In this episode, we explore common misconceptions about factor investing. We discuss why factors aren't less risky than the market, the challenges of diversification, and why adding more factors isn't always beneficial. We emphasize the importance of long-term perspectives when evaluating factor performance and the need for strategies to evolve with changing markets. We also touch on the emotional aspects of factor investing, the differences between academic studies and real-world implementation, and emerging ideas about factor design.
We hope you enjoy the discussion.
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[00:00:00] [SPEAKER_02]: Welcome to Two Quants and a Financial Planner, where we bridge the worlds of investing in financial planning to help investors achieve their long-term goals.
[00:00:05] [SPEAKER_02]: Join Matt Zeigler, Jack Forehand and me, Justin Carbonneau, as we cover a wide range of investing and planning topics that impact all of us and discuss how we can apply them in the real world to achieve the best outcomes in our financial lives.
[00:00:15] [SPEAKER_00]: Jack Forehand is a principal at Validia Capital Management. Matt Zeigler is managing director at Sunpoint Investments.
[00:00:20] [SPEAKER_00]: The opinions expressed in this podcast do not necessarily reflect the opinions of Validia Capital or Sunpoint Investments.
[00:00:25] [SPEAKER_00]: No information on this podcast should be construed as investment advice.
[00:00:28] [SPEAKER_00]: Securities discussed in the podcast may be holdings of clients at Validia Capital or Sunpoint Investments.
[00:00:32] [SPEAKER_01]: Matt Zeigler, Jack Forehand, Justin Carbonneau, as we cover a wide range of investing and planning topics that impact all of us and discuss how we can apply them in the real world to achieve the best outcomes in our financial lives.
[00:00:37] [SPEAKER_01]: Both from the perspective of when this article was written that we're talking about, but also from the perspective that it apparently has been running like factor portfolios for 20 years now, which is just freaking crazy.
[00:00:48] [SPEAKER_03]: Don't you love when you go back to something that you wrote a while ago and you have that moment of being like, when I wrote this I said, and I think you said 15 years ago.
[00:00:58] [SPEAKER_03]: But it's that thing about you're like, oh wait, I have to add more years to this. You go, oh no.
[00:01:03] [SPEAKER_01]: Yeah, if I ask Claude to rewrite the article or to repost it, I'm going to have to change the number of years I've been doing this.
[00:01:09] [SPEAKER_01]: It is crazy just to think about how much this is all factor investing has evolved since I started. Obviously it was discovered well before I started, but the way people do it, the amount of ETFs that are out there, basically when I started, I don't know if they're any, but they were very few.
[00:01:29] [SPEAKER_01]: It's amazing like the way the whole landscape has evolved.
[00:01:32] [SPEAKER_03]: It's so cool too because, and I think this is part of why we wanted to revisit this one as a topic is this is one of those things that as a topic for conversation it doesn't go out of style.
[00:01:44] [SPEAKER_03]: But little things inside of it are constantly like phasing in and out.
[00:01:47] [SPEAKER_03]: And we can relate it back to stuff like why factors are or aren't working in a given at a given point in time.
[00:01:54] [SPEAKER_03]: And some of that's just like what's getting arved out? What's not? What matters to people right now? What's not?
[00:01:59] [SPEAKER_03]: There's so many other layers besides the really always interesting academic data and this.
[00:02:05] [SPEAKER_03]: And that's part of why I love thinking about this with you because I think we both kind of approach this mentally from two different angles.
[00:02:10] [SPEAKER_03]: So it's well worth the update. I'm excited to talk through this today.
[00:02:15] [SPEAKER_01]: Yeah, so I probably should have introduced the topic. The topic is misconceptions about factor investing.
[00:02:18] [SPEAKER_01]: And when you run these things for a long time, you talk to a lot of people who use them.
[00:02:24] [SPEAKER_01]: And when you talk to those people, they have certain things in their minds about what factor investing is, how it works, how it should be judged, a lot of things like that.
[00:02:32] [SPEAKER_01]: And a lot of those things are not correct.
[00:02:34] [SPEAKER_01]: And so what we want to do today is I think we've come up with 11 of them.
[00:02:37] [SPEAKER_01]: We want to go through some of these things that are common misconceptions about factor investing and maybe talk about why they're misconceptions and then also what the reality is behind the scenes of factor investing.
[00:02:47] [SPEAKER_03]: Yeah, because there's a big reality behind the scenes of identifying the strategy from an academic perspective, the execution of the strategy from the professional or the vehicles perspective, and then the end holder investors perspective and how they do it.
[00:03:02] [SPEAKER_03]: And that all muddies up the results that come out on the other end.
[00:03:06] [SPEAKER_03]: So you can't really talk about one thing without talking about the other two, which I love in the nuance of this.
[00:03:11] [SPEAKER_01]: Yeah, so let's start here with the first one.
[00:03:14] [SPEAKER_01]: And this one is not really as much of a misconception now as it used to be.
[00:03:17] [SPEAKER_01]: This particularly relate to value.
[00:03:20] [SPEAKER_01]: So the misconceptions that are less risky than the market.
[00:03:23] [SPEAKER_01]: And this particularly relates to value and people thinking about Warren Buffett and Ben Graham and all that stuff.
[00:03:27] [SPEAKER_01]: And people thinking about well if I'm paying less for a dollar of earnings, I'm buying like a more stable return.
[00:03:34] [SPEAKER_01]: Like there's less risk in that stock than there is in a stock that I'm paying more for.
[00:03:38] [SPEAKER_01]: And the reality is that just doesn't play out.
[00:03:41] [SPEAKER_01]: When you look at a basket of cheap stocks ranked on any value metric, they tend to be more volatile in the market.
[00:03:47] [SPEAKER_01]: They tend to be riskier in the market.
[00:03:49] [SPEAKER_01]: And as we talked about in other episodes, that's what drives your return.
[00:03:53] [SPEAKER_01]: So that's not a bad thing.
[00:03:55] [SPEAKER_01]: But the idea that I'm going to buy all these companies at like a five P or something and that there's no risk in that because I'm paying so little for the earnings.
[00:04:02] [SPEAKER_01]: Is something some people think about this and that does not bear out in the data.
[00:04:06] [SPEAKER_03]: It's really interesting because you can clarify this point for me.
[00:04:09] [SPEAKER_03]: When you're talking about riskier, you're saying risk in terms of variance even though we're invoking the traditional value cult leaders.
[00:04:17] [SPEAKER_01]: That's right. And that's part of what you have to do is you have to think about how you define risk.
[00:04:21] [SPEAKER_01]: I mean Warren Buffett can tell you that risk is measured over 30 years and it has nothing to do with volatility.
[00:04:27] [SPEAKER_01]: Or you're going to lose your money over a very long period of time or whatever it is like permanent loss of capital.
[00:04:31] [SPEAKER_01]: That is a fair way to define risk.
[00:04:34] [SPEAKER_01]: It's just unfortunately not the way as you know dealing with investors on a day-to-day basis as I do.
[00:04:38] [SPEAKER_01]: It's not the way though most of us as investors define risk.
[00:04:40] [SPEAKER_01]: We don't define risk as am I going to lose money over 30 years because there's a lot that goes on to get to those 30 years and you're probably not going to be sitting there at the end of the 30 years if the risk in the middle is too much.
[00:04:52] [SPEAKER_03]: It's really interesting to me because this is so that both in terms of variance which cuts in both directions like things can do.
[00:05:00] [SPEAKER_03]: You know you can outperform the upside just like you can underperform to the downside.
[00:05:04] [SPEAKER_03]: So there's there's the two parts of skew of this and then there's just the reality it's like does Warren Buffett still love a good cigar butt today as he did then cigar butt meaning like the 50 cent dollars or whatever the analogy was from all those years ago from Ben Graham.
[00:05:20] [SPEAKER_03]: I mean I think he does but he probably likes it as much as Sir Mix a lot still likes big butts and cannot lie.
[00:05:26] [SPEAKER_03]: Plus it's there's the core truth in the thing and then there's the would this be a hit today.
[00:05:31] [SPEAKER_03]: Is this is relevant today.
[00:05:33] [SPEAKER_03]: This is kind of weird today but also kind of awesome today as a relic of history.
[00:05:37] [SPEAKER_03]: And I think we have to hold those things in the same regard because yeah they're old ideas.
[00:05:43] [SPEAKER_01]: Yeah you know Buffett has evolved you know to be a little bit more quality over time but but also like the other thing people have to keep in mind with Buffett and we're a little bit off track here but the idea that you know most of these types of investments that Buffett would like to invest in he can't even invest in.
[00:05:55] [SPEAKER_01]: I mean how many companies are there in the world at this point that Warren Buffett could actually buy.
[00:05:59] [SPEAKER_01]: There's very few so like it's interesting to have the view of like what Warren Buffett was at the beginning but what he has to be today is very very different than that just because of the realities of the pool of capital he's dealing with.
[00:06:11] [SPEAKER_03]: I'm really going to torture this metaphor but in the same way that Sir Mix a lot had to move on to fixing radios or whatever became his passion later in life.
[00:06:19] [SPEAKER_03]: That's very different.
[00:06:20] [SPEAKER_03]: Is that true?
[00:06:21] [SPEAKER_03]: Yeah he moved on and done it you know.
[00:06:24] [SPEAKER_03]: And then receivers or something crazy like that but he's really into it.
[00:06:27] [SPEAKER_03]: He's apparently really good at it and it's just there's new chapters in life so the same way Buffett can't stoop down to pick up those cigar butts the way he used to those net nets those sweet sweet net nets because they won't move the needle.
[00:06:38] [SPEAKER_03]: He's got to focus on things like apples.
[00:06:42] [SPEAKER_03]: Sir Mix a lot had to evolve his strategy as well and that's a beautiful thing.
[00:06:46] [SPEAKER_01]: I do like this idea though the next time a client calls me to panic during a you know a downturn I'm just going to tell him that risk is the permanent loss of capital and just hang up on him.
[00:06:53] [SPEAKER_01]: I think that's going to go really really well.
[00:06:56] [SPEAKER_01]: Absolutely.
[00:06:57] [SPEAKER_01]: Nothing like reminding him of that.
[00:06:59] [SPEAKER_01]: It's only a loss there's no risk in this thing but...
[00:07:04] [SPEAKER_01]: Which is kind of private equity in the Dutch town.
[00:07:09] [SPEAKER_01]: I do wish by the way that we could not mark our stuff all day that would be a huge advantage.
[00:07:13] [SPEAKER_01]: Some days all of us the native portfolio is in the real world like wish we could be private equity.
[00:07:17] [SPEAKER_01]: Wish we could just periodically mark the things nobody looks at it would truly be fantastic.
[00:07:22] [SPEAKER_03]: And in a way this is one of those reminders and this is I know we'll keep talking about factors on this but this is one of those reminders and like the punch card lesson too.
[00:07:31] [SPEAKER_03]: The buffet idea that you only get so many or you only have to take so many shots you should make them is the market's going to tell you the price the market's going to tell you the value.
[00:07:39] [SPEAKER_03]: You're allowed to say I have my own assessment of value I have my own assessment of what I think the markets are and like you can own something for 30 years and treat it like private equity and decide not to write it off until it's been absolutely zeroed.
[00:07:51] [SPEAKER_03]: Or just say you don't care about the volatility. It's just way harder to do in practice than it is to talk about in theory.
[00:07:59] [SPEAKER_03]: This is a big part of why we're having this conversation today.
[00:08:02] [SPEAKER_01]: Yeah so the first one is that they're less risky in the market and the second one and now that we've accepted the fact they're more risky is that you can diversify the majority of that risk away.
[00:08:10] [SPEAKER_01]: And I'm a big believer in multi-factor investing you know I don't think like unless somebody has some ridiculous conviction in value or momentum or something like that.
[00:08:17] [SPEAKER_01]: We pretty much will always use a an exposure to a lot of factors in a portfolio because it's just it's basically a free lunch type situation.
[00:08:24] [SPEAKER_01]: But the reality is like even after you've done that like if you think about if most people are judging you against the S&P 500 and I built this really well thought out multi-factor portfolio and even if I expand the number of stocks to try to limit the risk if I do all that stuff.
[00:08:38] [SPEAKER_01]: I still have one massive massive risk relative to the market and that massive massive risk is size because I'm equally weighting my positions.
[00:08:47] [SPEAKER_01]: I'm selecting at least for from us we select from a universe of about 2700 companies.
[00:08:51] [SPEAKER_01]: I'm competing with an index that's the 500 largest companies market cap weighty that size risk is going to be there no matter what I do that size risk is going to be there.
[00:09:01] [SPEAKER_01]: And when you get one of these periods has as we have in recent years where the biggest companies drive the market you're going to struggle because of them.
[00:09:07] [SPEAKER_01]: So the idea is like it's great to diversify as much risk as you can.
[00:09:11] [SPEAKER_01]: But if I think about I want to diversify all the risk relative to the S&P 500 I become the S&P 500.
[00:09:17] [SPEAKER_01]: I start market cap weighting my positions.
[00:09:18] [SPEAKER_01]: I start holding the largest companies in bigger share like I take away a lot of the value of at least over the long term what these factors have been.
[00:09:25] [SPEAKER_01]: So you're going to take risks when you do this.
[00:09:28] [SPEAKER_01]: You're going to look very different in the market how concentrated you are versus how diversified you are determines what that risk is.
[00:09:33] [SPEAKER_01]: But it's always going to be there.
[00:09:35] [SPEAKER_03]: The way that you think about how this stacks up and there's there's mathematical exercises and tools to help you do this is really important.
[00:09:43] [SPEAKER_03]: This is a big part of part of part of the approach to portfolio construction that I feel most aligned with personally is.
[00:09:53] [SPEAKER_03]: Admitting what you just said that you can't.
[00:09:56] [SPEAKER_03]: You get the more you diversify away from it the more you just become beta.
[00:10:00] [SPEAKER_03]: So if you know you're going to do that you want to probably have a beta component in the portfolio and then decide what you want to be active with.
[00:10:07] [SPEAKER_03]: In which ways you're going to specifically tilt away towards whatever it is that you believe in or that you're hardwired to do.
[00:10:13] [SPEAKER_03]: But instead of layering in so many things you just ultimately become the market again.
[00:10:17] [SPEAKER_03]: You have to figure out how am I going to layer and stuff to be intelligent.
[00:10:21] [SPEAKER_03]: And and it's OK.
[00:10:23] [SPEAKER_03]: It's OK if you don't want to do this either but you just have to be aware of it.
[00:10:26] [SPEAKER_03]: One of the worst things.
[00:10:28] [SPEAKER_03]: Sure you've seen this a million times too.
[00:10:30] [SPEAKER_03]: People come to you with like a billion different tilts and a billion different ideas expressed in the portfolio.
[00:10:35] [SPEAKER_03]: And you're like congratulations.
[00:10:36] [SPEAKER_03]: You underperformed the S&P by two percent here because you just you constructed the S&P in like a sloppier way.
[00:10:45] [SPEAKER_03]: You can get away from that.
[00:10:46] [SPEAKER_03]: You can somewhere in there there's a I like big betas and I cannot lie.
[00:10:51] [SPEAKER_03]: I don't know where to go.
[00:10:52] [SPEAKER_03]: It's in the best you but it feels like it does.
[00:10:54] [SPEAKER_03]: But this is a really common mistake that people just stumble into because they want to get cute about it.
[00:10:59] [SPEAKER_03]: And that's a problem.
[00:11:01] [SPEAKER_01]: You really call it mutual fund salad basically when you get that portfolio that just has every mutual fund like with every factor
[00:11:06] [SPEAKER_01]: and every active manager is just this pile of stuff put together.
[00:11:09] [SPEAKER_03]: Thank God that this is slowly this is one of those things that dies out as a class of investors die out.
[00:11:16] [SPEAKER_03]: I don't I don't say that like I wish harm on people.
[00:11:18] [SPEAKER_03]: I just say it as it's a crazy thing for the people who were the people who are hitting peak earning basically in like
[00:11:25] [SPEAKER_03]: 70s 80s into 90s in the peak mutual fund years and every once in a while I'll still run into these.
[00:11:31] [SPEAKER_03]: And it's usually a combination of the vehicles that were present the brokers that were selling them and what the clients were buying
[00:11:38] [SPEAKER_03]: far far less today than say 10 years ago certainly 15 years ago in my business.
[00:11:43] [SPEAKER_03]: But I would see mutual funds out.
[00:11:45] [SPEAKER_03]: I would literally get a portfolio and be like you have and I'm not making this up.
[00:11:50] [SPEAKER_03]: Like I've seen like a portfolio with like you have 90 different mutual funds of various share classes.
[00:11:57] [SPEAKER_03]: Sometimes the same fund in multiple share classes compiled over the last 30 40 years from working with somebody who is just selling new projects
[00:12:06] [SPEAKER_03]: and you built a suboptimal S&P 500 or whatever else the mix was in there.
[00:12:11] [SPEAKER_03]: Mutual fund salad is real and it's like that's the worst way to build a portfolio.
[00:12:16] [SPEAKER_03]: It's not hard to just not do that.
[00:12:19] [SPEAKER_01]: And just on this point of risk before we wrap up like the other thing to keep in mind is risk should always be looked at in a
[00:12:23] [SPEAKER_01]: portfolio context.
[00:12:24] [SPEAKER_01]: So it doesn't necessarily mean just because factor portfolios are riskier.
[00:12:29] [SPEAKER_01]: It doesn't mean that it's going to add a lot of risk to someone's individual portfolio.
[00:12:32] [SPEAKER_01]: It really depends on what they're doing with the rest of the portfolio.
[00:12:35] [SPEAKER_01]: Like for me right now, like if I was somebody who was heavily in the S&P 500, I might and Rick we
[00:12:41] [SPEAKER_01]: talked about this with Rick Ferry a little bit.
[00:12:42] [SPEAKER_01]: Like I might want a little small value exposure in there.
[00:12:44] [SPEAKER_01]: I might want to play because risk can be thought of in different ways.
[00:12:47] [SPEAKER_01]: One of the risks is that the biggest companies don't perform well in the future like they have in the past.
[00:12:51] [SPEAKER_01]: Well mitigating that risk one way you could do that is to put a factor portfolio in there
[00:12:55] [SPEAKER_01]: because a factor portfolio is going to be underweight those biggest companies and is going to be underweight size.
[00:13:00] [SPEAKER_01]: And so I think you have to look at it in that context.
[00:13:03] [SPEAKER_01]: And it's not one of those things like these are always these crazy risky strategies that add tons of risk to the picture.
[00:13:07] [SPEAKER_01]: If you think about it in a portfolio context.
[00:13:09] [SPEAKER_03]: Yeah, the financial planning corollary to this is you're looking for non-diversified assets all the time.
[00:13:16] [SPEAKER_03]: You're especially looking for them when you're getting above average or above expected results.
[00:13:21] [SPEAKER_03]: And a big conversation at the last I would say certainly in the last two years after we had the death of 6040 in 2022 temporarily before it came roaring back to life.
[00:13:31] [SPEAKER_03]: Where like any year like this you go it was easy to end up with an S&P 500 or a tech overweight or a large cap stock overweight.
[00:13:39] [SPEAKER_03]: If you need to diversify that inside of stocks that meant you probably needed to look overseas or you needed to look at smaller size.
[00:13:46] [SPEAKER_03]: If you needed to diversify that outside of stocks, you might have been looking at bonds and things like that.
[00:13:50] [SPEAKER_03]: These rebalancing strategies are really they for us they have to be in line with the financial plan and this understanding of do you need safer assets in the mix?
[00:13:59] [SPEAKER_03]: Do you just need to spread that risk out inside of the asset class of equities?
[00:14:04] [SPEAKER_03]: Do we need to do that inside the country outside of the country?
[00:14:06] [SPEAKER_03]: How do we do that to best meet the cash flow needs or the savings goals of the individual client?
[00:14:12] [SPEAKER_03]: Those layers of consideration are just super, super important here.
[00:14:16] [SPEAKER_01]: So number three is kind of a corollary in this idea of diversification and it's that more factors are always better.
[00:14:21] [SPEAKER_01]: And this is a temptation a lot of people have that run factor strategies that use them is to like think about well what if I had this and then what if I add this?
[00:14:28] [SPEAKER_01]: Like once you get your major factor exposures in your portfolio, you're usually in pretty good shape.
[00:14:34] [SPEAKER_01]: And there's a huge temptation to do a lot of data mining and to say all right well like this little thing I add that in and I add this in and I add this in and suddenly I get like suddenly again I've diversified myself too much.
[00:14:44] [SPEAKER_01]: And I don't have something where what I see in the past in terms of my results are as predictive of the future because I've just mined this whole thing together.
[00:14:52] [SPEAKER_01]: So I think there's you have to be careful about this temptation to say let's add more and more and more factors to a portfolio.
[00:14:58] [SPEAKER_03]: I think of this one too as so, I mean, anybody in the summertime who's had children coming over for a barbecue or whatever else has either picked a fruit tray or a fruit salad or something like that.
[00:15:12] [SPEAKER_03]: So the kids aren't just loading up on potato chips and sodas and whatever else.
[00:15:16] [SPEAKER_03]: When you select the fruit salad, perhaps the most important consideration is are you picking something with some weirdo fruit that like none of the kids are going to like?
[00:15:27] [SPEAKER_03]: And are there any fruits in your house that are like big no knows that nobody is always that's always my personal problem with the fruit salad.
[00:15:34] [SPEAKER_01]: I can't stand the cantaloupe and it has no business being in there.
[00:15:37] [SPEAKER_01]: It has no business.
[00:15:38] [SPEAKER_03]: OK, so like this is one of the problems of you don't necessarily need to have more factors to always make it better.
[00:15:46] [SPEAKER_03]: Like cantaloupe is a losing factor in the forehand household or my problem is like I like cantaloupe.
[00:15:54] [SPEAKER_03]: But if I get cantaloupe and maybe Jack's family comes over, then all of a sudden I have a surplus of cantaloupe that I can't possibly ingest by myself in the days or weeks that follow.
[00:16:04] [SPEAKER_03]: So kind of like constructing something around who is going to consume it.
[00:16:09] [SPEAKER_03]: That becomes a really important lesson here because if you just pile it all in for sake of piling it all in, there's going to be waste inevitably or you're going to disappoint people inevitably.
[00:16:19] [SPEAKER_03]: And it's it doesn't.
[00:16:21] [SPEAKER_03]: It's not a huge lift to just have that next step of intention.
[00:16:25] [SPEAKER_03]: What am I doing this for?
[00:16:26] [SPEAKER_03]: Who am I doing it for?
[00:16:28] [SPEAKER_03]: Why? How does it serve my plan?
[00:16:30] [SPEAKER_03]: How does it serve my long term beliefs and investment strategy?
[00:16:32] [SPEAKER_03]: How does it take care of the other people that this is supposed to take care of?
[00:16:35] [SPEAKER_03]: Those are integral questions to doing this so that you don't end up with mutual fund salad, factor salad and all the other crappy salads that nobody actually wants.
[00:16:44] [SPEAKER_01]: And one of the things I've learned since I've had kids is like the battle here is not what's in the fruit salad.
[00:16:48] [SPEAKER_01]: The battle is the Doritos versus the fruit salad.
[00:16:50] [SPEAKER_01]: And you basically will say to the kids, I don't care whatever freaking fruits in this salad you want.
[00:16:54] [SPEAKER_01]: Like if you're going to eat this salad, there could be one fruit, there could be three friends.
[00:16:56] [SPEAKER_01]: I don't even care.
[00:16:57] [SPEAKER_01]: But just just eat the fruits that I think the Doritos.
[00:17:00] [SPEAKER_03]: There's nothing wrong with it.
[00:17:01] [SPEAKER_03]: Just getting a thing of blueberries or whatever.
[00:17:03] [SPEAKER_03]: If it keeps them off the Doritos because in the end, who can really compete with Doritos?
[00:17:09] [SPEAKER_03]: Like you can't you can't win that.
[00:17:11] [SPEAKER_01]: So yeah, better to just find that there's like a there's a thing of Doritos now that Pringles makes.
[00:17:16] [SPEAKER_01]: It's like a one of those tubes that has like mini Doritos in it.
[00:17:19] [SPEAKER_01]: And like he loves it.
[00:17:20] [SPEAKER_01]: I've got to keep him away from that, but that's just that's a tantrum.
[00:17:23] [SPEAKER_01]: The tantrums of Doritos.
[00:17:24] [SPEAKER_01]: Yeah. All right.
[00:17:25] [SPEAKER_01]: Well, so so on the number four, number four is the three and five year period
[00:17:30] [SPEAKER_01]: of the best for judging performance.
[00:17:32] [SPEAKER_01]: And we've doubled this a lot, but it's still it happens.
[00:17:34] [SPEAKER_01]: It's surprising.
[00:17:34] [SPEAKER_01]: It happens a ton.
[00:17:36] [SPEAKER_01]: You know, people and we talked to Med Vavor about this, like when he was on his podcast,
[00:17:39] [SPEAKER_01]: he says all the time people would invest with him and then they use that phrase
[00:17:42] [SPEAKER_01]: you never want to hear, which is we'll see how it goes.
[00:17:45] [SPEAKER_01]: Like that is the freeze.
[00:17:46] [SPEAKER_01]: Like for me as a factor investor, I never ever want to hear from clients
[00:17:50] [SPEAKER_01]: because as soon as they say we'll see how it goes, they're not saying like
[00:17:53] [SPEAKER_01]: we'll see how our relationship develops over time.
[00:17:55] [SPEAKER_01]: They're not they're saying one thing.
[00:17:57] [SPEAKER_01]: They were saying, I want to look at the performance of this thing
[00:17:59] [SPEAKER_01]: and I want to see what happens and I want to make a decision with that performance.
[00:18:02] [SPEAKER_01]: And if you look at these factors, they all struggle over three and five
[00:18:06] [SPEAKER_01]: year periods, multi factor implementations that bring them together.
[00:18:10] [SPEAKER_01]: They struggle less over three and five year period, but they still struggle
[00:18:13] [SPEAKER_01]: over three and five year periods.
[00:18:14] [SPEAKER_01]: If you're going to judge these things over three and five year periods,
[00:18:17] [SPEAKER_01]: you shouldn't use them because it's never going to work.
[00:18:19] [SPEAKER_01]: And that's such a hard thing to get across because sitting there for three
[00:18:23] [SPEAKER_01]: and five years and like go logging into your brokerage account every single day
[00:18:26] [SPEAKER_01]: and see this thing is not working against the S&P 500 is really, really hard to do.
[00:18:30] [SPEAKER_01]: But if you can't do it, you shouldn't be a factor investor.
[00:18:33] [SPEAKER_03]: The idea of mean reversion, that mean reversion requires that you know
[00:18:39] [SPEAKER_03]: you're mean.
[00:18:40] [SPEAKER_03]: And it's one thing to look back over history and say, OK,
[00:18:42] [SPEAKER_03]: three to five years, you get an idea for this.
[00:18:45] [SPEAKER_03]: But anybody who's been allocating for more than a three or five year period
[00:18:49] [SPEAKER_03]: knows the pain and horror.
[00:18:51] [SPEAKER_03]: And there are academic studies that show this too of like the pension fund
[00:18:54] [SPEAKER_03]: managers who fire the people based on the three year number.
[00:18:57] [SPEAKER_03]: And that being a predictor of like those are the managers
[00:19:00] [SPEAKER_03]: are going to turn around and have a gangbuster following three years.
[00:19:04] [SPEAKER_03]: These things are really cruel.
[00:19:06] [SPEAKER_03]: So if your measurement period is three or five years, especially in a
[00:19:08] [SPEAKER_03]: place with value and I mean, you can tell me the data on how many
[00:19:11] [SPEAKER_03]: 10 year periods even value underperforms in that.
[00:19:15] [SPEAKER_03]: The reality is it's easy to fall in love with the wrong mean
[00:19:18] [SPEAKER_03]: and be expecting the wrong mean for the thing you have.
[00:19:21] [SPEAKER_03]: In most cases, it's a longer period than you would think.
[00:19:23] [SPEAKER_03]: And it's really important to understand like what factors
[00:19:26] [SPEAKER_03]: contribute to that getting close sooner.
[00:19:28] [SPEAKER_03]: What factors contribute them to getting stretched out.
[00:19:32] [SPEAKER_03]: And sometimes the ones that getting stretched out, you just
[00:19:34] [SPEAKER_03]: definitely can't know in advance.
[00:19:36] [SPEAKER_03]: You just know if I'm signing up for this, Mr. Value Investor,
[00:19:39] [SPEAKER_03]: you are signing up for pain.
[00:19:41] [SPEAKER_03]: You inherently don't like yourself in some deep, fundamental way.
[00:19:44] [SPEAKER_03]: And you're willing to take that on in the off chance that, you know,
[00:19:48] [SPEAKER_03]: historically this is paid out because once in a while it actually
[00:19:52] [SPEAKER_03]: matters the price that you pay for something.
[00:19:54] [SPEAKER_01]: And the worst implementation of this, which I was dumb enough
[00:19:56] [SPEAKER_01]: to get involved with really earlier in my career is when
[00:19:58] [SPEAKER_01]: the client comes to you at the horse race.
[00:20:00] [SPEAKER_01]: So the client is basically like I'm hiring you and his other manager.
[00:20:03] [SPEAKER_01]: I'm putting 100 grand with both of you.
[00:20:04] [SPEAKER_01]: Whoever has more money at the end of a year.
[00:20:07] [SPEAKER_01]: I'm putting all the money within.
[00:20:08] [SPEAKER_01]: Like we I think we did that maybe one time, like very early
[00:20:11] [SPEAKER_01]: in our career and like that is the worst possible thing you can do.
[00:20:14] [SPEAKER_01]: Like if you say I'm going to just over a one year period, I'm going
[00:20:17] [SPEAKER_01]: to pick whoever does best and I'm going to put all my money with them.
[00:20:19] [SPEAKER_01]: You almost always lose with that.
[00:20:21] [SPEAKER_01]: It's a terrible idea, but people still do it because people
[00:20:23] [SPEAKER_01]: are still using even periods, even a short one year to judge performance.
[00:20:27] [SPEAKER_03]: I feel like it's this is one of those things that I'm
[00:20:31] [SPEAKER_03]: pretty sure I've shared here before, but I read this.
[00:20:33] [SPEAKER_03]: I read this earlier on in my career.
[00:20:36] [SPEAKER_03]: I can't say I read it in like the financial crisis period,
[00:20:38] [SPEAKER_03]: but I don't feel like it was that long after it came from Barrier at Holtz.
[00:20:41] [SPEAKER_03]: And it was a brilliant answer or reply to the horse race story.
[00:20:45] [SPEAKER_03]: And he told a story at the time of a potential client,
[00:20:49] [SPEAKER_03]: a prospect reaching out saying I just inherited whatever,
[00:20:52] [SPEAKER_03]: like a million dollars and I'm calling you and four other people.
[00:20:57] [SPEAKER_03]: And I'm going to give you two hundred and fifty thousand dollars each.
[00:20:59] [SPEAKER_03]: And then at the end of the next year, whoever has the best track record,
[00:21:03] [SPEAKER_03]: I'll fire the other three managers and give it all to whoever wins.
[00:21:09] [SPEAKER_03]: And especially earlier in my career, that's like that's one of those things
[00:21:12] [SPEAKER_03]: when you're new and you're going like, A, that client sounds like, you know,
[00:21:16] [SPEAKER_03]: that might be a good business if you're starting from zero and you're an asset
[00:21:19] [SPEAKER_03]: manager. That might be one of those things that you like gets your ears up
[00:21:22] [SPEAKER_03]: and goes like, oh, like, OK, we can see you've proved my medal
[00:21:25] [SPEAKER_03]: of my value investing strategy or my growth strategy or my crypto strategy
[00:21:29] [SPEAKER_03]: or whatever it is. But what I learned from Barry in this thing
[00:21:32] [SPEAKER_03]: was the way he responded.
[00:21:34] [SPEAKER_03]: And the way he responded was, do you know the story?
[00:21:37] [SPEAKER_03]: Have we talked about this before?
[00:21:38] [SPEAKER_03]: I've heard it, but I don't know it. So yeah, I don't remember all that.
[00:21:41] [SPEAKER_03]: So the brilliant thing and this is this has been with me since whenever
[00:21:44] [SPEAKER_03]: I read this for the first time, so we'll have to look this up.
[00:21:46] [SPEAKER_03]: So I'm thinking of this on the spot.
[00:21:48] [SPEAKER_03]: The brilliant idea was that and as he explains back to this person
[00:21:52] [SPEAKER_03]: making this pitch is let me just tell you what the flaw is
[00:21:55] [SPEAKER_03]: and why I'm saying no to your proposition and I don't want this money.
[00:21:58] [SPEAKER_03]: It's not because I don't think you might not find somebody good.
[00:22:01] [SPEAKER_03]: That could happen.
[00:22:02] [SPEAKER_03]: But really what you're doing is you're asking for perverse incentives
[00:22:05] [SPEAKER_03]: from the people doing this.
[00:22:07] [SPEAKER_03]: Because if I know the way I get to a million dollars is I have to do
[00:22:11] [SPEAKER_03]: better than these three other guys that I have no idea who they are
[00:22:13] [SPEAKER_03]: or what they're going to do.
[00:22:15] [SPEAKER_03]: I actually need since I know I'm going to get zero at the end of the year
[00:22:18] [SPEAKER_03]: if I don't do this, I need to take an exceptional amount of risk on
[00:22:22] [SPEAKER_03]: to basically try to beat those guys to clean up after the year.
[00:22:26] [SPEAKER_03]: Because if in a year I'm basically getting fired
[00:22:28] [SPEAKER_03]: unless I take on enough risk to outperform them,
[00:22:30] [SPEAKER_03]: what's the point of even playing?
[00:22:32] [SPEAKER_03]: So no, thank you.
[00:22:34] [SPEAKER_03]: I don't want the money, but please understand the incentives that you're
[00:22:37] [SPEAKER_03]: creating for the people who say yes to this is to take as big a swing as possible
[00:22:40] [SPEAKER_03]: because they have one year to do something that's statistically
[00:22:44] [SPEAKER_03]: impossible to do or really hard to predict that you can possibly do in advance.
[00:22:48] [SPEAKER_01]: This is why those stock picking contests in like high school
[00:22:50] [SPEAKER_01]: where they try to teach people about stocks are like the worst idea of all time
[00:22:53] [SPEAKER_01]: because basically what you want to do is if you've got to be the one
[00:22:56] [SPEAKER_01]: in the class of the most money you want to buy like the outrageous
[00:22:58] [SPEAKER_01]: out of the money call option and something you want to just buy
[00:23:01] [SPEAKER_01]: something that has a chance to really blow up.
[00:23:03] [SPEAKER_01]: And but it teaches you zero about investing because it teaches like taking,
[00:23:06] [SPEAKER_01]: you know, incredible amounts of risk relative to what you should.
[00:23:09] [SPEAKER_03]: Yeah, and granted, I know a number of those projects do track the students
[00:23:13] [SPEAKER_03]: on risk adjusted returns and some of the other metrics to try to normalize this
[00:23:17] [SPEAKER_03]: because I think some kids probably cleaned up after a few years and being like,
[00:23:20] [SPEAKER_03]: oh, we just do like aggressive levered momentum training strategies on
[00:23:25] [SPEAKER_03]: like there's ways to do these things in game those systems too.
[00:23:28] [SPEAKER_03]: But just this idea of like you don't want perverse incentives to take bizarre risks.
[00:23:34] [SPEAKER_03]: Factors give us a language to actually understand what those incentives are
[00:23:38] [SPEAKER_03]: for the people taking the risks and why they're taking them.
[00:23:41] [SPEAKER_03]: Part of why they're so useful in understanding this this kind of thinking.
[00:23:46] [SPEAKER_01]: Before we finish to wrap this up, I just want to put this chart up
[00:23:48] [SPEAKER_01]: because this really explains this whole thing.
[00:23:49] [SPEAKER_01]: And this is from Larry Swedger along.
[00:23:51] [SPEAKER_01]: It's an old chart, but the idea would be the same if it was updated.
[00:23:54] [SPEAKER_01]: And then this is the number of one year, three year, five year,
[00:23:56] [SPEAKER_01]: 10 year and 20 year periods that each of the factors underperform.
[00:23:59] [SPEAKER_01]: And what you see in here is what we were talking about, which is on a one year period.
[00:24:03] [SPEAKER_01]: Yeah, you've got greater than 50, 50 odds, but the other side is very, very high.
[00:24:07] [SPEAKER_01]: The odds on the other side are very, very high.
[00:24:09] [SPEAKER_01]: And as you get to three years, it gets better,
[00:24:10] [SPEAKER_01]: but there's still significant three year periods with all these factors
[00:24:13] [SPEAKER_01]: where they underperform even at five years, there's significant periods.
[00:24:16] [SPEAKER_01]: And so if you're judging something based on this,
[00:24:18] [SPEAKER_01]: you're going to get yourself in trouble because if you're on the wrong
[00:24:21] [SPEAKER_01]: side of these odds and you abandon the thing at the wrong time,
[00:24:24] [SPEAKER_01]: you're probably going to miss the other side of that coin, which is,
[00:24:27] [SPEAKER_01]: you know, if I abandon value because of its 22% of the time
[00:24:31] [SPEAKER_01]: it underperforms after five years, the odds are the outperformance
[00:24:34] [SPEAKER_01]: is on the other side of that thing, because now the odds are probably
[00:24:37] [SPEAKER_01]: more in my favor at that point.
[00:24:38] [SPEAKER_01]: So it's just something to keep in mind when you run these strategies.
[00:24:41] [SPEAKER_01]: And it's a good thing.
[00:24:42] [SPEAKER_01]: I like to put this in front of clients a lot just because if you're a client,
[00:24:45] [SPEAKER_01]: this sort of sets the expectations of what you might see.
[00:24:48] [SPEAKER_01]: Now, being able to see it in the real world is a different thing.
[00:24:51] [SPEAKER_01]: But nonetheless, it at least sets expectations and lets you know
[00:24:54] [SPEAKER_01]: that, yeah, this is going to underperform over one year.
[00:24:56] [SPEAKER_01]: It's going to underperform over three, it's going to underperform over five.
[00:24:59] [SPEAKER_01]: You're going to have to be able to endure that.
[00:25:00] [SPEAKER_01]: And if you can't, you probably shouldn't be following these kind of strategies.
[00:25:03] [SPEAKER_03]: I love this chart too, not just for the the table setting of expectations,
[00:25:08] [SPEAKER_03]: but especially as we get into as you get into higher net worth situations
[00:25:12] [SPEAKER_03]: or where the money is not all needed for consumption,
[00:25:14] [SPEAKER_03]: but you're thinking over the longer term, the longer your time
[00:25:17] [SPEAKER_03]: horizon, the more you consider other type of intelligent or intentional risks to take on.
[00:25:23] [SPEAKER_03]: So if you need this money and it's part of your consumption strategy
[00:25:26] [SPEAKER_03]: in like a five to 10 year window or even 20 year window,
[00:25:30] [SPEAKER_03]: you got to be aware of these periods and you have to be as aware of them
[00:25:34] [SPEAKER_03]: as much for their underperformance as you actually have to be aware of them
[00:25:38] [SPEAKER_03]: for their outperformance too.
[00:25:39] [SPEAKER_03]: Because in the real world where we're making decisions about this stuff,
[00:25:43] [SPEAKER_03]: especially if it's for consumption again, I want to know what above
[00:25:47] [SPEAKER_03]: average looks like as well, because I want to know if I knock the cover
[00:25:50] [SPEAKER_03]: off the ball for one, two or three years in a row with something like this.
[00:25:54] [SPEAKER_03]: It's probably not going to stick.
[00:25:56] [SPEAKER_03]: Here's all your 10 year examples of where this falls apart.
[00:25:59] [SPEAKER_03]: If you got lucky and started value investing, you know, in like 99
[00:26:03] [SPEAKER_03]: and you thought it sucked for a couple of years, but then oh, one to oh,
[00:26:06] [SPEAKER_03]: three, you just clean house with your small cap value.
[00:26:09] [SPEAKER_03]: Take some chips off the table.
[00:26:11] [SPEAKER_03]: I think it's probably worth it.
[00:26:13] [SPEAKER_03]: Knowing the above average result is as important as the below average
[00:26:18] [SPEAKER_03]: when you start to stretch out these time periods.
[00:26:21] [SPEAKER_01]: So this next one is more of a semantic one, but I think it's important
[00:26:24] [SPEAKER_01]: just to keep in mind because people use this word alpha all the time.
[00:26:27] [SPEAKER_01]: So the idea is like once factors are widely known, the way I look at it
[00:26:31] [SPEAKER_01]: is once they're widely known and they're available inexpensively,
[00:26:34] [SPEAKER_01]: they effectively become beta.
[00:26:36] [SPEAKER_01]: So I mean, we have Fama French's work that if I buy low price to book stocks,
[00:26:41] [SPEAKER_01]: I may generate outperformance over time.
[00:26:43] [SPEAKER_01]: Now that's a crazy example, because you haven't done that in a long time.
[00:26:45] [SPEAKER_01]: If you bought low price to book stocks, but we'll assume we're in a world
[00:26:48] [SPEAKER_01]: where low price to book stocks actually work.
[00:26:50] [SPEAKER_01]: Yeah, that is beta now.
[00:26:52] [SPEAKER_01]: That is not like your manager can't come to you and be like, look at my alpha
[00:26:55] [SPEAKER_01]: generating strategy on buying low price to book stocks.
[00:26:58] [SPEAKER_01]: That's not the way it works anymore.
[00:27:00] [SPEAKER_01]: Like that's kind of your table stakes.
[00:27:02] [SPEAKER_01]: And then you have to beyond that you have to do something else.
[00:27:04] [SPEAKER_01]: If you want to generate alpha, you have to have something
[00:27:06] [SPEAKER_01]: in your strategy to do something beyond that.
[00:27:08] [SPEAKER_01]: So just the definition of what is beta has changed.
[00:27:10] [SPEAKER_01]: Beta is not just beta anymore.
[00:27:12] [SPEAKER_01]: Beta is like basic implementations of these factors, all of which
[00:27:15] [SPEAKER_01]: you can get inexpensively now just by buying cheap ETFs.
[00:27:19] [SPEAKER_03]: This always makes me think of what I think about when I think about this
[00:27:22] [SPEAKER_03]: of the Buffett's alpha paper.
[00:27:26] [SPEAKER_03]: I think is that a cliff as this paper?
[00:27:27] [SPEAKER_03]: Do you know what you're talking about?
[00:27:28] [SPEAKER_01]: Our paper, I'm not sure if it was on and I think he might have been.
[00:27:30] [SPEAKER_01]: OK, definitely an AQR paper.
[00:27:32] [SPEAKER_03]: The AQR paper that basically says.
[00:27:36] [SPEAKER_03]: And take us back.
[00:27:37] [SPEAKER_03]: I'm going to let you explain this because I feel like you'll do
[00:27:38] [SPEAKER_03]: a better job than me on this to the degree that I'm putting you
[00:27:41] [SPEAKER_03]: on the spot with an academic paper.
[00:27:42] [SPEAKER_03]: But like we didn't have words to describe this in the 60s.
[00:27:47] [SPEAKER_03]: So it's really interesting to apply
[00:27:50] [SPEAKER_03]: factored language to explaining what happens in that regression.
[00:27:55] [SPEAKER_01]: Right, so I can take these factor frameworks and I can take them
[00:27:57] [SPEAKER_01]: back to Buffett's returns and I can say, can I explain Buffett's
[00:28:00] [SPEAKER_01]: returns with these and AQR found that you can.
[00:28:02] [SPEAKER_01]: And basically what it was is a combination of value quality.
[00:28:05] [SPEAKER_01]: And I think there was some low volatility in there as well.
[00:28:07] [SPEAKER_01]: And then leverage.
[00:28:08] [SPEAKER_01]: So I take those factor exposures, I lever them up.
[00:28:11] [SPEAKER_01]: I think it was one point seven times.
[00:28:12] [SPEAKER_01]: I might have that wrong.
[00:28:13] [SPEAKER_01]: But anyway, that basically produces Buffett's returns.
[00:28:16] [SPEAKER_01]: So you could argue, well, you know, Buffett's it's in beta all the time
[00:28:19] [SPEAKER_01]: for Buffett and that's really dumb.
[00:28:20] [SPEAKER_01]: That's not true.
[00:28:21] [SPEAKER_01]: And that's not what AQR was saying.
[00:28:23] [SPEAKER_01]: AQR was saying knowing what we know now, we can do that.
[00:28:26] [SPEAKER_01]: But the reality is we didn't know what we knew then.
[00:28:28] [SPEAKER_01]: We didn't know we know now then.
[00:28:30] [SPEAKER_01]: So basically Buffett was not he didn't have Fala and
[00:28:32] [SPEAKER_01]: French's work to lean on.
[00:28:34] [SPEAKER_01]: Buffett was doing this himself.
[00:28:35] [SPEAKER_01]: So the same exact thing was alpha back then.
[00:28:38] [SPEAKER_01]: But now these types of implementations are more beta
[00:28:41] [SPEAKER_01]: because we've learned academic research has caught up.
[00:28:44] [SPEAKER_01]: What's widely available cheaply is caught up.
[00:28:46] [SPEAKER_01]: So it's just an example of it doesn't mean because something is
[00:28:49] [SPEAKER_01]: beta now, it was beta throughout history.
[00:28:51] [SPEAKER_01]: That's not true.
[00:28:52] [SPEAKER_01]: It means it's beta now because we've discovered things in the meantime.
[00:28:57] [SPEAKER_03]: This concept of we gain the words through through science.
[00:29:01] [SPEAKER_03]: I'm going to use science on this through regression analysis,
[00:29:04] [SPEAKER_03]: through understanding these things, through all the academic research
[00:29:06] [SPEAKER_03]: that's led to the discovery of all these factors.
[00:29:08] [SPEAKER_03]: They gave us words to explain explain something that happened in the past.
[00:29:12] [SPEAKER_03]: But that doesn't just mean that we should just assume that it's the
[00:29:15] [SPEAKER_03]: past thing going forward because the reality is like you and I both read
[00:29:19] [SPEAKER_03]: that paper whenever it came out from a QR.
[00:29:21] [SPEAKER_03]: We said, this is cool.
[00:29:24] [SPEAKER_03]: Did either of us go out and like create low beta port volumes
[00:29:29] [SPEAKER_03]: and lever them up?
[00:29:30] [SPEAKER_03]: Like I didn't I didn't go out and start an insurance company
[00:29:32] [SPEAKER_03]: so I could have low price float to lever my returns.
[00:29:35] [SPEAKER_03]: Like did you do any of these things because you read the
[00:29:37] [SPEAKER_03]: academic paper?
[00:29:38] [SPEAKER_01]: I did not.
[00:29:39] [SPEAKER_01]: And then that insurance company thing is so important too
[00:29:41] [SPEAKER_01]: because my cost to go leverage up this portfolio is going to be a
[00:29:44] [SPEAKER_01]: little bit different than Buffett's cost to leverage up this portfolio.
[00:29:46] [SPEAKER_01]: So, you know, it is like it's a very different world that he lived
[00:29:50] [SPEAKER_01]: in than what someone who tried to replicate this lived in.
[00:29:52] [SPEAKER_01]: And also as we've said, we've learned so much stuff since then.
[00:29:55] [SPEAKER_03]: What's really cool about it though is to go great.
[00:29:58] [SPEAKER_03]: We have words to describe what's happening.
[00:30:00] [SPEAKER_03]: We have a way to explain the regression analysis on why this
[00:30:04] [SPEAKER_03]: works and why this makes sense.
[00:30:06] [SPEAKER_03]: But instead of let's go out and build that in a portfolio,
[00:30:09] [SPEAKER_03]: what metaphorically can that teach us about other things that we do?
[00:30:13] [SPEAKER_03]: And like a big part of that in the understanding of that in the paper is
[00:30:16] [SPEAKER_03]: like, well, yeah, like how many people, how many clients have I worked
[00:30:19] [SPEAKER_03]: with or the parents where they made what would be considered boring,
[00:30:23] [SPEAKER_03]: less growthy, low beta investments today that they just
[00:30:26] [SPEAKER_03]: dollar cost averaged into for years if not decades.
[00:30:29] [SPEAKER_03]: And that turned into enormous gobs of money because when you
[00:30:32] [SPEAKER_03]: start buying, I don't know, McDonald's at pennies on the
[00:30:35] [SPEAKER_03]: dollar, you know, years and years ago and you just hold on
[00:30:38] [SPEAKER_03]: and keep reinvesting money and dividends going down to your
[00:30:40] [SPEAKER_03]: broker once a week on payday, like amazing things can happen.
[00:30:45] [SPEAKER_03]: And so it's a great validation of ways boring stuff can win over time
[00:30:50] [SPEAKER_03]: or the ways looking different from a benchmark can actually win
[00:30:53] [SPEAKER_03]: over time. So long as there is some intelligent thought
[00:30:55] [SPEAKER_03]: process to go behind it.
[00:30:57] [SPEAKER_03]: It doesn't mean just because we can identify it with science
[00:31:01] [SPEAKER_03]: or with math that it means it's a good idea that you
[00:31:04] [SPEAKER_03]: should go out and steal from or implement.
[00:31:07] [SPEAKER_03]: Alpha is one of those things that gets revealed as an
[00:31:09] [SPEAKER_03]: explanation later over time.
[00:31:10] [SPEAKER_03]: And then frequently, if it's a really good idea, it's going to
[00:31:13] [SPEAKER_03]: get arbed away.
[00:31:14] [SPEAKER_01]: Just as a side before we move on, what was also interesting
[00:31:16] [SPEAKER_01]: about that paper is Lynch, like he was the one person they
[00:31:19] [SPEAKER_01]: could not explain, like they couldn't they couldn't come up
[00:31:21] [SPEAKER_01]: with a factor explanation for Lynch.
[00:31:22] [SPEAKER_01]: So like what he was doing or who knows?
[00:31:24] [SPEAKER_01]: But I mean, he was obviously a very, very good stock picker.
[00:31:26] [SPEAKER_01]: But it was interesting that like Lynch, there were no
[00:31:28] [SPEAKER_01]: factors that really explained what he did.
[00:31:30] [SPEAKER_03]: And what's cool about so we're talking about Peter Lynch,
[00:31:32] [SPEAKER_03]: right? We're talking about what, uh, what was the name
[00:31:35] [SPEAKER_03]: of the Peter Lynch book that everybody read up on Wall Street,
[00:31:38] [SPEAKER_03]: one up on Wall Street.
[00:31:39] [SPEAKER_03]: So this idea of like buy what you know and Peter Lynch basically
[00:31:45] [SPEAKER_03]: wove a version of growth investing in all these different
[00:31:48] [SPEAKER_03]: people in a much different era from Buffett or at least
[00:31:50] [SPEAKER_03]: Buffett's start where it was buy what you know.
[00:31:53] [SPEAKER_03]: So it's like, oh, your kids like go into this place.
[00:31:56] [SPEAKER_03]: Like maybe that has a place in the portfolio because
[00:31:58] [SPEAKER_03]: you have some version of like market research.
[00:32:01] [SPEAKER_03]: If you combine the analysis of thinking about the
[00:32:04] [SPEAKER_03]: company with some things that you know, you can find these
[00:32:06] [SPEAKER_03]: results. That's a totally valid and totally different style of
[00:32:10] [SPEAKER_03]: investing. And guess what? Because it's kind of
[00:32:12] [SPEAKER_03]: scatter minded. There's not a whole lot of ways to pin this
[00:32:15] [SPEAKER_03]: together and say, this is what's going to work.
[00:32:17] [SPEAKER_03]: This guarantees hits.
[00:32:19] [SPEAKER_03]: I love that you brought up that footnote to the paper
[00:32:21] [SPEAKER_03]: because I think that's another really important takeaway that
[00:32:23] [SPEAKER_03]: just reminds you of the idiosyncrasies of coming up
[00:32:27] [SPEAKER_03]: with investment strategies that can have market beating
[00:32:29] [SPEAKER_03]: returns.
[00:32:30] [SPEAKER_01]: So moving on to our next one.
[00:32:31] [SPEAKER_01]: This is what we see all the time, which is the misconception
[00:32:34] [SPEAKER_01]: I have as the factor investing is good for stockpicking.
[00:32:37] [SPEAKER_01]: And I have to explain that a little bit more because one of
[00:32:39] [SPEAKER_01]: the things that factors do is they work on average.
[00:32:43] [SPEAKER_01]: So you build a diversified portfolio with a group of
[00:32:46] [SPEAKER_01]: stocks with exposure to that factor and you hope over time
[00:32:50] [SPEAKER_01]: you're going to do well with that.
[00:32:51] [SPEAKER_01]: Well, what you see a lot of the times with clients is
[00:32:53] [SPEAKER_01]: they'll say, well, you've got these 20 stocks of the
[00:32:55] [SPEAKER_01]: exposure to this factor, these 50 stocks or whatever
[00:32:57] [SPEAKER_01]: they are. Well, maybe I should just buy the three that
[00:33:00] [SPEAKER_01]: the highest score.
[00:33:01] [SPEAKER_01]: Like why would I have all these other ones when the highest
[00:33:02] [SPEAKER_01]: score according to your factor system is these three?
[00:33:05] [SPEAKER_01]: And that's not the way it works.
[00:33:06] [SPEAKER_01]: You know, when you see you do see when you deal with
[00:33:08] [SPEAKER_01]: desiles with factors like the top 10% outperform the next
[00:33:11] [SPEAKER_01]: one. But when you start to get granular in terms of
[00:33:14] [SPEAKER_01]: every individual stock, it doesn't work that way.
[00:33:16] [SPEAKER_01]: Like when we look back at our portfolios, like
[00:33:18] [SPEAKER_01]: through the top three outperform the top 20, not
[00:33:20] [SPEAKER_01]: really. You know, you're trying to get that diversified
[00:33:23] [SPEAKER_01]: exposure to factor and just because you know, if you're
[00:33:25] [SPEAKER_01]: looking at value, just because this is the absolute
[00:33:27] [SPEAKER_01]: cheapest stock or this has the absolute most momentum
[00:33:29] [SPEAKER_01]: doesn't mean it's going to outperform the one that has
[00:33:31] [SPEAKER_01]: the 50th. That's not the way it works.
[00:33:33] [SPEAKER_01]: You're trying to get exposure diversified across a broad
[00:33:36] [SPEAKER_01]: group of stocks to give you exposure to the factor.
[00:33:39] [SPEAKER_03]: You'll see a lot of this too in the academic literature
[00:33:42] [SPEAKER_03]: around this. This is something I learned from a
[00:33:44] [SPEAKER_03]: Sovieta subramanian years ago, but I've seen other
[00:33:46] [SPEAKER_03]: people do this too where you'll see people within
[00:33:49] [SPEAKER_03]: those factor strategies kind of like cut the tails
[00:33:51] [SPEAKER_03]: off and they'll say stuff gets weird in that first
[00:33:55] [SPEAKER_03]: decisal, that tenth decisal or that top quintile
[00:33:57] [SPEAKER_03]: that bottom quintile or whatever else and say
[00:33:59] [SPEAKER_03]: maybe temper your thinking around this stuff
[00:34:02] [SPEAKER_03]: because you don't just want to own the top three.
[00:34:04] [SPEAKER_03]: They might be there for a weird reason, especially
[00:34:06] [SPEAKER_03]: from running a quantitative screen and that might
[00:34:08] [SPEAKER_03]: be worth worth avoiding.
[00:34:10] [SPEAKER_03]: There were a number of strategies that got
[00:34:12] [SPEAKER_03]: improved by just cutting those tails off
[00:34:14] [SPEAKER_03]: and looking a little bit more clustered because
[00:34:17] [SPEAKER_03]: sometimes it's that thing that you're catching
[00:34:18] [SPEAKER_03]: like on the upswing through the ropes or
[00:34:20] [SPEAKER_03]: or on the downswing through it where you kind
[00:34:22] [SPEAKER_03]: of want to filter it out when it's already
[00:34:24] [SPEAKER_03]: landing at the extremes of the thing.
[00:34:27] [SPEAKER_03]: Do you remember the Greenblatt Magic Formula
[00:34:29] [SPEAKER_03]: website and that whole thing with I think he
[00:34:31] [SPEAKER_03]: shut it down over this? Do you remember this?
[00:34:33] [SPEAKER_01]: Yeah, I do remember. Yeah.
[00:34:35] [SPEAKER_01]: Yeah, does the portfolios they were self managed
[00:34:36] [SPEAKER_01]: versus the one? Yeah, I remember that.
[00:34:38] [SPEAKER_03]: So one of the big things.
[00:34:40] [SPEAKER_03]: So I mean Greenblatt writes the magic
[00:34:42] [SPEAKER_03]: the magic formula, which is still an
[00:34:45] [SPEAKER_03]: outstanding book and still a great logical
[00:34:47] [SPEAKER_03]: exercise to learn about this stuff and kind
[00:34:50] [SPEAKER_03]: of honestly be in between.
[00:34:52] [SPEAKER_03]: I always thought of that as sort of in between
[00:34:53] [SPEAKER_03]: a Buffett and a Lynch approach
[00:34:56] [SPEAKER_03]: and tremendously useful because it also
[00:34:57] [SPEAKER_03]: teaches you how to stack to related
[00:35:00] [SPEAKER_03]: but not the same factors together in a concept.
[00:35:03] [SPEAKER_03]: When they made the website for screening
[00:35:06] [SPEAKER_03]: based on a kind of magic formula approach,
[00:35:08] [SPEAKER_03]: they had these correct me if I'm wrong,
[00:35:10] [SPEAKER_03]: like the investors can make their own
[00:35:11] [SPEAKER_03]: portfolios versus the algorithmically
[00:35:13] [SPEAKER_03]: assembled portfolios.
[00:35:15] [SPEAKER_03]: People wanted to just make their own
[00:35:17] [SPEAKER_03]: and thought they would do better
[00:35:18] [SPEAKER_03]: pretty much constantly.
[00:35:20] [SPEAKER_03]: They did worse.
[00:35:21] [SPEAKER_03]: And that was you just couldn't cherry
[00:35:23] [SPEAKER_03]: pick the stuff out of the data and do
[00:35:24] [SPEAKER_03]: better than the simple algorithm.
[00:35:27] [SPEAKER_01]: Yeah, and that's that's for two reasons.
[00:35:29] [SPEAKER_01]: One because the top the absolute top
[00:35:30] [SPEAKER_01]: stocks are not necessarily better.
[00:35:32] [SPEAKER_01]: And then the second because of what
[00:35:33] [SPEAKER_01]: we're going to get into here in a second,
[00:35:34] [SPEAKER_01]: which is emotion, you know, when you
[00:35:37] [SPEAKER_01]: start making your putting your own
[00:35:38] [SPEAKER_01]: decision making into these factor
[00:35:39] [SPEAKER_01]: strategies, it becomes much, much more
[00:35:42] [SPEAKER_01]: difficult and that gets into our next
[00:35:43] [SPEAKER_01]: one, which is that the biggest key
[00:35:45] [SPEAKER_01]: to the performance of a factor
[00:35:46] [SPEAKER_01]: strategy is the strategy itself.
[00:35:47] [SPEAKER_01]: And it's not on the biggest key
[00:35:50] [SPEAKER_01]: to the performance of a factor strategy
[00:35:51] [SPEAKER_01]: is the person that uses it 100 percent.
[00:35:53] [SPEAKER_01]: Like I can I can test all I want in my
[00:35:55] [SPEAKER_01]: spreadsheet and I can say, well, you
[00:35:56] [SPEAKER_01]: get a little bit better return here.
[00:35:58] [SPEAKER_01]: You get, you know, whatever it is, I
[00:35:59] [SPEAKER_01]: can run those stats all day, but you've
[00:36:01] [SPEAKER_01]: got to believe in it and you've got
[00:36:02] [SPEAKER_01]: to stick with it.
[00:36:03] [SPEAKER_01]: And a strategy with a little bit worse
[00:36:04] [SPEAKER_01]: performance that you believe in is
[00:36:06] [SPEAKER_01]: pretty much always going to be better
[00:36:07] [SPEAKER_01]: than one that's a little bit better
[00:36:08] [SPEAKER_01]: performance that you don't believe in
[00:36:10] [SPEAKER_01]: or that's too volatile for you or
[00:36:11] [SPEAKER_01]: whatever it is.
[00:36:12] [SPEAKER_01]: So that's so important to keep in
[00:36:13] [SPEAKER_01]: mind because everybody wants to
[00:36:15] [SPEAKER_01]: make, you know, analyze these things
[00:36:17] [SPEAKER_01]: in all kinds of depth, these factor
[00:36:19] [SPEAKER_01]: strategies and every risk stat about
[00:36:20] [SPEAKER_01]: them and all that stuff.
[00:36:21] [SPEAKER_01]: But at the end of the day, it's got
[00:36:23] [SPEAKER_01]: to be do I believe in this thing?
[00:36:24] [SPEAKER_01]: Can I stick with this thing in my
[00:36:25] [SPEAKER_01]: portfolio?
[00:36:28] [SPEAKER_03]: This goes back to the concept we
[00:36:30] [SPEAKER_03]: were talking about the very beginning
[00:36:31] [SPEAKER_03]: of this conversation of it's one
[00:36:32] [SPEAKER_03]: thing to have the academic data
[00:36:34] [SPEAKER_03]: and the regression analysis that
[00:36:35] [SPEAKER_03]: explains the thing to you.
[00:36:36] [SPEAKER_03]: It's another thing to build the
[00:36:38] [SPEAKER_03]: vehicle that's going to execute
[00:36:40] [SPEAKER_03]: on the theory.
[00:36:41] [SPEAKER_03]: And then yet another thing, a third
[00:36:43] [SPEAKER_03]: thing to be the end investor
[00:36:45] [SPEAKER_03]: who's going to own the vehicle
[00:36:46] [SPEAKER_03]: that's going to execute on the
[00:36:48] [SPEAKER_03]: academic strategy or on the idea
[00:36:50] [SPEAKER_03]: itself.
[00:36:51] [SPEAKER_03]: The behavior creeps into those
[00:36:54] [SPEAKER_03]: that second and third layer in a
[00:36:55] [SPEAKER_03]: meaningful way, both in
[00:36:57] [SPEAKER_03]: if I'm the professional manager of
[00:36:59] [SPEAKER_03]: the money, what things are going to
[00:37:00] [SPEAKER_03]: creep into my own biases and
[00:37:02] [SPEAKER_03]: tendencies to go, oh, I think the
[00:37:03] [SPEAKER_03]: model is wrong.
[00:37:04] [SPEAKER_03]: That's the first layer.
[00:37:05] [SPEAKER_03]: But the second layer for the end
[00:37:07] [SPEAKER_03]: investor is is the vehicle going
[00:37:08] [SPEAKER_03]: to do what I actually think it's
[00:37:10] [SPEAKER_03]: going to do and can I stick to
[00:37:11] [SPEAKER_03]: it? I'll say it a million times
[00:37:13] [SPEAKER_03]: and it's another greenbladism.
[00:37:15] [SPEAKER_03]: But it's the if you don't like
[00:37:16] [SPEAKER_03]: broccoli, maybe don't do the all
[00:37:18] [SPEAKER_03]: broccoli diet.
[00:37:19] [SPEAKER_03]: There's a lot of diets out there.
[00:37:20] [SPEAKER_03]: Pick something if you that you
[00:37:22] [SPEAKER_03]: don't hate to try to give you the
[00:37:23] [SPEAKER_03]: best odds of sticking to the
[00:37:25] [SPEAKER_03]: strategy. The minute you make it
[00:37:26] [SPEAKER_03]: something you hate in the strategy,
[00:37:27] [SPEAKER_03]: the minute you show up at Jack's
[00:37:30] [SPEAKER_03]: you know, barbecue in the backyard
[00:37:31] [SPEAKER_03]: and it's all cantaloupe and he
[00:37:33] [SPEAKER_03]: flips the tray over and tells you
[00:37:34] [SPEAKER_03]: to get out and get the hell out
[00:37:36] [SPEAKER_03]: of here. You've already lost.
[00:37:38] [SPEAKER_03]: You got to know yourself first.
[00:37:39] [SPEAKER_03]: You got to know who you're
[00:37:40] [SPEAKER_03]: serving first.
[00:37:41] [SPEAKER_03]: It's an important lesson over and
[00:37:42] [SPEAKER_03]: over again.
[00:37:43] [SPEAKER_01]: I always look at this continuum
[00:37:44] [SPEAKER_01]: of like an index investor to a
[00:37:45] [SPEAKER_01]: crazy focused factor investor and
[00:37:47] [SPEAKER_01]: where you fall on that continuum is
[00:37:49] [SPEAKER_01]: the most important thing.
[00:37:50] [SPEAKER_01]: Like a lot of people should be
[00:37:51] [SPEAKER_01]: index investors because even
[00:37:52] [SPEAKER_01]: small deviations from the market
[00:37:54] [SPEAKER_01]: in their portfolio lead to them
[00:37:55] [SPEAKER_01]: making bad decisions.
[00:37:56] [SPEAKER_01]: So those people should be index
[00:37:57] [SPEAKER_01]: investors. Then you've got the
[00:37:59] [SPEAKER_01]: people who have more broad
[00:38:00] [SPEAKER_01]: exposure to factors.
[00:38:01] [SPEAKER_01]: They can deal with a little bit
[00:38:02] [SPEAKER_01]: or they can size it small,
[00:38:03] [SPEAKER_01]: whatever it is, they can deal
[00:38:05] [SPEAKER_01]: with that. They should have,
[00:38:06] [SPEAKER_01]: you know, small factor
[00:38:07] [SPEAKER_01]: exposures. Then you have the
[00:38:09] [SPEAKER_01]: people and I'm one of these
[00:38:10] [SPEAKER_01]: people who could sit here and
[00:38:11] [SPEAKER_01]: in these focus factor
[00:38:12] [SPEAKER_01]: strategies and not do anything
[00:38:13] [SPEAKER_01]: regardless of what period of
[00:38:15] [SPEAKER_01]: underperformance you see.
[00:38:16] [SPEAKER_01]: But that is the exception by
[00:38:18] [SPEAKER_01]: far for your average investor.
[00:38:20] [SPEAKER_01]: So it's just important to figure
[00:38:21] [SPEAKER_01]: out where you are on this and
[00:38:23] [SPEAKER_01]: going back to our discussion
[00:38:23] [SPEAKER_01]: earlier, like sizing is so
[00:38:25] [SPEAKER_01]: important here.
[00:38:26] [SPEAKER_01]: Like it doesn't mean you can't
[00:38:27] [SPEAKER_01]: use the focus factor strategy.
[00:38:29] [SPEAKER_01]: It just means the focus factor
[00:38:30] [SPEAKER_01]: strategy might have to be size
[00:38:31] [SPEAKER_01]: really small if you're
[00:38:31] [SPEAKER_01]: somebody who can't deal with
[00:38:32] [SPEAKER_01]: those goes ups and downs.
[00:38:34] [SPEAKER_01]: So just getting yourself in
[00:38:35] [SPEAKER_01]: that right place where I know
[00:38:36] [SPEAKER_01]: going back to that chart of
[00:38:38] [SPEAKER_01]: those periods of under
[00:38:39] [SPEAKER_01]: performance, I know that if I
[00:38:40] [SPEAKER_01]: see those periods of
[00:38:41] [SPEAKER_01]: underperformance, I'm not going
[00:38:41] [SPEAKER_01]: to do anything.
[00:38:43] [SPEAKER_01]: It's so so important.
[00:38:44] [SPEAKER_01]: I love that it's like index
[00:38:46] [SPEAKER_03]: and focused is the corollary
[00:38:49] [SPEAKER_03]: to basically, you know, sane
[00:38:53] [SPEAKER_03]: versus batch it crazy,
[00:38:55] [SPEAKER_01]: which is me.
[00:38:56] [SPEAKER_01]: I am for these things, but
[00:38:57] [SPEAKER_01]: it's not most people.
[00:38:59] [SPEAKER_03]: Well, I'm glad that you're
[00:39:00] [SPEAKER_03]: willing to look at it that way.
[00:39:01] [SPEAKER_03]: And I totally get it too.
[00:39:02] [SPEAKER_03]: And this is where I go back
[00:39:04] [SPEAKER_03]: over and over again.
[00:39:05] [SPEAKER_03]: For most people, this is
[00:39:06] [SPEAKER_03]: where it's it's OK to sin a
[00:39:08] [SPEAKER_03]: little. It's OK to figure
[00:39:09] [SPEAKER_03]: out what are the things that
[00:39:10] [SPEAKER_03]: scratch the intellectual itch
[00:39:12] [SPEAKER_03]: of the other thing that's
[00:39:13] [SPEAKER_03]: pulling me and my curiosity and
[00:39:14] [SPEAKER_03]: my interests into this.
[00:39:15] [SPEAKER_03]: How do I do that in a way that
[00:39:17] [SPEAKER_03]: doesn't blow me up the rest of
[00:39:18] [SPEAKER_03]: the way? Because let's face it,
[00:39:19] [SPEAKER_03]: it's just it's just really
[00:39:21] [SPEAKER_03]: hard. Investing is really hard
[00:39:23] [SPEAKER_03]: to do better than those
[00:39:25] [SPEAKER_03]: those sane index
[00:39:27] [SPEAKER_03]: broad market strategies.
[00:39:29] [SPEAKER_03]: So you got to know why you're
[00:39:29] [SPEAKER_03]: doing it if you're going to do
[00:39:30] [SPEAKER_03]: it at all.
[00:39:31] [SPEAKER_01]: So my next one was the past
[00:39:33] [SPEAKER_01]: is always predicted the future.
[00:39:34] [SPEAKER_01]: And what I was getting at
[00:39:35] [SPEAKER_01]: with this is like, I think
[00:39:36] [SPEAKER_01]: and I just talked as did put
[00:39:38] [SPEAKER_01]: an episode out today, I did
[00:39:38] [SPEAKER_01]: with Andy Constan.
[00:39:39] [SPEAKER_01]: And we talked about this, I
[00:39:41] [SPEAKER_01]: think at all areas of
[00:39:42] [SPEAKER_01]: investing, thinking and
[00:39:43] [SPEAKER_01]: probabilities is really important.
[00:39:45] [SPEAKER_01]: And so I am a huge believer
[00:39:47] [SPEAKER_01]: in these factors. I'm a huge
[00:39:48] [SPEAKER_01]: believer that they're going to
[00:39:49] [SPEAKER_01]: work over the long term.
[00:39:50] [SPEAKER_01]: I'm a huge believer that their
[00:39:51] [SPEAKER_01]: struggles in recent years are
[00:39:52] [SPEAKER_01]: part of that and they're going
[00:39:53] [SPEAKER_01]: to continue to outperform.
[00:39:54] [SPEAKER_01]: It doesn't mean you don't
[00:39:54] [SPEAKER_01]: evolve them, which we'll talk
[00:39:55] [SPEAKER_01]: about. But it does mean like
[00:39:56] [SPEAKER_01]: the core of this idea of a
[00:39:58] [SPEAKER_01]: big believer in.
[00:39:59] [SPEAKER_01]: But having said that, are
[00:40:01] [SPEAKER_01]: the odds that these factor
[00:40:02] [SPEAKER_01]: strategies are going to
[00:40:03] [SPEAKER_01]: outperform the S&P over the
[00:40:04] [SPEAKER_01]: next 50 years, 100
[00:40:05] [SPEAKER_01]: percent? No, they're not.
[00:40:07] [SPEAKER_01]: The odds almost anything in
[00:40:08] [SPEAKER_01]: investing being 100 percent
[00:40:09] [SPEAKER_01]: are very low. So you have
[00:40:11] [SPEAKER_01]: to think about that there
[00:40:12] [SPEAKER_01]: is always odds on the other
[00:40:13] [SPEAKER_01]: side of anything I'm doing.
[00:40:15] [SPEAKER_01]: If I'm making a bet on factor
[00:40:16] [SPEAKER_01]: investing, I'm making a bet
[00:40:17] [SPEAKER_01]: that I think there's a high
[00:40:18] [SPEAKER_01]: probability that if I invest
[00:40:19] [SPEAKER_01]: in these types of stocks, you
[00:40:21] [SPEAKER_01]: know, 30 years from now, I'm
[00:40:22] [SPEAKER_01]: going to be pretty happy I did
[00:40:23] [SPEAKER_01]: it. But that doesn't mean I
[00:40:24] [SPEAKER_01]: can't be wrong. I could be
[00:40:26] [SPEAKER_01]: wrong. I mean, over 30 years
[00:40:27] [SPEAKER_01]: these things could
[00:40:28] [SPEAKER_01]: underperform it. It's
[00:40:28] [SPEAKER_01]: possible. And so I just think
[00:40:30] [SPEAKER_01]: it's important to keep it in
[00:40:31] [SPEAKER_01]: that context, no matter what
[00:40:32] [SPEAKER_01]: in this school, this applies
[00:40:33] [SPEAKER_01]: to anything. If I'm making
[00:40:34] [SPEAKER_01]: a better an active manager,
[00:40:35] [SPEAKER_01]: if I'm making a bet on
[00:40:36] [SPEAKER_01]: anything, if I'm making a
[00:40:37] [SPEAKER_01]: bet of stocks relative to
[00:40:38] [SPEAKER_01]: bonds, I mean, all these
[00:40:40] [SPEAKER_01]: types of things, you have the
[00:40:41] [SPEAKER_01]: odds in your favor. If you
[00:40:42] [SPEAKER_01]: know what those odds are, that's
[00:40:44] [SPEAKER_01]: good. But the other side of
[00:40:45] [SPEAKER_01]: those odds can come up
[00:40:46] [SPEAKER_01]: sometimes it's just part of
[00:40:47] [SPEAKER_01]: the reality of it's what risk
[00:40:49] [SPEAKER_01]: is, you know, risk is this
[00:40:50] [SPEAKER_01]: thing that I think is going to
[00:40:51] [SPEAKER_01]: work out might not work out.
[00:40:54] [SPEAKER_03]: So I fell down this rabbit
[00:40:55] [SPEAKER_03]: hole, which is this is just
[00:40:58] [SPEAKER_03]: you'll appreciate this
[00:40:59] [SPEAKER_03]: rabbit hole. I can share this
[00:41:00] [SPEAKER_03]: with you everybody else
[00:41:01] [SPEAKER_03]: listening. This is just not
[00:41:02] [SPEAKER_03]: talking to Jeff. I fell
[00:41:03] [SPEAKER_03]: down this rabbit hole because
[00:41:05] [SPEAKER_03]: I was trying to remember
[00:41:07] [SPEAKER_03]: I knew there was a
[00:41:08] [SPEAKER_03]: difference. And this is an
[00:41:10] [SPEAKER_03]: example of like the words
[00:41:11] [SPEAKER_03]: I went down this rabbit hole
[00:41:12] [SPEAKER_03]: because of this podcast that I
[00:41:14] [SPEAKER_03]: released, where the term came
[00:41:17] [SPEAKER_03]: up and it came from a
[00:41:17] [SPEAKER_03]: marketing person interest
[00:41:18] [SPEAKER_03]: term goodwill as it relates to
[00:41:21] [SPEAKER_03]: badwill. And they're talking
[00:41:22] [SPEAKER_03]: about relationships between
[00:41:23] [SPEAKER_03]: brands and individuals or
[00:41:24] [SPEAKER_03]: people and companies or
[00:41:25] [SPEAKER_03]: professionals that they
[00:41:26] [SPEAKER_03]: engage with. And I was like
[00:41:28] [SPEAKER_03]: bad was really interesting.
[00:41:29] [SPEAKER_03]: I was like, but goodwill
[00:41:30] [SPEAKER_03]: when we think about goodwill
[00:41:31] [SPEAKER_03]: has actually changed a lot
[00:41:32] [SPEAKER_03]: over time. So I fell down
[00:41:34] [SPEAKER_03]: this rabbit hole with a I
[00:41:36] [SPEAKER_03]: think it was in on the
[00:41:37] [SPEAKER_03]: Deloitte website or somewhere
[00:41:38] [SPEAKER_03]: where they actually had like
[00:41:39] [SPEAKER_03]: the history of goodwill
[00:41:40] [SPEAKER_03]: impairments. And this is what
[00:41:42] [SPEAKER_03]: I was really looking for was
[00:41:43] [SPEAKER_03]: accounting standards. When
[00:41:45] [SPEAKER_03]: your definition includes
[00:41:47] [SPEAKER_03]: things like goodwill and
[00:41:48] [SPEAKER_03]: goodwill as an asset, do you
[00:41:49] [SPEAKER_03]: remember this at all? Is
[00:41:50] [SPEAKER_03]: this like a hazy memory of
[00:41:51] [SPEAKER_03]: how like goodwill has been
[00:41:52] [SPEAKER_03]: accounted for over like the
[00:41:54] [SPEAKER_03]: decades? Because this is a
[00:41:55] [SPEAKER_03]: prime example of what makes
[00:41:56] [SPEAKER_03]: things like value investing
[00:41:57] [SPEAKER_03]: so frigging hard. Yeah, yeah,
[00:42:00] [SPEAKER_03]: no, I saw this. You
[00:42:01] [SPEAKER_03]: probably have more than me
[00:42:01] [SPEAKER_03]: though. Again, this is
[00:42:03] [SPEAKER_03]: not this is go to the
[00:42:04] [SPEAKER_03]: Deloitte website, look this
[00:42:05] [SPEAKER_03]: up for yourself. But this
[00:42:06] [SPEAKER_03]: is just an interesting
[00:42:06] [SPEAKER_03]: rabbit hole to think about
[00:42:07] [SPEAKER_03]: even the words we use change
[00:42:09] [SPEAKER_03]: over time and then mean
[00:42:11] [SPEAKER_03]: different things to different
[00:42:11] [SPEAKER_03]: people. So in the 70s, they
[00:42:13] [SPEAKER_03]: introduced goodwill and say
[00:42:15] [SPEAKER_03]: if in an acquisition, you
[00:42:16] [SPEAKER_03]: mark the price up and you
[00:42:17] [SPEAKER_03]: can't account for it as
[00:42:18] [SPEAKER_03]: something, you're going to
[00:42:19] [SPEAKER_03]: count that thing as good
[00:42:20] [SPEAKER_03]: well, I'm grossly grossly
[00:42:22] [SPEAKER_03]: oversimplifying this. And
[00:42:23] [SPEAKER_03]: then you're gonna have to
[00:42:24] [SPEAKER_03]: amortize that thing for
[00:42:26] [SPEAKER_03]: the next no more than I
[00:42:27] [SPEAKER_03]: think it was like 40 years
[00:42:28] [SPEAKER_03]: or something like that. So
[00:42:30] [SPEAKER_03]: businesses would be carrying
[00:42:31] [SPEAKER_03]: an asset, a line item on
[00:42:33] [SPEAKER_03]: the balance sheet that was
[00:42:34] [SPEAKER_03]: marked as goodwill that
[00:42:36] [SPEAKER_03]: they were going to slowly
[00:42:36] [SPEAKER_03]: like depreciate over this
[00:42:38] [SPEAKER_03]: period of time. But if you're
[00:42:39] [SPEAKER_03]: looking at book values, you're
[00:42:40] [SPEAKER_03]: looking at other things, you're
[00:42:41] [SPEAKER_03]: trying to calculate it up, you'd
[00:42:43] [SPEAKER_03]: be looking at the acquisitions
[00:42:44] [SPEAKER_03]: of these businesses and you'd
[00:42:45] [SPEAKER_03]: have this goodwill thing
[00:42:46] [SPEAKER_03]: that's kind of made up
[00:42:47] [SPEAKER_03]: number at the end of the day.
[00:42:49] [SPEAKER_03]: Well, what brought the
[00:42:51] [SPEAKER_03]: assessments of goodwill to
[00:42:53] [SPEAKER_03]: a screeching hall? Do you
[00:42:54] [SPEAKER_03]: remember what lovely global
[00:42:56] [SPEAKER_03]: event did that? I don't say
[00:42:57] [SPEAKER_03]: the first time, but really
[00:42:59] [SPEAKER_03]: finally got the FASB to
[00:43:00] [SPEAKER_03]: change it. So in the tech
[00:43:02] [SPEAKER_03]: bubble, you might remember
[00:43:03] [SPEAKER_03]: companies were buying things
[00:43:05] [SPEAKER_03]: and maybe a shredsing
[00:43:07] [SPEAKER_03]: the amounts of goodwill that
[00:43:08] [SPEAKER_03]: they're willing to play.
[00:43:10] [SPEAKER_03]: Slightly, we're not
[00:43:11] [SPEAKER_03]: casting any disperse.
[00:43:13] [SPEAKER_03]: So the FASB is to come in
[00:43:15] [SPEAKER_03]: and they have to go, we can't
[00:43:16] [SPEAKER_03]: think of goodwill the way we
[00:43:17] [SPEAKER_03]: thought about it in the 70s
[00:43:18] [SPEAKER_03]: because in the 70s there weren't
[00:43:19] [SPEAKER_03]: internet stocks and things
[00:43:21] [SPEAKER_03]: like that. There's a massive
[00:43:22] [SPEAKER_03]: overhaul that gets updated
[00:43:24] [SPEAKER_03]: again. I can't remember, but
[00:43:25] [SPEAKER_03]: like post financial crisis,
[00:43:27] [SPEAKER_03]: same thing where you have to
[00:43:28] [SPEAKER_03]: change the rules for how you
[00:43:29] [SPEAKER_03]: address impairment. Are you
[00:43:30] [SPEAKER_03]: going to comment on it once
[00:43:32] [SPEAKER_03]: a year? I think that was
[00:43:33] [SPEAKER_03]: a 2001 adjustment and
[00:43:35] [SPEAKER_03]: 2011. Again, post financial
[00:43:37] [SPEAKER_03]: crisis, they have to think about
[00:43:38] [SPEAKER_03]: this stuff again. And
[00:43:41] [SPEAKER_03]: the lesson is if you're a value
[00:43:42] [SPEAKER_03]: investor and you're thinking
[00:43:43] [SPEAKER_03]: about something, you're going
[00:43:45] [SPEAKER_03]: to look how this worked over
[00:43:45] [SPEAKER_03]: time. Look how this works when
[00:43:47] [SPEAKER_03]: I think about this purely
[00:43:48] [SPEAKER_03]: mathematically. Look how this
[00:43:49] [SPEAKER_03]: works if I think I can set
[00:43:51] [SPEAKER_03]: to it. You got to think
[00:43:53] [SPEAKER_03]: about stuff like this that
[00:43:54] [SPEAKER_03]: manually has changed in the
[00:43:55] [SPEAKER_03]: calculation over time because
[00:43:57] [SPEAKER_03]: what you're calling something
[00:43:58] [SPEAKER_03]: today is not what somebody
[00:43:59] [SPEAKER_03]: called something 30 years ago
[00:44:00] [SPEAKER_03]: and you're dependent on other
[00:44:02] [SPEAKER_03]: people agreeing with you.
[00:44:03] [SPEAKER_03]: I'm in this conversation with
[00:44:05] [SPEAKER_03]: a musician and a marketing
[00:44:06] [SPEAKER_03]: person, and they're giving me
[00:44:07] [SPEAKER_03]: a definition of a word that
[00:44:09] [SPEAKER_03]: is totally separate and apart
[00:44:10] [SPEAKER_03]: for what the accountants would
[00:44:12] [SPEAKER_03]: think of it as. So we think
[00:44:13] [SPEAKER_03]: about what how we look at the
[00:44:15] [SPEAKER_03]: past data and how we look at
[00:44:17] [SPEAKER_03]: the who's going to arb this
[00:44:18] [SPEAKER_03]: thing out and bring me back
[00:44:20] [SPEAKER_03]: to reality. There is a mess
[00:44:22] [SPEAKER_03]: under the here. It's just
[00:44:24] [SPEAKER_03]: another level of what makes
[00:44:26] [SPEAKER_03]: it so hard.
[00:44:27] [SPEAKER_01]: This is a great segue into our
[00:44:28] [SPEAKER_01]: next one, by the way, which
[00:44:29] [SPEAKER_01]: is the fact of strategies or
[00:44:30] [SPEAKER_01]: set it and forget it because
[00:44:31] [SPEAKER_01]: just because you people
[00:44:34] [SPEAKER_01]: think all the time, I have to
[00:44:35] [SPEAKER_01]: you know, I want to stick with
[00:44:36] [SPEAKER_01]: my strategy. I want to stick
[00:44:38] [SPEAKER_01]: with it for the long term.
[00:44:39] [SPEAKER_01]: So they think that also means
[00:44:40] [SPEAKER_01]: I shouldn't change it.
[00:44:41] [SPEAKER_01]: You know, I should just I have
[00:44:42] [SPEAKER_01]: this thing I believe in.
[00:44:43] [SPEAKER_01]: I should just invest that way.
[00:44:45] [SPEAKER_01]: You know, I should use the
[00:44:45] [SPEAKER_01]: price to book ratio no matter
[00:44:46] [SPEAKER_01]: what and no matter what facts
[00:44:48] [SPEAKER_01]: I see like I'm going to
[00:44:49] [SPEAKER_01]: eventually be rewarded for using
[00:44:50] [SPEAKER_01]: the price to book ratio and
[00:44:51] [SPEAKER_01]: we're picking on the price to
[00:44:52] [SPEAKER_01]: book ratio here. But this is
[00:44:53] [SPEAKER_01]: the idea like when you're
[00:44:55] [SPEAKER_01]: building these strategies, you
[00:44:56] [SPEAKER_01]: can't just say like this is
[00:44:58] [SPEAKER_01]: the way I do it and I'm
[00:44:59] [SPEAKER_01]: never changing. It's great to
[00:45:00] [SPEAKER_01]: stick with them for a long term.
[00:45:02] [SPEAKER_01]: But as you're sticking with them
[00:45:02] [SPEAKER_01]: for the long term, you're also
[00:45:03] [SPEAKER_01]: evolving them. You're also
[00:45:05] [SPEAKER_01]: saying, you know, does the price
[00:45:06] [SPEAKER_01]: to book make sense in a world
[00:45:08] [SPEAKER_01]: of Google? Does the price to
[00:45:09] [SPEAKER_01]: book make sense? And you know,
[00:45:11] [SPEAKER_01]: nobody would argue you want to
[00:45:12] [SPEAKER_01]: evaluate Google with the price
[00:45:14] [SPEAKER_01]: to book. It doesn't mean I got
[00:45:15] [SPEAKER_01]: to eliminate it completely from
[00:45:16] [SPEAKER_01]: what I'm doing. But it does
[00:45:17] [SPEAKER_01]: mean I have to say like facts
[00:45:19] [SPEAKER_01]: of change in the world as a
[00:45:21] [SPEAKER_01]: factor investor. Does this
[00:45:22] [SPEAKER_01]: factor I've been using?
[00:45:23] [SPEAKER_01]: Does it still make sense or
[00:45:25] [SPEAKER_01]: does it not make sense?
[00:45:26] [SPEAKER_01]: And if it does not make sense,
[00:45:27] [SPEAKER_01]: then maybe I want to change
[00:45:28] [SPEAKER_01]: my strategy and this is a
[00:45:29] [SPEAKER_01]: very, very hard thing to do,
[00:45:31] [SPEAKER_01]: which we're going to talk about
[00:45:31] [SPEAKER_01]: a little bit in our next point.
[00:45:32] [SPEAKER_01]: But you can't just say these
[00:45:34] [SPEAKER_01]: things are said and forget it.
[00:45:35] [SPEAKER_01]: Here's my factor. Call me in
[00:45:37] [SPEAKER_01]: 50 years. You know, I'm not
[00:45:38] [SPEAKER_01]: changing anything. That doesn't
[00:45:40] [SPEAKER_01]: work. You do have to evolve
[00:45:41] [SPEAKER_01]: these things over time as
[00:45:42] [SPEAKER_01]: things change in the market.
[00:45:44] [SPEAKER_01]: The set it and forget it
[00:45:45] [SPEAKER_03]: thing is it's kind of like,
[00:45:47] [SPEAKER_03]: I know I've said this here
[00:45:48] [SPEAKER_03]: a million times. It's to me
[00:45:50] [SPEAKER_03]: the myth of passive
[00:45:51] [SPEAKER_03]: investing. Like there's
[00:45:52] [SPEAKER_03]: even if you own a Vanguard
[00:45:53] [SPEAKER_03]: fund and you set it and
[00:45:54] [SPEAKER_03]: forget it for 50 years at
[00:45:55] [SPEAKER_03]: some point money has to go in
[00:45:57] [SPEAKER_03]: or money has to come out.
[00:45:58] [SPEAKER_03]: And that means you need
[00:45:59] [SPEAKER_03]: some understanding of the
[00:46:00] [SPEAKER_03]: logic or the ideas, the
[00:46:01] [SPEAKER_03]: philosophies around how stuff
[00:46:03] [SPEAKER_03]: comes in and out.
[00:46:04] [SPEAKER_03]: You can't just leave
[00:46:05] [SPEAKER_03]: something alone because
[00:46:07] [SPEAKER_03]: the example you just gave
[00:46:08] [SPEAKER_03]: of like Google and Goodwill.
[00:46:10] [SPEAKER_03]: There's a million of these
[00:46:11] [SPEAKER_03]: which are.
[00:46:13] [SPEAKER_03]: This is the way we think
[00:46:14] [SPEAKER_03]: something works at this
[00:46:15] [SPEAKER_03]: point in time, but either
[00:46:16] [SPEAKER_03]: the markets or your life
[00:46:18] [SPEAKER_03]: or something else is going to
[00:46:19] [SPEAKER_03]: change.
[00:46:20] [SPEAKER_03]: You should have some
[00:46:21] [SPEAKER_03]: robustness, some flexibility
[00:46:23] [SPEAKER_03]: built into your philosophy.
[00:46:25] [SPEAKER_03]: Otherwise, great
[00:46:26] [SPEAKER_03]: if you get lucky.
[00:46:27] [SPEAKER_03]: But if you get unlucky, it's
[00:46:29] [SPEAKER_03]: going to come back to bite you
[00:46:30] [SPEAKER_03]: and not in a pleasant way.
[00:46:32] [SPEAKER_01]: Yeah, this even applies to
[00:46:33] [SPEAKER_01]: market cap and I wouldn't.
[00:46:35] [SPEAKER_01]: I mean, this is not going to
[00:46:36] [SPEAKER_01]: happen in the real world.
[00:46:37] [SPEAKER_01]: But just to give an example,
[00:46:38] [SPEAKER_01]: like if we ever got to a point
[00:46:39] [SPEAKER_01]: where some of my green
[00:46:41] [SPEAKER_01]: stuff came true, we ever got
[00:46:42] [SPEAKER_01]: to a point where the largest
[00:46:42] [SPEAKER_01]: companies accounted for an
[00:46:44] [SPEAKER_01]: outrageous percentage of the
[00:46:45] [SPEAKER_01]: S&P 500.
[00:46:46] [SPEAKER_01]: You know, maybe my idea that
[00:46:47] [SPEAKER_01]: I have that my portfolio
[00:46:48] [SPEAKER_01]: should be completely indexed.
[00:46:50] [SPEAKER_01]: Maybe I have to evolve that
[00:46:51] [SPEAKER_01]: a little bit. Maybe I have
[00:46:52] [SPEAKER_01]: to have some other stuff in my
[00:46:53] [SPEAKER_01]: portfolio to counteract that
[00:46:54] [SPEAKER_01]: risk of those huge companies.
[00:46:56] [SPEAKER_01]: Anything with investing, you
[00:46:57] [SPEAKER_01]: know, you have to look at the
[00:46:58] [SPEAKER_01]: facts. You have to see what's
[00:47:00] [SPEAKER_01]: sitting in front of me today
[00:47:00] [SPEAKER_01]: and say, should I change what
[00:47:02] [SPEAKER_01]: I believe in? It's a hard thing
[00:47:03] [SPEAKER_01]: to do, but you've got to be
[00:47:04] [SPEAKER_01]: able to do it no matter what
[00:47:05] [SPEAKER_01]: you're doing.
[00:47:06] [SPEAKER_03]: You got to be able to do it.
[00:47:07] [SPEAKER_03]: That's why instead of market
[00:47:08] [SPEAKER_03]: cap, I use forehand cap
[00:47:10] [SPEAKER_03]: for all my valuation.
[00:47:12] [SPEAKER_01]: I don't even want to know
[00:47:13] [SPEAKER_01]: what that is.
[00:47:15] [SPEAKER_03]: But it's a rough one.
[00:47:17] [SPEAKER_03]: Steer name, get your head out
[00:47:18] [SPEAKER_03]: of anything else.
[00:47:20] [SPEAKER_01]: But getting into the next
[00:47:22] [SPEAKER_01]: one is this other idea
[00:47:23] [SPEAKER_01]: that it plays into the same
[00:47:24] [SPEAKER_01]: exact thing, which is the
[00:47:25] [SPEAKER_01]: factor investing is free
[00:47:25] [SPEAKER_01]: of emotion. And we've talked
[00:47:27] [SPEAKER_01]: about on the client side how
[00:47:28] [SPEAKER_01]: it's not free of emotion, because
[00:47:29] [SPEAKER_01]: you got to stick with these
[00:47:30] [SPEAKER_01]: things. But it's also not free
[00:47:31] [SPEAKER_01]: of emotion on my side.
[00:47:32] [SPEAKER_01]: Like I've got to build these
[00:47:33] [SPEAKER_01]: strategies. I have to make
[00:47:34] [SPEAKER_01]: decisions as to what's in the
[00:47:36] [SPEAKER_01]: strategy. I have to make
[00:47:37] [SPEAKER_01]: decisions as to whether to
[00:47:38] [SPEAKER_01]: change the strategy.
[00:47:39] [SPEAKER_01]: I am dealing with all the
[00:47:40] [SPEAKER_01]: emotional things that are
[00:47:41] [SPEAKER_01]: going on in the market, the
[00:47:42] [SPEAKER_01]: bear markets, the under
[00:47:43] [SPEAKER_01]: performance. I'm being hit
[00:47:45] [SPEAKER_01]: with that all the time as I
[00:47:46] [SPEAKER_01]: make that decision about whether
[00:47:48] [SPEAKER_01]: to change the strategy. So my
[00:47:49] [SPEAKER_01]: ability to control my emotions or
[00:47:51] [SPEAKER_01]: whoever is building the
[00:47:52] [SPEAKER_01]: strategy. And this is true of
[00:47:53] [SPEAKER_01]: anybody. This is true of even
[00:47:54] [SPEAKER_01]: these cheap factory ETFs.
[00:47:56] [SPEAKER_01]: They still have a team behind the
[00:47:57] [SPEAKER_01]: scenes deciding how do we build
[00:47:59] [SPEAKER_01]: this portfolio? And that team is
[00:48:00] [SPEAKER_01]: going to make changes over time
[00:48:02] [SPEAKER_01]: and you have to trust that those
[00:48:03] [SPEAKER_01]: people are going to make the
[00:48:04] [SPEAKER_01]: correct changes. I guess in a lot
[00:48:06] [SPEAKER_01]: of ways, the more focused the
[00:48:07] [SPEAKER_01]: strategy is the bigger this is
[00:48:08] [SPEAKER_01]: an issue because if you make
[00:48:09] [SPEAKER_01]: the wrong change, you can end
[00:48:11] [SPEAKER_01]: up having much bigger impacts
[00:48:12] [SPEAKER_01]: but it impacts it all the way
[00:48:13] [SPEAKER_01]: across the spectrum. It's just
[00:48:15] [SPEAKER_01]: important to keep that in mind
[00:48:16] [SPEAKER_01]: because a lot of people think
[00:48:17] [SPEAKER_01]: oh, I'm a factor investor.
[00:48:19] [SPEAKER_01]: So there is absolutely no
[00:48:20] [SPEAKER_01]: emotion in this process
[00:48:21] [SPEAKER_01]: anywhere. And then that's
[00:48:22] [SPEAKER_01]: just not true.
[00:48:24] [SPEAKER_03]: The investment committee at my
[00:48:26] [SPEAKER_03]: company at Sunpoint, and one of
[00:48:29] [SPEAKER_03]: the things we were talking about
[00:48:30] [SPEAKER_03]: in the last several weeks,
[00:48:32] [SPEAKER_03]: certainly in the last several
[00:48:33] [SPEAKER_03]: months, but we did a real deep
[00:48:34] [SPEAKER_03]: dive in the investment
[00:48:35] [SPEAKER_03]: committee on basically the
[00:48:37] [SPEAKER_03]: growth manager universe, the
[00:48:38] [SPEAKER_03]: growth managers we use, the
[00:48:40] [SPEAKER_03]: things that are exposed to
[00:48:41] [SPEAKER_03]: things that are growthy.
[00:48:42] [SPEAKER_03]: And the outstanding overwhelming
[00:48:45] [SPEAKER_03]: 2024 takeaway was you could
[00:48:47] [SPEAKER_03]: basically lump them into the
[00:48:49] [SPEAKER_03]: growth managers who were cool
[00:48:50] [SPEAKER_03]: with owning a lot of Nvidia
[00:48:53] [SPEAKER_03]: and the growth managers who had
[00:48:54] [SPEAKER_03]: a very logical, very same reason
[00:48:57] [SPEAKER_03]: for either not owning Nvidia at
[00:48:59] [SPEAKER_03]: all or owning it in more limited
[00:49:00] [SPEAKER_03]: quantities than the benchmark.
[00:49:02] [SPEAKER_03]: And because performance in the
[00:49:04] [SPEAKER_03]: benchmarks has been so
[00:49:06] [SPEAKER_03]: disproportionately driven by
[00:49:07] [SPEAKER_03]: a handful of stocks, but by
[00:49:08] [SPEAKER_03]: large Nvidia was like the funny
[00:49:10] [SPEAKER_03]: common thing that you can see
[00:49:12] [SPEAKER_03]: in every one of these managers.
[00:49:13] [SPEAKER_03]: It just reminded you how much
[00:49:16] [SPEAKER_03]: something sometimes can get
[00:49:17] [SPEAKER_03]: reduced to an idiosyncratic
[00:49:19] [SPEAKER_03]: bet.
[00:49:21] [SPEAKER_03]: That middle level, that manager
[00:49:23] [SPEAKER_03]: decision, especially for people
[00:49:24] [SPEAKER_03]: who are hiring and firing or
[00:49:26] [SPEAKER_03]: sticking with managers, becomes
[00:49:28] [SPEAKER_03]: so critical that you understand
[00:49:29] [SPEAKER_03]: does the manager do what they
[00:49:31] [SPEAKER_03]: say they're going to do?
[00:49:32] [SPEAKER_03]: And do they do they actually
[00:49:33] [SPEAKER_03]: stick to that over time?
[00:49:35] [SPEAKER_03]: Because what I don't want in
[00:49:37] [SPEAKER_03]: most cases as a manager who's
[00:49:38] [SPEAKER_03]: going to be flighty in those
[00:49:39] [SPEAKER_03]: decision changes, because
[00:49:41] [SPEAKER_03]: there's a lot of risk in that
[00:49:42] [SPEAKER_03]: flightiness.
[00:49:44] [SPEAKER_03]: On the other hand, I full on
[00:49:46] [SPEAKER_03]: respect that man, I'm glad
[00:49:47] [SPEAKER_03]: I'm not a growth fund
[00:49:48] [SPEAKER_03]: manager, because in that
[00:49:49] [SPEAKER_03]: growth fund manager like that
[00:49:51] [SPEAKER_03]: universe, these are savage,
[00:49:53] [SPEAKER_03]: savage numbers right now.
[00:49:55] [SPEAKER_03]: And obviously the wreckage to
[00:49:56] [SPEAKER_03]: last month or so has
[00:49:58] [SPEAKER_03]: changed a little bit of that tune.
[00:50:00] [SPEAKER_03]: But these are just man, the
[00:50:02] [SPEAKER_03]: numbers from a couple of months
[00:50:04] [SPEAKER_03]: ago were just savage.
[00:50:05] [SPEAKER_03]: If you owned it or you didn't
[00:50:06] [SPEAKER_03]: like that spread between the
[00:50:09] [SPEAKER_03]: top and the bottom, just
[00:50:11] [SPEAKER_03]: wild to see.
[00:50:12] [SPEAKER_03]: It's frigging hard to be a
[00:50:13] [SPEAKER_03]: manager in the middle and
[00:50:14] [SPEAKER_03]: communicate those values and
[00:50:15] [SPEAKER_03]: then stick to them and not
[00:50:16] [SPEAKER_03]: change them, especially when
[00:50:17] [SPEAKER_03]: you're potentially hemorrhaging
[00:50:19] [SPEAKER_03]: assets and your business is in
[00:50:20] [SPEAKER_03]: decline.
[00:50:21] [SPEAKER_01]: What's interesting is an aside
[00:50:22] [SPEAKER_01]: too, is like a lot of these
[00:50:23] [SPEAKER_01]: large cap growth managers
[00:50:24] [SPEAKER_01]: struggled with this idea because
[00:50:25] [SPEAKER_01]: the growth companies became
[00:50:26] [SPEAKER_01]: such a huge percentage of the
[00:50:28] [SPEAKER_01]: S&P.
[00:50:29] [SPEAKER_01]: So if Apple, I don't know, do
[00:50:30] [SPEAKER_01]: you know what percentage Apple
[00:50:30] [SPEAKER_01]: is at the S&P right now?
[00:50:31] [SPEAKER_01]: It's a high single digits or
[00:50:32] [SPEAKER_01]: something like that, right?
[00:50:34] [SPEAKER_03]: It's still single digits in a
[00:50:35] [SPEAKER_03]: meaningful way.
[00:50:36] [SPEAKER_03]: It's still a top 10.
[00:50:37] [SPEAKER_01]: So if I'm if I have high
[00:50:39] [SPEAKER_01]: conviction in Apple, like how
[00:50:40] [SPEAKER_01]: do I overweat it?
[00:50:42] [SPEAKER_01]: It becomes hard because it's
[00:50:43] [SPEAKER_01]: such a huge portion of the
[00:50:44] [SPEAKER_01]: S&P. And remember what I'm
[00:50:45] [SPEAKER_01]: being judged against is my
[00:50:46] [SPEAKER_01]: performance relative to the S&P.
[00:50:47] [SPEAKER_01]: So if I believe a lot in
[00:50:49] [SPEAKER_01]: Apple, it's hard for me to take
[00:50:51] [SPEAKER_01]: advantage of that because I'm
[00:50:52] [SPEAKER_01]: getting to a point where I don't
[00:50:53] [SPEAKER_01]: want to overweat it much more
[00:50:55] [SPEAKER_01]: than it's weighted in the index.
[00:50:56] [SPEAKER_01]: And so it became a problem
[00:50:57] [SPEAKER_01]: like we interviewed a growth
[00:50:58] [SPEAKER_01]: manager who had this problem
[00:50:59] [SPEAKER_01]: was like some of these large
[00:51:00] [SPEAKER_01]: tech companies in terms of
[00:51:01] [SPEAKER_01]: like what people would live
[00:51:02] [SPEAKER_01]: with as a wait for a growth
[00:51:04] [SPEAKER_01]: manager, the index got up to
[00:51:05] [SPEAKER_01]: that week.
[00:51:06] [SPEAKER_01]: And so they had a hard time
[00:51:07] [SPEAKER_01]: overweating him.
[00:51:09] [SPEAKER_03]: It turns into and I think
[00:51:10] [SPEAKER_03]: this is a really important
[00:51:11] [SPEAKER_03]: thing for individual investors to
[00:51:13] [SPEAKER_03]: be aware of when they're
[00:51:14] [SPEAKER_03]: selecting their vehicles or
[00:51:16] [SPEAKER_03]: they're selecting their
[00:51:16] [SPEAKER_03]: managers is you want to be aware
[00:51:18] [SPEAKER_03]: of how much customer
[00:51:21] [SPEAKER_03]: based service or attention
[00:51:23] [SPEAKER_03]: those managers are taking for
[00:51:25] [SPEAKER_03]: why they're getting hired or
[00:51:26] [SPEAKER_03]: fired because flows are going to
[00:51:27] [SPEAKER_03]: determine the viability
[00:51:29] [SPEAKER_03]: of their business model.
[00:51:31] [SPEAKER_03]: This is a crude comparison, but
[00:51:33] [SPEAKER_03]: I think it's an important
[00:51:33] [SPEAKER_03]: comparison.
[00:51:35] [SPEAKER_03]: Did you ever did you ever
[00:51:35] [SPEAKER_03]: this is such a stupid thing
[00:51:37] [SPEAKER_03]: but there was like some great
[00:51:39] [SPEAKER_03]: boiler room or newsletter
[00:51:40] [SPEAKER_03]: newsletter stock pitch math
[00:51:42] [SPEAKER_03]: from years ago?
[00:51:44] [SPEAKER_03]: Have you ever gotten down
[00:51:44] [SPEAKER_03]: this ugly?
[00:51:46] [SPEAKER_03]: OK, so a lesson I learned
[00:51:48] [SPEAKER_03]: early on and this was
[00:51:50] [SPEAKER_03]: I think this was like a newsletter
[00:51:51] [SPEAKER_03]: thing, but it was just kind of
[00:51:52] [SPEAKER_03]: behind the scenes look at like
[00:51:53] [SPEAKER_03]: how this you know
[00:51:56] [SPEAKER_03]: those like those popups on the
[00:51:58] [SPEAKER_03]: internet or those emails where
[00:51:59] [SPEAKER_03]: you're like here are the five
[00:52:00] [SPEAKER_03]: stocks that are going to crush
[00:52:01] [SPEAKER_03]: in the year ahead or
[00:52:03] [SPEAKER_03]: the five stocks that are right
[00:52:05] [SPEAKER_03]: now and all that crap.
[00:52:06] [SPEAKER_03]: OK, so here's like just
[00:52:08] [SPEAKER_03]: an example of if your model
[00:52:10] [SPEAKER_03]: is to either sell subscriptions
[00:52:11] [SPEAKER_03]: or earn commissions in the
[00:52:13] [SPEAKER_03]: boiler room days from like these
[00:52:15] [SPEAKER_03]: stock tips, basically you would
[00:52:17] [SPEAKER_03]: start with oversimplifying the
[00:52:18] [SPEAKER_03]: math. I'm going to have a hundred
[00:52:19] [SPEAKER_03]: list of people.
[00:52:20] [SPEAKER_03]: I'm going to tell 50 of the
[00:52:22] [SPEAKER_03]: people that they should be long
[00:52:23] [SPEAKER_03]: this thing to save their financial
[00:52:25] [SPEAKER_03]: future. And I'm going to tell the
[00:52:27] [SPEAKER_03]: other 50 people that they should
[00:52:28] [SPEAKER_03]: be short this thing or I'm going
[00:52:29] [SPEAKER_03]: to be long some other stock or
[00:52:30] [SPEAKER_03]: whatever else. And then you
[00:52:32] [SPEAKER_03]: wait a week or a month or a
[00:52:34] [SPEAKER_03]: year or whatever the thing that
[00:52:35] [SPEAKER_03]: does. And you basically look at
[00:52:36] [SPEAKER_03]: which one of my 50 50, the more
[00:52:38] [SPEAKER_03]: like inversely correlated the
[00:52:39] [SPEAKER_03]: better succeeded.
[00:52:41] [SPEAKER_03]: And then I lose the numbers
[00:52:43] [SPEAKER_03]: or the contact information for
[00:52:44] [SPEAKER_03]: the people I got wrong because
[00:52:45] [SPEAKER_03]: they're never going to talk to me
[00:52:46] [SPEAKER_03]: again. And now I go back to that
[00:52:48] [SPEAKER_03]: next 50. I'm going to split them
[00:52:49] [SPEAKER_03]: 25 25 on the next completely
[00:52:51] [SPEAKER_03]: outlandish idea and wash
[00:52:54] [SPEAKER_03]: rinse repeat to just keep.
[00:52:56] [SPEAKER_03]: Oh my God, we were absolutely
[00:52:58] [SPEAKER_03]: right.
[00:52:59] [SPEAKER_03]: It's an A.B. testing exercise
[00:53:01] [SPEAKER_03]: and it's an A.B. testing
[00:53:02] [SPEAKER_03]: exercise. It's not focused on you
[00:53:03] [SPEAKER_03]: the end user. It's focused on the
[00:53:05] [SPEAKER_03]: vehicle and what accomplishes the
[00:53:07] [SPEAKER_03]: newsletter sales or the stock
[00:53:08] [SPEAKER_03]: commissions or whatever it is.
[00:53:10] [SPEAKER_03]: You want to examine the ethic
[00:53:12] [SPEAKER_03]: of the vehicle or the entity
[00:53:14] [SPEAKER_03]: that you're going through to make
[00:53:16] [SPEAKER_03]: sure that their math is at least
[00:53:17] [SPEAKER_03]: in line with your math.
[00:53:18] [SPEAKER_03]: Your beliefs are aligned with
[00:53:19] [SPEAKER_03]: their beliefs because if not
[00:53:22] [SPEAKER_03]: the extreme version of an adverse
[00:53:23] [SPEAKER_03]: selection scenario is you get
[00:53:26] [SPEAKER_03]: boiler room newsletter math being
[00:53:27] [SPEAKER_03]: applied against you and then you're
[00:53:29] [SPEAKER_03]: like, oh, this person's a genius
[00:53:30] [SPEAKER_03]: or I can't believe I listen to
[00:53:31] [SPEAKER_03]: that idiot. And that's
[00:53:33] [SPEAKER_03]: that's problematic for everybody
[00:53:34] [SPEAKER_03]: involved.
[00:53:35] [SPEAKER_01]: So I want to do two more. We
[00:53:36] [SPEAKER_01]: have one more on the agenda and
[00:53:37] [SPEAKER_01]: then I have one more surprise.
[00:53:38] [SPEAKER_01]: I'm going to throw you the end
[00:53:39] [SPEAKER_01]: here. But uh, oh, Joe,
[00:53:41] [SPEAKER_01]: the one on the agenda is the
[00:53:43] [SPEAKER_01]: idea that you should match,
[00:53:44] [SPEAKER_01]: expect to match the academic
[00:53:45] [SPEAKER_01]: results in the real world. And
[00:53:46] [SPEAKER_01]: the reason I put this in is because
[00:53:48] [SPEAKER_01]: some people don't recognize that
[00:53:50] [SPEAKER_01]: academic factor testing has done
[00:53:51] [SPEAKER_01]: long short and almost all
[00:53:53] [SPEAKER_01]: of them in a QR has some long
[00:53:55] [SPEAKER_01]: short funds and stuff, but almost
[00:53:56] [SPEAKER_01]: all of the implementation in the
[00:53:57] [SPEAKER_01]: real world is done long only.
[00:53:58] [SPEAKER_01]: And the reason this matters is
[00:54:00] [SPEAKER_01]: because when you look at these
[00:54:01] [SPEAKER_01]: academic tests, some of the
[00:54:03] [SPEAKER_01]: return comes from the long side
[00:54:04] [SPEAKER_01]: and some of the return comes
[00:54:05] [SPEAKER_01]: from the short side.
[00:54:06] [SPEAKER_01]: And if too much of that return is
[00:54:07] [SPEAKER_01]: from the short side, then this
[00:54:09] [SPEAKER_01]: might not be a factor.
[00:54:10] [SPEAKER_01]: I want to run long only in
[00:54:11] [SPEAKER_01]: the real world. Now the good
[00:54:13] [SPEAKER_01]: news around this is the major
[00:54:14] [SPEAKER_01]: factors all pass this test.
[00:54:15] [SPEAKER_01]: The major factors all have
[00:54:17] [SPEAKER_01]: return on the long only side.
[00:54:18] [SPEAKER_01]: It's not a problem, but you just
[00:54:20] [SPEAKER_01]: want to keep that in mind
[00:54:21] [SPEAKER_01]: because if the big return from
[00:54:23] [SPEAKER_01]: the factor comes from shorting
[00:54:24] [SPEAKER_01]: the stocks that are the worst
[00:54:26] [SPEAKER_01]: according to the factor, then
[00:54:27] [SPEAKER_01]: I'm not going to expect that to
[00:54:28] [SPEAKER_01]: work very well in my long only
[00:54:30] [SPEAKER_01]: ETF that follows the factor.
[00:54:32] [SPEAKER_03]: A really important takeaway from
[00:54:33] [SPEAKER_03]: this that I think regular
[00:54:34] [SPEAKER_03]: investors can use. We use it
[00:54:36] [SPEAKER_03]: in portfolio construction or I
[00:54:38] [SPEAKER_03]: definitely used it before when
[00:54:39] [SPEAKER_03]: I with like individual
[00:54:41] [SPEAKER_03]: security portfolio construction.
[00:54:43] [SPEAKER_03]: You can look at factors that
[00:54:45] [SPEAKER_03]: actually skew the up so you might
[00:54:46] [SPEAKER_03]: use the long only factors to
[00:54:48] [SPEAKER_03]: build your long only book as
[00:54:49] [SPEAKER_03]: an input. You can use those
[00:54:51] [SPEAKER_03]: factors though that skew on the
[00:54:52] [SPEAKER_03]: short side. This really shows
[00:54:54] [SPEAKER_03]: up in avoiding like
[00:54:56] [SPEAKER_03]: bankruptcy risks risks
[00:54:58] [SPEAKER_03]: in stocks. It skews heavily
[00:55:00] [SPEAKER_03]: to like there's basically stuff
[00:55:02] [SPEAKER_03]: where it's they're good short
[00:55:03] [SPEAKER_03]: candidates, but you can also
[00:55:04] [SPEAKER_03]: use it as a mechanism as a
[00:55:06] [SPEAKER_03]: multifactor part of your model
[00:55:07] [SPEAKER_03]: on just things to avoid.
[00:55:08] [SPEAKER_03]: So it might be a second or
[00:55:10] [SPEAKER_03]: third step where you go.
[00:55:11] [SPEAKER_03]: Here's my long only stuff, the
[00:55:13] [SPEAKER_03]: things that I want to own
[00:55:14] [SPEAKER_03]: because they have a value or
[00:55:15] [SPEAKER_03]: quality or whatever else by us.
[00:55:16] [SPEAKER_03]: But then I'm also going to filter
[00:55:18] [SPEAKER_03]: for there's any of these weird
[00:55:19] [SPEAKER_03]: red flag raising things that
[00:55:21] [SPEAKER_03]: work on the short side to say
[00:55:22] [SPEAKER_03]: let's make sure none of these
[00:55:23] [SPEAKER_03]: port these companies or types of
[00:55:25] [SPEAKER_03]: companies show up in the
[00:55:26] [SPEAKER_03]: portfolio to that's a way
[00:55:28] [SPEAKER_03]: without actually shorting.
[00:55:29] [SPEAKER_03]: You can use some of that stuff
[00:55:30] [SPEAKER_03]: as like an avoidance strategy
[00:55:31] [SPEAKER_03]: and in the end isn't shorting
[00:55:34] [SPEAKER_03]: and avoiding kind of the same
[00:55:35] [SPEAKER_03]: thing.
[00:55:36] [SPEAKER_01]: You know, I like this idea of
[00:55:37] [SPEAKER_01]: using it as a filter because
[00:55:38] [SPEAKER_01]: that's what we do. I mean,
[00:55:39] [SPEAKER_01]: for all of our value strategies,
[00:55:40] [SPEAKER_01]: we have a negative quality screen
[00:55:42] [SPEAKER_01]: against them. And you know, one of
[00:55:43] [SPEAKER_01]: the things, for instance, is like
[00:55:44] [SPEAKER_01]: crazy negative momentum will
[00:55:46] [SPEAKER_01]: filter out anything that has
[00:55:47] [SPEAKER_01]: crazy negative momentum.
[00:55:48] [SPEAKER_01]: So that's an example of taking it
[00:55:49] [SPEAKER_01]: like you said, taking advantage
[00:55:50] [SPEAKER_01]: of the fact that we know that
[00:55:52] [SPEAKER_01]: in the testing like low
[00:55:54] [SPEAKER_01]: momentum stocks did poorly,
[00:55:56] [SPEAKER_01]: we can carry that in and not
[00:55:57] [SPEAKER_01]: short the momentum stocks
[00:55:59] [SPEAKER_01]: but use them to filter against
[00:56:00] [SPEAKER_01]: our portfolio.
[00:56:00] [SPEAKER_01]: So that's a really good example
[00:56:02] [SPEAKER_01]: of how you can do it.
[00:56:03] [SPEAKER_03]: Yeah, it's really important to
[00:56:04] [SPEAKER_03]: think of it that way because
[00:56:05] [SPEAKER_03]: again, most people unless
[00:56:07] [SPEAKER_03]: you've been mired in these
[00:56:09] [SPEAKER_03]: academic studies, you don't
[00:56:10] [SPEAKER_03]: remember that there or you don't
[00:56:11] [SPEAKER_03]: know that these are,
[00:56:13] [SPEAKER_03]: you know, many of the studies
[00:56:14] [SPEAKER_03]: are long short to prove the
[00:56:15] [SPEAKER_03]: merits thing. I've got to prove
[00:56:16] [SPEAKER_03]: it just on the long side and
[00:56:17] [SPEAKER_03]: all the other frictions and
[00:56:18] [SPEAKER_03]: other quirky things that fall
[00:56:20] [SPEAKER_03]: into it. There's frameworks for
[00:56:21] [SPEAKER_03]: thinking through this stuff.
[00:56:23] [SPEAKER_01]: So the reason I put the bonus
[00:56:24] [SPEAKER_01]: one is because I want to get
[00:56:25] [SPEAKER_01]: at this idea that these
[00:56:26] [SPEAKER_01]: misconceptions change over time.
[00:56:28] [SPEAKER_01]: So what we believe about
[00:56:29] [SPEAKER_01]: factor investing today,
[00:56:30] [SPEAKER_01]: there's going to be some things
[00:56:31] [SPEAKER_01]: we believe 10 years from now
[00:56:32] [SPEAKER_01]: that are different. And we've
[00:56:33] [SPEAKER_01]: talked about this on the podcast,
[00:56:35] [SPEAKER_01]: but one of the things you
[00:56:36] [SPEAKER_01]: could say could be a
[00:56:37] [SPEAKER_01]: misconception about factor
[00:56:38] [SPEAKER_01]: investing was still learning about
[00:56:39] [SPEAKER_01]: it is the idea that factors have
[00:56:40] [SPEAKER_01]: to make sense.
[00:56:42] [SPEAKER_01]: And this comes from the idea of
[00:56:43] [SPEAKER_01]: Andrew Chan and Alejandro Lopez
[00:56:44] [SPEAKER_01]: Lyra, who wrote a recent paper
[00:56:46] [SPEAKER_01]: where they looked at the factors
[00:56:48] [SPEAKER_01]: that had behavioral and risk
[00:56:50] [SPEAKER_01]: based explanations.
[00:56:51] [SPEAKER_01]: And then there's data minded
[00:56:52] [SPEAKER_01]: bunch of factors.
[00:56:53] [SPEAKER_01]: They tested them historically up
[00:56:54] [SPEAKER_01]: to the point that Fomal and
[00:56:55] [SPEAKER_01]: French's work came out.
[00:56:56] [SPEAKER_01]: And then they looked at all of
[00:56:57] [SPEAKER_01]: them going forward out of San
[00:56:58] [SPEAKER_01]: Thu. And there was really no
[00:57:00] [SPEAKER_01]: difference if anything's the one
[00:57:01] [SPEAKER_01]: if anything, the ones that made
[00:57:02] [SPEAKER_01]: no sense did a little bit
[00:57:04] [SPEAKER_01]: better. And so this might be
[00:57:05] [SPEAKER_01]: something if we're doing this
[00:57:06] [SPEAKER_01]: in five years and 10 years, this
[00:57:08] [SPEAKER_01]: might be one of the misconceptions
[00:57:09] [SPEAKER_01]: we come up with about factor
[00:57:10] [SPEAKER_01]: investing is that factors have
[00:57:12] [SPEAKER_01]: to make sense.
[00:57:13] [SPEAKER_01]: And so I just wanted to put it in
[00:57:14] [SPEAKER_01]: here as an example of we're
[00:57:15] [SPEAKER_01]: always learning over time.
[00:57:16] [SPEAKER_01]: That's part of doing this, you
[00:57:18] [SPEAKER_01]: know, something that I thought
[00:57:19] [SPEAKER_01]: really, really strongly about 10
[00:57:20] [SPEAKER_01]: years from now, I might not
[00:57:21] [SPEAKER_01]: feel really strongly about or 10
[00:57:23] [SPEAKER_01]: years ago. I might not feel
[00:57:24] [SPEAKER_01]: really strongly about 10 years
[00:57:25] [SPEAKER_01]: from now. And this is an
[00:57:26] [SPEAKER_01]: example of something I'm coming
[00:57:27] [SPEAKER_01]: around on is this idea that
[00:57:29] [SPEAKER_01]: maybe the factors that don't
[00:57:31] [SPEAKER_01]: have to make sense, you know,
[00:57:32] [SPEAKER_01]: maybe some of these data mind
[00:57:33] [SPEAKER_01]: factors, if it's done
[00:57:34] [SPEAKER_01]: properly, maybe they do deserve
[00:57:36] [SPEAKER_01]: a role at least in a portfolio.
[00:57:39] [SPEAKER_01]: So that's an example of one, if
[00:57:40] [SPEAKER_01]: we do this again in five years
[00:57:41] [SPEAKER_01]: that might be on the list and
[00:57:42] [SPEAKER_01]: maybe he's not on the list now.
[00:57:44] [SPEAKER_03]: What I love about this and
[00:57:46] [SPEAKER_03]: I'll stretch this out.
[00:57:48] [SPEAKER_03]: I'm going to make it a this is
[00:57:49] [SPEAKER_03]: a semi tortured musical tie in
[00:57:51] [SPEAKER_03]: back to what we were talking
[00:57:52] [SPEAKER_03]: about earlier. But it's this
[00:57:54] [SPEAKER_03]: reminder that sometimes the
[00:57:55] [SPEAKER_03]: thing that's a hit makes no
[00:57:56] [SPEAKER_03]: logical sense.
[00:57:58] [SPEAKER_03]: And we might be able to make
[00:57:59] [SPEAKER_03]: sense about about it later,
[00:58:01] [SPEAKER_03]: like, like we can talk about
[00:58:02] [SPEAKER_03]: Buffett and the Buffett's
[00:58:03] [SPEAKER_03]: Alpha thing of having the
[00:58:04] [SPEAKER_03]: terms to explain all the
[00:58:05] [SPEAKER_03]: stuff well after the fact.
[00:58:07] [SPEAKER_03]: But that doesn't actually truly
[00:58:08] [SPEAKER_03]: explain it because you didn't
[00:58:09] [SPEAKER_03]: have that way of thinking like
[00:58:11] [SPEAKER_03]: you have to get in the time
[00:58:12] [SPEAKER_03]: machine and do it just so
[00:58:14] [SPEAKER_03]: alpha being a byproduct of
[00:58:15] [SPEAKER_03]: those types of things.
[00:58:16] [SPEAKER_03]: I'm thinking about so I was
[00:58:18] [SPEAKER_03]: talking about Sir Mix a lot
[00:58:19] [SPEAKER_03]: earlier. I need to write something
[00:58:20] [SPEAKER_03]: about this is such an
[00:58:21] [SPEAKER_03]: interesting thing. So do you
[00:58:22] [SPEAKER_03]: remember the band, the
[00:58:23] [SPEAKER_03]: presence of the United States
[00:58:24] [SPEAKER_03]: of America?
[00:58:25] [SPEAKER_03]: Yeah, lump lump was their big
[00:58:27] [SPEAKER_03]: hit peaches.
[00:58:29] [SPEAKER_03]: Can I say peaches?
[00:58:30] [SPEAKER_03]: Yeah, all those great
[00:58:32] [SPEAKER_03]: songs. Now on paper,
[00:58:34] [SPEAKER_03]: the the presidents I'll just
[00:58:35] [SPEAKER_03]: call them that for short.
[00:58:36] [SPEAKER_03]: The presidents should not have
[00:58:38] [SPEAKER_03]: had a hit song on paper.
[00:58:40] [SPEAKER_03]: They were doing weird stuff
[00:58:41] [SPEAKER_03]: like the guitar had three
[00:58:42] [SPEAKER_03]: strings on it and the bass had
[00:58:43] [SPEAKER_03]: two strings three instead of
[00:58:44] [SPEAKER_03]: six, two instead of four.
[00:58:46] [SPEAKER_03]: They were tuned down to sound
[00:58:47] [SPEAKER_03]: like weird thing.
[00:58:49] [SPEAKER_03]: They were a weird band.
[00:58:50] [SPEAKER_03]: I mean, lump or peaches are
[00:58:51] [SPEAKER_03]: not normal pop songs.
[00:58:53] [SPEAKER_03]: And even for like the 90s
[00:58:55] [SPEAKER_03]: when stuff was weird,
[00:58:56] [SPEAKER_03]: shouldn't have been hit songs.
[00:58:57] [SPEAKER_03]: On the other hand, you had
[00:58:59] [SPEAKER_03]: Sir Mix a lot who, you know,
[00:59:00] [SPEAKER_03]: baby got back and clearly
[00:59:02] [SPEAKER_03]: all the follow up hits that
[00:59:03] [SPEAKER_03]: you can name it.
[00:59:04] [SPEAKER_03]: Remember from either of them
[00:59:05] [SPEAKER_01]: if I can name another song by
[00:59:06] [SPEAKER_01]: him, I cannot.
[00:59:07] [SPEAKER_01]: I don't think so.
[00:59:08] [SPEAKER_03]: Here's there's a crazy thing
[00:59:09] [SPEAKER_03]: that I feel like it gets
[00:59:11] [SPEAKER_03]: forgotten.
[00:59:12] [SPEAKER_03]: But it was really good at the
[00:59:13] [SPEAKER_03]: time. And I actually wonder
[00:59:15] [SPEAKER_03]: it's one of those things that's
[00:59:16] [SPEAKER_03]: still like, yeah, I would
[00:59:16] [SPEAKER_03]: actually go see that.
[00:59:17] [SPEAKER_03]: So did you know that Sir
[00:59:19] [SPEAKER_03]: Mix a lot and the presence
[00:59:21] [SPEAKER_03]: of the United States of
[00:59:21] [SPEAKER_03]: America actually had like a band
[00:59:23] [SPEAKER_03]: together for a brief period of
[00:59:24] [SPEAKER_03]: time?
[00:59:25] [SPEAKER_03]: I just kind of.
[00:59:26] [SPEAKER_03]: So they have this ban.
[00:59:28] [SPEAKER_03]: It's like that would be an
[00:59:28] [SPEAKER_03]: interesting band.
[00:59:29] [SPEAKER_03]: Yeah, I want to say it was
[00:59:30] [SPEAKER_03]: called subset.
[00:59:31] [SPEAKER_03]: But like this is this is a
[00:59:33] [SPEAKER_03]: really interesting thing.
[00:59:34] [SPEAKER_03]: You have two hit artists and
[00:59:35] [SPEAKER_03]: you're like they're hit artists
[00:59:37] [SPEAKER_03]: that are probably one hit
[00:59:38] [SPEAKER_03]: wonders.
[00:59:39] [SPEAKER_03]: Could we put them together?
[00:59:40] [SPEAKER_03]: And there was some mutual
[00:59:41] [SPEAKER_03]: like West Coast like scene
[00:59:43] [SPEAKER_03]: respect or something else
[00:59:44] [SPEAKER_03]: that like led them to each
[00:59:45] [SPEAKER_03]: other.
[00:59:45] [SPEAKER_03]: But they actually did some
[00:59:46] [SPEAKER_03]: really free and good demos.
[00:59:47] [SPEAKER_03]: It's a really great song.
[00:59:48] [SPEAKER_03]: There was some like California
[00:59:49] [SPEAKER_03]: Scott Rats song.
[00:59:51] [SPEAKER_03]: They're my friend Gary
[00:59:52] [SPEAKER_03]: driving around listening to
[00:59:53] [SPEAKER_03]: on repeat because it was
[00:59:54] [SPEAKER_03]: just fantastic.
[00:59:56] [SPEAKER_03]: But there's like the
[00:59:57] [SPEAKER_03]: weirdness of sometimes
[00:59:58] [SPEAKER_03]: something that makes absolutely
[01:00:00] [SPEAKER_03]: no sense could be something
[01:00:01] [SPEAKER_03]: that produces a hit.
[01:00:03] [SPEAKER_03]: See peaches see baby got back
[01:00:05] [SPEAKER_03]: or something that makes absolutely
[01:00:06] [SPEAKER_03]: no sense.
[01:00:07] [SPEAKER_03]: You can combine it and it turns
[01:00:08] [SPEAKER_03]: into a dud see subset lost
[01:00:10] [SPEAKER_03]: to the sands of history.
[01:00:11] [SPEAKER_03]: The future is unknowable.
[01:00:13] [SPEAKER_03]: It is the factor ideas
[01:00:15] [SPEAKER_03]: are one of many things that
[01:00:16] [SPEAKER_03]: may or may not happen.
[01:00:18] [SPEAKER_03]: And we have to remember that
[01:00:20] [SPEAKER_03]: the humility you have to bring
[01:00:21] [SPEAKER_03]: to the table of this.
[01:00:22] [SPEAKER_03]: It's just so frigging important.
[01:00:24] [SPEAKER_03]: Like you got to live life for
[01:00:25] [SPEAKER_03]: now.
[01:00:25] [SPEAKER_03]: You got to figure out things you
[01:00:26] [SPEAKER_03]: can do for now.
[01:00:27] [SPEAKER_03]: The future is unknowable, but
[01:00:29] [SPEAKER_03]: we're going to try our best when
[01:00:30] [SPEAKER_03]: it comes to dedicating capital
[01:00:32] [SPEAKER_03]: for long term investments.
[01:00:33] [SPEAKER_03]: And I'm going to go look for some
[01:00:34] [SPEAKER_03]: subset after this call.
[01:00:36] [SPEAKER_01]: I'm going to look for that as well
[01:00:37] [SPEAKER_01]: because I want to see what that
[01:00:38] [SPEAKER_01]: looked like.
[01:00:39] [SPEAKER_01]: But that's probably
[01:00:41] [SPEAKER_01]: a good note to wrap up on.
[01:00:42] [SPEAKER_01]: I would say like and subscribe
[01:00:44] [SPEAKER_01]: like all the hosts do.
[01:00:45] [SPEAKER_01]: But I've learned in studying the
[01:00:45] [SPEAKER_01]: YouTube algorithm that that's
[01:00:47] [SPEAKER_01]: literally irrelevant.
[01:00:48] [SPEAKER_01]: It doesn't make any difference
[01:00:50] [SPEAKER_01]: in terms of the views of your
[01:00:51] [SPEAKER_01]: videos, although we still love
[01:00:52] [SPEAKER_01]: everybody to like and subscribe.
[01:00:54] [SPEAKER_01]: But I guess the big thing you want
[01:00:54] [SPEAKER_01]: people to do is you want them
[01:00:55] [SPEAKER_01]: to share the videos and you want
[01:00:57] [SPEAKER_01]: them to watch them to the end.
[01:00:58] [SPEAKER_01]: So if you're here at the end,
[01:01:00] [SPEAKER_01]: you've already done.
[01:01:01] [SPEAKER_01]: You've already done your part to
[01:01:02] [SPEAKER_03]: help Matt and I out.
[01:01:02] [SPEAKER_03]: You had one job to watch the end.
[01:01:04] [SPEAKER_03]: You completed that job.
[01:01:06] [SPEAKER_03]: Feel free to like or subscribe
[01:01:08] [SPEAKER_03]: or just comment with your
[01:01:10] [SPEAKER_03]: outlandish crypto recommendation.
[01:01:13] [SPEAKER_03]: Bizarro political theory or
[01:01:15] [SPEAKER_03]: favorite subset track.
[01:01:17] [SPEAKER_03]: I'd love to know some favorite
[01:01:18] [SPEAKER_03]: subset tracks from fans.
[01:01:19] [SPEAKER_03]: I'm sure they're out there.
[01:01:20] [SPEAKER_01]: Just a note, by the way, we do
[01:01:21] [SPEAKER_01]: have like the same comment about
[01:01:22] [SPEAKER_01]: something about I lost seventy
[01:01:23] [SPEAKER_01]: thousand dollars that's on like
[01:01:24] [SPEAKER_01]: every one of our videos now.
[01:01:26] [SPEAKER_01]: And then like two hundred and
[01:01:27] [SPEAKER_01]: fifty seven people like, you know,
[01:01:28] [SPEAKER_01]: obviously out of fake things all
[01:01:30] [SPEAKER_01]: comment on it.
[01:01:31] [SPEAKER_01]: So I have to go through and
[01:01:32] [SPEAKER_01]: delete all these because that same
[01:01:33] [SPEAKER_01]: comment is now coming out to
[01:01:34] [SPEAKER_01]: every one of our videos.
[01:01:35] [SPEAKER_01]: So if you see that, nobody actually
[01:01:36] [SPEAKER_01]: lost seventy thousand dollars.
[01:01:38] [SPEAKER_01]: It is some sort of thing that's
[01:01:39] [SPEAKER_01]: like and I'm sure coming in to
[01:01:40] [SPEAKER_01]: save the day in that I've read
[01:01:42] [SPEAKER_01]: it till the end.
[01:01:43] [SPEAKER_01]: But some stock picker that they've
[01:01:44] [SPEAKER_01]: come up with is coming into the
[01:01:45] [SPEAKER_01]: end of the day to save them
[01:01:46] [SPEAKER_01]: after they lost the seventy
[01:01:47] [SPEAKER_01]: thousand dollars.
[01:01:48] [SPEAKER_01]: I didn't make it till the end of
[01:01:49] [SPEAKER_01]: the story.
[01:01:50] [SPEAKER_03]: See the boiler room math or
[01:01:52] [SPEAKER_03]: newsletter math from Earth.
[01:01:53] [SPEAKER_03]: They heard this episode as your case
[01:01:55] [SPEAKER_03]: in point of, yeah,
[01:01:58] [SPEAKER_03]: consult a professional, not a
[01:01:59] [SPEAKER_03]: YouTube computer.
[01:02:01] [SPEAKER_03]: It's probably good advice.
[01:02:02] [SPEAKER_01]: So thank you everybody for joining
[01:02:03] [SPEAKER_01]: us and we'll see you next time.
[01:02:05] [SPEAKER_02]: Hi guys, this is Justin again.
[01:02:07] [SPEAKER_02]: Thanks so much for tuning into
[01:02:08] [SPEAKER_02]: this episode.
[01:02:09] [SPEAKER_02]: You can follow Jack on Twitter
[01:02:11] [SPEAKER_02]: at at practical quant.
[01:02:12] [SPEAKER_02]: You can follow me on Twitter at
[01:02:14] [SPEAKER_02]: JJ Carbono and follow Matt on
[01:02:16] [SPEAKER_02]: Twitter at at cultish creative.
[01:02:18] [SPEAKER_02]: If you found this discussion
[01:02:19] [SPEAKER_02]: interesting and valuable, please
[01:02:21] [SPEAKER_02]: subscribe in either iTunes or
[01:02:23] [SPEAKER_02]: on YouTube or leave a review
[01:02:25] [SPEAKER_02]: or a comment.
[01:02:26] [SPEAKER_02]: Also, if you have any ideas for
[01:02:27] [SPEAKER_02]: topics you'd like us to cover in
[01:02:29] [SPEAKER_02]: the future, please email us at
[01:02:31] [SPEAKER_02]: accessreturnspod at gmail.com.
[01:02:33] [SPEAKER_02]: We would like this to be a
[01:02:34] [SPEAKER_02]: listener driven podcast and
[01:02:36] [SPEAKER_02]: would appreciate any suggestions.
[01:02:37] [SPEAKER_02]: Thank you.