WEBVTT - Cliff Asness on How Markets Got Dumber in the Last 10 Years 0:00:02.720 --> 0:00:15.880 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.600 --> 0:00:21.320 Hello and welcome to another episode of the All Thoughts Podcast. 0:00:21.400 --> 0:00:22.640 I'm Tracy Allaway. 0:00:22.360 --> 0:00:23.560 And I'm Joe wysnent Thal. 0:00:23.800 --> 0:00:25.440 Joe, it's a big month for us. 0:00:25.480 --> 0:00:27.640 Big month for us. We've been doing this for ten years. 0:00:27.840 --> 0:00:30.920 I know, I can't believe it. Do you remember the 0:00:30.920 --> 0:00:31.640 first episode? 0:00:31.720 --> 0:00:33.559 Yeah, of course with Tom Keane. 0:00:33.640 --> 0:00:35.880 Yeah, But and then our second episode I think was 0:00:35.920 --> 0:00:38.560 about bananas for some reason, it was You're. 0:00:38.520 --> 0:00:41.159 Right, it took us a long time to figure out 0:00:41.200 --> 0:00:43.080 what we were doing. It took us a long time 0:00:43.159 --> 0:00:45.120 to figure out what we were doing, and I don't 0:00:45.159 --> 0:00:48.479 think at that point I would have expected that we'd be. 0:00:48.400 --> 0:00:50.080 Doing it ten years later. I don't know what I 0:00:50.120 --> 0:00:52.280 was expecting. I think turning on a microphone in a 0:00:52.360 --> 0:00:53.840 radio studio and talking for a while. 0:00:54.000 --> 0:00:56.520 We started doing it because we wanted to have a 0:00:56.520 --> 0:00:58.800 podcast and talk to interesting people. I think we were 0:00:58.880 --> 0:01:03.080 hashtag bless. No one was listening for a very very 0:01:03.120 --> 0:01:05.880 long time, which gave us a long runway to figure 0:01:05.920 --> 0:01:09.280 things out. So we got lucky. That said, you know, 0:01:09.400 --> 0:01:11.880 ten years, it is, in fact a long time to 0:01:11.959 --> 0:01:14.640 be doing this, and a lot has changed in that period. 0:01:14.800 --> 0:01:18.080 A lot has changed in that period, sometimes mind blowing. 0:01:18.160 --> 0:01:20.720 And we've talked about this before for sure, But the 0:01:20.880 --> 0:01:23.600 things that we were covering is capital and news at 0:01:23.640 --> 0:01:25.520 the time are now capital age history. 0:01:25.880 --> 0:01:28.520 And it's like these things that are we sort of 0:01:28.560 --> 0:01:29.840 take for granted. Everyone was there. 0:01:29.920 --> 0:01:31.840 It's like, no, children, let us tell you what it 0:01:31.920 --> 0:01:35.040 was like in the old days when people were worried 0:01:35.040 --> 0:01:36.880 the world was going to come to an end because 0:01:37.160 --> 0:01:39.560 you know, Greece is sovereign debt and all this stuff 0:01:39.600 --> 0:01:42.120 that we just sort of part of the landscape is 0:01:42.160 --> 0:01:43.280 people don't remember it. 0:01:43.440 --> 0:01:45.520 No, one of those things has to be the idea 0:01:45.600 --> 0:01:48.880 of value or fundamental investing, right, Like, let us tell 0:01:48.920 --> 0:01:51.920 you about the days when price actually mattered and had 0:01:51.920 --> 0:01:54.040 a limit to what investors would pile into. 0:01:54.240 --> 0:01:55.320 Yeah, that's exactly right. 0:01:55.400 --> 0:01:57.360 Let us tell you about the days when people used 0:01:57.360 --> 0:02:00.040 to talk about pe ratios and this stock, Oh so 0:02:00.200 --> 0:02:02.440 the twenty five pe we better sell it and buy 0:02:02.440 --> 0:02:04.280 the stock at a fifteen p or whatever. 0:02:04.640 --> 0:02:05.960 Yes, that feels quaint. 0:02:06.000 --> 0:02:08.040 Maybe it'll be back there one day, but for now, 0:02:08.480 --> 0:02:11.639 given how many things in the market seem to be 0:02:12.200 --> 0:02:15.400 the Graham and DoD kind of stuff, feels a little. 0:02:15.200 --> 0:02:17.079 Old, a little old fashioned, little old. 0:02:17.480 --> 0:02:17.679 Yeah. 0:02:17.720 --> 0:02:20.320 Okay, So one of the big themes that has emerged 0:02:20.360 --> 0:02:22.440 in the ten years that we've been doing this podcast 0:02:22.600 --> 0:02:25.239 is everyone seems to have grown more stupid. I would say, 0:02:25.840 --> 0:02:28.680 hopefully that's not related, so that's not like a correlation thing. 0:02:30.000 --> 0:02:32.120 It could be all right, but you know, we have 0:02:32.160 --> 0:02:36.160 all this gamification of investing, people betting onlines going up, 0:02:36.600 --> 0:02:40.160 we're down, people betting on random meme coins, things like that, 0:02:40.240 --> 0:02:42.480 and I think, you know, we talk about it a 0:02:42.520 --> 0:02:44.959 lot on the podcast, but this is actually a fundamental 0:02:44.960 --> 0:02:46.920 shift in the market. If you think about the market 0:02:47.000 --> 0:02:51.160 as something that's supposed to be about capital allocation, alignment 0:02:51.240 --> 0:02:54.639 of incentives. People are investing in something because they think 0:02:54.639 --> 0:02:56.519 it's going to be profitable in the future at the 0:02:56.600 --> 0:02:59.240 right price. And now people are just sort of piling 0:02:59.240 --> 0:03:01.800 into stuff because other people are doing it, and again, 0:03:01.960 --> 0:03:02.680 line go up. 0:03:02.880 --> 0:03:04.959 Deep down, I still believe that the value of a 0:03:05.000 --> 0:03:07.480 stock should reflect the net present value of all. I 0:03:07.520 --> 0:03:10.440 know you're an MH guy, but I've it's been a 0:03:10.480 --> 0:03:13.280 little bit hard with some of these things. And you 0:03:13.320 --> 0:03:15.800 know the other thing too, that is sort of changes 0:03:15.880 --> 0:03:18.320 that like half of our episodes these days are kind 0:03:18.360 --> 0:03:20.960 of AI related in some way, and so I think 0:03:21.040 --> 0:03:23.360 there's a lot of interesting stuff going on, particularly at 0:03:23.400 --> 0:03:26.919 the intersection of tech and applying tech to both investing 0:03:27.000 --> 0:03:29.800 in tech, but then the application of tech to investing 0:03:29.880 --> 0:03:30.560 and so forth. 0:03:30.919 --> 0:03:33.240 So yes, much has changed. 0:03:33.080 --> 0:03:35.480 A lot has changed, and we have the perfect guests 0:03:35.800 --> 0:03:39.560 to talk about how everyone has grown more stupid over time. 0:03:39.880 --> 0:03:41.560 We're going to be speaking with someone we've wanted on 0:03:41.600 --> 0:03:43.720 the show for a really, really long time. I'm very 0:03:43.760 --> 0:03:46.640 excited about this. It's Cliff Asnas, the co founder and 0:03:46.720 --> 0:03:49.400 CIO of AQR. Thank you so much for coming on. 0:03:49.400 --> 0:03:50.840 All thoughts, Thank you for having me. 0:03:51.200 --> 0:03:53.760 What's it like to be a rational person living in 0:03:54.040 --> 0:03:56.920 irrational Cliff, Yeah, you've been doing it for a long time. 0:03:57.120 --> 0:03:59.960 Well, a rational person is not always how I'm described, 0:04:00.680 --> 0:04:03.320 but this rational investing and in this rational conduct in 0:04:03.360 --> 0:04:04.080 your personal life. 0:04:04.080 --> 0:04:06.000 So let's just distinguish those. 0:04:06.480 --> 0:04:10.080 You guys in your intro said like, it's a it's 0:04:10.080 --> 0:04:11.880 a little scary for the next hour because you said 0:04:11.920 --> 0:04:13.560 like a third of the things I want to say. Oh, 0:04:14.840 --> 0:04:18.520 I wrote a rather gigantic piece in the Journal of 0:04:18.520 --> 0:04:21.760 Portfolio Management. They were having a fiftieth anniversary. None of 0:04:21.800 --> 0:04:23.359 us were quite old enough to have been there in 0:04:23.360 --> 0:04:25.599 the first issue, but they were looking for the old 0:04:25.640 --> 0:04:28.919 guys to write kind of retrospectives, and the piece I 0:04:28.960 --> 0:04:33.040 wrote was called the less Efficient Market Hypothesis. Now, I 0:04:33.120 --> 0:04:36.320 think you guys probably know this, but my dissertation advisor 0:04:36.920 --> 0:04:38.960 was a little known guy named Eugene Fama. 0:04:39.200 --> 0:04:39.680 We've heard of. 0:04:40.080 --> 0:04:42.120 I was his TA for two years. I grew up 0:04:42.200 --> 0:04:43.200 in EMH. 0:04:43.240 --> 0:04:45.160 I love that you guys just say EMH and your 0:04:45.200 --> 0:04:48.080 audience knows where you're talking about. That is not the 0:04:48.160 --> 0:04:50.800 norm for me when I talk about these things. I 0:04:51.200 --> 0:04:54.960 was not a perfect efficient marketer even back then. 0:04:55.560 --> 0:04:56.239 Neither is Gene. 0:04:56.240 --> 0:04:59.160 By the way, Genes not a zealot about third week 0:04:59.160 --> 0:05:01.200 of class. I know this because I took the class 0:05:01.240 --> 0:05:04.400 three times. I didn't fail, but as the TA, I 0:05:04.440 --> 0:05:07.520 sat through it three full years, and like the third week, 0:05:07.560 --> 0:05:09.040 he always tells the class. 0:05:09.120 --> 0:05:12.000 Markets are almost certainly not perfectly efficient. 0:05:12.320 --> 0:05:15.560 Because Jean's a brilliant guy and recognizes that perfection is 0:05:15.560 --> 0:05:17.240 a really stupid idea. 0:05:17.400 --> 0:05:18.600 He's been on the show. By the way. 0:05:18.640 --> 0:05:20.560 Oh, I don't know, yeah, yeah, And I don't know 0:05:20.560 --> 0:05:22.800 if that came up, but he's always very honest about that. 0:05:22.960 --> 0:05:25.719 He probably thinks they're considerably more efficient than I do 0:05:25.800 --> 0:05:27.719 these days, and I think I probably think it's they're 0:05:27.720 --> 0:05:29.120 more efficient than maybe. 0:05:28.920 --> 0:05:31.400 The active average retail trader. 0:05:31.680 --> 0:05:34.279 But I wrote a dissertation for him on the success 0:05:34.400 --> 0:05:38.400 of price momentum. That is not a very gene Fama dissertation. 0:05:38.880 --> 0:05:42.240 A gene Fama dissertation is I've studied price momentum and 0:05:42.279 --> 0:05:44.479 it loses gobs of money, and these idiots on Wall 0:05:44.480 --> 0:05:47.440 Street do it anyway. That's kind of a fishing market. 0:05:47.480 --> 0:05:49.840 It's lot how silly they are. And he was great 0:05:49.839 --> 0:05:52.880 about it. I remember I kind of mumbled, I'm like, 0:05:52.920 --> 0:05:54.920 I want to write a dissertation on price momentum, and 0:05:55.040 --> 0:05:57.159 by the way, I find it works very well. 0:05:57.240 --> 0:05:57.960 What was that, cliff? 0:05:58.000 --> 0:05:59.560 It works very well? And he said, if it's in 0:05:59.600 --> 0:06:03.159 the data, write the paper. So I've drifted at least 0:06:03.200 --> 0:06:07.560 a little bit further from efficient markets even way back then. Now, 0:06:07.600 --> 0:06:10.039 price momentum, I'll do a lot of segues. You're gonna 0:06:10.040 --> 0:06:14.520 have to stop. I do parentheticals within parentheticals. Price momentums 0:06:14.560 --> 0:06:18.440 often thought of as this index of irrationality. It can 0:06:18.520 --> 0:06:22.080 work for two different reasons. It can work because of yes, 0:06:22.240 --> 0:06:26.320 feedback loops, chasing line goes up just like you said before, 0:06:26.360 --> 0:06:29.600 and people pour in, which isn't very connected to reality. 0:06:29.640 --> 0:06:31.000 It's just chasing returns. 0:06:31.360 --> 0:06:34.080 But it can also work because of what the behavioral 0:06:34.080 --> 0:06:38.520 finance people would call underreaction. News comes out that should 0:06:38.560 --> 0:06:41.880 move the price by so and so on average. We 0:06:42.000 --> 0:06:43.719 have found, I say we it's the royal we of 0:06:43.760 --> 0:06:47.320 academia and private researchers that the price moves the right direction, 0:06:47.400 --> 0:06:49.720 but doesn't move all the way. So if you trade 0:06:49.800 --> 0:06:52.479 on that, there's still a little bit to go. That's 0:06:52.480 --> 0:06:54.279 a quant thing. You wouldn't want to bet on one 0:06:54.320 --> 0:06:56.960 stock that way. But if on average that happens and 0:06:57.000 --> 0:06:59.640 you could do that through observing the price or the fundamentals, 0:07:00.040 --> 0:07:01.880 usually a little bit more to go. So it's not 0:07:02.040 --> 0:07:07.720 always irrational momentum. But here's what I observed in the 0:07:07.839 --> 0:07:10.440 very beginning of AQR. EQR launched in nineteen ninety eight, 0:07:10.840 --> 0:07:13.800 after we had a fabulous run at Goldman sacks this 0:07:13.920 --> 0:07:15.960 survivorship bias. In this you don't get to start your 0:07:15.960 --> 0:07:18.680 own billion dollar hedge fun unless you have a fabulous 0:07:18.760 --> 0:07:21.920 runner at Goldman sacks or something equivalent. We had a 0:07:21.960 --> 0:07:23.840 good first month. You know how the story is going 0:07:23.880 --> 0:07:25.440 to go when you say you had a good first month, right, 0:07:25.480 --> 0:07:27.200 And then that first month, by the way, it was 0:07:27.240 --> 0:07:30.000 August of nineteen ninety eight when the S and P 0:07:30.200 --> 0:07:33.600 was down twenty percent on the Russian debt crisis, and 0:07:33.640 --> 0:07:36.680 we're doing high fives, like we say, we're marketing neutral 0:07:37.000 --> 0:07:40.520 and we're up a little bit in a crash. And 0:07:40.640 --> 0:07:43.800 it was my first of many lessons never to high 0:07:43.800 --> 0:07:46.960 five in this business. When you fully retire and divest, 0:07:47.200 --> 0:07:48.160 you get one high five. 0:07:49.080 --> 0:07:51.080 But that the well, no, it's the end when you 0:07:51.120 --> 0:07:51.800 do the high five. 0:07:52.040 --> 0:07:55.600 I'm a kwant who is also superstitious, which if that's 0:07:55.600 --> 0:07:59.080 a contradiction, what the heck. But the next eighteen months 0:07:59.160 --> 0:08:02.240 was the crescendo the famous dot com or tech bubble, 0:08:03.040 --> 0:08:05.480 and that was not kind to us. It was particularly 0:08:05.520 --> 0:08:08.560 not kind because we decided to start with a extremely 0:08:08.600 --> 0:08:13.040 aggressive market neutral fund. So momentum helped, as you can 0:08:13.040 --> 0:08:16.240 imagine in a bubble, but value was just destroyed and 0:08:16.240 --> 0:08:18.000 that was most of the model back then. Things have 0:08:18.120 --> 0:08:21.520 really broadened out. We hit spreads between cheap and expensive. 0:08:21.560 --> 0:08:23.280 This is something we invented at the time, and now. 0:08:23.240 --> 0:08:23.960 A lot of people do. 0:08:24.480 --> 0:08:27.320 People said shortstocks on valuations go along in the cheap, 0:08:27.360 --> 0:08:31.240 short the expensive, But the very obvious question of how 0:08:31.320 --> 0:08:34.600 cheap and how expensive are they sometimes pretty tightly clustered? 0:08:34.600 --> 0:08:37.920 Are they sometimes wider? Does that mean they're better or 0:08:37.960 --> 0:08:41.320 worse going forward? Was not asked before. So we invented 0:08:41.320 --> 0:08:44.520 this measure, and the spread between cheap and expensive for 0:08:44.559 --> 0:08:48.880 fifty years had looked like a well behaved series. 0:08:48.880 --> 0:08:50.120 It moved around a fair amount. 0:08:51.040 --> 0:08:53.480 And then I'm drawing on my hand if only see 0:08:53.520 --> 0:08:55.520 the video, Yeah. 0:08:54.760 --> 0:08:57.000 I should mention this is an audio medium. 0:08:57.760 --> 0:08:59.920 And then in late ninety nine two thousand and went 0:09:00.120 --> 0:09:03.440 to just way wider than anything ever seen for fifty 0:09:03.480 --> 0:09:09.120 plus years. We also showed that historically those were better times. 0:09:09.120 --> 0:09:11.240 You never saw that before. But when it was wider 0:09:11.360 --> 0:09:13.920 or better times for value, we stuck with it. We 0:09:14.000 --> 0:09:15.800 made money round trip life was good. 0:09:16.559 --> 0:09:17.160 If you had. 0:09:17.000 --> 0:09:19.480 Asked me after the round trip, which was harrowing. You know, 0:09:19.600 --> 0:09:21.640 you know, even if we love our process, you never 0:09:21.679 --> 0:09:25.000 want to start a business with poor returns. If you 0:09:25.040 --> 0:09:26.800 ask me at the end of that, which is probably 0:09:26.800 --> 0:09:29.000 a couple of years later, two thousand and three. Do 0:09:29.040 --> 0:09:30.320 you think you're ever going to see that in your 0:09:30.360 --> 0:09:33.520 career again? No one asked, thank God, because I think 0:09:33.520 --> 0:09:35.160 it would have gotten it wrong. But I think I 0:09:35.200 --> 0:09:38.600 would have said, oh, probably not hopefully. I wouldn't say definitely. 0:09:38.880 --> 0:09:40.280 No one who does what any of us do for 0:09:40.320 --> 0:09:43.439 a living should say definitely. That's a bad word in markets. 0:09:44.040 --> 0:09:45.000 Is the favorite term. 0:09:47.720 --> 0:09:49.360 But A it was the. 0:09:49.320 --> 0:09:53.400 Craziest thing numerically in fifty plus years. B. The question 0:09:53.520 --> 0:09:56.360 presupposed is it's built in that I and people of 0:09:56.400 --> 0:09:59.720 my core will still be around right and will probably 0:09:59.720 --> 0:10:02.000 be are to in charge. So how's it going to 0:10:02.040 --> 0:10:06.120 happen again? And then it happened again even before COVID. 0:10:06.480 --> 0:10:09.480 By late twenty nineteen, that spread between cheap and expensive 0:10:09.600 --> 0:10:13.439 was approaching dot com extremes, and then it blew past it. 0:10:13.920 --> 0:10:14.480 In COVID. 0:10:14.520 --> 0:10:17.320 It went to what I in a geeky math joke 0:10:17.360 --> 0:10:19.160 that no one ever gets called one hundred and twenty 0:10:19.200 --> 0:10:22.200 fifth percentile. There is no one hundred twenty five percentile. 0:10:22.280 --> 0:10:25.000 It's just a new hundred percentile. I'm trying to convey 0:10:25.040 --> 0:10:27.840 that it went further, and we survived that one too. 0:10:28.400 --> 0:10:30.880 We suffered somewhat, and then we made more than all 0:10:30.880 --> 0:10:33.240 of it back ground trip good. Most of the time, 0:10:33.240 --> 0:10:35.280 we really don't look like value investors, by the way, 0:10:35.760 --> 0:10:38.400 only in extreme bubbles do we have seem to have 0:10:38.440 --> 0:10:38.960 that property. 0:10:39.000 --> 0:10:40.720 And I think it's smaller now than it used to be. 0:10:41.440 --> 0:10:43.200 Last five years have been quite strong for us, and 0:10:43.240 --> 0:10:45.000 it's not been a very good value market. 0:10:45.160 --> 0:10:48.120 God, there's so many questions that I have that I 0:10:48.240 --> 0:10:50.640 want to ask that are sort of embedded or related 0:10:50.679 --> 0:10:52.200 to your answer. I'm going to ask at you just 0:10:52.240 --> 0:10:56.040 like a very narrow question, sort of skip ahead into something. 0:10:56.120 --> 0:10:56.240 Though. 0:10:57.280 --> 0:11:00.320 You make this spread between the most expensive than the 0:11:00.400 --> 0:11:04.960 cheapest stocks, how much easier it is to simply compile 0:11:05.120 --> 0:11:08.840 that spread? Is it today versus the technology that you're 0:11:08.880 --> 0:11:11.320 working with when you're starting your career? 0:11:11.880 --> 0:11:14.160 For that, I got to disappoint you and say not 0:11:14.240 --> 0:11:18.120 that much. Here we had the databases. A lot of 0:11:18.320 --> 0:11:23.000 technological investment is about speed and new data sets. What 0:11:23.480 --> 0:11:27.000 quanto Alternative data is something we're very into. But the 0:11:27.040 --> 0:11:29.840 classic data if you're looking for price to sales ratios, 0:11:30.480 --> 0:11:34.040 I'm old, but we had we have telephones and Bloombergs. 0:11:34.320 --> 0:11:38.439 But that does bring us to me observing these two episodes, 0:11:39.040 --> 0:11:42.319 and I stepped back and I asked a question, what 0:11:42.360 --> 0:11:45.480 the hell happened? Why did we see something crazier than 0:11:45.520 --> 0:11:48.840 fifty years? And then why did it happen again? And 0:11:48.880 --> 0:11:51.920 that led to this paper, the less efficient market Hypothesis. 0:11:52.240 --> 0:11:54.960 I do believe that markets have shown and I think 0:11:55.000 --> 0:11:57.679 I have some good guesses as to why that they 0:11:57.720 --> 0:12:01.600 are more susceptible to bouts of crazy than they used 0:12:01.640 --> 0:12:01.800 to be. 0:12:02.080 --> 0:12:05.959 Just before going further, one quick definitional question efficient markets, 0:12:05.960 --> 0:12:09.400 because one way you could define whether market is efficient 0:12:09.679 --> 0:12:13.640 is are these securities disconnected from what you would say 0:12:13.760 --> 0:12:16.720 the net present value of the all future free cash flows. 0:12:17.120 --> 0:12:19.520 Another way that I often think about it, but I'm 0:12:19.559 --> 0:12:23.240 no kuant is are there obvious opportunities for the active 0:12:23.280 --> 0:12:24.480 manager to make money? 0:12:24.960 --> 0:12:28.120 Just for our purposes here? How do you define market efficients? 0:12:28.200 --> 0:12:31.000 Much closer to the first one, Okay, The practical question 0:12:31.080 --> 0:12:33.560 of can you make money from these is if there 0:12:33.600 --> 0:12:36.280 are big deviations from fair value? And this relates to 0:12:36.320 --> 0:12:38.920 some stuff I did in a less efficient market hypothesis. 0:12:39.600 --> 0:12:43.040 If there are big deviations the classic and you'll notice 0:12:43.080 --> 0:12:46.120 a giant caveat if you can stick with your position 0:12:46.640 --> 0:12:47.480 not a small thing. 0:12:48.080 --> 0:12:48.920 You will make money. 0:12:49.200 --> 0:12:51.520 There are opportunities, and in fact, I think a less 0:12:51.520 --> 0:12:55.040 efficient market in that sense, in your present value sense, 0:12:55.480 --> 0:12:59.200 almost has to deliver bigger opportunities for people who can 0:12:59.360 --> 0:13:02.120 stick with it. It also makes it considerably harder to 0:13:02.120 --> 0:13:04.839 stick with because the extremes you have to live through 0:13:05.360 --> 0:13:07.720 and the length of time those extremes can go on. 0:13:07.840 --> 0:13:10.520 For one thing, that I'm dying for an academic to 0:13:10.520 --> 0:13:11.960 take me up on this. I'm too old to do 0:13:12.000 --> 0:13:14.360 the math on this, but I've never seen a model 0:13:15.040 --> 0:13:19.480 that looks at pain, disutility, the negative of losing money 0:13:19.920 --> 0:13:22.280 in terms of how long you've lost money for, not 0:13:22.360 --> 0:13:26.440 just magnitude. Right, And in real life, I can tell 0:13:26.440 --> 0:13:30.320 you a drawdown that is one and a half times bigger, 0:13:30.679 --> 0:13:34.800 but with six months instead of three years, is ridiculously 0:13:34.880 --> 0:13:39.800 easier to live through. So the bigger disconnect from reality. Again, 0:13:39.840 --> 0:13:41.520 I haven't even told you why I think it's going on, 0:13:42.200 --> 0:13:44.920 But if I'm right that we have these bouts of it, 0:13:44.920 --> 0:13:47.080 it's not necessarily every day things are crazy, but these 0:13:47.120 --> 0:13:50.000 bouts of it is a two edged sword. It's a 0:13:50.000 --> 0:13:52.560 bigger opportunity for people who can stick with it, and 0:13:52.600 --> 0:13:55.320 it's harder to do, and I find that not that 0:13:55.360 --> 0:13:57.960 what I think is fair is particularly relevant. But I 0:13:58.000 --> 0:14:01.240 find that really fair harder to do, but more lucrative 0:14:01.320 --> 0:14:03.480 if you can do it. I don't think the efficient 0:14:03.559 --> 0:14:07.520 market idea of buying what is fundamentally mismatched against its 0:14:07.520 --> 0:14:11.200 future cash flows adjusted for as risk forecasting those cash 0:14:11.200 --> 0:14:13.880 flows what risk really means? We still have some open 0:14:13.920 --> 0:14:16.320 issues there. Yeah, but I don't think that will ever 0:14:16.600 --> 0:14:20.600 go away unless markets are perfectly efficient. But how easy 0:14:20.640 --> 0:14:22.880 it is to identify and how easy it is to 0:14:22.880 --> 0:14:26.320 stick with. I think crazy markets make it easier to 0:14:26.360 --> 0:14:29.040 identify what to do and harder. 0:14:28.760 --> 0:14:29.520 To deal like that. 0:14:30.120 --> 0:14:31.600 I do want to ask you why you think this 0:14:31.680 --> 0:14:33.840 is happening, but before we do, this is a very 0:14:33.840 --> 0:14:36.680 basic question. But sometimes the basic questions are the most interesting. 0:14:36.720 --> 0:14:39.480 But when you say it's painful to try to stay 0:14:39.560 --> 0:14:44.640 rational during these bouts of irrationality, why is that exactly? 0:14:44.720 --> 0:14:46.720 Because I get that there are funding costs. I get 0:14:46.760 --> 0:14:48.560 that there are carrying costs. But on the other hand, 0:14:48.600 --> 0:14:51.200 you're a big hedge fund with deep pockets. This is 0:14:51.240 --> 0:14:54.520 presumably what investors are paying you to do. Is it 0:14:54.680 --> 0:14:58.400 just the emotional trauma or stress of having to explain 0:14:58.440 --> 0:15:01.640 to everyone why you're making the position that you have 0:15:01.960 --> 0:15:03.440 when it's not paying off yet. 0:15:04.000 --> 0:15:05.040 That is a big part of it. 0:15:05.640 --> 0:15:07.160 I have a running fight with one of my co 0:15:07.240 --> 0:15:10.960 founders who never gets upset. I'm always upset, but I'm 0:15:10.960 --> 0:15:12.280 more upset when we're losing money. 0:15:12.320 --> 0:15:14.440 This is sort of our dynamic. I have to I 0:15:14.440 --> 0:15:15.680 get more upset than Joj. 0:15:15.600 --> 0:15:18.240 Hunhes where He'll come in my office during a bad 0:15:18.280 --> 0:15:20.320 period and I'll be upset. 0:15:20.480 --> 0:15:22.560 It'll be a bad day in a bad period. He's like, 0:15:22.600 --> 0:15:23.320 why are you upset? 0:15:23.680 --> 0:15:26.240 And I'm like, well, cause people are yelling at us 0:15:26.280 --> 0:15:29.880 and I were losing money. And he's like, but you're 0:15:29.880 --> 0:15:30.880 pretty sure. 0:15:30.800 --> 0:15:32.960 We're going to win, right. I'm like yeah. 0:15:33.000 --> 0:15:34.480 He's like, and you have all your own money and 0:15:34.480 --> 0:15:36.960 your kids money in this right, so you're not doing 0:15:36.960 --> 0:15:37.640 anything different. 0:15:37.720 --> 0:15:40.080 You wouldn't do that if you weren't. I'm like yeah, 0:15:40.160 --> 0:15:42.880 He's like, so we're gonna win. It's just a question 0:15:42.920 --> 0:15:44.920 of when why do you care? And I look at 0:15:44.960 --> 0:15:46.640 him like he's from Mars and go, why do you 0:15:46.720 --> 0:15:47.200 not care? 0:15:47.600 --> 0:15:50.200 And we finally figured out it's kind of obvious that 0:15:50.280 --> 0:15:51.920 I talk to clients a lot more than he does. 0:15:53.240 --> 0:15:55.440 It's a lot easier to have that attitude when you're 0:15:55.480 --> 0:15:57.880 just sitting in your office. Also, we are not immune 0:15:57.880 --> 0:16:00.480 from this. Even if people love you and think you've 0:16:00.520 --> 0:16:02.720 done well for twenty five years, you have a bad 0:16:03.080 --> 0:16:06.760 two years, you get redemptions, and sometimes they're of serious size. 0:16:07.160 --> 0:16:10.600 We fell by like half over about three years, and 0:16:10.640 --> 0:16:12.960 that's not fun. You have to shrink your firm, you 0:16:13.000 --> 0:16:15.560 have to let some people you love go, so there 0:16:15.640 --> 0:16:18.360 is some real pain that goes with it. That period 0:16:18.400 --> 0:16:22.160 did not shake my confidence in the actual investment process. 0:16:22.720 --> 0:16:24.440 I feel bad. I think I did better than our 0:16:24.440 --> 0:16:27.040 investors because I kept adding and saying, take the ball 0:16:27.160 --> 0:16:29.560 up on what I do. Not everyone can do that, 0:16:29.600 --> 0:16:31.880 and I know more than they know. Not in a 0:16:31.920 --> 0:16:34.440 weird insider sense and just a I should be more 0:16:34.440 --> 0:16:37.560 confident in my own process than anyone else's. But it 0:16:37.640 --> 0:16:41.320 is excruciating the amount. I remember someone I admire tremendously, 0:16:41.360 --> 0:16:44.880 when Stan Druckenmeller retired to run his own money. He's 0:16:44.920 --> 0:16:47.840 still very active in markets. I think he wrote a 0:16:47.880 --> 0:16:51.520 note that resonated with me because I forget the exact details, 0:16:51.560 --> 0:16:54.120 but the essence was, it's too painful and too upsetting 0:16:54.120 --> 0:16:57.120 to run client money. The man never had a down year, 0:16:58.280 --> 0:17:01.440 and I'm like, if Stan can't take it, those of 0:17:01.520 --> 0:17:03.080 us and we've had a lot more up years than 0:17:03.120 --> 0:17:04.879 down years and life's been good, or I won't be 0:17:04.880 --> 0:17:08.080 sitting here. But we've had never three but two plus 0:17:08.200 --> 0:17:11.240 years of pain, and I'm like, Stan can't take it. Man, 0:17:11.800 --> 0:17:14.600 this is harder to do than it looks like. 0:17:14.760 --> 0:17:15.600 The whole world. 0:17:15.440 --> 0:17:17.959 Thinks you stupid when you losing money, no matter what 0:17:18.000 --> 0:17:19.840 you can point to, no matter what evidence you can 0:17:19.880 --> 0:17:21.920 point to, I should say, the whole world. 0:17:21.960 --> 0:17:25.040 Your mom still likes you, but a lot of your 0:17:25.040 --> 0:17:27.040 world and no, a lot of investors stuck with us, 0:17:27.080 --> 0:17:29.600 and I love them for it. But you do lose 0:17:29.640 --> 0:17:31.119 a lot of people. So it's not fun for a 0:17:31.119 --> 0:17:32.120 business to go through that. 0:17:32.400 --> 0:17:36.840 Intuitively, though, it's to your point measuring the disutility of 0:17:37.080 --> 0:17:41.359 long draw downs versus deep draw downs, this must be 0:17:41.440 --> 0:17:44.280 a very acute thing for anyone who's not just managing 0:17:44.320 --> 0:17:47.400 their own personal portfolio. For the reason that you've just described. 0:17:47.480 --> 0:17:49.760 Yeah, I've talked about this with other money managers, this 0:17:49.880 --> 0:17:53.080 idea of length versus severity. Yeah, and I've never had 0:17:53.119 --> 0:17:55.800 one who's not like, yeah, length is much worse. 0:17:56.080 --> 0:17:57.760 Well. One of the things is when. 0:17:57.560 --> 0:18:02.320 Something goes on, it's often a similar story for two 0:18:02.359 --> 0:18:05.240 and a quarter years. Right, So you go back after 0:18:05.320 --> 0:18:10.000 six months where rationality is getting absolutely punished. You get 0:18:10.000 --> 0:18:11.880 a lot of sympathy from people. You show them look 0:18:11.960 --> 0:18:15.439 bigger bargains, We're right, we're gonna be right. You go 0:18:15.520 --> 0:18:17.560 back six months. 0:18:17.320 --> 0:18:20.160 Later, they're like, Okay, you go back. 0:18:20.320 --> 0:18:22.720