The Compound and Friends - Old Man Yells at the Cloud

Episode Date: November 22, 2024

On episode 167 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Cliff Asness, of AQR Capital Management, to discuss: the less efficient market hypothesis, value investing, the quant world, private equity, and much more! This episode is sponsored by Public! Lock in a 6% or higher yield with a Bond Account at: https://public.com/compound Sign up for The Compound Newsletter and never miss out! Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: https://www.linkedin.com/company/the-compound-media/ Public disclosure: A Bond Account is a self-directed brokerage account with Public Investing, member FINRA/SIPC. Deposits into this account are used to purchase 10 investment-grade and high-yield bonds. As of 9/26/24, the average, annualized yield to worst (YTW) across the Bond Account is greater than 6%. A bond’s yield is a function of its market price, which can fluctuate; therefore, a bond’s YTW is not “locked in” until the bond is purchased, and your yield at time of purchase may be different from the yield shown here. The “locked in” YTW is not guaranteed; you may receive less than the YTW of the bonds in the Bond Account if you sell any of the bonds before maturity or if the issuer defaults on the bond. Public Investing charges a markup on each bond trade. See our Fee Schedule. Bond Accounts are not recommendations of individual bonds or default allocations. The bonds in the Bond Account have not been selected based on your needs or risk profile. See https://public.com/disclosures/bond-account to learn more. Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

I'm old enough, of course, that I can do 16ths and 8ths math pretty well. Which is useless today. But whenever I'm like, my kids, I'll be like, that's.375. And they'll be like, well, how do you know that? I'm like... So the thing is that... I could have figured it out anyway, but I know it instantly because that was the world. We used to get paid on 8ths and teenies. That's how they paid us. Teenies? J-Teenie?

Rob. Steens. Steies? Yeah. J-Teenie? Rob. Steens. Steens, babe. So our president, his name is J-Teenie. Siri calls him J-Teenie. Which I love. We used to get paid on eights and three eights and if we made a mark in the stock, maybe

five eights. You talking marijuana? No, I'm saying that's how we used to get paid. Yeah, yeah. I'd like a dime bag of Ginny Tent. Anyway, they are crushing my crush. You and I are not the same. I was Series 7 licensed in the 90s.

Do you understand that? I was always on the buy side. You were always on the buy side. You are definitely not the same. But I spent my first year and a half at Goldman before starting the Quant Group, being a buy side portfolio manager and trader for fixed income. So I was on the phones.

I was, you know. The tension, by the way, when you call four dealers and your entire job is to take the low and trying to remember I'm buying here. And the fact that some fixed income securities are quoted in interest rate, particularly like zeros, and some are quoted, most are quoted in price, and remembering not only do you have

to take the high but which way the high goes. I got, let's just say I got it right most of the time. But where's the tension with the guy on the other end of the phone you're saying? You're talking, generally you put dealers in comp, I have no idea how they do it anymore by the way, this is like 35 years old. They use probably a drone strike instead. It's market access, it's a software program. anymore by the way this is like 35 years old. They use probably a drone strike instead. It's market access, it's a software program.

But you know you wanna buy a hundred million dollars of the 10 year treasury, you call up three to four dealers, you tell them to make you a market, and then you very quickly, cause the markets move, get back to one, say done. I am talking about the low tech way we did that with pencils writing on paper. And we did get it right.

But there was a tension like you really don't want to buy the second to the low. Cause then you have to reimburse the client for the, for the difference. And you know, father Goldman did not appreciate that. Do you have a funny like Goldman origin story or is it pretty boring? It's pretty boring. I was a professor of mine from undergrad who ended up going there and my best friend ended up working for this professor and they, I was in the PhD program in Chicago and they said come for a month, a summer. I went for a summer. I had a good time. They said come for a year. You can write your dissertation from here. And I'm on like year 32 of that

sabbatical. Seems like it's going to stick. How did, did you guys see the AQR by yourself or did you have? Yeah, no, a hundred percent employee owned. The later on we sold the stake to AMG. Uh, but in the beginning it was, uh, based on savings and can we raise that? It was a little scary, like starting any new, new firm, but no, it was just us. it's just us. But you didn't do it as an incubated thing inside of Goldman. You broke away and started yourself. Nope. They were a little mad at us.

Yeah, no kidding. They would have liked to have had a piece of it, right? I didn't even go there. We had built up a fairly big quant group, so it would have been a little weird because we were going to be directly competing with the group we left behind. We did stay about three weeks after a few of us quit to transition to the people who would take over for us, which I think went a long way to smoothing over the relationship. They asked us to. John Corzine and then Hedda Goldman Sachs.

It was like a governor commuting my sentence. I had a three-month garden leave and he cut it to six weeks because we helped transition for three weeks. So there was tension, particularly to the people I reported to because we were making a fair amount of money for Goldman and we were leaving. It's always gonna be tense. The other thing we had in our pocket at the time

is the sell side very much wanted to trade with our new firm. So we had advocates at a different part of the firm than where I left the buy side of Goldman, but the sell side was kind of excited. Because for legal reasons, we could do very little business with our own firm when we the buy side of Goldman generally, you know, again, this is 35 year old knowledge, but generally doesn't trade a lot. Pretty much never for US institution with the sell side. Just considered a conflict of interest for obvious reasons. I didn't stop the people who ran futures

from every about six months. They would call me up and yell at me that we're not giving Goldman Sachs any of our business. They would hear that we're doing a ton of business elsewhere. And I'd say, that's because it's illegal and they'd go oh and that bought me another six months and then you guys know you have the exact same watch on with them and there are only two others of these in existence and I

could have worn it there's an inscription on the inside I don't know I don't know the inscription, but the classic Daytona? This is the Panda Daytona. I just have a Samariner on it. For our 10 year anniversary, Barry bought us this. He has a Sub-Tose. This is a very bougie... Josh bought me that.

I bought Michael the Wife's that you're wearing as a gift. Barry bought four of these for the four founding partners. That's cool. On the inside, they all have a portrait of Barry, Laser and Scribe. Well, as long as he's wearing a shirt. There we go. Cliff, before we start, what is your Nvidia price target?

Your end, if you don't mind. I don't know the current price of Nvidia. You know, I don't know, did you see my blow up with the whole world over AMC? I've seen all your blow ups. Okay. This is relevant. Individual stocks is just, you guys know, not something you ask Kekwan about. So I'm going on CNBC. I hadn't been on in about 10 years. We like them, but it's just, you know, we're institutional. We don't necessarily know if our clients want

to see us there. That man over there, who runs our public face. What's up Kevin? Kevin Infante, wonderful guy. No one else should hire him. He's actually terrible. No, we had a really rough 19 and 20 and then we were proven frankly right. He did one of these. Now it's time to go on and tell people we were right. So I go on, we do a prep call for this,

and they say, you gotta give us some individual stocks that you like and don't like. You gotta, they told you you have to do that. They probably said it nicer than that, but that was it, essentially. It was like, this segment, everybody does that. And I'm like, that's just ridiculous for a quant. I usually don't know.

Hold on, what show did you go on? What's how you do it? I don't know. You want a free stock lunch? usually don't know. Hold on, what show did you go on? What time of day? Were you on free stock lunch? I don't know, Kevin, you're on. You're on the podcast now. Closing bell. Oh, I get that. So eventually I agreed,

subject to being able to explain a bit why this is just for fun. Yeah. You know, I could be wrong about these three. We could have a great year. I could be right about these three. We could have a terrible year. You know, typical portfolio of ours

will have like 800 longs, 800 shorts. I told my team though, try to make the stocks interesting. I don't want to mention names no one's ever heard of. So they gave me one of the major meme stocks, AMC, that was bad on everything a quant, or I think a non-quant could ever care about. It was a high multiple on, very high multiple,

on the things you could even do it on. And on a business that's secular decline. Low quality, high valuation, bad management. Short sellers hated it. They were selling shares instead of buying back shares. There was like nothing. But in typical me fashion, I made it worse than it had to be.

I'm trying to explain, in my mind, I'm trying to explain how silly it is for me to talk about an individual stock. But I ended the segment with, but we're only, our short is all of 12 basis points. So the crazies can't even hurt us. It turns out, and this will shock you guys, that they're well named.

Crazy people generally don't like being called crazy. Shocker. I learned that. I was actually saying that they could be right for all the quant stuff in the world. Something could happen and it could be taken over by another firm. I was actually trying in my own weird way to be humble

and in my own normal way, it came out arrogant and nasty. So I became public enemy number three to the meme stock world. They thought like you're one of the people trying to like short their account balance because they don't they don't really know what you mean when you say that. Who is public enemy 2-in-1? Number one is Ken Griffin by far. A lot of the people who are hating on me have... Melvin? Well, yeah. Oh, Gabe? Well, he's kind of out of it.

Their old victims are not their current hate. The Ken Griffin, allegedly, and Ken denies this, and I believe Ken, had Robinhood, quote, pull the buy button that day. By the way, their whole thesis is if that didn't happen, the stock will be worth a thousand times more. By the way, Ken Griffin makes no money if people stop trading the stock. Ken Griffin doesn't... They don't even realize that they're trading, Ken Griffin makes no money if people stop trading the stock. Ken Griffin doesn't... They don't even realize that they're trading with Ken Griffin.

There's great irony there. The second public enemy is Gary Gensler, who just quit today, I saw. Having nothing to do with my story. The funny part is they think that Gary is in bed with Ken Griffin on this. To keep them down. It's the opposite. They have no idea. I can't imagine two people on Earth less likely to be in bed together. Watch your math. We don't want to get pinched up here by the apes. Hey, don't feel bad. Barry Ritholtz decided to mock...

What's the kid's name? Ryan Cohen. Ryan Cohen at the height of GameStop mania. He decided to send a tweet saying like, Ryan Cohen doesn't know how short selling works or something. We had a denial of service attack on our website. So you're in good company. A lot of people didn't know better. Steve Cohen didn't know better. No, that's exactly right. I certainly knew this was a weird world, but I had not paid that much attention.

I mean I saw GameStop, but even though I'm a quant, I'm glued to the markets all day. The depth and breadth of the fever swamp, I grossly underestimated. And without taking a political partisan stance, because I think it's everywhere, very similar to our politics these days. That's tribal. In terms of just people getting funneled

to more and more extreme views, trying to figure out what's true versus not true because it's all out there on the internet and the craziness looks it looks as well formatted as as the truth and you can relate to this though if somebody puts half their net worth into one stock and somebody who's way richer than them comes out on Twitter which is an equal like kind of like every everyone is up against everyone else. Right. They're going to get mad.

They're going to be like, why is this guy trying to keep me poor? Yeah. So it's, you could understand like where that passion comes from. So we... No, I get it. It was actually sad at times and I actually tried to be nice. It never worked. A few times I'm like, look, I'm the only one telling you the truth.

I'm not allowed to give financial advice. Though I get yelled at, I could talk about stocks and not, but nothing directly advice. I came perilously close, as close as I can come, to saying, don't put half your money or all your money in one meme stock. I feel like that's defensible. Well, AMC has since blown up and so did the apes thing. Did anyone ever come back and say... No. And to be honest, I can't even gloat about that because if I thought that was gonna happen, even as a quant, I'd be short a lot more than 12 basis points. Yeah. But it's down like in the 90% range since I went on TV and did that.

So I assume we made a little bit of money on that and to this day, I cannot tell you if we're long or short. I refuse to look. We're gonna kick another hornet's nest real quick, okay? I have a feeling it'll be an hour of. I'm not ready for you yet. I'm not ready for you yet. Go to the 30 seconds. The second point I make is if you look at Microsoft for example, 98.5% of the equity

value of Microsoft is based on forward expectations of quarterly earnings and 1.5% of the equity value of Microsoft is based on forward expectations of quarterly earnings. And 1.5% of the value of Microsoft is based upon tangible liquid assets. And another way to say it is Microsoft is 144 times levered to their quarterly earnings. If they earn 3 billion a quarter or X billion, whatever the number is a quarter, more than that, I guess, but you multiply it by 144 X, right? And if they miss by a billion, it's 144 billion where you move. And the reason why operating companies are like that

is because the SEC 33 Act and the SEC 40 Act required that operating companies hold no more than 40% of their liquid assets and securities. So normally they'd use treasury bills. And treasury bills, as we just showed on that chart, are toxic. It's toxic capital, it's poison. You might as well just inject poison into your veins, right?

All right. And of course that is Michelle Obama. So that's Michael Saylor. He's got the hottest stock in the universe, if you could call it a stock. It's basically a repository of leveraged Bitcoin and it's up 650% this year. That's right. I don't know how to respond to that. Where Kevin will be okay.

All right, let me. Let it rip, Clef, let it rip. Look at Kevin's laser eyes. Cover your ears, Kevin. I don't usually talk this way on classy podcasts like you, but that entire thing was the dumbest thing I've ever heard. You know that meme or that video where the guy goes, what you just said here?

And he goes through a long. Billy Madison I have I don't even know what it means companies are are the present value of their future Can I ask you a question cash flows? This is not my non Michael Saylor related though. Can I ask you a bigger question? Yeah This guy has arguably arguably pulled off the greatest trade of the era so far Yeah, his stock price is up 650 percent year-to-date his market cap is now bigger than Starbucks a hundred billion a touch today Does it matter if somebody gets it? So right even if their reasons are insane to you in your book

So an asterisk next to the obvious thing he just pulled off? It doesn't matter to his bank account. Exactly. Agreed. It does matter as to what lessons to learn going forward, because on average, and I'm not, I don't even have a very strong opinion on crypto. I'm not a guy who's done a deep dive on it. I have a natural old man cynicism that you creating money by burning oil doesn't seem

It's a spectrum. I'm somewhere on the spectrum close to you, I think. cynicism that you creating money by burning oil doesn't seem. It's a spectrum. I'm somewhere on the spectrum close to you, I think. You know, money has a little bit of magic to it. What any of us consider legal tenders, outside of a Jackson Brown song, it gets a little confusing. If someone does something you think makes absolutely

no sense or wins the lottery, in this case, he won the lottery. The rational, it doesn't imply a rational action going forward. Do I bet on all lottery tickets now? Most lottery tickets collapse worthless, and on net buying lottery tickets costs you money. So the lessons to be learned from one guy who won the lottery

are close to zero. He may be, he's brilliant, and maybe Bitcoin is worth much more than I realized. Maybe he's a brilliant just in trader. Yeah, we'll start the show. Hang on, hang on. We're going to talk more about the start of the show. We didn't start the show.

What the hell have we been doing? And for the record, for the record, Microsoft did 25 billion in earnings, not 3 billion last quarter. So let's get it on. Let's get it on. All right. All right, Nicole, let's clap it up. Let's get it on. Alright. Alright, Nicole, let's clap it up.

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This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. 167, ladies and gentlemen, welcome to the greatest investing podcast on earth. Very humble, Cliff. My name is Downtown Josh Brown. For first-time listeners, we appreciate you. Welcome. We'd love to see you. With me as always, my co-host co-host mr.. Michael batnick Michael say hello to the folks hello Daniel is here Nicole is here a very trepidatious Kevin of aqr is here Rob Duncan Guys I want to thank you so much for the unbelievable ratings and reviews for the last couple of shows

Thank you so much for the unbelievable ratings and reviews for the last couple of shows. The Michael Semblis joint is already at 40,000 views and counting. What do we do on Adam Parker? Is that 60,000? 50. 50,000? We'll be 60. It's going crazy. Guys, thank you so much for listening.

I said today when I walked in, there's no way this isn't going to be the best show of the year. It's just impossible. We have someone here today who I am such a huge fan of intellectually. Somebody that I learned something from every time he speaks. And I think that you guys walk away from this show feeling the same way. May I please introduce to you the eminent Mr. Cliff Astness.

Thank you, Josh. I'm going to give you the full intro, okay? Cliff is a founder, managing principal, and chief investment officer at AQR Capital Management. Prior to co-founding AQR Capital Management, he was a managing director and director of quantitative research for the asset management division of Goldman Sachs. Research?

Research. It was poorly named. Actually, it's funny you? Research. It was poorly named. Actually, it's funny you say that. It was poorly named. We immediately, close to immediately, started running client money directly. But there was another quant group, so I think it was easier to get us in

by calling us research. Research. But you did nail something that was weird. No, he wants me to say research. Oh, is that what you're fighting about? Well, because I say finance. You must, do you say, it depends. I say finance.

My kids make fun of me for this. What do you say? I say both. It depends. And they say when I want to about? Well, because I say finance. You must, do you say, it depends. I say finance. My kids make fun of me for this. What do you say? Because I say both. It depends. And they say when I want to sound pretentious, I say finance. That's me too. That's all. I knew I loved you.

You're from the South Shore and we don't see you pretentious. Hold on, we don't see you pretentious. Cliff is on the ambassador board of the Journal of Portfolio Management where he is a frequent author. Okay, that's the whole thing. I want to tell you how I first became aware of you. I don't know if you remember any of this. In the wake of the financial crisis, the most popular, or during the financial crisis,

the most popular finance blog, other than Barry's, was Dealbreaker. Yeah, they weren't huge fans of mine, but that's okay. They loved you, they wrote about you every day. Different sense of love. Okay, yes. For best leaven, in the early days of Dealbreaker, you were the main- SNL loves Donald Trump, that kind of love. Okay, yes. For best levin in the early days of Dealbreaker. SNL loves Donald Trump. That kind of love.

You were the main character though. For a while. And I was a comic book collector back in the day. And all the pictures of you, they thought they were ridiculing you by putting pictures of like your comic book figurines. Somebody like myself was like, no this guy's f***ing awesome. What are we talking about here? Was this on the Quantric? This was 2007, 2008, maybe a year afterwards. I still use for some avatars one of their graphics,

which is like me with Captain America shield on my arm, punching a computer monitor at the same time. I just, it was really, you know, Bess is not my favorite person. She was not very kind. You replied back, this creature, Beth Levin or whatever her name is. Oh my God.

But she, so I- I don't remember this at all, but I will say it sounds like me. It was a moment of weakness. It was a moment of weakness. Yeah, when your moment of weakness spans 22 years of your life, your moment starts to be a little-

So I knew Bess back then, and I know that you were like The moment of weakness spans 22 years of your life. Your moment starts to be a little... So I knew Bess back then, and I know that you were like one of the people that she actually liked the most. Steve Cohen, the people that she mocked the most were the people that she found to be the most interesting. That's a new perspective. If you ever get to meet her, you will hear that directly from her. Anyway, that's when I first started reading your stuff and that led me down this rabbit

hole of your research. Because I'm like, what is this guy about? And this is early days for me getting serious about understanding investing. I don't have a background where anybody like ever sat me down and said, this is how it all works. So your papers and your stuff was critical for me to understand things like quantitative finance and factors and all the various things that you talk about. So I wanted to say thank you for that.

I really appreciate it. And anything that I've gotten wrong subsequently is not your fault. So how many papers have you written over the years? Oh my God, I have no idea, but it's got to be north of 50. It depends where you count as a paper. If I do it 11 single-space page blog post, is that a paper? It could be much more than that if you count those published. It's probably 30 or so. So you just wrote one that we're

gonna talk a lot about today. What keeps you going? Like why are you like I need to do another paper? What keeps me going in writing specifically or in business in general? No, no, writing. Okay. Haven't you said it all? I actually just love it. When we started AQR and when we decided to leave Goldman, believe it or not, at least a small part of our motivation was to be able to write and say what we wanted.

And not just me, the other guys too, but maybe me most. And Goldman, it was a great place to me. I have no problem with it, but you are somewhat constrained in what you're allowed to say. If you're anti a certain kind of investment and Goldman makes a lot of money from that, there's a house view and you can only deviate so much. And I sense that early on, it was a small part.

Most of why we left was naked greed. Let's be clear. And anyone who says I left Goldman Sachs to start a hedge fund to save the world, is probably not telling the truth. You could help save the world along the way, that's really nice, but probably not your main thing. So I write, because I do love it.

You probably can tell when I see something out there that I think is wrong, and I'm not always right, this is my opinion, but when I see something I think is wrong, I get a weird, you know, you talked about comic books, my wife tells me I have a Spider-Man complex. With great power comes great responsibility. Oh, I was gonna say, like a very strong sense

of good versus evil. There's a little bit of that. There definitely is, though I wanna be uncharacteristically humble and go, my sense of good and evil, I'm not always right, but when I think someone's saying something misleading or wrong, for some reason I think it's my job to fix. I don't know why. Sometimes I don't get to it. Like you guys, I have a long list of topics

I want to write on, but eventually I get to most of them. All right, so the latest one is the less efficient market hypothesis, and there's a lot of people who would argue that the market has gotten more efficient over time because there's so many where players speed moves so much faster, and you tackle all of this. So let me just use your words and then we can refine it.

So you start with saying- It's fair to use my own words. A relatively efficient stock market is important for society, me great. The author believes the stock market has gotten less efficient over his now quite long career. And if so, this means disciplined, value-based stock picking is both riskier

and likely more rewarding in the long term. What does the long term mean to you? The long term means a period in which, even if you're right, your investors have left already. That's the actual long term. Well, that's the practical definition because everyone talks about the long term. I think there I'm talking about the next 10 to 20 years. If I think the market is prone to these bouts, and one thing I don't think I was clear

enough in the paper is I'm not sure the market is less efficient every day. I am more sure that periods like the dot com bubble, 99, 2000, and then 19 and 20, culminating but not caused by COVID, it was already as we measure it, crazy pre-COVID, I think the markets are more susceptible to those bouts of insanity.

I'm an ex-Jean Fama teaching assistant that I still worship at his altar on many things. So me using the word insanity, it's a little road to Damascus moment. I'm not used to- But do you think things have gotten less efficient in recent years? Yeah, I do. Why do you think that is?

Well, first, let me diminish expectations. Impossible to prove this stuff. I say at the very beginning of this piece, a lot of this is career retrospective, old man, 50th anniversary. I've been writing in it for 30 of these 50 years. Opinion. First, Michael mentioned speed. I actually concede at the very beginning of the paper that yes,

it markets by faster. Information probably gets into prices faster. I don't think price is being accurate and what accurate means can be debated. How to measure it, you need some model of what does it mean to be accurate. But I don't think speed has much to do with accuracy. If you have a strategy based on thinking things are misvalued, it could be a simple one like the quant multiple, long low multiple, short high. It could be much more subtle like a Graham and Dodd manager where they're looking, yes, they want to pay low multiples, but they also want all the other things that quants want to.

We just call them different things. If that is accurate or inaccurate, it has virtually nothing to do with the market going from 10 minutes for information to get into prices when I was 22 to 10 milliseconds now. These are one to three year holding period kind of strategies. The notion that speed matters. Speed matters if you're competing on speed. If you're a high frequency trader and you have a bigger leg or latency than the other high

frequency traders, you will not have a happy experience. And speed is the only thing. But for a lot of formal quantitative strategies that aren't HFT. Of course, quant are almost by definition HFT. Excuse me, HFT is almost by definition quant. But for a lot of longer holding period quantitative strategies, one of the standard things you do is imagine you figured out what you wanted to buy and then waited three days or two weeks to buy them. And that's a robustness check because if a lot

of the back-tested alpha goes away, then you are essentially predicting the next two weeks. And that's very rarely the case. You could take all the Fama French stuff, the other factor stuff, the more modern stuff that modern quants do, and a lot of it you can wait a friggin week and it's almost as good. In 2013, they gave the Nobel Prize in Economics to Fama and Bob Schiller at the same time. They shared it. There was a third guy I think he...

Lars Hansen. Okay. I'm not sure what his belief was but it strikes me Fama and Schiller while they were friendly in real life they believed the opposite things. Fama believed that no sense in trying to beat the market because everything's already priced in before you even wake up. And Schiller believed this whole thing is being driven by human emotion all day, all year, therefore something.

Doesn't sound like he was an active investor either though, because when pressed on television, Schiller would say, I just put my money at Vanguard anyway. But having opposite beliefs about how efficient versus how emotional the market is, they share the prize. So to your earlier point, none of this can be proved. Yeah. The Nobel committee punted on that one. And it's it's pretty fair because it's still being widely debated.

It's not like there's it's not like they can just say who's right. So the debate has been very valuable and I think they said both these guys are brilliant and they've contributed to the debate. Let them split it. Lars Hansen, by the way, is awesome. And I actually feel kind of bad because he gets forgotten a little bit in the discussion.

He was overshadowed by these two big famous names. Only because he's not fighting with anyone. What was his theory? Lars has done a lot of things, but mathematical ways to test these models is really what he excelled at. He's a great financial economist, but he's also, you know, neither Fama nor Schiller, and I'm not telling tales out of school, would be considered a great mathematical economist. Lars would be. He absolutely deserved the prize. So I just want to give him his due. Pharma should have gotten a sole prize by the way, about 10 years earlier, I'm still a little pissed about that.

Even if I think the market's less efficient now. He was a mentor of yours. I was his teaching assistant for two years and he was co-chair of my dissertation committee. Now you wanted to prove that momentum was a factor And he said if it's in the data write the paper, you know If you're gonna look at all my other podcasts, this is gonna be really boring. I got you. I got your back Don't worry about this. I am just kidding you

Yes, that is exactly what happened. It was the closest thing to a religious statement. I've ever heard from him I'm not saying he's not a religious man But I was nervous asking him because I had these preliminary results. I wasn't the first. There are two authors, the most Jagadish and Tipman, who I think should get pride of place. There's always like who invented it first. They deserve it for the quote momentum effect. Even that when we sign, you know, academics discovered this. There were tons of people trading on momentum in the real world prior to academics. So, who discovered something first is always out there.

But I was very early and I went to his office and I said, I wanna write a dissertation, at least partly, and there were some other things, focused on studying this price momentum strategy. And then I distinctly remember this. I cowardly mumbled the second part and it works very well. And Gene was like, what was that? Cause it shouldn't exist in his framework.

Well, with any, if you do a back test and we can get into the problems with back tests, but if you have a successful back test, really good historical returns over a long period, there are always three possibilities. One is you just tortured the data till it confessed. It's overfit. And it's always clear when you have very silly,

the Super Bowl effect. I'm sorry, I don't care how many years in a row it's right. I'm not buying because an NFC team won. If it's not that, then it's real. If it's real, it is either because what you were long or overweight and it was riskier than what you're short or underweight, you get paid a risk premium. That's the kind of gene pharma efficient market story.

The Bob Schiller and Dick Thaler is one of the Nobel Prize winners, it's not just Bob, is very often the thing that is long was actually mispriced against the thing that was short. In some sense, you've got to argue what mispricing means. With a lot of factors, there's an interesting argument to be had.

With the so-called value factor, which I think should be called the low multiple factor, that's a side story. I fall on the inefficiency side these days, but you can make a credible argument that it represents, say, a Great Depression risk, where maybe those companies will cease to exist. Momentum is very hard to reconcile with a risk model. Risk does not mean occasionally loses money or occasionally gets killed. That's not risk you should pay for if you can diversify that away. Risk is something you either can't diversify away or tends to happen when it's most painful to happen. So things that lose in bear markets, you might say, are riskier if there's an asymmetry. You don't really see that with Momentum. It's very hard. It's also exceedingly simple. Nowadays, we and many other quants will have much more, hopefully sophisticated, hopefully not, you know, overfit, but hopefully sophisticated ways to measure momentum.

But what I wrote my dissertation on was what I jokingly called the two newspaper strategy. You needed a newspaper from a year ago and from one relatively recent newspaper. And you needed to be a computer works better than a person because you want to write them down real fast. But you buy the ones that are up and sell the ones that are going down. That making money with no clear thing to point out where it's riskier is a real blow. Gene is very nice about it. He's not a big fan of the fact that momentum works. But he acknowledges it does and he calls it

the single biggest blow to the three and then the five factor model. It must drive you nuts. We're going to get to your pet peeves later. I know. We're going to get to your pet peeves later. But when people will tweet something dumb happening in an individual security and go,

efficient markets. First of all, the person saying that has definitely not been in the market over any meaningful period of time. Yeah so for example like our friend economic who you interact with tweeted my micro strategy market cap now 90 billion on 30 billion dollars of Bitcoin whatever and then Michael Antonelli tweeted the meme of the Intelligent Investor book going in the garbage So just because dumb shit happens does not prove that the market is inefficient.

No, not even close. You know, if you're making the full Gene Fama argument, and even Gene doesn't think markets are perfectly efficient. He shocks the class about the third week at Chicago by telling them perfection is ridiculous. He thinks that's a great way to start to think about it. And he thinks they're probably more efficient than I or probably you do. But he doesn't think they're perfect. But he allows for dumb shit to occasionally happen. He allows for dumb shit. And nobody's gonna stop individual dumb shit.

Is there pervasive dumb stuff that you can make very low risk profits off of? Well, right now, sort of? Well, keep in mind, I'm at least a mild heretic from Gene. I am saying, I do use the word bubble. One of my pet peeves way back when, and you are correct, I have some new ones, but in 2013 was overuse of the word bubble.

And I literally talked about a bubble in a single stock. That's not a bubble to me. You might argue that's a mispriced stock, but a bubble has to be fairly pervasive. And this is a subjective definition still. You might think one is a bubble. A bubble is a stock you didn't buy before it went up. Yeah, well, that's a funny way to put it.

But a bubble, say in a market, is I have tried very hard and I can't come up with remotely plausible assumptions that would make this price fair. Now again, your answer might not be the exact same as mine. What you find fair is the tough part. Yeah, though that's why I reserve it for very rare times. You know, at the very beginning of my career, and I was not actively trading, but You know, at the very beginning of my career, and I was not actively trading, but I think the Japanese market in the late 80s, when the stock market, what was it? The Palace was worth more than real estate

in Los Angeles. The Palace was worth more than California or something, I don't know. More than Earth, excluding the Palace. Or else you're double counting. One of my ex-professors, he's actually also co-chair of my dissertation, Ken French, Gene's often co-author.

Oh, we love Kenny French. Ken's awesome. But he had a paper with some co-authors in the late 80s with the title, Are Japanese Stock Prices Too High? The beautiful thing, which is a statement both about markets and about the lag in publishing academic papers that can sometimes take a few years to come out,

is it was published under the title, were Japanese stock prices too high. So I think that, I think the dot com bubble in the 99, 2000, and I think certainly by late 19 through early 2021, I think. Spack bubble. Spacks, yeah, I think they got crazy. I may not even use the word there.

But you distinguish between price bubbles and activity bubbles. The Spack bubble was an activity bubble. There were too many of them chasing too few good businesses. It was just too much activity. To be fair, I really focus on price. Right.

Is this price remotely justifiable? Or is it out of a bound where I am willing to lay some- So by that definition, they weren't bubbles, the SPACs. They were just poorly priced. They were dumb. They were just bad investments, not bubbles. Yeah, which we will occasionally buy when we think they get cheap enough. We have no problem with that.

But clearly, when everybody, when celebs started doing SPACs, you know, even I don't trade these rules with them as a quant, but I still, they're fun, right? When you start hearing that, you know, yeah, it has a SPAC. Anything with celebrities is either a scam or a bad investment because the only reason celebrities get brought in and flattered to be included in these things is because you're trying to suck in a lot of retail.

You're not trying to do that if you have something that's really of value. They're looking a little better now, but my favorite were the 2021 Super Bowl celebrities touting crypto. Yeah. All of them. It was hilarious. Here's my definition for... Not definition. My answer for whether or not markets are efficient.

I'm not a mathematician. I don't know if you could tell. I'm more of a poet. But the way I explain it to people is markets are never efficient. They're always on their way toward getting efficient. They never quite get there. And it's a bumpy road. No, I think that's exactly accurate. And in fact, some do- Clip that for TikTok, please. Some do apply math to that. Classic economic models that don't consider real world institutions and microstructure assume there's an auction that goes on in space and prices just come out to something.

In real life, that's just not how it works. If you accept that even what Gene Fama says, the markets are not perfectly efficient, they should always be careening around with a general gravity in the direction of whatever you think is, assuming you know what's a fair price, the gravity should be pulling you towards that.

And they do. And they do eventually, but the gravity can be stronger or weaker at different times. So you started as a value investor, or this is one of the big things that you've pioneered, or at least are partly pioneered. So you look at the real life value spread. So you don't look at the Fama French, you do the real, there's multiple factors, you do the long and the short.

And you thought at the time in 2000 when it was at its peak that you would probably never see anything like it again And then you did and then you go to 1.2 And then we did so things got crazy in 2020 and they've since backed off a little bit but Value stocks have sucked shit for a long time to be polite. What is going on with value? How do we fix it? Well, if you take suck shit and divide it by vol, you have an interesting new measure of performance. There's so much to say here,

and stop me if I keep going. First, I will brag a little bit. Value stocks, drubbing, that essentially has gone on since the GFC, is quantitative value managers that do things like like a relatively not equal weight but a lot closer to equal weight than cap weighted a lot of the famous value indices are you know just short Nvidia at this point. We've had plenty of years when there are big differences we

lose occasionally to to conventional value it's not like we've invented something that always wins. Obviously we do it our way because we think it's better, but we also don't take a very big industry bet. We wrote a paper and I start a lot of sentences obnoxiously with we wrote a paper. This was a 1995 paper, so it's approaching 30 years, showing that a lot of quantitative measures and value in particular work better

if you don't take a big industry or sector bet. Doing apples to apples within a industry or sector. Obviously tech versus textiles. I don't know if there are any pure textile plays anymore, but I think you'll never find a day where tech is selling cheaper on basic multiples and textiles. And permabets make no sense to me. Nothing is permanently mispriced in one way. So for much of 2009 through 2017,

not just us, but a lot of quants had a very good time. Our versions of value didn't have a banner period, but were not terrible. And everything else, quality stocks, momentum, low beta stocks, all worked. It was actually a somewhat golden age. So I love that period because I could point to conventional measures of value doing poorly and us doing well. And you know, always be careful, never celebrate. Sorry, conventional measures of value is Russell 1000 value.

Price to book. Which is largely based on price to book. As opposed to what you're selecting for, which is what? Multiple measures of value where we're hedging out a fair amount of industry and sector exposure. So you don't want to just look at the balance sheet, for example? Yeah. Like price to book, I'm not a hater on price to book. It's an easy one to hate. It's one everyone gangs up on. A lot of you quants bicker about it. It's not that different.

Well, this is one thing. Well, if investors don't care about book anymore. I'm just saying the strategies get to roughly, they go the same direction. They do. During the, I hope I get this right, during the 2009 through 2017 conventional way, price to book, unindustry adjusted, cap weighted.

It's the classic way value indices are done. Price to book was worse over that period. Interestingly enough, 18 through 20, when was the real disaster for value strategies, price to book was about as bad as every other. Price divided by you frigging name it. Price divided by your gibberish measure, whatever. If you cared about price, you lost approximately the same. And a lot of the criticism of value

would end up being really about price to book. Like I know Josh was about to say this, I could feel it. Price to book doesn't handle intangible assets well. And I think- Well I wrote a lot about it at that time, like contemporaneously, the things investors care about, they don't show up there. And I think that is true. And we've been adjusting for a decent amount of time. Book measures,

you know, the classic one is R&D spending. Yeah, you spend money on property, plan, equipment, it's capitalized and it's in book, you spend money on R&D, it's expensed and it's not in book. Yeah. Brand, brand, networking effects where, expensed, and it's not in book. Yeah. Brand. Brand networking effects where, I'd love to get rid of, I'm gonna be Tam. I'd love to get rid of Apple,

but my four kids will defect to another family if I did that. That's all real. That doesn't mean, by the way, that the measure doesn't work anymore. That means it's somewhat noisy. And out of favor. And it can just mean it is less precise of a measure.

What if, what if it was disrupted by cloud computing and, uh, and, and the iOS operating system? You dumbass, punch him in the face. No, no, no, he's not, he's not wrong. Those disruptions could happen. But the assumption that when a measure is less accurate, not inaccurate, there are plenty of firms where price to book still works, it automatically loses a ton of money.

No, the actual right way to think about it for me, and I'll geek out for a second, is if you used to think this has a 0.5 sharp ratio, and someone screwed around with the measure. You don't automatically lose. Who the hell said that was going to happen? That's the same as, it's just, prior to transactions costs, it is just, prior to transactions costs, it is just as hard to automatically lose as it is to automatically win. That's like saying, I knew the short price to book

because of this, that you have to have a thesis. If you said those kinds of companies are gonna do great, yeah. So I do think price to book is a little antiquated. I think it does miss some of that. I think it's not that hard to adjust for and make it back into a reasonable measure, But most modern quants, including us, will have it in a composite of many things, but will not give it any special standing. You think the kids coming

out of Chicago and other schools learning quantitative finance are going to over index to what's gone on in the last eight years? and they are, rather than being price to book oriented factor investors, they're gonna be earnings growth factor investors? Yeah, to some extent, everyone's always, whenever I speak to young people, I'm always hard pressed for good advice. I don't have any, you know, I tell them not to follow

their bliss, because their bliss is probably stupid. That doesn't get me particularly popular with them. I'm generally talking to business school students, so they've already decided not to follow their bliss. But one of the things I always tell them is don't chase the hot career, because you'll be five to ten years off the cycle. Don't eschew the hot career if that's what you really love. Then you're combining your bliss with something that's good. But we're all prisoners of our careers. And these careers are pretty short

of these people. We just found out what happens when interest rates go up for the first time in someone's career. I think some people had a little trouble with that one. Good Chicago quant though, quants have huge disadvantages. There are things we can't know that a traditional manager can know. I don't pretend it's a panacea, but one advantage is you do get to look at 75 years, not just the last eight years, if you're willing to look at the data.

And one reoccurring huge problem in all of investing, and you don't have to be a quant for this, this happens to you guys too, is what I call statistical time, time where you can draw valid conclusions from data. It's just far longer than real-life time, that you can stick with something. Or your clients. Or your clients will keep listening to you. Two, three years of underperformance is about it before it starts to get excruciating in the real world.

The very stock market can have a bad 10 years. Hasn't happened in a while. But 2000 to 2010 was a bad 10 years for the stock market. Luckily, the stock market has a lot of true believers. But if that were an active strategy, by the way, if you had an active strategy as good as the stock market but not correlated to the stock market, that means you've invented a second thing as good as stocks stock market, but not correlated to the stock market. That means you've invented a second thing as good as stocks for the long run that's fully diversified. That's a really good thing.

It is excruciatingly hard to stick with. Have you heard of private credit? We'll get to that later. No, that doesn't go down. You have three. That's not as good. Hold on. That's 100 times better than the stock market.

So what is driving the value of spreads? Because you say it's not intangibles, it's not just the mega cap, you sector adjust, you industry adjust. It's not all these different things. So what is it? Can I throw an idea out at you? Yeah, please.

Is it that tech is drugged? If this is a really great idea, I might have to leave and start trading. I might have to cancel the podcast. It's not that unique. Give me a phone, Kevin. What technology has enabled, and I don't just mean tech stocks, it has enabled companies to earn't just mean tech stocks,

it has enabled companies to earn higher margins for longer periods of time than we thought were possible. Could it be that simple or could that be a part of it? It's staved off the mean reversion of profit margins that normally occurs. No, I absolutely get that. You can never test everything. When someone says something's broken, you're trying to the classic disprove a negative, because there are infinite number of hypotheses

for why something is broken and it's different this time. We spent the better part of two years, as you could imagine, going through them all. I swear to God, I truly believe if we had found, oh, we're wrong, we missed it, damn, never gonna be happy you missed it. You'd publish it. But we would say we're changing the portfolio.

We're not the people, I hope, I've never been tested this way, but I truly believe we're not the people who would dig our heels in because we can't bear to change our public story. So what are some of the things we investigated to try to look at this? First of all, yes, it's not just about tech,

but we did throw out narrow and broad definitions of technology, broad ones include a lot of media and whatnot, just from the sample, and said, let's look at only more old line companies. The value had gotten about just as killed and the value spreads were about just as wide. That's a kind of indication there's something going on. I did a study, which I've only done one version of, I want to get back to this, but in writing my last piece on a less efficient market hypothesis I thought of something I hadn't looked at which is kind of obvious I hate when I think it's something kind of obvious because then I feel stupid that I didn't do it ten

years ago but this is every single month you could do this for 50 years line up all the stocks choose your favorite measures of valuation see how well they predict future earnings growth, sales growth. Earnings is really what you care about. Sales has better behaved because it's not negative ever, so it's a little more mathematically. So you do it a bunch of ways. And what you find is that more expensive stocks do in fact tend to outgrow cheaper stocks.

The market, as I say, goes too far on average, which is why value works, but it is on average not backwards. The expensive stocks are better companies in that sense. They're just not- That's why they get expensive. They're just people go too far and get overexcited about it or risk.

I'm never gonna, always got to throw Fama in there. There's a possibility. That tendency though has shown no sign to get stronger over the 50 plus years, including the most recent three year reading. The predictive power, that more expensive predicts better growth. It moves around every single month,

it's a different sample, but it is very steady. I did that, I shouldn't say worried because I shouldn't feel bad if we find we're wrong, but you prefer to be right. So I do this, it's always exciting and scary when you do a new test. And if I had found that that thing was tending to be stronger and stronger over predictor,

I might have to say basic simple valuation strategies. Are backwards. Are backwards or at least not as good as they used to be. The world has caught on. Now it turns out maybe the value spreads are wider, but they're more rational value spreads because they are better predictors of future growth. Just didn't see it.

Everything we did testing this stuff, by the way, has the same boring answer and we just didn't see it. So you can't find conclusive evidence. Can't find any evidence. The problem is that, so the problem for most investors, they're not doing what you're doing in terms of research, they're doing anecdotal testing. So they're looking at Costco at 50 times earnings,

and they're looking at Apple at 30 times earnings, and they're saying Costco's the best retailer, Apple's the best phone of course those stocks should first Costco should should work awesome any place I can get 100 bait cans of baked beans this is how normal investors think is is astoundingly cool um yeah I wrote a piece looking at at value spreads and interest rates showing that these spreads between cheap and expensive, one of the big justifications that has faded a lot

because it turned out not to work was that very low interest rates that we had at the time justified these value spreads. That's based on a very intuitive story that I don't disagree with directionally. Growth stocks by almost the definition of the word expect more of their cash flows in the future versus value stocks.

If you said that was a bond, it's a longer duration, longer maturity bond. So when particularly long-term real interest rates fall, it's very plausible that stuff with more cash flows in the future. It turns out for a quant who's doing a super diversified portfolio of low multiples against high around the world, hedged for industry, it looks a lot likeified portfolio of low multiples against high, around the world, hedge for industry, it looks a lot like a 19-year bond against an 18-year bond. Okay. Is a very small difference.

The expensive stuff, as I told you, outgrows, but it outgrows for about three years and then grows about the same going forward. That does not change your cash flow, bond math, Macaulay modified durations very much. By the way, people hate explanations when you go directionally right, but it's not nearly enough. They like black and white.

Just give me the answer, Cliff. I want to ask you about your hypotheses for why things are less efficient. Wait, I'm sorry. I'm sorry to be rude. But I just have to... Before we get to the values... Do you guys even need me? No. Before we get to... This is for you. Before we get to the value stuff Do you guys even need me? No, before we get off the... This is for you. Before we get off the value stuff, what if,

and please don't jump across the table and punch me in the nose, what if you and all the other Quant's ruined value? And what I mean by that is, there used to be, somebody explained it this way, there was a value embarrassment premium, because these companies were so bad

when it was just real stock pickers, before there was Quant, that nobody wanted to own these names, and therefore they traded at discount, because nobody wanted to own these names and therefore they traded at discount because nobody wanted to own them. You guys came around and you said, holy shit, there's a premium in here. And therefore.

So we gave it the patina of respectability. It vanished. It vanished. Oh, you made it not uncool to be in those stocks. You made it not that nobody was embarrassed to own AQR funds. First, this would. Do you want to apologize?

This would be the world's first time I made something cool. Second, you greatly overestimate my athletic ability if you think I could leap over this table and hit you. I could walk around this table and then hit you very lightly. It's plausible, like all these things, it's plausible, but you have to say, what would that look like? For me to believe that explanation,

it would have to show up in tighter value spreads, where people are not as embarrassed, or like I said, value spreads that are better predictive of future earnings growth. If you're not seeing in any of the actual measures, where's it coming from? In that story, one of the reasons we've monitored these value spreads since we created them in 99, it's not, again, me being wrong that there won't be another bubble as big as the tech bubble, which I was wrong about. It's what if it goes away? That was actually probably 75% of my motivation. Obviously, you build a new analytic, it doesn't cost much, you're going to keep monitoring it.

But 75% of the reason I found this interesting over time is what if one day we see these value spreads go not to higher levels than usual, but to unprecedentedly low. God does not promise us a value premium. There has been one. If they came to unprecedentedly low, maybe that isn't enough to compensate the value investor for the lower growth. If we had seen that, I really might be with you and say, yeah, it could be the quants, all buying value. Well the AUM of the quants growing sufficiently so that there are people who are unembarrassed

to own these stocks in size. And that's why all of a sudden they don't work as well as they used to. A lot. Again, this is a pure price multiple value strategy. I get terrified people will think that's all we do. It's not. But yeah, that is predicated partly, to the extent it's an inefficient market, partly on the embarrassment effect on the cheap side

and the over-enthusiasm effect on the expensive side. The quants, even when they were bigger than they are today, I would get asked a question a lot. Prior to the 18 through 20 painful period, most common question I would get was, how come this hasn't been arbitraged away? You guys and many other very good quants do this, and I'd go, first of all, if you look at market cap sizes,

we're still not that big compared to most of the other parts of the world. Second, I would literally point out that I was around in 99, 2000 and periodically there are wipeouts. I didn't, it would have been really nice if I knew one was coming up in an hour and a half. That's different. I'm not a big market timer, but if God told me it was coming,

I would take action Um, but it's really hard to arbitrage away something that occasionally tries to kill People that is actually is a feature not a bug of a strategy because it means it can maybe stick around forever But it is not a feature while it's going on if I can add one last thing to the technology thing that I this goes Back a bit, but I was thinking about this. I have this chart and I just use FOM and French's version here. Sometimes you use the lingua franca of the industry,

even if you think you have a better measure and it comes out the same. So I use that, but I have the steady positive returns over the very long term of their famous HML factor. That's their cheap minus expensive. Why did they call it CME? I don't know. Maybe there was a lawsuit in Chicago.

High multiple minus law. High multiple. Yeah. Oh, a story within my story. I'm gonna use up all your time. For years, even as their student, I wondered why they use book to price where everybody on earth uses price to book.

Yeah. Finally, I'm teaching a class. I've done this almost every year for Ken French. Wherever he's been, he's been in multiple schools. I'll do a guest lecture, kind of a real world. This is how, to the extent the quant world is the real world, it's more real world than academia. Tells war stories.

But I had a, at some point I had Ken on the spot because he's in front of his class, and I'm just like, Ken, why did you and Gene choose book to price, not price to book? And I always assumed there was some real subtle mathematical, like price to book could blow up if you had near zero book and we wanted to keep the math right.

He's like, well, you know when you do a chart where on the X axis you put book to where on the X axis you put like book to price? And the Y axis you put average return? We wanted the chart to slope up. Oh my god. It was a marketing decision. And I said, Ken, are you aware that somebody out there has gone long what they mean is short, and short what they mean to be long?

Because you made that choice? And he's like, I can live with that. Ken's a wonderful guy, but that is how he felt. So this chart of the long-term performance, and all I have next to it, the title of the chart is something like, Can Values Survive Changes in Technology? And the chart goes back to 1926,

so you can figure out what I'm doing. Seam ships turning to railroads, radio, World War II and atomic energy, so you can figure out what I'm doing. Seam ships turning to railroads. Radio. World War II and atomic energy. Rural electrification. Personal computer. Personal computer. In some extent, if you do believe the world overreacts

and goes too far, it might cause painful episodes for value, but you could easily argue it adds to its long-term return. People need something. If people are going to over extrapolate and get overexcited, they need something to get overexcited about. And I'm not saying this is the whole thing, and it's rather subjective when you're in a technological change period.

But my point is that strategy, again, only a small part of what we do overall, has been working for 100 years on average, and you cannot look at the last hundred years and say it's been a placid technological period. For it to work, people on average have to react to technological change similarly to the past. They have to, on average, perhaps overdo it a bit. For a quant, it doesn't have to be a gross overdoing.

In fact, we don't like it when it grossly overdoes it, because that means we have to wait two or three years and apologize for a while. But that overreaction is what sets up the opportunity for the quant. One of my running jokes is every quant, every active manager, not just a quant, doesn't want a perfectly efficient market.

We got nothing to do. Yeah, then what are you doing? That's our job is to, if you want to say we help in the world to make the market more efficient and help our clients make money. But we get really pissed off when it gets less efficient after we put the position on. So that's a great segue for where I wanted to go next. I think this is what people most want to hear from you. You say you have... People really want to hear my personal style and grooming habits. Of course.

You say you have three hypotheses for why markets have gotten less efficient for pricing the cross-section of stocks in the last 30 years. These are your three hypotheses, and you can react to all of them or whichever one you think is the most interesting. Hypothesis one, indexing has ruined the market. Hypothesis two, very low interest rates for a very long period. Hypothesis three, we have the effect of technology backward. Which of those do you think is worth getting into and why? Let me do two of them. Low interest rates are boring. I'll do a two-second version. As I said before, I don't think low interest rates justify the spreads we saw between but you know 10 plus

years of very low and occasionally negative real and occasionally nominal rates can in a very formal technical mathematical model can drive investors batshit. We saw it. And yeah people do some in principle you shouldn't buy the overvalued and sell the undervalued because you have super low interest rates but I just think it's correlated with some wacky behavior. At the end of the 15th year of ultra low interest rates, we started inventing things to trade. People were buying virtual land,

and they were valuing it based on the fact that it was contiguous to Snoop Dogg's virtual land. I don't even know what that means. Okay, nobody does. And it was an investing strategy for like 10 minutes. Yeah, I think your earlier question that can a relatively efficient market permit a lot of idiocy.

If we want to point out individual cases of idiocy, we'll be here all day. So let me focus on the first and the third. And the third, technological change being backwards, is my favorite. Let me say that. But the first is a very controversial one. You guys have talked about this. It's indexing. When I say indexing, I mean Jack Bogle style cap weighted indexing. I think sometimes it gets very confused. People will take any rules-based strategy and call it an index. It might be an index of something,

but it's not generally what I mean by- Is indexing and passive investing not the same thing? Yeah, so when I say indexing here, just think passive investing, cap weighted passive. Okay. You know, and the reason that's the true passive, it's the average of what we all own. Any active management is inherently arrogant act,

because it's saying I differ from the average person and I think I'm going to be right. There's one amount of indexing and passive indexing has certainly got much bigger in all of our careers. And I had the good fortune of actually being fairly close friends with Jack Bogle, which is a little bit of an odd couple.

I'm getting older, but I was in my 30s at the time and he was in his 70s, passive indexer, long short active quant. I think the only reason he maybe could look past that was his son was a long short active quant. That's right. Maybe some of that affection bled over to me. I got him to go on on CNBC or Bloomberg, I forget, with me once.

He said something that was my favorite thing, I think anyone's ever said about me. Someone said, you seem quite supportive of Cliff. Cliff runs some hedge funds. Don't you hate hedge funds? And he said, yes, I hate Cliff's the least. He was an awesome guy. Jack was great.

So there's this question, and I'm getting back to Jack because it came up with him, of how much of the market can passively index in the Jack Bogle sense. And the one number everyone agrees on or at least should agree on is it can't be a hundred percent. It's even hard to get your head around what that means. Nobody is trying to decide if Nvidia is worth more or less than the corner drug store. We're all piggybacking. Indexing is a free rider. It would like people to have relatively efficient prices,

so it's buying the whole market at a relatively reasonable number. But where it kicks in, I asked Jack this, and he readily agreed 100% in passive cannot occur. He was intellectually honest, Jack. He thought the marginal investor should move to passive, absolutely. But I said, so Jack, how much of the market can be passive?

And he goes 75%. And since he's Jack Bogle, I go, oh, where'd you get that number, Jack? What's the model? He goes, oh, I made it up. Which again, when you're at that point, he was probably 80 and the founder of Vanguard. You can get away with that.

The rest of us should not make a bold statement and then immediately add that we made it up. But even making it up conveys some accuracy that we really don't know this precise number. Some people, someone I think the world of, Owen Lamont at Acadian. I hope I'm one of the people who's willing to tout competitors at times. I feel proud of that.

Acadian's a great firm, but he writes a tremendous blog. He doesn't write too often, but he's a super smart guy. And he is mused, I don't think he literally says that he's definitely sure of this, that you could have 99% of the market pass. If it depends who's left, how much capital they're employed. It's America though, it'll never happen. It's all theoretical.

It won't. But once you accept that things break down and get silly at 100, most mathematical things in the world don't work like the O. and Lamont thing. They don't suddenly, all the crazy doesn't happen between 99.99 and 100%. Yeah, yeah, yeah. There are a lot of issues. I talk a lot in the paper of who's moving the passive, is it the informed traders or the noise traders, that's another issue.

That's closet indexers. Well, closet indexers make it very hard to measure that number I'm even talking about. What percentage of the market is passive? Because they're active but acting passively. I'm saying they're moving from closet indexers to true indexers, what's the difference? If you're taking 50-bips to tracking error,

you're mostly passive. Cliff. Do you guys remember Princess Bride? Of course. Mostly dead. Mostly dead. You're mostly passive. Cliff. Do you guys remember Princess Bride? Of course. Mostly dead? Mostly dead. You're mostly passive. Cliff, if I have an SMA and I raise $20 billion in my SMA and I'm managing money for RAAs all over the country

and I owe me- This isn't hypothetical, is this what you do? Hypothetical, because I blew up a few people that don't know what they're talking about 10 years ago with this. If I say I buy passive indexes, but I trade them every month. Am I active or passive? You're active on one dimension and passive on another.

I mean, it's a joke though. Saying you're passive and then timing the market, I think is intellectually inconsistent. But I only do it with the S and P. If you, if you overall, Okay, I got another story. I only buy the SPY, but I trade it every 10 minutes. I don't know if you guys like these parenthetical stories or ruining everything. We love them. So I'm on an investment committee of a school I once attended that narrows it down to two. During the GFC, we ended up after a tremendous argument. It was actually ended up after a tremendous argument.

And it was actually a fairly polite, tremendous argument. There was nobody shouting at each other, but a long debate, let's call it. We ended up selling some of our stocks very close to the bottom of the GFC. This was very frustrating. Myself, there's a guy named Marty Leibowitz and a guy named David Booth, who we were arguing,

we were not trying to tie in the market. We weren't saying, we know it's, you know, it's down 60%, that's it, we should buy. We were saying, you know, a year ago, we were calling ourselves the infinite horizon investor. And now we're selling because it's down and way cheaper than a year ago, that feels wrong. And we lost that argument.

I remember having an out of body experience. David Booth donated to business school in Chicago, named after him, wonderful guy. And I'm like, I'm losing an argument about investing at the University of Chicago with David Booth on my side. How much I must suck at arguing to do this. So I think we limited the damage. I think the debate kept it to a rather small,

that's what happens by the way. You guys have must have seen this a million times where someone wants to do something dumb. You can't talk them out of it, but you could talk them into doing a token amount that makes everyone feel okay and you move on. But the head of the board at the time, and I will not even come close to a name here,

but I said, do we have to sell because Chicago is going to have to shut down if we lose more money? Because then you got to stop your loss. If the University of Chicago has to shut its doors, if the market goes down another 20%, then A, we screwed up by taking way too much risk to begin with. But that's done. We have to do it. And everyone's like, no, no, no, we don't even pay for much of the university added us. I'm like, then we're timing the market if we sell. And the head of the board said, no, no, no, we don't even pay for much of the university added us. I'm like, then we're timing the market if we sell. And the head of the board said, no, no, no, Cliff, don't worry, we're not timing the market,

but I do believe we'll get back in in the spring. Oh my God, I love it. And I was like, okay, I lose, I lose. It actually bottomed in the spring, so in fairness. So wait, so is indexing- March of 09. But is indexing making markets less efficient? I saw you were with Michael Green. How'd that go?

I was not on. I had a friendly conversation with Michael Green. Which is news. See it's good to hash these out in person. I will say I think this is true of both Michael and I. We both can be quite a cervic quitter personalities. I think I'm very nice to people. You don't come across as well on social media as you do in person. You know that. I think you could, I'll very nice to people. You don't come across as well on social media as you do in person. You know that. I think you could, I'll defend myself a bit. If someone who's like just a newbie asks me a question,

even if it's really kind of what I think out to lunch, I'll spend a lot of time, I'll work at that, I'll be nice. If I perceive, and I will admit I have thin skin, someone disrespecting me, I will disrespect them back. And I think Mike's the same. I don't think Mike and I have a meeting of the minds on indexing. I remember when I talked to him in person,

I'm like, dude, you're mad that I make this one of my three reasons, not the number one reason. I've moved in your direction. It's one of the three reasons I just say, it's hard for me to be comfortable. I'm not on Twitter, is he anti-indexing? Mike Green is like one of the three reasons I just say, you know, it's hard for me to be comfortable. I'm not on Twitter. Is he anti-indexing? Oh, Mike Green is like one of the major intellectual forces who thinks indexing is the devil.

It can't be. But he wants to ban it, or he just doesn't like it? I asked him this when I talked with him. What's your prescription? It's enough, you can say something's a negative force, but then you have to say, what do you do about it? And he doesn't want a blanket ban. He does want something, and I'm gonna do a terrible job,

and he should correct this if I get it wrong, something to do with really large investors not being allowed to index. They're forced, you're like forcing people to think about what they buy. And I get the direction you're going to, but it's a really odd world where you just legislate, you people cannot buy one of everything.

Well, I don't think that'll happen in the next four years. No, I don't think it's gonna happen. Okay, so he's obviously a lot more intelligent than I am, so I'm glad that you're here. I gotta tell you, Michael, that really is quite obvious. It's... So I don't agree with him. But you are intelligent.

Mike Green is a brilliant guy who I happen to disagree with. He's incredibly smart. I don't agree with him that indexing is ruining the market, but I do agree with him, and I think you would agree with this, it can't be not having any impact. There's so much money coming in. It has to do something. Basically what I'm saying in my piece is it's really hard. People want precision to be precise about how much, but I am wide open and considerate, one of my three,

to the idea that the tethered to reality of prices is weaker when fewer people are thinking about the prices. Whether we're past a point where that's a significant, it's very possible that in the prior world, we had too many people thinking about prices that were just, how much of the world has to be active managers to get a fair market? We don't know the answer to that question. But so is this why value stocks could stay cheap forever? And Ironwood's been on this too via Mike Green,

that I used to find value in these names and the market used to agree with me eventually and now nobody's there to agree with me. It's so easily disprovable. All you have to do is say 10 years ago, what was the market cap of Intel versus Nvidia? One was 200 billion, the other was 50. GE too, but does that disprove it?

GE is the largest company in the country goes to almost a penny stock If if women if passive flows were the only thing propping up stocks Then none of those things should have been able to take place one thing everybody forgets And I do too on occasionally on occasion is most things have multi-dimensional Explanations where a lot of different things we want one! No, it's really hard. Everyone wants one. Everyone wants indexing is the devil, or it's absolutely nothing to do with it.

The case that indexing or passive might, and I still say might, have loosened the bounds where things can get a little crazy, does not mean they've removed those bounds. Where David maybe gets frustrated, and David yells at me when I paraphrase his stuff wrongly, so this is with some trepidation. Let me be clear, David, if you're listening,

these guys brought you up, not me. Well, I guess I kind of agree with David. What I write about in my piece is if I'm right, that these three things, we haven't even gotten to the third reason, have made markets somewhat less efficient or occasionally prone to bouts of gross inefficiency. If that's the case, then it should be a larger reward to so-called value managers.

And by the way, this doesn't have to be the narrow quant definition of value. It can be much broader. I notice every time that kind of measure does terribly, the Graham and Dodd old school people don't seem to have a good time. Right. Either. The notion is that in a less efficient market, I think it's almost a tautology that the rational strategy, if you can stick with it, big if, should make more money longer term than it used to. That's what it means to be. If it was perfectly efficient, we got nothing to do.

Do you believe that it will? Yes, I do believe it will, if you can stick with it. I also believe that if the tethered reality is weaker, then the periods when rational is thrown in the trash heap will be more severe and last longer. That is also close to a tautology. It's almost what I mean. Well, we're there right now. GMO had a piece showing that devalue stocks in the world are at the 0th percentile. They've never been cheaper. Somehow I will tell you I'm always directionally similar to GMO and a piece showing that deep value stocks in the world are at the 0th percentile. They've never been cheaper. Somehow I will tell you,

I'm always directionally similar to GMO and their numbers always come out bigger than mine. I always see things at like, literally I looked at it this morning, like 81st percentile globally cheap. We're all looking at different things. Directionally right. Deep value is not what we're looking at.

We're looking at a shallower version, looking at many, many stocks. I'm not gainsaying what they're saying. I'm just saying we don't have that extreme of view, but we are directionally alike. And I do think if David Einhorn is correct, it's very similar to what I'm saying. I am just less of an ultimate pessimist than David. I'm a believer that saying you make more money, but it's harder is how the world's supposed to work. The world where you make more money and it's easier, that's a fantasy world. So we'll get to your third, and we won't keep you all afternoon,

but just on the index front, I thought you would get a kick out of this. So, Buko Capital quote tweeted, he said, not gonna lie, pretty crazy for a member of Palantir's board of directors to tweet this. And the tweet was... This is the why we went to NASDAQ or something. The tweet was, we are moving Palantir Tech to NASDAQ because it will force billions in ETF buying and deliver attendees quote attendees to our retail investors. Player haters be aware that we've been hated for decades.

Everything we do is to reward and support our retail diamond hence following and then Buko Capital followed that up with said. Is that an adult? Listen to this. He said you can't get in trouble for tweeting if you just delete your account, right? Right? So the person who tweeted that then delete literally deleted their account. Well, because some lawyer at that firm said are you f***ing kidding me? Are people really talking this way? I've gotten that call from lawyers. Candies and diamond hands? What year is this?

But the point is, index inclusion. You know what diamond hands and hold on for dear life? Isn't that like five years ago? Well, one thing that drives me crazy, I actually have a little part of my piece talked about this, is the Diamond Hands, but I focus on HODL. It's actually a pretty good motto if you have a very good strategy. Sometimes you're going to go through hell, hold on for dear life, but they seem to think you could buy the worst company on earth and win just by owning it forever. In this context though, earth and win just by owning it forever. In this context though, it's kind of nuts that you can move to Nasdaq or think you can

move to Nasdaq, get into the queues because you're big enough to belong in there and that that is going to be more supportive of your stock price. Is it market manipulation if you tweet it in public? I'm about as far from a lawyer as you can get. I just listen to lawyers because they keep me from getting in trouble. I don't think Kevin has a law degree but he's gone through this stuff enough that he probably has an honorary one from somewhere. Right now he's trying to resist calling up our head of compliance and going, Cliff is saying a following. So far you haven't said anything that you wouldn't be comfortable to talk about.

So, Kevin's okay. You haven't met my head of compliance. I'm not dismissive that there might be, if there's more people indexing to NASDAQ than wherever they were before, that there could be a short-term price pressure effect. Part of that can even last. I think we're learning that some price pressure things don't all go away. The sum of it reverses.

So I'm not totally saying that's ridiculous. And markets again aren't perfect. And if more people are gonna buy it in the short run, it's gonna move the price. The notion that this will change the long-term outcome to a diamond hand, you know, the long-term outcome, if you do hold it forever, as Diamond Hands implies, is you will get the actual cash flows it produces. A short-term pop in the stock from moving indices is actually wildly inconsistent with the notion of Diamond Hands.

Because Diamond Hands shouldn't care about the current price. They should care about what you're doing for the company. What if I tell you that we're now... I got no problem with Palantir, by the way. A lot of super smart people. What if I tell you that we're now in an era where actually no, the stock price helps to determine what the fundamentals are. And companies that have higher stock prices and bigger valuations are in a position to do better fundamentally as companies because

better engineers want to work for those companies. And therefore, that's one of the reasons why this link exists between momentum and earnings growth and better earnings growth in the future. I don't want to upset you, Josh, but that's not a new story. Sure. No, I understand. Money is power. It's like having a big stack in poker is supposed to be an advantage. I've never actually won a poker, but um you don't buy it

It seems like I mostly don't buy it for one thing. I think the clearest place is Acquisitions you have a lot of a fuel for acquisitions What about stock-based comp the explosion of that which I know you talk a lot about There's a Michael Jensen who did like the original stuff on agency theory and and whatnot Um, he once gave a talk. This was right after the dot-com bubble where I'm not gonna go this far But he was asserting that a stock price that was too high relative to the fundamentals is More harmful to a company than one that's too low You end up doing a lot of stupid things because your cost of capital is free.

So there are two sides to this story. But I will repeat that if it's not showing up in the low multiple stocks being worse, more extremely unprofitable than they used to be, if it's not showing up in valuation measures, predicting growth going forward better than they used to, then no one can rule out it showing up going forward. That's impossible. But we've not seen a scintilla of evidence that this is actually changing. So I don't have the data to say that I have evidence.

I have conversations with people who say, why the would I take my resume and go to Snap when that stock all it does is go down when Meta will pay me the same amount but my stock-based comp is probably going to be better. Therefore, the better engineers end up working for Zuckerberg and not Spiegel. There's no way that that asserts itself in the fundamentals. No, there could be some of that. I do laugh at a little bit of the concept that they can look at what the stock prices have done. And extremely accurately discern. My job would be far easier if that were an easy task. It may have a

short-term ability to attract people, but a lot of these other firms, you know, they still have a fair amount of resources. Let me mention one other thing we did during our painful periods in these million tests of are we wrong? We threw out the mega caps on this analysis. We redid the history of value investing in the quant way, but we threw out the mega caps with an eye towards throwing out the then fangs. Today they'd be the mag seven.

You can't just throw out the fang to the mag seven today and compare it to the past when you didn't do such a similar exercise. It's apple star oranges. You have to have a similar, if you throw out the 10 biggest stocks, the 20 biggest stocks, and you redo values performance and the value spread,

imagining those mega caps just didn't exist. We found, and I told you they all end this way, the exact same results within rounding era. And this, by the way, it sounds really counterintuitive, but then you got to remember we're still quants. We have 800 longs and 800 shorts. You kind of knew the answer before we did the test. You still got to do the test. But if throwing out 20 companies, that none of them were held by particularly large weight in what we do, and we rebalance kind of rigorously back to modest weights, if that changed everything, it's weird.

These two bubbles, and I will use the word bubbles, were pervasive. They were in most of the industries. They were in big and small cap strata. So any story for this that really does explain it away has to explain why it's everywhere. And I think animal spirits is my favorite one for that. Because, you know, wherever people are more of,

wherever people are optimistic, they are more optimistic than usual. Right, and that's totally unquantifiable so nobody could really disprove it I hate things that are unquantifiable right yes, yeah What do you want to go do you want to go back to micro strategy? We said everything Let's do some pep he's a little like Cliff get out here actually wait no we have to do volatility laundering All right, and and we skip reason three my favorite one. We have so much We want to hear it as long as you guys can put up with it

Yeah, I want to push you out, but I just want to be respectful of your time. Well, my third reason was technology is backwards. And here is the, I say this in the piece, the most old man whining part of the piece. The whole piece can be construed as old man whining. Old man yells at cloud. This is old man yells, literally the cloud in this case. Old man yells at the cloud.

That these kids and their funky internet have ruined everything. It's like the end of a Scooby Doo. Meddling kids. Yeah, I would have gotten away with it if we were a few meddling kids. Yeah, exactly. And here's, you know, I don't have time to do a deep version.

I'll do, I think a pretty useful version. Regardless of your political persuasion, I think many people, not everyone, because we have some crazy people in this country, but many people would probably agree with the internet, social media, immediate access to all information, but most of it is crap,

world we live in has made our politics worse. That we are driven to extremes by algorithms, that we live in bubbles of people who agree with us, that we feel overconfident because we think we have all the world's information at our hands and information overload can also lead to overconfidence. Similarly, technology that's made trading cheaper, which it has gotten cheaper. Free. It's not free. You to drive me crazy. People say it's free. Think as much as I'm a huge fan of Ken Griffiths, but he's not, he doesn't run Citadel as a charitable institution.

He's not an altruist. You know, when people say, oh, there's, there's, there's no free. I'm like, people are buying your order flow. You think they are charitable people doing this, but even free trading doesn't necessarily make a market more efficient. If you sat me down in Las Vegas and said the VIG that the house takes out is now a third of what it used to be, I might play a lot more.

And the house might make more money from me because I think, hey, the edge is much smaller. So people thinking it's free can cause a lot of silliness. Yes. So markets are a voting mechanism, just like politics are. You vote with your money and it's a weighted average of everyone's money where the price comes out. And if these things can screw up our politics, how can they not have some effect?

Again, it's hard to go so far. And the fact that both of them occurred, one during the onset, I call this proto social media, the dot com bubble, and you'll remember this, Josh, was full of so-called message boards. A lot of the crazier stuff took place. Pre Twitter. Pre Twitter.

Remember I omega? Yeah, yeah, yeah, I remember all of it. Yeah. And the current one was obviously in a world of meshed in social media Again sounding like an old man 24 7 trading on your smartphone You know if again to pick on Nvidia if you're up at 2 a.m On a Saturday and what you really need is five more shares of Nvidia You're you might rethink your investment plan. You might want want to go to you guys and put in something more rational.

So short version is I think this could be a reason to be a part of crazy episodes. I think markets being efficient depends at least a fair amount on the famous idea of the wisdom of crowds. But the wisdom of crowds depends on a relatively independent crowd. When the crowd all gets to talk to each other,

you can get an unwise, scary mob. It's not really a crowd anymore, it's more of a mob. And I don't think there's anything better than social media and other parts of the electronic environment for potentially, occasionally turning us into an unruly mob that can create these episodes. So that's reason number three. You want to do volatility laundering? Yeah, so let me put thoughts into your mouth and you could swat them away if I'm wrong. The way that I read you is that you don't necessarily have a problem with the product per se, with the investment per se.

It's the way that it is marketed and let's say lied to people. So we have a chart, Daniel, one, three, two. I try very hard not to pick on specific firms. So three, two. So no, this is just showing the reported volatility. And this is actually, Quantz did the work here. This was an article in Bloomberg about Quantz entering private markets to show the actual returns to people

that are investing in them. So anyway, the reported vol versus the actual vol, the gap is enormous. It's like Michael Strahan's teeth but worse. And so I think it's just that when you lie to people. I like how you just throw in a random insult to Michael Strahan. I love Michael Strahan. When you lie to people about the investing opportunity, that's where you get pissed off.

Okay. Let's start out with something I think we can all agree on. Lying is bad. Yes, you sum me up right. I'm not against the investment. I've invested in private things myself. This is an extremely cliche statement, but some of my best friends are private equity managers.

I live in Greenwich, Connecticut. It's impossible to have your kid play ice hockey and not be buddies with a bunch of- You're surrounded. I'm surrounded. If you think of, I'm not saying Sharpe ratio is a perfect thing, but it's a measure of expected return over risk.

I am not fighting the fight over the numerator, the expected return these people get. I have some opinions that it may have changed given how much people love private equity, and I do think it's probably somewhat lower than the past. But most of what I'm talking about is what you're talking about, the denominator, how risky these things are. I've seen more extreme numbers. That's from a great paper by Mark Anson, where he smooths out. And we wrote a paper on hedge funds that are considered much more liquid, that even hedge funds own a bunch of illiquid assets such that you need to use about three lag months worth of data. Looking at the monthly

returns on many hedge funds compared to the S&P, you miss some of the beta because not everything trades. Private equity is that on steroids. Private equity, you need more than a few months. But even Mark stuff, I think it's the best stuff out there, but I think it's probably more extreme than that. You still see if somebody says the following, we think our private equity managers have unique alpha at restructuring companies. If that's the case, and I'm not the guy to judge that, that is uncorrelated alpha, I can't do it.

You can't get that from a quant. Yeah. If there really is alpha and then there are hills, and it overcomes some of the very large fees, more power to them. If you are willing to say, yeah, we run a mildly levered long portfolios, the true unobservable risk is probably a beta of about 1.1 and a volatility because it's a concentrated equity portfolio of about 32.

But we love it and we think it's going to do great. We think it's undervalued. You get zero problem from me. I might even invest if your pitch is really, really good. You still see, and I've yelled at my own clients, it's never a very positive net present value project to yell at your clients, but I've seen quite a few so-called efficient frontiers where it's like private equity numbers like up there, 7% of all. Give me a fucking break. Private credit, 40 bips of all. Come on.

My favorite, and I won't name them by name, but a prominent private credit firm. And I, you know, I loop, they're not the same, but I just talk about them together, very similar phenomenon, that had all the standard tear sheet stuff and at the bottom had Sharpe ratio 10.0. I particularly liked that it was 0.0, which is not their fault, it might have just come out to that, but it kind of implies that we know this, we know this number.

Mathematical. And you know, I don't know exactly what it is, but the late great Jim Simons of Renaissance in Medallion, the fund he wouldn't let any of us invest in. What was that sharp three? I don't know, but two to three might be my guess. That's pretty good. You know how much money you make over time? The laundering part is because the asset isn't liquid and doesn't have a ticker symbol or

a price each day, therefore you say, this is less volatile. The perceived risk is lower. But of course it's not. The valuation is definitely changing, but nobody can see it in the same way that the value of your home doesn't have a price monitor on the roof. And psychological things matter.

If someone's willing to say, I know this is total bullshit, but it makes it easier on investors investors and then they act like more rational I do it I would do that if I could if you could say to me Hey, I'll give you a vehicle you're gonna get the S&P minus 1% but but you don't see the marks I'll take that but if we accept all that You'll be shocked, but I have a retort First it's why don't I get to do that? Yeah. You guys in the private world,

100% can mark your portfolio every day. If we see a 10% drop in the S&P 500 today, the people who run those portfolios are brilliant. They know how to value companies. That's how they decide to buy or sell companies. If they could tell you in an orderly sale, and I won't push disorderly sale on privates, in an orderly sale, what would I get today versus yesterday? And it'll be down...

We have public real estate. So if you own private real estate, don't tell me you can't mark that every day. You absolutely could. Conversely, I, during some of our worst periods, during the peak of the tech bubble, the nadir for our firm, could tell you when prices return back to normal, we're going to make back X. So we've actually not lost you money. We just put it in a bank we call shortdoctorcoop.com. It's exactly what they're doing. And you could never say that. It's not fair. I can never say it, but it's exactly the same thing. So there's some quirk of our legal

and accounting system and just tradition that lets them exactly the same thing. So there's some quirk of our legal and accounting system and just tradition that lets them do it one way. So I admit a fair amount of my ranting and grating is professional jealousy. It's why am I perceived as risky and you're not. And I'm perfectly fine with a world where we're both perceived as not risky. We both get to use the marks we want.

Just the non-level playing field. The last thing and the only real statement By the way, how much private equity has actually made for their investors is a is a hotly debated topic Um, the IRR is the firms put out other people calculate other measures. I know you guys have looked at some of these There's one guy I Never pronounce right Philip who something like that is like he's a much more of a Anti-private equity person than I am because he says they haven't even made money. My general reading and my colleague Antti Ilmanen is much more versed in this than I am, is they probably have done well over the last 25

years, probably not as well as the IRRs look like, and even adjusting for risk. Whether they will going forward is a wide open question. And here's my final point, and maybe the most relevant one. If I'm right, and I do like to start sentences with the humble if, that people now value the illiquidity because it makes it easier to stick with. When David Swenson at Yale was pioneering doing privates for institutions, maybe in the late eighties, I don't, I'm not going to get that exactly right. I was around barely. I think the general acceptance, including if David were with us, he would say, yeah, we were getting an illiquidity premium.

Nobody wanted to own this crap. Um, that is not the case today. If, if, if what used to be a bug that you had to accept to get higher returns is now a feature that lets you stick with it, that's all well and good and it might work. But you pay for a feature. You pay for a feature through any kind of rational market. And as much as I diss perfectly efficient markets, I don't think they're so inefficient

you could drive a truck through. If more people want something because it has a feature that's now desirable, it will be priced to higher levels. Again, if you have friends in private equity and you get a few drinks into them at night, they'll tell you they're buying things at closer, much closer multiples to public than they used to. Well, you see it in the data. Non-rhetorical question. If you have $4 trillion in private equity and like $6 trillion in private, and they're all chasing the same assets, is there any possible chance they're allocating to things at similar valuations as KKR and Bain were in 1987? Zero chance. Well, I prefer to frame it this way.

If you have six trillion in private equity assets leaving on a train from LA at 4 p.m. And four, no. The short answer is, and this will get me in trouble, no. Of course not. No. Whether, I can't tell you that the sign is flipped, that it's so expensive now or so popular now that you're going to make less than your actual beta, your true life risk

numbers should entail. But that's what the leverage is for. I'm counting the leverage. Yeah, this is, if you really want to be cynical, you can call private equity, same thing. I used to say this about long-term equity hedge funds that had really very high betas, that weren't really hedging. That they've looked at the fact that active management,

active stock picking on average doesn't work, certainly after fees and costs. And said, we figured out the problem. at the fact that active management, active stock picking on average doesn't work, certainly after fees and costs, and said we figured out the problem. People just weren't charging enough. Yeah. And I kind of doubt that that fixes the problem. That's great. And again, if you find a private equity manager who's great at what they do, that should be

the reason we invest in private equity. That's a sponsor of today's show. Hey, do you have fun on the pod? It's over? I was just getting into it. There's one more segment where we're going to ask you about favorite things that the audience can take away. Your favorite books. Oh, I hate this.

I panic. If I don't prepare in advance, I'm always, this won't shock you, but I'm always reading books. There's great writing. It doesn't shock us. I read books, that's not a big flex. When someone just springs on me, what are you reading now? Your mind goes blank.

There have been times my mind has been like, it's something, I think it's by a Brit. It's really good, there's a girl in it, there's a dude. Cliff, what were your favorite comic books to collect when you were a young man? Well, I was a Marvel. I can go deep with you on this. I was a Marvel more than a DC person.

I liked DC, I read them, but I was Marvel. It's classic stuff, people know this now, but I think they were just much more real people with real problems than that. Agree. That appealed to me. Avengers, Captain America, Fantastic Four. Four. I'm still a little older than you and hopefully will remain so. So we might have somewhat, you were probably an X-Men

guy because they were much hotter. I was Marvel over DC. I think the DC characters, they had to come from outer space. There had to be something cosmic. Green Lantern and Superman. Silver Surfer. These were... No, that's Marvel. Michael, back out of this one. Stay out of this. Stay in your freaking lane. The Marvel characters were regular people that something f***ed up happened to, like Spider-Man. I know the X-Men are a different category, but I think that that's why they resonated more in the 60s, 70s, and 80s than the DC.

And just on that note, they lived in New York City. They didn't live in Metropolis or Gotham. Queens. Queens? Yeah, Brooklyn. They're wonderful. I can geek out on this. They're great maps of where all the Marvel superheroes lived.

Did you keep your collection? I have some of my collection. My parents moved into Manhattan right after I went to college Yeah, and they put it in storage and then they bought a house I would a wet basement didn't work very out so I won't throw them out for nostalgia But they're worthless because they're just in I have basically re bought a comic collection That's about my only indulgence. I'm not one of these managers I can't compete with Stephen Cohen for impressionist paintings, But luckily... Mark Lazare was a big comic book collector. He sold them all.

He did. I've seen his comic. He's shown me his comic collection. Was it out of control? It was amazing. Particularly, he was more of a DC guy and he had some just astoundingly high quality like Golden Age, you know, first Superman kind of things. I love Mark.

Mark's a hoot. Yeah, great. So I always love the stuff. I still read them a bit. You like the movies that they made based on them? Some of the movies? I loved the whole arc leading up to Endgame. Yeah, me too.

Civil War was great, right? Civil War was great. They had a bunch of clunkers in there. Since then, I'm not the only one saying this. How do you feel about Robert Downey Jr. returning but as Dr. Doom? I hate it so much. I hate it just because you always have to suspend your disbelief in these things. I can't do it that way. It's just harder once you've so identified with a character.

I love Robert Downey Jr. but nobody else on earth could play a guy. I'm not going to be able to suspend my disbelief having seen him as Tony Stark. I could do it. I'm mildly disfigured. I don't know if I could do it. And you're behind us a mask. The first two were so bad, the first iterations of the Fantastic Four, and they needed like an icon and Warner Brothers is in the dog house so... I have no story for why they can't do the Fantastic Four well.

And they can do the other ones. Yeah. Do you think James Gunn is going to resurrect the DC universe and do it right? I hope so. I do. I've liked, I liked the full Justice League Snyder Cut. That was the only time I've ever seen a so-called new cut change the movie that much for me

while making it much longer. I have actually watched that movie twice, which is, I've devoted a fair amount of your life to it. They put out a black and white edition and for some reason I said I need to watch the same friggin movie. I watched it in the vertical letterbox thing too. I watched all of them. It didn't have to be three and a half hours but I thought it was really good. So I'm hopeful I'll watch again but Marvel and the I'm not the only one saying this the idea that Disney ruins everything They did is um, you know Star Wars Marvel

Around us. It just feels like they need new creative energy there. But but Bob Iger doesn't take my calls He might I've never tried actually He might, I've never tried actually. I'd like to... You'll know they're serious about fixing the problem if they shelve this Snow White thing. Which I think 50-50 they're going to shelve it. I'm very bearish on the new Captain America. It looks horrendous.

I want Harrison Ford. Oh. Why? What don't you like about it? The trailer looks trash. I don't like the character that much. No offense. I've not seen the trailer yet. You're ahead of me. It doesn't look good.

I guess we'll all find out. That's sad. I guess we'll all find out together. My favorite this week? Country music at all? My extended family loves country music. I am taking eight of my family members to a Zach Bryan concert on the 18th. He's somewhere in New York. I keep calling him Luke Bryan. Well they keep yelling at me. There's there's several

versions of the same name that all sound the same. My version of country music tends to involve Willie Nelson or the man in black. Well Willie Nelson has a new record out believe it or not. He's 90 I think he's Buffett's age. He's 93 or 94. Buffett has a new record out. It's called Last Leaf on the Tree, New Willie Nelson. Good title. Chris Stapleton tore the house down last night at the Country Music Awards.

You could probably watch all the clips on YouTube. Worth watching. I think country music has become the new pop culture in America at the moment. It's kind of America's music, yeah. It's subsumed hip hop music, yeah. I agree. It's subsumed hip hop in terms of streams and sales. I feel like it's come back to the center.

Though I have not added a lot of artists to my listening repertoire since 1983. Understood. Same with Michael. He wasn't even born then. That's where he got stopped. What do you got for favorites for us? A bunch of the guys we saw at Herodot last night,

the A24 Hugh Grant movie. I liked it, what did you think? I loved it. Good, very good movie. I have not even heard of it. What is it about? So Hugh Grant lives in a house and two missionaries go knock on his door and they're selling whatever Mormonism,

whatever it is, and he kidnaps him, essentially. Oh really? That took an odd twist. I thought you were going to tell me the missionaries turned out to be... He's the bad guy? He's the bad guy. He was so good. He's kind of grown into a bunch of roles.

The young Hugh Grant was a little fluffy, and he had his untoward episodes outside of his work. Why? What happened? I don't live in that world. I don't want to know. He played a villain in Bridget Jones, effectively, and then since then he gets a lot of juicy villain roles. Which I kind of... He was very good.

I kind of like him that way. Alright, guys, that's it for the show this week. I want to give a huge thank you to one of our favorite people on Wall Street. A luminary, if you will. That just means old. Mr. Cliff asked this. Cliff, is there anywhere people can follow you that you're better than on Twitter? No. That's where you're at your best.

If you go to AQR's website, there's a section called Cliff's Perspective. Okay. Where that's your blog. That's my blog. It's very sporadically done. Sometimes I'll do three things in three weeks. Sometimes it'll be six months to like come up with something.

Some of the things are short. Some are mini research papers, but that's the other one. And in my Twitter bio, it has a link to it. Okay, so we're gonna follow at Cliff Asness on Twitter. Clifford, Clifford. Are you at Clifford Asness? Publicly, I need to use Clifford because my mom used to get mad at me.

Okay, what is your blue sky handle? I don't have a blue sky handle. You know you're coming though, right? I don't have a blue sky handle, I don't have a true social handle. You're coming to blue sky. We're at 21 million now. I'll come where the people are. All right, fair enough.

Clis Astonis, ladies and gentlemen, thank you so much for joining us. We had a blast. Guys, thanks for all the likes and subscribes. We appreciate it. We'll see you soon. Thanks for watching!