WEBVTT - The Year of the Value Hunter Has Arrived 0:00:00.280 --> 0:00:04.240 John, I have something I need you to read. It's 0:00:04.360 --> 0:00:07.360 possibly the best book I've ever read on markets. I know, 0:00:07.480 --> 0:00:09.000 even better than the Adams Smith when I was going 0:00:09.000 --> 0:00:11.600 on about last year. There's one is called Invested. How 0:00:11.640 --> 0:00:15.960 three centuries of stock market advice reshaped, reshaped our money, 0:00:16.160 --> 0:00:18.240 markets and minds. I'm not going to read all the authors, 0:00:18.239 --> 0:00:22.400 because there are five incredibly dedicated, dedicated academics who sat 0:00:22.400 --> 0:00:25.040 down together and actually written a history of things that 0:00:25.079 --> 0:00:26.760 you and I think we know more about than most 0:00:26.760 --> 0:00:31.800 of the history of newsletters, financial advice books, financial advice magazines, etcetera. 0:00:32.000 --> 0:00:36.319 Absolutely fascinating. Now the first one, first one came out 0:00:36.400 --> 0:00:40.080 hang on, I can tell you this seventeen sixty one, 0:00:40.760 --> 0:00:44.199 Mortimers Pioneering. They called it an actual first guide to 0:00:44.280 --> 0:00:49.320 investing in the market, every Man his own Broker, seventeen 0:00:49.440 --> 0:00:52.559 sixty one. And then in the UK we got going 0:00:52.560 --> 0:00:53.920 in the UK first, you know where it was a 0:00:54.000 --> 0:00:56.320 leader and this stuff, right, I didn't even realize that 0:00:57.320 --> 0:01:01.319 then we normally student so the So Sea bubble then 0:01:01.400 --> 0:01:04.839 the only bind stocks for as after that you could 0:01:04.840 --> 0:01:08.360 still buy and South stuff, you know, And this was 0:01:08.400 --> 0:01:10.559 just staring out through the railway bubble, right, you needed 0:01:10.600 --> 0:01:13.400 lots and lots and lots of financial advice books for that. 0:01:13.760 --> 0:01:16.360 You know, I've written about written a column about some 0:01:16.400 --> 0:01:18.880 of them. There's some really good ones. Moses Smith, he 0:01:18.959 --> 0:01:22.040 wrote Plain Truths about stock speculation. That's a little later on, 0:01:22.120 --> 0:01:24.759 moving into the eighteen hundreds of them, and then moved 0:01:25.120 --> 0:01:28.200 right through right through until the most recent ones. You know, 0:01:28.560 --> 0:01:31.280 there's all the Jim Kramer books, etcetera, the things we've 0:01:31.319 --> 0:01:33.400 written you and I over the years, and then there's 0:01:33.440 --> 0:01:36.760 Don't Panic, how to manage your finances and financial anxieties 0:01:36.880 --> 0:01:39.400 during and after the coronavirus. So you know, it goes 0:01:39.560 --> 0:01:42.319 all the way through. There's three hundred years worth of 0:01:42.440 --> 0:01:47.280 people writing these books and they're all the same. Yeah. 0:01:47.319 --> 0:01:49.360 I was just going to see that. That fast one 0:01:49.400 --> 0:01:52.920 sounds remarkably like it could have been published like tomorrow. 0:01:53.040 --> 0:01:55.000 Well you could. You could publish a book tomorrow called 0:01:55.000 --> 0:01:58.400 be Your Own and everyone would buy it. Every man 0:01:58.520 --> 0:02:03.240 his one broken? Yeah, everyone they're overbroaker, I think, is 0:02:03.280 --> 0:02:08.400 where we are today. Right. But the question that I 0:02:08.480 --> 0:02:11.480 asked I wrote about this for for Bloomberg Opinion. The 0:02:11.600 --> 0:02:13.959 question I ask is, given that there are all these 0:02:14.000 --> 0:02:16.119 books I mean hundreds of thousands of them. We many 0:02:16.160 --> 0:02:18.280 tens of thousands. I haven't got the end of the 0:02:18.320 --> 0:02:21.040 book yet. And they all say roughly the same thing, 0:02:21.600 --> 0:02:23.639 which is, you know, don't be taken in by stories, 0:02:23.800 --> 0:02:27.040 don't pay too much for staff, you know, control your 0:02:27.040 --> 0:02:30.040 emotions around investing. Don't forget that the price you pay 0:02:30.080 --> 0:02:32.280 at the beginning is the main indicator of your long 0:02:32.360 --> 0:02:38.160 term returns my book The Skeptical invest This remarkable, also 0:02:38.200 --> 0:02:40.280 says this. John's book says this, but it says this 0:02:40.400 --> 0:02:44.240 in the best possible way, by John's book, by John's book, um, 0:02:44.840 --> 0:02:47.400 but also by investing, because it tells you about the 0:02:47.440 --> 0:02:51.080 other books which say similar. Thanks. Anyway, the key point 0:02:51.200 --> 0:02:54.239 is if there are this many books out there, if 0:02:54.280 --> 0:02:56.520 they all say the same thing, If in the main 0:02:57.280 --> 0:03:00.600 the advice is good because it is because good advice, 0:03:01.000 --> 0:03:04.800 why aren't we all rich? You know? What is the 0:03:04.919 --> 0:03:12.360 same reason than not everyone is skinny and happy. Obvious. 0:03:12.960 --> 0:03:15.360 It's entirely obvious, but you need something to see it 0:03:15.400 --> 0:03:18.400 to you in a way that collects with you. Basically, 0:03:18.440 --> 0:03:21.000 I mean, these are basically these books are self help 0:03:21.120 --> 0:03:23.640 books in the same way that diet books are self 0:03:23.680 --> 0:03:25.919 help books and how to start a business books and 0:03:26.000 --> 0:03:28.840 self help books. I mean, I actually remember a financial 0:03:28.840 --> 0:03:31.160 publisher who we both know very well, said to me 0:03:31.200 --> 0:03:34.640 about a decade ago, um, he was launching more and 0:03:34.680 --> 0:03:36.520 more things, and I said, well, what are we doing here? 0:03:36.520 --> 0:03:38.760 And he said, well, it's just like the diet entertry mare, 0:03:38.800 --> 0:03:44.240 and we're not selling action, we're selling hope. That is 0:03:44.280 --> 0:03:49.320 the brutally cynical thing I see. I do. I actually 0:03:49.440 --> 0:03:54.760 I am quite a believer in self help and fatasty yeah, 0:03:54.840 --> 0:03:57.360 and all of those kinds of things. But it's just 0:03:57.480 --> 0:04:01.160 that there's that thing of people can tell you something 0:04:01.680 --> 0:04:05.680 that is very obvious and you can intellectually know it, 0:04:06.200 --> 0:04:08.520 but until it sinks through and it's something that connects 0:04:08.520 --> 0:04:11.760 me you behavior wise or you're ready to change, or 0:04:11.800 --> 0:04:13.920 but I don't really know what it is that triggers it. 0:04:14.280 --> 0:04:17.320 But that's why this stuff does kind of get recycled 0:04:17.320 --> 0:04:22.279 over and over again, because it's thinking, yeah, it is 0:04:22.320 --> 0:04:24.920 true and it is obvious, but people don't do it 0:04:25.080 --> 0:04:27.479 and and yeah, and yeah it does say a hope 0:04:27.520 --> 0:04:30.080 to an extent. It's like, but here's this thing in 0:04:30.080 --> 0:04:32.279 your life that you perceive to be a problem. You 0:04:32.360 --> 0:04:35.680 want to change it. I've got a solution, and just 0:04:35.720 --> 0:04:38.080 what happens. The solution is the same solution everyone else 0:04:38.120 --> 0:04:40.200 will tell you. But maybe if you hear it from 0:04:40.200 --> 0:04:44.320 me in my inimitable style, then you will something. I 0:04:44.360 --> 0:04:46.920 can find the right metabor, the right comparison, the right 0:04:46.960 --> 0:04:48.800 whatever it is to get through to you. I will 0:04:48.839 --> 0:04:51.120 like this. The diets things is the same. It's like 0:04:51.200 --> 0:04:54.279 they most apart from the really flaky ones, they mostly 0:04:54.279 --> 0:04:56.240 boiled down and eat something that's kind of like the 0:04:56.440 --> 0:04:59.520 Mediterranean diet and just don't eat too much yet, but 0:04:59.680 --> 0:05:01.880 maybe if you do. He's gonna write a diet, but 0:05:02.040 --> 0:05:04.920 was going to call the skeptical diet the skeptical dater 0:05:05.200 --> 0:05:09.599 skeptical data. Oh, fortunes are made, John, tell me one 0:05:09.640 --> 0:05:15.200 thing that's obvious in the market today? Um, what is 0:05:15.240 --> 0:05:18.640 obviously UK equities? I'm setting you up so well, just 0:05:18.680 --> 0:05:22.640 take it on. UK equities are cheap, too obvious. That 0:05:22.800 --> 0:05:25.520 always cheap at the moment. And actually that's toy a 0:05:25.600 --> 0:05:27.920 topic for our discussion at some point. Why are they 0:05:27.920 --> 0:05:31.960 always cheap because they're constantly outflows? Why are they're always outflows? 0:05:32.000 --> 0:05:34.280 That's the book you can read about this by the 0:05:34.279 --> 0:05:36.520 way in johnson news letter Money Distilled. He's written about 0:05:36.560 --> 0:05:38.400 UK equities and you can also read about it in 0:05:38.400 --> 0:05:41.640 a Bloomberg opinion econom I wrote relatively recently also on 0:05:41.839 --> 0:05:44.360 UK equities. And then you know, go and buy some 0:05:44.400 --> 0:05:54.800 books prefrobably Welcome to Marin Talks Money, the podcast in 0:05:54.800 --> 0:05:57.840 which people who know the markets explain the markets. I'm 0:05:57.880 --> 0:06:00.359 there in some set work this week I'll get is 0:06:00.400 --> 0:06:03.160 Ben Inca. Ben is the co head of our allocation 0:06:03.279 --> 0:06:07.160 at GMO, which is a value orientated investment house founded 0:06:07.160 --> 0:06:10.400 by Jeremy Grant. Some now, the most interesting thing about 0:06:10.480 --> 0:06:13.760 GMO in this context is the value orientated bit, because 0:06:13.800 --> 0:06:15.800 something that we've seen very little of over the last 0:06:15.800 --> 0:06:19.279 decade is a focus on value and what the price 0:06:19.320 --> 0:06:22.520 of any particular investment when you buy it means for 0:06:22.560 --> 0:06:25.840 its future returns. And we've had regular papers out from 0:06:25.839 --> 0:06:28.400 GMO explaining to us over the last few years that 0:06:28.640 --> 0:06:31.000 if you buy you high, you will not make a 0:06:31.000 --> 0:06:34.560 good return over the following decade or so. And everyone 0:06:34.640 --> 0:06:38.040 has ignored that, haven't they, Ben, It did seem so 0:06:38.120 --> 0:06:42.760 for quite a while. Not ignoring it anymore, though, are they? Well, 0:06:42.800 --> 0:06:44.920 I don't know. They didn't ignore it last year, But 0:06:45.839 --> 0:06:48.119 the beginning of this year has been a little bit weird. 0:06:48.680 --> 0:06:50.160 It has, hasn't it. Well, let's come back to the 0:06:50.160 --> 0:06:53.719 beginning of this year. Let's start. Let's start with you know, 0:06:53.800 --> 0:06:56.000 we knew that there was an everything bubble kicking off 0:06:56.040 --> 0:06:58.120 a few years ago, and I think everybody thought that 0:06:58.120 --> 0:06:59.720 there would be what you might call it a blow 0:06:59.760 --> 0:07:02.400 off phase of some kind at the end of the bubble. 0:07:02.640 --> 0:07:06.200 But what we didn't expect, or certainly what I didn't expect, 0:07:06.200 --> 0:07:08.719 and I suspect you didn't die them, was that that 0:07:08.760 --> 0:07:12.280 blow of phase, this massive end of the everything bubble, 0:07:12.640 --> 0:07:18.000 would coincide with the economic and financial conditions that we 0:07:18.080 --> 0:07:20.800 had during during COVID. That felt weird, didn't it. I 0:07:20.800 --> 0:07:22.800 know you wrote in one of your notes that this 0:07:22.880 --> 0:07:27.400 was one of the most disorientating times for professional managers 0:07:27.440 --> 0:07:30.600 to live through. Yeah, i'd say. I mean. We have 0:07:30.760 --> 0:07:34.800 spent a lot of time studying bubbles over the years, 0:07:35.040 --> 0:07:39.000 and one of the things that is common across almost 0:07:39.040 --> 0:07:42.480 all bubbles is they occur at a time where the 0:07:42.600 --> 0:07:48.440 underlying um economic situation is very good and has been 0:07:48.600 --> 0:07:52.480 very good for quite a while. So the particularly odd 0:07:52.520 --> 0:07:56.240 thing about the COVID bubble was you know, the economy 0:07:56.320 --> 0:07:59.560 wasn't going very well. Um. And if you look at 0:07:59.640 --> 0:08:04.560 times like nine, nine or two thousand, they were events 0:08:04.640 --> 0:08:08.440 where the economy had been going great and the bubble 0:08:08.560 --> 0:08:11.559 was really generated by people saying, well, I think these 0:08:11.640 --> 0:08:15.880 great times are going to last forever. Um. And they're 0:08:15.920 --> 0:08:19.320 wrong on that. The great times never last forever. But 0:08:19.440 --> 0:08:23.040 normally you at least have great times. Um. You know, 0:08:23.960 --> 0:08:27.480 was not a great time. One was weird, but I 0:08:27.520 --> 0:08:32.079 wouldn't call it a great time. Um. And yet we 0:08:32.200 --> 0:08:37.480 saw what has been claimed the everything bubble. Absolutely everything 0:08:37.520 --> 0:08:40.640 went up at the same time in a way that 0:08:41.440 --> 0:08:47.160 I'm not sure we have seen well honestly ever so interesting. 0:08:47.160 --> 0:08:49.600 So we learned something really great then, which was which 0:08:49.600 --> 0:08:52.440 we can use in later day later times, that you 0:08:52.480 --> 0:08:55.440 can drag out a bubble by printing fast amounts of 0:08:55.440 --> 0:08:57.760 money and putting it directly into people's pockets. This is 0:08:57.840 --> 0:09:02.560 valuable information, right Who could have guessed? Yeah? I mean 0:09:02.600 --> 0:09:05.200 that is that That is the interesting thing about this. 0:09:05.360 --> 0:09:10.239 We have never before put the money quite as directly 0:09:10.320 --> 0:09:13.800 into people's pockets, especially at a time where they didn't 0:09:13.840 --> 0:09:17.040 really have very much to spend it on. Um, So 0:09:17.160 --> 0:09:22.720 in retrospect, you can understand why. I can't remember who 0:09:22.760 --> 0:09:25.760 coined it, the boredom hypothesis, but people had nothing to do, 0:09:25.840 --> 0:09:30.760 so they speculated. But my god, did the speculation go wild. 0:09:31.320 --> 0:09:33.640 M So we had all these people sitting at home, 0:09:33.760 --> 0:09:36.480 big pile of money in their pockets. Um they've lived 0:09:36.559 --> 0:09:38.720 through I mean most young people in particular, I have 0:09:38.800 --> 0:09:40.839 never seen a proper band market or certainly no one 0:09:40.880 --> 0:09:43.160 that lasts very long. So they can look at all 0:09:43.160 --> 0:09:45.120 these statistics for what happens when you put your money 0:09:45.160 --> 0:09:47.959 in equities. They put their money in equities, and nobody 0:09:48.000 --> 0:09:50.559 tells them that risk is about the price you pay 0:09:50.600 --> 0:09:56.320 at the beginning. No, well, nobody tells them. But I 0:09:56.360 --> 0:10:01.280 would say, if you you know, certainly a lot of 0:10:01.280 --> 0:10:06.600 them were pretty naive, but not all of them were 0:10:06.679 --> 0:10:11.760 right the if you actually spent time reading you know, 0:10:11.840 --> 0:10:16.480 Wall Street bets on Reddit. These were people who were 0:10:16.600 --> 0:10:21.800 very aggressively saying fundamentals don't matter. What you have learned 0:10:22.120 --> 0:10:27.280 in you know, high school or university doesn't matter. Uh, 0:10:27.360 --> 0:10:30.160 you have to unlearn everything you've learned about investing. That's 0:10:30.200 --> 0:10:35.560 not the same thing as just being a naive person 0:10:35.720 --> 0:10:40.280 who hasn't experienced the stock market or learned anything about it, 0:10:40.400 --> 0:10:45.720 that is aggressively saying the rules don't matter anymore. Now 0:10:45.800 --> 0:10:47.280 we have that as well from some of the big 0:10:47.280 --> 0:10:49.320 fund managers. Didn't we and we won't name any names 0:10:49.320 --> 0:10:51.720 on this podcast because we're not like that, but you know, 0:10:51.760 --> 0:10:54.360 we heard from a lot of the big investment houses, 0:10:54.360 --> 0:10:57.480 the very growth orientated ones, again, that we should unlearned 0:10:57.520 --> 0:10:59.600 what we thought we knew about investing, and that all 0:10:59.640 --> 0:11:02.400 the big turns over long periods come very small numbers 0:11:02.440 --> 0:11:06.400 of very very very high quality companies, and what you 0:11:06.480 --> 0:11:10.080 pay for those companies doesn't matter because they're the ones 0:11:10.080 --> 0:11:11.920 that are going to deliver the returns long term. And 0:11:11.960 --> 0:11:15.480 that was a sort of academic backup for the idea 0:11:15.600 --> 0:11:19.160 that what old fashioned investors might have perceived as fundamentals 0:11:19.200 --> 0:11:22.440 are not as relevant as those old fashioned investors might think. 0:11:22.640 --> 0:11:24.840 So it wasn't just driven by individuals. It was driven 0:11:24.880 --> 0:11:29.760 by this new era of growth investing backed by some 0:11:29.840 --> 0:11:33.360 of the really big names. Yeah, and I do. I 0:11:33.360 --> 0:11:35.839 think you're absolutely right, and I think there is this 0:11:36.000 --> 0:11:42.120 really important piece of investing that that kind of analysis 0:11:42.240 --> 0:11:45.880 just completely leaves out um and it is what makes 0:11:46.840 --> 0:11:49.920 growth investing a challenge. And I'm not saying growth investing 0:11:50.040 --> 0:11:53.800 is a bad idea, but one of the issues with 0:11:53.880 --> 0:11:59.120 it is the mental image we have of how you 0:11:59.200 --> 0:12:03.080 make money as a growth investor misses out on an 0:12:03.160 --> 0:12:09.359 incredibly important piece of your portfolio UM. And it's understandable 0:12:09.440 --> 0:12:10.880 that it does so because it is a piece of 0:12:10.880 --> 0:12:14.840 your portfolio that doesn't stick around that long. The problem 0:12:14.880 --> 0:12:18.559 with growth investing, Yes, you want to find these companies 0:12:18.600 --> 0:12:21.559 that are going to wind up ruling the world. Right, 0:12:21.920 --> 0:12:24.600 and if you find a company early that winds up 0:12:24.679 --> 0:12:27.480 ruling the world, that company is going to generate great 0:12:27.480 --> 0:12:30.240 returns uh. And even if it is trading at an 0:12:30.240 --> 0:12:34.200 optically high pe multiple or price to book or what 0:12:34.280 --> 0:12:37.079 have you, Yes, it will generate good returns. The problem 0:12:37.200 --> 0:12:41.400 is not all of the companies that you hope and 0:12:41.520 --> 0:12:45.920 expect will do that do that. And when they fail 0:12:46.040 --> 0:12:50.599 to do that, when those growth stocks disappoint, the returns 0:12:50.880 --> 0:12:55.600 are really bad. UM. It is a term that I 0:12:55.679 --> 0:13:00.400 have tried to uh popularize and have completely failed. UM. 0:13:00.440 --> 0:13:03.840 But as a value manager, we always get pushed what 0:13:03.880 --> 0:13:05.960 do you do about value traps? How do you avoid 0:13:06.040 --> 0:13:10.680 value traps? UM? And the thing I try to talk 0:13:10.720 --> 0:13:13.679 to people about is Yeah, it's true, it's a problem. 0:13:13.679 --> 0:13:17.079 Owning a value company that turns out to disappoint and 0:13:17.360 --> 0:13:21.160 isn't worth what you thought it was stinks. But the 0:13:21.200 --> 0:13:24.160 same thing happens on the growth side. And when those 0:13:24.240 --> 0:13:29.880 growth companies disappoint their returns are really bad because not 0:13:30.000 --> 0:13:34.000 only did the earnings you expected not come in, but 0:13:34.160 --> 0:13:37.280 the pe that you're prepared to pay for that company 0:13:37.440 --> 0:13:40.000 as you realize it is less growthy than you thought, 0:13:40.160 --> 0:13:43.120 is a lot lower. So the returns of owning a 0:13:43.160 --> 0:13:47.400 disappointing growth company are really bad. And the growth stories 0:13:47.640 --> 0:13:51.520 are of course ex post only about the successes. So 0:13:51.600 --> 0:13:54.480 a mistake in the value arena as much less painful 0:13:54.520 --> 0:13:57.280 in the end than a mistake in the growth arena. Yeah, 0:13:57.320 --> 0:14:01.000 that's not to say it isn't painful, right, So I 0:14:01.000 --> 0:14:05.360 I've I've defined a value or growth trap as just 0:14:05.840 --> 0:14:10.800 any company, uh in the relevant universe that has disappointed 0:14:11.000 --> 0:14:15.439 on revenues and seen its future revenue forecast come down 0:14:15.559 --> 0:14:17.560 in the course of a given year, and in the 0:14:17.600 --> 0:14:20.520 value universe, they underperformed the average value stock by nine 0:14:20.520 --> 0:14:22.920 points a year. I mean, that's really bad. But in 0:14:22.960 --> 0:14:27.640 the growth universe. Those growth traps underperformed the rest of 0:14:27.680 --> 0:14:31.000 the growth universe by thirteen points a year, and over 0:14:31.040 --> 0:14:34.600 the last couple of years they've underperformed by twenty plus. 0:14:35.200 --> 0:14:37.520 So the last couple of years have been some of 0:14:37.560 --> 0:14:41.000 the worst years in history to be a growth company 0:14:41.040 --> 0:14:44.040 that disappointed investors. Okay, so what does the phrase we're 0:14:44.080 --> 0:14:47.360 trying to popularize here growth trap? Growth traps? We're trying 0:14:47.400 --> 0:14:49.880 to make people say growth traps. Okay, we can help 0:14:49.880 --> 0:14:52.680 with that. I can definitely help you with that. Okay. 0:14:52.880 --> 0:14:57.240 So let's move into last year when, which is when 0:14:57.280 --> 0:14:59.840 growth investors got what some might call the come up 0:15:00.080 --> 0:15:02.080 and some might call a small blood before everything goes 0:15:02.120 --> 0:15:04.800 back the way again. Um, but that was that was 0:15:04.840 --> 0:15:07.840 a chokra VF for growth investors and a chokra vf 0:15:07.520 --> 0:15:10.480 for everything that wasn't providing the returns that one might 0:15:10.520 --> 0:15:13.880 have expected. Um. How did you feel last year? Vindicated 0:15:14.560 --> 0:15:17.800 or like things weren't quite as they should have been? Still? Uh, 0:15:18.000 --> 0:15:21.080 well it was, I mean there was a certain amount 0:15:21.080 --> 0:15:26.680 of satisfaction seeing some of the uh kind of some 0:15:26.800 --> 0:15:31.160 of the most speculative assets and the backers of those 0:15:31.200 --> 0:15:35.280 assets get their come upance. Um. But it's hard to 0:15:35.280 --> 0:15:39.000 be excited about a year where pretty much everything went down, 0:15:39.440 --> 0:15:43.680 and our ability to shield our clients from the losses 0:15:44.080 --> 0:15:47.080 really depended on the extent to which the clients gave 0:15:47.160 --> 0:15:50.760 us the authority to move out of stocks and bonds entirely. 0:15:51.200 --> 0:15:53.880 Where we could do that, we could make them some money, 0:15:53.920 --> 0:15:56.960 because there were things in the liquid alternative space that 0:15:57.040 --> 0:15:59.960 actually did make money. Where we were stuck in stocks 0:16:00.040 --> 0:16:04.760 and bonds. We protected some, um, but it's never fun 0:16:05.880 --> 0:16:07.720 having to talk to your clients about the fact that 0:16:07.760 --> 0:16:10.000 you lost them a bunch of money, even if you 0:16:10.080 --> 0:16:12.720 lost them less money than their benchmark. Yeah, even if 0:16:12.720 --> 0:16:15.920 you were intellectually correct, you still lost the money. Yes, 0:16:16.080 --> 0:16:18.720 that's gonna hurt. Um. But presumably you were fairly heavily 0:16:18.720 --> 0:16:24.120 into the the classic value stocks, energy, et ctera last year. Yeah, 0:16:24.160 --> 0:16:27.960 we were, uh, and that definitely helped. We were generally 0:16:28.000 --> 0:16:32.320 able to in the ASCID Allocation team UH, deliver returns 0:16:32.320 --> 0:16:35.840 that were better than benchmarks. But you know, even value 0:16:35.880 --> 0:16:39.800 stocks around the world lost money. Um, they had their 0:16:39.840 --> 0:16:44.200 best year in twenty years relative to the market, in 0:16:44.240 --> 0:16:48.280 relative to growth stocks, but they still lost money. And then, 0:16:48.360 --> 0:16:51.080 interesting me, there's something in your latest letter or the 0:16:51.600 --> 0:16:54.560 letter at the end of last year about how it 0:16:54.720 --> 0:16:58.080 was unexpected to find the deep value it under performed 0:16:58.160 --> 0:16:59.760 value as a whole one. It should normally be the 0:16:59.800 --> 0:17:02.640 other around. Yeah, you know, that was one of the 0:17:02.680 --> 0:17:08.399 slightly weird things most times when you have a really 0:17:08.440 --> 0:17:11.639 big year for value stocks, And again this was a 0:17:11.720 --> 0:17:13.840 really big year for value stocks, even if they were 0:17:13.840 --> 0:17:18.320 going down in absolute terms. Most of the time, the 0:17:18.480 --> 0:17:22.040 story is kind of about value. Even in two thousand, 0:17:22.160 --> 0:17:25.320 when we were experiencing the bursting of the Internet bubble, 0:17:25.640 --> 0:17:29.639 what people were rotating into were the very cheapest value 0:17:29.680 --> 0:17:33.480 stocks um. And this year we didn't see that. In 0:17:33.640 --> 0:17:38.480 two value stocks again had a very good year relative 0:17:38.520 --> 0:17:41.680 to the market. It's almost always the case when value 0:17:41.680 --> 0:17:45.720 beats the market that the very cheapest stocks. Uh. We 0:17:45.800 --> 0:17:48.280 refer to it as deep value is the cheapest twenty 0:17:48.720 --> 0:17:53.000 of the market, and shallow value is the next thirty UM. 0:17:53.600 --> 0:17:58.680 And deep value almost invariably beats shallow value in any 0:17:58.760 --> 0:18:02.920 year where value wins, except last year. In last year, 0:18:03.119 --> 0:18:08.000 deep value stocks in the US underperformed shallow value stocks 0:18:08.119 --> 0:18:12.200 by close to five um. You know, at least over 0:18:12.240 --> 0:18:15.880 the last forty years, it's the only situation we've seen 0:18:16.000 --> 0:18:18.679 like that, and it was a little bit frustrating frankly 0:18:18.720 --> 0:18:21.200 as a value manager focusing on the very cheapest stocks 0:18:21.200 --> 0:18:24.840 and seeing the mildly cheap stocks beat you. Um. But 0:18:24.960 --> 0:18:28.159 on the other hand, it has led to an opportunity 0:18:28.160 --> 0:18:31.240 we are pretty excited about because those deep value stocks 0:18:31.280 --> 0:18:35.159 are trading at an extraordinary discount to the overall US market, 0:18:35.560 --> 0:18:38.280 and the US market fell a good deal last year, 0:18:38.359 --> 0:18:42.120 so in absolute terms, they're kind of the most exciting 0:18:42.240 --> 0:18:45.600 thing in the US we have seen in a number 0:18:45.640 --> 0:18:49.560 of years. Okay, that brings us very neatly on to 0:18:49.640 --> 0:18:53.000 where we are now. And you know, looking looking through 0:18:53.040 --> 0:18:54.800 what you wrote at the end of last year, you 0:18:54.840 --> 0:18:57.480 became it came as as as close to being excitable 0:18:57.520 --> 0:19:01.360 as I think possibly Jim managers can and saying that 0:19:01.880 --> 0:19:05.879 having seen possibly the worst outlook for the future, you 0:19:05.920 --> 0:19:10.119 can imagine at the end of one everything horribly expensive, 0:19:10.280 --> 0:19:12.400 absolutely nothing you want to hold for the long term, 0:19:12.440 --> 0:19:15.240 horrible environment. At the end of last year, you begin 0:19:15.280 --> 0:19:16.720 to look around and go, well, do you know what, 0:19:16.840 --> 0:19:20.040 nothing is really expensive anymore? You know, when I look 0:19:20.040 --> 0:19:23.399 at the charts that you have the volatility in return 0:19:23.440 --> 0:19:27.080 trade off exent or not really looking at negative returns 0:19:27.160 --> 0:19:31.280 for anything over the next seven years. Old, that seems 0:19:31.320 --> 0:19:36.240 like a massive turnaround. It is a very helpful thing 0:19:36.359 --> 0:19:42.720 to have markets fall considerably, especially in a circumstance where 0:19:42.760 --> 0:19:45.880 there's inflation as well. Now, I mean, inflation is not fun. 0:19:46.000 --> 0:19:50.120 Nobody enjoys the inflation. But on the other hand, if 0:19:50.160 --> 0:19:53.840 the SMP felt by eighteen percent last year and inflation 0:19:54.080 --> 0:19:59.120 was seven, right, in general, the fair value of equities, 0:19:59.240 --> 0:20:02.600 because these are real assets, goes up with inflation. So 0:20:02.680 --> 0:20:05.160 fair value went up by seven the price went down 0:20:05.160 --> 0:20:09.359 by eighteens, so it's cheaper. Now. That doesn't make it 0:20:09.440 --> 0:20:12.320 cheap and absolute terms, but it makes it a lot 0:20:12.400 --> 0:20:16.639 less overvalued than it was. Um. So we're certainly not 0:20:16.680 --> 0:20:19.119 pounding the table and saying what you really want to 0:20:19.119 --> 0:20:23.240 buy today is the SNP five hundred um. But whereas 0:20:23.359 --> 0:20:26.360 a year ago the SMP five hundred was trading at 0:20:26.520 --> 0:20:30.840 some of the most expensive valuations we have ever seen, 0:20:31.320 --> 0:20:34.399 kind of second only to the two thousand. Event, now 0:20:34.480 --> 0:20:42.640 it's just expensive. That doesn't sound great better but no great, um, 0:20:42.720 --> 0:20:45.919 it isn't great. But the nice thing is in a 0:20:46.040 --> 0:20:51.720 year where everything else fell to almost everything other than 0:20:51.760 --> 0:20:54.320 the SMP five hundred was cheaper than the sp F. 0:20:55.400 --> 0:20:59.840 So if you know, emerging came in mildly overvalued in 0:21:00.040 --> 0:21:04.119 it fell by twenty well, it fell by twenty inflation 0:21:04.240 --> 0:21:07.240 was seven, So in real terms kind of relative to 0:21:07.280 --> 0:21:09.439 fair value, it fell by twenty seven and maybe it 0:21:09.520 --> 0:21:14.040 was over valued, so now it's cheap. Uh. If the markets, 0:21:14.080 --> 0:21:18.320 if Europe and Japan were you know, twenty percent overvalued 0:21:18.440 --> 0:21:20.919 or twenty five percent over valued, and they fell by 0:21:20.960 --> 0:21:25.359 similar amounts, they're around fair value. So yeah, it's hard 0:21:25.440 --> 0:21:28.159 for us to be that excited about US large caps 0:21:28.400 --> 0:21:32.080 as an index. Um. But the nice thing about a 0:21:32.160 --> 0:21:36.960 market where everything fell was the things that weren't grossly 0:21:37.040 --> 0:21:41.080 overvalued to begin with are starting to trade at pretty 0:21:41.119 --> 0:21:44.920 compelling valuations. So if we look at what's really cheap, 0:21:45.000 --> 0:21:49.920 so that would be emerging market equities. Yeah. Um, small 0:21:50.000 --> 0:21:54.240 caps across the board. Japan. You know, I'd say our 0:21:54.320 --> 0:21:56.920 our favorite group of small caps around the world is 0:21:57.160 --> 0:22:00.960 Japanese small caps. Um. Partially that's because the valuations are low. 0:22:01.440 --> 0:22:05.880 The other thing that's, uh, that's nice about Japanese small 0:22:05.960 --> 0:22:09.600 caps relative to say, US small caps. If you look 0:22:09.640 --> 0:22:12.800 at what's happened over the last decade or so. The 0:22:13.000 --> 0:22:17.640 average US small company has levered itself up. The average 0:22:17.720 --> 0:22:23.879 company in the Russell has something like uh six times 0:22:24.640 --> 0:22:27.560 EBITDA in terms of debt, and that used to be 0:22:28.280 --> 0:22:32.760 the level of an LBL, so u S small caps 0:22:32.800 --> 0:22:36.560 have basically all l B O themselves. Japanese small caps 0:22:36.680 --> 0:22:41.560 on average have about zero net debt on their balance sheet. 0:22:42.560 --> 0:22:46.880 So a thing it's it is comforting if you own 0:22:46.920 --> 0:22:51.680 the Japanese ones is even if the economy gets really bad, 0:22:52.440 --> 0:22:55.280 they're not going to wind up in economic trouble. Whereas 0:22:55.400 --> 0:22:58.400 in the US and the UK, where these small cap 0:22:58.480 --> 0:23:01.800 companies have really levered them sells up, they're more vulnerable. 0:23:02.080 --> 0:23:04.280 They might get away with it uh. And they levered 0:23:04.320 --> 0:23:06.880 themselves up in an environment with very low interest rates, 0:23:07.000 --> 0:23:12.320 so it's not crazy, but it does feel risky um. 0:23:13.000 --> 0:23:17.479 And in Japan and kind of beyond that continental Europe, 0:23:17.960 --> 0:23:20.680 they did less of that, and they're trading pretty cheap 0:23:21.080 --> 0:23:25.520 uh and they seem pretty I'm not going to go 0:23:25.640 --> 0:23:29.480 so far as to say small caps are truly safe, UM, 0:23:30.040 --> 0:23:32.600 but these are companies that should be able to withstand 0:23:33.080 --> 0:23:37.000 a significant recession should one occur, and in the UK 0:23:37.240 --> 0:23:39.440 UK small caps and they had a really nasty ride 0:23:39.520 --> 0:23:43.320 last year. They certainly did they UM. But but again 0:23:43.560 --> 0:23:47.879 they look like US small caps from a leverage perspective. 0:23:48.640 --> 0:23:52.600 And when you talk about emerging market equities, which last 0:23:52.680 --> 0:23:54.160