1 00:00:09,080 --> 00:00:12,400 Speaker 1: Hello, and welcome to another edition of the Odd Thoughts Podcast. 2 00:00:12,480 --> 00:00:17,120 Speaker 1: I'm Tracy Alloway and I'm Joe Wisenthal. So Joe, Um. 3 00:00:17,160 --> 00:00:19,599 Speaker 1: Every once in a while, we like to talk about 4 00:00:19,840 --> 00:00:23,760 Speaker 1: poker on this show, right, that's true. We've had a 5 00:00:23,840 --> 00:00:28,560 Speaker 1: few Poker in Gambling episodes. I think it's one of 6 00:00:28,560 --> 00:00:32,560 Speaker 1: our popular recurring themes. Yeah, and every time I usually 7 00:00:32,600 --> 00:00:37,760 Speaker 1: managed to make my complete incomprehension of poker quite obvious. 8 00:00:37,880 --> 00:00:41,320 Speaker 1: But one thing I do understand, and I think one 9 00:00:41,360 --> 00:00:43,879 Speaker 1: reason we end up talking about poker so much, is 10 00:00:43,920 --> 00:00:47,239 Speaker 1: because it's a game that's kind of all about a 11 00:00:47,280 --> 00:00:52,000 Speaker 1: combination of luck and strategy. Right, Yeah, you know what. 12 00:00:52,040 --> 00:00:55,000 Speaker 1: I like you always point out with these poker episodes 13 00:00:55,120 --> 00:00:57,040 Speaker 1: that you don't really play poker, that you're not much 14 00:00:57,040 --> 00:01:01,040 Speaker 1: of a gambler. It's my caveat, but you do seem 15 00:01:01,080 --> 00:01:04,880 Speaker 1: to intuitively recognize that through the study of poker, there's 16 00:01:04,920 --> 00:01:07,119 Speaker 1: a lot of interesting stuff there. So even though it's 17 00:01:07,120 --> 00:01:12,840 Speaker 1: not your thing, you grasp it's power as a metaphor. Okay, 18 00:01:12,840 --> 00:01:17,640 Speaker 1: all right, Well I would hope so I would hope 19 00:01:17,640 --> 00:01:19,679 Speaker 1: that I'm able to talk about poker in the most 20 00:01:19,720 --> 00:01:23,520 Speaker 1: basic sense. But please don't ask me about any hands 21 00:01:23,600 --> 00:01:26,479 Speaker 1: and things like that. Okay, wait, Tracy, which is better 22 00:01:26,520 --> 00:01:32,720 Speaker 1: a full house or a flush? Uh um, a full house? 23 00:01:33,400 --> 00:01:36,880 Speaker 1: Yeah that's right. Okay, maybe I should play poker? Should 24 00:01:36,880 --> 00:01:40,520 Speaker 1: we play? Okay? Okay. Look, the reason I'm bringing up 25 00:01:40,520 --> 00:01:45,000 Speaker 1: poker yet again is because there's someone who's actually going 26 00:01:45,040 --> 00:01:48,200 Speaker 1: to be able to connect poker with one of the 27 00:01:48,240 --> 00:01:51,920 Speaker 1: biggest trends that's currently happening in financial markets, and that is, 28 00:01:51,960 --> 00:01:57,320 Speaker 1: of course, the debate between active versus passive investment management. Right. 29 00:01:57,400 --> 00:02:00,280 Speaker 1: I think we've also talked about this topic to or 30 00:02:00,320 --> 00:02:02,320 Speaker 1: if we haven't, we really should have this idea that 31 00:02:02,720 --> 00:02:06,560 Speaker 1: there's this huge wall of money every month, every day 32 00:02:06,680 --> 00:02:12,040 Speaker 1: leaving traditional mutual funds, traditional investing strategies and opting for 33 00:02:12,120 --> 00:02:15,880 Speaker 1: more passive strategies that are lower fees, not really intended 34 00:02:15,919 --> 00:02:20,080 Speaker 1: to beat the market, but at low cost essentially replicate 35 00:02:20,120 --> 00:02:24,200 Speaker 1: the market's performance. Yeah, that's right. And so the guy 36 00:02:24,280 --> 00:02:27,679 Speaker 1: who we're going to speak with today has actually written, um, well, 37 00:02:27,760 --> 00:02:29,880 Speaker 1: he's written a lot about poker, he's written a lot 38 00:02:29,919 --> 00:02:34,000 Speaker 1: about luck and investment strategy, but he has also specifically 39 00:02:34,080 --> 00:02:38,120 Speaker 1: written a really great paper about how passive investing the 40 00:02:38,240 --> 00:02:42,680 Speaker 1: rise of passive investing provides both opportunities and challenges for 41 00:02:42,760 --> 00:02:45,720 Speaker 1: active managers, and he kind of likens it to the 42 00:02:45,800 --> 00:02:49,480 Speaker 1: idea of, you know, weak poker players either staying at 43 00:02:49,480 --> 00:02:53,880 Speaker 1: the table or leaving. So it's a really interesting analogy. 44 00:02:54,200 --> 00:03:06,919 Speaker 1: So should we should we get started? Let's introduce him? Okay, 45 00:03:07,000 --> 00:03:10,600 Speaker 1: so we have Michael Mobison. He is, of course, the 46 00:03:10,720 --> 00:03:15,040 Speaker 1: head of Global Financial Strategies at Credit Suez. Uh, Michael, 47 00:03:15,080 --> 00:03:17,720 Speaker 1: thank you so much for joining us today. Tracy Joe. 48 00:03:17,760 --> 00:03:20,280 Speaker 1: Great to be with you, guys. I mean, shall we 49 00:03:20,360 --> 00:03:23,240 Speaker 1: start with that poker analogy? Why did you reach for 50 00:03:23,400 --> 00:03:28,160 Speaker 1: poker when it came to describing the dynamic between active 51 00:03:28,360 --> 00:03:32,120 Speaker 1: versus passive management? Right now? You know, Tracy, I actually 52 00:03:32,120 --> 00:03:34,440 Speaker 1: think it's a very very powerful way to think about 53 00:03:34,440 --> 00:03:37,320 Speaker 1: this problem. So let's imagine I say, Tracy, Joe, do 54 00:03:37,320 --> 00:03:38,840 Speaker 1: you want to come to my house Friday night to 55 00:03:38,880 --> 00:03:42,360 Speaker 1: play poker? Your first question, I suppose, assuming you like 56 00:03:42,400 --> 00:03:44,800 Speaker 1: to make money, is who else will be there? First 57 00:03:44,800 --> 00:03:47,400 Speaker 1: of all, I would just I'm just gonna say, yes, 58 00:03:48,040 --> 00:03:50,840 Speaker 1: I'm junking, but yes. If I were smarter and more rational, 59 00:03:50,880 --> 00:03:53,040 Speaker 1: I would ask that. But I would Okay, Joe, you 60 00:03:53,080 --> 00:03:54,800 Speaker 1: ask you say who else will be there, And I say, hey, 61 00:03:54,880 --> 00:03:57,920 Speaker 1: couple really rich players who are very bad at poker, 62 00:03:58,120 --> 00:04:00,040 Speaker 1: You'd be like, I'll be right over right, because you 63 00:04:00,080 --> 00:04:02,440 Speaker 1: could see where your money is going to come from. 64 00:04:02,480 --> 00:04:04,720 Speaker 1: But by by by contrast, if I say, hey, the 65 00:04:04,720 --> 00:04:07,400 Speaker 1: players that come are really great players, they're really sharp, 66 00:04:08,040 --> 00:04:09,960 Speaker 1: you probably know they're better than you. You probably say 67 00:04:10,000 --> 00:04:12,520 Speaker 1: I got I got better things to do, right, So 68 00:04:12,600 --> 00:04:14,840 Speaker 1: to me, there there are a couple really big lessons 69 00:04:14,880 --> 00:04:18,440 Speaker 1: from poker and thinking about this active indexing discussion. One 70 00:04:18,560 --> 00:04:21,560 Speaker 1: is it's very important for active managed to recognize for 71 00:04:21,600 --> 00:04:24,240 Speaker 1: every winner, there has to be a loser. Right, A 72 00:04:24,320 --> 00:04:27,039 Speaker 1: thousand dollars walks into my house to play poker on 73 00:04:27,080 --> 00:04:30,000 Speaker 1: Friday night, A thousand dollar walks out, right, So it's 74 00:04:30,000 --> 00:04:32,560 Speaker 1: gonna get shuffled around. But that's the main thing is 75 00:04:32,600 --> 00:04:34,440 Speaker 1: there's got to be a winner for a loser for 76 00:04:34,440 --> 00:04:37,960 Speaker 1: every winner. And second is, if you pay to play, 77 00:04:38,320 --> 00:04:40,320 Speaker 1: the amount of money walking out will be slightly less 78 00:04:40,360 --> 00:04:42,680 Speaker 1: than the money walking in the house takes a cut. 79 00:04:42,680 --> 00:04:45,760 Speaker 1: The house takes a cut, and we call that fees. Right, 80 00:04:45,800 --> 00:04:49,440 Speaker 1: So here's the here's the interesting provocation is it might 81 00:04:49,480 --> 00:04:52,280 Speaker 1: be might it be the case that as we've seen 82 00:04:52,279 --> 00:04:55,760 Speaker 1: the shift from active to indexing, that the people who 83 00:04:55,800 --> 00:04:59,320 Speaker 1: are leaving the table or taking their money away from 84 00:04:59,360 --> 00:05:02,440 Speaker 1: active managers are going to be our indexers. And so 85 00:05:02,720 --> 00:05:06,200 Speaker 1: the weaker players, in effect are leaving the table. And 86 00:05:06,240 --> 00:05:09,480 Speaker 1: so while it may may superficially make seem to make 87 00:05:09,520 --> 00:05:11,320 Speaker 1: sense that if these people are leaving, it's gonna make 88 00:05:11,320 --> 00:05:13,680 Speaker 1: it easier for us, in a sense, it actually makes 89 00:05:13,680 --> 00:05:15,880 Speaker 1: it more difficult because the people who are remaining at 90 00:05:15,880 --> 00:05:19,760 Speaker 1: the table are the smart players, the more motivated players, 91 00:05:19,839 --> 00:05:22,560 Speaker 1: the players are more resources. So in a sense, it 92 00:05:22,560 --> 00:05:24,640 Speaker 1: doesn't make it easier to beat beat the market. It 93 00:05:24,680 --> 00:05:27,440 Speaker 1: actually makes it as difficult or maybe even more difficult 94 00:05:27,440 --> 00:05:29,080 Speaker 1: than it did before. And that's somewhat counter into it. 95 00:05:29,080 --> 00:05:30,440 Speaker 1: If you just say, if these people are sort of 96 00:05:30,440 --> 00:05:33,280 Speaker 1: not in participating, right you, you often hear the other 97 00:05:33,320 --> 00:05:36,280 Speaker 1: are the opposite. It's like, oh, there's all this dumb money. 98 00:05:36,560 --> 00:05:40,640 Speaker 1: People are just indexing. People are not discriminating between one 99 00:05:40,640 --> 00:05:42,839 Speaker 1: stock or the other. Active has got to be really 100 00:05:42,880 --> 00:05:47,039 Speaker 1: easy now. But as you explain it pretty nicely there, 101 00:05:47,720 --> 00:05:50,559 Speaker 1: the remaining tables, of the remaining players at the table 102 00:05:50,680 --> 00:05:53,400 Speaker 1: are all really good or are getting better and better 103 00:05:53,440 --> 00:05:56,520 Speaker 1: and I'll just say Joe and talking to managers. UM, 104 00:05:56,560 --> 00:05:59,919 Speaker 1: there's a really interesting distinction that behavioral economists make between 105 00:06:00,960 --> 00:06:04,880 Speaker 1: the price is right, which means markets are informational, e efficient, 106 00:06:04,960 --> 00:06:07,640 Speaker 1: sort of fancy, and what they call no free lunch, 107 00:06:07,680 --> 00:06:10,720 Speaker 1: which means there is no strategy that consistently beats the market. 108 00:06:10,960 --> 00:06:13,200 Speaker 1: And here's the thing I think active managers struggle with. 109 00:06:13,680 --> 00:06:15,680 Speaker 1: If there's no if the prices are right, there is 110 00:06:15,680 --> 00:06:17,280 Speaker 1: no free lunch. I think we'd all agree on that. 111 00:06:17,279 --> 00:06:19,880 Speaker 1: That's easy, but it could be the case there's no 112 00:06:19,920 --> 00:06:22,360 Speaker 1: free lunch and prices are not right. So I think 113 00:06:22,400 --> 00:06:24,719 Speaker 1: a lot of actor active managers see these sort of 114 00:06:24,720 --> 00:06:28,000 Speaker 1: inefficiencies out there, but it's very difficult to exploit them. 115 00:06:28,040 --> 00:06:30,039 Speaker 1: Let me give you a really sort of trivial example. 116 00:06:30,279 --> 00:06:32,719 Speaker 1: Let's say you're a hedge fund manager and you know 117 00:06:32,760 --> 00:06:35,359 Speaker 1: you're investing in the restaurant sector, and you buy the 118 00:06:35,440 --> 00:06:38,920 Speaker 1: inexpensive one attractive one, and you short the expensive one 119 00:06:39,080 --> 00:06:42,479 Speaker 1: and not so good quality one. Well, so you like 120 00:06:42,520 --> 00:06:46,320 Speaker 1: your trade. Right. If investors decide we like restaurants, what 121 00:06:46,320 --> 00:06:48,800 Speaker 1: do they do? The answer is, today they typically go 122 00:06:49,000 --> 00:06:51,080 Speaker 1: right to the e t F. They buy the restaurant 123 00:06:51,080 --> 00:06:54,800 Speaker 1: et F and they all rise together, so there's no discrimination. 124 00:06:55,360 --> 00:06:57,880 Speaker 1: Likewise that they say we don't like restaurants, they sell 125 00:06:57,960 --> 00:07:00,280 Speaker 1: the E T F and they all go down. So 126 00:07:00,760 --> 00:07:03,640 Speaker 1: we're getting more of these sort of intersector correlations and 127 00:07:03,680 --> 00:07:06,840 Speaker 1: there's less a discrimination between good and bad, which makes 128 00:07:06,880 --> 00:07:11,680 Speaker 1: it very difficult to express your skill as an active manager. Michael, 129 00:07:11,720 --> 00:07:14,880 Speaker 1: can we take a step back, because I'm trying to 130 00:07:14,960 --> 00:07:18,360 Speaker 1: grapple with this concept of life getting harder for active 131 00:07:18,360 --> 00:07:21,360 Speaker 1: managers thanks to the rise of passive But could you 132 00:07:21,440 --> 00:07:25,280 Speaker 1: maybe give us your perspective on why passive has proved 133 00:07:25,320 --> 00:07:31,200 Speaker 1: so popular over the past few years. So, um, it's 134 00:07:31,240 --> 00:07:33,200 Speaker 1: really been eight, right, eight or nine years. I think 135 00:07:33,240 --> 00:07:36,480 Speaker 1: something like our data show the last decade there's been 136 00:07:36,520 --> 00:07:40,040 Speaker 1: one point to trillion dollars taken out of active funds 137 00:07:40,080 --> 00:07:44,000 Speaker 1: and one point for trillion gone into indexing or passive funds, 138 00:07:44,000 --> 00:07:47,560 Speaker 1: so at two point six trillion dollar net swing. So 139 00:07:47,600 --> 00:07:49,120 Speaker 1: I think here's the way to think about this and 140 00:07:49,160 --> 00:07:52,120 Speaker 1: sort of the centerpiece of this report was worked by 141 00:07:52,480 --> 00:07:56,680 Speaker 1: a very famous paper from by Sandy Grossman and Joe 142 00:07:56,720 --> 00:08:01,600 Speaker 1: Stiglets called on the Impossibility of Information Efficient Markets. On 143 00:08:01,680 --> 00:08:05,000 Speaker 1: the Impossibility of Informational efficient markets, So in nineteen eighties, 144 00:08:05,040 --> 00:08:07,520 Speaker 1: and interesting just as a side known interesting date because 145 00:08:07,560 --> 00:08:10,680 Speaker 1: the nineteen seventies was probably the peak of enthusiasm for 146 00:08:10,720 --> 00:08:13,760 Speaker 1: the efficient market hypothesis. So having written this in nineteen 147 00:08:13,800 --> 00:08:15,400 Speaker 1: eight you can see they're writing it sort of a 148 00:08:15,400 --> 00:08:18,760 Speaker 1: counter to the prevailing academic wisdom at the time. And 149 00:08:18,760 --> 00:08:21,000 Speaker 1: here's the basic argument they made. They said, hey, folks, 150 00:08:21,080 --> 00:08:25,880 Speaker 1: markets can't be perfectly informational efficient because there's a cost 151 00:08:26,080 --> 00:08:29,480 Speaker 1: to gathering information and reflecting in prices, and as a 152 00:08:29,560 --> 00:08:32,400 Speaker 1: payoff for that cost, you should get a requisite benefit 153 00:08:32,720 --> 00:08:35,000 Speaker 1: in the form of excess returns in the market. Now, 154 00:08:35,000 --> 00:08:38,199 Speaker 1: you can argue that these things should be roughly inequal portions, 155 00:08:39,040 --> 00:08:41,880 Speaker 1: but there's got to be some inefficient so so some 156 00:08:41,920 --> 00:08:46,760 Speaker 1: academics today have taken to this phrase markets are efficiently inefficient. 157 00:08:47,520 --> 00:08:50,240 Speaker 1: So I think what's happened as a confluence of factors, 158 00:08:50,240 --> 00:08:55,920 Speaker 1: including technology, including things like Bloomberg, this amazing access to information, 159 00:08:56,440 --> 00:09:02,920 Speaker 1: dissemination of information, regulatory shifts, overall cost of computing, and 160 00:09:02,960 --> 00:09:05,360 Speaker 1: so forth. I think markets have simply gotten more efficient. 161 00:09:05,600 --> 00:09:09,319 Speaker 1: So as a consequence, paying a lot for for this 162 00:09:09,360 --> 00:09:12,920 Speaker 1: price discovery function doesn't make as much sense. I think 163 00:09:12,920 --> 00:09:16,360 Speaker 1: there's there's been that natural pressure that's happened. But just 164 00:09:16,440 --> 00:09:19,199 Speaker 1: to be super clear about this, um, the markets can't 165 00:09:19,240 --> 00:09:24,680 Speaker 1: go d indexing, right Obviously, active managers provide two vital 166 00:09:25,440 --> 00:09:29,240 Speaker 1: um contributions to society. The first is what I mean 167 00:09:29,240 --> 00:09:31,520 Speaker 1: the academs call this price discovery. It's a fancy way 168 00:09:31,520 --> 00:09:34,320 Speaker 1: of saying they make markets efficient, and that's a huge 169 00:09:34,320 --> 00:09:38,439 Speaker 1: societal good actually. And the second is they provide liquidity. Right, 170 00:09:38,480 --> 00:09:41,400 Speaker 1: So if you need to buy or sell yourself, if 171 00:09:41,440 --> 00:09:44,120 Speaker 1: everyone's index, no one's moving around, right, so you need liquidity. 172 00:09:44,160 --> 00:09:47,200 Speaker 1: So those are two really vital things. And the index 173 00:09:47,280 --> 00:09:50,839 Speaker 1: and community, I think, by their own admission uh takes 174 00:09:50,840 --> 00:09:54,040 Speaker 1: advantage of that positive externality that comes as a consequence 175 00:09:54,040 --> 00:09:56,840 Speaker 1: of active manager So so they can't go away altogether. 176 00:09:57,320 --> 00:09:59,719 Speaker 1: And I think the operative sort of concept here is 177 00:09:59,760 --> 00:10:05,280 Speaker 1: this efficiently inefficient and and and many factors, not only sophistication, 178 00:10:05,440 --> 00:10:10,040 Speaker 1: but many other factors have contributed to greater broader market efficiency. 179 00:10:10,559 --> 00:10:14,800 Speaker 1: So we can't have a market that's entirely passive, and 180 00:10:14,960 --> 00:10:18,280 Speaker 1: we're still a long way away from that, which raises 181 00:10:18,320 --> 00:10:22,359 Speaker 1: the question, and this really gets to trying to distinguish 182 00:10:22,400 --> 00:10:25,040 Speaker 1: between skill and luck and why poker is a good 183 00:10:25,040 --> 00:10:27,760 Speaker 1: game Because it's a mix of a pure gambling game 184 00:10:27,800 --> 00:10:31,360 Speaker 1: and also a skill game. It's really hard to tell 185 00:10:31,400 --> 00:10:34,880 Speaker 1: who's good. You could have someone who has a mutual 186 00:10:34,920 --> 00:10:37,800 Speaker 1: fund it beats the market for several years in a row, 187 00:10:37,880 --> 00:10:40,200 Speaker 1: but then they blow up. Maybe they were just lucky. 188 00:10:41,240 --> 00:10:43,920 Speaker 1: How do you approach this question? And you've written a 189 00:10:43,960 --> 00:10:46,000 Speaker 1: lot about this, but it seems like it's the crucial 190 00:10:46,120 --> 00:10:50,400 Speaker 1: question for identifying who's good at active management. How do 191 00:10:50,440 --> 00:10:53,760 Speaker 1: you know? How do you start thinking about this question 192 00:10:53,760 --> 00:10:57,480 Speaker 1: of identifying who's actually a good manager. So it's a 193 00:10:57,520 --> 00:10:59,760 Speaker 1: great question, Joe, it's a tricky question. Let's take it 194 00:10:59,760 --> 00:11:02,280 Speaker 1: into resteps. The first step would be something like this 195 00:11:02,360 --> 00:11:04,160 Speaker 1: if if you and I can't really do that or 196 00:11:04,280 --> 00:11:07,200 Speaker 1: not convinced that we should do that, we should be indexed, right, 197 00:11:07,240 --> 00:11:09,840 Speaker 1: So let's just be clear that for most people that's 198 00:11:09,880 --> 00:11:12,160 Speaker 1: the proper prescription, and I think most people who are 199 00:11:12,160 --> 00:11:14,320 Speaker 1: thoughtful about markets would would be on the same page 200 00:11:14,360 --> 00:11:17,559 Speaker 1: with that. Second thing is to think about asset classes. 201 00:11:17,760 --> 00:11:20,680 Speaker 1: So we tenderally talked about mark equities, but of course 202 00:11:20,679 --> 00:11:23,880 Speaker 1: there are lots of different markets, including fixed income markets, 203 00:11:23,960 --> 00:11:26,840 Speaker 1: emerging markets, and so forth. And one of the areas 204 00:11:26,840 --> 00:11:29,840 Speaker 1: where skill can be expressed more readily is when there's 205 00:11:29,880 --> 00:11:33,200 Speaker 1: a large dispersion of results. Right, so the difference between 206 00:11:33,240 --> 00:11:35,360 Speaker 1: the very best players and the average players and the 207 00:11:35,360 --> 00:11:38,679 Speaker 1: poor players is wide versus narrow. And in fact, David 208 00:11:38,679 --> 00:11:41,920 Speaker 1: Swinson at Yale has this nice passage in his book 209 00:11:41,920 --> 00:11:44,040 Speaker 1: where he says, what we do at Yales we look 210 00:11:44,080 --> 00:11:46,400 Speaker 1: for this dispersion of returns for the asset class. And 211 00:11:46,440 --> 00:11:49,320 Speaker 1: if there's lots of dispersion, we Yale, we'll try to 212 00:11:49,360 --> 00:11:52,000 Speaker 1: find the skillful person. We're going to pay them fairly 213 00:11:52,080 --> 00:11:54,760 Speaker 1: handsome fees and we go at So so the second 214 00:11:54,840 --> 00:11:56,960 Speaker 1: question would be that of asset class. And then the 215 00:11:57,000 --> 00:11:59,880 Speaker 1: third now would be can we be more sophisticated in 216 00:12:00,120 --> 00:12:03,120 Speaker 1: assessing uh the skill of the managers? And you know, 217 00:12:03,160 --> 00:12:06,439 Speaker 1: there's a very nice paper by Rust Warmers and it's 218 00:12:06,480 --> 00:12:09,840 Speaker 1: Warmers and Jones about some techniques to do this, and 219 00:12:09,920 --> 00:12:12,120 Speaker 1: some things you might want to think about would be uh, 220 00:12:12,400 --> 00:12:15,280 Speaker 1: looking at past performance but adjusting it very carefully for 221 00:12:15,320 --> 00:12:18,320 Speaker 1: exposure to factors and things like skewness. It will be 222 00:12:18,320 --> 00:12:22,640 Speaker 1: looking at the characteristic characteristics of the manager him or herself, 223 00:12:23,160 --> 00:12:27,719 Speaker 1: so their age, their education. Uh, A factor would be 224 00:12:27,720 --> 00:12:31,640 Speaker 1: the size of the fund, this fund strategy, so there 225 00:12:31,679 --> 00:12:33,640 Speaker 1: there there are some ways that you can sort of 226 00:12:33,840 --> 00:12:36,000 Speaker 1: shade the odds in your face once it is also 227 00:12:36,040 --> 00:12:38,440 Speaker 1: a fan of skin in the game right. Measure whether 228 00:12:38,480 --> 00:12:41,880 Speaker 1: a fund manager the degree to which they're putting their 229 00:12:41,880 --> 00:12:43,400 Speaker 1: own money at risk and the skin of the game 230 00:12:43,440 --> 00:12:46,240 Speaker 1: things an interesting one because uh and I agree with that, 231 00:12:46,320 --> 00:12:48,160 Speaker 1: but I also think you can't take it too far. 232 00:12:48,280 --> 00:12:50,560 Speaker 1: So skin of the game is important in the sense 233 00:12:50,559 --> 00:12:53,640 Speaker 1: that people care about it and it dampens down principal 234 00:12:53,640 --> 00:12:56,480 Speaker 1: agent concerns. But by the same token, if someone has 235 00:12:57,320 --> 00:12:58,880 Speaker 1: their net worth and a fund and let's say it's 236 00:12:58,880 --> 00:13:01,200 Speaker 1: two thousand and eight thousand nine, it's going down a lot. 237 00:13:02,000 --> 00:13:05,200 Speaker 1: They start to worry about their own livelihood versus the 238 00:13:05,320 --> 00:13:07,160 Speaker 1: long term interests of their fund. So so I think 239 00:13:07,200 --> 00:13:09,880 Speaker 1: they have to have enough in there so they they 240 00:13:09,920 --> 00:13:12,480 Speaker 1: deal with this principalazon issue, but not so much that 241 00:13:12,559 --> 00:13:17,440 Speaker 1: at some point their objectivity or their responsibilities get distored 242 00:13:17,480 --> 00:13:20,239 Speaker 1: it based on their own worries about paying for the groceries. 243 00:13:20,920 --> 00:13:22,720 Speaker 1: So that's that's the whole skill luck and I would 244 00:13:22,720 --> 00:13:24,480 Speaker 1: just say that, you know, having written a book about 245 00:13:24,480 --> 00:13:26,800 Speaker 1: skill and luck. It's interesting that last thing I'll say 246 00:13:26,800 --> 00:13:29,360 Speaker 1: is that that investing appears to be an activity that's 247 00:13:29,640 --> 00:13:33,280 Speaker 1: luck laden. And I think there's a sort of counterintuitive 248 00:13:33,320 --> 00:13:35,440 Speaker 1: reason that's the case, and we call it the paradox 249 00:13:35,480 --> 00:13:38,160 Speaker 1: of skill, and the paradox of skill says and activities 250 00:13:38,160 --> 00:13:40,480 Speaker 1: were both skill and luck contribute to outcomes, and that's 251 00:13:40,480 --> 00:13:43,080 Speaker 1: certainly true for investing. It can be the case that 252 00:13:43,240 --> 00:13:48,080 Speaker 1: as skill increases, luck becomes more important, which seems not sensical, right. 253 00:13:48,400 --> 00:13:50,440 Speaker 1: But the key here is to think about skill on 254 00:13:50,640 --> 00:13:55,320 Speaker 1: with across two dimensions. The first is absolute skill, and 255 00:13:55,360 --> 00:13:56,880 Speaker 1: I think if you look around the world, look at 256 00:13:56,880 --> 00:13:59,360 Speaker 1: the world of investing, or sports or business, I think 257 00:13:59,400 --> 00:14:03,319 Speaker 1: we can say fairly unqualified that that absolute skills never 258 00:14:03,360 --> 00:14:05,839 Speaker 1: been better. The second dimension of skill, that is the 259 00:14:05,880 --> 00:14:09,200 Speaker 1: important one, and that's relative skill. The difference between the 260 00:14:09,280 --> 00:14:11,880 Speaker 1: very best players and the average players, and that we've 261 00:14:11,920 --> 00:14:15,440 Speaker 1: also seen in almost every domain has shrunk. So we 262 00:14:15,480 --> 00:14:18,400 Speaker 1: see that for example in batting averages for baseball players. 263 00:14:18,520 --> 00:14:20,840 Speaker 1: If you look at you know, running races, you see 264 00:14:20,840 --> 00:14:23,240 Speaker 1: the difference between the gold medal winner and the bronze 265 00:14:23,240 --> 00:14:25,440 Speaker 1: medal winner is much less today than it was a 266 00:14:25,520 --> 00:14:29,360 Speaker 1: generation or two before and in markets that's basically expresses 267 00:14:29,360 --> 00:14:33,200 Speaker 1: mostly efficient markets. So it's a consequence markets appear to 268 00:14:33,240 --> 00:14:36,280 Speaker 1: be mostly luck, but it's actually not because of a 269 00:14:36,360 --> 00:14:39,000 Speaker 1: lack of skill. It's actually because of a surfeit of skill, right, 270 00:14:39,040 --> 00:14:42,640 Speaker 1: too much skill canceling out right, Even in professional athletics, 271 00:14:42,640 --> 00:14:44,600 Speaker 1: we can see this that there's more and more parity 272 00:14:44,600 --> 00:14:47,720 Speaker 1: in many professional sports. And again, the athletes themselves are 273 00:14:47,760 --> 00:14:50,920 Speaker 1: absolutely amazing, and you put them back in the sixties 274 00:14:50,920 --> 00:14:54,160 Speaker 1: and they would clean up. But they're so equal now 275 00:14:54,160 --> 00:14:57,440 Speaker 1: and their skills because of selection of players and training 276 00:14:57,480 --> 00:15:00,720 Speaker 1: and and and so forth, that it appears to be 277 00:15:00,760 --> 00:15:02,560 Speaker 1: more random. So it's this interesting thing in our world. 278 00:15:02,600 --> 00:15:06,280 Speaker 1: Our world is grinding towards greater skill, and yet luck 279 00:15:06,360 --> 00:15:10,960 Speaker 1: is becoming more important in many of our outcomes. Well, Michael, 280 00:15:11,080 --> 00:15:14,240 Speaker 1: on that note, I mean you're talking about relative skills 281 00:15:15,000 --> 00:15:18,080 Speaker 1: becoming ever more sort of compressed, or the gap between 282 00:15:18,120 --> 00:15:21,280 Speaker 1: different UM managers I guess in this case becoming ever 283 00:15:21,360 --> 00:15:25,640 Speaker 1: more compressed. You also mentioned dispersion UM. One of the 284 00:15:25,680 --> 00:15:28,560 Speaker 1: big themes that we've had in financial markets, at least 285 00:15:28,560 --> 00:15:32,440 Speaker 1: since the Financial crisis, has been the idea of asset 286 00:15:32,480 --> 00:15:38,480 Speaker 1: classes moving altogether correlation increasing and it basically making life 287 00:15:38,520 --> 00:15:42,360 Speaker 1: a nightmare for active managers. So how much does that 288 00:15:42,480 --> 00:15:49,920 Speaker 1: play into UM the current debate about active versus passive? No, Tracy, 289 00:15:49,960 --> 00:15:52,320 Speaker 1: I think that's a huge issue right now. I do 290 00:15:52,440 --> 00:15:54,720 Speaker 1: think that UM and I think that's one of the 291 00:15:54,760 --> 00:15:59,520 Speaker 1: one of the effects of indexing and e t f 292 00:15:59,600 --> 00:16:02,360 Speaker 1: s is that, as I mentioned before my little restaurant example, 293 00:16:02,400 --> 00:16:05,160 Speaker 1: things do tend to get more correlated and you need 294 00:16:05,320 --> 00:16:08,480 Speaker 1: you need dispersion to express skill. Right, that's really the 295 00:16:08,560 --> 00:16:11,280 Speaker 1: key idea UM the other thing. So so you're I 296 00:16:11,280 --> 00:16:13,000 Speaker 1: think that's exactly right, and you want to look for that, 297 00:16:13,040 --> 00:16:15,680 Speaker 1: and it's it is the dispersions different by asset classes 298 00:16:15,720 --> 00:16:17,760 Speaker 1: and even within industries and sectors. So you have to 299 00:16:17,840 --> 00:16:20,000 Speaker 1: keep a track on that step. But that but that's uh, no, 300 00:16:20,080 --> 00:16:22,240 Speaker 1: I think that's exactly right. Nothing I'll mentioned to you. 301 00:16:22,280 --> 00:16:25,360 Speaker 1: That's that's interesting. It's also uh one of our One 302 00:16:25,360 --> 00:16:27,920 Speaker 1: of my favorite pictures in the report is we show 303 00:16:27,920 --> 00:16:31,120 Speaker 1: a picture of the standard deviation of excess returns of 304 00:16:31,200 --> 00:16:33,760 Speaker 1: mutual funds. Right, so here's what I want you just 305 00:16:33,960 --> 00:16:36,520 Speaker 1: envision that we plot the excess returns for all mutual 306 00:16:36,560 --> 00:16:39,320 Speaker 1: funds in a particular year. It looks like a you know, 307 00:16:39,400 --> 00:16:41,720 Speaker 1: roughly not exactly a bell shape, but pretend it's a 308 00:16:41,760 --> 00:16:45,240 Speaker 1: bell shaped distribution, and uh, we look at how fat 309 00:16:45,320 --> 00:16:48,040 Speaker 1: the bell shape is. Right, So if you're a skillful manager, 310 00:16:48,080 --> 00:16:50,600 Speaker 1: it's like my poker analogy, you want a fat bell, right, 311 00:16:50,640 --> 00:16:53,040 Speaker 1: so you have lots of positive excess returns and lots 312 00:16:53,040 --> 00:16:55,160 Speaker 1: of negative access returns, and if you're a smart player, 313 00:16:55,440 --> 00:16:57,920 Speaker 1: you can see where your profits are coming from. Well, 314 00:16:57,960 --> 00:16:59,440 Speaker 1: what we see if we have and we have these 315 00:16:59,520 --> 00:17:02,840 Speaker 1: data back in nineteen sixties, is that that fat bell 316 00:17:02,960 --> 00:17:06,600 Speaker 1: shaped curve has gotten skinnier and skinnier and skinnier over 317 00:17:06,640 --> 00:17:11,000 Speaker 1: the decades. There was actually a very brief reversal in 318 00:17:11,000 --> 00:17:14,119 Speaker 1: the late nineties early two thousands around the dot com phenomenon, 319 00:17:14,160 --> 00:17:17,840 Speaker 1: which is really interesting because that core coincides with mom 320 00:17:17,840 --> 00:17:20,640 Speaker 1: and pop coming rushing back into the market. So essentially 321 00:17:20,640 --> 00:17:22,359 Speaker 1: they are the ones that were the weak players at 322 00:17:22,400 --> 00:17:24,600 Speaker 1: the table. But as soon as they got showed back 323 00:17:24,600 --> 00:17:27,560 Speaker 1: out after the early two thousand's, we went right back 324 00:17:27,600 --> 00:17:31,480 Speaker 1: to trend. So today as it stands, uh, there's very 325 00:17:32,080 --> 00:17:35,840 Speaker 1: historically speaking, very little positive access return but there's also 326 00:17:35,960 --> 00:17:39,159 Speaker 1: very little negative excess return. So that's another way. It's 327 00:17:39,359 --> 00:17:42,520 Speaker 1: another speaks the same issue of correlations. Just very difficult 328 00:17:43,000 --> 00:17:45,840 Speaker 1: to distinguish yourself. Now, there are ways Joe's questions spoke 329 00:17:45,840 --> 00:17:47,840 Speaker 1: to before, there are ways to do this shade the 330 00:17:47,880 --> 00:17:50,640 Speaker 1: odds in your favor of finding skillful managers. But it's 331 00:17:50,640 --> 00:17:52,800 Speaker 1: just important to bear all these things in mind. It's 332 00:17:52,840 --> 00:17:56,120 Speaker 1: just like other things in life, just very competitive. It's 333 00:17:56,200 --> 00:17:59,960 Speaker 1: interesting the idea that for a brief time the dispersion 334 00:18:00,040 --> 00:18:04,320 Speaker 1: and really widened this sort of you know, after the fact, 335 00:18:04,359 --> 00:18:07,159 Speaker 1: pretty clear evidence that that was a mania or a bubble. 336 00:18:07,200 --> 00:18:09,399 Speaker 1: Can do you ever, can that be used sort of 337 00:18:09,440 --> 00:18:12,640 Speaker 1: as a market timing technique or is it just not 338 00:18:12,960 --> 00:18:15,439 Speaker 1: strong enough of a signal? And really, Joe, it's a 339 00:18:15,440 --> 00:18:18,439 Speaker 1: super interesting question. And we have another picture that's related 340 00:18:18,480 --> 00:18:20,960 Speaker 1: to that, which we're you know, we show on one 341 00:18:21,000 --> 00:18:25,400 Speaker 1: access Mom and Pops participations individual direct participation or markets. 342 00:18:25,880 --> 00:18:29,080 Speaker 1: At the beginning of the series, it's about fift about fifty, 343 00:18:29,560 --> 00:18:32,840 Speaker 1: and it's now about so it's drifted lower. So some 344 00:18:32,920 --> 00:18:35,520 Speaker 1: mom and propagetting the memo basically right that they shouldn't 345 00:18:35,560 --> 00:18:39,240 Speaker 1: be doing it directly. But but even though there's that 346 00:18:39,280 --> 00:18:41,480 Speaker 1: long term trend is down again. That was that lift 347 00:18:41,520 --> 00:18:44,679 Speaker 1: in the late nine so so there was a temptation 348 00:18:44,720 --> 00:18:47,840 Speaker 1: to come into markets and that was really good for 349 00:18:47,880 --> 00:18:51,120 Speaker 1: active managers they could take advantage of that. Okay, so uh. 350 00:18:51,200 --> 00:18:53,320 Speaker 1: The two other questions would be something like this, one 351 00:18:53,440 --> 00:18:57,480 Speaker 1: is UM, are there other signatures of what individuals are doing? 352 00:18:58,200 --> 00:19:00,600 Speaker 1: And to me, the best lead on that. So if 353 00:19:00,600 --> 00:19:04,240 Speaker 1: you said which would be funds flows? Because it's almost 354 00:19:04,280 --> 00:19:08,200 Speaker 1: always the case, it's true to a lesser degree for institutions, 355 00:19:08,240 --> 00:19:10,919 Speaker 1: but for sure for individuals. They tend to want to 356 00:19:10,920 --> 00:19:14,919 Speaker 1: do today what they should have done two years ago. Right, 357 00:19:14,960 --> 00:19:17,879 Speaker 1: so they tend to inflate certain you know, not as 358 00:19:17,960 --> 00:19:20,480 Speaker 1: dramatic as the dot coms, but you get a little 359 00:19:20,480 --> 00:19:23,520 Speaker 1: bit of excesses. So that the funds flow thing, I 360 00:19:23,520 --> 00:19:26,120 Speaker 1: think it's probably the place I would be looking at 361 00:19:26,160 --> 00:19:31,840 Speaker 1: to see if they're signatures of UM individual performance. The 362 00:19:32,200 --> 00:19:34,200 Speaker 1: one area, by the way, where it's interesting to take 363 00:19:34,200 --> 00:19:38,800 Speaker 1: a look at is UM so called smart beta UH strategies. Right, 364 00:19:38,840 --> 00:19:42,960 Speaker 1: so these are factors that academics typically have unearthed to 365 00:19:43,119 --> 00:19:46,439 Speaker 1: show so called excess returns. And there's a there's a 366 00:19:46,560 --> 00:19:49,399 Speaker 1: very interesting discussion that everyone should think about. One is 367 00:19:49,440 --> 00:19:52,639 Speaker 1: you know. Are these truly just factors? For example, small 368 00:19:52,720 --> 00:19:55,119 Speaker 1: caps do better in large caps, or cheap stocks do 369 00:19:55,160 --> 00:19:58,040 Speaker 1: better than expensive stocks. Are these just measures of risk, 370 00:19:58,359 --> 00:20:00,359 Speaker 1: which case they're not that interesting because you're is getting 371 00:20:00,359 --> 00:20:04,119 Speaker 1: compensated for risk you're assuming. Are they behavioral because they 372 00:20:04,160 --> 00:20:07,040 Speaker 1: arise because people are sub optimal in their behaviors. And 373 00:20:07,080 --> 00:20:09,200 Speaker 1: the third thing, which is really interesting is do they 374 00:20:09,240 --> 00:20:11,840 Speaker 1: work at least in the short run because people believe 375 00:20:11,920 --> 00:20:13,400 Speaker 1: they were right? And if I come to you side, 376 00:20:13,440 --> 00:20:16,920 Speaker 1: Joe Tracy, low ball is awesome and you got, oh great, 377 00:20:17,000 --> 00:20:19,080 Speaker 1: you buy low Ball, what what's your initial reaction? The 378 00:20:19,080 --> 00:20:21,240 Speaker 1: answer is it does well because you bought it and 379 00:20:21,280 --> 00:20:23,720 Speaker 1: a lot of other people did as well. So it's 380 00:20:23,760 --> 00:20:26,000 Speaker 1: neither of those. It's not behavioral or risk. It's just 381 00:20:26,040 --> 00:20:28,640 Speaker 1: this sort of funds flow. So so there's some very 382 00:20:28,640 --> 00:20:32,119 Speaker 1: interesting cross currents and thinking about where people are putting 383 00:20:32,119 --> 00:20:34,320 Speaker 1: their money that to me would be maybe the next 384 00:20:34,320 --> 00:20:39,760 Speaker 1: derivative signature of sort of that question. So, Michael, in 385 00:20:39,880 --> 00:20:44,520 Speaker 1: the battle between active versus passive and indexing, where do 386 00:20:44,560 --> 00:20:47,760 Speaker 1: you see us actually going from here? Because the the 387 00:20:47,920 --> 00:20:51,600 Speaker 1: standard accepted argument seems to be that eventually will have 388 00:20:51,680 --> 00:20:54,240 Speaker 1: so much money wrapped into passive, that that'll just make 389 00:20:54,280 --> 00:20:58,120 Speaker 1: life so easy for the active managers that their returns 390 00:20:58,160 --> 00:21:01,320 Speaker 1: are going to be absolutely color and everyone is going 391 00:21:01,359 --> 00:21:04,000 Speaker 1: to shift back to active managers. But your argument is 392 00:21:04,040 --> 00:21:08,919 Speaker 1: actually much more subtle than that, Tracy. And there is 393 00:21:08,920 --> 00:21:13,119 Speaker 1: a very important paper, it's well known, written by Bill Sharp, 394 00:21:13,160 --> 00:21:16,240 Speaker 1: obviously won the Nobel Prize um called the Arithmetic of 395 00:21:16,280 --> 00:21:18,199 Speaker 1: Active Management. And this is something that needs to be 396 00:21:18,359 --> 00:21:21,480 Speaker 1: people have to bear in mind. And the arithmetic arithmetic 397 00:21:21,520 --> 00:21:24,720 Speaker 1: of active management basically says that the returns for active 398 00:21:24,760 --> 00:21:27,880 Speaker 1: and passive in the aggregate will be equal to one another. Right, 399 00:21:28,680 --> 00:21:30,600 Speaker 1: pre feast. Now just think about this for a second. 400 00:21:30,640 --> 00:21:33,119 Speaker 1: Let's just pretend for simplicity that the market is the 401 00:21:33,200 --> 00:21:36,560 Speaker 1: SMP five, just making this easy, and then let's say 402 00:21:37,080 --> 00:21:39,359 Speaker 1: our population is indexed against it. So they're going to 403 00:21:39,400 --> 00:21:42,520 Speaker 1: earn the market return. That's easy to see. But the 404 00:21:42,600 --> 00:21:45,399 Speaker 1: question is how well the active managers these other and 405 00:21:45,440 --> 00:21:47,680 Speaker 1: the answers they have to earn the market return as well, right, 406 00:21:47,680 --> 00:21:51,720 Speaker 1: because the pieces have to equal the whole. So again 407 00:21:51,920 --> 00:21:54,080 Speaker 1: we goes back to our core argument that for one 408 00:21:54,119 --> 00:21:57,199 Speaker 1: active manager to win, someone else has to lose, and 409 00:21:57,240 --> 00:22:00,800 Speaker 1: that sort of becomes the operative question is where is 410 00:22:01,280 --> 00:22:03,120 Speaker 1: the other side of the trade right? And that's why 411 00:22:03,160 --> 00:22:05,360 Speaker 1: we call the piece looking for easy games? Where are 412 00:22:05,400 --> 00:22:08,800 Speaker 1: the easy games if you're the smart player. So rather 413 00:22:08,840 --> 00:22:12,000 Speaker 1: than saying, hey, here's the ratio some percentage number, I 414 00:22:12,040 --> 00:22:14,600 Speaker 1: think the way active managers, or think people thinking about 415 00:22:14,600 --> 00:22:16,920 Speaker 1: putting money into active management should think about it is 416 00:22:17,359 --> 00:22:19,760 Speaker 1: where are their opportunities for me to be the smart 417 00:22:19,800 --> 00:22:22,560 Speaker 1: player at the table? And you know I've already mentioned 418 00:22:22,600 --> 00:22:26,159 Speaker 1: a couple examples of cases where that might be a 419 00:22:26,240 --> 00:22:29,160 Speaker 1: good one is if you can you compete against individuals. 420 00:22:29,280 --> 00:22:32,399 Speaker 1: So there's a ton of data around the world showing 421 00:22:32,400 --> 00:22:35,520 Speaker 1: that when institutions compete against in individuals, they tend to 422 00:22:35,560 --> 00:22:37,920 Speaker 1: do well. A second example would be are there are 423 00:22:37,920 --> 00:22:40,840 Speaker 1: there people to buy or sell for non fundamental reasons 424 00:22:41,280 --> 00:22:44,360 Speaker 1: and sort of the classic example that is the spinoff literature. 425 00:22:44,480 --> 00:22:47,320 Speaker 1: This has been around for a really long time. Turns 426 00:22:47,359 --> 00:22:49,680 Speaker 1: out for a lot of spinoffs, they're obviously the spinoff 427 00:22:49,680 --> 00:22:52,600 Speaker 1: themselves tend to be smaller, often more levered. If you're 428 00:22:52,640 --> 00:22:55,960 Speaker 1: big some gargangel and mutual fund company, your mandate is 429 00:22:56,000 --> 00:22:58,719 Speaker 1: not to own these little things. You just sell it 430 00:22:58,880 --> 00:23:01,840 Speaker 1: without regard to value you, and as a consequence, those 431 00:23:01,840 --> 00:23:05,560 Speaker 1: things often present opportunities as well. UM. And then the 432 00:23:05,640 --> 00:23:08,000 Speaker 1: third thing I would say is really interesting is this 433 00:23:08,040 --> 00:23:11,439 Speaker 1: notion of wealth transfer. So I'm I'm presenting the market 434 00:23:11,440 --> 00:23:14,480 Speaker 1: as if it's a closed system investor versus investor. But 435 00:23:14,520 --> 00:23:17,840 Speaker 1: there's another set of entities that interact, the big one 436 00:23:17,880 --> 00:23:20,920 Speaker 1: being corporations which buy back stock and issue stock and 437 00:23:20,960 --> 00:23:25,160 Speaker 1: do mergers and acquisitions. And then governments actually are another participants. 438 00:23:25,200 --> 00:23:27,320 Speaker 1: So you have to start to think about their motivations, 439 00:23:27,359 --> 00:23:29,639 Speaker 1: their capabilities, and are the ways to take advantage of 440 00:23:29,640 --> 00:23:31,440 Speaker 1: them or work with them in a way that's constructive. 441 00:23:31,960 --> 00:23:34,080 Speaker 1: On the bill sharp piece, just to finish up, so 442 00:23:34,200 --> 00:23:39,120 Speaker 1: active passive are equal, right, but the second pieces the more. UH. 443 00:23:39,160 --> 00:23:42,720 Speaker 1: It's also worth taking consideration, which is active managers will 444 00:23:42,760 --> 00:23:46,080 Speaker 1: do less for every dollar invested than passive because they 445 00:23:46,119 --> 00:23:50,000 Speaker 1: charge higher fees, and so active management for for fees 446 00:23:50,080 --> 00:23:53,800 Speaker 1: or about a d basis points, passive averages about twenty 447 00:23:53,840 --> 00:23:58,879 Speaker 1: basis points, so that's a sixty basis point differential. And UH, 448 00:23:59,280 --> 00:24:02,040 Speaker 1: as a consequent, active management in the aggregate will always 449 00:24:02,080 --> 00:24:05,320 Speaker 1: underperform the index, and we're underform pass just because the 450 00:24:05,320 --> 00:24:07,600 Speaker 1: math of that right, So that's the people they're there. 451 00:24:08,119 --> 00:24:10,159 Speaker 1: That has always been true and it will always be 452 00:24:10,200 --> 00:24:13,320 Speaker 1: true because it's basically the math of it. So I 453 00:24:13,359 --> 00:24:15,960 Speaker 1: want to sort of take you know, take this out 454 00:24:16,040 --> 00:24:19,440 Speaker 1: of investing, and you you make the point that it's 455 00:24:19,560 --> 00:24:22,199 Speaker 1: very hard for the random person to be able to 456 00:24:22,320 --> 00:24:25,600 Speaker 1: identify who's actually a skilled manager and who's just lucky. 457 00:24:25,960 --> 00:24:29,360 Speaker 1: But what about sort of the inward looking question and 458 00:24:29,520 --> 00:24:32,639 Speaker 1: not just in investing. Some people have different degrees of 459 00:24:32,680 --> 00:24:36,240 Speaker 1: success in all realms, but we only arguably play the 460 00:24:36,240 --> 00:24:39,160 Speaker 1: game of life one time. We only have one instance. 461 00:24:39,640 --> 00:24:44,440 Speaker 1: So how do we know whether one's own uh success 462 00:24:44,440 --> 00:24:48,520 Speaker 1: in anything? How do we identify whether we're skilled in 463 00:24:48,600 --> 00:24:51,200 Speaker 1: something or not, whether we're lucky? How do you sort 464 00:24:51,200 --> 00:24:56,400 Speaker 1: of even identify those traits within oneself? Super super interesting question, Joe. 465 00:24:56,480 --> 00:24:58,840 Speaker 1: So a couple of things I'll say on that. One is, uh. 466 00:24:58,960 --> 00:25:00,320 Speaker 1: One of the things I like to think about is 467 00:25:00,359 --> 00:25:03,160 Speaker 1: what we call the luck skill continuum. And you might 468 00:25:03,200 --> 00:25:05,880 Speaker 1: imagine a continume, and at one extreme would be activities 469 00:25:05,880 --> 00:25:09,000 Speaker 1: that are all luck, no skill, So lotteries and roulette wheels. 470 00:25:09,000 --> 00:25:10,399 Speaker 1: So if you win the lottery, you probably don't walk 471 00:25:10,440 --> 00:25:12,480 Speaker 1: around saying like I'm the best lottery player you know 472 00:25:12,520 --> 00:25:15,080 Speaker 1: on the earth. And the other extreme is all skill, 473 00:25:15,480 --> 00:25:18,600 Speaker 1: no luck, and there aren't that many domains purely over there. 474 00:25:18,600 --> 00:25:20,879 Speaker 1: But you know, running races or chests, if you and 475 00:25:20,920 --> 00:25:23,119 Speaker 1: I played chess, you know, the better players going to 476 00:25:23,160 --> 00:25:25,080 Speaker 1: win more time to not. And then almost everything else 477 00:25:25,080 --> 00:25:27,680 Speaker 1: in life is is a raid between those two extremes. 478 00:25:27,960 --> 00:25:30,600 Speaker 1: So if you can place that activity, whether it's a 479 00:25:30,680 --> 00:25:33,080 Speaker 1: sports or business, on the continuum, you're gonna have a 480 00:25:33,119 --> 00:25:36,280 Speaker 1: sense of the relative contributions. So that's the first point. 481 00:25:36,359 --> 00:25:38,879 Speaker 1: And you know, for example, we can place professional sports 482 00:25:38,920 --> 00:25:41,320 Speaker 1: leagues and I'll just give you some sense that you know, 483 00:25:41,359 --> 00:25:44,240 Speaker 1: the NBA is the sport that's farthest away from randomness, 484 00:25:44,240 --> 00:25:47,119 Speaker 1: so most skill to determine the winners and losers, and 485 00:25:47,160 --> 00:25:50,199 Speaker 1: things like Major League Baseball much closer to a particular game, 486 00:25:50,280 --> 00:25:52,960 Speaker 1: much closer to random that's the first thing. The second 487 00:25:52,960 --> 00:25:55,840 Speaker 1: thing to say is that whenever you look at great performance, 488 00:25:55,880 --> 00:26:00,399 Speaker 1: we'll call them positive outliers. Right, it's almost always great 489 00:26:00,440 --> 00:26:04,320 Speaker 1: skill plus great luck, and if you think about it 490 00:26:04,359 --> 00:26:06,719 Speaker 1: for a minute, it sort of has to be true. Right, 491 00:26:06,760 --> 00:26:10,200 Speaker 1: So it's a right side district draw from the skill distribution, 492 00:26:10,760 --> 00:26:13,160 Speaker 1: and a right hand side draw from a luck distribution, 493 00:26:13,400 --> 00:26:16,120 Speaker 1: and that's really easy to show for things like sports, 494 00:26:16,160 --> 00:26:19,320 Speaker 1: like streaks and sports. A guy like DiMaggio hits in 495 00:26:19,359 --> 00:26:23,000 Speaker 1: fifty six straight games in one he's a career hitter. 496 00:26:23,000 --> 00:26:26,399 Speaker 1: He's a fantastic hitter. But he also benefited from a 497 00:26:26,440 --> 00:26:28,359 Speaker 1: lot of a huge count. He never did it again. 498 00:26:28,400 --> 00:26:30,399 Speaker 1: It was time. Well, he actually had a bunch of 499 00:26:30,400 --> 00:26:33,040 Speaker 1: little streaks, but he but but yeah, exactly, so he 500 00:26:33,160 --> 00:26:36,440 Speaker 1: was lots of skill plus lots of luck together. So 501 00:26:36,560 --> 00:26:39,080 Speaker 1: it's very important to recognize whenever you see, whether it's 502 00:26:39,119 --> 00:26:42,720 Speaker 1: corporate performance or an individualist done particularly well. And it's 503 00:26:42,760 --> 00:26:45,960 Speaker 1: interesting you mentioned sort of this introspection. If you're a 504 00:26:45,960 --> 00:26:48,920 Speaker 1: successful person, I mean, undoubtedly you've worked hard and so forth, 505 00:26:48,960 --> 00:26:51,399 Speaker 1: but people have to acknowledge, I mean we we all 506 00:26:51,440 --> 00:26:53,560 Speaker 1: can sit around, you have to acknowledge that luck has 507 00:26:53,600 --> 00:26:58,480 Speaker 1: almost always been a major source of um a contributor 508 00:26:58,520 --> 00:27:01,040 Speaker 1: to your success. And you have to think about that way. 509 00:27:01,080 --> 00:27:03,400 Speaker 1: And the other thing is, we don't people have failed 510 00:27:03,520 --> 00:27:05,320 Speaker 1: people got bad luck. We don't. They're just not in 511 00:27:05,359 --> 00:27:07,600 Speaker 1: our record books, right, we don't know any about them. 512 00:27:07,640 --> 00:27:09,680 Speaker 1: So it's really it's an important way to think about 513 00:27:09,680 --> 00:27:12,840 Speaker 1: life because and it's also if you've benefited from good luck, 514 00:27:12,960 --> 00:27:14,560 Speaker 1: you should be grateful for it. But you have to 515 00:27:14,720 --> 00:27:16,760 Speaker 1: you know, I understand that luck plays a role in 516 00:27:16,800 --> 00:27:19,760 Speaker 1: almost all of our lives. Very good lesson, Michael Mobison. 517 00:27:20,000 --> 00:27:24,879 Speaker 1: Really appreciate you coming on fascinating topic, highly relevant to 518 00:27:25,520 --> 00:27:29,000 Speaker 1: markets these days and everything else. Great conversation. Thank you, 519 00:27:29,119 --> 00:27:42,720 Speaker 1: my pleasure. Thanks guys, so Joe Um, I mean that 520 00:27:42,800 --> 00:27:46,160 Speaker 1: was a fascinating conversation. I do think that the role 521 00:27:46,320 --> 00:27:49,359 Speaker 1: of luck doesn't get as much attention as it should 522 00:27:49,680 --> 00:27:51,960 Speaker 1: when it comes to investing, but also when it comes 523 00:27:52,000 --> 00:27:55,960 Speaker 1: to success in life and wealth creation. And you know, 524 00:27:56,080 --> 00:27:59,600 Speaker 1: you think of all the sort of circumstances that can 525 00:27:59,680 --> 00:28:03,080 Speaker 1: contri tribute to someone, um either being successful in their 526 00:28:03,119 --> 00:28:06,840 Speaker 1: career or getting very wealthy. So much of it can 527 00:28:06,880 --> 00:28:11,560 Speaker 1: be determined by happenstance, right Yeah, And it's so loathsome 528 00:28:11,600 --> 00:28:16,040 Speaker 1: and tiresome when you read these articles someone wildly successful 529 00:28:16,200 --> 00:28:18,919 Speaker 1: and here are my fifteen tips to how I did it, 530 00:28:19,119 --> 00:28:22,440 Speaker 1: or these people have in coming. But here's the real 531 00:28:22,560 --> 00:28:25,800 Speaker 1: question is the next time you come visit New York, 532 00:28:26,280 --> 00:28:28,840 Speaker 1: you take a trip to Atlantic City with me, and 533 00:28:28,880 --> 00:28:32,439 Speaker 1: can we go play poker. Do I feel lucky or 534 00:28:32,480 --> 00:28:36,160 Speaker 1: do I feel skilled? Well? No, but no seriousness. Don't 535 00:28:36,200 --> 00:28:38,560 Speaker 1: you this probably isn't going to be the last time 536 00:28:38,600 --> 00:28:41,920 Speaker 1: we have some odd episode that was sort of gambling 537 00:28:42,000 --> 00:28:44,720 Speaker 1: or poker related. Don't you think it's kind of high 538 00:28:44,720 --> 00:28:47,960 Speaker 1: time you actually sort of you know, see what it's 539 00:28:48,000 --> 00:28:51,120 Speaker 1: like firsthand, so it's not just theoretical, you know. I 540 00:28:51,160 --> 00:28:53,520 Speaker 1: think we should do a podcast out of it. You 541 00:28:53,560 --> 00:28:56,800 Speaker 1: should bring recording device, go to Atlantic City and see 542 00:28:56,800 --> 00:28:59,960 Speaker 1: what happens. No, I don't think Casino's loved people take 543 00:29:00,120 --> 00:29:03,920 Speaker 1: recording devices to the team. It might not be ideal, 544 00:29:03,960 --> 00:29:06,720 Speaker 1: but let's definitely do it. All right, Well, that's it 545 00:29:06,880 --> 00:29:10,560 Speaker 1: for this edition of the Ad Thoughts Podcast. I'm Tracy Alloway. 546 00:29:10,680 --> 00:29:13,520 Speaker 1: You can find me on Twitter at Tracy Alloway, and 547 00:29:13,600 --> 00:29:16,400 Speaker 1: I'm Joe Wisntal. You can follow me on Twitter at 548 00:29:16,440 --> 00:29:19,400 Speaker 1: the Stalwart and you can find Michael on Twitter at 549 00:29:19,560 --> 00:29:21,600 Speaker 1: m J Mobison. Thanks for listening.