Practical Lessons from Aswath Damodaran

[00:00:00] Welcome to Two Quants and a Financial Planner where we bridge the worlds of investing in financial

[00:00:03] planning to help investors achieve their long-term goals. Join Matt Zeigler, Jack Forehand and

[00:00:06] me, Justin Carbonneau as we cover a wide range of investing and planning topics that impact

[00:00:10] all of us and discuss how we can apply them in the real world to achieve the best outcomes

[00:00:13] in our financial life.

[00:00:15] Jack Forehand is a principal at Validia Capital Management. Matt Zeigler is managing

[00:00:18] director at Sunpoint Investments. The opinions expressed in this podcast do not necessarily

[00:00:22] reflect the opinions of Validia Capital or Sunpoint Investments. No information

[00:00:26] on this podcast should be construed as investment advice. Security discussed in the podcast may

[00:00:30] be holdings of clients at Validia Capital or Sunpoint Investments.

[00:00:32] Jack Forehand, Justin Carbonneau, Two Quants and a Financial Planner

[00:00:33] So Matt, are you at the San Francisco office today or are you at your place in St. Barthes?

[00:00:35] Because I wasn't sure which one you were to report from.

[00:00:37] Live from the San Francisco office, we're in the same room. We just can't tell at this setup.

[00:00:42] We're in our San Francisco office.

[00:00:44] Jack Forehand, Justin Carbonneau, Two Quants and a Financial Planner

[00:00:44] Yeah, we got this. We're saying this because we got a comment, something about

[00:00:47] that we were out of touch in our San Francisco office with our financial

[00:00:50] accounts or something like that. I'm not even sure where that comes from because we've never

[00:00:53] talked about San Francisco. I haven't been in San Francisco in 15 years. We both operate

[00:00:57] from our houses, which are certainly not in San Francisco.

[00:01:00] But I thought it was funny. Some of the YouTube comments are always funny.

[00:01:03] In San Francisco. Yeah, thank you guys.

[00:01:06] So, but we're not... The other thing I just... Before we get into our topic for

[00:01:09] today, the other thing I wanted to comment on is I'm all for all the attacks on me

[00:01:13] about the quality of my content here. And there's certainly things you can attack

[00:01:16] me for, but there was one comment. And he actually... The commenter

[00:01:19] actually said something positive about me, but he referred to me as the bald guy, Matt.

[00:01:24] I just don't like it. No, look at the lots of hair, Matt. There's still plenty of hair left here.

[00:01:28] This is not the bald guy. I do not think that's appropriate at this time.

[00:01:33] I'm doing everything I can to fight it. It's not appropriate at this time.

[00:01:37] We're gonna have a separate conversation about bald denialism later,

[00:01:40] but we'll do that offline. Which means it might be correct,

[00:01:44] the common unfortunate. But you know, the long flowing hair is just not going to work for me

[00:01:50] anymore. It never really worked for me anyway because it was so straight that it was disgusting.

[00:01:54] It didn't curl ever. So it was awful. But now I guess things are headed downhill.

[00:01:59] It's never fun to watch the old episodes from the beginning of Excess Returns because you

[00:02:03] can see the deterioration of this over time. The hair situation has just gotten worse and

[00:02:08] worse. I look older and older. There's more gray in there. I don't know if I like having

[00:02:13] progression on the internet for the rest of my life.

[00:02:16] It's been documented. We can extrapolate this forward. I'm gonna call Hal Hirschfeld.

[00:02:20] He's gonna map you out, show you your future self on podcasts in 20 years.

[00:02:24] So anyway, besides these tangents we always get off on, we're gonna talk today.

[00:02:28] We just had Aswa D'Moderin on Excess Returns. You and I did the interview.

[00:02:33] I've been getting some comments that it was one of the best ones we've ever done.

[00:02:36] That's really cool. And that's not necessarily a reflection on you and me

[00:02:39] because I also think, I was thinking it's probably the least words the hosts ever

[00:02:43] said in one of our interviews too. We were just guy, he was on such a roll

[00:02:47] that we were basically just trying to guide him a little bit and he just kept going.

[00:02:52] There's something about it and it's one of those if you haven't watched it, go watch it,

[00:02:57] give it a listen, give it two. I mean I've played it back a couple of times now

[00:03:00] just because he's so thoughtful in the way he packages these ideas and we were both

[00:03:05] talking to each other afterwards. We're just like, you're listening to it and there's

[00:03:08] a point where he's just like, well there's too many quotes. There's too many things here for

[00:03:12] clips. It's an overwhelming amount because almost everything he says is so tightly packaged,

[00:03:17] but it's not go on TV and granted he can do that too. But it's not, he wasn't bringing

[00:03:23] that skill to the table of like, here's my buzzword for you to put in before the commercial

[00:03:28] break. It's just he's really good at putting really cogent thoughts together

[00:03:33] in a tightly packaged place and presenting them over and over and over and over again,

[00:03:37] which is why we said we had to do this show today.

[00:03:40] Yeah, he teaches other professors how to teach and you can tell. Based on having them on here,

[00:03:44] you can tell why that's true because it was like you said everything was so well said,

[00:03:48] like and everything was so well thought out too. You could tell he's thought deeply about these

[00:03:51] things we talked about. So anyway, what we want to do today is there's, we usually do lessons

[00:03:56] from some of our podcasts, but in this case, I don't even know if they're necessary lessons as

[00:03:59] much as things we're thinking about because there was so much stuff in here that are issues

[00:04:04] that investors are thinking about today, maybe things that don't even have an answer one way

[00:04:07] or the other, but listening to him talk about them got me to think about them in a different way

[00:04:12] than I had been. And so we're going to go through, we're going to play some clips of him today

[00:04:15] and we're going to go through these things and we're going to talk about what we took away from

[00:04:19] it. So the first one here is really interesting. This is the one that kind of got a little bit

[00:04:23] of anger on LinkedIn at me. Not necessarily at me, but the clip in general, but he had talked

[00:04:29] about the Berkshire meeting and he talks about the people that go to the Berkshire

[00:04:33] meeting and sort of their belief and value investing and how they think about

[00:04:36] investing and why he's never gone there. So let's play that clip first.

[00:04:39] The place terrifies me. It's full of true believers who think they found,

[00:04:44] I mean the three words that come to my mind when I think about old-time value investors.

[00:04:50] And I'm not, I'm not tarring Warren Buffett or Charlie Munger with this. It's rigid.

[00:04:59] It's ritualistic. There are certain things you're supposed to do as a value investor,

[00:05:04] including going to Omaha, reading Ben Graham's security. I'll wager for every hundred people

[00:05:11] who claim to have read Ben Graham's security analysis, maybe one actually read the book.

[00:05:15] I've actually read the book. It's a, I've written hideously boring books, but next to Ben Graham,

[00:05:22] my books are like, you know, Harry Potter to read. And you're supposed to follow those,

[00:05:30] those, those, it's very ritualistic. It's very rigid and it's very righteous.

[00:05:35] The righteous part really bothers me, which is they believe that the,

[00:05:39] that the chosen ones, you hang out with people who come to Omaha, they've been coming for

[00:05:43] about 30, 35, 40 years. They think they found the one pathway to successful investing.

[00:05:50] And I'm no problem with all of that. But then they look down at the rest of the world as

[00:05:55] shallow and stupid and not quite there. And I think that's one of the most dangerous things

[00:06:02] you can do in investing is to view the rest of the investment world with contempt,

[00:06:08] because you've done the right things. So I don't know, I don't feel any joy in hanging out

[00:06:15] with a crowd that's convinced that it's a, I mean, because that's, it's, it's a really,

[00:06:19] it becomes almost a religion rather than I have faith. I just, I tell people investing is

[00:06:25] about faith. I have faith, but I've no, I don't believe in dogma and a lot of old-time value

[00:06:31] investing has become dogma. Cannot do this. You should be doing this. You have to have

[00:06:35] a margin of safety says who? Okay. So I think that that's what bothers me about

[00:06:43] old-time value investing. And again, no, I think that, you know, Warren Buffett is

[00:06:49] actually a much more flexible investor than many of the people who claim to follow Warren Buffett.

[00:06:55] But I think old-time value investing has created these sets of rules that they

[00:07:00] believe everybody should follow. And to me, there is no one pathway to success. I love Peter Lynch,

[00:07:07] I love Warren Buffett. I like what something's a George Soros does. I think there's something

[00:07:12] to be learned by looking at great investors in every different, in every philosophy.

[00:07:19] And if you ask me, what's the best philosophy for me, my advice is look and work.

[00:07:23] Now figure out what makes you tech because that's going to tell you what the right philosophy for you

[00:07:28] is. It's not what worked for Warren Buffett, it's what's going to work for you.

[00:07:31] So this one was interesting to me because he talks about what he said was interesting. He says

[00:07:35] it's rigid, it's ritualistic and it's righteous. And those are all, first of all, he came up

[00:07:40] on the fly with all the Rs, which is very impressive. But second of all, it's all the

[00:07:44] things you don't want to be as an investor. You know, you don't want to be rigid, you

[00:07:47] don't want to be stuck in your ways. You don't want to be ritualistic, you don't want to

[00:07:50] be righteous, you know, judging the people who have different opinions than you. And I don't think

[00:07:54] the one thing I would disagree with him on is I do think there is some of that in the people

[00:07:58] who follow Buffett in general. But I also think we know a lot of people who go to the Berkshire

[00:08:02] meeting, we know a lot of people who follow Buffett and they are some of the most open

[00:08:05] investors to other approaches that I've found. So I don't think it's, and I don't

[00:08:08] think he meant it as everybody that goes to the meeting is this way. But I think

[00:08:12] it's important because this is something, this is a trap all of us can fall into

[00:08:15] an investing is we surround ourselves with people who are true believers in what we believe

[00:08:19] in. We see something else going on in the market that maybe contradicts that and we just

[00:08:23] dig our heels in. And that's a really dangerous thing. The way that he packages it up, this idea of

[00:08:30] have faith not dogma. And he brought us back to this in a couple of different ways, even if

[00:08:36] he only said it once, but have faith, not dogma dogma is what's dangerous. Dogma is the thing

[00:08:41] where you become part of the church and then you're like love everybody, but not those people

[00:08:45] and don't worry, they're going to hell. That's bad. You want to have an open enough

[00:08:50] mind to do this. We know this is true for the people going to the Berkshire meeting.

[00:08:54] We know they're not all like this. We all know some of them, because sometimes the

[00:08:57] Buffett people on Twitter and other places are as bad as the Bitcoin people as we've

[00:09:01] observed. If you anger the church, the people come running at you for these things,

[00:09:06] even if they're pointed criticisms. But then you meet somebody like I'm thinking about

[00:09:11] you know, friend of the show, Bogomil Baranowski. And I'm thinking about how he basically,

[00:09:15] he defines himself and his firm. He's like, I may, I think it's a I'm a value buyer,

[00:09:19] but I'm a growth holder. And it's one of those. There's a broader understanding.

[00:09:24] There's nuance to the understanding there's a richness of it. I know you get that from the

[00:09:28] community. Understanding with himself though, that it'd be easy to tip into that thing because

[00:09:34] I asked him in the interview, what's the upside of dogma? And he says, well,

[00:09:38] you never have to worry about being wrong about anything. You're always right. It's infallible,

[00:09:42] and it's right there. I think behind that is also this understanding if I join in this ritual,

[00:09:49] if I do this thing in this way, I might start to cement my thinking. And I'm not really going to

[00:09:54] gain anything from that room. Therefore, it's better for me to stay out of that room.

[00:09:58] Man, do I respect the hell out of that. There's no one good right way to invest. And I

[00:10:02] think that's what he was getting at here. And whether you're a Berkshire person or your

[00:10:05] growth investor or whatever you are, you have to be open to other people in the way they view

[00:10:10] the world. Or you're not going to be successful with this because things change. He referenced

[00:10:14] this idea that there are still some value investors out here out there who are shaking

[00:10:18] their fists at Google and all the big companies, Facebook and everything. And these things are

[00:10:23] about to collapse. It's about to come crashing down. This whole thing has been a house of cards.

[00:10:27] We referenced in one of our other episodes, Aaron Stanhope's chart he put up on this,

[00:10:31] showing that the free cash flow of these companies has tracked the performance pretty well.

[00:10:35] So these are great companies doing, you could argue they're overvalued certainly.

[00:10:39] But these are great companies that have built exceptional businesses. And as he pointed out,

[00:10:42] these businesses impact all of our lives in every way. So you can't sit here as a value investor

[00:10:47] and be like, well, we were right and those companies are wrong and they're going to come

[00:10:50] back to earth. That's just not right. Anybody who didn't own those was wrong.

[00:10:55] Whether you got there through factor investing, which we're going to talk about in a little

[00:10:58] while, or you got there in another way, I mean, if you didn't own those companies,

[00:11:01] you've struggled. So it's better to look in the mirror and say, why didn't I own those companies

[00:11:05] than to attack the other people and get, you know, dig your heels in and say this is all about

[00:11:09] the collapse. I'll paraphrase the Godfather. Leave the dogma take the faith. No matter what

[00:11:16] your investment philosophy is, leave the dogma take the faith. That's the thing.

[00:11:22] All investing is faith. Just like I love our all investing as a form of value investing.

[00:11:27] We only ever buy something because we think it'll be worth more later.

[00:11:32] So leave the dogma behind, have an open mind, keep the faith and what you're doing and why you

[00:11:36] think it's going to work. And then you got to play forward into reality with that.

[00:11:40] If you lose that, that's when you're going to get in trouble.

[00:11:43] So our next one deals with the active and passive debate. And this is something I

[00:11:46] asked a lot of people whenever we have someone really smart in the podcast,

[00:11:48] I like asking them about this and about Mike Green's work because this Mike Green's work

[00:11:52] is something I think about a ton because I think it makes a lot of sense. And I've kind of

[00:11:55] come from somebody who said maybe this is not right to believing more in it. So I like to ask

[00:11:59] anybody who comes on about this. So we asked him about the rise of passive,

[00:12:03] we asked him about the implications for active and what he thinks about it.

[00:12:06] Hold on before you play the clip. Tell me this when you think about it,

[00:12:09] active and passive and I guess anybody who has some type of approach that we would even

[00:12:14] modestly define as as active, do you think you're curious in it just because

[00:12:21] it's the dynamics of the other players on the field and like what's your actual

[00:12:24] awareness or how are you actually thinking about it? Or are you thinking in a vacuum?

[00:12:27] Why do you think it's so interesting to you?

[00:12:30] I think it's really interesting because it's something that influences the market that maybe

[00:12:33] has nothing to do with the companies themselves and the fundamentals of the companies themselves.

[00:12:36] And I think as somebody who's investing based on fundamentals, you have to think about that.

[00:12:40] If there's something else going on here with these flows where these big companies

[00:12:44] are going to be driven up relative to the rest of the market by flows that have nothing

[00:12:47] to do with their businesses themselves, I think that's something you have to consider.

[00:12:51] It's something you have to think about. And then also on the other side of it,

[00:12:54] Mike's work around how this could end. And again, he doesn't really...

[00:12:58] This is something he'll agree with Rick Ferry on which is you can't really do anything about

[00:13:02] how it might end. You could talk about bad things in terms of how it might end the future,

[00:13:05] but Mike is a believer and most people should be buying the index too,

[00:13:09] just like a Rick Ferry would be. But I think about that too,

[00:13:12] there's some sort of risk that we all should be thinking about over time to all this stuff.

[00:13:16] So I just think it's very interesting because you want to believe as an active investor,

[00:13:20] you want to believe that the fundamentals of companies will ultimately drive the outcomes

[00:13:23] over long periods of time. And if there's something that changes that,

[00:13:27] it just leads you to rethink what you're doing and I think it's something you need to pay attention to.

[00:13:31] That's an awesome answer. Let's play the clip.

[00:13:33] I describe active investing as the equivalent of floods or as a plumbing company

[00:13:37] that if you call into your house because it's a leak, leaves a flood

[00:13:40] and sends you a bill for it. You'd never pay the guy, right?

[00:13:45] Active investing, bad performance is caught up with them.

[00:13:48] I do think though that as passive investing grows and it will continue to grow,

[00:13:55] it's this is inexorable. It'll hit a cap. The reason it'll hit a cap,

[00:14:01] it's true that as passive investing grows, there are fewer and fewer people looking for

[00:14:06] bargains, looking for mistakes. But we talked about efficient, the reason mistakes are so

[00:14:10] difficult to exploit in markets is because other people are also looking for them.

[00:14:15] There's a tipping point where if too few people are looking for mistakes, you could argue that the

[00:14:20] magnitude of mistakes will get larger and that active investing is going to pay off again.

[00:14:25] So this is it. There's an ebb and a flow to this. And I think there will be a point where

[00:14:29] passive investing overreaches and active investors will come back. But it's, you know, it's

[00:14:35] the steady state is going to be about a lot fewer active investors than we see today.

[00:14:41] All those floors in Boston that Fidelity has, two-thirds of them they don't need.

[00:14:48] And so it's not great if you're in the active investing business because the business is going

[00:14:53] to get smaller. Remember we talked about bringing something to the table? The active investors

[00:14:59] are going to be left if people are going to be people who bring something to the table.

[00:15:03] And it's not going to be permanent. You've got to be adaptable because you bring

[00:15:06] something to the table. There's an ETF already getting formed saying let's replicate what this

[00:15:12] guy is doing. And they don't need to know what you're doing. They just need to know what you're

[00:15:15] buying and selling. They can look at your actions and reverse engineer what you do.

[00:15:20] And the next thing you know, there'll be an ETF doing exactly what you do,

[00:15:24] charging 10 basis points and you can't survive with 10 basis points.

[00:15:28] All right. So this is interesting. Like he didn't really, he didn't comment a lot on

[00:15:31] Mike Green stuff, although he did say at the beginning that he thought there was a

[00:15:34] momentum to this. So he did think that maybe the bigger companies were getting driven up by a

[00:15:38] momentum due to the passive flows, but he was more talking about active and you know, there's

[00:15:43] no, the case he made, you can't really dispute it. I mean, active management as a whole

[00:15:47] has been horrible. You know, the retract record is I don't know what he said, 85, 90%

[00:15:51] of active managers underperform. So that's just the fact of it. And he talked about

[00:15:56] how passive in the near term is going to keep getting bigger and active is probably

[00:15:59] going to get smaller. What I thought was the most interesting part is he talked about

[00:16:02] there should be a tipping point at some point. There should be a point where passive gets big

[00:16:07] enough that things kind of go the other direction. And I thought those were maybe some of his most,

[00:16:12] some of his better insights. I think this insight connects to a number of the other

[00:16:16] things that he talks about in the interview. And I think it's really, it's fascinating

[00:16:21] that when we think about business formation, it's really hard to start a competing business

[00:16:27] when something's going so well. And so to compete against the BlackRock BlackRock

[00:16:32] or a Vanguard, when all the data is against you, when everything else is there as an active

[00:16:36] investor, because it's really frigging hard to do. It's kind of a profound point to think about

[00:16:41] who would start a business to compete with thing this thing at the peak of its run.

[00:16:46] And that opens up the door to do we hit one of these great tipping points or inflection

[00:16:50] points where the whole market has to break before there is a viable business idea to not

[00:16:55] be running a passive shop or some form, or is there room as we accelerate towards whatever

[00:17:01] this tipping point is that maybe isn't going to completely break the markets or break capitalism

[00:17:06] or something. And maybe the idea is you can start that business in the wake of whatever

[00:17:12] comes to pass or when there's just enough room for this. It's really interesting to think

[00:17:18] about in this in layers. And I think the way he answered it shows just how aware he is

[00:17:24] of the nuance of these layers and how impossible it is to predict how it's going to play out.

[00:17:29] It can't be the market can't become 100% passive. And even if it did, there's still the

[00:17:35] active decisions of all the buys and sells and redemptions and redeems and everything else.

[00:17:38] Yeah, your point gets back to what I talked about before, which is what does this tipping

[00:17:41] point look like? It is a question a lot of us have to think about. Like obviously,

[00:17:45] we don't know what it is. We don't know which percentage of passive it is, but

[00:17:48] it could be a very ugly tipping point. It could be some sort of gradual thing

[00:17:51] where active management comes back to some degree. I don't know what it looks like.

[00:17:56] And that's what I like to think about. And that's why I like to ask people

[00:17:58] like him about it. And the other point is I thought he agreed with what Michael Bogus

[00:18:02] has talked about, which is unfortunately you can't say right now as we're getting less

[00:18:06] and less active managers, you can't say well, it's getting easier for active managers

[00:18:10] because what's left is the best active managers. And as you keep going down,

[00:18:13] that that's going to be the case. And so it doesn't necessarily get easier to be an

[00:18:17] active manager. I mean, he talked about the floors of fidelity and how many less people

[00:18:21] are going to be there. And that's probably right. I mean, I don't consider myself,

[00:18:24] I mean, I'm kind of an active manager where factor investors are sort of in that hybrid

[00:18:27] space between active managers and passive managers. Is this where you disclose your

[00:18:31] active fidelity real estate short position? Yes, exactly. Should I call alert compliance?

[00:18:36] Okay. Exactly. But I think about it like, I mean, obviously the market's getting harder.

[00:18:40] Not either. There's less active management, but it's probably getting harder, not easier.

[00:18:44] And so it's just an interesting thing for all of us to think about. And anybody who's

[00:18:47] in the active management space, and we'll talk about this a little bit more with AI later,

[00:18:50] like anybody who's in the space has to be thinking about like, what is my edge and

[00:18:54] what can I do that allows me to succeed in this type of environment?

[00:18:58] Yeah. And when does it work? The other brilliant part about this is just an awareness of when

[00:19:05] something works and who your competition is. And basically when's the tide going with you

[00:19:09] and when's it going against you? Understanding the basic tenets of that story, it's

[00:19:15] kind of everything, which is kind of why I love maybe it might seem ridiculous to somebody

[00:19:19] who hasn't really thought about this a lot, why we ask this question

[00:19:23] perpetually. But it really is one of the only ways we can address what's going on

[00:19:27] at all these different levels. I think it's a critical one.

[00:19:30] Yeah. The other thing he alluded to at the end, which I think is really important too,

[00:19:33] which is even if you do have you found something that works, even if you do have an edge,

[00:19:37] people who are like launching ETFs at very low cost are going to, if they can figure out how

[00:19:40] to systematize that, there's probably going to be an ETF that's going to come out,

[00:19:43] that's going to do the same thing you're doing and you've got to figure out something else to

[00:19:46] do, which makes it even harder. And especially in the world of AI where obviously technology is

[00:19:51] advancing very rapidly, I mean the ability to replicate some of this stuff is going to go up

[00:19:55] and up and up. So it's just a challenging place to be. So yeah, the next clip kind of hit home for me,

[00:20:01] which is he's not a fan of factor investing that it turns out.

[00:20:05] An efficient market is one that it's not one where markets don't make mistakes.

[00:20:09] That's the straw man that people like to use. Markets make, of course they make

[00:20:13] mistakes. They make some doosies. It's can you take advantage of those mistakes

[00:20:19] to earn more than you would have on an index fan? And the answer is it's really, really,

[00:20:24] really difficult. So when people talk about factor investing, it's, it is backward looking,

[00:20:32] it is mean reverting. And I think that they have to factor in a reality that the tides may be

[00:20:39] shifting, that the market may be changing. Now I'll give you an example, the small cap

[00:20:45] premium. Do you know there hasn't been a small cap premium since 1981? I'm going to add that on

[00:20:50] as a data set mix. So I'm going to let you pick the starting point and the ending point for the

[00:20:55] data. And I'm going to put up the data from 1927 to 2023. Over the entire period, small cap

[00:21:01] stocks have earned about 3.5% more than the, than large cap stocks, maybe even more 4 or 5%

[00:21:07] more than large cap stocks. Think, that's great. I should buy small cap stocks. But then I'll let

[00:21:13] you change the starting point from 1927 to 1950 to 1960. And you get to about 1977, starting

[00:21:22] in 1977, there's been no small cap premium. It doesn't mean that small cap stocks never do

[00:21:27] better. It's that they win some years, they lose other years. So that's what I think we need

[00:21:33] to think about. What's changed about the market first? The global economy is not US centric

[00:21:38] ending. 50 years ago, the US economy was a center of the global economy. Now it is a big part of

[00:21:45] the global economy, but it is not 50% of the global economy. Second, you got disruption, technology

[00:21:53] and globalization all playing havoc with what used to be mean reversion. Mean reversion

[00:21:59] used to be that you're a steel company, and your margins dropped, they would revert back to what

[00:22:04] they used to be. Well, that might or might not be the case when you have disruption and globalization.

[00:22:10] So I think we have to factor in the very real possibility that the world has shifted under us

[00:22:15] and if the world is shifted under us, many of the reasons these factors worked in the past

[00:22:21] are no longer in place. So investing based on factors, I mean, I'll give you a very

[00:22:27] honest reason why I think factor investing cannot deliver accessory to us. I have a very simple

[00:22:32] saying, I use in my investment philosophies class, if you don't bring something to the table,

[00:22:39] you should not expect to take something away. What are you doing in factor investing? You're

[00:22:44] basically screening, right? You're screening for small cap stocks, low price to bookstocks,

[00:22:48] whatever your factor is. 50 years ago that took a lot of work. You had to go collect the raw

[00:22:54] data you had to put in the screens, often run them by hand. Today I can run the screens on capital

[00:22:59] IQ. Across the global universe of stocks, it takes me three minutes to do. What makes you think

[00:23:06] that screening for factors entitles you to special status to earn accessory touch?

[00:23:13] An index fund and ETF can do exactly the same thing. If you bring nothing to the table,

[00:23:18] then many factor investors bring very little to the table. I don't expect you to take anything away.

[00:23:24] That's why I'm not a great believer in pure factor investing. I mean, you might add something to the

[00:23:31] mix that makes you unique. I know AQR had this quality small cap. They said we want small cap

[00:23:39] companies with quality in addition to small capitalization. Maybe there's a qualitative

[00:23:46] component to that quality. We look at management, we look at what they're doing.

[00:23:52] Now I can see the reason why you might be able to earn accessory touch, but factor analysis by itself

[00:23:58] is just mechanical. A machine can do it better than you can. I think that this is really interesting

[00:24:02] because it's important for me as a factor investor and we try to do this. You and I

[00:24:06] just did a thing about is value investing dead last week? We're trying to constantly

[00:24:09] challenge ourselves. A big part of his argument was if you want to take something from the

[00:24:15] table, you've got to bring something to the table. His argument was factor investors are not

[00:24:20] really bringing something to the table. Like he mentioned, back in the day, back in the 1960s or

[00:24:25] whatever, the process of finding the cheapest companies was very, very hard. You were actually

[00:24:31] getting documents from physical locations. You were doing the calculations by hand.

[00:24:35] You could definitely argue that was alpha back then because most people weren't going to do it.

[00:24:38] Today I can go run that screen in two seconds. Am I really bringing anything to the table

[00:24:43] as a factor investor? He said no. I'll get your take on that first, but I'll disagree with him

[00:24:47] after. But I think it's something you have to ask yourself at least. I think it's important to say

[00:24:51] like what am I bringing to the table or going back to when we talked about Ben Inker's

[00:24:54] lesson on one of our other podcasts, why should I get paid to do this? You have to

[00:24:59] have some reason the market just doesn't give you free returns. If you're doing something,

[00:25:03] why should I get paid to do this is I think a very important corollary question to what he

[00:25:06] was saying. This idea that back to our value investing episode, it's like, well, value investing

[00:25:14] is in dead, but maybe factor investing is dead inside. And it's this kind of gross idea,

[00:25:22] but really important of what are you doing that's actually adding value to this thing?

[00:25:26] And in his point, he talks about mean reversion and mean reversion. Somebody has to do something

[00:25:34] both to push something away from the mean, and then to push it back towards the mean over time.

[00:25:38] That's the way this works. So understanding if mean reversion becomes predictable in a market

[00:25:45] because everybody's got the information is going to converge that back onto the center,

[00:25:50] onto the neutral point or whatever you want to think about this, you got to ask this question

[00:25:54] of like, can I help push that thing back towards the middle? Or are there other

[00:25:59] forces at play that are already doing that for me? And my best case is to ride that wave?

[00:26:03] Or is it happening so fast or so thoroughly that I don't even have the opportunity to ride

[00:26:07] that wave in any way that's conceivably profitable? And that's a really powerful point. Because yeah,

[00:26:14] when you could run around all the places, I think about talking to Jim O'Shaughnessy about

[00:26:18] setting up his first the first business where they were doing the clone strategies

[00:26:22] of the managers to just try to predict, okay, here's how the managers act and then the clone

[00:26:26] strategies do better than the actual managers. But you still had to have access to this

[00:26:30] super sacred database and have the abilities to crunch these numbers with calculators and

[00:26:35] spreadsheets and whatever else. And now that now the day I can do it, now that somebody can launch

[00:26:40] an ETF tomorrow with a bunch of capabilities and some whiz bang pro programming to replicate

[00:26:45] these things and do it, what are you going to do? That's profitable beyond cost to drive

[00:26:52] these well understood pieces of mean reversion any further? That's a profound question.

[00:26:59] It is really brings that point on like is value investing dead? I still think the answer

[00:27:04] is no, but is factor investing dead inside? Man, sure feels soulless when we see the

[00:27:12] totally BS factors in that paper and go like, Oh, those work maybe better than price to book or

[00:27:18] whatever else. So to push back a little bit, and this kind of gets into what you're talking

[00:27:21] about that paper. But so I want to say a couple things. First of all, on mean reversion,

[00:27:25] we do have to remember that not all factors rely on mean reversion value relies on mean

[00:27:29] reversion. You momentum, you've got quality, you've got a lot of other things going on.

[00:27:33] So factor investing is not just about mean reversion. But the other thing I would say

[00:27:37] is going back to why these things work, you've got the risk based explanation,

[00:27:41] you've got the behavioral based explanation. So the idea is what am I bringing to the table?

[00:27:46] In a lot of ways, what I'm bringing to the table is the willingness to bear risk.

[00:27:50] What I'm bringing to the table is the willingness to wait things out while the market maybe

[00:27:53] corrects these mispricings over a variety of securities. So I do think I would push back on

[00:27:58] him to some degree by saying like, this is not, I agree with him that this is not necessarily alpha

[00:28:03] like basic factor investing is not alpha, it's kind of beta these days. But where I disagree is I

[00:28:07] think you still can get a better return for that. If all this academic research holds up,

[00:28:12] if I'm getting paid for taking on that risk, if that mispricing exists,

[00:28:15] I can still get a better return in the market. Now it's going to be a lumpy return.

[00:28:19] It's going to be a painful return. Most people shouldn't do it because you're going to

[00:28:23] go along the way, especially if you're just following value, which I would not recommend.

[00:28:26] But I do think there's a reason you can explain like within his framework why you should get a better

[00:28:32] return in the market as a factor investor. Here in the San Francisco office, we revert to meanness.

[00:28:37] That's right.

[00:28:38] Play that clip.

[00:28:39] And for it, I've just literally disagreed with Oswalt the Motor in here. So that's obviously

[00:28:43] you can pick who has a better track record to rely on with that. I would probably pick him.

[00:28:48] But I do think it gets to the idea that there really are two sides to a lot of this stuff.

[00:28:52] Even when you talk to great investors, I think we're going to have Cliff Asnes on the podcast

[00:28:57] coming up in a month or two. You could put him on the other side of this and he would have a

[00:29:01] different opinion than Aswalt. And they're both dramatically smarter than me. So

[00:29:04] I think it's just important with all these things. Everybody, just like Aswalt talked about,

[00:29:08] you don't want to just follow these legends blindly. Also with people we put on the podcast,

[00:29:12] no matter how smart they are, no matter what their resume is,

[00:29:15] you want to understand there probably is somebody smart who can argue the other

[00:29:18] side of some of this stuff as well. So moving on to our next one, I really like this one a lot.

[00:29:27] And this is the idea that everybody who's an active investor, most people are talking

[00:29:30] about the idea, I'm an actor investor, I'm going to beat the market. Oswalt talks about why he

[00:29:35] thinks about his portfolio in a different way than that.

[00:29:38] I invest actively because I enjoy investing. I invest actively not because I want to beat

[00:29:43] the market, but because I enjoy investing. Which means that when I invest, the one thing

[00:29:49] I have to do is remember the Hippocratic code, which is do no harm. Don't do things in your

[00:29:55] portfolio that could cause you calamitous costs. For instance, I diversify. I hold 40 plus stocks

[00:30:06] in my portfolio. That would be a no-no with old time value investing where you said concentrate.

[00:30:12] Now why not? Now people say don't you feel confident enough in your big winners? No,

[00:30:18] I don't. You might, I don't because I know how many things I don't control. Imagine buying Marriott

[00:30:25] in December of 2019 because you felt confident it was undervalued. You might have been right,

[00:30:33] but two months later COVID hit and there goes your rightness. There are too many things I

[00:30:38] don't control. It's hubris to think that you pick the five best companies in the market.

[00:30:45] So I diversify. I try to buy undervalued companies, but here's the bottom line though.

[00:30:53] If I get to be 85 and you came to me on my deathbed and said, you know what? You could have made

[00:31:00] 50 basis points more or 25 basis points more a year by investing in index funds. Instead of

[00:31:06] doing what you did value companies and buy cheap companies, you ask me, are you okay with that?

[00:31:12] My answer is yes. I'm okay with not beating the market. And that I think is critical because if you

[00:31:20] keep telling yourself, I did the right thing, therefore I should beat the market, they're in

[00:31:24] like the seeds for being righteous, for being indignant, for getting angry. I mean, when you

[00:31:29] get angry at markets, nothing good comes out of it. And if you think about it, there are a lot

[00:31:35] of people out there very angry at markets, very angry at other investors, they're very angry

[00:31:40] at what other people do. And my response is you're wasting your time and your energy and it's sucking

[00:31:47] up what you should be doing on your own investments. So if I end up underperforming the market,

[00:31:53] I'm perfectly okay with that. So I love this from the perspective that first of all,

[00:31:57] we just talked about this, like most people who manage their personal portfolio and try to beat

[00:32:01] the market are going to come up short. I mean, the data is overwhelming on that. But

[00:32:06] I think there's still value in it. And I think what he said is right. Now, first of all,

[00:32:10] he's probably outperforming the market by a lot will be my guest with his personal portfolio.

[00:32:13] He didn't say that and he did say he's outperform, but my guess is he probably has.

[00:32:17] But he still said he does it for the love of doing it. Like he enjoys it. And like he said,

[00:32:21] if I'm on my deathbed and I under reform the S&P 500 by 50 basis points a year over my

[00:32:25] whole career, I'm fine with that. And I think that's great. I think that's a great way

[00:32:29] to look at it. If you're not looking at it as for someone who really loves it,

[00:32:32] who wants to manage their money, who's not doing crazy things is going to destroy their

[00:32:36] financial future. I think that's perfectly fine if you don't outperform the market.

[00:32:40] It's okay to admit that your one life ambition at this point is to outlive

[00:32:46] Professor Demotorin and show up on his deathbed with his performance four card and just go,

[00:32:50] he's so I just want to review this with you in between medical charts here.

[00:32:55] I have a feeling he's not going to want to hear it.

[00:32:57] I have a bigger problem than that point.

[00:33:00] This idea of like not beating the market doesn't mean the market is beating you.

[00:33:07] It's it's so simple. It's so profound. It's so just, hey, I love this thing. I'm

[00:33:14] I'm speaking in his voice. He loves this thing. He's good at this thing. He loves teaching this

[00:33:19] thing. He loves taking his passion for explaining this thing he's good at and

[00:33:23] helping other people to understand it and then take and apply into other pieces of life,

[00:33:29] if not into other career paths and everything else. He's built his whole life and identity

[00:33:33] around this and sharing this thing that he is joy for. There's nothing wrong with that.

[00:33:39] And if you do have joy for something, it's really wonderful to be able to find people

[00:33:43] like him in the world to be able to read the books to go on YouTube, watch the lecture series,

[00:33:49] see the PowerPoint presentations, play with his data sets online off of his website,

[00:33:53] all the things that he does and know that he's doing it all for just the joy of doing it and

[00:33:57] sharing it. There's such a shortage of people with that approach in the world and to think

[00:34:03] for a minute, you know, this is why it's great. He's not taking investor money. He's

[00:34:08] not doing something else where like performance is a component of how we have to understand

[00:34:12] or believe this guy. We can look at the stuff he done. He's very transparent about the

[00:34:16] trades and the things that he does online. And we can see like, okay, like here's how it's going,

[00:34:20] but he's not offering to take my money. He doesn't want to charge me a fee for any of this stuff.

[00:34:25] It's a really lovely thing to see a person just doing it for the joy of doing it and

[00:34:31] wanting to help others do it better. Another point here is he is not most people.

[00:34:35] Like most people do not have the passion for valuation that he does. So I don't think

[00:34:39] the lesson to take for your average person out there is like, I just start managing

[00:34:42] my portfolio for the joy of it. Like he loves this stuff. Like if you look at his valuations,

[00:34:46] like he spends tons of time on that. He loves analyzing companies. Like that's a 0.1% type of

[00:34:51] thing. And you have to be careful. Like he talked about do no harm. And so what I said before

[00:34:55] about, well, he's okay underperforming the market by half a percent, there might be other people

[00:34:59] who don't have the kind of money he has who are relying on their portfolio for retirement,

[00:35:02] who are not okay underperforming the market by half a percent. And that could really change

[00:35:06] their future. So you've really got to think about who am I? Like what is my financial

[00:35:10] future? How much do I really love this? And I think it's a small portion of people

[00:35:13] who would agree with him and think this is the right thing to do. But I think there are people

[00:35:16] like that. And for people like that, I don't think there's any problem in saying like,

[00:35:20] I underperformed the market, but I got a lot of joy out of doing it along the way.

[00:35:25] There's nothing wrong with it at all. And if your thing is not the market side of it,

[00:35:29] if it's being a carpenter or managing properties or pick whatever other path in the world that

[00:35:34] you want to do and the degree that you want to do any of this stuff off to the side,

[00:35:38] it's all going to be a balancing act, no matter what. And just understanding that it's the balancing

[00:35:43] act you choose in your life. And hey, if you're interested in this stuff, and it's the other

[00:35:48] brilliant side of this, these are all there's just so many wonderful metaphors in this stuff

[00:35:51] because of the way he's exploring how to explain them. So yeah, he's the one guy who

[00:35:56] cares about that. But just listening to him do it, you get a whole bunch of that little

[00:35:59] wax on wax off wisdom falling off at the margins. And the other thing he talked

[00:36:04] about is really important is diversification. He talked about he owns something like 40 companies.

[00:36:08] So it's easy to take this idea of do what you love and love investing and be like,

[00:36:11] I'm going to put all my money in this profitless tech stock that I think is going to be the biggest

[00:36:14] company in the world. You can't do that. Even someone like him who does the detailed valuation

[00:36:18] he does holds 40 companies. And he talked to me even talking our interview about this,

[00:36:22] but he talked to another one. He also owns companies across the life cycle.

[00:36:25] Like we talked about the life cycle of companies with him. He owns companies that are on the

[00:36:28] rise. He owns companies in decline. And then that's part of his diversification. He's not

[00:36:32] known for his valuations of NVIDIA and stuff like that, but he owns a lot of companies that are

[00:36:36] like NVIDIA. So I think it's really important that even someone like him,

[00:36:41] he understands the importance of diversification. And all of us should probably understand that

[00:36:46] as well. Like he talked about a hubris and how much hubris it is to think,

[00:36:50] I can pick the three or four best companies. Like most people can't do it. He can't do it.

[00:36:54] And he recognizes that. And that's probably good for the rest of us too.

[00:36:58] Really good for the rest of us to hear that message. And really good,

[00:37:02] you know, like you said, don't put all your money into one thing. Spread it out.

[00:37:07] You can't be all Jack for hand coin all the time. He can't be all that Siggler token.

[00:37:12] You got to spread it out and actually think about

[00:37:15] again, it's one of those things that just lays into so many other life philosophies.

[00:37:19] Like you can love one thing that's your core guiding philosophical principles that

[00:37:23] you have faith on that you're not dogmatic about. But even inside of those things,

[00:37:27] having faith means like spreading out some of those bets and understanding a multitude

[00:37:31] of ways to express these desires for a life of growth with or without a benchmark being

[00:37:38] your determining factor of success. So this next one is my favorite one.

[00:37:42] It's the one I've thought about the most since the podcast. So I don't think anybody's created

[00:37:46] the Matt Ziggler bot yet. The Jack forehand bot does not exist, but the Acelot, the motor

[00:37:50] and bot does exist. So he talks about this and the idea of developing a boat against your bot.

[00:37:55] Five weeks before the spring semester of 2024 class has ended, I got a call from

[00:37:59] a friend of mine. In fact, I'm writing a blog post about this. His name is Vasanthar.

[00:38:04] He teaches machine learning. He knows more about artificial intelligence than I will

[00:38:09] ever learn in my lifetime. He called me and he said, I've created a demoderan bot.

[00:38:14] And I said, Oh what? He said, a demoderan bot. And I said, what is a demoderan bot?

[00:38:18] He said, I've created this AI entity that has read every single blog post you ever

[00:38:23] written, watched every single YouTube video that you've ever put on, which means it's

[00:38:29] watched every class. It's looked at every evaluation that you've ever done.

[00:38:34] And it remembers everything that it has and it's ready to go. And I said, ready to go where?

[00:38:40] He said, it's ready to value a company. Can you give me about 20 students from your class

[00:38:44] so we can run a contest talk the bot against? I don't have the final results in from that

[00:38:50] contest, but I'm terrified either way because if the bot works really well, that's about it

[00:38:55] as clear a signal as I can get that redundancies around the corner.

[00:39:01] If the bot does really badly, it means that everything I've done in my life is about

[00:39:06] teaching how to be that that's not working because this bot has read everything I've

[00:39:11] done and it's confused about value companies and clearly I'm not doing my job.

[00:39:15] But you know, the piece I'm writing is act as if there's a bot with your name

[00:39:20] looking over your shoulder watching what you're doing. Remember, I mean, you don't have to be

[00:39:25] even the public domain like I am. It's watching what you're doing and ask yourself,

[00:39:30] what can I do that a bot can't do better? And that I think is going to be the challenge for

[00:39:37] those people who think AI is going to change the way we work and live

[00:39:42] is if your job is mechanical. That's why factor investing completely mechanical

[00:39:49] if what you do is mechanical rule driven, bot can do it much better than you can

[00:39:56] because machines are better at mechanical stuff than you and I are

[00:40:00] and they follow the rules. They'll be absolutely fidelity to those rules.

[00:40:05] So whatever you do, take a look at what you do and ask yourself what can we talk about modes,

[00:40:11] right? Investing. My question is what's your mode against your bot? What is it that you do

[00:40:18] that you don't think you and it's something that's occupied my mind for the last few months.

[00:40:23] In my piece, I suggest a few things we can do. And I think that that's something that each of

[00:40:29] us has to think about what can I do to keep my bot underperforming what I can do.

[00:40:36] You think he has first bot mover advantage? Like is his bot going to dominate ours because

[00:40:41] it's out there first or is this his bot coming to kill it because he's produced so much public

[00:40:46] research that's so much better than anything you and I have ever produced that I mean he's basically

[00:40:50] done. I mean, every class he's done is online. All his valuations are online. Like I mean,

[00:40:54] he's produced 1000x the quality we produce. So I think just that alone is going to probably exceed

[00:41:00] our bots. Okay, but how many times does he discuss cat turd publicly? Really? That's

[00:41:05] true. I mean, you've got to do cat turd records twice now. Yeah, on two different occasions.

[00:41:09] It's cat turds Twitter account. But anyway, yeah, it's I don't even want to know what my bot

[00:41:13] my bot would probably all over the place yours would probably all over the place than mine.

[00:41:18] Different things you're talking about. But I do think it's really important.

[00:41:21] I'm thinking about this all the time like in everything I do, I'm thinking about like

[00:41:24] if you could create a bot that does what I do, what are the things I could do

[00:41:28] that it can't do? And I think all of us are going to be surprised by all the

[00:41:31] things the bot can do that we didn't think it could do. So that's not as easy a question

[00:41:35] as you think like all of us have egos and we want to say, Oh, you know, I can do this

[00:41:38] and there's no way the bot can do this. These bots are going to blow us away in terms of what

[00:41:42] they're going to be able to do. So I think about it like personally, I think about it

[00:41:45] in business. I mean, I'm a quantitative investor. Obviously, a quantitative investor is a place

[00:41:49] where these bots are going to have a big impact. Like am I going to be able to do something?

[00:41:52] I mean, you could argue on one hand like no, I'm not going to be able to have

[00:41:55] a moat there. You could argue on the other hand, like if I'm really early with this and I

[00:42:00] learned how to use these things with along with myself, maybe I become better than the

[00:42:04] people around me. But I think this general question like no matter what you're doing in life,

[00:42:09] I think you have to be asking yourself, like, what is my moat against my bot? What can I do

[00:42:13] that it can't? I gotta ask you this question too. This is another one out of the comments,

[00:42:18] but it was one that I didn't really think of in this way. But the thing I keep thinking

[00:42:23] about is this modest existential crisis. Like this is giving to me. Did you read the comment

[00:42:28] about, so basically if the bot ends up being better than you, then you've lost your bot.

[00:42:36] But if the bot ends up being worse than you, then like clearly you're a failure as a teacher.

[00:42:41] Did you read that comment? Yeah, that was in his quote. Like it's right. I mean,

[00:42:45] he's basically in a no win situation here. Like, right, if he's a good teacher, the bot

[00:42:49] should be better than him or it should be better than his students, which is what

[00:42:52] they're it's competing against right now. Right. But yeah, it's like there's both sides to

[00:42:56] it. So yeah, I really don't have any answer to this. It's just really interesting to me

[00:43:00] to think about and it's interesting to me to think about like in the world that I live

[00:43:04] in part of the time and who live in all the time, which is this world of financial advice,

[00:43:08] like what does it mean? Like I don't think like a bot is going to be when someone's

[00:43:14] panicking because the market's going down. And you know, a big part of that business

[00:43:16] is coaching and helping people get through things. Like I don't think they're going to

[00:43:20] be like typing into the bot or talking to the bot once the bot becomes a person,

[00:43:23] which is going to be. I don't think they're going to have their bot call Matt Ziggler's bot

[00:43:27] and have a discussion about this, like without you two having to get involved.

[00:43:30] So like that part of it might be pretty protected. But like if I think about like

[00:43:34] asset allocation and building a portfolio for a certain person's needs, I mean,

[00:43:38] a lot of that, you know, bots are probably going to be able to do a lot more than we think.

[00:43:42] So I think about like in the business we're in, like what can be our moat? How it's

[00:43:45] going to change? And we don't have any answers to it. But I think everybody should be

[00:43:48] thinking about it, not just with respect to financial advice, but with respect to what

[00:43:52] they do. It's also, I think tremendously important to remember anything with a

[00:43:59] bot. There's a big difference in looking backwards versus projecting forwards.

[00:44:06] And the bot is going to be and will probably grow in its ability to be really,

[00:44:11] really good at dealing with all those prior circumstances. But just like us,

[00:44:16] just like humanity, like going forward, it might be able to reduce some of those

[00:44:20] mistakes, but that's not always a good thing. Sometimes going forward in life,

[00:44:25] the little mistakes, the little things, even if they contribute to new learnings or don't

[00:44:29] contributing anything useful, that's kind of the magic of life. It's the magic of the

[00:44:33] accidents. It's the magic of the other stuff that just you learn through those experiences.

[00:44:38] It really him talking about it shifted that emphasis on what actually matters is the way

[00:44:45] you're going to mistakenly stumble your way forward through life. And if anything,

[00:44:49] the better the bots get, the more experimentation you might want to take

[00:44:53] with your faith, with your ability to let go of that dogma going forward, because you're going to

[00:44:58] want to tinker and experiment and do all these things more because you want to do stuff outside

[00:45:02] of the bounds, outside of the parameters of what a bot's going to do when it's being hyper

[00:45:06] trained on all that past looking data. Yeah, but my take right now is the people who figure

[00:45:11] out how to use this to supplement themselves are going to be the winners here. I always go

[00:45:15] back to this quote Rob Arnot had when he came on XS returns. He called like all of research

[00:45:19] affiliates together and he basically said AI is not going to take your job, but someone who learns

[00:45:24] how to use it is. And I think that's the that is absolutely the right way to look at this right

[00:45:28] now. Like, I don't think we're going to have like AI financial advisors that are going to be

[00:45:32] taking over the financial advice industry in the next 12 months. But I do think you

[00:45:36] and what you can do for your clients and your ability to prepare when you're talking

[00:45:39] to your clients and if you're really using this technology, you're going to make yourself

[00:45:42] much better. You're going to free up more of your time to do other things. You're going to

[00:45:46] free up more of your time probably to talk to clients, which is like one of the most important

[00:45:49] things that a bot's not going to be able to do. So I think that's the way to look at it is

[00:45:52] where is my true value? Where is my mode against my bot and how can I use the bot to do everything

[00:45:58] else so that I can really like focus on my true value. Which is why we have Rob Arnot's

[00:46:04] quote hanging above the door of our San Francisco office. That's right.

[00:46:08] You got to put it there. Yeah, absolutely agree. It's a beautiful office Matt. I really

[00:46:12] love it there. So I think about this a lot though that it's the bot army and I do feel like

[00:46:19] I do feel like this is a big part of it. And I actually do think of it as like a bot army.

[00:46:26] There's no unifying bot. We don't have like the one super computer that can go out and do

[00:46:30] anything, everything right now. But we are starting to see the advent of all these little

[00:46:34] bots to help us with all these little different details and tasks. And they're really good

[00:46:38] at those micro details and those micro tasks. So I look at the future profession of advice,

[00:46:46] the future profession of the entire finance industry of who's going to be able to collect

[00:46:50] up and build and manage those little bot armies to help them with all those tasks. And you know

[00:46:54] what? The crazy part is, as opposed to just making an old part of life simpler, which there's

[00:47:01] some of that although I've been less enamored with a lot of those things right now.

[00:47:05] I'm more enamored with the stuff that was a little bit hazy or really hard to do,

[00:47:09] or the lift was too much. You know, analyzing the tax return all the way through was always a

[00:47:16] nightmarish thing. But now there's doc, there's there's bots that can help us do this stuff

[00:47:21] and focus in on little different areas like, oh, you're going to take this distribution

[00:47:25] because you're buying this house or this thing is going on, it's going to screw up the

[00:47:28] Irma adjustment on your Medicare. And we just want to make sure so you don't get the surprise

[00:47:32] bill and blah, blah, blah, blah. And it's like little stuff like that. That was a

[00:47:36] important detail but a really huge lift. That army of bots totally changes the nature of

[00:47:42] the advice we can give the quality of the conversation we get out with the client.

[00:47:46] That's that's frigging amazing. And that's the part that's already here. So this keeps

[00:47:50] progressing. It's totally in the hand of not just the one bot to rule them all,

[00:47:55] but are you going to learn to be a generalist or a general, I guess at the front of this

[00:48:00] army of bots that helps you do the job and deliver the task because it's holy crap. What a

[00:48:06] scale advantage. And to your point on the tax return, that type of mechanical stuff is where

[00:48:09] it's really going to add value and it's also going to prevent mistakes. Like a person reviewing

[00:48:13] some extensive tax return is might miss something. They might miss something on there that you

[00:48:17] should see. Like when these things get really good and they are really good now,

[00:48:21] like you can be you're going to be able to have a high level of confidence that it's

[00:48:23] gone through the whole thing and that anything you need to brought to your attention is there.

[00:48:26] So it's not only a time saver, but it's probably going to avoid some mistakes for these

[00:48:30] mechanical processes that a person might otherwise make.

[00:48:33] We've found mistakes from otherwise good CPAs and they're just honest. It's just like

[00:48:38] for anything that's purely quantitative and very low on the qualitative scale. It can be

[00:48:44] a really great fact checker. It's a better version of spell check, even if that's an

[00:48:48] oversimplification of what it does. But in some cases, just just a better version of

[00:48:52] spell check. Hey, even the spell check I use, even like Grammarly plus whatever the default

[00:48:57] Google thing is when I'm like editing things that I'm writing. It's amazing how far along

[00:49:03] those have come. And it's also super annoying how many things I have to be like, no, I don't

[00:49:06] want the most premium service you offer. Even though I paid for some of this stuff.

[00:49:10] It's crazy. So this next one, we'll do a couple more here, but this next one was

[00:49:14] great for me. You asked him about this at the beginning and this is like,

[00:49:16] I feel like this is directed directly at me because I am Mr. Spreadsheet. So

[00:49:20] here he's talking about the importance of story in valuation.

[00:49:22] It reflects something else I started saying. I've taught valuation now for close to 40 years.

[00:49:29] I did my first valuation in 1981. I did it with an annual report and a ledger sheet,

[00:49:36] a paper and a calculator. That's how old I am. But one of the things I noticed as I kept

[00:49:42] and as I looked at appraisals and valuations is our access to data became much better.

[00:49:47] And we could know you couldn't go to S&P capital IQ facts that download the last 25 years of data,

[00:49:53] not just in your company but in every company in the sector.

[00:49:56] In seconds, you have more powerful tools. I work with a calculator and a pencil.

[00:50:02] You have Excel spreadsheet. You can build macros if you're really sophisticated.

[00:50:06] You can bring in Python. And I noticed a contradiction. We had more data,

[00:50:11] more powerful tools and evaluations were actually become quality became qualitatively worse.

[00:50:16] The question I started asking is what's going on? Why is the data and the more powerful

[00:50:22] tools not translating to better valuations? And my answer was, and I could be wrong,

[00:50:28] is that we've forgotten that every valuation you're telling a story. Whether you like it or not,

[00:50:34] when you put numbers for a company, you're telling a story about the company.

[00:50:38] And it's your job to make the story explicit and ask yourself, do I buy that story?

[00:50:44] We've forgotten that art of storytelling because much evaluation has become financial

[00:50:49] modeling. You're an Excel ninja. You know what buttons or what keys to hit to turn every other

[00:50:55] row a different color, but you've forgotten that every valuation is a story. So that book

[00:51:00] reflected the reality that we've forgotten the art of storytelling and that without stories,

[00:51:07] valuations has become numbers in a spreadsheet. So that book actually reflected my

[00:51:14] desire to bring back stories to valuation. Something that I've had a role in driving out

[00:51:20] because people looked at books like mine and thought equations and models would basically

[00:51:24] get the valuations. And it was my response to saying, look, you might have learned all these

[00:51:31] tools from my books, but they're not going to help you value companies unless

[00:51:35] you understand how to tell a story about a company.

[00:51:38] Yeah, I think this is really interesting to me. It particularly applies everywhere,

[00:51:42] I guess, but it particularly applies to early stage companies. So much of the valuation of

[00:51:48] these companies is they're telling you a story with respect to what they're going to be and you're

[00:51:53] trying to use that story to try to figure out what it's worth. And there's probably no one

[00:51:57] better than Musk to think about this. If you think about Elon Musk's career and what he's done,

[00:52:01] I mean, he's told stories about cars and self-driving, robo-taxi, solar roofs,

[00:52:05] digging tunnels under cities, he's putting stuff in people's minds, he's got rockets in space.

[00:52:10] If you're going to figure out what the value of any of that is, the idea is which of these

[00:52:15] stories are legitimate, which of these stories are going to become massive things, and how do I

[00:52:19] think about valuing it? So there's no way to avoid, there's no way to use the spreadsheet and

[00:52:23] just put numbers in there. There's no way to avoid the impact of the story on this stuff.

[00:52:27] The thing that I love and his new book, Outstanding, Super Super Interesting,

[00:52:34] the older book that we mentioned, the one that's all about narratives and numbers,

[00:52:40] you have to understand the story and then the layers of story within the greater story. And

[00:52:44] the Musk example is a profoundly important one, because you can't forget life cycle from the story,

[00:52:50] which means you can't forget the phases of the story, and you can't think about,

[00:52:55] can't not, can't talk about it without not talking about all the different layers of that

[00:52:58] thing that are going on. So you have an idea like the total addressable market thing,

[00:53:04] you have this idea, and you're like, Hey, we can go after this whole market with this

[00:53:07] stuff. Well, now the story starts where you are first identifying a problem, then saying I have

[00:53:13] a profitable way to solve the problem, then saying there's somebody who wants to pay me

[00:53:17] profitably to solve that problem. And now that I have to build this thing, I need somebody else

[00:53:22] to give me money because I don't have anything to sell yet to potentially fund my venture so

[00:53:26] I can solve that problem for those people. And then I have the money, but then I got

[00:53:29] to get the people who are willing to build the thing to solve the problem and make sure

[00:53:32] that can still be profitable. As that scales, as that snowball rolls, the story keeps changing.

[00:53:39] And as that snowball gets really, really big potentially, if you're successful and keeps

[00:53:42] rolling further and further along, all those things keep changing because now you could be

[00:53:46] 20 years long in the tooth, and trying to keep people on board. He told the the Yahoo story,

[00:53:52] I remember with Marissa Meyer when she came in to run this and was yelling at all the people

[00:53:55] to stop working from home and all the shenanigans that went on with that.

[00:53:59] Those are the layers of stories, as much to convince the shareholders of what the right

[00:54:03] activities of are as much to convince the activists who came into that company and

[00:54:07] try to like break it apart for pieces which they ended up succeeding in doing. There's

[00:54:13] there's just thinking of this in those layers is such a profoundly important piece. I will

[00:54:18] add though, in your defense gym to the spreadsheet people out there in the world

[00:54:23] of which I have many sympathies for this concept of the spreadsheet as a another form of poetry

[00:54:29] of another way to reflect reality. You really do need to bring those together and integrate them.

[00:54:34] Nobody does it better than him in my book, because he gets out of build out that model

[00:54:39] and think about those things and what more is poetry than just a description of reality

[00:54:44] in some other term in some way where you're like this actually gives me an accurate depiction

[00:54:50] of this thing. And yeah, you can use the most flowery language or you can use frigging numbers

[00:54:54] in rows and columns. But that idea that you can understand there's a connection between what's

[00:55:00] going on in the world my description of it and then all the different layers that it's operating

[00:55:03] and functioning in this model of it that I am building. That is a profoundly beautiful

[00:55:08] statement. So I think there's poetry in that Excel spreadsheet, Jack. So you're saying I can

[00:55:12] put poet in my Twitter description now, if who I am, I insist, I insist in your San Francisco

[00:55:18] office LinkedIn ID, you add resident poet, resident Excel poet, Python poet, maybe that

[00:55:26] sounds dirty. Don't use that one. HR will get on you for that. Yeah, something like that. You're

[00:55:30] clear. The other thing you said that I thought was important is it's not it is across the whole

[00:55:34] life cycle. Like I was talking about early stage, but like we talked in the podcast about

[00:55:38] Intel and Starbucks, which are both companies that are maybe maybe in the decline phase now,

[00:55:43] and they need like a rebirth story. You know, Intel, maybe it's around AI, Starbucks is

[00:55:47] struggling with online ordering versus the experience. So like those companies have to

[00:55:51] tell a story right now to figure out, like, how are we going to change things? And then people

[00:55:55] that are valuing those companies have to like evaluate the merits of those stories and how

[00:55:59] it will impact their cash flows in the future. So there's no way to get around this. There's no

[00:56:04] spreadsheet that's going to help you solve Starbucks problems right now because you have

[00:56:07] to figure out what it is they're going to do, whether you believe their story and how that

[00:56:11] impacts the future in order to value the company. Yeah. And in your model, you're

[00:56:15] going to see the stories in those layers because you're going to say, okay, here's what

[00:56:19] the CEO says they're going to do. Okay, do they need more money to do that? Do they need to keep

[00:56:24] shareholders happy if shareholders are dumping shares? Like what are the things that now

[00:56:28] not just is the story from the company out? But what's the story shareholders are telling?

[00:56:34] What's the story bondholders are telling? What's the story employees are telling? And

[00:56:38] do they want to come in and work at this place or they not? They're like, oh, everybody

[00:56:41] calls out at six in the morning and seven o'clock at night, but we're going to stubbornly refuse

[00:56:46] to stay open in these places. There's lots of reasons where a story's interpretation can adjust

[00:56:53] not just the price of the thing that you're investing in or thinking about investing in

[00:56:57] or evaluating or valuing, but how all those stories are going to stack together to say,

[00:57:03] is this a good story? And is this a good story? Is it an integral question to asking,

[00:57:08] is this a good investment? So for the last one, since it is our closing question of the podcast,

[00:57:12] we should do this. And I love asking people this question, which is if you could teach one

[00:57:15] lesson to the average investor, what would it be? And especially like asking people like Oswald

[00:57:19] this question because they don't get asked it very often and they've learned so much

[00:57:22] from what they've done over their career. So it's always interesting to see

[00:57:24] like what they break it down to. So here's his answer to the lesson he would teach the

[00:57:29] average investor. I think it's a lesson that increasingly is getting lost. Investing

[00:57:34] is about preserving and growing wealth. It's not about getting rich. And I think it's some

[00:57:39] of these days of YouTube celebrities telling you can get rich again. I was just watching a PBS

[00:57:44] documentary on crypto and how people want to hit the jackpot. I think that going for 10 baggers,

[00:57:53] 100 baggers, again, think of how much we go after those. That's not the name of investing

[00:57:58] is about preserving and growing wealth. Would I like to grow wealth at 50% a year? Yes.

[00:58:04] Would I like to have 100 bagger in my portfolio? Yes, but I shouldn't be actively looking for

[00:58:10] those things because if I look for those things, I'm going to miss the core tenets of investing.

[00:58:15] So I know it's tough to follow when people around you are getting rich effortlessly. The guy who

[00:58:20] bought Bitcoin at 100 and sold it at 5000, you say, I'm working so hard to get a 15% return

[00:58:27] a year and there he made 50 times. I think that's why looking at other people getting,

[00:58:33] letting envy drive what you should be doing as an investor can be extremely dangerous.

[00:58:39] So keep your focus on preserving and growing wealth, which means you need the income

[00:58:44] to create the wealth. So if you're a doctor, go back to being a doctor, don't spend your lunchtime

[00:58:50] looking at what stocks are doing, what your portfolio is doing, read up some medical stuff.

[00:58:54] If you're an engineer, be an engineer first. Live the rest of your lives and don't let investing

[00:59:00] become the center of your universe because you need the income from whatever you do to

[00:59:05] create the wealth which you can then preserve and grow. But in a world where markets and I

[00:59:11] think that watching CNBC all day is a recipe for a terrible investing philosophy. So spend

[00:59:20] less time tracking markets on a minute-by-minute basis, reading everything that's happening. Go back

[00:59:26] to living the rest of your lives and let investing do what it's supposed to do which is take the

[00:59:31] wealthy accumulate from the rest of your life and preserving and growing that.

[00:59:35] So yeah, I love this idea on preserving and growing wealth. There were a few different

[00:59:39] levels to what he talked about here. Focusing on preserving and growing wealth was really

[00:59:43] important and he talks about the idea that you don't want to take unreasonable risks

[00:59:47] in your pursuit of that. And I think the more important part was he focused on and we've had a

[00:59:52] lot of people who have given a similar answer here, the idea of focusing on your human capital.

[00:59:56] The idea that if you're a doctor, go be a doctor. Focus on preserving your wealth and then go be a

[01:00:01] doctor. If you're going to be, most people who have been successful who we've seen have been

[01:00:05] successful because of their human capital. They haven't been successful because they took

[01:00:09] a flyer on some company in the market and it turned out to be Apple. That happens certainly

[01:00:13] but it's not the common thing. So I liked sort of the multiple layers of the way he did this.

[01:00:19] It's the what are you bringing to the table question again for the factor investing thing?

[01:00:23] What are you bringing to the table? What's the net profit of what you bring to the table and then

[01:00:28] what can you do with the net profit after you've done it? For most people, the trade-off of time

[01:00:33] that they get from their day job, from their profession and maybe to a degree from,

[01:00:38] you know, your passion projects, your hobbies, whatever else too if they bring anything extra

[01:00:42] in and if they don't, maybe they allow you to do the other thing better. But this composite view of

[01:00:47] what are you bringing to the table? What's left over and then how can you be thoughtful with it?

[01:00:52] Suffice it to say there's not a lot of people staring into their phones trading

[01:00:57] stocks or cryptocurrencies or zero DTE options or something who can actually turn around and go

[01:01:02] like, okay, this is a viable contribution where I'm bringing something to the table

[01:01:06] and this is an actual, you know, rewarding lifetime let alone career.

[01:01:12] That's a really important thing to just step back and understand and say

[01:01:16] what's the driver of value over time? What's the driver of growth over time? What's the

[01:01:20] driver of just profitability over time? That means this is a sustaining concept that I have faith

[01:01:26] in continuing. And this gets back to our original thing about like managing, actively managing

[01:01:30] your portfolio because when you're doing that, you are taking time away from whatever it else

[01:01:35] ever else it is you do. And if you're better at that, then you are managing your portfolio

[01:01:40] and you don't love your managing your portfolio enough to overcome that like that might not be

[01:01:45] a good use of your time. So and that's why I was saying before like most people probably

[01:01:49] shouldn't spend like tons of time actively managing your portfolio because if you're a great

[01:01:52] doctor the world is probably better served by you being a great doctor and buying some

[01:01:56] index funds or something like that. So I think it's just important to keep all the like

[01:01:59] all this sort of ties together when you think about it. It's just about using yourself as

[01:02:04] a resource in the best way possible. And a lot of times that's not managing your stock portfolio.

[01:02:11] Proactive, inactive investment management. Can we can we put a label on that?

[01:02:14] Can we turn that into a thing? Trademark I got it. Trademark.

[01:02:18] Make sure you lock that down. So yeah, so that we got through seven of them and I think

[01:02:23] that's great. And we're trying to do more of these. I mean there's so many great lessons

[01:02:26] in these things. And I always recommend people listen to the full interview and I

[01:02:29] particularly would with this one because we can't do justice and we used a lot of clips

[01:02:33] here but we can't do justice to all the stuff that was in there and there's a lot more in there

[01:02:35] than we just put in these clips. So it's on the excess returns channel. You can see it as way

[01:02:39] more views than anything else we do. So it'll probably stand out. But thank you everybody

[01:02:43] for joining us and we'll see you next time. Hi guys, this is Justin again. Thanks so much

[01:02:47] for tuning into this episode. You can follow Jack on Twitter at at practical quant. You can

[01:02:53] follow me on Twitter at at JJ carbonam and follow Matt on Twitter at at cultish creative.

[01:02:58] If you found this discussion interesting and valuable, please subscribe in either iTunes or on

[01:03:03] YouTube or leave a review or a comment. Also if you have any ideas for topics you'd like us to

[01:03:09] cover in the future, please email us at access returns pod at gmail.com. We would like this

[01:03:14] to be a listener driven podcast and would appreciate any suggestions. Thank you.