ETF Edge - Gold beating stocks and bonds. Plus, can no one beat Buffett’s old edge? 4/8/24

Episode Date: April 8, 2024

Gold at historic highs and beating stock and bond averages… but what’s the real driver? Plus, investment advice for the very long haul with Larry Swedroe, Director of research at Buckingham Strategic Partners.    Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ, Supporting the Innovators Changing the World, Invesco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds. You are in the right place. Every week, we're bringing you interviews, market analysis, and breaking down what it all means for investors. I'm your host, Bob Cassani. Yes, indeed. Gold said an historic high, but what's really driving it? George Milling Stanley, Chief Gold Strategist is State Street, Global. and the man behind the world's largest goldie kf joins us plus what else is working and not working in 2024 Larry Swedro director of research at Buckingham strategic partners and author of the new book in Richer and Future the

keys to successful investing is also with us also along Todd Rosabloof head of research at Vettify George good to see you why is gold hitting a new high good to see you too Bob I think it's a whole bunch of reasons never just one thing with gold but we've got good strong jewelry demand and the emerging markets, you've mentioned India and China, but all across the emerging markets. That's a very good demand there. We've got very strong demand from emerging markets, central banks, and we've also got renewed investor demand.

And I think that that's building some momentum for gold, which is always a good thing to do. Yeah, it's quite amazing. So you and I have always emphasized this, and I know you're a supply-side demand, supply-side guy. Supply is fairly steady. Yeah. The amount of mining that's actually done in gold is fairly It's the demand side that matters.

So we're seeing increased demand from China and India, the two biggest suppliers out there. The Chinese average investors seem very dissatisfied with the stock market there and with the real estate market there. Is that benefiting gold? I think no question. I mean, gold is a very good alternative to both of those for Chinese investors. The other thing, China had been running into some economic problems that started in real estate and then spread into the financial sector.

I think that there's now some stimulus activity going on in China, and that helps. Yeah, and then we have central banks. Now, this is a very intriguing story. They're increasing their supply of gold out there. Explain why that's happening. Yeah, look, for central banks, primarily the emerging markets,

realized over the last 15 years that they are very heavily overweight in their official reserves in US dollar denom, terminated dead instruments and underweight in gold. They have more than two-thirds of their reserves in treasuries and less than 5% of their reserves in gold. That's a dangerous imbalance as far as they're concerned and they're doing something about it. They have been for 14 straight years now.

This year has already started well with China in particular, a big buyer already. And I think that we're probably going to be another good year for central bank demand. That has been very, very good support whenever gold's shown any softness. and I think it's going to help to push prices higher. And gold has a certain advantage. If you have it in a vault in your country, you can't confiscate it. I mean, this whole thing about what happened with seizing Russian assets can't be lost on some other countries in the world.

Exactly. I think, you know, it really increases the attractiveness of the one official reserve asset that is universally acceptable and entirely transparent. You know, Todd, we always talked about gold as a hedge against inflation. George and I have been talking about this for 20 years. But the academic literature seems very mixed on this, frankly. Some people think it is a hedge against inflation. Other people think it historically doesn't appear to act that way. Is there any thoughts on what people are saying now about gold?

Well, people are using gold ETFs to diversify away from stocks and bonds. And so we've seen a rally in gold. We've seen bid up demand for gold ETFs like GLD and GLDM in just the past month. But that's only limited the net outflows that we saw the first three or the first couple of months of the year. People have looked to other ETFs as either a hedge or to diversify their portfolio. Now that we have spot Bitcoin ETFs, those have seen tremendous demand out of the gate, even at the same time that gold has started the rally. Yeah, as a diversification strategy, it certainly makes sense. And people ask me as gold money, it's sort of a, you know, I guess a scholarly question.

I mean, it has functioned as money, George, throughout history. I don't know. You can't go to the store and buy groceries with gold, so in that sense it's not exchangeable, but it is a store of value. It has a perceived function as money. And there are some countries where you can still actually use gold to buy things, whether it's large purchases like real estate, houses, or whether it's white goods, for example. In Vietnam, you buy those with gold kilo-bos. Yeah. So the important thing here is it has a history of acting as money.

It is a store of value, even if we can say it's not, doesn't have all the attributes of money right now. And it is certainly a diversifier out there. And it's, the ETF revolution has made it easy to store gold in vaults. That's safe. So I guess it makes some sense to me that if you have some concerns about diversification, or people are better educated about diversification, gold would be doing a little bit better. On top of the demand, you're talking about. Yeah, and I would actually have thought we'd see even more demand for gold ETFs.

In fact, in 2023, gold did relatively well and it went up in value and investors moved away from it. We saw net outflows for the gold ETFs in general. So it's encouraging to see new demand. And it's also you can get gold exposure through gold mining companies and even more diversified metals and mining ZE. Like XME, for example, has gold exposure. That's a good point. Gold rally, but so is other things. Commodities have rallied.

Oil has rallied. metals have riding mining stocks that's xME the mining ETF in general has done very well the metals ATF I should say right and that you're going to get exposure to gold you're also going to get exposure to some of the other metals steel is I think the largest industry exposure to that diversified metals and mining ETF XME yeah now we we've talked about this many times gold stocks versus gold gold they don't always act the same although they sort of move in tandem

and what the reason they don't always move in tandem is why it goes gold stocks are part of the stock market. And they sometimes act, is that the answer? There's earnings potential for the companies. So obviously supply and demand plays a role in driving the overall price for gold mining companies. But then these are companies that have actual costs to be able to go in GDX and GDXJ from Vanek are some of the leading gold mining ETFs. Yeah. And I mean, that's, you agree with this point though.

They don't always, they sort of move together, but not exactly. Yeah, I mean the gold price is one of the inputs that determine the share price performance of gold mining companies. One of the reasons I own gold barb is that I believe it offers me some protection against potential weakness in the equity market. And as you said, when the equity market goes down, gold mining starts to remember that they're equities. And they tend to go down with the general level of the equity market. So they're not offering me that extra level of protection. Now, I want to bring up the fact that you actually run two different gold DTF, GLD and GLDM, the junior gold, I guess you want to call it, but it's the same thing, essentially, right?

I mean, just a different price structure. And so viewers get confused about that. Can you explain? There it is, GLDM and GLD. These are essentially the same products, right? They're very, very similar. The difference is how do you actually want your gold? If you are someone who wants to trade, if you want to rebalance a portfolio,

so you need to be trading in and out of gold, or if you want to be a tactical player, that means you need to be able to move very, very quickly. then GLD's liquidity after 20 years now means that that has very very low trading costs compared to any other gold ETF. If you have a million dollars and you want to put a million dollars into gold and leave it out there, then GLDM with its lower expense ratio makes more sense for you. But if you're trading, then GLD makes sense. State Street does this with this with this S&P 500, right?

They have a higher cost, the big SBY, the biggest ETF out there in the world, have a trillion dollar business and then they have a lower cost. Right. SPLG is the lower cost, S&P 500, ETF. That's a trend that we've seen in the ETF industry to bring in more retail-oriented new investors and compete a bit more on the expense ratio. So GLDM is probably the better way for new investors

that are looking to hold it, or there's obviously some competition from grounded shares and I shares and others. And speaking of retail investors, is there any sign that young people in the United States outside of China and India, I mean here in the United States, young people are interested in gold or the fuddy-duddy investment? No, I don't think it's the fuddy-duddies.

People of my age and older. I've always thought that our cohort understood gold better than anybody else. But State Street did a study recently, which basically said that millennials, in terms of their appreciation for the value of gold in a portfolio, millennials have overtaken Gen X and they've overtaken my cohort, the baby boomers as well. And what about the competition? He was mentioning Bitcoin ETFs out there. Is that competition? I mean, bonds are competition for stocks. Is Bitcoin ETFs competition for gold ETFs? I think Bitcoin may well be some competition for the people who want to take a tactical

position in gold and just wait for the price to go up and sell. I think that Bitcoin may well offer competition there. But I don't think that Bitcoin really competes in terms of a long-term strategic allocation. And that's where I think gold really comes into its own. All right. George, thank you very much. Really enjoyed. Always a pleasure. pleasure chatting with you 20 years I've been talking with George Billing Stanley the 20th anniversary of GLD is coming up coming up in November we'll be ringing we'll have you back for that we'll definitely have you back for that George thank you very much I want to switch gears and bring in my next guest

Larry Swedro another old friend of one I got a little friend here today Larry is the director of research at Buckingham State at Buckingham and of course the author of a new book enrich your future the keys to successful investing Larry, before I start, I just want to ask you about gold here because George just came off here. Your quick thoughts on gold and gold investing in general as a diversifier. Yeah, a few quick things. One, gold, a lot of people use it as a hedge for equities. A 2012 study looked at how gold performed an equity down markets.

And it's not a perfect hedge, but it has gone. down 17% of the time when stocks went down. So it doesn't act as a great hedge in that way, but 83% is not a bad track record. But in 0709, when we had the big financial crisis, gold fell 30%. So that's a problem there. On the inflation head side, I don't see how anyone could consider gold to be a good inflation edge over any reasonable horizon. A good example, 19. 80, gold hit 850 in March of 2002. It hit 293. In that 22-year period, inflation was 4%. So gold fell 86% in real terms. So I don't think you can really reasonably say gold is a good inflation hedge over any investor normal horizon. The last point I'll make is I think there are gold can act as a hedge against geopolitical risk.

And right now we're facing a lot of them, including, I would add, the deteriorating financial situation of the U.S. with its massive budget deficits, now looking more like, say, Italy and heading in that direction. So you could see, as your guests mentioned, more central banks moving away from dollar reserves. and that could put upward pressure from demand from central banks and maybe other investors who have been traditionally used the dollar as a safe phase in asset. So that's a potential plus for gold. All right. And I want to go back to the book now. So you start out with a fairly long digression on what matters in investing.

And you note that a very small number of factors explain most of the variance in stock returns. I'll put up a screen here, but you talk about size, value, momentum, profitability, quality. Briefly, just briefly note what we're talking about here. Here's the coming up on the screen here. Explain some of the variations because you start out with why do some stocks perform differently than other ones. And I think that's important to note here. Yeah, I think the best example in my book is filled with stories and analogies to make difficult concepts easy to understand. for people who haven't taken courses in capital markets theory, which means almost all of the

population of investors. So you can think of it the way Sabermoticians figured out that batting average wasn't the key statistic to tell you who was the best hitter for a team. It included on-based percentage and slugging percentage. So you had different metrics. So the academics have applied the same idea to try to figure out which metrics, how to determine the future stock returns and have provided premiums in the past. And what they have found for equities, there are five key metrics. One is what's called market beta, which is your exposure to the overall market. Some stocks have more exposure, the more volatile. Some stocks have less. The second is a size factor. Smaller companies have provided a premium over large companies over the very long term.

Value stocks or cheap stocks have provided a premium over growth stocks. More profitable companies have provided a premium over the less profitable ones. And Warren Buffett's maybe favorite factor would be quality, which includes profitability, but also looks at things like financial. strength, stability of earnings, limited debt, those things. And those five metrics explain almost 100% of the variation in returns of diversified. Right. You've got, you mentioned Warren Buffett. You've got a great chapter on Warren Buffett's secret. And that is, well, he is a great stock picker. It's the fact that he has exposure to quality as a factor that matters. It turns out, you know, after he got involved with Charlie Munger, he was one of the great

quality investors here. Chat about that briefly. Yeah, so Warren Buffett was generally considered the greatest stock picker of all time. And what we have learned in the academic research is Warren Buffett really was not a great stock picker at all. What Warren Buffett's secret source was, he figured out 50, 60 years before all the academics what these factors were that allowed you to earn excess returns. Cliff Asnest and the team at AQR did some great research and show that what you accounted for the leverage Buffett applied through his reinsurance company, if you bought an index of stocks that have these same characteristics, you would have matched Buffett's returns virtually. And so now today, every investor can own through ETFs or mutual funds,

the same types of stocks that Buffett is bought through companies that apply this academic research, companies like Dimensional, AQR, Bridgeway, Black Rock, Alpha Architect, and a few others. Yeah, so just moving on here, you're very adamant that two things that don't explain performance in the stock market is individual stock picking, which doesn't work, And market timing, which you talk about, again, trying to go in and out of the market. Does in fact, neither factor you say in the book leads to long-term success, particularly when accounting for the time people put in, the cost, the taxes. Yeah, that's true with one minor exception. Momentum certainly is a factor that has worked over the long term,

although it does go through some long periods like everything else, will underperform, but momentum does work. But that's a mechanistic, non-active management. It's purely systematic. Computers can run it. You don't need to pay big fees, and you can access it with cheap momentum funds run by some of the same companies I mentioned. Yeah, and Todd, we've been talking for years about index investing. One of the reasons the ETFs won out is essentially this research that Larry has summarized in his book is one of the main reasons that the ETF business. has been so strong. It is mostly index investing. It is. And we talked about some of those

factor-oriented strategies. So there are a number of ETFs that either are a single factor specific, like QAL is an I-Share's quality ETF that's focusing on those characteristics that was talking about strong balance sheets, consistent earnings, low leverage. And you even have ETFs that combine some of these factors together. So GSLC is a Goldman Sachs ETF that combines quality and value and momentum all within one portfolio. So we're seeing growing demand for factor-oriented ETFs. We are also seeing demand for actively managed ETFs, despite some of the data that shows it's hard for active management

to consistently outperform. Yeah. And Larry, there's another great chapter. One of my favorites actually in the whole book is on the similarities between sports betting and stock picking. So you make the point that you don't hear much about Rich Kahn. But you do hear about rich bookies that are going on. And it's the bookies that actually end up making the money in sports betting because how highly efficient it is.

Yeah, so I actually think this is the most important chapter in the book. I searched for a decade to figure out a way to explain how markets are actually setting prices. And the best analogy I came up with finally was looking how sports are, sports betting works. And everybody knows it's very easy to identify the better team. For example, if, you know, Connecticut, which won the championship in the NCAA last year and might win it again tonight, is playing Arkansas State. We all know they could play 100 times in Connecticut will win. But it doesn't do you any good betting because the market puts odds or a point spread and says if Connecticut doesn't win by, say, 32 points, betting on Arkansas will allow you to

win. And the point spread is exactly analogous to a PE ratio or a book-to-market ratio in the sense that great companies are going to have much higher PE ratios, much higher market to of book value prices in the same way that Connecticut is going to have a big point spread over Arkansas. So it does you know good to know which is the better team, in my view, and all of the research shows that it really does you know good to know which is the better company because the market already prices for that. Yeah. So what's great here, and again, this is the best chapter in the book, my favorite chapter is you point out that the real object of the game, what's the game we're all playing. The object of the game is to keep everybody playing because the bookie wins

as long as everybody keeps playing, stock brokers and active managers win as long as everybody keeps buying into stock picking. So the more you play, the more likely you are to lose or underperform essentially. This was one of the main points in the book in your chapter in your chapter in your book there, right? Yeah, because they're taking the vigorous. in the same way that if you go to the roulette wheel in Las Vegas, and Wall Street need you to trade a lot so they can make more money on bid offer spreads. Active managers make more money by getting you to believe that they're likely to outperform. And every year, like clockwork, despite the fact that every year active managers say this will be the year

when active managers will outperform. There is never a year when active managers in aggregate outperform. In fact, it's virtually impossible mathematically for that to happen because they just have higher expenses, including higher taxes. They just need you to play. And so, you know, that's why they tell you active management's a winner's game. We were just talking about, with Todd about indexing and ETFs. You've been a big backer of investing in indexes and exchange traded funds. We know 90% of large-cap fund managers underperform their benchmarks after 10 years.

This is the annual S&P 500. Before taxes, Bob. Yeah, even before taxes. You're right. Look at these numbers here, folks. 90 years, excuse me, 10 years, 90% underperforming. They underperform, as you note, Larry, because of higher costs. In fact, that the market is extremely efficient, essentially.

Yeah, that's exactly. They active managers don't underperform because they're dumb. They underperform simply because the competition is so good now. It's actually getting harder and harder for active managers to win. I point out in the book, Bob, coming out of World War II, 90% of stocks were owned by individuals trading their own accounts. That means when Warren Buffett was trading, 90% of the time there was a sucker at the other side of the trade who he could exploit. It was less knowledgeable. Today, 90% of the trading is done by big institutions, including hedge funds and really top world-class academics.

You know, physicists and world-class mathematicians are hired by these funds like Renaissance technology. And that's who Warren Buffett is now competing against. And if you run a factor analysis on a Berkshire Hathaway, you'll find that Warren Buffett is not outperformed in the last 15 or 20 years, where he outperformed dramatically before that. And that's because the market is caught up, discovered his secret source and exploited it. So some of those factor premiums have shrunk, but they're still there. And every investor can access them to these lower costs. tax-efficient factor-based strategies. So what he's saying here is that what used to be Alpha, Warren Buffett, for example,

is now what, beta, right? I mean, it's essentially, is that the way to describe? That's exactly right. It's different betas, Bob. So we have a beta of market beta. We have beta of size. We have beta of value, beta of momentum, and beta of profitability and quality. So if you look at ETFs like Goldman's Factor Fund,

has exposure to those five factors, but a very low level. You can use a great website portfolio visualizer to see the level of exposure, what's called the loading, while fund families like AQR or dimensional have much higher exposure to those factors in general. So it's important to know that every small value fund isn't the same, even if they're all, quote, index or systematic strategies, you want ones that give you the most exposure, the highest loadings relative to the cost. So you have to look at both factors. Yeah. So we get to the essential issue here, which is why is it so darn hard to beat the market? I mean, one of the points you make, and you did, you brought up this great study, that only a very small minority of stocks outperform in any

given year and it's impossible to pick which ones will. There's no persistence essentially here. And then there's the lack of persistence in outperformance. Funds that randomly outperform for some period, say three or four or five years, attract momentum investors, but the outperformance doesn't persist. They don't keep outperforming for many years. This is a simple way of describing it, but I think I got it right, Larry. Yeah, absolutely. And for those inches in the subject, I I wrote a book co-authored with my friend Andrew Berkin called The Incredible Shrinking Alpha to explain why it's getting actually dramatically higher, harder, to outperform, even though active managers predicted that if indexing share went up, which has gone up dramatically, from about 2%, 30 years ago, to some people think as much as 50% today, 20 years ago, or now it's 26 years ago, when our wrote my first book, 20% of active managers were outperforming before taxes. By 2011, that figure was down to 2%. And given for taxable investors, active management, the highest cost is taxes. It's probably half of that. And their issue is the markets is just getting more efficient because the people you need to exploit, which is basically dumb retail money, who and invest on emotions and recency biases.

They dramatically underform. In fact, they do so poorly. They underperform the very funds they invest in because they get stock picking wrong and market timing wrong. They get both wrong. And so there is some ability for active managers to win. The problem is 50 years ago, 90% of the market could be exploited. Today, it's a much smaller number, doing much less

trading and therefore there's just not enough of them to exploit to overcome all their expenses and so let me get to another point here that people bring up which is picking individual stocks you had a separate chapter noting that owning individual stocks is very very risky I covered this study last year as well the study of 64,000 publicly traded companies with the biggest one of the biggest studies I've ever seen it goes 30 years 1990 to 2020. And it looked at 60,000 companies all over the world. 2.4% of the U.S. listed companies generated all the returns in that 30-year period. Outside the U.S., only 1.4% generated all of the

returns. So owning index is essentially what you were saying in this chapter, it captures returns from those outperformers, you know, and reduces risk, essentially. Yeah, I've looked at there's similar studies in the U.S. that goes much longer back, and they show 4% of all stocks provided the excess return above T-bills. You have to think of what are the odds that you could own just those 4%. And the problem is, while the market has a standard deviation of 20%, any one individual stock is roughly double that on average. So you're getting the same expected return on average of the market, but you're taking twice the risk. That to me doesn't make much sense, especially when we know how efficient the market is. It's not perfectly efficient.

There are bubbles that happen from time to time. Today we may have a bubble in what was once the Magnificent Seven, although that's already being corrected. as no one calls it the Magnificent Seven anymore since a few have dropped out already. Yeah, I would just add that what we've seen is investors adopting this approach. We've seen the most popular ETFs in the first quarter of 2024 have been these low-cost S&P 500 index-based strategy. So Vanguard 500 VLO or IVV, which is the I-Share's version, or SPLG, which is the State Street ETF. Those are among the most popular ETFs. So many more investors are moving into the

ETF marketplace using these low-cost broadly diversified ETFs. That's an extremely encouraging sign to us at VETI. Just quickly, Larry, because we're running out of time. You're a pretty good market watcher. How do you feel about the markets right now? I mean, in terms of like how the market's priced, we know it's priced high on evaluation basis. I think it's something like 20 or 21 times forward earnings. What does that tell us? What is a high-price market? assuming it is high price. Tell us. Two quick things. One, there are two markets here. We're bifurcated. The U.S. market is very highly valued historically. On average, when P.E. ratios are this high. Future expected returns are much lower. However, the rest of the market is especially small value stocks that are quality oriented. They're trading as if we're in a deep recession already. A good example of the funds I own like Bridgeway and DFA and Avantas, their small value funds, are trading its single-digit PE ratios. And the same thing we see is also true in international emerging markets.

So there you have higher than expected future returns. My guess is that the likelihood is we'll see a reversion to the mean of longer-term returns. but we can have long periods where high prices can even go higher. Yeah, and that's a little disturbing because we've been waiting for this mean reversion for a long time, Larry. I mean, we know the literature, we know the academic literature. Small cap tends to outperform big cap over long periods. Value tends to outperform growth, and yet small cap and value have, with the maybe exception of 2022, underperformed for years and years and years.

How is there something wrong with the research or or or what's going on? There's nothing wrong with the research. The empirical data is what is. The problem is with individuals who don't understand that a decade when it comes to returns, you know, is basically what an economist would call noise. You can go, for example, 40 years, Bob, from 69 to 08 and the S&P, underperform long-term treasuries. That's 40 years where that happened. And there are three periods of at least 13 years where the S&P underperform T bills. 29 through 43 is 15 years. 66 to 83 is 17

years. 2012 is 13 years. The only answer to that is diversification. So you don't happen to own only the wrong asset at the wrong time. That's why you should stick with a globally diversified portfolio. You may want to have some value, some growth, some high profitability, some quality depending upon your ability to deal with this noise in what's called tracking error or tracking variance. But you should not end up being a performance chaser. That's how the average individual ends up underperforming the very funds in which they invest. You need a very long horizon. Yeah, 40 years are long horizon.

That's a long time. Ten years is a lot to ask for people. 40 is a really long time. Well, that's what you would have had a wait for for the S&P to outperform long-term bonds, Bob. So the final point here is what should investors do is stay diversified, stay in low-cost index funds. That's basically the message.

systematic. A lot of ATFs are not index funds. They are systematic. They define their own universe. There may not be an index, but they may say we buy the smallest 5% of stocks with the 10% lowest PEs and the 10% highest profitability. I'm just making that up. But there's no index that replicates that. All right. You want systematic, replical, and transparent. Great. We've gone a little long, folks. But as you can see, this is a very dense topic. Larry has 50 years of covering this. And he's an old friend, and I urge you to get a copy of his book and read it. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the Markets 102 portion of the podcast. Larry Swaydrow,

Director of Research at Buckingham Strategic Partners and author of the new book. And Richer Future, the Keys to Successful Investing continues with us now. thinking around. The interesting thing is I didn't get a chance to chat with you about is ESG investing. You had a book out a little while ago called The Essential Guide to Sustainable Investing, and you talked a lot about ESG investing. Can you sort of tell us what the academic literature reveals about investing in ESG? Yeah, let's see if we can keep this complex subject pretty simple here. The academic theory or economic theory would suggest that if enough investors screen out certain stocks for whatever reasons, whether it's DEI reasons, social reasons, pollution,

you know, those types of things, then the prices of those securities will be depressed. That doesn't change their earnings, Bob, if you don't buy Exxon stock, but it doesn't. does change their price if enough people don't do it. So their prices will be depressed. And if you favor, quote, green companies over the brown companies, and your investments go into them and out of the brown stocks, then the green stocks valuations go up and the brown stocks go down. But again, you don't change their earnings.

So what you're going to do is when you raise the price of something and don't change their earnings, you lower the future expected return. And when you avoid stocks driving their price down, you raise the cost of capital for that company. And the investors, therefore, get a higher return for taking those risks. So that's a pretty simple explanation.

Now, the short term, if you get a lot of money moving quickly, as what happened around 2017 through 2020 or 2021, you got a lot of money rushing in, prior to 2017, you had about a few billion a month coming in, maybe, or a few hundred million a month, beginning in around 2005 when the Paris Climate Accords and stuff that began. That didn't, over that period, the academic literature showed exactly what we expect. The sin stocks or the brown stocks outperform the green stocks, two to three percent a year.

Highest performing industries were alcohol, tobacco, gambling, oil, those types. After that, we got these big flows tens of billions a month and green outperformed by about 7% a year. Massive outperformance. Now it's reversing again. What's interesting to me is if you looked at the ESG portfolios back, you know, when we were doing a lot of this stuff of 2017 to 2019 or so, it was amazing. They all looked like big cap quality stocks. You know, it was all Microsoft and Amazon and Lilly and it was all big cap. So it was so it seemed like I know they weren't

consciously selecting quality as a factor, but that's what it was essentially. And I wonder if that accounts for some of the outperformance initially. Yeah. A lot of it will be explained by factor analysis. It tends to be number one. Larger companies tend to be greener because they can afford to make those investments. The big technology stocks tend to be greener by definition. They, you know, same reasons. They're not big polluters like the energy or coal, a lot of manufacturing. So they got lucky in that sense.

There was a period where the growth stocks, which outperformed, tend to be green. The manufacturing types of companies tend to be brown, and those value companies tended to do poorly. But eventually those things reverse because if you push the prices higher, you're going to get those lower future returns. And investors are now finding that out. And I think you're seeing some more dissatisfaction, not as much excitement about that.

There was a study I'd done a number of years ago. I think it was 2017, the Norway's pension fund. It was a $12 trillion dollar fund. And they found that excluding stocks, on ethical grounds, reduced returns about 1%, including divesting tobacco, avoiding weapons makers, et cetera. But there's not necessarily anything wrong with having lower returns if that's what you want ethically, right? I mean, everyone should know you might have lower returns. Yeah, I would go beyond that, Bob, because it's not a one-sided story. It's a two-sided story.

So first of all, you may be very willing to accept, say, one, two percent, three percent, even a year, lower returns to express your values. That's a personal decision. The other side of that issue, though, is not only you get lower returns, which should be economically obvious, but the green companies are less risky. They are less risky for simple reasons like, number one, they're not likely to face an Exxon Valdez Internet and get massive costs. You're not going to get consumer boycotts, lawsuits, you know, fraud issues. Of course, part of ESG investing is quality controls and you're reporting. So they are definitely less risky.

So there is some tradeoff between those risk and return, as you would expect now. Good point. You've also written about the dilemma of investing in volatile companies like biotech startups. I know you had an article on that recently. Summarize what the research showed. Well, the research shows here that investors love to buy what are called lottery-like stocks. So what that means is the distribution of their returns on average looks like a lottery ticket. the vast majority of lottery tickets or worth zero, the average return, say, is 50%, because, sorry, minus 50%, because the government takes half the payout. But you do have the chance for that big, fat, right tail. And investors love that. They figure, well, if I buy a lottery ticket, I can only lose a dollar. And but I could make, you know, 100 million. Of course, you could lose 100% of your investment. It turns out there's, a group of stocks that look like lottery tickets, penny stocks, small cap growth stocks that have high investment and low profitability look like that. You're hoping to hit the next Amazon and you might end up with the next Rivian or the next one that goes bankrupt. The vast

majority of these stocks do so poorly that on average stocks with small growth, high investment and low profitability have underperformed treasury bills over their lifetime. So I advise people, you know, unless it's just like your entertainment account like it might take to Las Vegas, you expect to lose, you know, you should avoid these investments and certainly don't want to be spending your time, research them because you're not likely to win. Lottery like returns. I know people like that. And it's quite amazing.

But there are people who always think that they can, you know, beat the market. Yeah, just think about, say, Hertz. Right? Recently, that stock had gone way up on speculation from the people from that social media side, Robin Hood. They drove up on price. And then, of course, you know, companies tend to go. 99% of companies that are in bankruptcy never pay a penny out. Yet they trade all the time.

Why do investors buy them when 99% end up paying nothing? All right. Larry, always a pleasure talking with you. And thank you for summarizing your book. Larry Swaydrow, everybody, Director of Research at Buckingham Strategic Partners, author of Enrich Your Future, The Keys to Successful Investing. Larry, thanks for joining us. And thank you, everyone, for listening to the ETF Edge podcast. InvescoQQQQQ believes new innovations create new opportunities,

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