0:00
People debate whether the prospect theory is real that losses hurt more than gains. It's very real to me. And me.
Search this video
0:06
Um in good years, I'm like, well, there's a lot of randomness to this.
0:09
I'm just you know, I I think we'll make money long term, but but that was probably luck.
0:12
In bad years, I'm like, I don't invest based on this.
0:16
I'm pretty good about avoiding that, but I have every bad emotion that that we attribute to investors. Losses hurt. They're not supposed to.
0:26
You're supposed to just do the rational strategy and keep repeating, but uh we live in the real world.
0:33
[Music] Welcome back to another Infinite Loops.
0:37
I'm Jim O'Shaughnessy, and I'm thrilled to be joined today by my friend Cliff Asness.
0:42
Cliff is the co-founder and chief investment officer of AQR Capital Management, one of the world's largest and most influential quantitative investment firms.
0:51
Please enjoy this episode with my friend Cliff Asness. Cliff Asness.
0:58
It is so great to see you. You had a great 2025.
1:01
It was very It was very nice year.
1:05
It It It must have felt really good, right?
1:07
It feels about a third as good as the equivalent bad year feels bad.
1:15
Oh, which is >> Which is very good.
1:17
But you know, I people debate whether the prospect theory is real that losses hurt more than gains. It's very real to me. And me. I yeah.
1:27
>> good years, I'm like, well, there's a lot of randomness to this.
1:29
I'm just you know, I I think we'll make money long term, but but that was probably luck.
1:32
In bad years, I'm like, I I'm I don't invest based on this.
1:38
I'm pretty good about avoiding that, but I have every bad emotion that that we attribute to investors. Losses hurt. Oh.
1:47
And you're They're not supposed to.
1:50
You're supposed to just do the rational strategy and keep re- repeating, but uh we live in the real world. Yeah.
1:56
And you know, one of the things I love about you though is you get more aggressive when you're having a bad year, right?
2:04
Uh By the way, I did something when I was at OSAM, we did the same thing.
2:09
I said to my people, I don't want you on the phone when we're 1,000 basis points ahead of our benchmark.
2:16
I want everyone, including me, on the phones when we are sucking wind.
2:21
>> I remember there we've had basically, you know, two and a half, three bad periods.
2:26
There was the tech bubble.
2:26
I'm I mean, Oh, you're already rich now. I know we are.
2:31
So, a lot of people listening, you know, that's like I think I read about that.
2:35
>> I I don't know about that, Daddy.
2:38
Some of the things we do, not everything, during the GFC.
2:39
Individual stocks were fine during the GFC.
2:41
It was um um but there were some parts that were really annoying.
2:46
And then uh two and a half years from kind of mid '18 through the end of 20 20.
2:52
And we do get more aggressive in the sense of being out there, uh you know, explaining.
2:59
You know, we'll do this in good times, too, if people want to hear it.
3:02
They just don't want to don't need to hear it >> Right. as much.
3:04
Though I do vary a little bit.
3:10
If we lose And by the way, we win a lot more than we lose.
3:13
Somehow I'm only focused on losing here.
3:15
But if we lose for reasons that I think are for instance, valuation based, um where I think things are getting a little stupid, then I get more aggressive. >> Yeah.
3:28
>> Um long term, we we just did this.
3:31
We wrote a blog on this about two years ago.
3:33
The correlation of our strategies to, you know, what people think of as basic value, long short, you know, Fama-French HML, or or or or somewhat more sophisticated versions than that, it's about 0. 2. It's not that large.
3:46
Uh it's been negative for rolling three-year periods.
3:51
Uh but there have been, particularly the tech bubble and and the period culminating at the end of kind of COVID, were value disasters.
3:57
And when they're value disasters, Yeah.
4:02
Um if the fundamentals are not why we lost, if it's just prices doing this, then I get more aggressive just cuz I believe in it.
4:09
If we lost because of momentum or quality or or more proprietary things.
4:14
We do a lot of things I will not talk. I'm sure you do, too. About.
4:18
Um I will I and the firm will explain what happened, of course.
4:25
But I wouldn't get more aggressive, like take more risk or even or even get more pugnacious in the world about it because, you know, for instance, if you lost because of a momentum, then you just change your mind and apologize.
4:37
And you know, we do believe if you do that over and over again, you win, and we think we've demonstrated that, but it it's when you lose because cuz the world goes mad, if you're right about that, that's the time we definitely get more more publicly aggressive, you know, writing a million things, look at this, this is crazy.
4:56
And last time you and I spoke, we talked a lot about the value spread. >> Yep. Um it's it's still high.
5:02
It's nowhere near as high as it was, so >> Right. Right.
5:06
>> Which is good news, I guess. Yeah.
5:06
I I think the the point about uh the dot bomb uh is really uh illustrates that it's kind of good that we've been around as long as we've been around because I remember I wrote a piece I don't forecast, right?
5:22
I listen to the numbers, and if it's if they are like crazy, then I'll write something, right?
5:29
And so I wrote a piece called the Internet Contrarian in April of 1999, in which I said, >> I'm sure I read it. Yeah.
5:35
95% of these companies are either going to be carried out feet first or be 90% lower, even the winners.
5:43
And I used Amazon as an example. >> You got lucky there. >> Yeah, I did. It total luck.
5:50
Um and will be 90% lower.
5:50
Cliff, the hate email >> Oh.
5:55
cuz this is the beginning of email, right?
5:57
The hate email I got because what? 39 years old.
5:59
And they're like, why are you such an old fogey?
6:03
You don't You don't understand the new world.
6:06
>> old if you if you prefer to pay a lower price for something. Exactly.
6:10
But you know, the mania that typified that time was like it it was all encompassing.
6:18
It was like a mind virus.
6:20
>> still think uh literally on the value spreads that we measure, um the end of 2020 got a little bit crazier, which I never saw coming.
6:28
I you know, and I admit this.
6:31
You know, a lot of my thinking is has evolved based on saying, we saw the craziest thing in 50, 60 years of good data in '99, 2000.
6:40
If someone had asked me then, are you going to see something crazier in your career?
6:44
I definitely I you know, I don't know if I'd say definitely no.
6:50
That's a stupid thing in our business to ever say.
6:52
But I'd say it's highly unlikely, right?
6:53
This is the most extreme thing in 50, 60 years.
6:56
Um people like Jim O'Shaughnessy and I will still be around.
7:03
The notion that if something happened 100 years ago, you could imagine the world forgets. Sure.
7:07
But you know, I was I was like 33 at the time of the tech bubble.
7:12
I'm like, in my career, so it's that 20 years later it's going to happen again, and and it happened again.
7:18
Um it now the value spreads got wider.
7:21
I still think the dot-com bubble was a little more extreme in a different way because the correlation of value and quality were different.
7:31
The dot-com bubble, value spreads were here, and they were all of the, if you'll pardon the technical language, crap companies. >> Yep.
7:40
In 2020, it wasn't terrible.
7:40
It wasn't like you had to short the hell out of quality, but it wasn't on both dimensions.
7:46
It was really evaluation, at least how we see it.
7:49
We saw it exactly the same way during the dot-com uh because we would when we would sort, right, just on our value uh composite, right?
7:59
And there'd be names like Citicorp there, and without the quality filter, you'd go you'd you would have been backing up the truck for city.
8:10
But when you put the quality factor in, you're like, holy [ __ ] I'm not touching that, right?
8:14
Um so, yeah, it was a it was a really interesting time.
8:18
Um but then the 2020, like I actually thought of you when I was watching those guys >> The GameStop guys?
8:27
>> Yeah, the GameStop guys.
8:29
I I've heard his real name like 20 times. I watched the movie.
8:31
I just don't remember it.
8:33
It's more accurate than saying I don't know it. >> Yeah.
8:35
But the reason I was thinking of you was like even I may be get agitated a little less than you do. Uh it's pretty safe bet.
8:46
>> But but like I was agitated.
8:46
I was watching it, and like because I was thinking, this is going to [ __ ] up a generation of young investors.
8:53
They're going to think that this is the way you make money.
8:57
Well, that prediction, I would say, is on its way to coming to coming true.
9:03
Bear markets are when stocks return to their rightful owners.
9:08
And those guys were not rightful owners.
9:11
I avoided watching the movie for a while um cuz I knew it would make him out to be a little bit of a hero.
9:14
Eventually, I had to cave.
9:16
In fact, I wrote an op-ed on this.
9:18
It was in the Wall Street Journal.
9:19
Um where I explicitly said, I'm going to to complain about this movie that I have not watched.
9:25
I try to avoid using the meme stocks as like my complete example cuz it's kind of unfair argument to take the most extreme example. Agreed.
9:34
>> Um as but as long as you remember that that's not a full argument.
9:37
The most extreme is edifying.
9:39
It It can tell you know, you would have to argue that nothing else this is in isolation going on.
9:45
And I I do think the meme stock phenomenon, I'm again, I'm going to sound like a very old man, um but the, you know, gamified 24/7 electronic trading, I am I'm fairly convinced there are a lot of I'll use the term investors, but there should be air quotes around this.
10:02
Um who can't distinguish FanDuel's from Robinhood. It's just an app.
10:11
Uh and they have their little systems.
10:11
I I I read What did I read this morning?
10:15
I was reading about some some some person who gives their financial advice out for for money and had a system that worked.
10:22
And this thing is And they blew up.
10:25
And they're saying they're selling it, right?
10:26
They lost They This one actually around Christmas um um lost a a whole bunch of money.
10:32
Um and they're like explaining, "Well, it was a Martingale system."
10:35
And I'm like, I'm reading this and I'm having this internal dialogue.
10:39
I mean, you mean the thing that's been around for like 400 years where you just keep doubling the bet?
10:46
And that's exactly what it was.
10:48
And First of all, the guy sounded like he rediscovered it.
10:50
Like, "Oh, you never lose."
10:53
And I'm like, "Yeah, with an infinite bankroll and and an infinite will. Do you got that?"
10:59
And it's just, you know, the old cliché pennies in front of a steamroller.
11:06
Advocating the Martingale strategy to to the individual out there who has no clue.
11:11
Just saying you keep doubling and eventually you win and you make back your initial your initial bet.
11:16
They leave out the risk of ruin.
11:18
And so pennies in front of a steamroller is literally being advocated.
11:22
And that was just this morning.
11:24
I don't know how widespread that one is, but that was my thing.
11:28
I got very unpopular with folks who were using massive amounts of leverage on illiquid assets.
11:34
Well, that is the death combination. It really is.
11:40
And I was at a club in Greenwich and talking to somebody who had been at Long-Term during their heyday. So this is way back.
11:49
And he got really mad at me when I pointed out that that amount of leverage it isn't if you're going to die, it's when you're going to die.
11:58
And I I it flummoxes me that we don't learn that lesson.
12:05
Yeah, I mean, leverage is always such a difficult topic.
12:08
Um and I I really doubt that we're in disagreement on this, but it can be a wonderful tool.
12:14
If you have a very diversified portfolio, um if the bets truly aren't the same, um it can it can help you balance out your bets.
12:23
You know, I always say um example we've been given for like 30 years is if you have equal skill at bond, stocks, and commodities, for instance.
12:33
And you take the same dollar bets in each, you're a commodity trader who dabbles in equities and it and bonds are irrelevant.
12:42
But But if you delever one, and you got to do both directions, and and lever the the lowest one, you create some balance.
12:50
But we've always imposed limits on it.
12:52
Like we've never done the so-called basis trade. Right?
12:55
Buy off-the-run Treasury, sell on-the-run Treasuries.
12:57
It's It's the best example because you literally can cash flow match the thing.
13:01
And it's the same government cash flows and as as as nervous you might be about the budget deficit, the notion that they will default on only selected bonds, it's a little weird.
13:14
So it's it's about as close as you can get into a true arbitrage in that sense.
13:19
And it still rises up to kill people all the time and exactly at the times you don't want to be killed. Right.
13:24
Um so you know, it's not it's it's it's not a Martingale, it's a different system, but it's very similar characteristic that it works most of the time.
13:35
Um but But when it ain't working, you know, let you know, here's another example.
13:41
We have the arrogance and I'm sure you share this arrogance to think that in the last 30 years since the early '90s our measures of of so-called factors have gotten better than they were back then.
13:53
And one thing that comes up is there are still a fair amount of indices for amount of people who trade kind of the old school ones.
14:00
So why not go long ours and short the old school ones?
14:05
Um That You can do that to some extent, but not much.
14:09
Because you got to lever the bejeezus out of that trade.
14:12
Because for instance, you know, if you're doing a momentum or a value strategy, you've taken out that part.
14:17
And you're leveraging up the idiosyncratic part, which may in fact be fairly high risk-adjusted return if your measures are better.
14:26
And beautifully like uncorrelated with things in the world cuz you're value on both sides, momentum on both sides.
14:30
You just have to lever it an uncomfortable amount.
14:36
Um and so that's on my to-do list to one day figure out how to do that without dying, but I I haven't gone down that road yet.
14:44
You know, the other real shock to quants was the global financial crisis, right?
14:50
We had a guy from who had What had been Lehman, but Barclays took it over.
14:52
He was a consultant to quants, right?
14:54
And I'm sure you've met with this guy.
14:56
I don't remember his name, but he came out right after and basically said to us that 68 and probably that's probably [ __ ] wrong, but 68% of quants overrode their model.
15:11
In other words, they freaked out and their model was overridden. Yeah, we didn't do that. >> No, nor did we.
15:21
You can always debate what is over You know, every time you do research and you change your model.
15:26
>> It's kind of a philosophical, but at no point did we say, "All right, take this all off.
15:30
We We don't know what's going on."
15:32
And that's That was my follow-up question.
15:33
Because I said, "Well, you know, we're evolving these models all the time.
15:37
And when we find something that's better, we put that we take out the old one that no longer works as well, and we put the new one in."
15:47
Uh and I said, "But so what do you mean specifically by overrode the model?"
15:50
And he basically said what you just said.
15:55
They were like, "We don't know what's going on.
15:58
We're just Yeah, now if you discovered that you truly took too much risk.
16:05
Um I will say in August of '07, we cut some positions in our most volatile places cuz we thought we had to. Yeah.
16:12
Um there's a difference between we actually think this is this is crazy enough that we're hitting risk limits and we don't like the model.
16:21
The vast majority of what we did, we did not do that in um because we weren't particularly worried about survival.
16:30
It was just a really painful Yeah. >> week. Yeah.
16:33
Um And And the GFC in total was actually not that bad for quant equity selection.
16:39
August of '07 and those events get conflated a little bit.
16:44
I I think of August '07 as the kind of the precursor.
16:48
The first maybe bad month uh for credit was July of '07 and I think a lot of people had added quant and had no idea what it was. Right.
16:56
So it's like the first thing you cut and and and you and I are cursed with doing very liquid things, which is wonderful as an actual investment property, but it does mean you're the world's ATM when they feel they need it.
17:10
So August of '07 was a harrowing week, mostly recovered in the following 2 weeks.
17:15
Actual calendar year 2008, I think we were slightly slightly up.
17:19
It was not a banner year.
17:21
Uh value went through a disastrous period in the middle, but bounced back a lot.
17:25
But a lot of the memories of of quant as we see it and you know, not every quant is exactly the same, but we do have We do overlap was really comes from August of '07.
17:34
There was no global financial crisis at that point.
17:39
That was a little adumbration of what was going to what was going to come.
17:43
One of my theories is that quant also can be the canary in the coal mine.
17:52
Um because in my research and I'm sure you've seen it in yours, uh I I'll give you an example.
17:57
This is one going up, but it works going down as well.
18:04
Um and I can't remember the year it was.
18:06
I think it might have been 2004 or 2005.
18:09
And all of a sudden, a bunch of tiny steel-making companies start showing up in our growth portfolio.
18:17
And I'm like, "What the [ __ ] is this?
18:19
This doesn't make any sense to me, right?"
18:21
And so we bought them, right?
18:24
Because the model said said said said buy them.
18:26
Well, about 7 months later, there was a Fortune or a Forbes magazine about how China was building one Boston a month.
18:36
And then I'm like, "Oh, they're buying all the steel, right?"
18:39
Um Do you Do you see that?
18:43
Are you You You You have a much broader portfolio than We were much more concentrated than you.
18:49
If we're right about what we do, and again, I think the evidence is is there, but I'll I'll always say if, you are picking up mispricings.
18:55
Maybe I briefly believe 35 you know, PhD students at the University of Chicago.
19:02
You have to be in efficient markets uh risk guy, but I wrote a dissertation on on the early versions of the momentum strategy and immediately we knew it's highly unlikely this is working because of rational risk space. Right.
19:15
Um therefore, if you're picking up mispricings, there're going to be a ton of stuff like that.
19:19
If you're concentrated, you have to worry about it more, right?
19:21
What we're we're adding these steel companies, um you don't want to change your model, but you're going to look at it hard.
19:29
Just to understand what it's doing.
19:29
For us, we try to be industry neutral mostly, not entirely.
19:33
Um and we'll have a thousand longs against a thousand shorts around the world, but in more micro small ways.
19:41
Um we're a really boring portfolio to actually talk about.
19:46
I mean, when people ask me, "Do you own this stock?"
19:49
which happens all the time cuz they're like, "This You're a professional investor, we're at some party. I'm like, I don't know.
19:56
And I love to say that cuz it just makes people's face go You don't know? >> Exactly.
20:00
>> And they give you something like, are you kidding?
20:02
Are you grossly incompetent and negligent?
20:05
I'm like, no, the bad news is occasionally when I do know about an individual name because it it's we we're not short GameStop, but it's more like, you know, you guys are short GameStop and you've lost a lot on that.
20:19
That would be to to Even that doesn't really happen.
20:23
>> little percent that you might own.
20:23
Oh, or short or be short.
20:27
>> my story about talking about shorting a meme stock on TV? No. No.
20:29
Let's hear Let's hear it.
20:32
This is one of these things where I pretend I regret, but I'm actually a little proud of. Okay.
20:35
Um that's actually kind of a go-to move of mine.
20:39
Um but so this is may maybe 2023.
20:45
I could be off by you know, the years in my stories I get increasingly confused. Same with me.
20:49
I particularly with COVID.
20:51
With COVID I have no idea if it happened before COVID.
20:53
This is a different time, but we had a really rough 2 and 1/2 years through like October of 2020.
21:01
And then things were fabulous and they're they've stayed fabulous for 5-plus years.
21:04
And you know, we know 5 years of fabulous is plus 2 and 1/2 years of pain is actually very good, but it doesn't make the pain any any more pleasant. >> Right. We shrunk a lot. That's his business.
21:14
You shrink when things So when things were probably good again, my uh team that does this stuff wanted me to go on TV and talk about it.
21:25
And they usually we I go on TV occasionally, but it it's not a big thing for us. Yeah.
21:29
Um so and and and so I was a little surprised and they're like, no, it's time to tell people, you know, as gently as we can it's a we were right.
21:38
So we're planning the segment.
21:39
It's on CNBC and you have a pre You've done this a million times.
21:41
You have a pre call not to script the whole thing, but just to make sure you have something to talk about. Right?
21:46
Um They want me to give them some names long and short.
21:52
They know we do both directions.
21:54
And I and I'm doing the standard quant explanation and that's kind of silly.
21:58
I usually don't know them.
21:59
We're betting on an idea that's working that that cheap profitable you know, companies that have been heading up lately that are buying back their own shares blah blah blah.
22:11
We we were buying the same stuff. >> That Yeah.
22:14
Um but I don't know the names and they're like, well, everyone in this segment gives us names.
22:18
So it's kind of a deal breaker and I'm like, all right, I'll give you names.
22:21
So I asked my team to put together Um I said, do the US because, you know, it's a US show.
22:28
I asked them for two criteria which may have been the null set, but one some stock somebody's heard of.
22:37
Um it's not that fun to to to say, you know, blah blah blah Acme whatever that No No one's not going to resonate with anyone. >> Acme Pharmaceutical. Wile E.
22:48
Coyote Micro cap No, exactly.
22:51
Sitting on top of a rocket with fuse.
22:54
Um second let's look for ones that are bad on most of the things that we publicly talk about.
23:01
Because I think it's easier to explain it's bad on the following six things than trade-offs. Right?
23:07
And there's some things you be short or long that are fabulously good or bad on four things and are quite the opposite on two. Yeah.
23:15
Um but that's that's a more subtle argument.
23:17
So I'm like, try to give me ones And and And I It's best we can. >> on CNBC. No. So buy, sell, or hold. TV in general.
23:24
I mean, one of the shorts they gave me was AMC, the moving company.
23:29
The movie company, not moving company. >> this.
23:32
I didn't see the segment, but keep going.
23:35
And I No, I brought it on myself cuz I was obnoxious.
23:36
Um I was trying to be funny, which is how you get in trouble. >> are funny.
23:42
It's not mutually exclusive with obnoxious though.
23:45
So I I The deal I made with them was they got to give me 45 seconds to explain we're quants that we could be totally right about this and still have a bad year.
23:55
We could be totally wrong and still have a good year. These are six names.
23:58
I don't even think I got to all three on both sides.
24:00
AMC was a big meme stock.
24:04
I did know that going in.
24:06
But I didn't know I had no experience with the depth and breadth of the fever swamp.
24:10
The whole GameStop Melvin Capital thing I I It's a total cult.
24:16
>> I I can't but I kind of watched it.
24:16
It was not relevant to us.
24:18
Uh I know we're super diversified.
24:21
You know, I I don't particularly like investing death cults that go around just trying to hurt people um because they don't like them, but but it was >> kind of opposed to them, too.
24:34
But it wasn't you know, to be blunt, it wasn't hurting my portfolio.
24:38
Um so I was like, this is some crazy stuff out there.
24:40
So I had an I I I I knew a little bit.
24:44
Um so I go through that we're short AMC.
24:47
And I went through like it was it was a beautiful example cuz it was just it was super expensive based on the fundamentals that were actually measurable.
24:55
It's not like it had earnings or something, but um it was super unprofitable.
24:59
They were issuing not buying back shares.
25:02
Every form of price and fundamental momentum was It was not It was super high beta.
25:06
Uh there's not a thing we liked about this stock. So it's easy to explain.
25:10
But then at the end I said, but again, we're quants.
25:15
So we're short a whopping 12 basis points of the portfolio in this thing I just described that it that we hate.
25:23
Um And then I added the line that I should not have added.
25:28
So the crazies can't hurt us even if they're right or something. I'm paraphrasing.
25:33
And I think I'm throwing them a lifeline trying to explain that it could be bad on everything we know.
25:40
And there could be management that does something revolutionary, fixes it all.
25:44
It was actually quite the opposite in real life. >> Of of course.
25:47
And you know, it's 12 basis points.
25:47
As crazy as that stock is, it never doubled in a day.
25:52
Um if if we lose 12 basis points in a day, it doesn't show up on my on on my radar screen.
25:58
Um so I'm saying this thinking I'm being funny, but it turns out one thing I misjudged, which was really you could have gotten right ex ante is people don't like being called crazy. I I know. I know.
26:10
It's It seems rather obvious after the fact.
26:14
Um so I got a ton of hate email.
26:16
We had weird phone calls.
26:19
Um we're people were pissed.
26:22
And also I I another I've gotten better at this. Not perfect, but better.
26:28
I have a bit of a problem in that I will at least initially respond to the crazy people on social media. Yeah.
26:35
And I You You and I have talked about that. >> Well, I know.
26:37
You've tried to You've one of my many good friends who've tried to have an intervention with me on it.
26:41
And I have gotten much better. >> You really have. I totally agree.
26:44
Um I try to be nice the first time. I know. I know.
26:49
I sit there and I go, look, you're yelling at me.
26:51
I actually think I'm one of the people trying to help you if you'll just listen for for for for a second.
26:57
I don't know this stock is terrible.
27:00
Um I tried to you know, I I would re-explain that it's just statistics.
27:04
It could work out for you, but I wouldn't They'd be these sad things.
27:08
People would be like, you're dissing this stock that I have my kids whole retirement Not retirement, college fund.
27:14
And And I'm like I you know, we're all careful.
27:17
I can't quote give investment advice on social media, but I'd be like, um you just might want to think about that a little bit.
27:25
And you know, not your stock in particular, but if you put your kids whole education fund in any one stock, that doesn't strike me as, you know, >> That's a bad idea. Yeah.
27:38
So but then they they scared me a bit.
27:43
It was one of the few times I've I've actually been like, there are some very angry not too well-adjusted people and they're angry at me um because I said I was short a stock.
27:55
All 12 basis >> basis points.
27:57
>> I mean I you know, if if I if if if I actually shorted, you know, all of our money and it went down about 98% since that point.
28:06
So 12 basis points is actually quite disappointing.
28:08
Sometimes it hurts to be a quant. Oh boy. I I feel you there 100%.
28:12
There have been times when I'm like like we we should maybe like do more.
28:21
We we should do more here, but we never did because Well, we have we have one part of what we do that is a little less quanty. Is that a word?
28:33
It's called AQ arbitrage.
28:33
We do convertible arbitrage, merger arbitrage when things are really apples to apples or as close as you can get.
28:40
And And these strategies all have leverage.
28:43
They all have the the the peso problem that we talked about before.
28:47
They're just not as extreme Right. as the basis trade.
28:49
So they're points on a on a spectrum, but we had on the Jim Chanos MicroStrategy trade.
28:56
Um and it wasn't short Bitcoin.
28:59
It was It was long Bitcoin against MicroStrategy.
29:01
And that that's the one this that last year just killed me.
29:04
Cuz we did way too little of that.
29:09
And that's our discipline. We're doing what we say. We don't take a big bet.
29:13
Even it it But I'm like, yeah, but that one was a closed-end fund selling for 2 and 1/2 times what it owns. Um It's so It's a layup. Yeah.
29:24
So I'm not supposed to be this guy.
29:27
You and I are supposed to be the rational guys who don't do this.
29:30
But I look back and I go, why didn't we put everything in that trade?
29:34
You know, actually >> should fire us if we do that.
29:36
It's not what we say we do, but Totally agree.
29:40
Um and yet I I had kind of an existential crisis during the Great Financial Crisis.
29:47
I, for a year, starting in 2006, was saying to anyone who would listen to me, "If you can short your house, short your [ __ ] house."
29:57
And like I would give them the But I did nothing.
30:00
>> You should make that your social media profile quote. Short your [ __ ] house.
30:07
But the thing is I I had so downloaded the discipline, the never do that, right?
30:15
So I'm not above, maybe you're not above being exposed about these things.
30:19
I think that discipline is probably stood both of us in totally pretty good stead over the the years.
30:28
But, you know, again, it's it's a version of prospect theory.
30:29
We remember the bad more than we remember the good.
30:33
I remember every trade I took off too early or didn't We talked before about overriding a model.
30:39
Um we were never very bad at this, but I will I have done it in my career.
30:45
And I I am fond of saying, which I've never actually tested, cuz it's hard to formally test, but I'm pretty sure I'm at least directionally right, the times we've made a change that I think were motivated by losing money is the only negative five sharp ratio strategy I've ever developed.
31:01
Sadly, I don't have any positive fives either.
31:04
If you make a change and we've gotten really good, this is probably 20 years now, at saying, "All right, we will consider that change, but in 6 months." Yep.
31:14
Um because >> what we did.
31:19
>> There's nothing in a model that's diversified that you have to do this second, right?
31:23
Um I wish we knew things that clearly.
31:26
That So, um all of these things they're they're hard to do in in in in real life. Yeah.
31:34
>> Or as the kids say, IRL. Do they still say that?
31:36
The kids probably don't even say that anymore.
31:37
>> Yeah, I know they say I think I've got six >> now my age.
31:39
Yeah, I I have six grandchildren and I look to them for all of the new lingo.
31:43
And >> I I don't have grandchildren yet, but I have 21 and 22-year-olds.
31:49
And um I do I could look this up, but sometimes I I just email them an abbreviation.
31:54
Um like, "What So what's this one?"
31:57
And they're like, "I can't tell you what that one is."
32:01
I'm like, "Okay, it's one of those."
32:06
Yeah, I had to get lectured on what based meant because a bunch of young people were on Twitter calling me based. Oh, you're based. I know this one.
32:16
And I'm like >> This is some Well, I learned I learned later, but I was like, "What the [ __ ] does this mean?"
32:22
>> hybrid of cool and contrarian, I think. >> Yes.
32:26
Yeah, that's it that's it exactly.
32:29
Cool, but highly contentious.
32:31
>> I I you know, I hope to achieve this, but I'm certainly I'm certainly you >> more based than me.
32:36
Sometimes you could be too based for your own good.
32:41
I agree, but like, you know, for a guy who's a quant I live for the stories.
32:47
And so, you know, on the thing where they were coming after you, I remember, you know, CNBC used to Squawk Box used to be a 3-hour program. >> it a few times.
32:59
>> I did Mark like every other week cuz we really got along, right?
33:06
But you could talk to a portfolio manager and really let them explain their thesis to you.
33:10
And then the last time I was on CNBC it was just like, "Yeah, we're going to give you the full 5 minutes." The Okay, great.
33:16
And then you get there and it's 2 and 1/2 minutes.
33:21
And I'm just like, you know, I'm out.
33:24
>> And it's not even their fault.
33:24
You know, this is these are market mechanisms.
33:28
The market gets what it wants in general and someone has figured out that long-form quants like us are probably not the highest ratings getters.
33:40
Um yeah, uh Let's talk about leptokurtosis.
33:43
So the uh Obviously, I wish it would swing back a little a little the other way.
33:51
I I I do think um um times affect this.
33:53
I'm I'm I can't root for a bear market.
33:57
Um it First of all, it's not in my financial interest.
34:02
We run a lot of long-only assets and I I'm guilty about rooting for our clients' money to go up because both for them and for us.
34:08
Um second, be careful what you root for. Yeah. >> Right?
34:13
You know, people who were rooting for a crash, you find out you are collateral damage um or during the GFC literally collateral damage.
34:23
Our example there, I'm all over the place, I know, but well, it's convertible arbitrage is very painful.
34:28
Uh in the GFC actually round trip was wonderful cuz we added a ton to it when it got just beyond stupid. >> Yeah.
34:35
But there was nothing wrong with that arbitrage.
34:38
It's just people needed their People needed their money and I like calling it collateral arbitrage cuz collateral is like a mortgage, it was literally collateral collateral damage, excuse me. Yeah.
34:49
Collateral arbitrage should be a strategy.
34:50
Things change minute by minute, markets change second by second.
34:55
Human nature hasn't changed millennia by millennia.
34:58
Arbitraging human nature is your last sustainable edge. >> Absolutely.
35:02
And you can, you know, the the simple measures obviously I think they could be made better, but I have this chart I still pull out occasionally um of just the growth in Fama and French's HML since 1926.
35:17
And it's just a line going, you know, mostly up.
35:23
But it's has all these labels.
35:25
Steamships give road give way to railroads, radio, rural electrification, space race, um personal computers, internet, AI.
35:32
And And I used to go, "Do you think something like the world's simplest value strategy needs technology not to change?" No.
35:43
It need It does need humans to overextrapolate for instance and think this technological change implies infinite valuations.
35:55
It But if human nature stays the same and not enough people are willing to take the other side of that. Right.
36:01
>> I'm basically saying there just aren't enough Jims and Cliffs in the world.
36:05
In theory, you enough people agree with us, this could get arb'd down.
36:07
I just don't think we're I I see no signs of it.
36:12
>> I think we're still a pretty If I had to guess in my career I've seen the opposite move.
36:16
I've seen it get a little stupider. Totally.
36:19
>> Um so the the notion that it's being arbitraged away um that human nature it it it I I think it's I like to call things mildly backwards.
36:31
Well, that brings me to AI.
36:31
I'm I'm deeply into AI now, but we're we're only >> real person, right? This is an animatronic.
36:40
>> actually real Jim's back in Greenwich sound asleep in bed. That's coming.
36:46
We're only doing investing for our family office.
36:48
We're We don't have clients, which is liberating.
36:53
Um but >> Yet I love our clients. I want that to be clear.
36:58
I You know, I I will second that. You really do.
37:01
I Of all of the asset managers I talk to, you talk more about your clients in a positive way than many many that I talk to. >> good to us long term.
37:13
I'm again again I keep saying prospect theory.
37:15
I am guilty of remembering the ones who left at the at the bottom and and that will always happen, right?
37:21
That's kind of how you get a bottom. Yep.
37:23
>> Um but by and large our clients I I would sign for this in a heartbeat in the next 26 years or so. AI, right?
37:32
You you you you basically said that you've been surrendering a little bit to the machines.
37:38
Talk about that for a bit. Sure.
37:38
Well, first of all, that that is too extreme.
37:42
You said it correctly, surrendering a little bit.
37:46
I said something along that lines and again, when I say headlines, these aren't top of the New York Times.
37:51
This is the geeky stuff we we read, so it's not like it's not like I walk down the street and people are saying, "Hey, that's the guy surrendering to AI."
37:58
But in our small financial world that that were a a bunch of, you know, AQR surrenders to the machines.
38:07
And I'm like, "This is a point on a on a spectrum." Yeah.
38:11
Um we spent and I'm again I'm going to I'm just going to guess we share this, a lot of years talking about how to bet on something. Uh call it a factor.
38:21
A factor is just for anyone who doesn't know, you short stocks or any other asset on some characteristics and the the high end tends to beat the low end.
38:32
Do you believe it's going to happen going forward?
38:34
What you have is two things going in.
38:35
You have evidence from the past, a so-called backtest, which even though everyone loves to malign, Let me just interject there, right?
38:44
Because that is that's one that gets me hot.
38:48
It's like yes, of course you can overengineer a backtest and do data snooping, even honest-minded monkeying with the backtest.
38:56
But the value of a backtest to me it's just like, what other It's like I used to get pissed off, like when the when the "Oh, I do it what I feel like.
39:08
You know, I talked to my buddy and he hooks me up with a great stock."
39:12
And I'm like, "I'm sitting here with 45 years of data.
39:15
Not only will I show you the 10 worst drawdowns, I will show you the base rates.
39:21
I will show you the fact that this does not win in every 3, 5, 7, and 10-year period."
39:25
And people are just like, "Oh, yeah, well, but that's just a a test."
39:29
So, that's my little rant.
39:31
I'm a huge believer in base rates and backtests.
39:34
Oh, you know, the the classic criticism of a backtest is it's like driving through the rearview mirror.
39:41
And I'm and I my my retort to that is always do you prefer to drive without a rear view mirror?
39:49
I wouldn't want to drive through the rear view mirror, but I wouldn't want to drive without one. Exactly. >> Either.
39:54
But the two things, so you have a back test that that's pretty good and then you have a story.
40:00
And story you have a reason why you think this works.
40:03
And we always were very proud and we still are but little less so that we demand roughly and it's impossible to know you know this is just a way of explaining it. Roughly 50% each.
40:17
You know, do we think this makes sense and how good of the historical results been?
40:24
If you have a longer back test that can start to weigh more, shorter one maybe you rely more.
40:27
So it's not an iron clad rule but that's how we thought of what we do.
40:33
Now comes along machine learning and there are certain steps in machine learning where you just don't get as much intuition as you used to get.
40:46
One of my partners Brian Kelly has written a paper.
40:49
It's controversial but Brian's 100% right.
40:51
So I'll settle the controversy with that called the virtue of complexity saying basically you throw more things in with modern ML and shrinkage techniques.
41:04
It's not it's actually a feature not a not not a bug in that world.
41:09
Other things one of the things this is not a secret.
41:12
We use and it's not unique to us at all natural language processing where you probably remember for a lot of years some quants used it some didn't but the quant way to process textual information was a table of good and bad words and phrases. And it was bespoke.
41:30
You made it up as you as you as as you went and you know if the word increasing is there plus one.
41:37
And we know the downside of that, right?
41:39
If the actual sentence was massive embezzlement is increasing.
41:45
You know, our bad on that one.
41:45
But we also know as quants we got to be right 52% of the time.
41:49
So you're allowed to look stupid 48% of the time.
41:52
So that was always that was the thing that drew me to quant.
41:56
I get to look dumb 48% of the time.
42:00
That's exactly it's a great way to view it.
42:03
Um natural language processing is taking things like and there are a lot of other uses for corporate statements and saying is this good or bad news.
42:14
But the way it actually works is it it expresses each statement as a vector of numbers. Right.
42:22
And then what you do is you test that vector and you look at linear or non-linear even non-linear combinations of this vector and say what predicts.
42:30
And it turns out this is actually fairly correlated with these older measures. It's just >> the same. >> better. Yep.
42:35
It the machine does a better job than me missing the word embezzlement in in in in the thing. Not perfect.
42:42
It's still a machine learning from the past but it's better.
42:48
And I think we understand a lot of the intuition around it.
42:49
But if you ask me or even much younger now smarter people than me who actually write the code exactly what are those numbers?
43:00
You tend to get a look like they represent the um the sentiment of the of the piece. Yeah, but what are they?
43:09
And there is a a certain element where you have to say do I buy this technique and if so I'm going to be 2/3 evidence now and 1/3 story.
43:20
We still in that instance basically require that that it works it's it's very comforting I should say that it's correlated to simpler measures that should be getting at the same thing. >> Yeah.
43:32
Cuz it makes us go I think we're measuring what we think we're measuring. >> Yeah.
43:37
But there's a step that I never would have been comfortable skipping 20 years ago where I go it's just doing its thing.
43:44
And one way to view it this just popped in my head at some point is I was I was complaining internally you know, I come on these podcasts and I sound all confident but internally I'd be like we have no [ __ ] idea what those numbers are. Um really?
43:59
You want me to bet money on that?
44:03
Um and it just struck me that if if artificial intelligence machine learning if I understood every step of what it's doing, what's it doing?
44:14
What's it adding to my world?
44:14
There almost has to be and this is not a mathematical theorem but there almost has to be some opacity to it it's hard to believe we weren't finding it with simple intuitive linear statistics before.
44:27
So it's that it's half comforting but it got me halfway to saying all right, if I'm going to use this at all I cannot hold it to the same standard.
44:38
So when I say as you correctly quoted or paraphrased we've moved a little towards surrendering to the machines. We have. Yeah. >> We have.
44:48
And that's just if if a technology gets better you know, why do you change your mind?
44:55
Well, because the facts change and you hope that's your reason.
44:59
So yeah, there are certain things we do that are that are a little more data driven.
45:03
I think modern techniques are better.
45:07
Um you know, ML for what we do is still just statistics.
45:10
It's it's just today's version.
45:13
And there there was some point where you know, people didn't use ridge regression or generalized least squares or something.
45:22
If you get better, you you believe it. Yeah.
45:26
The I was into machine learning really early.
45:30
I I'm a journal keeper and I saw one from when I was 25 where basically the whole piece that I wrote in my journal was I can't wait. I didn't call it AI.
45:40
But I can't I can't wait.
45:43
But but the point is you're right.
45:43
There is an opacity there that a dedicated quant has got to really look very closely at.
45:52
Because I brought on a guy who was specialist.
45:55
He'd already retired from one of the big tech firms.
46:00
He was their machine learning guy.
46:00
And so I nailing with all these questions and and finally he says Jim, here's the thing that might be really hard for you to accept. And I went what's that?
46:12
And he goes no human can look at arrays vector arrays of hundreds of millions of data points and find the five that go together, right? And and I'm like agreed.
46:29
I I never thought that that was possible.
46:31
And he goes let me keep continue.
46:33
And he goes the problem that you're going to have is it might be able to tell you what and when.
46:40
It will never be able to tell you why.
46:45
And I'm like >> That's fair.
46:46
That is a very interesting conundrum. But I like you agree.
46:48
I think it is where quant is going.
46:54
I think that there there will be much amusement when people start blowing [ __ ] up because they don't take the care.
47:03
Um but I I definitely think it belongs in a quant's toolkit in 2020. I absolutely agree.
47:12
Though I do fear it a little bit in only one way.
47:16
The older simpler stuff you never have fun when you're losing money.
47:23
But at least you could explain it fairly straightforward.
47:27
It's it's not fun in a giant valuation bubble to be long value when you're model.
47:32
And you will lose some people.
47:34
But you actually do get to point to exactly what happened.
47:37
It resonates with people cuz they're they're watching the same world.
47:39
Um so you know, I'm just going to try to avoid ever losing money again because the opacity is going to be harder for people.
47:51
Um because in our world it's not all the way there. We're a hybrid.
47:56
We still bet on the old factors.
48:00
We think that they do capture an aspect of human nature.
48:01
In some cases we have ML versions of the old factors that we think are are improvements.
48:08
In the value world we we we use it classic ML.
48:10
It's better at more parameters.
48:14
Which valuation measures to use in which industries, whether that function should be linear or non-linear stuff we never did before cuz it seemed like over fitting. ML makes it better.
48:23
But there there's still a core economics to what's going on.
48:28
But it will be at least marginally harder to explain the next time there's a bad period.
48:34
>> only investing for the family office now.
48:36
So we don't have any like constraints.
48:38
So it's not like we're putting a lot of money into these tests but I just find them really interesting.
48:46
And but the opacity that is that one is hard.
48:50
Because now I only have to explain it to a few family members.
48:54
But I just I just think that there's some really interesting stuff on the horizon there.
49:01
You know, one thing that we we haven't been doing a lot with but I've had this idea for a while.
49:06
I'd be really interested in your view on it.
49:08
Like so if we take the whole idea of the black swan can't be predicted, right?
49:15
I ask the question, well okay.
49:15
Let's assume that's true.
49:19
Let's just assume that is true. It might not be true. But let's assume.
49:24
But can a black swan be confirmed?
49:31
Do you mean after the fact or Let's let's use oil when it went negative, right? So, black swan.
49:39
Um but was there a point in that series of oil on its way to going negative where there could be some machine learning algorithm that could figure out oh, this is a black swan.
49:57
I And then does it tell you if it's going to keep going? Well, right. Exactly. Yeah.
50:03
For me, that's very akin to can you identify bubbles before the before the fact.
50:07
Black swan might be much more short-term. It is. It definitely is.
50:13
>> But for on the topic of bubbles what I I've written about this.
50:18
There's no bright line test. >> No, I agree.
50:22
>> I'm not going to pretend there is.
50:22
Um I basically screamed bubble twice in my career, not even during the GFC.
50:27
Wasn't smart enough to do it on on on on on on the John Paulson trade.
50:32
He was probably right about that being a bubble, but but um you know, again, dot-com and and culminating in 2020.
50:40
But I but in this in this piece where I said the 10 things I want to complain about in the financial analyst journal, I really had to work to get it down to 10.
50:51
Um I talked about over overusing some words.
50:53
Um I do think bubble in our industry and black swan to a similar extent, it's a little less well-known than the term bubble, get used too often. Yeah.
51:05
Like the individual stock you think is too expensive, I tend not to say it about an individual stock.
51:08
I may think it's overvalued.
51:10
I may even think it's wildly overvalued, but it could turn out to be right. Yeah.
51:14
You know, your example of Amazon from the dot-com bubble, I think that was a bubble. Yeah.
51:20
>> Um but what but if I said Amazon was in a bubble I would have been wrong.
51:24
I I you your prediction was correct.
51:27
Even Amazon went way down for a while. But it was worth it.
51:30
To me, a bubble is is still subjective.
51:32
But it's I have leaned over backwards to put in every assumption that would make this price be too high or too low in negative bubble.
51:45
Make this price reasonable and I can't come close.
51:48
Um I remember the things I wrote very similar when you were writing during the dot-com bubble.
51:52
I was just saying, all right, let's take Cisco Systems.
51:56
Let's assume it grows more than any other company has ever grown ever for the next 10 years and then gradually comes back to just growing fast. It still sucks.
52:10
Um and then in that in this thing called bubble logic I wrote then I I said, and I'm only using Cisco as an example, the entire Nasdaq 100 looks like one big Cisco.
52:21
Um turns out that one would have worked out for me cuz Cisco was like I think I just saw a headline just past its tech bubble. Not the last bubble.
52:29
This is the 2000 just past its its peak there. >> 26 years. >> People were right. It was a great company.
52:36
It was just the democ- a the in proto social media um the message boards of the late '90s, early 2000s, the text-based message boards.
52:47
In general, I'm I actually cleared this with compliance cuz can't just post on that.
52:54
It did it's I said, can I ask this hypothetical question?
52:56
And they're like, okay, just that question, yes.
52:58
That's that's not promoting something.
53:00
That's not I asked it was a Cisco message board.
53:05
And I I said, all right, you know, we all love the stock, but at what price would you sell it?
53:12
And I'm just trying to get somebody to think that these are actual cash flows to an actual company and no matter how much you love it and you may you may think may totally disagree with me and say the growth rate's going to be even faster. Yeah.
53:25
There still has to be a price where you say this is not a good long-term hold.
53:30
I got like 30 irrelevant answers, but my favorite one, the only one who actually answered in terms of price Yeah.
53:36
was one person said well, if if it went down by 50% I'd be out.
53:43
And I'm like, I was asking a value question and I got a momentum answer.
53:47
You're not actually wrong.
53:47
That that could be a decent strategy, too.
53:51
But I went like zero for 30 on on on on people responding who were like, I don't understand the question.
53:57
I'm like is there some price where it's too expensive?
54:01
And it just didn't even compute for people. >> Yeah.
54:04
I also used to carry around in my wallet.
54:06
I'm sad I lost this eventually. Probably disintegrated. A quote from 2000.
54:11
It was from a strategist at I think Prudential saying there are a set of stocks you need to own at any price.
54:20
>> Oh, I yeah, I saw that piece, too.
54:20
And I it's one of these things I would take out my wallet occasionally and it's in the credit card area and I'd see it and I remember that one.
54:31
Um it's probably Yeah, I hope I have that somewhere.
54:33
>> The four horsemen of the investment apocalypse are fear, greed, hope, and ignorance.
54:37
And ignorance you can deal with or not.
54:39
Um but like people become religious about these things, right?
54:47
And I I never could understand it.
54:50
I like I talking about uh not knowing, right?
54:56
Whether you own a name or not.
54:56
When when I was reestablishing O'Shaughnessy Asset Management after rolling out of Bear um I I suggested to my team you know what?
55:08
Let's let's take the names away.
55:08
Let's give them the ticker has a number. And I got rebellion.
55:18
You were trying to make it more dispassionate. Yeah.
55:19
And and they're like will you just stop with this stuff?
55:23
Like like my head trader especially, she was like I talked to the to these guys all day long and if you've got me to having to translate numbers back into names Yeah.
55:36
Well, well she has a logistical point. The information flow. We didn't do it. We didn't do it.
55:41
I was just trying to make it even more dispassionate.
55:43
It just a few days ago I was explaining to one of my one of my kids who has no interest in what I do, basically.
55:53
Um somehow currencies came up.
55:54
And I'm I'm explaining that some are quoted as the foreign currency per dollar and some as dollar per the foreign currency.
56:00
And I was admitting that doing this for 35 years, still have to occasionally think which way do I want this to go?
56:10
Um and they were like, isn't that a dumb system? And I'm like yeah.
56:16
So, and and and she was like, why don't you change it at your firm and you just do it the right way?
56:19
I'm like, CUZ WE'RE GOING TO TRADE IT and do the opposite of what we intend at some point.
56:23
If I say, let's quote all these things as dollars per whatever, some point in the code somebody's going to mess it up. Yep.
56:32
>> So, we're going we're going with the world on this.
56:35
>> But even if yes, it is kind of it is kind of silly.
56:37
>> Yeah, I lost on that one, too.
56:37
And I when, you know, looking at her point of view, I was like, yeah, you're right. Okay, I get it.
56:45
Um what do you think right now is the most overcrowded trade from a like a factor point of view?
56:57
We don't do we do some factor timing uh largely on on various trend following samples.
57:04
Um I don't think quant is particularly overcrowded at this point.
57:08
You know, the valuation spreads are still wider than normal. Very.
57:13
>> They're you know, everyone has their own measure.
57:14
Us taking out the industry bet means ours have come in a little bit more.
57:18
Um but they're 80th percentile versus versus history.
57:22
So, it's hard for me to call something crowded when it still looks cheaper than it normally does.
57:28
Um I do think some of the the kind of bleeding edge you could have short-term things that look like black swans, you know?
57:39
Hopefully many versions of August of '07 of '07, July of last year.
57:42
We saw a mini version of August of '07 and some of the more sophisticated stuff suffered a long uh even more so to us than than kind of simple old school quant stuff.
57:52
Um so, I I I think there are a fair amount of of people out there at places like that that are quicker to trade out of it than we are.
58:02
This should accrue to our benefit long-term. >> Mhm.
58:05
Um trading out of it doesn't mean you trade out of it before the problem.
58:09
It often means you're you you miss the comeback.
58:12
Um but it does mean if if if pod shops with very tight risk limits are doing similar things to you again, it may not have be crowded in the sense of squeezing the juice out of the trade.
58:23
The inefficiency you're trading on might be there, but in a different sense, it's crowded in that you are subject to you're always subject to anyone who overlaps with you and their actions. >> Yeah.
58:34
Um so, yeah, I I worry about short-term events.
58:39
Um you know, we do the same thing.
58:41
We When you look I look back at August of '07 and it was weird cuz it was it felt near death at the time and I'm like really wasn't. No.
58:49
Um it was a giant standard deviation event.
58:52
But a one-week standard deviation is not that big. Right.
58:57
>> So, we lost it was painful. Yeah.
58:57
But it wasn't life-threatening.
59:00
We weren't close to being forced to take down our positions or something like that.
59:04
So, you know, living with some of that every investor lives with some of that.
59:11
You don't have to be a quant.
59:13
Um but that's probably overlapping with the pod shops is the closest where I come to being worried about being crowded Mhm. Yeah.
59:22
Um Jeremy is I don't know whether you follow Jeremy Grantham, but he's back to saying that he would have zero exposure to US equities.
59:34
Um, I try to be charitable.
59:38
Um, if you look at previous forecasts um that he and his shop have made, he usually comes at things in in mostly pure valuation sense.
59:46
Um, the notion that the US might deserve a premium um I think it's entirely possible. Yeah.
59:56
>> Again, I don't we don't bet a whole lot on these grand themes to be to begin with. Right.
59:59
Um, we we've looked at and you've probably looked at similar numbers.
1:00:03
We've written a a bunch of things doing analysis like this.
1:00:07
How much of the the US depending on you want to measure it is probably a 25-year drubbing of the the world.
1:00:13
Um, it's probably since the Japan peak in like '89 or '90. Yep.
1:00:20
Partly because of the the Japan debacle, but Europe whatever US has beaten pretty much everything. Yeah.
1:00:30
Something like it all it depends on your favorite valuation measure, but pick your favorite.
1:00:33
It's going to be 75 to 85% the US getting more expensive against the world. >> Yeah.
1:00:40
That leaves 15 to 25% being genuine boots on the ground fundamentals being coming in better. Mhm.
1:00:48
And you may or may not be willing to assume that's going to keep going.
1:00:54
And I'm not going to fight about that.
1:00:57
That's not my my like the 75 to 85% that came from valuation, if you look at 1990 on most measures we look at the US looked cheap Yeah.
1:01:05
to the world and it now looks very expensive against the world.
1:01:09
So I say much milder things, but directionally similar to Jeremy.
1:01:14
I say I I would I would probably expect the world to gain some of that back. Mhm.
1:01:20
But that's that's betting on mean reversion.
1:01:23
At the very least I would not assume it happens again. Mhm.
1:01:29
Um, you know, in my heart of hearts do I think do I think there's probably some mean reversion in that trade? Yeah. Probably.
1:01:35
But not so much that it's anything close to a high sharp ratio trade.
1:01:40
Last year it actually worked fairly well. Yeah.
1:01:42
>> The world did beat the US for for once.
1:01:45
Um, so I'm directionally similar, but you know, I'm a two out of 10 where he's an 11.
1:01:51
He's spinal tap on these on these things.
1:01:56
Um, you know, we think valuation over 10, 15-year horizons is about the only thing that can guide you to to how expected returns change. It's not perfect.
1:02:04
It doesn't have an R squared of one at your favorite horizon.
1:02:08
Um, but it's not it's not a very high risk-adjusted return at any reasonable time horizon that that you can live with in this actual world. Right.
1:02:23
>> Um, so we always tell people we do Antti Ilmanen, my colleague, is is been the king of this for many years.
1:02:28
He He does similar forecast to Jeremy.
1:02:30
You know, 10-year forecast.
1:02:32
Um, but he doesn't assume valuation changes.
1:02:35
He just does it based on the yield effect essentially.
1:02:38
If you buy something at a higher price, all else equal, you make less money just cuz you're paying more for for the cash flows. >> Yeah.
1:02:45
So our versions are much more uh much more muted.
1:02:48
Um, and all I would use those long-term forecasts for, I don't I don't think I'd ever trade on them.
1:02:54
Um, if the long-term forecast is things are all expensive and I think we'll make less going forward, if I'm thinking about retiring or if I'm a pension plan who formally needs assumptions, Right.
1:03:05
I think it's useful to go hey, we probably should expect less going forward.
1:03:11
That affects how much you save, it affects when you retire. I spent my life.
1:03:16
My dad had a little sheet of paper that was some number that he thought he needed to retire.
1:03:21
It was probably he he was believe it or not he was my mom was the math person.
1:03:25
She he was not mathematical, so it was probably utter gibberish.
1:03:30
But a number you need for that sheet is how much do you have?
1:03:33
What are you going to spend?
1:03:34
And what can you make Yeah.
1:03:36
>> on your retirement savings.
1:03:36
So I do think these forecasts can be useful. Yeah.
1:03:41
But they're they're terrible trading strategies. Yeah. Yeah, I I I agree.
1:03:47
Um, and let's switch gears over to one of our mutual um I disdain is too strong a word, but uh we're we're highly critical of private equity.
1:04:04
And I think for the same reasons, but give me give me your version.
1:04:10
>> Um, well I like to say there there are two fronts in in in this fight.
1:04:17
Um, one is what's its long-term return been and its prospective return going forward.
1:04:23
The other is is how risky is it?
1:04:23
Um, I have opinions about both, but far more strongly about the risk Mhm. side. >> We are very similar.
1:04:32
>> Um, so they're a great debate on on what the actual historical track record is kind of hard to get. Yeah.
1:04:38
And there IRRs and are you getting a real sample of these firms?
1:04:42
Um, and there's a What's his What's his name?
1:04:46
I never pronounce his name right.
1:04:47
This long Italian name uh academic who's kind of taken the fight to private equity and he claims it's much lower and and I I'm I don't have a horse in that in that race. Right. I get driven crazy.
1:05:00
I coined the term volatility laundering Yeah, I love that term by the way.
1:05:05
>> of of clients general media articles that that will do the equivalent and I've you've seen this too.
1:05:17
Here's an efficient frontier, you know, the x-axis is risk, the y-axis is is is expected return.
1:05:22
Public equities use volatility, not a perfect measure, but 17% annual vol. Private equity, 6. 5 percent.
1:05:34
And I'm like, no, it's not.
1:05:34
It's not I had my first fight about this in 1997.
1:05:40
Um, private equity is a much smaller part of the world, but but I was at Goldman Sachs at the time and we had a private equity area and again, this is something that only you and I on the podcast will will remember, but the Asian debt crisis. >> Oh, yeah.
1:05:55
It's it's like 17 crises ago and seemed very minor by comparison, but at the time it was after a long positive low vol run on the S&P.
1:06:05
Um, and the S&P was down about 7% on in a day.
1:06:11
And I have other stories about this day.
1:06:14
Um, our P&L system said we were like up 6%.
1:06:19
We knew that was not true.
1:06:20
We were we at the time we were short the US and long Europe.
1:06:25
Um, and this is a mini version as close as I've came to private equity. Okay.
1:06:28
I is you look like a genius when what you're short is open and crashing and what you're long is closed.
1:06:38
Uh, Jon Corzine, the then head of Goldman Sachs, we were much lower tech at that point.
1:06:42
It was an Excel spreadsheet that we had to hit F9 >> Oh, I had those. to get a P&L.
1:06:45
Um, and he I had shown him this like a month earlier on one of these visiting dignitary tours. I was a stop.
1:06:51
Show John what we're doing.
1:06:53
So he was like wandering the firm to find where am I losing money today?
1:07:00
Um, and he he looks at our screen without me there and it says we're up 6%.
1:07:04
Reality we thought we'd be flat.
1:07:04
You know, it's betas, who knows, there's randomness, but if Europe opens up consistent with its beta, um, we're about flat, which is always a home run cuz we'd made a lot of money in a bull market for 3 years.
1:07:17
So flat in a crash was wonderful.
1:07:19
You cannot take a man from thinking he's up 6% to flat and still make him understand.
1:07:27
John was a brilliant guy, but you still can't make him understand grasp and be happy with flat.
1:07:30
So that was very disappointing to me.
1:07:32
Uh, but then later in that same day, the head of our private equity, whose name I will excise from this.
1:07:38
Nice guy, I'm sure >> with him a lot.
1:07:42
Comes by and I had learned.
1:07:44
So I'm manning first the the Excel sheet.
1:07:46
We didn't always have someone sitting there back in those in those days just so this doesn't happen again.
1:07:51
He comes by and goes, "How you guys doing today?"
1:07:54
And I said, "I think when Europe opens tomorrow and it's all the dust clears, if we if we end here, we're going to be you know, about flat."
1:08:03
And he was smart enough to go, "That's actually really That's that's so cool." >> Yeah.
1:08:07
And then he just goes, "Me, too."
1:08:11
He's the private equity guy.
1:08:13
And I was not as nice to him as he was to me. I'm like, "Back up.
1:08:19
If you went to sell your portfolio today, you would never sell a private equity portfolio in one day. But but yeah.
1:08:27
>> if you did, once you get a lot less than yesterday, and to his credit, he said, "Way less."
1:08:39
But of course, you know what he said next?
1:08:40
"But I don't have to sell."
1:08:42
And I said, "Neither do we."
1:08:45
Um, it's it's it's private equity is active levered equity. Yeah.
1:08:49
Um, it's more than a beta of one. I'm almost certain.
1:08:55
You Different firms, they could have more low beta stocks be levered. >> yeah.
1:08:59
But it it's a it's a levered active equity portfolio that they're just not marking.
1:09:03
The best argument that that comes back to me on this, and it's not a good argument, but the best one is something I've written about.
1:09:11
I don't think markets are perfectly efficient. >> No.
1:09:14
Um, you know, Bob Shiller won a Nobel Prize for saying volatility is excess volatility in the world.
1:09:18
That's probably part of the the inefficiencies.
1:09:23
I probably think they're less efficient than Gene Fama thinks these days and more efficient than the average person on Wall Street. >> Yeah.
1:09:29
Um but the the question of whether you have to to sell, they're like, "Well, if you agree markets aren't perfectly efficient, then the prices we have where we move them less might be more accurate as a reflection of fundamental value." And I go, "100%."
1:09:48
But why do you get to do it and we don't? Right.
1:09:51
Um in in March of of 2000, the peak of the tech bubble, when we were down, you know, two standard deviation down year and a half.
1:10:01
As a statistician, you don't freak out about that.
1:10:03
When it's your first 19 months in existence, it's not very pleasant.
1:10:07
But I could have I practically did, but I could have told people when prices returned somewhat normal, we are going to be actually up.
1:10:24
That did turn out to be right, by the way. I'm just going to Right.
1:10:25
I'm I'm going to toot my own horn there for a second.
1:10:29
But I don't get to do that.
1:10:29
I don't get to say I have not lost you money.
1:10:34
Your money is in a bank I call short Nasdaq.
1:10:39
And it is simply waiting for you there.
1:10:41
I get to tell them we're down two standard deviations.
1:10:43
Here's why I think it's going to roar back in the next two to three years and and net make us money. I get to say that.
1:10:48
But I don't get to tell them it didn't happen. Right.
1:10:52
And then people be like, "But we don't have to sell. You do." I'm like, "No, I don't."
1:10:57
I only have to sell if if if people foolishly make me sell, but we absolutely don't.
1:11:01
So I For long-term investors, it's just not apples to apples.
1:11:07
They You know, in private credit is this on steroids.
1:11:11
People Um I actually got I think I think this was me by making fun of it in social media, I got somebody to stop saying they have a 10. 0 Sharpe ratio.
1:11:22
Um the the best thing was that it was 10. 0. The 10. 0.
1:11:26
I'm sure that's just where the number came out, but the over-precision of that.
1:11:31
I'm like, "So an eight would just suck?
1:11:33
You would just have no interest in an eight?"
1:11:36
Um So So private credit will literally use volatilities very close to zero.
1:11:40
When again, they may be good investments, but the notion that public credit moves around a lot, but private doesn't is just madness. Yeah.
1:11:53
>> It's absolute madness.
1:11:53
Um Now, people will say being this opacity again, this this this fact that we show muted, makes it easier to hold these things.
1:12:03
And in a world of imperfect markets where we all use behavioral tricks to get ourselves to do certain things, I'll give you that.
1:12:09
Uh Cliff screaming, "Look how much we lost" is more painful than someone going, "We're fine."
1:12:15
Even if it's totally not True.
1:12:19
Um but here's where I I jump in the fight about the numerator, the expected return, a little bit.
1:12:23
And this is again, I want to be clear, a a less strongly held view. Okay.
1:12:30
That these things are are comparable or actually probably, given that they're concentrated portfolios, individual private equity is is going to be considerably more risky than a typical index fund, for instance. Right.
1:12:44
That I I don't know if I'll ever bet the ranch on any one thing, but I would I would I would bet at least most of my ranch on on me being correct. Yeah.
1:12:53
That it's the the expected return though, it actually filters in to this.
1:12:58
Because if 40 years ago, and David Swensen at Yale is credited, and I think probably deserves it, pioneering these things for institutions.
1:13:09
Go read his book, Pioneering Portfolio.
1:13:10
I haven't read it in like 25 years or whenever he wrote it. Yeah.
1:13:12
Again, I'm not good with the dates.
1:13:14
But he talks a lot about the illiquidity premium. Yeah.
1:13:17
That you get paid for owning something that's illiquid. Why?
1:13:20
Because you can't get the money when you need it.
1:13:22
That was it was a huge part of his thesis.
1:13:27
>> do have an opinion that maybe it's overvalued, there's nothing you can do about it.
1:13:30
There's all kinds of problems with illiquidity.
1:13:34
And that was fairly plausible.
1:13:34
You get paid a lot to own it.
1:13:35
Now, whether the historical track record, I'll leave to others, whether the massive fees in that world ate up the illiquidity premium, let others fight about that.
1:13:45
But the idea that that certainly in gross space there should you should make money.
1:13:49
But if all these things about are where they're telling me, "No, it's a it's actually a good thing cuz it's easier to hold."
1:13:55
That means illiquidity is not a bug anymore, it's a feature. Mhm.
1:13:58
And in the markets, all else equal, you get paid for putting up with a bug that's undiversifiable, you know, you know all that.
1:14:09
Um and you pay for a feature that everyone would want. >> Yeah.
1:14:13
So if these people's explanation is right, to me, it's probably also a story why you should expect to make less, not more, on this going forward.
1:14:21
Something easier to hold, and it If you You know, we both live in the tonier part of Connecticut, so we live with a lot of private equity people.
1:14:29
I I have a lot of fri- I You know, you know the old This sounds um like one of the classics.
1:14:33
Some of my best friends are >> Yeah.
1:14:37
So So I can't So I can't be a bad guy.
1:14:40
Some of my good friends are private investors. And and Same with mine.
1:14:41
And I'd be perfectly comfortable investing with them, cuz I tend to think maybe I maybe I overestimate my friends, but I tend to think there's probably some alpha there.
1:14:50
Private equity, one thing I talk up about it is their ability to add value from from changing the company.
1:14:58
I I wouldn't just assume everyone can, but that is a source of alpha unavailable to you and I in a quant Totally agree. portfolio.
1:15:04
And it's a beautiful source of alpha, too, because I don't think that's particularly correlated to most risk factors or markets.
1:15:12
That's just whether they're good at that.
1:15:13
So there are some things to to talk up. >> Yeah.
1:15:16
But if more of the world is buying this stuff because it's easy to hold, it's going to be priced to to the wrong level.
1:15:25
And the reason I brought up my my friends in Greenwich is if you get a few cocktails into one of these people, they will tell you, "Yeah, we're paying much closer to public multiples than we than we used to."
1:15:36
So it's very consistent with the theory, and it doesn't imply a disaster looming ahead. >> No.
1:15:41
But it does imply lower returns than the past. Yeah.
1:15:47
>> And I think that applies to everyone.
1:15:48
Things popular and and and and you ask me what's crowded, I think we're finding out.
1:15:53
Private equity, a lot of people would like to sell some of theirs, but they don't like the prices Right. >> they would get.
1:15:57
That's That's a version of crowded.
1:15:59
And the thing that always bothered me was, first off, regular people who don't have domain expertise, uh in my opinion, just an opinion, are being misled with mark-to-market, with volatility uh laundering.
1:16:17
They literally don't have a clue. And that bothers me. No, I'm I'm with you.
1:16:25
The um institutions, right or wrong, whether I'm right or they're right or somewhere in between, they're they're they're they're big people.
1:16:34
Um the move to quote democratize private investing, to bring it to the 401(k)s near you, really bothers me. >> Me, too.
1:16:43
And I tend to be a very laissez-faire, libertarian kind of person. >> Me, too.
1:16:47
So I'm a little bit of a hypocrite on this, cuz I get all paternalistic >> Yeah.
1:16:51
just saying it's just not a very good idea.
1:16:53
I mean, there are rules in 401(k)s.
1:16:55
They don't do everything.
1:16:55
There are all kinds of prudent standards, fiduciary standards.
1:17:01
I think it's a pretty bad idea.
1:17:01
And some of these places advertise, "We're going to let you trade your private equity." Um and I saw one.
1:17:08
I don't know if this ever happened.
1:17:11
I've not followed it that closely.
1:17:12
But it was like, "We're going to put it part of an ETF." I'm like, "Okay.
1:17:19
Good good luck with that."
1:17:19
I actually risk think they risk killing the golden goose a little bit, because the more they make it tradeable, the more it's going to trade to real-life prices. Yep.
1:17:34
>> And again, I think we're just starting on this road, Yep.
1:17:37
but also the 401(k), the next time there's like an equity disaster, someone's going to sue saying, "You're still marking that private here in my 401(k) when it's not It's It's It's a bad idea.
1:17:51
There are things, you know, online trade trading, you know, single stocks on Robinhood, God forbid single-day options on Robinhood.
1:18:01
I am not the authoritarian who'll say you're not allowed. Right.
1:18:04
>> My personal advice is it is a disastrously bad idea for you. Yes.
1:18:07
Um There are you know, every libertarian in the world thought we should legalize marijuana for years.
1:18:15
And now I'm an old man who walks around New York City going, "Why does this whole [ __ ] place stink of marijuana?" Well, okay.
1:18:24
>> I got to marijuana here. I don't know how.
1:18:26
>> am older than you and still believe that marijuana and most drugs should not be criminalized.
1:18:33
>> I am I believe I agree with you intellectually. Yeah.
1:18:36
Um and I would vote for that.
1:18:39
I I agree with you when walking around Union Square.
1:18:41
I'm just saying I've become enough of a paternalistic where I'm just walking around guy where I'm walking around just going, "That's a bad idea."
1:18:50
It should be legal, and you shouldn't do it.
1:18:52
Same with sports betting. Yeah.
1:18:52
Um Oh, we totally agree on that.
1:18:57
>> of of 22-year-old males who are spending half their life, I think it's ruining sports for them. Yeah.
1:19:03
>> root for teams anymore.
1:19:03
They root for one guy on a team. Right. Right. I agree.
1:19:08
And I had the same I had the same conflict with Robinhood, right?
1:19:10
Like I am in favor of democratizing investing, but not being idiotic about the whole thing.
1:19:21
When I first looked at their app, I mean, honestly, I I I almost couldn't believe it.
1:19:27
Little balloons come down at times.
1:19:31
>> Yeah, and and I'm looking at this and I'm like, this is a casino masquerading as an investment app. >> Yeah.
1:19:38
No, they will say investing is always a casino. It's really not.
1:19:40
Um I don't exactly know where a bet becomes an investment, but positive expected return Bingo.
1:19:48
>> is is a small part of it. >> Yeah.
1:19:50
>> And you know, it's ironic.
1:19:51
A lot of the individual traders who love Robinhood will rant and rave about hedge funds and Do you know how rich they're making brokerages that facilitate their single day option trades?
1:20:04
Sadly, I'm not the guy who does not my business. >> Right.
1:20:07
But they're just I promise you they're handing a lot of their money to quote Wall Street or a broad definition of of of Wall Street. >> The plumbing. It's paid. >> Plumbing, the pipes.
1:20:21
>> The pipes are like that's where the money is.
1:20:24
>> You and I should have built pipes.
1:20:25
>> We would really should We've done okay.
1:20:27
Um but in another world, I'm building the pipes.
1:20:30
>> But what they really don't understand is two steps.
1:20:33
It's how much money the the the pipes are making. >> Call them the pipes. >> Yeah.
1:20:38
And the fact that that comes out of the pie. So, you guys are losing. Yeah.
1:20:40
And it's it's such typical stuff where you'll only hear about people's winners.
1:20:48
Anyone who's describing this is I bought MicroStrategy when it was here and I got out here.
1:20:53
I'm like, I promise you that Citadel and Jane Street are taking your money.
1:21:00
I love both those firms, by the way. >> Right.
1:21:02
I mean, they're doing exactly what they should be Yep. >> doing.
1:21:05
Um but I promise you um and and some people are longer term trades that are on the other side of your your trades.
1:21:11
Uh this sounds terribly elitist and obnoxious, but retail loses long term. It's in the literature. I know.
1:21:17
And that was like my big crusade when I was younger, right?
1:21:22
Like I I did What Works on Wall Street and published it because I wanted people to have access.
1:21:27
>> off a lot of academics who thought they'd discovered that [ __ ] by the way.
1:21:31
>> Cuz I was part of that world at the time. All of the bibliography.
1:21:36
>> They all should have cited you. Including me.
1:21:38
I didn't know about your book.
1:21:40
>> But but but the point is my book cited all of them.
1:21:44
And then I like I I had certain individuals who we will delete uh the name.
1:21:51
Like really get pissed off at me for like talking about a factor. That was my factor.
1:21:58
And I'm like, I cited you in the bibliography of the book.
1:22:05
Yeah, I don't know how someone complains about that if they're cited.
1:22:06
I'm not above being petty if I think that stupidest thing in the world.
1:22:14
The way the simple way on Fama-French's website they they describe momentum is the last year returns leaving off a month, which tends to be more contrarian.
1:22:26
I did that in my dissertation.
1:22:26
You probably did it 10 years before me.
1:22:27
But I did that in my dissertation.
1:22:29
That's the version I and I'm the one who got them to adopt that.
1:22:34
And whenever people Not whenever. Almost always.
1:22:36
Here's here's my shallow story for the day.
1:22:41
Mark Carhart, brilliant guy who I admire, used Fama-French's three-factor model plus my momentum factor to analyze mutual funds, discovering that mutual funds on average don't do so well, blah blah blah.
1:22:54
When I when when I'm left when I'm left off and someone says when Mark Carhart created momentum, Oh, that would piss me off. >> Mark.
1:23:02
I love you, but I did that part.
1:23:04
And I didn't even do that.
1:23:06
Jack Treynor and Sherman were before me.
1:23:07
I created the specific form that became popular in in academia.
1:23:10
So, I'm not above not too often, but probably about eight times in my career have I sent an email to someone saying, "You know, you might want to cite the 12 papers I wrote on that."
1:23:23
Uh but I you know, you suffer from this more than me.
1:23:25
You're more removed from academia.
1:23:27
I started out in academia. >> Right.
1:23:29
But even me who's quite close to to academia, came from, intended to be an academic, you know, close to a fair amount of people there, things that we've written, not just me, in the more practitioner journals, the FAJ, the JPM, there've been several times the academics just rewrite the freaking paper. Yep.
1:23:49
>> And they don't feel they have to cite the practitioner. No, I know. >> papers.
1:23:51
So, not your pain, but I have felt a little bit of great story for you about this.
1:23:56
So, I always came at it from the point of view of a practitioner, right?
1:24:01
But I'm a research junkie, too.
1:24:03
And so, I read all French Fama.
1:24:03
I read all of the literature, LSV, like you.
1:24:06
I I read everything that was available.
1:24:13
And then kind of took my own take on it from the point of view of a practitioner, right?
1:24:16
So, you and I agree >> about uh stocks with no liquidity, right?
1:24:21
I would get into fights with academics who would say, "Yeah, but look at the smallest stock decile."
1:24:28
And I'm like, do you do understand that there's no liquidity there and if you tried to put a bid in that it would skyrocket?
1:24:36
And you know, it's like the old joke about economists on a desert island.
1:24:40
They find the crate of food and and the engineer says, "Well, I can get it open this way."
1:24:45
And the and the uh plumber says, "I can get it open this way."
1:24:49
And the economist says, "Let's just assume we had a can opener."
1:24:55
And and so, that always bothered me.
1:24:57
It's like I gave a guest lecture for Roger Ibbotson's class. Love his work.
1:25:01
Absolutely think the Stocks, Bonds, Bills like Somebody had to do it.
1:25:07
>> Yeah, somebody had to do it and very important, right?
1:25:10
But so, after class, I'm like, "You know, Professor, does it bother you that this is back in like the late '90s, early 2000.
1:25:17
Does it bother you that your small stock index that you hold the stocks for 5 years?"
1:25:26
And he's like, "What's the problem?"
1:25:28
And I'm like, "Well, it's probably getting a lot of its performance like when you last rebalanced, how many of the stocks in that were actually large cap stocks?"
1:25:37
It it rhymes with survivorship bias.
1:25:43
The um And and like he like literally looked at me.
1:25:45
But the story I wanted to tell you was I was up at Boston, won't say which university, but having a really great conversation with the academic guys, right?
1:25:57
And they were the on the committee.
1:25:57
We were trying to get their endowment uh to invest with us.
1:26:04
And we're at lunch and we're having a like I'm talking about um Mandelbrot.
1:26:09
I'm talking about all of that kind of stuff.
1:26:11
Uh um you know, standard deviation.
1:26:13
Uh yeah, that's a good risk measurement, but don't people only freak out when stocks are going down and do you ever look at the semi-standard de- deviation below zero?
1:26:24
Anyway, great conversation.
1:26:28
And then one of the guys says to me, "Where'd you get your PhD?"
1:26:31
And I said, "Oh, I I barely have a BA." >> of hard knocks. I barely have a BA. Boom. Shut it down. Yeah, credential.
1:26:38
Like literally over here, boy, this guy's got a lot of really good ideas.
1:26:45
Stupidest person on earth.
1:26:48
We have a a one of our partners at AQR didn't graduate from college.
1:26:53
Um and I won't name this person for obvious reasons, but I love this.
1:27:00
Um I'm not, you know, Peter Thiel level hatred of college where No nor am I.
1:27:06
>> He'll spend his own money to keep people from going to college.
1:27:08
Um but the fact that someone is a brilliant guy uh he's a polymath.
1:27:13
He's great at so many different things.
1:27:15
And he I think I I don't even know his story about this, but I I think he just probably would have found college boring.
1:27:22
Um so, yeah, credentialism can go too far.
1:27:24
Um though I think it it it goes both ways cuz nowadays we distrust experts Mm. too much, also. Yeah, I agree.
1:27:33
>> you know, I like to say experts are on average right.
1:27:35
It's a disaster to assume they're always right, but it's also a disaster if you need your think that that the pointy-headed expert over there is just always wrong. >> Right.
1:27:47
Um so, you know, like almost everything in life, there's some happy medium.
1:27:50
I think uh we probably do they're doing both bad things at the same time now. Yeah.
1:27:56
And like again, I it wasn't that I didn't read all of the academic papers.
1:28:01
I relied upon them and cited them.
1:28:04
Uh but I I really was much more interested in okay, what can a practitioner really get out of this?
1:28:09
Um >> small stuff you're just totally right about.
1:28:14
Uh first, we don't believe there actually is a small firm effect, period.
1:28:19
Um if you adjust for like 17 other factors, we wrote a paper on that.
1:28:22
But if you just adjust for market beta, it doesn't outperform.
1:28:27
The original small cap studies >> right. >> Yeah.
1:28:30
Uh I I think the um the Was that '85 internal portfolio management?
1:28:36
A couple years earlier, maybe it came out then. Um I remember '82, '83. That might be right. That might be right.
1:28:43
Like I said, I don't get the years right.
1:28:45
>> Um but some of that's been revised to a smaller spread because I think they assumed too large a recovery rate.
1:28:53
They always have there's some you're always doing some guesswork with imperks.
1:28:56
If something gets delisted, Right.
1:28:57
you know, what's it worth?
1:29:00
Um so, there's some there's some guesswork in there.
1:29:02
And I think they think they've upped the severity of or or or increased the severity of of the recovery assumptions. >> Right.
1:29:10
Um but our big thing is the betas were always woefully underestimated cuz they don't trade all the time. Right.
1:29:17
Simple adjustments for that. Yeah.
1:29:17
Just just make it go away.
1:29:19
And then the question is is it is absolutely true that if you run the tests on small, most of anomalies, factors, whatever, look stronger gross.
1:29:31
How much you get to keep? Um we trade small. We like small.
1:29:36
But ignoring the implementation side of small is an utter disaster.
1:29:38
And the small firm effect, almost all of it came from the first decile. Which is just crazy. Yeah.
1:29:45
We One of my favorite strategies was a microcap strategy.
1:29:50
I'm still Oh, even though I've sold the company, I still let O'Shaughnessy manage all my public equities.
1:29:57
Um and and I love the I just love our microcap strategy.
1:29:59
But it's adjusted for liquidity.
1:30:02
It's adjusted for all of the things that would destroy you.
1:30:05
Because the index itself is dog [ __ ] You just can't buy it. Right. Can't buy it.
1:30:10
And the companies, if you're doing a factor profile, the index itself, it's kind of dog shitty.
1:30:18
There's no strategy in the world where you don't want to worry about the real life details.
1:30:21
But there's some you have to worry a lot more.
1:30:25
Microcaps, you got to worry more than large cap equities.
1:30:29
I remember this goes back to '94, '95 when we were building our first First models we built at Goldman Sachs were actually macro models.
1:30:35
Um I had written or was still writing a dissertation on quant equity.
1:30:40
But you know, you do what your employer asks you to do.
1:30:44
Um so we we had a back test and it was still based on simple value and momentum stuff.
1:30:50
So for currencies, it was purchasing power parity and carry and and and momentum. Yeah.
1:30:56
And we spent time with the trading side.
1:30:59
We were on the asset management side, but we spent time with the sell side at Goldman, sat down with traders, and kept asking what assumptions for trading costs should we you know, we we were young and stupid, but we weren't morons.
1:31:12
We we knew we weren't going to trade for free. Right.
1:31:14
Um so we want to estimate this.
1:31:17
And I distinctly remember the currency traders said, "Just use zero." Um what do you mean?
1:31:23
This stuff is super cheap to trade. And that's never true.
1:31:29
But it was also a communications problem because they were thinking dollar yen.
1:31:34
And as a fraction of the volume you're taking on, the costs are quite low. Yeah.
1:31:38
Um but we don't think it's a particularly high sharp ratio trade. Right.
1:31:42
>> When you have 25 currencies, and you're relatively neutral on a lot of factors, you need more leverage.
1:31:46
And suddenly a fairly small trend and and a lot of them are more expensive to trade than dollar yen.
1:31:53
So we never assumed zero.
1:31:55
We knew they were they were crazy.
1:31:57
Um we also traded really stupid back then.
1:32:00
We even remember how they started.
1:32:00
The way we trade I I don't know.
1:32:02
I'm telling you all kinds of things I probably shouldn't tell you.
1:32:04
This is 27 years ago, so I think the statute of limitations I'm being stupid.
1:32:10
But we would go to one broker with a list of currency trades we want to do.
1:32:15
And we'd get fills from them.
1:32:17
And we we weren't again complete morons.
1:32:19
We would We would be watching Bloomberg.
1:32:22
And we literally were print screen on Bloomberg as they were doing it.
1:32:26
And we'd get some estimate of how far off of what we were seeing on the screens at the beginning of the trade we were getting executed at.
1:32:32
And we would occasionally move the business to a broker who did better on that scale. So not complete idiots. >> Yeah.
1:32:40
But what a dumb way to trade. My God.
1:32:42
We did exactly the same thing.
1:32:42
Cuz you know what the broker did?
1:32:45
They said, "We're going to screw these guys.
1:32:50
How much can we What's the optimal amount to screw them?"
1:32:52
How much can we screw them and still keep them happy? >> them fills.
1:32:55
And they're going to accept them here.
1:32:58
But if they really agreed to say might not trade with us again. Right.
1:33:00
So they they were just literally saying, "How much can we fleece Goldman Sachs and and Cliff's poor clients for?"
1:33:08
We learned pretty quickly.
1:33:10
But you know, you think back some of the things It was a simpler time, but we were Much much simpler, and things have improved dramatically.
1:33:17
We we got most of our trading to as close to zero as possible.
1:33:23
But that took us a long time because we did exactly what you did when we started out because we were dumb. All right?
1:33:30
It was just like, "Oh, Yeah, and maybe we shouldn't do it this way."
1:33:35
Edges erode over time, and more people are out there.
1:33:37
So it quite possibly I'd actually argue it was was actually true was not as important to be super optimal on the trading when you were the first person doing a certain That's right. strategy. That's right.
1:33:50
When something is part of everyone's toolkit, and you got to measure it a little better than other people, and you got to trade more efficiently than other people, the One of the We could say the world's improving.
1:34:01
It is, but it doesn't always make you better cuz it's improving for your opponent your opponents at the same at the same time.
1:34:07
So you know, don't get me wrong.
1:34:10
I'm as chauvinistic about our strategies as everyone else.
1:34:12
I Of course I think we're improving more rapidly than the average.
1:34:15
But you got to keep in mind the world is always trying to take away your edge.
1:34:18
So sometimes you have to admit that you have to improve these to run in place. Yep.
1:34:22
Um which is great if you have a good strategy to begin with. But it is sobering.
1:34:26
You'd like to think every improvement's an actual improvement, not just defending your turf.
1:34:33
>> it's just defending the turf. >> But you got to.
1:34:34
You You've taken some heat recently for talking about needing beta in alternatives.
1:34:39
I don't think of it as heat.
1:34:46
Well, I I wrote this up myself saying this will sound like hypocrisy.
1:34:51
Because in 2001, myself and colleagues wrote a paper called Do Hedge Funds Hedge?
1:34:56
I love that piece, by the way.
1:34:56
It was using some of the liquidity stuff I mentioned in small cap that that that people were underestimating the betas of hedge funds.
1:35:04
And what we ended up finding was hedge funds with the publicly accepted data, which kind of sucks for hedge funds.
1:35:11
But it was the same data other people were using to say these are awesome investments.
1:35:15
So we we said, "Actually, there's about zero alpha after fees.
1:35:20
Which given the size of your fees, guys, is actually pretty impressive."
1:35:25
But still not that helpful.
1:35:28
Um so we were on the on the bandwagon of the average hedge fund is is not adding value to the client.
1:35:35
There we would come up with hypocrisy accusations or something.
1:35:39
But you run things that you could call hedge funds. I'm like, "Yeah.
1:35:44
Any form of active management, not just a hedge fund, is an inherently arrogant act. Oh, absolutely.
1:35:48
Because Sharpe's arithmetic is diabolically powerful.
1:35:50
My partner Lasse Pedersen has written a piece.
1:35:56
One exception might be new issues that have to be priced.
1:36:00
It's going to be small, Lasse, if you're listening.
1:36:03
Uh Sharpe's arithmetic says the average can't beat the average.
1:36:04
So the idea that active management on average loses Yeah. Or best breaks even. But but but it loses.
1:36:15
>> But the idea that there are some systematic mistakes that you could take the other side of, you have to believe you're you're better than than average to do that.
1:36:23
And it's We live in a society where saying that out loud sounds obnoxious.
1:36:26
But when you drill down, would you really want to invest with a manager who says, "We're just getting the average here.
1:36:34
And the average We're charging you a lot to get back to zero." No.
1:36:40
So But you know, I'm older than you.
1:36:43
In the late gaining on you, Jack.
1:36:43
I'm getting as a as a fraction, it's getting closer to one every freaking day.
1:36:51
But back in the late '70s, early '80s, I started O'Shaughnessy Capital, my first company, as a consultant.
1:36:57
And it was a quantitative consultant.
1:36:59
And what I would do is build normal portfolios for pension plans, right?
1:37:04
So most people don't even know what a normal portfolio is today.
1:37:10
So it's a portfolio whose factor profile and general directionally looks very similar to the manager it's modeling.
1:37:20
And do you know how many closet indexers I found back then? Like I won't name them.
1:37:26
And that's only gone up over time. Oh, I know.
1:37:29
And it's like when the first time I I was a kid.
1:37:32
I was 27 when I founded this company.
1:37:35
And and I'm like in front of this big pension plan.
1:37:37
And I'm like, um manager A uh is essentially the S&P 500.
1:37:48
But but you asked about beta. Yeah.
1:37:48
So this result in Do Hedge Funds Hedge there was an implicit, maybe explicit, I don't remember the paper as well as I should, saying they should hedge because the hedge funds had like 0. 4, 0. 5 betas. Yeah.
1:38:04
Um and beta's not correlation. Right?
1:38:07
I'm not explaining this to you.
1:38:09
I'm saying >> I understand.
1:38:09
Um but they were about 0.
1:38:09
8 correlated to the S&P as a whole, a diversified portfolio of hedge funds.
1:38:13
Um because even if it's point you know, people always think at a 0. 4 beta, how's it 0. 8?
1:38:19
I'm like, "Well, imagine you invested 40% in the S&P 500 and 60% in cash."
1:38:25
100% of the variance comes from the S&P 500.
1:38:29
So that would be a correlation of one and a beta of 0. 4.
1:38:31
So they are separate things.
1:38:33
But at least if you built the diversified portfolio, it should you should A, you should only invest a big leap.
1:38:42
You should only invest in hedge funds you think are above average. That's the numerator.
1:38:48
But I also think they should hedge. Um so being 0.
1:38:50
8 correlated as an industry is kind of not the point. I still believe that.
1:38:54
But I actually think I cost myself a bit on this cuz for so many years I talked about this that I almost forgot that beta is actually good long term.
1:39:08
And when we say beta of one alternatives, we're really just talking about a portable alpha concept. Right, exactly.
1:39:13
Um you know, portable alpha return stacking, call it whatever you want.
1:39:17
But so imagine you have this fully hedged, for truth, fully hedged positive expected return asset.
1:39:25
When someone invests out of equities, as they often do, not always, if the expected return minus a little bit of diversification and compounding effects, we're going to ignore that. Yeah.
1:39:36
If the expected return on the fully hedged good hedge fund is less than the naked equity market, you have improved your Sharpe ratio, but you have lowered your average return.
1:39:47
So, you know, the old you can't eat risk-adjusted returns. >> Right.
1:39:51
You actually can, but it's often practically true.
1:39:55
So, the idea is imagine you have um a fully hedged process with with a decent risk-adjusted return, positive expected return.
1:40:05
You should do two things.
1:40:07
It should be run aggressively, and it should be equitized often.
1:40:13
And both of those are the exact same reason.
1:40:15
It's It's not that it's always going to work.
1:40:16
I'm not saying be aggressive for that reason.
1:40:17
I'm not saying equitize cuz beta's always going to work. >> Yeah.
1:40:20
But if you now imagine investing out of equities into this thing, you are replacing the equity beta.
1:40:28
You're not actually lowering it.
1:40:28
You're simply adding the positive expected return.
1:40:32
And then, given that these things are generally done in small size, uh this is a battle I've been fighting for years that I've yet to win.
1:40:39
Um and we run a lot of alternatives at very low risk levels cuz that's where our clients want and it's good for them.
1:40:45
But all else equal, they should give us less money at a higher risk level.
1:40:49
It's just more capital efficient >> Yeah. for them.
1:40:52
And it it by the way, it fixes fees perfectly.
1:40:54
When we originally launched our firm, this is a story I probably told you before, we only launched with one north of 20% vol product. >> Yeah, I remember.
1:41:02
And that was theoretically correct and practically disastrously wrong.
1:41:08
Because I I made this argument to people.
1:41:10
We We We weren't doing portable alpha at that point, so it was hedging to zero.
1:41:14
But I told people who would come and say tw- you know, 22% vol is crazy.
1:41:17
Um how about a quarter of that?
1:41:20
I'd say, give me a quarter of the money.
1:41:24
Um you and I know I was correct on the math.
1:41:27
I'm not going to apologize for that. >> Yeah.
1:41:29
But I will apologize for being wrong in the practical sense. Yeah.
1:41:30
Cuz we weren't quite down We weren't down 40, but two standard deviations down times 22% is a very big number to most people.
1:41:41
To a statistician, it is still a two standard deviations and just happens to a perfectly good process occasionally. Yep.
1:41:47
>> you throw in the world Our world's always going to be a little fat-tailed, and you're going to see bad events. Yeah.
1:41:54
I was naive about the industry, though.
1:41:57
Um and it you know, there certainly we survived Some people stuck with us, but we lost some accounts, and I'm sure you've experienced this.
1:42:05
The people who decided to invest with you are often not the decision makers when you have a bad period.
1:42:12
And the decision makers one or sometimes even two levels up in the firm.
1:42:14
If you're talking to the corporate treasurer trying to explain that you designed the thing to take 22% vol, and this is actually not even that terrible, you're just a egghead who lost them 30%.
1:42:30
>> had those conversations.
1:42:30
So, nowadays we will do whatever a client wants, within reason.
1:42:35
Um we won't run to any vol.
1:42:37
There's a There's a low enough vol where the noise of implementation would would be more than we think is is is is even worth it.
1:42:46
But I will still tell people the theoretically optimal way to invest in us is as high vol as we're willing to run, and hopefully there's a lot of prudence built into that cuz you never want to have a forced sale.
1:42:57
That's the main reason you would limit vol. Yeah.
1:42:58
Um or you hit a point where the dealers just won't give it to you. Yeah.
1:43:04
And for most people, beta of one actually makes a lot of sense if you're funding it out of equities as they often do.
1:43:11
Um because it just replaces that.
1:43:11
It's I tell them, "Don't think of this investment as a beta of one.
1:43:14
Think of it as we're not charging you for an index fund.
1:43:19
Index fund prices are very low a very low They're not quite usually zero.
1:43:23
Some big institutions can get actually negative when the securities lending or whatnot.
1:43:28
I I say these things cuz I'm talking to you, so I feel I have to dot every I.
1:43:32
But it is quite efficient for you to equitize Think of it as just replacing your equity. Don't judge us on that. >> Mhm.
1:43:40
Which they will, of course, at some point, but Of course they will.
1:43:41
Judge us on the vol on on on the on the alpha.
1:43:45
And by the way, that should be as aggressive as we're both comfortable Yeah.
1:43:48
with cuz then you have to give us less money. >> Yeah.
1:43:50
And you you could put it somewhere super safe.
1:43:54
Um oh, I made a huge error.
1:43:54
This is a 30-year-old 20 25-year-old error.
1:43:58
Occasionally, when making this argument, I would point out to people that if we lost more than 100% due to utter incompetence on our part or malfeasance, I ran off to Bolivia with it.
1:44:14
I don't even know how I would do that.
1:44:16
Um Could Could you imagine your firm telling telling your your ops area, "Yeah, could you um just wire all the client money to my Bolivian account. It's fine. It's fine." No.
1:44:27
So, not realistic, but not a good thing to even bring up as hypothetical, I discovered. >> Right.
1:44:32
But my point was investing at four times the vol with a quarter of the money in the disaster case that I I don't believe will ever happen.
1:44:41
I will go out on a limb and say I don't think that's going to happen. It is far safer.
1:44:46
You lost a quarter of the money. Right.
1:44:48
Robert Vesco can only take Um I'm really dating us now.
1:44:53
A famous embezzler uh can only take the money that's there.
1:44:56
So, in in all of in most cases, it's the same risk if you if you adjust the dollars.
1:45:01
In one hopefully wildly unrealistic but disastrous state of the world, it's actually lower risk. >> Right.
1:45:08
>> still have trouble More I convinced Excuse me, I've convinced more people than I have in the past, but I still have trouble convincing people of this one. Yeah. >> sticker shock.
1:45:16
It's the opposite of private equity. Right?
1:45:17
We're going to add the beta visibly, and then we're going to take a lot of vol that you're going to have to tell people Right. about.
1:45:25
I think it's the optimal You know, something being optimal and most people not being able to do it often go hand in glove.
1:45:32
The reason there's an edge there is most people can't do it.
1:45:35
So, that's what I tell myself to get myself through some hard hard nights. >> Yeah.
1:45:40
I I I totally understand that a a strategy like that makes perfect sense, and trying to cuz I used to just I tried everything trying to get regular people who weren't quants to understand.
1:45:57
And what I ended up doing for the most part, cuz you know, we were long only, right?
1:46:01
And And so essentially, I ended up telling a bunch of stories.
1:46:05
And I would start my speeches, or if it was a pension or a wealthy high net worth around a a table, I would start the pitch by saying, "I'm going to tell you a bunch of stories about why you shouldn't invest on stories." That's great.
1:46:23
I'll I'll be, as I've done many times in my career, stealing that from you. Please.
1:46:28
Um what is something that you believed, say 10 years ago, that you think is [ __ ] today?
1:46:34
I'm having trouble coming up with a good one. You got one? I do.
1:46:41
Um and it wasn't that I had a strong belief in it, but I believed that directionally it was important for our firm to offer it.
1:46:47
And that was when we were building out Canvas and putting a lot of emphasis on ESG.
1:46:56
See, I didn't have the guts to say that. And >> have.
1:47:01
Well, again, I don't have clients anymore, Cliff, so I It's much easier. It's much much easier.
1:47:06
>> Well, I I got in not in trouble.
1:47:06
Um I believe in if it's legal and you think you could do it well, doing what your clients ask you to do. Yes, I agree.
1:47:19
We are We are 100% ESG money.
1:47:19
We run a lot of money that's totally agnostic to ESG.
1:47:24
You You give me a restricted list, you give me a rule, we're going to do what our client As As did we.
1:47:31
I wrote a piece I don't know, this is probably 10 years ago.
1:47:37
Just saying the obvious, something you've known in your bones forever, that you can't tell people you're going to make them even more money if you if you insist it's ESG. Right.
1:47:45
That investment constraints have a max are the best they can be is zero expected value, and that's unlikely. Very unlikely.
1:47:55
And I give the example that two different clients give us the utterly same mandate, but one says there's a third of the stocks you're not allowed to own.
1:48:07
How could I look at the one who lets me own those and tell them, "Why you buying those?"
1:48:12
Cuz cuz I I think it's going to make the portfolio better.
1:48:16
Um So, you know, and to a fellow quant, all you have to say is is constraints are costly. Very.
1:48:20
Though I thought they would love me for this paper because I go on to ex- to explain.
1:48:29
And this is kind of similar to the to to the private equity i- ideas of of when something is a bug or a feature. Right.
1:48:37
That that the whole point of an ESG constraint, and I'm talking the classic exclusion of stocks >> you know, so-called um activist stuff, that's not our world.
1:48:51
So, I'm not saying there's no form of ESG that that this doesn't apply to, or the classic form of ESG is you're not allowed to buy this stuff. Right.
1:49:03
How is that supposed to make the world a better place?
1:49:06
And the goal is is noble.
1:49:06
It's to make the world a better place. >> I agree.
1:49:11
If it has any hope, and we can all debate how much hope it actually has, but if it has any hope, the only mechanism is by enough people not owning something, you're raising the cost of capital Exactly. Yep.
1:49:24
>> You're forcing the people who are who are ESG and perhaps morality agnostic, let's call them.
1:49:32
I may I may or may not be one of these people, so it's not meant to be a total insult.
1:49:36
But you're forcing them to own more than they would normally want.
1:49:41
Because you won't own it, and the market has to clear.
1:49:44
For them to do that, they should they should and probably do demand a higher expected return. Yeah.
1:49:50
So the sad fact of ESG is the main form the main way it can help the world be better.
1:49:56
Now, here's how it makes the world better.
1:49:57
If the cost of capital is higher, and you have traditional looking cash flows, we all know from old school NPV, you can have weird shaped cash flows, but traditional project, company sitting there evaluating, should we invest in this horribly environmental unfriendly project?
1:50:12
Well, we have to pay an extra 3% on our cost of equity because of these people.
1:50:18
So when you have build your little spreadsheet that they taught everyone in business school, and discount the cash flows, fewer projects will cross the threshold. >> Exactly.
1:50:29
>> And you will get less of the bad stuff. Yep.
1:50:33
I'm not sure how practical this is, how much it actually move the the dial.
1:50:37
Stocks are fairly substitutable and fungible, so but that's the principle.
1:50:40
But to accept it, that means the ESG people on average are making a little bit less. Right.
1:50:45
Uh because the higher expected returns on the stuff that is starved for capital, they're they're adding capital to the good places. >> Yep.
1:50:54
That is how they make the world a better place, and if they believe in it, they should be proud of it.
1:51:00
But they shouldn't just sit there and go, and of course you'll make more money. Right.
1:51:05
>> Fewer people say that these days, but there was a point where a lot of people were were were were saying and it's to have your cake and eat it, too.
1:51:10
You can be a wonderful person, wonderful organization, and of course you'll you'll profit from it. Yeah. Nah, you probably won't.
1:51:20
Um I always give an exception if if ESG is a trade, if somebody does it because I think the rest of the world is going to move to ESG and I want to be first. >> Right.
1:51:30
That that can work like any It can work or not work like like any trade.
1:51:31
I also a little nastily occasionally point out the evil people will do that trade, too. Right?
1:51:40
You're not saying I I love ESG or I'm doing this.
1:51:43
They're saying, you know, it's any trader, I think the world's about to buy a bunch of this.
1:51:46
So yeah, you came up with the one I should have come up with.
1:51:51
Yeah, and Though I don't think I believed in it too much 10 years ago. Yeah.
1:51:55
>> Um we do it again for anyone who wants it.
1:51:59
I just won't tell people it makes their portfolio better.
1:52:01
And and and back when I was still at the company before we sold it, whenever we would have someone who was really interested, I was fine, but I had to be able to say what you just said.
1:52:12
I had to be able to say, you do realize that by adding these restrictions, you're probably going to do less well.
1:52:23
And like the people who were like, that's fine.
1:52:25
I want to make a difference.
1:52:27
>> And of course people believe it too much now cuz there were a bunch of bad years in a row for most ESG tilted portfolios.
1:52:33
And you know, even if I'll tell people you should expect less, I'll also tell them, I'm sure you do, that you don't want to look at three years and abandon your whole project, either. Right.
1:52:42
Uh because that's just what happened.
1:52:46
Yeah, but the the other thing that was really useful for me, from my point of view, was it got me onto this stated preferences revealed preferences.
1:52:58
And, you know, it got me to guys like Todd Rose, who has a new way of doing polls that like literally nail the actual mood.
1:53:06
So for example, uh I had him on a couple uh episodes ago.
1:53:13
>> Does it involve physical torture? No, it does not. Does that my work? Yeah, it might.
1:53:17
No no Abu Ghraib uh bad posing.
1:53:19
But he was literally able to call before ahead of the traditional um pollsters Trump this time around. It's a tough call. >> months before. >> Really? months before.
1:53:37
And he has a very particular way of doing it.
1:53:39
So it got me very interested in all that.
1:53:41
So that's a net positive.
1:53:44
We're running out of time.
1:53:44
I always love talking to you, and we end up talking for forever.
1:53:48
We're going to wave a magic wand, we're going to make you the emperor of the world, but you can't kill anyone, and you can't put anyone in a reeducation camp.
1:53:57
That's my anti-authoritarianism >> immediate intention, but okay.
1:54:04
That's my anti-authoritarianism coming out.
1:54:06
Anyway, but what you can do is we're going to hand you a magic microphone.
1:54:09
You can say two things into it, and the next morning, whenever their next morning is, the entire population of the earth is going to wake up and say, I've just had two of the best ideas ever, and unlike all the other times, I'm actually going to act on these two.
1:54:30
What are you going to incept into the world? Give you two things.
1:54:35
All of our issues with government spending and taxation. They matter a lot.
1:54:41
Um and the debt problems are real problem, but I wish people understood most of the issue is what government actually does, whether it's funded as a deficit or surplus.
1:54:52
If it's a good idea, we should do it.
1:54:52
If it's a bad idea, we shouldn't do it.
1:54:56
Um and I I think that gets away and I I you know, again, this is not going to happen.
1:55:01
I'm not going to be granted this power in the world listening. Yeah.
1:55:03
Is unlikely if I was, but that's one.
1:55:05
The other one cuz I'm now I'm finally remembering you you did ask me this last time, so I'm going to repeat myself. Okay.
1:55:11
Uh I think statistics should be taught in junior high.
1:55:15
Oh, I completely agree with you.
1:55:17
Much more than calculus, for instance.
1:55:17
I I actually I'm geeky enough that I like calculus, um but for most people, they're not going to use that in their in their lives.
1:55:28
Everything people read, all these crazy things you hear on the internet, having even some knowledge of statistics, of randomness, would help so much.
1:55:38
I have my issues with Nassim Taleb.
1:55:41
I won't go through them here.
1:55:45
And when I say issues, not a fan.
1:55:48
But his first book, Fooled by Randomness, It was a good book.
1:55:53
It's a good book, massively pretentiously written. >> Oh, yeah.
1:55:56
Um self-referential, all that.
1:55:59
>> That goes without saying.
1:56:00
>> But he's doing the Lord's work there. Yeah, I agree.
1:56:02
Making people understand how much of what they see is random, and how much they over believe and want to give a reason for things that often don't have one.
1:56:11
Each of his books had a real point. The Black Swan, yeah. The world's fat tailed.
1:56:18
I I do think other people knew that.
1:56:20
He he he likes to yell about my one of my heroes, my professor Gene Fama.
1:56:25
Gene in the in the '60s wrote his dissertation I read I read Gene's dissertation.
1:56:31
>> daily returns that they were fat tailed. Yeah.
1:56:32
So and he'll say things like, you know, Fama thinks everything's normally distributed.
1:56:36
I'm like, 1965, man, before I was born, he was doing this.
1:56:41
Um you know, even the the fragile book, he's right.
1:56:48
Um there are things that are that like volatility, and there's things that dislike volatility.
1:56:52
I disagree with him on the options premium, um but you don't have to read every book, but a basic statistics class, I've told my own kids this, the more mathematical, the less mathematical ones, I've said, you know, to be a functional citizen and to have your vote actually be meaningful, not in the sense that you're going to swing the election one way or another as one as one vote, but have to be informed. Yeah.
1:57:19
I I would I would love the world to understand a little basic statistics, focusing most importantly on appreciating how random things can be in the in the shorter even medium term. Yeah. Those are both great.
1:57:31
Cliff, as always, I always have the best time chatting with you.
1:57:37
Thank you for coming on the program. >> you for having me. This was so much fun. Uh thanks. [Music]