The Wolf Of All Streets - The Investor's Mindset with Jim O'Shaugnessy, author of "What Works On Wall Street"

Episode Date: February 16, 2021

Legendary investor Jim O’Shaughnessy is a rational optimist. With decades of success as a quant trader, Jim looks at markets for what they are and has beaten the odds by expanding his time horizon and placing his bets on historically safe investment vehicles. As the author of "What Works On Wall Street," Jim is viewed as one of the greatest investors of our time, with an uncanny ability to see past the emotional traps that humans succumb to that prevent them from achieving wealth. Scott Melker and Jim O’Shaughnessy further discuss,millennial investing, world ETFs, hindsight bias, investing in private markets, quant trading, the most powerful emotion is fear, expanding your investment horizon, hedging with farmland, income inequality, GameStop short squeezes, the disservice of winning the lottery, endless money printing and more. ––– RSK Trade, lend, and borrow on the most robust smart contract platform. Spend without selling on the most trusted network in the world. Hop onto rsk.co/openfinance and be part of the future and start making money on your Bitcoin today. --- VOYAGER This episode is brought to you by Voyager, your new favorite crypto broker. Trade crypto fast and commission-free the easy way. Earn up to 9.5% interest on top coins with no lockups and no limits. Download the Voyager app and use code “SCOTT25” to get $25 in free Bitcoin when you create your account. --- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by Blockworks. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworks.co

What is up, everybody? I'm Scott Melker, and this is the Wolf of Wall Street's podcast. Today's guest is a Wall Street legend and is the bestselling author of not one book, but four incredible titles. His most notable publication, What Works on Wall Street, has offered insight to investors around the world and will certainly go down as a late 20th century finance classic. Boasting over 30 years of experience, Jim O'Shaughnessy is a pioneer of quantitative equity research with over 4 billion AUM in his asset management firm, OSAM. In this episode, I hope to better understand what's going on in today's financial markets, how an investor can

prepare for the future, and what the best ways are to hedge against money printing and inflation. Jim O'Shaughnessy, thank you so much for taking the time to come on the show. Great to be here, Scott. Thanks for having me. So once again, you're listening to the Wolf of Wall Street's podcast, which airs twice a week. I talk to your favorite personalities from the worlds of Bitcoin, finance, trading, art, music, sports, politics, basically anyone with a good story to tell. This show is powered by Blockworks Group, a media company with over 20 podcasts in their network. You can check them out at blockworksgroup.io. And if you like the podcast and follow me on Twitter, you should check out

my website. Join my newsletter. You can do both of those things at thewolfofallstreets.io. And if you like the podcast and follow me on Twitter, you should check out my website, join my newsletter. You can do both of those things at the wolf of all streets.io. So now onto what's important. So let's jump right into it. Let's pretend that you and I are much younger men. If you're a millennial and someone handed you a million dollars with the caveat being that you had to invest it for at least 10 years, where would you put your money in today's market? Wow. So I would probably default to my own portfolios, right? Quantitative process. But if I was not interested in the market at all, I would probably put it in a world ETF that basically mapped the world equity market. They have the longest history of doing very, very well. And then I'd forget about it. Very unexciting, but probably very profitable over those 10 years. So that would indicate that regardless of how the market looks

today, you obviously believe that markets will trend up over time and tracking a world index would be the best way and would offer you a bit of diversity, even only being in that single asset. Well, yeah, because that single asset is covering all of the world's equity markets, right? And so there's so many traps in trying to make good investment decisions. I mean, you know, where do you start? We all suffer from a huge number of behavioral biases that are very difficult to overcome. As a matter of fact, I had a friend once who was doing a thing on behavioral biases, and he sent two questions. And the first one was, what do you think your biggest behavioral bias is? And the second one was, and how do you deal with it? And my answer was very simple. My biggest behavioral bias is I am a human being. My way of overcoming that is I'm a quant. So one of the things that is very difficult for people to grasp

is the fact that even though we know about this stuff, right, we know about hindsight bias, we know about recency bias, et cetera, knowing about it and actually avoiding it are two very, very separate things. I mean, just look at what is going on in the market right now, right, with everybody and their brother, you know, forming these big mobs with torches and, you know, let's stick it to the man and these retail guys can't be doing this. It's kind of like an elaborate kabuki theater, honestly, because if you're familiar with market history, short squeezes are as old as markets and, you know, they will happen again. They've happened many, many, many times in the past. And, you know, I think that what fascinates me is to watch the people trying

to craft narratives for their own ends, right? So, you know, I've been around, you know, this isn't my first rodeo, right? And so the idea that retail is making the money is very appealing because, you know, you want the little guy to win. That's part of, you know, if you read any Campbell and the history of mythology, David and Goliath, right? I mean, these myths have guided us for as long as we have written history and before oral history. But the idea is, my advice is pretty simple. If you love crypto, if you love equities,

whatever it is you particularly love, set up a process that you yourself can follow, right? That's right for you. And that's a big learning of mine over the years. I used to, you know, when I was younger, it was all, you know, this is the way you got to do it. Now, what you've got to do is what's right for you. And everybody's different. And so I think if you follow a process that you look at in aggregate as opposed to any particular outcome. I mean, that's 95% of it right there. Interesting. You throw out the number 95% because we've all read certainly traders, not investors, but specific to traders that 95% of traders fail, right? It's commonly said, you're speaking specifically about investing,

right? And our biases with investing and the emotional challenges that come with it. Take that a step further and step into trading. I don't know what your opinion is on trading, but I think that it amplifies the things you're discussing by 10, 50, 100 times emotionally and biased, correct? Yeah. So trading, I started life as an options trader. But even then, I was doing it based off a mathematical anomaly that I found using the Black-Scholes option pricing model. And it was all around implied volatility. And now, of course, back in the dark ages, this was 1980, right, where my computer had 16K. And it took literally like five minutes to do one implied volatility analysis. But listen, so investing is super hard. Trading is like probably the hardest thing that I've ever looked at. And,

you know, there are successful traders. We all know that. But I think that your idea about emotional control, about it being amplified, you know, 10 to 100 times, I was thinking a lot about that because, you know, your time horizon really determines your opportunity set, right? So if your time horizon is market closed today, your focus gets hyper extenuated, right? And it's like being in a shootout. I was in a shootout in New York City. And boy, be in one shootout and you realize a lot about human nature. You don't scream, you make yourself small, and you don't say a word, right? And essentially, that's part of evolution. We evolved to survive. Fight or flight. Right. Fight or flight. Right. Fight or flight. And so that's what you're trying to deal with.

Imagine, if you will, like your cortisol levels are going to be off the charts. You're going to have, you are going to be, your executive brain is going to shut down. Your reptile brain, which is the fight or flee, is going to take over. And look, something I can't do. I tip my hat to people who are great traders, but you are really, really attempting. I guess your other job might be a Navy SEAL or a member of Delta Force, because I've met a lot of those guys. And they have to be stone cold. I mean, you certainly have to be stone cold. And it's and

you touched on a very interesting point, which is that when you reduce the timeframe, you're just giving yourself way exponentially higher opportunity to make a mistake and lose money. Right. So every single trade in my mind is another chance to lose another chance to win. So that, you know, take it. Yeah. Yeah. But that sounds like it's a rule in your process, right? But it took me, I mean, it took me decades to be a profitable trader. I'm definitely one of those stories of someone who slammed their face against a wall enough times that finally it hurt. And I didn't want to slam my face against the wall anymore. But that is so important, right? Because that is something you cannot tell another person, right? No, it has to be learned. There's an old Wall Street saying that shorting

two futures contracts nakedly is equal to one MBA. And there's a lot of truth to that. And you can't, that's wisdom, right? And you can teach knowledge, you can teach facts, you can't teach wisdom. And you really literally need to get punched in the face often repeatedly before you go, hey, I don't like being punched in the face anymore. Right. You touched on something

interesting earlier as well, when we were talking about just buying one thing. Well, what if you're a 45-year-old and you just finally came into money and you're not a millennial, maybe you're 50 and starting to approach retirement, you're slightly savvy and you want to diversify. Then how do you approach the market if you're not comfortable putting your money into a single asset? So the way we approach the market is obviously on the public equity side, we're quants. So we follow the empirical evidence there. And some of the benefits of that are if you've done proper back tests and a lot of people do very bad back tests. Right. And but if you if you use all of the tools that make it as honest a back test as you can, you're going to be aware of things that intuitive traders are not.

For example, nothing always wins. Some things have huge drawdowns that you know about going in. You get a sense for what the aggregate base rate of that approach to investing is. And so I think if we're trying to keep the advice for just somebody who's coming into some money at age 50, I would give pretty much the same advice. I mean, honestly. And, and so one thing that I have come around to is you know, if, if you're the type of person who like really gets FOMO, okay. So, so keep 5% of that money that you've got for your fun, but here's the important thing. Call it an entertainment expense, right? Because the way we mentally map things really determines our thought process. It's really kind of cool. It's something I've spent a lot of time thinking about. And, you know, Tim Leary, the much maligned psychologist who was very much into psychedelics, basically said, we live in reality tunnels, right? And what's a reality tunnel? Well, reality is very different depending on who you are, right?

So a reality tunnel is your construct of reality. And the ones that everyone has, that's consensus reality, which is interesting because without consensus reality, there's no money, there's no God, there's no politics, there's no human rights. All of these came out of the minds of human beings, which, hey, I think is a great thing. But you've always got to remember that that also can really color what you're looking at. And so you've got to remind yourself, the map you're using is not the actual physical territory, right? And so I try to put everything in a multi-model framework as opposed to a belief framework, because beliefs, basically, you got to have a lot of faith, whereas models, at least as I interpret them, are designed using empirical evidence up to that point, should be falsifiable, right? So if you've got a model or someone is saying something to you that is not falsifiable, well, okay, then really you're done with the conversation because you're

never going to convince them otherwise. But models, on the other hand, beg to be updated. And really it's very practical and it's, you know, don't look for meaning, look for use. That's, I'm stealing that from Wittgenstein, but it's quite true. And so to answer specifically your question, I've got pretty much the same answer. Keep a little bit for new, interesting ideas, see if they work out. And then if, as we get further and further down this path of democratizing finance, right, fractional shares in land, fractional shares in, you know, specifically farmland or real estate, those are all going to maybe be interesting.

So, you know, I would say there's your opportunity set. Stick with things that don't require a lot of maniacal faith, if you will. Right. And try to be very, very practical. Try to be really boring. Yeah. The famous quote that, you know, trading should be more like watching paint dry than gambling in Vegas. And it's funny, you actually, the approach that you suggest there for trading is much like someone who goes to Vegas, right? Take your 5%, say, listen, I've got 500 bucks. I'm calling it a good night out, right? I'm spending it for fun. I'm

not anticipating making money out of it. And then you can go and you can let go of that money as if it was a nice dinner or a bunch of drinks. And it totally transforms your mindset, right? Because if you think about it that way, the pressure on yourself is going to be greatly reduced. Money's already gone. Yeah, exactly. Right. And it's gone. South Park.

And it's gone. Absolutely. Yeah. And that works. I mean, I think for traders, that works very well. I always joke that, you know, when I plan a trade, I plan how much I'm going to lose and that's it. If it goes up, great.

But, you know, in advance, I'm planning my loss. So it's interesting also that you talk about the process for people. You find your own process. That's the system that you stick to. All of us aren't quants, obviously. And I find that the process is one thing, but sticking to it after it's already in action is a very different thing. And that goes to the psychology that you're talking about as well. It's one thing to say, these are my rules. It's another thing to say, I'm about to lose. I'm going to move my stop loss or this hasn't really gone my way or it went my way, but I'm not going to sell. Right. So what's the psychology behind actually following through with your plan, even if you've formulated a good one? Yeah. So that is the trillion dollar question because the plans are out there. Many of them

are very, very good. Most of them are really simple. The problem is us, right? I say often that markets change minute by minute. Human nature doesn't change barely millennia by millennia. Arbitraging human nature is your last sustainable edge. So we continue to make the same mistakes, no matter that we have decades, centuries of data showing exactly these mistakes. And so overcoming one's human nature is, you know, like that is a vision quest, really, because it is, because first off, you got to get to the place where you understand that, right? And I've talked to lots of people who aren't there, right? So one of the things, and I've written a lot about this in threads, in books, et cetera. But one of the things that is really fascinating about human OS, and I like to do that.

I'm stealing that from Brian Romelli because it makes it neutral. Because I found that when I talk to people and I say, well, you shouldn't or you should, boom, up go the shields. Because what happens with many people is they have a belief that may or may not be true. That's actually irrelevant but right the process is not irrelevant and this is how this happens right so they get a belief that belief gets tied to their emotions we're emotional creatures and basically the dominant emotion that uh that rules is fear right because you Because, you know, just think of our evolutionary history. It's like, sure.

But anyway, so when you understand human operating system and that we all have it, okay? Me too, you, everybody. If you're a human being and you're not visiting from a different galaxy, you have this, right? And just understanding that alone is really like more than half the battle.

Because what happens with people, and we're all the same, so this is a universal concept. We're very good at understanding the failings in another person. And we're horrible at seeing them in ourselves. So Tony DeMello is a really interesting kind of enlightenment guy. He was an Indian by birth and then a Jesuit priest. He had a really interesting kind of, but he had this waking up moment. And he has this great quote, which is, if you're trying to understand your own failings, look at what irritates you in others. So in other words, it is. But the process

of getting there, that's the hard part. So one of the things that I do is I try to help a lot of people, younger people who are, and it's not just with investing, you know, it's a very broad spectrum, but mostly investing and, and getting them over the hump that, you know, you are not the exception is, is harder than I would have ever thought. And I've been thinking about this all my adult life, right? So it is very, very difficult to grasp. And once you do, then the real work begins. Because as you said, you got the great rules, you got the great process, you got everything, and then calamity, right? I always, whenever I'm mapping anything out, I always put this big square in the middle that says

exogenous variable, okay? And so the exogenous variable can be the CDO market collapsing, causing a great financial crisis. It can be the pandemic, it can be whatever it is. But when that happens, that's when emotional nature takes over. And as an example, so quants, we're supposed to be the Vulcans of investing, right? We are not supposed to be the ones who override. And yet, when people say to me, like, what are you most proud of? It's the fact that I have never overridden one of our models. And we had a consultant come out after the great financial crisis, right? And that's 08. And a lot of people remember that. And one of the things that he told me just like struck me like a bolt. And it was more than 60% of quant investors with great track records

overrode their models, basically negating their entire history. Human emotion is an amazing thing. It's very powerful. The DeFi revolution is the next big opportunity in the crypto financial market. RSK, the Bitcoin-based smart contract platform, is hosting exciting, secure, and Thank you. Put your Bitcoin to work, trade without selling, spend without selling. Lend and borrow on the most trusted network in the world. Hop on to rsk.co slash openfinance. Be part of the future and start making money on your Bitcoin today. Sick of paying ridiculous fees to trade crypto? It's time you try Voyager. It's hands down my favorite place to buy and trade crypto and is 100% commission free.

Voyager gives you easy access to more than 50 top crypto assets and you can instantly transfer cash from your bank account so you never miss a trading opportunity. Even better, you can now automatically earn interest on crypto holdings. Currently, they're offering up to 6.5 APR on Bitcoin and up to 9.5% on USDC. Yes, you heard that correctly, up to 9.5%. And there are no limits or lockups,

which means your funds always stay liquid. Find out why so many people are making the switch to Voyager. Visit investvoyager.com or search for Voyager on the Apple App Store or Google Play Store and get twenty five dollars in free Bitcoin when you use the promo code Scott25. That's S-C-O-T-T-2-5. Well, everybody wants to feel like they're special and everybody has a problem admitting that they're wrong. And at the end of the day, those are probably the core issues there. I want to touch on something you said before. You said, when investing and choosing an investment strategy, you can't be maniacal. We Bitcoiners have been described as such on many occasions, and we're not the only ones, of course, you have your the Peter Schiff's and the gold bugs, and you have your passionate silver, and you've probably seen

it with assets for decades. Sure. That said, if you do have a passion like that for something, how do you incorporate that into your greater investment strategy? How do you avoid being all in and that single asset that you believe in? Does that come down to that's your 5% Vegas fund and the rest of it, you behave like a human being or is there a way to up that percentage because you really do have that true passion for an asset? So that's a really interesting

and very difficult question to answer in terms of giving advice to people who are going to be investing in public asset classes, right? So one of the things that I've found about successful people, even myself, is obsession. And so when I was writing What Works on Wall Street, I was obsessed. And by that, I mean, we would take our kids to Nantucket and half of the Ford Explorer was taken up with my computers because I had to be running these tests 24 hours a day. Not normal behavior. So I understand what that feels like. I also understand that it can be one of the most blinding. I think there's a great quote, which is obsession leads to genius and madness.

And so if we're optimistic, we think we're going to be the genius, right? Often we're the madman. So I think that passion, which is such a beautiful thing in so many aspects of life, in love of art, in love of other people, all of these things, bringing passion is awesome. And those people become, they're very charismatic and they're easy to believe and all of those things. Passion in investing tends to be the enemy because what happens is getting back to your emotions taking over, right? Passion is, is, is, can be all consuming and you're not, you're not using all the tools of these little quantum computers we carry around in our noggins, right? And, and so I guess, I think you answered your own question. And that is if, if, if you have like a burning passion for something, and it can be crypto, it can be Tesla, it can be, you know, whatever it happens to be, keep that in that category that is we'll see.

Because you brought up another thing, which is like, I say I don't know all the time. And I've been wrong a ton. I actually have written about it, all the mistakes that I've made. And I've trained myself to look at mistakes, not as failures, but as opportunities to learn something new. And it's so much of this is framing, right? So I'm fascinated by framing, internal framing and external framing, right? Because internal framing, you can, when I talk to somebody and I listen to them, I can pretty much pull out, you know, their, their ideas about what their self-talk is. And unfortunately, a lot of self-talk is very negative and, and some self-talk is. And unfortunately, a lot of self-talk is very negative. And some self-talk

is delusional. And so you're trying to find this balance. And one of the ways that I have found to find that balance is to look at results, right? So I said earlier that I tried to, instead of saying, this is my belief, I say, these are the models that I use to make these decisions, right? And so one way is to look, okay, was I right, right? So finding truth in quotes should be an opportunity to be right.

And if you are operating from models and you're always saying, God damn it, I was right and the market's wrong. No, you weren't right. The market's never wrong. The market is not wrong. And so it literally, if you don't know who you are, the market is a very expensive place to find out. But it will teach you and it will humble you.

And I don't know anyone, honestly. Well, that's not true. That's an exaggeration. There are a few out there, but I know very, very few. There's the old maxim on Wall Street. There are bold traders and old traders, but there are no old, bold traders. And so we're not traders. We're long-term investors. I have the luxury of having an infinite time horizon because there are charities I want to leave money to. I have family, I have

grandchildren, children, et cetera. When you're able to have that time horizon, your opportunity set is huge, right? And then you can just be much more methodical. So for example, one of the things I was reading some of your stuff, which is really interesting, by the way, and I think that one of my passions is collecting art. And I will not know the terminal value of whether I was right or not. Correct. I mean, unless something weird. Generational, right.

Exactly. Unless something really weird happens and, you know, this painter or whatever tends to get super hot and we take that opportunity, which we wouldn't, but okay. But the art market is really interesting because it's a doppelganger for parts of the investing market. So you're familiar with mimetic Girard and mimetic theory and all that. Of course. Yeah. You got to know about that if you want to be an investor, because human beings, it's also one of our greatest advantages that we copy. And that is a really good shortcut to learning things really fast. Right. So 80% of memetic behavior is good because it's just like, oh, that's how you do that. Oh, I don't have to reinvent the wheel. Oh, that's a fire, right? So the 20% that gets us into big, big trouble is when something is so strongly pulling you towards it, right? And your mimetic desire kicks in. And you can use the art market as a classic example of that, right? So I was thinking before coming on about the whole idea of money fascinates me because money is a myth. I mean, I don't have a dollar or whatever here, but it's a piece of paper.

And if we didn't have that, we wouldn't have any of this, right? So it's a good trade. The idea that people believe that these little slips of paper or the code on a thumb drive can be translated into a thing, a piece of art, some food, a house, whatever, that's fantastic. And so, but that myth built up over millennia, right? So you go back to what they used to use as currency, and it's basically everything, right? Seed shells and all of these things. But the whole idea, I think, is that if the collective unconscious, as Jung would say, or what I call ground state reality, is such that everybody believes in money, man, that's really, really good. Because you're going to get iPhones, and you're going to get Zoom, and you're going to get

all this kind of stuff. Because everything that we see because everything that we see, everything that we see other than if we're standing in a field that hasn't been touched by human beings comes out of the minds of humans, everything. And, and to me, that's, that's incredible and exciting, but it's also, it's also why we need like to to to get our arms around things like so thinking about crypto i don't i still don't have an opinion on crypto i i maybe it's just because i'm stupid but you know we i'm a big believer if you're going to really try to learn about

something you better put some skin in the game um because if you don't, you know. Didn't Peter McCormick send you 50 bucks in Bitcoin a couple of years ago? He did. He did. You're all in, man. You're all in. And also, so we have a family office of Shaughnessy Family Partners where we do experimental and startup investing and things like that. So I put some money in a crypto hedge fund several years ago because I wanted to understand better how it worked. We made money where we gave notice to redeem, not because they did anything wrong, just because we think that we've learned we actually did well. And and and but the learning process didn't get me where I wanted to get. So when I think about things like crypto or any kind of new speculative asset, if you ask me, okay, so Jim, you've got to put a rule set around this. I guess the rule set that I would put around it is one that I've learned from all my quant research, and I would be like a momentum guy.

So the best commodity traders, for example, are almost all momentum people. The hedge fund that I'm referring to, momentum. They shorted the bad momentum. They went long the good momentum. They shorted the bad momentum. They went long, the good momentum. And so that's a tactic, right? Instead of a strategy. I think that it's going to be, I generally say that it's a really bad and lazy thing to sort people by generation, right? So, because it almost encourages lazy, not thinking even, but prejudice, right? So all boomers are X, all millennials are Y, is not helpful.

One area where actually I am kind of leaning into thinking that it might be interesting to look at differences by generation is in things like crypto, because the haptics, right? Haptics are touch, right? So a boomer, the haptics of cash, cash in the pocket, cash available to spend, et cetera, are very, very strong, right? And anyone older than boomers, like they rule, right? Sure. As we go through Gen X and now millennials, and then especially

Gen Z, Zoomers, the haptics might change. And if the haptics change and it's as easy for them to think about a thumb drive as being like a $100 bill, then some interesting things might happen, right? Because I think that ultimately things like crypto, et cetera, the use case, I would learn from you. I'm sure you know the use case better than I do. And I'm still kind of, I'm still worried about, you know, exogenous variable, right? So I've talked to a lot of my friends invest in crypto, love crypto, et cetera. And, and I'm just like, always like, okay, but what if, and you know, you know, the questions I'm sure you've heard them all. Yeah. Regulation or it's banned. And of course the obvious.

Yeah, exactly. Right. And so it, another thing that kind of one of my little mental models is if it's so obvious that everyone asks that question, it's probably not going to be that. Right. In terms of. But, you know, again, if you know your history. FDR made owning gold illegal in the United States in the 1930s. And they went and they confiscated people's gold and they use guns to do it. And so it's like, I always say, I would rather not be on the side of a trade where I'm going to pick a fight with the federal government of the United States because, you know, but for many people who are in it, they view it as just that.

Right. And that that's actually what's attractive to them. Not to me necessarily, but there are people who say, this is my way to opt out of the system. This is my escape hatch. And that's why I'm doing it. Let them come, right? But I think then, as you just touched on with FDRs, the argument that Bitcoin is digital gold, and it is superior in a lot of ways, at gunpoint, your private keys aren't going to save you. That's right. And that may be an unpopular view among my community. But yes, they can dig up your gold and physically take it. But at gunpoint, they can also ask you for your private

keys, and you'll probably turn them over. So I do see that argument and there is obviously that risk. But that said, we're seeing infinite QE, money printing on a level that even you probably have not experienced in all of your years of investing. You have to hedge somewhere, right? I don't know if that answer is precious metals. I don't know if that answer is the art hanging behind you, but you know, where can people hedge in case this really does get out of control? Yeah, that's a great question. And I agree. I agree with the principle that we are seeing quantitative easing on a level that is pretty unprecedented. And my wonder about that

is, so inflation gets caused by a lot of things. Sometimes it doesn't get caused by what's going on. And there's a lot of complicated technicalities around why that is so. But let's just say that we accept the premise that for whatever reason, you want to hedge. OK. And so what I try to always do is just think probabilistically always. Right. So the highest probabilities, in my opinion, are that people with guns are not going to come into my house and ask me for, let's put it this way, officials with guns are not, who are like James Bond, licensed to kill. Officials with guns are not going to come into my house and ask me for my crypto keys or Peter's gift to me. They're coming for your 50 bucks. That 50 bucks is a lot now.

Exactly. I know. It was a great gift. I really need to thank him again. So I always try to go down to like, what's the most likely probability, right? And so I guess if you said to me, what would I want to hedge with? I would look not at precious metals or diamonds or any of those kinds of things. I guess my hedge would be land, would be farmland in particular, not exclusively in any one country. And the problem with that is until we get fractionalization where regular people can do that. But by the way, I think we're going to get there. I think that will happen. But it's like a shitty answer for somebody who's got 10 grand, right?

Yeah. I mean, so shorting is really hard. You know, we have looked for models to successfully short forever. And, you know, we found some, but the problem with shorting is that like, well, we're seeing writ large, right? Yeah, not only have to be right, you have to be right at the exact moment and you have to not get margin called on your way.

So it's like that. And I always try to make the things the easiest for myself as possible. My mom used to joke that because I was so lazy, I would always find the easiest way to do something. And, and, and I think that that's actually a good mantra for people. Try to find the easiest way. Don't make things harder for yourself than they already are, right? So I think what you just said is exactly right. Not only do you have to be right, you have to be right at the exact right time. You have to not be over leveraged and avoid the margin call. I'll give you an example.

So we did, I love doing kind of thought experiments because they can be very interesting if you have enough data and we got a lot of data. So I wanted to see what would be the maximum level of leverage that would be beneficial. So here was the thought experiment, and we used this on multiple actual results going back to 1926. So the question was that we put to, as I joked, data room one, was, okay, you have a blog post now or a podcast or for old olds like me, a Wall Street Journal from a year from now that falls through a time tunnel. And on the front of C1 is a list of the 10 best performing stocks over the previous 12 months. The number 10 is up 800%. Number one is up like 4,000%. And then I say, okay, Scott, here's the deal. I'm going to give you an account at, well, let's not be too cute. So let's make it, I'm going to give you an account at Goldman Sachs

and they're going to waive all the leverage requirements. You can use as much leverage as you want. You've got certainty. You have absolute certainty in the 10 years. Bingo. I've talked about this so many times. I talk about it all the time that you could tell someone that the price of Bitcoin will be 100K in a year. And if you're a trader and you're using leverage, you'll be broke before it gets there. Bingo. And here's the thing. I have told some of the smartest people on investors that I've ever met this thought experiment and shockingly few of them immediately get right to the answer. The answer, by the way, if you want tactics is if you use more than four times leverage, you're always wiped out 100% of the time. Because there's always that one big dip that wipes out your account before you get to the

finish line. Yeah. And so I always use, that's how I looked at things. Like, so long-term capital management, which was a huge hedge fund run by Merriweather and a bunch of Nobel prize winners. And the halo effect was strong with them right and you know where's your i remember talking to someone associated with it and i was saying dude it's not when you guys are going to go broke not if you guys are going to go broke it's when and he got

like really angry with me i'm sure and he was like fuck you O'Shaughnessy. Where's your Nobel prize? We've got no, you know, and I'm like, it doesn't matter. I can do arithmetic. Right. And, and, and so people get lost in this, in this game, right. That they, that they play in their own minds, that they convince themselves and the smarter you are, by the way, the better your narrative is going to be. So what I often say to people is like, well, I'm smart. That makes you more dangerous because you're going to come up with a really good narrative. So anyway, they did. Their leverage was off the charts, right? And we all know what happened.

They went bankrupt. And so really simple things like getting back to what are you going to do for a hedge okay so don't use leverage and if you do you if you do use leverage keep it at at half where you the the point of no return you know use two times leverage, right? Because that way you still have a pretty, you still have a higher chance of dying, but it's not certain. Right. And, and, and so it's like these simple concepts are like, I was talking to a friend and he's like, why don't you just write a book or just make it really simple don't make it fucking what works on wall street that's this thick and make people like you know have to go through every page right he's a good friend and it was and he goes why don't you just like do 10 commandments i said because i hate 10 best lists i mean right i don't apply to everyone. Exactly, exactly, exactly.

So, you know, I think that in earnest, right now, investors have more opportunities than they've ever had, in my opinion, in history. But with opportunities come risks. And so one of the things that nobody wants to hear, and like when your podcast airs, oh, look at that old, he's telling us not to do this. He's clueless.

He just doesn't know what the fuck he's talking about. Maybe, maybe, maybe. That's an acceptable potential position to take against me. I could be wrong. And Bitcoin or whatever, fill in the blank. It doesn't have to be Bitcoin. Fill in the blank is going to revolutionize and the olds aren't going to get it

and the young people are and bully for them. But the thing is, we have so much evidence that we are humans. And I don't think we're going to evolve really fast. And so it's like Damon Runyon has a great quote, which is, the race might not always be to the swift nor the battle to the strong, but that's the way to bet. And, and kind of like, yeah, it is kind of, there's a, there's a reason they have spreads on sports betting, right? I mean, you're not allowed to just bet on the best team equal because everybody would win more of the time. So it makes sense. But it's interesting. You talk about, um, and I agree with you,

by the way, land. And it's funny that then you say you need to diversify land into multiple countries because what if one of those governments obviously comes and takes your land? I've seen it all over the world many times. But the idea of land as a hedge, a store of value, kind of talks to the concept that stores of value and hedges aren't for people

who only have a $10,000 account. That's true. And so when you talk about a store of value and hedges aren't for people who only have a $10,000 account. That's true. And so when you talk about a store of value here in the Bitcoin community all the time, well, Bitcoin's a store of value, it's digital gold, but you have to be really wealthy to care about a store of value, right? So the narrative is kind of, I think, misconstrued by a large part of that community or any community because store of value is something you don't want to lose the money you've already made. It's not a way to make money. Like gold is kind of a shitty trade in that regard, right? Maybe it'll store your value, but gold isn't what you buy if

you want to like make a hundred times your money. No, no, not at all. And that actually brings up a really good point that I have struggled with. And I still don't have an answer that I find acceptable in terms of the model. And that is, so if Bitcoin wants to be a store of value rather than a speculative asset, stores of value are boring and shitty trades. Right. By definition, right? Right. Should not be that volatile, of course. And speculative assets, on the other hand, you can 10X your money.

You can lose all your money. But that's the disconnect that I think a lot of people, and premature certainty, man. It's like, if you want to look and find the problem for most really, really bad decisions is people become prematurely certain about something and then they stop thinking about it. Right. So I always try to avoid becoming prematurely certain about anything. And and so like that's why I'm interested in things like crypto and things like, you know, all of the various stuff. But you're right. And I don't think that gets said enough because it's honest. pray that the rule of law continues to work in the United States, that tyranny doesn't take over, and that we continue to be the kind of freest in a country, because I do believe that the more free a country, the better its economy overall. Because when you have rule of law, and that's important too,

and freedom, that allows maximum human creativity. And we're back to, human creativity is the ultimate resource, in my opinion. And so systems that allow it to function turn into really great economies. Systems that try to suppress it are shitty economies, are shitty places to live. Why do you think everyone, even today with all of our problems, why do you think all the smartest and most switched on people want to live and work in the United States? It's because they see what's going on. And despite all of the problems, they still want to live here. That's another one of my little soapboxes that I'm always on. We should let them.

We have this huge advantage that when I hear people, the immigrants are going to take our jobs. We're a nation of immigrants, all of us. I obviously agree with that. It seems pretty logical. It's funny that you keep talking about you being the boomer and the old, and I just want you to know that in this community, that's what they call me because I'm 44. So it doesn't matter. I don't know what you are, but I get okay boomer as a response to like half the things that I put on Twitter. But it is a really interesting point

that if you have $10,000, you're not worried about storing the value. You're worried about making sure you can buy food and pay rent. Exactly. Exactly. And then you got to take a very different course. And the course that I would recommend there is the one we began this conversation with. Put a little bit away and keep your emergency fund and live your life on the money that you have. It's interesting talking about free countries, obviously free markets, and that that's the way that an economy or country operates best. We've seen many cracks in the foundation of that in markets, certainly in the last few years. You touched on it very early. People won't know when we recorded this, but we're in the heat of the GameStop Robin Hood controversy, call it what you will. Do we have a free market if the buy button can be turned off while the sell button is still active? We have a very constrained market, if that is

true. And so, again, concepts, right? So we haven't had a free market in this country for a long time. We have a free-ish market. And I'm not saying that ironically, right? The way that things have evolved, does they always evolve in like super powerful countries? It's like Tim Urban, wait, but why? I have his podcast with podcast with infinite loops drops Thursday, a really bright guy. And it's like, he is really good at reframing stuff. So he's got this chart. I put it up on Twitter a couple of times and, and it's, you know, income inequality and, and he, it shows, you know, here, here's the, whatever. I can't remember if it's 5% or 10% or whatever. 10% here and 90% here. And the arrow points at the 10% and says the enemy. And then he reframes it and shows it.

And he's got a new column on it. And it's all of the grifters and all of those engaging in regulatory capture and trying to socialize losses, but keep gains private. That's not a free market. I am opposed to that. And so it's a problem. And, and, you know, the solution for that problem, you know, if I had that, I don't know, I guess, yeah, that'd kick you out. If you said it out loud, you need to find a new place to live. Because that's not the system is not does not want you to find that answer. And I always say, you want to know who's truly powerful in society. And this is, I'm stealing this from someone. The problem when you read a lot, you think it might be your quote.

It's not. I'm stealing it. So I always just say, I'm stealing this. But if you want to know who's really in power, look at who you can't criticize. They're the ones in power. And so we have a free-ish market. We have suffered from regulatory capture for a long time. Regulatory capture is when all the rich folk get the lobbyists to write the laws.

By the way, do you think that any of the Congress critters write the laws? Come on. No, of course. Not only do they not write the laws, they don't read them. They don't read them. Exactly. Shouldn't it make you go, hmm, if somebody who's been nothing but a public servant is suddenly worth $50 million? I scratch my head on that one. Because do I have a problem with you becoming worth a billion dollars? Not at all. Because you becoming worth, well, the point is, you being a billionaire, you would create something that is useful to society. That is like why I love entrepreneurs, right?

For the most part, they create things that make society better. Not always. Not always. So I'm sure there are people saying, yeah, but. Okay. But in general, if there's a fight that you want to get into, the fight I would say is, how do you make regulatory capture and all that it implies and all the grifting and all that become less important? And I ask that without having an answer. I don't know. Because, you know, systems evolve. And it sucks that that is happening, honestly. But then by the same token,

like if we were if you were sitting right here, by the way, Oculus five, you will be sitting right here. And and but and you say, well, where are you going to go then, Jim? My answer is I'm not going anywhere. Because we still have, when you compare, again, everything, you've got to frame things right. You've got to say, okay, but compared to where or what, right? And so we still have, despite all of that, which is shitty, I'm the first to say that, we still have the best environment where people with good ideas can start companies, get those companies funded and backed, and bring them to fruition. And, you know, it's kind of like this, right? It's like Elon Musk is one of my favorite ideas here because I don't have a dog in that hunt. Because I'm a quant, his stuff isn't valued where a quant could buy it, I think, okay? But I'm absolutely fascinated by him as a person, right? And I look at him very dispassionately.

And I'm just like, I'm like, God, I'd love to have a beer with that guy. Because I think that he is like really brilliant. And yes, of course, there's all of the people who are, yeah, but I like creative people. I like people who kind of think, oh, what about this? I mean, that's how we got here. One of my favorite authors is Robert Persig, and he wrote Zen and the Art of Motorcycle Maintenance. And so he really got that. He really got the idea that, man, steel doesn't exist in nature. It comes out of here. It comes out of the human mind.

And so I'm in favor of everything that maximizes human's ability to create. And does that mean that there'll be some creations that are abominations? Yeah. But I still think the 80-20 rule is going to work and that 80%, look, you don't succeed by making people's lives miserable, right? And the refrain, well, but what about the banks?

Well, they've been around a long time. If there could be a great new banking app, it'd kill. So compared to what? Here I am. Here you are. But do you think you've seen it? I mean, you've been through a lot of market corrections,

crashes, dips. This is the end of everything. And then it wasn't. And we all know the Templeton, the most dangerous words in investing are this time it's different. So is this situation any different or is this just gonna be par for the course,

water under the bridge, a forgotten thing that's somewhat like maybe they put another consumer protection. I'm doing quotes for anyone who's not watching, listening, consumer protection regulation in place and call it a day. Or do you think that we are actually seeing any sort of shift with specifically with the situation of seeing retail short squeezing Wall Street, if that's the narrative you choose to. So I have my suspicions. I have my suspicions. Yeah, I think it's bigger money that's doing it, but of course. Yeah. Right. Yeah, it definitely is. Okay. So I guess my answer would be that we already have all those regulations.

They're already in place. They haven't been applied. Okay. So it is the, it's all, you know, the story of the frog and the scorpion, right? Sure. Yeah. Okay. So it's in my nature.

So if the scorpion stings the frog, even though he's going to die too, because it's in his nature. That's what I do. Exactly. So it is in the nature of regulators to want more regulations. And so will we see some sort of new regulation? I don't know, maybe. But I would be willing to put a fairly sizable bet on longbets.org that it's not going to favor people who are already not privileged. So we already have these regulations. They're already in place. And by the way, let's make this very clear. I think regulation of markets is vital, right? Because in the way, way back where there was no regulation, people did really despicable

things and they cheated. They outright cheated and they were crooks and frauds. I mean, when the SEC was created, FDR sent Joe Kennedy to be the head, and everyone was aghast because Joe Kennedy was a bootlegger and a criminal. And they said, what are you doing? And he goes, I'm sending a crook to catch the crooks. So the scorpion, right? You want to keep the scorpions in line, get a scorpion in there. And so I definitely am in favor of sensible regulations, which I think, by the way, the 1940 Act, which guides what I do, the various regulations of the SEC are vital and important.

And I think you need to live by them, especially if you're a fiduciary. I've thought as a fiduciary all my life, right? So that means it is embedded in my DNA. If you're my client, you are first. And that's all there is to it. And now I see the skepticism. I believe you. I just think it makes you a bit of a unicorn. Well, I always joke to people, my lawyer was like teasing me about something and and i said i will wreck every survey group you put me in because i just don't i don't like the same things that other people like right and and so but yes regulations are vital because it, and now this goes back to collective ground state reality, right? So we have an innate sense as human beings of fairness. And, and I have a degree in economics, which always amuses me. And the reason I have a degree in economics is because I had like eight more credits than I had in history. But so the idea that economists like, let's assume.

Okay, you lost me right there. Let's assume that human beings are irrational. Wrong. Let's assume, et cetera, et cetera. But the problem that I see is when you do tests about just human nature, again, human OS, let's just keep it neutral. And you say, here's $100, Scott. And you get to be the guy who determines how much you keep and how much you're going to

share with Jim. And they've done this. Social sciences are in crisis right now. Very little of their stuff is replicating, which means that a lot of it's bullshit. But this does replicate. And they've done this everywhere, not just in America. That's another important thing. Most research that people refer to, 85% of it is done in this country with undergrads. It's like, oh. Anyway, this one replicates. And it is, here's $100.

You get to distribute it. And it's a game. It's a game that gets played over and over and over and over and over again. OK, so what happens? If you have the $100, economic theory would say that I, as your counterparty, would accept a nickel because I'm a nickel richer than I was before. What happens? No way. If you offer me anything less than half, I am apt to say, fuck you. And even though that is a bad outcome for both of us, that's our nature. And that's our nature because of evolution, because we needed the tribe to survive. We needed fairness. We needed all of these things. It's in our DNA. And so it's like, and I don't mean to bash economists here. I

have several who are friends. But the idea is, you know, Jed McKenna has this wonderful line, which I think governs a lot of things. And that is, if you're having a little tea party with Lord Lion and Lady Gazelle, and someone comes along who doesn't buy into your fantasy narrative, it's not that they're mean, it's that your fantasy narrative is a little fragile. And so that's the problem with a lot of these things. Like, well, if we assume this, well, sure, that's, you know, now you're in logic 101. Let's assume that all men have wings and all men can fly, then all men can fly anywhere in the world that they want. That is logically true. It is factually absolutely false. So the problem

with the situation as I see it is, yeah, the regulators, when given a chance to regulate, they'll do new ones they're not going to favor the little guy i can guarantee you that because he's not or she is not the one writing those regs it's the bigger players it's like the man i always i joke around a lot on twitter right and i and i love gifs because i think that memetics it it's like, I'm also doing an experiment. And when people hear that, they kind of like, what? But anyway, there's one that I put up all the time. And that's the picture of the back of the guy. And it's like the man. It's really hard in whatever society you look at, whoever was the man back then in Rome, right? The Pax Romana and now the Pax Americanus.

It's like, that happens for a reason. And like in Rome, the reason was if you fucked with a Roman citizen, the Romans sent the legions. They killed you, everyone in your family, either burnt your property to the ground or gave it to a Roman citizen and left your burning, smoking carcasses hanging from a tree. Yes. Who is going to do that, obviously. I guess the answer is be really careful. Look, anything that gets younger people or people who have not been interested in investing interested, I'm generally in favor of. This is the downside effect of that, right? Because people get whipped up. Don't blame them, by the way. If I found myself in that, yeah, it's human nature, right?

And when a mania takes over, man, just step away because it's tough. It's just so interesting to me. And you're right. Obviously, we're not going to leave bodies burning, hanging from trees. But financially, that's what happened to a lot of people who were buying GameStop on Robinhood. No question. And many of them were not using leverage and they're reporting that they were liquidated as if they had leveraged positions when they simply thought they were buying a stock. Now, given it's probably in the terms of service somewhere. Yes, it is. But the 30 page terms of service that no human being in history has ever read. But when you have people who think

they're just buying a stock and can hold it indefinitely and get liquidated when there's only a sell button, that's the financial equivalent to someone who just lost their $10,000 and the only $10,000 they have as having their house burned down and being left hanging on the tree. I don't disagree. I think that the terms of service, man, the truth loves the fine print. And I can tell you what's in those terms of service. This is a great example. I won't name him, but I helped a friend who's older. So he's 55. He had never invested ever in his life other than in his 401k. And so I said, well, what did you do there? And he goes, I just did what my manager told me to do. And it was the kind of the everything option. And so he came into a small inheritance and he wanted my help in setting

up a brokerage account. And so I will admit like my daughter, who's a comedian, a standup comedian has a great routine on me, which is like, dad, you're in a, you're, you're in a bubble in a bubble and another bubble. And it's okay. I am, but I haven't, I haven't filled out a form or whatever. And I had to, in this instance, I won't name the broker. It was not Robin hood though. Let's be clear. I would assume that. And, and I actually went through the signing up process with him. And I was irate because I had to decline margin three separate times. And like the third time I was almost, cause I can get the CEO of this brokerage on the phone. Sure. Of course. And it's like, what the fuck are you guys doing, man? I mean, this is just like, this is like really bad. Because, and of course, I know why they're doing it.

It's where all the profits are. Nothing is free. Tangle the little carrot. Come on, the margin carrot. You don't want it, right? You really do want it, don't you? You love it. You love it.

Here it is. Would you like more money? Doesn't that sound good? So anyway, I did successfully sign them up without margin. And we put them in a world index ETF with a low basis point fee. But listen, man, I did read the terms of service just because I wanted to know. They're not stacked in your favor. Let's put it that way. But by the way, that's true for these guys. That's true for everything we use, basically. Yeah, that's it. Nobody ever reads them and you agree to them on every single thing. Scroll down to the bottom, pretend you read it. And I accept.

Right. I just think, you know, I know we're running out of time here. So to round it out, you know, when you see this behavior, if you are the little guy, eventually, maybe you just feel like you've had enough and you're ready to just opt out or find your way. And I think to a lot of people, whether you or anyone views it rationally or not, that's why they come to Bitcoin or something similar or something different

during various periods of time. Because at what point do you just feel like you can't win in that system? I got to tell you, that is one of those exogenous variables out there that really worries me. Because back to the fairness, right? We are programmed to, when things are unfair, we get riled up. And it's in our nature. And so my advice is that try to find the least rigged game and play that one. So my outlook is that of what I would call a rational optimist, right? So, and I use history as my guide.

Man, we've really come like an amazingly long way as human beings. And sure, do we still have problems? Of course we do. We always will. And the nature of those problems change. I understand the emotional reaction, like, you know, they get hot and that's kind of intended, you know, by that, I mean, like it's much easier to control somebody who's making emotional decisions than somebody who's very rational. And I mean, that's just blunt, but that's the way the world works. And so if you can calm down and you can kind of like take a deep breath,

you're, And you can kind of like take a deep breath. You're probably going to be better off playing long-term games with positive sum outcomes and, and getting rich quick. You know, I just look at the history of lottery winners, right? So I'll lose it. Right. That's because they didn't build it. And, and so you drop like a hundred million on somebody unsuspectingly, and you are doing them a massive disservice because you're going to really fuck up their life. And because they didn't want that, they weren't working towards that. They were working towards a happy family and raising their kids right. And you fuck all that up if you drop

out of nowhere a fortune on them. The people who end up doing really well, for the most part, um it's a it's a mixture of luck and skill always will be um and but they're obsessed and they're playing that game intentionally and the the the the so what of this that i find very interesting is i have never met and i've been really lucky in life in that I've met like fascinating people and super successful people. I have never yet met one who was extremely rich, whose goal when they started was to get extremely rich, not one. Their goal was whatever made them extremely rich. And, and that is nuanced, but it's really true. And, and so it's kind of like, be careful what you wish for, because you might get it. It's so true. And, you know, it's, it's, you know, we could, we could turn this into a multi-day seminar and it's,

it's the nature of the beast here. And like, for example, us doing this podcast, right? This came out of people misunderstanding you. Right. And then I made a joke about it because I make jokes about everything. Sure. I tend to go for the same. Exactly. Right. But here something good came out of it. Right. So we get to know each other better. And, you know, I'm like, oh, wow, Scott is a cool guy. He's got some really great ideas.

No, I'm serious. I appreciate that. I appreciate that. But the idea is to keep, I mean, if I have to give like kind of universal advice, try to keep your mind as open as you can. Number two, you're probably wrong. If you look at history and you look at the smartest people in history, like from just 200 years ago, almost every one of their ideas were wrong. Wrong.

But some useful, right? So you're probably wrong. Try to upgrade your model so you're less wrong. And freely admit when you're wrong and freely say, I don't know if that's the case. And by the way, Scott, that's most of the time that's the case. It's like people don't, it's one of the problems that I've seen, which is kind of universal in human nature. And that is people don't listen to understand.

They listen to respond. And, you know, that's the, whenever I see, whenever I see, this is the hill I'll die on. I always put up the, the Patton gif, right. And I go, you know, I, I subscribe to the general George Patton's view that let's let the other poor dumb bastard die on his hill. Yeah. Because, look, there is one hill I will die on, and that is my family. So come from my family, I'll die. There's only one worth dying for, probably. But other than that, come on, you're probably wrong, man.

Strong opinions loosely held, right? Yeah, that's overused, I think. But yeah, I mean, so I have a lot of opinions that are, I guess I would say suspicions, right, that are not terribly strongly held, but have been pretty useful. And until the model provides me enough evidence to say, let's drop that one. It's not that I strongly hold them. It's that they work. I'm very practical in that nature.

I was speaking more to the willingness to change that opinion, no matter how strong it is. Which is great. Which provides you with evidence. Maybe there's a bigger hill worth climbing to go try to die on if you have evidence to the contrary. Always a bigger hill. Always a bigger hill.

Well, I really appreciate your time. I feel like I could ask you questions for the next five hours, but I know that we're up against it. Where can everybody find you, keep up with you after this conversation? So you can find me on social media, on Twitter. I'm at JP O'Shaughnessy.

You can find me on Clubhouse, even though I just joined and I really don't know how to use it. Same thing at JP O'Shaughnessy. If you're interested in what we're doing, we haven't even talked about what OSAM is doing. That's O'Shaughnessy Asset Management, which is www.OscarsamAdamMary.com. And then you'll have way too much of me and you'll throw up your hands in disgust.

Well, two things. Sorry, we didn't even get to talk about what you actually do. No, it's okay. And number two, your response to Clubhouse is the exact same response that I've had. I signed up two weeks ago. I have not used it. And everyone just says, okay, boomer. I guess I'm too old for Clubhouse. it right so i've never done an ask me anything on twitter um and i thought when i got on clubhouse voice that's interesting um and it's kind of like we've invented interactive radio wait a minute we've invented podcast but that's with a lot of people yeah exactly what i might do is do an ask me anything over on clubhouse see how that works just to give it a try. Great idea. Well, thank you again so much. Such a valuable conversation and so much insight. I think it's going to be really, really

well received and very useful for this audience, for sure. So thanks once again. And I look forward to doing this again in the future if you're game. I am totally game, Scott. This was a lot of fun. Thank you