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Robert Arnott on Global Asset Management (Podcast) · Masters in Business

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  Speaker 1: M. This is Mesters in Business with very Renaults on
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  Speaker 1: Bluebird Radio. This week on the podcast, I have an
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  Speaker 1: extra special guest. His name is Rob or Not and
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  Speaker 1: he is the chairman and founder of Research Affiliates, a
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  Speaker 1: firm who essentially patented the concept of fundamental index thing
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  Speaker 1: pretty much they invented it. And uh, I know Rob
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  Speaker 1: for a good couple of years. He was on the
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  Speaker 1: show in and his office just cranks out so many
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  Speaker 1: fascinating research pieces, hence the name Research Affiliates. That you know,
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  Speaker 1: after you read the third or fourth thing from somebody
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  Speaker 1: in a couple of months, it's like, damn, I gotta
• 0:43
  Speaker 1: get robbed back on. This is some really interesting things.
• 0:46
  Speaker 1: We went deep into the woods on electric vehicles in
• 0:50
  Speaker 1: Tesla and we talked about what makes a big market
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  Speaker 1: delusion when an entire sector, not just a company, a
• 0:57
  Speaker 1: whole sector runs amuck. We talked about everything really, from
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  Speaker 1: E s G to bitcoin to value. I thought it
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  Speaker 1: was really intriguing if you're at all interested in fundamental
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  Speaker 1: indexing or smart beta, if you're interested in where alpha
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  Speaker 1: comes from and what the sources of various value and
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  Speaker 1: other types of factor premiums are, then you're going to
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  Speaker 1: find this to be absolutely fascinating. So, with no further ado,
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  Speaker 1: my conversation with Research Affiliates Rob are Not. This is
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  Speaker 1: mesters in Business with very renaults on Bluebird Radio. My
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  Speaker 1: special guest this week is Rob are Not. He is
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  Speaker 1: the founder and chairman of Research Affiliates, a firm that
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  Speaker 1: has created and patented a methodology for creating indexes based
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  Speaker 1: on fundamental metrics instead of the traditional market cap waiting.
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  Speaker 1: Various asset managers are unning over a hundred and sixty
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  Speaker 1: billion dollars using strategies developed by Research Affiliates. Rob is
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  Speaker 1: the author of over a hundred academic papers, seven of
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  Speaker 1: which one Graham and Dodge Scrolls and Awards. He is
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  Speaker 1: the co author of the book The Fundamental Index A
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  Speaker 1: Better Way to Invest. Rob are Not, welcome to Bloomberg.
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  Speaker 1: Thank you so much. It's a privilege. Well, it's pleasure
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  Speaker 1: to have you back. There's so much to go over
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  Speaker 1: since the last time we had you on the show
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  Speaker 1: about three years ago. Let's just start out with Research
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  Speaker 1: Affiliates or or Raphaels as I know it. Um, you
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  Speaker 1: guys don't manage assets directly, but advise on over a
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  Speaker 1: hundred and sixty billion dollars in assets, explained to the
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  Speaker 1: listeners how that process works well. We want to focus
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  Speaker 1: on our area of competitive advantage, and that is in
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  Speaker 1: doing research and develop investment strategies, in carrying out um
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  Speaker 1: UH and exploring potentially disruptive ideas for the investment management community.
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  Speaker 1: UM to run an asset management firm also typically means
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  Speaker 1: UM call center, means portfolio accounting, it means UM trading desk,
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  Speaker 1: trade reconciliation departments, and the list goes on and on
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  Speaker 1: and on. So the last time I ran an asset
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  Speaker 1: management firm first quadrant back in two thousand four, we
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  Speaker 1: had about twenty people and a roughly twelve were in research.
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  Speaker 1: Here we've got about eighty people and roughly half of
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  Speaker 1: them are in research. So we're able to concentrate our
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  Speaker 1: attention on our area of competitive advantage while at the
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  Speaker 1: same time using affiliates external distribution partners to handle distribution
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  Speaker 1: and quiet relationships. And so basically they view us as
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  Speaker 1: an extension of their R and D capabilities. UH. Certainly,
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  Speaker 1: they're not going to replace their R and D efforts,
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  Speaker 1: but if our ideas are complementary, then we're an extension
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  Speaker 1: of that and we view them as our distribution channel.
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  Speaker 1: Let's talk about one of the strongest research ideas and
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  Speaker 1: strategies that you and your farm are behind. And and
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  Speaker 1: that's the basic concept that hey, we're doing this index
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  Speaker 1: waiting thing all wrong. Instead of doing it based on
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  Speaker 1: market cap or the size of the company, it's instead
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  Speaker 1: it should be based on fundamental metrics like revenues or profits.
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  Speaker 1: Explain why that's a better approach. Thank you for asking that.
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  Speaker 1: A lot of the attention in the world of so
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  Speaker 1: called smart beta is on formula based techniques for investing,
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  Speaker 1: and the umbrella terms smart beta began as a focus
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  Speaker 1: on strategies that no longer weight companies in direct proportion
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  Speaker 1: to their price, which is what cap Waiting does, and
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  Speaker 1: it's cap Waiting's heel Achilles heel um uh. If you
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  Speaker 1: wait companies in proportion to the their price, than any
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  Speaker 1: company that's above its eventual fair value and destined to
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  Speaker 1: underperform will have a current weight that's too high, and
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  Speaker 1: any company that's cheap and destined to outperform will have
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  Speaker 1: a current weight in the portfolio that's too low. So
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  Speaker 1: you're gonna be overweight the overvalued and underweight the undervalue
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  Speaker 1: even though you don't know which ones are which, which
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  Speaker 1: is an interesting nuance UM. But the term smart beta
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  Speaker 1: has since been broadened to embrace factor investing, and basically
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  Speaker 1: anything that uses a formula, even momentum investing, is called
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  Speaker 1: smart beta, although it's the antithesis of the original definition.
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  Speaker 1: UH Fundamental Index was an idea that we came up
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  Speaker 1: within two thousand three in the aftermath of the bursting
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  Speaker 1: of the tech bubble. A dear friend of mine who
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  Speaker 1: was on the board of the New York State Pension
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  Speaker 1: and was founding president of Common Fund, which manages commit
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  Speaker 1: Um university endowments. He was horrified at the amount of
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  Speaker 1: money that was lost by major pension funds by investing
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  Speaker 1: in cap weighted indexes. As the tech bubble burst. Four
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  Speaker 1: percent of the portfolio UM invested UH in the largest
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  Speaker 1: market cap company at the time UM Cisco, and Cisco
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  Speaker 1: subsequently went down. Something like so there went if you
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  Speaker 1: had four percent in it, there went three point six
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  Speaker 1: percent of your money and one single stock, okay, UH.
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  Speaker 1: He challenged us to think about better ways to invest,
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  Speaker 1: and we came up with the idea, an idea I
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  Speaker 1: had been playing around with for a few years. Why
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  Speaker 1: on earth do you want to invest in proportion to
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  Speaker 1: market capitalization, which means that the more expensive the company is,
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  Speaker 1: the more heaviest weight in the portfolio. Why not wait
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  Speaker 1: companies in accordance with sales, or with profits, or with
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  Speaker 1: book value, or or even with a number of employees.
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  Speaker 1: So UM, we went back and tested the idea first,
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  Speaker 1: starting with sales and book value and going back thirty
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  Speaker 1: plus years. We found that if you chose the thousand
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  Speaker 1: largest businesses in the US based on their sales and
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  Speaker 1: wasted them by their sales, that you wound up two
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  Speaker 1: and a half percent a year better off than with
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  Speaker 1: cap weighted indexing. And we tested it with book value,
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  Speaker 1: We tested it with offits, with cash flow, with EBA, duh,
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  Speaker 1: with number of employees. UM, and everything we tested had
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  Speaker 1: one and a half to two and a half percent
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  Speaker 1: access return. So that was our first a ha moment
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  Speaker 1: that oh, it doesn't matter what measure you're using. What
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  Speaker 1: matters is whether the measure incorporates price, because if the
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  Speaker 1: price is too high, then any any waiting scheme will
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  Speaker 1: do better. You could use darts, or you could base
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  Speaker 1: it on the number of executives who like to have
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  Speaker 1: a mustache or whatever. Um and you're still breaking the
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  Speaker 1: link with price, and you're still going to add one
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  Speaker 1: and a half to two and a half percent a year. Cool.
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  Speaker 1: And so we developed the idea of Fundamental Index, which
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  Speaker 1: has become a very important part of our business. It's
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  Speaker 1: over a hundred forty billion in assets now and it's
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  Speaker 1: under licensed to other distribution partners Pimco, Schwab, investc Amura,
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  Speaker 1: and the list goes on and on. We have at
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  Speaker 1: least eight part distribution partners with at least ten billion
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  Speaker 1: each managed using our ideas. So what is cool about
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  Speaker 1: Fundamental Index is that you're earning a profit based on
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  Speaker 1: two things. First, the obvious one a value tilt. If
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  Speaker 1: growth stock is priced at lofty multiples to fundamentals, then
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  Speaker 1: you're rewaiting those stocks down to their economic footprint, the
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  Speaker 1: size of the business. And if a stock is trading
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  Speaker 1: at deep discounts, you're rewaiting it up. So you have
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  Speaker 1: a stark value tilt all the time, and value investing
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  Speaker 1: usually wins. But it turns out that's not the dominant
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  Speaker 1: source of incremental return. It turns out that the dominant
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  Speaker 1: source of access return is a rebalancing discipline. If a
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  Speaker 1: stock soars and the fundamentals don't, then RAFI. The fundamental
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  Speaker 1: index will say, thank you for those lovely games. Let's
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  Speaker 1: rewait this investment down to its economic footprint. And if
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  Speaker 1: it's company tumbles and its fundamentals don't, rathey will say, oh,
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  Speaker 1: thanks for the lovely discount. Let's rewait you back up
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  Speaker 1: to your economic footprint. So, since the market is constantly
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  Speaker 1: changing its mind as to how much a company is worth,
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  Speaker 1: you're constantly rebalancing contratrating against the market's most extravagant bets,
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  Speaker 1: and your biggest bets will be on the companies where
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  Speaker 1: the market is making the biggest bet. In the opposite direction,
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  Speaker 1: the companies that have soared the most. Game Stop swared
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  Speaker 1: tremendously this quarter on top of an already stupendous rise
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  Speaker 1: in two thousand twenty. So you'd look at that and say,
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  Speaker 1: if you owned it, which we did, we owned it
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  Speaker 1: as a value investment with a cost bay syst of
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  Speaker 1: around a little under four bucks share. If you owned it,
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  Speaker 1: you'd say, thanks for this great gain. The underlying fundamentals
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  Speaker 1: haven't changed. Let's take some profits and rebalance that rebalancing
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  Speaker 1: alpha is the dominant engine for incremental return, and that
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  Speaker 1: is not true of most of the strategies that currently
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  Speaker 1: carry the smart beta label. That's interesting that the pushback
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  Speaker 1: I've heard from the traditional market cap weighted index ers
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  Speaker 1: are on the on the one hand, you're selling stocks
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  Speaker 1: that have rallied and very well may continue to rally.
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  Speaker 1: If if you're rebalancing away from Amazon or Apple anytime
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  Speaker 1: over the past I don't know, twelve years, you know
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  Speaker 1: you saw the stock go higher. And on the other hands,
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  Speaker 1: on the cheap ends, you have a tendency to buy
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  Speaker 1: into the value traps, things that look cheap because they're
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  Speaker 1: in a spensive and still have revenues but aren't. What's
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  Speaker 1: the counter to that critique? That critique is absolutely correct.
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  Speaker 1: M Here's the deal, though, for every Amazon, there is UM,
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  Speaker 1: a company that is perceived as a disruptor that subsequently
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  Speaker 1: gets disrupted UM. Apple has been hugely successful in contratrating
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  Speaker 1: out of Apple has not been a good thing. But
• 12:32
  Speaker 1: who came before Apple? UM? BlackBerry Palm. Palm was dominating
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  Speaker 1: the world of handheld communication devices back in the year
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  Speaker 1: two thousand when it was spun off from three com
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  Speaker 1: it's spun off at evaluation briefly greater than General Motors
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  Speaker 1: at the time of the spinoff. It was spun off
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  Speaker 1: from three com at a total market value larger than
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  Speaker 1: three comes market value before of the spinoff. Isn't that interesting?
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  Speaker 1: And um, of course it went to zero and BlackBerry
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  Speaker 1: disrupted Palms business. And then no sooner was BlackBerry dominance
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  Speaker 1: and world straddling on handheld communication devices than Apple came
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  Speaker 1: along with the iPhone and said hey, hey, this is
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  Speaker 1: a whole lot better, and so did the marketplace. So
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  Speaker 1: disruptors do get disrupted. And yes, we missed the boat
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  Speaker 1: on highly successful companies that go from strength to strength
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  Speaker 1: to strength until they don't. And on the down side,
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  Speaker 1: you do have value traps, you'll rebalance into them in
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  Speaker 1: theory all the way to zero, which is one reason
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  Speaker 1: you absolutely do not want to rebalance a fundamental index
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  Speaker 1: strategy daily, because then you'll just buy into the value
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  Speaker 1: traps all the way to zero. So there's two broad
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  Speaker 1: flavors of fundamental index. One rebalances annually, the other does
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  Speaker 1: what's called quarterly staggered rebalancing, which means every quarter you
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  Speaker 1: move one fourth of the way to your target weight.
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  Speaker 1: That way, you're going to be hurt by value traps
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  Speaker 1: only modestly, only occasionally. And for every value trap there
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  Speaker 1: are several companies that look cheap and in fact are
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  Speaker 1: so case in point two thousand nine trough of the
• 14:30
  Speaker 1: financial crisis that the March two thousand nine rebalancing that
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  Speaker 1: took place in Fundamental Index um UH. We rebalanced to
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  Speaker 1: the economic footprint of businesses b of A and City.
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  Speaker 1: We're both um priced at a fraction of a percent
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  Speaker 1: of the market, and yet both of them were about
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  Speaker 1: two of the US economy measured in terms of of revenues, profits,
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  Speaker 1: book value, dividends and so forth. General Motors was about
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  Speaker 1: one percent of the economy and a tenth percent of
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  Speaker 1: the market. So we rebalanced into all three. We rebalanced
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  Speaker 1: back up to a one percent WAIT and GM and
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  Speaker 1: two percent each for the A in City and GM
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  Speaker 1: went to zero. In the next quarter went bust value trap.
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  Speaker 1: There went one percent of our portfolio. The two percent
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  Speaker 1: each in the of A in City tripled, so you
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  Speaker 1: wound up going from two to six in two stocks
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  Speaker 1: and from one to zero in a third stock. So
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  Speaker 1: the beauty of Fundamental Index is not that it has
• 15:34
  Speaker 1: any special insights into what the fair value of a
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  Speaker 1: company is, but that it contra trades against the market's
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  Speaker 1: most extravagant bets, which often in the long run turn
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  Speaker 1: out to be wrong. People love to buy growth stocks
• 15:50
  Speaker 1: because they've got a great, great story, But the right
• 15:53
  Speaker 1: question to ask is not is this company a great company?
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  Speaker 1: If it's a growth stock, of course it's a great company.
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  Speaker 1: The question is how much good news is there in
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  Speaker 1: the future for this business that isn't already in the
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  Speaker 1: consensus opinion and already in the current price. Is there
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  Speaker 1: more likely to be downside surprise growth that is less
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  Speaker 1: extravagant than expected um, or upside surprise where lofty expectations
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  Speaker 1: are actually exceeded. Amazon is a beautiful example of a
• 16:31
  Speaker 1: case where lofty expectations have been exceeded again and again
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  Speaker 1: and again, and at some point they won't be But
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  Speaker 1: who knows when it's a brilliantly run company with a
• 16:43
  Speaker 1: brilliant product that is disrupting vast squaws of industry um.
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  Speaker 1: Kudos to Bezos and his team, But the price of
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  Speaker 1: the stock reflects an expectation that the growth of the
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  Speaker 1: last decade will persist in the next decade and that's
• 16:57
  Speaker 1: a little dangerous. So you guys actually received a patent
• 17:02
  Speaker 1: for this methodology of selecting securities and creating indexes. Um.
• 17:08
  Speaker 1: Why a patent? What does that do for the firm?
• 17:11
  Speaker 1: It's really kind of fascinating to see a financial methodology
• 17:16
  Speaker 1: actually awarded a patent. Well, method patents are not new.
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  Speaker 1: They've been around for decades. UM. Uh early days of patents,
• 17:26
  Speaker 1: it had to be something you could hold in your
• 17:28
  Speaker 1: hand to be patented. UM. But over time, with the
• 17:34
  Speaker 1: advent of computers and so forth. UM, the notion of
• 17:40
  Speaker 1: method patents applied to UH, software methods, computer software methods, UH,
• 17:49
  Speaker 1: even business methods if they were truly unique, truly different,
• 17:54
  Speaker 1: and truly disruptive to an industry. Um, why shouldn't it
• 17:59
  Speaker 1: be patent to Now? The issue that I think bears
• 18:04
  Speaker 1: mentioned is we could be in the business of product
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  Speaker 1: innovation or in the business of patent litigation. UH which
• 18:13
  Speaker 1: expertise do we have? The former not the latter. So
• 18:17
  Speaker 1: I view the patents really as a stake in the
• 18:19
  Speaker 1: ground to say to the financial services community, Hey, this
• 18:24
  Speaker 1: is our idea, please respect it. Please UM license from
• 18:29
  Speaker 1: us at modest fees if you want to use this idea,
• 18:34
  Speaker 1: work around the patent if you want to explore something
• 18:37
  Speaker 1: similar but different. Competition is a great thing, UM, And
• 18:42
  Speaker 1: what we've found is the financial services community as a
• 18:45
  Speaker 1: whole lot more um, honest, and has more integrity than
• 18:52
  Speaker 1: its reputation. A few bad eggs in the financial services
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  Speaker 1: community tarnish the reputation of the whole community. So what
• 19:01
  Speaker 1: we found is that there have been a handful of
• 19:03
  Speaker 1: cases where somebody just took the idea and ran with it,
• 19:09
  Speaker 1: and the vast majority of folks in the financial services community,
• 19:13
  Speaker 1: if they liked the idea, they'll come to us and
• 19:15
  Speaker 1: say we'd like to license it. And if they don't
• 19:19
  Speaker 1: like the idea, they don't have to use it. So
• 19:21
  Speaker 1: the patent is not so much a basis for going
• 19:25
  Speaker 1: after people. It is a basis for saying, hey, please
• 19:29
  Speaker 1: respect our space. Speaking for credit for respecting intellectual property.
• 19:35
  Speaker 1: For a long time, I've heard you credited with creating
• 19:39
  Speaker 1: the phrase smart data, UM, but you've described that as
• 19:44
  Speaker 1: more something you've popularized and created. Give us a quick
• 19:49
  Speaker 1: explanation of that. Sure, there's a consulting firm that works
• 19:54
  Speaker 1: with some of the largest pension funds in the world
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  Speaker 1: called Towers Watson their London an office. UM coined the
• 20:02
  Speaker 1: expression smart beta, and the idea was not that cap
• 20:07
  Speaker 1: weighted index funds were stupid beta. The idea was that, um,
• 20:12
  Speaker 1: the cap weighted index funds were a neutral form of beta.
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  Speaker 1: They called it bulk beta um UM. And the stupid
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  Speaker 1: beta is those who chase fads and load up just
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  Speaker 1: on whatever's gone up the most. And the phrase smart
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  Speaker 1: beta was attached initially just as strategies that broke the
• 20:34
  Speaker 1: link with price, that would trim a stock if it's
• 20:39
  Speaker 1: price went up and all else remained unchanged UM and
• 20:44
  Speaker 1: so that included equal weighting equal waiting. Is about as
• 20:48
  Speaker 1: simple as strategy as you can imagine. How could it
• 20:50
  Speaker 1: be smart? Well, it's smart because it has embedded rebalancing,
• 20:54
  Speaker 1: although it does have a profound small cap tilt that
• 20:58
  Speaker 1: makes it less liquid and more expensive to trade. Fundamental
• 21:02
  Speaker 1: index was the inspiration for the term smart beta, but
• 21:08
  Speaker 1: I never invented the term. I liked it. I thought
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  Speaker 1: that's a clever way to label it. And then pretty
• 21:15
  Speaker 1: soon everybody under the sun was saying, oh, we do
• 21:17
  Speaker 1: smart beta. You had index calculators saying, hey, our growth
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  Speaker 1: and value indexes are both smart beta. No, they're both
• 21:27
  Speaker 1: tied to the price of the stock. They're still cap weighted. Um.
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  Speaker 1: You had factor investors saying our value factor is smart beta. Well,
• 21:37
  Speaker 1: that's true because it does contratrade. Our momentum factor is
• 21:41
  Speaker 1: smart beta. No, that chases whatever has gone up the most.
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  Speaker 1: Our quality factor is smart data. No, that's going to
• 21:48
  Speaker 1: load up on whatever is expensive. Also, so you had
• 21:52
  Speaker 1: lots of organizations embrace the phrase because the phrase itself sells.
• 21:58
  Speaker 1: It helps selling product. So I like the expression smart data,
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  Speaker 1: but I like its original definition. And if smart beta
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  Speaker 1: is applied to everything under the sun, smart ideas and
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  Speaker 1: stupid ideas, then the term ceases to mean anything. And
• 22:13
  Speaker 1: I think that's where we are now. Rob you wrote
• 22:16
  Speaker 1: a really fascinating peace with your team titled Big Market
• 22:19
  Speaker 1: Delusions Electric Vehicles. I want to start with your definition
• 22:25
  Speaker 1: of quote big market delusion. That's when all the firms
• 22:29
  Speaker 1: in an evolving industry rise together even though their competitors,
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  Speaker 1: and ultimately some will win and some will lose. Why
• 22:39
  Speaker 1: does it not make sense for investors to just own
• 22:41
  Speaker 1: all of the basket of everybody in that space and
• 22:45
  Speaker 1: eventually the market will self correct. The winners and the
• 22:48
  Speaker 1: all outweigh the losers. Well, that is the basic definition
• 22:54
  Speaker 1: of diversification. And it makes sense unless all of the
• 22:58
  Speaker 1: firms in the industry are priced as if they will
• 23:01
  Speaker 1: be outlier winners, because they won't. Um If if a
• 23:09
  Speaker 1: company is priced as if it will achieve stupendous success,
• 23:13
  Speaker 1: and it achieves its stupendous success, wonderful you did find
• 23:17
  Speaker 1: you didn't get hurt by that. If five companies are
• 23:21
  Speaker 1: all priced as if they're going to be stupendous successes
• 23:23
  Speaker 1: and you know that only one or two of them will,
• 23:27
  Speaker 1: then you've just bought a basket that collectively is destined
• 23:31
  Speaker 1: to perform badly. The guy who coined the term big
• 23:36
  Speaker 1: market delusion is Brad Cornell, past professor at U C
• 23:40
  Speaker 1: l A and at cal Tech, and uh, it's an
• 23:44
  Speaker 1: idea that's been around, but it's a great term to
• 23:47
  Speaker 1: capture the concept. Back at the peak of the tech bubble,
• 23:50
  Speaker 1: there were several of us, me Cliff Fastness, and probably
• 23:54
  Speaker 1: dozens of others who pointed out that not all the
• 23:56
  Speaker 1: tech companies will win, and they're all priced as if
• 24:00
  Speaker 1: they will all win, so as a segment, they were
• 24:04
  Speaker 1: collectively extravagantly overpriced. You can even have it on the
• 24:08
  Speaker 1: other side and anti bubble like at the trough of
• 24:12
  Speaker 1: the financial crisis, financial services companies were all priced based
• 24:17
  Speaker 1: on the perceived risk of bankruptcy, and so they were
• 24:22
  Speaker 1: priced as a call option on future survival. And yet
• 24:27
  Speaker 1: with each company that failed that went out of business,
• 24:32
  Speaker 1: the landscape was now cleared for the others to earn
• 24:35
  Speaker 1: outsize profits in the subsequent economic rebounds. So big market
• 24:39
  Speaker 1: delusion can play out in both directions. We singled out
• 24:43
  Speaker 1: electric vehicles because at their peak during this last quarter,
• 24:50
  Speaker 1: Tesla was priced at thirty four times its annual run
• 24:54
  Speaker 1: rate sales UM. Now there's eight companies around the world
• 25:00
  Speaker 1: that specialized in electric vehicles. Tesla was the second cheapest
• 25:06
  Speaker 1: of the eight in terms of measured market value to
• 25:11
  Speaker 1: prior year revenues. Thirty four times sales was second cheapest
• 25:16
  Speaker 1: on the list. The others were ranged from uh The
• 25:20
  Speaker 1: others ranged from about twenty times sales to literally ten
• 25:25
  Speaker 1: thousand times sales. So when you have those kinds of valuations,
• 25:32
  Speaker 1: the winners might might be worth their valuations, but the
• 25:38
  Speaker 1: losers most assuredly won't. And that's the nature of big
• 25:42
  Speaker 1: market delusion. I have no idea if Tesla will be
• 25:46
  Speaker 1: worth its current price. I very much doubt it. But
• 25:51
  Speaker 1: I have absolute confidence that the collective e V market
• 25:56
  Speaker 1: is not worth its current price. Well, I know they've
• 25:59
  Speaker 1: had offense pastic run ending um the in the research piece,
• 26:05
  Speaker 1: you use January thirty one of this year to show
• 26:09
  Speaker 1: how far all of these companies have have come. Um,
• 26:13
  Speaker 1: are they remotely like? I'm thinking of the old days
• 26:17
  Speaker 1: of biotech, where it was impossible to come up with
• 26:21
  Speaker 1: evaluation because it was so binary. You would end up with, Hey,
• 26:26
  Speaker 1: either this company develops a molecule that does what it's
• 26:30
  Speaker 1: supposed to and then becomes a stupendent success, or it
• 26:34
  Speaker 1: doesn't and it's a zero. Or should we be looking
• 26:38
  Speaker 1: at these e V companies the same way. Either they're
• 26:40
  Speaker 1: gonna put out a successful car and that's what jump
• 26:43
  Speaker 1: starts them, or they're just expensive R and D shops
• 26:47
  Speaker 1: for now and perhaps might be worth nothing. Well, the
• 26:52
  Speaker 1: correct way to do the kind of analysis you're talking
• 26:55
  Speaker 1: about is, if this company produces a disruptive product that
• 27:01
  Speaker 1: massively changes the industry, what's it going to be worth
• 27:05
  Speaker 1: and what are the odds that this will happen with
• 27:08
  Speaker 1: this company as the dominant winner. The missing piece in
• 27:11
  Speaker 1: a market. Big market delusion is that latter piece. If
• 27:16
  Speaker 1: all of them are priced as if they have the
• 27:19
  Speaker 1: potential to be massive successes, then you have a problem.
• 27:24
  Speaker 1: And that's that's the issue we're dealing with Tesla. Is
• 27:30
  Speaker 1: it is its current valuation too high or is it
• 27:33
  Speaker 1: in bubble territory. One of the things that I think
• 27:36
  Speaker 1: is interesting is everyone band these around the word bubble
• 27:41
  Speaker 1: as if it has some clear meaning, and it doesn't.
• 27:46
  Speaker 1: Usually it's used in retrospect after a bubble has burst.
• 27:50
  Speaker 1: So we came up with a definition back in two
• 27:54
  Speaker 1: thousand eighteen we that we think can be used in
• 27:56
  Speaker 1: real time. And that definition is very simple. Um, if
• 28:02
  Speaker 1: you're using a discounted cash flow model, you would have
• 28:06
  Speaker 1: to make implausible assumptions about future growth to justify the
• 28:10
  Speaker 1: current price. And second part of the definition just as important, Um,
• 28:16
  Speaker 1: the marginal buyer has no interest in valuation models. Let's
• 28:21
  Speaker 1: take Tesla as an example. We UH did a piece
• 28:25
  Speaker 1: on Tesla last December as it was on its way
• 28:28
  Speaker 1: into the SMP, and we had done an analysis where
• 28:33
  Speaker 1: we assumed, let's let's say Tesla's book of business at
• 28:37
  Speaker 1: sales grow fifty percent a year for the next ten years. Now,
• 28:41
  Speaker 1: how plausible is that. Well, Amazon, the big winner of
• 28:45
  Speaker 1: the two thousand tens, grew six percent a year over
• 28:49
  Speaker 1: the decade ended two thousand twenty a year. That's enough
• 28:54
  Speaker 1: to make a company eleven times as large in just
• 28:58
  Speaker 1: ten years. Fifty sent a year makes a company fifty
• 29:01
  Speaker 1: five times as large. So tacitly, we were assuming that
• 29:06
  Speaker 1: Tesla would be five times as successful as Amazon over
• 29:11
  Speaker 1: the coming decade versus Amazon over the last decade. All right,
• 29:15
  Speaker 1: that's a pretty darned extravagant assumption. We then said, let's
• 29:21
  Speaker 1: us further assume that Tesla is has a an after
• 29:27
  Speaker 1: tax profit margin ten years from now. That is, that
• 29:32
  Speaker 1: matches the highest after tax profit margin of any automaker
• 29:37
  Speaker 1: in the world in the last decade. Well, there was
• 29:39
  Speaker 1: one year when Toyota hit a ten after tax profit margin.
• 29:45
  Speaker 1: So let's assume gross profit margin. Um well, that's pretty
• 29:52
  Speaker 1: good profits. If you discounted that back to current prices,
• 29:57
  Speaker 1: you could justify a price of fos tequ was twice that.
• 30:01
  Speaker 1: So that's an example of um uh using a definition
• 30:06
  Speaker 1: of bubble to test it in real time. Now, con
• 30:10
  Speaker 1: Tesla wind up using other markets to justify the current price. Perhaps,
• 30:20
  Speaker 1: but you're really dealing with some pretty extravagant assumptions. And
• 30:24
  Speaker 1: the point of big market delusion wasn't that Tesla is
• 30:28
  Speaker 1: a bubble poised to crash. I do think Tesla is
• 30:31
  Speaker 1: an extravagantly overpriced company that will investors will be very
• 30:36
  Speaker 1: lucky to have positive return over the next ten to
• 30:40
  Speaker 1: twenty years, very lucky indeed. But the point of big
• 30:45
  Speaker 1: market delusion is um if you look at the electric
• 30:50
  Speaker 1: vehicle industry in aggregate, it's worth about eight percent as
• 30:54
  Speaker 1: much as all other vehicle makers combined. And oh, by
• 30:59
  Speaker 1: the way, over half of all electric vehicles are made
• 31:02
  Speaker 1: by those other existing players who make conventional cars and
• 31:07
  Speaker 1: electric cars. So the e V specialists comprise less than
• 31:13
  Speaker 1: half of the EV market and have total valuation very
• 31:18
  Speaker 1: nearly that of companies that collectively produced nearly a hundred
• 31:21
  Speaker 1: times as many vehicles, a hundred times as many vehicles.
• 31:25
  Speaker 1: You know what's so fascinating about that is how, after
• 31:30
  Speaker 1: really taking their time, the traditional internal combustion engine car
• 31:38
  Speaker 1: manufacturers have really ramped up their e V game. I
• 31:42
  Speaker 1: had Afford Mustang for a week. I got to play
• 31:45
  Speaker 1: with really a very nice, very well made car, good looking,
• 31:49
  Speaker 1: very high quality, surprisingly high quality UM and in many
• 31:54
  Speaker 1: ways way superior to not the software of Tesla, just
• 31:59
  Speaker 1: the physical vehicle. The new Volkswagen I D four is
• 32:03
  Speaker 1: getting really good reviews were and that's before we start
• 32:07
  Speaker 1: talking about what's coming out of Mercedes and an Audi.
• 32:11
  Speaker 1: Audi has a run of um RS cars that are
• 32:16
  Speaker 1: very competitive, the same with the Porsche take in turbo
• 32:20
  Speaker 1: as fast as cars that cost ten times as much.
• 32:24
  Speaker 1: So I know the e V manufacturers are all battling
• 32:28
  Speaker 1: amongst themselves, but there's a really strong case to be
• 32:31
  Speaker 1: made that the future of electric vehicles is coming from
• 32:36
  Speaker 1: the internal combustion group. I think that's exactly right UM
• 32:42
  Speaker 1: when Volkswagen our Toyota decide, well, Toyota has been a
• 32:46
  Speaker 1: pioneer UM in hybrid technology, which by definition means they've
• 32:52
  Speaker 1: been a pioneer in electric vehicle technology UM for longer
• 32:58
  Speaker 1: than Tesla has been in existence. So nobody's gonna deny
• 33:02
  Speaker 1: that Tesla has been a massive disruptor, that Tesla has
• 33:07
  Speaker 1: a big head start, and that Tesla has a surprisingly
• 33:11
  Speaker 1: good product for a newbie automaker. But when Toyota decides
• 33:17
  Speaker 1: to spend more on electric vehicle um uh innovation, then
• 33:25
  Speaker 1: Tesla could plausibly take in as gross revenues over the
• 33:31
  Speaker 1: coming three to five years and to do that every year.
• 33:35
  Speaker 1: Um okay, Tesla is going to have some serious competition.
• 33:40
  Speaker 1: So um. The whole notion of big market delusion is
• 33:46
  Speaker 1: that people look at disruptors and say, these disruptors have
• 33:51
  Speaker 1: the future in their sights, they know what's coming, their
• 33:55
  Speaker 1: position for it beautifully, and they overlook the fact that
• 34:00
  Speaker 1: disruptors get disrupted. It happens again and again and again.
• 34:03
  Speaker 1: There's no doubt Tesla has a lead in things like
• 34:06
  Speaker 1: over the air updates and autonomous driving and the supercharging network.
• 34:11
  Speaker 1: But you already see companies like Lucid, which their new vehicle,
• 34:16
  Speaker 1: the Air is coming out later this year, much longer range,
• 34:21
  Speaker 1: much smaller electric motor. It's a midsize car on the outside,
• 34:27
  Speaker 1: and the inside it's a full sized vehicle. Because they
• 34:31
  Speaker 1: were able to miniaturize so many components. They really brought
• 34:36
  Speaker 1: um a lot of impressive technology to the game, disrupting
• 34:40
  Speaker 1: the disruptors. What does history tell us that's like? So
• 34:44
  Speaker 1: you mentioned phones. What about other things like PCs or
• 34:48
  Speaker 1: televisions or railroads? Is that historically consistent? The disruptive technologies
• 34:54
  Speaker 1: themselves eventually gets disrupted. Oh, that happens again and again
• 34:59
  Speaker 1: in industry after industry. It's hard to It's hard to
• 35:02
  Speaker 1: come up with any industry where the disruptors weren't ultimately
• 35:08
  Speaker 1: displaced by new disruptors. I mean, how many search engines
• 35:13
  Speaker 1: did Google displace UM in its rise to to dominance
• 35:18
  Speaker 1: of the search engine space? I read one study that
• 35:24
  Speaker 1: said there were twenty six search engines that came and
• 35:28
  Speaker 1: went with Google as the ultimate survivor. Will somebody disrupt Google?
• 35:35
  Speaker 1: Who knows? UM? Is it priced to allow for the
• 35:40
  Speaker 1: possibility that a disruptor will knock them from their perch. No,
• 35:44
  Speaker 1: it's priced for the um expectation that that can't possibly happen,
• 35:49
  Speaker 1: and and it could happen. UM. This is this is
• 35:53
  Speaker 1: the achilles heel of growth and momentum investing that UH
• 35:57
  Speaker 1: disruptors do get disrupted. I recall a couple of years
• 36:01
  Speaker 1: ago you had done a study about the additions and
• 36:05
  Speaker 1: deletions to various indexes, And it turns out, especially with
• 36:09
  Speaker 1: the SMP five hundred. The companies that get added underperformed
• 36:14
  Speaker 1: the companies they replace, and in Tesla's case, that would
• 36:18
  Speaker 1: be Apartment Investment and Management. Uh, you guys are forecasting
• 36:23
  Speaker 1: that this is going to outperform Tesla over the next one, five,
• 36:27
  Speaker 1: ten years. What what do those numbers look like historically
• 36:31
  Speaker 1: for additions and deletions. Well, just to be clear, we
• 36:36
  Speaker 1: aren't forecasting that um uh that uh Tesla will underperform
• 36:45
  Speaker 1: a I VUM by two thousand basis points. Were observing
• 36:50
  Speaker 1: that historically that's been the norm, and so that's a
• 36:54
  Speaker 1: little bit different. But um, the norm is that the
• 37:00
  Speaker 1: companies that are added to the S and P five
• 37:04
  Speaker 1: hundred underperformed by about two in the subsequent twelve months
• 37:09
  Speaker 1: after they're added. Companies that are added and are already
• 37:14
  Speaker 1: in the top one hundred by the time they're added
• 37:19
  Speaker 1: underperformed by about seven over the coming year. Now, no
• 37:26
  Speaker 1: company other than Tesla has ever been added which ranked
• 37:30
  Speaker 1: in the top ten the day it was added. Um,
• 37:34
  Speaker 1: and so one would assume, extrapolating from history, that its
• 37:38
  Speaker 1: performance in the first year would be expected to be
• 37:41
  Speaker 1: negative to an extent that's larger than those historic norms.
• 37:45
  Speaker 1: The Companies that are dropped, on the other hand, usually
• 37:48
  Speaker 1: are small, thinly traded, ill liquid, and they just get
• 37:52
  Speaker 1: clawbered as they get removed. But they're underlying fundamentals usually
• 37:57
  Speaker 1: are mediocre. That's why they're dropped, fully reflected in the
• 38:01
  Speaker 1: price before they're dropped, and bludging down to unreasonable levels
• 38:06
  Speaker 1: on the way out. And the result is the companies
• 38:09
  Speaker 1: that are dropped from the SMP UH. And here we're
• 38:12
  Speaker 1: excluding corporate actions. A company that's dropped from the SMP
• 38:16
  Speaker 1: because it doesn't exist anymore doesn't count. But discretionary deletions
• 38:21
  Speaker 1: like apartment investment in Management on average historically beat the
• 38:26
  Speaker 1: SMP by over two thousand basis points UH in the
• 38:30
  Speaker 1: first year after they're deleted. So that would suggest to
• 38:34
  Speaker 1: us that based on history, Apartment Investment and Management would
• 38:39
  Speaker 1: be expected to beat Tesla by maybe thirty percentage points
• 38:44
  Speaker 1: in the first year after the change was made. Tesla's
• 38:48
  Speaker 1: kind of a special case because everyone knew that SMP
• 38:52
  Speaker 1: was going to have to add Tesla, and the Investment
• 38:55
  Speaker 1: Committee of SMP just basically said, hey, we've got a rule.
• 38:59
  Speaker 1: If you don't have profits for the last four quarters,
• 39:03
  Speaker 1: we're not going to add you. And so in March
• 39:08
  Speaker 1: of two thousand and twenty, I remember seeing speculation in
• 39:13
  Speaker 1: the media that if the first quarter was profitable, Tesla
• 39:18
  Speaker 1: would finally have four consecutive positive quarters UM and the
• 39:24
  Speaker 1: S and P would have no choice but to add them,
• 39:27
  Speaker 1: and that set Tesla off on a on a tear.
• 39:30
  Speaker 1: So Tesla was up I think the number was six
• 39:33
  Speaker 1: or seven hundred from its March lows until the decision
• 39:41
  Speaker 1: was announced in November to add them uh and then
• 39:45
  Speaker 1: up another or more from the announcement date to the
• 39:50
  Speaker 1: actual inclusion in the index. Just astounding numbers because Tesla
• 39:55
  Speaker 1: was a big company, big market cap company, and so
• 40:00
  Speaker 1: the addition to the SMP meant that the market the
• 40:03
  Speaker 1: index funds would have to buy upwards of two hundred
• 40:07
  Speaker 1: billion dollars worth of the stock on that same day.
• 40:11
  Speaker 1: And of course it's not that anyone didn't anticipate that
• 40:17
  Speaker 1: hedge funds would load up on it in anticipation of
• 40:20
  Speaker 1: flipping it to the index funds, and of course they did. UM.
• 40:25
  Speaker 1: So additions and deletions to indexes have their own special
• 40:30
  Speaker 1: characteristics and are very much disrupted. Continue to be amazed
• 40:37
  Speaker 1: that academia hues to the notion that markets are efficient.
• 40:41
  Speaker 1: Has anyone thought to put a long short fund together
• 40:45
  Speaker 1: of these additions and deletions. It sounds like that's a
• 40:49
  Speaker 1: potential alpha generator. I think it's a potential alpha generator.
• 40:54
  Speaker 1: It's going to be a very niche oriented strategy because
• 40:58
  Speaker 1: let's say there's let's say there's twenty changes in the
• 41:01
  Speaker 1: index in a given year, You're gonna go long twenty
• 41:06
  Speaker 1: very illiquid stocks just before they're dropped UM and short
• 41:12
  Speaker 1: twenty very liquid, very popular stocks, uh, just as they
• 41:19
  Speaker 1: get at it. So you're gonna wind up UM having
• 41:22
  Speaker 1: a big short on large cap stocks and a big
• 41:25
  Speaker 1: long on small cap stocks, a big short on growth stocks,
• 41:29
  Speaker 1: a big long on value stocks, and a big short
• 41:32
  Speaker 1: on highly liquid stocks, and big long on highly illiquid
• 41:36
  Speaker 1: stocks in a lumpy, concentrated portfolio. So I think as
• 41:42
  Speaker 1: part of a broad strategy it would be a fun
• 41:44
  Speaker 1: thing to put together. As a standalone strategy, I think
• 41:49
  Speaker 1: it would have a little too much risk for the
• 41:53
  Speaker 1: tastes of most investors, to say the least. So let's
• 41:56
  Speaker 1: talk a little bit about value. You wrote an interesting
• 41:59
  Speaker 1: piece with your team titled Reports of Values. Death may
• 42:03
  Speaker 1: be greatly exaggerated tell us about why value ain't dead yet. Well,
• 42:11
  Speaker 1: whenever anything in the finance world is called dead, chances
• 42:15
  Speaker 1: are it's it's about to come back to life. However,
• 42:19
  Speaker 1: I would say that we've been hearing reports of values
• 42:22
  Speaker 1: death for three or four years now, and so it
• 42:25
  Speaker 1: sure took a long time to begin its recovery. UM.
• 42:30
  Speaker 1: The narrative is growth stocks are better. Growth have better
• 42:35
  Speaker 1: growth and better profit margins than they used to. Value
• 42:39
  Speaker 1: stocks are more disrupted, and disruptors are getting better and
• 42:42
  Speaker 1: faster at disrupting and just demolishing vast slaws of business UM,
• 42:49
  Speaker 1: and so values really had its day and is not
• 42:54
  Speaker 1: coming back. Well, why would value fail again? The narrative
• 43:02
  Speaker 1: fills in the details. One of the core engines for
• 43:06
  Speaker 1: the value factor is migration. A company that's in the
• 43:10
  Speaker 1: growth segment falls out of favor, tumbles invaluation multiples, pulling
• 43:16
  Speaker 1: down the performance of the growth portfolio, and then it's
• 43:19
  Speaker 1: kicked out and replaced with a new high flyer. UM.
• 43:24
  Speaker 1: A company is um on the values side turns out
• 43:29
  Speaker 1: not to be facing as severe headwinds as people feared,
• 43:32
  Speaker 1: so it's valuation multiple sore, and then it's replaced with
• 43:35
  Speaker 1: a new, deeply unloved value company. So you get this
• 43:40
  Speaker 1: constant rotation for growth, underperforming out for value, outperform, and out,
• 43:47
  Speaker 1: and that's the dominant engine for the value factor. It's
• 43:52
  Speaker 1: largely offset but not entirely offset by the main profit
• 43:56
  Speaker 1: engine for growth, which is the companies are growing faster,
• 44:00
  Speaker 1: they're more profitable, they're better companies. Of course they are.
• 44:02
  Speaker 1: That's why they have the higher multiples. And so if
• 44:07
  Speaker 1: in an efficient market, the benefit of growth should pretty
• 44:13
  Speaker 1: much exactly offset the benefits for value from its migration
• 44:18
  Speaker 1: from its rotation. Now the narrative is um that that
• 44:26
  Speaker 1: rotation is slowing and the difference in quality between growth
• 44:30
  Speaker 1: and value stocks has widened. There's truth in that narrative.
• 44:34
  Speaker 1: There's truth and most narratives. The migration has been slowing,
• 44:38
  Speaker 1: but not by much. The differential in profit margins for
• 44:44
  Speaker 1: growth versus value has widened, but not by much. And
• 44:48
  Speaker 1: so one of the shocking findings was that during the
• 44:53
  Speaker 1: worst period for value investing in history, a period of
• 44:57
  Speaker 1: time when if you're using price to book to define value,
• 45:03
  Speaker 1: value underperformed growth by fifty nine percentage points over a
• 45:09
  Speaker 1: thirteen year span, just horrific underperformance. How much of that
• 45:15
  Speaker 1: came from value falling out of favor and becoming cheaper
• 45:19
  Speaker 1: relative to growth. Well, it turns out well over the
• 45:23
  Speaker 1: under performance was value getting cheaper, not value companies under performing.
• 45:30
  Speaker 1: So what we found was that the relative cheapness of
• 45:33
  Speaker 1: value went from being one fourth as expensive as value
• 45:37
  Speaker 1: as growth to one twelfth is expensive in that thirteen
• 45:41
  Speaker 1: year span. That means that value cheapness fell by sixty
• 45:47
  Speaker 1: seven percent while its performance fell by Okay, that sounds
• 45:54
  Speaker 1: like a subtle nuance, but what it means is that
• 45:57
  Speaker 1: if the relative valuation hadn't moved, value would have beak
• 46:01
  Speaker 1: growth again in the last thirteen years and again in
• 46:04
  Speaker 1: the last three years during the really dreadful meltdown for value.
• 46:09
  Speaker 1: If you've got a stock that has fallen by sixty
• 46:12
  Speaker 1: or fifty or six, but it's pe ratio has fallen
• 46:16
  Speaker 1: by sixty or sevent do you look at that and say,
• 46:19
  Speaker 1: get me out of here, I can't stand the pain.
• 46:21
  Speaker 1: Or do you look at that and say, I can't
• 46:24
  Speaker 1: believe it's this cheap, Let me buy it. I leaned
• 46:27
  Speaker 1: towards the latter interpretation. Now, the second nuance in the
• 46:31
  Speaker 1: paper that I think is very important is that price
• 46:34
  Speaker 1: to book is the worst measure for defining value. If
• 46:38
  Speaker 1: you use price earnings ratios, the peak wasn't back in
• 46:41
  Speaker 1: two thousand seven. The peak was in two thousand fourteen.
• 46:45
  Speaker 1: If you use price to sales, it was two thousand seventeen.
• 46:50
  Speaker 1: If you use fundamental index to cap weight our strategy,
• 46:54
  Speaker 1: it was two thousand seventeen. It makes a big difference
• 46:58
  Speaker 1: between whether you've got a thirteen and a half year
• 47:00
  Speaker 1: dry spell where values underperforming and a three and a
• 47:04
  Speaker 1: half year dry spell. The former is really hard to
• 47:07
  Speaker 1: stay the course. The latter is less. So so I
• 47:11
  Speaker 1: look at UH price to book as a terrible measure,
• 47:15
  Speaker 1: and we, in fact, in that same paper dive into
• 47:19
  Speaker 1: that and show that price to book that book value
• 47:24
  Speaker 1: itself misses all the intangibles we've heard. We've all heard
• 47:28
  Speaker 1: the cliche that our assets go up and down in
• 47:31
  Speaker 1: the elevator every day. Well, that is true of bigger
• 47:34
  Speaker 1: and bigger swaws of the US economy or the world economy.
• 47:38
  Speaker 1: Then used to be the case. So we found that intangibles, Uh,
• 47:43
  Speaker 1: we're about as large as tangible book value fifty years ago,
• 47:48
  Speaker 1: and now it's as large. Means book value would double,
• 47:52
  Speaker 1: literally double, if you include intangibles. We also did a
• 47:56
  Speaker 1: test and found that if you use price to book
• 47:59
  Speaker 1: value where you adjust the book value for intangibles, Firstly,
• 48:03
  Speaker 1: the performance of the price to book value factor is
• 48:08
  Speaker 1: twice as good over that last fifty seven years as
• 48:12
  Speaker 1: it was without um adjusting for intangibles UM. And again
• 48:20
  Speaker 1: the peak was two thousand and fourteen, not two thousand seven.
• 48:24
  Speaker 1: So it works much better if you take account of intangibles.
• 48:28
  Speaker 1: But price to book is not the only measure. It's
• 48:31
  Speaker 1: not even by a long shot, the best measure, huh
• 48:35
  Speaker 1: and Rob. When we're talking about things like intangibles, we're
• 48:38
  Speaker 1: referring to things like patents, copyrights, processes, methodologies, things that
• 48:45
  Speaker 1: just don't show up in the traditional Hey, here's our factories,
• 48:50
  Speaker 1: here's our headquarters, those sort of measures of book value.
• 48:54
  Speaker 1: That's exactly right, quite interesting. So for value to start
• 48:59
  Speaker 1: generatinging that value premium again, what has to happen? Do
• 49:03
  Speaker 1: we need to see mean reversion against growth? Do rates
• 49:07
  Speaker 1: have to tick up, or do we need to see
• 49:10
  Speaker 1: a recession? What's going to be the the thing that
• 49:14
  Speaker 1: could kick off value reclaiming it's premium. Well, We've already
• 49:19
  Speaker 1: had that recession last year, and it was a doozy um.
• 49:23
  Speaker 1: The narrative was, and again, narratives are always based on
• 49:28
  Speaker 1: some measure of fact. The problem with narratives and investing
• 49:32
  Speaker 1: is that they move prices much too far. The narrative
• 49:37
  Speaker 1: was that the growth companies are beautifully positioned for a
• 49:39
  Speaker 1: COVID world and a post COVID world. True. The narrative was,
• 49:45
  Speaker 1: value stocks have much higher risk of bankruptcy, and in
• 49:49
  Speaker 1: the face of the COVID crisis, especially the business lockdowns,
• 49:54
  Speaker 1: is going to be sweeping bankruptcies. True. Now, what was
• 49:57
  Speaker 1: overlooked was almost all of those bankruptcy we're in companies
• 50:01
  Speaker 1: that were too small to be publicly traded. So there
• 50:03
  Speaker 1: were literally millions of companies that went out of business
• 50:06
  Speaker 1: last year, but shockingly few of the thirty million businesses
• 50:11
  Speaker 1: in the US, only thirty five hundred are publicly traded.
• 50:16
  Speaker 1: And of those thirty five hundred, let's say twenty or
• 50:20
  Speaker 1: value stocks, shockingly few went out of business as a
• 50:23
  Speaker 1: consequence of the lockdowns. So all you needed was for
• 50:28
  Speaker 1: people to realize ge uh, these value companies didn't fail.
• 50:33
  Speaker 1: Maybe I should now start pricing it not based on
• 50:36
  Speaker 1: bankruptcy risk, but based on its likely future P and L,
• 50:41
  Speaker 1: and all of a sudden, the turn happened at the
• 50:45
  Speaker 1: beginning of September, just when people were starting to realize, hey,
• 50:49
  Speaker 1: vaccines are about to be rolled out. Uh, this is
• 50:53
  Speaker 1: looking promising as an end to the crisis. And a
• 50:56
  Speaker 1: lot of these value companies are just not going to
• 50:58
  Speaker 1: go bust, so maybe I should reprice them for their
• 51:02
  Speaker 1: future success. And we've seen that in in energy stocks
• 51:06
  Speaker 1: and cyclicals, in bank stocks that rotation away from growth,
• 51:13
  Speaker 1: a lot of which were worked from home stocks and
• 51:16
  Speaker 1: towards traditional economic early cycle recovery stocks. That seems to
• 51:22
  Speaker 1: be really moving along unless I'm I'm seeing it wrong.
• 51:26
  Speaker 1: What what are your thoughts on that? I think that's
• 51:29
  Speaker 1: exactly right. Um. We did a test looking at draw
• 51:34
  Speaker 1: downs um when value underperformance growth, and it ranges from
• 51:38
  Speaker 1: you know what, one month value underperforms growth by half
• 51:43
  Speaker 1: a percent, so that's a half percent draw down from
• 51:45
  Speaker 1: the last peak and thirteen years underperformance by fifty nine
• 51:50
  Speaker 1: percentage points. We asked the question, historically, is there a
• 51:54
  Speaker 1: link between the magnitude of the draw down and the
• 51:57
  Speaker 1: magnitude of values out performance? In the subsequent two years,
• 52:03
  Speaker 1: and we found that when when value has underperformed by
• 52:06
  Speaker 1: more than three thousand basis points, it has no examples
• 52:13
  Speaker 1: historically of sailing to outperform over the next two years,
• 52:18
  Speaker 1: with an average outcome between four and five thousand basis
• 52:22
  Speaker 1: points about performance. So, when you see the nature of
• 52:27
  Speaker 1: that particular relationship, extrapolating to the current size of the
• 52:32
  Speaker 1: draw down um uh. And extrapolating is always dangerous. But
• 52:38
  Speaker 1: if past is prologue, and if extrapolating that relationship to
• 52:43
  Speaker 1: today's unprecedented draw down works, then value would be expected
• 52:48
  Speaker 1: to outperform growth by over one hundred percentage points over
• 52:52
  Speaker 1: the next two years. You know, if it's a third
• 52:55
  Speaker 1: of that, I'll be thrilled, to say the very least.
• 52:59
  Speaker 1: Let's talk a little it about yields and inflation. We've
• 53:03
  Speaker 1: been hearing a lot of chatter about yield starting to
• 53:06
  Speaker 1: tick up higher from admittedly low historical levels. Does this
• 53:11
  Speaker 1: have any meaning for value, stocks or the market as
• 53:15
  Speaker 1: a whole? What what should we take away about rising yields? Well, firstly,
• 53:22
  Speaker 1: it bears mentioned that yields are not well correlated with
• 53:29
  Speaker 1: the stock market. The stock market um has stocks and
• 53:34
  Speaker 1: bonds tend to have a negative correlation except during inflationary
• 53:38
  Speaker 1: times when inflation is rising or is materially elevated. And
• 53:45
  Speaker 1: so what we find is that it's a poor linkage.
• 53:48
  Speaker 1: But but um, again, the narrative is low rates justify
• 53:55
  Speaker 1: high valuation multiples and justify a bigger spread between orowth
• 54:00
  Speaker 1: and value than historic norms because growth stocks are going
• 54:03
  Speaker 1: to grow for a long time, and if you're discounting
• 54:06
  Speaker 1: at a very low rate, that future growth is more
• 54:09
  Speaker 1: valuable than it was at a high rate. Okay, it
• 54:12
  Speaker 1: makes intuitive sense. Going back over long periods of time
• 54:16
  Speaker 1: in history, you still you find lots of anomalies. Okay,
• 54:19
  Speaker 1: in the early fifties when interest rates were not too
• 54:23
  Speaker 1: much above current levels, um, what was the average valuation
• 54:28
  Speaker 1: multiple for the market, It was a third what it
• 54:30
  Speaker 1: is today. What was the average spread between growth and value?
• 54:34
  Speaker 1: It was a fraction of what it is today. So
• 54:37
  Speaker 1: and when you look at um non US markets, European
• 54:43
  Speaker 1: and Japanese markets in particular, where rates are zero, you
• 54:47
  Speaker 1: find valuations are not as elevated as in the US.
• 54:53
  Speaker 1: If the rates are even lower, why not that the
• 54:56
  Speaker 1: spread between growth and value is not as wide? As
• 54:59
  Speaker 1: the U. If the rates are lower, why not. But
• 55:03
  Speaker 1: a narrative can drive markets, and so the rising interest
• 55:06
  Speaker 1: rates I think has a lot to do with the
• 55:09
  Speaker 1: recent underperformance of fang stocks and the recent performance of
• 55:12
  Speaker 1: value stocks. UH. Basically, the rumor that this might happen
• 55:19
  Speaker 1: becomes a self fulfilling prophecy on a short term basis.
• 55:23
  Speaker 1: On a long term basis, I don't think the linkage
• 55:25
  Speaker 1: is all that useful or interesting. And I assume the
• 55:28
  Speaker 1: same goes for inflation and inflation expectations or or does
• 55:32
  Speaker 1: that result in a different outcome that's a little bit different.
• 55:37
  Speaker 1: Rising inflation UH clearly does horrible things for bonds and
• 55:44
  Speaker 1: also UM increases investors risk aversion inequities, so when stocks
• 55:52
  Speaker 1: are expensive, rising inflation has a nasty impact. So the
• 55:58
  Speaker 1: real question is UH, is the current increasing rate of
• 56:04
  Speaker 1: inflation a temporary consequence of deflationary pressures twelve months ago
• 56:14
  Speaker 1: and a snap back in pricing over the last twelve months,
• 56:17
  Speaker 1: or is it a sustained consequence of UM Today's central
• 56:25
  Speaker 1: bank and fiscal policies around the world which looked to
• 56:28
  Speaker 1: all the world to me like a full wholehearted embrace
• 56:33
  Speaker 1: of modern monetary theory, So let me ask that question. Now, deficits,
• 56:38
  Speaker 1: as far as the eye can see, it doesn't matter
• 56:41
  Speaker 1: if it's a Democrat or Republican in the White House.
• 56:44
  Speaker 1: Either it's tax cut and spend or tax I can spend.
• 56:48
  Speaker 1: But we've seen nothing but deficits were my entire at
• 56:53
  Speaker 1: out life with a couple of I think in or
• 56:56
  Speaker 1: we had a balanced budget for a year or so.
• 56:59
  Speaker 1: What is What is the rise of modern monetary theory
• 57:03
  Speaker 1: mean for markets? Well, modern monetary theory is a little
• 57:07
  Speaker 1: bit like Caynesianism on steroids. Canes basically said, Hey, you
• 57:11
  Speaker 1: can spend more money than you're taking in in taxes,
• 57:14
  Speaker 1: and you need to during an economic downturn. Then you
• 57:18
  Speaker 1: cut your deficit spending when the economy recovers because the
• 57:22
  Speaker 1: money the spending isn't as needed and you can run
• 57:26
  Speaker 1: a surplus to pay back the increase in the debt. Well,
• 57:30
  Speaker 1: that's gone right out of the window. I think Canes
• 57:32
  Speaker 1: would be horrified at current economic theory and practice. Modern
• 57:39
  Speaker 1: monetary theory takes it another step, basically saying, um, central
• 57:45
  Speaker 1: bank can print whatever money the policy elite wants to spend,
• 57:51
  Speaker 1: as long as that spending goes to increase employment and
• 57:55
  Speaker 1: therefore to increase future revenues to pay this act. Um. Okay,
• 58:04
  Speaker 1: as you said, it's it's um um not sensitive to
• 58:09
  Speaker 1: who's in the White House. Uh. I joked last year
• 58:12
  Speaker 1: in the run up to the election, when people would
• 58:14
  Speaker 1: ask about the election, I said, Look, we have an
• 58:19
  Speaker 1: incredibly important choice ahead of us. We have a choice
• 58:22
  Speaker 1: between somebody who will run two trillion dollar deficits as
• 58:26
  Speaker 1: far as the eye can see in somebody who will
• 58:28
  Speaker 1: run three trillion dollar deficits as far as the eye
• 58:30
  Speaker 1: can see. I may have heard on the downside on
• 58:33
  Speaker 1: that latter one, but to say any of the least. Yeah.
• 58:37
  Speaker 1: In any event, the usual immediate question was yes, but
• 58:41
  Speaker 1: who is who, to which I would reply exactly. So
• 58:47
  Speaker 1: let's both both parties have embraced MMT. Yeah, it certainly
• 58:51
  Speaker 1: seems that way. Let's let's stick with the topic of
• 58:55
  Speaker 1: recessions and recoveries. I am a big fan of Campbell Harvey,
• 59:00
  Speaker 1: an academic who is now a part of the team
• 59:03
  Speaker 1: at Research Affiliates. When when did Campbell Harvey join Raffie
• 59:08
  Speaker 1: and what does he do? I'm a huge fan of
• 59:10
  Speaker 1: his work. Um, I'm a huge fan too. We we
• 59:14
  Speaker 1: kept inviting him to join our advisory panel, which used
• 59:18
  Speaker 1: to meet once a year UM, where we would gather
• 59:22
  Speaker 1: notable academics, usually including a couple of Nobel laureates together
• 59:29
  Speaker 1: to pose big picture questions. Not where should people invest
• 59:34
  Speaker 1: today or what strategies and products should we look at
• 59:37
  Speaker 1: developing tomorrow? UM, but how is the world going to
• 59:41
  Speaker 1: change in the coming ten years? And uh uh he
• 59:46
  Speaker 1: joined our advisory panel two or three times, but he
• 59:49
  Speaker 1: was always committed to work for the folks at Man Group.
• 59:54
  Speaker 1: And as soon as Pimco UM recruited Manny Roman to
• 1:00:03
  Speaker 1: become their new CEO. Turns out Manny had not only
• 1:00:07
  Speaker 1: hired Cam Harvey also went to university with Cam Harvey
• 1:00:10
  Speaker 1: and uh they were very good friends. So UM uh
• 1:00:16
  Speaker 1: with UM, with the help of Manny, we went to
• 1:00:20
  Speaker 1: Cam and said, hey, why don't you UM join us
• 1:00:24
  Speaker 1: in a more formal relationship. And so we're his dominant
• 1:00:30
  Speaker 1: consulting relationship. We have access to a certain uh portion
• 1:00:35
  Speaker 1: of his time. Uh. He is the guiding light for
• 1:00:41
  Speaker 1: our R and D. He's already led some half breaking
• 1:00:46
  Speaker 1: work in UM what's called pears trading. And when you
• 1:00:52
  Speaker 1: mentioned that you're a big fan of his work. One
• 1:00:55
  Speaker 1: of the things I find fascinating is, unlike most academics,
• 1:00:59
  Speaker 1: his work is squarely focused on what's practical, what's useful,
• 1:01:04
  Speaker 1: and in modern academic finance, practical and useful are two
• 1:01:10
  Speaker 1: of the most damning things you can say about somebody's work.
• 1:01:13
  Speaker 1: If it's practical, oh my goodness, what use are they
• 1:01:16
  Speaker 1: in academia? Uh? Well, I love that about camp. He's
• 1:01:20
  Speaker 1: um uh tremendous innovator, deep thinker, and has been an
• 1:01:26
  Speaker 1: enormously important addition to our team. Let me ask about
• 1:01:30
  Speaker 1: another one of your team members, your colleague Alex Picard,
• 1:01:33
  Speaker 1: who wrote a fascinating piece um about bitcoin. And I
• 1:01:38
  Speaker 1: thought this was really intriguing. So many people are sort
• 1:01:42
  Speaker 1: of dancing around bitcoin given the run up they're they're
• 1:01:45
  Speaker 1: afraid to get in the way of it. Picard road quote,
• 1:01:49
  Speaker 1: Bitcoin is not a capital asset or a store of value.
• 1:01:53
  Speaker 1: The price of BTC is nearly certainly a bubble and
• 1:01:57
  Speaker 1: likely manipulated. What are your thoughts on that? Well, firstly,
• 1:02:01
  Speaker 1: you're asking the wrong guy, um um bitcoin. How do
• 1:02:07
  Speaker 1: you value using discounted cash flow? How do you value
• 1:02:11
  Speaker 1: something that has no cash flow and never will um.
• 1:02:15
  Speaker 1: In that sense, it's no about no different from a
• 1:02:17
  Speaker 1: dollar bill. A dollar bill has has a value, but
• 1:02:22
  Speaker 1: discount of cash flow it doesn't have any. So the
• 1:02:27
  Speaker 1: price of bitcoin and the price of the US dollar
• 1:02:31
  Speaker 1: is exactly what the consensus in the marketplace thinks it
• 1:02:36
  Speaker 1: ought to be worth. In the case of the dollar,
• 1:02:39
  Speaker 1: that moves slowly and sadly inexorably in the direction of
• 1:02:42
  Speaker 1: worth less and less. Uh, it's worth on the order
• 1:02:47
  Speaker 1: of one d when it was worse worse worth a
• 1:02:50
  Speaker 1: century ago. In terms of purchasing power, UM. Bitcoin seems
• 1:02:56
  Speaker 1: to move the opposite direction. But in both cases there
• 1:02:59
  Speaker 1: is no There is no measurable value. There is no
• 1:03:05
  Speaker 1: way to say this is worth that amount. UM. So
• 1:03:11
  Speaker 1: when Alex says bitcoin is near certainly a bubble and
• 1:03:15
  Speaker 1: likely manipulated, my response to that is yeah, I agree.
• 1:03:20
  Speaker 1: But the reason I say I'm the wrong person to
• 1:03:22
  Speaker 1: ask is that, unlike Alex, Uh, I never bought much
• 1:03:27
  Speaker 1: in the way of bitcoin. I think it was back
• 1:03:29
  Speaker 1: in two thousand fifteen, I bought one bitcoin just as
• 1:03:33
  Speaker 1: an item of curiosity to watch it, and um, I
• 1:03:39
  Speaker 1: missed that entire boat. UM. I do think bitcoin is
• 1:03:45
  Speaker 1: a speculative asset. People talk about it as a replacement
• 1:03:49
  Speaker 1: for fiad currency because the supply is strictly limited and
• 1:03:55
  Speaker 1: is capped at a level that is not that much
• 1:03:58
  Speaker 1: larger than today's out standing float. And they're right, but
• 1:04:05
  Speaker 1: occurrence a fiat currency is used as a mechanism for
• 1:04:11
  Speaker 1: exchange of goods and services and a store of value
• 1:04:15
  Speaker 1: across time too, and it can't be a store of
• 1:04:18
  Speaker 1: value if it's price PO goes around. That's a problem
• 1:04:22
  Speaker 1: with bitcoin. It can't be a means of transacting UM
• 1:04:27
  Speaker 1: buying and selling goods and services because transacting in bitcoin
• 1:04:33
  Speaker 1: has very large transaction costs, so it can't be a
• 1:04:38
  Speaker 1: replacement for fiat currency. And as as such UM I
• 1:04:43
  Speaker 1: wouldn't own it. But hey, my son a year and
• 1:04:46
  Speaker 1: a half ago bought a UM, put his money half
• 1:04:50
  Speaker 1: in Tesla and half in bitcoin, and at the end
• 1:04:53
  Speaker 1: of last year sent me his statement which was up,
• 1:04:58
  Speaker 1: and asked me, how do you do Dad? So I
• 1:05:02
  Speaker 1: have to addend to being having been dead wrong on
• 1:05:05
  Speaker 1: both for a while. Now that's pretty funny. Let's talk
• 1:05:09
  Speaker 1: about e s G for a moment. Some people have
• 1:05:12
  Speaker 1: been making the case e s G environmental, social, and
• 1:05:15
  Speaker 1: governmental styles of investing are a factor. You make the
• 1:05:21
  Speaker 1: case that it's more of a theme ben a factor.
• 1:05:23
  Speaker 1: Please explain that what's the difference? Sure? Sure? Um? A
• 1:05:28
  Speaker 1: theme A factor is something that can be clearly defined
• 1:05:32
  Speaker 1: where the stocks um on the one side of the
• 1:05:37
  Speaker 1: factor uh and the stocks on the other side of
• 1:05:40
  Speaker 1: the factor strongly correlate with members of that same cohort,
• 1:05:45
  Speaker 1: So growth versus value. Growth stocks correlate with one another.
• 1:05:49
  Speaker 1: Value stocks correlate with one another, and the difference in
• 1:05:52
  Speaker 1: performance has historically favored value and does so for a
• 1:05:57
  Speaker 1: reason that you can reasonably explain. E S g um.
• 1:06:03
  Speaker 1: One of my colleagues did a test where he looked
• 1:06:06
  Speaker 1: at a half dozen different vendors of E s G
• 1:06:09
  Speaker 1: product at their definitions of what is an E s
• 1:06:13
  Speaker 1: g um, how an E s G score is calculated
• 1:06:17
  Speaker 1: for each company, and found that the correlation between s
• 1:06:21
  Speaker 1: G definitions is shockingly not low, not that much above zero.
• 1:06:25
  Speaker 1: So my E s G and R s G are
• 1:06:28
  Speaker 1: likely to be very, very different. It's hard to create
• 1:06:31
  Speaker 1: a factor when that's the case. I think is also
• 1:06:36
  Speaker 1: interesting and a little disturbing. Is it used to be
• 1:06:39
  Speaker 1: called s R I UH Socially response investing. And back
• 1:06:45
  Speaker 1: then the narrative was you want to invest in ways
• 1:06:49
  Speaker 1: that align with your values, with your principles UM, and
• 1:06:55
  Speaker 1: you can do so with a portfolio that's going to
• 1:06:58
  Speaker 1: perform reasonably in line with the broad market. UM. Don't
• 1:07:05
  Speaker 1: expect to win with SRI investing, but don't expect to
• 1:07:09
  Speaker 1: give up much either. That narrative has shifted now. It
• 1:07:13
  Speaker 1: is with the s G investing. You can invest in
• 1:07:15
  Speaker 1: line with your principles, and as more and more people
• 1:07:18
  Speaker 1: shift over to E s G investing, you get a
• 1:07:21
  Speaker 1: tail wind and you will outperform as well as UM.
• 1:07:26
  Speaker 1: Aligning your investments with your principles, you you do well
• 1:07:29
  Speaker 1: by doing good. In fact, you do better than the market. UM. Well,
• 1:07:33
  Speaker 1: that narrative offends me because any time you you narrow
• 1:07:38
  Speaker 1: your opportunity set UM in theory, you shouldn't be boosting
• 1:07:42
  Speaker 1: your performance. You should be degrading it. And you'd be
• 1:07:45
  Speaker 1: boosting your performance only if E s G stocks were
• 1:07:49
  Speaker 1: inherently superior. I have no problem with the s G.
• 1:07:53
  Speaker 1: I have a problem with marketing it as a superior
• 1:07:56
  Speaker 1: source of higher investment performance UM, and so I look
• 1:08:01
  Speaker 1: at E s G as a major trend in the marketplace,
• 1:08:04
  Speaker 1: one that must not be ignored. One that indeed, we
• 1:08:07
  Speaker 1: have offered product to help people invest in E s
• 1:08:12
  Speaker 1: G in a fundamental index fashion that can beat the
• 1:08:19
  Speaker 1: market because of fundamental index, not because of E s G,
• 1:08:22
  Speaker 1: and we're pretty proud of that. But E s G
• 1:08:25
  Speaker 1: stocks are trading at a large premium. That raises a
• 1:08:28
  Speaker 1: really interesting question. And you've touched on this in three
• 1:08:32
  Speaker 1: separate groups of assets. One was domestically higher price. US
• 1:08:38
  Speaker 1: stocks are trading pretty well, especially compared to Europe and Japan.
• 1:08:45
  Speaker 1: Bitcoin there remains a firm bid beneath that that's doing well.
• 1:08:49
  Speaker 1: And now E s G as a potential telwin was
• 1:08:54
  Speaker 1: the phrase you used, which really raises the question for
• 1:08:57
  Speaker 1: all of these tradeable assets. Is it simply a function
• 1:09:02
  Speaker 1: of demand and supply if enough people want to buy something,
• 1:09:06
  Speaker 1: regardless evaluation. Arguably, we've seen elevated pe multiples in the
• 1:09:13
  Speaker 1: United States, especially if we use the Schiller Cape index
• 1:09:17
  Speaker 1: since the early nineties. At what what point is it
• 1:09:21
  Speaker 1: strictly more dollars chasing fewer shares or coins, and that
• 1:09:28
  Speaker 1: relative imbalance causes prices to go higher and higher. Well,
• 1:09:32
  Speaker 1: what you've described as the nature of a bubble. Bubbles
• 1:09:36
  Speaker 1: persist longer and can go further than anyone could possibly imagine.
• 1:09:41
  Speaker 1: My favorite example is Zimbabwe stocks, which during the summer
• 1:09:47
  Speaker 1: of two thousand eight, when the currency was first going
• 1:09:53
  Speaker 1: into free fall. Let's split the summer into first half
• 1:09:57
  Speaker 1: and second half of the summer. First half of the
• 1:10:00
  Speaker 1: summer the currency fell um Uh fell tenfold in purchasing
• 1:10:06
  Speaker 1: power in just six weeks, and Uh the Zimbabwe stock
• 1:10:11
  Speaker 1: market rose five hundred fold, not five five hundred fold,
• 1:10:16
  Speaker 1: five hundred times the price adjusted for the currency, it
• 1:10:21
  Speaker 1: rose fiftyfold, meaning that if you thought this market's over
• 1:10:25
  Speaker 1: priced and the currency has headed for a cliff, and
• 1:10:28
  Speaker 1: get me the heck out of there. Um. In fact,
• 1:10:31
  Speaker 1: I'm going to make a modest short position at two
• 1:10:34
  Speaker 1: short position, those six weeks would have wiped you out.
• 1:10:38
  Speaker 1: You would be bankrupt, um because they two short position
• 1:10:43
  Speaker 1: went up fifty fold. Okay, well that's daunting. What happened
• 1:10:47
  Speaker 1: in the next eight weeks the currency fell another hundredfold
• 1:10:49
  Speaker 1: in the stock market basically went to zero. So you
• 1:10:52
  Speaker 1: were right over the next quarter, but bankrupt. So be
• 1:10:57
  Speaker 1: very careful when dealing with bubble assets. Do not bet
• 1:11:03
  Speaker 1: against them. In any material way, but that doesn't mean
• 1:11:05
  Speaker 1: you necessarily want to hold them. Very interesting. I know
• 1:11:10
  Speaker 1: that you're a fan of motorcycles, and a couple of
• 1:11:13
  Speaker 1: years ago they were described as underpowered toys. But there
• 1:11:17
  Speaker 1: was a really interesting Hannah Elliott column and Bloomberg about
• 1:11:22
  Speaker 1: the e V market for motorcycles is surging with exciting
• 1:11:27
  Speaker 1: new possibilities, including some powerful bikes. What are you driving
• 1:11:32
  Speaker 1: these days? What are you riding these days? And would
• 1:11:34
  Speaker 1: you ever consider an electric bike? Well? I absolutely would
• 1:11:39
  Speaker 1: consider an electric bike. The problem with electric bikes today,
• 1:11:43
  Speaker 1: and this isn't a problem with cars, UM, is weight.
• 1:11:47
  Speaker 1: I mean, if you if you have a thousand pounds
• 1:11:50
  Speaker 1: battery in a car, um, so what if you have
• 1:11:56
  Speaker 1: a hundred pound battery on a motorcycle? That's a big deal.
• 1:12:02
  Speaker 1: And uh so it disrupts the handling and the range
• 1:12:07
  Speaker 1: is problematic. Um. In other words, I think electric cars
• 1:12:12
  Speaker 1: are already at a point where they are practicable and
• 1:12:17
  Speaker 1: useful for anyone other than long distance driving. UM. And
• 1:12:24
  Speaker 1: with motorcycles that's just not true. UM. I'm old enough
• 1:12:28
  Speaker 1: at this stage that I don't really ride that much.
• 1:12:32
  Speaker 1: I've been in Florida, um all of this year to date.
• 1:12:37
  Speaker 1: Last time I was out of Florida was last October UM,
• 1:12:42
  Speaker 1: and I won't ride in Florida, so I haven't written
• 1:12:45
  Speaker 1: this year yet. Um. But bottom line is, electric vehicles
• 1:12:53
  Speaker 1: are here to stay. Electric motorcycles are coming. It's just
• 1:12:57
  Speaker 1: that the technology isn't there yet. Uh Uh. That said,
• 1:13:02
  Speaker 1: they are blindingly fast. I was looking at the arc
• 1:13:05
  Speaker 1: vector and that thing is a bolt of lightning. Literally,
• 1:13:09
  Speaker 1: it's quite fascinating. So let me ask you a different
• 1:13:13
  Speaker 1: automobile question. I'm not a car collector. I'm a driver.
• 1:13:17
  Speaker 1: I don't understand people who buy sneakers and don't wear them.
• 1:13:21
  Speaker 1: Sneakers are for wearing cars for driving. That said, I'm
• 1:13:25
  Speaker 1: kind of fascinated with the thought of all of these
• 1:13:29
  Speaker 1: collectible internal combustion engine vehicles. What happens to that market
• 1:13:34
  Speaker 1: in thirty or fifty years. Will there still be people
• 1:13:38
  Speaker 1: who can repair them, rebuild them, renovate them, or is
• 1:13:43
  Speaker 1: this market, you know, on a on a short timeline. Well,
• 1:13:47
  Speaker 1: short answer would be, of course there will be people
• 1:13:49
  Speaker 1: who can repair them. Um. There's there's a market for
• 1:13:53
  Speaker 1: anything that any that has enough customers that are interested.
• 1:13:57
  Speaker 1: And uh, I do you think twenty years from now,
• 1:14:02
  Speaker 1: electric vehicles will utterly dominate the roads, and that self
• 1:14:08
  Speaker 1: driven cars, cars that a human being drives, will probably
• 1:14:12
  Speaker 1: be illegal because we'd be we'd be a threat. Um. Um,
• 1:14:19
  Speaker 1: autonomous cars are going to be electric. Um. Can you
• 1:14:23
  Speaker 1: imagine an autonomous car going to a gas station and
• 1:14:26
  Speaker 1: saying fill her up versus just going to a recharging
• 1:14:30
  Speaker 1: station and plugging itself in the ladder is very easy.
• 1:14:35
  Speaker 1: Uh So with autonomous cars, you're going to have electric
• 1:14:40
  Speaker 1: vehicles utterly dominant. That means that today's collectible cars, almost
• 1:14:46
  Speaker 1: all of them conventionally and powered, are going to be
• 1:14:50
  Speaker 1: an anachronism and have no practical value. They'll have collector value,
• 1:14:57
  Speaker 1: and there will be races where people take Ferraris and whatnot.
• 1:15:03
  Speaker 1: Whether I think that means is, if you've got a
• 1:15:05
  Speaker 1: Chevy um, it's going to be uh pretty pretty much
• 1:15:09
  Speaker 1: worthless in ten to twenty years. If you've got a Ferrari,
• 1:15:13
  Speaker 1: it'll have collector value. And um, okay, that's the nature
• 1:15:19
  Speaker 1: of a changing marketplace. Huh. Quite quite interesting. What are
• 1:15:23
  Speaker 1: you streaming these days? Tell us your favorite Netflix or
• 1:15:26
  Speaker 1: Amazon Prime show or whatever podcast you might be enjoying. Sure,
• 1:15:31
  Speaker 1: my wife is Russian and so one of the things
• 1:15:35
  Speaker 1: we love to do is is find an obscure Russian
• 1:15:38
  Speaker 1: film or an obscure UH Russian TV series where she
• 1:15:46
  Speaker 1: watches in the original language and I read the subtitles.
• 1:15:49
  Speaker 1: Um Uh. There's a UM Russian crime series from two
• 1:15:56
  Speaker 1: thousand fifteen called The Method, which is about a fellow
• 1:16:01
  Speaker 1: who solves crimes using all kinds of illegal methods to
• 1:16:07
  Speaker 1: find and take take down the bad guys and a
• 1:16:12
  Speaker 1: woman who um becomes more or less his apprentice, and
• 1:16:17
  Speaker 1: ultimately his health is not very good. Um, so she
• 1:16:22
  Speaker 1: really is his prospective replacement. And uh it ran for
• 1:16:28
  Speaker 1: I think two seasons, and it was great fun to
• 1:16:32
  Speaker 1: binge watch. It's called The Method. Uh. Fantastic actress. She
• 1:16:37
  Speaker 1: also appeared in a later UH TV series called Better
• 1:16:41
  Speaker 1: than Us, in which she placed played the role of
• 1:16:43
  Speaker 1: a robot that was able to have emotions and able
• 1:16:50
  Speaker 1: to think and feel and um, therefore better than us.
• 1:16:54
  Speaker 1: So anyway, too, wonderful Russian series. Very interesting. Tell us
• 1:17:00
  Speaker 1: about your mentors who helped to shape your career. Oh gosh,
• 1:17:05
  Speaker 1: there were so many of them. Um um um. Jack
• 1:17:11
  Speaker 1: Bogel was a mentor. UM. Harry mark Owitz was and
• 1:17:16
  Speaker 1: still is a mentor. Um. Peter Bernstein was a giant
• 1:17:21
  Speaker 1: in shaping who I am and how I think about investing.
• 1:17:27
  Speaker 1: Bill Sharp. The list goes on and on. Um. Basically,
• 1:17:34
  Speaker 1: I look to anyone, uh uh. And I still do this.
• 1:17:40
  Speaker 1: I mean, I think it's fair to say I still
• 1:17:43
  Speaker 1: have mentors, but I look to anyone who has insights
• 1:17:49
  Speaker 1: that are interesting that I can learn from, and who
• 1:17:53
  Speaker 1: has ways of approaching the business that I can emulate
• 1:17:57
  Speaker 1: and seek to build. Very interesting. Let's talk about books.
• 1:18:03
  Speaker 1: What are some of your favorites and what are you
• 1:18:05
  Speaker 1: reading right now? Oh, there's a fun book that I
• 1:18:09
  Speaker 1: had last week called ten ten Trends that every smart
• 1:18:15
  Speaker 1: person should know. It's an extremely fast read. Uh. It's
• 1:18:20
  Speaker 1: extremely simple, and basically it looks at you know, the
• 1:18:27
  Speaker 1: narrative is, look how many things are going wrong with
• 1:18:30
  Speaker 1: the world, And this one just turns that on its
• 1:18:32
  Speaker 1: head and says, look at how many things are going
• 1:18:34
  Speaker 1: right with the world. Life expectancy up um, the subsistence
• 1:18:40
  Speaker 1: poverty was something like the world population uh thirty years ago,
• 1:18:47
  Speaker 1: and it's dropped from eight um. And so it goes
• 1:18:52
  Speaker 1: through a whole series of trends and basically poses the question, Hey,
• 1:18:56
  Speaker 1: why why is everybody um so quick to criticize how
• 1:19:01
  Speaker 1: the world is? The world has its flaws, but it's
• 1:19:05
  Speaker 1: way better than it has ever been in human history,
• 1:19:09
  Speaker 1: and I thought it was just a marvelous piece. Another
• 1:19:13
  Speaker 1: that I I love that I finished about six or
• 1:19:16
  Speaker 1: eight months ago was four and four Two Big Tones,
• 1:19:22
  Speaker 1: detailing how the Western world looked before Columbus and how
• 1:19:27
  Speaker 1: the advent of global trade um U in the aftermath
• 1:19:31
  Speaker 1: of Columbus has reshaped the world and reshaped opportunities the
• 1:19:38
  Speaker 1: world over. Those are three really cool books that I
• 1:19:43
  Speaker 1: would heartily recommend. Very interesting. Let's talk about some advice
• 1:19:49
  Speaker 1: for a recent college grad if they were interested in
• 1:19:52
  Speaker 1: a career in finance. What sort of advice would you
• 1:19:56
  Speaker 1: give them? Oh, my advice would be very very simple.
• 1:20:02
  Speaker 1: Whatever you're taught from whoever teaches it to you, ask
• 1:20:07
  Speaker 1: the question, um, is this true? Have people tested it?
• 1:20:15
  Speaker 1: And um um? I think I could credit my career
• 1:20:22
  Speaker 1: too the notion that uh. Basically I always asked the question,
• 1:20:30
  Speaker 1: has somebody tested this? If there's a bit of conventional
• 1:20:33
  Speaker 1: wisdom floating around, I love to test it, and half
• 1:20:37
  Speaker 1: the time I find it's absolutely correct, and half the
• 1:20:40
  Speaker 1: time I find that it's absolutely false. And it's in
• 1:20:45
  Speaker 1: that latter category where something is widely believed but false,
• 1:20:50
  Speaker 1: that profit opportunities can be found. So be skeptical. These
• 1:20:55
  Speaker 1: skeptical ask, and if you have access to the data,
• 1:21:00
  Speaker 1: test it very interesting. And our final question, what do
• 1:21:06
  Speaker 1: you know about the world of investing today that you
• 1:21:09
  Speaker 1: wish you knew thirty or forty years ago when you
• 1:21:13
  Speaker 1: were first getting started. Yeah? Um uh, that's that's an
• 1:21:19
  Speaker 1: easy one. Thirty or forty years ago, I was doing
• 1:21:22
  Speaker 1: that stuff, testing conventional wisdom, often finding it to be wrong,
• 1:21:27
  Speaker 1: and then publishing my results and having expecting people to say, Wow,
• 1:21:32
  Speaker 1: this is cool, and instead the reaction was very, very often,
• 1:21:36
  Speaker 1: how dare you? How dare you challenge? Um? What we
• 1:21:42
  Speaker 1: know to be true? Um? And uh. I wrote a
• 1:21:48
  Speaker 1: piece in two thousand entitled Death of the Risk Premium,
• 1:21:52
  Speaker 1: and about five years later met a guy at a
• 1:21:54
  Speaker 1: conference and asked him how things were going, and he said,
• 1:21:57
  Speaker 1: all things are going finally. Oh, by the way, I
• 1:22:00
  Speaker 1: no longer hate you. And I said what you said?
• 1:22:05
  Speaker 1: You wrote Death of the Risk Premium. You challenged everything
• 1:22:07
  Speaker 1: I believed in investing, and I hated you for that.
• 1:22:11
  Speaker 1: I now realize you were right. Um, So thirty years ago,
• 1:22:17
  Speaker 1: I used to be really disappointed when my work angered people.
• 1:22:22
  Speaker 1: Now I just shrug it off. It's it's a given.
• 1:22:26
  Speaker 1: If you up end somebody's worldview, they're going to be
• 1:22:31
  Speaker 1: angry because they've built their career on the basis of
• 1:22:34
  Speaker 1: a premise that you just demonstrated was wrong. Of course
• 1:22:39
  Speaker 1: they're going to be angry, and so I roll with criticism.
• 1:22:44
  Speaker 1: I'm almost amused by criticism these days, where thirty years
• 1:22:48
  Speaker 1: ago it just um, I was things skin and it
• 1:22:51
  Speaker 1: really hurt. Well, Rob, thank you for being so generous
• 1:22:54
  Speaker 1: with your time. This has been really fascinating. We have
• 1:22:58
  Speaker 1: been speaking with Rob are Not. He is the founder
• 1:23:01
  Speaker 1: and chairman of Research Affiliates. If you enjoy this conversation,
• 1:23:06
  Speaker 1: be sure and check out any of our previous four
• 1:23:08
  Speaker 1: hundred interviews. You can find those at iTunes, Spotify, wherever
• 1:23:13
  Speaker 1: you feed your podcast fix. We love your comments, feedback
• 1:23:17
  Speaker 1: and suggestions right to us at m IB podcast at
• 1:23:20
  Speaker 1: Bloomberg dot net. Sign up from my daily reads at
• 1:23:24
  Speaker 1: Rid Halts dot com. You can check out my weekly
• 1:23:26
  Speaker 1: column on Bloomberg dot com slash Opinion. Follow me on
• 1:23:30
  Speaker 1: Twitter at rit Halts. I would be remiss if I
• 1:23:34
  Speaker 1: did not thank the crack staff that helps put these
• 1:23:36
  Speaker 1: conversations together each week. Maroufle is my audio engineer ATKO.
• 1:23:41
  Speaker 1: Val Bron is our project manager. Michael Batnick is my
• 1:23:44
  Speaker 1: head of research. Michael Boyle is my producer. I'm Barry Ridholts.
• 1:23:49
  Speaker 1: You've been listening to Master's in Business on Bloomberg Radio