48,719 --> 00:47:52,000
Speaker 1: and now it's as large. Means book value would double,

659
00:47:52,280 --> 00:47:56,279
Speaker 1: literally double, if you include intangibles. We also did a

660
00:47:56,360 --> 00:47:59,080
Speaker 1: test and found that if you use price to book

661
00:47:59,160 --> 00:48:03,560
Speaker 1: value where you adjust the book value for intangibles, Firstly,

662
00:48:03,960 --> 00:48:08,680
Speaker 1: the performance of the price to book value factor is

663
00:48:08,719 --> 00:48:12,600
Speaker 1: twice as good over that last fifty seven years as

664
00:48:12,640 --> 00:48:20,280
Speaker 1: it was without um adjusting for intangibles UM. And again

665
00:48:20,360 --> 00:48:23,840
Speaker 1: the peak was two thousand and fourteen, not two thousand seven.

666
00:48:24,440 --> 00:48:28,200
Speaker 1: So it works much better if you take account of intangibles.

667
00:48:28,920 --> 00:48:31,399
Speaker 1: But price to book is not the only measure. It's

668
00:48:31,600 --> 00:48:35,279
Speaker 1: not even by a long shot, the best measure, huh

669
00:48:35,719 --> 00:48:38,839
Speaker 1: and Rob. When we're talking about things like intangibles, we're

670
00:48:38,880 --> 00:48:45,839
Speaker 1: referring to things like patents, copyrights, processes, methodologies, things that

671
00:48:45,920 --> 00:48:49,960
Speaker 1: just don't show up in the traditional Hey, here's our factories,

672
00:48:50,120 --> 00:48:53,760
Speaker 1: here's our headquarters, those sort of measures of book value.

673
00:48:54,080 --> 00:48:59,200
Speaker 1: That's exactly right, quite interesting. So for value to start

674
00:48:59,440 --> 00:49:03,640
Speaker 1: generatinging that value premium again, what has to happen? Do

675
00:49:03,680 --> 00:49:07,680
Speaker 1: we need to see mean reversion against growth? Do rates

676
00:49:07,719 --> 00:49:10,120
Speaker 1: have to tick up, or do we need to see

677
00:49:10,120 --> 00:49:13,719
Speaker 1: a recession? What's going to be the the thing that

678
00:49:14,040 --> 00:49:19,320
Speaker 1: could kick off value reclaiming it's premium. Well, We've already

679
00:49:19,360 --> 00:49:23,440
Speaker 1: had that recession last year, and it was a doozy um.

680
00:49:23,480 --> 00:49:27,840
Speaker 1: The narrative was, and again, narratives are always based on

681
00:49:28,239 --> 00:49:32,120
Speaker 1: some measure of fact. The problem with narratives and investing

682
00:49:32,239 --> 00:49:37,000
Speaker 1: is that they move prices much too far. The narrative

683
00:49:37,120 --> 00:49:39,759
Speaker 1: was that the growth companies are beautifully positioned for a

684
00:49:39,840 --> 00:49:45,080
Speaker 1: COVID world and a post COVID world. True. The narrative was,

685
00:49:45,200 --> 00:49:48,840
Speaker 1: value stocks have much higher risk of bankruptcy, and in

686
00:49:49,120 --> 00:49:53,520
Speaker 1: the face of the COVID crisis, especially the business lockdowns,

687
00:49:54,000 --> 00:49:57,600
Speaker 1: is going to be sweeping bankruptcies. True. Now, what was

688
00:49:57,680 --> 00:50:01,120
Speaker 1: overlooked was almost all of those bankruptcy we're in companies

689
00:50:01,120 --> 00:50:03,640
Speaker 1: that were too small to be publicly traded. So there

690
00:50:03,680 --> 00:50:06,520
Speaker 1: were literally millions of companies that went out of business

691
00:50:06,600 --> 00:50:11,760
Speaker 1: last year, but shockingly few of the thirty million businesses

692
00:50:11,800 --> 00:50:15,960
Speaker 1: in the US, only thirty five hundred are publicly traded.

693
00:50:16,680 --> 00:50:20,040
Speaker 1: And of those thirty five hundred, let's say twenty or

694
00:50:20,120 --> 00:50:23,960
Speaker 1: value stocks, shockingly few went out of business as a

695
00:50:23,960 --> 00:50:28,560
Speaker 1: consequence of the lockdowns. So all you needed was for

696
00:50:28,600 --> 00:50:33,280
Speaker 1: people to realize ge uh, these value companies didn't fail.

697
00:50:33,680 --> 00:50:36,239
Speaker 1: Maybe I should now start pricing it not based on

698
00:50:36,320 --> 00:50:40,320
Speaker 1: bankruptcy risk, but based on its likely future P and L,

699
00:50:41,160 --> 00:50:45,319
Speaker 1: and all of a sudden, the turn happened at the

700
00:50:45,360 --> 00:50:49,120
Speaker 1: beginning of September, just when people were starting to realize, hey,

701
00:50:49,800 --> 00:50:53,200
Speaker 1: vaccines are about to be rolled out. Uh, this is

702
00:50:53,280 --> 00:50:56,719
Speaker 1: looking promising as an end to the crisis. And a

703
00:50:56,719 --> 00:50:58,840
Speaker 1: lot of these value companies are just not going to

704
00:50:58,960 --> 00:51:02,400
Speaker 1: go bust, so maybe I should reprice them for their

705
00:51:02,560 --> 00:51:06,200
Speaker 1: future success. And we've seen that in in energy stocks

706
00:51:06,200 --> 00:51:13,160
Speaker 1: and cyclicals, in bank stocks that rotation away from growth,

707
00:51:13,600 --> 00:51:16,759
Speaker 1: a lot of which were worked from home stocks and

708
00:51:16,920 --> 00:51:22,560
Speaker 1: towards traditional economic early cycle recovery stocks. That seems to

709
00:51:22,600 --> 00:51:26,800
Speaker 1: be really moving along unless I'm I'm seeing it wrong.

710
00:51:26,920 --> 00:51:29,239
Speaker 1: What what are your thoughts on that? I think that's

711
00:51:29,239 --> 00:51:33,960
Speaker 1: exactly right. Um. We did a test looking at draw

712
00:51:34,040 --> 00:51:38,759
Speaker 1: downs um when value underperformance growth, and it ranges from

713
00:51:38,840 --> 00:51:43,520
Speaker 1: you know what, one month value underperforms growth by half

714
00:51:43,560 --> 00:51:45,879
Speaker 1: a percent, so that's a half percent draw down from

715
00:51:45,880 --> 00:51:50,959
Speaker 1: the last peak and thirteen years underperformance by fifty nine

716
00:51:50,960 --> 00:51:54,640
Speaker 1: percentage points. We asked the question, historically, is there a

717
00:51:54,640 --> 00:51:57,759
Speaker 1: link between the magnitude of the draw down and the

718
00:51:57,800 --> 00:52:03,120
Speaker 1: magnitude of values out performance? In the subsequent two years,

719
00:52:03,360 --> 00:52:06,920
Speaker 1: and we found that when when value has underperformed by

720
00:52:06,960 --> 00:52:13,520
Speaker 1: more than three thousand basis points, it has no examples

721
00:52:13,560 --> 00:52:18,040
Speaker 1: historically of sailing to outperform over the next two years,

722
00:52:18,640 --> 00:52:22,720
Speaker 1: with an average outcome between four and five thousand basis

723
00:52:22,800 --> 00:52:27,239
Speaker 1: points about performance. So, when you see the nature of

724
00:52:27,239 --> 00:52:32,160
Speaker 1: that particular relationship, extrapolating to the current size of the

725
00:52:32,280 --> 00:52:37,480
Speaker 1: draw down um uh. And extrapolating is always dangerous. But

726
00:52:38,040 --> 00:52:43,080
Speaker 1: if past is prologue, and if extrapolating that relationship to

727
00:52:43,080 --> 00:52:48,600
Speaker 1: today's unprecedented draw down works, then value would be expected

728
00:52:48,640 --> 00:52:52,520
Speaker 1: to outperform growth by over one hundred percentage points over

729
00:52:52,560 --> 00:52:55,239
Speaker 1: the next two years. You know, if it's a third

730
00:52:55,239 --> 00:52:58,960
Speaker 1: of that, I'll be thrilled, to say the very least.

731
00:52:59,200 --> 00:53:03,319
Speaker 1: Let's talk a little it about yields and inflation. We've

732
00:53:03,320 --> 00:53:06,480
Speaker 1: been hearing a lot of chatter about yield starting to

733
00:53:06,480 --> 00:53:11,880
Speaker 1: tick up higher from admittedly low historical levels. Does this

734
00:53:11,960 --> 00:53:15,799
Speaker 1: have any meaning for value, stocks or the market as

735
00:53:15,840 --> 00:53:22,080
Speaker 1: a whole? What what should we take away about rising yields? Well, firstly,

736
00:53:22,280 --> 00:53:29,200
Speaker 1: it bears mentioned that yields are not well correlated with

737
00:53:29,239 --> 00:53:34,279
Speaker 1: the stock market. The stock market um has stocks and

738
00:53:34,320 --> 00:53:37,920
Speaker 1: bonds tend to have a negative correlation except during inflationary

739
00:53:38,000 --> 00:53:45,200
Speaker 1: times when inflation is rising or is materially elevated. And

740
00:53:45,320 --> 00:53:48,920
Speaker 1: so what we find is that it's a poor linkage.

741
00:53:48,960 --> 00:53:55,279
Speaker 1: But but um, again, the narrative is low rates justify

742
00:53:55,440 --> 00:54:00,200
Speaker 1: high valuation multiples and justify a bigger spread between orowth

743
00:54:00,239 --> 00:54:03,360
Speaker 1: and value than historic norms because growth stocks are going

744
00:54:03,440 --> 00:54:06,120
Speaker 1: to grow for a long time, and if you're discounting

745
00:54:06,120 --> 00:54:09,200
Speaker 1: at a very low rate, that future growth is more

746
00:54:09,280 --> 00:54:12,239
Speaker 1: valuable than it was at a high rate. Okay, it

747
00:54:12,239 --> 00:54:15,959
Speaker 1: makes intuitive sense. Going back over long periods of time

748
00:54:16,000 --> 00:54:19,760
Speaker 1: in history, you still you find lots of anomalies. Okay,

749
00:54:19,760 --> 00:54:23,440
Speaker 1: in the early fifties when interest rates were not too

750
00:54:23,560 --> 00:54:28,799
Speaker 1: much above current levels, um, what was the average valuation

751
00:54:28,880 --> 00:54:30,880
Speaker 1: multiple for the market, It was a third what it

752
00:54:30,960 --> 00:54:34,320
Speaker 1: is today. What was the average spread between growth and value?

753
00:54:34,360 --> 00:54:36,680
Speaker 1: It was a fraction of what it is today. So

754
00:54:37,880 --> 00:54:43,000
Speaker 1: and when you look at um non US markets, European

755
00:54:43,239 --> 00:54:47,839
Speaker 1: and Japanese markets in particular, where rates are zero, you

756
00:54:47,880 --> 00:54:52,920
Speaker 1: find valuations are not as elevated as in the US.

757
00:54:53,040 --> 00:54:56,400
Speaker 1: If the rates are even lower, why not that the

758
00:54:56,480 --> 00:54:59,520
Speaker 1: spread between growth and value is not as wide? As

759
00:54:59,560 --> 00:55:02,840
Speaker 1: the U. If the rates are lower, why not. But

760
00:55:03,080 --> 00:55:06,400
Speaker 1: a narrative can drive markets, and so the rising interest

761
00:55:06,440 --> 00:55:09,000
Speaker 1: rates I think has a lot to do with the

762
00:55:09,040 --> 00:55:12,560
Speaker 1: recent underperformance of fang stocks and the recent performance of

763
00:55:12,640 --> 00:55:18,640
Speaker 1: value stocks. UH. Basically, the rumor that this might happen

764
00:55:19,520 --> 00:55:23,480
Speaker 1: becomes a self fulfilling prophecy on a short term basis.

765
00:55:23,480 --> 00:55:25,760
Speaker 1: On a long term basis, I don't think the linkage

766
00:55:25,800 --> 00:55:28,840
Speaker 1: is all that useful or interesting. And I assume the

767
00:55:28,880 --> 00:55:32,680
Speaker 1: same goes for inflation and inflation expectations or or does

768
00:55:32,680 --> 00:55:37,440
Speaker 1: that result in a different outcome that's a little bit different.

769
00:55:37,800 --> 00:55:43,800
Speaker 1: Rising inflation UH clearly does horrible things for bonds and

770
00:55:44,160 --> 00:55:52,240
Speaker 1: also UM increases investors risk aversion inequities, so when stocks

771
00:55:52,239 --> 00:55:58,840
Speaker 1: are expensive, rising inflation has a nasty impact. So the

772
00:55:58,920 --> 00:56:04,680
Speaker 1: real question is UH, is the current increasing rate of

773
00:56:04,719 --> 00:56:12,680
Speaker 1: inflation a temporary consequence of deflationary pressures twelve months ago

774
00:56:14,120 --> 00:56:17,040
Speaker 1: and a snap back in pricing over the last twelve months,

775
00:56:17,640 --> 00:56:25,280
Speaker 1: or is it a sustained consequence of UM Today's central

776
00:56:25,360 --> 00:56:28,880
Speaker 1: bank and fiscal policies around the world which looked to

777
00:56:28,920 --> 00:56:33,600
Speaker 1: all the world to me like a full wholehearted embrace

778
00:56:33,719 --> 00:56:38,680
Speaker 1: of modern monetary theory, So let me ask that question. Now, deficits,

779
00:56:38,680 --> 00:56:41,080
Speaker 1: as far as the eye can see, it doesn't matter

780
00:56:41,160 --> 00:56:43,680
Speaker 1: if it's a Democrat or Republican in the White House.

781
00:56:44,160 --> 00:56:47,760
Speaker 1: Either it's tax cut and spend or tax I can spend.

782
00:56:48,440 --> 00:56:53,000
Speaker 1: But we've seen nothing but deficits were my entire at

783
00:56:53,040 --> 00:56:55,719
Speaker 1: out life with a couple of I think in or

784
00:56:56,760 --> 00:56:58,680
Speaker 1: we had a balanced budget for a year or so.

785
00:56:59,560 --> 00:57:03,160
Speaker 1: What is What is the rise of modern monetary theory

786
00:57:03,280 --> 00:57:07,680
Speaker 1: mean for markets? Well, modern monetary theory is a little

787
00:57:07,719 --> 00:57:11,799
Speaker 1: bit like Caynesianism on steroids. Canes basically said, Hey, you

788
00:57:11,840 --> 00:57:14,360
Speaker 1: can spend more money than you're taking in in taxes,

789
00:57:14,400 --> 00:57:18,200
Speaker 1: and you need to during an economic downturn. Then you

790
00:57:18,400 --> 00:57:22,920
Speaker 1: cut your deficit spending when the economy recovers because the

791
00:57:22,920 --> 00:57:26,360
Speaker 1: money the spending isn't as needed and you can run

792
00:57:26,360 --> 00:57:30,240
Speaker 1: a surplus to pay back the increase in the debt. Well,

793
00:57:30,320 --> 00:57:32,280
Speaker 1: that's gone right out of the window. I think Canes

794
00:57:32,320 --> 00:57:39,920
Speaker 1: would be horrified at current economic theory and practice. Modern

795
00:57:39,960 --> 00:57:45,160
Speaker 1: monetary theory takes it another step, basically saying, um, central

796
00:57:45,160 --> 00:57:49,840
Speaker 1: bank can print whatever money the policy elite wants to spend,

797
00:57:51,000 --> 00:57:54,960
Speaker 1: as long as that spending goes to increase employment and

798
00:57:55,080 --> 00:58:03,640
Speaker 1: therefore to increase future revenues to pay this act. Um. Okay,

799
00:58:04,160 --> 00:58:08,840
Speaker 1: as you said, it's it's um um not sensitive to

800
00:58:09,040 --> 00:58:12,800
Speaker 1: who's in the White House. Uh. I joked last year

801
00:58:12,880 --> 00:58:14,760
Speaker 1: in the run up to the election, when people would

802
00:58:14,760 --> 00:58:19,480
Speaker 1: ask about the election, I said, Look, we have an

803
00:58:19,520 --> 00:58:22,720
Speaker 1: incredibly important choice ahead of us. We have a choice

804
00:58:22,720 --> 00:58:26,200
Speaker 1: between somebody who will run two trillion dollar deficits as

805
00:58:26,200 --> 00:58:27,960
Speaker 1: far as the eye can see in somebody who will

806
00:58:28,000 --> 00:58:30,320
Speaker 1: run three trillion dollar deficits as far as the eye

807
00:58:30,360 --> 00:58:33,320
Speaker 1: can see. I may have heard on the downside on

808
00:58:33,400 --> 00:58:37,240
Speaker 1: that latter one, but to say any of the least. Yeah.

809
00:58:37,440 --> 00:58:41,240
Speaker 1: In any event, the usual immediate question was yes, but

810
00:58:41,320 --> 00:58:46,520
Speaker 1: who is who, to which I would reply exactly. So

811
00:58:47,520 --> 00:58:51,560
Speaker 1: let's both both parties have embraced MMT. Yeah, it certainly

812
00:58:51,560 --> 00:58:54,960
Speaker 1: seems that way. Let's let's stick with the topic of

813
00:58:55,280 --> 00:59:00,480
Speaker 1: recessions and recoveries. I am a big fan of Campbell Harvey,

814
00:59:00,680 --> 00:59:03,800
Speaker 1: an academic who is now a part of the team

815
00:59:03,800 --> 00:59:08,080
Speaker 1: at Research Affiliates. When when did Campbell Harvey join Raffie

816
00:59:08,560 --> 00:59:10,560
Speaker 1: and what does he do? I'm a huge fan of

817
00:59:10,600 --> 00:59:14,280
Speaker 1: his work. Um, I'm a huge fan too. We we

818
00:59:14,440 --> 00:59:18,240
Speaker 1: kept inviting him to join our advisory panel, which used

819
00:59:18,240 --> 00:59:21,400
Speaker 1: to meet once a year UM, where we would gather

820
00:59:22,880 --> 00:59:29,240
Speaker 1: notable academics, usually including a couple of Nobel laureates together

821
00:59:29,360 --> 00:59:34,880
Speaker 1: to pose big picture questions. Not where should people invest

822
00:59:34,960 --> 00:59:37,680
Speaker 1: today or what strategies and products should we look at

823
00:59:37,760 --> 00:59:41,760
Speaker 1: developing tomorrow? UM, but how is the world going to

824
00:59:41,920 --> 00:59:46,560
Speaker 1: change in the coming ten years? And uh uh he

825
00:59:46,760 --> 00:59:49,800
Speaker 1: joined our advisory panel two or three times, but he

826
00:59:49,880 --> 00:59:54,200
Speaker 1: was always committed to work for the folks at Man Group.

827
00:59:54,760 --> 01:00:03,320
Speaker 1: And as soon as Pimco UM recruited Manny Roman to

828
01:00:03,440 --> 01:00:07,040
Speaker 1: become their new CEO. Turns out Manny had not only

829
01:00:07,120 --> 01:00:10,600
Speaker 1: hired Cam Harvey also went to university with Cam Harvey

830
01:00:10,720 --> 01:00:16,360
Speaker 1: and uh they were very good friends. So UM uh

831
01:00:16,680 --> 01:00:20,080
Speaker 1: with UM, with the help of Manny, we went to

832
01:00:20,280 --> 01:00:24,360
Speaker 1: Cam and said, hey, why don't you UM join us

833
01:00:24,360 --> 01:00:30,080
Speaker 1: in a more formal relationship. And so we're his dominant

834
01:00:30,120 --> 01:00:35,520
Speaker 1: consulting relationship. We have access to a certain uh portion

835
01:00:35,600 --> 01:00:41,200
Speaker 1: of his time. Uh. He is the guiding light for

836
01:00:41,280 --> 01:00:46,000
Speaker 1: our R and D. He's already led some half breaking

837
01:00:46,320 --> 01:00:52,080
Speaker 1: work in UM what's called pears trading. And when you

838
01:00:52,120 --> 01:00:55,040
Speaker 1: mentioned that you're a big fan of his work. One

839
01:00:55,040 --> 01:00:59,440
Speaker 1: of the things I find fascinating is, unlike most academics,

840
01:00:59,480 --> 01:01:03,640
Speaker 1: his work is squarely focused on what's practical, what's useful,

841
01:01:04,440 --> 01:01:10,520
Speaker 1: and in modern academic finance, practical and useful are two

842
01:01:10,520 --> 01:01:13,480
Speaker 1: of the most damning things you can say about somebody's work.

843
01:01:13,560 --> 01:01:16,480
Speaker 1: If it's practical, oh my goodness, what use are they

844
01:01:16,480 --> 01:01:20,439
Speaker 1: in academia? Uh? Well, I love that about camp. He's

845
01:01:20,680 --> 01:01:26,520
Speaker 1: um uh tremendous innovator, deep thinker, and has been an

846
01:01:26,680 --> 01:01:30,040
Speaker 1: enormously important addition to our team. Let me ask about

847
01:01:30,040 --> 01:01:33,800
Speaker 1: another one of your team members, your colleague Alex Picard,

848
01:01:33,920 --> 01:01:38,920
Speaker 1: who wrote a fascinating piece um about bitcoin. And I

849
01:01:38,960 --> 01:01:42,000
Speaker 1: thought this was really intriguing. So many people are sort

850
01:01:42,040 --> 01:01:45,520
Speaker 1: of dancing around bitcoin given the run up they're they're

851
01:01:45,520 --> 01:01:48,920
Speaker 1: afraid to get in the way of it. Picard road quote,

852
01:01:49,320 --> 01:01:52,720
Speaker 1: Bitcoin is not a capital asset or a store of value.

853
01:01:53,240 --> 01:01:57,040
Speaker 1: The price of BTC is nearly certainly a bubble and

854
01:01:57,200 --> 01:02:01,760
Speaker 1: likely manipulated. What are your thoughts on that? Well, firstly,

855
01:02:01,800 --> 01:02:07,760
Speaker 1: you're asking the wrong guy, um um bitcoin. How do

856
01:02:07,800 --> 01:02:11,200
Speaker 1: you value using discounted cash flow? How do you value

857
01:02:11,280 --> 01:02:15,000
Speaker 1: something that has no cash flow and never will um.

858
01:02:15,040 --> 01:02:17,640
Speaker 1: In that sense, it's no about no different from a

859
01:02:17,680 --> 01:02:21,880
Speaker 1: dollar bill. A dollar bill has has a value, but

860
01:02:22,480 --> 01:02:27,200
Speaker 1: discount of cash flow it doesn't have any. So the

861
01:02:27,320 --> 01:02:30,360
Speaker 1: price of bitcoin and the price of the US dollar

862
01:02:31,400 --> 01:02:36,040
Speaker 1: is exactly what the consensus in the marketplace thinks it

863
01:02:36,080 --> 01:02:39,000
Speaker 1: ought to be worth. In the case of the dollar,

864
01:02:39,240 --> 01:02:42,640
Speaker 1: that moves slowly and sadly inexorably in the direction of

865
01:02:42,640 --> 01:02:47,280
Speaker 1: worth less and less. Uh, it's worth on the order

866
01:02:47,320 --> 01:02:49,960
Speaker 1: of one d when it was worse worse worth a

867
01:02:50,040 --> 01:02:55,960
Speaker 1: century ago. In terms of purchasing power, UM. Bitcoin seems

868
01:02:56,000 --> 01:02:59,640
Speaker 1: to move the opposite direction. But in both cases there

869
01:02:59,760 --> 01:03:04,040
Speaker 1: is no There is no measurable value. There is no

870
01:03:05,480 --> 01:03:10,320
Speaker 1: way to say this is worth that amount. UM. So

871
01:03:11,320 --> 01:03:15,000
Speaker 1: when Alex says bitcoin is near certainly a bubble and

872
01:03:15,080 --> 01:03:19,840
Speaker 1: likely manipulated, my response to that is yeah, I agree.

873
01:03:20,720 --> 01:03:22,480
Speaker 1: But the reason I say I'm the wrong person to

874
01:03:22,520 --> 01:03:27,760
Speaker 1: ask is that, unlike Alex, Uh, I never bought much

875
01:03:27,760 --> 01:03:29,360
Speaker 1: in the way of bitcoin. I think it was back

876
01:03:29,400 --> 01:03:33,480
Speaker 1: in two thousand fifteen, I bought one bitcoin just as

877
01:03:33,480 --> 01:03:39,280
Speaker 1: an item of curiosity to watch it, and um, I

878
01:03:39,800 --> 01:03:44,760
Speaker 1: missed that entire boat. UM. I do think bitcoin is

879
01:03:45,280 --> 01:03:49,200
Speaker 1: a speculative asset. People talk about it as a replacement

880
01:03:49,280 --> 01:03:54,880
Speaker 1: for fiad currency because the supply is strictly limited and

881
01:03:55,200 --> 01:03:58,760
Speaker 1: is capped at a level that is not that much

882
01:03:58,840 --> 01:04:04,400
Speaker 1: larger than today's out standing float. And they're right, but

883
01:04:05,400 --> 01:04:11,640
Speaker 1: occurrence a fiat currency is used as a mechanism for

884
01:04:11,840 --> 01:04:15,400
Speaker 1: exchange of goods and services and a store of value

885
01:04:15,440 --> 01:04:18,760
Speaker 1: across time too, and it can't be a store of

886
01:04:18,840 --> 01:04:22,360
Speaker 1: value if it's price PO goes around. That's a problem

887
01:04:22,360 --> 01:04:27,440
Speaker 1: with bitcoin. It can't be a means of transacting UM

888
01:04:27,440 --> 01:04:33,200
Speaker 1: buying and selling goods and services because transacting in bitcoin

889
01:04:33,480 --> 01:04:38,880
Speaker 1: has very large transaction costs, so it can't be a

890
01:04:38,920 --> 01:04:43,920
Speaker 1: replacement for fiat currency. And as as such UM I

891
01:04:43,920 --> 01:04:46,880
Speaker 1: wouldn't own it. But hey, my son a year and

892
01:04:46,880 --> 01:04:50,200
Speaker 1: a half ago bought a UM, put his money half

893
01:04:50,200 --> 01:04:53,880
Speaker 1: in Tesla and half in bitcoin, and at the end

894
01:04:53,920 --> 01:04:56,480
Speaker 1: of last year sent me his statement which was up,

895
01:04:58,360 --> 01:05:02,160
Speaker 1: and asked me, how do you do Dad? So I

896
01:05:02,600 --> 01:05:05,760
Speaker 1: have to addend to being having been dead wrong on

897
01:05:05,840 --> 01:05:09,320
Speaker 1: both for a while. Now that's pretty funny. Let's talk

898
01:05:09,320 --> 01:05:12,120
Speaker 1: about e s G for a moment. Some people have

899
01:05:12,280 --> 01:05:15,680
Speaker 1: been making the case e s G environmental, social, and

900
01:05:15,760 --> 01:05:20,920
Speaker 1: governmental styles of investing are a factor. You make the

901
01:05:21,000 --> 01:05:23,320
Speaker 1: case that it's more of a theme ben a factor.

902
01:05:23,720 --> 01:05:28,520
Speaker 1: Please explain that what's the difference? Sure? Sure? Um? A

903
01:05:28,760 --> 01:05:32,200
Speaker 1: theme A factor is something that can be clearly defined

904
01:05:32,840 --> 01:05:37,320
Speaker 1: where the stocks um on the one side of the

905
01:05:37,360 --> 01:05:40,200
Speaker 1: factor uh and the stocks on the other side of

906
01:05:40,200 --> 01:05:45,120
Speaker 1: the factor strongly correlate with members of that same cohort,

907
01:05:45,160 --> 01:05:49,160
Speaker 1: So growth versus value. Growth stocks correlate with one another.

908
01:05:49,240 --> 01:05:52,040
Speaker 1: Value stocks correlate with one another, and the difference in

909
01:05:52,040 --> 01:05:57,280
Speaker 1: performance has historically favored value and does so for a

910
01:05:57,320 --> 01:06:02,760
Speaker 1: reason that you can reasonably explain. E S g um.

911
01:06:03,520 --> 01:06:06,400
Speaker 1: One of my colleagues did a test where he looked

912
01:06:06,400 --> 01:06:09,480
Speaker 1: at a half dozen different vendors of E s G

913
01:06:09,720 --> 01:06:13,040
Speaker 1: product at their definitions of what is an E s

914
01:06:13,080 --> 01:06:17,480
Speaker 1: g um, how an E s G score is calculated

915
01:06:17,520 --> 01:06:20,960
Speaker 1: for each company, and found that the correlation between s

916
01:06:21,040 --> 01:06:25,520
Speaker 1: G definitions is shockingly not low, not that much above zero.

917
01:06:25,760 --> 01:06:28,440
Speaker 1: So my E s G and R s G are

918
01:06:28,480 --> 01:06:31,600
Speaker 1: likely to be very, very different. It's hard to create

919
01:06:31,640 --> 01:06:36,120
Speaker 1: a factor when that's the case. I think is also

920
01:06:36,360 --> 01:06:39,560
Speaker 1: interesting and a little disturbing. Is it used to be

921
01:06:39,560 --> 01:06:45,600
Speaker 1: called s R I UH Socially response investing. And back

922
01:06:45,720 --> 01:06:49,240
Speaker 1: then the narrative was you want to invest in ways

923
01:06:49,360 --> 01:06:54,760
Speaker 1: that align with your values, with your principles UM, and

924
01:06:55,920 --> 01:06:58,760
Speaker 1: you can do so with a portfolio that's going to

925
01:06:58,920 --> 01:07:05,160
Speaker 1: perform reasonably in line with the broad market. UM. Don't

926
01:07:05,240 --> 01:07:09,080
Speaker 1: expect to win with SRI investing, but don't expect to

927
01:07:09,080 --> 01:07:12,920
Speaker 1: give up much either. That narrative has shifted now. It

928
01:07:13,080 --> 01:07:15,680
Speaker 1: is with the s G investing. You can invest in

929
01:07:15,760 --> 01:07:18,040
Speaker 1: line with your principles, and as more and more people

930
01:07:18,120 --> 01:07:21,080
Speaker 1: shift over to E s G investing, you get a

931
01:07:21,120 --> 01:07:25,560
Speaker 1: tail wind and you will outperform as well as UM.

932
01:07:26,000 --> 01:07:29,360
Speaker 1: Aligning your investments with your principles, you you do well

933
01:07:29,480 --> 01:07:33,800
Speaker 1: by doing good. In fact, you do better than the market. UM. Well,

934
01:07:33,800 --> 01:07:37,960
Speaker 1: that narrative offends me because any time you you narrow

935
01:07:38,040 --> 01:07:42,840
Speaker 1: your opportunity set UM in theory, you shouldn't be boosting

936
01:07:42,840 --> 01:07:45,760
Speaker 1: your performance. You should be degrading it. And you'd be

937
01:07:45,800 --> 01:07:48,920
Speaker 1: boosting your performance only if E s G stocks were

938
01:07:49,040 --> 01:07:53,000
Speaker 1: inherently superior. I have no problem with the s G.

939
01:07:53,400 --> 01:07:55,880
Speaker 1: I have a problem with marketing it as a superior

940
01:07:56,000 --> 01:08:01,120
Speaker 1: source of higher investment performance UM, and so I look

941
01:08:01,160 --> 01:08:04,400
Speaker 1: at E s G as a major trend in the marketplace,

942
01:08:04,440 --> 01:08:07,480
Speaker 1: one that must not be ignored. One that indeed, we

943
01:08:07,600 --> 01:08:12,720
Speaker 1: have offered product to help people invest in E s

944
01:08:12,800 --> 01:08:18,960
Speaker 1: G in a fundamental index fashion that can beat the

945
01:08:19,000 --> 01:08:21,800
Speaker 1: market because of fundamental index, not because of E s G,

946
01:08:22,920 --> 01:08:25,200
Speaker 1: and we're pretty proud of that. But E s G

947
01:08:25,320 --> 01:08:28,040
Speaker 1: stocks are trading at a large premium. That raises a

948
01:08:28,080 --> 01:08:31,920
Speaker 1: really interesting question. And you've touched on this in three

949
01:08:32,080 --> 01:08:38,840
Speaker 1: separate groups of assets. One was domestically higher price. US

950
01:08:38,920 --> 01:08:44,360
Speaker 1: stocks are trading pretty well, especially compared to Europe and Japan.

951
01:08:45,240 --> 01:08:49,439
Speaker 1: Bitcoin there remains a firm bid beneath that that's doing well.

952
01:08:49,960 --> 01:08:54,160
Speaker 1: And now E s G as a potential telwin was

953
01:08:54,200 --> 01:08:57,559
Speaker 1: the phrase you used, which really raises the question for

954
01:08:57,600 --> 01:09:01,960
Speaker 1: all of these tradeable assets. Is it simply a function

955
01:09:02,360 --> 01:09:06,479
Speaker 1: of demand and supply if enough people want to buy something,

956
01:09:06,680 --> 01:09:13,559
Speaker 1: regardless evaluation. Arguably, we've seen elevated pe multiples in the

957
01:09:13,640 --> 01:09:17,599
Speaker 1: United States, especially if we use the Schiller Cape index

958
01:09:17,880 --> 01:09:21,840
Speaker 1: since the early nineties. At what what point is it

959
01:09:21,920 --> 01:09:28,599
Speaker 1: strictly more dollars chasing fewer shares or coins, and that

960
01:09:28,680 --> 01:09:32,719
Speaker 1: relative imbalance causes prices to go higher and higher. Well,

961
01:09:32,880 --> 01:09:35,839
Speaker 1: what you've described as the nature of a bubble. Bubbles

962
01:09:36,040 --> 01:09:41,360
Speaker 1: persist longer and can go further than anyone could possibly imagine.

963
01:09:41,920 --> 01:09:47,360
Speaker 1: My favorite example is Zimbabwe stocks, which during the summer

964
01:09:47,400 --> 01:09:53,000
Speaker 1: of two thousand eight, when the currency was first going

965
01:09:53,040 --> 01:09:57,120
Speaker 1: into free fall. Let's split the summer into first half

966
01:09:57,120 --> 01:09:59,960
Speaker 1: and second half of the summer. First half of the

967
01:10:00,040 --> 01:10:06,040
Speaker 1: summer the currency fell um Uh fell tenfold in purchasing

968
01:10:06,080 --> 01:10:11,479
Speaker 1: power in just six weeks, and Uh the Zimbabwe stock

969
01:10:11,520 --> 01:10:16,240
Speaker 1: market rose five hundred fold, not five five hundred fold,

970
01:10:16,320 --> 01:10:21,120
Speaker 1: five hundred times the price adjusted for the currency, it

971
01:10:21,280 --> 01:10:24,960
Speaker 1: rose fiftyfold, meaning that if you thought this market's over

972
01:10:25,040 --> 01:10:27,240
Speaker 1: priced and the currency has headed for a cliff, and

973
01:10:28,600 --> 01:10:31,639
Speaker 1: get me the heck out of there. Um. In fact,

974
01:10:31,720 --> 01:10:34,519
Speaker 1: I'm going to make a modest short position at two

975
01:10:34,920 --> 01:10:37,599
Speaker 1: short position, those six weeks would have wiped you out.

976
01:10:38,240 --> 01:10:43,040
Speaker 1: You would be bankrupt, um because they two short position

977
01:10:43,080 --> 01:10:47,160
Speaker 1: went up fifty fold. Okay, well that's daunting. What happened

978
01:10:47,160 --> 01:10:49,800
Speaker 1: in the next eight weeks the currency fell another hundredfold

979
01:10:49,800 --> 01:10:52,640
Speaker 1: in the stock market basically went to zero. So you

980
01:10:52,680 --> 01:10:57,240
Speaker 1: were right over the next quarter, but bankrupt. So be

981
01:10:57,479 --> 01:11:03,120
Speaker 1: very careful when dealing with bubble assets. Do not bet

982
01:11:03,120 --> 01:11:05,639
Speaker 1: against them. In any material way, but that doesn't mean

983
01:11:05,640 --> 01:11:09,960
Speaker 1: you necessarily want to hold them. Very interesting. I know

984
01:11:10,080 --> 01:11:13,320
Speaker 1: that you're a fan of motorcycles, and a couple of

985
01:11:13,400 --> 01:11:17,880
Speaker 1: years ago they were described as underpowered toys. But there

986
01:11:17,960 --> 01:11:22,519
Speaker 1: was a really interesting Hannah Elliott column and Bloomberg about

987
01:11:22,640 --> 01:11:26,720
Speaker 1: the e V market for motorcycles is surging with exciting

988
01:11:27,120 --> 01:11:32,360
Speaker 1: new possibilities, including some powerful bikes. What are you driving

989
01:11:32,360 --> 01:11:34,720
Speaker 1: these days? What are you riding these days? And would

990
01:11:34,760 --> 01:11:39,639
Speaker 1: you ever consider an electric bike? Well? I absolutely would

991
01:11:39,640 --> 01:11:43,000
Speaker 1: consider an electric bike. The problem with electric bikes today,

992
01:11:43,080 --> 01:11:47,280
Speaker 1: and this isn't a problem with cars, UM, is weight.

993
01:11:47,560 --> 01:11:49,599
Speaker 1: I mean, if you if you have a thousand pounds

994
01:11:50,680 --> 01:11:56,360
Speaker 1: battery in a car, um, so what if you have

995
01:11:56,560 --> 01:12:01,120
Speaker 1: a hundred pound battery on a motorcycle? That's a big deal.

996
01:12:02,200 --> 01:12:07,400
Speaker 1: And uh so it disrupts the handling and the range

997
01:12:07,640 --> 01:12:11,919
Speaker 1: is problematic. Um. In other words, I think electric cars

998
01:12:12,280 --> 01:12:17,280
Speaker 1: are already at a point where they are practicable and

999
01:12:17,520 --> 01:12:24,000
Speaker 1: useful for anyone other than long distance driving. UM. And

1000
01:12:24,360 --> 01:12:28,320
Speaker 1: with motorcycles that's just not true. UM. I'm old enough

1001
01:12:28,360 --> 01:12:31,080
Speaker 1: at this stage that I don't really ride that much.

1002
01:12:32,520 --> 01:12:37,120
Speaker 1: I've been in Florida, um all of this year to date.

1003
01:12:37,320 --> 01:12:42,680
Speaker 1: Last time I was out of Florida was last October UM,

1004
01:12:42,720 --> 01:12:45,240
Speaker 1: and I won't ride in Florida, so I haven't written

1005
01:12:45,240 --> 01:12:53,880
Speaker 1: this year yet. Um. But bottom line is, electric vehicles

1006
01:12:53,920 --> 01:12:57,479
Speaker 1: are here to stay. Electric motorcycles are coming. It's just

1007
01:12:57,600 --> 01:13:01,479
Speaker 1: that the technology isn't there yet. Uh Uh. That said,

1008
01:13:02,280 --> 01:13:05,760
Speaker 1: they are blindingly fast. I was looking at the arc

1009
01:13:05,880 --> 01:13:09,719
Speaker 1: vector and that thing is a bolt of lightning. Literally,

1010
01:13:09,920 --> 01:13:13,040
Speaker 1: it's quite fascinating. So let me ask you a different

1011
01:13:13,160 --> 01:13:17,479
Speaker 1: automobile question. I'm not a car collector. I'm a driver.

1012
01:13:17,640 --> 01:13:21,240
Speaker 1: I don't understand people who buy sneakers and don't wear them.

1013
01:13:21,240 --> 01:13:25,240
Speaker 1: Sneakers are for wearing cars for driving. That said, I'm

1014
01:13:25,320 --> 01:13:29,240
Speaker 1: kind of fascinated with the thought of all of these

1015
01:13:29,320 --> 01:13:34,320
Speaker 1: collectible internal combustion engine vehicles. What happens to that market

1016
01:13:34,360 --> 01:13:38,479
Speaker 1: in thirty or fifty years. Will there still be people

1017
01:13:38,560 --> 01:13:43,080
Speaker 1: who can repair them, rebuild them, renovate them, or is

1018
01:13:43,120 --> 01:13:46,920
Speaker 1: this market, you know, on a on a short timeline. Well,

1019
01:13:47,520 --> 01:13:49,840
Speaker 1: short answer would be, of course there will be people

1020
01:13:49,880 --> 01:13:52,960
Speaker 1: who can repair them. Um. There's there's a market for

1021
01:13:53,200 --> 01:13:57,120
Speaker 1: anything that any that has enough customers that are interested.

1022
01:13:57,280 --> 01:14:01,439
Speaker 1: And uh, I do you think twenty years from now,

1023
01:14:02,120 --> 01:14:07,880
Speaker 1: electric vehicles will utterly dominate the roads, and that self

1024
01:14:08,000 --> 01:14:12,240
Speaker 1: driven cars, cars that a human being drives, will probably

1025
01:14:12,280 --> 01:14:19,559
Speaker 1: be illegal because we'd be we'd be a threat. Um. Um,

1026
01:14:19,720 --> 01:14:23,479
Speaker 1: autonomous cars are going to be electric. Um. Can you

1027
01:14:23,479 --> 01:14:26,519
Speaker 1: imagine an autonomous car going to a gas station and

1028
01:14:26,520 --> 01:14:30,720
Speaker 1: saying fill her up versus just going to a recharging

1029
01:14:30,760 --> 01:14:34,599
Speaker 1: station and plugging itself in the ladder is very easy.

1030
01:14:35,360 --> 01:14:39,879
Speaker 1: Uh So with autonomous cars, you're going to have electric

1031
01:14:40,000 --> 01:14:46,519
Speaker 1: vehicles utterly dominant. That means that today's collectible cars, almost

1032
01:14:46,560 --> 01:14:50,400
Speaker 1: all of them conventionally and powered, are going to be

1033
01:14:50,479 --> 01:14:56,639
Speaker 1: an anachronism and have no practical value. They'll have collector value,

1034
01:14:57,040 --> 01:15:02,280
Speaker 1: and there will be races where people take Ferraris and whatnot.

1035
01:15:03,000 --> 01:15:05,040
Speaker 1: Whether I think that means is, if you've got a

1036
01:15:05,160 --> 01:15:09,519
Speaker 1: Chevy um, it's going to be uh pretty pretty much

1037
01:15:09,560 --> 01:15:13,639
Speaker 1: worthless in ten to twenty years. If you've got a Ferrari,

1038
01:15:13,800 --> 01:15:19,360
Speaker 1: it'll have collector value. And um, okay, that's the nature

1039
01:15:19,360 --> 01:15:23,400
Speaker 1: of a changing marketplace. Huh. Quite quite interesting. What are

1040
01:15:23,400 --> 01:15:26,000
Speaker 1: you streaming these days? Tell us your favorite Netflix or

1041
01:15:26,040 --> 01:15:30,759
Speaker 1: Amazon Prime show or whatever podcast you might be enjoying. Sure,

1042
01:15:31,760 --> 01:15:35,160
Speaker 1: my wife is Russian and so one of the things

1043
01:15:35,160 --> 01:15:38,439
Speaker 1: we love to do is is find an obscure Russian

1044
01:15:38,520 --> 01:15:45,760
Speaker 1: film or an obscure UH Russian TV series where she

1045
01:15:46,120 --> 01:15:49,120
Speaker 1: watches in the original language and I read the subtitles.

1046
01:15:49,760 --> 01:15:56,599
Speaker 1: Um Uh. There's a UM Russian crime series from two

1047
01:15:56,600 --> 01:16:01,639
Speaker 1: thousand fifteen called The Method, which is about a fellow

1048
01:16:01,720 --> 01:16:07,400
Speaker 1: who solves crimes using all kinds of illegal methods to

1049
01:16:07,439 --> 01:16:12,320
Speaker 1: find and take take down the bad guys and a

1050
01:16:12,439 --> 01:16:17,200
Speaker 1: woman who um becomes more or less his apprentice, and

1051
01:16:17,880 --> 01:16:21,880
Speaker 1: ultimately his health is not very good. Um, so she

1052
01:16:22,000 --> 01:16:27,599
Speaker 1: really is his prospective replacement. And uh it ran for

1053
01:16:28,439 --> 01:16:32,240
Speaker 1: I think two seasons, and it was great fun to

1054
01:16:32,320 --> 01:16:37,080
Speaker 1: binge watch. It's called The Method. Uh. Fantastic actress. She

1055
01:16:37,160 --> 01:16:41,080
Speaker 1: also appeared in a later UH TV series called Better

1056
01:16:41,120 --> 01:16:43,280
Speaker 1: than Us, in which she placed played the role of

1057
01:16:43,320 --> 01:16:50,080
Speaker 1: a robot that was able to have emotions and able

1058
01:16:50,120 --> 01:16:54,360
Speaker 1: to think and feel and um, therefore better than us.

1059
01:16:54,680 --> 01:17:00,400
Speaker 1: So anyway, too, wonderful Russian series. Very interesting. Tell us

1060
01:17:00,400 --> 01:17:05,599
Speaker 1: about your mentors who helped to shape your career. Oh gosh,

1061
01:17:05,640 --> 01:17:11,120
Speaker 1: there were so many of them. Um um um. Jack

1062
01:17:11,200 --> 01:17:15,920
Speaker 1: Bogel was a mentor. UM. Harry mark Owitz was and

1063
01:17:16,040 --> 01:17:21,400
Speaker 1: still is a mentor. Um. Peter Bernstein was a giant

1064
01:17:21,479 --> 01:17:26,240
Speaker 1: in shaping who I am and how I think about investing.

1065
01:17:27,400 --> 01:17:34,160
Speaker 1: Bill Sharp. The list goes on and on. Um. Basically,

1066
01:17:34,760 --> 01:17:40,640
Speaker 1: I look to anyone, uh uh. And I still do this.

1067
01:17:40,760 --> 01:17:43,080
Speaker 1: I mean, I think it's fair to say I still

1068
01:17:43,120 --> 01:17:49,280
Speaker 1: have mentors, but I look to anyone who has insights

1069
01:17:49,320 --> 01:17:53,200
Speaker 1: that are interesting that I can learn from, and who

1070
01:17:53,240 --> 01:17:57,320
Speaker 1: has ways of approaching the business that I can emulate

1071
01:17:57,760 --> 01:18:03,439
Speaker 1: and seek to build. Very interesting. Let's talk about books.

1072
01:18:03,479 --> 01:18:05,640
Speaker 1: What are some of your favorites and what are you

1073
01:18:05,680 --> 01:18:08,680
Speaker 1: reading right now? Oh, there's a fun book that I

1074
01:18:09,680 --> 01:18:15,679
Speaker 1: had last week called ten ten Trends that every smart

1075
01:18:15,800 --> 01:18:20,800
Speaker 1: person should know. It's an extremely fast read. Uh. It's

1076
01:18:20,880 --> 01:18:27,280
Speaker 1: extremely simple, and basically it looks at you know, the

1077
01:18:27,360 --> 01:18:29,920
Speaker 1: narrative is, look how many things are going wrong with

1078
01:18:30,000 --> 01:18:32,639
Speaker 1: the world, And this one just turns that on its

1079
01:18:32,640 --> 01:18:34,559
Speaker 1: head and says, look at how many things are going

1080
01:18:34,640 --> 01:18:40,160
Speaker 1: right with the world. Life expectancy up um, the subsistence

1081
01:18:40,280 --> 01:18:47,240
Speaker 1: poverty was something like the world population uh thirty years ago,

1082
01:18:47,280 --> 01:18:52,360
Speaker 1: and it's dropped from eight um. And so it goes

1083
01:18:52,400 --> 01:18:56,880
Speaker 1: through a whole series of trends and basically poses the question, Hey,

1084
01:18:56,880 --> 01:19:01,960
Speaker 1: why why is everybody um so quick to criticize how

1085
01:19:01,960 --> 01:19:05,920
Speaker 1: the world is? The world has its flaws, but it's

1086
01:19:05,960 --> 01:19:09,240
Speaker 1: way better than it has ever been in human history,

1087
01:19:09,520 --> 01:19:13,679
Speaker 1: and I thought it was just a marvelous piece. Another

1088
01:19:13,760 --> 01:19:16,519
Speaker 1: that I I love that I finished about six or

1089
01:19:16,560 --> 01:19:22,240
Speaker 1: eight months ago was four and four Two Big Tones,

1090
01:19:22,720 --> 01:19:27,040
Speaker 1: detailing how the Western world looked before Columbus and how

1091
01:19:27,600 --> 01:19:31,800
Speaker 1: the advent of global trade um U in the aftermath

1092
01:19:31,880 --> 01:19:38,439
Speaker 1: of Columbus has reshaped the world and reshaped opportunities the

1093
01:19:38,479 --> 01:19:43,400
Speaker 1: world over. Those are three really cool books that I

1094
01:19:43,400 --> 01:19:48,799
Speaker 1: would heartily recommend. Very interesting. Let's talk about some advice

1095
01:19:49,040 --> 01:19:52,320
Speaker 1: for a recent college grad if they were interested in

1096
01:19:52,320 --> 01:19:56,720
Speaker 1: a career in finance. What sort of advice would you

1097
01:19:56,720 --> 01:20:01,439
Speaker 1: give them? Oh, my advice would be very very simple.

1098
01:20:02,200 --> 01:20:07,719
Speaker 1: Whatever you're taught from whoever teaches it to you, ask

1099
01:20:07,840 --> 01:20:14,400
Speaker 1: the question, um, is this true? Have people tested it?

1100
01:20:15,280 --> 01:20:21,080
Speaker 1: And um um? I think I could credit my career

1101
01:20:22,640 --> 01:20:30,639
Speaker 1: too the notion that uh. Basically I always asked the question,

1102
01:20:30,720 --> 01:20:33,360
Speaker 1: has somebody tested this? If there's a bit of conventional

1103
01:20:33,360 --> 01:20:37,439
Speaker 1: wisdom floating around, I love to test it, and half

1104
01:20:37,479 --> 01:20:40,840
Speaker 1: the time I find it's absolutely correct, and half the

1105
01:20:40,880 --> 01:20:45,200
Speaker 1: time I find that it's absolutely false. And it's in

1106
01:20:45,400 --> 01:20:49,960
Speaker 1: that latter category where something is widely believed but false,

1107
01:20:50,800 --> 01:20:55,719
Speaker 1: that profit opportunities can be found. So be skeptical. These

1108
01:20:55,800 --> 01:21:00,599
Speaker 1: skeptical ask, and if you have access to the data,

1109
01:21:00,800 --> 01:21:06,559
Speaker 1: test it very interesting. And our final question, what do

1110
01:21:06,600 --> 01:21:09,720
Speaker 1: you know about the world of investing today that you

1111
01:21:09,800 --> 01:21:13,360
Speaker 1: wish you knew thirty or forty years ago when you

1112
01:21:13,400 --> 01:21:19,000
Speaker 1: were first getting started. Yeah? Um uh, that's that's an

1113
01:21:19,000 --> 01:21:22,679
Speaker 1: easy one. Thirty or forty years ago, I was doing

1114
01:21:22,720 --> 01:21:27,479
Speaker 1: that stuff, testing conventional wisdom, often finding it to be wrong,

1115
01:21:27,520 --> 01:21:32,400
Speaker 1: and then publishing my results and having expecting people to say, Wow,

1116
01:21:32,479 --> 01:21:36,639
Speaker 1: this is cool, and instead the reaction was very, very often,

1117
01:21:36,760 --> 01:21:42,559
Speaker 1: how dare you? How dare you challenge? Um? What we

1118
01:21:42,680 --> 01:21:48,600
Speaker 1: know to be true? Um? And uh. I wrote a

1119
01:21:48,640 --> 01:21:52,640
Speaker 1: piece in two thousand entitled Death of the Risk Premium,

1120
01:21:52,680 --> 01:21:54,800
Speaker 1: and about five years later met a guy at a

1121
01:21:54,840 --> 01:21:57,280
Speaker 1: conference and asked him how things were going, and he said,

1122
01:21:57,840 --> 01:21:59,840
Speaker 1: all things are going finally. Oh, by the way, I

1123
01:22:00,000 --> 01:22:05,320
Speaker 1: no longer hate you. And I said what you said?

1124
01:22:05,320 --> 01:22:07,839
Speaker 1: You wrote Death of the Risk Premium. You challenged everything

1125
01:22:07,880 --> 01:22:10,519
Speaker 1: I believed in investing, and I hated you for that.

1126
01:22:11,600 --> 01:22:17,320
Speaker 1: I now realize you were right. Um, So thirty years ago,

1127
01:22:17,360 --> 01:22:22,479
Speaker 1: I used to be really disappointed when my work angered people.

1128
01:22:22,960 --> 01:22:25,960
Speaker 1: Now I just shrug it off. It's it's a given.

1129
01:22:26,760 --> 01:22:30,960
Speaker 1: If you up end somebody's worldview, they're going to be

1130
01:22:31,040 --> 01:22:33,920
Speaker 1: angry because they've built their career on the basis of

1131
01:22:34,960 --> 01:22:39,479
Speaker 1: a premise that you just demonstrated was wrong. Of course

1132
01:22:39,520 --> 01:22:44,760
Speaker 1: they're going to be angry, and so I roll with criticism.

1133
01:22:44,800 --> 01:22:48,760
Speaker 1: I'm almost amused by criticism these days, where thirty years

1134
01:22:48,760 --> 01:22:51,479
Speaker 1: ago it just um, I was things skin and it

1135
01:22:51,560 --> 01:22:54,360
Speaker 1: really hurt. Well, Rob, thank you for being so generous

1136
01:22:54,439 --> 01:22:58,080
Speaker 1: with your time. This has been really fascinating. We have

1137
01:22:58,280 --> 01:23:01,439
Speaker 1: been speaking with Rob are Not. He is the founder

1138
01:23:01,479 --> 01:23:06,040
Speaker 1: and chairman of Research Affiliates. If you enjoy this conversation,

1139
01:23:06,160 --> 01:23:08,559
Speaker 1: be sure and check out any of our previous four

1140
01:23:08,640 --> 01:23:13,360
Speaker 1: hundred interviews. You can find those at iTunes, Spotify, wherever

1141
01:23:13,400 --> 01:23:16,960
Speaker 1: you feed your podcast fix. We love your comments, feedback

1142
01:23:17,000 --> 01:23:20,800
Speaker 1: and suggestions right to us at m IB podcast at

1143
01:23:20,800 --> 01:23:24,519
Speaker 1: Bloomberg dot net. Sign up from my daily reads at

1144
01:23:24,600 --> 01:23:26,839
Speaker 1: Rid Halts dot com. You can check out my weekly

1145
01:23:26,880 --> 01:23:30,800
Speaker 1: column on Bloomberg dot com slash Opinion. Follow me on

1146
01:23:30,840 --> 01:23:34,160
Speaker 1: Twitter at rit Halts. I would be remiss if I

1147
01:23:34,200 --> 01:23:36,439
Speaker 1: did not thank the crack staff that helps put these

1148
01:23:36,439 --> 01:23:41,320
Speaker 1: conversations together each week. Maroufle is my audio engineer ATKO.

1149
01:23:41,400 --> 01:23:44,720
Speaker 1: Val Bron is our project manager. Michael Batnick is my

1150
01:23:44,760 --> 01:23:49,400
Speaker 1: head of research. Michael Boyle is my producer. I'm Barry Ridholts.

1151
01:23:49,439 --> 01:23:53,000
Speaker 1: You've been listening to Master's in Business on Bloomberg Radio