1
00:00:01,960 --> 00:00:06,040
Speaker 1: This is Masters in Business with very Rid Holds on

2
00:00:06,200 --> 00:00:11,680
Speaker 1: Bloomberg Radio this week. On the podcast, this will be

3
00:00:11,720 --> 00:00:15,960
Speaker 1: my shortest introduction ever. Clifford Astenus and I just go

4
00:00:16,040 --> 00:00:20,680
Speaker 1: over the entire universe of quant factor and value investing.

5
00:00:21,079 --> 00:00:24,400
Speaker 1: It is a master class. And if you don't believe me,

6
00:00:24,480 --> 00:00:26,600
Speaker 1: I'm just going to shut up and say, with no

7
00:00:26,640 --> 00:00:31,520
Speaker 1: further ado, my conversation with a Qrs cliff Astness. Let's

8
00:00:31,520 --> 00:00:33,920
Speaker 1: start out a little bit going over some of your background.

9
00:00:34,320 --> 00:00:37,400
Speaker 1: You get your PhD at the University of Chicago, where

10
00:00:37,479 --> 00:00:41,320
Speaker 1: you are the teaching assistant for some obscure prof named

11
00:00:41,400 --> 00:00:47,040
Speaker 1: Gene Fama. Tell us, Yeah, I basically discovered him. I

12
00:00:47,159 --> 00:00:49,400
Speaker 1: ended up at the University of Chicago. I was an

13
00:00:49,440 --> 00:00:53,640
Speaker 1: undergrad studying business and engineering. I decided I wanted to

14
00:00:53,680 --> 00:00:56,320
Speaker 1: be a professor because I did a job just for

15
00:00:56,400 --> 00:01:01,880
Speaker 1: money coding up studies for three Warton pros. I liked

16
00:01:01,880 --> 00:01:03,120
Speaker 1: what they did. I said, how do I do what

17
00:01:03,160 --> 00:01:04,720
Speaker 1: you do? And they said, go get a PhD. I

18
00:01:04,760 --> 00:01:06,920
Speaker 1: said where should I go? And they said close the

19
00:01:06,959 --> 00:01:10,240
Speaker 1: doorc Because we were at Wharton, and Wharton's a great school,

20
00:01:10,280 --> 00:01:13,360
Speaker 1: but PhD program rankings can be different than sure and

21
00:01:13,400 --> 00:01:16,160
Speaker 1: they and almost to a man, because I went to

22
00:01:16,160 --> 00:01:20,000
Speaker 1: about ten professors they said, go to Chicago, and I went.

23
00:01:20,120 --> 00:01:23,160
Speaker 1: I mean I got in, I went, and Jane Farmer

24
00:01:23,240 --> 00:01:26,480
Speaker 1: was the man to say the very least. So your

25
00:01:26,520 --> 00:01:31,800
Speaker 1: doctoral thesis asserted that consistently beating market averages was attainable

26
00:01:32,400 --> 00:01:36,280
Speaker 1: by exploiting both value and momentum. In other words, you

27
00:01:36,360 --> 00:01:41,520
Speaker 1: took Farmer's value factor and added your own twist, which

28
00:01:41,640 --> 00:01:45,119
Speaker 1: was momentum, which eventually became a Farmer French factor. Right,

29
00:01:45,400 --> 00:01:48,840
Speaker 1: yeah it Farmer French still don't include it in their

30
00:01:48,880 --> 00:01:53,880
Speaker 1: official five factor model. A lot of us think they should.

31
00:01:54,760 --> 00:01:57,680
Speaker 1: I think that's just a philosophical difference. The way I

32
00:01:57,720 --> 00:02:00,920
Speaker 1: always describe it is one of the scariest moments of

33
00:02:00,960 --> 00:02:03,480
Speaker 1: my life was going into Jean's office. I was already

34
00:02:03,480 --> 00:02:07,920
Speaker 1: his teaching assistant. He had kind of agreed to be

35
00:02:08,200 --> 00:02:12,560
Speaker 1: my dissertation chair, even without a particular topic, and going

36
00:02:12,560 --> 00:02:15,000
Speaker 1: in and saying, I want to write it. I wrote it.

37
00:02:15,000 --> 00:02:16,520
Speaker 1: It was more than just this, but one of the

38
00:02:16,520 --> 00:02:18,959
Speaker 1: main things I want to explore is the momentum strategy.

39
00:02:19,280 --> 00:02:21,919
Speaker 1: And then mumbling and by the way, it works very

40
00:02:21,919 --> 00:02:26,720
Speaker 1: well because you know this is constant fight in academia.

41
00:02:27,320 --> 00:02:29,919
Speaker 1: If if you believe something works, does it work because

42
00:02:29,960 --> 00:02:33,160
Speaker 1: markets are efficient and it's compensation for risk or for

43
00:02:33,240 --> 00:02:37,440
Speaker 1: behavioral reasons and momentum inherently, And I think we all

44
00:02:37,520 --> 00:02:40,000
Speaker 1: knew this instinctively back then. It's very hard to come

45
00:02:40,040 --> 00:02:43,200
Speaker 1: up with a rational story or risk based story. And

46
00:02:43,240 --> 00:02:46,359
Speaker 1: I was nervous because he's mister efficient markets and rational,

47
00:02:47,280 --> 00:02:50,560
Speaker 1: And to his credit and my relief, he said, if

48
00:02:50,560 --> 00:02:53,519
Speaker 1: it's in the data, write the paper. And he was

49
00:02:53,639 --> 00:02:56,320
Speaker 1: very supportive of the paper. He works very closely with

50
00:02:56,400 --> 00:03:00,799
Speaker 1: Dimensional affirm I admire greatly. They don't give as much

51
00:03:00,800 --> 00:03:02,680
Speaker 1: weight to momentum as we do, but they use it

52
00:03:02,720 --> 00:03:05,240
Speaker 1: in their trading process. So I feel like I've won

53
00:03:05,280 --> 00:03:09,200
Speaker 1: half the battle on that over time. The only thing

54
00:03:09,200 --> 00:03:11,360
Speaker 1: you said that I might take a small disagreement with

55
00:03:11,720 --> 00:03:16,320
Speaker 1: is consistently. We think value plus momentum has a really

56
00:03:16,320 --> 00:03:19,640
Speaker 1: good risk adjusted return makes money over the long term.

57
00:03:20,240 --> 00:03:22,560
Speaker 1: But when you've gone through two year periods like the

58
00:03:22,560 --> 00:03:25,320
Speaker 1: tech bubble and three year periods like eighteen through twenty,

59
00:03:26,320 --> 00:03:29,520
Speaker 1: I think myself, my family, and some of my clients

60
00:03:29,560 --> 00:03:33,200
Speaker 1: might take issue with the word consistently. So let's let's

61
00:03:33,200 --> 00:03:36,120
Speaker 1: put a little more meat on those bones to define

62
00:03:36,200 --> 00:03:40,080
Speaker 1: what we're talking about. You want to identify the cheapest

63
00:03:40,160 --> 00:03:43,720
Speaker 1: value stocks, but only own those that seem to have

64
00:03:43,840 --> 00:03:47,400
Speaker 1: started on an up swim. That seems to make some sense. Yeah,

65
00:03:47,440 --> 00:03:51,240
Speaker 1: you're you're accidentally waiting until get another quant controversy whether

66
00:03:51,280 --> 00:03:54,680
Speaker 1: you need both these characteristics in every stock or whether

67
00:03:55,160 --> 00:03:57,400
Speaker 1: you can have some stocks that are great on one

68
00:03:57,480 --> 00:04:00,960
Speaker 1: and simply average on the other and the portfolio comes out.

69
00:04:01,160 --> 00:04:04,280
Speaker 1: But the intuition you're saying it's exactly right. Two things.

70
00:04:04,360 --> 00:04:06,920
Speaker 1: At that point. The literature has advanced. This is like

71
00:04:07,600 --> 00:04:11,120
Speaker 1: QUANDT Financi Cerca, nineteen ninety. You may throw in the

72
00:04:11,200 --> 00:04:13,800
Speaker 1: size effect and that was about it, which we're going

73
00:04:13,880 --> 00:04:15,920
Speaker 1: to talk about in a little a little while, because

74
00:04:16,400 --> 00:04:20,039
Speaker 1: I've read some papers that suggests may not exist. We're

75
00:04:20,040 --> 00:04:24,479
Speaker 1: cynics about it. But but value, momentum, and size in

76
00:04:24,520 --> 00:04:27,200
Speaker 1: the opposite order that I just said. Time wise, size

77
00:04:27,240 --> 00:04:30,240
Speaker 1: was kind of first, then value, then momentum with the

78
00:04:30,279 --> 00:04:34,080
Speaker 1: three biggies, And there's still very big in the in

79
00:04:34,120 --> 00:04:38,920
Speaker 1: the literature around nineteen ninety value says in the original metrics,

80
00:04:39,320 --> 00:04:42,440
Speaker 1: and I think they've advanced since then. Price to book

81
00:04:42,480 --> 00:04:45,440
Speaker 1: was the famous one fam in French use. They'll be

82
00:04:45,440 --> 00:04:47,160
Speaker 1: the first to tell you they do kind of like it,

83
00:04:47,200 --> 00:04:50,159
Speaker 1: but it has no special standing. It's basically price divided

84
00:04:50,160 --> 00:04:53,160
Speaker 1: by any reasonable fundamental so it could be priced to sales,

85
00:04:53,320 --> 00:04:57,000
Speaker 1: price to earnings, priced to whatever. You'll get people disagreeing

86
00:04:57,040 --> 00:04:59,880
Speaker 1: like crazy. At our firm, we prefer a broad ten

87
00:05:00,440 --> 00:05:02,840
Speaker 1: of giving you. We don't think we're particularly great at

88
00:05:02,839 --> 00:05:05,600
Speaker 1: saying which one is the exact right way to do this.

89
00:05:06,240 --> 00:05:08,640
Speaker 1: But if you buy low multiples and sell high multiples

90
00:05:09,800 --> 00:05:13,000
Speaker 1: either in a long only beat the benchmark sense when

91
00:05:13,200 --> 00:05:16,600
Speaker 1: over and underweight, and you did the same thing everyone does,

92
00:05:16,640 --> 00:05:18,360
Speaker 1: and call me a hedge fun manager. It's about half

93
00:05:18,400 --> 00:05:21,880
Speaker 1: our assets. About half our assets are really traditional where

94
00:05:21,960 --> 00:05:24,400
Speaker 1: money managers beat, you know plenty of things. Don't let

95
00:05:24,480 --> 00:05:26,240
Speaker 1: us short or lever or any of those hedge fun

96
00:05:26,360 --> 00:05:29,000
Speaker 1: kind of things. But the principle is exactly the same.

97
00:05:29,400 --> 00:05:32,240
Speaker 1: The overweight in a value strategy would be low multiples,

98
00:05:32,240 --> 00:05:35,000
Speaker 1: the underweight would be high multiples. If you're running a

99
00:05:35,040 --> 00:05:38,800
Speaker 1: pure momentum strategy, the overweight, and this is also momentum

100
00:05:38,800 --> 00:05:42,359
Speaker 1: circa nineteen ninety, would be who's doing better over the

101
00:05:42,440 --> 00:05:45,840
Speaker 1: last year it's that simple. I used to dismissively call

102
00:05:45,839 --> 00:05:49,640
Speaker 1: it the two newspaper strategy. You needed a newspaper recent

103
00:05:49,680 --> 00:05:52,039
Speaker 1: one and one from a year ago. It's better to

104
00:05:52,040 --> 00:05:54,159
Speaker 1: have a computer because a little faster than you. But

105
00:05:54,360 --> 00:05:56,640
Speaker 1: you look up and you buy what's going up. It

106
00:05:56,680 --> 00:06:00,479
Speaker 1: turns out this part is surprising. Both make money over

107
00:06:00,520 --> 00:06:05,200
Speaker 1: any decent time horizon. Probably not surprising is they are,

108
00:06:05,200 --> 00:06:09,320
Speaker 1: in geek speak, negatively correlated. If you are a pure

109
00:06:09,400 --> 00:06:13,000
Speaker 1: value person and I am a pure momentum person, occasionally

110
00:06:13,040 --> 00:06:16,200
Speaker 1: we agree. We may get into this later, but right

111
00:06:16,279 --> 00:06:19,880
Speaker 1: now we're in more agreement than normal because value stocks

112
00:06:19,960 --> 00:06:23,279
Speaker 1: kind of have the momentum, but more often than not,

113
00:06:23,480 --> 00:06:26,160
Speaker 1: the cheap stocks are cheap because one of the reasons

114
00:06:26,200 --> 00:06:30,000
Speaker 1: they're cheap is they've been losing. So they're negatively correlated strategies.

115
00:06:30,000 --> 00:06:32,719
Speaker 1: And this doesn't create a ten sharp ratio, but a

116
00:06:32,760 --> 00:06:35,640
Speaker 1: holy grail of quand finances to try to find two

117
00:06:35,680 --> 00:06:37,719
Speaker 1: things that are an average make money that hedge each other,

118
00:06:38,279 --> 00:06:42,240
Speaker 1: and value and momentum do whether it's relative our performance

119
00:06:42,240 --> 00:06:45,200
Speaker 1: against a benchmark or absolute performance in a hedge fund.

120
00:06:45,920 --> 00:06:48,680
Speaker 1: So let's talk a little bit about how you ended

121
00:06:48,800 --> 00:06:54,440
Speaker 1: up launching a QR. Following your PhD dissertation, you end

122
00:06:54,560 --> 00:07:00,640
Speaker 1: up eventually heading out to Goldman Sachs to effectively established

123
00:07:00,680 --> 00:07:04,480
Speaker 1: their quantitative research groups. That's it, though I'm going to

124
00:07:04,560 --> 00:07:06,400
Speaker 1: mend the story slightly because a few of those things

125
00:07:06,440 --> 00:07:11,320
Speaker 1: happen more simultaneously. I left the PhD program in late

126
00:07:11,440 --> 00:07:16,160
Speaker 1: ninety one to take a year off. I'm now on

127
00:07:16,360 --> 00:07:19,800
Speaker 1: year thirty two of that year off, so it appears

128
00:07:19,840 --> 00:07:23,320
Speaker 1: to have taken hold. So you're a PhD school dropout. No,

129
00:07:23,520 --> 00:07:27,320
Speaker 1: I did finish the PhD. I went to Goldman. I

130
00:07:27,360 --> 00:07:30,840
Speaker 1: had started my dissertation. I think a lot of people

131
00:07:30,920 --> 00:07:33,880
Speaker 1: leave intending to write a dissertation from a job, and

132
00:07:33,920 --> 00:07:38,440
Speaker 1: I don't think anyone, including me, succeeds at that. But

133
00:07:38,760 --> 00:07:41,560
Speaker 1: if you've already produced, like a first draft, it could

134
00:07:41,560 --> 00:07:43,800
Speaker 1: be a couple of years in this process to finish it.

135
00:07:44,160 --> 00:07:46,559
Speaker 1: But it's more Yeoman like work. After the first draft,

136
00:07:46,600 --> 00:07:50,520
Speaker 1: you're just responding to things, running new tests. So I

137
00:07:50,560 --> 00:07:53,520
Speaker 1: had finished a first draft, went to Goldman to take

138
00:07:53,560 --> 00:07:56,040
Speaker 1: a year with the concept that an option can only

139
00:07:56,080 --> 00:07:58,160
Speaker 1: be worth zero let me see if I let me

140
00:07:58,160 --> 00:08:00,400
Speaker 1: see it. I intended to be a professor when I

141
00:08:00,400 --> 00:08:01,920
Speaker 1: started out but let me see if I like this.

142
00:08:03,120 --> 00:08:05,600
Speaker 1: After about a year, maybe about a year and a half,

143
00:08:05,640 --> 00:08:08,120
Speaker 1: I stayed a little longer. I was really feeling like

144
00:08:08,160 --> 00:08:11,280
Speaker 1: I should get back to some of the academic roots.

145
00:08:11,320 --> 00:08:14,280
Speaker 1: I was a fixed income portfolio manager and trader, which

146
00:08:14,320 --> 00:08:17,640
Speaker 1: is a ton of fun. I recommend anyone who does

147
00:08:17,680 --> 00:08:20,040
Speaker 1: this stuffer a living trade in OTC market for a

148
00:08:20,040 --> 00:08:23,040
Speaker 1: while to learn the good bed and the ugly of

149
00:08:23,240 --> 00:08:26,680
Speaker 1: of of of what happens there. But it wasn't like

150
00:08:27,400 --> 00:08:29,400
Speaker 1: whatever skills they taught me in the PAHD program. It

151
00:08:29,400 --> 00:08:32,440
Speaker 1: didn't feel right. I then got just very lucky. Pimco

152
00:08:32,520 --> 00:08:34,679
Speaker 1: out on the West Coast read the first thing I

153
00:08:34,720 --> 00:08:38,760
Speaker 1: wrote in the Journal of Portfolio Management. UM. The exciting

154
00:08:39,080 --> 00:08:43,240
Speaker 1: title was option adjusted spreads and a steep yield curve. Um.

155
00:08:43,360 --> 00:08:46,360
Speaker 1: There's gonna be a TV movie at some point. Who's

156
00:08:46,360 --> 00:08:48,720
Speaker 1: going to play you in the movie? That's the big question.

157
00:08:48,760 --> 00:08:52,120
Speaker 1: I'm not gonna be flattered whoever, who whoever it is.

158
00:08:52,200 --> 00:08:55,600
Speaker 1: Let's just say that, UM, and they won't have any hair,

159
00:08:55,800 --> 00:08:57,840
Speaker 1: which will be annoying because when that when I wrote

160
00:08:57,840 --> 00:09:01,080
Speaker 1: that paper, I had hair, right they the paper, they

161
00:09:01,200 --> 00:09:02,920
Speaker 1: talked to me. They didn't even know I did. I

162
00:09:02,960 --> 00:09:06,400
Speaker 1: was writing a dissertation on quant equities at night, and

163
00:09:06,440 --> 00:09:10,640
Speaker 1: they basically offered me a job to start a research

164
00:09:10,679 --> 00:09:15,600
Speaker 1: group from scratch. Ironically, given what happened later, Long Term

165
00:09:15,679 --> 00:09:19,800
Speaker 1: Capital helped my life because circa that time they were

166
00:09:19,840 --> 00:09:23,880
Speaker 1: doing extremely well and suddenly, you know, all business, it's

167
00:09:23,880 --> 00:09:26,280
Speaker 1: not just Wall Street are something's doing great there. We

168
00:09:26,320 --> 00:09:29,160
Speaker 1: need one of those. So the notion that we should

169
00:09:29,200 --> 00:09:34,000
Speaker 1: have some academics helping us out was greatly aided by them.

170
00:09:34,040 --> 00:09:37,160
Speaker 1: And I actually think there's some brilliant people, though obviously

171
00:09:37,240 --> 00:09:39,400
Speaker 1: didn't end well there, so it's a little bit of

172
00:09:39,440 --> 00:09:42,280
Speaker 1: irony that they help. But PIMCO is looking to start

173
00:09:42,320 --> 00:09:44,560
Speaker 1: a group. I went to Goldman Sachs and said, I

174
00:09:44,600 --> 00:09:47,480
Speaker 1: think this is the perfect combination. I get to do

175
00:09:48,400 --> 00:09:52,000
Speaker 1: academic work but in the real world, both in the

176
00:09:52,040 --> 00:09:55,040
Speaker 1: sense of seeing if it actually works, and you make

177
00:09:55,120 --> 00:09:58,160
Speaker 1: more money. Anyone who tells you they do money management

178
00:09:58,200 --> 00:10:01,120
Speaker 1: over being a professor and never considered that it's probably

179
00:10:01,120 --> 00:10:06,720
Speaker 1: not never not telling the full truth. Goldman Um said,

180
00:10:07,840 --> 00:10:10,480
Speaker 1: unbeknownst to you, we're looking to start such a group.

181
00:10:10,960 --> 00:10:13,800
Speaker 1: To this day, I think that's probably true, but I

182
00:10:13,840 --> 00:10:17,000
Speaker 1: don't know if that was reactive to me or but

183
00:10:17,840 --> 00:10:19,920
Speaker 1: they did say that, and they offered me the job,

184
00:10:20,000 --> 00:10:22,520
Speaker 1: and I decided the weather in New York City's way

185
00:10:22,640 --> 00:10:27,520
Speaker 1: better than Luguona Beach, Newport Beach, excuse me, California. I

186
00:10:27,520 --> 00:10:30,320
Speaker 1: also chose Chicago over Stanford f PhD. So you don't

187
00:10:30,320 --> 00:10:34,800
Speaker 1: care about whether obvious No Chicago versus Stanford. Um, I

188
00:10:34,840 --> 00:10:38,319
Speaker 1: got into both. Yea. They offered a stipend. PhDs are

189
00:10:38,400 --> 00:10:40,280
Speaker 1: very lucky to actually, hey, you to go to school.

190
00:10:41,480 --> 00:10:44,360
Speaker 1: Everything was the same, except Chicago had in its budget

191
00:10:44,800 --> 00:10:48,119
Speaker 1: to give me money for airfare to go visit. Stanford

192
00:10:48,160 --> 00:10:51,840
Speaker 1: didn't and I had no money. So I visited Chicago

193
00:10:52,320 --> 00:10:54,760
Speaker 1: and not Stanford. And it was a beautiful spring day.

194
00:10:55,160 --> 00:10:57,440
Speaker 1: So I'm fond of telling people I'm the world's only

195
00:10:57,440 --> 00:10:59,880
Speaker 1: person to choose the University of Chicago over Stanford on

196
00:10:59,920 --> 00:11:02,880
Speaker 1: the weather. Based on the weather, I'm more intrigued by

197
00:11:02,880 --> 00:11:07,640
Speaker 1: the concept of you, uh sort of Bruce wayneing uh

198
00:11:07,960 --> 00:11:10,400
Speaker 1: fixed income during the day and at night your equity

199
00:11:10,400 --> 00:11:13,240
Speaker 1: work is your batman. Yeah, that was tied for the

200
00:11:13,240 --> 00:11:16,839
Speaker 1: craziest time in my life. Um. The other time my

201
00:11:16,880 --> 00:11:19,520
Speaker 1: wife and I with with you know, more her than me.

202
00:11:19,640 --> 00:11:21,840
Speaker 1: We had two sets of twins eighteen months apart. Oh

203
00:11:21,920 --> 00:11:24,600
Speaker 1: my goodness, um, and that was a ton of fun,

204
00:11:25,040 --> 00:11:28,840
Speaker 1: but it was ridiculous. Yeah. Right, So the nocturnal activity

205
00:11:28,920 --> 00:11:32,240
Speaker 1: was a little different than writing a dissertation, but working

206
00:11:32,240 --> 00:11:36,960
Speaker 1: at Goldman um with with with four babies, um, was

207
00:11:37,080 --> 00:11:39,680
Speaker 1: very similar to writing a dissertation, which is kind of

208
00:11:39,720 --> 00:11:42,520
Speaker 1: is your baby I could? I can imagine. So so

209
00:11:43,200 --> 00:11:46,920
Speaker 1: we we started talking about a QR in ninety eight.

210
00:11:47,040 --> 00:11:52,640
Speaker 1: You leave Goldman to launch that this is your first congratulations.

211
00:11:52,679 --> 00:11:54,520
Speaker 1: I like to say a quarter century. It has more

212
00:11:54,559 --> 00:11:57,680
Speaker 1: ground O case, it definitely does. It's amazing how quickly

213
00:11:58,160 --> 00:12:02,840
Speaker 1: quarter century goes by. That's the truly shocking thing. All

214
00:12:02,880 --> 00:12:05,920
Speaker 1: the cliches, particularly about children, but about all of life.

215
00:12:06,800 --> 00:12:09,200
Speaker 1: They're cliches for a reason. You wake up one day

216
00:12:09,200 --> 00:12:10,800
Speaker 1: and you go, what did I do for the last

217
00:12:10,800 --> 00:12:13,079
Speaker 1: twenty five years? How did this happen? I remember about

218
00:12:13,120 --> 00:12:16,760
Speaker 1: three of those years. I'm fond of telling people I

219
00:12:16,800 --> 00:12:19,040
Speaker 1: have a really good memory that extends to two periods,

220
00:12:19,360 --> 00:12:22,000
Speaker 1: the last two weeks in high school. I think that's

221
00:12:22,040 --> 00:12:24,439
Speaker 1: probably true for a lot of people. It just depends

222
00:12:24,440 --> 00:12:27,280
Speaker 1: on where you peaked. Yeah, personally, if you peak in

223
00:12:27,400 --> 00:12:30,160
Speaker 1: high school or you peak in college. That's that's where

224
00:12:30,200 --> 00:12:34,240
Speaker 1: all your memories are most vivid. So so, given a

225
00:12:34,400 --> 00:12:37,960
Speaker 1: QR has been around for twenty five years, how has

226
00:12:38,080 --> 00:12:42,800
Speaker 1: your investing philosophy evolved over that period? Assuming it's changed

227
00:12:42,800 --> 00:12:45,400
Speaker 1: at all, and I imagine it as it has, but

228
00:12:45,440 --> 00:12:51,000
Speaker 1: more has stayed the same than has changed, adding new factors,

229
00:12:51,080 --> 00:12:54,600
Speaker 1: measuring factors better. I don't think that's a change in philosophy.

230
00:12:54,640 --> 00:13:01,600
Speaker 1: That's just applying the philosophy and digging deeper our general belief,

231
00:13:01,840 --> 00:13:04,840
Speaker 1: starting out with value and momentum at Goldman in the

232
00:13:04,960 --> 00:13:09,400
Speaker 1: very early nineties, expanding along with the literature, some of

233
00:13:09,440 --> 00:13:12,920
Speaker 1: which some of our people have helped create UM to

234
00:13:13,040 --> 00:13:18,200
Speaker 1: other factors, low risk investing, quality investing, UM fundamental, not

235
00:13:18,280 --> 00:13:22,360
Speaker 1: just price funds. But let's let's define those UM like

236
00:13:22,480 --> 00:13:25,480
Speaker 1: I think we understand what quality investing is, but what

237
00:13:25,679 --> 00:13:29,040
Speaker 1: is low risk? Low risk investing at its simplest. Again,

238
00:13:29,200 --> 00:13:31,960
Speaker 1: all of these you get ten quants in a room,

239
00:13:31,960 --> 00:13:34,520
Speaker 1: which sounds like the beginning of a bad joke. Um,

240
00:13:34,559 --> 00:13:38,760
Speaker 1: they'll all have UM different ways and different sets of

241
00:13:38,760 --> 00:13:42,160
Speaker 1: ways to measure this, but at its simplest. As a

242
00:13:42,200 --> 00:13:46,640
Speaker 1: paper by two of my colleagues Lass Peterson and Andrea Frazini.

243
00:13:47,320 --> 00:13:49,560
Speaker 1: Andrea Frazini excuse may have left out the last syllable

244
00:13:49,600 --> 00:13:51,760
Speaker 1: of your name, Andrea. I will never do that again.

245
00:13:52,320 --> 00:13:56,040
Speaker 1: Um wrote a paper call Betting against Beta, UM and

246
00:13:56,120 --> 00:13:59,600
Speaker 1: I forget many years ago. Bab everything's three letters because

247
00:13:59,640 --> 00:14:02,400
Speaker 1: faming French name their factors three letters. So now we

248
00:14:02,440 --> 00:14:05,880
Speaker 1: all copy them and they'll be the first to tell

249
00:14:05,920 --> 00:14:10,319
Speaker 1: you they were essentially extending work of Fisher Blacks from

250
00:14:10,360 --> 00:14:13,360
Speaker 1: I don't know, ten twenty years ago, where he found

251
00:14:13,840 --> 00:14:17,840
Speaker 1: that in basic theory, the capital asset pricing model. You know,

252
00:14:17,880 --> 00:14:20,960
Speaker 1: we all kind of learn third week of an NBA

253
00:14:21,040 --> 00:14:27,040
Speaker 1: finance class bill bill sharp. High beta stocks are supposed

254
00:14:27,040 --> 00:14:29,360
Speaker 1: to return more on average than low beta stocks, and

255
00:14:29,400 --> 00:14:31,960
Speaker 1: in fact nothing else is supposed to matter all. It's

256
00:14:32,120 --> 00:14:36,400
Speaker 1: it's a one factor model, and it's admittedly simplistic, even

257
00:14:36,440 --> 00:14:38,120
Speaker 1: though people who created it won't tell you it's the

258
00:14:38,280 --> 00:14:40,200
Speaker 1: be all, end all, but it's a very useful way

259
00:14:40,240 --> 00:14:41,760
Speaker 1: to think of things. It gets you down to a

260
00:14:41,880 --> 00:14:46,920
Speaker 1: very important concept that diversifiable risk. You shouldn't get paid

261
00:14:46,960 --> 00:14:48,400
Speaker 1: for it because you don't have to bear. You get

262
00:14:48,440 --> 00:14:52,640
Speaker 1: bared for risk. You can't diversify away beta being a risk,

263
00:14:52,720 --> 00:14:55,920
Speaker 1: you can't diversify away because a lot of your portfolio

264
00:14:56,000 --> 00:15:00,440
Speaker 1: is already long beta should be paid. So the problem,

265
00:15:00,480 --> 00:15:04,280
Speaker 1: of course is in some sense you can say betas

266
00:15:04,280 --> 00:15:07,160
Speaker 1: paid because stocks tend to beat bonds over the long term.

267
00:15:07,440 --> 00:15:11,000
Speaker 1: But within the market, the so called security markets line

268
00:15:12,000 --> 00:15:16,760
Speaker 1: is pretty much entirely flat and has been in sample

269
00:15:16,760 --> 00:15:19,560
Speaker 1: and add a sample for a ridiculously long amount of

270
00:15:19,560 --> 00:15:23,040
Speaker 1: time in a ridiculously large amount of places, meaning low

271
00:15:23,040 --> 00:15:26,240
Speaker 1: beata stocks have kept up with high beta stocks, which

272
00:15:26,280 --> 00:15:29,560
Speaker 1: in the simplest theory, they're not supposed to. You can

273
00:15:29,680 --> 00:15:31,600
Speaker 1: use this in a number of ways. You can buy.

274
00:15:32,920 --> 00:15:35,080
Speaker 1: You can make your portfolio out of low beta stocks

275
00:15:35,480 --> 00:15:39,000
Speaker 1: earn as much money with smaller swings, or if you're

276
00:15:39,040 --> 00:15:41,520
Speaker 1: a hedge fund kind of person, and you can use

277
00:15:41,520 --> 00:15:43,440
Speaker 1: this in long only portfolios too. It's just a little

278
00:15:43,480 --> 00:15:48,080
Speaker 1: more complicated. You can go long lowbay a short high beta,

279
00:15:48,280 --> 00:15:51,000
Speaker 1: but you better apply a heade ratio if you're long

280
00:15:51,160 --> 00:15:53,720
Speaker 1: a dollar of high bay. Excuse me of low beta.

281
00:15:54,200 --> 00:15:58,040
Speaker 1: I sometimes get the sign wrong in interviews, I promise

282
00:15:58,240 --> 00:16:00,640
Speaker 1: in real life, when we're trading, you get the sign

283
00:16:00,720 --> 00:16:03,680
Speaker 1: right like three out of four times, and that's a

284
00:16:03,720 --> 00:16:05,720
Speaker 1: pretty good n hopefully everyone knows that three out of

285
00:16:05,760 --> 00:16:08,560
Speaker 1: four is a joke. But you go long low beta

286
00:16:08,640 --> 00:16:11,000
Speaker 1: short high beta. If you did that on a dollar

287
00:16:11,080 --> 00:16:13,920
Speaker 1: along on a dollar short, you just massively short the market.

288
00:16:14,480 --> 00:16:18,320
Speaker 1: Long lowbat and short high beta. Beta's work. So you

289
00:16:18,320 --> 00:16:20,760
Speaker 1: apply a hedge race. Here you short less than you long,

290
00:16:21,240 --> 00:16:23,240
Speaker 1: and you try to create something about zero beta, and

291
00:16:23,280 --> 00:16:27,720
Speaker 1: that has created a very you know, like all these things, imperfect.

292
00:16:27,800 --> 00:16:30,680
Speaker 1: It goes through bad periods, but a very attractive risk

293
00:16:30,680 --> 00:16:34,040
Speaker 1: adjusted return in and out of sample long term, and

294
00:16:34,080 --> 00:16:36,520
Speaker 1: then you can get into theories as to why it works.

295
00:16:36,880 --> 00:16:38,720
Speaker 1: So what where I was going to ask you is

296
00:16:39,120 --> 00:16:42,880
Speaker 1: if low beta returns just about the same or almost

297
00:16:42,960 --> 00:16:45,800
Speaker 1: the same as high beta, why the complexity? Why not

298
00:16:45,840 --> 00:16:48,640
Speaker 1: just own low beta and it will give you, on

299
00:16:48,680 --> 00:16:51,960
Speaker 1: a risk adjusted basis a better return than high bad. Well,

300
00:16:52,000 --> 00:16:56,480
Speaker 1: absolutely some do. But if you want to create, if

301
00:16:56,480 --> 00:16:59,280
Speaker 1: you're a hedge fund person trying to create an alternative

302
00:16:59,320 --> 00:17:04,440
Speaker 1: investment that's truly uncorrelated, low beata stocks are still highly

303
00:17:04,440 --> 00:17:08,600
Speaker 1: correlated to the market. So by going long low beta

304
00:17:08,680 --> 00:17:11,560
Speaker 1: and shorting a smaller amount of high beta, and this

305
00:17:11,640 --> 00:17:14,000
Speaker 1: depends on your preferences and how aggressive you want to be,

306
00:17:14,200 --> 00:17:18,280
Speaker 1: but you're eliminating that. Yes, you can create a I'm

307
00:17:18,280 --> 00:17:23,960
Speaker 1: always Lerian saying uncorrelated worries. Well, I were striving for uncorrelated,

308
00:17:24,000 --> 00:17:27,160
Speaker 1: but the compliance officer in my head is saying, sometimes

309
00:17:27,560 --> 00:17:29,600
Speaker 1: it doesn't come out to zero all the time, but

310
00:17:29,600 --> 00:17:32,240
Speaker 1: it comes out close. So you can create a very

311
00:17:32,240 --> 00:17:35,320
Speaker 1: diversifying stream of returns, where if you just want low

312
00:17:35,320 --> 00:17:39,400
Speaker 1: beata stocks, you're creating a more attractive stream of returns,

313
00:17:39,440 --> 00:17:43,359
Speaker 1: but still extremely correlated to perhaps your other holdings, so

314
00:17:43,520 --> 00:17:45,199
Speaker 1: it could be used in different ways. So well, I

315
00:17:45,240 --> 00:17:48,240
Speaker 1: think when most people think of a QR, they think

316
00:17:48,640 --> 00:17:52,359
Speaker 1: value shop. But as I'm doing my homework to prep

317
00:17:52,400 --> 00:17:56,119
Speaker 1: for our conversation and finding all my previous notes, you

318
00:17:56,119 --> 00:17:58,680
Speaker 1: don't just wing this. No, I try not to. I've

319
00:17:58,680 --> 00:18:00,879
Speaker 1: done it on a raid down val I just waned

320
00:18:00,880 --> 00:18:03,000
Speaker 1: it with But with you, I feel like I have

321
00:18:03,040 --> 00:18:06,960
Speaker 1: to come in loaded for bear. Let's say that's a

322
00:18:06,960 --> 00:18:09,959
Speaker 1: good accident to Wall Street joke, right on purpose, not

323
00:18:10,000 --> 00:18:13,320
Speaker 1: so accident. Okay, good, um, you know I have a

324
00:18:13,359 --> 00:18:15,359
Speaker 1: whole I have all I got a million of it, right,

325
00:18:15,359 --> 00:18:17,560
Speaker 1: I got am well teed up waiting for you. So

326
00:18:17,640 --> 00:18:20,960
Speaker 1: people tend to think of a QR as a value shop,

327
00:18:21,440 --> 00:18:25,120
Speaker 1: but really you're a deep quantitative shop with a lot

328
00:18:25,160 --> 00:18:28,880
Speaker 1: of different strategies. Let's talk a little bit about the

329
00:18:29,040 --> 00:18:32,719
Speaker 1: various ways you guys invest money. Well, let me, can

330
00:18:32,760 --> 00:18:35,320
Speaker 1: I back up for second talk about why people think

331
00:18:35,359 --> 00:18:38,000
Speaker 1: of us as a value Absolutely. There are a few reasons.

332
00:18:38,440 --> 00:18:41,640
Speaker 1: One is there was one point in the very distant

333
00:18:41,640 --> 00:18:44,320
Speaker 1: past where it was much closer to true. Um. Some

334
00:18:44,359 --> 00:18:47,040
Speaker 1: of the things like betting against made up quality or

335
00:18:47,040 --> 00:18:52,080
Speaker 1: profitability carry strategies or additions over time. So anyone who's

336
00:18:52,160 --> 00:18:54,520
Speaker 1: even not the people. A lot of people follow us,

337
00:18:54,520 --> 00:18:57,280
Speaker 1: but anyone has followed us from the beginning, it's not

338
00:18:57,320 --> 00:19:00,719
Speaker 1: crazy that they started out thinking that. Also, I just

339
00:19:00,760 --> 00:19:02,960
Speaker 1: wrote a piece maybe a few months ago on our

340
00:19:02,960 --> 00:19:07,840
Speaker 1: website with the highly defensive worried title we are not

341
00:19:07,920 --> 00:19:12,480
Speaker 1: just about value in parentheses except occasionally when we are.

342
00:19:13,480 --> 00:19:16,720
Speaker 1: Because you do get these periods and value seems to

343
00:19:16,760 --> 00:19:20,679
Speaker 1: be the worst culprit um. Not even even half of

344
00:19:20,720 --> 00:19:25,439
Speaker 1: your headlines, yeah are hedged fund now, Well, you know,

345
00:19:26,680 --> 00:19:28,399
Speaker 1: remind me where we were, because I'll go off on

346
00:19:28,440 --> 00:19:32,600
Speaker 1: tangents like you do. But but but I do write

347
00:19:32,600 --> 00:19:34,439
Speaker 1: a lot of head statements and I'm kind of famous

348
00:19:34,520 --> 00:19:36,760
Speaker 1: from my footnotes, both because I stick the humor there,

349
00:19:36,800 --> 00:19:39,040
Speaker 1: but also I put in all the ways I might

350
00:19:39,080 --> 00:19:43,200
Speaker 1: be wrong. Um, and it's it's really not a compliance reason.

351
00:19:43,320 --> 00:19:46,200
Speaker 1: I hope it's more of an intellectual honesty reason. Anyone

352
00:19:46,240 --> 00:19:50,680
Speaker 1: who's sure they're right is very, very dangerous. The footnotes

353
00:19:50,720 --> 00:19:54,480
Speaker 1: allow you to get past that point. Yeah, I love saying.

354
00:19:54,840 --> 00:19:57,399
Speaker 1: First of all, we hate to kill our darlings, anybody rights,

355
00:19:57,480 --> 00:20:01,280
Speaker 1: but secondly, you could very easily get stuck somewhere. All right,

356
00:20:01,320 --> 00:20:03,639
Speaker 1: let me just throw this in a footnote, be done

357
00:20:03,640 --> 00:20:06,920
Speaker 1: with it, and keep going. And it allows that. Okay,

358
00:20:07,040 --> 00:20:09,000
Speaker 1: I've cleared the road for the rest of my thought.

359
00:20:09,040 --> 00:20:11,159
Speaker 1: The footnotes have three purposes to me. There where I

360
00:20:11,160 --> 00:20:15,199
Speaker 1: stick the humor, they are the hedges. Here are the

361
00:20:15,240 --> 00:20:17,360
Speaker 1: ways that what I just said might have been bull

362
00:20:17,560 --> 00:20:20,920
Speaker 1: blank and uh, and I could be wrong. And finally,

363
00:20:20,960 --> 00:20:23,119
Speaker 1: they are sentences I love that my editor did not

364
00:20:23,200 --> 00:20:27,720
Speaker 1: love where we can mutually agree that that that it's

365
00:20:27,760 --> 00:20:30,280
Speaker 1: worth the foot that it's worth the footnote. But and

366
00:20:30,359 --> 00:20:32,480
Speaker 1: they do, by the way, your editor just yes, is

367
00:20:32,560 --> 00:20:35,160
Speaker 1: you god? I gotta deal with Cliff today? Just throw

368
00:20:35,200 --> 00:20:37,840
Speaker 1: it in the footnote and keep going. It's helpful to

369
00:20:37,880 --> 00:20:40,760
Speaker 1: have a weights paper batsket. I used to use a

370
00:20:41,040 --> 00:20:44,959
Speaker 1: separate doc that I would whatever it was, something something

371
00:20:45,040 --> 00:20:47,640
Speaker 1: something edits So when I would get stuck, I would

372
00:20:47,720 --> 00:20:50,040
Speaker 1: let me just move the sentence this paragraph year because

373
00:20:50,080 --> 00:20:53,320
Speaker 1: it's interfering with the narrative. And almost anyone who writes

374
00:20:53,440 --> 00:20:56,120
Speaker 1: will find like they want to make the argument seven

375
00:20:56,160 --> 00:20:59,880
Speaker 1: different ways because you want you want to both both

376
00:21:00,280 --> 00:21:02,400
Speaker 1: kill the counter argument and then jump on its grave

377
00:21:02,960 --> 00:21:06,920
Speaker 1: for a while. Anticipate a good editor will say, pick

378
00:21:07,000 --> 00:21:11,359
Speaker 1: your one or maybe two best arguments and go with those.

379
00:21:11,720 --> 00:21:16,320
Speaker 1: Um and and footnotes again are useful. So digression aside,

380
00:21:16,359 --> 00:21:19,800
Speaker 1: Let's go back to the multiple strategies. Oh, I'm not done.

381
00:21:19,800 --> 00:21:24,000
Speaker 1: I got to finish all right, Um, this could take

382
00:21:24,040 --> 00:21:26,879
Speaker 1: the rest of the time. I cleared my schedule through dinner.

383
00:21:27,160 --> 00:21:30,480
Speaker 1: We are multi strategy. We go through long periods, almost

384
00:21:30,560 --> 00:21:34,280
Speaker 1: decade long periods, where we hardly talk about value. It's one,

385
00:21:34,720 --> 00:21:37,479
Speaker 1: it's a relatively important factor, frankly, but it's it's not

386
00:21:37,520 --> 00:21:40,159
Speaker 1: a it's not a majority of what we do, and

387
00:21:40,280 --> 00:21:42,800
Speaker 1: we go through long periods. A good example would be

388
00:21:42,920 --> 00:21:47,360
Speaker 1: post GFC through twenty seventeen, where value is tough. Yeah,

389
00:21:47,880 --> 00:21:51,720
Speaker 1: and we had a great almost a decade. Because everything

390
00:21:51,760 --> 00:21:56,280
Speaker 1: else we do work um profitability, one fundamental momentum, one

391
00:21:56,400 --> 00:21:59,600
Speaker 1: low risk one. UM. We don't need value to work.

392
00:22:00,119 --> 00:22:02,760
Speaker 1: A lot of that is because value lost over that

393
00:22:02,800 --> 00:22:06,200
Speaker 1: period for what I will call and Gene Fama will

394
00:22:06,240 --> 00:22:10,640
Speaker 1: have to forgive me here rational reasons, meaning the expensive

395
00:22:10,720 --> 00:22:17,520
Speaker 1: companies buy and large outperformed, not on price, which they

396
00:22:17,520 --> 00:22:21,240
Speaker 1: did also, but they out executed. They grew more in

397
00:22:21,359 --> 00:22:24,040
Speaker 1: terms of earning sales, cash flows. If you are a

398
00:22:24,119 --> 00:22:27,360
Speaker 1: pure value investor in a quant sense, just buying low multiples,

399
00:22:28,040 --> 00:22:30,960
Speaker 1: you win on average because on average the price goes

400
00:22:30,960 --> 00:22:34,040
Speaker 1: too far the cheap stuff. And there's a risk based

401
00:22:34,080 --> 00:22:37,320
Speaker 1: explanation too. Again I'm pissing off Fama constantly on this,

402
00:22:39,040 --> 00:22:41,480
Speaker 1: but you A big part of why you win, we think,

403
00:22:41,680 --> 00:22:44,840
Speaker 1: is the expensive stuff is better to better company usually

404
00:22:45,080 --> 00:22:47,920
Speaker 1: but not that much better, not what's priced in. That's

405
00:22:47,960 --> 00:22:52,480
Speaker 1: on average sometimes thankfully more less often than not, but

406
00:22:52,680 --> 00:22:55,240
Speaker 1: still quite often the expensive stuff ends up being worth

407
00:22:55,280 --> 00:22:58,360
Speaker 1: it or more than worth it. And when that happens,

408
00:22:58,440 --> 00:23:01,840
Speaker 1: the value factor, the qual value factor very different than

409
00:23:01,920 --> 00:23:03,479
Speaker 1: how a Graham and Dodd investor. And we can get

410
00:23:03,520 --> 00:23:06,760
Speaker 1: into this later we'll use the term value. That'll suffer

411
00:23:07,000 --> 00:23:10,000
Speaker 1: at those times. But pretty much the rest of the

412
00:23:10,080 --> 00:23:13,119
Speaker 1: process you can think of, and we do it all simultaneously.

413
00:23:13,119 --> 00:23:15,280
Speaker 1: It's not really like one first than the other, but

414
00:23:15,359 --> 00:23:17,080
Speaker 1: you can think of it as trying to avoid a

415
00:23:17,160 --> 00:23:21,840
Speaker 1: value trap. Is this thing high profitability with things changing

416
00:23:21,840 --> 00:23:25,040
Speaker 1: in the right direction and low risk. Therefore someone should

417
00:23:25,080 --> 00:23:28,080
Speaker 1: pay a high multiple and you want to avoid value

418
00:23:28,119 --> 00:23:31,760
Speaker 1: just shorting that that works like a charm in a

419
00:23:31,880 --> 00:23:36,280
Speaker 1: rational market, in a bubble. And here again, I'll try

420
00:23:36,280 --> 00:23:38,680
Speaker 1: to make this the final time. I'm a gene farm

421
00:23:38,760 --> 00:23:42,240
Speaker 1: a heretic because I love the man who specifically says,

422
00:23:42,600 --> 00:23:46,800
Speaker 1: what's a bubble? Yeah? I think I'm somewhere in between.

423
00:23:46,880 --> 00:23:48,840
Speaker 1: I think I've seen a few in my career. I

424
00:23:48,880 --> 00:23:51,600
Speaker 1: think they exist. I think they are far more rare

425
00:23:51,640 --> 00:23:53,560
Speaker 1: than the way a lot of Wall Street refers to them.

426
00:23:53,720 --> 00:23:55,360
Speaker 1: A lot of Wall Street will say a stock they

427
00:23:55,359 --> 00:23:57,920
Speaker 1: think as expensive is in a bubble. Single stock can't

428
00:23:57,960 --> 00:24:00,640
Speaker 1: be in a bubble. It has, though, I do think

429
00:24:00,640 --> 00:24:04,719
Speaker 1: the tech bubble um and and certainly by by mid COVID,

430
00:24:05,160 --> 00:24:09,680
Speaker 1: we were in a various kinds of kinds of bubbles

431
00:24:09,680 --> 00:24:13,840
Speaker 1: in a bubble value loses. Of course, almost by definition,

432
00:24:13,880 --> 00:24:16,800
Speaker 1: people want the darlings, but they but the darlings are

433
00:24:16,840 --> 00:24:19,160
Speaker 1: not the ones who are out executing. They're the ones

434
00:24:19,200 --> 00:24:22,200
Speaker 1: with the greatest stories. Um. So the rest of our

435
00:24:22,200 --> 00:24:27,160
Speaker 1: process doesn't protect us very much. Um that is incredibly

436
00:24:27,200 --> 00:24:30,560
Speaker 1: painful period for our process that both this time, which

437
00:24:30,640 --> 00:24:34,320
Speaker 1: I think we're still in the midst of and we've

438
00:24:34,400 --> 00:24:36,640
Speaker 1: more than recovered from the round trip, has been good

439
00:24:37,359 --> 00:24:40,960
Speaker 1: but has led to some really tough times to wait out.

440
00:24:41,560 --> 00:24:44,480
Speaker 1: Um My holy grail would be to come up with

441
00:24:45,080 --> 00:24:47,680
Speaker 1: something to add to our process that would do really

442
00:24:47,720 --> 00:24:51,280
Speaker 1: well in bubbles but not cost us money long term,

443
00:24:51,280 --> 00:24:54,800
Speaker 1: because I don't think we can time these and I

444
00:24:54,800 --> 00:24:56,960
Speaker 1: don't think i'll I don't really think i'll find that.

445
00:24:57,440 --> 00:25:00,320
Speaker 1: And by the way, um this is self serving. But

446
00:25:00,400 --> 00:25:02,080
Speaker 1: if your worst times are going to be when everyone

447
00:25:02,119 --> 00:25:04,680
Speaker 1: else is partying in a bubble, and your best times

448
00:25:04,680 --> 00:25:07,240
Speaker 1: are going to be when that bubble is killing everyone

449
00:25:07,280 --> 00:25:10,119
Speaker 1: because it's coming down, it's not a terrible property. No, No,

450
00:25:10,200 --> 00:25:12,640
Speaker 1: it is absolutely not. So we're going to talk more

451
00:25:12,640 --> 00:25:15,520
Speaker 1: about value and growth later, but since you brought this up,

452
00:25:16,000 --> 00:25:18,360
Speaker 1: I want to just throw a couple of ideas at

453
00:25:18,400 --> 00:25:22,120
Speaker 1: you about that decade that followed the financial crisis, where

454
00:25:22,600 --> 00:25:27,080
Speaker 1: not only did growth outperform value, but really thoroughly trounced it.

455
00:25:27,400 --> 00:25:29,399
Speaker 1: So there are a couple of theories I've heard that

456
00:25:29,520 --> 00:25:35,240
Speaker 1: I think are worth discussing. First, the decade before, at

457
00:25:35,320 --> 00:25:39,520
Speaker 1: least the eight nine years before the financial crisis, value

458
00:25:39,600 --> 00:25:42,240
Speaker 1: was winning and growth was getting killed. So you started

459
00:25:42,280 --> 00:25:45,240
Speaker 1: from a relative uneven place. Maybe some of this was

460
00:25:45,320 --> 00:25:48,320
Speaker 1: catch up. But the theme I kind of find more

461
00:25:48,400 --> 00:25:53,480
Speaker 1: interesting is that prior to the financial crisis, Wall Street

462
00:25:53,560 --> 00:26:02,560
Speaker 1: and the markets had systematically undervalued intangibles patents, copyright, algorithms, etc.

463
00:26:02,920 --> 00:26:06,840
Speaker 1: How much of that twenty ten's rally was catch up

464
00:26:06,840 --> 00:26:09,960
Speaker 1: for by intangibles, It certainly could have been some of

465
00:26:10,000 --> 00:26:15,240
Speaker 1: the early part. A lot of quants added adjustments for

466
00:26:15,320 --> 00:26:19,880
Speaker 1: that along the way. Most of us are not purists

467
00:26:19,920 --> 00:26:23,120
Speaker 1: saying we're not going to change our models since nineteen.

468
00:26:23,520 --> 00:26:25,880
Speaker 1: The notion, for instance, that R and D that's viewed

469
00:26:25,880 --> 00:26:29,879
Speaker 1: as an expense, maybe all of it, maybe part of

470
00:26:29,880 --> 00:26:32,760
Speaker 1: it should actually be capitalized, which would go into book

471
00:26:32,840 --> 00:26:35,560
Speaker 1: value and make make a firm look not as expensive.

472
00:26:35,680 --> 00:26:37,320
Speaker 1: A company that spends a lot of money doing R

473
00:26:37,400 --> 00:26:40,840
Speaker 1: and D is investing in the future exactly, so I

474
00:26:41,160 --> 00:26:45,000
Speaker 1: think that that maybe part of it. I think it's

475
00:26:45,080 --> 00:26:49,000
Speaker 1: overdone in a few ways. One, it applies to more

476
00:26:49,000 --> 00:26:53,000
Speaker 1: than just price to book, but it applies most directly

477
00:26:53,040 --> 00:26:55,760
Speaker 1: to price to book where you're not capitalizing things like

478
00:26:55,880 --> 00:26:58,359
Speaker 1: R and D. It can apply to earnings, but plenty

479
00:26:58,359 --> 00:27:01,840
Speaker 1: of valuation measures has no applicability for price to sales.

480
00:27:03,080 --> 00:27:05,840
Speaker 1: Is should make it's I don't see where you think

481
00:27:05,880 --> 00:27:08,639
Speaker 1: about intangibles. What's the price and now what revenue is

482
00:27:08,640 --> 00:27:13,040
Speaker 1: it generating? And those type measures did just about as

483
00:27:13,080 --> 00:27:17,800
Speaker 1: bad as the ones that were contaminatable. Is that a word,

484
00:27:17,800 --> 00:27:22,760
Speaker 1: I'm not sure, but it is now um, So I

485
00:27:22,840 --> 00:27:25,560
Speaker 1: definitely think you want to account for that in places

486
00:27:25,600 --> 00:27:28,800
Speaker 1: like price to book in earnings, and I think collectively,

487
00:27:28,880 --> 00:27:31,520
Speaker 1: not just a qr UM. That has been an improvement

488
00:27:31,600 --> 00:27:34,480
Speaker 1: how we measure value and the world has changed a bit,

489
00:27:35,520 --> 00:27:41,040
Speaker 1: but we it applied, and caring about price versus anything,

490
00:27:41,520 --> 00:27:45,040
Speaker 1: even if it were immune to intangibles, was not a

491
00:27:45,160 --> 00:27:49,439
Speaker 1: very good thing until late twenty twenty since the GFC,

492
00:27:49,640 --> 00:27:52,760
Speaker 1: so about eleven years. So I don't think that you know,

493
00:27:53,320 --> 00:27:56,000
Speaker 1: the real world's always more complicated. Everyone's always looking for

494
00:27:56,320 --> 00:28:00,520
Speaker 1: single explanations when a lot of things have multiple explanation.

495
00:28:00,560 --> 00:28:02,199
Speaker 1: So I think this can definitely be part of it,

496
00:28:02,240 --> 00:28:04,600
Speaker 1: but I don't think it's the main driver. Nuance is

497
00:28:04,640 --> 00:28:08,400
Speaker 1: wildly underrated in finance, to say the least. Let's talk

498
00:28:08,440 --> 00:28:11,760
Speaker 1: a little bit about your research and writing. And I

499
00:28:11,840 --> 00:28:15,080
Speaker 1: want to quote your favorite publication, The New York Times,

500
00:28:15,480 --> 00:28:19,320
Speaker 1: who wrote about you. Quote. He built a public reputation

501
00:28:19,760 --> 00:28:22,439
Speaker 1: for his willingness to write and say what's on his mind.

502
00:28:22,800 --> 00:28:26,240
Speaker 1: In academia, he's known for witty, biting papers he writes

503
00:28:26,520 --> 00:28:31,040
Speaker 1: for such publications as The Financial Analyst Journal. I know

504
00:28:31,200 --> 00:28:34,359
Speaker 1: you don't write to do branding, but what do you

505
00:28:34,440 --> 00:28:39,640
Speaker 1: personally get out of a fairly steady stream of deep,

506
00:28:39,720 --> 00:28:42,880
Speaker 1: thoughtful academic papers. First year being too kind? Of course,

507
00:28:42,920 --> 00:28:45,560
Speaker 1: I write to do branding, Okay. I run a real

508
00:28:45,600 --> 00:28:48,560
Speaker 1: world business and I prefer people to think we're good

509
00:28:48,560 --> 00:28:52,360
Speaker 1: at this, And I think that's LEGiT's fair. If I

510
00:28:52,400 --> 00:28:55,760
Speaker 1: write something that people think is lousy or they disagree

511
00:28:55,760 --> 00:28:57,840
Speaker 1: with or misses the point, it's going to hurt our business.

512
00:28:58,360 --> 00:29:01,000
Speaker 1: So I won't pretend part of it is not a

513
00:29:01,040 --> 00:29:03,520
Speaker 1: business decision, but it's really not most of it. A

514
00:29:03,520 --> 00:29:06,040
Speaker 1: lot of it is the DNA. Three of our four

515
00:29:06,400 --> 00:29:09,880
Speaker 1: founders met at the PhD program at the University of Chicago.

516
00:29:10,680 --> 00:29:15,600
Speaker 1: We consider writing academic or often that that kind of

517
00:29:15,640 --> 00:29:18,520
Speaker 1: area in between academia and applied. You know, we've written

518
00:29:18,520 --> 00:29:21,080
Speaker 1: a lot of papers in the Journal of Finance, the JFE,

519
00:29:21,080 --> 00:29:24,480
Speaker 1: and that's true academia. A lot of our work shows

520
00:29:24,560 --> 00:29:27,120
Speaker 1: up in great places like the Financial Analysts Journal and

521
00:29:27,160 --> 00:29:30,720
Speaker 1: the Journal of Portfolio Management UM, which is kind of

522
00:29:30,720 --> 00:29:35,320
Speaker 1: the nexus between those two. This will sound childish, but

523
00:29:35,360 --> 00:29:38,600
Speaker 1: a fair amount of this is just personal consumption. We

524
00:29:38,720 --> 00:29:42,640
Speaker 1: enjoy being part of that world. We grew up thinking

525
00:29:42,760 --> 00:29:45,280
Speaker 1: part of the way you measure success is whether you

526
00:29:45,320 --> 00:29:49,520
Speaker 1: influence the intellectual debate um, whether and and and and

527
00:29:49,840 --> 00:29:52,560
Speaker 1: how you're regarded in those circles. And it's just part

528
00:29:52,560 --> 00:29:57,200
Speaker 1: of our utility function. I do think a few things first.

529
00:29:57,520 --> 00:30:01,600
Speaker 1: I always point out I don't know the exact breakdown,

530
00:30:01,880 --> 00:30:03,840
Speaker 1: but a fair amount of what we do is public.

531
00:30:03,920 --> 00:30:06,720
Speaker 1: But there's a fair amount that we think is proprietary.

532
00:30:06,960 --> 00:30:10,800
Speaker 1: And there are things that I would have a QR

533
00:30:10,880 --> 00:30:15,440
Speaker 1: researchers hunted it down and killed if they published. Yes, UM,

534
00:30:15,920 --> 00:30:19,000
Speaker 1: my compliance area would like you to know that I'm

535
00:30:19,040 --> 00:30:21,800
Speaker 1: I'm speaking hyperbole. I would like you to know that

536
00:30:21,840 --> 00:30:25,720
Speaker 1: I'm not um. But there are there are things we think,

537
00:30:25,840 --> 00:30:27,680
Speaker 1: you know even if there are things we think the

538
00:30:27,720 --> 00:30:29,880
Speaker 1: world will discover where you think you're somewhat ahead on

539
00:30:30,200 --> 00:30:33,080
Speaker 1: and we do try to walk that line on But

540
00:30:33,200 --> 00:30:35,760
Speaker 1: a lot of what we do is, you know, is

541
00:30:35,800 --> 00:30:40,080
Speaker 1: the value strategy cheap um someone role writer paper saying

542
00:30:40,120 --> 00:30:43,520
Speaker 1: the betting against beta strategy is really all only small

543
00:30:43,560 --> 00:30:46,880
Speaker 1: cap stocks and will respond to that. So it's really

544
00:30:46,920 --> 00:30:49,160
Speaker 1: not giving away some of the stuff which I think

545
00:30:49,240 --> 00:30:53,160
Speaker 1: does exist that is really unique. It does go to

546
00:30:53,240 --> 00:30:56,960
Speaker 1: our taste and I do think besides just the the

547
00:30:56,960 --> 00:31:00,720
Speaker 1: the advertising aspect, I think one que benefit to our

548
00:31:00,760 --> 00:31:04,640
Speaker 1: business is we hire a lot of PhDs, including professors.

549
00:31:05,160 --> 00:31:08,360
Speaker 1: We hire some full time and we have very strong

550
00:31:08,360 --> 00:31:10,960
Speaker 1: relationships where they work kind of halftime for us. Usually

551
00:31:10,960 --> 00:31:13,000
Speaker 1: they get to work full time for their school. Also,

552
00:31:13,640 --> 00:31:16,880
Speaker 1: it's a great deal can they get to multiple jobs.

553
00:31:17,520 --> 00:31:19,560
Speaker 1: And that's because what they're doing for us is also

554
00:31:19,600 --> 00:31:22,640
Speaker 1: what they're researching. It's it's actually quite beautiful. I don't

555
00:31:22,640 --> 00:31:25,240
Speaker 1: think we get taken nearly as seriously in that world,

556
00:31:25,720 --> 00:31:28,280
Speaker 1: meaning it would be a recruitment challenge. You can say

557
00:31:28,280 --> 00:31:31,080
Speaker 1: to a professor, you could write for your whatever you're

558
00:31:31,080 --> 00:31:33,720
Speaker 1: working on, you can help us, and if you ever

559
00:31:33,800 --> 00:31:36,360
Speaker 1: want to publish with us, we can play with Exactly.

560
00:31:36,360 --> 00:31:40,080
Speaker 1: It's absolutely twofold. They're allowed again, within the stricture of

561
00:31:40,240 --> 00:31:45,840
Speaker 1: if it's staggeringly proprietary, no, But broadly speaking, we're helping

562
00:31:45,920 --> 00:31:48,360
Speaker 1: their academic career also because we're okay with them writing

563
00:31:48,400 --> 00:31:50,920
Speaker 1: about a lot of this, and that's very attractive versus

564
00:31:50,920 --> 00:31:53,960
Speaker 1: a firm that says you can't say a word. Second,

565
00:31:54,680 --> 00:31:56,960
Speaker 1: I don't think we could have even access to these

566
00:31:56,960 --> 00:31:59,760
Speaker 1: people to the same degree if we weren't producers as

567
00:31:59,760 --> 00:32:02,440
Speaker 1: well as consumers of this research. You get a different

568
00:32:02,440 --> 00:32:05,720
Speaker 1: respect level when you're publishing, at least occasionally in some

569
00:32:05,800 --> 00:32:08,960
Speaker 1: of the same journals they are, and you've become enough

570
00:32:08,960 --> 00:32:13,320
Speaker 1: of an institution that affiliation with AQR doesn't look bad

571
00:32:13,480 --> 00:32:17,160
Speaker 1: on anybody's resume, and vice versa allows you to have

572
00:32:17,200 --> 00:32:20,600
Speaker 1: access to some of the top academics that are out there. Absolutely,

573
00:32:21,000 --> 00:32:22,880
Speaker 1: there are exceptions. I think, you know, kind of near

574
00:32:22,880 --> 00:32:25,320
Speaker 1: the end of twenty twenty, maybe people were being quiet

575
00:32:25,320 --> 00:32:28,520
Speaker 1: about that affiliation for a while. That was a short

576
00:32:28,600 --> 00:32:31,440
Speaker 1: term performance. Yeah, I had nothing to do with your research.

577
00:32:31,560 --> 00:32:33,840
Speaker 1: I'm kidding, I am. I am proud of the fact

578
00:32:33,840 --> 00:32:38,240
Speaker 1: that I do think a QR on an academic resume

579
00:32:38,560 --> 00:32:42,240
Speaker 1: doesn't at least doesn't hurt and maybe even helps. I would,

580
00:32:42,280 --> 00:32:47,560
Speaker 1: I would say, you're being um, humble, beyond necessary. I

581
00:32:47,600 --> 00:32:49,440
Speaker 1: can fake that at times. All right, Well, you know,

582
00:32:49,480 --> 00:32:52,800
Speaker 1: if you can fake sincerity, that's that's all right. That's right.

583
00:32:52,920 --> 00:32:55,080
Speaker 1: So let's talk about a couple of your publications that

584
00:32:55,320 --> 00:32:59,000
Speaker 1: I was amused by. In late twenty nineteen, you wrote,

585
00:32:59,480 --> 00:33:03,720
Speaker 1: bonds are freaking expensive? How do you invest around that thesis?

586
00:33:03,800 --> 00:33:07,800
Speaker 1: Because going back to the bull market and bonds that

587
00:33:07,880 --> 00:33:11,400
Speaker 1: began in nineteen eighty one, it felt like bonds were

588
00:33:11,400 --> 00:33:15,080
Speaker 1: expensive throughout the whole twenty tens. What made you finally

589
00:33:15,080 --> 00:33:17,880
Speaker 1: cry our uncle in twenty nineteen and say, all right,

590
00:33:17,960 --> 00:33:21,440
Speaker 1: no muss. Well, first of all, I'm gonna somewhat disappoint

591
00:33:21,440 --> 00:33:24,280
Speaker 1: you saying we do not take very big bets on

592
00:33:24,440 --> 00:33:30,960
Speaker 1: views like timing asset classes based on valuation. Auntie Ellman

593
00:33:31,000 --> 00:33:34,680
Speaker 1: and I wrote a paper I forget the exact title.

594
00:33:34,720 --> 00:33:36,880
Speaker 1: I think one of them was called sin a Little,

595
00:33:37,560 --> 00:33:40,720
Speaker 1: where we say timing the market and this applies to

596
00:33:40,760 --> 00:33:42,600
Speaker 1: the bond market as well as the stock market. Is

597
00:33:42,640 --> 00:33:46,840
Speaker 1: an investing sin, and ultimately we recommend you sin occasionally

598
00:33:46,880 --> 00:33:50,280
Speaker 1: and a little. Not that I've done all my homework,

599
00:33:50,360 --> 00:33:55,120
Speaker 1: but that was November seven, twenty nineteen. It's time to sin. Well,

600
00:33:55,160 --> 00:33:59,160
Speaker 1: I've researched it recently, and you wrote it three years ago.

601
00:33:59,520 --> 00:34:01,920
Speaker 1: I'm actually bad at keeping the catalog of my own work.

602
00:34:02,000 --> 00:34:03,760
Speaker 1: There's there's a lot going on here. The one year

603
00:34:03,840 --> 00:34:08,400
Speaker 1: referring to was about value timing, and it's really the

604
00:34:08,480 --> 00:34:13,000
Speaker 1: same concept. We do believe that when that if you

605
00:34:13,080 --> 00:34:17,200
Speaker 1: systematically follow a legit, meaning you're not forward looking, you're

606
00:34:17,200 --> 00:34:20,720
Speaker 1: only looking at backward data. Try to time the stock market,

607
00:34:20,719 --> 00:34:25,360
Speaker 1: the bond market, or even value based on how cheaper

608
00:34:25,480 --> 00:34:29,239
Speaker 1: rich it looks. They usually have very very modest positive

609
00:34:29,880 --> 00:34:32,239
Speaker 1: long term risk adjustive returns. As you said, you can

610
00:34:32,280 --> 00:34:36,359
Speaker 1: go through long, long periods where they're overvalued and get

611
00:34:36,400 --> 00:34:43,719
Speaker 1: more overvalued. Um. We do use valuation in concert with

612
00:34:43,880 --> 00:34:48,080
Speaker 1: things like momentum and profitability and things where where now

613
00:34:48,120 --> 00:34:50,640
Speaker 1: it starts to be better because it's negatively correlated to

614
00:34:50,680 --> 00:34:55,200
Speaker 1: those and all else equal. If you have momentum and

615
00:34:55,280 --> 00:34:59,040
Speaker 1: you're not overvalued, it may be better right if you

616
00:34:59,160 --> 00:35:02,320
Speaker 1: if you're using the momentum, how much does timing really matters?

617
00:35:03,400 --> 00:35:06,600
Speaker 1: It's in there with more um um that piece on

618
00:35:06,719 --> 00:35:10,400
Speaker 1: bonds being freaking expensive um, which is going to eventually

619
00:35:10,400 --> 00:35:13,680
Speaker 1: be a technical term. I'm gonna push it that I

620
00:35:14,160 --> 00:35:17,440
Speaker 1: stressed in there. I don't know how to time this um.

621
00:35:17,480 --> 00:35:20,600
Speaker 1: This is a five to ten year view. I know.

622
00:35:21,080 --> 00:35:25,200
Speaker 1: I tried various methods of looking at bonds. This was

623
00:35:25,239 --> 00:35:27,360
Speaker 1: well before the yield back up and well before the

624
00:35:27,360 --> 00:35:32,960
Speaker 1: inflation spike. UM. Compared to any forecast or trailing version

625
00:35:33,000 --> 00:35:36,600
Speaker 1: of inflation, and doing that consistently through time, bonds were

626
00:35:36,600 --> 00:35:40,480
Speaker 1: about tied with giving you the least they've ever given

627
00:35:40,480 --> 00:35:45,799
Speaker 1: you and tied for worst is I think expensive. How

628
00:35:45,880 --> 00:35:48,600
Speaker 1: someone reflects that if they are taking a long horizon,

629
00:35:49,320 --> 00:35:51,560
Speaker 1: now we can get into the tina there is no

630
00:35:51,600 --> 00:35:56,080
Speaker 1: alternative equities didn't look great either. UM. I think a

631
00:35:56,200 --> 00:35:58,600
Speaker 1: lot of why we publish these long term forecasts, and

632
00:35:58,680 --> 00:36:01,120
Speaker 1: my colleague at the Eelman and is really the master

633
00:36:01,200 --> 00:36:04,120
Speaker 1: of this is both we're interested in it and our

634
00:36:04,200 --> 00:36:07,600
Speaker 1: clients really seem to value it, but we don't trade

635
00:36:07,640 --> 00:36:09,960
Speaker 1: on a ten year forecast. UM. Let me give you

636
00:36:09,960 --> 00:36:12,520
Speaker 1: an example, a ten year forecast. Let's say you have

637
00:36:12,680 --> 00:36:15,160
Speaker 1: value has power, and that's even disputable, but we believe

638
00:36:15,200 --> 00:36:17,480
Speaker 1: it does. To tell you, is this going to be

639
00:36:17,480 --> 00:36:19,800
Speaker 1: a better or worse than normal ten years going forward?

640
00:36:20,560 --> 00:36:24,120
Speaker 1: Very often the answer will be we predict positive returns,

641
00:36:24,160 --> 00:36:27,239
Speaker 1: but considerably less than history. Okay, what do you do?

642
00:36:27,320 --> 00:36:30,120
Speaker 1: Are you just hedging or is that a that's genuinely

643
00:36:30,200 --> 00:36:32,520
Speaker 1: often a prediction from a from a model, sort of

644
00:36:32,560 --> 00:36:34,319
Speaker 1: like the forty percent number? What are the odds of

645
00:36:34,320 --> 00:36:37,080
Speaker 1: this happening? You can't be wrong when you say, yeah,

646
00:36:37,080 --> 00:36:39,879
Speaker 1: this stuff is always wishy washy. You know, Statisticians never

647
00:36:39,960 --> 00:36:42,360
Speaker 1: say we know this. They say the chance we're wrong

648
00:36:42,800 --> 00:36:48,120
Speaker 1: is small, but it's also intellectually accurate. You don't ever

649
00:36:48,200 --> 00:36:50,840
Speaker 1: know something, But imagine you have a forecast. Stocks usually

650
00:36:50,880 --> 00:36:53,920
Speaker 1: make ten percent a year, and don't hold in any

651
00:36:53,960 --> 00:36:56,360
Speaker 1: of these numbers. We think they're gonna make five percent

652
00:36:56,360 --> 00:36:59,880
Speaker 1: a year, but not negative. You know what someone is

653
00:37:00,160 --> 00:37:03,360
Speaker 1: who shorts for the next ten years or underweights against

654
00:37:03,520 --> 00:37:06,480
Speaker 1: a benchmark. You know what happens if you short a

655
00:37:06,560 --> 00:37:11,080
Speaker 1: positive but smaller than historical return, If you lose less

656
00:37:11,080 --> 00:37:13,080
Speaker 1: than you would over history, and you get to go

657
00:37:13,120 --> 00:37:15,880
Speaker 1: to your client after ten years, well, I lost your

658
00:37:15,880 --> 00:37:17,640
Speaker 1: money for a decade, but the good news is I

659
00:37:17,680 --> 00:37:20,000
Speaker 1: lost you less than I would have used lost over

660
00:37:20,040 --> 00:37:23,799
Speaker 1: the average decade. And it's a good example where forecasting

661
00:37:23,840 --> 00:37:26,400
Speaker 1: the ten year period can be interesting and can be vital,

662
00:37:26,760 --> 00:37:29,680
Speaker 1: right if you're anywhere from an individual to a pension fund,

663
00:37:30,200 --> 00:37:32,920
Speaker 1: saying how much do I have to save to retire?

664
00:37:33,520 --> 00:37:35,759
Speaker 1: What you're going to earn on that money is an

665
00:37:35,800 --> 00:37:40,520
Speaker 1: important number, but it's not necessarily a timing actionable number.

666
00:37:40,680 --> 00:37:43,560
Speaker 1: For years, my dad it wasn't spreadsheet. It was a

667
00:37:43,600 --> 00:37:46,279
Speaker 1: little piece of paper, and it was probably calculated all wrong,

668
00:37:46,320 --> 00:37:48,240
Speaker 1: because I believe it or not, my dad was a enumerate.

669
00:37:48,840 --> 00:37:50,879
Speaker 1: My mom was a math teacher, So okay, I got

670
00:37:50,880 --> 00:37:52,759
Speaker 1: it from somewhere. But he had that little sheet what

671
00:37:52,760 --> 00:37:55,120
Speaker 1: do I need to retire? Which I think everyone has

672
00:37:55,160 --> 00:37:58,839
Speaker 1: in some extent, including institutions. So we think that number

673
00:37:58,880 --> 00:38:02,800
Speaker 1: is really important. But I do not recommend trading on

674
00:38:02,960 --> 00:38:08,640
Speaker 1: just valuation, except that sin a little. When things get

675
00:38:09,320 --> 00:38:12,319
Speaker 1: I like to joke to one hundred twentieth percentile um.

676
00:38:12,600 --> 00:38:14,200
Speaker 1: The joke, of course, is there's no such thing as

677
00:38:14,200 --> 00:38:18,320
Speaker 1: one hundred twenty is beyond our lifetime experience. It's yeah,

678
00:38:18,520 --> 00:38:21,319
Speaker 1: it's beyond anything we've seen before. It would have been

679
00:38:21,680 --> 00:38:24,200
Speaker 1: twenty percent above the prior one hundred percentile. It's the

680
00:38:24,200 --> 00:38:27,880
Speaker 1: new hundred percentile. And we've really tried hard and we

681
00:38:27,920 --> 00:38:31,319
Speaker 1: can't find any rational reason for it. A small move.

682
00:38:31,520 --> 00:38:33,520
Speaker 1: Don't be a hero, because again, these things can get

683
00:38:33,560 --> 00:38:36,840
Speaker 1: crazier and crazier. That's the sin a little. We recommend

684
00:38:36,880 --> 00:38:39,920
Speaker 1: sinning a little, and occasionally I recommend that burying your

685
00:38:39,920 --> 00:38:42,759
Speaker 1: personal life also in a very different context. You can

686
00:38:42,800 --> 00:38:47,680
Speaker 1: apply that anyway you would like. UM. And so at

687
00:38:47,719 --> 00:38:51,040
Speaker 1: that point in twenty nineteen with bonds, I think we

688
00:38:51,040 --> 00:38:53,240
Speaker 1: would have told people we probably own a drop less

689
00:38:53,760 --> 00:38:57,040
Speaker 1: than normal on a really long horizon. But mostly we're

690
00:38:57,080 --> 00:39:02,719
Speaker 1: telling people, assume you're gonna make less now the late

691
00:39:02,719 --> 00:39:07,040
Speaker 1: twenty nineteen, UM, it's time for a sin I think

692
00:39:07,040 --> 00:39:08,680
Speaker 1: it was. I think I tried to use is it?

693
00:39:08,760 --> 00:39:12,920
Speaker 1: Is it pronounced vineal or venal? A mild sin um?

694
00:39:13,160 --> 00:39:15,400
Speaker 1: You got you got two Jews here, we need a

695
00:39:15,440 --> 00:39:20,040
Speaker 1: Catholic um. The what I basically said, it's time for

696
00:39:20,480 --> 00:39:24,040
Speaker 1: I'm gonna say vineal value sin a veneal value timing

697
00:39:24,080 --> 00:39:26,960
Speaker 1: sin um. And I was looking at the spread between

698
00:39:27,040 --> 00:39:30,400
Speaker 1: cheap and expensive. What we I want to say we

699
00:39:30,480 --> 00:39:33,080
Speaker 1: created this that is probably false. You never know who

700
00:39:33,080 --> 00:39:36,520
Speaker 1: created things privately and didn't share them. We were the

701
00:39:36,560 --> 00:39:39,439
Speaker 1: first to publish on this, UH, and it was back

702
00:39:39,440 --> 00:39:41,080
Speaker 1: in the tech bubble. This is a twenty four year

703
00:39:41,120 --> 00:39:44,839
Speaker 1: old result from nineteen ninety nine, very similar period to

704
00:39:45,120 --> 00:39:49,560
Speaker 1: particularly nineteen and twenty value killed we think irrationally, so

705
00:39:49,600 --> 00:39:52,800
Speaker 1: the other parts of the process don't help extremely painful

706
00:39:53,160 --> 00:39:57,359
Speaker 1: huge recovery UH afterwards, but during the teeth of the pain,

707
00:39:58,000 --> 00:40:01,000
Speaker 1: we wanted a measure of how dream it is. And

708
00:40:01,080 --> 00:40:04,000
Speaker 1: you can't always just look at returns. Returns tell you

709
00:40:04,040 --> 00:40:07,200
Speaker 1: the pain you're in. But if those returns were say,

710
00:40:07,320 --> 00:40:11,560
Speaker 1: justified by massive you know, earnings growth, right, if your

711
00:40:11,560 --> 00:40:15,680
Speaker 1: earnings double, your pee stays the same and your return

712
00:40:16,640 --> 00:40:18,799
Speaker 1: and that didn't make you more expensive. If it just

713
00:40:18,840 --> 00:40:21,800
Speaker 1: was a great result, and some of that can always

714
00:40:21,800 --> 00:40:24,000
Speaker 1: be in there, so you want to be prospective. So

715
00:40:24,040 --> 00:40:27,480
Speaker 1: we built this measure that's very simple. All the academic

716
00:40:27,560 --> 00:40:30,320
Speaker 1: and implied work that was published at the time sordid

717
00:40:30,360 --> 00:40:34,799
Speaker 1: stocks on valuation measures generally went long or overweight the cheap,

718
00:40:34,840 --> 00:40:38,800
Speaker 1: and shorter or underweight the expensive, and really never addressed

719
00:40:38,880 --> 00:40:41,880
Speaker 1: how cheap and how expensive you always get a spread.

720
00:40:42,320 --> 00:40:45,279
Speaker 1: I'm fond of saying otherwise your spreadsheet is broken or

721
00:40:45,320 --> 00:40:48,240
Speaker 1: every stock is coincidentally selling for the same price to sales.

722
00:40:49,000 --> 00:40:52,959
Speaker 1: But sometimes that spread is huge, and sometimes it's very tight,

723
00:40:53,040 --> 00:40:56,200
Speaker 1: and it does correspond to times that would intuitively strike

724
00:40:56,280 --> 00:41:02,960
Speaker 1: you as frothy spread. The more attractive the valuation, the

725
00:41:03,080 --> 00:41:06,239
Speaker 1: lower value the value stocks versus the growth. Value looks

726
00:41:06,280 --> 00:41:09,560
Speaker 1: better versus growth on a three to five year horizon.

727
00:41:09,640 --> 00:41:12,920
Speaker 1: It's also not pure. Value is never a great timing tool.

728
00:41:13,200 --> 00:41:15,240
Speaker 1: I think you do put yourself on the right side

729
00:41:15,239 --> 00:41:19,640
Speaker 1: of so called catalysts. When valuations are that extreme, bad

730
00:41:19,719 --> 00:41:22,320
Speaker 1: catalyst for you will hurt a little, and good catalysts

731
00:41:22,320 --> 00:41:25,640
Speaker 1: will help a lot. But but but it's still I

732
00:41:25,680 --> 00:41:28,920
Speaker 1: wrote this in late twenty nineteen because spreads were approaching

733
00:41:28,920 --> 00:41:32,320
Speaker 1: something I never thought i'd see again. They were approaching

734
00:41:32,360 --> 00:41:35,920
Speaker 1: the tech bubble peaks. Really, that's shocking. In ninety nine

735
00:41:36,000 --> 00:41:39,920
Speaker 1: before the what do we have off the pandemic lows

736
00:41:39,920 --> 00:41:42,359
Speaker 1: the sixty eight percent gain in the SMP, and then

737
00:41:42,360 --> 00:41:44,680
Speaker 1: the next year another twenty eight percent on top of that.

738
00:41:45,000 --> 00:41:49,879
Speaker 1: So this is late. This is the late we were

739
00:41:49,960 --> 00:41:52,640
Speaker 1: not there yet. And I'm talking about the spread between

740
00:41:52,719 --> 00:41:56,640
Speaker 1: cheap and expensive, not not the whole market. The entire

741
00:41:56,680 --> 00:41:58,640
Speaker 1: market if you like a Schiller cape or something was

742
00:41:58,760 --> 00:42:01,799
Speaker 1: much worse in nine nine two hit about forty five,

743
00:42:02,200 --> 00:42:04,600
Speaker 1: where it hit the low to mid thirties at the

744
00:42:04,640 --> 00:42:12,879
Speaker 1: peak in two thousand. Same way, the indicator that when

745
00:42:12,880 --> 00:42:16,160
Speaker 1: the schillcape is very high, the pe is very high,

746
00:42:16,200 --> 00:42:18,840
Speaker 1: the ten year perspective returns are low. We don't actually

747
00:42:18,880 --> 00:42:21,359
Speaker 1: go short something because of the schillarcape. It seems like

748
00:42:21,400 --> 00:42:24,080
Speaker 1: it's been on the high side for decades. Yeah, that's

749
00:42:24,120 --> 00:42:25,839
Speaker 1: one of the main ones Auntie and I look at

750
00:42:25,920 --> 00:42:28,680
Speaker 1: and saying, it's pretty hard to make your money actively

751
00:42:28,719 --> 00:42:32,479
Speaker 1: timing based on only the schillar cape. It is much

752
00:42:32,520 --> 00:42:38,200
Speaker 1: more reasonable to have a valuable ten year modification to

753
00:42:38,280 --> 00:42:42,520
Speaker 1: historical norms because the shillocape is high or low. But

754
00:42:42,640 --> 00:42:44,800
Speaker 1: in late twenty nineteen I wrote this, It's time for

755
00:42:44,840 --> 00:42:48,720
Speaker 1: a veneal value timing sin. I wrote that I'm ignoring

756
00:42:48,840 --> 00:42:52,759
Speaker 1: momentum or trend here um, which is against a lot

757
00:42:52,800 --> 00:42:57,279
Speaker 1: of our philosophy, and and largely because I thought this

758
00:42:57,440 --> 00:43:02,160
Speaker 1: was epically crazy and it could come back very very quickly,

759
00:43:02,280 --> 00:43:05,360
Speaker 1: just because on average, trend and momentum work on average.

760
00:43:05,920 --> 00:43:07,480
Speaker 1: You want to be able to do something that works

761
00:43:07,520 --> 00:43:09,960
Speaker 1: on average many many times. You only had one shot

762
00:43:09,960 --> 00:43:12,640
Speaker 1: at this, right If this came back in a three

763
00:43:12,760 --> 00:43:16,000
Speaker 1: month melt up for value stocks, you could miss a

764
00:43:16,000 --> 00:43:17,440
Speaker 1: lot of it if you if you didn't do this,

765
00:43:17,880 --> 00:43:20,239
Speaker 1: um so, And it turned out if I'd listened to

766
00:43:20,239 --> 00:43:23,319
Speaker 1: trend plus value it has worked out well for us.

767
00:43:23,320 --> 00:43:25,040
Speaker 1: It would have been even a little better. So there's

768
00:43:25,040 --> 00:43:27,000
Speaker 1: a little bit of a moral story. I give you

769
00:43:27,080 --> 00:43:29,879
Speaker 1: my faults as well as my but I wrote this thing,

770
00:43:30,280 --> 00:43:32,879
Speaker 1: and then about I don't know four or five months later,

771
00:43:33,080 --> 00:43:35,239
Speaker 1: I wrote a follow up piece saying, no sin has

772
00:43:35,280 --> 00:43:40,560
Speaker 1: ever been punished this violently and this quickly. I will

773
00:43:40,640 --> 00:43:43,200
Speaker 1: make an excuse, but I think as excuses go, it's

774
00:43:43,200 --> 00:43:47,000
Speaker 1: one of the better ones. It's called covid. Um certainly

775
00:43:47,640 --> 00:43:51,000
Speaker 1: that was not in my predictive power. Um Also, I

776
00:43:51,040 --> 00:43:55,960
Speaker 1: think the market reacted ex posts certainly crazy to covid Basically,

777
00:43:56,000 --> 00:43:59,160
Speaker 1: you remember, all you needed to own was Peloton and Tesla,

778
00:43:59,320 --> 00:44:02,319
Speaker 1: and values were going to cease to exist in the lockdown. Well,

779
00:44:02,360 --> 00:44:05,160
Speaker 1: Tesla started running up in anticipation of being added to

780
00:44:05,200 --> 00:44:10,760
Speaker 1: the S and P before just really went next The

781
00:44:10,840 --> 00:44:13,400
Speaker 1: value as we are almost anyone else measures it was

782
00:44:13,560 --> 00:44:17,960
Speaker 1: destroyed over the first six months of COVID, and it

783
00:44:18,000 --> 00:44:21,680
Speaker 1: turned out not to even be directionally true. The value

784
00:44:21,680 --> 00:44:25,839
Speaker 1: stocks fundamentals, what I call them executing outside of what

785
00:44:25,880 --> 00:44:30,080
Speaker 1: the market cares about, just executing their companies was actually strong,

786
00:44:30,880 --> 00:44:34,360
Speaker 1: even including the pandemic, so the fear did not materialize.

787
00:44:34,360 --> 00:44:37,719
Speaker 1: We thought those spreads got crazy, but they as approached

788
00:44:37,800 --> 00:44:41,279
Speaker 1: as opposed to approaching tech bubble highs. Never thought i'd

789
00:44:41,280 --> 00:44:43,520
Speaker 1: see in my career again after the tech bubble. Admit

790
00:44:43,600 --> 00:44:47,080
Speaker 1: I got that wrong. They blew past it, well passed

791
00:44:47,160 --> 00:44:50,200
Speaker 1: it when COVID hit, and we stuck to our guns

792
00:44:50,200 --> 00:44:53,080
Speaker 1: and even added to that tilt a bit. We tried

793
00:44:54,560 --> 00:44:58,719
Speaker 1: basically any explanation that someone from the outside, a strategist,

794
00:44:58,719 --> 00:45:01,880
Speaker 1: a pun did, a client, consultant, or internal that we

795
00:45:01,880 --> 00:45:04,200
Speaker 1: could come up with for why we might be wrong.

796
00:45:04,800 --> 00:45:07,160
Speaker 1: You know, the way I think of these is, you've

797
00:45:07,200 --> 00:45:09,239
Speaker 1: got to keep a really open mind, consider why you

798
00:45:09,360 --> 00:45:13,239
Speaker 1: might be wrong, test that story, and if at the

799
00:45:13,360 --> 00:45:17,080
Speaker 1: end of the day, there's something that's unprecedentedly crazy looking

800
00:45:17,920 --> 00:45:21,839
Speaker 1: and you have after keeping that open mind rejected those

801
00:45:21,880 --> 00:45:25,839
Speaker 1: stories for then you got to plant both feet and

802
00:45:25,840 --> 00:45:29,600
Speaker 1: say I will not be moved. And I think we've

803
00:45:29,640 --> 00:45:33,160
Speaker 1: gotten pretty good at that over time. I never wanted

804
00:45:33,160 --> 00:45:36,560
Speaker 1: that one thing you asked earlier about investment philosophy changing,

805
00:45:36,600 --> 00:45:40,120
Speaker 1: and we went off in twenty other fun tangents. One

806
00:45:40,280 --> 00:45:43,600
Speaker 1: major way my investment philosophy has changed is at the

807
00:45:43,600 --> 00:45:46,080
Speaker 1: beginning of my career thirty years ago. Really, if you

808
00:45:46,120 --> 00:45:49,000
Speaker 1: go back to the Goldman days, if you had asked

809
00:45:49,000 --> 00:45:54,640
Speaker 1: me what will make a great investor? Quantitative in my

810
00:45:54,760 --> 00:45:57,120
Speaker 1: sake but in general, I would have probably given you

811
00:45:57,320 --> 00:46:01,520
Speaker 1: an arrogant answer that, oh, just being smarter than other people,

812
00:46:03,160 --> 00:46:05,560
Speaker 1: you know, being smarter than other investors than the market

813
00:46:05,600 --> 00:46:09,440
Speaker 1: as a whole. The arrogant part is the implicit assumption

814
00:46:09,520 --> 00:46:11,840
Speaker 1: that kind of comes along that I'm one of those people.

815
00:46:11,920 --> 00:46:16,200
Speaker 1: At the I still think this is a bold statement.

816
00:46:16,320 --> 00:46:19,680
Speaker 1: Smart is good. I don't think I haven't changed the

817
00:46:19,719 --> 00:46:24,240
Speaker 1: sign on smart, but I now think long term success

818
00:46:24,640 --> 00:46:28,719
Speaker 1: half the battle is after keeping that open mind. You

819
00:46:28,800 --> 00:46:32,640
Speaker 1: can't skip that step. If you decide you're right, having

820
00:46:32,640 --> 00:46:38,520
Speaker 1: an extremely ordinary sticktuitiveness to you is an equal partner

821
00:46:38,600 --> 00:46:41,000
Speaker 1: to being smart, all right, So I'm gonna just edit

822
00:46:41,080 --> 00:46:44,040
Speaker 1: what you just said for a moment because I understand

823
00:46:44,080 --> 00:46:47,080
Speaker 1: exactly what you're saying, but I want to rephrase it.

824
00:46:47,440 --> 00:46:50,600
Speaker 1: So intelligence in the market, those are table stakes. You

825
00:46:50,680 --> 00:46:55,480
Speaker 1: have to assume everybody you're trading with and against is intelligent,

826
00:46:55,520 --> 00:46:58,320
Speaker 1: even if it's not true. You have to assume that

827
00:46:58,320 --> 00:47:00,279
Speaker 1: that's what's on the other side. Hey, I don't know

828
00:47:00,280 --> 00:47:01,680
Speaker 1: who's on the other side of my trade, but I'm

829
00:47:01,680 --> 00:47:04,040
Speaker 1: gonna assume they know at least what I know, if

830
00:47:04,080 --> 00:47:08,719
Speaker 1: not more. What you're also sort of suggesting is you

831
00:47:08,800 --> 00:47:15,000
Speaker 1: have to learn when your high conviction trades become I

832
00:47:15,160 --> 00:47:17,600
Speaker 1: stick to my guns and ride this out, even if

833
00:47:17,640 --> 00:47:21,279
Speaker 1: I'm wrong for a quarter or more or four this

834
00:47:21,320 --> 00:47:25,960
Speaker 1: will eventually work or eleven because I know these numbers precisely.

835
00:47:26,280 --> 00:47:31,600
Speaker 1: Because drawdowns have this amazing subjective. We borrow the term

836
00:47:31,640 --> 00:47:34,280
Speaker 1: from physics time dilation, even though we use it differently,

837
00:47:34,840 --> 00:47:37,200
Speaker 1: where you will look at if you look at a

838
00:47:37,200 --> 00:47:40,120
Speaker 1: back test or even real life returns and you see

839
00:47:40,160 --> 00:47:43,160
Speaker 1: a fairly horrible drawdown, but you know it ends well,

840
00:47:43,760 --> 00:47:45,560
Speaker 1: you look at and go. Of course I'd stick with that.

841
00:47:45,600 --> 00:47:47,680
Speaker 1: It's a great process. Look look at what it delivers

842
00:47:48,040 --> 00:47:51,080
Speaker 1: two three years. As some of these can take. They

843
00:47:51,120 --> 00:47:56,200
Speaker 1: are an eternity. Everyone wants quarterly numbers, which means you've

844
00:47:56,200 --> 00:47:59,319
Speaker 1: gone back to people eleven times, twelve times and said

845
00:47:59,840 --> 00:48:03,160
Speaker 1: we stink again. It becomes a proof statement the world

846
00:48:03,520 --> 00:48:06,839
Speaker 1: and your show is a partial antidote to this. But

847
00:48:06,880 --> 00:48:09,480
Speaker 1: the financial media does a great job of coming up

848
00:48:09,480 --> 00:48:12,440
Speaker 1: with stories why whatever's working is the truth and whoever's

849
00:48:12,480 --> 00:48:18,279
Speaker 1: losing right now? Um, so you're defending yourself. I do

850
00:48:18,360 --> 00:48:20,279
Speaker 1: think we've done a great job of sticking our guns

851
00:48:20,280 --> 00:48:23,000
Speaker 1: at these times. But I do worry that some years

852
00:48:23,000 --> 00:48:25,160
Speaker 1: at the end of my life have been used up.

853
00:48:25,480 --> 00:48:29,800
Speaker 1: What's the quote? There are some days at last decades

854
00:48:29,840 --> 00:48:33,279
Speaker 1: and some decades that well, we talked about children. That's

855
00:48:33,280 --> 00:48:35,520
Speaker 1: an example of decades to go by. In days, draw

856
00:48:35,560 --> 00:48:38,040
Speaker 1: downs are an example of days that go by. Days

857
00:48:39,760 --> 00:48:42,600
Speaker 1: it feels far longer than it really is. And what

858
00:48:42,680 --> 00:48:44,799
Speaker 1: I might call I don't think it's a real term,

859
00:48:44,800 --> 00:48:49,880
Speaker 1: but statistical time. When can you actually say this is wrong? Um,

860
00:48:49,960 --> 00:48:53,279
Speaker 1: it's pain time. When you're in pain, time goes much

861
00:48:53,320 --> 00:48:56,439
Speaker 1: more slowly. Time flies when you're having a good time.

862
00:48:56,560 --> 00:48:58,839
Speaker 1: And this is the inverse and and this is this

863
00:48:58,920 --> 00:49:03,080
Speaker 1: is perhaps self serving, but this raising us a rational

864
00:49:03,760 --> 00:49:07,759
Speaker 1: after being open minded and cynical. Sticktuitiveness to half the

865
00:49:07,800 --> 00:49:11,200
Speaker 1: battle is also why I think some of these things

866
00:49:11,320 --> 00:49:14,960
Speaker 1: last and don't get arbitraged away in a reel as

867
00:49:15,040 --> 00:49:17,640
Speaker 1: late as twenty seventeen, which again was a bad period

868
00:49:17,640 --> 00:49:19,279
Speaker 1: for value but a very good period for us, and

869
00:49:19,440 --> 00:49:23,160
Speaker 1: our firm grew. Most common question I'd get, particularly in

870
00:49:23,160 --> 00:49:27,439
Speaker 1: public forms, would be, and it's an intelligent question, if

871
00:49:27,480 --> 00:49:30,600
Speaker 1: this is as good as it looks like, why is

872
00:49:30,640 --> 00:49:34,000
Speaker 1: in an arbitraged away? And I literally I did not

873
00:49:34,360 --> 00:49:36,640
Speaker 1: expect or want to be as right as I was

874
00:49:36,680 --> 00:49:40,040
Speaker 1: over the following three years. But I would say, particularly

875
00:49:40,080 --> 00:49:42,480
Speaker 1: having lived through the tech bubble, you have no idea

876
00:49:42,520 --> 00:49:45,000
Speaker 1: how hard this can be to stick with. At times

877
00:49:45,040 --> 00:49:48,439
Speaker 1: it is not that easy. It seems easy now over

878
00:49:48,520 --> 00:49:53,359
Speaker 1: full cycles. And I am schizophrenic about this. Half of

879
00:49:53,360 --> 00:49:56,440
Speaker 1: me hates it because these times are hell, but half

880
00:49:56,440 --> 00:50:01,520
Speaker 1: of me realizes that if they didn't exist, right, this

881
00:50:01,719 --> 00:50:03,920
Speaker 1: every value manager on Earth, and it's probably applies to

882
00:50:03,960 --> 00:50:07,160
Speaker 1: non value, but this is people like everyone every discipline

883
00:50:07,160 --> 00:50:10,760
Speaker 1: on Earth in finance. Anyway, I'm gonna I'm gonna steal

884
00:50:10,800 --> 00:50:15,080
Speaker 1: your line. You don't get the full glory of the

885
00:50:15,160 --> 00:50:18,640
Speaker 1: upside without suffering through the out of favorite down. So

886
00:50:19,400 --> 00:50:23,040
Speaker 1: West Gray, someone you and I talked about before we started, Um,

887
00:50:23,960 --> 00:50:27,120
Speaker 1: has a great I think it's West's term. It is

888
00:50:27,840 --> 00:50:30,279
Speaker 1: exactly where you gonna pain no premium. Oh no, I

889
00:50:30,320 --> 00:50:32,920
Speaker 1: was gonna say even God would get five. An active

890
00:50:32,960 --> 00:50:36,960
Speaker 1: manager is a line from Lestina said no pain, no premium. Um.

891
00:50:37,160 --> 00:50:40,399
Speaker 1: I'm not good at I'm good at offering attribution. I'm

892
00:50:40,400 --> 00:50:44,040
Speaker 1: not always good at actetting. But they're both awesome. So um,

893
00:50:44,080 --> 00:50:46,920
Speaker 1: But I do think there's truth to that. My favorite

894
00:50:46,920 --> 00:50:49,040
Speaker 1: story which I'm gonna make you listen to now, Okay,

895
00:50:49,120 --> 00:50:52,560
Speaker 1: this is from the tech bubble. I am probably late

896
00:50:52,640 --> 00:50:55,960
Speaker 1: ninety nine, early two thousand, UM, at home at night

897
00:50:56,040 --> 00:51:00,160
Speaker 1: talking to my new wife, and I'm whining, and and

898
00:51:00,480 --> 00:51:02,919
Speaker 1: worse than whining, I'm cursing up a blue streak about

899
00:51:02,960 --> 00:51:06,399
Speaker 1: how stupid and crazy this world is, none of which

900
00:51:06,440 --> 00:51:08,800
Speaker 1: I can repeat even with the lax or laws today

901
00:51:09,239 --> 00:51:12,000
Speaker 1: on George Carlin, seven words, I still wouldn't go through

902
00:51:12,040 --> 00:51:14,759
Speaker 1: what I was screaming that night. And she said to me,

903
00:51:14,800 --> 00:51:17,640
Speaker 1: she only said one sentence. The rest was implied. She said,

904
00:51:17,880 --> 00:51:20,640
Speaker 1: I thought you make your money because people have some

905
00:51:20,840 --> 00:51:26,759
Speaker 1: behavioral biases and the rest is implied. She's saying, but

906
00:51:27,400 --> 00:51:30,359
Speaker 1: when those biases get really ugly and they make really

907
00:51:30,400 --> 00:51:33,160
Speaker 1: big mistakes, you whine like a stock pick. So wait,

908
00:51:33,200 --> 00:51:36,440
Speaker 1: you're a quant and your wife is a behavioralist. My

909
00:51:36,520 --> 00:51:38,920
Speaker 1: wife has a master's in social work, so I guess,

910
00:51:39,160 --> 00:51:42,920
Speaker 1: I guess behavioralist is accurate. And anyone who's been happily married,

911
00:51:42,920 --> 00:51:44,560
Speaker 1: which I'm going to search, she is and she can

912
00:51:44,600 --> 00:51:48,280
Speaker 1: Rebut if you invite her on to me for for

913
00:51:48,280 --> 00:51:50,960
Speaker 1: for a quarter century, is it has to be a

914
00:51:50,960 --> 00:51:55,359
Speaker 1: bit of a behavioralist. But what we all want, which

915
00:51:55,360 --> 00:51:58,080
Speaker 1: will never get, is a world where there are opportunities.

916
00:51:58,080 --> 00:52:00,600
Speaker 1: We're active investors. We think we make the market a

917
00:52:00,640 --> 00:52:03,040
Speaker 1: more efficient place. We think we make capital markets better.

918
00:52:03,080 --> 00:52:06,399
Speaker 1: That's important for society. But we exist to a large

919
00:52:06,400 --> 00:52:09,319
Speaker 1: extent to take the other side of errors and and

920
00:52:09,320 --> 00:52:12,080
Speaker 1: and correct that. We don't want a world with no errors,

921
00:52:12,120 --> 00:52:14,279
Speaker 1: because there's nothing to do. We want a world with

922
00:52:14,400 --> 00:52:18,400
Speaker 1: there are significant errors. And after Barrier Cliff puts the

923
00:52:18,440 --> 00:52:21,560
Speaker 1: position on eleven minutes later, the market realizes we were

924
00:52:21,640 --> 00:52:24,319
Speaker 1: right and hands us our money. That doesn't work, though,

925
00:52:24,360 --> 00:52:27,200
Speaker 1: And it doesn't work that way, it is almost perfectly

926
00:52:27,239 --> 00:52:30,440
Speaker 1: calibrated to make sure most people can't do it. Um

927
00:52:30,800 --> 00:52:33,399
Speaker 1: I like that phrase it I don't. I wouldn't say

928
00:52:33,440 --> 00:52:38,280
Speaker 1: it's almost perfectly calibrated. The countryside is littered with people.

929
00:52:38,880 --> 00:52:40,319
Speaker 1: By the way, I don't know how much I know

930
00:52:40,400 --> 00:52:43,439
Speaker 1: you spend time on Twitter. We'll talk about that on

931
00:52:43,880 --> 00:52:48,600
Speaker 1: Investment TikTok, which has since shrunk dramatically. I love it.

932
00:52:49,080 --> 00:52:53,360
Speaker 1: I never got on investment well. I access it via Twitter.

933
00:52:53,719 --> 00:52:58,279
Speaker 1: Do you like wrap your stuff on INVESTMENTO? Do you

934
00:52:58,360 --> 00:53:00,600
Speaker 1: ever do? You may put it to a son trimality

935
00:53:00,680 --> 00:53:05,000
Speaker 1: might be more proprible. What I love is so what

936
00:53:05,000 --> 00:53:10,280
Speaker 1: what TikTok calls investing TikTok? I called Dunnan Krueger TikTok.

937
00:53:10,480 --> 00:53:14,120
Speaker 1: And my favorite is the young couple, both good looking

938
00:53:14,160 --> 00:53:18,640
Speaker 1: people who choose the way we The way we make

939
00:53:18,719 --> 00:53:21,560
Speaker 1: money is we only buy stocks that are going up,

940
00:53:21,920 --> 00:53:23,719
Speaker 1: and once they stop going up, we sell them, and

941
00:53:23,719 --> 00:53:27,239
Speaker 1: that's how we subsidize our whole lifestyle. I am not paraphrasing.

942
00:53:27,280 --> 00:53:30,440
Speaker 1: That is like a verbatium quote, as as one of

943
00:53:30,800 --> 00:53:34,880
Speaker 1: jagadician Tipman or the two academics who really deserve prior

944
00:53:34,880 --> 00:53:36,759
Speaker 1: place of momentum. But it's one of the very early

945
00:53:36,800 --> 00:53:39,520
Speaker 1: discoveries of momentum. I always got to give them the

946
00:53:39,520 --> 00:53:42,759
Speaker 1: there's a little truth to what they're saying, but they

947
00:53:42,800 --> 00:53:44,440
Speaker 1: don't do it. Tend to do it in a very

948
00:53:44,440 --> 00:53:50,400
Speaker 1: disciplined way, and very often um individuals and institutions and

949
00:53:50,520 --> 00:53:55,000
Speaker 1: professional investors tend to be what I call momentum investors.

950
00:53:55,040 --> 00:53:58,080
Speaker 1: At a value time horizon, they look at something that's

951
00:53:58,080 --> 00:54:01,880
Speaker 1: been strong for three five years and it's got to

952
00:54:01,960 --> 00:54:04,040
Speaker 1: keep going and at that time arising. You want to

953
00:54:04,080 --> 00:54:08,560
Speaker 1: be a contrarian, not a momentum investor. So I feel obligated,

954
00:54:08,600 --> 00:54:10,640
Speaker 1: as a co author of some of the momentum stuff

955
00:54:10,680 --> 00:54:13,279
Speaker 1: to defend that a little bit. But this is not

956
00:54:13,360 --> 00:54:17,359
Speaker 1: adding up well for these people, I promise. One last

957
00:54:17,400 --> 00:54:20,880
Speaker 1: thing about it. A running joke I've had for years

958
00:54:21,480 --> 00:54:25,880
Speaker 1: is people, in describing this kind of thing often subtly

959
00:54:26,200 --> 00:54:29,680
Speaker 1: use the wrong tents. They talk about buying what has

960
00:54:29,840 --> 00:54:34,440
Speaker 1: been going up, but the implication is it is going up,

961
00:54:34,800 --> 00:54:36,920
Speaker 1: and you just gotta watch your tents. Very easy to

962
00:54:36,960 --> 00:54:39,200
Speaker 1: identify what has going up, and it's part of our process.

963
00:54:39,560 --> 00:54:41,360
Speaker 1: By the way, I would not be a pure momentum

964
00:54:41,360 --> 00:54:44,799
Speaker 1: trader momentum has what the geeks will call a very

965
00:54:44,800 --> 00:54:48,920
Speaker 1: bad left tail. Some famous periods of reversals in market,

966
00:54:48,920 --> 00:54:51,359
Speaker 1: the most famous spring of two thousand and nine when

967
00:54:51,400 --> 00:54:54,480
Speaker 1: we came off the GFC. Yeah, for multi factor it

968
00:54:54,560 --> 00:54:56,960
Speaker 1: was actually enoughing value did well enough that it was

969
00:54:57,040 --> 00:54:59,960
Speaker 1: not particularly but if you were a pure momentum investor,

970
00:55:00,400 --> 00:55:03,160
Speaker 1: that was a very very ugly period. So in another way,

971
00:55:03,200 --> 00:55:07,000
Speaker 1: I think this couple that I've never watched is probably

972
00:55:07,000 --> 00:55:10,160
Speaker 1: getting it wrong. Yeah, to to say the very least,

973
00:55:10,360 --> 00:55:13,719
Speaker 1: So I could talk about your publications forever. There's a

974
00:55:13,880 --> 00:55:16,960
Speaker 1: few that I feel like, why don't I throw three

975
00:55:17,040 --> 00:55:19,239
Speaker 1: or four at you and you tell me which ones

976
00:55:19,280 --> 00:55:22,200
Speaker 1: you want to talk about? Stock options and the lying

977
00:55:22,280 --> 00:55:26,279
Speaker 1: liars who don't want them, stock buybacks, unmitigated good or

978
00:55:26,320 --> 00:55:32,040
Speaker 1: incomprehensible evil. That's a paraphrase. AQR Zone research has disproven

979
00:55:32,080 --> 00:55:36,960
Speaker 1: the size factor and undermined long term investing or for

980
00:55:37,800 --> 00:55:42,680
Speaker 1: what is volatility laundering? Okay, I mean I'm gonna I

981
00:55:42,800 --> 00:55:45,080
Speaker 1: usually lie about this, but I'm gonna try to be

982
00:55:45,200 --> 00:55:48,520
Speaker 1: quick and just go go through them. Stock options and

983
00:55:48,560 --> 00:55:51,080
Speaker 1: the lying liars who don't want to or won't expend

984
00:55:51,080 --> 00:55:53,000
Speaker 1: somebody forget the exact title. It was a player in

985
00:55:53,040 --> 00:55:55,640
Speaker 1: an Al Franken book back in the back in the time.

986
00:55:55,840 --> 00:55:58,600
Speaker 1: I think Rush Limbaugh was the was the was the

987
00:55:58,719 --> 00:56:03,320
Speaker 1: villain in his title. This was particularly post tech bubble.

988
00:56:03,719 --> 00:56:08,719
Speaker 1: There's been this issue forever that stock based compensation, be

989
00:56:08,760 --> 00:56:13,760
Speaker 1: they options or particularly if they're options, are not considered

990
00:56:13,800 --> 00:56:17,800
Speaker 1: an expense of the company. That the paper I wrote,

991
00:56:17,840 --> 00:56:20,320
Speaker 1: does this beat to death. Let's look at the twenty

992
00:56:20,320 --> 00:56:22,480
Speaker 1: two ways you could argue this and why they're all stupid.

993
00:56:23,480 --> 00:56:26,920
Speaker 1: The best argument is the simplest one. These people accept

994
00:56:26,960 --> 00:56:31,560
Speaker 1: a lower salary and want these things. Obviously they're costly

995
00:56:32,000 --> 00:56:35,399
Speaker 1: ultimately to shareholders. What's a little said? And I won't

996
00:56:35,400 --> 00:56:38,760
Speaker 1: go through all the other subtleties. What's a little sad?

997
00:56:38,800 --> 00:56:42,120
Speaker 1: As We kind of won the battle in that current

998
00:56:42,120 --> 00:56:45,279
Speaker 1: accounting standards make you expense stock options, and that was

999
00:56:45,320 --> 00:56:48,240
Speaker 1: a change, but we also lost the battle because plenty

1000
00:56:48,280 --> 00:56:51,439
Speaker 1: of firms, particularly in the tech world, still issue kind

1001
00:56:51,440 --> 00:56:55,600
Speaker 1: of ProForma earnings that don't expense them, and a lot

1002
00:56:55,600 --> 00:56:58,200
Speaker 1: of Wall Street analysts, to their shame, in my opinion,

1003
00:56:58,840 --> 00:57:01,560
Speaker 1: let them get away with it. Use those numbers. They're

1004
00:57:01,600 --> 00:57:06,000
Speaker 1: just not real. Let's go to one of your favorites buybacks, buybacks.

1005
00:57:06,480 --> 00:57:11,720
Speaker 1: You gave this manichean evil or good. My positions, actually,

1006
00:57:11,920 --> 00:57:14,560
Speaker 1: I don't say it mildly, but much more mild than that.

1007
00:57:15,120 --> 00:57:20,040
Speaker 1: My position is they're largely in nothing. They're largely um,

1008
00:57:20,520 --> 00:57:23,480
Speaker 1: very close to a dividend, you can say, and you

1009
00:57:23,520 --> 00:57:25,919
Speaker 1: can argue there are a more tax efficient, more tax

1010
00:57:25,960 --> 00:57:27,760
Speaker 1: efficient dividend. And by the way, I don't take a

1011
00:57:27,840 --> 00:57:29,520
Speaker 1: great stance on how they should be taxed. That's a

1012
00:57:29,600 --> 00:57:32,680
Speaker 1: separate issue. I take a stance on the idea that

1013
00:57:32,800 --> 00:57:35,360
Speaker 1: they're evil. Um. And by the way, that this is

1014
00:57:35,400 --> 00:57:38,320
Speaker 1: one of the fun ones today because it's horseshoe theory.

1015
00:57:38,480 --> 00:57:41,880
Speaker 1: Both the left and the right hate buybacks. Yeah, it's

1016
00:57:41,920 --> 00:57:44,720
Speaker 1: kind of interesting, isn't it. It's just, you know, for

1017
00:57:44,880 --> 00:57:49,280
Speaker 1: different levels of numeracy and paranoia. Um, they think this

1018
00:57:49,440 --> 00:57:52,760
Speaker 1: is just a scam. Again, there could be forty arguments

1019
00:57:52,920 --> 00:57:56,080
Speaker 1: for why buybacks are neutral and are not the evil

1020
00:57:56,160 --> 00:57:59,080
Speaker 1: thing you think. We give you one argument. Sure, in

1021
00:57:59,160 --> 00:58:02,439
Speaker 1: a world where companies do buy backs and other companies don't,

1022
00:58:02,880 --> 00:58:05,560
Speaker 1: the companies that do buy backs tend to perform better

1023
00:58:05,640 --> 00:58:07,840
Speaker 1: than the ones that don't. They that's been a very

1024
00:58:07,960 --> 00:58:10,840
Speaker 1: mild effect. But it has been true, and it's been

1025
00:58:10,880 --> 00:58:13,160
Speaker 1: a relevvely short term. Now is it. Whether it's causation

1026
00:58:13,240 --> 00:58:16,000
Speaker 1: or correlation is a whole nother conversation. If it is causation,

1027
00:58:16,440 --> 00:58:20,360
Speaker 1: the most likely estimate, which is not crazy, as management

1028
00:58:20,440 --> 00:58:23,440
Speaker 1: has more information than you do about about the stock.

1029
00:58:23,840 --> 00:58:26,800
Speaker 1: And by the way, if they, if they, if they

1030
00:58:26,920 --> 00:58:29,640
Speaker 1: do believe the stock is undervalued, and very often this

1031
00:58:29,720 --> 00:58:32,400
Speaker 1: is public information. They're just saying we're really undervalued, right,

1032
00:58:33,320 --> 00:58:37,200
Speaker 1: they should be buying things back. It's voluntary whether you sell,

1033
00:58:37,240 --> 00:58:39,880
Speaker 1: and those who don't choose to sell will benefit from that.

1034
00:58:40,120 --> 00:58:43,160
Speaker 1: So I have no problem with that. It is a

1035
00:58:43,320 --> 00:58:46,640
Speaker 1: relevely small effect. But that's interesting because you make such

1036
00:58:46,760 --> 00:58:49,560
Speaker 1: a I've watched you. You and I have debated it

1037
00:58:49,720 --> 00:58:52,040
Speaker 1: on Twitter. But I've watched you and I'm not so

1038
00:58:52,200 --> 00:58:55,320
Speaker 1: far from your position. But I've watched you demolish people

1039
00:58:55,400 --> 00:58:58,800
Speaker 1: on Twitter as if it's a giant. Hey, this is

1040
00:58:58,880 --> 00:59:02,440
Speaker 1: like the value effect. It's not. It's it's much smaller.

1041
00:59:02,480 --> 00:59:04,560
Speaker 1: If I've done that. That is one of my many

1042
00:59:04,680 --> 00:59:07,240
Speaker 1: Twitter exaggerations. I will not claim that I always keep

1043
00:59:07,280 --> 00:59:11,520
Speaker 1: a calm head on Twitter. Um, but the simplest way

1044
00:59:11,520 --> 00:59:14,360
Speaker 1: to explain it now, let me give you two quick ones.

1045
00:59:14,840 --> 00:59:17,840
Speaker 1: One is most of it is a re allocation or

1046
00:59:17,880 --> 00:59:21,600
Speaker 1: other stocks. When most investors get participate in a buy back,

1047
00:59:21,920 --> 00:59:23,960
Speaker 1: they put it in back in the stock market, run

1048
00:59:24,040 --> 00:59:27,120
Speaker 1: in another stock. It's a diversifier. So you know, a

1049
00:59:27,240 --> 00:59:32,200
Speaker 1: company that has great investment opportunities is seeking more capital

1050
00:59:32,240 --> 00:59:34,919
Speaker 1: and a company that doesn't should be giving capital back.

1051
00:59:35,000 --> 00:59:37,400
Speaker 1: So that's how it's supposed to work. Second is even

1052
00:59:37,560 --> 00:59:41,640
Speaker 1: more basic, and this does not get enough play. The

1053
00:59:41,760 --> 00:59:45,760
Speaker 1: shareholders own earn the money. They own the money. If

1054
00:59:45,800 --> 00:59:48,000
Speaker 1: there's cash on the balance sheet or assets on the

1055
00:59:48,040 --> 00:59:51,760
Speaker 1: balance sheet, the shareholder, it's the shareholders if they choose

1056
00:59:51,880 --> 00:59:54,240
Speaker 1: to move it to There's only one group that's allowed

1057
00:59:54,240 --> 00:59:56,720
Speaker 1: to get upset at them if they choose to move

1058
00:59:56,800 --> 00:59:59,320
Speaker 1: it from the company to their own balance sheet, which

1059
00:59:59,360 --> 01:00:00,960
Speaker 1: is not stealing because they owned it when it was

1060
01:00:01,000 --> 01:00:05,720
Speaker 1: in the company. Right. Bonds, often corporate bonds can have

1061
01:00:05,880 --> 01:00:09,360
Speaker 1: covenants that say you can't lever beyond a certain point,

1062
01:00:09,720 --> 01:00:11,920
Speaker 1: and if buybacks pushed past that point, then there's a

1063
01:00:12,000 --> 01:00:16,880
Speaker 1: legitimate argument, but that's contractual. The bond holders should be

1064
01:00:16,960 --> 01:00:19,040
Speaker 1: a lawsuit that would stop that. I think I think

1065
01:00:19,120 --> 01:00:22,760
Speaker 1: got to be pretty much. I think UM buybacks also

1066
01:00:22,840 --> 01:00:26,360
Speaker 1: get a little demonizes because incorporations do do this UM

1067
01:00:26,640 --> 01:00:30,720
Speaker 1: for some reason I do not understand. They often couple

1068
01:00:30,840 --> 01:00:35,040
Speaker 1: them with the executive stock option grants we talked about before,

1069
01:00:35,800 --> 01:00:37,840
Speaker 1: and I think there is a little subterfuge going on there.

1070
01:00:37,840 --> 01:00:41,640
Speaker 1: They don't want to share account to change a whole lot,

1071
01:00:41,760 --> 01:00:43,800
Speaker 1: and because questions will be asked. I think that's the

1072
01:00:43,880 --> 01:00:47,560
Speaker 1: most valid criticism is, hey, you're really hiding all this

1073
01:00:47,720 --> 01:00:51,000
Speaker 1: exact compensation by doing a expense and it jibes with

1074
01:00:51,160 --> 01:00:54,880
Speaker 1: the lying liars stuff, But it is not the buyback

1075
01:00:54,960 --> 01:00:57,320
Speaker 1: per se that's bad. The buyback is still a neutral.

1076
01:00:57,320 --> 01:01:00,080
Speaker 1: They're paying a market price for the security. So I

1077
01:01:00,120 --> 01:01:03,080
Speaker 1: wish people would be more precise. So largely on buybacks,

1078
01:01:03,520 --> 01:01:06,720
Speaker 1: I think, And again maybe in contrast to some of

1079
01:01:06,840 --> 01:01:10,600
Speaker 1: my more aggressive things I've tweeted on occasion, I want

1080
01:01:10,640 --> 01:01:13,439
Speaker 1: you to find those tweets. Yeah they're I think you've

1081
01:01:13,480 --> 01:01:15,360
Speaker 1: deleted a bunch there. I don't know if they're around

1082
01:01:15,400 --> 01:01:17,360
Speaker 1: where anyone could well. I challenge you to find them,

1083
01:01:17,480 --> 01:01:20,040
Speaker 1: knowing I've deleted them that this is part of my strategy.

1084
01:01:20,960 --> 01:01:24,440
Speaker 1: But it regardless if you look at what we wrote.

1085
01:01:25,160 --> 01:01:27,919
Speaker 1: The derangement we write about is how much people hate

1086
01:01:27,960 --> 01:01:31,320
Speaker 1: them buy back derangement syndrome. Yeah. We titled both a

1087
01:01:32,280 --> 01:01:34,960
Speaker 1: h an academic paper in the journal Portfolio Management and

1088
01:01:35,040 --> 01:01:37,320
Speaker 1: a Wall Street Journal editorial. So you know, from whence

1089
01:01:37,400 --> 01:01:40,880
Speaker 1: the derangement comes? I know, trump arrangement. No well no, no, no,

1090
01:01:42,000 --> 01:01:44,560
Speaker 1: by the way, it used to go back to bushed arrangements. Oh,

1091
01:01:44,600 --> 01:01:46,400
Speaker 1: it's not just trying to remember it from yeah. No,

1092
01:01:46,840 --> 01:01:48,919
Speaker 1: So you know, when you get older, the memory start

1093
01:01:49,080 --> 01:01:51,640
Speaker 1: at some point there was there a Millard Fillmore direction.

1094
01:01:52,400 --> 01:01:54,280
Speaker 1: I'm not that old, I'm not that much older than you.

1095
01:01:54,400 --> 01:01:58,920
Speaker 1: But it's just all of the anecdotal examples that people

1096
01:01:59,320 --> 01:02:04,040
Speaker 1: my two faces. Back in the day, Dell was notorious

1097
01:02:04,160 --> 01:02:07,960
Speaker 1: for top ticking the market when announcing their stock buybacks.

1098
01:02:08,000 --> 01:02:11,680
Speaker 1: But now you have the train derailments and they had

1099
01:02:11,720 --> 01:02:14,800
Speaker 1: a buyback last year, so of course the buyback is

1100
01:02:14,840 --> 01:02:17,400
Speaker 1: the reason why they didn't upgrade their breaks, and that

1101
01:02:17,600 --> 01:02:22,440
Speaker 1: example become it sort of colors everybody's here. You respect them,

1102
01:02:22,560 --> 01:02:27,080
Speaker 1: Medigliani and Miller. Firms should and I'm not saying theories perfect,

1103
01:02:27,200 --> 01:02:30,840
Speaker 1: but as a starting point, firms should pursue all positive

1104
01:02:30,920 --> 01:02:34,520
Speaker 1: net present value projects. And I do think most management tries,

1105
01:02:34,560 --> 01:02:39,200
Speaker 1: I think the short terminism can be exaggerated. So if

1106
01:02:39,240 --> 01:02:42,400
Speaker 1: they need the money they should be investing. They can

1107
01:02:42,520 --> 01:02:44,520
Speaker 1: raise money in debt and a lot a lot of

1108
01:02:44,560 --> 01:02:47,280
Speaker 1: the buybacks, by the way, and you could argue leverage

1109
01:02:47,320 --> 01:02:51,040
Speaker 1: has its own problems. But have been a corporate treasurers

1110
01:02:51,080 --> 01:02:54,640
Speaker 1: thinking that bonds were more overvalued than stocks, so they

1111
01:02:54,680 --> 01:02:58,040
Speaker 1: should buyback stock and sell another arge during the twenty tens,

1112
01:02:58,240 --> 01:03:03,760
Speaker 1: it's very rational to borrow cheap and buy back stock. Yes, essentially,

1113
01:03:04,160 --> 01:03:07,360
Speaker 1: And and that means and we show this in our

1114
01:03:07,480 --> 01:03:09,120
Speaker 1: in our more formal paper, there wasn't room to do

1115
01:03:09,200 --> 01:03:12,000
Speaker 1: it in the Wall Street Journal that investment has really

1116
01:03:12,040 --> 01:03:14,760
Speaker 1: not suffered on net. You can always pick and choose,

1117
01:03:14,800 --> 01:03:17,360
Speaker 1: and in an argument, every side pixes and chooses their

1118
01:03:17,400 --> 01:03:20,040
Speaker 1: favorite examples. This is a company that brought back that

1119
01:03:20,160 --> 01:03:23,360
Speaker 1: then did great and uh and and you know Apple

1120
01:03:23,440 --> 01:03:25,840
Speaker 1: has brought back a ton and sometimes they're criticized for that,

1121
01:03:26,320 --> 01:03:28,920
Speaker 1: and I'm like, it's it's well, it's fairly well, It's

1122
01:03:28,920 --> 01:03:31,720
Speaker 1: worked out fairly well for them. They don't say Buffett.

1123
01:03:31,720 --> 01:03:33,880
Speaker 1: They also have a ridiculous amount of cash. Apple on

1124
01:03:33,960 --> 01:03:36,960
Speaker 1: the book, so it's not like they needed the money.

1125
01:03:37,280 --> 01:03:40,520
Speaker 1: Buffett is a huge defender of of of buybacks, so

1126
01:03:41,080 --> 01:03:44,320
Speaker 1: I think I'm mainly yelling into avoid saying this is

1127
01:03:44,360 --> 01:03:47,520
Speaker 1: just not that big a deal, but it's politically too

1128
01:03:47,600 --> 01:03:51,040
Speaker 1: good for populace of both stripes to yell about to

1129
01:03:51,160 --> 01:03:55,600
Speaker 1: go away. Huh really really interesting. Last week actually I

1130
01:03:55,840 --> 01:04:00,320
Speaker 1: interviewed Maria Vassalu from Goman Sack's Asset Management, who painted

1131
01:04:00,440 --> 01:04:04,400
Speaker 1: out that within the small cap effect really is a

1132
01:04:04,560 --> 01:04:09,919
Speaker 1: microcap effect and if the small cap has effect has disappeared, Well, first,

1133
01:04:10,000 --> 01:04:13,760
Speaker 1: let's let's talk about your research. Was there ever truly

1134
01:04:13,960 --> 01:04:17,120
Speaker 1: a small cap effect? I'll start out saying I don't

1135
01:04:17,240 --> 01:04:19,920
Speaker 1: know if I don't think I've met Maria, but she's right, Um,

1136
01:04:21,440 --> 01:04:24,320
Speaker 1: was there ever? Is the right question. There's a little

1137
01:04:24,360 --> 01:04:28,000
Speaker 1: bit of a of a Keanu Reeves matrix thing going

1138
01:04:28,120 --> 01:04:32,160
Speaker 1: on here. Is there really a spoon red pillars? Yea.

1139
01:04:32,960 --> 01:04:36,840
Speaker 1: Our Our view is there never really was one. Our

1140
01:04:36,920 --> 01:04:38,520
Speaker 1: view is not that there was one and it got

1141
01:04:38,640 --> 01:04:41,160
Speaker 1: arbitraged away, which is a different way to view it.

1142
01:04:41,760 --> 01:04:46,640
Speaker 1: UM essentially or in the early eighties, UM, the original

1143
01:04:46,760 --> 01:04:50,280
Speaker 1: capital asset pricing studies look pretty good. Seemed like beta

1144
01:04:50,400 --> 01:04:54,320
Speaker 1: was rewarded, and that later got revised also um but

1145
01:04:54,480 --> 01:04:57,959
Speaker 1: then hole started appearing in that pure one factor world.

1146
01:04:58,560 --> 01:05:03,880
Speaker 1: The first major one was that even after accounting for beta,

1147
01:05:04,520 --> 01:05:07,960
Speaker 1: small cops caps generally have higher betas they move more.

1148
01:05:08,280 --> 01:05:11,000
Speaker 1: If the market goes up five percent on average, they

1149
01:05:11,080 --> 01:05:14,400
Speaker 1: might go up seven percent as as a group, So

1150
01:05:14,600 --> 01:05:17,640
Speaker 1: you're suggesting it's just a more risk they're they're more

1151
01:05:17,720 --> 01:05:21,560
Speaker 1: volatile as a rule, and beta's composed of correlation and volatility.

1152
01:05:22,200 --> 01:05:24,680
Speaker 1: I think it's more of the volatility than the correlation driving,

1153
01:05:24,720 --> 01:05:28,400
Speaker 1: but they're higher beta. The cap m or all theory

1154
01:05:28,520 --> 01:05:31,520
Speaker 1: says you should make more money if you're higher beta,

1155
01:05:31,720 --> 01:05:35,520
Speaker 1: but not more than that. And the findings were not

1156
01:05:36,760 --> 01:05:39,280
Speaker 1: that small cap makes more money. That's not that interesting.

1157
01:05:40,000 --> 01:05:43,440
Speaker 1: The findings with small cap makes more money than implied

1158
01:05:43,520 --> 01:05:50,600
Speaker 1: by their higher betas, so even more that over years

1159
01:05:50,720 --> 01:05:52,640
Speaker 1: some of the work a lot of the work being ours,

1160
01:05:52,680 --> 01:05:56,280
Speaker 1: but not all of it has been revised. Two big revisions.

1161
01:05:56,480 --> 01:05:58,880
Speaker 1: The second one we really were a big part of

1162
01:05:59,200 --> 01:06:03,440
Speaker 1: the first was simply revisions to the databases. Small cap

1163
01:06:03,520 --> 01:06:09,560
Speaker 1: stocks delist more often than large cap stocks. In any study,

1164
01:06:09,920 --> 01:06:12,080
Speaker 1: you need to make an assumption about what people actually

1165
01:06:12,120 --> 01:06:15,280
Speaker 1: got out of that delisting way. You're suggesting this whole

1166
01:06:15,320 --> 01:06:18,160
Speaker 1: thing is just survivorship bias a little bit though though

1167
01:06:18,240 --> 01:06:22,760
Speaker 1: not you know, with well intentioned people had assumptions for

1168
01:06:23,520 --> 01:06:27,200
Speaker 1: delisting returns. The general consensus, and my expertise does not

1169
01:06:27,320 --> 01:06:31,680
Speaker 1: lie here, but the general consensus is they underestimated the

1170
01:06:31,800 --> 01:06:36,040
Speaker 1: negativity of those delisting returns, all else equal, making small

1171
01:06:36,080 --> 01:06:39,280
Speaker 1: cap a little less attractive because your data has has

1172
01:06:39,320 --> 01:06:44,000
Speaker 1: not accounted for enough. Where we jumped in is again,

1173
01:06:44,120 --> 01:06:46,400
Speaker 1: remember we're not talking about the small beat large. We're

1174
01:06:46,440 --> 01:06:49,840
Speaker 1: talking about does it beat it beyond its beta? Is

1175
01:06:50,960 --> 01:06:53,400
Speaker 1: those betas, and we're not the only ones to do

1176
01:06:53,480 --> 01:06:55,760
Speaker 1: this too. Shoals and Williams looked at it a while ago.

1177
01:06:57,520 --> 01:07:02,560
Speaker 1: Those betas are generally under estimated by conventional techniques. If

1178
01:07:02,640 --> 01:07:05,280
Speaker 1: you do a quant geek's favorite thing, regress the monthly

1179
01:07:05,320 --> 01:07:09,240
Speaker 1: returns on small versus large on the market, you get

1180
01:07:09,360 --> 01:07:13,200
Speaker 1: up beta more than you get a positive beta. Small

1181
01:07:13,640 --> 01:07:15,560
Speaker 1: has a higher beta than large, so if you go

1182
01:07:15,640 --> 01:07:17,680
Speaker 1: long small and short large, you have a positive beta

1183
01:07:18,160 --> 01:07:21,320
Speaker 1: left over. A lot of small doesn't trade every day.

1184
01:07:22,360 --> 01:07:25,720
Speaker 1: If you look over a few months, those betas increase.

1185
01:07:25,760 --> 01:07:28,880
Speaker 1: If you if you do statistical work, we include the

1186
01:07:29,000 --> 01:07:32,480
Speaker 1: response of small not just to this month's cap weighted market,

1187
01:07:32,880 --> 01:07:36,000
Speaker 1: but to the last few. It tends to get into

1188
01:07:36,000 --> 01:07:39,640
Speaker 1: the small cap prices slowly, but that's still real. So

1189
01:07:39,840 --> 01:07:44,800
Speaker 1: we've underestimated their betas. If their betas are underestimated, meaning

1190
01:07:44,840 --> 01:07:47,440
Speaker 1: we thought they were too low, we've overestimated their alphas.

1191
01:07:48,000 --> 01:07:51,600
Speaker 1: Their betas should have been higher. More of their return

1192
01:07:51,640 --> 01:07:54,640
Speaker 1: should be just attributed to the market going up, and

1193
01:07:55,200 --> 01:07:58,960
Speaker 1: it's not. And basically between those two things, there's nothing

1194
01:07:59,040 --> 01:08:01,760
Speaker 1: going on small caps and this is not a bad thing.

1195
01:08:02,240 --> 01:08:05,919
Speaker 1: Small caps need to be priced reasonably efficiently versus large caps.

1196
01:08:06,080 --> 01:08:08,680
Speaker 1: One thing, by the way, that's kind of surprising, given

1197
01:08:09,120 --> 01:08:12,080
Speaker 1: how much more coverage is on the better known big

1198
01:08:12,160 --> 01:08:16,000
Speaker 1: caps and how often these are orphans. Well, I think

1199
01:08:16,040 --> 01:08:19,000
Speaker 1: that does show up in something you anticipated me. I'm

1200
01:08:19,000 --> 01:08:22,639
Speaker 1: about to say, these get confused occasionally. I do think

1201
01:08:22,800 --> 01:08:27,960
Speaker 1: many of the factors anomalies affects that quants and academics

1202
01:08:28,000 --> 01:08:32,400
Speaker 1: believe in value being again, maybe maybe the poster child,

1203
01:08:32,479 --> 01:08:36,080
Speaker 1: but not the only one, do work better among small caps.

1204
01:08:36,680 --> 01:08:42,439
Speaker 1: So long cheap short expensive in small caps and certainly

1205
01:08:42,640 --> 01:08:46,640
Speaker 1: has a higher gross risk adjusted return net, they're more

1206
01:08:46,680 --> 01:08:48,680
Speaker 1: expensive to trade. I still think that's going to be

1207
01:08:48,800 --> 01:08:51,400
Speaker 1: the truth the case net, but it's it's a little

1208
01:08:51,439 --> 01:08:54,920
Speaker 1: more arguable. But I have no problem with someone saying

1209
01:08:54,960 --> 01:08:57,920
Speaker 1: I love small value because I think value probably does

1210
01:08:57,960 --> 01:09:02,160
Speaker 1: work better. That's very small. But the so called small

1211
01:09:02,240 --> 01:09:05,640
Speaker 1: cap effect, it often gets conflated with that. It is

1212
01:09:05,800 --> 01:09:09,799
Speaker 1: not small value. It's that small is better than large

1213
01:09:10,600 --> 01:09:16,080
Speaker 1: and just and that we're finding is no longer. We

1214
01:09:16,160 --> 01:09:18,400
Speaker 1: don't think it's supported, at least if you only adjust

1215
01:09:18,439 --> 01:09:22,880
Speaker 1: for beta. Just to make everyone's head hurt. We have

1216
01:09:23,000 --> 01:09:27,599
Speaker 1: an additional paper showing that using the more modern factors

1217
01:09:27,640 --> 01:09:30,240
Speaker 1: that weren't even around in the eighties when guys like

1218
01:09:30,360 --> 01:09:32,800
Speaker 1: Ralph Bonds and a few others were were looking at

1219
01:09:32,800 --> 01:09:34,679
Speaker 1: the small cap effects, so I can't say they should

1220
01:09:34,720 --> 01:09:39,120
Speaker 1: have used them. Small cap tend to be bad on

1221
01:09:39,280 --> 01:09:44,360
Speaker 1: some of the newer factors betting against beta profitability, they

1222
01:09:44,439 --> 01:09:48,600
Speaker 1: tend to be fairly unprofitable. If you adjust for that,

1223
01:09:48,800 --> 01:09:52,479
Speaker 1: they should do even worse in a modern sense, and

1224
01:09:52,840 --> 01:09:55,600
Speaker 1: ironically you get back to a small cap effect, but

1225
01:09:55,840 --> 01:09:58,280
Speaker 1: only if you adjust for kind of the full penalty

1226
01:09:58,720 --> 01:10:03,560
Speaker 1: of modern factors. Small cap against the market is not

1227
01:10:03,760 --> 01:10:07,479
Speaker 1: a bargain. What about the microcap against the small cap?

1228
01:10:07,600 --> 01:10:11,600
Speaker 1: Why does think to have something well? Again, even including that,

1229
01:10:11,720 --> 01:10:13,719
Speaker 1: I think we see most of the small cap effect

1230
01:10:13,800 --> 01:10:16,360
Speaker 1: go away when you adjust for the delisting again and

1231
01:10:16,520 --> 01:10:19,400
Speaker 1: the and the higher beat is from illiquidity. But whatever,

1232
01:10:19,600 --> 01:10:23,640
Speaker 1: if there's something left, it is disproportionately coming from microcap,

1233
01:10:23,760 --> 01:10:27,000
Speaker 1: that's true. Let's talk a little bit about one of

1234
01:10:27,080 --> 01:10:30,599
Speaker 1: the things we haven't discussed, which is macro, and twenty

1235
01:10:30,680 --> 01:10:33,679
Speaker 1: twenty two was kind of a good year for macro

1236
01:10:33,840 --> 01:10:35,280
Speaker 1: at least if you want on the right side of

1237
01:10:35,360 --> 01:10:42,200
Speaker 1: the trade. Um Why why why was last year so unique? Well,

1238
01:10:42,320 --> 01:10:44,840
Speaker 1: it's it's interesting we haven't talked. We've focused largely on

1239
01:10:44,920 --> 01:10:48,280
Speaker 1: stock selection and value um. A big part of our

1240
01:10:48,320 --> 01:10:52,439
Speaker 1: business is actually macro um. It is I often say,

1241
01:10:52,479 --> 01:10:54,439
Speaker 1: we do less than people think they think we do

1242
01:10:54,520 --> 01:10:56,560
Speaker 1: all these different things, but a lot of what we

1243
01:10:56,640 --> 01:11:00,680
Speaker 1: do in macro and an early inside of ours, when

1244
01:11:00,920 --> 01:11:04,720
Speaker 1: frankly about nineteen ninety five at Goldman Sachs was if

1245
01:11:04,800 --> 01:11:08,080
Speaker 1: you look at the factors again, it was really value,

1246
01:11:08,120 --> 01:11:11,080
Speaker 1: momentum and size at that point and apply them to

1247
01:11:11,200 --> 01:11:13,920
Speaker 1: macro decisions what country to be in, what currency to

1248
01:11:14,040 --> 01:11:18,560
Speaker 1: be in they had similar efficacy. They worked in the

1249
01:11:18,640 --> 01:11:21,519
Speaker 1: statistical sense. I always say statistical sense. If your car

1250
01:11:21,600 --> 01:11:24,439
Speaker 1: work like this, you'd fire your mechanic. Right If your

1251
01:11:24,479 --> 01:11:26,920
Speaker 1: car work six out of ten days, that would be

1252
01:11:26,960 --> 01:11:30,720
Speaker 1: pretty bad, but it's pretty great as a as a strategy.

1253
01:11:31,560 --> 01:11:35,320
Speaker 1: So we've been using value momentum even for market direction.

1254
01:11:35,439 --> 01:11:38,200
Speaker 1: Trend has become an increasingly it's probably the most important

1255
01:11:38,240 --> 01:11:40,920
Speaker 1: part of what we do in the macro side, with

1256
01:11:41,400 --> 01:11:45,880
Speaker 1: economic trends, not just price trends being a releavely recent

1257
01:11:45,920 --> 01:11:52,519
Speaker 1: innovation and super important and last year trend following in particular,

1258
01:11:52,560 --> 01:11:54,280
Speaker 1: which is a subset of macro I will tell you

1259
01:11:54,360 --> 01:11:57,000
Speaker 1: we also run some where we consider relative value and

1260
01:11:57,160 --> 01:12:00,599
Speaker 1: carry and other things, but we run some really focused

1261
01:12:00,640 --> 01:12:05,880
Speaker 1: on both economic and price trend factors um that we've

1262
01:12:05,880 --> 01:12:09,559
Speaker 1: always described as having kind of a dual mandate. Long term,

1263
01:12:09,600 --> 01:12:12,000
Speaker 1: it's supposed to make money. It's not a crazy thing

1264
01:12:12,040 --> 01:12:15,880
Speaker 1: for an investment to do right, but it's supposed to

1265
01:12:16,000 --> 01:12:20,960
Speaker 1: do particularly well in really bad times. This is a

1266
01:12:21,080 --> 01:12:24,920
Speaker 1: managed futures industry, the CTA industry. Trend following has had

1267
01:12:25,000 --> 01:12:29,479
Speaker 1: that property over time, meaning commodities, currencies, anything that you

1268
01:12:29,640 --> 01:12:34,400
Speaker 1: bond with commodities, currencies, equities, bond futures, and we've actually

1269
01:12:34,479 --> 01:12:37,960
Speaker 1: expanded that to what we call a lot of alternative

1270
01:12:38,040 --> 01:12:44,080
Speaker 1: trends UM more esoteric commodities, yield curve shape trades. Even

1271
01:12:44,160 --> 01:12:49,240
Speaker 1: the equity factors themselves, even though we're talking macro show. Yeah,

1272
01:12:49,360 --> 01:12:53,280
Speaker 1: show some tendency to trend, but that dual mandate is

1273
01:12:53,439 --> 01:12:56,599
Speaker 1: a little bit different than most most investments. You would

1274
01:12:56,600 --> 01:12:59,400
Speaker 1: like a low correlation to other things. Um sometimes you

1275
01:12:59,479 --> 01:13:02,200
Speaker 1: accept the medium or high correlation, but it's mostly about

1276
01:13:02,600 --> 01:13:07,280
Speaker 1: the risk adjusted return of the acid itself. Trend following

1277
01:13:07,640 --> 01:13:10,920
Speaker 1: has always, I think forever people are looking for both,

1278
01:13:11,439 --> 01:13:13,960
Speaker 1: and it's not free. You can create a higher risk

1279
01:13:14,000 --> 01:13:16,800
Speaker 1: adjusted return if you don't want to hedge giant draw

1280
01:13:16,880 --> 01:13:19,759
Speaker 1: downs in the equity market, but this combination has always

1281
01:13:19,800 --> 01:13:23,160
Speaker 1: been a nice edition of portfolios and attractive to people.

1282
01:13:23,920 --> 01:13:28,639
Speaker 1: It got very loved after the GFC when it really

1283
01:13:28,680 --> 01:13:30,560
Speaker 1: did what it was supposed to and you had a

1284
01:13:30,640 --> 01:13:34,240
Speaker 1: giant trend that lasted, it felt like forever. Yeah, And

1285
01:13:34,520 --> 01:13:36,960
Speaker 1: I should say trend following is not a panacea. You

1286
01:13:37,120 --> 01:13:40,040
Speaker 1: have bolts from the blue. Neither of these were very

1287
01:13:40,120 --> 01:13:42,760
Speaker 1: bad for trend following, but they weren't. They didn't make it.

1288
01:13:43,000 --> 01:13:45,560
Speaker 1: Didn't make a lot of money either October nineteenth of

1289
01:13:45,680 --> 01:13:49,719
Speaker 1: eighty seven, which saw a small trend start to start

1290
01:13:49,800 --> 01:13:53,639
Speaker 1: in about August, but not that much. And obviously COVID

1291
01:13:54,360 --> 01:13:56,840
Speaker 1: was trend following was not how to protect yourself. There

1292
01:13:56,920 --> 01:13:58,640
Speaker 1: was no trend to follow out of the blue. A

1293
01:13:58,720 --> 01:14:04,120
Speaker 1: pandemic hit exogeneous shocks will do that, but most serious

1294
01:14:04,200 --> 01:14:08,640
Speaker 1: bear markets we've seen aren't a day. They are a

1295
01:14:08,760 --> 01:14:13,200
Speaker 1: few years of pent up crazy or an economic event

1296
01:14:13,280 --> 01:14:14,880
Speaker 1: that leads to a few years the other way. And

1297
01:14:14,920 --> 01:14:20,200
Speaker 1: that's where trend following really shines. The decade after ironically

1298
01:14:20,320 --> 01:14:23,760
Speaker 1: pretty similar to value well not as bad. Trend following

1299
01:14:23,760 --> 01:14:25,599
Speaker 1: simply didn't make a lot of money in the decade

1300
01:14:25,600 --> 01:14:30,080
Speaker 1: after the DFC, unlike value loss money versus growth, value

1301
01:14:30,120 --> 01:14:34,719
Speaker 1: loss versus growth. But still people started to lose interest

1302
01:14:34,800 --> 01:14:37,559
Speaker 1: in it. They got excited after the DFC. And then

1303
01:14:38,280 --> 01:14:40,400
Speaker 1: if there is an insurance like aspect, which I think

1304
01:14:40,439 --> 01:14:43,719
Speaker 1: there is, to trend following ten years of a wild

1305
01:14:43,800 --> 01:14:45,640
Speaker 1: bull market, a lot of people start going why do

1306
01:14:45,720 --> 01:14:48,520
Speaker 1: I need Why have I been wasting this money on insurance?

1307
01:14:48,920 --> 01:14:53,080
Speaker 1: And then last year and not I think it started

1308
01:14:53,120 --> 01:14:55,800
Speaker 1: in parts of twenty twenty one, and it's it's still

1309
01:14:55,840 --> 01:14:59,040
Speaker 1: continuing a little bit this year. But last year was

1310
01:14:59,080 --> 01:15:04,240
Speaker 1: a blowout year for both trend following and UM and

1311
01:15:04,600 --> 01:15:08,240
Speaker 1: even the more general macro investing that considers relative value.

1312
01:15:08,520 --> 01:15:10,920
Speaker 1: And it's exactly the year it's supposed to help him.

1313
01:15:11,640 --> 01:15:17,160
Speaker 1: UM consider a rival insurance strategy. Always owning puts sounds expensive.

1314
01:15:17,479 --> 01:15:19,840
Speaker 1: It is expensive, and sounds like it doesn't work most

1315
01:15:19,880 --> 01:15:21,800
Speaker 1: of the time. I've had huge Twitter fights whit and

1316
01:15:21,840 --> 01:15:24,360
Speaker 1: it seemed to leave about this UM. But like you

1317
01:15:24,479 --> 01:15:28,600
Speaker 1: and Bose Weinstein both seemed to go at him politely

1318
01:15:29,000 --> 01:15:31,479
Speaker 1: about and you both have the shot it out. I

1319
01:15:31,560 --> 01:15:33,839
Speaker 1: did what I would I always do. I started out politely.

1320
01:15:33,880 --> 01:15:37,560
Speaker 1: It didn't necessarily it didn't necessarily end there. And I

1321
01:15:37,600 --> 01:15:40,680
Speaker 1: will say I think it seems absolutely brilliant. He's just

1322
01:15:40,880 --> 01:15:44,760
Speaker 1: also insufferable at times. It's a dangerous combination. You know,

1323
01:15:45,520 --> 01:15:48,360
Speaker 1: I may be less brilliant and less insufferable, but I

1324
01:15:48,439 --> 01:15:50,760
Speaker 1: might have some of the same characteristics, which is a

1325
01:15:50,840 --> 01:15:53,639
Speaker 1: dangerous mix. When you the differences, you bring a certain

1326
01:15:53,680 --> 01:15:57,160
Speaker 1: degree of personal humor and charm. Well, he can perhaps

1327
01:15:57,200 --> 01:16:00,680
Speaker 1: does not make fun of himself that so you know,

1328
01:16:01,080 --> 01:16:04,639
Speaker 1: will you all exist on a continuum and everybody sort

1329
01:16:04,680 --> 01:16:07,920
Speaker 1: of slots in in different places. Absolutely, I find you

1330
01:16:08,160 --> 01:16:13,599
Speaker 1: much more accessible and warm and fuzzy. Listen, his books

1331
01:16:13,640 --> 01:16:16,519
Speaker 1: are groundbreaking. He's no one's going to argue that he's

1332
01:16:16,600 --> 01:16:20,280
Speaker 1: not brilliant. You're more accessible on Twitter than he is.

1333
01:16:20,560 --> 01:16:24,439
Speaker 1: I do try to be um the so a strategy

1334
01:16:24,520 --> 01:16:27,080
Speaker 1: he's been involved with for a long time. That kind

1335
01:16:27,120 --> 01:16:29,599
Speaker 1: of corresponds to his black Swan books. It's a very

1336
01:16:29,600 --> 01:16:32,759
Speaker 1: good book, m's It basically is one liner a giant

1337
01:16:32,800 --> 01:16:36,400
Speaker 1: things happen more often than we quote normal model, normal

1338
01:16:36,479 --> 01:16:39,960
Speaker 1: distributions say. But it's an important message. He got very

1339
01:16:40,080 --> 01:16:43,920
Speaker 1: lucky that he wrote a timeless message about an hour

1340
01:16:43,920 --> 01:16:48,120
Speaker 1: and a half before the GFC. Right, But my colleaguante

1341
01:16:48,160 --> 01:16:50,120
Speaker 1: Elmanan is getting very lucky in that same he wrote

1342
01:16:50,120 --> 01:16:52,200
Speaker 1: a book called Investing in a Low Expected Return of

1343
01:16:52,280 --> 01:16:56,040
Speaker 1: Environment right before twenty twenty two. So you can write

1344
01:16:56,080 --> 01:16:59,599
Speaker 1: something it's absolutely right and correct, but timing luck thirty

1345
01:16:59,680 --> 01:17:02,280
Speaker 1: six and we're almost there. When did that come out? Like,

1346
01:17:03,360 --> 01:17:05,679
Speaker 1: at least one of the book was none. The difference

1347
01:17:05,800 --> 01:17:12,120
Speaker 1: between Auntie and na seems books they're actually real and meaningful,

1348
01:17:12,479 --> 01:17:15,240
Speaker 1: and that book was just nothing but none for pure

1349
01:17:15,280 --> 01:17:17,040
Speaker 1: fun at the end. You can ask me about that again.

1350
01:17:17,160 --> 01:17:21,840
Speaker 1: But the strategy that seemed favors is buying insurance through

1351
01:17:21,840 --> 01:17:25,400
Speaker 1: the options market tests of the simplest form, as my

1352
01:17:25,479 --> 01:17:28,960
Speaker 1: colleague Auntie has done. Say that loses a boatload of money,

1353
01:17:29,000 --> 01:17:33,439
Speaker 1: including its huge victories in crashes. I have no problem

1354
01:17:33,520 --> 01:17:36,639
Speaker 1: with someone liked to seem saying, actually, we we whoever

1355
01:17:36,720 --> 01:17:39,360
Speaker 1: he works with, does this much smarter than pure rolling

1356
01:17:39,360 --> 01:17:42,519
Speaker 1: of puts. It's not equal size every year, A million

1357
01:17:42,680 --> 01:17:44,840
Speaker 1: other ways to spend that. But but he doesn't like

1358
01:17:44,960 --> 01:17:48,600
Speaker 1: the basic finding that Aunty is. He wants both and

1359
01:17:48,880 --> 01:17:51,760
Speaker 1: I won't give him both. Um puts work really well

1360
01:17:51,840 --> 01:17:55,280
Speaker 1: and crashes Yeah right, March of twenty twenty October nineteenth

1361
01:17:55,320 --> 01:18:00,600
Speaker 1: of eighty seven. Huge. Uh. The their their leakages in

1362
01:18:01,040 --> 01:18:03,600
Speaker 1: terms of premium over the long haul that doesn't have

1363
01:18:03,720 --> 01:18:07,880
Speaker 1: crashes is larger than what they make. And there are

1364
01:18:08,000 --> 01:18:11,800
Speaker 1: some bear markets that they failed to help with. They

1365
01:18:11,880 --> 01:18:14,720
Speaker 1: did not particularly help in twenty twenty two. There was

1366
01:18:14,800 --> 01:18:18,360
Speaker 1: no crash quick well, no too slow for the puts

1367
01:18:18,840 --> 01:18:22,120
Speaker 1: um in twenty and then you snapped right, But that

1368
01:18:22,240 --> 01:18:24,680
Speaker 1: was March of twenty twenty I'm sorry now, you're you

1369
01:18:24,800 --> 01:18:27,599
Speaker 1: had it right given your time period. The puts helped

1370
01:18:27,640 --> 01:18:31,280
Speaker 1: like crazy then, and managed futures didn't. In twenty twenty two,

1371
01:18:32,000 --> 01:18:34,559
Speaker 1: managed futures helped like crazy because it was a long

1372
01:18:34,640 --> 01:18:38,400
Speaker 1: slow developed in June, and puts, I don't think, really

1373
01:18:38,439 --> 01:18:41,600
Speaker 1: helped at all. The premiums got very high and there

1374
01:18:41,720 --> 01:18:45,400
Speaker 1: was no big crash, and that's not an environment. If

1375
01:18:45,600 --> 01:18:47,360
Speaker 1: you like puts more than I do, you think the

1376
01:18:47,439 --> 01:18:51,040
Speaker 1: cost is lower. A portfolio of the two as an

1377
01:18:51,080 --> 01:18:53,559
Speaker 1: insurance product could make a lot of sense because they

1378
01:18:54,960 --> 01:18:58,920
Speaker 1: hedge different things. Puts hedge bolt from the blue crashes

1379
01:18:59,600 --> 01:19:03,559
Speaker 1: U and trend following hedges long slow crashes. I will

1380
01:19:03,640 --> 01:19:07,439
Speaker 1: make the self serving claim that long slow crashes are

1381
01:19:08,160 --> 01:19:11,519
Speaker 1: tend to be more deliterious to your wealth long term things.

1382
01:19:11,800 --> 01:19:14,360
Speaker 1: A lot of short term crashes reversed soon afterwards. They're

1383
01:19:14,400 --> 01:19:19,160
Speaker 1: really about surviving. UM, So I will make a small

1384
01:19:19,160 --> 01:19:21,240
Speaker 1: commercial for how we do it. But if someone a

1385
01:19:21,320 --> 01:19:23,439
Speaker 1: little bit more reasonable than the seam wanted to go,

1386
01:19:23,800 --> 01:19:26,160
Speaker 1: all right, it is costly, but it's less costly than

1387
01:19:26,200 --> 01:19:29,080
Speaker 1: you think, and maybe we should combine these two. I'm

1388
01:19:29,280 --> 01:19:33,479
Speaker 1: I'm I'm wide open to that, but in twenty twenty two,

1389
01:19:34,120 --> 01:19:39,599
Speaker 1: and frankly, I don't think you know going forward, I'm mildly.

1390
01:19:39,640 --> 01:19:41,760
Speaker 1: I don't do a lot of timing of our own strategies.

1391
01:19:42,320 --> 01:19:45,639
Speaker 1: I said, it's a sin. Most of what I recommend

1392
01:19:45,760 --> 01:19:49,840
Speaker 1: is always having some allocation to trend following. There'll be long,

1393
01:19:49,960 --> 01:19:53,080
Speaker 1: boring periods where I hopefully won't lose you a ton,

1394
01:19:53,160 --> 01:19:55,800
Speaker 1: but won't make you a ton. That's usually a pretty

1395
01:19:55,800 --> 01:19:58,479
Speaker 1: good time for the rest of your portfolio. Over time,

1396
01:19:58,520 --> 01:20:00,360
Speaker 1: it should add up to a positive, which it has,

1397
01:20:01,120 --> 01:20:03,160
Speaker 1: and it should help a lot in these one two

1398
01:20:03,280 --> 01:20:08,080
Speaker 1: year gigantic events. If I had to time it, I'm

1399
01:20:08,080 --> 01:20:10,320
Speaker 1: a little more bullish than normal. It tends to do

1400
01:20:10,439 --> 01:20:13,080
Speaker 1: better when there's great macro vall when people don't know

1401
01:20:13,160 --> 01:20:16,559
Speaker 1: what's gonna happen. Boring times where nothing is really going

1402
01:20:16,600 --> 01:20:18,600
Speaker 1: on is not your time for puts. And I do

1403
01:20:18,760 --> 01:20:21,000
Speaker 1: think we have you know, I'm a little leery of

1404
01:20:21,040 --> 01:20:23,040
Speaker 1: saying this because I laugh when people are always saying

1405
01:20:23,080 --> 01:20:26,519
Speaker 1: now is special, So it's dangerous to go. We have

1406
01:20:26,600 --> 01:20:29,080
Speaker 1: more uncertainty now than normal, But I do think I'm

1407
01:20:29,120 --> 01:20:31,080
Speaker 1: gonna do it. I do think we have more macro

1408
01:20:31,200 --> 01:20:33,719
Speaker 1: uncertainty now than normal, so I like it a little

1409
01:20:33,800 --> 01:20:36,400
Speaker 1: more than normal. But mostly our argument is, you don't

1410
01:20:36,439 --> 01:20:37,720
Speaker 1: know when this is gonna happen. You don't know if

1411
01:20:37,760 --> 01:20:40,080
Speaker 1: we're gonna have another two years of this, and by

1412
01:20:40,120 --> 01:20:42,120
Speaker 1: the way, if we don't have another two years of disaster,

1413
01:20:42,560 --> 01:20:45,040
Speaker 1: you're pretty happy everywhere else. So let me let me

1414
01:20:45,160 --> 01:20:49,280
Speaker 1: push back on the more uncertainty, okay, because I cringe

1415
01:20:49,320 --> 01:20:51,880
Speaker 1: every time I see someone on TV say that, me too.

1416
01:20:52,520 --> 01:20:54,479
Speaker 1: When I gave you a long caveat that, I feel

1417
01:20:54,560 --> 01:20:57,400
Speaker 1: did it did? But and yet you still went jump right,

1418
01:20:58,760 --> 01:21:01,479
Speaker 1: Which is, you know, when do we ever know what's

1419
01:21:01,479 --> 01:21:02,880
Speaker 1: going to happen in the future, When do we have

1420
01:21:02,920 --> 01:21:07,000
Speaker 1: a high degree of confidence. I take the behavioral side,

1421
01:21:07,080 --> 01:21:10,800
Speaker 1: which is when people are talking about uncertainty, what they're

1422
01:21:10,840 --> 01:21:13,160
Speaker 1: really saying is, hey, we're having a hard time lying

1423
01:21:13,280 --> 01:21:16,200
Speaker 1: to ourselves about how little we know is going to happen,

1424
01:21:16,479 --> 01:21:19,960
Speaker 1: and we're starting to get nervous. So macro val might

1425
01:21:20,040 --> 01:21:23,879
Speaker 1: be the good descriptor for that where you can't pretend

1426
01:21:23,960 --> 01:21:27,920
Speaker 1: you know what's going to happen, because it's so I

1427
01:21:28,080 --> 01:21:30,800
Speaker 1: want to say uncertain, but that's the wrong word. You

1428
01:21:30,960 --> 01:21:34,800
Speaker 1: just lose yourself confidence in knowing what might happen. We're

1429
01:21:34,880 --> 01:21:37,680
Speaker 1: directionally the same, and I did also as part of

1430
01:21:37,720 --> 01:21:42,200
Speaker 1: my caveatside I still wouldn't time this very much. I do,

1431
01:21:42,400 --> 01:21:45,760
Speaker 1: and I admit I want to. I explicitly want to

1432
01:21:45,840 --> 01:21:48,360
Speaker 1: count of the belief that people might think we've missed it.

1433
01:21:49,320 --> 01:21:53,560
Speaker 1: Managed futures is it's one a decade, huge positive. It

1434
01:21:53,640 --> 01:21:56,560
Speaker 1: adds up to good over the whole decade, but it

1435
01:21:56,720 --> 01:22:00,800
Speaker 1: means reverts now. We see no tendency for that real historically. No,

1436
01:22:00,960 --> 01:22:02,760
Speaker 1: it's a trend following strategy. If it starts to get

1437
01:22:02,800 --> 01:22:06,639
Speaker 1: it wrong, it'll switch its mind pretty pretty quickly. Actually,

1438
01:22:07,040 --> 01:22:09,760
Speaker 1: the fundamental trends that we've added in the last five

1439
01:22:09,840 --> 01:22:13,519
Speaker 1: to getting closer to seven or eight years, we think

1440
01:22:13,520 --> 01:22:15,880
Speaker 1: have made the strategy materially better. It's no longer just

1441
01:22:16,040 --> 01:22:18,840
Speaker 1: your grandfather's trend following strategy where you follow a price.

1442
01:22:19,880 --> 01:22:21,839
Speaker 1: We think that always has a role for a portfolio.

1443
01:22:21,840 --> 01:22:24,000
Speaker 1: In a portfolio, we don't know if crazy stuff will

1444
01:22:24,040 --> 01:22:26,960
Speaker 1: continue or we'll go back to normal again. If things

1445
01:22:27,040 --> 01:22:30,040
Speaker 1: do go back to normal, yeah, maybe your managed futures

1446
01:22:30,040 --> 01:22:32,160
Speaker 1: don't help you very much, but everything else goes back

1447
01:22:32,200 --> 01:22:35,360
Speaker 1: to helping you. So we think the case is at

1448
01:22:35,439 --> 01:22:37,400
Speaker 1: least let me just be more mild, at least as

1449
01:22:37,439 --> 01:22:39,519
Speaker 1: strong as it normally is, and we think it's pretty strong.

1450
01:22:40,320 --> 01:22:44,840
Speaker 1: I will back slightly off my sin there of forecasting. So,

1451
01:22:45,360 --> 01:22:49,840
Speaker 1: given the fact that you've been investing now for thirty

1452
01:22:49,880 --> 01:22:53,240
Speaker 1: five years something along those lines in your lifetime, have

1453
01:22:53,400 --> 01:22:57,160
Speaker 1: you ever seen a ten percent spike in inflation or

1454
01:22:57,800 --> 01:23:01,800
Speaker 1: of five percent rise in rates as an investor UM

1455
01:23:02,720 --> 01:23:06,559
Speaker 1: five percent rise in rates over long periods. We've seen them,

1456
01:23:06,600 --> 01:23:10,800
Speaker 1: but not anything like the recent period, and maybe not

1457
01:23:11,000 --> 01:23:13,760
Speaker 1: even it's been a downtrend in rates over my career.

1458
01:23:13,800 --> 01:23:17,320
Speaker 1: I'm trying to do this. I know for a fact

1459
01:23:17,320 --> 01:23:20,640
Speaker 1: because I looked at it recently, that I've not seen uh,

1460
01:23:20,840 --> 01:23:26,000
Speaker 1: you know, five six percent inflation in my career. UM. Now,

1461
01:23:27,680 --> 01:23:29,880
Speaker 1: I do think you know, I'd be happy to share

1462
01:23:29,920 --> 01:23:33,280
Speaker 1: with you. Quants have some disadvantages. There's less we can

1463
01:23:33,360 --> 01:23:36,720
Speaker 1: know about any one individual situation than than than than

1464
01:23:36,800 --> 01:23:39,920
Speaker 1: a than a more discretionary manager. But we do have

1465
01:23:40,040 --> 01:23:44,240
Speaker 1: one advantage. UM. Sometimes they're they're maligned correctly, but sometimes

1466
01:23:44,240 --> 01:23:47,639
Speaker 1: they're over maligned. Back tests can be really helpful because

1467
01:23:48,160 --> 01:23:50,680
Speaker 1: just because I haven't lived through inflationary periods doesn't mean

1468
01:23:50,760 --> 01:23:53,880
Speaker 1: we can't look at inflationary periods and that is a

1469
01:23:53,960 --> 01:23:58,280
Speaker 1: quant advantage. And frankly, with the exception of the trend

1470
01:23:58,360 --> 01:24:01,760
Speaker 1: following strategy, which I think when giant stuff happens it

1471
01:24:01,880 --> 01:24:06,320
Speaker 1: does tend to do better the core stock selection strategies.

1472
01:24:07,000 --> 01:24:09,479
Speaker 1: An Auntie is again I keep quoting Auntie. You should

1473
01:24:09,479 --> 01:24:11,080
Speaker 1: have had him on instead of I did, I know

1474
01:24:11,200 --> 01:24:13,360
Speaker 1: you did? I know you did. Um. But if I'm

1475
01:24:13,400 --> 01:24:14,760
Speaker 1: going to quote them all the time, why not just

1476
01:24:14,880 --> 01:24:18,280
Speaker 1: go go go to him? Um. He has done a

1477
01:24:18,320 --> 01:24:22,160
Speaker 1: lot of our work on showing the environments that factor

1478
01:24:22,240 --> 01:24:25,639
Speaker 1: investing tends to do better or worse in by factor

1479
01:24:25,760 --> 01:24:28,680
Speaker 1: and as a group. This is for stock selection and

1480
01:24:29,479 --> 01:24:31,880
Speaker 1: some things. If you want to make it a tautology, yeah,

1481
01:24:31,920 --> 01:24:35,200
Speaker 1: when the spreads between cheap and expensive go way wider,

1482
01:24:35,640 --> 01:24:40,680
Speaker 1: value does lousy, But that's a tautology. Macro wise, this

1483
01:24:40,920 --> 01:24:44,120
Speaker 1: very little relation, there's very little consistency to it. Um.

1484
01:24:44,240 --> 01:24:47,400
Speaker 1: That's actually I think a good thing. Um. It means

1485
01:24:47,720 --> 01:24:51,560
Speaker 1: if you do this for asset classes, there's obviously correlations.

1486
01:24:51,760 --> 01:24:54,560
Speaker 1: Higher growth and lower inflation is good for stocks and

1487
01:24:54,680 --> 01:24:58,320
Speaker 1: good for bonds. As they mix up, you can get

1488
01:24:58,360 --> 01:25:01,759
Speaker 1: different results. Low growth, low inflation is dynamite for bonds.

1489
01:25:01,800 --> 01:25:03,479
Speaker 1: How it comes out for stocks it's a little bit

1490
01:25:03,560 --> 01:25:07,160
Speaker 1: more iffy. But when it comes to factors, doesn't mean

1491
01:25:07,200 --> 01:25:10,080
Speaker 1: there aren't some big factor events, but they occur in

1492
01:25:10,120 --> 01:25:14,560
Speaker 1: all environments without a great pattern. So again, we do

1493
01:25:14,760 --> 01:25:17,439
Speaker 1: think we're a pretty good diversifier to a lot of

1494
01:25:17,479 --> 01:25:19,360
Speaker 1: the rest of the world that is much more linked

1495
01:25:19,680 --> 01:25:22,760
Speaker 1: to the macro cycle. So when you're looking at back

1496
01:25:22,840 --> 01:25:26,599
Speaker 1: tests and you're heading into twenty one and twenty two,

1497
01:25:27,360 --> 01:25:29,640
Speaker 1: how are you thinking about the risks and do you

1498
01:25:29,760 --> 01:25:33,400
Speaker 1: make changes? Do you just suffer through twenty and twenty

1499
01:25:33,439 --> 01:25:37,400
Speaker 1: one waiting for twenty two, or are you gradually shifting

1500
01:25:37,479 --> 01:25:43,200
Speaker 1: the portfolio mix before you make it to the promised land. Again,

1501
01:25:43,240 --> 01:25:44,840
Speaker 1: you and I have been bouncing back in a great

1502
01:25:44,880 --> 01:25:49,120
Speaker 1: way between quantitative stock selection and the more macro trend following.

1503
01:25:49,120 --> 01:25:52,280
Speaker 1: And the stories aren't precisely the same. I mean, it's

1504
01:25:52,320 --> 01:25:54,880
Speaker 1: the six blind men describing the elephant, and which is

1505
01:25:54,960 --> 01:25:58,559
Speaker 1: my favorite parable, But we're really just talking about different

1506
01:25:58,640 --> 01:26:04,639
Speaker 1: aspects of what takes place in risk market for value. Yeah, well,

1507
01:26:04,880 --> 01:26:10,880
Speaker 1: to be honest, when when it does look unexplainably after that,

1508
01:26:11,040 --> 01:26:13,960
Speaker 1: keeping that open mind attractive and we do that sin

1509
01:26:14,040 --> 01:26:17,680
Speaker 1: a little. We do just wait now, Barry. Of course

1510
01:26:17,720 --> 01:26:20,000
Speaker 1: we didn't sit there in twenty twenty and say we're

1511
01:26:20,040 --> 01:26:22,200
Speaker 1: gonna have to wait, and in fact it by waiting

1512
01:26:22,320 --> 01:26:26,559
Speaker 1: till March twenty twenty two. Mark your can the well.

1513
01:26:26,600 --> 01:26:28,680
Speaker 1: The funny thing is value actually started turning around in

1514
01:26:28,720 --> 01:26:31,960
Speaker 1: late twenty twenty. Everyone calls it twenty twenty two. That

1515
01:26:32,040 --> 01:26:34,840
Speaker 1: value has been coming back since since COVID started to

1516
01:26:35,400 --> 01:26:38,560
Speaker 1: to to well. Once everything got way crazy by the

1517
01:26:38,720 --> 01:26:42,160
Speaker 1: end of twenty It's not. This is a little hindsight bias,

1518
01:26:42,280 --> 01:26:44,920
Speaker 1: but it makes sense for people to Sorry, let's peel

1519
01:26:44,920 --> 01:26:47,680
Speaker 1: a little off here and rotated. No. Absolutely, And but

1520
01:26:47,840 --> 01:26:49,639
Speaker 1: if you go back a couple of years earlier, value

1521
01:26:49,640 --> 01:26:51,600
Speaker 1: spreads were very wide. And yeah, we were saying we

1522
01:26:51,600 --> 01:26:53,760
Speaker 1: don't know when this will turn around, but it will.

1523
01:26:54,040 --> 01:26:57,200
Speaker 1: And importantly on net from here, say you know, one

1524
01:26:57,240 --> 01:26:59,000
Speaker 1: day go up again doesn't really help you. If it's

1525
01:26:59,040 --> 01:27:00,760
Speaker 1: gonna go down more, then it's going to go up

1526
01:27:00,800 --> 01:27:05,040
Speaker 1: in the future. It has to be on net right

1527
01:27:05,360 --> 01:27:08,240
Speaker 1: not this time. Um I won't say I didn't break

1528
01:27:08,280 --> 01:27:12,000
Speaker 1: other things, but that's just between me and whatever strewn

1529
01:27:12,080 --> 01:27:17,400
Speaker 1: around my office. Um So, value on its own. Yeah, well,

1530
01:27:17,680 --> 01:27:21,840
Speaker 1: sometimes we do wait catalysts or famously people look for catalysts.

1531
01:27:22,040 --> 01:27:26,720
Speaker 1: Obviously momentum both price and fundamental. You could you could

1532
01:27:26,760 --> 01:27:28,920
Speaker 1: lump into the catalyst camp. So we do look for

1533
01:27:29,000 --> 01:27:31,400
Speaker 1: some of that, but some of the things when the

1534
01:27:31,600 --> 01:27:34,640
Speaker 1: absolute peak occurs, which is a timing level that I

1535
01:27:34,720 --> 01:27:37,559
Speaker 1: think is beyond any of our ability. Somebody always nails

1536
01:27:37,600 --> 01:27:39,880
Speaker 1: at X post, but I don't think anyone can consistently

1537
01:27:40,320 --> 01:27:42,080
Speaker 1: do that. You look at the peak of the tech

1538
01:27:42,160 --> 01:27:44,560
Speaker 1: bubble in March of two thousand, You look at the

1539
01:27:44,840 --> 01:27:47,679
Speaker 1: peak of the valuation bubble in stocks, which was kind

1540
01:27:47,680 --> 01:27:51,320
Speaker 1: of October of twenty twenty. Why it peaked there not

1541
01:27:51,479 --> 01:27:54,320
Speaker 1: three months earlier or six months later, even with the

1542
01:27:54,360 --> 01:27:57,200
Speaker 1: benefit of hindsight, I don't think we have great stories.

1543
01:27:57,200 --> 01:28:00,240
Speaker 1: I think when things get egregiously valued, the odd get

1544
01:28:00,280 --> 01:28:03,280
Speaker 1: more and more on your side. Again, good catalysts will

1545
01:28:03,360 --> 01:28:05,720
Speaker 1: help you more and bad will help you less. And

1546
01:28:05,880 --> 01:28:07,800
Speaker 1: sometimes our job is to plan our feet and say

1547
01:28:07,840 --> 01:28:11,519
Speaker 1: we will not move now on the macro trend. Following strategy,

1548
01:28:12,160 --> 01:28:16,000
Speaker 1: it was a better timing story. Again, it didn't make

1549
01:28:16,080 --> 01:28:17,840
Speaker 1: money for a long time, but didn't lose a lot,

1550
01:28:18,320 --> 01:28:21,040
Speaker 1: and both from some price trends, but I think even

1551
01:28:21,120 --> 01:28:25,320
Speaker 1: more from fundamental trends. We started to see the fundamental

1552
01:28:25,439 --> 01:28:29,920
Speaker 1: trends that could lead to a more inflationary environment. Again,

1553
01:28:30,000 --> 01:28:32,360
Speaker 1: it's not us sitting around making inflation forecast We're not

1554
01:28:32,439 --> 01:28:37,240
Speaker 1: macro econists. Fundamental trends are things like those actual economists

1555
01:28:37,280 --> 01:28:42,640
Speaker 1: revising up their inflation forecasts. Growth trends are things like

1556
01:28:42,880 --> 01:28:48,000
Speaker 1: GDP surprises aggregated for the whole for the whole world,

1557
01:28:48,040 --> 01:28:50,479
Speaker 1: if you're doing the oil of equities or country by country.

1558
01:28:51,439 --> 01:28:54,439
Speaker 1: Those did a really good job of getting ahead of

1559
01:28:54,600 --> 01:28:58,479
Speaker 1: the inflation that came. So there, I'll say on the

1560
01:28:58,600 --> 01:29:00,400
Speaker 1: value side, I'll say we didn't do it very good

1561
01:29:00,439 --> 01:29:02,200
Speaker 1: job on the catalyst, but we did a really good

1562
01:29:02,280 --> 01:29:04,920
Speaker 1: job on sticking with it and has paid off on

1563
01:29:05,080 --> 01:29:09,120
Speaker 1: the trend following and macro side, i will say, I'll

1564
01:29:09,120 --> 01:29:11,400
Speaker 1: give us higher grades on the catalyst side as to

1565
01:29:11,520 --> 01:29:13,960
Speaker 1: the timing, but that's naturally what it's trying to do

1566
01:29:14,240 --> 01:29:18,680
Speaker 1: right by definition. Really fascinating. So the past couple of

1567
01:29:18,800 --> 01:29:22,120
Speaker 1: years we've seen a huge performance of value over growth.

1568
01:29:22,720 --> 01:29:26,320
Speaker 1: What does that mean looking forward? How much persistency does

1569
01:29:26,560 --> 01:29:32,200
Speaker 1: that value advantage have? Especially following a decade of growth advantage.

1570
01:29:32,400 --> 01:29:38,880
Speaker 1: It's funny it takes a much longer time for excesses

1571
01:29:38,920 --> 01:29:40,760
Speaker 1: to get squeezed out of the market than people think,

1572
01:29:41,200 --> 01:29:42,960
Speaker 1: particularly if you're on the wrong side of it. You're like,

1573
01:29:43,120 --> 01:29:45,080
Speaker 1: if you're a growth stock investor, the last two years,

1574
01:29:45,080 --> 01:29:47,920
Speaker 1: I'm in such pain. This has to be extreme. No,

1575
01:29:48,280 --> 01:29:51,920
Speaker 1: We again, we start with measures that don't look at returns,

1576
01:29:51,960 --> 01:29:54,840
Speaker 1: that look at the actual valuation ratios of stocks. And

1577
01:29:55,240 --> 01:29:58,120
Speaker 1: at the peak of the bubble in twenty twenty, a

1578
01:29:58,200 --> 01:30:01,439
Speaker 1: few months after COVID it by far the widest ever

1579
01:30:01,680 --> 01:30:05,439
Speaker 1: north of the tech bubble after two plus phenomenal years.

1580
01:30:06,680 --> 01:30:08,920
Speaker 1: It is now. The last time I looked which a

1581
01:30:08,960 --> 01:30:11,120
Speaker 1: couple of days ago, it was at the eighty nine percentile,

1582
01:30:11,320 --> 01:30:16,680
Speaker 1: so still wildly Yeah. Also tactically I said, I think

1583
01:30:16,680 --> 01:30:18,840
Speaker 1: I did. I tilted a little too early because I

1584
01:30:18,920 --> 01:30:21,280
Speaker 1: went on just value, not on trend. The trend is

1585
01:30:21,320 --> 01:30:24,280
Speaker 1: now at its back, so we're at you know, nothing

1586
01:30:24,400 --> 01:30:27,240
Speaker 1: is a certainty that can be huge reversals in any

1587
01:30:27,320 --> 01:30:29,840
Speaker 1: trend into room. I don't want to predict the next quarter,

1588
01:30:30,479 --> 01:30:33,400
Speaker 1: but we are still very excited. We're seeing still a

1589
01:30:33,479 --> 01:30:38,280
Speaker 1: mispricing that prior to COVID, I would have considered almost

1590
01:30:38,320 --> 01:30:41,920
Speaker 1: close to tide with the most extreme ever, and we're

1591
01:30:41,920 --> 01:30:44,479
Speaker 1: seeing the wind at it's back. So again I don't

1592
01:30:44,479 --> 01:30:46,840
Speaker 1: want to overpromise. The short term can always make anyone

1593
01:30:46,880 --> 01:30:49,360
Speaker 1: look silly, but on a few year horizon, we are

1594
01:30:49,400 --> 01:30:54,040
Speaker 1: super excited about value. So the Goldman Sachs nonprofitable tech

1595
01:30:54,160 --> 01:30:58,920
Speaker 1: basket and there's another basket of low quality stocks they've

1596
01:30:59,200 --> 01:31:02,600
Speaker 1: crushed it in twenty twenty three. Is this just a

1597
01:31:02,880 --> 01:31:06,360
Speaker 1: dead cat bounce? What does this mean? Is the cycle

1598
01:31:06,520 --> 01:31:10,760
Speaker 1: changing or what's happening in your least favored part of

1599
01:31:10,800 --> 01:31:12,559
Speaker 1: the market. This is going to be a hard one

1600
01:31:12,680 --> 01:31:15,240
Speaker 1: because it's confusing. Yeah, I'll tell you that in advance,

1601
01:31:15,760 --> 01:31:17,720
Speaker 1: but it's it's confusing in a different way. I think

1602
01:31:17,760 --> 01:31:23,280
Speaker 1: even than you're thinking break up what's going on into

1603
01:31:24,000 --> 01:31:29,200
Speaker 1: pure measures of junk no valuation here, low profitability as

1604
01:31:29,240 --> 01:31:32,560
Speaker 1: Goldman does against high profitability, and Goldman's not wrong about that,

1605
01:31:32,640 --> 01:31:36,200
Speaker 1: though not surprisingly the results are right LOWBATA against high

1606
01:31:36,200 --> 01:31:39,040
Speaker 1: beta that we often consider part of quality. All else equal,

1607
01:31:39,360 --> 01:31:41,960
Speaker 1: you'd prefer a low beta. All else is not always equal,

1608
01:31:42,000 --> 01:31:44,080
Speaker 1: but if you can have less vol and less sensitivity,

1609
01:31:44,520 --> 01:31:50,080
Speaker 1: it's a good thing. Profitability choosing more profitable and underweighting

1610
01:31:50,160 --> 01:31:54,560
Speaker 1: or selling low profitable, and beta choosing low beta and

1611
01:31:54,800 --> 01:31:58,560
Speaker 1: underweighting or selling high beta. As a together, as a

1612
01:31:58,600 --> 01:32:01,439
Speaker 1: group and individually have had a really bad start to

1613
01:32:01,960 --> 01:32:04,479
Speaker 1: this year for the exact reasons you're talking about. It

1614
01:32:04,640 --> 01:32:08,280
Speaker 1: has been a junk rally now here. I'm hoping to

1615
01:32:08,360 --> 01:32:10,680
Speaker 1: blow your mind a little bit. Go ahead the way

1616
01:32:10,760 --> 01:32:14,000
Speaker 1: we measure value, and keep in mind everybody does it

1617
01:32:14,040 --> 01:32:16,800
Speaker 1: a little different any You could have ten great people

1618
01:32:16,880 --> 01:32:19,280
Speaker 1: here and they're all going to have their own favorite ways.

1619
01:32:19,640 --> 01:32:21,960
Speaker 1: One thing we do is is since nineteen ninety five

1620
01:32:22,000 --> 01:32:23,880
Speaker 1: when we wrote a paper on this, we don't allow

1621
01:32:24,000 --> 01:32:26,320
Speaker 1: value to take an industry bed. We try to make

1622
01:32:26,360 --> 01:32:29,000
Speaker 1: it apples to apples. Everyone talks about value in terms

1623
01:32:29,040 --> 01:32:32,680
Speaker 1: of like tech versus textiles. You can't fully remove it

1624
01:32:33,040 --> 01:32:35,720
Speaker 1: in a bubble. These are all correlated, but we think

1625
01:32:35,920 --> 01:32:39,360
Speaker 1: value value can be hard to compare. Valuation ratios can

1626
01:32:39,439 --> 01:32:43,160
Speaker 1: mean very different things in different industries. So um, but

1627
01:32:43,479 --> 01:32:47,439
Speaker 1: broadly speaking, are and compliance gets nervous when I talk

1628
01:32:47,439 --> 01:32:50,680
Speaker 1: about performance to the public, but I will tell you

1629
01:32:50,840 --> 01:32:54,439
Speaker 1: value has had a Alane has had a very strong

1630
01:32:54,560 --> 01:32:57,760
Speaker 1: start to this year. Which you would not guess if

1631
01:32:57,800 --> 01:33:00,960
Speaker 1: I told you it's a junk rally. Now they can

1632
01:33:01,000 --> 01:33:04,880
Speaker 1: happen simultaneously and perhaps for different reasons. Now, this is

1633
01:33:04,920 --> 01:33:14,320
Speaker 1: actually much more normal historically when junkier when when profitability

1634
01:33:14,360 --> 01:33:19,360
Speaker 1: and value are often negatively correlated because the cheap stocks

1635
01:33:19,360 --> 01:33:23,120
Speaker 1: are often unprofitable. Um So when the profitability factor, if

1636
01:33:23,160 --> 01:33:25,479
Speaker 1: you will, is doing well, it has at least a

1637
01:33:25,600 --> 01:33:28,679
Speaker 1: decent negative correlation. It's been stronger in the US than globally,

1638
01:33:28,760 --> 01:33:31,160
Speaker 1: but it's negatively correlated value. So what's going on this

1639
01:33:31,280 --> 01:33:33,920
Speaker 1: year is more normal, but that is not what was

1640
01:33:33,920 --> 01:33:36,600
Speaker 1: going on for the prior a few years. Value and

1641
01:33:37,200 --> 01:33:43,759
Speaker 1: profitability in particular, we're highly correlated because in a bubble, remember,

1642
01:33:44,000 --> 01:33:46,760
Speaker 1: in a rational loss for value we can do well.

1643
01:33:46,920 --> 01:33:50,719
Speaker 1: Profitability does well in a bubble. It's not the profitable

1644
01:33:50,760 --> 01:33:53,400
Speaker 1: stocks that are throwing to the moon. It's the story stocks.

1645
01:33:53,640 --> 01:33:55,839
Speaker 1: So let me take the other side of the bubble

1646
01:33:55,960 --> 01:33:59,840
Speaker 1: claim and say, hey, stockscott overvalued in twenty twenty one,

1647
01:34:00,520 --> 01:34:03,080
Speaker 1: But was it really a bubble? We're down what twenty

1648
01:34:03,160 --> 01:34:07,439
Speaker 1: percent on the SMP the NAZAC. That seems like a

1649
01:34:07,920 --> 01:34:10,599
Speaker 1: run of the mill draw down and not a full

1650
01:34:10,760 --> 01:34:13,560
Speaker 1: on crash. One of the hard parts is in a

1651
01:34:13,720 --> 01:34:16,320
Speaker 1: fun way because they're all relevant. We're mixing a few

1652
01:34:16,360 --> 01:34:19,200
Speaker 1: different things. There is the level of the overall stock

1653
01:34:19,320 --> 01:34:22,520
Speaker 1: market and the overall bond market, and then there's internal

1654
01:34:22,600 --> 01:34:26,479
Speaker 1: to the stock market, how cheap stocks did against expensive stocks,

1655
01:34:26,960 --> 01:34:31,479
Speaker 1: how profitable stocks did against unprofitable stocks hedged without a

1656
01:34:31,560 --> 01:34:35,559
Speaker 1: market exposure. Right. People have used the term everything bubble,

1657
01:34:36,880 --> 01:34:39,840
Speaker 1: which is really wrong. Everything can't be in a bubble

1658
01:34:39,880 --> 01:34:43,320
Speaker 1: at once by definition, by the way the opposite you

1659
01:34:43,400 --> 01:34:46,759
Speaker 1: can short the values. And we were in a depression,

1660
01:34:46,800 --> 01:34:50,280
Speaker 1: not a bubble. But there were some correlated things going

1661
01:34:50,360 --> 01:34:54,400
Speaker 1: on for the market as a whole. The move in

1662
01:34:54,439 --> 01:34:58,519
Speaker 1: the stock market in one year was big, not something

1663
01:34:58,560 --> 01:35:02,240
Speaker 1: we don't see occasionally. This is this is not on

1664
01:35:02,320 --> 01:35:05,120
Speaker 1: the seem to lead black swan moment. The move in

1665
01:35:05,160 --> 01:35:08,960
Speaker 1: the bond market was very big, closer, but still not

1666
01:35:09,120 --> 01:35:13,840
Speaker 1: a black swan. The moving sixty forty maybe not still

1667
01:35:13,880 --> 01:35:17,000
Speaker 1: black swan, but was far more extreme than either alone

1668
01:35:17,120 --> 01:35:21,000
Speaker 1: because they happened at the same time. Time. You saw

1669
01:35:21,080 --> 01:35:23,439
Speaker 1: that again, Auntie, It will be the first to admit

1670
01:35:23,560 --> 01:35:25,560
Speaker 1: he looks like his timing is better than it really was,

1671
01:35:25,560 --> 01:35:27,680
Speaker 1: because he's been saying this for a while, but that

1672
01:35:27,840 --> 01:35:30,040
Speaker 1: was the core of his work. He does a ten

1673
01:35:30,120 --> 01:35:34,200
Speaker 1: year forecast on the outlook for sixty forty what current

1674
01:35:34,280 --> 01:35:38,160
Speaker 1: valuations coal. It's more complicated this, but cold the Schiller

1675
01:35:38,240 --> 01:35:41,479
Speaker 1: cape for stocks lower expected real returns when the Shiller

1676
01:35:41,520 --> 01:35:44,960
Speaker 1: cape is high, and just really yields on bonds yields

1677
01:35:45,040 --> 01:35:48,519
Speaker 1: versus economist forecast of inflation, and he takes sixty percent.

1678
01:35:48,880 --> 01:35:51,120
Speaker 1: Here's the genius math to get to sixty forty. He

1679
01:35:51,200 --> 01:35:53,720
Speaker 1: takes sixty percent of the stock forecasts, adds it to

1680
01:35:53,800 --> 01:35:59,400
Speaker 1: forty percent of the bond forecasts. That number hit the low. Ever,

1681
01:36:00,400 --> 01:36:02,519
Speaker 1: at least as we can monitor it. I won't say

1682
01:36:02,560 --> 01:36:05,920
Speaker 1: the rot the end of twenty one. Call it yeah,

1683
01:36:06,320 --> 01:36:08,439
Speaker 1: that's pretty good time. I always feel guilty when I

1684
01:36:08,479 --> 01:36:11,280
Speaker 1: say ever, maybe in the Roman Empire it was worse,

1685
01:36:11,400 --> 01:36:14,559
Speaker 1: but we can't. We can't measure it in the measurable

1686
01:36:14,680 --> 01:36:18,439
Speaker 1: universe that we have. And sixty forty. I'm gonna try

1687
01:36:18,439 --> 01:36:20,720
Speaker 1: to get this right. Sometimes we talk global, sometimes we

1688
01:36:20,800 --> 01:36:23,080
Speaker 1: talk to you us. Call it. It's made about four

1689
01:36:23,120 --> 01:36:27,880
Speaker 1: and a half percent real meaning over inflation over the

1690
01:36:27,960 --> 01:36:31,000
Speaker 1: long term. That's actually quite a nice real return. We're

1691
01:36:31,040 --> 01:36:35,799
Speaker 1: used to talking about nominal returns make and almost half bonds,

1692
01:36:36,000 --> 01:36:39,760
Speaker 1: So four and a half percent real is a very

1693
01:36:39,840 --> 01:36:44,040
Speaker 1: nice um. Auntie's forecast, which I think is is quite useful,

1694
01:36:44,040 --> 01:36:46,600
Speaker 1: obviously got down to below two. It was in the

1695
01:36:46,840 --> 01:36:49,560
Speaker 1: high ones at the end of twenty twenty one, just

1696
01:36:49,640 --> 01:36:52,960
Speaker 1: looking at current valuations and saying how does that usually

1697
01:36:53,040 --> 01:36:57,040
Speaker 1: play out over ten years. By the end of twenty

1698
01:36:57,120 --> 01:37:01,680
Speaker 1: twenty two, after all the pain, I think it got

1699
01:37:01,760 --> 01:37:06,080
Speaker 1: into the just about three really, which that's surprising given

1700
01:37:06,160 --> 01:37:07,920
Speaker 1: that we're now looking at rates in the four to

1701
01:37:08,040 --> 01:37:12,160
Speaker 1: five percent ring. Well, remember this is real, and right

1702
01:37:12,200 --> 01:37:14,560
Speaker 1: now this gets back to you challenging me on is

1703
01:37:14,600 --> 01:37:16,920
Speaker 1: there more uncertainty. It's pretty hard to come up with

1704
01:37:16,960 --> 01:37:19,640
Speaker 1: a really good ten year forecast of inflation right now,

1705
01:37:20,200 --> 01:37:24,880
Speaker 1: but certainly positive is forecasted. So five cash is interesting again,

1706
01:37:24,960 --> 01:37:28,840
Speaker 1: I'll say that, but how interesting it is depends a

1707
01:37:28,920 --> 01:37:32,559
Speaker 1: lot on what your actual inflation outlook. Bonds are interesting again.

1708
01:37:33,320 --> 01:37:38,679
Speaker 1: So basically, the fairly massive trade off was still only

1709
01:37:38,720 --> 01:37:42,200
Speaker 1: a one year trade off after a thirteen year bull market.

1710
01:37:42,720 --> 01:37:45,240
Speaker 1: You don't fix, and not all of that bull market

1711
01:37:45,360 --> 01:37:48,120
Speaker 1: was bubbly. A lot of that was fundamentals, but a

1712
01:37:48,200 --> 01:37:50,800
Speaker 1: lot of that was repricing things getting more expensive. You

1713
01:37:50,840 --> 01:37:54,599
Speaker 1: don't fix thirteen years of getting more expensive in general

1714
01:37:54,760 --> 01:37:56,240
Speaker 1: in one year. I'm not sure you want to because

1715
01:37:56,240 --> 01:37:58,320
Speaker 1: you've got to go down a lot more than we did.

1716
01:37:58,680 --> 01:38:02,000
Speaker 1: So Auntie's number, which I agree with U instead of

1717
01:38:02,040 --> 01:38:05,080
Speaker 1: four and a half, he'd probably use in the low threes. Now,

1718
01:38:05,240 --> 01:38:07,439
Speaker 1: as if you're sitting there saying, what do I need

1719
01:38:07,479 --> 01:38:11,080
Speaker 1: to retire? What's that number? Um by no means are

1720
01:38:11,160 --> 01:38:14,400
Speaker 1: we certain that three is irrational? That we need to

1721
01:38:14,439 --> 01:38:16,760
Speaker 1: get four and a half? Four and a half. And

1722
01:38:16,880 --> 01:38:18,880
Speaker 1: I know you've heard these arguments may have been just

1723
01:38:18,920 --> 01:38:22,400
Speaker 1: too good of a deal historically. For instance, for much

1724
01:38:22,439 --> 01:38:25,200
Speaker 1: of how you saying sixty forty has been arbitraged away

1725
01:38:25,280 --> 01:38:27,880
Speaker 1: or is it just the environment we're in it, it

1726
01:38:28,080 --> 01:38:31,479
Speaker 1: may have been repriced higher price to a lower expected return.

1727
01:38:32,320 --> 01:38:34,600
Speaker 1: Here's my favorite argument for that, and it's it's not

1728
01:38:34,680 --> 01:38:37,720
Speaker 1: a complicated one. Very few people actually got the four

1729
01:38:37,760 --> 01:38:41,600
Speaker 1: and a half percent weal the costs of investing in

1730
01:38:41,800 --> 01:38:46,400
Speaker 1: various ways were far higher today, and almost all portfolios

1731
01:38:46,479 --> 01:38:48,880
Speaker 1: were not like index funds today. They were you know,

1732
01:38:48,920 --> 01:38:53,120
Speaker 1: you had a broker who so a lot of friction

1733
01:38:53,400 --> 01:38:56,679
Speaker 1: and the effective volatility of your portfolios double the markets

1734
01:38:56,680 --> 01:39:00,080
Speaker 1: because you owned a handful of socks. So both the

1735
01:39:00,160 --> 01:39:02,080
Speaker 1: top line was lower because he didn't get you didn't

1736
01:39:02,080 --> 01:39:05,080
Speaker 1: really get it, and second you were facing higher risks

1737
01:39:05,920 --> 01:39:09,760
Speaker 1: by choice. But the index fund concept didn't exist for

1738
01:39:09,920 --> 01:39:12,000
Speaker 1: much of this time, so and even when it exists,

1739
01:39:12,080 --> 01:39:15,200
Speaker 1: the concept existed, you couldn't execute on it. So basically,

1740
01:39:15,240 --> 01:39:18,799
Speaker 1: I think the three today may this is very arguable,

1741
01:39:19,080 --> 01:39:20,840
Speaker 1: but maybe as good as the four and a half

1742
01:39:21,360 --> 01:39:23,760
Speaker 1: historically in terms of what you get to keep and

1743
01:39:23,880 --> 01:39:26,800
Speaker 1: what risks you have to take to get it. At

1744
01:39:26,920 --> 01:39:29,400
Speaker 1: below two, and this is art, not science, nobody can

1745
01:39:29,439 --> 01:39:31,599
Speaker 1: tell you what this no should be. At Below two,

1746
01:39:32,000 --> 01:39:34,760
Speaker 1: I an aunty and a lot of people didn't think

1747
01:39:34,880 --> 01:39:37,759
Speaker 1: that's too low, that doesn't make any sense. But above

1748
01:39:37,880 --> 01:39:42,720
Speaker 1: three maybe I I you know, I think pimp goes

1749
01:39:42,720 --> 01:39:45,280
Speaker 1: a super firm, but I hate to give competitors any

1750
01:39:45,320 --> 01:39:49,519
Speaker 1: credit anytime, But we maybe have a new normal, lower

1751
01:39:49,560 --> 01:39:54,839
Speaker 1: than normal, lower than historically normal. That's really really interesting.

1752
01:39:54,920 --> 01:39:58,240
Speaker 1: All right, So now I gave have you for five minutes,

1753
01:39:58,360 --> 01:40:02,679
Speaker 1: which means this is our speed rounds and these answers

1754
01:40:02,720 --> 01:40:05,679
Speaker 1: have to be less than sixty seconds. Are you're ready,

1755
01:40:05,880 --> 01:40:08,439
Speaker 1: I am all right. So first we'll do a quick

1756
01:40:09,080 --> 01:40:12,280
Speaker 1: three part curveball one minute. How early do you pull

1757
01:40:12,320 --> 01:40:14,479
Speaker 1: a goalie when you're down one, two or three goals?

1758
01:40:14,680 --> 01:40:17,680
Speaker 1: When you pull? You pull a goalie if you're down

1759
01:40:17,760 --> 01:40:19,760
Speaker 1: one at about five and a half six minutes in

1760
01:40:19,840 --> 01:40:22,320
Speaker 1: the last period, in the last period. All this can

1761
01:40:22,360 --> 01:40:24,760
Speaker 1: be situational. Our model is simple. Right, if it's in

1762
01:40:24,840 --> 01:40:26,439
Speaker 1: your own zone, you put the goalie back in for

1763
01:40:26,479 --> 01:40:29,479
Speaker 1: a while. All sequel. The two goal result is the

1764
01:40:29,520 --> 01:40:31,960
Speaker 1: one that always shocks people. You pull about eleven minutes,

1765
01:40:32,560 --> 01:40:35,160
Speaker 1: you're essentially paying playing the last period. You're playing half

1766
01:40:35,280 --> 01:40:38,160
Speaker 1: more than the period, and the ideas you're out of

1767
01:40:38,160 --> 01:40:41,680
Speaker 1: the money option losing by three, four or five, it's

1768
01:40:41,720 --> 01:40:44,439
Speaker 1: the same. It may have pride issues, which is not

1769
01:40:44,560 --> 01:40:47,320
Speaker 1: in our model, but it doesn't have standings issues. And

1770
01:40:47,560 --> 01:40:49,360
Speaker 1: three I actually forget the number, but I think it

1771
01:40:49,439 --> 01:40:53,040
Speaker 1: maybe before the third period. Got it? Uh M? A

1772
01:40:53,160 --> 01:40:56,439
Speaker 1: poker tournament in April? Are you participating this year? Since

1773
01:40:56,439 --> 01:40:59,040
Speaker 1: about since the GFC, which really had nothing to do

1774
01:40:59,080 --> 01:41:01,720
Speaker 1: with it. It's just coin sent little timing. I have

1775
01:41:02,000 --> 01:41:06,360
Speaker 1: only played poker in every third year in that charitable tournament.

1776
01:41:06,479 --> 01:41:09,000
Speaker 1: My skills to the extent I ever had any I

1777
01:41:09,720 --> 01:41:12,439
Speaker 1: was never a great poker player because I have a

1778
01:41:12,479 --> 01:41:15,960
Speaker 1: short attention span and a lot of poker is being patient,

1779
01:41:16,040 --> 01:41:18,400
Speaker 1: willing to stare at somebody for seven hours so you

1780
01:41:18,439 --> 01:41:21,599
Speaker 1: can remember what they did six hours ago. I had

1781
01:41:21,640 --> 01:41:23,920
Speaker 1: fun with poker I had. I think I was pretty intuitive.

1782
01:41:23,960 --> 01:41:25,519
Speaker 1: I didn't. I don't lose a time, but I probably

1783
01:41:25,560 --> 01:41:29,160
Speaker 1: lost money in my poker career. First time I ever,

1784
01:41:29,439 --> 01:41:32,280
Speaker 1: I learned poker to play in this Math for America tournament.

1785
01:41:32,920 --> 01:41:35,760
Speaker 1: I didn't know seven or hold him. I didn't know

1786
01:41:35,840 --> 01:41:38,960
Speaker 1: how to play. And my second year I played and

1787
01:41:39,040 --> 01:41:43,559
Speaker 1: I came in second day. There's so much random chance

1788
01:41:43,640 --> 01:41:48,320
Speaker 1: in one tournament over time. Poker's pure skill over anything.

1789
01:41:48,439 --> 01:41:51,760
Speaker 1: It's very similar to investing over sure horizons. It's really not.

1790
01:41:52,400 --> 01:41:54,160
Speaker 1: But one of the worst things that can happen to

1791
01:41:54,200 --> 01:41:56,760
Speaker 1: you as an investor or a gambler is to get

1792
01:41:56,840 --> 01:41:59,760
Speaker 1: lucky early. Yep. Absolutely the best thing for you is

1793
01:41:59,800 --> 01:42:02,280
Speaker 1: the walk into a casino and lou No matter how

1794
01:42:02,520 --> 01:42:04,720
Speaker 1: smart you think you are, you think you're smarter than

1795
01:42:04,800 --> 01:42:07,400
Speaker 1: you than you were, always looking for that hit a dopamine. Yeah,

1796
01:42:07,760 --> 01:42:08,880
Speaker 1: I don't know if I'll be able to get you

1797
01:42:08,920 --> 01:42:12,479
Speaker 1: an answer this in under a minute. Marvel or DC,

1798
01:42:12,840 --> 01:42:16,000
Speaker 1: and what's your favorite Marvel film? UM? I do like both.

1799
01:42:16,240 --> 01:42:18,200
Speaker 1: I'm a I'm a comic book fan. I was reading

1800
01:42:18,360 --> 01:42:20,720
Speaker 1: this is how I learned to read. I'm more of

1801
01:42:20,800 --> 01:42:24,599
Speaker 1: a Marvel guy. Um, though sometimes DC's great, it's varies

1802
01:42:24,840 --> 01:42:30,840
Speaker 1: who who current Wryter Crop is better. M favorite movies hard.

1803
01:42:31,320 --> 01:42:33,280
Speaker 1: And what I'm saying is, if you go find other

1804
01:42:33,280 --> 01:42:35,000
Speaker 1: people who have asked me this, I'm not claiming full

1805
01:42:35,040 --> 01:42:39,360
Speaker 1: consistency at varies whole time. I think the original first

1806
01:42:39,400 --> 01:42:43,160
Speaker 1: Iron Man that kicked off the MCU is an underrated movie.

1807
01:42:43,200 --> 01:42:47,519
Speaker 1: It's a damn good movie, and not in the MCU.

1808
01:42:48,040 --> 01:42:52,360
Speaker 1: Before the MCU, the first X Men movie, I don't

1809
01:42:52,400 --> 01:42:54,360
Speaker 1: remember even how great it was, but it was the

1810
01:42:54,520 --> 01:42:59,240
Speaker 1: first time we saw maybe Michael Keaton's Batman in eighty nine,

1811
01:42:59,640 --> 01:43:01,599
Speaker 1: but from me, certainly with Marvel, it was the first

1812
01:43:01,640 --> 01:43:04,519
Speaker 1: time I saw a superhero movie or TV show that

1813
01:43:04,640 --> 01:43:09,000
Speaker 1: didn't look ridiculous, that looked the CGI and the effects

1814
01:43:09,080 --> 01:43:11,040
Speaker 1: caught up. That was good. So I think there was

1815
01:43:11,080 --> 01:43:13,240
Speaker 1: a milestone. So those two, I'm gonna throw two at

1816
01:43:13,240 --> 01:43:15,800
Speaker 1: you because I think they're they're both have a so

1817
01:43:15,880 --> 01:43:19,080
Speaker 1: it's a lightning round. But you're disagreeing with you, I'm

1818
01:43:19,120 --> 01:43:23,360
Speaker 1: I'm I'm impending, all right. Deadpool and Guarding to the

1819
01:43:23,439 --> 01:43:28,800
Speaker 1: Galaxy both have a certain sense of humor. Aways that's right,

1820
01:43:28,880 --> 01:43:30,920
Speaker 1: always seem to be missing from the rest of the mark.

1821
01:43:31,040 --> 01:43:35,519
Speaker 1: I love those um as and and it's not some

1822
01:43:35,760 --> 01:43:38,519
Speaker 1: some people want to be purist and say that's not

1823
01:43:38,920 --> 01:43:41,439
Speaker 1: how the common books were. They're wrong. If you're really

1824
01:43:42,400 --> 01:43:45,280
Speaker 1: they had they were wise cracking during every fight. So

1825
01:43:45,520 --> 01:43:48,640
Speaker 1: I do love those for the combination of humor. X

1826
01:43:48,720 --> 01:43:51,400
Speaker 1: Men didn't have much humor. I'll admit that Iron Man

1827
01:43:51,520 --> 01:43:55,439
Speaker 1: one did, mainly because Robert Downing Junior is just hilarious.

1828
01:43:55,880 --> 01:43:57,160
Speaker 1: He was so good. So I do like the ones

1829
01:43:57,160 --> 01:43:59,479
Speaker 1: with humor. So let's talk about favorite books. What are

1830
01:43:59,479 --> 01:44:01,559
Speaker 1: you reading? What are some of your all time favors?

1831
01:44:01,680 --> 01:44:04,840
Speaker 1: Can I rant one more section? Marvel movies? Um, you

1832
01:44:04,880 --> 01:44:07,240
Speaker 1: didn't ask me when my least favorite are? Oh, go ahead.

1833
01:44:07,360 --> 01:44:09,960
Speaker 1: They should find every copy, which is hard digitally these days.

1834
01:44:10,320 --> 01:44:13,360
Speaker 1: Doctor Strange and the Multiverse of Madness. Yeah, and they

1835
01:44:13,400 --> 01:44:17,000
Speaker 1: should bury it in the sun. Let's move on. That's

1836
01:44:17,000 --> 01:44:18,200
Speaker 1: all I want to say about that. Well, you're not

1837
01:44:18,280 --> 01:44:20,920
Speaker 1: a fan of Doctor Strange Terrible. I'm a big fan

1838
01:44:20,960 --> 01:44:23,240
Speaker 1: of the character. It makes me even angry. Let's talk

1839
01:44:23,240 --> 01:44:25,200
Speaker 1: about favorite books. What are you reading that? What are

1840
01:44:25,240 --> 01:44:28,000
Speaker 1: some of your favorites? My all time favorites tend to

1841
01:44:28,040 --> 01:44:30,599
Speaker 1: be in the sci fi fantasy world, not surprising given

1842
01:44:30,640 --> 01:44:35,000
Speaker 1: our comic Are you a big dickhead? Um, I've read

1843
01:44:35,040 --> 01:44:37,799
Speaker 1: a bunch by him. That's one of the odd questions

1844
01:44:37,800 --> 01:44:40,320
Speaker 1: I'll get, By the way, I am a self professed

1845
01:44:40,360 --> 01:44:42,599
Speaker 1: to head. And when I say that, people who don't

1846
01:44:42,640 --> 01:44:45,600
Speaker 1: know Philip nay Dick in my career of going to

1847
01:44:45,840 --> 01:44:49,960
Speaker 1: comic book conventions, I've not heard that term. Oh really,

1848
01:44:50,560 --> 01:44:52,960
Speaker 1: It's very common on the internet, and it's really the

1849
01:44:53,479 --> 01:44:56,120
Speaker 1: one thing fun about him is he's written a lot

1850
01:44:56,160 --> 01:45:01,559
Speaker 1: of things that became like famous movies that no one knows.

1851
01:45:01,600 --> 01:45:05,360
Speaker 1: It's the Schwartzenega movie. They did two of them total. Recall, right,

1852
01:45:05,439 --> 01:45:08,240
Speaker 1: we can remember for your wholesale? Was that short story?

1853
01:45:08,760 --> 01:45:14,120
Speaker 1: My my all time choice? One is very cliche. Go ahead,

1854
01:45:14,439 --> 01:45:17,240
Speaker 1: Dune I loved. There are a couple of Frank Herbert

1855
01:45:17,240 --> 01:45:20,519
Speaker 1: books that are just amazing. First The Dune Friend. Yeah,

1856
01:45:21,600 --> 01:45:23,640
Speaker 1: the first two Dune books I thought were great, the

1857
01:45:23,680 --> 01:45:25,720
Speaker 1: first one much better than the second one. Then they

1858
01:45:25,840 --> 01:45:31,200
Speaker 1: got totally weird, very messianic, religious odd that was always

1859
01:45:31,240 --> 01:45:34,200
Speaker 1: a thread three a thread, but it became all that.

1860
01:45:34,320 --> 01:45:38,920
Speaker 1: But I loved Dune complex book. You know, sci fi

1861
01:45:39,120 --> 01:45:43,200
Speaker 1: or fantasy sometimes gets a simplistic, childish label. Dune blows

1862
01:45:43,240 --> 01:45:45,720
Speaker 1: that away. Um. The last movie was the first time

1863
01:45:45,720 --> 01:45:49,240
Speaker 1: I've seen doing reasonable on TV. Don't even start me

1864
01:45:49,320 --> 01:45:53,840
Speaker 1: on sting of dueling with the swords that were in

1865
01:45:53,960 --> 01:45:56,880
Speaker 1: the book. Um. Also, I'm a big fan of some

1866
01:45:56,920 --> 01:45:59,920
Speaker 1: of the old pulps, like the original Cone stories by

1867
01:46:00,560 --> 01:46:03,439
Speaker 1: Roberty Howard in the thirties. Not we're not talking. I'm

1868
01:46:03,479 --> 01:46:05,640
Speaker 1: not against him, but I'm not talking about Arnold Schwartzinker's

1869
01:46:05,640 --> 01:46:07,960
Speaker 1: Cohnan And I'm talking about the stuff that appeared in

1870
01:46:08,080 --> 01:46:11,960
Speaker 1: like weird tales serialized and then became books. I think

1871
01:46:12,040 --> 01:46:16,080
Speaker 1: Roberty Howard, he unfortunately killed himself very young. Um, and

1872
01:46:16,200 --> 01:46:20,439
Speaker 1: no one, you know, no one remembers him, but hes

1873
01:46:20,560 --> 01:46:23,000
Speaker 1: now he didn't. He created Conan and his writing was

1874
01:46:23,080 --> 01:46:27,000
Speaker 1: so rich, like dripped with feeling and color. So I

1875
01:46:27,080 --> 01:46:30,639
Speaker 1: was a big fan of that. This actually segues nicely

1876
01:46:30,680 --> 01:46:33,720
Speaker 1: into what I'm reading now go on, because I am

1877
01:46:34,000 --> 01:46:38,400
Speaker 1: rereading the original basic Lord of the Rings, which you

1878
01:46:38,520 --> 01:46:41,000
Speaker 1: use the term table stakes before. That's table stakes for

1879
01:46:41,520 --> 01:46:44,320
Speaker 1: a fantasy fan, like every other summer. As I I

1880
01:46:46,840 --> 01:46:48,840
Speaker 1: like the Hobbit, I never liked the full Lord of

1881
01:46:48,880 --> 01:46:52,680
Speaker 1: the Rings I have. Now I'm liking it more. Um.

1882
01:46:53,280 --> 01:46:56,200
Speaker 1: I have found historically I have a small tolerance for

1883
01:46:56,720 --> 01:47:00,680
Speaker 1: twelve pages of Elvin poetry, um which I think Tom

1884
01:47:00,760 --> 01:47:04,800
Speaker 1: bomba deal. For some reason. The character scared me as

1885
01:47:04,800 --> 01:47:07,080
Speaker 1: a kid, even though he's not very scary. So let

1886
01:47:07,160 --> 01:47:09,360
Speaker 1: me ask you this question. But I'm miyamore now. So

1887
01:47:09,920 --> 01:47:12,160
Speaker 1: I love both The Hobbit and the Lord of the Rings,

1888
01:47:12,479 --> 01:47:16,760
Speaker 1: and well, everybody loved Peter Jackson's I thought it was

1889
01:47:16,880 --> 01:47:21,360
Speaker 1: way too dark within the Lord of the Rings. Within

1890
01:47:21,439 --> 01:47:25,719
Speaker 1: the original, there's a balance between the hope and the fear.

1891
01:47:25,960 --> 01:47:29,120
Speaker 1: I think that's that's fair and ultimately hope when so

1892
01:47:29,560 --> 01:47:31,400
Speaker 1: it's it's it is a po So they take you

1893
01:47:31,560 --> 01:47:34,439
Speaker 1: to this really dark place and it's almost like the

1894
01:47:34,600 --> 01:47:36,960
Speaker 1: ending is tacked on. But by the way they going

1895
01:47:37,000 --> 01:47:39,720
Speaker 1: over a minute, it's completely your fault. So I own

1896
01:47:40,080 --> 01:47:43,599
Speaker 1: if you go through Token's experience of World War one

1897
01:47:43,720 --> 01:47:45,800
Speaker 1: and then writing in the World War Two. He really

1898
01:47:45,880 --> 01:47:49,200
Speaker 1: had that light and dark um going on, but it

1899
01:47:49,320 --> 01:47:51,719
Speaker 1: was balanced. But but but I did enjoy the movies

1900
01:47:51,760 --> 01:47:53,400
Speaker 1: because part of it is just saving a fan your

1901
01:47:53,439 --> 01:47:55,640
Speaker 1: whole life, seeing it come to life in such a

1902
01:47:55,720 --> 01:47:59,040
Speaker 1: glorious I do not recommend the extended versions. I've steered

1903
01:47:59,080 --> 01:48:01,679
Speaker 1: clear of that because the same reason they were already

1904
01:48:01,720 --> 01:48:04,240
Speaker 1: a little too long, and the extended versions basically, like

1905
01:48:04,320 --> 01:48:08,520
Speaker 1: Bilbo says, goodbye eleven times, you have like eleven elegic

1906
01:48:08,880 --> 01:48:10,600
Speaker 1: kind of I'm not trying to pronounce that right, but

1907
01:48:10,880 --> 01:48:13,360
Speaker 1: he's going away. Um, So I don't recommend that. But

1908
01:48:13,520 --> 01:48:16,559
Speaker 1: I do love those movies. I'm reading that now. I'm

1909
01:48:16,760 --> 01:48:21,040
Speaker 1: reading David Rubinstein's book on investing, largely because in May,

1910
01:48:21,479 --> 01:48:24,320
Speaker 1: April or May, he's going to interview me. Oh good,

1911
01:48:24,600 --> 01:48:26,600
Speaker 1: I'm terrified of because he may have seen some of

1912
01:48:26,600 --> 01:48:29,120
Speaker 1: the things I've said about private equity over time. I'm kidding,

1913
01:48:29,240 --> 01:48:31,040
Speaker 1: he knows about those. He still wants to interview me,

1914
01:48:31,240 --> 01:48:33,080
Speaker 1: but I gotta be prepared for that one. He could

1915
01:48:33,160 --> 01:48:38,200
Speaker 1: care less, can I say that? I mean, yeah, there

1916
01:48:38,360 --> 01:48:40,280
Speaker 1: there are people who are you know, And I use

1917
01:48:40,360 --> 01:48:43,000
Speaker 1: the phrase wrong. It's actually could not care less, but

1918
01:48:43,120 --> 01:48:46,559
Speaker 1: everybody says could care less, which you know you're all right.

1919
01:48:46,920 --> 01:48:49,519
Speaker 1: Are two adult questions we say, for the very ends,

1920
01:48:50,040 --> 01:48:52,200
Speaker 1: What sort of advice would you give to a recent

1921
01:48:52,280 --> 01:48:58,000
Speaker 1: college grad interested in a career in value investing, quantitative finance,

1922
01:48:58,560 --> 01:49:03,479
Speaker 1: or even academia, um, in broad general, a financial career.

1923
01:49:04,120 --> 01:49:08,320
Speaker 1: I'll go with I don't like either. And if someone

1924
01:49:08,400 --> 01:49:10,840
Speaker 1: tries to only steer you to lucrative careers, that's not

1925
01:49:10,920 --> 01:49:13,960
Speaker 1: a happy life. If people only steer you to find

1926
01:49:14,040 --> 01:49:17,000
Speaker 1: your bliss, well, if you're not the best in the

1927
01:49:17,040 --> 01:49:19,320
Speaker 1: world at your bliss and the bliss doesn't actually pay

1928
01:49:19,360 --> 01:49:22,760
Speaker 1: you anything, it's not such a great thing. I got

1929
01:49:22,840 --> 01:49:25,800
Speaker 1: into finance because I liked it, Because I work for

1930
01:49:25,840 --> 01:49:27,920
Speaker 1: these professors, I found an interesting thought. I'd be a

1931
01:49:28,000 --> 01:49:31,280
Speaker 1: professor at not everyone has to follow that route, but

1932
01:49:31,360 --> 01:49:33,640
Speaker 1: you want to blend those two things. The only concrete

1933
01:49:33,640 --> 01:49:36,840
Speaker 1: advice I'll give people young people, and I say this

1934
01:49:36,920 --> 01:49:39,599
Speaker 1: all the time, is try very hard not to chase

1935
01:49:39,720 --> 01:49:45,000
Speaker 1: what's currently hot, particularly starting out your career. Don't try

1936
01:49:45,000 --> 01:49:50,160
Speaker 1: to be suicidal. But but going into what's currently hot,

1937
01:49:50,600 --> 01:49:53,880
Speaker 1: you're gonna be five years off every time. Um, So

1938
01:49:54,120 --> 01:49:55,800
Speaker 1: I would back off that and if someone is really

1939
01:49:55,840 --> 01:50:01,320
Speaker 1: considering a career in value investing, recommend investing. As I

1940
01:50:01,360 --> 01:50:04,280
Speaker 1: said earlier, at least half your time in building up

1941
01:50:04,320 --> 01:50:10,559
Speaker 1: your psychological endurance level. You think it's all about balance

1942
01:50:10,640 --> 01:50:13,800
Speaker 1: sheet and income statement analysis, No, about half of it

1943
01:50:14,479 --> 01:50:17,760
Speaker 1: is the right personality and the right emotional makeup and

1944
01:50:17,800 --> 01:50:20,800
Speaker 1: the right partners. Our final question, what do you know

1945
01:50:20,920 --> 01:50:23,639
Speaker 1: about the world of investing today? You wish you knew

1946
01:50:23,680 --> 01:50:26,960
Speaker 1: forty years ago when you were first getting your feet wet.

1947
01:50:27,640 --> 01:50:31,280
Speaker 1: Going back, there's always been this tension in academic finance

1948
01:50:31,360 --> 01:50:35,519
Speaker 1: and an applied quantitative finance in why these things worked.

1949
01:50:35,520 --> 01:50:38,720
Speaker 1: And we talked about it very briefly earlier. If you

1950
01:50:38,840 --> 01:50:41,599
Speaker 1: find if someone shows you a great baptest, there really

1951
01:50:41,640 --> 01:50:46,120
Speaker 1: three possibilities. One is it's gibberish data mining. And let's

1952
01:50:46,160 --> 01:50:48,439
Speaker 1: assume it's not that that they've just tortured the data.

1953
01:50:48,840 --> 01:50:51,719
Speaker 1: Let's assume you think it's real. It can work because

1954
01:50:51,880 --> 01:50:55,479
Speaker 1: you're taking an actual rational risk and being compensated for it,

1955
01:50:56,400 --> 01:50:59,200
Speaker 1: or what's called often called behavioral finance. Some people are

1956
01:50:59,280 --> 01:51:03,400
Speaker 1: making errors. I often take two Nobel laureates my gene

1957
01:51:03,439 --> 01:51:07,200
Speaker 1: Fama as one end and Dick Thaylor, also at Chicago

1958
01:51:07,520 --> 01:51:09,600
Speaker 1: as the behavioral a lot of other great people in

1959
01:51:09,640 --> 01:51:11,880
Speaker 1: this field. I don't mean to make it so these two,

1960
01:51:12,200 --> 01:51:15,440
Speaker 1: but I would say you could do worse than those two. Absolutely,

1961
01:51:15,479 --> 01:51:19,479
Speaker 1: and I'm a fan of both. If if you ask

1962
01:51:19,600 --> 01:51:23,600
Speaker 1: me who I think is more right now, Like, I

1963
01:51:23,640 --> 01:51:26,280
Speaker 1: think Gene's contributions are actually the biggest in the entire

1964
01:51:26,320 --> 01:51:28,040
Speaker 1: world of finance because a lot of the field won't

1965
01:51:28,040 --> 01:51:31,080
Speaker 1: exist without him. But that's a different question of who's right.

1966
01:51:31,520 --> 01:51:33,400
Speaker 1: I think I would have been seventy five twenty five

1967
01:51:33,439 --> 01:51:36,559
Speaker 1: in the Gene camp when I left Chicago, even finding momentum,

1968
01:51:37,320 --> 01:51:40,360
Speaker 1: and now and now I think it'd be seventy twenty five.

1969
01:51:40,479 --> 01:51:44,080
Speaker 1: And all that means is more of why our stuff works,

1970
01:51:44,520 --> 01:51:47,320
Speaker 1: I think is taking another side of behavioral biases than

1971
01:51:47,400 --> 01:51:50,519
Speaker 1: a rational risk premium than I used to. And we're

1972
01:51:50,560 --> 01:51:53,760
Speaker 1: all a prisoner of our lived experience, right, living through

1973
01:51:53,960 --> 01:51:58,400
Speaker 1: both the tech bubble and those last five years to

1974
01:51:58,920 --> 01:52:03,040
Speaker 1: and change terrible, to and change very good. All that

1975
01:52:03,840 --> 01:52:06,519
Speaker 1: it may have overinfluenced me. You know, sometimes you see

1976
01:52:06,600 --> 01:52:09,680
Speaker 1: more crazy events in a career than the average. But

1977
01:52:09,760 --> 01:52:14,240
Speaker 1: I've definitely moved. I've still vote Ginge, the MVP of

1978
01:52:14,439 --> 01:52:18,479
Speaker 1: academic finance throughout all of Again, I'm impugning the Roman

1979
01:52:18,560 --> 01:52:23,200
Speaker 1: Empire throughout all of history, but I probably have moved

1980
01:52:23,240 --> 01:52:26,280
Speaker 1: more towards the behavioral side. That someone's got to be

1981
01:52:26,320 --> 01:52:27,760
Speaker 1: on the wrong side of the trade, and if you

1982
01:52:27,880 --> 01:52:31,880
Speaker 1: quantitatively identify who that is, they seem to work very

1983
01:52:31,920 --> 01:52:35,320
Speaker 1: well and harm absolutely. Cliff, thank you for being so

1984
01:52:35,560 --> 01:52:39,879
Speaker 1: generous with your time. We have been speaking with Cliff Astins.

1985
01:52:40,000 --> 01:52:44,040
Speaker 1: He is the co founder and just general all about

1986
01:52:44,120 --> 01:52:49,439
Speaker 1: Town managing principle at AQR Capital Management. If you enjoy

1987
01:52:49,520 --> 01:52:52,439
Speaker 1: this conversation, well check out any of the previous ones

1988
01:52:52,840 --> 01:52:55,640
Speaker 1: we've done over the past nine years. We're coming up

1989
01:52:55,720 --> 01:53:01,560
Speaker 1: on almost five hundred and you can find those at YouTube, iTunes, Spotify,

1990
01:53:01,720 --> 01:53:05,200
Speaker 1: wherever you find your favorite podcasts. Sign up from my

1991
01:53:05,400 --> 01:53:07,840
Speaker 1: daily reading list at ridolts dot com, follow me on

1992
01:53:07,880 --> 01:53:14,000
Speaker 1: Twitter at ridolts, follow Clifford Asnes on Twitter at Clifford Assness,

1993
01:53:14,360 --> 01:53:16,799
Speaker 1: and you could check out all of the Bloomberg podcasts

1994
01:53:16,920 --> 01:53:19,760
Speaker 1: at podcasts. I would be remiss if I did not

1995
01:53:19,880 --> 01:53:22,639
Speaker 1: thank the crack team that helps put these conversations together

1996
01:53:23,040 --> 01:53:26,599
Speaker 1: each week. Justin Milner is my audio engineer. Attica val

1997
01:53:26,640 --> 01:53:30,040
Speaker 1: Bron is our project manager. Paris Walds is my producer.

1998
01:53:30,479 --> 01:53:34,000
Speaker 1: Sean Russo is my head of research. I'm Barry Ridults.

1999
01:53:34,400 --> 01:53:38,160
Speaker 1: You've been listening to Master's Business on Bloomberg Radio.