Speaker 1: Strap on your parachute. It's time for What Goes Up. Hello,
Speaker 1: and welcome to What Goes Up, a Bloomberg Weekly Markets podcast.
Speaker 1: I'm Mike Reagan, and this week on the show, we'll
Speaker 1: talk to one of the pioneers of factory investing about
Speaker 1: his new endeavor and why he's taking a more active
Speaker 1: approach these days, using quantitative methods to hunt for innovative
Speaker 1: small cap companies to go both long and short on.
Speaker 1: But first, I think regular listeners are probably wondering now
Speaker 1: who this week's mystery co host is, So Charlie Pellett
Speaker 1: taken away and tell them who this week's co host is.
Speaker 1: This week's mystery co host is Lisa Abramowitz. Lisa is
Speaker 1: the co host of Bloomberg Surveillance and a mother of two.
Speaker 1: And even though she has been friends with Mike Reagan
Speaker 1: for a decade, she's never laughed at one of his jokes.
Speaker 1: Not even once. Okay, Mike, that is just not true.
Speaker 1: Let's just set the record straight. I laugh at every
Speaker 1: single one of your jokes. You could rely on me
Speaker 1: in the news room to be your joke laugher, So
Speaker 1: don't even start with that. You're calling Charlie Pellett a liar, Lisa,
Speaker 1: I'm calling him misinformed by the best out there. Okay,
Speaker 1: it's you know, it's it's a dangerous power to have
Speaker 1: to be able to ask Charlie Pellett to read some
Speaker 1: insult comedy for you. I I this could get this
Speaker 1: could get dangerous. But Lisa, for listeners who don't know,
Speaker 1: Lisa and I go pretty far back, I guess. I
Speaker 1: don't want to say too far back, but back to
Speaker 1: the days of Bloomberg gad Fly for sure, where I
Speaker 1: think we were the original too god flies we were,
Speaker 1: we were, and now of course Lisa the co host
Speaker 1: of bloomberg Sperience. I need to confess though, in in
Speaker 1: the pandemic lockdown era, I don't watch it as much
Speaker 1: as I should, just because my WiFi. I've got a
Speaker 1: bunch of kids on WiFi and I don't have a TV.
Speaker 1: I know, excuses, excuses. Don't tell Tom Keened any of this. Please,
Speaker 1: you don't have a TV. Your kids ate your television.
Speaker 1: That's why you can't watch for the survillains. That's cool, great,
Speaker 1: I'm glad. You know what. Keep telling us that it's
Speaker 1: the internet, it's the broadband save the kids. Now in
Speaker 1: my office, the kids are all watching their TikTok's the
Speaker 1: TVs in the TV room. I can't go in there.
Speaker 1: I'll have I'll just be too distracted. Well, my point is, Lisa,
Speaker 1: I want a download of your just quick download of
Speaker 1: your current thoughts of the market. I think of Lisa A.
Speaker 1: Brahma Witz as what's the best word market sentiment? We'll
Speaker 1: say cautious? Is cautious? Fair? Well? I think if you
Speaker 1: lask my co host, they'll just say perme bear. I
Speaker 1: would say that it's not so much permea bear as
Speaker 1: it is trying to see around corners. That's my recent
Speaker 1: line to try to defend myself against all the people
Speaker 1: who try to slam me down. But the idea is,
Speaker 1: what are we missing right? I Mean, there's a sort
Speaker 1: of idea that we're in this incredible melt up that
Speaker 1: can't be stopped because of the wall of money, whether
Speaker 1: it's from monetary stimulus or whether it's from fiscal stimulus.
Speaker 1: And here we are in a situation that seems too
Speaker 1: good to be true for some people, because if you
Speaker 1: buy what's been doing well, you will keep doing well.
Speaker 1: And so there is a question what are we missing
Speaker 1: either about the economic recovery or about inflation, or about
Speaker 1: this idea that yield will remain contained for the longer term.
Speaker 1: And these are some of the conundrums that I think
Speaker 1: that I spend every day discussing. That is a quick overview.
Speaker 1: I I love it. You know. I've always been team
Speaker 1: of Brahma Witz and I gotta say as I've gotten older,
Speaker 1: I've gotten more quote unquote cautious too. I'd like to
Speaker 1: say it's you getting older too, but you've been that
Speaker 1: way since you were much younger, that way, since I
Speaker 1: was a five year old. Al Right, great, that is
Speaker 1: the That's the kind of temperature check I needed from Lisa.
Speaker 1: I'm glad because we haven't talked so long. It's it's
Speaker 1: it's a shame. But anyway, enough about us. We've got
Speaker 1: a really fascinating guest this week, and I'm so excited
Speaker 1: to have him on the show. He uh, it's the
Speaker 1: founder of a firm called gir Gersteine fisher Um, which
Speaker 1: he founded at the ripe old age of one just
Speaker 1: a few years ago. We'll say, we won't say the
Speaker 1: exact date. He's now gone on to start a new
Speaker 1: firm called Quent's Capital. His name is Greg Fisher. Greg,
Speaker 1: welcome to the show. Thank you so much. It's uh,
Speaker 1: it's really nice to be here with you, Mike and Lisa.
Speaker 1: And I was I was kind of prepared for this
Speaker 1: very serious interaction, and I'm having so much fun just
Speaker 1: watching the two of you interact with one another. I
Speaker 1: think I'm now officially on team Abrama. It's two alright, alright,
Speaker 1: there's always there's always room for another on on team.
Speaker 1: It's a small ship. But Greg, I, I really I'm
Speaker 1: fascinated by the the approach you're taking at quent Capital Um.
Speaker 1: And let me describe it briefly the way I understand it.
Speaker 1: Correct me if I'm wrong, which is highly likely me
Speaker 1: talking about quantz. It's kind of like a Norwegian guy
Speaker 1: explaining baseball, so to feel, you know, feel free to
Speaker 1: correct any of this. But what I think of sort
Speaker 1: of the methods of a quant um I think of
Speaker 1: sort of big data, you know, crunching through massive amounts
Speaker 1: of data trying to find I don't know, momentum or
Speaker 1: the factors of certain companies that historically have have outperformed.
Speaker 1: But your approach now applies sort of the quant method
Speaker 1: to finding finding innovative companies and what I think of
Speaker 1: investing in innovators. Um, I think that's something sort of
Speaker 1: completely different, you know, not a lot of historical data
Speaker 1: to work with, sort of having to take some intuitive
Speaker 1: leaps about what trends are gonna be like in the future.
Speaker 1: You know, I'm basing a lot of this on kind
Speaker 1: of the public face of the quote unquote innovator investment
Speaker 1: space these days, which is obviously our investment in Cathy.
Speaker 1: Would you know you can listen to Kathy talk about
Speaker 1: her strategy for a long time and not hear any ratios,
Speaker 1: not here, any numbers. So I'm just curious from your perspective,
Speaker 1: how do you sort of tie the two approaches together.
Speaker 1: That's a good question, and thanks so well. First, you know,
Speaker 1: Quent Capital my new firm. I started my original firm
Speaker 1: back and back then there was like one index fund
Speaker 1: that nobody used. There were no E T f s,
Speaker 1: no text messaging, no email, you know, barely an internet,
Speaker 1: and uh the idea. I was twenty one. I sold
Speaker 1: the drum set my father bought me for nine bucks,
Speaker 1: bought a computer, hung up a shingle, opened up a phone,
Speaker 1: book and started calling people asking if they would allow
Speaker 1: me to manage their assets using this sort of like
Speaker 1: data driven investment strategy. It was sort of a funny thing.
Speaker 1: It kind of worked out and uh and and I
Speaker 1: was successful for my investors and myself too. I mean
Speaker 1: it was it was a great good time. I'm now fifty.
Speaker 1: When I was forty six, I sold the company a
Speaker 1: few years ago, take a little break, work on this
Speaker 1: new thing. And I think, like the motivation when I
Speaker 1: think about quantitative investing, I think people's minds would immediately
Speaker 1: go to, you know, algorithms and complexities and high frequency
Speaker 1: trading and all these jazz. But I think about it
Speaker 1: more as evidence based investing, where you have an idea
Speaker 1: and you can go back looking at data to sort
Speaker 1: of prove out that idea that at least you can
Speaker 1: show that this has worked in the past with a
Speaker 1: large sample of data, so that it's not completely judgment
Speaker 1: around your predictions of what will happen in the future.
Speaker 1: We never know what will happen in the future, but
Speaker 1: using evidence based investing is how I think about quantitative investing.
Speaker 1: And if you don't have evidence around what you're doing,
Speaker 1: if there are things you're doing that you don't have
Speaker 1: evidence of You can't go back and look at them,
Speaker 1: there isn't data to try them well. Then, in fact,
Speaker 1: it's a little bit more of what I think people
Speaker 1: think of as more traditional active management, where you know
Speaker 1: it's your gut or your intuition or some prediction into
Speaker 1: the future. I came up with this term quent Capital,
Speaker 1: as our firm name blends together the word quant and entrepreneur.
Speaker 1: In my career, I've been managing portfolios of growth stocks,
Speaker 1: largely globally, and what I found was that when you're
Speaker 1: trying to invest in growth stocks, it's very difficult to
Speaker 1: put a number in the numerator and a number in
Speaker 1: the denominator and compare things to one another. There's a
Speaker 1: lot more ambiguity of the valuation of these businesses, particularly
Speaker 1: in the last ten years. So I use this term
Speaker 1: quent to show that you know, data can only take
Speaker 1: you so far um with these small, innovative, disruptive, entrepreneurial
Speaker 1: style businesses. You know you mentioned TikTok earlier. My kids
Speaker 1: are watching TikTok, and I noticed you didn't say Facebook.
Speaker 1: You sort of need to be like I think genuinely
Speaker 1: resident to the universe you're thinking about, um to really
Speaker 1: understand it. And I do think that being an entrepreneur myself,
Speaker 1: my whole life, does make me a better investor in
Speaker 1: these entrepreneurial activities. Before we get into the idea of
Speaker 1: entrepreneurship at this moment, I want to talk about the
Speaker 1: nexus between high frequency trading and the quantitative strategies that
Speaker 1: you started up before the Internet was as adopted as
Speaker 1: it is even ten years ago. Did high frequency trading
Speaker 1: destroy the notion of quantitative investing as you knew it
Speaker 1: me launched you from initially? It didn't. I mean, I
Speaker 1: think that to the extent that a lot of things
Speaker 1: that happened in the industry made costs lower and liquidity higher.
Speaker 1: Um I think to some degree that sort of helped
Speaker 1: me personally in my firm for my investors. As you know,
Speaker 1: costs continue to drive down. But UM, I guess there's
Speaker 1: always this argument that if you know, if there's some
Speaker 1: good idea, like let's just use the oldest one we
Speaker 1: all know, like value investing a good idea, right. We'll
Speaker 1: probably get to that later, but anyway, so you know,
Speaker 1: price to book, it's you know, I could teach my
Speaker 1: nine year old how to do that, And I guess
Speaker 1: it took a while for people to realize that that
Speaker 1: was a powerful signal. And then all of a sudden,
Speaker 1: one day, everybody knows that this thing works, everybody starts
Speaker 1: doing it, doing it faster than everyone else does, the
Speaker 1: benefit of that style of investing go away. And I
Speaker 1: guess there's arguments around all these things. That's an easy
Speaker 1: one to understand. They're the more complicated ones. I think
Speaker 1: the issue is just simply, you know, if the reason
Speaker 1: that this is happening is because of some behavioral factor, um,
Speaker 1: some flaw in the human system, and or risk, you know,
Speaker 1: the efficient market stories around these things, if it's one
Speaker 1: of those two things where you know, I always give
Speaker 1: an example. Uh, you know, if you're trying to lose weight,
Speaker 1: and you like me and you like chocolate chip cookies. Um,
Speaker 1: I come home, there's a chocolate chip cookie on the table.
Speaker 1: I know if I eat it, I'm gonna gain weight,
Speaker 1: But I eat it anyway. UM, I just can't help myself.
Speaker 1: So there are a lot of things that we all
Speaker 1: know that are well documented that people could do faster
Speaker 1: than all of us, but they still work. Because they're
Speaker 1: happening for reasons that are not necessarily about market manipulation
Speaker 1: or transaction costs or how fast you can trade. Hey, Greg,
Speaker 1: I want to rewind and and go back to something
Speaker 1: you said that I find completely fascinating, and that's that
Speaker 1: you sold a drum set for nine bucks in the nineties.
Speaker 1: I mean, it's not like a Neil Pert style piece
Speaker 1: drum set. I I'll tell you why. I I'm a
Speaker 1: sort of hack musician myself, and I recently bought a
Speaker 1: drum set off of Facebook marketplace from some high school
Speaker 1: kid who I think was driving his parents nuts for
Speaker 1: a hundred and fifty bucks. So there must be deflation
Speaker 1: and drums going on there this set. Man, I would
Speaker 1: do anything to have it back. Um. When I sold
Speaker 1: my company, I there's not much that I really wanted,
Speaker 1: but I did do one thing. I built a music
Speaker 1: studio in my basement and bought two drum sets. But uh,
Speaker 1: and they were more expensive than when I was old.
Speaker 1: But it was a Slingerland like old school metallic red
Speaker 1: jazz set. And uh. I played this thing like every
Speaker 1: minute of my life, starting from when I was twelve
Speaker 1: years old. I would do anything to have that thing back.
Speaker 1: I tried actually years ago, but I wasn't successful. But
Speaker 1: I am still a drummer, and so was my my
Speaker 1: son actually, but I uh yeah, I think uh, I
Speaker 1: think music actually and playing the drums was one of
Speaker 1: the reasons I got into math, just you know, always counting.
Speaker 1: You know, I hear that a lot from five A
Speaker 1: lot of smart finance people are are side musicians on
Speaker 1: the side. It's an interesting phenomenon. But Greg, I wanted
Speaker 1: to ask you about that notion of the switch from
Speaker 1: sort of a more index factor based approach to actually
Speaker 1: more active stock picking. I make a joke that, um,
Speaker 1: every time we have an active manager on, he goes,
Speaker 1: you know, this is the year of the stock picker,
Speaker 1: and as it has been the case, I think in
Speaker 1: two thousand, two thousand and two that I could go on.
Speaker 1: But I really do think there's a case now, uh
Speaker 1: that it seems like it's gonna be true. Active funds
Speaker 1: majority are once again outperforming their benchmark by a lot
Speaker 1: of metrics. But I'm curious how you made that lead
Speaker 1: because here's a guy, or if it really was a
Speaker 1: big lead, because here's a guy who's spen sort of
Speaker 1: looking more closely at indexes for decades and then to
Speaker 1: kind of make that jump into a more active approach.
Speaker 1: I wonder how is has passive investing, you know, sort
Speaker 1: of jumped the shark. Has it become a crowded trade
Speaker 1: in a way. It's a great question. Boy, I can
Speaker 1: talk for hours about this, so I hope you'll edit this.
Speaker 1: But but at any rate, so a little a little
Speaker 1: bit of a background on this. So, um, yeah, I was.
Speaker 1: If you sort of look me up, you'll see that
Speaker 1: for the last thirty years, I've been basically telling the
Speaker 1: world you should build market based portfolios, keep turnover down,
Speaker 1: keep taxes down, keep an eye on your costs. You know,
Speaker 1: buy and hold. You know, these things still work. They'll
Speaker 1: always work. Bill Sharp wrote that paper years back, the
Speaker 1: Arithmetic of active management. So this idea that there's certain
Speaker 1: market environments where you know, on the average, we can't
Speaker 1: be better than average in any market at any moment,
Speaker 1: at any time, right, he tells, he talks about this,
Speaker 1: of us will do better, of us will do worse.
Speaker 1: You add in costs, you knock out another. The math
Speaker 1: doesn't change. But what I experienced in all the years
Speaker 1: that I was, you know, sort of working within this
Speaker 1: market based framework of investing. Um I had. I had
Speaker 1: actually trademarked the term multi factor in the use of
Speaker 1: mutual fund investing about twelve so years ago. I launched
Speaker 1: a bunch of funds. This was like the innovative way
Speaker 1: to index. It was evidence based investing your building market portfolios.
Speaker 1: But you have a little more of the things that
Speaker 1: have worked historically a little less of the things that hadn't.
Speaker 1: Um So I was doing this stuff for a long time,
Speaker 1: but what I watched is indexing go from like zero
Speaker 1: to a lot all of a sudden. I mean, the
Speaker 1: whole idea of the efficient market idea hypothesis is that
Speaker 1: if everyone's out there searching for miss price security, spending
Speaker 1: billions of dollars and lots of energy, and we're all
Speaker 1: working so hard to find miss price securities, then it's
Speaker 1: hard to find miss price securities. And you might as
Speaker 1: well just accept the price of the stocks and markets
Speaker 1: because on average, everyone is spending a lot of time
Speaker 1: doing it. Why waste your own time just by it
Speaker 1: accept everyone else's price. And that's that and and that's
Speaker 1: a beautiful thing. And it worked quite well for a
Speaker 1: long time. But I think that when you get to
Speaker 1: a point like where we are now, where there's been
Speaker 1: this huge decline in analysts, where the there's this increase
Speaker 1: in indexing too, depending on who you ask, I think
Speaker 1: I've heard something like six of all the assets indexed
Speaker 1: now or something like that. If you have fewer people
Speaker 1: searching for missed priced securities and no incentive to go
Speaker 1: out and do it. My son is in school as
Speaker 1: a finance major. I'm like, don't become an analyst. You
Speaker 1: know I'm an analyst, but like, there's no money in
Speaker 1: being an analyst. Um, nobody wants to pay analysts anymore.
Speaker 1: We just accept market prices. I was kind of kidding,
Speaker 1: but I wanted to see what his reaction was. Anyway,
Speaker 1: you get to this point where if everyone is just
Speaker 1: accepting market prices and fewer people are doing the work
Speaker 1: to determine if the prices right or wrong, Well, we
Speaker 1: still have this fifty fifty thing Bill Sharp described, but
Speaker 1: the distribution around that average would be wider. If you
Speaker 1: get it right, you'll be more right. If you get
Speaker 1: it wrong, you'll be more wrong. So I I have
Speaker 1: this perspective, and I watched this happen, that there is
Speaker 1: an opportunity. It's still the fifty fifty thing. But if
Speaker 1: you're the person, if you're on the rights side to that,
Speaker 1: your ability to outperform by more I believe exists and
Speaker 1: less two, which is why I actually built a long
Speaker 1: short strategy versus long only strategy. My last point on this,
Speaker 1: I published a paper with some co authors last summer
Speaker 1: was in the Journal of Indexing, and it talked about this.
Speaker 1: You know, the market environments. You know, we never know
Speaker 1: when when we're going to enter an environment where the
Speaker 1: correlation of securities is less positive, where the difference across
Speaker 1: securities is less positive. We never know when we're going
Speaker 1: to enter that environment. But what we can know is
Speaker 1: when we're in those environments, the difference between winners and
Speaker 1: losers is greater. We've been in an environment for a
Speaker 1: while where things were just trending together. I had this
Speaker 1: hypothesis that sooner or later we'll enter an environment where
Speaker 1: that's not true. Didn't know COVID was going to happen,
Speaker 1: because as we know, I think last year something like
Speaker 1: half the securities and the Russell two thousand um had
Speaker 1: negative returns or something like that. So if you're in
Speaker 1: an environment where lots of people are indexing, and there's
Speaker 1: fewer people paying attention to what the price should be.
Speaker 1: If you're in an environment where the difference between winners
Speaker 1: and losers is greater. You know, it's my belief that
Speaker 1: at least for some portion of someone's portfolio, and probably
Speaker 1: not the majority of it, by the way, but for
Speaker 1: some portion of someone's portfolio, having a strategy that could
Speaker 1: take advantage of those themes and trends I think is important.
Speaker 1: So that's how I got here today. I'd still say
Speaker 1: that most investors should have like their portfolio in a
Speaker 1: market based strategy of some capacity. But if there was
Speaker 1: ever a time to give this thing a shot, I
Speaker 1: think it's probably now, which is why I'm doing it.
Speaker 1: I'm hung up on what you said about the right price,
Speaker 1: and I'm struggling with it, because how do you analyze
Speaker 1: a stock when it's determined as much by what FED
Speaker 1: chair J. Powell says today or tomorrow as it does
Speaker 1: how much they're earning, or how much some people might
Speaker 1: think they are, or perhaps what somebody on Reddit says
Speaker 1: about the stock price. In other words, how do you
Speaker 1: figure out the winners when the right price isn't being
Speaker 1: determined by fundamentals that are a stagnant concept. That's so
Speaker 1: so important, Lisa UM. I think Keene said it the
Speaker 1: best a hundred years ago. It wasn't important what I
Speaker 1: thought something was worth. It was more important for me
Speaker 1: to understand what you thought Mike thought, his sister or
Speaker 1: brother thought it was worth. Like many of us, I've gotten,
Speaker 1: you know, fascinated with behavioral finance for my whole career.
Speaker 1: I grew up in the tax business. My family started
Speaker 1: this tax business and park Slope in the nineteen seventies,
Speaker 1: and I watched people coming in with like a shoe
Speaker 1: box filled with their statements from all these different brokerage firms,
Speaker 1: with all the things they bought, and like the way
Speaker 1: people were making decisions some Another paper I wrote with
Speaker 1: another co author mine is titled um Past Performance is
Speaker 1: Indicative of future beliefs. What we did is we we
Speaker 1: analyzed and we showed. Look, we know security prices are
Speaker 1: positively correlated like yesterday, security prices actually have memory. It's
Speaker 1: not this random walk where today has nothing to do
Speaker 1: with yesterday. We all make decisions today based on what
Speaker 1: we ate for breakfast, how we're feeling, what music we
Speaker 1: listened to whether the sun was shining, whether things went
Speaker 1: up or down yesterday. So Lisa, you're right read it today,
Speaker 1: you know, whatever it is like, we have to pay
Speaker 1: attention to what people think. We can't only look at
Speaker 1: the fundamentals. But I think the mistake people are making
Speaker 1: these days is to not look at the fundamentals at all, um.
Speaker 1: And that's a whole different discussion. This point you make
Speaker 1: about looking around corners. What you pay for things still matters,
Speaker 1: it like actually matters, you know. Now the question is
Speaker 1: what are we valuing. Like in the old days, we
Speaker 1: used to think sewing machines and buildings were worth something,
Speaker 1: And these days our greatest assets are the people who
Speaker 1: work for us, our brand, um, you know, our customer
Speaker 1: service scores. You know, there's a lot of things that
Speaker 1: are really hard to measure. We're all trying, but what
Speaker 1: you pay for things still matters. But this behavioral thing
Speaker 1: you touched on is critical. You know, Lisa, my fourteen
Speaker 1: and year old and I we have this game where
Speaker 1: we try to scare each other, you know, you hide
Speaker 1: and jump out and and so I'm looking around corners
Speaker 1: a lot these days as well. I'm a very abrama
Speaker 1: with approach. But Greg, one thing I love when I
Speaker 1: talked to uh small cap fund managers is you guys
Speaker 1: have your heads wrapped around companies a lot of times
Speaker 1: that I've never even heard of. Um, So if you
Speaker 1: could just kind of rapid fire through for us some
Speaker 1: of the stocks that have you excited, uh, sort of
Speaker 1: on the long end the short end. I mean one
Speaker 1: in particular, there's this company that we've invested in called
Speaker 1: smart Eye. I would say, like, there'sn't any one company
Speaker 1: I would necessarily hone in on in this conversation, but
Speaker 1: just to use them as an example, it's it's a
Speaker 1: company in Sweden that basically has created technology that looks
Speaker 1: at your eyeballs while you're driving in your car and
Speaker 1: it helps to in advance determine if you're falling asleep
Speaker 1: or you might get in an accident. So like most
Speaker 1: a lot of the cars you buy today will have
Speaker 1: this technology in it. And uh, it's pretty fascinating, small
Speaker 1: little company, most people have never heard of it. It's
Speaker 1: done quite well. It's volatile. They should they should apply
Speaker 1: that to traders too, you know, yeah, and that's right, Um,
Speaker 1: they probably do these days. Maybe just another one that
Speaker 1: I think most people probably would have heard of by now.
Speaker 1: A couple of years ago, they would not have was
Speaker 1: a fiver. It's become a big company pretty quickly. But
Speaker 1: I find this shocking. I remember I was at a
Speaker 1: course at Harvard and there was someone teaching what he
Speaker 1: called at the time, the Future of Work, and I'm like,
Speaker 1: the future of work? What the heck is that? Now?
Speaker 1: This was like five years ago, you know, and like,
Speaker 1: now we all know what the future of work is.
Speaker 1: We're in the future. But anyway, but back then, you know,
Speaker 1: it was, you know, a couple of people from you know,
Speaker 1: in a basement in Israel somewhere came up with this
Speaker 1: idea of being able to offer consulting services online for
Speaker 1: a very small fee relative to hiring like big consulting firms.
Speaker 1: Now I really could relate to this. When I was
Speaker 1: building my company, I spent millions of dollars on my brand.
Speaker 1: I had this logo which I loved. I don't own
Speaker 1: it anymore, but it was a hummingbird. And uh but
Speaker 1: I remember, you know, paying a lot of money to
Speaker 1: come up with this idea, and you know, months and
Speaker 1: strategic analysis and brand strategy and stuff that I totally
Speaker 1: value that is really important these days. But now you know,
Speaker 1: if you want to do that stuff, you go on fiber,
Speaker 1: you type in what you're looking for, and within minutes
Speaker 1: you'll get you know, retired McKinsey executives, PhD s from
Speaker 1: great schools and everybody else you could imagine bidding on
Speaker 1: this project and for like a thousand bucks instead of
Speaker 1: a hundred thousand bucks, you'll get some pretty good work. Um,
Speaker 1: And you can do that for virtually anything these days.
Speaker 1: And that company just you know, coming out of nowhere
Speaker 1: and now taking market share away from huge consulting firms,
Speaker 1: the barriers to entry for these little businesses today to
Speaker 1: get into business. Even in my own business, I remember
Speaker 1: years ago, I bought one of these first voice over
Speaker 1: IP phone systems, Like that was so cool that I
Speaker 1: could have people working for me from home, taking maternity leave,
Speaker 1: working from other states, like it never mattered where they were.
Speaker 1: You call their phone number and they were there. I
Speaker 1: think that was like several hundred thousand dollars of equipment,
Speaker 1: where you know, thousands of dollars a month of consulting contracts.
Speaker 1: Then I start my new business and for like twenty
Speaker 1: dollars per month. Ring Central does all the same stuff
Speaker 1: for me. Um, you know, I could turn it on
Speaker 1: turn it off like it's the most amazing thing. Well,
Speaker 1: the idea here also is how you find some of
Speaker 1: these things. And by the way, as you talk about this,
Speaker 1: I'm thinking out a story today on the Bloomberg about
Speaker 1: how RBC's CEO is worrying about burnout. So his solution,
Speaker 1: in addition to say take some time off, is saying
Speaker 1: you can all download a meditation app on your phone.
Speaker 1: And I was just thinking, really, how successful will that be,
Speaker 1: you know, for forgetting in play satisfaction. They can download
Speaker 1: that meditation app they want going while the kids are
Speaker 1: screaming in the other room. But I'm wondering there's a
Speaker 1: question here about how you find these companies because it's
Speaker 1: not as easy as sort of screening factors or you know,
Speaker 1: the same type of security selection, because where even are
Speaker 1: those securities traded? How do you screen them out? I mean,
Speaker 1: what is the investigative process that you undergo to find
Speaker 1: a company that has the true entrepreneurship values that you're
Speaker 1: looking Well, I mean I could give a couple of
Speaker 1: examples that are I think things that are sort of
Speaker 1: easy to get your head around. The first and the
Speaker 1: most obvious is is the founder still there? I mean
Speaker 1: that's like a zero in a one. You go on
Speaker 1: your Bloomberg machine and you look up founder yes, no,
Speaker 1: and maybe do a little more than that, but that's
Speaker 1: pretty much. So the question is there evidence and there
Speaker 1: is that companies that have their founders still there and
Speaker 1: engaged and and by the way, engaged and still there
Speaker 1: are two different things. But are there companies whose founders
Speaker 1: are still there? Do they? Is there something special about
Speaker 1: an entrepreneur being at a company to a certain size.
Speaker 1: I mean I was an entrepreneur of a certain company.
Speaker 1: I think I added some value, but I also know
Speaker 1: when I got to like eighty employees, I was in
Speaker 1: over my head. You have to know where there's limits
Speaker 1: to that too. So there's times where it adds value
Speaker 1: in times where it might take away. But I think
Speaker 1: the question is the entrepreneur. The other thing is and
Speaker 1: one of my adviser's great friends, her name's Francis Fry.
Speaker 1: She's a Harvard professor. You know, she always says like
Speaker 1: the best leaders are the ones whose organizations thrive in
Speaker 1: their absence. So when this founder does leave, do they
Speaker 1: leave behind the crumbs that keep the culture of that
Speaker 1: entrepreneur entrepreneurship still running through the company. And how do
Speaker 1: you go looking for those things? What are those things? Well,
Speaker 1: there are things like innovation, right, how do you measure innovation?
Speaker 1: How many H one B VISs file are filed? How
Speaker 1: many patents are filed? Who filed them? Um, there's you
Speaker 1: know how much R and D do they spend? You
Speaker 1: can pull that right off their income statement. Lots of
Speaker 1: things you could do. Now, you're not going to find
Speaker 1: these things unless you know what you're looking for. So
Speaker 1: the information and you know, quant strategies in my mind
Speaker 1: has always been you know, we all have access to
Speaker 1: the same data, but it's all about what questions are
Speaker 1: you asking? What are the intuitions? Um? So, I would
Speaker 1: just say things like that are examples of how you
Speaker 1: might go finding these companies globally. And there are a
Speaker 1: lot of them, and there are many of them that
Speaker 1: there are very few analysts following because you know, when
Speaker 1: you're looking at smaller companies. You know mentioned earlier that
Speaker 1: you know the whole of indexing concept, but in the
Speaker 1: smaller company stocks there are even fewer people following them. Frequently. Greg,
Speaker 1: I've got to see great trick that will get Lisa
Speaker 1: really excited. You're ready watch her. We're on zoom. The
Speaker 1: listeners can't see your facial expression, but if you watch,
Speaker 1: you'll see you'll see a reaction, and that is to
Speaker 1: switch gears and talk about the macro outlook and the
Speaker 1: rising yields and everything like that. You can see Lisa's
Speaker 1: She's getting excited already. But and the reason I want
Speaker 1: to ask you is because a lot of you know,
Speaker 1: a lot of uh equity managers that I talked will
Speaker 1: be like, well, sir, I'm not a macro guy. I
Speaker 1: don't give it much thought, but I know you are,
Speaker 1: and I'm curious just you know, a what kind of
Speaker 1: your your take on the current macro environment is inflation? Uh,
Speaker 1: you know, the rotation from cyclical to growth and back
Speaker 1: and forth every day. It's a different, you know, side
Speaker 1: of the boat. And also kind of how important it
Speaker 1: is to your strategy. I want to I want to
Speaker 1: answer the question because I do have an opinion and
Speaker 1: thoughts around it, but just to take a step back,
Speaker 1: I think one important thing about this strategy or any strategy,
Speaker 1: that the idea around small cap stocks um. So probably
Speaker 1: anyone listening to this has seen this data. If you
Speaker 1: go back a hundred years and you look at all
Speaker 1: the data we have in every country, and you do
Speaker 1: like rolling periods, you know, like rolling ten year periods
Speaker 1: or the whole hundred years, or however you look at it,
Speaker 1: the fact is that small company stocks have earned about
Speaker 1: two percentage points per year more than large companies over
Speaker 1: the long term and over most five, ten, fifteen year periods.
Speaker 1: Turns out, however, in the last ten years, the reverse
Speaker 1: has been true. We saw this change a little bit
Speaker 1: in the last few months, but the reverse has been
Speaker 1: true that actually large companies have outperformed small companies by
Speaker 1: almost the same amount two percent a year for the
Speaker 1: prior decade. Is that is that the Bogel effect to
Speaker 1: some degree, the effect, you know, I don't know what
Speaker 1: to blame it on. There are people who have blame
Speaker 1: it on macro issues, like the banks cut off small
Speaker 1: companies and stopped lending to them after the financial isis,
Speaker 1: or you know, the indexing concepts of big getting bigger
Speaker 1: because we're all just buying what we love and the
Speaker 1: most popular things get the highest prices, and the indexes
Speaker 1: are generally cap weighted. And I don't know, there's a
Speaker 1: lot of answers to this. I don't think any of
Speaker 1: us ever really know the answer as to why things happened.
Speaker 1: But I think the one thing I would come back
Speaker 1: to is the idea that little, risky businesses earning a
Speaker 1: lower rate of return on the average than large, established
Speaker 1: institutional players. It's it's hard to get my head around
Speaker 1: that like this risk return thing should bear fruit over
Speaker 1: a long period. Before you go Macro, I actually want
Speaker 1: to push back a little bike because one of the
Speaker 1: things that I've noticed recently about the Macro outlook, Wait,
Speaker 1: push push back on Greg, not on me, though, right,
Speaker 1: push back on you. I can't handle the Abromo pushback.
Speaker 1: I'm I'm on train Reagan. I just think that, you know,
Speaker 1: recently the Macro calls have gotten, you know, both really
Speaker 1: convergent when it comes to generally positive and really divergent
Speaker 1: when it comes to inflation. The issue, though, that I
Speaker 1: want to pick up on Greg, that I think that
Speaker 1: you're talking about that I find fascinating is this idea
Speaker 1: of betting on smaller companies and how that restrains bigger
Speaker 1: investors because you cannot commit that much capital to those
Speaker 1: players efficiently while doing the work that you're talking about,
Speaker 1: how much is the small versus big argument also applicable
Speaker 1: to portfolio managers to this idea that smaller fund managers
Speaker 1: actually will start out performing in a meaningful way in
Speaker 1: this current environment. Oh, that's such a great point, and
Speaker 1: I've obviously one that I love hearing. But yeah, there's
Speaker 1: there is evidence in the data, and it makes sense
Speaker 1: based on what you've said that you know, small fund
Speaker 1: buying small names should do better than a large fund
Speaker 1: buying small names because large cons can't really buy the
Speaker 1: small names and make it have and have it make
Speaker 1: a material impact. Well. And I guess that the way
Speaker 1: that that folds into the macro is where we are
Speaker 1: in the economic cycle. There seems to be a turn
Speaker 1: under the markets. People have priced in very low rates
Speaker 1: that was a main driver of performance people have priced
Speaker 1: in a new economic cycle. I'll be at one that's
Speaker 1: very different given the hangover of debt. Is the only
Speaker 1: way to meaningfully outperformed now really have to do with
Speaker 1: names in a way that it just hasn't because of
Speaker 1: where we are in the rate cycle. If nothing else,
Speaker 1: I do believe that there's some absolute truth to that,
Speaker 1: and that that will be a factor in the performance
Speaker 1: of managers going forward. I do want to also touch
Speaker 1: on coming back, So I would define this this idea
Speaker 1: of investors generally don't have much in the way of
Speaker 1: small companies to begin with, Like they're under allocated, and
Speaker 1: you can see that in the data. Um, Like if
Speaker 1: you just look at the total market index, it's like
Speaker 1: ten eleven small cap and you know, large cap, and
Speaker 1: that's sort of a proxy for all of us on
Speaker 1: the average. Yet consultants tell everyone they should have like
Speaker 1: in small business. Now investors will uh, institutional investors will
Speaker 1: ratchet up small business by private equity verse public equity,
Speaker 1: and I have some thoughts on that too. But at
Speaker 1: the end of the day, small business investing people are
Speaker 1: tend to be uh, sort of under allocated. Combine that
Speaker 1: with they've done poorly for the last ten years by
Speaker 1: a lot, you know, I mean bigger than ever. Um.
Speaker 1: I think there's a good environment for you know, taking
Speaker 1: a close look at what you have as an investor
Speaker 1: in small company stocks, and then combine that with doing
Speaker 1: the work being a small fund being able to outperform
Speaker 1: based on these trends. We see the other thing about
Speaker 1: the macro and interest rates in inflation. Um, they say
Speaker 1: you've mentioned something a couple of times, and it makes
Speaker 1: me think of something. You know, I I think the
Speaker 1: ten year bond peaked at like six back, and the
Speaker 1: long term average is I think six percent. And uh,
Speaker 1: we just went from fifty basis points roughly in August
Speaker 1: to one point seven percent. Now I'm rounding, but that's close, like,
Speaker 1: and that surprised everyone. I don't think people were expecting that. Now.
Speaker 1: It's shocking to me that we're all like worried about
Speaker 1: two when like we've seen sixteen almost and the average
Speaker 1: was six, like getting a three or four. To me,
Speaker 1: I'm not I'm not good at predicting the future, so
Speaker 1: I'm not saying we're gona have massive inflation, but I'm
Speaker 1: just like the idea that we could get to three
Speaker 1: or four, Like, I don't think that should be like
Speaker 1: a big shocker. I think it's possible that can happen.
Speaker 1: And I think this point you made earlier about um,
Speaker 1: you know, as human beings, we all underweight the low
Speaker 1: probability event, and that's the one that we always have
Speaker 1: to worry about. Um, so paying a little bit of attention.
Speaker 1: So if I'm an investor, I'm saying, what percentage of
Speaker 1: my portfolio do I have invested in things that might
Speaker 1: do well if we see that happen at least something,
Speaker 1: you know, like the idea that there's a zero chance
Speaker 1: that could happen is probably a mistake. There is at
Speaker 1: least some chance that that could happen. Now, as it
Speaker 1: relates to you know, investing inequities, I think we've all
Speaker 1: learned that rising discount rates are the enemy to the
Speaker 1: financial asset, you know, and a surprise rise in interest
Speaker 1: rates are like really bad. So if we all just
Speaker 1: expect rates to go up, and we know they're going
Speaker 1: to go up, and we're all anticipating they go up,
Speaker 1: then that's not that horrible. Like companies optimize around what
Speaker 1: they know and just deal with it, and over time
Speaker 1: we're probably okay. But the thing that we're all afraid
Speaker 1: of is a shock of surprise something we weren't expecting.
Speaker 1: Like we woke up tomorrow and the ten year was
Speaker 1: at three percent, I think we'd all be like really scared,
Speaker 1: at least for the short term. Now you look at
Speaker 1: the NASDAC and interest rates over the last two months,
Speaker 1: and you've seen this negative correlation of rates go up
Speaker 1: growth stocks go down. After we all got comfortable at
Speaker 1: the one point seven and the prices sort of got
Speaker 1: baked in. Now it looks like that relationship has broke
Speaker 1: down where it's not happening anymore. So it's a little
Speaker 1: bit about you know this, understanding what everybody's thinking again
Speaker 1: versus what actually happened. Greg. My my goal is a
Speaker 1: journalist is to find someone who bought that long bond
Speaker 1: you're talking about in the eighties and and held soul maturity.
Speaker 1: They whoever they are, is probably the world's biggest investing
Speaker 1: genius out there. But hey, guys, I think that's enough
Speaker 1: of the serious stuff. Okay, It's time for the more
Speaker 1: important stuff, which is our tradition. Here the craziest thing
Speaker 1: we saw in markets this week, Lisa, I know I
Speaker 1: sent you like a thousand emails about this podcast, but
Speaker 1: hopefully you read the one about the crazy things. I
Speaker 1: have a lot of faith in your ability to bring
Speaker 1: some crazy market stories to us this week. Ghost cattle.
Speaker 1: That's I'm just gonna say, ghost cattle. There were cattle,
Speaker 1: two hundred thousand cattle that seemed to disappear from Tyson
Speaker 1: and it turns out it was due to fraudulent future
Speaker 1: trading among other things. Uh, they never existed. There's two
Speaker 1: d cattle and uh. I could go in further to
Speaker 1: this story, but it's um. I will say that ghost
Speaker 1: cattle is the strangest thing that I read about. So
Speaker 1: someone was naked naked sure cattle? Well, it was Easterday
Speaker 1: Ranches submitted. I'm not as intimate with the story, but
Speaker 1: there was there was some issue. There were some issues
Speaker 1: with the tickets around the particular cattle, and then there
Speaker 1: was an insolvency having to do with this particular ranch.
Speaker 1: But the idea of you know, ghost cattle, to me
Speaker 1: is a fantastic market. You know, I knew you would
Speaker 1: not disappoint on this, on this metric, and I you
Speaker 1: came prepared. I that is a strong, first crazy thing.
Speaker 1: That's cool. I don't I don't know that I'm going
Speaker 1: to have anything better than that. Alright, Greg, You're gonna pass.
Speaker 1: You can pass. It's at least it's a tough act
Speaker 1: to follow. I I I have to follow her because
Speaker 1: this is my gimmick. But but let's hear what you
Speaker 1: got well. I guess this is not like new information
Speaker 1: anybody listening, because we're all following this stuff. But I
Speaker 1: do find it shocking. How like we watched this recent
Speaker 1: episode of this you know, dollar Money Manager get accepted
Speaker 1: by all these large institutional players that are just looking
Speaker 1: to make more money somehow, and watch this thing just
Speaker 1: like wither away overnight. And the idea that in this society,
Speaker 1: like you would think we would have learned by now
Speaker 1: from all these experiences over the last twenty years, if
Speaker 1: not even the last hundred, Like, I just find it fastening.
Speaker 1: This keeps happening over and over again, and then the
Speaker 1: other thing connected to that and another firm that's out there,
Speaker 1: this idea that, like religious beliefs um are like driving
Speaker 1: people's risk taking behavior. I mean, with all the science
Speaker 1: we have out there today, I find that kind of
Speaker 1: weird too, you know, like it's just hard for me
Speaker 1: to get my head around that. You know, you know,
Speaker 1: you raise a good point, And that's one of the
Speaker 1: crazy aspects of this story, the Archagas story is what
Speaker 1: you're talking about, twenty billion dollars to zero overnight. It
Speaker 1: is crazy, and yet it is so fundamental to human nature.
Speaker 1: So when somebody presents themselves with confidence and they're dealing
Speaker 1: with a lot of money, everybody trusts them. And when
Speaker 1: greed outweighs fear. You know, this is how you get
Speaker 1: scenarios just like this. Yeah, and that's why I always
Speaker 1: liked the data and the science of investing, Like, you know,
Speaker 1: show me some proof. Yeah, just to talk to the
Speaker 1: house book here a little bit. There's a great story
Speaker 1: in this week's Business Week about the whole Archagoes drama, Lisa,
Speaker 1: Eric Shatzker, your colleague on TV with the bio in there.
Speaker 1: All right, both are excellent things. I I gotta hand
Speaker 1: it to you. I think I'm only going to take
Speaker 1: the bronze this time in the craziest thing, first time
Speaker 1: ever that I haven't haven't meddled higher. But I will
Speaker 1: say mine's not necessarily the craziest, but perhaps the most
Speaker 1: interesting thing. And at least I I thought of you
Speaker 1: when I conjured this up, because I want to hear
Speaker 1: your take on it. And this is courtesy of Matt
Speaker 1: Levine's excellent Money Stuff newsletter. Lisa, have you heard of
Speaker 1: this concept the green um, which is if you're selling
Speaker 1: a green bond, you can price it at a lower
Speaker 1: rate than a regular corporate bond because there's so much
Speaker 1: greg to your point about you know, religion influencing people's
Speaker 1: desire for sustainability and for diversity and for all the
Speaker 1: s D type of stuff is causing so much capital
Speaker 1: to to chase it that you can price a green
Speaker 1: bond at a lower rate than a regular bond. And
Speaker 1: as you know, as I'm kind of a tree hugger
Speaker 1: at heart, so I I'm kind of happy to hear this,
Speaker 1: But as a market guy, I'm like, wait a minute,
Speaker 1: some something weird here. And the one that that Levin
Speaker 1: wrote about is actually a revolver loan that black Rock
Speaker 1: sold to a bunch of banks, and it's a one
Speaker 1: basis point incentive built into the rate depending on whether
Speaker 1: block Rock hits certain sustainability UH and diversity goals at
Speaker 1: one basis point. So all the lawyers and paperwork that
Speaker 1: went into determine this for a one basis point move.
Speaker 1: But I guess the idea is that black Rock can
Speaker 1: can show this to other investors and kind of get
Speaker 1: the ball roll for this type more of this type
Speaker 1: of product out there. Curious what you both think of
Speaker 1: this whole whole notion that's the price of pr I
Speaker 1: think that that's essentially what this is. I mean, let's
Speaker 1: just put it. Let's call it spade a spade. I mean, look,
Speaker 1: I think that there's some very real goals, and I
Speaker 1: would totally agree and applaud goals to try to make
Speaker 1: our world a little bit more sustainable so that we
Speaker 1: can avoid that two percentage point or that two increase
Speaker 1: in temperature, which is sort of the Nopeman no go
Speaker 1: kind of place. I think that whether some of these
Speaker 1: financial incentives achieve that talked about looking around corners, the
Speaker 1: skeptic in me always wonders how much is greenwashing and
Speaker 1: how much is reality? That said, the more emphasis. I
Speaker 1: don't know. I'm not going to get into a political spiel,
Speaker 1: but what I will say is this said, I think that,
Speaker 1: you know, there is an incredible amount of money looking
Speaker 1: to make companies look better and look more responsible. That
Speaker 1: money will find a home. How much of it will
Speaker 1: get directed to the initiatives that actually need to get done,
Speaker 1: formates to be seen, But I applaud the sort of
Speaker 1: effort and the fact that there are more people who
Speaker 1: care about it. How about that for a non answer
Speaker 1: the price of pr That's a good that's a good
Speaker 1: catch phrase. I actually, um, I'll sort of bring this
Speaker 1: back a little bit of something I've been thinking about.
Speaker 1: You know, obviously there's a lot of interest in E S.
Speaker 1: G investing in general, but I've been more interested in
Speaker 1: the S than the E and the G. And as
Speaker 1: it relates to small companies. Something I've been doing some
Speaker 1: work on and speaking to some academics about, is, you know,
Speaker 1: can we link this idea that if you treat the
Speaker 1: employees who work for you well, that your company will
Speaker 1: outperform your competitors that don't. Now, the question for all
Speaker 1: of us is how do you measure whether employees are
Speaker 1: treated well or not? And can you go back long
Speaker 1: enough to prove that out? But ideally, if you could
Speaker 1: prove that in a rigorous way. There's some kind of
Speaker 1: weakly ways of doing that now, but if you could
Speaker 1: prove that in a in a rigor this way, you know,
Speaker 1: maybe it would lower the cost of capital for these
Speaker 1: companies that are doing good things for their employees or
Speaker 1: something like that. It's sort of the same idea in bonds,
Speaker 1: except on equities. I don't know, you know, it's it's
Speaker 1: a tough one, and actually, if you ever have any
Speaker 1: ideas around how one could measure that using publicly available data,
Speaker 1: give me a call. Greg, Greg. All I'll say is,
Speaker 1: as long as Bloomberg keeps providing free potato chips, I'm
Speaker 1: a happy loyal employee for for the duration. Mike, for
Speaker 1: the record, are they sending you shipments of them at home?
Speaker 1: I can't. I can't discuss that. I show up to
Speaker 1: the office every now and then and fill a backpack
Speaker 1: and then then head back. Hey uh, Greg and Lisa,
Speaker 1: thank you so much for your time. One of the
Speaker 1: more fascinating conversations I've I've had in a while. Granted
Speaker 1: the rest have been with my my teenage daughters, so
Speaker 1: but I really appreciate your time. Hopefully we can have
Speaker 1: you both back on the show sometimes. Oh it's been
Speaker 1: a great time for me. Thank you. I enjoyed this
Speaker 1: very much. Thank you. Thank you both, have one of
Speaker 1: apter do what goes up. We'll be back next week.
Speaker 1: Until then, you can find us on the Bloomberg Terminal,
Speaker 1: website and app where wherever you get your podcasts. We'd
Speaker 1: love it if you took the time to rate and
Speaker 1: review the show on Apple podcasts so more listeners can
Speaker 1: find us, and you can find us on Twitter, follow
Speaker 1: me at Reaganonymous. Lisa brama Witz is at Lisa brama
Speaker 1: Witz one. You can also follow Bloomberg Podcasts at at podcasts.
Speaker 1: Thank you to Charlie Pellette of Bloomberg Radio and the
Speaker 1: voice of the New York City Subway System. What Goes
Speaker 1: Up is produced by Laura Carlson. The head of Bloomberg
Speaker 1: podcast is Francesco Levy. Thanks for listening, See you next time.