WEBVTT - Do Valuations Matter? 0:00:12.800 --> 0:00:16.280 Hello, and welcome to What Goes Up a weekly markets podcast. 0:00:16.360 --> 0:00:19.200 My name is Mike Reagan. I'm a senior editor at Bloomberg, 0:00:19.960 --> 0:00:22.880 and I'm gonna hire a cross acid reporter with Bloomberg 0:00:23.520 --> 0:00:25.599 this week on the show. Well, we've all heard it 0:00:25.640 --> 0:00:29.000 a million times. Stocks got really expensive in the post 0:00:29.040 --> 0:00:32.879 financial crisis Bowl market, especially when you look at cyclically 0:00:32.920 --> 0:00:36.839 adjusted valuation metrics that include corporate earnings over the past decade. 0:00:37.800 --> 0:00:40.760 But what exactly should we do with that information. We'll 0:00:40.800 --> 0:00:43.199 get into it with the founder of an investment management 0:00:43.240 --> 0:00:46.640 firm that focuses on dynamic index investing, and he's done 0:00:46.640 --> 0:00:51.440 on some really interesting research into exactly that topic. But first, 0:00:51.720 --> 0:00:54.360 vill Donna, I need to know, uh, now that the 0:00:54.360 --> 0:00:56.240 Buffalo Bills are out of it, who a you're rooting 0:00:56.240 --> 0:00:59.360 for on Sunday in the Super Bowl? Well, I'm I'm 0:00:59.400 --> 0:01:03.400 rooting for are the Bengals because they're like, yeah, of 0:01:03.440 --> 0:01:06.760 course you have to root for them, like they're the underdog. 0:01:06.800 --> 0:01:09.000 Maybe I heard a rumor you had a lot of 0:01:09.000 --> 0:01:11.120 money riding on the rams though, is that true? I 0:01:11.120 --> 0:01:13.800 have a whole twenty dollars riding on the rams. But 0:01:14.120 --> 0:01:17.400 remember last podcast we talked about how I'm so bad 0:01:17.760 --> 0:01:20.959 at predicting who's going to win, and I just go 0:01:21.080 --> 0:01:24.840 by intuition. Yeah, that's why I'm betting on the Rams, 0:01:24.880 --> 0:01:28.200 because that means that the Bengals will win. It's your 0:01:28.280 --> 0:01:31.200 kind and then if if they lose, you, you win bucks. 0:01:31.240 --> 0:01:33.040 You kind of hedged. It's like a good hedge. Yeah, 0:01:33.080 --> 0:01:35.759 and I think I win like a hundred bucks or something. Yeah, something, 0:01:35.920 --> 0:01:39.360 some one of those new you know, FanDuel Draftking type 0:01:39.360 --> 0:01:41.920 of things that are legal in New York. Now, one 0:01:41.920 --> 0:01:44.080 of those one of those type of things. Okay, But 0:01:44.240 --> 0:01:47.520 because because because I'm I'm betting on l A, it 0:01:47.680 --> 0:01:50.920 means that the Bengals will win. It's it's an official app. 0:01:50.960 --> 0:01:53.320 You're not with a buckie name Lefty somewhere and uh, 0:01:55.440 --> 0:01:59.360 all right, fair enough. Well, I'm super excited for this 0:01:59.400 --> 0:02:03.640 week's guy. It's just a fascinating career on Wall Street. 0:02:04.000 --> 0:02:05.760 So let's get into it. I I'd love for you 0:02:05.800 --> 0:02:07.720 to introduce him. What do we know about this guy? 0:02:08.120 --> 0:02:10.040 I am too, I'm I'm really happy that he can 0:02:10.120 --> 0:02:13.280 join us. His name is Victor Hagani. He's the founder 0:02:13.320 --> 0:02:17.280 and CIO of ELM Wealth, and he is talking to 0:02:17.360 --> 0:02:19.480 us from Wyoming. So thank you so much for joining 0:02:19.520 --> 0:02:22.959 us this week. Thank you great to be on the show. Yeah, 0:02:23.000 --> 0:02:26.000 thanks Victor. This might be our first Wyoming based guests. 0:02:26.000 --> 0:02:27.680 I don't know if we've had anyone in Jackson Hall. 0:02:27.880 --> 0:02:31.440 Very very exciting, but Victor, Victor, like I said, what 0:02:31.960 --> 0:02:35.240 a really fascinating career. Um, I feel like you've sort 0:02:35.280 --> 0:02:38.680 of lived through some of my favorite finance books. You know, 0:02:38.840 --> 0:02:42.480 you were at Solomon Brothers in the liars poker years. 0:02:42.760 --> 0:02:45.280 You went on to a long term capital management during 0:02:45.320 --> 0:02:48.639 the one Genius failed era. What a trip, and now 0:02:48.840 --> 0:02:52.160 without partners. Just give us sort of a synopsis of 0:02:52.360 --> 0:02:54.760 your career. I mean, I feel like you sort of 0:02:54.760 --> 0:02:58.000 took the long scenic route into index investing if if 0:02:58.040 --> 0:03:00.960 that's a right way to phrase it it. Just give 0:03:01.040 --> 0:03:03.000 us sort of the brief highlights of your career from 0:03:03.080 --> 0:03:06.200 from Solomon's where we are now. Sure thing. Yeah, I 0:03:06.240 --> 0:03:10.280 think that's a good description along scenic route. Although you know, 0:03:10.280 --> 0:03:13.640 studying finance at university, you know we're kind of taught 0:03:13.680 --> 0:03:17.480 that owning the market portfolio is the right reference point 0:03:17.600 --> 0:03:20.320 to start with. Anyway, I went to the London School 0:03:20.320 --> 0:03:22.680 of Economics and after that I got a job at 0:03:22.680 --> 0:03:26.840 Solomon Brothers and bond portfolio Analysis, the group led by 0:03:26.880 --> 0:03:30.760 Marty Lebowitz, and I worked for Bob Coprash. Eventually I 0:03:30.800 --> 0:03:33.440 was invited to join a trading group out on the 0:03:33.480 --> 0:03:38.200 trading floor, John Merryweather's Government arbitrage group. I worked there, 0:03:38.480 --> 0:03:42.880 and when John and some of my partners from the 0:03:42.960 --> 0:03:45.360 arbitrage desk went to set up l t c M, 0:03:45.760 --> 0:03:47.560 it was right around when I was getting married, So 0:03:47.600 --> 0:03:50.640 I got back from my honeymoon and left Solomon and 0:03:51.040 --> 0:03:56.360 joined ltc M and stayed at lt CM through and 0:03:56.480 --> 0:04:00.320 stayed beyond that to both the help liquid a all 0:04:00.360 --> 0:04:02.960 of the positions that the consortium of banks took over, 0:04:03.120 --> 0:04:08.320 and then to help with my partners founding a successor 0:04:08.400 --> 0:04:10.640 firm that kept some of the positions and tried to 0:04:11.360 --> 0:04:15.600 continue doing relative value trading in a sort of updated manner. 0:04:16.160 --> 0:04:19.720 And since about two thousand or two thousand and one, 0:04:20.200 --> 0:04:22.400 starting at that time, I took a long sabbatical of 0:04:22.440 --> 0:04:26.039 about ten years and spent a lot of time with 0:04:26.120 --> 0:04:30.240 my family, my young three children, and and did a 0:04:30.320 --> 0:04:33.400 lot of thinking and researching and catching up on different things. 0:04:33.440 --> 0:04:36.599 And and then eventually in two thousand and eleven, I 0:04:36.800 --> 0:04:40.640 started ELM Wealth, which is a wealth management firm that 0:04:40.680 --> 0:04:46.120 tries to help people with low cost, diversified investing. And 0:04:46.120 --> 0:04:49.719 it was really based on how my own approach to 0:04:49.800 --> 0:04:54.400 investing had evolved after the Solomon and LTCM years and 0:04:55.120 --> 0:04:57.800 the beginning of my sabbatical years, when I was investing 0:04:57.839 --> 0:04:59.920 in hedge funds and private equity, and I kind of 0:05:00.279 --> 0:05:03.480 decided to really get back to basics and to get 0:05:03.520 --> 0:05:08.400 my family's savings invested in index funds as the main vehicle. 0:05:08.920 --> 0:05:13.520 And I realized that that that decision was really the 0:05:13.560 --> 0:05:15.960 beginning of a number of decisions that needed to get made. 0:05:15.960 --> 0:05:18.520 That it wasn't enough to just say I'm gonna index, 0:05:18.560 --> 0:05:21.320 you know, you needed to decide, well, how much equities 0:05:21.360 --> 0:05:23.719 do I want, and how much US and non US, 0:05:23.760 --> 0:05:27.120 an emerging market and all these different things, and and 0:05:27.680 --> 0:05:31.320 you know, I realized that people needed help with putting 0:05:31.320 --> 0:05:34.160 their portfolios together, but that it should be very very 0:05:34.200 --> 0:05:37.479 low cost. It should be a very low cost product. 0:05:37.520 --> 0:05:40.839 And so that was really how ELM Wealth started back then, 0:05:41.480 --> 0:05:44.839 with a bunch of my colleagues being the first clients. 0:05:45.480 --> 0:05:47.800 And you know, now after ten years, we have about 0:05:47.839 --> 0:05:50.160 one and a half billion of assets and three hundred 0:05:50.240 --> 0:05:56.000 clients that are are investing family and you know it's great, Well, 0:05:56.040 --> 0:05:59.240 well one part I'll throw in. Their Alum has my 0:05:59.279 --> 0:06:05.159 favorite investment company website ever, because not only can you 0:06:05.160 --> 0:06:06.960 read a lot of good writings from Victor, but it's 0:06:07.000 --> 0:06:09.839 got a game on there where you flip a coin 0:06:10.720 --> 0:06:14.720 and the coin has a sixty probability of being heads 0:06:15.160 --> 0:06:17.720 each time, and you start with twenty dollars. You get 0:06:17.720 --> 0:06:21.040 ten minutes to flip the coin as many times as 0:06:21.080 --> 0:06:23.760 you can and bet as much as you want of 0:06:23.839 --> 0:06:26.720 your bounce. Victor, I was up to like ten grand 0:06:26.720 --> 0:06:29.400 on that thing by the end of my ten minutes. 0:06:29.400 --> 0:06:33.080 I assume you pay out on that, right. We did 0:06:33.160 --> 0:06:35.479 pay out on that we you know, originally that's what 0:06:35.560 --> 0:06:39.040 we did. We did it for real money with quantitatively 0:06:39.160 --> 0:06:42.760 trained mostly young people that were either you know, in 0:06:43.040 --> 0:06:47.000 university or in uh Wall Street firms, and we did 0:06:47.040 --> 0:06:51.679 give them to start and we paid them out real 0:06:51.760 --> 0:06:54.840 money based on their winnings after half an hour and 0:06:54.880 --> 0:06:57.080 we and if they got we we were gonna we 0:06:57.400 --> 0:07:01.000 had a maximum pay out and so if you got 0:07:01.000 --> 0:07:03.760 close to that, we would say you're close to the 0:07:03.800 --> 0:07:06.120 maximum payout of two fifty you know, you might want 0:07:06.120 --> 0:07:08.600 to bet accordingly, you know, sort of into the end. 0:07:08.800 --> 0:07:10.960 So we didn't pay anybody ten thousand, but we paid 0:07:10.960 --> 0:07:15.920 a bunch two fifty dollars. And it was an amazing experiment, 0:07:16.000 --> 0:07:19.239 and it really got us thinking that there's not enough 0:07:20.240 --> 0:07:24.920 said about investment sizing right. I mean that everything that 0:07:25.000 --> 0:07:27.280 we hear about in the media and so on is 0:07:27.320 --> 0:07:31.360 about what to invest in, what's going up, um, what's 0:07:31.400 --> 0:07:34.360 going down, what's going sideways. But we need to get 0:07:34.400 --> 0:07:37.560 the investment sizing decision right to In fact, you know, 0:07:37.600 --> 0:07:40.800 if you think about those two decisions, if I get 0:07:40.840 --> 0:07:45.600 the choice of investments wrong, but my investment sizing right, 0:07:46.200 --> 0:07:48.280 I'm gonna be okay. I mean, I'm not gonna be happy, 0:07:48.400 --> 0:07:51.680 I'm gonna lose money, but I'm gonna be okay. If 0:07:51.720 --> 0:07:56.160 I get the investment choice right, I choose the right 0:07:56.240 --> 0:07:59.440 things to invest in, but I get the size wrong 0:07:59.760 --> 0:08:02.600 on bust. And you know, in some ways that's the 0:08:02.640 --> 0:08:07.480 story of LTCM, because you know, when we went down 0:08:08.040 --> 0:08:13.840 plus percent, there was a broad feeling that the investments 0:08:13.840 --> 0:08:16.520 that we had in the portfolio were good investments, and 0:08:16.560 --> 0:08:20.120 that was born out over the subsequent few years when 0:08:20.200 --> 0:08:24.200 most of those investments, you know, bounced back to being 0:08:24.480 --> 0:08:28.600 good investments. But we had the size wrong. And so 0:08:28.640 --> 0:08:31.000 even though we had good investments, you know that when 0:08:31.000 --> 0:08:32.840 you have the sage on. So think about the U 0:08:32.920 --> 0:08:36.120 S stock market. I mean the last hundred and twenty years, 0:08:37.040 --> 0:08:38.880 the U S stock market, I don't know, has gone 0:08:38.920 --> 0:08:42.760 up nine let's call it nine percent a year. Right, 0:08:43.200 --> 0:08:45.360 So let's say you know you're sitting there a hundred 0:08:45.360 --> 0:08:48.000 and twenty years ago, and you knew that it was 0:08:48.040 --> 0:08:51.480 going to go up by nine percent a year. Well, 0:08:51.600 --> 0:08:53.800 if you were greedy, you might say, oh my goodness, 0:08:53.800 --> 0:08:57.200 you know, I want to really get rich. So you 0:08:57.280 --> 0:08:59.760 might have wanted to own as much of it as 0:08:59.800 --> 0:09:02.680 you could. Let's say that you were leveraged three x 0:09:02.800 --> 0:09:05.040 or something like that. And if you were and if 0:09:05.040 --> 0:09:08.360 you kept yourself leveraged at three x, there were a 0:09:08.400 --> 0:09:10.920 couple of times when you would have actually gone bust 0:09:11.160 --> 0:09:12.560 or I don't know, three or three and a half 0:09:12.720 --> 0:09:16.280 x something, depending depending on exactly how often you were 0:09:16.320 --> 0:09:19.240 rebalancing your portfolio. But there was a certain amount of leverage. 0:09:19.280 --> 0:09:23.160 Even though it's like the best investment ever, you would 0:09:23.200 --> 0:09:26.520 have lost all your money and you would be bust today. 0:09:26.760 --> 0:09:29.840 But if you invested, you know, the right size in it, 0:09:29.920 --> 0:09:34.480 you would have whatever was a forty x or something, 0:09:34.840 --> 0:09:38.640 uh from then until now, or it's a it's a 0:09:38.679 --> 0:09:41.200 fascinating point and that the questions at the end of 0:09:41.240 --> 0:09:44.280 the game were I think even trickier. And and now 0:09:44.320 --> 0:09:46.520 I get it. I kind of got it. I thought 0:09:46.520 --> 0:09:49.280 it was more about risk tolerance, but sort of same 0:09:49.360 --> 0:09:51.480 same side to two different sides of the same coin, 0:09:51.559 --> 0:09:54.000 I guess. But I almost busted out on the first flip. 0:09:54.040 --> 0:09:57.360 I think I bet twentys on the first flip, so 0:09:57.360 --> 0:10:01.240 I am almost busted out, but at with ltcm of course. 0:10:01.280 --> 0:10:03.360 And it's it's the size in two different ways, the 0:10:03.400 --> 0:10:05.840 size relative to how big the market was too. I guess. 0:10:05.840 --> 0:10:08.000 You know, you guys were sort of the original whale 0:10:08.080 --> 0:10:11.560 as they as they say, uh these days, I guess yeah. 0:10:11.800 --> 0:10:13.560 I think in some of some of the positions, you 0:10:13.559 --> 0:10:17.400 know that they were positions that people were worried about 0:10:17.440 --> 0:10:20.880 what the impact would be when liquidation, when and if 0:10:20.920 --> 0:10:24.199 liquidation was going to happen. That's right, And Victor Mike 0:10:24.360 --> 0:10:26.320 is right in that your website has so much research 0:10:26.360 --> 0:10:28.600 on it, so and I tried to read a bunch 0:10:28.640 --> 0:10:30.400 of it, so I might be mixing some things up here, 0:10:30.400 --> 0:10:32.920 but correct me from wrong. I think you wrote a 0:10:32.920 --> 0:10:37.440 piece for Bloomberg last year and you said huge gains 0:10:37.440 --> 0:10:40.520 and things like Tesla, and I just checked because I 0:10:40.559 --> 0:10:44.080 put really behind me and I couldn't remember if seven 0:10:45.640 --> 0:10:48.800 was its actual gain for But you had said that 0:10:48.800 --> 0:10:51.680 that that games like that is sending the wrong message 0:10:51.720 --> 0:10:55.600 to individual investors, and so I wanted to ask you 0:10:55.679 --> 0:10:58.880 and the research that or the game that Mike just mentioned, 0:10:58.880 --> 0:11:01.800 I think was also part of that article that you wrote, 0:11:01.800 --> 0:11:04.360 But so I wanted to ask you about that and 0:11:04.520 --> 0:11:06.680 also the sell off that we're seeing in some of 0:11:06.720 --> 0:11:10.560 those names now, especially in some of the meme stocks, 0:11:10.640 --> 0:11:13.400 or any of those names that had run up just 0:11:13.600 --> 0:11:16.960 so so much over the last two years. Yes, I 0:11:16.960 --> 0:11:20.280 mean the you know, it's all it's all related to 0:11:20.280 --> 0:11:23.760 each other. I mean the the coin flip game, you know, 0:11:23.840 --> 0:11:27.560 really helps us to think about sizing in a you know, 0:11:27.640 --> 0:11:30.200 sort of on a blank slate, because you know, when 0:11:30.240 --> 0:11:31.800 you're thinking about how much should I have in the 0:11:31.800 --> 0:11:35.320 stock market, well you might say I should have or 0:11:36.600 --> 0:11:38.679 so it's kind of like almost within a range to 0:11:38.760 --> 0:11:41.160 begin with. But when you've got this coin that you're flipping, 0:11:41.200 --> 0:11:44.120 and you could put all of your money onto one flip, 0:11:44.679 --> 0:11:47.360 then um, you know it's it's it's more of a 0:11:47.360 --> 0:11:51.400 blank slate with the full opportunity to to do well 0:11:51.520 --> 0:11:55.040 or to hurt yourself based on sizing. The main message 0:11:55.040 --> 0:11:56.640 of the whole thing is that when you're trying to 0:11:56.679 --> 0:12:00.760 figure out how much you should bet on something that's good, 0:12:00.920 --> 0:12:03.240 how much you should invest on something that you believe 0:12:03.360 --> 0:12:08.160 is good, that the objective is not to make as 0:12:08.240 --> 0:12:12.960 much money as possible. The objective needs to be to 0:12:13.120 --> 0:12:17.439 maximize your utility. And and I know, you know, going 0:12:17.520 --> 0:12:20.240 this is now taking us into an economics course or whatever, 0:12:20.280 --> 0:12:22.560 but it's not. I mean, it's just that the more 0:12:22.640 --> 0:12:27.280 money we have, the less that it's improving our welfare 0:12:27.400 --> 0:12:30.480 at the margin. Right, So, um, there's this. You know, 0:12:30.520 --> 0:12:34.040 there's a curve that would be a concave curve. That's 0:12:34.080 --> 0:12:37.800 as our wealth goes up, our happiness or our utility 0:12:38.000 --> 0:12:41.320 is going up, but it's going up more slowly. And 0:12:41.360 --> 0:12:45.040 this is what makes us makes normal people risk averse 0:12:45.160 --> 0:12:47.920 that word kind of self regulating. The more that we 0:12:48.000 --> 0:12:52.600 have of something, the less we want that additional unit 0:12:52.679 --> 0:12:56.000 of it. And so winning is good. We want to win, 0:12:56.480 --> 0:12:59.160 but losing is kind of worse than winning. And this 0:12:59.240 --> 0:13:02.760 is a classical economic idea. It's not uh, it's it's 0:13:02.800 --> 0:13:05.280 not from behavioral finance or anything like that. I mean, 0:13:05.320 --> 0:13:08.320 that is why we are and should be risk averse. 0:13:08.360 --> 0:13:10.400 And it's an idea. You know, it's been around for 0:13:10.559 --> 0:13:14.600 hundreds of years, so you know, so when you see 0:13:14.640 --> 0:13:17.920 people that are going all in on things that are 0:13:18.080 --> 0:13:23.080 super risky, it really is hard to make sense of that. 0:13:23.679 --> 0:13:26.960 You know, based on a typical or a sensible set 0:13:27.000 --> 0:13:31.240 of preferences with regard to risk aversion. And you know, 0:13:31.280 --> 0:13:33.600 the more attractive that something is, the more you should 0:13:33.600 --> 0:13:36.000 want to have of it. Right, So if if in 0:13:36.040 --> 0:13:38.280 the coin flip game, if we had made the coin 0:13:38.800 --> 0:13:42.800 seventy instead of a sixty forty coin, you should have 0:13:42.880 --> 0:13:46.040 wanted to bet more on each flip. Then if you know, 0:13:46.080 --> 0:13:48.960 then then if we're sixty forty, if the stock market 0:13:49.640 --> 0:13:54.439 is offering higher expected returns relative to the safe asset 0:13:54.480 --> 0:13:56.680 that you would be invested in if you weren't invested 0:13:56.679 --> 0:13:59.040 in the stock market, then you should own more of 0:13:59.080 --> 0:14:02.320 the stock market. But sometimes people just get a little 0:14:02.360 --> 0:14:05.640 carried away and are taking on so much risk that 0:14:05.720 --> 0:14:10.280 that the probability that they will lose money gets to 0:14:10.280 --> 0:14:15.760 be very high, even though they're expected gain in monetary 0:14:15.880 --> 0:14:19.800 terms is very high. But they're doing something which is not, 0:14:20.160 --> 0:14:22.520 you know, necessarily in their best interests. Of course, we 0:14:22.520 --> 0:14:25.640 can always say whatever somebody does, by definition is in 0:14:25.720 --> 0:14:29.800 their best interest. But I think that we can sometimes 0:14:30.000 --> 0:14:33.280 talk to people about a framework and they might look 0:14:33.280 --> 0:14:35.360 at things differently and change what they think is in 0:14:35.400 --> 0:14:47.160 their best interest. In fact, I wanted to get back 0:14:47.200 --> 0:14:50.120 to that UH what I talked about in the introduction 0:14:50.160 --> 0:14:54.960 there this paper you and your colleagues have out about tape. 0:14:55.040 --> 0:14:57.720 You know, the cyclically adjusted price earnings or if you 0:14:57.840 --> 0:15:02.360 prefer the inverseity cyclically adjusted UH earnings yield. You know, 0:15:03.040 --> 0:15:06.560 all the research shows that, you know, if the PE 0:15:06.600 --> 0:15:10.320 starts getting higher and higher, your future return expected returns 0:15:10.320 --> 0:15:14.000 get lower and lower. Your research showed is that UM 0:15:14.000 --> 0:15:17.960 trying to allocate along those lines doesn't seem to work 0:15:18.480 --> 0:15:21.120 on a sort of simplified level, that that you sort 0:15:21.120 --> 0:15:24.640 of a static allocation through all the valuations would would 0:15:24.640 --> 0:15:27.920 have done better. UM can correct me if I'm bungling 0:15:27.960 --> 0:15:30.600 the the research there, but but then you took a 0:15:30.640 --> 0:15:33.640 step further to figure out, well, how how should we 0:15:33.680 --> 0:15:37.760 be using sickly cyclically adjusted valuation measures like this? So 0:15:37.760 --> 0:15:39.760 so walk us through that paper and what the main 0:15:39.840 --> 0:15:43.360 findings are. We we haven't we haven't published it yet, 0:15:43.360 --> 0:15:46.800 but it's forth it's forthcoming. We've been getting comments from 0:15:47.200 --> 0:15:50.840 friends and some academics, and that's what you said, is 0:15:50.880 --> 0:15:55.240 exactly right. That first of all, CAPE or it's a 0:15:55.280 --> 0:15:58.680 little it's even nicer. Rather than thinking about the price 0:15:58.720 --> 0:16:00.840 to earnings ratio, it's nicer think about it as the 0:16:00.880 --> 0:16:04.200 earnings yield, which is just one over CAPE. And the 0:16:04.240 --> 0:16:07.200 earnings yield is a decent you know, it's not perfect, 0:16:07.200 --> 0:16:11.680 but it's a decent predictor of the long term real 0:16:11.760 --> 0:16:16.040 return after inflation, that that you should expect to earn 0:16:16.160 --> 0:16:20.720 from owning a diversified portfolio of equities. And that is 0:16:20.840 --> 0:16:24.040 the case. You know that that predictive power has been 0:16:24.640 --> 0:16:26.920 uh there for the last hundred and twenty years in 0:16:26.920 --> 0:16:30.960 the US, and it's also existed in non US markets, 0:16:31.040 --> 0:16:34.160 and it just makes logical sense. It's based on the 0:16:34.240 --> 0:16:38.360 idea that a company, if a company paid out all 0:16:38.360 --> 0:16:41.800 of its earnings every year to its investors that it 0:16:41.880 --> 0:16:46.000 could keep its earnings level with inflation and paying out 0:16:46.040 --> 0:16:48.360 all of its earnings. If it doesn't pay out all 0:16:48.400 --> 0:16:51.359 of its earnings and keep some of them as retained earnings, 0:16:51.440 --> 0:16:54.600 it can actually grow its earnings faster than inflation. You know. 0:16:54.600 --> 0:16:57.640 So it's just but the basic model is just saying, well, 0:16:57.840 --> 0:16:59.760 if it paid out all its earnings, could it keep 0:16:59.840 --> 0:17:03.440 up with inflation? And you know that's the underlying idea 0:17:03.680 --> 0:17:06.040 and why it seems to be the case. So when 0:17:06.080 --> 0:17:08.520 we look at the last hundred and twenty years, we see, wow, 0:17:09.240 --> 0:17:13.760 when the earning zeald was around four oh, the next 0:17:13.760 --> 0:17:17.320 ten or twenty years, equities delivered about a four percent 0:17:17.400 --> 0:17:21.639 return over inflation when the pe was sorry, when the 0:17:21.640 --> 0:17:24.280 earning zield was seven and a half percent. You know, 0:17:24.720 --> 0:17:27.480 on average, you got around a seven and a half 0:17:27.520 --> 0:17:30.720 percent real return above inflation from holding equities for a 0:17:30.760 --> 0:17:35.120 long time. So you would say that's wonderful. So now 0:17:35.160 --> 0:17:37.320 all I need to do is just own more equities 0:17:37.359 --> 0:17:39.440 when they're going to give a higher return, own less 0:17:39.440 --> 0:17:41.960 equities when they're gonna give a lower return. And I'm 0:17:41.960 --> 0:17:45.440 gonna do better than somebody that just does a static 0:17:45.560 --> 0:17:50.119 allocation of always being say sixty percent in equities in 0:17:50.200 --> 0:17:53.920 thirty five percent and say treasury build and you would 0:17:53.920 --> 0:17:56.720 think that that is what you would find. But when 0:17:56.720 --> 0:17:59.800 you run the numbers, you don't find that. I mean 0:17:59.840 --> 0:18:02.399 you you find that over the last hundred and twenty 0:18:02.480 --> 0:18:06.080 years that that extra information from the earning zeald didn't 0:18:06.080 --> 0:18:08.800 help you. And in fact, over the last twenty years 0:18:08.840 --> 0:18:11.440 it's been really terrible. It would have had you very 0:18:11.560 --> 0:18:15.800 underweight equities because the earnings yield has been relatively low. 0:18:15.840 --> 0:18:19.960 I mean today the US earnings yield is in the 0:18:20.840 --> 0:18:24.760 percentile of bad, and so you would not want to 0:18:24.760 --> 0:18:28.040 own very many equities today based on that rule. But 0:18:28.240 --> 0:18:33.080 what's happening is it's missing the it's missing a critical component. 0:18:33.760 --> 0:18:36.000 What is it that you should be investing in if 0:18:36.000 --> 0:18:38.879 you're not investing in equities or what should you compare 0:18:39.400 --> 0:18:42.359 those equities too? Well, you might say I'm going to 0:18:42.440 --> 0:18:44.439 compare it to bills because I'm either going to be 0:18:44.520 --> 0:18:47.520 in bills or I'm gonna be in uh in equities. Well, 0:18:47.520 --> 0:18:49.800 if you're going to do that, then you need to 0:18:49.880 --> 0:18:54.360 think about what's the expected real return of owning bills. 0:18:55.000 --> 0:18:58.080 You can't just say I'm gonna own this based on 0:18:58.400 --> 0:19:01.480 its expected return, or I'm just gonna own that without 0:19:01.520 --> 0:19:04.800 thinking about his expected return. And really what we should 0:19:04.800 --> 0:19:07.960 be comparing is more apples to apples. You know, either 0:19:08.040 --> 0:19:13.400 equities that hopefully we'll deliver this long term real return 0:19:14.400 --> 0:19:18.399 including a premium for the risk we're taking, or something 0:19:18.440 --> 0:19:22.520 else that gives us a safe, long term real return. 0:19:23.000 --> 0:19:26.320 And that thing exists, and it's tips. It's it's US 0:19:26.400 --> 0:19:29.800 inflation protected bonds called TIPS, and they've been around since 0:19:31.480 --> 0:19:34.240 Unfortunately they haven't been around for a hundred and twenty years. 0:19:34.720 --> 0:19:38.119 If they had been, I'm sure that the research that 0:19:38.200 --> 0:19:40.919 we've done in the understanding of this would be just 0:19:41.000 --> 0:19:43.560 second nature to everybody. But TIPS is still a little 0:19:43.600 --> 0:19:46.520 bit of a weird little corner, you know, like a 0:19:46.520 --> 0:19:49.280 lot of people haven't even heard of them exactly. Or 0:19:49.320 --> 0:19:51.280 it's like or those those I bonds that you can 0:19:51.280 --> 0:19:53.439 buy at the post office. So what we did in 0:19:53.440 --> 0:19:55.679 our research, as we said, well, what if now we 0:19:55.800 --> 0:19:59.080 did this apples to apples investment program where you were 0:19:59.119 --> 0:20:02.880 either invested in equities or in tips, depending on the 0:20:03.000 --> 0:20:06.920 spread in expected return between the two. So let's take 0:20:07.560 --> 0:20:11.560 the earnings yield of equities minus the yield the real 0:20:11.640 --> 0:20:14.680 yield on tips, and we'll call that the excess expected 0:20:15.119 --> 0:20:20.359 return on on equities or the excess earnings yield. And 0:20:20.440 --> 0:20:24.000 let's do our allocation according to that, and will either 0:20:24.080 --> 0:20:26.280 be in equities or will be in tips, depending on 0:20:26.320 --> 0:20:31.280 how attractive that is. So back in, for instance, amazingly 0:20:31.480 --> 0:20:34.320 and partly this is because the U S tips market 0:20:34.400 --> 0:20:39.840 was so young. Tips were yielding four four percent above 0:20:39.920 --> 0:20:43.879 inflation and US equities back then it was sort of 0:20:43.880 --> 0:20:47.920 a pretty uh builliant time for equities. The earnings yield 0:20:47.960 --> 0:20:51.160 was around four percent. Why would you want to own 0:20:51.160 --> 0:20:55.359 equities if they're expected long term return it's four percent, 0:20:55.960 --> 0:20:58.560 But you could buy tips and get four percent. Well, 0:20:59.080 --> 0:21:00.640 there might be some reason is to own a little 0:21:00.640 --> 0:21:02.720 bit of equities, but you wouldn't want to own a lot. 0:21:03.240 --> 0:21:06.520 And sure enough, that was a really good decision ex post. 0:21:06.880 --> 0:21:08.680 But it made sense. It's not just it's not a 0:21:08.760 --> 0:21:12.040 cherry picking thing. Just makes sense. Right. And over the 0:21:12.119 --> 0:21:16.840 last few years, right, tips have been negative, I mean, 0:21:17.240 --> 0:21:19.800 which is really weird, etcetera. But you know, in the 0:21:19.920 --> 0:21:23.840 real interest rate has been negative because inflation has been 0:21:23.880 --> 0:21:27.040 relatively high and expected to be high compared to what 0:21:28.080 --> 0:21:32.000 we can get on on treasuries. And so even though 0:21:32.040 --> 0:21:35.840 the earnings yield has been really low, uh, the spread 0:21:35.880 --> 0:21:38.920 between the earnings yield and tips has been pretty high. 0:21:39.160 --> 0:21:42.440 And so it made sense on that basis to continue 0:21:42.480 --> 0:21:45.480 to own a healthy amount of equities. And so then 0:21:45.520 --> 0:21:49.320 you say, well, okay, you know that's just that's really 0:21:49.359 --> 0:21:51.560 a short time. What twenty five years, I mean, that's 0:21:51.560 --> 0:21:53.840 a really short time, and it's is super short when 0:21:53.880 --> 0:21:55.600 you're thinking about this stuff. So we said, well, what 0:21:55.600 --> 0:21:57.760 would it look like if we went back to Well, 0:21:57.760 --> 0:22:00.560 there's no tips, So we said, well, can we try 0:22:00.600 --> 0:22:04.120 to make believe, you know, figure out what Tips might 0:22:04.160 --> 0:22:06.760 have been trading at going back? And so in our 0:22:06.800 --> 0:22:10.160 research paper, we we did that. You know, it's far 0:22:10.280 --> 0:22:12.439 from perfect. I mean, who knows where they would have traded, 0:22:12.440 --> 0:22:15.480 but we've made some guesses based on the information that 0:22:15.520 --> 0:22:18.719 existed at each moment in time going back. And then 0:22:18.800 --> 0:22:21.199 we ran the analysis all the way back and you know, 0:22:21.359 --> 0:22:25.640 just as from until today it was a good way 0:22:25.720 --> 0:22:29.760 to invest your money, it was also good from hundred 0:22:29.880 --> 0:22:33.919 to So that's really the research paper and a nutshell, 0:22:33.960 --> 0:22:36.520 and it's really just based on this idea that the 0:22:36.640 --> 0:22:39.639 high all else equal, the more you expect to earn 0:22:39.800 --> 0:22:42.440 relative to your safe asset, the more exposure to take. 0:22:42.480 --> 0:22:45.000 And is right back to the the whole coin flipping, 0:22:45.720 --> 0:22:49.280 the whole coin flipping exercise as well thell doanta. Every 0:22:49.320 --> 0:22:52.439 time Victor said, going back a twenty years, I was 0:22:52.520 --> 0:22:55.000 bracing for you to make a joke about you were 0:22:55.000 --> 0:22:57.199 thinking about your child, that's what. Yeah, that's when I 0:22:57.200 --> 0:22:59.920 was in high school or something. Yeah, but Victor, I 0:23:00.119 --> 0:23:03.080 could bottom line all that, Um, it sounds to me 0:23:03.200 --> 0:23:06.920 that with real yield still negative, it still makes sense 0:23:06.960 --> 0:23:10.199 to be sort of, you know, aggressively exposed to stocks. 0:23:10.240 --> 0:23:13.440 Is that is it as imposed that? Yes, I think 0:23:13.480 --> 0:23:17.159 it is. Yeah. And and non US equities, um, you know, 0:23:17.240 --> 0:23:21.720 are are offering much higher have a much higher cyclically 0:23:21.760 --> 0:23:24.320 adjusted earning zeal than US equities. I mean that's a 0:23:24.359 --> 0:23:29.359 really interesting topic, worthy of its own long conversation. But 0:23:29.800 --> 0:23:34.840 so global equities are even more attractive than just US equities, 0:23:34.840 --> 0:23:38.480 So the whole world combined is even more attractive. And yes, 0:23:38.560 --> 0:23:42.720 you know that that the excess expected return is UH 0:23:43.040 --> 0:23:45.840 is pretty nice. You know, it's it's it's healthy. I mean, 0:23:46.080 --> 0:23:48.639 it's it's really healthy. I mean, get an extra getting 0:23:48.640 --> 0:23:53.480 an extra five percent for taking equity market risk feels okay, 0:23:53.680 --> 0:23:56.600 you know, I mean, you know these are imperfect estimates. 0:23:56.640 --> 0:23:58.960 You know, the earnings. The one thing you know that 0:23:59.119 --> 0:24:02.040 is not going to have up been is uh, the 0:24:02.119 --> 0:24:05.160 you're gonna earn five percent. You know that's not gonna happen. 0:24:05.160 --> 0:24:09.200 You're gonna earn six three, you know something. But you 0:24:09.280 --> 0:24:11.360 know that's our expectation, and we have to make our 0:24:11.400 --> 0:24:15.320 decisions based on, uh, you know, the expectations based on 0:24:15.400 --> 0:24:19.280 the distribution of outcomes, and you know that summary statistic 0:24:19.400 --> 0:24:22.919 is useful in combination with the risk. So Victor, obviously, 0:24:22.960 --> 0:24:24.879 I've been talking to a lot of people about the 0:24:24.960 --> 0:24:28.600 recent valuation reset that we've had since the start of 0:24:28.600 --> 0:24:30.359 the year. So I wanted to ask you how you're 0:24:30.400 --> 0:24:34.359 thinking about the about a volatility that we've seen, especially 0:24:34.680 --> 0:24:37.600 when we have some people comparing, you know, making comparisons 0:24:37.680 --> 0:24:42.000 to two thousand eight or two thousand Well, you know, 0:24:42.080 --> 0:24:45.800 our perspective is to look at the broad market, and 0:24:46.520 --> 0:24:50.439 you know, the broad equity market, uh, globally and the 0:24:50.560 --> 0:24:54.679 US have been more volatile than they had been for 0:24:54.840 --> 0:24:57.399 much of the second half of two thousand and twenty 0:24:57.400 --> 0:25:00.520 one and more volatile than they are, say, on average. 0:25:01.440 --> 0:25:05.560 But the performance in January, um, you know, it was 0:25:05.600 --> 0:25:07.920 a down month for US equities, it was a down 0:25:07.960 --> 0:25:10.600 month for global equities, and it was a relatively large 0:25:10.720 --> 0:25:14.639 down month, but it wasn't huge. The real story, the 0:25:14.720 --> 0:25:17.359 real you know, amazing stuff that's going on right is 0:25:17.400 --> 0:25:22.400 this rotation that's happening within the equity market where low 0:25:22.480 --> 0:25:24.879 price to book stocks have been doing so much better 0:25:25.520 --> 0:25:30.400 than high high price to book stocks or high price 0:25:30.440 --> 0:25:33.320 to earnings. You know, growth stocks have been underperforming in 0:25:33.400 --> 0:25:36.800 particularly like certain sectors of growth stocks have been really 0:25:36.880 --> 0:25:40.920 underperforming value stocks. And that rotation, you know, has has 0:25:40.960 --> 0:25:44.840 been really dramatic. Um. But you know, we don't have 0:25:45.400 --> 0:25:48.080 too much that we can say about that because all right, 0:25:48.119 --> 0:25:50.080 you know that I don't have a great insight into 0:25:50.080 --> 0:25:52.800 the whole thing, because yes, it's been very dramatic. But 0:25:53.040 --> 0:25:57.199 you know that I find it so much easier to, uh, 0:25:57.359 --> 0:25:59.480 you know, to to look at the broad market. It 0:25:59.520 --> 0:26:01.560 reminds me of my dad. I guess this joke is 0:26:01.600 --> 0:26:05.040 probably in many different cultures, but my dad was Iranian 0:26:05.160 --> 0:26:08.680 and he always loved this joke about this character named 0:26:08.880 --> 0:26:13.879 lan Astradin and he was looking around his house and 0:26:14.280 --> 0:26:16.639 his wife said, what are you looking for? And he said, 0:26:16.720 --> 0:26:19.639 you know, I I misplaced my wallet and she said, well, 0:26:19.680 --> 0:26:21.879 where did you lose it? And he said, well, I 0:26:21.960 --> 0:26:24.359 think I lost it in the barn And she said, well, 0:26:24.359 --> 0:26:25.880 why are you looking for it here? And he says, 0:26:25.920 --> 0:26:27.639 there's no light in the barn. You know, I got 0:26:27.760 --> 0:26:30.560 to look for it here. You know, I can't see 0:26:30.600 --> 0:26:33.640 anything in the bar and started. So, you know that's 0:26:33.680 --> 0:26:36.360 how I feel that. Um, you know, when we're trying 0:26:36.400 --> 0:26:38.320 to think about investing, I want to look where the 0:26:38.440 --> 0:26:40.960 light is, where I can see a little bit what's 0:26:40.960 --> 0:26:42.520 going on. I think it's you know, for me, it's 0:26:42.560 --> 0:26:45.440 too hard to look at individual stocks. That's a really 0:26:45.520 --> 0:26:48.600 tough thing. You know, that's a specialist thing to do, 0:26:48.920 --> 0:26:51.080 and there's lots and lots of capital and people that 0:26:51.240 --> 0:26:53.240 want to do that and are good at doing that. 0:26:53.720 --> 0:26:55.680 I want to look at these broad indusseries where I 0:26:55.720 --> 0:26:58.600 can have a better idea of long term expected return. 0:26:58.680 --> 0:27:02.560 And when it comes to you know, these different sectors 0:27:02.720 --> 0:27:05.359 and all of that, it's so difficult to have a 0:27:05.440 --> 0:27:09.000 view because it's like these things anything can happen, you know, 0:27:09.400 --> 0:27:13.359 within individual companies and within sectors you know as well. 0:27:13.520 --> 0:27:17.480 So it's been really dramatic, but you know, from the 0:27:17.520 --> 0:27:20.560 broad market it's been more um, you know, a lot 0:27:20.640 --> 0:27:23.960 more tame. Still pretty painful, but tame. Yeah. I want 0:27:24.000 --> 0:27:26.040 to follow up on that Victor because I wanted to 0:27:26.080 --> 0:27:28.840 ask you about that. You know, people talk about how 0:27:28.920 --> 0:27:32.760 twenty was the year where every chart we like to 0:27:32.800 --> 0:27:35.600 look at was you know, basically ruined for life. You know, 0:27:35.680 --> 0:27:38.200 we we've never seen GDP contract the way it did 0:27:38.320 --> 0:27:40.440 and then bounce back the way it did. You know, 0:27:40.520 --> 0:27:43.360 we've never seen some of these things that we saw 0:27:43.480 --> 0:27:47.119 during the pandemic and the aftermath. Does that sort of 0:27:47.680 --> 0:27:51.280 coming out of a situation like that, does that kind 0:27:51.320 --> 0:27:54.399 of affect your confidence in this academic approach you have 0:27:54.640 --> 0:27:58.120 to markets or does it make you believe in them 0:27:58.160 --> 0:28:01.199 even more? That you know, his tree is somehow going 0:28:01.240 --> 0:28:04.560 to get us, you know, through this sort of unprecedented 0:28:04.760 --> 0:28:06.720 error that that we're we we've been through, you know 0:28:06.760 --> 0:28:10.119 what I mean to me, I almost it seems like 0:28:10.160 --> 0:28:12.840 a little bit of being risk averse makes sense in 0:28:12.920 --> 0:28:16.920 this environment, just because we're coming through uh, such unprecedented 0:28:17.080 --> 0:28:19.399 and at times, dude, does that plan you're thinking it 0:28:19.480 --> 0:28:21.120 all just sort of you know, the year where every 0:28:21.240 --> 0:28:26.080 chart was was ruined by just COVID anomalies. I think 0:28:26.160 --> 0:28:30.760 that the the tendency to look at what's happened in 0:28:30.920 --> 0:28:40.320 our near term history is can lead to insufficient amount 0:28:40.480 --> 0:28:45.920 of concern and and worries about the future. We have 0:28:46.040 --> 0:28:48.360 come to the edge of the precipice a couple of 0:28:48.480 --> 0:28:51.920 times in our recent memory, I mean two thousand and 0:28:52.400 --> 0:28:56.760 two thousand eight, two thousand nine, the pandemic. These were 0:28:57.280 --> 0:29:00.560 points where we came to the precipice and we were 0:29:00.640 --> 0:29:07.720 about to witness permanent destruction of capital. And then it 0:29:07.920 --> 0:29:12.240 came back at the last moment, mostly due to government 0:29:12.480 --> 0:29:16.560 intervention and printing of money and support and uh. And 0:29:16.720 --> 0:29:20.080 of course we saw the precipice and went over it, 0:29:20.400 --> 0:29:23.760 you know, in the nineteen thirties, um, where where we 0:29:23.840 --> 0:29:27.080 did see that destruction. So you know, I think that, 0:29:27.360 --> 0:29:30.360 um that that if anything, you know, two thousand and 0:29:30.440 --> 0:29:33.400 twenty uh and two thousand and eight nine can kind 0:29:33.480 --> 0:29:35.960 of give this wrong to me, can give this wrong 0:29:36.120 --> 0:29:40.080 message you know, of buying the dips, of everything's gonna 0:29:40.080 --> 0:29:43.520 be okay, of even and and this is kind of 0:29:43.520 --> 0:29:46.680 an interesting thing. You know that within academia there's a 0:29:46.720 --> 0:29:50.400 lot of debate about what they call the excess volatility 0:29:50.520 --> 0:29:54.000 of equities. It's kind of like the economy and and 0:29:54.200 --> 0:29:58.040 aggregate earnings are not that volatile, are much less volatile 0:29:58.080 --> 0:30:00.600 than equities are. And so it seems as though what's 0:30:00.600 --> 0:30:04.040 happening is when equities go down, it's a result of 0:30:04.120 --> 0:30:08.120 two things. One is that people are more negative on 0:30:08.240 --> 0:30:11.480 the future of the earnings. You know that that earnings 0:30:11.520 --> 0:30:15.680 growth and earnings just the real fundamental cash flows are 0:30:15.720 --> 0:30:17.920 going to be lower. Fine, that's one thing. But the 0:30:17.960 --> 0:30:20.040 other thing that tends to happen when the market goes 0:30:20.080 --> 0:30:22.360 down is like that the discount rate goes out, the 0:30:22.440 --> 0:30:25.160 expected return is higher. So it's it's a combination of 0:30:25.240 --> 0:30:27.800 those things. And so if we kept if somehow the 0:30:27.880 --> 0:30:30.200 market kept the same discount rate, equities would be a 0:30:30.200 --> 0:30:33.240 lot less volatile. And and that's really you know that 0:30:33.360 --> 0:30:35.520 I think we have to be careful about putting too 0:30:35.640 --> 0:30:37.480 much faith in that because at the end of the day, 0:30:38.400 --> 0:30:43.520 markets do can and do and have gone to zero 0:30:43.800 --> 0:30:46.920 and never come back. So you know, like the discount 0:30:46.960 --> 0:30:49.440 rate could get really high, but all of a sudden, 0:30:49.520 --> 0:30:51.720 it's like that market's gone, you know, and so the 0:30:51.800 --> 0:30:55.800 Russian market, the Chinese market, other markets have really got 0:30:55.840 --> 0:30:58.400 an individual companies. That happens all the time. But even 0:30:58.520 --> 0:31:01.000 broad markets can go to zero row and then they 0:31:01.080 --> 0:31:04.880 just they're absorbed. They're absorbed there in the academic speak, 0:31:05.440 --> 0:31:07.880 you know, I guess different people get different messages out 0:31:07.920 --> 0:31:09.880 of it. Like, you know, somebody could look at two 0:31:09.920 --> 0:31:12.640 thousand and twenty and say, wow, that's really scary. That's 0:31:12.760 --> 0:31:16.320 that's what I think, because we didn't go over the precipice, 0:31:16.320 --> 0:31:18.120 but we almost did, and we have to realize that 0:31:18.160 --> 0:31:20.600 we could have gone over. But other people could look 0:31:20.640 --> 0:31:22.400 at it and say, oh, everything's gonna be okay. I mean, 0:31:22.440 --> 0:31:24.640 that was nothing, you know, look at that, you know 0:31:24.920 --> 0:31:27.280 it was it was actually a good year, but we 0:31:27.400 --> 0:31:30.640 were almost over. We could have gone over, and we 0:31:30.720 --> 0:31:32.440 didn't go over, but we could have gone over, and 0:31:32.520 --> 0:31:35.360 so we should be reminded of that. So I'm certain 0:31:35.560 --> 0:31:38.960 I'm agreeing with you. I think different people have taken 0:31:39.560 --> 0:31:42.400 both of those lessons that either it's scared the heck 0:31:42.440 --> 0:31:44.840 out of them and they're staying scared, and that's good 0:31:45.240 --> 0:31:49.440 because this stuff is risky, or it's like, oh, you know, 0:31:49.680 --> 0:31:54.880 by the dip, don't worry about it. Just well, so Victor, 0:31:54.960 --> 0:31:57.800 for the listeners who I feel like there's a cohort 0:31:57.840 --> 0:32:01.240 of listeners who are waiting patiently thinking, just tell me 0:32:01.360 --> 0:32:03.400 what to do with my money right now, Victors. So 0:32:03.480 --> 0:32:06.400 it's to me, it sounds like you're you're bullish. You know, 0:32:06.480 --> 0:32:08.640 I would have a bullish allocation of stocks, and and 0:32:08.800 --> 0:32:12.240 perhaps even more so the rest of the world versus us. 0:32:12.400 --> 0:32:15.880 Is that fair? The first thing that the investor needs 0:32:15.960 --> 0:32:19.000 to do, I think the investor needs to look in 0:32:19.080 --> 0:32:23.520 the mirror and really know himself for herself, you know. 0:32:23.560 --> 0:32:27.160 I think that the what you should do is really 0:32:27.240 --> 0:32:31.560 a function of your makeup and circumstances and everything. So 0:32:32.600 --> 0:32:34.080 what I would say is, if you look in the 0:32:34.200 --> 0:32:38.360 mirror and you see in the mirror somebody who is 0:32:38.400 --> 0:32:42.880 a long term investor, somebody who's thinking about the long term, 0:32:43.560 --> 0:32:48.040 saving and investing for their retirement and for later in life, 0:32:48.960 --> 0:32:51.680 and you know, and and somebody that is um is 0:32:51.760 --> 0:32:55.200 willing to be patient and disciplined and kind of boring 0:32:55.480 --> 0:32:57.960 in how they invest. If that's what you see when 0:32:58.000 --> 0:33:01.440 you look in the mirror, then I think, yes, owning 0:33:02.080 --> 0:33:05.080 a healthy fraction of equities for the long run probably 0:33:05.200 --> 0:33:08.040 makes sense for for you with it if you have 0:33:08.120 --> 0:33:11.240 a typical amount of risk, aversion, etcetera. I think that 0:33:11.600 --> 0:33:14.280 makes sense. But if you look in the mirror and 0:33:14.400 --> 0:33:16.840 you see somebody who's like, you know, who wants to 0:33:16.920 --> 0:33:20.440 make twenty percent a year and is like just reading 0:33:20.640 --> 0:33:23.440 everything to find out, you know, which coin they should 0:33:23.480 --> 0:33:25.960 invest in or which meme stock or whatever, and that's 0:33:26.000 --> 0:33:29.560 what your personality is, then don't do that because well, 0:33:29.600 --> 0:33:31.960 I don't you know. I would say, try to change yourself. 0:33:32.080 --> 0:33:34.240 But if that's what you see in the mirror, you 0:33:34.280 --> 0:33:36.760 know you're not gonna be happy with this sort of 0:33:36.840 --> 0:33:40.880 boring long term allocation to equities. The coin flip experiment 0:33:41.080 --> 0:33:44.560 again is really interesting in this regard because what we 0:33:44.680 --> 0:33:47.920 found was that people would play it and they would 0:33:47.960 --> 0:33:51.280 do poorly on it. You know, very few people or 0:33:51.360 --> 0:33:53.880 not enough people made the twitter and fifty dollars that 0:33:54.000 --> 0:33:57.440 everybody should have made a sensible strategy of like betting 0:33:57.520 --> 0:34:01.040 ten percent on each flip or team percent on each 0:34:01.080 --> 0:34:03.840 flip would have given you like a ninety eight percent 0:34:03.960 --> 0:34:07.400 chance of getting to two fifty dollars in walking out 0:34:07.440 --> 0:34:09.840 of that half hour at a very good with a 0:34:09.960 --> 0:34:12.800 very good reward. But they didn't play it like that, 0:34:12.920 --> 0:34:16.360 and they didn't know and they were under pressure, et cetera. 0:34:16.520 --> 0:34:18.759 So there's all these reasons, but they didn't play well. 0:34:19.600 --> 0:34:22.160 Then we talked about it afterwards, you know, we were 0:34:22.239 --> 0:34:23.480 it was like in a class A lot of it 0:34:23.560 --> 0:34:25.160 was in a classroom, we're meeting room whatever, so that 0:34:25.239 --> 0:34:27.680 we talked about it, and we said, these are why, 0:34:27.800 --> 0:34:29.759 these are the reasons, this is how to think about it. 0:34:29.840 --> 0:34:32.879 These are the reasons why a constant proportional betting makes 0:34:32.920 --> 0:34:35.600 sense for most of the game. You know, you shouldn't 0:34:35.600 --> 0:34:37.879 been on tails obviously, all these different things we talked 0:34:37.880 --> 0:34:41.560 about it. What we found was that, um, if we 0:34:41.680 --> 0:34:43.600 let people play again and some of the people did 0:34:43.680 --> 0:34:45.959 want to play it again, that they just all sat 0:34:46.080 --> 0:34:49.360 there and clicked away, you know, at fifteent per hand 0:34:49.840 --> 0:34:51.840 and just did that got to the two fifty. We 0:34:51.880 --> 0:34:55.239 didn't pay them anymore. But but but they got the 0:34:55.320 --> 0:34:59.200 message right. But the problem is that it's cool to 0:34:59.280 --> 0:35:01.440 sit there for off an hour and just keep clicking 0:35:01.680 --> 0:35:06.200 at bet each time, But try doing that for forty years. 0:35:06.719 --> 0:35:12.400 Try being disciplined and boring for forty years and not saying, oh, 0:35:12.800 --> 0:35:14.719 the next one is gonna be heads, I'm gonna bet 0:35:15.960 --> 0:35:18.560 on that, or the next one is gonna be tails, 0:35:18.640 --> 0:35:21.200 I'm gonna bet on tails. I had my mom play 0:35:21.280 --> 0:35:24.400 the game for free, and I looked at her betting 0:35:24.440 --> 0:35:27.440 pattern and I said, Mom, you bet on tails And 0:35:27.560 --> 0:35:30.440 she said, you know, I knew I wasn't supposed to 0:35:30.560 --> 0:35:32.680 do that, but I just couldn't help myself. I just 0:35:32.760 --> 0:35:36.120 had to see what would happen. So it's it's really 0:35:36.200 --> 0:35:38.759 hard to be uh discipline. It's even harder to be 0:35:38.840 --> 0:35:41.360 a journalist, and uh, you know, I think it was 0:35:41.440 --> 0:35:44.200 Jason Zwagas said, Oh, it's it's really hard being a 0:35:44.280 --> 0:35:47.640 journalist and giving sound financial advice because it's so bloody 0:35:47.680 --> 0:35:50.200 boring and just it's the same thing. He says, he's 0:35:50.239 --> 0:35:54.000 written the same column every year for but he's, well, 0:35:54.080 --> 0:35:55.840 he's shown that it's you can do it. You know 0:35:55.960 --> 0:35:58.840 you can. It is possible to be interesting and to 0:35:58.960 --> 0:36:02.160 keep going. But but anyway, so so that's that would 0:36:02.200 --> 0:36:05.680 be my advice for long term investors. You know, you know, 0:36:05.840 --> 0:36:09.239 have a healthy allocation to equities, own some tips, you know, 0:36:09.320 --> 0:36:10.960 as well, don't you know? I think the tips are 0:36:11.080 --> 0:36:14.400 less risky for us then treasury bills are. Even though 0:36:14.440 --> 0:36:16.160 the price of tips goes up and down, it is 0:36:16.239 --> 0:36:20.279 giving us a real consumption, you know, it's giving us 0:36:20.360 --> 0:36:23.360 something of a real hedge of consumption. Yeah, they're yield 0:36:23.480 --> 0:36:25.960 is terrible right now, but you know who knows. I mean, 0:36:26.000 --> 0:36:28.120 they could go down or up. It's a you know, 0:36:28.239 --> 0:36:30.680 it's a market. And uh, you know, I think that 0:36:31.200 --> 0:36:33.480 owning some tips is probably an okay thing too. And 0:36:33.880 --> 0:36:35.920 and if tips get back to yielding a couple of 0:36:36.040 --> 0:36:38.920 percent above inflation, that would be great. You know, I 0:36:38.960 --> 0:36:56.080 think we'll all be happier than Bill do. I think 0:36:56.200 --> 0:36:59.759 Victor's mom's strategy of betting on on tails explains the 0:37:00.040 --> 0:37:03.200 higher cryptocurrency market. What do you think? Well, I like 0:37:03.320 --> 0:37:05.920 a victory that you added in there that she played 0:37:05.920 --> 0:37:11.000 for free. Actually, if my mom were playing for money, 0:37:11.080 --> 0:37:16.439 she probably wouldn't have been on tails. But we can't 0:37:16.480 --> 0:37:19.040 let you go. I want to ask you about, you know, 0:37:19.160 --> 0:37:22.360 the luck factor versus the skill factor and investing. And 0:37:22.480 --> 0:37:24.840 I know one of your most more famous papers is 0:37:24.880 --> 0:37:28.239 titled What's Past is Not Prologue, where you suggested that 0:37:28.600 --> 0:37:30.680 even if you look at two decades of performance, it's 0:37:30.719 --> 0:37:34.520 not enough to fully distinguish a fun manager from anything 0:37:35.160 --> 0:37:37.920 other than average. So can you talk about that, and 0:37:38.000 --> 0:37:41.200 can you talk about how you differentiate luck from skill 0:37:41.239 --> 0:37:45.279 and investing? Sure? So, um, you know, there's definitely we 0:37:45.360 --> 0:37:52.040 definitely are programmed behaviorally to extrapolate the future from a 0:37:52.160 --> 0:37:56.799 statistically insignificant amount of data. And you know, there's all 0:37:56.920 --> 0:38:00.239 kinds of reasons that, uh, you know, cognitive and to 0:38:00.440 --> 0:38:03.520 say that we developed that way. So we did an experiment. 0:38:03.640 --> 0:38:05.759 We love doing these different experiments, and we did this 0:38:05.880 --> 0:38:09.640 experiment where where we asked people, imagine, um, you have 0:38:09.800 --> 0:38:12.280 two coins. Somebody is giving you two coins to flip. 0:38:13.040 --> 0:38:16.200 One of them has a sixty chance of landing on heads. 0:38:16.280 --> 0:38:19.160 The other one is a fifty coin. But we won't 0:38:19.200 --> 0:38:22.080 tell you which one it is. But you can flip 0:38:22.160 --> 0:38:24.520 them if you want. You can flip them a million times, 0:38:25.239 --> 0:38:27.800 But tell us how many times do you need to 0:38:27.880 --> 0:38:30.160 flip them, sort of the minimum number of times that 0:38:30.280 --> 0:38:32.759 you need to flip them both and count up how 0:38:32.840 --> 0:38:35.960 many times they've landed heads and tails to have a 0:38:37.280 --> 0:38:41.879 confidence that this is the coin that's sixty and that's 0:38:41.920 --> 0:38:46.560 the coin that is. And again, you know, like we 0:38:46.680 --> 0:38:51.040 when we are our readership are kind of quantitative financing people. 0:38:51.600 --> 0:38:53.360 You know, some of the people kind of gave the 0:38:53.719 --> 0:38:56.920 right answer, but we also as people to just answer 0:38:57.000 --> 0:38:59.960 it based on their intuition and not to do the calculation. 0:39:00.040 --> 0:39:02.759 And and and a lot of people thought it took 0:39:02.880 --> 0:39:05.160 you know, ten flips, you know, with ten flips you 0:39:05.239 --> 0:39:08.400 could tell or fifteen flips or twenty flips. Well, the 0:39:08.520 --> 0:39:12.000 answer is a hundred and forty three flips or maybe 0:39:12.000 --> 0:39:13.440 a hundred and forty one. I think a hundred and 0:39:13.480 --> 0:39:16.320 forty three flips. I never would have guessed that, you 0:39:16.360 --> 0:39:18.600 know if you had asked me, is that nobody guesses 0:39:18.719 --> 0:39:21.200 that just you know, like a hundred and forty You 0:39:21.280 --> 0:39:23.240 have to do that thing a hundred and forty times 0:39:23.800 --> 0:39:26.200 to be that confident. I mean, I'm starting off fifty 0:39:26.920 --> 0:39:28.560 you know, like if I just choose that coin, I've 0:39:28.560 --> 0:39:30.799 got a fifty percent chance of choosing the right one. 0:39:31.200 --> 0:39:32.640 But I've got to do a hundred and forty. So 0:39:33.120 --> 0:39:36.040 that's like an illustration because if we're thinking about active 0:39:36.960 --> 0:39:42.760 managers versus the index and index investment, that an active 0:39:42.840 --> 0:39:45.839 manager is going to be more like a sixty forty coin, 0:39:46.320 --> 0:39:49.160 you know, relative to the benchmark. But if he's not 0:39:49.320 --> 0:39:51.840 a good active manager, he's like just fifty fifty. You 0:39:51.880 --> 0:39:54.120 know that that he if it's just a manager, was 0:39:54.160 --> 0:39:57.080 like just flipping. You know, he's just throwing darts at 0:39:57.080 --> 0:39:59.640 the wall. He'll be more like, in fact, he'll be worse, 0:40:00.160 --> 0:40:03.160 which I mentioned at the end, but let's just say 0:40:03.160 --> 0:40:05.719 who would be. And so what that tells you is 0:40:05.760 --> 0:40:08.200 you need a lot of data. You know, the world 0:40:08.320 --> 0:40:10.040 is not like coin flips that you know that when 0:40:10.120 --> 0:40:11.960 you by the time you get a lot of data 0:40:12.200 --> 0:40:15.600 on your manager, he's not even the manager anymore. Somebody 0:40:15.680 --> 0:40:19.080 else or he's not. I mean, you know that I'm 0:40:19.160 --> 0:40:21.799 not the same person that I'm gonna be ten years 0:40:22.040 --> 0:40:24.759 from now, you know, we you know whatever, No no 0:40:24.960 --> 0:40:27.880 man steps in the same river twice. So yeah, I 0:40:27.920 --> 0:40:30.720 think that that was kind of the the the idea 0:40:30.800 --> 0:40:34.920 there was to both show the statistical power of of 0:40:35.080 --> 0:40:37.520 these things, you know, which is very weak, and and 0:40:37.600 --> 0:40:40.440 also to show us our behavioral bias, you know, to 0:40:40.600 --> 0:40:43.440 extrapolate from too little data. But on top of that, 0:40:43.760 --> 0:40:46.240 you know, if we're just talking about active versus passive, 0:40:47.000 --> 0:40:49.120 I don't know if you've come across this. Bessem Binder 0:40:49.239 --> 0:40:55.120 Hendrick bessem Binder is a academic professor from Arizona, and 0:40:55.320 --> 0:40:58.320 he's done this research where he looked at all US 0:40:58.400 --> 0:41:02.759 equities and even though as we know, US equities outperformed 0:41:02.800 --> 0:41:05.840 treasury bills by like six percent a year over the 0:41:05.920 --> 0:41:10.560 last hundred and twenty years, he found that significantly more 0:41:10.640 --> 0:41:15.319 than half of all US equities have underperformed treasury build 0:41:15.880 --> 0:41:18.960 What that tells you is that if you are, if 0:41:19.120 --> 0:41:23.759 if you are an active manager holding a concentrated portfolio 0:41:23.800 --> 0:41:28.320 of stocks, that a concentrated portfolio of stocks has a 0:41:28.560 --> 0:41:32.920 higher than fifty percent chance of underperforming an index because 0:41:33.000 --> 0:41:36.080 of that concentration itself. You know, it's it's like a 0:41:36.960 --> 0:41:41.440 volatility drag phenomenon. So when you know that that somebody's 0:41:41.440 --> 0:41:45.280 gonna concentrated portfolio that is riskier than the broad market, 0:41:45.760 --> 0:41:48.120 you know, if they were just throwing darts, you know, 0:41:48.160 --> 0:41:50.760 if they had no skill, there's more than a fifty 0:41:50.800 --> 0:41:54.640 percent chance before fees and before transactions cost, that you 0:41:54.680 --> 0:42:00.120 would underperform the index because of this volatility drag. And 0:42:00.160 --> 0:42:02.239 then you've got fees, and you've got taxes, and you've 0:42:02.239 --> 0:42:04.400 got transactions cost and the whole thing is a bit 0:42:04.440 --> 0:42:07.080 of a mess. I don't know, dot all. This talk 0:42:07.120 --> 0:42:10.600 about coin flips has me interested in the biggest prop 0:42:10.680 --> 0:42:12.319 bet of the Super Bowl at all. You can bet 0:42:12.400 --> 0:42:15.319 on the coin flip at the opening of the Super Bowl, 0:42:15.400 --> 0:42:17.879 so you might want to get in on that. Put 0:42:18.000 --> 0:42:21.160 put twenty on heads, which I think has has become 0:42:21.239 --> 0:42:24.680 popular thanks to what happened to the Buffalo bills. What 0:42:24.800 --> 0:42:28.040 happened refresh my memory to happen to them? No, no, 0:42:28.360 --> 0:42:32.920 don't do it, don't go there. Sorry, tiden up your 0:42:32.920 --> 0:42:36.839 straight jackets. It's time for the craziest things we saw 0:42:37.320 --> 0:42:41.240 in markets this week? Well, speaking of knowing something, Bill Dana, 0:42:41.239 --> 0:42:44.440 I think it's that time to know what your craziest 0:42:44.520 --> 0:42:47.200 thing you saw in markets was this week. Let's hear it. 0:42:47.239 --> 0:42:48.680 I think I have an idea what it's going to 0:42:48.760 --> 0:42:53.080 be really good transition. Yeah, thanks, I think I think 0:42:53.120 --> 0:42:55.880 you might not know. But first, I had a submission 0:42:55.960 --> 0:42:59.560 come into my Twitter, which, by the way, I noticed, 0:42:59.640 --> 0:43:02.120 nobody send you submissions. They send them to me. I 0:43:02.480 --> 0:43:05.319 get some, I get some first. I always forget about them, 0:43:05.360 --> 0:43:10.080 though I do. Anyway. This one is from and I 0:43:10.200 --> 0:43:12.359 really hope I pronounce this correctly. I even asked him 0:43:12.400 --> 0:43:14.800 how to pronounce it. But his name is Brian reich 0:43:14.880 --> 0:43:18.040 Cough And he sent a message that said fixed income 0:43:18.120 --> 0:43:21.120 feels a bit boomer compared to crypto, but it's wild. 0:43:21.760 --> 0:43:24.680 And he shared a tweet which actually was from last week. 0:43:24.760 --> 0:43:28.600 But somebody pointed out that equity investors, especially in the US, 0:43:28.760 --> 0:43:31.520 could be forgiven for thinking that the most important events 0:43:31.760 --> 0:43:35.600 of the last forty eight hours were Facebook and Amazon numbers. Wrong. 0:43:35.760 --> 0:43:38.680 It was the six sigma move in European rates. The 0:43:38.760 --> 0:43:41.960 bond boogeyman is coming to an equity market near you. 0:43:42.560 --> 0:43:44.200 So I wanted to share that one, even though it 0:43:44.280 --> 0:43:46.440 was from last week, and just remind everybody that if 0:43:46.680 --> 0:43:49.320 if anyone sees anything weird, you can send it to 0:43:49.360 --> 0:43:53.439 my Twitter, not Mike's mine. That's a good point, Victor 0:43:53.520 --> 0:43:56.040 about this, the velocity of the move in rates. I 0:43:56.120 --> 0:43:59.560 feel like that is makes you have to rethink your 0:43:59.560 --> 0:44:02.160 allocay a bit more frequently than you would otherwise. Or 0:44:02.680 --> 0:44:05.280 or what does the that sort of rate of change 0:44:05.360 --> 0:44:09.080 in yields that we've seen give you any you know, 0:44:09.600 --> 0:44:11.120 give you the spins at all? Does it? Does it 0:44:11.239 --> 0:44:15.160 make you you know, want to reallocate more than perhaps 0:44:15.200 --> 0:44:18.400 you would otherwise. No, I mean I think that, you know, 0:44:18.600 --> 0:44:21.600 keeping an eye on your portfolio once a month or 0:44:22.160 --> 0:44:25.200 once a quarter is not bad. I mean, you know, 0:44:25.239 --> 0:44:29.520 I think that if we if we moved sort of 0:44:29.560 --> 0:44:32.400 in a straight line. Let's take us Tips for an example, 0:44:32.480 --> 0:44:35.960 So tenure, uh, Tips were trading it like minus one 0:44:36.080 --> 0:44:39.480 percent around the end of two thousand and twenty one, 0:44:40.200 --> 0:44:43.719 and now I think maybe we're around minus half a percent. Yeah, 0:44:43.760 --> 0:44:45.560 I mean, I think that if if Tips went from 0:44:45.600 --> 0:44:48.480 minus one percent, you know, all the way up to 0:44:48.600 --> 0:44:51.719 two percent over a couple of months, you know, it 0:44:51.760 --> 0:44:54.520 would be a shame to have missed out on the 0:44:54.600 --> 0:44:59.480 opportunity perhaps to have reduced your equity allocation as that 0:44:59.680 --> 0:45:03.080 was how spending, assuming that equities did not fall as 0:45:03.200 --> 0:45:07.200 much as would have been called for by that increase 0:45:07.480 --> 0:45:10.680 in in real yield. You know, you're right that the 0:45:10.920 --> 0:45:14.319 that the velocity of changes in everything, I mean, every 0:45:14.400 --> 0:45:18.440 everything has sort of got this. I mean the markets, 0:45:18.719 --> 0:45:20.879 you know, I don't know, over over time have sort 0:45:20.920 --> 0:45:23.880 of developed into this not much is going on, and 0:45:23.960 --> 0:45:26.600 then boom, you know, they make these big moves, and 0:45:27.120 --> 0:45:30.480 you know that they've become much more in in my feeling. 0:45:30.560 --> 0:45:33.400 You know, they're much more discontinuous than they used to be, 0:45:33.960 --> 0:45:36.759 which I think might have to do with uh, they're 0:45:36.800 --> 0:45:41.680 just being much less market maker capital relative to the 0:45:41.760 --> 0:45:44.680 size of the market than there used to be. But 0:45:44.840 --> 0:45:46.719 I don't know, I'm not sure about that. Less of 0:45:46.760 --> 0:45:49.279 a shock absorber built into the system. I guess I 0:45:49.320 --> 0:45:52.719 think there's less shock absorber from from that, I'm not 0:45:52.920 --> 0:45:54.759 that worried, you know, I think that you know that. 0:45:54.880 --> 0:45:57.839 Another I guess the reason I'm not that concerned about 0:45:57.880 --> 0:46:01.600 it is that when interest rates go up, if equities 0:46:01.640 --> 0:46:04.960 don't move at all, we'll want to reduce our equity allocation. 0:46:05.640 --> 0:46:07.560 But you know, when interest rates go up, equities are 0:46:07.560 --> 0:46:09.520 going to go down somewhat, and when you look at 0:46:09.560 --> 0:46:11.759 the whole thing, you're gonna want to reduce. You know, 0:46:11.880 --> 0:46:14.840 maybe you were you were at se and equities and 0:46:14.920 --> 0:46:19.080 you might want to reduce down two sixty four percent 0:46:19.160 --> 0:46:21.400 and equities or something. It's not you know that that 0:46:22.080 --> 0:46:24.239 you know looking at it, even if you're looking at 0:46:24.280 --> 0:46:27.320 it every quarter for for our business and for the clients, 0:46:27.719 --> 0:46:30.759 you know that where we're managing capital, we're looking we're 0:46:30.840 --> 0:46:34.879 rebalancing their portfolio every week. We also have a risk 0:46:35.000 --> 0:46:39.080 indicator in the form of momentum that we're using to 0:46:39.400 --> 0:46:43.600 underweight or overweight in conjunction with with excess earning ZEALD. 0:46:44.000 --> 0:46:46.000 So you know, we're trying to stay on top of 0:46:46.040 --> 0:46:48.440 all of that. But for individual investors who are men 0:46:48.480 --> 0:46:51.640 who are self managing, uh, you know, these long term 0:46:51.719 --> 0:46:54.080 investors that are looking in the mirror and seeing themselves 0:46:54.080 --> 0:46:57.279 as long term investors, it's it's okay too, it's you know, 0:46:57.320 --> 0:47:00.520 I think that you're okay doing this stuff. Looking at 0:47:00.560 --> 0:47:03.960 your portfolio once a quarter is fine. I think. All right, Victor, 0:47:04.000 --> 0:47:06.680 how about you? You see anything crazy in markets this week? 0:47:08.040 --> 0:47:10.239 Well that was a good one. That who that wrote 0:47:10.280 --> 0:47:13.960 into bil donna Um. You know. The thing that just 0:47:14.239 --> 0:47:17.160 amazes me is what's going on in the options market 0:47:17.320 --> 0:47:22.400 in the US. Options trading in single stocks now is 0:47:22.960 --> 0:47:27.640 as big as trading in the stocks themselves. So we 0:47:27.680 --> 0:47:30.279 always thought of options as the derivatives, you know, but 0:47:30.840 --> 0:47:33.040 at these kinds of volumes, you're wondering which is the 0:47:33.160 --> 0:47:36.120 real and which is the derivative. So we're getting I 0:47:36.160 --> 0:47:39.560 don't know, four five hundred billion dollars of options or 0:47:39.600 --> 0:47:43.160 trading every day, and that's about the same amount as 0:47:43.280 --> 0:47:45.960 is trading in the in the stock market in individual names. 0:47:46.480 --> 0:47:50.200 Even more remarkable than that is like one third of 0:47:50.400 --> 0:47:55.760 all of the options trading is in TESLA. That's amazing. 0:47:56.120 --> 0:47:59.040 And then amazing beyond that is like eighty percent of 0:47:59.200 --> 0:48:03.080 that trading is in options expiring out to one month. 0:48:03.680 --> 0:48:06.520 So you know, it's really I think that there's I 0:48:06.640 --> 0:48:12.280 think there's no doubt that the securities markets are also 0:48:13.480 --> 0:48:18.680 functioning as a as an outlet for um for the 0:48:18.800 --> 0:48:22.480 same kinds of demand that take people to Vegas or 0:48:22.840 --> 0:48:25.560 or a c You know that there is a gambling. 0:48:26.239 --> 0:48:28.960 There is this sort of almost you know, risk seeking 0:48:29.360 --> 0:48:34.480 kind of behavior that we're seeing manifest itself in the 0:48:34.560 --> 0:48:39.879 securities markets, in the coin markets. You know, I think 0:48:39.960 --> 0:48:43.080 it's uh. I mean, you know, look, Americans are spending 0:48:43.120 --> 0:48:48.280 I don't know, eighty billion dollars a year on lottery tickets, 0:48:49.120 --> 0:48:51.440 and and I haven't bought any I bet you know 0:48:51.560 --> 0:48:56.000 Bill Donna bottery lottery tickets recently, right, so, so, so 0:48:56.280 --> 0:48:59.360 like eighty billion dollars a year on lottery tickets. I 0:48:59.400 --> 0:49:01.719 think that's I'm not sure, but let's call that two 0:49:02.200 --> 0:49:05.279 fifty dollars per person, but the three of us haven't 0:49:05.280 --> 0:49:09.719 even bought any So there's some people out there that 0:49:09.800 --> 0:49:14.839 are spending thousands of dollars a year on lottery tickets. Now, 0:49:15.320 --> 0:49:17.920 you know, these are just you know, mysteries. You know 0:49:18.040 --> 0:49:23.040 that that academic finance has not really explained this. These 0:49:23.080 --> 0:49:26.520 are mysteries, but they're also kind of um, I think 0:49:26.600 --> 0:49:29.719 that they're also problems. You know, I think that I 0:49:29.920 --> 0:49:32.879 I think society, I think ours we would have less inequality. 0:49:33.440 --> 0:49:35.920 I think we would have more wealth, you know, general 0:49:36.280 --> 0:49:38.640 welfare of everybody. You know, I mean, it's kind of 0:49:38.719 --> 0:49:41.479 remarkable to me. And you know, that's seventy or eighty 0:49:41.520 --> 0:49:46.840 billion dollars pales in comparison two people buying and selling 0:49:47.880 --> 0:49:51.320 one week out of the money Tesla options that the 0:49:51.440 --> 0:49:56.000 Yolo effects, like what what what crazy happened recently? It's like, 0:49:56.120 --> 0:50:00.720 what what's happening? That's not crazy? It's gout and suffered 0:50:00.760 --> 0:50:02.800 to find h we'll have to change it to the 0:50:03.360 --> 0:50:07.279 most rational thing I said this week. But it's a 0:50:07.480 --> 0:50:09.680 it's an excellent point, and I think we're all trying 0:50:09.719 --> 0:50:12.080 to wrap our heads around sort of the tail wagon 0:50:12.160 --> 0:50:14.680 the dog effect of it all when you have you know, 0:50:14.760 --> 0:50:17.959 everyone's talking about gamma hedging as being the main driver 0:50:18.120 --> 0:50:20.359 of a market on any given week. It's it's uh 0:50:21.320 --> 0:50:23.880 strange times and deeds. All right, I'll give you my 0:50:23.960 --> 0:50:26.000 crazy thing. I'm gonna take you both out of your 0:50:26.040 --> 0:50:29.080 comfort zones though, and get into the private markets a 0:50:29.160 --> 0:50:32.799 little bit. And as you know, the term unicorn uh 0:50:33.680 --> 0:50:38.719 is refers to a private startup company that gets a 0:50:39.000 --> 0:50:43.280 valuation of one billion dollars or more in private markets 0:50:43.320 --> 0:50:47.919 before before they go public. Business Week kind of story 0:50:48.000 --> 0:50:50.800 talking about the whole unicorn phenomenon. And you know the 0:50:51.520 --> 0:50:54.040 reason they're called unicorn is because that that at one 0:50:54.040 --> 0:50:56.880 point was considered such a rarity to have a private 0:50:56.920 --> 0:51:00.520 company get that sort of valuation. You start up to 0:51:00.560 --> 0:51:03.680 get that sort of evaluation before going public. So this 0:51:04.040 --> 0:51:08.400 Business Week story lists gives an account a number of 0:51:08.880 --> 0:51:13.600 the total number of unicorns out there currently. And vil Donna, 0:51:13.680 --> 0:51:15.879 you'd be smirking had you read this story. Usually you've 0:51:15.920 --> 0:51:17.759 read the story I'm referring, and I can tell you 0:51:19.480 --> 0:51:22.080 you have read Okay, so you know the answer, right. Well, 0:51:22.120 --> 0:51:24.520 let's see if we'll quiz Victor, Victor, how many unicorns 0:51:24.560 --> 0:51:27.359 do you think there are out there in the world today. Sorry, 0:51:27.480 --> 0:51:32.160 it is it. Did you say it's private or yet private? Private? Yep? 0:51:32.400 --> 0:51:37.400 Private private companies? Uh. I think embedded in the definition 0:51:37.560 --> 0:51:39.960 is the notion that they're they're sort of a startup, 0:51:40.040 --> 0:51:43.360 some somewhat new. You know, you wouldn't consider say a 0:51:44.000 --> 0:51:46.399 you know, a private company that's been around a hundred years, 0:51:46.520 --> 0:51:50.799 but a startup that's a few years old that's worth 0:51:50.880 --> 0:51:54.839 at least a billion dollars. How many you think I'm 0:51:54.880 --> 0:52:01.720 going to embarrass myself? Can I can? I give the answer? 0:52:03.600 --> 0:52:09.080 It's a thousand. I couldn't believe it. I couldn't believe it. 0:52:09.160 --> 0:52:12.359 The best quote from from this article is somebody said, 0:52:12.480 --> 0:52:16.080 when you have a thousand unicorns, that's almost an oxymoron. 0:52:17.680 --> 0:52:23.280 I love that. That's incredible. So a trillion dollars in unicorns, 0:52:23.320 --> 0:52:26.320 it's it's it's unbelieved, but it's it seems to me that, 0:52:26.480 --> 0:52:29.960 like suggest there's some sort of lopsided nous between the 0:52:30.000 --> 0:52:32.480 private and public markets that needs to resolve itself. I 0:52:32.520 --> 0:52:34.560 don't know, it just seems like they're I don't know why, 0:52:34.640 --> 0:52:37.120 but there's so much money slashing around in those markets. 0:52:37.560 --> 0:52:39.759 People think they have an edge. I guess, I don't know. 0:52:39.880 --> 0:52:42.799 I don't I don't get it. I'm certainly out of touch. 0:52:44.960 --> 0:52:49.920 Elm Elm is not investing in the private market. I 0:52:49.960 --> 0:52:51.799 couldn't believe it either. That's why I brought it up. 0:52:51.800 --> 0:52:54.120 I never I never would have guessed that many. I 0:52:54.160 --> 0:52:57.400 wouldn't maybe said, I don't know. Seven sounds about right, 0:52:58.320 --> 0:53:00.760 A couple of couple of hundred tops, but a thousand 0:53:00.880 --> 0:53:06.759 unicorns pretty amazing anyway, Victor, fascinating conversation. Really appreciate your time, 0:53:06.800 --> 0:53:09.400 and I hope, uh we can get you back next time. 0:53:09.440 --> 0:53:11.560 You've got some some hot off the press research. Even 0:53:11.600 --> 0:53:13.560 though this research isn't even on the press yet. I 0:53:13.600 --> 0:53:19.000 think it's it's pre press hot off the typewriter. I guess, yeah, yeah, 0:53:19.000 --> 0:53:21.120 we'll get it. We'll get it up on too ssr 0:53:21.280 --> 0:53:23.920 N and on our website soon. But you heard it, 0:53:24.000 --> 0:53:26.080 but you heard it here. You've heard it here first. 0:53:26.239 --> 0:53:28.799 And I encourage everyone to go play Victor's coin flip game. 0:53:28.840 --> 0:53:30.719 It's a lot of fun. Thank you for joining us. 0:53:31.040 --> 0:53:33.200 Thanks guys, it was really a pleasure being on. Thank 0:53:33.200 --> 0:53:41.640 you very much for having me. What comes up. We'll 0:53:41.680 --> 0:53:43.640 be back next week. Until then, you can find us 0:53:43.680 --> 0:53:46.960 on the Bloomberg Terminal, website or app, or wherever you 0:53:47.040 --> 0:53:49.239 get your podcast. We love it if you took the 0:53:49.320 --> 0:53:51.799 time to rate and review the show on Apple Podcasts 0:53:52.000 --> 0:53:54.480 so more listeners can find us. And you can find 0:53:54.560 --> 0:53:58.040 us on Twitter, follow me at Bring Anonymous. The Dotta 0:53:58.080 --> 0:54:01.279 Hirich is at the Dotta Hirich. You can also follow 0:54:01.280 --> 0:54:05.000 Bloomberg Podcasts at podcasts and thank you to Charlie Pall 0:54:05.120 --> 0:54:08.960 to Bloomberg Radio. What Goes Up is produced by Laura Carlson. 0:54:09.160 --> 0:54:12.920 The head of Bloomberg Podcasts is Francesco Levie. Thanks for listening, 0:54:13.040 --> 0:54:13.799 See you next time.