WEBVTT - Did Passive Investing Fuel A Bubble In Ultra-Large Tech Stocks? 0:00:10.600 --> 0:00:15.120 Hello, and welcome to another episode of the odd Lot Podcast. 0:00:15.200 --> 0:00:19.079 I'm Joe Wisenthal and I'm Tracy Halloway. Tracy, do you 0:00:19.120 --> 0:00:22.720 remember our episode a few weeks ago with Mike Green. 0:00:23.720 --> 0:00:27.840 I do, indeed. Fantastic episode. Yeah, this idea and of 0:00:27.880 --> 0:00:31.120 course for those who don't recall it or those uh 0:00:31.320 --> 0:00:34.920 maybe haven't listen to it, the topic was what are 0:00:35.040 --> 0:00:38.960 the sort of distortions in the market that are being 0:00:39.000 --> 0:00:41.879 caused by the rise of passive investing. People are just 0:00:42.280 --> 0:00:45.559 throwing money a month after month, paycheck after paycheck in 0:00:45.600 --> 0:00:48.239 the index funds. A lot of people think it's a 0:00:48.240 --> 0:00:51.720 really good trend, but there is more attention and more 0:00:51.800 --> 0:00:54.600 questions being raised by what is it really like mean 0:00:54.720 --> 0:00:58.080 for markets and market structure when so much money isn't 0:00:58.120 --> 0:01:03.600 going towards individual security selection? Right, there's this assumption that 0:01:03.680 --> 0:01:08.080 passive investing is actually good in many ways because investors 0:01:08.120 --> 0:01:10.640 are paying lower fees so over the long run they 0:01:10.680 --> 0:01:14.480 make more money. But also in the sense that passive investing, 0:01:14.560 --> 0:01:18.080 because you're just putting money into these big benchmarks that 0:01:18.200 --> 0:01:22.360 are reflective of the market as it is, that you're 0:01:22.360 --> 0:01:26.959 not actually impacting the market at all, and only now 0:01:27.000 --> 0:01:30.360 are we starting to see some real criticism of that 0:01:30.440 --> 0:01:33.920 thesis and also some academic research where people are saying 0:01:33.959 --> 0:01:38.720 that actually passive investing and benchmark index construction can impact 0:01:38.880 --> 0:01:43.000 the market itself. Right, And of course, you know passive investing. 0:01:43.040 --> 0:01:46.200 You mentioned the low fees. There is also a body 0:01:46.240 --> 0:01:51.120 of academic research on the side of passive investing, believers 0:01:51.120 --> 0:01:54.600 in efficient markets and so forth, to essentially say, look, 0:01:55.200 --> 0:01:58.960 the sum total of all active investors is just going 0:01:59.000 --> 0:02:02.600 to be the index self, and you're unlikely to beat 0:02:02.640 --> 0:02:05.520 the market with your own stocks selection, so why not 0:02:05.680 --> 0:02:08.480 just buy the market itself and then you get the 0:02:08.520 --> 0:02:10.520 same return as everyone else, but at least you didn't 0:02:10.560 --> 0:02:14.840 pay the fees. My Green's argument when we talked to 0:02:14.919 --> 0:02:19.680 him was essentially, it's creating all these distortions because the 0:02:19.760 --> 0:02:22.480 money just sort of goes to the index itself that 0:02:22.600 --> 0:02:25.600 drives the index higher, and anyone who's trying to buy 0:02:25.720 --> 0:02:30.119 individual stocks, you know, can't possibly compete with a strategy 0:02:30.240 --> 0:02:33.440 that's just put it all on the index. Right. And 0:02:33.560 --> 0:02:37.240 there's this sort of underlying theme that's running through all 0:02:37.280 --> 0:02:40.560 of this, which is what does passive investing actually imply 0:02:40.800 --> 0:02:44.480 about the functioning of the market, and I suppose, uh 0:02:44.520 --> 0:02:47.959 the state of capitalism, right, markets are supposed to be 0:02:48.160 --> 0:02:52.079 funneling money in an efficient way, and if passive investing 0:02:52.160 --> 0:02:56.000 is causing these sorts of distortions where these overvalued companies 0:02:56.040 --> 0:02:59.359 just get more and more overvalued, I guess then is 0:02:59.480 --> 0:03:03.799 capital some really working exactly right? So today we're going 0:03:03.840 --> 0:03:07.600 to explore this topic further because it's clearly something that's 0:03:07.600 --> 0:03:10.560 of growing interest, and we're gonna talk with someone else 0:03:10.639 --> 0:03:15.320 who's done research on this exact question, also making the 0:03:15.440 --> 0:03:21.120 argument that the rise of passive is creating weird, anomalous 0:03:21.160 --> 0:03:25.560 bubble type behaviors in some stocks that's clearly different than 0:03:26.040 --> 0:03:28.839 the old days. And so I think we're gonna get 0:03:28.880 --> 0:03:33.040 more granular on what we're really seeing in the market 0:03:33.440 --> 0:03:36.440 that says something is weird about how the market is 0:03:36.440 --> 0:03:40.720 behaving specifically specifically because of the rise of passive. Great, 0:03:40.920 --> 0:03:43.880 let's go granular. All right, We're gonna go granular. We're 0:03:43.880 --> 0:03:47.800 gonna be talking today with Vincent Deliad. He's the director 0:03:47.880 --> 0:03:51.440 of Global Macro for I N T l F C. Stone. 0:03:52.040 --> 0:03:55.920 UH major broker dealer recently came out with a report 0:03:56.200 --> 0:04:00.640 talking about the connection between passive investing and the sort 0:04:00.680 --> 0:04:03.880 of rise of these mega caps and the connection between 0:04:03.960 --> 0:04:08.320 the incredible performance of stocks like Apple and Microsoft and 0:04:08.480 --> 0:04:10.440 Alphabet and so on, and what that has to do 0:04:10.480 --> 0:04:13.360 with passive investing. So, Vincent, thank you very much for 0:04:13.480 --> 0:04:16.479 joining us. Thanks for having me a pleasure. First of all, 0:04:16.480 --> 0:04:21.400 before we get into the question of the distortionary impacts 0:04:21.480 --> 0:04:26.000 of passive investing, what is I mean, some people debate 0:04:26.040 --> 0:04:29.200 what that even means passive investing, and some people say, oh, 0:04:29.200 --> 0:04:32.080 it's a myth, passive investing isn't even the thing or 0:04:32.360 --> 0:04:34.960 whatever it is, or that everyone is making some sort 0:04:34.960 --> 0:04:38.200 of active decision. But when we talk about this, how 0:04:38.240 --> 0:04:42.640 do you define the phenomenon that seems to define this, uh, 0:04:42.680 --> 0:04:45.720 this sort of age and investing. Yeah. Absolutely, I mean 0:04:47.040 --> 0:04:49.760 I've been in my work. I've just define it as 0:04:50.320 --> 0:04:55.440 investing it in um market gap weighted in the season. 0:04:55.480 --> 0:04:57.720 And I do realize that people use them for short 0:04:57.800 --> 0:05:01.000 term trading as as a replacement to other vehicle and 0:05:01.040 --> 0:05:02.520 that at the end of the day there is a 0:05:02.600 --> 0:05:06.840 human behind it. But my my focus, um, I think 0:05:06.880 --> 0:05:10.000 and that's what the I think that the missing link 0:05:10.080 --> 0:05:11.720 is for for a lot of people is to ask 0:05:11.760 --> 0:05:13.920 not so much where the money is going, but where 0:05:14.080 --> 0:05:16.400 is it coming from? And I think that's what creates 0:05:16.400 --> 0:05:21.200 a distortion. So in the research note that Joe mentioned, 0:05:21.640 --> 0:05:25.160 you subtitle it as dumb alpha how to be an 0:05:25.200 --> 0:05:29.400 intelligent investor in a stupid age, which I find very 0:05:29.440 --> 0:05:32.599 amusing but maybe a lot of index investors would find 0:05:32.680 --> 0:05:36.440 kind of insulting. Why do you think passive investing or 0:05:36.480 --> 0:05:40.599 index investing is dumb alpha? Walk us through your thought 0:05:40.640 --> 0:05:44.400 process here, because, as you point out, actually following the 0:05:44.480 --> 0:05:49.280 indusicries putting money in the most overvalued stocks would have 0:05:49.320 --> 0:05:53.680 paid off in recent times. Absolutely. I mean this was 0:05:53.720 --> 0:05:56.760 the driver for for the title is you look at 0:05:56.880 --> 0:05:59.320 last year, I think the SMP five index out before 0:05:59.320 --> 0:06:03.159 maybe five sound of global stocks. So if you wanted 0:06:03.200 --> 0:06:07.400 to generate alpha, then you have this traditional framework right 0:06:07.440 --> 0:06:10.599 where you have beta, which is just buying exposure to 0:06:10.640 --> 0:06:12.640 the index, and an alpha I'm gonna, you know, pick 0:06:12.680 --> 0:06:14.600 stocks and because I'm smart and I'm going to beat 0:06:14.640 --> 0:06:17.000 the market. What I would slap on its head last year, 0:06:17.640 --> 0:06:20.160 the way to generate alpha was to own the index, 0:06:20.560 --> 0:06:23.200 and pretty much anyone who did not own Apple or 0:06:23.200 --> 0:06:25.600 Microsoft in proportion to their weights in the index ended 0:06:25.680 --> 0:06:30.159 up under performing, regardless of how skillful you were with 0:06:30.160 --> 0:06:32.440 with your trading. And you know, it's recently talking to 0:06:32.520 --> 0:06:34.640 a friend who runs a hedge phone and had a 0:06:34.680 --> 0:06:38.599 good year but underperformed the index because Apple was reclassified, 0:06:38.640 --> 0:06:42.159 and just that simple factory classifying Apple men that a 0:06:42.240 --> 0:06:44.479 great year ended up being a bad year. And I 0:06:44.480 --> 0:06:47.120 think that's an experience that's very common for for many 0:06:47.120 --> 0:06:51.839 investors last year. So you mentioned that the SMP five 0:06:51.920 --> 0:06:57.080 hundred itself is essentially where the alpha is, and that 0:06:57.240 --> 0:07:01.480 it beat the majority of stocks. Of the stocks underperformed. 0:07:02.120 --> 0:07:06.040 I was under the oppression that historically most stocks did 0:07:06.120 --> 0:07:09.279 bad and that historically the vast majority of gains in 0:07:09.320 --> 0:07:14.320 any environment, whether it's passive or whatever, are often generated 0:07:14.320 --> 0:07:16.360 by a handful of stocks, and that over time most 0:07:16.360 --> 0:07:21.440 stocks do underperform the index. How different is what you're 0:07:21.480 --> 0:07:24.560 seeing now with that level of out performance of the 0:07:24.600 --> 0:07:27.560 index versus a twenty years ago or forty years ago 0:07:27.600 --> 0:07:29.880 or long before. Just sort of buying the s P 0:07:30.080 --> 0:07:32.960 y E t F was a major thing that investors 0:07:32.960 --> 0:07:35.600 did right. So what you're referring to, I think is 0:07:35.600 --> 0:07:37.760 is Barto's law. You know, you get eighty percent of 0:07:37.800 --> 0:07:41.080 your revenue from your top customers, or the same thing 0:07:41.120 --> 0:07:44.840 with stock market returns. Uh, what's unique about last year, 0:07:44.920 --> 0:07:48.440 or maybe not unique, but at least rare, is that 0:07:48.520 --> 0:07:52.440 the larger stock in the index massively outperformed. Then you 0:07:52.480 --> 0:07:54.520 can go back. I mean, it's it's a very easy 0:07:54.520 --> 0:07:56.360 simulation to run. I mean, you can go back on 0:07:56.400 --> 0:07:58.680 the data you know up to the beginning of the 0:07:58.720 --> 0:08:02.120 twentieth century. And one of the easiest way to have 0:08:02.160 --> 0:08:05.160 generated consistent alpha would just be a void your larger 0:08:05.200 --> 0:08:07.800 stock in the index. I mean, that's the I care 0:08:07.920 --> 0:08:10.760 scurs if you want. You know, once, once I car 0:08:11.120 --> 0:08:13.240 runs too close to the sun, he falls down. Like 0:08:13.480 --> 0:08:16.080 usually stocks that become the largest in the world even 0:08:16.160 --> 0:08:21.160 face increased competition, regulated scrutiny, just ubers because you know, 0:08:21.160 --> 0:08:24.240 it's hard to grow and usually fall back. And of 0:08:24.280 --> 0:08:27.560 course last year was the big exception, with you know, 0:08:27.600 --> 0:08:30.280 Apple up like probably on a toll return basis close 0:08:31.640 --> 0:08:34.400 and then Microsoft closely behind. So all you have to 0:08:34.400 --> 0:08:37.160 do last year to a fantastic year is just on 0:08:37.320 --> 0:08:39.760 the largest two stocks in the world, which is usually 0:08:39.800 --> 0:08:42.560 not the way you make the money. So can you 0:08:42.600 --> 0:08:46.080 walk us through the mechanics of what's actually happening here, 0:08:46.240 --> 0:08:50.880 Like why are these you know, big overvalued stocks like Microsoft, 0:08:50.920 --> 0:08:55.880 like Apple? Why does money continue to flow into them? Right? 0:08:56.200 --> 0:08:59.079 And I think that's that is the part where I 0:08:59.120 --> 0:09:04.960 think the the criticism of passive is traditionally weak, and 0:09:05.000 --> 0:09:08.000 I think part of it comes from a bigger place 0:09:08.040 --> 0:09:10.760 of resentment. Like you have a lot of active managers 0:09:10.760 --> 0:09:13.640 that are the performed and and every year they read 0:09:13.679 --> 0:09:18.520 the SNP a active versus passive reports that says, oh, 0:09:19.240 --> 0:09:22.360 of the age underperform and that number rises over time, 0:09:22.440 --> 0:09:25.360 and it's a it's a very painful fit. So you 0:09:25.400 --> 0:09:29.040 have a lot of like resentment and and and he said, well, 0:09:29.080 --> 0:09:31.600 it's because you know the index functions by the larger stocks, 0:09:32.320 --> 0:09:34.600 and that's not exactly true. I mean it's very easy 0:09:34.640 --> 0:09:37.560 if you're Vanguard or black Rock to to respond, well, no, 0:09:38.000 --> 0:09:42.760 if we market gap waiting, we are not overweighting anything. 0:09:43.280 --> 0:09:47.840 We let we let the active segment of the markets 0:09:47.840 --> 0:09:50.080 at price, and we just span wagon. We don't do 0:09:50.160 --> 0:09:54.880 price discovery, So any sort of um miss pricing is 0:09:55.120 --> 0:09:58.640 not coming from us. And that's a powerful argument one 0:09:58.679 --> 0:10:02.959 that I I don't think we should take the correct 0:10:03.040 --> 0:10:06.640 argument is more, okay, passive does not create distortion, But 0:10:06.800 --> 0:10:09.679 can we think about where where the money coming into 0:10:09.679 --> 0:10:13.480 passive vehicle is coming from? And if this sector is 0:10:13.520 --> 0:10:18.559 structurally underway these megacaps, then shifting from them into market 0:10:18.600 --> 0:10:22.160 cap weight will result in net buying of the megacap stocks. 0:10:22.200 --> 0:10:26.160 So what do we see empirically in terms of the 0:10:26.320 --> 0:10:31.480 performance of across the spire or other indicries. So you 0:10:31.559 --> 0:10:33.560 and you made the point right in the beginning, which 0:10:33.600 --> 0:10:35.520 I think was key. It's not enough to say that 0:10:35.559 --> 0:10:38.160 the money is going into pass of it's that it's 0:10:38.160 --> 0:10:40.079 come what it's coming out of it. So what you're 0:10:40.360 --> 0:10:43.400 said in that last answer is essentially the money is 0:10:43.400 --> 0:10:47.760 coming out of active managers. The active managers were probably 0:10:47.960 --> 0:10:51.600 underweight the very largest companies, and so therefore there is 0:10:51.679 --> 0:10:56.640 this rotation of people putting money UH into funds that 0:10:56.720 --> 0:11:00.160 are are more heavily exposed to the largest companies. Do 0:11:00.240 --> 0:11:03.839 we see the reverse though? Where do we see UH 0:11:03.960 --> 0:11:07.880 Now just the upward pole on the biggest companies, but 0:11:07.920 --> 0:11:12.839 do we see drags on smaller companies relative weakness of 0:11:12.920 --> 0:11:15.880 the lower end of the five. So that's not just 0:11:15.960 --> 0:11:19.719 about the behavior of a few tech mega caps. Yeah, absolutely, 0:11:19.800 --> 0:11:23.800 I mean you have because generally it's you know, you say, 0:11:23.840 --> 0:11:27.240 an asset to buy another one, so it's not really 0:11:27.440 --> 0:11:29.280 new money. I mean, if anything, that's been one of 0:11:29.320 --> 0:11:33.640 the um peculiarities of this cycle is how little new 0:11:33.679 --> 0:11:36.080 money has gone into the market. You know, the investor 0:11:36.200 --> 0:11:38.880 mostly sides size staying on the sideline pretty much. Is 0:11:39.360 --> 0:11:44.200 really since the Vics armageddon in into January eighteen, you've 0:11:44.240 --> 0:11:48.640 seen steady outflows on equity phones, more more and more 0:11:48.679 --> 0:11:50.559 outflows some metual phones than you have from ets on 0:11:50.600 --> 0:11:53.120 net selling, which is very unusual as the market makes 0:11:53.120 --> 0:11:55.960 the top. So it's been indeed not new money but 0:11:56.520 --> 0:11:59.280 shifting money, and and so the place where the money 0:11:59.360 --> 0:12:01.600 to to MEAs of that effect, what I did is 0:12:02.240 --> 0:12:05.480 I looked at the top two d largest mutual froms 0:12:05.480 --> 0:12:09.560 in the US with management field more than one percent, 0:12:10.440 --> 0:12:12.959 and I thought that would be a very good proxy 0:12:13.040 --> 0:12:18.520 for the asset losing segment of the market obviously, uh. 0:12:18.559 --> 0:12:21.160 And I looked at the top twenty holdings and I 0:12:21.200 --> 0:12:23.520 looked whether they had any of them are called the 0:12:23.559 --> 0:12:27.280 thank plus Fang plus Microsoft testline. So for fact that 0:12:27.280 --> 0:12:29.960 the big megacaps have been driving the rally. And what 0:12:30.080 --> 0:12:33.439 I found is that more than half of these mutual 0:12:33.480 --> 0:12:36.800 forms do not have the Fank plus in their top 0:12:36.840 --> 0:12:41.680 ten holding UH, and the vast majority of them who 0:12:42.160 --> 0:12:44.880 own these stocks have them in a much more proportion 0:12:44.920 --> 0:12:47.200 than they were in the index. So to me, that 0:12:47.320 --> 0:12:49.839 is the source of this distortion, as these guys lose money, 0:12:49.880 --> 0:12:53.400 and as that money flows into market cap waiting index 0:12:54.400 --> 0:12:58.240 the way UM in terms of of net flow, it 0:12:58.280 --> 0:13:02.319 means net selling of these guys on which is primarily 0:13:02.400 --> 0:13:07.560 value oriented small cap stocks into large growth And to 0:13:07.679 --> 0:13:11.920 answer finally answer your your question, UM, you certainly see 0:13:11.920 --> 0:13:14.880 that enormous valuation discrepancy that has open between you can 0:13:14.880 --> 0:13:18.120 growth and value. Um. Actually it's higher today than it 0:13:18.240 --> 0:13:19.920 was back at the peak of two thousand if you 0:13:20.080 --> 0:13:21.800 get the FAMI French data that goes back all the 0:13:21.840 --> 0:13:24.520 way to the twenties. The slope of the market meaning 0:13:24.559 --> 0:13:28.440 how how expensive your most decides, which is your cheapest decide, 0:13:28.440 --> 0:13:31.560 has never been greater and she's consistently we being seeing 0:13:33.360 --> 0:13:37.680 What do you say to two people who would argue that, UM, 0:13:37.760 --> 0:13:40.640 the price on something like an Apple or a Microsoft 0:13:40.720 --> 0:13:44.560 is justified by the amount of dividends or buy backs 0:13:44.600 --> 0:13:46.640 that they've been doing in the market. So if you 0:13:46.720 --> 0:13:49.920 can't get a massive growth in the share price, maybe 0:13:49.920 --> 0:13:53.280 you can get growth through the dividend for instance. So 0:13:54.040 --> 0:13:56.480 that would be one argument for buying these things even 0:13:56.520 --> 0:14:01.080 at inflated levels. What do you say to that, right, Well, 0:14:01.320 --> 0:14:04.480 first of all, I wouldn't exactly define the dividend deals 0:14:04.480 --> 0:14:08.679 as extremely high. I mean, you could probably have made 0:14:08.679 --> 0:14:14.800 that argument in December December twenty four eighteen when went Apples, 0:14:14.920 --> 0:14:17.560 you know, trading at a UM I don't like eleven 0:14:17.600 --> 0:14:20.880 twelve p something like that. After last year, it becomes 0:14:20.920 --> 0:14:24.160 a lot harder, especially and again as as I explained 0:14:24.160 --> 0:14:26.440 that the money is coming from forms that have a 0:14:26.520 --> 0:14:30.080 value tilt to them, So if anything, they're probably selling 0:14:30.080 --> 0:14:32.560 stock to the higher dividion deild to go into into 0:14:32.640 --> 0:14:35.440 lower dividient deal. But the buyback question is is also 0:14:35.520 --> 0:14:38.840 quite interesting um and I think it adds to this 0:14:39.000 --> 0:14:41.920 kind of supply and demand demanding balance. If you look 0:14:41.960 --> 0:14:45.280 at last year, it's no surprise at the best performing 0:14:45.320 --> 0:14:48.840 stock where Apple and Microsoft the two large gap texts 0:14:48.840 --> 0:14:52.320 with the largest buyback programs. So you have this rotation 0:14:52.360 --> 0:14:54.800 that resulting kind of structural buying at these stocks, and 0:14:54.800 --> 0:14:56.840 then on top of that you have a I mean, 0:14:56.960 --> 0:14:58.640 I don't have the exact number, but I think for 0:14:58.680 --> 0:15:00.280 Apple it was a closed to five to s person 0:15:00.240 --> 0:15:02.360 on the market gab that they brought back last year. 0:15:03.000 --> 0:15:07.120 And I mean, I hate to sound to say it, 0:15:07.200 --> 0:15:09.760 but sometimes the market goes up because there's mobiles and 0:15:09.840 --> 0:15:13.800 set us what about Okay? So one of the things 0:15:13.840 --> 0:15:17.840 that you point out is that historically speaking, you could 0:15:17.920 --> 0:15:23.120 generate alpha simply as easily as avoiding the biggest companies 0:15:23.480 --> 0:15:25.520 in the index, and that you know, there's just sort 0:15:25.520 --> 0:15:28.480 of like a natural I guess maybe the icarous effect 0:15:28.480 --> 0:15:30.680 following too close to the sun or some sort of 0:15:31.080 --> 0:15:34.880 natural diseconomies of scale where there's always so forth so 0:15:34.960 --> 0:15:39.040 far you can go. What about the idea though, that 0:15:39.440 --> 0:15:42.200 tech is unique and the way it's unique is that 0:15:42.640 --> 0:15:46.560 the competitiveness of data driven companies goes up as they 0:15:46.560 --> 0:15:50.000 get bigger. So if you're a Facebook and you have Instagram, 0:15:50.120 --> 0:15:52.840 you can serve a higher quality of ads with a 0:15:52.880 --> 0:15:56.480 billion users than a company that just has a million 0:15:56.560 --> 0:15:58.640 users because you have so much more data and your 0:15:58.640 --> 0:16:01.400 business runs better. And of what you could make the 0:16:01.480 --> 0:16:06.240 argument that these megacaps are better and more competitive and 0:16:06.320 --> 0:16:10.000 more in a position to grow organically, setting aside share 0:16:10.040 --> 0:16:13.240 price then big companies in the past, because there are 0:16:13.440 --> 0:16:17.560 returns to scale and that maybe you just can't compare 0:16:17.960 --> 0:16:20.680 a really large tech company that has the advantage of 0:16:20.720 --> 0:16:23.720 all this data versus I don't know, a big steel 0:16:23.760 --> 0:16:27.000 company from fifty years ago. Yeah, that is a very 0:16:27.160 --> 0:16:30.880 white u K argument, which you know, coincidently that the 0:16:30.960 --> 0:16:34.600 last time we saw this this phenomenon was you remember 0:16:34.640 --> 0:16:39.760 when when Cisco in the in the fourth quarter. You know, 0:16:39.880 --> 0:16:43.280 I think triple quadrupled in just three months, and I 0:16:43.280 --> 0:16:45.760 think it end up at a close to sixion market gap, 0:16:45.800 --> 0:16:47.600 and and then that was the top of the market. 0:16:47.960 --> 0:16:49.760 But the argument was exactly the same. It was it 0:16:49.880 --> 0:16:52.720 the network effect, right, I mean, as we enter in 0:16:52.760 --> 0:16:57.760 this dematalized world, we no longer have the you know, 0:16:58.040 --> 0:17:00.600 the low of the mission return, which from montl principle 0:17:00.640 --> 0:17:02.960 of economics no longer applies because you're dealing with we 0:17:03.520 --> 0:17:07.080 with data instead of things, and the more people are 0:17:07.080 --> 0:17:10.080 are on your network, the more valuable it becomes. Today, 0:17:10.119 --> 0:17:14.879 there is more of a big data AI uh tweak 0:17:14.960 --> 0:17:17.800 to the argument, but it's definitely the same one. Um 0:17:17.840 --> 0:17:19.560 I mean, I'll just point to the experience of of 0:17:19.640 --> 0:17:21.760 two thousand. You know, it didn't work out all that 0:17:21.800 --> 0:17:24.920 wealth for Cisco, uh, and then for the companies for 0:17:25.040 --> 0:17:27.040 which I think there was indeed some sort of a 0:17:27.119 --> 0:17:33.040 natural monopoly, like Microsoft, Eventually the regulators caught on with it. 0:17:33.040 --> 0:17:36.680 Because if reality is the way you describe it, and 0:17:37.080 --> 0:17:39.240 I think then we have a almost a social and 0:17:39.240 --> 0:17:42.560 political problem that you know, wealth just accrues to the 0:17:42.560 --> 0:17:47.320 one that have the most powerful platform, and competition becomes impossible, right, 0:17:47.359 --> 0:17:50.000 which is when you would expect regulatory pressure to come 0:17:50.040 --> 0:17:52.680 into the play as well. And that's exactly what happened 0:17:52.680 --> 0:17:55.159 to Microsoft back in you know, with the various and 0:17:55.760 --> 0:17:58.239 probe in the both Europe and the US in the 0:17:58.320 --> 0:18:11.600 late nineties. One of the really interesting things in your 0:18:11.600 --> 0:18:15.240 report is you talk a little bit about demographics and 0:18:15.400 --> 0:18:21.120 different approaches to investing between baby boomers and millennials, who 0:18:21.160 --> 0:18:24.280 are you know, really just starting to accrue wealth in 0:18:24.320 --> 0:18:27.119 the stock market. Can you talk about how that plays 0:18:27.240 --> 0:18:31.280 into your thesis about you know, money flowing into certain things, 0:18:31.320 --> 0:18:36.199 but also money coming out of certain things, right, I 0:18:36.200 --> 0:18:40.879 mean overwhelmingly, um, you know, baby boomers are in you know, 0:18:41.280 --> 0:18:45.320 they came of age, you know, really started saving in 0:18:45.359 --> 0:18:47.920 the nineties at the time when you had the Peter Lynch, 0:18:48.480 --> 0:18:51.920 the big you know mutual from managers and they were 0:18:51.920 --> 0:18:55.200 happy to pay you know, one percent management fee to 0:18:55.400 --> 0:18:59.960 invest with an exceptional type at the time active manager 0:19:00.119 --> 0:19:03.240 actually did perform quite well and anywhere returns were higher, 0:19:03.320 --> 0:19:06.760 so people were not less constensitive. And as as as 0:19:06.760 --> 0:19:10.120 I'm sure everybody knows here that the medium baby boomer 0:19:10.280 --> 0:19:14.480 is somewhere around six sixty five. As you head into retirement, 0:19:14.640 --> 0:19:17.119 you reduce your allocation to risk as that increased that 0:19:17.200 --> 0:19:20.560 of bonds, which in many way explains the floor paraducts 0:19:20.560 --> 0:19:23.280 that I was highlighting before, where we see the market 0:19:23.280 --> 0:19:26.280 making you high, but money coming out of major funds. 0:19:26.800 --> 0:19:30.640 So boomers are selling their holdings which are primarily made 0:19:30.640 --> 0:19:35.600 of high fee value tilted small cap tilted mutual funds. 0:19:35.680 --> 0:19:38.840 And to the extent that millennials are building wealth, which 0:19:39.000 --> 0:19:41.080 you know, as you all know, is not as fast 0:19:41.119 --> 0:19:45.720 as everyone would wish, um, that that money is primarily 0:19:45.720 --> 0:19:49.200 invested yeah, you know, robot advisor or even directly in 0:19:49.480 --> 0:19:53.199 local CITF and it's a very it's very hard to 0:19:53.200 --> 0:19:57.560 see the strength change, um, in two thousand twenty two one. 0:19:58.600 --> 0:20:01.480 As much as like and you know, someone who believes 0:20:01.520 --> 0:20:05.840 in market based allocation of capital and and and the 0:20:05.920 --> 0:20:09.320 value of price discovery, it's very hard to see this 0:20:10.320 --> 0:20:14.520 change in the near or even medium term. I want 0:20:14.560 --> 0:20:18.320 to go back real quickly to the question of, uh, 0:20:18.480 --> 0:20:22.000 comparing mega caps today versus back of the day when 0:20:22.040 --> 0:20:24.520 it was a big steel company. So as if the 0:20:24.600 --> 0:20:28.600 day were recording this just for people's uh, you know knowledge, 0:20:28.960 --> 0:20:31.160 we're recording this a few weeks before it comes out. 0:20:31.520 --> 0:20:34.120 But the day before we recorded this, we got earnings 0:20:34.160 --> 0:20:38.040 from one of those mega caps, Alphabet the core advertising 0:20:38.080 --> 0:20:44.320 business up seventeen percent, the cloud business, I mean whatever, 0:20:44.680 --> 0:20:47.960 it was, the biggest company in or whatever. I don't 0:20:48.000 --> 0:20:50.119 know what it was, but probably some big industrial right 0:20:50.640 --> 0:20:54.640 like they were growing like this, were they you had 0:20:54.720 --> 0:20:57.080 such incredible like I just want to push I mean, 0:20:57.119 --> 0:21:00.760 these are like incredible numbers. That's what would say, okay 0:21:00.760 --> 0:21:04.479 forgetting passive, forgetting all of this, Like it's just it's uh, 0:21:04.840 --> 0:21:08.640 they're incredible juggernauts that make more and more money every year. 0:21:08.960 --> 0:21:11.719 And it's funny you should bring up the sixties and 0:21:11.760 --> 0:21:15.480 seventies because you actually had something very similar, which is 0:21:15.480 --> 0:21:18.280 the nifty fifties, right. Um, so at the time it 0:21:18.400 --> 0:21:24.120 was your your IBM, your Coca Cola, American Express McDonald's, UM. 0:21:24.480 --> 0:21:26.800 And I don't have off the top of my head 0:21:26.840 --> 0:21:29.840 down on on how fast they grew. But it also 0:21:30.080 --> 0:21:32.280 seemed like, you know, they had these kind of new 0:21:32.600 --> 0:21:35.160 methods of management that had been you know, invented after 0:21:35.200 --> 0:21:38.679 the war. They were the first multinational. They had you know, 0:21:39.400 --> 0:21:42.280 some sorts, you know, Europe was recovering Asia. It seemed 0:21:42.320 --> 0:21:44.480 that they also had endless growth. And the argument that 0:21:44.560 --> 0:21:46.560 was made at the time, you know, they were one 0:21:46.600 --> 0:21:49.320 decision stock, don't worry but the valuation they'll grow into it, 0:21:49.760 --> 0:21:52.199 which is exactly what we hear today about you know, 0:21:52.320 --> 0:21:56.120 Google and the other the other mega captain. The one 0:21:56.119 --> 0:21:59.920 thing I would point on on the the earning side 0:22:00.040 --> 0:22:05.760 these well actually two things. Uh one watch for margins 0:22:05.840 --> 0:22:10.800 and cogs um actional salary costs. I mean, that's that's 0:22:10.800 --> 0:22:14.520 an area that's been really painfully growing much faster than 0:22:14.600 --> 0:22:17.479 earning the revenues. And people cannot focus oh, you know, 0:22:18.840 --> 0:22:21.440 you know top line revenue. Look at how much SARAH 0:22:21.480 --> 0:22:24.360 expenses are growing, especially stock based compensation and I think 0:22:24.359 --> 0:22:27.159 that's a that's a huge advantage that these companies have 0:22:27.480 --> 0:22:31.160 over traditional companies. You know, you look at a typical 0:22:31.640 --> 0:22:36.399 sary package at Google or Facebook or Amazon. First of all, 0:22:36.440 --> 0:22:39.600 it's very very high inter I was reading a piece 0:22:39.640 --> 0:22:41.720 that I think it was in Bloomberg. Interns at Facebook 0:22:42.000 --> 0:22:44.800 start at eight thousand, eight thousand dollar a month. Entry 0:22:44.880 --> 0:22:47.040 level jobs are probably more round two hundred, and then 0:22:47.040 --> 0:22:50.439 mid level you're looking at four hundred. But half of 0:22:50.480 --> 0:22:52.880 that is paid in stock, so you don't really feel 0:22:52.880 --> 0:22:55.400 the pinch, right because if you pay, if you pay 0:22:55.400 --> 0:22:59.160 your new employees in stock or half of your camping stock, hey, 0:22:59.200 --> 0:23:00.719 you can steell end up with the cash at the end, 0:23:00.760 --> 0:23:03.199 so you can do a buy back. You can you know, 0:23:03.280 --> 0:23:05.840 invest in the next big startup. You can. I guess 0:23:05.880 --> 0:23:08.119 if employees assume that the stock is going to keep 0:23:08.119 --> 0:23:13.080 going up year, that's the sumplicitly worth more than cash, 0:23:13.119 --> 0:23:15.080 even if it's the same award and in to some 0:23:15.200 --> 0:23:18.080 extent it also adds to my my supply and Amanda 0:23:18.920 --> 0:23:22.240 argument before, and that's only. Another peculiarity about a lot 0:23:22.240 --> 0:23:25.639 of these TEX stocks is that the float is actually 0:23:25.640 --> 0:23:29.040 smaller than the market gap because well, in many cases, 0:23:29.080 --> 0:23:30.800 you have a found that that has a significant stake. 0:23:30.880 --> 0:23:34.240 I mean you can think of Amazon with Bazos and Mackenzie, 0:23:34.800 --> 0:23:37.080 and then you have employees who have also been given 0:23:37.080 --> 0:23:39.480