The Case Against Value Investing

[00:00:00] [SPEAKER_01]: Welcome to Two Quants and a Financial Planner, where we bridge the Worlds of Investing and Financial Planning to help investors achieve the long-term goals.

[00:00:05] [SPEAKER_01]: Join that Ziggler, Jack Forehand and me, Justin Carbonneau as we cover a wide range of investing and planning topics that impact all of us and discuss how we can apply them in the real world to achieve the best outcomes in our financial life.

[00:00:15] [SPEAKER_00]: Jack Forehand is a principal at the Lydia Capital Management. Matt Zeigler is managing director at Sunpoint Investments.

[00:00:20] [SPEAKER_00]: The opinions expressed in this podcast do not necessarily reflect the opinions of the Lydia Capital or Sunpoint Investments.

[00:00:25] [SPEAKER_00]: No information on this podcast should be construed as investment advice.

[00:00:28] [SPEAKER_00]: Security's discussed in the podcast may be holding some clients of the Lydia Capital or Sunpoint Investments.

[00:00:32] [SPEAKER_03]: So, Matt for the last three or four years I've been writing an annual article about value investing and whether it's dead.

[00:00:38] [SPEAKER_03]: And the reason I do it is because I've always been a big believer in value investing and I think you have to challenge that.

[00:00:43] [SPEAKER_03]: And the way I found it was best for me to challenge it was to try to write out my best case against value every year and then to come back and reevaluate it.

[00:00:52] [SPEAKER_03]: And the one thing that's happened this year is that I've become much more lazy.

[00:00:56] [SPEAKER_03]: So now I'm not writing anymore.

[00:00:58] [SPEAKER_03]: So now I'm just going to get on with Matt and we're going to do it this way.

[00:01:02] [SPEAKER_03]: So I don't have to actually write an article.

[00:01:03] [SPEAKER_03]: So that's what puts us here where we are today.

[00:01:06] [SPEAKER_02]: Well good. I'm glad I am, uh, I'm at least one step better than a GPT prompt for the sake of getting this out of you today.

[00:01:15] [SPEAKER_02]: So Jack, but it's value investing dead.

[00:01:17] [SPEAKER_03]: Is this where we're going today? We're going to actually think just as you said that though like in my path to lazy maybe next year is the GPT prompt.

[00:01:23] [SPEAKER_03]: Maybe we don't even record the podcast with Matt now it's basically it's like,

[00:01:26] [SPEAKER_03]: the GPT is value investing dead. And I just call it a day.

[00:01:31] [SPEAKER_02]: I accept my role as a rebound between laziness and despair except that.

[00:01:38] [SPEAKER_03]: So anyway, yeah, so you're to your question like I think the most important thing to ask here and we're going to go through all kinds of arguments against value investing but I think a good place to always start is what is value investing because everybody defines value investing in a different way.

[00:01:50] [SPEAKER_03]: Um, you know, for those of us that are quant investors value investing is buying all these statistically cheap companies and you can do it doesn't mean the price to book them and you can do it in a lot of different ways.

[00:02:00] [SPEAKER_03]: But it's basically buying statistically cheap companies but a lot of other people will look at value in a different way and I always like look at this to use this example of brand versus buffet versus bill Miller like buying the really cheap cigar but type companies is sort of Graham value investing.

[00:02:13] [SPEAKER_03]: Then you've got the evolution of buffet over time let's buy high quality companies at a discounted price and then you've got the bill Miller approach which is the one that's worked a lot better by the way recently, which is let's look at the future cash flows this business can generate and let this can't that discount that back to the present.

[00:02:29] [SPEAKER_03]: So I can buy companies that are losing money now and have them be value companies because there's so much potential in the future and by the way that that has been the best approach so far like in the past decade of the three but I think it's just important to say like value investing really can't be dead.

[00:02:42] [SPEAKER_03]: If you look at value investing is buying something for less than it ends up being worth.

[00:02:47] [SPEAKER_02]: Just curiously which one of the I'm saying the three between Graham Buffett and Bill Miller like which one of those do you default identify with the strongest just your personality.

[00:02:58] [SPEAKER_03]: I mean I probably in personality wise it's probably Graham so that's something I've had to fight over time because I tend to want to go too far that way.

[00:03:07] [SPEAKER_03]: So when I build claw models I tend to be more balanced in it just because I have to be careful of fighting myself that I really want to buy this statistically cheap stuff and I think this better way to do it as you kind of diversify and add quality and do other things.

[00:03:20] [SPEAKER_02]: Yeah, I think it's interesting because I think so number one it's important to acknowledge that all these things are out there but then second to that is it's good to know the default way you approach this stuff because I think.

[00:03:32] [SPEAKER_02]: I think like my default is in the Buffett camp where is I respect the math of Graham and I respect the people who can program all that stuff but I know there's a certain inertia laziness that keep people going through all that.

[00:03:45] [SPEAKER_02]: And then the same white like the bill Miller idea of being like well Bitcoin makes sense or something and I'm like oh yeah but that I get Bill Miller's dangerous because I'll get swept up in the story and I can't back it up the way that he can back it up and I'm very comfortable my buffet late.

[00:03:59] [SPEAKER_02]: I also realized as I was we had a lot of family over the house where a Buffett is household I realized as I was moving to get my chair I have this like trying to take a white distilled vinegar because it was on sale and it's the one that I watched because you know.

[00:04:17] [SPEAKER_02]: It's a good deal and it's not a cigar but it'll get put to good use.

[00:04:22] [SPEAKER_02]: Are you a Costco guy?

[00:04:24] [SPEAKER_02]: I was but that we moved to an area where there's not a Costco and I catch myself away from Sam's club or BJs or whatever's up the road from us.

[00:04:34] [SPEAKER_02]: But yes yes so my mode is not to like clip all the coupons and go full gram and it's also not like to go I don't know what the bill Miller discount shop orientation would be but in my household we'd no good deal with it.

[00:04:52] [SPEAKER_03]: But the thing is that I'm like, you know what I mean?

[00:04:53] [SPEAKER_03]: Yeah I run this cost of the thing that is part of my value.

[00:04:55] [SPEAKER_03]: You think it's like these eight blocks of cheese are an incredible deal and then you're like throwing out four of the blocks of cheese.

[00:05:00] [SPEAKER_03]: Maybe this wasn't the value I thought it was.

[00:05:03] [SPEAKER_02]: Well so my point in this is I think it's important before anybody debates this stuff even thinks about it we kind of we all have default views that we approach this stuff from we all the way that were wired.

[00:05:14] [SPEAKER_02]: And a big part of this exercise we've been having conversation or writing articles the way you've written articles about this is going here's how I naturally see the world or process information and now we're trying to like stretch those boundaries a little bit which is.

[00:05:29] [SPEAKER_02]: I think it's it's so interesting go back to the the mobus and point again the just buying something for less than its worth.

[00:05:37] [SPEAKER_03]: How do you yeah this is you know you and I are going to have get to interview us while the modern tomorrow and this is something they both kind of agree with which is.

[00:05:44] [SPEAKER_03]: You know values ultimately if you buy something and then it ends up being worth more money it's it was a value so they they both play in this world of.

[00:05:52] [SPEAKER_03]: Statistically cheap companies is not what value is value is figuring out what something's worth and paying less than that so you can you can be a bill miller style of value investor if you can take Airbnb.

[00:06:03] [SPEAKER_03]: You know when it comes public and you can figure out what the potential future cash flows of that are and you can buy it for less than that like Google is a great example I mean Google looked very very expensive when it became public but it was exceptionally cheap.

[00:06:16] [SPEAKER_03]: I mean we're all too much to what it did and that's an example like that was value investing as much as people like me can shake our fist with our price to book ratio all day.

[00:06:23] [SPEAKER_03]: Like that was value testing if you were someone who could have figured that out you made a lot of money.

[00:06:28] [SPEAKER_02]: So this is where something feels wrong about the.

[00:06:33] [SPEAKER_02]: Backwards logic applied forward of this it's not just anything right it can't just be like anytime I bought something and it's worth more I had to have some logic up front.

[00:06:45] [SPEAKER_02]: I had to have some scientific sounding word that basically said like this is a value play I think this is cheap relative to the future is that a precursor here like you have to use something to look forward on this and why you think it's cheap.

[00:06:57] [SPEAKER_02]: You just can't in hindsight be like oh genius value investor.

[00:07:01] [SPEAKER_03]: Yeah, no and you know if you the bottom is a great example I mean if you've seen one of his valuations that he does like they're extensive.

[00:07:07] [SPEAKER_03]: He's very he knows the space he knows what's going on he's with the one of the world's biggest experts in valuation.

[00:07:12] [SPEAKER_03]: Like he's able to look at these companies in advance and figure out yeah there is value here now most people can't do that I mean I could have given you the projected future cash flows of pets.com and it didn't work out that way.

[00:07:24] [SPEAKER_03]: You know those cash flows never came so for every Amazon and Google there's a lot of other companies it just doesn't work out.

[00:07:29] [SPEAKER_03]: So it's a hard thing to do but it is right to say that if I'm able to do it if I can figure it out like those types of companies are value use if you can figure out that they have this massive potential.

[00:07:39] [SPEAKER_03]: And you know if you can bring that back to the present and you can see wow that price doesn't really reflect what this company could ultimately do.

[00:07:46] [SPEAKER_02]: If I had a time machine I would totally go back in time and go into.

[00:07:52] [SPEAKER_02]: Not cooking the books but I want to invent ratios for those companies like price to price to barcory show like I want to figure it out and go under and like give them the community adjusted even dot numbers for these things to say why they're cheap.

[00:08:06] [SPEAKER_03]: Yeah, and I think the the other thing here is like this is any time there's as people as smart as there was the people we're talking about on both sides of an argument like this you don't understand this is a tough thing to figure out.

[00:08:15] [SPEAKER_03]: You know, first of all we can say value investing can't be dead because you can measure it in different ways but even if we're talking about just go back to statistically cheap value investing like there's some really even you would have the clip ass and that is of the world saying no it's not it's still works you would have the ass loss of the world saying you know no it's not going to work anymore.

[00:08:31] [SPEAKER_03]: It's those are both really really smart people and smarter than me and so the idea here is not for me and madziggler to figure out whether value investing is dead the idea is here is to tackle all the different things we can think about.

[00:08:42] [SPEAKER_03]: To say how can we decide for ourselves what we believe about whether value investing might or might not be dead.

[00:08:48] [SPEAKER_02]: Yeah, and do that with the evolving landscape of the marketplace for these things because I think what's amazing going back to that original point about.

[00:08:58] [SPEAKER_02]: Gram then buff it then bill Miller and carry that forward to wherever you want today. I think you probably even do a more modern version of that and.

[00:09:07] [SPEAKER_02]: And recent or what's or something probably to is you get this happening like it occurs from both sides so it's not just the investors the people like us or the people who are going out and trying to buy new dollars into these things and saying I'm going to exploit these opportunities I see taking place in the marketplace.

[00:09:25] [SPEAKER_02]: It's other people on the flip side of it coming up with stuff like community adjusted EBITDA compute coming up with stuff that's going to basically say like look we're cheap on these new metrics or these made up metrics are in this new way of categorizing thinking.

[00:09:41] [SPEAKER_02]: It's the world keeps getting more complicated as more data comes out as more stuff comes out and the things that maybe worked back in the day for Buffet or grammar and prior years.

[00:09:52] [SPEAKER_02]: They definitely can't apply to now because the whole marketplace is treating those stories in new and different ways.

[00:09:59] [SPEAKER_03]: What you said is so important because when you have things changing in the world and we'll get into this later sometimes new metrics makes sense sometimes you know the price to book ratio doesn't make sense anymore I need a new metric there.

[00:10:09] [SPEAKER_03]: But sometimes also the new metrics community adjusted EBITDA are a bunch of garages that they come up with and so it's very hard to balance that like it's true that there are new metrics that have to be used to value companies but then the companies are going to take it as far as they possibly can.

[00:10:23] [SPEAKER_03]: To price to whatever ridiculousness they can come up with to try to make themselves look cheap so that's the hard thing is an investor as you have to say yeah things things do change.

[00:10:30] [SPEAKER_03]: But I also have to realize companies are going to take this to an extreme to come up with something that probably is not tied to the fundamentals of the company in any way.

[00:10:38] [SPEAKER_02]: I think it's always fascinating how this ties back into remembering there's two sides of a market you can't have like is value dead doesn't mean is growth alive is value dead just basically means like how is value being used in the stories that are told that both like drive flow and ultimately drive the investing decisions of people who are allocating capital on both sides of the economy.

[00:11:00] [SPEAKER_02]: So what's the question are they selling stuff because they think it's richly valued and that applies as much to saying I'm going to sell some of these large cap you know US growth stocks because the valuations are rich.

[00:11:12] [SPEAKER_02]: As it does the large cap growth stocks saying we're going to sell some shares of stock to the market to raise funds for the next venture to help fund this growth.

[00:11:21] [SPEAKER_02]: It all applies it just keeps changing as as the whole marketplace changes over time buyers and sellers together.

[00:11:28] [SPEAKER_03]: So let's take a step back before we get into this and talk about why we're having this discussion the reason we're having this discussion is over the long term.

[00:11:35] [SPEAKER_03]: The cheapest desile of companies so the use the I mean price the book was typically used in the research, but you can use anything.

[00:11:41] [SPEAKER_03]: We priced a cash flow whatever evita evita die you can use whatever you want but.

[00:11:45] [SPEAKER_03]: The cheapest desile has typically helped perform the market over time the most expensive desile has typically under performed and you've had you know it's it's moved at a pretty decent line in the middle.

[00:11:56] [SPEAKER_03]: And so if over the 100 years if you've bought statistically cheap companies it's been a good investment strategy it's had its periods of struggle, but it worked out.

[00:12:04] [SPEAKER_03]: In the past 20 years that is not in the case.

[00:12:07] [SPEAKER_03]: We're looking at like literally decade now where that type of approach has not worked and the growth e-type companies have actually outperformed and the value type companies are under performed.

[00:12:16] [SPEAKER_03]: So that puts us in a situation where we need to evaluate now what's going on and this is the absolute hardest thing to do as a factor investor is when you see something that's worked over really really long periods of time.

[00:12:27] [SPEAKER_03]: And it stops working for a period of time trying to judge what do I do with this is something broken or is this just one of those underperforming periods you always see.

[00:12:36] [SPEAKER_03]: And this is like there's no answer to this, but this is absolutely the most and you can't do it statistically by the way because this is something core hosting talked about in factor fendel winter like if I wanted to do this statistically.

[00:12:45] [SPEAKER_03]: The amount of data I would need to save value investing is dead is longer than my investing lifetime.

[00:12:50] [SPEAKER_03]: So I can't do that. So I as a person have to look at this and I need to look at these arguments we're about to go through and I have to say do I believe these arguments that statistically cheap companies are not going to outperform anymore and it's a really really tough thing to do.

[00:13:04] [SPEAKER_02]: Really, really tough to do on average right right you can get lucky once you can have the thing hit you can have the thing miss but it's really hard to do.

[00:13:16] [SPEAKER_02]: Reliably on average that you're going to be more right than wrong.

[00:13:21] [SPEAKER_02]: It's also really interesting I think inside of these things to consider how the information got introduced to the world, the marketplace to the access information and I'm going to talk about this a bit more but it's like the information gets out there it kind of feels cool right you and I are both of an age where enough of this was available and it worked well enough statistically up to the point in time.

[00:13:43] [SPEAKER_02]: But by the time we could learn about this stuff it was due to have a 20 year failure period.

[00:13:50] [SPEAKER_03]: Yeah, that's right and it's you know and then that's an important point because if you look back at like following French is work.

[00:13:55] [SPEAKER_03]: You know typically when any of this stuff becomes public it doesn't work as well that that's just part of the deal and that's true with following French is work like we had a injured in all the underlope as Lira on access returns and we talked about this like post publication the factors have worked as well.

[00:14:08] [SPEAKER_03]: And by the way, they did all this stuff where they data mind a bunch of factors which were not available publicly in the same thing happened.

[00:14:15] [SPEAKER_03]: You know it also post publication didn't work as well so that's just part of the deal is like when this stuff becomes widely used when it becomes you know it's disseminated into the public if not going to be as good.

[00:14:25] [SPEAKER_03]: But the question is does it still work so maybe value investing doesn't work as well as it did before it was widely known by everybody but maybe it still works and that's the challenge here and that's what we're trying to think you know as we get into these explanations.

[00:14:36] [SPEAKER_03]: We're trying to understand like what are the pros and cons of that idea.

[00:14:42] [SPEAKER_03]: So yeah so before we start I think one thing I did want to do is I wanted to look at why value investing works because I think it's important to keep that in context as we go through these things so.

[00:14:52] [SPEAKER_03]: Typically academic research will have two reasons value investing works a risk based explanation and a behavior explanation.

[00:14:56] [SPEAKER_03]: So the risk based one is very simple value stocks cheap statistical stocks their cheap statistically are riskier than the market.

[00:15:03] [SPEAKER_03]: Therefore you would get an excess return for investing in those types of stocks.

[00:15:07] [SPEAKER_03]: The behavioral one is basically there's a misprasing going on so people overestimate the problems obviously if the companies cheap there's problems something's going on something's gone wrong with the company.

[00:15:16] [SPEAKER_03]: Across a wide group of those companies people overestimate that and therefore if I buy a basket of those companies I can benefit from the fact that eventually they're going to realize things aren't as bad as they seem.

[00:15:26] [SPEAKER_03]: So those are the two explanations that you'll get in academic research about why value investing works and I think it's important to keep those in the back of your mind as we go through these reasons why maybe it doesn't now.

[00:15:38] [SPEAKER_02]: Both reasons both sides again think in terms of variance and thinking both directions because whether it's the risk based idea of stuff goes bad or stuff goes really well or behaviorally stuff goes bad and people are reacting it doing going bad or stuff goes really well and people are overreacting to it going really well.

[00:15:56] [SPEAKER_02]: They both have that buy and sell side. I think it's really important to think about it in those terms from both the buyer side and the seller side and how they might be contemplating what the stories around the valuation at that point using this type of methodology to understand just the types of stories that you have to tell to justify the future that you want to see.

[00:16:14] [SPEAKER_02]: That becomes really, really important as we think about how this is all over time.

[00:16:19] [SPEAKER_02]: How it exists right now and then how we apply it in our own practices either as allocators or individual investors to make sense of because this is all we're doing is trying to make sense of the prices on the page in front of us and go, can I fit this with something that.

[00:16:35] [SPEAKER_02]: Make some logical sense to me.

[00:16:37] [SPEAKER_03]: Let's get a number one here. This is my my roles of value investors to rail against the fed.

[00:16:42] [SPEAKER_03]: So now I'm going to rail against the fed for a decent period of time. I'm not actually going to do that, but that is the number one reason here and one of the things people suggested is that the fed changed the game when they kept interest rates artificially low for a very long period of time.

[00:16:55] [SPEAKER_03]: And you know if you're a believer in the theory behind it, you could say in a period of low interest rates growth companies have way more of their value in the future.

[00:17:02] [SPEAKER_03]: You discount those back at a lower interest rate growth is worth more than value therefore by keeping rate down for a standard period of time the Federal Reserve killed value.

[00:17:10] [SPEAKER_03]: So that was my initial thing and then I kind of took it back and I said well, you know now rates are higher.

[00:17:16] [SPEAKER_03]: So this is not going to this doesn't you know this is not going to be the case anymore now this is better for value.

[00:17:20] [SPEAKER_03]: But since gone to like the third thing which is basically I don't think this really matters all that much.

[00:17:25] [SPEAKER_03]: I think when you look at the long term data to suggest the theories really really strong in terms of interest rates and the performance of value against growth.

[00:17:31] [SPEAKER_03]: I think the data doesn't show anything almost.

[00:17:35] [SPEAKER_03]: So I don't think the data shows that during periods of high rates value outperforms or that underperforms during periods of low rates.

[00:17:41] [SPEAKER_03]: So I think to a large extent what the fed is doing is it's probably irrelevant and I think somebody's other reasons probably play a bigger role on whether values dead or not.

[00:17:49] [SPEAKER_02]: The fed is one of those things that personal, personal belief, personal opinion is it fades in and out of where people really care and when people don't really care.

[00:18:02] [SPEAKER_02]: And I think in the pervasive ADHD of the last you know five years but certainly the last 20 years is probably like grown more and more and more.

[00:18:09] [SPEAKER_02]: The amount of attention people pay to stuff with the fed and if it's going to.

[00:18:14] [SPEAKER_02]: If it's going to show up in places like factor regressions for value and if it's going to work.

[00:18:19] [SPEAKER_02]: The amount of time we spend in the moment when there's a big fed decision or a big comment like we got a jackson hole the other week or something else where everybody's laser focused on it for a second.

[00:18:29] [SPEAKER_02]: But they're not laser focused on it for like a three or a five or a ten year period while waiting to see if something like the value factor has produced some type of you know excess return.

[00:18:39] [SPEAKER_02]: Or whatever it is in time.

[00:18:41] [SPEAKER_02]: I think of it a lot like it's blaming the fed or just pinning something on the fed that's not a very momentary point in time.

[00:18:50] [SPEAKER_02]: Complaint acknowledgement, whatever it's a lot like say like the ten commandments were written and then everything was fine.

[00:18:57] [SPEAKER_02]: It's like no, no there's still a lot of chaos going on around it even when Moses comes down when Charles and the has to come down off the mountain in the movie like there's pandemonium taking place.

[00:19:08] [SPEAKER_02]: Like these things these institutions they punctuate time and that they put the highlight or on different things but then I mean how many times does the the value factor work over what like a three week period around a fed announcement.

[00:19:22] [SPEAKER_02]: It's just noise.

[00:19:23] [SPEAKER_03]: Yeah, no absolutely.

[00:19:25] [SPEAKER_03]: The other thing in first of all I have never I don't think anybody's ever brought Moses into a is a investing dead podcast but that's a good to do it.

[00:19:31] [SPEAKER_03]: There's not enough child and has to on this podcast damn it.

[00:19:35] [SPEAKER_03]: But the other thing is like I hate all this and you guys to do this early in my career, but I hate all this blending whatever for whatever's going on in the market.

[00:19:41] [SPEAKER_03]: Like we don't even know what's going on but second of all like if if the fed had kept reach low forever and that was part of the thing and you've got to play the field isn't running even investing like.

[00:19:50] [SPEAKER_03]: You know it's is an investor you can't be like for a two decades being like well I've underperform because the fed is cause screwed up the market like.

[00:19:57] [SPEAKER_03]: If the fed's gonna keep screwed up the market then figure out something that works with the fed screwed up the market.

[00:20:01] [SPEAKER_03]: You know we know short-term performance is noise anyway, but I hate the idea of like trying to say oh we underperform this year because the fed screwed us or something like that and it's I just don't think there's any validity to that.

[00:20:11] [SPEAKER_02]: Yeah you got to this is where you have to take less like the formal there aren't like formal mathematical rules to this stuff and this isn't to say go out lie cheat and steal your way to profits but it is a way to basically say like.

[00:20:24] [SPEAKER_02]: I don't know your your plan sports with your your kid brothers or something when you're a little kid and like.

[00:20:30] [SPEAKER_02]: If your brother's cheating a little like you have two options you can go tell mom and dad and complain about him cheating or you can figure out how to out cheat the brother and this is what other states did the fed change of the game if you really think that.

[00:20:42] [SPEAKER_02]: And you know that the game has been changed then you should be able to theoretically profit off of those changes.

[00:20:49] [SPEAKER_02]: The people who make that complaint but don't do something like structurally having advantage if you're so confident in some new set of rules.

[00:20:56] [SPEAKER_02]: Shouldn't that be an advantage to you?

[00:20:58] [SPEAKER_03]: That's what always bothers me when people say yeah before we move on the next one to I will say like I've come around in that favor on this one like this is one of his we did this podcast with him of like the things he believes that 75% investors would disagree with.

[00:21:08] [SPEAKER_03]: And his first one was the fed is actually done a pretty good job and I think I agree with him for the most part.

[00:21:12] [SPEAKER_03]: I mean I think they have a really really tough job and for the most part I mean they obviously relate with inflation and they make mistakes but like you won't see me railing too much against the fed because they have a tough job and I think they've done a halfway decent job with it.

[00:21:24] [SPEAKER_02]: It's one of those.

[00:21:26] [SPEAKER_02]: Could they have done worse I think that's that's what the measurements that I think it was I think about the fact I look at a lot of things and I'm like was it great no did it feel good in the moment not always.

[00:21:37] [SPEAKER_02]: But in so many cases could I imagine a far far worse scenario to this yes I could I kind of think about this as and we're talking about a value is investing his dead like keep in my brain whenever we have this conversation and might even been one of your might have been an excess returns cover all I can think of is the money python bring out your dead thing like that's just what's in my mind whenever it is bring out your dead.

[00:22:01] [SPEAKER_02]: I'm not quite dead yet like yes you are shut up like bureaucracy whatever like that's how this feels what are we really complaining about here I could see ways this could go a lot worse and not that I'm willing to give everybody just a total pass on this but I think I'm with you and Matt more and more on this point.

[00:22:17] [SPEAKER_03]: So my second one is a too many people are doing it so too many people have become value investors it got discovered everybody became value investors and so it's not working and.

[00:22:25] [SPEAKER_03]: I'm not a huge believer in this but I think there is some truth to it because you have to say when pharma French works following French has worked up published the premium is deteriorated after that.

[00:22:34] [SPEAKER_03]: So you do have to say the fact that it became public the fact that people knew about it led to lower premiums than we're there in the past.

[00:22:40] [SPEAKER_03]: But the reason I'm not a huge believer in this comes down to value spreads so I can look at the spread between how expensive row companies are and how expensive value companies are and I can look at whether that's compressing or getting wider over time.

[00:22:51] [SPEAKER_03]: Now what would I expect it everybody becomes value investors and they all start buying the statistically cheap companies I would expect compression I would expect those spreads to be tight.

[00:22:59] [SPEAKER_03]: So if this was true that's what I expect to see but that's not what I'm seeing I'm not seeing like 99% how widespread is any more but I'm still seeing pretty wide spreads relative to history.

[00:23:08] [SPEAKER_03]: And so that to me says there's not just a spot the people you know going to become value investors and if anything if you think about how people behave like after what we witnessed in the past 20 years like you see people to cocktail party race and out to be value investors.

[00:23:21] [SPEAKER_03]: I mean it doesn't seem to be like to people are all so are all pumped up about it right now.

[00:23:26] [SPEAKER_02]: What do I go on the Reddit and I read the message boards about the game stops and the coins they're all value investors are jack all of them every last one.

[00:23:35] [SPEAKER_02]: I have a question about this on the spreads point too.

[00:23:39] [SPEAKER_02]: I think this is an interesting point when you're talking about the spreads you're also talking about it's not like we're talking about like microcap stocks or places where.

[00:23:48] [SPEAKER_02]: Look, what we're talking about is that the people are really looking at what we're talking about is a lot of liquidity and spread are very very closely tied when we look at like spreads and desials were typically talking about larger capitalization stocks with some amount of.

[00:24:00] [SPEAKER_02]: Of volume going through them so we're saying places where people regularly trans act those spreads aren't crazy it's not to say there's not like little private company spreads that are still bananas but it's like anywhere you see.

[00:24:12] [SPEAKER_03]: Actual volume those spreads are not as wild as you would have imagined that's right if you look at it in just the large cap space that's true the way we do it is we filter out illiquid names so we have small mid in large cap in there and we look at it.

[00:24:25] [SPEAKER_03]: But the the type of stuff you're talking about like the five million dollar market cap company not that's in there like I think it's for us like 200 million or more market cap if there was certain amount of volume like we use our investible universe of companies we think we could actually buy if we wanted to buy them that's what we use when we look at stuff like that but people have looked at it in the large cap space and it still holds true so.

[00:24:42] [SPEAKER_03]: I don't think you're seeing tight spreads anywhere right now for value versus truth.

[00:24:47] [SPEAKER_02]: Which is really interesting because to your point if too many people were doing it then.

[00:24:52] [SPEAKER_02]: It's not like they're all going to become treasury bills overnight but those spreads would be much tighter than they are.

[00:24:58] [SPEAKER_03]: That's right so our third one here in this this gets back to our friend Ben Hunt is the idea that narrative is driving the market now more than fundamentals.

[00:25:05] [SPEAKER_03]: And this is interesting I mean this is by the way 100% true I think at least like from from what I see I think you know narrative is it plays a much bigger role in the market and then the question is.

[00:25:15] [SPEAKER_03]: If narrative get things separated from fundamentals for individual companies how long can that last can that perpetually go on forever like how do those two things relate together so you may have better insight than me on this but I think it's at least something interesting to consider right now that we are in more of a narrative driven market than a fundamentally driven market.

[00:25:32] [SPEAKER_02]: I think Ben would agree with this point too when I say it this way it's it's the combination of narrative and the combination of flow behind it.

[00:25:40] [SPEAKER_02]: And I'm very much enjoying and I don't know if he originated it so he gets at least partial credit if not full credit for this our friend Dave Nodig has been referring to this is free me have you seen the free Macron inf letting around the flow.

[00:25:53] [SPEAKER_02]: Flow rules everything around me get the money so this concept of not just do you have the story but then you also have flows and I think those actually are interwoven on this idea because.

[00:26:07] [SPEAKER_02]: Back to the idea you have to talk about the buyer you have to talk about the seller you have to talk about how they make the market together each of them is telling a story the seller needs a buyer the buyer needs a seller with a story that gets them to transact.

[00:26:19] [SPEAKER_02]: A core function behind that is the idea of flow and how that permeates this market because if those flows tip in a more aggressive manner in either direction.

[00:26:29] [SPEAKER_02]: That's where we get these imbalances this is where we get these dislocations this is where we get crazy stuff whether it's a financial crisis or volmigated in whatever else.

[00:26:39] [SPEAKER_02]: So being able to track both what are the what are the dominant narratives of buyers and sellers and what component is flow and therefore volume playing in those stories at any point in time.

[00:26:51] [SPEAKER_02]: And if you're not looking through to that level of understanding you're probably missing something that's bigger than the statistical artifice of whatever it is of saying like oh stocks are at 21 times forward earnings again.

[00:27:06] [SPEAKER_02]: And you have now worked Moses and Wu Tang into the same episode I believe.

[00:27:10] [SPEAKER_02]: Yeah, we got we got Moses and and Wu Tang in here so what's something this probably never been done before I would guess.

[00:27:19] [SPEAKER_02]: Method man.

[00:27:20] [SPEAKER_03]: But anyway moving on.

[00:27:22] [SPEAKER_03]: This is another one from I've been doing tons of preparation for our loss while I interview coming up and this is one he believes which is that.

[00:27:30] [SPEAKER_03]: If you go back in the day like back in Ben Graham's day like if I wanted to calculate find these price cheap price to book companies like what would I have to do.

[00:27:39] [SPEAKER_03]: Like I'd have to go to a physical location I'd have to get out this stuff like these were annual reports I'd have to pull the stuff out of there I'd have to do the calculations like it was hard to figure out like with the cheapest you know companies passing like a Ben Graham price to book screen were like it wasn't easy now today I if I could do it right now like while you and I are talking I could go pull up a list of them.

[00:27:59] [SPEAKER_03]: So his point was when it becomes that easy do you expect it to still keep working and I think it's a valid point now the other side of that you would take is most value investors are doing things more sophisticated than that now they're not just doing you know at least people who are doing it well aren't just saying well I'm just going to buy these cheap you don't praise the book companies and I'm going to call it a day that may work that may not work but most people aren't doing that but I think I saw this 100% right about this I think you shouldn't expect like when something was very very difficult to do in the past.

[00:28:27] [SPEAKER_03]: And you got an edge by doing it and now it becomes so easy that anybody can just do it you shouldn't expect to get the same returns from that in the future back to think about this from both sides.

[00:28:39] [SPEAKER_02]: Not only are the tools available but they're available to everyone and if you're in any position of trying to shape a story you're going to use those tools that away that's advantageous to your story not necessarily to defraud people

[00:28:55] [SPEAKER_02]: although in some cases it certainly used to defraud people back to the narrative and flow piece of it but.

[00:29:02] [SPEAKER_02]: When you come up with like a we work just as an example we work knows because of the quick availability of tools it's not just somebody who had to go down into the accounting basements of the.

[00:29:13] [SPEAKER_02]: We work building to pull out the fire the physical files of the thing to go like well our price to book value is pretty ugly.

[00:29:22] [SPEAKER_02]: It doesn't just stop there it's like well we know because quick books can tell you some of these calculations you can go in any small businesses access to stuff like this it's so easy to have a balance sheet these days.

[00:29:34] [SPEAKER_02]: We know the balance sheet for basically like all of our clients like this is not something that's complicated or takes a whole lot of pen paper and calculator time to come up with.

[00:29:45] [SPEAKER_02]: And therefore if you're on the opposite side of this if you're a company who's growing assets like you're a we work and you're like well here's all the ways we value a real estate company.

[00:29:56] [SPEAKER_02]: Man we look like crap.

[00:29:58] [SPEAKER_02]: Help these metrics we better invent some new metrics and some new stories to go around them to try to persuade investors that there's other ways to think of us what if we thought of ourselves as a tech company instead of a real estate company.

[00:30:10] [SPEAKER_02]: Now I'm picking on we work, but this is the idea those tools aren't just there for buyers for us to be more nuanced they're there for sellers and people on the other side of the table too to go okay we know these don't work so what else do we have to do and that just muddies the water.

[00:30:26] [SPEAKER_03]: Yeah you will see that with companies they'll basically tell you like when they're a forklift like this is the ratio you should be paying attention to and it typically won't be those standard ratios.

[00:30:34] [SPEAKER_03]: And the only other thing I'll say on in price to book is.

[00:30:36] [SPEAKER_03]: It is possible price to books still works of a long term like I'm not saying it doesn't to me if you go back to the risk piece and the behavioral explanation it's possible you know both of those might fill hold those price to book stocks are still look a pretty risky to me they're all of the place.

[00:30:51] [SPEAKER_03]: It's still very possible people are fundamentally misprasing those stocks now that's where you'll get the pushback from people like us walk more I think is are they really doing that or not.

[00:30:58] [SPEAKER_03]: I think it's possible out of work over the long term but I also think if you're going to do something like that that's really really simple you definitely have to be in for a wild ride and you have to lengthen your timeframes.

[00:31:08] [SPEAKER_03]: You know I don't think I don't think that stuff's going to consistently work I think it's going to you're going to pay a price in terms of really long periods of underperformance and I do think there's better ways to do value than these really really simple you know let's just buy cheap price to book stocks.

[00:31:20] [SPEAKER_02]: You got to ask that question like who's selling it to me and why and man could there be any other.

[00:31:28] [SPEAKER_02]: Like the easiest person to just dump something on is somebody who's dogmatic and they're principal and believes in any one thing.

[00:31:35] [SPEAKER_02]: So like so long as there's a tribe of you know value thumping grandma it's like running around like there's there's technically there's an always willing buyer of some crappy little security that you're like well it's cheap one first of a basis.

[00:31:49] [SPEAKER_02]: I know will buy it hey Jack where's my bid.

[00:31:53] [SPEAKER_02]: Could be me that's not dark it's dark but again you got to think about it in both directions.

[00:32:00] [SPEAKER_03]: So this next one's interesting this is this is something I put in my original article this is this idea of big data and so the idea is do people have information if you're thinking of like value investors as people who are just using what's on the fundamental stuff that gets reported.

[00:32:13] [SPEAKER_03]: Other people that have other information that no more and so my example is like you probably at any given time have several drones up over various Walmart parking lots.

[00:32:20] [SPEAKER_03]: We're trying to figure out like if there's cars there and if Walmart is truly an attractive value so with your drones you might have an advantage over me.

[00:32:27] [SPEAKER_03]: I'm just using the financial statements I don't realize Walmart's about to report a horrible quarter because there's no one in the parking lots.

[00:32:32] [SPEAKER_03]: Like people have all this David Vance credit card data you know it's possible the more advanced investors have something where they're ahead of the value investors.

[00:32:40] [SPEAKER_03]: You know they know the information that things are bad first and so you're at a disadvantage as a value investor just using this you know historically reported data when everybody's got this new big data that's out there.

[00:32:51] [SPEAKER_02]: More than once I've thought you know you see those things with like the AI produced images of people and doing different things and then they have six fingers or a group of I or something all messed up.

[00:33:02] [SPEAKER_02]: And more than once I've thought this explains the phenomena of the wall Martian to me.

[00:33:10] [SPEAKER_02]: You're familiar with the.

[00:33:15] [SPEAKER_02]: But what if those were just drones sent by big hedge fund to exploit Walmart pricing data.

[00:33:23] [SPEAKER_02]: But I'm with you on this one. I mean big data has changed what's available but I think what that's really done more than anything is it's changed the tools that are available and the ways that we can reframe repackage and tell stories about the data to try to get people on board with here is the one true way right way to think about this story that makes use smart.

[00:33:46] [SPEAKER_02]: And if we can get enough people to think about this is the one right true way to think about this data that makes people smart.

[00:33:53] [SPEAKER_02]: That's as much as we get a we work as it is a game stop as it is we get an Amazon or a Tesla or a take your pick up things that have worked out too that haven't just been like disastrous frauds and failures.

[00:34:04] [SPEAKER_02]: If you have more data points you have more things to build a story on and that's a help of a lot more convenient than being able to go like.

[00:34:13] [SPEAKER_02]: Hey, we're a great price to book deal like hey are you know are our net net position makes us you know you could technically bias and liquidates tomorrow nobody's making that pitch in public markets.

[00:34:24] [SPEAKER_02]: This extra data has just given extra resources for telling these stories in different ways and it's a constant evangelism campaign.

[00:34:33] [SPEAKER_03]: Maybe that'll be with the traditional value investors maybe there'll be so many drones over Walmart parking lots that like.

[00:34:50] [SPEAKER_02]: I think that's a great company too and I remember.

[00:34:54] [SPEAKER_02]: Forgive me if it's if it's not her but it was somebody where because I remember thinking of that when they were talking about and obviously big data has become a big thing and you know our friend like.

[00:35:03] [SPEAKER_02]: Mad Ober and Howard and all those guys are doing stuff with this and they're fascinated by big data sets and when that became a new thing we started to hear the stories about flying the drones over Walmart and everything else.

[00:35:12] [SPEAKER_02]: It was like the real trade here has not to get Walmart's quarterly earnings earnings right the real trade here is who is selling these drones to these hedge funds right and how do I get into that business.

[00:35:24] [SPEAKER_02]: He goes that is a crazy attractive selling story and if I adjust for those two and 20 fees even if they get the earnings number wrong but they talk about their drone fleet.

[00:35:35] [SPEAKER_02]: I'm just saying like there's that second or third order effect or second order derivative on all these things you got it.

[00:35:42] [SPEAKER_03]: That's been and we're talking with us about this tomorrow but that's been the play where they are so far early in the thing is like forget about what they're doing with a eye let's just buy a video who's allowing them to do it.

[00:35:51] [SPEAKER_03]: You know and that's common in the early stages of these new technologies is like the people that are building the stuff do very well now in the future that that made up both well for a video's future.

[00:36:00] [SPEAKER_03]: But it is interesting you're right and you've got to figure out who's like enabling the stuff to happen at the beginning and that's where you want to be.

[00:36:08] [SPEAKER_02]: Yeah yeah it's a real question who's enabling the stuff who's making it happen.

[00:36:13] [SPEAKER_03]: So we're going to the next this is another awesome one I got from listening to him when his arguments against value investing and it's the idea that there's more winner take all businesses now

[00:36:21] [SPEAKER_03]: and I think this is interesting like these able he gave was Airbnb.

[00:36:24] [SPEAKER_03]: So if you're someone who's valuing like hotel companies with the PE ratio well if that's becoming more of a winner take all industry and Airbnb is perpetually going to be taking share from hotel companies in general.

[00:36:36] [SPEAKER_03]: Maybe the PE ratio those hotel companies should be treating at is less in the PE ratio those hotel companies should be treated at in the past.

[00:36:43] [SPEAKER_03]: So maybe as these businesses become winner take all the bigger companies with even though they look expensive and the smaller companies look less expensive.

[00:36:54] [SPEAKER_03]: Maybe the bigger companies win more and more industries now this is not true of every industry I don't see like steel being disrupted in this way, but it is interesting to think about that like if you have more winner take all businesses this could be bad in general for value investing.

[00:37:07] [SPEAKER_02]: For all the businesses that can scale especially off of technology and I think this is where you get into new factors that rhyme with old factors.

[00:37:16] [SPEAKER_02]: So like an Airbnb case as you have the technology layer imposed on top of old brick and mortar hotel real estate that type of thing.

[00:37:23] [SPEAKER_02]: So you get this mix of you have a new factor with a new story around it that maps just enough over an old factor.

[00:37:30] [SPEAKER_02]: So people who could understand the old factors go like okay I see the merits here I see what this is and then once that becomes the dominant narrative what that does is it makes it really hard to compete against for the old players.

[00:37:43] [SPEAKER_02]: And the Airbnb case is really great a professor domitaron when he did the Uber valuation it was really interesting to because like what is this taking market share away from.

[00:37:53] [SPEAKER_02]: And how is the new story and the new factor that's being used to explain the new story going to build a motor around this thing because once you get dominant position.

[00:38:03] [SPEAKER_02]: Flow takes over again like once you're the biggest one in the space and the money is coming in that takes over there still stuff that happens at the margin that's all the my green stuff on like how this works too, but it's really really interesting to think about.

[00:38:16] [SPEAKER_02]: That magic combination of if you can build a factor S story over an old factor you can get enough people around a new dominant narrative and approach a winner take all scenario where it's really hard for anybody to outcompete you on the upswing.

[00:38:33] [SPEAKER_02]: Airbnb great example of that the Uber lift IPOs and all that stuff great example of that we've seen a lot of this over the last 10 years.

[00:38:41] [SPEAKER_03]: Remember the argument against growth companies has been that as you get bigger and bigger it becomes harder and harder to sustain high growth rates and we're seeing a lot of really big tech companies right now that are violating what's happened in the past with respect to that and that's the question is.

[00:38:54] [SPEAKER_03]: Is that going to continue or we still in a situation where the bigger these companies get more of an advantage they get it just keeps going and going and going and going and that does become a problem for value.

[00:39:03] [SPEAKER_03]: I mean if you if you're competing against the S&P 500 those types of companies are a huge percentage of the S&P 500 right now, so if they're going to keep winning and winning and winning and that's not necessarily what I believe but if you do believe that it's harder for value in the future definitely relative to those companies.

[00:39:18] [SPEAKER_02]: It's also interesting to how those companies so the hiring higher growth rates can't keep going to hold trees don't grow to the sky thing but what's been really fascinating of the last call it 10ish years is that the companies with the high growth rates doing the most stuff built the biggest cast positions and or the biggest like venture books.

[00:39:37] [SPEAKER_02]: So it's the way that they're finding growth in new categories are from from new high risk kind of like barbell type portfolios we have the we have the old business but then we have this like venture portfolio that has high high high growth potential to try to offset that thing.

[00:39:54] [SPEAKER_02]: The world's not seen that dynamic before like the closest we got to seeing the dynamic to that was like seeing telidine do like roll ups and I don't know.

[00:40:03] [SPEAKER_02]: GE get into the mortgage business like little punctuated up swings but we've never seen this stacking of tech growth at these levels with basically pools of capital of this size before.

[00:40:14] [SPEAKER_02]: Really really interesting to think about how this all breaks down and why just today is so much different than 20 years ago let alone 40 50 60 years ago.

[00:40:43] [SPEAKER_03]: And they're power to keep their control and to not have this company come from nowhere and like dominate the market.

[00:40:49] [SPEAKER_03]: And so it'll be interesting to see it mean you have to say being honest about it like the big tech players have a huge leg up on the start of companies right now just because of what it costs to run these AI models and because of the scale they have but it'll be interesting to see how it plays out like as we go into the future.

[00:41:03] [SPEAKER_02]: And it's going to be very interesting because we're going to find out if you know I don't want to invoke Alan iverson on this but there's a lot of heartache and heartache and let down I can tell you as a 76 just fan like what comes on the other side of this you can really get your hopes up for something.

[00:41:17] [SPEAKER_02]: And then be like.

[00:41:19] [SPEAKER_02]: You know my guys barely six feet tall maybe five eleven and sure he's dominant out there but just can't bring it all the way home for us and it'll break some hearts.

[00:41:27] [SPEAKER_03]: AI I hope you don't let us down like the last AI so this next one also is basically similar thing which is the idea that values of editing and technology and you know one of the things when you talk to at least most long only value investors like I know West talked about this West Gray when he was on our podcast is.

[00:41:41] [SPEAKER_03]: Most of them think you want to have pretty loose sector constraints at least if you run value long only if you run a long short you would have tight sector constraints but if you run it long only you want to lose sector constraints and what that's meant.

[00:41:52] [SPEAKER_03]: Over the past you know decade plus is you've been significantly underweight technology because there's work cheap companies in technology now you could run it that you know.

[00:42:00] [SPEAKER_03]: And you can see that the value is neutral and you could own a bunch of tech companies but even if you do that you're still dealing with like the cheapest tech companies so the cheapest tech companies is not where the innovation is becoming so you're still underperforming.

[00:42:10] [SPEAKER_03]: So this idea is value has been a bed against technology no matter how you look at it and is that if if technology is going to continue out performing if these big companies are going to continue driving the term returns to the market then this bed against technology is a bad thing and it's going to continue to detract from values performance going forward so that that's the big question here is you think.

[00:42:29] [SPEAKER_03]: Technology is going to continue to lead the market in the indefinite you in the decades ahead or do you think we're in for some sort of mean reversion here.

[00:42:36] [SPEAKER_03]: Or maybe technology companies are not going to be the leaders.

[00:42:39] [SPEAKER_03]: It's a question out of the answer to but it's important for value because if you're going to buy your nature be underweight technology then whether technology is driving the entire market.

[00:42:48] [SPEAKER_03]: You know the for outperforms of the entire market is a very important question to answer.

[00:42:52] [SPEAKER_02]: Back when I'm thinking like magic formula.

[00:42:56] [SPEAKER_02]: In my my era of like learning my way through gram buffet bill Miller you go through the magic formula the green black stage of trying to understand this stuff.

[00:43:06] [SPEAKER_02]: And you start to find out about and I can't remember I can't remember which book it's in but it's definitely from green black like and then I know West great talks about it too about how certain factor things will default ignore certain sectors or certain cohorts where it doesn't apply.

[00:43:21] [SPEAKER_02]: So I'm not sure if you're going to be in the middle of the day.

[00:43:24] [SPEAKER_02]: I mean, you know, you know, like, you know, like, you need to be in something like that.

[00:43:27] [SPEAKER_03]: Like can't you like financial insurance companies because yeah, it's a spot like certain ones financials with the big when you see like there's people like a fourth and Mohan rim I think was part of the Mohan rim.

[00:43:36] [SPEAKER_03]: We're a real whole paper about value and financials because like so many of these ratios don't work well and financials.

[00:43:42] [SPEAKER_03]: It was just exclude them from their value screens, but then you run with this problem of like I don't want any financials.

[00:43:48] [SPEAKER_03]: So like if financials are driving the market for a long period of time, I don't know if you find it so you're right.

[00:43:51] [SPEAKER_03]: And it's sort of ratio is work better in other areas than, you know, than they do another's which this is where like the.

[00:43:58] [SPEAKER_02]: A composite version can work different awareness for different sectors can be really effective on this.

[00:44:04] [SPEAKER_02]: But I think any time like if you're clinging to value in a definition that it's going to default be exclusionary of a sector like technology, you should at least come up with a way to understand at least that sector inside of your framework so that you're you're making that call is this something I really just want to not own.

[00:44:21] [SPEAKER_02]: Or is it something where there's the unintended consequence of what I don't own it? I could systematically underperform for a long time, especially given the size of the size of technology.

[00:44:30] [SPEAKER_02]: It makes me think a lot of another good, it's not a perfect analog to this, but I think it's worth mentioning. This is like when I don't know five or 10 years ago when ESG had his big run on gathering assets and a huge part of that big run on gathering assets was just avoiding all the energy and commodity and other stuff that got absolutely shalacked.

[00:44:51] [SPEAKER_02]: So you had no energy in the portfolio and overweight to tech and you had basically an underweight to like most financials just because of the size to make that up.

[00:45:01] [SPEAKER_02]: Made those ESG funds look really really good five ten years out of the gate coming off the financial crisis on raising those assets. They were doing it masquerading under the name of oh, it's the quality it's all these things and it's like well.

[00:45:13] [SPEAKER_02]: Actually if I just net out some of the sector exposure that seems to generate most of your returns when I look back we have to be really careful on when you're netting this stuff out what you're going to compare back to and if that logically matches what the logic is that you're hoping to use if it's a logic he can stick to.

[00:45:33] [SPEAKER_02]: You get a pass along as you can stick to your logic and it's consistent if you just performance chasing and you're not asking these questions you can probably expect to be disappointed.

[00:45:42] [SPEAKER_03]: So on the side of the ESG thing like I'm not I'm not one to judge whether people should be investing based on ESG or not I mean I'm not a believe that it actually works performance wise, but it is interesting like how many people.

[00:45:51] [SPEAKER_03]: We're not true believers in ESG of the people investing in ESG because as soon as the energy stocks and everything turned up and like the thing wasn't leading out performance like the run for the exits on ESG. I mean how much do you hear about ESG anymore like not that much like a lot of it was the fact that I could do good and I could outperform with the same time and as soon as you took away the outperform at the same time part like a lot less people are interested in ESG than we're before.

[00:46:14] [SPEAKER_02]: The beautiful thing about this run in the run in energy and sort of like the ESG coming the shine coming off as a marketing screen and all the other.

[00:46:26] [SPEAKER_02]: All the other things is like that shine came off and now we're back to the.

[00:46:33] [SPEAKER_02]: The ESG shops that we talk to some of the clients we have the allocating this way were back to at least people following through on values and the performance chase is out of there.

[00:46:43] [SPEAKER_02]: I'm all about a cottage or a niche industry existing around values that people stick to even if they're not totally mathematically or scientifically sound in some way if that's the thing you're allocating money to.

[00:46:55] [SPEAKER_02]: Fantastic it's when you're chasing performance and you're like oh I'm going to do good to him in a save the world it's like.

[00:47:01] [SPEAKER_03]: Just man yeah let's let's be a little bit more skeptical here people it's great now because like the people who are doing ESG now or the people actually believe in ESG which is the way you want in the first place.

[00:47:10] [SPEAKER_03]: This is what I love he can so you didn't want to be doing is she in the first place who thought they somehow were performing because of it and now we've.

[00:47:16] [SPEAKER_03]: You know now ESG will become what it should be which is I think it's great if people want to invest that way and they want to invest to make a better world that way I think that's fantastic.

[00:47:23] [SPEAKER_03]: But just understand what you're getting into which is your probably not going to outperform the market by 300 basis points a year while you're doing.

[00:47:30] [SPEAKER_02]: Yeah know what you're betting for know what you're betting against make sure you're in alignment with that thing and if what you're betting for is.

[00:47:38] [SPEAKER_02]: Positive performance and you're going I'll make this manager because of the positive performance but it really works out over grasses down to yeah they didn't know any energy stocks there overweight tech.

[00:47:49] [SPEAKER_02]: That's the kind of information you want to be on board with if your bet if your value alignment is really with.

[00:47:55] [SPEAKER_03]: The net performance figure and just one more point in this value is about against technology like one of the other arguments you can make is there there are ways to correct this in terms of you can start adjusting for intangible assets like we know like if I'm running a price to book screen against the technology sector it's pretty much garbage like there's there's no point in running a price to book screen against the technology sector because most of the asset they have aren't reflected.

[00:48:16] [SPEAKER_03]: In that so you know there's there's the basic way if I can adjust the financial statements I can capitalize R&D I can try to do it better but there's people like I move and the podcast who think is even better ways to do it with advanced data when he's come up with a bunch of different ratios.

[00:48:30] [SPEAKER_03]: There are price relative to something that actually does try to measure that intangible value so there are ways to limit this if you're a believer in that type of stuff there are ways to limit this better against technology by trying to say can I come up with metrics that more appropriately.

[00:48:44] [SPEAKER_03]: Value technology company so I can use value but I can use it in a different way from the standard ones you'll see on the financial statements.

[00:48:51] [SPEAKER_02]: You got to have again I think that highlights the aligning your values point with the thing that's going to be your expression of what what this is.

[00:49:02] [SPEAKER_02]: If I want to have intangibles because I want to be able to consider a technology these are those critical ways that I can actually take the strategy I have and fit it so that I'm not in just some pure exclusionary place so that I actually have a thoughtful approach to how I think about this.

[00:49:17] [SPEAKER_03]: Kai rules doing some brilliant work it's really interesting if you want to figure out how to do this so the last one I have this comes from Aaron stand open it seems like every time we've got these great insightful things in the podcast or come from Aaron stand hope but.

[00:49:27] [SPEAKER_03]: This is a blog pussy wrote a really really long time ago but I keep reposting up with the chart in the podcast but he looked at all the different factors and in the pre recession period during a recession post recession then during just a standard expansion which factors outperform and what he found is values.

[00:49:45] [SPEAKER_03]: Values outperformance comes largely in and around recessions like in the pure expansionary period that was not the time that will value pre recession recession and post recession.

[00:49:54] [SPEAKER_03]: That's where a lot of the outperformance of value can so if you're at are if you argue and we have seen this and we're seeing less recessions than we've seen in the past.

[00:50:01] [SPEAKER_03]: We also you know you can argue in 2020's a great example this although that was an exogenous thing like these recessions are quicker now.

[00:50:08] [SPEAKER_03]: The up and down is quicker so you can argue if a lot of values out performance historically comes around these recessionary periods if we have less and quicker recessionary periods.

[00:50:16] [SPEAKER_03]: Maybe values not going to work as well as it has in the past so again I don't have an answer on this but I think it's an interesting argument to think about if something has changed economically where the periods where value works are shorter.

[00:50:28] [SPEAKER_03]: Maybe value is not going to work as well as it has in the past.

[00:50:31] [SPEAKER_02]: To quote the poet Rob Thomas man it's a hot one.

[00:50:36] [SPEAKER_02]: These things work in seasons they work in phases you can smooth this stuff out and you can see it get rough again and I'm pretty confident that that's what we're seeing.

[00:50:46] [SPEAKER_02]: Like is the economic cycle smoothing back to the first point like did the Fed change the game we could do all these things but it's just stuff coming in and out of style it's just.

[00:50:57] [SPEAKER_02]: Styles coming in and out of like our cultural awareness and the stories around them it's Santana being a hit you know in the 70s and then coming back and being a hit again in the in the 90s when he partners with Rob Thomas for that song that's now going to be stuck in my head that I don't know.

[00:51:14] [SPEAKER_02]: Suffice it's say we've now covered what child in the has been we've gone from the 10 commandments to Wu Tang references to bringing it on home to Santana takes that are 25 years still.

[00:51:26] [SPEAKER_02]: But it's this idea of like things coming in and out of style they come in and out of Vogue and there are always going to be periods where it feels like stuff like the variance has been squashed or things have been there so is the economic cycle smoothing but now we just have.

[00:51:40] [SPEAKER_02]: Crazy moments of terror like pandemics like I don't know but we all have to adapt the strategies in the way we understand them to fit the situation that we're dealing with.

[00:51:52] [SPEAKER_02]: If if finance has taught us anything I feel this I don't know if you feel this way too it's like you.

[00:51:58] [SPEAKER_02]: My default skepticism for anything that's going smoothly I'm just learned to like embrace in most of life the only things we can rely on.

[00:52:07] [SPEAKER_02]: To to like have stick to goodness and like get through are the things that like survive when the smooth road turns into a horribly rocky or bumpy road and then you look around and you're like who's still with me on this.

[00:52:19] [SPEAKER_02]: The more that people argue like the economic cycle is smooth or whatever else I look at things like the pandemic and I go oh no.

[00:52:26] [SPEAKER_02]: This is not good sign if we think things are smoothing out when the variance on these horrific events seems like it just gets worse and worse.

[00:52:34] [SPEAKER_03]: Yeah, that's right and what was interesting is you look at the bottom right here that this is a most people will see the big chart here but the bottom right is interesting so.

[00:52:40] [SPEAKER_03]: Like this was the percentage of time we were in each one of these historically so we were in a pure expansion 61% of the time historically and then the pre post enduring recession was 39% of the time.

[00:52:51] [SPEAKER_03]: So I would argue you know this chart goes through 2015 I would argue in the post 2015 that pre during and post recession is probably not in 39% of the time it's been less than that and so that gets to the argument is if that is less is that necessarily a bad thing for value which I don't think it is but.

[00:53:07] [SPEAKER_03]: I think it's interesting point to make because I think this is a really interesting chart to think about when the factors have worked historically and when they have not worked historically.

[00:53:14] [SPEAKER_02]: And how much time they need to work because the other thing is if you have like how many how many cheap price to book situations went off the table when we shut the world down for COVID.

[00:53:25] [SPEAKER_02]: Like would there have been more cigar butts if we had like play out a different version of history if if we had gone through this and the way that we might have gone through this in the 60s or like the Spanish flu version where they're more cigar butts in the Spanish flu like I don't know like this this stuff is really it's wonky but you.

[00:53:42] [SPEAKER_02]: You have to take this in when we understand this in the context of history the stuff isn't static.

[00:53:47] [SPEAKER_03]: And what's interesting and this is one of the reasons I think of Sean is getting rid of price to book is price to book is a proxy for bankruptcy risk and the great depression.

[00:53:54] [SPEAKER_03]: So basically you know the low price to book stocks or the ones that were going bankrupt so like when they when they expanded their data set to see more than they had seen that's when they went to like an enhanced price to book.

[00:54:05] [SPEAKER_03]: Or it were just excluded from some of their composites by saying like all right we brought in this new information we realized you know maybe this price to book maybe it's not just what's going on now but looking at a full history maybe this price to book isn't what we thought it was.

[00:54:17] [SPEAKER_03]: Where's my old man Z score come save me I've been here's about that thing trying to program that they from but from the day for the bit anyway.

[00:54:26] [SPEAKER_03]: Yeah moving to the conclusion I think it's just I think this is really interesting and so I'm trying to think about like we've taken both sides of a lot of stuff so people are probably asking like what do they take away from this and and I think there's a few takeaways I think one is what I just said which is this is hard there's smart people on either side.

[00:54:41] [SPEAKER_03]: I don't know whether value I mean obviously I'm a believer in value at least as part of what you do in a portfolio.

[00:54:46] [SPEAKER_03]: I'm a believer it's going to work over time but I understand there's really smart people on the other side of that argument.

[00:54:51] [SPEAKER_03]: I also understand that probably value needs to be enhanced you know you're probably I mean I don't know too many people and I talked to a lot of quantum vesters that are sitting here running you know pure price to book screens anymore.

[00:55:02] [SPEAKER_03]: Most people have got rid of it all together if they're using it it's part of a composite so people are learning they're evolving they're doing things in different ways so doing like pure price to book value is that dead is a different question than is an intelligently put together value strategy.

[00:55:17] [SPEAKER_03]: That in court reach what we know now is that dead so I think it's important to maybe keep those two things in mind and it also like the Michael Mobison you gotta go back to him and uswoth again.

[00:55:25] [SPEAKER_03]: Like the way they define value investing it's never going to be dead because value investing is buying something for less than it's worth.

[00:55:31] [SPEAKER_03]: And you'll always be able to do that and amount of how you'd mother whether you're doing with a price to book or you're doing it with something it does nothing to do with any quantitative method.

[00:55:37] [SPEAKER_03]: You'll always be able to do that so I'm not sure there's a takeaway here.

[00:55:41] [SPEAKER_03]: I mean I think they're still pretty good arguments for like using statistically statistical value investing done in the right way but I also understand their strong arguments on the other side too.

[00:55:51] [SPEAKER_02]: Both arguments in both directions to help nuance the point around who you are and why you believe something works with some evidence that actually works over time.

[00:56:00] [SPEAKER_02]: And I look at this and I say from both directions both buyers and sellers of all strategies of ideologies have to meet in this marketplace to make these decisions.

[00:56:10] [SPEAKER_02]: So to still be able to look at something and even if the definition of value is still as simple as do I think this thing will be worth more tomorrow or in a year and five years than it is today.

[00:56:22] [SPEAKER_02]: Break down those layers of why.

[00:56:24] [SPEAKER_02]: And the things that I think of evolved the most that everybody can look at are if you think fundamentally add the nuance of add some trend or technical or other categorization to it add sentiment add flow add several more layers of why to say like okay for me to be right on this multi dimensional look.

[00:56:44] [SPEAKER_02]: What are the various other categories that I need to be right for this to play out over my time horizon.

[00:56:51] [SPEAKER_02]: The active asking those questions is actually as old as time that's been around for for the whole thing and we can take it all the way back to the price to book days and saying like hey if this thing just doesn't go bankrupt I could buy the whole thing out and take it private and then maybe my little.

[00:57:04] [SPEAKER_02]: Berkshire Hathaway company or flourish over time or whatever the stories are going to be.

[00:57:09] [SPEAKER_02]: But this idea of you have to have a constantly evolving like composite view of how you see the world and the things that you're going to invest in and then all the different layers of reasoning on why you think it's going to be right and it can't just be your little narrow lens of one thing only for why you think you're going to be right because if you do that you're overlooking all the other people and all the other ways they think about it and you might miss the point of.

[00:57:34] [SPEAKER_02]: Or enough of them get to get all the same pages you over time so that you can get out of the thing you just got into.

[00:57:41] [SPEAKER_03]: Yeah, I think there's two questions you want to ask yourself what is do when you think about something like it's something dead in the market what is do I have to even make that decision and then the second is if I'm making that decision like what other things can I do along with it where I'm not just betting on that one answer and so.

[00:57:54] [SPEAKER_03]: I could be an index investor and I don't have to make the decision about is value investing dead so that that's an option for people.

[00:58:01] [SPEAKER_03]: I also if I'm like I'm doing if I'm building a value portfolio I can bet on momentum or a factor portfolio I can better momentum I can bet on quality I could better on a bunch of other stuff so that decision about it value investing debt is dead if not my full portfolio writing on that.

[00:58:14] [SPEAKER_03]: It's a portion of what I'm doing and I can do value in a more thoughtful way than the price to book which increases my odds the maybe the answer is it's not dead so I think it's just it's tempting.

[00:58:23] [SPEAKER_03]: To look at this in terms of like I have to figure out whether value investing is dead but I think most people don't have to make that decision and the other thing I would make and this is this is kind of the argument the opposite way is like if you're one if you're a S&P of 100 investor right now you are making the big bet on size.

[00:58:38] [SPEAKER_03]: Because the index is exceptionally concentrated so I would argue at the current time like that's a decision you have to make like adding a little bit of value to your portfolio might be a good thing because maybe you're mitigating the risk that these big companies are going to be in are not going to be what we think they're going to be and they're not going to dominate the world forever so.

[00:58:56] [SPEAKER_03]: Coupling that strategy with the value strategy you could argue it's actually a good thing right now I don't know how I don't know if you think that but it's something I think about.

[00:59:03] [SPEAKER_02]: I think about it a lot and I think about it a lot from the standpoint of you know what you just said if you're a passive investor you have to ask these you should ask a version of these same questions it's just important that we think about.

[00:59:16] [SPEAKER_02]: goes back to that idea we talked about I think it was on the podcast for last week we're talking about the the best of from the last question and the point gets raised.

[00:59:27] [SPEAKER_02]: About you know just thinking about like what you actually value and like what's sacred and dear to you over time.

[00:59:35] [SPEAKER_02]: You want to make sure like no matter what unless you're just going to be passive and mail the whole thing in like if these are savings if you're going to protect these things or if you need these to grow and how you're going to parse that out in your mind.

[00:59:45] [SPEAKER_02]: If you're making investments in the future.

[00:59:47] [SPEAKER_02]: You should at least have some intentional awareness to why you think this thing makes sense and what the risks are that you're bearing by doing that if you're full on market cap weighted like passive funds.

[00:59:58] [SPEAKER_02]: Hopefully you understand what those drawdowns look like every now and then when things get tilted out of whack and I'm in your camp on this one there's certain things were just like.

[01:00:07] [SPEAKER_02]: Just a verse five little yeah nothing else the verse by a little let's not just bet on this one thing.

[01:00:13] [SPEAKER_03]: Yeah, and it's not like you have to it's not like you used to look at that and you're like well you should be out of the market camp we in index is you should be 100% value like that that's sort of the opposite what we're talking about but.

[01:00:21] [SPEAKER_03]: It is interesting to think like as the index becomes more and more concentrated and I don't know whether it will or not if these companies continue to dominate that'll be a great bet to bet on the indexes.

[01:00:30] [SPEAKER_03]: But like for me I'm always like a split the different type of guy and everything I do from the from the ground in terms of the value factors we use we use multiple factors like I try to do multiple things so.

[01:00:39] [SPEAKER_03]: Like to me if I and I'm not a person who wants to index funds anyway, but if I was I would think about like what is the version of the world look like where these companies don't dominate like if.

[01:00:47] [SPEAKER_03]: If what's happened in the past where when you look in one decade and look at the top 10 companies in the S&T and then you look at the next decade most of them aren't there anymore.

[01:00:52] [SPEAKER_03]: If that's what happens and I'm not saying it is because I don't know like maybe I want to have at least some bet on something that's more fundamentally based.

[01:01:00] [SPEAKER_03]: As part of my portfolio so I am always a believer in that in all different directions is in terms of like trying to split the difference and trying to understand that I don't know what the world's going to bring in the future so trying to have you know something that does well in various outcomes.

[01:01:13] [SPEAKER_02]: My takeaway is value investing may or may not be dead but one thanks for sure at least as of this very second when I'm making this statement.

[01:01:19] [SPEAKER_03]: I am not dead and I should probably think about this true and so we bring you back with AI and the FDC continues beyond you.

[01:01:29] [SPEAKER_03]: But I would think if I was thinking of all the people I know like that I could program an AI to be I think you would probably like dead last in that list.

[01:01:36] [SPEAKER_03]: I'm just not sure that the combination of Moses and the Wu Tanklan can be done via I think it's it's probably impossible.

[01:01:42] [SPEAKER_02]: All I got to do is just you know spill a little bit of that drink into the computer right let it's a little bit of a great that's how you achieve this level close ADHD.

[01:01:55] [SPEAKER_03]: Well on that note that's a good note to wrap up on we'll see everybody next time hi guys this is Justin again.

[01:02:00] [SPEAKER_01]: Thanks so much for tuning into this episode.

[01:02:03] [SPEAKER_01]: You can follow Jack on Twitter at app practical quan you can follow me on Twitter at JJ Carbono and follow Matt on Twitter at at Coltish Creative.

[01:02:12] [SPEAKER_01]: If you found this discussion interesting and valuable please subscribe and either iTunes or on YouTube or leave a review or a comment.

[01:02:19] [SPEAKER_01]: Also if you have any ideas for topics you'd like us to cover in the future please email us at access returns pod at gmail.com

[01:02:26] [SPEAKER_01]: We would like this to be a listener driven podcast and would appreciate any suggestions. Thank you.