WEBVTT - What Happens When Markets As We Know Them Cease to Exist 0:00:00.160 --> 0:00:02.320 But knowledge to work and grow your business with c 0:00:02.520 --> 0:00:06.680 i T. From transportation to healthcare to manufacturing. C i 0:00:06.760 --> 0:00:10.520 T offers commercial lending, leasing, and treasury management services for 0:00:10.600 --> 0:00:13.520 small and middle market businesses. Learn more at c i 0:00:13.560 --> 0:00:26.920 T dot com put Knowledge to Work. Hello, and welcome 0:00:26.960 --> 0:00:30.800 to another episode of the Odd Thoughts Podcast. I'm Tracy Alloway. 0:00:31.160 --> 0:00:34.880 My normal co host Joe Wisenthal is away this episode, 0:00:35.040 --> 0:00:38.360 but don't worry. I've found the perfect replacement. It is 0:00:38.440 --> 0:00:43.400 Bloomberg reporter Sid Verma. So Sid, you're filling in for 0:00:43.520 --> 0:00:45.960 Joe today. That means that we get to talk about 0:00:45.960 --> 0:00:49.920 whatever we want basically, right, definitely, I mean, yeah, let's 0:00:49.920 --> 0:00:52.920 be postmortem and talk about anything, all right. So, speaking 0:00:52.920 --> 0:00:57.640 of postmodernism, I have a complaint, and it's it's aggrievance 0:00:57.680 --> 0:00:59.680 of mine, which is, you know, you know, when other 0:00:59.720 --> 0:01:04.280 people tell you that you should pursue your dreams. You'm 0:01:04.319 --> 0:01:09.520 talking about the positivity industrial complex that runs America. The 0:01:09.640 --> 0:01:13.360 same page. I wasn't quite talking about that, but you know, like, 0:01:13.520 --> 0:01:15.240 if you want to be an actress, you should try 0:01:15.240 --> 0:01:17.360 to be an actress, that's like the classic one. Or 0:01:17.520 --> 0:01:19.600 if you want to be an astronaut, you should try 0:01:19.600 --> 0:01:21.600 to be an astronaut, and then you always hear these 0:01:21.600 --> 0:01:25.440 big success stories from all these people. Right, of course, 0:01:25.480 --> 0:01:28.880 it's awful. There's a word for it though, Right. I 0:01:29.240 --> 0:01:34.560 believe in managing expectations, So I wish that I fail, 0:01:34.760 --> 0:01:38.600 and then if I succeed, I'm pleasantly surprised. Okay. But 0:01:38.640 --> 0:01:41.760 the fact that we focus on all these celebrities who 0:01:41.800 --> 0:01:45.320 have succeeded in life and they're sort of our base standard. 0:01:45.760 --> 0:01:48.680 There's a concept that we use for that, and it's 0:01:48.720 --> 0:01:53.680 called survivorship bias, right, And that's basically the mistake we 0:01:53.760 --> 0:01:57.240 make that by concentrating on the people or things that 0:01:57.480 --> 0:02:02.200 survived some certain process or situation that that's kind of 0:02:02.240 --> 0:02:05.280 like the norm, right, just because they did it, they're there, 0:02:05.720 --> 0:02:08.800 of course. Yeah, losers don't matter. That's that's how the 0:02:08.800 --> 0:02:14.400 whole world is framed winners. Right. History also a classic example. Okay, so, 0:02:14.480 --> 0:02:17.840 believe it or not, that concept can also be applied 0:02:18.280 --> 0:02:21.880 to the markets. Yeah, I guess create a destruction of 0:02:21.960 --> 0:02:26.800 capitalism is another way of putting it. I'm trying to 0:02:26.800 --> 0:02:29.680 be really alpha male here and I'm gonna ask Simon, 0:02:29.720 --> 0:02:32.919 why does it matter? You know? You know, survival of 0:02:32.960 --> 0:02:36.760 the fittest destruction of capitalism. Why is this a problem? 0:02:36.800 --> 0:02:39.040 That's what I'm going to be doing. Well, you just 0:02:39.080 --> 0:02:41.760 give away our guest. We have the perfect person here 0:02:41.760 --> 0:02:45.040 with us to talk about survivorship bias. It's Simon Hendrickson. 0:02:45.320 --> 0:02:48.600 He works on the multi asset team of First State Investments, 0:02:48.639 --> 0:02:53.679 and he has authored a fantastic paper all about this topic. Awesome, 0:02:53.960 --> 0:02:56.600 should we bring him on? Definitely? You already be zump 0:02:56.600 --> 0:03:09.400 to me. I scooped you. Okay, all right, Simon, thank 0:03:09.440 --> 0:03:11.360 you so much for joining us today. Thank you for 0:03:11.400 --> 0:03:16.040 having me. So I use that example about us focusing 0:03:16.160 --> 0:03:20.480 on successful celebrities as the sort of baseline norm um. 0:03:20.520 --> 0:03:22.440 Do you think that's the right way of looking at 0:03:22.680 --> 0:03:25.480 survivorship bias. I think it's a pretty good way of 0:03:25.520 --> 0:03:28.799 looking at it. In finance, you often hear things like 0:03:28.880 --> 0:03:30.960 equities are going to do better in the long run, 0:03:31.480 --> 0:03:34.519 and there are certain managers and fund managers who are 0:03:35.160 --> 0:03:40.240 celebrated for their ability to beat the market. Well oftentimes 0:03:40.240 --> 0:03:43.320 while we miss all these really really big events that 0:03:43.440 --> 0:03:47.920 either destroy whole markets or as you say, sometimes people 0:03:47.960 --> 0:03:50.840 are just lucky. So if we look at equities over 0:03:50.880 --> 0:03:54.560 the long term, well, What people often mean is that 0:03:54.960 --> 0:03:58.600 the US or the U K's equity markets or developed 0:03:58.640 --> 0:04:02.520 markets have done really well. But what they don't necessarily 0:04:02.520 --> 0:04:05.520 mean all the countries that didn't make it. Now, if 0:04:05.560 --> 0:04:08.720 we talk about fund managers, well, imagine that you have 0:04:08.920 --> 0:04:12.040 a hundred people were you gave the money and each 0:04:12.080 --> 0:04:15.000 had to try to beat the market. Inevitably, at some 0:04:15.120 --> 0:04:17.000 point you're going to have someone who's going to look 0:04:17.040 --> 0:04:20.000 like a genius. But someone is always going to end 0:04:20.040 --> 0:04:24.600 up looking like that. It's just chance. And it's really 0:04:24.600 --> 0:04:28.159 important not to conflate luck with ability, but also really 0:04:28.200 --> 0:04:33.360 important to be able to distinguish are we actually falling 0:04:33.400 --> 0:04:37.240 for the survivorship bias in when we look at investments? 0:04:37.560 --> 0:04:40.560 And does that mean that you have massive concentration risk 0:04:40.600 --> 0:04:44.240 in your portfolio? Right? So, when you looked at survivorship 0:04:44.279 --> 0:04:48.600 bias in the markets, where did you find the biggest 0:04:48.920 --> 0:04:52.159 or the best example of this? You mentioned equities just then, 0:04:52.200 --> 0:04:54.680 so I guess that's an obvious one. Well it is, 0:04:54.760 --> 0:04:57.000 But if we look back, some of the some of 0:04:57.040 --> 0:05:00.360 the really interesting event especially through history, has actually lippen 0:05:00.480 --> 0:05:03.560 where you had catastrophic events. So my favorite is probably 0:05:03.960 --> 0:05:08.159 back in nineteen seventeen where we had a revolution. Lennon 0:05:08.200 --> 0:05:12.120 took over from this artist, and after when World War 0:05:12.160 --> 0:05:17.119 One began the markets closed. Then if we look back 0:05:17.440 --> 0:05:20.360 over the last fifty years before they actually closed, Russian 0:05:20.360 --> 0:05:23.360 equity markets did remarkably well and they actually produced pretty 0:05:23.400 --> 0:05:28.479 good returns. What what one happened? Equity market shot Everyone 0:05:28.600 --> 0:05:31.600 thought that okay, when markets open, we're going to go 0:05:31.680 --> 0:05:35.160 back to to the way they were. They opened up up. 0:05:35.480 --> 0:05:39.080 You had two months of trading before the Russian Revolution 0:05:39.480 --> 0:05:45.159 where where the communist expropriated all equity holders, so it 0:05:45.200 --> 0:05:47.800 actually went to zero. I can imagine the investment bank 0:05:47.839 --> 0:05:51.480 reports at that time where you have, by Russia, we 0:05:51.520 --> 0:05:55.600 believe that the company's revolution will deliver stability, et cetera. 0:05:56.240 --> 0:05:59.400 Do you think that's a problem about institutional memory? We 0:05:59.440 --> 0:06:04.279 forget this um Financial market participants are basically forced to 0:06:04.320 --> 0:06:09.200 be have unrealistic assumptions based on data that's effectively massaged. 0:06:09.839 --> 0:06:13.120 I think it is because remember, at any point in time, 0:06:13.520 --> 0:06:16.720 nobody actually knows what happens. So if you have a 0:06:17.440 --> 0:06:19.880 let's say we know a probability of something happens, and 0:06:19.960 --> 0:06:23.400 let's say it's seventy If you bet on the seventy 0:06:23.480 --> 0:06:26.120 and it actually comes out, you're gonna look pretty smart. 0:06:26.200 --> 0:06:28.640 But it doesn't mean that it was a good idea 0:06:28.680 --> 0:06:32.800 not to protect against the last. So that just because 0:06:32.839 --> 0:06:36.200 something happened doesn't mean that you were an idiot for 0:06:36.240 --> 0:06:39.360 thinking the opposite. The problem is if you say things 0:06:39.400 --> 0:06:43.280 like equities will always perform over the long run, you 0:06:43.400 --> 0:06:47.640 end up having some thing's like Russia in your portfolio 0:06:47.720 --> 0:06:49.479 if you don't know how to correct for that. I 0:06:49.480 --> 0:06:52.680 hate to use these terms, but um, how would you 0:06:52.760 --> 0:06:57.320 distinguish this concept from tail risk and black swan event? 0:06:57.440 --> 0:07:00.000 Because I think a lot of people obviously very accustom 0:07:00.160 --> 0:07:03.320 to those terms, um, and they were bandied around during 0:07:03.320 --> 0:07:07.200 the financial crisis. But how is this conceptually different? I 0:07:07.200 --> 0:07:11.120 would actually say that this is a property risk, a 0:07:11.120 --> 0:07:16.160 proper catastrophic event which we don't know could happen. So 0:07:16.200 --> 0:07:18.800 if we go back to our old friend Donald Rumsfeld 0:07:18.840 --> 0:07:21.960 and the known knowns and unknown unknowns, if we look forward, 0:07:22.560 --> 0:07:26.120 this is an unknown unknown something Where we look backwards 0:07:26.440 --> 0:07:29.080 in terms of Russia, we knew that happened. But if 0:07:29.080 --> 0:07:31.760 you remember, you need to correct for these type of things. 0:07:31.840 --> 0:07:36.800 So say that you analyze a portfolio of world equity markets. 0:07:37.160 --> 0:07:41.239 If you don't correct for all the constituencies that fall out, 0:07:41.320 --> 0:07:43.440 all the companies that go bankrupt, you're going to have 0:07:43.560 --> 0:07:46.720 a concentrated portfolio of all the really great companies. This 0:07:46.800 --> 0:07:49.200 would be like if you knew that invest your money 0:07:49.240 --> 0:07:52.160 with Berkshire had a way forty years ago, of course 0:07:52.200 --> 0:07:54.760 you would do it, but at the time nobody really 0:07:54.840 --> 0:07:57.080 knew this was a good idea. But I do think 0:07:57.080 --> 0:08:00.320 that survivorship it is actually a proper, proper tail risk event, 0:08:00.720 --> 0:08:05.680 and it's something where it's very hot to protect against 0:08:05.760 --> 0:08:09.200 going forward. But if you and if you don't know 0:08:09.320 --> 0:08:11.160 what to look for in the past, So this is 0:08:11.200 --> 0:08:13.520 one of the areas where you can have a history 0:08:13.640 --> 0:08:15.840 is really really important. But it's also important to have 0:08:16.080 --> 0:08:19.200 very long time series. Yeah, so I think that's an 0:08:19.200 --> 0:08:22.840 important point. And I really like the Russia example because 0:08:22.960 --> 0:08:24.560 if you think about it, you know, if you were 0:08:24.680 --> 0:08:28.760 a European investor in the early nineteen hundreds, Russia was 0:08:28.800 --> 0:08:31.800 one of the great powers, So why wouldn't you invest 0:08:31.840 --> 0:08:34.040 in that market? And you know, the idea that the 0:08:34.040 --> 0:08:36.240 market was going to close down at some point was, 0:08:36.600 --> 0:08:42.120 as you put it, a complete unknown unknown. But realistically 0:08:42.200 --> 0:08:44.840 how do you protect yourself against that? Is it just 0:08:44.960 --> 0:08:49.240 about having a wide variety of assets in your portfolio. 0:08:49.760 --> 0:08:53.280 It's about having a lot of different risk drivers and 0:08:53.360 --> 0:08:56.720 making sure that when you look at your portfolio that 0:08:56.840 --> 0:08:59.839 you don't just look over a short horizon, but you 0:09:00.040 --> 0:09:04.960 so look at what can actually happen. So, say the 0:09:05.000 --> 0:09:08.080 idea of having what has been very popular over the 0:09:08.120 --> 0:09:12.000 last sixty forty years, having a portfolio which is six 0:09:12.520 --> 0:09:17.960 equities and bonds. Now, this has been a uniquely optimized 0:09:18.000 --> 0:09:21.040 portfolio over the last forty years, and market conditions have 0:09:21.120 --> 0:09:25.079 been great because one you started from a valuation point 0:09:25.360 --> 0:09:27.880 where equities were really cheap and bonds were really cheap, 0:09:28.080 --> 0:09:30.680 so you wrote the cycle. You also had the added 0:09:30.720 --> 0:09:34.199 benefit of having negative correlation between the two. So when 0:09:34.240 --> 0:09:39.200 equity fell, equities fell, which would be seven, you had 0:09:39.240 --> 0:09:41.760 the dot com bubble, you had the Great Financial Crisis, 0:09:41.760 --> 0:09:44.720 you actually saw bonds doing really well. That has not 0:09:44.920 --> 0:09:48.319 been the case historically. So if you go back and 0:09:48.320 --> 0:09:51.520 take England, and England is one of the good examples 0:09:51.559 --> 0:09:54.320 because we actually have great data going back almost five years, 0:09:54.520 --> 0:09:58.280 because the Bank of England is it's good at collecting data. 0:09:58.840 --> 0:10:02.839 Then for three D and fifty out of the last 0:10:02.920 --> 0:10:06.160 four hundred years you actually saw a positive correlation between 0:10:06.160 --> 0:10:10.199 bondson and equities. So all the times of say wars 0:10:10.960 --> 0:10:13.400 both actually behave like risk assets and they were not 0:10:13.520 --> 0:10:18.560 good offsets. That's something that's hard for people to get 0:10:18.760 --> 0:10:22.120 if all you've lived through, like me, were the last 0:10:22.120 --> 0:10:26.120 twenty years of time where it was conventional system that 0:10:26.440 --> 0:10:33.600 bonds and equities are good offsets. But knowledge to work 0:10:33.640 --> 0:10:36.840 and grow your business with c i T from transportation 0:10:37.000 --> 0:10:41.120 to healthcare to manufacturing. C i T offers commercial lending, leasing, 0:10:41.200 --> 0:10:44.839 and treasury management services for small and middle market businesses. 0:10:45.040 --> 0:10:47.720 Learn more at c i T dot com put knowledge 0:10:47.760 --> 0:10:55.040 to work UM. Obviously, you know in the emerging market space, 0:10:55.120 --> 0:10:58.880 if fuel you get, you fall out of benchmark industries, 0:10:58.960 --> 0:11:02.760 if you don't have what the rating agencies want you 0:11:02.800 --> 0:11:05.640 to have, if they look at institutional strengths and so forth. 0:11:05.920 --> 0:11:08.400 So if you look at all those indicries, a lot 0:11:08.440 --> 0:11:12.560 of those sovereigns are those were strong institutions UM, and 0:11:12.640 --> 0:11:15.120 so you forget that. Actually there are a lot of 0:11:15.160 --> 0:11:20.320 reasons why strong corporate structures matter for equities. That actually 0:11:20.600 --> 0:11:23.800 matters to have a rule of law, and it seems 0:11:23.800 --> 0:11:26.960 like institutional memory. Just to heart back on my my point, 0:11:27.040 --> 0:11:29.800 because um, it seems to be forgotten by a lot 0:11:29.840 --> 0:11:33.320 of investors. UM. So I guess it's just really hard 0:11:33.320 --> 0:11:36.160 to kind of correct that impression because on day to 0:11:36.240 --> 0:11:39.000 day trading, UM, you could go mad if you have 0:11:39.120 --> 0:11:42.960 to revisit every single prior that you have. So I 0:11:42.960 --> 0:11:45.760 think that's a very good point because what we've had 0:11:45.800 --> 0:11:49.040 in terms of survivorship bias here is that the countries 0:11:49.120 --> 0:11:51.520 that have done very well have in general been the 0:11:51.600 --> 0:11:54.800 countries that have had strong institutions. There's a whole strand 0:11:54.800 --> 0:11:59.920 of literature in the economic history body where the overarching 0:12:00.040 --> 0:12:02.880 theme is that institutions really matter. And I tend to 0:12:02.920 --> 0:12:05.000 make fun of them a little bit because it seems 0:12:05.000 --> 0:12:09.240 a little bit simplified and well because obviously they do, 0:12:09.679 --> 0:12:13.880 but they actually do. And this is obviously pretty important 0:12:13.920 --> 0:12:18.280 as we look forward in terms of countries where we 0:12:18.400 --> 0:12:21.920 now have big institutional changes. So think about Trump. Is 0:12:21.960 --> 0:12:24.360 this just something that's going to happen and he's going 0:12:24.400 --> 0:12:27.080 to disappear in four years? It might be. It also 0:12:27.160 --> 0:12:31.400 might be that the institutions have dramatically changed, and this 0:12:31.480 --> 0:12:34.800 is a structural break is the fact that Brexit is 0:12:34.840 --> 0:12:37.240 going to happen a structural break for the ur Zone, 0:12:37.320 --> 0:12:39.720 which as far as we can remember back has moved 0:12:39.760 --> 0:12:42.480 forward in terms of integration. If this is a break, 0:12:42.800 --> 0:12:45.600 then are we starting to having to look back to 0:12:45.760 --> 0:12:49.319 history where European countries weren't trying to help each other, 0:12:49.360 --> 0:12:53.040 but we're actually in conflict. And that's the sort of 0:12:53.080 --> 0:12:56.280 thing where it's very important to know history. It's very 0:12:56.280 --> 0:12:59.360 important to know that if you don't take these things 0:12:59.400 --> 0:13:02.320 into account when you build a portfolio, oftentimes you end 0:13:02.360 --> 0:13:05.760 up with concentration risk. And it's not enough just to say, well, 0:13:06.160 --> 0:13:10.320 US has outperformed US equities have outperformed basically everything else 0:13:10.360 --> 0:13:13.800 over the last hundred years. Well, yes they have, because 0:13:13.960 --> 0:13:18.480 they were the best, most democratic, most best well functioning 0:13:18.480 --> 0:13:23.079 country that has been there. So you end up having 0:13:23.120 --> 0:13:25.360 to look at a variety of things. And one of 0:13:25.400 --> 0:13:27.679 the things if you go from backward looking forward looking 0:13:27.760 --> 0:13:30.200 is well, these type of things rule of law, it 0:13:30.280 --> 0:13:32.840 really matters, and especially when you look at em we 0:13:32.960 --> 0:13:35.960 know that it matters for equity returns, for bond returns, 0:13:36.840 --> 0:13:39.640 and should we think about this where we live now. 0:13:39.760 --> 0:13:43.040 I mean, if you look at Venezuela. It's everyone knows 0:13:43.120 --> 0:13:46.520 that you're going to have to take appropriation risk that 0:13:46.640 --> 0:13:50.000 they're actually not gonna gonna pay you back, or they 0:13:50.080 --> 0:13:53.240 might not just expropriate some of the assets in the country. Well, 0:13:53.280 --> 0:13:55.800 it's not really something that people have done. Developed markets 0:13:55.840 --> 0:13:58.440 only think about. And one of the things that worries 0:13:58.440 --> 0:14:00.520 me is that the people who were really really worried 0:14:00.559 --> 0:14:03.280 about what has happened over the last year I tend 0:14:03.440 --> 0:14:07.800 people who tend to do emerging markets or history. Yeah, 0:14:07.840 --> 0:14:10.480 so that reminds me. But we did see at least 0:14:10.480 --> 0:14:15.880 one rating agency talking about developed countries exhibiting more emerging 0:14:15.920 --> 0:14:18.680 market risks, right, said, I seem to remember you writing 0:14:18.679 --> 0:14:20.920 a story about that. Yeah, I mean, it was an 0:14:21.000 --> 0:14:26.480 interesting statement from SMP stating the fact that institutional strength 0:14:26.560 --> 0:14:29.640 has been one of the biggest anchors for high sovereign 0:14:29.720 --> 0:14:35.480 ratings amongst developed markets, along with you know, strong capital markets, um, 0:14:35.520 --> 0:14:39.320 et cetera. But now they say the strength of institutions 0:14:39.480 --> 0:14:42.720 and the rule of law is now under question because 0:14:42.760 --> 0:14:46.280 of this rise and populism. Um. I think your point 0:14:46.320 --> 0:14:49.800 of earlier kind of really struck homes to me because 0:14:50.000 --> 0:14:52.960 it seems that emerging market investors get much more concerned 0:14:52.960 --> 0:14:57.200 about developed market risk than vice versa. And it seems 0:14:57.480 --> 0:15:01.120 um like, yeah, that's part of that point, the survivorship, 0:15:01.160 --> 0:15:04.520 but it seems to be extremely important. If you have 0:15:04.680 --> 0:15:09.680 that perspectively, you understand the historic anchors for capital market performance. 0:15:10.360 --> 0:15:12.520 And I think it's important to say that I don't 0:15:12.520 --> 0:15:16.120 know what's going to happen, but I know which risks 0:15:16.200 --> 0:15:19.120 are important to look for. So it might be that 0:15:19.160 --> 0:15:21.200 the next hundred years are going to see amazing US 0:15:21.240 --> 0:15:25.280 equities returns. But the situation is different, and just because 0:15:25.360 --> 0:15:28.080 something happened over the last hundred years doesn't mean that 0:15:28.120 --> 0:15:31.800 it's going to continue because, as we know, US were 0:15:31.840 --> 0:15:35.440 the hedgemon and they actually won. Whereas if we are 0:15:35.560 --> 0:15:39.040 in a situation where we've seen lots of these things 0:15:39.040 --> 0:15:41.400 happen over time. So another one of my favorites is 0:15:41.480 --> 0:15:44.640 back in the French Revolution when the Jacobeans came in 0:15:44.720 --> 0:15:47.160 and they exprobriate a lot of church land. You have 0:15:47.680 --> 0:15:54.640 other episodes in the twentieth century in Shanghai the communists 0:15:54.640 --> 0:15:58.320 expropriated all of the equities as well, and you do 0:15:58.440 --> 0:16:01.600 see these types of events. Well, what strikes me is 0:16:01.680 --> 0:16:04.240 the fact that just looking at some of the data, 0:16:04.960 --> 0:16:09.800 US assets have outperformed in real terms, nominal terms, risk 0:16:09.840 --> 0:16:12.880 adjusted returns for the last one hundred years. So this 0:16:13.000 --> 0:16:17.280 is American exceptionalism in capitalism. And how dare you question 0:16:17.320 --> 0:16:22.720 American exceptionalism? Would be the naysayers to your narrative, which 0:16:22.800 --> 0:16:25.240 is fair. But what I would say is try and 0:16:25.280 --> 0:16:28.320 wind back a hundred years, who were going to be 0:16:28.480 --> 0:16:31.880 the world hedgemon at the time. And then if you 0:16:31.920 --> 0:16:37.160 look at returns for Germany versus the UK versus Soviet Union, 0:16:37.560 --> 0:16:40.760 you end up with a discrepancy that is so big 0:16:41.160 --> 0:16:43.800 that it's actually a hard to measure because there can 0:16:43.800 --> 0:16:46.320 only be one winner. And over the last hundred years 0:16:46.600 --> 0:16:50.080 German bonds you would have been returned basically nothing in 0:16:50.160 --> 0:16:53.400 real terms, whereas you've had really good performance in in 0:16:53.440 --> 0:16:57.200 the US. So the thing is, I'm not actually questioning 0:16:57.600 --> 0:17:00.400 what has happened and the conventional wisdom as a world 0:17:00.400 --> 0:17:02.920 over the last hundred years, just saying that it's very 0:17:02.960 --> 0:17:05.560 important to look at these big episodes, whether it's going 0:17:05.640 --> 0:17:11.080 to be political revolutions or hyper inflation, currency mismanagement, or 0:17:11.119 --> 0:17:15.800 potentially wars. Look at those see what did capital markets 0:17:15.840 --> 0:17:18.520 do in those type of situations, and how does that 0:17:18.560 --> 0:17:22.760 actually affect affect the portfolio. And this is not something 0:17:23.280 --> 0:17:26.959 that is likely to happen, but it's a useful exercise 0:17:27.040 --> 0:17:30.840 for your mind to say, well, let's assume that the 0:17:30.880 --> 0:17:34.359 world is not gonna be like it was over the 0:17:34.440 --> 0:17:38.560 last ten years, what actually happens and do we have 0:17:38.640 --> 0:17:43.800 too much risk into one scenario. It's kind of like, um, 0:17:44.320 --> 0:17:47.000 a gloomy scenario though, isn't it, Because if you're taking 0:17:47.000 --> 0:17:51.360 a really really long historical time frame of the world, 0:17:51.640 --> 0:17:56.320 then you're almost ignoring whatever progress you might claim to 0:17:56.400 --> 0:17:59.120 have been made over the past, you know, fifty years 0:17:59.200 --> 0:18:02.000 or a hundred years. Is it's almost mean reversion to 0:18:02.720 --> 0:18:06.560 what the Middle Ages. I don't know absolutely, if you 0:18:06.640 --> 0:18:10.920 read someone like Pickeoty, you would actually say that the 0:18:11.000 --> 0:18:14.639 last fifty years worth the anomaly, and that over time 0:18:14.800 --> 0:18:19.440 we've generally seen that it is the high owners who 0:18:19.560 --> 0:18:22.400 take most of their money home and you have massive inequality. 0:18:22.920 --> 0:18:25.000 Now I'm not a massive fan of his theories, but 0:18:25.040 --> 0:18:27.240 his data is really good and if you go back 0:18:27.400 --> 0:18:31.320 and and see through history, we actually have had it 0:18:31.440 --> 0:18:33.720 very well over the last hundred years. I mean, I 0:18:33.840 --> 0:18:37.159 find this framework really useful, not just for thinking about 0:18:37.560 --> 0:18:41.359 big global macro events and big terrorists, but just on 0:18:41.400 --> 0:18:45.240 the simple concept of unrealistic assumptions. I mean, you've got 0:18:45.520 --> 0:18:49.800 pension funds that are targeting, you know, UM, high inflation 0:18:49.840 --> 0:18:54.119 adjusted returns UM, and they're complaining that they can't fulfill 0:18:54.200 --> 0:18:57.280 these return targets. But it's not just because government born 0:18:57.359 --> 0:19:01.240 yields are are low UM. It's because UM that it's 0:19:01.240 --> 0:19:06.080 all based on benchmarks only UM cover the winners UM 0:19:06.119 --> 0:19:08.840 and the losers always consigned to the dustbin of history 0:19:08.960 --> 0:19:12.520 firstily and if we make it a little bit more tangible. 0:19:13.720 --> 0:19:16.920 A lot of people have said that global financial crisis 0:19:17.000 --> 0:19:18.960 looked a lot like the Great Depression. I think that's 0:19:18.960 --> 0:19:21.119 a fair comparison if you go back and look at 0:19:21.200 --> 0:19:24.119 as it returns. Let's assume that the UK and the 0:19:24.240 --> 0:19:27.840 US are actually the template going forward. Bond returns were 0:19:27.880 --> 0:19:30.560 really bad in nineteen fifties. You came from really really 0:19:30.600 --> 0:19:34.800 low yield and they rose, which meant that equities did very, 0:19:34.920 --> 0:19:37.200 very well the bonds didn't. We live in a world 0:19:37.200 --> 0:19:40.880 where we've been used to double digit bond returns, and 0:19:41.480 --> 0:19:44.280 at these levels, it's just not possible. Now, I don't 0:19:44.280 --> 0:19:49.000 think we're gonna necessarily see bond deals that are going 0:19:49.040 --> 0:19:51.720 to be double digit any anytime soon, but just the 0:19:51.800 --> 0:19:54.879 return assumptions from say, pension funds, as you said it, 0:19:54.880 --> 0:19:57.960 it's a little bit hard to imagine those actually coming 0:19:58.000 --> 0:20:00.879 to fruit. Do you have any simple the for people 0:20:00.960 --> 0:20:04.200 who mount the classic argument that this time is different, 0:20:04.880 --> 0:20:09.120 you know, like secular stagnation will change bond returns or 0:20:09.160 --> 0:20:14.000 alter portfolio balance, any sympathy at all for them. Now, 0:20:14.000 --> 0:20:19.560 I'm a historian economic historian by education, and most things 0:20:19.560 --> 0:20:22.680 have actually happened before. At any point in time, you 0:20:22.760 --> 0:20:27.160 usually had people saying this time is different. Sometimes it's true. 0:20:27.600 --> 0:20:31.000 Mostly those can be found in terms of technological progress, 0:20:31.600 --> 0:20:36.000 in terms of political cycles, economic cycles. Things have a 0:20:36.040 --> 0:20:39.479 tendency to repeat themselves. And when people say that this 0:20:39.520 --> 0:20:42.560 time is different, well, this time was actually not that different. 0:20:43.400 --> 0:20:46.000 You had the Great Depression, which was a pretty good 0:20:46.160 --> 0:20:49.840 way of looking at the global financial crisis. Bond yills 0:20:49.880 --> 0:20:52.320 did more or less what we would expect them to do, 0:20:52.880 --> 0:20:56.000 and you have so many countries in the world that 0:20:57.080 --> 0:21:00.840 it's not unlikely that we're going to see hyper inflation 0:21:00.880 --> 0:21:04.760 going forward. Is not unlikely that we're going to see revolution. 0:21:04.920 --> 0:21:09.159 We have wars all over, so I have sympathy that 0:21:09.240 --> 0:21:11.119 things are not going to be the exact same, and 0:21:11.160 --> 0:21:13.360 you need to be very careful how you actually look 0:21:13.400 --> 0:21:15.320 at history and use it as a guide. But in 0:21:15.440 --> 0:21:18.960 terms of things are great, and we are now in 0:21:19.000 --> 0:21:22.000 the most peaceful time. As one author put it when 0:21:22.040 --> 0:21:24.439 he said that we haven't seen a big war in 0:21:24.960 --> 0:21:28.440 since the Second World War, I think that's misunderstanding what 0:21:28.600 --> 0:21:31.520 it has actually driven history. And if we want to 0:21:31.560 --> 0:21:35.159 tie this back to survivorship bias, one thing that I 0:21:35.160 --> 0:21:38.560 haven't mentioned is that the most dangerous thing is that 0:21:39.080 --> 0:21:41.880 all the things in history which we can't measure, so 0:21:42.000 --> 0:21:46.520 oftentimes the thing that really drives survivorship bias are either 0:21:46.640 --> 0:21:49.760 records that are lost, people who have died, or people 0:21:49.800 --> 0:21:53.119 have disappeared. All well used to say that history is 0:21:53.119 --> 0:21:56.040 written by the winners. This is very, very true. There 0:21:56.200 --> 0:21:59.520 is not really any way to measure whether a conquering 0:21:59.680 --> 0:22:05.800 country three back three years expropriated um, expropriated some assets 0:22:05.800 --> 0:22:08.000 and never told anyone about it. Now we have a 0:22:08.000 --> 0:22:11.640 lot of these stories, but I'm sure there are many more, 0:22:12.000 --> 0:22:14.800 simply because nobody is really left to tell them and 0:22:14.840 --> 0:22:18.680 if nobody documented them, well, even if they did. Try 0:22:18.680 --> 0:22:21.200 to tell your friend a story and then see when 0:22:21.240 --> 0:22:23.080 that story comes back to you from another friend how 0:22:23.160 --> 0:22:26.680 much has changed. It's changed quite a bit. Usually, Well, 0:22:26.680 --> 0:22:28.240 should we leave it on that? I feel like we 0:22:28.320 --> 0:22:32.200 go into a dark place when Joe isn't around. Yeah, 0:22:32.200 --> 0:22:34.600 I'm actually too scared to ask a follow up question 0:22:34.720 --> 0:22:39.080 to Simon because I'm I'm worried about We can leave things, 0:22:39.080 --> 0:22:41.399 but it's probably gonna be okay. It's just important to 0:22:41.400 --> 0:22:46.080 be be like knowledgeable about these risks. And I'm not 0:22:46.119 --> 0:22:49.080 saying that we're going to see a world things world 0:22:49.119 --> 0:22:54.840 extinction event, but managing history. History has told us that 0:22:55.000 --> 0:22:58.480 managing expectation is is not the worst thing you can do. Okay, 0:22:58.760 --> 0:23:02.239 Simon Hendrickson from First State Investments, thank you so much 0:23:02.280 --> 0:23:17.399 for joining us, so said, Have I scared you away 0:23:17.440 --> 0:23:23.000 from the ad Thoughts podcast forever? Yeah? Maybe, I'm pretty 0:23:24.400 --> 0:23:26.560 I think this is a useful framework to think about 0:23:26.760 --> 0:23:32.399 the end of the world. Stroke tail risk, stroke equity market, stroke, 0:23:32.560 --> 0:23:35.959 mutual fund performance UM. And I was very skeptical when 0:23:36.000 --> 0:23:39.000 I heard of the concept because, as I said at 0:23:39.000 --> 0:23:41.240 the you know, the outside. I wanted to be really 0:23:41.280 --> 0:23:43.879 alpha about it and say, why do you lose this matter? 0:23:44.280 --> 0:23:47.560 This is what makes capitavism is great. But yeah, you 0:23:47.640 --> 0:23:50.879 realize that history really does matter, and it really flatters 0:23:51.560 --> 0:23:54.600 the winners. It does make you think about core concepts 0:23:54.760 --> 0:23:57.600 in investing, such as you know, if you're sat in 0:23:57.600 --> 0:24:02.639 a developed market, you're probably mostly buying developed market assets 0:24:02.840 --> 0:24:05.480 and should that be the case, And if you really 0:24:05.480 --> 0:24:08.880 want to catch onto the next big thing, it might 0:24:08.920 --> 0:24:13.240 not be the current big thing, right, Yeah, and that 0:24:13.359 --> 0:24:15.920 totally can change. But if you look at the data 0:24:16.200 --> 0:24:19.520 over the long haul UM, it will massage and airbrush 0:24:19.560 --> 0:24:23.440