WEBVTT - Why Value Investing Has Been Doing Terribly 0:00:11.280 --> 0:00:15.120 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:15.240 --> 0:00:19.480 I'm Tracy Alloway and I'm Joe Wisenthal. So, Joe, when 0:00:19.520 --> 0:00:25.040 you think about value investing, what what springs to mind? Um? 0:00:25.120 --> 0:00:29.120 I guess probably immediately the image of Warren Buffett floats 0:00:29.120 --> 0:00:31.000 into my head as soon as I hear that term, 0:00:31.160 --> 0:00:35.040 or maybe that big um Benjamin Graham book that I 0:00:35.080 --> 0:00:37.600 bought when I was like early on in my career 0:00:37.640 --> 0:00:39.120 and never read. But it's like one of the most 0:00:39.120 --> 0:00:42.239 famous investing books about how to invest, like how they 0:00:42.280 --> 0:00:45.159 did back when they bought like bonds from Brooklyn Railways 0:00:45.200 --> 0:00:48.400 and stuff like that. At least you're honest about it. 0:00:48.640 --> 0:00:51.200 But I think for most people, it's definitely that image 0:00:51.200 --> 0:00:55.320 of Warren Buffett and someone sort of seeking out these 0:00:55.440 --> 0:00:58.600 undervalued stocks in the market that are going to generate 0:00:58.680 --> 0:01:01.880 longer term gains and making loads of money from it. 0:01:01.960 --> 0:01:06.120 That's sort of the classic value investing paradigm. Yeah, And 0:01:06.160 --> 0:01:10.080 I think like when I first became aware of how 0:01:10.120 --> 0:01:12.800 the world of investing worked, I sort of thought that 0:01:12.920 --> 0:01:15.360 was essentially the essence of it, that you're supposed to 0:01:15.400 --> 0:01:18.640 find cheap stocks and look at the stocks that had 0:01:18.640 --> 0:01:21.720 low pe ratios and low price to book ratios and 0:01:21.760 --> 0:01:23.760 if there was a good one that had some nice 0:01:23.800 --> 0:01:26.200 low ratios, then those were the stocks to buy. And 0:01:26.240 --> 0:01:28.959 that's basically what investing is. And I know there are 0:01:28.959 --> 0:01:31.120 a lot of people who are still adherance of that approach, 0:01:31.400 --> 0:01:33.120 but over the years, I've learned that there's sort of 0:01:33.360 --> 0:01:38.200 multiple approaches to doing well in the stock market. Yes, indeed, 0:01:38.200 --> 0:01:41.280 and the big headwind I would say for value investing 0:01:41.400 --> 0:01:44.080 over the past uh, well, it's been more than a 0:01:44.120 --> 0:01:49.040 decade actually, but basically since the start of the financial 0:01:49.080 --> 0:01:53.960 crisis sort of two thousand seven, value investing has massively, 0:01:54.320 --> 0:01:58.320 massively underperformed a lot of other investing styles. And this 0:01:58.400 --> 0:02:00.440 means that a bunch of people have been watching their 0:02:00.440 --> 0:02:04.240 heads trying to figure out exactly why this is happening. Yeah, 0:02:04.240 --> 0:02:07.880 there's a lot of consternation among people for whom they 0:02:07.880 --> 0:02:11.080 look at the data. And historically it says if you 0:02:11.160 --> 0:02:13.760 buy lots of companies, a basket of companies with the 0:02:13.800 --> 0:02:16.639 low price to book ratio or low PE ratio, they 0:02:16.680 --> 0:02:21.160 should eventually outperform um. But they haven't. And that's sort 0:02:21.200 --> 0:02:23.640 of been one of the main stories post crisis, is 0:02:23.639 --> 0:02:28.320 this persistent underperformance of the so called value factor, and 0:02:28.360 --> 0:02:31.640 people keep trying to call the turn. They now the 0:02:31.639 --> 0:02:34.560 fetters raising race. Okay, the value factors gonna perform. Oh, 0:02:34.600 --> 0:02:36.799 we're going into a bit of a downturn. This is 0:02:36.840 --> 0:02:40.720 the moment. And it keeps eluding the adherence of this view, 0:02:40.880 --> 0:02:43.520 and you have some people saying value is dead or 0:02:43.560 --> 0:02:46.600 this style is never going to work again. But of 0:02:46.639 --> 0:02:49.480 course you have people holding out that eventually this approach 0:02:49.480 --> 0:02:53.120 will come back and vogue. Yeah, exactly, and you sort 0:02:53.120 --> 0:02:55.120 of alluded to it just then. But there are all 0:02:55.160 --> 0:02:58.440 these theories about why exactly value has been underperforming. The 0:02:58.440 --> 0:03:01.600 big one, of course, is central banks and low interest rates. 0:03:01.760 --> 0:03:06.480 But one explanation, uh that doesn't get as much attention 0:03:06.680 --> 0:03:10.880 has to do with technology. And this is a really 0:03:10.919 --> 0:03:13.560 interesting one I think. Um, you know, some analysts have 0:03:13.560 --> 0:03:17.000 talked about it a bit before, but the notion that 0:03:17.160 --> 0:03:22.520 big technological discoveries or turns can basically lead to under 0:03:22.520 --> 0:03:26.040 performance and value is one that I think is worth exploring, 0:03:26.639 --> 0:03:28.960 right And you know, it's interesting because obviously, I think 0:03:28.960 --> 0:03:30.799 a lot of people know that the best stocks of 0:03:30.840 --> 0:03:34.800 the last several years have been this these high flying 0:03:34.880 --> 0:03:38.839 tech stocks like Amazon or Facebook or whatever, Netflix, which 0:03:38.840 --> 0:03:42.760 are nobody's idea. Very few people would characterize them as 0:03:43.160 --> 0:03:46.920 value stocks, at least under the traditional notion. But I guess, uh, 0:03:46.960 --> 0:03:49.119 and we're going to talk about this on today's episode, 0:03:49.400 --> 0:03:52.200 that this isn't that rare, that there are these periods 0:03:52.400 --> 0:03:54.680 of times when there can be a companies on the 0:03:54.720 --> 0:04:00.640 vanguard of a new technology, trading at extraordinary multiples, outperforming value, 0:04:00.680 --> 0:04:03.760 but it doesn't last forever. This isn't the first time, 0:04:03.800 --> 0:04:07.360 I guess that we've seen companies like Amazon and Netflix 0:04:08.800 --> 0:04:13.280 help expensive stocks be the big winners. Yeah, exactly, So 0:04:13.400 --> 0:04:15.240 I guess, without further ado, I should bring on the 0:04:15.280 --> 0:04:19.840 guest for the episode. It is Chris Meredith. He's co 0:04:20.040 --> 0:04:23.200 c I O over at O'Shaughnessy Asset Management and also 0:04:23.279 --> 0:04:27.080 a visiting lecture at Cornell University. Chris, thanks so much 0:04:27.120 --> 0:04:30.320 for coming on. Thank you for having me. So I 0:04:30.320 --> 0:04:32.600 should just mention the reason we're having you on is 0:04:32.880 --> 0:04:37.680 actually a suggestion from your your co researcher on a 0:04:37.720 --> 0:04:41.920 recent paper, Mr Jamie Catherwood, who was of course a 0:04:42.040 --> 0:04:44.680 previous odd lots guests. Lots of people will know him 0:04:44.680 --> 0:04:48.880 as the finance history guy. He helped you look into 0:04:49.200 --> 0:04:53.600 whether or not there are historic parallels for under performance 0:04:53.640 --> 0:04:57.279 in value investing. Just to step back initially, can I 0:04:57.320 --> 0:05:00.919 ask why you decided to to go on the hunt 0:05:01.000 --> 0:05:05.719 for those historic parallels. Well, obviously it's borne out of 0:05:05.720 --> 0:05:08.640 what you were talking about earlier, where value has underperformed. 0:05:08.760 --> 0:05:11.800 Value is one of the bedrock principles at O'shaughnessysset Management. 0:05:12.160 --> 0:05:14.960 And obviously it's been a difficult, you know, time since 0:05:14.960 --> 0:05:17.240 the beginning of two thousand seven. To set it in context, 0:05:17.760 --> 0:05:19.640 some of the style benchmarks that are used in the 0:05:19.720 --> 0:05:23.120 large cap like Russell one thousand, value versus growth over 0:05:23.160 --> 0:05:24.960 that time period from the beginning in two thousand seven 0:05:24.960 --> 0:05:27.400 to the middle of it's a it's a return gap 0:05:27.400 --> 0:05:30.200 of about thirty six percent, which is a tremendous difference, 0:05:30.200 --> 0:05:32.000 and over the last twenty four months it's an additional 0:05:33.279 --> 0:05:37.520 So that's obviously where clients, allocators, financial advisors, they're all 0:05:37.520 --> 0:05:40.400 looking to us and trying to understand what's going on. 0:05:40.480 --> 0:05:43.920 Anybody who has a value bias against a core benchmark 0:05:44.080 --> 0:05:46.640 or growth managers that are putting value governors on it, 0:05:46.640 --> 0:05:48.960 they're all feeling this as a long term headwind in 0:05:49.000 --> 0:05:52.320 their investment styles and strategies. And so we started taking 0:05:52.320 --> 0:05:54.279 a look, and what we had seen was there's a 0:05:54.360 --> 0:05:58.760 lot of people in industry that are using data I 0:05:58.800 --> 0:06:00.760 call it like a short form aided dump where they 0:06:00.800 --> 0:06:02.880 just take like the Fama French series and they put 0:06:02.920 --> 0:06:04.440 out there and they're saying, look, this is this is 0:06:04.480 --> 0:06:07.560 the worst it's ever been, so it must be broken, right, UM. 0:06:07.640 --> 0:06:09.920 And there's a lot of people that are just just 0:06:09.920 --> 0:06:11.160 just to back up when they say this is the 0:06:11.160 --> 0:06:13.360 worst that's ever been, they say, this is the worst 0:06:13.720 --> 0:06:16.760 under performance of the value factor relatively the market. And 0:06:16.960 --> 0:06:18.719 you know, a lot of times they're dealing with shorter 0:06:18.800 --> 0:06:21.839 data series than than you know, than we have available 0:06:21.839 --> 0:06:24.320 at O'Shaughnessy because we've invested in a research platform that 0:06:24.360 --> 0:06:26.960 lets us test all the way back to ninety six 0:06:27.000 --> 0:06:29.719 and we've spent you know, millions of dollars and million 0:06:29.960 --> 0:06:31.800 over ten years in order to get this platform and 0:06:31.800 --> 0:06:34.440 allowing us to do research. UH. And one of the 0:06:34.440 --> 0:06:36.159 things that we were looking at was saying, okay, let's 0:06:36.200 --> 0:06:38.240 let's use our platform and try to figure out, you know, 0:06:38.240 --> 0:06:41.040 if we've seen a period like this before. UH. And 0:06:41.120 --> 0:06:43.200 you know, we had built out a research data set 0:06:43.200 --> 0:06:47.480 proprietary to osam O'Shaughnessy that we call Deep History, that 0:06:47.520 --> 0:06:50.320 where we took all the Moody's financial statements and we 0:06:50.320 --> 0:06:52.240 we had to actually team overseas type those up and 0:06:52.240 --> 0:06:53.880 put them into our platform. So we were able to 0:06:53.880 --> 0:06:56.080 look at things like net income and sales, and we 0:06:56.160 --> 0:06:58.559 found that there's another period of value under performance similar 0:06:58.560 --> 0:07:03.839 to this one back in nineteen And what's interesting is, 0:07:03.920 --> 0:07:06.120 you know, you start you start looking at those periods, 0:07:06.320 --> 0:07:08.039 um you know, and I've I've heard people say, you know, 0:07:08.520 --> 0:07:10.520 what would that time period have anything to do with today? 0:07:10.520 --> 0:07:13.680 It's obviously it's incredibly different, um And and there are 0:07:13.680 --> 0:07:17.000 differences obviously, but there's also a ton of similarities. And 0:07:17.280 --> 0:07:19.200 when we started looking at it, obviously with you know 0:07:19.200 --> 0:07:22.840 what we see with recession depression that happened, interest rates 0:07:22.840 --> 0:07:25.960 falling to zero and that time frame, but also that 0:07:26.080 --> 0:07:29.880 the the increase of technological shift of that time frame 0:07:29.960 --> 0:07:33.200 is comparable to today. And what really cemented it and 0:07:33.200 --> 0:07:35.120 and and made it come home was when we we 0:07:35.160 --> 0:07:38.280 started first we started looking at what companies were outperforming 0:07:38.280 --> 0:07:40.480 on the growth side versus the value side, and that 0:07:40.560 --> 0:07:43.360 time frame and you you you nailed it. Where today 0:07:43.400 --> 0:07:45.480 it is technology stocks on the growth side that are 0:07:45.800 --> 0:07:47.640 the fang stocks, let's just you know, sum it up 0:07:47.640 --> 0:07:49.720 that way. And on the on the value side, it's 0:07:49.720 --> 0:07:52.280 financial stocks. Right, those have been having a structural headwind 0:07:52.280 --> 0:07:56.120 obviously since two thousand seven. Financial stocks wind up in 0:07:56.120 --> 0:07:58.560 the value ledger, right, So that's part of the split 0:07:58.600 --> 0:08:00.960 there is technology is doing great. Financi stockstone entally that 0:08:01.040 --> 0:08:04.920 time frame forty one, it was manufacturing stocks that were 0:08:04.920 --> 0:08:08.320 the tech stocks of the day and versus utilities and 0:08:08.600 --> 0:08:11.200 which I include railroads and steam railroads and utilities that 0:08:11.240 --> 0:08:14.560 were essentially the ones dragging. And the interesting part was 0:08:14.720 --> 0:08:17.400 what we found was we were doing research and we 0:08:17.400 --> 0:08:19.280 were reading and there was one book that just that 0:08:19.400 --> 0:08:21.400 just cemented and put it home, and it was Carlotta 0:08:21.400 --> 0:08:25.760 Perez's Technological Revolutions and Financial Capital, where she was talking 0:08:25.800 --> 0:08:29.400 through long term economic waves called that short form, they 0:08:29.400 --> 0:08:32.920 call him technological revolutions, and they've identified five of these. 0:08:32.960 --> 0:08:35.439 Historically they're able to identify because the timing of market 0:08:35.440 --> 0:08:39.280 crashes that come along with them. But mainly, what what 0:08:39.400 --> 0:08:41.760 it summed up was that the stocks that we're winning 0:08:41.760 --> 0:08:44.640 in that time period, Uh can be automobile stocks, so 0:08:44.679 --> 0:08:47.280 you're talking about GM. Ford was a privately list of stock, 0:08:47.320 --> 0:08:49.000 but GM was the big one of the of the 0:08:49.280 --> 0:08:52.560 publicly listed at that time frame. And oil stocks like 0:08:52.559 --> 0:08:56.200 standard Oil, which we're supplying gasoline, and then retail stocks 0:08:56.240 --> 0:08:58.199 like Sears and will Worth in manufacturing and all those 0:08:58.240 --> 0:09:01.080 are bundled together with this id you have clusters of 0:09:01.080 --> 0:09:05.480 technological innovations that changed the socioeconomic paradigm of how people 0:09:05.480 --> 0:09:07.760 deploy their capital. And the way to think of that 0:09:07.960 --> 0:09:11.000 is that, you know, back in the nineteen tens, you know, 0:09:11.080 --> 0:09:13.599 people were getting around by the steam railroad and that 0:09:13.679 --> 0:09:14.760 was how they got around, and then it was like 0:09:14.800 --> 0:09:16.319 bicycles for the rest of it, and they hadn't figured 0:09:16.320 --> 0:09:19.040 out that last mile, right. Henry Ford invented the model 0:09:19.040 --> 0:09:22.160 Tea and in particular this idea of mass manufacturing and 0:09:22.320 --> 0:09:24.920 the idea that then automobiles went from zero to zero 0:09:24.960 --> 0:09:27.280 point eight per household in the US, and all of 0:09:27.320 --> 0:09:28.960 a sudden there was this just massive change of how 0:09:29.000 --> 0:09:31.920 everybody got around the country. Was our c A was 0:09:31.960 --> 0:09:35.520 like another like massive stock market winner, the Radio Company. 0:09:35.559 --> 0:09:39.040 And I sort of like when I've read about the twenties. 0:09:39.080 --> 0:09:42.079 I always see like it always feels like the explosion 0:09:42.120 --> 0:09:44.600 of radio is probably similar to the internet today. Was 0:09:44.640 --> 0:09:45.920 that one of the ones that was sort of in 0:09:45.920 --> 0:09:48.720 the growth factor in those years. Radio is another another 0:09:48.760 --> 0:09:51.240 great example of that and the idea of mass manufacturing 0:09:51.240 --> 0:09:54.720 of radios but entertainment as well. But in particular, what's 0:09:54.720 --> 0:09:59.160 interesting is this idea of mass manufacturing led to things 0:09:59.200 --> 0:10:01.880 like Nibisco National Biscuit back in the day, which started 0:10:01.880 --> 0:10:04.320 mass producing food and sending those out with which led 0:10:04.360 --> 0:10:09.160 to national brands, mass culture, and then advertising, which led 0:10:09.200 --> 0:10:11.480 to the advent of radio and entertainments and medium for 0:10:11.520 --> 0:10:13.920 delivering that as well. So that's again it's part of 0:10:13.920 --> 0:10:17.400 that pocket, that cluster of innovation and which again just 0:10:17.520 --> 0:10:22.640 radically changed how people were basically just spending their money. So, 0:10:22.920 --> 0:10:28.520 Chris Uh, you argue that innovation from technological revolution basically 0:10:28.600 --> 0:10:31.400 changes societal behavior in a bunch of different ways, and 0:10:31.440 --> 0:10:34.760 that impacts business and the economy in a bunch of 0:10:34.800 --> 0:10:37.319 different ways. Could you maybe dig in a little bit 0:10:37.360 --> 0:10:42.120 more into exactly how it impacts value investing, Like, what 0:10:42.200 --> 0:10:44.840 was the shift that we would have seen in the 0:10:44.920 --> 0:10:48.000 time period that you just described. Yeah, so let's let's 0:10:48.000 --> 0:10:49.800 back up and talk about value investing a little bit 0:10:49.800 --> 0:10:53.000 and how the value versus growth stocks and what we've 0:10:53.000 --> 0:10:55.920 seen at O'Shaughnessy with our research. We did a research 0:10:55.960 --> 0:10:59.440 paper about eighteen months agoll Ago called Factors from Scratch, 0:11:00.000 --> 0:11:02.320 where we dug into the mechanics of value investing. And 0:11:02.320 --> 0:11:04.600 the way that it works is that, um you get 0:11:04.600 --> 0:11:06.960 compensated as an investor through a couple of avenues. One 0:11:07.000 --> 0:11:08.240 if you think of it as you buy a stock 0:11:08.240 --> 0:11:10.480 and it's got a a pe of ten. As a 0:11:10.600 --> 0:11:12.600 value investor, it's either going to have it where it 0:11:12.679 --> 0:11:14.560 maintains the same earnings and it and it rerates to 0:11:14.600 --> 0:11:16.560 like a higher multiple of a PEU fifteen, which gives 0:11:16.559 --> 0:11:18.960 you get a fifty percent return, or the earnings are 0:11:18.960 --> 0:11:21.280 going to grow in the multiple stays the same and 0:11:21.320 --> 0:11:24.160 you get you know, you get compensated. That way, we 0:11:24.280 --> 0:11:26.720 dug in and built a framework to analyze growth stocks 0:11:26.840 --> 0:11:28.839 versus value stocks, and what happens is value stocks on 0:11:28.920 --> 0:11:32.840 average actually see some short term call it flatness to 0:11:32.880 --> 0:11:35.720 decline and earnings, but then they re rate over time period, right, 0:11:35.760 --> 0:11:38.320 but there's a stabilization where they they decline a little bit, 0:11:38.360 --> 0:11:41.000 but then come back to normal growth levels, right, and 0:11:41.040 --> 0:11:43.040 growth stocks have it where there's this price for these 0:11:43.080 --> 0:11:46.760 incredible future earnings um that they tend to not reach, right. 0:11:46.800 --> 0:11:49.120 And all this is on average over to long time 0:11:49.120 --> 0:11:52.440 periods across you know, thousands millions of stocks that we've 0:11:52.440 --> 0:11:55.320 been looking at historically over our millions over different time periods. 0:11:55.400 --> 0:11:58.480 Right now, what we see is in these periods where 0:11:58.480 --> 0:12:01.520 growth is outperforming value, what happens is the growth stocks 0:12:01.520 --> 0:12:03.880 actually live up to their potential. If you think about 0:12:03.920 --> 0:12:07.360 Amazon right now, Amazon had ten billion, you're talking about 0:12:07.360 --> 0:12:10.080 it had ten billion in net income. Right ten years ago, 0:12:10.320 --> 0:12:12.959 the company was priced about thirty billion dollars, so it 0:12:13.000 --> 0:12:14.840 had a pe of on a four ten year basis 0:12:14.880 --> 0:12:17.360 of about three. Right, So you're saying, would somebody argue 0:12:17.360 --> 0:12:20.199 Amazon's value stock you could argue on a ten year basis, 0:12:20.320 --> 0:12:22.440 you know, Amazon lived up to its value, right. And 0:12:22.480 --> 0:12:27.959 I remember, like, even which is forever ago, people like, oh, 0:12:28.120 --> 0:12:30.760 this's crazy what people are paying for Amazon. And then 0:12:30.800 --> 0:12:33.440 you look now it's like, not only was that not crazy, 0:12:33.520 --> 0:12:35.600 that was cheap based on what the income did over 0:12:35.640 --> 0:12:37.240 the next several years exactly. And so this is the 0:12:37.280 --> 0:12:40.319 idea that there's these changes in technology which leads to 0:12:40.360 --> 0:12:42.760 accelerated growth of companies that lives up to its potential. 0:12:42.880 --> 0:12:45.120 And that's where these technology companies, the fang stocks have 0:12:45.120 --> 0:12:47.559 have earned their their keep. I mean, this is different 0:12:47.600 --> 0:12:50.040 than the dot com bubble, where there was these incredible 0:12:50.120 --> 0:12:52.719 valuations and then the growth wasn't there, right, So that's 0:12:52.760 --> 0:12:55.480 a different time a different time frame, a different outcome 0:12:55.640 --> 0:12:58.120 on this. This experience of growth in value stocks where 0:12:58.120 --> 0:13:01.040 you've seen you know, financial company is obviously struggling with 0:13:01.080 --> 0:13:03.880 what's happened. They have increased regulation, they're unable to increase 0:13:03.880 --> 0:13:05.760 their their growth over time, and they're not they're not 0:13:05.760 --> 0:13:08.920 stabilizing back to normal growth levels. You have energy stocks 0:13:08.920 --> 0:13:11.160 have seen multiple shocks, Retail that's getting a head wind 0:13:11.200 --> 0:13:14.680 from Amazon. All those stocks are having difficulty and that 0:13:14.800 --> 0:13:17.640 idea of maintaining In fact, they've been getting the same discount. 0:13:17.960 --> 0:13:19.880 What we've seen is those discounts have been priced in 0:13:20.160 --> 0:13:22.800 pretty pretty close to what they should have been right now. 0:13:22.920 --> 0:13:25.720 The comparison from the forty one is this idea that 0:13:25.920 --> 0:13:29.040 automobiles were priced this growth stocks, and those actually did great, 0:13:29.080 --> 0:13:32.160 they grew. It was a part of the everybody everybody 0:13:32.160 --> 0:13:34.960 bought one by the time, So that's the comparison and 0:13:35.000 --> 0:13:37.679 the time framing. On the flip side, railroads were once 0:13:37.679 --> 0:13:40.040 that got I got left out peak railroad and passenger 0:13:40.080 --> 0:13:43.319 travel was back in. And so that's one where on 0:13:43.360 --> 0:13:45.240 the value letter they saw a structural decline for what 0:13:45.240 --> 0:13:47.000 happened in their economic Well, I want to ask you 0:13:47.000 --> 0:13:51.360 a question about the definition of value investing or maybe 0:13:51.440 --> 0:13:55.120 different approaches. And I know, like I follow trend Griffin 0:13:55.240 --> 0:13:58.040 on Twitter. He talks a lot about the distinction between 0:13:58.559 --> 0:14:01.480 value as a sort of satistical factor, which is, you know, 0:14:01.520 --> 0:14:03.440 you look at the thousands of stocks out there, and 0:14:03.440 --> 0:14:06.720 then you take the cheapest ones on various multiples, versus 0:14:07.520 --> 0:14:12.520 value as say approached by Warren Buffett of a concentrated portfolio, 0:14:12.800 --> 0:14:15.840 some of which may be cheap on metrics, but some 0:14:15.960 --> 0:14:18.640 of them maybe not so cheap, but he has other 0:14:18.720 --> 0:14:20.920 things that he likes about them, whether great brands or 0:14:20.960 --> 0:14:23.920 great modes or whatever it is. Okay, is there a 0:14:23.960 --> 0:14:27.440 distinction between those two ways in which people use the 0:14:27.560 --> 0:14:30.840 term value investing? Yes, and and and part of it's 0:14:30.880 --> 0:14:33.000 a simple value, right if you just only go off 0:14:33.000 --> 0:14:36.520 of evaluation multiple, we're seeing more of that nowadays with 0:14:36.720 --> 0:14:40.440 these widespread etf that are single value factor or value models, right, 0:14:40.480 --> 0:14:42.000 and they're just basically saying we're only going to give 0:14:42.040 --> 0:14:45.280 you like that, looking at like you said, broadly, a 0:14:45.280 --> 0:14:47.160 couple of metrics maybe and just saying these are we're 0:14:47.160 --> 0:14:49.400 going to buy you the cheapest part of that versus 0:14:49.440 --> 0:14:52.320 the you know, the more the buffet fundamental model, which 0:14:52.360 --> 0:14:54.800 is they tend to look for quality, like you said, 0:14:54.920 --> 0:14:59.360 the good management economic modes, UM, some form of called 0:14:59.480 --> 0:15:01.520 long term trend for why this company would be a 0:15:01.560 --> 0:15:04.560 good value or essentially you know, we have it where 0:15:04.760 --> 0:15:08.440 you're able to get more qualification on that reason for 0:15:08.480 --> 0:15:10.520 the discount and the reason that I should revert back 0:15:10.520 --> 0:15:13.800 to normal multiples and O shaughnessy, we we tend towards 0:15:13.800 --> 0:15:16.560 that side. We look at multiple characteristics of blending those together, 0:15:17.000 --> 0:15:19.240 things like quality of earnings, things like earnings growth to 0:15:19.280 --> 0:15:21.760 try to determine which stocks are more likely to have 0:15:21.800 --> 0:15:41.880 the rebound you mentioned um sort of e t S. 0:15:41.920 --> 0:15:44.680 And I was curious, you know, I'm I think back 0:15:44.720 --> 0:15:47.760 to say twenty years ago, as someone trying to capture 0:15:48.120 --> 0:15:51.320 the value factor within the stock market, and I imagined 0:15:51.360 --> 0:15:54.200 that like required a lot of legwork and a lot 0:15:54.320 --> 0:15:56.720 of people doing a lot of calculations, and probably a 0:15:56.720 --> 0:15:59.000 lot of the kind of investment you're talking about of 0:15:59.400 --> 0:16:02.640 scrubbing the data and just doing it by hand. Now 0:16:02.800 --> 0:16:05.480 I could go on to anyone can sort of go 0:16:05.520 --> 0:16:07.600 into their brokerage account and click I want to buy 0:16:07.760 --> 0:16:09.960 a value et F and then walk away without doing 0:16:10.000 --> 0:16:15.520 any work. Does that change the game? When value investing? 0:16:15.560 --> 0:16:18.880 It's no longer work to sort of even discover the 0:16:18.920 --> 0:16:21.040 value factor is just click of a button. Someone else 0:16:21.080 --> 0:16:23.720 has done it for you. So it is easier to 0:16:23.920 --> 0:16:26.680 access you know, quote unquote value than it has ever 0:16:26.760 --> 0:16:28.960 been before. And that's because of the product proliferation right 0:16:29.480 --> 0:16:33.400 where you're seeing access of our very low fee funds 0:16:33.400 --> 0:16:35.880 that are coming around and and you know, again like 0:16:35.920 --> 0:16:37.720 you said, they are on many platforms. Are et fs 0:16:37.760 --> 0:16:40.720 are easy to buy from our point of view, though 0:16:40.880 --> 0:16:43.520 ease of access doesn't mean that you're getting better investments 0:16:43.520 --> 0:16:45.280 out of it, right, because there's a wide range of 0:16:45.280 --> 0:16:47.720 outcomes that still comes from any of these investment products. 0:16:48.120 --> 0:16:51.200 The difficulty is communicating the transparency of of what the 0:16:51.320 --> 0:16:53.160 what the features are in each of those products. Right, 0:16:53.200 --> 0:16:55.960 So you know, are you buying on book value? Are 0:16:56.000 --> 0:16:57.560 you buying on earnings? By the way, how are you 0:16:57.640 --> 0:17:00.360 calculating earnings? The example we gave we wrote I wrote 0:17:00.360 --> 0:17:03.280 a paper cult Factors and not Commodities a couple of 0:17:03.400 --> 0:17:05.600 years ago, Um, and you were talking about going in 0:17:05.720 --> 0:17:08.960 and getting the data. There's a lot of nuance. And 0:17:09.000 --> 0:17:11.480 again I say nuance in my world from my seat 0:17:11.480 --> 0:17:13.280 on things like even as simple as a PE ratio, 0:17:13.320 --> 0:17:15.879 where you can have companies that will wind up having 0:17:15.880 --> 0:17:18.640 it where you're depending on if you're accounting for extraordinaries, 0:17:18.720 --> 0:17:22.400 preferred dividends, an occasional tax cut that comes around every 0:17:22.400 --> 0:17:24.080 once in a while boosting earnings, right, And if you 0:17:24.119 --> 0:17:25.359 put that all and you can wind up with some 0:17:25.440 --> 0:17:29.560 wildly different outcomes. Kraft Heins had seven million net income 0:17:29.560 --> 0:17:32.240 and then at seven seven billion and met income plus 0:17:32.240 --> 0:17:34.840 a seven billion dollar boost from the tax cut. Right. 0:17:35.040 --> 0:17:36.600 So if you don't account for that or not, you know, 0:17:36.640 --> 0:17:38.720 you wind up having a PE that's half of what 0:17:38.800 --> 0:17:41.480 it should be along the way. So I have a 0:17:41.720 --> 0:17:45.480 sort of big picture existential question. And part of this 0:17:45.600 --> 0:17:50.240 is because I just got done talking with um John Hampton, 0:17:50.840 --> 0:17:55.400 the hedge fund manager, who is pretty dismissive of value investors, 0:17:55.520 --> 0:17:58.840 and he sometimes refers to them as sort of bearded, 0:17:59.200 --> 0:18:02.560 self righteous people who think they're smarter than everyone else. 0:18:02.920 --> 0:18:06.159 I say, I'm in the studio with with Chris right now. 0:18:06.240 --> 0:18:07.560 He does not have a beer. I shaved my beer 0:18:07.640 --> 0:18:12.560 a couple of months. Okay, okay, very important details. So 0:18:12.760 --> 0:18:17.960 my question is why should value investing generate higher returns 0:18:18.000 --> 0:18:21.960 than say, growth stocks, because isn't that basically saying that 0:18:22.000 --> 0:18:27.679 the market has misvalued the companies or um misvalued their 0:18:27.720 --> 0:18:30.879 potential earnings growth. I guess yes, is the is the 0:18:30.880 --> 0:18:34.160 short answer. What happens is over a normal long term 0:18:34.200 --> 0:18:36.920 market cycle, what we have seen, and this again is 0:18:36.920 --> 0:18:38.880 borne out from data we've looked at, you know, over 0:18:39.000 --> 0:18:43.120 ninety two years of value investing to show that on average, 0:18:43.160 --> 0:18:48.080 what happens again is these companies your biomins these incredible discounts. Yes, 0:18:48.119 --> 0:18:49.840 they come with some distress along the way, some near 0:18:49.920 --> 0:18:53.199 term distress where um you'll possibly see earnings decline over 0:18:53.280 --> 0:18:57.600 twelve months, but they'll re essentially get back to a 0:18:57.720 --> 0:19:02.000 normal earning stream and earnings growth level within three years, 0:19:02.520 --> 0:19:05.240 and the market will discount those at thirty percent when 0:19:05.240 --> 0:19:08.000 they should be discounted fiftcent based on earnings. Right, So 0:19:08.040 --> 0:19:10.720 the idea is, like, what you're getting is that discount 0:19:10.720 --> 0:19:12.600 over a three year basis of close to five percent 0:19:12.600 --> 0:19:14.760 a year on average. Now, there are periods of time 0:19:14.800 --> 0:19:18.159 where that distress gets increased and these companies wind up 0:19:18.200 --> 0:19:21.960 having it where their priced effectively and growth stocks have 0:19:22.040 --> 0:19:24.879 the flip side where you know, on average their priced 0:19:24.880 --> 0:19:28.399 to have this incredible growth of like, but they actually 0:19:28.400 --> 0:19:31.840 only achieve twenty percent, right, or so they lose five 0:19:31.840 --> 0:19:34.240 percent on average over those three years. So that's one 0:19:34.240 --> 0:19:38.200 where again if you look over ninety two years, yes, 0:19:38.240 --> 0:19:40.680 that value investing is one that should bear out over time, 0:19:40.680 --> 0:19:42.960 but what we have seen, particularly when extending it back 0:19:43.560 --> 0:19:46.440 to include periods one, is that there can be extent 0:19:46.520 --> 0:19:49.520 periods of time where this gets in burned. So how 0:19:49.680 --> 0:19:53.560 long should investors actually be willing to wait until they 0:19:53.600 --> 0:19:58.679 are rewarded for their value investing? Because as you mentioned before, 0:19:58.480 --> 0:20:02.000 we're now in sort of the twelve fear of under performance, 0:20:02.119 --> 0:20:06.800 it's fairly unprecedented. How much longer should people be waiting? Well, 0:20:06.800 --> 0:20:09.159 for us, that's that's that's the hardest part, which is 0:20:09.200 --> 0:20:11.800 keeping to a discipline when a strategy is working against you. Right. 0:20:12.200 --> 0:20:14.960 Obviously this has been painful, you know, as us having 0:20:15.000 --> 0:20:17.679 a value bias with our strategies and value strategies overall. 0:20:17.680 --> 0:20:20.040 This is one where you know you want to see 0:20:20.040 --> 0:20:22.160 it revert back in a in a in a quicker fashion. 0:20:22.200 --> 0:20:24.480 But obviously the market is held out and these growth 0:20:24.840 --> 0:20:27.479 these growth stocks have continued to outperform for us. What 0:20:27.520 --> 0:20:29.160 we feel would be the worst thing to do would 0:20:29.160 --> 0:20:31.240 be to abandon our principles at this point, right. And 0:20:31.280 --> 0:20:34.080 the idea is that we see that there are signs 0:20:34.080 --> 0:20:36.119