Ten Simple Lessons from Fama and French

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

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

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

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

[00:00:14] in our financial lives. Justin Carbonneau and Jack Forehand are principles

[00:00:17] at the Lidia Capital Management. Matt Zeigler is managing director at some point in

[00:00:20] investments. The opinions expressed in his podcast do not necessarily reflect the opinions

[00:00:23] of Lidia Capital or some point in investments. No information on this podcast should be construed

[00:00:27] as investment advice. Securities discussed in the podcast may be holdings of clients

[00:00:31] of Lidia Capital or some point in investments.

[00:00:33] Jess, thank you for joining us. Thanks for having me here, guys.

[00:00:37] I should give you a proper introduction before we get going here. You know, people are

[00:00:40] used to me, Matt and Justin. So we're joined today by Jess Boss. She's the VP of Strategic

[00:00:45] Partnerships and Clients Success at Alpha Architect. And what I really like about what

[00:00:49] you do is you kind of combine what I do with what Matt does. You know, you're on the

[00:00:54] factor investing side, but you're also on the financial plan inside. So, you know, if

[00:00:57] we ever need a one person show to host this podcast and Matt and I need to be eliminated,

[00:01:02] you would be the perfect person to bring in to kind of bridge that gap.

[00:01:05] Oh, that's a wonderful introduction. I'd like to call myself a woman of the people in

[00:01:10] that I am not native to the quant world and really not even native to the advisory world

[00:01:16] of that. I do understand people and I understand that these are very important topics for them

[00:01:20] to be able to grab away and understand in a meaningful way for their lives so they

[00:01:25] can build wealth. And so thank you for having here.

[00:01:29] Woman of the people is far superior to Jack's impression as Jess's terminator. So thank

[00:01:35] you for saying we can survive this.

[00:01:38] We can't.

[00:01:39] And woman of the people also gets into what we're going to do. We're talking about today,

[00:01:42] because when people see this idea of I know whatever there's a tweet on Twitter and it's

[00:01:47] like follow and French, you know, I expect some crazy formula to be like the first thing

[00:01:51] in there. And then it just gets more complicated from there and I have no idea what's going

[00:01:54] on.

[00:01:55] And you went the exact opposite direction here. You wrote a great 20 principle tweet of

[00:02:00] things we can learn from follow and French and you did it in a way your average person

[00:02:03] can actually understand which almost never happens with follow and French. So today

[00:02:07] what we're going to do is we're going to go through 10 or 11 or as many as we can get

[00:02:11] through of those points.

[00:02:12] And we're going to maybe talk about how we can explain these in a more understandable way

[00:02:16] for investors and then some things we can learn from it.

[00:02:19] And so we'll have you at a high level explaining it will have me boring people to death with

[00:02:24] a quant definition after and basically undoing everything you've done. And then we'll

[00:02:28] have Matt explaining how the work of Skid Row in 80s metal will explain all of this to

[00:02:32] your average person. So a buckle up.

[00:02:35] Yeah, exactly. So Matt, I look forward to Fama and the youth gone wild. How are you going

[00:02:39] to bring those two together?

[00:02:40] Mission accepted.

[00:02:41] Thanks.

[00:02:42] Let's do it.

[00:02:44] But to get into it, we're going to start with something that you know sounds pretty complicated

[00:02:47] on the surface, but really is not and you did a great job in your tweet of explaining

[00:02:51] it. And it's this idea of efficient markets in the efficient market hypothesis. And you

[00:02:55] know, just to show how people can make this complicated, I went and found an academic

[00:02:58] paper to bring us in here.

[00:03:00] And I read the and I'm going to read the definition. So the definition of the efficient

[00:03:03] market hypothesis is the primary role of the capital market is allocation of ownership

[00:03:06] of the economy stock. In general terms, the ideal is a marketing which prices accurate.

[00:03:12] This provides accurate signals for resource allocation. That is a market in which firms

[00:03:15] can make production investment decisions and investors can choose among the securities

[00:03:19] that represent ownership of firms activities under the assumption that security prices at

[00:03:23] any time fully reflect all available information or market in which prices all fully reflect

[00:03:27] available information is called efficient. So I have no idea what I just read, which is

[00:03:32] why I want to have you on and then you could explain this.

[00:03:34] So can you just say for your average person, can you explain what the efficient market

[00:03:37] hypothesis is?

[00:03:38] Yeah, well, first of all, there's no better way to tell somebody that they don't belong

[00:03:42] here than to give them that kind of a definition to a term. So I appreciate you calling

[00:03:48] that out and also the thing about the financial markets is there is a lot of information that

[00:03:54] we don't know at the surface level, but the problem is that those pieces really are known

[00:04:00] and so the efficient market hypothesis is just about recognizing, realizing, stating

[00:04:06] that there are the majority of the things to know about the market are actually known.

[00:04:10] You may not individually know them, but they are known and that actually impacts the investment

[00:04:17] price when all of those variables can be known. So that's really the bottom line of the

[00:04:23] efficient market hypothesis, even if you don't personally know it, those things are known

[00:04:27] that is baked into the price of the stock that you're looking at.

[00:04:31] And it's such a dangerous thing because I always want to think I know stuff that everybody

[00:04:36] else doesn't know and I want to think I can profit from that stuff and you'll all of us

[00:04:39] think that, but when you think about the collective market, I always like to look at this as

[00:04:44] thinking about the smartest investors I know. You work with Wes Gray, he would be right

[00:04:48] at the top of that list. If I think about all those people and all their knowledge and

[00:04:52] them coming together to make a market, how am I going to know more than that? That's

[00:04:57] the way whenever I have the tendency to think I know something that's maybe not reflected

[00:05:01] in market prices, I always go back to that and try to think about those types of people.

[00:05:07] The example that I use, which just for me seem to help just distill this down to something

[00:05:17] that everybody can understand was just the idea of playing GoFish with your friends.

[00:05:21] So if you are playing GoFish, the idea behind the game is you don't know what your friends

[00:05:26] have in their hands and so therefore it could give you an advantage if you can figure that

[00:05:30] out without them knowing that you figured it out because then you're asking for things

[00:05:33] that you know are there and that gives you some competitive advantage within the game.

[00:05:38] If your playing GoFish with all of your cards laid out, everybody has all their cards laid

[00:05:42] out on the table. There really is no competitive advantage there. So the description of the

[00:05:47] efficient market hypothesis is that everybody has all of their cards laid on the table.

[00:05:53] So again, you're playing a game, you may know all the rules but everybody else says to

[00:05:58] you may think you have all the information they also have it to. There's really no way

[00:06:02] to gain an advantage in that scenario. It's really interesting to think about this

[00:06:07] and the way you just explained it and how it maps over the parts of life that make sense

[00:06:11] and the parts of life that don't make sense. I'm a big fan of approaching at least this

[00:06:16] part of the very textbooky definition with if I walk into the grocery store and I'm

[00:06:21] amongst my friends, the produce and I say there's fruit salad for sale and there's fruit

[00:06:27] for sale. The efficient market hypothesis says I should be able to look at the prices

[00:06:31] of the fruits, the prices of the fruit salad. Yes, at the labor cost of the people making

[00:06:37] the fruit salad and come to a natural conclusion because we all have the same information.

[00:06:42] And maybe this is like the ultimate lesson of the emerging market or efficient emerging

[00:06:47] market. Efficiency markets hypothesis is that like it's just fruit salad. You can look

[00:06:52] at it. It's useful to understand why in concept, this should make sense. But out here

[00:06:56] in the real world, this is one of those things that even if it exists for a brief moment

[00:07:00] in time, we are right to question this whole thing.

[00:07:05] Yeah, and you know, I was on the Go Fish thing. My nine year old consistently beats me

[00:07:10] at Go Fish. And so I was thinking, I need to have, I need to be in favor of the efficient

[00:07:14] market hypothesis. I need to turn the cards over and then it's your nine year old boy.

[00:07:19] How do you want more?

[00:07:21] Yeah, yeah. It works in my favor. But I think this kind of leads well into the next thing

[00:07:26] that I'm going to talk about, which is the different levels of market efficiency. And

[00:07:28] this is where can get it a little bit even more complicated for people. You know, you've

[00:07:31] got the strong form, the semi strong form, the weak form. And you had a good way too to break

[00:07:35] this kind of stuff down and make it a little more understandable.

[00:07:38] Yeah, thanks. The these ideas right they get so ethereal and it's really hard to bring

[00:07:45] them out into some kind of tangible piece that goes, Oh, that makes sense to me. I can map

[00:07:50] that back over. And so that's really sometimes the fun part of an investment conversation when

[00:07:54] you get down to the client level is just giving them something that makes sense to them.

[00:07:57] It may not be market related at all that they can then transfer back over to feel like

[00:08:02] they've wrestled with and come to some conclusion that's meaningful to them with their portfolio.

[00:08:07] So this one for me was like, you know, if you're imagining the markets like a giant puzzle.

[00:08:11] So the strong form of the market would be like you have really big puzzle pieces. And even

[00:08:16] without putting the puzzle together, you can kind of sort of see how the puzzle is going

[00:08:20] to look with the semi strong is like having maybe that hundred 150 piece puzzle. It's

[00:08:26] like you don't really know yet what it's going to come together, but you have an idea of

[00:08:30] the landscape that you probably know just by glancing at the pieces whether it's a picture

[00:08:35] of Elmo or a picture of some mountains. And then there's the really tricky tricky puzzles

[00:08:42] that have the tiny complicated pieces they don't all fit together exactly the same. You

[00:08:46] may have some that look like edge pieces that aren't really edge pieces. We've all put

[00:08:49] the puzzle together like that. They could be really frustrating. That can be like the,

[00:08:53] you know, that can be an I guess an example or a analogy of the wheat market where information

[00:08:57] is just scattered about not everybody knows everything. It makes it a little tougher to figure

[00:09:01] out, you know, how to navigate that kind of information to an outcome where you might

[00:09:07] win in the market might you we might choose the right stocks to invest in or the right

[00:09:11] ETS right investment products to utilize to get your outcome that you're looking for.

[00:09:16] Yeah, you know, having kids like you start with like those four piece puzzles and when

[00:09:21] they're young, you know, like this is easy. And then suddenly you get to the point where,

[00:09:24] you know, they can do better than you when it gets further along.

[00:09:27] Yeah, and also just to tie this back to kind of my more nerdy, quant part about this,

[00:09:34] you know, the strong form is really everything is reflected and that includes like inside

[00:09:38] information. So, you know, most people that doesn't hold in the real world for the most part.

[00:09:42] I mean, if I have inside information about something typically I can profit from that

[00:09:45] so that one is sort of been most people don't think that's true.

[00:09:50] Right. You know, and then the semi strong would be I can you know if I have inside information

[00:09:54] if I have non public public information, you know, I can benefit from that.

[00:09:57] And then the weak one is all past price information is included in the price and that,

[00:10:01] you know, kind of indicates fundamental analysis might work but technical analysis,

[00:10:05] you know, our friends at technical analyst don't get too much love from the efficient market

[00:10:09] eyepositis. So that's kind of says, you know, it's fundamental analysis might work but technical

[00:10:12] analysis is not going to work. So that's kind of the nerdy definition now Matt, I'm sure you have

[00:10:17] some sort of real world cultural thing you can bring into this. I think it's the matter

[00:10:23] of your accepting who has what information how and when does that apply? And how and when does

[00:10:28] it matter? And I think what Jack, what you said about losing it go fish and you know,

[00:10:34] this is just the reality of things maybe you should be playing with all the cards out.

[00:10:37] The reality is you don't have it all they don't have it all. I love the puzzle analogy Jess

[00:10:41] because it reminds us that there's different situations where these apply. And I think that's

[00:10:48] like the fruit salad example, which is silly, but when we think about

[00:10:52] because this shouldn't just apply, we're talking about it as it applies to stock markets and

[00:10:56] everything else. But think about it how it applies to the job market. Think about how you think

[00:11:01] about it with a marketing strategy or a marketing fail or whatever else. There's examples of this

[00:11:06] where various amounts of information are known by everybody or known by very few people.

[00:11:11] And it's really useful to understand that in different little sandboxes,

[00:11:15] these advantages can play out in meaningfully different ways. So it's worth having a theory that

[00:11:20] ties them all together. So the next one is actually where we're going to get a little bit more

[00:11:24] on the complicated side. But this is something you know, all of us, anybody's took finance classes

[00:11:28] you know learned way back in college, which is this idea of the capital asset pricing model.

[00:11:32] So how do you think about an understandable way to explain that?

[00:11:36] So the illustration that came to mind for that one was just

[00:11:42] it's a balance equation, right? So with the capital asset pricing model, you're trying

[00:11:47] to find a balance of the right amount of stocks and bonds or whatever investments you're using

[00:11:53] to achieve this ideal return. And so the illustration I used was you know, imagine a seesaw,

[00:12:00] right? If you've got a bigger kid on one side, it's going to tip to that side.

[00:12:04] And this aspect of physics, which most people learn at some point along the way, whether it's

[00:12:09] middle school or high school now, I don't know because they keep backing these ideas up. But if you

[00:12:14] if you can understand this idea of physics and you can kind of anticipate like you're going to see

[00:12:18] two kids, they're both going to get on the seesaw. You already have an idea of which kid is going

[00:12:22] like which way the seesaw is going to tilt. And so if you're using this kind of idea mapping it

[00:12:28] over to finance, if you can take two stocks and you see which one aligns a little bit more

[00:12:33] with the whole, the market as a whole or it tilts away from the market in which direction it tilts

[00:12:39] away from the market. You're going to be able to kind of get get in sense of how that could perform

[00:12:47] in relation to the market as a whole. So which ways of seesaw going to tilt when this stock gets

[00:12:52] added to my portfolio? Which way is it going to tilt if that stock gets added to my portfolio?

[00:12:56] If you understand how it is relative to the market so is it you know riskier than the market?

[00:13:01] Less risk in the market. You can kind of see where it would fit in your portfolio and how it might

[00:13:05] help you achieve that overall return you're going for. Yeah, this is something that kind of gets a

[00:13:09] bad rap in my world but I think it's actually still great and I think they still teach it like in

[00:13:14] college and the reason it gets a bad rap is because if you actually get into the weeds about like

[00:13:18] actually testing this, it doesn't work like you know higher beta stocks, which is a measure of risk

[00:13:24] don't outperform lower beta stocks. But why why I think it's great is it gets at the relationship

[00:13:29] between risking return and that matters so much is you know the idea that if I want to get a

[00:13:33] better return, if I'm in an efficient market and I want to get a better return, I'm going to have

[00:13:37] to take some more risk. And so I think that's you know I think cap M like really as a place in

[00:13:42] you know in the world even if people like me can test it and say you know well it doesn't it doesn't

[00:13:46] hold up because it gets at that key definition which I think is a huge part of learning about investing.

[00:13:52] You have to have the assumptions like this is the beauty of all this stuff is it literally

[00:13:56] is saying you need to have an assumption first. If I put no offense to the fat kids,

[00:14:03] I put the fat kid on the seesaw and there's a little tiny skinny mat on the other side of it at like

[00:14:09] eight years old we know what's going to happen and we have that assumption but in in comic book

[00:14:15] universe, we can play with those assumptions and have something else play out. If you have no

[00:14:21] assumptions to start from which if nothing else this is the value of these theories, it gives you

[00:14:26] an assumption set to start from. So the cap M says well I'm thinking about adding this stock to my

[00:14:30] portfolio, what do we think and why should this matter? I'm thinking about you know this kid going

[00:14:37] to that college versus this kid going to another. Why do I have any assumptions about this and why

[00:14:41] should this matter? This is handing us a construct to actually start to make sense of that stuff.

[00:14:46] Doesn't mean we're predicting the future per se but it does mean we actually have a way to start

[00:14:50] to say what's right or what's wrong when the future finally plays out.

[00:14:56] And I think the other thing too is the idea that it brings in not just the risk of an individual

[00:15:00] asset but how that risk correlates with the market, you know with the factor like beta. That's

[00:15:04] really important too because it's an important concept to understand that you know just looking at

[00:15:08] if I'm adding something to my portfolio, just looking at it on its own doesn't tell me everything

[00:15:12] I need to know. I need to know also how is that can interact with my portfolio? You know if it's

[00:15:16] something that's always going up when my portfolio is going down, it might be very volatile but it

[00:15:19] might help me. And so like I think this also gets at that point and I think it's helpful to learn

[00:15:24] it from that perspective as well. Assumption is relative to the benchmark. I think that's the huge part

[00:15:29] here. It's not just that we have the assumption. I think this will this will cause that. It's this

[00:15:34] will cause that in relation to this other thing. That's a pretty profound and heavy thought.

[00:15:41] So just then the next one gets a little bit more complicated or at least your

[00:15:44] your explanation doesn't but the idea gets a little bit more complicated. Now we're actually

[00:15:48] getting into Fama and French's papers. And I don't know if you guys have read them,

[00:15:52] I've read part of them and it can be very hard to understand but a lot of tables. A lot of tables.

[00:15:57] A lot of tables. A lot of tables. Yeah, exactly. A lot of tables and a lot of fancy for

[00:16:03] a lot of stuff. But the idea is actually aren't that complicated and you did a really good job

[00:16:07] of boiling it down here. So how did you explain the Fama and French three factor?

[00:16:11] Well, I think the first thing to do is to determine or discuss like what is a factor.

[00:16:17] And we talk about this a lot at Alvargatec. Factors are just characteristics.

[00:16:22] And if you get into Fama's papers, French's papers, what you end up finding is there are a lot of

[00:16:29] characteristics in the investment world but he really felt like they distilled down to a few that

[00:16:34] really mattered. And they mattered. This three factor model was a outworking of his theory that more

[00:16:42] than just regular market ideas mattered in the sense of like companies, they're

[00:16:53] what looked good for a company on the books. There were things about those companies that

[00:16:58] mattered that kind of affected their overall performance beyond that. So for me, that's like if you

[00:17:04] are picking cookies and you want to get to the best cookie or you're looking for the best recipe

[00:17:11] for those cookies, like there are things that matter beyond flour and sugar in those cookies.

[00:17:17] Like maybe if you added chocolate chips or if you added nuts or if you've looked really

[00:17:22] deeply into these recipes, you can find out that if you add more butter, you get a different kind

[00:17:26] of cookie. If you add more sugar, you get a different kind of cookie. And so like all of these

[00:17:31] different ingredients even beyond the basics still some of them really do matter.

[00:17:38] Yeah, and thinking about this like it from an academic perspective, we had Cap M. We had this

[00:17:44] one risk factor that we tried to use to explain stock returns. It didn't work as I referenced before.

[00:17:49] Well now we have to look at what are these other characteristics? What are these other things that

[00:17:52] are out there? These other risk factors that might help us better explain stock returns. And so

[00:17:57] when they added in size and they added in value, they get to something that explains stock returns

[00:18:02] better than the Cap M did. And I think the other important point with this is we're using the word

[00:18:07] risk factor. And that gets back to what we talked about before with the efficient market hypothesis.

[00:18:11] The idea is if the market's efficient, the reason things like value give you an excess return

[00:18:17] is because they are riskier. They are risk factors. And we'll talk about other things with

[00:18:20] anomalies and stuff later. But I think that's also something important to keep in mind is I'm getting

[00:18:24] in these types of models, I'm getting a better return from value or from size or for many

[00:18:29] things like that because they are risk factors. So apart from cookie recipe tips, which I'm

[00:18:35] already earmarking the time on this, I can go back. Are we pro are we pro adding potato chips to

[00:18:42] chocolate chip cookies? Yes or anti-nure house all did not realize this is an option. This is a thing.

[00:18:48] You want that? I'm making notes. If you done this, all right. Oh yeah. Oh yeah. We don't mess

[00:18:52] around over here. Okay. So my introduction to portfolio construction and three factor model testing

[00:19:01] came in the form of the original Nintendo isochi game. Did either of you partake in this joyous

[00:19:07] creation? I did a long time ago. So if you remember, the portfolio construction by which I mean team

[00:19:14] construction in this game consisted of you could either you could make your team and it could

[00:19:19] consist of basically the fat and slow player, the skinny and small and fast player or the mid and mid

[00:19:26] player. And depending on how you stacked your team would determine what to do. And so instinct

[00:19:32] would say like, oh, I should focus on spreading the factors out across my team, but fun and portfolio

[00:19:39] construction consists of like, can my little scrawny tiny guy fast team beat the big dumb and slow

[00:19:46] team and whatever else? And so what three factor tells us is that in different composition and

[00:19:52] different things, depending what we're competing against if we're trying to beat a benchmark or do

[00:19:56] whatever else. It gives us an actual framework to think through how does this team? How does this

[00:20:02] stacking of different types interact with each other? And again, if you have no framework,

[00:20:08] how are you supposed to make sense of some of the decisions you're making? This is a pretty

[00:20:11] profound thought to say we have three factors to explain the performance of this team and now we can

[00:20:17] make predictive assumptions about what's going to go on. That's way more than just an Nintendo

[00:20:23] grade Nintendo game, but really, really interesting to think about that way.

[00:20:27] What was the best way to build a team? I'm wondering if there's anything I can learn about

[00:20:31] factor investing from the best way you constructed this team. So so the best way to have the team is

[00:20:37] you need at least like at least one of like the big guys and then if memory serves it was

[00:20:42] basically just avoid the mids like the mids do nothing for you. So you want like either to try

[00:20:47] to dominate with a couple of really fast guys or whatever else. Now if you're playing it as my

[00:20:52] brother and I you quickly get bored of this. And then one of you is like what if I'm all slow

[00:20:56] and big and you're all fast and small and you start to just figure that out. And then because I'm

[00:21:01] the older brother, I always win anyway. And he develops a complex that carried him into adulthood. So

[00:21:07] hopefully therapy can fix that. I think that's the answer.

[00:21:11] So as you can probably tell, yes we get off track in these things pretty frequently.

[00:21:16] I got to know without Justin here, we don't have anybody to rain us back in so we could end up

[00:21:20] all kinds of rabbit holes. But I will try to do the job. Your next one was also very good and it

[00:21:26] sort of alludes to something we already talked about which is idea of risk factors, but you expanded

[00:21:30] it a little bit. So this idea of factoring investing. What's a simple way to explain that?

[00:21:35] Yeah so kind of to your point Matt on that Nintendo game. I didn't play the ice hockey game,

[00:21:40] but I did play Contra with my brother. And I...

[00:21:43] I'll book down, down left right left right.

[00:21:45] Up up down. You know where I'm going with this right?

[00:21:47] You're going to get me going.

[00:21:50] With factor investing again back to those characteristics the idea was that we're

[00:21:54] gonna isolate these characteristics as something that could generate returns during years when

[00:22:00] the market at large may not be giving us the return that we were looking for. And so it was like

[00:22:05] having special power inside your portfolio. So if you in that game up up down down left right,

[00:22:12] left right. AB plus or AB.

[00:22:15] B-A-B-A.

[00:22:16] So like start.

[00:22:17] If you want to start. Thank you.

[00:22:19] It's been a minute since I've used that one.

[00:22:21] This special powers would give you the opportunity to win a game you could come from behind

[00:22:26] after giving that special power to your character. And so you could be on the losing streak and then

[00:22:34] that one thing about the game would give you that edge that you needed in order to win.

[00:22:37] And so the idea behind factor investing is if you can eliminate and identify and utilize

[00:22:42] those special powers when you need them. It could help your portfolio overall even if it's behind

[00:22:49] even if the market return isn't where it needs to be in order for you to be able to continue on this

[00:22:54] distribution rate that you've been using. These other factors added to your portfolio could

[00:23:00] perform during those periods of time to give you what you need and to keep you financially secure.

[00:23:06] How do you think about how investors should view factors? There's something that I struggle with

[00:23:09] all the time. To some extent we go back to the efficient market hypothesis. Indexing is a great

[00:23:14] solution for a lot of people, but then I also look at the kind of stuff we do and the kind of stuff

[00:23:17] you do and you say these factors do generate an excess return over time, but you've got to be

[00:23:23] behaviorally the right person to be able to use them. So like how do you think about that?

[00:23:27] Who should use factors?

[00:23:28] As you mentioned, like someone with an appetite without an appetite for any sort of variability

[00:23:37] from the benchmark is not going to be a good fit for factor investing because you are going to see

[00:23:42] a lot of that. And what that means is like the benchmark is just really what you think it should

[00:23:46] be and I actually made a post about this yesterday. If your benchmark is your neighbor's cousin's

[00:23:52] daughter's mom's portfolio that you are comparing your portfolio to, that is your benchmark. And so

[00:23:58] identifying what the benchmark is for you, what matters to you, what you're trying to at least perform

[00:24:04] as well as and potentially outperform is kind of the first piece of that. But a lot of people look

[00:24:09] at the S&P 500, the market at large, that's what a lot of the conversations are around. And so if

[00:24:15] that's your benchmark and you can't really tolerate being below that during periods of time,

[00:24:22] whenever the market is surging when the S&P is doing well when those mag seven are going to the moon

[00:24:27] right then you're going to have a hard time with factor investing because it is going to lag during

[00:24:32] periods of time when the mag seven are doing well. But during the period of time when those mag seven

[00:24:36] really are not holding up the performance you need especially if you're in retirement

[00:24:41] and you're pulling several thousand dollars out of your portfolio every month,

[00:24:46] you may want to consider at least figuring out how to have an appetite for some of these

[00:24:52] additional factors and including that in your portfolio so that you can continue to

[00:24:57] generate the return you need to be able to pull that, several thousand dollars out of your portfolio

[00:25:02] every month regardless of what the market at large with S&P 500 is doing. So it's kind of a

[00:25:09] push and pull, some education, some willingness to trust maybe the advice of your

[00:25:17] advisor on including some ideas that could generate these returns during times in the market

[00:25:23] are down. But really it's just you know what can you tolerate? Can you tolerate some deviation

[00:25:29] because these factors are definitely going to bring it during periods of time.

[00:25:33] Yeah I think you were spot on with that like one of the things I've learned is I think

[00:25:36] judging people relative to how much they care about benchmarks is a great thing to determining whether

[00:25:41] their factor investing is going to work for them. If there's somebody that cares a lot about

[00:25:45] benchmarks, if there's somebody that cares a lot like about the benchmark of the S&P 500 I'm

[00:25:48] more referring to not like a properly constructed benchmark behind the scenes because most people

[00:25:53] don't even know what that is but if they're going to go to the cocktail party they're going

[00:25:56] to see their friends in the S&P 500, they're going to see their friends that bought Salana or whatever

[00:26:00] that's what they're going to compare themselves to. In fact, investing may not be a great fit.

[00:26:04] But if they understand like what they're trying to do long-term and they understand you know how

[00:26:07] to properly judge it, then it is I think that's sort of a good way to look at it.

[00:26:12] I think the behavioral value of factors is so often less about the investment

[00:26:20] and more about the invest or for all those reasons because if the investment is just a market factor

[00:26:28] great. If I know I'm comparing myself against the S&P 500, then that market factor is as much

[00:26:35] as about the invest or who has to stick with it as it is about the investment choice itself.

[00:26:40] If I can choose deviation, if I can choose to self-flagulate in small cap value,

[00:26:46] high my little Roth, I see you out there struggling but we'll make it. If you can handle that and

[00:26:51] you want that and you want to make that choice again, it does much about the investor as it is

[00:26:56] the investment itself. So the behavioral identification of these factors, it's super important but

[00:27:03] it's really about what can you stick to? Either of you guys come up with some good ideas in terms

[00:27:09] of how to help investors with this. I mean, Jess West is really good about this in terms of

[00:27:12] you know, West has kind of flipped a script in terms of the way people sell stuff like

[00:27:15] West will be very very open and upfront about like if you buy our focused ETFs here are the horrible

[00:27:21] things you're going to have to endure in order to get this return which is great because people

[00:27:24] used to do it the opposite way and people kind of got surprised by it. And I think in a lot of ways

[00:27:28] that that's probably a great technique to do it but do you have any other ideas about what you

[00:27:32] think the best ways are to maybe get people who the right people on board for these kind of things?

[00:27:36] Yeah, I mean, it is sort of a lowball approach right to say this could be really bad you need to be

[00:27:41] okay with it being really bad in order for it to potentially deliver you with a return

[00:27:45] so you're looking for over time. Parenting is definitely one of those scenarios where

[00:27:52] the more you experience as a parent the more you realize that or I guess the further out your tolerance

[00:27:59] man's go for what could be deemed as generally acceptable child behavior. And so it really just

[00:28:09] it is that idea of expectations that have to be determined and set forth and talked about

[00:28:19] as explicitly and as much as possible with the investor. The better you can be at setting those

[00:28:26] expectations one of my favorite quotes around this is expectations minus reality equals your experience

[00:28:35] and your happiness so if you have high expectations and your reality isn't really great then

[00:28:40] or reality minus expectations I got that backwards reality minus expectations is going to

[00:28:45] be your happiness and so if your reality with your portfolio is pretty bad the expectations were

[00:28:51] high then you're going to be on the downside of that happiness factor. And I think that applies

[00:28:56] very well to your investment portfolio and the expectations that the advisor should be setting

[00:29:02] around the experiences that you're going to have with that model.

[00:29:08] The next one you did is I think one of the biggest lessons people can learn which is

[00:29:12] all of us want to sit here and look at the three-year track record, the five-year track record of

[00:29:16] whatever's out there and say all right that tells me everything I need to know about the investment

[00:29:20] strategy. I just want to buy the stuff that's doing well over these periods and that performance

[00:29:24] is going to persist in the future and it doesn't usually work out that way so what was your way of

[00:29:29] explaining persistence of performance? Yeah I mean everybody just wants to go up into the right

[00:29:33] right like we just only want to pick winners but the example that I used in this was just the

[00:29:38] horse racing example and you know we can have... we assume that everybody out on the race track are

[00:29:45] all the horses out on the racetrack and their riders. We assume that they are professionals that

[00:29:51] they understand their skill and their craft and their talent well and that they are going to do

[00:29:55] their best to perform and at the same time it doesn't necessarily mean that the same horse

[00:30:00] or the same skilled rider is going to win each time and that's because elements are different like

[00:30:06] the rest that the horses had, the sickness that the horse or the rider have had, the luck

[00:30:11] with where they were seated and where they started from. All of those things impact the outcome

[00:30:18] of that horse race and so just because we picked a stock that's done well in the past doesn't

[00:30:22] always mean it's going to do well in the future just because it's won a lot of races doesn't mean

[00:30:26] that the horse is always going to win those races into the future and that's just because of

[00:30:30] things that we can anticipate and don't know and can't always keep consistent from time to time,

[00:30:39] from market time period to market time period or from race to race in the case of the horse.

[00:30:45] I think one of the things this is one of the things investors get wrong a lot is and this is

[00:30:49] something I don't know if it was true of YouTube but I learned when I got in the factor investing

[00:30:52] spaces how long a period you truly need to judge requirements. You know what? It's not three years

[00:30:57] five years you know it's not really 10 years like mehfabour talks all the time about how it's really

[00:31:01] like 20 years and so that inconsistency between that and the way people typically judge performance

[00:31:07] which is way in here is where we end up with so many problems and investing as people not understanding

[00:31:12] you know how long of a period you really need to judge performance. I think you nailed it with

[00:31:19] racist plural and the idea that you have different starting conditions and different finish lines

[00:31:24] all the time and if there's anything from the advisor seat that we're trying to do in matching

[00:31:29] up investment strategies to the individuals it's yeah what you said three months ago or six

[00:31:35] months ago not not necessarily in like your long term assumptions but the starting conditions are

[00:31:41] always changing the horses and the riders are always changing the finish lines are always changing

[00:31:46] and you have to be flexible to that inside of it on just like we try to extrapolate this again

[00:31:52] away from just the investing side and think about it on the personal side we think a lot about how

[00:31:57] do we just sounds dumb but well how do we lower expectations and not just lower expectations of what

[00:32:04] we can achieve in a career or in retirement or in the fun activity we want to do with our kids or

[00:32:11] with our grandkids when they come visit us in the nursing home because they will but how to raise

[00:32:16] ambitions at the same time as you lower expectations so be ambitious in the things that you're

[00:32:23] going to go out there and do for what you can control because if my expectations of the other races

[00:32:28] or the other racers and what's going to happen if I get lower those by raising my ambitions by

[00:32:33] raising my emotional investment in the things that can control hopefully I'm going to have a happier

[00:32:37] outcome and even if my little Roth with its small cap value fund is like having its brothers I can

[00:32:44] go great another years come around I can make another contribution let's see if this is the lucky

[00:32:50] time that you know C biscuit is going to race ahead I love you bringing in C biscuit Matt

[00:32:57] very impressive channel your inner C biscuit Jack that's the lesson for today I don't know how to

[00:33:01] do that but I'm gonna give it a shot give it a shot so so the next one seems seems a little

[00:33:06] complicated on the surface but you did a good job of explaining it and this is idea of transaction

[00:33:10] rationality so can you explain that one yeah sure um I think the hardest part about transaction

[00:33:15] rationality is whether or not you actually trust the markets in general and so the the analogy

[00:33:24] for this one was simple it's just think of a big group of friends playing a game let's just call

[00:33:29] it monopoly right everybody's trying to win but they're all playing fair and following the rules so

[00:33:35] nobody's like stealing money from the bank uh you know bodies flipping you know trading cards behind

[00:33:42] their you know behind their backs like this is not the monopoly we played in my house so yeah so

[00:33:48] I think honestly and that's the problem right like life experience tells you that people don't

[00:33:54] always play fair and so you come into this scenario with this embedded assumption that somebody

[00:34:00] somewhere is trying to disrupt for their advantage and when it comes to stock markets like

[00:34:08] while that possibility does exist I think there's also at the same time a combined respect

[00:34:15] for how markets work and how it's produced uh returns and benefits for our society at large up

[00:34:22] to this point and for the most part everybody involved wants to continue to see that persist into

[00:34:28] the future so this idea behind it is really all here trying to continue to see and we want to

[00:34:38] expect the same scenario to play out for us into the future so we're all coming into it as honestly

[00:34:43] as we can yeah just this is the idea that I think it's good to look at everything is being done

[00:34:48] rationally even even though sometimes it's not you know it's good to think about that from that

[00:34:53] perspective because to sometimes what's rational to you is not what's rational to another person

[00:34:57] and you know if I sit here use my own rationality the judge the decision of someone else

[00:35:01] you know I may get myself into a bad place and yeah you know a good example that like

[00:35:06] if you think about people who grow certain kind of crops um you know they typically will hedge

[00:35:10] the price of those crops like in the futures market or something and they'll do that knowing that

[00:35:14] they're going to lose money on the hedge so it doesn't seem like a rational thing oh that this

[00:35:19] person keeps losing money but the reality is it is totally rational thing to do because they have

[00:35:23] this risk that they have to hedge um and so they're making a rational decision to give up some

[00:35:28] return in order to hedge that risk right it feels to me like it's the transactional transaction

[00:35:34] rationality is less important than transaction repetition that's my takeaway for this one

[00:35:40] it's the market can be rational the market can be irrational people can put their thumb on the

[00:35:45] scale the hunt brothers can corner the silver market what we have faith in with markets though

[00:35:50] is the repetition of transactions will correct these things eventually yeah in a recession what's

[00:35:56] the the bear market thing good money being returned to its rightful owners or whatever like this

[00:36:01] is the idea repetition produces some sense of rationality over some greater time scale

[00:36:08] markets are one mechanism to enforce that I will get off my you know free market soapbox now

[00:36:14] well thank you for doing that Matt um so the next one is another term you'll hear a lot related

[00:36:21] to factor investing which is this idea of a market anomaly so can what was your your story to explain

[00:36:27] that one yeah that's super straightforward and easy I was actually at a dairy queen as a kid

[00:36:35] my family was there uh and my sister who seems to always be the one with the luck

[00:36:42] was under the table on the floor of dairy queen which everybody at this point should vomit like

[00:36:47] that is just not the place to be but while she was down there she found a hundred dollar bill um and

[00:36:54] our family being family they are they reported it to the manager the manager called a week later

[00:36:59] nobody had come back to claim their hundred dollar bills so my sister went home with you

[00:37:03] the new owner of a hundred dollars and this is probably just a little tell of how I feel about

[00:37:12] the markets and life in general but like to this day when I go into a dairy queen I look under a

[00:37:18] table to see if there's a random hundred dollar bill on the floor because I still have this

[00:37:23] point of reference of that is the place where you could find a hundred dollar bill and I think

[00:37:28] people translate that real life experience sometimes over to the way that they think the market might

[00:37:33] work and they find you know their hundred dollar bill in something that they did and then while

[00:37:39] that's a cool surprise it's probably never going to happen again I've never since that moment

[00:37:42] found a hundred dollar bill under a table at a dairy queen um but I still look for it right and so

[00:37:48] they still have this kind of feeling or this pinpoint of that could happen to me if I just replicated

[00:37:54] the scenario one more time and it really it's just it's just an anomaly it's not something that is

[00:37:59] maybe ever going to happen again um it was a temporary opportunity for you but take that and move

[00:38:05] on go back to the way that the markets normally work yeah and this kind of relief back to factor

[00:38:10] investing in that you know you hear the terms anomaly and factor used and kind of the way I think

[00:38:15] about it you know we just had two academics on the podcast where we talked about it like I kind

[00:38:18] of think about anomaly is like a behavioral thing and and I think about factor is kind of a risk

[00:38:23] thing so and what happens is the the riskier the risk based things are tend to be more persistent you

[00:38:28] tend to be more confident that they're going to continue over time whereas the anomalies like you

[00:38:32] said you know maybe I found this thing but maybe it won't continue working in the future like if

[00:38:36] this anomaly exists in the market people are gonna cheat you know people are gonna get rid of

[00:38:39] the arbitrage and the anomaly is not going to exist anymore so I think it's interesting how it

[00:38:44] relates to factors from that perspective like if we go back to the beginning when we talked about

[00:38:47] risk factors a value as a risk factor you know people like me I think would tend to think it's

[00:38:52] more persistent or I have more confidence in the future than if it's purely driven by something like

[00:38:56] an anomaly so I had this weird experience that was not a dairy cream experience but it is down

[00:39:02] the street from a dairy queen so I feel like this is apropos with the bank actually so there was

[00:39:07] this this bank down the street from one of the houses that we grew up in and two two anomalies

[00:39:14] of this bank the first anomaly is this horrible feeling that if take yourself back to like 2000

[00:39:21] I go through the ATM drive-through in the car I go to take out 20 bucks I'm not distracted by a

[00:39:26] smartphone I don't know what I'm distracted by probably the music or something I drive away

[00:39:33] I have my card and I realize I don't have the $20 bill I just took out

[00:39:37] and I realize like right away like I'm halfway down the block and I'm like

[00:39:42] there's no $20 bill so I turn around and I go back and there's nobody there and there's no $20

[00:39:48] like sitting there blowing in the wind and this is probably before they beat that you and

[00:39:53] yelled at you or whatever in like the machine or made you take the cash before your card or whatever

[00:39:57] they do now but it was one of those where I like was just like well that sucks that's no that's not

[00:40:03] a hundred dollar bill sit and below you know the glorious dairy queen countered or whatever

[00:40:08] but it is one of those things where I gave somebody free money and that always just felt like

[00:40:12] I mean we get to see you enjoy it and I was like 18 so it that really sucked now same bank

[00:40:18] same bank fact I go into the bank one day I don't know if it was opening account or what I had to do

[00:40:25] but have you guys done the like the thing where you search either for clients or for yourself of

[00:40:30] do you have any unclaimed property we ever done that yeah this is a thing I forget the website

[00:40:36] but you you can go out and look and see if you have unclaimed property in a state maybe I got a letter

[00:40:40] first somehow I end up and this is Jack kind of like to your point of like what's the anomaly that's

[00:40:46] just a random thing that happens versus what's a good idea so I had gotten I don't know communion

[00:40:52] money or something like when I was 12 and good mom and dad take me to the bank we open an account

[00:40:59] so here I am at like 20 years old and getting notified that I had put like a hundred dollars in

[00:41:04] this bank account 10 years ago totally forgot about it and until it like earned enough interest to

[00:41:10] report a tax statement or something I never even heard about it and so all of a sudden I had a

[00:41:15] bank account with like a couple hundred bucks in it which was way more valuable than the 20 bucks

[00:41:19] I stupidly gave away by driving away from the ATM but the important lesson there is like the behavioral

[00:41:25] lesson is if I could take money and not touch it it might actually grow and serve a purpose down the

[00:41:30] road so these anomalies exist they're always sneaking up on us but we have to recognize them as

[00:41:35] that if you can't replicate the thing leaving your money in the ATM finding a hundred dollars

[00:41:41] under the table don't bet on that get it out of your assumptions but if you can figure out there's

[00:41:46] a behavioral solution forgetting you might had money in an account and it grew well that's the

[00:41:52] kind of stuff you can actually architect into your plan I didn't use that word intentionally but

[00:41:57] I'm gonna claim I used it intentionally and that's that's the way I think about anomalies you got

[00:42:01] to figure out the ones you can ring fence into your favor and focus on those yeah on that on

[00:42:07] claim property thing like I get so excited I don't know if you guys see a net favorite does

[00:42:11] that tweet every year where he put the link up to the unclaimed property thing and I'm always

[00:42:14] I'm going in there I'm like I'm gonna find something and every year zero I'm pretty sure next time

[00:42:19] I it's like I'll find out I owe somebody money if I go into that that's the only outcome that can

[00:42:25] happen I think I'm like to obsessively organized because I just would never there would never be an

[00:42:29] account floating out there that I somehow forgot about but like I did look at my family members who

[00:42:33] are not obsessively organized and they're of course there were accounts so I found them money although

[00:42:38] I found myself nothing there's always something so this next one is actually I think one of the most

[00:42:43] important things to learn investing in you know to intro it like I have to go back to the story

[00:42:47] of 2003 Jack so 2003 Jack like started in the world of factor investing like in the best year

[00:42:53] you could possibly start in the world of factor investing like 2003 was one of those years

[00:42:58] that basically if you had any exposure like to size and value so if you had you know relative to

[00:43:03] market capweight indexes if you had smaller companies if you had cheaper companies you were producing

[00:43:08] like two and three times the return of the market basically by being dumb and doing nothing

[00:43:12] so my problem was I was I thought I was doing something I didn't think I was dumb and doing

[00:43:16] nothing I think I was I thought I was doing like crazy smart things and so like I didn't learn as

[00:43:20] much as I should have I wasn't continuing to update my strategy at that point I wasn't continuing

[00:43:25] to learn around new things that were going on because I just thought I was the greatest thing in the

[00:43:29] world and then obviously eventually in this in this life you get humbled and you realize you're not

[00:43:33] so how did you explain this better better than my story I'm sure how do you explain this idea of

[00:43:38] continuous learning yeah well to your to your point to your story like the Dunning career effect

[00:43:43] always comes to mind whenever I'm thinking about whether or not I know enough in the world of

[00:43:48] investing you know I get to this point where I think I know it all and then all of a sudden I

[00:43:52] know I have a moment of reflection or some asteroid hits my world of knowledge and I realize actually

[00:44:01] I know nothing and then I have to kind of start that learning curve all over again um and and

[00:44:07] I think there's there's a lot of people who feel this is the reason why people feel investing

[00:44:13] is unapproachable to them it's because there's just no way that you can learn everything that you

[00:44:18] need to know uh in order to really feel like you've you have the best understanding possible of how

[00:44:27] markets work and how finance work and so especially for the common investor like there's just too much

[00:44:33] and so but it doesn't mean that we can relieve ourselves of the burden of searching for that knowledge

[00:44:39] and also very importantly be careful about where that knowledge information is coming from

[00:44:44] and so I think the easy the default way for a lot of investors and a lot of folks to learn about

[00:44:48] markets and to learn what's going on in the markets is just to watch the news or to turn around

[00:44:52] their favorite um news channel in their car and the problem with that is that there is also this

[00:44:59] aspect of news where they only make money if they sell the story if people are listening and tuning in

[00:45:05] and so we've had this competing kind of interest in um in news in the media to just sell the thing

[00:45:13] that people want to hear or sell the thing that people most eyes will turn their attention toward

[00:45:19] and so the problem with where you know where you're sourcing your information is if there's this

[00:45:24] embedded idea that they want more eyes they want more marketing they want more attention on their story

[00:45:30] so you know the the the way that I laid this out was you know kind of just the

[00:45:38] the process of going through school like you start in kindergarten you learn basic things

[00:45:42] like counting and reading and then as you get older you learn more advanced subjects

[00:45:46] when you graduate from school like learning doesn't stop you go to college you start to really dive

[00:45:50] in on specific subjects that are meaningful to you that you feel like can help you translate

[00:45:56] your gifts into the world and so thinking about investing from this perspective and starting on

[00:46:01] the basics of investing is really to me the ideal place to start if you are coming at this from

[00:46:08] the perspective that I don't know enough like start where you are think about where you might be in

[00:46:14] your um journey of understanding the investment landscape and start with the basics start with

[00:46:22] understanding what stocks and bonds are start with understanding how they relate to those in the

[00:46:26] market into to each other in in the market like start with those very basic concepts and add to it

[00:46:32] as opposed to starting with the thing that may be most available which is going to be your local news

[00:46:39] yeah on that point like there's one of the problems with like social media and with everything we

[00:46:44] have these days is like there's so much information out there and so much of the information

[00:46:49] isn't right and so when an investor is kind of coming up from the beginning trying to learn

[00:46:52] you know they can quickly get steered down completely down the wrong path like there's this ad

[00:46:56] that keeps showing up my Twitter which is something along the lines of this guy that says like

[00:47:00] I'm a certified stock in options trading specialist you know come get my latest stock you know my

[00:47:06] latest options ideas or whatever and I'm like first of all there's no such thing as a certified

[00:47:09] stock so he's completely made that up like that I don't know that you know I mean that certification

[00:47:15] I do not believe exists I have that certification I'm pretty sure yeah I mean I didn't mention

[00:47:20] that this tweet actually was from Matt but uh but uh sorry but but anyway there's just so much

[00:47:25] stuff like that out there and it's hard when you're trying to learn you know what no matter what

[00:47:28] level you're at you know and even like you know you you work with West and guys like Jim O'Shaugh

[00:47:32] on a sea like they are learning like they're admitting things they don't know so they can be way up here

[00:47:36] in their learning you can be way down here in your learning like you said it's about understanding

[00:47:40] where you are and trying to advance yourself you know to the next level and trying to take in the

[00:47:44] right information to do that and not take in my certified stock in options trading specialist along the

[00:47:48] way yeah yeah a big tell for those folks is how much did they tell you that they don't know versus

[00:47:53] how much should they tell you that they do know um and and and the ones that you want to lean into

[00:47:58] are the ones who are very forthcoming with what they don't know on the front end I think that's

[00:48:03] right I think that's a big difference between like the guys that make it or the the guys and girls

[00:48:07] that make it 10 years versus 30 years is like the ones that make it 10 years can be overconfident

[00:48:12] but like eventually that gets to you um like I was listening to a great interview that uh

[00:48:16] Chris Davis did on the farm street podcast um which is great it's like three hours long

[00:48:20] but like you can tell like he's had longevity he's he's been through everything and he was talking

[00:48:24] about what he doesn't know constantly throughout the whole interview and and like that's the difference

[00:48:28] I think that gets you to the next level is when you're willing to admit you know what I don't know

[00:48:32] when you're willing to go out and try to learn what you don't know I think that's the big separator

[00:48:37] there's this concept that I reference often the first time I heard it I fell in love with it I

[00:48:43] haven't been able to get off uh get it off my mind since and this is this idea of virtuosity

[00:48:47] and it was introduced to me through CrossFit actually in Greg Glassman who was the founder of CrossFit

[00:48:53] was talking about how you know at a gymnastics meet for example you know there's this panel of judges

[00:48:59] and each of those judges have the score that they can give to the athlete after their performance

[00:49:06] and that it is nearly impossible to get a score of 10 which would be the highest perfect score

[00:49:13] and the reason for that is the way to go from 9.7 to a 10 is this idea of virtuosity

[00:49:22] and what that idea what that idea distills down to is how how flawless are the basics of their

[00:49:31] performance so they can get to a 9.9 and a half through individuality and through skill and through

[00:49:39] the mastery of the like the complicated nature of this routine that they've just performed but

[00:49:48] the way to get from 9.5 to a 10 or 9.7 to a 10 is through demonstrating that they can do the basics

[00:49:56] uncommonly well so showing the judges that the basics of movement that have been embedded into

[00:50:03] gymnastics are things that they can do better than anyone else in their field and so this idea

[00:50:10] of doing the common uncommonly well and I think that's something that is lost sometimes in the idea

[00:50:16] of investing is it instead of doing the common and commonly well we try to get into the world of

[00:50:21] complication and we try to make this as difficult as possible and then we lose sight of the ability

[00:50:27] to actually execute on the ideas that we brought into the mission to begin with.

[00:50:32] I think that fits pretty well on this next one which is doing the common and commonly well which

[00:50:36] is emotional discipline which is something like all of us no matter how good we are investing

[00:50:41] we have to be able to do this well to be successful so what was your method of explaining that one?

[00:50:47] So this one I laid out as a game of musical chairs and you know as you're going through musical

[00:50:52] chairs if you've ever played this game before which I don't know how you've avoided if you haven't

[00:50:57] as you're going around obviously you're listening to the music and you're waiting for that moment

[00:51:00] and trying to anticipate that moment when the music stops so that you are in front of a chair

[00:51:05] that no one else is in front of so you can vacate or you can inhabit that chair like that will be

[00:51:12] your chair we know one else's and as they start to take chairs away from this game you feel a little

[00:51:17] more anxious that like maybe I'm not going to be in front of that chair and so the stock market

[00:51:22] sometimes can feel like that game of musical chairs in the sense of like when there's a panic buying

[00:51:28] or panic selling you're trying to get out of these positions especially on that day trading kind

[00:51:32] of mentality of the market where if something is good I have to buy it now or if something is bad

[00:51:37] I have to sell it now before anyone else does so that the value doesn't increase or decrease without

[00:51:42] me being able to manage that for myself like that panic drush decision making approach to the market

[00:51:50] leads to and can lead to mistakes so the important piece of that one is just defining your

[00:51:57] your landscape or maybe the timeline of when you need to invest when you might need to

[00:52:04] start the decumulation process or the process of pulling your investments out the cash

[00:52:09] and being really objective and very systematic in your way of approaching investments

[00:52:18] having that kind of discipline piece of I get up every morning and I brush my teeth

[00:52:24] the same kind of approach to the market or to buying stocks or purchasing

[00:52:32] investments in your in your model as opposed to I'm going to get up and brush my teeth because

[00:52:38] I have that breath you know so it's not a reactive decision but more of a

[00:52:43] a disciplined process for the way that you're approaching this investment.

[00:52:47] I love the perspective on this because it acknowledges the reality of sentiment in the decision

[00:52:52] making process and I think so often we lose track of how important sentiment is in the decision

[00:52:59] whether that sentiment internal to us or as a reflection on sentiment we're experiencing around

[00:53:04] us wanting to sell a stock because everything is crashing and burning or wanting to buy a stock

[00:53:09] because everything is rushing forward. The the Peter Atwater stuff is outstanding on this he's got

[00:53:15] his confidence map and in that he basically says if you have low control and low certainty

[00:53:21] you're you're operating from a place of stress so you probably don't want to make that decision

[00:53:26] until you've moved yourself out of that place of stress which means you've either raised your

[00:53:30] control and that might be as simple as the decision to click the button on your computer whatever it

[00:53:35] is or you've you've increased your certainty so am I getting rid of this because there's new

[00:53:41] information that I go I really don't want to hold this thing any longer in pure you know markets

[00:53:45] and betting terms or is it something where as I start to zoom out I can change the sentiment I can

[00:53:50] change my my comfort level with it it might not be that it's I am a complete reversal in thinking

[00:53:57] but it can track me back to what's the sentiment outside of this immediate time horizon because the

[00:54:03] reality is my portfolio is probably not trying to kill me today when something is happening or try

[00:54:08] to make me a billionaire the reality is probably there's been a gyration does this matter in my

[00:54:13] retirement plan does this matter in paying for my kids college does this matter in my ability to

[00:54:18] purchase a home or you know oh my god my house value has gone so much in last year okay are you

[00:54:24] going to sell it no okay this is probably like one of the biggest learnings in my career you know

[00:54:32] both from the perspective myself and trying to improve my own emotional discipline but also

[00:54:36] understanding that you know I think at the beginning I built like factor strategies in like an

[00:54:40] academic world where nobody's using them and you kind of think about them like all right what

[00:54:44] gets the best return you know don't don't worry about anything else and then you start doing it

[00:54:48] with in the real world and you realize like nobody has unlimited emotional discipline you've got to

[00:54:52] either build your strategies in such a way the people can stick with them or you've got to find

[00:54:57] the people and bring in the people that could stick with them but you can't just you can't just

[00:55:00] take these kind of strategies and just throw them out to a random audience of people and expect

[00:55:04] them to stick with them you know when you're gonna you're going to achieve a worse outcome for those

[00:55:07] people then if they just bought an index fund or something like that because they're going to panic

[00:55:11] and they're they're going to you know fear and greed and what you mentioned here is going to kick in

[00:55:15] and they're going to make the wrong decisions so like that's a constant battle and it's

[00:55:18] something I'll never figure out completely but you know I think that's a really important thing

[00:55:22] to think about is not just about my emotional discipline like when I'm someone managing people's

[00:55:26] money it's also about theirs and trying to match what I'm doing to what that is yeah yeah and back

[00:55:30] to those expectations I mean if you're planning a game of musical chairs and every time somebody

[00:55:35] every time around presents itself only one chair gets taken away and then all of a sudden

[00:55:39] you're down to the last ten people and there's nine chairs and during that one song continuous

[00:55:45] chairs just keep getting taken away and all of a sudden you've changed the rules of the game

[00:55:50] you thought you were playing to where we've gone from nine chairs down to one in the course

[00:55:55] of one song like the you will see the affective people in that room aggressively change and so

[00:56:02] just continuing to also like be able to set expectations for your investors that you're working

[00:56:07] with being able to anticipate maybe changes in the games that you can bring those expectations

[00:56:12] to bear for them sooner than they're going to experience them is a big part of this type of behavior

[00:56:18] management and emotional discipline that you're trying to also scale down and provide to the

[00:56:26] investors that are trusting you with this strategy. This last one I think is a great one to wrap

[00:56:31] up on because it's something you see all the time like I do it myself like everybody wants to judge

[00:56:36] every decision every investment on its own so even if what I'm doing as a whole is working

[00:56:40] I still want to pick apart the thing that's not working and I say well what if I didn't do that

[00:56:44] like if you're working even better if I didn't have that thing and I didn't make that decision or

[00:56:47] if I didn't have that investment so can you talk about a holistic approach and what your idea was

[00:56:51] of that one. Yeah yeah so the example I used to riding a bike and as you were talking it was

[00:56:57] almost even something else came to mind is after you've crashed your bike and broken your elbow like

[00:57:02] how many times do you go back and revisit that scenario and think if I had just not done you know

[00:57:08] I just not looked this direction or if I had just had both my hands on this handlebars at that time

[00:57:13] that I hit it hit that bomb or hit that rock and so of course a big piece of this right is just

[00:57:19] understanding that you only know what you know and you can't ever have that high-insight kind of

[00:57:26] 2020 vision of what would be coming until you're past that moment and so you do really just have to

[00:57:36] to pinpoint that future goal or that future destination as the place that you're going to get to

[00:57:44] through and trust this the strategy that you've chosen to get you there it will actually get you

[00:57:49] there so that when you do come to that next rock or bump in the road you don't just bail the bike

[00:57:54] completely. You stay on it you trust your ability to move through that kind of volatile moment

[00:58:01] with the strategy that you've chosen because you know that if you get off the bike you're never

[00:58:06] going to get to the place that you're trying to get to so even though it's scary even though you're

[00:58:11] going to feel a little nervous probably at moments in the time if you're staying focused on that

[00:58:16] long goal if you are you know tying yourself to the idea that you do need to eventually get to

[00:58:22] that place this is the thing that will get you there that will help you in your kind of short-term

[00:58:27] periods of discomfort that you may feel because you're portfolio is a little volatile it's moving

[00:58:35] around a bit maybe in a way that you didn't expect or anticipate. Yeah the bike is a great example

[00:58:41] and I was thinking like you know people have this tendency to look at these individual things and

[00:58:44] start peeling off the individual things because they're not working but like at a certain point

[00:58:48] if you don't ride a bike you know you're not going to get the joy of riding a bike you might get hurt

[00:58:51] but at a certain point you're in a white padded room by yourself you know and you're sitting there

[00:58:55] and you're like well I'm never going to get sick I'm never going to get hurt this is fantastic

[00:58:58] and it's like the worst thing you could possibly do so I think that was a good analogy from that

[00:59:03] reminding people you have to play this game like you have to get on the thing and take the risk

[00:59:07] to get to where you want to go that's that's a huge that's a huge part of it we uh my wife and I

[00:59:13] took a hike this weekend and we went to this it was it's converted railroad tracks and if my mom is

[00:59:18] listening we never rode our bikes all the way up those railroad tracks to like 10 towns up never

[00:59:24] never never never mom yeah this was not a good bike riding path and I still don't understand

[00:59:30] because it's like two and a half miles of like low grade uphill like on this thing so I don't

[00:59:35] know how I did that on you know at mid 80s BMX bike or whatever but somehow some way so we walk up

[00:59:41] this thing and it's it's the reality of well they've they've taken the railroad tracks away they've

[00:59:46] taken the the rocky places away where you could almost die and you had to carry your bike over trickling

[00:59:52] water and things that were never safe on and we get to the end of this trail and they've now

[00:59:57] mapped the trail behind these backyards it didn't used to exist and where does the trail lead out

[01:00:02] right now to a wonderful pizza restaurant that serves beer and on a through like three o'clock on

[01:00:07] a Sunday afternoon we're like are we doing this we're walking home downhill we can eat pizza and beer

[01:00:13] before we go home and whether it's on the bike or on the path like knowing that destination awaits and

[01:00:18] that's why you're actually doing it even when you don't know you might get the anomaly of a great

[01:00:22] pizza restaurant and beer and frost and mug yeah maybe the anomaly isn't the scary part

[01:00:28] normally it's not the scary part at least not always I got lots of stories about falling off bikes

[01:00:32] as a kid but worried avoid those and bury those deep down. Well, peace and beer is probably a good

[01:00:37] place to wrap up. Oh, I'm not letting you end it there. Oh, you're not done yet. You gotta

[01:00:41] resist. Are you gonna bring this kid row in or do you got something else? I'm not for

[01:00:44] eating skid rowing. This is you can do 18 18 in the value factors having 18 in life now or something

[01:00:49] I mean you could go there if you wanted to. I'm not gonna lie. I did wake up this morning with

[01:00:53] this idea in my head that I have this like 20 part like complicated playlist explaining all the

[01:00:57] songs. I've abandoned them but just as an example, if if you would indulge me with a game,

[01:01:03] I'd like to prove out price discovery and the efficient markets hypothesis are you

[01:01:08] game to play my game? More games I love it. Okay, so the question is

[01:01:14] and you can blur it out the answer if you figure this out. If you can name the song,

[01:01:20] I'll give you the song, The Artist or Where This Famously Appears. This is in special tribute to

[01:01:26] you Jess. You already got points just on the board just because of how you showed up today for

[01:01:30] this. So if you can name the artist, the song or where this appears, you win the game. I'll only

[01:01:36] give you a small snippet of this. I'm not gonna sing it. I'm reciting it as spoken word poetry as

[01:01:40] it ought to be. I watch with open eyes, I will give you more information as this goes as hints.

[01:01:45] I watch with open eyes till it's time to take it all away. Hey, every day the game is ours to play.

[01:01:52] Oh, tell me why there are no alibis because winner takes it all. Loser takes the fall. Fight to the

[01:01:59] beginning of the end winner takes it all till he breaks the fall in time. He'll make it does anybody

[01:02:07] know yet? Last hint if you don't know it yet. I don't okay. This is the clue. He'll make it

[01:02:15] over the top. Anybody? Anybody? The movie at least? This is the clue. Do we have it?

[01:02:23] Over the top. Is this so as a Sylvester Stallone movie? Jack, I think you want an arm wrestling movie

[01:02:28] he did or something? Yes. Okay. The lesson in over the top starring Sylvester Stallone with the song,

[01:02:36] winner takes it all by Sammy Heygar is that you get your superpower when you put your hat on

[01:02:41] and turn it around backwards. Jess, we assume this is where you get your powers from. Thank you so

[01:02:46] much for being our guest today. Thanks for having me. Hi guys, this is Justin again. Thanks so much

[01:02:52] for tuning into this episode. You can follow Jack on Twitter at app practical quant. You can follow me

[01:02:59] on Twitter at at JJ Carbano and follow Matt on Twitter at at cultish creative. If you found this

[01:03:04] discussion interesting and valuable, please subscribe and either iTunes or on YouTube

[01:03:09] or leave a review or a comment. Also if you have any ideas for topics you'd like us to cover in

[01:03:14] the future, please email us at accessforturnspod at gmail.com. We would like this to be a listener-driven

[01:03:20] podcast and would appreciate any suggestions. Thank you.