Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Allaway and I'm Joey. Isn't all so, Joe.
Speaker 1: It's been a while since we've talked about passive investing,
Speaker 1: and I can't decide if that's just because um, so
Speaker 1: much else has been going on in the world, including
Speaker 1: a global pandemic, or if it's because passive investing itself
Speaker 1: seems to have gotten a little boring, like it doesn't
Speaker 1: feel like there's that much happening in the space. Well,
Speaker 1: I know I've said it before, and I don't remember
Speaker 1: the last thing we talked about it, but I know
Speaker 1: I've said it before that in the post Great Financial
Speaker 1: Crisis period, it felt like there was just this overwhelming
Speaker 1: message and there's like through the media and marketing and
Speaker 1: academic research, it's like just go passive, just go you know,
Speaker 1: index whatever, forget about your investments. And it really feels
Speaker 1: like in the last couple of years, even before the pandemic,
Speaker 1: but now especially since the pandemic, it's like there's been
Speaker 1: the like revenge of active management and individual stock selection
Speaker 1: and robin hood and crypto and all that, and it's
Speaker 1: like this repressed desire to trade and invest in individual names.
Speaker 1: It just come like raging back. So I guess that
Speaker 1: sort of asked the question. It's like, okay, well then
Speaker 1: like where does where does the passive fit in? Now? Yeah, totally.
Speaker 1: And the other thing I've been thinking about, just on
Speaker 1: that point, about the message about investing in passive like
Speaker 1: when you start to break it down, this idea of
Speaker 1: just pour all your money into an SMP E t
Speaker 1: F like spy, you know, something like that. If you
Speaker 1: think about it, that's basically telling you to invest your
Speaker 1: money in a technology, like a fun technology that can
Speaker 1: trace its origins back to the early And it's kind
Speaker 1: of crazy with all the technological advances that we've seen
Speaker 1: since then, that the biggest um or the most prominent
Speaker 1: advice is to just dump everything in an E t F. Yeah.
Speaker 1: I like your characterizatione that as a technology, and this
Speaker 1: is something that I think about a lot. Like, Okay,
Speaker 1: we call say index investing passive investing, and it's pretty passive.
Speaker 1: But prior to the advent of the index fund and
Speaker 1: especially like E t F, it was not like a
Speaker 1: trivial thing to do. So the academic research might say,
Speaker 1: by the SNP or by some big basket and forget
Speaker 1: about it. But prior to like some easy way to
Speaker 1: just sort of automatic that like that was not actually
Speaker 1: like a strategy an individual could do. No individual is
Speaker 1: going to like buy all stocks in the SPI and
Speaker 1: re waste com early day and you know, so it's
Speaker 1: like there, it is kind of like a technological breakthrough
Speaker 1: that that happened that we sort of take for granted totally.
Speaker 1: So on that note, today we're going to be talking
Speaker 1: about what a lot of people are saying, is the
Speaker 1: next technological breakthrough in fund management or the next big
Speaker 1: advancement um something that is definitely not boring but does
Speaker 1: count as passive investing sort of as we'll get into
Speaker 1: we're gonna be talking about custom indexing, and there's been
Speaker 1: a lot of action and deals in that space recently, right,
Speaker 1: And of course this gets to the question of like
Speaker 1: you knows again, I think this is something you've pointed
Speaker 1: out a lot. You could buy the sp it's passive ish,
Speaker 1: but you're sort of outsourcing the indexing question or the
Speaker 1: management question to whoever you know in that case, the
Speaker 1: Committee of S and P or if you buy an
Speaker 1: MSc I index, the you're outsourcing investment decisions to mbs
Speaker 1: C I, so what is the future of like essentially
Speaker 1: designing the index exactly? So we have the best guests
Speaker 1: to talk about it, We're going to be speaking with
Speaker 1: Patrick O'Shaughnessy. He's the CEO over at A Shaughnessy Asset Management,
Speaker 1: of course, also the chairman at Colossus and general partner
Speaker 1: or n CEO at Positive Some And in addition to that,
Speaker 1: he is also the host of the invest Like the
Speaker 1: Best podcast. So a fellow podcaster, Patrick, thank you so
Speaker 1: much for coming on. I'm really delighted to be here.
Speaker 1: I love love this show, so thank you for having me.
Speaker 1: Thank you. So maybe just to begin with, we should
Speaker 1: start with the obvious question, uh, and I should mention
Speaker 1: here that your company, oh Sam, it has its own
Speaker 1: custom indexing platform called Canvas. What exactly is a custom
Speaker 1: index and what does your platform do? Sure? Thank you
Speaker 1: for having me. I love where you started the conversation
Speaker 1: around technology and innovation and that's how I think about
Speaker 1: this entire story. And custom indexing is just one point
Speaker 1: in in the timeline. And I think you raised the
Speaker 1: right ones. Which are I think of as a code?
Speaker 1: I think of code mingled funds as a technology or innovation.
Speaker 1: I think of Vanguard's mutual structure that allowed for much
Speaker 1: lower cost for investors as a great innovation in this timeline.
Speaker 1: Ditto for E t F s. I think custom indexing
Speaker 1: is just the next natural uh stop in that journey.
Speaker 1: And when I say journey, I mean better, cheaper, more
Speaker 1: convenient investing, more tailored investing for each individual investor. So
Speaker 1: in the past, it's E t f s in general
Speaker 1: and just index funds in general have been sort of
Speaker 1: like the model T You can have any color you
Speaker 1: want as long as it's black. And I think that
Speaker 1: is obviously going to change, and the reason it's going
Speaker 1: to change is because of technology. So I always like
Speaker 1: to look at what I call directional arrows of progress,
Speaker 1: the term I learned from my friend Josh Wolfe, and
Speaker 1: see where the world's going. So we already know that
Speaker 1: trading is now free thanks to Robin Hood and all
Speaker 1: the other brokerages that have followed suit. We know that
Speaker 1: the cost of operating your own separate account in at
Speaker 1: a brokerage like a Schwab or wherever is falling in
Speaker 1: cost every single year for asset managers like us that
Speaker 1: that work with those firms, and we know that in
Speaker 1: the future we're gonna have fully fractionalized shares. So the
Speaker 1: all three of those were huge impediments to owning your
Speaker 1: own basket of stocks directly, not through a fond or
Speaker 1: any t f but directly, and all those cost curves
Speaker 1: are either at zero or going towards zero, or going
Speaker 1: to be very possible. And in a world where it
Speaker 1: doesn't cost anything to trade, it costs very little to
Speaker 1: have a brokerage account and have an asset manager like
Speaker 1: us or a black Rock or a Vanguard whoever, trade
Speaker 1: on your behalf, and you can own fractional shares. What
Speaker 1: seems really obvious to me in that world is this
Speaker 1: idea of custom indexing, a term that that I'm proud
Speaker 1: that we we coined a couple of years back. And
Speaker 1: this the idea is very simple, which is that why
Speaker 1: why should everybody own the same five stocks in the
Speaker 1: SMP five hundred. Why wouldn't it be easy to adjust
Speaker 1: for little things and big things such as I don't
Speaker 1: want to own stocks with certain characteristics. For me, I
Speaker 1: work in capital markets, as you just mentioned my my CV,
Speaker 1: I don't really want to own more capital markets exposure.
Speaker 1: I've got plenty of that in my human capital in
Speaker 1: my day to day job. I don't want to own
Speaker 1: tobacco stocks. That's just a personal thing for me. It's
Speaker 1: a very small part of market cap, but I don't
Speaker 1: want them. Very easy to adjust for in something like
Speaker 1: a custom index. Perhaps the most important thing that custom
Speaker 1: and also direct indexing unlocks is the ability to do
Speaker 1: better after taxes as well. What we've learned is that
Speaker 1: everybody has a very specific and personal tax situation. No
Speaker 1: one likes paying taxes. Everyone wants a better after tax return.
Speaker 1: That's the if you ask me. That's one of the
Speaker 1: key geniuses of the index fund is that it's low turnover,
Speaker 1: so you don't have a huge tax bill when you
Speaker 1: own SPY or own Vanguards Total Market d t F
Speaker 1: or fund or something like this. What you can do
Speaker 1: when you own each of the underlying securities let's just
Speaker 1: stick with the SMP five, is you can sell positions
Speaker 1: that are at a loss and you can use that
Speaker 1: loss to offset gains elsewhere in your portfolio and actually
Speaker 1: come out ahead on an after tax basis. We call
Speaker 1: this tax loss harvesting. It's been around for a while,
Speaker 1: typically for just the very very wealthy because you need
Speaker 1: very big accounts. But again, as the costs fall, this
Speaker 1: opportunity to create losses and create better after tax returns
Speaker 1: will to you know, more mass market uh individuals as well.
Speaker 1: So custom indexing is the prospect of why would I
Speaker 1: have the same strategy as everybody else when my circumstances,
Speaker 1: my preferences are different, They're unique to me. And I
Speaker 1: think personalization is a big trend, not just in in investing,
Speaker 1: but in everywhere writing, whether it's in clothing or other
Speaker 1: areas of technology, and that that will come to investing.
Speaker 1: Two and and you know, we're proud to be at
Speaker 1: sort of the vanguard of pun intended of the custom
Speaker 1: indexing trend. So I sort of hinted at this in
Speaker 1: the beginning, and there's always this debate and you see
Speaker 1: it on Twitter elsewhere. It's like this passive investing actually exist.
Speaker 1: And by that it's like, Okay, uh, is the S
Speaker 1: and P If you buy S P Y, is that
Speaker 1: truly passive? Because Okay, that's only five stocks and there
Speaker 1: are thousands of stocks. Committee had to select them. And
Speaker 1: the way I think about this question is that it's
Speaker 1: sort of a false binary, and that there's like basically
Speaker 1: a spectrum, and that buying the SMP five or buying
Speaker 1: spy is you know, just like buying a little bit
Speaker 1: every month or never, say, more passive than some other
Speaker 1: strategy where you try to like pick twenty stocks or whatever.
Speaker 1: And it sounds like to me that with customer indexing,
Speaker 1: it's basically just adjusting where you are on the spectrum
Speaker 1: a little bit. And so rather than going hole hog
Speaker 1: into some sort of like or trying to beat the market,
Speaker 1: it's okay, let's take the premise that for the most
Speaker 1: part we want to just sort of buy something general
Speaker 1: and stable and diversified, but it can be tweaked a
Speaker 1: little bit to get some sort of different returns while
Speaker 1: still maintaining the gist of the benefits of wide diversification
Speaker 1: and avoiding some market timing. Yeah. I think this. I
Speaker 1: think this whole committee thing whenever I hear the committee
Speaker 1: at SMP brought up, I sort of laugh. It's just
Speaker 1: it's it's I think it's a very strange argument for
Speaker 1: people to spend any of their time on because if
Speaker 1: instead of uh, using the quote unquote committee, you just
Speaker 1: bought the top five stocks by market cap, it's the
Speaker 1: exact same return. It's the exact same return, and and
Speaker 1: and so I think the key thing here is you
Speaker 1: want to own roughly the market in its market cap
Speaker 1: weights roughly to get the market return, and even if
Speaker 1: you deviate that from that, whether it's via committee or
Speaker 1: via a fancy term stratified sampling, which is what a
Speaker 1: lot of firms like us do, where you own most
Speaker 1: of the securities in the market, but you don't need
Speaker 1: to own them all. You know, the the last ten
Speaker 1: stocks in the SMP make up a tiny miniscule weight
Speaker 1: even combined, and not owning them will not materially change
Speaker 1: your overall return. So I think the key here is
Speaker 1: you want to be broadly diversified. You want to roughly
Speaker 1: look like the market. But with customer indexing you can
Speaker 1: then also make these adjustments and and you'll, yeah, you'll
Speaker 1: perform a little bit differently, but that's sort of the
Speaker 1: trade you're willing to make to customize something to your
Speaker 1: specific circumstances and preferences. Again, so in my view this
Speaker 1: all these arguments about like what is passive are just silly.
Speaker 1: I mean, technically passive would just be a market cap
Speaker 1: weighted total market every stock in the market um for
Speaker 1: equities globally, but most of the things that people argue
Speaker 1: about look very very close to that. So this feeds
Speaker 1: into something I wanted to ask you. But with custom indexing,
Speaker 1: what do people actually benchmark themselves against? Or does it
Speaker 1: not really matter anymore? Like does your performance compared to
Speaker 1: a broader index or a specific index like just not
Speaker 1: come into the equation as much. So there's two ways
Speaker 1: to do it, and they're both very very simple. One
Speaker 1: is just to use a broad market index. It could
Speaker 1: be the Russell three thousand, and it could be you know,
Speaker 1: pick your pick your broad benchmark that's market cap weighted
Speaker 1: and very simple to understand. The second would be sort
Speaker 1: of a custom benchmark, and this would be used by
Speaker 1: people who have a very clear deviation from something like
Speaker 1: the Russell three thousand. I'm gonna make up an example.
Speaker 1: Let's say someone's custom index is large cap sixty small cap,
Speaker 1: which that's not what the market looks like at all.
Speaker 1: The markets like large cap five percent small cap by
Speaker 1: market cap. In that scenario, it really wouldn't make sense
Speaker 1: to compare your performance because in this case, you are
Speaker 1: making a very active allocation decision to be way overweight
Speaker 1: small cap. So in that case you might just blend
Speaker 1: a benchmark and say, my benchmark is going to you know,
Speaker 1: sp Russell two thousand or some other small cap benchmark.
Speaker 1: But in every case you're you're using simple, easy to understand,
Speaker 1: broad market benchmarks in some combination or or alone to
Speaker 1: use as your reference for how you're performing. I'm really
Speaker 1: interested in what you said about, you know, if you
Speaker 1: work in capital markets, or if you work in a
Speaker 1: bank in some sort and you own bank stock to
Speaker 1: your kind of like you know, you're kind of doing
Speaker 1: the Texas hedge of betting on a sector that is
Speaker 1: already probably responsible for a lot of your annual income,
Speaker 1: and and so it maybe it may not make sense.
Speaker 1: Can you talk a little bit more. I've always wondered
Speaker 1: about this whether financial advisors think about this question and
Speaker 1: when you and it's because i'd something I just like
Speaker 1: popped into my head before, and that's the first time
Speaker 1: I've heard someone talk about this and tailoring a portfolio
Speaker 1: around someone's um, you know, normal income. Can you talk
Speaker 1: a little bit more about how that's being used in
Speaker 1: some of the ways you see that uh, potentially being used. Sure, so,
Speaker 1: so what is the market but a collection of discounted
Speaker 1: cash flows? You know, theoretically, and maybe there's some problems
Speaker 1: with that conception, but if you look at the SMP five,
Speaker 1: the value of each of those stocks and therefore of
Speaker 1: your portfolio is the market's estimation of how all those
Speaker 1: companies will do in the future, discounted at some rate
Speaker 1: back to today, and that's that's the value of your portfolio.
Speaker 1: Well why why should my human capital be any different
Speaker 1: than that I've got, you know, fifty years or hopefully
Speaker 1: more left to live and work, and there's going to
Speaker 1: be cash flows that I generate from that. And when
Speaker 1: I dig into where those cash flows are going to
Speaker 1: come from, I couldn't be talking about what's one step
Speaker 1: beyond the Texas hedge, like, wouldn't be more all in
Speaker 1: on on capital markets, like the equity market specifically is
Speaker 1: going to be a large determinant of how I do
Speaker 1: in my human capital. So if I think of my
Speaker 1: human capital as discounting my future cash flows into some
Speaker 1: value today, often that is worth a lot more to
Speaker 1: people than they're they're brokerage portfolio is if you actually
Speaker 1: did the math and I certainly think it is in
Speaker 1: my case, So why would I have more exposure to
Speaker 1: the same risk profile that determines you know, a large
Speaker 1: chunk of my human capital portfolio, let's call it. And
Speaker 1: I think simple adjustments like that are just intuitive. It
Speaker 1: just makes sense to me. Um. And you can certainly
Speaker 1: demonstrate it, you know, if you if you do some
Speaker 1: napkin math, you can say, yeah, like, I don't really like,
Speaker 1: let's go back to oh eight, if I if I'm
Speaker 1: working at Lehman. Uh, And it's a ridiculous example, of
Speaker 1: course in hindsight. But if I'm working at Lehman, like,
Speaker 1: it's pretty obvious where my risk is bundled up and
Speaker 1: I don't want more of that same risk. So if
Speaker 1: if indexing in part is great because of diversification, I
Speaker 1: think this is just one way to add another asset
Speaker 1: to the mix, which is your own, your own learnings. Yeah,
Speaker 1: so Joe and I are going to have to steal
Speaker 1: steer clear of financial data stocks. And actually that reminds
Speaker 1: me no facts set for you. I should just mention
Speaker 1: um that Bloomberg does have its own indexing business. In
Speaker 1: the interests of transparency. Um. So now that I've got
Speaker 1: that disclaimer out of the way. Um, one thing I
Speaker 1: wanted to ask was, can you give us an example
Speaker 1: of like the most interesting or unusual custom index that
Speaker 1: you've seen in your time in the space. Sure, so, well,
Speaker 1: I guess the first thing I would say, at an
Speaker 1: even higher level is how popular customization is. So we
Speaker 1: built this platform. It's a web it's software. It's a
Speaker 1: web based platform. So you think about it like building
Speaker 1: a car. So go to like Tesla dot com and
Speaker 1: go through the experience of building a car. There's an
Speaker 1: interior next year, you can you know, tune all these
Speaker 1: old dials or choose options. It feels like that to
Speaker 1: build a customer index with with a bit more options.
Speaker 1: So we don't we don't anyone to do anything, you know,
Speaker 1: the default, Our default would be that you buy the
Speaker 1: broad market, right, that you don't do any customization, that
Speaker 1: you just do low cost indexing, maybe with some tax
Speaker 1: loss harvesting. And we went into this not knowing what
Speaker 1: people would do with this platform. That's the beauty of platforms,
Speaker 1: I think, is to be surprised by how they're used.
Speaker 1: And now we're you know, a year and a half
Speaker 1: click getting in on two years in, we're about two
Speaker 1: billion in assets or approaching that number today on the platform,
Speaker 1: and fully eight or so of the of the indexes
Speaker 1: that are designed are completely unique, meaning they're not they
Speaker 1: have they have different settings than any other custom index
Speaker 1: that's been built to date on the platform. And I
Speaker 1: would definitely I would have taken the under on that.
Speaker 1: Had you set the line at will be fully customed,
Speaker 1: I definitely would have said it's going to be way
Speaker 1: less than that. There's going to be more you know,
Speaker 1: clumpiness around what people do. So I guess the first
Speaker 1: big point is like people really use the customization features,
Speaker 1: and we we've been blown away by some of the
Speaker 1: stuff that people ask us if they can adjust for UM.
Speaker 1: So some thing's are in taxes, So they might say,
Speaker 1: I want to pay zero dollars in capital gains gross.
Speaker 1: I want you to generate a single gain for me.
Speaker 1: I refused to pay taxes. Others might. Others have said, look,
Speaker 1: we're willing to We're willing to spend a hundred thousand
Speaker 1: dollars on capital gains taxes, so do everything you can
Speaker 1: inside that absolute dollar budget. UM. One person came to
Speaker 1: us and said, we don't want to own companies that
Speaker 1: produce sugary drinks because one of our key focuses as
Speaker 1: a family is to avoid or help ameliorate the obesity epidemic,
Speaker 1: and we think sugary drinks are the prime culprit. So
Speaker 1: we had to build a custom quantitative screen for that.
Speaker 1: We've had people say, look, I've got all these and
Speaker 1: this is a more advanced feature that wouldn't be broadly
Speaker 1: available right now, but what we can do. We we've
Speaker 1: got this huge private equity portfolio and clearly kind of
Speaker 1: like the human capital example, I gave like, we've got
Speaker 1: a lot of risk in these fifty portfolio companies, but
Speaker 1: we don't really know how to map them onto public equities.
Speaker 1: Can you do that? And that's where you know, the
Speaker 1: fancier like machine learning modeling type stuff can come in
Speaker 1: and create something really cool so that we can avoid
Speaker 1: public equities that look very very similar when we model
Speaker 1: them to the private equity portfolio. You know, that's just
Speaker 1: four examples, but it's kind of constant, like every everyone
Speaker 1: that we meet, every new client that we bring on,
Speaker 1: has some new question in the form of you know,
Speaker 1: can it also do X? And so I just think
Speaker 1: what we're what we're seeing live is a huge latent
Speaker 1: demand for customization that has gone unfulfilled for a long time,
Speaker 1: so no one talks about it. But I think you'll
Speaker 1: see an explosion of these platforms in the next couple
Speaker 1: of years. Can you talk a little bit more about
Speaker 1: the sort of I don't know, maybe it's trading tech
Speaker 1: or the sort of like other platforms necessary to make
Speaker 1: this work, because, as I mentioned in the introduction, you know,
Speaker 1: even if you go back long enough, by even buying
Speaker 1: just the straight up S ANDP five would would not
Speaker 1: have been a trivial exercise at all for an individual.
Speaker 1: No one can sort of like buys and rebalance them, etcetera.
Speaker 1: And of course that got productized and now it's easy.
Speaker 1: But like, okay, let's say I want to buy I
Speaker 1: don't know how many financials are in the SMP five hundred,
Speaker 1: but let's say I want to buy you know, four
Speaker 1: hundred and sixty of the spire excluding all the financials.
Speaker 1: Could you talk a little bit about the text act
Speaker 1: that makes it possible for someone to set that index
Speaker 1: using your software or any software, and then how that
Speaker 1: how it can after that decision has made get the
Speaker 1: sort of like you know, cheap trading and replication of
Speaker 1: that part of the index. Sure, and it brings to
Speaker 1: mind a really cool idea from a gentleman named Eric Bistria,
Speaker 1: who's an early stage technology investator from called Benchmark. He
Speaker 1: uses this term competitive frontier, which is the sort of
Speaker 1: the battlegrounds if you will, that an industry will fight
Speaker 1: on and where things will be lost or one. So
Speaker 1: you have to be good in these competitive frontiers to
Speaker 1: to compete in a changing era. I think those two
Speaker 1: competitive frontiers for for this segment of the market for
Speaker 1: indexing and and of course custom indexing are quantitative research
Speaker 1: and software development, and those are very different probably than
Speaker 1: what has won or determined the winners in indexing at
Speaker 1: large for a very long time. And it's the answer
Speaker 1: to your question, which is that it requires a lot
Speaker 1: of technology. We honestly sort of fell backwards into this
Speaker 1: opportunity because we just by luck, had built so much
Speaker 1: trading software for our our core firm, which is a quantitative,
Speaker 1: quantitative investing firm over the last you know, ten plus years.
Speaker 1: So we were a quant firm that was managing active
Speaker 1: strategies that managed thousands and thousands of separate accounts. To
Speaker 1: be able to do that at scale across brokerages and
Speaker 1: across custodians, etcetera, you have to build software that you
Speaker 1: can't do it manually with a database. So we had
Speaker 1: built we had built an entirely custom piece of trading software,
Speaker 1: an entirely custom piece of something called workbenches is like
Speaker 1: account management and settings management software for all of our
Speaker 1: separate account strategies. Um, so it requires the technolo alogy
Speaker 1: that I talked about, like building a Tesla, that's just
Speaker 1: the front end that sits on top of these other systems.
Speaker 1: And so so I think that the answer is a lot.
Speaker 1: It requires a lot. It's it's effectively pure software and
Speaker 1: technology that's required. And the twist on this is that
Speaker 1: to be really good at this, you have to be
Speaker 1: good at quantitative research, which is just different than software development.
Speaker 1: Bring the best software development people in the world, they're
Speaker 1: not going to be able to do some of the
Speaker 1: stuff that's required for custom indexing. That's a data science function.
Speaker 1: And that's the second function that I think is will
Speaker 1: be critically important. So just on the competitive frontier idea,
Speaker 1: I mean, there has been a lot of activity in
Speaker 1: the direct indexing space um which we mentioned intro. But
Speaker 1: you know, I think JP Morgan bought open invest and
Speaker 1: black Rock and Morgan Stanley have also been buying indux platforms.
Speaker 1: How intense is the competition at the moment. What are
Speaker 1: the sort of variations in strategies being pursued by different players? Uh?
Speaker 1: And and what can make you sort of stand out
Speaker 1: from the crowd, like what makes a custom index platform
Speaker 1: better than another one? So so direct indexing to define that,
Speaker 1: since we've used the term a few times, I think
Speaker 1: of as picking a reference index supplied by somebody else,
Speaker 1: S and P Russell and S C I whatever, and
Speaker 1: then running a tax loss harvesting strategy on top of it.
Speaker 1: And sometimes that's just you know, simple market cap index
Speaker 1: is probably most of the assets indirect indexing firms like
Speaker 1: a Parametric or Imperio which were bought as you mentioned
Speaker 1: by some of the big players. That it's it's very simple.
Speaker 1: You just try to generate after tax returns. You sell
Speaker 1: positions at a loss. It's a complicated optimization and algorithm
Speaker 1: to be clear, so it requires a lot of work
Speaker 1: on their part, but it's it's sort of one thing
Speaker 1: that you can do. Uh. In a portfolio, I think
Speaker 1: of customer indexing is the natural next uh progression in that.
Speaker 1: So if if if we're painting on a blank canvas,
Speaker 1: so to speak, as a reason we call our system canvas.
Speaker 1: If you're planning on a blank canvas, direct indect seeing
Speaker 1: a sort of like one tube of paint. It's it's
Speaker 1: one of the things that you can do in your portfolio.
Speaker 1: I think for us, staying competitive and being competitive first
Speaker 1: was arriving at the party first or getting the party started.
Speaker 1: So most of those direct indexing firms can't do anything
Speaker 1: remotely close to the kind of customization driven by our
Speaker 1: quant research capabilities that that I've described so far. So
Speaker 1: you can you basically get to pick your index and
Speaker 1: and that's that's your pick. But it's typically supplied by
Speaker 1: a third party. Our viue is it should be first party,
Speaker 1: Like we should design these things, not not SMP. We
Speaker 1: can move a lot faster, we can be a lot
Speaker 1: more specific to the individual. We can we can use
Speaker 1: our quant research muscle to do so. So those two
Speaker 1: competitive frontiers are what we're focused on. Like, if you
Speaker 1: look at who are hiring our last you know five
Speaker 1: hires are three software developers to quantitative research experts, and
Speaker 1: if we can keep pushing the envelope on what we
Speaker 1: can do at low cost. We haven't talked about costs,
Speaker 1: but these things are are very low cost. What we
Speaker 1: can do at low costs, then we should stay at
Speaker 1: the at the forefront of this trend. Can you actually
Speaker 1: just explain a little bit further the quant researching component.
Speaker 1: I mean, you mentioned the two component trading software and
Speaker 1: quand I kind of I think I intuitively get the
Speaker 1: trading software. Look, talk a little bit more about um
Speaker 1: what the quant research aspect is and why that's so
Speaker 1: pivotal to make this work. Yeah, you know, I think
Speaker 1: this is something way beyond just investing too. You're you're
Speaker 1: seeing data science pop up as something that used to
Speaker 1: be no one talked about or knew what it was.
Speaker 1: Now it's a central function in like every company, and
Speaker 1: it's not complicated, it's very simple. There there's some quantitative outcome,
Speaker 1: some measurable outcome that matters to people, and I'm talking
Speaker 1: big picture here, not just investing, and you you build
Speaker 1: a model that that does a good job of predicting
Speaker 1: that outcome. And this happened in sports with the moneyball trend.
Speaker 1: You know, we figured out that obviously you want runs,
Speaker 1: you want to score points, and you don't want to
Speaker 1: give up you don't want to give up runs in
Speaker 1: any sport, and certain things relate to that. On base
Speaker 1: percentage was the example in in moneyball. In in public
Speaker 1: market invest you want good returns, but there's other things
Speaker 1: you want to So anything that you can target, that
Speaker 1: could be companies that sell sugary drinks, well that's a
Speaker 1: that's a measurable outcome. It's hard. You have to get
Speaker 1: data sets, you have to build data sets um but
Speaker 1: you can build predictive models for outcomes that matter or
Speaker 1: information that matters to the individual. And every time you
Speaker 1: do that, you're adding an arrow to your quiver. So
Speaker 1: once we did that, Once the next family that comes
Speaker 1: to us and says we don't want to own sugary drinks,
Speaker 1: we don't have to rebuild that thing from scratch. We
Speaker 1: have the model already. Same thing for the tax loss optimization.
Speaker 1: Every time you build a new model, you sort of
Speaker 1: expand what your platform can do. And quantitative researchers that's
Speaker 1: all they do all day. So they say it's very
Speaker 1: simple terms. There's three things that matter. There's the outcome
Speaker 1: that's called the label in in the data science parlance.
Speaker 1: There's the inputs, the features, what what things are going
Speaker 1: to predict the outcome that we care about and how?
Speaker 1: And what is the model itself. It's you know, people
Speaker 1: listening probably are familiar with something very simple like living
Speaker 1: your aggression or a linear model. These are just much
Speaker 1: fancier models. That's that's all you have to really know
Speaker 1: about it. So there's inputs, there's the model, there's outputs.
Speaker 1: You have to be expert at building those things and
Speaker 1: those three parts of a model and then offering those
Speaker 1: effectively as services or products. To build a custom index
Speaker 1: in this case, or you know, predict what clothes you're
Speaker 1: gonna like in the case of something like stitch fix
Speaker 1: or whatever. It's a function that we just think will
Speaker 1: be embedded everywhere. What does this mean for e t
Speaker 1: f s and mutual funds and the sort of traditional
Speaker 1: players of fund management, because I imagine, as you just mentioned,
Speaker 1: you know this idea that if you build one custom index,
Speaker 1: basically you've created a new product that you can then
Speaker 1: roll out to additional clients. So it seems like a
Speaker 1: pretty efficient way to create you know, almost an infinite
Speaker 1: number of indexes which on the surface would would seem
Speaker 1: to um potentially threaten or at least compete with ETFs
Speaker 1: and mutual funds. I think if you narrow two taxable
Speaker 1: investors where the the underlying strategy that's being designed or
Speaker 1: implemented has has an annual turnover of twenty or less,
Speaker 1: which is sort of the crossover point for taxes, that
Speaker 1: this is a huge threat to e t f s.
Speaker 1: There in my mind, there's really no reason, especially as
Speaker 1: costs continue to fall, and it's not like they're that
Speaker 1: far apart anyway. You know, our lowest prices twenty basis
Speaker 1: points today, um so that additional let's call it ten
Speaker 1: basis points that we might get down to over the
Speaker 1: next ten years. I mean, you comp on ten basis
Speaker 1: points over time, it's not a huge difference. And so
Speaker 1: we're pretty close on cost already. And if you think
Speaker 1: about that whole segment of UH turnover would qualify for
Speaker 1: that and taxable investors that own e t f s,
Speaker 1: that is a huge segment of the market. Now above turnover,
Speaker 1: ETFs remain and I think will remain thanks to the
Speaker 1: sort of law of tax law that governs them the
Speaker 1: ultimate app right, there's just there's there's no beating. Let's
Speaker 1: say you want to invest in a pure momentum strategy
Speaker 1: or something that has a PC annual turnover. There's just
Speaker 1: no better rapper than the e t F because you
Speaker 1: don't have to pay the ongoing taxes as a taxable investor.
Speaker 1: So high turnover strategies I think will always and should
Speaker 1: always live in an e t F S for the
Speaker 1: most part, unless you know, deep customization is really important
Speaker 1: to the investor, in which case they may go custom
Speaker 1: index but below that threshold. And this applies to mutual
Speaker 1: funds too, you know, more of which are converting to
Speaker 1: e t f s or will in the future. I
Speaker 1: think this is a huge This is a huge and
Speaker 1: important uh move and shift, And obviously it's counterpositioned. E
Speaker 1: t F providers other than going into the custom indexing
Speaker 1: business cannot compete against this. I mean, it's the rapper
Speaker 1: itself by definition does not allow for customization. So Patrick,
Speaker 1: I want to uh, you know, I think of you
Speaker 1: as someone who's just sort of like the ultimate markets
Speaker 1: and business omnivore. And even like when Tracy did the intro,
Speaker 1: I mean well, would you have like four titles I
Speaker 1: think you mentioned, including host of a podcast that's a
Speaker 1: competitor to ours, you know, not all partners here but
Speaker 1: uh but no, but in all series is you have
Speaker 1: like an extraordinary like broad ray of interest. And it's
Speaker 1: evident to anyone who follows you. And I'm kind of
Speaker 1: like jealous, I would say, of how open minded you are,
Speaker 1: and whether it's like VC investing or crypto or n
Speaker 1: f T S or anything. I think you just like
Speaker 1: exhibit this sort of like first to learn more. And
Speaker 1: you know, I said in the intro, and I really
Speaker 1: felt this like my career, like as a journalist, really
Speaker 1: started in the wake of a great, great financial crisis.
Speaker 1: You know, like we're just like hammered home this idea
Speaker 1: of like passive passive passive by the index. Forget about it.
Speaker 1: Don't buy individual stocks, don't try to time the market,
Speaker 1: don't try to beat the market. Put some of your
Speaker 1: paycheck at an index fund every two weeks or whatever
Speaker 1: and just said it and forget it and look at
Speaker 1: your four one K maybe twice a year or whatever. Okay,
Speaker 1: so we all know that obviously we live now in
Speaker 1: this world of people buying all kinds of stuff, and
Speaker 1: you've like really dived head first into that. How do
Speaker 1: you think about this question of like, Okay, all the
Speaker 1: academic research says do X and don't try to time
Speaker 1: the market, but we have a lot of people who
Speaker 1: are interested in all this other stuff. How do you
Speaker 1: think about this sort of like tension and how people
Speaker 1: should think about incorporating sort of more concentrated, riskier, far
Speaker 1: out of the risk curve ideas and bets into their portfolio.
Speaker 1: It's a great question, obviously an animating one for me
Speaker 1: when I spend all my time thinking about, you know,
Speaker 1: at my own portfolio. I you know, I'm involved in
Speaker 1: a lot of people's portfolios. It's it's so interesting and important,
Speaker 1: I think, honestly, I think the answer is there's a
Speaker 1: lot of room for all this stuff in in our
Speaker 1: lives and our careers and our portfolios, and that some
Speaker 1: large component of low cost broad market exposure is appropriate
Speaker 1: advice for just about anybody. And I have to say,
Speaker 1: like when I was at when I was thinking learning
Speaker 1: about all this stuff in the early days, the passive
Speaker 1: thing makes complete sense to me. But it's also remark
Speaker 1: comply boring from a career standpoint. I mean like, Okay,
Speaker 1: you can say that and become convinced of it, but
Speaker 1: then go work and you know, manufacturing or something like.
Speaker 1: There's nothing left to do, right. You just described the whole,
Speaker 1: the whole strategy in thirty seconds. And look, I think
Speaker 1: that strategy for like literally for everybody or for the
Speaker 1: vast majority of people is incredibly smart and will produce
Speaker 1: good outcomes. Um, but it's fundamentally ignoring things that are
Speaker 1: changing rapidly where you can access them via an index fund.
Speaker 1: You know, you cannot buy some crypto in these kind
Speaker 1: of cool index like structures, but you certainly can't access
Speaker 1: let's say, early stage technology companies. That's something I'm very
Speaker 1: interested in. I spend most of my time in investing
Speaker 1: in building thinking about software. And I can buy a
Speaker 1: software e t F I suppose, But to me, it's
Speaker 1: far more interesting to build a variety of software companies
Speaker 1: like Canvas. It's far more interesting to form a VC,
Speaker 1: which I did, to invest in early stage companies and
Speaker 1: help them along the way. I I guess I'm just
Speaker 1: defined by change and understanding how systems work, and when
Speaker 1: those two things come together, there's just an unlimited amount
Speaker 1: of cool stuff to learn about. And so you know,
Speaker 1: in I spent a huge amount of time trying to
Speaker 1: understand crypto, and I still do. I just think it's fascinating. Um,
Speaker 1: I don't, I don't. I don't have a huge amount
Speaker 1: of personal exposure to it. I do have some a
Speaker 1: lot more than I used to, just because of market appreciation.
Speaker 1: And and I'm just I just like new stuff that
Speaker 1: is changing, that enables new behavior or new good outcomes
Speaker 1: for for humans, and like to have, like to be
Speaker 1: at the frontiers of these things. And yeah, I've got
Speaker 1: a lot of titles, and you know, it seems like
Speaker 1: I'm doing a lot, but I'm kind of just doing
Speaker 1: one thing, which is trying to understand what's new, what's changing,
Speaker 1: is it interesting or not? What people can help us
Speaker 1: learn about this, you know, can can we expose their
Speaker 1: ideas to the world. Can we share as broadly as
Speaker 1: we can as we learn? And and that's that's very fun.
Speaker 1: It's a lot more fun than you know. By Vanguard, uh,
Speaker 1: and by Vanguard is very very good advice. Still, this
Speaker 1: is something that I think Joe and I both wanted
Speaker 1: to ask you. But what do you see as the
Speaker 1: role of crypto in a portfolio, because you just described
Speaker 1: having a little bit of it more than you used to.
Speaker 1: And I think one way that a lot of investors
Speaker 1: think about it is as a sort of like lottery ticket,
Speaker 1: where you know, you put a little bit of money
Speaker 1: in a particular token or coin or whatever, and you
Speaker 1: kind of hold your breath and hope that it's going
Speaker 1: to be the right one to go up. So how
Speaker 1: are you thinking about it? One of my favorite investing
Speaker 1: quotes I Cammeramer who said it. But but the quote
Speaker 1: is diversification is the only rational deployment of ignorance. And
Speaker 1: I have to claim some like a lot of knowledge
Speaker 1: but but also a lot of ignorance on the topic
Speaker 1: of crypto and what the few sure of it might
Speaker 1: be in a as you said, traditional portfolio. I think
Speaker 1: traditional there is is the operative word. I don't I
Speaker 1: don't know the answer. I can tell you what I've done,
Speaker 1: which is that you know, when I learned about this stuff,
Speaker 1: the exciting core, you know, base level protocols that I
Speaker 1: spent the most time with seemed really interesting to me,
Speaker 1: and I could I could understand a future where they
Speaker 1: are critical components of how the world works. Much like
Speaker 1: http is or or smt P for email. These are
Speaker 1: other protocols that just didn't have any value associated with
Speaker 1: them that have totally changed the world. And in this case,
Speaker 1: the protocols have a value. They have a they have
Speaker 1: a they have a token or a coin or whatever
Speaker 1: you want to call it, a cryptocurrency which quote unquote
Speaker 1: powers the protocol and those things can can have and
Speaker 1: retain value or grow value. And is bitcoin gonna be
Speaker 1: a thing in ten years? You know, I'm not smart
Speaker 1: enough to know, Sure seems like it will be to me?
Speaker 1: Um is ethereum gonna be a thing? It sure seems
Speaker 1: like it to me. Uh as as something that I
Speaker 1: know countless people are using on a daily basis. How
Speaker 1: many products can you say that about with a very clever,
Speaker 1: you know, economic design behind of it, behind it and
Speaker 1: evolving design. So for me, it was it was no
Speaker 1: more complicated than Look like, these are incredibly interesting technologies.
Speaker 1: Many of the smartest people that I've encountered, and I
Speaker 1: encounter a lot of smart people in in the course
Speaker 1: of my life, are are gravitating towards this field. And
Speaker 1: you could see how philosophically these are good ideas that
Speaker 1: could could have and retained values. So I put a
Speaker 1: small position and and have have added a little bit
Speaker 1: and and never really sold anything. And and that's been
Speaker 1: my personal stance. It's not advice, it's just what worked
Speaker 1: for me. But I think of it as diversification, and
Speaker 1: I think everyone agrees to versification is good at some level.
Speaker 1: Like the SP five hunter that we talked about earlier,
Speaker 1: you should own that instead of one stock, one stock
Speaker 1: would be dune. I think there's an argument to be
Speaker 1: made that that idea of diversification needs to extend further
Speaker 1: into things that maybe we don't quite understand yet or
Speaker 1: or we're not sure where they're going to go. But
Speaker 1: seemed to have that kind of promise. You know. I
Speaker 1: was talking to someone a few months ago, I think
Speaker 1: he worked, he did he worked at a macro hedge fund,
Speaker 1: and he was talking about how like they had this
Speaker 1: very tiny crypto allocation in the fund a while back,
Speaker 1: but then over like the course of the last year,
Speaker 1: it became a fairly substantial crypto allocation because of the
Speaker 1: rapid appreciation, and it got to the point quickly where
Speaker 1: not only did it becomes substantial, but on a day
Speaker 1: to day basis, or a week to week basis, the
Speaker 1: funds returns were almost always determined by whether that crypto portion,
Speaker 1: and so I feel like there's a kind of like
Speaker 1: this like weird like I get, you know, mind virus
Speaker 1: aspect where maybe it feels like people dip their toe
Speaker 1: in the water and they're like, oh, I'm just you know,
Speaker 1: gonna have a little bit because I'm curious, and then
Speaker 1: suddenly it like dominates the daily swings in their portfolio,
Speaker 1: and then they can't stop thinking about it and can't
Speaker 1: stop talking about it, And I'm curious, Like mean, you
Speaker 1: talk to people all the time, both on your podcast
Speaker 1: and then professionally and through the VC. I'm curious if
Speaker 1: you see that phenomenon where it's like somehow it's sort
Speaker 1: of they have this like little interest or buy some
Speaker 1: on a lark, and then it next thing, you know,
Speaker 1: it's sort of like dominates their every waking second like
Speaker 1: thinking about it and watching the return. Yeah, it's like
Speaker 1: it's like surpassed you know, being from Texas or going
Speaker 1: to Harvard, Right, is like the first thing you mentioned, right,
Speaker 1: I mean, there's a joke that one of my friends
Speaker 1: who's one of the largest bitcoin owners in the world
Speaker 1: said it was very early in the ecosystem. It's like,
Speaker 1: look like, don't worry. Everyone wishes they had more bitcoin,
Speaker 1: like myself and myself included, and when something especially bit
Speaker 1: Bitcoin is my favorite because ultimately it's tethered to nothing,
Speaker 1: right like the the the use case. The use case
Speaker 1: is the value, and the value is based on perception.
Speaker 1: And unlike ether, which is actually used in a lot
Speaker 1: of you know, like like a utility in a lot
Speaker 1: of ways, for for for functions or for things that
Speaker 1: happen in in on the web, bitcoin is just this
Speaker 1: kind of like it's like a philosophy argument. It's so
Speaker 1: cool and and I think for something like that, if
Speaker 1: you own a lot of it, it's hard not to
Speaker 1: become obsessed with it. And uh, for for wealthy people,
Speaker 1: I have this idea called balance sheet syndrome, which is
Speaker 1: like you get too rich and then you all you
Speaker 1: do is like think about and talk about and worried
Speaker 1: about your balance sheet, which I think is awful by
Speaker 1: the way. Um, and you see that like crazy with
Speaker 1: with holders of a lot of crypto, and it's very
Speaker 1: very religious esque. You know, if you study mass movements
Speaker 1: or religions or history, like there's a lot shared in
Speaker 1: common here, and uh, that's not interesting to me at all,
Speaker 1: Like you know when someone like it's just not it's
Speaker 1: just it's just It's one of those things that if
Speaker 1: someone wants to talk about endlessly, like I lose interest
Speaker 1: very quickly. But I do see it kind of constantly.
Speaker 1: I want to ask about one other thing and another
Speaker 1: project that you're associated with then that sort of joint
Speaker 1: colossus and you do these like deep dive into like
Speaker 1: mechanical understandings of businesses. So it's like we we think
Speaker 1: we understand like how to Polar works or Lululemon works
Speaker 1: or GM works, And this is something you see, um
Speaker 1: that you are clearly very interesting. Is like let's really
Speaker 1: like drill down and like get to know their business
Speaker 1: models and so forth, that how they became, what they did,
Speaker 1: How has that helped you as an investor? And what
Speaker 1: do you think is the importance of that, because I
Speaker 1: don't see a lot of people doing that the way
Speaker 1: you do, like really like getting to know a business. Well,
Speaker 1: talk to us a little bit about what value you've
Speaker 1: gotten from that exercise. Yeah, one one of my one
Speaker 1: of my frustrations with a lot of investors, even the
Speaker 1: great ones. Is that as they get better and better known,
Speaker 1: like they tend towards being philosophers versus you know, on
Speaker 1: the ground thinkers like that. And I just like getting
Speaker 1: on the ground. Like there's that amazing quote. It's like
Speaker 1: one of the painters that says, like, you know, our
Speaker 1: critics are always talking about theory and and and aesthetics
Speaker 1: and whatever, and like painters are talking about like where
Speaker 1: to buy cheap turpentine and and I just like that idea.
Speaker 1: So I personally have learned a lot more. I didn't
Speaker 1: want to. I did we call these business breakdowns? And
Speaker 1: I did one yesterday on on Wyndham Hotels with my
Speaker 1: friend Lauren Taylor Wolf. And you know, we spent an
Speaker 1: hour and a half talking about Windham Hotels, right like
Speaker 1: who cares? But when when when you dive into windhom
Speaker 1: you just learn all this cool stuff about the world,
Speaker 1: like how all their brands like Super eight to this
Speaker 1: kind of lower segment of the market evolved along with
Speaker 1: the interstate highway system in the fifties and sixties, and
Speaker 1: and what the franchise economics look like for someone that
Speaker 1: starts and buys a Windham hotel versus buying a dominoes
Speaker 1: or you know whatever, like these very real on the
Speaker 1: ground things that if you pay seventy bucks for a hotel,
Speaker 1: like now I know where that seventy bucks goes, and
Speaker 1: like what the underlying economics are. And when I'm looking
Speaker 1: at another business to invest in or or to build
Speaker 1: in the future, it feels like I'm just collecting all
Speaker 1: these individual models and I can say, oh, like this
Speaker 1: looks like this piece of software somehow looks like windhom
Speaker 1: you know, doubt that one will happen, But all these
Speaker 1: points of learning in comparison, you know, Harvard is famous
Speaker 1: for its business case studies, which I think are very good.
Speaker 1: And this is just that, you know, for for and
Speaker 1: in the open and in conversation. So I like the
Speaker 1: turpentine approach to learning about business versus the very like haughty, philosophical,
Speaker 1: you know, principled approach. And I was a philosophy major,
Speaker 1: so you know, I know this takes one to know one,
Speaker 1: I guess, and that's why we do it. We we
Speaker 1: just I just like how stuff works, and I find
Speaker 1: all of the detail to be far more interesting in
Speaker 1: a Chipotle than you know, like the source of its Moat, Like,
Speaker 1: I like learning about how the guacamole has made and
Speaker 1: how you can get the cost of guacamole down by
Speaker 1: owning a guacamole farm, and this kind of stuff like
Speaker 1: just more interesting to me. You know, I think for
Speaker 1: Tracy and I that probably that speaks to us because
Speaker 1: we I think some of both of our favorite episodes
Speaker 1: have been like let's talk about how trucking works. It
Speaker 1: reminds me of like uh Bob Dylan's actually his Nobel
Speaker 1: Prize speech where it's like people always talk about Shakespeare,
Speaker 1: you know, something like great literary of playwright, but Shakespeare
Speaker 1: was thinking about the quote is like where am I
Speaker 1: going to get a human skull? Because that needed to
Speaker 1: me and like to put on to put on a
Speaker 1: performance of Hamlet that yorick. So like I feel like
Speaker 1: you know that actually, like understanding what matters for the
Speaker 1: person doing the thing is often way more interesting than
Speaker 1: like the deep theory. I mean we we both talked
Speaker 1: to Ryan Peterson at flex Sport, and you know, you
Speaker 1: talk to someone like that and you're talking, you're talking
Speaker 1: about maritime law and how it came to be, and
Speaker 1: what you realize is, like God, everything's just messy, like
Speaker 1: nothing's neat and tidy, like like Aristotle was right, not
Speaker 1: not Plato. You know, if you know your philosophy, and
Speaker 1: the details matter and path dependence matters, and you just
Speaker 1: like everything is a compromise and you gotta keep pushing,
Speaker 1: like all these great stories like Ryan will tell about
Speaker 1: their business, like he ran headfirst into it, not a
Speaker 1: brick wall of steel, wall of just inertia, and like
Speaker 1: weird paper and pen processes, and he learned about how
Speaker 1: stuff moves around on the ocean and it's way more
Speaker 1: interesting and complicated than you could possibly imagine. And and
Speaker 1: my friend zachs Zack Cantra has an amazing article he
Speaker 1: always sends around called reality has a surprising amount of detail,
Speaker 1: And I just loved I love that idea, like learning
Speaker 1: about maritime law and shipping invoices and why it matters
Speaker 1: to the world. And it's just so much more interesting
Speaker 1: to me than than some you know, broadly applicable concept detail.
Speaker 1: It's more fun. I love that saying, Um, that's really good.
Speaker 1: We're going to have to take that to heart in
Speaker 1: some future Logistics and supply episodes. I think, Okay, well, Patrick,
Speaker 1: we're going to leave it there, but thank you so
Speaker 1: much for coming on. That was really great. Thank you
Speaker 1: guys so much for having me. That was great, Patrick,
Speaker 1: thank you so much. Okay, so that was really enjoyable.
Speaker 1: And obviously, um, Patrick is a pro at podcasting and
Speaker 1: a competitor. UM, so we shouldn't hype his podcast too much,
Speaker 1: although it is very good. Um. But one thing I
Speaker 1: was thinking about is you know that, um, you know
Speaker 1: that last point he was making about, you know, reality
Speaker 1: is sort of full of details, are all about the details,
Speaker 1: And I was sort of thinking about that in the
Speaker 1: context of the custom indexing business itself. So this idea
Speaker 1: that if you want an index that actually reflects the
Speaker 1: world as you see it, or you know, as you
Speaker 1: want it to be reflected, like, you are going to
Speaker 1: have to drill down into specific companies and maybe it
Speaker 1: makes more sense to make your own judgment call on
Speaker 1: what those should be versus actually buying you know, the
Speaker 1: top five hundred firms by market cap. Yeah, I thought,
Speaker 1: I mean, I thought that whole conversation is interesting and
Speaker 1: he was definitely sort of speaking our language at the end.
Speaker 1: I thought you were going to go the other way
Speaker 1: with the point about like, you know, again that buying
Speaker 1: the S and P five hundred seems like the easiest
Speaker 1: like strategy in the world. But as he points out,
Speaker 1: like even that is like and you pointed out in
Speaker 1: the intros, like even that as an doble like feet
Speaker 1: of technology, even though like the technology has been abstracted
Speaker 1: away to the point where we like I don't think
Speaker 1: most people think of like buying spy as a technology thing,
Speaker 1: but even that, like just think about like how messy
Speaker 1: that must have been, like to create a piece of
Speaker 1: software that can like rebalance five stocks every minute or
Speaker 1: every day, Like, given that, it is like sort of
Speaker 1: an extraordinary feet of like detail and attention, you know,
Speaker 1: attention to detail. Yeah, But also it sort of ties
Speaker 1: into his point about diversification as well, which is like
Speaker 1: passive investing isn't necessarily very good at identifying the next
Speaker 1: up and coming thing for obvious reasons. So like there's
Speaker 1: not going to be some sort of crypto play in
Speaker 1: the SMP five hundred um, so you're not going to
Speaker 1: make a lot of money from that, and so you
Speaker 1: kind of have to go out and seek those outside
Speaker 1: of the realms of traditional fund management. I think, well,
Speaker 1: Visa Blood and n f T recently, so they're now
Speaker 1: now they could be okay, but no, no, no, you're
Speaker 1: absolutely right. Yeah, everyone's um buying bitcoin for they're like
Speaker 1: cash reserve, so everything will be a crypto play soon enough.
Speaker 1: But you know, if you wanted to get in early,
Speaker 1: you would have struggled without some sort of absolutely yeah, okay, um,
Speaker 1: shall we leave it there? Let's leave it there. Okay.
Speaker 1: This has been another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway and I'm Joe wisn't Thal. You can follow
Speaker 1: me on Twitter at The Stalwart. Follow our guest on Twitter,
Speaker 1: Patrick O'Shaughnessy. He's at Patrick Underscore Oshang. Follow our producer
Speaker 1: Laura Carlson. She's at Laura M. Carlson. Followed the Bloomberg
Speaker 1: head of podcast were incessca Levie at Francesco Today, and
Speaker 1: check out all of our podcasts at Bloomberg under the
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