WEBVTT - Next up: Barry Ritholtz

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<v Speaker 1>Hey, it's Joel. I know you're not supposed to hear

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<v Speaker 1>from me or Eric for another week, but I'm just

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<v Speaker 1>too excited about our next episode. We recently sat down

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<v Speaker 1>with legendary money manager, Bloomberg opinion columnists, podcast host, and

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<v Speaker 1>general jack of all trades Barry Ritholtz for several hours.

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<v Speaker 1>That's right, several hours. We talked about e t f s,

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<v Speaker 1>the state of the economy, and whether we still even

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<v Speaker 1>need financial advisors like Barry. We even threw caution to

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<v Speaker 1>the win and waded into politics and tariffs. Berry didn't

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<v Speaker 1>hold back. So tune in next week for special double

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<v Speaker 1>episode of Trillions, and in the meantime, check out Barry's

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<v Speaker 1>podcasts Masters in Business while you wait. He's been doing

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<v Speaker 1>this forever. He's amazing to get a taste of Masters

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<v Speaker 1>in Business. Here's an excerpt from a recent interview that

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<v Speaker 1>he did with research affiliates rob Or, not a big

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<v Speaker 1>name in E t S. Let's talk a little bit

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<v Speaker 1>about factors investing. Um Fama French famously identified first the

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<v Speaker 1>three factor model and the five factor model, then the

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<v Speaker 1>seven factor model. Are there still factors out there that

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<v Speaker 1>have yet to be discovered? Two answers to that question. Firstly, yes,

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<v Speaker 1>there will be. They've already been five factors published five

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<v Speaker 1>and um, there will be hundreds more. Now the more

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<v Speaker 1>pertinent question is how much of this is data mining

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<v Speaker 1>finding relationships that prevailed in the past that have no

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<v Speaker 1>reason to prevail in the future, and how much of

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<v Speaker 1>it is, um truly factors that drive price that can

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<v Speaker 1>be truly a reliable source of excess return, Meaning is

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<v Speaker 1>there enough outperformance here that can be captured by a portfolio?

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<v Speaker 1>Exactly so of those five So, if these were really

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<v Speaker 1>good factors, why wouldn't we create a if not a

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<v Speaker 1>five hundred factor portfolio. Hey, let's put these in order

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<v Speaker 1>of the strongest outperformance generators, and here are the fifty

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<v Speaker 1>or five best factors. Why can't we do that? Well?

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<v Speaker 1>I wrote a paper a couple of years ago called

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<v Speaker 1>how can smart pay to Go Horribly Wrong? And I

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<v Speaker 1>remember that it was massively controversial. I thought the controversy

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<v Speaker 1>was amusing because if I'd written a paper entitled how

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<v Speaker 1>can stock picking go Horribly wrong? And I offered the

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<v Speaker 1>the sage insight that if a stock soars and its

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<v Speaker 1>fundamentals haven't, so it's valuation multiples have sword, it's past

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<v Speaker 1>returns will look artificially wonderful, and if there's any mean

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<v Speaker 1>or version on valuations, it's future performance will to use

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<v Speaker 1>a technical term, suck. So um. People would have read

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<v Speaker 1>that paper and said, what's this nitwit talking about? Everybody

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<v Speaker 1>knows that by saying exactly the same thing about factors

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<v Speaker 1>and smart beta strategies, I was pilloried for suggesting that

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<v Speaker 1>the same thing could apply for strategies. Now, if you

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<v Speaker 1>go back historically, you find that the alpha of many

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<v Speaker 1>of the smart beta factors have has not been tested

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<v Speaker 1>in terms of how much of that access return came

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<v Speaker 1>from rising valuation multiples. We might as well have a

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<v Speaker 1>an Apple factor that simply says Apple has outperformed magnificently.

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<v Speaker 1>It is a powerful factor. You have a long Apple,

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<v Speaker 1>short everything else factor, and because of the past performance,

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<v Speaker 1>we know it's going to continue to work. Let's digress

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<v Speaker 1>a little bit and and define factors for people who

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<v Speaker 1>may not be familiar with Gene Fama, who won the

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<v Speaker 1>Noble Prize a few years ago for his for a

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<v Speaker 1>lot of his work. Um the original and it's Gene

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<v Speaker 1>Farm and Ken Frenchship. Dartmouth Farm is at Chicago. The

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<v Speaker 1>original farm of French factor paper was small capitalization value,

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<v Speaker 1>and I'm trying to remember was that momentum or quality

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<v Speaker 1>market market beta market. So that's the three, okay, and

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<v Speaker 1>then when we moved to five, we added um uh,

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<v Speaker 1>quality and momentum, So that's the next lot, and then seven.

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<v Speaker 1>I don't even know what the next two are. I'm

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<v Speaker 1>not certain, but I think it's illiquidity and investment. Right. So,

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<v Speaker 1>so all of this comes back to let's let's keep

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<v Speaker 1>it simple. Low cost stocks over long periods of time,

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<v Speaker 1>better value stocks, not a expensive stocks. I don't mean

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<v Speaker 1>low price tend to outperform expensive stocks over the long haul,

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<v Speaker 1>exactly right Now. Advocates of efficient markets will say it's

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<v Speaker 1>got to be because of some kind of hidden risk,

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<v Speaker 1>because you can't get something for nothing. Um. I would

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<v Speaker 1>push back against that and say it's not risk with value.

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<v Speaker 1>Might be risked with small cap because there and then

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<v Speaker 1>there's a liquidity issues, but with value, it's the psychology.

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<v Speaker 1>It's to behavior of who wants to buy this. Dominoes

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<v Speaker 1>is one of my favorite examples. Domino's had a big,

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<v Speaker 1>a whole run of issues late nineties early two thousand's

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<v Speaker 1>the stock did poorly. People were thinking, all right, well

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<v Speaker 1>that chain is pretty much done, and dominoes over the

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<v Speaker 1>past I think it's either fifteen or twenty years has

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<v Speaker 1>handily outperformed Apple. I may be getting the timeframe wrong,

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<v Speaker 1>glow so, and that's the psychology of who wants to

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<v Speaker 1>touch that? And if you look from the trough in

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<v Speaker 1>two thousand nine, Uh City ever so briefly dipped below

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<v Speaker 1>a buck, be of a dipped to roughly two bucks.

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<v Speaker 1>And since then those have handily outperformed Apple. Um so,

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<v Speaker 1>but they've outperformed it from a starting point of being

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<v Speaker 1>thought on death's door. So value, it seems to me,

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<v Speaker 1>does have a behavioral basis. Basically, when you have a

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<v Speaker 1>value orientation, you're buying what's unloved, what people want to shun.

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<v Speaker 1>That should be rewarded. Now is it a hidden risk

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<v Speaker 1>factor only psychologically? Well, let me let me push back

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<v Speaker 1>a little bit over there. Two companies in the financial

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<v Speaker 1>crisis look terrible. One of them's a I G. The

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<v Speaker 1>other's Lehman Brothers. You can buy a i G rescued

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<v Speaker 1>and and since pretty decent, not great, but pretty decent

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<v Speaker 1>returns off of the bottom and Lehman. I guess we

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<v Speaker 1>could call that of value trap. Although there were elements

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<v Speaker 1>of fraud in RepA one O five, there was a

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<v Speaker 1>whole different set of problems with Lehman. But the risk

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<v Speaker 1>with value is am I buying something that's going to

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<v Speaker 1>be a zero. That's known as a value trap. It's

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<v Speaker 1>a stock that looks cheap on its way to zero.

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<v Speaker 1>Now it's hard to have a whole sector that looks

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<v Speaker 1>cheap on its way to zero. I coined the term

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<v Speaker 1>anti bubble in two thousand nine to describe what I

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<v Speaker 1>perceived as the inverse of a bubble, where an entire

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<v Speaker 1>sector of the economy is priced as if they're all

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<v Speaker 1>headed for oblivion, when in fact, every failure clears the

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<v Speaker 1>runway for the survivors to have higher profits, higher margins,

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<v Speaker 1>and greater success ahead. So unless you wanted to um

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<v Speaker 1>accept the notion of armageddon the end of the economy,

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<v Speaker 1>uh you, it made sense to think that collectively this

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<v Speaker 1>sector was being dismissed when it shouldn't be. There's a

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<v Speaker 1>whole group of people that are the armagen traders. I

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<v Speaker 1>think the Ft called them the plastic bears. They'll scream

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<v Speaker 1>arm again, but then they'll he here's what we can

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<v Speaker 1>sell you while we're waiting for armagin um. The other

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<v Speaker 1>thing about anti bubble is so fascinating. You could say,

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<v Speaker 1>there's an anti bubble in what was it? Home builders

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<v Speaker 1>and oh five, and mortgage brokers and bankers and oh

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<v Speaker 1>six and