WEBVTT - Jeffrey Sherman on Trading in Academics for Fund Management 0:00:02.279 --> 0:00:06.840 This is Masters in Business with Barry Ridholtz on Boomberg Radio. 0:00:09.000 --> 0:00:11.440 This week on the podcast, I have a special guest 0:00:11.520 --> 0:00:14.800 and this was so much fun. His name is Jeffrey Sherman. 0:00:14.880 --> 0:00:17.720 He is the I'm gonna make him see I O 0:00:17.880 --> 0:00:21.040 of Double Line and uh, one of the people who 0:00:21.120 --> 0:00:24.079 came over from Trust Company of the West with Jeff 0:00:24.120 --> 0:00:27.200 Gunlock to help set up. He actually is Deputy c 0:00:27.360 --> 0:00:29.880 i O as well as sitting on a number of 0:00:29.880 --> 0:00:35.080 different executive management committees UM fixed Income Financial Allocation Committee. 0:00:35.280 --> 0:00:37.559 He runs a number of farm funds as well as 0:00:37.560 --> 0:00:42.040 co runs some funds with Jeff Gunlock UH, and is 0:00:42.200 --> 0:00:45.840 as about as knowledgeable a quants working in the fixed 0:00:45.880 --> 0:00:51.320 income and equity and commodity space uh as as you'll 0:00:51.400 --> 0:00:55.240 ever want to meet. UM. We really don't go too 0:00:55.280 --> 0:00:58.080 deep into the weeds on the wonky quant stuff, but 0:00:58.240 --> 0:01:02.120 it's really a fascinating, roll up your sleeve sort of conversation. 0:01:02.280 --> 0:01:06.600 He understands this as well as anybody out in finance. 0:01:06.880 --> 0:01:09.040 He also hosts his own podcast, which we talked a 0:01:09.040 --> 0:01:11.679 little bit about. So I found the conversation to be 0:01:11.760 --> 0:01:16.319 absolutely uh fascinating and intriguing, and I think you will too, 0:01:16.680 --> 0:01:20.640 so with no further ado, my conversation with Double Lines 0:01:21.080 --> 0:01:29.200 Other Jeff Jeffrey Sherman. My special guest today is Jeff 0:01:29.200 --> 0:01:33.360 Sherman of Double Line Capital, where he serves as Deputy 0:01:33.440 --> 0:01:36.680 Chief Investment Officer UH. The c i O of Double 0:01:36.720 --> 0:01:41.080 Line is Jeff Gunlock, who coincidentally was the very first 0:01:41.080 --> 0:01:46.240 broadcast guest on Masters and Business UM. Jeff Sherman, previous 0:01:46.319 --> 0:01:48.920 to Double Line, worked as a senior VP at Trust 0:01:48.920 --> 0:01:52.400 Company of the West, where he was a portfolio manager 0:01:52.440 --> 0:01:57.240 and quant analysts focused on fixed income and real asset portfolios. 0:01:57.640 --> 0:02:00.320 He has a b s and applied mathematics from the 0:02:00.360 --> 0:02:04.840 University of Pacific and a master's degree in financial engineering 0:02:04.880 --> 0:02:07.760 from Claremont Graduate University. He is also a c f 0:02:07.880 --> 0:02:13.880 A charter holder as well as a financial podcaster. Jeff Sherman, 0:02:14.040 --> 0:02:17.200 Welcome to Bloomberg. Thanks for having me, Barry. So I 0:02:17.280 --> 0:02:22.400 have to start with the the education applied mathematics and 0:02:22.440 --> 0:02:26.280 financial engineering. Did you know you wanted to go into 0:02:26.400 --> 0:02:30.959 asset management earlier in your life? Not at all, not whatsoever, really, 0:02:31.000 --> 0:02:34.200 because that would suggest, oh, here's the path to Wall Street. 0:02:34.240 --> 0:02:38.520 That's right, and um, what happened is is Um. Naturally, 0:02:38.680 --> 0:02:41.240 I guess I was. I was more inclined towards mathematics 0:02:41.240 --> 0:02:44.320 along the way. I started off actually as a pure mathematician, 0:02:44.760 --> 0:02:48.160 which is a lot of abstract math and just trying 0:02:48.200 --> 0:02:52.080 to prove concepts, a lot of logic. Really, um and uh, 0:02:52.560 --> 0:02:54.919 although it was okay to me, it just didn't really 0:02:55.000 --> 0:02:57.560 seem to have a long term path. Obviously, you can 0:02:57.600 --> 0:03:01.200 be a professor. I mean talking about ring theory and groups. 0:03:01.280 --> 0:03:04.799 I mean you're already falling asleep. No, I love them. Okay, good, 0:03:04.880 --> 0:03:08.720 so um, so let's talk deeper about that. Everybody else, Oh, 0:03:08.720 --> 0:03:11.960 there we go, so we'll transition them. But the idea 0:03:12.120 --> 0:03:16.120 was the applications of of mathematics. It typically it's applied 0:03:16.120 --> 0:03:20.359 to a lot of physics, right, and engineering concepts, And um, 0:03:20.400 --> 0:03:23.000 I was always kind of curious by statistics, and for 0:03:23.040 --> 0:03:25.200 some reason, I like the probabilition statistics course is a 0:03:25.200 --> 0:03:28.880 little more and so I'd actually changed my major around 0:03:28.919 --> 0:03:31.239 the middle of my junior year to become an applied mathematician. 0:03:31.680 --> 0:03:34.800 But unlike the traditional folks, I didn't use the engineering 0:03:34.840 --> 0:03:37.520 and physics physics as the application actually used its stats 0:03:37.520 --> 0:03:41.080 and probability. So, um, you know, I forgot to really 0:03:41.120 --> 0:03:44.280 apply for a job as I was going through my Yeah, well, 0:03:44.360 --> 0:03:46.760 you know, you kind of get stuck in that academic 0:03:46.840 --> 0:03:49.640 lifestyle and so decided to take the g r S 0:03:49.680 --> 0:03:52.720 and just try to keep going to school. So ended 0:03:52.840 --> 0:03:56.400 up applying to grad school UM, and ended up down 0:03:56.400 --> 0:04:00.400 in Florida State, down in Tallahassee and uh, interesting place. 0:04:00.960 --> 0:04:04.480 UM didn't really have a lot of application towards statistics 0:04:04.480 --> 0:04:07.400 and probability as you might think of them. They're they're 0:04:07.440 --> 0:04:10.320 pretty well honed on a meteorological tilt. Uh. There's these 0:04:10.360 --> 0:04:12.960 things called hurricanes that they study, and they're well known 0:04:13.040 --> 0:04:15.840 for that. So my application got thrown out the window 0:04:15.880 --> 0:04:19.240 of statistics, not my application for grad school. But they 0:04:19.279 --> 0:04:23.000 said everybody learns fluid mechanics here. Um and by the way, 0:04:23.040 --> 0:04:26.600 here's fifth semester physics. Figure it out, and so um 0:04:26.760 --> 0:04:29.080 it was doing that along the way. It's kind of late. 0:04:29.200 --> 0:04:32.560 This was like late ninety nine early two thousand. Realized 0:04:32.560 --> 0:04:34.800 there are this quand jobs on Wall Street, and there's 0:04:34.839 --> 0:04:39.160 these programs that actually had a financial tilt and so 0:04:39.680 --> 0:04:43.440 similar types of equations like um, uh kind of like 0:04:43.600 --> 0:04:47.280 think in those areas and started taking simulation and things 0:04:47.320 --> 0:04:50.920 like that, and UH ended up transferring back to Claremont, 0:04:51.080 --> 0:04:54.000 closer to home, back in California, and UM went from 0:04:54.040 --> 0:04:58.320 there financial engineering. Speaking of another mathematician, You're working at 0:04:58.320 --> 0:05:00.800 the Trust Company of the West with a gentleman named 0:05:00.839 --> 0:05:06.000 Jeff Gunlock. UM, what was that like when you were there? 0:05:06.120 --> 0:05:09.400 Tell us about about your relationship. Well, Um, it was 0:05:09.839 --> 0:05:12.320 non existent when I started. UM, it's worked in a 0:05:12.360 --> 0:05:15.520 different department. And I remember at the time. It's probably 0:05:15.520 --> 0:05:18.440 a story a lot of people haven't heard. Is Mr 0:05:18.440 --> 0:05:20.680 Gunlock would go around and put out puzzles of the 0:05:20.720 --> 0:05:24.240 month and they were always some quirky, very deep in 0:05:24.279 --> 0:05:27.640 thought puzzle and it was always the rumor was if 0:05:27.640 --> 0:05:30.440 you could solve it within the month and turned into him, 0:05:30.720 --> 0:05:33.200 you could get a job in his department. I'm not 0:05:33.240 --> 0:05:34.760 here to tell you I solved one of those, by 0:05:34.760 --> 0:05:38.800 the way, UM, but it was always curious to me. UM. 0:05:38.880 --> 0:05:42.200 You know someone that's kind of challenging folks in the workplace. 0:05:42.640 --> 0:05:44.919 And obviously as I was, I was working in the 0:05:44.960 --> 0:05:46.920 risk type of group and kind of the middle office 0:05:46.960 --> 0:05:50.320 type analyzing things and just seeing kind of tracker of 0:05:50.440 --> 0:05:53.640 the team and and how the team had some autonomy. 0:05:54.360 --> 0:05:56.560 It's always something that I wanted to do. Um, and 0:05:56.600 --> 0:06:00.240 so UM just kind of started hanging around the oaks 0:06:00.240 --> 0:06:02.719 on the team trying to, uh, you know, get my 0:06:02.839 --> 0:06:05.240 name known or something that, to try to get in 0:06:05.240 --> 0:06:07.640 the group. So you never solve one of his puzzles. 0:06:07.680 --> 0:06:10.600 Negative and then he I don't know if he actually 0:06:10.920 --> 0:06:14.680 for fairness, I'm not sure if anyone ever did. I 0:06:14.720 --> 0:06:17.880 believe he probably did, but I'm not sure if anyone 0:06:17.920 --> 0:06:20.000 ever did and actually got rewarded with that. It could 0:06:20.000 --> 0:06:22.600 have just been a rumor. But the puzzles were available. 0:06:22.640 --> 0:06:25.800 I do know that it's an interesting crowdsourcing. They could 0:06:25.839 --> 0:06:28.160 be puzzles he couldn't solve and say, let's see if 0:06:28.160 --> 0:06:31.159 we can find someone else who can. Uh. Again, I 0:06:31.160 --> 0:06:34.119 don't know the answer to that, but you know, again 0:06:34.200 --> 0:06:35.960 you have to ask him next time you see. I 0:06:35.960 --> 0:06:40.160 will so so he leaves to launch double line on 0:06:40.240 --> 0:06:43.880 his own. How did you go about saying, hey, Jeff, 0:06:43.960 --> 0:06:47.120 I think you need another Jeff in the shop right? Well, Um, 0:06:47.160 --> 0:06:48.680 you know I was on the team at that point 0:06:48.720 --> 0:06:50.920 in time. I've been with the team probably at least 0:06:50.920 --> 0:06:53.600 around five years, four to five years at the time, 0:06:54.200 --> 0:06:58.039 and Um, it was. It was a very quick kind 0:06:58.080 --> 0:07:01.520 of movement and a bunch of people on the desk 0:07:01.560 --> 0:07:04.320 we're talking about, you know, what should we do? And 0:07:04.440 --> 0:07:06.359 it was a pretty easy decision. I was in my 0:07:06.360 --> 0:07:09.120 early thirties, Um, and I said, you know, if there's 0:07:09.120 --> 0:07:11.800 a risk to take, this is the time to do it. 0:07:11.880 --> 0:07:14.760 One and you know, one of the most respected investors 0:07:14.760 --> 0:07:16.960 in the world. Why wouldn't you take a risk to 0:07:17.040 --> 0:07:18.840 join this person on a new venture? And so from 0:07:18.880 --> 0:07:21.520 that perspective, it's it's almost one of those things people 0:07:21.560 --> 0:07:23.920 call a no brainer. Obviously there's a little bit of 0:07:24.000 --> 0:07:28.320 you know, strife and turmoil and internally and again look 0:07:28.360 --> 0:07:30.760 back and the rest is history. You have a lot 0:07:30.840 --> 0:07:34.080 of different subject areas you cover your deputy c I, oh, 0:07:34.160 --> 0:07:37.520 you're on the executive committee. Uh, you're a fund manager. 0:07:37.680 --> 0:07:39.760 What takes the most of your time? What do you 0:07:39.800 --> 0:07:42.240 focus on the most? Well, I'll clarify that I don't 0:07:42.320 --> 0:07:46.480 run the executive Did I say it sounded like tend 0:07:46.520 --> 0:07:49.120 to give people promotion? You know, Hey, it's good to 0:07:49.120 --> 0:07:53.600 be here. But that said, um, most of my day, 0:07:53.840 --> 0:07:57.400 you know, is spent between you know, facing clients, you know, 0:07:57.720 --> 0:08:02.040 portfolio review, strategy, reviews UM, giving outlooks and forecasts of 0:08:02.040 --> 0:08:05.240 how we're thinking about the markets UM and obviously you know, 0:08:05.320 --> 0:08:10.040 coming up with ideas for implementation. So UM our team 0:08:10.080 --> 0:08:13.880 works on the astilication side, So we're trying to kind 0:08:13.920 --> 0:08:18.400 of find relative valuation across various sectors of the bond market. UM. Additionally, 0:08:18.520 --> 0:08:21.080 you know, we run our commodity strategy all quantitatively. Orned 0:08:21.680 --> 0:08:25.560 my team also helps run the equity products that we 0:08:25.640 --> 0:08:27.520 have on the UH. It's kind of a blend of 0:08:27.520 --> 0:08:31.080 an index with some active fixed income management. And so 0:08:31.320 --> 0:08:34.520 again it's it's UM. It's every day is different, but 0:08:34.840 --> 0:08:36.959 that's what makes it interesting, right, It's UM. You don't 0:08:37.000 --> 0:08:39.360 come in and do the same thing day and day out. UM. 0:08:39.440 --> 0:08:42.320 And it's I always viewed as a problem solving exercise, right, UH. 0:08:42.360 --> 0:08:44.679 The ideas you're trying to find, you know, inefficiencies in 0:08:44.720 --> 0:08:48.080 the markets, something that looks attractive, perhaps something that people 0:08:48.080 --> 0:08:50.880 are missing in the puzzle, and more importantly, trying to 0:08:50.920 --> 0:08:53.600 poke holes in what we own today. Right. So that's 0:08:53.600 --> 0:08:55.000 a that's a big part of it, is that are 0:08:55.040 --> 0:08:58.160 we missing some risk out there? Obviously the exogenous ones 0:08:58.200 --> 0:09:01.600 you can ever figure out to after the fact, but 0:09:01.679 --> 0:09:04.280 It's also are we are we getting lulled into, you know, 0:09:04.360 --> 0:09:07.440 an environment like today which is complacent, low volatility, not 0:09:07.600 --> 0:09:10.839 much going on? UM, Are we being lulled to sleep 0:09:10.840 --> 0:09:12.840 as well? And is there something we can do in 0:09:12.880 --> 0:09:15.400 our portfolios to help kind of offset that, or you know, 0:09:15.520 --> 0:09:19.280 try to think about something that's UM again, somewhat exogenous 0:09:19.360 --> 0:09:21.760 to the process today. Here's a rumor that I just 0:09:21.920 --> 0:09:27.480 love Bob Schiller visits Double Lines Los Angeles office and 0:09:27.600 --> 0:09:30.520 more or less starts pitching Cape as a way to 0:09:30.640 --> 0:09:36.640 manage equities more safely, and then somehow this becomes a 0:09:36.679 --> 0:09:42.280 portfolio How how exaggerated? Is that there's some truth in it? Um? 0:09:43.120 --> 0:09:45.200 The facts are that we don't want fake news right, 0:09:45.240 --> 0:09:48.960 want facts right. The facts are that Professor Schiller was 0:09:49.000 --> 0:09:52.920 in our office and Professor Schiller was talking about his 0:09:53.080 --> 0:09:55.760 Cape Index family of the products he had partnered with 0:09:55.800 --> 0:09:59.960 Barclays to work on UM. And I don't know if 0:10:00.040 --> 0:10:02.760 he pitched as a more safe way or that he 0:10:02.840 --> 0:10:06.560 was actually there truly pitching the product, because that's not 0:10:07.160 --> 0:10:10.080 that's not really Professor Schiller's style. You know. Yeah, he's 0:10:10.160 --> 0:10:13.400 he's very humble and he likes to talk about ideas, 0:10:13.440 --> 0:10:15.439 But I don't believe it was a full blown pitch. 0:10:16.080 --> 0:10:19.600 The bankers with them, well, I think perhaps they were 0:10:19.640 --> 0:10:23.640 pitching um. And the question became, okay, this is great. 0:10:24.000 --> 0:10:25.800 We run a lot of fixed income assets, we have 0:10:25.840 --> 0:10:28.040 a macro fund, we have a hedge fund that we 0:10:28.120 --> 0:10:30.240 do things where we could body these types of products. 0:10:30.240 --> 0:10:32.600 But so do you want us to just trade this 0:10:32.800 --> 0:10:35.720 or what's the idea here? So from there what we 0:10:35.800 --> 0:10:37.839 ended up doing was taking a look at the at 0:10:37.880 --> 0:10:40.719 the family in disease and thinking about is there a 0:10:40.880 --> 0:10:44.679 merit here? And at first, looking at it cursory glance, think, 0:10:44.720 --> 0:10:48.280 you know, just another value product, you know, So okay, great, 0:10:48.280 --> 0:10:54.120 good job, you know, yeah, using like a cape cape ratio, 0:10:54.200 --> 0:10:57.240 which is a tenure price. Duran's racist And because the 0:10:57.280 --> 0:10:59.840 longer time you got inflation adjust of course, full cycle 0:11:00.000 --> 0:11:01.760 blah blah blah. Well, who knows if it's a full 0:11:01.760 --> 0:11:04.080 cycle anymore? Here? Where are you're eight? You know? Will 0:11:04.120 --> 0:11:07.679 we uh? You know the low? I know, I know 0:11:07.720 --> 0:11:10.679 you're about that right the bull market starts with the 0:11:10.679 --> 0:11:13.160 new high. I get it, um, But that being said, 0:11:14.280 --> 0:11:16.600 I've read, I've I've read enough and heard enough about it. 0:11:17.120 --> 0:11:19.800 But what we did is started to do some kind 0:11:19.840 --> 0:11:22.120 of statistical work on it, look at kind of factory 0:11:22.160 --> 0:11:25.120 decomposition and things, and I gotta The story I like 0:11:25.160 --> 0:11:28.360 to tell is that the first blush through, I just said, 0:11:28.360 --> 0:11:31.040 this is wrong. These these results make no sense. You 0:11:31.080 --> 0:11:33.559 still have like residual return of alpha in there after 0:11:33.600 --> 0:11:36.160 this process of adjusting for factors. So in ways I'm 0:11:36.200 --> 0:11:39.400 saying there's something to this another when you say it's wrong, Hey, 0:11:39.440 --> 0:11:43.960 this is identifying an inefficiency that you hadn't previously considered. However, 0:11:44.080 --> 0:11:45.880 you don't know me well enough, Barry the first thing, 0:11:45.880 --> 0:11:48.040 I say, that's gonna be wrong, Right, it's gotta be wrong, 0:11:48.559 --> 0:11:51.400 um and so um. So crank through it again. And 0:11:51.200 --> 0:11:53.200 then the next step, after we see it again, go 0:11:53.240 --> 0:11:55.600 for monthly to daily, start looking at different time periods 0:11:55.600 --> 0:11:57.360 like go, now, give me the data set. I want 0:11:57.400 --> 0:11:59.480 to make sure. Let me look through how you're doing it, 0:12:00.040 --> 0:12:02.599 and yeah, you're absolutely correct. It's that there seems to 0:12:02.679 --> 0:12:05.640 be something beyond what's in the factors. And there's nothing 0:12:05.679 --> 0:12:09.080 wrong with factory decomposition or factory portflows. They're great. But 0:12:09.200 --> 0:12:12.040 if everybody can deliver to you and it's commoditized, what's 0:12:12.080 --> 0:12:15.120 my edge, right. So well, we ended up finding out 0:12:15.120 --> 0:12:17.800 there is that this this excess return seemed to exist, 0:12:18.360 --> 0:12:21.400 and we started going through regime changes and look at 0:12:21.400 --> 0:12:25.679 different rate environments and different growth and recessionary areas. What 0:12:25.720 --> 0:12:29.240 we found is it seems to be relatively robust. And 0:12:29.360 --> 0:12:33.120 so now the big question becomes, we have this equity 0:12:33.120 --> 0:12:36.600 inducts that we've seen that appears to deliver something different 0:12:36.600 --> 0:12:39.360 in the value space or even just in core large 0:12:39.400 --> 0:12:42.400 cap equity in the US. What do you do with it? Right? 0:12:42.640 --> 0:12:45.280 Double Line historically have been known for being more fixed 0:12:45.280 --> 0:12:48.120 income oriented, So what do we do with him? And 0:12:48.640 --> 0:12:50.960 so first thing I think about is why not do 0:12:51.000 --> 0:12:53.719 it as an overlay? Right? So, an overlay means that 0:12:53.800 --> 0:12:56.520 you can get this exposure through a derivative like a swap, 0:12:57.160 --> 0:12:59.520 and you can put that on top of let's say 0:12:59.559 --> 0:13:02.720 a treasure report foil that will replicate the total return 0:13:03.240 --> 0:13:05.720 um and you can deliver that. But that's no fun, 0:13:05.880 --> 0:13:09.920 that's just an index business um. And if you're not familiar, 0:13:09.960 --> 0:13:12.200 we run about a hundred and seventeen billion dollars of 0:13:12.520 --> 0:13:16.280 actively managed product. So from the standpoint of what to 0:13:16.320 --> 0:13:18.360 do with it, why not be a little active with 0:13:18.440 --> 0:13:21.760 that treasury PORTFOLIL, and why not run things beyond treasuries. 0:13:21.760 --> 0:13:24.120 Why not do what we do well and try to 0:13:24.200 --> 0:13:27.760 build a diversified kind of lower risk fixed income probably 0:13:27.800 --> 0:13:30.480 don't look like the traditional intermediate term bond funds, but 0:13:30.600 --> 0:13:33.000 run something that'll will take a little bit of interest risk, 0:13:33.040 --> 0:13:34.959 take a little bit of credit risk, and use our 0:13:35.000 --> 0:13:38.480 macro forecasting to blend that together for the right environment. 0:13:38.760 --> 0:13:40.880 And if you do it right, you can add let's 0:13:40.880 --> 0:13:42.480 call it, a couple hundred basis points a year over 0:13:42.480 --> 0:13:45.040 the index. So if you have a good product in 0:13:45.360 --> 0:13:48.360 a process that you believe in from the equity side, 0:13:48.360 --> 0:13:51.520 which UM really resonated with us, so you buy the 0:13:51.600 --> 0:13:55.720 four cheapest s and P five hundred sectors as measured 0:13:55.760 --> 0:13:58.640 by the ten year cape not precisely. So there's a 0:13:58.679 --> 0:14:01.400 couple of things different there. One is UM. Instead of 0:14:01.480 --> 0:14:04.920 using just the cap ratio to identify the value, think 0:14:04.960 --> 0:14:08.400 about like for instance, tech, the technology sector, and think 0:14:08.400 --> 0:14:12.760 about utilities. Historically, utilities have always really traded a lower 0:14:12.840 --> 0:14:15.080 multiple than technology, right, and then there's reasons for that. 0:14:15.200 --> 0:14:19.240 Vall Um. You know, highly regulated industries versus high flying 0:14:19.240 --> 0:14:22.960 growthy stocks. David, Yeah, all the traditional kind of metrics 0:14:23.000 --> 0:14:26.240 you would think for that. So if you just used 0:14:26.240 --> 0:14:29.800 the cap ratio, you would always buy utilities, for instance, right, 0:14:30.000 --> 0:14:33.000 because it would be one of those lower valuation sectors 0:14:33.040 --> 0:14:36.080 as at least in a historical context, and that would 0:14:36.080 --> 0:14:39.240 introduce bias to the portfolio. So to normalize this, or 0:14:39.280 --> 0:14:41.440 to try to standardize it, what you do is you 0:14:41.480 --> 0:14:45.200 compare each sector's cap ratio to its own historical average. 0:14:45.520 --> 0:14:47.920 So think about it's normalizing it for its own trading range. 0:14:48.240 --> 0:14:50.680 Now you have a basis to compare them. So in 0:14:50.720 --> 0:14:54.440 other words, you're picking the four least expensive sectors relative 0:14:54.480 --> 0:14:58.760 to their own history. You're almost there getting and thus far, 0:14:58.920 --> 0:15:01.440 that's all the information you have that is correct um. 0:15:01.480 --> 0:15:04.440 So you rank these each month, and you're gonna pick 0:15:04.520 --> 0:15:07.880 the bottom five. And then of those five, which is 0:15:07.880 --> 0:15:11.440 the cheapest Because it's valuation, you want to avoid value traps, 0:15:11.520 --> 0:15:14.240 cheap getting cheaper, right, falling knife, all those you know, 0:15:14.320 --> 0:15:17.320 sexy adages we put to the to the to that 0:15:17.400 --> 0:15:21.040 process which you do is apply momentum. So the five sectors, 0:15:21.040 --> 0:15:23.440 whicheveryone is the worst performer, you throw it away. So 0:15:23.520 --> 0:15:26.560 think about you're sitting in two thousand fourteen energy is 0:15:26.560 --> 0:15:30.080 extremely cheap on a on a multiple basis, especially real 0:15:30.120 --> 0:15:32.680 to its own history on this CAPE basis. And all 0:15:32.720 --> 0:15:34.840 of a sudden, oil starts declining in the middle of 0:15:34.840 --> 0:15:37.640 the second half of fourteen and by a couple of 0:15:37.680 --> 0:15:40.600 months because of such negative performance in the equities, it 0:15:40.680 --> 0:15:42.640 kicks it out of the index. So you're left with 0:15:42.680 --> 0:15:45.320 the other four. Well, this actually would have saved you 0:15:45.520 --> 0:15:47.400 if you if you just only focus on the five, 0:15:47.680 --> 0:15:50.880 it saves you approximately six hundred basis points PERU over 0:15:50.920 --> 0:15:53.440 the next couple of years. Right, So that's just when 0:15:53.440 --> 0:15:56.880 those CAPE plus a factor plus plus a factor. But 0:15:57.200 --> 0:16:00.400 you're not trying to emphasize the factor, right, So I 0:16:00.760 --> 0:16:03.560 like to say that we're not factor investors. The factors 0:16:03.600 --> 0:16:06.240 are a result of the process. And who came up 0:16:06.240 --> 0:16:10.240 with this really interesting way to use CAPE as a 0:16:10.320 --> 0:16:15.560 basis of creating an equity like product. Not me. First 0:16:15.560 --> 0:16:17.320 of all, I'm not going to take credit for that, 0:16:17.640 --> 0:16:19.680 even though you want to give me a promotion on No, no, no, 0:16:19.800 --> 0:16:22.240 not gonna do that. But this was a joint effort 0:16:22.280 --> 0:16:25.920 between Professor Schiller and the folks at Barclays. So after 0:16:26.280 --> 0:16:28.120 I think it was in early two thousand and ten, 0:16:28.640 --> 0:16:31.960 they started getting together working on this project to try 0:16:31.960 --> 0:16:34.680 to use the CAPE ratio to do something investable. You know, 0:16:34.680 --> 0:16:37.240 there's all these critics out there about the KPE ratio. Oh, 0:16:37.280 --> 0:16:40.520 it doesn't work right, Uh, it's been above average for 0:16:40.560 --> 0:16:42.560 a long period. Well, you can't just use it as 0:16:42.560 --> 0:16:46.040 a buy or cell decision at face value. That's why 0:16:46.080 --> 0:16:48.880 people say it doesn't work, but they're really not looking 0:16:48.920 --> 0:16:51.280 at it correctly. I would agree with that, and I 0:16:51.320 --> 0:16:54.320 would agree that what what is KPE? It is a 0:16:54.440 --> 0:16:57.760 valuation metric? What do evaluation metrics to They don't tell 0:16:57.760 --> 0:16:59.840 you when to time the market, They tell you how 0:16:59.840 --> 0:17:03.200 to think about prospective returns, right, And that's exactly what 0:17:03.240 --> 0:17:05.760 the cap ratio does. When it's above average, it says 0:17:05.760 --> 0:17:09.200 you should expect below average returns. Wow, that's not very hard. 0:17:09.480 --> 0:17:11.800 But people want to say, oh, it's at this level, 0:17:11.880 --> 0:17:15.360 the market hasn't crashed. It's stupid, right, Um, But if 0:17:15.400 --> 0:17:18.639 you look at any valuation metric today, they are and 0:17:18.680 --> 0:17:21.200 apply it to the US equity market, at least as 0:17:21.240 --> 0:17:23.919 many as I'm aware of, They all say the market 0:17:23.960 --> 0:17:26.720 is overvalued, But it doesn't say it's gonna crash. But 0:17:26.840 --> 0:17:29.960 for some reason people get uh fascinated by this cape 0:17:30.040 --> 0:17:32.520 ratio and just want to attack it. And again it 0:17:32.560 --> 0:17:36.639 does have, um, some good credibility of of of talking 0:17:36.680 --> 0:17:38.960 about forward looking returns. In fact, it has one of 0:17:38.960 --> 0:17:42.360 the highest our squares of the metrics out there. However, 0:17:42.800 --> 0:17:44.600 it doesn't say when to get out of the market. 0:17:44.800 --> 0:17:47.280 I'm fond of reminding people that stocks were cheap in 0:17:47.440 --> 0:17:50.440 the seventies and they did poorly, and they were expensive 0:17:50.480 --> 0:17:53.440 in the nineties and they did really well. Right well, Um, 0:17:53.480 --> 0:17:55.360 And you know the level we see on the KP 0:17:55.440 --> 0:17:57.960 ratio at the US equity market day large cap U 0:17:58.480 --> 0:18:00.399 has had. This is the third time we've been here, 0:18:00.600 --> 0:18:02.800 and both times, once it's hit this level, at some 0:18:02.880 --> 0:18:07.200 point it collapsed. You you had the great depression which 0:18:07.240 --> 0:18:12.520 you lost about between friends. Yeah, especially if you compounded 0:18:12.520 --> 0:18:14.280 how it doesn't take it doesn't take much but five 0:18:14.960 --> 0:18:17.720 to get back to break even, that is, and then 0:18:17.720 --> 0:18:20.200 getting your bowl market as you'd like to say, right, um. 0:18:20.240 --> 0:18:23.720 But then the second time was in the technology kind 0:18:23.720 --> 0:18:27.000 of boom and it went up like another before it 0:18:27.080 --> 0:18:30.680 ultimately did crash. Putting us all together, there's nothing that said, 0:18:30.760 --> 0:18:33.000 you know, we have two data points not very robust 0:18:33.000 --> 0:18:36.920 statistically set right, but it does, you know, it does 0:18:36.960 --> 0:18:39.159 strike some fear. But you know, if you want to 0:18:39.160 --> 0:18:41.960 get bullish, I just think of the Japanese stocks in 0:18:41.960 --> 0:18:43.640 the late eighties. I mean they traded with a high 0:18:43.720 --> 0:18:46.560 ninety cape multiple. So I mean, look, we've got in 0:18:46.560 --> 0:18:49.800 a couple percent to run without even earnings growing if 0:18:49.840 --> 0:18:52.280 you believe in the Japanese model. Let's talk a little 0:18:52.280 --> 0:18:54.640 bit about the two Jeff's, which is how you and 0:18:54.800 --> 0:18:59.040 the other Jeff. Jeff Gunlock is known. Uh, he has 0:18:59.119 --> 0:19:03.159 a pretty wild origin story. He's a board drummer in 0:19:03.359 --> 0:19:07.440 hair bands, watching the television show Lifestyles are the Rich 0:19:07.480 --> 0:19:10.679 and Famous. When he decides he's tired of being broke 0:19:11.359 --> 0:19:14.359 and takes a phone book and just literally starts reaching 0:19:14.359 --> 0:19:17.600 out to finance companies. More or less, he looked at 0:19:17.600 --> 0:19:20.119 the word investment banker. That's right, And it wasn't in 0:19:20.119 --> 0:19:23.640 the Yellow Pages. It was not in the Yellow Pages. Um, 0:19:23.760 --> 0:19:29.280 what was your origin story like? Uh? Nothing dramatic like that. Um. 0:19:29.320 --> 0:19:32.119 After I was in grad school and obviously one of 0:19:32.119 --> 0:19:34.119 the things you have to do as an internship, you know, 0:19:34.359 --> 0:19:36.520 to get some hands on experience. And I did my 0:19:36.960 --> 0:19:39.359 internship at a place called Trust Company in the West 0:19:40.240 --> 0:19:43.520 and so as an intern there. UM I accepted a 0:19:43.560 --> 0:19:47.439 full time position. Why I finished up the last piece 0:19:47.520 --> 0:19:52.080 of my graduate work. So unfortunately, nothing really sexy like 0:19:52.240 --> 0:19:54.879 using the phone book at the time. I guess the 0:19:55.160 --> 0:19:57.960 if you could, if you want to get nostalgic the 0:19:58.000 --> 0:20:02.240 way I got the internship. UM, I actually accepted an 0:20:02.240 --> 0:20:05.480 internship back at Florida Power and Light down in West 0:20:05.520 --> 0:20:08.520 Palm Beach. I knew some people there from my Florida 0:20:08.520 --> 0:20:11.359 State days, and so looking for an internship, I tried 0:20:11.400 --> 0:20:14.240 some local companies and then getting calls back, and I 0:20:14.320 --> 0:20:18.240 drove my Ford Ranger pick up you know, the two 0:20:18.280 --> 0:20:20.639 seat or not the extended cat and you can see 0:20:20.680 --> 0:20:23.080 I'm you know, I'm about six three, not the most 0:20:23.080 --> 0:20:26.760 comfortable ride cross country, UM in that four cylinder beasts 0:20:26.760 --> 0:20:30.640 that I had there, and drove to West Palm Beach 0:20:30.880 --> 0:20:33.560 from California. From California, I was because like a week 0:20:33.640 --> 0:20:37.440 driving four days, four days. I mean, look, there's not 0:20:37.480 --> 0:20:39.520 a lot of money to go around internships. You get 0:20:39.520 --> 0:20:42.240 there as soon as you can. What those motels are 0:20:42.240 --> 0:20:45.119 expensive across the country at like thirty bucks a night. 0:20:45.880 --> 0:20:48.639 So anyway, I get there and why I say it's 0:20:48.640 --> 0:20:51.120 a little nostalgic. Is I get a call from my 0:20:51.240 --> 0:20:55.520 roommate back in l A who says, Hey, it's this 0:20:55.520 --> 0:20:58.520 guy from tc W who left you a voicemail, you know, 0:20:58.640 --> 0:21:03.200 on the answering machine, right, this isn't cell phone days. Um, 0:21:03.240 --> 0:21:07.040 and so, UM, they're talking about interviewing you for internships. 0:21:07.080 --> 0:21:08.960 I said, great, I'll call them. So I ended up 0:21:08.960 --> 0:21:11.639 actually calling them. UH, did the interview, and at the 0:21:11.720 --> 0:21:12.879 end of it, I was like, you know, kind of 0:21:12.880 --> 0:21:15.320 what's your time frame, A couple of weeks or something 0:21:15.400 --> 0:21:18.120 like that, I said, I started, I started a job 0:21:18.160 --> 0:21:20.680 in like four days. Um, but if you guys can 0:21:20.720 --> 0:21:22.479