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Interview With Wesley Gray: Masters in Business (Audio) · Masters in Business

• 0:00
  Speaker 1: Look ahead, imagine more, gain insight for your industry with
• 0:04
  Speaker 1: forward thinking advice from the professionals at Cone Resnick. Is
• 0:08
  Speaker 1: your business ready to break through? Find out more at
• 0:11
  Speaker 1: Cone resnick dot com. Slash Breakthrough. This week on the podcast,
• 0:16
  Speaker 1: I have an extra special guest. He's an old friend.
• 0:18
  Speaker 1: His name is Wes Gray, and he is not your
• 0:23
  Speaker 1: usual quant slash money manager. He is the founder and
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  Speaker 1: CEO of Alpha architect Um, and he's also an unusual guy.
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  Speaker 1: He uh comes out of uh University of Chicago in
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  Speaker 1: an MBA PhD program and decides to take a little
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  Speaker 1: time off in order to join the Marines, which he
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  Speaker 1: did as a captain, went overseas in Iraq, where he
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  Speaker 1: served as an information order officer embedded with the Iraqi Army,
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  Speaker 1: and Um wrote a book about it, Colds Embedded and
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  Speaker 1: Really a fascinating uh An unusual background discusses throughout his
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  Speaker 1: career how Iraq and and the prosecution of war are
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  Speaker 1: in some ways very similar to investing. Alpha architect is
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  Speaker 1: a quantitative firm. Uh West crunches a lot of numbers.
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  Speaker 1: He's a big believer in factor investing. He has long
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  Speaker 1: since been a proponent of both momentum and value, which
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  Speaker 1: is a somewhat unusual combination, but they are two of
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  Speaker 1: the six main factors UH that are out there. I
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  Speaker 1: thought the conversation was absolutely fascinating. If you are a
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  Speaker 1: fan of quantitative investing, or if you enjoyed our previous
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  Speaker 1: podcasts with people like Ammanual Derman or MEB Fabor or
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  Speaker 1: any of the other quants we've spoken with, UH, you'll
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  Speaker 1: really enjoy this. So, with no further ado, my conversation
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  Speaker 1: with Wes Gray. This is Masters in Business with Barry
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  Speaker 1: Ridholts on Bloomberg Radio. My special guest today is Dr
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  Speaker 1: Wesley Gray. He is a former captain in the United
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  Speaker 1: States Marine Corps. West graduated Magnicum Laudy from Morton. He
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  Speaker 1: earned both his m b a. And PhD in finance
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  Speaker 1: from the University of Chicago before becoming a professor of
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  Speaker 1: finance at Drexel University. He currently runs the site Alpha Architect,
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  Speaker 1: as well as running an asset management shop for high
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  Speaker 1: net worth individuals. He is the author of three soon
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  Speaker 1: to be four books on quantitative investing, as well as
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  Speaker 1: numerous academic articles. Wes Gray, Welcome to Bloomberg. Very happy
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  Speaker 1: to be here. So let's talk a little bit about
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  Speaker 1: your background, because it's kind of unusual. Lots of people
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  Speaker 1: take some time off between college and grad school. What
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  Speaker 1: did you do between college and grad school? So what
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  Speaker 1: I did is basically, right out of undergrad actually directly
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  Speaker 1: enrolled in the University of Chicago paced program at ripe
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  Speaker 1: old age of two, spent two years there getting hazed,
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  Speaker 1: you know, fighting against Russian math champs to compete. And
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  Speaker 1: then after two years in a PhD program, you you
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  Speaker 1: get to your comps stage and I passed the comps
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  Speaker 1: and I said, you know what, um twenty four, I'm
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  Speaker 1: hating finance at the moment. I needed to do something
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  Speaker 1: that I always wanted to do, and that was serve
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  Speaker 1: in the military. So I asked for a special four
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  Speaker 1: year sabbatical uh to basically serving the Marine Corps at
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  Speaker 1: left for four years, which is probably first time that's
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  Speaker 1: ever happened, I imagine in Chicago finance PhD program history,
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  Speaker 1: and then came back and finished up. So let's not
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  Speaker 1: skip over that middle part. Those four years were the
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  Speaker 1: middle of the Iraq War. You were embedded with the
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  Speaker 1: Iraqi Army as a captain or lieutenant. What was your rank.
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  Speaker 1: When I was there as a lieutenant lieutenant, I called
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  Speaker 1: you a first lieutenant. Yeah, well I got out as
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  Speaker 1: a captain, but okay, I serving there as a first
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  Speaker 1: lieutenant and your nickname amongst the Iraqis was Jamal. How
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  Speaker 1: did that come about? Basically? I was the intel guy
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  Speaker 1: in our our mid team military transition team, and so
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  Speaker 1: the intel guy is supposed to know how to speak
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  Speaker 1: the language, you know, how to influence the people. And
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  Speaker 1: one of the things you learned about reading about Arab
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  Speaker 1: culture is it's really important to learn the language and
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  Speaker 1: hang out with the people in order to you know,
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  Speaker 1: be able to better influence them. So I used to
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  Speaker 1: hang out in what they call the swats Uh and
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  Speaker 1: I was down there and they would always call me
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  Speaker 1: lulas um gay because they can't say ours very well.
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  Speaker 1: And I was like, you know what, guys, let's try
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  Speaker 1: to find a language so instead of gay, instead of great.
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  Speaker 1: You know, and it's usually not the greatest idea to
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  Speaker 1: walk around with a bunch of Marines when when I
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  Speaker 1: ras are calling you malasam gay, you just get some
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  Speaker 1: ridicule subtimes um and they just couldn't say it, so
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  Speaker 1: as like, can you guys, name me, and they literally
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  Speaker 1: had like a naming party where there was probably fifty
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  Speaker 1: Iraqis in the uh in this swaha it's maybe you know,
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  Speaker 1: thousand square foot you know, cardboard building type thing, you
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  Speaker 1: can think about it. And they came up with Jamal,
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  Speaker 1: and then I was called Malasam Jamal, and uh, I
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  Speaker 1: kind of like I actually that was my identity. Even
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  Speaker 1: when I came back, I still felt like I was
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  Speaker 1: Malasam Jamal. That's funny. So how did the Marines and
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  Speaker 1: your your time in Iraq helped prepare you for a
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  Speaker 1: career as a quant in in finance. I'd say the
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  Speaker 1: biggest thing is just understanding that in all endeavors, humans
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  Speaker 1: are involved. And when humans are involved in any sort
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  Speaker 1: of decision making or activity where there's a lot of emotion,
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  Speaker 1: stress and chaos, they do crazy things. There's certainly a
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  Speaker 1: level of emotion involved there. And I think in the
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  Speaker 1: military what you learn is it's all about standard operating procedures,
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  Speaker 1: training to do things that seem you know, mundane and
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  Speaker 1: dumb and checklist driven now, but when you get into
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  Speaker 1: a chaotic situation, you think, God, you did that, so
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  Speaker 1: you don't rely on your natural action you're rely on
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  Speaker 1: your standard operating procedure. You know. Perfect example might be
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  Speaker 1: I remember I was in the palm groves, an area
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  Speaker 1: called Haditha, which is kind of you think out in
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  Speaker 1: Alomar Province where a lot of the isis guys are
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  Speaker 1: now and I was on Iraqi patrol and literally a
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  Speaker 1: dude gets shot in the chest fifteen feet in front
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  Speaker 1: of me. You know, natural action is hit the deck,
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  Speaker 1: you know, go to the ground as fast as possible.
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  Speaker 1: Another natural action, which you're not supposed to do, is
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  Speaker 1: go run to the person who just got shot and
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  Speaker 1: see what beat on him? And now that and they're
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  Speaker 1: gonna go shoot me now, so what. But what you
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  Speaker 1: train to is when there's a casualty, the first thing
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  Speaker 1: you do is hit the deck, fine cover, figure out
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  Speaker 1: where the other guys are, to make sure you secure
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  Speaker 1: the area. The only way that you you have a
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  Speaker 1: reaction to do that because you have stand operating procedure
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  Speaker 1: and you're trained to that standard. Just like in financial markets,
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  Speaker 1: I think a lot of time, like let's say there's
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  Speaker 1: a fifty draw down in your portfolio, your gut reaction
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  Speaker 1: is sell everything. But that's not what you should probably do.
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  Speaker 1: So you need to have a process or something in
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  Speaker 1: place before you hit chaos. So when you're actually in chaos,
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  Speaker 1: you you know, you're act in a more rational, i'd
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  Speaker 1: say logical way, And I think that you see a
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  Speaker 1: lot of that between military and investing. You know, I
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  Speaker 1: started on a trading desk. The head of the desk
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  Speaker 1: was a former Marine jungle combat instructor. There was someone
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  Speaker 1: else who was a former seal on the desk. Now,
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  Speaker 1: what I always found fascinating wasn't just the standard operating
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  Speaker 1: procedure for what to do. It was preparing emotionally for
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  Speaker 1: the firefight. Like, how can an investor prepare emotionally for
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  Speaker 1: those big draw downs? Yes, so I think it's just
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  Speaker 1: like in the military. You try to train as close
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  Speaker 1: as you can to fight and have ultimate faith and
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  Speaker 1: confidence in the leadership and the decisions and the process
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  Speaker 1: that you believe in. And when you have that, i'd
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  Speaker 1: say belief in what you're doing, and you really put
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  Speaker 1: a you know, good faith effort into working on that.
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  Speaker 1: When you hit chaos, if you believe in your training,
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  Speaker 1: you're more likely than not to stick with that process.
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  Speaker 1: I'm Barry Ridhults. You're listening to Masters in Business on
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  Speaker 1: Bloomberg Radio. My special guest today is West Gray. He
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  Speaker 1: is a former captain in the Marines, served as an
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  Speaker 1: in bed with the Iraqi Army on behalf of the
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  Speaker 1: U S Marines. He runs a shop called Alpha Architect
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  Speaker 1: and has written numerous books on quantitative investing. Let's talk
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  Speaker 1: about a book of viewers that I really enjoyed quantitative value.
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  Speaker 1: When we think of quantz and we think of value investors,
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  Speaker 1: we really don't think of those as having a big overlap. Up.
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  Speaker 1: Tell us how you came to the idea of value
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  Speaker 1: that was quantitatively driven. Sure, so I had start out
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  Speaker 1: with this being a total bible thumping Ben Graham intelligent
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  Speaker 1: investor stockpicker did that for ten years my own personal money,
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  Speaker 1: and thank god I had the opportunity to eat a
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  Speaker 1: lot of humble pie along the way, and I was thinking,
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  Speaker 1: you know what, this whole Warren Buffett Ben Graham idea
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  Speaker 1: makes total sense to me. But after you get engaged
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  Speaker 1: in the activity of stockpicking, you realize that you get
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  Speaker 1: very emotionally involved. And even if you understand the biases
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  Speaker 1: you've memorized. You know Kniman's book, even if you know it,
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  Speaker 1: and you know how the biases influence you. You start
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  Speaker 1: to realize you still can't control against the biases. So
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  Speaker 1: I thought, hey, you know, fundamentally, value investing makes sense
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  Speaker 1: by cheap stuff everyone hates. Great. The problem is hold
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  Speaker 1: it for a long time, hold your nose when inevitably
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  Speaker 1: it told the underperforms for potentially multi air stretches um.
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  Speaker 1: But at the same time, how can we implement this
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  Speaker 1: process in an objective discipline way such that I can
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  Speaker 1: pull out monkey brain from making bad decisions, uh, you know,
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  Speaker 1: from trying to be a stock picker, because I learned
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  Speaker 1: my lessons basically on that. That's quite fascinating. So some
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  Speaker 1: of the things you reference in the book. Obviously the
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  Speaker 1: benefits of using a quant approach is you're taking out
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  Speaker 1: the human elements. One of the things you reference in
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  Speaker 1: the book is the importance of finding the highest quality stocks.
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  Speaker 1: So first, what does it mean when we say a
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  Speaker 1: stock is high quality? And then how do you screen
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  Speaker 1: for those? Sure? So, so stepping back, it's really important
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  Speaker 1: when we when we talk about quality in the context investing,
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  Speaker 1: to understand given it's already cheap. So with value investing
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  Speaker 1: the way we look at it, you have to be
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  Speaker 1: buying the stress cheapest securities in the market. Only within
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  Speaker 1: the cheap does quality start to help add value. So
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  Speaker 1: if you just look at quality as a standalone, you know,
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  Speaker 1: characteristic of a security, it's unclear that it adds any
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  Speaker 1: quote unquote alpha or edge. It's all about looking at quality.
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  Speaker 1: Given you're in the cheap stocks everyone hates. So the
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  Speaker 1: step one is screened for an expensive stock. Step two
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  Speaker 1: is within those cheap stocks. So how do you identify
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  Speaker 1: what's quality and what's not amongst the cheap So, given
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  Speaker 1: we're in the in the cheap bin, which are security,
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  Speaker 1: obviously there's something going on and that's why they're cheap.
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  Speaker 1: We have a table like the we call it the
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  Speaker 1: quality table. There's two legs to it. There's understanding the
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  Speaker 1: fundamental quality of the business and there's another thing called
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  Speaker 1: current financial strength. So in assessing economic mode, we try
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  Speaker 1: to objectively ascertain is this company a good business? How
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  Speaker 1: do we do that? We look at things like long
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  Speaker 1: term geometric means on return on assets, return on capital.
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  Speaker 1: We look at long term free cash flow generation, profit
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  Speaker 1: margin dynamics, like if you have fifty percent margin year
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  Speaker 1: and year out, that's probably good business and we want
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  Speaker 1: to quantify the quality of this business to essentially generate
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  Speaker 1: returns hopefully an excess of their cost of capital. But
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  Speaker 1: that's not enough. That's leg one because we're dealing with
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  Speaker 1: cheap stocks that have issues. So we can one ascertain
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  Speaker 1: that there historically have some indication of being a good business.
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  Speaker 1: But then current financial strength is now at ten point
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  Speaker 1: checklist where we want to make sure are you going
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  Speaker 1: to survive the next few years? I e. Are you
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  Speaker 1: making money? Are you're paying down debt? Are your repurchasing stock?
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  Speaker 1: Is your current ratio is improving? Uh, it's literally like
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  Speaker 1: a pre flight checklist. So are you a quality business
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  Speaker 1: organically and do you have the current financial stature to
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  Speaker 1: live for the next few years? So eventually hopefully you
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  Speaker 1: can get revalued up to not be a value stock
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  Speaker 1: anymore and hopefully be a growth stock in the future.
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  Speaker 1: So is it safe to say that companies with strong
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  Speaker 1: balance sheets have stocks that outperform? Or is that overstating it?
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  Speaker 1: I think it is. I think cheap stocks with strong
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  Speaker 1: balance sheets on a risk adjusted basis and from a
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  Speaker 1: you know, betting standpoint, or better than cheap stocks with
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  Speaker 1: bad balance sheets independently. No, because there's a few reasons
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  Speaker 1: why everyone knows Google is great, Facebook's great, Procter and
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  Speaker 1: Gambles great, So what's the edge? And then secondly, it's
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  Speaker 1: also easy to buy those names for someone to recommend them.
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  Speaker 1: So it's emotionally. Emotionally or are you referring to the
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  Speaker 1: principal agency issue the principal agent problem? And also just emotionally,
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  Speaker 1: it's easy to own high quality securities. But when you
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  Speaker 1: look at it objectively from like an evidence based standpoint,
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  Speaker 1: just as an independent analysis to I, we think quality
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  Speaker 1: is not that valuable and it doesn't make any sense
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  Speaker 1: it would have edge were cheapness. Everyone hates these things.
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  Speaker 1: They're hard to own, like it's crazy, They're hard to hold.
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  Speaker 1: There's a lot of pain involved and unfortunately, you know,
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  Speaker 1: just like in the Marine Corps, no pain, no gain.
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  Speaker 1: You know that that BAC holds and financial markets unfortunately
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  Speaker 1: as well. So let's talk about stocks that can cause
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  Speaker 1: permanent loss of capital. There's a chapter in the book
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  Speaker 1: where you discuss that how do you avoid these stocks?
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  Speaker 1: What do you look for to avoid owning names that
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  Speaker 1: are going to go down and never come up? The
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  Speaker 1: classic value trap, the value trap. Yeah, you catch the
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  Speaker 1: falling knife, as they called on the way down. So, uh,
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  Speaker 1: three of them are basically there's there's two or three
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  Speaker 1: ways you can think about permanent loss of capital, and
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  Speaker 1: these are One would be like a fraud or manipulation.
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  Speaker 1: So if it comes out that the business you thought
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  Speaker 1: that was making a billion dollars a year is actually
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  Speaker 1: making zero, that's gonna be a bad news for equity holders.
• 14:52
  Speaker 1: I would guess, Yeah, same thing with manipulation, like oh
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  Speaker 1: we thought we had this, now we have this other thing.
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  Speaker 1: And then the other one that's that's obviously is financial
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  Speaker 1: distress or bankruptcy. You can own the best business in
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  Speaker 1: the world, but if you're an equity holder and this
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  Speaker 1: firm is in distress, the debt holders might end up
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  Speaker 1: owning that great company, not you as the stockholders. So
• 15:14
  Speaker 1: so by the time that news comes out, it's too late.
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  Speaker 1: What can investors do to avoid owning those names? What
• 15:20
  Speaker 1: signs should they be looking for? Sure? So, so we
• 15:23
  Speaker 1: do is we leverage a lot of uh, I guess
• 15:25
  Speaker 1: you call them technologies in academic literature where people have
• 15:29
  Speaker 1: built up statistical constructs to try to predict who's most
• 15:33
  Speaker 1: likely or red flagged as being a manipulator, fraud ster,
• 15:37
  Speaker 1: or potentially going to be in a financial distress situation,
• 15:40
  Speaker 1: and we just at the outset say hey, if you're
• 15:42
  Speaker 1: extreme red flagging on any of these sort of things,
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  Speaker 1: you're not in our You're not even gonna be in
• 15:47
  Speaker 1: our potential. Just remo. We're removing, yeah, because we don't
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  Speaker 1: want to buy your falling knife situation. I'm Barry Hults.
• 15:54
  Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
• 15:58
  Speaker 1: special guest today is Wes League Gray. He is a
• 16:02
  Speaker 1: retired captain in the U. S. Marine Corps, an m
• 16:05
  Speaker 1: b A and PhD out of the University of Chicago.
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  Speaker 1: He now runs Alpha Architect, which is a unique quantitative
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  Speaker 1: asset management firm. And the first book he wrote was
• 16:19
  Speaker 1: called Embedded, which is something that you pretty much pens
• 16:24
  Speaker 1: right after getting out of the Marine Corps and after
• 16:27
  Speaker 1: spending was it four years in Iraq? Is that about right?
• 16:30
  Speaker 1: It was four years in the service I did uh.
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  Speaker 1: I was there for a standard Marine seven months deployment
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  Speaker 1: in a place called Haditha which down el Ombar Province there.
• 16:40
  Speaker 1: So what motivated you to sit down and write a
• 16:42
  Speaker 1: book when you get back that had nothing to do
• 16:44
  Speaker 1: with finance. That was strictly about your time with the Marines.
• 16:48
  Speaker 1: When it was is you know, I remember before the
• 16:51
  Speaker 1: Iraq War, had Colin Pale show us that little white
• 16:55
  Speaker 1: you know bottle that you're all gonna die, and I
• 16:58
  Speaker 1: was like, you know, this is kind of maybe a
• 16:59
  Speaker 1: survive of a war. This is a pretty important thing.
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  Speaker 1: I'm a buyer, I'm a believer. And then you know,
• 17:04
  Speaker 1: so when in a Marine Corps, not really for that reason.
• 17:07
  Speaker 1: I just want to do my service. But when I
• 17:09
  Speaker 1: was I thought, hey, this is a mission that makes sense.
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  Speaker 1: You know, it's a win win for America and hopefully
• 17:14
  Speaker 1: for the Rockies what have you. But then after actually
• 17:17
  Speaker 1: living and being embedded with the people, I started to
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  Speaker 1: realize that, you know, culture matters, and we're we're in
• 17:24
  Speaker 1: a in this war now, we're really taking on a
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  Speaker 1: fifty two year commitment because we're gonna try to change
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  Speaker 1: culture and not easy to do. Not easy to do.
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  Speaker 1: And I would argue it's very, very time intensive and costly,
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  Speaker 1: and that's fine as a decision, but let's weigh that
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  Speaker 1: against the potential benefits um and that book just really
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  Speaker 1: opened my eyes to understanding. I would say just Arab
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  Speaker 1: culture in general, and how the way they think about
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  Speaker 1: the world is just so much different than us. And
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  Speaker 1: then the idea that we can impose, you know, our
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  Speaker 1: ideas and how we think about the world on them,
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  Speaker 1: it just doesn't work. And I have an analogy here.
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  Speaker 1: It's like, you know, it's a fish trying to tell
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  Speaker 1: me how to breed it underwater, Like I understand I
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  Speaker 1: need gills and understand you need to get oxygen, but
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  Speaker 1: it doesn't work for me. Like it's just we all
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  Speaker 1: understand each other kind of, but we just it's not
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  Speaker 1: gonna work. Um. And that that was the biggest insight
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  Speaker 1: when I had to share it, because it changed my
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  Speaker 1: mind about the whole thing one eighty about why are
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  Speaker 1: we here? And is this really a positive MPV project
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  Speaker 1: for us? So so you can't really just walk into
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  Speaker 1: a country with a completely different set of mores and
• 18:35
  Speaker 1: cultures and say here's how you do it. That's not
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  Speaker 1: gonna fly, no, no, yeah, yeah exactly. It seems obviously
• 18:42
  Speaker 1: trivial after the fact, but yeah, but beforehand, you know,
• 18:45
  Speaker 1: that's the classic hindsight bias. It's easy to say these things.
• 18:49
  Speaker 1: Acts in In early two thousand three, a handful of
• 18:55
  Speaker 1: people were warning about that. Everybody remembers the big Eric
• 18:58
  Speaker 1: san Seki, the Army general, warning about you're not gonna
• 19:02
  Speaker 1: do this with a hundred thousand troops. You need a
• 19:04
  Speaker 1: half a million troops. It's more than just hearts and minds.
• 19:08
  Speaker 1: It's really a long process. Nobody wants to hear that
• 19:11
  Speaker 1: before you go in. Yeah, the biggest insight I got action.
• 19:15
  Speaker 1: And also it's a lot of the things I cite
• 19:17
  Speaker 1: and embedded. It is just my conversations with the actual
• 19:20
  Speaker 1: Rocky people about why they thought we were so weird
• 19:23
  Speaker 1: and crazy and the things that we did say that
• 19:25
  Speaker 1: was that the readers, these Americans are crazy. Um. They
• 19:28
  Speaker 1: try to explain to me their perspective, and a perfect
• 19:31
  Speaker 1: one is okay. So you guys want to go bring
• 19:33
  Speaker 1: democracy and freedom to the Rocky people, and you've done that.
• 19:37
  Speaker 1: But here's the problem. When you let a country of
• 19:41
  Speaker 1: cage lions totally free out of their cage, you don't
• 19:45
  Speaker 1: give them freedom and Rocky to give them anarchy because
• 19:48
  Speaker 1: you guys in America have a lot of implicit structures,
• 19:51
  Speaker 1: either legal, culturally or trust. Like we're tribal here, guys
• 19:55
  Speaker 1: like like we don't have a lot of that kind
• 19:57
  Speaker 1: of ether in your culture there that it's in stitutionalized
• 20:00
  Speaker 1: here there exactly. In fact, you wrote, the tribe matters
• 20:05
  Speaker 1: much more than the state. There, you got it. So
• 20:07
  Speaker 1: so the idea that you can bring us freedom and
• 20:09
  Speaker 1: democracy and that's a great thing, and you're helping us, No,
• 20:13
  Speaker 1: you're giving us anarchy. And everyone has a house with
• 20:17
  Speaker 1: one ak in thirty round seven six to mag And
• 20:20
  Speaker 1: guess what if there's not enough police, if I don't
• 20:22
  Speaker 1: like my neighbor, I'm gonna go shoot him because that's freedom.
• 20:25
  Speaker 1: And you guys don't do that in America. You're not
• 20:28
  Speaker 1: really that free. You're still constrained by civil laws and
• 20:31
  Speaker 1: and all these other things. And the idea that when
• 20:33
  Speaker 1: you give us freedom, you somehow are gonna help us out, No,
• 20:37
  Speaker 1: you're you're you're destroying all law and order in anything
• 20:40
  Speaker 1: that resembled a society here. So so let's bring this
• 20:44
  Speaker 1: back to finance. So what did you learn from the
• 20:48
  Speaker 1: experience there that you were able to bring to the
• 20:51
  Speaker 1: world of finance. You know, I think it's a lot
• 20:54
  Speaker 1: of times like coming from a you know, PhD. University
• 20:56
  Speaker 1: of Chicago, everyone's rational. This is how the markets work,
• 21:01
  Speaker 1: and yeah, they're probably right, but that fails to consider humans.
• 21:06
  Speaker 1: And there's humans operate in the economy, not agents, rational agents.
• 21:10
  Speaker 1: So I think just like when when we go to
• 21:12
  Speaker 1: a situation like Irock on paper, Yeah, go bring him freedom, democracy,
• 21:17
  Speaker 1: and they will become like America and everyone will have
• 21:19
  Speaker 1: a you know, a pick, white picket fence and three kids.
• 21:23
  Speaker 1: But then you start realizing, wait a second, there's cultural
• 21:26
  Speaker 1: issues here. There's human elements. Same thing in finance. Yeah,
• 21:29
  Speaker 1: you should go buy cheap stocks and do it, Warren
• 21:32
  Speaker 1: Buffett does. Why doesn't everyone do that? Well, because there's
• 21:34
  Speaker 1: humans involving finance, and it's really really hard. It's really
• 21:38
  Speaker 1: really hard, and we always need to consider the behavioral
• 21:41
  Speaker 1: human element of decision making. I'm Barry rid Hilts. You're
• 21:44
  Speaker 1: listening to Master's in Business on Bloomberg Radio. My special
• 21:48
  Speaker 1: guest today is West Gray. He runs the quantitative asset
• 21:52
  Speaker 1: management firm Alpha Architect. Let's talk a little bit about
• 21:58
  Speaker 1: quants on Wall Street. So, first question, what do people
• 22:03
  Speaker 1: misunderstand about quants and their models in the world of finance. Sure,
• 22:10
  Speaker 1: so I probably can't speak on behalf of all quants
• 22:13
  Speaker 1: because like every walks of life. There's a lot of
• 22:15
  Speaker 1: varieties within that segment. In one corner when it when
• 22:18
  Speaker 1: you talk about a quant you think about the physics
• 22:21
  Speaker 1: PhD who's never read a finance book ever. He's data mining,
• 22:26
  Speaker 1: building crazy models and C plus plus and do whatever
• 22:30
  Speaker 1: they do. That that's not the type of quant analysis
• 22:34
  Speaker 1: that we bring to the table. We're we're essentially economists
• 22:37
  Speaker 1: that are trying to think about how the machine works,
• 22:40
  Speaker 1: and we just leverage quantitative analysis and tools that basically
• 22:43
  Speaker 1: allow us to conduct what we consider like scientific method
• 22:46
  Speaker 1: as best we can. So we have competing hypotheses about
• 22:49
  Speaker 1: how the world works. We grab data, we test these
• 22:52
  Speaker 1: competing hypotheses, and we're always trying to get better evidence
• 22:57
  Speaker 1: space investing. It's not just let's data mind, because we've
• 23:00
  Speaker 1: got better computers and more physics PhDs like we're we're
• 23:04
  Speaker 1: basically fundamental investors that use quantitative tools to help our
• 23:08
  Speaker 1: process and how we think about things in the world.
• 23:11
  Speaker 1: So from your perspective, then models are really never finished.
• 23:15
  Speaker 1: You're constantly testing them and seeing how can I make
• 23:18
  Speaker 1: this better? Where can it be improved, or what may
• 23:20
  Speaker 1: have changed in the market. That means that this model
• 23:23
  Speaker 1: is no longer delivering any sort of advantage or edge
• 23:26
  Speaker 1: that it might have been previously. Sure, there's an element
• 23:29
  Speaker 1: of that, and then but the other element is is
• 23:31
  Speaker 1: understanding that when you start going down the model creep situation,
• 23:36
  Speaker 1: it's it's like the old game where the kids, like
• 23:38
  Speaker 1: the little girl first says, hey, you know, the princess
• 23:41
  Speaker 1: kissed the fraud and by the end of the circle,
• 23:44
  Speaker 1: it's like, you know, Spider Man beat up he Man.
• 23:47
  Speaker 1: So it's a total different story. And it's all because
• 23:49
  Speaker 1: you have small little changes where you end up in
• 23:51
  Speaker 1: a total object place you wanted to end up in
• 23:53
  Speaker 1: the first place. So when when we build models, and
• 23:56
  Speaker 1: when we think about it, it's very very time and
• 23:59
  Speaker 1: ten set of an R and D intenses up front
• 24:02
  Speaker 1: to build the simplest, most robust model we can Simpilicity
• 24:08
  Speaker 1: beats complexity definitely, because we want to look for the
• 24:12
  Speaker 1: what is the real signal here, not the noise, and
• 24:16
  Speaker 1: let's just focus on that signal. And what we've found
• 24:19
  Speaker 1: is that in financial markets, frankly, nothing's changed. Human behavior
• 24:23
  Speaker 1: is pretty constant, and incentives, specifically like this principal agent
• 24:28
  Speaker 1: delegating asset management problem, those are two constants, and they
• 24:32
  Speaker 1: derive a lot of predictions about what works and what
• 24:35
  Speaker 1: doesn't work. And we keep coming back to the same themes.
• 24:39
  Speaker 1: Value by cheap stuff, momentum by relatively strong stuff, and
• 24:43
  Speaker 1: trend being good trends and everything we look at at
• 24:47
  Speaker 1: having memorized, like most of these databases at this point,
• 24:51
  Speaker 1: it's it's those three simple muscle limits usually drive all
• 24:56
  Speaker 1: other perturbation of anomaly or fact or whatever the heck.
• 25:00
  Speaker 1: Super looking, So, how do you have momentum and trends
• 25:04
  Speaker 1: as the same group, because normally when you're saying by
• 25:07
  Speaker 1: trends you're buying strong stuff going up, but value you're
• 25:12
  Speaker 1: buying weak stuff that everybody hates. Yeah, So so really
• 25:15
  Speaker 1: the way we look at value and momentum in particular,
• 25:19
  Speaker 1: is there really two sides of the same behavioral coins.
• 25:21
  Speaker 1: So if you look at value, one of the arguments
• 25:25
  Speaker 1: for why it outperforms is obviously it could be more risky,
• 25:28
  Speaker 1: and we can't discount that. That's surely one component. But
• 25:31
  Speaker 1: there is a mispricing component, we think, and that's what
• 25:34
  Speaker 1: is that an inefficiency? It is, but it's it's hard
• 25:37
  Speaker 1: to arbitrage, which we can discuss. But what values driven
• 25:40
  Speaker 1: by we think, and by we I mean, like the
• 25:43
  Speaker 1: academic research community, is an overreaction to bad news. Essentially,
• 25:48
  Speaker 1: they throw the baby out at the bathwater. On average momentum,
• 25:52
  Speaker 1: it turns out is there's two competing theories, Like we're
• 25:54
  Speaker 1: talking about relative strength momentum, which is the classic kind
• 25:58
  Speaker 1: of stock selection momentum academics discuss, and that the proponse
• 26:03
  Speaker 1: of the evidence is that it's an under reaction to
• 26:07
  Speaker 1: positive news, so values and overrea to bad news. The
• 26:12
  Speaker 1: evidence in general seems to suggest that momentum is more
• 26:15
  Speaker 1: of an underreaction to positive news that's being signaled in
• 26:19
  Speaker 1: the price. But because people are overconfident in their own
• 26:22
  Speaker 1: information set, even though the price keeps telling them yeah,
• 26:26
  Speaker 1: and there's disposition effects. You know, you're supposed to let
• 26:29
  Speaker 1: your winners ride and cut your newsers short. What do
• 26:30
  Speaker 1: people do the opposite? So there's a lot of kind
• 26:33
  Speaker 1: of organic, you know, fake supply that comes on the
• 26:36
  Speaker 1: market for high momentum stocks, and they're only because they're
• 26:40
  Speaker 1: a winner. People are hey, hit the bed. Nobody. I
• 26:43
  Speaker 1: when I started, I used to hear this all the time,
• 26:45
  Speaker 1: and it turns out to be terrible advice. Nobody ever
• 26:48
  Speaker 1: went broke taking a profit. Yeah, exactly, And that's the
• 26:50
  Speaker 1: worst just supply for for a momentum. Yeah, it just
• 26:54
  Speaker 1: puts supply into the market when maybe the fundamental should
• 26:57
  Speaker 1: be the stocks should be worth a hunted and starts
• 27:00
  Speaker 1: at eighty, but it can only go to ninety because
• 27:02
  Speaker 1: as it starts moving, and who wants to be the
• 27:04
  Speaker 1: last guy owning it on the highest peak? Fear of
• 27:07
  Speaker 1: looking stupid? Yeah, fair looking stupid. So I love the
• 27:09
  Speaker 1: symmetry of overreaction on the value side undreaction on the
• 27:13
  Speaker 1: momentum side. Let me throw a little bit of a
• 27:16
  Speaker 1: curve ball again. What I learned early in the career,
• 27:19
  Speaker 1: which may or may not be true, is hey, you
• 27:21
  Speaker 1: know managers, when you look at the big institutions, hedge funds,
• 27:24
  Speaker 1: mutual funds, endowments, they have their favorite names, and especially
• 27:29
  Speaker 1: if it's a fund that has a lot of four
• 27:31
  Speaker 1: one K or that sort of inflow, there's only so
• 27:36
  Speaker 1: many names they're gonna buy in. As fresh money comes
• 27:39
  Speaker 1: in over the transom every week, they put it to
• 27:41
  Speaker 1: work in the same names, and that's why you see
• 27:43
  Speaker 1: some form of of persistency of price action. Is that
• 27:48
  Speaker 1: a fair description of momentum or is that just a
• 27:50
  Speaker 1: narrative that I think that that's basically like the fund
• 27:54
  Speaker 1: flows arguments. And there's actually a new paper that I
• 27:58
  Speaker 1: can't remember. It's some new like germ of finance papers,
• 28:00
  Speaker 1: a theory paper this trying to explain the value and
• 28:04
  Speaker 1: momentum effect via fun flows. Were like one fund is
• 28:08
  Speaker 1: like losing because they own like the you know, the
• 28:11
  Speaker 1: value stocks, so they're getting out of there. Then other
• 28:14
  Speaker 1: funds they're they're winning, they own the winner stocks, and
• 28:16
  Speaker 1: then you know, because they're winning, they get more fun flows,
• 28:19
  Speaker 1: and then those keep moving and eventually, like the value
• 28:22
  Speaker 1: stocks get too cheap, they may in revert. Momentum stocks
• 28:25
  Speaker 1: unless you keep staying in the high momentum eventually crash
• 28:28
  Speaker 1: and burn. And there's all these theories about trying to
• 28:31
  Speaker 1: explain value momentum, not via behavioral like overreaction to bad
• 28:35
  Speaker 1: news unreaction to good news theory, but through like a
• 28:38
  Speaker 1: fun flows argument. There could be something to it. I think,
• 28:41
  Speaker 1: I think all no one really knows exactly how and
• 28:45
  Speaker 1: while this works, but it's all about what is the
• 28:47
  Speaker 1: proponance of the evidence kind of tilt you towards because
• 28:51
  Speaker 1: God only knows what really explains value, So you really
• 28:54
  Speaker 1: don't need to know why it works. You just need
• 28:56
  Speaker 1: to know this works. This doesn't stay with what works
• 28:58
  Speaker 1: avoid what doesn't to some extent. And you know, as
• 29:01
  Speaker 1: this has a great quote about like we all knew
• 29:04
  Speaker 1: the world was flat before, or it wasn't flat before
• 29:07
  Speaker 1: we could explain exactly, you know, why it was. Some
• 29:10
  Speaker 1: of us still held out, Yeah, exactly, and value something.
• 29:13
  Speaker 1: I think that's way more understood because it's more intuitive.
• 29:16
  Speaker 1: Um by cheap stuff everyone hates, you get kind of distress. Premium,
• 29:20
  Speaker 1: you know, careers, premium were momentum. You know this. We
• 29:24
  Speaker 1: just wrote a whole book dedicated trying to understand this.
• 29:27
  Speaker 1: You know, there seems to be this underaction to the
• 29:29
  Speaker 1: good news. But there's another thing when I started reading about,
• 29:33
  Speaker 1: like what Soros talks about with with reflexivity, at some level,
• 29:37
  Speaker 1: price action itself can actually influence fundamentals. And here would
• 29:42
  Speaker 1: be an example. Let's say we're out in the valley,
• 29:44
  Speaker 1: like Silicon Valley. We have Google, who's got great price
• 29:47
  Speaker 1: action linked in who just dropped the hunter you know
• 29:50
  Speaker 1: fifty until recently here, But so what do you think
• 29:54
  Speaker 1: when most of your comp and it's all human capital.
• 29:57
  Speaker 1: Business is tied to your stock price Linkedins, so their
• 30:03
  Speaker 1: price movement momentum fundamentally is changing their fundamentals. And if
• 30:08
  Speaker 1: marketplace can't anticipate kind of the second derivative or nonlinear change,
• 30:13
  Speaker 1: they'll always kind of underappreciate the benefit of good prices
• 30:17
  Speaker 1: because you also get lower cost of capital on the street.
• 30:19
  Speaker 1: If I'm a high flying stock, every banker in the
• 30:22
  Speaker 1: world is going to help me go sell that over
• 30:24
  Speaker 1: priced stock to fund acquisitions and what have you. If
• 30:27
  Speaker 1: I'm a total Loserville stock, you know, I gotta pay
• 30:30
  Speaker 1: cash like LinkedIn yeah now, and now I gotta like
• 30:32
  Speaker 1: pay real market cost of capital. And you're at a
• 30:35
  Speaker 1: competitive disadvantage compared to this company that can you know,
• 30:39
  Speaker 1: check out overvalued stock to do acquisition until Microsoft comes
• 30:43
  Speaker 1: along advise you at a nice fat premium. So there's
• 30:45
  Speaker 1: there's momentums complex. You mentioned momentum and you mentioned Cliff Assness.
• 30:50
  Speaker 1: Am I correct in saying both you and Cliff had
• 30:54
  Speaker 1: Eugene Fama as your thesis h advisors at Chicago? Is
• 31:00
  Speaker 1: that right? We have more similar than that, even he
• 31:03
  Speaker 1: was also a working undergrad. So unfortunately both of your
• 31:08
  Speaker 1: your dissertations were on momentum to the guy who essentially
• 31:12
  Speaker 1: invented the efficient market hypothesis. That's right. So so we
• 31:16
  Speaker 1: apparently like a lot of pain and english and fighting
• 31:19
  Speaker 1: uphill when we probably don't have to. Maybe that's a
• 31:22
  Speaker 1: shared characteristics of Cliff and I is what it seems.
• 31:26
  Speaker 1: You guys have put out a few e t F
• 31:28
  Speaker 1: You've worked and advised on other e t f s.
• 31:30
  Speaker 1: How has the exchange traded fund shift changed the game
• 31:35
  Speaker 1: in terms of cost and execution? I think it's it's
• 31:39
  Speaker 1: revolutionized access to retail I would say more typical investors.
• 31:44
  Speaker 1: In the old days, you could always get clean, process
• 31:47
  Speaker 1: driven factor exposures as institutional investor, but you never could
• 31:51
  Speaker 1: do it as a retail investor with tax efficiency and
• 31:54
  Speaker 1: reasonable fees. And now the world is your oyster. You
• 31:57
  Speaker 1: can go on your you know, Schwab account by you
• 32:01
  Speaker 1: know a really great factor exposure for low costs with
• 32:04
  Speaker 1: tax efficiency and full transparency. And I think that's revolutionizing
• 32:09
  Speaker 1: the asset manager business as we speak. So, if people
• 32:12
  Speaker 1: want to read more about your writings and your research,
• 32:16
  Speaker 1: where's the best place for them to find you? Best
• 32:18
  Speaker 1: places just go to ALF architect dot com and sign
• 32:21
  Speaker 1: up for the blog, and that's that's how we communicate
• 32:24
  Speaker 1: to our audience. We have been speaking with Captain Wesley Gray,
• 32:28
  Speaker 1: formerly of the U. S. Marine Corps, now with Alpha Architect.
• 32:33
  Speaker 1: If you've enjoyed this conversation, be sure and hang out
• 32:36
  Speaker 1: for our podcast where we keep the tape rolling and
• 32:39
  Speaker 1: continue chatting about all things quantitative. Be sure and follow
• 32:43
  Speaker 1: my daily column on Bloomberg dot com or follow me
• 32:47
  Speaker 1: on Twitter at rit Halts. I'm Barry rit Halts. You're
• 32:51
  Speaker 1: listening to Masters in Business on Bloomberg Radio. Are you
• 32:59
  Speaker 1: looking to take your business to the next level? The accounting,
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  Speaker 1: tax and advisory professionals from Cone Resnick can guide you.
• 33:06
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• 33:21
  Speaker 1: Learn more at Cone Resnick dot com Slash Breakthrough, Cone
• 33:25
  Speaker 1: Resnick Accounting, Tax Advisory. West, thanks so much for being
• 33:30
  Speaker 1: so generous with your time. UM, so there's so much
• 33:33
  Speaker 1: stuff to go over. We blew through so many questions. UM,
• 33:38
  Speaker 1: but I really enjoy you, know West, I know West
• 33:43
  Speaker 1: for a good couple of years. I've followed Alpha Architect
• 33:46
  Speaker 1: for a while and everybody in my shop loves reading
• 33:50
  Speaker 1: his work. Uh. He is another one of the collection
• 33:55
  Speaker 1: of people who are really and I think you made
• 33:58
  Speaker 1: this clear during the the radio portion. He is evidence
• 34:03
  Speaker 1: based and data driven. So much of of finance is
• 34:08
  Speaker 1: filled with myths and heuristics and and shorthand rules of
• 34:13
  Speaker 1: thumb that turned out not to be true. Looking at
• 34:16
  Speaker 1: the actual data um really makes a really makes a
• 34:21
  Speaker 1: big difference. So let's let's go over a few questions
• 34:25
  Speaker 1: we we didn't get to, including a quote of yours
• 34:28
  Speaker 1: that I that I really like. And I don't remember
• 34:31
  Speaker 1: which book this was, but you said sustainable Alpha requires
• 34:36
  Speaker 1: sustainable clients. What does that mean? Sure? So I've always
• 34:42
  Speaker 1: been puzzled with this question of we find this factor
• 34:46
  Speaker 1: it generates the access for terms. Why is this there?
• 34:51
  Speaker 1: And why will it continue because you know? Sorry? And
• 34:54
  Speaker 1: why why hasn't everybody found this and stayed with it
• 34:59
  Speaker 1: if it's generally exactly and you have open secrets called
• 35:02
  Speaker 1: value momentum value as the strategy has been around for
• 35:06
  Speaker 1: a hundred years. Momentum was talked about like also two
• 35:09
  Speaker 1: hundred years ago, so it's not like these are secrets,
• 35:12
  Speaker 1: and yet they continue to work. So I needed to
• 35:16
  Speaker 1: intellectualize how is this possible? And what I started thinking
• 35:20
  Speaker 1: about is is I started thinking about behavioral finance and
• 35:23
  Speaker 1: the two real building blocks of it, which are one
• 35:26
  Speaker 1: understanding human behavior and to understanding institutional incentives to arbitrage
• 35:33
  Speaker 1: bad behavior. So most factors exist typically because there's some
• 35:39
  Speaker 1: sort of expectation are on behalf of investors that creates
• 35:43
  Speaker 1: a dislocation from fundamental prices, so that that would be
• 35:46
  Speaker 1: either the something like that, because you've got to have
• 35:51
  Speaker 1: someone can't be a perfectly rational buyer and seller, because
• 35:55
  Speaker 1: then prices would never deviate from their fundamental value in
• 35:57
  Speaker 1: efficient market, ipocess would hold. But clearly there's overwhelming evidence
• 36:02
  Speaker 1: that that happens. But the question is wise does it sustain?
• 36:06
  Speaker 1: And so that's where we got to look at the
• 36:08
  Speaker 1: incentives of those who manage the capital and for easy
• 36:12
  Speaker 1: things that are easy to arbitrage, Like if we see
• 36:14
  Speaker 1: a twenty dollar bill on this table, well let's grab it.
• 36:18
  Speaker 1: What if we see a twenty dollar bill on the table,
• 36:20
  Speaker 1: but there's a grizzly bear over it, Like is that
• 36:24
  Speaker 1: rational that a twenty dollar bills there no, but the
• 36:27
  Speaker 1: problem is to pick up this twenty it's a grizzly
• 36:29
  Speaker 1: bear there. So sometimes it's it's not frictionless to arbitrage prices,
• 36:34
  Speaker 1: which is a cordline assumption of the Fisher market, I passes,
• 36:38
  Speaker 1: is that competition will always drive prices to fundamental because
• 36:42
  Speaker 1: it's assumed it's easy to arbitrage. But that is totally
• 36:46
  Speaker 1: not true. And I would say the biggest issue with
• 36:50
  Speaker 1: quote unquote arbitrage on things like value or momentum is
• 36:54
  Speaker 1: career risk because to do those strategies, they're really long
• 36:59
  Speaker 1: duration kind of expected winners, but in the short one
• 37:03
  Speaker 1: they can get destroyed relative to standard benchmarks. We were
• 37:08
  Speaker 1: discussing the pain trade. The pain trade exactly and pain
• 37:12
  Speaker 1: trades ironically are the exact trades you want to own
• 37:17
  Speaker 1: if you want to have a sustainable out of sample
• 37:20
  Speaker 1: chance at outperformance, because now there's you want to have
• 37:23
  Speaker 1: a credible reason why other people on the side of
• 37:26
  Speaker 1: this trade or not make a good decision over overreaction,
• 37:29
  Speaker 1: bad news, unreaction, good news, or what have you. Then,
• 37:32
  Speaker 1: on the other hand, we understand, well, what are the
• 37:34
  Speaker 1: other competitive players in the market doing and why aren't
• 37:37
  Speaker 1: they already doing this? And it's usually because they like
• 37:39
  Speaker 1: their jobs a lot more than they like actually take
• 37:42
  Speaker 1: advantage of anomalies. That that's the famous Kings quote. Better
• 37:47
  Speaker 1: to fail conventionally than succeed un convention exactly. And there's
• 37:50
  Speaker 1: tons of research about this. It all boils down what
• 37:53
  Speaker 1: they call the principal agent conflict. There's there's a classic
• 37:56
  Speaker 1: theory paper um under Cipher and rob Vision and in
• 38:00
  Speaker 1: general Finance ninety seven is called limits of arbitrage, and
• 38:03
  Speaker 1: they make this very simple point. We all know what works.
• 38:06
  Speaker 1: The problem is in the short run, it may not work,
• 38:10
  Speaker 1: especially relative to other stuff. And to the extent that
• 38:14
  Speaker 1: I can't credibly convince my investors that I'm not an idiot,
• 38:18
  Speaker 1: even though I just lost twenty points to the index
• 38:21
  Speaker 1: and they pull my capital, I'm actually not in a
• 38:24
  Speaker 1: position to take advantage of this, so I kind of
• 38:26
  Speaker 1: hold back. So the only way to really exploit true
• 38:30
  Speaker 1: active anomalies is you need to one have a process
• 38:34
  Speaker 1: that takes advantage of some bias problem. But then more
• 38:37
  Speaker 1: importantly is you need to couple the capital that's there
• 38:41
  Speaker 1: to exploit and make sure it has the same duration
• 38:45
  Speaker 1: as the anomaly it's trying to exploit, which is long term,
• 38:48
  Speaker 1: so long term duration on the capital, long time duration
• 38:51
  Speaker 1: on the anomaly, short term human behavior getting in the
• 38:54
  Speaker 1: way exactly. And its analogy is like the bank that
• 38:58
  Speaker 1: that we discussed earlier, where a bank lands long borrows
• 39:02
  Speaker 1: short great most of the time, but sometimes you have
• 39:06
  Speaker 1: a run on the bank. Same thing with value strategies,
• 39:09
  Speaker 1: long duration opportunity that more often than not gets coupled
• 39:13
  Speaker 1: with short duration capital. Sometimes there's a run on the bank.
• 39:17
  Speaker 1: And when that run on the bank occurs, the winner
• 39:20
  Speaker 1: in that trade ends up being the Warren buffets, the
• 39:22
  Speaker 1: guys that just hold onto these things like grim death
• 39:26
  Speaker 1: and will not sell. I have a friend who runs
• 39:29
  Speaker 1: a value hedge funds, if there's such a thing, and
• 39:34
  Speaker 1: he says he'll go through the pain trade for quarters
• 39:38
  Speaker 1: and years at a time, and he said he's been
• 39:41
  Speaker 1: doing it for forty years. He knows when the portfolio
• 39:45
  Speaker 1: is going to start out performing because usually just before
• 39:48
  Speaker 1: he starts getting all sorts of inquiries about redemption and
• 39:51
  Speaker 1: people have had enough, and it's usually at that moment
• 39:54
  Speaker 1: when when the wheel is turning definitely, we we we
• 39:58
  Speaker 1: know multiple multibillion dollar hedge for manasures with heavy value
• 40:03
  Speaker 1: focus that are literally out of business because of the
• 40:06
  Speaker 1: back half of two thousand fifteen because deep value just
• 40:09
  Speaker 1: got destroyed and redemptions just overwhelmed their ability to convince
• 40:15
  Speaker 1: the capital stage. So so let's talk about career risk,
• 40:19
  Speaker 1: and let's talk about running money in real time. You
• 40:23
  Speaker 1: run a model, you run multiple models, multiple ETFs, but
• 40:26
  Speaker 1: you run a model that essentially is two sleeves. One
• 40:30
  Speaker 1: is value and the other is is the momentum side.
• 40:35
  Speaker 1: And invariably one of those two sleeves. And by the way,
• 40:39
  Speaker 1: I've explained this to people and the like, so wait,
• 40:41
  Speaker 1: they first they screened for value and then they screen
• 40:44
  Speaker 1: for momentum. No, these are a dual model where there
• 40:48
  Speaker 1: is simultaneously offsetting value and momentum. Uh, two different screens
• 40:53
  Speaker 1: and two different pools of stocks. But invariably one of
• 40:58
  Speaker 1: those sleeves is getting She'll act usually when one is
• 41:01
  Speaker 1: doing well, the other is doing poorly. Number one, how
• 41:05
  Speaker 1: does that make money over the long haul? And Number two?
• 41:09
  Speaker 1: What happens in the real world with all but the
• 41:12
  Speaker 1: most savvy institutions or individuals who may have money in
• 41:15
  Speaker 1: a portfolio like that. Sure, So so the way um
• 41:19
  Speaker 1: that value momentum work in a combination, whereas you mentioned,
• 41:23
  Speaker 1: it's not about an integrated package. It's about pure value
• 41:28
  Speaker 1: focusing on that religion, and then pure momentum focused on
• 41:32
  Speaker 1: that religion, combining the two and they happen to have
• 41:35
  Speaker 1: this very great dynamic relationship where they're like Yin and yang.
• 41:39
  Speaker 1: When one is blown up, the other one on average
• 41:42
  Speaker 1: tends to be working. So you get amazing diversification benefits.
• 41:45
  Speaker 1: Whereas if you look at either of those strategies as
• 41:48
  Speaker 1: a standalone basis, you know you're gonna want to jump
• 41:51
  Speaker 1: off a bridge it's too volatile. But that combination basically
• 41:55
  Speaker 1: gives you more survivability. From like a human psychology standpoint,
• 41:59
  Speaker 1: pure value, how you im pure momentum combined ran in
• 42:02
  Speaker 1: a very active way, can still have opportunities to have
• 42:06
  Speaker 1: multi year underperformance, but it's more sustainable than just being
• 42:10
  Speaker 1: a pure value person or a pure momentum person where
• 42:14
  Speaker 1: you could go for five ten years in theory of underperforming,
• 42:18
  Speaker 1: and who can do that? Even I would have problems,
• 42:22
  Speaker 1: you know, sticking to the model probably and I'm like
• 42:25
  Speaker 1: a cold believer in this stuff. So so what do
• 42:27
  Speaker 1: you say to somebody who says, hey, I'm in this
• 42:29
  Speaker 1: portfolio for three years. I understand it intellectually, but you're
• 42:34
  Speaker 1: under performing the benchmarked by forty basis points for three years.
• 42:38
  Speaker 1: How do you communicate, Well, that's part of the model
• 42:42
  Speaker 1: that's not unexpected, and soon it will be out performing
• 42:45
  Speaker 1: and by a substantial by file undred basis points. How
• 42:48
  Speaker 1: do you communicate that? So, the way we communicated is
• 42:51
  Speaker 1: this is not for everyone, it's for we have a
• 42:54
  Speaker 1: very segmented component of the marketplace where we need to
• 42:57
  Speaker 1: identify long duration cap roll that's really sophisticated and has
• 43:02
  Speaker 1: minimal agency conflicts where their career doesn't really amiable consultants,
• 43:08
  Speaker 1: No consultants, no, it's it literally who wants to take
• 43:11
  Speaker 1: care of their money best, the guy who owns their
• 43:14
  Speaker 1: own money because they actually have horizon, they don't have careers,
• 43:17
  Speaker 1: not gonna fire themselves, and they just want to maximize
• 43:20
  Speaker 1: their best chance of long term expected compounding. That is
• 43:24
  Speaker 1: the segment that we talked to. That's a really specific,
• 43:28
  Speaker 1: very specific niche, and the reason we're so hyper focus
• 43:33
  Speaker 1: on that niche is going back to that sustainable, active
• 43:36
  Speaker 1: framework where you need a couple long duration arbitrage with
• 43:40
  Speaker 1: long duration capital in order for it to be a victory.
• 43:43
  Speaker 1: You that's the only way you can believably exploit these
• 43:47
  Speaker 1: anomalies is the capital. The source of capital, and the
• 43:51
  Speaker 1: education of that capital and its ability to stick to
• 43:54
  Speaker 1: the program is more important than the nuance of your model. Yeah, Like,
• 43:59
  Speaker 1: we can do a billion perturbations of buy cheap, they're
• 44:02
  Speaker 1: all gonna be nine correlated. Do we think ours is
• 44:05
  Speaker 1: marginally better than Joe blows down the street. Sure, but
• 44:09
  Speaker 1: you know if you stuck a gun to my head
• 44:11
  Speaker 1: and said which value molo do you want, I'd be like,
• 44:13
  Speaker 1: they're all good. That's not the hard part. The hard
• 44:16
  Speaker 1: part is making sure the money that's in it is
• 44:19
  Speaker 1: able to actually exploit it the duration of that. Yeah,
• 44:23
  Speaker 1: and so we that's why we have this saying, like
• 44:25
  Speaker 1: most products on the street, they're they're sold, not bought.
• 44:29
  Speaker 1: For our strategies, we say no, no, we have to
• 44:32
  Speaker 1: have our products be bought, not sold, because it's more
• 44:36
  Speaker 1: important that our clients and investors understand explicitly, maybe even
• 44:41
  Speaker 1: more than we even understand it, how and why this works.
• 44:44
  Speaker 1: Because it's not it's not about us being smarter than
• 44:47
  Speaker 1: the next guy. There's already hundred peach d guys around here.
• 44:50
  Speaker 1: They got higher i q s and I could ever
• 44:52
  Speaker 1: dream of. That's not our edge, our edges getting the
• 44:55
  Speaker 1: capital matched with a reasonable process that's good enough for
• 45:00
  Speaker 1: our you know, not brains, that's gonna be. That's the
• 45:05
  Speaker 1: buffet trade basically. So let's talk about your dissertation with
• 45:08
  Speaker 1: Eugene Fama. We we mentioned that he was your your advisor.
• 45:12
  Speaker 1: What's it like pitching momentum to the father of the
• 45:15
  Speaker 1: efficient market hypothesis? So Cliff did value and momentum to
• 45:19
  Speaker 1: the vastness. I actually pitched him on value exclusive. I
• 45:24
  Speaker 1: wasn't going to touch the momentum, pain trade and a
• 45:27
  Speaker 1: dissertation because I wasn't that a wild as Cliff was. Um.
• 45:31
  Speaker 1: But what I did is, you know, I don't I
• 45:33
  Speaker 1: has always been a stock picker. Reading Ben Graham, warm
• 45:37
  Speaker 1: off its stuffed, I was blue in the face. I
• 45:39
  Speaker 1: believed that that was the way of the world. Um.
• 45:43
  Speaker 1: And so obviously, you know, you have the most famous
• 45:45
  Speaker 1: guy in the world that says no, that's never gonna work.
• 45:48
  Speaker 1: Screw this guy. I'm gonna figure out how to like,
• 45:50
  Speaker 1: you know, let's see if we can an outsmart this guy.
• 45:53
  Speaker 1: So what I did is, um, I'm sure if we
• 45:55
  Speaker 1: were like Joe Greenblatt, a little little book, little yeah,
• 46:00
  Speaker 1: great book, great ideas. He has this organization called Value
• 46:03
  Speaker 1: Messrs Club UM, which is ah, it's basically like an
• 46:05
  Speaker 1: invite only group of all these hedge fund managers and
• 46:09
  Speaker 1: really smart kind of fundamental stock pickers UM. And you've
• 46:12
  Speaker 1: been doing it since two thousand. I was like, hey,
• 46:14
  Speaker 1: this is a really great data source where there's all
• 46:17
  Speaker 1: these like full scale stock pitches from the by side.
• 46:20
  Speaker 1: Let's look at how it's done over time's let me
• 46:23
  Speaker 1: guess they stunt the joint on. Well no, actually interesting enough.
• 46:27
  Speaker 1: Well it's kinda but in an indirect way. So when
• 46:31
  Speaker 1: you actually look at the performance of as a whole,
• 46:35
  Speaker 1: they're actually pretty good. Like these people had real value.
• 46:38
  Speaker 1: It's unclear that if you paid in their funds after
• 46:41
  Speaker 1: the but there's certainly evidence that these guys have some
• 46:46
  Speaker 1: skill and an especially when you get that segmented down
• 46:49
  Speaker 1: to like the small value, there's no doubt these this
• 46:54
  Speaker 1: group has a ton of skill. There's a shortage of information,
• 46:57
  Speaker 1: there's not a lot of coverage, there's more risk's whole bunch.
• 47:00
  Speaker 1: When you read there, when you read their thesis, a
• 47:02
  Speaker 1: lot of these guys are talking about long duration anomalies
• 47:05
  Speaker 1: and like, hey, the cell side is crazy because they're
• 47:08
  Speaker 1: trying to beat the So a lot of it made
• 47:09
  Speaker 1: intuitive sense, um, and it was all good. I literally
• 47:12
  Speaker 1: read every single one of these stock pitches catalog did.
• 47:16
  Speaker 1: I had them all database by, Like what did they
• 47:18
  Speaker 1: mentioned as to why they liked this idea? Would have
• 47:20
  Speaker 1: you one part of it? I had a theory papers well,
• 47:26
  Speaker 1: which was beyond this discussion. But um, right, this thing up.
• 47:30
  Speaker 1: It actually says that these value investors actually do have skill.
• 47:34
  Speaker 1: And you know the fisher marketypothsis. It just it seems
• 47:38
  Speaker 1: to be some slack in it, which is fine, um,
• 47:40
  Speaker 1: you know. So so I sent it off to him
• 47:42
  Speaker 1: and of course, I you know, the first team I
• 47:43
  Speaker 1: get is basically no, this is wronging a conclusions false. Um.
• 47:48
  Speaker 1: So I'm like, great, it just wastes the year of
• 47:50
  Speaker 1: my life and I'm totally scared. But you have to
• 47:52
  Speaker 1: you can he I'm told he's pretty open minded, very
• 47:56
  Speaker 1: openustness said, listen, I think you're wrong, Prove I'm I'm
• 48:00
  Speaker 1: not correct exactly so. And and this is my like,
• 48:04
  Speaker 1: oh my god, I'm dead moment. So of course I
• 48:06
  Speaker 1: run down. I'm like, you know, and everyone calls him
• 48:08
  Speaker 1: prof fam I'm sure like Clifaz's price, I would never
• 48:12
  Speaker 1: call him by his first team. Yeah he's so gane.
• 48:14
  Speaker 1: Let me tell you why. Yeah, he's just too He's
• 48:17
  Speaker 1: too steadily. Like I just feel like, you know, I
• 48:20
  Speaker 1: don't want so many people I have a lot of
• 48:23
  Speaker 1: I'm not a big E M H guy, although I
• 48:26
  Speaker 1: the weak version of it makes sense, but there are
• 48:30
  Speaker 1: so many people I have all this respect for who
• 48:32
  Speaker 1: just sing say the world about him? Yeah, I mean, yeah,
• 48:36
  Speaker 1: a little off track, but as just a human being.
• 48:39
  Speaker 1: You know, the guy grinds every day. He's super honest,
• 48:42
  Speaker 1: super humble, works his face off, Like I don't care
• 48:46
  Speaker 1: if he's bacon donuts. I like this dude. Um. He
• 48:49
  Speaker 1: happens to be a Nobel Prize winner and that's awesome,
• 48:53
  Speaker 1: but but it's more about a fundamental respect for just
• 48:55
  Speaker 1: working his whole process. Yeah, what he's all about, like
• 48:58
  Speaker 1: not even death act. He's a financial economists. I just
• 49:01
  Speaker 1: like his the way it carries himself. You know. That's
• 49:04
  Speaker 1: why I said the exact same thing about Charlie Ellis,
• 49:07
  Speaker 1: who was a guest on the show Who and I
• 49:10
  Speaker 1: and I after the show, we walked downtown. I spent
• 49:12
  Speaker 1: like an extra hours with him, and I came away
• 49:15
  Speaker 1: with like, this is the finest human being I've ever
• 49:17
  Speaker 1: met in my life. And I'm hearing the same sort
• 49:19
  Speaker 1: of thing from the same thing. Just good dude, Like
• 49:22
  Speaker 1: like if I was in the Marine Corps and I
• 49:24
  Speaker 1: could transplant him fifty years or I want to, like,
• 49:28
  Speaker 1: this guy is good to go it regardless of what
• 49:30
  Speaker 1: he knows about finance. But so back to that, I
• 49:33
  Speaker 1: ran down there and and it was the same thing.
• 49:35
  Speaker 1: Like his Cliff said, he's very very open minded empirical evidence,
• 49:39
  Speaker 1: scientific focus, like if you got the evidence, you run
• 49:43
  Speaker 1: the right robustant tests, like all good. Um, so go
• 49:45
  Speaker 1: down there. And you know, in my dissertation in the
• 49:48
  Speaker 1: abstract for this particular paper, you know, I made an
• 49:51
  Speaker 1: overstated claim. I said value investors beat the market. You know,
• 49:55
  Speaker 1: He's like, no, the sample value investors you analyze be
• 50:01
  Speaker 1: at the market. And so literally it was like that
• 50:03
  Speaker 1: two or three word difference that because semantics matter and
• 50:06
  Speaker 1: that kind of stuff, because one is an overstatement and
• 50:09
  Speaker 1: the other is within the sub slept set of value managers.
• 50:13
  Speaker 1: I analyzed, they clearly have some skill, but you can't
• 50:17
  Speaker 1: say that value the market. And I was like, he's
• 50:21
  Speaker 1: being very precise, very precise, which was a great lesson.
• 50:25
  Speaker 1: And then and to be more precise on that particular thing.
• 50:28
  Speaker 1: This is not really in the dissertation because it's this
• 50:30
  Speaker 1: is a little bit too practitioner focus, I would say.
• 50:33
  Speaker 1: But after the fact we said, wow, this is incredible.
• 50:35
  Speaker 1: You have all these people that spend all this time,
• 50:39
  Speaker 1: incredible effort in data collection information come up with a
• 50:43
  Speaker 1: thesis on the stock pitch. Um, I'm really curious, can
• 50:47
  Speaker 1: this be quanted out? Turns out that we looked at
• 50:51
  Speaker 1: like that quant value agorithm, which basically is is essentially
• 50:55
  Speaker 1: a computer version of what the Value Investors Club guys
• 50:58
  Speaker 1: do by cheap high quality firms with a ton of
• 51:03
  Speaker 1: analysis on like the quality component, but cheapness is is
• 51:06
  Speaker 1: a is a primary. Turns out that the correlation between
• 51:10
  Speaker 1: just buying like a superactive cheap high quality basket is
• 51:15
  Speaker 1: essentially the same and very very highly correlated with kind
• 51:19
  Speaker 1: of what quote unquote the alpha generation is from these
• 51:22
  Speaker 1: stock picker people. So you know it's you know, what
• 51:25
  Speaker 1: is alpha? What is beta? Who knows? Um? You know,
• 51:28
  Speaker 1: alpha is just intercept on a regression where if you
• 51:31
  Speaker 1: put enough factors in there, obviously alpha is always zero,
• 51:34
  Speaker 1: but to some extent of you know, super concentrated. Wait
• 51:37
  Speaker 1: when you say, obviously alpha is always zero, but is
• 51:39
  Speaker 1: it always zero? It is if you keep adding factors
• 51:42
  Speaker 1: that explain the variants. Because because alpha, so you risk adjusted.
• 51:46
  Speaker 1: You once you once you go through all those different dimensions,
• 51:50
  Speaker 1: since we're talking about Chicago, eventually you can rationalize where
• 51:54
  Speaker 1: all that alpha comes and eventually alpha becomes beta. Yeah, exactly,
• 51:58
  Speaker 1: because all it is Alpha is literally just when you
• 52:01
  Speaker 1: calculate this stuff formally, beta is the coefficient on the factor.
• 52:05
  Speaker 1: Alpha is just kind of the average intercept, the kind
• 52:08
  Speaker 1: of the extra you get that's unexplained for. So the
• 52:11
  Speaker 1: deviation that you're looking for, why it occurs? Yeah, after
• 52:15
  Speaker 1: controlling for all these other quote unquote risk factors. But
• 52:18
  Speaker 1: let's take momentum for example. Okay, let's say we think
• 52:21
  Speaker 1: momentum is alpha. If you run momentum and you control
• 52:25
  Speaker 1: for market size, value, blah blah blah, you're gonna have
• 52:29
  Speaker 1: a huge alpha. So what do you do to control
• 52:31
  Speaker 1: for the alpha momentum? Throw a momentum factor on there. Now,
• 52:34
  Speaker 1: what happens the momentum strategy they have no alpha. So
• 52:37
  Speaker 1: now is that because they don't work and they're not
• 52:40
  Speaker 1: miss price or is that just because you controlled for
• 52:42
  Speaker 1: the momentum factor to say that momentum doesn't work anymore. Well, no,
• 52:46
  Speaker 1: momentum still works and it's been embraced in the factor.
• 52:50
  Speaker 1: But that doesn't necessarily mean that that factor is a
• 52:53
  Speaker 1: true risk factor. What if the returns associated with it
• 52:58
  Speaker 1: are associated with miss pricing problem, not like fundamental risks,
• 53:02
  Speaker 1: like it co varies with your future consumption or whatever
• 53:06
  Speaker 1: you know, fancy you know macro or model that some
• 53:09
  Speaker 1: economists is coming up with. And so I think the
• 53:12
  Speaker 1: problem with that the idea of alpha's and beta's is
• 53:15
  Speaker 1: alpha is an intuitive concept, is excess return controlling for
• 53:20
  Speaker 1: a bunch of risks. But the mechanical construct, it's a
• 53:24
  Speaker 1: statistical item and it can be totally manipulated. Where obviously
• 53:28
  Speaker 1: all alpha can become beta because you just put the
• 53:30
  Speaker 1: alpha generator on the beta side and you can go
• 53:33
  Speaker 1: buy it. But just because it can be beta, that
• 53:36
  Speaker 1: doesn't mean it's not alpha doesn't mean it's not real
• 53:38
  Speaker 1: or at least for that subset, And it doesn't mean
• 53:40
  Speaker 1: it's It's not easy to explain, right, because momentum is
• 53:43
  Speaker 1: a great example. Momentum is underperformed as a long short
• 53:46
  Speaker 1: factor for arguably five to ten years. Everyone's like, oh,
• 53:50
  Speaker 1: it's dead. Yeah. One of my old bosses, Chris Gates,
• 53:53
  Speaker 1: he wrote the paper like the long World's longest back tests.
• 53:56
  Speaker 1: They get data back and he actually expecially says in
• 54:00
  Speaker 1: the abstract momentum factor has underperformed for tenure cycles like
• 54:05
  Speaker 1: seven times. So this is this underperformance recently a momentum Yeah,
• 54:09
  Speaker 1: it's not all that operational, it's just so so one
• 54:12
  Speaker 1: of the one of the things you mentioned before about
• 54:15
  Speaker 1: the two two issues you look at, which is the
• 54:18
  Speaker 1: behavioral side and and the principal agent side. So I
• 54:23
  Speaker 1: would imagine someone like you looks at the FED with
• 54:27
  Speaker 1: Quie and up and all that stuff and says, yeah,
• 54:30
  Speaker 1: we don't care about that. It's not. What matters is
• 54:33
  Speaker 1: is the behavioral and the agency issue, not all these externalities.
• 54:39
  Speaker 1: It's all about what is the signal? What is the noise?
• 54:43
  Speaker 1: The signal is the huge It just driven from the
• 54:47
  Speaker 1: humans evolved in the game and the dynamics and the
• 54:50
  Speaker 1: rules of the game they play and how that shapes
• 54:52
  Speaker 1: their own synips. That doesn't change no matter what. I
• 54:56
  Speaker 1: don't care about g DP what the FED says, because
• 54:59
  Speaker 1: it's relevant. Human behavior stay indo chain, stay in the
• 55:03
  Speaker 1: same in human incentives are stay in the same in
• 55:06
  Speaker 1: the institutional construct that we currently live in, which is
• 55:10
  Speaker 1: primarily driven by a lot of delegated asset management. That's
• 55:13
  Speaker 1: funny because as we're as we're recording this, the FET
• 55:17
  Speaker 1: is meeting and uh literally the news is coming out
• 55:20
  Speaker 1: the second and we won't even talk about it because
• 55:22
  Speaker 1: it's meaningless. Instead, let's in the last ten or fifteen
• 55:26
  Speaker 1: minutes I have you, let's get to some of my
• 55:29
  Speaker 1: favorite questions. Um, well, you mentioned Cliff ass Nests. Who
• 55:35
  Speaker 1: else were other quants that you you admired or who
• 55:38
  Speaker 1: were mentors of yours? Tell tell us the people who
• 55:42
  Speaker 1: who influenced your approach to invest in Sure, I'd say
• 55:45
  Speaker 1: the danser directly like the quants that I admire. Obviously,
• 55:48
  Speaker 1: Cliff as nous I like a lot. He does value momentum.
• 55:51
  Speaker 1: HRS a great firm. Uh, you know, booth at Ata
• 55:55
  Speaker 1: is great. They figured out how to capture small value premium.
• 55:58
  Speaker 1: And I think probably the most underrespected or under appreciated
• 56:01
  Speaker 1: quant is Jack Bogel at Vanguard because indexing is a
• 56:06
  Speaker 1: form of systematic quant investing. It's just your your systematically
• 56:10
  Speaker 1: buying these market capuited passive indices. And for all intents
• 56:15
  Speaker 1: and purposes, he is a quantitative, systematic investor, and clearly
• 56:19
  Speaker 1: that's in a world of good for society. And his
• 56:22
  Speaker 1: alpha is we recognize that the cost structure is the
• 56:25
  Speaker 1: most important element investing, and if we could do everything
• 56:29
  Speaker 1: we can to reduce the cost factor, that's gonna our
• 56:32
  Speaker 1: beta is everybody else's is actually a form of alpha
• 56:36
  Speaker 1: if only you've given enough time. Yeah, costs and taxes,
• 56:40
  Speaker 1: or if you can minimize those somehow, that that is
• 56:44
  Speaker 1: always the answer now and that even they talk about
• 56:47
  Speaker 1: like active active is only bad to the extent that
• 56:51
  Speaker 1: it's the cost of achieving it. The net benefit is
• 56:54
  Speaker 1: not positive, it's negative because it goes in taxes and
• 56:56
  Speaker 1: fees to some idiot people. People are surprised when I said,
• 57:01
  Speaker 1: you know, Vanguard has a trillion dollars in active funds
• 57:04
  Speaker 1: that like really has anybody written a paper or or
• 57:07
  Speaker 1: or a column, and I may have to if nobody
• 57:09
  Speaker 1: has Jack Bogel the quant. I don't know if anyone has.
• 57:13
  Speaker 1: But so now now you've forced me to do this,
• 57:16
  Speaker 1: that's what's gonna happen. I think he might be the
• 57:18
  Speaker 1: world's greatest quant, just that no one really appreciate it.
• 57:22
  Speaker 1: I'm gonna have to quote you in this and you've
• 57:24
  Speaker 1: just given me an idea. Now I have to get
• 57:27
  Speaker 1: this out before the podcast goes up, so uh, it'll
• 57:31
  Speaker 1: it'll be pretty interesting. So you've mentioned Buffett, You've mentioned Graham.
• 57:35
  Speaker 1: What other investors have influenced your approach? I would say, um,
• 57:41
  Speaker 1: not much beyond that, Like Graham taught me about, you know,
• 57:45
  Speaker 1: thinking about businesses or stocks is businesses. Buffett actually didn't
• 57:50
  Speaker 1: add any thing onto that. But I just like his
• 57:52
  Speaker 1: like transparent approach and the whole idea that integrity is
• 57:56
  Speaker 1: everything and in the end that's what you live and
• 57:58
  Speaker 1: die by. And he has that old what were you know?
• 58:00
  Speaker 1: You know, integrity spends a lifetime to build, five minutes
• 58:03
  Speaker 1: to destroy, which it has nothing to do with investing,
• 58:06
  Speaker 1: but it has everything to do with investing. Well, it
• 58:08
  Speaker 1: has everything to do with working in the investment field exact.
• 58:12
  Speaker 1: It's always you know, my my favorite line is no
• 58:16
  Speaker 1: one has a patience to get rich slowly, and the
• 58:18
  Speaker 1: people who are in a hurry invariably run into trouble.
• 58:22
  Speaker 1: You got it. It's amazing. Let's talk about books you
• 58:25
  Speaker 1: mentioned one or two earlier. What are some of your
• 58:28
  Speaker 1: and fiction, nonfiction, investing, whatever, what What are some of
• 58:32
  Speaker 1: your favorite books? Yeah, so, unfortunately I'm not a one
• 58:36
  Speaker 1: of my weaknesses is I'm very pragmatic and I just
• 58:39
  Speaker 1: read stuff that helps me get better. So you're reading
• 58:43
  Speaker 1: more academic papers, Yeah, I read. I read a lot
• 58:45
  Speaker 1: of journals, four books. Some of the things that heavily
• 58:48
  Speaker 1: influenced the way I've thought about things, and I know
• 58:51
  Speaker 1: you know it very well, like Dan Kahneman's book The
• 58:53
  Speaker 1: Fastest Epic. Another one is, you know Taylor sustained that
• 58:57
  Speaker 1: Nudge book. The whole idea of like liberty Ryan paternalism,
• 59:01
  Speaker 1: I thought made a ton of sense because I used
• 59:03
  Speaker 1: to be a libertarian. I was like, wait a secondaris
• 59:05
  Speaker 1: humans involved and they make bad decisions. You have to
• 59:08
  Speaker 1: have some bumpers up otherwise that someone just someone just
• 59:12
  Speaker 1: ran maybe with Samantha b at the Libertarian convention, and
• 59:17
  Speaker 1: one of the guys got booed for saying, I believe
• 59:21
  Speaker 1: that we should have um people, the states should mandate
• 59:26
  Speaker 1: tests for driving. We don't just give anyone a car.
• 59:28
  Speaker 1: And they were booed by the Libertarians, and it's like, oh,
• 59:31
  Speaker 1: so you guys don't understand humans at all. Yeah, yeah,
• 59:34
  Speaker 1: and that's my big I mean, I'm a I'm gonna
• 59:37
  Speaker 1: be a Gary Johnson voter. He was the one who
• 59:40
  Speaker 1: was booed when he said, yes, you should. He's a
• 59:42
  Speaker 1: pragmatic hematic libertarian. That's a subset of the part. And
• 59:47
  Speaker 1: guess what, none of these political folks appealed to the
• 59:50
  Speaker 1: pragmatic part. You always get extremes because that's what sells well.
• 59:55
  Speaker 1: Was but yeah, give me one more book, the other one,
• 59:58
  Speaker 1: a whole bunch of them. Chardini's books on like the
• 1:00:02
  Speaker 1: science of persuadion, influence, influence, fifty scientific ways to say yes,
• 1:00:06
  Speaker 1: like after re and that guy's stuff. It just made
• 1:00:09
  Speaker 1: me rethink the whole world of of like human thinking
• 1:00:13
  Speaker 1: and decision making from the perspective of like a marketing person,
• 1:00:18
  Speaker 1: and how you get influence and bombarded every day in
• 1:00:21
  Speaker 1: subconscious ways to do things you may or may not
• 1:00:24
  Speaker 1: want to do. But it's very important, I think, to
• 1:00:27
  Speaker 1: be aware of this influenced tactics out there, so one
• 1:00:30
  Speaker 1: you can defend against it, and then too, you can
• 1:00:33
  Speaker 1: use it to your advantage, you know, in a sensible,
• 1:00:35
  Speaker 1: you know, high integrity way. I'm gonna out myself embarrassingly.
• 1:00:40
  Speaker 1: I've had that book on my bookshelf for years. I
• 1:00:42
  Speaker 1: still haven't read it. Unlivable. You're not the first want
• 1:00:46
  Speaker 1: to say that. All right, we're down to our last
• 1:00:48
  Speaker 1: few favorite questions. So if somebody, if a millennial's coming
• 1:00:53
  Speaker 1: to you and says, I'm beginning my career in finance,
• 1:00:57
  Speaker 1: what sort of uh, what sort of advice would you
• 1:01:00
  Speaker 1: give them? So back to our discussion about manual labor,
• 1:01:04
  Speaker 1: I would say, first, get mentally tough. So do sports.
• 1:01:09
  Speaker 1: Do things that are painful that allow you to be tough.
• 1:01:13
  Speaker 1: Adapt because we're in the world where it's gonna change,
• 1:01:17
  Speaker 1: it's gonna be tough, it's gonna be adapting, and you're
• 1:01:19
  Speaker 1: competing not with Americans, you're competing with the globe now.
• 1:01:23
  Speaker 1: So you know, we have a lot of you know,
• 1:01:24
  Speaker 1: my old students are Chinese guys, and these guys grind,
• 1:01:29
  Speaker 1: they work harder, faster, stronger, and that's who you're competing
• 1:01:33
  Speaker 1: with out there. So unless you're you gotta rate rise occasion.
• 1:01:38
  Speaker 1: I hear, I hear a lot of marine corps. Yeah,
• 1:01:40
  Speaker 1: so I would say, just get mentally tough, don't It
• 1:01:43
  Speaker 1: doesn't even matter what you learn. Get mentally tough and
• 1:01:45
  Speaker 1: know how to adapt and overcome. And then the other
• 1:01:48
  Speaker 1: thing I said here I just write down my notes
• 1:01:50
  Speaker 1: is you know, I become a either a robot salesman
• 1:01:53
  Speaker 1: or a robot manufacturer because I feel like in the
• 1:01:56
  Speaker 1: very near future robots are taken over and so you
• 1:02:00
  Speaker 1: might as well adapt and train to the future and
• 1:02:02
  Speaker 1: not you know, be a basket weaver guy anymore because
• 1:02:05
  Speaker 1: it's not gonna pay um. And our final question, what
• 1:02:09
  Speaker 1: is it that you know about investing today that you
• 1:02:12
  Speaker 1: wish you knew fifteen years ago? Well, I wrote down
• 1:02:16
  Speaker 1: the Big Three, which have been uh, you know, endowed
• 1:02:19
  Speaker 1: upon me by a lot of our investors who are
• 1:02:21
  Speaker 1: all insanely rich. And I'm like, wow, that's pretty cool.
• 1:02:24
  Speaker 1: How how do you guys do that? And there's literally
• 1:02:26
  Speaker 1: three themes that come out of every single one of
• 1:02:28
  Speaker 1: these stories. Minimize tax burdens, defer to for to for
• 1:02:34
  Speaker 1: have horizon, and live below your means. So always be humble,
• 1:02:38
  Speaker 1: you know, never rise to the level of what you
• 1:02:41
  Speaker 1: can afford. Just you know, live within your means and
• 1:02:45
  Speaker 1: enjoy your life with what you got. Um and and
• 1:02:48
  Speaker 1: those are the three things and you'll be all right.
• 1:02:50
  Speaker 1: West Gray, thank you so much for for doing this this.
• 1:02:53
  Speaker 1: This has just been absolutely fascinating. We have been speaking
• 1:02:57
  Speaker 1: with Captain Wesley Gray, formally of the U. S. Marine
• 1:03:01
  Speaker 1: Corps now with Alpha Architect. I would be remiss if
• 1:03:06
  Speaker 1: I did not think our producer Charlie Vhmer, my booker
• 1:03:10
  Speaker 1: Taylor Riggs, and Mike bat Nick, my head of research,
• 1:03:14
  Speaker 1: our recording engineer Jennie. If you have enjoyed this conversation,
• 1:03:18
  Speaker 1: be sure and look up an Inch or Down an
• 1:03:20
  Speaker 1: Inch on Apple iTunes and you will see any of
• 1:03:23
  Speaker 1: the nineties six other such podcasts that we've had. Uh,
• 1:03:28
  Speaker 1: be sure and check out the list of upcoming guests,
• 1:03:31
  Speaker 1: which is really quite astonishing. I'm Barry rit Halts. You're
• 1:03:36
  Speaker 1: listening to Masters in Business on Bloomberg Radio look Ahead
• 1:03:46
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