WEBVTT - Cliff Asness 0:00:02.720 --> 0:00:07.200 Bloomberg Audio Studios, podcasts, radio news. 0:00:08.160 --> 0:00:09.680 I was hoping to be like one of those like 0:00:09.680 --> 0:00:11.160 clips on TikTok you see. 0:00:11.320 --> 0:00:13.280 Fake that's the thing you look like you're on a 0:00:13.280 --> 0:00:14.760 podcast pads on home. 0:00:14.880 --> 0:00:16.079 Now it just looks like, you know. 0:00:16.040 --> 0:00:18.360 Instead of we just randomly got together the. 0:00:18.440 --> 0:00:20.840 Chat and microphonest. 0:00:20.960 --> 0:00:23.720 It is like with Bloomberg podcasts behind us. 0:00:24.079 --> 0:00:26.960 Yeah right, I guess we've conveyed podcasts efficiently with all 0:00:27.000 --> 0:00:28.520 of the Bloomberg podcasts. 0:00:28.600 --> 0:00:28.800 Joe. 0:00:29.040 --> 0:00:30.680 Part of the reason this has to be on video 0:00:31.000 --> 0:00:33.839 is because Matt shaved. Matt has had a beard for 0:00:33.960 --> 0:00:35.000 the past I don't know that. 0:00:35.120 --> 0:00:39.960 I've had a winter beard from like Christmas break through memorild. 0:00:39.600 --> 0:00:41.960 That I shaved over COVID for the first time in 0:00:41.960 --> 0:00:45.320 about thirty years. Okay, and my kids freaked out. Yeah, 0:00:45.400 --> 0:00:46.760 they were like, you're an alien. 0:00:47.640 --> 0:00:49.720 Yeah, my kids didn't care that much. But one of 0:00:49.720 --> 0:00:51.800 my sons said, it's a different daddy. 0:00:52.120 --> 0:00:55.040 Well, you also have hair on the top of your 0:00:55.080 --> 0:00:57.400 head when you shave the beard and you don't have 0:00:57.440 --> 0:00:59.320 any hair, Suddenly you're mister clean. 0:00:59.480 --> 0:01:01.000 You just does mister clean. 0:01:02.000 --> 0:01:05.639 No, I don't think so, mister clean. You know clean, 0:01:06.400 --> 0:01:08.680 Come on, I think that's a fair point. 0:01:13.280 --> 0:01:16.520 It's the Money Stuff podcast. We have a guest, Cliff 0:01:16.560 --> 0:01:20.880 has runs a q R. Thanks for coming in, Thanks 0:01:20.920 --> 0:01:23.120 for having me. I always like to ask how to 0:01:23.160 --> 0:01:26.240 my managers, like what do you do for a living? 0:01:26.319 --> 0:01:29.160 Like what is it like economic function of like the 0:01:29.200 --> 0:01:30.199 business that you run. 0:01:30.600 --> 0:01:33.720 Okay, those are to me slightly different questions. 0:01:33.920 --> 0:01:35.560 Right. One sounds like it's about you. One sounds like 0:01:35.560 --> 0:01:36.240 it's about AQR. 0:01:36.280 --> 0:01:39.520 I'm more interested in even if it's about a q R. 0:01:40.160 --> 0:01:43.600 What you do for a living is And people might 0:01:43.600 --> 0:01:47.200 not like this phraseology, but you're trying to predict what 0:01:47.240 --> 0:01:50.000 happens to securities. You're trying to buy ones that go 0:01:50.240 --> 0:01:52.840 up either in the absolute or more than some benchmark, 0:01:52.880 --> 0:01:57.320 and and sell ones that do the opposite. The broader question, 0:01:57.320 --> 0:02:00.800 which I think is behind what you're saying, is what 0:02:00.840 --> 0:02:03.360 do you do for the world by doing that? And 0:02:03.400 --> 0:02:06.520 they overlap, but they're not exactly the same thing. Something 0:02:06.520 --> 0:02:08.640 can have a net positive effect on the world even 0:02:08.639 --> 0:02:11.440 if you're not waking up. And I'll admit this, I 0:02:11.480 --> 0:02:13.840 don't think most people in their jobs waked up and 0:02:13.880 --> 0:02:17.360 always think that way, and certainly not active managers just 0:02:17.440 --> 0:02:19.840 go I am just making the world a better place. 0:02:19.840 --> 0:02:23.720 They're thinking, is in Nvidia undervalued? Is it overvalued? The 0:02:23.800 --> 0:02:25.959 things that I think you do for the world. 0:02:26.360 --> 0:02:31.840 Is first, take the other side of positions other people 0:02:32.080 --> 0:02:35.160 disagree with you on or don't want to bear. That 0:02:35.200 --> 0:02:38.800 can take two forms. That can mean one of you 0:02:39.520 --> 0:02:41.000 is biased and wrong. 0:02:41.400 --> 0:02:42.320 You hope it's not you. 0:02:43.120 --> 0:02:45.240 But in that case, what you do for the world 0:02:45.320 --> 0:02:47.840 is you move prices back towards not necessarily all the 0:02:47.880 --> 0:02:51.440 way too in the abstract, the correct price. That's hard 0:02:51.480 --> 0:02:54.400 to define, actually, but something is mispriced and you take 0:02:54.440 --> 0:02:55.160 the other side of that. 0:02:55.639 --> 0:02:57.520 It could be a risk premium. Other people don't want 0:02:57.520 --> 0:03:00.919 to bear in a lot of strategies necessarily that they're 0:03:00.919 --> 0:03:01.720 making an error. 0:03:01.880 --> 0:03:05.120 If a merger's announced and three quarters of the pop 0:03:05.160 --> 0:03:07.400 you should get if it closes happens, a lot of 0:03:07.440 --> 0:03:09.600 people might not want to stick around for that last quarter. 0:03:09.680 --> 0:03:11.160 And if you're willing to. 0:03:11.080 --> 0:03:12.639 Take the other side of that, maybe you get paid 0:03:12.639 --> 0:03:15.080 a little for doing that, and that is a service 0:03:15.080 --> 0:03:17.600 to the market. People want to get out and you're helping. 0:03:18.360 --> 0:03:23.000 That's kind of the positive side, But again it's not 0:03:23.040 --> 0:03:24.000 what you're thinking about. 0:03:23.800 --> 0:03:24.720 When you do the trade. 0:03:25.040 --> 0:03:29.600 There are positions active managers will take that are not 0:03:29.720 --> 0:03:30.200 about that. 0:03:30.480 --> 0:03:31.440 Let me put it this way. 0:03:31.639 --> 0:03:34.800 If what you're trying to do is predict returns, you 0:03:34.840 --> 0:03:37.480 can predict returns because the price. 0:03:37.280 --> 0:03:39.720 Is moving towards truth. 0:03:40.120 --> 0:03:42.200 But you can also make money if you predict the 0:03:42.240 --> 0:03:44.480 price moves further away from truth. 0:03:44.640 --> 0:03:45.560 You know, if you're a. 0:03:45.880 --> 0:03:49.440 Momentum memestock investor. And doesn't mean you can't get that right, 0:03:49.520 --> 0:03:50.720 you know. I think of that a little more as 0:03:50.760 --> 0:03:54.000 trading than investing. But they all come together, and it 0:03:54.120 --> 0:03:58.160 even gets complicated within some famous quantitative factors. One famous 0:03:58.200 --> 0:03:59.840 quant factor is the momentum factor. 0:04:00.400 --> 0:04:02.360 I asked the finance professor I should I have asked? 0:04:03.400 --> 0:04:06.840 And he said, you should ask him if momentum trading 0:04:07.000 --> 0:04:08.560 makes markets more or less efficient. 0:04:08.720 --> 0:04:11.000 We don't fully know, but I can tell you the framework. 0:04:11.640 --> 0:04:12.920 There are two. 0:04:12.800 --> 0:04:17.360 Competing explanations in academia and a general world that cares 0:04:17.400 --> 0:04:20.440 about these things. For why momentum on average. 0:04:20.120 --> 0:04:22.920 Works, there's always a third that it will never. 0:04:22.800 --> 0:04:24.400 Work again and it was just random and it was 0:04:24.480 --> 0:04:26.920 just luck. But if it's true, why does it work? 0:04:27.240 --> 0:04:29.360 I actually think these can both coexist, so it's not 0:04:29.400 --> 0:04:32.960 truly embarrassing. But it sounds embarrassing that the two major 0:04:33.000 --> 0:04:37.960 explanations one is under reaction and the other is over reaction. 0:04:38.360 --> 0:04:40.200 When you've narrowed it down to two things that at. 0:04:40.200 --> 0:04:42.480 Least feel like the opposites, you should feel a little shame. 0:04:42.520 --> 0:04:45.279 For a second, there's the situation just like there's a 0:04:45.279 --> 0:04:48.640 correct price and momentum is trading from below to above the. 0:04:48.560 --> 0:04:50.680 Credit friends, Well, I'll give you two scenarios. 0:04:51.120 --> 0:04:55.000 Information comes out and people have a behavioral bias that 0:04:55.080 --> 0:04:57.880 behavioral psychologists would call anchoring an adjustment. 0:04:58.360 --> 0:05:00.920 They move towards all the way to the. 0:05:00.880 --> 0:05:03.159 New information, and I think that fits a lot of 0:05:03.160 --> 0:05:06.920 intuition in the short run that can make momentum work. 0:05:07.200 --> 0:05:11.320 If you're following fundamentals or prices, good news comes out 0:05:11.600 --> 0:05:14.719 or the price moves. If good news comes out, on average, 0:05:14.760 --> 0:05:18.880 the price goes up but not enough. If the price moves, 0:05:19.400 --> 0:05:21.680 it may on average be responding to good news, and 0:05:21.720 --> 0:05:25.479 simply by observing the price move, you can say, Okay, 0:05:25.560 --> 0:05:28.800 sometimes it's wrong, but on average it doesn't quite move enough. 0:05:29.400 --> 0:05:31.520 If that's the reason, And I think the weight of 0:05:31.560 --> 0:05:36.479 the opinion in academia I believe is towards this underreaction explanation. Then, 0:05:36.600 --> 0:05:38.960 even though you're trading on momentum, you're still moving the 0:05:39.000 --> 0:05:42.839 price towards kind of truth or equilibrium or something. But 0:05:42.920 --> 0:05:45.760 the flip side is overreaction. Do you think of that 0:05:45.920 --> 0:05:49.880 more as just your classic positive feedback loop. Someone's buying 0:05:49.920 --> 0:05:53.039 something just for you know, fomo. It's been going up 0:05:53.120 --> 0:05:55.080 in there, and well that could be a negative reason, 0:05:55.160 --> 0:05:57.960 or they're just predicting more people buy it because of Fomo. 0:05:58.480 --> 0:06:01.400 In that sense, if you buy some weird meme coin, 0:06:01.920 --> 0:06:04.039 you could do that for a rational reason, not that 0:06:04.120 --> 0:06:06.160 you are a long term holder, but you just believe 0:06:06.600 --> 0:06:07.559 it's going to keep going. 0:06:07.839 --> 0:06:09.440 So did you make money on GameStop? 0:06:10.680 --> 0:06:11.680 This the god's honest truth. 0:06:11.720 --> 0:06:13.520 You won't believe me. I have no idea if we 0:06:13.520 --> 0:06:15.520 were long or short game stop during the whole thing. 0:06:15.680 --> 0:06:16.920 You never went back and check. 0:06:17.080 --> 0:06:19.520 No, I never did. I did have an episode where 0:06:19.560 --> 0:06:22.520 I mentioned on perhaps a different TV network that we 0:06:22.520 --> 0:06:23.479 were short, AMC. 0:06:23.960 --> 0:06:25.520 What does your Twitter look like after that? 0:06:25.600 --> 0:06:28.080 It was very ugly. Yeah, I certainly knew of that world, 0:06:28.120 --> 0:06:30.880 even though we're quants. I watch the markets all day, 0:06:30.920 --> 0:06:33.279 even even if I don't do anything about it. It's 0:06:33.320 --> 0:06:35.120 like the old joke about the weather. Everyone talks about it, 0:06:35.160 --> 0:06:36.280 but nobody does anything about it. 0:06:36.360 --> 0:06:37.400 Best thing to talk about. 0:06:37.720 --> 0:06:40.640 So it's not like everything that went on with GameStop 0:06:40.720 --> 0:06:44.000 Melvin Capitol. You know, I'm watching it every day, but 0:06:44.279 --> 0:06:47.839 we take relevant tiny positions in every stock. There was 0:06:47.839 --> 0:06:50.160 nothing weird in our P and L. And yes, I 0:06:50.200 --> 0:06:53.160 was not even curious. It probably wasn't even in our 0:06:53.279 --> 0:06:54.560 universe at that point of things. 0:06:54.560 --> 0:06:55.200 We trade. 0:06:55.200 --> 0:06:59.600 But then I'm going on this other network it's allowed 0:07:01.720 --> 0:07:04.240 and in kind of a pre call of what are 0:07:04.240 --> 0:07:04.960 we going to talk about? 0:07:05.000 --> 0:07:05.680 You guys know, you. 0:07:05.600 --> 0:07:07.640 Don't want to get on there and have absolutely nothing 0:07:07.680 --> 0:07:09.880 to talk about. You want to have some not necessarily 0:07:09.880 --> 0:07:12.520 the answers worked out, but agreed upon topics. They're like 0:07:12.560 --> 0:07:15.600 everyone in this segment gives us some longs and shorts, 0:07:16.000 --> 0:07:18.200 but I'm saying, as a quant that's kind of silly. 0:07:18.680 --> 0:07:21.000 They're not indicative, and we kind of made a deal 0:07:21.680 --> 0:07:26.200 where they'd let me briefly explain that doesn't make a 0:07:26.240 --> 0:07:28.160 whole lot of sense for quantum, but it might be fun. 0:07:28.720 --> 0:07:30.600 And my way of saying it was, if I give 0:07:30.600 --> 0:07:32.200 you a few names long and a few names short, 0:07:33.040 --> 0:07:34.840 you could look in six months later and think we 0:07:34.880 --> 0:07:37.240 had a fantastic year or a terrible year and be 0:07:37.480 --> 0:07:40.920 terribly wrong in either direction because they're tiny. So I 0:07:40.960 --> 0:07:44.200 went through an AMC was I think I'm accidentally doing 0:07:44.240 --> 0:07:44.640 it again. 0:07:45.520 --> 0:07:46.960 We'll keep going hopefully. 0:07:46.600 --> 0:07:47.680 They don't listen to you, guys. 0:07:49.600 --> 0:07:53.600 But it was bad on every single thing in our 0:07:53.680 --> 0:07:57.440 model practically, which is hard to do. It was expensive, unprofitable, 0:07:57.520 --> 0:08:00.800 high beta. They were issuing shares, not buying backshit. There 0:08:00.800 --> 0:08:03.080 are more examples, and so I said that, but then 0:08:03.120 --> 0:08:07.880 I added that were only short twelve basis points, so 0:08:08.160 --> 0:08:12.000 the crazy people could be right and it doesn't really matter. 0:08:12.280 --> 0:08:14.440 I discovered two things. They're not going to like a 0:08:14.440 --> 0:08:19.000 short period, and crazy people don't always like being called crazy. Yeah, 0:08:19.040 --> 0:08:21.239 I had to discover that from myself. So my Twitter 0:08:21.280 --> 0:08:23.600 got ugly for a while. You may have noticed. I've 0:08:23.600 --> 0:08:26.120 gotten I think a fair amount better at this, But 0:08:26.240 --> 0:08:28.760 I used to be pretty bad about responding to ugly, 0:08:29.400 --> 0:08:30.920 which you learn your lesson on that. 0:08:30.920 --> 0:08:32.720 You always feed the trolls. 0:08:32.640 --> 0:08:34.840 Less so than I used to. At least I think 0:08:34.920 --> 0:08:35.360 I'm better. 0:08:35.440 --> 0:08:39.000 Maybe I'm wrong, but I became public enemy number three 0:08:39.080 --> 0:08:39.760 to the meme. 0:08:39.600 --> 0:08:41.560 Stock crowd for a while, I did. 0:08:41.520 --> 0:08:45.800 Not really Yes, Kenny Ken Griffin was number one. I 0:08:45.840 --> 0:08:48.080 don't believe Ken did this, but it's the whole poll, 0:08:48.240 --> 0:08:53.320 the Bible. And oddly enough, Gary Gensler was clearly number two. Yeah, 0:08:53.360 --> 0:08:57.280 because they thought he was covering for the manipulators and 0:08:57.320 --> 0:08:59.840 the naked shorts and whatnot. I've met both, I know, 0:09:00.040 --> 0:09:01.480 and a little better than Gary. I don't think there 0:09:01.520 --> 0:09:04.160 are any two people on Earth less likely to be 0:09:04.240 --> 0:09:07.079 in cahoots than those two. I think they're on the 0:09:07.120 --> 0:09:10.240 opposite side of most issues. But that was the theory. 0:09:10.280 --> 0:09:12.520 But both Ken and Gary are too smart to respond 0:09:12.520 --> 0:09:15.400 to them on Twitter, so I certainly became the most 0:09:15.440 --> 0:09:19.280 actively engaged, and then I never did that again before today, 0:09:19.640 --> 0:09:21.000 when I've accidentally done it. 0:09:21.120 --> 0:09:22.959 Before we get back to stuff that matters, can I 0:09:23.000 --> 0:09:26.960 just on AMC, I tweeted, when did June two come out? 0:09:27.080 --> 0:09:27.920 It was like last summer. 0:09:28.120 --> 0:09:28.720 Yeah, year ago. 0:09:28.800 --> 0:09:29.520 I tweeted that I. 0:09:29.440 --> 0:09:33.200 Fell asleep during Dune two, and it reawakened that crowd, 0:09:33.200 --> 0:09:35.839 at least on my Twitter, because I've the same. 0:09:35.640 --> 0:09:39.400 Crowds crowd because he's dissing a movie. 0:09:40.440 --> 0:09:43.360 Don't understand you have to like every movie or else 0:09:43.400 --> 0:09:46.200 here anti America, And then there were. 0:09:46.160 --> 0:09:49.840 A lot of conspiracy theories about Bloomberg reporter lies about 0:09:50.160 --> 0:09:51.040 falling asleep in. 0:09:51.080 --> 0:09:54.000 Doom too because she hates AMC. It would be, but 0:09:54.040 --> 0:09:55.480 it wasn't to. 0:09:55.760 --> 0:09:59.520 Oh, yeah, you do innocuous that I was obnoxious, so 0:09:59.559 --> 0:10:00.560 I'd kind of deserved it. 0:10:00.640 --> 0:10:03.120 You didn't deserve Thank you for saying that you didn't 0:10:03.120 --> 0:10:03.600 deserve it. 0:10:03.679 --> 0:10:05.520 I haven't sent. That's not doing what I was good. 0:10:05.880 --> 0:10:07.520 That's all too. It's pretty good. 0:10:07.760 --> 0:10:09.600 No you didn't, actually I didn't. 0:10:09.760 --> 0:10:12.360 You were asleep, well no, not the whole time, not 0:10:12.400 --> 0:10:13.000 the whole. 0:10:12.760 --> 0:10:15.679 Time, but also like you and and they were like, 0:10:15.800 --> 0:10:19.040 give me some shorts, and you gave them some lungs 0:10:19.040 --> 0:10:21.720 and shorts. Would you have known that or did you 0:10:21.760 --> 0:10:22.880 have to be like I got it. 0:10:22.960 --> 0:10:25.079 I would not have known that, right, So you don't. 0:10:24.880 --> 0:10:26.439 Know, you're ar It would have been better for me 0:10:26.480 --> 0:10:28.520 if we didn't have the call, because then I could 0:10:28.520 --> 0:10:32.720 have just said I don't know. I rarely know individual stocks, 0:10:33.120 --> 0:10:35.400 and if I do know, I'm probably not happy I know. 0:10:35.960 --> 0:10:38.120 And even then it's like we lost twenty BIPs on 0:10:38.160 --> 0:10:40.000 that today, which is a giant number for us to 0:10:40.040 --> 0:10:42.680 lose on one stock, and even then I probably don't 0:10:42.720 --> 0:10:44.040 notice twenty bit. 0:10:44.040 --> 0:10:46.200 If someone comes to you and says that's not. 0:10:46.320 --> 0:10:48.959 One, I might be told about it. 0:10:49.000 --> 0:10:51.480 For us, it's whether these seven hundred and fifty stocks be 0:10:51.600 --> 0:10:54.840 these seven hundred and fifty stocks. Yeah, I don't memorize 0:10:54.840 --> 0:10:58.120 fifteen hundred stocks. Now, we take a fair amount of risks, 0:10:58.160 --> 0:11:01.040 some funds more, some funds designed to be less. And 0:11:01.080 --> 0:11:04.840 that's about the size of these two positions. So when 0:11:04.840 --> 0:11:07.320 I say small, I'm not saying we're not both taking 0:11:07.400 --> 0:11:10.520 risk and trying to generate pretty decent returns. But if 0:11:10.520 --> 0:11:12.640 you just think about it, a quant is playing the odds. 0:11:12.920 --> 0:11:17.319 They're saying, affirm a company with these characteristics. And this 0:11:17.360 --> 0:11:20.520 can be old school factor quants from the nineteen nineties, 0:11:20.559 --> 0:11:23.760 these can be modern machine learning. But with these characteristics 0:11:23.760 --> 0:11:26.880 tend to beat these characteristics. If that's all you know, 0:11:26.960 --> 0:11:29.680 and it is all we know, why on earth would 0:11:29.679 --> 0:11:31.320 you take a lot of risk in any one company. 0:11:31.520 --> 0:11:33.080 AMC really could have done well. 0:11:33.120 --> 0:11:35.600 It could have been bad on every single thing that 0:11:35.720 --> 0:11:38.120 on average doesn't work, and it could be a special 0:11:38.600 --> 0:11:41.240 situation that we don't understand. Something could be good on 0:11:41.320 --> 0:11:44.920 everything and the CEO can embezzle all the money. We 0:11:45.040 --> 0:11:46.920 don't want to take a lot of risk on any 0:11:46.920 --> 0:11:48.880 one thing because we have no insight in that it's 0:11:48.960 --> 0:11:49.920 risk for no return. 0:11:50.320 --> 0:11:53.000 One thing you've written is that like over time, the 0:11:53.400 --> 0:11:56.439 quant like factor model has moved closer to being what 0:11:56.559 --> 0:11:59.520 Gramm and dot investors do. Like are you like an 0:11:59.559 --> 0:12:02.520 abstract like Metagram and Dada investors? I like the way 0:12:02.559 --> 0:12:03.520 to think of what you do. 0:12:04.320 --> 0:12:05.760 I think it's moved closer. 0:12:05.800 --> 0:12:09.200 There are still differences and maybe some of the like 0:12:09.480 --> 0:12:13.199 momentum if it's overreaction, if you're riding momentum. I don't 0:12:13.200 --> 0:12:14.959 think a Graham and DoD manager does that. So I 0:12:14.960 --> 0:12:18.360 don't want to push the analogy. But this came out 0:12:18.480 --> 0:12:20.720 very very early in my career. This is like thirty 0:12:20.920 --> 0:12:23.480 years ago. This is like my Goldman Sax days. I 0:12:23.559 --> 0:12:26.600 started hearing a lot of active stock pickers, some I'm 0:12:26.640 --> 0:12:29.320 still still friends with one guy in particular. I was 0:12:29.600 --> 0:12:31.679 laughing at them, and I was telling my friend, you 0:12:31.720 --> 0:12:33.559 all say the same thing. You all say you're looking 0:12:33.600 --> 0:12:36.800 for valuation plus a catalyst. It's like a I don't 0:12:36.800 --> 0:12:38.959 know if everyone says it, but I've heard it many 0:12:39.000 --> 0:12:41.880 times and I'm making fun of him, and at some 0:12:41.880 --> 0:12:43.959 point he looks at me and goes, you do value 0:12:43.960 --> 0:12:47.960 on momentum, and it was a gotcha. He won that 0:12:48.040 --> 0:12:51.480 round because I'm like, okay, I see your point. So 0:12:51.640 --> 0:12:54.160 even back then, you can think of those two together. 0:12:54.240 --> 0:12:55.280 We literally add them up. 0:12:55.320 --> 0:12:57.240 But if you think of him as this holistic system, 0:12:57.240 --> 0:12:58.960 we're looking for cheap things that are starting to get 0:12:59.360 --> 0:13:03.600 better in price or fundamentals over time. And now I'm 0:13:03.920 --> 0:13:07.360 I'm not talking the really modern stuff, alternative data, machine learning. 0:13:07.640 --> 0:13:11.000 I'm talking just classic quant stuff that's been academia and 0:13:11.000 --> 0:13:13.199 then imports over to applied. 0:13:13.800 --> 0:13:15.200 Profitability is a factor. 0:13:15.360 --> 0:13:17.440 Robert nov Mark's wrote a great paper that we all 0:13:17.880 --> 0:13:22.160 incorporated where also equal give evaluation and momentum. 0:13:22.400 --> 0:13:25.000 If a company is more profitable on some. 0:13:25.080 --> 0:13:29.319 Famous scale's gross profitability ROA Roe, that's some degree a 0:13:29.400 --> 0:13:33.240 positive low beta investing. Two of my colleagues, Andrea Frazini 0:13:33.440 --> 0:13:36.760 and los A. Peterson, resurrecting stuff Fisher Black did, and 0:13:36.800 --> 0:13:40.040 they're very good about saying Fisher did it first. That 0:13:40.320 --> 0:13:44.360 lower beta stocks. If you're famously a capital asset pricing 0:13:44.559 --> 0:13:48.160 model person, they're supposed to sell on average underperform higher 0:13:48.200 --> 0:13:51.960 beta stocks. That's the main output of that model. It 0:13:52.040 --> 0:13:54.480 doesn't work. I mean, it's one of the largest empirical 0:13:54.480 --> 0:13:56.920 failures ever. It doesn't work in any kind even outside 0:13:56.920 --> 0:13:59.880 of stocks people tested in other places. Therefore, it kind 0:13:59.880 --> 0:14:02.720 of makes low beta stocks a little bit of a 0:14:02.760 --> 0:14:05.920 free lunch because they are lower risk and they keep up. 0:14:06.800 --> 0:14:09.360 If you actually go read Graham and DoD, they're not 0:14:09.480 --> 0:14:13.400 just buying low multiples. They're much more holistic than that. 0:14:13.640 --> 0:14:17.080 You know, high quality companies that have a moat, that 0:14:17.120 --> 0:14:19.400 have some kind of margin of safety I think was 0:14:19.440 --> 0:14:22.320 the term they use. Margin of safety and looking for 0:14:22.400 --> 0:14:26.720 low risk doesn't sound so so different. So over time 0:14:26.760 --> 0:14:30.320 I've thought at least a core amount of what quants 0:14:30.440 --> 0:14:33.560 and academics, if you take them as a whole, are finding, 0:14:34.240 --> 0:14:36.560 is the full paneplyy of stuff that a Graham and 0:14:36.600 --> 0:14:39.560 DoD investor. We do it very differently. Again, we're betting 0:14:39.560 --> 0:14:41.320 on the concept working on average. 0:14:41.320 --> 0:14:42.280 They are using it. 0:14:42.840 --> 0:14:44.880 In a soft or a hard sense as a screen 0:14:45.000 --> 0:14:47.480 to look for candidates, and then they're trying to learn 0:14:47.520 --> 0:14:50.680 a lot about that situation. They're upside as if they 0:14:50.800 --> 0:14:52.680 learn a lot about that situation, they could be more 0:14:52.720 --> 0:14:55.160 reliable than my You know, hey, we could be wrong 0:14:55.200 --> 0:14:58.360 about AMC, and their downside is they better be right. 0:14:58.840 --> 0:15:00.880 The concept can work, and they can still lose if 0:15:00.920 --> 0:15:04.080 they're wrong about the specific So over time I've gotten 0:15:04.120 --> 0:15:06.760 a little less hubrious about this. I think quants caused 0:15:06.800 --> 0:15:08.920 the problem, by the way. I think when Gene fam 0:15:09.040 --> 0:15:11.320 and Ken French started looking at like price to book 0:15:11.400 --> 0:15:14.480 in the late eighties and early nineties, and there were 0:15:14.480 --> 0:15:16.360 other people who did it too, I'm just Chicago guy, 0:15:16.400 --> 0:15:18.200 so I'm going to just go with Fama and French. 0:15:18.560 --> 0:15:22.160 They did it best. In my very biased opinion. I 0:15:22.200 --> 0:15:23.840 don't think i'd have to go back and check, but 0:15:23.880 --> 0:15:26.080 I don't think the first few papers use the word 0:15:26.200 --> 0:15:31.000 value investing. Over time, low multiple investing in the quant 0:15:31.040 --> 0:15:34.840 world came to be called value investing, and in the 0:15:34.880 --> 0:15:36.760 Gramm and Dodd world they get kind of mad at that, 0:15:37.560 --> 0:15:39.320 and they'd be like, it's not value investing. There are 0:15:39.320 --> 0:15:42.600 plenty of low multiple companies that deserve to be low multiple, 0:15:42.640 --> 0:15:45.200 and there are plenty of high multiple companies that deserve it, 0:15:45.800 --> 0:15:51.000 and I think over time, the quantitative process agreed with them. 0:15:51.000 --> 0:15:51.600 More and more. 0:15:51.720 --> 0:15:54.040 So I still think it's a communication problem because they'll 0:15:54.080 --> 0:15:56.960 still talk about the value factor. In the quant world, 0:15:56.960 --> 0:15:59.680 that's just low multiples. And if a Gramm and Dodd 0:16:00.360 --> 0:16:03.280 gets mad or any old school active stock picker gets 0:16:03.320 --> 0:16:06.080 mad at that, I'll just say you're right, because value 0:16:06.160 --> 0:16:08.600 implies a more holistic thing. 0:16:08.640 --> 0:16:10.640 But isn't like modern quantit and what you're doing now 0:16:10.760 --> 0:16:13.000 kind of just that more holistic thing, like you're just 0:16:13.160 --> 0:16:15.760 ingesting more data plans and you have a less linear model, 0:16:15.800 --> 0:16:17.760 and it's like moving towards that. 0:16:17.760 --> 0:16:19.960 Anyway, if you look at machine learning, where either to 0:16:20.000 --> 0:16:23.680 construct factors. One of the best uses of mL we 0:16:23.840 --> 0:16:26.920 found is a subset of mL called natural language processing, 0:16:27.320 --> 0:16:30.560 where you take textual data and you try to say 0:16:30.600 --> 0:16:33.200 is this good news or bad news? Quants have kind 0:16:33.200 --> 0:16:36.480 of done this forever. You get transcript of an earnings call. 0:16:36.560 --> 0:16:38.040 And the old school way to do this for a 0:16:38.040 --> 0:16:41.200 long time was you count up good words and bad words, 0:16:41.640 --> 0:16:45.120 good phrases and bad phrases, so increasing plus one and 0:16:45.160 --> 0:16:47.600 you tech parse the whole thing, and sure, you guys 0:16:47.640 --> 0:16:50.400 immediately see the problem. If the actual sentence was massive 0:16:50.400 --> 0:16:53.960 embezzlement is increasing, then you were off on that plus one. 0:16:54.160 --> 0:16:58.000 Quantitative stuff can survive doing some horrifically stupid things in isolation, 0:16:58.520 --> 0:17:00.720 If fifty three percent of the time increasing is a 0:17:00.720 --> 0:17:04.440 good word, than forty percent of the time you were stupid, 0:17:04.840 --> 0:17:07.840 turns out natural language processing or NLP, if we want 0:17:07.880 --> 0:17:10.720 to sound like the cool kids. That is, taking that 0:17:10.800 --> 0:17:16.480 same data and training a mL model to say what 0:17:16.560 --> 0:17:18.840 predicts and what doesn't predict, and of course never gets 0:17:18.840 --> 0:17:21.320 near perfect at the end of the day, though we 0:17:21.440 --> 0:17:24.240 believe it does a lot better than the word count 0:17:24.280 --> 0:17:27.600 methods and is additive to a model. But importantly, and 0:17:27.640 --> 0:17:31.920 I think this was your point, Matt, it's not qualitatively different. 0:17:32.200 --> 0:17:36.760 We've looked at both price and fundamental momentum forever. Fundamental 0:17:36.760 --> 0:17:39.360 momentum the classic measures of things like our earnings being 0:17:39.440 --> 0:17:41.040 revised and you want the revision. 0:17:41.080 --> 0:17:42.280 You want the new news. 0:17:42.720 --> 0:17:46.520 Up faster or slower. Our earning surprise is coming in 0:17:46.600 --> 0:17:49.200 positive or negative. And this is this anchoring and adjustment 0:17:49.240 --> 0:17:52.560 idea that if that's good or bad news, you can 0:17:52.560 --> 0:17:54.800 make money trading on it. Because it's not fully incorporated 0:17:54.800 --> 0:17:58.880 in the stock price parsing and earnings call poorly as 0:17:58.920 --> 0:18:01.159 in the past or better now, we think of it 0:18:01.200 --> 0:18:03.879 as just another form of our good things happening in 0:18:03.920 --> 0:18:07.200 the new year term, and if so, they're probably under appreciated. 0:18:07.280 --> 0:18:10.560 So yes, I don't think it's changed dramatically. It's much 0:18:10.560 --> 0:18:13.520 more of an evolution rather than a spirit change. 0:18:13.760 --> 0:18:16.280 But we got bigger tools in the tool chest now. 0:18:16.840 --> 0:18:18.399 I mean, like, you know, you ask, like what a 0:18:18.560 --> 0:18:20.879 sort of like traditional old school fundamental manager would do. 0:18:20.880 --> 0:18:22.480 One thing they do is listen to their next call 0:18:22.720 --> 0:18:25.280