WEBVTT - Interview With Wesley Gray: Masters in Business (Audio) 0:00:00.440 --> 0:00:04.480 Look ahead, imagine more, gain insight for your industry with 0:00:04.519 --> 0:00:08.520 forward thinking advice from the professionals at Cone Resnick. Is 0:00:08.520 --> 0:00:11.600 your business ready to break through? Find out more at 0:00:11.640 --> 0:00:16.200 Cone resnick dot com. Slash Breakthrough. This week on the podcast, 0:00:16.280 --> 0:00:18.840 I have an extra special guest. He's an old friend. 0:00:18.920 --> 0:00:22.920 His name is Wes Gray, and he is not your 0:00:23.040 --> 0:00:27.120 usual quant slash money manager. He is the founder and 0:00:27.240 --> 0:00:32.640 CEO of Alpha architect Um, and he's also an unusual guy. 0:00:33.280 --> 0:00:38.600 He uh comes out of uh University of Chicago in 0:00:38.640 --> 0:00:44.160 an MBA PhD program and decides to take a little 0:00:44.200 --> 0:00:47.519 time off in order to join the Marines, which he 0:00:47.560 --> 0:00:52.040 did as a captain, went overseas in Iraq, where he 0:00:52.200 --> 0:00:57.760 served as an information order officer embedded with the Iraqi Army, 0:00:57.960 --> 0:01:01.800 and Um wrote a book about it, Colds Embedded and 0:01:01.880 --> 0:01:08.840 Really a fascinating uh An unusual background discusses throughout his 0:01:09.000 --> 0:01:14.039 career how Iraq and and the prosecution of war are 0:01:14.640 --> 0:01:18.840 in some ways very similar to investing. Alpha architect is 0:01:18.880 --> 0:01:23.000 a quantitative firm. Uh West crunches a lot of numbers. 0:01:23.000 --> 0:01:28.360 He's a big believer in factor investing. He has long 0:01:28.400 --> 0:01:32.400 since been a proponent of both momentum and value, which 0:01:32.440 --> 0:01:35.720 is a somewhat unusual combination, but they are two of 0:01:35.800 --> 0:01:39.200 the six main factors UH that are out there. I 0:01:39.280 --> 0:01:43.440 thought the conversation was absolutely fascinating. If you are a 0:01:43.480 --> 0:01:48.520 fan of quantitative investing, or if you enjoyed our previous 0:01:48.560 --> 0:01:53.120 podcasts with people like Ammanual Derman or MEB Fabor or 0:01:53.160 --> 0:01:56.160 any of the other quants we've spoken with, UH, you'll 0:01:56.200 --> 0:02:00.200 really enjoy this. So, with no further ado, my conversation 0:02:00.400 --> 0:02:06.600 with Wes Gray. This is Masters in Business with Barry 0:02:06.680 --> 0:02:11.400 Ridholts on Bloomberg Radio. My special guest today is Dr 0:02:11.440 --> 0:02:15.240 Wesley Gray. He is a former captain in the United 0:02:15.280 --> 0:02:20.480 States Marine Corps. West graduated Magnicum Laudy from Morton. He 0:02:20.600 --> 0:02:24.600 earned both his m b a. And PhD in finance 0:02:25.080 --> 0:02:28.480 from the University of Chicago before becoming a professor of 0:02:28.520 --> 0:02:35.280 finance at Drexel University. He currently runs the site Alpha Architect, 0:02:35.800 --> 0:02:40.320 as well as running an asset management shop for high 0:02:40.360 --> 0:02:44.320 net worth individuals. He is the author of three soon 0:02:44.400 --> 0:02:49.079 to be four books on quantitative investing, as well as 0:02:49.160 --> 0:02:54.520 numerous academic articles. Wes Gray, Welcome to Bloomberg. Very happy 0:02:54.520 --> 0:02:57.239 to be here. So let's talk a little bit about 0:02:57.400 --> 0:03:01.079 your background, because it's kind of unusual. Lots of people 0:03:01.160 --> 0:03:04.960 take some time off between college and grad school. What 0:03:05.000 --> 0:03:08.120 did you do between college and grad school? So what 0:03:08.200 --> 0:03:11.400 I did is basically, right out of undergrad actually directly 0:03:11.520 --> 0:03:15.160 enrolled in the University of Chicago paced program at ripe 0:03:15.200 --> 0:03:19.160 old age of two, spent two years there getting hazed, 0:03:19.560 --> 0:03:22.880 you know, fighting against Russian math champs to compete. And 0:03:22.880 --> 0:03:26.080 then after two years in a PhD program, you you 0:03:26.120 --> 0:03:29.400 get to your comps stage and I passed the comps 0:03:29.760 --> 0:03:32.960 and I said, you know what, um twenty four, I'm 0:03:33.000 --> 0:03:36.560 hating finance at the moment. I needed to do something 0:03:36.600 --> 0:03:38.120 that I always wanted to do, and that was serve 0:03:38.200 --> 0:03:40.840 in the military. So I asked for a special four 0:03:40.880 --> 0:03:44.720 year sabbatical uh to basically serving the Marine Corps at 0:03:44.800 --> 0:03:47.400 left for four years, which is probably first time that's 0:03:47.440 --> 0:03:51.480 ever happened, I imagine in Chicago finance PhD program history, 0:03:51.760 --> 0:03:54.480 and then came back and finished up. So let's not 0:03:54.800 --> 0:03:58.960 skip over that middle part. Those four years were the 0:03:59.000 --> 0:04:02.160 middle of the Iraq War. You were embedded with the 0:04:02.200 --> 0:04:06.640 Iraqi Army as a captain or lieutenant. What was your rank. 0:04:06.800 --> 0:04:09.600 When I was there as a lieutenant lieutenant, I called 0:04:09.640 --> 0:04:11.440 you a first lieutenant. Yeah, well I got out as 0:04:11.440 --> 0:04:13.640 a captain, but okay, I serving there as a first 0:04:13.680 --> 0:04:18.440 lieutenant and your nickname amongst the Iraqis was Jamal. How 0:04:18.440 --> 0:04:23.080 did that come about? Basically? I was the intel guy 0:04:23.240 --> 0:04:26.120 in our our mid team military transition team, and so 0:04:26.160 --> 0:04:28.159 the intel guy is supposed to know how to speak 0:04:28.160 --> 0:04:30.800 the language, you know, how to influence the people. And 0:04:30.800 --> 0:04:32.640 one of the things you learned about reading about Arab 0:04:32.680 --> 0:04:35.599 culture is it's really important to learn the language and 0:04:35.640 --> 0:04:37.839 hang out with the people in order to you know, 0:04:37.880 --> 0:04:39.960 be able to better influence them. So I used to 0:04:40.000 --> 0:04:42.359 hang out in what they call the swats Uh and 0:04:42.440 --> 0:04:44.440 I was down there and they would always call me 0:04:44.880 --> 0:04:48.400 lulas um gay because they can't say ours very well. 0:04:48.800 --> 0:04:50.560 And I was like, you know what, guys, let's try 0:04:50.600 --> 0:04:54.000 to find a language so instead of gay, instead of great. 0:04:54.520 --> 0:04:56.760 You know, and it's usually not the greatest idea to 0:04:56.800 --> 0:04:59.480 walk around with a bunch of Marines when when I 0:04:59.600 --> 0:05:02.320 ras are calling you malasam gay, you just get some 0:05:02.440 --> 0:05:05.760 ridicule subtimes um and they just couldn't say it, so 0:05:05.960 --> 0:05:08.279 as like, can you guys, name me, and they literally 0:05:08.279 --> 0:05:10.520 had like a naming party where there was probably fifty 0:05:10.760 --> 0:05:14.000 Iraqis in the uh in this swaha it's maybe you know, 0:05:14.120 --> 0:05:17.920 thousand square foot you know, cardboard building type thing, you 0:05:17.960 --> 0:05:20.400 can think about it. And they came up with Jamal, 0:05:20.520 --> 0:05:23.520 and then I was called Malasam Jamal, and uh, I 0:05:23.640 --> 0:05:26.360 kind of like I actually that was my identity. Even 0:05:26.400 --> 0:05:28.599 when I came back, I still felt like I was 0:05:28.680 --> 0:05:33.800 Malasam Jamal. That's funny. So how did the Marines and 0:05:33.960 --> 0:05:39.800 your your time in Iraq helped prepare you for a 0:05:39.920 --> 0:05:44.800 career as a quant in in finance. I'd say the 0:05:45.000 --> 0:05:49.560 biggest thing is just understanding that in all endeavors, humans 0:05:49.760 --> 0:05:52.920 are involved. And when humans are involved in any sort 0:05:52.920 --> 0:05:56.400 of decision making or activity where there's a lot of emotion, 0:05:57.120 --> 0:06:00.839 stress and chaos, they do crazy things. There's certainly a 0:06:00.920 --> 0:06:03.960 level of emotion involved there. And I think in the 0:06:03.960 --> 0:06:07.280 military what you learn is it's all about standard operating procedures, 0:06:07.760 --> 0:06:12.080 training to do things that seem you know, mundane and 0:06:12.800 --> 0:06:15.640 dumb and checklist driven now, but when you get into 0:06:15.640 --> 0:06:18.839 a chaotic situation, you think, God, you did that, so 0:06:18.920 --> 0:06:21.039 you don't rely on your natural action you're rely on 0:06:21.080 --> 0:06:24.520 your standard operating procedure. You know. Perfect example might be 0:06:24.600 --> 0:06:26.720 I remember I was in the palm groves, an area 0:06:26.760 --> 0:06:29.400 called Haditha, which is kind of you think out in 0:06:29.520 --> 0:06:31.840 Alomar Province where a lot of the isis guys are 0:06:31.880 --> 0:06:35.240 now and I was on Iraqi patrol and literally a 0:06:35.360 --> 0:06:38.320 dude gets shot in the chest fifteen feet in front 0:06:38.320 --> 0:06:40.800 of me. You know, natural action is hit the deck, 0:06:41.000 --> 0:06:42.839 you know, go to the ground as fast as possible. 0:06:43.160 --> 0:06:46.320 Another natural action, which you're not supposed to do, is 0:06:46.360 --> 0:06:48.680 go run to the person who just got shot and 0:06:48.720 --> 0:06:51.000 see what beat on him? And now that and they're 0:06:51.000 --> 0:06:53.000 gonna go shoot me now, so what. But what you 0:06:53.080 --> 0:06:55.840 train to is when there's a casualty, the first thing 0:06:55.880 --> 0:06:59.400 you do is hit the deck, fine cover, figure out 0:06:59.400 --> 0:07:01.560 where the other guys are, to make sure you secure 0:07:01.560 --> 0:07:03.880 the area. The only way that you you have a 0:07:03.920 --> 0:07:07.440 reaction to do that because you have stand operating procedure 0:07:07.440 --> 0:07:10.840 and you're trained to that standard. Just like in financial markets, 0:07:10.840 --> 0:07:12.800 I think a lot of time, like let's say there's 0:07:12.840 --> 0:07:16.880 a fifty draw down in your portfolio, your gut reaction 0:07:17.040 --> 0:07:20.760 is sell everything. But that's not what you should probably do. 0:07:21.040 --> 0:07:23.080 So you need to have a process or something in 0:07:23.120 --> 0:07:27.080 place before you hit chaos. So when you're actually in chaos, 0:07:27.160 --> 0:07:29.640 you you know, you're act in a more rational, i'd 0:07:29.640 --> 0:07:32.280 say logical way, And I think that you see a 0:07:32.320 --> 0:07:34.360 lot of that between military and investing. You know, I 0:07:34.360 --> 0:07:36.480 started on a trading desk. The head of the desk 0:07:36.680 --> 0:07:40.600 was a former Marine jungle combat instructor. There was someone 0:07:40.640 --> 0:07:42.960 else who was a former seal on the desk. Now, 0:07:43.000 --> 0:07:46.800 what I always found fascinating wasn't just the standard operating 0:07:46.800 --> 0:07:51.320 procedure for what to do. It was preparing emotionally for 0:07:51.360 --> 0:07:55.960 the firefight. Like, how can an investor prepare emotionally for 0:07:56.000 --> 0:07:59.520 those big draw downs? Yes, so I think it's just 0:07:59.600 --> 0:08:03.120 like in the military. You try to train as close 0:08:03.160 --> 0:08:05.960 as you can to fight and have ultimate faith and 0:08:06.040 --> 0:08:09.600 confidence in the leadership and the decisions and the process 0:08:09.640 --> 0:08:12.520 that you believe in. And when you have that, i'd 0:08:12.520 --> 0:08:16.480 say belief in what you're doing, and you really put 0:08:16.480 --> 0:08:19.280 a you know, good faith effort into working on that. 0:08:19.600 --> 0:08:22.120 When you hit chaos, if you believe in your training, 0:08:22.480 --> 0:08:25.040 you're more likely than not to stick with that process. 0:08:25.280 --> 0:08:28.520 I'm Barry Ridhults. You're listening to Masters in Business on 0:08:28.560 --> 0:08:32.640 Bloomberg Radio. My special guest today is West Gray. He 0:08:32.880 --> 0:08:36.280 is a former captain in the Marines, served as an 0:08:36.280 --> 0:08:39.320 in bed with the Iraqi Army on behalf of the 0:08:39.440 --> 0:08:43.040 U S Marines. He runs a shop called Alpha Architect 0:08:43.120 --> 0:08:48.120 and has written numerous books on quantitative investing. Let's talk 0:08:48.160 --> 0:08:52.000 about a book of viewers that I really enjoyed quantitative value. 0:08:52.440 --> 0:08:56.199 When we think of quantz and we think of value investors, 0:08:56.640 --> 0:09:00.199 we really don't think of those as having a big overlap. Up. 0:09:00.720 --> 0:09:03.960 Tell us how you came to the idea of value 0:09:04.000 --> 0:09:07.960 that was quantitatively driven. Sure, so I had start out 0:09:08.000 --> 0:09:11.600 with this being a total bible thumping Ben Graham intelligent 0:09:11.640 --> 0:09:16.280 investor stockpicker did that for ten years my own personal money, 0:09:16.800 --> 0:09:19.240 and thank god I had the opportunity to eat a 0:09:19.280 --> 0:09:21.800 lot of humble pie along the way, and I was thinking, 0:09:21.880 --> 0:09:24.800 you know what, this whole Warren Buffett Ben Graham idea 0:09:25.480 --> 0:09:28.800 makes total sense to me. But after you get engaged 0:09:28.840 --> 0:09:32.880 in the activity of stockpicking, you realize that you get 0:09:33.000 --> 0:09:37.160 very emotionally involved. And even if you understand the biases 0:09:37.240 --> 0:09:40.839 you've memorized. You know Kniman's book, even if you know it, 0:09:41.160 --> 0:09:44.160 and you know how the biases influence you. You start 0:09:44.240 --> 0:09:47.120 to realize you still can't control against the biases. So 0:09:47.240 --> 0:09:51.360 I thought, hey, you know, fundamentally, value investing makes sense 0:09:51.480 --> 0:09:56.760 by cheap stuff everyone hates. Great. The problem is hold 0:09:56.800 --> 0:09:59.280 it for a long time, hold your nose when inevitably 0:09:59.280 --> 0:10:03.960 it told the underperforms for potentially multi air stretches um. 0:10:04.000 --> 0:10:07.080 But at the same time, how can we implement this 0:10:07.200 --> 0:10:11.760 process in an objective discipline way such that I can 0:10:11.920 --> 0:10:15.960 pull out monkey brain from making bad decisions, uh, you know, 0:10:16.040 --> 0:10:18.440 from trying to be a stock picker, because I learned 0:10:18.480 --> 0:10:22.679 my lessons basically on that. That's quite fascinating. So some 0:10:22.760 --> 0:10:25.640 of the things you reference in the book. Obviously the 0:10:25.640 --> 0:10:29.240 benefits of using a quant approach is you're taking out 0:10:29.240 --> 0:10:32.200 the human elements. One of the things you reference in 0:10:32.240 --> 0:10:38.160 the book is the importance of finding the highest quality stocks. 0:10:38.480 --> 0:10:40.319 So first, what does it mean when we say a 0:10:40.440 --> 0:10:43.960 stock is high quality? And then how do you screen 0:10:44.040 --> 0:10:47.439 for those? Sure? So, so stepping back, it's really important 0:10:47.480 --> 0:10:51.079 when we when we talk about quality in the context investing, 0:10:51.240 --> 0:10:55.760 to understand given it's already cheap. So with value investing 0:10:55.800 --> 0:10:57.960 the way we look at it, you have to be 0:10:58.080 --> 0:11:02.600 buying the stress cheapest securities in the market. Only within 0:11:02.760 --> 0:11:06.120 the cheap does quality start to help add value. So 0:11:06.160 --> 0:11:08.960 if you just look at quality as a standalone, you know, 0:11:09.120 --> 0:11:12.360 characteristic of a security, it's unclear that it adds any 0:11:12.440 --> 0:11:16.000 quote unquote alpha or edge. It's all about looking at quality. 0:11:16.480 --> 0:11:19.520 Given you're in the cheap stocks everyone hates. So the 0:11:19.600 --> 0:11:22.520 step one is screened for an expensive stock. Step two 0:11:22.640 --> 0:11:26.400 is within those cheap stocks. So how do you identify 0:11:26.559 --> 0:11:30.559 what's quality and what's not amongst the cheap So, given 0:11:30.600 --> 0:11:32.840 we're in the in the cheap bin, which are security, 0:11:32.920 --> 0:11:35.160 obviously there's something going on and that's why they're cheap. 0:11:35.480 --> 0:11:37.679 We have a table like the we call it the 0:11:37.760 --> 0:11:41.360 quality table. There's two legs to it. There's understanding the 0:11:41.440 --> 0:11:44.440 fundamental quality of the business and there's another thing called 0:11:44.480 --> 0:11:48.320 current financial strength. So in assessing economic mode, we try 0:11:48.360 --> 0:11:53.000 to objectively ascertain is this company a good business? How 0:11:53.040 --> 0:11:55.280 do we do that? We look at things like long 0:11:55.400 --> 0:11:59.680 term geometric means on return on assets, return on capital. 0:12:00.000 --> 0:12:03.200 We look at long term free cash flow generation, profit 0:12:03.280 --> 0:12:06.640 margin dynamics, like if you have fifty percent margin year 0:12:06.640 --> 0:12:09.280 and year out, that's probably good business and we want 0:12:09.280 --> 0:12:13.160 to quantify the quality of this business to essentially generate 0:12:13.200 --> 0:12:16.480 returns hopefully an excess of their cost of capital. But 0:12:16.600 --> 0:12:19.520 that's not enough. That's leg one because we're dealing with 0:12:19.679 --> 0:12:23.400 cheap stocks that have issues. So we can one ascertain 0:12:23.559 --> 0:12:26.880 that there historically have some indication of being a good business. 0:12:27.320 --> 0:12:30.680 But then current financial strength is now at ten point 0:12:30.840 --> 0:12:33.040 checklist where we want to make sure are you going 0:12:33.120 --> 0:12:35.959 to survive the next few years? I e. Are you 0:12:36.120 --> 0:12:39.440 making money? Are you're paying down debt? Are your repurchasing stock? 0:12:39.840 --> 0:12:42.480 Is your current ratio is improving? Uh, it's literally like 0:12:42.480 --> 0:12:45.360 a pre flight checklist. So are you a quality business 0:12:45.600 --> 0:12:49.439 organically and do you have the current financial stature to 0:12:49.679 --> 0:12:52.640 live for the next few years? So eventually hopefully you 0:12:52.679 --> 0:12:55.559 can get revalued up to not be a value stock 0:12:55.600 --> 0:12:57.840 anymore and hopefully be a growth stock in the future. 0:12:58.120 --> 0:13:02.160 So is it safe to say that companies with strong 0:13:02.240 --> 0:13:06.440 balance sheets have stocks that outperform? Or is that overstating it? 0:13:06.679 --> 0:13:11.199 I think it is. I think cheap stocks with strong 0:13:11.240 --> 0:13:14.480 balance sheets on a risk adjusted basis and from a 0:13:14.720 --> 0:13:18.040 you know, betting standpoint, or better than cheap stocks with 0:13:18.240 --> 0:13:23.800 bad balance sheets independently. No, because there's a few reasons 0:13:23.840 --> 0:13:27.920 why everyone knows Google is great, Facebook's great, Procter and 0:13:27.960 --> 0:13:30.719 Gambles great, So what's the edge? And then secondly, it's 0:13:30.720 --> 0:13:34.800 also easy to buy those names for someone to recommend them. 0:13:34.840 --> 0:13:37.920 So it's emotionally. Emotionally or are you referring to the 0:13:37.920 --> 0:13:41.840 principal agency issue the principal agent problem? And also just emotionally, 0:13:41.880 --> 0:13:45.840 it's easy to own high quality securities. But when you 0:13:45.880 --> 0:13:48.840 look at it objectively from like an evidence based standpoint, 0:13:49.440 --> 0:13:52.960 just as an independent analysis to I, we think quality 0:13:53.080 --> 0:13:55.400 is not that valuable and it doesn't make any sense 0:13:55.400 --> 0:13:58.880 it would have edge were cheapness. Everyone hates these things. 0:13:58.920 --> 0:14:02.240 They're hard to own, like it's crazy, They're hard to hold. 0:14:02.280 --> 0:14:05.520 There's a lot of pain involved and unfortunately, you know, 0:14:05.600 --> 0:14:08.120 just like in the Marine Corps, no pain, no gain. 0:14:08.520 --> 0:14:12.120 You know that that BAC holds and financial markets unfortunately 0:14:12.200 --> 0:14:16.319 as well. So let's talk about stocks that can cause 0:14:16.640 --> 0:14:19.080 permanent loss of capital. There's a chapter in the book 0:14:19.360 --> 0:14:22.600 where you discuss that how do you avoid these stocks? 0:14:22.640 --> 0:14:26.200 What do you look for to avoid owning names that 0:14:26.240 --> 0:14:28.280 are going to go down and never come up? The 0:14:28.520 --> 0:14:31.760 classic value trap, the value trap. Yeah, you catch the 0:14:31.800 --> 0:14:35.000 falling knife, as they called on the way down. So, uh, 0:14:35.200 --> 0:14:37.120 three of them are basically there's there's two or three 0:14:37.120 --> 0:14:39.960 ways you can think about permanent loss of capital, and 0:14:40.000 --> 0:14:43.280 these are One would be like a fraud or manipulation. 0:14:43.600 --> 0:14:45.880 So if it comes out that the business you thought 0:14:46.120 --> 0:14:48.480 that was making a billion dollars a year is actually 0:14:48.560 --> 0:14:51.880 making zero, that's gonna be a bad news for equity holders. 0:14:52.320 --> 0:14:55.440 I would guess, Yeah, same thing with manipulation, like oh 0:14:55.560 --> 0:14:58.120 we thought we had this, now we have this other thing. 0:14:58.400 --> 0:15:01.080 And then the other one that's that's obviously is financial 0:15:01.080 --> 0:15:04.360 distress or bankruptcy. You can own the best business in 0:15:04.400 --> 0:15:07.280 the world, but if you're an equity holder and this 0:15:07.400 --> 0:15:10.400 firm is in distress, the debt holders might end up 0:15:10.400 --> 0:15:14.160 owning that great company, not you as the stockholders. So 0:15:14.160 --> 0:15:16.520 so by the time that news comes out, it's too late. 0:15:16.680 --> 0:15:20.480 What can investors do to avoid owning those names? What 0:15:20.600 --> 0:15:22.960 signs should they be looking for? Sure? So, so we 0:15:23.040 --> 0:15:25.520 do is we leverage a lot of uh, I guess 0:15:25.560 --> 0:15:29.200 you call them technologies in academic literature where people have 0:15:29.320 --> 0:15:33.640 built up statistical constructs to try to predict who's most 0:15:33.720 --> 0:15:37.080 likely or red flagged as being a manipulator, fraud ster, 0:15:37.440 --> 0:15:40.120 or potentially going to be in a financial distress situation, 0:15:40.560 --> 0:15:42.760 and we just at the outset say hey, if you're 0:15:42.800 --> 0:15:45.480 extreme red flagging on any of these sort of things, 0:15:46.280 --> 0:15:47.880 you're not in our You're not even gonna be in 0:15:47.880 --> 0:15:51.000 our potential. Just remo. We're removing, yeah, because we don't 0:15:51.000 --> 0:15:54.480 want to buy your falling knife situation. I'm Barry Hults. 0:15:54.680 --> 0:15:58.240 You're listening to Masters in Business on Bloomberg Radio. My 0:15:58.320 --> 0:16:02.000 special guest today is Wes League Gray. He is a 0:16:02.040 --> 0:16:05.080 retired captain in the U. S. Marine Corps, an m 0:16:05.160 --> 0:16:08.560 b A and PhD out of the University of Chicago. 0:16:08.960 --> 0:16:13.920 He now runs Alpha Architect, which is a unique quantitative 0:16:14.280 --> 0:16:18.960 asset management firm. And the first book he wrote was 0:16:19.080 --> 0:16:23.760 called Embedded, which is something that you pretty much pens 0:16:24.200 --> 0:16:27.560 right after getting out of the Marine Corps and after 0:16:27.600 --> 0:16:30.480 spending was it four years in Iraq? Is that about right? 0:16:30.560 --> 0:16:33.000 It was four years in the service I did uh. 0:16:33.240 --> 0:16:36.160 I was there for a standard Marine seven months deployment 0:16:36.600 --> 0:16:40.200 in a place called Haditha which down el Ombar Province there. 0:16:40.280 --> 0:16:42.880 So what motivated you to sit down and write a 0:16:42.880 --> 0:16:44.680 book when you get back that had nothing to do 0:16:44.720 --> 0:16:47.880 with finance. That was strictly about your time with the Marines. 0:16:48.320 --> 0:16:51.160 When it was is you know, I remember before the 0:16:51.200 --> 0:16:54.840 Iraq War, had Colin Pale show us that little white 0:16:55.080 --> 0:16:58.120 you know bottle that you're all gonna die, and I 0:16:58.160 --> 0:16:59.600 was like, you know, this is kind of maybe a 0:16:59.640 --> 0:17:02.040 survive of a war. This is a pretty important thing. 0:17:02.360 --> 0:17:04.760 I'm a buyer, I'm a believer. And then you know, 0:17:04.800 --> 0:17:07.000 so when in a Marine Corps, not really for that reason. 0:17:07.040 --> 0:17:09.280 I just want to do my service. But when I 0:17:09.080 --> 0:17:11.520 was I thought, hey, this is a mission that makes sense. 0:17:11.840 --> 0:17:14.560 You know, it's a win win for America and hopefully 0:17:14.560 --> 0:17:17.120 for the Rockies what have you. But then after actually 0:17:17.400 --> 0:17:21.119 living and being embedded with the people, I started to 0:17:21.119 --> 0:17:24.919 realize that, you know, culture matters, and we're we're in 0:17:24.960 --> 0:17:28.119 a in this war now, we're really taking on a 0:17:28.200 --> 0:17:31.320 fifty two year commitment because we're gonna try to change 0:17:31.640 --> 0:17:34.760 culture and not easy to do. Not easy to do. 0:17:34.800 --> 0:17:38.920 And I would argue it's very, very time intensive and costly, 0:17:39.440 --> 0:17:42.399 and that's fine as a decision, but let's weigh that 0:17:42.480 --> 0:17:45.720 against the potential benefits um and that book just really 0:17:45.760 --> 0:17:49.240 opened my eyes to understanding. I would say just Arab 0:17:49.280 --> 0:17:52.760 culture in general, and how the way they think about 0:17:53.320 --> 0:17:55.359 the world is just so much different than us. And 0:17:55.359 --> 0:17:58.560 then the idea that we can impose, you know, our 0:17:58.640 --> 0:18:01.320 ideas and how we think about the world on them, 0:18:01.760 --> 0:18:04.040 it just doesn't work. And I have an analogy here. 0:18:04.400 --> 0:18:06.920 It's like, you know, it's a fish trying to tell 0:18:06.960 --> 0:18:09.199 me how to breed it underwater, Like I understand I 0:18:09.240 --> 0:18:11.800 need gills and understand you need to get oxygen, but 0:18:12.080 --> 0:18:14.160 it doesn't work for me. Like it's just we all 0:18:14.240 --> 0:18:17.159 understand each other kind of, but we just it's not 0:18:17.200 --> 0:18:20.080 gonna work. Um. And that that was the biggest insight 0:18:20.119 --> 0:18:22.240 when I had to share it, because it changed my 0:18:22.320 --> 0:18:26.399 mind about the whole thing one eighty about why are 0:18:26.400 --> 0:18:29.800 we here? And is this really a positive MPV project 0:18:29.840 --> 0:18:33.040 for us? So so you can't really just walk into 0:18:33.040 --> 0:18:35.520 a country with a completely different set of mores and 0:18:35.560 --> 0:18:37.840 cultures and say here's how you do it. That's not 0:18:37.840 --> 0:18:42.639 gonna fly, no, no, yeah, yeah exactly. It seems obviously 0:18:42.760 --> 0:18:45.800 trivial after the fact, but yeah, but beforehand, you know, 0:18:45.960 --> 0:18:49.240 that's the classic hindsight bias. It's easy to say these things. 0:18:49.200 --> 0:18:55.159 Acts in In early two thousand three, a handful of 0:18:55.200 --> 0:18:58.960 people were warning about that. Everybody remembers the big Eric 0:18:58.960 --> 0:19:02.639 san Seki, the Army general, warning about you're not gonna 0:19:02.640 --> 0:19:04.439 do this with a hundred thousand troops. You need a 0:19:04.440 --> 0:19:08.600 half a million troops. It's more than just hearts and minds. 0:19:08.600 --> 0:19:11.720 It's really a long process. Nobody wants to hear that 0:19:11.800 --> 0:19:15.040 before you go in. Yeah, the biggest insight I got action. 0:19:15.160 --> 0:19:17.240 And also it's a lot of the things I cite 0:19:17.240 --> 0:19:20.120 and embedded. It is just my conversations with the actual 0:19:20.240 --> 0:19:23.280 Rocky people about why they thought we were so weird 0:19:23.320 --> 0:19:25.879 and crazy and the things that we did say that 0:19:25.960 --> 0:19:28.560 was that the readers, these Americans are crazy. Um. They 0:19:28.640 --> 0:19:31.160 try to explain to me their perspective, and a perfect 0:19:31.200 --> 0:19:33.600 one is okay. So you guys want to go bring 0:19:33.640 --> 0:19:37.400 democracy and freedom to the Rocky people, and you've done that. 0:19:37.600 --> 0:19:41.000 But here's the problem. When you let a country of 0:19:41.160 --> 0:19:45.240 cage lions totally free out of their cage, you don't 0:19:45.280 --> 0:19:48.280 give them freedom and Rocky to give them anarchy because 0:19:48.320 --> 0:19:51.520 you guys in America have a lot of implicit structures, 0:19:51.520 --> 0:19:55.600 either legal, culturally or trust. Like we're tribal here, guys 0:19:55.640 --> 0:19:57.720 like like we don't have a lot of that kind 0:19:57.720 --> 0:20:00.760 of ether in your culture there that it's in stitutionalized 0:20:00.840 --> 0:20:04.960 here there exactly. In fact, you wrote, the tribe matters 0:20:05.080 --> 0:20:07.560 much more than the state. There, you got it. So 0:20:07.560 --> 0:20:09.760 so the idea that you can bring us freedom and 0:20:09.840 --> 0:20:13.359 democracy and that's a great thing, and you're helping us, No, 0:20:13.680 --> 0:20:17.040 you're giving us anarchy. And everyone has a house with 0:20:17.119 --> 0:20:20.080 one ak in thirty round seven six to mag And 0:20:20.119 --> 0:20:22.000 guess what if there's not enough police, if I don't 0:20:22.040 --> 0:20:25.439 like my neighbor, I'm gonna go shoot him because that's freedom. 0:20:25.480 --> 0:20:28.040 And you guys don't do that in America. You're not 0:20:28.119 --> 0:20:31.480 really that free. You're still constrained by civil laws and 0:20:31.480 --> 0:20:33.960 and all these other things. And the idea that when 0:20:33.960 --> 0:20:36.840 you give us freedom, you somehow are gonna help us out, No, 0:20:37.960 --> 0:20:40.920 you're you're you're destroying all law and order in anything 0:20:40.960 --> 0:20:43.960 that resembled a society here. So so let's bring this 0:20:44.040 --> 0:20:48.119 back to finance. So what did you learn from the 0:20:48.160 --> 0:20:51.320 experience there that you were able to bring to the 0:20:51.359 --> 0:20:54.040 world of finance. You know, I think it's a lot 0:20:54.040 --> 0:20:56.960 of times like coming from a you know, PhD. University 0:20:56.960 --> 0:21:01.280 of Chicago, everyone's rational. This is how the markets work, 0:21:01.800 --> 0:21:05.960 and yeah, they're probably right, but that fails to consider humans. 0:21:06.119 --> 0:21:10.840 And there's humans operate in the economy, not agents, rational agents. 0:21:10.840 --> 0:21:12.919 So I think just like when when we go to 0:21:12.960 --> 0:21:17.600 a situation like Irock on paper, Yeah, go bring him freedom, democracy, 0:21:17.640 --> 0:21:19.760 and they will become like America and everyone will have 0:21:19.800 --> 0:21:23.320 a you know, a pick, white picket fence and three kids. 0:21:23.640 --> 0:21:26.120 But then you start realizing, wait a second, there's cultural 0:21:26.119 --> 0:21:29.720 issues here. There's human elements. Same thing in finance. Yeah, 0:21:29.760 --> 0:21:32.280 you should go buy cheap stocks and do it, Warren 0:21:32.280 --> 0:21:34.840 Buffett does. Why doesn't everyone do that? Well, because there's 0:21:34.920 --> 0:21:38.159 humans involving finance, and it's really really hard. It's really 0:21:38.160 --> 0:21:41.040 really hard, and we always need to consider the behavioral 0:21:41.119 --> 0:21:44.400 human element of decision making. I'm Barry rid Hilts. You're 0:21:44.520 --> 0:21:48.280 listening to Master's in Business on Bloomberg Radio. My special 0:21:48.320 --> 0:21:52.600 guest today is West Gray. He runs the quantitative asset 0:21:52.680 --> 0:21:58.159 management firm Alpha Architect. Let's talk a little bit about 0:21:58.359 --> 0:22:03.359 quants on Wall Street. So, first question, what do people 0:22:03.840 --> 0:22:10.119 misunderstand about quants and their models in the world of finance. Sure, 0:22:10.200 --> 0:22:13.199 so I probably can't speak on behalf of all quants 0:22:13.200 --> 0:22:15.280 because like every walks of life. There's a lot of 0:22:15.320 --> 0:22:18.600 varieties within that segment. In one corner when it when 0:22:18.600 --> 0:22:21.440 you talk about a quant you think about the physics 0:22:21.480 --> 0:22:26.280 PhD who's never read a finance book ever. He's data mining, 0:22:26.440 --> 0:22:30.720 building crazy models and C plus plus and do whatever 0:22:30.760 --> 0:22:34.000 they do. That that's not the type of quant analysis 0:22:34.000 --> 0:22:37.640 that we bring to the table. We're we're essentially economists 0:22:37.680 --> 0:22:40.359 that are trying to think about how the machine works, 0:22:40.359 --> 0:22:43.760 and we just leverage quantitative analysis and tools that basically 0:22:43.760 --> 0:22:46.439 allow us to conduct what we consider like scientific method 0:22:46.480 --> 0:22:49.480 as best we can. So we have competing hypotheses about 0:22:49.560 --> 0:22:52.800 how the world works. We grab data, we test these 0:22:52.800 --> 0:22:57.200 competing hypotheses, and we're always trying to get better evidence 0:22:57.200 --> 0:23:00.800