We Study Billionaires - The Investor’s Podcast Network - TIP 049 : Quantitative Value Investing (Investing Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 49 of The Investors Podcast. Broadcasting from Bel Air Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Sting Broderson. Hey, how's everybody doing out there?

Starting point is 00:00:30 This is Preston Pish, and I'm your host. for the investors podcast. And as usual, I'm accompanied by my co-host Stig Broderson out in Denmark. And this is the second part interview that we have with Dr. Wesley Gray. And we're going to go ahead and cut to that tape right now. Okay. So let's talk about ETFs again. So I think the difference between ETFs and mutual funds is really something that the public will realize the next five or 10 years. At least that is the trend I'm seeing in the market right now. But Wes, let's just make a shortcut through those five or ten years. Let's just say, what is it the one secret?

Starting point is 00:01:09 If there's any secret, there's the difference between ETS and mutual funds. What is it that people haven't realized yet? I think tax is huge. That's probably 80% of it. And then the other one is the structural sales difference, where it's disintermediated by nature. and that just lowers the cost of how I would deliver any strategy when the distribution is, you know, at the margin lower cost structurally. But tax is number one. Yeah, and perhaps we could revert to tax.

Starting point is 00:01:44 I also remember you said tax before, but could you just very simply explain why is it that we can defer tax on ETFs, which is basically 80% that you're saying, and why is it that we have to pay tax on mutual funds? So I don't know why it is. That's just how the rules are set, but I can just explain how the rules work, right? So in a mutual fund construct, or any construct, frankly, outside of like an insurance company, there's all kinds of other ways you can deal with tax problems. But let's say we want to deal with, you know, the non-billionaire versions of these. You can do a mutual fund. You could do a hedge fund. You could do a manage account. You could do like a limited partnership or a hedge fund structure. If it's a mutual fund, manage account, or hedge fund structure, what will happen is if that portfolio trades and it has a gain, that needs to be distributed out to the clients on a K-1 in the case of a hedge fund or some sort of 1099 in the case of a mutual fund person or a managed account person. And that's fine.

Starting point is 00:02:53 That would actually also happen in an ETF if you traded securities in the ETF and you didn't trade them in kind through the authorized participants. Now, the essence of how the tax works, and this is how a lot of tax ideas, concepts works, is banks have what they call mark to market P&L accounting, which means that if I were, let's say Stig is a bank and Preston is just some individual or registered investment company. If Preston gives Stig a $10 stock with a $0 basis and Stig is a bank, he doesn't give a, right? Because when he gets that security, he pulls it in with mark to market accounting. So his basis is 10. If he turns around and sells it immediately, he's no, he's indifferent. Now, let's revert this. Let's say Stig is an individual. Preston is individual. If Preston gives Stig a $10 security with $0 basis, Stig is going to swiftly turn around and

Starting point is 00:04:04 punch Preston in the face because you just gave a deferred capital gain liability, right? So the arbitrage, I guess you call it the tax arbitrage happens because we deal with two tax regimes. ETF structures or registered investment companies have flow through capital gain problems like you or I. Banks are marked to market. So when we dump low basis stock on a bank, they're indifferent. And essentially that capital gain liability, you know, it vanishes. So and that's the same thing like they do, structured products, swaps, all these other different tax minimization concepts that are out on the street that most, you know, people don't know about unless they got a large amount of dough. It all works on that, right? You go to a bank and if you want to swap, you say, listen,

Starting point is 00:04:55 I don't want to pay capital gains on or day-to-day short-term on this strategy. Can you, I'm going to give you this index. Can you write me a total return swap on this index? And so now, instead of buying and holding the index, which has a lot of activity that would kill you on taxes, you go to the bank and they write a swap on that contract, which now you turn something that has a lot of taxes into something that is long-term tax deferred. It's the same kind of, it's just structuring, and ETFs leverage the fact that banks and people or individuals or Ricks,

Starting point is 00:05:30 registered investment companies, have a different tax regime. All right, Wes, I got a question for you. So recently billionaire Carl Icon's been in the news about ETFs here because he got in a spat with Larry Fink, who's the CEO of BlackRock about these bond ETFs, these junk bond ETFs, and their potential bottleneck for investors as they potentially try to exit those positions. So do you agree with Carl Icon's position? And can you kind of describe some of the context of this being an expert in ETFs?

Starting point is 00:05:58 Because I think a lot of people in the audience are very interested in this topic and really kind of understanding this potential junk bond bubble as well. Sure. So, I mean, obviously Carl Icon is a smart guy. And so a lot of what he says is potentially true. The problem is I think he may lack the institutional knowledge of how ETFs actually work. So if you remember, ETF structures are bait. You can arbitrage an ETF every day, right?

Starting point is 00:06:29 So if there is a spread between underlying an NAV, you could do a market on close order at like 359-59. and if you know that the NAV is really $1, but the underlying is $0.99, you know, it's free money, basically, right? So as long as there's a lot of competition and a lot of prop guys and market making desks that have supercomputers that literally have buttons that in real time figure out the bid ass spread costs, impact costs, what have you, and incorporate that into their little arbitrage mechanism, that spread is going to be tight because, and what that means is ETF liquidity is basically a reflection of the underlying liquidity under the assumption

Starting point is 00:07:18 that that arbitrage mechanism continues and people like to make free money. So now let's look, if we know that given that assumption, arbitrage is capable, and ETFs are basically a reflection of the underlying liquidity, clearly,

Starting point is 00:07:35 ETFs that buy junk, bonds, if junk bonds, if we go into an 08 financial crisis and there isn't a bid on junk bonds, you know, whether you own the junk bonds directly or whether you own them through an ETF, you're completely screwed. You're not getting any liquidity, but I don't think the ETF layer, you know, screws with the liquidity any more than just the underlying liquidity of the asset. Yeah. And I don't think Icon really, maybe fully appreciates that as much as maybe he should. Yeah. No, and I think Stig and I see it the exact same way. Now, what are your comments on the bond, the junk bond market being the potential next bubble? I'm real curious to hear your thoughts on that. Listen, my thought from an asset allocation perspective is that junk bonds are just another version of equity, just lower beta, right? And figure out what you want to buy, what's the best value? Because in the end, you know, when we build a portfolio, we don't care about.

Starting point is 00:08:37 diversification on the junk bonds versus equity in a normal sense. We care about when, you know, beta goes to, you know, terrible and the whole world blows up. Junk bonds, everything blows up. So I'd say just find the smartest way to gain generic equity exposure at the cheapest best value and do that and, you know, maybe avoid things like junk bonds where you're not getting comp for what your risk you're taking. I'm real curious to hear your opinion on this because I've heard this was a really interesting idea that somebody threw at me. So my understanding is that this junk bond market is call it anywhere from like $10 to $15 trillion, which is just totally insane. Of that amount, I guess $3 trillion of this is in debt that relates back to oil companies.

Starting point is 00:09:27 Okay. And whenever you look at these oil prices, and now they're potentially going to even go as low as the $30 range, they're in the mid-40. in going lower right now. My understanding is all these big oil companies, they are not assuming that risk for that lower price. They had futures contracts locked in. It called it $80, $75 or somewhere around in that price. So somebody basically insured that price point of call it $80.

Starting point is 00:09:52 And now it's down in the $40 range, maybe even the $30. Somebody is eating that cost. And that is at an enormous, enormous value. And it's just a matter of how long. that's going to take the play out of who is that person that's ultimately assuming that risk? Because I don't think it's the oil companies, even though they're getting slaughtered. I don't think it's the big investment banks. I think it's people that are buying this junk debt, and I think it's been nested into there somehow

Starting point is 00:10:20 to the tune of around $3 trillion is the number that I'm hearing. And whenever that comes to fruition and people are going to have to start paying that bill, I think we're going to see something really interesting happening. And I can't help but look at the parallel to 2007, 2008, when oil prices went wild up to $150. It almost seems like that was the ying and now this is the yang. And you're seeing the exact same circumstances play out. And somebody is insuring that price.

Starting point is 00:10:51 And I just don't know who it is. I know it's not me that's insuring that price. But there's somebody out there that is and I'm sure they don't know. And I'm real curious to hear your thoughts on that. So my thoughts are in fixed income is that, you know, people that trade equity are usually pretty smart. People that trade fixed income and bonds are really, really smart. I think it's a way more competitive marketplace and just knowing which ones of my friends went that way versus equity. You know, I just don't want to compete in that space.

Starting point is 00:11:21 There's a lot of nuance because the problem is you're exactly right, like oil services or what have, it could be a great example. But the question is, is it asset backed or not? So, for example, if I own debt on Exxon, you know, that debt's actually awesome because if it's asset backed by what Exxon owns those assets, you know, that could be gold. Where if there's another situation where it's on an oil company, but it's just, you know, on the good faith and credit of Exxon, you know, that's a complete different story. So I think there's, and there's also callability. There's just so much nuance within bonds.

Starting point is 00:11:58 I almost think like making a macro statement while you probably could. In the end, the devil would be in the details on that specifically, I think. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum,

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Starting point is 00:16:17 Back to the show. Yeah. My concern is the long. it stays down at that price, the worst this is going to get. Oh, yeah. Oh, yeah. No, no, clearly. I mean, we took a big energy bet because, I mean, we're value guys and you buy what

Starting point is 00:16:30 everyone hates. And, you know, when prices shoot down and expect returns shoot up, and we know on average, you're exploring that psychology of, you know, oppression and hatred, you know, that's just what you got to do. But clearly, you know, oils at like, whatever, 40, 45 bucks, you know, could it go to 30? Could it go to 20? Sure. You know, is that the marginal cost of extraction for the average player? No, you know, the equilibrium probably needs to be around 75 to 80,

Starting point is 00:17:00 but that could happen next week or it could happen 50 years from now after they're already all bust. So it's a risk-reward, I'd say. Yeah, another thing I want to talk about, and I'm rewording here to value investing into Fs again, is Joe Greenblatt. So Joe Greenblatt is a fantastic writer. I think most of the audience,

Starting point is 00:17:19 they're familiar with his work and the magic formula. And what I'm experiencing right now in my inbox is that a lot of people, they're saying, have you read Tobis book? Or no, I've read Toby's book, Quartzmorsuzebel, and also Tobis book that he wrote with you quantitative value. And they're basically saying, so what do you think about that when you compare that to the magic formula? But actually, I think I want to forward that question again to you.

Starting point is 00:17:46 Because clearly I have some opinion about Greenblatt and also have a some opinion about what you're doing. You shouldn't sound like a threat or anything. I think it's really interesting what you're doing. But I don't know if you could just wrap up your research on Joe Greenblatt's formula. Sure. So in the end, one has to really sit back and think, why does value investing work? Okay.

Starting point is 00:18:12 So when I was a kid and I had my grandmother making me read like intelligent investment and all these other things, I was like, oh, you know, Now, value works because I'm just going to go figure out the DCF, and as long as it's lower than intrinsic value, you know, like over time, values its own catalyst. Okay, that's kind of incarnation one of value investing. Then I start thinking about it. In the end, how you make money in a market is very simple. Front run expectations.

Starting point is 00:18:44 If you know how the market forms an expectation and you know how they're going to have that expectation formed in the future and you can bet ahead of that, you will make money by construction. Because market prices reflect, you know, current expectations and immediately reflect changes in expectations. So then we think back to the value anomaly, how and why it works. and if you look back in the research, going back to La Constrax-Cyfer-Vishny, these guys called LSV, which is a huge asset management firm with $500 billion, they make this point that the reason value works is because investors form expectations that fail to consider or appreciate systematic mean reversion and fundamentals. What does that mean? That means, or what do they find? Not what does that mean? That means that the cheapest securities out there,

Starting point is 00:19:43 their fundamentals tend to all on average do better than expected, the most expensive securities in the marketplace. Their fundamentals tend to do worse than expected, okay? So that is fundamentally why primarily psychology overreaction to bad news, overreaction to good news. That is the so-called value anomaly, period. It's all about price to fundamentals. Now let's go think about something like quality. So everyone likes to think that Warren Buffett, you know, because he kind of changed the mantra from Ben Graham. Ben Graham said buy cheap stuff, margin safety, period. Warren Buffett comes along and says, well, that's interesting.

Starting point is 00:20:28 You know, I hate taxes. I like to compound over a long haul. I'm going to buy cheap, but I'm also going to really focus on quality. Okay. So now we got to ask yourself, we know why price and cheapness works. It goes back to that psychology of, you know, people form expectations that are screwed up because they felt to appreciate muta version of fundamentals. When we look at quality at the outset, before we to say, well, quality sounds good. We got to understand why would that be mispriced? And I would argue that there is no psychology to suggest that quality is misprice in the market.

Starting point is 00:21:07 Everybody knows that Google is a great company. Everybody knows that Procter & Gamble can sell, you know, toothpaste at 50% margin while everyone else can't. So why would you build systems that organically don't have an edge and it doesn't even make intuitive sense that they're going to give you ability to front rent expectation? And you do that by basically incorporating quality at the outset like the magic formula. It's just diluting the performance of it. the anomaly. I really wanted to talk about quality because one of the things that are really find interesting about Greenblatt's formula is because he's saying quality that is returned on capital. Then when I read your work west, you're saying basically that quality is not that important

Starting point is 00:21:56 or you shouldn't just say that's the same as return on capital. And then I read your white paper which is telling us about how you invest in your fund and it actually also includes return on capital. And I'm curious to see, how do you look at quality differently than green blood? Preston, do you want to make comment? I'll answer that question for you. I think it's important to highlight that Wes is most likely saying that based off of a basket of stocks, not individual stocks. But go ahead, Wes. Sorry to do you. Yeah, yeah. What I'm talking about is average effect. So this is a very nuanced point that a lot of people overlook with respect to quality. So what I'm saying is that there's clear evidence based on, and there's also a lot of psychology research suggests that price and cheapness works because of the overreaction to fundamental saying.

Starting point is 00:22:49 At the outset, if I just sort securities on quality, of course, you don't see any sort of spread on average because intuitively, why would that be mispriced? It's like obvious. It's quality. So why would at the outset quality be weighed equally to price to fundamentals when we already know that quality is a price component of value and then price to fundamentals is a, it tends to be a misprice element. Where you want to use quality is it's the ordering that matters. So the magic formula is all about 50%, you know, EBIT to price value, 50% EBIT rock. it's basically 50% quality, 50% price. And that's fine.

Starting point is 00:23:34 It works because it's 50% price. But it actually is diluted because it's 50% quality. Now, a smarter way to do that that's also grounded in actual like evidence and psychology research is get to price first. That's where the anomaly is, the cheap, crappy stocks that everybody hates. Right. Now, when we have two cheap. crappy stocks or what are preceded cheap crappy stocks, but one is, you know, huge debt losing a lot of money and sells at a P.E. of five. The other one is, you know, no debt, you know, maybe not, but they're making money, you know, P.E. of five. Now we can argue, because there's another thing about what they call limited attention to fundamentals. And this is like the Petroski work where I say, okay, now we've got cheap. This is the anomaly, but within that,

Starting point is 00:24:30 people just throw the baby out with the bathwater and don't pay attention to fundamentals amongst those most hated. And now we can use that in a beneficial way, not a way that like shoots ourselves in the foot like the magic formula does. So I totally agree with that analysis. And I think it'd be really interesting to see how many of those companies that aren't highly leveraged that are in that PE ratio that you're describing of like a five. How many of them have a change of management that causes their price to come back up. I'd be really curious to know what that percentage would be as you'd be doing that analysis. And I don't know if you've done that research or not, but I would think that it'd be extremely high.

Starting point is 00:25:10 Well, yeah, so I can tell you something we have done is going back to that data mining we did on valuation metrics, popped out, you know, enterprise multiples or just EBIT TV, basically what we use. Toby talks a lot about that or perturbations in his book Deep Value. you, you know, we actually went and said, well, you know, we don't want to just be data miners. We want to be evidence-based investors. And one of our hypotheses is that it is kind of also related to deep value is cheap EBIT total enterprise value stocks are not just cheap to maybe like some guys like me or you who are in the public equity, but private equity guys focus on those sort of metrics, right? Because they got to buy this whole company. So one of the things we said is, I wonder,

Starting point is 00:25:58 if the most, if you just sort securities into like, say, your most extreme PE stocks, like, or cheapest PE stocks and your cheapest, you know, EBIT, toy enterprise value yield stocks, is there a higher propensity for takeout from private equity is much higher for those extreme enterprise, cheap enterprise multiple firms than cheap PE firms? because, you know, that's how a lot of times you're winning in public equities. You're buying cheap equity that the outside guys want. And then you get your premium on the takeout or whatever. So I think it's certainly the case that, you know, private equity is a good person to sell out to if you buy cheap public equity stocks. So, Wes, one of my biggest concerns moving into this next crash, whenever that might be, and we have no idea when it's going to be. But whenever it does happen, one of our biggest concerns is that people are going to get back into the market too quickly. The reason that we feel that equities are going to maybe get punished a little longer than they did during the 2009 turned down is because the Fed doesn't have the tools that they had at their disposal back in 2008, 2009.

Starting point is 00:27:10 Back then, they could lower interest rates and they could do QE. Now they're pretty much left because I don't think interest rates are going to get high before the next crash. And I think a lot of people would agree with that. you already have Carl Icon putting on credit default swaps and things like that, which, you know, he's not going to do that unless he thinks it's going to be in the near term. But with all that said, we don't think that the Fed has a lot of tools at their exposure except for quantitative easing, which would devalue the dollar. So my concern at this point is how useful and how much of that can they do without drastically putting big waves into the market with real estate and other things? and do you maybe see commodities as being a really good play in that interim between market downturn and time to get back into equities as you wait for that to happen? Sure.

Starting point is 00:27:58 So are you guys familiar with managed futures at all by chance? No, I'm not. Okay. So let me explain how we deal with this problem. So our issue is after thinking long and hard, we realize that we don't know. anything and have no edge in trying to predict exactly whether we're going to go hyperinflation or hyper deflation. So if you can't predict, you need to build systems that front run these things. And you basically use the predictions of the marketplace to kind of help you to move your

Starting point is 00:28:34 assets. So one of the tools that we leverage is the concept of managed futures, which is in the typical most famous managed future construct is just short-term trend falling. So, an example, the prices above the 100-day moving average, you're long, otherwise you're short. We do that system across the commodity complex and the bond complex across the globe. Idea being is that if all the sudden, some you said and mentions, like there starts to be a trend where bonds start, you know, blowing up or maybe they don't. Maybe they stay flat, but now all of a sudden we're getting like an inflation expectation problem. You're going to start seeing that movement in the underlying commodity contracts. Short-term trend falling is going to get you into that trend early. And if it

Starting point is 00:29:27 actually expresses itself, you're going to make a ton of money and essentially it serves as like a portfolio insurance because it's going to protect you whether we go into an extreme bond scenario where we become Japan and it's going to protect you if we go into extreme, you know, commodity scenario if we become Zimbabwe. And we just leverage managed future technologies and kind of structures to kind of front run and get ahead of those trades. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:33:14 All right. Back to the show. So is there something that the individual person could access to help them with doing that? Yeah. I mean, there's man. AQR has, I mean, there's managed products you can do. There's, you know, AQR has a mutual fund. There's FUTs.

Starting point is 00:33:31 It's like some ETF that basically just. short-term trend following. You can also just do it yourself. I mean, just go to go into account interactive brokers, learn a little bit about futures trading. I mean, it's a little bit complex, but you could do it yourself or there's a lot of different managed future offerings out there.

Starting point is 00:33:49 Yeah, I mean, that's what I mean, or just, or you can just trend follow across like DBC and, I don't know, IEF, like the I share's 10-year bond and, you know,

Starting point is 00:34:00 some generic ETF commodity complex and just, do kind of a simplified version of trend following. That's what I would do to deal with that problem. Okay, Wes, so let's go back to ETFs in general. And actually,

Starting point is 00:34:17 I would like to talk about your ETFs. As I can see right now, you have two active managed ETFs. You have one that is US and one there is international. I'll make sure to link to the white paper that you've been reading about the philosophy behind it, but

Starting point is 00:34:33 Perhaps you could just break it down to us. I know you have like five somewhat simple steps that you go through and find the stocks you ultimately want to invest in. Sure. Yeah. So for the two value ETFs at a real high level, what we're trying to do is simple. By the cheapest, highest quality value stocks, do it at an affordable price, tax deferred. Period. With tons of tracking error that we're not trying to.

Starting point is 00:35:03 benchmark hug whatsoever, five, 10 year horizon. So how the heck do we do that? Well, going back to this outline of this five-step process, and I'll put some numbers on it. Let's say the universe has a thousand names, mid-large, liquid, domestic equity that has shares outstanding. We actually trade. So we have a thousand names. Step two is one of the problems with value investing is catching that proverbial falling knife. It's the firm that's cheap because there's a good shot it's going to go bankrupt in the next six months or it's cheap because the numbers are fake. So step two is all about forensic accounting, leveraging technology from various academic

Starting point is 00:35:48 research papers to try to forensically identify who might be that falling knife. And all we're going to do there is if you pop as the worst 5% relative to all our security, even if you're Walmart, I don't care, we're booting you out. It's just a red flag. Okay? And let's say that brings us from 1,000 names to 900. So now we have a universe of 900 names that we've at least tried to eliminate anything that could be like a total permanent loss of capital. Is it going to be perfect? No, but we need to do something. Then step three, because we want to exploit the actual value anomaly, we get down to cheap fast. So we want to look at that top decile cheap based on enterprise multiples.

Starting point is 00:36:35 So now we're down to 90 securities. Once we have these 90 securities that are the cheapest securities in the universe that literally everyone pretty much hates, which we like, our job is then to try to identify which ones of those are the highest quality. Because we think that those firms that are cheap but also have evidence for high quality have a higher shot of ability to mean revert back to their previous life form than firms that are cheap and like totally pieces of crap. And so if we have 90 securities, step four in that quality section, we're going to split it, get down to in this case 45 securities. And then after training execution and all the realities of the marketplace because of liquidity, maybe we get down to 35 to 40.

Starting point is 00:37:24 That's the portfolio we hold. Yeah, I'm actually a very curious. about the number of stocks you're holding because I think I looked it up and it was actually very accurate to what you just said. I think it was 41 stocks or something you hold that you're having in the in the US. I'm curious about the number of stocks. Like why you want to say something like 40? Because if you think about, especially in terms of something like greenblatt, some extent I would think that you might want to have less stocks. I don't know how many. if you look at it from, say, an academic standpoint,

Starting point is 00:37:56 you would say something like 20 stocks, 25 stocks, because that means that you don't have exposure to the individual stock, but you have like a generic stock market exposure. So I'm thinking, why not have fewer stocks and then amid some of the transaction costs and perhaps also then be more heavily invested in the cheaper stocks? Yeah, no, I totally agree. like there's there's kind of a sweet spot there between say 20 and 40 or 50 where diversification

Starting point is 00:38:28 benefits kind of go away. The primary reason, frankly, is we're subject to the 1940 investment company act and there's just limitations. So you can't have over 25% in a given industry, for example. You can't have over 5% a given name. And even though we could kind of get down to the margin on that, you don't want to do that. You want to be. build a lot of buffer where, you know, if you're at 4% and the limit is 5, you know, that's just kind of bad. You don't want to run a foul basically of SEC rules. So we kind of, we try to optimize given regulatory regulation constraints, basically. All right, Wes, so this is one of the questions we really like to ask everybody that comes on the show. And if there's only one book that you could

Starting point is 00:39:16 recommend to our audience that has really had an impact on you, what would that book be? I'm sure someone said this, but I'm a huge fan of Dan Conneman thinking fast and slow, just because I think psychology and understanding the human mind and how it forms expectations is basically investing. The rest is details. So I think that book is maybe not very exciting, but a good book about learning about how the human mind actually works. I love that.

Starting point is 00:39:47 I'm so happy you said that, Wes, I think it was a few days ago, Preston, and I, we were email and begging forth about the, what are the next books we're going to do? And that was actually on that. And we didn't even plan this. Yeah, yeah. No, it's a, like I said, I have it sit by me. It's more of a reference book because it's pretty boring. If you've ever read, it's like 800 pages, but I just think it's a great book.

Starting point is 00:40:09 And that guy's really smart. I love that. That's too awesome. Okay. Yep. So everyone knows we'll be reading that book. We'll be doing an executive summary. People that sign up for our mailing list, get our free executive summary of all the books that

Starting point is 00:40:21 we read. So that one will be in the future. Do you know the timeline when that might come out? It's going to be in a few months, though. Yeah, it's probably going to be eight weeks from now. It's going to be four books from now. So that's probably like something like eight weeks. All right. So that's coming up. All right. So what we're going to do right now and we're going to keep Wes on the call here so that we can answer this question together with all three of us. And we're going to take a question from our audience. And just so you know, Wes, we have people that record questions and then we play them on the show and then we provide. feedback and our best answer that we can muster.

Starting point is 00:40:55 And this week's question comes from Kevin Karahara, and here we go. Hi, Preston and Stig. Thanks for all the hard work that you do. I'm learning so much from your podcast. You both mentioned the importance of questioning your own beliefs or sort of self-interrogation in order to get the optimal answer. That being said, what are your views on the practice of growth investing as opposed to value investing. Are there any virtues that can be drawn from growth investing? Thanks and keep up the good

Starting point is 00:41:24 work. All right, Kevin. I am so glad we have Wes on the call because I think he could probably give you a lot better response than I can. I don't personally do any growth investing, so I'm probably the worst person to ask that question too. I don't know about Stig's opinion, but let's throw it over to West first and hear what he has to say. And we're definitely putting him on the spot because he had no idea we were going to play that question. Let's hear what he has to say. Yeah, no problem. I've heard it all at this point. So just so you know, we have two firm beliefs, systematic decision making and evidence-based investing, and that evidence-based investing creates a problem when we start talking about growth-based investing. It's just, I can't find any evidence to suggest

Starting point is 00:42:10 that it actually works over the long haul. And so if we can't find evidence that it works, then we're just not going to do it. I understand why a lot of people do do it because it's way cooler. You know, investment banks want to promote these names for various, you know, service offerings or what have you. But we just don't participate

Starting point is 00:42:33 because we have belief in evidence-based investing and I don't have any evidence on hand to suggest that it works. So not that it's not that. it's bad. It's just for me personally, that's what we believe in. So we can't do it. Yeah. And Kevin, I think that's a, I think it's a great question because you're saying other similarities. And basically when we talk growth investing and value investing, it's kind of the same thing. And then it's not. It's kind of the same thing because basically

Starting point is 00:42:59 you are, as is also made it before, discounted the future cash flow and compared to the price. Now, the problem with growth investing is that you are reliant on having high. growth rates, which is just a very speculative way of investing compared to value investing, which President I talk about, and what also Wes is doing in his fund. And I just want to say that when you hear these stories about people that have been rich from growth stocks, and one name that comes to mind would be something like Elon Musk, because I'm reading a book about him right now. But he has not become rich because he bought a lot of great growth stocks.

Starting point is 00:43:38 You know, these guys that usually get rich of growth stocks is because they created the assets and then made the IPO and sold the stocks. It's really, really hard to find people that had just found really good tech stocks and just invested in that. That's really hard. And Wes was also talking about empirical evidence. I found a great article from Fidelity, and I'll show you'll show to link to that in the show notes. And if you look from 1980 to 2010, so both you include that.

Starting point is 00:44:08 it's 31 years. You can actually see that for lots cap stocks, so large cap growth compared to large cap value, large cap value outperform 1.7 percent annual compounding, and the small value cap is 4.2 percent. That's massive. If you have $10,000 to invest in, that's $188,000 compared to $601,000 over 31 years. So it's really a massive difference. if you look at the empirical evidence between growth and value. So, Kevin, fantastic question. We're so excited that you recorded it for us. For anybody else out there, if you want to get your question played on our show, go to

Starting point is 00:44:49 Asktheinvestors.com, and you can record your question there. And for Kevin, we're going to send you a free signed copy of our book, the Warren Buffett Accounting Book, for asking your question. So we really want to thank Dr. Wesley Gray for coming on our show today. If you haven't noticed, the guy knows what he's talking about. It was pretty amazing to hear some. of his responses to these difficult questions. And, Wes, thank you for taking the time out of your busy day to talk with us on the show.

Starting point is 00:45:16 No problem. Gentlemen, really love what you guys are doing. And yeah, our mission is to empower investors for education. Wes, if people want to find out more about you, where can they find you and talk about your book quantitative value, just kind of give people a handoff so that they know where they can read more about you. Best find is just go to alphaarchitect.com and click on the blog. and if you want to buy the book, we actually sell it. We bought a whole bulk buy from the publisher because we don't want to make money on the book. And if you click on a link from our website, you can buy it for $19.99 as opposed to like $50

Starting point is 00:45:50 or whatever the heck the publisher wants. So alphaarchitect.com. And if you buy it to the link on our website, you know, it's $1999 on Amazon, which is basically our costs. Awesome. So what we'll do is we'll have a link in our show notes to that, what, is talking about and anything else that we've talked about during the show. Just go to our show notes. You'll see that all there. And then you can hop on over where he's offering it for 1999. So, Wes, thank you so much for offering that up to our community. I know that they're going

Starting point is 00:46:18 to greatly appreciate that. Sure. Appreciate it. All right, guys, that's all we have for you. And we'll see you guys next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.theinvestorspodcast.com. Submit your questions or request a guest appearance to the investors podcast by going to www.w.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application.

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