Speaker 1: Hello, and welcome to What Goes Up a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at Bloomberg,
Speaker 1: and I'm gonna hire a cross acid reporter with Bloomberg
Speaker 1: this week on the show. Well, we've all heard it
Speaker 1: a million times. Stocks got really expensive in the post
Speaker 1: financial crisis Bowl market, especially when you look at cyclically
Speaker 1: adjusted valuation metrics that include corporate earnings over the past decade.
Speaker 1: But what exactly should we do with that information. We'll
Speaker 1: get into it with the founder of an investment management
Speaker 1: firm that focuses on dynamic index investing, and he's done
Speaker 1: on some really interesting research into exactly that topic. But first,
Speaker 1: vill Donna, I need to know, uh, now that the
Speaker 1: Buffalo Bills are out of it, who a you're rooting
Speaker 1: for on Sunday in the Super Bowl? Well, I'm I'm
Speaker 1: rooting for are the Bengals because they're like, yeah, of
Speaker 1: course you have to root for them, like they're the underdog.
Speaker 1: Maybe I heard a rumor you had a lot of
Speaker 1: money riding on the rams though, is that true? I
Speaker 1: have a whole twenty dollars riding on the rams. But
Speaker 1: remember last podcast we talked about how I'm so bad
Speaker 1: at predicting who's going to win, and I just go
Speaker 1: by intuition. Yeah, that's why I'm betting on the Rams,
Speaker 1: because that means that the Bengals will win. It's your
Speaker 1: kind and then if if they lose, you, you win bucks.
Speaker 1: You kind of hedged. It's like a good hedge. Yeah,
Speaker 1: and I think I win like a hundred bucks or something. Yeah, something,
Speaker 1: some one of those new you know, FanDuel Draftking type
Speaker 1: of things that are legal in New York. Now, one
Speaker 1: of those one of those type of things. Okay, But
Speaker 1: because because because I'm I'm betting on l A, it
Speaker 1: means that the Bengals will win. It's it's an official app.
Speaker 1: You're not with a buckie name Lefty somewhere and uh,
Speaker 1: all right, fair enough. Well, I'm super excited for this
Speaker 1: week's guy. It's just a fascinating career on Wall Street.
Speaker 1: So let's get into it. I I'd love for you
Speaker 1: to introduce him. What do we know about this guy?
Speaker 1: I am too, I'm I'm really happy that he can
Speaker 1: join us. His name is Victor Hagani. He's the founder
Speaker 1: and CIO of ELM Wealth, and he is talking to
Speaker 1: us from Wyoming. So thank you so much for joining
Speaker 1: us this week. Thank you great to be on the show. Yeah,
Speaker 1: thanks Victor. This might be our first Wyoming based guests.
Speaker 1: I don't know if we've had anyone in Jackson Hall.
Speaker 1: Very very exciting, but Victor, Victor, like I said, what
Speaker 1: a really fascinating career. Um, I feel like you've sort
Speaker 1: of lived through some of my favorite finance books. You know,
Speaker 1: you were at Solomon Brothers in the liars poker years.
Speaker 1: You went on to a long term capital management during
Speaker 1: the one Genius failed era. What a trip, and now
Speaker 1: without partners. Just give us sort of a synopsis of
Speaker 1: your career. I mean, I feel like you sort of
Speaker 1: took the long scenic route into index investing if if
Speaker 1: that's a right way to phrase it it. Just give
Speaker 1: us sort of the brief highlights of your career from
Speaker 1: from Solomon's where we are now. Sure thing. Yeah, I
Speaker 1: think that's a good description along scenic route. Although you know,
Speaker 1: studying finance at university, you know we're kind of taught
Speaker 1: that owning the market portfolio is the right reference point
Speaker 1: to start with. Anyway, I went to the London School
Speaker 1: of Economics and after that I got a job at
Speaker 1: Solomon Brothers and bond portfolio Analysis, the group led by
Speaker 1: Marty Lebowitz, and I worked for Bob Coprash. Eventually I
Speaker 1: was invited to join a trading group out on the
Speaker 1: trading floor, John Merryweather's Government arbitrage group. I worked there,
Speaker 1: and when John and some of my partners from the
Speaker 1: arbitrage desk went to set up l t c M,
Speaker 1: it was right around when I was getting married, So
Speaker 1: I got back from my honeymoon and left Solomon and
Speaker 1: joined ltc M and stayed at lt CM through and
Speaker 1: stayed beyond that to both the help liquid a all
Speaker 1: of the positions that the consortium of banks took over,
Speaker 1: and then to help with my partners founding a successor
Speaker 1: firm that kept some of the positions and tried to
Speaker 1: continue doing relative value trading in a sort of updated manner.
Speaker 1: And since about two thousand or two thousand and one,
Speaker 1: starting at that time, I took a long sabbatical of
Speaker 1: about ten years and spent a lot of time with
Speaker 1: my family, my young three children, and and did a
Speaker 1: lot of thinking and researching and catching up on different things.
Speaker 1: And and then eventually in two thousand and eleven, I
Speaker 1: started ELM Wealth, which is a wealth management firm that
Speaker 1: tries to help people with low cost, diversified investing. And
Speaker 1: it was really based on how my own approach to
Speaker 1: investing had evolved after the Solomon and LTCM years and
Speaker 1: the beginning of my sabbatical years, when I was investing
Speaker 1: in hedge funds and private equity, and I kind of
Speaker 1: decided to really get back to basics and to get
Speaker 1: my family's savings invested in index funds as the main vehicle.
Speaker 1: And I realized that that that decision was really the
Speaker 1: beginning of a number of decisions that needed to get made.
Speaker 1: That it wasn't enough to just say I'm gonna index,
Speaker 1: you know, you needed to decide, well, how much equities
Speaker 1: do I want, and how much US and non US,
Speaker 1: an emerging market and all these different things, and and
Speaker 1: you know, I realized that people needed help with putting
Speaker 1: their portfolios together, but that it should be very very
Speaker 1: low cost. It should be a very low cost product.
Speaker 1: And so that was really how ELM Wealth started back then,
Speaker 1: with a bunch of my colleagues being the first clients.
Speaker 1: And you know, now after ten years, we have about
Speaker 1: one and a half billion of assets and three hundred
Speaker 1: clients that are are investing family and you know it's great, Well,
Speaker 1: well one part I'll throw in. Their Alum has my
Speaker 1: favorite investment company website ever, because not only can you
Speaker 1: read a lot of good writings from Victor, but it's
Speaker 1: got a game on there where you flip a coin
Speaker 1: and the coin has a sixty probability of being heads
Speaker 1: each time, and you start with twenty dollars. You get
Speaker 1: ten minutes to flip the coin as many times as
Speaker 1: you can and bet as much as you want of
Speaker 1: your bounce. Victor, I was up to like ten grand
Speaker 1: on that thing by the end of my ten minutes.
Speaker 1: I assume you pay out on that, right. We did
Speaker 1: pay out on that we you know, originally that's what
Speaker 1: we did. We did it for real money with quantitatively
Speaker 1: trained mostly young people that were either you know, in
Speaker 1: university or in uh Wall Street firms, and we did
Speaker 1: give them to start and we paid them out real
Speaker 1: money based on their winnings after half an hour and
Speaker 1: we and if they got we we were gonna we
Speaker 1: had a maximum pay out and so if you got
Speaker 1: close to that, we would say you're close to the
Speaker 1: maximum payout of two fifty you know, you might want
Speaker 1: to bet accordingly, you know, sort of into the end.
Speaker 1: So we didn't pay anybody ten thousand, but we paid
Speaker 1: a bunch two fifty dollars. And it was an amazing experiment,
Speaker 1: and it really got us thinking that there's not enough
Speaker 1: said about investment sizing right. I mean that everything that
Speaker 1: we hear about in the media and so on is
Speaker 1: about what to invest in, what's going up, um, what's
Speaker 1: going down, what's going sideways. But we need to get
Speaker 1: the investment sizing decision right to In fact, you know,
Speaker 1: if you think about those two decisions, if I get
Speaker 1: the choice of investments wrong, but my investment sizing right,
Speaker 1: I'm gonna be okay. I mean, I'm not gonna be happy,
Speaker 1: I'm gonna lose money, but I'm gonna be okay. If
Speaker 1: I get the investment choice right, I choose the right
Speaker 1: things to invest in, but I get the size wrong
Speaker 1: on bust. And you know, in some ways that's the
Speaker 1: story of LTCM, because you know, when we went down
Speaker 1: plus percent, there was a broad feeling that the investments
Speaker 1: that we had in the portfolio were good investments, and
Speaker 1: that was born out over the subsequent few years when
Speaker 1: most of those investments, you know, bounced back to being
Speaker 1: good investments. But we had the size wrong. And so
Speaker 1: even though we had good investments, you know that when
Speaker 1: you have the sage on. So think about the U
Speaker 1: S stock market. I mean the last hundred and twenty years,
Speaker 1: the U S stock market, I don't know, has gone
Speaker 1: up nine let's call it nine percent a year. Right,
Speaker 1: So let's say you know you're sitting there a hundred
Speaker 1: and twenty years ago, and you knew that it was
Speaker 1: going to go up by nine percent a year. Well,
Speaker 1: if you were greedy, you might say, oh my goodness,
Speaker 1: you know, I want to really get rich. So you
Speaker 1: might have wanted to own as much of it as
Speaker 1: you could. Let's say that you were leveraged three x
Speaker 1: or something like that. And if you were and if
Speaker 1: you kept yourself leveraged at three x, there were a
Speaker 1: couple of times when you would have actually gone bust
Speaker 1: or I don't know, three or three and a half
Speaker 1: x something, depending depending on exactly how often you were
Speaker 1: rebalancing your portfolio. But there was a certain amount of leverage.
Speaker 1: Even though it's like the best investment ever, you would
Speaker 1: have lost all your money and you would be bust today.
Speaker 1: But if you invested, you know, the right size in it,
Speaker 1: you would have whatever was a forty x or something,
Speaker 1: uh from then until now, or it's a it's a
Speaker 1: fascinating point and that the questions at the end of
Speaker 1: the game were I think even trickier. And and now
Speaker 1: I get it. I kind of got it. I thought
Speaker 1: it was more about risk tolerance, but sort of same
Speaker 1: same side to two different sides of the same coin,
Speaker 1: I guess. But I almost busted out on the first flip.
Speaker 1: I think I bet twentys on the first flip, so
Speaker 1: I am almost busted out, but at with ltcm of course.
Speaker 1: And it's it's the size in two different ways, the
Speaker 1: size relative to how big the market was too. I guess.
Speaker 1: You know, you guys were sort of the original whale
Speaker 1: as they as they say, uh these days, I guess yeah.
Speaker 1: I think in some of some of the positions, you
Speaker 1: know that they were positions that people were worried about
Speaker 1: what the impact would be when liquidation, when and if
Speaker 1: liquidation was going to happen. That's right, And Victor Mike
Speaker 1: is right in that your website has so much research
Speaker 1: on it, so and I tried to read a bunch
Speaker 1: of it, so I might be mixing some things up here,
Speaker 1: but correct me from wrong. I think you wrote a
Speaker 1: piece for Bloomberg last year and you said huge gains
Speaker 1: and things like Tesla, and I just checked because I
Speaker 1: put really behind me and I couldn't remember if seven
Speaker 1: was its actual gain for But you had said that
Speaker 1: that that games like that is sending the wrong message
Speaker 1: to individual investors, and so I wanted to ask you
Speaker 1: and the research that or the game that Mike just mentioned,
Speaker 1: I think was also part of that article that you wrote,
Speaker 1: But so I wanted to ask you about that and
Speaker 1: also the sell off that we're seeing in some of
Speaker 1: those names now, especially in some of the meme stocks,
Speaker 1: or any of those names that had run up just
Speaker 1: so so much over the last two years. Yes, I
Speaker 1: mean the you know, it's all it's all related to
Speaker 1: each other. I mean the the coin flip game, you know,
Speaker 1: really helps us to think about sizing in a you know,
Speaker 1: sort of on a blank slate, because you know, when
Speaker 1: you're thinking about how much should I have in the
Speaker 1: stock market, well you might say I should have or
Speaker 1: so it's kind of like almost within a range to
Speaker 1: begin with. But when you've got this coin that you're flipping,
Speaker 1: and you could put all of your money onto one flip,
Speaker 1: then um, you know it's it's it's more of a
Speaker 1: blank slate with the full opportunity to to do well
Speaker 1: or to hurt yourself based on sizing. The main message
Speaker 1: of the whole thing is that when you're trying to
Speaker 1: figure out how much you should bet on something that's good,
Speaker 1: how much you should invest on something that you believe
Speaker 1: is good, that the objective is not to make as
Speaker 1: much money as possible. The objective needs to be to
Speaker 1: maximize your utility. And and I know, you know, going
Speaker 1: this is now taking us into an economics course or whatever,
Speaker 1: but it's not. I mean, it's just that the more
Speaker 1: money we have, the less that it's improving our welfare
Speaker 1: at the margin. Right, So, um, there's this. You know,
Speaker 1: there's a curve that would be a concave curve. That's
Speaker 1: as our wealth goes up, our happiness or our utility
Speaker 1: is going up, but it's going up more slowly. And
Speaker 1: this is what makes us makes normal people risk averse
Speaker 1: that word kind of self regulating. The more that we
Speaker 1: have of something, the less we want that additional unit
Speaker 1: of it. And so winning is good. We want to win,
Speaker 1: but losing is kind of worse than winning. And this
Speaker 1: is a classical economic idea. It's not uh, it's it's
Speaker 1: not from behavioral finance or anything like that. I mean,
Speaker 1: that is why we are and should be risk averse.
Speaker 1: And it's an idea. You know, it's been around for
Speaker 1: hundreds of years, so you know, so when you see
Speaker 1: people that are going all in on things that are
Speaker 1: super risky, it really is hard to make sense of that.
Speaker 1: You know, based on a typical or a sensible set
Speaker 1: of preferences with regard to risk aversion. And you know,
Speaker 1: the more attractive that something is, the more you should
Speaker 1: want to have of it. Right, So if if in
Speaker 1: the coin flip game, if we had made the coin
Speaker 1: seventy instead of a sixty forty coin, you should have
Speaker 1: wanted to bet more on each flip. Then if you know,
Speaker 1: then then if we're sixty forty, if the stock market
Speaker 1: is offering higher expected returns relative to the safe asset
Speaker 1: that you would be invested in if you weren't invested
Speaker 1: in the stock market, then you should own more of
Speaker 1: the stock market. But sometimes people just get a little
Speaker 1: carried away and are taking on so much risk that
Speaker 1: that the probability that they will lose money gets to
Speaker 1: be very high, even though they're expected gain in monetary
Speaker 1: terms is very high. But they're doing something which is not,
Speaker 1: you know, necessarily in their best interests. Of course, we
Speaker 1: can always say whatever somebody does, by definition is in
Speaker 1: their best interest. But I think that we can sometimes
Speaker 1: talk to people about a framework and they might look
Speaker 1: at things differently and change what they think is in
Speaker 1: their best interest. In fact, I wanted to get back
Speaker 1: to that UH what I talked about in the introduction
Speaker 1: there this paper you and your colleagues have out about tape.
Speaker 1: You know, the cyclically adjusted price earnings or if you
Speaker 1: prefer the inverseity cyclically adjusted UH earnings yield. You know,
Speaker 1: all the research shows that, you know, if the PE
Speaker 1: starts getting higher and higher, your future return expected returns
Speaker 1: get lower and lower. Your research showed is that UM
Speaker 1: trying to allocate along those lines doesn't seem to work
Speaker 1: on a sort of simplified level, that that you sort
Speaker 1: of a static allocation through all the valuations would would
Speaker 1: have done better. UM can correct me if I'm bungling
Speaker 1: the the research there, but but then you took a
Speaker 1: step further to figure out, well, how how should we
Speaker 1: be using sickly cyclically adjusted valuation measures like this? So
Speaker 1: so walk us through that paper and what the main
Speaker 1: findings are. We we haven't we haven't published it yet,
Speaker 1: but it's forth it's forthcoming. We've been getting comments from
Speaker 1: friends and some academics, and that's what you said, is
Speaker 1: exactly right. That first of all, CAPE or it's a
Speaker 1: little it's even nicer. Rather than thinking about the price
Speaker 1: to earnings ratio, it's nicer think about it as the
Speaker 1: earnings yield, which is just one over CAPE. And the
Speaker 1: earnings yield is a decent you know, it's not perfect,
Speaker 1: but it's a decent predictor of the long term real
Speaker 1: return after inflation, that that you should expect to earn
Speaker 1: from owning a diversified portfolio of equities. And that is
Speaker 1: the case. You know that that predictive power has been
Speaker 1: uh there for the last hundred and twenty years in
Speaker 1: the US, and it's also existed in non US markets,
Speaker 1: and it just makes logical sense. It's based on the
Speaker 1: idea that a company, if a company paid out all
Speaker 1: of its earnings every year to its investors that it
Speaker 1: could keep its earnings level with inflation and paying out
Speaker 1: all of its earnings. If it doesn't pay out all
Speaker 1: of its earnings and keep some of them as retained earnings,
Speaker 1: it can actually grow its earnings faster than inflation. You know.
Speaker 1: So it's just but the basic model is just saying, well,
Speaker 1: if it paid out all its earnings, could it keep
Speaker 1: up with inflation? And you know that's the underlying idea
Speaker 1: and why it seems to be the case. So when
Speaker 1: we look at the last hundred and twenty years, we see, wow,
Speaker 1: when the earning zeald was around four oh, the next
Speaker 1: ten or twenty years, equities delivered about a four percent
Speaker 1: return over inflation when the pe was sorry, when the
Speaker 1: earning zield was seven and a half percent. You know,
Speaker 1: on average, you got around a seven and a half
Speaker 1: percent real return above inflation from holding equities for a
Speaker 1: long time. So you would say that's wonderful. So now
Speaker 1: all I need to do is just own more equities
Speaker 1: when they're going to give a higher return, own less
Speaker 1: equities when they're gonna give a lower return. And I'm
Speaker 1: gonna do better than somebody that just does a static
Speaker 1: allocation of always being say sixty percent in equities in
Speaker 1: thirty five percent and say treasury build and you would
Speaker 1: think that that is what you would find. But when
Speaker 1: you run the numbers, you don't find that. I mean
Speaker 1: you you find that over the last hundred and twenty
Speaker 1: years that that extra information from the earning zeald didn't
Speaker 1: help you. And in fact, over the last twenty years
Speaker 1: it's been really terrible. It would have had you very
Speaker 1: underweight equities because the earnings yield has been relatively low.
Speaker 1: I mean today the US earnings yield is in the
Speaker 1: percentile of bad, and so you would not want to
Speaker 1: own very many equities today based on that rule. But
Speaker 1: what's happening is it's missing the it's missing a critical component.
Speaker 1: What is it that you should be investing in if
Speaker 1: you're not investing in equities or what should you compare
Speaker 1: those equities too? Well, you might say I'm going to
Speaker 1: compare it to bills because I'm either going to be
Speaker 1: in bills or I'm gonna be in uh in equities. Well,
Speaker 1: if you're going to do that, then you need to
Speaker 1: think about what's the expected real return of owning bills.
Speaker 1: You can't just say I'm gonna own this based on
Speaker 1: its expected return, or I'm just gonna own that without
Speaker 1: thinking about his expected return. And really what we should
Speaker 1: be comparing is more apples to apples. You know, either
Speaker 1: equities that hopefully we'll deliver this long term real return
Speaker 1: including a premium for the risk we're taking, or something
Speaker 1: else that gives us a safe, long term real return.
Speaker 1: And that thing exists, and it's tips. It's it's US
Speaker 1: inflation protected bonds called TIPS, and they've been around since
Speaker 1: Unfortunately they haven't been around for a hundred and twenty years.
Speaker 1: If they had been, I'm sure that the research that
Speaker 1: we've done in the understanding of this would be just
Speaker 1: second nature to everybody. But TIPS is still a little
Speaker 1: bit of a weird little corner, you know, like a
Speaker 1: lot of people haven't even heard of them exactly. Or
Speaker 1: it's like or those those I bonds that you can
Speaker 1: buy at the post office. So what we did in
Speaker 1: our research, as we said, well, what if now we
Speaker 1: did this apples to apples investment program where you were
Speaker 1: either invested in equities or in tips, depending on the
Speaker 1: spread in expected return between the two. So let's take
Speaker 1: the earnings yield of equities minus the yield the real
Speaker 1: yield on tips, and we'll call that the excess expected
Speaker 1: return on on equities or the excess earnings yield. And
Speaker 1: let's do our allocation according to that, and will either
Speaker 1: be in equities or will be in tips, depending on
Speaker 1: how attractive that is. So back in, for instance, amazingly
Speaker 1: and partly this is because the U S tips market
Speaker 1: was so young. Tips were yielding four four percent above
Speaker 1: inflation and US equities back then it was sort of
Speaker 1: a pretty uh builliant time for equities. The earnings yield
Speaker 1: was around four percent. Why would you want to own
Speaker 1: equities if they're expected long term return it's four percent,
Speaker 1: But you could buy tips and get four percent. Well,
Speaker 1: there might be some reason is to own a little
Speaker 1: bit of equities, but you wouldn't want to own a lot.
Speaker 1: And sure enough, that was a really good decision ex post.
Speaker 1: But it made sense. It's not just it's not a
Speaker 1: cherry picking thing. Just makes sense. Right. And over the
Speaker 1: last few years, right, tips have been negative, I mean,
Speaker 1: which is really weird, etcetera. But you know, in the
Speaker 1: real interest rate has been negative because inflation has been
Speaker 1: relatively high and expected to be high compared to what
Speaker 1: we can get on on treasuries. And so even though
Speaker 1: the earnings yield has been really low, uh, the spread
Speaker 1: between the earnings yield and tips has been pretty high.
Speaker 1: And so it made sense on that basis to continue
Speaker 1: to own a healthy amount of equities. And so then
Speaker 1: you say, well, okay, you know that's just that's really
Speaker 1: a short time. What twenty five years, I mean, that's
Speaker 1: a really short time, and it's is super short when
Speaker 1: you're thinking about this stuff. So we said, well, what
Speaker 1: would it look like if we went back to Well,
Speaker 1: there's no tips, So we said, well, can we try
Speaker 1: to make believe, you know, figure out what Tips might
Speaker 1: have been trading at going back? And so in our
Speaker 1: research paper, we we did that. You know, it's far
Speaker 1: from perfect. I mean, who knows where they would have traded,
Speaker 1: but we've made some guesses based on the information that
Speaker 1: existed at each moment in time going back. And then
Speaker 1: we ran the analysis all the way back and you know,
Speaker 1: just as from until today it was a good way
Speaker 1: to invest your money, it was also good from hundred
Speaker 1: to So that's really the research paper and a nutshell,
Speaker 1: and it's really just based on this idea that the
Speaker 1: high all else equal, the more you expect to earn
Speaker 1: relative to your safe asset, the more exposure to take.
Speaker 1: And is right back to the the whole coin flipping,
Speaker 1: the whole coin flipping exercise as well thell doanta. Every
Speaker 1: time Victor said, going back a twenty years, I was
Speaker 1: bracing for you to make a joke about you were
Speaker 1: thinking about your child, that's what. Yeah, that's when I
Speaker 1: was in high school or something. Yeah, but Victor, I
Speaker 1: could bottom line all that, Um, it sounds to me
Speaker 1: that with real yield still negative, it still makes sense
Speaker 1: to be sort of, you know, aggressively exposed to stocks.
Speaker 1: Is that is it as imposed that? Yes, I think
Speaker 1: it is. Yeah. And and non US equities, um, you know,
Speaker 1: are are offering much higher have a much higher cyclically
Speaker 1: adjusted earning zeal than US equities. I mean that's a
Speaker 1: really interesting topic, worthy of its own long conversation. But
Speaker 1: so global equities are even more attractive than just US equities,
Speaker 1: So the whole world combined is even more attractive. And yes,
Speaker 1: you know that that the excess expected return is UH
Speaker 1: is pretty nice. You know, it's it's it's healthy. I mean,
Speaker 1: it's it's really healthy. I mean, get an extra getting
Speaker 1: an extra five percent for taking equity market risk feels okay,
Speaker 1: you know, I mean, you know these are imperfect estimates.
Speaker 1: You know, the earnings. The one thing you know that
Speaker 1: is not going to have up been is uh, the
Speaker 1: you're gonna earn five percent. You know that's not gonna happen.
Speaker 1: You're gonna earn six three, you know something. But you
Speaker 1: know that's our expectation, and we have to make our
Speaker 1: decisions based on, uh, you know, the expectations based on
Speaker 1: the distribution of outcomes, and you know that summary statistic
Speaker 1: is useful in combination with the risk. So Victor, obviously,
Speaker 1: I've been talking to a lot of people about the
Speaker 1: recent valuation reset that we've had since the start of
Speaker 1: the year. So I wanted to ask you how you're
Speaker 1: thinking about the about a volatility that we've seen, especially
Speaker 1: when we have some people comparing, you know, making comparisons
Speaker 1: to two thousand eight or two thousand Well, you know,
Speaker 1: our perspective is to look at the broad market, and
Speaker 1: you know, the broad equity market, uh, globally and the
Speaker 1: US have been more volatile than they had been for
Speaker 1: much of the second half of two thousand and twenty
Speaker 1: one and more volatile than they are, say, on average.
Speaker 1: But the performance in January, um, you know, it was
Speaker 1: a down month for US equities, it was a down
Speaker 1: month for global equities, and it was a relatively large
Speaker 1: down month, but it wasn't huge. The real story, the
Speaker 1: real you know, amazing stuff that's going on right is
Speaker 1: this rotation that's happening within the equity market where low
Speaker 1: price to book stocks have been doing so much better
Speaker 1: than high high price to book stocks or high price
Speaker 1: to earnings. You know, growth stocks have been underperforming in
Speaker 1: particularly like certain sectors of growth stocks have been really
Speaker 1: underperforming value stocks. And that rotation, you know, has has
Speaker 1: been really dramatic. Um. But you know, we don't have
Speaker 1: too much that we can say about that because all right,
Speaker 1: you know that I don't have a great insight into
Speaker 1: the whole thing, because yes, it's been very dramatic. But
Speaker 1: you know that I find it so much easier to, uh,
Speaker 1: you know, to to look at the broad market. It
Speaker 1: reminds me of my dad. I guess this joke is
Speaker 1: probably in many different cultures, but my dad was Iranian
Speaker 1: and he always loved this joke about this character named
Speaker 1: lan Astradin and he was looking around his house and
Speaker 1: his wife said, what are you looking for? And he said,
Speaker 1: you know, I I misplaced my wallet and she said, well,
Speaker 1: where did you lose it? And he said, well, I
Speaker 1: think I lost it in the barn And she said, well,
Speaker 1: why are you looking for it here? And he says,
Speaker 1: there's no light in the barn. You know, I got
Speaker 1: to look for it here. You know, I can't see
Speaker 1: anything in the bar and started. So, you know that's
Speaker 1: how I feel that. Um, you know, when we're trying
Speaker 1: to think about investing, I want to look where the
Speaker 1: light is, where I can see a little bit what's
Speaker 1: going on. I think it's you know, for me, it's
Speaker 1: too hard to look at individual stocks. That's a really
Speaker 1: tough thing. You know, that's a specialist thing to do,
Speaker 1: and there's lots and lots of capital and people that
Speaker 1: want to do that and are good at doing that.
Speaker 1: I want to look at these broad indusseries where I
Speaker 1: can have a better idea of long term expected return.
Speaker 1: And when it comes to you know, these different sectors
Speaker 1: and all of that, it's so difficult to have a
Speaker 1: view because it's like these things anything can happen, you know,
Speaker 1: within individual companies and within sectors you know as well.
Speaker 1: So it's been really dramatic, but you know, from the
Speaker 1: broad market it's been more um, you know, a lot
Speaker 1: more tame. Still pretty painful, but tame. Yeah. I want
Speaker 1: to follow up on that Victor because I wanted to
Speaker 1: ask you about that. You know, people talk about how
Speaker 1: twenty was the year where every chart we like to
Speaker 1: look at was you know, basically ruined for life. You know,
Speaker 1: we we've never seen GDP contract the way it did
Speaker 1: and then bounce back the way it did. You know,
Speaker 1: we've never seen some of these things that we saw
Speaker 1: during the pandemic and the aftermath. Does that sort of
Speaker 1: coming out of a situation like that, does that kind
Speaker 1: of affect your confidence in this academic approach you have
Speaker 1: to markets or does it make you believe in them
Speaker 1: even more? That you know, his tree is somehow going
Speaker 1: to get us, you know, through this sort of unprecedented
Speaker 1: error that that we're we we've been through, you know
Speaker 1: what I mean to me, I almost it seems like
Speaker 1: a little bit of being risk averse makes sense in
Speaker 1: this environment, just because we're coming through uh, such unprecedented
Speaker 1: and at times, dude, does that plan you're thinking it
Speaker 1: all just sort of you know, the year where every
Speaker 1: chart was was ruined by just COVID anomalies. I think
Speaker 1: that the the tendency to look at what's happened in
Speaker 1: our near term history is can lead to insufficient amount
Speaker 1: of concern and and worries about the future. We have
Speaker 1: come to the edge of the precipice a couple of
Speaker 1: times in our recent memory, I mean two thousand and
Speaker 1: two thousand eight, two thousand nine, the pandemic. These were
Speaker 1: points where we came to the precipice and we were
Speaker 1: about to witness permanent destruction of capital. And then it
Speaker 1: came back at the last moment, mostly due to government
Speaker 1: intervention and printing of money and support and uh. And
Speaker 1: of course we saw the precipice and went over it,
Speaker 1: you know, in the nineteen thirties, um, where where we
Speaker 1: did see that destruction. So you know, I think that,
Speaker 1: um that that if anything, you know, two thousand and
Speaker 1: twenty uh and two thousand and eight nine can kind
Speaker 1: of give this wrong to me, can give this wrong
Speaker 1: message you know, of buying the dips, of everything's gonna
Speaker 1: be okay, of even and and this is kind of
Speaker 1: an interesting thing. You know that within academia there's a
Speaker 1: lot of debate about what they call the excess volatility
Speaker 1: of equities. It's kind of like the economy and and
Speaker 1: aggregate earnings are not that volatile, are much less volatile
Speaker 1: than equities are. And so it seems as though what's
Speaker 1: happening is when equities go down, it's a result of
Speaker 1: two things. One is that people are more negative on
Speaker 1: the future of the earnings. You know that that earnings
Speaker 1: growth and earnings just the real fundamental cash flows are
Speaker 1: going to be lower. Fine, that's one thing. But the
Speaker 1: other thing that tends to happen when the market goes
Speaker 1: down is like that the discount rate goes out, the
Speaker 1: expected return is higher. So it's it's a combination of
Speaker 1: those things. And so if we kept if somehow the
Speaker 1: market kept the same discount rate, equities would be a
Speaker 1: lot less volatile. And and that's really you know that
Speaker 1: I think we have to be careful about putting too
Speaker 1: much faith in that because at the end of the day,
Speaker 1: markets do can and do and have gone to zero
Speaker 1: and never come back. So you know, like the discount
Speaker 1: rate could get really high, but all of a sudden,
Speaker 1: it's like that market's gone, you know, and so the
Speaker 1: Russian market, the Chinese market, other markets have really got
Speaker 1: an individual companies. That happens all the time. But even
Speaker 1: broad markets can go to zero row and then they
Speaker 1: just they're absorbed. They're absorbed there in the academic speak,
Speaker 1: you know, I guess different people get different messages out
Speaker 1: of it. Like, you know, somebody could look at two
Speaker 1: thousand and twenty and say, wow, that's really scary. That's
Speaker 1: that's what I think, because we didn't go over the precipice,
Speaker 1: but we almost did, and we have to realize that
Speaker 1: we could have gone over. But other people could look
Speaker 1: at it and say, oh, everything's gonna be okay. I mean,
Speaker 1: that was nothing, you know, look at that, you know
Speaker 1: it was it was actually a good year, but we
Speaker 1: were almost over. We could have gone over, and we
Speaker 1: didn't go over, but we could have gone over, and
Speaker 1: so we should be reminded of that. So I'm certain
Speaker 1: I'm agreeing with you. I think different people have taken
Speaker 1: both of those lessons that either it's scared the heck
Speaker 1: out of them and they're staying scared, and that's good
Speaker 1: because this stuff is risky, or it's like, oh, you know,
Speaker 1: by the dip, don't worry about it. Just well, so Victor,
Speaker 1: for the listeners who I feel like there's a cohort
Speaker 1: of listeners who are waiting patiently thinking, just tell me
Speaker 1: what to do with my money right now, Victors. So
Speaker 1: it's to me, it sounds like you're you're bullish. You know,
Speaker 1: I would have a bullish allocation of stocks, and and
Speaker 1: perhaps even more so the rest of the world versus us.
Speaker 1: Is that fair? The first thing that the investor needs
Speaker 1: to do, I think the investor needs to look in
Speaker 1: the mirror and really know himself for herself, you know.
Speaker 1: I think that the what you should do is really
Speaker 1: a function of your makeup and circumstances and everything. So
Speaker 1: what I would say is, if you look in the
Speaker 1: mirror and you see in the mirror somebody who is
Speaker 1: a long term investor, somebody who's thinking about the long term,
Speaker 1: saving and investing for their retirement and for later in life,
Speaker 1: and you know, and and somebody that is um is
Speaker 1: willing to be patient and disciplined and kind of boring
Speaker 1: in how they invest. If that's what you see when
Speaker 1: you look in the mirror, then I think, yes, owning
Speaker 1: a healthy fraction of equities for the long run probably
Speaker 1: makes sense for for you with it if you have
Speaker 1: a typical amount of risk, aversion, etcetera. I think that
Speaker 1: makes sense. But if you look in the mirror and
Speaker 1: you see somebody who's like, you know, who wants to
Speaker 1: make twenty percent a year and is like just reading
Speaker 1: everything to find out, you know, which coin they should
Speaker 1: invest in or which meme stock or whatever, and that's
Speaker 1: what your personality is, then don't do that because well,
Speaker 1: I don't you know. I would say, try to change yourself.
Speaker 1: But if that's what you see in the mirror, you
Speaker 1: know you're not gonna be happy with this sort of
Speaker 1: boring long term allocation to equities. The coin flip experiment
Speaker 1: again is really interesting in this regard because what we
Speaker 1: found was that people would play it and they would
Speaker 1: do poorly on it. You know, very few people or
Speaker 1: not enough people made the twitter and fifty dollars that
Speaker 1: everybody should have made a sensible strategy of like betting
Speaker 1: ten percent on each flip or team percent on each
Speaker 1: flip would have given you like a ninety eight percent
Speaker 1: chance of getting to two fifty dollars in walking out
Speaker 1: of that half hour at a very good with a
Speaker 1: very good reward. But they didn't play it like that,
Speaker 1: and they didn't know and they were under pressure, et cetera.
Speaker 1: So there's all these reasons, but they didn't play well.
Speaker 1: Then we talked about it afterwards, you know, we were
Speaker 1: it was like in a class A lot of it
Speaker 1: was in a classroom, we're meeting room whatever, so that
Speaker 1: we talked about it, and we said, these are why,
Speaker 1: these are the reasons, this is how to think about it.
Speaker 1: These are the reasons why a constant proportional betting makes
Speaker 1: sense for most of the game. You know, you shouldn't
Speaker 1: been on tails obviously, all these different things we talked
Speaker 1: about it. What we found was that, um, if we
Speaker 1: let people play again and some of the people did
Speaker 1: want to play it again, that they just all sat
Speaker 1: there and clicked away, you know, at fifteent per hand
Speaker 1: and just did that got to the two fifty. We
Speaker 1: didn't pay them anymore. But but but they got the
Speaker 1: message right. But the problem is that it's cool to
Speaker 1: sit there for off an hour and just keep clicking
Speaker 1: at bet each time, But try doing that for forty years.
Speaker 1: Try being disciplined and boring for forty years and not saying, oh,
Speaker 1: the next one is gonna be heads, I'm gonna bet
Speaker 1: on that, or the next one is gonna be tails,
Speaker 1: I'm gonna bet on tails. I had my mom play
Speaker 1: the game for free, and I looked at her betting
Speaker 1: pattern and I said, Mom, you bet on tails And
Speaker 1: she said, you know, I knew I wasn't supposed to
Speaker 1: do that, but I just couldn't help myself. I just
Speaker 1: had to see what would happen. So it's it's really
Speaker 1: hard to be uh discipline. It's even harder to be
Speaker 1: a journalist, and uh, you know, I think it was
Speaker 1: Jason Zwagas said, Oh, it's it's really hard being a
Speaker 1: journalist and giving sound financial advice because it's so bloody
Speaker 1: boring and just it's the same thing. He says, he's
Speaker 1: written the same column every year for but he's, well,
Speaker 1: he's shown that it's you can do it. You know
Speaker 1: you can. It is possible to be interesting and to
Speaker 1: keep going. But but anyway, so so that's that would
Speaker 1: be my advice for long term investors. You know, you know,
Speaker 1: have a healthy allocation to equities, own some tips, you know,
Speaker 1: as well, don't you know? I think the tips are
Speaker 1: less risky for us then treasury bills are. Even though
Speaker 1: the price of tips goes up and down, it is
Speaker 1: giving us a real consumption, you know, it's giving us
Speaker 1: something of a real hedge of consumption. Yeah, they're yield
Speaker 1: is terrible right now, but you know who knows. I mean,
Speaker 1: they could go down or up. It's a you know,
Speaker 1: it's a market. And uh, you know, I think that
Speaker 1: owning some tips is probably an okay thing too. And
Speaker 1: and if tips get back to yielding a couple of
Speaker 1: percent above inflation, that would be great. You know, I
Speaker 1: think we'll all be happier than Bill do. I think
Speaker 1: Victor's mom's strategy of betting on on tails explains the
Speaker 1: higher cryptocurrency market. What do you think? Well, I like
Speaker 1: a victory that you added in there that she played
Speaker 1: for free. Actually, if my mom were playing for money,
Speaker 1: she probably wouldn't have been on tails. But we can't
Speaker 1: let you go. I want to ask you about, you know,
Speaker 1: the luck factor versus the skill factor and investing. And
Speaker 1: I know one of your most more famous papers is
Speaker 1: titled What's Past is Not Prologue, where you suggested that
Speaker 1: even if you look at two decades of performance, it's
Speaker 1: not enough to fully distinguish a fun manager from anything
Speaker 1: other than average. So can you talk about that, and
Speaker 1: can you talk about how you differentiate luck from skill
Speaker 1: and investing? Sure? So, um, you know, there's definitely we
Speaker 1: definitely are programmed behaviorally to extrapolate the future from a
Speaker 1: statistically insignificant amount of data. And you know, there's all
Speaker 1: kinds of reasons that, uh, you know, cognitive and to
Speaker 1: say that we developed that way. So we did an experiment.
Speaker 1: We love doing these different experiments, and we did this
Speaker 1: experiment where where we asked people, imagine, um, you have
Speaker 1: two coins. Somebody is giving you two coins to flip.
Speaker 1: One of them has a sixty chance of landing on heads.
Speaker 1: The other one is a fifty coin. But we won't
Speaker 1: tell you which one it is. But you can flip
Speaker 1: them if you want. You can flip them a million times,
Speaker 1: But tell us how many times do you need to
Speaker 1: flip them, sort of the minimum number of times that
Speaker 1: you need to flip them both and count up how
Speaker 1: many times they've landed heads and tails to have a
Speaker 1: confidence that this is the coin that's sixty and that's
Speaker 1: the coin that is. And again, you know, like we
Speaker 1: when we are our readership are kind of quantitative financing people.
Speaker 1: You know, some of the people kind of gave the
Speaker 1: right answer, but we also as people to just answer
Speaker 1: it based on their intuition and not to do the calculation.
Speaker 1: And and and a lot of people thought it took
Speaker 1: you know, ten flips, you know, with ten flips you
Speaker 1: could tell or fifteen flips or twenty flips. Well, the
Speaker 1: answer is a hundred and forty three flips or maybe
Speaker 1: a hundred and forty one. I think a hundred and
Speaker 1: forty three flips. I never would have guessed that, you
Speaker 1: know if you had asked me, is that nobody guesses
Speaker 1: that just you know, like a hundred and forty You
Speaker 1: have to do that thing a hundred and forty times
Speaker 1: to be that confident. I mean, I'm starting off fifty
Speaker 1: you know, like if I just choose that coin, I've
Speaker 1: got a fifty percent chance of choosing the right one.
Speaker 1: But I've got to do a hundred and forty. So
Speaker 1: that's like an illustration because if we're thinking about active
Speaker 1: managers versus the index and index investment, that an active
Speaker 1: manager is going to be more like a sixty forty coin,
Speaker 1: you know, relative to the benchmark. But if he's not
Speaker 1: a good active manager, he's like just fifty fifty. You
Speaker 1: know that that he if it's just a manager, was
Speaker 1: like just flipping. You know, he's just throwing darts at
Speaker 1: the wall. He'll be more like, in fact, he'll be worse,
Speaker 1: which I mentioned at the end, but let's just say
Speaker 1: who would be. And so what that tells you is
Speaker 1: you need a lot of data. You know, the world
Speaker 1: is not like coin flips that you know that when
Speaker 1: you by the time you get a lot of data
Speaker 1: on your manager, he's not even the manager anymore. Somebody
Speaker 1: else or he's not. I mean, you know that I'm
Speaker 1: not the same person that I'm gonna be ten years
Speaker 1: from now, you know, we you know whatever, No no
Speaker 1: man steps in the same river twice. So yeah, I
Speaker 1: think that that was kind of the the the idea
Speaker 1: there was to both show the statistical power of of
Speaker 1: these things, you know, which is very weak, and and
Speaker 1: also to show us our behavioral bias, you know, to
Speaker 1: extrapolate from too little data. But on top of that,
Speaker 1: you know, if we're just talking about active versus passive,
Speaker 1: I don't know if you've come across this. Bessem Binder
Speaker 1: Hendrick bessem Binder is a academic professor from Arizona, and
Speaker 1: he's done this research where he looked at all US
Speaker 1: equities and even though as we know, US equities outperformed
Speaker 1: treasury bills by like six percent a year over the
Speaker 1: last hundred and twenty years, he found that significantly more
Speaker 1: than half of all US equities have underperformed treasury build
Speaker 1: What that tells you is that if you are, if
Speaker 1: if you are an active manager holding a concentrated portfolio
Speaker 1: of stocks, that a concentrated portfolio of stocks has a
Speaker 1: higher than fifty percent chance of underperforming an index because
Speaker 1: of that concentration itself. You know, it's it's like a
Speaker 1: volatility drag phenomenon. So when you know that that somebody's
Speaker 1: gonna concentrated portfolio that is riskier than the broad market,
Speaker 1: you know, if they were just throwing darts, you know,
Speaker 1: if they had no skill, there's more than a fifty
Speaker 1: percent chance before fees and before transactions cost, that you
Speaker 1: would underperform the index because of this volatility drag. And
Speaker 1: then you've got fees, and you've got taxes, and you've
Speaker 1: got transactions cost and the whole thing is a bit
Speaker 1: of a mess. I don't know, dot all. This talk
Speaker 1: about coin flips has me interested in the biggest prop
Speaker 1: bet of the Super Bowl at all. You can bet
Speaker 1: on the coin flip at the opening of the Super Bowl,
Speaker 1: so you might want to get in on that. Put
Speaker 1: put twenty on heads, which I think has has become
Speaker 1: popular thanks to what happened to the Buffalo bills. What
Speaker 1: happened refresh my memory to happen to them? No, no,
Speaker 1: don't do it, don't go there. Sorry, tiden up your
Speaker 1: straight jackets. It's time for the craziest things we saw
Speaker 1: in markets this week? Well, speaking of knowing something, Bill Dana,
Speaker 1: I think it's that time to know what your craziest
Speaker 1: thing you saw in markets was this week. Let's hear it.
Speaker 1: I think I have an idea what it's going to
Speaker 1: be really good transition. Yeah, thanks, I think I think
Speaker 1: you might not know. But first, I had a submission
Speaker 1: come into my Twitter, which, by the way, I noticed,
Speaker 1: nobody send you submissions. They send them to me. I
Speaker 1: get some, I get some first. I always forget about them,
Speaker 1: though I do. Anyway. This one is from and I
Speaker 1: really hope I pronounce this correctly. I even asked him
Speaker 1: how to pronounce it. But his name is Brian reich
Speaker 1: Cough And he sent a message that said fixed income
Speaker 1: feels a bit boomer compared to crypto, but it's wild.
Speaker 1: And he shared a tweet which actually was from last week.
Speaker 1: But somebody pointed out that equity investors, especially in the US,
Speaker 1: could be forgiven for thinking that the most important events
Speaker 1: of the last forty eight hours were Facebook and Amazon numbers. Wrong.
Speaker 1: It was the six sigma move in European rates. The
Speaker 1: bond boogeyman is coming to an equity market near you.
Speaker 1: So I wanted to share that one, even though it
Speaker 1: was from last week, and just remind everybody that if
Speaker 1: if anyone sees anything weird, you can send it to
Speaker 1: my Twitter, not Mike's mine. That's a good point, Victor
Speaker 1: about this, the velocity of the move in rates. I
Speaker 1: feel like that is makes you have to rethink your
Speaker 1: allocay a bit more frequently than you would otherwise. Or
Speaker 1: or what does the that sort of rate of change
Speaker 1: in yields that we've seen give you any you know,
Speaker 1: give you the spins at all? Does it? Does it
Speaker 1: make you you know, want to reallocate more than perhaps
Speaker 1: you would otherwise. No, I mean I think that, you know,
Speaker 1: keeping an eye on your portfolio once a month or
Speaker 1: once a quarter is not bad. I mean, you know,
Speaker 1: I think that if we if we moved sort of
Speaker 1: in a straight line. Let's take us Tips for an example,
Speaker 1: So tenure, uh, Tips were trading it like minus one
Speaker 1: percent around the end of two thousand and twenty one,
Speaker 1: and now I think maybe we're around minus half a percent. Yeah,
Speaker 1: I mean, I think that if if Tips went from
Speaker 1: minus one percent, you know, all the way up to
Speaker 1: two percent over a couple of months, you know, it
Speaker 1: would be a shame to have missed out on the
Speaker 1: opportunity perhaps to have reduced your equity allocation as that
Speaker 1: was how spending, assuming that equities did not fall as
Speaker 1: much as would have been called for by that increase
Speaker 1: in in real yield. You know, you're right that the
Speaker 1: that the velocity of changes in everything, I mean, every
Speaker 1: everything has sort of got this. I mean the markets,
Speaker 1: you know, I don't know, over over time have sort
Speaker 1: of developed into this not much is going on, and
Speaker 1: then boom, you know, they make these big moves, and
Speaker 1: you know that they've become much more in in my feeling.
Speaker 1: You know, they're much more discontinuous than they used to be,
Speaker 1: which I think might have to do with uh, they're
Speaker 1: just being much less market maker capital relative to the
Speaker 1: size of the market than there used to be. But
Speaker 1: I don't know, I'm not sure about that. Less of
Speaker 1: a shock absorber built into the system. I guess I
Speaker 1: think there's less shock absorber from from that, I'm not
Speaker 1: that worried, you know, I think that you know that.
Speaker 1: Another I guess the reason I'm not that concerned about
Speaker 1: it is that when interest rates go up, if equities
Speaker 1: don't move at all, we'll want to reduce our equity allocation.
Speaker 1: But you know, when interest rates go up, equities are
Speaker 1: going to go down somewhat, and when you look at
Speaker 1: the whole thing, you're gonna want to reduce. You know,
Speaker 1: maybe you were you were at se and equities and
Speaker 1: you might want to reduce down two sixty four percent
Speaker 1: and equities or something. It's not you know that that
Speaker 1: you know looking at it, even if you're looking at
Speaker 1: it every quarter for for our business and for the clients,
Speaker 1: you know that where we're managing capital, we're looking we're
Speaker 1: rebalancing their portfolio every week. We also have a risk
Speaker 1: indicator in the form of momentum that we're using to
Speaker 1: underweight or overweight in conjunction with with excess earning ZEALD.
Speaker 1: So you know, we're trying to stay on top of
Speaker 1: all of that. But for individual investors who are men
Speaker 1: who are self managing, uh, you know, these long term
Speaker 1: investors that are looking in the mirror and seeing themselves
Speaker 1: as long term investors, it's it's okay too, it's you know,
Speaker 1: I think that you're okay doing this stuff. Looking at
Speaker 1: your portfolio once a quarter is fine. I think. All right, Victor,
Speaker 1: how about you? You see anything crazy in markets this week?
Speaker 1: Well that was a good one. That who that wrote
Speaker 1: into bil donna Um. You know. The thing that just
Speaker 1: amazes me is what's going on in the options market
Speaker 1: in the US. Options trading in single stocks now is
Speaker 1: as big as trading in the stocks themselves. So we
Speaker 1: always thought of options as the derivatives, you know, but
Speaker 1: at these kinds of volumes, you're wondering which is the
Speaker 1: real and which is the derivative. So we're getting I
Speaker 1: don't know, four five hundred billion dollars of options or
Speaker 1: trading every day, and that's about the same amount as
Speaker 1: is trading in the in the stock market in individual names.
Speaker 1: Even more remarkable than that is like one third of
Speaker 1: all of the options trading is in TESLA. That's amazing.
Speaker 1: And then amazing beyond that is like eighty percent of
Speaker 1: that trading is in options expiring out to one month.
Speaker 1: So you know, it's really I think that there's I
Speaker 1: think there's no doubt that the securities markets are also
Speaker 1: functioning as a as an outlet for um for the
Speaker 1: same kinds of demand that take people to Vegas or
Speaker 1: or a c You know that there is a gambling.
Speaker 1: There is this sort of almost you know, risk seeking
Speaker 1: kind of behavior that we're seeing manifest itself in the
Speaker 1: securities markets, in the coin markets. You know, I think
Speaker 1: it's uh. I mean, you know, look, Americans are spending
Speaker 1: I don't know, eighty billion dollars a year on lottery tickets,
Speaker 1: and and I haven't bought any I bet you know
Speaker 1: Bill Donna bottery lottery tickets recently, right, so, so, so
Speaker 1: like eighty billion dollars a year on lottery tickets. I
Speaker 1: think that's I'm not sure, but let's call that two
Speaker 1: fifty dollars per person, but the three of us haven't
Speaker 1: even bought any So there's some people out there that
Speaker 1: are spending thousands of dollars a year on lottery tickets. Now,
Speaker 1: you know, these are just you know, mysteries. You know
Speaker 1: that that academic finance has not really explained this. These
Speaker 1: are mysteries, but they're also kind of um, I think
Speaker 1: that they're also problems. You know, I think that I
Speaker 1: I think society, I think ours we would have less inequality.
Speaker 1: I think we would have more wealth, you know, general
Speaker 1: welfare of everybody. You know, I mean, it's kind of
Speaker 1: remarkable to me. And you know, that's seventy or eighty
Speaker 1: billion dollars pales in comparison two people buying and selling
Speaker 1: one week out of the money Tesla options that the
Speaker 1: Yolo effects, like what what what crazy happened recently? It's like,
Speaker 1: what what's happening? That's not crazy? It's gout and suffered
Speaker 1: to find h we'll have to change it to the
Speaker 1: most rational thing I said this week. But it's a
Speaker 1: it's an excellent point, and I think we're all trying
Speaker 1: to wrap our heads around sort of the tail wagon
Speaker 1: the dog effect of it all when you have you know,
Speaker 1: everyone's talking about gamma hedging as being the main driver
Speaker 1: of a market on any given week. It's it's uh
Speaker 1: strange times and deeds. All right, I'll give you my
Speaker 1: crazy thing. I'm gonna take you both out of your
Speaker 1: comfort zones though, and get into the private markets a
Speaker 1: little bit. And as you know, the term unicorn uh
Speaker 1: is refers to a private startup company that gets a
Speaker 1: valuation of one billion dollars or more in private markets
Speaker 1: before before they go public. Business Week kind of story
Speaker 1: talking about the whole unicorn phenomenon. And you know the
Speaker 1: reason they're called unicorn is because that that at one
Speaker 1: point was considered such a rarity to have a private
Speaker 1: company get that sort of valuation. You start up to
Speaker 1: get that sort of evaluation before going public. So this
Speaker 1: Business Week story lists gives an account a number of
Speaker 1: the total number of unicorns out there currently. And vil Donna,
Speaker 1: you'd be smirking had you read this story. Usually you've
Speaker 1: read the story I'm referring, and I can tell you
Speaker 1: you have read Okay, so you know the answer, right. Well,
Speaker 1: let's see if we'll quiz Victor, Victor, how many unicorns
Speaker 1: do you think there are out there in the world today. Sorry,
Speaker 1: it is it. Did you say it's private or yet private? Private? Yep?
Speaker 1: Private private companies? Uh. I think embedded in the definition
Speaker 1: is the notion that they're they're sort of a startup,
Speaker 1: some somewhat new. You know, you wouldn't consider say a
Speaker 1: you know, a private company that's been around a hundred years,
Speaker 1: but a startup that's a few years old that's worth
Speaker 1: at least a billion dollars. How many you think I'm
Speaker 1: going to embarrass myself? Can I can? I give the answer?
Speaker 1: It's a thousand. I couldn't believe it. I couldn't believe it.
Speaker 1: The best quote from from this article is somebody said,
Speaker 1: when you have a thousand unicorns, that's almost an oxymoron.
Speaker 1: I love that. That's incredible. So a trillion dollars in unicorns,
Speaker 1: it's it's it's unbelieved, but it's it seems to me that,
Speaker 1: like suggest there's some sort of lopsided nous between the
Speaker 1: private and public markets that needs to resolve itself. I
Speaker 1: don't know, it just seems like they're I don't know why,
Speaker 1: but there's so much money slashing around in those markets.
Speaker 1: People think they have an edge. I guess, I don't know.
Speaker 1: I don't I don't get it. I'm certainly out of touch.
Speaker 1: Elm Elm is not investing in the private market. I
Speaker 1: couldn't believe it either. That's why I brought it up.
Speaker 1: I never I never would have guessed that many. I
Speaker 1: wouldn't maybe said, I don't know. Seven sounds about right,
Speaker 1: A couple of couple of hundred tops, but a thousand
Speaker 1: unicorns pretty amazing anyway, Victor, fascinating conversation. Really appreciate your time,
Speaker 1: and I hope, uh we can get you back next time.
Speaker 1: You've got some some hot off the press research. Even
Speaker 1: though this research isn't even on the press yet. I
Speaker 1: think it's it's pre press hot off the typewriter. I guess, yeah, yeah,
Speaker 1: we'll get it. We'll get it up on too ssr
Speaker 1: N and on our website soon. But you heard it,
Speaker 1: but you heard it here. You've heard it here first.
Speaker 1: And I encourage everyone to go play Victor's coin flip game.
Speaker 1: It's a lot of fun. Thank you for joining us.
Speaker 1: Thanks guys, it was really a pleasure being on. Thank
Speaker 1: you very much for having me. What comes up. We'll
Speaker 1: be back next week. Until then, you can find us
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Speaker 1: us on Twitter, follow me at Bring Anonymous. The Dotta
Speaker 1: Hirich is at the Dotta Hirich. You can also follow
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Speaker 1: The head of Bloomberg Podcasts is Francesco Levie. Thanks for listening,
Speaker 1: See you next time.