The Chris Voss Show - The Chris Voss Show Podcast 271 RebellionResearch.com CEO Alexander Fleiss Machine Learning Investment Management

Episode Date: February 25, 2019

RebellionResearch.com CEO Alexander Fleiss Machine Learning Investment Management Rebellionresearch.com

Certainly appreciate you guys tuning in as an audience and being with us every broadcast we do. Be sure to subscribe to the show. You can go to youtube.com forward slash Chris Voss. Hit that bell notification button. You can also go to twitch.tv. We're giving away a lot of gaming codes and a lot of different gifts and different things from Sixth Continent. Be sure to check that out. You can get details there.

And also, you can go to chrisvosspodcastnetwork.com where you can see i think the six or seven different podcasts we have going on with book authors with ai uh with uh the chris voss show.com as well gaming of course we have there everything you can go see it there and of course the chris voss show.com be sure to refer the show to your friends neighbors relatives of course we always have the best guests on the Chris Voss show, so we appreciate your support. We have today Alexander Fleiss. He is the CEO of RebellionResearch.com, and he runs an artificial intelligence, or what some of you may know as AI, investment firm and hedge fund. He teaches at Cornell financial engineering.

He's guest taught at Amherst college for over a decade, Yale school of management for four years, Rutgers business school for two years. He's guest lectured at U Chicago booth, Princeton, Columbia business, Columbia engineering, NYU Stern,

NYU engineering and Harvard prior to funding RebellionResearch.com. This guy has done it all, and he's worked at KMF Partners LP, a long, short U.S. hedge fund. Welcome to the show, Alexander. Welcome to have you today. All right, Chris. Really appreciate it. Good afternoon.

Sounds good. Man, you have a huge educational background. Of course, you teach as well. Yeah. No, I love to teach. It's fantastic. Plus, it's the best way to stay in touch with the brightest minds of today. And technology is changing so fast and so much.

That's why I have people on the shows because they can tell me what's going on in the world and I don't have to keep up. No, without a doubt. We have one of the biggest companies in the world, Facebook, that was really created by a 19-year-old when you think about it. The entire premise of the company completely put together by a teenager. And so, you know, can the next level of machine learning be developed by 19-year-olds? Of course it can. You know, when you think about the top 1% of China, you know, that's what, you

know, 20 million people. You've got a 2 billion population there. So they've got a lot of really smart people who are coming over here and doing work that's turning heads. Yeah. And you guys have taken and developed investment algorithms and basically built this company where you can take and you guys use machine learning AI to take and figure out. It's a great story. Let me. Sure. Go ahead. Yeah. let me tell you, Chris. My partner, Spencer Greenberg, was developing machine learning for the NSA and the CIA

to do smart document search for terrorists. The idea being that the CIA and the NSA wanted to come across potential terrorist subjects that were not on their network. And so this technology, this machine learning technology, would look at millions of documents in the Middle East, and it would find out that terrorist subject A and terrorist subject B lived in the same apartment complex as this unknown XYZ. And unknown XYZ also played in the same soccer league as terrorist z and terrorist b and so all of a sudden this unknown middle unknown becomes a known potential terrorist that's actually what

our machine learning was originally developed for oh wow that's crazy man and then of course suddenly a drone flies in and takes care of all that business. Oh! Yeah, no. What drones can do now is quite frightening. I'm the generation that was influenced by 9-11. I lost a number of friends. One Saturday, I had two funerals in the same day.

So I can tell you that it was, you know, really inspired, you know, a lot of us to want to give back. And my partner, Spencer, you know, really wanted to help in, you know, the war on terrorism. And so that actually was a big catalyst for my partner to start working on machine learning, which eventually I joined him afterwards. So it's crazy how the world can affect our future. But without a doubt, without 9-11, we'd never have started this company. Yeah, it's really amazing what's going on. And of course, there's the implications of it. But what you guys are doing is using it for the benefit of investors to take and be able to find the best investments and search through everything that's going on the world of investments and identify different trends and things like that oh yeah well for our company

rebellionresearch.com you know we're managing you know from billionaires to doctors, teachers, really anybody and everybody. We're in 38 countries now. And it's very easy. It takes 10 minutes to open up an account online. And we have a track record that has outperformed the hedge fund indexes consistently over 11 years. So we're offering hedge fund returns, not just hedge fund returns, but hedge fund beating returns, Chris, to clients in 38 countries, by the way, at fees that will out, you know, for infidelities or so, whatever advisory fee you pay, we will beat it. You know, we're a platform. It costs us $5 to take on a new client, whether you're a $1 million client, a $5,000 client, or a $20 million client.

It costs us no more than $4.95, $5.95 a year just in our platform fee, which is something that, yeah, so it's extremely cheap for us to bring in a new client. Is that because you guys are able to use the machine learning, the AI, it doesn't cost as much because the computers are doing all the chewing? Oh, exactly. And so everybody goes on the platform.

And so if the AI decides that Kraft Heinz is a bad company, it sells Kraft Heinz for every account at once. And it's a very seamless situation. So in making that decision, there was no human insight. You know, the system will look at, you know, hundreds of balance sheet and financial factors. And in fact, Kraft Heinz has been something the system has been negative on. I'm sure you saw over the weekend and last week, there was some terrible news. And, you know, their business is not a place you want to be right now. Our AI does not like packaged goods.

Yeah, they're stuck too. Our AI likes whole – oh, yeah. They're basically hyper-leveraged, unpackaged goods. When everybody wants fresh goods, it's all about fresh, fresh, fresh. I mean Panera Bread, their entire thing is fresh. Everything McDonald's is doing is trying to get fresh. So when you have Kraft Heinz that comes along, you've got $30 billion of debt on top of a bunch of packaged products from the 50s.

And you know what? Most millennials don't have products unless it's 3 in the morning and there's nothing else to eat. So, you know. It's really, you know, with the AI... Oh, please go. Go ahead.

What would the AI allow you to do chris oh yes so funny so so they can open account at rebellionresearch.com that's where you guys have your uh website people can go down there open an account uh see the different things that you do university lectures interviews your press facebook instagram uh the details on your AI and all that good stuff. Oh, yeah. We post everything there. And we also run a blog series. We've got about 100 contributors, which includes a few other professors. Yeah, it's a really fun thing we started. It's really purely research-driven. It's really all about think pieces.

There's no... We don't do any advertising on it, so there's no... It's not a revenue-based idea. It's just to tackle fun and interesting topics of today, be it pollution in the Dominican Republic or the re-emergence of

Kodak as a printing company. Everyone thinks of Kodak as a printing company. Everyone thinks of Kodak as the camera company. Now they're becoming a printing company. And lots of licensing, too. I see a lot of different cameras and stuff. They've licensed their name out, too. So according to your website, it says,

our machine learning review is a 24 historical database on 55 countries daily to call the next Greek debt crisis or U.S. financial crisis before economists, banks, and funds. So does it also chew up the data and consume data on news on top of the trending in stocks and what's going on the investment world yeah no the ai is looking at you know auto sales and consumer pricing and for instance in 2009 our system was one of the first to get negative on greece and you know we were able to to call the Greek debt crisis because our system saw, you know, a decrease in industrial output, a decrease in retail sales, and a valuation of the Greek markets that was more expensive than Germany or France.

So, you know, people say, oh, you've got this very complicated machine learning. Yes, it's a very cutting edge technology and the technology to build is complicated. But the reasoning of what it does, Chris, is really very simple. You know, when it buys a company, it likes the industry. It likes the countries that the company operates in. You know, for instance, it likes pet food, but it doesn't like packaged goods. And so, you know, what you get is an economic robot mixed with a robotic investor. And so the AI is looking for the ideal economic spots globally and the ideal economic industries, those industries that are growing the most. And then it picks those companies whose valuations are the best compared to their peers.

So there'll be up to 200 reasons why we'll buy something. So if the system decides to buy Nestle, for instance, there could be 250 positive factors, which could span economic, even some political, you've really got so many different financial world. So it's not as easy as us buying small PE ratios and hoping for the best. This is a really ever-changing world. And within two to three weeks, the global economy can shift significantly. Wow. And you guys monitor 73 countries.

People can invest with you as low as $5,000. And you guys basically set up a managed account with them and uh so in the case of like recently with the the Heinz company and Robert Kraft uh does no I think I just conflated two different companies with Robert Kraft um does do you guys pick up on the news of that first? And then the computer goes, whoa, there's some dark news coming that's probably going to affect the stock. Is that how it works? Well, actually, Howard, we do monitor the releases of the company. But the system puts together its ratings based on multiple years of performance.

So the system has disliked Kraft Heinz for maybe six months because for the last two years, the system has seen a deterioration in the margins of Kraft Heinz. It's seen that its business has become more expensive. It's seen that it hasn't been growing. At the same time, Kraft Heinz debt has been going up and up and up. So it's essentially borrowing to pay the dividends it pays. It's borrowing to operate. And so it's not really generating much actual value and much actual

earnings. And so our system has no emotion to it. So, you know, Kraft Heinz has a wonderful name brand, one of the best around. The name itself inspires people to want to invest. But our AI just looks at the financials. It looks at the businesses. It sees what packaged goods are doing. It sees all packaged goods companies are not growing anymore. It sees that their costs are rising. It sees that the stocks that are going up are fresher companies, companies that focus on fresh foods. So when it decides it doesn't like Kraft Heinz, it takes a few years of data to come to that decision. You know, it could be just that your AI isn't a Patriots fan and could be vegan. Just kidding. You never know. These AI systems, man, they might be Eagles fans or something. You never know.

You know, we're getting very close to that point. You know, sentient AI, five, ten years away, Chris. So it's, you know. Maybe that AI is going, hey, man, I'm not a Patriots fan. Brady's won that Super Bowl way too many times. Well, I'll tell you this, though. AIs are naturally aggressive, and AIs naturally like winners. Oh, you're telling me you're a Patriots fan then.

I'm just kidding so yeah this is really amazing stuff i i trained to be a stockbroker back in the 80s just right before the the black black friday black monday um and uh and that career you know went in the tubes when that happened. But I was training to be a stockbroker. And back in the day, you, of course, you would read, you'd have these giant thick magazines that you'd have to subscribe to flip through each one. And I remember back in the day, the rule was if the P ratio, the price earnings ratio was over a quotient of 15, then that was like too much. It was probably trying to back off that because it was you know maxing out like you're talking about uh and but it was like you would have to

go through the magazine and then you'd have to call the broker and or the desk and you know all blah blah blah and even when i did nasdaq day trading in the 90s, I think I was level two NASDAQ, but you still would get screwed sometimes by whoever the floor broker was at the New York Stock Exchange who had to execute your trade. So we went through like two or three different, I think two different levels of stuff.

But this is really amazing what we can do now where you just have the computer crunch all the numbers and do all the work for you, munch all the data, and can pretty super pull in and out of stuff. Think about it this way. Our AI makes 10,000 factor decisions over a second. Wow.

So the amount of data that's crunched is simply, it's staggering. It's too much for a human being. And it gives an edge to the AI, an economic edge that human managers can never compete with. It's just data out there now. Human managers can still make money. There are many ways to make money, but it's becoming harder and harder because machines are learning how to do what humans are doing. And there's so much data online. There's so much that's publicly available now. I mean, you know, when I was growing up in the 90s, like I said, you had to go through all this work and expense to get the data, to research it, and you had to usually research it by hand.

You know, literally, it was that newspaper print, newspaper paper, because they, you know, they'd send you this thick book, and you'd have to, you'd be reading through it going, what's this trend line and of course by the time you got the magazine uh from the stock reporting company uh you know the data was like i don't know a week old or something so you missed you it's not just the ability chris of the ai to take in the data immediately it's also the the reams of data the amount of data we're taking in every public company from ch to Colombia to South Korea to France and Germany and Greece, every filing that comes in gets recomputed in the system. So that's a pretty, pretty wide radar in terms of what we can monitor. And we immediately recompute our global estimates based on new information that's coming in from 54 countries every single night so it's uh it's it's a gigantic jump start um but it also allows us like during

the january and december uh you know crash to have confidence the ai saw a strong economy the ai said you know this is a passionate sell-off human beings are being scared ignore this so we told all of our clients ignore this everything will be okay you know yes the market just crashed 25 and it's very scary but you know human beings are an irrational creature so ignore this and everything should come back normal pretty quickly um and that was one of the first things that got us um a lot of press was our economic calls. We were, well, we were very early on the 2008 financial crisis. We actually entered 2008 expecting the market to drop 30%. And then in the book, Dark Pools by Wall Street Journal

reporter, Scott Patterson, there's actually a chapter about my firm. It's awesome. It's a great book, by the way. New York Times best-selling list. One of the best quant and Wall Street books around. Dark Pools by Scott Patterson. But it chronicles how our technology in early 2009

saw the U.S. economy was turning for the positive. And so everyone was still in this you know stock market crash great depression mindset and our system was selling defensive stocks and buying aggressive stocks so for instance in 2009 we offered a total return of like 57 percent wow yeah which was a monster return um and and that another reason why we're preferable to the other robo-advisors. The other robo-advisors just buy you the S&P, charge you a fee, and then that's it. We actually try and succeed at bringing in hedge fund-beating returns to anybody,

poor people, rich people. We are an equal company. And like I mentioned, they can take and apply for an account. You can go to rebellionresearch.com, open an account. You can do research on Alexander's company and check it

out and all that good stuff. This is pretty interesting. What do you see the future coming for investing in AI and what's going to come down the line? Are there improvements and different things you're going to see that are going to make things even better? I mean, AI is just going to continually take more and more of the investing universe, but it's going to take more and more of our society as well. When you stop at a red light and you look over at a coffee shop, you'll be seeing robotic waiters and robotic cooks. AI money management is just the tip of the iceberg for what's happening in the next

25 years. It's really going to be very exciting. The entire economy is going to be taken over by robots. It's going to be startling and very much like out of the Jetsons. With 5G, by the way, Chris, it's going to be startling and very much like out of the Jetsons with 5G by the way Chris we're going to have flying cars very soon that'll be awesome with the flying I've seen the 5G robot

that I can't remember where it was displayed at I think Congress or something but basically with 5G there's enough data going yeah my friend did that robot actually really wow I'd love to have him on the show. Oh, yeah. Happy to. Ben Goetzel.

He designed the robot Pepper, which answered questions at Parliament. Ben works with Singularity U. He's a really, really cool guy. He's the inspiration for that silly character on Silicon Valley, but he's a very cool guy, and Silicon Valley took some liberties with that. It was amazing to watch the robot working, and they're just running it over self-service, basically.

You know what's funny is for a couple months now, I've been running the joke where any time one of my techno friends from Silicon Valley or wherever brings up 5g and he's like 5g is coming of course we had that huge discussion during ces uh and i think we're going to have more discussions during the nav show coming here to vegas about 5g because that's where we really get into cellular 5g is going to change the world chris it's going to change the world i i hate to get uh you know wonky and passionate but what 5g is going to allow is going to blow your mind from flying cars to automated cars to 5g is going to allow the robotic age to come about that's what

it's going to allow that type of instantaneous internet is going to change everything i mean from downloading you know movies in two seconds to flying cars. Because you have to realize that the big problem with flying cars now and automated driving now is you don't have as good internet. But if you can have fantastic internet everywhere, then the future is now. It's actually 5G is going to change the world like nothing else has. So for months, I've been running the joke that anytime one of my friends brings up 5G, I go, you know what? Screw that. I'm holding out for 6G. And for months, I've had that joke. Because my friends always look

at me and go like, you're just kidding, right? I'm like, yeah, it's a joke. It's, you know, 6G would be like 10 or 15 years from now. Yeah, 10 or 12 years. Someone who claims to be the president of our country actually stole my joke but he was serious i yeah i saw that yeah well you know that's kind of funny but that is my joke i run around

anytime somebody brings up 5g i go nah i'm holding out for six but uh i get a long wait if that happens but no that's that's really exciting and amazing. And yeah, if more stuff can happen. Let me ask you this, because this is kind of an interesting conversation we have in the tech world. I'm sure you're aware of it, is how we make this conversion from going to a we have a huge problem in the center of our country where we need to retrain, rejob these people, get people, you know, moved from an older economy, especially in some of the parts of the country that are still kind of working from a blue collar aspect. You know, there's even been talk about how much, you know, self-driving cars will impact people who drive vehicles or taxis, things of that nature. Do you see us going through an economic dip? And do you see us in the need of, you know, I'm going to be talking today. We've got this new, you know, the Democrats have announced this green new deal.

I'm like, hey, we really need a new jobs deal. We need a retraining of a lot of people and a lot of industries to be able to adopt and adapt to AI and learn the new jobs from the job losses that are going to be created from this new technology and putting people into a space where they can be retrained. Otherwise, we're probably going to have a whole lot of people that are going to be left behind as robots and AI take over. What do you think about that? Well, that's a huge worry, without a doubt, and it's definitely one of the top questions.

And I like to bring up a story from Willy Wonka and the Chocolate Factory. If we remember, Willie's father worked for a toothpaste company and automated their line and fired his father. But it was doing so well that it brought him in to fix the robot that had replaced him

in the first place. And the joke of that is that automation is actually going to create more jobs than it's going to destroy people will have to go back and learn yeah but this isn't you know years of training they can learn three weeks six months a lot of the companies will hire them even without the training yeah so you know mckinsey says that you know uh ai wait three and a half million uh you know vacancies over the next decade.

McKinsey is the smartest consulting firm on the planet, and they have no dog in this hunt. But at the same time, it's what I'm seeing. I'm seeing all these companies. What happens is all of these companies come up with new services that we could never have imagined. For instance, Uber could not have been created without the 4G network. 3G could not have been possible with Uber.

So Uber is only inventable in 4G world. But then Uber created all these other jobs for the Uber itself. And so my point is that you're going to have all these services and companies that are created with all of our new technology that are going to need to hire people. And those jobs will pay more than the blue collar jobs and so people will get retrained albeit you know from the new job even before they're trained but they will get retrained and it doesn't take four years a person that can be a few months it can be a few weeks you know you can learn some basic programming languages in less than a month. So, yes, people will get retrained, but they're going to get better jobs, making more money, and this country is going to be richer.

So you see with AI and automation and robots and things like that, we're just going to have faster turnaround. We're going to have more economy based upon the quicker time to go from manufacturing to retailing a product or putting a product on the market. We're going to save time by not having to do as much. I mean, clearly, from what I was talking about earlier, where you go through pages of investment material and try and do a thing where you guys are doing it just quickly within seconds, you know, processing, you know, billions of points of data sort of thing um the time that i've been sleeping as a human

being is going to equate to a much better life experience chris there's about 100 million people in this country who love dogs about 100 million people and many of them most cannot afford a dog walker what if a robotic dog walker became financially practical for 80 million of those people that's a lot of that company would grow and then have a lot of other companies related to it that's a lot of jobs all of a sudden created for a market that never existed before because there was no price point so my point is they're going to have whole new markets created from robots ai and 5g so you think we're going to have whole new markets created from robots, AI, and 5G. So you think we're going to have more jobs?

You think we're going to go through an economic curve? Or is that going to be resolved by just the financial output of the AI and robots and stuff like that, being able to save us time and money so that we can put stuff towards better things or retraining when it comes down to it. Yeah, I mean, I think it's just going to be more efficient and more economy. I don't think... The question we have is,

is there going to be a downturn in the economy before it as we go through a trough, or if it's just going to, you know, zip, zap, zoom, you know, and the advancement will take care of itself not nothing ever really is zip zap zoom it takes time uh you know we will have natural recessions just you know economies you know they have their recessions uh you know we have our seven years of you know fat cows and seven years of skinny cows. It's just the way life is. But with a more diverse economy,

you're going to have fumes that last shorter amounts of time. Plus, you have to realize the greatest recession we had, the Great Depression, was because there was no liquidity. We've entered a new world now

where liquidity is something that everyone has decided will be ample. All the central banks around the world have made liquidity very very available whenever it's necessary and so will we have a sustained depression i don't think we're going to ever see a depression like we saw without a major event be it a coup, a political takeover, you know, war. I think our economy is about to take off. What about Chinese developing downturn?

You know, they've been cheating their GDP for 20 years, building cities that no one lives in. And it's starting to really catch up to them. And they're starting to downturn, which could, you know, as the world's second largest economy and maybe the first world's largest economy here in the future, do you see that being a huge hit coming down the pipe for us?

You know, if China were to enter a financial crisis, that would definitely slow up this economy. Would it push us to recession? Maybe. You know, but, you know, China, you know, we buy from China. That's the whole issue with the trading gaps. So,

you know, their problems won't affect us as much, you have to realize. Warren Buffett has a fun little point. You know, when the U.S. gets a cold, the rest of the world gets the flu. So if China gets an economic flu, it might hit us a little bit. But like I mentioned, we're buying from China right now. We're keeping them in business.

What do you think about cryptocurrency and the future of cryptocurrency and maybe how it fits into what you guys are doing? I think cryptocurrency is... I gyrate between fraud and amusing fraud. I think the Winklevii are brilliant guys who I grew up with and are very old friends of mine. And by the way, they are extraordinarily smart. In my opinion, Mark Zuckerberg completely defrauded them out of the Facebook. But I don't agree with the Winklevii on Bitcoin. I'm not a fan of alternative currency.

Well, it's going to be an interesting future the way it goes. And anything else you want to talk about for the future and what you guys are going to be doing in it? Yeah, no, I mean, we're just going to continue to outperform the markets. Our RebellionResearch.com flagship global strategy is up almost 20% already in 2019. Yeah, no, this is after we were flat for 2018. So, you know, we naturally were up 24 percent in 2017. So we've had a good few years here, but we've also had a good 11 years. You know, the system has been around for a while. And so the exciting, you know, world of AI is only going to let us become more and more powerful as a company. You know, machine learning, Chris. So, you know, we can steal the best machine learning that Google, Facebook, and Amazon are developing.

Well, you know, being able to have a system that can buy and sell really quickly, especially when stuff comes up, like, you know, we were talking about Kraft Heinz recently, where it can, you know, sell that instantaneously so you can beat. I know the stock took just a drubbing over the news. And being able to enact that way on different stocks is super important. I remember sometimes when I used to day trade, you know, if you're not up on the news, you can really take a drubbing. And by the time you get to your computer do your trade and stuff you're just like ah man i lost the fortune sometimes you miss gaining a fortune i remember one time buying a stock in and uh and i think by the time the trade executed uh i only

made like 50 grand in like 20 minutes or something like that but I could have made 100 grand if it would have traded faster. And I just missed it by minutes. And it's just one of those things. And so if you're going to have AI computers that are doing these buying, trading, and selling, and spinning it out, then yeah, it can make all the difference in the world. Because when it's trading day i mean those nanoseconds count oh yes they do and uh you know the ability to be a few weeks ahead counts as

well and also the ability to not be scared when others are is a fantastic strength of the ai that's one of the that's one of the things you always deal with as a uh as an emotional day trader investor if you're doing your personal invest, is the emotion gets to you, the mental game of it gets to you, and you sometimes make some really bad decisions. And you're always operating, AI probably doesn't have the problem that humans do, where you have that reputation of hindsight, where you're like, oh, if only I had done that sooner, I could have made all this money. And you can see through your hindsight. But then that emotion or guilt affects your next buying decision. And you buy too soon. You screw it up.

And so the great thing about AI is it doesn't have that emotional basis where it can just use your logic. One of our best data sources is the past mistakes of our AI. So the AI learns from its past mistakes. That's one of the best ways that our AI gets smarter and stronger. I think I need to become an AI system in the future and have a chip put in my brain. It makes me learn from my mistakes.

I think an AI insertable chip is probably something that will happen in 30 years. Yeah. I think. Insert it into your brain. I think we can connect to your brain without being inserted. There's already apps that are using brain thoughts to control. It's actually technology that's sooner than you think. That's actually pudding.

So if you can figure out how to put AI in pudding, you'll have a way to use my brain. So Alexander's website is RebellionResearch.com. You can take and check it out. You can go there and open an account. Anything more we need to know about what you guys are doing over there? No. Thank you so much for the time today, Chris. Go to RebellionResearch.com, open up an account, ask us for any information, and we're here

for you 24-7. Sounds good. And thanks to my audience for tuning in. We certainly appreciate you guys. Go to youtube.com, ForgeHouseChrisVoss. Hit that bell notification button so you get all the notifications of everything we're doing. You can also go to twitch.tv, ForgeHouseChrisVoss,

to see all the gaming giveaways we're doing, lots of codes, money, all that sort of stuff on the show over there. And also chrisvosspodcastnetwork.com. You can go there and see all the different podcasts that of stuff on the show over there. And also Chris Voss podcast, uh, network.com. You can go there and see all the different podcasts that we have on the show and you can take and hear them. And of course you'll always hear great stuff on the Chris Voss show.com. Thanks for tuning in. We'll see you guys next time.