0:00
I'm gonna tell you a series of 📍 stories about why you shouldn't make investment decisions on stories.
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0:07
Anything that goes up a bajillion gazillion percent in the last 10 years attracts a lot of the underbelly.
0:17
Don't have to swing at every pitch.
0:19
That's one thing all investors should know.
0:21
In our view, a true hedge fund is long something and short something, trying to make money on the spread, not on markets going up or down.
0:29
The sophisticated part was that index funds are free riders and we need some active managers to set prices and what markets do is set accurates prices.
0:39
We don't want a world where markets are perfect.
0:44
No, We have to find a different job.
0:47
Yeah, We are there to help correct them.
0:50
I wrote a piece in March of 2009 called a Generational Buying Opportunity, and everyone was like, "Oh, that was so brilliant. I said, no, no, no, no".
0:59
Everyone hated me when I wrote it. Exactly. That's why I wrote it.
1:03
She just said, I thought you make your money cuz people make mistakes.
1:07
Study statistics, and stick to your principles.
1:13
Jim O’Shaughnessy: Well, hello everyone, it's Jim O'Shaughnessy with another Infinite Loops and today I must tell you, I have one of my quant heroes as my guest.
1:28
I have Cliff Asness, Founder, CIO of AQR Capital Management, one of the original gangsters of Quant in the flesh.
1:39
Cliff, I am so happy to have you here.
1:42
Cliff Asness: If I were doing a podcast with you as a guest, I might use the exact same introduction.
1:47
Jim O’Shaughnessy: That's very kind of you, but I have no PhD, I have no CFA, so you're way ahead of me.
1:54
Cliff Asness: No, you just came up with the same stuff we did separately, Jim O’Shaughnessy: Right.
1:59
It's like the two quants walk into a bar. What did we talk about?
2:02
The same thing, because we all basically- Cliff Asness: Best we got Jim O’Shaughnessy: Yeah, we don't have too much else and we're going to get into that as we go along here, but first, delighted to be able to have this chat with you.
2:14
So I'm going to lead in with what's dominating the news.
2:18
I don't really have other than an independent observer viewpoint into this, but what the fuck is going on with FTX and Sam, whatever, Bankman, why is he not behind bars in your opinion?
2:35
Cliff Asness: Oh, well I'm going to guess much like you financially we're very far away from this on either side. This is just observant.
2:45
Jim O’Shaughnessy: Totally, totally.
2:46
Cliff Asness: Second, you didn't tell me this was an expletives allowed podcast.
2:50
Jim O’Shaughnessy: Fuck yeah.
2:51
Cliff Asness: I got to change my whole thinking as to how to answer these questions.
2:56
There's FTX and many other, I would guess, firms in the crypto kind of biosphere and then there's the nature and validity of crypto itself, which aren't necessarily the same things, but I don't think if you go through history, if you find an asset class that has gone through a major valuation bubble, you're not going to find many, many scams attached to it and from the tech bubble to tulips.
3:29
It brings them out of the woodwork.
3:31
One thing I'll admit right now, I don't think people over 50 should try to understand crypto too hard.
3:37
Most older people are going to be cynical about it.
3:42
If we're wrong, it's not going to matter to our lives and our chance of being right, it's too much work.
3:48
You got to be under 30 and calm and not kind of a naturally bubbly mentality.
3:54
I have noticed this about crypto, and this is the worst kind of analysis 'cause it's not my own analysis, it's meta just looking at what other people say.
4:04
I know, some people I respect a lot, let's just call them that, who are crypto fans, but it's very mixed among the people I respect a lot.
4:12
Probably tending to the cynical side, but certainly some people I think are very good and smart who like it and do think it has a big future.
4:20
I don't know anyone, and I will name no names here, but I don't know anyone I have not considered a bit of a scammer or a huckster in our broadly defined field who doesn't frigging love crypto and is not willing to sell it to you tomorrow.
4:38
Again, we're both quants.
4:40
This is about as far from a diversified trading rule as you can come.
4:44
But when you get to things that we don't trade, I'm allowed to just go with instinct and opinion and I shouldn't say we don't trade it.
4:52
We actually trade crypto in one place, pure trend following funds.
4:57
Jim O’Shaughnessy: That was my answer too.
5:00
Cliff Asness: Yeah, because that's the only thing we know about crypto is what the price was right now or is right now and what it was a month to a year ago, and that rule's kind of been fairly effective so far, but FTX, why he's not in prison, I tend to be a defender of free enterprise.
5:22
I tend to be a guy who, when people say someone should go to prison, say we have to understand the difference between incompetence and criminality.
5:32
Ultimately it's hard for me to believe this was pure incompetence, but I want to be very clear both in the interest of truth and in the interest of not accidentally entering litigation along with the rest of them, I don't really know anything.
5:48
I'm just looking from the outside.
5:50
The level of incompetence it would take to just be muddling along and have no idea what your exposures are, to be shocked that, oh, I didn't know we could move client money and in fact we're doing that.
6:03
It is possible and it really is that it was just so epically incompetent and fly-by-night and put together at the last moment and everything ad hoc that it really wasn't ultimately criminal. I don't know.
6:18
There is such a thing as criminal negligence.
6:20
I don't know how that applies in this kind of case.
6:22
I don't know if you could be so dumb at some point that it actually becomes a crime.
6:28
Actually, I hope not because I think I've probably achieved that in my life at some point.
6:33
Jim O’Shaughnessy: You and I would probably share a cell if that was the case.
6:35
Cliff Asness: But there's going to be a lot of interesting stuff to come out in the next year.
6:41
I hope he does follow through and testify in front of Congress and whatnot.
6:46
I don't think he actually will.
6:48
He announced, I'm happy to come in front of Congress.
6:51
Again, guilt or innocent, there's no competent lawyer who would let you do that just for fun for your own PR benefit, but again, this doesn't mean everything in crypto is a scam.
7:03
It really doesn't, but it does mean no matter what, there's a lot of scam going on in the crypto world.
7:12
And again, this is not a shot at crypto in particular.
7:15
Anything that goes up a bajillion gazillion percent in the last 10 years attracts a lot of the underbelly.
7:26
So I'm still long-term a cynic that you could just make a new kind of money quite that easily.
7:34
I buy into some of the arguments of is it being used for anything but speculation?
7:40
You and I have talked offline, there are some countries that are in dire straits that are using it in a way that I think is helpful to them.
7:48
That doesn't prove the whole concept is good, it will just make me feel really bad if it turns out to be a big blow up.
7:54
But with FTX, I will make no prediction, but how much of this was idiocy versus malfeasance?
8:05
There's no other explanation. There's nothing else.
8:08
That's all we got is those two and I think we will find out about a fair amount of this.
8:13
There's certain things, like what happened at Madoff, if you want to go through just financial scandals, I still don't feel like we've gotten the whole story about that one, which amazes me and sadly it's because a fair amount of the people have passed on.
8:27
I don't feel like all the people involved with FTX and SBF and all the other acronyms, I don't feel like they're the holdout, like the Sicilian Omertà kind of people.
8:40
So, I do feel like we're going to know the story here, but we might have to be patient.
8:45
Jim O’Shaughnessy: Yeah, and so like you, I am about as free market maximalist as they come, and I agree that trying to criminalize free markets is something people enjoy doing and I'm very opposed to.
9:01
I do think though that both of us, I've been a fiduciary for more than 35 years and I don't know if you're as long and tenured, but- Cliff Asness: I'm close.
9:12
Jim O’Shaughnessy: But the algorithms in our brain are run by a fiduciary mindset.
9:17
And so I find that more and more as I try to understand.
9:21
Okay, I agree with you by the way, we experimented with crypto.
9:26
Patrick did a big series on it back in 2017 and I'm like, all right, give me half an hour and explain it to me. And he did.
9:35
And I said, okay, we should probably know a little bit more about this, but I put the money in a long short momentum crypto fund because that was, again, because of my background as a quant.
9:47
That's all I could understand.
9:48
Cliff Asness: Yeah, we don't have evaluation model.
9:50
Jim O’Shaughnessy: No- Cliff Asness: We don't have a quality factor for it, but evaluation models I've seen are all extremely dodgy, right, they're- Jim O’Shaughnessy: Yeah.
9:59
Cliff Asness: Very speculative.
10:00
If we're X percent of gold and blah blah blah.
10:04
I just don't think they have a lot of substance.
10:06
Again, doesn't mean I'm not missing something and this doesn't catch on and become the next big thing, but you don't have to swing at every pitch.
10:14
That's one thing all investors should know.
10:16
Jim O’Shaughnessy: Totally agree.
10:19
So we exited that hedge fund.
10:21
It's a fun story because I first written it off because the first month came back and I'd lost 50% of the original investment. And I'm like, okay.
10:30
Cliff Asness: And Jim, that's the exact thing you'd hate for client to do to you.
10:34
Jim O’Shaughnessy: Exactly.
10:35
Cliff Asness: And we're all guilty of that at times.
10:37
We're all physician heal thyself.
10:38
Jim O’Shaughnessy: Of course, of course.
10:39
Cliff Asness: I'm famous for getting upset about a daily P&L as I talk to people about good factors can be bad for a decade.
10:47
Why are you in a bad mood today? The factors down.
10:51
Jim O’Shaughnessy: Yeah, I know how that goes.
10:53
And by the way, I, like you, also, I'm not informed enough on crypto Ethereum, although I'm learning more about Ethereum as kind of a platform, not as a currency, which there's some interesting use cases there.
11:07
So listeners, viewers, this is not two older guys saying that this is bullshit, it's just that we put it into the too hard pile and move on because we like things that we can measure, as Cliff pointed out about the quality metrics that we both use.
11:28
I want to keep going on the fun part here because- Cliff Asness: Go ahead.
11:31
Why should we do anything that's not fun?
11:33
Jim O’Shaughnessy: Exactly. Exactly.
11:36
It's going to be a romp, my friend.
11:38
So I loved the whole AMC thing and you provided me with a great deal of entertainment with- Cliff Asness: Not my intention.
11:52
Jim O’Shaughnessy: No, I know, but in dealing with, shall I say charitably, very poorly, if at all, informed people who were trying to argue with you about it.
12:03
Let's talk about it, let's talk about that and the CNBC experience because- Cliff Asness: Well, the good news for me is none of them are going to have sat through the first seven minutes of this to get to this point.
12:12
So I'm not going to get anyone angry again.
12:15
All right, so I'm going on CNBC.
12:18
I had not been on CNBC for 10 years.
12:22
Generally we've gone on Bloomberg a couple times, but TV has never been a very big thing for us.
12:27
We're mainly an institutional asset manager.
12:30
It had been a fairly horrible '18 through '20 and then it had been a very strong '21 and '22.
12:36
My people, whoever they may be, wanted me kind of out there again and said, yeah, it's time to at least show the flag and business television is starved for guests.
12:45
You should not be that impressed with yourself that you're on business television.
12:48
They got to figure out 24 hours’ worth of repeating a lot of the same stuff.
12:55
So I'm not bragging here, but they were like, yeah, it'll be great. Come on.
13:00
So for almost all these things, you and I only did a couple emails back and forth, but you often have a prep call.
13:07
And I don't like the prep calls to go on too long or be too detailed.
13:12
Sometimes they want to do a dry run of the whole thing.
13:16
I'm like, let's just get general topics out there.
13:18
I don't want set up questions.
13:20
I don't want to know exactly what you're going to say, but if your topic's going to be way off of anything I want to talk about, we should discuss it.
13:29
So in the midst of a lot of other things we're talking about, they asked if I could share some specific names of stocks with them.
13:41
And as a fellow quant, Jim, you would've told them many of the same things.
13:44
I was like, well that's really very silly of us.
13:48
It varies in different places, but in our most broad global market neutral accounts, we might have 750 names long, 750 names short.
13:59
And this [inaudible] horrify the active management world or the more traditional, I think we're active managers too, but the more traditional stock pickers, but I usually don't know which they are.
14:09
Jim O’Shaughnessy: No, neither do I. Absolutely.
14:11
Cliff Asness: I always joke, quants are high conviction traders on the whole process, particularly if given enough time, we're very low conviction on any individual name because it's about the characteristics of the stock and the characteristics of the long and the short portfolio.
14:27
So I go through a bunch of this and I just go, it'll be really odd for me to talk about names.
14:32
And we went through about six rounds of this.
14:34
They're like all our guests named some names. So I made them a deal.
14:39
I thought I was being smart.
14:41
I do not turn out to be that smart in this story.
14:43
I say you got to give me a full minute and a minute is a freaking eternity on TV.
14:49
It doesn't feel like much, but everything is very bang bang.
14:53
There's a little person in your ear after about eight seconds saying, finish this thought.
14:57
So you got to give me a full minute to explain why the names I'm going to give you are purely indicative.
15:03
They're just to give you a flavor of what these characteristics might look like in an individual stock that I could get the names I'm telling you dramatically wrong and we could still have a great year or vice versa.
15:16
So I don't remember exactly what I said but they did that, they let me do that, but of course I asked my team to put together give me five longs and five shorts and here's probably where I got in trouble.
15:29
I think I said something that might be interesting. I name a few of them.
15:36
And this is a greatly disputed thing in the quant world, but we tend to look at things within the same industry, so there are always some tech stocks that even if we have a value, a tilt to what we have going on, there'll always be some we like by definition.
15:53
So that was kind of a little bit fun and a little different.
15:57
One of the shorts they gave me was AMC, the movie theater chain.
16:03
And so I mention it, I say it's pretty much bad on all the things we don't like, it looks expensive on the metrics, you can calculate, it actually doesn't have earnings, so there's some you can't calculate.
16:16
The fundamental momentum is poor.
16:18
It doesn't really make profits.
16:21
The quality measures are poor and it's very, very high beta.
16:23
I didn't go into everything in our process or whatnot, but I gave a big overview, which is true, but then to echo my minute of don't take any of this too seriously, I told them, which I haven't even kept track, no one believes me, but I have not checked on our position since going on to CNBC in June, but at that point in the main account I was quoting, it was like a 12 basis point short.
16:48
So I think I actually said it's 12 basis points short.
16:51
And here's where I made my fatal error.
16:53
And I admit this sounds really challenging even though I meant it self-deprecating.
17:01
I said something, I'm not going to get it exactly right, 'cause it's a 12 basis point short, and I think I called him a little nutty.
17:10
I said even the nutty people out there can't hurt us.
17:15
And I believe in way the way quant's do it, but I'm making fun of us for being low conviction.
17:22
I'm saying if you make it go up by a factor of 10 in a day, which by the way just ain't going to happen, it's a down 1% percent-ish day- Jim O’Shaughnessy: It's de minimis, it doesn't matter. Cliff Asness: ...
17:34
and I go, oh we're down a lot. That's not even a lot.
17:36
I go, oh we're down that day. I notice that.
17:41
I don't notice if it goes up 50%.
17:43
I don't notice six basis points.
17:46
That's my point I'm trying to make, but I said it in a provocative way.
17:50
It seems en masse they took it when I said they can't hurt us, they took it as they can't possibly be right.
18:01
And now you have to roll into the fact that very much against my better instincts and the instincts of all the grownups at my firm, of which I'm not one of them, I'm active on Twitter and I've actually post AM...
18:18
Actually AMC changed me on this little...
18:21
I had a bad habit for a lot of years too of responding to the person with three followers who started the account.
18:28
Jim O’Shaughnessy: You and I actually had a lunch about that specific topic, remember?
18:30
Cliff Asness: Yeah, you tried an intervention, it didn't work.
18:34
So they just freaked out about this, and if you go through, and I've not done this, but from memory, if you go look at the old tweets, I'm pretty sure I started out kind of like, no, let me explain.
18:44
I'm not saying it can't go up.
18:46
I'm saying we take a very low position and then they start calling me a coward for the low position and I'm like, well that's literally true in one stock but I don't think it makes me a coward overall.
19:01
And then they get, to be honest, really gross and nasty really fast.
19:08
I had no idea what this world was like.
19:10
I had watched from 2021, the Melvin Capital stuff with GameStop and a few others.
19:18
We're all citizens of the financial world.
19:21
We read the papers, we watch the various news channels.
19:24
So I knew about that story but I had no idea what a fever swamp this was.
19:32
So I don't know if this is in my defense, but I don't think I would've poked this particular bear or ape as the case may be, I wouldn't have poked this ape if I knew how crazy this ape was.
19:45
It is a world of nastiness, of shouting down of pornographic memes being thrown at you left and right, of logic that really...
19:57
Imagine you scour the internet looking at numbers you don't understand, then you take a screenshot and just like the crazy person in the room with the tax and the yarn and you start going...
20:10
I should tell you, I think I faded a bit.
20:13
If they do happen to watch this, which I do not predict, you have great reach Jim, but I don't know if you reach into that world, if they do happen to watch this maybe I'll catapult back up, but I only made it to public enemy number three I think at the high.
20:29
Enemy number one is Ken Griffin.
20:30
Jim O’Shaughnessy: Of course.
20:31
Cliff Asness: It started out where they think he's the one who told Robin Hood to take away the buy button on a certain day.
20:39
My personal opinion, I have no knowledge of this, but I don't think that's even close to true.
20:43
I think they took it away because they have a settlement problem and a mismatch and they had to do it to...
20:48
Not that they didn't mismanage that whole thing, but I don't think it was Ken Griffin making that secret call, but he is the ultimate evil.
20:57
A lot of them, like their Twitter names, are some version of Ken Griffin lied, which again I don't really think he did. Then who's next?
21:06
Oh the head of the SEC is next.
21:10
Just because he's in bed with Ken Griffin and trying to keep the short that by right and truth, the shorts should all be wiped out and the stock should go up to, they have numbers up, the stock is like five now, it's going to go to 50,000.
21:28
You don't want to do the market cap of what this semi bankrupt movie company would be if this happens, but the head of the SEC Gary Gensler's in on it.
21:37
Again, I have no knowledge of this but I'm going to guess Gary Gensler and Ken Griffin are in on nothing together.
21:44
My personal guess is they're not the best of friends.
21:47
Jim O’Shaughnessy: Exactly.
21:48
Cliff Asness: I don't get why the SEC would be carrying water for the short sellers, but they clearly think it's obvious.
21:56
Again, they find these crazy things on the internet.
21:58
At one point they wrote that Ken Griffin's firm Citadel lost, I forget the number, call it a hundred quadrillion dollars.
22:06
And what they were doing was somewhere that Citadel publishes the size of their balance sheet and what I'm guessing is the world got volatile and they shrunk along in short side. Again, pure guess.
22:19
Again, if you can get Ken on and he can rebut everything, I will not be insulted, but a lot of people practice risk management where if the volatility or however you measure risk goes up, you take your positions in. Jim O’Shaughnessy: Yeah.
22:32
Cliff Asness: I think they took that as a loss and suddenly now they're covering up hundreds of billions of dollars worth of losses.
22:42
They kept telling me, I'm naked short.
22:45
I kept saying I don't know how to naked short, and certainly nobody wants me literally shorting naked.
22:51
That would be a very unappealing thing to look at.
22:53
Jim O’Shaughnessy: Be almost as bad as me doing it.
22:56
Cliff Asness: Oh I would switch off, I have to be honest between angry, 'cause when someone's really mean to you, we all tend to get angry, but I'd also feel really bad because there'd be sad stories.
23:09
People would go, you are blanking on a stock that I've put my life savings in and my family needs to go up.
23:17
And I'm sitting there going, that doesn't change reality.
23:21
If anything, it may be too late, but I know you have similar stories.
23:27
I feel like I'm the one telling you the truth, but that is a hard pill to swallow at times and they tend not to like the messenger.
23:37
So some of that was just said, then some of it was just silly.
23:41
Why do I invest in this company, someone will say, and this is maybe 50 times, because I love movies and I would respond because I'm occasionally sarcastic Jim O’Shaughnessy: Occasionally. Cliff Asness: ...
23:51
this is why I only invest in companies that make socks because I love socks.
23:57
I don't know if I love socks more than the next guy, but I'd be uncomfortable most days without a pair of socks on.
24:03
Jim O’Shaughnessy: As would I.
24:04
Cliff Asness: It does not make all sock companies attractive at any valuation in any financial condition.
24:13
I don't want to get more into this world, but you could write a little primer on common investing mistakes that they take to great extremes just based on this.
24:24
I like movies as a way of investing, but the best part of this world is learning the acronyms.
24:32
One famous one which is now I think used outside of there, which I might even use for some strategies is HODL, hold on for dear life.
24:40
The funny part of this one is if applied correctly, my self-serving view of correctly, like late 2020 to value strategies.
24:51
I actually think if you've really done the work, really think you understand why it's not been working and really feel it's going to make you a lot of money, hold on for dear life is half the success in investing at times.
25:04
If you go back to the beginning of my career, I probably would've said all of investing success is this would've been arrogant, it's about being cleverer or smarter than the market or the next person. I think that's half.
25:16
I think half of it might be some form maybe milder than dear life, but it's some form of sticking with something.
25:24
So I'm naturally predisposed to that.
25:26
You can't take it and apply it to anything and magically make that thing a good investment by holding it forever.
25:34
If the thing is expensive and the company is in bad shape, hold on for dear life.
25:40
It doesn't suddenly make it a good investment, but that's not the best, that's the last thing I'll say.
25:45
The best acronym is we're all sitting around waiting for the MOASS.
25:50
Do you know what the MOASS is, Jim?
25:53
Jim O’Shaughnessy: No I don't.
25:55
That's one I don't know Cliff Asness: The mother of all short squeezes.
26:00
This is why the whole thing feels very cult-like to me.
26:07
Jim O’Shaughnessy: Oh for sure.
26:08
Cliff Asness: A cult in the sense of there's an us and a them logic, it's impenetrable to logic but it is even a cult up to the point of having their apocalyptic moment where it'll be apocalypse for people like you and me maybe, but they'll
26:24
ascend to a heaven, but they have a date and every good apocalyptic cult, whenever it doesn't happen, because they do say they'll find things I've never heard of the options on the AMC expire three Tuesdays from now, it has to happen at that point, the MOASS has to happen between now and then it won't happen. They just moved the date.
26:45
They just moved the date. Jim O’Shaughnessy: Yeah.
26:49
Cliff Asness: If you go back through history, that's actually fairly common for apocalyptic cults.
26:52
Jim O’Shaughnessy: Totally.
26:54
There's so much to talk about there.
26:57
First off, the cult-like mentality is...
27:02
So what my strategy is for all those things is on Twitter for example, I just do not engage because I know that I'm not going to be able to change anybody's mind.
27:14
The thing that makes me sad here though is that we do have this platform which I think very highly of if you use it right.
27:24
And the fact that people have access to you.
27:28
Come on, you are an amazingly accomplished and successful person and you've demonstrated your willingness to help people.
27:35
And so that I think is tragic.
27:39
Cliff Asness: No, this is partly what keeps bringing me back is first there's the general fintwit community.
27:46
There are a lot of very earnest good people trying to figure things out, having great conversations.
27:53
You learn about ideas faster.
27:57
It's not always accurate, but you can get news on Twitter often before you get it through- Jim O’Shaughnessy: For sure. Cliff Asness: ... through regular news.
28:03
So there's a great finance community.
28:05
Second, yeah, I do enjoy talking about this stuff, sometimes to my detriment, but I enjoy it.
28:12
So if somebody is reasonable and has a question, even if they're kind of a newbie, I'll try to give all the right disclosure.
28:18
It's not really even for legal reasons, but just because they should know I may have done this longer than them, but I'm just a guy with an opinion, but I'll engage.
28:26
And then you can't stay away from the total crazies and not all of us have your strength and willpower when it comes to not responding.
28:37
I have gotten better in the last six months.
28:40
Jim O’Shaughnessy: You have, I've noticed.
28:41
Cliff Asness: I've definitely gotten better, but I do feel like I'm Twitter anonymous and I have my six month chip, but like an Alcoholic's anonymous, they'll never say I'm cured.
28:51
I'm an alcoholic who just hasn't had a drink in 30 years.
28:56
So I will not say that it's the last time I ever overly engaged with an unpleasant person on Twitter, let's just say, but I'm trying.
29:06
Jim O’Shaughnessy: I appreciate that, I appreciate that.
29:08
I think to shift it a little bit to CNBC, Bloomberg, et cetera, I owe a ton of my career success to those guys.
29:19
Back in the day when I was on CNBC seemingly every other week, it was because Mark Haynes liked me.
29:26
It was that simple, but it was a completely different show.
29:30
Cliff Asness: It wasn't that simple, Jim, you were also very good at explaining complex things very clearly.
29:35
Jim O’Shaughnessy: Well, thank you Cliff Asness: He didn't just like you because he liked the cut of your jib.
29:40
Jim O’Shaughnessy: Fair enough, but the whole format was more conducive to actually letting a portfolio manager explain their strategy.
29:51
We used to give them 20 minutes and literally we would have a conversation that we would challenge them if we didn't agree, but it was a two-way street and then I saw it turn into ESPN.
30:08
And I can't remember when it was, but it was like, I think maybe 2017 they kept telling me, you got to come on, you got to come on, you got to come on, and I'm like, I've known those guys for a long time and I like most of them.
30:22
And so I'm like, all right, I'll come on, but give me five minutes and then they swear up and down they will.
30:30
And by the way, this is not just CNBC, it's all financial TV, and then you get on and you get not even two minutes and nobody can say anything intelligent or help people with a sound bite.
30:46
And so I just stopped going.
30:48
Cliff Asness: A sound bite you can get a trade recommendation out if you're a stock picker.
30:52
Jim O’Shaughnessy: And for us quants that's just like, are you kidding me?
30:56
It's like, okay, here's what I want you to buy, and then I give the characteristics of the underlying stocks that we like.
31:03
Cliff Asness: But you want to explain the evidence behind that, you want to- Jim O’Shaughnessy: Exactly. Cliff Asness: ...
31:08
explain the fact that we do believe it will work long term, but it's had some terrible periods, you should know that going in.
31:13
You want to give all the subtleties and richness.
31:15
Jim O’Shaughnessy: Exactly.
31:16
Cliff Asness: And I get it.
31:18
No TV is going to give you or I half an hour to just...
31:20
But there is some level of depth I think could be done better.
31:24
Though, one thing, I don't know if you'll agree with this, but I occasionally will call out my own hypocrisy because I'm this big free market capitalism fan and yet if free market capitalism produces a product that is obviously maximizing profits for these people, but it's not the exact product I would like, I'm not above getting pissed off. Jim O’Shaughnessy: Nope. Nor am I. Nor am I. You're absolutely right.
31:47
Cliff Asness: It may just be Jim, that there's not a giant market for people who want video interviews on TV with you and I where we get a blackboard and half an hour.
31:56
Jim O’Shaughnessy: And yet I would make the argument that there maybe is a market for that on channels like YouTube, on podcasts- Cliff Asness: Like this.
32:05
Jim O’Shaughnessy: Yeah, like this.
32:06
I think that there is a deep hunger for that, actually.
32:09
Cliff Asness: And the podcast world is in general, not just what we're doing here, it shows that people really do want long form stuff.
32:17
So maybe the world's just splitting.
32:18
Jim O’Shaughnessy: I think you're right. I think you're right.
32:21
And so with me it's like I always want to acknowledge, listen my career got a huge boost from TV journalists, the Wall Street Journal Barons.
32:33
I owe a tremendous amount to them, have a great deal of respect for many of them today.
32:40
Cliff Asness: No, as do I. Jim O’Shaughnessy: Yeah.
32:43
And so- Cliff Asness: I'm sure many of them feel exactly how you and I feel.
32:47
Jim O’Shaughnessy: Oh absolutely. Absolutely.
32:50
And people don't understand that they have editors, they have people that write those headlines.
32:57
They don't write those headlines and- Cliff Asness: Oh, I make that mistake myself all the time.
33:03
If I'm ever even vaguely involved with something, and I like the article but hate the headline, I know the author didn't write the headline, but I'm capable of forgetting that for about half an hour.
33:15
Jim O’Shaughnessy: Well yeah, me too, me too.
33:17
So yeah, I think that from my point of view, I think you might be right.
33:21
I think what's happening is kind of a bifurcation.
33:24
The people who want long form are finding it.
33:26
There's ample long form available.
33:29
I think there's some really great stuff out there, actually.
33:32
And the kid on Twitter, 10-k, I had him here on the show, I think he's doing excellent work in trying to do these long form pieces on Twitter. That is not easy.
33:44
And so I admire those people who are doing the really good work and it's rough when you see...
33:52
The thing that gets me going as we chatted about briefly before we started recording is I really do want to help these people and it really drives me crazy when I see them being taken advantage of, but it's very difficult, unless it's a long form, unless you can give the nuance, and take the example of quant.
34:18
So we're in the same boat.
34:20
We're mostly value based, we have a lot of momentum stuff and we're quality as you know, and so when value was sucking, we were too.
34:31
And we make the same case.
34:34
Look at the history here.
34:36
Look, you think this is bad?
34:37
Cliff Asness: The spread between cheap and expensive.
34:40
Look at what's happened in the past.
34:42
Jim O’Shaughnessy: Yes, exactly. Yeah.
34:46
So those war stories we share completely because I kind of use it as an informal indicator when my last adherent loses faith and fires me.
35:00
In fact, I wrote a piece in March of 2009 called ‘A Generational Buying Opportunity’ and everyone was like, oh that was so brilliant. No, no, no, no, no.
35:08
Cliff Asness: Everyone hated me when I wrote it.
35:10
Jim O’Shaughnessy: Exactly. That's why I wrote it.
35:14
And it was one of our greatest clients who had been with us from my first company, O’Shaughnessy Capital Management, which morphed into...
35:24
Anyway, I walk into his office, my head of intermediary sales is with me, great guy named Ari Rosenbaum, very positive, can do type anything, he goes, Jim, you got to come, you got to come.
35:40
And I'm like, well, but he's been with us since the beginning, and he goes, you got to come.
35:44
So I walk into his office, and big nice office and here's what he does, Cliff, I'm not kidding.
35:50
He's sitting at his desk and he goes like this and puts his hand up for those who are listening and aren't watching, and he goes O'Shaughnessy, I know that when you got in that briefcase are 20 tables and graphs and charts about how this is a great time to be adding, not getting out of it, I don't give a shit.
36:14
I just don't care anymore. Save your breath. You're done.
36:19
Cliff Asness: I know you'd be shocked by this, but this is a coincidence, I think I've had the same meeting once or twice and I've had plenty of good meetings.
36:28
We still have a lot of assets and clients.
36:32
Jim O’Shaughnessy: You're doing okay.
36:34
You're doing okay, Cliff.
36:36
Cliff Asness: Maybe it's my nature, but I think everyone's like this to some extent, you should really focus on the people who stuck with you.
36:44
You think about each of those meetings much more.
36:46
Well partly that's just human. It's more dramatic.
36:49
It's more of a shock, but when someone's literally saying, I don't want to see the evidence, you're trying to show me evidence.
36:56
I'm still looking at, even with the trade-off in markets we've seen, they're not as bad as they were a year and a half ago, but they're still expensive versus history.
37:04
Jim O’Shaughnessy: Oh, totally.
37:05
Cliff Asness: And the value spread as we measure it, the spread between cheap and expensive, for those who are interested, it's well down from its COVID highs, but it's not way off of the tech bubble, at least the way we measure it.
37:17
We don't take an industry bet, so the tech bubble's a little smaller in our measures because it was a tech bubble, but I look at this and this is the most self-serving thing on earth, but I look at it and go every investment committee I or one of my friends sits on is thinking of adding to their private equity.
37:37
How are they not adding to this?
37:39
It's the only thing out there that looks cheap that I can find, and that's the world we live in.
37:46
Jim O’Shaughnessy: Could not agree more.
37:48
I added only to our small cap value, and our micro cap.
37:54
That's where I added money.
37:56
And you're absolutely right.
37:58
The evidence can't scream at us loud enough.
38:01
Let's underline the point you made though, historically we are still expensive and we are sowing what we reaped with the cost, the cost of capital being zero.
38:13
If the cost of capital is zero, it's going to create all of these- Cliff Asness: A lot of silly things get done.
38:19
Jim O’Shaughnessy: Totally.
38:21
And to unwind that for how long they allowed capital to be zero, just reality is it's going to take some time.
38:32
Cliff Asness: No, you're exactly right.
38:33
At least 10 years worth of craziness is not unwound in a year and a quarter.
38:39
Jim O’Shaughnessy: Totally agree.
38:40
Cliff Asness: And people get very local about it, they're like this incredibly painful year, and I won't deny that for markets in general, but they have this immediate reaction like, oh it's such a terrible year, things must be back to normal now. And that can happen.
38:56
It would have to be very ugly and scary, and I don't wish for this because be careful what you wish for, that kind of move can have a lot of collateral damage but it doesn't fix itself very easily when you've hit record levels in terms of spreads between cheap and expensive, X tech bubble record levels in terms of evaluation of the whole market and had zero to negative rates for a long period.
39:24
You don't have a one year, pretty darn bad, but not crazy bad year and go all right, all fixed.
39:33
Jim O’Shaughnessy: Oh, not at all.
39:35
I have a friend who during the height of the crazy bubble used to call me and say, so how high can the price to magic go?
39:44
Cliff Asness: Well, here's one thing I try to remind myself of, is once you've crossed the Rubicon of saying something is irrational, and remember I'm an ex Gene Fama student.
39:58
I was [inaudible] for two years. He was very kind to me.
40:02
I wrote a dissertation on price momentum, something you knew about at the time, but academics didn't, saying that it's actually effective, and he was good about that.
40:11
Still doesn't like that it's true, but was very good about it.
40:16
So I studied under the demigod of efficient markets.
40:20
I was not a perfect efficient marketer even back then, but I will admit 30 years later I'm more willing to use the word bubble than I would have back then.
40:30
I do think we've gone through things where have been demonstrably mispriced.
40:36
It doesn't make investing easy by any means to survive those periods.
40:40
One real irony, and I know this will resonate with you, we don't want a world where markets are perfect. Jim O’Shaughnessy: No.
40:53
Cliff Asness: We have to find a different job. Jim O’Shaughnessy: Yeah.
40:55
Cliff Asness: If local markets are perfect.
40:57
We are there to help correct them.
40:59
I think we do serve as societal purpose when prices are really out of whack and that's how we make alpha.
41:04
Jim O’Shaughnessy: Exactly.
41:05
Cliff Asness: Yet we really hate it when they get really imperfect.
41:12
Way back in the tech bubble, I was talking to my wife, we had gotten married in 1999 and as a separate story, I once made the mistake of saying 1999 was the worst year of my life.
41:22
And to which she was like, “uhh”.
41:24
She encouraged me, and I think I've done this to say that was the worst professional year of my life.
41:30
There was one specific night where I'm sitting around ranting and raving about how crazy the world is.
41:36
I was in the middle of the .
41:36
com bubble and I was probably using a lot of expletives and she had one sentence to me, the rest was implied.
41:43
She just said, “I thought you make your money because people make mistakes” and- Jim O’Shaughnessy: What a killer line.
41:48
Cliff Asness: And I'm like, she probably said it nicer than that.
41:54
That's probably the me version. She's nicer than me.
41:56
She probably said something like, I thought you've talked... Whatever. But the rest is implied.
42:01
You do want people to make mistakes but you want them to realize you were right and correct them an hour and a half after Cliff or O'Shaughnessy's put a position on.
42:11
And once you admit that things can get irrational, saying you know precisely how irrational they can get is folly.
42:22
Jim O’Shaughnessy: Totally folly.
42:23
Cliff Asness: Now I don't think that's a good excuse for dumping the rational for the irrational as many do, and sometimes they'll tell you, you can't predict when this will turnaround.
42:34
And I'm sure you've said the same, no, but I can predict with a strong conviction, not perfect, that over the next five years it's going to do really well, but you can't tell me when it's going to turn around.
42:45
No, but neither can they.
42:46
You're asking for the impossible.
42:48
If someone gives you a five year, never a guarantee, we're trained not to use that word because lawyers descend from the rafters and beat us with sticks if we say that.
42:57
Jim O’Shaughnessy: I've got a few watching through the window right now.
43:00
Cliff Asness: But at some of the crazier levels I've been as close as I've ever been to wanting to use that word.
43:06
And that's the time no one's interested.
43:08
Jim O’Shaughnessy: Of course.
43:09
Cliff Asness: I shouldn't say no one, there's always someone. Most.
43:14
It's very difficult sell when it should be the easiest sell. Jim O’Shaughnessy: Yeah.
43:18
And that's why I use it as kind of my informal little indicator that my spidey sense starts heating up, and I'm like, okay, this is very interesting.
43:27
Cliff Asness: When we started, Jim, you were saying you invested in your small value and I think there was another fund- Jim O’Shaughnessy: Yeah, [inaudible].
43:33
Cliff Asness: We actually started a really aggressive version of a value fund that was market neutral, taking high vol, just to be purist about it, and I did put a fair amount of whatever money I put away from my children in these funds and this never happened, but I was waiting, this was my signal, never happened.
43:57
I was waiting for one of my kids to bring it up.
43:59
Now they generally don't follow these things so it was kind of a fantasy or a nightmare fantasy, but I had this nightmare fantasy about being at dinner one night and one of my kids saying, so this value thing still not working, huh? And me saying what?
44:16
And then one of them being like, have you really considered the impact of intangible assets, dad?
44:21
And I'm like, I'm at dinner!
44:24
And by the way, you're the same, I'll speak for you, you can correct me if I'm wrong.
44:29
I wrote a piece recently saying we are not all about value in parentheses except occasionally when we are.
44:36
I took our longest live track record just almost a quarter a century and I regressed it on a value back test.
44:43
I can't get live because we've never run a pure value live, and the average correlation was in the 0. 2's, the long term.
44:51
Plenty of times you have three year periods where we're negatively correlated to value just because everything else in the process- Jim O’Shaughnessy: Same with our stuff. Yep.
44:59
Cliff Asness: [inaudible] post GFC through 2017 was actually a fairly good period even though it was not a great period for value.
45:05
So it does appear in these crazy bubbles, we do get correlated for value.
45:10
And this one is well on its way to working out the last one like '99, 2000, where the round trip was very good at the end.
45:18
But it does take years off the end of our lives occasionally.
45:21
Occasionally we put on our value superman suits and go fight the battles. Jim O’Shaughnessy: Yeah.
45:27
And ours regresses the same way. We've looked at it.
45:31
And again, part of the challenge for we quants, is we are story-based creatures.
45:40
When I started out I used to give speeches saying I'm going to tell you a series of stories about why you shouldn't make investment decisions on stories, but it's the way that our human OS works and so we have to find these creative ways...
45:59
I'm very interested in hearing that from you because we did the same and basically the same stats as you would understand, but you and me and maybe a couple of the guys in our research groups, we're the only ones who are interested in that.
46:14
Cliff Asness: And I get it. I'm not being critical.
46:16
When you have someone who has a very small part of their portfolio with us who sees the last four or five years and how we have moved the lot with value, they're not studying it to the level that you and I are, nor should they.
46:29
It's not enough [inaudible] full-time.
46:31
So I get it, but it can be frustrating at those times, let's just say that. Jim O’Shaughnessy: Yeah.
46:38
Next thing I want to talk, you've written a lot about this and I have personal experience with this, when I was starting out and got my first big client, it was a wonderful family where he was a gold prospector and salt of the earth, sold his company to Barrick Gold up in Canada.
46:56
He'd read ‘What Works on Wall Street’, totally bought in, and so I flew out there and spent a weekend with him and by the way, he's the guy who gave me the line that I stole from him, which is my time horizon is infinite because he was 70 plus when I flew out- Cliff Asness: [inaudible] for the next generation.
47:16
Jim O’Shaughnessy: Right.
47:17
And I was like, well you should probably want this more conservative stuff over here, and he just looked at me and we were sitting at...
47:23
It was a great ranch and like you and me, we were talking about how we have the photos of our kids and family, he just had this wall on a desk of photos of his family and he gets this smile on his face and he looks at me and he goes, Jim, I have an infinite horizon.
47:41
He just points at the kids.
47:43
And I'm like, oh man, I love you.
47:46
So anyway, we were doing our really aggressive Momo stuff as you would expect was doing really well because of the bubble, and so he had an advisor who used to run risk at Bear Stearns and he came to my office here in Greenwich and he's like, Jim, I got to tell you something man.
48:05
Yeah, you got to turn yourself into a hedge fund. And I'm like, but why?
48:08
And he is like, dude, the alpha that you're generating over here, you can do the research for the short side, just do it.
48:17
I elected, for different reasons, not to because I was a little worried about the market at that time.
48:25
But you've written, and I think you deserve to be congratulated for this because you are a massive hedge fund and yet you are the first to point out that what's happening honestly is the name works, the two and 20 really works, but there are a lot of people and will remain nameless but who are really stock pickers charging two and 20 and not hedging.
48:50
Cliff Asness: I'll say this.
48:53
So life's been good to us long term, we've discussed it here, we've had some really painful periods, we're far from perfect, but when we call something a hedge fund, we tell you what it's correlation and beta we expect it to be.
49:06
Most are trying for true zero.
49:10
Sometimes when we're going to run against the hedge fund industry, the client wants us to run a similar beta to them because it's going into a portfolio, but in our view, a true hedge fund is long something and short something and trying to make money on the spread, not on markets going up or down.
49:25
Jim O’Shaughnessy: Exactly.
49:26
Cliff Asness: We wrote a piece I think you're referring to and I've updated it through some blogs over time in very, very similar form called ‘Do Hedge Funds Hedge?
49:33
’ Jim O’Shaughnessy: Yeah.
49:35
That is the piece I'm referring to.
49:36
Cliff Asness: I think it was in like 2001 or 2000, was a- Jim O’Shaughnessy: Long time ago.
49:41
Cliff Asness: This is something I'm sure you have many of these, I do, where the out sample period is considerably longer now than the in sample period that we had for the paper.
49:52
That'll make you feel old.
49:54
When you go we wrote this paper thinking 11 years of data was good but now we have another 26 years of data whatever.
50:00
Jim O’Shaughnessy: Exactly.
50:01
Cliff Asness: And it has held up.
50:02
We basically took the hedge fund indices, which admittedly I wouldn't bet my life that they're very good.
50:10
Jim O’Shaughnessy: No, I agree.
50:11
Cliff Asness: Who reports to hedge fund indices?
50:13
A client once said to me, you use hedge fund indices, do you report to them? And I'm like, no.
50:18
Having said that, you go through the names, some really do and they are certainly out there as hedge funds and they're the best we got.
50:26
And we showed that A, they ran average betas certainly long short equity funds.
50:34
We used to joke, we literally had a page in the book with long in a big font and short in a small font 'cause they ran kind of 0. 5 betas, they were 0.
50:39
8 correlated to the stock market.
50:46
They also, even before it was the rage as it is today, they owned a fair amount of illiquid assets.
50:52
And we used just some lag beta techniques to tease out, this would not work on private equity, three months of legs would not help.
51:00
But if someone owns microcap stocks that trade every six weeks, it does help.
51:06
And you could show that the betas were actually somewhat higher.
51:09
Higher beta means lower alpha if it's been a bull market, more of your money has come from just being long.
51:15
And we showed there was effectively no alpha at the end of the day.
51:20
And again we don't think this applies to any specific fund.
51:23
If someone says to me, does that mean your funds stink? I'd say no.
51:28
It's just like the average active manager, certainly after fees and costs, has to underperform a cap weighted index, doesn't mean you or I don't believe in what we do.
51:40
That's the average, but it is an interesting thing to start with.
51:43
It's an interesting thing to know what the lake you're fishing in looks like.
51:49
Doesn't mean you can't catch some great fish.
51:51
But we wrote that, I got yelled at, we were very young in our careers at that point and our ages, those tended to go together.
51:58
So I was probably as arrogant as I was today, but I was more careful back then.
52:04
So I had about six or seven fairly famous hedge fund managers called me up to yell at me about this paper.
52:12
And some of them were quant enough to understand it, some of them were just like, you're dissing the industry, why are you doing this?
52:20
This was arrogant to one of them who was a bit of a jerk on the phone.
52:23
He's like, why are you doing this crap?
52:26
And I said, I guess because we think it's true.
52:29
It's not enough of a reason?
52:31
Most of the time I was very nice because I was a little scared.
52:35
One guy, I don't know if he'll ever even know that I've told a story in public maybe 20 times, I don't know if it's ever gotten back to him, but a guy named Richard Perry who I think he came out of the Goldman Mergers group.
52:47
If you did a taxonomy of where people in hedge funds started, there was Tiger, there was there, there was Commodities Corp, there was some key kind of breeding grounds, really smart guy.
52:57
He was the last guy who called me about the paper.
53:01
So I pick up the phone just with trepidation knowing what I'm in for and he just goes, that paper you wrote, yeah, good for you, that's pretty much what we do.
53:12
Ironically, a client once sent me to analyze some of his returns and maybe this is why he liked the paper.
53:20
He meant the we as the royal we that we're getting the industry right because his returns look great.
53:25
[inaudible] lag beta, lots of alpha, but I so appreciated that, even if it was one out of eight famous person call me up and just say, you got it right.
53:36
It was like, good job kid, but the other seven were kind of unpleasant.
53:40
Jim O’Shaughnessy: Well see, that's one of the reasons I admire you so much because you have a consistent record of just calling them the way you see them, and listen, obviously I passionately believe in what we do.
53:56
I think it's the right path for many.
53:58
Is it the right path for all? No, absolutely not.
54:03
For most people, honestly, I tell them buy a really low cost ETF global in your 401k. Keep adding to it. You'll do great. Cliff Asness: Yeah.
54:13
I was one speaking to a conference and someone asked me what advice I'd give to the man on the street to outperform, and I said something like, I'm friendly with this man, I'll give you his phone number, there's this guy named Jack Bogle to talk to, and I forget where, it may have been clients, it may have been reported somewhere.
54:34
People were like, isn't that inconsistent given what you do?
54:38
And I'm like, I don't think it's inconsistent at all.
54:40
Jim O’Shaughnessy: No, not at all. Not in the least.
54:42
Cliff Asness: It's hard to begin with and it's hard to stick with, and anything you're not going to stick with is not a good idea, even if it's a good idea.
54:50
So basically this gets rather morbid, but if something happens to me, my wife knows there are a handful of firms, you would be on this list.
54:59
Jim O’Shaughnessy: Oh, thank you.
55:00
Cliff Asness: But a handful of firms out there, and so would Vanguard or the equivalent of Vanguard for a big chunk of the portfolio 'cause I don't think she's going to want her or my kids want to spend their lives doing this.
55:11
Jim O’Shaughnessy: And I like your point about it's not inconsistent at all.
55:17
It is very consistent with empirically based people like you and me.
55:24
If you're not going to use us, then use Bogle, man.
55:26
Cliff Asness: I wrote a piece a while ago in response, I forget who wrote this, but it's got a big splash because it said index funds were worse than Marxism.
55:37
And A, I appreciated that someone thought Marxism wasn't that great, which was nice, that's not always what you read these days.
55:43
Jim O’Shaughnessy: Exactly.
55:46
Cliff Asness: And there was a little sophistication and then a horrible point, the sophisticated part was that index funds are free riders, and we need some active managers to set prices, and what markets do is set accurate prices, but I think what the authors viewed as a bug, I viewed as a massive feature.
56:08
Not everyone in the world should be researching either quant or active stock picking should be spending their time doing that.
56:16
They can get the average return on the market, which this year's side is a pretty good thing to get for a four basis point fee and let someone else worry about that.
56:29
And there is some equilibrium.
56:30
The amount of brain cells that people in our industry and academics have wasted on the what if everyone tried to cap weight index?
56:38
And it's kind of a brain breaking thing because where do prices come from?
56:42
Somebody has to be trying to make sure that that McDonald's and the corner grocery store have a different market. But how much?
56:49
I once had Jack, we did a podcast for a couple years and then some version of COVID and value when we suspended it, we might start it again one day, but Jack was nice enough to come on, and I may have the specific number wrong, but we got into this exact topic and I said, Jack, we got to get your number.
57:05
How much of the world can index in the way you would call indexing?
57:08
He'll also go on and explain that a hyperactive ETF in one industry is not what he would call indexing, and he doesn't like people overlapping those things, but in what he would call indexing, he said, precisely 75% of investors can index and 25% have to be trying to pick price things.
57:32
And I said, where'd you get that from Jack?
57:34
And he smiled in a puckish kind of way and said, I just totally made it up.
57:40
Again, if someone goes and plays back that podcast, and it's not precisely that I apologize, but always have to get better with the telling, no?
57:48
Jim O’Shaughnessy: Yeah, always.
57:49
It was like when I did the online version, what we ultimately came back to with canvas of the customized portfolios, I called it NetFolio, and I was trying to get John Neff, who many listeners or viewers won't even know who he is.
58:05
Cliff Asness: Famous value manager.
58:06
Jim O’Shaughnessy: Legendary value manager, and a wonderful gentleman.
58:11
I went down there to have lunch with him and just what a wonderful guy, and we're talking and he is like, I'm very pleased and flattered that you would like me to come on your advisory, and I think it's a really interesting idea.
58:26
Anyway, then he declined very graciously.
58:29
But anyway, we started talking about investment style and as I'm listening to him, I start to get this smile on my face, which he goes, I know what you're going to say. And I said, really? What am I going to say?
58:43
He said, you are going to say I'm a closet quant, and I went, that is exactly what I was going to say.
58:51
And here's what I love Cliff.
58:54
He just sat there and he got this wonderful smile on his face and he goes, I prefer to call myself disciplined.
59:03
Cliff Asness: Well, it's funny.
59:05
I'm sure you've seen, I have three of my partners wrote a paper called Buffett's Alpha, where they took Warren Buffett's record, regressed on both the market and some of the quantitative factors, found that it had explained pretty much all his alpha and then spent a significant amount of the paper saying why what he did was still amazingly awesome.
59:28
One thing, he was doing this stuff certainly before I was, maybe even before you were, so it's not like he was a sneaky quant taking our stuff.
59:40
Second, he clearly wasn't a quant.
59:41
He ran a very concentrated portfolio.
59:43
You and I know to say it acts like a factor, doesn't mean it's a factor.
59:46
It says he's buying cheap things with low betas and high profitability.
59:52
And ten, this was part of their paper, they showed that he had some horrific, I don't know, three year long drawdowns in both absolute and relative return space and never backed off at all.
1:00:06
Jim O’Shaughnessy: See, now people have asked me because I'm leaving OSAM, as you know, and I'm starting O'Shaughnessy Ventures, which is a very different kind of company.
1:00:16
So I- Cliff Asness: I know, you're getting into the cannabis and the crypto industries, I understand.
1:00:20
Jim O’Shaughnessy: I am funding psychedelics because- Cliff Asness: A little closer than I meant. Jim O’Shaughnessy: Yeah.
1:00:24
I think that the potential there is awesome.
1:00:29
Anyway- Cliff Asness: We got to redo this on psychedelics.
1:00:32
I've never done one, but for your podcast, if you and I both go there- Jim O’Shaughnessy: I'll do it. It's a date. It's a date.
1:00:41
But when they ask me, so what are you proudest of in your career?
1:00:45
I always and instantly give the same answer.
1:00:49
I am proudest of the fact that I never overrode a model. That's it.
1:00:57
Cliff Asness: I love that.
1:00:58
Jim O’Shaughnessy: That is what I am proudest of.
1:01:00
And I learned from the guy who's now the head of all research and senior portfolio manager and my co-CIO, he told me after the great financial crisis, he goes, hey Jim, do you remember during the crisis when every morning I came into your office and looked at you and just said, hey. And I went, yeah. So?
1:01:23
He goes, the reason I was doing that was I was so panicked that I had to see you with Bach on and- Cliff Asness: Relaxed.
1:01:34
Jim O’Shaughnessy: Relaxed.
1:01:35
And he goes, that's what got me through.
1:01:36
Cliff Asness: Well Jim, you and I are not wired the same way.
1:01:40
I'm somewhat well known...
1:01:41
There's one monitor punching incident 13, 14 years ago that still being dredged up.
1:01:46
A running joke at my firm and at my home is, again, I talk about the long term all the time, and I'm wired to understand what one has to do to do what one has to do, but I'm not wired to be relaxed about what one has to do.
1:02:02
So I love what I do, but interpret it a different way.
1:02:06
I have built almost a perfect torture machine.
1:02:09
Sticking with something and not overriding it through its bad times because you know it will work out is really great if you can pull off the Bach thing, but if you're going to hate every day it's not working.
1:02:21
It's taking it to another level.
1:02:24
Though, again, you're free to disagree, but I'm going to guess we're on the same wavelength here, not overriding a model is not equivalent to not changing and evolving.
1:02:32
Jim O’Shaughnessy: Oh, absolutely. We evolved forever.
1:02:38
Cliff Asness: We try very hard, I will not claim 30 years of perfection on this, but not to make a change to a model in response to a bad period.
1:02:49
Jim O’Shaughnessy: Bingo.
1:02:50
Cliff Asness: I have literally imposed waiting periods.
1:02:53
Jim O’Shaughnessy: So have I.
1:02:55
Cliff Asness: If three, six months from now you still think this is the right thing to do, and it's not the heat of the moment, but I won't claim perfection.
1:03:03
I do think changes you make in response and you're fully convinced you're doing a good thing, but if it's 'cause you're in a lot of pain, those are about the only negative five sharp ratio strategies aside from overcharging or over trading that I've ever seen.
1:03:21
I'm fairly convinced we're all wired to somehow, if you could bottle that and reverse it, which I've also failed to do, but I think you'd be on to something. Jim O’Shaughnessy: Yeah.
1:03:32
And thank you for making that distinction too, because some people bought into it way too deeply.
1:03:40
So when we moved to multifactor models and composites and quality and financial strength and all those, those were all the result of ongoing research.
1:03:51
And the way I would explain it is we researched the underlying models the way stock pickers research the name. Cliff Asness: Right.
1:03:59
And they don't have the same name forever.
1:04:00
Jim O’Shaughnessy: But I'll tell you, man, when we would go and present it, there was that certain segment, thank God it wasn't huge, but they were like, you are abandoning what you said that you would never override a model, and I'm like, I'm not overriding.
1:04:15
Cliff Asness: All right, let's just put two poles up that can both be frustrating.
1:04:21
There's the much more common pole of you got to change what you're doing, it's not working, and then there's the pole of if you make a change, it's the natural evolution of research.
1:04:31
As I always describe it, this is the same research we did to come up with the original stuff.
1:04:36
Jim O’Shaughnessy: Exactly.
1:04:37
Cliff Asness: We never planted a flag and said, there is nothing else to find in the world.
1:04:41
I will say, I think both can be an error without making some of these errors myself.
1:04:47
I think the second error of getting mad at us for changing things, I have a lot more sympathy for that.
1:04:53
That is someone who's at least philosophically aligned, who's maybe taking it more than a few steps further than I think is right, but they've at least internalized the most of this is coming up with basically good things and sticking with them.
1:05:09
I can work with that person.
1:05:11
Jim O’Shaughnessy: As can I. As can I.
1:05:12
Well listen, I've already run over time with you, I know you've been very gracious with your time.
1:05:17
Cliff Asness: It was a lot of fun.
1:05:18
Jim O’Shaughnessy: So at the end of all my podcasts, I am going to wave a wand, and I'm going to make you the emperor of the world for a day.
1:05:26
You can't put anyone in prison, so that fantasy's out the window.
1:05:30
You can't put them in reeducation camps, you can't kill anybody, but what you can do is you got a magic microphone and you can say two things into it and it will incept all 8 billion people on the planet are going to wake up whenever their morning is, and they're
1:05:49
going to think that the ideas that you're about to give me where their own idea, and not only are they going to think it's one of the greatest things in the world, they're actually going to follow through and start doing that thing. What two do you got for them?
1:06:00
What two do you got for them?
1:06:01
Cliff Asness: Study statistics and stick to your principles. Jim O’Shaughnessy: Boom. Those are great.
1:06:11
Cliff Asness: I've told my kids, and they could certainly handle calculus, I would study statistics ahead of calculus if I had a choice.
1:06:19
And that's not being a quant.
1:06:20
That's for reading the newspaper. Jim O’Shaughnessy: Yeah.
1:06:22
I used to say, anytime the math gets above the algebra, it's pretty certain you're going to lose your money. Cliff Asness: Yeah.
1:06:33
Linear regression I can handle, not much more. Jim O’Shaughnessy: Yeah. I'm with you.
1:06:38
Cliff Asness: I used to be better.
1:06:39
When I was a PhD student... I know I'm over time.
1:06:42
One of my dissertation inside members, there are three inside, three outside members of our committee strongly encouraged, and I listened to him to rewrite my dissertation in continuous time finance.
1:06:53
And I said to him, you know it's going to come out to the same answer?
1:06:57
And he was like, of course I know that, but this is advertising.
1:07:01
Jim O’Shaughnessy: Right. Oh man. Well, this was so fun.
1:07:07
Maybe we'll schedule the psychedelic one for sometime next year.
1:07:11
Cliff Asness: Someone at my firm, we panicked, I joked about that.
1:07:15
I was kidding, for anyone who's listening, Jim O’Shaughnessy: Joking. We're just joking. We make a lot of jokes.
1:07:20
Well, listen, Cliff, this has been a huge delight for me.
1:07:24
Thank you for making the time.
1:07:25
Cliff Asness: And like John Neff, you are one of the gentlemen of the industry in general and our corner of the industry in particular. So thank you, Jim.
1:07:34
Jim O’Shaughnessy: Thank you, Cliff. All right, cheers.
1:07:36
Cliff Asness: Bye everyone.