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Hi, I'm Jim O'Shaughnessy and welcome to Infinite Loops.
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Sometimes we get caught up in what feel like infinite loops when trying to figure things out.
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Markets go up and down, research is presented and then refuted, and we find ourselves right back where we started.
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The goal of this podcast is to learn how we can reset our thinking on issues that hopefully leaves us with a better understanding as to why we think the way we think and how we might be able to change that to avoid going in infinite loops of thought.
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We hope to offer our listeners a fresh perspective on a variety of issues and look at them through a multifaceted lens — including history, philosophy, art, science, linguistics, and yes, also through quantitative analysis.
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And through these discussions help you not only become a better investor, but also become a more nuanced thinker.
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With each episode we hope to bring you along with us as we learn together.
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Thanks for joining us, now please enjoy this episode of Infinite Loops.
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Disclaimer: Jim O'Shaughnessy is chairman and Co-Chief Investment Officer of O'Shaughnessy Asset Management, where Jamie Catherwood is an associate.
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All opinions expressed by Jim, Jamie and podcast guests are solely their own opinions and do not reflect the opinions of O'Shaughnessy Asset Management.
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This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions.
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Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.
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Jim O'Shaughnessy: Well, hello, everyone.
1:39
It's Jim O'Shaughnessy with my colleague, Jamie Catherwood for another edition of Infinite Loops.
1:44
Today I have my friend Tobias Carlisle, and that is the last time I'm going to call you Tobias, Tobi, the author of The Acquirer's Multiple, which we will get into, and the portfolio manager of [crosstalk] The Acquirer's Fund ticker symbol. Is this correct? ZIG, Z-I-G. Tobias Carlisle: Z-I-G.
2:07
I should also mention that I manage a small and micro-fund, which is the round to Acquirers a deep value fund.
2:11
And the ticker for that is deep, D-E-E-P. Jim O'Shaughnessy: Nice. Wow. How'd you get that? Tobias Carlisle: Yeah. Very lucky for that one. Jim O'Shaughnessy: Wow. I'm impressed.
2:23
Of course, well, this is the O'Shaughnessy podcast where you can say buck and do whatever you want.
2:28
So Patrick would be just kidding me.
2:33
Tobias Carlisle: I'll definitely sling it around.
2:33
Just let me warm up first.
2:36
Jim O'Shaughnessy: Absolutely. So we're recording this.
2:38
Tomorrow is the 1st of May, 2021. What do you think?
2:45
What do you think about where we've been, where we're going?
2:47
Tobias Carlisle: It's been a wild run through the markets and in life as well.
2:51
It's been an interesting, not unprecedented, I don't want to say that because nothing is really unprecedented, but unprecedented in my lifetime anyway.
2:56
And I think every sort of generation gets it.
3:02
It has one of those marquee moments and I think 9/11 might've been the last one that was sort of on any sort of scale comparable to this one, just in terms of the human toll, in terms of debts, but also in terms of the impact that it's had on our lives and also that it's going to continue to have on our lives.
3:22
So for me last year was I had just launched the fund, just launched ZIG.
3:22
It's just the nature of these things that it was subscale when it launched.
3:28
So it was losing a lot of money to manage it.
3:32
And then we were sort of approaching break even last year just before it all happened.
3:37
And then the drawdown, that was frightening.
3:39
We're looking at the piece of that drawdown was faster than 1929, faster than 1987 and deep, but not as deep ultimately as those ones where I was fully bracing for.
3:44
I thought this could be a 2000.
3:53
This could be one of those mega bears.
3:53
It could be a 2000 mega bears.
3:56
And the thing that characterizes or 2007, 2008, I'm just talking, that's as far back as I go in my career.
4:03
I didn't have any- Jim O'Shaughnessy: Go all the way back to 1973.
4:07
Tobias Carlisle: I want to ask you a little bit about that.
4:10
So we should get into that briefly, but the thing that characterizes those kinds of mega bears is not the very violent drop.
4:14
It's the fact that every rally gets sold for months and months and months, years until you're on the 14th or 15th rally that gets sold.
4:27
And you just think it'll never, ever recover.
4:33
We're going to look like the stock market in 1929, or the Japanese stock market. It'll never come back.
4:39
So I thought that there was a reasonable possibility because we're at that time where the market was expensive.
4:44
We were at an unusually elevated cape, all those other sort of metrics.
4:50
I don't know how relevant it is, but it was just one of those conditions often precede mega bears, and then you get that volatility and I thought this could be very rough.
5:00
So the very big bounce caught me completely by surprise.
5:04
And then it's sort of I'm a value guy.
5:04
I'm a deep value guy and value didn't really participate in the first six months of that.
5:08
Continued to underperform.
5:08
So drew down more than everything else.
5:14
Then it didn't recover after what had been a very rough sort of decade for value.
5:19
And I think that a lot of value guys at that point would have been asking, is there any possibility that this stuff actually works anymore?
5:26
Is it just completely broken?
5:26
I don't know if I've got a really good answer for that.
5:30
It's been nice that it's come back a little bit over the last six months and particularly for my strategy, which is a little bit, it's not just pure value, it's more of a value, quality type approach.
5:38
Of course, I'm a fan of What Works on Wall Street and that's one of the places that I started and then I've done my own research for quantitative value and so on and other things like that.
5:47
So I have a blend of stuff.
5:50
I don't use any of the price measures like momentum or anything like that.
5:50
I'm still more of a fundamental guy, but I like quality and so on.
5:54
So when value ripped, it wasn't a value-quality rip either. It was just pure value.
6:00
It was all of the stuff that was reflation tray that was heavy assets that was heavily indebted.
6:06
The stuff that's dancing on the edge of the cliff, and then people sensibly sell that stuff because they go over the cliff plenty of times.
6:16
But on this occasion, they didn't and then they've ripped back, but that's the sort of stuff that often I'm short.
6:20
Some of that stuff that's got a terrible balance sheet and losing cash and so on.
6:23
So that was a painful rip for me too and I thought I'm probably gone here if my kind of quality value doesn't do something.
6:36
So as it happens, it really sucked until early February, mid-February, and then the return since then was pretty good.
6:43
So we ended up outperforming in Q1 and we've got our run that the tiger type exposure where it tends to be about 70% net. It's about 100% long. It's about 30% short.
6:55
And so we've done better in Q1 and then it's sort of continued on.
7:00
So that's the business side for me has been better.
7:00
On the lesser, we were very lucky.
7:06
We've got a pretty big house in California.
7:06
I've got lots of outdoor space and I've got a pretty good view.
7:10
So we were locked down, but didn't feel.
7:10
A few years ago, five years ago, I was in an apartment with a couple of little kids and that would have been a nightmare.
7:18
So we're very, very fortunate that we had a support system already built out.
7:22
My wife and I both worked from a home office so we were very lucky through that.
7:28
I would say probably one of the luckier people who sort of survived that whole thing. Jim O'Shaughnessy: Yeah. We were very lucky too.
7:34
Ours was driven by an intense fear of infecting my 94-year-old mother-in-law who lives nearby.
7:42
So we were really locked down and started sooner than others.
7:49
But the dividend there was that Patrick, my son and my daughter-in-law Lauren live a little over a mile away.
7:55
They were similarly locked down.
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So afterwards, we could socialize.
8:03
And that is what saved us, honestly, because having the grandkids over, having Patrick and Lauren over, it just felt a little normal.
8:08
And then we finally decided that my mother-in-law, who's very healthy and lives on her own, and as every marvel she started life with, I was talking to my wife and I said, we can't let her die of loneliness.
8:23
And so we'd all been super careful.
8:28
So she came over and has been coming over since and now, of course, thank God we're all vaccinated.
8:33
And so that's a great thing.
8:38
And I got to tell you, Tobi, I have great admiration for anybody who's got the balls to start anything, honestly.
8:43
And especially in our industry where you're measured, you shouldn't be, but you're measured every day, which is one of the gifts that we, quants, actually have because it's human nature to do that and it's really stupid to do it at the same time because you collapse your time horizon.
8:59
You don't know you're doing that, but you're doing that.
9:05
Tobias Carlisle: I 100% agree. You feel it too. I feel it.
9:06
Jim O'Shaughnessy: Well, of course, you do.
9:09
And so honestly, tip of the hat, because not only did you have the guts to put yourself out there, which I think is amazing, but you started a fund, a business that's not easy.
9:21
I don't care what anybody says.
9:21
And then you also started it in one of the most competitive fields in the world. So good for you. Tobias Carlisle: Yeah. Thanks for that, Jim.
9:31
I really do appreciate that.
9:34
It's a mix of we're all optimists beyond what we should be.
9:34
We don't see the downside as much as we probably should.
9:41
And that's probably what keeps humanity surging for that while a lot of us don't make it, a lot of us do.
9:46
And so we sort of set a new beachhead and then keep on pushing forward.
9:50
And I think that's probably, it was a mixture of stupidity and naivety.
9:54
And perhaps there's a little bit of courage in there too, but I 100% agree.
9:58
And that's why I've got great admiration for you because I know that you've done it successfully and I've used you as a model among other people like Meb Faber as well.
10:07
I liked that idea of writing the book, expressing the philosophy, and then making something available for folks who agree with that philosophy or think that that should work.
10:18
The problem is when you write a book like that, I've got a very strict method of investment, which is when I look at the value spectrum, there are guys who are doing it who are at that franchise growth level.
10:28
And I think that's a little bit racy for my blood.
10:32
I'm at the much more assume less, assume as little as you possibly can kind of level.
10:38
I want to see the cash flow coming out of that base before I'll have a go at it.
10:43
So it's- Jim O'Shaughnessy: Nullius in verba.
10:46
Take no one's word for it. Tobias Carlisle: Yeah. Exactly right.
10:49
I was going to try and work it.
10:49
I was going to try and have a little bit of Latin, a little bit of Spanish.
10:51
I was going to try and do that on the fly, but no, I'm glad you [inaudible].
10:56
Jim O'Shaughnessy: Well, I took six years of Latin and that's what it got me.
10:58
I can quote some of that stuff. [foreign language].
11:04
Which is the biggest fantasy in the world.
11:07
Tobias Carlisle: Do you read? That's true, isn't it?
11:07
It's a little bit of a cop-out.
11:10
It's a little bit of- Jim O'Shaughnessy: It's absurd.
11:12
And when we did all of our early modeling, when say, Keynes and all of those folks were doing their massive econometric models, they were inserting a rational agent, i. e, human beings. I mean, come on.
11:27
Tobias Carlisle: It's funny.
11:29
Jim O'Shaughnessy: A great book you should read by the way is The Beginning of Infinity by David Deutsch who's a quantum physicist at Oxford where he does a really good job for explaining why you should be a rational optimist.
11:37
So one of the things is a really good explanation is hard to add to or subtract from.
11:43
So what he says is you know you've got a really good explanation if by adding something or taking something away, you make it less, right?
11:56
Tobias Carlisle: Yeah, 100% agree. I 100% agree.
11:59
Jim O'Shaughnessy: And so what the rational expectations guys did was very simple.
12:01
They said, nice econometric model you got there, Mr. Keynes.
12:07
But you're saying that if the government decided to suddenly start taxing everything at 100%, no one would change their behavior? I mean, that was it. It was economics.
12:20
It was the deer in the headlights. Well, yeah.
12:20
But then they came on the scene.
12:27
Tobias Carlisle: The thing that I'd find challenging about economics is that microeconomics is very intuitive and seems to be true.
12:29
Macroeconomics does not attach itself very well to microeconomics.
12:36
And it seems to me that it's more politics and philosophy and I love philosophy.
12:41
So it's not a knock on that.
12:41
It's just that I don't necessarily want.
12:47
There are many, many competing schools of philosophy and you could adopt any of these as the way that you're going to live your life.
12:56
And then some of them are going to be right, some they're going to be wrong.
12:56
And I don't know that I necessarily want people making big policy prescriptions based on flawed philosophies, flawed data, and their own agendas that have massive unintended consequences for the people who are subject to it.
13:12
And, I mean, that's something we should talk about a little bit too because over the last year we've had this massive expansion and the money supply.
13:19
And it looks to me like all the commodities are.
13:19
In addition to that massive expansion, the money supply, we've also had this supply interruption in many instances.
13:29
So I can't get many of the things that I usually get on a subscription basis through Amazon.
13:33
And I know that you can look at the prices of commodities. Everything is run up.
13:36
It may be that we're basing it on a trough period almost exactly 12 months ago and so that's not necessarily appropriate, but a lot of them are running anyway.
13:45
And so I think that the best argument that the sort of the macro guys have is that this is all transitory.
13:50
But I wonder if we've ever looked at inflation in the past and said, oh, this is here to stay.
13:57
Now you need to adjust for it.
13:57
I mean, I think we always think it's transitory.
13:57
So I don't know that it's...
14:01
It makes me a little bit nervous that we play around with the money supply the way we do.
14:05
And I don't know how often you look at the valuations of the companies that you're actually invested in.
14:10
I understand as a quant you maybe try to be above that because anytime you sort of look in, you start getting a little bit nervous.
14:18
And I run different tests all the time.
14:18
One of the things that I've noticed is that, the models that I have are basically deep value because it would be nice to have something that works or what strategy has worked through this period. Not momentum.
14:27
Something that is more fundamental based.
14:32
And so let's just work backwards rather than working from value through to quality.
14:39
Let's work backwards from what is a great business that's high quality.
14:42
And then what's the most we'd pay for that.
14:42
And sort of approach the problem from that direction.
14:48
And I've found that as I look at these things, it's not really often driven by the starting valuation, but the starting valuation seems to be the best.
14:57
The thing that has the best R squared is the starting valuation, but the R squared is not very good.
15:02
There's a lot of randomness in there. Jim O'Shaughnessy: Yeah.
15:06
So I wrote an entire book about that called Predicting the Markets of Tomorrow by looking at the real 20 year rate of return.
15:14
So real inflation adjusted and what I found, and you'll probably see this coming, was when we had come off a fantastic 20 year period with double digit returns, the next 20 years were awful.
15:28
I mean, basically awful and a reversion to the mean seemed very, very evident.
15:35
Now there's lots of asterisks and footnotes in here two fours that we need to put in here.
15:41
Tobias Carlisle: So it's a book. Jim O'Shaughnessy: Yeah. Exactly.
15:43
So Macquarie wrote a great article, which I included in the current edition of What Works on Wall Street, which basically says, you know the crisp dataset everyone is using, that center for research and security prices at the University of Chicago has, I used it in What Works on Wall Street, the fourth edition.
16:03
So Macquarie's article basically, he's rude enough to point out that this database didn't include 50% of the stocks that existed at the time. And guess what?
16:14
Many of those stocks then ended up going bankrupt.
16:14
So just as soon as you think you've got a look back problem addressed, along comes somebody who does his research like Macquarie and you're back to the drawing board.
16:31
So my point is we look at this stuff directionally.
16:31
So we bootstrap and I'm sure you do as well.
16:38
We do all the tests to make sure that we're not doing honest minded data mining.
16:38
In other words, data mining, but being unaware you're doing it.
16:43
People do that all the time and we found that by doing the randomization and the bootstrapping, and all of that.
16:48
What we want to see is after you've done all of that randomization, et cetera, are your results still directionally the same?
16:58
And if they are, you probably have engaged in data mining.
17:04
So then I took it back or tried to to the founding of the U. S.
17:04
stock exchange in the late 1700s under the Buttonwood tree.
17:09
But come on, when you look at the data, if you're going to be empirically honest, you're looking at maybe two, three stocks.
17:23
And they're probably bank stocks that didn't trade on an open exchange like we have today.
17:28
So lots of problems in trying to do it.
17:28
I still find it, like you, very interesting and instructive.
17:33
And so I was thinking as you were talking about micro and macroeconomics that the humorous PJ or work has a great quote, which is microeconomics is about what economists are specifically wrong about whereas macroeconomics is about what economists are wrong about generally.
17:53
Tobias Carlisle: I love it.
17:53
I knew where you're going with it. I love it.
17:56
Jim O'Shaughnessy: So back to the problem. Look, I'm an empiricist.
17:57
I always have been, but I also am never certain a probabilistic thinker as well.
18:03
So I try to avoid premature certainty and go with the things that have the best base rates and have the best kind of logic behind them.
18:09
But am I open to this idea that in a digital world things are priced differently than they are in a physical world? Sure.
18:21
I'm not going to immediately say no.
18:26
I'm going to ask for a lot of evidence and I'm going to be skeptical because I'm looking around and I noticed that they haven't changed human behavior and that we get crazy.
18:32
And we had our research partner Jesse Livermore, not his real name as you know, we dropped his podcast yesterday and he simplifies it by saying, let's look at intrinsic value.
18:50
In other words, what's the value of any asset to you.
18:55
And now let's make it that you have to hold this asset for the rest of your life.
18:55
You can bequeath it to your kids, but you can't sell it.
18:59
That's how he forces himself to think about things in that regard.
19:05
And then he said, plus transactional value.
19:05
So transactional value can be, often is huge.
19:11
But when you get back to that intrinsic value, you start saying, well, how much is in the intrinsic part of it, say small cap stocks in Japan verse how much of the value is in the transactional part like Bitcoin?
19:31
And it's not that I'm opposed to Bitcoin. I'm not.
19:31
I'm not opposed to non-fungible tokens either.
19:36
I think the technology is really interesting and as soon as some really interesting use cases come along, I think it's great.
19:42
And maybe I'm antiquated.
19:42
Maybe we're both antiquated.
19:47
Maybe we are both missing the bigger picture.
19:47
And the idea of what something's value is has fundamentally changed.
19:54
I'm not yet persuaded by that argument. And I'm open. Go ahead.
19:58
Tobias Carlisle: I was just going to say just to refer back to that, it's a tweet that goes around every now and again.
19:59
I'm sure you've seen it, but it's something like, at the very top of the market, your time horizon expands to infinity and at the very bottom, your time horizon is zero.
20:09
And this was sort of what I was referring to a little bit before too.
20:14
When you get to this point where you have a market where there's no real alternative too, you can put it in a tenure, I guess, and you get 1. 5% or 6%.
20:24
Jim O'Shaughnessy: Maybe. Not normally.
20:26
Tobias Carlisle: That's normal. Exactly right. That's normal.
20:29
And I think inflation expectations are now exceeding that by a point or so.
20:29
So there's a reasonable chance you're ripping up money there, which would make sense.
20:33
And then you look at the sort of things that are working in this market.
20:37
And I look at Amazon on $100 billion base has had like a 47% year of growth, which is difficult to wrap your mind around a company that big doing growth numbers that big.
20:53
Still it's 20 something years into its life.
20:53
And so clearly there's a very big difference between Google, Amazon, Microsoft and these new breed of companies than the businesses that were around even 20 years ago.
21:03
There has been some sort of change and they have one interaction with each customer through that screen.
21:08
So they only have to get that screen right.
21:12
It's not like you had to make every single car the right way if you go forward.
21:17
And any problem that you had, there are limits to your growth.
21:17
That don't seem to be those limits anymore.
21:21
So how do we think about those kinds of companies?
21:21
Well, I wouldn't necessarily change the approach that I have.
21:26
We're still ultimately looking for the same stuff that we were before.
21:32
I think that the growth is less important than just the return that you can get from these businesses.
21:36
At what rate can they reinvest?
21:36
At what rate can they pay money back out?
21:39
Do they need to reinvest?
21:39
So that's sort of been the project like Jesse's and it sounds like the one that cheated with markets of tomorrow.
21:45
I've been engaged in a project like that saying it just never sell and let's see what happens.
21:49
And so I just get a crop of companies every year that meet the criteria that we would all agree are the definition of a good company.
21:59
Very fat margins, great returns on invested capital, great transmission of sort of accounting earnings and revenues into cash flows.
22:03
And then a management team that at the time that you purchase, it seems to be doing the right thing.
22:13
So they're taking advantage of the potential undervaluation, if there is any, by buying back some stock, it's still growing, all those sort of things.
22:21
And then look at what happens if you fast forward over 20 years.
22:21
And I sort of just run the screen and take the portfolio as a monolith and see how it does.
22:25
And the returns are pretty good in most years.
22:29
In most sort of crops that I create, it does seem to beat the market today. Not every year.
22:35
And there's a few years that standard 2015 crop hasn't beaten the market.
22:40
But then I go through that list and just with my own biases, which ones of these stocks would I buy as a discretionary investor?
22:43
And which ones would I pass over in silence?
22:49
Because I know that they're filling the screen in some way.
22:55
And I try to do that thing where I don't know what happens.
22:55
I look at some of these names and I'm like, oh, Netflix, you can pick up Netflix and you get a 6,000% return.
23:02
Would you have done Netflix probably for a variety of reasons and some other things like that?
23:04
But it's very, very hard to beat the screen.
23:09
And the reason is I think that definitionally, these are things that are against expectation because if the market knew that they were going to do this, they'd be more expensive. Jim O'Shaughnessy: Yeah.
23:19
And so one of the things that I learned, because I did very similar things to that, and there's actually a mutual fund.
23:23
It used to be called the Lexington Corporate Leaders.
23:28
I don't know who it is now, but it was done in the 1930s and it's wacky.
23:32
They picked what they thought were the corporate leaders of that era in the '30s and they price weighted to my thing kind of the Tao.
23:44
And it was just super, super wacky.
23:44
But in any rolling 10 year period, it's in the top quartile.
23:50
And so that got me kind of thinking about the idea, maybe as researchers, we need to disambiguate and the return, the beta, so to speak.
23:57
So if you put your money into an asset like an equity, you're going to do pretty well over almost all rolling 20 year periods because the company can grow.
24:10
It can all of that and you participate in that.
24:16
If you put yourself in a fixed income, it's an IOU.
24:16
If you're lucky enough to do it in 1985, you can dine out on those returns for the next 30 years because you were lucky.
24:32
But if you start now, 30 years from now you're not going to look very smart.
24:37
So, I don't know, is there going to be some, we're going to get a quantum computer at some point?
24:42
Hopefully, in my life, hopefully in my lifetime.
24:42
Are we going to be able to use machine learning to have insights that you and I with our silly little quant formulas will look like ants too? I don't know.
24:53
I'm open to the fact that that's possible.
24:58
But for right now I think that the way that I try to kind of frame all of my investments, both public and private, in public markets, I use algorithmic methods that I've researched for all of my career. Why?
25:14
Because the honest reason is because they negate my being a human being.
25:21
And I know that I would be just as likely to fall into every one of those human behavior traps as anyone else and probably even more so because I would think somebody, which I can.
25:37
And so just putting that rule in place, and it's not just on Wall Street.
25:45
I'm sure you've seen the research. It's everywhere.
25:50
Doctors making a cancer diagnosis, handicapping horses, universities deciding who to admit, they're all beat by simple algorithmic formulas.
25:58
And they're all beat by those formulas because they're human beings and they do things inconsistently other than act inconsistently.
26:04
They're very consistent in their inconsistency.
26:11
Tobias Carlisle: I couldn't agree with you more.
26:14
I have as much or more of these biases in me.
26:14
I'm on Twitter pretty regularly.
26:21
I look at a lot of the guys who have discretion because I live more in a value world than I live in a quant world and I look at the value guys and there's some great investors on Twitter discussing their ideas.
26:28
And I wouldn't put myself in their league, but I do think that I understand this stuff well enough that I can test an idea that I can get from reading a financial statement or looking at a business.
26:45
I wouldn't then necessarily.
26:45
So I know that lots of guys like to have checklists and things like that, and that gets you a long way.
26:48
But I want to take the idea and then see what it does to the portfolio if I had always done it this way.
26:53
Because I want to see, because there are many things that are counterintuitive.
26:59
It doesn't necessarily follow that something that makes sense helps you outperform.
27:04
And I don't know the reasons why.
27:04
Maybe everybody has the same idea at the same time or something like that. I'm not sure.
27:08
But I would rather test it.
27:12
And then I don't trust myself from that point on to faithfully implement the strategy without having that system or that screen or whatever you want to put the model, whatever you want to call it, being the thing that dictates the ideas.
27:26
I want to make sure that that model...
27:26
So the model is completely intuitive to me.
27:26
It's the way that I would invest if I was an automaton.
27:31
And I want to look at the output and make sure that this is part of the research process, and I've been doing this now for a decade.
27:39
I look at the output and I think to myself, is this a portfolio that I, as a value investor, could sensibly buy?
27:44
And if it is, then I think the model is on the right track. So that's my philosophy. Jim O'Shaughnessy: Yeah. I agree.
27:50
And one of the things is that you need the humility to understand that you're probably more often wrong than you're right.
27:56
And you should use all of the times that you are wrong as learning opportunities to better calibrate your mental models going forward and your actual models.
28:07
So if you looked at the first edition of What Works on Wall Street and you looked at this current edition, very little, they're the same. Because we've evolved.
28:16
We don't use single factors anymore because we've evolved to factor composites.
28:20
We have all sorts of quality factors that I don't even write about in the first three editions of What Works on Wall Street.
28:26
So what we do is what like you do, we study very hard.
28:32
We are always doing our homework, but it's to make the model better.
28:32
And actually one of the things I'm most proud of is I never overwrote a model, ever.
28:44
And I met a guy right after the great financial crisis who only called on quants on behalf of, and the funny thing is it used to be Lehman that it was Barclays.
28:50
So he came out and he covers quants for Barclays.
28:57
And he said, 65% of quants overwrote their models.
28:57
To me, that's the kiss of death.
29:04
In other words, you have just negated your entire tracker because you did something that isn't in the model.
29:10
And whenever we were being considered for a big mandate, I would go and would always get asked the question, what happens if you're walking out of the office today and you get hit by a bus?
29:22
And I said, well, listen, if any of your managers are going to get hit by a bus, you wanted it to be me because the model is going to be run exactly the same way tomorrow, absent me, that it was run today.
29:39
I said, the only thing you would watch for is my successor, and that's Patrick O'Shaughnessy, is he or she as disciplined around implementation?
29:46
That is when you would want to keep your eye on for a little while.
29:53
And, of course, Patrick has been at the helm since 2017 and he's very disciplined.
29:59
So if you've got that combination, I think that's one of the attributes and you know this, it's going to appeal to a very small segment of the buying population.
30:12
And, in fact, I used to have conversations with other quants and they're like, well, what happens when everybody is a quantum? Are you insane?
30:17
Human nature, I mean, if that ever happened, I won't be a quant any more then because I'll say something really changed. But I'm happy with that.
30:29
And I think that you just have to want to be a little bit in the minority in terms of your outlook or your process or whatever. But listen to me.
30:40
We use momentum, we've tested momentum back to the '20s with all those caveats that I mentioned earlier and it really works. It really works well.
30:46
And it works for, I think, we could have a conversation for the rest of this podcast as to why momentum works.
30:55
It's the one that drives theorists the most crazy because it implies that Mandelbrot has been right all along and that markets have memories. I do too.
31:05
Tobias Carlisle: Have you read that book?
31:05
That book is unbelievably good.
31:10
It's one of my favorite books, Jim O'Shaughnessy: It's a Bible to me.
31:11
When people come to work for me, they say, well, what books should I read?
31:15
And everyone expects me to say What Works on Wall Street?
31:15
I always say the Misbehavior of Markets by Mandelbrot.
31:19
Tobias Carlisle: Such a great book.
31:21
Jim O'Shaughnessy: Because, again, good explanations.
31:23
Good explanations are pretty simple, not simplistic, simple, very difficult to make them better by adding or subtracting.
31:31
And he just nails it in the chapter on, he uses academic speak, which I just love.
31:37
It's like, oh, by the way, I'm going to come and I'm going to knife you a thousand times, but I'm going to do it really politely.
31:45
Tobias Carlisle: To see your face, at least.
31:46
I'm going to stab you in the face.
31:46
That's what I can promise.
31:50
Jim O'Shaughnessy: Exactly.
31:50
I'm not going to do it behind your back.
31:53
And so he proved to be right.
31:53
And what I love about that is he's a mathematician.
31:57
He wasn't even a market guy, but it's the curiosity that you have.
31:57
That's why I love doing these podcasts because I get to talk to people I want to talk to.
32:03
And they're all curious people. Tobias Carlisle: Yeah.
32:10
I love that Mandelbrot book.
32:10
I think it was co-written with a gentleman who was a journalist, I think so.
32:14
I think that he has- Jim O'Shaughnessy: That's correct. Tobias Carlisle: ...
32:19
acted as the M and Eustis or whatever, however you say, whatever the role he is.
32:20
And he's done a really great job of kind of getting Mandelbrot ideas down. It's a stunning book.
32:23
It's one I really love and I couldn't agree more.
32:28
I've read it multiple times just because he has that humility with that absolutely first-class Rolls Royce engine mind and that's kind of one of those things that are really love finding in human beings.
32:38
I don't have any sort of philosophical objection to momentum at all.
32:44
It's just that I had this.
32:44
It sort of occurred to me a few years ago that you have to make a decision at some point in the markets as to what sort of investor that you are.
32:53
And you have to find the thing that you know that when it's March, 2020, and you're down a lot and you go to do that rebalance that you're going to be able to faithfully execute on that strategy when you're down.
33:07
I'm sure I could do it with momentum too.
33:07
I'm not saying that it couldn't, it's just that I believe the value stuff, the fundamental stuff it's in my bones I just can't not do it.
33:15
And so I did have some things that came out of that whole period.
33:15
And one of them was that I decided that I would rather be more of an industrialist style investor than a market operator.
33:24
And that's sort of the distinction that I make.
33:27
And there's nothing wrong with being a market operator.
33:27
And there are lots of guys who do...
33:31
Jim Simons is a market operator, as another quant who would say what's the difference between you and everybody else?
33:36
And he says, we faithfully implement our models. We follow the model.
33:40
And they're doing something that's quite distinct from what we are doing where anybody else is doing it.
33:43
I don't really fully understand what they're doing and I have no ability to get to understand it, but that's okay.
33:46
Because that's not the way that I invest.
33:52
On my Mount Rushmore is Warren Buffett.
33:52
I want to be a Buffett-style investor.
33:57
And so when I started thinking last year in that big drawdown, which is sort of what I'm doing this project where I'm looking at the very long holding periods, what can you determine?
34:04
What can you decide out of that?
34:04
And sort of it occurred to me that what Buffett has achieved is this lifelong, he's 90, I think he's 92. He still [inaudible].
34:14
Jim O'Shaughnessy: I think he might be older. I don't know. He might in his 90s. Correct.
34:22
Tobias Carlisle: He's in his 90s, he's chairman and CEO of a thing that he likes doing.
34:26
No one is ever going to get him out of there. He gets to run that.
34:30
He gets to do what he loves for his entire life.
34:30
And I can't tell you how much I respect that.
34:34
I love the fact that he gets to decide when he goes out on his own terms and he's played the game better than anybody else.
34:41
He's outperformed enormously, made himself very wealthy, but he's also done it ethically.
34:47
And he's been very open about what...
34:47
Other generations have had great industrialists of their age who didn't explain what they did.
34:52
He's just told you exactly what he did, but he hasn't taught.
34:57
The thing is, it's very subtle, I think in some respects, because when you read Buffett's letters and then you learn a little bit more of...
35:04
I've read Buffett's letters multiple times through my life and then I learned a little bit more, I go back and read Buffett's letters again.
35:10
And then I completely missed this idea that he was trying to explain, and it's not his inability to explain something because he has that quality as well, where it's very hard to take words out of what he says.
35:19
I find if I go to tweet something as Buffett says, and it doesn't quite fit the character limit, it's extremely difficult to remove a word without altering the meaning.
35:27
So he's achieved that level where he says exactly what he means to say when he writes.
35:33
So it's not his limitation.
35:33
It's my limitation completely that I didn't have this idea.
35:37
I didn't understand this idea when I read it.
35:42
So I love going back and reading again.
35:42
It's one of the few things that every time I go back and read it, I think, Warren, you old dog, you got there in 1983 and it's taken me this long to figure it out.
35:50
And I even read what you wrote then, and I didn't understand it. So that's been fun. Jim O'Shaughnessy: Yeah.
35:57
And of course Charlie Munger.
35:57
Honestly, of the two, I'm more drawn to Charlie because I just love his brutal honesty and he was one of the guys who I read a ton of what he was writing, and I was very attracted to the whole Latticework of Mental Models because I think that beliefs drive the world, right?
36:16
But that people sometimes complete their beliefs with things that are factual, and then they compound that problem by taking their beliefs and making them part of their personality and what that describes them as a person.
36:33
And that's why people become so angry and they view you questioning one of their beliefs as an attack on them personally. Tobias Carlisle: 100%.
36:44
That means you should be very careful labeling yourself or labeling anybody else, because then you become tribal and you will follow whatever the rules are of your tribe.
36:54
You'll start following those rules.
36:54
Jim O'Shaughnessy: And so I went through a very elaborate change almost 10 years ago, which was kind of coincidentally when I first read Deutsch's book, it was like, you know what, I think maybe I should start presenting everything I'm thinking about as a thesis or a hypothesis- Tobias Carlisle: I love that. Jim O'Shaughnessy: ...
37:13
because models are meant to be challenged, right?
37:15
It's like, well, what about this? What about this? What about this?
37:15
And it doesn't become part of who I defined myself as.
37:19
And I just think it's so freeing because it's not wrapped up in my identity.
37:26
My identity is wrapped up with just saying, you know what, on most things I'm probably wrong.
37:31
If history is a good guide, me and you, and most of the world right now, we're wrong about almost everything.
37:42
And so when you go back in history and read the letters, read the diaries, read the diary of Samuel Pepys, wrong, wrong, wrong, wrong, wrong.
37:47
But that's this whole for me, how cool is that? We continue to progress.
37:52
And so I don't know what people are going to be saying about us 200 years from now.
37:58
I think they're going to look and go, "What the fuck were they thinking?"
38:03
Tobias Carlisle: It's madness. I couldn't agree more.
38:04
Look as part of this project, I've read Sun Tzu, The Art of War.
38:09
I've read it probably every five years since I was in high school.
38:09
And every time I've read it, I thought I can't get into this.
38:14
I just don't get what everybody sees in this thing.
38:18
And I've read Bhagavad Gita.
38:18
I couldn't really get into that, if I'm being honest.
38:23
The Confucian Analects, similarly, couldn't really get into that.
38:27
But for some reason in September last year when I read Sun Tzu's The Art of War, and I talked about this on Bill Bruce's podcast and I got a little bit of grief on Twitter afterwards, a few people making fun of me as a result, but that's fine because I completely understand this point of view.
38:39
I do think that there's something potentially a little bit frivolous about philosophy.
38:43
And I do think it can also be a little bit pretentious to sort of talk about it, but this is a real thing that happened to me.
38:48
And this was a very profound thing for me to have this happen.
38:52
When I read Sun Tzu and I'd read some of John Boyd's present...
38:59
Colonel John Boyd is the OODA loop gentlemen.
38:59
That's how I knew him at the time.
39:03
And I read Sun Tzu and then I watched Boyd because I know that boy discussed Sun Tzu.
39:06
And so I went in and it was the first time Boyd kind of unlocked Sun Tzu for me.
39:11
And then as it was unlocked I realized that Buffet does all of these things, and he either does them consciously because he's red Sun Tzu, but might be unlikely. I'm sure he's read it.
39:24
I'm sure he just sort of went of course and sort of factored it into what he was doing, or it speaks to some sort of universal law.
39:28
There are some universal ideas.
39:28
And so Sun Tzu wrote that in 430 BC or 500BC or somebody wrote that, because it begins master Sun says and they're quoting masters Sun all the way through the book.
39:42
When I read it, I realized that there's this huge sort of universe of philosophy about exactly this stuff.
39:48
So part of it is described as grand strategy, and there are lots of authors who've written on grand strategy, lots of philosophers who've written on grand strategy for two and a half thousand years about as far because we have sort of written records.
40:02
And then there's something else in there as well is this idea of being self-aware and that's a much, much bigger universe of work, and that includes...
40:06
And then just the reason I'm coming to this is that I read some of the Stoics.
40:11
And so I read Seneca's letters, and for the first time I sort of read this and I thought, isn't this great.
40:16
It's getting an email from a funny wise mate who's explaining something to each of us as it's like that.
40:26
Marcus really has found a little bit more difficult to get into meditation, but I did eventually find a translation of it that I liked.
40:30
And really is this sort of he's writing to himself, he's taking notes, and he's the emperor of Rome, and he's not hereditary because he's been adopted but in order to become the emperor and then he's been trained to become the emperor.
40:48
And at the same time, he's a general fighting these wars and he's writing these notes to himself.
40:52
And just it's kind of an extraordinary insight into somebody's mind.
40:57
He's second century AD I think so. Sorry. That's not right.
41:05
I'm a little bit confused about that.
41:05
But he's either writing as Christ is walking the earth or he's writing- Jim O'Shaughnessy: He was after. Tobias Carlisle: ... [inaudible]. It's second century AD. Jim O'Shaughnessy: Yeah.
41:15
I would have to look it up. But a big fan. So keep going though.
41:18
Tobias Carlisle: I think Seneca is writing while literally, I think Christ is walking the earth while Seneca is writing.
41:20
And I think then, that's right, Aurelius is dealing with the atheists as he calls them.
41:24
And those are the Christians because they don't believe in the Roman gods.
41:29
And I think reading those things, I'm astonished at how well those ideas stand up.
41:35
And there were lots of competing schools of philosophy at the time.
41:39
You could have been a Senec, you could have been an Epicurean.
41:41
Now, all of these schools were sort of the self-help centers of the day, offering a guide on how to live a good life or how to live a life.
41:46
And you would go to one of these schools to learn how to be a good human being.
41:51
Not only good in the sense of doing good, but good as in good at being a human being.
41:56
And so I think that the Stoics, it's either luck or they were onto something.
42:03
But I think that their philosophy for me anyway, but possibly it's my mum and dad's sort of natural Stoics or something like that, but it was the way that I was sort of raised.
42:12
And so it spoke to me very clearly when I read it.
42:12
So I've been on this project now where I've read for a book eventually, but the book is sort of taking a little bit of a backseat at the moment just to reading these works and just trying to understand what these people are driving at and why this stuff has held up so well.
42:27
And so I do think that there's something in some of these ideas that have persisted.
42:27
And I should say it's not only a Western philosophy thing either because Sun Tzu, and then as I've mentioned Bhagavad Gita and the Confucian Alex, which I haven't conquered.
42:37
I'm having a little bit more difficulty getting into those.
42:44
But it's been it's been a really fun project because I do think that there's this universality between many of these ideas, whether they come from the East or the West, whether they're separated by thousands of years, they still are speaking about the same thing. And I see a lot of that.
42:57
I think that they're good models for living your life.
42:57
But I also think they're good models for business.
43:03
I think that Buffett has either intuitively or consciously adopted many of these practices.
43:07
And I think that that's the thing that helps you be a 90 something year old man running a business that you love.
43:12
And he gets to go on his own terms.
43:17
I just respect the hell out of it.
43:17
It's so hard to get going in business.
43:21
It's so hard to get into the seat where you own the thing and you run it, and everybody wants that seat.
43:26
Every single day, I get all of these offers all the time and all of the offers that someone wants to basically come in and help me run the business and sort of take it over without paying any money for it.
43:34
Buffet has managed to survive. Jim O'Shaughnessy: Yeah.
43:38
And I'm not as big a Buffett guy as most people are.
43:42
Whereas you described yourself as a value guy, I am much more thoroughly a quant.
43:48
And by that, I mean, I look for symmetries, if you will, describing why systems work the way they work.
43:56
And so value is a pretty good metric, so is momentum, et cetera.
44:02
I have great admiration for Buffet.
44:02
I have great admiration for anyone who can have that kind of success compounding continually over one's entire life.
44:07
It's how do you not give that guy a bow.
44:14
It's funny that you mentioned Sun Tzu because now you're on my grounds a little bit.
44:19
Tobias Carlisle: Well, it makes me nervous.
44:20
Jim O'Shaughnessy: So Lao Tzu, Dallas thought you should really read Lao Tzu because- Tobias Carlisle: So I have done that too.
44:25
I'm glad we're going in this direction. Let's talk about this.
44:27
Jim O'Shaughnessy: By the way I've read all the Stoics as well.
44:32
And I think the simple thing I take away from the Stoics, at least for me, is this really helpful idea of if your actions can't change the outcome of something, stop worrying about it.
44:50
Tobias Carlisle: Don't worry about it.
44:51
Jim O'Shaughnessy: Stop fretting about it.
44:51
I'm virtually impossible to offend.
44:56
And I really did download that Stoic attitude of, you know what, if I can't, through my own actions or my own words or my own whatever, affect the outcome of that, I'm just not going to worry about it.
45:09
I'm not going to get offended.
45:09
I'm not going to invest any emotional energy in it.
45:13
And so- Tobias Carlisle: It's incredibly freeing. Jim O'Shaughnessy: ... that's unbelievable. Unbelievable.
45:17
And the other thing that is freeing is so I'm very lucky in that I don't have the interests that a lot of men especially have.
45:21
I know nothing about sports. I honestly don't.
45:27
I don't care about them in the least.
45:27
And my son is a sports fanatic, my grandson just shakes his head every time because he already knows more about sports than I do.
45:39
I have a secret, it's a quant secret for how to have a sports conversation. It works every time.
45:44
And I'll give it to you very quickly.
45:49
If we go back to traveling, and I know you do like sports, but this is applicable on any topic really.
45:55
It doesn't have to be sports. It can be politics.
45:55
It can be whatever that you have no interest in.
46:00
I have no interest in sports, and TV, and celebrities, and all of those things that occupy a lot of mind space in a lot of people's minds. So here's the trick.
46:08
If you travel a lot for work and you have a black car service, or an Uber, or whatever, they pick you up, if you're picked up by a normal American male, the first question he will ask you is about your favorite sports team.
46:24
And so my thing was, whatever town I would get in, I would ask first.
46:24
I would come in and I'd say, "Hey, how you doing?" And he'd go, "Great."
46:30
And I'd go, if I'm in Chicago, "So what do you think of those Bears, man?"
46:34
And he would start, and he would say, "Well, I think this, this, this."
46:41
And I'm like, "Wow, that is so true."
46:41
And then he says more then I'm like, "Wow, we are just totally alike."
46:47
And and then if you have to, "Well, but what do you think the chances are for this game?"
46:54
The easy answer is, "It depends on what team shows up on the field that night."
46:59
And he'll go, "Oh man, you nailed it." But here's the fun.
47:05
So all you do is agree with what he's saying.
47:05
When you're getting out of the car, often he will turn all the way around in the seat, look you in the eye and say you more about sports than anyone I've ever driven.
47:16
Tobias Carlisle: That's right. Oh, that's sneaky, Jim. I love sport.
47:20
I love the sport in the sense that I like seeing people endure difficult things and then get a good result of it.
47:24
And I like the strategy of sports.
47:30
Jim O'Shaughnessy: Moneyball was a weakness for me. I did like that book.
47:35
Tobias Carlisle: I couldn't watch a game of baseball.
47:35
And I quite liked that there's this F1 drive to survive. I couldn't watch an F1.
47:38
They've just been going round, and round, and round.
47:41
It's been so fucking boring, but the drama behind the scenes is great. All of the gossip.
47:46
They're young guys, so they're emotional, and they're highly paid, and they really want those seats, and it's great kind of that.
47:56
I did get into the UFC a little bit last year, which is kind of I don't really like seeing people getting hurt, but there's so much Sun Tzu strategy in what they do.
48:02
One of the things that Sun Tzu says is that you don't engage in battle until you've won, until you've figured out how you're going to win this thing.
48:13
And so you see that over and over and over again in these fights.
48:19
They try to shatter the other guy mentally before they get into the ring, and they try to mislead them, and they do all of these things that Sun Tzu talks about.
48:25
And I do think that that's interesting, but I do think that that's the surface level of Sun Tzu.
48:29
I think that the more interesting stuff of Sun Tzu is the stuff that you're referring to, which is the Tao.
48:37
And I do recall that you have spoken about this in the past, but the reason I got there is that the addition of the book that I have is the Thomas Cleary from '88.
48:40
I've read a few different versions of it, and there's quite a big difference between the way that authors translate.
48:50
And the difference is so big that it does make a difference to the meaning that is being transmitted.
48:55
So I've tried to read quite a few different versions of it.
48:58
I think there are six or I've read through six of them.
48:58
And I've found the Thomas Cleary one, I think is the best, but it's still incomplete without the other ones.
49:07
The difference is stuff like they talk about Sun Tzu says that he can determine who will be victorious in a battle by looking at which of the two sovereigns possesses the moral law.
49:17
And that is translated in other texts as the way.
49:20
And so you know what the way is.
49:20
So the first time that I read that, I said, what's the way?
49:24
And that was how I got to the Tao And then I read that and I thought, isn't that an interesting idea for someone who is like me?
49:30
I'm a value guy and I want to be a contrarian.
49:34
And then I read the idea of there is this rhythm or flow to the universe.
49:42
And the more that you're aligned with that, the more effective you can be.
49:42
And so it's you determine which way the tide is going at the beach.
49:47
You can swim against the tide and not go anywhere, or you can float with the tide and go a very long distance.
49:51
And if you swim with the tide, you're going to get even further.
49:58
And that state of swimming with the tide they described as Wu Wei effortless action.
49:58
So this is what Sun Tzu is trying to achieve.
50:04
He's trying to achieve with basically no effort, massive results.
50:09
And the way that he characterizes that, he says, "The best way is just to not be attacked. Don't attract attack.
50:16
Become invincible so people don't even want to challenge you.
50:22
Second best is to defeat them without fighting."
50:25
And then he continues on along this path.
50:25
And I thought, when I look at what Buffett has done, and I look at the way that they write about this stuff, the way that Sun Tzu...
50:33
One of the ways that you can avoid attack or one of the ways that you...
50:33
Which of the sovereign possesses the moral law or follows the way, you have to have this idea of harmony.
50:42
And so harmony is just, are you looking after your people? Are they happy? Are you a tyrant?
50:48
If you're a tyrant, then you might get toppled.
50:48
And I love the way Boyd describes it.
50:48
So basically, you become invincible.
50:53
The only way that you're going to be defeated as an invincible entity is through guerrilla warfare.
50:58
And that's because the people are upset with you.
50:58
You're sort of heavy handed.
51:02
The people become upset with you.
51:02
And so they help the guerrillas.
51:05
They help the terrorists.
51:05
They want them to succeed.
51:05
And so they hide in their midst.
51:10
And Boyd says the only way to defeat the guerrillas is to offer the people what they want.
51:17
And if you're the general and the sovereign is not giving them what they want, then you should change sides. I kind of love that.
51:23
Jim O'Shaughnessy: I do too.
51:24
Tobias Carlisle: It speaks deeply.
51:25
Jim O'Shaughnessy: I can hardly wait for your book because this has been my thing ever since I was an adult.
51:27
I started reading Lao Tzu the Tao Te Ching when I was 17.
51:33
And you're right about translations.
51:33
I always tease people about caring about translations, because it's pay attention to what is said, not who is saying it, is my mantra. But you're right.
51:45
And so I glanced down here when you were talking and it's literally, I'll show you.
51:49
Oh, well, I'm going to spill everything. I won't show you.
51:50
It's 12 different copies of the Tao Te Ching, all the different translators.
51:57
And one of the other ways you're finding it being called the way or the path, in one of them it's called the process.
52:02
And so I'm like, oh, wow, this is so cool.
52:02
I love your metaphor about swimming with the tide.
52:09
That's been a message of mine.
52:09
And on Twitter, I always use the dude from the big Lebowski sitting on the couch as me, as my avatar, and a couple of people have gotten it.
52:20
They're like, "Oh, wu wei. Effortless activity.
52:20
You're going with the flow." And that is so powerful.
52:28
By putting yourself in a situation where you're going with the flow, not against it, when you are actually able, as you point out, to swim a little bit too, man, you're going to get so far versus trying to swim against the tide and Lao Tzu or whoever they were, because these are many, many different men. Same with Sun Tzu.
52:55
And anyway, what they constantly use is the idea of that which is young and yielding survives.
52:59
In other words, that which goes with the flow, and they use a tree batch, right?
53:06
So a tree branch that is young and supple, when the snows come, the heavy snows come, it goes down and all the snow falls off and then it springs right back up.
53:17
When it is old and dying, it doesn't bend, and it breaks.
53:24
And then they marry that with the image of water being so powerful.
53:24
I always am amused by people who think that...
53:29
So Bruce Lee, loved the guy.
53:29
Loved that he followed the Lao Tzu and everything.
53:35
So people have gotten really angry with me for suggesting that love that line for Bruce Lee, but you do know that he's quoting Taoism there, right?
53:49
Tobias Carlisle: Which line from Bruce Lee? What's the line?
53:51
Jim O'Shaughnessy: Any number of them.
53:53
Tobias Carlisle: Oh, I see.
53:54
Jim O'Shaughnessy: On Twitter, if you see Bruce Lee quotes about water, water being soft yet strong, that's all directly from the Tao Te Ching, which I think is great.
54:04
And I think when Bruce Lee was quoting it, he knew that he was quoting the Tao Te Ching.
54:08
Tobias Carlisle: And Sun Tzu as well.
54:09
Jim O'Shaughnessy: Absolutely.
54:12
And so it's one of the things that amuses me in that where it's another human trait, getting really worked up about who said it.
54:17
And so I do this thing on Twitter where I say two thoughts from, and I pick different people that I've read or from my notes or whatever.
54:28
And I just love it when you pick somebody like Nietzsche. He was crazy.
54:37
He entered his life blah, blah, blah, blah, blah, blah.
54:37
And these people get so worked up.
54:41
So I never did this because I've people won't understand that they'll try and cancel me.
54:47
But what I was going to do is I was going to find a quote from Hitler that was, "Children are nice." Or "I like puppies." Adolf Hitler.
54:52
Tobias Carlisle: They can't separate the message from the- Jim O'Shaughnessy: From the messenger.
55:00
And then you've got to understand mimetic theory and all why that is.
55:05
There's really good reasons for it, by the way.
55:08
Tobias Carlisle: Well, what are they?
55:10
Jim O'Shaughnessy: Well, human beings have become the apex predator on this planet that we occupy- Tobias Carlisle: Yeah. Good for us. Jim O'Shaughnessy: ...
55:17
because we are very good at learning by copying.
55:17
So you always hear the phrase don't reinvent the wheel. Right?
55:23
Well, we don't because we copy.
55:23
And so that's what mimetic desire is based on.
55:28
René Girard was the French man who came up with it.
55:28
And he was originally a historian and then they wanted him to teach literature classes.
55:38
And he was like, "I've never read any of this."
55:38
So he's reading it, and so suddenly he comes up with this insight, "Oh my God.
55:43
These great characters in Shakespeare, and Moliere, and at all, they all take their desires from somebody else."
55:53
Tobias Carlisle: They're all derivative.
55:55
Jim O'Shaughnessy: They're modeling. They're all derivative.
55:57
And so he comes up with mimetic desire, which by the way, leads to this whole idea of scapegoating.
56:04
And we scapegoat when we single a person out. You're the villain.
56:07
Tobias Carlisle: Accept the blame and we'll throw you off the cliff.
56:10
Jim O'Shaughnessy: So my friend, Alex Danco, says that every day someone is on Twitter, and his goal is to always not be it.
56:17
But so mimetic desire is caused by the idea that we copy.
56:17
And 85% of that is great because it allowed for this guy, the iPhone.
56:27
So aggregate social evolution has leapfrogged human evolution because we keep adding to it, right? Tobias Carlisle: Right.
56:43
Jim O'Shaughnessy: But so the copying instinct in humans, if you have ever been around a baby, you see it- Tobias Carlisle: Through them. Jim O'Shaughnessy: Yeah.
56:50
And I have three grandchildren now.
56:53
And so my granddaughter is here, who's six months.
56:53
And my daughter is like, "Will you stop with these mimetic experiments on my daughter please."
56:59
But it's amazing because we're natural mimes, humans.
57:04
Tobias Carlisle: I've got a great Bruce Lee line from you.
57:07
This did come from a movie. I forget who it was.
57:12
So it could have been Brandon.
57:12
I forget which movie I saw, but the line is, it's like a finger pointing at the moon.
57:17
Don't stare at the finger or you'll miss all the heavenly glory.
57:22
Which is exactly, don't look at the messenger.
57:22
Don't stare at the finger.
57:26
Jim O'Shaughnessy: And also that quote is a very well-known Dallas Zen quote, don't look at the finger, look at what it's pointing at.
57:33
Tobias Carlisle: It's such a great line.
57:34
Jim O'Shaughnessy: I love it.
57:35
Tobias Carlisle: I think about that all the time.
57:35
So when I talk about Buffett, I am thinking about sort of this ideal version of him, not necessarily even the man.
57:42
And this is just to tie this to Nietzsche, who we're just talking about.
57:46
I think the problem for Nietzsche is that he has created this idea of the Uberman, the Ubermensch, the Overman Superman.
57:52
And he uses that as almost a stoic idea. He talks about Seneca.
57:59
And I think he uses that as a stoic idea.
57:59
This is what we should all been seeking.
58:02
This is the point that we're trying to get to.
58:02
And then of course, that's become associated with Nazi-ism.
58:05
Jim O'Shaughnessy: They've ruined so many things Got damn it.
58:08
Tobias Carlisle: They've ruined Nietzsche.
58:11
Every time I read this great quote, because I my search history is all Stoics and all that, and so I get these Nietzsche quotes coming through all the time and I don't necessarily recognize that it's him when I start reading it.
58:18
And I always think, gee, this is a really compelling insight. Who said this?
58:22
Friedrich Nietzsche every time.
58:27
Jim O'Shaughnessy: And again, just one of the wonderful things that demonstrates the folly of this is...
58:31
Do you know that prior to World War II, the best nutrition research was being done by German doctors and by the way, most of whom were Jewish.
58:48
And what they found was it's not fat that's the villain, it's carbohydrates, sugar.
58:55
Tobias Carlisle: I knew it.
58:56
Jim O'Shaughnessy: And so you read Gary Tob about this.
58:58
He's done all the research. And what did we do?
59:05
We ignored all of that research because it was done by the Germans, right?
59:05
And so after World War II, we jettison all this impeccable research and we get the food pyramid brought to you by Nabisco. And what happens?
59:20
We get this food pyramid that's all wrong, completely wrong.
59:27
We have everyone saying, "Don't eat that fat. You'll die." Wrong.
59:27
And what happens to obesity in America? It's a straight line up.
59:34
And so these things have consequences.
59:41
And picking up on what you were saying earlier about, huh, wouldn't it be nice if they kind of did their homework to think about what the secondary and tertiary effects of advocating this is going to be?
59:50
Tobias Carlisle: I mean, it assumes that the research is correct.
59:53
The research is right, but then it also seems that there's no agenda.
59:57
And I don't think that you can safely make either of those assumptions.
1:00:01
And I think that that would argue against having some sort of monolithic approach to these things.
1:00:06
Would be much better off saying it's going to be different for everybody.
1:00:10
And it's amazing that when I was a lawyer, I managed to get pretty fat.
1:00:10
I was 240 pounds and I'm about 195 now.
1:00:16
I've lost a lot of weight, but I've had a lot of the weight off for most of my life.
1:00:20
This is unusual though to be sort of as lean as I currently am.
1:00:20
And a big part of that has just been intermittent fasting is incredibly powerful.
1:00:29
It's just, don't eat breakfast.
1:00:29
How's that for a simple rule, wake up and don't eat breakfast.
1:00:34
And the first time that I did it, I was a little bit nervous about that because I thought, what if I get really hungry mid-morning and I can't function and don't really work.
1:00:37
And I found that I don't even notice. It's so easy to do. Jim O'Shaughnessy: Yeah.
1:00:43
I've done the same thing for years and years.
1:00:45
And once you understand how easy it is, and it's so funny.
1:00:45
I do self-experimentation all the time.
1:00:51
I'm kind of nutty that way. Tobias Carlisle: Yeah. Me too. Jim O'Shaughnessy: Yeah.
1:00:55
So intermittent fasting was one of the things that I started and what happens, what I've found, is that if you don't even think about it, it four o'clock and you haven't had anything to eat. And you're like, "What."
1:01:06
And then Eric Hoffer, since you like philosophy, it was a longshoreman who wrote some of the best philosophical books ever.
1:01:16
One is called The True Believer, which I would highly recommend you read if you haven't.
1:01:21
But he made the comment about he self-experimented a lot and he realized that hunger, the minute he stopped focusing on it, he stopped being hungry, obviously.
1:01:30
Tobias Carlisle: It went away. Jim O'Shaughnessy: Yeah.
1:01:31
It doesn't go away if you're on a hunger strike, but you know what I mean. It goes away.
1:01:36
Tobias Carlisle: This is the Western overfed view of hunger, where you get hungry if your blood sugar drops or you need to eat something immediately to get your blood sugar back up.
1:01:44
But we're assuming that we're all well fed and the issue for us is not finding enough nutrients, it's finding too many of them.
1:01:49
I love little hacks like that. Here's another one.
1:01:55
I watched, I don't know if who this gentleman is.
1:01:55
I'm probably going to mispronounce his name, Pavel Tsatsouline.
1:01:59
Do you know who this guy is? Jim O'Shaughnessy: No.
1:02:03
Tobias Carlisle: So he's a Russian guy.
1:02:03
He's the reason that kettlebells are sort of popular in the States at the moment.
1:02:07
And you can find his videos are on YouTube.
1:02:13
And then they sort of look like they're made in about 1994, 1990s. And it's totally cheesy.
1:02:19
It's hilarious because he always begins "Comrades, do you want to know the secrets of the Soviet Superman?"
1:02:25
And then he does this, and he's got his shirt off, and he says, "If you want to get strong, I will make you.
1:02:30
If you don't, I will break it." It's hilarious. This so much fun.
1:02:34
Jim O'Shaughnessy: You know what, I'll bet that's where the Saturday Night Live parody came from, "We're going to pump you up."
1:02:42
Or was that Arnold, maybe.
1:02:42
Tobias Carlisle: I think that was Arnold because he's been doing this stuff for quite a while, but he's been totally under the radar until he did a Joe Rogan podcast a few years ago, or a year or something, in reasonably recent memory, which is where I discovered him.
1:02:53
And then I Googled the name or he looked for him on YouTube, and I found these old things and I totally got it.
1:03:00
As soon as I started watching it, I was laughing.
1:03:03
I thought, well, this is fun.
1:03:03
I'm going to try and see what this stuff is.
1:03:03
So I've got a full weight set.
1:03:07
I've got a rack and all these other things in here that I use all the time, and I have always used that stuff.
1:03:10
But the kettlebells is something that I've done fairly much more recently.
1:03:14
And the kettlebells are really fun because they're sort of more fun to use, but it's a different kind of exercise.
1:03:19
And I totally get why people get addicted to these things because it's not extreme weight that you're getting on yourself, which is a good thing for you in small doses, but it's a different sort of springy.
1:03:32
It's more, he calls it holistic.
1:03:32
It's more sort of movement and throwing these things.
1:03:36
Sort of accelerating into the swing and getting them to move, but then not sort of beyond that.
1:03:42
So you can injure yourself of course, but I think you're less prone to injury.
1:03:47
And I find them really fun.
1:03:47
So it was just fun to kind of swing it. Jim O'Shaughnessy: Yeah.
1:03:52
I have a gym here at the house and have kettlebells and had a trainer, and he was the one who turned me on to them 10 years ago, and they are fun.
1:03:58
It's just like, let's have some fun.
1:04:02
This is also giving me another idea for not for me, but somebody else should do a podcast where it's kind of Wall Street guys talk about other things.
1:04:11
Tobias Carlisle: Well, there's William Green, who I had on my own podcast has a great book out called Richer, Wiser, Happier probably. I don't know.
1:04:22
It's Richer, Wiser, something, but then he's interviewed all of these well-known investors for things outside of them. It's markets and life.
1:04:28
So he's talked to them about those ideas and he has this theory and I'm sure that you are the model of this, that you sort of have this philosophy about researching and sort of experimentation and doing things, and it works in the market and so you start doing it in your own life, and it works in your own life as well.
1:04:41
I think it's a great kind of approach to life.
1:04:45
Don't get too wedded to any philosophy or follow them.
1:04:45
I heard a great line the other day, which is remain open-minded, but skeptical. So open to new things.
1:04:53
Jim O'Shaughnessy: It could be my mantra basically.
1:04:56
Tobias Carlisle: It's a good line.
1:04:58
Jim O'Shaughnessy: I always say avoid premature certainty because when you become certain of something, you stop thinking about it, and it could come and bite you in the very, very quickly.
1:05:06
Tobias Carlisle: The decedents are always the ones who push science forward.
1:05:08
It's the people who don't believe who push forward.
1:05:12
Jim O'Shaughnessy: Always.
1:05:14
And look, we've ever had such a good time.
1:05:14
If Jamie were here, he would be clucking his tongue and telling me, "Jim, you're running over. You're running over."
1:05:19
So we always end with this question, and I'm really with all of your Sun Tzu and the Stoics, and all of that.
1:05:32
I'm kind of jazzed that you're into that. So am I.
1:05:35
I rarely talk to other market people who are so into it.
1:05:35
So we're going to wave a wand and we're going to make you the emperor of the world for one day. You can't kill anybody.
1:05:46
So [inaudible] and you can't put anybody in a reeducation camp or the like.
1:05:46
So no [inaudible], no Pol Pot, no Stalin.
1:05:54
But what you can do is you can incept people.
1:06:01
You can whisper something in their ear and they're going to wake up the next day thinking it was their thought, and they're going to change their behavior or change the way they think about two things that you're going to let you do two things. What do you got for me?
1:06:16
Tobias Carlisle: My favorite is the golden rule, which is do unto others, as you would have them do unto you.
1:06:23
I think that that's a very, very good one.
1:06:23
And that gets you a long way in life.
1:06:27
I think that that's a good...
1:06:27
The second one is a little bit more difficult, but probably it would be you want to...
1:06:32
I like that idea of remaining open minded, but skeptical.
1:06:35
And I think it's a very difficult line to walk, and I meet lots of people who are very open-minded and perhaps too open-minded and will accept anything at face value.
1:06:40
And then you meet the other people who are at the other end of the spectrum, and won't consider any idea, that won't consider any new idea.
1:06:49
And neither of those are good places to be.
1:06:51
I just think you need to be flexible.
1:06:51
When I talk about Sun Tzu, I've been talking about Sun Tzu, but it may be that what I really am talking about is Taoism.
1:06:56
And I don't sort of know.
1:07:00
The project is ongoing and I'm still trying to resolve the ideas for myself as well.
1:07:05
But there's this idea in Sun Tzu or there's this idea that the objective is to sort of we want to survive.
1:07:08
What best helps everybody in society and society itself continue on and continue to grow and improve?
1:07:14
And I think that Sun Tzu has some ideas on it, and I think that he discusses it.
1:07:19
Boyd has some really great ideas on those as well.
1:07:23
But they're the things that they recur over and over again, striking how many times I hear somebody talking about some philosopher.
1:07:27
And I've never encountered their ideas before, but where they talk about these things, and they're exactly the same ideas.
1:07:35
And I would say that if we approach things from that perspective of this not optimization, but resiliency for society and for individuals in it, then I do think that potentially we get out of some of the little internet scene fights that we have because you get a sort of a longer-term view on where we all want to be in what we want to achieve in life.
1:07:56
So I think that open-minded and skeptical sort of maybe that achieves that end.
1:07:56
So that's my answer, Jim.
1:08:00
Jim O'Shaughnessy: I love it. Both of them are good.
1:08:01
So I got two things for you, and then we're going to say goodbye.
1:08:05
The first thing is I've got a good Sun Tzu quote for you that I want you to ponder, which is build your enemies a golden bridge to retreat across.
1:08:17
Tobias Carlisle: Such a great line.
1:08:18
Jim O'Shaughnessy: Love that one.
1:08:18
If you think about that one for a little while, you'll see why he said that.
1:08:22
And then I'm going to DM you.
1:08:22
I did four threads on using the Tao, T-A-O, to understand the Dow, D-O-W.
1:08:27
I'm going to DM you the threads and then you tell me what you think of them.
1:08:36
Tobias Carlisle: Yeah, please. I'll love that.
1:08:38
It's been an absolute pleasure, Jim, chatting to you.
1:08:38
I love the way you think, and I've been a long, long-term fan of yours.
1:08:41
And so it's been one of the nice things about coming to the States and entering into this field that I've been able to interact with you a little bit. So I'm very grateful.
1:08:49
Thank you for having me on.
1:08:52
Jim O'Shaughnessy: And I, for you, Tobi.
1:08:53
And best of luck with the investing and the book.
1:08:53
I'll be one of your first readers.