WEBVTT - Inside a Liquidation 0:00:05.640 --> 0:00:06.280 What can of trains. 0:00:06.320 --> 0:00:09.200 I'm Joel Webber and I'm Eric balchunis. 0:00:11.320 --> 0:00:13.840 Eric. The thing that we've talked about on the podcast 0:00:13.920 --> 0:00:17.320 before every Halloween or so, we try and do an 0:00:17.360 --> 0:00:21.000 ETF graveyard, which are things that liquidate, but we've actually 0:00:21.000 --> 0:00:24.880 never talked to someone who's actually liquidated up on ETF, 0:00:24.960 --> 0:00:26.640 and we are going to do so today. 0:00:26.920 --> 0:00:29.200 Yeah, the whole idea of how hard the ETF industry 0:00:29.200 --> 0:00:31.080 camp a lot in the bitcoin ETF race, because. 0:00:31.040 --> 0:00:32.880 You've long called this the ETF terror dome. 0:00:33.000 --> 0:00:34.319 Yeah, it's the ETF terro dome. 0:00:34.360 --> 0:00:35.919 So if you get a hundred million like some even 0:00:35.920 --> 0:00:37.680 the like the eighth bitcoin TF is one hundred million, 0:00:37.720 --> 0:00:39.920 I'm like, that's really good. Because it's a hard market. 0:00:40.280 --> 0:00:43.479 Advisors are cost obsessed. Your performance out of the gate, 0:00:43.560 --> 0:00:46.800 timing matters. There's a lot of variables, especially if you're 0:00:46.800 --> 0:00:49.080 doing something other than a vanguardian cheap thing. Right. It's 0:00:49.120 --> 0:00:51.720 interesting to find stories of people who took the chance, 0:00:52.200 --> 0:00:54.600 you know, in this case, folded up. They gave it, 0:00:54.640 --> 0:00:57.400 I don't know, five six years, tried everything they could, 0:00:57.560 --> 0:00:58.640 the market went against them. 0:00:58.680 --> 0:00:59.280 It was tough. 0:00:59.640 --> 0:01:02.840 These stories I think have universal appeal because twenty five 0:01:02.840 --> 0:01:06.040 percent of every ETF launch is closed, so your odds 0:01:06.040 --> 0:01:08.760 are one in four of not making it, and especially 0:01:08.800 --> 0:01:11.479 if you're smaller and it's your whole thing, right, Blackrock 0:01:11.520 --> 0:01:14.240 and those guys can sustain the ETFs that don't. 0:01:14.120 --> 0:01:16.639 Sell for a while because they do all these other things. 0:01:16.880 --> 0:01:18.760 But for an India issuer, this is you know, a 0:01:18.800 --> 0:01:21.640 lot of your whole life gets poured into this ETF. 0:01:21.680 --> 0:01:24.120 And these stories are really interesting to me. But I 0:01:24.400 --> 0:01:27.480 give everybody credit. It takes gut stroll to launch an 0:01:27.520 --> 0:01:31.319 ETF because it's public. The performance is there every day, 0:01:31.600 --> 0:01:34.280 you can't hide from it. It does take a lot 0:01:34.319 --> 0:01:36.200 and it doesn't always work out, and that's why it 0:01:36.240 --> 0:01:36.960 takes guts. 0:01:37.360 --> 0:01:41.440 So we're gonna speak with Validia Capital Management, where we've 0:01:41.480 --> 0:01:45.319 got Jack Foehand who's the president, and Justin Carmono who's 0:01:45.360 --> 0:01:50.080 the partner. The name of the ETF was Validia Market Legends. 0:01:50.120 --> 0:01:54.600 The ticker was va l X. If you like listening 0:01:54.640 --> 0:01:59.640 to them, you can check out their podcast Access returns, 0:02:00.080 --> 0:02:05.960 this time on Trillions inside a Liquidation. Jack, Justin, welcome 0:02:06.000 --> 0:02:06.520 to trillions. 0:02:07.000 --> 0:02:08.480 Thank you for having us, Hi guys. 0:02:08.560 --> 0:02:11.440 Okay, So the ETF that we're going to talk about 0:02:11.680 --> 0:02:16.440 is the validia market Legends ETF, which rip no longer. 0:02:16.760 --> 0:02:19.840 When did it launch and when did it liquidate? 0:02:20.600 --> 0:02:23.120 So launched in twenty fourteen and we liquidated it. It 0:02:23.280 --> 0:02:24.880 h during the pandemic in twenty twenty. 0:02:25.440 --> 0:02:28.080 Okay, and why what happened? 0:02:31.040 --> 0:02:33.400 Well, were going going back to the beginning, I should, 0:02:33.520 --> 0:02:35.120 There's a lot behind that. So we started. 0:02:35.120 --> 0:02:37.639 You know, we're primarily quant investors, and you know, when 0:02:37.680 --> 0:02:39.720 we look at like quant strategies that work over time, 0:02:40.000 --> 0:02:41.079 I think they tend to have a little bit of 0:02:41.120 --> 0:02:41.720 a value. 0:02:41.520 --> 0:02:42.040 Bent to them. 0:02:42.480 --> 0:02:45.600 So we had seen going back like in twenty thirteen 0:02:45.680 --> 0:02:49.480 when Cambria did shareholder yield, that ETF did really really well. 0:02:49.520 --> 0:02:51.040 I mean Eric knows better than me, but it got 0:02:51.080 --> 0:02:53.560 like three hundred million in assets pretty quickly. And you know, 0:02:53.560 --> 0:02:55.919 the the ETF space, like in that space was much 0:02:56.000 --> 0:02:59.119 less competitive back then. So in twenty fourteen we decided, 0:02:59.240 --> 0:03:00.880 you know, we should do it, this idea of like 0:03:00.919 --> 0:03:03.320 following the strategies of Legends. We thought we could market it. 0:03:03.480 --> 0:03:05.160 You know, it was a good thing for our clients 0:03:05.160 --> 0:03:07.640 from a tax efficiency standpoint. We thought we'd get some 0:03:07.680 --> 0:03:10.320 outside capital. So we decided to give it a shot. 0:03:10.400 --> 0:03:13.679 So what does legends mean? What were the legends? 0:03:15.720 --> 0:03:20.320 So the yeah, the idea is basically taking the publicly 0:03:20.360 --> 0:03:25.280 disclosed investment methodologies from famous investors, but it's extended beyond 0:03:26.080 --> 0:03:28.880 the likes of Born Buffet, Peter Lynch and Benjamin Graham 0:03:28.960 --> 0:03:31.720 and other strategies that have been written about in books 0:03:31.760 --> 0:03:36.880 or academic papers and basically creating models that utilize those 0:03:36.880 --> 0:03:40.520 strategies to select stocks. And so what the Market Legends 0:03:40.520 --> 0:03:43.440 strategy specifically was doing is at the outset, we were 0:03:43.440 --> 0:03:48.200 taking ten of those unique stock selection models and building 0:03:48.280 --> 0:03:51.720 what was effectively one hundred stock portfolio that sat inside 0:03:51.760 --> 0:03:55.200 the ETF rapper. So, and I think they're still around. 0:03:55.200 --> 0:03:57.200 I remember Alpha Clone was out there, and there was 0:03:57.240 --> 0:04:01.080 some other cloning strategies that exist, but they were using 0:04:01.120 --> 0:04:04.800 thirteen as filings. So we thought we could maybe stand 0:04:04.800 --> 0:04:08.480 out from a strategy perspective by saying, Okay, we're capturing 0:04:08.480 --> 0:04:12.800 these fundamental strategies quantitatively and let's stack these models together 0:04:12.920 --> 0:04:15.240 to create the actual portfolio for the ETF. 0:04:15.320 --> 0:04:17.400 I mean that sounds like a good idea because it's like, Okay, 0:04:17.440 --> 0:04:21.640 if we have these got people investors legends over time, 0:04:21.720 --> 0:04:24.200 and you could kind of deduce what their strategies were 0:04:24.240 --> 0:04:26.480 and bring them into an ETF. We talked a lot 0:04:26.480 --> 0:04:29.799 about how ETFs can be like a vehicle for trades before. 0:04:30.279 --> 0:04:32.280 So when you launched, it must feel a little bit 0:04:32.279 --> 0:04:34.000 like you got bottled lightning. What did it feel like 0:04:34.000 --> 0:04:34.839 to bring this to market? 0:04:35.720 --> 0:04:37.520 Yeah, it was fun just learning like what goes on 0:04:37.560 --> 0:04:39.360 behind the scenes to get it to market in the 0:04:39.360 --> 0:04:41.279 first place was really cool because we knew nothing about that. 0:04:41.360 --> 0:04:43.200 But yeah, you know, we thought we had a pretty 0:04:43.200 --> 0:04:43.800 good opportunity. 0:04:43.839 --> 0:04:45.839 I mean, we had developed a pretty good plan in 0:04:45.920 --> 0:04:47.720 terms of how we would do this, and obviously that 0:04:47.760 --> 0:04:49.400 plan had to change a lot when we realized the 0:04:49.400 --> 0:04:51.640 reality of the ETF market. But you know, we had 0:04:51.640 --> 0:04:53.120 some of our own client money we were going to 0:04:53.160 --> 0:04:54.920 put in there. We thought we had a good story. 0:04:55.040 --> 0:04:57.240 We thought there was a good factor investing underpinnings and 0:04:57.279 --> 0:04:58.800 what we were doing in terms of like exposure to 0:04:58.880 --> 0:05:01.320 value and at that time turned out to be completely wrong. 0:05:01.320 --> 0:05:02.400 But at that time we thought it was a great 0:05:02.400 --> 0:05:04.840 time to invest in value. We thought value looked really attractive, 0:05:04.920 --> 0:05:05.880 so we thought. 0:05:05.720 --> 0:05:07.320 All that together gave us a shot. 0:05:07.360 --> 0:05:08.960 I mean, I don't think we had any illusions that 0:05:09.000 --> 0:05:10.719 it was going to be easy, but we thought we 0:05:10.760 --> 0:05:12.480 had a decent chance well. 0:05:12.480 --> 0:05:14.240 And I think one of the things that we realized 0:05:14.279 --> 0:05:16.560 too that that was different for us because we were 0:05:16.640 --> 0:05:20.320 running SMAs before that and we still do. But you know, 0:05:20.360 --> 0:05:22.119 when you come into the fund world, there's a whole 0:05:22.120 --> 0:05:25.120 different set of compliance rules and regulation around performance. So 0:05:25.640 --> 0:05:28.960 out of the gate, we couldn't show anyone any back 0:05:29.000 --> 0:05:32.919 tested or hypothetical results, and so you know, we started 0:05:33.160 --> 0:05:36.560 whatever it was December tenth of twenty fourteen, started tracking 0:05:36.560 --> 0:05:39.560 the actual fund and it was always the question of 0:05:39.600 --> 0:05:41.760 people liked the story, but it was like what is 0:05:41.800 --> 0:05:43.800 the performance? And so you start with kind of a 0:05:44.040 --> 0:05:46.200 day one with no performance, and then you have to 0:05:46.240 --> 0:05:48.760 build it up, and just the first couple of years 0:05:48.760 --> 0:05:52.440 for this type of strategy just was tough. So we 0:05:52.480 --> 0:05:53.920 were always struggling in that sense too. 0:05:54.080 --> 0:05:55.880 One of the things as an analyst, you brought up 0:05:55.920 --> 0:05:58.960 Alpha Clone and then I also think of GURU and GVIP. 0:05:59.120 --> 0:06:02.360 These are eachfs sort of look through thirteen F filings 0:06:02.400 --> 0:06:05.400 to see what stock picks hedge funds have bought and sold, 0:06:05.839 --> 0:06:07.560 and a lot of times these funds end up with 0:06:07.640 --> 0:06:09.920 a lot of tech, so they do. Okay, I can't 0:06:09.920 --> 0:06:11.960 say any of these have crushed it and been huge successes. 0:06:12.000 --> 0:06:14.680 GURU had a little nice run there, GVP as a Goldman, 0:06:14.800 --> 0:06:17.360 so I think some people like that brand, but they 0:06:17.360 --> 0:06:21.560 haven't really like crushed it either in performance or flows. 0:06:21.920 --> 0:06:22.760 But they've survived. 0:06:22.760 --> 0:06:26.200 I think because they largely are in large cap us equities, 0:06:26.440 --> 0:06:27.400 which have dominated. 0:06:27.440 --> 0:06:28.960 You guys are in small value. 0:06:29.440 --> 0:06:31.800 I guess as an analyst, I would have assumed this 0:06:31.960 --> 0:06:35.120 was large cap, but you weren't looking through thirteen f's right, 0:06:35.160 --> 0:06:38.120 and so as these market legends, what led you to 0:06:38.360 --> 0:06:40.840 small value? Did you pick small value and then say 0:06:40.839 --> 0:06:43.039 we're going to take these legends strategies and apply it 0:06:43.040 --> 0:06:46.760 to small value or were the legends picking small value? 0:06:46.880 --> 0:06:47.960 I guess I don't understand that. 0:06:48.360 --> 0:06:50.440 No, it actually flowed through the strategies themselves. 0:06:50.520 --> 0:06:52.880 So when you look at say Ben Graham's strategy, or 0:06:53.279 --> 0:06:55.400 any of these strategies that have either a long term 0:06:55.440 --> 0:06:57.279 track record on their own or follow people who have 0:06:57.320 --> 0:06:59.520 long term track records, these guys tend to be a 0:06:59.520 --> 0:07:02.320 little more of value biased. And also when you run 0:07:02.320 --> 0:07:04.799 a strategy and you run it as an all cap strategy. 0:07:04.839 --> 0:07:07.520 So you know, our universe was, say twenty seven hundred stocks, 0:07:07.520 --> 0:07:09.360 give or take we can invest in. When you run 0:07:09.360 --> 0:07:12.040 an equal weight strategy with twenty seven hundred stocks, the 0:07:12.160 --> 0:07:13.880 natural thing is you're going to end up with much 0:07:13.920 --> 0:07:16.120 more small cap exposure than say the S and P 0:07:16.120 --> 0:07:18.560 five hundred, because one you're equal weighting, and two you're 0:07:18.600 --> 0:07:20.520 picking from a much larger universe that has all those 0:07:20.520 --> 0:07:23.200 small and midcaps, and you typically find more small, more 0:07:23.280 --> 0:07:25.760 value in that small and MidCap area. So it was 0:07:25.840 --> 0:07:27.720 just like a natural We didn't come out saying we 0:07:27.720 --> 0:07:29.920 want to launch a small cap value ETF, but it 0:07:29.960 --> 0:07:31.920 was like this natural progression from the type of strategy 0:07:31.920 --> 0:07:32.520 we were running. 0:07:33.560 --> 0:07:36.640 And how much experience did either of you have around 0:07:36.720 --> 0:07:38.520 with ETFs before the launch? 0:07:40.080 --> 0:07:44.040 Almost none, right, justin yeah, well, we were running SMAs 0:07:44.080 --> 0:07:46.360 and we may have invested some of our client money 0:07:46.360 --> 0:07:48.560 in ets, but in terms of like launching a ETS 0:07:48.560 --> 0:07:51.200 and the inner workings of it, we basically did it 0:07:51.240 --> 0:07:53.960 all internally. There's services out there now that you can 0:07:54.280 --> 0:07:56.239 kind of partner and white label, and those are great 0:07:56.280 --> 0:07:58.840 for a lot of different shops. You know, we kind 0:07:58.840 --> 0:08:02.840 of said we got our own exemptive release, We interfaced 0:08:02.880 --> 0:08:05.960 with US Bank on the compliance and the trading jack 0:08:06.000 --> 0:08:10.440 did all the custom custom creating redeems in terms of 0:08:10.480 --> 0:08:13.320 sending those trades to the to the custodian, to the 0:08:13.320 --> 0:08:16.920 brokerage firm or the trader. So yeah, So, I. 0:08:16.840 --> 0:08:20.720 Mean there's hundreds of launches a year, thousands of ETFs 0:08:20.920 --> 0:08:22.720 out there. What did you what do you think you 0:08:22.880 --> 0:08:26.000 know now that you didn't know then about bringing an 0:08:26.040 --> 0:08:27.720 ETF to market in terms of the success. 0:08:27.760 --> 0:08:29.840 The biggest thing I think I know now is that, 0:08:30.040 --> 0:08:32.080 going back to what Justin said before about about short 0:08:32.120 --> 0:08:35.000 term performance, is that when you launch an ETF, you've 0:08:35.040 --> 0:08:37.160 got your story, you've got your marketing, you've got all 0:08:37.160 --> 0:08:37.640 that stuff. 0:08:38.000 --> 0:08:39.520 But what you do in those. 0:08:39.360 --> 0:08:41.559 First six months, that for a year, the first two years, 0:08:41.760 --> 0:08:43.840 is a huge party or success, and it's something that 0:08:43.920 --> 0:08:46.400 you cannot control. And so for us as a small 0:08:46.400 --> 0:08:48.920 cap value manager, that ended up going the other way. 0:08:48.960 --> 0:08:50.720 You know, we launched at the same time as Kathy 0:08:50.720 --> 0:08:52.679 Wood or right right around the same time. That went 0:08:52.760 --> 0:08:54.560 the you know, obviously in the positive way for her, 0:08:54.760 --> 0:08:55.839 in the negative way for us. 0:08:55.840 --> 0:08:58.000 But this is not an excuse for not working. 0:08:58.080 --> 0:09:01.000 But that is like maybe not withindts, but with these 0:09:01.120 --> 0:09:04.240 type of active strategies, people don't have any performance track 0:09:04.280 --> 0:09:05.880 record to go on other than what you've put out 0:09:05.920 --> 0:09:07.920 in the real world, and so they're going to judge 0:09:07.960 --> 0:09:09.640 you by that, and that's going to be a big 0:09:09.679 --> 0:09:10.400 part of your success. 0:09:10.440 --> 0:09:12.199 And you know, in our case of our failure. 0:09:18.040 --> 0:09:21.280 When did you get a sense that it wasn't going 0:09:21.880 --> 0:09:24.160 the way that you were most hoping for. 0:09:24.280 --> 0:09:25.640 I guess it took. It took a little while. 0:09:25.800 --> 0:09:27.839 We never had great performance because as you guys know, 0:09:27.920 --> 0:09:30.080 small Cat Value coming out of twenty fourteen had many 0:09:30.120 --> 0:09:31.679 years where it didn't work. 0:09:31.760 --> 0:09:32.560 But we did do okay. 0:09:32.600 --> 0:09:34.200 I think we got to like thirty million and assets 0:09:34.200 --> 0:09:36.960 at one point, so we crossed break even. So it 0:09:37.000 --> 0:09:38.600 wasn't like it was a failure out of the gate 0:09:38.640 --> 0:09:40.960 and it was just a disaster. It was like periods 0:09:41.000 --> 0:09:42.880 of great optimism and we got up to thirty million, 0:09:42.920 --> 0:09:45.280 were above break even, and then periods are great pessimism. 0:09:45.360 --> 0:09:46.920 In twenty twenty was a great example of that. 0:09:46.960 --> 0:09:48.960 You know, when the market was down thirty five percent 0:09:49.000 --> 0:09:51.120 with small Cat value to cut in half, so you know, 0:09:51.120 --> 0:09:52.880 I think our ATF went down to like fifteen million, 0:09:52.960 --> 0:09:54.040 so it wasn't. 0:09:54.120 --> 0:09:55.640 It was a back and forth justin. 0:09:55.520 --> 0:09:57.440 You may have some some you know, comments on that, 0:09:57.480 --> 0:09:58.760 but it was got back and forth as it went. 0:10:00.200 --> 0:10:01.679 No, I agree with all that. The only thing is 0:10:01.679 --> 0:10:03.520 like at the low end COVID we had I think 0:10:03.520 --> 0:10:05.800 it was like something like thirteen million in assets in 0:10:05.840 --> 0:10:08.480 the fund and we had a six year track record 0:10:08.600 --> 0:10:11.720 that it just wasn't good. And so as a business, 0:10:11.720 --> 0:10:14.120 we kind of just had to say, like, we kind 0:10:14.120 --> 0:10:16.880 of have to shut this thing down because you know, 0:10:17.000 --> 0:10:18.480 kind of pulling out of this is going to be 0:10:18.520 --> 0:10:21.280 tough now in retrospect, to be honest with you, those 0:10:21.320 --> 0:10:23.760 types of stocks that we were owning and we were 0:10:24.360 --> 0:10:26.000 part of what we did with the ETF. We actually 0:10:26.000 --> 0:10:29.040 followed like a monthly rebalancing, so every month we were 0:10:29.040 --> 0:10:31.760 rebalancing one tenth of the fund. So we were a 0:10:31.800 --> 0:10:34.160 little bit more active in that sense. So during that 0:10:34.240 --> 0:10:40.160 COVID decline, we were rebalancing and finding like more attractively 0:10:40.200 --> 0:10:42.600 priced value stocks. That was just part of the process. 0:10:43.040 --> 0:10:45.079 And then kind of coming out of that, that kind 0:10:45.080 --> 0:10:47.520 of stuff took off. But we shuttered the ETF I 0:10:47.520 --> 0:10:50.480 think in like May of that year, so at least 0:10:50.480 --> 0:10:52.840 the fundholders didn't get that. Now some of those clients' 0:10:52.840 --> 0:10:55.560 assets moved back over to the SMA, so we were 0:10:55.880 --> 0:10:56.920 fortunate in that sense. 0:10:57.000 --> 0:10:59.880 But yeah, so I'm curious, so you had the six 0:11:00.000 --> 0:11:03.560 that's your track record, and just wondering, did you have 0:11:03.640 --> 0:11:06.800 you kept a version of this strategy in place so 0:11:06.840 --> 0:11:08.960 that you could kind of track what the strategy would 0:11:08.960 --> 0:11:11.079 be doing had it not been liquidated. 0:11:11.400 --> 0:11:12.760 Yeah, we actually continue to run it. 0:11:12.840 --> 0:11:16.000 So for any of our clients that were in the ETF, 0:11:16.080 --> 0:11:18.120 we basically moved them the day the ETF shut down 0:11:18.200 --> 0:11:20.640 into an SMA strategy. There was actually a little bit 0:11:20.640 --> 0:11:23.400 more aggressive focused, small cat value version of what the 0:11:23.400 --> 0:11:26.440 ETF was that obviously did exceptionally well. And so you know, 0:11:26.480 --> 0:11:28.559 for us, that was something that we questioned after the fact, 0:11:28.760 --> 0:11:31.199 did we shut this ETF down at exactly the wrong time? 0:11:31.559 --> 0:11:33.520 Because we basically shut it down at the COVID bottom 0:11:33.520 --> 0:11:35.040 And as you guys know, small cat Value went on 0:11:35.080 --> 0:11:38.120 to have a ridiculous run in the next year or two. So, yeah, 0:11:38.280 --> 0:11:40.040 it did well, and you know, the clients that moved 0:11:40.040 --> 0:11:42.800 to the SMAs did well. But you know, we always 0:11:42.800 --> 0:11:44.040 have that question, you know, did we make. 0:11:43.920 --> 0:11:46.520 The right choice that strategy that Jack's talking about kind 0:11:46.559 --> 0:11:49.520 of tracks AVUV, but with a little bit more optane. 0:11:49.960 --> 0:11:52.559 So the event to small cat value figned with kind 0:11:52.600 --> 0:11:56.920 of more variation both to the up and downside. 0:11:56.720 --> 0:11:58.240 Which by the way, is a pretty big hit. 0:11:58.320 --> 0:12:01.319 Avantis has a pretty decent hit with that small value fund, 0:12:01.320 --> 0:12:04.760 but it came out better timing. And it's interesting. It's 0:12:04.800 --> 0:12:08.200 always darkest before dawn. They literally closed it like four 0:12:08.200 --> 0:12:10.840 in the morning, you know what I mean. They didn't 0:12:10.840 --> 0:12:13.640 realize the sun was just about to rise. Ted Aronson, 0:12:13.640 --> 0:12:15.720 who's a guy I interviewed for my Bogel book, he 0:12:15.840 --> 0:12:19.160 also closed up at a similar time. There was a 0:12:19.160 --> 0:12:22.640 couple shops who were just like, I don't get this market, 0:12:22.760 --> 0:12:25.160 Like they almost had like an existential crisis, and they 0:12:25.160 --> 0:12:27.440 were like, the hell with it, I'm done. And most 0:12:27.440 --> 0:12:30.440 of them were value type investors, because value was supposed 0:12:30.440 --> 0:12:32.120 to come back like three or four times, and it 0:12:32.120 --> 0:12:34.640 would have like a couple months, but then growth would 0:12:34.760 --> 0:12:38.240 just run it over again and again. Like Marshawn Lynch, 0:12:39.000 --> 0:12:41.400 you know, the the cues would go beast mode, as 0:12:41.400 --> 0:12:44.880 we say, and I want to ask about that. We 0:12:45.360 --> 0:12:48.680 have been studying the cues and for us, we felt 0:12:48.720 --> 0:12:51.440 like last year, the cues We're going to have like 0:12:51.480 --> 0:12:54.040 a decade where small value and these other things were 0:12:54.080 --> 0:12:55.960 going to do well, and the cues came back even though. 0:12:55.920 --> 0:12:56.600 Rates were high. 0:12:57.000 --> 0:12:59.640 I want to talk about the existential crisis that people 0:12:59.679 --> 0:13:03.240 who are steeped in academic literature, who have mentors who 0:13:03.320 --> 0:13:07.280 have taken CFAs and multiple degrees. You know, only one 0:13:07.320 --> 0:13:11.160 manager on planet Earth has outperformed QQQ over fifteen years, 0:13:11.440 --> 0:13:13.800 and it's this guy, Ron Barron. And he only did 0:13:13.800 --> 0:13:16.360 it because he bought Tesla like fifteen years ago and 0:13:16.480 --> 0:13:19.240 let it become like fifty percent of the portfolio, and 0:13:19.280 --> 0:13:23.440 that was the only winning way to beat QQQ. Everybody 0:13:23.480 --> 0:13:26.680 else underperformed it. And a lot of the training is, well, 0:13:26.679 --> 0:13:29.400 these stocks look over valued, I should go into better deals. 0:13:29.520 --> 0:13:31.880 How do you feel about that? Because all of the 0:13:31.920 --> 0:13:36.920 academic literature and everything's pointing to looking at fundamentals and value, 0:13:36.960 --> 0:13:39.000 and yet the cues just kind of runs it over 0:13:39.280 --> 0:13:41.760 with these seven stocks leading the way. I guess I 0:13:41.800 --> 0:13:45.280 want to talk about your mentality and your spirit as 0:13:45.360 --> 0:13:46.600 this goes on year after year. 0:13:47.440 --> 0:13:47.640 Yeah. 0:13:47.679 --> 0:13:49.520 No, it's really really tough because, like you said, I mean, 0:13:49.559 --> 0:13:51.040 if you look at value spreads or if you look 0:13:51.040 --> 0:13:52.679 at any kind of data, someone like us behind the 0:13:52.720 --> 0:13:55.120 scenes will look at to say, is value attractive? 0:13:55.200 --> 0:13:55.960 Is value cheap? 0:13:56.679 --> 0:13:58.400 It's been that way, It's been cheap for a really 0:13:58.400 --> 0:14:00.600 long time, and we have had a good on recently. 0:14:00.640 --> 0:14:02.840 But like you said, it's nothing like what's going on 0:14:02.880 --> 0:14:05.800 with the qqqs. But you know, ultimately this is something 0:14:05.800 --> 0:14:07.360 you see throughout history. 0:14:07.559 --> 0:14:08.320 There's two things with this. 0:14:08.440 --> 0:14:10.280 One is this is something you've seen in other periods 0:14:10.280 --> 0:14:12.880 in history, and value has always come back, So that 0:14:12.920 --> 0:14:15.520 gives all of us that follow it optimism. But the 0:14:15.559 --> 0:14:17.080 other thing we tend to say to a lot of 0:14:17.080 --> 0:14:20.320 people is small cap value investing, particularly small cat value, 0:14:20.360 --> 0:14:23.120 aggressive small cat value investing is not for your average investor, 0:14:24.040 --> 0:14:25.560 or not for a lot of your average investors. 0:14:25.600 --> 0:14:27.800 You have to be able to sit through these periods. 0:14:27.800 --> 0:14:29.760 And you look at the period, say from two thousand 0:14:30.000 --> 0:14:32.320 to two thousand and two, after you know a period 0:14:32.320 --> 0:14:34.560 that ended in ninety nine where small cat value was awful, 0:14:34.880 --> 0:14:37.480 you got ridiculous performance over a three year period. 0:14:37.880 --> 0:14:39.239 And that's kind of what the history. 0:14:38.960 --> 0:14:41.040 Of value tells you, is that you get these long 0:14:41.080 --> 0:14:44.400 periods where you struggle, you get outrageously good performance over 0:14:44.440 --> 0:14:46.760 a very short period, and if you can't stick through 0:14:46.760 --> 0:14:49.000 the long periods, you don't get the short period. So 0:14:49.360 --> 0:14:51.480 for us, for people who look at data like you said, 0:14:51.640 --> 0:14:54.560 I mean, we're very very optimistic about small cap value. 0:14:54.600 --> 0:14:57.160 It's still exceptionally cheap. But also, like I think every 0:14:57.160 --> 0:14:58.920 investor has to look themselves in the mirror and say, 0:14:59.000 --> 0:15:01.960 can I sit through those kind of periods or maybe 0:15:02.000 --> 0:15:03.520 as you've talked about ERIC a lot of like in 0:15:03.600 --> 0:15:05.480 terms of how people size ARC and things like that, 0:15:05.760 --> 0:15:08.520 you know, sizing small cat value is a smaller portion 0:15:08.560 --> 0:15:11.040 of your portfolio is probably a good idea because it 0:15:11.080 --> 0:15:13.760 allows you to maybe sit through those kind of periods. 0:15:14.720 --> 0:15:14.960 Yeah. 0:15:15.040 --> 0:15:16.960 No, I remember one year we said that it was 0:15:17.040 --> 0:15:19.720 q VAL, which is your colleague West Gray's ETF. We 0:15:20.040 --> 0:15:22.640 thought that could be the next ARC because we're tobias 0:15:22.720 --> 0:15:26.280 is because it was so concentrated and if the regime 0:15:26.400 --> 0:15:28.680 changed that one should pop the most. Then we thought 0:15:28.720 --> 0:15:32.360 it had ARC potential, but it never lasted long enough 0:15:32.400 --> 0:15:34.400 to turn heads. It sort of needs to be like 0:15:34.520 --> 0:15:36.400 over a year, you know, it has to like have 0:15:36.440 --> 0:15:38.360 time to set in, and it just never got going. 0:15:38.840 --> 0:15:40.880 I think the other question I have for you about 0:15:40.960 --> 0:15:43.320 value is we had Kai wuh In here who runs 0:15:43.360 --> 0:15:45.720 the it tan ETF. He's a you know, a quant 0:15:45.760 --> 0:15:48.280 guy too, and he talks about intangible value, which is 0:15:48.320 --> 0:15:50.880 like a lot of the numbers that all of the 0:15:51.000 --> 0:15:54.560 quants look at. The dark matter that isn't measured is 0:15:54.640 --> 0:15:59.000 the brands and the brand value, and there's the people 0:15:59.080 --> 0:16:02.960 and this other stuff that makes the Magnificent seven and 0:16:03.000 --> 0:16:07.480 the queues actually more justifiable, and the sort of beaten 0:16:07.560 --> 0:16:11.120 up value stocks actually more justifiable where they are. In 0:16:11.160 --> 0:16:13.360 other words, that gap that you might measure that seems 0:16:13.400 --> 0:16:16.400 like values obvious is actually more narrow because of the 0:16:16.440 --> 0:16:19.000 intangible value not measured by the numbers. 0:16:19.000 --> 0:16:20.440 Do you have any thoughts on that? 0:16:21.760 --> 0:16:23.480 Yeah? No, I think Kai is one hundred percent right. 0:16:23.480 --> 0:16:25.160 We've actually had him on our podcast and talked about 0:16:25.160 --> 0:16:27.000 this as well. If you look at a company like 0:16:27.040 --> 0:16:29.480 say Microsoft, and you look at the price to book, like, 0:16:29.960 --> 0:16:33.480 is Microsoft's valuation relative to its office buildings and whatever 0:16:33.560 --> 0:16:35.720 physical things it has? Does that make any sense at all? No, 0:16:36.160 --> 0:16:38.040 it doesn't make any sense. So it obviously makes sense 0:16:38.080 --> 0:16:41.920 to adjust for its brand. It's technology like all that stuff. 0:16:41.920 --> 0:16:44.440 And so I think, actually what Kai is doing is awesome, 0:16:44.520 --> 0:16:47.360 and I think it's a great compliment to traditional value. 0:16:47.520 --> 0:16:49.800 Another thing I would say, though in favor of traditional value, 0:16:49.800 --> 0:16:52.520 is when you run like a very cheap small cap 0:16:52.600 --> 0:16:55.640 value strategy, the types of companies you're investing in are 0:16:55.680 --> 0:16:57.040 not the types of companies that have a lot of 0:16:57.040 --> 0:17:00.760 intangible assets. So value does a better je of valuing 0:17:00.800 --> 0:17:03.640 those kind of companies that are steel companies or whatever 0:17:03.640 --> 0:17:06.160 they are like that they don't have tons of intangible assets. 0:17:06.160 --> 0:17:08.280 And so as much as like the christ to book 0:17:08.320 --> 0:17:11.040 is way way off for Microsoft or Google, it's a 0:17:11.080 --> 0:17:14.320 better valuation metric for those really cheap companies. But when 0:17:14.359 --> 0:17:16.040 we had Kai on, he talked about the idea of 0:17:16.119 --> 0:17:18.960 blending both, which is, if you have your traditional value, 0:17:19.080 --> 0:17:22.040 taking this sort of new intangible based value and putting 0:17:22.080 --> 0:17:23.720