We Study Billionaires - The Investor’s Podcast Network - TIP176: Momentum & Value Investing w/ Dr. Wesley Gray (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. All right. So on today's show, we bring back a popular guest, Dr. Wesley Gray. We first got introduced to Dr. Gray through a member of our mastermind group, Toby Carlisle, because they co-authored a book together, and the name of the book is quantitative value. The book is a popular read among value investors because it takes decades of data and provides clues into the best metrics to determine when companies are oversold and potentially undervalued. This is commonly called backtesting.

Starting point is 00:00:28 The interesting thing about Dr. Gray is that he's also conducted extensive research into momentum investing as well. And so based on this research, both on the value investing side and on the momentum side, he has taken a really interesting way to invest, which is a hybrid approach to value and momentum. So on today's show, we're talking to Dr. Gray about some of the interesting trends he's finding in the market today. We also talk about areas where an investor can improve or challenge their current belief structure. And finally, Dr. Gray talks about the way he accounts for systematic risk and how he might hedge a market during challenging times. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right.

Starting point is 00:01:30 So welcome back to the show. Wes, man, we always have so much fun when you come on the show and chat because you always just have a tendency to show us different ways to look at things. So we are very excited to have you back on the show. Thanks for taking time out of your day to be with us. It's always an honor. I'm humble to be here again. Well, let's talk about, I'm sure everyone wants to kind of hear West Gray's opinion on where we're at in the market because the last time I checked, this thing's starting to go parabolic. and I'm just kind of curious what you're thinking. Sure.

Starting point is 00:02:05 So there's a difference between what I'm thinking and what I actually do. Because as you know, I am a quant nowadays. Yeah. I'm a fundamental dude wrapped in the quant's, you know, equilibrium here. So what I think is the markets are insanely overvalued and it's crazy. And I've been expecting to crash for five years now, but that hasn't happened. But that's why I don't think I use machines and we're big trend followers. So to the extent, you know, markets are moving and trending, we own it essentially buy

Starting point is 00:02:40 and hold. So we've, I mean, to the extent these markets keep trending, we're in. You know, evaluation is doesn't really, isn't relevant to how we think about owning data risk, basically. So, Wes, I guess what you're saying might come as a surprise to a lot of people who have followed your early careers. I mean, you literally wrote a book about value investing. So whenever you're saying you're doing trend following, is it only on value picks or is it basically on every pick up there, even though they have, say, high multiples?

Starting point is 00:03:13 Yep. So it's a great distinction to make clear. So at the stock selection level, we're buying cheap, high quality. Right. And right now, like in the U.S., you know, the average EBIT yield on our stocks, which is kind of how we look at the market. So basically you're, you know, essentially your operating income over your enterprise value. You know, that basket's probably around 10 to 11 versus the market, which is around five. So we're buying cheap stocks straight up because we're hardcore value investors.

Starting point is 00:03:41 But embedded in any investment, unless your market neutral, is the beta bet, right? If you're long stocks, whether they're cheap stocks, expensive stocks or anything in between, if, you know, you have market risk embedded in there. and how we think about timing the market risk component of what we do is based on trend. So, for example, we buy the cheapest dirtball stocks out there that we can find, and there's plenty of them, even in today's markets. But how we think about whether we want to be long only or hedge has nothing to do with valuations and everything about trend.

Starting point is 00:04:18 So right now, we're long, cheap quality stocks, and we're not in a hedge position. We're not long, short, or market neutral. So let me ask you this. So let's say the trend starts to shift. Let's say we're three months, four months later or a year later, whatever it is. And you start to see a statistical change in the trend. First of all, what would you, like for the market, for you to start saying, hey, this trend is over or we think this trend is reversing? What are some of the things that you're looking at to be able to make that determination?

Starting point is 00:04:51 It's very simple. So we use basically two rules, and we have 50-50 them. And we got a 20-page blog post about it. But first one is just long-term moving average. So the current price on S&P, like if we're talking about domestic markets relative to a 12-month moving average, if it's above, great. Keep owning value stocks and momentum stocks. If it's below, that signal says we need to be hedged.

Starting point is 00:05:18 And then the other signal is it's called time series momentum or absolute momentum. And we use, it's, you know, Gary Antanachi, if you guys are familiar with him, has a great book, Do a Momentum, where he kind of talks about this concept. And we use one element of dual momentum. It's just literally current cumulative return on S&P relative to the cumulative return on the, you know, T bills, basically. If it's positive in, otherwise you're hedged. And so we have those two signals.

Starting point is 00:05:49 We'll assess them every month. if both say good to go, we stay long with whatever we're owning. If they, if they're 50-50, we're 50% hedge. And if they're both say, hey, you know, it's time to jump off a bridge, then we'll fully hedge the portfolio, basically. And you're completely short at that point. Yeah. So we'll be long, we're always long value and momentum names,

Starting point is 00:06:13 but we'll start layering down passive shorts like SPY or EFA or we'll use futures to kind of pull out the beta component of the bet. So essentially be marked the neutral. So what are the numbers for this past month when you did the analysis, just so the audience can kind of understand what you mean by what you're saying there in actual numbers? Sure. So I don't have the exact, you know, figures at the top of my tongue here.

Starting point is 00:06:39 But there has not been a trend break in either international or U.S. equity for, I think, at least a year and a half at this point. And that makes sense because obviously we've been in a massive trend. And so we would have to have a fairly substantial crash and it would have to happen fairly quickly and robustly to hit a trend rule, basically. Now, why do you use one year moving average? Why not 200 days, 100 days, or say 50 days moving average? So basically, it doesn't really matter. out of sample, whatever we're using currently is almost, there's a 100% probably it's not going to be the, you know, the one we should have used.

Starting point is 00:07:23 But all we know is that ex-annie and all the research we've done on this, as long as you're in the general genre of long-term trend, you could do 200 day, you could do, you know, 356.256.255 days. We don't really care. They're all about the same. There's a lot of noise around the signal. but it is robust to the concept. So we just use that because it's simple, it's easy to communicate, and it's in the ballpark of, you know, it's evidence-based. So that's what we stick to.

Starting point is 00:07:55 There's no science. That's more of the art of quant signals. I would think that you would get yourself into long-term gains. You would limit your short-term gains by going with a longer moving average, like a year-long. Like if you were at a 60-day moving average, I would think that you would incur a lot of short-term gains,

Starting point is 00:08:13 because you're constantly buying and selling as it would move in and out of that out of that average. Is that correct? Is that a better? That's correct. And, you know, it really depends. Like, trend following is not an end-all be-all. And for all intents and purposes, a long-term trend-foiling metric is basically buy-and-hold

Starting point is 00:08:32 because it's long trend. And so you are kind of a buy-and-holder most of the time. And if you do shorter trend models, like the time in the market, to your point, you know, it's much more reactive, but it's also going to cost you a lot more infrictional cost taxes. And it's unclear to me, it's any better for what we're looking at it, which is tail risk protection versus a long-term one. So why not use the one that, you know, is not as crazy and causes you as much brain damage all the time to use it? So now, so this can be applied when you're doing this stuff. I mean, because you're really

Starting point is 00:09:06 talking just straight price action is what you're paying attention to for hedging yourself. Yeah, just to be clear on that. Because I understand what I'm saying is heresy to fundamental value investors, which I still am that person, that shell of a person I used to be. So what's important to understand here is that there's a difference between stock using value to pick individual securities. And when you're picking individual stocks, you want to be cheap and stay cheap, right? But then when you start getting into the world of macro and timing market risk, i.e. overall market valuations, there is no evidence that I know of that's very robust that suggests that just because I know today that the market's at a 99 percentile valuation metric, that it can somehow tactically help

Starting point is 00:10:00 me outperform like basically a generic buy and hold proposition. And we've tried a million different way to cut that cake. It's just empirical fact. Here's what we do know. The one thing that can help you improve your risk return profile relative to buy and hold is trend. And what's really important is that trend is what you want to pay attention to, especially when valuations are top heavy. So you don't want to time your allocations based on valuation alone, but to the extent that the trend sucks and valuations are high. That's the, that's when you definitely want to get the hell away from the market if you want to take the risk of, you know, market timing, which I'm not saying it's perfect. But if you wanted to do it, that would be the, that would be the recipe for success, at least historically.

Starting point is 00:10:53 Do you find yourself participating in other markets? So we've seen that commodities have just been crushed for the last three or four years. That's had a very, uh, bottoming effect over the last year where they've been really flat. And you've seen oil come back quite a bit recently. So I'm curious, are you seeing a reversal? First of all, do you participate in other markets outside of equities, call it commodities? And if so, I'm kind of curious to hear your thoughts on that trend reversing at this point, because it appears, and you talk to a lot of macro people, they're all saying that they're seeing a reversal in the commodities sector.

Starting point is 00:11:30 Sure. So, yes, we basically trade or have traded anything that you can possibly try. trade. And so beside our equity business, we are a CTA and a CPO. We trade managed future. So we trade every future on the planet, basically. And again, there, we are focused on trend and then the carry trade. So looking at backwardation contango. So, and obviously, you know, the trend, you know, was kind of mixed and all over the place. But recently, you know, you're pretty much long, most of the commodity complex, especially in energy and the metals. And And it's also backwards in the energy complex, which hasn't happened in, you know, God knows how long.

Starting point is 00:12:10 So, I mean, from a quamp perspective, it's great. And even from a qualitative perspective, if I can own, you know, trending contracts that are also going to be backward versus contango. So I capture roll yield. I mean, the wind is, you know, at your back finally versus what it has, has been in the past. Explain to the audience, the backwardation piece here, because some people might not be familiar with what you're saying there. Sure. So in futures contracts, you know, the century return is determined not really just necessarily by the spot movement, but also by kind of the what they call the term structure of the future. And so to the extent that the spot price is above the future price, that means the future is in backwardation. And so what's going to happen is over time, the future is going to roll up to the spot price.

Starting point is 00:13:07 And it's called capturing kind of the roll yield. Whereas if you buy, if the current spot is below the future price and you buy the future, that future price will slowly kind of decay down to the spot price, which means you got negative role. And historically, at least in like oil futures, for example, like last 10, 15 years, you've always been, because you don't own a barrel of oil, you own a future in oil typically, right? When you buy any sort of investment product out there. And so you kind of own obviously the risk of the spot price that comes into play. And just like, or like I said, our last recent memory,

Starting point is 00:13:45 oil contracts has always been contango. So you're not, you're not only need oil price to move up to win. You also need it to overcome the negative role yield that you've been facing recently. But now let's just say the spot price stays the same, you're still going to have a positive return on that investment because now you're capturing roll yield that's positive, which is cool. Awesome. 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.

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Starting point is 00:18:01 Sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. back to the show. Would you say that there's statistical significance behind the momentum change in commodities in general, or would you just say that you're starting to see it break through some of the moving averages that you track? Yeah, so for sure. So we run both long trend models, which are basically like 12 month type ideas. Yeah. Yeah. And also run like a short term one that's much

Starting point is 00:18:39 more, you know, high frequency. And it's a 10-100 crossover type model. So it's you literally compare like the 10-day versus 100-day. But if you look at it, you look at the 10-day, but if you look at Look at like the energy sector, for example, I mean, it's pretty much raging on everything. I mean, it's like, I don't even know it's price to have any bucks, 65 bucks right now or something, depending on which contract you look at. So I mean, it's all signs are green from a trend perspective and right now on a carry perspective. Same thing with the equity, like valuation-based timing on commodities is a noisy, tough game. But, you know, if you put a gun to my head and said, hey, is our Commoddy's a better bet now than they were, you know, three or four

Starting point is 00:19:22 years ago when they were the coolest thing, you know, since sliced bread, I'd say probably better now because everyone hates them and they got trained and they're backwards. So, you know, the natural being a contrarian in me, you know, I'd say commodities seem to be an interesting place to be it. Yeah, Jeff Gunlock. I mean, he's really tooting that horn. I mean, he's screaming. That's the play of 2018. as commodities. Yeah. Well, I mean, I'll tell you what, man, like in our managed futures program, again, it's just a quant system, but this thing's kind of built for crisis alpha. So it's kind of saying we're probably moving to an inflation world by saying we're short the entire, you know, sovereign bond complex. And we're kind of long, a lot of the metals and energy sector. There's a mixed

Starting point is 00:20:13 signal in kind of like the weeds and the softs right now, but in general, I'd say it's saying, hey, if there's going to be a crisis or a surprise, it's going to be an inflationary surprise, not a deflationary surprise. At least that's what's being shown in kind of managed futures land at the moment. So you briefly hit on this. And it really takes me to the next point that President I wanted to cover. How do you look at the bond prices right now and the trend there? because at least some of the billionaires that we follow have made some really crazy predictions of what's going to happen. Yeah, I don't know what the billionaires are saying,

Starting point is 00:20:50 but I do know that a lot of billionaires have lost a lot of money over the last four to five years because they've been saying that, you know, yields are going to go up forever now and they've been wrong. However, that's why we don't think we're billioners. We just follow models. And right now is finally a point in time where, you know, long duration, you know,

Starting point is 00:21:10 credit, or not credit, but long duration sovereign bonds, the trend sucks. And so we're starting to get short. And so now it's a situation where they've been arguably overvalued forever. But as I mentioned, that's not a great timing mechanism. It's a sucker bet. However, when you have assets that have terrible trend and you have a sense that they're systematically overvalued, now might be the time to say, hey, you know, maybe fixed income. you know, is not really a great place to be. So on the short end of that, at least 10 years and shorter, there might be a reversion happening.

Starting point is 00:21:48 I don't know if you see this the same way, Wes, or if your models will tell you otherwise. So I'm very curious about your opinion on this. Oh, yeah. I mean, we only, we track all the 10-year sovereign bonds across the globe. I mean, they're literally across-the-board short, which means they all have terrible trend,

Starting point is 00:22:06 i.e., the prices have been going down because the rates have been, you know, ballooning. So if you're someone who's a long-term bond bear, the trend is kind of confirming that. And I'd say if you're going to time that bet and, you know, take risk out of that bucket, this would be the time where it probably makes sense versus, you know, last few years where it's been, you know, getting in front of a steamroller, basically. So if all that money's coming out of the bond market,

Starting point is 00:22:35 let's just say that that theory is true. And that that trend persists and it moves forward for the next six months. And all that money comes out of the bond market. Well, I mean, in general, there's always equilibrium, right? So even when bonds are getting sold, someone's buying them. So the money's still there. It's just someone else's owning it. So I'm not, that's actually a really, it sounds like a simple question.

Starting point is 00:22:58 That's actually a really tough question. And frankly, I don't know. The thing I like to ask really smart people like yourself, every time I get a chance to talk with you is, at least for the last, quarter has been commodities because they've been just punished so badly over the last three years where everything else has just performed so well and then we're

Starting point is 00:23:18 seeing the bond market start to turn itself inside out so and I mean when you see the the equity market going parabolic you're exactly right this trend has not been broken whatsoever this thing is still going strong and it might keep going strong yeah you got it and you've

Starting point is 00:23:34 kind of hit on what I call poor man's managed future What I would recommend is if I wasn't going to do a 60-40, because my advisor is just telling me that and charge me 1% to do that, even though it's bad advice. For my 40, I would say, listen, I don't know if we're going hyperinflation or hyper-deflation, but I do know that commodities in long-duration bonds are kind of the barbell trade amongst those. And I'm just going to trend follow them. So if commodities start getting perked up a trend, I'm just in, you know, treasuries or not, I'm going to, start getting moving in commodities from my diverse firing away from duration bonds and then vice versa if the trend you know tends to drift the other way and that right there is kind of a if you want to

Starting point is 00:24:19 have a simple 6040 but have protection in that 40 that's not just deflation asset protection yeah you'd want to use commodities and bonds and just trend follow them across whatever one's working best so how does the tax cut play into this i mean is giving the stocks it seems like a lot of momentum. Is the markets so much in momentum that it doesn't really add anything or how do you guys look at it? When we're talking about macro level stuff, we focus on trend exclusively to the extent, you know, and obviously that's in the, it's in the price. Like the market's telling you this is worth a lot, which is why prices keep moving up. So would be in that trend because it's probably the case that I imagine the markets don't even fully appreciate just how big that could be.

Starting point is 00:25:08 Now, but, you know, that's just also pontificating there. And we just focus on momentum. Now, at the individual stock level, like in value land, the reason you buy cheap with margin of safety is you bought cheap with margin of safety and anything that could potentially be good has a huge spike. So that tax bill was great for value people because value guys are buying dirtball retailers and people that tend to pay a lot of high marginal tax rates. And they just basically got their net income doubled because they go from whatever a 40% marginal to 20.

Starting point is 00:25:45 I mean, that's a big deal, which is why like a lot of kind of securities we've owned, which have been suck and win of just, you know, they're on a ripping tear. But that's more a function of just if you buy cheap with margin of safety and the wins shift and you get lucky, you know, when they bounce back with that news, which in this case was favorable, you know, they go rip it. But I could have never predicted that. I didn't. My only thing is just buy cheap and that works. So other than that, we don't really incorporate it into our thought processes that much, to be honest. So, Wes, I want to talk about one of your ETFs. Wes has a, your company has an ETF. It's QVAL, QVAL, QVAL, and this is,

Starting point is 00:26:27 correct me if I'm wrong, if I'm explaining this wrong, but this ETF is basically purely based off of your book quantitative value that you did with Toby Carlisle as far as EBIT to, uh, enterprise value is how this is making its selections. Is that correct? Yeah. For all intents and purposes of the big muscle limits, you got it. And it's by the cheapest, highest quality stocks, hold with conviction, don't closet index. And the cheapest is, to your point, enterprise multiples. And then, and that's kind of the core driver of what we do. But then within the cheapest dirt balls, we obviously want to identify the highest quality of the cheapest. So, and this is an area where I think there's a little bit of disagreement,

Starting point is 00:27:12 probably with Toby, but, you know, where we kind of like cheap, but we also do want to have an element of quality in there. But, I mean, where Toby just likes it cheap. Yeah, he just like to. He just likes it. Yeah. I like it cheap too. But I am a believer that, you know, cheap with, you got to be cheap, but, but added a quality element in there is also, at least for our context important, but, you know, if you just buy cheap, too, that's also perfectly reasonable approach, just, you know, different strokes for different folks, I guess. So it's interesting because whenever I look at the performance of this compared to the S&P for the last year, you guys have outperformed the S&P 500 with this thing. But if I go back

Starting point is 00:27:56 to Inception from whenever it first started, you guys are underperforming because you went through this period in 2015 that was just, it was really strange. Like you can see that everything is very closely correlated for the most part to the S&P 500, except for this one little tiny spot in 2015 through really kind of the second half of 2015. And if it wasn't for that, you guys would be, you guys would be beating it since inception. I'm just curious if you know, like, is there a way that you can explain what happened in during that six-month period of time?

Starting point is 00:28:32 Or is it just how the numbers shake out sometimes? Yeah, so to give you a little further history, so that QV strategy, we've actually been running for five years, because we got that seed in SMAs in 2012. And so we've always done this concentrated value strategy. We launched that like at the end of 2012, and it went on an, like all deep value guys, it went on an epic rager, right? It was like, we were amazing. And then we got this bright idea for tax reasons, like, hey, we should launch. this whole ETF deal. And of course, you know, well, I have perfect timing in my life. I also launched the hedge fund back today, September 08. We launched this ETF in late 2014, about five months before

Starting point is 00:29:20 one of the most epic drawdowns ever in the EBIT, you know, value factor killed by, you know, a lot of just, you know, in the path of Amazon's war machine. We're just, yeah, being in bad retail, that's what have you. But it just so happens that the ETF came up and a track record just started at kind of the pinnacle right before it about collapsed. And then to your point, like the last year, you know, it's been on an epic rager where it's like destroyed the S&P. But that's just the nature of value. You're going to look like a total genius sometimes. You're going to look like the biggest idiot on the planet sometimes. And the only thing we know is you got to just hold for a long haul and be willing to be very dangerous.

Starting point is 00:30:04 different, if you plan on, you know, having even a chance of winning over the long haul. And you've seen that empirically in the QV system. I'm curious if you have an ETF that you'd be looking that would do kind of a hedging strategy. Is that something that you can even do with an ETF? Can you, I don't know this. You can. So, I mean, we run one that has like a trend falling component to it where it's, you know, it's long, you know, the securities, but to the extent the trend starts not doing great, we'll start layering and hedge. It'll kind of move to more like a market neutral stance. So it's kind of like a hedge fund strategy basically in, you know, an ETF wrapper, which, again, we do that for tax reasons. But it doesn't, but it doesn't do inverses at that point.

Starting point is 00:30:51 It won't go. No, it doesn't. Inverse, it literally short because inverse is basically too expensive, capital and efficient, and frankly, in my opinion, that's just stupid. I understand why people sometimes do it in an IRA because you're not really allowed to short, but it's much more cost effective if you want to hedge to either short, sell a future or sell like SPY short as opposed to buying an inverse because that's what they're basically doing, but they're charging you like whatever it is, 1% and just, yeah, it's just not a smart idea. It's much better to do it, you know, directly. And there's a, there's a few other, you know, Pacer ETFs have some pretty cool products that can go to hedge status. I think you're going to start seeing that

Starting point is 00:31:37 that's going to be a new frontier where right now in ETF land, kind of the product innovation's always been, you know, originally was just closet indexing. And then they had a little small, smart beta factor tilt, but basic closet indexing. We kind of led the frontier on doing concentrated factors. I think the next frontier is going to be kind of basically moving all the hedge fund type strategies and their kind of unique risk profiles into the ETF wrapper, which is, you know, going to be great because it'll be tax efficient and more accessible, it's cheaper costs for, you know, broader base of investors out there. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect

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Starting point is 00:35:35 So let's take a step back from the big markets and the big movements in the markets that we're seeing right now and talk about the individual invest and perhaps to just starting to get their feet wet, what do you think, Wes, with your experience, is the two biggest mistakes that you typically see this vest to conduct? And what can they do to correct them? The biggest one is just the too good to be true problem is a lot of people that get in the vest and they get real excited. And like Bitcoin is a great example. They're like, oh, this is easy. You know, you just buy this thing. It goes up 1,000%. So just the number one mistake is just not understanding that when you go into a market, you are fighting with grizzly bears and 200 IQ people

Starting point is 00:36:23 that, you know, they're trying to feed their kids. So it's super competitive, super hardcore, and going in with the expectation, it's going to be easy or there's some, you know, kind of magic free lunch out there, I think is the number one mistake. And then kind of on the flip side of that, The number two mistake is that if you want to be disciplined, if you've got the right temperament, and if you've got the kind of emotional capability to not succumb to crazy behavioral biases to assume that you can't beat the market. So it's kind of an irony. Like on one hand, assuming you can beat the market and it's easy money and everything's too good to be true,

Starting point is 00:37:05 let's just do it. That's one problem. But on the flip side, if you do have the temperament, just assuming, that the market's perfectly efficient and, you know, what's the point is also kind of stupid, you know, if you have the temperament. So those are kind of flip sides of the same coin, but they represent two mistakes that a lot of people just get into business or just starting succumb to, I think. So to take this discussion further, say that you have this camp of hardcore value investors, you know, the Warren Buffett investing philosophy type. You know,

Starting point is 00:37:41 they're looking straight at the fundamentals, you know, like Preston and I are doing, and perhaps not looking too much at the momentum, the trend, and what's happening in your alley. What is our biggest mistake in not considering your vantage point? Well, so first of all, just want to clarify that just because I personally believe in momentum and trend, I don't, that's something that I understand that process. I have the confidence in it, and I have, because I have the. confidence in it. I personally have the emotional ability to stick to it, but it is totally inappropriate for people that just think it's total baloney. So that's cool. And it's not,

Starting point is 00:38:20 it's not me telling that's what people should do. It's just that's what I do. It's not appropriate everyone. So, so it's kind of a, it's kind of a tough question. Because if you're a value investor that thinks that everything I just mentioned about trend and momentum is total, you know, horse manure, that's totally fine. some sense you could argue it's a mistake because based on the evidence it's very clear that these are probably ideas that are just as well evidence-based and ingrained in the marketplace as deep value investing is but on the flip side of that because you're not confident because you think it's baloney it also would be a mistake to do it so it's kind of like this weird irony

Starting point is 00:39:08 where on one hand they're wrong because it's just the facts of life. But on the other hand, because given you think it's wrong, it would also be wrong to actually do the strategy because the minute they started doing it, they'd be like, oh, see, it stopped working. It doesn't work. Yeah, I know he was the God and wrote the Bible and you're not supposed to do this stuff. And these guys are stupid. And then you sell out.

Starting point is 00:39:30 And, of course, you're going to do it the wrong time. So it really all boils down to what's your temperament for the process that you're following. and if you can't stick to it, then just don't do it. So it's interesting because I was going to ask you the mistake that a lot of momentum guys that are just strictly momentum traders, what would be their mistake? And I'd imagine you'd answer it the exact same way that they don't have fundamentals into their approach, but it's also the irony involved with that. Would you agree?

Starting point is 00:39:58 It's just the inverse thing you just said. Exactly. The bottom line is everyone's got great ideas, but people get emotionally attached for their ideas so it prevents them from kind of thinking outside the box. But once they become emotional about ideas that are outside their box, that's also where the behavioral problems come in. So it's like this kind of circular logic where, okay, you weren't smart enough to realize that you should be doing it, but because you're not smart enough to realize that you should be doing it, because you have an emotional attachment to some other religion,

Starting point is 00:40:34 if you were to go do it, you would actually end up, you know, screwing yourself up anyway. So it's kind of like what they call like a second best equilibrium outcome where first best would you would just be purely evidence-based, do what the data say, do it gives you the best chance of, you know, long run after tax, after fee compounding. But that's not reality for most people. So then it's the second best solution of,

Starting point is 00:40:58 given your behavioral problems, what optimizes. And that's what most people do, which is cool. Awesome. Hey, I was looking around on your site recently, and I see that you have a new tool platform where people can filter results based off of EBIT to enterprise value, which I know is a very useful metric for trying to find undervalued companies. But it seems like your filter does this for ETFs. Is that correct?

Starting point is 00:41:26 Or does it do it for individual companies? companies as well. So built this tool, it's in beta right now. If you go to new tools. Alpharchitect.com, you can sign up. You have to verify your finance professional. And so to the extent you deem that you have that labeled and go for it, it's free. But what we're trying to solve for there is making sure that people understand what they're

Starting point is 00:41:50 buying and why they're buying it. So it basically gives you deep x-ray look into the underlying holdings of ETFs where you can like if someone says, hey, I'm a value fund, well, let's go sort your securities and look at how every individual security maps out on value. Like, did you actually buy cheap stuff or were you just clause indexing? You know, this tool will be able to directly analyze that. And you can also, I don't know if you even had a chance to look at it, but if you can click on individual securities in an ETF portfolio,

Starting point is 00:42:21 it'll drill down to the stock level and give you all the factor analysis and give you like, hey, what does this thing rank on enterprise multiples or price to book or whatever the heck it is? So it's meant for folks that are looking at ETFs, but if you're an individual stock person, you can look at an ETF and if it owns a security interest and click on it and it'll drill down to that level of detail. Well, what I like about this, Wes, is when you go and you do research on, you know, Yahoo Finance, or a lot of these different platforms and you're looking specifically at an ETF, it's really kind of hard to maybe find some of the information on even a PE ratio. Sometimes you can't even find out what the PE ratio is for an ETF.

Starting point is 00:43:04 But looking at your tool here, this is incredible because you guys have a lot of data. Yeah, we think it's going to be kind of life-changing and from a transparency standpoint. And we're trying to keep an open architecture where if you're looking at tool, like, we don't care if you're value, Vol investor, momentum investor, we have like 20 or 30 different characteristics that you can answer. analyze based on the holdings and all the data is there. So if you look at a fund, it'll spit out its holdings and the different parameters and what they rank on, whatever you believe in, whatever factor characteristic that you think matters for your livelihood of investing, it gives you the basically the forensic details on that at the holdings level for any ETF that's at this point at U.S. traded long only. We're going to add mutual funds here. But just the engineering

Starting point is 00:43:56 on this is a kind of a non-trivial thing. All right. So, Wes, last time we had you on, we played a question from the audience and we got your feedback from the question or you answered the question. So today we're going to do that again. This question comes from Nate. He's out in Silicon Valley and here's his question. Hi, this is Nate. And first, just wanted to say, thank you so much for putting on this podcast. I've learned a ton from listening to you guys. And thank you very much for putting this up every week. I found that when learning something new, you need to start by building a foundational knowledge base, a strong basal understanding of how the fundamentals work. Then as you learn new things,

Starting point is 00:44:33 because you already have this foundation, you know exactly where to put any new knowledge, and you can see how it relates to everything else. As someone who is fairly new to investing, I've learned a lot of things that are point learnings, but I haven't yet formed a foundational knowledge base upon which to build and place each of these point learnings. What would you recommend as the best way, aside from your podcast, to build that initial foundational knowledge base, both for investing knowledge and for broader macroeconomic knowledge. Thanks. All right. So, Wes, fantastic question, by the way. I really like this question, but I want to hear what you think. Yeah, I concur, press. I think it's a great question. And, you know,

Starting point is 00:45:15 I don't think it has a simple answer because you could take it many different ways. But I'd say, if you want to get in the weeds on on the micro components of you know fundamental valuation or stock selection you know unfortunately you got to go to the dig in the well and you know stick to things like security analysis intelligent investor even though i know they're you know seem like they're two old books and you know they're for old guys but i think that's just a great baseline fundamental framework for you know figuring out how to value a stock like the classic methods now if once you move beyond kind of the micro on valuation, you know, if you Google around, there's probably 100 resources. You know, I know Preston and Stig, they have a great, you know,

Starting point is 00:45:58 course on their website. Con Academy almost certainly has great resources. And there's this good old thing called Google. I think a lot of times Googling around, the machines have kind of optimized on, you know, if you answer the right question with enough detail, a lot of times the best resources a bubble to the top, and I'd stick to that because it's free. Probably a good place to start. So I completely agree with Wes on the security analysis, Benjamin Graham, all that kind of stuff is really good for the micro level. I think for a person who's coming into this fairly new,

Starting point is 00:46:35 security analysis is probably going to be a little difficult to go through, depending on if you've had business classes or what, like how much accounting experience you have might make it difficult. Yeah, you need to be accounting. And well, here's another thing. If you're coming in new to investing, I mean, frankly, it probably means you're not going to be like a stock picker. Like that means you're becoming a professional.

Starting point is 00:46:59 So if you're coming in new, it's really about more high-level frameworks. Like we have the fax framework. Like, know the fees, know your liquidity, know the complexity, the taxes. Because you're probably going to end up just buying a Vanguard fund anyways. It's, you know, so really, if you're going to get into the micro-wee, the reality is it's painful and it requires you to basically read that kind of stuff. A lot. So it just is what it is.

Starting point is 00:47:26 I mean, so if you don't want to be a professional or someone who's like dedicated their life to the trade and you really just kind of someone who wants to learn about investing and how you're going to allocate your portfolio down the road, you know, you may not even want to go into that level of detail because it's just going to make your head spin and it's not going to be worth it. And that's what I was saying.

Starting point is 00:47:45 Just by, I'm, about this, Wes, and I know I'm changing gears away from the question, but we were talking with Shane Parrish, and I asked Shane if he had the choice between the intelligent investor or margin of safety, you know, if he had to pick one or the other, which one would he pick? And he said margin of safety, and I tend to agree with him. I'm kind of curious if you enjoyed that book as much as we liked it. Yeah, I mean, I agree, but the problem is to buy that book's like a thousand bucks. That one's more like the access. But yeah, Seth Karmar is much better at, I think,

Starting point is 00:48:17 exposition and kind of storyboarding it where it's more tangible. We're intelligent investors boring as hell, frankly. But, you know, it's like eating your Brussels sprouts. Sometimes the things that are good for you aren't exactly easier, fun, but they're still good for you. So I'm a big fan of, you know, big fan of it. But you're right, margin safety is also a great resource to the extent you can access the manuscript somehow. I guess for me when it comes to micro, I mean, obviously you can have and find books that's very quantitative and you have a lot of key ratios to look at and a lot of accounting to look at.

Starting point is 00:48:55 One of the most recent books that we read was called How to Mighty Fall by Jim Collins, which is, I wouldn't say it's the complete opposite of what you suggested was. There are a few key ratios in there, but it's a very different approach to understanding why companies fail, which is, at least in my opinion, one of the best approaches to understand on the flip side why companies are successful and might want to invest in them. And not only in terms of making the acquisition of the stock, but also to follow the progress and not just look at the numbers, but also look what's behind the numbers and perhaps considering when you should sell. To answer his question about macro, I had a, I think that one of the most profound

Starting point is 00:49:37 reads that I've ever had on macro came off of Ray Dalio's website. I'll put a link to it in the show notes, but Ray lays out his principles for basically macro and the way that he thinks about it. And a lot of it is based off of the video that I'm sure most people know about by now. There's a 30-minute video that he has on YouTube about like how the economic machine works. I would highly recommend you watch that. We'll put the video into the show notes as well. But the PDF that goes along with that, I want to say it's like a 250-page white page. paper on his opinion on how macro works and how it all fits together. That is hands down the best thing that I've ever read on macro that's out there.

Starting point is 00:50:16 And we'll have that all for free in the show notes if you guys want to check that out as well. I'll second that motion because I agree. That's, I mean, that guy is obviously a genius and you probably read where he writes. And the economic machine piece is amazing. Yeah. So Nate, thank you so much for this really, awesome question. We really enjoyed talking about this one. As a token of our appreciation for submitting your question, we want to give you our intrinsic value investment course, which can be found on our

Starting point is 00:50:47 TIP Academy page. This is a paid course, but because you ask such a great question, you'll get it completely for free. So if anyone else out there wants to get their question played on the show and get a free course, just go to AsktheInvesters.com, and you can record your questions there. So, Wes, thanks for coming on the show. I always have so much fun. And you know what? I want to thank you so much. We did a event in New York back in August, and I just want to say this publicly, because that event would have never happened without Wes Gray. West, you came to my rescue helping orchestrate it. We were able to have it at the CFA. That was all because of Wes, putting me in contact with the right people, and just helping me organize it. You always come through

Starting point is 00:51:30 and always help us out so much. So I just wanted to thank you for that, Wes. And I want to give you the opportunity to just tell our audience where they can learn more about you. You know, back to that event. Like, like, I mean, I was just hooking up with some connections. But I thought that was amazing, man. You rallied a great group, super entertaining. And that signed book by Munger, literally, I got a signed book collection. And that's one I thought I'd never get.

Starting point is 00:51:55 And I was like, you got to be kidding me. So, I mean, I was freaking awesome, man. And humbled and, you know, honored to participate. As far as us, I mean, yeah, so we've got. got, you know, the three books, DIY financial advisor, quantitative value and quantitative momentum. The two quant value, quantum momentum are a little bit hardcore if you're, you know, haven't been doing finance for a while, but, you know, go for it if you want to challenge. And then we have a blog, Alpharchitect.com. You know, our firm mission is empowered through education. So

Starting point is 00:52:24 we're not going to sell you anything. It's, we're just trying to help people out. And we hope that's reflected in, you know, amount of content and all the free resources we give to folks out there. I really want people to remember this because that ETF tool we were talking about earlier, I'm going to have a link in the show notes for that. This thing is awesome. You guys really need to check it out. It's completely free. It's 100% free. So check it out. I think you're going to be pretty impressed when you start playing around with it. With respect to that tool, like feel free to reach out. Like we're just trying to get better all the time. So to the extent you're trying to break that thing and you find something broken or man, I wish you had this. Just let us know.

Starting point is 00:53:02 because we want to actively be making that thing like the best tool on the web for, you know, people that want to get transparency on what they're buying. All right. Well, Wes Gray, thank you so much for coming on the show. It's always such a pleasure to have you here and we really appreciate it. Always enjoy it. So, guys, I wanted to conclude this episode by telling you about our community event that we're having alongside with the Berkshire Hathaway Shareholders meeting.

Starting point is 00:53:30 So this is open to anyone that wants to. to attend and we always have such an incredible time together. You don't need to own a $325,000 share of Berkshire aid to attend. We explain exactly how you can do it on our website, so don't worry about that. Warren and Charlie aren't getting any younger and the time to see them is right now. We have plenty of people that come to the event all by themselves, but the common thing that we hear is that it was so easy for everyone to make friends and they had so much fun with all the other TIPers that attend the meeting. We do everything together so you won't miss anything or you won't feel left out.

Starting point is 00:54:07 If you'd like to attend this meeting with Stig, myself, and some of the guests that we have on the show, simply go to tip berkshire.com. We bought the domain and we have it pointed to an information page where you can sign up and you can learn exactly what you need to do to attend the meeting. So let me repeat the address so you don't forget it. It's tip berkshire, all one word.com. We would love to hang out with you. So come and join us.

Starting point is 00:54:33 That was all that Preston and I had for this week's episode of The Investors Podcast. We see each other again next week. Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to Asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional.

Starting point is 00:55:02 show is copyrighted by the TIP network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP176: Momentum & Value Investing w/ Dr. Wesley Gray (Business Podcast)

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