Invest Like the Best with Patrick O'Shaughnessy - Jim O’Shaughnessy - Premeditated Success - [Invest Like the Best, EP.29]

Episode Date: March 21, 2017

My guest this week is my father, Jim O’Shaughnessy. He was a pioneer in quantitative equity research, part of an early group of explorers who combed through data to find factors which predicted future stock returns. While we’ve both written extensively on factor investing, we chose to mostly avoid that topic for this conversation. Instead, we discuss what has been a fascinating and colorful career on Wall Street. We talk about the power of premeditation, formative books, and his crazy experience during the dot-com boom when he ran a robo-advisor 15-years ahead of its time.   For comprehensive show notes on this episode go to http://investorfieldguide.com/jim For more episodes go to InvestorFieldGuide.com/podcast.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

This podcast is sponsored by CFA Institute, the Global Association of Investment Professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals working to build an investment industry where investors' interests come first, financial markets function at their best, and economies grow. The chartered financial analyst credential is the most respected and recognized investment management designation in the world.

The views expressed in this podcast do not necessarily represent the views of CFA Institute. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com. Patrick O'Shaughnessy is a principal and portfolio manager at O'Shaunacy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Oshamacy Asset Management.

This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy asset management may maintain positions in the securities discussed in this podcast. My guest this week is my father, Jim O'Shaughnessy. I debated whether or not to do this interview, but many people have asked for it and I'm glad that I did. I had never heard a few of the stories he tells, which is a testament to the power of this. this kind of interview. My dad was a pioneer of quantitative equity research, part of an early group of explorers that studied factors which predicted future stock returns. While many of his peers were academics, he was pure practitioner from day one. Along with others at our firm,

we've been through a lot together professionally, and everyone would agree that the guy has ice water in his veins and unwavering discipline, two traits that can bring you far as an investor. For those looking for a discussion of factor investing, look elsewhere. Because we agree, on just about everything in the world of investing, we chose to instead discuss what has been a fascinating career, chock full of business and life lessons. What's most interesting about our relationship is that he's taught me very few things in particular. Instead, he's opened the doors which have allowed me to learn and experience so much more on my own than I ever could have hoped to learn under his direct tutelage. It's the model for fatherhood that I am using with my kids, and I couldn't

be more thankful for the example he has set. We talk about pre-bole. meditation, business, learning, books, and his wild experience during the tech boom. For show notes on this episode, visit investorfieldguide.com forward slash Jim. And now, please enjoy my conversation with Jim O'Shaughnessy. First, thanks for hiring me as a quant intern when I had never even used Excel. Yes, of course, nepotism at its finest. Even though I was really only putting together chairs and desks in the office. That's right.

We didn't let you anywhere near a real computer for a while. Looking for office space for a while. This is going to be fun. We will focus as much as we can on hopefully stories people haven't heard beyond just the basic common belief in factors, which we've written about ad nauseum. So I thought a fun place to start would be with the James J. Hill Public Library in St. Paul, Minnesota, yeah. Well, this is also fun for me because I didn't even know you had a podcast, so this is kind of cool. So James J. Hill is a research library in St. Paul, Minnesota. where I grew up. And as you know, my grandfather had been very successful in the oil business, ended up giving away probably 90% of his money during his own lifetime. But the balance went into a

foundation. And my uncles and aunts would come to St. Paul once a quarter to discuss grants and also investments. And I was allowed when I was a teenager finally to sit in on these dinners. And what interested me the most, I think, was listening to my dad, argue with my uncle about, you know, whether IBM was a good stock or not. And it was all about personalities. It was all about things that didn't seem to resonate with me at all. And I kind of thought, well, IBM is a good or bad company based not on who the chairman is, but there's got to be some measurement like PE or whatever. So I went down to the James J. Hill Library, and originally I was very ambitious. And this will tell you my age, I had a paper spreadsheet, which was one of the very large ones.

And I originally was going to go to the S&P 500 tear sheet, which was a book that was put out every year, immediately being very, very lazy, realized that that would not do. And so I alighted on the 30 stocks in the Dow Jones Industrial Average, went through a book that showed which 30 stocks were in the Dow every year, and then literally by hand wrote out, you know, price, PE ratio, price to book. dividend yield, earnings yield, etc. And what I wanted to see was, you know, was there any measurement that led to better performance than just buying all the stocks in the Dow? What I found very quickly was that buying the 10 stocks with the lowest PE ratio killed buying the 10 with the highest PE

ratio, and it did so consistently. Now, of course, there were periods where that didn't work, generally when super-duper growth was in fashion, but in general, overall, rolling five and 10-year periods, it did very well. I also found that buying the 10 stocks with the highest dividend yield did extraordinarily well. So I was very intrigued, wanted to continue this, but after all, I was a teenager, much more interested in girls and going to parties. So I sort of shelved that research and then took it up again after getting married and the advent of computers, making it a lot easier. easier for me than I had to do it all by hand when I was a teenager. Maybe talk a little bit more about IA, who is your grandfather, my great-grandfather, just to set the tone a bit for some of what we'll talk about later in the conversation

about things like premeditation, how to measure success, things of that nature. So I had the really great good fortune of being the youngest male of the third generation of my family. and most of my uncles worked for my grandfather. My father did not. As I mentioned, he was born in 1885 in Stillwater, Minnesota, the 13th child. So in our family, 13 was always a lucky number. But he was a real character, very, very ambitious, but also very funny, very fun to be around. And I had the good fortune of having dinner with him twice a week after my grandmother died, right up until the point where he died. So I got to see him a lot more than the other grandkids. But, you know, when he was a young man, he went to a university or college at that time called St. John's College in Collegeville, Minnesota.

Yes, it is as bad as it sounds. In the middle of nowhere, in the sticks, and this was in the early 1900s. And he and his buddies had a keg in the woods during Vespers. It was a Catholic college for you Catholics out there. They got caught, and they were all immediately expelled. So not wanting his father and mother to find out about this, he took the train to St. Paul, Minnesota, to the College of St. Thomas and stopped a priest that, this is January, stopped a priest that he saw on the campus, and he said, excuse me, father, could you tell me where the president's office is? And the priest said, well, why do you want to know? And he said, well, because I'm seeking admission here. And the priest said, but it's January. You know, you missed the admission schedule. Why do you want to get in now? And, um, My grandfather said, well, I was at St. John's and I got expelled. Well, really, why did you get expelled? Having a keg in the woods during Vespers? And the priest said to him, well, do you think that St. John's was fair in expelling you?

And my grandfather's answer was absolutely. I knew the rule. I broke the rule. They didn't have a choice. Well, of course, the guy he stopped was the president of the university. And he admitted my grandfather on the spot. What my grandfather didn't know was that his fellow. kids that had been thrown out had beat him there. And they had all said, oh, no, it was

completely unfair of him to the university or college to expel us. We think it's a travesty, but we'd like to come here. None of them got in. So sort of the earliest message about my grandfather was character is fate. If you have the character and you have the persistence and you have the vision, you can go on to do great things. So it's a very long story. Let's just make it short. He got into the oil business, and the first well that he ever dug was called Blackwell No. 1, and it pumped oil for more than 80 years. I think, and I could be wrong about this, I'd have to check with my cousins, but I think it is still pumping oil today. The great irony, of course, was my grandfather did not trust the stock market. You know, when Joe Kennedy was made the

head of the SEC, it said, well, you've got to send a crook to find a crook. He thought the market was rigged, which back during those days it primarily was. And so going into the crash of 29, he was one of the most successful wildcatters, but he didn't put any money in the market like all of his fellow wildcatters who were doing it on margin, sometimes $5 to $10 for a $100 position. They all got wiped out during the crash. So my grandfather was in a position to go around to all of these failed enterprises and buy them out for business. pennies on the dollar. In short order, by the late 1930s, early 1940s, he had one of the Americas and one of the world's largest privately owned oil companies. And then, as I mentioned earlier, he proceeded to give almost all of his money away during his own lifetime. So also a great,

I'm incredibly proud of that fact. He used to say to my grandmother, you know, monies like manure. If you have it in one big pile, it stinks to high heaven and you got to spread it around to make it do any good. He believed in the idea of premeditation. Yeah. And I'd love to hear whether or not you agree with that, because I think this might actually be one thing we disagree on. That's right. So we can explore it a little bit. Yeah, I do believe in it. In fact, he taught me that at a very early age. And the idea of premeditation was to think very long and hard about what you wanted to achieve. Make sure, test it. You know, it was never, oh, I want to be a millionaire, or I want to be a millionaire, or I want to be the president of the United States.

It had to be something that given your character and your abilities and your talents, you could actually do. And then he would say to me, then envision it. Make it happen in your mind. And I said, so, grandfather, you mean that kind of pretend that it's happening? And he goes, absolutely. He said, you have to premeditate everything you do. And he goes, because when you do this, if you do it enough,

You're going to start coming up with things that you really wouldn't have consciously thought of. And you'll address them, right? So you'll say, oh, I hadn't even thought about that. I better look into how I'm going to deal with that. So I used it all of my adult life, from wanting to get into the stock market to wanting to be in the position that I'm in today. I'll tell you a funny story. So you know this story. So I guess it'll be the listeners that haven't heard this one.

So I'm out for a walk. And it's 1993. and we have just moved to Greenwich from St. Paul. And as I'm walking, I kind of think, well, the stock market, you know, you've got to really be somebody for people to take you seriously. And I was 33 at the time. And I had a lot of success with an article I had written for Barons about the Dogs of the Dow. So I thought, you know what? I'm going to write a book.

And I'm going to write a book about the way I look at the market. And I went back and talked to your mom. And she looked at me and she goes, so, okay, you're going to. going to write a book, you do know that you have to get somebody who's willing to publish it, right? And I said, of course, I'm not an idiot. And I said, again, being one of the laziest human beings on the planet, I'm not going to actually write the book until someone agrees to publish it. So I did a cover letter that I sent to, and again, this will show you no internet. So I sent out 65 query letters with the outline for my book. And for the longest time, saved all the rejection.

Some of them were really, really funny. And then, two exceptions. acceptances came in. And one was McGraw-Hill and Wiley was the other and showed it to my wife, Missy, and said, well, here I got to write a book, I guess. So that led to Invest Like the Best, which basically was a book trying to teach the reader how they could emulate their favorite money manager by putting their portfolios on a database, seeing the most relevant differences from the portfolio manager from the universe, and then using those differences to create screens that got you to portfolios that looked, acted, and most importantly performed like the manager. A lot of people who know me actually, I'm best known for what works on Wall Street,

but a lot of people who know me really well say, you know, that first book was actually your most radical book, because you demonstrated that, you know, you could, you could systematize the process. It's really interesting about that story is that this was also the genesis for the name of the podcast and the idea being, make this. this podcast is sort of qualitative version of that same idea, find really successful stories, or interesting stories at least, and then try to back out what is replicable about those stories, but also what's not, right? Because there's always a mix of kind of nature, nurture. And it's fascinating to learn that in investing, most is what's in the data. Yeah, most was factor profiles,

normal portfolios, and that often portfolio managers underperformed a simple replication versus another strategy. Actually, as a matter of fact, we haven't done it for a while. I think the last time we did it was in 2005 or six, but we used to routinely update what I call clone portfolios and look at how they had done versus the manager they cloned. And the last time we did it, every single clone was beating the manager they cloned. And that's part and parcel of our story, right? It's the emotional side of investing that destroys virtually, even the greatest minds. You know, if you cannot master your emotions, you might as well just index and you might as well put it on automatic pilot because, you know, even if you index, you can still have a point of failure when the market is like 2008 and you can sell out near the bottom. So you have to be careful of that.

But if you can't master your emotions, all the data in the world will not save you. And so you're right, though. I mean, it is great because in investing, it's sometimes, you know, it's like dieting, right? So there's a million diet books on the market today. Most of them have really, really simple, easy to execute plans, right? And it is remarkably difficult to get anyone to use that simple system. And it all is emotion. I mean, basically, that's what trips us up.

We are running programs that were designed at the 21st century. This is not unique to me. I read this somewhere on 50,000-year-old hardware. And that is our huge advantage the way we approach the market because we just remove the emotion. But again, all of that, we started with premeditated. All of that was premeditated. How much of the advantage in factor-based strategies do you think, if you had to sort of if there's a total pie and you have to allocate,

is the factors themselves, which obviously a lot of people have identified value, momentum, low volatility, yield, quality. Well, we all have the same data, right? Yeah, certainly most of the research is done on the same set of data versus just that pure discipline, because I'm always struck by how simplistic a basic deep value strategy can be where anyone can run a price to X, comparison and get a basket of 50 or 100 cheap stocks. And how remarkably consistent that

almost dumb, naive portfolio is at beating people who are incredibly smart with unlimited resources. And I always come back to that idea that a lot more than people think is just pure discipline. I couldn't agree with you more. I think that the factors are a way, they're an expression for us to gain alpha over long periods of time. But ultimately, if you don't have the discipline to stick with your underlying strategy, particularly when it's not going in your favor, it's nothing. It's data on a page. And, you know, I have always thought that, now, granted,

when I would tell people about factor investing, I would, you know, just out of necessity, Make it simple, right? So dogs of the Dow or buy stocks with low PEs, etc. Now, the factors have gotten a lot more complicated. And our colleague, Chris Meredith, has actually written a really great paper talking about the fact that really good factors are not commodities. There's a lot of thought that has to go into it. But ultimately, action without knowledge is foolish and knowledge without action is futile. It's the ability to, in a completely dispassionate way, let the point. portfolios work. And I ultimately have found that that is the single hardest thing to do. We had a consultant come in after the financial crisis and say, I think the number was 60 plus percent of quants violated their models. And as you know, my opinion is that negates every part of the track record. Because if they're going to switch horses in midstream, they're no better than somebody who doesn't say they're a quant and changes their strategy dramatically. You know, consistency and persistence and the application of superior factors sounds very, very simple,

but, you know, it's really not. And so we're always looking for ways to improve what we do, but without the discipline, it's a fool's errand. People always ask me how much mentorship there was between you and I. And it's an interesting question because you're an incredibly hands-off in a good way, a manager of people and manager of children. And there was really one lesson, one primary lesson, and it could be best summed up in the words,

look it up. We would always ask for help or to hear what you thought about something. And at home, I'll post a picture of this library with the episode. There's a massive wall of books in the house that we grew up in with every kind of book you could imagine. There's thousands of books there. And I don't know how many of them you've read most of them. And so we figured you'd be a shortcut to a lot of knowledge and homework and things

like that. And the fact was I was. Yep. But I wouldn't let you know that. I always said, look it up, figure it out. Yeah, it was an incredibly simple, powerful lesson because of its consistency that you never broke from that mold. but I will use the occasion of talking about the library to ask that if you had the power to prescribe five books, normally I say one book, but given the size of the library, I'll give you a little bit more leeway. If you could prescribe five books for everyone to read, so everyone has to read them and you can count that they will digest them, really pay attention and learn from them, what five would you pick?

So you know me. I'm always over the top in terms of these types of things. So I'm going to do more. than five. The one I would start with would be the Tao Dijing, the Way of Life by Lao Tzu. Taoism is one of the major philosophical lines of thought in Asia. I have been reading and rereading this book since I was in my early 20s. And honestly, I'm 56 now. Every time I open that book, I find yet another interpretation of what they're saying that I hadn't thought of. I think it's a remarkably powerful philosophy, and I think everyone would just benefit enormously if they could read it and take it to heart. Another one would be a fun one, Adventures of a Bystander by Peter Drucker. Now, Drucker is best known for his consulting work and all, you know, the GM story and all that.

Adventures of a bystander is his personal story, and his personal life is almost unbelievable. I mean, you would look at this and say, this has to be a work of fiction. He met some of the most incredible people at the most incredible points in time. It's like if we had a time machine, right, and we said, well, where would we go back? Drucker was there. So I think it's just a really fun book to read. Somebody I've admired for a long time, and it shows how a great mind thinks. Surely you're joking, Mr. Feynman.

Feynman was the physicist who solved the challenger problem by taking the material and putting it in a glass of ice and it disappeared. He goes, there's your problem. And everyone else, of course, was overthinking and over-analyzing and he had such an incisive mind. But he was also an incredibly cool guy, bongo drums, you know, parties and then, you know, writing proofs for quantum physics. I mean, this guy really had it all. Another book that I've read probably five or six times, Zen and the Art of Motorcycle Maintenance, love the book. It taught me a lot about how to think about the fact that people value brands, right?

So one story that's great is they both have BMW motorcycles, and Persig, who's the author, he's very happy if he's looking for or he's missing a part. He'll take a soda can top and put it in there. And his friend is absolutely, you know, aghast. How can you do this? This is a BMW. You can only use BMW parts. Of course, guess whose motorcycle works better?

Persigs. Very simple and to the point and a much bigger message in that. But it's a great book and it's just fun in its own right. I love poetry, so I would include the complete poems and plays of T.S. Eliot, probably one of my favorite poets. The Love Song of J. Alfred Poofrock, I think, is one of the greatest poems written in the last 150 years. And when I was still doing a lot of memorization, I had the whole poem down. It's very long. You can't do the whole thing probably anymore, but I would recommend that people take that in.

An author who I love, but I'm going to recommend the book that I love the most, Cloud Atlas by David Mitchell. It is a tour to force, and it's written in a very unique way. But it works. For those of you who've seen the movie, don't make any comparisons. the book is a thousand times better than the movie. Finally, on the market side, I guess I should recommend one market book other than what works on Wall Street, I would say the misbehavior of markets by Mandelbrot. The chapter alone on the destruction of the efficient market theory is worth the entire book. But he basically demonstrates, I think, conclusively, that markets are not log normal.

They're chaotic normal. And the difference there is they have much more of a peak and the tails are much longer. And anyone who lived through the financial crisis will realize that. One last one, which was one where I'm not a crier. But at the end of the book, I did have tears in my eyes. It was written by a young doctor who died. And it's called When Breath Becomes Air. Yeah, that book, the last paragraph of that book is gutting.

If you have kids. Yeah, if you have children, I mean, yeah, your mother and I used to talk about it. And we agreed that the one thing that we just probably couldn't recover from is if you or your sisters died. Now we have grandchildren, so we have more to worry about. So the total opposite of that, at what stage of your career did you feel the most alive? Wow, that's a great question. Probably when I formed O'Shaughnessy Capital Management and what works on Wall Street just came out. I did things that really got my publisher angry. For example, I gave the entire manuscript to Andrew Barry at Barron's, and he wrote a huge story on it, and they were

livid because there were no books in the stores. I said, trust me, Barron's is the Bible, and it was back then. Anyone who was anyone read Barron's. And so when the book ultimately came out, boom, bestseller, which we certainly didn't expect because it was graphs and charts. And then at the same time, concurrent with that, we were launching mutual funds and quite literally had three to four hundred million dollars come over the transom from the book and the article in Barron's. All of our calls were incoming. We had no outgoing calls. And, you know, we had tons of people calling us saying, we want to work together, got a call from a guy up in Canada, which resulted in the, his name was Dave Chilton, is Dave Chilton. He wrote a book called The Wealthy Barber, which

actually has outsold the Bible in Canada. So he's really well known up there. I had no idea who he was. And so I thought, you know, who is this wealthy, you know, baker guy? So I took the call and he started saying, you know, I'm known for this, but I'm really a quant. I want to introduce you to the Royal Bank of Canada. And I said, sure, whatever. And again, I think most exciting because back then, literally we did the deal that is now 20 years old.

The chairman or and CEO of the RBC asset management came down to Greenwich. We had a day together. We literally shook hands on doing the deal. And that was it. Now, granted, we did contracts and we did all that. But it was a handshake. You can't imagine anything like that happening right now. So that was a really, really exciting time because everything was happening at once.

And then the mutual funds we launched, one called Cornerstone Growth. shot out of the gate. It was like one of the top performing small cap funds. New York Times writes a big article, the Wall Street Journal's writing. And, you know, this is pretty heady stuff, right? So lots and lots of exciting times during that period. So how long was that period from the publication of what works through? So that was from about 1996 until late 1998. We were going into the bubble, as you know, in hindsight. And our stuff was, you know, like the entire world was a tuxedo and we were a pair of brown shoes, right? Nobody wanted value or a small cap. And interestingly enough, human nature, you didn't get compared to the Russell 2000 growth

index, you got compared to the NASDAQ, right? And, you know, you tried to explain to people, well, that's not a fair comparison. They weren't hearing it. So definitely the two years, two and a half years 96 through end of 98 beginning of 1999. The most popular theme today, or one of the most popular themes in the fintech space is this idea of robo advisors. And the fact that so much of what people used to do, using all sorts of different people and systems can now be centralized and it's almost a commodity to get your kind of risk level based acid allocation for extreme, if you go to Schwab can be for free. Right. I'm waiting for them to say, we're going to pay you. Yeah. Well, they might. That might actually happen. So I'd be curious to know how much you can

tell us about what I think is the very first robo advisor or early version of a robo advisor that you launched called Netfolio. And to get into the story behind Netfolio, I think would be fascinating because it was an idea 15 or so years behind it ahead of its time. A little ahead of its time. Yeah. So this is an interesting story because it shows the power of what is happening. in the marketplace has on even people who pride themselves on being completely dispassionate, non-emotional. I had in fact written a piece for our website called the Internet Contrarian, and I wrote that in April of 1999. And in it, I basically said, when this bubble pops, 80% of these companies are going to be carried out feet first. Their burn rates are enormous.

The valuations are in the stratosphere. Ultimately, economics wins. And then I got the bright idea, hey, wouldn't it be cool to have an online investment advisor? We called it Netfolio. And what we were pitching and designing was the ability for somebody to come to Netfolio, take a risk profile, and then we would serve up one of our many, many quantitatively derived portfolios. The cool thing about it was we would show you the backtest of that particular strategy. And we would show you the stocks that were currently qualifying.

So let's say that you were anti-smoking, right? And Philip Morris was one of the stocks. You could kick it out. And then the next name on the quant list would go in its place. And we managed through negotiations with some of the biggest houses on Wall Street to make it very cheap.

At the time, it was $200. All your trades were free. You could trade, I think we limited it to like three times a year for that $200 membership. And we called what we thought would be a revolution personal funds. Back then, everything was mutual funds. We had an hysterical ad campaign about the difference between mutual funds and personal funds. And the funding of it was absolutely crazy. I mean, it went from the first money seed round was a $25 million pre-money valuation.

The next one, like a month and a half later, $72 million pre-money valuation. Then in January of 2000, we got a ludicrous offer from one of a very large Wall Street bank, which we ultimately didn't take. And, you know, it keeps me humble, right? Because I've made so many mistakes in my life. This was probably the biggest because they offered us an enormous sum of cash. They offered us options on their shares. which were a great deal. But myself and our advisors who are all venture capitalists, right,

they're like, Jim, you're crazy. This is a legacy company. You can't do that. Your IPO goes away. You've got to be pure internet. And, you know, you not being, well, you were around, but you were a kid. You probably can't even get your head around that kind of thinking. But that was the thinking. And so we turned it down. And then, of course, Barron's published burn rate, which basically took the internet down single-handedly, Jack Willoughby, God bless him. He did the, you said earlier about how sometimes these simple things, well, all he did was compare the amount of cash that these companies had with their monthly burn rate and list when they were all going to die. Paul Graham calls that default dead. Yeah, and they were all default dead. And we went along with

them. So I think that, yeah, we were, we were the first out there out of the gates. in 2000, still think it's a great idea. I think I would love the idea of being able to do active portfolios, mixed with other things, right? But yeah, that was 17 years ago. It's amazing that it took, obviously there's a VC cycle, and there was quite a bit of a dead period. There's a lot of burn off to do after the collapse of the NASDAQ,

but pretty shocking how long it was until just in the last few years. Yeah. the betterments and wealth fronts of the world are, are starting to gain some scale. But even then, it's all passive, simple asset allocation. This is not,

you know, not rocket science in terms of the asset allocation. They do some extremely, you know, I know betterment pretty well, and they do some really neat stuff on behavioral finance and marketing. Yeah, I listened to that podcast.

It was great, actually. You know, engineering people's decisions, which I think is a whole, a whole other interesting topic, right? Because the financial advisors can

It can hopefully help people with that as well. Yeah. But it's amazing how long it takes to get from basically the same idea. Actually, that doesn't even exist yet. No one's even built this. No, Netfolio was an iteration ahead of these guys, right? Because you're going to be able to mix active with passive. We didn't have ETFs, but we did have access to mutual funds, right, for the fixed income portion.

Look, I think that one of my worries with Netfolio is still one of my worries today. And that is, yeah, you can automate it all. And if you can do it in a manner where you rebalance with some frequency and, you know, you're buying, forcing you to buy the asset class that's going down and sell off the one that's going up, great. Guess what sits squarely in between that success and the technology? Human nature. And I don't think that getting an email saying, hey, don't panic when they're watching the Dow down 900. hundred points in one day is going to work. I wish them all the best.

I love this opportunity for younger investors especially. I think, you know, I had a company that was trying to do just that. And in as much as they can figure the behavioral stuff out, that's where I would be focusing, right? I would be focusing on how do you interrupt this? Because it's the lizard brain that is making these choices. It is not your best evolved self. And I have seen some of the smartest people I know, quite literally geniuses, you know, immediately just totally screw up their entire future because of emotions and selling when they should have been buying. And so I think that's the challenge.

We haven't seen a really bad bear market and hopefully we won't see another killer bear market like the financial crisis for a while. But when the bear market comes, that will be the test of the robo advisors. It's always interesting to see the behavior gap, the difference between time weighted and dollar-weighted returns. And I saw when someone published recently the behavior gap for the major factor, single-factor ETFs. And it's enormous for the minimum volatility ETF. It was something like on the trailing three-year, 25% a year. It's crazy. Because obviously it did incredibly well.

The money, $15 million piled in. And then it goes on to significantly underperform in the next couple of years. Bales. And everyone's going to bail. Yep. So I always think about that example and countless others like it when people ask, well, everyone knows about these factors, so will they keep working? And then you see just repeatedly these examples of the same foolish behavior, just one level up. Yeah. If it's not an individual stock that they're being dumb about with 20, you know, 20 turns of turnover, it's ETFs that represent a basket of them. Or mutual funds or managed money. It's all the same. You know, you know this because

you have been around me for a long time, your entire life, in fact. But, you know, I always say the four horsemen of the investment apocalypse are fear, greed, hope, and ignorance. If you think about it, fear, greed, and hope, they're all emotions. Ignorance, even ignorance, even if you correct it, fear, greed, and hope are going to wipe you out. And this is what fascinates me about this is everybody knows this. Like, back when I wrote my original paper in 1987 about using quantitative, models as an offset to flawed human decision making.

I've gotten a lot better at titles. You know, this data was all there, right? We've had this data since the 50s in various forms. And yet, you know, it doesn't matter. It could be Wall Street. It could be doctors. It could be school administrators. It could be betters.

Everyone underperforms a simple, well-tested, quantitative screen. And we do so because, as Walt Kelly said, didn't Pogo. We've met the enemy and it's us. And what's cool about that for as far as I'm concerned is, as long as human beings price securities, we got a job because they're going to continually make the same mistake time and time again. And there's very little that we can do to stop them. I think, look, you know, this is one of my hobby horses. I think the entire investment management approach is deeply flawed. People using quarterly results, that's noise.

There is no signal there. None. And yet, why did this, why did this happen? Why did this happen? We don't know. And yet, everyone wants a narrative. We are storytelling creatures. And I used to say, we tell stories about why you should pay no attention to stories. And when you make decisions based on quarter to quarter, you're going to fail. Basically, you have, you have guaranteed that you will fail because there'll be a bad quarter or a good quarter. And they'll lead you to types of behavior that are full. foolish. Three years. Basically, again, mostly noise, some signal, some signal. But, you know, Josh Brown at the reform broker has a piece about a study that looked at managers who are fired because of underperforming three years. Guess what? They outperform the managers that the people hire to replace them. Regression, reversion to the mean. And so I think if you could have a truly long-term perspective, right? 10 plus years.

And if you're an endowment or you're a foundation or you're a college, your perspective should be infinite because hopefully that college is going to be around for a long, long time. If you're even a 56-year-old like me, well, I should have an infinite time horizon, too, because I have a three-year-old grandson and a 10-month-old granddaughter, right? And yet people don't think like that. And so we use tools because we have them, right? It doesn't mean that they're good to use. So if you're looking at just three-year periods, you're really setting yourself up for failure.

So we've investing for a while because we agree on just about everything. So I'm not going to learn anything. I remember one time you came into my office and you were really steamed because you loved in the, well, you still love, but at that time you really loved to argue. And you came in and you sat down in a huff and you said, you know, you're the only one who can argue well. and I agree with everything you say. Let's jump to business. Sure. And hone in on a couple of the biggest lessons that you've gleaned over time across two relatively small businesses,

a hot startup for several years there, but also a big, huge, you know, mainstay, Wall Street Bank and Bear Stearns. If you could maybe pin down two, three things that you found completely outside of investing, just in terms of running a business, running a good practice, being a good manager, however you want to interpret the question that you gleaned. I think that would be a neat angle outside of investing. Absolutely. Well, so number one, from my own experience, running my own companies. I'm not running a kindergarten here. I hire adults who I expect to do a great job. I hire them because I think very highly of them and their past would suggest that they're going to do great things here. So things like, you know, we have no vacation policy at O'Shaughnessy Asset Management. Again, adults can decide when they want to go on vacation and how long they want to go. They can get their work done at home or here at the office. I really don't care. I'm not a FaceTime guy.

And so I think the more freedom that you give people, that's when you get the best out of people, right? And I'm a huge believer in never making a decision, right? I'm the chairman CEO. What do I know about the way we are doing, you know, trading of individual accounts through some of the big brokers. Basically nothing. So I've got a guy who knows more than, you know, I'll ever know and knows more than a lot of people in the industry.

Empower him. Tell him, you know, you tell me the way you want to do it, and that's the way we're going to do it. And I think that treating people well and with respect, you get the most out of them. Prescribing rules and regulations and all that simply leads good people to chafe and say, you know what, I'm going to go somewhere else. It leads mediocre people to always refer back, well, there was a rule, and this is the rule. I've always found that people who are really big on rules in terms of how they conduct themselves tend to be mediocre. Another thing I would say is consistency.

I'd like to joke that I have a very low standard deviation of return. The president of this company, Chris Lovelace, has said to me on a number of occasions, I always know when I'm going into your office to ask you something. I'm pretty certain what the answer is going to be, but, you know, I've got to ask you anyway. I think the more consistent you can be with the people who work with you, the better. No huge surprises in terms of you don't come out of left field and say, you know, we're going to do it this way. When I started O'Shaunce Capital Management, it kind of was that way. It was my way or the highway, and it was, you know, we're doing this, we're doing this, we're doing this.

and I learned that if you want and to have really great people to stay with you and do the great job that you know they can, you can't do that. So consistency in terms of allowing people the freedom to do their work that they can. And then from Bear Stearns, Bear Stearns was really interesting because they were kind of the last of the real entrepreneurs on Wall Street. They basically left me alone, right? I was in asset management. I devised how I wanted to approach the Bear Stearns Network. And as long as I kept growing, they were very, very happy. They didn't meddle too much.

And yet also, I saw the downside of bureaucracy, right? Takes forever, you know, we need a data set. It's got to go through this committee and this committee and this committee. And we would have gotten things done a lot faster for even the most entrepreneurial. I can only imagine how the other ones are just, you know, committee upon committee upon committee. I think meetings for the most part are a waste of everyone's time. And, and I think that, you know, they're on a lot of people's, well, we got to meet about this.

Actually, we don't. So they were really good in leaving me alone. Getting what I needed was always a challenge, was always frustrating. But, you know, I had a good time there. A lot of great people, a lot of smart people. And then finally, I would say ultimately, I think Buffett said this, but I really agree with it, you know, and that is, you know, your reputation. Buffett, I think, said something along the lines of, you know, it can take 20 years to build your reputation and, you know, just a couple hours to totally ruin it. And what most people don't understand about Wall Street, you know, especially those really angry at the street, is that essentially, I think more than most businesses, our business is built entirely. untrust. When you say you decay some trade, right? That means don't know. You do that and you're going to be cut out. You do that more than once or twice. They're going to cut you out because it's a small

group that you're dealing with. So everything is based on your word. And it's operated, you know, we've had some big boo-boos, but it has operated pretty well over time. I mean, look at Solomon Brothers, for example, during the Treasury scandal. The Treasury, was going to just disallow Solomon, basically, which would have shut them down. Warren Buffett becomes temporary co-chairman, calls the head of the Treasury, apologizes profusely for something he didn't do, but immediately the guy listened and he knew Buffett's reputation, he knew he had integrity. Guess what?

He saved the firm simply by his reputation. The section of snowball that gets into that Solomon Brothers scandal is so incredible. It shows the power of just owning up to something, a proud moment for him. So I'm curious what the most proud moment or the thing you're most proud of in your career is. Oh, boy, that's tough. So I guess what I'm most proud of, and I had offers from very big institutions not to do this, but I was passionate about a level playing field and educating people. That's why I've written four books.

I had people tell me you're insane to write what works on Wall Street. Why would you put this out into the public domain? Come work with us. We'll keep it proprietary. We'll, you know, we won't tell anyone what the secret sauce is. But a very strong element of my belief system is educating. I think that if you can empower people to do better and to level a playing field, that's really cool.

And I think that especially what works, because now we're in our fourth edition, and yet you can go in there. If you want to do your homework, you can see, wow, maybe I shouldn't buy stocks that are the most expensive over long periods of time because they do worse than T-bills. And if you're open to it, right? And all we can say is here's the information. But I was, if you're talking about what I'm proud of, I'm really proud of that. I'm proud of the fact that not only was I a maniac, and you'll know, because we used to vacation in Nantucket, and this was before laptops, and I, you know, half of our Ford Explorer was taken up with my computers because I was running tests for what works on Wall Street. I think that part saying, you know, definitively, this is what has worked. We believe it's going to continue to work, empowering individuals to use that data.

Now I know much more about behavioral finance, right? and so you can educate people until you're blue in the face, and they'll still forget all of that education. But I think that's what I'm most proud of, was putting all that information out there and letting investors take advantage of it. We got cut off a bit earlier talking about premeditation, but we'll circle back to it because there's another question.

So you've got this crazy journal where you wrote down, I don't know how young you were in early 20s probably. No, it's 29. A big list of a pretty very different. Highly varied list of things. It's not just a bunch of investing goals by means. Most of which have happened. More than 90%.

So obviously there is, I don't deny that there is tremendous power in setting goals and premeditating those ideas or scenarios or whatever. But I wonder to what, there's two interesting threads here. One is to one extent premeditation and goal setting is very self-limiting, meaning, yes, it's powerful in that if you set a goal and you're the kind of person that can achieve those things, you'll probably do it if you have the drive and the grit. But there's a whole universe of things that that may then preclude you from doing. That you don't, there's less serendipity.

There's less surprise, I guess. Right, right. But the reason I circle back to it is to talk about the role of luck. And I get frustrated with conversations about luck because it seems like an exercise sometimes of successful people in false humility that they just say, well, you know, it was just all luck. or most of it was luck. And obviously, I fully acknowledge the huge amount of luck that goes into any success story. But it does sound a bit like a humble brag.

Yeah. Well, it just strikes me as not a very useful piece of information. I agree. So, sure, there's a tremendous amount of luck. And we are literally two of the most lucky people that have ever walked the planet. And so I'm not trying to downplay that role of that at all. But for those listening that, for anyone that wants to do well, I'm curious what you think about this entanglement of premeditated and luck, given that, you know, here you've got a list of stuff in your 20s.

Some of it's pretty ambitious. Be the chairman of a major arts organization, for example. Yeah, yeah. Some of it's pretty ambitious and it happened. And sure, there's lots of luck that goes along. But I struck that I've never actually asked you this question. I've never talked about the role of luck in this specific way. So how much, what do you think about the topic?

How important is luck? Yeah. So I kind of think the old quote, the harder I work, the luckier I get. I believe that having goals and having a process to try to reach them, look, I think the brain is a lot cooler than we currently understand. And I think that by, it's like affirmations, right? Affirmations might work simply because by repeating it enough, it gets into your subconscious, which is really where most things go on anyway. It's a great book on that topic talking about how the subconscious basically consumes 95%

of the brain's energy. It's crazy. So I think that if you've primed your brain, it sees things that you wouldn't otherwise see. And so if you have a series of goals or a process that you are working to get towards what you want, and you're aware of that, you're priming your brain to see things that others don't see. And many people call that luck, right? So it was, would be easy for me to say, and it's true, I am lucky that Ben Graham didn't have computers. Because if Ben Graham had computers, he would have written what works on Wall Street, because that was his nature. I was lucky to be born in 1960, right? The computers were just catching on when, and with useful tools when I was about 24, 1984. So I was in the right place

the right time. And then I had to talk my way into the data. So, and I was persistent because they didn't want to give it to me. But I was lucky. I was lucky that I was born when I was born. I was lucky that I was born into the family that I was born into. What does Buffett call it, the Lucky Sperm Club or something like that? And I'm aware of that. And I fully acknowledge that. There's no question about that. But I also tend to think that luck depends on how aware you are of what's going on around you. Unless it's just dumb luck, right? Like your mom was out walking and found a $100 bill.

I mean, an economist would say that's not possible because someone else should have found that and yet you were the first person to find it. Dumb luck, yeah, sure. But, you know, Fran Leibowitz has a great quote, which is your chances of winning the lottery are the same whether you buy a ticket or not. So those kinds of dumb luck situations actually tend to lead to very tragic outcomes down the path. So, well, there's no question that luck has played a role in my life. Luck is the hand that you get dealt. Talent and achievement is the way you play that hand. I'm sure there are

other people who got dealt very similar cards to me and just didn't make it work. Plus, I'm sure that there are other people who had much worse hands than my hand and are doing much better than me. But yes, of course, luck is a big part of what it means to be a human being. But I would not attribute the majority of what I've been able to achieve to luck. It's the most memorable day. We've done a lot of fun stories, times, periods, but not an individual day. So in my career? So I think the most memorable day in my career was I, when I got that huge offer from a big Wall Street and investment house to take an ownership position in net folio, I was like tap dancing, right?

It was just like, this is like the best thing that could ever have happened to me. I'll always remember it. And for a while, I had framed that offer letter and kept it in my office to remind me of hubris. I was very guilty of hubris because, you know, I'm going to get a better deal than this one. Well, I didn't. But it was a very, very memorable day. And it was, you know, kind of like I went back and talked to your mom and I was like, look at this and kind of really unexpected and kind of I'm not a terribly emotional person but I could

just feel the you know the happy happy joy joy rising in me. There's an interesting question which gets at maybe like an innate skill set or it's an interesting way of identifying people's competitive advantage which is to ask what that you do looks like very hard work from the outside to most passive observers, but doesn't feel at all like hard work to you. So what would those things be for you? Well, again, being the laziest human on the planet, I try to make everything I do look incredibly easy.

I don't want anyone, I mean, that would be bad form to make it look like it's hard. I guess let me go back in my career and then bring you up to now. So back in my career was my obsession with wanting to know, with ultimately, what turned out to be what works on Wall Street,

I had to do that year by year by hand because their so-called program didn't work at all. And literally, I knew every stock. The name of every stock, I could tell you it's price, I could tell you its P.E. ratio. I remember giving an interview in Canada, and the interviewer was just like, how do you know all this stuff?

I said, spend two years in front of a computer screen looking at these names and you retain it. So that looked really, really hard, kind of crazy to some people. To me, it was effortless. It was because I, every day, woke up and I was like, boy, I'm lucky to be alive today because I'm going to go in there and I'm going to figure out more. So that looked hard. Kind of was hard if you think about it.

I did it by hand, basically, year by year by year by year. Now, mercifully, we have all you smart people working for me and we don't have to do that anymore. Now I think it is trying to always be calm about everything. Most people are not calm, right? And I think that it is incumbent upon me in what I do right now to have a disposition, even during the worst crisis that is one that people see that they're going to make it through it. your mom always said that I am absolutely at my best in a crisis, that I just calm way down and just see things that maybe others don't see.

And I think that that looks hard. People have told me that they think that that's hard. It's not hard for me. I mean, it's kind of in my life. And I love it, right? Because if you can settle people down, if you can get them to stop the crazy things they're about to do, like selling in February of 2009. That's a win.

That's a really big win. And you're not going to do it by being really, really excitable like they are. You're going to do it through being very calm and trying to help them out of their lizard brain into their fully formed brain. So, yeah, that would be, those would be the two things, I think. Those are pretty innate. And, again, everyone's probably got some mixture of cultivated skills. innate skills. Yeah.

What would be some cultivated ones? So what are some things that you feel because of your own experience you can actually get better at with work as opposed to just being born with a certain advantage? So I think you can get better at being a communicator. I think that I was lucky enough like you to have a natural talent for communicating and for convincing people of things. But I think you can get a lot better. I mean, you know, Zins are on writing well, for example.

There are a lot of tools out there that if you avail yourself of them, you become clearer, you become more compelling, you become more interesting to people, and that you have to work at. It's great if you have a natural talent for it, but I think that it's something that you can take somebody who doesn't even have a natural talent, and you can make them good at it. You know, for example, how to win friends and influence people. I never read that book until recently because I always thought, oh, man, that sounds so corny. You know, that sounds so 1930s and, you know, yes, sir, we're going to show you how to do it. And so I never read it.

And then I was reading, I think it was Tim Ferriss. He was a podcast, and a lot of people talked about that book. And so I thought, okay, I'm going to read it. It's fantastic. It's a great book. And so communicating. Definitely you can get much, much better at it by reading on how to write better, by learning how to speak better, by learning what's interesting to other people, right?

Generally speaking, you're not interesting to them. They're interesting to them. And that's true for all of us. So the more you read and practice and get to know that, the better you're going to communicate and the better you're going to be able to help people, to understand themselves and put your own message. I think another thing that I've gotten a lot better at is in managing people. As I mentioned earlier, when I was younger and, you know, my first round of O'Shaughnessy Capital Management,

I was a bit of a tyrant. It was my way or the highway. And so I read a lot, the Drucker book, I recommend it. But then I read some other books on, you know, what kinds of qualities did people who were really great? managers because I wasn't naturally a manager. I still believe I'm not naturally a manager. I was very good at kind of pointing the way, but I had very high expectations for people. It was like, well, you know, what's the problem here? Yeah, I've told you what I want you to do. Now, just go and do it. And what I found is very few people respond well to that. They really need support and they need,

they need guidance and they need help. And so I read a lot about it and started putting some of those things that I learned into practice. And I think it made me a better manager because it was one I didn't have a natural talent at. But, you know, you'll hear as you listen to me, literally reading. That's, I mean, you can make yourself a better person in virtually every category, whether you have a natural talent there or not. If you read, read, read, read, and then read some more. Because it's like looking at art. You know, your mom and I collect contemporary art and photography.

And you know what we did before we bought our first piece? We went to every major museum that we could go to. We're lucky to living in the New York area that we could go to the Met and MoMA and those places that now the Whitney. And we went not once or twice. We went dozens and dozens of times. you probably remember we took you kids there and and really you educated your eye. I remember I was asleep. You were.

You woke up when we got to the arms and armor room though. You really liked that place because you really like the swords. And plus you were always a foodie and the Met has a great brunch. And so you didn't really care about the art except the arms and armor. But what you really look forward to and continually tugged on, you know, our jackets, Can we go to brunch now? Can we go to brunch now? But, you know, looking.

I think it was yogi Berra. Sometimes you can see a lot just by looking. Well, in fact, it's true. And so if you expose yourself, if it's art, then you want to look at tons of art, all kinds of different kinds of art. If it's other things, you want to read as much as you possibly can, and then read some more. Because there's always something to learn. And so I think that that's...

This is more of a general category, but I think that, you know, reading endlessly and specifically outside my area of expertise has helped me a lot in how I put together problems and thinking about things. And then writing. Again, I think writing is very important. As you know, when you were born, I was 24 years old. I wrote my first letter to you at age 24 and then gave you the book of letters when you were 21 or 22. And reading it over, I was kind of like, wow, I really haven't changed it at all. I was on to something. But, you know, you, it's really, big journal keeper and not just about goals, just about everything. I think the more you read, the more you write, the more you take in, the better you can do a lot of different things.

Aside from me letting you come on this podcast, what is the kindest thing that anyone's ever done for you? Uh-huh. Yeah. Well, that would be a close second. Definitely a close second, the kindest thing that anyone has ever done for me. I think the kindest thing that was ever done for me was done by a mentor of mine. When we moved here to Greenwich, we were new to the area. Your mother is a real nestor.

And so I had a certain amount of capital. that I was going to put towards the business and getting O.C.M. off the ground. But, you know, another maxim, happy wife, happy life. So she needed a house. And so I built that house, consuming that capital that was supposed to go to the business. And then found very inconveniently that I wasn't going to be given a mortgage because of my brilliance. I needed, you know, to have a job that had paychecks and things like that. So this man who I had been in several business ventures with, I was telling him my plight. And he goes, I'll own you the money. And I went, really, Jim?

Really? And he goes, yeah. He goes, I have no doubt. I have no doubt that you will do great things because I know what you're like. And again, it's kind of that out of the blue. And I took him up on his offer. And of course, naturally, when the bank who I was trying to get the mortgage from found out that I didn't need it anymore, then they wanted to give it to me. which I just think is so hysterical and so true.

But he did that just because he believed in me. And obviously it helped me out enormously and let me go on to create what I did. Well, this is a lot more fun than I expected it to be. Thank you. Thanks for joining me. Well, it's because you get to do it every day. Appreciate your time as always. Hey, always will make time mostly for you.

Hey, everyone. Patrick here again. To find more episodes of Invest like the Best, go to investorfieldguide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at investorfield guide.com forward slash book club. After you sign up, you'll receive a full investor curriculum right away, and then three to four suggestions of new books every month. You can also follow me on Twitter at Patrick underscore Oshag, OSHAG. If you enjoy the show, please leave a quick review for us on iTunes, which will help me. more people discover invest like the best.

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