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Cliff Asness on Quant Value Investing · Masters in Business

• 0:01
  Speaker 1: This is Masters in Business with very Rid Holds on
• 0:06
  Speaker 1: Bloomberg Radio this week. On the podcast, this will be
• 0:11
  Speaker 1: my shortest introduction ever. Clifford Astenus and I just go
• 0:16
  Speaker 1: over the entire universe of quant factor and value investing.
• 0:21
  Speaker 1: It is a master class. And if you don't believe me,
• 0:24
  Speaker 1: I'm just going to shut up and say, with no
• 0:26
  Speaker 1: further ado, my conversation with a Qrs cliff Astness. Let's
• 0:31
  Speaker 1: start out a little bit going over some of your background.
• 0:34
  Speaker 1: You get your PhD at the University of Chicago, where
• 0:37
  Speaker 1: you are the teaching assistant for some obscure prof named
• 0:41
  Speaker 1: Gene Fama. Tell us, Yeah, I basically discovered him. I
• 0:47
  Speaker 1: ended up at the University of Chicago. I was an
• 0:49
  Speaker 1: undergrad studying business and engineering. I decided I wanted to
• 0:53
  Speaker 1: be a professor because I did a job just for
• 0:56
  Speaker 1: money coding up studies for three Warton pros. I liked
• 1:01
  Speaker 1: what they did. I said, how do I do what
• 1:03
  Speaker 1: you do? And they said, go get a PhD. I
• 1:04
  Speaker 1: said where should I go? And they said close the
• 1:06
  Speaker 1: doorc Because we were at Wharton, and Wharton's a great school,
• 1:10
  Speaker 1: but PhD program rankings can be different than sure and
• 1:13
  Speaker 1: they and almost to a man, because I went to
• 1:16
  Speaker 1: about ten professors they said, go to Chicago, and I went.
• 1:20
  Speaker 1: I mean I got in, I went, and Jane Farmer
• 1:23
  Speaker 1: was the man to say the very least. So your
• 1:26
  Speaker 1: doctoral thesis asserted that consistently beating market averages was attainable
• 1:32
  Speaker 1: by exploiting both value and momentum. In other words, you
• 1:36
  Speaker 1: took Farmer's value factor and added your own twist, which
• 1:41
  Speaker 1: was momentum, which eventually became a Farmer French factor. Right,
• 1:45
  Speaker 1: yeah it Farmer French still don't include it in their
• 1:48
  Speaker 1: official five factor model. A lot of us think they should.
• 1:54
  Speaker 1: I think that's just a philosophical difference. The way I
• 1:57
  Speaker 1: always describe it is one of the scariest moments of
• 2:00
  Speaker 1: my life was going into Jean's office. I was already
• 2:03
  Speaker 1: his teaching assistant. He had kind of agreed to be
• 2:08
  Speaker 1: my dissertation chair, even without a particular topic, and going
• 2:12
  Speaker 1: in and saying, I want to write it. I wrote it.
• 2:15
  Speaker 1: It was more than just this, but one of the
• 2:16
  Speaker 1: main things I want to explore is the momentum strategy.
• 2:19
  Speaker 1: And then mumbling and by the way, it works very
• 2:21
  Speaker 1: well because you know this is constant fight in academia.
• 2:27
  Speaker 1: If if you believe something works, does it work because
• 2:29
  Speaker 1: markets are efficient and it's compensation for risk or for
• 2:33
  Speaker 1: behavioral reasons and momentum inherently, And I think we all
• 2:37
  Speaker 1: knew this instinctively back then. It's very hard to come
• 2:40
  Speaker 1: up with a rational story or risk based story. And
• 2:43
  Speaker 1: I was nervous because he's mister efficient markets and rational,
• 2:47
  Speaker 1: And to his credit and my relief, he said, if
• 2:50
  Speaker 1: it's in the data, write the paper. And he was
• 2:53
  Speaker 1: very supportive of the paper. He works very closely with
• 2:56
  Speaker 1: Dimensional affirm I admire greatly. They don't give as much
• 3:00
  Speaker 1: weight to momentum as we do, but they use it
• 3:02
  Speaker 1: in their trading process. So I feel like I've won
• 3:05
  Speaker 1: half the battle on that over time. The only thing
• 3:09
  Speaker 1: you said that I might take a small disagreement with
• 3:11
  Speaker 1: is consistently. We think value plus momentum has a really
• 3:16
  Speaker 1: good risk adjusted return makes money over the long term.
• 3:20
  Speaker 1: But when you've gone through two year periods like the
• 3:22
  Speaker 1: tech bubble and three year periods like eighteen through twenty,
• 3:26
  Speaker 1: I think myself, my family, and some of my clients
• 3:29
  Speaker 1: might take issue with the word consistently. So let's let's
• 3:33
  Speaker 1: put a little more meat on those bones to define
• 3:36
  Speaker 1: what we're talking about. You want to identify the cheapest
• 3:40
  Speaker 1: value stocks, but only own those that seem to have
• 3:43
  Speaker 1: started on an up swim. That seems to make some sense. Yeah,
• 3:47
  Speaker 1: you're you're accidentally waiting until get another quant controversy whether
• 3:51
  Speaker 1: you need both these characteristics in every stock or whether
• 3:55
  Speaker 1: you can have some stocks that are great on one
• 3:57
  Speaker 1: and simply average on the other and the portfolio comes out.
• 4:01
  Speaker 1: But the intuition you're saying it's exactly right. Two things.
• 4:04
  Speaker 1: At that point. The literature has advanced. This is like
• 4:07
  Speaker 1: QUANDT Financi Cerca, nineteen ninety. You may throw in the
• 4:11
  Speaker 1: size effect and that was about it, which we're going
• 4:13
  Speaker 1: to talk about in a little a little while, because
• 4:16
  Speaker 1: I've read some papers that suggests may not exist. We're
• 4:20
  Speaker 1: cynics about it. But but value, momentum, and size in
• 4:24
  Speaker 1: the opposite order that I just said. Time wise, size
• 4:27
  Speaker 1: was kind of first, then value, then momentum with the
• 4:30
  Speaker 1: three biggies, And there's still very big in the in
• 4:34
  Speaker 1: the literature around nineteen ninety value says in the original metrics,
• 4:39
  Speaker 1: and I think they've advanced since then. Price to book
• 4:42
  Speaker 1: was the famous one fam in French use. They'll be
• 4:45
  Speaker 1: the first to tell you they do kind of like it,
• 4:47
  Speaker 1: but it has no special standing. It's basically price divided
• 4:50
  Speaker 1: by any reasonable fundamental so it could be priced to sales,
• 4:53
  Speaker 1: price to earnings, priced to whatever. You'll get people disagreeing
• 4:57
  Speaker 1: like crazy. At our firm, we prefer a broad ten
• 5:00
  Speaker 1: of giving you. We don't think we're particularly great at
• 5:02
  Speaker 1: saying which one is the exact right way to do this.
• 5:06
  Speaker 1: But if you buy low multiples and sell high multiples
• 5:09
  Speaker 1: either in a long only beat the benchmark sense when
• 5:13
  Speaker 1: over and underweight, and you did the same thing everyone does,
• 5:16
  Speaker 1: and call me a hedge fun manager. It's about half
• 5:18
  Speaker 1: our assets. About half our assets are really traditional where
• 5:21
  Speaker 1: money managers beat, you know plenty of things. Don't let
• 5:24
  Speaker 1: us short or lever or any of those hedge fun
• 5:26
  Speaker 1: kind of things. But the principle is exactly the same.
• 5:29
  Speaker 1: The overweight in a value strategy would be low multiples,
• 5:32
  Speaker 1: the underweight would be high multiples. If you're running a
• 5:35
  Speaker 1: pure momentum strategy, the overweight, and this is also momentum
• 5:38
  Speaker 1: circa nineteen ninety, would be who's doing better over the
• 5:42
  Speaker 1: last year it's that simple. I used to dismissively call
• 5:45
  Speaker 1: it the two newspaper strategy. You needed a newspaper recent
• 5:49
  Speaker 1: one and one from a year ago. It's better to
• 5:52
  Speaker 1: have a computer because a little faster than you. But
• 5:54
  Speaker 1: you look up and you buy what's going up. It
• 5:56
  Speaker 1: turns out this part is surprising. Both make money over
• 6:00
  Speaker 1: any decent time horizon. Probably not surprising is they are,
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  Speaker 1: in geek speak, negatively correlated. If you are a pure
• 6:09
  Speaker 1: value person and I am a pure momentum person, occasionally
• 6:13
  Speaker 1: we agree. We may get into this later, but right
• 6:16
  Speaker 1: now we're in more agreement than normal because value stocks
• 6:19
  Speaker 1: kind of have the momentum, but more often than not,
• 6:23
  Speaker 1: the cheap stocks are cheap because one of the reasons
• 6:26
  Speaker 1: they're cheap is they've been losing. So they're negatively correlated strategies.
• 6:30
  Speaker 1: And this doesn't create a ten sharp ratio, but a
• 6:32
  Speaker 1: holy grail of quand finances to try to find two
• 6:35
  Speaker 1: things that are an average make money that hedge each other,
• 6:38
  Speaker 1: and value and momentum do whether it's relative our performance
• 6:42
  Speaker 1: against a benchmark or absolute performance in a hedge fund.
• 6:45
  Speaker 1: So let's talk a little bit about how you ended
• 6:48
  Speaker 1: up launching a QR. Following your PhD dissertation, you end
• 6:54
  Speaker 1: up eventually heading out to Goldman Sachs to effectively established
• 7:00
  Speaker 1: their quantitative research groups. That's it, though I'm going to
• 7:04
  Speaker 1: mend the story slightly because a few of those things
• 7:06
  Speaker 1: happen more simultaneously. I left the PhD program in late
• 7:11
  Speaker 1: ninety one to take a year off. I'm now on
• 7:16
  Speaker 1: year thirty two of that year off, so it appears
• 7:19
  Speaker 1: to have taken hold. So you're a PhD school dropout. No,
• 7:23
  Speaker 1: I did finish the PhD. I went to Goldman. I
• 7:27
  Speaker 1: had started my dissertation. I think a lot of people
• 7:30
  Speaker 1: leave intending to write a dissertation from a job, and
• 7:33
  Speaker 1: I don't think anyone, including me, succeeds at that. But
• 7:38
  Speaker 1: if you've already produced, like a first draft, it could
• 7:41
  Speaker 1: be a couple of years in this process to finish it.
• 7:44
  Speaker 1: But it's more Yeoman like work. After the first draft,
• 7:46
  Speaker 1: you're just responding to things, running new tests. So I
• 7:50
  Speaker 1: had finished a first draft, went to Goldman to take
• 7:53
  Speaker 1: a year with the concept that an option can only
• 7:56
  Speaker 1: be worth zero let me see if I let me
• 7:58
  Speaker 1: see it. I intended to be a professor when I
• 8:00
  Speaker 1: started out but let me see if I like this.
• 8:03
  Speaker 1: After about a year, maybe about a year and a half,
• 8:05
  Speaker 1: I stayed a little longer. I was really feeling like
• 8:08
  Speaker 1: I should get back to some of the academic roots.
• 8:11
  Speaker 1: I was a fixed income portfolio manager and trader, which
• 8:14
  Speaker 1: is a ton of fun. I recommend anyone who does
• 8:17
  Speaker 1: this stuffer a living trade in OTC market for a
• 8:20
  Speaker 1: while to learn the good bed and the ugly of
• 8:23
  Speaker 1: of of of what happens there. But it wasn't like
• 8:27
  Speaker 1: whatever skills they taught me in the PAHD program. It
• 8:29
  Speaker 1: didn't feel right. I then got just very lucky. Pimco
• 8:32
  Speaker 1: out on the West Coast read the first thing I
• 8:34
  Speaker 1: wrote in the Journal of Portfolio Management. UM. The exciting
• 8:39
  Speaker 1: title was option adjusted spreads and a steep yield curve. Um.
• 8:43
  Speaker 1: There's gonna be a TV movie at some point. Who's
• 8:46
  Speaker 1: going to play you in the movie? That's the big question.
• 8:48
  Speaker 1: I'm not gonna be flattered whoever, who whoever it is.
• 8:52
  Speaker 1: Let's just say that, UM, and they won't have any hair,
• 8:55
  Speaker 1: which will be annoying because when that when I wrote
• 8:57
  Speaker 1: that paper, I had hair, right they the paper, they
• 9:01
  Speaker 1: talked to me. They didn't even know I did. I
• 9:02
  Speaker 1: was writing a dissertation on quant equities at night, and
• 9:06
  Speaker 1: they basically offered me a job to start a research
• 9:10
  Speaker 1: group from scratch. Ironically, given what happened later, Long Term
• 9:15
  Speaker 1: Capital helped my life because circa that time they were
• 9:19
  Speaker 1: doing extremely well and suddenly, you know, all business, it's
• 9:23
  Speaker 1: not just Wall Street are something's doing great there. We
• 9:26
  Speaker 1: need one of those. So the notion that we should
• 9:29
  Speaker 1: have some academics helping us out was greatly aided by them.
• 9:34
  Speaker 1: And I actually think there's some brilliant people, though obviously
• 9:37
  Speaker 1: didn't end well there, so it's a little bit of
• 9:39
  Speaker 1: irony that they help. But PIMCO is looking to start
• 9:42
  Speaker 1: a group. I went to Goldman Sachs and said, I
• 9:44
  Speaker 1: think this is the perfect combination. I get to do
• 9:48
  Speaker 1: academic work but in the real world, both in the
• 9:52
  Speaker 1: sense of seeing if it actually works, and you make
• 9:55
  Speaker 1: more money. Anyone who tells you they do money management
• 9:58
  Speaker 1: over being a professor and never considered that it's probably
• 10:01
  Speaker 1: not never not telling the full truth. Goldman Um said,
• 10:07
  Speaker 1: unbeknownst to you, we're looking to start such a group.
• 10:10
  Speaker 1: To this day, I think that's probably true, but I
• 10:13
  Speaker 1: don't know if that was reactive to me or but
• 10:17
  Speaker 1: they did say that, and they offered me the job,
• 10:20
  Speaker 1: and I decided the weather in New York City's way
• 10:22
  Speaker 1: better than Luguona Beach, Newport Beach, excuse me, California. I
• 10:27
  Speaker 1: also chose Chicago over Stanford f PhD. So you don't
• 10:30
  Speaker 1: care about whether obvious No Chicago versus Stanford. Um, I
• 10:34
  Speaker 1: got into both. Yea. They offered a stipend. PhDs are
• 10:38
  Speaker 1: very lucky to actually, hey, you to go to school.
• 10:41
  Speaker 1: Everything was the same, except Chicago had in its budget
• 10:44
  Speaker 1: to give me money for airfare to go visit. Stanford
• 10:48
  Speaker 1: didn't and I had no money. So I visited Chicago
• 10:52
  Speaker 1: and not Stanford. And it was a beautiful spring day.
• 10:55
  Speaker 1: So I'm fond of telling people I'm the world's only
• 10:57
  Speaker 1: person to choose the University of Chicago over Stanford on
• 10:59
  Speaker 1: the weather. Based on the weather, I'm more intrigued by
• 11:02
  Speaker 1: the concept of you, uh sort of Bruce wayneing uh
• 11:07
  Speaker 1: fixed income during the day and at night your equity
• 11:10
  Speaker 1: work is your batman. Yeah, that was tied for the
• 11:13
  Speaker 1: craziest time in my life. Um. The other time my
• 11:16
  Speaker 1: wife and I with with you know, more her than me.
• 11:19
  Speaker 1: We had two sets of twins eighteen months apart. Oh
• 11:21
  Speaker 1: my goodness, um, and that was a ton of fun,
• 11:25
  Speaker 1: but it was ridiculous. Yeah. Right, So the nocturnal activity
• 11:28
  Speaker 1: was a little different than writing a dissertation, but working
• 11:32
  Speaker 1: at Goldman um with with with four babies, um, was
• 11:37
  Speaker 1: very similar to writing a dissertation, which is kind of
• 11:39
  Speaker 1: is your baby I could? I can imagine. So so
• 11:43
  Speaker 1: we we started talking about a QR in ninety eight.
• 11:47
  Speaker 1: You leave Goldman to launch that this is your first congratulations.
• 11:52
  Speaker 1: I like to say a quarter century. It has more
• 11:54
  Speaker 1: ground O case, it definitely does. It's amazing how quickly
• 11:58
  Speaker 1: quarter century goes by. That's the truly shocking thing. All
• 12:02
  Speaker 1: the cliches, particularly about children, but about all of life.
• 12:06
  Speaker 1: They're cliches for a reason. You wake up one day
• 12:09
  Speaker 1: and you go, what did I do for the last
• 12:10
  Speaker 1: twenty five years? How did this happen? I remember about
• 12:13
  Speaker 1: three of those years. I'm fond of telling people I
• 12:16
  Speaker 1: have a really good memory that extends to two periods,
• 12:19
  Speaker 1: the last two weeks in high school. I think that's
• 12:22
  Speaker 1: probably true for a lot of people. It just depends
• 12:24
  Speaker 1: on where you peaked. Yeah, personally, if you peak in
• 12:27
  Speaker 1: high school or you peak in college. That's that's where
• 12:30
  Speaker 1: all your memories are most vivid. So so, given a
• 12:34
  Speaker 1: QR has been around for twenty five years, how has
• 12:38
  Speaker 1: your investing philosophy evolved over that period? Assuming it's changed
• 12:42
  Speaker 1: at all, and I imagine it as it has, but
• 12:45
  Speaker 1: more has stayed the same than has changed, adding new factors,
• 12:51
  Speaker 1: measuring factors better. I don't think that's a change in philosophy.
• 12:54
  Speaker 1: That's just applying the philosophy and digging deeper our general belief,
• 13:01
  Speaker 1: starting out with value and momentum at Goldman in the
• 13:04
  Speaker 1: very early nineties, expanding along with the literature, some of
• 13:09
  Speaker 1: which some of our people have helped create UM to
• 13:13
  Speaker 1: other factors, low risk investing, quality investing, UM fundamental, not
• 13:18
  Speaker 1: just price funds. But let's let's define those UM like
• 13:22
  Speaker 1: I think we understand what quality investing is, but what
• 13:25
  Speaker 1: is low risk? Low risk investing at its simplest. Again,
• 13:29
  Speaker 1: all of these you get ten quants in a room,
• 13:31
  Speaker 1: which sounds like the beginning of a bad joke. Um,
• 13:34
  Speaker 1: they'll all have UM different ways and different sets of
• 13:38
  Speaker 1: ways to measure this, but at its simplest. As a
• 13:42
  Speaker 1: paper by two of my colleagues Lass Peterson and Andrea Frazini.
• 13:47
  Speaker 1: Andrea Frazini excuse may have left out the last syllable
• 13:49
  Speaker 1: of your name, Andrea. I will never do that again.
• 13:52
  Speaker 1: Um wrote a paper call Betting against Beta, UM and
• 13:56
  Speaker 1: I forget many years ago. Bab everything's three letters because
• 13:59
  Speaker 1: faming French name their factors three letters. So now we
• 14:02
  Speaker 1: all copy them and they'll be the first to tell
• 14:05
  Speaker 1: you they were essentially extending work of Fisher Blacks from
• 14:10
  Speaker 1: I don't know, ten twenty years ago, where he found
• 14:13
  Speaker 1: that in basic theory, the capital asset pricing model. You know,
• 14:17
  Speaker 1: we all kind of learn third week of an NBA
• 14:21
  Speaker 1: finance class bill bill sharp. High beta stocks are supposed
• 14:27
  Speaker 1: to return more on average than low beta stocks, and
• 14:29
  Speaker 1: in fact nothing else is supposed to matter all. It's
• 14:32
  Speaker 1: it's a one factor model, and it's admittedly simplistic, even
• 14:36
  Speaker 1: though people who created it won't tell you it's the
• 14:38
  Speaker 1: be all, end all, but it's a very useful way
• 14:40
  Speaker 1: to think of things. It gets you down to a
• 14:41
  Speaker 1: very important concept that diversifiable risk. You shouldn't get paid
• 14:46
  Speaker 1: for it because you don't have to bear. You get
• 14:48
  Speaker 1: bared for risk. You can't diversify away beta being a risk,
• 14:52
  Speaker 1: you can't diversify away because a lot of your portfolio
• 14:56
  Speaker 1: is already long beta should be paid. So the problem,
• 15:00
  Speaker 1: of course is in some sense you can say betas
• 15:04
  Speaker 1: paid because stocks tend to beat bonds over the long term.
• 15:07
  Speaker 1: But within the market, the so called security markets line
• 15:12
  Speaker 1: is pretty much entirely flat and has been in sample
• 15:16
  Speaker 1: and add a sample for a ridiculously long amount of
• 15:19
  Speaker 1: time in a ridiculously large amount of places, meaning low
• 15:23
  Speaker 1: beata stocks have kept up with high beta stocks, which
• 15:26
  Speaker 1: in the simplest theory, they're not supposed to. You can
• 15:29
  Speaker 1: use this in a number of ways. You can buy.
• 15:32
  Speaker 1: You can make your portfolio out of low beta stocks
• 15:35
  Speaker 1: earn as much money with smaller swings, or if you're
• 15:39
  Speaker 1: a hedge fund kind of person, and you can use
• 15:41
  Speaker 1: this in long only portfolios too. It's just a little
• 15:43
  Speaker 1: more complicated. You can go long lowbay a short high beta,
• 15:48
  Speaker 1: but you better apply a heade ratio if you're long
• 15:51
  Speaker 1: a dollar of high bay. Excuse me of low beta.
• 15:54
  Speaker 1: I sometimes get the sign wrong in interviews, I promise
• 15:58
  Speaker 1: in real life, when we're trading, you get the sign
• 16:00
  Speaker 1: right like three out of four times, and that's a
• 16:03
  Speaker 1: pretty good n hopefully everyone knows that three out of
• 16:05
  Speaker 1: four is a joke. But you go long low beta
• 16:08
  Speaker 1: short high beta. If you did that on a dollar
• 16:11
  Speaker 1: along on a dollar short, you just massively short the market.
• 16:14
  Speaker 1: Long lowbat and short high beta. Beta's work. So you
• 16:18
  Speaker 1: apply a hedge race. Here you short less than you long,
• 16:21
  Speaker 1: and you try to create something about zero beta, and
• 16:23
  Speaker 1: that has created a very you know, like all these things, imperfect.
• 16:27
  Speaker 1: It goes through bad periods, but a very attractive risk
• 16:30
  Speaker 1: adjusted return in and out of sample long term, and
• 16:34
  Speaker 1: then you can get into theories as to why it works.
• 16:36
  Speaker 1: So what where I was going to ask you is
• 16:39
  Speaker 1: if low beta returns just about the same or almost
• 16:42
  Speaker 1: the same as high beta, why the complexity? Why not
• 16:45
  Speaker 1: just own low beta and it will give you, on
• 16:48
  Speaker 1: a risk adjusted basis a better return than high bad. Well,
• 16:52
  Speaker 1: absolutely some do. But if you want to create, if
• 16:56
  Speaker 1: you're a hedge fund person trying to create an alternative
• 16:59
  Speaker 1: investment that's truly uncorrelated, low beata stocks are still highly
• 17:04
  Speaker 1: correlated to the market. So by going long low beta
• 17:08
  Speaker 1: and shorting a smaller amount of high beta, and this
• 17:11
  Speaker 1: depends on your preferences and how aggressive you want to be,
• 17:14
  Speaker 1: but you're eliminating that. Yes, you can create a I'm
• 17:18
  Speaker 1: always Lerian saying uncorrelated worries. Well, I were striving for uncorrelated,
• 17:24
  Speaker 1: but the compliance officer in my head is saying, sometimes
• 17:27
  Speaker 1: it doesn't come out to zero all the time, but
• 17:29
  Speaker 1: it comes out close. So you can create a very
• 17:32
  Speaker 1: diversifying stream of returns, where if you just want low
• 17:35
  Speaker 1: beata stocks, you're creating a more attractive stream of returns,
• 17:39
  Speaker 1: but still extremely correlated to perhaps your other holdings, so
• 17:43
  Speaker 1: it could be used in different ways. So well, I
• 17:45
  Speaker 1: think when most people think of a QR, they think
• 17:48
  Speaker 1: value shop. But as I'm doing my homework to prep
• 17:52
  Speaker 1: for our conversation and finding all my previous notes, you
• 17:56
  Speaker 1: don't just wing this. No, I try not to. I've
• 17:58
  Speaker 1: done it on a raid down val I just waned
• 18:00
  Speaker 1: it with But with you, I feel like I have
• 18:03
  Speaker 1: to come in loaded for bear. Let's say that's a
• 18:06
  Speaker 1: good accident to Wall Street joke, right on purpose, not
• 18:10
  Speaker 1: so accident. Okay, good, um, you know I have a
• 18:13
  Speaker 1: whole I have all I got a million of it, right,
• 18:15
  Speaker 1: I got am well teed up waiting for you. So
• 18:17
  Speaker 1: people tend to think of a QR as a value shop,
• 18:21
  Speaker 1: but really you're a deep quantitative shop with a lot
• 18:25
  Speaker 1: of different strategies. Let's talk a little bit about the
• 18:29
  Speaker 1: various ways you guys invest money. Well, let me, can
• 18:32
  Speaker 1: I back up for second talk about why people think
• 18:35
  Speaker 1: of us as a value Absolutely. There are a few reasons.
• 18:38
  Speaker 1: One is there was one point in the very distant
• 18:41
  Speaker 1: past where it was much closer to true. Um. Some
• 18:44
  Speaker 1: of the things like betting against made up quality or
• 18:47
  Speaker 1: profitability carry strategies or additions over time. So anyone who's
• 18:52
  Speaker 1: even not the people. A lot of people follow us,
• 18:54
  Speaker 1: but anyone has followed us from the beginning, it's not
• 18:57
  Speaker 1: crazy that they started out thinking that. Also, I just
• 19:00
  Speaker 1: wrote a piece maybe a few months ago on our
• 19:02
  Speaker 1: website with the highly defensive worried title we are not
• 19:07
  Speaker 1: just about value in parentheses except occasionally when we are.
• 19:13
  Speaker 1: Because you do get these periods and value seems to
• 19:16
  Speaker 1: be the worst culprit um. Not even even half of
• 19:20
  Speaker 1: your headlines, yeah are hedged fund now, Well, you know,
• 19:26
  Speaker 1: remind me where we were, because I'll go off on
• 19:28
  Speaker 1: tangents like you do. But but but I do write
• 19:32
  Speaker 1: a lot of head statements and I'm kind of famous
• 19:34
  Speaker 1: from my footnotes, both because I stick the humor there,
• 19:36
  Speaker 1: but also I put in all the ways I might
• 19:39
  Speaker 1: be wrong. Um, and it's it's really not a compliance reason.
• 19:43
  Speaker 1: I hope it's more of an intellectual honesty reason. Anyone
• 19:46
  Speaker 1: who's sure they're right is very, very dangerous. The footnotes
• 19:50
  Speaker 1: allow you to get past that point. Yeah, I love saying.
• 19:54
  Speaker 1: First of all, we hate to kill our darlings, anybody rights,
• 19:57
  Speaker 1: but secondly, you could very easily get stuck somewhere. All right,
• 20:01
  Speaker 1: let me just throw this in a footnote, be done
• 20:03
  Speaker 1: with it, and keep going. And it allows that. Okay,
• 20:07
  Speaker 1: I've cleared the road for the rest of my thought.
• 20:09
  Speaker 1: The footnotes have three purposes to me. There where I
• 20:11
  Speaker 1: stick the humor, they are the hedges. Here are the
• 20:15
  Speaker 1: ways that what I just said might have been bull
• 20:17
  Speaker 1: blank and uh, and I could be wrong. And finally,
• 20:20
  Speaker 1: they are sentences I love that my editor did not
• 20:23
  Speaker 1: love where we can mutually agree that that that it's
• 20:27
  Speaker 1: worth the foot that it's worth the footnote. But and
• 20:30
  Speaker 1: they do, by the way, your editor just yes, is
• 20:32
  Speaker 1: you god? I gotta deal with Cliff today? Just throw
• 20:35
  Speaker 1: it in the footnote and keep going. It's helpful to
• 20:37
  Speaker 1: have a weights paper batsket. I used to use a
• 20:41
  Speaker 1: separate doc that I would whatever it was, something something
• 20:45
  Speaker 1: something edits So when I would get stuck, I would
• 20:47
  Speaker 1: let me just move the sentence this paragraph year because
• 20:50
  Speaker 1: it's interfering with the narrative. And almost anyone who writes
• 20:53
  Speaker 1: will find like they want to make the argument seven
• 20:56
  Speaker 1: different ways because you want you want to both both
• 21:00
  Speaker 1: kill the counter argument and then jump on its grave
• 21:02
  Speaker 1: for a while. Anticipate a good editor will say, pick
• 21:07
  Speaker 1: your one or maybe two best arguments and go with those.
• 21:11
  Speaker 1: Um and and footnotes again are useful. So digression aside,
• 21:16
  Speaker 1: Let's go back to the multiple strategies. Oh, I'm not done.
• 21:19
  Speaker 1: I got to finish all right, Um, this could take
• 21:24
  Speaker 1: the rest of the time. I cleared my schedule through dinner.
• 21:27
  Speaker 1: We are multi strategy. We go through long periods, almost
• 21:30
  Speaker 1: decade long periods, where we hardly talk about value. It's one,
• 21:34
  Speaker 1: it's a relatively important factor, frankly, but it's it's not
• 21:37
  Speaker 1: a it's not a majority of what we do, and
• 21:40
  Speaker 1: we go through long periods. A good example would be
• 21:42
  Speaker 1: post GFC through twenty seventeen, where value is tough. Yeah,
• 21:47
  Speaker 1: and we had a great almost a decade. Because everything
• 21:51
  Speaker 1: else we do work um profitability, one fundamental momentum, one
• 21:56
  Speaker 1: low risk one. UM. We don't need value to work.
• 22:00
  Speaker 1: A lot of that is because value lost over that
• 22:02
  Speaker 1: period for what I will call and Gene Fama will
• 22:06
  Speaker 1: have to forgive me here rational reasons, meaning the expensive
• 22:10
  Speaker 1: companies buy and large outperformed, not on price, which they
• 22:17
  Speaker 1: did also, but they out executed. They grew more in
• 22:21
  Speaker 1: terms of earning sales, cash flows. If you are a
• 22:24
  Speaker 1: pure value investor in a quant sense, just buying low multiples,
• 22:28
  Speaker 1: you win on average because on average the price goes
• 22:30
  Speaker 1: too far the cheap stuff. And there's a risk based
• 22:34
  Speaker 1: explanation too. Again I'm pissing off Fama constantly on this,
• 22:39
  Speaker 1: but you A big part of why you win, we think,
• 22:41
  Speaker 1: is the expensive stuff is better to better company usually
• 22:45
  Speaker 1: but not that much better, not what's priced in. That's
• 22:47
  Speaker 1: on average sometimes thankfully more less often than not, but
• 22:52
  Speaker 1: still quite often the expensive stuff ends up being worth
• 22:55
  Speaker 1: it or more than worth it. And when that happens,
• 22:58
  Speaker 1: the value factor, the qual value factor very different than
• 23:01
  Speaker 1: how a Graham and Dodd investor. And we can get
• 23:03
  Speaker 1: into this later we'll use the term value. That'll suffer
• 23:07
  Speaker 1: at those times. But pretty much the rest of the
• 23:10
  Speaker 1: process you can think of, and we do it all simultaneously.
• 23:13
  Speaker 1: It's not really like one first than the other, but
• 23:15
  Speaker 1: you can think of it as trying to avoid a
• 23:17
  Speaker 1: value trap. Is this thing high profitability with things changing
• 23:21
  Speaker 1: in the right direction and low risk. Therefore someone should
• 23:25
  Speaker 1: pay a high multiple and you want to avoid value
• 23:28
  Speaker 1: just shorting that that works like a charm in a
• 23:31
  Speaker 1: rational market, in a bubble. And here again, I'll try
• 23:36
  Speaker 1: to make this the final time. I'm a gene farm
• 23:38
  Speaker 1: a heretic because I love the man who specifically says,
• 23:42
  Speaker 1: what's a bubble? Yeah? I think I'm somewhere in between.
• 23:46
  Speaker 1: I think I've seen a few in my career. I
• 23:48
  Speaker 1: think they exist. I think they are far more rare
• 23:51
  Speaker 1: than the way a lot of Wall Street refers to them.
• 23:53
  Speaker 1: A lot of Wall Street will say a stock they
• 23:55
  Speaker 1: think as expensive is in a bubble. Single stock can't
• 23:57
  Speaker 1: be in a bubble. It has, though, I do think
• 24:00
  Speaker 1: the tech bubble um and and certainly by by mid COVID,
• 24:05
  Speaker 1: we were in a various kinds of kinds of bubbles
• 24:09
  Speaker 1: in a bubble value loses. Of course, almost by definition,
• 24:13
  Speaker 1: people want the darlings, but they but the darlings are
• 24:16
  Speaker 1: not the ones who are out executing. They're the ones
• 24:19
  Speaker 1: with the greatest stories. Um. So the rest of our
• 24:22
  Speaker 1: process doesn't protect us very much. Um that is incredibly
• 24:27
  Speaker 1: painful period for our process that both this time, which
• 24:30
  Speaker 1: I think we're still in the midst of and we've
• 24:34
  Speaker 1: more than recovered from the round trip, has been good
• 24:37
  Speaker 1: but has led to some really tough times to wait out.
• 24:41
  Speaker 1: Um My holy grail would be to come up with
• 24:45
  Speaker 1: something to add to our process that would do really
• 24:47
  Speaker 1: well in bubbles but not cost us money long term,
• 24:51
  Speaker 1: because I don't think we can time these and I
• 24:54
  Speaker 1: don't think i'll I don't really think i'll find that.
• 24:57
  Speaker 1: And by the way, um this is self serving. But
• 25:00
  Speaker 1: if your worst times are going to be when everyone
• 25:02
  Speaker 1: else is partying in a bubble, and your best times
• 25:04
  Speaker 1: are going to be when that bubble is killing everyone
• 25:07
  Speaker 1: because it's coming down, it's not a terrible property. No, No,
• 25:10
  Speaker 1: it is absolutely not. So we're going to talk more
• 25:12
  Speaker 1: about value and growth later, but since you brought this up,
• 25:16
  Speaker 1: I want to just throw a couple of ideas at
• 25:18
  Speaker 1: you about that decade that followed the financial crisis, where
• 25:22
  Speaker 1: not only did growth outperform value, but really thoroughly trounced it.
• 25:27
  Speaker 1: So there are a couple of theories I've heard that
• 25:29
  Speaker 1: I think are worth discussing. First, the decade before, at
• 25:35
  Speaker 1: least the eight nine years before the financial crisis, value
• 25:39
  Speaker 1: was winning and growth was getting killed. So you started
• 25:42
  Speaker 1: from a relative uneven place. Maybe some of this was
• 25:45
  Speaker 1: catch up. But the theme I kind of find more
• 25:48
  Speaker 1: interesting is that prior to the financial crisis, Wall Street
• 25:53
  Speaker 1: and the markets had systematically undervalued intangibles patents, copyright, algorithms, etc.
• 26:02
  Speaker 1: How much of that twenty ten's rally was catch up
• 26:06
  Speaker 1: for by intangibles, It certainly could have been some of
• 26:10
  Speaker 1: the early part. A lot of quants added adjustments for
• 26:15
  Speaker 1: that along the way. Most of us are not purists
• 26:19
  Speaker 1: saying we're not going to change our models since nineteen.
• 26:23
  Speaker 1: The notion, for instance, that R and D that's viewed
• 26:25
  Speaker 1: as an expense, maybe all of it, maybe part of
• 26:29
  Speaker 1: it should actually be capitalized, which would go into book
• 26:32
  Speaker 1: value and make make a firm look not as expensive.
• 26:35
  Speaker 1: A company that spends a lot of money doing R
• 26:37
  Speaker 1: and D is investing in the future exactly, so I
• 26:41
  Speaker 1: think that that maybe part of it. I think it's
• 26:45
  Speaker 1: overdone in a few ways. One, it applies to more
• 26:49
  Speaker 1: than just price to book, but it applies most directly
• 26:53
  Speaker 1: to price to book where you're not capitalizing things like
• 26:55
  Speaker 1: R and D. It can apply to earnings, but plenty
• 26:58
  Speaker 1: of valuation measures has no applicability for price to sales.
• 27:03
  Speaker 1: Is should make it's I don't see where you think
• 27:05
  Speaker 1: about intangibles. What's the price and now what revenue is
• 27:08
  Speaker 1: it generating? And those type measures did just about as
• 27:13
  Speaker 1: bad as the ones that were contaminatable. Is that a word,
• 27:17
  Speaker 1: I'm not sure, but it is now um, So I
• 27:22
  Speaker 1: definitely think you want to account for that in places
• 27:25
  Speaker 1: like price to book in earnings, and I think collectively,
• 27:28
  Speaker 1: not just a qr UM. That has been an improvement
• 27:31
  Speaker 1: how we measure value and the world has changed a bit,
• 27:35
  Speaker 1: but we it applied, and caring about price versus anything,
• 27:41
  Speaker 1: even if it were immune to intangibles, was not a
• 27:45
  Speaker 1: very good thing until late twenty twenty since the GFC,
• 27:49
  Speaker 1: so about eleven years. So I don't think that you know,
• 27:53
  Speaker 1: the real world's always more complicated. Everyone's always looking for
• 27:56
  Speaker 1: single explanations when a lot of things have multiple explanation.
• 28:00
  Speaker 1: So I think this can definitely be part of it,
• 28:02
  Speaker 1: but I don't think it's the main driver. Nuance is
• 28:04
  Speaker 1: wildly underrated in finance, to say the least. Let's talk
• 28:08
  Speaker 1: a little bit about your research and writing. And I
• 28:11
  Speaker 1: want to quote your favorite publication, The New York Times,
• 28:15
  Speaker 1: who wrote about you. Quote. He built a public reputation
• 28:19
  Speaker 1: for his willingness to write and say what's on his mind.
• 28:22
  Speaker 1: In academia, he's known for witty, biting papers he writes
• 28:26
  Speaker 1: for such publications as The Financial Analyst Journal. I know
• 28:31
  Speaker 1: you don't write to do branding, but what do you
• 28:34
  Speaker 1: personally get out of a fairly steady stream of deep,
• 28:39
  Speaker 1: thoughtful academic papers. First year being too kind? Of course,
• 28:42
  Speaker 1: I write to do branding, Okay. I run a real
• 28:45
  Speaker 1: world business and I prefer people to think we're good
• 28:48
  Speaker 1: at this, And I think that's LEGiT's fair. If I
• 28:52
  Speaker 1: write something that people think is lousy or they disagree
• 28:55
  Speaker 1: with or misses the point, it's going to hurt our business.
• 28:58
  Speaker 1: So I won't pretend part of it is not a
• 29:01
  Speaker 1: business decision, but it's really not most of it. A
• 29:03
  Speaker 1: lot of it is the DNA. Three of our four
• 29:06
  Speaker 1: founders met at the PhD program at the University of Chicago.
• 29:10
  Speaker 1: We consider writing academic or often that that kind of
• 29:15
  Speaker 1: area in between academia and applied. You know, we've written
• 29:18
  Speaker 1: a lot of papers in the Journal of Finance, the JFE,
• 29:21
  Speaker 1: and that's true academia. A lot of our work shows
• 29:24
  Speaker 1: up in great places like the Financial Analysts Journal and
• 29:27
  Speaker 1: the Journal of Portfolio Management UM, which is kind of
• 29:30
  Speaker 1: the nexus between those two. This will sound childish, but
• 29:35
  Speaker 1: a fair amount of this is just personal consumption. We
• 29:38
  Speaker 1: enjoy being part of that world. We grew up thinking
• 29:42
  Speaker 1: part of the way you measure success is whether you
• 29:45
  Speaker 1: influence the intellectual debate um, whether and and and and
• 29:49
  Speaker 1: how you're regarded in those circles. And it's just part
• 29:52
  Speaker 1: of our utility function. I do think a few things first.
• 29:57
  Speaker 1: I always point out I don't know the exact breakdown,
• 30:01
  Speaker 1: but a fair amount of what we do is public.
• 30:03
  Speaker 1: But there's a fair amount that we think is proprietary.
• 30:06
  Speaker 1: And there are things that I would have a QR
• 30:10
  Speaker 1: researchers hunted it down and killed if they published. Yes, UM,
• 30:15
  Speaker 1: my compliance area would like you to know that I'm
• 30:19
  Speaker 1: I'm speaking hyperbole. I would like you to know that
• 30:21
  Speaker 1: I'm not um. But there are there are things we think,
• 30:25
  Speaker 1: you know even if there are things we think the
• 30:27
  Speaker 1: world will discover where you think you're somewhat ahead on
• 30:30
  Speaker 1: and we do try to walk that line on But
• 30:33
  Speaker 1: a lot of what we do is, you know, is
• 30:35
  Speaker 1: the value strategy cheap um someone role writer paper saying
• 30:40
  Speaker 1: the betting against beta strategy is really all only small
• 30:43
  Speaker 1: cap stocks and will respond to that. So it's really
• 30:46
  Speaker 1: not giving away some of the stuff which I think
• 30:49
  Speaker 1: does exist that is really unique. It does go to
• 30:53
  Speaker 1: our taste and I do think besides just the the
• 30:56
  Speaker 1: the advertising aspect, I think one que benefit to our
• 31:00
  Speaker 1: business is we hire a lot of PhDs, including professors.
• 31:05
  Speaker 1: We hire some full time and we have very strong
• 31:08
  Speaker 1: relationships where they work kind of halftime for us. Usually
• 31:10
  Speaker 1: they get to work full time for their school. Also,
• 31:13
  Speaker 1: it's a great deal can they get to multiple jobs.
• 31:17
  Speaker 1: And that's because what they're doing for us is also
• 31:19
  Speaker 1: what they're researching. It's it's actually quite beautiful. I don't
• 31:22
  Speaker 1: think we get taken nearly as seriously in that world,
• 31:25
  Speaker 1: meaning it would be a recruitment challenge. You can say
• 31:28
  Speaker 1: to a professor, you could write for your whatever you're
• 31:31
  Speaker 1: working on, you can help us, and if you ever
• 31:33
  Speaker 1: want to publish with us, we can play with Exactly.
• 31:36
  Speaker 1: It's absolutely twofold. They're allowed again, within the stricture of
• 31:40
  Speaker 1: if it's staggeringly proprietary, no, But broadly speaking, we're helping
• 31:45
  Speaker 1: their academic career also because we're okay with them writing
• 31:48
  Speaker 1: about a lot of this, and that's very attractive versus
• 31:50
  Speaker 1: a firm that says you can't say a word. Second,
• 31:54
  Speaker 1: I don't think we could have even access to these
• 31:56
  Speaker 1: people to the same degree if we weren't producers as
• 31:59
  Speaker 1: well as consumers of this research. You get a different
• 32:02
  Speaker 1: respect level when you're publishing, at least occasionally in some
• 32:05
  Speaker 1: of the same journals they are, and you've become enough
• 32:08
  Speaker 1: of an institution that affiliation with AQR doesn't look bad
• 32:13
  Speaker 1: on anybody's resume, and vice versa allows you to have
• 32:17
  Speaker 1: access to some of the top academics that are out there. Absolutely,
• 32:21
  Speaker 1: there are exceptions. I think, you know, kind of near
• 32:22
  Speaker 1: the end of twenty twenty, maybe people were being quiet
• 32:25
  Speaker 1: about that affiliation for a while. That was a short
• 32:28
  Speaker 1: term performance. Yeah, I had nothing to do with your research.
• 32:31
  Speaker 1: I'm kidding, I am. I am proud of the fact
• 32:33
  Speaker 1: that I do think a QR on an academic resume
• 32:38
  Speaker 1: doesn't at least doesn't hurt and maybe even helps. I would,
• 32:42
  Speaker 1: I would say, you're being um, humble, beyond necessary. I
• 32:47
  Speaker 1: can fake that at times. All right, Well, you know,
• 32:49
  Speaker 1: if you can fake sincerity, that's that's all right. That's right.
• 32:52
  Speaker 1: So let's talk about a couple of your publications that
• 32:55
  Speaker 1: I was amused by. In late twenty nineteen, you wrote,
• 32:59
  Speaker 1: bonds are freaking expensive? How do you invest around that thesis?
• 33:03
  Speaker 1: Because going back to the bull market and bonds that
• 33:07
  Speaker 1: began in nineteen eighty one, it felt like bonds were
• 33:11
  Speaker 1: expensive throughout the whole twenty tens. What made you finally
• 33:15
  Speaker 1: cry our uncle in twenty nineteen and say, all right,
• 33:17
  Speaker 1: no muss. Well, first of all, I'm gonna somewhat disappoint
• 33:21
  Speaker 1: you saying we do not take very big bets on
• 33:24
  Speaker 1: views like timing asset classes based on valuation. Auntie Ellman
• 33:31
  Speaker 1: and I wrote a paper I forget the exact title.
• 33:34
  Speaker 1: I think one of them was called sin a Little,
• 33:37
  Speaker 1: where we say timing the market and this applies to
• 33:40
  Speaker 1: the bond market as well as the stock market. Is
• 33:42
  Speaker 1: an investing sin, and ultimately we recommend you sin occasionally
• 33:46
  Speaker 1: and a little. Not that I've done all my homework,
• 33:50
  Speaker 1: but that was November seven, twenty nineteen. It's time to sin. Well,
• 33:55
  Speaker 1: I've researched it recently, and you wrote it three years ago.
• 33:59
  Speaker 1: I'm actually bad at keeping the catalog of my own work.
• 34:02
  Speaker 1: There's there's a lot going on here. The one year
• 34:03
  Speaker 1: referring to was about value timing, and it's really the
• 34:08
  Speaker 1: same concept. We do believe that when that if you
• 34:13
  Speaker 1: systematically follow a legit, meaning you're not forward looking, you're
• 34:17
  Speaker 1: only looking at backward data. Try to time the stock market,
• 34:20
  Speaker 1: the bond market, or even value based on how cheaper
• 34:25
  Speaker 1: rich it looks. They usually have very very modest positive
• 34:29
  Speaker 1: long term risk adjustive returns. As you said, you can
• 34:32
  Speaker 1: go through long, long periods where they're overvalued and get
• 34:36
  Speaker 1: more overvalued. Um. We do use valuation in concert with
• 34:43
  Speaker 1: things like momentum and profitability and things where where now
• 34:48
  Speaker 1: it starts to be better because it's negatively correlated to
• 34:50
  Speaker 1: those and all else equal. If you have momentum and
• 34:55
  Speaker 1: you're not overvalued, it may be better right if you
• 34:59
  Speaker 1: if you're using the momentum, how much does timing really matters?
• 35:03
  Speaker 1: It's in there with more um um that piece on
• 35:06
  Speaker 1: bonds being freaking expensive um, which is going to eventually
• 35:10
  Speaker 1: be a technical term. I'm gonna push it that I
• 35:14
  Speaker 1: stressed in there. I don't know how to time this um.
• 35:17
  Speaker 1: This is a five to ten year view. I know.
• 35:21
  Speaker 1: I tried various methods of looking at bonds. This was
• 35:25
  Speaker 1: well before the yield back up and well before the
• 35:27
  Speaker 1: inflation spike. UM. Compared to any forecast or trailing version
• 35:33
  Speaker 1: of inflation, and doing that consistently through time, bonds were
• 35:36
  Speaker 1: about tied with giving you the least they've ever given
• 35:40
  Speaker 1: you and tied for worst is I think expensive. How
• 35:45
  Speaker 1: someone reflects that if they are taking a long horizon,
• 35:49
  Speaker 1: now we can get into the tina there is no
• 35:51
  Speaker 1: alternative equities didn't look great either. UM. I think a
• 35:56
  Speaker 1: lot of why we publish these long term forecasts, and
• 35:58
  Speaker 1: my colleague at the Eelman and is really the master
• 36:01
  Speaker 1: of this is both we're interested in it and our
• 36:04
  Speaker 1: clients really seem to value it, but we don't trade
• 36:07
  Speaker 1: on a ten year forecast. UM. Let me give you
• 36:09
  Speaker 1: an example, a ten year forecast. Let's say you have
• 36:12
  Speaker 1: value has power, and that's even disputable, but we believe
• 36:15
  Speaker 1: it does. To tell you, is this going to be
• 36:17
  Speaker 1: a better or worse than normal ten years going forward?
• 36:20
  Speaker 1: Very often the answer will be we predict positive returns,
• 36:24
  Speaker 1: but considerably less than history. Okay, what do you do?
• 36:27
  Speaker 1: Are you just hedging or is that a that's genuinely
• 36:30
  Speaker 1: often a prediction from a from a model, sort of
• 36:32
  Speaker 1: like the forty percent number? What are the odds of
• 36:34
  Speaker 1: this happening? You can't be wrong when you say, yeah,
• 36:37
  Speaker 1: this stuff is always wishy washy. You know, Statisticians never
• 36:39
  Speaker 1: say we know this. They say the chance we're wrong
• 36:42
  Speaker 1: is small, but it's also intellectually accurate. You don't ever
• 36:48
  Speaker 1: know something, But imagine you have a forecast. Stocks usually
• 36:50
  Speaker 1: make ten percent a year, and don't hold in any
• 36:53
  Speaker 1: of these numbers. We think they're gonna make five percent
• 36:56
  Speaker 1: a year, but not negative. You know what someone is
• 37:00
  Speaker 1: who shorts for the next ten years or underweights against
• 37:03
  Speaker 1: a benchmark. You know what happens if you short a
• 37:06
  Speaker 1: positive but smaller than historical return, If you lose less
• 37:11
  Speaker 1: than you would over history, and you get to go
• 37:13
  Speaker 1: to your client after ten years, well, I lost your
• 37:15
  Speaker 1: money for a decade, but the good news is I
• 37:17
  Speaker 1: lost you less than I would have used lost over
• 37:20
  Speaker 1: the average decade. And it's a good example where forecasting
• 37:23
  Speaker 1: the ten year period can be interesting and can be vital,
• 37:26
  Speaker 1: right if you're anywhere from an individual to a pension fund,
• 37:30
  Speaker 1: saying how much do I have to save to retire?
• 37:33
  Speaker 1: What you're going to earn on that money is an
• 37:35
  Speaker 1: important number, but it's not necessarily a timing actionable number.
• 37:40
  Speaker 1: For years, my dad it wasn't spreadsheet. It was a
• 37:43
  Speaker 1: little piece of paper, and it was probably calculated all wrong,
• 37:46
  Speaker 1: because I believe it or not, my dad was a enumerate.
• 37:48
  Speaker 1: My mom was a math teacher, So okay, I got
• 37:50
  Speaker 1: it from somewhere. But he had that little sheet what
• 37:52
  Speaker 1: do I need to retire? Which I think everyone has
• 37:55
  Speaker 1: in some extent, including institutions. So we think that number
• 37:58
  Speaker 1: is really important. But I do not recommend trading on
• 38:02
  Speaker 1: just valuation, except that sin a little. When things get
• 38:09
  Speaker 1: I like to joke to one hundred twentieth percentile um.
• 38:12
  Speaker 1: The joke, of course, is there's no such thing as
• 38:14
  Speaker 1: one hundred twenty is beyond our lifetime experience. It's yeah,
• 38:18
  Speaker 1: it's beyond anything we've seen before. It would have been
• 38:21
  Speaker 1: twenty percent above the prior one hundred percentile. It's the
• 38:24
  Speaker 1: new hundred percentile. And we've really tried hard and we
• 38:27
  Speaker 1: can't find any rational reason for it. A small move.
• 38:31
  Speaker 1: Don't be a hero, because again, these things can get
• 38:33
  Speaker 1: crazier and crazier. That's the sin a little. We recommend
• 38:36
  Speaker 1: sinning a little, and occasionally I recommend that burying your
• 38:39
  Speaker 1: personal life also in a very different context. You can
• 38:42
  Speaker 1: apply that anyway you would like. UM. And so at
• 38:47
  Speaker 1: that point in twenty nineteen with bonds, I think we
• 38:51
  Speaker 1: would have told people we probably own a drop less
• 38:53
  Speaker 1: than normal on a really long horizon. But mostly we're
• 38:57
  Speaker 1: telling people, assume you're gonna make less now the late
• 39:02
  Speaker 1: twenty nineteen, UM, it's time for a sin I think
• 39:07
  Speaker 1: it was. I think I tried to use is it?
• 39:08
  Speaker 1: Is it pronounced vineal or venal? A mild sin um?
• 39:13
  Speaker 1: You got you got two Jews here, we need a
• 39:15
  Speaker 1: Catholic um. The what I basically said, it's time for
• 39:20
  Speaker 1: I'm gonna say vineal value sin a veneal value timing
• 39:24
  Speaker 1: sin um. And I was looking at the spread between
• 39:27
  Speaker 1: cheap and expensive. What we I want to say we
• 39:30
  Speaker 1: created this that is probably false. You never know who
• 39:33
  Speaker 1: created things privately and didn't share them. We were the
• 39:36
  Speaker 1: first to publish on this, UH, and it was back
• 39:39
  Speaker 1: in the tech bubble. This is a twenty four year
• 39:41
  Speaker 1: old result from nineteen ninety nine, very similar period to
• 39:45
  Speaker 1: particularly nineteen and twenty value killed we think irrationally, so
• 39:49
  Speaker 1: the other parts of the process don't help extremely painful
• 39:53
  Speaker 1: huge recovery UH afterwards, but during the teeth of the pain,
• 39:58
  Speaker 1: we wanted a measure of how dream it is. And
• 40:01
  Speaker 1: you can't always just look at returns. Returns tell you
• 40:04
  Speaker 1: the pain you're in. But if those returns were say,
• 40:07
  Speaker 1: justified by massive you know, earnings growth, right, if your
• 40:11
  Speaker 1: earnings double, your pee stays the same and your return
• 40:16
  Speaker 1: and that didn't make you more expensive. If it just
• 40:18
  Speaker 1: was a great result, and some of that can always
• 40:21
  Speaker 1: be in there, so you want to be prospective. So
• 40:24
  Speaker 1: we built this measure that's very simple. All the academic
• 40:27
  Speaker 1: and implied work that was published at the time sordid
• 40:30
  Speaker 1: stocks on valuation measures generally went long or overweight the cheap,
• 40:34
  Speaker 1: and shorter or underweight the expensive, and really never addressed
• 40:38
  Speaker 1: how cheap and how expensive you always get a spread.
• 40:42
  Speaker 1: I'm fond of saying otherwise your spreadsheet is broken or
• 40:45
  Speaker 1: every stock is coincidentally selling for the same price to sales.
• 40:49
  Speaker 1: But sometimes that spread is huge, and sometimes it's very tight,
• 40:53
  Speaker 1: and it does correspond to times that would intuitively strike
• 40:56
  Speaker 1: you as frothy spread. The more attractive the valuation, the
• 41:03
  Speaker 1: lower value the value stocks versus the growth. Value looks
• 41:06
  Speaker 1: better versus growth on a three to five year horizon.
• 41:09
  Speaker 1: It's also not pure. Value is never a great timing tool.
• 41:13
  Speaker 1: I think you do put yourself on the right side
• 41:15
  Speaker 1: of so called catalysts. When valuations are that extreme, bad
• 41:19
  Speaker 1: catalyst for you will hurt a little, and good catalysts
• 41:22
  Speaker 1: will help a lot. But but but it's still I
• 41:25
  Speaker 1: wrote this in late twenty nineteen because spreads were approaching
• 41:28
  Speaker 1: something I never thought i'd see again. They were approaching
• 41:32
  Speaker 1: the tech bubble peaks. Really, that's shocking. In ninety nine
• 41:36
  Speaker 1: before the what do we have off the pandemic lows
• 41:39
  Speaker 1: the sixty eight percent gain in the SMP, and then
• 41:42
  Speaker 1: the next year another twenty eight percent on top of that.
• 41:45
  Speaker 1: So this is late. This is the late we were
• 41:49
  Speaker 1: not there yet. And I'm talking about the spread between
• 41:52
  Speaker 1: cheap and expensive, not not the whole market. The entire
• 41:56
  Speaker 1: market if you like a Schiller cape or something was
• 41:58
  Speaker 1: much worse in nine nine two hit about forty five,
• 42:02
  Speaker 1: where it hit the low to mid thirties at the
• 42:04
  Speaker 1: peak in two thousand. Same way, the indicator that when
• 42:12
  Speaker 1: the schillcape is very high, the pe is very high,
• 42:16
  Speaker 1: the ten year perspective returns are low. We don't actually
• 42:18
  Speaker 1: go short something because of the schillarcape. It seems like
• 42:21
  Speaker 1: it's been on the high side for decades. Yeah, that's
• 42:24
  Speaker 1: one of the main ones Auntie and I look at
• 42:25
  Speaker 1: and saying, it's pretty hard to make your money actively
• 42:28
  Speaker 1: timing based on only the schillar cape. It is much
• 42:32
  Speaker 1: more reasonable to have a valuable ten year modification to
• 42:38
  Speaker 1: historical norms because the shillocape is high or low. But
• 42:42
  Speaker 1: in late twenty nineteen I wrote this, It's time for
• 42:44
  Speaker 1: a veneal value timing sin. I wrote that I'm ignoring
• 42:48
  Speaker 1: momentum or trend here um, which is against a lot
• 42:52
  Speaker 1: of our philosophy, and and largely because I thought this
• 42:57
  Speaker 1: was epically crazy and it could come back very very quickly,
• 43:02
  Speaker 1: just because on average, trend and momentum work on average.
• 43:05
  Speaker 1: You want to be able to do something that works
• 43:07
  Speaker 1: on average many many times. You only had one shot
• 43:09
  Speaker 1: at this, right If this came back in a three
• 43:12
  Speaker 1: month melt up for value stocks, you could miss a
• 43:16
  Speaker 1: lot of it if you if you didn't do this,
• 43:17
  Speaker 1: um so, And it turned out if I'd listened to
• 43:20
  Speaker 1: trend plus value it has worked out well for us.
• 43:23
  Speaker 1: It would have been even a little better. So there's
• 43:25
  Speaker 1: a little bit of a moral story. I give you
• 43:27
  Speaker 1: my faults as well as my but I wrote this thing,
• 43:30
  Speaker 1: and then about I don't know four or five months later,
• 43:33
  Speaker 1: I wrote a follow up piece saying, no sin has
• 43:35
  Speaker 1: ever been punished this violently and this quickly. I will
• 43:40
  Speaker 1: make an excuse, but I think as excuses go, it's
• 43:43
  Speaker 1: one of the better ones. It's called covid. Um certainly
• 43:47
  Speaker 1: that was not in my predictive power. Um Also, I
• 43:51
  Speaker 1: think the market reacted ex posts certainly crazy to covid Basically,
• 43:56
  Speaker 1: you remember, all you needed to own was Peloton and Tesla,
• 43:59
  Speaker 1: and values were going to cease to exist in the lockdown. Well,
• 44:02
  Speaker 1: Tesla started running up in anticipation of being added to
• 44:05
  Speaker 1: the S and P before just really went next The
• 44:10
  Speaker 1: value as we are almost anyone else measures it was
• 44:13
  Speaker 1: destroyed over the first six months of COVID, and it
• 44:18
  Speaker 1: turned out not to even be directionally true. The value
• 44:21
  Speaker 1: stocks fundamentals, what I call them executing outside of what
• 44:25
  Speaker 1: the market cares about, just executing their companies was actually strong,
• 44:30
  Speaker 1: even including the pandemic, so the fear did not materialize.
• 44:34
  Speaker 1: We thought those spreads got crazy, but they as approached
• 44:37
  Speaker 1: as opposed to approaching tech bubble highs. Never thought i'd
• 44:41
  Speaker 1: see in my career again after the tech bubble. Admit
• 44:43
  Speaker 1: I got that wrong. They blew past it, well passed
• 44:47
  Speaker 1: it when COVID hit, and we stuck to our guns
• 44:50
  Speaker 1: and even added to that tilt a bit. We tried
• 44:54
  Speaker 1: basically any explanation that someone from the outside, a strategist,
• 44:58
  Speaker 1: a pun did, a client, consultant, or internal that we
• 45:01
  Speaker 1: could come up with for why we might be wrong.
• 45:04
  Speaker 1: You know, the way I think of these is, you've
• 45:07
  Speaker 1: got to keep a really open mind, consider why you
• 45:09
  Speaker 1: might be wrong, test that story, and if at the
• 45:13
  Speaker 1: end of the day, there's something that's unprecedentedly crazy looking
• 45:17
  Speaker 1: and you have after keeping that open mind rejected those
• 45:21
  Speaker 1: stories for then you got to plant both feet and
• 45:25
  Speaker 1: say I will not be moved. And I think we've
• 45:29
  Speaker 1: gotten pretty good at that over time. I never wanted
• 45:33
  Speaker 1: that one thing you asked earlier about investment philosophy changing,
• 45:36
  Speaker 1: and we went off in twenty other fun tangents. One
• 45:40
  Speaker 1: major way my investment philosophy has changed is at the
• 45:43
  Speaker 1: beginning of my career thirty years ago. Really, if you
• 45:46
  Speaker 1: go back to the Goldman days, if you had asked
• 45:49
  Speaker 1: me what will make a great investor? Quantitative in my
• 45:54
  Speaker 1: sake but in general, I would have probably given you
• 45:57
  Speaker 1: an arrogant answer that, oh, just being smarter than other people,
• 46:03
  Speaker 1: you know, being smarter than other investors than the market
• 46:05
  Speaker 1: as a whole. The arrogant part is the implicit assumption
• 46:09
  Speaker 1: that kind of comes along that I'm one of those people.
• 46:11
  Speaker 1: At the I still think this is a bold statement.
• 46:16
  Speaker 1: Smart is good. I don't think I haven't changed the
• 46:19
  Speaker 1: sign on smart, but I now think long term success
• 46:24
  Speaker 1: half the battle is after keeping that open mind. You
• 46:28
  Speaker 1: can't skip that step. If you decide you're right, having
• 46:32
  Speaker 1: an extremely ordinary sticktuitiveness to you is an equal partner
• 46:38
  Speaker 1: to being smart, all right, So I'm gonna just edit
• 46:41
  Speaker 1: what you just said for a moment because I understand
• 46:44
  Speaker 1: exactly what you're saying, but I want to rephrase it.
• 46:47
  Speaker 1: So intelligence in the market, those are table stakes. You
• 46:50
  Speaker 1: have to assume everybody you're trading with and against is intelligent,
• 46:55
  Speaker 1: even if it's not true. You have to assume that
• 46:58
  Speaker 1: that's what's on the other side. Hey, I don't know
• 47:00
  Speaker 1: who's on the other side of my trade, but I'm
• 47:01
  Speaker 1: gonna assume they know at least what I know, if
• 47:04
  Speaker 1: not more. What you're also sort of suggesting is you
• 47:08
  Speaker 1: have to learn when your high conviction trades become I
• 47:15
  Speaker 1: stick to my guns and ride this out, even if
• 47:17
  Speaker 1: I'm wrong for a quarter or more or four this
• 47:21
  Speaker 1: will eventually work or eleven because I know these numbers precisely.
• 47:26
  Speaker 1: Because drawdowns have this amazing subjective. We borrow the term
• 47:31
  Speaker 1: from physics time dilation, even though we use it differently,
• 47:34
  Speaker 1: where you will look at if you look at a
• 47:37
  Speaker 1: back test or even real life returns and you see
• 47:40
  Speaker 1: a fairly horrible drawdown, but you know it ends well,
• 47:43
  Speaker 1: you look at and go. Of course I'd stick with that.
• 47:45
  Speaker 1: It's a great process. Look look at what it delivers
• 47:48
  Speaker 1: two three years. As some of these can take. They
• 47:51
  Speaker 1: are an eternity. Everyone wants quarterly numbers, which means you've
• 47:56
  Speaker 1: gone back to people eleven times, twelve times and said
• 47:59
  Speaker 1: we stink again. It becomes a proof statement the world
• 48:03
  Speaker 1: and your show is a partial antidote to this. But
• 48:06
  Speaker 1: the financial media does a great job of coming up
• 48:09
  Speaker 1: with stories why whatever's working is the truth and whoever's
• 48:12
  Speaker 1: losing right now? Um, so you're defending yourself. I do
• 48:18
  Speaker 1: think we've done a great job of sticking our guns
• 48:20
  Speaker 1: at these times. But I do worry that some years
• 48:23
  Speaker 1: at the end of my life have been used up.
• 48:25
  Speaker 1: What's the quote? There are some days at last decades
• 48:29
  Speaker 1: and some decades that well, we talked about children. That's
• 48:33
  Speaker 1: an example of decades to go by. In days, draw
• 48:35
  Speaker 1: downs are an example of days that go by. Days
• 48:39
  Speaker 1: it feels far longer than it really is. And what
• 48:42
  Speaker 1: I might call I don't think it's a real term,
• 48:44
  Speaker 1: but statistical time. When can you actually say this is wrong? Um,
• 48:49
  Speaker 1: it's pain time. When you're in pain, time goes much
• 48:53
  Speaker 1: more slowly. Time flies when you're having a good time.
• 48:56
  Speaker 1: And this is the inverse and and this is this
• 48:58
  Speaker 1: is perhaps self serving, but this raising us a rational
• 49:03
  Speaker 1: after being open minded and cynical. Sticktuitiveness to half the
• 49:07
  Speaker 1: battle is also why I think some of these things
• 49:11
  Speaker 1: last and don't get arbitraged away in a reel as
• 49:15
  Speaker 1: late as twenty seventeen, which again was a bad period
• 49:17
  Speaker 1: for value but a very good period for us, and
• 49:19
  Speaker 1: our firm grew. Most common question I'd get, particularly in
• 49:23
  Speaker 1: public forms, would be, and it's an intelligent question, if
• 49:27
  Speaker 1: this is as good as it looks like, why is
• 49:30
  Speaker 1: in an arbitraged away? And I literally I did not
• 49:34
  Speaker 1: expect or want to be as right as I was
• 49:36
  Speaker 1: over the following three years. But I would say, particularly
• 49:40
  Speaker 1: having lived through the tech bubble, you have no idea
• 49:42
  Speaker 1: how hard this can be to stick with. At times
• 49:45
  Speaker 1: it is not that easy. It seems easy now over
• 49:48
  Speaker 1: full cycles. And I am schizophrenic about this. Half of
• 49:53
  Speaker 1: me hates it because these times are hell, but half
• 49:56
  Speaker 1: of me realizes that if they didn't exist, right, this
• 50:01
  Speaker 1: every value manager on Earth, and it's probably applies to
• 50:03
  Speaker 1: non value, but this is people like everyone every discipline
• 50:07
  Speaker 1: on Earth in finance. Anyway, I'm gonna I'm gonna steal
• 50:10
  Speaker 1: your line. You don't get the full glory of the
• 50:15
  Speaker 1: upside without suffering through the out of favorite down. So
• 50:19
  Speaker 1: West Gray, someone you and I talked about before we started, Um,
• 50:23
  Speaker 1: has a great I think it's West's term. It is
• 50:27
  Speaker 1: exactly where you gonna pain no premium. Oh no, I
• 50:30
  Speaker 1: was gonna say even God would get five. An active
• 50:32
  Speaker 1: manager is a line from Lestina said no pain, no premium. Um.
• 50:37
  Speaker 1: I'm not good at I'm good at offering attribution. I'm
• 50:40
  Speaker 1: not always good at actetting. But they're both awesome. So um,
• 50:44
  Speaker 1: But I do think there's truth to that. My favorite
• 50:46
  Speaker 1: story which I'm gonna make you listen to now, Okay,
• 50:49
  Speaker 1: this is from the tech bubble. I am probably late
• 50:52
  Speaker 1: ninety nine, early two thousand, UM, at home at night
• 50:56
  Speaker 1: talking to my new wife, and I'm whining, and and
• 51:00
  Speaker 1: worse than whining, I'm cursing up a blue streak about
• 51:02
  Speaker 1: how stupid and crazy this world is, none of which
• 51:06
  Speaker 1: I can repeat even with the lax or laws today
• 51:09
  Speaker 1: on George Carlin, seven words, I still wouldn't go through
• 51:12
  Speaker 1: what I was screaming that night. And she said to me,
• 51:14
  Speaker 1: she only said one sentence. The rest was implied. She said,
• 51:17
  Speaker 1: I thought you make your money because people have some
• 51:20
  Speaker 1: behavioral biases and the rest is implied. She's saying, but
• 51:27
  Speaker 1: when those biases get really ugly and they make really
• 51:30
  Speaker 1: big mistakes, you whine like a stock pick. So wait,
• 51:33
  Speaker 1: you're a quant and your wife is a behavioralist. My
• 51:36
  Speaker 1: wife has a master's in social work, so I guess,
• 51:39
  Speaker 1: I guess behavioralist is accurate. And anyone who's been happily married,
• 51:42
  Speaker 1: which I'm going to search, she is and she can
• 51:44
  Speaker 1: Rebut if you invite her on to me for for
• 51:48
  Speaker 1: for a quarter century, is it has to be a
• 51:50
  Speaker 1: bit of a behavioralist. But what we all want, which
• 51:55
  Speaker 1: will never get, is a world where there are opportunities.
• 51:58
  Speaker 1: We're active investors. We think we make the market a
• 52:00
  Speaker 1: more efficient place. We think we make capital markets better.
• 52:03
  Speaker 1: That's important for society. But we exist to a large
• 52:06
  Speaker 1: extent to take the other side of errors and and
• 52:09
  Speaker 1: and correct that. We don't want a world with no errors,
• 52:12
  Speaker 1: because there's nothing to do. We want a world with
• 52:14
  Speaker 1: there are significant errors. And after Barrier Cliff puts the
• 52:18
  Speaker 1: position on eleven minutes later, the market realizes we were
• 52:21
  Speaker 1: right and hands us our money. That doesn't work, though,
• 52:24
  Speaker 1: And it doesn't work that way, it is almost perfectly
• 52:27
  Speaker 1: calibrated to make sure most people can't do it. Um
• 52:30
  Speaker 1: I like that phrase it I don't. I wouldn't say
• 52:33
  Speaker 1: it's almost perfectly calibrated. The countryside is littered with people.
• 52:38
  Speaker 1: By the way, I don't know how much I know
• 52:40
  Speaker 1: you spend time on Twitter. We'll talk about that on
• 52:43
  Speaker 1: Investment TikTok, which has since shrunk dramatically. I love it.
• 52:49
  Speaker 1: I never got on investment well. I access it via Twitter.
• 52:53
  Speaker 1: Do you like wrap your stuff on INVESTMENTO? Do you
• 52:58
  Speaker 1: ever do? You may put it to a son trimality
• 53:00
  Speaker 1: might be more proprible. What I love is so what
• 53:05
  Speaker 1: what TikTok calls investing TikTok? I called Dunnan Krueger TikTok.
• 53:10
  Speaker 1: And my favorite is the young couple, both good looking
• 53:14
  Speaker 1: people who choose the way we The way we make
• 53:18
  Speaker 1: money is we only buy stocks that are going up,
• 53:21
  Speaker 1: and once they stop going up, we sell them, and
• 53:23
  Speaker 1: that's how we subsidize our whole lifestyle. I am not paraphrasing.
• 53:27
  Speaker 1: That is like a verbatium quote, as as one of
• 53:30
  Speaker 1: jagadician Tipman or the two academics who really deserve prior
• 53:34
  Speaker 1: place of momentum. But it's one of the very early
• 53:36
  Speaker 1: discoveries of momentum. I always got to give them the
• 53:39
  Speaker 1: there's a little truth to what they're saying, but they
• 53:42
  Speaker 1: don't do it. Tend to do it in a very
• 53:44
  Speaker 1: disciplined way, and very often um individuals and institutions and
• 53:50
  Speaker 1: professional investors tend to be what I call momentum investors.
• 53:55
  Speaker 1: At a value time horizon, they look at something that's
• 53:58
  Speaker 1: been strong for three five years and it's got to
• 54:01
  Speaker 1: keep going and at that time arising. You want to
• 54:04
  Speaker 1: be a contrarian, not a momentum investor. So I feel obligated,
• 54:08
  Speaker 1: as a co author of some of the momentum stuff
• 54:10
  Speaker 1: to defend that a little bit. But this is not
• 54:13
  Speaker 1: adding up well for these people, I promise. One last
• 54:17
  Speaker 1: thing about it. A running joke I've had for years
• 54:21
  Speaker 1: is people, in describing this kind of thing often subtly
• 54:26
  Speaker 1: use the wrong tents. They talk about buying what has
• 54:29
  Speaker 1: been going up, but the implication is it is going up,
• 54:34
  Speaker 1: and you just gotta watch your tents. Very easy to
• 54:36
  Speaker 1: identify what has going up, and it's part of our process.
• 54:39
  Speaker 1: By the way, I would not be a pure momentum
• 54:41
  Speaker 1: trader momentum has what the geeks will call a very
• 54:44
  Speaker 1: bad left tail. Some famous periods of reversals in market,
• 54:48
  Speaker 1: the most famous spring of two thousand and nine when
• 54:51
  Speaker 1: we came off the GFC. Yeah, for multi factor it
• 54:54
  Speaker 1: was actually enoughing value did well enough that it was
• 54:57
  Speaker 1: not particularly but if you were a pure momentum investor,
• 55:00
  Speaker 1: that was a very very ugly period. So in another way,
• 55:03
  Speaker 1: I think this couple that I've never watched is probably
• 55:07
  Speaker 1: getting it wrong. Yeah, to to say the very least,
• 55:10
  Speaker 1: So I could talk about your publications forever. There's a
• 55:13
  Speaker 1: few that I feel like, why don't I throw three
• 55:17
  Speaker 1: or four at you and you tell me which ones
• 55:19
  Speaker 1: you want to talk about? Stock options and the lying
• 55:22
  Speaker 1: liars who don't want them, stock buybacks, unmitigated good or
• 55:26
  Speaker 1: incomprehensible evil. That's a paraphrase. AQR Zone research has disproven
• 55:32
  Speaker 1: the size factor and undermined long term investing or for
• 55:37
  Speaker 1: what is volatility laundering? Okay, I mean I'm gonna I
• 55:42
  Speaker 1: usually lie about this, but I'm gonna try to be
• 55:45
  Speaker 1: quick and just go go through them. Stock options and
• 55:48
  Speaker 1: the lying liars who don't want to or won't expend
• 55:51
  Speaker 1: somebody forget the exact title. It was a player in
• 55:53
  Speaker 1: an Al Franken book back in the back in the time.
• 55:55
  Speaker 1: I think Rush Limbaugh was the was the was the
• 55:58
  Speaker 1: villain in his title. This was particularly post tech bubble.
• 56:03
  Speaker 1: There's been this issue forever that stock based compensation, be
• 56:08
  Speaker 1: they options or particularly if they're options, are not considered
• 56:13
  Speaker 1: an expense of the company. That the paper I wrote,
• 56:17
  Speaker 1: does this beat to death. Let's look at the twenty
• 56:20
  Speaker 1: two ways you could argue this and why they're all stupid.
• 56:23
  Speaker 1: The best argument is the simplest one. These people accept
• 56:26
  Speaker 1: a lower salary and want these things. Obviously they're costly
• 56:32
  Speaker 1: ultimately to shareholders. What's a little said? And I won't
• 56:35
  Speaker 1: go through all the other subtleties. What's a little sad?
• 56:38
  Speaker 1: As We kind of won the battle in that current
• 56:42
  Speaker 1: accounting standards make you expense stock options, and that was
• 56:45
  Speaker 1: a change, but we also lost the battle because plenty
• 56:48
  Speaker 1: of firms, particularly in the tech world, still issue kind
• 56:51
  Speaker 1: of ProForma earnings that don't expense them, and a lot
• 56:55
  Speaker 1: of Wall Street analysts, to their shame, in my opinion,
• 56:58
  Speaker 1: let them get away with it. Use those numbers. They're
• 57:01
  Speaker 1: just not real. Let's go to one of your favorites buybacks, buybacks.
• 57:06
  Speaker 1: You gave this manichean evil or good. My positions, actually,
• 57:11
  Speaker 1: I don't say it mildly, but much more mild than that.
• 57:15
  Speaker 1: My position is they're largely in nothing. They're largely um,
• 57:20
  Speaker 1: very close to a dividend, you can say, and you
• 57:23
  Speaker 1: can argue there are a more tax efficient, more tax
• 57:25
  Speaker 1: efficient dividend. And by the way, I don't take a
• 57:27
  Speaker 1: great stance on how they should be taxed. That's a
• 57:29
  Speaker 1: separate issue. I take a stance on the idea that
• 57:32
  Speaker 1: they're evil. Um. And by the way, that this is
• 57:35
  Speaker 1: one of the fun ones today because it's horseshoe theory.
• 57:38
  Speaker 1: Both the left and the right hate buybacks. Yeah, it's
• 57:41
  Speaker 1: kind of interesting, isn't it. It's just, you know, for
• 57:44
  Speaker 1: different levels of numeracy and paranoia. Um, they think this
• 57:49
  Speaker 1: is just a scam. Again, there could be forty arguments
• 57:52
  Speaker 1: for why buybacks are neutral and are not the evil
• 57:56
  Speaker 1: thing you think. We give you one argument. Sure, in
• 57:59
  Speaker 1: a world where companies do buy backs and other companies don't,
• 58:02
  Speaker 1: the companies that do buy backs tend to perform better
• 58:05
  Speaker 1: than the ones that don't. They that's been a very
• 58:07
  Speaker 1: mild effect. But it has been true, and it's been
• 58:10
  Speaker 1: a relevvely short term. Now is it. Whether it's causation
• 58:13
  Speaker 1: or correlation is a whole nother conversation. If it is causation,
• 58:16
  Speaker 1: the most likely estimate, which is not crazy, as management
• 58:20
  Speaker 1: has more information than you do about about the stock.
• 58:23
  Speaker 1: And by the way, if they, if they, if they
• 58:26
  Speaker 1: do believe the stock is undervalued, and very often this
• 58:29
  Speaker 1: is public information. They're just saying we're really undervalued, right,
• 58:33
  Speaker 1: they should be buying things back. It's voluntary whether you sell,
• 58:37
  Speaker 1: and those who don't choose to sell will benefit from that.
• 58:40
  Speaker 1: So I have no problem with that. It is a
• 58:43
  Speaker 1: relevely small effect. But that's interesting because you make such
• 58:46
  Speaker 1: a I've watched you. You and I have debated it
• 58:49
  Speaker 1: on Twitter. But I've watched you and I'm not so
• 58:52
  Speaker 1: far from your position. But I've watched you demolish people
• 58:55
  Speaker 1: on Twitter as if it's a giant. Hey, this is
• 58:58
  Speaker 1: like the value effect. It's not. It's it's much smaller.
• 59:02
  Speaker 1: If I've done that. That is one of my many
• 59:04
  Speaker 1: Twitter exaggerations. I will not claim that I always keep
• 59:07
  Speaker 1: a calm head on Twitter. Um, but the simplest way
• 59:11
  Speaker 1: to explain it now, let me give you two quick ones.
• 59:14
  Speaker 1: One is most of it is a re allocation or
• 59:17
  Speaker 1: other stocks. When most investors get participate in a buy back,
• 59:21
  Speaker 1: they put it in back in the stock market, run
• 59:24
  Speaker 1: in another stock. It's a diversifier. So you know, a
• 59:27
  Speaker 1: company that has great investment opportunities is seeking more capital
• 59:32
  Speaker 1: and a company that doesn't should be giving capital back.
• 59:35
  Speaker 1: So that's how it's supposed to work. Second is even
• 59:37
  Speaker 1: more basic, and this does not get enough play. The
• 59:41
  Speaker 1: shareholders own earn the money. They own the money. If
• 59:45
  Speaker 1: there's cash on the balance sheet or assets on the
• 59:48
  Speaker 1: balance sheet, the shareholder, it's the shareholders if they choose
• 59:51
  Speaker 1: to move it to There's only one group that's allowed
• 59:54
  Speaker 1: to get upset at them if they choose to move
• 59:56
  Speaker 1: it from the company to their own balance sheet, which
• 59:59
  Speaker 1: is not stealing because they owned it when it was
• 1:00:01
  Speaker 1: in the company. Right. Bonds, often corporate bonds can have
• 1:00:05
  Speaker 1: covenants that say you can't lever beyond a certain point,
• 1:00:09
  Speaker 1: and if buybacks pushed past that point, then there's a
• 1:00:12
  Speaker 1: legitimate argument, but that's contractual. The bond holders should be
• 1:00:16
  Speaker 1: a lawsuit that would stop that. I think I think
• 1:00:19
  Speaker 1: got to be pretty much. I think UM buybacks also
• 1:00:22
  Speaker 1: get a little demonizes because incorporations do do this UM
• 1:00:26
  Speaker 1: for some reason I do not understand. They often couple
• 1:00:30
  Speaker 1: them with the executive stock option grants we talked about before,
• 1:00:35
  Speaker 1: and I think there is a little subterfuge going on there.
• 1:00:37
  Speaker 1: They don't want to share account to change a whole lot,
• 1:00:41
  Speaker 1: and because questions will be asked. I think that's the
• 1:00:43
  Speaker 1: most valid criticism is, hey, you're really hiding all this
• 1:00:47
  Speaker 1: exact compensation by doing a expense and it jibes with
• 1:00:51
  Speaker 1: the lying liars stuff, But it is not the buyback
• 1:00:54
  Speaker 1: per se that's bad. The buyback is still a neutral.
• 1:00:57
  Speaker 1: They're paying a market price for the security. So I
• 1:01:00
  Speaker 1: wish people would be more precise. So largely on buybacks,
• 1:01:03
  Speaker 1: I think, And again maybe in contrast to some of
• 1:01:06
  Speaker 1: my more aggressive things I've tweeted on occasion, I want
• 1:01:10
  Speaker 1: you to find those tweets. Yeah they're I think you've
• 1:01:13
  Speaker 1: deleted a bunch there. I don't know if they're around
• 1:01:15
  Speaker 1: where anyone could well. I challenge you to find them,
• 1:01:17
  Speaker 1: knowing I've deleted them that this is part of my strategy.
• 1:01:20
  Speaker 1: But it regardless if you look at what we wrote.
• 1:01:25
  Speaker 1: The derangement we write about is how much people hate
• 1:01:27
  Speaker 1: them buy back derangement syndrome. Yeah. We titled both a
• 1:01:32
  Speaker 1: h an academic paper in the journal Portfolio Management and
• 1:01:35
  Speaker 1: a Wall Street Journal editorial. So you know, from whence
• 1:01:37
  Speaker 1: the derangement comes? I know, trump arrangement. No well no, no, no,
• 1:01:42
  Speaker 1: by the way, it used to go back to bushed arrangements. Oh,
• 1:01:44
  Speaker 1: it's not just trying to remember it from yeah. No,
• 1:01:46
  Speaker 1: So you know, when you get older, the memory start
• 1:01:49
  Speaker 1: at some point there was there a Millard Fillmore direction.
• 1:01:52
  Speaker 1: I'm not that old, I'm not that much older than you.
• 1:01:54
  Speaker 1: But it's just all of the anecdotal examples that people
• 1:01:59
  Speaker 1: my two faces. Back in the day, Dell was notorious
• 1:02:04
  Speaker 1: for top ticking the market when announcing their stock buybacks.
• 1:02:08
  Speaker 1: But now you have the train derailments and they had
• 1:02:11
  Speaker 1: a buyback last year, so of course the buyback is
• 1:02:14
  Speaker 1: the reason why they didn't upgrade their breaks, and that
• 1:02:17
  Speaker 1: example become it sort of colors everybody's here. You respect them,
• 1:02:22
  Speaker 1: Medigliani and Miller. Firms should and I'm not saying theories perfect,
• 1:02:27
  Speaker 1: but as a starting point, firms should pursue all positive
• 1:02:30
  Speaker 1: net present value projects. And I do think most management tries,
• 1:02:34
  Speaker 1: I think the short terminism can be exaggerated. So if
• 1:02:39
  Speaker 1: they need the money they should be investing. They can
• 1:02:42
  Speaker 1: raise money in debt and a lot a lot of
• 1:02:44
  Speaker 1: the buybacks, by the way, and you could argue leverage
• 1:02:47
  Speaker 1: has its own problems. But have been a corporate treasurers
• 1:02:51
  Speaker 1: thinking that bonds were more overvalued than stocks, so they
• 1:02:54
  Speaker 1: should buyback stock and sell another arge during the twenty tens,
• 1:02:58
  Speaker 1: it's very rational to borrow cheap and buy back stock. Yes, essentially,
• 1:03:04
  Speaker 1: And and that means and we show this in our
• 1:03:07
  Speaker 1: in our more formal paper, there wasn't room to do
• 1:03:09
  Speaker 1: it in the Wall Street Journal that investment has really
• 1:03:12
  Speaker 1: not suffered on net. You can always pick and choose,
• 1:03:14
  Speaker 1: and in an argument, every side pixes and chooses their
• 1:03:17
  Speaker 1: favorite examples. This is a company that brought back that
• 1:03:20
  Speaker 1: then did great and uh and and you know Apple
• 1:03:23
  Speaker 1: has brought back a ton and sometimes they're criticized for that,
• 1:03:26
  Speaker 1: and I'm like, it's it's well, it's fairly well, It's
• 1:03:28
  Speaker 1: worked out fairly well for them. They don't say Buffett.
• 1:03:31
  Speaker 1: They also have a ridiculous amount of cash. Apple on
• 1:03:33
  Speaker 1: the book, so it's not like they needed the money.
• 1:03:37
  Speaker 1: Buffett is a huge defender of of of buybacks, so
• 1:03:41
  Speaker 1: I think I'm mainly yelling into avoid saying this is
• 1:03:44
  Speaker 1: just not that big a deal, but it's politically too
• 1:03:47
  Speaker 1: good for populace of both stripes to yell about to
• 1:03:51
  Speaker 1: go away. Huh really really interesting. Last week actually I
• 1:03:55
  Speaker 1: interviewed Maria Vassalu from Goman Sack's Asset Management, who painted
• 1:04:00
  Speaker 1: out that within the small cap effect really is a
• 1:04:04
  Speaker 1: microcap effect and if the small cap has effect has disappeared, Well, first,
• 1:04:10
  Speaker 1: let's let's talk about your research. Was there ever truly
• 1:04:13
  Speaker 1: a small cap effect? I'll start out saying I don't
• 1:04:17
  Speaker 1: know if I don't think I've met Maria, but she's right, Um,
• 1:04:21
  Speaker 1: was there ever? Is the right question. There's a little
• 1:04:24
  Speaker 1: bit of a of a Keanu Reeves matrix thing going
• 1:04:28
  Speaker 1: on here. Is there really a spoon red pillars? Yea.
• 1:04:32
  Speaker 1: Our Our view is there never really was one. Our
• 1:04:36
  Speaker 1: view is not that there was one and it got
• 1:04:38
  Speaker 1: arbitraged away, which is a different way to view it.
• 1:04:41
  Speaker 1: UM essentially or in the early eighties, UM, the original
• 1:04:46
  Speaker 1: capital asset pricing studies look pretty good. Seemed like beta
• 1:04:50
  Speaker 1: was rewarded, and that later got revised also um but
• 1:04:54
  Speaker 1: then hole started appearing in that pure one factor world.
• 1:04:58
  Speaker 1: The first major one was that even after accounting for beta,
• 1:05:04
  Speaker 1: small cops caps generally have higher betas they move more.
• 1:05:08
  Speaker 1: If the market goes up five percent on average, they
• 1:05:11
  Speaker 1: might go up seven percent as as a group, So
• 1:05:14
  Speaker 1: you're suggesting it's just a more risk they're they're more
• 1:05:17
  Speaker 1: volatile as a rule, and beta's composed of correlation and volatility.
• 1:05:22
  Speaker 1: I think it's more of the volatility than the correlation driving,
• 1:05:24
  Speaker 1: but they're higher beta. The cap m or all theory
• 1:05:28
  Speaker 1: says you should make more money if you're higher beta,
• 1:05:31
  Speaker 1: but not more than that. And the findings were not
• 1:05:36
  Speaker 1: that small cap makes more money. That's not that interesting.
• 1:05:40
  Speaker 1: The findings with small cap makes more money than implied
• 1:05:43
  Speaker 1: by their higher betas, so even more that over years
• 1:05:50
  Speaker 1: some of the work a lot of the work being ours,
• 1:05:52
  Speaker 1: but not all of it has been revised. Two big revisions.
• 1:05:56
  Speaker 1: The second one we really were a big part of
• 1:05:59
  Speaker 1: the first was simply revisions to the databases. Small cap
• 1:06:03
  Speaker 1: stocks delist more often than large cap stocks. In any study,
• 1:06:09
  Speaker 1: you need to make an assumption about what people actually
• 1:06:12
  Speaker 1: got out of that delisting way. You're suggesting this whole
• 1:06:15
  Speaker 1: thing is just survivorship bias a little bit though though
• 1:06:18
  Speaker 1: not you know, with well intentioned people had assumptions for
• 1:06:23
  Speaker 1: delisting returns. The general consensus, and my expertise does not
• 1:06:27
  Speaker 1: lie here, but the general consensus is they underestimated the
• 1:06:31
  Speaker 1: negativity of those delisting returns, all else equal, making small
• 1:06:36
  Speaker 1: cap a little less attractive because your data has has
• 1:06:39
  Speaker 1: not accounted for enough. Where we jumped in is again,
• 1:06:44
  Speaker 1: remember we're not talking about the small beat large. We're
• 1:06:46
  Speaker 1: talking about does it beat it beyond its beta? Is
• 1:06:50
  Speaker 1: those betas, and we're not the only ones to do
• 1:06:53
  Speaker 1: this too. Shoals and Williams looked at it a while ago.
• 1:06:57
  Speaker 1: Those betas are generally under estimated by conventional techniques. If
• 1:07:02
  Speaker 1: you do a quant geek's favorite thing, regress the monthly
• 1:07:05
  Speaker 1: returns on small versus large on the market, you get
• 1:07:09
  Speaker 1: up beta more than you get a positive beta. Small
• 1:07:13
  Speaker 1: has a higher beta than large, so if you go
• 1:07:15
  Speaker 1: long small and short large, you have a positive beta
• 1:07:18
  Speaker 1: left over. A lot of small doesn't trade every day.
• 1:07:22
  Speaker 1: If you look over a few months, those betas increase.
• 1:07:25
  Speaker 1: If you if you do statistical work, we include the
• 1:07:29
  Speaker 1: response of small not just to this month's cap weighted market,
• 1:07:32
  Speaker 1: but to the last few. It tends to get into
• 1:07:36
  Speaker 1: the small cap prices slowly, but that's still real. So
• 1:07:39
  Speaker 1: we've underestimated their betas. If their betas are underestimated, meaning
• 1:07:44
  Speaker 1: we thought they were too low, we've overestimated their alphas.
• 1:07:48
  Speaker 1: Their betas should have been higher. More of their return
• 1:07:51
  Speaker 1: should be just attributed to the market going up, and
• 1:07:55
  Speaker 1: it's not. And basically between those two things, there's nothing
• 1:07:59
  Speaker 1: going on small caps and this is not a bad thing.
• 1:08:02
  Speaker 1: Small caps need to be priced reasonably efficiently versus large caps.
• 1:08:06
  Speaker 1: One thing, by the way, that's kind of surprising, given
• 1:08:09
  Speaker 1: how much more coverage is on the better known big
• 1:08:12
  Speaker 1: caps and how often these are orphans. Well, I think
• 1:08:16
  Speaker 1: that does show up in something you anticipated me. I'm
• 1:08:19
  Speaker 1: about to say, these get confused occasionally. I do think
• 1:08:22
  Speaker 1: many of the factors anomalies affects that quants and academics
• 1:08:28
  Speaker 1: believe in value being again, maybe maybe the poster child,
• 1:08:32
  Speaker 1: but not the only one, do work better among small caps.
• 1:08:36
  Speaker 1: So long cheap short expensive in small caps and certainly
• 1:08:42
  Speaker 1: has a higher gross risk adjusted return net, they're more
• 1:08:46
  Speaker 1: expensive to trade. I still think that's going to be
• 1:08:48
  Speaker 1: the truth the case net, but it's it's a little
• 1:08:51
  Speaker 1: more arguable. But I have no problem with someone saying
• 1:08:54
  Speaker 1: I love small value because I think value probably does
• 1:08:57
  Speaker 1: work better. That's very small. But the so called small
• 1:09:02
  Speaker 1: cap effect, it often gets conflated with that. It is
• 1:09:05
  Speaker 1: not small value. It's that small is better than large
• 1:09:10
  Speaker 1: and just and that we're finding is no longer. We
• 1:09:16
  Speaker 1: don't think it's supported, at least if you only adjust
• 1:09:18
  Speaker 1: for beta. Just to make everyone's head hurt. We have
• 1:09:23
  Speaker 1: an additional paper showing that using the more modern factors
• 1:09:27
  Speaker 1: that weren't even around in the eighties when guys like
• 1:09:30
  Speaker 1: Ralph Bonds and a few others were were looking at
• 1:09:32
  Speaker 1: the small cap effects, so I can't say they should
• 1:09:34
  Speaker 1: have used them. Small cap tend to be bad on
• 1:09:39
  Speaker 1: some of the newer factors betting against beta profitability, they
• 1:09:44
  Speaker 1: tend to be fairly unprofitable. If you adjust for that,
• 1:09:48
  Speaker 1: they should do even worse in a modern sense, and
• 1:09:52
  Speaker 1: ironically you get back to a small cap effect, but
• 1:09:55
  Speaker 1: only if you adjust for kind of the full penalty
• 1:09:58
  Speaker 1: of modern factors. Small cap against the market is not
• 1:10:03
  Speaker 1: a bargain. What about the microcap against the small cap?
• 1:10:07
  Speaker 1: Why does think to have something well? Again, even including that,
• 1:10:11
  Speaker 1: I think we see most of the small cap effect
• 1:10:13
  Speaker 1: go away when you adjust for the delisting again and
• 1:10:16
  Speaker 1: the and the higher beat is from illiquidity. But whatever,
• 1:10:19
  Speaker 1: if there's something left, it is disproportionately coming from microcap,
• 1:10:23
  Speaker 1: that's true. Let's talk a little bit about one of
• 1:10:27
  Speaker 1: the things we haven't discussed, which is macro, and twenty
• 1:10:30
  Speaker 1: twenty two was kind of a good year for macro
• 1:10:33
  Speaker 1: at least if you want on the right side of
• 1:10:35
  Speaker 1: the trade. Um Why why why was last year so unique? Well,
• 1:10:42
  Speaker 1: it's it's interesting we haven't talked. We've focused largely on
• 1:10:44
  Speaker 1: stock selection and value um. A big part of our
• 1:10:48
  Speaker 1: business is actually macro um. It is I often say,
• 1:10:52
  Speaker 1: we do less than people think they think we do
• 1:10:54
  Speaker 1: all these different things, but a lot of what we
• 1:10:56
  Speaker 1: do in macro and an early inside of ours, when
• 1:11:00
  Speaker 1: frankly about nineteen ninety five at Goldman Sachs was if
• 1:11:04
  Speaker 1: you look at the factors again, it was really value,
• 1:11:08
  Speaker 1: momentum and size at that point and apply them to
• 1:11:11
  Speaker 1: macro decisions what country to be in, what currency to
• 1:11:14
  Speaker 1: be in they had similar efficacy. They worked in the
• 1:11:18
  Speaker 1: statistical sense. I always say statistical sense. If your car
• 1:11:21
  Speaker 1: work like this, you'd fire your mechanic. Right If your
• 1:11:24
  Speaker 1: car work six out of ten days, that would be
• 1:11:26
  Speaker 1: pretty bad, but it's pretty great as a as a strategy.
• 1:11:31
  Speaker 1: So we've been using value momentum even for market direction.
• 1:11:35
  Speaker 1: Trend has become an increasingly it's probably the most important
• 1:11:38
  Speaker 1: part of what we do in the macro side, with
• 1:11:41
  Speaker 1: economic trends, not just price trends being a releavely recent
• 1:11:45
  Speaker 1: innovation and super important and last year trend following in particular,
• 1:11:52
  Speaker 1: which is a subset of macro I will tell you
• 1:11:54
  Speaker 1: we also run some where we consider relative value and
• 1:11:57
  Speaker 1: carry and other things, but we run some really focused
• 1:12:00
  Speaker 1: on both economic and price trend factors um that we've
• 1:12:05
  Speaker 1: always described as having kind of a dual mandate. Long term,
• 1:12:09
  Speaker 1: it's supposed to make money. It's not a crazy thing
• 1:12:12
  Speaker 1: for an investment to do right, but it's supposed to
• 1:12:16
  Speaker 1: do particularly well in really bad times. This is a
• 1:12:21
  Speaker 1: managed futures industry, the CTA industry. Trend following has had
• 1:12:25
  Speaker 1: that property over time, meaning commodities, currencies, anything that you
• 1:12:29
  Speaker 1: bond with commodities, currencies, equities, bond futures, and we've actually
• 1:12:34
  Speaker 1: expanded that to what we call a lot of alternative
• 1:12:38
  Speaker 1: trends UM more esoteric commodities, yield curve shape trades. Even
• 1:12:44
  Speaker 1: the equity factors themselves, even though we're talking macro show. Yeah,
• 1:12:49
  Speaker 1: show some tendency to trend, but that dual mandate is
• 1:12:53
  Speaker 1: a little bit different than most most investments. You would
• 1:12:56
  Speaker 1: like a low correlation to other things. Um sometimes you
• 1:12:59
  Speaker 1: accept the medium or high correlation, but it's mostly about
• 1:13:02
  Speaker 1: the risk adjusted return of the acid itself. Trend following
• 1:13:07
  Speaker 1: has always, I think forever people are looking for both,
• 1:13:11
  Speaker 1: and it's not free. You can create a higher risk
• 1:13:14
  Speaker 1: adjusted return if you don't want to hedge giant draw
• 1:13:16
  Speaker 1: downs in the equity market, but this combination has always
• 1:13:19
  Speaker 1: been a nice edition of portfolios and attractive to people.
• 1:13:23
  Speaker 1: It got very loved after the GFC when it really
• 1:13:28
  Speaker 1: did what it was supposed to and you had a
• 1:13:30
  Speaker 1: giant trend that lasted, it felt like forever. Yeah, And
• 1:13:34
  Speaker 1: I should say trend following is not a panacea. You
• 1:13:37
  Speaker 1: have bolts from the blue. Neither of these were very
• 1:13:40
  Speaker 1: bad for trend following, but they weren't. They didn't make it.
• 1:13:43
  Speaker 1: Didn't make a lot of money either October nineteenth of
• 1:13:45
  Speaker 1: eighty seven, which saw a small trend start to start
• 1:13:49
  Speaker 1: in about August, but not that much. And obviously COVID
• 1:13:54
  Speaker 1: was trend following was not how to protect yourself. There
• 1:13:56
  Speaker 1: was no trend to follow out of the blue. A
• 1:13:58
  Speaker 1: pandemic hit exogeneous shocks will do that, but most serious
• 1:14:04
  Speaker 1: bear markets we've seen aren't a day. They are a
• 1:14:08
  Speaker 1: few years of pent up crazy or an economic event
• 1:14:13
  Speaker 1: that leads to a few years the other way. And
• 1:14:14
  Speaker 1: that's where trend following really shines. The decade after ironically
• 1:14:20
  Speaker 1: pretty similar to value well not as bad. Trend following
• 1:14:23
  Speaker 1: simply didn't make a lot of money in the decade
• 1:14:25
  Speaker 1: after the DFC, unlike value loss money versus growth, value
• 1:14:30
  Speaker 1: loss versus growth. But still people started to lose interest
• 1:14:34
  Speaker 1: in it. They got excited after the DFC. And then
• 1:14:38
  Speaker 1: if there is an insurance like aspect, which I think
• 1:14:40
  Speaker 1: there is, to trend following ten years of a wild
• 1:14:43
  Speaker 1: bull market, a lot of people start going why do
• 1:14:45
  Speaker 1: I need Why have I been wasting this money on insurance?
• 1:14:48
  Speaker 1: And then last year and not I think it started
• 1:14:53
  Speaker 1: in parts of twenty twenty one, and it's it's still
• 1:14:55
  Speaker 1: continuing a little bit this year. But last year was
• 1:14:59
  Speaker 1: a blowout year for both trend following and UM and
• 1:15:04
  Speaker 1: even the more general macro investing that considers relative value.
• 1:15:08
  Speaker 1: And it's exactly the year it's supposed to help him.
• 1:15:11
  Speaker 1: UM consider a rival insurance strategy. Always owning puts sounds expensive.
• 1:15:17
  Speaker 1: It is expensive, and sounds like it doesn't work most
• 1:15:19
  Speaker 1: of the time. I've had huge Twitter fights whit and
• 1:15:21
  Speaker 1: it seemed to leave about this UM. But like you
• 1:15:24
  Speaker 1: and Bose Weinstein both seemed to go at him politely
• 1:15:29
  Speaker 1: about and you both have the shot it out. I
• 1:15:31
  Speaker 1: did what I would I always do. I started out politely.
• 1:15:33
  Speaker 1: It didn't necessarily it didn't necessarily end there. And I
• 1:15:37
  Speaker 1: will say I think it seems absolutely brilliant. He's just
• 1:15:40
  Speaker 1: also insufferable at times. It's a dangerous combination. You know,
• 1:15:45
  Speaker 1: I may be less brilliant and less insufferable, but I
• 1:15:48
  Speaker 1: might have some of the same characteristics, which is a
• 1:15:50
  Speaker 1: dangerous mix. When you the differences, you bring a certain
• 1:15:53
  Speaker 1: degree of personal humor and charm. Well, he can perhaps
• 1:15:57
  Speaker 1: does not make fun of himself that so you know,
• 1:16:01
  Speaker 1: will you all exist on a continuum and everybody sort
• 1:16:04
  Speaker 1: of slots in in different places. Absolutely, I find you
• 1:16:08
  Speaker 1: much more accessible and warm and fuzzy. Listen, his books
• 1:16:13
  Speaker 1: are groundbreaking. He's no one's going to argue that he's
• 1:16:16
  Speaker 1: not brilliant. You're more accessible on Twitter than he is.
• 1:16:20
  Speaker 1: I do try to be um the so a strategy
• 1:16:24
  Speaker 1: he's been involved with for a long time. That kind
• 1:16:27
  Speaker 1: of corresponds to his black Swan books. It's a very
• 1:16:29
  Speaker 1: good book, m's It basically is one liner a giant
• 1:16:32
  Speaker 1: things happen more often than we quote normal model, normal
• 1:16:36
  Speaker 1: distributions say. But it's an important message. He got very
• 1:16:40
  Speaker 1: lucky that he wrote a timeless message about an hour
• 1:16:43
  Speaker 1: and a half before the GFC. Right, But my colleaguante
• 1:16:48
  Speaker 1: Elmanan is getting very lucky in that same he wrote
• 1:16:50
  Speaker 1: a book called Investing in a Low Expected Return of
• 1:16:52
  Speaker 1: Environment right before twenty twenty two. So you can write
• 1:16:56
  Speaker 1: something it's absolutely right and correct, but timing luck thirty
• 1:16:59
  Speaker 1: six and we're almost there. When did that come out? Like,
• 1:17:03
  Speaker 1: at least one of the book was none. The difference
• 1:17:05
  Speaker 1: between Auntie and na seems books they're actually real and meaningful,
• 1:17:12
  Speaker 1: and that book was just nothing but none for pure
• 1:17:15
  Speaker 1: fun at the end. You can ask me about that again.
• 1:17:17
  Speaker 1: But the strategy that seemed favors is buying insurance through
• 1:17:21
  Speaker 1: the options market tests of the simplest form, as my
• 1:17:25
  Speaker 1: colleague Auntie has done. Say that loses a boatload of money,
• 1:17:29
  Speaker 1: including its huge victories in crashes. I have no problem
• 1:17:33
  Speaker 1: with someone liked to seem saying, actually, we we whoever
• 1:17:36
  Speaker 1: he works with, does this much smarter than pure rolling
• 1:17:39
  Speaker 1: of puts. It's not equal size every year, A million
• 1:17:42
  Speaker 1: other ways to spend that. But but he doesn't like
• 1:17:44
  Speaker 1: the basic finding that Aunty is. He wants both and
• 1:17:48
  Speaker 1: I won't give him both. Um puts work really well
• 1:17:51
  Speaker 1: and crashes Yeah right, March of twenty twenty October nineteenth
• 1:17:55
  Speaker 1: of eighty seven. Huge. Uh. The their their leakages in
• 1:18:01
  Speaker 1: terms of premium over the long haul that doesn't have
• 1:18:03
  Speaker 1: crashes is larger than what they make. And there are
• 1:18:08
  Speaker 1: some bear markets that they failed to help with. They
• 1:18:11
  Speaker 1: did not particularly help in twenty twenty two. There was
• 1:18:14
  Speaker 1: no crash quick well, no too slow for the puts
• 1:18:18
  Speaker 1: um in twenty and then you snapped right, But that
• 1:18:22
  Speaker 1: was March of twenty twenty I'm sorry now, you're you
• 1:18:24
  Speaker 1: had it right given your time period. The puts helped
• 1:18:27
  Speaker 1: like crazy then, and managed futures didn't. In twenty twenty two,
• 1:18:32
  Speaker 1: managed futures helped like crazy because it was a long
• 1:18:34
  Speaker 1: slow developed in June, and puts, I don't think, really
• 1:18:38
  Speaker 1: helped at all. The premiums got very high and there
• 1:18:41
  Speaker 1: was no big crash, and that's not an environment. If
• 1:18:45
  Speaker 1: you like puts more than I do, you think the
• 1:18:47
  Speaker 1: cost is lower. A portfolio of the two as an
• 1:18:51
  Speaker 1: insurance product could make a lot of sense because they
• 1:18:54
  Speaker 1: hedge different things. Puts hedge bolt from the blue crashes
• 1:18:59
  Speaker 1: U and trend following hedges long slow crashes. I will
• 1:19:03
  Speaker 1: make the self serving claim that long slow crashes are
• 1:19:08
  Speaker 1: tend to be more deliterious to your wealth long term things.
• 1:19:11
  Speaker 1: A lot of short term crashes reversed soon afterwards. They're
• 1:19:14
  Speaker 1: really about surviving. UM, So I will make a small
• 1:19:19
  Speaker 1: commercial for how we do it. But if someone a
• 1:19:21
  Speaker 1: little bit more reasonable than the seam wanted to go,
• 1:19:23
  Speaker 1: all right, it is costly, but it's less costly than
• 1:19:26
  Speaker 1: you think, and maybe we should combine these two. I'm
• 1:19:29
  Speaker 1: I'm I'm wide open to that, but in twenty twenty two,
• 1:19:34
  Speaker 1: and frankly, I don't think you know going forward, I'm mildly.
• 1:19:39
  Speaker 1: I don't do a lot of timing of our own strategies.
• 1:19:42
  Speaker 1: I said, it's a sin. Most of what I recommend
• 1:19:45
  Speaker 1: is always having some allocation to trend following. There'll be long,
• 1:19:49
  Speaker 1: boring periods where I hopefully won't lose you a ton,
• 1:19:53
  Speaker 1: but won't make you a ton. That's usually a pretty
• 1:19:55
  Speaker 1: good time for the rest of your portfolio. Over time,
• 1:19:58
  Speaker 1: it should add up to a positive, which it has,
• 1:20:01
  Speaker 1: and it should help a lot in these one two
• 1:20:03
  Speaker 1: year gigantic events. If I had to time it, I'm
• 1:20:08
  Speaker 1: a little more bullish than normal. It tends to do
• 1:20:10
  Speaker 1: better when there's great macro vall when people don't know
• 1:20:13
  Speaker 1: what's gonna happen. Boring times where nothing is really going
• 1:20:16
  Speaker 1: on is not your time for puts. And I do
• 1:20:18
  Speaker 1: think we have you know, I'm a little leery of
• 1:20:21
  Speaker 1: saying this because I laugh when people are always saying
• 1:20:23
  Speaker 1: now is special, So it's dangerous to go. We have
• 1:20:26
  Speaker 1: more uncertainty now than normal, But I do think I'm
• 1:20:29
  Speaker 1: gonna do it. I do think we have more macro
• 1:20:31
  Speaker 1: uncertainty now than normal, so I like it a little
• 1:20:33
  Speaker 1: more than normal. But mostly our argument is, you don't
• 1:20:36
  Speaker 1: know when this is gonna happen. You don't know if
• 1:20:37
  Speaker 1: we're gonna have another two years of this, and by
• 1:20:40
  Speaker 1: the way, if we don't have another two years of disaster,
• 1:20:42
  Speaker 1: you're pretty happy everywhere else. So let me let me
• 1:20:45
  Speaker 1: push back on the more uncertainty, okay, because I cringe
• 1:20:49
  Speaker 1: every time I see someone on TV say that, me too.
• 1:20:52
  Speaker 1: When I gave you a long caveat that, I feel
• 1:20:54
  Speaker 1: did it did? But and yet you still went jump right,
• 1:20:58
  Speaker 1: Which is, you know, when do we ever know what's
• 1:21:01
  Speaker 1: going to happen in the future, When do we have
• 1:21:02
  Speaker 1: a high degree of confidence. I take the behavioral side,
• 1:21:07
  Speaker 1: which is when people are talking about uncertainty, what they're
• 1:21:10
  Speaker 1: really saying is, hey, we're having a hard time lying
• 1:21:13
  Speaker 1: to ourselves about how little we know is going to happen,
• 1:21:16
  Speaker 1: and we're starting to get nervous. So macro val might
• 1:21:20
  Speaker 1: be the good descriptor for that where you can't pretend
• 1:21:23
  Speaker 1: you know what's going to happen, because it's so I
• 1:21:28
  Speaker 1: want to say uncertain, but that's the wrong word. You
• 1:21:30
  Speaker 1: just lose yourself confidence in knowing what might happen. We're
• 1:21:34
  Speaker 1: directionally the same, and I did also as part of
• 1:21:37
  Speaker 1: my caveatside I still wouldn't time this very much. I do,
• 1:21:42
  Speaker 1: and I admit I want to. I explicitly want to
• 1:21:45
  Speaker 1: count of the belief that people might think we've missed it.
• 1:21:49
  Speaker 1: Managed futures is it's one a decade, huge positive. It
• 1:21:53
  Speaker 1: adds up to good over the whole decade, but it
• 1:21:56
  Speaker 1: means reverts now. We see no tendency for that real historically. No,
• 1:22:00
  Speaker 1: it's a trend following strategy. If it starts to get
• 1:22:02
  Speaker 1: it wrong, it'll switch its mind pretty pretty quickly. Actually,
• 1:22:07
  Speaker 1: the fundamental trends that we've added in the last five
• 1:22:09
  Speaker 1: to getting closer to seven or eight years, we think
• 1:22:13
  Speaker 1: have made the strategy materially better. It's no longer just
• 1:22:16
  Speaker 1: your grandfather's trend following strategy where you follow a price.
• 1:22:19
  Speaker 1: We think that always has a role for a portfolio.
• 1:22:21
  Speaker 1: In a portfolio, we don't know if crazy stuff will
• 1:22:24
  Speaker 1: continue or we'll go back to normal again. If things
• 1:22:27
  Speaker 1: do go back to normal, yeah, maybe your managed futures
• 1:22:30
  Speaker 1: don't help you very much, but everything else goes back
• 1:22:32
  Speaker 1: to helping you. So we think the case is at
• 1:22:35
  Speaker 1: least let me just be more mild, at least as
• 1:22:37
  Speaker 1: strong as it normally is, and we think it's pretty strong.
• 1:22:40
  Speaker 1: I will back slightly off my sin there of forecasting. So,
• 1:22:45
  Speaker 1: given the fact that you've been investing now for thirty
• 1:22:49
  Speaker 1: five years something along those lines in your lifetime, have
• 1:22:53
  Speaker 1: you ever seen a ten percent spike in inflation or
• 1:22:57
  Speaker 1: of five percent rise in rates as an investor UM
• 1:23:02
  Speaker 1: five percent rise in rates over long periods. We've seen them,
• 1:23:06
  Speaker 1: but not anything like the recent period, and maybe not
• 1:23:11
  Speaker 1: even it's been a downtrend in rates over my career.
• 1:23:13
  Speaker 1: I'm trying to do this. I know for a fact
• 1:23:17
  Speaker 1: because I looked at it recently, that I've not seen uh,
• 1:23:20
  Speaker 1: you know, five six percent inflation in my career. UM. Now,
• 1:23:27
  Speaker 1: I do think you know, I'd be happy to share
• 1:23:29
  Speaker 1: with you. Quants have some disadvantages. There's less we can
• 1:23:33
  Speaker 1: know about any one individual situation than than than than
• 1:23:36
  Speaker 1: a than a more discretionary manager. But we do have
• 1:23:40
  Speaker 1: one advantage. UM. Sometimes they're they're maligned correctly, but sometimes
• 1:23:44
  Speaker 1: they're over maligned. Back tests can be really helpful because
• 1:23:48
  Speaker 1: just because I haven't lived through inflationary periods doesn't mean
• 1:23:50
  Speaker 1: we can't look at inflationary periods and that is a
• 1:23:53
  Speaker 1: quant advantage. And frankly, with the exception of the trend
• 1:23:58
  Speaker 1: following strategy, which I think when giant stuff happens it
• 1:24:01
  Speaker 1: does tend to do better the core stock selection strategies.
• 1:24:07
  Speaker 1: An Auntie is again I keep quoting Auntie. You should
• 1:24:09
  Speaker 1: have had him on instead of I did, I know
• 1:24:11
  Speaker 1: you did? I know you did. Um. But if I'm
• 1:24:13
  Speaker 1: going to quote them all the time, why not just
• 1:24:14
  Speaker 1: go go go to him? Um. He has done a
• 1:24:18
  Speaker 1: lot of our work on showing the environments that factor
• 1:24:22
  Speaker 1: investing tends to do better or worse in by factor
• 1:24:25
  Speaker 1: and as a group. This is for stock selection and
• 1:24:29
  Speaker 1: some things. If you want to make it a tautology, yeah,
• 1:24:31
  Speaker 1: when the spreads between cheap and expensive go way wider,
• 1:24:35
  Speaker 1: value does lousy, But that's a tautology. Macro wise, this
• 1:24:40
  Speaker 1: very little relation, there's very little consistency to it. Um.
• 1:24:44
  Speaker 1: That's actually I think a good thing. Um. It means
• 1:24:47
  Speaker 1: if you do this for asset classes, there's obviously correlations.
• 1:24:51
  Speaker 1: Higher growth and lower inflation is good for stocks and
• 1:24:54
  Speaker 1: good for bonds. As they mix up, you can get
• 1:24:58
  Speaker 1: different results. Low growth, low inflation is dynamite for bonds.
• 1:25:01
  Speaker 1: How it comes out for stocks it's a little bit
• 1:25:03
  Speaker 1: more iffy. But when it comes to factors, doesn't mean
• 1:25:07
  Speaker 1: there aren't some big factor events, but they occur in
• 1:25:10
  Speaker 1: all environments without a great pattern. So again, we do
• 1:25:14
  Speaker 1: think we're a pretty good diversifier to a lot of
• 1:25:17
  Speaker 1: the rest of the world that is much more linked
• 1:25:19
  Speaker 1: to the macro cycle. So when you're looking at back
• 1:25:22
  Speaker 1: tests and you're heading into twenty one and twenty two,
• 1:25:27
  Speaker 1: how are you thinking about the risks and do you
• 1:25:29
  Speaker 1: make changes? Do you just suffer through twenty and twenty
• 1:25:33
  Speaker 1: one waiting for twenty two, or are you gradually shifting
• 1:25:37
  Speaker 1: the portfolio mix before you make it to the promised land. Again,
• 1:25:43
  Speaker 1: you and I have been bouncing back in a great
• 1:25:44
  Speaker 1: way between quantitative stock selection and the more macro trend following.
• 1:25:49
  Speaker 1: And the stories aren't precisely the same. I mean, it's
• 1:25:52
  Speaker 1: the six blind men describing the elephant, and which is
• 1:25:54
  Speaker 1: my favorite parable, But we're really just talking about different
• 1:25:58
  Speaker 1: aspects of what takes place in risk market for value. Yeah, well,
• 1:26:04
  Speaker 1: to be honest, when when it does look unexplainably after that,
• 1:26:11
  Speaker 1: keeping that open mind attractive and we do that sin
• 1:26:14
  Speaker 1: a little. We do just wait now, Barry. Of course
• 1:26:17
  Speaker 1: we didn't sit there in twenty twenty and say we're
• 1:26:20
  Speaker 1: gonna have to wait, and in fact it by waiting
• 1:26:22
  Speaker 1: till March twenty twenty two. Mark your can the well.
• 1:26:26
  Speaker 1: The funny thing is value actually started turning around in
• 1:26:28
  Speaker 1: late twenty twenty. Everyone calls it twenty twenty two. That
• 1:26:32
  Speaker 1: value has been coming back since since COVID started to
• 1:26:35
  Speaker 1: to to well. Once everything got way crazy by the
• 1:26:38
  Speaker 1: end of twenty It's not. This is a little hindsight bias,
• 1:26:42
  Speaker 1: but it makes sense for people to Sorry, let's peel
• 1:26:44
  Speaker 1: a little off here and rotated. No. Absolutely, And but
• 1:26:47
  Speaker 1: if you go back a couple of years earlier, value
• 1:26:49
  Speaker 1: spreads were very wide. And yeah, we were saying we
• 1:26:51
  Speaker 1: don't know when this will turn around, but it will.
• 1:26:54
  Speaker 1: And importantly on net from here, say you know, one
• 1:26:57
  Speaker 1: day go up again doesn't really help you. If it's
• 1:26:59
  Speaker 1: gonna go down more, then it's going to go up
• 1:27:00
  Speaker 1: in the future. It has to be on net right
• 1:27:05
  Speaker 1: not this time. Um I won't say I didn't break
• 1:27:08
  Speaker 1: other things, but that's just between me and whatever strewn
• 1:27:12
  Speaker 1: around my office. Um So, value on its own. Yeah, well,
• 1:27:17
  Speaker 1: sometimes we do wait catalysts or famously people look for catalysts.
• 1:27:22
  Speaker 1: Obviously momentum both price and fundamental. You could you could
• 1:27:26
  Speaker 1: lump into the catalyst camp. So we do look for
• 1:27:29
  Speaker 1: some of that, but some of the things when the
• 1:27:31
  Speaker 1: absolute peak occurs, which is a timing level that I
• 1:27:34
  Speaker 1: think is beyond any of our ability. Somebody always nails
• 1:27:37
  Speaker 1: at X post, but I don't think anyone can consistently
• 1:27:40
  Speaker 1: do that. You look at the peak of the tech
• 1:27:42
  Speaker 1: bubble in March of two thousand, You look at the
• 1:27:44
  Speaker 1: peak of the valuation bubble in stocks, which was kind
• 1:27:47
  Speaker 1: of October of twenty twenty. Why it peaked there not
• 1:27:51
  Speaker 1: three months earlier or six months later, even with the
• 1:27:54
  Speaker 1: benefit of hindsight, I don't think we have great stories.
• 1:27:57
  Speaker 1: I think when things get egregiously valued, the odd get
• 1:28:00
  Speaker 1: more and more on your side. Again, good catalysts will
• 1:28:03
  Speaker 1: help you more and bad will help you less. And
• 1:28:05
  Speaker 1: sometimes our job is to plan our feet and say
• 1:28:07
  Speaker 1: we will not move now on the macro trend. Following strategy,
• 1:28:12
  Speaker 1: it was a better timing story. Again, it didn't make
• 1:28:16
  Speaker 1: money for a long time, but didn't lose a lot,
• 1:28:18
  Speaker 1: and both from some price trends, but I think even
• 1:28:21
  Speaker 1: more from fundamental trends. We started to see the fundamental
• 1:28:25
  Speaker 1: trends that could lead to a more inflationary environment. Again,
• 1:28:30
  Speaker 1: it's not us sitting around making inflation forecast We're not
• 1:28:32
  Speaker 1: macro econists. Fundamental trends are things like those actual economists
• 1:28:37
  Speaker 1: revising up their inflation forecasts. Growth trends are things like
• 1:28:42
  Speaker 1: GDP surprises aggregated for the whole for the whole world,
• 1:28:48
  Speaker 1: if you're doing the oil of equities or country by country.
• 1:28:51
  Speaker 1: Those did a really good job of getting ahead of
• 1:28:54
  Speaker 1: the inflation that came. So there, I'll say on the
• 1:28:58
  Speaker 1: value side, I'll say we didn't do it very good
• 1:29:00
  Speaker 1: job on the catalyst, but we did a really good
• 1:29:02
  Speaker 1: job on sticking with it and has paid off on
• 1:29:05
  Speaker 1: the trend following and macro side, i will say, I'll
• 1:29:09
  Speaker 1: give us higher grades on the catalyst side as to
• 1:29:11
  Speaker 1: the timing, but that's naturally what it's trying to do
• 1:29:14
  Speaker 1: right by definition. Really fascinating. So the past couple of
• 1:29:18
  Speaker 1: years we've seen a huge performance of value over growth.
• 1:29:22
  Speaker 1: What does that mean looking forward? How much persistency does
• 1:29:26
  Speaker 1: that value advantage have? Especially following a decade of growth advantage.
• 1:29:32
  Speaker 1: It's funny it takes a much longer time for excesses
• 1:29:38
  Speaker 1: to get squeezed out of the market than people think,
• 1:29:41
  Speaker 1: particularly if you're on the wrong side of it. You're like,
• 1:29:43
  Speaker 1: if you're a growth stock investor, the last two years,
• 1:29:45
  Speaker 1: I'm in such pain. This has to be extreme. No,
• 1:29:48
  Speaker 1: We again, we start with measures that don't look at returns,
• 1:29:51
  Speaker 1: that look at the actual valuation ratios of stocks. And
• 1:29:55
  Speaker 1: at the peak of the bubble in twenty twenty, a
• 1:29:58
  Speaker 1: few months after COVID it by far the widest ever
• 1:30:01
  Speaker 1: north of the tech bubble after two plus phenomenal years.
• 1:30:06
  Speaker 1: It is now. The last time I looked which a
• 1:30:08
  Speaker 1: couple of days ago, it was at the eighty nine percentile,
• 1:30:11
  Speaker 1: so still wildly Yeah. Also tactically I said, I think
• 1:30:16
  Speaker 1: I did. I tilted a little too early because I
• 1:30:18
  Speaker 1: went on just value, not on trend. The trend is
• 1:30:21
  Speaker 1: now at its back, so we're at you know, nothing
• 1:30:24
  Speaker 1: is a certainty that can be huge reversals in any
• 1:30:27
  Speaker 1: trend into room. I don't want to predict the next quarter,
• 1:30:30
  Speaker 1: but we are still very excited. We're seeing still a
• 1:30:33
  Speaker 1: mispricing that prior to COVID, I would have considered almost
• 1:30:38
  Speaker 1: close to tide with the most extreme ever, and we're
• 1:30:41
  Speaker 1: seeing the wind at it's back. So again I don't
• 1:30:44
  Speaker 1: want to overpromise. The short term can always make anyone
• 1:30:46
  Speaker 1: look silly, but on a few year horizon, we are
• 1:30:49
  Speaker 1: super excited about value. So the Goldman Sachs nonprofitable tech
• 1:30:54
  Speaker 1: basket and there's another basket of low quality stocks they've
• 1:30:59
  Speaker 1: crushed it in twenty twenty three. Is this just a
• 1:31:02
  Speaker 1: dead cat bounce? What does this mean? Is the cycle
• 1:31:06
  Speaker 1: changing or what's happening in your least favored part of
• 1:31:10
  Speaker 1: the market. This is going to be a hard one
• 1:31:12
  Speaker 1: because it's confusing. Yeah, I'll tell you that in advance,
• 1:31:15
  Speaker 1: but it's it's confusing in a different way. I think
• 1:31:17
  Speaker 1: even than you're thinking break up what's going on into
• 1:31:24
  Speaker 1: pure measures of junk no valuation here, low profitability as
• 1:31:29
  Speaker 1: Goldman does against high profitability, and Goldman's not wrong about that,
• 1:31:32
  Speaker 1: though not surprisingly the results are right LOWBATA against high
• 1:31:36
  Speaker 1: beta that we often consider part of quality. All else equal,
• 1:31:39
  Speaker 1: you'd prefer a low beta. All else is not always equal,
• 1:31:42
  Speaker 1: but if you can have less vol and less sensitivity,
• 1:31:44
  Speaker 1: it's a good thing. Profitability choosing more profitable and underweighting
• 1:31:50
  Speaker 1: or selling low profitable, and beta choosing low beta and
• 1:31:54
  Speaker 1: underweighting or selling high beta. As a together, as a
• 1:31:58
  Speaker 1: group and individually have had a really bad start to
• 1:32:01
  Speaker 1: this year for the exact reasons you're talking about. It
• 1:32:04
  Speaker 1: has been a junk rally now here. I'm hoping to
• 1:32:08
  Speaker 1: blow your mind a little bit. Go ahead the way
• 1:32:10
  Speaker 1: we measure value, and keep in mind everybody does it
• 1:32:14
  Speaker 1: a little different any You could have ten great people
• 1:32:16
  Speaker 1: here and they're all going to have their own favorite ways.
• 1:32:19
  Speaker 1: One thing we do is is since nineteen ninety five
• 1:32:22
  Speaker 1: when we wrote a paper on this, we don't allow
• 1:32:24
  Speaker 1: value to take an industry bed. We try to make
• 1:32:26
  Speaker 1: it apples to apples. Everyone talks about value in terms
• 1:32:29
  Speaker 1: of like tech versus textiles. You can't fully remove it
• 1:32:33
  Speaker 1: in a bubble. These are all correlated, but we think
• 1:32:35
  Speaker 1: value value can be hard to compare. Valuation ratios can
• 1:32:39
  Speaker 1: mean very different things in different industries. So um, but
• 1:32:43
  Speaker 1: broadly speaking, are and compliance gets nervous when I talk
• 1:32:47
  Speaker 1: about performance to the public, but I will tell you
• 1:32:50
  Speaker 1: value has had a Alane has had a very strong
• 1:32:54
  Speaker 1: start to this year. Which you would not guess if
• 1:32:57
  Speaker 1: I told you it's a junk rally. Now they can
• 1:33:01
  Speaker 1: happen simultaneously and perhaps for different reasons. Now, this is
• 1:33:04
  Speaker 1: actually much more normal historically when junkier when when profitability
• 1:33:14
  Speaker 1: and value are often negatively correlated because the cheap stocks
• 1:33:19
  Speaker 1: are often unprofitable. Um So when the profitability factor, if
• 1:33:23
  Speaker 1: you will, is doing well, it has at least a
• 1:33:25
  Speaker 1: decent negative correlation. It's been stronger in the US than globally,
• 1:33:28
  Speaker 1: but it's negatively correlated value. So what's going on this
• 1:33:31
  Speaker 1: year is more normal, but that is not what was
• 1:33:33
  Speaker 1: going on for the prior a few years. Value and
• 1:33:37
  Speaker 1: profitability in particular, we're highly correlated because in a bubble, remember,
• 1:33:44
  Speaker 1: in a rational loss for value we can do well.
• 1:33:46
  Speaker 1: Profitability does well in a bubble. It's not the profitable
• 1:33:50
  Speaker 1: stocks that are throwing to the moon. It's the story stocks.
• 1:33:53
  Speaker 1: So let me take the other side of the bubble
• 1:33:55
  Speaker 1: claim and say, hey, stockscott overvalued in twenty twenty one,
• 1:34:00
  Speaker 1: But was it really a bubble? We're down what twenty
• 1:34:03
  Speaker 1: percent on the SMP the NAZAC. That seems like a
• 1:34:07
  Speaker 1: run of the mill draw down and not a full
• 1:34:10
  Speaker 1: on crash. One of the hard parts is in a
• 1:34:13
  Speaker 1: fun way because they're all relevant. We're mixing a few
• 1:34:16
  Speaker 1: different things. There is the level of the overall stock
• 1:34:19
  Speaker 1: market and the overall bond market, and then there's internal
• 1:34:22
  Speaker 1: to the stock market, how cheap stocks did against expensive stocks,
• 1:34:26
  Speaker 1: how profitable stocks did against unprofitable stocks hedged without a
• 1:34:31
  Speaker 1: market exposure. Right. People have used the term everything bubble,
• 1:34:36
  Speaker 1: which is really wrong. Everything can't be in a bubble
• 1:34:39
  Speaker 1: at once by definition, by the way the opposite you
• 1:34:43
  Speaker 1: can short the values. And we were in a depression,
• 1:34:46
  Speaker 1: not a bubble. But there were some correlated things going
• 1:34:50
  Speaker 1: on for the market as a whole. The move in
• 1:34:54
  Speaker 1: the stock market in one year was big, not something
• 1:34:58
  Speaker 1: we don't see occasionally. This is this is not on
• 1:35:02
  Speaker 1: the seem to lead black swan moment. The move in
• 1:35:05
  Speaker 1: the bond market was very big, closer, but still not
• 1:35:09
  Speaker 1: a black swan. The moving sixty forty maybe not still
• 1:35:13
  Speaker 1: black swan, but was far more extreme than either alone
• 1:35:17
  Speaker 1: because they happened at the same time. Time. You saw
• 1:35:21
  Speaker 1: that again, Auntie, It will be the first to admit
• 1:35:23
  Speaker 1: he looks like his timing is better than it really was,
• 1:35:25
  Speaker 1: because he's been saying this for a while, but that
• 1:35:27
  Speaker 1: was the core of his work. He does a ten
• 1:35:30
  Speaker 1: year forecast on the outlook for sixty forty what current
• 1:35:34
  Speaker 1: valuations coal. It's more complicated this, but cold the Schiller
• 1:35:38
  Speaker 1: cape for stocks lower expected real returns when the Shiller
• 1:35:41
  Speaker 1: cape is high, and just really yields on bonds yields
• 1:35:45
  Speaker 1: versus economist forecast of inflation, and he takes sixty percent.
• 1:35:48
  Speaker 1: Here's the genius math to get to sixty forty. He
• 1:35:51
  Speaker 1: takes sixty percent of the stock forecasts, adds it to
• 1:35:53
  Speaker 1: forty percent of the bond forecasts. That number hit the low. Ever,
• 1:36:00
  Speaker 1: at least as we can monitor it. I won't say
• 1:36:02
  Speaker 1: the rot the end of twenty one. Call it yeah,
• 1:36:06
  Speaker 1: that's pretty good time. I always feel guilty when I
• 1:36:08
  Speaker 1: say ever, maybe in the Roman Empire it was worse,
• 1:36:11
  Speaker 1: but we can't. We can't measure it in the measurable
• 1:36:14
  Speaker 1: universe that we have. And sixty forty. I'm gonna try
• 1:36:18
  Speaker 1: to get this right. Sometimes we talk global, sometimes we
• 1:36:20
  Speaker 1: talk to you us. Call it. It's made about four
• 1:36:23
  Speaker 1: and a half percent real meaning over inflation over the
• 1:36:27
  Speaker 1: long term. That's actually quite a nice real return. We're
• 1:36:31
  Speaker 1: used to talking about nominal returns make and almost half bonds,
• 1:36:36
  Speaker 1: So four and a half percent real is a very
• 1:36:39
  Speaker 1: nice um. Auntie's forecast, which I think is is quite useful,
• 1:36:44
  Speaker 1: obviously got down to below two. It was in the
• 1:36:46
  Speaker 1: high ones at the end of twenty twenty one, just
• 1:36:49
  Speaker 1: looking at current valuations and saying how does that usually
• 1:36:53
  Speaker 1: play out over ten years. By the end of twenty
• 1:36:57
  Speaker 1: twenty two, after all the pain, I think it got
• 1:37:01
  Speaker 1: into the just about three really, which that's surprising given
• 1:37:06
  Speaker 1: that we're now looking at rates in the four to
• 1:37:08
  Speaker 1: five percent ring. Well, remember this is real, and right
• 1:37:12
  Speaker 1: now this gets back to you challenging me on is
• 1:37:14
  Speaker 1: there more uncertainty. It's pretty hard to come up with
• 1:37:16
  Speaker 1: a really good ten year forecast of inflation right now,
• 1:37:20
  Speaker 1: but certainly positive is forecasted. So five cash is interesting again,
• 1:37:24
  Speaker 1: I'll say that, but how interesting it is depends a
• 1:37:28
  Speaker 1: lot on what your actual inflation outlook. Bonds are interesting again.
• 1:37:33
  Speaker 1: So basically, the fairly massive trade off was still only
• 1:37:38
  Speaker 1: a one year trade off after a thirteen year bull market.
• 1:37:42
  Speaker 1: You don't fix, and not all of that bull market
• 1:37:45
  Speaker 1: was bubbly. A lot of that was fundamentals, but a
• 1:37:48
  Speaker 1: lot of that was repricing things getting more expensive. You
• 1:37:50
  Speaker 1: don't fix thirteen years of getting more expensive in general
• 1:37:54
  Speaker 1: in one year. I'm not sure you want to because
• 1:37:56
  Speaker 1: you've got to go down a lot more than we did.
• 1:37:58
  Speaker 1: So Auntie's number, which I agree with U instead of
• 1:38:02
  Speaker 1: four and a half, he'd probably use in the low threes. Now,
• 1:38:05
  Speaker 1: as if you're sitting there saying, what do I need
• 1:38:07
  Speaker 1: to retire? What's that number? Um by no means are
• 1:38:11
  Speaker 1: we certain that three is irrational? That we need to
• 1:38:14
  Speaker 1: get four and a half? Four and a half. And
• 1:38:16
  Speaker 1: I know you've heard these arguments may have been just
• 1:38:18
  Speaker 1: too good of a deal historically. For instance, for much
• 1:38:22
  Speaker 1: of how you saying sixty forty has been arbitraged away
• 1:38:25
  Speaker 1: or is it just the environment we're in it, it
• 1:38:28
  Speaker 1: may have been repriced higher price to a lower expected return.
• 1:38:32
  Speaker 1: Here's my favorite argument for that, and it's it's not
• 1:38:34
  Speaker 1: a complicated one. Very few people actually got the four
• 1:38:37
  Speaker 1: and a half percent weal the costs of investing in
• 1:38:41
  Speaker 1: various ways were far higher today, and almost all portfolios
• 1:38:46
  Speaker 1: were not like index funds today. They were you know,
• 1:38:48
  Speaker 1: you had a broker who so a lot of friction
• 1:38:53
  Speaker 1: and the effective volatility of your portfolios double the markets
• 1:38:56
  Speaker 1: because you owned a handful of socks. So both the
• 1:39:00
  Speaker 1: top line was lower because he didn't get you didn't
• 1:39:02
  Speaker 1: really get it, and second you were facing higher risks
• 1:39:05
  Speaker 1: by choice. But the index fund concept didn't exist for
• 1:39:09
  Speaker 1: much of this time, so and even when it exists,
• 1:39:12
  Speaker 1: the concept existed, you couldn't execute on it. So basically,
• 1:39:15
  Speaker 1: I think the three today may this is very arguable,
• 1:39:19
  Speaker 1: but maybe as good as the four and a half
• 1:39:21
  Speaker 1: historically in terms of what you get to keep and
• 1:39:23
  Speaker 1: what risks you have to take to get it. At
• 1:39:26
  Speaker 1: below two, and this is art, not science, nobody can
• 1:39:29
  Speaker 1: tell you what this no should be. At Below two,
• 1:39:32
  Speaker 1: I an aunty and a lot of people didn't think
• 1:39:34
  Speaker 1: that's too low, that doesn't make any sense. But above
• 1:39:37
  Speaker 1: three maybe I I you know, I think pimp goes
• 1:39:42
  Speaker 1: a super firm, but I hate to give competitors any
• 1:39:45
  Speaker 1: credit anytime, But we maybe have a new normal, lower
• 1:39:49
  Speaker 1: than normal, lower than historically normal. That's really really interesting.
• 1:39:54
  Speaker 1: All right, So now I gave have you for five minutes,
• 1:39:58
  Speaker 1: which means this is our speed rounds and these answers
• 1:40:02
  Speaker 1: have to be less than sixty seconds. Are you're ready,
• 1:40:05
  Speaker 1: I am all right. So first we'll do a quick
• 1:40:09
  Speaker 1: three part curveball one minute. How early do you pull
• 1:40:12
  Speaker 1: a goalie when you're down one, two or three goals?
• 1:40:14
  Speaker 1: When you pull? You pull a goalie if you're down
• 1:40:17
  Speaker 1: one at about five and a half six minutes in
• 1:40:19
  Speaker 1: the last period, in the last period. All this can
• 1:40:22
  Speaker 1: be situational. Our model is simple. Right, if it's in
• 1:40:24
  Speaker 1: your own zone, you put the goalie back in for
• 1:40:26
  Speaker 1: a while. All sequel. The two goal result is the
• 1:40:29
  Speaker 1: one that always shocks people. You pull about eleven minutes,
• 1:40:32
  Speaker 1: you're essentially paying playing the last period. You're playing half
• 1:40:35
  Speaker 1: more than the period, and the ideas you're out of
• 1:40:38
  Speaker 1: the money option losing by three, four or five, it's
• 1:40:41
  Speaker 1: the same. It may have pride issues, which is not
• 1:40:44
  Speaker 1: in our model, but it doesn't have standings issues. And
• 1:40:47
  Speaker 1: three I actually forget the number, but I think it
• 1:40:49
  Speaker 1: maybe before the third period. Got it? Uh M? A
• 1:40:53
  Speaker 1: poker tournament in April? Are you participating this year? Since
• 1:40:56
  Speaker 1: about since the GFC, which really had nothing to do
• 1:40:59
  Speaker 1: with it. It's just coin sent little timing. I have
• 1:41:02
  Speaker 1: only played poker in every third year in that charitable tournament.
• 1:41:06
  Speaker 1: My skills to the extent I ever had any I
• 1:41:09
  Speaker 1: was never a great poker player because I have a
• 1:41:12
  Speaker 1: short attention span and a lot of poker is being patient,
• 1:41:16
  Speaker 1: willing to stare at somebody for seven hours so you
• 1:41:18
  Speaker 1: can remember what they did six hours ago. I had
• 1:41:21
  Speaker 1: fun with poker I had. I think I was pretty intuitive.
• 1:41:23
  Speaker 1: I didn't. I don't lose a time, but I probably
• 1:41:25
  Speaker 1: lost money in my poker career. First time I ever,
• 1:41:29
  Speaker 1: I learned poker to play in this Math for America tournament.
• 1:41:32
  Speaker 1: I didn't know seven or hold him. I didn't know
• 1:41:35
  Speaker 1: how to play. And my second year I played and
• 1:41:39
  Speaker 1: I came in second day. There's so much random chance
• 1:41:43
  Speaker 1: in one tournament over time. Poker's pure skill over anything.
• 1:41:48
  Speaker 1: It's very similar to investing over sure horizons. It's really not.
• 1:41:52
  Speaker 1: But one of the worst things that can happen to
• 1:41:54
  Speaker 1: you as an investor or a gambler is to get
• 1:41:56
  Speaker 1: lucky early. Yep. Absolutely the best thing for you is
• 1:41:59
  Speaker 1: the walk into a casino and lou No matter how
• 1:42:02
  Speaker 1: smart you think you are, you think you're smarter than
• 1:42:04
  Speaker 1: you than you were, always looking for that hit a dopamine. Yeah,
• 1:42:07
  Speaker 1: I don't know if I'll be able to get you
• 1:42:08
  Speaker 1: an answer this in under a minute. Marvel or DC,
• 1:42:12
  Speaker 1: and what's your favorite Marvel film? UM? I do like both.
• 1:42:16
  Speaker 1: I'm a I'm a comic book fan. I was reading
• 1:42:18
  Speaker 1: this is how I learned to read. I'm more of
• 1:42:20
  Speaker 1: a Marvel guy. Um, though sometimes DC's great, it's varies
• 1:42:24
  Speaker 1: who who current Wryter Crop is better. M favorite movies hard.
• 1:42:31
  Speaker 1: And what I'm saying is, if you go find other
• 1:42:33
  Speaker 1: people who have asked me this, I'm not claiming full
• 1:42:35
  Speaker 1: consistency at varies whole time. I think the original first
• 1:42:39
  Speaker 1: Iron Man that kicked off the MCU is an underrated movie.
• 1:42:43
  Speaker 1: It's a damn good movie, and not in the MCU.
• 1:42:48
  Speaker 1: Before the MCU, the first X Men movie, I don't
• 1:42:52
  Speaker 1: remember even how great it was, but it was the
• 1:42:54
  Speaker 1: first time we saw maybe Michael Keaton's Batman in eighty nine,
• 1:42:59
  Speaker 1: but from me, certainly with Marvel, it was the first
• 1:43:01
  Speaker 1: time I saw a superhero movie or TV show that
• 1:43:04
  Speaker 1: didn't look ridiculous, that looked the CGI and the effects
• 1:43:09
  Speaker 1: caught up. That was good. So I think there was
• 1:43:11
  Speaker 1: a milestone. So those two, I'm gonna throw two at
• 1:43:13
  Speaker 1: you because I think they're they're both have a so
• 1:43:15
  Speaker 1: it's a lightning round. But you're disagreeing with you, I'm
• 1:43:19
  Speaker 1: I'm I'm impending, all right. Deadpool and Guarding to the
• 1:43:23
  Speaker 1: Galaxy both have a certain sense of humor. Aways that's right,
• 1:43:28
  Speaker 1: always seem to be missing from the rest of the mark.
• 1:43:31
  Speaker 1: I love those um as and and it's not some
• 1:43:35
  Speaker 1: some people want to be purist and say that's not
• 1:43:38
  Speaker 1: how the common books were. They're wrong. If you're really
• 1:43:42
  Speaker 1: they had they were wise cracking during every fight. So
• 1:43:45
  Speaker 1: I do love those for the combination of humor. X
• 1:43:48
  Speaker 1: Men didn't have much humor. I'll admit that Iron Man
• 1:43:51
  Speaker 1: one did, mainly because Robert Downing Junior is just hilarious.
• 1:43:55
  Speaker 1: He was so good. So I do like the ones
• 1:43:57
  Speaker 1: with humor. So let's talk about favorite books. What are
• 1:43:59
  Speaker 1: you reading? What are some of your all time favors?
• 1:44:01
  Speaker 1: Can I rant one more section? Marvel movies? Um, you
• 1:44:04
  Speaker 1: didn't ask me when my least favorite are? Oh, go ahead.
• 1:44:07
  Speaker 1: They should find every copy, which is hard digitally these days.
• 1:44:10
  Speaker 1: Doctor Strange and the Multiverse of Madness. Yeah, and they
• 1:44:13
  Speaker 1: should bury it in the sun. Let's move on. That's
• 1:44:17
  Speaker 1: all I want to say about that. Well, you're not
• 1:44:18
  Speaker 1: a fan of Doctor Strange Terrible. I'm a big fan
• 1:44:20
  Speaker 1: of the character. It makes me even angry. Let's talk
• 1:44:23
  Speaker 1: about favorite books. What are you reading that? What are
• 1:44:25
  Speaker 1: some of your favorites? My all time favorites tend to
• 1:44:28
  Speaker 1: be in the sci fi fantasy world, not surprising given
• 1:44:30
  Speaker 1: our comic Are you a big dickhead? Um, I've read
• 1:44:35
  Speaker 1: a bunch by him. That's one of the odd questions
• 1:44:37
  Speaker 1: I'll get, By the way, I am a self professed
• 1:44:40
  Speaker 1: to head. And when I say that, people who don't
• 1:44:42
  Speaker 1: know Philip nay Dick in my career of going to
• 1:44:45
  Speaker 1: comic book conventions, I've not heard that term. Oh really,
• 1:44:50
  Speaker 1: It's very common on the internet, and it's really the
• 1:44:53
  Speaker 1: one thing fun about him is he's written a lot
• 1:44:56
  Speaker 1: of things that became like famous movies that no one knows.
• 1:45:01
  Speaker 1: It's the Schwartzenega movie. They did two of them total. Recall, right,
• 1:45:05
  Speaker 1: we can remember for your wholesale? Was that short story?
• 1:45:08
  Speaker 1: My my all time choice? One is very cliche. Go ahead,
• 1:45:14
  Speaker 1: Dune I loved. There are a couple of Frank Herbert
• 1:45:17
  Speaker 1: books that are just amazing. First The Dune Friend. Yeah,
• 1:45:21
  Speaker 1: the first two Dune books I thought were great, the
• 1:45:23
  Speaker 1: first one much better than the second one. Then they
• 1:45:25
  Speaker 1: got totally weird, very messianic, religious odd that was always
• 1:45:31
  Speaker 1: a thread three a thread, but it became all that.
• 1:45:34
  Speaker 1: But I loved Dune complex book. You know, sci fi
• 1:45:39
  Speaker 1: or fantasy sometimes gets a simplistic, childish label. Dune blows
• 1:45:43
  Speaker 1: that away. Um. The last movie was the first time
• 1:45:45
  Speaker 1: I've seen doing reasonable on TV. Don't even start me
• 1:45:49
  Speaker 1: on sting of dueling with the swords that were in
• 1:45:53
  Speaker 1: the book. Um. Also, I'm a big fan of some
• 1:45:56
  Speaker 1: of the old pulps, like the original Cone stories by
• 1:46:00
  Speaker 1: Roberty Howard in the thirties. Not we're not talking. I'm
• 1:46:03
  Speaker 1: not against him, but I'm not talking about Arnold Schwartzinker's
• 1:46:05
  Speaker 1: Cohnan And I'm talking about the stuff that appeared in
• 1:46:08
  Speaker 1: like weird tales serialized and then became books. I think
• 1:46:12
  Speaker 1: Roberty Howard, he unfortunately killed himself very young. Um, and
• 1:46:16
  Speaker 1: no one, you know, no one remembers him, but hes
• 1:46:20
  Speaker 1: now he didn't. He created Conan and his writing was
• 1:46:23
  Speaker 1: so rich, like dripped with feeling and color. So I
• 1:46:27
  Speaker 1: was a big fan of that. This actually segues nicely
• 1:46:30
  Speaker 1: into what I'm reading now go on, because I am
• 1:46:34
  Speaker 1: rereading the original basic Lord of the Rings, which you
• 1:46:38
  Speaker 1: use the term table stakes before. That's table stakes for
• 1:46:41
  Speaker 1: a fantasy fan, like every other summer. As I I
• 1:46:46
  Speaker 1: like the Hobbit, I never liked the full Lord of
• 1:46:48
  Speaker 1: the Rings I have. Now I'm liking it more. Um.
• 1:46:53
  Speaker 1: I have found historically I have a small tolerance for
• 1:46:56
  Speaker 1: twelve pages of Elvin poetry, um which I think Tom
• 1:47:00
  Speaker 1: bomba deal. For some reason. The character scared me as
• 1:47:04
  Speaker 1: a kid, even though he's not very scary. So let
• 1:47:07
  Speaker 1: me ask you this question. But I'm miyamore now. So
• 1:47:09
  Speaker 1: I love both The Hobbit and the Lord of the Rings,
• 1:47:12
  Speaker 1: and well, everybody loved Peter Jackson's I thought it was
• 1:47:16
  Speaker 1: way too dark within the Lord of the Rings. Within
• 1:47:21
  Speaker 1: the original, there's a balance between the hope and the fear.
• 1:47:25
  Speaker 1: I think that's that's fair and ultimately hope when so
• 1:47:29
  Speaker 1: it's it's it is a po So they take you
• 1:47:31
  Speaker 1: to this really dark place and it's almost like the
• 1:47:34
  Speaker 1: ending is tacked on. But by the way they going
• 1:47:37
  Speaker 1: over a minute, it's completely your fault. So I own
• 1:47:40
  Speaker 1: if you go through Token's experience of World War one
• 1:47:43
  Speaker 1: and then writing in the World War Two. He really
• 1:47:45
  Speaker 1: had that light and dark um going on, but it
• 1:47:49
  Speaker 1: was balanced. But but but I did enjoy the movies
• 1:47:51
  Speaker 1: because part of it is just saving a fan your
• 1:47:53
  Speaker 1: whole life, seeing it come to life in such a
• 1:47:55
  Speaker 1: glorious I do not recommend the extended versions. I've steered
• 1:47:59
  Speaker 1: clear of that because the same reason they were already
• 1:48:01
  Speaker 1: a little too long, and the extended versions basically, like
• 1:48:04
  Speaker 1: Bilbo says, goodbye eleven times, you have like eleven elegic
• 1:48:08
  Speaker 1: kind of I'm not trying to pronounce that right, but
• 1:48:10
  Speaker 1: he's going away. Um, So I don't recommend that. But
• 1:48:13
  Speaker 1: I do love those movies. I'm reading that now. I'm
• 1:48:16
  Speaker 1: reading David Rubinstein's book on investing, largely because in May,
• 1:48:21
  Speaker 1: April or May, he's going to interview me. Oh good,
• 1:48:24
  Speaker 1: I'm terrified of because he may have seen some of
• 1:48:26
  Speaker 1: the things I've said about private equity over time. I'm kidding,
• 1:48:29
  Speaker 1: he knows about those. He still wants to interview me,
• 1:48:31
  Speaker 1: but I gotta be prepared for that one. He could
• 1:48:33
  Speaker 1: care less, can I say that? I mean, yeah, there
• 1:48:38
  Speaker 1: there are people who are you know, And I use
• 1:48:40
  Speaker 1: the phrase wrong. It's actually could not care less, but
• 1:48:43
  Speaker 1: everybody says could care less, which you know you're all right.
• 1:48:46
  Speaker 1: Are two adult questions we say, for the very ends,
• 1:48:50
  Speaker 1: What sort of advice would you give to a recent
• 1:48:52
  Speaker 1: college grad interested in a career in value investing, quantitative finance,
• 1:48:58
  Speaker 1: or even academia, um, in broad general, a financial career.
• 1:49:04
  Speaker 1: I'll go with I don't like either. And if someone
• 1:49:08
  Speaker 1: tries to only steer you to lucrative careers, that's not
• 1:49:10
  Speaker 1: a happy life. If people only steer you to find
• 1:49:14
  Speaker 1: your bliss, well, if you're not the best in the
• 1:49:17
  Speaker 1: world at your bliss and the bliss doesn't actually pay
• 1:49:19
  Speaker 1: you anything, it's not such a great thing. I got
• 1:49:22
  Speaker 1: into finance because I liked it, Because I work for
• 1:49:25
  Speaker 1: these professors, I found an interesting thought. I'd be a
• 1:49:28
  Speaker 1: professor at not everyone has to follow that route, but
• 1:49:31
  Speaker 1: you want to blend those two things. The only concrete
• 1:49:33
  Speaker 1: advice I'll give people young people, and I say this
• 1:49:36
  Speaker 1: all the time, is try very hard not to chase
• 1:49:39
  Speaker 1: what's currently hot, particularly starting out your career. Don't try
• 1:49:45
  Speaker 1: to be suicidal. But but going into what's currently hot,
• 1:49:50
  Speaker 1: you're gonna be five years off every time. Um, So
• 1:49:54
  Speaker 1: I would back off that and if someone is really
• 1:49:55
  Speaker 1: considering a career in value investing, recommend investing. As I
• 1:50:01
  Speaker 1: said earlier, at least half your time in building up
• 1:50:04
  Speaker 1: your psychological endurance level. You think it's all about balance
• 1:50:10
  Speaker 1: sheet and income statement analysis, No, about half of it
• 1:50:14
  Speaker 1: is the right personality and the right emotional makeup and
• 1:50:17
  Speaker 1: the right partners. Our final question, what do you know
• 1:50:20
  Speaker 1: about the world of investing today? You wish you knew
• 1:50:23
  Speaker 1: forty years ago when you were first getting your feet wet.
• 1:50:27
  Speaker 1: Going back, there's always been this tension in academic finance
• 1:50:31
  Speaker 1: and an applied quantitative finance in why these things worked.
• 1:50:35
  Speaker 1: And we talked about it very briefly earlier. If you
• 1:50:38
  Speaker 1: find if someone shows you a great baptest, there really
• 1:50:41
  Speaker 1: three possibilities. One is it's gibberish data mining. And let's
• 1:50:46
  Speaker 1: assume it's not that that they've just tortured the data.
• 1:50:48
  Speaker 1: Let's assume you think it's real. It can work because
• 1:50:51
  Speaker 1: you're taking an actual rational risk and being compensated for it,
• 1:50:56
  Speaker 1: or what's called often called behavioral finance. Some people are
• 1:50:59
  Speaker 1: making errors. I often take two Nobel laureates my gene
• 1:51:03
  Speaker 1: Fama as one end and Dick Thaylor, also at Chicago
• 1:51:07
  Speaker 1: as the behavioral a lot of other great people in
• 1:51:09
  Speaker 1: this field. I don't mean to make it so these two,
• 1:51:12
  Speaker 1: but I would say you could do worse than those two. Absolutely,
• 1:51:15
  Speaker 1: and I'm a fan of both. If if you ask
• 1:51:19
  Speaker 1: me who I think is more right now, Like, I
• 1:51:23
  Speaker 1: think Gene's contributions are actually the biggest in the entire
• 1:51:26
  Speaker 1: world of finance because a lot of the field won't
• 1:51:28
  Speaker 1: exist without him. But that's a different question of who's right.
• 1:51:31
  Speaker 1: I think I would have been seventy five twenty five
• 1:51:33
  Speaker 1: in the Gene camp when I left Chicago, even finding momentum,
• 1:51:37
  Speaker 1: and now and now I think it'd be seventy twenty five.
• 1:51:40
  Speaker 1: And all that means is more of why our stuff works,
• 1:51:44
  Speaker 1: I think is taking another side of behavioral biases than
• 1:51:47
  Speaker 1: a rational risk premium than I used to. And we're
• 1:51:50
  Speaker 1: all a prisoner of our lived experience, right, living through
• 1:51:53
  Speaker 1: both the tech bubble and those last five years to
• 1:51:58
  Speaker 1: and change terrible, to and change very good. All that
• 1:52:03
  Speaker 1: it may have overinfluenced me. You know, sometimes you see
• 1:52:06
  Speaker 1: more crazy events in a career than the average. But
• 1:52:09
  Speaker 1: I've definitely moved. I've still vote Ginge, the MVP of
• 1:52:14
  Speaker 1: academic finance throughout all of Again, I'm impugning the Roman
• 1:52:18
  Speaker 1: Empire throughout all of history, but I probably have moved
• 1:52:23
  Speaker 1: more towards the behavioral side. That someone's got to be
• 1:52:26
  Speaker 1: on the wrong side of the trade, and if you
• 1:52:27
  Speaker 1: quantitatively identify who that is, they seem to work very
• 1:52:31
  Speaker 1: well and harm absolutely. Cliff, thank you for being so
• 1:52:35
  Speaker 1: generous with your time. We have been speaking with Cliff Astins.
• 1:52:40
  Speaker 1: He is the co founder and just general all about
• 1:52:44
  Speaker 1: Town managing principle at AQR Capital Management. If you enjoy
• 1:52:49
  Speaker 1: this conversation, well check out any of the previous ones
• 1:52:52
  Speaker 1: we've done over the past nine years. We're coming up
• 1:52:55
  Speaker 1: on almost five hundred and you can find those at YouTube, iTunes, Spotify,
• 1:53:01
  Speaker 1: wherever you find your favorite podcasts. Sign up from my
• 1:53:05
  Speaker 1: daily reading list at ridolts dot com, follow me on
• 1:53:07
  Speaker 1: Twitter at ridolts, follow Clifford Asnes on Twitter at Clifford Assness,
• 1:53:14
  Speaker 1: and you could check out all of the Bloomberg podcasts
• 1:53:16
  Speaker 1: at podcasts. I would be remiss if I did not
• 1:53:19
  Speaker 1: thank the crack team that helps put these conversations together
• 1:53:23
  Speaker 1: each week. Justin Milner is my audio engineer. Attica val
• 1:53:26
  Speaker 1: Bron is our project manager. Paris Walds is my producer.
• 1:53:30
  Speaker 1: Sean Russo is my head of research. I'm Barry Ridults.
• 1:53:34
  Speaker 1: You've been listening to Master's Business on Bloomberg Radio.