Speaker 1: This is Masters in Business with very Rid Holds on
Speaker 1: Bloomberg Radio this week. On the podcast, this will be
Speaker 1: my shortest introduction ever. Clifford Astenus and I just go
Speaker 1: over the entire universe of quant factor and value investing.
Speaker 1: It is a master class. And if you don't believe me,
Speaker 1: I'm just going to shut up and say, with no
Speaker 1: further ado, my conversation with a Qrs cliff Astness. Let's
Speaker 1: start out a little bit going over some of your background.
Speaker 1: You get your PhD at the University of Chicago, where
Speaker 1: you are the teaching assistant for some obscure prof named
Speaker 1: Gene Fama. Tell us, Yeah, I basically discovered him. I
Speaker 1: ended up at the University of Chicago. I was an
Speaker 1: undergrad studying business and engineering. I decided I wanted to
Speaker 1: be a professor because I did a job just for
Speaker 1: money coding up studies for three Warton pros. I liked
Speaker 1: what they did. I said, how do I do what
Speaker 1: you do? And they said, go get a PhD. I
Speaker 1: said where should I go? And they said close the
Speaker 1: doorc Because we were at Wharton, and Wharton's a great school,
Speaker 1: but PhD program rankings can be different than sure and
Speaker 1: they and almost to a man, because I went to
Speaker 1: about ten professors they said, go to Chicago, and I went.
Speaker 1: I mean I got in, I went, and Jane Farmer
Speaker 1: was the man to say the very least. So your
Speaker 1: doctoral thesis asserted that consistently beating market averages was attainable
Speaker 1: by exploiting both value and momentum. In other words, you
Speaker 1: took Farmer's value factor and added your own twist, which
Speaker 1: was momentum, which eventually became a Farmer French factor. Right,
Speaker 1: yeah it Farmer French still don't include it in their
Speaker 1: official five factor model. A lot of us think they should.
Speaker 1: I think that's just a philosophical difference. The way I
Speaker 1: always describe it is one of the scariest moments of
Speaker 1: my life was going into Jean's office. I was already
Speaker 1: his teaching assistant. He had kind of agreed to be
Speaker 1: my dissertation chair, even without a particular topic, and going
Speaker 1: in and saying, I want to write it. I wrote it.
Speaker 1: It was more than just this, but one of the
Speaker 1: main things I want to explore is the momentum strategy.
Speaker 1: And then mumbling and by the way, it works very
Speaker 1: well because you know this is constant fight in academia.
Speaker 1: If if you believe something works, does it work because
Speaker 1: markets are efficient and it's compensation for risk or for
Speaker 1: behavioral reasons and momentum inherently, And I think we all
Speaker 1: knew this instinctively back then. It's very hard to come
Speaker 1: up with a rational story or risk based story. And
Speaker 1: I was nervous because he's mister efficient markets and rational,
Speaker 1: And to his credit and my relief, he said, if
Speaker 1: it's in the data, write the paper. And he was
Speaker 1: very supportive of the paper. He works very closely with
Speaker 1: Dimensional affirm I admire greatly. They don't give as much
Speaker 1: weight to momentum as we do, but they use it
Speaker 1: in their trading process. So I feel like I've won
Speaker 1: half the battle on that over time. The only thing
Speaker 1: you said that I might take a small disagreement with
Speaker 1: is consistently. We think value plus momentum has a really
Speaker 1: good risk adjusted return makes money over the long term.
Speaker 1: But when you've gone through two year periods like the
Speaker 1: tech bubble and three year periods like eighteen through twenty,
Speaker 1: I think myself, my family, and some of my clients
Speaker 1: might take issue with the word consistently. So let's let's
Speaker 1: put a little more meat on those bones to define
Speaker 1: what we're talking about. You want to identify the cheapest
Speaker 1: value stocks, but only own those that seem to have
Speaker 1: started on an up swim. That seems to make some sense. Yeah,
Speaker 1: you're you're accidentally waiting until get another quant controversy whether
Speaker 1: you need both these characteristics in every stock or whether
Speaker 1: you can have some stocks that are great on one
Speaker 1: and simply average on the other and the portfolio comes out.
Speaker 1: But the intuition you're saying it's exactly right. Two things.
Speaker 1: At that point. The literature has advanced. This is like
Speaker 1: QUANDT Financi Cerca, nineteen ninety. You may throw in the
Speaker 1: size effect and that was about it, which we're going
Speaker 1: to talk about in a little a little while, because
Speaker 1: I've read some papers that suggests may not exist. We're
Speaker 1: cynics about it. But but value, momentum, and size in
Speaker 1: the opposite order that I just said. Time wise, size
Speaker 1: was kind of first, then value, then momentum with the
Speaker 1: three biggies, And there's still very big in the in
Speaker 1: the literature around nineteen ninety value says in the original metrics,
Speaker 1: and I think they've advanced since then. Price to book
Speaker 1: was the famous one fam in French use. They'll be
Speaker 1: the first to tell you they do kind of like it,
Speaker 1: but it has no special standing. It's basically price divided
Speaker 1: by any reasonable fundamental so it could be priced to sales,
Speaker 1: price to earnings, priced to whatever. You'll get people disagreeing
Speaker 1: like crazy. At our firm, we prefer a broad ten
Speaker 1: of giving you. We don't think we're particularly great at
Speaker 1: saying which one is the exact right way to do this.
Speaker 1: But if you buy low multiples and sell high multiples
Speaker 1: either in a long only beat the benchmark sense when
Speaker 1: over and underweight, and you did the same thing everyone does,
Speaker 1: and call me a hedge fun manager. It's about half
Speaker 1: our assets. About half our assets are really traditional where
Speaker 1: money managers beat, you know plenty of things. Don't let
Speaker 1: us short or lever or any of those hedge fun
Speaker 1: kind of things. But the principle is exactly the same.
Speaker 1: The overweight in a value strategy would be low multiples,
Speaker 1: the underweight would be high multiples. If you're running a
Speaker 1: pure momentum strategy, the overweight, and this is also momentum
Speaker 1: circa nineteen ninety, would be who's doing better over the
Speaker 1: last year it's that simple. I used to dismissively call
Speaker 1: it the two newspaper strategy. You needed a newspaper recent
Speaker 1: one and one from a year ago. It's better to
Speaker 1: have a computer because a little faster than you. But
Speaker 1: you look up and you buy what's going up. It
Speaker 1: turns out this part is surprising. Both make money over
Speaker 1: any decent time horizon. Probably not surprising is they are,
Speaker 1: in geek speak, negatively correlated. If you are a pure
Speaker 1: value person and I am a pure momentum person, occasionally
Speaker 1: we agree. We may get into this later, but right
Speaker 1: now we're in more agreement than normal because value stocks
Speaker 1: kind of have the momentum, but more often than not,
Speaker 1: the cheap stocks are cheap because one of the reasons
Speaker 1: they're cheap is they've been losing. So they're negatively correlated strategies.
Speaker 1: And this doesn't create a ten sharp ratio, but a
Speaker 1: holy grail of quand finances to try to find two
Speaker 1: things that are an average make money that hedge each other,
Speaker 1: and value and momentum do whether it's relative our performance
Speaker 1: against a benchmark or absolute performance in a hedge fund.
Speaker 1: So let's talk a little bit about how you ended
Speaker 1: up launching a QR. Following your PhD dissertation, you end
Speaker 1: up eventually heading out to Goldman Sachs to effectively established
Speaker 1: their quantitative research groups. That's it, though I'm going to
Speaker 1: mend the story slightly because a few of those things
Speaker 1: happen more simultaneously. I left the PhD program in late
Speaker 1: ninety one to take a year off. I'm now on
Speaker 1: year thirty two of that year off, so it appears
Speaker 1: to have taken hold. So you're a PhD school dropout. No,
Speaker 1: I did finish the PhD. I went to Goldman. I
Speaker 1: had started my dissertation. I think a lot of people
Speaker 1: leave intending to write a dissertation from a job, and
Speaker 1: I don't think anyone, including me, succeeds at that. But
Speaker 1: if you've already produced, like a first draft, it could
Speaker 1: be a couple of years in this process to finish it.
Speaker 1: But it's more Yeoman like work. After the first draft,
Speaker 1: you're just responding to things, running new tests. So I
Speaker 1: had finished a first draft, went to Goldman to take
Speaker 1: a year with the concept that an option can only
Speaker 1: be worth zero let me see if I let me
Speaker 1: see it. I intended to be a professor when I
Speaker 1: started out but let me see if I like this.
Speaker 1: After about a year, maybe about a year and a half,
Speaker 1: I stayed a little longer. I was really feeling like
Speaker 1: I should get back to some of the academic roots.
Speaker 1: I was a fixed income portfolio manager and trader, which
Speaker 1: is a ton of fun. I recommend anyone who does
Speaker 1: this stuffer a living trade in OTC market for a
Speaker 1: while to learn the good bed and the ugly of
Speaker 1: of of of what happens there. But it wasn't like
Speaker 1: whatever skills they taught me in the PAHD program. It
Speaker 1: didn't feel right. I then got just very lucky. Pimco
Speaker 1: out on the West Coast read the first thing I
Speaker 1: wrote in the Journal of Portfolio Management. UM. The exciting
Speaker 1: title was option adjusted spreads and a steep yield curve. Um.
Speaker 1: There's gonna be a TV movie at some point. Who's
Speaker 1: going to play you in the movie? That's the big question.
Speaker 1: I'm not gonna be flattered whoever, who whoever it is.
Speaker 1: Let's just say that, UM, and they won't have any hair,
Speaker 1: which will be annoying because when that when I wrote
Speaker 1: that paper, I had hair, right they the paper, they
Speaker 1: talked to me. They didn't even know I did. I
Speaker 1: was writing a dissertation on quant equities at night, and
Speaker 1: they basically offered me a job to start a research
Speaker 1: group from scratch. Ironically, given what happened later, Long Term
Speaker 1: Capital helped my life because circa that time they were
Speaker 1: doing extremely well and suddenly, you know, all business, it's
Speaker 1: not just Wall Street are something's doing great there. We
Speaker 1: need one of those. So the notion that we should
Speaker 1: have some academics helping us out was greatly aided by them.
Speaker 1: And I actually think there's some brilliant people, though obviously
Speaker 1: didn't end well there, so it's a little bit of
Speaker 1: irony that they help. But PIMCO is looking to start
Speaker 1: a group. I went to Goldman Sachs and said, I
Speaker 1: think this is the perfect combination. I get to do
Speaker 1: academic work but in the real world, both in the
Speaker 1: sense of seeing if it actually works, and you make
Speaker 1: more money. Anyone who tells you they do money management
Speaker 1: over being a professor and never considered that it's probably
Speaker 1: not never not telling the full truth. Goldman Um said,
Speaker 1: unbeknownst to you, we're looking to start such a group.
Speaker 1: To this day, I think that's probably true, but I
Speaker 1: don't know if that was reactive to me or but
Speaker 1: they did say that, and they offered me the job,
Speaker 1: and I decided the weather in New York City's way
Speaker 1: better than Luguona Beach, Newport Beach, excuse me, California. I
Speaker 1: also chose Chicago over Stanford f PhD. So you don't
Speaker 1: care about whether obvious No Chicago versus Stanford. Um, I
Speaker 1: got into both. Yea. They offered a stipend. PhDs are
Speaker 1: very lucky to actually, hey, you to go to school.
Speaker 1: Everything was the same, except Chicago had in its budget
Speaker 1: to give me money for airfare to go visit. Stanford
Speaker 1: didn't and I had no money. So I visited Chicago
Speaker 1: and not Stanford. And it was a beautiful spring day.
Speaker 1: So I'm fond of telling people I'm the world's only
Speaker 1: person to choose the University of Chicago over Stanford on
Speaker 1: the weather. Based on the weather, I'm more intrigued by
Speaker 1: the concept of you, uh sort of Bruce wayneing uh
Speaker 1: fixed income during the day and at night your equity
Speaker 1: work is your batman. Yeah, that was tied for the
Speaker 1: craziest time in my life. Um. The other time my
Speaker 1: wife and I with with you know, more her than me.
Speaker 1: We had two sets of twins eighteen months apart. Oh
Speaker 1: my goodness, um, and that was a ton of fun,
Speaker 1: but it was ridiculous. Yeah. Right, So the nocturnal activity
Speaker 1: was a little different than writing a dissertation, but working
Speaker 1: at Goldman um with with with four babies, um, was
Speaker 1: very similar to writing a dissertation, which is kind of
Speaker 1: is your baby I could? I can imagine. So so
Speaker 1: we we started talking about a QR in ninety eight.
Speaker 1: You leave Goldman to launch that this is your first congratulations.
Speaker 1: I like to say a quarter century. It has more
Speaker 1: ground O case, it definitely does. It's amazing how quickly
Speaker 1: quarter century goes by. That's the truly shocking thing. All
Speaker 1: the cliches, particularly about children, but about all of life.
Speaker 1: They're cliches for a reason. You wake up one day
Speaker 1: and you go, what did I do for the last
Speaker 1: twenty five years? How did this happen? I remember about
Speaker 1: three of those years. I'm fond of telling people I
Speaker 1: have a really good memory that extends to two periods,
Speaker 1: the last two weeks in high school. I think that's
Speaker 1: probably true for a lot of people. It just depends
Speaker 1: on where you peaked. Yeah, personally, if you peak in
Speaker 1: high school or you peak in college. That's that's where
Speaker 1: all your memories are most vivid. So so, given a
Speaker 1: QR has been around for twenty five years, how has
Speaker 1: your investing philosophy evolved over that period? Assuming it's changed
Speaker 1: at all, and I imagine it as it has, but
Speaker 1: more has stayed the same than has changed, adding new factors,
Speaker 1: measuring factors better. I don't think that's a change in philosophy.
Speaker 1: That's just applying the philosophy and digging deeper our general belief,
Speaker 1: starting out with value and momentum at Goldman in the
Speaker 1: very early nineties, expanding along with the literature, some of
Speaker 1: which some of our people have helped create UM to
Speaker 1: other factors, low risk investing, quality investing, UM fundamental, not
Speaker 1: just price funds. But let's let's define those UM like
Speaker 1: I think we understand what quality investing is, but what
Speaker 1: is low risk? Low risk investing at its simplest. Again,
Speaker 1: all of these you get ten quants in a room,
Speaker 1: which sounds like the beginning of a bad joke. Um,
Speaker 1: they'll all have UM different ways and different sets of
Speaker 1: ways to measure this, but at its simplest. As a
Speaker 1: paper by two of my colleagues Lass Peterson and Andrea Frazini.
Speaker 1: Andrea Frazini excuse may have left out the last syllable
Speaker 1: of your name, Andrea. I will never do that again.
Speaker 1: Um wrote a paper call Betting against Beta, UM and
Speaker 1: I forget many years ago. Bab everything's three letters because
Speaker 1: faming French name their factors three letters. So now we
Speaker 1: all copy them and they'll be the first to tell
Speaker 1: you they were essentially extending work of Fisher Blacks from
Speaker 1: I don't know, ten twenty years ago, where he found
Speaker 1: that in basic theory, the capital asset pricing model. You know,
Speaker 1: we all kind of learn third week of an NBA
Speaker 1: finance class bill bill sharp. High beta stocks are supposed
Speaker 1: to return more on average than low beta stocks, and
Speaker 1: in fact nothing else is supposed to matter all. It's
Speaker 1: it's a one factor model, and it's admittedly simplistic, even
Speaker 1: though people who created it won't tell you it's the
Speaker 1: be all, end all, but it's a very useful way
Speaker 1: to think of things. It gets you down to a
Speaker 1: very important concept that diversifiable risk. You shouldn't get paid
Speaker 1: for it because you don't have to bear. You get
Speaker 1: bared for risk. You can't diversify away beta being a risk,
Speaker 1: you can't diversify away because a lot of your portfolio
Speaker 1: is already long beta should be paid. So the problem,
Speaker 1: of course is in some sense you can say betas
Speaker 1: paid because stocks tend to beat bonds over the long term.
Speaker 1: But within the market, the so called security markets line
Speaker 1: is pretty much entirely flat and has been in sample
Speaker 1: and add a sample for a ridiculously long amount of
Speaker 1: time in a ridiculously large amount of places, meaning low
Speaker 1: beata stocks have kept up with high beta stocks, which
Speaker 1: in the simplest theory, they're not supposed to. You can
Speaker 1: use this in a number of ways. You can buy.
Speaker 1: You can make your portfolio out of low beta stocks
Speaker 1: earn as much money with smaller swings, or if you're
Speaker 1: a hedge fund kind of person, and you can use
Speaker 1: this in long only portfolios too. It's just a little
Speaker 1: more complicated. You can go long lowbay a short high beta,
Speaker 1: but you better apply a heade ratio if you're long
Speaker 1: a dollar of high bay. Excuse me of low beta.
Speaker 1: I sometimes get the sign wrong in interviews, I promise
Speaker 1: in real life, when we're trading, you get the sign
Speaker 1: right like three out of four times, and that's a
Speaker 1: pretty good n hopefully everyone knows that three out of
Speaker 1: four is a joke. But you go long low beta
Speaker 1: short high beta. If you did that on a dollar
Speaker 1: along on a dollar short, you just massively short the market.
Speaker 1: Long lowbat and short high beta. Beta's work. So you
Speaker 1: apply a hedge race. Here you short less than you long,
Speaker 1: and you try to create something about zero beta, and
Speaker 1: that has created a very you know, like all these things, imperfect.
Speaker 1: It goes through bad periods, but a very attractive risk
Speaker 1: adjusted return in and out of sample long term, and
Speaker 1: then you can get into theories as to why it works.
Speaker 1: So what where I was going to ask you is
Speaker 1: if low beta returns just about the same or almost
Speaker 1: the same as high beta, why the complexity? Why not
Speaker 1: just own low beta and it will give you, on
Speaker 1: a risk adjusted basis a better return than high bad. Well,
Speaker 1: absolutely some do. But if you want to create, if
Speaker 1: you're a hedge fund person trying to create an alternative
Speaker 1: investment that's truly uncorrelated, low beata stocks are still highly
Speaker 1: correlated to the market. So by going long low beta
Speaker 1: and shorting a smaller amount of high beta, and this
Speaker 1: depends on your preferences and how aggressive you want to be,
Speaker 1: but you're eliminating that. Yes, you can create a I'm
Speaker 1: always Lerian saying uncorrelated worries. Well, I were striving for uncorrelated,
Speaker 1: but the compliance officer in my head is saying, sometimes
Speaker 1: it doesn't come out to zero all the time, but
Speaker 1: it comes out close. So you can create a very
Speaker 1: diversifying stream of returns, where if you just want low
Speaker 1: beata stocks, you're creating a more attractive stream of returns,
Speaker 1: but still extremely correlated to perhaps your other holdings, so
Speaker 1: it could be used in different ways. So well, I
Speaker 1: think when most people think of a QR, they think
Speaker 1: value shop. But as I'm doing my homework to prep
Speaker 1: for our conversation and finding all my previous notes, you
Speaker 1: don't just wing this. No, I try not to. I've
Speaker 1: done it on a raid down val I just waned
Speaker 1: it with But with you, I feel like I have
Speaker 1: to come in loaded for bear. Let's say that's a
Speaker 1: good accident to Wall Street joke, right on purpose, not
Speaker 1: so accident. Okay, good, um, you know I have a
Speaker 1: whole I have all I got a million of it, right,
Speaker 1: I got am well teed up waiting for you. So
Speaker 1: people tend to think of a QR as a value shop,
Speaker 1: but really you're a deep quantitative shop with a lot
Speaker 1: of different strategies. Let's talk a little bit about the
Speaker 1: various ways you guys invest money. Well, let me, can
Speaker 1: I back up for second talk about why people think
Speaker 1: of us as a value Absolutely. There are a few reasons.
Speaker 1: One is there was one point in the very distant
Speaker 1: past where it was much closer to true. Um. Some
Speaker 1: of the things like betting against made up quality or
Speaker 1: profitability carry strategies or additions over time. So anyone who's
Speaker 1: even not the people. A lot of people follow us,
Speaker 1: but anyone has followed us from the beginning, it's not
Speaker 1: crazy that they started out thinking that. Also, I just
Speaker 1: wrote a piece maybe a few months ago on our
Speaker 1: website with the highly defensive worried title we are not
Speaker 1: just about value in parentheses except occasionally when we are.
Speaker 1: Because you do get these periods and value seems to
Speaker 1: be the worst culprit um. Not even even half of
Speaker 1: your headlines, yeah are hedged fund now, Well, you know,
Speaker 1: remind me where we were, because I'll go off on
Speaker 1: tangents like you do. But but but I do write
Speaker 1: a lot of head statements and I'm kind of famous
Speaker 1: from my footnotes, both because I stick the humor there,
Speaker 1: but also I put in all the ways I might
Speaker 1: be wrong. Um, and it's it's really not a compliance reason.
Speaker 1: I hope it's more of an intellectual honesty reason. Anyone
Speaker 1: who's sure they're right is very, very dangerous. The footnotes
Speaker 1: allow you to get past that point. Yeah, I love saying.
Speaker 1: First of all, we hate to kill our darlings, anybody rights,
Speaker 1: but secondly, you could very easily get stuck somewhere. All right,
Speaker 1: let me just throw this in a footnote, be done
Speaker 1: with it, and keep going. And it allows that. Okay,
Speaker 1: I've cleared the road for the rest of my thought.
Speaker 1: The footnotes have three purposes to me. There where I
Speaker 1: stick the humor, they are the hedges. Here are the
Speaker 1: ways that what I just said might have been bull
Speaker 1: blank and uh, and I could be wrong. And finally,
Speaker 1: they are sentences I love that my editor did not
Speaker 1: love where we can mutually agree that that that it's
Speaker 1: worth the foot that it's worth the footnote. But and
Speaker 1: they do, by the way, your editor just yes, is
Speaker 1: you god? I gotta deal with Cliff today? Just throw
Speaker 1: it in the footnote and keep going. It's helpful to
Speaker 1: have a weights paper batsket. I used to use a
Speaker 1: separate doc that I would whatever it was, something something
Speaker 1: something edits So when I would get stuck, I would
Speaker 1: let me just move the sentence this paragraph year because
Speaker 1: it's interfering with the narrative. And almost anyone who writes
Speaker 1: will find like they want to make the argument seven
Speaker 1: different ways because you want you want to both both
Speaker 1: kill the counter argument and then jump on its grave
Speaker 1: for a while. Anticipate a good editor will say, pick
Speaker 1: your one or maybe two best arguments and go with those.
Speaker 1: Um and and footnotes again are useful. So digression aside,
Speaker 1: Let's go back to the multiple strategies. Oh, I'm not done.
Speaker 1: I got to finish all right, Um, this could take
Speaker 1: the rest of the time. I cleared my schedule through dinner.
Speaker 1: We are multi strategy. We go through long periods, almost
Speaker 1: decade long periods, where we hardly talk about value. It's one,
Speaker 1: it's a relatively important factor, frankly, but it's it's not
Speaker 1: a it's not a majority of what we do, and
Speaker 1: we go through long periods. A good example would be
Speaker 1: post GFC through twenty seventeen, where value is tough. Yeah,
Speaker 1: and we had a great almost a decade. Because everything
Speaker 1: else we do work um profitability, one fundamental momentum, one
Speaker 1: low risk one. UM. We don't need value to work.
Speaker 1: A lot of that is because value lost over that
Speaker 1: period for what I will call and Gene Fama will
Speaker 1: have to forgive me here rational reasons, meaning the expensive
Speaker 1: companies buy and large outperformed, not on price, which they
Speaker 1: did also, but they out executed. They grew more in
Speaker 1: terms of earning sales, cash flows. If you are a
Speaker 1: pure value investor in a quant sense, just buying low multiples,
Speaker 1: you win on average because on average the price goes
Speaker 1: too far the cheap stuff. And there's a risk based
Speaker 1: explanation too. Again I'm pissing off Fama constantly on this,
Speaker 1: but you A big part of why you win, we think,
Speaker 1: is the expensive stuff is better to better company usually
Speaker 1: but not that much better, not what's priced in. That's
Speaker 1: on average sometimes thankfully more less often than not, but
Speaker 1: still quite often the expensive stuff ends up being worth
Speaker 1: it or more than worth it. And when that happens,
Speaker 1: the value factor, the qual value factor very different than
Speaker 1: how a Graham and Dodd investor. And we can get
Speaker 1: into this later we'll use the term value. That'll suffer
Speaker 1: at those times. But pretty much the rest of the
Speaker 1: process you can think of, and we do it all simultaneously.
Speaker 1: It's not really like one first than the other, but
Speaker 1: you can think of it as trying to avoid a
Speaker 1: value trap. Is this thing high profitability with things changing
Speaker 1: in the right direction and low risk. Therefore someone should
Speaker 1: pay a high multiple and you want to avoid value
Speaker 1: just shorting that that works like a charm in a
Speaker 1: rational market, in a bubble. And here again, I'll try
Speaker 1: to make this the final time. I'm a gene farm
Speaker 1: a heretic because I love the man who specifically says,
Speaker 1: what's a bubble? Yeah? I think I'm somewhere in between.
Speaker 1: I think I've seen a few in my career. I
Speaker 1: think they exist. I think they are far more rare
Speaker 1: than the way a lot of Wall Street refers to them.
Speaker 1: A lot of Wall Street will say a stock they
Speaker 1: think as expensive is in a bubble. Single stock can't
Speaker 1: be in a bubble. It has, though, I do think
Speaker 1: the tech bubble um and and certainly by by mid COVID,
Speaker 1: we were in a various kinds of kinds of bubbles
Speaker 1: in a bubble value loses. Of course, almost by definition,
Speaker 1: people want the darlings, but they but the darlings are
Speaker 1: not the ones who are out executing. They're the ones
Speaker 1: with the greatest stories. Um. So the rest of our
Speaker 1: process doesn't protect us very much. Um that is incredibly
Speaker 1: painful period for our process that both this time, which
Speaker 1: I think we're still in the midst of and we've
Speaker 1: more than recovered from the round trip, has been good
Speaker 1: but has led to some really tough times to wait out.
Speaker 1: Um My holy grail would be to come up with
Speaker 1: something to add to our process that would do really
Speaker 1: well in bubbles but not cost us money long term,
Speaker 1: because I don't think we can time these and I
Speaker 1: don't think i'll I don't really think i'll find that.
Speaker 1: And by the way, um this is self serving. But
Speaker 1: if your worst times are going to be when everyone
Speaker 1: else is partying in a bubble, and your best times
Speaker 1: are going to be when that bubble is killing everyone
Speaker 1: because it's coming down, it's not a terrible property. No, No,
Speaker 1: it is absolutely not. So we're going to talk more
Speaker 1: about value and growth later, but since you brought this up,
Speaker 1: I want to just throw a couple of ideas at
Speaker 1: you about that decade that followed the financial crisis, where
Speaker 1: not only did growth outperform value, but really thoroughly trounced it.
Speaker 1: So there are a couple of theories I've heard that
Speaker 1: I think are worth discussing. First, the decade before, at
Speaker 1: least the eight nine years before the financial crisis, value
Speaker 1: was winning and growth was getting killed. So you started
Speaker 1: from a relative uneven place. Maybe some of this was
Speaker 1: catch up. But the theme I kind of find more
Speaker 1: interesting is that prior to the financial crisis, Wall Street
Speaker 1: and the markets had systematically undervalued intangibles patents, copyright, algorithms, etc.
Speaker 1: How much of that twenty ten's rally was catch up
Speaker 1: for by intangibles, It certainly could have been some of
Speaker 1: the early part. A lot of quants added adjustments for
Speaker 1: that along the way. Most of us are not purists
Speaker 1: saying we're not going to change our models since nineteen.
Speaker 1: The notion, for instance, that R and D that's viewed
Speaker 1: as an expense, maybe all of it, maybe part of
Speaker 1: it should actually be capitalized, which would go into book
Speaker 1: value and make make a firm look not as expensive.
Speaker 1: A company that spends a lot of money doing R
Speaker 1: and D is investing in the future exactly, so I
Speaker 1: think that that maybe part of it. I think it's
Speaker 1: overdone in a few ways. One, it applies to more
Speaker 1: than just price to book, but it applies most directly
Speaker 1: to price to book where you're not capitalizing things like
Speaker 1: R and D. It can apply to earnings, but plenty
Speaker 1: of valuation measures has no applicability for price to sales.
Speaker 1: Is should make it's I don't see where you think
Speaker 1: about intangibles. What's the price and now what revenue is
Speaker 1: it generating? And those type measures did just about as
Speaker 1: bad as the ones that were contaminatable. Is that a word,
Speaker 1: I'm not sure, but it is now um, So I
Speaker 1: definitely think you want to account for that in places
Speaker 1: like price to book in earnings, and I think collectively,
Speaker 1: not just a qr UM. That has been an improvement
Speaker 1: how we measure value and the world has changed a bit,
Speaker 1: but we it applied, and caring about price versus anything,
Speaker 1: even if it were immune to intangibles, was not a
Speaker 1: very good thing until late twenty twenty since the GFC,
Speaker 1: so about eleven years. So I don't think that you know,
Speaker 1: the real world's always more complicated. Everyone's always looking for
Speaker 1: single explanations when a lot of things have multiple explanation.
Speaker 1: So I think this can definitely be part of it,
Speaker 1: but I don't think it's the main driver. Nuance is
Speaker 1: wildly underrated in finance, to say the least. Let's talk
Speaker 1: a little bit about your research and writing. And I
Speaker 1: want to quote your favorite publication, The New York Times,
Speaker 1: who wrote about you. Quote. He built a public reputation
Speaker 1: for his willingness to write and say what's on his mind.
Speaker 1: In academia, he's known for witty, biting papers he writes
Speaker 1: for such publications as The Financial Analyst Journal. I know
Speaker 1: you don't write to do branding, but what do you
Speaker 1: personally get out of a fairly steady stream of deep,
Speaker 1: thoughtful academic papers. First year being too kind? Of course,
Speaker 1: I write to do branding, Okay. I run a real
Speaker 1: world business and I prefer people to think we're good
Speaker 1: at this, And I think that's LEGiT's fair. If I
Speaker 1: write something that people think is lousy or they disagree
Speaker 1: with or misses the point, it's going to hurt our business.
Speaker 1: So I won't pretend part of it is not a
Speaker 1: business decision, but it's really not most of it. A
Speaker 1: lot of it is the DNA. Three of our four
Speaker 1: founders met at the PhD program at the University of Chicago.
Speaker 1: We consider writing academic or often that that kind of
Speaker 1: area in between academia and applied. You know, we've written
Speaker 1: a lot of papers in the Journal of Finance, the JFE,
Speaker 1: and that's true academia. A lot of our work shows
Speaker 1: up in great places like the Financial Analysts Journal and
Speaker 1: the Journal of Portfolio Management UM, which is kind of
Speaker 1: the nexus between those two. This will sound childish, but
Speaker 1: a fair amount of this is just personal consumption. We
Speaker 1: enjoy being part of that world. We grew up thinking
Speaker 1: part of the way you measure success is whether you
Speaker 1: influence the intellectual debate um, whether and and and and
Speaker 1: how you're regarded in those circles. And it's just part
Speaker 1: of our utility function. I do think a few things first.
Speaker 1: I always point out I don't know the exact breakdown,
Speaker 1: but a fair amount of what we do is public.
Speaker 1: But there's a fair amount that we think is proprietary.
Speaker 1: And there are things that I would have a QR
Speaker 1: researchers hunted it down and killed if they published. Yes, UM,
Speaker 1: my compliance area would like you to know that I'm
Speaker 1: I'm speaking hyperbole. I would like you to know that
Speaker 1: I'm not um. But there are there are things we think,
Speaker 1: you know even if there are things we think the
Speaker 1: world will discover where you think you're somewhat ahead on
Speaker 1: and we do try to walk that line on But
Speaker 1: a lot of what we do is, you know, is
Speaker 1: the value strategy cheap um someone role writer paper saying
Speaker 1: the betting against beta strategy is really all only small
Speaker 1: cap stocks and will respond to that. So it's really
Speaker 1: not giving away some of the stuff which I think
Speaker 1: does exist that is really unique. It does go to
Speaker 1: our taste and I do think besides just the the
Speaker 1: the advertising aspect, I think one que benefit to our
Speaker 1: business is we hire a lot of PhDs, including professors.
Speaker 1: We hire some full time and we have very strong
Speaker 1: relationships where they work kind of halftime for us. Usually
Speaker 1: they get to work full time for their school. Also,
Speaker 1: it's a great deal can they get to multiple jobs.
Speaker 1: And that's because what they're doing for us is also
Speaker 1: what they're researching. It's it's actually quite beautiful. I don't
Speaker 1: think we get taken nearly as seriously in that world,
Speaker 1: meaning it would be a recruitment challenge. You can say
Speaker 1: to a professor, you could write for your whatever you're
Speaker 1: working on, you can help us, and if you ever
Speaker 1: want to publish with us, we can play with Exactly.
Speaker 1: It's absolutely twofold. They're allowed again, within the stricture of
Speaker 1: if it's staggeringly proprietary, no, But broadly speaking, we're helping
Speaker 1: their academic career also because we're okay with them writing
Speaker 1: about a lot of this, and that's very attractive versus
Speaker 1: a firm that says you can't say a word. Second,
Speaker 1: I don't think we could have even access to these
Speaker 1: people to the same degree if we weren't producers as
Speaker 1: well as consumers of this research. You get a different
Speaker 1: respect level when you're publishing, at least occasionally in some
Speaker 1: of the same journals they are, and you've become enough
Speaker 1: of an institution that affiliation with AQR doesn't look bad
Speaker 1: on anybody's resume, and vice versa allows you to have
Speaker 1: access to some of the top academics that are out there. Absolutely,
Speaker 1: there are exceptions. I think, you know, kind of near
Speaker 1: the end of twenty twenty, maybe people were being quiet
Speaker 1: about that affiliation for a while. That was a short
Speaker 1: term performance. Yeah, I had nothing to do with your research.
Speaker 1: I'm kidding, I am. I am proud of the fact
Speaker 1: that I do think a QR on an academic resume
Speaker 1: doesn't at least doesn't hurt and maybe even helps. I would,
Speaker 1: I would say, you're being um, humble, beyond necessary. I
Speaker 1: can fake that at times. All right, Well, you know,
Speaker 1: if you can fake sincerity, that's that's all right. That's right.
Speaker 1: So let's talk about a couple of your publications that
Speaker 1: I was amused by. In late twenty nineteen, you wrote,
Speaker 1: bonds are freaking expensive? How do you invest around that thesis?
Speaker 1: Because going back to the bull market and bonds that
Speaker 1: began in nineteen eighty one, it felt like bonds were
Speaker 1: expensive throughout the whole twenty tens. What made you finally
Speaker 1: cry our uncle in twenty nineteen and say, all right,
Speaker 1: no muss. Well, first of all, I'm gonna somewhat disappoint
Speaker 1: you saying we do not take very big bets on
Speaker 1: views like timing asset classes based on valuation. Auntie Ellman
Speaker 1: and I wrote a paper I forget the exact title.
Speaker 1: I think one of them was called sin a Little,
Speaker 1: where we say timing the market and this applies to
Speaker 1: the bond market as well as the stock market. Is
Speaker 1: an investing sin, and ultimately we recommend you sin occasionally
Speaker 1: and a little. Not that I've done all my homework,
Speaker 1: but that was November seven, twenty nineteen. It's time to sin. Well,
Speaker 1: I've researched it recently, and you wrote it three years ago.
Speaker 1: I'm actually bad at keeping the catalog of my own work.
Speaker 1: There's there's a lot going on here. The one year
Speaker 1: referring to was about value timing, and it's really the
Speaker 1: same concept. We do believe that when that if you
Speaker 1: systematically follow a legit, meaning you're not forward looking, you're
Speaker 1: only looking at backward data. Try to time the stock market,
Speaker 1: the bond market, or even value based on how cheaper
Speaker 1: rich it looks. They usually have very very modest positive
Speaker 1: long term risk adjustive returns. As you said, you can
Speaker 1: go through long, long periods where they're overvalued and get
Speaker 1: more overvalued. Um. We do use valuation in concert with
Speaker 1: things like momentum and profitability and things where where now
Speaker 1: it starts to be better because it's negatively correlated to
Speaker 1: those and all else equal. If you have momentum and
Speaker 1: you're not overvalued, it may be better right if you
Speaker 1: if you're using the momentum, how much does timing really matters?
Speaker 1: It's in there with more um um that piece on
Speaker 1: bonds being freaking expensive um, which is going to eventually
Speaker 1: be a technical term. I'm gonna push it that I
Speaker 1: stressed in there. I don't know how to time this um.
Speaker 1: This is a five to ten year view. I know.
Speaker 1: I tried various methods of looking at bonds. This was
Speaker 1: well before the yield back up and well before the
Speaker 1: inflation spike. UM. Compared to any forecast or trailing version
Speaker 1: of inflation, and doing that consistently through time, bonds were
Speaker 1: about tied with giving you the least they've ever given
Speaker 1: you and tied for worst is I think expensive. How
Speaker 1: someone reflects that if they are taking a long horizon,
Speaker 1: now we can get into the tina there is no
Speaker 1: alternative equities didn't look great either. UM. I think a
Speaker 1: lot of why we publish these long term forecasts, and
Speaker 1: my colleague at the Eelman and is really the master
Speaker 1: of this is both we're interested in it and our
Speaker 1: clients really seem to value it, but we don't trade
Speaker 1: on a ten year forecast. UM. Let me give you
Speaker 1: an example, a ten year forecast. Let's say you have
Speaker 1: value has power, and that's even disputable, but we believe
Speaker 1: it does. To tell you, is this going to be
Speaker 1: a better or worse than normal ten years going forward?
Speaker 1: Very often the answer will be we predict positive returns,
Speaker 1: but considerably less than history. Okay, what do you do?
Speaker 1: Are you just hedging or is that a that's genuinely
Speaker 1: often a prediction from a from a model, sort of
Speaker 1: like the forty percent number? What are the odds of
Speaker 1: this happening? You can't be wrong when you say, yeah,
Speaker 1: this stuff is always wishy washy. You know, Statisticians never
Speaker 1: say we know this. They say the chance we're wrong
Speaker 1: is small, but it's also intellectually accurate. You don't ever
Speaker 1: know something, But imagine you have a forecast. Stocks usually
Speaker 1: make ten percent a year, and don't hold in any
Speaker 1: of these numbers. We think they're gonna make five percent
Speaker 1: a year, but not negative. You know what someone is
Speaker 1: who shorts for the next ten years or underweights against
Speaker 1: a benchmark. You know what happens if you short a
Speaker 1: positive but smaller than historical return, If you lose less
Speaker 1: than you would over history, and you get to go
Speaker 1: to your client after ten years, well, I lost your
Speaker 1: money for a decade, but the good news is I
Speaker 1: lost you less than I would have used lost over
Speaker 1: the average decade. And it's a good example where forecasting
Speaker 1: the ten year period can be interesting and can be vital,
Speaker 1: right if you're anywhere from an individual to a pension fund,
Speaker 1: saying how much do I have to save to retire?
Speaker 1: What you're going to earn on that money is an
Speaker 1: important number, but it's not necessarily a timing actionable number.
Speaker 1: For years, my dad it wasn't spreadsheet. It was a
Speaker 1: little piece of paper, and it was probably calculated all wrong,
Speaker 1: because I believe it or not, my dad was a enumerate.
Speaker 1: My mom was a math teacher, So okay, I got
Speaker 1: it from somewhere. But he had that little sheet what
Speaker 1: do I need to retire? Which I think everyone has
Speaker 1: in some extent, including institutions. So we think that number
Speaker 1: is really important. But I do not recommend trading on
Speaker 1: just valuation, except that sin a little. When things get
Speaker 1: I like to joke to one hundred twentieth percentile um.
Speaker 1: The joke, of course, is there's no such thing as
Speaker 1: one hundred twenty is beyond our lifetime experience. It's yeah,
Speaker 1: it's beyond anything we've seen before. It would have been
Speaker 1: twenty percent above the prior one hundred percentile. It's the
Speaker 1: new hundred percentile. And we've really tried hard and we
Speaker 1: can't find any rational reason for it. A small move.
Speaker 1: Don't be a hero, because again, these things can get
Speaker 1: crazier and crazier. That's the sin a little. We recommend
Speaker 1: sinning a little, and occasionally I recommend that burying your
Speaker 1: personal life also in a very different context. You can
Speaker 1: apply that anyway you would like. UM. And so at
Speaker 1: that point in twenty nineteen with bonds, I think we
Speaker 1: would have told people we probably own a drop less
Speaker 1: than normal on a really long horizon. But mostly we're
Speaker 1: telling people, assume you're gonna make less now the late
Speaker 1: twenty nineteen, UM, it's time for a sin I think
Speaker 1: it was. I think I tried to use is it?
Speaker 1: Is it pronounced vineal or venal? A mild sin um?
Speaker 1: You got you got two Jews here, we need a
Speaker 1: Catholic um. The what I basically said, it's time for
Speaker 1: I'm gonna say vineal value sin a veneal value timing
Speaker 1: sin um. And I was looking at the spread between
Speaker 1: cheap and expensive. What we I want to say we
Speaker 1: created this that is probably false. You never know who
Speaker 1: created things privately and didn't share them. We were the
Speaker 1: first to publish on this, UH, and it was back
Speaker 1: in the tech bubble. This is a twenty four year
Speaker 1: old result from nineteen ninety nine, very similar period to
Speaker 1: particularly nineteen and twenty value killed we think irrationally, so
Speaker 1: the other parts of the process don't help extremely painful
Speaker 1: huge recovery UH afterwards, but during the teeth of the pain,
Speaker 1: we wanted a measure of how dream it is. And
Speaker 1: you can't always just look at returns. Returns tell you
Speaker 1: the pain you're in. But if those returns were say,
Speaker 1: justified by massive you know, earnings growth, right, if your
Speaker 1: earnings double, your pee stays the same and your return
Speaker 1: and that didn't make you more expensive. If it just
Speaker 1: was a great result, and some of that can always
Speaker 1: be in there, so you want to be prospective. So
Speaker 1: we built this measure that's very simple. All the academic
Speaker 1: and implied work that was published at the time sordid
Speaker 1: stocks on valuation measures generally went long or overweight the cheap,
Speaker 1: and shorter or underweight the expensive, and really never addressed
Speaker 1: how cheap and how expensive you always get a spread.
Speaker 1: I'm fond of saying otherwise your spreadsheet is broken or
Speaker 1: every stock is coincidentally selling for the same price to sales.
Speaker 1: But sometimes that spread is huge, and sometimes it's very tight,
Speaker 1: and it does correspond to times that would intuitively strike
Speaker 1: you as frothy spread. The more attractive the valuation, the
Speaker 1: lower value the value stocks versus the growth. Value looks
Speaker 1: better versus growth on a three to five year horizon.
Speaker 1: It's also not pure. Value is never a great timing tool.
Speaker 1: I think you do put yourself on the right side
Speaker 1: of so called catalysts. When valuations are that extreme, bad
Speaker 1: catalyst for you will hurt a little, and good catalysts
Speaker 1: will help a lot. But but but it's still I
Speaker 1: wrote this in late twenty nineteen because spreads were approaching
Speaker 1: something I never thought i'd see again. They were approaching
Speaker 1: the tech bubble peaks. Really, that's shocking. In ninety nine
Speaker 1: before the what do we have off the pandemic lows
Speaker 1: the sixty eight percent gain in the SMP, and then
Speaker 1: the next year another twenty eight percent on top of that.
Speaker 1: So this is late. This is the late we were
Speaker 1: not there yet. And I'm talking about the spread between
Speaker 1: cheap and expensive, not not the whole market. The entire
Speaker 1: market if you like a Schiller cape or something was
Speaker 1: much worse in nine nine two hit about forty five,
Speaker 1: where it hit the low to mid thirties at the
Speaker 1: peak in two thousand. Same way, the indicator that when
Speaker 1: the schillcape is very high, the pe is very high,
Speaker 1: the ten year perspective returns are low. We don't actually
Speaker 1: go short something because of the schillarcape. It seems like
Speaker 1: it's been on the high side for decades. Yeah, that's
Speaker 1: one of the main ones Auntie and I look at
Speaker 1: and saying, it's pretty hard to make your money actively
Speaker 1: timing based on only the schillar cape. It is much
Speaker 1: more reasonable to have a valuable ten year modification to
Speaker 1: historical norms because the shillocape is high or low. But
Speaker 1: in late twenty nineteen I wrote this, It's time for
Speaker 1: a veneal value timing sin. I wrote that I'm ignoring
Speaker 1: momentum or trend here um, which is against a lot
Speaker 1: of our philosophy, and and largely because I thought this
Speaker 1: was epically crazy and it could come back very very quickly,
Speaker 1: just because on average, trend and momentum work on average.
Speaker 1: You want to be able to do something that works
Speaker 1: on average many many times. You only had one shot
Speaker 1: at this, right If this came back in a three
Speaker 1: month melt up for value stocks, you could miss a
Speaker 1: lot of it if you if you didn't do this,
Speaker 1: um so, And it turned out if I'd listened to
Speaker 1: trend plus value it has worked out well for us.
Speaker 1: It would have been even a little better. So there's
Speaker 1: a little bit of a moral story. I give you
Speaker 1: my faults as well as my but I wrote this thing,
Speaker 1: and then about I don't know four or five months later,
Speaker 1: I wrote a follow up piece saying, no sin has
Speaker 1: ever been punished this violently and this quickly. I will
Speaker 1: make an excuse, but I think as excuses go, it's
Speaker 1: one of the better ones. It's called covid. Um certainly
Speaker 1: that was not in my predictive power. Um Also, I
Speaker 1: think the market reacted ex posts certainly crazy to covid Basically,
Speaker 1: you remember, all you needed to own was Peloton and Tesla,
Speaker 1: and values were going to cease to exist in the lockdown. Well,
Speaker 1: Tesla started running up in anticipation of being added to
Speaker 1: the S and P before just really went next The
Speaker 1: value as we are almost anyone else measures it was
Speaker 1: destroyed over the first six months of COVID, and it
Speaker 1: turned out not to even be directionally true. The value
Speaker 1: stocks fundamentals, what I call them executing outside of what
Speaker 1: the market cares about, just executing their companies was actually strong,
Speaker 1: even including the pandemic, so the fear did not materialize.
Speaker 1: We thought those spreads got crazy, but they as approached
Speaker 1: as opposed to approaching tech bubble highs. Never thought i'd
Speaker 1: see in my career again after the tech bubble. Admit
Speaker 1: I got that wrong. They blew past it, well passed
Speaker 1: it when COVID hit, and we stuck to our guns
Speaker 1: and even added to that tilt a bit. We tried
Speaker 1: basically any explanation that someone from the outside, a strategist,
Speaker 1: a pun did, a client, consultant, or internal that we
Speaker 1: could come up with for why we might be wrong.
Speaker 1: You know, the way I think of these is, you've
Speaker 1: got to keep a really open mind, consider why you
Speaker 1: might be wrong, test that story, and if at the
Speaker 1: end of the day, there's something that's unprecedentedly crazy looking
Speaker 1: and you have after keeping that open mind rejected those
Speaker 1: stories for then you got to plant both feet and
Speaker 1: say I will not be moved. And I think we've
Speaker 1: gotten pretty good at that over time. I never wanted
Speaker 1: that one thing you asked earlier about investment philosophy changing,
Speaker 1: and we went off in twenty other fun tangents. One
Speaker 1: major way my investment philosophy has changed is at the
Speaker 1: beginning of my career thirty years ago. Really, if you
Speaker 1: go back to the Goldman days, if you had asked
Speaker 1: me what will make a great investor? Quantitative in my
Speaker 1: sake but in general, I would have probably given you
Speaker 1: an arrogant answer that, oh, just being smarter than other people,
Speaker 1: you know, being smarter than other investors than the market
Speaker 1: as a whole. The arrogant part is the implicit assumption
Speaker 1: that kind of comes along that I'm one of those people.
Speaker 1: At the I still think this is a bold statement.
Speaker 1: Smart is good. I don't think I haven't changed the
Speaker 1: sign on smart, but I now think long term success
Speaker 1: half the battle is after keeping that open mind. You
Speaker 1: can't skip that step. If you decide you're right, having
Speaker 1: an extremely ordinary sticktuitiveness to you is an equal partner
Speaker 1: to being smart, all right, So I'm gonna just edit
Speaker 1: what you just said for a moment because I understand
Speaker 1: exactly what you're saying, but I want to rephrase it.
Speaker 1: So intelligence in the market, those are table stakes. You
Speaker 1: have to assume everybody you're trading with and against is intelligent,
Speaker 1: even if it's not true. You have to assume that
Speaker 1: that's what's on the other side. Hey, I don't know
Speaker 1: who's on the other side of my trade, but I'm
Speaker 1: gonna assume they know at least what I know, if
Speaker 1: not more. What you're also sort of suggesting is you
Speaker 1: have to learn when your high conviction trades become I
Speaker 1: stick to my guns and ride this out, even if
Speaker 1: I'm wrong for a quarter or more or four this
Speaker 1: will eventually work or eleven because I know these numbers precisely.
Speaker 1: Because drawdowns have this amazing subjective. We borrow the term
Speaker 1: from physics time dilation, even though we use it differently,
Speaker 1: where you will look at if you look at a
Speaker 1: back test or even real life returns and you see
Speaker 1: a fairly horrible drawdown, but you know it ends well,
Speaker 1: you look at and go. Of course I'd stick with that.
Speaker 1: It's a great process. Look look at what it delivers
Speaker 1: two three years. As some of these can take. They
Speaker 1: are an eternity. Everyone wants quarterly numbers, which means you've
Speaker 1: gone back to people eleven times, twelve times and said
Speaker 1: we stink again. It becomes a proof statement the world
Speaker 1: and your show is a partial antidote to this. But
Speaker 1: the financial media does a great job of coming up
Speaker 1: with stories why whatever's working is the truth and whoever's
Speaker 1: losing right now? Um, so you're defending yourself. I do
Speaker 1: think we've done a great job of sticking our guns
Speaker 1: at these times. But I do worry that some years
Speaker 1: at the end of my life have been used up.
Speaker 1: What's the quote? There are some days at last decades
Speaker 1: and some decades that well, we talked about children. That's
Speaker 1: an example of decades to go by. In days, draw
Speaker 1: downs are an example of days that go by. Days
Speaker 1: it feels far longer than it really is. And what
Speaker 1: I might call I don't think it's a real term,
Speaker 1: but statistical time. When can you actually say this is wrong? Um,
Speaker 1: it's pain time. When you're in pain, time goes much
Speaker 1: more slowly. Time flies when you're having a good time.
Speaker 1: And this is the inverse and and this is this
Speaker 1: is perhaps self serving, but this raising us a rational
Speaker 1: after being open minded and cynical. Sticktuitiveness to half the
Speaker 1: battle is also why I think some of these things
Speaker 1: last and don't get arbitraged away in a reel as
Speaker 1: late as twenty seventeen, which again was a bad period
Speaker 1: for value but a very good period for us, and
Speaker 1: our firm grew. Most common question I'd get, particularly in
Speaker 1: public forms, would be, and it's an intelligent question, if
Speaker 1: this is as good as it looks like, why is
Speaker 1: in an arbitraged away? And I literally I did not
Speaker 1: expect or want to be as right as I was
Speaker 1: over the following three years. But I would say, particularly
Speaker 1: having lived through the tech bubble, you have no idea
Speaker 1: how hard this can be to stick with. At times
Speaker 1: it is not that easy. It seems easy now over
Speaker 1: full cycles. And I am schizophrenic about this. Half of
Speaker 1: me hates it because these times are hell, but half
Speaker 1: of me realizes that if they didn't exist, right, this
Speaker 1: every value manager on Earth, and it's probably applies to
Speaker 1: non value, but this is people like everyone every discipline
Speaker 1: on Earth in finance. Anyway, I'm gonna I'm gonna steal
Speaker 1: your line. You don't get the full glory of the
Speaker 1: upside without suffering through the out of favorite down. So
Speaker 1: West Gray, someone you and I talked about before we started, Um,
Speaker 1: has a great I think it's West's term. It is
Speaker 1: exactly where you gonna pain no premium. Oh no, I
Speaker 1: was gonna say even God would get five. An active
Speaker 1: manager is a line from Lestina said no pain, no premium. Um.
Speaker 1: I'm not good at I'm good at offering attribution. I'm
Speaker 1: not always good at actetting. But they're both awesome. So um,
Speaker 1: But I do think there's truth to that. My favorite
Speaker 1: story which I'm gonna make you listen to now, Okay,
Speaker 1: this is from the tech bubble. I am probably late
Speaker 1: ninety nine, early two thousand, UM, at home at night
Speaker 1: talking to my new wife, and I'm whining, and and
Speaker 1: worse than whining, I'm cursing up a blue streak about
Speaker 1: how stupid and crazy this world is, none of which
Speaker 1: I can repeat even with the lax or laws today
Speaker 1: on George Carlin, seven words, I still wouldn't go through
Speaker 1: what I was screaming that night. And she said to me,
Speaker 1: she only said one sentence. The rest was implied. She said,
Speaker 1: I thought you make your money because people have some
Speaker 1: behavioral biases and the rest is implied. She's saying, but
Speaker 1: when those biases get really ugly and they make really
Speaker 1: big mistakes, you whine like a stock pick. So wait,
Speaker 1: you're a quant and your wife is a behavioralist. My
Speaker 1: wife has a master's in social work, so I guess,
Speaker 1: I guess behavioralist is accurate. And anyone who's been happily married,
Speaker 1: which I'm going to search, she is and she can
Speaker 1: Rebut if you invite her on to me for for
Speaker 1: for a quarter century, is it has to be a
Speaker 1: bit of a behavioralist. But what we all want, which
Speaker 1: will never get, is a world where there are opportunities.
Speaker 1: We're active investors. We think we make the market a
Speaker 1: more efficient place. We think we make capital markets better.
Speaker 1: That's important for society. But we exist to a large
Speaker 1: extent to take the other side of errors and and
Speaker 1: and correct that. We don't want a world with no errors,
Speaker 1: because there's nothing to do. We want a world with
Speaker 1: there are significant errors. And after Barrier Cliff puts the
Speaker 1: position on eleven minutes later, the market realizes we were
Speaker 1: right and hands us our money. That doesn't work, though,
Speaker 1: And it doesn't work that way, it is almost perfectly
Speaker 1: calibrated to make sure most people can't do it. Um
Speaker 1: I like that phrase it I don't. I wouldn't say
Speaker 1: it's almost perfectly calibrated. The countryside is littered with people.
Speaker 1: By the way, I don't know how much I know
Speaker 1: you spend time on Twitter. We'll talk about that on
Speaker 1: Investment TikTok, which has since shrunk dramatically. I love it.
Speaker 1: I never got on investment well. I access it via Twitter.
Speaker 1: Do you like wrap your stuff on INVESTMENTO? Do you
Speaker 1: ever do? You may put it to a son trimality
Speaker 1: might be more proprible. What I love is so what
Speaker 1: what TikTok calls investing TikTok? I called Dunnan Krueger TikTok.
Speaker 1: And my favorite is the young couple, both good looking
Speaker 1: people who choose the way we The way we make
Speaker 1: money is we only buy stocks that are going up,
Speaker 1: and once they stop going up, we sell them, and
Speaker 1: that's how we subsidize our whole lifestyle. I am not paraphrasing.
Speaker 1: That is like a verbatium quote, as as one of
Speaker 1: jagadician Tipman or the two academics who really deserve prior
Speaker 1: place of momentum. But it's one of the very early
Speaker 1: discoveries of momentum. I always got to give them the
Speaker 1: there's a little truth to what they're saying, but they
Speaker 1: don't do it. Tend to do it in a very
Speaker 1: disciplined way, and very often um individuals and institutions and
Speaker 1: professional investors tend to be what I call momentum investors.
Speaker 1: At a value time horizon, they look at something that's
Speaker 1: been strong for three five years and it's got to
Speaker 1: keep going and at that time arising. You want to
Speaker 1: be a contrarian, not a momentum investor. So I feel obligated,
Speaker 1: as a co author of some of the momentum stuff
Speaker 1: to defend that a little bit. But this is not
Speaker 1: adding up well for these people, I promise. One last
Speaker 1: thing about it. A running joke I've had for years
Speaker 1: is people, in describing this kind of thing often subtly
Speaker 1: use the wrong tents. They talk about buying what has
Speaker 1: been going up, but the implication is it is going up,
Speaker 1: and you just gotta watch your tents. Very easy to
Speaker 1: identify what has going up, and it's part of our process.
Speaker 1: By the way, I would not be a pure momentum
Speaker 1: trader momentum has what the geeks will call a very
Speaker 1: bad left tail. Some famous periods of reversals in market,
Speaker 1: the most famous spring of two thousand and nine when
Speaker 1: we came off the GFC. Yeah, for multi factor it
Speaker 1: was actually enoughing value did well enough that it was
Speaker 1: not particularly but if you were a pure momentum investor,
Speaker 1: that was a very very ugly period. So in another way,
Speaker 1: I think this couple that I've never watched is probably
Speaker 1: getting it wrong. Yeah, to to say the very least,
Speaker 1: So I could talk about your publications forever. There's a
Speaker 1: few that I feel like, why don't I throw three
Speaker 1: or four at you and you tell me which ones
Speaker 1: you want to talk about? Stock options and the lying
Speaker 1: liars who don't want them, stock buybacks, unmitigated good or
Speaker 1: incomprehensible evil. That's a paraphrase. AQR Zone research has disproven
Speaker 1: the size factor and undermined long term investing or for
Speaker 1: what is volatility laundering? Okay, I mean I'm gonna I
Speaker 1: usually lie about this, but I'm gonna try to be
Speaker 1: quick and just go go through them. Stock options and
Speaker 1: the lying liars who don't want to or won't expend
Speaker 1: somebody forget the exact title. It was a player in
Speaker 1: an Al Franken book back in the back in the time.
Speaker 1: I think Rush Limbaugh was the was the was the
Speaker 1: villain in his title. This was particularly post tech bubble.
Speaker 1: There's been this issue forever that stock based compensation, be
Speaker 1: they options or particularly if they're options, are not considered
Speaker 1: an expense of the company. That the paper I wrote,
Speaker 1: does this beat to death. Let's look at the twenty
Speaker 1: two ways you could argue this and why they're all stupid.
Speaker 1: The best argument is the simplest one. These people accept
Speaker 1: a lower salary and want these things. Obviously they're costly
Speaker 1: ultimately to shareholders. What's a little said? And I won't
Speaker 1: go through all the other subtleties. What's a little sad?
Speaker 1: As We kind of won the battle in that current
Speaker 1: accounting standards make you expense stock options, and that was
Speaker 1: a change, but we also lost the battle because plenty
Speaker 1: of firms, particularly in the tech world, still issue kind
Speaker 1: of ProForma earnings that don't expense them, and a lot
Speaker 1: of Wall Street analysts, to their shame, in my opinion,
Speaker 1: let them get away with it. Use those numbers. They're
Speaker 1: just not real. Let's go to one of your favorites buybacks, buybacks.
Speaker 1: You gave this manichean evil or good. My positions, actually,
Speaker 1: I don't say it mildly, but much more mild than that.
Speaker 1: My position is they're largely in nothing. They're largely um,
Speaker 1: very close to a dividend, you can say, and you
Speaker 1: can argue there are a more tax efficient, more tax
Speaker 1: efficient dividend. And by the way, I don't take a
Speaker 1: great stance on how they should be taxed. That's a
Speaker 1: separate issue. I take a stance on the idea that
Speaker 1: they're evil. Um. And by the way, that this is
Speaker 1: one of the fun ones today because it's horseshoe theory.
Speaker 1: Both the left and the right hate buybacks. Yeah, it's
Speaker 1: kind of interesting, isn't it. It's just, you know, for
Speaker 1: different levels of numeracy and paranoia. Um, they think this
Speaker 1: is just a scam. Again, there could be forty arguments
Speaker 1: for why buybacks are neutral and are not the evil
Speaker 1: thing you think. We give you one argument. Sure, in
Speaker 1: a world where companies do buy backs and other companies don't,
Speaker 1: the companies that do buy backs tend to perform better
Speaker 1: than the ones that don't. They that's been a very
Speaker 1: mild effect. But it has been true, and it's been
Speaker 1: a relevvely short term. Now is it. Whether it's causation
Speaker 1: or correlation is a whole nother conversation. If it is causation,
Speaker 1: the most likely estimate, which is not crazy, as management
Speaker 1: has more information than you do about about the stock.
Speaker 1: And by the way, if they, if they, if they
Speaker 1: do believe the stock is undervalued, and very often this
Speaker 1: is public information. They're just saying we're really undervalued, right,
Speaker 1: they should be buying things back. It's voluntary whether you sell,
Speaker 1: and those who don't choose to sell will benefit from that.
Speaker 1: So I have no problem with that. It is a
Speaker 1: relevely small effect. But that's interesting because you make such
Speaker 1: a I've watched you. You and I have debated it
Speaker 1: on Twitter. But I've watched you and I'm not so
Speaker 1: far from your position. But I've watched you demolish people
Speaker 1: on Twitter as if it's a giant. Hey, this is
Speaker 1: like the value effect. It's not. It's it's much smaller.
Speaker 1: If I've done that. That is one of my many
Speaker 1: Twitter exaggerations. I will not claim that I always keep
Speaker 1: a calm head on Twitter. Um, but the simplest way
Speaker 1: to explain it now, let me give you two quick ones.
Speaker 1: One is most of it is a re allocation or
Speaker 1: other stocks. When most investors get participate in a buy back,
Speaker 1: they put it in back in the stock market, run
Speaker 1: in another stock. It's a diversifier. So you know, a
Speaker 1: company that has great investment opportunities is seeking more capital
Speaker 1: and a company that doesn't should be giving capital back.
Speaker 1: So that's how it's supposed to work. Second is even
Speaker 1: more basic, and this does not get enough play. The
Speaker 1: shareholders own earn the money. They own the money. If
Speaker 1: there's cash on the balance sheet or assets on the
Speaker 1: balance sheet, the shareholder, it's the shareholders if they choose
Speaker 1: to move it to There's only one group that's allowed
Speaker 1: to get upset at them if they choose to move
Speaker 1: it from the company to their own balance sheet, which
Speaker 1: is not stealing because they owned it when it was
Speaker 1: in the company. Right. Bonds, often corporate bonds can have
Speaker 1: covenants that say you can't lever beyond a certain point,
Speaker 1: and if buybacks pushed past that point, then there's a
Speaker 1: legitimate argument, but that's contractual. The bond holders should be
Speaker 1: a lawsuit that would stop that. I think I think
Speaker 1: got to be pretty much. I think UM buybacks also
Speaker 1: get a little demonizes because incorporations do do this UM
Speaker 1: for some reason I do not understand. They often couple
Speaker 1: them with the executive stock option grants we talked about before,
Speaker 1: and I think there is a little subterfuge going on there.
Speaker 1: They don't want to share account to change a whole lot,
Speaker 1: and because questions will be asked. I think that's the
Speaker 1: most valid criticism is, hey, you're really hiding all this
Speaker 1: exact compensation by doing a expense and it jibes with
Speaker 1: the lying liars stuff, But it is not the buyback
Speaker 1: per se that's bad. The buyback is still a neutral.
Speaker 1: They're paying a market price for the security. So I
Speaker 1: wish people would be more precise. So largely on buybacks,
Speaker 1: I think, And again maybe in contrast to some of
Speaker 1: my more aggressive things I've tweeted on occasion, I want
Speaker 1: you to find those tweets. Yeah they're I think you've
Speaker 1: deleted a bunch there. I don't know if they're around
Speaker 1: where anyone could well. I challenge you to find them,
Speaker 1: knowing I've deleted them that this is part of my strategy.
Speaker 1: But it regardless if you look at what we wrote.
Speaker 1: The derangement we write about is how much people hate
Speaker 1: them buy back derangement syndrome. Yeah. We titled both a
Speaker 1: h an academic paper in the journal Portfolio Management and
Speaker 1: a Wall Street Journal editorial. So you know, from whence
Speaker 1: the derangement comes? I know, trump arrangement. No well no, no, no,
Speaker 1: by the way, it used to go back to bushed arrangements. Oh,
Speaker 1: it's not just trying to remember it from yeah. No,
Speaker 1: So you know, when you get older, the memory start
Speaker 1: at some point there was there a Millard Fillmore direction.
Speaker 1: I'm not that old, I'm not that much older than you.
Speaker 1: But it's just all of the anecdotal examples that people
Speaker 1: my two faces. Back in the day, Dell was notorious
Speaker 1: for top ticking the market when announcing their stock buybacks.
Speaker 1: But now you have the train derailments and they had
Speaker 1: a buyback last year, so of course the buyback is
Speaker 1: the reason why they didn't upgrade their breaks, and that
Speaker 1: example become it sort of colors everybody's here. You respect them,
Speaker 1: Medigliani and Miller. Firms should and I'm not saying theories perfect,
Speaker 1: but as a starting point, firms should pursue all positive
Speaker 1: net present value projects. And I do think most management tries,
Speaker 1: I think the short terminism can be exaggerated. So if
Speaker 1: they need the money they should be investing. They can
Speaker 1: raise money in debt and a lot a lot of
Speaker 1: the buybacks, by the way, and you could argue leverage
Speaker 1: has its own problems. But have been a corporate treasurers
Speaker 1: thinking that bonds were more overvalued than stocks, so they
Speaker 1: should buyback stock and sell another arge during the twenty tens,
Speaker 1: it's very rational to borrow cheap and buy back stock. Yes, essentially,
Speaker 1: And and that means and we show this in our
Speaker 1: in our more formal paper, there wasn't room to do
Speaker 1: it in the Wall Street Journal that investment has really
Speaker 1: not suffered on net. You can always pick and choose,
Speaker 1: and in an argument, every side pixes and chooses their
Speaker 1: favorite examples. This is a company that brought back that
Speaker 1: then did great and uh and and you know Apple
Speaker 1: has brought back a ton and sometimes they're criticized for that,
Speaker 1: and I'm like, it's it's well, it's fairly well, It's
Speaker 1: worked out fairly well for them. They don't say Buffett.
Speaker 1: They also have a ridiculous amount of cash. Apple on
Speaker 1: the book, so it's not like they needed the money.
Speaker 1: Buffett is a huge defender of of of buybacks, so
Speaker 1: I think I'm mainly yelling into avoid saying this is
Speaker 1: just not that big a deal, but it's politically too
Speaker 1: good for populace of both stripes to yell about to
Speaker 1: go away. Huh really really interesting. Last week actually I
Speaker 1: interviewed Maria Vassalu from Goman Sack's Asset Management, who painted
Speaker 1: out that within the small cap effect really is a
Speaker 1: microcap effect and if the small cap has effect has disappeared, Well, first,
Speaker 1: let's let's talk about your research. Was there ever truly
Speaker 1: a small cap effect? I'll start out saying I don't
Speaker 1: know if I don't think I've met Maria, but she's right, Um,
Speaker 1: was there ever? Is the right question. There's a little
Speaker 1: bit of a of a Keanu Reeves matrix thing going
Speaker 1: on here. Is there really a spoon red pillars? Yea.
Speaker 1: Our Our view is there never really was one. Our
Speaker 1: view is not that there was one and it got
Speaker 1: arbitraged away, which is a different way to view it.
Speaker 1: UM essentially or in the early eighties, UM, the original
Speaker 1: capital asset pricing studies look pretty good. Seemed like beta
Speaker 1: was rewarded, and that later got revised also um but
Speaker 1: then hole started appearing in that pure one factor world.
Speaker 1: The first major one was that even after accounting for beta,
Speaker 1: small cops caps generally have higher betas they move more.
Speaker 1: If the market goes up five percent on average, they
Speaker 1: might go up seven percent as as a group, So
Speaker 1: you're suggesting it's just a more risk they're they're more
Speaker 1: volatile as a rule, and beta's composed of correlation and volatility.
Speaker 1: I think it's more of the volatility than the correlation driving,
Speaker 1: but they're higher beta. The cap m or all theory
Speaker 1: says you should make more money if you're higher beta,
Speaker 1: but not more than that. And the findings were not
Speaker 1: that small cap makes more money. That's not that interesting.
Speaker 1: The findings with small cap makes more money than implied
Speaker 1: by their higher betas, so even more that over years
Speaker 1: some of the work a lot of the work being ours,
Speaker 1: but not all of it has been revised. Two big revisions.
Speaker 1: The second one we really were a big part of
Speaker 1: the first was simply revisions to the databases. Small cap
Speaker 1: stocks delist more often than large cap stocks. In any study,
Speaker 1: you need to make an assumption about what people actually
Speaker 1: got out of that delisting way. You're suggesting this whole
Speaker 1: thing is just survivorship bias a little bit though though
Speaker 1: not you know, with well intentioned people had assumptions for
Speaker 1: delisting returns. The general consensus, and my expertise does not
Speaker 1: lie here, but the general consensus is they underestimated the
Speaker 1: negativity of those delisting returns, all else equal, making small
Speaker 1: cap a little less attractive because your data has has
Speaker 1: not accounted for enough. Where we jumped in is again,
Speaker 1: remember we're not talking about the small beat large. We're
Speaker 1: talking about does it beat it beyond its beta? Is
Speaker 1: those betas, and we're not the only ones to do
Speaker 1: this too. Shoals and Williams looked at it a while ago.
Speaker 1: Those betas are generally under estimated by conventional techniques. If
Speaker 1: you do a quant geek's favorite thing, regress the monthly
Speaker 1: returns on small versus large on the market, you get
Speaker 1: up beta more than you get a positive beta. Small
Speaker 1: has a higher beta than large, so if you go
Speaker 1: long small and short large, you have a positive beta
Speaker 1: left over. A lot of small doesn't trade every day.
Speaker 1: If you look over a few months, those betas increase.
Speaker 1: If you if you do statistical work, we include the
Speaker 1: response of small not just to this month's cap weighted market,
Speaker 1: but to the last few. It tends to get into
Speaker 1: the small cap prices slowly, but that's still real. So
Speaker 1: we've underestimated their betas. If their betas are underestimated, meaning
Speaker 1: we thought they were too low, we've overestimated their alphas.
Speaker 1: Their betas should have been higher. More of their return
Speaker 1: should be just attributed to the market going up, and
Speaker 1: it's not. And basically between those two things, there's nothing
Speaker 1: going on small caps and this is not a bad thing.
Speaker 1: Small caps need to be priced reasonably efficiently versus large caps.
Speaker 1: One thing, by the way, that's kind of surprising, given
Speaker 1: how much more coverage is on the better known big
Speaker 1: caps and how often these are orphans. Well, I think
Speaker 1: that does show up in something you anticipated me. I'm
Speaker 1: about to say, these get confused occasionally. I do think
Speaker 1: many of the factors anomalies affects that quants and academics
Speaker 1: believe in value being again, maybe maybe the poster child,
Speaker 1: but not the only one, do work better among small caps.
Speaker 1: So long cheap short expensive in small caps and certainly
Speaker 1: has a higher gross risk adjusted return net, they're more
Speaker 1: expensive to trade. I still think that's going to be
Speaker 1: the truth the case net, but it's it's a little
Speaker 1: more arguable. But I have no problem with someone saying
Speaker 1: I love small value because I think value probably does
Speaker 1: work better. That's very small. But the so called small
Speaker 1: cap effect, it often gets conflated with that. It is
Speaker 1: not small value. It's that small is better than large
Speaker 1: and just and that we're finding is no longer. We
Speaker 1: don't think it's supported, at least if you only adjust
Speaker 1: for beta. Just to make everyone's head hurt. We have
Speaker 1: an additional paper showing that using the more modern factors
Speaker 1: that weren't even around in the eighties when guys like
Speaker 1: Ralph Bonds and a few others were were looking at
Speaker 1: the small cap effects, so I can't say they should
Speaker 1: have used them. Small cap tend to be bad on
Speaker 1: some of the newer factors betting against beta profitability, they
Speaker 1: tend to be fairly unprofitable. If you adjust for that,
Speaker 1: they should do even worse in a modern sense, and
Speaker 1: ironically you get back to a small cap effect, but
Speaker 1: only if you adjust for kind of the full penalty
Speaker 1: of modern factors. Small cap against the market is not
Speaker 1: a bargain. What about the microcap against the small cap?
Speaker 1: Why does think to have something well? Again, even including that,
Speaker 1: I think we see most of the small cap effect
Speaker 1: go away when you adjust for the delisting again and
Speaker 1: the and the higher beat is from illiquidity. But whatever,
Speaker 1: if there's something left, it is disproportionately coming from microcap,
Speaker 1: that's true. Let's talk a little bit about one of
Speaker 1: the things we haven't discussed, which is macro, and twenty
Speaker 1: twenty two was kind of a good year for macro
Speaker 1: at least if you want on the right side of
Speaker 1: the trade. Um Why why why was last year so unique? Well,
Speaker 1: it's it's interesting we haven't talked. We've focused largely on
Speaker 1: stock selection and value um. A big part of our
Speaker 1: business is actually macro um. It is I often say,
Speaker 1: we do less than people think they think we do
Speaker 1: all these different things, but a lot of what we
Speaker 1: do in macro and an early inside of ours, when
Speaker 1: frankly about nineteen ninety five at Goldman Sachs was if
Speaker 1: you look at the factors again, it was really value,
Speaker 1: momentum and size at that point and apply them to
Speaker 1: macro decisions what country to be in, what currency to
Speaker 1: be in they had similar efficacy. They worked in the
Speaker 1: statistical sense. I always say statistical sense. If your car
Speaker 1: work like this, you'd fire your mechanic. Right If your
Speaker 1: car work six out of ten days, that would be
Speaker 1: pretty bad, but it's pretty great as a as a strategy.
Speaker 1: So we've been using value momentum even for market direction.
Speaker 1: Trend has become an increasingly it's probably the most important
Speaker 1: part of what we do in the macro side, with
Speaker 1: economic trends, not just price trends being a releavely recent
Speaker 1: innovation and super important and last year trend following in particular,
Speaker 1: which is a subset of macro I will tell you
Speaker 1: we also run some where we consider relative value and
Speaker 1: carry and other things, but we run some really focused
Speaker 1: on both economic and price trend factors um that we've
Speaker 1: always described as having kind of a dual mandate. Long term,
Speaker 1: it's supposed to make money. It's not a crazy thing
Speaker 1: for an investment to do right, but it's supposed to
Speaker 1: do particularly well in really bad times. This is a
Speaker 1: managed futures industry, the CTA industry. Trend following has had
Speaker 1: that property over time, meaning commodities, currencies, anything that you
Speaker 1: bond with commodities, currencies, equities, bond futures, and we've actually
Speaker 1: expanded that to what we call a lot of alternative
Speaker 1: trends UM more esoteric commodities, yield curve shape trades. Even
Speaker 1: the equity factors themselves, even though we're talking macro show. Yeah,
Speaker 1: show some tendency to trend, but that dual mandate is
Speaker 1: a little bit different than most most investments. You would
Speaker 1: like a low correlation to other things. Um sometimes you
Speaker 1: accept the medium or high correlation, but it's mostly about
Speaker 1: the risk adjusted return of the acid itself. Trend following
Speaker 1: has always, I think forever people are looking for both,
Speaker 1: and it's not free. You can create a higher risk
Speaker 1: adjusted return if you don't want to hedge giant draw
Speaker 1: downs in the equity market, but this combination has always
Speaker 1: been a nice edition of portfolios and attractive to people.
Speaker 1: It got very loved after the GFC when it really
Speaker 1: did what it was supposed to and you had a
Speaker 1: giant trend that lasted, it felt like forever. Yeah, And
Speaker 1: I should say trend following is not a panacea. You
Speaker 1: have bolts from the blue. Neither of these were very
Speaker 1: bad for trend following, but they weren't. They didn't make it.
Speaker 1: Didn't make a lot of money either October nineteenth of
Speaker 1: eighty seven, which saw a small trend start to start
Speaker 1: in about August, but not that much. And obviously COVID
Speaker 1: was trend following was not how to protect yourself. There
Speaker 1: was no trend to follow out of the blue. A
Speaker 1: pandemic hit exogeneous shocks will do that, but most serious
Speaker 1: bear markets we've seen aren't a day. They are a
Speaker 1: few years of pent up crazy or an economic event
Speaker 1: that leads to a few years the other way. And
Speaker 1: that's where trend following really shines. The decade after ironically
Speaker 1: pretty similar to value well not as bad. Trend following
Speaker 1: simply didn't make a lot of money in the decade
Speaker 1: after the DFC, unlike value loss money versus growth, value
Speaker 1: loss versus growth. But still people started to lose interest
Speaker 1: in it. They got excited after the DFC. And then
Speaker 1: if there is an insurance like aspect, which I think
Speaker 1: there is, to trend following ten years of a wild
Speaker 1: bull market, a lot of people start going why do
Speaker 1: I need Why have I been wasting this money on insurance?
Speaker 1: And then last year and not I think it started
Speaker 1: in parts of twenty twenty one, and it's it's still
Speaker 1: continuing a little bit this year. But last year was
Speaker 1: a blowout year for both trend following and UM and
Speaker 1: even the more general macro investing that considers relative value.
Speaker 1: And it's exactly the year it's supposed to help him.
Speaker 1: UM consider a rival insurance strategy. Always owning puts sounds expensive.
Speaker 1: It is expensive, and sounds like it doesn't work most
Speaker 1: of the time. I've had huge Twitter fights whit and
Speaker 1: it seemed to leave about this UM. But like you
Speaker 1: and Bose Weinstein both seemed to go at him politely
Speaker 1: about and you both have the shot it out. I
Speaker 1: did what I would I always do. I started out politely.
Speaker 1: It didn't necessarily it didn't necessarily end there. And I
Speaker 1: will say I think it seems absolutely brilliant. He's just
Speaker 1: also insufferable at times. It's a dangerous combination. You know,
Speaker 1: I may be less brilliant and less insufferable, but I
Speaker 1: might have some of the same characteristics, which is a
Speaker 1: dangerous mix. When you the differences, you bring a certain
Speaker 1: degree of personal humor and charm. Well, he can perhaps
Speaker 1: does not make fun of himself that so you know,
Speaker 1: will you all exist on a continuum and everybody sort
Speaker 1: of slots in in different places. Absolutely, I find you
Speaker 1: much more accessible and warm and fuzzy. Listen, his books
Speaker 1: are groundbreaking. He's no one's going to argue that he's
Speaker 1: not brilliant. You're more accessible on Twitter than he is.
Speaker 1: I do try to be um the so a strategy
Speaker 1: he's been involved with for a long time. That kind
Speaker 1: of corresponds to his black Swan books. It's a very
Speaker 1: good book, m's It basically is one liner a giant
Speaker 1: things happen more often than we quote normal model, normal
Speaker 1: distributions say. But it's an important message. He got very
Speaker 1: lucky that he wrote a timeless message about an hour
Speaker 1: and a half before the GFC. Right, But my colleaguante
Speaker 1: Elmanan is getting very lucky in that same he wrote
Speaker 1: a book called Investing in a Low Expected Return of
Speaker 1: Environment right before twenty twenty two. So you can write
Speaker 1: something it's absolutely right and correct, but timing luck thirty
Speaker 1: six and we're almost there. When did that come out? Like,
Speaker 1: at least one of the book was none. The difference
Speaker 1: between Auntie and na seems books they're actually real and meaningful,
Speaker 1: and that book was just nothing but none for pure
Speaker 1: fun at the end. You can ask me about that again.
Speaker 1: But the strategy that seemed favors is buying insurance through
Speaker 1: the options market tests of the simplest form, as my
Speaker 1: colleague Auntie has done. Say that loses a boatload of money,
Speaker 1: including its huge victories in crashes. I have no problem
Speaker 1: with someone liked to seem saying, actually, we we whoever
Speaker 1: he works with, does this much smarter than pure rolling
Speaker 1: of puts. It's not equal size every year, A million
Speaker 1: other ways to spend that. But but he doesn't like
Speaker 1: the basic finding that Aunty is. He wants both and
Speaker 1: I won't give him both. Um puts work really well
Speaker 1: and crashes Yeah right, March of twenty twenty October nineteenth
Speaker 1: of eighty seven. Huge. Uh. The their their leakages in
Speaker 1: terms of premium over the long haul that doesn't have
Speaker 1: crashes is larger than what they make. And there are
Speaker 1: some bear markets that they failed to help with. They
Speaker 1: did not particularly help in twenty twenty two. There was
Speaker 1: no crash quick well, no too slow for the puts
Speaker 1: um in twenty and then you snapped right, But that
Speaker 1: was March of twenty twenty I'm sorry now, you're you
Speaker 1: had it right given your time period. The puts helped
Speaker 1: like crazy then, and managed futures didn't. In twenty twenty two,
Speaker 1: managed futures helped like crazy because it was a long
Speaker 1: slow developed in June, and puts, I don't think, really
Speaker 1: helped at all. The premiums got very high and there
Speaker 1: was no big crash, and that's not an environment. If
Speaker 1: you like puts more than I do, you think the
Speaker 1: cost is lower. A portfolio of the two as an
Speaker 1: insurance product could make a lot of sense because they
Speaker 1: hedge different things. Puts hedge bolt from the blue crashes
Speaker 1: U and trend following hedges long slow crashes. I will
Speaker 1: make the self serving claim that long slow crashes are
Speaker 1: tend to be more deliterious to your wealth long term things.
Speaker 1: A lot of short term crashes reversed soon afterwards. They're
Speaker 1: really about surviving. UM, So I will make a small
Speaker 1: commercial for how we do it. But if someone a
Speaker 1: little bit more reasonable than the seam wanted to go,
Speaker 1: all right, it is costly, but it's less costly than
Speaker 1: you think, and maybe we should combine these two. I'm
Speaker 1: I'm I'm wide open to that, but in twenty twenty two,
Speaker 1: and frankly, I don't think you know going forward, I'm mildly.
Speaker 1: I don't do a lot of timing of our own strategies.
Speaker 1: I said, it's a sin. Most of what I recommend
Speaker 1: is always having some allocation to trend following. There'll be long,
Speaker 1: boring periods where I hopefully won't lose you a ton,
Speaker 1: but won't make you a ton. That's usually a pretty
Speaker 1: good time for the rest of your portfolio. Over time,
Speaker 1: it should add up to a positive, which it has,
Speaker 1: and it should help a lot in these one two
Speaker 1: year gigantic events. If I had to time it, I'm
Speaker 1: a little more bullish than normal. It tends to do
Speaker 1: better when there's great macro vall when people don't know
Speaker 1: what's gonna happen. Boring times where nothing is really going
Speaker 1: on is not your time for puts. And I do
Speaker 1: think we have you know, I'm a little leery of
Speaker 1: saying this because I laugh when people are always saying
Speaker 1: now is special, So it's dangerous to go. We have
Speaker 1: more uncertainty now than normal, But I do think I'm
Speaker 1: gonna do it. I do think we have more macro
Speaker 1: uncertainty now than normal, so I like it a little
Speaker 1: more than normal. But mostly our argument is, you don't
Speaker 1: know when this is gonna happen. You don't know if
Speaker 1: we're gonna have another two years of this, and by
Speaker 1: the way, if we don't have another two years of disaster,
Speaker 1: you're pretty happy everywhere else. So let me let me
Speaker 1: push back on the more uncertainty, okay, because I cringe
Speaker 1: every time I see someone on TV say that, me too.
Speaker 1: When I gave you a long caveat that, I feel
Speaker 1: did it did? But and yet you still went jump right,
Speaker 1: Which is, you know, when do we ever know what's
Speaker 1: going to happen in the future, When do we have
Speaker 1: a high degree of confidence. I take the behavioral side,
Speaker 1: which is when people are talking about uncertainty, what they're
Speaker 1: really saying is, hey, we're having a hard time lying
Speaker 1: to ourselves about how little we know is going to happen,
Speaker 1: and we're starting to get nervous. So macro val might
Speaker 1: be the good descriptor for that where you can't pretend
Speaker 1: you know what's going to happen, because it's so I
Speaker 1: want to say uncertain, but that's the wrong word. You
Speaker 1: just lose yourself confidence in knowing what might happen. We're
Speaker 1: directionally the same, and I did also as part of
Speaker 1: my caveatside I still wouldn't time this very much. I do,
Speaker 1: and I admit I want to. I explicitly want to
Speaker 1: count of the belief that people might think we've missed it.
Speaker 1: Managed futures is it's one a decade, huge positive. It
Speaker 1: adds up to good over the whole decade, but it
Speaker 1: means reverts now. We see no tendency for that real historically. No,
Speaker 1: it's a trend following strategy. If it starts to get
Speaker 1: it wrong, it'll switch its mind pretty pretty quickly. Actually,
Speaker 1: the fundamental trends that we've added in the last five
Speaker 1: to getting closer to seven or eight years, we think
Speaker 1: have made the strategy materially better. It's no longer just
Speaker 1: your grandfather's trend following strategy where you follow a price.
Speaker 1: We think that always has a role for a portfolio.
Speaker 1: In a portfolio, we don't know if crazy stuff will
Speaker 1: continue or we'll go back to normal again. If things
Speaker 1: do go back to normal, yeah, maybe your managed futures
Speaker 1: don't help you very much, but everything else goes back
Speaker 1: to helping you. So we think the case is at
Speaker 1: least let me just be more mild, at least as
Speaker 1: strong as it normally is, and we think it's pretty strong.
Speaker 1: I will back slightly off my sin there of forecasting. So,
Speaker 1: given the fact that you've been investing now for thirty
Speaker 1: five years something along those lines in your lifetime, have
Speaker 1: you ever seen a ten percent spike in inflation or
Speaker 1: of five percent rise in rates as an investor UM
Speaker 1: five percent rise in rates over long periods. We've seen them,
Speaker 1: but not anything like the recent period, and maybe not
Speaker 1: even it's been a downtrend in rates over my career.
Speaker 1: I'm trying to do this. I know for a fact
Speaker 1: because I looked at it recently, that I've not seen uh,
Speaker 1: you know, five six percent inflation in my career. UM. Now,
Speaker 1: I do think you know, I'd be happy to share
Speaker 1: with you. Quants have some disadvantages. There's less we can
Speaker 1: know about any one individual situation than than than than
Speaker 1: a than a more discretionary manager. But we do have
Speaker 1: one advantage. UM. Sometimes they're they're maligned correctly, but sometimes
Speaker 1: they're over maligned. Back tests can be really helpful because
Speaker 1: just because I haven't lived through inflationary periods doesn't mean
Speaker 1: we can't look at inflationary periods and that is a
Speaker 1: quant advantage. And frankly, with the exception of the trend
Speaker 1: following strategy, which I think when giant stuff happens it
Speaker 1: does tend to do better the core stock selection strategies.
Speaker 1: An Auntie is again I keep quoting Auntie. You should
Speaker 1: have had him on instead of I did, I know
Speaker 1: you did? I know you did. Um. But if I'm
Speaker 1: going to quote them all the time, why not just
Speaker 1: go go go to him? Um. He has done a
Speaker 1: lot of our work on showing the environments that factor
Speaker 1: investing tends to do better or worse in by factor
Speaker 1: and as a group. This is for stock selection and
Speaker 1: some things. If you want to make it a tautology, yeah,
Speaker 1: when the spreads between cheap and expensive go way wider,
Speaker 1: value does lousy, But that's a tautology. Macro wise, this
Speaker 1: very little relation, there's very little consistency to it. Um.
Speaker 1: That's actually I think a good thing. Um. It means
Speaker 1: if you do this for asset classes, there's obviously correlations.
Speaker 1: Higher growth and lower inflation is good for stocks and
Speaker 1: good for bonds. As they mix up, you can get
Speaker 1: different results. Low growth, low inflation is dynamite for bonds.
Speaker 1: How it comes out for stocks it's a little bit
Speaker 1: more iffy. But when it comes to factors, doesn't mean
Speaker 1: there aren't some big factor events, but they occur in
Speaker 1: all environments without a great pattern. So again, we do
Speaker 1: think we're a pretty good diversifier to a lot of
Speaker 1: the rest of the world that is much more linked
Speaker 1: to the macro cycle. So when you're looking at back
Speaker 1: tests and you're heading into twenty one and twenty two,
Speaker 1: how are you thinking about the risks and do you
Speaker 1: make changes? Do you just suffer through twenty and twenty
Speaker 1: one waiting for twenty two, or are you gradually shifting
Speaker 1: the portfolio mix before you make it to the promised land. Again,
Speaker 1: you and I have been bouncing back in a great
Speaker 1: way between quantitative stock selection and the more macro trend following.
Speaker 1: And the stories aren't precisely the same. I mean, it's
Speaker 1: the six blind men describing the elephant, and which is
Speaker 1: my favorite parable, But we're really just talking about different
Speaker 1: aspects of what takes place in risk market for value. Yeah, well,
Speaker 1: to be honest, when when it does look unexplainably after that,
Speaker 1: keeping that open mind attractive and we do that sin
Speaker 1: a little. We do just wait now, Barry. Of course
Speaker 1: we didn't sit there in twenty twenty and say we're
Speaker 1: gonna have to wait, and in fact it by waiting
Speaker 1: till March twenty twenty two. Mark your can the well.
Speaker 1: The funny thing is value actually started turning around in
Speaker 1: late twenty twenty. Everyone calls it twenty twenty two. That
Speaker 1: value has been coming back since since COVID started to
Speaker 1: to to well. Once everything got way crazy by the
Speaker 1: end of twenty It's not. This is a little hindsight bias,
Speaker 1: but it makes sense for people to Sorry, let's peel
Speaker 1: a little off here and rotated. No. Absolutely, And but
Speaker 1: if you go back a couple of years earlier, value
Speaker 1: spreads were very wide. And yeah, we were saying we
Speaker 1: don't know when this will turn around, but it will.
Speaker 1: And importantly on net from here, say you know, one
Speaker 1: day go up again doesn't really help you. If it's
Speaker 1: gonna go down more, then it's going to go up
Speaker 1: in the future. It has to be on net right
Speaker 1: not this time. Um I won't say I didn't break
Speaker 1: other things, but that's just between me and whatever strewn
Speaker 1: around my office. Um So, value on its own. Yeah, well,
Speaker 1: sometimes we do wait catalysts or famously people look for catalysts.
Speaker 1: Obviously momentum both price and fundamental. You could you could
Speaker 1: lump into the catalyst camp. So we do look for
Speaker 1: some of that, but some of the things when the
Speaker 1: absolute peak occurs, which is a timing level that I
Speaker 1: think is beyond any of our ability. Somebody always nails
Speaker 1: at X post, but I don't think anyone can consistently
Speaker 1: do that. You look at the peak of the tech
Speaker 1: bubble in March of two thousand, You look at the
Speaker 1: peak of the valuation bubble in stocks, which was kind
Speaker 1: of October of twenty twenty. Why it peaked there not
Speaker 1: three months earlier or six months later, even with the
Speaker 1: benefit of hindsight, I don't think we have great stories.
Speaker 1: I think when things get egregiously valued, the odd get
Speaker 1: more and more on your side. Again, good catalysts will
Speaker 1: help you more and bad will help you less. And
Speaker 1: sometimes our job is to plan our feet and say
Speaker 1: we will not move now on the macro trend. Following strategy,
Speaker 1: it was a better timing story. Again, it didn't make
Speaker 1: money for a long time, but didn't lose a lot,
Speaker 1: and both from some price trends, but I think even
Speaker 1: more from fundamental trends. We started to see the fundamental
Speaker 1: trends that could lead to a more inflationary environment. Again,
Speaker 1: it's not us sitting around making inflation forecast We're not
Speaker 1: macro econists. Fundamental trends are things like those actual economists
Speaker 1: revising up their inflation forecasts. Growth trends are things like
Speaker 1: GDP surprises aggregated for the whole for the whole world,
Speaker 1: if you're doing the oil of equities or country by country.
Speaker 1: Those did a really good job of getting ahead of
Speaker 1: the inflation that came. So there, I'll say on the
Speaker 1: value side, I'll say we didn't do it very good
Speaker 1: job on the catalyst, but we did a really good
Speaker 1: job on sticking with it and has paid off on
Speaker 1: the trend following and macro side, i will say, I'll
Speaker 1: give us higher grades on the catalyst side as to
Speaker 1: the timing, but that's naturally what it's trying to do
Speaker 1: right by definition. Really fascinating. So the past couple of
Speaker 1: years we've seen a huge performance of value over growth.
Speaker 1: What does that mean looking forward? How much persistency does
Speaker 1: that value advantage have? Especially following a decade of growth advantage.
Speaker 1: It's funny it takes a much longer time for excesses
Speaker 1: to get squeezed out of the market than people think,
Speaker 1: particularly if you're on the wrong side of it. You're like,
Speaker 1: if you're a growth stock investor, the last two years,
Speaker 1: I'm in such pain. This has to be extreme. No,
Speaker 1: We again, we start with measures that don't look at returns,
Speaker 1: that look at the actual valuation ratios of stocks. And
Speaker 1: at the peak of the bubble in twenty twenty, a
Speaker 1: few months after COVID it by far the widest ever
Speaker 1: north of the tech bubble after two plus phenomenal years.
Speaker 1: It is now. The last time I looked which a
Speaker 1: couple of days ago, it was at the eighty nine percentile,
Speaker 1: so still wildly Yeah. Also tactically I said, I think
Speaker 1: I did. I tilted a little too early because I
Speaker 1: went on just value, not on trend. The trend is
Speaker 1: now at its back, so we're at you know, nothing
Speaker 1: is a certainty that can be huge reversals in any
Speaker 1: trend into room. I don't want to predict the next quarter,
Speaker 1: but we are still very excited. We're seeing still a
Speaker 1: mispricing that prior to COVID, I would have considered almost
Speaker 1: close to tide with the most extreme ever, and we're
Speaker 1: seeing the wind at it's back. So again I don't
Speaker 1: want to overpromise. The short term can always make anyone
Speaker 1: look silly, but on a few year horizon, we are
Speaker 1: super excited about value. So the Goldman Sachs nonprofitable tech
Speaker 1: basket and there's another basket of low quality stocks they've
Speaker 1: crushed it in twenty twenty three. Is this just a
Speaker 1: dead cat bounce? What does this mean? Is the cycle
Speaker 1: changing or what's happening in your least favored part of
Speaker 1: the market. This is going to be a hard one
Speaker 1: because it's confusing. Yeah, I'll tell you that in advance,
Speaker 1: but it's it's confusing in a different way. I think
Speaker 1: even than you're thinking break up what's going on into
Speaker 1: pure measures of junk no valuation here, low profitability as
Speaker 1: Goldman does against high profitability, and Goldman's not wrong about that,
Speaker 1: though not surprisingly the results are right LOWBATA against high
Speaker 1: beta that we often consider part of quality. All else equal,
Speaker 1: you'd prefer a low beta. All else is not always equal,
Speaker 1: but if you can have less vol and less sensitivity,
Speaker 1: it's a good thing. Profitability choosing more profitable and underweighting
Speaker 1: or selling low profitable, and beta choosing low beta and
Speaker 1: underweighting or selling high beta. As a together, as a
Speaker 1: group and individually have had a really bad start to
Speaker 1: this year for the exact reasons you're talking about. It
Speaker 1: has been a junk rally now here. I'm hoping to
Speaker 1: blow your mind a little bit. Go ahead the way
Speaker 1: we measure value, and keep in mind everybody does it
Speaker 1: a little different any You could have ten great people
Speaker 1: here and they're all going to have their own favorite ways.
Speaker 1: One thing we do is is since nineteen ninety five
Speaker 1: when we wrote a paper on this, we don't allow
Speaker 1: value to take an industry bed. We try to make
Speaker 1: it apples to apples. Everyone talks about value in terms
Speaker 1: of like tech versus textiles. You can't fully remove it
Speaker 1: in a bubble. These are all correlated, but we think
Speaker 1: value value can be hard to compare. Valuation ratios can
Speaker 1: mean very different things in different industries. So um, but
Speaker 1: broadly speaking, are and compliance gets nervous when I talk
Speaker 1: about performance to the public, but I will tell you
Speaker 1: value has had a Alane has had a very strong
Speaker 1: start to this year. Which you would not guess if
Speaker 1: I told you it's a junk rally. Now they can
Speaker 1: happen simultaneously and perhaps for different reasons. Now, this is
Speaker 1: actually much more normal historically when junkier when when profitability
Speaker 1: and value are often negatively correlated because the cheap stocks
Speaker 1: are often unprofitable. Um So when the profitability factor, if
Speaker 1: you will, is doing well, it has at least a
Speaker 1: decent negative correlation. It's been stronger in the US than globally,
Speaker 1: but it's negatively correlated value. So what's going on this
Speaker 1: year is more normal, but that is not what was
Speaker 1: going on for the prior a few years. Value and
Speaker 1: profitability in particular, we're highly correlated because in a bubble, remember,
Speaker 1: in a rational loss for value we can do well.
Speaker 1: Profitability does well in a bubble. It's not the profitable
Speaker 1: stocks that are throwing to the moon. It's the story stocks.
Speaker 1: So let me take the other side of the bubble
Speaker 1: claim and say, hey, stockscott overvalued in twenty twenty one,
Speaker 1: But was it really a bubble? We're down what twenty
Speaker 1: percent on the SMP the NAZAC. That seems like a
Speaker 1: run of the mill draw down and not a full
Speaker 1: on crash. One of the hard parts is in a
Speaker 1: fun way because they're all relevant. We're mixing a few
Speaker 1: different things. There is the level of the overall stock
Speaker 1: market and the overall bond market, and then there's internal
Speaker 1: to the stock market, how cheap stocks did against expensive stocks,
Speaker 1: how profitable stocks did against unprofitable stocks hedged without a
Speaker 1: market exposure. Right. People have used the term everything bubble,
Speaker 1: which is really wrong. Everything can't be in a bubble
Speaker 1: at once by definition, by the way the opposite you
Speaker 1: can short the values. And we were in a depression,
Speaker 1: not a bubble. But there were some correlated things going
Speaker 1: on for the market as a whole. The move in
Speaker 1: the stock market in one year was big, not something
Speaker 1: we don't see occasionally. This is this is not on
Speaker 1: the seem to lead black swan moment. The move in
Speaker 1: the bond market was very big, closer, but still not
Speaker 1: a black swan. The moving sixty forty maybe not still
Speaker 1: black swan, but was far more extreme than either alone
Speaker 1: because they happened at the same time. Time. You saw
Speaker 1: that again, Auntie, It will be the first to admit
Speaker 1: he looks like his timing is better than it really was,
Speaker 1: because he's been saying this for a while, but that
Speaker 1: was the core of his work. He does a ten
Speaker 1: year forecast on the outlook for sixty forty what current
Speaker 1: valuations coal. It's more complicated this, but cold the Schiller
Speaker 1: cape for stocks lower expected real returns when the Shiller
Speaker 1: cape is high, and just really yields on bonds yields
Speaker 1: versus economist forecast of inflation, and he takes sixty percent.
Speaker 1: Here's the genius math to get to sixty forty. He
Speaker 1: takes sixty percent of the stock forecasts, adds it to
Speaker 1: forty percent of the bond forecasts. That number hit the low. Ever,
Speaker 1: at least as we can monitor it. I won't say
Speaker 1: the rot the end of twenty one. Call it yeah,
Speaker 1: that's pretty good time. I always feel guilty when I
Speaker 1: say ever, maybe in the Roman Empire it was worse,
Speaker 1: but we can't. We can't measure it in the measurable
Speaker 1: universe that we have. And sixty forty. I'm gonna try
Speaker 1: to get this right. Sometimes we talk global, sometimes we
Speaker 1: talk to you us. Call it. It's made about four
Speaker 1: and a half percent real meaning over inflation over the
Speaker 1: long term. That's actually quite a nice real return. We're
Speaker 1: used to talking about nominal returns make and almost half bonds,
Speaker 1: So four and a half percent real is a very
Speaker 1: nice um. Auntie's forecast, which I think is is quite useful,
Speaker 1: obviously got down to below two. It was in the
Speaker 1: high ones at the end of twenty twenty one, just
Speaker 1: looking at current valuations and saying how does that usually
Speaker 1: play out over ten years. By the end of twenty
Speaker 1: twenty two, after all the pain, I think it got
Speaker 1: into the just about three really, which that's surprising given
Speaker 1: that we're now looking at rates in the four to
Speaker 1: five percent ring. Well, remember this is real, and right
Speaker 1: now this gets back to you challenging me on is
Speaker 1: there more uncertainty. It's pretty hard to come up with
Speaker 1: a really good ten year forecast of inflation right now,
Speaker 1: but certainly positive is forecasted. So five cash is interesting again,
Speaker 1: I'll say that, but how interesting it is depends a
Speaker 1: lot on what your actual inflation outlook. Bonds are interesting again.
Speaker 1: So basically, the fairly massive trade off was still only
Speaker 1: a one year trade off after a thirteen year bull market.
Speaker 1: You don't fix, and not all of that bull market
Speaker 1: was bubbly. A lot of that was fundamentals, but a
Speaker 1: lot of that was repricing things getting more expensive. You
Speaker 1: don't fix thirteen years of getting more expensive in general
Speaker 1: in one year. I'm not sure you want to because
Speaker 1: you've got to go down a lot more than we did.
Speaker 1: So Auntie's number, which I agree with U instead of
Speaker 1: four and a half, he'd probably use in the low threes. Now,
Speaker 1: as if you're sitting there saying, what do I need
Speaker 1: to retire? What's that number? Um by no means are
Speaker 1: we certain that three is irrational? That we need to
Speaker 1: get four and a half? Four and a half. And
Speaker 1: I know you've heard these arguments may have been just
Speaker 1: too good of a deal historically. For instance, for much
Speaker 1: of how you saying sixty forty has been arbitraged away
Speaker 1: or is it just the environment we're in it, it
Speaker 1: may have been repriced higher price to a lower expected return.
Speaker 1: Here's my favorite argument for that, and it's it's not
Speaker 1: a complicated one. Very few people actually got the four
Speaker 1: and a half percent weal the costs of investing in
Speaker 1: various ways were far higher today, and almost all portfolios
Speaker 1: were not like index funds today. They were you know,
Speaker 1: you had a broker who so a lot of friction
Speaker 1: and the effective volatility of your portfolios double the markets
Speaker 1: because you owned a handful of socks. So both the
Speaker 1: top line was lower because he didn't get you didn't
Speaker 1: really get it, and second you were facing higher risks
Speaker 1: by choice. But the index fund concept didn't exist for
Speaker 1: much of this time, so and even when it exists,
Speaker 1: the concept existed, you couldn't execute on it. So basically,
Speaker 1: I think the three today may this is very arguable,
Speaker 1: but maybe as good as the four and a half
Speaker 1: historically in terms of what you get to keep and
Speaker 1: what risks you have to take to get it. At
Speaker 1: below two, and this is art, not science, nobody can
Speaker 1: tell you what this no should be. At Below two,
Speaker 1: I an aunty and a lot of people didn't think
Speaker 1: that's too low, that doesn't make any sense. But above
Speaker 1: three maybe I I you know, I think pimp goes
Speaker 1: a super firm, but I hate to give competitors any
Speaker 1: credit anytime, But we maybe have a new normal, lower
Speaker 1: than normal, lower than historically normal. That's really really interesting.
Speaker 1: All right, So now I gave have you for five minutes,
Speaker 1: which means this is our speed rounds and these answers
Speaker 1: have to be less than sixty seconds. Are you're ready,
Speaker 1: I am all right. So first we'll do a quick
Speaker 1: three part curveball one minute. How early do you pull
Speaker 1: a goalie when you're down one, two or three goals?
Speaker 1: When you pull? You pull a goalie if you're down
Speaker 1: one at about five and a half six minutes in
Speaker 1: the last period, in the last period. All this can
Speaker 1: be situational. Our model is simple. Right, if it's in
Speaker 1: your own zone, you put the goalie back in for
Speaker 1: a while. All sequel. The two goal result is the
Speaker 1: one that always shocks people. You pull about eleven minutes,
Speaker 1: you're essentially paying playing the last period. You're playing half
Speaker 1: more than the period, and the ideas you're out of
Speaker 1: the money option losing by three, four or five, it's
Speaker 1: the same. It may have pride issues, which is not
Speaker 1: in our model, but it doesn't have standings issues. And
Speaker 1: three I actually forget the number, but I think it
Speaker 1: maybe before the third period. Got it? Uh M? A
Speaker 1: poker tournament in April? Are you participating this year? Since
Speaker 1: about since the GFC, which really had nothing to do
Speaker 1: with it. It's just coin sent little timing. I have
Speaker 1: only played poker in every third year in that charitable tournament.
Speaker 1: My skills to the extent I ever had any I
Speaker 1: was never a great poker player because I have a
Speaker 1: short attention span and a lot of poker is being patient,
Speaker 1: willing to stare at somebody for seven hours so you
Speaker 1: can remember what they did six hours ago. I had
Speaker 1: fun with poker I had. I think I was pretty intuitive.
Speaker 1: I didn't. I don't lose a time, but I probably
Speaker 1: lost money in my poker career. First time I ever,
Speaker 1: I learned poker to play in this Math for America tournament.
Speaker 1: I didn't know seven or hold him. I didn't know
Speaker 1: how to play. And my second year I played and
Speaker 1: I came in second day. There's so much random chance
Speaker 1: in one tournament over time. Poker's pure skill over anything.
Speaker 1: It's very similar to investing over sure horizons. It's really not.
Speaker 1: But one of the worst things that can happen to
Speaker 1: you as an investor or a gambler is to get
Speaker 1: lucky early. Yep. Absolutely the best thing for you is
Speaker 1: the walk into a casino and lou No matter how
Speaker 1: smart you think you are, you think you're smarter than
Speaker 1: you than you were, always looking for that hit a dopamine. Yeah,
Speaker 1: I don't know if I'll be able to get you
Speaker 1: an answer this in under a minute. Marvel or DC,
Speaker 1: and what's your favorite Marvel film? UM? I do like both.
Speaker 1: I'm a I'm a comic book fan. I was reading
Speaker 1: this is how I learned to read. I'm more of
Speaker 1: a Marvel guy. Um, though sometimes DC's great, it's varies
Speaker 1: who who current Wryter Crop is better. M favorite movies hard.
Speaker 1: And what I'm saying is, if you go find other
Speaker 1: people who have asked me this, I'm not claiming full
Speaker 1: consistency at varies whole time. I think the original first
Speaker 1: Iron Man that kicked off the MCU is an underrated movie.
Speaker 1: It's a damn good movie, and not in the MCU.
Speaker 1: Before the MCU, the first X Men movie, I don't
Speaker 1: remember even how great it was, but it was the
Speaker 1: first time we saw maybe Michael Keaton's Batman in eighty nine,
Speaker 1: but from me, certainly with Marvel, it was the first
Speaker 1: time I saw a superhero movie or TV show that
Speaker 1: didn't look ridiculous, that looked the CGI and the effects
Speaker 1: caught up. That was good. So I think there was
Speaker 1: a milestone. So those two, I'm gonna throw two at
Speaker 1: you because I think they're they're both have a so
Speaker 1: it's a lightning round. But you're disagreeing with you, I'm
Speaker 1: I'm I'm impending, all right. Deadpool and Guarding to the
Speaker 1: Galaxy both have a certain sense of humor. Aways that's right,
Speaker 1: always seem to be missing from the rest of the mark.
Speaker 1: I love those um as and and it's not some
Speaker 1: some people want to be purist and say that's not
Speaker 1: how the common books were. They're wrong. If you're really
Speaker 1: they had they were wise cracking during every fight. So
Speaker 1: I do love those for the combination of humor. X
Speaker 1: Men didn't have much humor. I'll admit that Iron Man
Speaker 1: one did, mainly because Robert Downing Junior is just hilarious.
Speaker 1: He was so good. So I do like the ones
Speaker 1: with humor. So let's talk about favorite books. What are
Speaker 1: you reading? What are some of your all time favors?
Speaker 1: Can I rant one more section? Marvel movies? Um, you
Speaker 1: didn't ask me when my least favorite are? Oh, go ahead.
Speaker 1: They should find every copy, which is hard digitally these days.
Speaker 1: Doctor Strange and the Multiverse of Madness. Yeah, and they
Speaker 1: should bury it in the sun. Let's move on. That's
Speaker 1: all I want to say about that. Well, you're not
Speaker 1: a fan of Doctor Strange Terrible. I'm a big fan
Speaker 1: of the character. It makes me even angry. Let's talk
Speaker 1: about favorite books. What are you reading that? What are
Speaker 1: some of your favorites? My all time favorites tend to
Speaker 1: be in the sci fi fantasy world, not surprising given
Speaker 1: our comic Are you a big dickhead? Um, I've read
Speaker 1: a bunch by him. That's one of the odd questions
Speaker 1: I'll get, By the way, I am a self professed
Speaker 1: to head. And when I say that, people who don't
Speaker 1: know Philip nay Dick in my career of going to
Speaker 1: comic book conventions, I've not heard that term. Oh really,
Speaker 1: It's very common on the internet, and it's really the
Speaker 1: one thing fun about him is he's written a lot
Speaker 1: of things that became like famous movies that no one knows.
Speaker 1: It's the Schwartzenega movie. They did two of them total. Recall, right,
Speaker 1: we can remember for your wholesale? Was that short story?
Speaker 1: My my all time choice? One is very cliche. Go ahead,
Speaker 1: Dune I loved. There are a couple of Frank Herbert
Speaker 1: books that are just amazing. First The Dune Friend. Yeah,
Speaker 1: the first two Dune books I thought were great, the
Speaker 1: first one much better than the second one. Then they
Speaker 1: got totally weird, very messianic, religious odd that was always
Speaker 1: a thread three a thread, but it became all that.
Speaker 1: But I loved Dune complex book. You know, sci fi
Speaker 1: or fantasy sometimes gets a simplistic, childish label. Dune blows
Speaker 1: that away. Um. The last movie was the first time
Speaker 1: I've seen doing reasonable on TV. Don't even start me
Speaker 1: on sting of dueling with the swords that were in
Speaker 1: the book. Um. Also, I'm a big fan of some
Speaker 1: of the old pulps, like the original Cone stories by
Speaker 1: Roberty Howard in the thirties. Not we're not talking. I'm
Speaker 1: not against him, but I'm not talking about Arnold Schwartzinker's
Speaker 1: Cohnan And I'm talking about the stuff that appeared in
Speaker 1: like weird tales serialized and then became books. I think
Speaker 1: Roberty Howard, he unfortunately killed himself very young. Um, and
Speaker 1: no one, you know, no one remembers him, but hes
Speaker 1: now he didn't. He created Conan and his writing was
Speaker 1: so rich, like dripped with feeling and color. So I
Speaker 1: was a big fan of that. This actually segues nicely
Speaker 1: into what I'm reading now go on, because I am
Speaker 1: rereading the original basic Lord of the Rings, which you
Speaker 1: use the term table stakes before. That's table stakes for
Speaker 1: a fantasy fan, like every other summer. As I I
Speaker 1: like the Hobbit, I never liked the full Lord of
Speaker 1: the Rings I have. Now I'm liking it more. Um.
Speaker 1: I have found historically I have a small tolerance for
Speaker 1: twelve pages of Elvin poetry, um which I think Tom
Speaker 1: bomba deal. For some reason. The character scared me as
Speaker 1: a kid, even though he's not very scary. So let
Speaker 1: me ask you this question. But I'm miyamore now. So
Speaker 1: I love both The Hobbit and the Lord of the Rings,
Speaker 1: and well, everybody loved Peter Jackson's I thought it was
Speaker 1: way too dark within the Lord of the Rings. Within
Speaker 1: the original, there's a balance between the hope and the fear.
Speaker 1: I think that's that's fair and ultimately hope when so
Speaker 1: it's it's it is a po So they take you
Speaker 1: to this really dark place and it's almost like the
Speaker 1: ending is tacked on. But by the way they going
Speaker 1: over a minute, it's completely your fault. So I own
Speaker 1: if you go through Token's experience of World War one
Speaker 1: and then writing in the World War Two. He really
Speaker 1: had that light and dark um going on, but it
Speaker 1: was balanced. But but but I did enjoy the movies
Speaker 1: because part of it is just saving a fan your
Speaker 1: whole life, seeing it come to life in such a
Speaker 1: glorious I do not recommend the extended versions. I've steered
Speaker 1: clear of that because the same reason they were already
Speaker 1: a little too long, and the extended versions basically, like
Speaker 1: Bilbo says, goodbye eleven times, you have like eleven elegic
Speaker 1: kind of I'm not trying to pronounce that right, but
Speaker 1: he's going away. Um, So I don't recommend that. But
Speaker 1: I do love those movies. I'm reading that now. I'm
Speaker 1: reading David Rubinstein's book on investing, largely because in May,
Speaker 1: April or May, he's going to interview me. Oh good,
Speaker 1: I'm terrified of because he may have seen some of
Speaker 1: the things I've said about private equity over time. I'm kidding,
Speaker 1: he knows about those. He still wants to interview me,
Speaker 1: but I gotta be prepared for that one. He could
Speaker 1: care less, can I say that? I mean, yeah, there
Speaker 1: there are people who are you know, And I use
Speaker 1: the phrase wrong. It's actually could not care less, but
Speaker 1: everybody says could care less, which you know you're all right.
Speaker 1: Are two adult questions we say, for the very ends,
Speaker 1: What sort of advice would you give to a recent
Speaker 1: college grad interested in a career in value investing, quantitative finance,
Speaker 1: or even academia, um, in broad general, a financial career.
Speaker 1: I'll go with I don't like either. And if someone
Speaker 1: tries to only steer you to lucrative careers, that's not
Speaker 1: a happy life. If people only steer you to find
Speaker 1: your bliss, well, if you're not the best in the
Speaker 1: world at your bliss and the bliss doesn't actually pay
Speaker 1: you anything, it's not such a great thing. I got
Speaker 1: into finance because I liked it, Because I work for
Speaker 1: these professors, I found an interesting thought. I'd be a
Speaker 1: professor at not everyone has to follow that route, but
Speaker 1: you want to blend those two things. The only concrete
Speaker 1: advice I'll give people young people, and I say this
Speaker 1: all the time, is try very hard not to chase
Speaker 1: what's currently hot, particularly starting out your career. Don't try
Speaker 1: to be suicidal. But but going into what's currently hot,
Speaker 1: you're gonna be five years off every time. Um, So
Speaker 1: I would back off that and if someone is really
Speaker 1: considering a career in value investing, recommend investing. As I
Speaker 1: said earlier, at least half your time in building up
Speaker 1: your psychological endurance level. You think it's all about balance
Speaker 1: sheet and income statement analysis, No, about half of it
Speaker 1: is the right personality and the right emotional makeup and
Speaker 1: the right partners. Our final question, what do you know
Speaker 1: about the world of investing today? You wish you knew
Speaker 1: forty years ago when you were first getting your feet wet.
Speaker 1: Going back, there's always been this tension in academic finance
Speaker 1: and an applied quantitative finance in why these things worked.
Speaker 1: And we talked about it very briefly earlier. If you
Speaker 1: find if someone shows you a great baptest, there really
Speaker 1: three possibilities. One is it's gibberish data mining. And let's
Speaker 1: assume it's not that that they've just tortured the data.
Speaker 1: Let's assume you think it's real. It can work because
Speaker 1: you're taking an actual rational risk and being compensated for it,
Speaker 1: or what's called often called behavioral finance. Some people are
Speaker 1: making errors. I often take two Nobel laureates my gene
Speaker 1: Fama as one end and Dick Thaylor, also at Chicago
Speaker 1: as the behavioral a lot of other great people in
Speaker 1: this field. I don't mean to make it so these two,
Speaker 1: but I would say you could do worse than those two. Absolutely,
Speaker 1: and I'm a fan of both. If if you ask
Speaker 1: me who I think is more right now, Like, I
Speaker 1: think Gene's contributions are actually the biggest in the entire
Speaker 1: world of finance because a lot of the field won't
Speaker 1: exist without him. But that's a different question of who's right.
Speaker 1: I think I would have been seventy five twenty five
Speaker 1: in the Gene camp when I left Chicago, even finding momentum,
Speaker 1: and now and now I think it'd be seventy twenty five.
Speaker 1: And all that means is more of why our stuff works,
Speaker 1: I think is taking another side of behavioral biases than
Speaker 1: a rational risk premium than I used to. And we're
Speaker 1: all a prisoner of our lived experience, right, living through
Speaker 1: both the tech bubble and those last five years to
Speaker 1: and change terrible, to and change very good. All that
Speaker 1: it may have overinfluenced me. You know, sometimes you see
Speaker 1: more crazy events in a career than the average. But
Speaker 1: I've definitely moved. I've still vote Ginge, the MVP of
Speaker 1: academic finance throughout all of Again, I'm impugning the Roman
Speaker 1: Empire throughout all of history, but I probably have moved
Speaker 1: more towards the behavioral side. That someone's got to be
Speaker 1: on the wrong side of the trade, and if you
Speaker 1: quantitatively identify who that is, they seem to work very
Speaker 1: well and harm absolutely. Cliff, thank you for being so
Speaker 1: generous with your time. We have been speaking with Cliff Astins.
Speaker 1: He is the co founder and just general all about
Speaker 1: Town managing principle at AQR Capital Management. If you enjoy
Speaker 1: this conversation, well check out any of the previous ones
Speaker 1: we've done over the past nine years. We're coming up
Speaker 1: on almost five hundred and you can find those at YouTube, iTunes, Spotify,
Speaker 1: wherever you find your favorite podcasts. Sign up from my
Speaker 1: daily reading list at ridolts dot com, follow me on
Speaker 1: Twitter at ridolts, follow Clifford Asnes on Twitter at Clifford Assness,
Speaker 1: and you could check out all of the Bloomberg podcasts
Speaker 1: at podcasts. I would be remiss if I did not
Speaker 1: thank the crack team that helps put these conversations together
Speaker 1: each week. Justin Milner is my audio engineer. Attica val
Speaker 1: Bron is our project manager. Paris Walds is my producer.
Speaker 1: Sean Russo is my head of research. I'm Barry Ridults.
Speaker 1: You've been listening to Master's Business on Bloomberg Radio.