WEBVTT - Antti Ilmanen on Expected Returns 0:00:02.000 --> 0:00:07.120 This is mesters in Business with Very Results on Bloomberg Radio. 0:00:09.480 --> 0:00:12.440 This week on the podcast, I have an extra special guest. 0:00:12.920 --> 0:00:17.320 Auntie Elmanin is a QRS co head of the Portfolio 0:00:17.440 --> 0:00:20.240 Solutions Group. He is the author of a new book, 0:00:20.360 --> 0:00:24.600 Investing amid Low expected Returns, making the most when the 0:00:24.760 --> 0:00:29.120 markets offer the least. He has an incredible CV full 0:00:29.160 --> 0:00:31.880 of all sorts of awards and has worked at all 0:00:31.920 --> 0:00:36.680 sorts of places like Salomon Brothers and Brevin Howard before 0:00:36.760 --> 0:00:39.960 ending up at a q R. If you're at all 0:00:40.040 --> 0:00:46.559 interested in value investing, factor investing, understanding how you're starting 0:00:46.600 --> 0:00:50.720 condition leads to future returns that might be better or 0:00:50.760 --> 0:00:55.200 worse than historical averages, you're gonna find this to absolutely 0:00:55.240 --> 0:00:59.800 be a master class in investing. I found it absolutely fascinating, 0:00:59.800 --> 0:01:03.320 and I think you will as well. With no further ado, 0:01:03.800 --> 0:01:10.360 my conversation with a u RS Auntie Elmanen. Welcome to Bloomberg. Thanks, Perry. 0:01:10.480 --> 0:01:13.800 I'm really looking forward to this same here. So so first, 0:01:13.840 --> 0:01:18.120 I found the book to be quite fascinating, very in depth, 0:01:18.360 --> 0:01:21.720 and you managed to take some of the more technical 0:01:22.000 --> 0:01:25.720 arcana and make it very understandable. Will circle back with that. 0:01:25.880 --> 0:01:29.360 Let's let's start just by talking about your career. You 0:01:29.360 --> 0:01:34.240 you began as a sang Central Bank portfolio manager in Finland. 0:01:34.640 --> 0:01:37.600 So yeah, my really first stroke of luck, I think, 0:01:37.720 --> 0:01:41.160 was getting that job. Before that, I had been nerdy 0:01:41.240 --> 0:01:46.440 kid with interesting esoteric things like royal family trees or 0:01:46.760 --> 0:01:49.440 or track and field statistic, not trading, and when I 0:01:49.480 --> 0:01:52.840 was studying in university economics, I did not really get 0:01:52.840 --> 0:01:55.480 the passion. The passion came when I went to invest 0:01:55.840 --> 0:01:58.200 the country's foreign exchange reserves there and it was it 0:01:58.240 --> 0:02:01.720 was very much global government bond markets, so thinking about 0:02:01.720 --> 0:02:05.720 macro picture. I never never then then or later had 0:02:06.000 --> 0:02:09.320 I don't know much much interested on a single stock picking, 0:02:09.360 --> 0:02:11.400 so so think thinking of the big picture. And there 0:02:11.400 --> 0:02:14.840 were some lovely, lovely things like I was there in 0:02:14.880 --> 0:02:17.600 the October eighty seven crash and saw two year yields 0:02:17.680 --> 0:02:20.400 falling in one one overnight from nine and a half 0:02:20.400 --> 0:02:22.799 percent to seven and a half percent. You don't see 0:02:22.800 --> 0:02:26.360 those movements, yeah absolutely, Yeah. So so anyway, so that 0:02:26.400 --> 0:02:29.320 was that was That was a great, great learning experience. 0:02:29.400 --> 0:02:32.240 And and then my second related stroke of luckworse that 0:02:32.320 --> 0:02:37.240 Professor ten French came there. Yeah, he came to educate 0:02:37.720 --> 0:02:40.440 nine and sort of what we were doing, what we 0:02:40.440 --> 0:02:44.119 should be doing, and and I was an enthusiastic kid there. 0:02:44.160 --> 0:02:46.560 Well by that time, I was already almost twenty eight 0:02:46.600 --> 0:02:49.400 and and he when I was expressing some interest about 0:02:49.440 --> 0:02:51.280 studying in the US, he was only, you should do 0:02:51.320 --> 0:02:53.120 it soon. You have yourself old enough to do that. 0:02:53.560 --> 0:02:55.400 And and and a few months later I was. I 0:02:55.480 --> 0:02:57.560 was in the US. And it was so lucky in 0:02:57.639 --> 0:03:00.639 my life because because that year I met then H. 0:03:00.840 --> 0:03:04.320 Cliff Asnest and John lou who later founded uh a 0:03:04.440 --> 0:03:06.920 q R so as my fellow students. I met my 0:03:06.960 --> 0:03:09.359 wife there. She was NBA student from Germany. And it 0:03:09.400 --> 0:03:12.359 would have left a few months later University of Chicago, Chicago. 0:03:12.680 --> 0:03:15.120 So all of this, all of this luck sort of 0:03:15.320 --> 0:03:19.760 was related to my wonderful first jobs. And Gean Farmer 0:03:19.800 --> 0:03:23.800 teachers there and his research partners Can French. Yeah, both 0:03:24.000 --> 0:03:26.840 both Cliff, actually all three, Cliff, John and I. We 0:03:27.080 --> 0:03:30.760 we had Farmer and French as our dissertation chairman. And 0:03:30.760 --> 0:03:34.720 and that's a small source of pride, a little little intimidating. 0:03:34.800 --> 0:03:37.520 So so you go from Chicago, is that how you 0:03:37.640 --> 0:03:41.080 ended up at Salmon Brothers? Yeah? So that that relationship 0:03:41.080 --> 0:03:44.480 actually already started when I was a portfolio manager, right funnily, 0:03:44.480 --> 0:03:48.040 in effectually like one of these Michael Lewis's la spoke 0:03:48.080 --> 0:03:51.880 as good guys was one of my sales sales context. Yeah, 0:03:51.880 --> 0:03:53.680 he didn't have many good guys, but one was anyway. 0:03:53.720 --> 0:03:56.640 So so and and and I got to know people 0:03:56.680 --> 0:03:58.840 like Marty Leebovitz before I went to Chicago, and I 0:03:58.920 --> 0:04:00.720 think he helped. He may have again had a hand 0:04:01.000 --> 0:04:04.280 hand somewhere there. And so when I finished my studies, 0:04:04.840 --> 0:04:07.680 it was pretty clear that I wasn't sort of academic enough. 0:04:07.720 --> 0:04:09.960 I wanted to go to either by side or sales side. 0:04:09.960 --> 0:04:12.200 I even talked to them ge some Ware, Cliff and 0:04:12.240 --> 0:04:15.160 John Ware didn't go there. Uh sort of thought from 0:04:15.160 --> 0:04:17.800 my eighties experience ad by side, this dust the wrong 0:04:17.880 --> 0:04:22.160 choice anyway. So so I then went to Salomon Brothers, 0:04:22.520 --> 0:04:24.960 did bond research for a couple of years on yield 0:04:24.960 --> 0:04:28.680 curve strategies, then moved to Europe. That was always a 0:04:28.680 --> 0:04:31.720 deal with my wife to um to be a bond 0:04:31.760 --> 0:04:37.080 strategist at Salomon for for many years, initially very discretionary, 0:04:37.120 --> 0:04:40.560 but gradually becoming more and more systematic. And uh, and 0:04:40.600 --> 0:04:44.760 eventually turned from this customer oriented role to prop trading 0:04:44.800 --> 0:04:47.560 for a while and then her gender up Brevan Howard. Yes, 0:04:47.680 --> 0:04:50.200 so I think that from from these times when I 0:04:50.240 --> 0:04:53.479 was strategist, I was talking to my two great people, 0:04:53.520 --> 0:04:56.920 but like you know, earlier on some LTCM and then 0:04:57.000 --> 0:04:59.560 various other people and including Alan who came actually from 0:04:59.560 --> 0:05:03.240 Salomon and so somewhere all three he sort of invited 0:05:03.279 --> 0:05:07.200 me to try to be a mini cliff Uh systematic 0:05:07.279 --> 0:05:09.920 systematic trader with a small team there at Brevan Howard, 0:05:10.200 --> 0:05:12.839 which was in some sense great, but it is sort 0:05:12.839 --> 0:05:15.839 of a misfit because it's a very discretionary place, and 0:05:15.880 --> 0:05:19.320 so trying to do systematic in that environment was harder, 0:05:19.400 --> 0:05:21.560 and I think none of us were doing extremely well, 0:05:21.600 --> 0:05:23.400 none of us were doing extremely badly, but it just 0:05:23.600 --> 0:05:26.360 it just didn't become a um it's not a great 0:05:26.360 --> 0:05:28.560 third yeah yeah, yeah, but it was. It was. On 0:05:28.560 --> 0:05:30.720 the other hand, it was just a great place well 0:05:30.839 --> 0:05:32.599 first to try it. But the second thing is that 0:05:32.600 --> 0:05:34.719 when two thousand and eight came along, it was one 0:05:34.760 --> 0:05:36.720 of the few places that we're making money, so it 0:05:36.760 --> 0:05:40.400 was a very comfortable vantage point for for that environment. 0:05:40.480 --> 0:05:42.680 How did you go from being a Mini clif firstness 0:05:42.760 --> 0:05:46.640 to a Maxi Cliff first. Yeah, so so, um, I 0:05:46.680 --> 0:05:48.799 had stopped that systematic trading, but I had been talking 0:05:48.800 --> 0:05:53.760 with those guys often possibly um. Joining It was a 0:05:53.760 --> 0:05:56.599 matter also of them opening European office because that's where 0:05:56.600 --> 0:05:59.680 I was physically and so so so that that was 0:05:59.720 --> 0:06:03.719 a coaching. It also helped that I was I basically 0:06:03.760 --> 0:06:07.240 decided to write this book expected returns, and when I 0:06:07.320 --> 0:06:09.320 when I wrote it, I asked Cliff to write the 0:06:09.320 --> 0:06:11.920 foreword for it. And and by the way, like if 0:06:11.920 --> 0:06:14.880 you if you looked like check some time the first 0:06:14.880 --> 0:06:17.080 words he has there, like it was, I was sweating 0:06:17.080 --> 0:06:20.640 when I read read that. Um, it's just by telling 0:06:20.839 --> 0:06:22.880 that first time I met Anti, I thought he was 0:06:22.920 --> 0:06:26.000 insane and I was right so so so that that 0:06:26.000 --> 0:06:28.000 that was a little stressful, but it turns it out 0:06:28.279 --> 0:06:32.400 very nice. But anyway, so that experience reminded I think 0:06:32.400 --> 0:06:34.880 both of us how aligned our thinking is based on 0:06:34.920 --> 0:06:37.960 this common common background, and that's somehow I think motivated 0:06:38.000 --> 0:06:39.919 them to I think them to offer, and me to 0:06:40.120 --> 0:06:43.440 me to say yes yes to uh to the idea 0:06:43.480 --> 0:06:46.200 of joining them. Really, what I would think is getting 0:06:46.200 --> 0:06:48.760 to my natural home, and it happened in twenty eleven, 0:06:49.240 --> 0:06:51.360 so you've been there for more than a decade. You're 0:06:51.400 --> 0:06:55.720 now cohord of Portfolio Solutions. What is that role like? 0:06:55.839 --> 0:06:58.720 What's your what's your day to day work like at 0:06:58.800 --> 0:07:03.960 a QR Capital. Yeah, so the Portfolio Solutions group advice 0:07:04.160 --> 0:07:08.159 is mainly institutional clients on all kinds of challenges that 0:07:08.200 --> 0:07:12.160 they haven't thinking about expect it, returns, portfolio construction, risk management, etcetera. 0:07:12.480 --> 0:07:15.360 And then in addition, we write lots of papers, I 0:07:15.440 --> 0:07:18.240 speak in many conferences. And then in addition to that, 0:07:18.280 --> 0:07:21.800 I've had a hand in designing and improving some of 0:07:21.800 --> 0:07:24.600 our strategies, especially related to style premium. That was something 0:07:24.640 --> 0:07:28.280 I was quite passionate about when I joined. And and 0:07:28.320 --> 0:07:32.440 by now i'm co head. The guy who has collaborated 0:07:32.520 --> 0:07:35.400 very closely with me, Dan Bill alone has taken more 0:07:35.400 --> 0:07:37.640 and more over the day to day running of the thing. 0:07:37.680 --> 0:07:39.400 And I, you know, I took time to write a 0:07:39.400 --> 0:07:41.960 second book recently and now I'm talking about it. And 0:07:42.040 --> 0:07:43.880 I think, with with with my age, I'm happy to 0:07:44.040 --> 0:07:47.320 sort of moved part time status. I think so. In 0:07:47.360 --> 0:07:52.360 the book, Cliff Fastness again does the introduction and he says, 0:07:53.440 --> 0:07:57.680 you overshare a great characteristic for someone research, but he 0:07:58.080 --> 0:08:01.720 sometimes says he's afraid you're gonna feel the secret sauce. 0:08:01.800 --> 0:08:08.320 So what explain over sharing of financial research? Yeah, so 0:08:08.360 --> 0:08:10.559 this is this is related to all of us having 0:08:10.600 --> 0:08:14.239 this University of Chicago experience where where we were really 0:08:14.600 --> 0:08:18.480 taught the value of being open and and putting your 0:08:18.520 --> 0:08:21.960 research out there for public scrutiny too, to improve it 0:08:22.040 --> 0:08:25.840 and to educate. But of course there are possible downsides 0:08:25.880 --> 0:08:28.440 to that, and and and that has been always always 0:08:28.440 --> 0:08:31.520 a question. So so I'm not and we are not 0:08:31.800 --> 0:08:34.800 writing about all the proprietary proprietary strategies that we have, 0:08:34.880 --> 0:08:38.440 but we are talking quite openly about some things like 0:08:38.679 --> 0:08:42.280 against styles, factory investing, alternatively premium things that are relatively 0:08:42.320 --> 0:08:44.800 widely known. And I have this I don't know, Yeah, 0:08:45.000 --> 0:08:48.200 I'm sort of leaning that way of being too transparent 0:08:48.320 --> 0:08:52.400 and and and then somebody may have to control me 0:08:52.440 --> 0:08:55.760 a little. So so let's just talk a little bit 0:08:55.840 --> 0:08:59.360 about um. Two of the key themes in the book. 0:08:59.480 --> 0:09:03.520 The first is alpha. It's the holy grail but also 0:09:03.679 --> 0:09:08.840 allusive and costly explain. Alpha is something we all aspire for, 0:09:09.480 --> 0:09:13.720 but in reality the evidence is very limited that that 0:09:13.880 --> 0:09:17.880 most investors can deliver alpha. Moreover, there's there's a lot 0:09:17.920 --> 0:09:21.840 of good research by others and us showing that much 0:09:21.840 --> 0:09:25.199 what people think is alpha can be explained by either 0:09:25.400 --> 0:09:28.680 you know, heads funds running, taking on lots of equity 0:09:28.679 --> 0:09:32.760 correlation or then correlation to these various styles that are 0:09:32.760 --> 0:09:35.440 not quite quite market better. But it's it's certainly not 0:09:35.520 --> 0:09:38.480 pure alpha either. So somehow this type of demystifying, I 0:09:38.520 --> 0:09:41.920 think is helpful. But it's it's clear that investors tend 0:09:41.960 --> 0:09:44.760 to be managers and investors tend to be over confident 0:09:44.840 --> 0:09:47.520 in their ability to find that. So I'm glad you 0:09:47.520 --> 0:09:51.480 brought that up, because there's another bullet points in the 0:09:51.600 --> 0:09:55.040 last chapter the book which strikes me. Let me let 0:09:55.080 --> 0:10:00.199 me read it. Quote discipline, humility and patience UM as 0:10:00.200 --> 0:10:03.160 a key to invest in success. That sounds more like 0:10:03.280 --> 0:10:08.960 behavioral finance than factor investment. Yeah. Yeah. So one other founder, 0:10:09.080 --> 0:10:12.040 David Cabilt, he's he's always had this very good point 0:10:12.080 --> 0:10:16.800 that good investment results require good investment strategies and good 0:10:16.840 --> 0:10:21.720 investors and and so we wrote the paper together almost 0:10:21.760 --> 0:10:24.040 a decade to go on bad habits and good practices 0:10:24.120 --> 0:10:26.000 and and really think thinking about those things, and it 0:10:26.240 --> 0:10:29.160 does definitely get to behavior our advices in general, I 0:10:29.200 --> 0:10:32.320 think behavioral finance literature focus is way too much on 0:10:32.559 --> 0:10:35.480 how you can exploit other people's mistakes as opposed to 0:10:35.480 --> 0:10:38.680 looking in the mirror and reducing your your own own mistakes. 0:10:38.679 --> 0:10:42.400 So really, really quite interesting. So so let's talk a 0:10:42.400 --> 0:10:46.400 little bit about UM. Some of the concepts about expected 0:10:46.440 --> 0:10:50.559 returns UM you mentioned in the beginning of the book, 0:10:51.400 --> 0:10:57.280 lower asset yields and richer asset prices have pulled forward 0:10:57.480 --> 0:11:00.959 future returns. In other words, a lot of the games 0:11:01.000 --> 0:11:04.800 we've seen in the twenty tens and our guess twenty 0:11:05.000 --> 0:11:08.480 one and twenty two weren't so much based on that 0:11:09.040 --> 0:11:14.240 multiple and of earnings, but future multiples that were pulled forward. 0:11:14.600 --> 0:11:17.120 And so that time period explain that it's always good 0:11:17.120 --> 0:11:19.439 to think of starting deals and valuations sort of as 0:11:19.480 --> 0:11:21.960 two sides of the same coin. So starting deals of 0:11:22.040 --> 0:11:25.480 all major assets were coming down in last decade and 0:11:25.559 --> 0:11:29.800 last decades actually several decades. So something that I try 0:11:29.840 --> 0:11:32.840 to make investors see that, Uh, they naturally think of 0:11:32.920 --> 0:11:36.520 this way this way also of expected returns with bonds, 0:11:36.559 --> 0:11:39.440 but when they think of equities or housing they sort 0:11:39.520 --> 0:11:41.400 look at the rear view mirror and think of historical 0:11:41.440 --> 0:11:44.400 libraries returns that can be distorted by this returning or 0:11:44.480 --> 0:11:47.800 cheapening quite a lot. So I think it's helpful to 0:11:47.840 --> 0:11:51.640 think that all of these long only investments are priced 0:11:51.720 --> 0:11:55.200 by thinking of expected cast flows discounted by a common 0:11:55.200 --> 0:11:57.880 discount right to risk less part and some varius as 0:11:57.880 --> 0:12:01.160 a specific premier. And now when this common discount rate 0:12:01.440 --> 0:12:04.600 has been at all time lows and was coming down 0:12:04.640 --> 0:12:07.679 for a decades, so that was making everything expensive. At 0:12:07.720 --> 0:12:10.280 the same time, whatever happened to the expected cast flows 0:12:10.280 --> 0:12:14.079 and other premium and so that that situation has gotten 0:12:14.280 --> 0:12:17.080 us to this sort of everything bubble less. Some some 0:12:17.200 --> 0:12:19.320 saying I think it's a bubble is a bit wrong 0:12:19.360 --> 0:12:21.199 word there in the sense that there is a fundamental 0:12:21.280 --> 0:12:25.480 story behind it. The low real yields that were influencing 0:12:25.600 --> 0:12:28.480 all kinds of investments makes a lot of sense. You 0:12:28.559 --> 0:12:32.680 wrote this book in one or at least finished it 0:12:32.720 --> 0:12:36.520 in and you describe in the book what you see 0:12:36.559 --> 0:12:40.160 as an unquote investment winter ahead. I have to say 0:12:40.240 --> 0:12:44.640 that seems pretty president considering since you handed the book 0:12:44.679 --> 0:12:48.040 in to be published last year, markets have pretty much 0:12:48.120 --> 0:12:51.880 done nothing but roll over and head south in two. 0:12:52.559 --> 0:12:55.840 Was this just lucky timing or were you a little president? 0:12:56.880 --> 0:13:00.760 I'll put it largely too lucky timing. But so the story, 0:13:00.800 --> 0:13:02.959 I was always saying that we know that we've got 0:13:02.960 --> 0:13:06.160 these low expected returns given those low starting deals. And 0:13:06.160 --> 0:13:08.160 and by the way, related to what you're saying, I 0:13:08.200 --> 0:13:11.560 really like another statement, we borrowed returns from the future 0:13:11.600 --> 0:13:14.199 when we were when we were capitalizing everything at those 0:13:14.200 --> 0:13:17.679 expensive levels, and so that locked in low future returns. 0:13:17.679 --> 0:13:20.120 We just didn't know whether that's gonna materialized through slow 0:13:20.160 --> 0:13:23.560 pain staying in this low expected return world, or fast 0:13:23.559 --> 0:13:26.160 pain cheapening. And so then in the in the book 0:13:26.240 --> 0:13:27.839 I was I was saying that I don't really have 0:13:27.880 --> 0:13:30.319 a strong view on this one. But but in conclusions 0:13:30.400 --> 0:13:32.960 I did put there that that it just seems that 0:13:33.160 --> 0:13:36.400 stars are aligning for some fast pain. And it wasn't 0:13:36.400 --> 0:13:38.679 just the high valuations, but there was a catalyst. There 0:13:38.760 --> 0:13:43.200 was this basically inflation problem was seemingly getting as close 0:13:43.240 --> 0:13:45.160 to the day when FED finally has to make some 0:13:45.520 --> 0:13:49.600 hard choices, and so so so that I got got right. 0:13:49.679 --> 0:13:51.520 But but I would say that I was really lucky 0:13:51.520 --> 0:13:53.520 because I could have written in six months earlier, and 0:13:53.559 --> 0:13:56.960 in general I've had other market timing calls. I'm not 0:13:57.040 --> 0:13:58.880 famous for being good at market. I mean I don't 0:13:58.880 --> 0:14:02.080 know anybody who is. There are no old gold market 0:14:02.080 --> 0:14:05.840 timers in France Billionaire list. There's there's old in this bowl, 0:14:05.960 --> 0:14:09.840 but there's not both. Um, let's let's talk a little 0:14:09.840 --> 0:14:13.240 bit about the pushback to low expected returns, you know, 0:14:13.679 --> 0:14:18.160 following the financial crisis and the FED cutting rates economy 0:14:18.200 --> 0:14:21.600 and the market starts recovering late two thousand nine and 0:14:21.640 --> 0:14:25.040 then two thousand and ten, and we kept hearing from 0:14:25.080 --> 0:14:29.600 a lot of different value corners. Hey, everything is richly priced. 0:14:30.080 --> 0:14:32.640 Bonds are the most expensive they've been in thirty years. 0:14:32.680 --> 0:14:37.160 Stocks are pricy, lower your return expectations. But yet the 0:14:37.760 --> 0:14:42.840 tens sore returns and equities and bonds close to double 0:14:43.240 --> 0:14:48.960 historical averages. How do we explain why that advice took 0:14:49.000 --> 0:14:52.240 so long before it started to work. So I think 0:14:52.680 --> 0:14:56.400 there is a fair risk that we anybody who was 0:14:56.480 --> 0:14:59.120 talking like that, he's thought that's the boy who cried 0:14:59.160 --> 0:15:02.040 wolf and Lucy losing credibility then by this time, and 0:15:02.080 --> 0:15:04.800 I think that would be said because I think sometimes 0:15:04.800 --> 0:15:07.120 it's going to really work, and this year really looks 0:15:07.120 --> 0:15:09.560 like it can be can be that sometime. And I 0:15:09.880 --> 0:15:12.160 felt always somewhat good that we were at least we 0:15:12.160 --> 0:15:14.560 were not pushing for we were not predicting me and 0:15:14.640 --> 0:15:17.000 reverting valuations that we have made things work. We were 0:15:17.040 --> 0:15:19.600 saying it, let's be really humble about any market timing 0:15:19.680 --> 0:15:23.120 use of this stuff. But low starting heels do anchor 0:15:23.200 --> 0:15:26.280 expected returns lower. But it's true that and and what 0:15:26.320 --> 0:15:28.400 we saw then in that in that decade, that rich 0:15:28.480 --> 0:15:30.600 things can get richer, and that doesn't take quite a 0:15:30.640 --> 0:15:34.360 long time. And so actually my favorite quote is to 0:15:34.400 --> 0:15:37.840 think about what happened to SMP five shielder p that 0:15:37.960 --> 0:15:42.560 went from mildly above historical average too empty to double 0:15:42.760 --> 0:15:45.800 and wildly above average forty in ten years time. And 0:15:45.840 --> 0:15:48.520 that type of thing gives you well, basically seven percent 0:15:48.560 --> 0:15:51.600 annual returns pro rated then and so so that's the 0:15:51.720 --> 0:15:54.080 key reason. And something similar happened. Real yels on bonds 0:15:54.120 --> 0:15:58.040 were already low, they went even lower. Um rental heels 0:15:58.040 --> 0:16:02.160 on equities, credit spread, anything you look at had basically 0:16:02.880 --> 0:16:06.680 tail winds from from these following years, and that repricing 0:16:06.720 --> 0:16:09.400 then gave high returns. And that there's a danger that 0:16:09.480 --> 0:16:11.760 people then look at the rear view mirror and become 0:16:11.840 --> 0:16:14.440 complacent just at the wrong time. So so let's talk 0:16:14.440 --> 0:16:18.560 a little bit about that. How significant was the ultra 0:16:18.680 --> 0:16:23.040 low rates of the Fell reserve to making all of 0:16:23.080 --> 0:16:28.320 these different asset classes richly valued and continuing to generate 0:16:28.680 --> 0:16:32.480 strong returns right up until the FED started raising rates. 0:16:33.160 --> 0:16:35.520 So I think so short term what happened this year 0:16:35.720 --> 0:16:39.200 was really there was a catalyst of inflation and FED tightening. 0:16:39.200 --> 0:16:42.200 But the long term story was always always about valuations 0:16:42.200 --> 0:16:44.640 and and the important thing, as I said, is related 0:16:44.680 --> 0:16:47.880 to this common part low real deals. And should we 0:16:47.920 --> 0:16:51.119 blame FED for that or should be blaming somehow greedy investors. 0:16:51.680 --> 0:16:54.200 I buy more the stories that there was this fundamental 0:16:54.360 --> 0:16:59.920 fundamental effects, most importantly proper probably savings glad excess savings 0:17:00.040 --> 0:17:03.280 coming from pension savers. Also another story is that that 0:17:03.480 --> 0:17:06.080 when when the wealthy we're getting a bigger share of 0:17:06.119 --> 0:17:08.560 the pie, their savings rates are higher. There are there 0:17:08.560 --> 0:17:11.160 are research on both fronts which which sort of explain 0:17:11.200 --> 0:17:15.040 why we've gotten this exceptional savings clot which was then 0:17:15.080 --> 0:17:21.040 pushing all assets yields lower and and creating this and 0:17:21.200 --> 0:17:24.680 fed them. Investors were basically then responding to that situation 0:17:25.800 --> 0:17:28.600 rather than driving it. Now, we heard a lot about 0:17:28.640 --> 0:17:32.439 the savings clout from then chairman Ben Bernanke in the 0:17:32.480 --> 0:17:37.719 early two thousand's. Is this savings clot qualitatively different than 0:17:37.760 --> 0:17:41.120 what we saw two decades ago? Yeah, it's it's it's 0:17:41.119 --> 0:17:42.919 it's the same idea. So always when you think of 0:17:42.960 --> 0:17:45.200 real years, you think that, okay, there's a there's either 0:17:45.520 --> 0:17:47.760 an issue with investments or savings, and it's it's a 0:17:47.760 --> 0:17:49.760 balance between those two. And he was highlighting that this 0:17:49.840 --> 0:17:52.120 probably is more coming from the savings side, and then 0:17:52.160 --> 0:17:54.720 he was symphasized this is the this is a China 0:17:54.800 --> 0:17:59.960 and and often often emerging market foreign reserves, those those 0:18:00.000 --> 0:18:02.960 types of excess savings where sort the culprit for the 0:18:03.000 --> 0:18:06.760 conundrum in two thousand five or whatever it was. And 0:18:06.760 --> 0:18:09.560 and I think that that story still has some legs, 0:18:09.600 --> 0:18:13.000 but sort of the key culprit then became demographics and 0:18:13.040 --> 0:18:16.240 retirement savers And the latest story now we center in 0:18:16.280 --> 0:18:19.520 the sort of one percent. So so the flip side 0:18:19.520 --> 0:18:22.960 of that, if there's a savings glut, meaning a big 0:18:23.000 --> 0:18:26.520 uptick in demand for that paper, does that also suggest 0:18:27.160 --> 0:18:31.680 we have a dearth of high quality sovereign paper of 0:18:32.400 --> 0:18:36.280 bonds issued by countries like the US or the UK, 0:18:36.760 --> 0:18:42.080 or is it just whatever. The existing supply of paper 0:18:42.280 --> 0:18:45.560 is what, Liz, And it's the demand that has spiked. Yeah, 0:18:45.560 --> 0:18:49.320 I think the demand has been driving things and and 0:18:49.320 --> 0:18:52.240 and well, the supply has been there like there's there's 0:18:52.280 --> 0:18:55.080 there's been plenty of plenty of supply as well to 0:18:55.080 --> 0:18:58.600 to cater for it, and and really really given the 0:18:58.680 --> 0:19:02.040 need for the to to cover public deficits and so on. 0:19:02.200 --> 0:19:04.320 But again, I think I think if one thinks of 0:19:04.480 --> 0:19:07.560 what what sort of started this among fundamental forces, I 0:19:07.760 --> 0:19:10.800 choose to go with that savings plat That's my best 0:19:10.840 --> 0:19:13.160 reading of the literaty and it makes some sense. So 0:19:13.400 --> 0:19:16.359 you wrote the prior book a decade ago, two thousand 0:19:16.359 --> 0:19:20.760 and eleven, just expected returns in the decade between that 0:19:20.840 --> 0:19:23.800 book in this book, What have we all learned? What 0:19:23.800 --> 0:19:26.760 what has the markets taught us? And how did you 0:19:26.880 --> 0:19:29.119 work that into the new book? Well? I like that. 0:19:29.200 --> 0:19:32.320 I like the basic framework still still in the book. 0:19:32.400 --> 0:19:35.720 But I think certainly it was a terrible decade for 0:19:35.760 --> 0:19:39.280 all kinds of contrarian strategies and and I have become 0:19:39.520 --> 0:19:41.240 even more humble. It's sort of funny that I I 0:19:41.560 --> 0:19:44.320 wrote my dissertation four the years ago in duration timing, 0:19:44.320 --> 0:19:46.440 and I've thought about all kinds of market time. Every 0:19:46.440 --> 0:19:49.639 decade I become more humble about about the endeavor. And 0:19:49.720 --> 0:19:51.960 yet even as I told at the end of this 0:19:52.160 --> 0:19:54.639 latest book, I'm still mentioning star start aligning. And it 0:19:54.920 --> 0:19:57.040 might be so, so the temptation is there. But I 0:19:57.080 --> 0:19:59.159 think the main point I want to say is I 0:19:59.160 --> 0:20:01.000 think what we should really try to think of investing 0:20:01.040 --> 0:20:05.240 as a strategic effort good diversification and so as opposed 0:20:05.280 --> 0:20:08.280 to some great tactical timing, because that doesn't do too well. 0:20:08.320 --> 0:20:10.680 So I think I think that would be and part partly, 0:20:11.080 --> 0:20:14.760 you know, relearned through the difficulty of contrarian timing strategies. 0:20:15.000 --> 0:20:18.919 Then then another thing, which which was very important in 0:20:18.920 --> 0:20:22.040 this decade, was there was a growing interest in these 0:20:22.040 --> 0:20:25.440 diversifying return sources. But I think by now the most 0:20:25.440 --> 0:20:28.480 popular one is related to a liquid investments, whereas my 0:20:28.600 --> 0:20:32.080 favorites where then and are still now more liquid strategies 0:20:32.119 --> 0:20:34.960 Vario style, premium value investing, trend following, and so on 0:20:35.080 --> 0:20:36.959 and so so. One of the interesting things to talk 0:20:37.000 --> 0:20:40.240 about in the book is that we continue to find 0:20:40.880 --> 0:20:44.119 more data, and not just the decade of data that 0:20:44.200 --> 0:20:47.480 went by, but historical data, old data going back to 0:20:47.520 --> 0:20:50.639 the eighteen hundreds. I have to ask, where is this 0:20:51.920 --> 0:20:55.200 do we call it ancient? Where is this nineteenth century 0:20:55.280 --> 0:20:58.359 data coming from? And how can you apply it to 0:20:58.480 --> 0:21:01.800 investing in the twenty one cent Yeah. So the first 0:21:01.800 --> 0:21:05.480 point is that we accrue out of sample new experience 0:21:05.520 --> 0:21:08.080 so slowly that that that it's sort of pain painful 0:21:08.119 --> 0:21:11.439 to do to do that waiting, and and therefore it 0:21:11.640 --> 0:21:15.680 is helpful supplementary source to get some old data. Most 0:21:15.680 --> 0:21:18.800 really studies were done with datas in nineteen sixties to nineties, 0:21:18.800 --> 0:21:21.560 and then it was extended to beginning of CRISP data 0:21:22.520 --> 0:21:25.720 six and now we've had people going further back and 0:21:25.520 --> 0:21:27.560 and I am so I haven't been one of those 0:21:27.600 --> 0:21:29.879 in the archives, but but I'm one of those looking 0:21:29.920 --> 0:21:33.000 at that that data and studying it critically and and 0:21:33.040 --> 0:21:36.480 seeing what what we can learn from there, mainly whether 0:21:36.560 --> 0:21:40.680 you whether you get similar patterns. I do love it 0:21:41.160 --> 0:21:46.040 when I find that some strategies have worked persistently over 0:21:46.960 --> 0:21:52.080 different centuries, pervasively across different countries and asset classes and 0:21:52.200 --> 0:21:56.560 robust with different specifications. So that makes me more confident. 0:21:56.760 --> 0:21:58.639 But I do I have recognized And that's something I 0:21:59.080 --> 0:22:01.679 say in the book as well, that that when people 0:22:01.720 --> 0:22:04.280 see my hundred and two hundred years of data there 0:22:04.720 --> 0:22:08.800 some just roll their eyes and and and why is that? Why? 0:22:08.840 --> 0:22:10.920 Why do why do I care about two hundred years 0:22:10.960 --> 0:22:13.960 of data? I really care about last three years with 0:22:14.000 --> 0:22:18.359 my old portfolio. Well, obviously that's a very specific example set. 0:22:18.359 --> 0:22:20.960 You want to go away beyond that. But it raises 0:22:21.080 --> 0:22:24.320 people rolling their eyes, raise the question how reliable is 0:22:24.359 --> 0:22:28.440 that data? How accurate is it? Can we have confidence 0:22:28.520 --> 0:22:32.919