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Andrew Slimmon on Quantitative Factors in Markets · Masters in Business

0:02
Speaker 1: This is Master's in Business with Barry Ridholds on Bloomberg Radio.
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Speaker 2: This week on the podcast, I have another extra special guest, ANDREWS.
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Speaker 2: Lemons has pretty much done everything on the wealth management
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Speaker 2: side of the business, starting at Brown Brothers Harriman before
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Speaker 2: going on to Morgan Stanley where he started out as
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Speaker 2: a client facing wealth manager, before moving into portfolio manager
0:32
Speaker 2: and eventually creating the Applied Equity Advisors team that uses
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Speaker 2: a combination of quantitative and fundamental and behavioral thinking to
0:46
Speaker 2: create portfolios and funds that are sturdy and can survive
0:54
Speaker 2: any sort of change in investor sentiment. They look at geography,
1:00
Speaker 2: they look at capsize, they look at style, and they
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Speaker 2: look at sector and try and keep a portfolio leaning
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Speaker 2: towards what's working best. These tend to be concentrated portfolios.
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Speaker 2: The US versions are thirty to sixty holdings, where the
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Speaker 2: overseas versions are just twenty holdings. I found this conversation
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Speaker 2: to be fascinating. There are a few people in asset
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Speaker 2: management that have seen the world of investing from both
1:31
Speaker 2: the client's perspective and a client facing advisor side to
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Speaker 2: a PM and then a broader asset manager than Andrew has.
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Speaker 2: He really comes with a wealth of knowledge and he's
1:44
Speaker 2: been with Morganstantley since nineteen ninety one. That sort of
1:48
Speaker 2: tenure at a single firm is increasingly rare, rare these days.
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Speaker 2: I found this discussion to be absolutely fascinating and I
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Speaker 2: think you will also, with no further ado, Morgan Stanley
2:00
Speaker 2: Andrews Slimmon.
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Speaker 1: Thank you. It's an ho to be here.
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Speaker 2: Well, it's a pleasure to have you. So let's start
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Speaker 2: at the beginning with your background. You get a BA
2:08
Speaker 2: from the University of Pennsylvania and an NBA from University
2:12
Speaker 2: of Chicago. Was finance always the plan.
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Speaker 1: I think being in a competitive industry with all the plan.
2:18
Speaker 1: I played tennis competitively in juniors and went out and
2:21
Speaker 1: played in college, and I always liked the you know,
2:23
Speaker 1: you either won or loss. And what I always liked
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Speaker 1: about this industry it was all about, you know, did
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Speaker 1: you win or loose? There wasn't a lot of gray
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Speaker 1: era and I think that's what I do love about
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Speaker 1: the stock market and investing in general, because there's a
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Speaker 1: scorecard and you can't there's no room in the scorecard
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Speaker 1: for the editorials.
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Speaker 2: No points for style or form. It's just did you
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Speaker 2: win or lose? So where did you begin? What was
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Speaker 2: your first role within the industry?
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Speaker 1: Sure? So, well, my first role was opening the mail
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Speaker 1: at a broker's firm in Hartford, Connecticut. But I started
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Speaker 1: my career at Brown Brothers Harriman right here in New
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Speaker 1: York in a training program, which was great because they
3:01
Speaker 1: had commercial banking, they had capital markets, and they had
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Speaker 1: the investment management side of the business. And that's what
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Speaker 1: getting exposure all those led me to believe, Gee, I
3:11
Speaker 1: really am interested in the stock market and how it
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Speaker 1: works in investing in general.
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Speaker 2: So what led you to Morgan Stanley? How'd you find
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Speaker 2: your way to write?
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Speaker 1: So? Yeah, I was a research analyst at Brown Brothers
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Speaker 1: and I was covering, you know, in healthcare stocks. I
3:29
Speaker 1: realized that there must be something more to investing than
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Speaker 1: just what was going on at the company level, because
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Speaker 1: I noticed that the things that were moving my stocks
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Speaker 1: on a day to day basis weren't just what was
3:41
Speaker 1: going on at the company level. And University's Chicago, where
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Speaker 1: I got to my MBA, was obviously very focused on
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Speaker 1: more the quantitative areas of investing, and I took FOMA
3:52
Speaker 1: and French and so forth. And Miller and all those
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Speaker 1: that taught me that what drives a stock price is
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Speaker 1: more than just the company level. And so that was
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Speaker 1: really how it rounded my knowledge of kind of investing,
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Speaker 1: the first steps. And then coming out of business school,
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Speaker 1: it was ninety one, and it was a recession. And
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Speaker 1: I had met my wife in business school and she
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Speaker 1: got a job at kid r Peabody, if you remember that,
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Speaker 1: invest in banking in Chicago, and I couldn't find kind
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Speaker 1: of a buy side opportunity, and Morgan Stanley had a
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Speaker 1: department called Prior Wealth Management that covered wealthy individuals and
4:36
Speaker 1: small institutions in Chicago. And I needed a job, and
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Speaker 1: I had a lot of student debts, so I said, hey,
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Speaker 1: as opposed to go in the traditional buy side route,
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Speaker 1: I'll start in this area, covering clients and investing for them.
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Speaker 2: So ninety one kind of a mild recession, mild and
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Speaker 2: really halfway through what was a rampaging bull market. What
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Speaker 2: was it like in the nineteen nineties in New York and.
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Speaker 1: Finance, Well, I mean the thing that was amazing is
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Speaker 1: we would have clients in the late nineties. It would
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Speaker 1: come to us and they'd say, Andrew, I'm not greedy.
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Speaker 1: I just want fifteen to twenty percent returns a year,
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Speaker 1: right and no, with limited risks. And that is what
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Speaker 1: was so fascinating about today is today people say to me, Andrew,
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Speaker 1: why would I invest in equities when I can get
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Speaker 1: five percent in the money market. And what a difference
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Speaker 1: in a mindset, which tells you where we are. In
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Speaker 1: the late nineties, we had just gone through a roaring
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Speaker 1: bull market. Optimism was just so rampant in the worst
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Speaker 1: year in the business I can remember was nineteen ninety
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Speaker 1: nine because as an investor covering clients, I was caught
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Speaker 1: between doing the right thing for them, which was avoid
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Speaker 1: these ridiculously priced stocks or get on the train because
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Speaker 1: the money is pouring through. And then it all came
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Speaker 1: to an end in two thousand and two thousand and
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Speaker 1: I took a step back and say, thank god, I
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Speaker 1: never you know, I just didn't buy in the way
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Speaker 1: some people did, and therefore save people a lot of money.
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Speaker 1: It was a tremendously good learning experience for me to
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Speaker 1: stay true to your values of investing. Ultimately, they work
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Speaker 1: out you.
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Speaker 2: Are identifying something that I'm so fascinated by. The problem
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Speaker 2: we run into with surveys or even the risk tolerance questionnaires.
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Speaker 2: Is all you find out is, hey, what has the
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Speaker 2: market done for the past six months. If the market's
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Speaker 2: been good, hey, I of course I want more risk.
6:34
Speaker 2: I'm more than comfortable with it. And if the market
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Speaker 2: got shellacked, no, no, no, I can't so offer anymore
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Speaker 2: draw downs. It's just pure psychology.
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Speaker 1: And I would go one step further. You know this,
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Speaker 1: you're in the business, but when you first meet someone,
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Speaker 1: you never know the ones that are going to be
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Speaker 1: truly risk averse or truly can withstand the vault to
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Speaker 1: the and ones that can. Some people say, don't worry,
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Speaker 1: I'm not worried about the draw downs, and the minute
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Speaker 1: happens on the phone to you, and some people I
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Speaker 1: told you I wasn't worried and I didn't call you.
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Speaker 1: And you can never know just the first time you
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Speaker 1: meet people who that's going to be.
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Speaker 2: It's a challenge figuring out who people really are not easy.
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Speaker 2: So you start at Morgan Stanley in nineteen ninety one,
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Speaker 2: you're in. That's a long time ago. You start on
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Speaker 2: the private wealth side. What led you to becoming a
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Speaker 2: portfolio manager with Morgan Stanley Wealth Strategy.
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Speaker 1: So if you think about my career, I learned to
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Speaker 1: be a fundamental analyst. I went to Universe Chicago and
7:29
Speaker 1: learned that, oh, there's quantitative factors that drive a stock
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Speaker 1: price beyond kind of what's going on at the company level.
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Speaker 1: The third part of my experience was being in prior
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Speaker 1: wealth management. Clients want to believe they all buy low
7:42
Speaker 1: and sell high, but bear you know that doesn't isn't
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Speaker 1: the case.
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Speaker 2: Somebody does accidentally, someone randomly top ticks and bottom ticks
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Speaker 2: of market, but nobody does that conceive exactly.
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Speaker 1: And here's a great example of what I mean. If
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Speaker 1: you think about the years twenty twenty. In twenty twenty one,
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Speaker 1: growth stocks took off right, but in twenty twenty two
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Speaker 1: they got crushed. Do you think more money went into
8:04
Speaker 1: growth managers and funds in twenty twenty one or the
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Speaker 1: end of twenty twenty two after they got crushed.
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Speaker 2: The flows are always a year behind me exactly what
8:15
Speaker 2: people are backwards.
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Speaker 1: Like well, and that's because there's something called the tear sheet.
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Speaker 1: If you were my client, I went to you and said, Barry,
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Speaker 1: I think you should invest in emerging markets because look
8:24
Speaker 1: how terribly it's done. The last five years and I can.
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Speaker 1: You're the tear sheet everybody. Hey, I hate it. So
8:31
Speaker 1: the problem with this business is a stock price does
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Speaker 1: not care what happened in the past. It only cares
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Speaker 1: about what's happened in the future. But as humans, we
8:40
Speaker 1: all suffer from recency buyas. So what I observed in
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Speaker 1: the nineties, it's a long winted answer. Your question is
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Speaker 1: what I observed in the nineties. As a coverage offer,
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Speaker 1: you can't get clients to actually buy what's out of favor.
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Speaker 1: And the flaw in the whole growth value US international
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Speaker 1: is people frame, Oh, maybe I should buy more growth
9:03
Speaker 1: because it's working well, except it gets too expensive. So
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Speaker 1: the reason I left being in wealth management, I was
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Speaker 1: convinced that I could start strategies using more quantitative but
9:16
Speaker 1: give us flexibility. So if we could start core strategies
9:20
Speaker 1: so that if growth got too expensive, we could tilt
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Speaker 1: away from growth, or if Europe wasn't working, we could
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Speaker 1: tilt away from Europe. That gave us more flexibility as
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Speaker 1: an active manager, versus saying I'm only a growth manager,
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Speaker 1: that I'm always trying to justify why you should buy growth,
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Speaker 1: or if I'm a value manager always justifying why buy value. Remember,
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Speaker 1: by nineteen ninety nine, a half of value managers had
9:44
Speaker 1: gone out of business in the last three years, that
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Speaker 1: just before they took off.
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Speaker 2: That's unbelievable. I know folks who run short hedge funds
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Speaker 2: and they say they could always tell when we're due
9:55
Speaker 2: for a major correction because that's when all of their
9:58
Speaker 2: redemptions and outflows hit a crescendo.
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Speaker 1: And so that's the problem with the dedicated style is
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Speaker 1: you're always fighting human behavior just at the juncture with
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Speaker 1: which you should be investing. They're selling, they're selling their stocks.
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Speaker 2: So let me ask you the flip side of the question.
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Speaker 2: If you can't get people or if it's really challenging
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Speaker 2: to make people comfortable with buying out of favor styles
10:25
Speaker 2: or companies, can you get them to sell the companies
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Speaker 2: that are in favor and have had, you know, an
10:32
Speaker 2: exorbitant run up and are really pricey or is that
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Speaker 2: just the other side of the same coin.
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Speaker 1: It's the other side of the same coin. But I
10:38
Speaker 1: think what complicates is is taxes, sure, because people don't
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Speaker 1: want to sell for taxes and general Electric was a
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Speaker 1: very important experience in my life in a you know
10:50
Speaker 1: back in the nineties, which was it became the number
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Speaker 1: one stock. Everyone loved it, and then you know, it
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Speaker 1: went through a can't grow as quickly anymore. So the
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Speaker 1: issue that I see in the industry is stocks never
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Speaker 1: survive as the number one company, and so eventually they
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Speaker 1: decline and people don't want to take money off the
11:14
Speaker 1: table when they're the number one or tops because they
11:17
Speaker 1: have big gains. And then ultimately people sold a lot
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Speaker 1: of General Electric with a lot less of a gain.
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Speaker 1: So the trick is is to reduce the exposures over time.
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Speaker 1: So if I'm a core manager and I know that
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Speaker 1: growth is expensive relative to its history versus value, we'll
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Speaker 1: tilt the portfolio, but we won't go all into value
11:38
Speaker 1: all in growth because timing these things is very, very tricky.
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Speaker 2: So you've been with Morgan Stanley since nineteen ninety one,
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Speaker 2: three decades with the same firm, pretty rare these days.
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Speaker 2: What makes the firm so special? What's kept you there
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Speaker 2: for all this time?
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Speaker 1: Well, you have to remember that when I started in
11:56
Speaker 1: nineteen ninety one, wealth management was a relatively small part
11:59
Speaker 1: of of the firm, and I give James Gorman tremendous credit.
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Speaker 1: He really grew that area because of the stability of
12:08
Speaker 1: the cash flow. You know, I'm a pretty stable cash flow.
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Speaker 1: And then when I progressed to Morgan Stanley Investment Management,
12:15
Speaker 1: it was the same concept, which was we value the
12:18
Speaker 1: multiple on stable cash flows is higher than on capital
12:24
Speaker 1: markets flows. And so that's I've kind of followed the
12:27
Speaker 1: progression of how Morgan Stanley's changed, and that's been a
12:31
Speaker 1: great opportunity. And then I look and say, well, I
12:33
Speaker 1: was able to go from wealth management into the asset
12:37
Speaker 1: management because the firm grew in that era. So it's
12:40
Speaker 1: been a tremendously great firm to be with. But I've
12:43
Speaker 1: you know, my career has changed over time as the
12:46
Speaker 1: firm's changed over time.
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Speaker 2: Sure, I had John mac on about a year ago
12:50
Speaker 2: and he described that exact same thing, the appeal of
12:54
Speaker 2: wealth management, and part of the reason what was a
12:57
Speaker 2: Dean winner. The big acquisition that was done was, hey,
13:00
Speaker 2: this allows us to suffer the ups and downs in
13:03
Speaker 2: the other side of the business, which has potential for
13:06
Speaker 2: great rewards but no stability versus ready steady, moderate gains
13:11
Speaker 2: from the funeral wealth management.
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Speaker 1: We bought Smith Barney another thing. So then over the
13:16
Speaker 1: acid management side, there's eating Vance each trade wealth management,
13:20
Speaker 1: and with eat Advance came Parametric and Calvert. So the
13:24
Speaker 1: firm has grown in the areas that I've grown personally.
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Speaker 1: So it's been a great, great marriage for a long time.
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Speaker 2: So your experience with General Electric, I had a similar
13:33
Speaker 2: experience with EMC and with Cisco late nineties, trying to
13:37
Speaker 2: get people to recognize, hey, this has been a fantastic run,
13:41
Speaker 2: but the growth engine isn't there, the trend has been broken.
13:45
Speaker 2: Don't be afraid to ring the bell. And I'm not
13:48
Speaker 2: an active trader. I'm a long term holder. Getting people
13:53
Speaker 2: to sell their winners not easy to.
13:55
Speaker 1: Do, very hard. But also when stocks get very very big,
13:58
Speaker 1: companies get very very big, it just gets tougher to grow.
14:02
Speaker 1: In my experience, and this has nothing to ge just
14:05
Speaker 1: in general, is when companies get big, usually the government
14:09
Speaker 1: starts looking into their business because they might dominate too much.
14:13
Speaker 1: And so it's a combination of why over time, and
14:17
Speaker 1: I know this is hard to believe given the last
14:19
Speaker 1: couple of years, why the equal weighted SMP does actually
14:22
Speaker 1: outperform the cap weighted S and P because companies mid
14:26
Speaker 1: cap companies that are moving up it's easier to grow.
14:29
Speaker 2: Well, it hasn't been twenty five years since the Microsoft
14:32
Speaker 2: any trust. Uh boy, that's that's that's amazing. How often
14:37
Speaker 2: are equal weight SMP outperforming?
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Speaker 1: It outperforms about half the time. It's certainly had. I mean,
14:43
Speaker 1: think about last year and through October, the cap weighted
14:47
Speaker 1: to perform the equated by eleven hundred base ports. Wow.
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Speaker 1: That's But the thing that's fascinating about this verier and
14:53
Speaker 1: again you know this is that it's always the first
14:56
Speaker 1: year off of bear market low investors sell. So tail
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Speaker 1: flows were negative from the low of October twenty two
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Speaker 1: until for a year in that November twenty three exactly.
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Speaker 1: But if you go back to twenty twenty March of
15:10
Speaker 1: twenty twenty, flows were negative until February of twenty one.
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Speaker 1: So it always takes about.
15:17
Speaker 2: A February twenty. That's amazing because from the lows in
15:20
Speaker 2: March it was a huge set of game.
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Speaker 1: Net flows from muta funds ets. They're always negative the
15:27
Speaker 1: first year because of that rear view mirror recency bias.
15:30
Speaker 1: The reason why that's relevant, Barry, is because when investors
15:34
Speaker 1: finally said I shouldn't sell anymore, I should buy. They're
15:37
Speaker 1: not going to buy what's already worked. They're looking for
15:39
Speaker 1: other things and that's when the equated really started out before. Huh.
15:42
Speaker 1: Really interesting.
15:43
Speaker 2: So let's talk a little bit about your concept of
15:47
Speaker 2: applied investing. What does that mean? What is applied investing involved?
15:53
Speaker 1: Okay, so there's the theoretical story about it, and then
15:56
Speaker 1: there's a practical story. I'm sure you'll get a kick
15:57
Speaker 1: out of the practical, But the theoretical is that I
16:01
Speaker 1: don't believe that a stock price return comes purely from
16:05
Speaker 1: what's going on. Fundamentally, you have to decide should I
16:07
Speaker 1: own growth, value, large cap, mid cap US versus non
16:13
Speaker 1: US any stocks return? About two thirds of return in
16:17
Speaker 1: any one year can be defined by those, So we
16:20
Speaker 1: have to get that right first, and that's the quantitative size.
16:23
Speaker 1: So we use factor models to say, hey, should we
16:26
Speaker 1: own growth stocks or value stocks? And so we tilt
16:29
Speaker 1: our portfolios quantitatively based on which of those factors are
16:34
Speaker 1: setting a signal that they'll work in the future.
16:37
Speaker 2: So let me just make sure I understand this geography, size, sector,
16:43
Speaker 2: and style, all the four metrics. If you're looking at
16:46
Speaker 2: and trying to tilt into what you expect to be
16:49
Speaker 2: working away from.
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Speaker 1: Exactly, and the goal of that is to keep people
16:54
Speaker 1: in the game. Flip side is you know things are
16:57
Speaker 1: out of favor, they can stay out of favor. The
16:59
Speaker 1: problem in this business is styles and investing can stay
17:03
Speaker 1: out of favor longer than the client's patients duration.
17:07
Speaker 2: Just look at value in the twenty tens. I mean,
17:09
Speaker 2: if you were not leaning into growth, you were left
17:13
Speaker 2: way behind exactly.
17:14
Speaker 1: And what I observe from my time being advisor is
17:17
Speaker 1: at the end of the day, clients don't really care
17:19
Speaker 1: where they own growth or value. They don't care where
17:21
Speaker 1: they own European US. They want to make money and
17:25
Speaker 1: they don't want to go backwards. And if all you
17:27
Speaker 1: keep saying is yes, but you know, my value manager
17:30
Speaker 1: has outperformed the value index and they're like, yeah, but
17:32
Speaker 1: the S and P is going through the roof, right,
17:35
Speaker 1: So you have to have some flexibility in your approach.
17:38
Speaker 1: So I wanted to start a group that at the
17:41
Speaker 1: core would use those quantitative metrics. But pure quantitative takes
17:48
Speaker 1: out kind of the fundamentals of investing, because a certain
17:51
Speaker 1: portion of a stock's return comes from what's going out
17:54
Speaker 1: the company level. And the other thing is if all
17:56
Speaker 1: I did was focused on the quantitative. You'd end up
18:00
Speaker 1: owning three hundred securities. So let's talk tom and an
18:03
Speaker 1: SMA can't do that, or you don't drive enough active share.
18:07
Speaker 2: SMA is separately managed account. Let's talk about active share.
18:11
Speaker 2: Because your portfolios are fairly concentrated. The US core portfolio
18:18
Speaker 2: is thirty to sixty companies. That's considered a modest holding,
18:23
Speaker 2: a concentrated holding. Tell us about the thinking behind that concentration.
18:28
Speaker 1: So it's funny going back to that first job at
18:30
Speaker 1: Brown Brothers, you know, and the time in the eighties,
18:33
Speaker 1: no one knew about passive investing. But I observed that,
18:36
Speaker 1: you know, they'd have these portfolios and they'd have kind
18:39
Speaker 1: of two or three stocks in every sector, so you'd
18:41
Speaker 1: end up with you know, one hundred, one hundred and
18:43
Speaker 1: fifty stocks, and you know, they not that they did poorly,
18:46
Speaker 1: but they never really you know, it's really hard to
18:49
Speaker 1: drive a lot of active you know.
18:50
Speaker 2: Performance everything is one to two percent.
18:52
Speaker 1: And at the time it wasn't really there wasn't really
18:55
Speaker 1: passive investing. But then as as time progressed, all these
18:58
Speaker 1: studies came out and said, well, actually the most excess
19:02
Speaker 1: return in active management comes from managers that are very,
19:06
Speaker 1: very active. And if you own one hundred and fifty
19:09
Speaker 1: stocks and you're the benchmark is the S and P,
19:12
Speaker 1: you're not active. So it was clear to me that
19:15
Speaker 1: we needed very concentrated portfolios but control the risk. And
19:20
Speaker 1: so that's why we run these limited portfolios. The applied
19:24
Speaker 1: term is so it gave some quantitative approach to what
19:28
Speaker 1: we do. But here's the practical barrier, which is, when
19:31
Speaker 1: the firm came to me and said, okay, you're going
19:33
Speaker 1: to become an asset management arm, you got to come
19:36
Speaker 1: up with a name for your team. I knew that
19:39
Speaker 1: these firms show asset management companies alphabetically, so apply to this.
19:45
Speaker 1: I wasn't going to be ze applied, right. I wanted
19:49
Speaker 1: to be at the top of the list.
19:50
Speaker 2: That's very that's triple a exterminator. So let's talk about
19:56
Speaker 2: two things you just mentioned. One is active share. But
19:59
Speaker 2: really what you're implying are that a lot of these
20:03
Speaker 2: other funds with two hundred and three hundred or more holdings,
20:07
Speaker 2: they're all high fee closet indexers. What's the value there?
20:11
Speaker 1: Right? And that's why as an active manager, I have
20:13
Speaker 1: nothing against ETFs. I think it's done great for the
20:17
Speaker 1: industry because shame on funds that own lots and lots
20:21
Speaker 1: of securities. You're not doing a service to your investing.
20:24
Speaker 1: But at the end of the day, if I marginally underperform,
20:28
Speaker 1: not me, but in general, you know, it will take
20:30
Speaker 1: time to lose your assets. You know, what's right for
20:32
Speaker 1: the money management firm is not always what's right for
20:35
Speaker 1: the investors. So the right thing is choose passive strategies.
20:39
Speaker 1: But there's a place for activities, but it's got to
20:41
Speaker 1: be active.
20:42
Speaker 2: Core and satellite. You have a core of a passive index,
20:45
Speaker 2: but you're surrounding it, which something that gives you a
20:47
Speaker 2: little opportunity for more upside exactly. Huh really really interesting.
20:51
Speaker 2: So if the US holdings are thirty to sixty companies,
20:55
Speaker 2: the global portfolio is even more concentrated about twenty companies.
21:00
Speaker 1: Yeah, I mean, so taking a step back again, one
21:04
Speaker 1: of the you know, remember I run mutual funds, but
21:07
Speaker 1: I started in the separate managed account business. So what
21:11
Speaker 1: it what means is they would wealth manage would implement
21:15
Speaker 1: our portfolio for individuals by buying socks. And one of
21:20
Speaker 1: the things that I observed is that clients pull from
21:24
Speaker 1: the market faster than they pull from stocks. So in
21:29
Speaker 1: other words, when you're worried about the market, if it's
21:32
Speaker 1: about the market some macro story, Well do you want
21:36
Speaker 1: to sell your Microsoft? Oh? No, I like Microsoft, but
21:39
Speaker 1: I'm worried about the market. Okay, Well, owning individual securities
21:43
Speaker 1: is really powerful because it actually keeps people invested.
21:46
Speaker 2: There's a brand name, there's a brand.
21:49
Speaker 1: Exactly, so people are more likely to pull from the market.
21:52
Speaker 1: So I believe in owning stocks. But the problem is
21:56
Speaker 1: again it goes back to but if you own two
21:57
Speaker 1: hundred sucks, then they don't have any wedded So did
22:00
Speaker 1: we start a strategy? We started this so eight where
22:02
Speaker 1: all the securities would be on one page. That's amazing.
22:05
Speaker 2: So your global portfolio also has some international US companies.
22:11
Speaker 2: So in addition to things like LVMH and some other
22:14
Speaker 2: international stocks, you have Microsoft, you have Costco. Correct, what's
22:17
Speaker 2: the thinking of putting those because giant US companies in
22:21
Speaker 2: a global portfolio.
22:21
Speaker 1: It goes back to Barry that concept, which is clients
22:25
Speaker 1: don't care really where they make their money. And the
22:29
Speaker 1: problem with the benefit of global global strategies. I can
22:33
Speaker 1: own some US stocks and international only I can't own
22:37
Speaker 1: and what happens If the US just so happens to
22:41
Speaker 1: do better than the rest of the world, then international
22:44
Speaker 1: doesn't work as well. So it just gives us more
22:47
Speaker 1: flex It's that flexible flexibility to go where the opportunity
22:51
Speaker 1: set up.
22:51
Speaker 2: And to that point, your fund. The Morgan Stanley Institutional
22:55
Speaker 2: Global Concentrated Funds, which does have US stock trounce the
23:02
Speaker 2: MSCI X US because the US has been out performing international.
23:08
Speaker 2: That's another style for fifty since the financial crisis. The
23:11
Speaker 2: US has been crushing everyone else.
23:14
Speaker 1: But think about this way also, if I can own
23:16
Speaker 1: twenty stocks, okay, but they're not all correlated to each other,
23:19
Speaker 1: so they have a lot of different themes. Like I
23:22
Speaker 1: really like this the infrastructure stocks right now, but I
23:27
Speaker 1: also think they're a place as you said Microsoft, but
23:32
Speaker 1: luxury brands only a few stocks but have a different theme.
23:36
Speaker 1: Then I can control the risk in the portfolio. You
23:39
Speaker 1: act to share, good concentrate high act to share, but
23:42
Speaker 1: lower kind of risk.
23:44
Speaker 2: So when I look at the Morgan Stanley Institutional US Core,
23:49
Speaker 2: the description is we seek to outperform the benchmark, regardless
23:54
Speaker 2: of which investment style, value or growth, is currently in favor.
23:58
Speaker 2: So your style agnostic. You want to just stay with
24:01
Speaker 2: what's working exactly.
24:02
Speaker 1: And Philip Kim is the other portfolio manager. We've worked
24:05
Speaker 1: together fourteen years. I started these quantitative models and then
24:08
Speaker 1: he really took it to the next level, and this
24:10
Speaker 1: was what has the likelihood of outperforming for the next
24:14
Speaker 1: twelve to eighteen months. From a style standpoint, that's how
24:18
Speaker 1: we buy us the portfolio. Things could get just too expensive,
24:22
Speaker 1: things get too cheaps, but we need to see some
24:24
Speaker 1: migration in the opposite direction, and then we buy us accordingly.
24:28
Speaker 1: We want to stay in the game.
24:29
Speaker 2: What about the Russell three thousand strategy that's not It's
24:34
Speaker 2: obviously more concentrated than the Russell, but it's still a
24:37
Speaker 2: few hundred stocks. Tell us what goes into that thing.
24:39
Speaker 1: Well, we noticed that our just our quantitative factor model
24:43
Speaker 1: alone was doing well right beyond just adding the stock
24:47
Speaker 1: to buy. So we wanted to start a strategy that
24:51
Speaker 1: would add a little bit of excess return versus just
24:55
Speaker 1: buying an ETF that was just focused on that factor models,
24:58
Speaker 1: but we would diverse five away. The stock risk really intriguing.
25:02
Speaker 2: So let's talk a little bit about Slimmon's take, which
25:05
Speaker 2: is not only widely read at Morgan Stanley, it's also
25:09
Speaker 2: pretty widely distributed on the street itself. Towards the end
25:12
Speaker 2: of twenty twenty three, you put out a piece a
25:15
Speaker 2: few lessons from the year, and I thought some of
25:18
Speaker 2: these were really fascinating, Starting with the S and B
25:22
Speaker 2: five hundred has produced a positive return in sixty seven
25:26
Speaker 2: of the past ninety three years, the market produced two
25:30
Speaker 2: consecutive down years only eleven times. That's amazing.
25:34
Speaker 1: I had no idea. Well, I mean, think about it,
25:37
Speaker 1: the likelihood over time in any one year the market's
25:40
Speaker 1: going to go up, and if it doesn't go up,
25:44
Speaker 1: that's irregular, but then to have another year in a
25:46
Speaker 1: row is very very irregular. So that's why being in
25:50
Speaker 1: twenty twenty three saying hey, it's it's highly likely it's
25:53
Speaker 1: going to be a good year, just purely based on
25:56
Speaker 1: the odds, and then you layer in that whole recency
25:59
Speaker 1: by rear view mirror, and people were way too negative.
26:03
Speaker 2: Yeah, At the end of twenty twenty two, the SMP
26:06
Speaker 2: peak to troth was down about twenty five percent. You
26:10
Speaker 2: point out there were only eight instances since nineteen sixty
26:14
Speaker 2: where you had that level of draw down and the
26:17
Speaker 2: average one year return was twenty two percent following that.
26:21
Speaker 1: So I put out a piece in September of twenty
26:24
Speaker 1: twenty two saying market's down twenty percent, you should add
26:28
Speaker 1: money down twenty percent, And of course I felt like
26:30
Speaker 1: an idiot, you know, a month later, because and then
26:32
Speaker 1: the mark was down twenty five percent, and I produce
26:34
Speaker 1: a piece saying the average return is just over twenty
26:38
Speaker 1: percent if you buy into down twenty five percent, which
26:41
Speaker 1: doesn't necessarily mean it stops going down, right, But what's
26:43
Speaker 1: amazing about that is, you know what the return off
26:46
Speaker 1: that October twenty second low of twenty twenty two was
26:50
Speaker 1: thirty something twenty one percent. Oh really, dead right, dead
26:53
Speaker 1: on in line. It's uncanny how these things repeat itself.
26:56
Speaker 1: And that's Barry again. It goes back to, you know,
26:59
Speaker 1: your experience experiences the macro changes, but behaviors don't. That's
27:05
Speaker 1: the consistency of this business. And that's what I'm fascinated with.
27:08
Speaker 2: Human nature is what it is, no doubt about it.
27:11
Speaker 1: And that's what gave me confident that the fun flows
27:14
Speaker 1: would turn positive at some point in the fourth quarter,
27:17
Speaker 1: because it was a year off below.
27:19
Speaker 2: I really liked that be dubious when a stock is
27:21
Speaker 2: declared expensive or cheap based on a singular evaluation methodology
27:26
Speaker 2: like pe, this is a pet peeve of mine. The
27:30
Speaker 2: E is an estimate, it's someone's opinion. How can you
27:34
Speaker 2: rely on something, especially from someone who doesn't have a
27:38
Speaker 2: great track record of.
27:39
Speaker 1: Making it's the I think that's the biggest air investors
27:43
Speaker 1: make over time is well, this stock is you know,
27:46
Speaker 1: as you said, this stock is cheap or this market.
27:49
Speaker 1: Think about Europe mark. Europe has looked cheaper than the
27:53
Speaker 1: US for a number of years. The flaw on that
27:57
Speaker 1: is the E is a forward estimate, and it's turned
28:00
Speaker 1: out that the E for Europe hasn't been as good
28:02
Speaker 1: as what's expected, and the E for the US, especially
28:06
Speaker 1: the NASTAC has been a lot higher than was expected.
28:10
Speaker 1: So the denominator has come up in the US, which
28:13
Speaker 1: makes it Pe lower, and the denominator has come down US,
28:16
Speaker 1: which made it look more expensive.
28:18
Speaker 2: So that's always amazing is if the estimates are wrong
28:21
Speaker 2: to the downside, well then expensive stocks aren't that expensive,
28:26
Speaker 2: and vice versa. If the estimates are too high, cheap
28:29
Speaker 2: stocks really ain't cheap right.
28:31
Speaker 1: I watched that, but we also watch revisions, and I've
28:34
Speaker 1: learned also from being, you know, cynically in this business.
28:37
Speaker 1: Companies don't always come clean right away and say, oh,
28:40
Speaker 1: business really bad. It's that they drip out the news.
28:43
Speaker 1: Usually one bad quote as follows another bad quote. I mean,
28:46
Speaker 1: it's very rare, so be careful that. And analysts are
28:51
Speaker 1: slow to adjust their numbers. Anytime someone says, I'm cutting
28:56
Speaker 1: my estimates, cutting my price target, but I think it's bottomed. Yeah,
29:01
Speaker 1: be careful.
29:03
Speaker 2: That's always amusing. I thought this was really very perceptive.
29:06
Speaker 2: Over thirty seven years in the investment business, I have
29:09
Speaker 2: become convinced that the most money is made when perceptions
29:14
Speaker 2: move from very bad to less bad. I love that
29:17
Speaker 2: because if you've lived through the dot com implosion, or
29:21
Speaker 2: the financial crisis, or even the first quarter of twenty twenty,
29:25
Speaker 2: you know how true that is.
29:27
Speaker 1: Think about last year. You know it's the old saying
29:30
Speaker 1: by Sir John Templeton. Bull markets are born on pessimism,
29:33
Speaker 1: they grow in skepticism, they mature on optimism, and they
29:37
Speaker 1: die on you for it. Well, we had a bear
29:39
Speaker 1: market bottom in October of twenty twenty two. And so
29:44
Speaker 1: we came into last year twenty twenty three, with it's
29:48
Speaker 1: going to be a hard landing, it's going to be bad,
29:50
Speaker 1: and so there's high levels of pessimism. And now as
29:53
Speaker 1: you advance into the fourth quarter, fun flows turned positive
29:58
Speaker 1: as people realize, well, maybe it wasn't gonna be so bad.
30:01
Speaker 1: We've moved into the skepticism phase. So that's why the
30:04
Speaker 1: biggest return year is always the first year off the low,
30:10
Speaker 1: because that's the biggest pivot and has the least volatility.
30:14
Speaker 1: We didn't have a lot of volatility last year, and.
30:16
Speaker 2: We saw that in eight oh nine, and we saw
30:20
Speaker 2: that in twenty twenty twenty. It was really, it was
30:23
Speaker 2: really quite amazing. The flip side of this is also true,
30:27
Speaker 2: which is most money is lost when things moved from
30:31
Speaker 2: great to just good.
30:33
Speaker 1: Well again, if I go back to kind of growth investing,
30:37
Speaker 1: it got expensive and the growth rates of companies were
30:41
Speaker 1: quite as good. And you know, in twenty twenty two
30:44
Speaker 1: and the Fed started raising rates and that was problematic.
30:47
Speaker 1: It was no different. It reminded me a little bit
30:49
Speaker 1: of the dot com bubble. What brought down the dot
30:52
Speaker 1: com bubble is that companies just couldn't report the earnings
30:55
Speaker 1: that were expected, and you had plenty of time to
30:58
Speaker 1: get out. But the problem is what I said on
31:00
Speaker 1: the dot com bubble, people wanted to kept buying these
31:02
Speaker 1: stocks as they're going lower because they were you know,
31:05
Speaker 1: rear view mirror investing. They were their previous the loves.
31:09
Speaker 1: And what's amazing is think about I said before half
31:11
Speaker 1: the value managers allount of business ninety nine. By the
31:14
Speaker 1: year two thousand and eight, you know what the biggest
31:16
Speaker 1: sector of the SMP was financials. They grew from nothing
31:20
Speaker 1: to thirty percent of the sp So value worked all
31:24
Speaker 1: through the first period until we know what happened in
31:26
Speaker 1: Great Financial Crisis.
31:27
Speaker 2: It's amazing that muscle memory. When you're rewarded for buying
31:31
Speaker 2: the dip for a decade, it's a tough habit to break, exactly.
31:35
Speaker 2: So here's another really interesting observation of yours. Whatever the
31:39
Speaker 2: hot product is rarely works the next twelve months.
31:43
Speaker 1: It's because a hot product invariably pushes oftentimes valuations to
31:50
Speaker 1: extreme And one of the things that we got very
31:52
Speaker 1: right in twenty twenty three was in twenty twenty two
31:56
Speaker 1: bear market, what did people buy into the lows of
31:58
Speaker 1: bear market they bought defense stocks. Dividend oriented, low volatility
32:04
Speaker 1: type strategies became very popular in twenty twenty two during
32:09
Speaker 1: a bear market, and so we could see that the
32:12
Speaker 1: defensive factor safety became very expensive. So as we came
32:17
Speaker 1: out of this bear market, what lack consumer staples, healthcare utilities,
32:23
Speaker 1: all the safe things, so hot products pushes things to
32:29
Speaker 1: extreme and that usually, you know, unwinds itself badly.
32:34
Speaker 2: Historically, once the FED stops hiking rates, equity rallies last
32:40
Speaker 2: longer and go higher than anyone expects.
32:43
Speaker 1: Explain the thinking though, So I think it's good news
32:45
Speaker 1: for this year, but also worries me about this year
32:47
Speaker 1: is if you look at the history of the period
32:50
Speaker 1: of time when the FED said we're done hiking till
32:53
Speaker 1: we're going to cut, that period does very very well
32:57
Speaker 1: for equities, and we're kind of at a juncture where
33:02
Speaker 1: we've done pretty well. But if they're not going to
33:04
Speaker 1: cut rates until the summer, I think there's more room
33:08
Speaker 1: to run for stocks now. The flip side is I
33:10
Speaker 1: hear a lot of people talk about when the FED cuts,
33:13
Speaker 1: the perception that that's going to be good for equities.
33:17
Speaker 1: I'm not so sure about that because if you look
33:19
Speaker 1: back in history, when the FED cuts, markets tend to
33:23
Speaker 1: go down initially, not up. And you could argue yes,
33:26
Speaker 1: but Andrew, that's because usually when they're raising rates, it's
33:29
Speaker 1: an economic cycle, and therefore, if they're cutting, there's a
33:33
Speaker 1: problem and this time is all about inflation. But what
33:37
Speaker 1: worries me is when the Fed does announce the cut, well,
33:40
Speaker 1: people say, oh, they know something you don't know. There's
33:45
Speaker 1: a problem out there, And I think there's an that
33:47
Speaker 1: will increase the anxiety. And so I think that's we're
33:52
Speaker 1: in a good period right now. But it worries me
33:54
Speaker 1: when they do cut, will it be people start to
33:56
Speaker 1: worry about there's a problem in the economy.
33:59
Speaker 2: See, I'm a student of Federal Reserve history, and I
34:02
Speaker 2: could say with a high degree of confidence, they don't
34:06
Speaker 2: know anything that you don't know. They look at the
34:09
Speaker 2: same data. They're populated by humans. None of them have
34:13
Speaker 2: demonstrated any particular sort of prescience. And if we watched
34:18
Speaker 2: the past decade, they were late to get off their
34:21
Speaker 2: emergency footing. They were late to recognize inflation, they were
34:24
Speaker 2: late to recognize inflation peaked, and now it feels like
34:27
Speaker 2: they're late to recognize, Hey, you guys, won you begin
34:30
Speaker 2: inflation take a victory lap. They seem to always be
34:34
Speaker 2: talking about backwards looking. They always seem to be behind
34:37
Speaker 2: the right.
34:38
Speaker 1: But I just think the stock market is an emotional beast. Sure,
34:41
Speaker 1: And you know, and I looked last year and the
34:44
Speaker 1: bears people were too pessimistic. Every time they popped their
34:47
Speaker 1: head out of the den, they got stampeded. And so
34:49
Speaker 1: they'll have a better year this year. And I think
34:51
Speaker 1: it will scare investors, and cynically, I can't help but think, well,
34:55
Speaker 1: people missed. A lot of people missed last year, and
34:57
Speaker 1: the other started to get back in. And after a
35:00
Speaker 1: very low volatility year, there's always more volatile the next year,
35:04
Speaker 1: and so it's inevitable it's going to be more. It
35:06
Speaker 1: doesn't mean it'll be a bad year for equities, it
35:08
Speaker 1: just will have more gut wrenching periods.
35:10
Speaker 2: I love this data point. Since nineteen forty, markets have
35:15
Speaker 2: always gone up in the year when an incumbent president
35:19
Speaker 2: runs for reelection seventeen for seventeen. Now, if we break
35:23
Speaker 2: that down, what you're really saying is, hey, if an
35:26
Speaker 2: incumbent isn't running, the economy really has to be in
35:29
Speaker 2: the stinkaroo when the stock market is following. But anytime
35:33
Speaker 2: an incumbent is running typically means we're doing pretty okay well.
35:37
Speaker 1: And remember I said, didn't get reelected, just ran for reelection, right,
35:42
Speaker 1: And so what happens, and I see it this year,
35:45
Speaker 1: is when presidents run for reelection, they want to juice
35:49
Speaker 1: the economy. They want the economy going well. And we
35:51
Speaker 1: have Joe Biden has in his pocket the Infrastructure Act,
35:55
Speaker 1: the Chips Act, in the Inflation Reduction Act, we own.
35:59
Speaker 1: The reason why we own industrial stocks is because they
36:04
Speaker 1: are telling us that the money is just starting to
36:08
Speaker 1: come in from the government and these projects are getting
36:10
Speaker 1: just getting off the way. We've seen this with the
36:12
Speaker 1: Chips Act. That money has just started poor. That's why
36:15
Speaker 1: the market tends do well, because the economy stays afloat
36:18
Speaker 1: during a reelection year.
36:20
Speaker 2: And the really interesting thing about all this, you know,
36:22
Speaker 2: it's funny. The twenty twenties is the decade of fiscal stimulus,
36:25
Speaker 2: whereas the twenty tens were monetary stimulus. The first three
36:30
Speaker 2: Cares Acts, that was just a boatload of money that
36:33
Speaker 2: hit the market, hits the economy all at once. Each
36:36
Speaker 2: of the legislation packages you mentioned that's spending over a decade,
36:41
Speaker 2: that could be a pretty decent tail wind for a while.
36:43
Speaker 1: Very interesting between listening to Wall Street and what you
36:46
Speaker 1: listen to companies. And so I'm a company guy. I
36:48
Speaker 1: listen to companies, and I'll give you a great example.
36:50
Speaker 1: Right now, people think the consumer is getting tapped out,
36:52
Speaker 1: but on the costco call the other day, they say
36:55
Speaker 1: they see big ticket purchase items reaccelerating. Well, wait a minute,
36:59
Speaker 1: I thought, the considering which is it? Which is it? Right?
37:02
Speaker 1: And you know, and so the point of this is
37:04
Speaker 1: is that I go back to listen to what companies say,
37:07
Speaker 1: and I suspect as food inflation starts to come down
37:10
Speaker 1: and people have jobs, they actually could start to go buy,
37:13
Speaker 1: you know, higher ticket purchases.
37:15
Speaker 2: And we've seen some uptick in credit card use, but
37:18
Speaker 2: nothing problematic with the ability to service that debt still
37:22
Speaker 2: seems to be very much intact.
37:23
Speaker 1: Correct, And that goes back to last year. One of
37:25
Speaker 1: the reasons. The other reason I was optimistic is I
37:27
Speaker 1: kept hearing our companies say to me, I'm being told
37:30
Speaker 1: the recessions around the corner, but our business seems to
37:33
Speaker 1: be doing with it. We don't see it.
37:35
Speaker 2: That's really amazing. So let's talk a little bit about
37:38
Speaker 2: who your clients are. You obviously are working with all
37:42
Speaker 2: the advisors at Morgan Stanley, but you're managing mutual funds.
37:46
Speaker 2: Who are the buyers of those funds? Are they in house?
37:50
Speaker 2: Are they the rest of the investing community? Who are
37:53
Speaker 2: your clients?
37:54
Speaker 1: Yeah? I mean so that's when I left being advisor
37:57
Speaker 1: in two thousand and four, I started this group within
38:01
Speaker 1: more coan Stailing Wealth Management with the products were only
38:03
Speaker 1: available to financial advisors at Morgan Stailing. But when I
38:07
Speaker 1: left to go into more Cogan Saliing Investment Management in
38:10
Speaker 1: twenty fourteen, the purpose of that was to make my
38:13
Speaker 1: products available beyond more con Stailing Wealth Management because I
38:16
Speaker 1: was getting calls from consultants and institutional investors saying, how
38:21
Speaker 1: do we get access to these funds? And I'd have
38:23
Speaker 1: to think, well, you have to go through advisors, So
38:26
Speaker 1: that I wanted to broaden out the reach beyond. So
38:29
Speaker 1: I would say, we're on a number of platforms. You
38:32
Speaker 1: can buy our funds through the self directed route, and
38:36
Speaker 1: so we're broading out the distribution. And you mentioned the
38:40
Speaker 1: slim and take before that is a methodology that we
38:46
Speaker 1: use to reach out to our investor base. Obviously, I'd
38:50
Speaker 1: love to talk to each of every one of them,
38:51
Speaker 1: but I can't. But I've learned in this business, if
38:54
Speaker 1: you communicate in a way that they can understand. I
39:00
Speaker 1: don't mean understanding in a bad way, like but writing
39:03
Speaker 1: a six page di tribe about why my stocks are
39:06
Speaker 1: so great and why the rest of the market stinks,
39:08
Speaker 1: no one's going to read that. They put it aside
39:09
Speaker 1: and say I'll read it tonight, then they don't. But
39:11
Speaker 1: if you can provide short bullets of what's going on
39:15
Speaker 1: in the market, why people should be bullish or bearish,
39:19
Speaker 1: you provide them with talking points. And that's what we
39:21
Speaker 1: really try to do within the firm, but beyond the
39:24
Speaker 1: firm as well.
39:25
Speaker 2: Yeah, one of the reasons I like Slimmon's take is
39:28
Speaker 2: you really boil things down to brass tacks. You're not
39:31
Speaker 2: afraid to use third parties in some of your competitors research.
39:36
Speaker 2: You cite other people on the street when they have
39:40
Speaker 2: an interesting data point or and I very much appreciate
39:44
Speaker 2: that because a lot of people sort of take the
39:47
Speaker 2: if it wasn't invented here, it doesn't exist to us.
39:51
Speaker 1: Yeah, I mean, look, I want to grow the assets,
39:54
Speaker 1: I want to perform well, but I value the response
40:00
Speaker 1: is from those who sit on the front lines dealing
40:02
Speaker 1: with clients every day, because they're the ones that feel
40:06
Speaker 1: kind of the emotional side of the business. If you
40:09
Speaker 1: sit back in my office and all I'm looking at
40:13
Speaker 1: a company and just evaluating whether it's pe is appropriate
40:15
Speaker 1: and earnings, you're missing a huge part of this business.
40:18
Speaker 1: It's a behavioral business, and so having access to advisors
40:23
Speaker 1: and listening to their feedback is so important.
40:27
Speaker 2: So you serve on Morgan Stanley's Wealth Management's Global Investment Committee,
40:32
Speaker 2: what is that experience? Like, I would imagine that's a
40:34
Speaker 2: huge amount of capital and a tremendous responsibility.
40:38
Speaker 1: It is a huge amount of capital and it drives
40:41
Speaker 1: kind of suggested asset allocation for advisors. They don't necessarily
40:46
Speaker 1: have to pursue it that way. My input is obviously
40:50
Speaker 1: on the equity side, but they have people in the
40:53
Speaker 1: the fixed income, high yield alternatives and they all provide
40:58
Speaker 1: inputs into framing and overview. So I'm really I sit
41:02
Speaker 1: in more than Stanily Investment Management, but I do provide
41:05
Speaker 1: that context and I think they like to have me
41:07
Speaker 1: on because I actually have skin in the game and
41:09
Speaker 1: I run money for a living, and I'm not always
41:13
Speaker 1: there saying you gotta buy growth, you gotta buy value.
41:15
Speaker 1: So I'm an agnostic. I'm just trying to figure out
41:18
Speaker 1: where the kind of the ball is going.
41:20
Speaker 2: So in the old days, you used to speak with
41:22
Speaker 2: retail investors all the time as a PM. Do you
41:27
Speaker 2: miss that back and forth because there is some signal
41:31
Speaker 2: in all of that noise, whether it's fear or greed
41:35
Speaker 2: or emotion. How do you operate being arm's length away
41:40
Speaker 2: from that.
41:41
Speaker 1: That is a big concern I have is losing that access.
41:45
Speaker 1: So I still I'm going to I'm speaking an event
41:48
Speaker 1: tonight with you know, a room full of advisors, so
41:52
Speaker 1: and then you know, we'll get together afterwards and I'll
41:55
Speaker 1: listen to what they have to say. So I'm always
41:57
Speaker 1: interested in feedback that I get from advised. Obviously, I
42:01
Speaker 1: can't spend all day talking on the phone. That's the
42:04
Speaker 1: big reason why I left being an advisor was I recognize, hey,
42:08
Speaker 1: being advisor, you got to talk to your clients. So
42:10
Speaker 1: forth you can't manage money, and we're into you can't
42:13
Speaker 1: do both and anyone that things you can't you know,
42:15
Speaker 1: it's it's crazy and I really want to develop these models.
42:19
Speaker 1: But so so all these communication ways like slim and
42:23
Speaker 1: take is a way to be in touch with advisors,
42:26
Speaker 1: encourage them. Hey, you think you disagree, send me an email.
42:31
Speaker 1: You know, I'm happy to happy to hear from you
42:33
Speaker 1: because I think that's very important and really behavioral finance.
42:39
Speaker 1: You know, the longer I've been in this busin I've
42:41
Speaker 1: been in this business a long time, it's the behavioral
42:44
Speaker 1: finance that's the consistency of this business. Geopolitics changes, right,
42:49
Speaker 1: but how people react is it's not right.
42:52
Speaker 2: You can't control what country is invading what other country, but.
42:57
Speaker 1: You can manage your own behavior. And people a hard
43:00
Speaker 1: time with that exactly.
43:01
Speaker 2: It's really interesting. I know only have you for another
43:04
Speaker 2: five minutes, so let me jump to my favorite questions.
43:07
Speaker 2: I ask all of my guests starting with what have
43:09
Speaker 2: you been screaming these days? Tell us what's been either
43:12
Speaker 2: audio or video? What's been keeping you entertained?
43:15
Speaker 1: Yeah, so, if I think about my career, no one
43:18
Speaker 1: took me aside and said this is how you manage money, right, Like,
43:22
Speaker 1: think about it. I learned about fundamental research, I learned
43:24
Speaker 1: about quantitative I learn about the practicality of being in
43:28
Speaker 1: wealth management. And so I've always researched and watched. And
43:32
Speaker 1: what does that do to do with your question is
43:34
Speaker 1: I've learned my way to being successful portfolio managers. So
43:39
Speaker 1: I'm obsessed with kind of always learning along the way.
43:42
Speaker 1: So you know, when I watch podcasts, it's all about
43:45
Speaker 1: well or or listen to podcasts or watch you know things,
43:50
Speaker 1: it's all how to advance my knowledge base. Now, I
43:53
Speaker 1: did play tennis, you know, in college, and so I
43:56
Speaker 1: love all those you know, breakpoint first tea, know the
44:00
Speaker 1: formula one. I love all those things. But but you know,
44:03
Speaker 1: as my wife gets frustrated with me because I'm probably
44:05
Speaker 1: not gonna sit down and watch a three hour mindless
44:08
Speaker 1: movie because it's kind of like not not advancing, huh.
44:13
Speaker 2: Really really interesting to tell us about your mentors who
44:17
Speaker 2: helped to.
44:17
Speaker 1: Shape your career. So I mean, again, I look at
44:21
Speaker 1: points along the way we're in their valuable. When I
44:24
Speaker 1: got to Morgan Stanley Byron Ween, who you know, I
44:29
Speaker 1: barely knew, but he was the first person that I
44:33
Speaker 1: recognized had this very good touch of fundamentals. But also
44:37
Speaker 1: the psychology, and so he was a great mentor, even
44:41
Speaker 1: though he never really knew me, but listening and reading
44:44
Speaker 1: and understanding him was really important. But then I had
44:48
Speaker 1: a guy who ran our department named Glenn Reagan, who
44:51
Speaker 1: had come from studying money management organizations, and I didn't
44:54
Speaker 1: know how to start on money management organizing because it
44:56
Speaker 1: was a team within and how do you grow and diversify.
44:59
Speaker 1: So there's different people along the way that have really
45:03
Speaker 1: shaped me. I came out of Universe Chicago. Gene Fama
45:06
Speaker 1: told me buy cheap stocks. But then William O'Neill said, yeah,
45:10
Speaker 1: but that doesn't work, and you need to have some
45:12
Speaker 1: momentum to you, you know, like he didn't tell cancel. You
45:15
Speaker 1: need to know you had a little cancelor, so you
45:17
Speaker 1: need to cancel exactly. So there's been people along the
45:21
Speaker 1: way that have been great influences on me, that have
45:24
Speaker 1: mentioned me at the right time in my correct.
45:26
Speaker 2: What are some of your favorite books? And what are
45:28
Speaker 2: you reading right now?
45:29
Speaker 1: I just finished Same as Ever by Morgan House. Again,
45:33
Speaker 1: this concept of behavioral I will eat up at you
45:36
Speaker 1: put a behavioral anything about behaviors in front of me.
45:39
Speaker 1: I read it so like you know, Richard Thalor or
45:42
Speaker 1: misbehaving or you know, think fast and slow, all those
45:46
Speaker 1: boasts of books. Daniel Crosby is another one all those books.
45:49
Speaker 1: I just but I just finished that and I just
45:51
Speaker 1: love it because again, all he spends the whole book
45:53
Speaker 1: is about these things. They just don't change over to
45:56
Speaker 1: human nature, human human nature. I'll tell you the last story,
46:01
Speaker 1: so or I was tell you story I was. I
46:03
Speaker 1: was on the floor of the New York Stocks Change
46:06
Speaker 1: the day that Russian Vada Crimea and one of my
46:09
Speaker 1: stocks was down. My biggest position was down eight percent
46:12
Speaker 1: that day. And I said, they don't have any stores
46:16
Speaker 1: in Crimea. Why is a stock down? Well, because it
46:19
Speaker 1: was geopolitics, well you know. And within three days the
46:21
Speaker 1: stock came running back. So it's all it points to
46:24
Speaker 1: is sometimes fundamentals dislodge from you know, the stock prices,
46:29
Speaker 1: and you have to understand that there's a behavioral element.
46:32
Speaker 2: My favorite version of that story was are you familiar
46:36
Speaker 2: with Cuba? So Obama announces we're going to normalize or
46:41
Speaker 2: start the process of normalizing relationships with Cuba. There's a
46:44
Speaker 2: stock that trades under the symbol Cuba, having nothing whatsoever,
46:49
Speaker 2: and it runs up twenty percent just on the announcement
46:52
Speaker 2: because some algorithm picked up Cuba and bought it and
46:55
Speaker 2: off we go. Amazing. All right, our final two questions,
47:00
Speaker 2: what sort of advice would you give to a recent
47:02
Speaker 2: college grad interested in the career in either investment management
47:06
Speaker 2: or finance.
47:07
Speaker 1: Yeah, so it's interested to have for kids that are,
47:10
Speaker 1: you know, in the process of or have just come
47:12
Speaker 1: out of college, or in the process of it. And
47:14
Speaker 1: one of the dangers I see today is kids come
47:17
Speaker 1: out of school and they think they know exactly what
47:18
Speaker 1: they want to do, you know, and then and I'll say,
47:21
Speaker 1: you don't know what your capabilities are when you're twenty
47:25
Speaker 1: two years old. I mean I was an introvert where
47:27
Speaker 1: I was twenty two. I've I've realized in their early thirties,
47:30
Speaker 1: I knew how to communicate. So I all say, get
47:33
Speaker 1: into if you can get into a firm that has
47:36
Speaker 1: a lot of opportunities. You know, today there's less training programs,
47:40
Speaker 1: but those types of things with lots of opportunities. Because
47:43
Speaker 1: you don't know what you're going to be good at
47:45
Speaker 1: and what you're good at, always follow what you think
47:48
Speaker 1: you're interested in as long as it makes money, because
47:51
Speaker 1: that's ultimately, but you don't know initially. So I always
47:54
Speaker 1: encourage people initially, don't come out and say I want
47:57
Speaker 1: to do this the rest of my life. You don't know.
47:59
Speaker 1: That's too narrow. Try to go to something broad. That's
48:03
Speaker 1: the first advice. And I see today we're people too
48:06
Speaker 1: narrow in their focus.
48:08
Speaker 2: I think that's great advice. People. Most of the folks
48:12
Speaker 2: I work with who are very successful, they're not doing
48:15
Speaker 2: what they did right out of school. And to imagine
48:17
Speaker 2: that that's going to be your career very much misleading.
48:21
Speaker 2: And our final question, what do you know about the
48:23
Speaker 2: world of investing today that you wish you knew thirty
48:27
Speaker 2: plus years ago when you were first getting started.
48:29
Speaker 1: Well, I think, you know, thirty years ago, I thought
48:31
Speaker 1: it was all about just what's going at the company level,
48:34
Speaker 1: and then I realized, oh wait, that doesn't really you know,
48:37
Speaker 1: drive most of a stocks return, So you have to
48:40
Speaker 1: understand more about the broader implications of companies. I think
48:46
Speaker 1: thirty years ago there was less dissemination of fundamental news broadly.
48:51
Speaker 1: Today it's much you know, it's much broader, so having
48:55
Speaker 1: information access fundamentally is more more difficult. So I think
48:59
Speaker 1: the business has changed, but again I go back to
49:03
Speaker 1: I think the biggest change in how I think about
49:07
Speaker 1: it as behaviorally. I've come to the real estate that
49:10
Speaker 1: being an advisor, sitting on the front line. I view
49:13
Speaker 1: that as a very key part of what's shaped my career.
49:17
Speaker 1: Understanding that, you know, again, it doesn't matter that the
49:20
Speaker 1: company didn't have any stories in Crimea it went down
49:23
Speaker 1: for you know quite a bit, or your Cuba story.
49:26
Speaker 1: I mean that there's just a behavioral element to this
49:29
Speaker 1: investing investing business. And look, you know again, I go
49:33
Speaker 1: a great example which I've mentioned before, which is it
49:36
Speaker 1: didn't matter what gross stocks you're own. In twenty twenty two,
49:38
Speaker 1: they all went down right, and so was it. All
49:41
Speaker 1: the companies did poorly, no growth, got too overbought, and
49:45
Speaker 1: so it had a correction. They all came back last year,
49:47
Speaker 1: you know, so understanding kind of those behaviors. I love
49:52
Speaker 1: that Warren Buffett quote investors framed their view looking solidly
49:56
Speaker 1: in the rearview mirror. Understanding that and having the ability
49:59
Speaker 1: to attack against that. That's really what's worked for me
50:03
Speaker 1: over time.
50:04
Speaker 2: Really fascinating stuff. Thank you Andrew for being so generous
50:08
Speaker 2: with your time. We have been speaking with Andrew Slimon.
50:11
Speaker 2: He's Managing director at Morgan Stanley Investment Management, where he
50:16
Speaker 2: is also lead portfolio manager for the long equity Strategies
50:19
Speaker 2: for the Applied Equity Advisors team. If you enjoy this conversation,
50:25
Speaker 2: be sure and check out any of the five hundred
50:27
Speaker 2: previous discussions we've done over the past nine and a
50:31
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50:36
Speaker 2: wherever you find your favorite podcast. Sign up for my
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50:53
Speaker 2: out my new podcast, At the Money. Short ten minute
50:58
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51:04
Speaker 2: and your money. At the Money can be found at
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Speaker 2: the Masters in Business podcast feed. I would be remiss
51:10
Speaker 2: if I did not thank the Cracked team that helps
51:12
Speaker 2: put these conversations together each week. Meredith Frank is my
51:16
Speaker 2: audio engineer. Attika of Albron is my project manager. Shortan
51:20
Speaker 2: Russo is my head of research. Anna Luke is my producer.
51:25
Speaker 2: I'm Barry Ridolts. You've been listening to masters of business
51:29
Speaker 2: on Bloomberg Radio.