Animal Spirits Podcast - Talk Your Book: Price Is the Ultimate Factor

Starting point is 00:00:00 Today's Animal Spirits Talk Your Book is brought to you by the Motley Fool Asset Management. Go to fooletoffs.com. Learn more about all of the Motley Fool's various strategies in ETFs. That's Motley Fool Asset Management, Fooletoffs.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Redhol's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

Starting point is 00:00:35 Clients of Britholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spurts with Michael and Ben. On today's show, we spoke with Bill Mann from oddly full asset management. We've talked to him a number of times before. The internet boom the first time was the first really, you know, we had these internet chat rooms, right, where you could kind of spread information faster. And that whole hurting thing is always happening. happen. But it is, it does just seem to go up another level with every new technology we have. Yeah. It started with the chat rooms and then social media came along and blogging and now AI. I do think that the momentum type behavior, which we're talking about today, a lot of momentum

Starting point is 00:01:19 strategies, I do think that stuff is going to just get put on steroids and those cycles are going to be happening way, way faster. One of the things that has become more and more difficult in the modern world is long term thinking and long-term investing. I think a lot of people are of the mind that, all right, this cycle is going to end at some point, right? We've gone up a lot. We're going to go down a lot. And then that's it. The stock market goes away. Don't you think that that's sort of some people's, I know, not literally, but some people think like, all right, when the cycle ends, yeah. But no, guess what? We're going to be alive. You will be investing, God willing, for the next 10,

Starting point is 00:01:55 20, 30, 40 years, and beyond. People always try to equate investing. to some sort of sports analogy, like what inning are we in? The game just keeps going. That's right. It's a different kind of game. We're still trying to figure out, like, how does this end? What does this mean? With AI, and it feels like we're talking in circles in some ways.

Starting point is 00:02:14 But that's what I like the idea of Bill talked about how they have, they call them passive strategies and they're rules-based. And I think that to me is the, that's how you force yourself to be a long-term investor, is you put rules in place and you don't try to let it, you know, because how many people are going to be putting in, hey, hey, listen, I, I want. want to invest in the AI theme, but I want to stay away from the hyperscalers, but I want to avoid companies that are below this level. And how many people are getting spit out those same exact companies to invest in and putting it in? And then how willing are you going to be to

Starting point is 00:02:40 stick with one of those stocks that you just, it spits out to you, right? Rules are more important than that ever. I agree. So here's our talk with Bill May I. He is the chief investment strategies at Motley Fool asset management. Bill, it is great to see you again. Michael, you guys look healthy. You look good. You've got your summer glow. Still like, God, Ben's got a mustache. He does. I have to look close, but I see it. All right. We are talking about momentum today.

Starting point is 00:03:10 And I've used this example a million times, probably with you. When talking about momentum, it seems to be an under allocated space, at least from the advisor side. I think a lot of advisors have drunk the value serum. I don't want to use coolie. That's a bad word. Nothing wrong with value. We believe in it. There's a wide acceptance.

Starting point is 00:03:31 among all sorts of investors, particularly advisors with value. And if you compare the assets in value strategies versus momentum strategies, it value dwarf momentum. And they really are two sides of the same coin. There's a lot of behavioral anomalies that make the factors persist to the extent that they do. But I think even though there's been an under allocation to momentum compared to value, I think there's, I think investors have largely come around to the idea that momentum exists, that it is pervasive, especially in a world today where the factor exists because of behavioral

Starting point is 00:04:03 anomalies, the way information spreads, and it spreads a lot faster today than it did 40 years ago when it was first discovered or whatever year that was. How do you think the general investor, I know this is sort of an unfair question, how do you think momentum is understood today? I would love to come up with a better word than momentum for momentum as you think about it as an investing strategy because it really sounds like Mr. Toad's wild ride. Like you're getting put into the catapult, you know, an angry bird type situation. You're getting, you know, slingshot out into space. And what momentum is functionally is a way of tracking those behavioral anomalies of what is working in the market. And that doesn't necessarily mean the hottest components of the market.

Starting point is 00:04:49 What it means is the parts of the market that are showing outsized performance relative to how they usually perform. So you can end up with a substantial overlap between a value strategy and a momentum strategy depending on the kinds of markets that you're in. And what's important that is different between momentum and value is that as we know and people who are died in the moment, will value investors. Value investing can have a bad decade or two as we've gone through. And what momentum is doing is taking a little bit of the edge out of putting all of your eggs into that value basket waiting for it to work with the other understanding that, you know, at some point it will. But in the meantime, why are you not allocating a component of your portfolio to the things that are working within reason?

Starting point is 00:05:49 I've often talked about how the fact that in a roundabout way, the S&P 500 is like a momentum strategy, right? The cream rises to the top. You're letting your winners ride. The losers are kind of cutting themselves short. But obviously, that's not the quantitative definition of momentum, right? Like a quant would tell you. I'm curious how you think about, because even with value factors, any type of quantitative strategy, you can slice and dice it in a million ways, right?

Starting point is 00:06:13 Certain value factors for large-cap stocks will look different because of the rules that are chosen. So how do you think about like the 80-20 principle of getting the big stuff right versus trying to get too much into the nitty gritty into the weeds and the details in over-optimizing a strategy from momentum that like it's kind of, or do you just keep it simpler? I'm curious how you think about like the level of detail that's desired in a quantitative strategy like this. We are simple bears first and foremost that, you know, at the Motley Fool and Motley Fool and Motley Fool asset management, our, you know, our philosophy is finding high quality companies. So the top of our universe is always going to be one of the highest quality companies that we would like to have a long-term investing relationship with. And if you understand the simplicity of that, it's endlessly complex, right? But the fundamental of it is very simple.

Starting point is 00:07:07 We're not looking into the hottest parts of the market. We're looking into making sure that we're getting that 80% right. like we are invested at all times in the types of companies that we would like to be invested in. And so if you get that right over time, that should pay off. So I think probably, you know, thinking about your question is, I think that we tend to think or that people generally think of momentum as being the same thing as leverage. You know, a leverage strategy. And we are fundamentally unlevered.

Starting point is 00:07:45 And even more so than that, you know, when you're looking at high quality companies, they tend to be unlevered as well. What we are trying to do is to ensure that we are focusing in the market within that space, in the, you know, in the companies that the market is, you know, is favoring and valuing at that moment. I want to talk more about some of the quantitative measures and thinking about longer term momentum versus short term breaks and how they all shake out. But just getting back to how it's perceived, momentum to me is a fair description. I understand your point that people think it's like this crazy strategy. But it's sure a lot, it's sure way better than the Chase Stock strategy. I don't have a better word, by the way. I think one of the reasons.

Starting point is 00:08:33 So when people think about investing, they think about, all right, how to get smart on companies and let's do research. We research the fundamentals, the income statement, the balance sheet, cash flows, all of that sort of stuff, try to normalize, look at the moat, the competitive advantage, the governance, the board, the C-suite, all those sort of things, and you try and understand. And those could be sliced in terms as like factors, different factors, quality, whatever you're looking at. I think people don't consider that price is the ultimate factor. And price distills all of it. And the reason that momentum exists fundamentally before even the behavioral things kick in

Starting point is 00:09:14 is because these companies are doing well. Stocks don't just get momentum. They get momentum because all of the things that you would research are clicking in the right direction. And then, of course, there's the, you know, the pylon and the underreaction, the overaction, all of those sort of things. But price is it. And I think people are too quick to dismiss it because it sounds so simple.

Starting point is 00:09:36 We have all seen in our careers in investing in individual equities where you own an equity and you're very excited about it and the company is doing well. But then suddenly the stock starts to perform poorly. And there's a lag of nine months. And then suddenly the news that somehow that price factor understood comes out and becomes well understood by the market. So, yeah, I absolutely do agree that price is the ultimate factor. and a momentum strategy is simply leaning on the fact that that is true.

Starting point is 00:10:11 We can agree or disagree, and it does seem like every time I come on to, I come on to your podcast, I complain about something. But, you know, last time it was active versus passive. And this time it's momentum. I'm becoming grumpy in my old age. But, I mean, you know, ultimately, when you think about price and what is working in the market, it's not like, you know, things are being pulled out of a scrabble bag. There's not randomness to it.

Starting point is 00:10:38 It is based on entities that are, you know, that are ideally, you know, capitally appreciative. That's what businesses is. They are the core element. And so a momentum strategy looking at those behavioral anomalies is simply a distillation of the fact that the market is, in fact, smarter than all of us, regardless of how much sophistication we bring to our analysis. Bill, there shouldn't be that much to complain about right now because we're in a bull market. We've been in a nice bull market for a while now.

Starting point is 00:11:12 You had this topic that you call the NOAA principle. I'm curious to just explain to me what the NOAA principle is and why it's important. So we can think about the NOAA principle as being, you know, going back to the Old Testament, Noah at one point had to build an arc, right? And, you know, I won't recount the story. I believe that, you know, most people are familiar with the story. of Noah, but Noah went through a period of time where he was building this large boat and looked like an idiot, right?

Starting point is 00:11:43 Why are you building a boat, Noah? Right? What is it that you're going to do? How is it that you're going to collect two of everything? You know, when, look, it's sunny out. When we think about investing, one of the, you know, one of the key elements that is that is simply true is that people have a very, very hard time. preparing for, in a really principled way, the upcoming flood.

Starting point is 00:12:10 Right? We can talk about AI now. Right now, we know that there are a lot of people who believe that AI is in a bubble. There's, like, circular investment. There are all these things that we can worry about. And at some point, the market will decide to worry about it. It'll just decide. Now is the time in which I do not believe anything in AI has to be true.

Starting point is 00:12:32 We saw it with semiconductors. Suddenly you had semiconductors, you know, they were the hottest thing on the planet in the first quarter and they were ice cold in the second quarter. Why? Right. You know, so when we think about managing money and when we think about making those decisions, it is a very, very difficult thing to get out away from the things that are working at the moment, even if you can see that there are storm clouds on the horizon. Bill, those storm clouds happen faster today than they used to. So when building a strategy that is dictated on fundamentally on price, how do you think about what happens when a company and you're just staring at the chart? Clearly, the short term momentum is lost, right? A company went up, went from 50 up to $100 over a two-year period and then over a one-month period, it falls down to $82 pretty rapidly. The shorter term trader would say, I'm out, done, right? Clearly has lost the momentum. The longer term trader would look at, say, a weekly chart or whatever, a longer term moving average, I'd say, no. This is totally normal

Starting point is 00:13:42 within the scope of a long-term winner. It pulls back, but it hasn't really violated what we think to be the longer term momentum signals. How do you think about balancing those two competing forces? So the way that our strategy is, you know, is worked. And again, you know, we are primarily a passive shop. So we are updating quarterly. And so in some ways, the short, the short term charts are somewhat irrelevant to us. We're singing in the hams of the church of what's happening now. When we come to those rebalances quarterly, we have a fairly stochastic method of, you know, of favoring more what the longer term momentum is showing rather than being super sensitive. And again, I think that that comes from, you know, from a belief that the market does,

Starting point is 00:14:30 tend to overreact to news. But if you think again, you know, what I was saying about a company that nine months ago, you know, hit its peak and then you figure out longer term that there actually was something wrong. And, you know, we we see a bunch of those in the news today, some formerly high-flying brands that are no longer, you know, that are that are seeing a lot of trouble. The way that we tend to think about setting up our, you know, reacting is reacting in a. much more to the longer term than to the shorter term. I guess my big broad thing on your NOAA principle is that we've just been, people have been hit over the head for years with predictions about what the next shoot-a-drop is going to be.

Starting point is 00:15:13 Like, this is going to be the thing that gets us. We're going to be in a recession. We're going to be in stackflation. It's going to be a lower, like Michael and I have talked about all these things, ad nauseum, about what the next thing is it's going to get us. And now, of course, AI is obviously an easy one. And to be honest, I think AI is the one that probably makes the most sense. If there is a pullback in CAP-X, it's such a big part of the economy in the market.

Starting point is 00:15:33 If that did happen, it would seem like you would have a meaningful pullback on maybe the economy and the market. I'm just curious how you think about just preparing for the flood with the understanding that the flood don't happen very often. And how people can kind of balance that because it is hard when you're a constant drumbeat of this is going to crash and that's going to crash. Then the crashes don't happen. And then you're like, well, maybe I'm becoming too not worried about stuff. And it's hard, right? It's endlessly fascinating, too, right? The degree to which economists have called 15 of the last five recessions, for example,

Starting point is 00:16:08 you know, like, yes, there are always, you know, we talk about the markets climbing a wall of worry. I think that, you know, I think that that's absolutely true. When I think about building the arc, if you will, ultimately, we are talking about individuals, you know, and individual investors who have to be able to be able to, to live with their own portfolios, right? At the end of the day, a perfectly built portfolio will do you no good if you either overreact or underreact to reality, right? And we worry more about people who overreact than underreact,

Starting point is 00:16:46 and I think that this history would show that people who trade the most tend to do the least well. So ultimately, what we are trying to do is create a balance between worrying about things like that and just having a mechanism in place that adjusts naturally. And Michael, you mentioned the S&P 500 earlier on some levels. That's exactly what that is. It's exactly what the S&P 500 does. It is a private weighted mechanism that measures how the market is thinking about companies at any given point.

Starting point is 00:17:22 It's one of the most powerful things that's ever been devised, but it was not in mind. It was not discovered. It was in fact devised. Do you think with the momentum stuff, there was some chatter going around today that, listen, every analyst now has access to the same tool, whatever LLM you're using, opening eye or cloud or whatever? We're all asking it kind of the same questions. We're taking the same data and filtering it through. And they're probabilistic by nature, right? They're not going to give you the answers, but they're going to say, hey, here's probably the baseline.

Starting point is 00:17:52 Do you think that there's actually the case to be made that there will be more hurting in the future because of this and more momentum, but that maybe the momentum crashes? Well, I'm getting very theoretical here. But maybe momentum crashes will even bigger because people are all just going to, you know what, we're outsourcing all our thinking to these robots anyway. Let's just do it. Why think? Yeah. I mean, you see that to the Reddit forums and all that. Like, there are going to be more hurting into these things.

Starting point is 00:18:17 And it seems like the behavioral stuff that causes momentum is going to be even more amplified going forward. I wish I'd thought about pulling this up beforehand, but there's a fascinating study that looks at 70 different models. The University of Washington did it. 70 different AI models, and they would query questions that were things like, why is six afraid of seven? Give me 500 words on this. And they were dramatically the same.

Starting point is 00:18:46 And this is a tendency that's called high tea. So yes, absolutely, within AI models, they are designed and they are meant to give you the highest level of consensus. So I think that there probably will be additional hurting. We thought the same thing about the internet, by the way, right? Hey, suddenly information is available. Google is out there, I guess at the time, Alta Vista and Likos are out there. And so people are going to be asking the same questions.

Starting point is 00:19:16 It didn't really happen that way. And so I think that there will be a curve. But the thing that we try to remember first and foremost is that although the market is a giant paramutual system, the logic of the market is based on how these companies are performing. The instruments themselves are not on a one-to-one correlation with the market, right? The businesses perform or do not perform completely separate from the market itself. And so ultimately, the convergence happens naturally. So how do you think about the evolving nature in terms of like the sectoral composition? Do you put any guardrails around this?

Starting point is 00:19:59 Because for much of the last couple of years, it was really clustering around technology and communication services. I believe I read the other day that we had the highest concentration in 2025 in technology in the U.S. markets since the railroads in the early 20s when they were 70% of the market. So it's obviously a huge concentration. I guess the difference being between the technology companies and, say, the railroads, although I could talk myself into the opposite position, that generally speaking, they have incredible returns on capital still, even with the capital investing, you know, investment

Starting point is 00:20:39 budget, you know, that they have. Yeah, I think one of the ways that, you know, that a momentum strategy can actually, it can actually pay off is by picking up on the real subtle changes in the markets or even not so subtle. You know, in the first quarter of 2026, it was everything was semiconductors. And then, you know, the second quarter of 2026, we were back to, you know, back to capital investment in AI. We can assume that those changes are going to continue. I think one of the things that is fundamental about a factor model is that it will pick up on what the market is seeing. way before the average investor can see it.

Starting point is 00:21:23 So what do you think happens when this stuff does here? I think that's the interesting part to me about the momentum strategies is that they are kind of these chameleons where it's not just like some people assume, well, momentum, that's just you're investing in tech or growth stocks. But there's a big difference between growth and momentum, obviously. And for the people who don't invest in momentum, I think that's a surprise. So if the, you know, if dividend stocks start working again in high-quality stocks, like those are the ones that are going to show up on the screen,

Starting point is 00:21:48 I'm just curious how you think about the transition periods, though, of getting there. Like if this AI stuff does kind of cool down and we start to see consumer staples or these more defensive names actually start working, like how painful is the process of getting from here to there? I think given the fact that the market is, what, 44% invested in technology. And I think probably if you could throw basically the energy sector into being a derivative bet on data centers on technology at this point. I mean, it is a massive bet that's being made. And it's not just inequity anymore. I mean, the debt markets at this point are really, really highly levered towards

Starting point is 00:22:29 the tech buildout and the AI buildout. So I don't really see a scenario in which that is anything other than painful. And I think that even, you know, even if the end goal ends up in the same, you know, in the place that we think it's going to, there are. going to be, I mean, right now, there are hundreds of billions of dollars that are being invested that have very little chance of return. We don't happen to know which those hundreds of billions are, but we know that they're out there because people are guessing what the development is going to be. And now that they're using debt, as opposed to just equity, there's a time premium involved as well, right? Like, you can, you can be right and still default. It's hard to do, you know, it's hard

Starting point is 00:23:15 to do if you're unlevered, but you certainly can be. So, you know, for us, I think that, you know, I think that whenever you have a, you know, a revolution in an economy, and I think that that's what AI promises to be, there are going to be real, real pain points along the way. I don't happen to think that it's going to come in the form of the massive job losses that people are talking about. So the fact that employment should still be okay, even if it is disrupted, should be helpful. There's never been a technological advancement that has destroyed more jobs than it is created. So even if we don't see what those jobs are going to be, that will be helpful. But ultimately, I think we can just count on the fact that the financial exposure that we have

Starting point is 00:24:11 to these investments is going to cause a fair amount of disruption at some point, even if the core of it's correct. So if and when that happens, obviously it'll drag the stock market down. What does the transition look like between the former momentum names to names that usually hold up better in a sell-off like consumer staples and utility stocks, I guess before AI? I don't know the utility stocks are in that are in that bucket. anymore. Yeah, no, they probably will get killed, actually. But just generally, what do you think that looks like? Would you guys have a portfolio that is heavy into whatever the defensive names happen to be that exhibit either absolute or maybe relative momentum?

Starting point is 00:24:57 Yeah, and relative momentum is the correct term. I mean, you guys know the terms upside versus downside capture. You know, our momentum strategies are generally speaking if they are unlevered. They're not built to not go down. Wait, what? This conversation is over. Yeah, cut us mic, Travis. You're here under false pretenses. I mean, that is the promise of momentum is, you know, is that it will have a lower downside capture than the overall market.

Starting point is 00:25:33 Not that it will miss because what we know is that, you know, and during, during, and I'm not forecasting this, you know, as, you know, as, you. you know, anytime soon. But at some point, it will happen that the markets will, you know, will be in such a crisis that correlations will descend to one, right? Like, everything will move at once. We've, we've seen this in our career multiple times. When that happens, the areas that momentum strategies will move into will be the ones that are, frankly, declining the least, that are, you know, that are showing the most resilience. Even if that resilience is a negative number, or resilience is a relative form, and that's, you know, and that's the core of a momentum strategy. The good news is when the downturn comes, everyone can claim that they predicted it ahead of time.

Starting point is 00:26:20 That's right. Then you ask them how many times they predicted it and there's dead silence. Bill, just for people who are not familiar, tell us what about your fund business. So Motley Fool asset management is a sister company of the Motley Fool Publishing Company, which is the company that people probably are much more familiar with. We started our asset management business in 2008. And the reason that we started it is that we saw how people had panicked during the dot-com crash, you know, in the early to mid-2000s. And so we wanted to give people a place to go, you know, with a name that they trusted. So we've been around actually for quite some time.

Starting point is 00:26:58 We have now nine ETFs, six of which are passive. We've been talking about a momentum strategy, which we have. We have other factors, innovative growth. We have a value fund. But these are all based upon the research of our sister company, The Motley Fool. So we are closing in on $3 billion in assets under management. And we're proud of our stable. Great.

Starting point is 00:27:25 So people want to learn more where do we send them? Here's my home phone number. You can call me here. You can reach us at fooletfs.com. And if you do come, we've got a couple of things. of newsletters. I write one called, man, on the street, come sign up, and you'll, you'll hear some more of my scurrilous thoughts on a monthly basis. Cool. And one clarification before we leave. You said, hey, we have passive strategies. I don't want to make sure like that. You're saying,

Starting point is 00:27:50 listen, these are rules-based. They're not discretionary. It's not someone who's deciding what to do based on the way that they feel or how their opinion is. These are rules-based strategies that you're running. Yeah, they're rules-based strategies. And they are set that way by perspective. so we don't have any real ability to put our thumb on the scale at any point. So we will be as good as the ability of our sister company to identify high quality companies to create the top of the portfolio. You know, our capacity to have put rules in place that followed the strategies that, you know, as we have designated them.

Starting point is 00:28:24 Makes sense. All right, Bill, thanks for time. Appreciate it. Great talking to you guys. Okay, thanks, Bill. Always great catching up with him. Remember, checkout Fooletefs.com. from all their strategies, and then email us,

Starting point is 00:28:36 Animal Spirits at the compound news.com.

Animal Spirits Podcast - Talk Your Book: Price Is the Ultimate Factor

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