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Speaker 1: Hello, and welcome to What Goes Up a weekly markets podcast.

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Speaker 1: My name is Mike Reagan. I'm a senior editor at Bloomberg,

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Speaker 1: and I'm gonna hire a cross acid reporter with Bloomberg

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Speaker 1: this week on the show. Well, we've all heard it

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Speaker 1: a million times. Stocks got really expensive in the post

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Speaker 1: financial crisis Bowl market, especially when you look at cyclically

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Speaker 1: adjusted valuation metrics that include corporate earnings over the past decade.

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Speaker 1: But what exactly should we do with that information. We'll

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Speaker 1: get into it with the founder of an investment management

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Speaker 1: firm that focuses on dynamic index investing, and he's done

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Speaker 1: on some really interesting research into exactly that topic. But first,

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Speaker 1: vill Donna, I need to know, uh, now that the

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Speaker 1: Buffalo Bills are out of it, who a you're rooting

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Speaker 1: for on Sunday in the Super Bowl? Well, I'm I'm

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Speaker 1: rooting for are the Bengals because they're like, yeah, of

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Speaker 1: course you have to root for them, like they're the underdog.

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Speaker 1: Maybe I heard a rumor you had a lot of

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Speaker 1: money riding on the rams though, is that true? I

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Speaker 1: have a whole twenty dollars riding on the rams. But

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Speaker 1: remember last podcast we talked about how I'm so bad

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Speaker 1: at predicting who's going to win, and I just go

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Speaker 1: by intuition. Yeah, that's why I'm betting on the Rams,

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Speaker 1: because that means that the Bengals will win. It's your

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Speaker 1: kind and then if if they lose, you, you win bucks.

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Speaker 1: You kind of hedged. It's like a good hedge. Yeah,

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Speaker 1: and I think I win like a hundred bucks or something. Yeah, something,

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Speaker 1: some one of those new you know, FanDuel Draftking type

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Speaker 1: of things that are legal in New York. Now, one

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Speaker 1: of those one of those type of things. Okay, But

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Speaker 1: because because because I'm I'm betting on l A, it

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Speaker 1: means that the Bengals will win. It's it's an official app.

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Speaker 1: You're not with a buckie name Lefty somewhere and uh,

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Speaker 1: all right, fair enough. Well, I'm super excited for this

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Speaker 1: week's guy. It's just a fascinating career on Wall Street.

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Speaker 1: So let's get into it. I I'd love for you

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Speaker 1: to introduce him. What do we know about this guy?

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Speaker 1: I am too, I'm I'm really happy that he can

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Speaker 1: join us. His name is Victor Hagani. He's the founder

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Speaker 1: and CIO of ELM Wealth, and he is talking to

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Speaker 1: us from Wyoming. So thank you so much for joining

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Speaker 1: us this week. Thank you great to be on the show. Yeah,

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Speaker 1: thanks Victor. This might be our first Wyoming based guests.

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Speaker 1: I don't know if we've had anyone in Jackson Hall.

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Speaker 1: Very very exciting, but Victor, Victor, like I said, what

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Speaker 1: a really fascinating career. Um, I feel like you've sort

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Speaker 1: of lived through some of my favorite finance books. You know,

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Speaker 1: you were at Solomon Brothers in the liars poker years.

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Speaker 1: You went on to a long term capital management during

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Speaker 1: the one Genius failed era. What a trip, and now

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Speaker 1: without partners. Just give us sort of a synopsis of

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Speaker 1: your career. I mean, I feel like you sort of

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Speaker 1: took the long scenic route into index investing if if

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Speaker 1: that's a right way to phrase it it. Just give

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Speaker 1: us sort of the brief highlights of your career from

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Speaker 1: from Solomon's where we are now. Sure thing. Yeah, I

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Speaker 1: think that's a good description along scenic route. Although you know,

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Speaker 1: studying finance at university, you know we're kind of taught

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Speaker 1: that owning the market portfolio is the right reference point

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Speaker 1: to start with. Anyway, I went to the London School

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Speaker 1: of Economics and after that I got a job at

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Speaker 1: Solomon Brothers and bond portfolio Analysis, the group led by

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Speaker 1: Marty Lebowitz, and I worked for Bob Coprash. Eventually I

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Speaker 1: was invited to join a trading group out on the

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Speaker 1: trading floor, John Merryweather's Government arbitrage group. I worked there,

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Speaker 1: and when John and some of my partners from the

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Speaker 1: arbitrage desk went to set up l t c M,

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Speaker 1: it was right around when I was getting married, So

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Speaker 1: I got back from my honeymoon and left Solomon and

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Speaker 1: joined ltc M and stayed at lt CM through and

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Speaker 1: stayed beyond that to both the help liquid a all

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Speaker 1: of the positions that the consortium of banks took over,

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Speaker 1: and then to help with my partners founding a successor

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Speaker 1: firm that kept some of the positions and tried to

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Speaker 1: continue doing relative value trading in a sort of updated manner.

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Speaker 1: And since about two thousand or two thousand and one,

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Speaker 1: starting at that time, I took a long sabbatical of

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Speaker 1: about ten years and spent a lot of time with

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Speaker 1: my family, my young three children, and and did a

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Speaker 1: lot of thinking and researching and catching up on different things.

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Speaker 1: And and then eventually in two thousand and eleven, I

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Speaker 1: started ELM Wealth, which is a wealth management firm that

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Speaker 1: tries to help people with low cost, diversified investing. And

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Speaker 1: it was really based on how my own approach to

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Speaker 1: investing had evolved after the Solomon and LTCM years and

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Speaker 1: the beginning of my sabbatical years, when I was investing

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Speaker 1: in hedge funds and private equity, and I kind of

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Speaker 1: decided to really get back to basics and to get

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Speaker 1: my family's savings invested in index funds as the main vehicle.

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Speaker 1: And I realized that that that decision was really the

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Speaker 1: beginning of a number of decisions that needed to get made.

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Speaker 1: That it wasn't enough to just say I'm gonna index,

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Speaker 1: you know, you needed to decide, well, how much equities

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Speaker 1: do I want, and how much US and non US,

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Speaker 1: an emerging market and all these different things, and and

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Speaker 1: you know, I realized that people needed help with putting

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Speaker 1: their portfolios together, but that it should be very very

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Speaker 1: low cost. It should be a very low cost product.

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Speaker 1: And so that was really how ELM Wealth started back then,

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Speaker 1: with a bunch of my colleagues being the first clients.

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Speaker 1: And you know, now after ten years, we have about

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Speaker 1: one and a half billion of assets and three hundred

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Speaker 1: clients that are are investing family and you know it's great, Well,

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Speaker 1: well one part I'll throw in. Their Alum has my

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Speaker 1: favorite investment company website ever, because not only can you

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Speaker 1: read a lot of good writings from Victor, but it's

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Speaker 1: got a game on there where you flip a coin

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Speaker 1: and the coin has a sixty probability of being heads

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Speaker 1: each time, and you start with twenty dollars. You get

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Speaker 1: ten minutes to flip the coin as many times as

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Speaker 1: you can and bet as much as you want of

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Speaker 1: your bounce. Victor, I was up to like ten grand

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Speaker 1: on that thing by the end of my ten minutes.

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Speaker 1: I assume you pay out on that, right. We did

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Speaker 1: pay out on that we you know, originally that's what

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Speaker 1: we did. We did it for real money with quantitatively

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Speaker 1: trained mostly young people that were either you know, in

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Speaker 1: university or in uh Wall Street firms, and we did

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Speaker 1: give them to start and we paid them out real

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Speaker 1: money based on their winnings after half an hour and

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Speaker 1: we and if they got we we were gonna we

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Speaker 1: had a maximum pay out and so if you got

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Speaker 1: close to that, we would say you're close to the

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Speaker 1: maximum payout of two fifty you know, you might want

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Speaker 1: to bet accordingly, you know, sort of into the end.

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Speaker 1: So we didn't pay anybody ten thousand, but we paid

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Speaker 1: a bunch two fifty dollars. And it was an amazing experiment,

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Speaker 1: and it really got us thinking that there's not enough

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Speaker 1: said about investment sizing right. I mean that everything that

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Speaker 1: we hear about in the media and so on is

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Speaker 1: about what to invest in, what's going up, um, what's

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Speaker 1: going down, what's going sideways. But we need to get

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Speaker 1: the investment sizing decision right to In fact, you know,

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Speaker 1: if you think about those two decisions, if I get

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Speaker 1: the choice of investments wrong, but my investment sizing right,

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Speaker 1: I'm gonna be okay. I mean, I'm not gonna be happy,

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Speaker 1: I'm gonna lose money, but I'm gonna be okay. If

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Speaker 1: I get the investment choice right, I choose the right

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Speaker 1: things to invest in, but I get the size wrong

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Speaker 1: on bust. And you know, in some ways that's the

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Speaker 1: story of LTCM, because you know, when we went down

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Speaker 1: plus percent, there was a broad feeling that the investments

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Speaker 1: that we had in the portfolio were good investments, and

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Speaker 1: that was born out over the subsequent few years when

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Speaker 1: most of those investments, you know, bounced back to being

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Speaker 1: good investments. But we had the size wrong. And so

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Speaker 1: even though we had good investments, you know that when

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Speaker 1: you have the sage on. So think about the U

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Speaker 1: S stock market. I mean the last hundred and twenty years,

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Speaker 1: the U S stock market, I don't know, has gone

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Speaker 1: up nine let's call it nine percent a year. Right,

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Speaker 1: So let's say you know you're sitting there a hundred

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Speaker 1: and twenty years ago, and you knew that it was

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Speaker 1: going to go up by nine percent a year. Well,

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Speaker 1: if you were greedy, you might say, oh my goodness,

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Speaker 1: you know, I want to really get rich. So you

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Speaker 1: might have wanted to own as much of it as

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Speaker 1: you could. Let's say that you were leveraged three x

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Speaker 1: or something like that. And if you were and if

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Speaker 1: you kept yourself leveraged at three x, there were a

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Speaker 1: couple of times when you would have actually gone bust

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Speaker 1: or I don't know, three or three and a half

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Speaker 1: x something, depending depending on exactly how often you were

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Speaker 1: rebalancing your portfolio. But there was a certain amount of leverage.

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Speaker 1: Even though it's like the best investment ever, you would

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Speaker 1: have lost all your money and you would be bust today.

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Speaker 1: But if you invested, you know, the right size in it,

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Speaker 1: you would have whatever was a forty x or something,

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Speaker 1: uh from then until now, or it's a it's a

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Speaker 1: fascinating point and that the questions at the end of

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Speaker 1: the game were I think even trickier. And and now

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Speaker 1: I get it. I kind of got it. I thought

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Speaker 1: it was more about risk tolerance, but sort of same

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Speaker 1: same side to two different sides of the same coin,

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Speaker 1: I guess. But I almost busted out on the first flip.

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Speaker 1: I think I bet twentys on the first flip, so

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Speaker 1: I am almost busted out, but at with ltcm of course.

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Speaker 1: And it's it's the size in two different ways, the

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Speaker 1: size relative to how big the market was too. I guess.

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Speaker 1: You know, you guys were sort of the original whale

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Speaker 1: as they as they say, uh these days, I guess yeah.

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Speaker 1: I think in some of some of the positions, you

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Speaker 1: know that they were positions that people were worried about

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Speaker 1: what the impact would be when liquidation, when and if

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Speaker 1: liquidation was going to happen. That's right, And Victor Mike

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Speaker 1: is right in that your website has so much research

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Speaker 1: on it, so and I tried to read a bunch

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Speaker 1: of it, so I might be mixing some things up here,

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Speaker 1: but correct me from wrong. I think you wrote a

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Speaker 1: piece for Bloomberg last year and you said huge gains

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Speaker 1: and things like Tesla, and I just checked because I

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Speaker 1: put really behind me and I couldn't remember if seven

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Speaker 1: was its actual gain for But you had said that

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Speaker 1: that that games like that is sending the wrong message

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Speaker 1: to individual investors, and so I wanted to ask you

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Speaker 1: and the research that or the game that Mike just mentioned,

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Speaker 1: I think was also part of that article that you wrote,

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Speaker 1: But so I wanted to ask you about that and

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Speaker 1: also the sell off that we're seeing in some of

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Speaker 1: those names now, especially in some of the meme stocks,

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Speaker 1: or any of those names that had run up just

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Speaker 1: so so much over the last two years. Yes, I

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Speaker 1: mean the you know, it's all it's all related to

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Speaker 1: each other. I mean the the coin flip game, you know,

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Speaker 1: really helps us to think about sizing in a you know,

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Speaker 1: sort of on a blank slate, because you know, when

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Speaker 1: you're thinking about how much should I have in the

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Speaker 1: stock market, well you might say I should have or

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Speaker 1: so it's kind of like almost within a range to

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Speaker 1: begin with. But when you've got this coin that you're flipping,

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Speaker 1: and you could put all of your money onto one flip,

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Speaker 1: then um, you know it's it's it's more of a

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Speaker 1: blank slate with the full opportunity to to do well

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Speaker 1: or to hurt yourself based on sizing. The main message

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Speaker 1: of the whole thing is that when you're trying to

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Speaker 1: figure out how much you should bet on something that's good,

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Speaker 1: how much you should invest on something that you believe

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Speaker 1: is good, that the objective is not to make as

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Speaker 1: much money as possible. The objective needs to be to

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Speaker 1: maximize your utility. And and I know, you know, going

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Speaker 1: this is now taking us into an economics course or whatever,

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Speaker 1: but it's not. I mean, it's just that the more

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Speaker 1: money we have, the less that it's improving our welfare

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Speaker 1: at the margin. Right, So, um, there's this. You know,

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Speaker 1: there's a curve that would be a concave curve. That's

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Speaker 1: as our wealth goes up, our happiness or our utility

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Speaker 1: is going up, but it's going up more slowly. And

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Speaker 1: this is what makes us makes normal people risk averse

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Speaker 1: that word kind of self regulating. The more that we

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Speaker 1: have of something, the less we want that additional unit

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Speaker 1: of it. And so winning is good. We want to win,

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Speaker 1: but losing is kind of worse than winning. And this

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Speaker 1: is a classical economic idea. It's not uh, it's it's

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Speaker 1: not from behavioral finance or anything like that. I mean,

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Speaker 1: that is why we are and should be risk averse.

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Speaker 1: And it's an idea. You know, it's been around for

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Speaker 1: hundreds of years, so you know, so when you see

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Speaker 1: people that are going all in on things that are

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Speaker 1: super risky, it really is hard to make sense of that.

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Speaker 1: You know, based on a typical or a sensible set

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Speaker 1: of preferences with regard to risk aversion. And you know,

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Speaker 1: the more attractive that something is, the more you should

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Speaker 1: want to have of it. Right, So if if in

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Speaker 1: the coin flip game, if we had made the coin

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Speaker 1: seventy instead of a sixty forty coin, you should have

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Speaker 1: wanted to bet more on each flip. Then if you know,

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Speaker 1: then then if we're sixty forty, if the stock market

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Speaker 1: is offering higher expected returns relative to the safe asset

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Speaker 1: that you would be invested in if you weren't invested

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Speaker 1: in the stock market, then you should own more of

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Speaker 1: the stock market. But sometimes people just get a little

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Speaker 1: carried away and are taking on so much risk that

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Speaker 1: that the probability that they will lose money gets to

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Speaker 1: be very high, even though they're expected gain in monetary

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Speaker 1: terms is very high. But they're doing something which is not,

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Speaker 1: you know, necessarily in their best interests. Of course, we

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Speaker 1: can always say whatever somebody does, by definition is in

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Speaker 1: their best interest. But I think that we can sometimes

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Speaker 1: talk to people about a framework and they might look

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Speaker 1: at things differently and change what they think is in

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Speaker 1: their best interest. In fact, I wanted to get back

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Speaker 1: to that UH what I talked about in the introduction

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Speaker 1: there this paper you and your colleagues have out about tape.

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Speaker 1: You know, the cyclically adjusted price earnings or if you

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Speaker 1: prefer the inverseity cyclically adjusted UH earnings yield. You know,

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Speaker 1: all the research shows that, you know, if the PE

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Speaker 1: starts getting higher and higher, your future return expected returns

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Speaker 1: get lower and lower. Your research showed is that UM

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Speaker 1: trying to allocate along those lines doesn't seem to work

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Speaker 1: on a sort of simplified level, that that you sort

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Speaker 1: of a static allocation through all the valuations would would

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Speaker 1: have done better. UM can correct me if I'm bungling

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Speaker 1: the the research there, but but then you took a

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Speaker 1: step further to figure out, well, how how should we

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Speaker 1: be using sickly cyclically adjusted valuation measures like this? So

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Speaker 1: so walk us through that paper and what the main

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Speaker 1: findings are. We we haven't we haven't published it yet,

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Speaker 1: but it's forth it's forthcoming. We've been getting comments from

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Speaker 1: friends and some academics, and that's what you said, is

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Speaker 1: exactly right. That first of all, CAPE or it's a

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Speaker 1: little it's even nicer. Rather than thinking about the price

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Speaker 1: to earnings ratio, it's nicer think about it as the

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Speaker 1: earnings yield, which is just one over CAPE. And the

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Speaker 1: earnings yield is a decent you know, it's not perfect,

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Speaker 1: but it's a decent predictor of the long term real

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Speaker 1: return after inflation, that that you should expect to earn

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Speaker 1: from owning a diversified portfolio of equities. And that is

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Speaker 1: the case. You know that that predictive power has been

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Speaker 1: uh there for the last hundred and twenty years in

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Speaker 1: the US, and it's also existed in non US markets,

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Speaker 1: and it just makes logical sense. It's based on the

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Speaker 1: idea that a company, if a company paid out all

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Speaker 1: of its earnings every year to its investors that it

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Speaker 1: could keep its earnings level with inflation and paying out

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Speaker 1: all of its earnings. If it doesn't pay out all

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Speaker 1: of its earnings and keep some of them as retained earnings,

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Speaker 1: it can actually grow its earnings faster than inflation. You know.

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Speaker 1: So it's just but the basic model is just saying, well,

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Speaker 1: if it paid out all its earnings, could it keep

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Speaker 1: up with inflation? And you know that's the underlying idea

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Speaker 1: and why it seems to be the case. So when

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Speaker 1: we look at the last hundred and twenty years, we see, wow,

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Speaker 1: when the earning zeald was around four oh, the next

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Speaker 1: ten or twenty years, equities delivered about a four percent

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Speaker 1: return over inflation when the pe was sorry, when the

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Speaker 1: earning zield was seven and a half percent. You know,

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Speaker 1: on average, you got around a seven and a half

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Speaker 1: percent real return above inflation from holding equities for a

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Speaker 1: long time. So you would say that's wonderful. So now

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Speaker 1: all I need to do is just own more equities

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Speaker 1: when they're going to give a higher return, own less

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Speaker 1: equities when they're gonna give a lower return. And I'm

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Speaker 1: gonna do better than somebody that just does a static

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Speaker 1: allocation of always being say sixty percent in equities in

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Speaker 1: thirty five percent and say treasury build and you would

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Speaker 1: think that that is what you would find. But when

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Speaker 1: you run the numbers, you don't find that. I mean

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Speaker 1: you you find that over the last hundred and twenty

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Speaker 1: years that that extra information from the earning zeald didn't

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Speaker 1: help you. And in fact, over the last twenty years

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Speaker 1: it's been really terrible. It would have had you very

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Speaker 1: underweight equities because the earnings yield has been relatively low.

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Speaker 1: I mean today the US earnings yield is in the

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Speaker 1: percentile of bad, and so you would not want to

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Speaker 1: own very many equities today based on that rule. But

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Speaker 1: what's happening is it's missing the it's missing a critical component.

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Speaker 1: What is it that you should be investing in if

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Speaker 1: you're not investing in equities or what should you compare

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Speaker 1: those equities too? Well, you might say I'm going to

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Speaker 1: compare it to bills because I'm either going to be

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Speaker 1: in bills or I'm gonna be in uh in equities. Well,

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Speaker 1: if you're going to do that, then you need to

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Speaker 1: think about what's the expected real return of owning bills.

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Speaker 1: You can't just say I'm gonna own this based on

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Speaker 1: its expected return, or I'm just gonna own that without

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Speaker 1: thinking about his expected return. And really what we should

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Speaker 1: be comparing is more apples to apples. You know, either

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Speaker 1: equities that hopefully we'll deliver this long term real return

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Speaker 1: including a premium for the risk we're taking, or something

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Speaker 1: else that gives us a safe, long term real return.

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Speaker 1: And that thing exists, and it's tips. It's it's US

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Speaker 1: inflation protected bonds called TIPS, and they've been around since

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Speaker 1: Unfortunately they haven't been around for a hundred and twenty years.

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Speaker 1: If they had been, I'm sure that the research that

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Speaker 1: we've done in the understanding of this would be just

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Speaker 1: second nature to everybody. But TIPS is still a little

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Speaker 1: bit of a weird little corner, you know, like a

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Speaker 1: lot of people haven't even heard of them exactly. Or

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Speaker 1: it's like or those those I bonds that you can

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Speaker 1: buy at the post office. So what we did in

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Speaker 1: our research, as we said, well, what if now we

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Speaker 1: did this apples to apples investment program where you were

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Speaker 1: either invested in equities or in tips, depending on the

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Speaker 1: spread in expected return between the two. So let's take

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Speaker 1: the earnings yield of equities minus the yield the real

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Speaker 1: yield on tips, and we'll call that the excess expected

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Speaker 1: return on on equities or the excess earnings yield. And

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Speaker 1: let's do our allocation according to that, and will either

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Speaker 1: be in equities or will be in tips, depending on

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Speaker 1: how attractive that is. So back in, for instance, amazingly

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Speaker 1: and partly this is because the U S tips market

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Speaker 1: was so young. Tips were yielding four four percent above

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Speaker 1: inflation and US equities back then it was sort of

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Speaker 1: a pretty uh builliant time for equities. The earnings yield

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Speaker 1: was around four percent. Why would you want to own

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Speaker 1: equities if they're expected long term return it's four percent,

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Speaker 1: But you could buy tips and get four percent. Well,

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Speaker 1: there might be some reason is to own a little

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Speaker 1: bit of equities, but you wouldn't want to own a lot.

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Speaker 1: And sure enough, that was a really good decision ex post.

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Speaker 1: But it made sense. It's not just it's not a

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Speaker 1: cherry picking thing. Just makes sense. Right. And over the

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Speaker 1: last few years, right, tips have been negative, I mean,

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Speaker 1: which is really weird, etcetera. But you know, in the

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Speaker 1: real interest rate has been negative because inflation has been

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Speaker 1: relatively high and expected to be high compared to what

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Speaker 1: we can get on on treasuries. And so even though

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Speaker 1: the earnings yield has been really low, uh, the spread

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Speaker 1: between the earnings yield and tips has been pretty high.

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Speaker 1: And so it made sense on that basis to continue

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Speaker 1: to own a healthy amount of equities. And so then

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Speaker 1: you say, well, okay, you know that's just that's really

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Speaker 1: a short time. What twenty five years, I mean, that's

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Speaker 1: a really short time, and it's is super short when

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Speaker 1: you're thinking about this stuff. So we said, well, what

385
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Speaker 1: would it look like if we went back to Well,

386
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Speaker 1: there's no tips, So we said, well, can we try

387
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Speaker 1: to make believe, you know, figure out what Tips might

388
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Speaker 1: have been trading at going back? And so in our

389
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Speaker 1: research paper, we we did that. You know, it's far

390
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Speaker 1: from perfect. I mean, who knows where they would have traded,

391
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Speaker 1: but we've made some guesses based on the information that

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Speaker 1: existed at each moment in time going back. And then

393
00:22:18,800 --> 00:22:21,199
Speaker 1: we ran the analysis all the way back and you know,

394
00:22:21,359 --> 00:22:25,640
Speaker 1: just as from until today it was a good way

395
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Speaker 1: to invest your money, it was also good from hundred

396
00:22:29,880 --> 00:22:33,919
Speaker 1: to So that's really the research paper and a nutshell,

397
00:22:33,960 --> 00:22:36,520
Speaker 1: and it's really just based on this idea that the

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Speaker 1: high all else equal, the more you expect to earn

399
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Speaker 1: relative to your safe asset, the more exposure to take.

400
00:22:42,480 --> 00:22:45,000
Speaker 1: And is right back to the the whole coin flipping,

401
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Speaker 1: the whole coin flipping exercise as well thell doanta. Every

402
00:22:49,320 --> 00:22:52,439
Speaker 1: time Victor said, going back a twenty years, I was

403
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Speaker 1: bracing for you to make a joke about you were

404
00:22:55,000 --> 00:22:57,199
Speaker 1: thinking about your child, that's what. Yeah, that's when I

405
00:22:57,200 --> 00:22:59,920
Speaker 1: was in high school or something. Yeah, but Victor, I

406
00:23:00,119 --> 00:23:03,080
Speaker 1: could bottom line all that, Um, it sounds to me

407
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Speaker 1: that with real yield still negative, it still makes sense

408
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Speaker 1: to be sort of, you know, aggressively exposed to stocks.

409
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Speaker 1: Is that is it as imposed that? Yes, I think

410
00:23:13,480 --> 00:23:17,159
Speaker 1: it is. Yeah. And and non US equities, um, you know,

411
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Speaker 1: are are offering much higher have a much higher cyclically

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Speaker 1: adjusted earning zeal than US equities. I mean that's a

413
00:23:24,359 --> 00:23:29,359
Speaker 1: really interesting topic, worthy of its own long conversation. But

414
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Speaker 1: so global equities are even more attractive than just US equities,

415
00:23:34,840 --> 00:23:38,480
Speaker 1: So the whole world combined is even more attractive. And yes,

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Speaker 1: you know that that the excess expected return is UH

417
00:23:43,040 --> 00:23:45,840
Speaker 1: is pretty nice. You know, it's it's it's healthy. I mean,

418
00:23:46,080 --> 00:23:48,639
Speaker 1: it's it's really healthy. I mean, get an extra getting

419
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Speaker 1: an extra five percent for taking equity market risk feels okay,

420
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Speaker 1: you know, I mean, you know these are imperfect estimates.

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Speaker 1: You know, the earnings. The one thing you know that

422
00:23:59,119 --> 00:24:02,040
Speaker 1: is not going to have up been is uh, the

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Speaker 1: you're gonna earn five percent. You know that's not gonna happen.

424
00:24:05,160 --> 00:24:09,200
Speaker 1: You're gonna earn six three, you know something. But you

425
00:24:09,280 --> 00:24:11,360
Speaker 1: know that's our expectation, and we have to make our

426
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Speaker 1: decisions based on, uh, you know, the expectations based on

427
00:24:15,400 --> 00:24:19,280
Speaker 1: the distribution of outcomes, and you know that summary statistic

428
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Speaker 1: is useful in combination with the risk. So Victor, obviously,

429
00:24:22,960 --> 00:24:24,879
Speaker 1: I've been talking to a lot of people about the

430
00:24:24,960 --> 00:24:28,600
Speaker 1: recent valuation reset that we've had since the start of

431
00:24:28,600 --> 00:24:30,359
Speaker 1: the year. So I wanted to ask you how you're

432
00:24:30,400 --> 00:24:34,359
Speaker 1: thinking about the about a volatility that we've seen, especially

433
00:24:34,680 --> 00:24:37,600
Speaker 1: when we have some people comparing, you know, making comparisons

434
00:24:37,680 --> 00:24:42,000
Speaker 1: to two thousand eight or two thousand Well, you know,

435
00:24:42,080 --> 00:24:45,800
Speaker 1: our perspective is to look at the broad market, and

436
00:24:46,520 --> 00:24:50,439
Speaker 1: you know, the broad equity market, uh, globally and the

437
00:24:50,560 --> 00:24:54,679
Speaker 1: US have been more volatile than they had been for

438
00:24:54,840 --> 00:24:57,399
Speaker 1: much of the second half of two thousand and twenty

439
00:24:57,400 --> 00:25:00,520
Speaker 1: one and more volatile than they are, say, on average.

440
00:25:01,440 --> 00:25:05,560
Speaker 1: But the performance in January, um, you know, it was

441
00:25:05,600 --> 00:25:07,920
Speaker 1: a down month for US equities, it was a down

442
00:25:07,960 --> 00:25:10,600
Speaker 1: month for global equities, and it was a relatively large

443
00:25:10,720 --> 00:25:14,639
Speaker 1: down month, but it wasn't huge. The real story, the

444
00:25:14,720 --> 00:25:17,359
Speaker 1: real you know, amazing stuff that's going on right is

445
00:25:17,400 --> 00:25:22,400
Speaker 1: this rotation that's happening within the equity market where low

446
00:25:22,480 --> 00:25:24,879
Speaker 1: price to book stocks have been doing so much better

447
00:25:25,520 --> 00:25:30,400
Speaker 1: than high high price to book stocks or high price

448
00:25:30,440 --> 00:25:33,320
Speaker 1: to earnings. You know, growth stocks have been underperforming in

449
00:25:33,400 --> 00:25:36,800
Speaker 1: particularly like certain sectors of growth stocks have been really

450
00:25:36,880 --> 00:25:40,920
Speaker 1: underperforming value stocks. And that rotation, you know, has has

451
00:25:40,960 --> 00:25:44,840
Speaker 1: been really dramatic. Um. But you know, we don't have

452
00:25:45,400 --> 00:25:48,080
Speaker 1: too much that we can say about that because all right,

453
00:25:48,119 --> 00:25:50,080
Speaker 1: you know that I don't have a great insight into

454
00:25:50,080 --> 00:25:52,800
Speaker 1: the whole thing, because yes, it's been very dramatic. But

455
00:25:53,040 --> 00:25:57,199
Speaker 1: you know that I find it so much easier to, uh,

456
00:25:57,359 --> 00:25:59,480
Speaker 1: you know, to to look at the broad market. It

457
00:25:59,520 --> 00:26:01,560
Speaker 1: reminds me of my dad. I guess this joke is

458
00:26:01,600 --> 00:26:05,040
Speaker 1: probably in many different cultures, but my dad was Iranian

459
00:26:05,160 --> 00:26:08,680
Speaker 1: and he always loved this joke about this character named

460
00:26:08,880 --> 00:26:13,879
Speaker 1: lan Astradin and he was looking around his house and

461
00:26:14,280 --> 00:26:16,639
Speaker 1: his wife said, what are you looking for? And he said,

462
00:26:16,720 --> 00:26:19,639
Speaker 1: you know, I I misplaced my wallet and she said, well,

463
00:26:19,680 --> 00:26:21,879
Speaker 1: where did you lose it? And he said, well, I

464
00:26:21,960 --> 00:26:24,359
Speaker 1: think I lost it in the barn And she said, well,

465
00:26:24,359 --> 00:26:25,880
Speaker 1: why are you looking for it here? And he says,

466
00:26:25,920 --> 00:26:27,639
Speaker 1: there's no light in the barn. You know, I got

467
00:26:27,760 --> 00:26:30,560
Speaker 1: to look for it here. You know, I can't see

468
00:26:30,600 --> 00:26:33,640
Speaker 1: anything in the bar and started. So, you know that's

469
00:26:33,680 --> 00:26:36,360
Speaker 1: how I feel that. Um, you know, when we're trying

470
00:26:36,400 --> 00:26:38,320
Speaker 1: to think about investing, I want to look where the

471
00:26:38,440 --> 00:26:40,960
Speaker 1: light is, where I can see a little bit what's

472
00:26:40,960 --> 00:26:42,520
Speaker 1: going on. I think it's you know, for me, it's

473
00:26:42,560 --> 00:26:45,440
Speaker 1: too hard to look at individual stocks. That's a really

474
00:26:45,520 --> 00:26:48,600
Speaker 1: tough thing. You know, that's a specialist thing to do,

475
00:26:48,920 --> 00:26:51,080
Speaker 1: and there's lots and lots of capital and people that

476
00:26:51,240 --> 00:26:53,240
Speaker 1: want to do that and are good at doing that.

477
00:26:53,720 --> 00:26:55,680
Speaker 1: I want to look at these broad indusseries where I

478
00:26:55,720 --> 00:26:58,600
Speaker 1: can have a better idea of long term expected return.

479
00:26:58,680 --> 00:27:02,560
Speaker 1: And when it comes to you know, these different sectors

480
00:27:02,720 --> 00:27:05,359
Speaker 1: and all of that, it's so difficult to have a

481
00:27:05,440 --> 00:27:09,000
Speaker 1: view because it's like these things anything can happen, you know,

482
00:27:09,400 --> 00:27:13,359
Speaker 1: within individual companies and within sectors you know as well.

483
00:27:13,520 --> 00:27:17,480
Speaker 1: So it's been really dramatic, but you know, from the

484
00:27:17,520 --> 00:27:20,560
Speaker 1: broad market it's been more um, you know, a lot

485
00:27:20,640 --> 00:27:23,960
Speaker 1: more tame. Still pretty painful, but tame. Yeah. I want

486
00:27:24,000 --> 00:27:26,040
Speaker 1: to follow up on that Victor because I wanted to

487
00:27:26,080 --> 00:27:28,840
Speaker 1: ask you about that. You know, people talk about how

488
00:27:28,920 --> 00:27:32,760
Speaker 1: twenty was the year where every chart we like to

489
00:27:32,800 --> 00:27:35,600
Speaker 1: look at was you know, basically ruined for life. You know,

490
00:27:35,680 --> 00:27:38,200
Speaker 1: we we've never seen GDP contract the way it did

491
00:27:38,320 --> 00:27:40,440
Speaker 1: and then bounce back the way it did. You know,

492
00:27:40,520 --> 00:27:43,360
Speaker 1: we've never seen some of these things that we saw

493
00:27:43,480 --> 00:27:47,119
Speaker 1: during the pandemic and the aftermath. Does that sort of

494
00:27:47,680 --> 00:27:51,280
Speaker 1: coming out of a situation like that, does that kind

495
00:27:51,320 --> 00:27:54,399
Speaker 1: of affect your confidence in this academic approach you have

496
00:27:54,640 --> 00:27:58,120
Speaker 1: to markets or does it make you believe in them

497
00:27:58,160 --> 00:28:01,199
Speaker 1: even more? That you know, his tree is somehow going

498
00:28:01,240 --> 00:28:04,560
Speaker 1: to get us, you know, through this sort of unprecedented

499
00:28:04,760 --> 00:28:06,720
Speaker 1: error that that we're we we've been through, you know

500
00:28:06,760 --> 00:28:10,119
Speaker 1: what I mean to me, I almost it seems like

501
00:28:10,160 --> 00:28:12,840
Speaker 1: a little bit of being risk averse makes sense in

502
00:28:12,920 --> 00:28:16,920
Speaker 1: this environment, just because we're coming through uh, such unprecedented

503
00:28:17,080 --> 00:28:19,399
Speaker 1: and at times, dude, does that plan you're thinking it

504
00:28:19,480 --> 00:28:21,120
Speaker 1: all just sort of you know, the year where every

505
00:28:21,240 --> 00:28:26,080
Speaker 1: chart was was ruined by just COVID anomalies. I think

506
00:28:26,160 --> 00:28:30,760
Speaker 1: that the the tendency to look at what's happened in

507
00:28:30,920 --> 00:28:40,320
Speaker 1: our near term history is can lead to insufficient amount

508
00:28:40,480 --> 00:28:45,920
Speaker 1: of concern and and worries about the future. We have

509
00:28:46,040 --> 00:28:48,360
Speaker 1: come to the edge of the precipice a couple of

510
00:28:48,480 --> 00:28:51,920
Speaker 1: times in our recent memory, I mean two thousand and

511
00:28:52,400 --> 00:28:56,760
Speaker 1: two thousand eight, two thousand nine, the pandemic. These were

512
00:28:57,280 --> 00:29:00,560
Speaker 1: points where we came to the precipice and we were

513
00:29:00,640 --> 00:29:07,720
Speaker 1: about to witness permanent destruction of capital. And then it

514
00:29:07,920 --> 00:29:12,240
Speaker 1: came back at the last moment, mostly due to government

515
00:29:12,480 --> 00:29:16,560
Speaker 1: intervention and printing of money and support and uh. And

516
00:29:16,720 --> 00:29:20,080
Speaker 1: of course we saw the precipice and went over it,

517
00:29:20,400 --> 00:29:23,760
Speaker 1: you know, in the nineteen thirties, um, where where we

518
00:29:23,840 --> 00:29:27,080
Speaker 1: did see that destruction. So you know, I think that,

519
00:29:27,360 --> 00:29:30,360
Speaker 1: um that that if anything, you know, two thousand and

520
00:29:30,440 --> 00:29:33,400
Speaker 1: twenty uh and two thousand and eight nine can kind

521
00:29:33,480 --> 00:29:35,960
Speaker 1: of give this wrong to me, can give this wrong

522
00:29:36,120 --> 00:29:40,080
Speaker 1: message you know, of buying the dips, of everything's gonna

523
00:29:40,080 --> 00:29:43,520
Speaker 1: be okay, of even and and this is kind of

524
00:29:43,520 --> 00:29:46,680
Speaker 1: an interesting thing. You know that within academia there's a

525
00:29:46,720 --> 00:29:50,400
Speaker 1: lot of debate about what they call the excess volatility

526
00:29:50,520 --> 00:29:54,000
Speaker 1: of equities. It's kind of like the economy and and

527
00:29:54,200 --> 00:29:58,040
Speaker 1: aggregate earnings are not that volatile, are much less volatile

528
00:29:58,080 --> 00:30:00,600
Speaker 1: than equities are. And so it seems as though what's

529
00:30:00,600 --> 00:30:04,040
Speaker 1: happening is when equities go down, it's a result of

530
00:30:04,120 --> 00:30:08,120
Speaker 1: two things. One is that people are more negative on

531
00:30:08,240 --> 00:30:11,480
Speaker 1: the future of the earnings. You know that that earnings

532
00:30:11,520 --> 00:30:15,680
Speaker 1: growth and earnings just the real fundamental cash flows are

533
00:30:15,720 --> 00:30:17,920
Speaker 1: going to be lower. Fine, that's one thing. But the

534
00:30:17,960 --> 00:30:20,040
Speaker 1: other thing that tends to happen when the market goes

535
00:30:20,080 --> 00:30:22,360
Speaker 1: down is like that the discount rate goes out, the

536
00:30:22,440 --> 00:30:25,160
Speaker 1: expected return is higher. So it's it's a combination of

537
00:30:25,240 --> 00:30:27,800
Speaker 1: those things. And so if we kept if somehow the

538
00:30:27,880 --> 00:30:30,200
Speaker 1: market kept the same discount rate, equities would be a

539
00:30:30,200 --> 00:30:33,240
Speaker 1: lot less volatile. And and that's really you know that

540
00:30:33,360 --> 00:30:35,520
Speaker 1: I think we have to be careful about putting too

541
00:30:35,640 --> 00:30:37,480
Speaker 1: much faith in that because at the end of the day,

542
00:30:38,400 --> 00:30:43,520
Speaker 1: markets do can and do and have gone to zero

543
00:30:43,800 --> 00:30:46,920
Speaker 1: and never come back. So you know, like the discount

544
00:30:46,960 --> 00:30:49,440
Speaker 1: rate could get really high, but all of a sudden,

545
00:30:49,520 --> 00:30:51,720
Speaker 1: it's like that market's gone, you know, and so the

546
00:30:51,800 --> 00:30:55,800
Speaker 1: Russian market, the Chinese market, other markets have really got

547
00:30:55,840 --> 00:30:58,400
Speaker 1: an individual companies. That happens all the time. But even

548
00:30:58,520 --> 00:31:01,000
Speaker 1: broad markets can go to zero row and then they

549
00:31:01,080 --> 00:31:04,880
Speaker 1: just they're absorbed. They're absorbed there in the academic speak,

550
00:31:05,440 --> 00:31:07,880
Speaker 1: you know, I guess different people get different messages out

551
00:31:07,920 --> 00:31:09,880
Speaker 1: of it. Like, you know, somebody could look at two

552
00:31:09,920 --> 00:31:12,640
Speaker 1: thousand and twenty and say, wow, that's really scary. That's

553
00:31:12,760 --> 00:31:16,320
Speaker 1: that's what I think, because we didn't go over the precipice,

554
00:31:16,320 --> 00:31:18,120
Speaker 1: but we almost did, and we have to realize that

555
00:31:18,160 --> 00:31:20,600
Speaker 1: we could have gone over. But other people could look

556
00:31:20,640 --> 00:31:22,400
Speaker 1: at it and say, oh, everything's gonna be okay. I mean,

557
00:31:22,440 --> 00:31:24,640
Speaker 1: that was nothing, you know, look at that, you know

558
00:31:24,920 --> 00:31:27,280
Speaker 1: it was it was actually a good year, but we

559
00:31:27,400 --> 00:31:30,640
Speaker 1: were almost over. We could have gone over, and we

560
00:31:30,720 --> 00:31:32,440
Speaker 1: didn't go over, but we could have gone over, and

561
00:31:32,520 --> 00:31:35,360
Speaker 1: so we should be reminded of that. So I'm certain

562
00:31:35,560 --> 00:31:38,960
Speaker 1: I'm agreeing with you. I think different people have taken

563
00:31:39,560 --> 00:31:42,400
Speaker 1: both of those lessons that either it's scared the heck

564
00:31:42,440 --> 00:31:44,840
Speaker 1: out of them and they're staying scared, and that's good

565
00:31:45,240 --> 00:31:49,440
Speaker 1: because this stuff is risky, or it's like, oh, you know,

566
00:31:49,680 --> 00:31:54,880
Speaker 1: by the dip, don't worry about it. Just well, so Victor,

567
00:31:54,960 --> 00:31:57,800
Speaker 1: for the listeners who I feel like there's a cohort

568
00:31:57,840 --> 00:32:01,240
Speaker 1: of listeners who are waiting patiently thinking, just tell me

569
00:32:01,360 --> 00:32:03,400
Speaker 1: what to do with my money right now, Victors. So

570
00:32:03,480 --> 00:32:06,400
Speaker 1: it's to me, it sounds like you're you're bullish. You know,

571
00:32:06,480 --> 00:32:08,640
Speaker 1: I would have a bullish allocation of stocks, and and

572
00:32:08,800 --> 00:32:12,240
Speaker 1: perhaps even more so the rest of the world versus us.

573
00:32:12,400 --> 00:32:15,880
Speaker 1: Is that fair? The first thing that the investor needs

574
00:32:15,960 --> 00:32:19,000
Speaker 1: to do, I think the investor needs to look in

575
00:32:19,080 --> 00:32:23,520
Speaker 1: the mirror and really know himself for herself, you know.

576
00:32:23,560 --> 00:32:27,160
Speaker 1: I think that the what you should do is really

577
00:32:27,240 --> 00:32:31,560
Speaker 1: a function of your makeup and circumstances and everything. So

578
00:32:32,600 --> 00:32:34,080
Speaker 1: what I would say is, if you look in the

579
00:32:34,200 --> 00:32:38,360
Speaker 1: mirror and you see in the mirror somebody who is

580
00:32:38,400 --> 00:32:42,880
Speaker 1: a long term investor, somebody who's thinking about the long term,

581
00:32:43,560 --> 00:32:48,040
Speaker 1: saving and investing for their retirement and for later in life,

582
00:32:48,960 --> 00:32:51,680
Speaker 1: and you know, and and somebody that is um is

583
00:32:51,760 --> 00:32:55,200
Speaker 1: willing to be patient and disciplined and kind of boring

584
00:32:55,480 --> 00:32:57,960
Speaker 1: in how they invest. If that's what you see when

585
00:32:58,000 --> 00:33:01,440
Speaker 1: you look in the mirror, then I think, yes, owning

586
00:33:02,080 --> 00:33:05,080
Speaker 1: a healthy fraction of equities for the long run probably

587
00:33:05,200 --> 00:33:08,040
Speaker 1: makes sense for for you with it if you have

588
00:33:08,120 --> 00:33:11,240
Speaker 1: a typical amount of risk, aversion, etcetera. I think that

589
00:33:11,600 --> 00:33:14,280
Speaker 1: makes sense. But if you look in the mirror and

590
00:33:14,400 --> 00:33:16,840
Speaker 1: you see somebody who's like, you know, who wants to

591
00:33:16,920 --> 00:33:20,440
Speaker 1: make twenty percent a year and is like just reading

592
00:33:20,640 --> 00:33:23,440
Speaker 1: everything to find out, you know, which coin they should

593
00:33:23,480 --> 00:33:25,960
Speaker 1: invest in or which meme stock or whatever, and that's

594
00:33:26,000 --> 00:33:29,560
Speaker 1: what your personality is, then don't do that because well,

595
00:33:29,600 --> 00:33:31,960
Speaker 1: I don't you know. I would say, try to change yourself.

596
00:33:32,080 --> 00:33:34,240
Speaker 1: But if that's what you see in the mirror, you

597
00:33:34,280 --> 00:33:36,760
Speaker 1: know you're not gonna be happy with this sort of

598
00:33:36,840 --> 00:33:40,880
Speaker 1: boring long term allocation to equities. The coin flip experiment

599
00:33:41,080 --> 00:33:44,560
Speaker 1: again is really interesting in this regard because what we

600
00:33:44,680 --> 00:33:47,920
Speaker 1: found was that people would play it and they would

601
00:33:47,960 --> 00:33:51,280
Speaker 1: do poorly on it. You know, very few people or

602
00:33:51,360 --> 00:33:53,880
Speaker 1: not enough people made the twitter and fifty dollars that

603
00:33:54,000 --> 00:33:57,440
Speaker 1: everybody should have made a sensible strategy of like betting

604
00:33:57,520 --> 00:34:01,040
Speaker 1: ten percent on each flip or team percent on each

605
00:34:01,080 --> 00:34:03,840
Speaker 1: flip would have given you like a ninety eight percent

606
00:34:03,960 --> 00:34:07,400
Speaker 1: chance of getting to two fifty dollars in walking out

607
00:34:07,440 --> 00:34:09,840
Speaker 1: of that half hour at a very good with a

608
00:34:09,960 --> 00:34:12,800
Speaker 1: very good reward. But they didn't play it like that,

609
00:34:12,920 --> 00:34:16,360
Speaker 1: and they didn't know and they were under pressure, et cetera.

610
00:34:16,520 --> 00:34:18,759
Speaker 1: So there's all these reasons, but they didn't play well.

611
00:34:19,600 --> 00:34:22,160
Speaker 1: Then we talked about it afterwards, you know, we were

612
00:34:22,239 --> 00:34:23,480
Speaker 1: it was like in a class A lot of it

613
00:34:23,560 --> 00:34:25,160
Speaker 1: was in a classroom, we're meeting room whatever, so that

614
00:34:25,239 --> 00:34:27,680
Speaker 1: we talked about it, and we said, these are why,

615
00:34:27,800 --> 00:34:29,759
Speaker 1: these are the reasons, this is how to think about it.

616
00:34:29,840 --> 00:34:32,879
Speaker 1: These are the reasons why a constant proportional betting makes

617
00:34:32,920 --> 00:34:35,600
Speaker 1: sense for most of the game. You know, you shouldn't

618
00:34:35,600 --> 00:34:37,879
Speaker 1: been on tails obviously, all these different things we talked

619
00:34:37,880 --> 00:34:41,560
Speaker 1: about it. What we found was that, um, if we

620
00:34:41,680 --> 00:34:43,600
Speaker 1: let people play again and some of the people did

621
00:34:43,680 --> 00:34:45,959
Speaker 1: want to play it again, that they just all sat

622
00:34:46,080 --> 00:34:49,360
Speaker 1: there and clicked away, you know, at fifteent per hand

623
00:34:49,840 --> 00:34:51,840
Speaker 1: and just did that got to the two fifty. We

624
00:34:51,880 --> 00:34:55,239
Speaker 1: didn't pay them anymore. But but but they got the

625
00:34:55,320 --> 00:34:59,200
Speaker 1: message right. But the problem is that it's cool to

626
00:34:59,280 --> 00:35:01,440
Speaker 1: sit there for off an hour and just keep clicking

627
00:35:01,680 --> 00:35:06,200
Speaker 1: at bet each time, But try doing that for forty years.

628
00:35:06,719 --> 00:35:12,400
Speaker 1: Try being disciplined and boring for forty years and not saying, oh,

629
00:35:12,800 --> 00:35:14,719
Speaker 1: the next one is gonna be heads, I'm gonna bet

630
00:35:15,960 --> 00:35:18,560
Speaker 1: on that, or the next one is gonna be tails,

631
00:35:18,640 --> 00:35:21,200
Speaker 1: I'm gonna bet on tails. I had my mom play

632
00:35:21,280 --> 00:35:24,400
Speaker 1: the game for free, and I looked at her betting

633
00:35:24,440 --> 00:35:27,440
Speaker 1: pattern and I said, Mom, you bet on tails And

634
00:35:27,560 --> 00:35:30,440
Speaker 1: she said, you know, I knew I wasn't supposed to

635
00:35:30,560 --> 00:35:32,680
Speaker 1: do that, but I just couldn't help myself. I just

636
00:35:32,760 --> 00:35:36,120
Speaker 1: had to see what would happen. So it's it's really

637
00:35:36,200 --> 00:35:38,759
Speaker 1: hard to be uh discipline. It's even harder to be

638
00:35:38,840 --> 00:35:41,360
Speaker 1: a journalist, and uh, you know, I think it was

639
00:35:41,440 --> 00:35:44,200
Speaker 1: Jason Zwagas said, Oh, it's it's really hard being a

640
00:35:44,280 --> 00:35:47,640
Speaker 1: journalist and giving sound financial advice because it's so bloody

641
00:35:47,680 --> 00:35:50,200
Speaker 1: boring and just it's the same thing. He says, he's

642
00:35:50,239 --> 00:35:54,000
Speaker 1: written the same column every year for but he's, well,

643
00:35:54,080 --> 00:35:55,840
Speaker 1: he's shown that it's you can do it. You know

644
00:35:55,960 --> 00:35:58,840
Speaker 1: you can. It is possible to be interesting and to

645
00:35:58,960 --> 00:36:02,160
Speaker 1: keep going. But but anyway, so so that's that would

646
00:36:02,200 --> 00:36:05,680
Speaker 1: be my advice for long term investors. You know, you know,

647
00:36:05,840 --> 00:36:09,239
Speaker 1: have a healthy allocation to equities, own some tips, you know,

648
00:36:09,320 --> 00:36:10,960
Speaker 1: as well, don't you know? I think the tips are

649
00:36:11,080 --> 00:36:14,400
Speaker 1: less risky for us then treasury bills are. Even though

650
00:36:14,440 --> 00:36:16,160
Speaker 1: the price of tips goes up and down, it is

651
00:36:16,239 --> 00:36:20,279
Speaker 1: giving us a real consumption, you know, it's giving us

652
00:36:20,360 --> 00:36:23,360
Speaker 1: something of a real hedge of consumption. Yeah, they're yield

653
00:36:23,480 --> 00:36:25,960
Speaker 1: is terrible right now, but you know who knows. I mean,

654
00:36:26,000 --> 00:36:28,120
Speaker 1: they could go down or up. It's a you know,

655
00:36:28,239 --> 00:36:30,680
Speaker 1: it's a market. And uh, you know, I think that

656
00:36:31,200 --> 00:36:33,480
Speaker 1: owning some tips is probably an okay thing too. And

657
00:36:33,880 --> 00:36:35,920
Speaker 1: and if tips get back to yielding a couple of

658
00:36:36,040 --> 00:36:38,920
Speaker 1: percent above inflation, that would be great. You know, I

659
00:36:38,960 --> 00:36:56,080
Speaker 1: think we'll all be happier than Bill do. I think

660
00:36:56,200 --> 00:36:59,759
Speaker 1: Victor's mom's strategy of betting on on tails explains the

661
00:37:00,040 --> 00:37:03,200
Speaker 1: higher cryptocurrency market. What do you think? Well, I like

662
00:37:03,320 --> 00:37:05,920
Speaker 1: a victory that you added in there that she played

663
00:37:05,920 --> 00:37:11,000
Speaker 1: for free. Actually, if my mom were playing for money,

664
00:37:11,080 --> 00:37:16,439
Speaker 1: she probably wouldn't have been on tails. But we can't

665
00:37:16,480 --> 00:37:19,040
Speaker 1: let you go. I want to ask you about, you know,

666
00:37:19,160 --> 00:37:22,360
Speaker 1: the luck factor versus the skill factor and investing. And

667
00:37:22,480 --> 00:37:24,840
Speaker 1: I know one of your most more famous papers is

668
00:37:24,880 --> 00:37:28,239
Speaker 1: titled What's Past is Not Prologue, where you suggested that

669
00:37:28,600 --> 00:37:30,680
Speaker 1: even if you look at two decades of performance, it's

670
00:37:30,719 --> 00:37:34,520
Speaker 1: not enough to fully distinguish a fun manager from anything

671
00:37:35,160 --> 00:37:37,920
Speaker 1: other than average. So can you talk about that, and

672
00:37:38,000 --> 00:37:41,200
Speaker 1: can you talk about how you differentiate luck from skill

673
00:37:41,239 --> 00:37:45,279
Speaker 1: and investing? Sure? So, um, you know, there's definitely we

674
00:37:45,360 --> 00:37:52,040
Speaker 1: definitely are programmed behaviorally to extrapolate the future from a

675
00:37:52,160 --> 00:37:56,799
Speaker 1: statistically insignificant amount of data. And you know, there's all

676
00:37:56,920 --> 00:38:00,239
Speaker 1: kinds of reasons that, uh, you know, cognitive and to

677
00:38:00,440 --> 00:38:03,520
Speaker 1: say that we developed that way. So we did an experiment.

678
00:38:03,640 --> 00:38:05,759
Speaker 1: We love doing these different experiments, and we did this

679
00:38:05,880 --> 00:38:09,640
Speaker 1: experiment where where we asked people, imagine, um, you have

680
00:38:09,800 --> 00:38:12,280
Speaker 1: two coins. Somebody is giving you two coins to flip.

681
00:38:13,040 --> 00:38:16,200
Speaker 1: One of them has a sixty chance of landing on heads.

682
00:38:16,280 --> 00:38:19,160
Speaker 1: The other one is a fifty coin. But we won't

683
00:38:19,200 --> 00:38:22,080
Speaker 1: tell you which one it is. But you can flip

684
00:38:22,160 --> 00:38:24,520
Speaker 1: them if you want. You can flip them a million times,

685
00:38:25,239 --> 00:38:27,800
Speaker 1: But tell us how many times do you need to

686
00:38:27,880 --> 00:38:30,160
Speaker 1: flip them, sort of the minimum number of times that

687
00:38:30,280 --> 00:38:32,759
Speaker 1: you need to flip them both and count up how

688
00:38:32,840 --> 00:38:35,960
Speaker 1: many times they've landed heads and tails to have a

689
00:38:37,280 --> 00:38:41,879
Speaker 1: confidence that this is the coin that's sixty and that's

690
00:38:41,920 --> 00:38:46,560
Speaker 1: the coin that is. And again, you know, like we

691
00:38:46,680 --> 00:38:51,040
Speaker 1: when we are our readership are kind of quantitative financing people.

692
00:38:51,600 --> 00:38:53,360
Speaker 1: You know, some of the people kind of gave the

693
00:38:53,719 --> 00:38:56,920
Speaker 1: right answer, but we also as people to just answer

694
00:38:57,000 --> 00:38:59,960
Speaker 1: it based on their intuition and not to do the calculation.

695
00:39:00,040 --> 00:39:02,759
Speaker 1: And and and a lot of people thought it took

696
00:39:02,880 --> 00:39:05,160
Speaker 1: you know, ten flips, you know, with ten flips you

697
00:39:05,239 --> 00:39:08,400
Speaker 1: could tell or fifteen flips or twenty flips. Well, the

698
00:39:08,520 --> 00:39:12,000
Speaker 1: answer is a hundred and forty three flips or maybe

699
00:39:12,000 --> 00:39:13,440
Speaker 1: a hundred and forty one. I think a hundred and

700
00:39:13,480 --> 00:39:16,320
Speaker 1: forty three flips. I never would have guessed that, you

701
00:39:16,360 --> 00:39:18,600
Speaker 1: know if you had asked me, is that nobody guesses

702
00:39:18,719 --> 00:39:21,200
Speaker 1: that just you know, like a hundred and forty You

703
00:39:21,280 --> 00:39:23,240
Speaker 1: have to do that thing a hundred and forty times

704
00:39:23,800 --> 00:39:26,200
Speaker 1: to be that confident. I mean, I'm starting off fifty

705
00:39:26,920 --> 00:39:28,560
Speaker 1: you know, like if I just choose that coin, I've

706
00:39:28,560 --> 00:39:30,799
Speaker 1: got a fifty percent chance of choosing the right one.

707
00:39:31,200 --> 00:39:32,640
Speaker 1: But I've got to do a hundred and forty. So

708
00:39:33,120 --> 00:39:36,040
Speaker 1: that's like an illustration because if we're thinking about active

709
00:39:36,960 --> 00:39:42,760
Speaker 1: managers versus the index and index investment, that an active

710
00:39:42,840 --> 00:39:45,839
Speaker 1: manager is going to be more like a sixty forty coin,

711
00:39:46,320 --> 00:39:49,160
Speaker 1: you know, relative to the benchmark. But if he's not

712
00:39:49,320 --> 00:39:51,840
Speaker 1: a good active manager, he's like just fifty fifty. You

713
00:39:51,880 --> 00:39:54,120
Speaker 1: know that that he if it's just a manager, was

714
00:39:54,160 --> 00:39:57,080
Speaker 1: like just flipping. You know, he's just throwing darts at

715
00:39:57,080 --> 00:39:59,640
Speaker 1: the wall. He'll be more like, in fact, he'll be worse,

716
00:40:00,160 --> 00:40:03,160
Speaker 1: which I mentioned at the end, but let's just say

717
00:40:03,160 --> 00:40:05,719
Speaker 1: who would be. And so what that tells you is

718
00:40:05,760 --> 00:40:08,200
Speaker 1: you need a lot of data. You know, the world

719
00:40:08,320 --> 00:40:10,040
Speaker 1: is not like coin flips that you know that when

720
00:40:10,120 --> 00:40:11,960
Speaker 1: you by the time you get a lot of data

721
00:40:12,200 --> 00:40:15,600
Speaker 1: on your manager, he's not even the manager anymore. Somebody

722
00:40:15,680 --> 00:40:19,080
Speaker 1: else or he's not. I mean, you know that I'm

723
00:40:19,160 --> 00:40:21,799
Speaker 1: not the same person that I'm gonna be ten years

724
00:40:22,040 --> 00:40:24,759
Speaker 1: from now, you know, we you know whatever, No no

725
00:40:24,960 --> 00:40:27,880
Speaker 1: man steps in the same river twice. So yeah, I

726
00:40:27,920 --> 00:40:30,720
Speaker 1: think that that was kind of the the the idea

727
00:40:30,800 --> 00:40:34,920
Speaker 1: there was to both show the statistical power of of

728
00:40:35,080 --> 00:40:37,520
Speaker 1: these things, you know, which is very weak, and and

729
00:40:37,600 --> 00:40:40,440
Speaker 1: also to show us our behavioral bias, you know, to

730
00:40:40,600 --> 00:40:43,440
Speaker 1: extrapolate from too little data. But on top of that,

731
00:40:43,760 --> 00:40:46,240
Speaker 1: you know, if we're just talking about active versus passive,

732
00:40:47,000 --> 00:40:49,120
Speaker 1: I don't know if you've come across this. Bessem Binder

733
00:40:49,239 --> 00:40:55,120
Speaker 1: Hendrick bessem Binder is a academic professor from Arizona, and

734
00:40:55,320 --> 00:40:58,320
Speaker 1: he's done this research where he looked at all US

735
00:40:58,400 --> 00:41:02,759
Speaker 1: equities and even though as we know, US equities outperformed

736
00:41:02,800 --> 00:41:05,840
Speaker 1: treasury bills by like six percent a year over the

737
00:41:05,920 --> 00:41:10,560
Speaker 1: last hundred and twenty years, he found that significantly more

738
00:41:10,640 --> 00:41:15,319
Speaker 1: than half of all US equities have underperformed treasury build

739
00:41:15,880 --> 00:41:18,960
Speaker 1: What that tells you is that if you are, if

740
00:41:19,120 --> 00:41:23,759
Speaker 1: if you are an active manager holding a concentrated portfolio

741
00:41:23,800 --> 00:41:28,320
Speaker 1: of stocks, that a concentrated portfolio of stocks has a

742
00:41:28,560 --> 00:41:32,920
Speaker 1: higher than fifty percent chance of underperforming an index because

743
00:41:33,000 --> 00:41:36,080
Speaker 1: of that concentration itself. You know, it's it's like a

744
00:41:36,960 --> 00:41:41,440
Speaker 1: volatility drag phenomenon. So when you know that that somebody's

745
00:41:41,440 --> 00:41:45,280
Speaker 1: gonna concentrated portfolio that is riskier than the broad market,

746
00:41:45,760 --> 00:41:48,120
Speaker 1: you know, if they were just throwing darts, you know,

747
00:41:48,160 --> 00:41:50,760
Speaker 1: if they had no skill, there's more than a fifty

748
00:41:50,800 --> 00:41:54,640
Speaker 1: percent chance before fees and before transactions cost, that you

749
00:41:54,680 --> 00:42:00,120
Speaker 1: would underperform the index because of this volatility drag. And

750
00:42:00,160 --> 00:42:02,239
Speaker 1: then you've got fees, and you've got taxes, and you've

751
00:42:02,239 --> 00:42:04,400
Speaker 1: got transactions cost and the whole thing is a bit

752
00:42:04,440 --> 00:42:07,080
Speaker 1: of a mess. I don't know, dot all. This talk

753
00:42:07,120 --> 00:42:10,600
Speaker 1: about coin flips has me interested in the biggest prop

754
00:42:10,680 --> 00:42:12,319
Speaker 1: bet of the Super Bowl at all. You can bet

755
00:42:12,400 --> 00:42:15,319
Speaker 1: on the coin flip at the opening of the Super Bowl,

756
00:42:15,400 --> 00:42:17,879
Speaker 1: so you might want to get in on that. Put

757
00:42:18,000 --> 00:42:21,160
Speaker 1: put twenty on heads, which I think has has become

758
00:42:21,239 --> 00:42:24,680
Speaker 1: popular thanks to what happened to the Buffalo bills. What

759
00:42:24,800 --> 00:42:28,040
Speaker 1: happened refresh my memory to happen to them? No, no,

760
00:42:28,360 --> 00:42:32,920
Speaker 1: don't do it, don't go there. Sorry, tiden up your

761
00:42:32,920 --> 00:42:36,839
Speaker 1: straight jackets. It's time for the craziest things we saw

762
00:42:37,320 --> 00:42:41,240
Speaker 1: in markets this week? Well, speaking of knowing something, Bill Dana,

763
00:42:41,239 --> 00:42:44,440
Speaker 1: I think it's that time to know what your craziest

764
00:42:44,520 --> 00:42:47,200
Speaker 1: thing you saw in markets was this week. Let's hear it.

765
00:42:47,239 --> 00:42:48,680
Speaker 1: I think I have an idea what it's going to

766
00:42:48,760 --> 00:42:53,080
Speaker 1: be really good transition. Yeah, thanks, I think I think

767
00:42:53,120 --> 00:42:55,880
Speaker 1: you might not know. But first, I had a submission

768
00:42:55,960 --> 00:42:59,560
Speaker 1: come into my Twitter, which, by the way, I noticed,

769
00:42:59,640 --> 00:43:02,120
Speaker 1: nobody send you submissions. They send them to me. I

770
00:43:02,480 --> 00:43:05,319
Speaker 1: get some, I get some first. I always forget about them,

771
00:43:05,360 --> 00:43:10,080
Speaker 1: though I do. Anyway. This one is from and I

772
00:43:10,200 --> 00:43:12,359
Speaker 1: really hope I pronounce this correctly. I even asked him

773
00:43:12,400 --> 00:43:14,800
Speaker 1: how to pronounce it. But his name is Brian reich

774
00:43:14,880 --> 00:43:18,040
Speaker 1: Cough And he sent a message that said fixed income

775
00:43:18,120 --> 00:43:21,120
Speaker 1: feels a bit boomer compared to crypto, but it's wild.

776
00:43:21,760 --> 00:43:24,680
Speaker 1: And he shared a tweet which actually was from last week.

777
00:43:24,760 --> 00:43:28,600
Speaker 1: But somebody pointed out that equity investors, especially in the US,

778
00:43:28,760 --> 00:43:31,520
Speaker 1: could be forgiven for thinking that the most important events

779
00:43:31,760 --> 00:43:35,600
Speaker 1: of the last forty eight hours were Facebook and Amazon numbers. Wrong.

780
00:43:35,760 --> 00:43:38,680
Speaker 1: It was the six sigma move in European rates. The

781
00:43:38,760 --> 00:43:41,960
Speaker 1: bond boogeyman is coming to an equity market near you.

782
00:43:42,560 --> 00:43:44,200
Speaker 1: So I wanted to share that one, even though it

783
00:43:44,280 --> 00:43:46,440
Speaker 1: was from last week, and just remind everybody that if

784
00:43:46,680 --> 00:43:49,320
Speaker 1: if anyone sees anything weird, you can send it to

785
00:43:49,360 --> 00:43:53,439
Speaker 1: my Twitter, not Mike's mine. That's a good point, Victor

786
00:43:53,520 --> 00:43:56,040
Speaker 1: about this, the velocity of the move in rates. I

787
00:43:56,120 --> 00:43:59,560
Speaker 1: feel like that is makes you have to rethink your

788
00:43:59,560 --> 00:44:02,160
Speaker 1: allocay a bit more frequently than you would otherwise. Or

789
00:44:02,680 --> 00:44:05,280
Speaker 1: or what does the that sort of rate of change

790
00:44:05,360 --> 00:44:09,080
Speaker 1: in yields that we've seen give you any you know,

791
00:44:09,600 --> 00:44:11,120
Speaker 1: give you the spins at all? Does it? Does it

792
00:44:11,239 --> 00:44:15,160
Speaker 1: make you you know, want to reallocate more than perhaps

793
00:44:15,200 --> 00:44:18,400
Speaker 1: you would otherwise. No, I mean I think that, you know,

794
00:44:18,600 --> 00:44:21,600
Speaker 1: keeping an eye on your portfolio once a month or

795
00:44:22,160 --> 00:44:25,200
Speaker 1: once a quarter is not bad. I mean, you know,

796
00:44:25,239 --> 00:44:29,520
Speaker 1: I think that if we if we moved sort of

797
00:44:29,560 --> 00:44:32,400
Speaker 1: in a straight line. Let's take us Tips for an example,

798
00:44:32,480 --> 00:44:35,960
Speaker 1: So tenure, uh, Tips were trading it like minus one

799
00:44:36,080 --> 00:44:39,480
Speaker 1: percent around the end of two thousand and twenty one,

800
00:44:40,200 --> 00:44:43,719
Speaker 1: and now I think maybe we're around minus half a percent. Yeah,

801
00:44:43,760 --> 00:44:45,560
Speaker 1: I mean, I think that if if Tips went from

802
00:44:45,600 --> 00:44:48,480
Speaker 1: minus one percent, you know, all the way up to

803
00:44:48,600 --> 00:44:51,719
Speaker 1: two percent over a couple of months, you know, it

804
00:44:51,760 --> 00:44:54,520
Speaker 1: would be a shame to have missed out on the

805
00:44:54,600 --> 00:44:59,480
Speaker 1: opportunity perhaps to have reduced your equity allocation as that

806
00:44:59,680 --> 00:45:03,080
Speaker 1: was how spending, assuming that equities did not fall as

807
00:45:03,200 --> 00:45:07,200
Speaker 1: much as would have been called for by that increase

808
00:45:07,480 --> 00:45:10,680
Speaker 1: in in real yield. You know, you're right that the

809
00:45:10,920 --> 00:45:14,319
Speaker 1: that the velocity of changes in everything, I mean, every

810
00:45:14,400 --> 00:45:18,440
Speaker 1: everything has sort of got this. I mean the markets,

811
00:45:18,719 --> 00:45:20,879
Speaker 1: you know, I don't know, over over time have sort

812
00:45:20,920 --> 00:45:23,880
Speaker 1: of developed into this not much is going on, and

813
00:45:23,960 --> 00:45:26,600
Speaker 1: then boom, you know, they make these big moves, and

814
00:45:27,120 --> 00:45:30,480
Speaker 1: you know that they've become much more in in my feeling.

815
00:45:30,560 --> 00:45:33,400
Speaker 1: You know, they're much more discontinuous than they used to be,

816
00:45:33,960 --> 00:45:36,759
Speaker 1: which I think might have to do with uh, they're

817
00:45:36,800 --> 00:45:41,680
Speaker 1: just being much less market maker capital relative to the

818
00:45:41,760 --> 00:45:44,680
Speaker 1: size of the market than there used to be. But

819
00:45:44,840 --> 00:45:46,719
Speaker 1: I don't know, I'm not sure about that. Less of

820
00:45:46,760 --> 00:45:49,279
Speaker 1: a shock absorber built into the system. I guess I

821
00:45:49,320 --> 00:45:52,719
Speaker 1: think there's less shock absorber from from that, I'm not

822
00:45:52,920 --> 00:45:54,759
Speaker 1: that worried, you know, I think that you know that.

823
00:45:54,880 --> 00:45:57,839
Speaker 1: Another I guess the reason I'm not that concerned about

824
00:45:57,880 --> 00:46:01,600
Speaker 1: it is that when interest rates go up, if equities

825
00:46:01,640 --> 00:46:04,960
Speaker 1: don't move at all, we'll want to reduce our equity allocation.

826
00:46:05,640 --> 00:46:07,560
Speaker 1: But you know, when interest rates go up, equities are

827
00:46:07,560 --> 00:46:09,520
Speaker 1: going to go down somewhat, and when you look at

828
00:46:09,560 --> 00:46:11,759
Speaker 1: the whole thing, you're gonna want to reduce. You know,

829
00:46:11,880 --> 00:46:14,840
Speaker 1: maybe you were you were at se and equities and

830
00:46:14,920 --> 00:46:19,080
Speaker 1: you might want to reduce down two sixty four percent

831
00:46:19,160 --> 00:46:21,400
Speaker 1: and equities or something. It's not you know that that

832
00:46:22,080 --> 00:46:24,239
Speaker 1: you know looking at it, even if you're looking at

833
00:46:24,280 --> 00:46:27,320
Speaker 1: it every quarter for for our business and for the clients,

834
00:46:27,719 --> 00:46:30,759
Speaker 1: you know that where we're managing capital, we're looking we're

835
00:46:30,840 --> 00:46:34,879
Speaker 1: rebalancing their portfolio every week. We also have a risk

836
00:46:35,000 --> 00:46:39,080
Speaker 1: indicator in the form of momentum that we're using to

837
00:46:39,400 --> 00:46:43,600
Speaker 1: underweight or overweight in conjunction with with excess earning ZEALD.

838
00:46:44,000 --> 00:46:46,000
Speaker 1: So you know, we're trying to stay on top of

839
00:46:46,040 --> 00:46:48,440
Speaker 1: all of that. But for individual investors who are men

840
00:46:48,480 --> 00:46:51,640
Speaker 1: who are self managing, uh, you know, these long term

841
00:46:51,719 --> 00:46:54,080
Speaker 1: investors that are looking in the mirror and seeing themselves

842
00:46:54,080 --> 00:46:57,279
Speaker 1: as long term investors, it's it's okay too, it's you know,

843
00:46:57,320 --> 00:47:00,520
Speaker 1: I think that you're okay doing this stuff. Looking at

844
00:47:00,560 --> 00:47:03,960
Speaker 1: your portfolio once a quarter is fine. I think. All right, Victor,

845
00:47:04,000 --> 00:47:06,680
Speaker 1: how about you? You see anything crazy in markets this week?

846
00:47:08,040 --> 00:47:10,239
Speaker 1: Well that was a good one. That who that wrote

847
00:47:10,280 --> 00:47:13,960
Speaker 1: into bil donna Um. You know. The thing that just

848
00:47:14,239 --> 00:47:17,160
Speaker 1: amazes me is what's going on in the options market

849
00:47:17,320 --> 00:47:22,400
Speaker 1: in the US. Options trading in single stocks now is

850
00:47:22,960 --> 00:47:27,640
Speaker 1: as big as trading in the stocks themselves. So we

851
00:47:27,680 --> 00:47:30,279
Speaker 1: always thought of options as the derivatives, you know, but

852
00:47:30,840 --> 00:47:33,040
Speaker 1: at these kinds of volumes, you're wondering which is the

853
00:47:33,160 --> 00:47:36,120
Speaker 1: real and which is the derivative. So we're getting I

854
00:47:36,160 --> 00:47:39,560
Speaker 1: don't know, four five hundred billion dollars of options or

855
00:47:39,600 --> 00:47:43,160
Speaker 1: trading every day, and that's about the same amount as

856
00:47:43,280 --> 00:47:45,960
Speaker 1: is trading in the in the stock market in individual names.

857
00:47:46,480 --> 00:47:50,200
Speaker 1: Even more remarkable than that is like one third of

858
00:47:50,400 --> 00:47:55,760
Speaker 1: all of the options trading is in TESLA. That's amazing.

859
00:47:56,120 --> 00:47:59,040
Speaker 1: And then amazing beyond that is like eighty percent of

860
00:47:59,200 --> 00:48:03,080
Speaker 1: that trading is in options expiring out to one month.

861
00:48:03,680 --> 00:48:06,520
Speaker 1: So you know, it's really I think that there's I

862
00:48:06,640 --> 00:48:12,280
Speaker 1: think there's no doubt that the securities markets are also

863
00:48:13,480 --> 00:48:18,680
Speaker 1: functioning as a as an outlet for um for the

864
00:48:18,800 --> 00:48:22,480
Speaker 1: same kinds of demand that take people to Vegas or

865
00:48:22,840 --> 00:48:25,560
Speaker 1: or a c You know that there is a gambling.

866
00:48:26,239 --> 00:48:28,960
Speaker 1: There is this sort of almost you know, risk seeking

867
00:48:29,360 --> 00:48:34,480
Speaker 1: kind of behavior that we're seeing manifest itself in the

868
00:48:34,560 --> 00:48:39,879
Speaker 1: securities markets, in the coin markets. You know, I think

869
00:48:39,960 --> 00:48:43,080
Speaker 1: it's uh. I mean, you know, look, Americans are spending

870
00:48:43,120 --> 00:48:48,280
Speaker 1: I don't know, eighty billion dollars a year on lottery tickets,

871
00:48:49,120 --> 00:48:51,440
Speaker 1: and and I haven't bought any I bet you know

872
00:48:51,560 --> 00:48:56,000
Speaker 1: Bill Donna bottery lottery tickets recently, right, so, so, so

873
00:48:56,280 --> 00:48:59,360
Speaker 1: like eighty billion dollars a year on lottery tickets. I

874
00:48:59,400 --> 00:49:01,719
Speaker 1: think that's I'm not sure, but let's call that two

875
00:49:02,200 --> 00:49:05,279
Speaker 1: fifty dollars per person, but the three of us haven't

876
00:49:05,280 --> 00:49:09,719
Speaker 1: even bought any So there's some people out there that

877
00:49:09,800 --> 00:49:14,839
Speaker 1: are spending thousands of dollars a year on lottery tickets. Now,

878
00:49:15,320 --> 00:49:17,920
Speaker 1: you know, these are just you know, mysteries. You know

879
00:49:18,040 --> 00:49:23,040
Speaker 1: that that academic finance has not really explained this. These

880
00:49:23,080 --> 00:49:26,520
Speaker 1: are mysteries, but they're also kind of um, I think

881
00:49:26,600 --> 00:49:29,719
Speaker 1: that they're also problems. You know, I think that I

882
00:49:29,920 --> 00:49:32,879
Speaker 1: I think society, I think ours we would have less inequality.

883
00:49:33,440 --> 00:49:35,920
Speaker 1: I think we would have more wealth, you know, general

884
00:49:36,280 --> 00:49:38,640
Speaker 1: welfare of everybody. You know, I mean, it's kind of

885
00:49:38,719 --> 00:49:41,479
Speaker 1: remarkable to me. And you know, that's seventy or eighty

886
00:49:41,520 --> 00:49:46,840
Speaker 1: billion dollars pales in comparison two people buying and selling

887
00:49:47,880 --> 00:49:51,320
Speaker 1: one week out of the money Tesla options that the

888
00:49:51,440 --> 00:49:56,000
Speaker 1: Yolo effects, like what what what crazy happened recently? It's like,

889
00:49:56,120 --> 00:50:00,720
Speaker 1: what what's happening? That's not crazy? It's gout and suffered

890
00:50:00,760 --> 00:50:02,800
Speaker 1: to find h we'll have to change it to the

891
00:50:03,360 --> 00:50:07,279
Speaker 1: most rational thing I said this week. But it's a

892
00:50:07,480 --> 00:50:09,680
Speaker 1: it's an excellent point, and I think we're all trying

893
00:50:09,719 --> 00:50:12,080
Speaker 1: to wrap our heads around sort of the tail wagon

894
00:50:12,160 --> 00:50:14,680
Speaker 1: the dog effect of it all when you have you know,

895
00:50:14,760 --> 00:50:17,959
Speaker 1: everyone's talking about gamma hedging as being the main driver

896
00:50:18,120 --> 00:50:20,359
Speaker 1: of a market on any given week. It's it's uh

897
00:50:21,320 --> 00:50:23,880
Speaker 1: strange times and deeds. All right, I'll give you my

898
00:50:23,960 --> 00:50:26,000
Speaker 1: crazy thing. I'm gonna take you both out of your

899
00:50:26,040 --> 00:50:29,080
Speaker 1: comfort zones though, and get into the private markets a

900
00:50:29,160 --> 00:50:32,799
Speaker 1: little bit. And as you know, the term unicorn uh

901
00:50:33,680 --> 00:50:38,719
Speaker 1: is refers to a private startup company that gets a

902
00:50:39,000 --> 00:50:43,280
Speaker 1: valuation of one billion dollars or more in private markets

903
00:50:43,320 --> 00:50:47,919
Speaker 1: before before they go public. Business Week kind of story

904
00:50:48,000 --> 00:50:50,800
Speaker 1: talking about the whole unicorn phenomenon. And you know the

905
00:50:51,520 --> 00:50:54,040
Speaker 1: reason they're called unicorn is because that that at one

906
00:50:54,040 --> 00:50:56,880
Speaker 1: point was considered such a rarity to have a private

907
00:50:56,920 --> 00:51:00,520
Speaker 1: company get that sort of valuation. You start up to

908
00:51:00,560 --> 00:51:03,680
Speaker 1: get that sort of evaluation before going public. So this

909
00:51:04,040 --> 00:51:08,400
Speaker 1: Business Week story lists gives an account a number of

910
00:51:08,880 --> 00:51:13,600
Speaker 1: the total number of unicorns out there currently. And vil Donna,

911
00:51:13,680 --> 00:51:15,879
Speaker 1: you'd be smirking had you read this story. Usually you've

912
00:51:15,920 --> 00:51:17,759
Speaker 1: read the story I'm referring, and I can tell you

913
00:51:19,480 --> 00:51:22,080
Speaker 1: you have read Okay, so you know the answer, right. Well,

914
00:51:22,120 --> 00:51:24,520
Speaker 1: let's see if we'll quiz Victor, Victor, how many unicorns

915
00:51:24,560 --> 00:51:27,359
Speaker 1: do you think there are out there in the world today. Sorry,

916
00:51:27,480 --> 00:51:32,160
Speaker 1: it is it. Did you say it's private or yet private? Private? Yep?

917
00:51:32,400 --> 00:51:37,400
Speaker 1: Private private companies? Uh. I think embedded in the definition

918
00:51:37,560 --> 00:51:39,960
Speaker 1: is the notion that they're they're sort of a startup,

919
00:51:40,040 --> 00:51:43,360
Speaker 1: some somewhat new. You know, you wouldn't consider say a

920
00:51:44,000 --> 00:51:46,399
Speaker 1: you know, a private company that's been around a hundred years,

921
00:51:46,520 --> 00:51:50,799
Speaker 1: but a startup that's a few years old that's worth

922
00:51:50,880 --> 00:51:54,839
Speaker 1: at least a billion dollars. How many you think I'm

923
00:51:54,880 --> 00:52:01,720
Speaker 1: going to embarrass myself? Can I can? I give the answer?

924
00:52:03,600 --> 00:52:09,080
Speaker 1: It's a thousand. I couldn't believe it. I couldn't believe it.

925
00:52:09,160 --> 00:52:12,359
Speaker 1: The best quote from from this article is somebody said,

926
00:52:12,480 --> 00:52:16,080
Speaker 1: when you have a thousand unicorns, that's almost an oxymoron.

927
00:52:17,680 --> 00:52:23,280
Speaker 1: I love that. That's incredible. So a trillion dollars in unicorns,

928
00:52:23,320 --> 00:52:26,320
Speaker 1: it's it's it's unbelieved, but it's it seems to me that,

929
00:52:26,480 --> 00:52:29,960
Speaker 1: like suggest there's some sort of lopsided nous between the

930
00:52:30,000 --> 00:52:32,480
Speaker 1: private and public markets that needs to resolve itself. I

931
00:52:32,520 --> 00:52:34,560
Speaker 1: don't know, it just seems like they're I don't know why,

932
00:52:34,640 --> 00:52:37,120
Speaker 1: but there's so much money slashing around in those markets.

933
00:52:37,560 --> 00:52:39,759
Speaker 1: People think they have an edge. I guess, I don't know.

934
00:52:39,880 --> 00:52:42,799
Speaker 1: I don't I don't get it. I'm certainly out of touch.

935
00:52:44,960 --> 00:52:49,920
Speaker 1: Elm Elm is not investing in the private market. I

936
00:52:49,960 --> 00:52:51,799
Speaker 1: couldn't believe it either. That's why I brought it up.

937
00:52:51,800 --> 00:52:54,120
Speaker 1: I never I never would have guessed that many. I

938
00:52:54,160 --> 00:52:57,400
Speaker 1: wouldn't maybe said, I don't know. Seven sounds about right,

939
00:52:58,320 --> 00:53:00,760
Speaker 1: A couple of couple of hundred tops, but a thousand

940
00:53:00,880 --> 00:53:06,759
Speaker 1: unicorns pretty amazing anyway, Victor, fascinating conversation. Really appreciate your time,

941
00:53:06,800 --> 00:53:09,400
Speaker 1: and I hope, uh we can get you back next time.

942
00:53:09,440 --> 00:53:11,560
Speaker 1: You've got some some hot off the press research. Even

943
00:53:11,600 --> 00:53:13,560
Speaker 1: though this research isn't even on the press yet. I

944
00:53:13,600 --> 00:53:19,000
Speaker 1: think it's it's pre press hot off the typewriter. I guess, yeah, yeah,

945
00:53:19,000 --> 00:53:21,120
Speaker 1: we'll get it. We'll get it up on too ssr

946
00:53:21,280 --> 00:53:23,920
Speaker 1: N and on our website soon. But you heard it,

947
00:53:24,000 --> 00:53:26,080
Speaker 1: but you heard it here. You've heard it here first.

948
00:53:26,239 --> 00:53:28,799
Speaker 1: And I encourage everyone to go play Victor's coin flip game.

949
00:53:28,840 --> 00:53:30,719
Speaker 1: It's a lot of fun. Thank you for joining us.

950
00:53:31,040 --> 00:53:33,200
Speaker 1: Thanks guys, it was really a pleasure being on. Thank

951
00:53:33,200 --> 00:53:41,640
Speaker 1: you very much for having me. What comes up. We'll

952
00:53:41,680 --> 00:53:43,640
Speaker 1: be back next week. Until then, you can find us

953
00:53:43,680 --> 00:53:46,960
Speaker 1: on the Bloomberg Terminal, website or app, or wherever you

954
00:53:47,040 --> 00:53:49,239
Speaker 1: get your podcast. We love it if you took the

955
00:53:49,320 --> 00:53:51,799
Speaker 1: time to rate and review the show on Apple Podcasts

956
00:53:52,000 --> 00:53:54,480
Speaker 1: so more listeners can find us. And you can find

957
00:53:54,560 --> 00:53:58,040
Speaker 1: us on Twitter, follow me at Bring Anonymous. The Dotta

958
00:53:58,080 --> 00:54:01,279
Speaker 1: Hirich is at the Dotta Hirich. You can also follow

959
00:54:01,280 --> 00:54:05,000
Speaker 1: Bloomberg Podcasts at podcasts and thank you to Charlie Pall

960
00:54:05,120 --> 00:54:08,960
Speaker 1: to Bloomberg Radio. What Goes Up is produced by Laura Carlson.

961
00:54:09,160 --> 00:54:12,920
Speaker 1: The head of Bloomberg Podcasts is Francesco Levie. Thanks for listening,

962
00:54:13,040 --> 00:54:13,799
Speaker 1: See you next time.