WEBVTT - Cliff Asness on Quant Value Investing 0:00:01.960 --> 0:00:06.040 This is Masters in Business with very Rid Holds on 0:00:06.200 --> 0:00:11.680 Bloomberg Radio this week. On the podcast, this will be 0:00:11.720 --> 0:00:15.960 my shortest introduction ever. Clifford Astenus and I just go 0:00:16.040 --> 0:00:20.680 over the entire universe of quant factor and value investing. 0:00:21.079 --> 0:00:24.400 It is a master class. And if you don't believe me, 0:00:24.480 --> 0:00:26.600 I'm just going to shut up and say, with no 0:00:26.640 --> 0:00:31.520 further ado, my conversation with a Qrs cliff Astness. Let's 0:00:31.520 --> 0:00:33.920 start out a little bit going over some of your background. 0:00:34.320 --> 0:00:37.400 You get your PhD at the University of Chicago, where 0:00:37.479 --> 0:00:41.320 you are the teaching assistant for some obscure prof named 0:00:41.400 --> 0:00:47.040 Gene Fama. Tell us, Yeah, I basically discovered him. I 0:00:47.159 --> 0:00:49.400 ended up at the University of Chicago. I was an 0:00:49.440 --> 0:00:53.640 undergrad studying business and engineering. I decided I wanted to 0:00:53.680 --> 0:00:56.320 be a professor because I did a job just for 0:00:56.400 --> 0:01:01.880 money coding up studies for three Warton pros. I liked 0:01:01.880 --> 0:01:03.120 what they did. I said, how do I do what 0:01:03.160 --> 0:01:04.720 you do? And they said, go get a PhD. I 0:01:04.760 --> 0:01:06.920 said where should I go? And they said close the 0:01:06.959 --> 0:01:10.240 doorc Because we were at Wharton, and Wharton's a great school, 0:01:10.280 --> 0:01:13.360 but PhD program rankings can be different than sure and 0:01:13.400 --> 0:01:16.160 they and almost to a man, because I went to 0:01:16.160 --> 0:01:20.000 about ten professors they said, go to Chicago, and I went. 0:01:20.120 --> 0:01:23.160 I mean I got in, I went, and Jane Farmer 0:01:23.240 --> 0:01:26.480 was the man to say the very least. So your 0:01:26.520 --> 0:01:31.800 doctoral thesis asserted that consistently beating market averages was attainable 0:01:32.400 --> 0:01:36.280 by exploiting both value and momentum. In other words, you 0:01:36.360 --> 0:01:41.520 took Farmer's value factor and added your own twist, which 0:01:41.640 --> 0:01:45.119 was momentum, which eventually became a Farmer French factor. Right, 0:01:45.400 --> 0:01:48.840 yeah it Farmer French still don't include it in their 0:01:48.880 --> 0:01:53.880 official five factor model. A lot of us think they should. 0:01:54.760 --> 0:01:57.680 I think that's just a philosophical difference. The way I 0:01:57.720 --> 0:02:00.920 always describe it is one of the scariest moments of 0:02:00.960 --> 0:02:03.480 my life was going into Jean's office. I was already 0:02:03.480 --> 0:02:07.920 his teaching assistant. He had kind of agreed to be 0:02:08.200 --> 0:02:12.560 my dissertation chair, even without a particular topic, and going 0:02:12.560 --> 0:02:15.000 in and saying, I want to write it. I wrote it. 0:02:15.000 --> 0:02:16.520 It was more than just this, but one of the 0:02:16.520 --> 0:02:18.959 main things I want to explore is the momentum strategy. 0:02:19.280 --> 0:02:21.919 And then mumbling and by the way, it works very 0:02:21.919 --> 0:02:26.720 well because you know this is constant fight in academia. 0:02:27.320 --> 0:02:29.919 If if you believe something works, does it work because 0:02:29.960 --> 0:02:33.160 markets are efficient and it's compensation for risk or for 0:02:33.240 --> 0:02:37.440 behavioral reasons and momentum inherently, And I think we all 0:02:37.520 --> 0:02:40.000 knew this instinctively back then. It's very hard to come 0:02:40.040 --> 0:02:43.200 up with a rational story or risk based story. And 0:02:43.240 --> 0:02:46.359 I was nervous because he's mister efficient markets and rational, 0:02:47.280 --> 0:02:50.560 And to his credit and my relief, he said, if 0:02:50.560 --> 0:02:53.519 it's in the data, write the paper. And he was 0:02:53.639 --> 0:02:56.320 very supportive of the paper. He works very closely with 0:02:56.400 --> 0:03:00.799 Dimensional affirm I admire greatly. They don't give as much 0:03:00.800 --> 0:03:02.680 weight to momentum as we do, but they use it 0:03:02.720 --> 0:03:05.240 in their trading process. So I feel like I've won 0:03:05.280 --> 0:03:09.200 half the battle on that over time. The only thing 0:03:09.200 --> 0:03:11.360 you said that I might take a small disagreement with 0:03:11.720 --> 0:03:16.320 is consistently. We think value plus momentum has a really 0:03:16.320 --> 0:03:19.640 good risk adjusted return makes money over the long term. 0:03:20.240 --> 0:03:22.560 But when you've gone through two year periods like the 0:03:22.560 --> 0:03:25.320 tech bubble and three year periods like eighteen through twenty, 0:03:26.320 --> 0:03:29.520 I think myself, my family, and some of my clients 0:03:29.560 --> 0:03:33.200 might take issue with the word consistently. So let's let's 0:03:33.200 --> 0:03:36.120 put a little more meat on those bones to define 0:03:36.200 --> 0:03:40.080 what we're talking about. You want to identify the cheapest 0:03:40.160 --> 0:03:43.720 value stocks, but only own those that seem to have 0:03:43.840 --> 0:03:47.400 started on an up swim. That seems to make some sense. Yeah, 0:03:47.440 --> 0:03:51.240 you're you're accidentally waiting until get another quant controversy whether 0:03:51.280 --> 0:03:54.680 you need both these characteristics in every stock or whether 0:03:55.160 --> 0:03:57.400 you can have some stocks that are great on one 0:03:57.480 --> 0:04:00.960 and simply average on the other and the portfolio comes out. 0:04:01.160 --> 0:04:04.280 But the intuition you're saying it's exactly right. Two things. 0:04:04.360 --> 0:04:06.920 At that point. The literature has advanced. This is like 0:04:07.600 --> 0:04:11.120 QUANDT Financi Cerca, nineteen ninety. You may throw in the 0:04:11.200 --> 0:04:13.800 size effect and that was about it, which we're going 0:04:13.880 --> 0:04:15.920 to talk about in a little a little while, because 0:04:16.400 --> 0:04:20.039 I've read some papers that suggests may not exist. We're 0:04:20.040 --> 0:04:24.479 cynics about it. But but value, momentum, and size in 0:04:24.520 --> 0:04:27.200 the opposite order that I just said. Time wise, size 0:04:27.240 --> 0:04:30.240 was kind of first, then value, then momentum with the 0:04:30.279 --> 0:04:34.080 three biggies, And there's still very big in the in 0:04:34.120 --> 0:04:38.920 the literature around nineteen ninety value says in the original metrics, 0:04:39.320 --> 0:04:42.440 and I think they've advanced since then. Price to book 0:04:42.480 --> 0:04:45.440 was the famous one fam in French use. They'll be 0:04:45.440 --> 0:04:47.160 the first to tell you they do kind of like it, 0:04:47.200 --> 0:04:50.159 but it has no special standing. It's basically price divided 0:04:50.160 --> 0:04:53.160 by any reasonable fundamental so it could be priced to sales, 0:04:53.320 --> 0:04:57.000 price to earnings, priced to whatever. You'll get people disagreeing 0:04:57.040 --> 0:04:59.880 like crazy. At our firm, we prefer a broad ten 0:05:00.440 --> 0:05:02.840 of giving you. We don't think we're particularly great at 0:05:02.839 --> 0:05:05.600 saying which one is the exact right way to do this. 0:05:06.240 --> 0:05:08.640 But if you buy low multiples and sell high multiples 0:05:09.800 --> 0:05:13.000 either in a long only beat the benchmark sense when 0:05:13.200 --> 0:05:16.600 over and underweight, and you did the same thing everyone does, 0:05:16.640 --> 0:05:18.360 and call me a hedge fun manager. It's about half 0:05:18.400 --> 0:05:21.880 our assets. About half our assets are really traditional where 0:05:21.960 --> 0:05:24.400 money managers beat, you know plenty of things. Don't let 0:05:24.480 --> 0:05:26.240 us short or lever or any of those hedge fun 0:05:26.360 --> 0:05:29.000 kind of things. But the principle is exactly the same. 0:05:29.400 --> 0:05:32.240 The overweight in a value strategy would be low multiples, 0:05:32.240 --> 0:05:35.000 the underweight would be high multiples. If you're running a 0:05:35.040 --> 0:05:38.800 pure momentum strategy, the overweight, and this is also momentum 0:05:38.800 --> 0:05:42.359 circa nineteen ninety, would be who's doing better over the 0:05:42.440 --> 0:05:45.840 last year it's that simple. I used to dismissively call 0:05:45.839 --> 0:05:49.640 it the two newspaper strategy. You needed a newspaper recent 0:05:49.680 --> 0:05:52.039 one and one from a year ago. It's better to 0:05:52.040 --> 0:05:54.159 have a computer because a little faster than you. But 0:05:54.360 --> 0:05:56.640 you look up and you buy what's going up. It 0:05:56.680 --> 0:06:00.479 turns out this part is surprising. Both make money over 0:06:00.520 --> 0:06:05.200 any decent time horizon. Probably not surprising is they are, 0:06:05.200 --> 0:06:09.320 in geek speak, negatively correlated. If you are a pure 0:06:09.400 --> 0:06:13.000 value person and I am a pure momentum person, occasionally 0:06:13.040 --> 0:06:16.200 we agree. We may get into this later, but right 0:06:16.279 --> 0:06:19.880 now we're in more agreement than normal because value stocks 0:06:19.960 --> 0:06:23.279 kind of have the momentum, but more often than not, 0:06:23.480 --> 0:06:26.160 the cheap stocks are cheap because one of the reasons 0:06:26.200 --> 0:06:30.000 they're cheap is they've been losing. So they're negatively correlated strategies. 0:06:30.000 --> 0:06:32.719 And this doesn't create a ten sharp ratio, but a 0:06:32.760 --> 0:06:35.640 holy grail of quand finances to try to find two 0:06:35.680 --> 0:06:37.719 things that are an average make money that hedge each other, 0:06:38.279 --> 0:06:42.240 and value and momentum do whether it's relative our performance 0:06:42.240 --> 0:06:45.200 against a benchmark or absolute performance in a hedge fund. 0:06:45.920 --> 0:06:48.680 So let's talk a little bit about how you ended 0:06:48.800 --> 0:06:54.440 up launching a QR. Following your PhD dissertation, you end 0:06:54.560 --> 0:07:00.640 up eventually heading out to Goldman Sachs to effectively established 0:07:00.680 --> 0:07:04.480 their quantitative research groups. That's it, though I'm going to 0:07:04.560 --> 0:07:06.400 mend the story slightly because a few of those things 0:07:06.440 --> 0:07:11.320 happen more simultaneously. I left the PhD program in late 0:07:11.440 --> 0:07:16.160 ninety one to take a year off. I'm now on 0:07:16.360 --> 0:07:19.800 year thirty two of that year off, so it appears 0:07:19.840 --> 0:07:23.320 to have taken hold. So you're a PhD school dropout. No, 0:07:23.520 --> 0:07:27.320 I did finish the PhD. I went to Goldman. I 0:07:27.360 --> 0:07:30.840 had started my dissertation. I think a lot of people 0:07:30.920 --> 0:07:33.880 leave intending to write a dissertation from a job, and 0:07:33.920 --> 0:07:38.440 I don't think anyone, including me, succeeds at that. But 0:07:38.760 --> 0:07:41.560 if you've already produced, like a first draft, it could 0:07:41.560 --> 0:07:43.800 be a couple of years in this process to finish it. 0:07:44.160 --> 0:07:46.559 But it's more Yeoman like work. After the first draft, 0:07:46.600 --> 0:07:50.520 you're just responding to things, running new tests. So I 0:07:50.560 --> 0:07:53.520 had finished a first draft, went to Goldman to take 0:07:53.560 --> 0:07:56.040 a year with the concept that an option can only 0:07:56.080 --> 0:07:58.160 be worth zero let me see if I let me 0:07:58.160 --> 0:08:00.400 see it. I intended to be a professor when I 0:08:00.400 --> 0:08:01.920 started out but let me see if I like this. 0:08:03.120 --> 0:08:05.600 After about a year, maybe about a year and a half, 0:08:05.640 --> 0:08:08.120 I stayed a little longer. I was really feeling like 0:08:08.160 --> 0:08:11.280 I should get back to some of the academic roots. 0:08:11.320 --> 0:08:14.280 I was a fixed income portfolio manager and trader, which 0:08:14.320 --> 0:08:17.640 is a ton of fun. I recommend anyone who does 0:08:17.680 --> 0:08:20.040 this stuffer a living trade in OTC market for a 0:08:20.040 --> 0:08:23.040 while to learn the good bed and the ugly of 0:08:23.240 --> 0:08:26.680 of of of what happens there. But it wasn't like 0:08:27.400 --> 0:08:29.400 whatever skills they taught me in the PAHD program. It 0:08:29.400 --> 0:08:32.440 didn't feel right. I then got just very lucky. Pimco 0:08:32.520 --> 0:08:34.679 out on the West Coast read the first thing I 0:08:34.720 --> 0:08:38.760 wrote in the Journal of Portfolio Management. UM. The exciting 0:08:39.080 --> 0:08:43.240 title was option adjusted spreads and a steep yield curve. Um. 0:08:43.360 --> 0:08:46.360 There's gonna be a TV movie at some point. Who's 0:08:46.360 --> 0:08:48.720 going to play you in the movie? That's the big question. 0:08:48.760 --> 0:08:52.120 I'm not gonna be flattered whoever, who whoever it is. 0:08:52.200 --> 0:08:55.600 Let's just say that, UM, and they won't have any hair, 0:08:55.800 --> 0:08:57.840 which will be annoying because when that when I wrote 0:08:57.840 --> 0:09:01.080 that paper, I had hair, right they the paper, they 0:09:01.200 --> 0:09:02.920 talked to me. They didn't even know I did. I 0:09:02.960 --> 0:09:06.400 was writing a dissertation on quant equities at night, and 0:09:06.440 --> 0:09:10.640 they basically offered me a job to start a research 0:09:10.679 --> 0:09:15.600 group from scratch. Ironically, given what happened later, Long Term 0:09:15.679 --> 0:09:19.800 Capital helped my life because circa that time they were 0:09:19.840 --> 0:09:23.880 doing extremely well and suddenly, you know, all business, it's 0:09:23.880 --> 0:09:26.280 not just Wall Street are something's doing great there. We 0:09:26.320 --> 0:09:29.160 need one of those. So the notion that we should 0:09:29.200 --> 0:09:34.000 have some academics helping us out was greatly aided by them. 0:09:34.040 --> 0:09:37.160 And I actually think there's some brilliant people, though obviously 0:09:37.240 --> 0:09:39.400 didn't end well there, so it's a little bit of 0:09:39.440 --> 0:09:42.280 irony that they help. But PIMCO is looking to start 0:09:42.320 --> 0:09:44.560 a group. I went to Goldman Sachs and said, I 0:09:44.600 --> 0:09:47.480 think this is the perfect combination. I get to do 0:09:48.400 --> 0:09:52.000 academic work but in the real world, both in the 0:09:52.040 --> 0:09:55.040 sense of seeing if it actually works, and you make 0:09:55.120 --> 0:09:58.160 more money. Anyone who tells you they do money management 0:09:58.200 --> 0:10:01.120 over being a professor and never considered that it's probably 0:10:01.120 --> 0:10:06.720 not never not telling the full truth. Goldman Um said, 0:10:07.840 --> 0:10:10.480 unbeknownst to you, we're looking to start such a group. 0:10:10.960 --> 0:10:13.800 To this day, I think that's probably true, but I 0:10:13.840 --> 0:10:17.000 don't know if that was reactive to me or but 0:10:17.840 --> 0:10:19.920 they did say that, and they offered me the job, 0:10:20.000 --> 0:10:22.520 and I decided the weather in New York City's way 0:10:22.640 --> 0:10:27.520 better than Luguona Beach, Newport Beach, excuse me, California. I 0:10:27.520 --> 0:10:30.320 also chose Chicago over Stanford f PhD. So you don't 0:10:30.320 --> 0:10:34.800 care about whether obvious No Chicago versus Stanford. Um, I 0:10:34.840 --> 0:10:38.319 got into both. Yea. They offered a stipend. PhDs are 0:10:38.400 --> 0:10:40.280 very lucky to actually, hey, you to go to school. 0:10:41.480 --> 0:10:44.360 Everything was the same, except Chicago had in its budget 0:10:44.800 --> 0:10:48.119 to give me money for airfare to go visit. Stanford 0:10:48.160 --> 0:10:51.840 didn't and I had no money. So I visited Chicago 0:10:52.320 --> 0:10:54.760 and not Stanford. And it was a beautiful spring day. 0:10:55.160 --> 0:10:57.440 So I'm fond of telling people I'm the world's only 0:10:57.440 --> 0:10:59.880 person to choose the University of Chicago over Stanford on 0:10:59.920 --> 0:11:02.880 the weather. Based on the weather, I'm more intrigued by 0:11:02.880 --> 0:11:07.640 the concept of you, uh sort of Bruce wayneing uh 0:11:07.960 --> 0:11:10.400 fixed income during the day and at night your equity 0:11:10.400 --> 0:11:13.240 work is your batman. Yeah, that was tied for the 0:11:13.240 --> 0:11:16.839 craziest time in my life. Um. The other time my 0:11:16.880 --> 0:11:19.520 wife and I with with you know, more her than me. 0:11:19.640 --> 0:11:21.840 We had two sets of twins eighteen months apart. Oh 0:11:21.920 --> 0:11:24.600 my goodness, um, and that was a ton of fun, 0:11:25.040 --> 0:11:28.840 but it was ridiculous. Yeah. Right, So the nocturnal activity 0:11:28.920 --> 0:11:32.240 was a little different than writing a dissertation, but working 0:11:32.240 --> 0:11:36.960 at Goldman um with with with four babies, um, was 0:11:37.080 --> 0:11:39.680 very similar to writing a dissertation, which is kind of 0:11:39.720 --> 0:11:42.520 is your baby I could? I can imagine. So so 0:11:43.200 --> 0:11:46.920 we we started talking about a QR in ninety eight. 0:11:47.040 --> 0:11:52.640 You leave Goldman to launch that this is your first congratulations. 0:11:52.679 --> 0:11:54.520 I like to say a quarter century. It has more 0:11:54.559 --> 0:11:57.680 ground O case, it definitely does. It's amazing how quickly 0:11:58.160 --> 0:12:02.840 quarter century goes by. That's the truly shocking thing. All 0:12:02.880 --> 0:12:05.920 the cliches, particularly about children, but about all of life. 0:12:06.800 --> 0:12:09.200 They're cliches for a reason. You wake up one day 0:12:09.200 --> 0:12:10.800 and you go, what did I do for the last 0:12:10.800 --> 0:12:13.079 twenty five years? How did this happen? I remember about 0:12:13.120 --> 0:12:16.760 three of those years. I'm fond of telling people I 0:12:16.800 --> 0:12:19.040 have a really good memory that extends to two periods, 0:12:19.360 --> 0:12:22.000 the last two weeks in high school. I think that's 0:12:22.040 --> 0:12:24.439 probably true for a lot of people. It just depends 0:12:24.440 --> 0:12:27.280 on where you peaked. Yeah, personally, if you peak in 0:12:27.400 --> 0:12:30.160 high school or you peak in college. That's that's where 0:12:30.200 --> 0:12:34.240 all your memories are most vivid. So so, given a 0:12:34.400 --> 0:12:37.960 QR has been around for twenty five years, how has 0:12:38.080 --> 0:12:42.800 your investing philosophy evolved over that period? Assuming it's changed 0:12:42.800 --> 0:12:45.400 at all, and I imagine it as it has, but 0:12:45.440 --> 0:12:51.000 more has stayed the same than has changed, adding new factors, 0:12:51.080 --> 0:12:54.600 measuring factors better. I don't think that's a change in philosophy. 0:12:54.640 --> 0:13:01.600 That's just applying the philosophy and digging deeper our general belief, 0:13:01.840 --> 0:13:04.840 starting out with value and momentum at Goldman in the 0:13:04.960 --> 0:13:09.400 very early nineties, expanding along with the literature, some of 0:13:09.440 --> 0:13:12.920 which some of our people have helped create UM to 0:13:13.040 --> 0:13:18.200 other factors, low risk investing, quality investing, UM fundamental, not 0:13:18.280 --> 0:13:22.360 just price funds. But let's let's define those UM like 0:13:22.480 --> 0:13:25.480 I think we understand what quality investing is, but what 0:13:25.679 --> 0:13:29.040 is low risk? Low risk investing at its simplest. Again, 0:13:29.200 --> 0:13:31.960 all of these you get ten quants in a room, 0:13:31.960 --> 0:13:34.520 which sounds like the beginning of a bad joke. Um, 0:13:34.559 --> 0:13:38.760 they'll all have UM different ways and different sets of 0:13:38.760 --> 0:13:42.160 ways to measure this, but at its simplest. As a 0:13:42.200 --> 0:13:46.640 paper by two of my colleagues Lass Peterson and Andrea Frazini. 0:13:47.320 --> 0:13:49.560 Andrea Frazini excuse may have left out the last syllable 0:13:49.600 --> 0:13:51.760 of your name, Andrea. I will never do that again. 0:13:52.320 --> 0:13:56.040 Um wrote a paper call Betting against Beta, UM and 0:13:56.120 --> 0:13:59.600 I forget many years ago. Bab everything's three letters because 0:13:59.640 --> 0:14:02.400 faming French name their factors three letters. So now we 0:14:02.440 --> 0:14:05.880 all copy them and they'll be the first to tell 0:14:05.920 --> 0:14:10.319 you they were essentially extending work of Fisher Blacks from 0:14:10.360 --> 0:14:13.360 I don't know, ten twenty years ago, where he found 0:14:13.840 --> 0:14:17.840 that in basic theory, the capital asset pricing model. You know, 0:14:17.880 --> 0:14:20.960 we all kind of learn third week of an NBA 0:14:21.040 --> 0:14:27.040 finance class bill bill sharp. High beta stocks are supposed 0:14:27.040 --> 0:14:29.360 to return more on average than low beta stocks, and 0:14:29.400 --> 0:14:31.960 in fact nothing else is supposed to matter all. It's 0:14:32.120 --> 0:14:36.400 it's a one factor model, and it's admittedly simplistic, even 0:14:36.440 --> 0:14:38.120 though people who created it won't tell you it's the 0:14:38.280 --> 0:14:40.200 be all, end all, but it's a very useful way 0:14:40.240 --> 0:14:41.760 to think of things. It gets you down to a 0:14:41.880 --> 0:14:46.920 very important concept that diversifiable risk. You shouldn't get paid 0:14:46.960 --> 0:14:48.400 for it because you don't have to bear. You get 0:14:48.440 --> 0:14:52.640 bared for risk. You can't diversify away beta being a risk, 0:14:52.720 --> 0:14:55.920 you can't diversify away because a lot of your portfolio 0:14:56.000 --> 0:15:00.440 is already long beta should be paid. So the problem, 0:15:00.480 --> 0:15:04.280 of course is in some sense you can say betas 0:15:04.280 --> 0:15:07.160 paid because stocks tend to beat bonds over the long term. 0:15:07.440 --> 0:15:11.000 But within the market, the so called security markets line 0:15:12.000 --> 0:15:16.760 is pretty much entirely flat and has been in sample 0:15:16.760 --> 0:15:19.560 and add a sample for a ridiculously long amount of 0:15:19.560 --> 0:15:23.040 time in a ridiculously large amount of places, meaning low 0:15:23.040 --> 0:15:26.240 beata stocks have kept up with high beta stocks, which 0:15:26.280 --> 0:15:29.560 in the simplest theory, they're not supposed to. You can 0:15:29.680 --> 0:15:31.600 use this in a number of ways. You can buy. 0:15:32.920 --> 0:15:35.080 You can make your portfolio out of low beta stocks 0:15:35.480 --> 0:15:39.000 earn as much money with smaller swings, or if you're 0:15:39.040 --> 0:15:41.520 a hedge fund kind of person, and you can use 0:15:41.520 --> 0:15:43.440 this in long only portfolios too. It's just a little 0:15:43.480 --> 0:15:48.080 more complicated. You can go long lowbay a short high beta, 0:15:48.280 --> 0:15:51.000 but you better apply a heade ratio if you're long 0:15:51.160 --> 0:15:53.720 a dollar of high bay. Excuse me of low beta. 0:15:54.200 --> 0:15:58.040 I sometimes get the sign wrong in interviews, I promise 0:15:58.240 --> 0:16:00.640 in real life, when we're trading, you get the sign 0:16:00.720 --> 0:16:03.680 right like three out of four times, and that's a 0:16:03.720 --> 0:16:05.720 pretty good n hopefully everyone knows that three out of 0:16:05.760 --> 0:16:08.560 four is a joke. But you go long low beta 0:16:08.640 --> 0:16:11.000 short high beta. If you did that on a dollar 0:16:11.080 --> 0:16:13.920 along on a dollar short, you just massively short the market. 0:16:14.480 --> 0:16:18.320 Long lowbat and short high beta. Beta's work. So you 0:16:18.320 --> 0:16:20.760 apply a hedge race. Here you short less than you long, 0:16:21.240 --> 0:16:23.240 and you try to create something about zero beta, and 0:16:23.280 --> 0:16:27.720 that has created a very you know, like all these things, imperfect. 0:16:27.800 --> 0:16:30.680 It goes through bad periods, but a very attractive risk 0:16:30.680 --> 0:16:34.040 adjusted return in and out of sample long term, and 0:16:34.080 --> 0:16:36.520 then you can get into theories as to why it works. 0:16:36.880 --> 0:16:38.720 So what where I was going to ask you is 0:16:39.120 --> 0:16:42.880 if low beta returns just about the same or almost 0:16:42.960 --> 0:16:45.800 the same as high beta, why the complexity? Why not 0:16:45.840 --> 0:16:48.640 just own low beta and it will give you, on 0:16:48.680 --> 0:16:51.960 a risk adjusted basis a better return than high bad. Well, 0:16:52.000 --> 0:16:56.480 absolutely some do. But if you want to create, if 0:16:56.480 --> 0:16:59.280 you're a hedge fund person trying to create an alternative 0:16:59.320 --> 0:17:04.440 investment that's truly uncorrelated, low beata stocks are still highly 0:17:04.440 --> 0:17:08.600 correlated to the market. So by going long low beta 0:17:08.680 --> 0:17:11.560 and shorting a smaller amount of high beta, and this 0:17:11.640 --> 0:17:14.000 depends on your preferences and how aggressive you want to be, 0:17:14.200 --> 0:17:18.280 but you're eliminating that. Yes, you can create a I'm 0:17:18.280 --> 0:17:23.960 always Lerian saying uncorrelated worries. Well, I were striving for uncorrelated, 0:17:24.000 --> 0:17:27.160 but the compliance officer in my head is saying, sometimes 0:17:27.560 --> 0:17:29.600 it doesn't come out to zero all the time, but 0:17:29.600 --> 0:17:32.240 it comes out close. So you can create a very 0:17:32.240 --> 0:17:35.320 diversifying stream of returns, where if you just want low 0:17:35.320 --> 0:17:39.400 beata stocks, you're creating a more attractive stream of returns, 0:17:39.440 --> 0:17:43.359 but still extremely correlated to perhaps your other holdings, so 0:17:43.520 --> 0:17:45.199 it could be used in different ways. So well, I 0:17:45.240 --> 0:17:48.240 think when most people think of a QR, they think 0:17:48.640 --> 0:17:52.359 value shop. But as I'm doing my homework to prep 0:17:52.400 --> 0:17:56.119 for our conversation and finding all my previous notes, you 0:17:56.119 --> 0:17:58.680 don't just wing this. No, I try not to. I've 0:17:58.680 --> 0:18:00.879 done it on a raid down val I just waned 0:18:00.880 --> 0:18:03.000 it with But with you, I feel like I have 0:18:03.040 --> 0:18:06.960 to come in loaded for bear. Let's say that's a 0:18:06.960 --> 0:18:09.959 good accident to Wall Street joke, right on purpose, not 0:18:10.000 --> 0:18:13.320 so accident. Okay, good, um, you know I have a 0:18:13.359 --> 0:18:15.359 whole I have all I got a million of it, right, 0:18:15.359 --> 0:18:17.560 I got am well teed up waiting for you. So 0:18:17.640 --> 0:18:20.960 people tend to think of a QR as a value shop, 0:18:21.440 --> 0:18:25.120 but really you're a deep quantitative shop with a lot 0:18:25.160 --> 0:18:28.880 of different strategies. Let's talk a little bit about the 0:18:29.040 --> 0:18:32.719 various ways you guys invest money. Well, let me, can 0:18:32.760 --> 0:18:35.320 I back up for second talk about why people think 0:18:35.359 --> 0:18:38.000 of us as a value Absolutely. There are a few reasons. 0:18:38.440 --> 0:18:41.640 One is there was one point in the very distant 0:18:41.640 --> 0:18:44.320 past where it was much closer to true. Um. Some 0:18:44.359 --> 0:18:47.040 of the things like betting against made up quality or 0:18:47.040 --> 0:18:52.080 profitability carry strategies or additions over time. So anyone who's 0:18:52.160 --> 0:18:54.520 even not the people. A lot of people follow us, 0:18:54.520 --> 0:18:57.280 but anyone has followed us from the beginning, it's not 0:18:57.320 --> 0:19:00.719 crazy that they started out thinking that. Also, I just 0:19:00.760 --> 0:19:02.960 wrote a piece maybe a few months ago on our 0:19:02.960 --> 0:19:07.840 website with the highly defensive worried title we are not 0:19:07.920 --> 0:19:12.480 just about value in parentheses except occasionally when we are. 0:19:13.480 --> 0:19:16.720 Because you do get these periods and value seems to 0:19:16.760 --> 0:19:20.679 be the worst culprit um. Not even even half of 0:19:20.720 --> 0:19:25.439 your headlines, yeah are hedged fund now, Well, you know, 0:19:26.680 --> 0:19:28.399 remind me where we were, because I'll go off on 0:19:28.440 --> 0:19:32.600 tangents like you do. But but but I do write 0:19:32.600 --> 0:19:34.439 a lot of head statements and I'm kind of famous 0:19:34.520 --> 0:19:36.760 from my footnotes, both because I stick the humor there, 0:19:36.800 --> 0:19:39.040 but also I put in all the ways I might 0:19:39.080 --> 0:19:43.200 be wrong. Um, and it's it's really not a compliance reason. 0:19:43.320 --> 0:19:46.200 I hope it's more of an intellectual honesty reason. Anyone 0:19:46.240 --> 0:19:50.680 who's sure they're right is very, very dangerous. The footnotes 0:19:50.720 --> 0:19:54.480 allow you to get past that point. Yeah, I love saying. 0:19:54.840 --> 0:19:57.399 First of all, we hate to kill our darlings, anybody rights, 0:19:57.480 --> 0:20:01.280 but secondly, you could very easily get stuck somewhere. All right, 0:20:01.320 --> 0:20:03.639 let me just throw this in a footnote, be done 0:20:03.640 --> 0:20:06.920 with it, and keep going. And it allows that. Okay, 0:20:07.040 --> 0:20:09.000 I've cleared the road for the rest of my thought. 0:20:09.040 --> 0:20:11.159 The footnotes have three purposes to me. There where I 0:20:11.160 --> 0:20:15.199 stick the humor, they are the hedges. Here are the 0:20:15.240 --> 0:20:17.360 ways that what I just said might have been bull 0:20:17.560 --> 0:20:20.920 blank and uh, and I could be wrong. And finally, 0:20:20.960 --> 0:20:23.119 they are sentences I love that my editor did not 0:20:23.200 --> 0:20:27.720 love where we can mutually agree that that that it's 0:20:27.760 --> 0:20:30.280 worth the foot that it's worth the footnote. But and 0:20:30.359 --> 0:20:32.480 they do, by the way, your editor just yes, is 0:20:32.560 --> 0:20:35.160 you god? I gotta deal with Cliff today? Just throw 0:20:35.200 --> 0:20:37.840 it in the footnote and keep going. It's helpful to 0:20:37.880 --> 0:20:40.760 have a weights paper batsket. I used to use a 0:20:41.040 --> 0:20:44.959 separate doc that I would whatever it was, something something 0:20:45.040 --> 0:20:47.640 something edits So when I would get stuck, I would 0:20:47.720 --> 0:20:50.040 let me just move the sentence this paragraph year because 0:20:50.080 --> 0:20:53.320 it's interfering with the narrative. And almost anyone who writes 0:20:53.440 --> 0:20:56.120 will find like they want to make the argument seven 0:20:56.160 --> 0:20:59.880 different ways because you want you want to both both 0:21:00.280 --> 0:21:02.400 kill the counter argument and then jump on its grave 0:21:02.960 --> 0:21:06.920 for a while. Anticipate a good editor will say, pick 0:21:07.000 --> 0:21:11.359 your one or maybe two best arguments and go with those. 0:21:11.720 --> 0:21:16.320 Um and and footnotes again are useful. So digression aside, 0:21:16.359 --> 0:21:19.800 Let's go back to the multiple strategies. Oh, I'm not done. 0:21:19.800 --> 0:21:24.000 I got to finish all right, Um, this could take 0:21:24.040 --> 0:21:26.879 the rest of the time. I cleared my schedule through dinner. 0:21:27.160 --> 0:21:30.480 We are multi strategy. We go through long periods, almost 0:21:30.560 --> 0:21:34.280 decade long periods, where we hardly talk about value. It's one, 0:21:34.720 --> 0:21:37.479 it's a relatively important factor, frankly, but it's it's not 0:21:37.520 --> 0:21:40.159 a it's not a majority of what we do, and 0:21:40.280 --> 0:21:42.800 we go through long periods. A good example would be 0:21:42.920 --> 0:21:47.360 post GFC through twenty seventeen, where value is tough. Yeah, 0:21:47.880 --> 0:21:51.720 and we had a great almost a decade. Because everything 0:21:51.760 --> 0:21:56.280 else we do work um profitability, one fundamental momentum, one 0:21:56.400 --> 0:21:59.600 low risk one. UM. We don't need value to work. 0:22:00.119 --> 0:22:02.760 A lot of that is because value lost over that 0:22:02.800 --> 0:22:06.200 period for what I will call and Gene Fama will 0:22:06.240 --> 0:22:10.640 have to forgive me here rational reasons, meaning the expensive 0:22:10.720 --> 0:22:17.520 companies buy and large outperformed, not on price, which they 0:22:17.520 --> 0:22:21.240 did also, but they out executed. They grew more in 0:22:21.359 --> 0:22:24.040 terms of earning sales, cash flows. If you are a 0:22:24.119 --> 0:22:27.360 pure value investor in a quant sense, just buying low multiples, 0:22:28.040 --> 0:22:30.960 you win on average because on average the price goes 0:22:30.960 --> 0:22:34.040 too far the cheap stuff. And there's a risk based 0:22:34.080 --> 0:22:37.320 explanation too. Again I'm pissing off Fama constantly on this, 0:22:39.040 --> 0:22:41.480 but you A big part of why you win, we think, 0:22:41.680 --> 0:22:44.840 is the expensive stuff is better to better company usually 0:22:45.080 --> 0:22:47.920 but not that much better, not what's priced in. That's 0:22:47.960 --> 0:22:52.480 on average sometimes thankfully more less often than not, but 0:22:52.680 --> 0:22:55.240 still quite often the expensive stuff ends up being worth 0:22:55.280 --> 0:22:58.360 it or more than worth it. And when that happens, 0:22:58.440 --> 0:23:01.840 the value factor, the qual value factor very different than 0:23:01.920 --> 0:23:03.479 how a Graham and Dodd investor. And we can get 0:23:03.520 --> 0:23:06.760 into this later we'll use the term value. That'll suffer 0:23:07.000 --> 0:23:10.000 at those times. But pretty much the rest of the 0:23:10.080 --> 0:23:13.119 process you can think of, and we do it all simultaneously. 0:23:13.119 --> 0:23:15.280 It's not really like one first than the other, but 0:23:15.359 --> 0:23:17.080 you can think of it as trying to avoid a 0:23:17.160 --> 0:23:21.840 value trap. Is this thing high profitability with things changing 0:23:21.840 --> 0:23:25.040 in the right direction and low risk. Therefore someone should 0:23:25.080 --> 0:23:28.080 pay a high multiple and you want to avoid value 0:23:28.119 --> 0:23:31.760 just shorting that that works like a charm in a 0:23:31.880 --> 0:23:36.280 rational market, in a bubble. And here again, I'll try 0:23:36.280 --> 0:23:38.680 to make this the final time. I'm a gene farm 0:23:38.760 --> 0:23:42.240 a heretic because I love the man who specifically says, 0:23:42.600 --> 0:23:46.800 what's a bubble? Yeah? I think I'm somewhere in between. 0:23:46.880 --> 0:23:48.840 I think I've seen a few in my career. I 0:23:48.880 --> 0:23:51.600 think they exist. I think they are far more rare 0:23:51.640 --> 0:23:53.560 than the way a lot of Wall Street refers to them. 0:23:53.720 --> 0:23:55.360 A lot of Wall Street will say a stock they 0:23:55.359 --> 0:23:57.920 think as expensive is in a bubble. Single stock can't 0:23:57.960 --> 0:24:00.640 be in a bubble. It has, though, I do think 0:24:00.640 --> 0:24:04.719 the tech bubble um and and certainly by by mid COVID, 0:24:05.160 --> 0:24:09.680 we were in a various kinds of kinds of bubbles 0:24:09.680 --> 0:24:13.840 in a bubble value loses. Of course, almost by definition, 0:24:13.880 --> 0:24:16.800 people want the darlings, but they but the darlings are 0:24:16.840 --> 0:24:19.160 not the ones who are out executing. They're the ones 0:24:19.200 --> 0:24:22.200 with the greatest stories. Um. So the rest of our 0:24:22.200 --> 0:24:27.160 process doesn't protect us very much. Um that is incredibly 0:24:27.200 --> 0:24:30.560 painful period for our process that both this time, which 0:24:30.640 --> 0:24:34.320 I think we're still in the midst of and we've 0:24:34.400 --> 0:24:36.640 more than recovered from the round trip, has been good 0:24:37.359 --> 0:24:40.960 but has led to some really tough times to wait out. 0:24:41.560 --> 0:24:44.480 Um My holy grail would be to come up with 0:24:45.080 --> 0:24:47.680 something to add to our process that would do really 0:24:47.720 --> 0:24:51.280 well in bubbles but not cost us money long term, 0:24:51.280 --> 0:24:54.800 because I don't think we can time these and I 0:24:54.800 --> 0:24:56.960 don't think i'll I don't really think i'll find that. 0:24:57.440 --> 0:25:00.320 And by the way, um this is self serving. But 0:25:00.400 --> 0:25:02.080 if your worst times are going to be when everyone 0:25:02.119 --> 0:25:04.680 else is partying in a bubble, and your best times 0:25:04.680 --> 0:25:07.240 are going to be when that bubble is killing everyone 0:25:07.280 --> 0:25:10.119 because it's coming down, it's not a terrible property. No, No, 0:25:10.200 --> 0:25:12.640 it is absolutely not. So we're going to talk more 0:25:12.640 --> 0:25:15.520 about value and growth later, but since you brought this up, 0:25:16.000 --> 0:25:18.360 I want to just throw a couple of ideas at 0:25:18.400 --> 0:25:22.120 you about that decade that followed the financial crisis, where 0:25:22.600 --> 0:25:27.080 not only did growth outperform value, but really thoroughly trounced it. 0:25:27.400 --> 0:25:29.399 So there are a couple of theories I've heard that 0:25:29.520 --> 0:25:35.240 I think are worth discussing. First, the decade before, at 0:25:35.320 --> 0:25:39.520 least the eight nine years before the financial crisis, value 0:25:39.600 --> 0:25:42.240 was winning and growth was getting killed. So you started 0:25:42.280 --> 0:25:45.240 from a relative uneven place. Maybe some of this was 0:25:45.320 --> 0:25:48.320 catch up. But the theme I kind of find more 0:25:48.400 --> 0:25:53.480 interesting is that prior to the financial crisis, Wall Street 0:25:53.560 --> 0:26:02.560 and the markets had systematically undervalued intangibles patents, copyright, algorithms, etc. 0:26:02.920 --> 0:26:06.840 How much of that twenty ten's rally was catch up 0:26:06.840 --> 0:26:09.960 for by intangibles, It certainly could have been some of 0:26:10.000 --> 0:26:15.240 the early part. A lot of quants added adjustments for 0:26:15.320 --> 0:26:19.880 that along the way. Most of us are not purists 0:26:19.920 --> 0:26:23.120 saying we're not going to change our models since nineteen. 0:26:23.520 --> 0:26:25.880 The notion, for instance, that R and D that's viewed 0:26:25.880 --> 0:26:29.879 as an expense, maybe all of it, maybe part of 0:26:29.880 --> 0:26:32.760 it should actually be capitalized, which would go into book 0:26:32.840 --> 0:26:35.560 value and make make a firm look not as expensive. 0:26:35.680 --> 0:26:37.320 A company that spends a lot of money doing R 0:26:37.400 --> 0:26:40.840 and D is investing in the future exactly, so I 0:26:41.160 --> 0:26:45.000 think that that maybe part of it. I think it's 0:26:45.080 --> 0:26:49.000 overdone in a few ways. One, it applies to more 0:26:49.000 --> 0:26:53.000 than just price to book, but it applies most directly 0:26:53.040 --> 0:26:55.760 to price to book where you're not capitalizing things like 0:26:55.880 --> 0:26:58.359 R and D. It can apply to earnings, but plenty 0:26:58.359 --> 0:27:01.840 of valuation measures has no applicability for price to sales. 0:27:03.080 --> 0:27:05.840 Is should make it's I don't see where you think 0:27:05.880 --> 0:27:08.639 about intangibles. What's the price and now what revenue is 0:27:08.640 --> 0:27:13.040 it generating? And those type measures did just about as 0:27:13.080 --> 0:27:17.800 bad as the ones that were contaminatable. Is that a word, 0:27:17.800 --> 0:27:22.760 I'm not sure, but it is now um, So I 0:27:22.840 --> 0:27:25.560 definitely think you want to account for that in places 0:27:25.600 --> 0:27:28.800 like price to book in earnings, and I think collectively, 0:27:28.880 --> 0:27:31.520 not just a qr UM. That has been an improvement 0:27:31.600 --> 0:27:34.480 how we measure value and the world has changed a bit, 0:27:35.520 --> 0:27:41.040 but we it applied, and caring about price versus anything, 0:27:41.520 --> 0:27:45.040 even if it were immune to intangibles, was not a 0:27:45.160 --> 0:27:49.439 very good thing until late twenty twenty since the GFC, 0:27:49.640 --> 0:27:52.760 so about eleven years. So I don't think that you know, 0:27:53.320 --> 0:27:56.000 the real world's always more complicated. Everyone's always looking for 0:27:56.320 --> 0:28:00.520 single explanations when a lot of things have multiple explanation. 0:28:00.560 --> 0:28:02.199 So I think this can definitely be part of it, 0:28:02.240 --> 0:28:04.600 but I don't think it's the main driver. Nuance is 0:28:04.640 --> 0:28:08.400 wildly underrated in finance, to say the least. Let's talk 0:28:08.440 --> 0:28:11.760 a little bit about your research and writing. And I 0:28:11.840 --> 0:28:15.080 want to quote your favorite publication, The New York Times, 0:28:15.480 --> 0:28:19.320 who wrote about you. Quote. He built a public reputation 0:28:19.760 --> 0:28:22.439 for his willingness to write and say what's on his mind. 0:28:22.800 --> 0:28:26.240 In academia, he's known for witty, biting papers he writes 0:28:26.520 --> 0:28:31.040 for such publications as The Financial Analyst Journal. I know 0:28:31.200 --> 0:28:34.359 you don't write to do branding, but what do you 0:28:34.440 --> 0:28:39.640 personally get out of a fairly steady stream of deep, 0:28:39.720 --> 0:28:42.880 thoughtful academic papers. First year being too kind? Of course, 0:28:42.920 --> 0:28:45.560 I write to do branding, Okay. I run a real 0:28:45.600 --> 0:28:48.560 world business and I prefer people to think we're good 0:28:48.560 --> 0:28:52.360 at this, And I think that's LEGiT's fair. If I 0:28:52.400 --> 0:28:55.760 write something that people think is lousy or they disagree 0:28:55.760 --> 0:28:57.840 with or misses the point, it's going to hurt our business. 0:28:58.360 --> 0:29:01.000 So I won't pretend part of it is not a 0:29:01.040 --> 0:29:03.520 business decision, but it's really not most of it. A 0:29:03.520 --> 0:29:06.040 lot of it is the DNA. Three of our four 0:29:06.400 --> 0:29:09.880 founders met at the PhD program at the University of Chicago. 0:29:10.680 --> 0:29:15.600 We consider writing academic or often that that kind of 0:29:15.640 --> 0:29:18.520 area in between academia and applied. You know, we've written 0:29:18.520 --> 0:29:21.080 a lot of papers in the Journal of Finance, the JFE, 0:29:21.080 --> 0:29:24.480 and that's true academia. A lot of our work shows 0:29:24.560 --> 0:29:27.120 up in great places like the Financial Analysts Journal and 0:29:27.160 --> 0:29:30.720 the Journal of Portfolio Management UM, which is kind of 0:29:30.720 --> 0:29:35.320 the nexus between those two. This will sound childish, but 0:29:35.360 --> 0:29:38.600 a fair amount of this is just personal consumption. We 0:29:38.720 --> 0:29:42.640 enjoy being part of that world. We grew up thinking 0:29:42.760 --> 0:29:45.280 part of the way you measure success is whether you 0:29:45.320 --> 0:29:49.520 influence the intellectual debate um, whether and and and and 0:29:49.840 --> 0:29:52.560 how you're regarded in those circles. And it's just part 0:29:52.560 --> 0:29:57.200 of our utility function. I do think a few things first. 0:29:57.520 --> 0:30:01.600 I always point out I don't know the exact breakdown, 0:30:01.880 --> 0:30:03.840 but a fair amount of what we do is public. 0:30:03.920 --> 0:30:06.720 But there's a fair amount that we think is proprietary. 0:30:06.960 --> 0:30:10.800 And there are things that I would have a QR 0:30:10.880 --> 0:30:15.440 researchers hunted it down and killed if they published. Yes, UM, 0:30:15.920 --> 0:30:19.000 my compliance area would like you to know that I'm 0:30:19.040 --> 0:30:21.800 I'm speaking hyperbole. I would like you to know that 0:30:21.840 --> 0:30:25.720 I'm not um. But there are there are things we think, 0:30:25.840 --> 0:30:27.680 you know even if there are things we think the 0:30:27.720 --> 0:30:29.880 world will discover where you think you're somewhat ahead on 0:30:30.200 --> 0:30:33.080 and we do try to walk that line on But 0:30:33.200 --> 0:30:35.760 a lot of what we do is, you know, is 0:30:35.800 --> 0:30:40.080 the value strategy cheap um someone role writer paper saying 0:30:40.120 --> 0:30:43.520 the betting against beta strategy is really all only small 0:30:43.560 --> 0:30:46.880 cap stocks and will respond to that. So it's really 0:30:46.920 --> 0:30:49.160 not giving away some of the stuff which I think 0:30:49.240 --> 0:30:53.160 does exist that is really unique. It does go to 0:30:53.240 --> 0:30:56.960 our taste and I do think besides just the the 0:30:56.960 --> 0:31:00.720 the advertising aspect, I think one que benefit to our 0:31:00.760 --> 0:31:04.640 business is we hire a lot of PhDs, including professors. 0:31:05.160 --> 0:31:08.360 We hire some full time and we have very strong 0:31:08.360 --> 0:31:10.960 relationships where they work kind of halftime for us. Usually 0:31:10.960 --> 0:31:13.000 they get to work full time for their school. Also, 0:31:13.640 --> 0:31:16.880 it's a great deal can they get to multiple jobs. 0:31:17.520 --> 0:31:19.560 And that's because what they're doing for us is also 0:31:19.600 --> 0:31:22.640 what they're researching. It's it's actually quite beautiful. I don't 0:31:22.640 --> 0:31:25.240 think we get taken nearly as seriously in that world, 0:31:25.720 --> 0:31:28.280 meaning it would be a recruitment challenge. You can say 0:31:28.280 --> 0:31:31.080 to a professor, you could write for your whatever you're 0:31:31.080 --> 0:31:33.720 working on, you can help us, and if you ever 0:31:33.800 --> 0:31:36.360 want to publish with us, we can play with Exactly. 0:31:36.360 --> 0:31:40.080 It's absolutely twofold. They're allowed again, within the stricture of 0:31:40.240 --> 0:31:45.840 if it's staggeringly proprietary, no, But broadly speaking, we're helping 0:31:45.920 --> 0:31:48.360 their academic career also because we're okay with them writing 0:31:48.400 --> 0:31:50.920 about a lot of this, and that's very attractive versus 0:31:50.920 --> 0:31:53.960 a firm that says you can't say a word. Second, 0:31:54.680 --> 0:31:56.960 I don't think we could have even access to these 0:31:56.960 --> 0:31:59.760 people to the same degree if we weren't producers as 0:31:59.760 --> 0:32:02.440 well as consumers of this research. You get a different 0:32:02.440 --> 0:32:05.720 respect level when you're publishing, at least occasionally in some 0:32:05.800 --> 0:32:08.960 of the same journals they are, and you've become enough 0:32:08.960 --> 0:32:13.320 of an institution that affiliation with AQR doesn't look bad 0:32:13.480 --> 0:32:17.160 on anybody's resume, and vice versa allows you to have 0:32:17.200 --> 0:32:20.600 access to some of the top academics that are out there. Absolutely, 0:32:21.000 --> 0:32:22.880 there are exceptions. I think, you know, kind of near 0:32:22.880 --> 0:32:25.320 the end of twenty twenty, maybe people were being quiet 0:32:25.320 --> 0:32:28.520 about that affiliation for a while. That was a short 0:32:28.600 --> 0:32:31.440 term performance. Yeah, I had nothing to do with your research. 0:32:31.560 --> 0:32:33.840 I'm kidding, I am. I am proud of the fact 0:32:33.840 --> 0:32:38.240 that I do think a QR on an academic resume 0:32:38.560 --> 0:32:42.240 doesn't at least doesn't hurt and maybe even helps. I would, 0:32:42.280 --> 0:32:47.560 I would say, you're being um, humble, beyond necessary. I 0:32:47.600 --> 0:32:49.440 can fake that at times. All right, Well, you know, 0:32:49.480 --> 0:32:52.800 if you can fake sincerity, that's that's all right. That's right. 0:32:52.920 --> 0:32:55.080 So let's talk about a couple of your publications that 0:32:55.320 --> 0:32:59.000 I was amused by. In late twenty nineteen, you wrote, 0:32:59.480 --> 0:33:03.720 bonds are freaking expensive? How do you invest around that thesis? 0:33:03.800 --> 0:33:07.800 Because going back to the bull market and bonds that 0:33:07.880 --> 0:33:11.400 began in nineteen eighty one, it felt like bonds were 0:33:11.400 --> 0:33:15.080 expensive throughout the whole twenty tens. What made you finally 0:33:15.080 --> 0:33:17.880 cry our uncle in twenty nineteen and say, all right, 0:33:17.960 --> 0:33:21.440 no muss. Well, first of all, I'm gonna somewhat disappoint 0:33:21.440 --> 0:33:24.280 you saying we do not take very big bets on 0:33:24.440 --> 0:33:30.960 views like timing asset classes based on valuation. Auntie Ellman 0:33:31.000 --> 0:33:34.680 and I wrote a paper I forget the exact title. 0:33:34.720 --> 0:33:36.880 I think one of them was called sin a Little, 0:33:37.560 --> 0:33:40.720 where we say timing the market and this applies to 0:33:40.760 --> 0:33:42.600 the bond market as well as the stock market. Is 0:33:42.640 --> 0:33:46.840 an investing sin, and ultimately we recommend you sin occasionally 0:33:46.880 --> 0:33:50.280 and a little. Not that I've done all my homework, 0:33:50.360 --> 0:33:55.120 but that was November seven, twenty nineteen. It's time to sin. Well, 0:33:55.160 --> 0:33:59.160 I've researched it recently, and you wrote it three years ago. 0:33:59.520 --> 0:34:01.920 I'm actually bad at keeping the catalog of my own work. 0:34:02.000 --> 0:34:03.760 There's there's a lot going on here. The one year 0:34:03.840 --> 0:34:08.400 referring to was about value timing, and it's really the 0:34:08.480 --> 0:34:13.000 same concept. We do believe that when that if you 0:34:13.080 --> 0:34:17.200 systematically follow a legit, meaning you're not forward looking, you're 0:34:17.200 --> 0:34:20.720 only looking at backward data. Try to time the stock market, 0:34:20.719 --> 0:34:25.360 the bond market, or even value based on how cheaper 0:34:25.480 --> 0:34:29.239 rich it looks. They usually have very very modest positive 0:34:29.880 --> 0:34:32.239 long term risk adjustive returns. As you said, you can 0:34:32.280 --> 0:34:36.359 go through long, long periods where they're overvalued and get 0:34:36.400 --> 0:34:43.719 more overvalued. Um. We do use valuation in concert with 0:34:43.880 --> 0:34:48.080 things like momentum and profitability and things where where now 0:34:48.120 --> 0:34:50.640 it starts to be better because it's negatively correlated to 0:34:50.680 --> 0:34:55.200 those and all else equal. If you have momentum and 0:34:55.280 --> 0:34:59.040 you're not overvalued, it may be better right if you 0:34:59.160 --> 0:35:02.320 if you're using the momentum, how much does timing really matters? 0:35:03.400 --> 0:35:06.600 It's in there with more um um that piece on 0:35:06.719 --> 0:35:10.400 bonds being freaking expensive um, which is going to eventually 0:35:10.400 --> 0:35:13.680 be a technical term. I'm gonna push it that I 0:35:14.160 --> 0:35:17.440 stressed in there. I don't know how to time this um. 0:35:17.480 --> 0:35:20.600 This is a five to ten year view. I know. 0:35:21.080 --> 0:35:25.200 I tried various methods of looking at bonds. This was 0:35:25.239 --> 0:35:27.360 well before the yield back up and well before the 0:35:27.360 --> 0:35:32.960 inflation spike. UM. Compared to any forecast or trailing version 0:35:33.000 --> 0:35:36.600 of inflation, and doing that consistently through time, bonds were 0:35:36.600 --> 0:35:40.480 about tied with giving you the least they've ever given 0:35:40.480 --> 0:35:45.799 you and tied for worst is I think expensive. How 0:35:45.880 --> 0:35:48.600 someone reflects that if they are taking a long horizon, 0:35:49.320 --> 0:35:51.560 now we can get into the tina there is no 0:35:51.600 --> 0:35:56.080 alternative equities didn't look great either. UM. I think a 0:35:56.200 --> 0:35:58.600 lot of why we publish these long term forecasts, and 0:35:58.680 --> 0:36:01.120 my colleague at the Eelman and is really the master 0:36:01.200 --> 0:36:04.120 of this is both we're interested in it and our 0:36:04.200 --> 0:36:07.600 clients really seem to value it, but we don't trade 0:36:07.640 --> 0:36:09.960 on a ten year forecast. UM. Let me give you 0:36:09.960 --> 0:36:12.520 an example, a ten year forecast. Let's say you have 0:36:12.680 --> 0:36:15.160 value has power, and that's even disputable, but we believe 0:36:15.200 --> 0:36:17.480 it does. To tell you, is this going to be 0:36:17.480 --> 0:36:19.800 a better or worse than normal ten years going forward? 0:36:20.560 --> 0:36:24.120 Very often the answer will be we predict positive returns, 0:36:24.160 --> 0:36:27.239 but considerably less than history. Okay, what do you do? 0:36:27.320 --> 0:36:30.120 Are you just hedging or is that a that's genuinely 0:36:30.200 --> 0:36:32.520 often a prediction from a from a model, sort of 0:36:32.560 --> 0:36:34.319 like the forty percent number? What are the odds of 0:36:34.320 --> 0:36:37.080 this happening? You can't be wrong when you say, yeah, 0:36:37.080 --> 0:36:39.879 this stuff is always wishy washy. You know, Statisticians never 0:36:39.960 --> 0:36:42.360 say we know this. They say the chance we're wrong 0:36:42.800 --> 0:36:48.120 is small, but it's also intellectually accurate. You don't ever 0:36:48.200 --> 0:36:50.840 know something, But imagine you have a forecast. Stocks usually 0:36:50.880 --> 0:36:53.920 make ten percent a year, and don't hold in any 0:36:53.960 --> 0:36:56.360 of these numbers. We think they're gonna make five percent 0:36:56.360 --> 0:36:59.880 a year, but not negative. You know what someone is 0:37:00.160 --> 0:37:03.360 who shorts for the next ten years or underweights against 0:37:03.520 --> 0:37:06.480 a benchmark. You know what happens if you short a 0:37:06.560 --> 0:37:11.080 positive but smaller than historical return, If you lose less 0:37:11.080 --> 0:37:13.080 than you would over history, and you get to go 0:37:13.120 --> 0:37:15.880 to your client after ten years, well, I lost your 0:37:15.880 --> 0:37:17.640 money for a decade, but the good news is I 0:37:17.680 --> 0:37:20.000 lost you less than I would have used lost over 0:37:20.040 --> 0:37:23.799 the average decade. And it's a good example where forecasting 0:37:23.840 --> 0:37:26.400 the ten year period can be interesting and can be vital, 0:37:26.760 --> 0:37:29.680 right if you're anywhere from an individual to a pension fund, 0:37:30.200 --> 0:37:32.920 saying how much do I have to save to retire? 0:37:33.520 --> 0:37:35.759 What you're going to earn on that money is an 0:37:35.800 --> 0:37:40.520 important number, but it's not necessarily a timing actionable number. 0:37:40.680 --> 0:37:43.560 For years, my dad it wasn't spreadsheet. It was a 0:37:43.600 --> 0:37:46.279 little piece of paper, and it was probably calculated all wrong, 0:37:46.320 --> 0:37:48.240 because I believe it or not, my dad was a enumerate. 0:37:48.840 --> 0:37:50.879 My mom was a math teacher, So okay, I got 0:37:50.880 --> 0:37:52.759 it from somewhere. But he had that little sheet what 0:37:52.760 --> 0:37:55.120 do I need to retire? Which I think everyone has 0:37:55.160 --> 0:37:58.839 in some extent, including institutions. So we think that number 0:37:58.880 --> 0:38:02.800 is really important. But I do not recommend trading on 0:38:02.960 --> 0:38:08.640 just valuation, except that sin a little. When things get 0:38:09.320 --> 0:38:12.319 I like to joke to one hundred twentieth percentile um. 0:38:12.600 --> 0:38:14.200 The joke, of course, is there's no such thing as 0:38:14.200 --> 0:38:18.320 one hundred twenty is beyond our lifetime experience. It's yeah, 0:38:18.520 --> 0:38:21.319 it's beyond anything we've seen before. It would have been 0:38:21.680 --> 0:38:24.200 twenty percent above the prior one hundred percentile. It's the 0:38:24.200 --> 0:38:27.880 new hundred percentile. And we've really tried hard and we 0:38:27.920 --> 0:38:31.319 can't find any rational reason for it. A small move. 0:38:31.520 --> 0:38:33.520 Don't be a hero, because again, these things can get 0:38:33.560 --> 0:38:36.840 crazier and crazier. That's the sin a little. We recommend 0:38:36.880 --> 0:38:39.920 sinning a little, and occasionally I recommend that burying your 0:38:39.920 --> 0:38:42.759 personal life also in a very different context. You can 0:38:42.800 --> 0:38:47.680 apply that anyway you would like. UM. And so at 0:38:47.719 --> 0:38:51.040 that point in twenty nineteen with bonds, I think we 0:38:51.040 --> 0:38:53.240 would have told people we probably own a drop less 0:38:53.760 --> 0:38:57.040 than normal on a really long horizon. But mostly we're 0:38:57.080 --> 0:39:02.719 telling people, assume you're gonna make less now the late 0:39:02.719 --> 0:39:07.040 twenty nineteen, UM, it's time for a sin I think 0:39:07.040 --> 0:39:08.680 it was. I think I tried to use is it? 0:39:08.760 --> 0:39:12.920 Is it pronounced vineal or venal? A mild sin um? 0:39:13.160 --> 0:39:15.400 You got you got two Jews here, we need a 0:39:15.440 --> 0:39:20.040 Catholic um. The what I basically said, it's time for 0:39:20.480 --> 0:39:24.040 I'm gonna say vineal value sin a veneal value timing 0:39:24.080 --> 0:39:26.960 sin um. And I was looking at the spread between 0:39:27.040 --> 0:39:30.400 cheap and expensive. What we I want to say we 0:39:30.480 --> 0:39:33.080 created this that is probably false. You never know who 0:39:33.080 --> 0:39:36.520 created things privately and didn't share them. We were the 0:39:36.560 --> 0:39:39.439 first to publish on this, UH, and it was back 0:39:39.440 --> 0:39:41.080 in the tech bubble. This is a twenty four year 0:39:41.120 --> 0:39:44.839 old result from nineteen ninety nine, very similar period to 0:39:45.120 --> 0:39:49.560 particularly nineteen and twenty value killed we think irrationally, so 0:39:49.600 --> 0:39:52.800 the other parts of the process don't help extremely painful 0:39:53.160 --> 0:39:57.359 huge recovery UH afterwards, but during the teeth of the pain, 0:39:58.000 --> 0:40:01.000 we wanted a measure of how dream it is. And 0:40:01.080 --> 0:40:04.000 you can't always just look at returns. Returns tell you 0:40:04.040 --> 0:40:07.200 the pain you're in. But if those returns were say, 0:40:07.320 --> 0:40:11.560 justified by massive you know, earnings growth, right, if your 0:40:11.560 --> 0:40:15.680 earnings double, your pee stays the same and your return 0:40:16.640 --> 0:40:18.799 and that didn't make you more expensive. If it just 0:40:18.840 --> 0:40:21.800 was a great result, and some of that can always 0:40:21.800 --> 0:40:24.000 be in there, so you want to be prospective. So 0:40:24.040 --> 0:40:27.480 we built this measure that's very simple. All the academic 0:40:27.560 --> 0:40:30.320 and implied work that was published at the time sordid 0:40:30.360 --> 0:40:34.799 stocks on valuation measures generally went long or overweight the cheap, 0:40:34.840 --> 0:40:38.800 and shorter or underweight the expensive, and really never addressed 0:40:38.880 --> 0:40:41.880 how cheap and how expensive you always get a spread. 0:40:42.320 --> 0:40:45.279 I'm fond of saying otherwise your spreadsheet is broken or 0:40:45.320 --> 0:40:48.240 every stock is coincidentally selling for the same price to sales. 0:40:49.000 --> 0:40:52.959 But sometimes that spread is huge, and sometimes it's very tight, 0:40:53.040 --> 0:40:56.200 and it does correspond to times that would intuitively strike 0:40:56.280 --> 0:41:02.960 you as frothy spread. The more attractive the valuation, the 0:41:03.080 --> 0:41:06.239 lower value the value stocks versus the growth. Value looks 0:41:06.280 --> 0:41:09.560 better versus growth on a three to five year horizon. 0:41:09.640 --> 0:41:12.920 It's also not pure. Value is never a great timing tool. 0:41:13.200 --> 0:41:15.240 I think you do put yourself on the right side 0:41:15.239 --> 0:41:19.640 of so called catalysts. When valuations are that extreme, bad 0:41:19.719 --> 0:41:22.320 catalyst for you will hurt a little, and good catalysts 0:41:22.320 --> 0:41:25.640 will help a lot. But but but it's still I 0:41:25.680 --> 0:41:28.920 wrote this in late twenty nineteen because spreads were approaching 0:41:28.920 --> 0:41:32.320 something I never thought i'd see again. They were approaching 0:41:32.360 --> 0:41:35.920 the tech bubble peaks. Really, that's shocking. In ninety nine 0:41:36.000 --> 0:41:39.920 before the what do we have off the pandemic lows 0:41:39.920 --> 0:41:42.359 the sixty eight percent gain in the SMP, and then 0:41:42.360 --> 0:41:44.680 the next year another twenty eight percent on top of that. 0:41:45.000 --> 0:41:49.879 So this is late. This is the late we were 0:41:49.960 --> 0:41:52.640 not there yet. And I'm talking about the spread between 0:41:52.719 --> 0:41:56.640 cheap and expensive, not not the whole market. The entire 0:41:56.680 --> 0:41:58.640 market if you like a Schiller cape or something was 0:41:58.760 --> 0:42:01.799 much worse in nine nine two hit about forty five, 0:42:02.200 --> 0:42:04.600 where it hit the low to mid thirties at the 0:42:04.640 --> 0:42:12.879 peak in two thousand. Same way, the indicator that when 0:42:12.880 --> 0:42:16.160 the schillcape is very high, the pe is very high, 0:42:16.200 --> 0:42:18.840 the ten year perspective returns are low. We don't actually 0:42:18.880 --> 0:42:21.359 go short something because of the schillarcape. It seems like 0:42:21.400 --> 0:42:24.080 it's been on the high side for decades. Yeah, that's 0:42:24.120 --> 0:42:25.839 one of the main ones Auntie and I look at 0:42:25.920 --> 0:42:28.680 and saying, it's pretty hard to make your money actively 0:42:28.719 --> 0:42:32.479 timing based on only the schillar cape. It is much 0:42:32.520 --> 0:42:38.200 more reasonable to have a valuable ten year modification to 0:42:38.280 --> 0:42:42.520 historical norms because the shillocape is high or low. But 0:42:42.640 --> 0:42:44.800 in late twenty nineteen I wrote this, It's time for 0:42:44.840 --> 0:42:48.720 a veneal value timing sin. I wrote that I'm ignoring 0:42:48.840 --> 0:42:52.759 momentum or trend here um, which is against a lot 0:42:52.800 --> 0:42:57.279 of our philosophy, and and largely because I thought this 0:42:57.440 --> 0:43:02.160 was epically crazy and it could come back very very quickly, 0:43:02.280 --> 0:43:05.360 just because on average, trend and momentum work on average. 0:43:05.920 --> 0:43:07.480 You want to be able to do something that works 0:43:07.520 --> 0:43:09.960 on average many many times. You only had one shot 0:43:09.960 --> 0:43:12.640 at this, right If this came back in a three 0:43:12.760 --> 0:43:16.000 month melt up for value stocks, you could miss a 0:43:16.000 --> 0:43:17.440 lot of it if you if you didn't do this, 0:43:17.880 --> 0:43:20.239 um so, And it turned out if I'd listened to 0:43:20.239 --> 0:43:23.319 trend plus value it has worked out well for us. 0:43:23.320 --> 0:43:25.040 It would have been even a little better. So there's 0:43:25.040 --> 0:43:27.000 a little bit of a moral story. I give you 0:43:27.080 --> 0:43:29.879 my faults as well as my but I wrote this thing, 0:43:30.280 --> 0:43:32.879 and then about I don't know four or five months later, 0:43:33.080 --> 0:43:35.239 I wrote a follow up piece saying, no sin has 0:43:35.280 --> 0:43:40.560 ever been punished this violently and this quickly. I will 0:43:40.640 --> 0:43:43.200 make an excuse, but I think as excuses go, it's 0:43:43.200 --> 0:43:47.000 one of the better ones. It's called covid. Um certainly 0:43:47.640 --> 0:43:51.000 that was not in my predictive power. Um Also, I 0:43:51.040 --> 0:43:55.960 think the market reacted ex posts certainly crazy to covid Basically, 0:43:56.000 --> 0:43:59.160 you remember, all you needed to own was Peloton and Tesla, 0:43:59.320 --> 0:44:02.319 and values were going to cease to exist in the lockdown. Well, 0:44:02.360 --> 0:44:05.160 Tesla started running up in anticipation of being added to 0:44:05.200 --> 0:44:10.760 the S and P before just really went next The 0:44:10.840 --> 0:44:13.400 value as we are almost anyone else measures it was 0:44:13.560 --> 0:44:17.960 destroyed over the first six months of COVID, and it 0:44:18.000 --> 0:44:21.680 turned out not to even be directionally true. The value 0:44:21.680 --> 0:44:25.839 stocks fundamentals, what I call them executing outside of what 0:44:25.880 --> 0:44:30.080 the market cares about, just executing their companies was actually strong, 0:44:30.880 --> 0:44:34.360 even including the pandemic, so the fear did not materialize. 0:44:34.360 --> 0:44:37.719 We thought those spreads got crazy, but they as approached 0:44:37.800 --> 0:44:41.279 as opposed to approaching tech bubble highs. Never thought i'd 0:44:41.280 --> 0:44:43.520 see in my career again after the tech bubble. Admit 0:44:43.600 --> 0:44:47.080 I got that wrong. They blew past it, well passed 0:44:47.160 --> 0:44:50.200 it when COVID hit, and we stuck to our guns 0:44:50.200 --> 0:44:53.080 and even added to that tilt a bit. We tried 0:44:54.560 --> 0:44:58.719 basically any explanation that someone from the outside, a strategist, 0:44:58.719 --> 0:45:01.880 a pun did, a client, consultant, or internal that we 0:45:01.880 --> 0:45:04.200 could come up with for why we might be wrong. 0:45:04.800 --> 0:45:07.160 You know, the way I think of these is, you've 0:45:07.200 --> 0:45:09.239 got to keep a really open mind, consider why you 0:45:09.360 --> 0:45:13.239 might be wrong, test that story, and if at the 0:45:13.360 --> 0:45:17.080 end of the day, there's something that's unprecedentedly crazy looking 0:45:17.920 --> 0:45:21.839 and you have after keeping that open mind rejected those 0:45:21.880 --> 0:45:25.839 stories for then you got to plant both feet and 0:45:25.840 --> 0:45:29.600 say I will not be moved. And I think we've 0:45:29.640 --> 0:45:33.160 gotten pretty good at that over time. I never wanted 0:45:33.160 --> 0:45:36.560 that one thing you asked earlier about investment philosophy changing, 0:45:36.600 --> 0:45:40.120 and we went off in twenty other fun tangents. One 0:45:40.280 --> 0:45:43.600 major way my investment philosophy has changed is at the 0:45:43.600 --> 0:45:46.080 beginning of my career thirty years ago. Really, if you 0:45:46.120 --> 0:45:49.000 go back to the Goldman days, if you had asked 0:45:49.000 --> 0:45:54.640 me what will make a great investor? Quantitative in my 0:45:54.760 --> 0:45:57.120 sake but in general, I would have probably given you 0:45:57.320 --> 0:46:01.520 an arrogant answer that, oh, just being smarter than other people, 0:46:03.160 --> 0:46:05.560 you know, being smarter than other investors than the market 0:46:05.600 --> 0:46:09.440 as a whole. The arrogant part is the implicit assumption 0:46:09.520 --> 0:46:11.840 that kind of comes along that I'm one of those people. 0:46:11.920 --> 0:46:16.200 At the I still think this is a bold statement. 0:46:16.320 --> 0:46:19.680 Smart is good. I don't think I haven't changed the 0:46:19.719 --> 0:46:24.240 sign on smart, but I now think long term success 0:46:24.640 --> 0:46:28.719 half the battle is after keeping that open mind. You 0:46:28.800 --> 0:46:32.640 can't skip that step. If you decide you're right, having 0:46:32.640 --> 0:46:38.520 an extremely ordinary sticktuitiveness to you is an equal partner 0:46:38.600 --> 0:46:41.000 to being smart, all right, So I'm gonna just edit 0:46:41.080 --> 0:46:44.040 what you just said for a moment because I understand 0:46:44.080 --> 0:46:47.080 exactly what you're saying, but I want to rephrase it. 0:46:47.440 --> 0:46:50.600 So intelligence in the market, those are table stakes. You 0:46:50.680 --> 0:46:55.480 have to assume everybody you're trading with and against is intelligent, 0:46:55.520 --> 0:46:58.320 even if it's not true. You have to assume that 0:46:58.320 --> 0:47:00.279 that's what's on the other side. Hey, I don't know 0:47:00.280 --> 0:47:01.680 who's on the other side of my trade, but I'm 0:47:01.680 --> 0:47:04.040 gonna assume they know at least what I know, if 0:47:04.080 --> 0:47:08.719 not more. What you're also sort of suggesting is you 0:47:08.800 --> 0:47:15.000 have to learn when your high conviction trades become I 0:47:15.160 --> 0:47:17.600 stick to my guns and ride this out, even if 0:47:17.640 --> 0:47:21.279 I'm wrong for a quarter or more or four this 0:47:21.320 --> 0:47:25.960 will eventually work or eleven because I know these numbers precisely. 0:47:26.280 --> 0:47:31.600 Because drawdowns have this amazing subjective. We borrow the term 0:47:31.640 --> 0:47:34.280 from physics time dilation, even though we use it differently, 0:47:34.840 --> 0:47:37.200 where you will look at if you look at a 0:47:37.200 --> 0:47:40.120 back test or even real life returns and you see 0:47:40.160 --> 0:47:43.160 a fairly horrible drawdown, but you know it ends well, 0:47:43.760 --> 0:47:45.560 you look at and go. Of course I'd stick with that. 0:47:45.600 --> 0:47:47.680 It's a great process. Look look at what it delivers 0:47:48.040 --> 0:47:51.080 two three years. As some of these can take. They 0:47:51.120 --> 0:47:56.200 are an eternity. Everyone wants quarterly numbers, which means you've 0:47:56.200 --> 0:47:59.319 gone back to people eleven times, twelve times and said 0:47:59.840 --> 0:48:03.160 we stink again. It becomes a proof statement the world 0:48:03.520 --> 0:48:06.839 and your show is a partial antidote to this. But 0:48:06.880 --> 0:48:09.480 the financial media does a great job of coming up 0:48:09.480 --> 0:48:12.440 with stories why whatever's working is the truth and whoever's 0:48:12.480 --> 0:48:18.279 losing right now? Um, so you're defending yourself. I do 0:48:18.360 --> 0:48:20.279 think we've done a great job of sticking our guns 0:48:20.280 --> 0:48:23.000 at these times. But I do worry that some years 0:48:23.000 --> 0:48:25.160 at the end of my life have been used up. 0:48:25.480 --> 0:48:29.800 What's the quote? There are some days at last decades 0:48:29.840 --> 0:48:33.279 and some decades that well, we talked about children. That's 0:48:33.280 --> 0:48:35.520 an example of decades to go by. In days, draw 0:48:35.560 --> 0:48:38.040 downs are an example of days that go by. Days 0:48:39.760 --> 0:48:42.600 it feels far longer than it really is. And what 0:48:42.680 --> 0:48:44.799 I might call I don't think it's a real term, 0:48:44.800 --> 0:48:49.880 but statistical time. When can you actually say this is wrong? Um, 0:48:49.960 --> 0:48:53.279 it's pain time. When you're in pain, time goes much 0:48:53.320 --> 0:48:56.439 more slowly. Time flies when you're having a good time. 0:48:56.560 --> 0:48:58.839 And this is the inverse and and this is this 0:48:58.920 --> 0:49:03.080 is perhaps self serving, but this raising us a rational 0:49:03.760 --> 0:49:07.759 after being open minded and cynical. Sticktuitiveness to half the 0:49:07.800 --> 0:49:11.200 battle is also why I think some of these things 0:49:11.320 --> 0:49:14.960 last and don't get arbitraged away in a reel as 0:49:15.040 --> 0:49:17.640 late as twenty seventeen, which again was a bad period 0:49:17.640 --> 0:49:19.279 for value but a very good period for us, and 0:49:19.440 --> 0:49:23.160 our firm grew. Most common question I'd get, particularly in 0:49:23.160 --> 0:49:27.439 public forms, would be, and it's an intelligent question, if 0:49:27.480 --> 0:49:30.600 this is as good as it looks like, why is 0:49:30.640 --> 0:49:34.000 in an arbitraged away? And I literally I did not 0:49:34.360 --> 0:49:36.640 expect or want to be as right as I was 0:49:36.680 --> 0:49:40.040 over the following three years. But I would say, particularly 0:49:40.080 --> 0:49:42.480 having lived through the tech bubble, you have no idea 0:49:42.520 --> 0:49:45.000 how hard this can be to stick with. At times 0:49:45.040 --> 0:49:48.439 it is not that easy. It seems easy now over 0:49:48.520 --> 0:49:53.359 full cycles. And I am schizophrenic about this. Half of 0:49:53.360 --> 0:49:56.440 me hates it because these times are hell, but half 0:49:56.440 --> 0:50:01.520 of me realizes that if they didn't exist, right, this 0:50:01.719 --> 0:50:03.920 every value manager on Earth, and it's probably applies to 0:50:03.960 --> 0:50:07.160 non value, but this is people like everyone every discipline 0:50:07.160 --> 0:50:10.760 on Earth in finance. Anyway, I'm gonna I'm gonna steal 0:50:10.800 --> 0:50:15.080 your line. You don't get the full glory of the 0:50:15.160 --> 0:50:18.640 upside without suffering through the out of favorite down. So 0:50:19.400 --> 0:50:23.040 West Gray, someone you and I talked about before we started, Um, 0:50:23.960 --> 0:50:27.120 has a great I think it's West's term. It is 0:50:27.840 --> 0:50:30.279 exactly where you gonna pain no premium. Oh no, I 0:50:30.320 --> 0:50:32.920 was gonna say even God would get five. An active 0:50:32.960 --> 0:50:36.960 manager is a line from Lestina said no pain, no premium. Um. 0:50:37.160 --> 0:50:40.399 I'm not good at I'm good at offering attribution. I'm 0:50:40.400 --> 0:50:44.040 not always good at actetting. But they're both awesome. So um, 0:50:44.080 --> 0:50:46.920 But I do think there's truth to that. My favorite 0:50:46.920 --> 0:50:49.040 story which I'm gonna make you listen to now, Okay, 0:50:49.120 --> 0:50:52.560 this is from the tech bubble. I am probably late 0:50:52.640 --> 0:50:55.960 ninety nine, early two thousand, UM, at home at night 0:50:56.040 --> 0:51:00.160 talking to my new wife, and I'm whining, and and 0:51:00.480 --> 0:51:02.919 worse than whining, I'm cursing up a blue streak about 0:51:02.960 --> 0:51:06.399 how stupid and crazy this world is, none of which 0:51:06.440 --> 0:51:08.800 I can repeat even with the lax or laws today 0:51:09.239 --> 0:51:12.000 on George Carlin, seven words, I still wouldn't go through 0:51:12.040 --> 0:51:14.759 what I was screaming that night. And she said to me, 0:51:14.800 --> 0:51:17.640 she only said one sentence. The rest was implied. She said, 0:51:17.880 --> 0:51:20.640 I thought you make your money because people have some 0:51:20.840 --> 0:51:26.759 behavioral biases and the rest is implied. She's saying, but 0:51:27.400 --> 0:51:30.359 when those biases get really ugly and they make really 0:51:30.400 --> 0:51:33.160 big mistakes, you whine like a stock pick. So wait, 0:51:33.200 --> 0:51:36.440 you're a quant and your wife is a behavioralist. My 0:51:36.520 --> 0:51:38.920 wife has a master's in social work, so I guess, 0:51:39.160 --> 0:51:42.920 I guess behavioralist is accurate. And anyone who's been happily married, 0:51:42.920 --> 0:51:44.560 which I'm going to search, she is and she can 0:51:44.600 --> 0:51:48.280 Rebut if you invite her on to me for for 0:51:48.280 --> 0:51:50.960 for a quarter century, is it has to be a 0:51:50.960 --> 0:51:55.359 bit of a behavioralist. But what we all want, which 0:51:55.360 --> 0:51:58.080 will never get, is a world where there are opportunities. 0:51:58.080 --> 0:52:00.600 We're active investors. We think we make the market a 0:52:00.640 --> 0:52:03.040 more efficient place. We think we make capital markets better. 0:52:03.080 --> 0:52:06.399 That's important for society. But we exist to a large 0:52:06.400 --> 0:52:09.319 extent to take the other side of errors and and 0:52:09.320 --> 0:52:12.080 and correct that. We don't want a world with no errors, 0:52:12.120 --> 0:52:14.279 because there's nothing to do. We want a world with 0:52:14.400 --> 0:52:18.400 there are significant errors. And after Barrier Cliff puts the 0:52:18.440 --> 0:52:21.560 position on eleven minutes later, the market realizes we were 0:52:21.640 --> 0:52:24.319 right and hands us our money. That doesn't work, though, 0:52:24.360 --> 0:52:27.200 And it doesn't work that way, it is almost perfectly 0:52:27.239 --> 0:52:30.440 calibrated to make sure most people can't do it. Um 0:52:30.800 --> 0:52:33.399 I like that phrase it I don't. I wouldn't say 0:52:33.440 --> 0:52:38.280 it's almost perfectly calibrated. The countryside is littered with people. 0:52:38.880 --> 0:52:40.319 By the way, I don't know how much I know 0:52:40.400 --> 0:52:43.439 you spend time on Twitter. We'll talk about that on 0:52:43.880 --> 0:52:48.600 Investment TikTok, which has since shrunk dramatically. I love it. 0:52:49.080 --> 0:52:53.360 I never got on investment well. I access it via Twitter. 0:52:53.719 --> 0:52:58.279 Do you like wrap your stuff on INVESTMENTO? Do you 0:52:58.360 --> 0:53:00.600 ever do? You may put it to a son trimality 0:53:00.680 --> 0:53:05.000 might be more proprible. What I love is so what 0:53:05.000 --> 0:53:10.280 what TikTok calls investing TikTok? I called Dunnan Krueger TikTok. 0:53:10.480 --> 0:53:14.120 And my favorite is the young couple, both good looking 0:53:14.160 --> 0:53:18.640 people who choose the way we The way we make 0:53:18.719 --> 0:53:21.560 money is we only buy stocks that are going up, 0:53:21.920 --> 0:53:23.719 and once they stop going up, we sell them, and 0:53:23.719 --> 0:53:27.239 that's how we subsidize our whole lifestyle. I am not paraphrasing. 0:53:27.280 --> 0:53:30.440 That is like a verbatium quote, as as one of 0:53:30.800 --> 0:53:34.880 jagadician Tipman or the two academics who really deserve prior 0:53:34.880 --> 0:53:36.759 place of momentum. But it's one of the very early 0:53:36.800 --> 0:53:39.520 discoveries of momentum. I always got to give them the 0:53:39.520 --> 0:53:42.759 there's a little truth to what they're saying, but they 0:53:42.800 --> 0:53:44.440 don't do it. Tend to do it in a very 0:53:44.440 --> 0:53:50.400 disciplined way, and very often um individuals and institutions and 0:53:50.520 --> 0:53:55.000 professional investors tend to be what I call momentum investors. 0:53:55.040 --> 0:53:58.080 At a value time horizon, they look at something that's 0:53:58.080 --> 0:54:01.880 been strong for three five years and it's got to 0:54:01.960 --> 0:54:04.040 keep going and at that time arising. You want to 0:54:04.080 --> 0:54:08.560 be a contrarian, not a momentum investor. So I feel obligated, 0:54:08.600 --> 0:54:10.640 as a co author of some of the momentum stuff 0:54:10.680 --> 0:54:13.279 to defend that a little bit. But this is not 0:54:13.360 --> 0:54:17.359 adding up well for these people, I promise. One last 0:54:17.400 --> 0:54:20.880 thing about it. A running joke I've had for years 0:54:21.480 --> 0:54:25.880 is people, in describing this kind of thing often subtly 0:54:26.200 --> 0:54:29.680 use the wrong tents. They talk about buying what has 0:54:29.840 --> 0:54:34.440 been going up, but the implication is it is going up, 0:54:34.800 --> 0:54:36.920 and you just gotta watch your tents. Very easy to 0:54:36.960 --> 0:54:39.200 identify what has going up, and it's part of our process. 0:54:39.560 --> 0:54:41.360 By the way, I would not be a pure momentum 0:54:41.360 --> 0:54:44.799 trader momentum has what the geeks will call a very 0:54:44.800 --> 0:54:48.920 bad left tail. Some famous periods of reversals in market, 0:54:48.920 --> 0:54:51.359 the most famous spring of two thousand and nine when 0:54:51.400 --> 0:54:54.480 we came off the GFC. Yeah, for multi factor it 0:54:54.560 --> 0:54:56.960 was actually enoughing value did well enough that it was 0:54:57.040 --> 0:54:59.960 not particularly but if you were a pure momentum investor, 0:55:00.400 --> 0:55:03.160 that was a very very ugly period. So in another way, 0:55:03.200 --> 0:55:07.000 I think this couple that I've never watched is probably 0:55:07.000 --> 0:55:10.160 getting it wrong. Yeah, to to say the very least, 0:55:10.360 --> 0:55:13.719 So I could talk about your publications forever. There's a 0:55:13.880 --> 0:55:16.960 few that I feel like, why don't I throw three 0:55:17.040 --> 0:55:19.239 or four at you and you tell me which ones 0:55:19.280 --> 0:55:22.200 you want to talk about? Stock options and the lying 0:55:22.280 --> 0:55:26.279 liars who don't want them, stock buybacks, unmitigated good or 0:55:26.320 --> 0:55:32.040 incomprehensible evil. That's a paraphrase. AQR Zone research has disproven 0:55:32.080 --> 0:55:36.960 the size factor and undermined long term investing or for 0:55:37.800 --> 0:55:42.680 what is volatility laundering? Okay, I mean I'm gonna I 0:55:42.800 --> 0:55:45.080 usually lie about this, but I'm gonna try to be 0:55:45.200 --> 0:55:48.520 quick and just go go through them. Stock options and 0:55:48.560 --> 0:55:51.080 the lying liars who don't want to or won't expend 0:55:51.080 --> 0:55:53.000 somebody forget the exact title. It was a player in 0:55:53.040 --> 0:55:55.640 an Al Franken book back in the back in the time. 0:55:55.840 --> 0:55:58.600 I think Rush Limbaugh was the was the was the 0:55:58.719 --> 0:56:03.320 villain in his title. This was particularly post tech bubble. 0:56:03.719 --> 0:56:08.719 There's been this issue forever that stock based compensation, be 0:56:08.760 --> 0:56:13.760 they options or particularly if they're options, are not considered 0:56:13.800 --> 0:56:17.800 an expense of the company. That the paper I wrote, 0:56:17.840 --> 0:56:20.320 does this beat to death. Let's look at the twenty 0:56:20.320 --> 0:56:22.480 two ways you could argue this and why they're all stupid. 0:56:23.480 --> 0:56:26.920 The best argument is the simplest one. These people accept 0:56:26.960 --> 0:56:31.560 a lower salary and want these things. Obviously they're costly 0:56:32.000 --> 0:56:35.399 ultimately to shareholders. What's a little said? And I won't 0:56:35.400 --> 0:56:38.760 go through all the other subtleties. What's a little sad? 0:56:38.800 --> 0:56:42.120 As We kind of won the battle in that current 0:56:42.120 --> 0:56:45.279 accounting standards make you expense stock options, and that was 0:56:45.320 --> 0:56:48.240 a change, but we also lost the battle because plenty 0:56:48.280 --> 0:56:51.439 of firms, particularly in the tech world, still issue kind 0:56:51.440 --> 0:56:55.600 of ProForma earnings that don't expense them, and a lot 0:56:55.600 --> 0:56:58.200 of Wall Street analysts, to their shame, in my opinion, 0:56:58.840 --> 0:57:01.560 let them get away with it. Use those numbers. They're 0:57:01.600 --> 0:57:06.000 just not real. Let's go to one of your favorites buybacks, buybacks. 0:57:06.480 --> 0:57:11.720 You gave this manichean evil or good. My positions, actually, 0:57:11.920 --> 0:57:14.560 I don't say it mildly, but much more mild than that. 0:57:15.120 --> 0:57:20.040 My position is they're largely in nothing. They're largely um, 0:57:20.520 --> 0:57:23.480 very close to a dividend, you can say, and you 0:57:23.520 --> 0:57:25.919 can argue there are a more tax efficient, more tax 0:57:25.960 --> 0:57:27.760 efficient dividend. And by the way, I don't take a 0:57:27.840 --> 0:57:29.520 great stance on how they should be taxed. That's a 0:57:29.600 --> 0:57:32.680 separate issue. I take a stance on the idea that 0:57:32.800 --> 0:57:35.360 they're evil. Um. And by the way, that this is 0:57:35.400 --> 0:57:38.320 one of the fun ones today because it's horseshoe theory. 0:57:38.480 --> 0:57:41.880 Both the left and the right hate buybacks. Yeah, it's 0:57:41.920 --> 0:57:44.720 kind of interesting, isn't it. It's just, you know, for 0:57:44.880 --> 0:57:49.280 different levels of numeracy and paranoia. Um, they think this 0:57:49.440 --> 0:57:52.760 is just a scam. Again, there could be forty arguments 0:57:52.920 --> 0:57:56.080 for why buybacks are neutral and are not the evil 0:57:56.160 --> 0:57:59.080 thing you think. We give you one argument. Sure, in 0:57:59.160 --> 0:58:02.439 a world where companies do buy backs and other companies don't, 0:58:02.880 --> 0:58:05.560 the companies that do buy backs tend to perform better 0:58:05.640 --> 0:58:07.840 than the ones that don't. They that's been a very 0:58:07.960 --> 0:58:10.840 mild effect. But it has been true, and it's been 0:58:10.880 --> 0:58:13.160 a relevvely short term. Now is it. Whether it's causation 0:58:13.240 --> 0:58:16.000 or correlation is a whole nother conversation. If it is causation, 0:58:16.440 --> 0:58:20.360 the most likely estimate, which is not crazy, as management 0:58:20.440 --> 0:58:23.440 has more information than you do about about the stock. 0:58:23.840 --> 0:58:26.800 And by the way, if they, if they, if they 0:58:26.920 --> 0:58:29.640 do believe the stock is undervalued, and very often this 0:58:29.720 --> 0:58:32.400 is public information. They're just saying we're really undervalued, right, 0:58:33.320 --> 0:58:37.200 they should be buying things back. It's voluntary whether you sell, 0:58:37.240 --> 0:58:39.880 and those who don't choose to sell will benefit from that. 0:58:40.120 --> 0:58:43.160 So I have no problem with that. It is a 0:58:43.320 --> 0:58:46.640 relevely small effect. But that's interesting because you make such 0:58:46.760 --> 0:58:49.560 a I've watched you. You and I have debated it 0:58:49.720 --> 0:58:52.040 on Twitter. But I've watched you and I'm not so 0:58:52.200 --> 0:58:55.320 far from your position. But I've watched you demolish people 0:58:55.400 --> 0:58:58.800 on Twitter as if it's a giant. Hey, this is 0:58:58.880 --> 0:59:02.440 like the value effect. It's not. It's it's much smaller. 0:59:02.480 --> 0:59:04.560 If I've done that. That is one of my many 0:59:04.680 --> 0:59:07.240 Twitter exaggerations. I will not claim that I always keep 0:59:07.280 --> 0:59:11.520 a calm head on Twitter. Um, but the simplest way 0:59:11.520 --> 0:59:14.360 to explain it now, let me give you two quick ones. 0:59:14.840 --> 0:59:17.840 One is most of it is a re allocation or 0:59:17.880 --> 0:59:21.600 other stocks. When most investors get participate in a buy back, 0:59:21.920 --> 0:59:23.960 they put it in back in the stock market, run 0:59:24.040 --> 0:59:27.120 in another stock. It's a diversifier. So you know, a 0:59:27.240 --> 0:59:32.200 company that has great investment opportunities is seeking more capital 0:59:32.240 --> 0:59:34.919 and a company that doesn't should be giving capital back. 0:59:35.000 --> 0:59:37.400 So that's how it's supposed to work. Second is even 0:59:37.560 --> 0:59:41.640 more basic, and this does not get enough play. The 0:59:41.760 --> 0:59:45.760 shareholders own earn the money. They own the money. If 0:59:45.800 --> 0:59:48.000 there's cash on the balance sheet or assets on the 0:59:48.040 --> 0:59:51.760 balance sheet, the shareholder, it's the shareholders if they choose 0:59:51.880 --> 0:59:54.240 to move it to There's only one group that's allowed 0:59:54.240 --> 0:59:56.720 to get upset at them if they choose to move 0:59:56.800 --> 0:59:59.320 it from the company to their own balance sheet, which 0:59:59.360 --> 1:00:00.960 is not stealing because they owned it when it was 1:00:01.000 --> 1:00:05.720 in the company. Right. Bonds, often corporate bonds can have 1:00:05.880 --> 1:00:09.360 covenants that say you can't lever beyond a certain point, 1:00:09.720 --> 1:00:11.920 and if buybacks pushed past that point, then there's a 1:00:12.000 --> 1:00:16.880 legitimate argument, but that's contractual. The bond holders should be 1:00:16.960 --> 1:00:19.040 a lawsuit that would stop that. I think I think 1:00:19.120 --> 1:00:22.760 got to be pretty much. I think UM buybacks also 1:00:22.840 --> 1:00:26.360 get a little demonizes because incorporations do do this UM 1:00:26.640 --> 1:00:30.720 for some reason I do not understand. They often couple 1:00:30.840 --> 1:00:35.040 them with the executive stock option grants we talked about before, 1:00:35.800 --> 1:00:37.840 and I think there is a little subterfuge going on there. 1:00:37.840 --> 1:00:41.640 They don't want to share account to change a whole lot, 1:00:41.760 --> 1:00:43.800 and because questions will be asked. I think that's the 1:00:43.880 --> 1:00:47.560 most valid criticism is, hey, you're really hiding all this 1:00:47.720 --> 1:00:51.000 exact compensation by doing a expense and it jibes with 1:00:51.160 --> 1:00:54.880 the lying liars stuff, But it is not the buyback 1:00:54.960 --> 1:00:57.320 per se that's bad. The buyback is still a neutral. 1:00:57.320 --> 1:01:00.080 They're paying a market price for the security. So I 1:01:00.120 --> 1:01:03.080 wish people would be more precise. So largely on buybacks, 1:01:03.520 --> 1:01:06.720 I think, And again maybe in contrast to some of 1:01:06.840 --> 1:01:10.600 my more aggressive things I've tweeted on occasion, I want 1:01:10.640 --> 1:01:13.439 you to find those tweets. Yeah they're I think you've 1:01:13.480 --> 1:01:15.360 deleted a bunch there. I don't know if they're around 1:01:15.400 --> 1:01:17.360 where anyone could well. I challenge you to find them, 1:01:17.480 --> 1:01:20.040 knowing I've deleted them that this is part of my strategy. 1:01:20.960 --> 1:01:24.440 But it regardless if you look at what we wrote. 1:01:25.160 --> 1:01:27.919 The derangement we write about is how much people hate 1:01:27.960 --> 1:01:31.320 them buy back derangement syndrome. Yeah. We titled both a 1:01:32.280 --> 1:01:34.960 h an academic paper in the journal Portfolio Management and 1:01:35.040 --> 1:01:37.320 a Wall Street Journal editorial. So you know, from whence 1:01:37.400 --> 1:01:40.880 the derangement comes? I know, trump arrangement. No well no, no, no, 1:01:42.000 --> 1:01:44.560 by the way, it used to go back to bushed arrangements. Oh, 1:01:44.600 --> 1:01:46.400 it's not just trying to remember it from yeah. No, 1:01:46.840 --> 1:01:48.919 So you know, when you get older, the memory start 1:01:49.080 --> 1:01:51.640 at some point there was there a Millard Fillmore direction. 1:01:52.400 --> 1:01:54.280 I'm not that old, I'm not that much older than you. 1:01:54.400 --> 1:01:58.920 But it's just all of the anecdotal examples that people 1:01:59.320 --> 1:02:04.040 my two faces. Back in the day, Dell was notorious 1:02:04.160 --> 1:02:07.960 for top ticking the market when announcing their stock buybacks. 1:02:08.000 --> 1:02:11.680 But now you have the train derailments and they had 1:02:11.720 --> 1:02:14.800 a buyback last year, so of course the buyback is 1:02:14.840 --> 1:02:17.400 the reason why they didn't upgrade their breaks, and that 1:02:17.600 --> 1:02:22.440 example become it sort of colors everybody's here. You respect them, 1:02:22.560 --> 1:02:27.080 Medigliani and Miller. Firms should and I'm not saying theories perfect, 1:02:27.200 --> 1:02:30.840 but as a starting point, firms should pursue all positive 1:02:30.920 --> 1:02:34.520 net present value projects. And I do think most management tries, 1:02:34.560 --> 1:02:39.200 I think the short terminism can be exaggerated. So if 1:02:39.240 --> 1:02:42.400 they need the money they should be investing. They can 1:02:42.520 --> 1:02:44.520 raise money in debt and a lot a lot of 1:02:44.560 --> 1:02:47.280 the buybacks, by the way, and you could argue leverage 1:02:47.320 --> 1:02:51.040 has its own problems. But have been a corporate treasurers 1:02:51.080 --> 1:02:54.640 thinking that bonds were more overvalued than stocks, so they 1:02:54.680 --> 1:02:58.040 should buyback stock and sell another arge during the twenty tens, 1:02:58.240 --> 1:03:03.760 it's very rational to borrow cheap and buy back stock. Yes, essentially, 1:03:04.160 --> 1:03:07.360 And and that means and we show this in our 1:03:07.480 --> 1:03:09.120 in our more formal paper, there wasn't room to do 1:03:09.200 --> 1:03:12.000 it in the Wall Street Journal that investment has really 1:03:12.040 --> 1:03:14.760 not suffered on net. You can always pick and choose, 1:03:14.800 --> 1:03:17.360 and in an argument, every side pixes and chooses their 1:03:17.400 --> 1:03:20.040 favorite examples. This is a company that brought back that 1:03:20.160 --> 1:03:23.360 then did great and uh and and you know Apple 1:03:23.440 --> 1:03:25.840 has brought back a ton and sometimes they're criticized for that, 1:03:26.320 --> 1:03:28.920 and I'm like, it's it's well, it's fairly well, It's 1:03:28.920 --> 1:03:31.720 worked out fairly well for them. They don't say Buffett. 1:03:31.720 --> 1:03:33.880 They also have a ridiculous amount of cash. Apple on 1:03:33.960 --> 1:03:36.960 the book, so it's not like they needed the money. 1:03:37.280 --> 1:03:40.520 Buffett is a huge defender of of of buybacks, so 1:03:41.080 --> 1:03:44.320 I think I'm mainly yelling into avoid saying this is 1:03:44.360 --> 1:03:47.520 just not that big a deal, but it's politically too 1:03:47.600 --> 1:03:51.040 good for populace of both stripes to yell about to 1:03:51.160 --> 1:03:55.600 go away. Huh really really interesting. Last week actually I 1:03:55.840 --> 1:04:00.320 interviewed Maria Vassalu from Goman Sack's Asset Management, who painted 1:04:00.440 --> 1:04:04.400 out that within the small cap effect really is a 1:04:04.560 --> 1:04:09.919 microcap effect and if the small cap has effect has disappeared, Well, first, 1:04:10.000 --> 1:04:13.760 let's let's talk about your research. Was there ever truly 1:04:13.960 --> 1:04:17.120 a small cap effect? I'll start out saying I don't 1:04:17.240 --> 1:04:19.920 know if I don't think I've met Maria, but she's right, Um, 1:04:21.440 --> 1:04:24.320 was there ever? Is the right question. There's a little 1:04:24.360 --> 1:04:28.000 bit of a of a Keanu Reeves matrix thing going 1:04:28.120 --> 1:04:32.160 on here. Is there really a spoon red pillars? Yea. 1:04:32.960 --> 1:04:36.840 Our Our view is there never really was one. Our 1:04:36.920 --> 1:04:38.520 view is not that there was one and it got 1:04:38.640 --> 1:04:41.160 arbitraged away, which is a different way to view it. 1:04:41.760 --> 1:04:46.640 UM essentially or in the early eighties, UM, the original 1:04:46.760 --> 1:04:50.280 capital asset pricing studies look pretty good. Seemed like beta 1:04:50.400 --> 1:04:54.320 was rewarded, and that later got revised also um but 1:04:54.480 --> 1:04:57.959 then hole started appearing in that pure one factor world. 1:04:58.560 --> 1:05:03.880 The first major one was that even after accounting for beta, 1:05:04.520 --> 1:05:07.960 small cops caps generally have higher betas they move more. 1:05:08.280 --> 1:05:11.000 If the market goes up five percent on average, they 1:05:11.080 --> 1:05:14.400 might go up seven percent as as a group, So 1:05:14.600 --> 1:05:17.640 you're suggesting it's just a more risk they're they're more 1:05:17.720 --> 1:05:21.560 volatile as a rule, and beta's composed of correlation and volatility. 1:05:22.200 --> 1:05:24.680 I think it's more of the volatility than the correlation driving, 1:05:24.720 --> 1:05:28.400 but they're higher beta. The cap m or all theory 1:05:28.520 --> 1:05:31.520 says you should make more money if you're higher beta, 1:05:31.720 --> 1:05:35.520 but not more than that. And the findings were not 1:05:36.760 --> 1:05:39.280 that small cap makes more money. That's not that interesting. 1:05:40.000 --> 1:05:43.440 The findings with small cap makes more money than implied 1:05:43.520 --> 1:05:50.600 by their higher betas, so even more that over years 1:05:50.720 --> 1:05:52.640 some of the work a lot of the work being ours, 1:05:52.680 --> 1:05:56.280 but not all of it has been revised. Two big revisions. 1:05:56.480 --> 1:05:58.880 The second one we really were a big part of 1:05:59.200 --> 1:06:03.440 the first was simply revisions to the databases. Small cap 1:06:03.520 --> 1:06:09.560 stocks delist more often than large cap stocks. In any study, 1:06:09.920 --> 1:06:12.080 you need to make an assumption about what people actually 1:06:12.120 --> 1:06:15.280 got out of that delisting way. You're suggesting this whole 1:06:15.320 --> 1:06:18.160 thing is just survivorship bias a little bit though though 1:06:18.240 --> 1:06:22.760 not you know, with well intentioned people had assumptions for 1:06:23.520 --> 1:06:27.200 delisting returns. The general consensus, and my expertise does not 1:06:27.320 --> 1:06:31.680 lie here, but the general consensus is they underestimated the 1:06:31.800 --> 1:06:36.040 negativity of those delisting returns, all else equal, making small 1:06:36.080 --> 1:06:39.280 cap a little less attractive because your data has has 1:06:39.320 --> 1:06:44.000 not accounted for enough. Where we jumped in is again, 1:06:44.120 --> 1:06:46.400 remember we're not talking about the small beat large. We're 1:06:46.440 --> 1:06:49.840 talking about does it beat it beyond its beta? Is 1:06:50.960 --> 1:06:53.400 those betas, and we're not the only ones to do 1:06:53.480 --> 1:06:55.760 this too. Shoals and Williams looked at it a while ago. 1:06:57.520 --> 1:07:02.560 Those betas are generally under estimated by conventional techniques. If 1:07:02.640 --> 1:07:05.280 you do a quant geek's favorite thing, regress the monthly 1:07:05.320 --> 1:07:09.240 returns on small versus large on the market, you get 1:07:09.360 --> 1:07:13.200 up beta more than you get a positive beta. Small 1:07:13.640 --> 1:07:15.560 has a higher beta than large, so if you go 1:07:15.640 --> 1:07:17.680 long small and short large, you have a positive beta 1:07:18.160 --> 1:07:21.320 left over. A lot of small doesn't trade every day. 1:07:22.360 --> 1:07:25.720 If you look over a few months, those betas increase. 1:07:25.760 --> 1:07:28.880 If you if you do statistical work, we include the 1:07:29.000 --> 1:07:32.480 response of small not just to this month's cap weighted market, 1:07:32.880 --> 1:07:36.000 but to the last few. It tends to get into 1:07:36.000 --> 1:07:39.640 the small cap prices slowly, but that's still real. So 1:07:39.840 --> 1:07:44.800 we've underestimated their betas. If their betas are underestimated, meaning 1:07:44.840 --> 1:07:47.440 we thought they were too low, we've overestimated their alphas. 1:07:48.000 --> 1:07:51.600 Their betas should have been higher. More of their return 1:07:51.640 --> 1:07:54.640 should be just attributed to the market going up, and 1:07:55.200 --> 1:07:58.960 it's not. And basically between those two things, there's nothing 1:07:59.040 --> 1:08:01.760 going on small caps and this is not a bad thing. 1:08:02.240 --> 1:08:05.919 Small caps need to be priced reasonably efficiently versus large caps. 1:08:06.080 --> 1:08:08.680 One thing, by the way, that's kind of surprising, given 1:08:09.120 --> 1:08:12.080 how much more coverage is on the better known big 1:08:12.160 --> 1:08:16.000 caps and how often these are orphans. Well, I think 1:08:16.040 --> 1:08:19.000 that does show up in something you anticipated me. I'm 1:08:19.000 --> 1:08:22.639 about to say, these get confused occasionally. I do think 1:08:22.800 --> 1:08:27.960 many of the factors anomalies affects that quants and academics 1:08:28.000 --> 1:08:32.400 believe in value being again, maybe maybe the poster child, 1:08:32.479 --> 1:08:36.080 but not the only one, do work better among small caps. 1:08:36.680 --> 1:08:42.439 So long cheap short expensive in small caps and certainly 1:08:42.640 --> 1:08:46.640 has a higher gross risk adjusted return net, they're more 1:08:46.680 --> 1:08:48.680 expensive to trade. I still think that's going to be 1:08:48.800 --> 1:08:51.400 the truth the case net, but it's it's a little 1:08:51.439 --> 1:08:54.920 more arguable. But I have no problem with someone saying 1:08:54.960 --> 1:08:57.920 I love small value because I think value probably does 1:08:57.960 --> 1:09:02.160 work better. That's very small. But the so called small 1:09:02.240 --> 1:09:05.640 cap effect, it often gets conflated with that. It is 1:09:05.800 --> 1:09:09.799 not small value. It's that small is better than large 1:09:10.600 --> 1:09:16.080 and just and that we're finding is no longer. We 1:09:16.160 --> 1:09:18.400 don't think it's supported, at least if you only adjust 1:09:18.439 --> 1:09:22.880 for beta. Just to make everyone's head hurt. We have 1:09:23.000 --> 1:09:27.599 an additional paper showing that using the more modern factors 1:09:27.640 --> 1:09:30.240 that weren't even around in the eighties when guys like 1:09:30.360 --> 1:09:32.800 Ralph Bonds and a few others were were looking at 1:09:32.800 --> 1:09:34.679 the small cap effects, so I can't say they should 1:09:34.720 --> 1:09:39.120 have used them. Small cap tend to be bad on 1:09:39.280 --> 1:09:44.360 some of the newer factors betting against beta profitability, they 1:09:44.439 --> 1:09:48.600 tend to be fairly unprofitable. If you adjust for that, 1:09:48.800 --> 1:09:52.479 they should do even worse in a modern sense, and 1:09:52.840 --> 1:09:55.600 ironically you get back to a small cap effect, but 1:09:55.840 --> 1:09:58.280 only if you adjust for kind of the full penalty 1:09:58.720 --> 1:10:03.560 of modern factors. Small cap against the market is not 1:10:03.760 --> 1:10:07.479 a bargain. What about the microcap against the small cap? 1:10:07.600 --> 1:10:11.600 Why does think to have something well? Again, even including that, 1:10:11.720 --> 1:10:13.719 I think we see most of the small cap effect 1:10:13.800 --> 1:10:16.360 go away when you adjust for the delisting again and 1:10:16.520 --> 1:10:19.400 the and the higher beat is from illiquidity. But whatever, 1:10:19.600 --> 1:10:23.640 if there's something left, it is disproportionately coming from microcap, 1:10:23.760 --> 1:10:27.000 that's true. Let's talk a little bit about one of 1:10:27.080 --> 1:10:30.599 the things we haven't discussed, which is macro, and twenty 1:10:30.680 --> 1:10:33.679 twenty two was kind of a good year for macro 1:10:33.840 --> 1:10:35.280 at least if you want on the right side of 1:10:35.360 --> 1:10:42.200 the trade. Um Why why why was last year so unique? Well, 1:10:42.320 --> 1:10:44.840 it's it's interesting we haven't talked. We've focused largely on 1:10:44.920 --> 1:10:48.280 stock selection and value um. A big part of our 1:10:48.320 --> 1:10:52.439 business is actually macro um. It is I often say, 1:10:52.479 --> 1:10:54.439 we do less than people think they think we do 1:10:54.520 --> 1:10:56.560 all these different things, but a lot of what we 1:10:56.640 --> 1:11:00.680 do in macro and an early inside of ours, when 1:11:00.920 --> 1:11:04.720 frankly about nineteen ninety five at Goldman Sachs was if 1:11:04.800 --> 1:11:08.080 you look at the factors again, it was really value, 1:11:08.120 --> 1:11:11.080 momentum and size at that point and apply them to 1:11:11.200 --> 1:11:13.920 macro decisions what country to be in, what currency to 1:11:14.040 --> 1:11:18.560 be in they had similar efficacy. They worked in the 1:11:18.640 --> 1:11:21.519 statistical sense. I always say statistical sense. If your car 1:11:21.600 --> 1:11:24.439 work like this, you'd fire your mechanic. Right If your 1:11:24.479 --> 1:11:26.920 car work six out of ten days, that would be 1:11:26.960 --> 1:11:30.720 pretty bad, but it's pretty great as a as a strategy. 1:11:31.560 --> 1:11:35.320 So we've been using value momentum even for market direction. 1:11:35.439 --> 1:11:38.200 Trend has become an increasingly it's probably the most important 1:11:38.240 --> 1:11:40.920 part of what we do in the macro side, with 1:11:41.400 --> 1:11:45.880 economic trends, not just price trends being a releavely recent 1:11:45.920 --> 1:11:52.519 innovation and super important and last year trend following in particular, 1:11:52.560 --> 1:11:54.280 which is a subset of macro I will tell you 1:11:54.360 --> 1:11:57.000 we also run some where we consider relative value and 1:11:57.160 --> 1:12:00.599 carry and other things, but we run some really focused 1:12:00.640 --> 1:12:05.880 on both economic and price trend factors um that we've 1:12:05.880 --> 1:12:09.559 always described as having kind of a dual mandate. Long term, 1:12:09.600 --> 1:12:12.000 it's supposed to make money. It's not a crazy thing 1:12:12.040 --> 1:12:15.880 for an investment to do right, but it's supposed to 1:12:16.000 --> 1:12:20.960 do particularly well in really bad times. This is a 1:12:21.080 --> 1:12:24.920 managed futures industry, the CTA industry. Trend following has had 1:12:25.000 --> 1:12:29.479 that property over time, meaning commodities, currencies, anything that you 1:12:29.640 --> 1:12:34.400 bond with commodities, currencies, equities, bond futures, and we've actually 1:12:34.479 --> 1:12:37.960 expanded that to what we call a lot of alternative 1:12:38.040 --> 1:12:44.080 trends UM more esoteric commodities, yield curve shape trades. Even 1:12:44.160 --> 1:12:49.240 the equity factors themselves, even though we're talking macro show. Yeah, 1:12:49.360 --> 1:12:53.280 show some tendency to trend, but that dual mandate is 1:12:53.439 --> 1:12:56.599 a little bit different than most most investments. You would 1:12:56.600 --> 1:12:59.400 like a low correlation to other things. Um sometimes you 1:12:59.479 --> 1:13:02.200 accept the medium or high correlation, but it's mostly about 1:13:02.600 --> 1:13:07.280 the risk adjusted return of the acid itself. Trend following 1:13:07.640 --> 1:13:10.920 has always, I think forever people are looking for both, 1:13:11.439 --> 1:13:13.960 and it's not free. You can create a higher risk 1:13:14.000 --> 1:13:16.800 adjusted return if you don't want to hedge giant draw 1:13:16.880 --> 1:13:19.759 downs in the equity market, but this combination has always 1:13:19.800 --> 1:13:23.160 been a nice edition of portfolios and attractive to people. 1:13:23.920 --> 1:13:28.639 It got very loved after the GFC when it really 1:13:28.680 --> 1:13:30.560 did what it was supposed to and you had a 1:13:30.640 --> 1:13:34.240 giant trend that lasted, it felt like forever. Yeah, And 1:13:34.520 --> 1:13:36.960 I should say trend following is not a panacea. You 1:13:37.120 --> 1:13:40.040 have bolts from the blue. Neither of these were very 1:13:40.120 --> 1:13:42.760 bad for trend following, but they weren't. They didn't make it. 1:13:43.000 --> 1:13:45.560 Didn't make a lot of money either October nineteenth of 1:13:45.680 --> 1:13:49.719 eighty seven, which saw a small trend start to start 1:13:49.800 --> 1:13:53.639 in about August, but not that much. And obviously COVID 1:13:54.360 --> 1:13:56.840 was trend following was not how to protect yourself. There 1:13:56.920 --> 1:13:58.640 was no trend to follow out of the blue. A 1:13:58.720 --> 1:14:04.120 pandemic hit exogeneous shocks will do that, but most serious 1:14:04.200 --> 1:14:08.640 bear markets we've seen aren't a day. They are a 1:14:08.760 --> 1:14:13.200 few years of pent up crazy or an economic event 1:14:13.280 --> 1:14:14.880 that leads to a few years the other way. And 1:14:14.920 --> 1:14:20.200 that's where trend following really shines. The decade after ironically 1:14:20.320 --> 1:14:23.760 pretty similar to value well not as bad. Trend following 1:14:23.760 --> 1:14:25.599 simply didn't make a lot of money in the decade 1:14:25.600 --> 1:14:30.080 after the DFC, unlike value loss money versus growth, value 1:14:30.120 --> 1:14:34.719 loss versus growth. But still people started to lose interest 1:14:34.800 --> 1:14:37.559 in it. They got excited after the DFC. And then 1:14:38.280 --> 1:14:40.400 if there is an insurance like aspect, which I think 1:14:40.439 --> 1:14:43.719 there is, to trend following ten years of a wild 1:14:43.800 --> 1:14:45.640 bull market, a lot of people start going why do 1:14:45.720 --> 1:14:48.520 I need Why have I been wasting this money on insurance? 1:14:48.920 --> 1:14:53.080 And then last year and not I think it started 1:14:53.120 --> 1:14:55.800 in parts of twenty twenty one, and it's it's still 1:14:55.840 --> 1:14:59.040 continuing a little bit this year. But last year was 1:14:59.080 --> 1:15:04.240 a blowout year for both trend following and UM and 1:15:04.600 --> 1:15:08.240 even the more general macro investing that considers relative value. 1:15:08.520 --> 1:15:10.920 And it's exactly the year it's supposed to help him. 1:15:11.640 --> 1:15:17.160 UM consider a rival insurance strategy. Always owning puts sounds expensive. 1:15:17.479 --> 1:15:19.840 It is expensive, and sounds like it doesn't work most 1:15:19.880 --> 1:15:21.800 of the time. I've had huge Twitter fights whit and 1:15:21.840 --> 1:15:24.360 it seemed to leave about this UM. But like you 1:15:24.479 --> 1:15:28.600 and Bose Weinstein both seemed to go at him politely 1:15:29.000 --> 1:15:31.479 about and you both have the shot it out. I 1:15:31.560 --> 1:15:33.839 did what I would I always do. I started out politely. 1:15:33.880 --> 1:15:37.560 It didn't necessarily it didn't necessarily end there. And I 1:15:37.600 --> 1:15:40.680 will say I think it seems absolutely brilliant. He's just 1:15:40.880 --> 1:15:44.760 also insufferable at times. It's a dangerous combination. You know, 1:15:45.520 --> 1:15:48.360 I may be less brilliant and less insufferable, but I 1:15:48.439 --> 1:15:50.760 might have some of the same characteristics, which is a 1:15:50.840 --> 1:15:53.639 dangerous mix. When you the differences, you bring a certain 1:15:53.680 --> 1:15:57.160 degree of personal humor and charm. Well, he can perhaps 1:15:57.200 --> 1:16:00.680 does not make fun of himself that so you know, 1:16:01.080 --> 1:16:04.639 will you all exist on a continuum and everybody sort 1:16:04.680 --> 1:16:07.920 of slots in in different places. Absolutely, I find you 1:16:08.160 --> 1:16:13.599 much more accessible and warm and fuzzy. Listen, his books 1:16:13.640 --> 1:16:16.519 are groundbreaking. He's no one's going to argue that he's 1:16:16.600 --> 1:16:20.280 not brilliant. You're more accessible on Twitter than he is. 1:16:20.560 --> 1:16:24.439 I do try to be um the so a strategy 1:16:24.520 --> 1:16:27.080 he's been involved with for a long time. That kind 1:16:27.120 --> 1:16:29.599 of corresponds to his black Swan books. It's a very 1:16:29.600 --> 1:16:32.759 good book, m's It basically is one liner a giant 1:16:32.800 --> 1:16:36.400 things happen more often than we quote normal model, normal 1:16:36.479 --> 1:16:39.960 distributions say. But it's an important message. He got very 1:16:40.080 --> 1:16:43.920 lucky that he wrote a timeless message about an hour 1:16:43.920 --> 1:16:48.120 and a half before the GFC. Right, But my colleaguante 1:16:48.160 --> 1:16:50.120 Elmanan is getting very lucky in that same he wrote 1:16:50.120 --> 1:16:52.200 a book called Investing in a Low Expected Return of 1:16:52.280 --> 1:16:56.040 Environment right before twenty twenty two. So you can write 1:16:56.080 --> 1:16:59.599 something it's absolutely right and correct, but timing luck thirty 1:16:59.680 --> 1:17:02.280 six and we're almost there. When did that come out? Like, 1:17:03.360 --> 1:17:05.679 at least one of the book was none. The difference 1:17:05.800 --> 1:17:12.120 between Auntie and na seems books they're actually real and meaningful, 1:17:12.479 --> 1:17:15.240 and that book was just nothing but none for pure 1:17:15.280 --> 1:17:17.040 fun at the end. You can ask me about that again. 1:17:17.160 --> 1:17:21.840 But the strategy that seemed favors is buying insurance through 1:17:21.840 --> 1:17:25.400 the options market tests of the simplest form, as my 1:17:25.479 --> 1:17:28.960 colleague Auntie has done. Say that loses a boatload of money, 1:17:29.000 --> 1:17:33.439 including its huge victories in crashes. I have no problem 1:17:33.520 --> 1:17:36.639 with someone liked to seem saying, actually, we we whoever 1:17:36.720 --> 1:17:39.360 he works with, does this much smarter than pure rolling 1:17:39.360 --> 1:17:42.519 of puts. It's not equal size every year, A million 1:17:42.680 --> 1:17:44.840 other ways to spend that. But but he doesn't like 1:17:44.960 --> 1:17:48.600 the basic finding that Aunty is. He wants both and 1:17:48.880 --> 1:17:51.760 I won't give him both. Um puts work really well 1:17:51.840 --> 1:17:55.280 and crashes Yeah right, March of twenty twenty October nineteenth 1:17:55.320 --> 1:18:00.600 of eighty seven. Huge. Uh. The their their leakages in 1:18:01.040 --> 1:18:03.600 terms of premium over the long haul that doesn't have 1:18:03.720 --> 1:18:07.880 crashes is larger than what they make. And there are 1:18:08.000 --> 1:18:11.800 some bear markets that they failed to help with. They 1:18:11.880 --> 1:18:14.720 did not particularly help in twenty twenty two. There was 1:18:14.800 --> 1:18:18.360 no crash quick well, no too slow for the puts 1:18:18.840 --> 1:18:22.120 um in twenty and then you snapped right, But that 1:18:22.240 --> 1:18:24.680 was March of twenty twenty I'm sorry now, you're you 1:18:24.800 --> 1:18:27.599 had it right given your time period. The puts helped 1:18:27.640 --> 1:18:31.280 like crazy then, and managed futures didn't. In twenty twenty two, 1:18:32.000 --> 1:18:34.559 managed futures helped like crazy because it was a long 1:18:34.640 --> 1:18:38.400 slow developed in June, and puts, I don't think, really 1:18:38.439 --> 1:18:41.600 helped at all. The premiums got very high and there 1:18:41.720 --> 1:18:45.400 was no big crash, and that's not an environment. If 1:18:45.600 --> 1:18:47.360 you like puts more than I do, you think the 1:18:47.439 --> 1:18:51.040 cost is lower. A portfolio of the two as an 1:18:51.080 --> 1:18:53.559 insurance product could make a lot of sense because they 1:18:54.960 --> 1:18:58.920 hedge different things. Puts hedge bolt from the blue crashes 1:18:59.600 --> 1:19:03.559 U and trend following hedges long slow crashes. I will 1:19:03.640 --> 1:19:07.439 make the self serving claim that long slow crashes are 1:19:08.160 --> 1:19:11.519 tend to be more deliterious to your wealth long term things. 1:19:11.800 --> 1:19:14.360 A lot of short term crashes reversed soon afterwards. They're 1:19:14.400 --> 1:19:19.160 really about surviving. UM, So I will make a small 1:19:19.160 --> 1:19:21.240 commercial for how we do it. But if someone a 1:19:21.320 --> 1:19:23.439 little bit more reasonable than the seam wanted to go, 1:19:23.800 --> 1:19:26.160 all right, it is costly, but it's less costly than 1:19:26.200 --> 1:19:29.080 you think, and maybe we should combine these two. I'm 1:19:29.280 --> 1:19:33.479 I'm I'm wide open to that, but in twenty twenty two, 1:19:34.120 --> 1:19:39.599 and frankly, I don't think you know going forward, I'm mildly. 1:19:39.640 --> 1:19:41.760 I don't do a lot of timing of our own strategies. 1:19:42.320 --> 1:19:45.639 I said, it's a sin. Most of what I recommend 1:19:45.760 --> 1:19:49.840 is always having some allocation to trend following. There'll be long, 1:19:49.960 --> 1:19:53.080 boring periods where I hopefully won't lose you a ton, 1:19:53.160 --> 1:19:55.800 but won't make you a ton. That's usually a pretty 1:19:55.800 --> 1:19:58.479 good time for the rest of your portfolio. Over time, 1:19:58.520 --> 1:20:00.360 it should add up to a positive, which it has, 1:20:01.120 --> 1:20:03.160 and it should help a lot in these one two 1:20:03.280 --> 1:20:08.080 year gigantic events. If I had to time it, I'm 1:20:08.080 --> 1:20:10.320 a little more bullish than normal. It tends to do 1:20:10.439 --> 1:20:13.080 better when there's great macro vall when people don't know 1:20:13.160 --> 1:20:16.559 what's gonna happen. Boring times where nothing is really going 1:20:16.600 --> 1:20:18.600 on is not your time for puts. And I do 1:20:18.760 --> 1:20:21.000 think we have you know, I'm a little leery of 1:20:21.040 --> 1:20:23.040 saying this because I laugh when people are always saying 1:20:23.080 --> 1:20:26.519 now is special, So it's dangerous to go. We have 1:20:26.600 --> 1:20:29.080 more uncertainty now than normal, But I do think I'm 1:20:29.120 --> 1:20:31.080 gonna do it. I do think we have more macro 1:20:31.200 --> 1:20:33.719 uncertainty now than normal, so I like it a little 1:20:33.800 --> 1:20:36.400 more than normal. But mostly our argument is, you don't 1:20:36.439 --> 1:20:37.720 know when this is gonna happen. You don't know if 1:20:37.760 --> 1:20:40.080 we're gonna have another two years of this, and by 1:20:40.120 --> 1:20:42.120 the way, if we don't have another two years of disaster, 1:20:42.560 --> 1:20:45.040 you're pretty happy everywhere else. So let me let me 1:20:45.160 --> 1:20:49.280 push back on the more uncertainty, okay, because I cringe 1:20:49.320 --> 1:20:51.880 every time I see someone on TV say that, me too. 1:20:52.520 --> 1:20:54.479 When I gave you a long caveat that, I feel 1:20:54.560 --> 1:20:57.400 did it did? But and yet you still went jump right, 1:20:58.760 --> 1:21:01.479 Which is, you know, when do we ever know what's 1:21:01.479 --> 1:21:02.880 going to happen in the future, When do we have 1:21:02.920 --> 1:21:07.000 a high degree of confidence. I take the behavioral side, 1:21:07.080 --> 1:21:10.800 which is when people are talking about uncertainty, what they're 1:21:10.840 --> 1:21:13.160 really saying is, hey, we're having a hard time lying 1:21:13.280 --> 1:21:16.200 to ourselves about how little we know is going to happen, 1:21:16.479 --> 1:21:19.960 and we're starting to get nervous. So macro val might 1:21:20.040 --> 1:21:23.879 be the good descriptor for that where you can't pretend 1:21:23.960 --> 1:21:27.920 you know what's going to happen, because it's so I 1:21:28.080 --> 1:21:30.800 want to say uncertain, but that's the wrong word. You 1:21:30.960 --> 1:21:34.800 just lose yourself confidence in knowing what might happen. We're 1:21:34.880 --> 1:21:37.680 directionally the same, and I did also as part of 1:21:37.720 --> 1:21:42.200 my caveatside I still wouldn't time this very much. I do, 1:21:42.400 --> 1:21:45.760 and I admit I want to. I explicitly want to 1:21:45.840 --> 1:21:48.360 count of the belief that people might think we've missed it. 1:21:49.320 --> 1:21:53.560 Managed futures is it's one a decade, huge positive. It 1:21:53.640 --> 1:21:56.560 adds up to good over the whole decade, but it 1:21:56.720 --> 1:22:00.800 means reverts now. We see no tendency for that real historically. No, 1:22:00.960 --> 1:22:02.760 it's a trend following strategy. If it starts to get 1:22:02.800 --> 1:22:06.639 it wrong, it'll switch its mind pretty pretty quickly. Actually, 1:22:07.040 --> 1:22:09.760 the fundamental trends that we've added in the last five 1:22:09.840 --> 1:22:13.519 to getting closer to seven or eight years, we think 1:22:13.520 --> 1:22:15.880 have made the strategy materially better. It's no longer just 1:22:16.040 --> 1:22:18.840 your grandfather's trend following strategy where you follow a price. 1:22:19.880 --> 1:22:21.839 We think that always has a role for a portfolio. 1:22:21.840 --> 1:22:24.000 In a portfolio, we don't know if crazy stuff will 1:22:24.040 --> 1:22:26.960 continue or we'll go back to normal again. If things 1:22:27.040 --> 1:22:30.040 do go back to normal, yeah, maybe your managed futures 1:22:30.040 --> 1:22:32.160 don't help you very much, but everything else goes back 1:22:32.200 --> 1:22:35.360 to helping you. So we think the case is at 1:22:35.439 --> 1:22:37.400 least let me just be more mild, at least as 1:22:37.439 --> 1:22:39.519 strong as it normally is, and we think it's pretty strong. 1:22:40.320 --> 1:22:44.840 I will back slightly off my sin there of forecasting. So, 1:22:45.360 --> 1:22:49.840 given the fact that you've been investing now for thirty 1:22:49.880 --> 1:22:53.240 five years something along those lines in your lifetime, have 1:22:53.400 --> 1:22:57.160 you ever seen a ten percent spike in inflation or 1:22:57.800 --> 1:23:01.800 of five percent rise in rates as an investor UM 1:23:02.720 --> 1:23:06.559 five percent rise in rates over long periods. We've seen them, 1:23:06.600 --> 1:23:10.800 but not anything like the recent period, and maybe not 1:23:11.000 --> 1:23:13.760 even it's been a downtrend in rates over my career. 1:23:13.800 --> 1:23:17.320 I'm trying to do this. I know for a fact 1:23:17.320 --> 1:23:20.640 because I looked at it recently, that I've not seen uh, 1:23:20.840 --> 1:23:26.000 you know, five six percent inflation in my career. UM. Now, 1:23:27.680 --> 1:23:29.880 I do think you know, I'd be happy to share 1:23:29.920 --> 1:23:33.280 with you. Quants have some disadvantages. There's less we can 1:23:33.360 --> 1:23:36.720 know about any one individual situation than than than than 1:23:36.800 --> 1:23:39.920 a than a more discretionary manager. But we do have 1:23:40.040 --> 1:23:44.240 one advantage. UM. Sometimes they're they're maligned correctly, but sometimes 1:23:44.240 --> 1:23:47.639 they're over maligned. Back tests can be really helpful because 1:23:48.160 --> 1:23:50.680 just because I haven't lived through inflationary periods doesn't mean 1:23:50.760 --> 1:23:53.880 we can't look at inflationary periods and that is a 1:23:53.960 --> 1:23:58.280 quant advantage. And frankly, with the exception of the trend 1:23:58.360 --> 1:24:01.760 following strategy, which I think when giant stuff happens it 1:24:01.880 --> 1:24:06.320 does tend to do better the core stock selection strategies. 1:24:07.000 --> 1:24:09.479 An Auntie is again I keep quoting Auntie. You should 1:24:09.479 --> 1:24:11.080 have had him on instead of I did, I know 1:24:11.200 --> 1:24:13.360 you did? I know you did. Um. But if I'm 1:24:13.400 --> 1:24:14.760 going to quote them all the time, why not just 1:24:14.880 --> 1:24:18.280 go go go to him? Um. He has done a 1:24:18.320 --> 1:24:22.160 lot of our work on showing the environments that factor 1:24:22.240 --> 1:24:25.639 investing tends to do better or worse in by factor 1:24:25.760 --> 1:24:28.680 and as a group. This is for stock selection and 1:24:29.479 --> 1:24:31.880 some things. If you want to make it a tautology, yeah, 1:24:31.920 --> 1:24:35.200 when the spreads between cheap and expensive go way wider, 1:24:35.640 --> 1:24:40.680 value does lousy, But that's a tautology. Macro wise, this 1:24:40.920 --> 1:24:44.120 very little relation, there's very little consistency to it. Um. 1:24:44.240 --> 1:24:47.400 That's actually I think a good thing. Um. It means 1:24:47.720 --> 1:24:51.560 if you do this for asset classes, there's obviously correlations. 1:24:51.760 --> 1:24:54.560 Higher growth and lower inflation is good for stocks and 1:24:54.680 --> 1:24:58.320 good for bonds. As they mix up, you can get 1:24:58.360 --> 1:25:01.759 different results. Low growth, low inflation is dynamite for bonds. 1:25:01.800 --> 1:25:03.479 How it comes out for stocks it's a little bit 1:25:03.560 --> 1:25:07.160 more iffy. But when it comes to factors, doesn't mean 1:25:07.200 --> 1:25:10.080 there aren't some big factor events, but they occur in 1:25:10.120 --> 1:25:14.560 all environments without a great pattern. So again, we do 1:25:14.760 --> 1:25:17.439 think we're a pretty good diversifier to a lot of 1:25:17.479 --> 1:25:19.360 the rest of the world that is much more linked 1:25:19.680 --> 1:25:22.760 to the macro cycle. So when you're looking at back 1:25:22.840 --> 1:25:26.599 tests and you're heading into twenty one and twenty two, 1:25:27.360 --> 1:25:29.640 how are you thinking about the risks and do you 1:25:29.760 --> 1:25:33.400 make changes? Do you just suffer through twenty and twenty 1:25:33.439 --> 1:25:37.400 one waiting for twenty two, or are you gradually shifting 1:25:37.479 --> 1:25:43.200 the portfolio mix before you make it to the promised land. Again, 1:25:43.240 --> 1:25:44.840 you and I have been bouncing back in a great 1:25:44.880 --> 1:25:49.120 way between quantitative stock selection and the more macro trend following. 1:25:49.120 --> 1:25:52.280 And the stories aren't precisely the same. I mean, it's 1:25:52.320 --> 1:25:54.880 the six blind men describing the elephant, and which is 1:25:54.960 --> 1:25:58.559 my favorite parable, But we're really just talking about different 1:25:58.640 --> 1:26:04.639 aspects of what takes place in risk market for value. Yeah, well, 1:26:04.880 --> 1:26:10.880 to be honest, when when it does look unexplainably after that, 1:26:11.040 --> 1:26:13.960 keeping that open mind attractive and we do that sin 1:26:14.040 --> 1:26:17.680 a little. We do just wait now, Barry. Of course 1:26:17.720 --> 1:26:20.000 we didn't sit there in twenty twenty and say we're 1:26:20.040 --> 1:26:22.200 gonna have to wait, and in fact it by waiting 1:26:22.320 --> 1:26:26.559 till March twenty twenty two. Mark your can the well. 1:26:26.600 --> 1:26:28.680 The funny thing is value actually started turning around in 1:26:28.720 --> 1:26:31.960 late twenty twenty. Everyone calls it twenty twenty two. That 1:26:32.040 --> 1:26:34.840 value has been coming back since since COVID started to 1:26:35.400 --> 1:26:38.560 to to well. Once everything got way crazy by the 1:26:38.720 --> 1:26:42.160 end of twenty It's not. This is a little hindsight bias, 1:26:42.280 --> 1:26:44.920 but it makes sense for people to Sorry, let's peel 1:26:44.920 --> 1:26:47.680 a little off here and rotated. No. Absolutely, And but 1:26:47.840 --> 1:26:49.639 if you go back a couple of years earlier, value 1:26:49.640 --> 1:26:51.600 spreads were very wide. And yeah, we were saying we 1:26:51.600 --> 1:26:53.760 don't know when this will turn around, but it will. 1:26:54.040 --> 1:26:57.200 And importantly on net from here, say you know, one 1:26:57.240 --> 1:26:59.000 day go up again doesn't really help you. If it's 1:26:59.040 --> 1:27:00.760 gonna go down more, then it's going to go up 1:27:00.800 --> 1:27:05.040 in the future. It has to be on net right 1:27:05.360 --> 1:27:08.240 not this time. Um I won't say I didn't break 1:27:08.280 --> 1:27:12.000 other things, but that's just between me and whatever strewn 1:27:12.080 --> 1:27:17.400 around my office. Um So, value on its own. Yeah, well, 1:27:17.680 --> 1:27:21.840 sometimes we do wait catalysts or famously people look for catalysts. 1:27:22.040 --> 1:27:26.720 Obviously momentum both price and fundamental. You could you could 1:27:26.760 --> 1:27:28.920 lump into the catalyst camp. So we do look for 1:27:29.000 --> 1:27:31.400 some of that, but some of the things when the 1:27:31.600 --> 1:27:34.640 absolute peak occurs, which is a timing level that I 1:27:34.720 --> 1:27:37.559 think is beyond any of our ability. Somebody always nails 1:27:37.600 --> 1:27:39.880 at X post, but I don't think anyone can consistently 1:27:40.320 --> 1:27:42.080 do that. You look at the peak of the tech 1:27:42.160 --> 1:27:44.560 bubble in March of two thousand, You look at the 1:27:44.840 --> 1:27:47.679 peak of the valuation bubble in stocks, which was kind 1:27:47.680 --> 1:27:51.320 of October of twenty twenty. Why it peaked there not 1:27:51.479 --> 1:27:54.320 three months earlier or six months later, even with the 1:27:54.360 --> 1:27:57.200 benefit of hindsight, I don't think we have great stories. 1:27:57.200 --> 1:28:00.240 I think when things get egregiously valued, the odd get 1:28:00.280 --> 1:28:03.280 more and more on your side. Again, good catalysts will 1:28:03.360 --> 1:28:05.720 help you more and bad will help you less. And 1:28:05.880 --> 1:28:07.800 sometimes our job is to plan our feet and say 1:28:07.840 --> 1:28:11.519 we will not move now on the macro trend. Following strategy, 1:28:12.160 --> 1:28:16.000 it was a better timing story. Again, it didn't make 1:28:16.080 --> 1:28:17.840 money for a long time, but didn't lose a lot, 1:28:18.320 --> 1:28:21.040 and both from some price trends, but I think even 1:28:21.120 --> 1:28:25.320 more from fundamental trends. We started to see the fundamental 1:28:25.439 --> 1:28:29.920 trends that could lead to a more inflationary environment. Again, 1:28:30.000 --> 1:28:32.360 it's not us sitting around making inflation forecast We're not 1:28:32.439 --> 1:28:37.240 macro econists. Fundamental trends are things like those actual economists 1:28:37.280 --> 1:28:42.640 revising up their inflation forecasts. Growth trends are things like 1:28:42.880 --> 1:28:48.000 GDP surprises aggregated for the whole for the whole world, 1:28:48.040 --> 1:28:50.479 if you're doing the oil of equities or country by country. 1:28:51.439 --> 1:28:54.439 Those did a really good job of getting ahead of 1:28:54.600 --> 1:28:58.479 the inflation that came. So there, I'll say on the 1:28:58.600 --> 1:29:00.400 value side, I'll say we didn't do it very good 1:29:00.439 --> 1:29:02.200 job on the catalyst, but we did a really good 1:29:02.280 --> 1:29:04.920 job on sticking with it and has paid off on 1:29:05.080 --> 1:29:09.120 the trend following and macro side, i will say, I'll 1:29:09.120 --> 1:29:11.400 give us higher grades on the catalyst side as to 1:29:11.520 --> 1:29:13.960 the timing, but that's naturally what it's trying to do 1:29:14.240 --> 1:29:18.680 right by definition. Really fascinating. So the past couple of 1:29:18.800 --> 1:29:22.120 years we've seen a huge performance of value over growth. 1:29:22.720 --> 1:29:26.320 What does that mean looking forward? How much persistency does 1:29:26.560 --> 1:29:32.200 that value advantage have? Especially following a decade of growth advantage. 1:29:32.400 --> 1:29:38.880 It's funny it takes a much longer time for excesses 1:29:38.920 --> 1:29:40.760 to get squeezed out of the market than people think, 1:29:41.200 --> 1:29:42.960 particularly if you're on the wrong side of it. You're like, 1:29:43.120 --> 1:29:45.080 if you're a growth stock investor, the last two years, 1:29:45.080 --> 1:29:47.920 I'm in such pain. This has to be extreme. No, 1:29:48.280 --> 1:29:51.920 We again, we start with measures that don't look at returns, 1:29:51.960 --> 1:29:54.840 that look at the actual valuation ratios of stocks. And 1:29:55.240 --> 1:29:58.120 at the peak of the bubble in twenty twenty, a 1:29:58.200 --> 1:30:01.439 few months after COVID it by far the widest ever 1:30:01.680 --> 1:30:05.439 north of the tech bubble after two plus phenomenal years. 1:30:06.680 --> 1:30:08.920 It is now. The last time I looked which a 1:30:08.960 --> 1:30:11.120 couple of days ago, it was at the eighty nine percentile, 1:30:11.320 --> 1:30:16.680 so still wildly Yeah. Also tactically I said, I think 1:30:16.680 --> 1:30:18.840 I did. I tilted a little too early because I 1:30:18.920 --> 1:30:21.280 went on just value, not on trend. The trend is 1:30:21.320 --> 1:30:24.280 now at its back, so we're at you know, nothing 1:30:24.400 --> 1:30:27.240 is a certainty that can be huge reversals in any 1:30:27.320 --> 1:30:29.840 trend into room. I don't want to predict the next quarter, 1:30:30.479 --> 1:30:33.400 but we are still very excited. We're seeing still a 1:30:33.479 --> 1:30:38.280 mispricing that prior to COVID, I would have considered almost 1:30:38.320 --> 1:30:41.920 close to tide with the most extreme ever, and we're 1:30:41.920 --> 1:30:44.479 seeing the wind at it's back. So again I don't 1:30:44.479 --> 1:30:46.840 want to overpromise. The short term can always make anyone 1:30:46.880 --> 1:30:49.360 look silly, but on a few year horizon, we are 1:30:49.400 --> 1:30:54.040 super excited about value. So the Goldman Sachs nonprofitable tech 1:30:54.160 --> 1:30:58.920 basket and there's another basket of low quality stocks they've 1:30:59.200 --> 1:31:02.600 crushed it in twenty twenty three. Is this just a 1:31:02.880 --> 1:31:06.360 dead cat bounce? What does this mean? Is the cycle 1:31:06.520 --> 1:31:10.760 changing or what's happening in your least favored part of 1:31:10.800 --> 1:31:12.559 the market. This is going to be a hard one 1:31:12.680 --> 1:31:15.240 because it's confusing. Yeah, I'll tell you that in advance, 1:31:15.760 --> 1:31:17.720 but it's it's confusing in a different way. I think 1:31:17.760 --> 1:31:23.280 even than you're thinking break up what's going on into 1:31:24.000 --> 1:31:29.200 pure measures of junk no valuation here, low profitability as 1:31:29.240 --> 1:31:32.560 Goldman does against high profitability, and Goldman's not wrong about that, 1:31:32.640 --> 1:31:36.200 though not surprisingly the results are right LOWBATA against high 1:31:36.200 --> 1:31:39.040 beta that we often consider part of quality. All else equal, 1:31:39.360 --> 1:31:41.960 you'd prefer a low beta. All else is not always equal, 1:31:42.000 --> 1:31:44.080 but if you can have less vol and less sensitivity, 1:31:44.520 --> 1:31:50.080 it's a good thing. Profitability choosing more profitable and underweighting 1:31:50.160 --> 1:31:54.560 or selling low profitable, and beta choosing low beta and 1:31:54.800 --> 1:31:58.560 underweighting or selling high beta. As a together, as a 1:31:58.600 --> 1:32:01.439 group and individually have had a really bad start to 1:32:01.960 --> 1:32:04.479 this year for the exact reasons you're talking about. It 1:32:04.640 --> 1:32:08.280 has been a junk rally now here. I'm hoping to 1:32:08.360 --> 1:32:10.680 blow your mind a little bit. Go ahead the way 1:32:10.760 --> 1:32:14.000 we measure value, and keep in mind everybody does it 1:32:14.040 --> 1:32:16.800 a little different any You could have ten great people 1:32:16.880 --> 1:32:19.280 here and they're all going to have their own favorite ways. 1:32:19.640 --> 1:32:21.960 One thing we do is is since nineteen ninety five 1:32:22.000 --> 1:32:23.880 when we wrote a paper on this, we don't allow 1:32:24.000 --> 1:32:26.320 value to take an industry bed. We try to make 1:32:26.360 --> 1:32:29.000 it apples to apples. Everyone talks about value in terms 1:32:29.040 --> 1:32:32.680 of like tech versus textiles. You can't fully remove it 1:32:33.040 --> 1:32:35.720 in a bubble. These are all correlated, but we think 1:32:35.920 --> 1:32:39.360 value value can be hard to compare. Valuation ratios can 1:32:39.439 --> 1:32:43.160 mean very different things in different industries. So um, but 1:32:43.479 --> 1:32:47.439 broadly speaking, are and compliance gets nervous when I talk 1:32:47.439 --> 1:32:50.680 about performance to the public, but I will tell you 1:32:50.840 --> 1:32:54.439 value has had a Alane has had a very strong 1:32:54.560 --> 1:32:57.760 start to this year. Which you would not guess if 1:32:57.800 --> 1:33:00.960 I told you it's a junk rally. Now they can 1:33:01.000 --> 1:33:04.880 happen simultaneously and perhaps for different reasons. Now, this is 1:33:04.920 --> 1:33:14.320 actually much more normal historically when junkier when when profitability 1:33:14.360 --> 1:33:19.360 and value are often negatively correlated because the cheap stocks 1:33:19.360 --> 1:33:23.120 are often unprofitable. Um So when the profitability factor, if 1:33:23.160 --> 1:33:25.479 you will, is doing well, it has at least a 1:33:25.600 --> 1:33:28.679 decent negative correlation. It's been stronger in the US than globally, 1:33:28.760 --> 1:33:31.160 but it's negatively correlated value. So what's going on this 1:33:31.280 --> 1:33:33.920 year is more normal, but that is not what was 1:33:33.920 --> 1:33:36.600 going on for the prior a few years. Value and 1:33:37.200 --> 1:33:43.759 profitability in particular, we're highly correlated because in a bubble, remember, 1:33:44.000 --> 1:33:46.760 in a rational loss for value we can do well. 1:33:46.920 --> 1:33:50.719 Profitability does well in a bubble. It's not the profitable 1:33:50.760 --> 1:33:53.400 stocks that are throwing to the moon. It's the story stocks. 1:33:53.640 --> 1:33:55.839 So let me take the other side of the bubble 1:33:55.960 --> 1:33:59.840 claim and say, hey, stockscott overvalued in twenty twenty one, 1:34:00.520 --> 1:34:03.080 But was it really a bubble? We're down what twenty 1:34:03.160 --> 1:34:07.439 percent on the SMP the NAZAC. That seems like a 1:34:07.920 --> 1:34:10.599 run of the mill draw down and not a full 1:34:10.760 --> 1:34:13.560 on crash. One of the hard parts is in a 1:34:13.720 --> 1:34:16.320 fun way because they're all relevant. We're mixing a few 1:34:16.360 --> 1:34:19.200 different things. There is the level of the overall stock 1:34:19.320 --> 1:34:22.520 market and the overall bond market, and then there's internal 1:34:22.600 --> 1:34:26.479 to the stock market, how cheap stocks did against expensive stocks, 1:34:26.960 --> 1:34:31.479 how profitable stocks did against unprofitable stocks hedged without a 1:34:31.560 --> 1:34:35.559 market exposure. Right. People have used the term everything bubble, 1:34:36.880 --> 1:34:39.840 which is really wrong. Everything can't be in a bubble 1:34:39.880 --> 1:34:43.320 at once by definition, by the way the opposite you 1:34:43.400 --> 1:34:46.759 can short the values. And we were in a depression, 1:34:46.800 --> 1:34:50.280 not a bubble. But there were some correlated things going 1:34:50.360 --> 1:34:54.400 on for the market as a whole. The move in 1:34:54.439 --> 1:34:58.519 the stock market in one year was big, not something 1:34:58.560 --> 1:35:02.240 we don't see occasionally. This is this is not on 1:35:02.320 --> 1:35:05.120 the seem to lead black swan moment. The move in 1:35:05.160 --> 1:35:08.960 the bond market was very big, closer, but still not 1:35:09.120 --> 1:35:13.840 a black swan. The moving sixty forty maybe not still 1:35:13.880 --> 1:35:17.000 black swan, but was far more extreme than either alone 1:35:17.120 --> 1:35:21.000 because they happened at the same time. Time. You saw 1:35:21.080 --> 1:35:23.439 that again, Auntie, It will be the first to admit 1:35:23.560 --> 1:35:25.560 he looks like his timing is better than it really was, 1:35:25.560 --> 1:35:27.680 because he's been saying this for a while, but that 1:35:27.840 --> 1:35:30.040 was the core of his work. He does a ten 1:35:30.120 --> 1:35:34.200 year forecast on the outlook for sixty forty what current 1:35:34.280 --> 1:35:38.160 valuations coal. It's more complicated this, but cold the Schiller 1:35:38.240 --> 1:35:41.479 cape for stocks lower expected real returns when the Shiller 1:35:41.520 --> 1:35:44.960 cape is high, and just really yields on bonds yields 1:35:45.040 --> 1:35:48.519 versus economist forecast of inflation, and he takes sixty percent. 1:35:48.880 --> 1:35:51.120 Here's the genius math to get to sixty forty. He 1:35:51.200 --> 1:35:53.720 takes sixty percent of the stock forecasts, adds it to 1:35:53.800 --> 1:35:59.400 forty percent of the bond forecasts. That number hit the low. Ever, 1:36:00.400 --> 1:36:02.519 at least as we can monitor it. I won't say 1:36:02.560 --> 1:36:05.920 the rot the end of twenty one. Call it yeah, 1:36:06.320 --> 1:36:08.439 that's pretty good time. I always feel guilty when I 1:36:08.479 --> 1:36:11.280 say ever, maybe in the Roman Empire it was worse, 1:36:11.400 --> 1:36:14.559 but we can't. We can't measure it in the measurable 1:36:14.680 --> 1:36:18.439 universe that we have. And sixty forty. I'm gonna try 1:36:18.439 --> 1:36:20.720 to get this right. Sometimes we talk global, sometimes we 1:36:20.800 --> 1:36:23.080 talk to you us. Call it. It's made about four 1:36:23.120 --> 1:36:27.880 and a half percent real meaning over inflation over the 1:36:27.960 --> 1:36:31.000 long term. That's actually quite a nice real return. We're 1:36:31.040 --> 1:36:35.799 used to talking about nominal returns make and almost half bonds, 1:36:36.000 --> 1:36:39.760 So four and a half percent real is a very 1:36:39.840 --> 1:36:44.040 nice um. Auntie's forecast, which I think is is quite useful, 1:36:44.040 --> 1:36:46.600 obviously got down to below two. It was in the 1:36:46.840 --> 1:36:49.560 high ones at the end of twenty twenty one, just 1:36:49.640 --> 1:36:52.960 looking at current valuations and saying how does that usually 1:36:53.040 --> 1:36:57.040 play out over ten years. By the end of twenty 1:36:57.120 --> 1:37:01.680 twenty two, after all the pain, I think it got 1:37:01.760 --> 1:37:06.080 into the just about three really, which that's surprising given 1:37:06.160 --> 1:37:07.920 that we're now looking at rates in the four to 1:37:08.040 --> 1:37:12.160 five percent ring. Well, remember this is real, and right 1:37:12.200 --> 1:37:14.560 now this gets back to you challenging me on is 1:37:14.600 --> 1:37:16.920 there more uncertainty. It's pretty hard to come up with 1:37:16.960 --> 1:37:19.640 a really good ten year forecast of inflation right now, 1:37:20.200 --> 1:37:24.880 but certainly positive is forecasted. So five cash is interesting again, 1:37:24.960 --> 1:37:28.840 I'll say that, but how interesting it is depends a 1:37:28.920 --> 1:37:32.559 lot on what your actual inflation outlook. Bonds are interesting again. 1:37:33.320 --> 1:37:38.679 So basically, the fairly massive trade off was still only 1:37:38.720 --> 1:37:42.200 a one year trade off after a thirteen year bull market. 1:37:42.720 --> 1:37:45.240 You don't fix, and not all of that bull market 1:37:45.360 --> 1:37:48.120 was bubbly. A lot of that was fundamentals, but a 1:37:48.200 --> 1:37:50.800 lot of that was repricing things getting more expensive. You 1:37:50.840 --> 1:37:54.599 don't fix thirteen years of getting more expensive in general 1:37:54.760 --> 1:37:56.240 in one year. I'm not sure you want to because 1:37:56.240 --> 1:37:58.320 you've got to go down a lot more than we did. 1:37:58.680 --> 1:38:02.000 So Auntie's number, which I agree with U instead of 1:38:02.040 --> 1:38:05.080 four and a half, he'd probably use in the low threes. Now, 1:38:05.240 --> 1:38:07.439 as if you're sitting there saying, what do I need 1:38:07.479 --> 1:38:11.080 to retire? What's that number? Um by no means are 1:38:11.160 --> 1:38:14.400 we certain that three is irrational? That we need to 1:38:14.439 --> 1:38:16.760 get four and a half? Four and a half. And 1:38:16.880 --> 1:38:18.880 I know you've heard these arguments may have been just 1:38:18.920 --> 1:38:22.400 too good of a deal historically. For instance, for much 1:38:22.439 --> 1:38:25.200 of how you saying sixty forty has been arbitraged away 1:38:25.280 --> 1:38:27.880 or is it just the environment we're in it, it 1:38:28.080 --> 1:38:31.479 may have been repriced higher price to a lower expected return. 1:38:32.320 --> 1:38:34.600 Here's my favorite argument for that, and it's it's not 1:38:34.680 --> 1:38:37.720 a complicated one. Very few people actually got the four 1:38:37.760 --> 1:38:41.600 and a half percent weal the costs of investing in 1:38:41.800 --> 1:38:46.400 various ways were far higher today, and almost all portfolios 1:38:46.479 --> 1:38:48.880 were not like index funds today. They were you know, 1:38:48.920 --> 1:38:53.120 you had a broker who so a lot of friction 1:38:53.400 --> 1:38:56.679 and the effective volatility of your portfolios double the markets 1:38:56.680 --> 1:39:00.080 because you owned a handful of socks. So both the 1:39:00.160 --> 1:39:02.080 top line was lower because he didn't get you didn't 1:39:02.080 --> 1:39:05.080 really get it, and second you were facing higher risks 1:39:05.920 --> 1:39:09.760 by choice. But the index fund concept didn't exist for 1:39:09.920 --> 1:39:12.000 much of this time, so and even when it exists, 1:39:12.080 --> 1:39:15.200 the concept existed, you couldn't execute on it. So basically, 1:39:15.240 --> 1:39:18.799 I think the three today may this is very arguable, 1:39:19.080 --> 1:39:20.840 but maybe as good as the four and a half 1:39:21.360 --> 1:39:23.760 historically in terms of what you get to keep and 1:39:23.880 --> 1:39:26.800 what risks you have to take to get it. At 1:39:26.920 --> 1:39:29.400 below two, and this is art, not science, nobody can 1:39:29.439 --> 1:39:31.599 tell you what this no should be. At Below two, 1:39:32.000 --> 1:39:34.760 I an aunty and a lot of people didn't think 1:39:34.880 --> 1:39:37.759 that's too low, that doesn't make any sense. But above 1:39:37.880 --> 1:39:42.720 three maybe I I you know, I think pimp goes 1:39:42.720 --> 1:39:45.280 a super firm, but I hate to give competitors any 1:39:45.320 --> 1:39:49.519 credit anytime, But we maybe have a new normal, lower 1:39:49.560 --> 1:39:54.839 than normal, lower than historically normal. That's really really interesting. 1:39:54.920 --> 1:39:58.240 All right, So now I gave have you for five minutes, 1:39:58.360 --> 1:40:02.679 which means this is our speed rounds and these answers 1:40:02.720 --> 1:40:05.679 have to be less than sixty seconds. Are you're ready, 1:40:05.880 --> 1:40:08.439 I am all right. So first we'll do a quick 1:40:09.080 --> 1:40:12.280 three part curveball one minute. How early do you pull 1:40:12.320 --> 1:40:14.479 a goalie when you're down one, two or three goals? 1:40:14.680 --> 1:40:17.680 When you pull? You pull a goalie if you're down 1:40:17.760 --> 1:40:19.760 one at about five and a half six minutes in 1:40:19.840 --> 1:40:22.320 the last period, in the last period. All this can 1:40:22.360 --> 1:40:24.760 be situational. Our model is simple. Right, if it's in 1:40:24.840 --> 1:40:26.439 your own zone, you put the goalie back in for 1:40:26.479 --> 1:40:29.479 a while. All sequel. The two goal result is the 1:40:29.520 --> 1:40:31.960 one that always shocks people. You pull about eleven minutes, 1:40:32.560 --> 1:40:35.160 you're essentially paying playing the last period. You're playing half 1:40:35.280 --> 1:40:38.160 more than the period, and the ideas you're out of 1:40:38.160 --> 1:40:41.680 the money option losing by three, four or five, it's 1:40:41.720 --> 1:40:44.439 the same. It may have pride issues, which is not 1:40:44.560 --> 1:40:47.320 in our model, but it doesn't have standings issues. And 1:40:47.560 --> 1:40:49.360 three I actually forget the number, but I think it 1:40:49.439 --> 1:40:53.040 maybe before the third period. Got it? Uh M? A 1:40:53.160 --> 1:40:56.439 poker tournament in April? Are you participating this year? Since 1:40:56.439 --> 1:40:59.040 about since the GFC, which really had nothing to do 1:40:59.080 --> 1:41:01.720 with it. It's just coin sent little timing. I have 1:41:02.000 --> 1:41:06.360 only played poker in every third year in that charitable tournament. 1:41:06.479 --> 1:41:09.000 My skills to the extent I ever had any I 1:41:09.720 --> 1:41:12.439 was never a great poker player because I have a 1:41:12.479 --> 1:41:15.960 short attention span and a lot of poker is being patient, 1:41:16.040 --> 1:41:18.400 willing to stare at somebody for seven hours so you 1:41:18.439 --> 1:41:21.599 can remember what they did six hours ago. I had 1:41:21.640 --> 1:41:23.920 fun with poker I had. I think I was pretty intuitive. 1:41:23.960 --> 1:41:25.519 I didn't. I don't lose a time, but I probably 1:41:25.560 --> 1:41:29.160 lost money in my poker career. First time I ever, 1:41:29.439 --> 1:41:32.280 I learned poker to play in this Math for America tournament. 1:41:32.920 --> 1:41:35.760 I didn't know seven or hold him. I didn't know 1:41:35.840 --> 1:41:38.960 how to play. And my second year I played and 1:41:39.040 --> 1:41:43.559 I came in second day. There's so much random chance 1:41:43.640 --> 1:41:48.320 in one tournament over time. Poker's pure skill over anything. 1:41:48.439 --> 1:41:51.760 It's very similar to investing over sure horizons. It's really not. 1:41:52.400 --> 1:41:54.160 But one of the worst things that can happen to 1:41:54.200 --> 1:41:56.760 you as an investor or a gambler is to get 1:41:56.840 --> 1:41:59.760 lucky early. Yep. Absolutely the best thing for you is 1:41:59.800 --> 1:42:02.280 the walk into a casino and lou No matter how 1:42:02.520 --> 1:42:04.720 smart you think you are, you think you're smarter than 1:42:04.800 --> 1:42:07.400 you than you were, always looking for that hit a dopamine. Yeah, 1:42:07.760 --> 1:42:08.880 I don't know if I'll be able to get you 1:42:08.920 --> 1:42:12.479 an answer this in under a minute. Marvel or DC, 1:42:12.840 --> 1:42:16.000 and what's your favorite Marvel film? UM? I do like both. 1:42:16.240 --> 1:42:18.200 I'm a I'm a comic book fan. I was reading 1:42:18.360 --> 1:42:20.720 this is how I learned to read. I'm more of 1:42:20.800 --> 1:42:24.599 a Marvel guy. Um, though sometimes DC's great, it's varies 1:42:24.840 --> 1:42:30.840 who who current Wryter Crop is better. M favorite movies hard. 1:42:31.320 --> 1:42:33.280 And what I'm saying is, if you go find other 1:42:33.280 --> 1:42:35.000 people who have asked me this, I'm not claiming full 1:42:35.040 --> 1:42:39.360 consistency at varies whole time. I think the original first 1:42:39.400 --> 1:42:43.160 Iron Man that kicked off the MCU is an underrated movie. 1:42:43.200 --> 1:42:47.519 It's a damn good movie, and not in the MCU. 1:42:48.040 --> 1:42:52.360 Before the MCU, the first X Men movie, I don't 1:42:52.400 --> 1:42:54.360 remember even how great it was, but it was the 1:42:54.520 --> 1:42:59.240 first time we saw maybe Michael Keaton's Batman in eighty nine, 1:42:59.640 --> 1:43:01.599 but from me, certainly with Marvel, it was the first 1:43:01.640 --> 1:43:04.519 time I saw a superhero movie or TV show that 1:43:04.640 --> 1:43:09.000 didn't look ridiculous, that looked the CGI and the effects 1:43:09.080 --> 1:43:11.040 caught up. That was good. So I think there was 1:43:11.080 --> 1:43:13.240 a milestone. So those two, I'm gonna throw two at 1:43:13.240 --> 1:43:15.800 you because I think they're they're both have a so 1:43:15.880 --> 1:43:19.080 it's a lightning round. But you're disagreeing with you, I'm 1:43:19.120 --> 1:43:23.360 I'm I'm impending, all right. Deadpool and Guarding to the 1:43:23.439 --> 1:43:28.800 Galaxy both have a certain sense of humor. Aways that's right, 1:43:28.880 --> 1:43:30.920 always seem to be missing from the rest of the mark. 1:43:31.040 --> 1:43:35.519 I love those um as and and it's not some 1:43:35.760 --> 1:43:38.519 some people want to be purist and say that's not 1:43:38.920 --> 1:43:41.439 how the common books were. They're wrong. If you're really 1:43:42.400 --> 1:43:45.280 they had they were wise cracking during every fight. So 1:43:45.520 --> 1:43:48.640 I do love those for the combination of humor. X 1:43:48.720 --> 1:43:51.400 Men didn't have much humor. I'll admit that Iron Man 1:43:51.520 --> 1:43:55.439 one did, mainly because Robert Downing Junior is just hilarious. 1:43:55.880 --> 1:43:57.160 He was so good. So I do like the ones 1:43:57.160 --> 1:43:59.479 with humor. So let's talk about favorite books. What are 1:43:59.479 --> 1:44:01.559 you reading? What are some of your all time favors? 1:44:01.680 --> 1:44:04.840 Can I rant one more section? Marvel movies? Um, you 1:44:04.880 --> 1:44:07.240 didn't ask me when my least favorite are? Oh, go ahead. 1:44:07.360 --> 1:44:09.960 They should find every copy, which is hard digitally these days. 1:44:10.320 --> 1:44:13.360 Doctor Strange and the Multiverse of Madness. Yeah, and they 1:44:13.400 --> 1:44:17.000 should bury it in the sun. Let's move on. That's 1:44:17.000 --> 1:44:18.200 all I want to say about that. Well, you're not 1:44:18.280 --> 1:44:20.920 a fan of Doctor Strange Terrible. I'm a big fan 1:44:20.960 --> 1:44:23.240 of the character. It makes me even angry. Let's talk 1:44:23.240 --> 1:44:25.200 about favorite books. What are you reading that? What are 1:44:25.240 --> 1:44:28.000 some of your favorites? My all time favorites tend to 1:44:28.040 --> 1:44:30.599 be in the sci fi fantasy world, not surprising given 1:44:30.640 --> 1:44:35.000 our comic Are you a big dickhead? Um, I've read 1:44:35.040 --> 1:44:37.799 a bunch by him. That's one of the odd questions 1:44:37.800 --> 1:44:40.320 I'll get, By the way, I am a self professed 1:44:40.360 --> 1:44:42.599 to head. And when I say that, people who don't 1:44:42.640 --> 1:44:45.600 know Philip nay Dick in my career of going to 1:44:45.840 --> 1:44:49.960 comic book conventions, I've not heard that term. Oh really, 1:44:50.560 --> 1:44:52.960 It's very common on the internet, and it's really the 1:44:53.479 --> 1:44:56.120 one thing fun about him is he's written a lot 1:44:56.160 --> 1:45:01.559 of things that became like famous movies that no one knows. 1:45:01.600 --> 1:45:05.360 It's the Schwartzenega movie. They did two of them total. Recall, right, 1:45:05.439 --> 1:45:08.240 we can remember for your wholesale? Was that short story? 1:45:08.760 --> 1:45:14.120 My my all time choice? One is very cliche. Go ahead, 1:45:14.439 --> 1:45:17.240 Dune I loved. There are a couple of Frank Herbert 1:45:17.240 --> 1:45:20.519 books that are just amazing. First The Dune Friend. Yeah, 1:45:21.600 --> 1:45:23.640 the first two Dune books I thought were great, the 1:45:23.680 --> 1:45:25.720 first one much better than the second one. Then they 1:45:25.840 --> 1:45:31.200 got totally weird, very messianic, religious odd that was always 1:45:31.240 --> 1:45:34.200 a thread three a thread, but it became all that. 1:45:34.320 --> 1:45:38.920 But I loved Dune complex book. You know, sci fi 1:45:39.120 --> 1:45:43.200 or fantasy sometimes gets a simplistic, childish label. Dune blows 1:45:43.240 --> 1:45:45.720 that away. Um. The last movie was the first time 1:45:45.720 --> 1:45:49.240 I've seen doing reasonable on TV. Don't even start me 1:45:49.320 --> 1:45:53.840 on sting of dueling with the swords that were in 1:45:53.960 --> 1:45:56.880 the book. Um. Also, I'm a big fan of some 1:45:56.920 --> 1:45:59.920 of the old pulps, like the original Cone stories by 1:46:00.560 --> 1:46:03.439 Roberty Howard in the thirties. Not we're not talking. I'm 1:46:03.479 --> 1:46:05.640 not against him, but I'm not talking about Arnold Schwartzinker's 1:46:05.640 --> 1:46:07.960 Cohnan And I'm talking about the stuff that appeared in 1:46:08.080 --> 1:46:11.960 like weird tales serialized and then became books. I think 1:46:12.040 --> 1:46:16.080 Roberty Howard, he unfortunately killed himself very young. Um, and 1:46:16.200 --> 1:46:20.439 no one, you know, no one remembers him, but hes 1:46:20.560 --> 1:46:23.000 now he didn't. He created Conan and his writing was 1:46:23.080 --> 1:46:27.000 so rich, like dripped with feeling and color. So I 1:46:27.080 --> 1:46:30.639 was a big fan of that. This actually segues nicely 1:46:30.680 --> 1:46:33.720 into what I'm reading now go on, because I am 1:46:34.000 --> 1:46:38.400 rereading the original basic Lord of the Rings, which you 1:46:38.520 --> 1:46:41.000 use the term table stakes before. That's table stakes for 1:46:41.520 --> 1:46:44.320 a fantasy fan, like every other summer. As I I 1:46:46.840 --> 1:46:48.840 like the Hobbit, I never liked the full Lord of 1:46:48.880 --> 1:46:52.680 the Rings I have. Now I'm liking it more. Um. 1:46:53.280 --> 1:46:56.200 I have found historically I have a small tolerance for 1:46:56.720 --> 1:47:00.680 twelve pages of Elvin poetry, um which I think Tom 1:47:00.760 --> 1:47:04.800 bomba deal. For some reason. The character scared me as 1:47:04.800 --> 1:47:07.080 a kid, even though he's not very scary. So let 1:47:07.160 --> 1:47:09.360 me ask you this question. But I'm miyamore now. So 1:47:09.920 --> 1:47:12.160 I love both The Hobbit and the Lord of the Rings, 1:47:12.479 --> 1:47:16.760 and well, everybody loved Peter Jackson's I thought it was 1:47:16.880 --> 1:47:21.360 way too dark within the Lord of the Rings. Within 1:47:21.439 --> 1:47:25.719 the original, there's a balance between the hope and the fear. 1:47:25.960 --> 1:47:29.120 I think that's that's fair and ultimately hope when so 1:47:29.560 --> 1:47:31.400 it's it's it is a po So they take you 1:47:31.560 --> 1:47:34.439 to this really dark place and it's almost like the 1:47:34.600 --> 1:47:36.960 ending is tacked on. But by the way they going 1:47:37.000 --> 1:47:39.720 over a minute, it's completely your fault. So I own 1:47:40.080 --> 1:47:43.599 if you go through Token's experience of World War one 1:47:43.720 --> 1:47:45.800 and then writing in the World War Two. He really 1:47:45.880 --> 1:47:49.200 had that light and dark um going on, but it 1:47:49.320 --> 1:47:51.719 was balanced. But but but I did enjoy the movies 1:47:51.760 --> 1:47:53.400 because part of it is just saving a fan your 1:47:53.439 --> 1:47:55.640 whole life, seeing it come to life in such a 1:47:55.720 --> 1:47:59.040 glorious I do not recommend the extended versions. I've steered 1:47:59.080 --> 1:48:01.679 clear of that because the same reason they were already 1:48:01.720 --> 1:48:04.240 a little too long, and the extended versions basically, like 1:48:04.320 --> 1:48:08.520 Bilbo says, goodbye eleven times, you have like eleven elegic 1:48:08.880 --> 1:48:10.600 kind of I'm not trying to pronounce that right, but 1:48:10.880 --> 1:48:13.360 he's going away. Um, So I don't recommend that. But 1:48:13.520 --> 1:48:16.559 I do love those movies. I'm reading that now. I'm 1:48:16.760 --> 1:48:21.040 reading David Rubinstein's book on investing, largely because in May, 1:48:21.479 --> 1:48:24.320 April or May, he's going to interview me. Oh good, 1:48:24.600 --> 1:48:26.600 I'm terrified of because he may have seen some of 1:48:26.600 --> 1:48:29.120 the things I've said about private equity over time. I'm kidding, 1:48:29.240 --> 1:48:31.040 he knows about those. He still wants to interview me, 1:48:31.240 --> 1:48:33.080 but I gotta be prepared for that one. He could 1:48:33.160 --> 1:48:38.200 care less, can I say that? I mean, yeah, there 1:48:38.360 --> 1:48:40.280 there are people who are you know, And I use 1:48:40.360 --> 1:48:43.000 the phrase wrong. It's actually could not care less, but 1:48:43.120 --> 1:48:46.559 everybody says could care less, which you know you're all right. 1:48:46.920 --> 1:48:49.519 Are two adult questions we say, for the very ends, 1:48:50.040 --> 1:48:52.200 What sort of advice would you give to a recent 1:48:52.280 --> 1:48:58.000 college grad interested in a career in value investing, quantitative finance, 1:48:58.560 --> 1:49:03.479 or even academia, um, in broad general, a financial career. 1:49:04.120 --> 1:49:08.320 I'll go with I don't like either. And if someone 1:49:08.400 --> 1:49:10.840 tries to only steer you to lucrative careers, that's not 1:49:10.920 --> 1:49:13.960 a happy life. If people only steer you to find 1:49:14.040 --> 1:49:17.000 your bliss, well, if you're not the best in the 1:49:17.040 --> 1:49:19.320 world at your bliss and the bliss doesn't actually pay 1:49:19.360 --> 1:49:22.760 you anything, it's not such a great thing. I got 1:49:22.840 --> 1:49:25.800 into finance because I liked it, Because I work for 1:49:25.840 --> 1:49:27.920 these professors, I found an interesting thought. I'd be a 1:49:28.000 --> 1:49:31.280 professor at not everyone has to follow that route, but 1:49:31.360 --> 1:49:33.640 you want to blend those two things. The only concrete 1:49:33.640 --> 1:49:36.840 advice I'll give people young people, and I say this 1:49:36.920 --> 1:49:39.599 all the time, is try very hard not to chase 1:49:39.720 --> 1:49:45.000 what's currently hot, particularly starting out your career. Don't try 1:49:45.000 --> 1:49:50.160 to be suicidal. But but going into what's currently hot, 1:49:50.600 --> 1:49:53.880 you're gonna be five years off every time. Um, So 1:49:54.120 --> 1:49:55.800 I would back off that and if someone is really 1:49:55.840 --> 1:50:01.320 considering a career in value investing, recommend investing. As I 1:50:01.360 --> 1:50:04.280 said earlier, at least half your time in building up 1:50:04.320 --> 1:50:10.559 your psychological endurance level. You think it's all about balance 1:50:10.640 --> 1:50:13.800 sheet and income statement analysis, No, about half of it 1:50:14.479 --> 1:50:17.760 is the right personality and the right emotional makeup and 1:50:17.800 --> 1:50:20.800 the right partners. Our final question, what do you know 1:50:20.920 --> 1:50:23.639 about the world of investing today? You wish you knew 1:50:23.680 --> 1:50:26.960 forty years ago when you were first getting your feet wet. 1:50:27.640 --> 1:50:31.280 Going back, there's always been this tension in academic finance 1:50:31.360 --> 1:50:35.519 and an applied quantitative finance in why these things worked. 1:50:35.520 --> 1:50:38.720 And we talked about it very briefly earlier. If you 1:50:38.840 --> 1:50:41.599 find if someone shows you a great baptest, there really 1:50:41.640 --> 1:50:46.120 three possibilities. One is it's gibberish data mining. And let's 1:50:46.160 --> 1:50:48.439 assume it's not that that they've just tortured the data. 1:50:48.840 --> 1:50:51.719 Let's assume you think it's real. It can work because 1:50:51.880 --> 1:50:55.479 you're taking an actual rational risk and being compensated for it, 1:50:56.400 --> 1:50:59.200 or what's called often called behavioral finance. Some people are 1:50:59.280 --> 1:51:03.400 making errors. I often take two Nobel laureates my gene 1:51:03.439 --> 1:51:07.200 Fama as one end and Dick Thaylor, also at Chicago 1:51:07.520 --> 1:51:09.600 as the behavioral a lot of other great people in 1:51:09.640 --> 1:51:11.880 this field. I don't mean to make it so these two, 1:51:12.200 --> 1:51:15.440 but I would say you could do worse than those two. Absolutely, 1:51:15.479 --> 1:51:19.479 and I'm a fan of both. If if you ask 1:51:19.600 --> 1:51:23.600 me who I think is more right now, Like, I 1:51:23.640 --> 1:51:26.280 think Gene's contributions are actually the biggest in the entire 1:51:26.320 --> 1:51:28.040 world of finance because a lot of the field won't 1:51:28.040 --> 1:51:31.080 exist without him. But that's a different question of who's right. 1:51:31.520 --> 1:51:33.400 I think I would have been seventy five twenty five 1:51:33.439 --> 1:51:36.559 in the Gene camp when I left Chicago, even finding momentum, 1:51:37.320 --> 1:51:40.360 and now and now I think it'd be seventy twenty five. 1:51:40.479 --> 1:51:44.080 And all that means is more of why our stuff works, 1:51:44.520 --> 1:51:47.320 I think is taking another side of behavioral biases than 1:51:47.400 --> 1:51:50.519 a rational risk premium than I used to. And we're 1:51:50.560 --> 1:51:53.760 all a prisoner of our lived experience, right, living through 1:51:53.960 --> 1:51:58.400 both the tech bubble and those last five years to 1:51:58.920 --> 1:52:03.040 and change terrible, to and change very good. All that 1:52:03.840 --> 1:52:06.519 it may have overinfluenced me. You know, sometimes you see 1:52:06.600 --> 1:52:09.680 more crazy events in a career than the average. But 1:52:09.760 --> 1:52:14.240 I've definitely moved. I've still vote Ginge, the MVP of 1:52:14.439 --> 1:52:18.479 academic finance throughout all of Again, I'm impugning the Roman 1:52:18.560 --> 1:52:23.200 Empire throughout all of history, but I probably have moved 1:52:23.240 --> 1:52:26.280 more towards the behavioral side. That someone's got to be 1:52:26.320 --> 1:52:27.760 on the wrong side of the trade, and if you 1:52:27.880 --> 1:52:31.880 quantitatively identify who that is, they seem to work very 1:52:31.920 --> 1:52:35.320 well and harm absolutely. Cliff, thank you for being so 1:52:35.560 --> 1:52:39.879 generous with your time. We have been speaking with Cliff Astins. 1:52:40.000 --> 1:52:44.040 He is the co founder and just general all about 1:52:44.120 --> 1:52:49.439 Town managing principle at AQR Capital Management. If you enjoy 1:52:49.520 --> 1:52:52.439 this conversation, well check out any of the previous ones 1:52:52.840 --> 1:52:55.640 we've done over the past nine years. We're coming up 1:52:55.720 --> 1:53:01.560 on almost five hundred and you can find those at YouTube, iTunes, Spotify, 1:53:01.720 --> 1:53:05.200 wherever you find your favorite podcasts. Sign up from my 1:53:05.400 --> 1:53:07.840 daily reading list at ridolts dot com, follow me on 1:53:07.880 --> 1:53:14.000 Twitter at ridolts, follow Clifford Asnes on Twitter at Clifford Assness, 1:53:14.360 --> 1:53:16.799 and you could check out all of the Bloomberg podcasts 1:53:16.920 --> 1:53:19.760 at podcasts. I would be remiss if I did not 1:53:19.880 --> 1:53:22.639 thank the crack team that helps put these conversations together 1:53:23.040 --> 1:53:26.599 each week. Justin Milner is my audio engineer. Attica val 1:53:26.640 --> 1:53:30.040 Bron is our project manager. Paris Walds is my producer. 1:53:30.479 --> 1:53:34.000 Sean Russo is my head of research. I'm Barry Ridults. 1:53:34.400 --> 1:53:38.160 You've been listening to Master's Business on Bloomberg Radio.