1 00:00:03,240 --> 00:00:07,560 Speaker 1: This is Masters in Business with Barry Riddholts on Bloomberg Radio. 2 00:00:08,119 --> 00:00:11,360 Speaker 1: Welcome to Masters in Business. I'm Barry Ridholts. You're listening 3 00:00:11,360 --> 00:00:16,439 Speaker 1: to Bloomberg Radio and today's guest is someone uh you 4 00:00:16,480 --> 00:00:19,279 Speaker 1: will find absolutely fascinating. First, let me give you a 5 00:00:19,280 --> 00:00:22,919 Speaker 1: brief intro. How do I begin to describe Cliff ass Ness. 6 00:00:23,120 --> 00:00:26,119 Speaker 1: He is the founder of a q R, which is 7 00:00:26,160 --> 00:00:29,680 Speaker 1: a hundred and twenty billion dollar asset management firm slash 8 00:00:29,720 --> 00:00:34,599 Speaker 1: hedge fund. A q R stands for Applied Quantitative Research. 9 00:00:35,440 --> 00:00:41,680 Speaker 1: Fascinating gentleman, really really interesting background. Undergraduate University of Pennsylvania, 10 00:00:41,840 --> 00:00:47,200 Speaker 1: Wharton Economics, you pen engineering degree a double engineer, double major. 11 00:00:47,600 --> 00:00:49,960 Speaker 1: Goes to University of Chicago, ends up with an m 12 00:00:50,040 --> 00:00:55,600 Speaker 1: b a slash PhD in the Chicago program. Um eventually 13 00:00:55,720 --> 00:00:58,560 Speaker 1: takes a time off to go to Goldman Sachs, where, 14 00:00:58,560 --> 00:01:00,920 Speaker 1: at age twenty nine, he's the head of the quant group. 15 00:01:01,280 --> 00:01:06,000 Speaker 1: Just an absurd, absurd resume. Pull up the papers that 16 00:01:06,040 --> 00:01:11,280 Speaker 1: he's written, dozens of award winning best and Best in Show, 17 00:01:11,680 --> 00:01:16,120 Speaker 1: Best of the Year. Just really a phenomenally interesting and 18 00:01:16,200 --> 00:01:19,640 Speaker 1: insightful guy. A little background as to how we met 19 00:01:20,080 --> 00:01:22,640 Speaker 1: and how he ended up doing the show because um, 20 00:01:22,680 --> 00:01:25,640 Speaker 1: as he generally said during the interview, I stalked him 21 00:01:25,640 --> 00:01:30,600 Speaker 1: for a while. So Cliff rights very frequently, which is 22 00:01:30,640 --> 00:01:32,639 Speaker 1: something that we do in our shop. And I really 23 00:01:32,840 --> 00:01:35,880 Speaker 1: like people who take all their thoughts and put them 24 00:01:35,920 --> 00:01:39,880 Speaker 1: down in an organized, structured fashion, and they have something 25 00:01:40,040 --> 00:01:43,080 Speaker 1: interesting to say, and lots of lots of things that 26 00:01:43,160 --> 00:01:47,600 Speaker 1: he writes are just fascinating and insightful and just a 27 00:01:47,680 --> 00:01:50,360 Speaker 1: touch of humor, a dollarp of humor thrown in. You 28 00:01:50,400 --> 00:01:52,440 Speaker 1: look at some of the headlines of his white papers 29 00:01:52,520 --> 00:01:56,000 Speaker 1: or his blog post and you'll see some really clever 30 00:01:56,680 --> 00:02:01,520 Speaker 1: amusing titles that with lots and lots of pop cultural references. 31 00:02:01,960 --> 00:02:04,560 Speaker 1: In addition, there ain't a whole lot of hedge fund 32 00:02:04,560 --> 00:02:07,440 Speaker 1: managers running the sort of money he is that tweet 33 00:02:07,480 --> 00:02:10,960 Speaker 1: on a regular basis, and so he published. He was 34 00:02:11,000 --> 00:02:13,040 Speaker 1: one of the signatories to the letter to Ben Ben 35 00:02:13,080 --> 00:02:16,919 Speaker 1: Bernanke worried about hyper inflation and the collapse of the dollar, 36 00:02:17,480 --> 00:02:19,760 Speaker 1: and I called him in a number of people out 37 00:02:19,840 --> 00:02:23,040 Speaker 1: on it. And while many of the people who who 38 00:02:23,080 --> 00:02:25,880 Speaker 1: were on the wrong side of the hyper inflation debate 39 00:02:26,440 --> 00:02:29,840 Speaker 1: kind of pretended they never said it, Cliff came right 40 00:02:29,880 --> 00:02:33,280 Speaker 1: back at me on Twitter. Well, you know there's still time, 41 00:02:33,360 --> 00:02:35,840 Speaker 1: but so far it looks like I'm wrong and you're right. Hey, 42 00:02:35,880 --> 00:02:38,560 Speaker 1: you don't get that sort of response from people. Usually 43 00:02:38,600 --> 00:02:40,560 Speaker 1: you get a lot of arrogance and pushed back and 44 00:02:40,600 --> 00:02:42,760 Speaker 1: we'll see, you know, it's only been five years, give 45 00:02:42,800 --> 00:02:45,839 Speaker 1: it another decade. But he's not that way. He's like, well, 46 00:02:45,880 --> 00:02:48,440 Speaker 1: so far, I've clearly been wrong. And you know, he's 47 00:02:48,440 --> 00:02:53,559 Speaker 1: a real data guy and I respect that tremendously. Um, 48 00:02:53,600 --> 00:02:58,480 Speaker 1: you'll find he's not your typical billionaire hedge fund manager. Uh. 49 00:02:58,520 --> 00:03:01,880 Speaker 1: Extremely Even though he doesn't do a lot of media, 50 00:03:01,960 --> 00:03:03,800 Speaker 1: and even though I stalked him for a good year 51 00:03:03,880 --> 00:03:07,119 Speaker 1: to get him on the show, he was really stunning 52 00:03:07,240 --> 00:03:11,359 Speaker 1: Lee charming and self effacing and witty and not at 53 00:03:11,400 --> 00:03:14,920 Speaker 1: all what you would imagine a lot of people in 54 00:03:15,040 --> 00:03:17,920 Speaker 1: his position are like. And if you read some of 55 00:03:17,960 --> 00:03:22,960 Speaker 1: his writings, they're very very you know, here's the data, 56 00:03:23,160 --> 00:03:26,400 Speaker 1: here's the context, here's here's what the details are, and 57 00:03:26,400 --> 00:03:28,600 Speaker 1: that's pretty much it. They're very aggressive, they're a little 58 00:03:28,600 --> 00:03:31,400 Speaker 1: in your face, but he's got the goods to back it. 59 00:03:31,440 --> 00:03:34,360 Speaker 1: If he's in your face, it's because the numbers are there, 60 00:03:34,720 --> 00:03:38,520 Speaker 1: and he's at heart a numbers guy. So we stopped 61 00:03:38,600 --> 00:03:41,760 Speaker 1: just around the two hour mark. I'm not kidding when 62 00:03:41,800 --> 00:03:44,280 Speaker 1: I say this could have gone another two hours. We 63 00:03:44,400 --> 00:03:47,560 Speaker 1: absolutely would not have run out of questions. I find 64 00:03:47,600 --> 00:03:50,600 Speaker 1: him to be one of the most fascinating people in finance. 65 00:03:51,080 --> 00:03:55,400 Speaker 1: Lots of what he writes is really really influential. It 66 00:03:55,560 --> 00:03:59,360 Speaker 1: moves the debate forward, it moves the argument of finance forward. 67 00:03:59,560 --> 00:04:02,040 Speaker 1: And um, I think this is one of the most 68 00:04:02,040 --> 00:04:06,040 Speaker 1: interesting conversations we've had on the show. So without me 69 00:04:06,160 --> 00:04:08,840 Speaker 1: babbling a whole lot further, I think you're really gonna 70 00:04:08,920 --> 00:04:17,080 Speaker 1: enjoy our conversation with a qu Rs Cliff Astenus. This 71 00:04:17,320 --> 00:04:21,240 Speaker 1: is Masters in Business with Barry Ridholts on Bloomberg Radio. 72 00:04:21,520 --> 00:04:24,480 Speaker 1: My special guest today is someone who I've been chasing 73 00:04:24,839 --> 00:04:27,040 Speaker 1: for a while to have on the show. I'm gonna 74 00:04:27,120 --> 00:04:30,760 Speaker 1: introduce him first and then give you his curriculum vitae, 75 00:04:30,920 --> 00:04:32,760 Speaker 1: and that will be the first half hour of the show. 76 00:04:32,960 --> 00:04:35,680 Speaker 1: Cliff Fastness, welcome to the program. Thank you, Barry. I'm 77 00:04:35,720 --> 00:04:38,239 Speaker 1: excited to be here. Um, I'm I'm actually really excited 78 00:04:38,279 --> 00:04:40,040 Speaker 1: to have you. Let me. For those of you who 79 00:04:40,040 --> 00:04:42,800 Speaker 1: are not in the financial industry and may not be 80 00:04:42,920 --> 00:04:46,280 Speaker 1: familiar with Cliff assness name. We have a little bit 81 00:04:46,320 --> 00:04:50,560 Speaker 1: of of financial royalty here. First, you're the founder and 82 00:04:50,680 --> 00:04:53,880 Speaker 1: chief investment officer of a q u R, which runs 83 00:04:53,920 --> 00:04:57,120 Speaker 1: about a hundred and twenty billion dollars in both hedge 84 00:04:57,120 --> 00:05:01,320 Speaker 1: funds and traditional strategies. Have a few co founders, David 85 00:05:01,360 --> 00:05:03,680 Speaker 1: Cambrella and John lou Those are the guys that you 86 00:05:03,760 --> 00:05:06,840 Speaker 1: were working with at Goldman Sachs. Correct, When before we 87 00:05:06,880 --> 00:05:10,640 Speaker 1: get to Goldman Sachs, you graduated you penn with a 88 00:05:10,680 --> 00:05:14,760 Speaker 1: degree in economics from Wharton and a simultaneous degree Bachelors 89 00:05:14,760 --> 00:05:18,080 Speaker 1: of Science and Engineering. Yes, either one of those is 90 00:05:18,120 --> 00:05:20,880 Speaker 1: a heck of a degree. To have a lot of 91 00:05:20,960 --> 00:05:22,880 Speaker 1: a lot of effort, a lot of work, both of 92 00:05:22,920 --> 00:05:26,039 Speaker 1: them at once. That's really an impressive. I didn't know 93 00:05:26,080 --> 00:05:28,680 Speaker 1: any better and had no social life there you go. 94 00:05:29,080 --> 00:05:34,160 Speaker 1: So you go from Wharton to Chicago at the Booth School. 95 00:05:34,400 --> 00:05:36,719 Speaker 1: But may not it was, It wasn't, but it was 96 00:05:36,720 --> 00:05:39,119 Speaker 1: just Chicago. I'm giving David as due was the Booths 97 00:05:39,120 --> 00:05:41,960 Speaker 1: School just wasn't called it yet. And you the research 98 00:05:41,960 --> 00:05:45,680 Speaker 1: assistant to Eugene Fama, known as the father of the 99 00:05:45,680 --> 00:05:48,840 Speaker 1: efficient market hypothesis. We'll get to that a little later. 100 00:05:48,839 --> 00:05:51,159 Speaker 1: Because you're not exactly an E. M. H type of guy, 101 00:05:51,440 --> 00:05:54,560 Speaker 1: and um, he chaired your doctoral dissertation. You got your 102 00:05:54,600 --> 00:05:57,880 Speaker 1: PhD um which is not in any specific atis a PhD. 103 00:05:57,920 --> 00:06:00,280 Speaker 1: And no people always ask me this. It's you get 104 00:06:00,279 --> 00:06:03,720 Speaker 1: it from the business school. You effectively major in whatever 105 00:06:03,760 --> 00:06:06,279 Speaker 1: you wrote your dissertation in, but it's a generic business 106 00:06:06,279 --> 00:06:09,520 Speaker 1: school PhD. And so you decide to write your dissertation 107 00:06:09,839 --> 00:06:12,800 Speaker 1: on how you could use momentum and value to beat 108 00:06:12,839 --> 00:06:15,560 Speaker 1: the market when your doctoral thesis advisor is the guy 109 00:06:15,560 --> 00:06:19,800 Speaker 1: who says, no, you can't. Yes, that was with some trepidation. 110 00:06:19,920 --> 00:06:22,000 Speaker 1: He and his co author was also one of my advisors. 111 00:06:22,040 --> 00:06:24,280 Speaker 1: Ken French had already done a lot of work on value. 112 00:06:24,480 --> 00:06:28,799 Speaker 1: French from again More Financial Royalty. To say the least, 113 00:06:29,560 --> 00:06:32,159 Speaker 1: they had already done a lot of the pioneering work 114 00:06:32,200 --> 00:06:36,040 Speaker 1: on value investing and value investing. It's still a fight. 115 00:06:36,080 --> 00:06:39,160 Speaker 1: It's still arguable whether it works because markets are irrational 116 00:06:39,279 --> 00:06:41,520 Speaker 1: or whether it works because it's a risk premium of 117 00:06:41,560 --> 00:06:43,279 Speaker 1: some kind. And we could spend a whole show talking 118 00:06:43,279 --> 00:06:46,400 Speaker 1: about that momentum. I guess some people argue about it 119 00:06:46,440 --> 00:06:48,680 Speaker 1: but I think the literature is far stronger on the 120 00:06:48,680 --> 00:06:51,159 Speaker 1: irrational side. So yeah, it was scary to tell you. 121 00:06:51,279 --> 00:06:53,159 Speaker 1: I tell I've told the story for years, going up 122 00:06:53,200 --> 00:06:55,400 Speaker 1: to Gane and saying I want to write a dissertation 123 00:06:55,480 --> 00:06:58,240 Speaker 1: on on price momentum, the simplest of all momentum to 124 00:06:59,360 --> 00:07:02,120 Speaker 1: dr Farm and and then I mumbled the second part. 125 00:07:02,440 --> 00:07:06,240 Speaker 1: And it works really well because a dissertation saying momentum 126 00:07:06,320 --> 00:07:08,840 Speaker 1: is terrible is a perfect Fama dissertation. You know, look 127 00:07:08,839 --> 00:07:11,240 Speaker 1: at these fools following this to his credit, and this 128 00:07:11,320 --> 00:07:13,520 Speaker 1: is actually I think a warm story. Um, he has 129 00:07:13,520 --> 00:07:16,400 Speaker 1: his opinions, and he but he is brilliant and he's 130 00:07:16,400 --> 00:07:19,680 Speaker 1: open minded. Um, you don't change his mind. But he 131 00:07:19,840 --> 00:07:22,280 Speaker 1: is very comfortable. He said, if it's in the data, 132 00:07:22,360 --> 00:07:25,880 Speaker 1: write the paper. Wow, that's really interesting. So the weather 133 00:07:25,920 --> 00:07:29,160 Speaker 1: in Pennsylvania is bad enough, what made you say I 134 00:07:29,200 --> 00:07:31,160 Speaker 1: want to go to Chicago? It gets worse? So I 135 00:07:31,200 --> 00:07:34,680 Speaker 1: had to choose between Chicago and Stanford. They had precisely 136 00:07:34,760 --> 00:07:38,000 Speaker 1: the same scholarship program for Peach. Peach season has got 137 00:07:38,040 --> 00:07:40,800 Speaker 1: a good deal, we don't actually pay. It was exactly 138 00:07:41,240 --> 00:07:44,760 Speaker 1: the same, and UM, Chicago at that point probably still 139 00:07:44,920 --> 00:07:47,200 Speaker 1: UM was just an incredible program. I got advice from 140 00:07:47,240 --> 00:07:49,720 Speaker 1: so many people saying, if you if you're serious about finance, 141 00:07:49,720 --> 00:07:51,680 Speaker 1: and you can go to Chicago, go But it was 142 00:07:51,680 --> 00:07:53,880 Speaker 1: pretty hard enough to go to Stanford. I can imagine. 143 00:07:53,920 --> 00:07:56,680 Speaker 1: Did you know you would be working with Fama beforehand? No, 144 00:07:57,240 --> 00:07:59,280 Speaker 1: he kind of chooses you, and I got lucky and 145 00:07:59,280 --> 00:08:02,000 Speaker 1: he chose me. Um. He was one of the reasons 146 00:08:02,080 --> 00:08:03,840 Speaker 1: I'd certainly heard of him, but less so than you 147 00:08:03,840 --> 00:08:06,440 Speaker 1: can imagine. I was a little naive. Um. I just 148 00:08:06,520 --> 00:08:08,320 Speaker 1: walked around, said I want to study this more. Where 149 00:08:08,320 --> 00:08:10,320 Speaker 1: should I go? I got the advice to go there, 150 00:08:10,600 --> 00:08:13,680 Speaker 1: took jeans class. Uh. And then at the end of 151 00:08:13,760 --> 00:08:16,080 Speaker 1: his the first year, he asked somebody to ta this 152 00:08:16,120 --> 00:08:19,120 Speaker 1: class next year. And I got lucky. He gave me 153 00:08:19,120 --> 00:08:22,600 Speaker 1: the tap. That's great. Now you leave, you graduate, you 154 00:08:22,600 --> 00:08:24,840 Speaker 1: get your your doctor. And now I left without the 155 00:08:24,840 --> 00:08:26,720 Speaker 1: doctorate for Goldman. I left to take a year off, 156 00:08:27,480 --> 00:08:30,000 Speaker 1: to take a year off, that's to find myself. No, 157 00:08:30,160 --> 00:08:34,160 Speaker 1: I I got it eventually. It's not doctor essence because 158 00:08:34,160 --> 00:08:37,840 Speaker 1: it's massively pretentious for finance. These were doctor and I'm 159 00:08:37,880 --> 00:08:41,920 Speaker 1: afraid you'll ask me to check your hernia. Well, I 160 00:08:41,920 --> 00:08:45,400 Speaker 1: did get the PhD along the way. So now you 161 00:08:45,480 --> 00:08:50,800 Speaker 1: end up at Goldman you actually be eventually become director 162 00:08:50,840 --> 00:08:55,079 Speaker 1: of Quantitative Research for asset management. At age twenty nine, 163 00:08:55,640 --> 00:08:58,960 Speaker 1: you formed the Goldman Sacks Global Alpha Funds, which was 164 00:08:59,000 --> 00:09:03,920 Speaker 1: a quant vehicle for deploying their capital using your quantitative metrics. 165 00:09:03,920 --> 00:09:07,040 Speaker 1: That's at age twenty nine. And then sixteen years ago 166 00:09:07,480 --> 00:09:11,760 Speaker 1: you found a q R, which stands for applied quantitative research. 167 00:09:11,760 --> 00:09:13,880 Speaker 1: Didn't know anyone knew that anymore. Yes, I guess that, 168 00:09:14,000 --> 00:09:16,520 Speaker 1: but I guess that and punched it in when it 169 00:09:16,600 --> 00:09:18,800 Speaker 1: came up thought about starting our own firm. We had 170 00:09:18,840 --> 00:09:20,240 Speaker 1: a whole bunch of you know, three of us who 171 00:09:20,240 --> 00:09:21,920 Speaker 1: were thinking about it. Should we do this? Should we not? 172 00:09:22,160 --> 00:09:24,080 Speaker 1: We ended up spending almost all the time talking about 173 00:09:24,080 --> 00:09:25,599 Speaker 1: what we should name it, and we came up with 174 00:09:25,640 --> 00:09:28,000 Speaker 1: the IBM of Firms, about the most boring name you 175 00:09:28,000 --> 00:09:30,280 Speaker 1: can imagine, but if it's what we do exactly, and 176 00:09:30,320 --> 00:09:32,120 Speaker 1: it's better because when you first see a q R, 177 00:09:32,160 --> 00:09:34,560 Speaker 1: it's like, all right, it's as in this, and then ye, 178 00:09:34,720 --> 00:09:36,360 Speaker 1: people are still looking for the you know they're looking 179 00:09:36,400 --> 00:09:38,560 Speaker 1: for right, and I left out by the way, some 180 00:09:38,600 --> 00:09:42,360 Speaker 1: of the awards top paper um from the Graham and 181 00:09:42,400 --> 00:09:45,040 Speaker 1: Dot Award in two thousand three and two thousand eleven 182 00:09:45,640 --> 00:09:48,600 Speaker 1: best perspectives piece for the financial analyst general? Is that 183 00:09:48,640 --> 00:09:51,400 Speaker 1: what that is? Two thousand four and then the Portfolio 184 00:09:51,480 --> 00:09:56,800 Speaker 1: Management Best Paper Award O one oh three and that's 185 00:09:56,840 --> 00:09:59,000 Speaker 1: all the time we have. Thanks for coming by, Cliff. 186 00:09:59,320 --> 00:10:02,640 Speaker 1: So so really, the first question I gotta ask you 187 00:10:02,720 --> 00:10:05,160 Speaker 1: in the last minute we have in this segment is 188 00:10:06,160 --> 00:10:10,000 Speaker 1: what made you decide to go into not just finance 189 00:10:10,320 --> 00:10:14,640 Speaker 1: but quantitative finance. First, there was total indecision. Um. I 190 00:10:14,679 --> 00:10:17,079 Speaker 1: took this. You mentioned my undergrad I was an engineer 191 00:10:17,120 --> 00:10:19,720 Speaker 1: in a business school student because I had no idea 192 00:10:19,760 --> 00:10:22,360 Speaker 1: what I wanted to do. I was fairly mathematical, and 193 00:10:22,440 --> 00:10:25,520 Speaker 1: my father read about this program, this dual degree program, 194 00:10:25,720 --> 00:10:27,480 Speaker 1: and said, why don't you do this? You can decide later. 195 00:10:27,760 --> 00:10:30,960 Speaker 1: That was the total amount of planning. I like the finance. 196 00:10:31,600 --> 00:10:35,080 Speaker 1: I liked I found it intellectually interesting, and to be honest, 197 00:10:35,600 --> 00:10:36,960 Speaker 1: you know, you never know. You look back when you 198 00:10:37,000 --> 00:10:39,200 Speaker 1: were twenty and you try to figure out if you 199 00:10:39,200 --> 00:10:41,440 Speaker 1: planned it or not. Um, but I think I was 200 00:10:41,480 --> 00:10:44,160 Speaker 1: attracted to the idea of something that I found intellectually fascinating, 201 00:10:44,600 --> 00:10:47,000 Speaker 1: that you could make an actual career out of that. 202 00:10:47,120 --> 00:10:50,520 Speaker 1: Wasn't the archaeology. I just upset all the archaeologists out there. 203 00:10:50,720 --> 00:10:53,120 Speaker 1: I'm Barry, what helps. You're listening to Masters in Business 204 00:10:53,120 --> 00:10:56,600 Speaker 1: on Bloomberg Radio. My guest today is Cliff Assness. He's 205 00:10:56,679 --> 00:11:00,839 Speaker 1: the founder and chief investment officer of a q R, 206 00:11:01,080 --> 00:11:04,720 Speaker 1: which Fortune Magazine called one of the most important and 207 00:11:04,880 --> 00:11:08,319 Speaker 1: influential hedge funds in the world. Cliff, let's talk a 208 00:11:08,360 --> 00:11:11,760 Speaker 1: little bit about the quant crisis of oh seven, and 209 00:11:11,800 --> 00:11:15,520 Speaker 1: I'm just gonna quickly set the table. We had. We 210 00:11:15,559 --> 00:11:18,400 Speaker 1: had the bear Sterns wobbling a bit, then the bear 211 00:11:18,440 --> 00:11:22,720 Speaker 1: Sterns hedge funds around June of oh seven, right, they 212 00:11:22,760 --> 00:11:26,000 Speaker 1: blew up and that was a whole another issue. And 213 00:11:26,040 --> 00:11:29,160 Speaker 1: then we saw in August a lot of things hit 214 00:11:29,240 --> 00:11:32,760 Speaker 1: the fan all at once. That was a really rough period. 215 00:11:33,280 --> 00:11:36,400 Speaker 1: That began a period where let's I don't want to 216 00:11:36,400 --> 00:11:39,480 Speaker 1: talk about the entire financial crisis, but the quant crisis 217 00:11:39,480 --> 00:11:42,760 Speaker 1: and oh seven, you guys saw a short period of 218 00:11:42,800 --> 00:11:46,000 Speaker 1: time you lost of assets that that had to be 219 00:11:46,160 --> 00:11:49,240 Speaker 1: a hellish period to live through. I um, we can't 220 00:11:49,280 --> 00:11:51,440 Speaker 1: do this segment because I've blocked it all out. Okay, 221 00:11:51,480 --> 00:11:54,560 Speaker 1: so it's just all suppressed so before we then, let 222 00:11:54,559 --> 00:11:59,480 Speaker 1: me let me try and free that up just so, 223 00:11:59,480 --> 00:12:02,760 Speaker 1: so just sscribe for listeners who may not be familiar 224 00:12:02,800 --> 00:12:05,800 Speaker 1: with what quants are. What is a quant what is 225 00:12:05,800 --> 00:12:09,320 Speaker 1: the quantitative approach to invest? Sure? Um, there are some 226 00:12:09,360 --> 00:12:12,400 Speaker 1: other people who will do quantitative techniques. I'll describe it 227 00:12:12,520 --> 00:12:16,160 Speaker 1: very generally and as it applies to us. Quant investment 228 00:12:16,200 --> 00:12:19,720 Speaker 1: managers are about I would say two words describing very well. 229 00:12:19,720 --> 00:12:23,280 Speaker 1: They're about averages, and they're about diversification. They're not about 230 00:12:23,480 --> 00:12:27,240 Speaker 1: kind of the sexy side of here's my best stock pick? Uh. 231 00:12:27,280 --> 00:12:29,960 Speaker 1: Sometimes I respond if people ask me, you know, what's 232 00:12:29,960 --> 00:12:32,439 Speaker 1: your favorite stock or what's your biggest holding, I look 233 00:12:32,440 --> 00:12:35,079 Speaker 1: at them and go, I don't know. Which is usually true, 234 00:12:35,160 --> 00:12:37,160 Speaker 1: and they get very confused because we are on thousands 235 00:12:37,200 --> 00:12:41,199 Speaker 1: of But let me give you some examples. If cheap 236 00:12:41,200 --> 00:12:44,160 Speaker 1: stocks measured you have any of your favorite ways, price 237 00:12:44,200 --> 00:12:47,280 Speaker 1: divided by earnings, cash flow, dividend sales tend to beat 238 00:12:47,280 --> 00:12:51,560 Speaker 1: expensive stocks on average over time. On average, yes, on 239 00:12:51,640 --> 00:12:54,319 Speaker 1: average over time, not always, not even close to always. 240 00:12:54,320 --> 00:12:56,319 Speaker 1: I wish it was always. If they tend to win, 241 00:12:56,920 --> 00:12:59,520 Speaker 1: and that's all you knew and all you believed, you 242 00:12:59,559 --> 00:13:01,960 Speaker 1: wouldn't bet on it by picking your three favorite cheap 243 00:13:01,960 --> 00:13:05,920 Speaker 1: stocks and shorting your three least favorite expensive stocks. You 244 00:13:06,000 --> 00:13:07,959 Speaker 1: believe in the average, you would do it with a 245 00:13:08,040 --> 00:13:11,559 Speaker 1: very diversified portfolio of cheap and you would sell or underweight, 246 00:13:11,600 --> 00:13:13,520 Speaker 1: depending if it's a hedge fund or if it's a 247 00:13:13,520 --> 00:13:17,640 Speaker 1: traditional portfolio, a very diverse side portfolio of expensive and 248 00:13:17,800 --> 00:13:21,560 Speaker 1: you'd hope that your logic and your historical evidence repeated 249 00:13:21,600 --> 00:13:24,920 Speaker 1: itself over the next long term. We have found, along 250 00:13:24,960 --> 00:13:28,400 Speaker 1: with others, this is not unique to us. A set 251 00:13:28,480 --> 00:13:32,200 Speaker 1: of things that work like value is one of them. 252 00:13:32,240 --> 00:13:34,920 Speaker 1: I didn't choose the random of the example randomly. You 253 00:13:35,000 --> 00:13:36,760 Speaker 1: gotta be careful When I say work, I mean like 254 00:13:36,800 --> 00:13:39,240 Speaker 1: a statistician two out of three years, three out of 255 00:13:39,280 --> 00:13:41,400 Speaker 1: four years. If your car work like this, you'd fire 256 00:13:41,440 --> 00:13:44,560 Speaker 1: your mechanic. You need an economic story why it works. 257 00:13:45,280 --> 00:13:46,880 Speaker 1: I don't believe in just data. I believe in try 258 00:13:46,920 --> 00:13:49,080 Speaker 1: and understand why it works. And you need a lot 259 00:13:49,200 --> 00:13:51,839 Speaker 1: of out of sample tests, for instance, in value and 260 00:13:51,840 --> 00:13:53,920 Speaker 1: and all and all the things we do, we have 261 00:13:53,920 --> 00:13:56,320 Speaker 1: found it's not just individual stocks. We always end up 262 00:13:56,320 --> 00:14:00,800 Speaker 1: discussing individual stocks, but cheap countries measured at an analogous 263 00:14:00,800 --> 00:14:03,520 Speaker 1: way at the country level, Cheap bond markets using real 264 00:14:03,559 --> 00:14:06,560 Speaker 1: bond yield slope of the yield curve, cheap currencies using 265 00:14:06,600 --> 00:14:10,160 Speaker 1: purchasing power parity, cheap commodities using just commodities to press 266 00:14:10,200 --> 00:14:13,640 Speaker 1: first day long term average. Anything we've looked at shows 267 00:14:13,640 --> 00:14:16,800 Speaker 1: some tendency for cheap to beat expensive. Then other things 268 00:14:16,800 --> 00:14:21,280 Speaker 1: exist momentum, which you mentioned. I wrote my dissertation on 269 00:14:21,920 --> 00:14:24,360 Speaker 1: things that are getting better relatively recently tend to beat 270 00:14:24,360 --> 00:14:26,800 Speaker 1: things that are getting worse. It feels like the opposite 271 00:14:26,800 --> 00:14:28,800 Speaker 1: of value, but very different times. Say that again, things 272 00:14:28,840 --> 00:14:33,160 Speaker 1: that are getting better relatively recently six to twelve months, um, 273 00:14:33,320 --> 00:14:36,040 Speaker 1: be things that are still on a down slopes um. 274 00:14:36,080 --> 00:14:38,040 Speaker 1: And this, uh, this is a bit of a blow 275 00:14:38,080 --> 00:14:40,640 Speaker 1: to the efficient market hypothesis. Maybe one day people will 276 00:14:40,640 --> 00:14:44,520 Speaker 1: reconcile them. Um. But that kind of shouldn't be. It's 277 00:14:44,520 --> 00:14:45,960 Speaker 1: it's a little too easy. I called the new to 278 00:14:46,120 --> 00:14:48,600 Speaker 1: newspaper strategy. If you're only trading price momentum, we need 279 00:14:48,640 --> 00:14:51,360 Speaker 1: a newspaper from today, in a newspaper from a year ago. 280 00:14:52,120 --> 00:14:54,640 Speaker 1: I think I when I when I wrote this dissertation 281 00:14:54,680 --> 00:14:57,520 Speaker 1: for gene Fama, who is both efficient markets and the 282 00:14:57,600 --> 00:15:00,760 Speaker 1: value Guru. I didn't say this is better than value. 283 00:15:00,800 --> 00:15:04,200 Speaker 1: That would have been both wrong investing and bad graduation strategy. 284 00:15:04,440 --> 00:15:07,800 Speaker 1: I said it complements value very well. They both make money. 285 00:15:08,000 --> 00:15:11,360 Speaker 1: Value is a much slower turnover strategy. You often do 286 00:15:11,440 --> 00:15:13,840 Speaker 1: find stocks, even though it doesn't sound common. You often 287 00:15:13,880 --> 00:15:16,280 Speaker 1: find stocks that are still cheap, not as cheap as 288 00:15:16,280 --> 00:15:19,240 Speaker 1: they were a year ago, but have good momentum. So 289 00:15:19,360 --> 00:15:21,240 Speaker 1: both of those tend to work on average, so do 290 00:15:21,320 --> 00:15:24,440 Speaker 1: other things like high quality. High profitability tends to beat 291 00:15:24,840 --> 00:15:28,440 Speaker 1: poor profitability, low beta, low wrist stocks tend to beat 292 00:15:28,480 --> 00:15:31,280 Speaker 1: high risk stocks. To a quant You want to trade 293 00:15:31,280 --> 00:15:33,840 Speaker 1: those very diversified in as many places, not just for 294 00:15:33,880 --> 00:15:36,800 Speaker 1: individual I keep saying stocks, but I have to correct myself. 295 00:15:38,120 --> 00:15:41,040 Speaker 1: Anything you can trade that's liquid and you have good 296 00:15:41,120 --> 00:15:44,440 Speaker 1: data on which both makes it better investment because you 297 00:15:44,480 --> 00:15:47,960 Speaker 1: can spread your bets more and makes you more confident. 298 00:15:48,040 --> 00:15:50,320 Speaker 1: It's not just random data mining. So I want to 299 00:15:50,520 --> 00:15:52,800 Speaker 1: go back to what you said, an out of sample set, 300 00:15:53,320 --> 00:15:56,320 Speaker 1: and you didn't use the words mean reversion, but essentially 301 00:15:56,360 --> 00:16:00,800 Speaker 1: what you're describing is using mathematics to analyze is any 302 00:16:00,800 --> 00:16:03,520 Speaker 1: place that you can put your money to work and 303 00:16:03,920 --> 00:16:08,280 Speaker 1: look to take advantage of that eventual mean reversion, meaning 304 00:16:08,600 --> 00:16:11,160 Speaker 1: cheap stocks will eventually get back to be fairly priced, 305 00:16:11,600 --> 00:16:14,080 Speaker 1: as will expensive stocks will eventually come back down to 306 00:16:14,120 --> 00:16:16,600 Speaker 1: fair If you put the two together, I would readily 307 00:16:16,640 --> 00:16:20,600 Speaker 1: agree that value investing is highly related to the idea 308 00:16:20,640 --> 00:16:24,840 Speaker 1: of mean reversion. They're almost almost synonyms. Um. If you 309 00:16:24,840 --> 00:16:26,640 Speaker 1: add momentum in there is just that. Again, there are 310 00:16:26,640 --> 00:16:29,280 Speaker 1: more that we do. But if that's the second one, UM, 311 00:16:29,320 --> 00:16:31,760 Speaker 1: we would say things without a doubt mean revert. But 312 00:16:32,040 --> 00:16:34,040 Speaker 1: they get there eventually. They tend to keep going the 313 00:16:34,040 --> 00:16:36,120 Speaker 1: same direction for at least a little while longer before 314 00:16:36,120 --> 00:16:40,480 Speaker 1: they mean. Way to put that they overshoot. And just 315 00:16:40,560 --> 00:16:43,120 Speaker 1: for the lay people listening, you mentioned out of sample 316 00:16:43,200 --> 00:16:47,920 Speaker 1: set um. So if we're looking at tech stocks um, 317 00:16:48,000 --> 00:16:51,600 Speaker 1: or we're looking at recent data, describe how you would 318 00:16:51,680 --> 00:16:54,000 Speaker 1: use an out of sample set to confirm that a 319 00:16:54,120 --> 00:16:56,600 Speaker 1: sample refers to the following problem. If you give me 320 00:16:56,680 --> 00:17:00,440 Speaker 1: enough data or anyone good with computers and statistics, I 321 00:17:00,480 --> 00:17:02,640 Speaker 1: will find you something that has worked in the past. 322 00:17:03,080 --> 00:17:06,840 Speaker 1: It might be total gibberish. One of the most famous ones, 323 00:17:07,400 --> 00:17:11,520 Speaker 1: UH is butter prices in Bangladesh help predict the SNP fight. 324 00:17:11,600 --> 00:17:13,359 Speaker 1: I could be mangling that, but it's something like I 325 00:17:13,400 --> 00:17:15,880 Speaker 1: recall that and the same thing with the decreased number 326 00:17:15,920 --> 00:17:20,600 Speaker 1: of pirates and the the pirates decreased number of pirates 327 00:17:20,640 --> 00:17:23,840 Speaker 1: and the increased in in measured temperatures. People say you 328 00:17:23,840 --> 00:17:26,280 Speaker 1: could randomly find any two things. The Super Bowl effects 329 00:17:26,280 --> 00:17:28,440 Speaker 1: another example by after the NFC, but not just the 330 00:17:28,520 --> 00:17:31,879 Speaker 1: NFC or an old because they had adjusted for the 331 00:17:31,880 --> 00:17:34,600 Speaker 1: Steelers who won annoyingly often. And if it's screwed up 332 00:17:34,640 --> 00:17:38,960 Speaker 1: the rule. So there's no real cure for this, but 333 00:17:39,040 --> 00:17:41,280 Speaker 1: there's there's some there's something you can do. You can 334 00:17:41,320 --> 00:17:44,480 Speaker 1: go look somewhere you haven't looked yet. One great out 335 00:17:44,480 --> 00:17:48,080 Speaker 1: of sample test. It's time and it's now been twenty 336 00:17:48,080 --> 00:17:51,600 Speaker 1: five years since my dissertation. That's frightening to say out loud, 337 00:17:51,840 --> 00:17:53,439 Speaker 1: and and the stuff is held up and that's a 338 00:17:53,440 --> 00:17:55,679 Speaker 1: wonderful out of sample test. But when I'm as you 339 00:17:55,720 --> 00:17:58,880 Speaker 1: said twenty nine at Goldman Sachs, a good career strategy 340 00:17:59,000 --> 00:18:01,880 Speaker 1: was not first, we wait twenty five years and if 341 00:18:01,880 --> 00:18:04,920 Speaker 1: it works, we pounce. We keep going right. So another 342 00:18:04,960 --> 00:18:06,800 Speaker 1: thing you can do is say, well, if this logic 343 00:18:06,840 --> 00:18:09,359 Speaker 1: works to pick stocks in the US, doesn't work in Europe, 344 00:18:09,359 --> 00:18:11,320 Speaker 1: doesn't work in Japan. All right, If it works for 345 00:18:11,320 --> 00:18:13,400 Speaker 1: stocks around the world, doesn't work for bond markets, doesn't 346 00:18:13,400 --> 00:18:16,960 Speaker 1: work for commodities, doesn't work for currencies. So finding these 347 00:18:17,000 --> 00:18:20,560 Speaker 1: things work for other things was both lucrative because you 348 00:18:20,560 --> 00:18:24,040 Speaker 1: could do it in more places, but also very calming 349 00:18:24,560 --> 00:18:27,199 Speaker 1: because it made you think that's a much smaller chance 350 00:18:27,560 --> 00:18:30,240 Speaker 1: that you're just lucky. It's not random. There's actually a 351 00:18:30,280 --> 00:18:33,760 Speaker 1: theme underneath. I'm Barry Ridhults. You're listening to Masters and 352 00:18:33,800 --> 00:18:37,280 Speaker 1: Business on Bloomberg Radio. My guest today is Cliff Assness. 353 00:18:37,680 --> 00:18:41,000 Speaker 1: He's founder and c i O of the most influential 354 00:18:41,000 --> 00:18:42,880 Speaker 1: hedge fund in the world. Am I giving you a promotion? 355 00:18:43,680 --> 00:18:46,200 Speaker 1: What did they call you? One of the most influential hedgefund? 356 00:18:46,240 --> 00:18:50,600 Speaker 1: Take that? And the irony is you've been fairly critical 357 00:18:50,920 --> 00:18:54,680 Speaker 1: of the hedge fund industry in general. Let's let's talk 358 00:18:54,680 --> 00:18:56,960 Speaker 1: a little bit about that. What what's your beef with 359 00:18:56,960 --> 00:18:59,320 Speaker 1: with hedge Well, first, I've been a schizophrenic on the 360 00:18:59,359 --> 00:19:00,920 Speaker 1: hedge fund industry. You know, it's kind of like having 361 00:19:00,960 --> 00:19:03,320 Speaker 1: a little brother, if other not that they're my little brother. 362 00:19:03,400 --> 00:19:05,480 Speaker 1: But if they someone else picks on your little brother, 363 00:19:05,520 --> 00:19:07,520 Speaker 1: you defend them, and if your little brothers having a 364 00:19:07,520 --> 00:19:11,639 Speaker 1: good day, you punch him all. We started out in 365 00:19:11,720 --> 00:19:13,639 Speaker 1: the year two thousand, this is fifteen years ago. We 366 00:19:13,680 --> 00:19:16,199 Speaker 1: wrote a paper called do hedge funds hedge? When I 367 00:19:16,280 --> 00:19:18,879 Speaker 1: was a younger whipper snapper, and I got yelled at 368 00:19:18,920 --> 00:19:21,520 Speaker 1: by half the big names in hedge funds. Was both 369 00:19:21,560 --> 00:19:24,800 Speaker 1: fun and scary. Uh. And we said there to net 370 00:19:24,840 --> 00:19:28,400 Speaker 1: long the word hedge implies their hedging, and they were 371 00:19:28,440 --> 00:19:32,880 Speaker 1: about forty percent net long stocks, meaning if you went 372 00:19:32,960 --> 00:19:36,679 Speaker 1: long a dollar in short sixty cents, you're still exposed. 373 00:19:37,160 --> 00:19:40,119 Speaker 1: That that might be a good idea for total returns, 374 00:19:40,160 --> 00:19:41,880 Speaker 1: but you shouldn't pay two and twenty for that because 375 00:19:41,920 --> 00:19:45,560 Speaker 1: you can get net long from Jack Bogel forty. They 376 00:19:45,600 --> 00:19:50,440 Speaker 1: actually Vanguard, so you're referencing ran a big study after 377 00:19:50,520 --> 00:19:53,760 Speaker 1: the o A crisis, and they found that a sixty 378 00:19:53,800 --> 00:19:59,080 Speaker 1: forty unleveraged portfolio beat something like the hedge funds out 379 00:19:59,160 --> 00:20:03,040 Speaker 1: there and once fees they want. Well on the little 380 00:20:03,040 --> 00:20:05,360 Speaker 1: brother comment, I think that's mostly right, but I'm gonna 381 00:20:05,400 --> 00:20:07,879 Speaker 1: take a little issue with that. Here's the criticism. I 382 00:20:07,920 --> 00:20:10,600 Speaker 1: think hedge funds. UH do a lot of very good 383 00:20:10,640 --> 00:20:13,720 Speaker 1: strategies that make economic sense and have evidence behind them. 384 00:20:14,000 --> 00:20:18,120 Speaker 1: Forgetting fees and forgetting hedging, merger arbitrage lending capital after 385 00:20:18,160 --> 00:20:20,600 Speaker 1: a situation has occurred. You have a liquidity risk of 386 00:20:20,680 --> 00:20:22,359 Speaker 1: a deal blow up risk, you get paid for that. 387 00:20:22,640 --> 00:20:25,960 Speaker 1: Convertible arbitrage is largely I think a liquidity premium trend 388 00:20:26,000 --> 00:20:29,199 Speaker 1: following and managed futures. I'm a momentum part of what 389 00:20:29,240 --> 00:20:32,600 Speaker 1: we do. We think it works. There are others good strategies. 390 00:20:33,040 --> 00:20:36,240 Speaker 1: They do them partially not fully hedged, which is weird 391 00:20:36,440 --> 00:20:39,680 Speaker 1: and adds to the price because effectively you're getting a 392 00:20:39,800 --> 00:20:42,119 Speaker 1: party of return from an exposure. You should get more cheaply, 393 00:20:42,560 --> 00:20:44,600 Speaker 1: and then they charge a ton for it. So this 394 00:20:44,640 --> 00:20:46,480 Speaker 1: is self serving because it's kind of how we do it. 395 00:20:46,520 --> 00:20:48,280 Speaker 1: But we think hedge fund should fully hedge and then 396 00:20:48,359 --> 00:20:53,000 Speaker 1: charge less. We wrote this paper that's critical. Some of 397 00:20:53,000 --> 00:20:55,640 Speaker 1: the criticisms of hedge funds. The worst ones are when 398 00:20:55,640 --> 00:20:59,560 Speaker 1: they compare them to a stocks. Now their net long 399 00:21:00,000 --> 00:21:03,119 Speaker 1: long term about forty of the stock market and geeks 400 00:21:03,119 --> 00:21:05,720 Speaker 1: speak a point for beta. Stock market goes up ten 401 00:21:05,720 --> 00:21:08,679 Speaker 1: percent a day, you expect four percent on your hedge funds, 402 00:21:08,720 --> 00:21:10,439 Speaker 1: but if it goes down ten percent, you expect to 403 00:21:10,480 --> 00:21:16,520 Speaker 1: only lose. So stocks is a bad comparison. In general. 404 00:21:16,800 --> 00:21:20,399 Speaker 1: That guy who bet against Warren Buffett is discovering this um. 405 00:21:20,440 --> 00:21:22,119 Speaker 1: It wasn't my bet, so I'm allowed to It's not 406 00:21:22,200 --> 00:21:24,919 Speaker 1: ex posts. It could have been bad for Warren too 407 00:21:24,960 --> 00:21:27,240 Speaker 1: if we had a bear market. It's just a a 408 00:21:28,040 --> 00:21:31,120 Speaker 1: bad comparison. And in five six years of bull markets, 409 00:21:31,280 --> 00:21:34,240 Speaker 1: it's a terrible comparison to hedge funds. Sixty forty is 410 00:21:34,320 --> 00:21:38,440 Speaker 1: much better, but it's still about more long stocks than 411 00:21:38,760 --> 00:21:41,200 Speaker 1: than hedge funds have been historically, even before the last 412 00:21:41,200 --> 00:21:43,600 Speaker 1: few years. You can show this, and when the market 413 00:21:43,640 --> 00:21:46,200 Speaker 1: goes up fifteen percent a year for five years, that's 414 00:21:46,240 --> 00:21:49,160 Speaker 1: three percent a year of a drag. So I think 415 00:21:49,160 --> 00:21:51,560 Speaker 1: it's a much better comparison. But if you do the 416 00:21:51,600 --> 00:21:54,040 Speaker 1: actual dollar for dollar, you end up critical of a 417 00:21:54,080 --> 00:21:56,879 Speaker 1: few things. They don't Actually this will sound weird, but 418 00:21:56,960 --> 00:22:00,240 Speaker 1: take enough risk. We don't want risk, we want turn 419 00:22:00,400 --> 00:22:02,160 Speaker 1: But that's how you get return is from them taking 420 00:22:02,200 --> 00:22:05,440 Speaker 1: more risks. So after you headge out that that market exposure, 421 00:22:05,760 --> 00:22:08,160 Speaker 1: they're not quite doing enough to really move your portfolio 422 00:22:08,240 --> 00:22:11,000 Speaker 1: that much. But there has historically been in our dad 423 00:22:11,040 --> 00:22:15,600 Speaker 1: to some excess return. So I called this a tepid defense. First, 424 00:22:15,640 --> 00:22:17,720 Speaker 1: I've criticized him as being too not long, not a 425 00:22:17,760 --> 00:22:21,520 Speaker 1: good enough deal. But then when others have made comparisons 426 00:22:21,560 --> 00:22:26,040 Speaker 1: that UM one is not terrible, the stocks a terrible comparison, 427 00:22:26,400 --> 00:22:29,080 Speaker 1: I think it's been too negative. I think the truth 428 00:22:29,200 --> 00:22:32,239 Speaker 1: is there are good strategies UM they just don't do 429 00:22:32,280 --> 00:22:34,600 Speaker 1: it at as a good enough deal, at at an 430 00:22:34,600 --> 00:22:36,800 Speaker 1: aggressive enough way to make it a good deal for investing. 431 00:22:36,840 --> 00:22:38,800 Speaker 1: So in. In In other words, and I know you don't 432 00:22:38,800 --> 00:22:41,280 Speaker 1: like to pat yourself on the back, but I will 433 00:22:41,800 --> 00:22:45,119 Speaker 1: so you that I love You looked at this and 434 00:22:45,280 --> 00:22:47,679 Speaker 1: basically said, well, when we look at the world of 435 00:22:47,720 --> 00:22:51,240 Speaker 1: hedge funds, they're they're not embracing risk relative to what 436 00:22:51,359 --> 00:22:54,840 Speaker 1: their mandate is, and they're not fully hedging, and they're 437 00:22:54,960 --> 00:22:58,160 Speaker 1: charging too much. And you said, we can hit all three, 438 00:22:58,160 --> 00:23:02,160 Speaker 1: but check off all three boxes. We could really embrace 439 00:23:02,280 --> 00:23:05,879 Speaker 1: appropriate measured risk in a way that makes sense, not 440 00:23:06,160 --> 00:23:08,520 Speaker 1: kind of be a little bit pregnant, but really be 441 00:23:08,640 --> 00:23:12,640 Speaker 1: fully in. We could fully hedge this position and instead 442 00:23:12,640 --> 00:23:16,879 Speaker 1: of charging two plus of the profits, the Delta fund 443 00:23:16,960 --> 00:23:20,720 Speaker 1: is one in ten um. By the way, could we 444 00:23:20,760 --> 00:23:23,880 Speaker 1: have had this conversation a few years ago or would 445 00:23:23,920 --> 00:23:27,600 Speaker 1: you have been prevented by uh the SEC rules back then. 446 00:23:27,720 --> 00:23:30,199 Speaker 1: I have no idea. I know they once sent me 447 00:23:30,240 --> 00:23:33,159 Speaker 1: on TV where I had not passed my Series seven. 448 00:23:33,640 --> 00:23:35,680 Speaker 1: I shouldn't take too much time here, but I had 449 00:23:35,720 --> 00:23:38,639 Speaker 1: passed it and it passed it in at Goldman expired. 450 00:23:39,119 --> 00:23:41,400 Speaker 1: We weren't a broken dealer, so I and then we started. 451 00:23:42,359 --> 00:23:44,360 Speaker 1: I had to retake it, so they told me, don't 452 00:23:44,359 --> 00:23:45,880 Speaker 1: talk about fees. It's one of the things you don't 453 00:23:45,880 --> 00:23:47,359 Speaker 1: have to talk about if you haven't passed the test. 454 00:23:48,280 --> 00:23:51,680 Speaker 1: The anchor, of course, immediately asking me about fees, which 455 00:23:51,800 --> 00:23:54,800 Speaker 1: which he was told not to, and I had to 456 00:23:54,840 --> 00:23:57,560 Speaker 1: look like the most evasive guy the man. I I 457 00:23:57,640 --> 00:23:59,920 Speaker 1: kind of said, we think the low versus the industry, 458 00:24:00,000 --> 00:24:03,119 Speaker 1: and I kind of look down and prayed he didn't continue, 459 00:24:03,160 --> 00:24:05,560 Speaker 1: which he didn't. It was not my high point of media. 460 00:24:05,880 --> 00:24:08,399 Speaker 1: I'm Barry rid Helts. You're listening to Masters in Business 461 00:24:08,440 --> 00:24:12,240 Speaker 1: on Bloomberg Radio. My guest today is Cliff Assness. We 462 00:24:12,240 --> 00:24:15,760 Speaker 1: were speaking earlier about hedge funds and in general, how 463 00:24:15,800 --> 00:24:18,760 Speaker 1: they don't necessarily hedge and why they charged too much, 464 00:24:19,160 --> 00:24:23,200 Speaker 1: and h u r S Delta Funds charges one in ten, 465 00:24:23,920 --> 00:24:29,200 Speaker 1: which actually got of all people Vanguard founders Jack Bogel 466 00:24:29,840 --> 00:24:33,760 Speaker 1: saying that seems like a pretty reasonable deal. I'm impressed, 467 00:24:33,880 --> 00:24:37,119 Speaker 1: quote unquote, I'm impressed. Well, that's tough to do to impressed. Now, 468 00:24:37,160 --> 00:24:39,680 Speaker 1: I've I've known Jack for a while. He's kind um. 469 00:24:39,760 --> 00:24:42,440 Speaker 1: The mutual fund version of this is called the multi 470 00:24:42,480 --> 00:24:46,879 Speaker 1: strategy fund Jack. I actually asked him about this afterwards, 471 00:24:46,920 --> 00:24:49,400 Speaker 1: because if Jack Bogel says something nice about your strategy, 472 00:24:49,440 --> 00:24:51,280 Speaker 1: you want to be able to quote it, and we 473 00:24:51,400 --> 00:24:53,720 Speaker 1: mutually agreed how I could quote him, and I'm I'm 474 00:24:53,760 --> 00:24:56,680 Speaker 1: I'm very fond of this. UM. I did not convince 475 00:24:56,760 --> 00:25:00,199 Speaker 1: Jack to invest and recommend hedge funds. Jack does like 476 00:25:00,280 --> 00:25:02,720 Speaker 1: tilting away from market cap and long home. He doesn't 477 00:25:02,720 --> 00:25:05,480 Speaker 1: like value. You know, he's straight down the line. That's 478 00:25:05,480 --> 00:25:07,520 Speaker 1: a separate issue. But he's straight down the line. So 479 00:25:07,560 --> 00:25:10,800 Speaker 1: I'm not that persuasive. But I got him to say 480 00:25:10,840 --> 00:25:12,600 Speaker 1: that what we do in hedge funds, because of the 481 00:25:12,680 --> 00:25:16,720 Speaker 1: transparency and the fee structure, is the hedge fund he 482 00:25:16,760 --> 00:25:22,520 Speaker 1: hates least I am quite proud of. That's a fantastic quote. 483 00:25:22,680 --> 00:25:24,879 Speaker 1: So let's let's talk a little bit about hedge funds 484 00:25:24,920 --> 00:25:29,800 Speaker 1: in general, because it seems to be a very bifurcated industry. 485 00:25:30,280 --> 00:25:35,080 Speaker 1: Most hedge funds seem to be really significantly underperforming and 486 00:25:35,200 --> 00:25:39,560 Speaker 1: a handful of winners. Um not. I'm not just referring 487 00:25:39,600 --> 00:25:42,120 Speaker 1: to some of your big firms funds that have done well, 488 00:25:42,440 --> 00:25:46,600 Speaker 1: but a handful full of firms, not just Renaissance technologies. 489 00:25:47,720 --> 00:25:51,520 Speaker 1: It's really a a it's not a Gaussian distribution, it's 490 00:25:51,520 --> 00:25:55,600 Speaker 1: not a bell curved. It's it's a fat head and 491 00:25:55,640 --> 00:25:57,560 Speaker 1: a long his seat is getting close in to my 492 00:25:57,640 --> 00:26:00,600 Speaker 1: new It's a fat head with a long tail, and 493 00:26:00,760 --> 00:26:03,880 Speaker 1: it's really just a handful of giant winners and everybody 494 00:26:03,880 --> 00:26:08,119 Speaker 1: else are also runs also rans. Why is that the 495 00:26:08,160 --> 00:26:13,040 Speaker 1: industry has gotten more like that over over time? Uh? 496 00:26:13,600 --> 00:26:15,919 Speaker 1: Part of it, Part of it is for good reasons, 497 00:26:15,960 --> 00:26:19,000 Speaker 1: part of it is for bad reasons. I do think 498 00:26:19,520 --> 00:26:21,800 Speaker 1: if the market is not perfectly efficient and some people 499 00:26:21,840 --> 00:26:23,680 Speaker 1: can beat it, it's still a pretty narrow group. It's 500 00:26:23,680 --> 00:26:25,920 Speaker 1: still pretty efficient and a pretty narrow group of people 501 00:26:26,359 --> 00:26:28,960 Speaker 1: who can beat it, So still a handful in that sense, 502 00:26:29,000 --> 00:26:32,240 Speaker 1: it's not that crazy. I think there's a negative reason 503 00:26:32,640 --> 00:26:36,600 Speaker 1: to that, UM that investors of all types of all stripes, institutional, 504 00:26:36,680 --> 00:26:41,720 Speaker 1: high net worth, retail, chase performance too much. Um. You know, 505 00:26:41,800 --> 00:26:44,639 Speaker 1: they chase short term performance and they chase multi year performance. 506 00:26:44,920 --> 00:26:47,440 Speaker 1: And certainly that's indicative and all I'll sequel. I prefer 507 00:26:47,480 --> 00:26:50,480 Speaker 1: it when mine is good. UM. I whine about this 508 00:26:50,560 --> 00:26:52,200 Speaker 1: much more when it's going against me than when it's 509 00:26:52,240 --> 00:26:54,560 Speaker 1: going for me. But I think people should spend a 510 00:26:54,600 --> 00:26:57,040 Speaker 1: lot more time on the process. Whether it makes sense 511 00:26:57,400 --> 00:26:59,399 Speaker 1: if they have a very long term track record. But 512 00:26:59,440 --> 00:27:02,880 Speaker 1: I think people chase too much, and particularly people seem 513 00:27:02,960 --> 00:27:05,959 Speaker 1: to look at three to five year horizons and chase them. 514 00:27:06,000 --> 00:27:07,879 Speaker 1: And one of the few things I'm that we actually 515 00:27:07,880 --> 00:27:10,080 Speaker 1: know about three to five year horizons and finance is 516 00:27:10,119 --> 00:27:12,800 Speaker 1: that's about the horizon. Things tend to mean revert, not continue. 517 00:27:12,960 --> 00:27:15,399 Speaker 1: That's a full side. That's about a cycle. Where in 518 00:27:15,440 --> 00:27:19,159 Speaker 1: the mutual fun world, that's about when somebody ends up 519 00:27:19,240 --> 00:27:22,119 Speaker 1: on the cover. Hedge funds aren't that different, and usually 520 00:27:22,119 --> 00:27:24,879 Speaker 1: all the money plows into it just as they've peaked 521 00:27:24,880 --> 00:27:26,840 Speaker 1: in a reverse. And there are some people who defy 522 00:27:26,880 --> 00:27:29,399 Speaker 1: all the odds and just keep going. But some of 523 00:27:29,440 --> 00:27:32,240 Speaker 1: the very large hedge funds are this effect doing well 524 00:27:32,280 --> 00:27:34,400 Speaker 1: for a while, and then the money just pours in, 525 00:27:34,800 --> 00:27:36,960 Speaker 1: and I'll say it, I'll say it, even when it's us, 526 00:27:36,800 --> 00:27:40,439 Speaker 1: it's probably too much. So is there a dollar amount 527 00:27:40,440 --> 00:27:43,800 Speaker 1: what you would say, Okay, No, we have done that 528 00:27:43,840 --> 00:27:46,640 Speaker 1: to various strategies. We are blessed and having fairly large 529 00:27:46,680 --> 00:27:51,520 Speaker 1: capacity as quants. We trade very diverse side portfolios, big 530 00:27:51,600 --> 00:27:56,320 Speaker 1: cap stocks, UH countries, currencies. But we have closed some 531 00:27:56,440 --> 00:28:00,000 Speaker 1: arbitrage strategies and mergers and converts. We've opened and closed them. 532 00:28:00,000 --> 00:28:04,320 Speaker 1: We've closed them whenever the market wasn't amenable to more capital. 533 00:28:04,320 --> 00:28:07,800 Speaker 1: We've traded. We've closed some I wouldn't call him high frequency, 534 00:28:07,880 --> 00:28:10,760 Speaker 1: but but faster trading strategies because those end of hit 535 00:28:10,800 --> 00:28:13,920 Speaker 1: capacity faster, and there is no strategy we wouldn't close 536 00:28:13,960 --> 00:28:18,760 Speaker 1: at some point. Because there's no strategy is an obvious 537 00:28:18,760 --> 00:28:21,480 Speaker 1: statement that's still upsets some people. There is no strategy 538 00:28:21,480 --> 00:28:25,240 Speaker 1: that doesn't get worse past a certain minimum necessary point 539 00:28:25,560 --> 00:28:27,920 Speaker 1: as it gets bigger. But we see that time and again. 540 00:28:27,960 --> 00:28:30,240 Speaker 1: We see the mutual funds. We see in hedge funds 541 00:28:30,280 --> 00:28:34,040 Speaker 1: there's a dollar amount that the manager can handle successfully, 542 00:28:34,040 --> 00:28:37,439 Speaker 1: can regularly make money and beyond that, it looks like 543 00:28:37,480 --> 00:28:40,640 Speaker 1: they're just gathering assets for the sake of gathering assets, 544 00:28:40,720 --> 00:28:44,240 Speaker 1: and the performance goes away. I think it's very strategy specific. 545 00:28:44,240 --> 00:28:47,080 Speaker 1: You've got to really grill your managers. If you are 546 00:28:47,360 --> 00:28:50,560 Speaker 1: inclined to look for stock picking skill and you are 547 00:28:50,600 --> 00:28:52,760 Speaker 1: thrilled with someone's track record, it's not that hard to 548 00:28:52,760 --> 00:28:55,280 Speaker 1: figure out if it was mainly small cap and microcap 549 00:28:55,320 --> 00:28:58,200 Speaker 1: stocks and they're way too big for that. Now, if 550 00:28:58,200 --> 00:29:00,080 Speaker 1: they were a currency trader of any kind, and you 551 00:29:00,080 --> 00:29:01,600 Speaker 1: don't have to be a quant but they were a 552 00:29:01,600 --> 00:29:05,200 Speaker 1: currency trader, um, maybe it's not that crazy that they 553 00:29:05,240 --> 00:29:07,640 Speaker 1: can take and it requires some thought, but I think 554 00:29:07,640 --> 00:29:09,360 Speaker 1: it's one of the key things that should be asked. 555 00:29:09,360 --> 00:29:11,440 Speaker 1: How you pass the point where you can manage The 556 00:29:11,480 --> 00:29:13,320 Speaker 1: answer is gonna be very different for different people, but 557 00:29:13,360 --> 00:29:16,240 Speaker 1: it's always a good question. So let's talk I'm gonna 558 00:29:16,240 --> 00:29:18,880 Speaker 1: pivot a little bit. Let's talk about high frequency trading, 559 00:29:19,080 --> 00:29:21,239 Speaker 1: because I know you use you You guys are not 560 00:29:21,360 --> 00:29:24,080 Speaker 1: an h f T, but you certainly use a lot 561 00:29:24,080 --> 00:29:29,680 Speaker 1: of um computer generated or algorithmically driven trading to be 562 00:29:29,840 --> 00:29:33,880 Speaker 1: more productive, more efficient, lower cost for your execution. You're 563 00:29:33,880 --> 00:29:36,880 Speaker 1: a pretty big defender of HFT. We're an s f T, 564 00:29:36,960 --> 00:29:41,040 Speaker 1: a slothful frequency trader UM and and you know we've 565 00:29:41,080 --> 00:29:43,480 Speaker 1: been I'll be honest, I've been trying to be very 566 00:29:43,520 --> 00:29:45,520 Speaker 1: clear and careful about this. We have been a public 567 00:29:45,560 --> 00:29:49,719 Speaker 1: defender of of high frequency trading and and we are quantitative. 568 00:29:49,760 --> 00:29:52,480 Speaker 1: So it's easy to confuse those two and not. We're defenders. 569 00:29:52,520 --> 00:29:53,800 Speaker 1: We don't think there's anything wrong with it, but we 570 00:29:53,800 --> 00:29:56,080 Speaker 1: don't want people to think we're doing something we're we're not. 571 00:29:56,120 --> 00:30:00,480 Speaker 1: We're not high frequency traders. It is my belief that 572 00:30:00,480 --> 00:30:03,760 Speaker 1: that there's there's nothing perfect. I'm not excusing all behavior 573 00:30:03,800 --> 00:30:07,240 Speaker 1: and saying nothing wrong goes on UM, but that's true 574 00:30:07,280 --> 00:30:09,240 Speaker 1: of every industry, of every group. I'm not sure HFT 575 00:30:09,400 --> 00:30:12,240 Speaker 1: is worse either. Most of what goes on in h 576 00:30:12,320 --> 00:30:14,600 Speaker 1: f T, which also explains most of the behavior that 577 00:30:14,640 --> 00:30:18,080 Speaker 1: scares people, is about making markets. They make most of 578 00:30:18,080 --> 00:30:20,760 Speaker 1: their money. But if Barry wants to trade comes to 579 00:30:20,800 --> 00:30:23,800 Speaker 1: the market, they will take the other side of Barry's trade. Uh, 580 00:30:23,800 --> 00:30:25,640 Speaker 1: and then they will try to hedge that risk. And 581 00:30:25,680 --> 00:30:27,600 Speaker 1: they will And and why do they have to trade 582 00:30:27,680 --> 00:30:30,440 Speaker 1: high frequency? Well, they put out a bid in an offer, 583 00:30:30,480 --> 00:30:32,360 Speaker 1: they'll buy it for somewhat less than they'll sell it 584 00:30:32,440 --> 00:30:34,400 Speaker 1: to Barry. I'm going to use you as my example 585 00:30:34,520 --> 00:30:36,920 Speaker 1: the way. Now, let's say the market moves a little bit. 586 00:30:36,960 --> 00:30:41,080 Speaker 1: They gotta change those bids and offers, or else you 587 00:30:41,240 --> 00:30:42,600 Speaker 1: or I could sneak in and get too good of 588 00:30:42,640 --> 00:30:44,160 Speaker 1: a deal on them. They got to move it with 589 00:30:44,200 --> 00:30:47,520 Speaker 1: the market. So they are canceling, correcting constantly. Why do 590 00:30:47,560 --> 00:30:49,360 Speaker 1: they have to trade it near light speed? I still 591 00:30:49,440 --> 00:30:51,160 Speaker 1: laughed at the speed of light has something to do 592 00:30:51,200 --> 00:30:53,720 Speaker 1: with my industry. It shouldn't. We're not in. We're not in. 593 00:30:54,480 --> 00:30:59,000 Speaker 1: Electrons can move down optic fiber cable from your office 594 00:30:59,040 --> 00:31:01,600 Speaker 1: to the exchange. I geek equations, but that little c 595 00:31:01,880 --> 00:31:04,520 Speaker 1: for the speed alike should not be in any finance equations. 596 00:31:04,600 --> 00:31:07,040 Speaker 1: Yet it does show up occasionally. But most of their 597 00:31:07,080 --> 00:31:09,120 Speaker 1: need for speed, and I sound a little too top 598 00:31:09,160 --> 00:31:11,880 Speaker 1: gun there, but most of their need for speed comes 599 00:31:11,880 --> 00:31:15,760 Speaker 1: from having to beat other high frequency traders to Yes, 600 00:31:15,800 --> 00:31:17,400 Speaker 1: it is an arms race, but to be the one 601 00:31:17,440 --> 00:31:21,800 Speaker 1: to execute Barry's trade. So by and large, and I 602 00:31:22,120 --> 00:31:26,640 Speaker 1: think everyone almost everyone agrees with this. I shouldn't say everyone, um, 603 00:31:26,680 --> 00:31:29,680 Speaker 1: but from Vanguard, Jack Bogel, other people have looked at 604 00:31:29,680 --> 00:31:34,520 Speaker 1: this agree, they've lowered costs for investors. Um, there's always 605 00:31:34,520 --> 00:31:36,680 Speaker 1: been market making has always been a middleman. We might 606 00:31:36,760 --> 00:31:38,720 Speaker 1: all not love a middleman, but there's always been someone 607 00:31:38,720 --> 00:31:41,040 Speaker 1: to do this. They do it cheaper than the more 608 00:31:41,120 --> 00:31:44,800 Speaker 1: mob monopolistic specialists and old market makers used to do it. 609 00:31:45,240 --> 00:31:47,840 Speaker 1: Um things that look like front running that scare people. 610 00:31:48,120 --> 00:31:50,160 Speaker 1: Market makers used to do once someone starts to buy 611 00:31:50,200 --> 00:31:56,040 Speaker 1: a lot. Unethical front running is you have some information 612 00:31:56,040 --> 00:31:58,120 Speaker 1: that someone's about to trade that you shouldn't have. But 613 00:31:58,200 --> 00:32:02,240 Speaker 1: observing trades and saying where there's something, that's probably something else, 614 00:32:02,240 --> 00:32:04,400 Speaker 1: so we're gonna start to move the price that's gone 615 00:32:04,440 --> 00:32:06,680 Speaker 1: on forever. It's just rational. Anyone making a market's going 616 00:32:06,720 --> 00:32:09,000 Speaker 1: to do that. So it's not a blanket defense. But 617 00:32:09,040 --> 00:32:12,080 Speaker 1: we think most of what they do is provide trading 618 00:32:12,120 --> 00:32:15,840 Speaker 1: liquidity cheaper. The two big complaints that I think are credible. 619 00:32:16,320 --> 00:32:19,280 Speaker 1: The first is what some people call packet sniffing. So 620 00:32:19,320 --> 00:32:21,920 Speaker 1: it's not an order that's been executed, it's not a trade. 621 00:32:22,160 --> 00:32:25,120 Speaker 1: It's cliff is sending an order to buy a hundred 622 00:32:25,120 --> 00:32:28,360 Speaker 1: thousand x y z. They sniff that order out before 623 00:32:28,400 --> 00:32:30,920 Speaker 1: it hits the exchange and jump in line in front 624 00:32:30,920 --> 00:32:33,440 Speaker 1: of you and flip what you were about to buy 625 00:32:33,440 --> 00:32:36,120 Speaker 1: to you anyway, but at half a sent higher. So 626 00:32:36,200 --> 00:32:40,160 Speaker 1: that's one complaint. The other complaint is, you know, it's 627 00:32:40,160 --> 00:32:42,280 Speaker 1: like the old joke about a banker is happy to 628 00:32:42,320 --> 00:32:44,120 Speaker 1: lend you money as long as you don't need any 629 00:32:44,160 --> 00:32:47,560 Speaker 1: They provide liquidly until it's necessary, and then hey, this 630 00:32:47,600 --> 00:32:49,280 Speaker 1: is getting a little too hairy for us, will close. 631 00:32:49,400 --> 00:32:51,640 Speaker 1: Either of those are are jokes. Those are quite serious 632 00:32:51,680 --> 00:32:54,960 Speaker 1: and accurate statements. Um. But I will agree with you 633 00:32:55,360 --> 00:32:57,360 Speaker 1: um on the first one, and I'll take a little 634 00:32:57,360 --> 00:33:00,280 Speaker 1: issue with the second one about them running away. Um, 635 00:33:00,320 --> 00:33:03,160 Speaker 1: when it comes to information they're not supposed to have. 636 00:33:03,600 --> 00:33:06,920 Speaker 1: If anyone has private information that they're not supposed to have, 637 00:33:07,160 --> 00:33:09,480 Speaker 1: that should be stopped. I think that's a relevantly tiny 638 00:33:09,520 --> 00:33:11,560 Speaker 1: part of what goes on. And I think you know, 639 00:33:11,640 --> 00:33:14,720 Speaker 1: traders have attempted to do stuff like this since time immemorial. 640 00:33:14,800 --> 00:33:18,560 Speaker 1: There was probably someone on the outside of Rome, uh 641 00:33:18,640 --> 00:33:21,760 Speaker 1: during this two thousand years ago. But if we find 642 00:33:21,760 --> 00:33:26,040 Speaker 1: a place someone's finding information that that's private, that's using them, 643 00:33:26,320 --> 00:33:29,040 Speaker 1: they're jumping ahead of me or you, that should be stopped. Well, 644 00:33:29,120 --> 00:33:31,720 Speaker 1: I think that it's private it's that the exchange has 645 00:33:31,720 --> 00:33:35,080 Speaker 1: the information, they're providing it to people who are paying 646 00:33:35,200 --> 00:33:37,240 Speaker 1: for it. You get into a gray area when people 647 00:33:37,280 --> 00:33:39,360 Speaker 1: are paying for it. If it's disclosed and they're paying 648 00:33:39,360 --> 00:33:42,280 Speaker 1: for it, you could make a caveat emptor article that 649 00:33:42,320 --> 00:33:45,240 Speaker 1: we all know we're being front run. And these these 650 00:33:45,280 --> 00:33:48,080 Speaker 1: profits are are It's a competitive world. These guys are 651 00:33:48,120 --> 00:33:50,680 Speaker 1: hyper competitive with each other, so they then try to 652 00:33:50,760 --> 00:33:53,480 Speaker 1: undercut each other and providing more competitive liquidity, and you 653 00:33:53,520 --> 00:33:55,520 Speaker 1: have dark pools and you have other things that it's 654 00:33:55,560 --> 00:33:58,120 Speaker 1: no longer as profitable as it was. I am still 655 00:33:58,120 --> 00:34:00,320 Speaker 1: perfectly fine. I would like to see it be volume terry, 656 00:34:00,360 --> 00:34:02,680 Speaker 1: but if I were setting up in exchange, I probably 657 00:34:03,040 --> 00:34:05,360 Speaker 1: would make that not allowed. I think the confidence would 658 00:34:05,400 --> 00:34:07,600 Speaker 1: be larger than the gained to that. So I think 659 00:34:07,640 --> 00:34:09,480 Speaker 1: it's a bad idea, though I could make a more 660 00:34:10,160 --> 00:34:13,400 Speaker 1: uh you know, geeky economic argument that if it's disclosed, 661 00:34:13,400 --> 00:34:16,600 Speaker 1: it's okay. I'd like to see that stopped. The other 662 00:34:17,239 --> 00:34:19,799 Speaker 1: the the other part in them running away, I think 663 00:34:19,800 --> 00:34:22,160 Speaker 1: they do run away. I'm not taking issue with your facts. 664 00:34:22,320 --> 00:34:25,080 Speaker 1: I just think market makers have always run away. I 665 00:34:25,320 --> 00:34:28,000 Speaker 1: think this fantasy that uh that in the old days 666 00:34:28,040 --> 00:34:30,200 Speaker 1: they would take a loss for the team, ready willing 667 00:34:30,200 --> 00:34:33,319 Speaker 1: and able to make a market and to provide stability 668 00:34:33,320 --> 00:34:35,919 Speaker 1: regardless of market conditions. I don't think you will ever 669 00:34:36,120 --> 00:34:39,600 Speaker 1: find a market maker in these kind of markets and 670 00:34:39,640 --> 00:34:41,799 Speaker 1: these kind of trading who buys at a price they 671 00:34:41,840 --> 00:34:44,960 Speaker 1: know is is above the equilibrium price, or sells at 672 00:34:44,960 --> 00:34:47,600 Speaker 1: a price they know is the true price. Two out 673 00:34:47,640 --> 00:34:49,799 Speaker 1: of duty, and I don't think it's any less than 674 00:34:49,960 --> 00:34:51,600 Speaker 1: was before. I think they used to run away before. 675 00:34:51,640 --> 00:34:54,760 Speaker 1: So I'm not saying they're wonderful. I'm saying they're precisest, cowardly, 676 00:34:54,800 --> 00:34:58,200 Speaker 1: and venal as they've always been, and we shouldn't expect different. 677 00:34:58,440 --> 00:35:00,920 Speaker 1: They're the same as it ever was. It's just technology 678 00:35:00,920 --> 00:35:03,880 Speaker 1: instead of you. You can hang around a little bit, 679 00:35:03,920 --> 00:35:07,080 Speaker 1: we can keep talking. For the podcast portion. I've been 680 00:35:07,120 --> 00:35:09,799 Speaker 1: speaking with Cliff Astness. He's the founder and c i 681 00:35:09,880 --> 00:35:13,520 Speaker 1: O of a q R. If you enjoy these conversations, 682 00:35:13,600 --> 00:35:16,399 Speaker 1: be sure and check out our complete chat. This will 683 00:35:16,440 --> 00:35:19,000 Speaker 1: go on for hours after this. You can find that 684 00:35:19,040 --> 00:35:22,040 Speaker 1: on Bloomberg dot com, at SoundCloud, and of course at 685 00:35:22,040 --> 00:35:25,560 Speaker 1: Apple iTunes. Be sure to check out my daily column 686 00:35:25,560 --> 00:35:30,000 Speaker 1: on Bloomberg View. Follow me on Twitter. At rid Halts. Cliff, 687 00:35:30,080 --> 00:35:36,160 Speaker 1: what's your Twitter handle? Uh? Sumarian? Uh. Someone go read 688 00:35:36,200 --> 00:35:38,560 Speaker 1: old Conan comics and that's how it's how they spelled 689 00:35:38,600 --> 00:35:41,080 Speaker 1: in the old cord. It's also just search for Cliff 690 00:35:41,120 --> 00:35:43,960 Speaker 1: Astness and where you can find it. This is Barry Ridholts. 691 00:35:43,960 --> 00:35:47,239 Speaker 1: You're listening to Masters in Business the podcast. This is 692 00:35:47,320 --> 00:35:49,920 Speaker 1: this is my favorite part where I don't have to 693 00:35:49,920 --> 00:35:52,520 Speaker 1: worry about I'm taking the year piece off. I don't 694 00:35:52,560 --> 00:35:55,120 Speaker 1: have to worry about um the radio, the times we 695 00:35:55,239 --> 00:35:58,200 Speaker 1: just kicked back. Cliff, thank you so much for coming by. 696 00:35:58,280 --> 00:36:01,120 Speaker 1: We were off air, we would des i ibing. I 697 00:36:01,160 --> 00:36:03,600 Speaker 1: was chasing you for a while and I figured I 698 00:36:03,640 --> 00:36:05,799 Speaker 1: would wear you down and get you here eventually. Yeah, 699 00:36:05,800 --> 00:36:08,560 Speaker 1: I am. I wasn't really avoiding you, but I must 700 00:36:08,600 --> 00:36:11,959 Speaker 1: tell you having so many amazing people, many of which 701 00:36:12,040 --> 00:36:15,719 Speaker 1: I consider people I study, wore me down and said 702 00:36:15,719 --> 00:36:17,400 Speaker 1: I want to be part of this group. That that's 703 00:36:17,440 --> 00:36:20,000 Speaker 1: the that was the trick, only sucking up I'm gonna 704 00:36:20,000 --> 00:36:22,719 Speaker 1: be doing in this whole thing, and that I do. 705 00:36:22,840 --> 00:36:26,480 Speaker 1: I enjoyed that the my rolodex is not bad, not 706 00:36:26,640 --> 00:36:29,520 Speaker 1: the greatest rolodex, but not too bad. And I knew 707 00:36:30,160 --> 00:36:35,320 Speaker 1: enough people between Michael Mobison, Lasla Borrini and a handful 708 00:36:35,360 --> 00:36:37,840 Speaker 1: of guys like that, I knew that there would be 709 00:36:37,960 --> 00:36:41,840 Speaker 1: enough critical mass that I would eventually start honing in 710 00:36:41,960 --> 00:36:45,399 Speaker 1: on guys like yourself and Bill Gross. So it's really 711 00:36:46,120 --> 00:36:49,600 Speaker 1: and Bob Schiller and Ray Dally and triangulating and yeah, no, 712 00:36:49,880 --> 00:36:53,680 Speaker 1: since I just name drop Bob Schiller. You mentioned something 713 00:36:53,800 --> 00:36:56,080 Speaker 1: in one of your papers, by the way, I've I've 714 00:36:56,120 --> 00:36:59,600 Speaker 1: read and my head of research has read a lot 715 00:36:59,640 --> 00:37:01,840 Speaker 1: of what you guys crank out and put out some 716 00:37:02,520 --> 00:37:08,080 Speaker 1: really interesting pagers. You talk about being somewhere between Fama 717 00:37:08,120 --> 00:37:10,560 Speaker 1: and Schiller, And the funny thing is you and I 718 00:37:10,640 --> 00:37:13,279 Speaker 1: both wrote something after the two of them won the 719 00:37:13,320 --> 00:37:16,920 Speaker 1: Nobel the difference being mine was this fluffy, eight hundred 720 00:37:16,920 --> 00:37:20,160 Speaker 1: word piece and you put out a three thousand word 721 00:37:20,640 --> 00:37:24,279 Speaker 1: dissertation on why they're both right and that's why they 722 00:37:24,320 --> 00:37:27,960 Speaker 1: both want the um. Well, it was it was fun. 723 00:37:28,160 --> 00:37:30,239 Speaker 1: I co wrote that with John lou Is, one of 724 00:37:30,280 --> 00:37:33,040 Speaker 1: my founding partners, and I'm also both of us had 725 00:37:33,080 --> 00:37:36,760 Speaker 1: Fama as uh co chairs of our dissertation, so we 726 00:37:36,239 --> 00:37:39,080 Speaker 1: really we we had a similar um. You know, we've 727 00:37:39,120 --> 00:37:41,879 Speaker 1: worked together forever, so our perspective is similar in that sense, 728 00:37:41,920 --> 00:37:45,160 Speaker 1: but we also had a similar history, and I would 729 00:37:45,160 --> 00:37:49,560 Speaker 1: say we started out as Fama's students and are incredibly 730 00:37:49,560 --> 00:37:52,680 Speaker 1: schooled by him in that efficient markets way of of thinking. 731 00:37:53,400 --> 00:37:56,080 Speaker 1: I wrote my dissertation early on on momentum trading, which 732 00:37:56,120 --> 00:38:00,840 Speaker 1: is already a bit heretical for the afficient markets hypothesis. UH. 733 00:38:00,880 --> 00:38:05,400 Speaker 1: Today this is big fight about why certain things have 734 00:38:05,520 --> 00:38:10,360 Speaker 1: worked historically, like like cheap beating expensive um. One camp, 735 00:38:10,520 --> 00:38:14,040 Speaker 1: the efficient markets farmer camp, says, well, if cheap winds, 736 00:38:14,400 --> 00:38:16,839 Speaker 1: it's because it's risk here, you're assuming more risk. You're 737 00:38:16,880 --> 00:38:19,360 Speaker 1: buying these small cap or these value stocks that have 738 00:38:19,440 --> 00:38:22,240 Speaker 1: fallen out of favor. You assume the risk and therefore 739 00:38:22,280 --> 00:38:25,960 Speaker 1: pays off with a better return over time. Another exactly right, 740 00:38:26,480 --> 00:38:29,400 Speaker 1: another camp, and that would be consistent with an efficient market. 741 00:38:29,440 --> 00:38:31,480 Speaker 1: You can make more if you take more risk. And 742 00:38:31,520 --> 00:38:34,960 Speaker 1: that's not that's not inefficient. You're just right. You're you're 743 00:38:35,000 --> 00:38:38,719 Speaker 1: at the hundred dollar table and the payout. The other camp, 744 00:38:38,760 --> 00:38:41,960 Speaker 1: the inefficient, the irrational camp, as typified by Bob is 745 00:38:42,080 --> 00:38:44,600 Speaker 1: sharing in the Nobel Prize. But it's certainly broader than 746 00:38:44,719 --> 00:38:47,799 Speaker 1: than Bob is. And I'm just using an example of 747 00:38:47,840 --> 00:38:51,600 Speaker 1: value cheap each expensive because people make errors. If something 748 00:38:51,960 --> 00:38:54,440 Speaker 1: is doing poorly, they think it'll go on forever, and 749 00:38:54,520 --> 00:38:56,640 Speaker 1: it should be. You should pay less for it, but 750 00:38:56,680 --> 00:38:58,839 Speaker 1: not as much. This would be a terrible English sense, 751 00:38:58,840 --> 00:39:01,279 Speaker 1: but not as much. Less as the actual price. It 752 00:39:01,280 --> 00:39:03,879 Speaker 1: goes too far, and vice versa. Things that are are 753 00:39:03,920 --> 00:39:06,640 Speaker 1: going well. Um and we saw lots of examples of 754 00:39:06,680 --> 00:39:09,960 Speaker 1: that in two thousands. We saw stocks trading for less 755 00:39:10,000 --> 00:39:13,279 Speaker 1: than book value, less than cash on hand. Things like that. 756 00:39:13,880 --> 00:39:17,920 Speaker 1: I'll never forget along the small cap slash value thesis. 757 00:39:18,280 --> 00:39:21,480 Speaker 1: There was a company I had traded earlier, micro Music. 758 00:39:21,520 --> 00:39:24,400 Speaker 1: It run up to two hundred bucks. It collapsed. I 759 00:39:24,400 --> 00:39:26,560 Speaker 1: want to say it about two forty three with three 760 00:39:26,640 --> 00:39:31,480 Speaker 1: dollars cash on hand, debt free, profitable. How is this possible? 761 00:39:31,719 --> 00:39:34,320 Speaker 1: You're waiting for this thing to go out of business 762 00:39:34,320 --> 00:39:37,680 Speaker 1: eventually gets it goes up, gets taken up by IBM. 763 00:39:37,800 --> 00:39:42,640 Speaker 1: We UM. We launched a q R in late um 764 00:39:42,680 --> 00:39:46,560 Speaker 1: after very good RONNERD Goldman, and the first thing we did, 765 00:39:47,040 --> 00:39:50,400 Speaker 1: and we didn't quanto it's very diversified, but implicitly did 766 00:39:50,800 --> 00:39:55,200 Speaker 1: was fight the tech bubble. Um value investing did not 767 00:39:55,239 --> 00:39:58,480 Speaker 1: have a very good say the least it had. Five 768 00:39:58,560 --> 00:40:00,799 Speaker 1: years of the nineties were pretty toil, but ninety nine 769 00:40:00,920 --> 00:40:04,279 Speaker 1: was a crescendo of doom um. And I don't mean 770 00:40:04,280 --> 00:40:08,160 Speaker 1: to be melodramatic phrase, but it certainly felt that way. 771 00:40:08,360 --> 00:40:10,640 Speaker 1: And again it's not all we do. For instance, momentum 772 00:40:11,200 --> 00:40:13,040 Speaker 1: was good enough to offset value for much of the 773 00:40:13,120 --> 00:40:17,120 Speaker 1: late nineties, not nine. Value was so bad. Um. So 774 00:40:17,200 --> 00:40:19,279 Speaker 1: I I cut my teeth at least at my new firm, 775 00:40:19,360 --> 00:40:22,480 Speaker 1: not not originally a goldman on fighting the tech bubble, 776 00:40:22,520 --> 00:40:24,879 Speaker 1: and I still have the scars of that. A lot 777 00:40:24,880 --> 00:40:26,360 Speaker 1: of battles since that. That was still the worst. So 778 00:40:26,440 --> 00:40:29,720 Speaker 1: let's talk about the word bubble, because I could say, yeah, 779 00:40:29,880 --> 00:40:33,440 Speaker 1: you you basically think everybody over you, well, no doubt 780 00:40:33,480 --> 00:40:37,080 Speaker 1: the tech bubble. That was a genuine bubble. But since 781 00:40:37,120 --> 00:40:40,600 Speaker 1: then you you've said, people over use the term, almost 782 00:40:40,640 --> 00:40:42,520 Speaker 1: to the point of making it meaningless. This is a 783 00:40:42,600 --> 00:40:45,279 Speaker 1: great way to explain how I'm in the middle of 784 00:40:45,320 --> 00:40:48,800 Speaker 1: Bob Schiller and Jean Fauma. Jean will tell you, and 785 00:40:48,800 --> 00:40:51,960 Speaker 1: I've recently had this conversation with him again, there there's 786 00:40:52,000 --> 00:40:54,000 Speaker 1: nothing he'll look back on and say that was definitely 787 00:40:54,040 --> 00:40:57,400 Speaker 1: a bubble. And he's very intellectually consistent. No matter how 788 00:40:57,440 --> 00:40:59,640 Speaker 1: strong you you feel and how smart you think you are, 789 00:40:59,640 --> 00:41:01,879 Speaker 1: you don't want argue with with with Gene He's it's 790 00:41:01,880 --> 00:41:03,879 Speaker 1: pretty hard to beat. I still don't agree with him 791 00:41:03,880 --> 00:41:09,160 Speaker 1: on this, but I would run from that and hide. 792 00:41:09,640 --> 00:41:14,319 Speaker 1: But I do believe bubbles occur. Gene gene Um at 793 00:41:14,400 --> 00:41:16,279 Speaker 1: least he might not go as far as say they 794 00:41:16,280 --> 00:41:18,640 Speaker 1: don't recur. He'll say we can't really prove they've occurred. 795 00:41:18,680 --> 00:41:21,040 Speaker 1: I think there was a definite bubble in tech stocks. 796 00:41:21,520 --> 00:41:23,520 Speaker 1: I think, and I want to accuse Bob Shulder directly 797 00:41:23,560 --> 00:41:25,920 Speaker 1: of this. I love Bob. I don't know what he 798 00:41:25,920 --> 00:41:29,080 Speaker 1: he does, but I think people on the irrational side 799 00:41:29,440 --> 00:41:31,279 Speaker 1: use the word bubble too much, and certainly on the 800 00:41:31,280 --> 00:41:33,920 Speaker 1: wall street side, there's a bubble and everything. I I 801 00:41:34,239 --> 00:41:36,319 Speaker 1: had a presentation where I had with I threw up 802 00:41:36,360 --> 00:41:38,840 Speaker 1: like twenty headlines from bubbles and markets to bubbles and 803 00:41:38,880 --> 00:41:42,040 Speaker 1: individual stocks too. We have dumbed down the word bubble. 804 00:41:42,400 --> 00:41:45,960 Speaker 1: The definition I like a bubble is it's still subjective, 805 00:41:46,560 --> 00:41:50,480 Speaker 1: but it's I can't come up with any plausible future 806 00:41:50,480 --> 00:41:53,960 Speaker 1: scenario where this yields a return that's even remotely acceptable. 807 00:41:53,960 --> 00:41:56,160 Speaker 1: It could be a low return. So the funny thing 808 00:41:56,200 --> 00:42:00,319 Speaker 1: about that line of yours is, I you just did 809 00:42:00,560 --> 00:42:03,919 Speaker 1: in a column headline the bubble in bubbles. Well, we're 810 00:42:03,920 --> 00:42:08,560 Speaker 1: gonna be in coort over that um. But your definition 811 00:42:09,000 --> 00:42:12,360 Speaker 1: of what a bubble is is there is just no rational, 812 00:42:13,040 --> 00:42:15,839 Speaker 1: reasonable price in the future based on what you paid. 813 00:42:16,280 --> 00:42:18,160 Speaker 1: And this was real time, and we have the papers 814 00:42:18,160 --> 00:42:20,600 Speaker 1: to show it. During the tech bubble, we tried very 815 00:42:20,640 --> 00:42:22,719 Speaker 1: hard to say, could we be wrong about this? What 816 00:42:22,800 --> 00:42:25,000 Speaker 1: if you assumed the high end of Woltere earning scores, 817 00:42:25,040 --> 00:42:28,040 Speaker 1: which was insane assumptions at the time. They weren't gonna happen, 818 00:42:28,760 --> 00:42:31,800 Speaker 1: But assume them. Assume people are willing to accept less 819 00:42:31,800 --> 00:42:34,520 Speaker 1: on stocks than the past, because the less you'll accept 820 00:42:34,520 --> 00:42:36,680 Speaker 1: in return, the more you can pay in price. That 821 00:42:36,760 --> 00:42:39,120 Speaker 1: was counterintuitive because everyone's assuming it would go on forever. 822 00:42:39,480 --> 00:42:41,960 Speaker 1: Let's assume it's rational in a in a in a 823 00:42:42,200 --> 00:42:44,319 Speaker 1: fish in markets world, we couldn't get close to the 824 00:42:44,320 --> 00:42:47,360 Speaker 1: current price. I was willing to call that a bubble. 825 00:42:47,400 --> 00:42:50,160 Speaker 1: I wrote, um, something I called a partial book draft 826 00:42:50,160 --> 00:42:52,640 Speaker 1: that never you asked me earlier, why I've never in 827 00:42:52,680 --> 00:42:55,080 Speaker 1: the book? I tried once? Uh, you don't want to 828 00:42:55,080 --> 00:42:58,239 Speaker 1: write a book about something being a bubble and have 829 00:42:58,360 --> 00:43:00,600 Speaker 1: it start to crash around you. I kept revising the 830 00:43:00,600 --> 00:43:03,200 Speaker 1: book for about six months, and then I decided I'd 831 00:43:03,239 --> 00:43:06,040 Speaker 1: rather make money than finish the book. And no one 832 00:43:06,120 --> 00:43:07,719 Speaker 1: wants a book. Hey, there was a bubble and I 833 00:43:07,800 --> 00:43:10,239 Speaker 1: called it, but I forgot to tell you real time. Um, 834 00:43:10,440 --> 00:43:12,200 Speaker 1: but I was, I was writing this thing. I wrote 835 00:43:12,280 --> 00:43:14,839 Speaker 1: articles on it that thank god, we're we're out there, 836 00:43:14,840 --> 00:43:16,719 Speaker 1: but that i'd call a bubble. Let me give you 837 00:43:16,920 --> 00:43:19,560 Speaker 1: a current example of something that I think is a 838 00:43:19,600 --> 00:43:22,560 Speaker 1: very expensive market, but people call a bubble all the time. 839 00:43:22,640 --> 00:43:27,840 Speaker 1: Is the bond market? Bond really yields using forecasts of inflation, 840 00:43:27,880 --> 00:43:31,319 Speaker 1: talking about US bonds are perilously close to zero. They 841 00:43:31,360 --> 00:43:35,920 Speaker 1: bounce around. They've been that is about as low as 842 00:43:35,920 --> 00:43:39,600 Speaker 1: they've ever been several times in history. That's pretty bad. 843 00:43:39,800 --> 00:43:42,440 Speaker 1: Zero is pretty bad. Can I come up with a 844 00:43:42,480 --> 00:43:47,359 Speaker 1: scenario where these bonds do okay over the next ten years? Well, 845 00:43:47,680 --> 00:43:50,160 Speaker 1: I don't call this a plausible scenario. Can I come 846 00:43:50,239 --> 00:43:53,680 Speaker 1: up with is not my best guess, just just something 847 00:43:53,719 --> 00:43:56,279 Speaker 1: that's not wholly ridiculous. And you can come up with 848 00:43:56,320 --> 00:43:58,240 Speaker 1: it with one word, and you know the word Japan. 849 00:43:58,600 --> 00:44:02,080 Speaker 1: You knew it, and now you have harmony yielding almost 850 00:44:02,120 --> 00:44:05,440 Speaker 1: briefly yielding lessons by no means. And and just to reiterate, 851 00:44:05,560 --> 00:44:08,600 Speaker 1: am I predicting the US turns into Japan? From pretty 852 00:44:08,640 --> 00:44:11,239 Speaker 1: much still now? Um? Maybe ninety to two thousand at 853 00:44:11,239 --> 00:44:15,239 Speaker 1: the worst. Um, But is it possible? Yeah, So I 854 00:44:15,280 --> 00:44:17,960 Speaker 1: am willing to say it's a quite expensive market versus history. 855 00:44:18,200 --> 00:44:20,640 Speaker 1: That's a different statement. Bubble has a level of assurance, 856 00:44:20,680 --> 00:44:22,879 Speaker 1: it has a level of insanity. It is a level 857 00:44:22,880 --> 00:44:24,840 Speaker 1: of you should go out and short this thing. The 858 00:44:24,880 --> 00:44:27,400 Speaker 1: other problem with bubble is much more practical, and this 859 00:44:27,440 --> 00:44:29,560 Speaker 1: applies even when they're real bubbles. To the tech bubble, 860 00:44:29,920 --> 00:44:33,560 Speaker 1: timing is always an issue. People forget again. Bob Shill 861 00:44:33,600 --> 00:44:36,200 Speaker 1: has done tremendous work, but he started saying it at 862 00:44:36,280 --> 00:44:42,560 Speaker 1: least um a rational juberance was more or less his 863 00:44:42,680 --> 00:44:47,480 Speaker 1: phrase that the Greenspan said it tanked the market and 864 00:44:47,480 --> 00:44:49,520 Speaker 1: then had to retreat from it. I think that was 865 00:44:49,600 --> 00:44:51,520 Speaker 1: quietly Bob's fault, which I would find so much fun 866 00:44:51,520 --> 00:44:55,480 Speaker 1: if I were Bob. Congressional testimony tanks the market. But 867 00:44:56,040 --> 00:44:58,960 Speaker 1: and this is notrefore proving the market is completely around. 868 00:44:59,080 --> 00:45:00,840 Speaker 1: This is not a knock on Bob, because he'd be 869 00:45:00,840 --> 00:45:02,560 Speaker 1: the first to tell you not to use his stuff 870 00:45:02,600 --> 00:45:06,520 Speaker 1: to time the market and actively trade. But if you 871 00:45:06,560 --> 00:45:09,400 Speaker 1: did from when he first started saying it, I'm not 872 00:45:09,400 --> 00:45:11,560 Speaker 1: I don't think you made money. I think round trip, 873 00:45:11,600 --> 00:45:14,080 Speaker 1: we don't think we ever got back to so we 874 00:45:14,160 --> 00:45:16,719 Speaker 1: got lower returns than normal. Where his measures very good 875 00:45:16,760 --> 00:45:20,200 Speaker 1: for forecasting, but to actually make money by being an 876 00:45:20,200 --> 00:45:22,640 Speaker 1: active trade or you don't want to use the Schiller 877 00:45:22,719 --> 00:45:25,919 Speaker 1: p with a ten year horizon. The Cape measure, yeah, 878 00:45:26,040 --> 00:45:29,680 Speaker 1: which I love. If you look at the past thirty years, 879 00:45:29,920 --> 00:45:33,080 Speaker 1: CAPE has been showing over valued market for something like 880 00:45:34,040 --> 00:45:37,719 Speaker 1: the time, which you know that I think I'll trust 881 00:45:37,760 --> 00:45:41,040 Speaker 1: your numbers. It's certainly something like that. I find that 882 00:45:41,080 --> 00:45:43,919 Speaker 1: to be a little less of a knock. These things 883 00:45:43,920 --> 00:45:47,680 Speaker 1: can wander away from normal for so long that it 884 00:45:47,760 --> 00:45:50,080 Speaker 1: does impress upon people. While you don't want to trade 885 00:45:50,080 --> 00:45:52,719 Speaker 1: over this, even over a even perhaps over a third 886 00:45:52,840 --> 00:45:55,760 Speaker 1: year horizon, I have if I ever find an investor 887 00:45:55,760 --> 00:45:57,399 Speaker 1: will give me a fifty year lock up, maybe I'll 888 00:45:57,480 --> 00:45:59,480 Speaker 1: use the CAPE to to try to forecast things. And 889 00:45:59,520 --> 00:46:01,719 Speaker 1: if you've been thinking about it, because you mentioned something 890 00:46:01,760 --> 00:46:06,319 Speaker 1: earlier about this um, if you look at modern society 891 00:46:06,960 --> 00:46:09,400 Speaker 1: and how much more productive and efficient. I'm trying to 892 00:46:09,400 --> 00:46:12,480 Speaker 1: remember where I I'm pulling this from something you you wrote, 893 00:46:12,520 --> 00:46:15,880 Speaker 1: but I'm I'm not remembering which paper this was. Uh, 894 00:46:15,880 --> 00:46:18,760 Speaker 1: it might have been something more informal than a white paper. 895 00:46:19,160 --> 00:46:23,600 Speaker 1: But look at at the lack of capital intensive heavy industries. 896 00:46:23,840 --> 00:46:27,600 Speaker 1: Think about manufacturing and what used to go into stamping 897 00:46:27,640 --> 00:46:33,160 Speaker 1: out locomotives versus hey, we're we're creating a software company. 898 00:46:33,400 --> 00:46:37,040 Speaker 1: Look at uber with no hard costs other than some 899 00:46:37,239 --> 00:46:42,480 Speaker 1: code and some serverses. But that becomes you know, that 900 00:46:42,560 --> 00:46:45,640 Speaker 1: becomes a small cost of business as opposed to having 901 00:46:45,640 --> 00:46:48,640 Speaker 1: to build these giants, steel mills and these you know 902 00:46:48,760 --> 00:46:51,920 Speaker 1: that that sort of stuff. So maybe to some small degree, 903 00:46:52,520 --> 00:46:55,560 Speaker 1: how more productive and efficient and less capital intensive these 904 00:46:55,560 --> 00:47:01,040 Speaker 1: companies are. Maybe that rationalizes somewhat of a higher return 905 00:47:01,040 --> 00:47:04,520 Speaker 1: at at at a higher pe, but that's really just 906 00:47:04,600 --> 00:47:07,719 Speaker 1: a small part. It's certainly possible. The the argument I 907 00:47:07,800 --> 00:47:13,200 Speaker 1: like best um is that that people required a much 908 00:47:13,280 --> 00:47:17,840 Speaker 1: higher return prior to call the last thirty years because 909 00:47:18,520 --> 00:47:21,160 Speaker 1: some behavioral and some structural structural as it was far 910 00:47:21,200 --> 00:47:24,200 Speaker 1: costlier town stocks. You know, we all act like there 911 00:47:24,280 --> 00:47:27,319 Speaker 1: was these Vanguard, Jack Bogel ten basis point index funds 912 00:47:27,360 --> 00:47:31,360 Speaker 1: forever when they were the way to own stocks, and 913 00:47:31,520 --> 00:47:33,759 Speaker 1: and this is the behavioral part, was generally far more 914 00:47:33,800 --> 00:47:37,320 Speaker 1: concentrated portfolios. I don't think many people before this called 915 00:47:37,320 --> 00:47:40,080 Speaker 1: the seventies owned the index. We look at it as 916 00:47:40,120 --> 00:47:42,520 Speaker 1: if they did, but they tend to on the tent stocks. 917 00:47:42,520 --> 00:47:47,320 Speaker 1: They're brokers recommended a huge that was insane, but at 918 00:47:47,480 --> 00:47:51,560 Speaker 1: large cost. Concentrated portfolio, so riskier, we're to lower average 919 00:47:51,560 --> 00:47:53,520 Speaker 1: return because the costs are much bigger trading through a 920 00:47:53,560 --> 00:47:56,480 Speaker 1: broker at the old Brockdge costs before they changed the feast. 921 00:47:56,640 --> 00:47:58,439 Speaker 1: So we look at the old returns like people got 922 00:47:58,480 --> 00:48:00,319 Speaker 1: those from Bogel when they weren't. They were getting it 923 00:48:00,320 --> 00:48:03,959 Speaker 1: from their stockbroker with more risk. So along the lines 924 00:48:04,000 --> 00:48:05,480 Speaker 1: what you said, and I'd build on that, I'm not 925 00:48:05,520 --> 00:48:08,759 Speaker 1: I'm not dismissing that. I'd say in the in the 926 00:48:08,800 --> 00:48:11,320 Speaker 1: history we look at of stock returns, perhaps people required 927 00:48:11,360 --> 00:48:14,359 Speaker 1: a much higher gross level because they didn't get all 928 00:48:14,400 --> 00:48:16,440 Speaker 1: of it, They got much less of it, and it 929 00:48:16,520 --> 00:48:18,200 Speaker 1: had to take on more risk to get it because 930 00:48:18,200 --> 00:48:21,040 Speaker 1: their portfolios were more concentrated. So there is a case 931 00:48:21,960 --> 00:48:24,600 Speaker 1: that it's a little more pessimistic than your case, a 932 00:48:24,640 --> 00:48:28,080 Speaker 1: case that justifies higher prices today, but it also comes 933 00:48:28,120 --> 00:48:30,920 Speaker 1: with a lower expected return. The lower expected turn is 934 00:48:30,960 --> 00:48:33,200 Speaker 1: not wrong when prices are higher, returns are lower in 935 00:48:33,239 --> 00:48:36,839 Speaker 1: this world. But it's rational. So let's get paid too much. 936 00:48:36,880 --> 00:48:38,560 Speaker 1: You don't need to get paid that much. Let's talk 937 00:48:38,600 --> 00:48:41,640 Speaker 1: about that, because you've said recently you're in the camp 938 00:48:42,000 --> 00:48:46,160 Speaker 1: that anyone looking out ten years should rationally expect lower 939 00:48:46,200 --> 00:48:50,000 Speaker 1: than average returns going far. Yeah, I'll be specific um 940 00:48:50,080 --> 00:48:52,759 Speaker 1: without mean reversion in prices um. And because that's too 941 00:48:52,840 --> 00:48:55,440 Speaker 1: much about forecasting some people. I mean, you know, I 942 00:48:55,719 --> 00:48:58,200 Speaker 1: probably believe in a little mean reversion um in p 943 00:48:58,480 --> 00:49:02,399 Speaker 1: s in real bond yields, but that's forecasting and guests work. 944 00:49:03,440 --> 00:49:06,600 Speaker 1: Just you're you're not a big fan of forecast. I try. 945 00:49:06,640 --> 00:49:09,160 Speaker 1: I mean, you know, you implicitly forecast a lot of things. 946 00:49:09,200 --> 00:49:11,880 Speaker 1: But if I forecast, we want to forecast two thousand 947 00:49:11,960 --> 00:49:14,000 Speaker 1: things and take tiny bets on all of them. I'm 948 00:49:14,000 --> 00:49:16,480 Speaker 1: not especially not a fan of trying to forecast big 949 00:49:16,520 --> 00:49:19,439 Speaker 1: giant things. Occasionally, something like the tech bubble will force 950 00:49:19,480 --> 00:49:21,600 Speaker 1: me into a corner where there's no other bet to make. 951 00:49:21,640 --> 00:49:24,640 Speaker 1: Either bet it goes up or down. But by and 952 00:49:24,719 --> 00:49:26,799 Speaker 1: large we try to diversify, and and and if we 953 00:49:26,840 --> 00:49:30,520 Speaker 1: do have to forecast, forecast, forecast as cowardly as possible. 954 00:49:31,800 --> 00:49:36,960 Speaker 1: But right now Schiller pas are around UM without mean reversion. 955 00:49:37,200 --> 00:49:38,960 Speaker 1: I mean to get about a four percent real return 956 00:49:39,040 --> 00:49:43,520 Speaker 1: historically on stocks from here UM per example year, not 957 00:49:43,600 --> 00:49:49,200 Speaker 1: including dividends, No include total return. Excuse me, real return 958 00:49:49,800 --> 00:49:52,680 Speaker 1: over inflation that thank god you asked, because that's really 959 00:49:54,440 --> 00:49:57,919 Speaker 1: including dividends. And after taking off one or two percent 960 00:49:58,000 --> 00:50:01,040 Speaker 1: for inflation one or two now knowst long term, if 961 00:50:01,080 --> 00:50:03,640 Speaker 1: inflation goes up, this goes up because not because earnings 962 00:50:03,640 --> 00:50:06,640 Speaker 1: growth will move with inflation, we believe it makes some 963 00:50:08,400 --> 00:50:11,560 Speaker 1: On a nominal basis, stocks are a great return, great investment. 964 00:50:11,800 --> 00:50:15,319 Speaker 1: In a period of high inflation people all the time, 965 00:50:15,400 --> 00:50:19,080 Speaker 1: surprise inflation tends to hit all assets, including stocks, But 966 00:50:19,200 --> 00:50:21,360 Speaker 1: long term, steady state inflation is kind of what stocks 967 00:50:21,360 --> 00:50:26,680 Speaker 1: are for UM Now bonds uh it bounces around call 968 00:50:26,719 --> 00:50:31,600 Speaker 1: him fifty basis points tiny real real expected yield. So 969 00:50:31,840 --> 00:50:36,000 Speaker 1: take your classic sixty forty portfolio six of four percent 970 00:50:36,120 --> 00:50:40,399 Speaker 1: or four hundred basis points of fifty rounded, it's about 971 00:50:40,400 --> 00:50:43,279 Speaker 1: two and a half percent real to forty and it's 972 00:50:43,280 --> 00:50:45,680 Speaker 1: a bit above two and a half. It's not right. 973 00:50:45,920 --> 00:50:47,800 Speaker 1: Did I mentioned quantas in my title? I can't do 974 00:50:47,920 --> 00:50:51,680 Speaker 1: math in front of people. It's really so six times 975 00:50:51,719 --> 00:50:57,839 Speaker 1: four is two four times where he's another twenty. Um, 976 00:50:57,880 --> 00:51:01,440 Speaker 1: I liked a round teach Cliff a little bit, a 977 00:51:01,480 --> 00:51:03,319 Speaker 1: little bit. But but but but I but I could 978 00:51:03,360 --> 00:51:08,360 Speaker 1: take the derivative of it in a heartbeat. Um. The 979 00:51:08,600 --> 00:51:10,360 Speaker 1: it's fun to have kids who are ten and eleven, 980 00:51:10,400 --> 00:51:13,360 Speaker 1: by the way, because I'm trying to teach them division. Um, 981 00:51:13,400 --> 00:51:16,440 Speaker 1: it's it's it's very humbling. Your kids are completely unimpressed 982 00:51:16,440 --> 00:51:18,640 Speaker 1: that you're a quant of any kind of Like Dad, 983 00:51:18,680 --> 00:51:20,120 Speaker 1: you're doing it wrong. That's not how I see the 984 00:51:20,120 --> 00:51:22,000 Speaker 1: way they do it now. It is so different than 985 00:51:22,040 --> 00:51:23,759 Speaker 1: the way we learned. I know. And the first thing 986 00:51:23,760 --> 00:51:24,960 Speaker 1: I have to do is go on the web and 987 00:51:24,960 --> 00:51:28,799 Speaker 1: figure out how they're teaching it now. Well, everything's gonn 988 00:51:28,880 --> 00:51:31,040 Speaker 1: wrong to you and I but I gotta really it's 989 00:51:31,080 --> 00:51:32,879 Speaker 1: like it's it's a lot of work. I got I'm 990 00:51:32,920 --> 00:51:35,399 Speaker 1: learning relearning division. But that's not the Let me get 991 00:51:35,440 --> 00:51:37,120 Speaker 1: back to it. It's two and a percent reel on 992 00:51:38,400 --> 00:51:41,200 Speaker 1: rough the other numbers are all around it too, so 993 00:51:41,200 --> 00:51:44,840 Speaker 1: we don't have forget this exact anyway. Long term, again 994 00:51:45,120 --> 00:51:47,480 Speaker 1: rounding you made about five percent reel on sixty for 995 00:51:47,760 --> 00:51:50,480 Speaker 1: about a hundred years, so we would forcus you make 996 00:51:50,480 --> 00:51:54,560 Speaker 1: half the real return as you've made historically. Stocks are 997 00:51:54,640 --> 00:51:57,759 Speaker 1: priced more expensively again Schiller P or dividend yield plus 998 00:51:57,880 --> 00:52:01,840 Speaker 1: expected growth, whatever model you like, call it roughly about 999 00:52:01,880 --> 00:52:05,840 Speaker 1: more expensive than about of the last hundred years at 1000 00:52:05,880 --> 00:52:09,279 Speaker 1: the time. Bonds this shocks some people are really not 1001 00:52:09,320 --> 00:52:11,200 Speaker 1: worse than stocks. They are more expensive than about nine 1002 00:52:11,600 --> 00:52:14,880 Speaker 1: at the time. The difference teen stocks and bonds. Bonds 1003 00:52:14,880 --> 00:52:17,279 Speaker 1: are bumping against zero, so they're more dramatic looking, but 1004 00:52:17,360 --> 00:52:21,399 Speaker 1: that difference in in spread is roughly average. But they're 1005 00:52:21,400 --> 00:52:26,520 Speaker 1: both really low. They usually don't happen at the same time. 1006 00:52:27,680 --> 00:52:34,120 Speaker 1: Stinks another bad being bad stinks to really and now 1007 00:52:34,160 --> 00:52:37,360 Speaker 1: I'm not being quantitative at all, really really stinks. We 1008 00:52:37,480 --> 00:52:40,920 Speaker 1: find forty portfolio is approximately as bad as it's ever 1009 00:52:40,960 --> 00:52:46,040 Speaker 1: been perspectively two and a half as bad as it's 1010 00:52:46,120 --> 00:52:48,319 Speaker 1: And by the way, people, the funny thing is with 1011 00:52:48,400 --> 00:52:51,640 Speaker 1: the math of this. People assume zero is as low 1012 00:52:51,680 --> 00:52:54,359 Speaker 1: as you can go. But if you pay attention you'll 1013 00:52:54,560 --> 00:52:57,759 Speaker 1: you'll know you can actually have negative no, not even 1014 00:52:57,800 --> 00:53:02,400 Speaker 1: real returns, negative nominal resent realized returns. Anything can happen 1015 00:53:02,440 --> 00:53:06,359 Speaker 1: even over longer periods, and people, many people think, um, 1016 00:53:06,440 --> 00:53:11,239 Speaker 1: I agree with that. If we ever had negative expected returns, 1017 00:53:11,800 --> 00:53:13,200 Speaker 1: that would be I'd be willing to use the word 1018 00:53:13,239 --> 00:53:16,280 Speaker 1: bubble there. We talked about that earlier because negative expect 1019 00:53:16,520 --> 00:53:21,640 Speaker 1: real returns were negative expected real returns very very hard 1020 00:53:21,680 --> 00:53:23,760 Speaker 1: for me to imagine a world where people would rationally 1021 00:53:23,840 --> 00:53:26,760 Speaker 1: on stocks and bonds, say, and we've seen some negative 1022 00:53:26,800 --> 00:53:31,239 Speaker 1: nominal returns on bonds. Those are places that have convenience yield, 1023 00:53:31,320 --> 00:53:34,279 Speaker 1: meaning keep my money protected. Or maybe they're worried about 1024 00:53:34,280 --> 00:53:37,719 Speaker 1: deflation and they're actually expecting positive real returns because you know, 1025 00:53:37,760 --> 00:53:43,319 Speaker 1: if deflation comes in a small negative nominal negative one 1026 00:53:43,320 --> 00:53:45,960 Speaker 1: percent of inflations minus two percent, that's still one percent 1027 00:53:46,040 --> 00:53:50,320 Speaker 1: better than inflation. But if you on your diversified broadly 1028 00:53:50,560 --> 00:53:53,520 Speaker 1: stocks and bonds portfolio, if instead of two and a half, 1029 00:53:53,520 --> 00:53:57,359 Speaker 1: which is disastrous versus history, we're expecting zero negative, I'd 1030 00:53:57,400 --> 00:54:00,520 Speaker 1: have to start, Uh there, I'd be screaming bubble here, 1031 00:54:00,520 --> 00:54:05,040 Speaker 1: I'm I'm screaming more expensive than history. Lower your expectations, 1032 00:54:05,120 --> 00:54:06,920 Speaker 1: which isn't the same as a bubble. Let me shift 1033 00:54:06,960 --> 00:54:09,680 Speaker 1: gears a little bit about with you and talk about 1034 00:54:10,280 --> 00:54:14,359 Speaker 1: um the small cap premium. I love the title of 1035 00:54:14,360 --> 00:54:18,359 Speaker 1: your paper. We got channel channeling Seinfeld a little bit. 1036 00:54:18,800 --> 00:54:22,400 Speaker 1: It's real and it's spectacular on the small firm effect. 1037 00:54:22,480 --> 00:54:25,200 Speaker 1: That was my blog entry. The title was even worse. 1038 00:54:25,400 --> 00:54:28,160 Speaker 1: What was the blog That was the blog entry title. 1039 00:54:28,200 --> 00:54:31,360 Speaker 1: The title of the paper was size Matters if you 1040 00:54:31,400 --> 00:54:34,560 Speaker 1: control your junk. It was a bit of a double end, 1041 00:54:34,960 --> 00:54:38,439 Speaker 1: which I've been apologizing for though. Well, well, the theme 1042 00:54:38,480 --> 00:54:41,480 Speaker 1: of the paper was people sort of downplay. So first 1043 00:54:41,520 --> 00:54:45,880 Speaker 1: let's back up. The small cap premium is by small 1044 00:54:45,920 --> 00:54:49,320 Speaker 1: cap stocks over time, and you'll outperform big cap stocks. 1045 00:54:49,760 --> 00:54:52,480 Speaker 1: Now that seems some people have been questioning that as 1046 00:54:52,560 --> 00:54:56,319 Speaker 1: that shrunk. But your your paper says, well, there's so 1047 00:54:56,400 --> 00:55:00,400 Speaker 1: much bad stocks. The SMB five, you know, get the 1048 00:55:00,440 --> 00:55:03,200 Speaker 1: same sort of junk filtering into that. So now when 1049 00:55:03,239 --> 00:55:06,359 Speaker 1: we look at the two thousand small cap stock, pull 1050 00:55:06,400 --> 00:55:09,840 Speaker 1: out the junkie lower quality stocks, and what do you 1051 00:55:09,880 --> 00:55:12,080 Speaker 1: have left? You're exactly right. You needed to do do the 1052 00:55:12,120 --> 00:55:14,520 Speaker 1: research and let me take people a little bit back. 1053 00:55:14,560 --> 00:55:16,840 Speaker 1: This is was the first crack in the armor of 1054 00:55:16,880 --> 00:55:19,640 Speaker 1: the famous capital asset pricing model. Back in the and 1055 00:55:19,719 --> 00:55:23,520 Speaker 1: efficient markets if you will UM back in the early eighties, 1056 00:55:23,520 --> 00:55:25,480 Speaker 1: a guy named Ralph Bonds, who was a former student, 1057 00:55:25,480 --> 00:55:28,080 Speaker 1: also found the first version that I know of. There 1058 00:55:28,120 --> 00:55:30,480 Speaker 1: might have been others of the small firm effect that 1059 00:55:30,680 --> 00:55:34,840 Speaker 1: after adjusting for the famous cap EM beta, small stocks 1060 00:55:35,000 --> 00:55:38,560 Speaker 1: beat large stocks, and you know, why should that be? Uh? 1061 00:55:38,600 --> 00:55:43,880 Speaker 1: And they've been all kinds of theories about this. CAPEM 1062 00:55:43,920 --> 00:55:45,840 Speaker 1: tries to adjust for that with beta. Some of the 1063 00:55:45,840 --> 00:55:48,480 Speaker 1: early studies said, maybe we're measuring risks wrong. Maybe the 1064 00:55:48,480 --> 00:55:50,799 Speaker 1: beta is really higher. That got you a little bit, 1065 00:55:50,920 --> 00:55:54,120 Speaker 1: not much, Maybe it's a liquidity premium. There are stories, 1066 00:55:54,640 --> 00:55:57,720 Speaker 1: but basically there's one thing. I don't want to confuse 1067 00:55:57,719 --> 00:56:02,040 Speaker 1: it with small value stocks. Buy cheap small stocks, at 1068 00:56:02,080 --> 00:56:06,240 Speaker 1: least in the data that's unassailable. UM. You know, going forward, 1069 00:56:06,280 --> 00:56:08,439 Speaker 1: as always, will history repeat? I believe it will there, 1070 00:56:08,440 --> 00:56:12,680 Speaker 1: but I can't prove it. You mentioned David Booth Dimensional Funds, 1071 00:56:12,680 --> 00:56:17,520 Speaker 1: which now runs if anything, that's that's that's the core 1072 00:56:17,560 --> 00:56:20,879 Speaker 1: premise of their's and I'm I am certainly believer in that. 1073 00:56:21,200 --> 00:56:23,439 Speaker 1: The small firm effect, though, is exactly what it says 1074 00:56:23,440 --> 00:56:26,080 Speaker 1: it doesn't buy small cheap, it buys all small stocks. 1075 00:56:26,560 --> 00:56:28,919 Speaker 1: Uh and should they beat large stocks. Well, that's far 1076 00:56:29,040 --> 00:56:32,480 Speaker 1: weaker than many of the other so called anomalies, the 1077 00:56:32,480 --> 00:56:35,880 Speaker 1: findings of value momentum, a few others in in in 1078 00:56:36,040 --> 00:56:38,560 Speaker 1: in the finance literature. It's kind of the weak sibling 1079 00:56:39,160 --> 00:56:42,200 Speaker 1: to those immediately went on a bad fifteen twenty year 1080 00:56:42,280 --> 00:56:44,839 Speaker 1: run after it was discovered. Has come back somewhat since then, 1081 00:56:45,200 --> 00:56:47,160 Speaker 1: but if you look at it through time, has other quirks. 1082 00:56:47,160 --> 00:56:50,840 Speaker 1: Almost all happens in January. That's not necessarily terrible, but 1083 00:56:50,960 --> 00:56:55,000 Speaker 1: it's a little weird. Confidence a little bit, even if 1084 00:56:55,000 --> 00:56:57,759 Speaker 1: you don't really understand why. Uh and in general wasn't 1085 00:56:57,840 --> 00:57:00,440 Speaker 1: nearly as strong as the other as the other fall value, 1086 00:57:00,960 --> 00:57:04,560 Speaker 1: as small value certainly, as as as momentum, small momentum, 1087 00:57:04,600 --> 00:57:06,279 Speaker 1: whatever you want to do. Most of the rest of 1088 00:57:06,320 --> 00:57:09,080 Speaker 1: empirical finance was better than the small firm effect. It 1089 00:57:09,160 --> 00:57:11,279 Speaker 1: was a weak and people have been losing faith in it. 1090 00:57:12,120 --> 00:57:16,440 Speaker 1: We discovered irrelatively recent research by US and others totally 1091 00:57:16,440 --> 00:57:20,080 Speaker 1: separate from this, looks at quality investing. This son Warren 1092 00:57:20,120 --> 00:57:22,240 Speaker 1: Buffett figured out thirty or forty years ago. It took us. 1093 00:57:22,480 --> 00:57:24,320 Speaker 1: Took us a little while to get to it. But 1094 00:57:24,680 --> 00:57:27,720 Speaker 1: what's what's this war is onto something? Well, we do 1095 00:57:27,760 --> 00:57:29,760 Speaker 1: it much geekier than he does, of course, and we're 1096 00:57:29,760 --> 00:57:32,000 Speaker 1: doing in a diversified way. He does it by picking 1097 00:57:32,000 --> 00:57:35,000 Speaker 1: the right quality, and he also cares about value and 1098 00:57:35,000 --> 00:57:37,640 Speaker 1: other things. But what's the quality stock? It's anything that 1099 00:57:37,680 --> 00:57:41,000 Speaker 1: you in not just theory, but in in intuition, anything 1100 00:57:41,000 --> 00:57:43,800 Speaker 1: that makes sense that you pay more for. Why would 1101 00:57:43,840 --> 00:57:45,880 Speaker 1: you pay more for stock? Well, if it's more profitable, 1102 00:57:46,440 --> 00:57:49,680 Speaker 1: if those profits are growing faster, and and you believe 1103 00:57:49,680 --> 00:57:51,520 Speaker 1: by the way this will continue, and you can show 1104 00:57:51,560 --> 00:57:53,880 Speaker 1: that that a profitable company tends to be profitable next 1105 00:57:54,280 --> 00:57:55,960 Speaker 1: quarter or whatnot, you should pay more for these. You 1106 00:57:55,960 --> 00:57:58,480 Speaker 1: should pay more for a lower risk company. All else 1107 00:57:58,520 --> 00:58:01,160 Speaker 1: equal if it makes as moch money now son as 1108 00:58:01,200 --> 00:58:03,080 Speaker 1: they don't of course, but if it makes as much money. 1109 00:58:03,200 --> 00:58:05,040 Speaker 1: We love low risk. I'll pay a little bit more 1110 00:58:05,080 --> 00:58:07,240 Speaker 1: if I have less risk for the same for the 1111 00:58:07,280 --> 00:58:09,000 Speaker 1: same money. And finally, if they're able to pay you 1112 00:58:09,040 --> 00:58:13,160 Speaker 1: a bigger dividend, while everything else is equal, growing the 1113 00:58:13,200 --> 00:58:16,720 Speaker 1: same same profitability, same same risk, why not more more 1114 00:58:16,760 --> 00:58:19,800 Speaker 1: dividends are good? These are all things that we call quality. 1115 00:58:19,880 --> 00:58:21,800 Speaker 1: We have a separate work and we're not the only 1116 00:58:21,840 --> 00:58:23,400 Speaker 1: ones to look at this, but we we of course 1117 00:58:23,440 --> 00:58:25,760 Speaker 1: love our version that looks at these things and goes 1118 00:58:25,840 --> 00:58:29,800 Speaker 1: all of these things seem to have an unexplained out performance. 1119 00:58:30,160 --> 00:58:31,680 Speaker 1: And you can get in your old debate as this 1120 00:58:31,800 --> 00:58:33,920 Speaker 1: risk is it is it inefficient markets? But we think 1121 00:58:33,920 --> 00:58:37,080 Speaker 1: it's very statistically valid. If you go look at other countries, 1122 00:58:37,120 --> 00:58:39,600 Speaker 1: it shows up again and again and again high quality 1123 00:58:39,640 --> 00:58:43,480 Speaker 1: beats low quality. Then we we decided to take a 1124 00:58:43,480 --> 00:58:45,120 Speaker 1: look at how does what does this mean for small 1125 00:58:45,560 --> 00:58:48,280 Speaker 1: and we noticed something that kind of jumped out at us. 1126 00:58:48,320 --> 00:58:52,000 Speaker 1: The small universe was very low quality, what we often 1127 00:58:52,040 --> 00:58:55,840 Speaker 1: called junkie. Something you fire universe to small capitalized. There 1128 00:58:55,840 --> 00:58:58,360 Speaker 1: are high quality small cap, but it had far more 1129 00:58:58,440 --> 00:59:00,880 Speaker 1: junk in it. And you said this early here um 1130 00:59:01,000 --> 00:59:04,120 Speaker 1: then as a percentage of the index than the large 1131 00:59:04,160 --> 00:59:08,160 Speaker 1: cap And I think it's fairly intuitive. But but it 1132 00:59:08,200 --> 00:59:13,040 Speaker 1: turns out that small was being seriously hurt if you believe. 1133 00:59:13,480 --> 00:59:15,680 Speaker 1: Not everyone believes it, but we believe it strongly. That 1134 00:59:15,800 --> 00:59:19,360 Speaker 1: high quality has and will win over over the past. 1135 00:59:19,440 --> 00:59:22,960 Speaker 1: High profitability is my favorite of them. That profitable firms 1136 00:59:23,040 --> 00:59:26,480 Speaker 1: uh will outperform for either risk or inefficient market reasons. 1137 00:59:27,400 --> 00:59:30,240 Speaker 1: Go look at small firms. You're shorting that effect. You're 1138 00:59:30,240 --> 00:59:33,680 Speaker 1: betting against it. Small firms are less profitable, far more 1139 00:59:33,760 --> 00:59:37,040 Speaker 1: junkie unprofitable firms, so you're betting against something that you 1140 00:59:37,040 --> 00:59:41,000 Speaker 1: think works. One thing that academics and quant and applied 1141 00:59:41,040 --> 00:59:43,640 Speaker 1: quants are pretty good at doing is saying, what if 1142 00:59:43,640 --> 00:59:46,560 Speaker 1: we remove that, What if we bet on small, but 1143 00:59:46,680 --> 00:59:49,200 Speaker 1: we make it so their average quality. Take what we 1144 00:59:49,240 --> 00:59:52,480 Speaker 1: know that's good, remove what we know is bad, and 1145 00:59:52,520 --> 00:59:54,880 Speaker 1: don't cheat. Don't only buy quality, but make it just 1146 00:59:54,960 --> 00:59:57,400 Speaker 1: average quality. So so small on net doesn't have a 1147 00:59:57,480 --> 01:00:00,640 Speaker 1: tilt towards high quality or junk, so it's just neutral 1148 01:00:00,720 --> 01:00:03,680 Speaker 1: on It turns out we've restored the small farm effect. 1149 01:00:03,960 --> 01:00:09,000 Speaker 1: Small crushes large does really well and about comparable to 1150 01:00:09,040 --> 01:00:11,600 Speaker 1: the value and momentum effects. We've restored it, we think 1151 01:00:11,640 --> 01:00:13,360 Speaker 1: to kind of equal standing with some of the other 1152 01:00:13,400 --> 01:00:18,480 Speaker 1: major findings in finance. We've also confused everyone, including ourselves, 1153 01:00:18,680 --> 01:00:21,160 Speaker 1: because we don't have a great economic story for this. 1154 01:00:21,320 --> 01:00:23,720 Speaker 1: It is too big of a premium. I don't yet, 1155 01:00:23,840 --> 01:00:26,080 Speaker 1: I like I'd like to start with gene Fama stories 1156 01:00:26,080 --> 01:00:28,360 Speaker 1: with efficient market stories and only be willing to go 1157 01:00:28,400 --> 01:00:33,360 Speaker 1: to inefficient markets if I fail, and small winning is 1158 01:00:33,360 --> 01:00:35,240 Speaker 1: one of the ones. Some people find it very intuitive, 1159 01:00:35,280 --> 01:00:37,400 Speaker 1: But when you ask them, why is it intuitive? Well, 1160 01:00:37,400 --> 01:00:39,800 Speaker 1: they're less liquid? Well then how come the higher quality 1161 01:00:39,840 --> 01:00:42,440 Speaker 1: ones when more consistently they're they're a little bit more 1162 01:00:42,480 --> 01:00:45,040 Speaker 1: liquid um. It's hard to come up with a great 1163 01:00:45,040 --> 01:00:49,960 Speaker 1: economic story why why why small winds value? I think 1164 01:00:49,960 --> 01:00:53,920 Speaker 1: it's quite easy. Whether you like risk or inefficiency momentum, 1165 01:00:53,960 --> 01:00:56,200 Speaker 1: you can tell pretty simple stories about people under reacting 1166 01:00:56,280 --> 01:00:59,640 Speaker 1: information small. If two small companies merge, do they suddenly 1167 01:00:59,640 --> 01:01:01,960 Speaker 1: go away up in price because now they're a big 1168 01:01:01,960 --> 01:01:04,240 Speaker 1: company and have a lower cost of capital, lower expect 1169 01:01:04,280 --> 01:01:06,640 Speaker 1: to return and a higher price. They don't seem to 1170 01:01:06,680 --> 01:01:09,120 Speaker 1: do that. They're weird things that go on. Why small 1171 01:01:09,200 --> 01:01:11,400 Speaker 1: works we have not helped, but we have helped for 1172 01:01:11,480 --> 01:01:13,560 Speaker 1: store to. It's kind of so you don't have you 1173 01:01:13,560 --> 01:01:16,920 Speaker 1: don't have an you don't have a narrative that explains 1174 01:01:16,960 --> 01:01:22,240 Speaker 1: the data as to why small minus junk trounce is large. 1175 01:01:23,320 --> 01:01:25,360 Speaker 1: There's not a narrow I really hate to say no, 1176 01:01:25,480 --> 01:01:27,200 Speaker 1: but I gotta go with not yet, let me be 1177 01:01:27,200 --> 01:01:30,439 Speaker 1: more optimistic and yet and it's nothing as simple as well. 1178 01:01:31,160 --> 01:01:34,600 Speaker 1: Big caps run into the law of big numbers. Small 1179 01:01:34,640 --> 01:01:36,240 Speaker 1: has huge head room and there's a lot of place 1180 01:01:36,280 --> 01:01:39,080 Speaker 1: for them to go as more and more people discover them, 1181 01:01:39,080 --> 01:01:40,800 Speaker 1: find them, and they grow and side Verry. That could 1182 01:01:40,840 --> 01:01:43,800 Speaker 1: absolutely be the answer, but that's a very inefficient With 1183 01:01:43,880 --> 01:01:45,640 Speaker 1: any other issues, you can say no, no, no, no 1184 01:01:46,600 --> 01:01:51,840 Speaker 1: on after you get that could be the answer. You 1185 01:01:51,920 --> 01:01:56,880 Speaker 1: jumped on the credit a little too fast because I said, 1186 01:01:56,920 --> 01:01:58,520 Speaker 1: I like to start to try to figure out a 1187 01:01:58,560 --> 01:02:02,200 Speaker 1: risk story in a markets stories are quite simple to 1188 01:02:02,240 --> 01:02:05,720 Speaker 1: come up with. Why people people are people under But 1189 01:02:05,800 --> 01:02:09,760 Speaker 1: these these these things they don't appreciate the upside. Inefficient 1190 01:02:09,760 --> 01:02:11,959 Speaker 1: market stories which I'm not quite willing to go there yet, 1191 01:02:12,160 --> 01:02:14,760 Speaker 1: but those are easy to come up with. Um they 1192 01:02:14,880 --> 01:02:17,320 Speaker 1: these are neglected people just don't pay as much attention, 1193 01:02:17,680 --> 01:02:21,880 Speaker 1: no Wall Street coverage whatsoever. They're unknown. There are a 1194 01:02:21,880 --> 01:02:23,920 Speaker 1: host of stories like that. I like to get there 1195 01:02:23,960 --> 01:02:26,120 Speaker 1: after I've exhausted all possibilities. I don't feel we have 1196 01:02:26,640 --> 01:02:29,720 Speaker 1: I have not found yet. This is the part A 1197 01:02:29,840 --> 01:02:33,480 Speaker 1: risk based story, a rational story, all those stories, when 1198 01:02:33,520 --> 01:02:36,520 Speaker 1: you say they grow faster, why don't the market recognize that? 1199 01:02:36,560 --> 01:02:39,160 Speaker 1: Barry market? If an efficient market the market should recognize 1200 01:02:39,160 --> 01:02:41,720 Speaker 1: exactly what you said, that it has upside and large 1201 01:02:41,720 --> 01:02:45,280 Speaker 1: cap does. There's not a lot of coverage. Remember, institutions 1202 01:02:45,280 --> 01:02:48,240 Speaker 1: have certain rules about what they can and can't buy. 1203 01:02:48,360 --> 01:02:51,520 Speaker 1: There's a hundred little stories. I'm completely I bet you 1204 01:02:51,560 --> 01:02:53,600 Speaker 1: know all of that. I am completely with you. And 1205 01:02:53,600 --> 01:02:55,840 Speaker 1: and at this point I have to say my money 1206 01:02:55,840 --> 01:02:57,560 Speaker 1: would be on some version of that being right because 1207 01:02:57,560 --> 01:02:59,280 Speaker 1: I haven't come up with the others. But they are 1208 01:02:59,280 --> 01:03:04,240 Speaker 1: in the inefficient markets irrationality camp. So so this conversation 1209 01:03:04,280 --> 01:03:08,640 Speaker 1: about small cap and value, UM, small value could be 1210 01:03:08,720 --> 01:03:10,360 Speaker 1: risk Let me throw that in because value can be 1211 01:03:10,480 --> 01:03:12,840 Speaker 1: very risky. But go on, But you you triggered two 1212 01:03:12,880 --> 01:03:16,080 Speaker 1: things I want to not forget to ask you. One 1213 01:03:16,280 --> 01:03:20,600 Speaker 1: is about smart beta and factor investing, and the second 1214 01:03:20,680 --> 01:03:23,320 Speaker 1: is what happens when you take a quantitative approach to 1215 01:03:23,480 --> 01:03:25,960 Speaker 1: warn Buffett. So where do you want to go with that? 1216 01:03:26,160 --> 01:03:28,600 Speaker 1: Let me start with with smart beta. UM. You and 1217 01:03:28,600 --> 01:03:30,280 Speaker 1: I talked about hedge funds earlier, and I gave you 1218 01:03:30,320 --> 01:03:33,560 Speaker 1: a schizophrenic answer. I'm gonna give you another one. UM. 1219 01:03:33,640 --> 01:03:36,120 Speaker 1: I am both a fan of smart beta and its 1220 01:03:36,120 --> 01:03:41,280 Speaker 1: most famous version, fundamental indexing. UH and UM A skeptic 1221 01:03:41,320 --> 01:03:43,800 Speaker 1: in a in a very narrow sense. Now before before 1222 01:03:43,840 --> 01:03:46,600 Speaker 1: you get into too much detail, I know you're friendly 1223 01:03:46,640 --> 01:03:50,520 Speaker 1: with Rob. Are not right. We're also friendly with And 1224 01:03:50,680 --> 01:03:54,400 Speaker 1: he was here not too long ago. Some people have 1225 01:03:54,480 --> 01:03:58,520 Speaker 1: called him the father of fundamental indexing. Um. I don't 1226 01:03:58,560 --> 01:04:01,439 Speaker 1: know if that's overstating it'll little bit um. I don't 1227 01:04:01,440 --> 01:04:03,640 Speaker 1: think it's overstating it. I I do think and and 1228 01:04:03,640 --> 01:04:06,040 Speaker 1: and and Rob's an honest guy. He'll he'll tell you this. 1229 01:04:06,560 --> 01:04:09,560 Speaker 1: People were doing some fundamental indusseries. Uh, there's some people 1230 01:04:09,560 --> 01:04:13,960 Speaker 1: of Goldman sacks. But the father of something is an 1231 01:04:13,960 --> 01:04:16,880 Speaker 1: early adapter who's the one most responsible for its popularity 1232 01:04:16,960 --> 01:04:20,960 Speaker 1: by far. And my disagreements with Rob and we we 1233 01:04:21,000 --> 01:04:23,960 Speaker 1: are friends, and we are co authors, have been intellectual, 1234 01:04:24,120 --> 01:04:28,200 Speaker 1: never about whether they would outperform Um. I believe, and 1235 01:04:28,240 --> 01:04:30,960 Speaker 1: I think the math is more of a proof than 1236 01:04:30,960 --> 01:04:33,920 Speaker 1: a belief. I'll go far on this one. That fundamental 1237 01:04:33,960 --> 01:04:38,680 Speaker 1: indexing versus the market is a rather clear, straightforward tilt 1238 01:04:38,720 --> 01:04:41,440 Speaker 1: towards value. If you build a fundament. Hold on, let 1239 01:04:41,440 --> 01:04:42,920 Speaker 1: me stop you there, because I want to break this 1240 01:04:42,960 --> 01:04:45,480 Speaker 1: down so so people who are listening to understand what 1241 01:04:45,560 --> 01:04:48,040 Speaker 1: this is. You take the SMP five hundred. It's a 1242 01:04:48,080 --> 01:04:53,000 Speaker 1: market capitalization waiting, which Rob points out and Jim O'Shaughnessy 1243 01:04:53,120 --> 01:04:55,520 Speaker 1: also points out that at the end of a cycle, 1244 01:04:55,560 --> 01:04:59,240 Speaker 1: everybody piles in and you end up with this wildly 1245 01:04:59,320 --> 01:05:04,040 Speaker 1: disproportion in it handful of stocks um attracting all the 1246 01:05:04,080 --> 01:05:07,800 Speaker 1: assets in the SMP five hundred. We saw it, we 1247 01:05:07,840 --> 01:05:10,520 Speaker 1: saw it again um in oh seven oh eight. But 1248 01:05:10,880 --> 01:05:14,560 Speaker 1: towards the end of that cycle, half a dozen to 1249 01:05:14,600 --> 01:05:17,800 Speaker 1: a dozen stocks are driving the vast majority of the 1250 01:05:17,840 --> 01:05:21,080 Speaker 1: gains in the index. And so when that and some 1251 01:05:21,160 --> 01:05:24,240 Speaker 1: prices are exceptionally high against fundamental summer very low, and 1252 01:05:24,280 --> 01:05:27,960 Speaker 1: so this old they just in the down cycle, they 1253 01:05:28,080 --> 01:05:32,040 Speaker 1: really the big ones end up really getting punished. And 1254 01:05:32,080 --> 01:05:34,680 Speaker 1: the first version that we knew that there was an 1255 01:05:34,720 --> 01:05:37,320 Speaker 1: issue here was if you just take the SMP five 1256 01:05:37,400 --> 01:05:39,560 Speaker 1: hundred and equal weight at all of them. Now there 1257 01:05:39,600 --> 01:05:42,280 Speaker 1: are reasons to say, why do I have Apple and 1258 01:05:42,480 --> 01:05:44,920 Speaker 1: some tiny little company at the same weight, But it 1259 01:05:45,040 --> 01:05:48,600 Speaker 1: tends to at certain points to outperform. So that's not 1260 01:05:48,640 --> 01:05:52,080 Speaker 1: what we're talking about. We're talking about waiting companies instead 1261 01:05:52,080 --> 01:05:55,280 Speaker 1: of based on their capitalization. You mentioned these earlier, as 1262 01:05:55,280 --> 01:06:00,000 Speaker 1: you mentioned uh dividends, earnings, growth, sales, growth, book value. 1263 01:06:00,400 --> 01:06:02,680 Speaker 1: There's a whole bunch of fundamental facts. Let me give 1264 01:06:02,720 --> 01:06:05,440 Speaker 1: you the example. First. I respect the heck out of 1265 01:06:05,480 --> 01:06:08,040 Speaker 1: both Rob and Jim. Um. They are a little bit 1266 01:06:08,120 --> 01:06:10,080 Speaker 1: more on that on that we talked earlier about the 1267 01:06:10,080 --> 01:06:13,280 Speaker 1: Schiller Farmer spectrum of efficient markets to inefficient. Maybe they're 1268 01:06:13,280 --> 01:06:15,400 Speaker 1: just more courageous than me. I'm in the muddy middle. 1269 01:06:15,600 --> 01:06:17,720 Speaker 1: They're a little bit more towards Schiller in their explanations. 1270 01:06:17,720 --> 01:06:20,520 Speaker 1: I'm always I think bubbles and insanity like you talked 1271 01:06:20,520 --> 01:06:23,760 Speaker 1: about do happen, just more rarely than probably those guys do. 1272 01:06:23,880 --> 01:06:26,600 Speaker 1: And I'm more willing to entertain efficient market risk based. 1273 01:06:26,880 --> 01:06:28,560 Speaker 1: Maybe it's just in my DNA and I'm still scared 1274 01:06:28,600 --> 01:06:35,720 Speaker 1: of my my professor. Um, but that wouldn't fature. You're right, 1275 01:06:36,320 --> 01:06:39,600 Speaker 1: if if fundam if a fundamental index. Let's make it 1276 01:06:39,600 --> 01:06:42,960 Speaker 1: simple and just use one measure. Earnings is formed waiting 1277 01:06:42,960 --> 01:06:45,040 Speaker 1: things by earnings. I had a friend, Bob Jones, who 1278 01:06:45,080 --> 01:06:48,200 Speaker 1: was doing this back in the eighties at Goldman sachs Um. 1279 01:06:48,240 --> 01:06:50,480 Speaker 1: It turns out that if you do the math and 1280 01:06:50,520 --> 01:06:54,280 Speaker 1: you compare and index weighted by earnings to one weighted 1281 01:06:54,280 --> 01:06:58,720 Speaker 1: by market cap. It's exactly not similar, but exactly the 1282 01:06:58,760 --> 01:07:02,040 Speaker 1: same as starting with a market cap and tilting with 1283 01:07:02,120 --> 01:07:05,160 Speaker 1: a precise, simple formula towards a low price to earning 1284 01:07:05,200 --> 01:07:07,680 Speaker 1: stocks and away from high price to earning stocks. So 1285 01:07:07,760 --> 01:07:12,480 Speaker 1: it's it's away from momentum and towards value. Towards Yeah, 1286 01:07:12,640 --> 01:07:17,760 Speaker 1: that's more accurate. Momentum will vary some sometimes, so it's 1287 01:07:17,800 --> 01:07:20,920 Speaker 1: away from growth towards value. What I think Rob has 1288 01:07:21,240 --> 01:07:24,440 Speaker 1: come up with is a great way to explain value 1289 01:07:24,440 --> 01:07:28,400 Speaker 1: investing in a different way, explaining it as ignoring prices 1290 01:07:28,440 --> 01:07:31,000 Speaker 1: and waiting by fundamentals, but you get to the exact 1291 01:07:31,080 --> 01:07:33,400 Speaker 1: same place. What I don't think and Rob knows this, 1292 01:07:33,440 --> 01:07:35,400 Speaker 1: we've argued about, we've debated it at the Q Group 1293 01:07:35,800 --> 01:07:38,960 Speaker 1: a quantitative of finance gathering is I think he's come 1294 01:07:39,040 --> 01:07:41,480 Speaker 1: up with a great way to explain in market value investing. 1295 01:07:42,240 --> 01:07:44,920 Speaker 1: But but that is different than saying he's come up 1296 01:07:44,920 --> 01:07:47,520 Speaker 1: with something that we didn't know about before we did 1297 01:07:47,600 --> 01:07:49,919 Speaker 1: know about value investing. If he's brought more people into 1298 01:07:49,920 --> 01:07:53,080 Speaker 1: the fold, if if, if on net this makes markets better, 1299 01:07:53,120 --> 01:07:55,480 Speaker 1: because I think more people did value investing, some of 1300 01:07:55,480 --> 01:07:57,600 Speaker 1: the efficacy would go away like it does for any strategy, 1301 01:07:57,720 --> 01:07:59,720 Speaker 1: but prices would be a little more accurate. These are 1302 01:07:59,720 --> 01:08:02,520 Speaker 1: all things, but I don't think it was as new. 1303 01:08:02,880 --> 01:08:05,160 Speaker 1: My title, as you know for this was was it 1304 01:08:05,240 --> 01:08:13,320 Speaker 1: fundamental indexing? Not uh not not indexing, not new, still awesome? 1305 01:08:13,440 --> 01:08:18,599 Speaker 1: That was a smart beta smart bank, not beta, not new, 1306 01:08:18,640 --> 01:08:20,680 Speaker 1: still awesome. And why is it not new? Because we 1307 01:08:20,720 --> 01:08:23,439 Speaker 1: knew about value forever? You gave the example in the 1308 01:08:23,479 --> 01:08:26,120 Speaker 1: tech bubble of a few stocks driving everything. You know 1309 01:08:26,160 --> 01:08:28,479 Speaker 1: what if you tilted towards towards low price to book 1310 01:08:28,520 --> 01:08:30,360 Speaker 1: to earn, low price to book, low price earnings, low 1311 01:08:30,360 --> 01:08:33,640 Speaker 1: price to sales, you avoided the exact same stocks, and 1312 01:08:33,720 --> 01:08:36,600 Speaker 1: you overweighed all the same jump that that a fundamental 1313 01:08:36,640 --> 01:08:38,960 Speaker 1: index or rob or not would be underweighting. Get to 1314 01:08:39,040 --> 01:08:41,559 Speaker 1: the same place. He came up with a great way 1315 01:08:41,600 --> 01:08:46,200 Speaker 1: to explain value investing as being indifferent to price. It 1316 01:08:46,280 --> 01:08:50,200 Speaker 1: is a very specific value tilt um. So it's it's wonderful, 1317 01:08:50,240 --> 01:08:52,479 Speaker 1: it's just less new. The paper he put out that 1318 01:08:52,520 --> 01:08:54,840 Speaker 1: I found endlessly amusing, if you can say that about 1319 01:08:54,840 --> 01:08:57,280 Speaker 1: a white paper, was that you could take any of 1320 01:08:57,320 --> 01:09:01,920 Speaker 1: these fundamental metrics Devan, and you'll earnings, growth, sales, growth 1321 01:09:02,400 --> 01:09:07,120 Speaker 1: and either the that metric or the inverse of that 1322 01:09:07,200 --> 01:09:11,719 Speaker 1: metric beats capitalization, meaning we're gonna take the and wait 1323 01:09:11,800 --> 01:09:16,679 Speaker 1: this by the fastest growing earnings or inverted and and 1324 01:09:17,000 --> 01:09:20,080 Speaker 1: reverse it. As long as it's essentially what that says is, 1325 01:09:20,120 --> 01:09:22,320 Speaker 1: as long as it's not market gap, it's going to 1326 01:09:22,400 --> 01:09:25,799 Speaker 1: be better what happens there. Um And I don't remember 1327 01:09:25,880 --> 01:09:28,120 Speaker 1: the specific measures e e use, but if you get 1328 01:09:28,160 --> 01:09:32,120 Speaker 1: anything close to an equal weighted portfolio and to a 1329 01:09:32,200 --> 01:09:34,200 Speaker 1: random or an equal way to portfolios, why you named 1330 01:09:34,240 --> 01:09:38,600 Speaker 1: after Malkiel's monkeys, Because that's the ultimate, uh you know 1331 01:09:38,840 --> 01:09:41,559 Speaker 1: statement about a random portfolio. If you get any kind 1332 01:09:41,560 --> 01:09:45,559 Speaker 1: of random portfolio, it ends up tilting towards small value. 1333 01:09:46,560 --> 01:09:48,880 Speaker 1: See rob phrases it in terms of say that again, 1334 01:09:48,920 --> 01:09:52,080 Speaker 1: if you take a random portfolio diversified enough that you 1335 01:09:52,120 --> 01:09:55,639 Speaker 1: can't randomly pick just tech stocks. Um, if you take 1336 01:09:55,640 --> 01:09:58,280 Speaker 1: a random portfolio, it starts to look a lot like 1337 01:09:58,320 --> 01:10:03,160 Speaker 1: an equal weighted portfolio. Both of those random or equal 1338 01:10:03,200 --> 01:10:06,960 Speaker 1: weight will on average look small because there are a 1339 01:10:06,960 --> 01:10:11,680 Speaker 1: lot more, and we'll look cheap because those guys were 1340 01:10:11,720 --> 01:10:14,920 Speaker 1: overpriced or expensive because of rational reasons. I'll try to 1341 01:10:15,280 --> 01:10:17,519 Speaker 1: not to not to fight that battle here. But those 1342 01:10:17,560 --> 01:10:20,479 Speaker 1: guys who are are very expensive are bigger market caps, 1343 01:10:21,080 --> 01:10:22,760 Speaker 1: so they're to make up the total market cap to 1344 01:10:22,840 --> 01:10:26,840 Speaker 1: have to be more so if you get that random portfolio, 1345 01:10:26,880 --> 01:10:30,000 Speaker 1: it's a fun finding, but it really is saying something. 1346 01:10:30,240 --> 01:10:33,760 Speaker 1: And again I this one. I'm not saying I'm not 1347 01:10:34,280 --> 01:10:37,040 Speaker 1: kind of lacking. There's great originality in this finding, but 1348 01:10:38,120 --> 01:10:41,160 Speaker 1: we kind of knew it. Again, Um, we were not beta, 1349 01:10:41,320 --> 01:10:44,720 Speaker 1: meaning it's not the market. We doubt there's beta going on. 1350 01:10:44,760 --> 01:10:47,400 Speaker 1: I get, I doubt this is tremendous. If you randomly 1351 01:10:47,400 --> 01:10:49,200 Speaker 1: select the portfolio probably goes the other way. You're probably 1352 01:10:49,200 --> 01:10:51,360 Speaker 1: a litt high beta and it's not new because we 1353 01:10:51,439 --> 01:10:52,920 Speaker 1: knew this for a lot. You're saying this was no 1354 01:10:53,560 --> 01:10:57,840 Speaker 1: great way to show it. It's awesome again, Yes, but 1355 01:10:58,080 --> 01:11:01,720 Speaker 1: if you pick a random portfolio, you will be smaller 1356 01:11:02,280 --> 01:11:05,960 Speaker 1: and cheaper than than than than the market. Um doesn't 1357 01:11:05,960 --> 01:11:08,439 Speaker 1: mean you should pick a random portfolio. Once you think 1358 01:11:08,520 --> 01:11:10,280 Speaker 1: small and cheap work, you might want to be a 1359 01:11:10,320 --> 01:11:13,639 Speaker 1: little more systematic about it than throwing darts. Rob's way, 1360 01:11:13,840 --> 01:11:16,519 Speaker 1: our way, other d phase ways, other ways I would 1361 01:11:16,520 --> 01:11:19,760 Speaker 1: say are better than random, right, but random will get 1362 01:11:19,760 --> 01:11:22,920 Speaker 1: you a little towards small and which is a fun finding. 1363 01:11:23,200 --> 01:11:26,200 Speaker 1: It absolutely is. Let's take, um, keep trying to buy 1364 01:11:26,280 --> 01:11:28,880 Speaker 1: Rob's monkeys, he won't sell them. Um, you could go 1365 01:11:29,120 --> 01:11:31,679 Speaker 1: and pick up monkeys pretty much anywhere these days. Any 1366 01:11:31,680 --> 01:11:37,320 Speaker 1: monkey will work to Maryland special monkeys. No, he just takes, 1367 01:11:37,400 --> 01:11:42,080 Speaker 1: you know, just just he takes discarded traders and and 1368 01:11:42,120 --> 01:11:44,280 Speaker 1: puts them. Uh. And I still work in this field. 1369 01:11:44,320 --> 01:11:46,960 Speaker 1: I'm not gonna laugh at that. On so do I. 1370 01:11:47,120 --> 01:11:51,000 Speaker 1: But on I care less than um. So let's talk 1371 01:11:51,040 --> 01:11:55,360 Speaker 1: about the Uh, let's talk about the buffet. A quantitative 1372 01:11:55,360 --> 01:11:59,160 Speaker 1: approach to Warren Buffett, which I thought was um white, 1373 01:11:59,760 --> 01:12:02,439 Speaker 1: it's charming, the right word for a white paper. We'll 1374 01:12:02,439 --> 01:12:05,240 Speaker 1: take charming. Um. This was written by colleagues of mine, 1375 01:12:05,439 --> 01:12:08,880 Speaker 1: David Cabilla, lass A Peterson and Andrea Frasini. Um. So 1376 01:12:08,920 --> 01:12:10,960 Speaker 1: I'm just gonna take credit for their work or blame 1377 01:12:10,960 --> 01:12:13,720 Speaker 1: because I'm the one. I'm the one here. Um, they 1378 01:12:13,760 --> 01:12:17,120 Speaker 1: did a really fun thing. Um. They And by the way, 1379 01:12:17,360 --> 01:12:19,880 Speaker 1: let me say beforehand, in case we don't get to it, 1380 01:12:19,960 --> 01:12:24,439 Speaker 1: we ended up with we We had tremendous, incredible respect 1381 01:12:24,520 --> 01:12:27,000 Speaker 1: for his investing skill beforehand, and we ended up there 1382 01:12:27,040 --> 01:12:29,960 Speaker 1: afterwards Um, when we say, and we do a couple 1383 01:12:29,960 --> 01:12:32,439 Speaker 1: of times, and I'm gonna guess he wouldn't agree with this. 1384 01:12:33,520 --> 01:12:35,360 Speaker 1: I have not spoken to a man personally about it. 1385 01:12:35,640 --> 01:12:39,120 Speaker 1: We say things like we explain his alpha, that is 1386 01:12:39,200 --> 01:12:44,000 Speaker 1: saying that after thirty forty years, we've seen that these 1387 01:12:44,040 --> 01:12:46,640 Speaker 1: are factor tilts. He did it thirty four years ago, 1388 01:12:46,760 --> 01:12:49,840 Speaker 1: thirty forty years ago. He's stuck with it through incredibly 1389 01:12:49,960 --> 01:12:54,000 Speaker 1: big ups and downs. He has not always made people 1390 01:12:54,000 --> 01:12:59,000 Speaker 1: were like nineties and seventies, he suffered greatly in the 1391 01:12:59,040 --> 01:13:01,800 Speaker 1: bear market. He's he's had his ups and downs. Um, 1392 01:13:01,880 --> 01:13:04,400 Speaker 1: But what they did was they took some of admittedly 1393 01:13:04,439 --> 01:13:06,679 Speaker 1: the standard things people like us look at the same 1394 01:13:06,720 --> 01:13:09,479 Speaker 1: things you and I have been talking about. Value. Yes, 1395 01:13:09,800 --> 01:13:13,000 Speaker 1: not surprisingly, he has a tilt towards systematic value. Doesn't 1396 01:13:13,120 --> 01:13:15,880 Speaker 1: mean he's a quant following the strategy. It just means 1397 01:13:15,920 --> 01:13:18,800 Speaker 1: his returns tend to correlate, tend to move when when 1398 01:13:18,880 --> 01:13:21,840 Speaker 1: cheap beats expensive, it's a better time for Buffett. A 1399 01:13:21,840 --> 01:13:26,240 Speaker 1: time like when expensive crushes cheap, all I'll see equal 1400 01:13:26,280 --> 01:13:28,040 Speaker 1: your guests would be not as good a time for Buffett. 1401 01:13:28,320 --> 01:13:31,080 Speaker 1: He had no waiting on momentum. Not surprising How could 1402 01:13:31,080 --> 01:13:33,439 Speaker 1: a man who's holding period preferred holding period is forever, 1403 01:13:33,680 --> 01:13:36,360 Speaker 1: an actual holding period is very very strong, very very long, 1404 01:13:37,080 --> 01:13:39,080 Speaker 1: really have a loading on momentum. You need to rebalance 1405 01:13:39,120 --> 01:13:41,000 Speaker 1: to load on momentum. If he had, when we would 1406 01:13:41,000 --> 01:13:45,000 Speaker 1: have doubted our data. He also loaded, though interestingly, on 1407 01:13:45,120 --> 01:13:48,400 Speaker 1: the major measures for quality, things like profitable companies and 1408 01:13:48,479 --> 01:13:51,479 Speaker 1: low risk companies. And he but he talks about that 1409 01:13:51,520 --> 01:13:53,840 Speaker 1: all the time. Is I buy this? Is this as 1410 01:13:53,840 --> 01:13:57,080 Speaker 1: if I'm buying a company that's private, unaware of what 1411 01:13:57,479 --> 01:14:00,760 Speaker 1: here's Here's it accurate but very nice, but still I 1412 01:14:00,800 --> 01:14:03,920 Speaker 1: think not not overnice, just just accurately, nice way to 1413 01:14:04,000 --> 01:14:06,880 Speaker 1: describe it. He does what he says he does, and 1414 01:14:06,920 --> 01:14:09,800 Speaker 1: that's what our guys verified. Now that might seem like 1415 01:14:09,800 --> 01:14:11,400 Speaker 1: a small thing, but do you know how many times 1416 01:14:11,439 --> 01:14:14,000 Speaker 1: you go look and find someone doesn't do what they 1417 01:14:14,000 --> 01:14:18,200 Speaker 1: say they do. He systematically, and he's not following a 1418 01:14:18,280 --> 01:14:21,439 Speaker 1: quant system, but he systematically with a great nice fit 1419 01:14:21,680 --> 01:14:26,280 Speaker 1: long term. Looks like someone looking for cheap, profitable, low 1420 01:14:26,360 --> 01:14:28,759 Speaker 1: risk stocks. And then here's something that I do believe, 1421 01:14:28,840 --> 01:14:31,080 Speaker 1: we just know he does. He applies a modest amount 1422 01:14:31,080 --> 01:14:33,879 Speaker 1: of leverage to it. If you buy low risk stocks 1423 01:14:34,840 --> 01:14:37,240 Speaker 1: you tend to and this is something we believe. So 1424 01:14:37,360 --> 01:14:40,160 Speaker 1: let's let's talk about let's let's pivot on this to 1425 01:14:40,280 --> 01:14:44,360 Speaker 1: your discussion on risk party where right. Well, that's why 1426 01:14:44,360 --> 01:14:46,599 Speaker 1: I wanted to bring it up, because most people talk 1427 01:14:46,640 --> 01:14:50,240 Speaker 1: about allocation in terms of asset class. When we talk 1428 01:14:50,280 --> 01:14:53,160 Speaker 1: about risk parity, we're really talking about allocation in terms 1429 01:14:53,439 --> 01:14:56,920 Speaker 1: of different types of risk. And you have said, you know, 1430 01:14:57,880 --> 01:15:02,559 Speaker 1: and I'll give you an opportunity to caveat that huge 1431 01:15:02,640 --> 01:15:07,080 Speaker 1: judiciously used with the right assets, used at the right time. 1432 01:15:07,560 --> 01:15:09,960 Speaker 1: A little bit of leverage is not a terrible thing. Yeah. 1433 01:15:10,320 --> 01:15:12,760 Speaker 1: Um And and here you guys can all think I'm 1434 01:15:12,760 --> 01:15:14,559 Speaker 1: wimpy for all the caveats, but you've got to be 1435 01:15:14,640 --> 01:15:17,439 Speaker 1: very careful. I would never want to be quoted. It's 1436 01:15:17,479 --> 01:15:19,640 Speaker 1: just saying leverage is a good thing because you go 1437 01:15:19,760 --> 01:15:23,679 Speaker 1: take a concentrated bet that's already scary, and lever you've 1438 01:15:23,680 --> 01:15:26,880 Speaker 1: made it super scary. You go lever something that's not 1439 01:15:27,040 --> 01:15:30,040 Speaker 1: very liquid. Um with leverage that has a shorter time 1440 01:15:30,080 --> 01:15:35,120 Speaker 1: arise and shorter term long term capital. That's the postal 1441 01:15:35,200 --> 01:15:38,720 Speaker 1: child for that. Yeah, it's they've certainly become that. Um 1442 01:15:39,000 --> 01:15:41,479 Speaker 1: I I we call that the death combination to bid 1443 01:15:41,520 --> 01:15:44,960 Speaker 1: melodramatic uh, and it can happen, you know if anyone does. 1444 01:15:45,080 --> 01:15:49,200 Speaker 1: No one has magic leveraging a a illiquid asset with 1445 01:15:49,200 --> 01:15:52,559 Speaker 1: with leverage have to pay back tomorrow. That's that's extremely dangerous. 1446 01:15:52,600 --> 01:15:58,240 Speaker 1: And as we saw in the last crisis, UM, borrowing 1447 01:15:58,360 --> 01:16:01,800 Speaker 1: long and funding it short is a meaning long term 1448 01:16:01,840 --> 01:16:05,280 Speaker 1: obligations that are funded with short term cash flow is 1449 01:16:05,320 --> 01:16:08,280 Speaker 1: a is a terrible combination. It always has been, and 1450 01:16:08,320 --> 01:16:10,720 Speaker 1: there's always the lower and it always happens again. Now 1451 01:16:10,720 --> 01:16:13,800 Speaker 1: here's where we think leverage can be useful. UM and 1452 01:16:13,880 --> 01:16:15,519 Speaker 1: you I, you and I just talked about the case 1453 01:16:15,520 --> 01:16:18,160 Speaker 1: of Warren Buffett where he has low risk, low BITA stocks, 1454 01:16:18,960 --> 01:16:22,639 Speaker 1: so he think that those do tend to outperform their 1455 01:16:22,720 --> 01:16:26,160 Speaker 1: risk over time. There has been a strong results for 1456 01:16:26,240 --> 01:16:29,040 Speaker 1: very long periods that lower stocks do better than they should. 1457 01:16:29,520 --> 01:16:31,439 Speaker 1: But that doesn't mean they actually do better than high 1458 01:16:31,479 --> 01:16:34,920 Speaker 1: risk stocks. They're supposed to lose, and they refuse to lose. 1459 01:16:35,880 --> 01:16:37,760 Speaker 1: If a lower stock keeps up with a high risk 1460 01:16:37,800 --> 01:16:40,559 Speaker 1: stock just keeps up, you go, wow, that's not supposed 1461 01:16:40,560 --> 01:16:44,280 Speaker 1: to happen. The risk premium if if correct correct. Having 1462 01:16:44,320 --> 01:16:47,000 Speaker 1: said that, if you don't apply some leverage. Buffett actually 1463 01:16:47,000 --> 01:16:49,679 Speaker 1: went about performed. He would have kept up at low risk. 1464 01:16:50,200 --> 01:16:51,680 Speaker 1: And I don't think he was too interested in He's 1465 01:16:51,680 --> 01:16:54,280 Speaker 1: not looking for risk adjusted return. He wanted to eat them. 1466 01:16:54,320 --> 01:16:56,479 Speaker 1: People always say you can't eat risk adjusted returns. With 1467 01:16:56,560 --> 01:16:58,679 Speaker 1: some mild leverage, you can. You can go too far. 1468 01:16:59,840 --> 01:17:02,559 Speaker 1: One No Warren buffets one point six to one. Pretty 1469 01:17:02,560 --> 01:17:04,800 Speaker 1: good idea and a guy who's also sitting with forty 1470 01:17:04,800 --> 01:17:07,640 Speaker 1: billion dollars of cash and no borrowed money, and the 1471 01:17:07,880 --> 01:17:10,479 Speaker 1: bullet proof and the way he structured his business exactly, 1472 01:17:10,520 --> 01:17:12,720 Speaker 1: there's a form of alpha to that. We say he's 1473 01:17:12,760 --> 01:17:15,679 Speaker 1: stuck with things through thick and thin. He that requires 1474 01:17:15,680 --> 01:17:19,160 Speaker 1: incredible mental fortitude. Even with a great structure. Anyone can 1475 01:17:19,200 --> 01:17:21,600 Speaker 1: cave on their own just from panic. He didn't do that, 1476 01:17:21,600 --> 01:17:23,240 Speaker 1: but he also structured it so no one else could 1477 01:17:23,280 --> 01:17:25,599 Speaker 1: make him throw in the towel. So now let's talk 1478 01:17:25,640 --> 01:17:28,960 Speaker 1: about something, because you're you're making me think of things 1479 01:17:29,000 --> 01:17:32,000 Speaker 1: we didn't get. Sorry, I'm I'm I'm I'm a tangent. 1480 01:17:32,280 --> 01:17:34,679 Speaker 1: No no, no, I love these digressions because you're making 1481 01:17:34,680 --> 01:17:37,559 Speaker 1: me think of other stuff we didn't get to. The August. Oh, seven, 1482 01:17:39,120 --> 01:17:40,840 Speaker 1: avoid I was hoping to run out the clock line. 1483 01:17:40,880 --> 01:17:45,120 Speaker 1: We could, we could do something. So so so let 1484 01:17:45,120 --> 01:17:46,719 Speaker 1: me set this up in a way that I couldn't 1485 01:17:46,760 --> 01:17:49,400 Speaker 1: done the radio because it was too long. So oh seven. 1486 01:17:49,439 --> 01:17:51,639 Speaker 1: So in Juno seven we have the bear Stones hedge 1487 01:17:51,680 --> 01:17:55,000 Speaker 1: fund collapse. A lot of quant funds are crunching the 1488 01:17:55,000 --> 01:17:57,639 Speaker 1: same numbers. I don't say they're looking at these same things, 1489 01:17:58,000 --> 01:18:01,000 Speaker 1: but a lot of the same data everybody looks at. 1490 01:18:01,400 --> 01:18:04,640 Speaker 1: And so you ended up with similar positions across a 1491 01:18:04,680 --> 01:18:07,559 Speaker 1: lot of different quand funds. You actually talk about this 1492 01:18:08,080 --> 01:18:11,240 Speaker 1: in the book The Quants to some some degree. And 1493 01:18:11,320 --> 01:18:15,960 Speaker 1: so August oh seven is a debacle, and your fund 1494 01:18:16,080 --> 01:18:19,240 Speaker 1: gets she lacked. You're down thirteen percent in a month, 1495 01:18:19,720 --> 01:18:21,720 Speaker 1: in a week, in a week, I'm sorry, in a 1496 01:18:21,720 --> 01:18:26,599 Speaker 1: week down So down thirteen percent in a week? What 1497 01:18:26,640 --> 01:18:28,200 Speaker 1: the you know? The number is better than I don't 1498 01:18:28,200 --> 01:18:30,080 Speaker 1: even remember the precise number, but I do remember the 1499 01:18:30,080 --> 01:18:35,320 Speaker 1: timeframe thirty and by the way, you wanted to the number. No, no, 1500 01:18:35,400 --> 01:18:38,479 Speaker 1: I believe you. I was not thirty nine billion across 1501 01:18:38,560 --> 01:18:41,040 Speaker 1: this is this You were smaller fund ten years ago, 1502 01:18:41,560 --> 01:18:44,639 Speaker 1: and this was right in the middle of the financial crisis. 1503 01:18:45,000 --> 01:18:47,920 Speaker 1: You started out at thirty nine billion and you ended 1504 01:18:47,920 --> 01:18:50,639 Speaker 1: at seventeen billion. Now that's got to be a painful 1505 01:18:50,680 --> 01:18:56,760 Speaker 1: thing most But before before you answer, you and you 1506 01:18:56,800 --> 01:18:59,320 Speaker 1: and I are two walking tangents, So so before you answer, 1507 01:18:59,400 --> 01:19:02,120 Speaker 1: I just want soon an't have to stand. This has 1508 01:19:02,160 --> 01:19:06,040 Speaker 1: a happy ending. Stuck with the model and you recovered 1509 01:19:06,520 --> 01:19:09,120 Speaker 1: and then some it actually turned out to be long 1510 01:19:09,240 --> 01:19:12,160 Speaker 1: term a winner. But what was it like in that 1511 01:19:12,240 --> 01:19:15,559 Speaker 1: month when you're just watching assets get destroyed? If you'll 1512 01:19:15,560 --> 01:19:18,280 Speaker 1: permit me, I want to back up one section on 1513 01:19:18,280 --> 01:19:21,559 Speaker 1: on your numbers sound exactly right on on the shrinkage 1514 01:19:21,560 --> 01:19:23,240 Speaker 1: of our firm, which is another sign I told you 1515 01:19:23,320 --> 01:19:26,960 Speaker 1: I have a great research stuff. With that said, one 1516 01:19:27,000 --> 01:19:29,760 Speaker 1: thing that I should have made clear much earlier is 1517 01:19:29,920 --> 01:19:33,400 Speaker 1: and I think you know this barriers. We're not, uh 1518 01:19:33,479 --> 01:19:35,799 Speaker 1: by any means only a hedge fund. That's a minority 1519 01:19:35,800 --> 01:19:36,720 Speaker 1: of what we do. A lot of what we do 1520 01:19:36,800 --> 01:19:38,960 Speaker 1: is long only. So a fair amount of that came 1521 01:19:39,000 --> 01:19:41,840 Speaker 1: from just market shrinking. You know, every asset manager shrunk 1522 01:19:41,840 --> 01:19:43,280 Speaker 1: by a lot. And we had a very rough time 1523 01:19:43,479 --> 01:19:45,800 Speaker 1: we had. That was a couple of months the whole 1524 01:19:45,800 --> 01:19:48,519 Speaker 1: market and then over the whole financial crisis. It was 1525 01:19:48,520 --> 01:19:53,160 Speaker 1: more than draw down. We actually didn't lose a ton 1526 01:19:53,240 --> 01:19:56,479 Speaker 1: of clients. We we we we lost some, but mostly 1527 01:19:56,560 --> 01:20:00,360 Speaker 1: we watched our assets shrink with the markets. But none 1528 01:20:00,400 --> 01:20:02,360 Speaker 1: of that makes your figures for August wrong. This was 1529 01:20:02,400 --> 01:20:06,080 Speaker 1: a harrowing. Maybe it wasn't near death, but it felt 1530 01:20:06,120 --> 01:20:08,880 Speaker 1: near death. Hold on a second, you said, and I 1531 01:20:08,920 --> 01:20:13,960 Speaker 1: love giving you your own quotes. Um, I'm looking for 1532 01:20:14,000 --> 01:20:17,360 Speaker 1: your exact quote. We were looking the grim reaper in 1533 01:20:17,400 --> 01:20:20,839 Speaker 1: the face. Well, I mean a particular person. I'm friendly. 1534 01:20:21,240 --> 01:20:23,960 Speaker 1: I'm friends with Ken Griffin Um, who is one of 1535 01:20:24,000 --> 01:20:26,320 Speaker 1: the head fund managers. I I believe in. I think 1536 01:20:26,360 --> 01:20:29,120 Speaker 1: this guy is a pretty amazing guy. Uh run citi 1537 01:20:30,720 --> 01:20:34,759 Speaker 1: um he Um is famous for being a smart investor. 1538 01:20:34,800 --> 01:20:37,600 Speaker 1: When something's very distressed and facing doom, he goes and 1539 01:20:37,600 --> 01:20:40,519 Speaker 1: buys it very cheaply. Ken called me near the negative 1540 01:20:41,040 --> 01:20:43,160 Speaker 1: of this, and my assistant just goes Ken Griffins on 1541 01:20:43,160 --> 01:20:45,160 Speaker 1: the line and um, I think, I actually wrote, I 1542 01:20:45,160 --> 01:20:48,000 Speaker 1: could see the valkyries coming, I could feel um and 1543 01:20:48,040 --> 01:20:51,479 Speaker 1: in fact, he just wanted to shoot. And and I 1544 01:20:51,520 --> 01:20:54,880 Speaker 1: literally said, you know, I think we're actually pretty stable here. 1545 01:20:54,880 --> 01:20:56,960 Speaker 1: I don't think we're but but if Ken thinks were dying. 1546 01:20:56,960 --> 01:21:00,000 Speaker 1: We must be dying. Um. So if you were an 1547 01:21:00,040 --> 01:21:02,160 Speaker 1: sharing you would you would say, if Ken thinks were dying, 1548 01:21:02,160 --> 01:21:05,200 Speaker 1: we're gonna be okay, Well I go to stay. I 1549 01:21:05,240 --> 01:21:07,839 Speaker 1: will be honest. For most people, I am a contrarian. 1550 01:21:07,840 --> 01:21:09,439 Speaker 1: Which can I start to think, maybe he knows something 1551 01:21:09,479 --> 01:21:12,040 Speaker 1: I don't know. Um, maybe he knows it's worse than 1552 01:21:12,080 --> 01:21:17,080 Speaker 1: I think. But so let's let's let's roll roll back 1553 01:21:17,400 --> 01:21:20,160 Speaker 1: what happened. You are exactly right. I do not deny 1554 01:21:20,280 --> 01:21:24,479 Speaker 1: for a second that that quants do related things. Everyone 1555 01:21:24,479 --> 01:21:26,920 Speaker 1: has their own twist on it, um how to measure 1556 01:21:26,960 --> 01:21:29,080 Speaker 1: it better. Some some parts of what we do or 1557 01:21:29,120 --> 01:21:31,519 Speaker 1: others do are completely different than others. But by and large, 1558 01:21:32,080 --> 01:21:34,280 Speaker 1: the two of the key things in all of quantitative 1559 01:21:34,320 --> 01:21:36,439 Speaker 1: management I've talked about with you for a few hours 1560 01:21:36,520 --> 01:21:39,320 Speaker 1: our value and momentum investing. You can have every twist 1561 01:21:39,320 --> 01:21:41,880 Speaker 1: in you in the world you want. We think value 1562 01:21:41,920 --> 01:21:44,479 Speaker 1: works better if you don't make an industry bed. For instance, 1563 01:21:44,520 --> 01:21:46,800 Speaker 1: if you buy the cheap and sell the expensive within 1564 01:21:46,840 --> 01:21:50,559 Speaker 1: every industry, within each each group. It can work a 1565 01:21:50,560 --> 01:21:53,280 Speaker 1: little bit for industries, but it is stronger risk adjusted. 1566 01:21:53,280 --> 01:21:57,479 Speaker 1: Certainly you're that industry is harder to compare one tiny example. 1567 01:21:57,520 --> 01:22:01,720 Speaker 1: Everyone has a twist, is my only example, but they're correlated. 1568 01:22:01,760 --> 01:22:04,240 Speaker 1: If you're if you're if you're running a quant shop, 1569 01:22:04,280 --> 01:22:06,280 Speaker 1: and let's do a hedge fund not to beat the benchmark. 1570 01:22:06,640 --> 01:22:09,719 Speaker 1: You're long cheap with good momentum, and you short expensive 1571 01:22:09,720 --> 01:22:12,439 Speaker 1: with bad momentum. Again, the models do other things than that. 1572 01:22:12,479 --> 01:22:14,320 Speaker 1: But let's say that's it, and I'm doing the same, 1573 01:22:14,360 --> 01:22:17,200 Speaker 1: And we've worked for ten years separately and we've done tweaks, 1574 01:22:17,240 --> 01:22:18,800 Speaker 1: and we both think our models better than the other 1575 01:22:18,800 --> 01:22:21,479 Speaker 1: guy and better than they were ten years ago. That 1576 01:22:21,560 --> 01:22:23,120 Speaker 1: might or might it's not gonna be true for both 1577 01:22:23,160 --> 01:22:24,559 Speaker 1: of us, but we both can be better than ten 1578 01:22:24,640 --> 01:22:26,479 Speaker 1: years ago, and one of us is in reality better. 1579 01:22:26,760 --> 01:22:28,800 Speaker 1: It's not gonna matter that the in the in the 1580 01:22:28,880 --> 01:22:31,760 Speaker 1: in the ten days value and momentum both get utterly obliterated. 1581 01:22:32,160 --> 01:22:34,519 Speaker 1: We both have a common theme that ven diagram is 1582 01:22:34,520 --> 01:22:36,840 Speaker 1: gonna have a huge overlap and it's gonna be the 1583 01:22:36,880 --> 01:22:40,280 Speaker 1: most extreme in that period. Now I can speak for ourselves, 1584 01:22:40,280 --> 01:22:42,920 Speaker 1: we were not I think maybe we were um, but 1585 01:22:43,040 --> 01:22:45,000 Speaker 1: I don't think we were naive about this. Going into 1586 01:22:45,320 --> 01:22:47,840 Speaker 1: that time, we knew a ton of more people were 1587 01:22:47,840 --> 01:22:50,640 Speaker 1: doing quants than when we started fifteen we started in 1588 01:22:50,680 --> 01:22:54,640 Speaker 1: the mid nineties, two thousands, twelve years later, we're a 1589 01:22:54,720 --> 01:22:58,760 Speaker 1: ton more people. We're doing it um. We measure we 1590 01:22:58,800 --> 01:23:00,559 Speaker 1: wrote a paper on this during the act bubble and 1591 01:23:00,560 --> 01:23:04,160 Speaker 1: we still do it. We measure the longs verse of shorts. 1592 01:23:04,160 --> 01:23:07,360 Speaker 1: How cheap are they? They're always a little bit cheaper. Remember, 1593 01:23:07,439 --> 01:23:09,720 Speaker 1: values a big part of our model. So if they 1594 01:23:09,760 --> 01:23:12,240 Speaker 1: weren't cheaper, we're just doing it wrong. So we hope 1595 01:23:12,240 --> 01:23:14,360 Speaker 1: they're cheaper or else, or else we're adding it up wrong. 1596 01:23:14,560 --> 01:23:16,439 Speaker 1: You know, if if if cheapest part of your model, 1597 01:23:16,479 --> 01:23:18,240 Speaker 1: a big part of your model, and what you're long 1598 01:23:18,320 --> 01:23:22,000 Speaker 1: is not cheaper than what you're short, you that's backwards. 1599 01:23:22,000 --> 01:23:24,960 Speaker 1: Your your math is off. So but but they're not 1600 01:23:24,960 --> 01:23:27,719 Speaker 1: always the same amount cheaper at the at the peak, 1601 01:23:27,800 --> 01:23:30,439 Speaker 1: that spread can vary dramatic. Flip it over to talk 1602 01:23:30,439 --> 01:23:33,240 Speaker 1: about how much more expensive the expensive stocks are, as 1603 01:23:33,240 --> 01:23:34,880 Speaker 1: you can imagine, at the peak of the tech bubble 1604 01:23:34,920 --> 01:23:37,040 Speaker 1: was the most that numbers ever been. The expensive stocks 1605 01:23:37,040 --> 01:23:43,200 Speaker 1: were ridiculously way more than going into August of of 1606 01:23:43,280 --> 01:23:45,439 Speaker 1: oh seven, and we were thinking about this, We're worried 1607 01:23:45,439 --> 01:23:48,960 Speaker 1: it was crowded. This number was about its long term average. 1608 01:23:49,360 --> 01:23:51,960 Speaker 1: Really yeah, which now there Now there are a lot 1609 01:23:52,000 --> 01:23:54,240 Speaker 1: more people doing quant but someone is on the other side. 1610 01:23:54,600 --> 01:23:56,160 Speaker 1: This is a question we try to ask ourselves all 1611 01:23:56,200 --> 01:23:58,960 Speaker 1: the time. Um, my colleague Aunt Dilman, and I are 1612 01:23:58,960 --> 01:24:01,200 Speaker 1: going to write a paper this with the title Who's 1613 01:24:01,200 --> 01:24:03,800 Speaker 1: on the other side. Anytime you do a strategy, a trade, 1614 01:24:03,840 --> 01:24:06,120 Speaker 1: whatever you do, you should say, who's money am I taking? 1615 01:24:06,520 --> 01:24:07,960 Speaker 1: And if you don't have a good answer, you probably 1616 01:24:08,000 --> 01:24:11,720 Speaker 1: shouldn't be doing it. We think who's the sucker at 1617 01:24:11,760 --> 01:24:14,880 Speaker 1: the exactly if it's not you, it's more if you 1618 01:24:14,920 --> 01:24:18,599 Speaker 1: can't spot after everyone has a different version after half 1619 01:24:18,640 --> 01:24:20,120 Speaker 1: an hour. If you can't spot the spot the soccer, 1620 01:24:20,160 --> 01:24:23,479 Speaker 1: it's you, it's the it's the trading version, the strategy 1621 01:24:23,600 --> 01:24:26,439 Speaker 1: version of that. So what we said to ourselves is 1622 01:24:26,479 --> 01:24:28,920 Speaker 1: this has not been arbitraged away. This is not a 1623 01:24:28,920 --> 01:24:31,240 Speaker 1: ton of capital that has made cheap stocks no longer 1624 01:24:31,320 --> 01:24:34,880 Speaker 1: very cheap, but it compressed that whole spectrum. And here's 1625 01:24:34,880 --> 01:24:36,840 Speaker 1: where I think, you know, I think we went further 1626 01:24:36,840 --> 01:24:38,400 Speaker 1: than most and even worrying about it. A lot of 1627 01:24:38,439 --> 01:24:41,000 Speaker 1: people were pretty blase about it, but we didn't get 1628 01:24:41,000 --> 01:24:43,639 Speaker 1: it right. We still had a disaster. So what happened 1629 01:24:43,800 --> 01:24:46,519 Speaker 1: is if you had asked me before August of oh seven, 1630 01:24:46,800 --> 01:24:52,320 Speaker 1: I would have thought that a not a precondition, but 1631 01:24:52,320 --> 01:24:55,840 Speaker 1: but two for something to crash, it was far more 1632 01:24:55,920 --> 01:24:59,200 Speaker 1: likely to crash it was expensive, and this was not expensive, 1633 01:25:00,040 --> 01:25:01,840 Speaker 1: it turns out, and this is really quite obvious. I 1634 01:25:01,840 --> 01:25:04,320 Speaker 1: just thought it was less likely, not impossible, that if 1635 01:25:04,360 --> 01:25:06,200 Speaker 1: everyone tries to sell on the same day, it doesn't 1636 01:25:06,200 --> 01:25:08,479 Speaker 1: matter if it's expensive or cheap. It was really just 1637 01:25:08,600 --> 01:25:11,360 Speaker 1: the crowded trade unwind it. And my version of what 1638 01:25:11,479 --> 01:25:14,080 Speaker 1: happened in July and August of oh seven it's very 1639 01:25:14,080 --> 01:25:15,680 Speaker 1: similar to what you said. But but I think we've 1640 01:25:15,720 --> 01:25:17,920 Speaker 1: actually tracked and we still don't know the actual firm 1641 01:25:17,960 --> 01:25:21,600 Speaker 1: that began the selling. We joked home patient zero um, 1642 01:25:21,680 --> 01:25:25,920 Speaker 1: but it was. But that's a great metaphor because a virus. 1643 01:25:26,080 --> 01:25:29,440 Speaker 1: It was the first kind of echoing. The first adimbiration 1644 01:25:29,479 --> 01:25:32,439 Speaker 1: of the of the of the financial crisis was in July, 1645 01:25:32,680 --> 01:25:36,639 Speaker 1: following that Bear Stern stuff. In July, credit got really 1646 01:25:36,680 --> 01:25:39,400 Speaker 1: pummeled and a lot of particular hedge funds had added 1647 01:25:39,479 --> 01:25:41,840 Speaker 1: quant during a great five year run, and this is 1648 01:25:41,880 --> 01:25:44,599 Speaker 1: I think dangerous. They weren't quants in their in their DNA, 1649 01:25:45,000 --> 01:25:47,439 Speaker 1: they added it. They they saw it was doing well. 1650 01:25:47,680 --> 01:25:49,559 Speaker 1: They hired a guy that gave him some capital and said, 1651 01:25:49,560 --> 01:25:51,559 Speaker 1: trying not to message. And then this is hard literally 1652 01:25:51,600 --> 01:25:53,640 Speaker 1: still hard to prove. But what we think happened is 1653 01:25:53,680 --> 01:25:56,080 Speaker 1: credit got slammed in July, and a lot of these 1654 01:25:56,080 --> 01:25:57,960 Speaker 1: people said, we just got a lower risk. We weren't 1655 01:25:57,960 --> 01:26:00,360 Speaker 1: particularly against quant, we just got a lower risk. And 1656 01:26:00,360 --> 01:26:02,120 Speaker 1: all try to lower everything. They do it once and 1657 01:26:02,160 --> 01:26:05,639 Speaker 1: we're very common in their quant traits. And then like 1658 01:26:05,640 --> 01:26:09,160 Speaker 1: like all these stories, Um, it just got rolling. And 1659 01:26:09,240 --> 01:26:11,080 Speaker 1: this was much more. This was not a bear market 1660 01:26:11,120 --> 01:26:13,760 Speaker 1: for quant. This was closer to a QUANT flash crash. 1661 01:26:13,800 --> 01:26:16,400 Speaker 1: It was no one's described it that way. I grew 1662 01:26:16,439 --> 01:26:19,519 Speaker 1: up it in the car on the way here. But 1663 01:26:19,600 --> 01:26:22,800 Speaker 1: the longer than the flash crash. But it was three 1664 01:26:22,800 --> 01:26:25,280 Speaker 1: weeks instead of a day. But it's not. It was 1665 01:26:25,320 --> 01:26:28,599 Speaker 1: a brutal three weeks. Yeah, the and roughly the first 1666 01:26:28,640 --> 01:26:30,160 Speaker 1: half of that was down on the next half of 1667 01:26:30,160 --> 01:26:32,640 Speaker 1: it was making two thirds of it back. Um, and 1668 01:26:32,680 --> 01:26:34,479 Speaker 1: you are right. We did stick with what we do. 1669 01:26:35,160 --> 01:26:37,320 Speaker 1: Which is a question I have to ask you, just 1670 01:26:37,479 --> 01:26:43,640 Speaker 1: from a um a judicial temperament question is how do 1671 01:26:43,680 --> 01:26:46,479 Speaker 1: you live with that as the c I O. Everyone 1672 01:26:46,479 --> 01:26:50,160 Speaker 1: at my firm is laughing here because, um, I wish 1673 01:26:50,200 --> 01:26:53,080 Speaker 1: this was not public information. Uh. But the Wall Street 1674 01:26:53,120 --> 01:26:55,439 Speaker 1: Journal ran a couple of stories, and the Quant Book 1675 01:26:55,520 --> 01:26:58,120 Speaker 1: talked about this. Uh. By the way, that Quant book 1676 01:26:58,200 --> 01:27:00,519 Speaker 1: is one of my favorite books. It's fent. I am 1677 01:27:00,520 --> 01:27:03,080 Speaker 1: my major beef for that book. Is they they tell 1678 01:27:03,160 --> 01:27:05,719 Speaker 1: him he reports I was a fat kid in high school. 1679 01:27:05,960 --> 01:27:09,120 Speaker 1: I'm a fat guy. Now it's not fair. I was 1680 01:27:09,120 --> 01:27:12,559 Speaker 1: not I was. This is why is he assuming that 1681 01:27:14,160 --> 01:27:17,439 Speaker 1: that's a tough yellow journalism. Um, but it's ill sea 1682 01:27:18,320 --> 01:27:20,680 Speaker 1: I had. I had several friends from high school called 1683 01:27:20,720 --> 01:27:22,160 Speaker 1: me up and go, yeah you chubby now? But you 1684 01:27:22,200 --> 01:27:27,760 Speaker 1: were okay about um? But um, you know to your point, Uh, 1685 01:27:27,800 --> 01:27:30,719 Speaker 1: this is a little embarrassing. But I might have punched 1686 01:27:30,720 --> 01:27:32,960 Speaker 1: my computer screen a couple of times and and had 1687 01:27:32,960 --> 01:27:35,280 Speaker 1: it visible and had the Walster Journal actually write about it. 1688 01:27:35,520 --> 01:27:38,040 Speaker 1: So you just smashed yeah, I and and either I 1689 01:27:38,040 --> 01:27:42,040 Speaker 1: throw a lousy punch or view sonic. Really I should 1690 01:27:42,040 --> 01:27:43,439 Speaker 1: have been a commercial for them, because I did it 1691 01:27:43,479 --> 01:27:46,639 Speaker 1: with my best cross and did no damage to it. Um. 1692 01:27:46,960 --> 01:27:49,800 Speaker 1: The journal, I'm sorry for the segue, but the journal 1693 01:27:50,439 --> 01:27:52,360 Speaker 1: I wrote a letter to the journal, thinking they would 1694 01:27:52,360 --> 01:27:55,479 Speaker 1: never publish it. I love the Walster Journal, but they're 1695 01:27:55,520 --> 01:27:57,760 Speaker 1: not known for their hilarity. And I wrote what I 1696 01:27:57,760 --> 01:28:01,640 Speaker 1: thought was a humorous letter doesn't translate into type area. 1697 01:28:01,800 --> 01:28:04,320 Speaker 1: But but I forgot that as the subject of a story, 1698 01:28:04,400 --> 01:28:06,920 Speaker 1: they they feel and they have great journalistic integrity. I 1699 01:28:06,920 --> 01:28:10,599 Speaker 1: think they feel a h that they should publish your response. 1700 01:28:11,000 --> 01:28:12,960 Speaker 1: But I wrote what I thought was a whimsical response 1701 01:28:12,960 --> 01:28:15,000 Speaker 1: that had no chance of being published. I wrote, your 1702 01:28:15,000 --> 01:28:17,960 Speaker 1: reporter wrote that on several occasions, on bad days, I 1703 01:28:18,000 --> 01:28:21,360 Speaker 1: punched the computer. Um. I can't disagree with the facts, 1704 01:28:21,800 --> 01:28:24,160 Speaker 1: but he left out a very important thing on each 1705 01:28:24,160 --> 01:28:27,559 Speaker 1: of those days. The monitor deserved it. The next day 1706 01:28:27,600 --> 01:28:30,599 Speaker 1: it's in the journal, and I swear to God didn't. 1707 01:28:30,720 --> 01:28:33,880 Speaker 1: What was the response to that, Because people like that, Um, 1708 01:28:34,479 --> 01:28:36,479 Speaker 1: human foibles are okay, but being able to laugh at 1709 01:28:36,479 --> 01:28:38,840 Speaker 1: yourself is okay too. And I do find myself ridiculous 1710 01:28:38,840 --> 01:28:41,439 Speaker 1: at times. Uh, you met my wife. There's no one 1711 01:28:41,439 --> 01:28:47,599 Speaker 1: more ridiculous than me. And all right, spouses and children 1712 01:28:48,200 --> 01:28:50,360 Speaker 1: have no respect for you, no matter who you are. 1713 01:28:50,600 --> 01:28:53,760 Speaker 1: That's why you get dogs dogs. You know. The line 1714 01:28:53,800 --> 01:28:57,640 Speaker 1: I love is we we hope to become the person 1715 01:28:58,200 --> 01:29:01,439 Speaker 1: dogs think, Oh that's awesome. Have a Winston Churchill line 1716 01:29:01,640 --> 01:29:04,639 Speaker 1: that he said he prefers pigs because as pets, because 1717 01:29:04,680 --> 01:29:06,400 Speaker 1: dogs look up to your cats look down to your 1718 01:29:06,400 --> 01:29:08,800 Speaker 1: pigs looking straight in the eye, which I don't know 1719 01:29:08,840 --> 01:29:12,800 Speaker 1: if that's actually true. It's a great. So let me 1720 01:29:12,800 --> 01:29:16,000 Speaker 1: bring this back. So you're you're running thirty billion dollars 1721 01:29:16,080 --> 01:29:20,360 Speaker 1: or so, the market is just we're getting Actually do 1722 01:29:20,439 --> 01:29:22,800 Speaker 1: you take that home at night? How do you keep 1723 01:29:22,920 --> 01:29:28,400 Speaker 1: faith with your quant world was miserable. One thing left 1724 01:29:28,400 --> 01:29:31,920 Speaker 1: out occasionally is this was after a bad month and 1725 01:29:32,000 --> 01:29:35,799 Speaker 1: before the GFC, but over the full painful period for quants, 1726 01:29:35,840 --> 01:29:39,160 Speaker 1: the SMP was actually up slightly. We didn't rattle the world. 1727 01:29:39,200 --> 01:29:40,960 Speaker 1: The world had nothing to do. We lost I like 1728 01:29:41,000 --> 01:29:42,920 Speaker 1: to say we lost money all on our own. Our 1729 01:29:43,520 --> 01:29:46,000 Speaker 1: shorts went up and our longs went down. But the 1730 01:29:46,040 --> 01:29:48,320 Speaker 1: market was it was it. We were about to have 1731 01:29:48,320 --> 01:29:52,479 Speaker 1: a bad neutral funds Well, I'd hate to try to 1732 01:29:52,479 --> 01:29:54,160 Speaker 1: sell us two clients at the time. Is no, it's 1733 01:29:54,200 --> 01:29:57,040 Speaker 1: okay because because we are market neutral. But I would 1734 01:29:57,040 --> 01:29:59,200 Speaker 1: prefer it to happening there then in a crash, because 1735 01:29:59,200 --> 01:30:02,559 Speaker 1: it does fit the spare it so emotionally, emotionally, are 1736 01:30:02,560 --> 01:30:05,240 Speaker 1: you taking this home at night? Other than the occasional 1737 01:30:05,280 --> 01:30:08,320 Speaker 1: view sonic, I'll try to be very introspective about this. 1738 01:30:08,720 --> 01:30:12,599 Speaker 1: I'm really bad at internalizing something. I preach that this 1739 01:30:12,640 --> 01:30:15,439 Speaker 1: is a statistical process in a fat tailed world. Stuff 1740 01:30:15,479 --> 01:30:18,720 Speaker 1: will happen, it will work long term. UM. I I 1741 01:30:18,800 --> 01:30:21,640 Speaker 1: do get emotional because I wanted to work. UM. And 1742 01:30:21,680 --> 01:30:25,200 Speaker 1: it's frustrated to stare at red long absolutely and you 1743 01:30:25,240 --> 01:30:27,479 Speaker 1: get something UM that that I and others have called 1744 01:30:27,520 --> 01:30:30,640 Speaker 1: time dilation. We're trying to be physicists here, but what 1745 01:30:30,840 --> 01:30:33,120 Speaker 1: feels like a like a very long time is actually not. 1746 01:30:34,080 --> 01:30:35,920 Speaker 1: You know, you stare at it for a whole day, 1747 01:30:36,479 --> 01:30:38,240 Speaker 1: which we're not supposed to do by the way you're 1748 01:30:38,240 --> 01:30:41,120 Speaker 1: supposed to Um. You know, it's a statistical thing you 1749 01:30:41,320 --> 01:30:43,080 Speaker 1: check a few times, but staring at it every day 1750 01:30:43,200 --> 01:30:45,680 Speaker 1: is not old day. It's not productive. You stare at 1751 01:30:45,720 --> 01:30:47,639 Speaker 1: something old day, you'll feel like you just went through 1752 01:30:47,680 --> 01:30:51,400 Speaker 1: every up and down since since since the flood. Um. 1753 01:30:51,439 --> 01:30:54,880 Speaker 1: But what I've actually and I and my firm are 1754 01:30:54,880 --> 01:30:57,719 Speaker 1: actually pretty good at is not letting our emotions affect 1755 01:30:57,720 --> 01:31:01,479 Speaker 1: our investment process. So so stuck with the models, even 1756 01:31:01,520 --> 01:31:04,519 Speaker 1: though it might have been really churning you and the Kishkas. 1757 01:31:04,760 --> 01:31:08,880 Speaker 1: It was really bothering. The Kishka's were a flame. But uh, 1758 01:31:08,920 --> 01:31:11,439 Speaker 1: we did a few things. Now, when something's not working 1759 01:31:12,240 --> 01:31:14,680 Speaker 1: I think of the time, the right thing to do 1760 01:31:14,760 --> 01:31:17,559 Speaker 1: is nothing. Maybe some risk control if the bets too big, 1761 01:31:17,600 --> 01:31:20,800 Speaker 1: but but almost nothing. Don't just do something, sit there exactly, 1762 01:31:20,840 --> 01:31:23,160 Speaker 1: and that's very often, uh, the right thing to do. 1763 01:31:23,360 --> 01:31:26,040 Speaker 1: Far more often. I think you want to keep your mind, 1764 01:31:26,560 --> 01:31:29,240 Speaker 1: if not open slightly, Ajar. You can take that a 1765 01:31:29,280 --> 01:31:32,160 Speaker 1: few different ways too. You know, has the world really changed? 1766 01:31:32,200 --> 01:31:34,439 Speaker 1: It almost never does when they say it does. But 1767 01:31:34,760 --> 01:31:37,439 Speaker 1: could happen? Is there some reason our process won't work 1768 01:31:37,479 --> 01:31:41,720 Speaker 1: going forward? Um? And we try every time there's a 1769 01:31:41,720 --> 01:31:43,680 Speaker 1: bad result, and that that was the ultimate example, but 1770 01:31:43,720 --> 01:31:45,400 Speaker 1: every time we've had you know, we've done this for 1771 01:31:45,720 --> 01:31:48,639 Speaker 1: almost twenty years, including Goldman Sax. Life's been net good 1772 01:31:48,680 --> 01:31:50,800 Speaker 1: to us. But if it's never we're not better than 1773 01:31:50,800 --> 01:31:53,280 Speaker 1: Warren Buffett, and he's had bad times. Um So so 1774 01:31:53,400 --> 01:31:58,160 Speaker 1: I sense that you're good and emotionally compartmentalizing. Yeah, people, 1775 01:31:58,560 --> 01:32:02,000 Speaker 1: the the volet aility and the you know, you're the 1776 01:32:02,080 --> 01:32:05,479 Speaker 1: natural human reaction to panic would get greedy. I'm I 1777 01:32:05,520 --> 01:32:07,920 Speaker 1: wish I were good at having it not get to 1778 01:32:07,960 --> 01:32:10,800 Speaker 1: me the same way I have. I and my firm 1779 01:32:10,880 --> 01:32:13,599 Speaker 1: have gotten very good and always have been pretty pretty 1780 01:32:13,640 --> 01:32:16,599 Speaker 1: darn good at not letting an effect what we actually do. 1781 01:32:16,880 --> 01:32:19,519 Speaker 1: If I like to put it this way, Um, we 1782 01:32:19,680 --> 01:32:22,040 Speaker 1: trade on what we think or at least partially, somehoat 1783 01:32:22,160 --> 01:32:24,320 Speaker 1: risk and we're still in the farmer camp partially but somewhat. 1784 01:32:24,320 --> 01:32:28,160 Speaker 1: Behavioral biases that desire to run away and take off 1785 01:32:28,439 --> 01:32:31,080 Speaker 1: a process you know is a good process is a 1786 01:32:31,120 --> 01:32:35,000 Speaker 1: behavioral bias. It's what is what is uh a run 1787 01:32:35,040 --> 01:32:37,800 Speaker 1: on the strategy where people too many people try to 1788 01:32:37,800 --> 01:32:40,240 Speaker 1: get out? That makes it better going forward. If you're 1789 01:32:40,240 --> 01:32:42,080 Speaker 1: a believer, you've been right all along. It was a 1790 01:32:42,080 --> 01:32:45,320 Speaker 1: crowded trade. Now it's and I'll tell you we took 1791 01:32:45,360 --> 01:32:47,280 Speaker 1: too much comfort. And I mentioned it earlier that it 1792 01:32:47,320 --> 01:32:49,759 Speaker 1: wasn't expensive in the beginning. It's about the fifties percentage 1793 01:32:50,760 --> 01:32:54,479 Speaker 1: by the NAT or by the low point. It wasentie 1794 01:32:54,520 --> 01:32:58,639 Speaker 1: attractive and you love that intellectually. Doesn't mean you're Kishkas 1795 01:32:58,680 --> 01:33:00,680 Speaker 1: are not battling each other. I I'm gonna say that 1796 01:33:00,720 --> 01:33:04,720 Speaker 1: more often. Um, but we've gotten very good at at 1797 01:33:04,720 --> 01:33:08,519 Speaker 1: sticking with with things while keeping that mind a jar 1798 01:33:08,560 --> 01:33:09,920 Speaker 1: sounds a little crazy. I'm gonna have to come up 1799 01:33:09,920 --> 01:33:13,639 Speaker 1: with a not quite open that mean that's too willy nilly, 1800 01:33:13,680 --> 01:33:16,439 Speaker 1: that's like, yeah, maybe we're wrong. You're you're open to 1801 01:33:16,479 --> 01:33:20,320 Speaker 1: the possibility that everything you're doing is wrong while knowing 1802 01:33:20,600 --> 01:33:23,760 Speaker 1: mathematically it's unlikely. So you should look at it an 1803 01:33:23,760 --> 01:33:27,080 Speaker 1: open mind, expecting not to find anything. But if you do, 1804 01:33:27,600 --> 01:33:29,719 Speaker 1: if you you know, for instance, it are certain strategy 1805 01:33:29,760 --> 01:33:33,519 Speaker 1: strategy that are about speed. Um. They're famous ones earning 1806 01:33:33,560 --> 01:33:36,160 Speaker 1: surprise when earnings announcements come out. Maybe that still has 1807 01:33:36,160 --> 01:33:38,000 Speaker 1: a little bit of efficacy, but nowhere near what it 1808 01:33:38,080 --> 01:33:41,040 Speaker 1: once had because the world has not much faster. Um. 1809 01:33:41,080 --> 01:33:43,040 Speaker 1: So if you see an actual reason why your strategy 1810 01:33:43,040 --> 01:33:45,479 Speaker 1: shouldn't work anymore. I'm not saying you should keep doing 1811 01:33:45,520 --> 01:33:47,240 Speaker 1: what you've done in the past forever. But if you 1812 01:33:47,320 --> 01:33:50,559 Speaker 1: see no reason why what you've done in the past, 1813 01:33:51,439 --> 01:33:53,200 Speaker 1: what you think has worked for a hundred years in 1814 01:33:53,200 --> 01:33:56,519 Speaker 1: fifty different places, should not continue to work. You should 1815 01:33:56,560 --> 01:33:58,880 Speaker 1: not let your term results dissuade you. And we have 1816 01:33:59,000 --> 01:34:01,080 Speaker 1: gotten very very good, and I think we've always I've 1817 01:34:01,080 --> 01:34:03,599 Speaker 1: always been good. But even better over time and learning 1818 01:34:03,600 --> 01:34:05,960 Speaker 1: that lesson. A few times I've ever violated that, and 1819 01:34:05,960 --> 01:34:08,200 Speaker 1: those stories I'll take to the grave. I have regretted 1820 01:34:09,000 --> 01:34:12,720 Speaker 1: anytime you've violated when you know the math backs up 1821 01:34:12,760 --> 01:34:15,040 Speaker 1: with you haven't haven't done it in more than a decade. 1822 01:34:15,040 --> 01:34:17,160 Speaker 1: But a few times, you know, you don't say I'm 1823 01:34:17,240 --> 01:34:20,280 Speaker 1: violating this. You convince yourself, Well, this is the exception 1824 01:34:20,320 --> 01:34:23,559 Speaker 1: to convince yourself it's the right thing. You get data 1825 01:34:23,600 --> 01:34:26,080 Speaker 1: on it, you change your model, you tweak it. The 1826 01:34:26,120 --> 01:34:28,000 Speaker 1: whole world is fa And by the way, this is 1827 01:34:28,040 --> 01:34:30,760 Speaker 1: not just quants. How many how many non quants have 1828 01:34:30,800 --> 01:34:33,439 Speaker 1: a strong investment thesis that will turn out to be right, 1829 01:34:33,479 --> 01:34:35,599 Speaker 1: but occasionally cave on it when it gets too painful. 1830 01:34:35,960 --> 01:34:38,559 Speaker 1: How how often do we hear about a fun blowing 1831 01:34:38,720 --> 01:34:41,920 Speaker 1: up and find out, gee, you know, if they weren't 1832 01:34:42,040 --> 01:34:44,760 Speaker 1: either using borrowed money or so leverage or what have you, 1833 01:34:45,200 --> 01:34:48,000 Speaker 1: if they just stuck it out another six months, the 1834 01:34:48,320 --> 01:34:51,200 Speaker 1: uh MF Global, even the thing that blew up MF 1835 01:34:51,280 --> 01:34:53,519 Speaker 1: global a year later, that would have been a great 1836 01:34:53,600 --> 01:34:57,759 Speaker 1: that's that's exactly right. Things like whether leverage is useful, 1837 01:34:57,760 --> 01:35:00,080 Speaker 1: how much leverage is safe, how much volatility you've and 1838 01:35:00,160 --> 01:35:02,760 Speaker 1: take getting those lines of credit lined up right if 1839 01:35:02,800 --> 01:35:04,719 Speaker 1: you if you do that, how much you can take. 1840 01:35:05,240 --> 01:35:08,679 Speaker 1: Are all about surviving the short term. At no point 1841 01:35:08,760 --> 01:35:11,000 Speaker 1: should you do a strategy. And this is art not science. 1842 01:35:11,000 --> 01:35:13,040 Speaker 1: I'm not claiming that I have a perfect quant model 1843 01:35:13,080 --> 01:35:17,599 Speaker 1: for this, but you should the perfect strategy that you 1844 01:35:17,680 --> 01:35:20,240 Speaker 1: can't stick with, whether for real reasons that your creditors 1845 01:35:20,240 --> 01:35:23,920 Speaker 1: say you're done or emotional reasons that that that we 1846 01:35:23,960 --> 01:35:26,160 Speaker 1: all have a breaking just can't just can't, can't take it. 1847 01:35:26,479 --> 01:35:29,240 Speaker 1: The great strategy you can stick with, and this is obvious, 1848 01:35:29,320 --> 01:35:31,200 Speaker 1: but I think really important. The great strategy you can't 1849 01:35:31,200 --> 01:35:34,360 Speaker 1: stick with is obviously vastly inferior to the very good 1850 01:35:34,360 --> 01:35:37,880 Speaker 1: strategy you can stick with. Suboptimal beats optimal if you 1851 01:35:37,920 --> 01:35:40,520 Speaker 1: can't run with options. This comes up with investment advisors 1852 01:35:40,560 --> 01:35:43,160 Speaker 1: a lot um and and and this is something you 1853 01:35:43,160 --> 01:35:45,840 Speaker 1: know much more about than I am, and I do um. 1854 01:35:46,120 --> 01:35:48,160 Speaker 1: I think they have a huge role in helping structure 1855 01:35:48,160 --> 01:35:50,280 Speaker 1: a portfolio, but I think the single most important thing 1856 01:35:50,360 --> 01:35:52,000 Speaker 1: they do is make sure people stick with their plan 1857 01:35:52,080 --> 01:35:53,880 Speaker 1: through the long term. We we talked about that in 1858 01:35:53,880 --> 01:35:56,400 Speaker 1: the office all the time, that we well like to 1859 01:35:56,479 --> 01:35:59,920 Speaker 1: pretend that we're investment managers, but were really behavioral counselors. 1860 01:36:00,280 --> 01:36:03,240 Speaker 1: And a lot of that is before anybody puts a 1861 01:36:03,280 --> 01:36:06,640 Speaker 1: dime to work. Hey, this is a great strategy. But 1862 01:36:06,720 --> 01:36:10,160 Speaker 1: when this is down, are you gonna? Uh? The old 1863 01:36:10,240 --> 01:36:13,040 Speaker 1: joke is you know your your portfolio is getting killed? 1864 01:36:13,360 --> 01:36:15,559 Speaker 1: How how are you sleeping? I sleep like a baby? 1865 01:36:15,680 --> 01:36:19,080 Speaker 1: Really you you're down? Well? I wake up every hour, 1866 01:36:19,160 --> 01:36:21,960 Speaker 1: went myself and cry for mommy? Is is that that 1867 01:36:21,960 --> 01:36:24,200 Speaker 1: that cliche has never worked for that exact reason? Baby 1868 01:36:24,240 --> 01:36:27,639 Speaker 1: sleep lousy? Yeah? No, it's a terrible But now innocent 1869 01:36:27,920 --> 01:36:31,120 Speaker 1: is what they're going for? Um, but go on? Sorry, 1870 01:36:31,200 --> 01:36:34,000 Speaker 1: so no, but it's that thing is is It's funny 1871 01:36:34,040 --> 01:36:36,720 Speaker 1: because the more I'm listening to you, the more I'm 1872 01:36:36,760 --> 01:36:43,880 Speaker 1: thinking you are precisely, precisely halfway between farm and which 1873 01:36:43,960 --> 01:36:46,280 Speaker 1: is not a bad place too. You know, if you're 1874 01:36:46,280 --> 01:36:48,599 Speaker 1: gonna pick an island to live on, that's a damn 1875 01:36:48,600 --> 01:36:50,960 Speaker 1: good I. Um, you know I'd signed for that in 1876 01:36:51,000 --> 01:36:54,880 Speaker 1: a heartbeat. Quality wise, I think philosophy wise, I really 1877 01:36:54,880 --> 01:36:57,840 Speaker 1: am and have been for a long long time. I 1878 01:36:58,000 --> 01:37:01,280 Speaker 1: And it all comes back to thinking markets are not perfect, 1879 01:37:01,360 --> 01:37:03,439 Speaker 1: but they're they're harder to beat than people think. There's 1880 01:37:03,439 --> 01:37:06,080 Speaker 1: the Schiller's the first part faum is the second part 1881 01:37:06,600 --> 01:37:11,320 Speaker 1: um taking risk and and again are mixed with science. Uh. 1882 01:37:11,439 --> 01:37:14,680 Speaker 1: Taking risk gets paid off over time. Taking too much 1883 01:37:14,760 --> 01:37:16,880 Speaker 1: risk and you won't live to see to see the 1884 01:37:17,000 --> 01:37:20,000 Speaker 1: ending and then the things. Uh. You know, it's very 1885 01:37:20,000 --> 01:37:23,200 Speaker 1: funny Fama Schiller. UH. Fama would probably believe in value 1886 01:37:23,200 --> 01:37:25,360 Speaker 1: more than momentum, but the firm he works with, d 1887 01:37:25,479 --> 01:37:27,920 Speaker 1: f A uses some momentum UH in their in their 1888 01:37:28,000 --> 01:37:30,200 Speaker 1: in their process. We would use more. I'm not saying 1889 01:37:30,240 --> 01:37:33,840 Speaker 1: there aren't differences. Momentum is more of an inefficient um 1890 01:37:33,840 --> 01:37:37,360 Speaker 1: market story, but they try to avoid shorting momentum. And 1891 01:37:37,439 --> 01:37:40,120 Speaker 1: I won't get into the the geeky side. So even there, 1892 01:37:40,360 --> 01:37:42,840 Speaker 1: we're a point on a spectrum difference. We're not a 1893 01:37:42,880 --> 01:37:46,320 Speaker 1: sea change. One joke I had, I did a little 1894 01:37:46,360 --> 01:37:49,080 Speaker 1: tv UM where I had Fama and Schiller come on 1895 01:37:49,120 --> 01:37:51,960 Speaker 1: after their Nobel Prize separately. I wasn't trying to create 1896 01:37:52,000 --> 01:37:55,679 Speaker 1: a steel cage match um, but uh, and I pointed 1897 01:37:55,680 --> 01:37:57,040 Speaker 1: out to both of them, and I think they both 1898 01:37:57,200 --> 01:37:59,080 Speaker 1: I think they both agreed with this, that they both 1899 01:37:59,080 --> 01:38:03,520 Speaker 1: put on pretty similar portfolios, mostly value tilts a momentum 1900 01:38:03,520 --> 01:38:05,599 Speaker 1: to what they do. Again, probably more momentum for Shiller 1901 01:38:05,600 --> 01:38:09,519 Speaker 1: than Fama. Uh more market timing for Siller than Fama, 1902 01:38:10,120 --> 01:38:13,679 Speaker 1: but they would interpret it as working for radically different reasons. 1903 01:38:14,360 --> 01:38:15,920 Speaker 1: So it's kind of like, remember, me and Rob are 1904 01:38:15,960 --> 01:38:18,439 Speaker 1: not um fundamental in the mixing wins. He thinks it's 1905 01:38:18,439 --> 01:38:19,960 Speaker 1: brand new. I think it's the value effect. But we 1906 01:38:19,960 --> 01:38:22,920 Speaker 1: get to the same place, just just take different routes. Cliff, 1907 01:38:22,960 --> 01:38:25,200 Speaker 1: You've been so generous with your time, and I know 1908 01:38:25,640 --> 01:38:28,280 Speaker 1: your your staff is looking to take you to your 1909 01:38:28,320 --> 01:38:33,920 Speaker 1: next appointment. I want to thank important. Um, well, you 1910 01:38:33,960 --> 01:38:36,760 Speaker 1: are important, You're You're Let me blow a little smoke 1911 01:38:36,880 --> 01:38:40,479 Speaker 1: your way. It's not just that fortune of Forbes or 1912 01:38:40,479 --> 01:38:43,680 Speaker 1: whoever it was called, your hedge fund very influential. You 1913 01:38:43,760 --> 01:38:48,640 Speaker 1: consistently publish deeply thoughtful white papers. Forget the fact that 1914 01:38:48,680 --> 01:38:51,680 Speaker 1: they regularly win awards Best Paper with you this, and 1915 01:38:51,760 --> 01:38:56,920 Speaker 1: that you are part of the philosophical and financial debate 1916 01:38:57,479 --> 01:39:01,320 Speaker 1: that is moving the world to finance forward. And the 1917 01:39:01,400 --> 01:39:04,040 Speaker 1: joke in physics we you and I talked about about 1918 01:39:04,080 --> 01:39:07,160 Speaker 1: science earlier, there's a famous joke I forgot who I'm 1919 01:39:07,200 --> 01:39:10,559 Speaker 1: I'm I'm stealing this from who said physics advances one 1920 01:39:10,600 --> 01:39:14,240 Speaker 1: funeral at a time. It turns out finance doesn't have 1921 01:39:14,280 --> 01:39:17,200 Speaker 1: to advance that way. It advances one white paper at 1922 01:39:17,200 --> 01:39:20,360 Speaker 1: a time, as long as it's written in an intelligent, 1923 01:39:20,479 --> 01:39:24,200 Speaker 1: coaching and persuasive way that enough people say, hey, this 1924 01:39:24,240 --> 01:39:28,679 Speaker 1: guy is really impacting finance, and um, that's a smoke 1925 01:39:28,720 --> 01:39:31,280 Speaker 1: fellow your way. Very nice to you to say, Um, 1926 01:39:31,640 --> 01:39:34,599 Speaker 1: I appreciate that. I also punched computers when we lose, 1927 01:39:34,640 --> 01:39:36,080 Speaker 1: and I have a face for radio, but I will 1928 01:39:36,120 --> 01:39:38,880 Speaker 1: take the compliment same same. Here I've been speaking with 1929 01:39:39,320 --> 01:39:42,040 Speaker 1: Clifford ass Neest. He is the founder and c i 1930 01:39:42,120 --> 01:39:47,280 Speaker 1: O of a q r UM. If you enjoy these 1931 01:39:47,320 --> 01:39:50,880 Speaker 1: sort of conversations, you can look up an Inch or 1932 01:39:51,000 --> 01:39:53,559 Speaker 1: down an Inch on iTunes and see all of the 1933 01:39:53,560 --> 01:39:57,120 Speaker 1: previous UH Masters in Business series. Cliff, thank you so 1934 01:39:57,200 --> 01:39:59,280 Speaker 1: much for spending so much time. Thank you was great. 1935 01:39:59,560 --> 01:40:02,000 Speaker 1: This is ay Rehults. You've been listening to Masters in 1936 01:40:02,080 --> 01:40:03,759 Speaker 1: Business on Bloomberg Radio.