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MiB: David Snyderman, Magnetar Capital

   This week, we speak with David Snyderman, global head of Magnetar Capital LLC’s alternative credit and fixed-income business. He also serves as chairman of Magnetar’s investment committee and as a member of its management committee. Snyderman, who joined Magnetar in 2005 shortly after its launch, was previously the head of global credit and… Read More The post MiB: David Snyderman, Magnetar Capital appeared first on The Big Picture.    This week, we speak with David Snyderman, global head of Magnetar Capital LLC’s alternative credit and fixed-income business. He also serves as chairman of Magnetar’s investment committee and as a member of its management committee. Snyderman, who joined Magnetar in 2005 shortly after its launch, was previously the head of global credit and a senior managing director at Citadel Investment Group, and he served as a member of the management, portfolio management and investment/risk committees. Prior to joining Citadel, he focused on convertible securities, merger arbitrage and special situations portfolios at Koch Industries Inc. We discuss how the firm was built to identify overlooked opportunities. Finding “idioosyncratic” bets leads to an asymmetric risk profile that reduces downside while maintaining upside. Snyderman explains how Magnetar’s approach was to both measure and manage risk, and operated mostly hedged, avoiding macro bets. A list of his favorite books is here; A transcript of our conversation is available here Tuesday. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. Be sure to check out our Masters in Business next week with Sean Dobson, Amherst Group CEO & CIO. The firm focuses on mortgage and  securitized products, as well as a real estate investment, management and operating platform. They manage $16.8 billion in mortgage-backed securities (MBS), Commercial Real Estate CRE), and single-family rentals.       David Snyderman’s favorite books The Missing Billionaires: A Guide to Better Financial Decisions by Victor Haghani and James White Memos from the Chairman by Alan Greenberg   Books Barry mentioned The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by Michael Mauboussin     The post MiB: David Snyderman, Magnetar Capital appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTURE7 hr. 2 min. ago Related News

Making Complicated Ideas Simple

  The one and only Howard Marks…   The post Making Complicated Ideas Simple appeared first on The Big Picture.   The one and only Howard Marks…   The post Making Complicated Ideas Simple appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTURE7 hr. 2 min. ago Related News

U.S. Technology Adoption, 1900-2021

A century of tech adoption in less than 30 seconds:      Blackrock: “The key to harnessing mega forces and their potential is to first identify the catalysts that can supercharge them and how they interact with each other. Rapid adoption of technology can change the path of transitions. Markets can underappreciate the speed… Read More The post U.S. Technology Adoption, 1900-2021 appeared first on The Big Picture. A century of tech adoption in less than 30 seconds:      Blackrock: “The key to harnessing mega forces and their potential is to first identify the catalysts that can supercharge them and how they interact with each other. Rapid adoption of technology can change the path of transitions. Markets can underappreciate the speed of transitions, creating investment opportunities. Conversely, exuberance over their potential can also cause temporary price spikes. AI has been turbocharged by the roll-out of ChatGPT and other consumer-friendly tools. We think markets are still assessing the potential effects as AI applications could disrupt entire industries and bring greater cybersecurity risks across the board.” Good stuff!     Source: Mega forces: An investment opportunity BlackRock Investment Institute, January 2024 The post U.S. Technology Adoption, 1900-2021 appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREMar 1st, 2024Related News

Transcript: Andrew Slimmon, Morgan Stanley Investment Management

     Transcript: The transcript from this week’s MiB: Andrew Slimmon, Morgan Stanley Investment Management, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.     ~~~ This is… Read More The post Transcript: Andrew Slimmon, Morgan Stanley Investment Management appeared first on The Big Picture.      Transcript: The transcript from this week’s MiB: Andrew Slimmon, Morgan Stanley Investment Management, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.     ~~~ This is Masters in business with Barry Ritholtz on Bloomberg Radio. 00:00:09 [Barry Ritholtz] This week on the podcast, I have another extra special guest. Andrew Lemons has pretty much done everything on the wealth management side of the business, starting at Brown Brothers Harriman before going on to Morgan Stanley, where he started out as a client facing wealth manager before moving into Portfolio Manager and eventually creating the Applied equity advisors team that uses a combination of quantitative and fundamental and behavioral thinking to create portfolios and funds that are sturdy and can survive any sort of change in investor sentiment. They look at geography, they look at cap size, they look at style, and they look at sector and try and keep a portfolio leaning towards what’s working best. These tend to be concentrated portfolios. The US versions are 30 to 60 holdings where the overseas versions are just 20 holdings. I, I found this conversation to be fascinating. There are a few people in asset management that have seen the world of investing from both the client’s perspective and a client facing advisor side to a PM and then a broader asset manager than Andrew has. He really comes with a wealth of knowledge, and he’s been with Morgan Stanley since 1991. That sort of tenure at a single firm is increasingly rare, rare these days. I, I found this discussion to be absolutely fascinating and I think you will also, with no further ado, Morgan Stanley’s, Andrew Slim. 00:02:01 [Andrew Slimmon] Thank you. It’s an honor to be here. 00:02:02 [Barry Ritholtz] Well, it’s a pleasure to have you. So let’s start at the beginning with your background. You get a BA from the University of Pennsylvania and an MBA from University of Chicago. Was finance always the plan? 00:02:15 [Andrew Slimmon] I think being in a competitive industry was all the plan. I played tennis competitively in juniors and went on and played in college and, and I always liked the, you know, you either won or lost and what I always liked about this industry, it was all about, you know, did you win or lose? There wasn’t a lot of gray area, and I think that’s what I do love about the stock market and investing in general, because there’s a scorecard and you can’t, there’s no room on the scorecard for the editorials. 00:02:41 [Barry Ritholtz]] No, no points for style or form. Exactly, exactly. It’s just did you win or lose? Exactly. So, so where did you begin? What was your first role within the industry? 00:02:48 [Andrew Slimmon] Sure. So, well, my first role was opening the, the mail at a brokerage firm in Hartford, Connecticut. But I started my career at Brown Brothers Herriman right here in, in New York, in a training program, which was great because they had commercial banking, they had capital markets, and they had the investment management side of the business. And that’s what getting exposure, all those led me to believe, gee, I really am interested in the stock market and how it works and investing in general. 00:03:16 [Barry Ritholtz] So what led you to Morgan Stanley? How’d you find your way to right to 00:03:21 [Andrew Slimmon] Ms? So I, yeah, I was a research analyst at, at Brown Brothers, and I was covering, you know, in healthcare stocks. I, I realized that there must be something more to investing than just what was going at the company level, because I noticed that the things that were moving my stocks on a day-to-day basis, weren’t just what was going at the company level. And University of Chicago where I went, got my MBA was obviously very focused on more the quantitative areas of investing. And I took Fama and French and so forth and Miller and all those that, that taught me that what drives a stock price is more than just the, you know, the company level. And so that’s, that was really how it, it rounded my knowledge of kind of investing the first steps and then coming out of, of business school. It was 91 and it was a recession. And I, I, I had met my wife in business school and she got a job at Kid or Peabody, if you remember that, investment banking in Chicago. And I couldn’t find kind of a buy side opportunity. And Morgan Stanley had a department called Prior Wealth Management that covered wealthy individuals and small institutions in Chicago. And I needed a job and I had a lot of student debt. So I said, Hey, as opposed to going the traditional buy side route, I’ll start in this area covering clients and investing for them. 00:04:49 [Speaker Changed] So 91, kind of a mild recession, mild and really halfway through what was a rampaging bull market. What was it like in the 1990s in New York in finance? 00:05:04 [Speaker Changed] Well, I mean, the thing that was amazing is we would have clients in the late nineties, they would come to us and they’d say, Andrew, I’m not greedy. I just want 15, 20% returns a year. 00:05:15 [Speaker Changed] Right. 00:05:15 [Speaker Changed] And no risk with, 00:05:16 [Speaker Changed] With limited risk risk, limited risk. Right. I knew you’re gonna go there. 00:05:19 [Speaker Changed] And, and that is what was so fascinating about today Yeah. Is today people say to me, Andrew, why would I invest in equities when I can get 5% in the money market? And what a difference in a mindset, which tells you where we are. In the late nineties, we had just gone through a roaring bull market optimism was just so rampant. And the worst year in the business I can remember was 1999, because as an investor covering clients, I was caught between doing the right thing for them, which was avoid these ridiculously priced stocks. Right. Or get on the train because the money is pouring through. And then it all came to an end in 2000, 2001. And I took a step back and said, thank God I never, you know, I I I just didn’t buy in the way some people did, and therefore save people a lot of money. It was a tremendously good learning experience for me to stay true to your values of investing. Ultimately, they work out. You, 00:06:16 [Speaker Changed] You are identifying something that I, I’m so fascinated by. The problem we run into with surveys or even the risk tolerance questionnaires is all you find out is, Hey, what has the market done for the past six months? If the market’s been good, Hey, every I, of course I want more risk. I’m, I’m, I’m more than comfortable with it. And if the market got shellacked, no, no, no. I, I can’t, I can’t suffer any more drawdowns. It’s just pure psychology. 00:06:42 [Speaker Changed] And, and I would go one step further. You know this, you’re in the business, but when you first meet someone, you never know the ones that are going to be truly risk averse or truly can withstand the volatility. And ones that can, some people say, don’t worry, I’m not worried about the drawdowns. And the minute it happens, they’re on the phone to you. And some people, I told you I wasn’t worried and I didn’t call you. Right. And you can never know. Just the first time you meet people who that’s going to be it, it’s 00:07:08 [Speaker Changed] A challenge figuring out who people really are. Not, not easy. So you started Morgan Stanley in 1991. You’re in that, that’s a long time ago. Yeah. You start on the private wealth side. What led you to becoming a portfolio manager with Morgan Stanley Wealth strategy? 00:07:24 [Speaker Changed] So if you think about my career, I learned to be a fundamental analyst. I went to University of Chicago and learned that, oh, there’s quantitative factors that drive a stock price beyond kind of what’s going on at the company level. The third part of my experience was being in prior wealth management, clients wanna believe they all buy low and sell high, but bear, you know, that doesn’t, isn’t the case. 00:07:45 [Speaker Changed] Somebody does accidentally someone randomly top ticks and bottom ticks to market. But nobody does that consistently. 00:07:51 [Speaker Changed] Exactly. And here’s a great example of what, I mean, if you think about the years 2020, in 2021, growth stocks took off. Right? But in 2022 they got crushed. Do you think more money went into growth managers and funds in 2021 or the end of 2022 after they got crushed? 00:08:10 [Speaker Changed] The flows are always a year behind where the market is. Exactly 00:08:13 [Speaker Changed] Right. So, so what I People 00:08:15 [Speaker Changed] Are backwards looking. 00:08:16 [Speaker Changed] What? Well, and that’s because there’s something called the tear sheet. If you were my client, I went to you and said, Barry, I think you should invest in emerging markets because look how terribly it’s done in the last five years. And I can you the tear sheet, you’re gonna go away. 00:08:28 [Speaker Changed] Everybody hates it, 00:08:29 [Speaker Changed] Right? Hate it. So the problem with this business is a stock price does not care what happened in the past. It only cares about what’s happened in the future. But as humans, we all suffer from recency buys. So what I observed in the nineties, it’s a long-winded answer. Your question is no, it’s 00:08:45 [Speaker Changed] An 00:08:46 [Speaker Changed] Interesting, what I observed in the nineties as a coverage offer, you can’t get clients to actually buy what’s out of favor. Right. And the flaw in the whole growth value us international is people frame, oh, maybe I should buy more growth because it’s working well, except it gets too expensive. So the reason I left being in wealth management, I was convinced that I could start strategies using more quantitative, but give us flexibility. So if we could start core strategies so that if growth got too expensive, we could tilt away from growth, or if Europe wasn’t working, we could tilt away from Europe. That gave us more flexibility as an active manager versus saying, I’m only a growth manager. And then I’m always trying to justify why you should buy growth. Or if I’m a value manager, all always justifying why I buy value. Remember, by 1999, a half of value managers had gone outta business in the last three years that just before they took off. That’s 00:09:48 [Speaker Changed] Unbelievable. I, I know folks who run short hedge funds and they say they could always tell when we’re due for a major correction. ’cause that’s when all of their redemptions and outflows it, it’s hit, hit a crescendo. 00:10:01 [Speaker Changed] And so that’s the problem with the dedicated style is you’re always fighting human behavior just at the juncture with which you should be investing. They’re selling, they’re selling their stocks. So, 00:10:14 [Speaker Changed] So let me ask you the flip side of the question. If you can’t get people, or if it’s really challenging to make people comfortable with buying outta favor styles or companies, can you get them to sell the companies that are in favor and have had, you know, an exorbitant runup and are really pricey? Or, or is that just the other side of the same coin? It’s 00:10:36 [Speaker Changed] The other side of the same coin, but, but I think what complicates, is it taxes? Sure. Because people don’t want to sell for taxes. And General Electric was a very important experience in my life in a, you know, back in the nineties, which was, it became the number one stock. Everyone loved it. And, and then, you know, it went through a can’t grow as quickly anymore. So the issue that I see in the industry is stocks never survive as the the number one company. And so eventually they, they decline and people don’t want to take money off the table when they’re the number one or tops because they have big gains. And then ultimately people sold a lot of General Electric with a lot less of a gain. So the trick is, is to reduce the exposures over time. So with, if I’m a core manager and I know that growth is expensive relative to its history versus value, we’ll tilt the portfolio. But we won’t go all into value, all into growth because timing these things is very, very tricky. 00:11:42 [Speaker Changed] So you’ve been with Morgan Stanley since 19 91, 3 decades with the same firm. Pretty rare these days. What makes the firm so special? What’s kept you there for all this time? 00:11:54 [Speaker Changed] Well, you have to remember that when I started in 9 19 91, wealth management was a, was a relatively small part of the, of the firm. And I give James Gorman tremendous credit. He really grew that area because of the stability of the cash flow. I ge I’m a pretty stable cash flow. And then when I progressed to and Morgan Stanley investment management, it was the same concept, which was we value the multiple on stable cash flows is higher than on capital market flows. And so that’s, I’ve kind of followed the progression of how Morgan Stanley’s changed and that’s been a great opportunity. And then I look and say, well, I was able to go from wealth management into the asset management because the firm grew in that era. So it’s a, it’s been a tremendously great firm to be with, but I’ve, you know, my career has changed over time as a firm’s changed over time. Sure. 00:12:47 [Speaker Changed] I, I had John Mack on about a year ago and he described that exact same thing, the appeal of, of wealth management. And part of the reason, what was it, Dean Witter, the big acquisition that was done was, hey, this allows us to suffer the ups and downs in the other side of the business, which has potential for great rewards but no stability. Right. Versus ready, steady, moderate gains from From the wealth management 00:13:12 [Speaker Changed] Side. Exactly. We bought Smith Barney, so on the wealth manage, that was another big one. Right. So then over the asset management side, there’s Eaton Vance E-Trade Wealth Management and with Eaton Vance came Parametric and Calvert. So the firm has grown in the areas that I’ve grown personally. So it’s been a great, great marriage for a long time. 00:13:30 [Speaker Changed] So your experience with General Electric? I had a similar experience with EMC and with Cisco late nineties trying to get people to recognize, hey, this has been a fantastic run, but the growth engine isn’t there. The trend has been broken. Don’t be afraid to ring the bell. And I’m not an active trader. Yeah. I’m a long-term holder. Getting people to sell their winners is not easy 00:13:54 [Speaker Changed] To do, is very, very hard. But, but also when stocks get very, very big, companies get very, very big. It just gets tougher to grow. In my experience, and this has nothing to do, GE just in general is when companies get big, usually the government starts looking into their business ’cause they might dominate too much. And so it’s a combination of why over time, and I know this is hard to believe given the last couple years, why the equal weighted s and p does actually outperform the cap weighted s and p because companies, mid-cap companies that are moving up, it’s easier to grow. That 00:14:30 [Speaker Changed] Hasn’t, what has it been 25 years since the Microsoft antitrust 00:14:34 [Speaker Changed] Boy? And that’s, that’s 00:14:35 [Speaker Changed] That’s that’s amazing. How often are equal weight s and p outperforming cap 00:14:40 [Speaker Changed] Weighted? It outperforms about half the time. It certainly had, I mean think about last year and through October, the cap weighted had outperformed the equated by 1100 base points. 00:14:50 [Speaker Changed] Wow. That’s a lot. 00:14:51 [Speaker Changed] But the thing that’s fascinating about this, Barry, and, and again, you know this is that it’s always the first year off of bear market, low investors sell. So retail flows were negative from the low of October 22 until for a year. And that’s until 00:15:06 [Speaker Changed] November 23. Exactly. 00:15:08 [Speaker Changed] But if you go back to 2020, March of 2020 flows were negative until February of 21. So it always takes about a year, 00:15:17 [Speaker Changed] February of 20. That’s amazing. ’cause from the lows in March percent, it was a huge set 00:15:22 [Speaker Changed] Of gains and net flows from mutual funds. ETFs were net they’re always negative the first year because of that rear view mirror recency bias. The reason why that’s relevant, Barry, is because when investors finally said, I can’t, I shouldn’t sell anymore, I should buy, they’re not gonna buy what’s already worked. They’re looking for other things. And that’s when the equated really started out before. Huh, 00:15:42 [Speaker Changed] Really interesting. So let’s talk a little bit about your concept of applied investing. What does that mean? What, what does applied investing involve? 00:15:53 [Speaker Changed] Okay, so there’s the theoretical story about it and then there’s the practical story. And I’m sure you’ll get a kick out of the practical, but the theoretical is that I don’t believe that a stock price return comes purely from what’s going on. Fundamentally, you have to decide should I own growth value, large cap, mid cap us versus non-US any stocks return about two thirds of return in any one year can be defined by those. So we have to get that right first. And that’s the quantitative size. So we use factor models to say, Hey, should we own growth stocks or value stocks? And so we tilt our portfolios quantitatively based on which of those factors are sending a signal that they’ll work in the future. 00:16:36 [Speaker Changed] So, so let me just make sure I understand this. Geography size, sector and style style are the four metrics exactly you’re looking at and trying to tilt accordingly into what you expect to be working and away from. 00:16:50 [Speaker Changed] Exactly. And the goal of that is to keep people in the game flip side is, you know, things are out of favor. They can stay out of favor. The problem in this business is styles and investing can stay out of favor longer than the client’s patient’s duration. 00:17:06 [Speaker Changed] Ju just look at value in the 2010s, right? I mean if you were not leaning into growth, you were left way behind. 00:17:13 [Speaker Changed] Exactly. And what I observed from my time being advisor is at the end of the day, clients don’t really care whether they own growth or value. They don’t care whether they own European US, they want to make money and they don’t want ’em go backwards. And if all you keep saying is yes, but you know, my value manager has outperformed the value index. And they’re like, yeah, but the s and p is going through the roof. Right? So you have to have some flexibility in your approach. So I wanted to start a group that at the core would use those quantitative metrics, but pure quantitative takes out kind of the fundamentals of investing because a certain portion of a stock’s return comes from what’s going at the company level. And the other thing is, if all I did was focus on the quantitative, you’d end up owning 300 securities. So 00:18:01 [Speaker Changed] Let’s, let’s 00:18:02 [Speaker Changed] Talk about SA and an SMA can’t do that or you don’t drive enough active share. 00:18:07 [Speaker Changed] MA is separately managed, managed, managed account account. Let, let’s talk about active share because your portfolios are fairly concentrated. The US core portfolio is 30 to 60 companies. That’s considered a modest holding, a concentrated holding. Tell us about the thinking behind that concentration. 00:18:28 [Speaker Changed] So it’s funny, going back to that first job at Brown Brothers, you know, at, in the time in the eighties, no one knew about passive investing. But I observed that, you know, they’d have these portfolios and they’d have kind of two or three stocks in every sector. So you’d end up with, you know, a hundred or 150 stocks and you know, they, it, not that they did poorly, but they never really, you know, it was really hard to drive a lot of active, you know, performance. 00:18:51 [Speaker Changed] Everything is one 2%. 00:18:52 [Speaker Changed] And at the time it wasn’t really, there wasn’t really passive investing. But then as, as time progressed, all these studies came out and said, well actually the most excess return in active management comes from managers that are very, very active. Right? And if you own a hundred, 150 stocks and you’re the benchmark is the s and p, you’re not active. So it was clear to me that we needed very concentrated portfolios but control the risk. And so that’s why we run these limited portfolios. The applied term is, so it gave some quantitative approach to what we do. But here’s the practical Barry, which is when the firm came to me and said, okay, you’re gonna become an asset management arm, you gotta come up with a name for your team. I knew that these firms show asset management companies alphabetically. 00:19:44 [Speaker Changed] So applied investing right 00:19:45 [Speaker Changed] There, I wasn’t gonna be Z applied. 00:19:48 [Speaker Changed] Right. 00:19:49 [Speaker Changed] I wanted to be at the top of 00:19:50 [Speaker Changed] The list. That’s very, that’s AAA exterminator always the first one. Exactly. To pull in the phone book. So let’s talk about two things you just mentioned. One is active share, but really what you’re implying are that a lot of these other funds with 200, 300 or more holdings, they’re all high fee closet indexers. What’s the value 00:20:10 [Speaker Changed] There? Right. And that’s why as an active manager, I have nothing against ETFs. I think it’s done great for the industry because shame on funds that own lots and lots of securities. You’re not doing a service to your investing. But at the end of the day, if I marginally underperform, not me, but in general, you know, it will take time to lose your assets. You know what’s right for the money management firm is not always what’s right for the, so the right thing is choose passive strategies, but there’s a place for active image, but it’s gotta be active 00:20:42 [Speaker Changed] Core and satellite. Exactly. You have a core of a passive index, but you’re surrounding it bingo with something that gives you a little opportunity for more upside. Exactly. Huh. Really, really interesting. So if the US holdings are 30 to 60 companies, the global portfolio is even more concentrated about 20 companies? 00:21:00 [Speaker Changed] Yeah, I mean, so, so taking a step back again, one of the, you know, remember I run mutual funds, but I start in the separate managed account business. So what it, what means is they would wealth manage would implement our portfolio for individuals by buying stock. And one of the things that I observed is that clients pull from the market faster than they pull from stocks. So in other words, when you’re worried about the market, if it’s about the market, some macro story, well do you wanna sell your Microsoft? Oh no, I like Microsoft, but I’m worried about the market. Okay, well owning individual securities is really powerful because it actually keeps people invested. 00:21:46 [Speaker Changed] There’s a brand name there that they relate to a 00:21:49 [Speaker Changed] Brand. Exactly. So people are more likely to pull from the market. So I believe in owning stocks, but the problem is, again, it goes back to, but if you own 200 stocks and they don’t have any wedded, so could we start a strategy? We started this oh eight where all the securities would be on one page. 00:22:04 [Speaker Changed] That’s amazing. So your global portfolio also has some international US companies. So in addition to things like LVMH and some other international stocks, you have Microsoft, you have Costco. Correct. What’s the thinking of putting those giant US companies in a global portfolio? 00:22:21 [Speaker Changed] It goes back to Barry, that concept, which is clients don’t care really where they make their money. And the problem with the, the benefit of global, a global strategies, I can own some US stocks and an international only I can’t own. And what happens if the US just so happens to do better than the rest of the world, then international doesn’t work as well. So it just gives us more flex. It’s that flexible flexibility to go where the opportunity set is. 00:22:51 [Speaker Changed] And to that point, your fund, the Morgan Stanley institutional global concentrated fund, which does have US stock trounce, the, the MSEI exactly X us, because the US has been outperforming international. That’s another style for 15. Since the financial crisis, the US has been crushing absolutely everyone else. 00:23:14 [Speaker Changed] But think about this way also, if I can own 20 stocks, okay, but they’re not all correlated to each other, right? So they’re, they have a lot of different themes. Like I really like this, the, the, the infrastructure stocks right now. But I also think there’s a place, as you said, Microsoft, but luxury brands only a few stocks, but have a different theme. Then I can control the risk in the portfolio. You, 00:23:38 [Speaker Changed] You’re diversified high act to share, but concentrated 00:23:41 [Speaker Changed] High act to share, but lower kind of risk. 00:23:44 [Speaker Changed] So when I look at the Morgan Stanley institutional US core, the description is we seek to outperform the benchmark regardless of which investment style, value, or growth is currently in favor. So your style agnostic, you want to just stay with what’s working. 00:24:02 [Speaker Changed] Exactly. And Philip Kim is the other portfolio manager. We’ve worked together 14 years. I started these quantitative models and then he really took it to the next level. And this was what has the likelihood of outperforming for the next 12 to 18 months from a style standpoint. That’s how we bias the portfolio. Things could get just too expensive, things get too cheap, but we need to see some migration in the opposite direction and then we buy us accordingly. We want to stay in the game. 00:24:29 [Speaker Changed] What about the Russell 3000 strategy? That’s not, it’s obviously more concentrated than the Russell, but it’s still a few hundred stocks. Tell us what goes into that thing. Well 00:24:39 [Speaker Changed] We noticed that our, just our quantitative factor model alone was doing well right beyond just adding the stock to buy. So we wanted to start a strategy that would add a little bit of excess return versus just buying an ETF that was just focused on that factor models. But we would diversify away the stock risk. 00:25:01 [Speaker Changed] Really intriguing. So let’s talk a little bit about Slimmons take, which is not only widely read at Morgan Stanley, it’s also pretty widely distributed on the street itself. Towards the end of 2023, you put out a piece, a few lessons from the year, and I I thought some of these were really fascinating. Starting with the s and p 500 has produced a positive return in 67 of the past 93 years, the market produced two consecutive down years, only 11 times. That’s amazing. I had no idea. 00:25:35 [Speaker Changed] Well, I mean, think about it. The, the, the likelihood over time in any one year, the market’s going to go up and if it, if it doesn’t go up, that’s irregular. But then to have another year in a row is very, very irregular. So that’s, that’s why I began 2023 saying, Hey, it’s, it’s highly likely it’s gonna be a good year just purely based on, based on the odds. And then you layer in that whole recency bias rear view mirror and people were way too negative. 00:26:02 [Speaker Changed] Yeah. At the end of 2022, the s and p peak to Trth was down about 25%. You point out there were only eight instances since 1960 where you had that level of drawdown and the average one year return was 22% following that. 00:26:21 [Speaker Changed] So I’ve put out a piece in September of 2022 saying, market’s down 20%, you should add money down 20%. And of course I felt like an idiot, you know, a month later because, and then the market was down 25%. And I produce a piece saying the average return is just over 20% if you buy into down 25%, which doesn’t necessarily mean it stops going down. Right? But what’s amazing about that is, you know what, the return off that October 22nd low of 2022 was 00:26:49 [Speaker Changed] 30 something. 00:26:50 [Speaker Changed] No, 21%. Oh 00:26:52 [Speaker Changed] Really? Dead on 00:26:53 [Speaker Changed] Right. Dead on in line. It’s uncanny how these things repeat itself. And that’s Barry again, it goes back to, you know, your experience, my experience is the macro changes, but behaviors don’t. Right. That’s the consistency of this business and that’s what I’m fascinated 00:27:08 [Speaker Changed] With. Human nature is perpetual. It’s, it’s, it’s Right. No, no doubt about it. 00:27:11 [Speaker Changed] And that’s what gave me confident that the fun flows would turn positive at some point in the fourth quarter because it was a year off the low. 00:27:18 [Speaker Changed] I really like that. Be dubious when a stock is declared expensive or cheap based on a singular valuation methodology like pe this is a pet peeve of mine. The e is an estimate at someone’s opinion. How can you rely on something, especially from someone who doesn’t have a great track record of making 00:27:39 [Speaker Changed] This forecast. It’s the, I think that’s the biggest error investors make over time is, well this stock is, you know, as you said, this stock is cheap or this market, think about Europe. Mar Europe has looked cheaper than the US for a number of years. The flaw in that is the e is a forward estimate. And it’s turned out that the E for Europe hasn’t been as good as what’s expected. And the E for the US especially the Nasdaq, has been a lot higher than was expected. So the denominator has come up in the us which makes a PE lower and the denominator come down you, which made it look more expensive. 00:28:18 [Speaker Changed] So that, that’s always amazing is if the estimates are are wrong to the downside, well then expensive stocks aren’t that expensive and vice versa. Exactly. If the estimates are too high, cheap stocks really ain’t cheap. Right. 00:28:31 [Speaker Changed] I watched that. But we also watched revisions and I’ve learned, learned also from being, you know, cynically in this business. Companies don’t always come clean right away and say, oh, our business really bad. It’s the, they drip out the news, right? Usually one bad quota follows another bad quote. I mean it’s very rare. So be careful that, and analysts are slow to adjust their numbers. Anytime someone says, I’m cutting my estimates, cutting my price target. But I think it’s bottomed, 00:29:00 [Speaker Changed] Right? 00:29:00 [Speaker Changed] Yeah. Be careful. 00:29:02 [Speaker Changed] Yeah. To that’s always, always amusing. I thought this was really very perceptive. Over 37 years in the investment business, I have become convinced that the most money is made when perceptions move from very bad to less bad. I love that because if you’ve lived through the.com implosion or the financial crisis or even the first quarter of 2020, you know how true that is. 00:29:26 [Speaker Changed] Think about last year, you know, it’s the old saying by Sir John Templeton bull markets are born on pessimism. They grow in skepticism, they mature on optimism and they die on euphoric. Well, we had a bear market bottom in October of 2022. And so we came into last year, 2023 with, it’s gonna be a hard landing, it’s gonna be bad. And so there’s high levels of pessimism. And now as you advance into the fourth quarter fund flows turned positive as people realize, well maybe it wasn’t gonna be so bad. We’ve moved into the skepticism phase. So that’s why the biggest return year is always the first year off the low because that’s the biggest pivot and it has the least volatility. We didn’t have a lot of volatility last year 00:30:16 [Speaker Changed] And, and we saw that in oh 8, 0 9 and we saw that in 2020. 2020. It was really, it was really quite amazing. The flip side of this is also true, which is most money is lost when things move from great to just good. 00:30:33 [Speaker Changed] Well, again, if I go back to kind of growth investing, it got expensive and the growth rates of companies wasn’t quite as good and you know, in 2022 and the Fed started raising rates and that was problematic. It was no different. It reminded me a little bit of the.com bubble. What brought down the.com bubble is that companies just couldn’t report the earnings that were expected. And you had plenty of time to get out. But the problem is, what I saw in the.com bubble, people wanted to kept buying these stocks as they’re going lower because they were, you know, rear view mirror investing. They were the previous the the loves. And what’s amazing is think about, I said before half the value managers went outta business in 99 by the year 2008. Do you know what the biggest sector of the s and p was? Financials they grew from nothing to 30% of the SP. So value worked all through the first period until we know what happened in great financial crisis. It 00:31:27 [Speaker Changed] It, it’s amazing that muscle memory when you’re rewarded for buying the dip for a decade, it’s a tough habit to break. Exactly. Exactly. So, so here’s another really interesting observation of yours. Whatever the hot product is rarely works the next 12 months. 00:31:43 [Speaker Changed] It’s because a hot product invariably pushes oftentimes valuations to extreme. And one of the things that we got very right in 2023 was in 2022 Bear Market, what did people buy into the lows of Bear Market? They bought defensive stocks, dividend oriented, low volatility type strategies became very popular in 2022 during a bear market. And so we could see that the defensive factor, safety became very expensive. So as we came out of this bear market, what lagged consumer staples, healthcare, utilities, all the safe things. So hot products pushes things to extreme and that usually, you know, unwinds itself badly 00:32:34 [Speaker Changed] Historically, once the fed stops hiking rates, equity rallies last longer and go higher than anyone expects. Explain the thinking 00:32:43 [Speaker Changed] Then. So I think it’s good news for this year, but also worries me about this year is if you look at the history of the period of time when the Fed said we’re done hiking till we’re going to cut that period does very, very well for equities. And we are kind of at a, a juncture where it, we’ve done pretty well. But if they’re not gonna cut rates until the summer, I think there’s more room to run for stocks. Now the flip side is, I hear a lot of people talk about when the Fed cuts the perception that that’s gonna be good for equities. I’m not so sure about that because if you look back in history, when the Fed cuts markets tend to go down initially not up. And you could argue yes, but Andrew, that’s because usually when they’re raising rates it’s an economic cycle, right? And therefore if they’re cutting, there’s a problem. And this time it was all about inflation. But what worries me is when the Fed does announce they’ll cut will people say, oh, they know something you don’t know. There’s a problem out there. And I think there’s an that will increase the anxiety. And so I think that’s, we’re in a good period right now, but it worries me when they do cut, will it be people start to worry about, there’s some, there’s a problem in the economy. 00:33:59 [Speaker Changed] See I I I’m a student of federal reserve history and I I could say with a high degree of confidence, they don’t know anything that you don’t know. They, they look at the same data, they’re populated by humans, none of whom have demonstrated any particular sort of prescient. And if we watched the past decade, they were late to get off their emergency footing. They were late to recognize inflation, they were late to recognize inflation peaked. And now it feels like they’re late to recognize, hey, you guys won, you beat inflation. Exactly. Take a victory lap. Right? They, they seem to always be talk about backwards looking. They always seem to be behind the curve. Right. 00:34:38 [Speaker Changed] But I just think the stock market is an emotional beast. Sure. And you know, and I look last year and the Bears people were too pessimistic every time they pop their head out of the den, they got stampeded. And so they’ll have a better year this year and I think it will scare investors and cynically, I can’t help but think, well people missed most, a lot of people missed last year and now they’re starting to get back in and after a very low volatility year, there’s always more volatility the next year. And so it’s inevitable it’s gonna be more, it doesn’t mean it’ll be a bad year for equities, it just will have more gut wrenching periods. 00:35:10 [Speaker Changed] I love this data point since 1940, markets have always gone up in the year when an incumbent president runs for reelection 17 for 17. Now if we break that down, what you’re really saying is, hey, if an incumbent isn’t running, the economy really has to be in the stinker roo and the stock market is following. But anytime an incumbent is running typically means we’re we’re doing pretty okay. Well 00:35:37 [Speaker Changed] And remember I said didn’t get reelected, just ran for reelection. Right. And so what happens, and I see it this year, is when presidents run for reelection, they want to juice the economy, they want the economy going well, right? And we have, Joe Biden has in his pocket the Infrastructure Act, the CHIPS Act and the Inflation Reduction Act. We own, the reason why we own industrial stocks is because they are telling us that the money is just starting to come in from the government. And these projects are getting just getting off way. We’ve seen this with the chips act, the money is just started poor. Right. That’s why the market tends to do well because the economy stays afloat during a reelection year. And 00:36:20 [Speaker Changed] And the really interesting thing about all this, you know, it’s funny, the 2020s is the decade of fiscal stimulus, whereas the 2010s were monetary stimulus, the first three cares acts. That was a, just a boatload of money that hit the market, hit the economy all at once. Each of the legislation packages you mentioned, that’s spending over a decade, that could be a pretty decent tailwind for a while. 00:36:43 [Speaker Changed] Very interesting between listen to Wall Street and what you listen to companies. And so I’m a company guy. I listen to companies and I’ll give you a great example. Right now people think the consumer is getting tapped out, but on the Costco call the other day, they say they see big ticket purchase items. Reaccelerating, well wait a minute, I thought the consumer well, which is it? Which is it? Right. And you know, and so the the point of this is, is that I go back to listen to what companies say. And I suspect as food inflation starts to come down and people have jobs, they actually could start to go buy, you know, higher ticket purchases. So, 00:37:15 [Speaker Changed] And we’ve seen some uptick in credit card use, but it nothing problematic with the ability to service that debt still seems to be very much intact. Correct. 00:37:24 [Speaker Changed] And that goes back to last year, one of the reasons I, the other reason I was optimistic is I kept hearing our companies say to me, I’m being told the recessions around the corner, but our business seems to be doing well. We don’t see it. Right. We 00:37:34 [Speaker Changed] Don’t see it. That’s really amazing. So, so let’s talk a little bit about who your clients are. You obviously are working with all the advisors at Morgan Stanley, but you’re managing mutual funds. Who, who are the buyers of, of those funds? Are they in-house? Are they the rest of the investing community? Who, who, who are your clients? 00:37:53 [Speaker Changed] Yeah, I mean, so that’s when, when I left being advisor in 2004, I started this group within Morgan Stanley. Wealth management with the products were only available to financial advisors at Morgan Ceiling. But when I left to go into Morgan Ceiling investment management in 2014, the purpose of that was to make my products available beyond Morgan Ceiling wealth management because I was getting calls from consultants and institutional investors saying, how do we get access to these funds? And I’d have to say, well you have to go through an advisor. So, so that, I wanted to broaden out the reach beyond. So I would say we’re on a number of platforms, you can buy our funds through the self-directed route. And so we’re broadening out the, the distribution. And you mentioned the slim and take before. That is a, a methodology that we use to reach out to our investor base. 00:38:49 Obviously I’d love to talk to each of every one of ’em, but I can’t. But I’ve learned in this business, if you communicate in a way that they can understand, and I don’t mean understand in, you know, in, in a bad way. Like, but writing a six page diatribe about why my stocks are so great and why the rest of the market stinks. No one’s gonna read that. They put it aside and say, I’ll read it tonight, then they don’t. But if you can provide short bullets of what’s going on in the market, why people should be bullish or bearish, you provide them with talking points. And that’s what we really try to do within the firm, but beyond the firm as well. 00:39:24 [Speaker Changed] Yeah. I I, one of the reasons I like lemon’s take is you really boil things down to brass tack. You’re not afraid to use third parties in some of your competitors research. You, you cite other people on the street when they have an interesting data point or, or, and and I very much appreciate that. ’cause a lot of people sort of take the, if it wasn’t invented here, it doesn’t exist to us. 00:39:51 [Speaker Changed] Yeah. I mean look, I’m, I’m, I want to grow the assets. I want to perform well, but I value the responses from the those who sit on the front lines dealing with clients every day because they’re the ones that feel kind of the emotional side of the business. Sure. If you sit back in, you know, my office and all, I’m looking at a company and just evaluating whether it’s PE is appropriate and earnings, you’re missing a huge part of this business. It’s a behavioral business. And so having access to advisors and listening to their feedback is so important. 00:40:27 [Speaker Changed] So you serve on Morgan Stanley’s Wealth Management’s Global Investment Committee. What is that experience like? I would imagine that’s a huge amount of capital and a tremendous responsibility. It 00:40:39 [Speaker Changed] Is a huge amount of capital and it drives kind of asset out suggested asset allocation for advisors. They don’t necessarily have to pursue it that way. My input is obviously on the equity side, but they have people in the, on the re the fixed income, high yield alternatives. And they all provide inputs into framing and overview. So I’m really, I sit in Morgan Stanley investment management, but I do provide that context and I think they like to have me on ’cause I actually have skin in the game and I run money for a, a living and I’m not always there saying you gotta buy growth or you gotta buy value. So I’m of agnostic. I’m just trying to figure out where the kind of the ball’s going. Do. 00:41:20 [Speaker Changed] So in the old days you used to speak with retail investors all the time, a as a pm Do you miss that back and forth because there is some signal in all of that noise, whether it’s fear or greed or Sure. Emotion. How, how do you, how do you operate being arm’s length away from that? 00:41:41 [Speaker Changed] I, that is a big concern I have is losing that access. So I still, I’m going to, I’m speaking in an event tonight with a, you know, a room full of advisors. So, and then, you know, we’re, we’ll, we’ll get together afterwards and I’ll listen to what they have to say. So I’m always interested in feedback that I get from advisors. Obviously I can’t spend all day talking on the phone. That’s the big reason why I left being an advisor was I recognize, hey, being an advisor, you gotta talk to your clients so forth. You can’t manage money and worry about both quarter can both. You can’t do both. And anyone that thinks you can, I, you know, it’s, it’s crazy and I really wanna develop these models, but I I, so, so all these communication ways, like slim and Take is a way to be in touch with advisors, encourage them, Hey, you think you, you disagree, send me an email. You know, I’m happy to, happy to hear from you because I think that’s very important. Huh. Really, 00:42:35 [Speaker Changed] Really 00:42:36 [Speaker Changed] Interesting. I really, behavioral finance, you know, the, the longer I’ve been in this business, I’ve been in this business a long time. It’s the behavioral finance that’s the consistency of this business. Geopolitics changes, right? But how people react is, is not, doesn’t 00:42:52 [Speaker Changed] Really change. Right. You, you, you can’t ch control what country is invading what other country. But you can manage your own behavior. Exactly. And people have a hard time with that. Exactly. It’s really interesting. I, I know only have you for another five minutes, so let me jump to my favorite questions. I ask all of my guests starting with what have you been screaming these days? Tell us what’s been either audio or video, what’s been keeping you entertained? 00:43:15 [Speaker Changed] Yeah, I, so if I think about my career, no one took me aside and said, this is how you manage money, right? Like, think about it. I learned about fundamental research, I learn about quantitative, I learn about the practicality of being in wealth management. And so I’ve always researched and watch and what does that got to do with your question is I’ve learned my way to being successful portfolio managers. So I’m obsessed with kind of always learning along the way. So I, you know, when I watch podcasts it’s always about, whoa. Or, or, or listen to podcasts or watch, you know, things. It’s, it’s always how to advance my knowledge base. Now I did play tennis, you know, in college and so I love all those, you know, break point, first tee, you know, the Formula one. I love all those things. But, but you know, as my wife gets frustrated with me, ’cause I’m probably gonna not gonna sit down and watch a three hour mindless movie because it’s kind of like not, not advancing. 00:44:13 [Speaker Changed] Huh. Really, really interesting. Tell, tell us about your mentors who helped to shape your career. 00:44:19 [Speaker Changed] So I mean, again, I look at points along the way were invaluable When I got to Morgan Stanley, Byron Ween, who, you know, I barely knew, but he was the first person that I recognized had this very good touch of fundamentals, but also the psychology, right? And so he was a great mentor even though he never really knew me, but listening and reading and understanding him was really important. But then I had a guy who ran our department named Glenn Regan, who had come from studying money management organizations and I didn’t know how to start a money management organization ’cause it was a team within and how do you grow and diversify. So there’s been different people along the way that have really shaped me. I came outta University of Chicago, gene Fama told me buy cheap stocks, but then William O’Neill said, yeah, but that doesn’t work and you need to have some momentum to, you know, like, he didn’t tell me that you 00:45:14 [Speaker Changed] Need a little can slim in that you 00:45:15 [Speaker Changed] Need to, you know, you had a little can so you need to cancel. Exactly. So there’s been people along the way that have been great influences on me that have mentioned me at the right time in my career. 00:45:26 [Speaker Changed] What are some of your favorite books and and what are you reading right now? 00:45:29 [Speaker Changed] I just finished same as Ever by Morgan Housel. Again, this concept of behavioral. I will eat up, you put a behavioral, anything about behaviors in front of me, I read it so like, you know, Richard Thaler mis misbehaving or you know, think fast, think slow, all those boats of books. Daniel Crosby is another one. All those books I just, but I just finished that and I just love it because again, all he spends the whole book is about these things. They just don’t change over time. 00:45:56 [Speaker Changed] Human nature, human perpetual, 00:45:58 [Speaker Changed] Human nature. Huh. 00:45:59 [Speaker Changed] Really interesting. I’ll tell you 00:46:00 [Speaker Changed] The last story. So, or I was tell a story. I was, I was on the floor of the New York stock change the day that Russian invaded Crimea. And one of my stocks was down ni my biggest position was down 8% that day. And I said, they don’t have any stores in Crimea. Why is the stock down? Well, because it was geopolitics. Well, you know, and within three days the stock came ro back. So I, it it’s, all it points to is sometimes fundamentals dislodged from, you know, the, the stock prices. And you have to understand that there’s a hu behavioral element. 00:46:32 [Speaker Changed] My favorite version of that story was, are you familiar with Cuba? Yeah, sure. So Obama announces we’re gonna normalize or start the process of normalizing relationships with Cuba. There’s a stock that trades under the symbol CUBA having nothing whatsoever. And it runs up 20% on just on the announcement. Correct. Because some algorithm picked up Cuba and bought it. And off, off we go. Correct. Amazing. All right, our final two questions. What sort of advice would you give to a recent college grad interested in a career in either investment management or finance? 00:47:07 [Speaker Changed] Yeah, so it’s interesting. I have four kids that are, you know, in the process of or have just come outta college or in the process of, and one of the dangers I see today is kids come outta school and they think they know exactly what, what they wanna do. You know, and then, and I’ll say, you don’t know your, what your capabilities are when you’re 22 years old. I mean, I was an introvert when I was 22. I’ve, I’ve realized in the early thirties I knew how to communicate. So I’m, I always say get into, if you can get into a firm that has a lot of opportunities, you know, today there’s less training programs, but those types of things with lots of opportunities. ’cause you don’t know what you’re gonna be good at and what you’re good at. Always follow what you think you’re interested in as long as it makes money, because that’s ultimately, but you don’t know initially. So I always encourage people initially don’t come out and say, I want to do this the rest of my life. You don’t know, that’s too narrow. Try to go to something broad. That’s the first advice. And, and I see today where people too narrow in their focus. 00:48:08 [Speaker Changed] I think that’s great advice. People, most of the folks I work with who are very successful, they’re not doing what they did right outta school. And to imagine that that’s gonna be your career. Very much misleading. And, and our final question, what do you know about the world of investing today that you wish you knew 30 plus years ago when you were first getting started? 00:48:29 [Speaker Changed] Well, I think, you know, 30 years ago I thought it was all about just what’s going at the company level. And then I realized, oh wait, that doesn’t really, you know, drive most of the stocks return. So you have to understand more about the broader implications of companies. I think 30 years ago there was less dissemination of fundamental news. Broadly today it’s much, you know, it’s much broader. So having information access fundamentally is more, more difficult. So I think the, the business has changed. But again, I go back to, I think the, the biggest change in my, how I think about it is behaviorally I’ve come to the real, that being an advisor sitting on the front line, I view that as a very key part of what’s shaped my career. Understanding that, you know, again, it doesn’t matter that the company didn’t have any stores in Crimea. 00:49:22 It went down for, you know, quite a bit. Or your Cuba story. I mean that, there’s just a behavioral element to this in investing, investing business. And look, you know, again, I go a, a great example which I mentioned before, which is it didn’t matter what growth stocks you own in 2022, they all went down, right? And so was it all the companies did poorly, no growth got too overbought. And so it had a correction. They all came back last year. You know, so understanding kind of those behaviors. I love that Warren Buffet quote investors frame their view looking solidly in the rear view mirror. Understanding that and having the ability to tack against that. That’s really what’s what’s worked for me over time. 00:50:03 [Speaker Changed] Hmm. Fa fa really fascinating stuff. Thank you Andrew for being so generous with your time. We have been speaking with Andrew Schleman. He’s managing director at Morgan Stanley Investment Management, where he is also lead portfolio manager for the long equity strategies for the Applied Equity Advisors team. If you enjoy this conversation, be sure and check out any of the 500 previous discussions we’ve done over the past nine and a half years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcast. Sign up for my daily reading list@rithu.com. Follow me on Twitter at ritholtz. Follow all of the Bloomberg family of podcasts on, on Twitter at podcast, and be sure to check out my new podcast at the Money short. 10 Minute conversations with Experts about the most important topics affecting you and your money at the money can be found at the Masters in Business podcast feed. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Meredith Frank is my audio engineer. Atika Val Brown is my project manager. Shorten Russo is my head of research. Anna Luke is my producer. I’m Barry Ltz. You’ve been listening to Masters in Business on Bloomberg Radio.   ~~~   The post Transcript: Andrew Slimmon, Morgan Stanley Investment Management appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 28th, 2024Related News

At the Money: Woke Investing vs. Values-Based Investing

     At the Money: Woke Investing vs. Values-Based Investing Meir Statman, February 28, 2024  There’s been criticism of what some call “Woke Investing.” But “Value-based investing” is more politically agnostic than its critics realize. Used by Pro-life investors like the Catholic Church, it aligns capital with deeply held beliefs – be they left… Read More The post At the Money: Woke Investing vs. Values-Based Investing appeared first on The Big Picture.      At the Money: Woke Investing vs. Values-Based Investing Meir Statman, February 28, 2024  There’s been criticism of what some call “Woke Investing.” But “Value-based investing” is more politically agnostic than its critics realize. Used by Pro-life investors like the Catholic Church, it aligns capital with deeply held beliefs – be they left or right. Full transcript below. ~~~ About this week’s guest: Meir Statman is Professor of Finance at Santa Clara University. His book “What Investors Really Want” has become a classic that explains what drives investors. For more info, see: Professional Bio LinkedIn Google Scholar Twitter   ~~~   Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg.       Transcript: Meir Statman Barry Ritholtz: There’s been a lot of talk lately about socially responsible investing and ESG, what’s been called woke Wall Street in political circles. But is it really woke to want your investment decisions to reflect your personal values, beliefs, and preferences? We know investors seek expressive benefits from their portfolios. They want their money to reflect their values as well as their financial goals. I’m Barry Ritholtz, and on today’s edition of At The Money, we are going to discuss values-based investing. To help us unpack this and what it means for your portfolio, let’s bring in Meir Statman. Professor of Finance at Santa Clara University. He’s an award-winning expert on investor behavior and financial decision-making. His book, What Investors Really Want, has become a classic that explains what drives investors. So, let’s just start with a basic definition. What is values-based investing? Meir Statman: Well, values-based investment is my preferred name to that movement.  That includes values. in investments. It is called socially responsible investing. It is called ESG. Most prominently, it is called sustainability investing, and, so on. Each of them has some deficiencies because they tilt in a particular direction, liberal or conservative values. Based investing is a neutral term; people care about their values, and many don’t want to separate them from their investments. I use the analogy of advising an orthodox Jew, if you are a financial advisor, and you say, listen, pork costs less than kosher beef. It tastes pretty good. How about if you eat pork and donate the savings to your synagogue? Well, everybody understands that that is stupid. My point is that for some investors, having stocks of say a fossil fuel company feels like pork in the mouth of an Orthodox Jew. And if this is how you feel, then by all means stay away from having fossil fuel stocks in your portfolio or any others that really offends greatly your particular values. Barry Ritholtz: So let’s talk about some of the nuances that you’re describing between SRI or ESG and values-based investing. As I understand socially responsible investing, it’s centered on using your investment dollars to create quote “Positive social change.” How does values-based investing differ? It seems to be less focused on changing society and more, just being in sync with your own personal belief system. Is that a fair description? Meir Statman: Not entirely. So, I think it’s very important to distinguish two parts. One that I call “waving banners” and one that I call “pulling plows”. Waving banners as being true to your values. That is what socially responsible investing was, but pulling plows is about doing good for others. It’s about changing the world for the better, and they are really very different, and people confuse them all the time. And so, when an orthodox Jew refrains from eating pork, they don’t think that they’re going to affect the pork market much or change other people’s diets. They just want to be true to their own values. The same applies to somebody who stays away from say companies that employ child labor abroad or engage in poor employee relations or whatever that other thing is. They don’t change the world. They are true to their values. Barry Ritholtz: Your early research in the 1980s found no change really in performance between the socially responsible funds and the broader market indexes. How does that look today? Is there any impact of ESG or SRI on portfolio performance versus the broader market? Meir Statman: So there are a ton of studies, literally thousands and some find that ESG-type investments do better than conventional ones; some find that they do worse; some find that they’re about the same. So it is really hard to figure out that there are many things that can get in the way. Periods, for example, in the late 1990s with the tech boom because ESG portfolios tend to tilt towards growth, ESG portfolios did very well and then they slumped in the slump in the bust of the early 2000s. My own sense overall is that if you are investing in an ESG portfolio, you are going to lag, what you’re going to have in a conventional low-cost index investing. And the reason for that is really fees and expenses. Barry Ritholtz: So you’ve described value-based investing as a neutral term that allows investors to base their decisions on any specific value. It could be the doctrine of the Catholic Church, it could be environmental, it could be anything. If that’s the case, why has there been so much pushback to this if people just want their portfolios to reflect their personal values, be them left, right, or center? How come there’s so much, uh, so much pushback to this? Meir Statman: Well, there’s so much pushback because of the politics because of people’s values. That is, people do not take the approach I take, which says your values are yours and mine are mine, and we should not debate them. Uh, when, when you think about a bad value, like, like protecting the environment, well, if you are liberal, you think that’s good. If you are conservative, you say “Drill, baby, drill” you know. And so poor BlackRock got itself in deep doo doo because they were promoting ESG which, people, interpreted with, reason as tilting left, and they hated it. And, boy, I’ve heard financial advisors talk about it. And financial advisors tend to be Republicans and conservatives. And they are red in the face when they talk about that. And in fact, BlackRock decided that they are not going to talk about ESG anymore and move on to do other things. They said, look, you can choose whatever we want. You want, we in fact, we have, we have funds that are entirely in oil and gas.  So if that’s what you want, invest in that. But of course, it didn’t do them much good because of course, conservatives understood that they are tilting towards Democrats and they hated it. Barry Ritholtz: So I’m glad you brought up financial advisors. For my last question, how should financial advisors deal with client preferences for value-based investing? Is this the same as other client preferences? Low risk, high income, anything along those lines? Or is this completely different? Meir Statman: It is, and it is somewhat different. So the last thing financial advisors should do when they have a prospect who says, I’d like to hire you to manage my portfolio. But you should know that I care deeply about the environment and I don’t want fossil fuel stocks in my portfolio. The worst answer for an advisor is to say, “Listen, I’m here to maximize your returns at the given level of risk. I will do that. And then you use the money I make for you to support the environment.” What a client, what the prospect hears, this advisor does not care about me at all. He has some kind of a solution for everyone. He’s going to shove it down my throat. He doesn’t listen to me. So don’t do that. That is even if you are a conservative and your prospect is obviously liberal. Put yourself in his shoes rather than asking to put himself in your shoes, and start conversations precisely on what are your values? What matters to you? I just gave a presentation to a whole bunch of financial advisors.  And a woman asked, she said, “You know, isn’t it true that this easier for women to talk about those squishy things of values of family and so on, then, then men?” And I said, “Well, yes, it is true, but you can train yourself to act in this sense, like a woman, even if you are a man.” I said, “I am shy by nature, but here I stand in front of hundreds of advisors and speaking,” and if I might add a commercial for my forthcoming book, “A Wealth of Well Being” what it does, what a book like that does is help advisors and help their clients, uh, make that jump to speaking about things that are more than risk and return and portfolios. To speak about family, about friends, about community, about health, about religion, and all of those things, that especially men find it difficult to make this jump from, we are talking about the policy of the Fed, blah, blah, to, uh, how’s your family doing? Barry Ritholtz: Really, really interesting. So to wrap up, Many investors want more than just capital appreciation or income. They want their portfolios to stay true to their values. It’s perfectly fine if you want to do this. Just be aware of the factors that are influencing your decision making, including the costs. Be aware of what all of your goals are when you’re managing your money. I’m Barry Ritholtz. This is Bloomberg’s At The Money.   ~~~   The post At the Money: Woke Investing vs. Values-Based Investing appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 28th, 2024Related News

MiB: Andrew Slimmon, Morgan Stanley Investment Management

     This week, we speak with Andrew Slimmon, managing director at Morgan Stanley Investment Management, where he leads the Applied Equity Advisors team. He is also the lead senior portfolio manager on all long equity strategies for the applied equity advisors team, as well as a member of the Morgan Stanley Wealth Management Global… Read More The post MiB: Andrew Slimmon, Morgan Stanley Investment Management appeared first on The Big Picture.      This week, we speak with Andrew Slimmon, managing director at Morgan Stanley Investment Management, where he leads the Applied Equity Advisors team. He is also the lead senior portfolio manager on all long equity strategies for the applied equity advisors team, as well as a member of the Morgan Stanley Wealth Management Global Investment Committee. He began his career at Morgan Stanley in 1991 as an adviser in private wealth management, and later served as chief investment officer of the Morgan Stanley Trust Co. Slimmon describes his concentrated portfolios — either 30 US stocks or 20 global stocks — as a way to avoid closet indexing. Owning 150-200 names invariably creates a portfolio with a low active share — meaning it is an expensive index-like product. His approach combines quantitative strategy with behavioral economics.  He explains how his popular Slimmon’s TAKE is a way to stay in touch with his investors. A list of his favorite books is here; A transcript of our conversation is available here Tuesday. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. Be sure to check out our Masters in Business next week with David Snyderman, Global Head of Alternative Credit + Fixed Income for Magnetar Capital. The firm is a multi-strategy and multi-product alternative investment management firm, managing $14.9 billion in client assets, and has created over $11 billion of net P&L across all strategies since its 2005 inception.       Andrew Slimmon’s Favorite Books   The post MiB: Andrew Slimmon, Morgan Stanley Investment Management appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 23rd, 2024Related News

At the Money: Why Self-Insight Is So Important  

At the Money: David Dunning professor of psychology at the University of Michigan (January 10, 2024) How well do you understand yourself? For investors, it is an important question. We’re co-conspirators in self-deception and this prevents us from having accurate self-knowledge. This does not lead to good results in the markets. Full transcript below. ~~~ About this… Read More The post At the Money: Why Self-Insight Is So Important   appeared first on The Big Picture. At the Money: David Dunning professor of psychology at the University of Michigan (January 10, 2024) How well do you understand yourself? For investors, it is an important question. We’re co-conspirators in self-deception and this prevents us from having accurate self-knowledge. This does not lead to good results in the markets. Full transcript below. ~~~ About this week’s guest: David Dunning is a professor of psychology at the University of Michigan. Dunning’s research focuses on decision-making in various settings. In work on economic games, he explores how choices commonly presumed to be economic in nature actually hinge more on psychological factors, such as social norms and emotion. For more info, see: Professional Bio Google Scholar Twitter ~~~ Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg.       Transcript:  David Dunning    The financial writer Adam Smith once wrote, if you don’t know who you are, this is an expensive place to find out. He was writing about Wall Street and investing and his insight is correct. If you don’t know who you are — and if you don’t understand what you own, how much leverage you’re undertaking, how much risk you have — this is a very expensive place to learn that lesson the hard way. I’m Barry Ritholtz, and on today’s edition of At The Money, we’re going to discuss self-insight, our ability to know ourselves and understand our abilities. To help us unpack all of this and what it means for your portfolio, let’s bring in Professor David Dunning of the University of Michigan. He is the author of several books on the psychology of self. And if his name is familiar, he is the Dunning in Dunning Kruger. Welcome, professor. Let’s just ask a simple question. How come it’s so hard to know ourselves? David Dunning: There are many, many reasons (and thank you for having me). Well, in many reasons, there are problems in knowing ourselves in terms of our character and in knowing ourselves in terms of our competence. In terms of our character, we overplay how much agency we have over the world. We’re not as influential as we think.  And in terms of confidence, we overestimate how much we know. Now now each of us knows a tremendous amount, but by definition, our ignorance is infinite. And the problem with that is our ignorance is also invisible to us. That creates an issue. Barry Ritholtz: So what other roadblocks and detours are there on the path to knowing thyself? David Dunning: Well, it’s the invisibility of our flaws and our foibles. Some of it is the world – it’s not a very good teacher.  It doesn’t tell us. Its feedback is chancy. Often, its feedback is invisible. What doesn’t happen to you as opposed to what does happen to you. What people tell you, to your face is different from what they’re saying behind your back. So the information we get, our information environment is either incomplete or it’s misleading. And beyond that, we’re co-conspirators. We engage in self-deception. We protect our egos. We are active, in the duplicity in terms of getting to accurate self-knowledge. Barry Ritholtz: We’ve discussed before, any decision or plan we make requires not 1, but 2 judgments. The first judgment is what the item we’re deciding about is, and the second judgment is our degree of confidence in assessing whether or not our first judgment was valid. Which is the more important of the two David Dunning: It should be the second 1, but we tend to focus on the first 1. We tend to focus on our plans, the scenario.  And we tend to ignore or neglect the second one, the fact that life happens and life tends to be unexpected.  Um, we should expect the unexpected,  We should be sure to think about what typically happens to other people and have plan Bs and plan Cs for when those sorts of things can happen. Or at least have plans for unknown things that can happen because the 1 thing we know is that unknown things will happen. And everything in the past has always been slower than we expected. We should expect everything in the future is going to be expected, but we tend to overweight, give too much attention to our plans and not think about the barriers and not think about the unknown barriers that are certainly gonna hit us in the future. That’s why what I mean by, the fact that we tend to give too much weight to our agency in the world, not give credit to the world and its deviousness in thwarting us. Barry Ritholtz: So let’s talk a little bit about how illusory our understanding of our own abilities are. Is it that we’re merely unskilled at evaluating ourselves, or are we just lying to ourselves? David Dunning: We’re actually doing both. I mean, there are two layers of issues. One  layer of issues is, we’re not very skilled at knowing what we don’t know. I mean, think about it. It’s incredibly difficult to know what you don’t know. You don’t know it! How could you know what you don’t know?  That’s a problem. We’re not very skilled at knowing how good our information environment is, how complete our information is. That’s one issue. The second issue is what psychologists refer to as the motivated reasoning issue, which is just simply then we go from there and we practice some motivated reasoning, self deception, wishful thinking. We actively deceive ourselves in how good we think our judgments are. We bias our reasoning or distort our reasoning toward preferred conclusion. That stock that stock will succeed. Our judgment is absolutely terrific. This will be a wonderful investment year. There’s nothing but a rosy stock market ahead for us. That’s the second layer. But there are issues before we even get that second layer, which is just simply, uh, we don’t know what we don’t know. And it’s very hard to know what we don’t know. Barry Ritholtz: So we live in an era of social media. Everybody walks around with their phones in their pockets. They’re plugged into everything from TikTok to Instagram to Twitter to Facebook.  What’s the impact of social media on our self awareness  of who we are, has it had a negative impact? David Dunning: I think, social media has had all sorts of impact, and I think what it’s done is create a lot of variance, a lot of spread in terms of the accuracy of what people think about themselves and the positivity and the negativity of what people think about themselves. There’s just a lot of information out there and people can truly become expert if they know what to look for. But there’s also a lot of possibility for people to come truly misled if they’re not careful or discerning in what they’re looking at. Because there’s a lot of misinformation and there’s a lot of outright fraud in social media as well. So people can think that they’re expert, because there’s a lot of plausible stuff out there, but there’s a lot more in the world that’s plausible than is true. And so, people can think they have good information where they don’t have good information. That involves issues like finance, that involves issues like health, that involves issues like national affairs and politics, that’s an issue. But it’s possible to become expert if you know what to look for. So there’s a lot of variance in terms of people becoming expert or thinking they’re expert and becoming anything, but. In terms of being positive or being negative, there’s a lot of  tragedy on the Internet. So by comparison, you can think well of yourself.  And it is a fact that when people go on the Internet, what they post are all the good things that happen in their life, all the good news that’s happened to them, but that’s the only thing they post. And if you’re sitting there in your rather good news/bad news life, you can think that you’re rather ordinary or you can think that you’re rather mundane when everybody else is having so much more of a best life than you are, you can think that you’re doing much worse than everybody else. So the Internet just can create a lot of different impacts on people that’s both good and bad, truthful and untruthful. It just turns up the volume and everything. Barry Ritholtz: Yeah, we certainly see, um, social status and wealth on display. You never see the bills and the debt that comes along with that. That that that’s a really good way of describing it. Talking about expertise, I cannot help but notice over the past few years, especially on social media, how blithely so many people proclaimed their own expertise. First, it was on epidemiology, then it was on vaccines, then it was constitutional law, more recently it’s been on military theory. Is this just the human condition where we’re wildly overconfident in our ability to become experts even if we don’t have that expertise? David Dunning: Well, I think it is. Aand if it’s not all of us, at least it’s some of us. That is we have a little bit of knowledge and it leads us to think that we can be expert in something that we’re quite frankly not expert in. We know a little bit of math. We can draw a curve and so we think we can become expert in epidemiology, when we’re a mathematician or maybe a lawyer or maybe we’ve heard a little bit about evolution. And so we think we can comment on the evolution of a virus when we’re not — we don’t study viruses, we’re not an epidemiologist, but we know a little bit and once again we don’t know what we don’t know. So we think we can comment on another person’s area of expertise because we know nothing about the expertise contained in that other person’s area of expertise.  A philosopher friend of mine, Nathan Ballantyne, and I have written about “Epistemic Trespassing,” where people in one area of expertise who know a little bit about something decide that they can trespass into another area of expertise and make huge public proclamations because they know something that looks like it’s, relevant, looks like it’s informative, and it has a small slice of relevance,  but it misses a lot in terms of really commenting on things like international affairs or economic policy or epidemiology. But people feel that they have license to comment on something that lies far outside of their actual area of expertise. Now, some of us give ourselves great license to do that, but I do want to mention that this is part of being human because part of being human – part of the way that we’re built is every day we do wander into new situations  and we have to solve problems, we have to innovate, we have to figure out how do I handle this situation. So, we cobble together whatever expertise, whatever experience, whatever ideas we have, to try to figure out how do we handle this situation. This imagination is how we’re built. That’s part of our genius, but it’s a genius that we can over apply. And what you’re seeing in Epistemic Transpassing is a flamboyant way in which this genius is over applied  in the public domain. Barry Ritholtz: So wrap this up for us, professor. What do we need to do to better understand ourselves, our capabilities, and our limitations? David Dunning: Well, I think when it comes to understanding information like the Internet,  lik, reading someone who might be an epistemic trespasser for example or someone who is  making grand statements about epidemiology or foreign policy or whatnot is – maybe it would be good to familiarize ourselves with the skills of journalism. And actually, I wish  schools would teach journalism skills or at least fact checking skills more prominently in the American education system. That is as we progress in the 20 first century, dealing with information is going to be the skill that we all need. Finding experts and evaluating experts – Who is an expert? – is gonna be a skill that we all need. Figuring out if we’re expert enough is gonna be a skill that we all need. And a lot of that is really about being able to evaluate the information that we confront and a lot of that really boils down to fact checking and journalism. So,  finding out how to do that, I wish we have a little bit more of those skills, as a country or at least that that that’s  the the nudge that I would give people. Barry Ritholtz: Really, really very fascinating. So to wrap up, having a strong sense of self moderated with a dose of humility is a good way to avoid disaster on Wall Street.  Adam Smith was right. If you don’t know who you are, Wall Street is an expensive place to find out. I’m Barry Ritholtz, and this is Bloomberg’s  At The Money.       The post At the Money: Why Self-Insight Is So Important   appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 22nd, 2024Related News

All-Time Highs Are Historically Bullish

  A quick note to answer this question: What happens after markets make a new all-time high (after a year w/o one)? Check out the table above, via Warren Pies. He spoke with Batnick and Josh earlier this month. Going back to 1954, markets are always higher one year later – the only exception was… Read More The post All-Time Highs Are Historically Bullish appeared first on The Big Picture.   A quick note to answer this question: What happens after markets make a new all-time high (after a year w/o one)? Check out the table above, via Warren Pies. He spoke with Batnick and Josh earlier this month. Going back to 1954, markets are always higher one year later – the only exception was 2007. That was after housing had peaked, subprime mortgages were defaulting, and the great financial crisis was about to start. This is the 15th time markets have made ATH highs after 12 months. Excluding 07, returns have ranged from 4.9% to 36.9% a year later, averaging about 14%; the bull market that followed ranges from 9.7% to 350%, with an average of 85%. Drawdowns following ATH tend to be shallower than other periods as well. Peter Mallouk points out that investments made on days of all-time highs outperform investments made on all other days,   Technicians will tell you All-Time Highs are bullish because there is no selling resistance; behavioral economics suggests it’s bullish due to FOMO and plain old greed. Ask yourself this: Is 2024 more akin to 2007, or most other markets where new all-time highs were made?     See also: Nothing is More Bullish than All-Time Highs (Michael Batnick, February 3, 2024) All-Time Highs in the Stock Market are Usually Followed by More All-Time Highs (Ben Carlson, February 8, 2024)   Previously: How Bullish Were You in 2011? (November 29, 2023) The Most Hated Rally in Wall Street History (October 8, 2009) Bull & Bear Markets The post All-Time Highs Are Historically Bullish appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 22nd, 2024Related News

MiB: Bill Dudley, NY Fed Chief

     This week, we speak with Bill Dudley, former president and chief executive officer of the Federal Reserve Bank of New York, where he also served as vice chairman and a permanent member of the Federal Open Market Committee. He was executive vice president of the Markets Group at the New York Fed,… Read More The post MiB: Bill Dudley, NY Fed Chief appeared first on The Big Picture.      This week, we speak with Bill Dudley, former president and chief executive officer of the Federal Reserve Bank of New York, where he also served as vice chairman and a permanent member of the Federal Open Market Committee. He was executive vice president of the Markets Group at the New York Fed, where he also managed the System Open Market Account. Previously, he was chief US economist at Goldman Sachs (the firm’s first) as well as a partner and managing director. He is the chair of the Bretton Woods Committee, and Chairman of the Committee on the Global Financial System of the Bank for International Settlements. Dudley explains how he became President of the NY Fed in January 2009 — right in the heart of the GFC. He guided the NYFed in providing support to financial markets and administering “stress tests” to banks — at a time when banks like Citi and Morgan Stanley were under enormous pressure — a very large job in the Spring of 2009. He describes that as a turning point in the banking crisis. A list of his favorite books is here; A transcript of our conversation is available here Tuesday. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. Be sure to check out our Masters in Business next week with Andrew Slimmon, Managing Director at Morgan Stanley Investment Management, where he leads the Applied Equity Advisors team. His Slimmon’s TAKE is a popular and widely read commentary among Morgan Stanley advisors and on The Street as well. He also serves as Senior Portfolio Manager for all long equity strategies and is a member of Morgan Stanley Wealth Management’s Global Investment Committee.     Bill Dudley’s Current Reading Project Hail Mary by Andy Weir Small Mercies: A Detective Mystery by Dennis Lehane The Cartel by Don Winslow Killing Floor by Lee Child Exhalation by Ted Chiang   Books Barry Mentioned The Three-Body Problem by Cixin Liu Stories of Your Life and Others by Ted Chiang Intergalactic Refrigerator Repairmen Seldom Carry Cash: And Other Wild Tales by Tom Gerencer   The post MiB: Bill Dudley, NY Fed Chief appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 20th, 2024Related News

2024 Aston Martin Vantage

    Over the past few years, my automotive focus has been drawn from achingly beautiful classic cars, toward something newer: Hybrids, EVs, and assorted new technologies. I like to keep current, and that means tracking recent trends and developments in the automotive industry. But when the most beautiful car I have seen in decades… Read More The post 2024 Aston Martin Vantage appeared first on The Big Picture.     Over the past few years, my automotive focus has been drawn from achingly beautiful classic cars, toward something newer: Hybrids, EVs, and assorted new technologies. I like to keep current, and that means tracking recent trends and developments in the automotive industry. But when the most beautiful car I have seen in decades comes along — and has a beastly 656+ HP — well, I revert to my default petrolhead status and drool something that sounds like arghgeghh… The photos are simply stunning: From the massive front grill to the muscular haunches, the eye-catching rear fenders, flowing indents, and that sexy tail bob, everything about this car screams Beauty AND Beast. Even the interior, long an Aston Martin weak spot, looks fantastic. Specs: -656BHP at 6000rpm -Maximum Torque: 800NM (2000-5000 rpm) -0-62 in 3.5 seconds (0-100km/h) -Top speed: 202mph (325kph) -All alloy quad overhead cam, 4.0 litre twin turbo V8 -Rear mid-mounted ZF eight-speed automatic transmission -Body: aluminium body structure with composite panels -Rear tires: Michelin Pilot Sport S 5: 325/30/ZR21 (Huge!); Front  275/35/ZR21 (Beefy!) What Aston calls “Podium Green and Lime” looks like a cross between AMG’s Green Magno Hell and British Racing Green with acid yellow trim is spectacular (Maybe it is Ion or Aston Martin Racing Green). The full palette of colors read wet, beautiful, and nuanced. It comes in the widest range of choices I can recall from AM, from in-your-face oranges and neon to subtle blacks, greys, and silvers. I tend to like cars in Blue, as they are less cliched and rarer — check out the low-key Ion Blue. I had no idea this was coming out until I watched it on Harry’s Garage. No rear wheel steer or heavy hybrid batteries, just a monster Mercedes-sourced twin-turbo AMG engine. I imagine the folks in Stuttgart are taking notice — anyone in the market for a Porsche 911 Turbo S now has to decide how much beauty they can handle. If this is the ICE era’s last hurrah, we are certainly going out on top…       Source: Auto Car Source: Aston Martin, Goodwood, Evo   The post 2024 Aston Martin Vantage appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 20th, 2024Related News

Transcript: Bill Dudley, NY Fed Chief

   The transcript from this week’s, MiB: Bill Dudley, NY Fed Chief, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ This is Masters in business with Barry… Read More The post Transcript: Bill Dudley, NY Fed Chief appeared first on The Big Picture.    The transcript from this week’s, MiB: Bill Dudley, NY Fed Chief, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ This is Masters in business with Barry Ritholtz on Bloomberg Radio 00:00:09 [Barry Ritholtz] This week on the podcast, what can I say? Bill Dudley, former New York Fed President, multiple positions at Goldman Sachs on the Federal Reserve at the New York Fed. Really a masterclass in how monetary policy is not only made but executed and put into actual operations. There are few people in the world who understand the interrelationships between central banks, the economy, and markets like Bill Dudley does this, this is just a master class in, in understanding all the factors that affect everything from the economy to inflation, to the labor market, the housing market, and of course, federal Reserve policy. I, I could go on and on, but instead I, I’ll just say with no further ado my conversation with former New York Fed President, bill Dudley. 00:01:10 [Bill Dudley] Great to be here, Barry. It, 00:01:11 [Barry Ritholtz] It’s great to have you. So I feel like I have to call you Bill. 00:01:15 [Barry Ritholtz] Bill. That’s how, 00:01:15 [Barry Ritholtz] Because that’s what I always hear you described as not a William. Yep. Let, let’s talk a little bit about your background. You get an economics PhD from California, Berkeley in 82, and around the same time you become an economist at the Federal Reserve Board from 81 to 83. Tell, tell us a little bit about that role. 00:01:34 [Bill Dudley] I, I was there in the, what’s called, called the financial studies section, which is one of the very small places in the Fed that is not macroeconomics driven. It’s microeconomics. So we worked on things like payments policy, you know, regulatory policy. So all, all sorts of micro issues, not macro issues. It was a pretty interesting period because the, the congress had just passed what’s called the Monetary Control Act, where they were forcing the Fed to charge for all its services to, so, so, so to sort of level the playing field with the private sector. So we had to figure out how are we gonna price all these services in a way that we can still sort of stay in business and be a viable competitor to the private sector. Huh. 00:02:11 [Barry Ritholtz] That, that’s kind of bizarre. I would imagine in 1982, the Fed was a much smaller entity than it is today. What was a day in the life of a Fed economist like back then? 00:02:23 [Speaker Changed] So, I was working on issues, you know, on payments. I worked on issues on, you know, some, some, some, some of them were quite esoteric. So, for example, the treasury was thinking about moving to direct deposit, but they wanted to know how much it was gonna cost them because direct deposit, they, they, they, they, the money clears, you know, sorry, almost instantly, right? When you write a check, you get check float, it takes time for the checks to come back to the hit the treasury account. So they wanna know how many days does it take a, a treasury check to get back to us. So we actually set, set up this project where we went out to the reserve banks and sampled checks to find out how long did it actually take someone to get their treasury check and deposit it somewhere and have it get back to the Fed and debit the treasury of the county. It turned out to be like eight or nine days on average, 00:03:07 [Speaker Changed] And, and on a couple of billion dollars, that float is real money. 00:03:10 [Speaker Changed] It’s real money. So we wanted to make sure that under PE people understood what the cost was. Now, obviously, it’s a good thing to do. I mean, it does cost the treasury money, but it’s a much more efficient and more reliable payments medium. 00:03:23 [Speaker Changed] Did you overlap with Chairman Paul Volker when you were there? 00:03:27 [Speaker Changed] Yes, I did. I didn’t have a lot of interactions with him. I remember one time though, I did do a briefing of the, of the Board of Governors, and at the time they had, they had this very long table in the board in the main, you know, board of governor’s meeting room. And Volcker sat at one end and the, the briefer sat all the way at the other end, which was made it sort of complicated because Volcker had a, usually had a cigar stuck in his mouth, and he would actually quiet, like, and you could like straining to hear them. The, the senior staff was ready to rescue you if you said something inappropriate. I mean, right. They set the bar, the tension bar so high because you, you actually couldn’t actually do a briefing until you’ve actually taken a course. 00:04:08 [Speaker Changed] No kidding. So 00:04:08 [Speaker Changed] That means like, you’re not exactly relaxed when you’re going to, to brief the governors. I’m, it’s not a lot of give and take. It’s very, it was a very formal process 00:04:16 [Speaker Changed] And even without a cigar in his mouth, I only got to meet Tall Paul once, but he’s kind of gruff and mumbles, like not a clear projecting voice, kind of a, a horse mumbling voice. I can imagine with a cigar in his mouth, who could even tell what he’s saying. 00:04:31 [Speaker Changed] Well, I seem to have, have gotten it good enough. And you know, what’s interesting about that? I didn’t really have that much interaction with Paul over the next, you know, 15, 20 years. But once I got to the Fed, we started to actually see each other on a much more regular basis. I got involved with a group of 30, Paul was a member of the group of 30, and we gradually became pretty good friends. So it started like very slow and started it matured like fine wine. 00:04:56 [Speaker Changed] He’s a, he’s a fascinating guy. And what, what an amazing career. So before you come back to the Fed, there’s a private sector interval. Tell us a little bit about the 20 years you spent at Goldman Sachs, where you not only became a managing director and a partner, but you know, really very much rose through the ranks. 00:05:16 [Speaker Changed] Well, first I went to JP Morgan. I was their, the regulatory comm, JP Morgan at the time had one regulatory commiss. And so when the job came open and they approached me at the Fed, I thought, boy, if I don’t take this job, it’s not gonna be available, you know, a few years later. So I went to JB Morgan and I worked on a lot of bank regulatory matters, and that’s why I’m still very interested in bank regulatory issues. But that seemed to me like not a really great long-term career. ’cause as you know, bank regulation changes very slowly, and I sort of wanted a faster tempo. So Goldman Sachs had me into interview for a macroeconomics job, and I thought, well, I don’t really know a lot of macroeconomics, but I do know about how the Federal Reserve operates, how the payment system operates, how the plumbing works, how reserves, you know, move through the system. And I think they liked the fact that I knew about how things worked at sort of a micro level. So they hired me to do macroeconomics. 00:06:11 [Speaker Changed] You were chief US economist for, for a decade over a, a really fascinating period, really, the heart of the bull market. Tell us a little bit what you remember from that role in that era. 00:06:27 [Speaker Changed] Well, I remember how, how, how it was a period of sort of stars for, for, for, for equity analysts, much more than it is today. And one of the biggest stars was Abby, Joseph Cohen Sure. Who was the equity analyst for Goldman Sachs. So trying to find some space between Abby and your audience was a little bit challenging. But, but, you know, we, I focused mostly on fixed income and foreign exchange. So there was sort of room for me to, to, to do my business. Probably the highlight of my career at Goldman Sachs was that, I can’t remember exactly the year, but it was in the early two thousands when people in the markets were, couldn’t figure out if the Fed was going to move by 25 basis points or by 50 basis points. And unlike today going into the meeting, it really was 50 50. 00:07:13 Right. And Lloyd Blankfine called me up the night before and sort of said, you know, we have a lot of risk on, on this notion that they’re gonna do 50. How do you, how do you feel about that? And that was my call. I said, I, I told Lloyd, I said, I don’t know what’s gonna happen, but the probability of 50 is a lot more than 50 50 at this point. Next day I had to go to Boston for a client meeting. It was really sort of sad because I wasn’t on the floor at the time that the announcement came, but apparently people stood up and cheered for me, 00:07:40 [Speaker Changed] And it was a 50 point mark. 00:07:41 [Speaker Changed] Yeah, yeah. So I got that, that, so that, that was probably the highlight. And I sort of got to miss the best part of it actually. 00:07:47 [Speaker Changed] So, so after, you know, more than 20 years at Goldman, you joined the New York Fed in 2007, overseeing domestic and foreign exchange trading operations, 2007, that, that’s some timing. It’s really, it’s after real estate rolled over, but it’s kind of before the market peaked and the real trouble began in oh 8, 0 9. 00:08:11 [Speaker Changed] Yeah. Well, I had about I seven months of calm and then chaos started in August of 2007. I remember it really well because I just finished building this house in West Virginia and we, we were taking occupancy in early August, and it was, it was literally the same day that BMP Paraba shut off redemptions from some of their mutual funds, caused all sorts of chaos in Europe. And then the question is, well, what are we gonna do about adding liquidity in the us? So, didn’t get outta the house, my new house for the next two days as we tried to figure out how to calm markets after the BNP Paraba event 00:08:48 [Speaker Changed] And, and the US market kept going higher. I don’t think we peaked till like October oh seven, something like that. 00:08:53 [Speaker Changed] Yeah. People didn’t really understand the, the, the consequences of subprime, you know, I thought 00:09:00 [Speaker Changed] For years, I mean, literally for years if you mentioned it, you would be mocked on tv. 00:09:05 [Speaker Changed] Yeah. I mean, you know, one thing I am proud about when I joined the Fed is in January, 2007, that was my first briefing of the FOMC. And I, I actually talked about how this could turn out poorly. You know, that subprime was being supported by, you know, subprime was being, you know, the credit was flowing to subprime, subprime was enabling people to buy houses. Home prices were going up as, ’cause home prices were going up. Subprime wasn’t a problem, right? But at some point, supply was gonna increase in response to the higher home prices. And once prices stopped going up, subprime was gonna start to go the wrong direction. I said, this is a possibility. I didn’t say it was going to happen, but I said it was a possibility. So I was sort of pleased that I got off on the right track. 00:09:48 [Speaker Changed] And, and then in January, 2009, we we’re deep into the financial crisis. We’re post Lehman and post a IG you get named 10th president, CEO of the New York Fed. Again, fantastic timing. What was taking up your attention right in the midst of, of the CRI financial crisis? 00:10:08 [Speaker Changed] Well, you know, that was a tremendously fortunate event for me. I always tell people like, B Barack Obama had to become president. Tim Geitner had to become treasury secretary, and then the board of directors in your fed had to pick me. So it’s sort of like a low probability times, low probability times low probability. So I, 00:10:25 [Speaker Changed] So sometimes it works out. Yeah, 00:10:26 [Speaker Changed] Sort of a bank, a bank, a triple bank shot. You know, a lot, lot of things we were focused on at the time was trying to provide support to financial markets. So, if you remember, we were, we were still rolling out various facilities like the, the, the term asset backed, the lending facility, for example. We were running the commercial paper funding facility. We were trying to figure out how to do stress test, the first stress test of banks, right? So that was a big job in the spring of, of 2009. And those stress tests were probably the critical turning point in the financial crisis. I remember the, the day after we published the stress test, and for the Fed, we were actually pretty transparent about what we did and what our assumptions were. And here’s the results. Bridgewater published a piece, and I think the headline said something like, we agree. 00:11:13 And I, and I said, okay, we’ve, now that’s, that’s really important because if our analysis is viewed as credible, and we have the tarp money being able to supply the capital that’s needed, then people can start to rest assured that the banking system is, is gonna stabilize and, and it’s gonna stop deteriorating. Now, it also helped that the economy was showing signs of bottoming out, right? So it didn’t look like we’re just heading down into a, a deep hole. But, you know, it was very touch, touch, touch and go there in the first part of 2009. And there, you know, there were still some major financial firms that were pretty darn shaky. I mean, Citi was pretty shaky. Morgan Stanley was pretty shaky. Some of the banks were still pretty shaky. So it, you know, until you actually hit bottom and start to pull up, you’re really wondering, are you gonna get through this in, in one piece? 00:12:00 [Speaker Changed] So, so the Bridgewater piece raises a really interesting question. The New York Fed is kind of, I don’t know how to say this first, amongst the regional feds, because you’re located right in the heart of the financial community. What is the communication like back and forth between the New York Fed and major players in finance, especially in the midst of a crisis like that? 00:12:29 [Speaker Changed] So the New York Fed is sort of unique among central banking entities because most central banks, they, they do the policy and strategy and the operations all in the same place. But in the Fed is split. You have policy done in Washington, the operational implement implementation of that policy. Almost all of that takes place at, at the New York Fed. So the New York Fed is sort of the eyes and ears of, of the Federal Reserve for markets. I think that, you know, one thing that helped me a lot during the financial crisis is I knew a lot of people on Wall Street. And so when something was happening, I could call up people I knew and and just ask their opinion, recognizing that oftentimes their opinion does have a touch of self-interest. Sure. So you need to talk to three or four people to sort of triangulate and figure out what you think is really going on. 00:13:15 I mean, I’ll give you an example of one thing that really struck me during the, that period, I called up someone and I said, here, here’s a complex, you know, CDO obligation, you know, with, you know, with all these different mortgages and all these different tranches, how long would it take you to actually go through that and value it appropriately to come up with a appropriate valuation? He said, oh, it’d take at least two or three weeks, really? And I thought, oh boy, we’re in big trouble. Wow. You know, if you don’t really know what things are worth when you’re going through a period of financial stress, that’s gonna be, make things much, much more difficult, 00:13:49 [Speaker Changed] I would’ve guessed they would break that up into five parts, give it to a bunch of juniors, and they’d have an answer in three hours 00:13:55 [Speaker Changed] At the most. Well, it’s, it scared me. Wow. It scared 00:13:56 [Speaker Changed] Me. I, I, I can imagine. So, so from the New York Fed, you ultimately end up as vice chairman of the FOMC helping to formulate US monetary policy. What was that like going from New York to, to dc? 00:14:14 [Speaker Changed] Well, it wasn’t such a big change because I had already been going to the FMC meetings and briefing the, the, the, the, the FMC members as 00:14:21 [Speaker Changed] As president of the New York Fed. You have a seat on 00:14:23 [Speaker Changed] That. What what what what happened though is, is as I sort of switch sides, so there, so the, the, the day that Tim Geer was named Treasury Secretary was basically the day before an FOMC meeting. And I literally didn’t know when I went down to Washington that Monday evening, whether I was gonna be briefing the FOMC participants or whether I was gonna be an FOMC participant myself. So I actually prepared two sets of notes. Here’s my briefing notes, if I’m, I’m the so manager, and here’s my remarks if I’m the president of New York Feds. Wow. So I was ready for both. 00:14:56 [Speaker Changed] And what happened that day? 00:14:57 [Speaker Changed] He was, he was named on that Monday and so on Tuesday I was, I was the, I was the president of New York Fed. Wow. And, you know, I didn’t, you know, so I, and I, when I got back to New York on, you know, I think Thursday morning, I, we had a town hall and I gave my first remarks to the New York Fed people and had a very simple message for them. Best idea wins because I was really struck by how hierarchical central banks tend to be. And I wanted to sort of push aga against that idea and basically say, it doesn’t matter where the idea comes, if it’s the best idea, that’s the idea that should win out. 00:15:34 [Speaker Changed] Huh. Ma makes a lot of sense. And, and since then, you, you’ve gone on to do some work reforming L-I-B-O-R as the benchmark for rates. Tell us, I always get the name SOR the new one that replaced it. sofa. Yeah. So, so tell us a little bit about the work you did. ’cause L-I-B-O-R was probably the most important number, certainly in credit, maybe in all of finance. 00:16:00 [Speaker Changed] So LIBR for while was there was a real question whether Central banks were gonna take this on or not. And I remember I was in Basel for the BIS meetings and I wrote a one page memo to, to Ben Bernanke, to hand to Mervin King. Mervin King was the head of the, sort of the policymaking group at the BIS at the time. And the memo was basically arguing why Central banks needed to own the L-I-B-O-R problem. ’cause if they didn’t own it, it wouldn’t get fixed. It’d be a problem again. And then the central banks would be blamed for, well, why didn’t you fix that problem? So I don’t know how much import that memo had, but I was very pleased to see the central banks take it up. And as you know, it was a huge undertaking, which took, you know, many, many years to complete. 00:16:44 [Speaker Changed] And, and, and for those people who may not be familiar with the London Interbank offered rate offered rate literally was a survey where they call up various bond debts and say, so what are you charging for an overnight loan? And eventually traders figured out they could game that by, let’s just call it, talking their books, so to speak, in a way that would move the L-I-B-O-R in their direction. You could, you could do a bunch of things with derivatives and eventually L-I-B-O-R kind of spiraled outta control the new improved version. How do we prevent that from taking place? What, what were the structural changes? 00:17:26 [Speaker Changed] Well, the, the problem, I mean, the problem of of L-I-B-O-R was that you had a small cash lib i bor market that was, was referencing a very large futures market year at dollar futures market. And so you had a situation where you could take big positions in the euro dollar market, affect the price and the cash market and actually make a profit. So the sort of the tail was wagging the dog for SOFR, the secured overnight funding rate for repo. You have a big repo market. I mean it’s, you know, hundreds and hundreds of billions of dollars. So the idea, and it’s a real market. I mean, there’s real transactions that are traded and you can sort of track what the prices are and where trades are. So it’s, so it’s almost impossible to imagine someone manipulating the this so, so R market. 00:18:07 [Speaker Changed] Huh. Really, really interesting. So, so first, before we start talking about policy, I have to ask, you’re at Goldman Sachs for 20 years and, and you get the phone call to join the New York Fed. What was that like? Was that a tough call or was that an easy decision to make? 00:18:24 [Speaker Changed] Well, what happened actually is Tim Geer called me several months earlier and said, would you like to come over to be a senior advisor? And I said, I’d love to be a senior advisor to you, Tim, but what do I do with the rest of my, you know, 40, 50 hour work week? And he didn’t have a really good answer for that. 00:18:39 [Speaker Changed] Was this a full-time gig? I means he was economies position. 00:18:42 [Speaker Changed] He, he, he was per, well, I didn’t, when I left Goldman, I didn’t really know what my next thing was. So I did not have the next job. I was just assuming that I would, I, something would come along that would be 00:18:51 [Speaker Changed] Right. Fair assumption. 00:18:52 [Speaker Changed] It would be interesting. So he, he offered that. And I thought, well, you know, I I, you know, Tim and I had a very good relationship and you know, I, I sort of liked the idea of working for him, but I thought a senior advisor was a little bit too informed. And a couple months later he came back and said, can you run the markets group at the New York Fed? That’s completely different. You’re running the group that actually implements monetary policy, oversees market analysis, deal deals with the primary dealer community. That was a real opportunity. So that one I didn’t have to think very hard about. 00:19:21 [Speaker Changed] And, and what’s, what, not long after Tim gets elevated, you, you take the role of New York Fed President, what’s a day in the life of New York Fed Pres? Like 00:19:33 [Speaker Changed] There’s a lot to, to do because the New York Fed does lots of different things. So you, you know, we have supervision, we oversee some of the largest financial institutions in the world from a supervisory perspective. We’re the international arm of the Fed. So pretty much every two months I would go to B to to the BIS in Basel, be part of the Bank for International Settlement meetings. New York Fed President as, as well as the chairman of the FO of the Board of Governors is on the board of directors of the BIS. As Alan Blinder once joked to me, he says, New York Fed is the only only institution that’s treated it like their their own country because they have this board of directors position. You know, there’s lots of things and, you know, payments their Fed, New York Fed runs fed wire, the, the New York Fed runs Central Bank International Services for a bunch of foreign central banks. 00:20:24 They have, I don’t know, three, $4 trillion of custody assets from foreign. Wow. So there’s a lot, there’s lots of pieces to the Fed, and then there’s a research department and there’s a lot of outreach to try to get information about what’s really happening in the world. I mean, the one thing that I did that was probably a little new from the Fed’s perspective is I tried to broaden out the, the people that the New York Fed was talking to historically, the New York Fed had typically talked mainly to the primary dealer community. So that’s where they obtained their information from. And I thought that that was too narrow. We need, we need, we need a broader set of perspectives. And so I hired a, a woman named Hailey Bosky who came in and, and literally built out a whole operation so we could actually interact not just with the sell side, but also with the buy side. 00:21:10 And so we started an advisory group of people, you know, hedge funds, pension funds, insurance companies, you know, buy side investors. And so we have them in periodically to talk to. And so we got a much broader network of information that we could sort of take on board. And I think that’s valuable because, you know, where you sit really does influence your perspective and you sort of wanna understand what biases and, you know, self-promotion sometimes that people are talking their book that you want to be able to make sure you, you don’t get to fooled by that. 00:21:42 [Speaker Changed] Now, you could go back not all that far in the Fed history, and there was none of this communication. There wasn’t transcripts released, there wasn’t a reporter Scrum and, and a q and a. There wasn’t even an announcement of change in interest rates. You had to follow the bond market to see when rates changed. What are the pros and cons of being so clear and so transparent with market participants? Is the risk that maybe we’re too clear? 00:22:13 [Speaker Changed] Well, I think there’s a strong argument in favor of transparency as opposed to opacity. And, you know, this has been debated within the Fed for many years. I mean, Alan Greenspan, Paul Volcker definitely preferred to be opaque. I mean, Alan Greenspan famously said, if you understand, if you think you understand what I said, then I wasn’t, wasn’t unclear enough or something to that effect, right? So I, the, the value of transparency is, is if, if is that if markets understand how the Federal Reserve is gonna react to incoming information, the market can essentially price in what the Fed hasn’t even yet done. And so that can make monetary policy work much more rapidly. So let’s think about it today. So the market is pricing in roughly five to 6 25 basis point rate cuts between now and the end of the year. So that means monetary policy is easier, even though the Fed reserve hasn’t cut rates yet. So the, 00:23:06 [Speaker Changed] They do some of the work for the Fed for 00:23:08 [Speaker Changed] Them. Yeah. And, and it makes it, and it also means that as new coming information is coming in the market can reprice. And so that can cause the impulse of the economic news to be filtered into financial conditions much more, more quickly. I’m a big believer in financial conditions as a framework for thinking about monetary policy. You know, 20 something years ago, Jan Hottes and I introduced the Goldman Sachs Financial Conditions index, and it took about 20 plus years for the Federal Reserve to sort sort of endorse it. I mean, Jay Powell talks about financial conditions a lot more than any other chair of the Fed ever has. The reason why financial conditions are so important is in the United States, the economy doesn’t really run on short-term interest rates. It really runs on how short-term interest rates affect long-term rates, mortgage rates, stock market, the dollar credit spreads, you know, we have a big capital market compared to other countries. 00:23:58 And so short-term rates are not really the driver. Now, if short-term rates and financial conditions were, you know, rigidly connected, so if I move the short term rate by XI, I know exactly how much financial conditions are moved by y you wouldn’t have to worry about financial conditions, but there’s actually a lot of give between the two. And so financial conditions can move a lot, even as short- term interest rates haven’t changed very much. I mean, good example is just the last three months, last three months since the end of October till now, financial conditions have eased dramatically. I mean, the Goldman Sachs financial Conditions index has moved by about a one point half per points, which is a big move for that index, even as the Fed hasn’t done anything in terms of short term rates. So 00:24:39 [Speaker Changed] Part of the problem with everybody anticipating Fed actions is there’s a tendency for many people, sometimes most people to get it wrong. Wall Street has been anticipating a Fed cut for, what is it now? This, we’re in the seventh month, eighth month of, hey, if the Fed’s gonna start cutting any, any day now, what does it mean when anticipating Fed actions almost becomes a Wall Street parlor game and there’s less focus on, on what’s happening in the broad economy and more focus on, well, what does the second and third derivative of this mean to this economist advising this Fed governor and the impact on the FOMC? 00:25:23 [Speaker Changed] I mean, sometimes I think you’re right that there’s almost too much focus on what’s gonna happen at the next meeting. I mean, you know, when you go to the press conference now, if Powell’s just asked multiple different varieties of the question, okay, so what would cause you to move at, at, at, at the March meeting or at or at the May meeting? And of course, Powell’s not gonna answer that question, you know, because it depends, it depends on how the economy evolves between now and then. So I think, you know, one of the problems I think you, you have is that the Fed Reserve does publish a forecast, the Summary of economic projections, which is the forecast of all the 19 FMC participants. So that gives you an idea of what they sort of think is gonna happen at any given point in time. But those forecasts are, you know, not particularly reliable. And so as 00:26:06 [Speaker Changed] All forecasts are 00:26:07 [Speaker Changed] On, yeah, it’s all four kind stars. So you, you don’t want to, you don’t want to take it sort of literally, but it, you know, like right now there’s a bit of a, a gap, right? The feds is talking about three rate cuts in, in, in 2024, and the market’s got five to six priced in. So you know, what will happen is the economic news will come out and that will drive, make the Fed either go more quickly or more slowly, and that that will, will, what actually is, is important. So I, I always tell people, focus on the data more than what the Federal Reserve says beyond the next meeting. 00:26:39 [Speaker Changed] Although, to be fair, and I find this perplexing, say what people will say about Jerome Powell, he has said what his position is, is he has said what he’s going to do. And then he has done exactly that for the past three years. And it’s almost as if Wall Street just doesn’t believe him. Like, no, no, we’re not gonna cut this year. You got, you got three or four quarters, settle down, no, no, go cut next month says Wall Street. He has said what he meant and then stuck to it. And yet the street seems to doubt him. 00:27:10 [Speaker Changed] Well, there’s two reasons why the market could disagree with the Fed. One is they could misunderstand the Fed’s reaction function. So you give them the Fed have set of economic data, how are they gonna react to it? But it also could be a disagreement about how the economy itself is gonna evolve. The Fed might be more optimistic or more pessimistic on the economy than than market participants right now. It’s really hard to sort of say, what, what’s the, what’s the disagreement about, does Wall Street think that economy is gonna be weaker than the Fed does, or does the, or or does the market just think that the Fed is going to be more aggressive than the Fed thinks at this point? 00:27:44 [Speaker Changed] Right. Sometimes it just looks like pure wishful thinking. 00:27:48 [Speaker Changed] I think sometimes the markets are just gets ahead of itself. It’s almost like there’s, we’re now talking about easing, so the bell’s about to go off and I don’t want to miss out. And so I’m gonna be pretty aggressive about positioning for that. And I, I think there’s a little bit of, you know, and sometimes things tend to go too far because people get caught off size and then people have to close out the, the trades that went wrong. And so everyone’s sort of moving all, all at once to the other side of the boat. And so things can get overdone at the end of the day though. I mean the Fed Reserve, you know, writes the story, you know, the market has to converge to what the Fed ultimately does. And so this is why the Fed’s not parti.....»»

Category: blogSource: THEBIGPICTUREFeb 20th, 2024Related News

CPI Shelter Measures: 6-12 Month Lag

    Last month, I mentioned that CPI inflation measures were based on lagging BLS measures of Owners’ Equivalent Rent (OER). BLS highlighted housing prices, headlining the CPI report as “CPI for all items rose 0.3% in January; shelter up” As the chart above shows, Shelter was 2/3rds of the increase in the most recent.… Read More The post CPI Shelter Measures: 6-12 Month Lag appeared first on The Big Picture.     Last month, I mentioned that CPI inflation measures were based on lagging BLS measures of Owners’ Equivalent Rent (OER). BLS highlighted housing prices, headlining the CPI report as “CPI for all items rose 0.3% in January; shelter up” As the chart above shows, Shelter was 2/3rds of the increase in the most recent. (Chart thanks to Michael McDonough). We all know OER lags real-world prices — I used to spitball this at 3-6 months. But this week’s podcast guest, former NY Fed President Bill Dudley, tells me the lag is closer to 6-12 months. So BLS uses a measure of shelter for its inflation calculation that might actually lag behind actual prices by as much as a year. That puts this week’s big sell-off into proper perspective. It was a reaction to data that was either old or very old. It would not surprise me to see that as people figure this out, we claw back that sell-off over the next few days or weeks. The ever-present question: How much does the FOMC recognize how behind the curve this data is?     Previously: CPI Increase is Based on Bad Shelter Data (January 11, 2024) How Everybody Miscalculated Housing Demand (July 29, 2021)   The post CPI Shelter Measures: 6-12 Month Lag appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 15th, 2024Related News

Transcript: David Einhorn, Greenlight Capital

     The transcript from this week’s, MiB: David Einhorn, Greenlight Capital, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ This is Masters in business with Barry… Read More The post Transcript: David Einhorn, Greenlight Capital appeared first on The Big Picture.      The transcript from this week’s, MiB: David Einhorn, Greenlight Capital, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ This is Masters in business with Barry Ritholtz on Bloomberg Radio. Barry Ritholtz: This week on the podcast, I have an extra special guest, David Einhorn, founder of Greenlight Capital. What a fascinating investor and what a fascinating career David has had. He came to public attention for shorting, probably most famously, Lehman Brothers, about eight months before the company went bankrupt. But he has very publicly talked about other companies that he thought were either wildly overstating their results or actually engaging in, in outright fraud. He has put together an amazing track record at Greenlight in the middle 2000 and tens. The performance at the fund flagged, which sort of set him back hunting for what was going wrong with his style of value investing. And he came to some really fascinating conclusions, which led him to change how they approached investing. And since that happened, I don’t know, about four or five years ago, the fund has been putting up great numbers, outperforming doing really, really well. It’s kind of rare to not only find somebody whose variant perspective has allowed him to make some tremendous and successful investments early in their career, but when the world changed, they figured out they had a change, also made those adjustments and did so successfully. I thought this conversation was absolutely fascinating, and I think you will also, with no further ado, my discussion with Greenlight Capitals. David Einhorn, 00:01:51 [David Einhorn] Thank you so much. I’m excited to be here. Barry, 00:01:53 [Barry Ritholtz] I I’ve been looking forward to this for a long time. You and I had met way back when, and you’ve been one of the people that I’ve really been enthusiastic about getting here. So I’m, I’m thrilled you’re here. Let’s start out talking a little bit about your background. You, you graduate from Cornell Summa Laude with Distinction Phi Beta Kappa, all the good stuff. What’d you study there? What was the original career plan? 00:02:18 [David Einhorn] I, I studied government. I was a government major and the thing with me is that I don’t really think too far out into the future. What I just try to do is do a really good job wherever I’m doing when I’m doing it and figure that that will just create good options for me going forward. So in high school, I didn’t worry where I’d go to college. I just tried to do well in college. I didn’t try to worry about what my career would be. I just figured if I do well, I would be able to be presented with, with good options. So I didn’t even begin thinking about my career really until my senior year. And at that point, I decided what I really wanted to do was be a PhD in economics. So I applied to half a dozen of the best programs. 00:03:03 I got rejected at all of them really. And that gave me an opportunity to enter the job market. So then I just started interviewing with companies as they came on, on the, on-campus recruiting to see what, what I could find. I, I interviewed with the CIAI interviewed with Car Guil. They could put me running a grain elevator, gosh knows where I interviewed with consulting companies and banking companies. I interviewed with some airlines. I interviewed with just whatever was coming onto campus. And eventually I got a job offer at Donaldson Lefkin Jenette, which is no longer here, but it was an investment bank of, of some note at the time. And I joined their two year analyst program. 00:03:42 [Speaker Changed] So, so I get the full benefit of, of knowing what happened and, and hindsight bias. But I have a fairly good sense of you and your personality, and I know what DLJ was like. I don’t really see that as a great fit. 00:03:58 [Speaker Changed] It wasn’t a great fit. It was miserable for me within three weeks of getting there. I, the one thing you get in college is you have control over your time. And so you study when you wanna study, and as long as you get your work done, you know you can do great. And at DLJ, you know, they control your time. And I never really, I came from the Midwest and in the Midwest where I grew up, like all the dads were home for dinner, not just my dad. Everybody’s dad was home for dinner and we didn’t understand this thing about, you know, overnights in the office. And, you know, if you don’t come in on Saturday, don’t even think about coming in on Sunday and all of this kind of stuff. So I didn’t really understand what I was signing up for. And by the time I figured it out, I mean, it was, it was a tough, tough cultural fit for me. I, 00:04:45 [Speaker Changed] I, I read somewhere you described it as similar to a frat hazing. 00:04:50 [Speaker Changed] Well, I was in a fraternity and there was hazing, but it wasn’t bad. I actually didn’t mind the hazing at all because it was combined with basketball and parties and beer and hanging, good nature, hazing, hanging out, and people you wanna spend time with, right? When you have that same behavior and when they’re done hazing, you, then they’re abusing you over your work and your schedule and the rest of it. Well, that’s not fun at all. 00:05:13 [Speaker Changed] So Siegler Collary and company was next. Tell us what you did there. 00:05:18 [Speaker Changed] Well, I went to Siegler Collary, I worked for Peter Collary. He was the research oriented of the two partners. And he basically would tell you, here’s an idea. Go look at the idea, go figure it out, tell me if we should invest in it. And I would go and read all the stuff and spend a week getting ready and making spreadsheets and talking to people. And I would give it to Peter and then he’d take it all home the next night, that night, come back the next day and ask me 15 questions. And I wouldn’t know the answer to any of them. And by the time I, I progressed the next time I could answer maybe five of them. And then after that, eventually I could, I could figure out how to answer most of the questions. But it was a, it was an amazing opportunity ’cause he would just show me what I should be asking, what I should be looking for. And ultimately I just learned how to do that. 00:06:06 [Speaker Changed] Huh, really interesting. Then 1996 you launch Greenlight Capital. What were you 27 at the time? What gave you the confidence to say, sure, I could raise some money and launch a hedge fund and have my entire income dependent on how well we do? Where, where did the gumption for that come from? 00:06:25 [Speaker Changed] It, it came up on very, very short notice. You know, I got to the end of 1995 and I was a little bit disappointed in how the compensation worked out, as was the fellow who was in the office next to me. And we went out to lunch that December one day and said, why don’t we just go launch our own thing? And in early January there was a huge snowstorm and we were on the street looking for office space. 00:06:52 [Speaker Changed] And how did you find the process of raising money for a hedge fund when you guys were a bunch of young Turks? Barely a few years outta school? 00:07:01 [Speaker Changed] I would describe it as nearly impossible. 00:07:04 [Speaker Changed] Really. Yeah. And yet you guys still managed to raise enough to launch with a, a decent pile of capital? 00:07:10 [Speaker Changed] We didn’t. We raised with, with with of outside money, we raised about just about $1 million. 00:07:16 [Speaker Changed] So not a lot 00:07:17 [Speaker Changed] Of money. Not a lot of money. 00:07:18 [Speaker Changed] How did you ramp up from there? That, that seems like it’s tough to make a living trading a million dollars? 00:07:24 [Speaker Changed] Well, the thing was, I didn’t really view it as all that risky because I had some savings. I’d had, you know, four, you know, small Wall Street bonuses. I had very little living expenses. There was no chance, like if this work didn’t work, I’d be on the street, right? So I would just go get another job similar to the one that I just left if I needed to. So I just didn’t see this as so risky. And it didn’t matter if I didn’t make very much money. I didn’t expect to make any money right away. But the thing was is we did get to meet a lot of people and as we began to tell our story on day zero, they’re not going to invest. But as my, one of the best things my original partner said was in, in April when we hadn’t raised as much money as we thought, he said, we better get started. 00:08:07 And I said, well, why are we gonna get started? Well, you know, you’re not gonna have a three year record until you’ve been going for three years, so you may as well get going. And, and that kind of worked. So as we got going and then as the initial results just turned out to be, you know, extremely fortunate, some of the people that we met with earlier that said, yeah, you know, two young guys, I don’t know. But now they’re putting up some results. And the results were following from the thesis that we were telling them, here’s our style, here’s how we implement it. We’re gonna buy these five stocks. Then we bought those five stocks, and then they went up and now we made this money and here’s the next five stocks that we’re going to buy. That explaining that process and communication to people built confidence. And one by one they began to give us some capital. 00:08:51 [Speaker Changed] So, so not that complicated. You went out and said, here’s our strategy. You executed on the strategy, and when people saw you were doing what you said, suddenly the, the capital access became a little better. When was it clear, Hey, we’re gonna get to a billion dollars or more? How, how long did that take? 00:09:09 [Speaker Changed] Yeah, I don’t know about a billion dollars, but at the end of the first year, we were at 10 and at the end of the second year we were at a hundred and we’d, that was our best year ever. We made 57% now. Wow. And we have a dinner for our partners every year in January. And I remember going to that partner dinner and in January after our 57% year, and we announced we were gonna close the fund for the time being to absorb what we were doing. And we had about, I don’t know, we had about eight or 10 tables and we have, I do a presentation PowerPoint and the rest of it, then you have questions and answers. And what we had essentially was a bloodbath. The partners were raising their hands and saying, you’ve raised too much money, how are you going to keep these returns up? This is really terrible. And I just couldn’t believe like this dinner didn’t go well. It was like one of the worst partner dinners that 00:09:55 [Speaker Changed] We that’s 00:09:56 [Speaker Changed] Unbelievable that we, that we ever had. And my answer was is we’re probably never gonna make 57% again. Right. And it doesn’t matter what the amount of the capital was. Like, we just had a, an incredible, it was just a perfect year, 19, 19 97, 00:10:09 [Speaker Changed] Right? Yeah. There was that big drop in the latter part of the year. And then the fast recovery, if you were on the right side of that, you, you would’ve done really well. And if you’re in the right companies, there were some companies in 97 that really screamed higher. So, so you close the fund, when do you reopen the gates to take capital in again? We, 00:10:29 [Speaker Changed] We reopened, I don’t know, sometime then two th 1998 was a tough year. That was the long-term capital year. Right. And by the end of the year, some people were beginning to redeem because we had six straight down months from like March to September. Right. And so we opened again and we were able to replace the capital that wanted to leave with new capital that was coming in. Then we stayed open until about 2000. And then in 2000, I don’t know, we were maybe around six or 700 million at that point. And we closed the fund and then we left it closed until 2019. We, we had four openings where we would say we’re open and we raised a capital round like in a week or like in a month or something like this. Right. But other than those rounds, we were hard closed for the better part of like 19 years. 00:11:18 [Speaker Changed] And, and there’s nothing that makes a wealthy investor one in more than a closed fund. Right. Isn’t that the psychology there? 00:11:27 [Speaker Changed] Absolutely. Like right now we’re an open fund and it’s really hard to convince people to invest 00:11:31 [Speaker Changed] You. You wanna .....»»

Category: blogSource: THEBIGPICTUREFeb 14th, 2024Related News

At the Money: Is War Good for Markets?

   At the Money: Is War Good for Markets? (February 14,  2024) What does history tell us about how war impacts the stock market? What is the correlation between geopolitical conflict and inflation? Can these patterns inform us of future bull market behavior? In this episode, I speak with Jeffrey Hirsch about what happens… Read More The post At the Money: Is War Good for Markets? appeared first on The Big Picture.    At the Money: Is War Good for Markets? (February 14,  2024) What does history tell us about how war impacts the stock market? What is the correlation between geopolitical conflict and inflation? Can these patterns inform us of future bull market behavior? In this episode, I speak with Jeffrey Hirsch about what happens to equities after global conflicts. Hirsch is editor of the Stock Trader’s Almanac & Almanac Investor Newsletter. He’s devoted much of his career to the study of historical patterns and market seasonality in conjunction with fundamental and technical analysis. Full transcript below. ~~~ Previously: Hirsch’s WTF Forecast: Dow 38,820 (September 28, 2010) Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It (April 12, 2011) ~~~ Jeffrey Hirsch is editor of the Stock Trader’s Almanac & Almanac Investor Newsletter. For more info, see: Professional website LinkedIn Twitter ~~~   Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg.       TRANSCRIPT: War in the Ukraine and the Middle East, inflation spikes in 2020 and 21,  what is the financial impact of global conflict and rising prices? 20? The answer might surprise you.  20. I’m Barry Ritholtz, and on today’s edition of At the Money, we’re gonna discuss whether war and inflation 20 somehow adds up to higher portfolio prices. To help us unpack all of this and what it means for your investments, let’s bring in Jeff Hirsch. Not only is he the editor-in-chief of the Stock Traders’ Almanac, he is the author of the 2011 book, “Superboom. Why the Dow Jones Will Hit 38,820 and How You Can Profit From It.” Full disclosure, I was privileged to write the forward to that book, and I have been delighted to see it more or less come true. So let’s start with your dad, Yale Hirsch, who founded the Stock Traders Almanac 60 years ago. In 1976, He predicted a 15-year super boom. [Mhmm]. A 500% move in the stock market. At the time, it wasn’t especially well received. In fact, it was fairly widely mocked.  But not only did he turn out to be right, by 2000, the move was 1000%. Explain your dad’s thinking about how war plus inflation equals a stock bull market. Jeff Hirsch: Well, I was a wee lad back then, but I remember the T-shirts, The Dow 3420 T-shirts. I still have a box of mediums in the house, but my kids can wear it, but not me. So coming off the, you know, generational low in 1974, um, that everyone knows, which Barry Ritholtz: ’73-74 bear market was as vicious as the financial crisis. Jeff Hirsch: Yeah. As ’07-08. As vicious. And perhaps more so because it was a little bit fresher. It was it was a little bit Barry Ritholtz: It was also in the middle of a long bear market as opposed to coming off of market highs. Jeff Hirsch: True. We had been coming down for a few years. [Since ‘66].  A student of the 4-year cycle, uh, 4-year presidential election cycle and the decennial patterns and having, you know, written the almanac for several years And be just being an avid researcher. He’s discovered that after war and, you know, we’re in the Vietnam War. We were, we just came out. We had the April 75 coming out of, you know, Saigon that horrific, you know, seemed to helicopters over the embassy.  And we had, you know, the oil embargo, uh, which you and I probably both remember the odds and even days. And what he observed was that after these previous big, international conflagrations wars, World War 1 and World War 2. But after this this war period, there was inflation stimulated by government spending. Barry Ritholtz: More than a rally. That’s a full-blown bull market, 500 percent. Jeff Hirsch: Secular bull market. Barry Ritholtz: So I’m I’m glad you used that term to different then a shorter term cyclical market within a longer term, secular. So what were the numbers like after World War 1 and after World War 2? Jeff Hirsch: The numbers, it was about just around 500 percent, 517%, 521%, right in the just over 500%. For both following both wars. Following both wars. Unbeknownst to him, after the Vietnam War and the inflation 20 that came from, you know, that [Oil embargo] and all the rest. And all the rest. It ended up being the better part of 1500 or 2000 percent going all the way up To to the top in either 98 or or 2000 if you wanna measure it there. Right. His forecast, his prediction was for Dow 3420 by 1990. Barry Ritholtz: That was 500% percent from the market low, Jeff Hirsch: From the intraday low of the Dow on December 6th, if memory serves, uh, 1974.  And the Dow didn’t actually hit that number until, uh, it was July of 1992, but the S&P had the 500 percent move-in. It was May of 19 And that’s really the more important index than July 1990. It did in 1990. So, you know, I remember when you and I were, You know, talking about the forward, and I had showed you the old, you know, newsletters that he put up. It’s called smart money back then. And in January 77, he put out a special report called “Invitation to a Super Boom” which took all of the research that had been done and the articles that were written through at 76 and put it together a little package to, You know, give to subscribers and to promote what he was talking about there. Um, and we put those pictures in there. You know, he’s got some hand-drawn lines on the old, you know, overhead projector, you know, transparency.  And then, you know, as we were going through the financial crisis, 0 7, 0 8. Also looking back to the 2002 9/11 situation and then going into Afghanistan and all that stuff. Looking at that, we were tracking this, You know, long secular bear market pattern. And, um, you know, after the bottom in o9, you know, we’re looking at things in early 2010 are saying this is setting up again. Barry Ritholtz: Coming out of the financial crisis,  a 56% peak to trough sell off.  You’re looking at what just took place. We’ve been in Afghanistan really soon after 9/11, it’s almost a a decade. And then around the same time, we’ve been in, Iraq for about 7 years. We had a bout of inflation in ‘07-08-09. What are you thinking when you look out over the next 15 years from the perspective of 2010-11? Jeff Hirsch: We weren’t looking out initially 15 years; what we were witnessing and what we were observing was a similar chart pattern. It was it was chart pattern recognition. Looking at the image that, you know, you’ve seen in the book of Yale’s chart and seeing the same thing. Barry Ritholtz: That’s a hundred-year chart that shows you war, inflation, and several 500 percent gains. Jeff Hirsch: I think Josh called it, you know, the greatest chart, you know, he’s ever seen or ever. It was something like on Earth or something like that at 1 point. But it’s a log scale, so you can see, you know, the moves relative of the different time frames. But looking at that, you could see it’s setting up again coming Off the ‘09 bottom. We just, you know, crunched numbers, did research, went back and, you know, read all the old stuff that he wrote, Went through the old almanacs, and we’re like, this is happening again. Barry Ritholtz: So let’s let’s take this apart and see if we can rationalize why this might happen. In the past, governments have talked about the peace dividend when the Berlin Wall came down as an example, the shift of government spending from the military and the Pentagon to civilian usage. Is that part of the thinking behind this? Jeff Hirsch: It does play a part, you know, in there, but the spending from the war – and I think this time around, the COVID spending, is similar. It’s government spending period. It just puts a lot of money into the economy, enables a lot of development. Barry Ritholtz: You’re totally anticipating my next question, which is how parallel is the the war on COVID, the pandemic, lockdown, pent-up demand, terrible sentiment, CARES Act 1 was 10% of GDP. We’ve spent – depending on whose numbers you rely on – 4, 5, 6 trillion dollars. [Insane]. And then we have a giant 9, 10 percent spike in inflation. COVID + inflation: How parallel is this to what we saw following World War 1, World War 2, and Iraq and Afghanistan? Jeff Hirsch: I think it’s incredibly parallel. Um, 1 of the things that the current Cycle didn’t have from the previous cycles was the inflation. We had very low inflation spike a little bit during the financial crisis. Very Barry Ritholtz: Remember, oil ran up to $150 a barrel and meat and milk got crazy expensive. Jeff Hirsch: But it didn’t come through to the, you know, the regular CPI, you know, Minus food and energy. Barry Ritholtz: Because housing appeared to be disastrous. So that was why – by the way, there’s a crazy thing about owner’s equivalent rent that when real estate prices go up, depending on the circumstances, sometimes OER goes down dramatically,  especially when rates are low and they’ll give anybody a mortgage. So CPI Jeff Hirsch: Which happened back in COVID. Right. Who didn’t refinance? The US government. Right. All the rest of us did. Barry Ritholtz: That exactly right. So how much of this is sort of like a wartime, you know, there was rationing, there’s supply chain issues, there’s a ton of pent-up demand and a lot of negative sentiment. And then when the dam breaks, it seems like everybody goes crazy. Jeff Hirsch: It’s so parallel to me. I could not have imagined COVID back in 2010 when I first made this forecast.  We were thinking only, you know, large military involvement overseas. It’s gonna take a lot of spending, and it’s and, you know, when that’s over, we’ll get that relief rally. The other thing that I add to the equation that, you know, I my father didn’t articulate us clearly, but having, you know, the benefit of hindsight standing on his shoulders. You know, the equation, the war plus inflation equals super boom or bull market as you, you know, you you’ve put it is Technology, and something I the phrase that I came up with “Culturally Enabling Paradigm Shifting Technology.”  You know, all the global keep going. So it’s not biotechnology, energy, what whatever. [And Now AI]. Now AI. And exactly. It’s not just 1 thing. It’s a it’s a cocktail of different technologies that drive productivity And the next boom the next boom and new developments, and I think that’s where we’re at right now. Barry Ritholtz: I’m so glad you said that. Whenever I try and explain to people the difference between a secular expansion, a secular bull market, and a cyclical I always go back to your dad’s post-World War 2 chart. And I like to tell people: You know, when World War 2 ended, 42 million GIs returned home. They have the GI Bill that puts them through college. [That’s where he got his degree in the GI Bill]. You have the expansion of suburbia, the rise of the automobile culture. The interstate highway system. Interstate highway system, the rise of civilian air travel, the rise of the electronic industry, which we don’t think about anymore. But appliances, the conveniences All those things. Refrigerators, television, radio, dishwashers, plus the baby boom on top of it. What a great time to be an investor. Today, sentiment is very negative. Social media is a cancer about it. Social media is a cancer on us.  And the regular media does a terrible job covering the economy. Jeff Hirsch: They’re trying to compete with social to get eyeballs. Barry Ritholtz: And the question I always like to ask people whenever we see political polling is, who the hell is answering the landline at home except for cranky old grandpa who just watched Fox News and has yelled at the kids to get off. Who am I voting for? They all suck. Goodbye. Like, I hate that sort of stuff, but it leads to a fascinating question, which is people might be unhappy, but you have a massive technological boom, a ton of fiscal spending, and an enormous amount of corporate productivity and very low debt.  Might we be looking at another super boom? Jeff Hirsch: We’re in it. Barry Ritholtz: We’re in it? We’re already in it. [Right] What inning is this? Jeff Hirsch: There was this secular bear market ahead of the oil embargo. Barry Ritholtz: I use 66-82 is my phrase is my range. Some people look at 68. But it’s, like, 15 plus or minus years. Which is interesting. Jeff Hirsch: The ultimate low was 74. But everyone says that ‘09 was the beginning of the of the second half. Not. Absolutely not. I think 2016 was. That little bear market. Barry Ritholtz: 2013, we set a new high in the S&P going back to ’01. That’s the start of the new bull market for me. Jeff Hirsch: Or somewhere in the 13 to 16 period where we had that little tiny, uh, bear mini bear market from 15 to February 20 16. Barry Ritholtz: Barely down 18, 19 percent. Q4 2018, 19.9%. [Either way]. Uh, it’s just a normal pullback. The 20 percent number is meaningless. 1. I’m still in the UK. You think we’re like, fifth inning, sixth inning?. Jeff Hirsch: Maybe even a little bit further up there. I think by the time we get into 25, 26, we could start looking at, you know, another stock picker sideways trading market for for many years to come or at least, you know, a handful. The thing with these cycles, you know, people have what you said 66 to 82. People wanna look at this 18-year cycle, a 17-and-a-half-year cycle. It’s more and the thing that we pointed out on this chart is that it’s impacted by events. Like, the bull market after World War 2 was short. It was it was 8 years, the roaring twenties. Okay? Then you had, you know, [Correction: World War 1] Thank you. World War 1. And then the depression and the whole secular bear market before, you know, World War 2 was 25 years. Okay. So these things aren’t necessarily the same time frame. We could have a secular bear market, you know, after this we get them to the super boom level or a little bit past it, You know, for it could be a few years. It could be 5, 6, 7, 8. It could be, you know, 15, 20. We have to see what I think it’ll be on the short end of things. I think all these cycles have compressed with the productivity, and we’re gonna get more compression with AI and all the technology. So I don’t think it’s gonna be a super long depression, despite some of the real, you know, Pollyanna’s out there. Barry Ritholtz: So to wrap up, There’s an incalculable and terrible cost of war in lost lives and physical and emotional injuries. Global conflicts and war just exert a horrific cost on society. Analysts who’ve studied this have found that the joys of peace when war ends go beyond the relief of ending human suffering; peace often leads to strong economic growth and large subsequent gains in stock markets. I’m Barry Ritholtz and you’ve been listening to Bloomberg’s At the Money.   ~~~   The post At the Money: Is War Good for Markets? appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 14th, 2024Related News

MIT Sloan Investment Conference 2024

  Hey, I am heading up to Boston today for the annual MIT Sloan Investment Conference. Its’ always a fascinating time (I usually depart with some quality swag!). I will be on a panel discussing Macroeconomics with former Fed Economist Claudia Sahm. I am looking forward to meeting Karen Karniol-Tambour, Co-Chief Investment Officer at Bridgewater… Read More The post MIT Sloan Investment Conference 2024 appeared first on The Big Picture.   Hey, I am heading up to Boston today for the annual MIT Sloan Investment Conference. Its’ always a fascinating time (I usually depart with some quality swag!). I will be on a panel discussing Macroeconomics with former Fed Economist Claudia Sahm. I am looking forward to meeting Karen Karniol-Tambour, Co-Chief Investment Officer at Bridgewater Associates. If you are around, please swing by and say hello!   Please join us for the 19th Annual MIT Sloan Investment Conference on February 9th, 2024 at the Intercontinental Hotel in Boston. This year’s theme is THRIVING IN THE UNKNOWN: Capitalizing on Change and Disruption. Throughout the day, we’ll hear from distinguished Keynote Speakers and Panelists as they discuss a range of topics pertinent to the industry today through the lens of continued change and disruption. We are also hosting a Networking Reception on Thursday, February 8th, from 6-8 PM ET in Downtown Boston. Light bites and drinks will be served. Tickets to both events may be purchased via Eventbrite.     The post MIT Sloan Investment Conference 2024 appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 10th, 2024Related News

MiB: David Einhorn, Greenlight Capital

     This week, we speak with David Einhorn. president of Greenlight Capital. He launched the value-oriented in 1996. Since inception, Greenlight has generated about 13% annually, and  ~290o% total return versus the S&P500’s 1117% total and 9.5% annual returns. He famously shorted Allied Capital in the 2ooos and Lehman Brothers about a year… Read More The post MiB: David Einhorn, Greenlight Capital appeared first on The Big Picture.      This week, we speak with David Einhorn. president of Greenlight Capital. He launched the value-oriented in 1996. Since inception, Greenlight has generated about 13% annually, and  ~290o% total return versus the S&P500’s 1117% total and 9.5% annual returns. He famously shorted Allied Capital in the 2ooos and Lehman Brothers about a year before it collapsed into bankruptcy in 2008. Time magazine named him to their “100 most influential people in the world” in 2013. In our wide-ranging discussion, Einhorn stated that “Market structures are broken and value investing is dead.” We also discussed the Einhorn Collaborative, which seeks to help Americans build stronger relationships, embrace their differences, and rediscover shared values and humanity. His books on his experiences shorting Allied Capital is here; A transcript of our conversation is available here Tuesday. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. Be sure to check out our Masters in Business next week with William Dudley, former USD Economist for Goldman Sachs and President of the New York Federal Reserve Bank.         The post MiB: David Einhorn, Greenlight Capital appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 8th, 2024Related News

Transcript: Tom Hancock, GMO

   The transcript from this week’s, MiB: Tom Hancock, GMO Focused Equity, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ This is Masters in business with Barry… Read More The post Transcript: Tom Hancock, GMO appeared first on The Big Picture.    The transcript from this week’s, MiB: Tom Hancock, GMO Focused Equity, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ This is Masters in business with Barry Ritholtz on Bloomberg Radio. 00:00:10 [Barry Ritholtz] This week on the podcast, I have an extra special guest. I love finding these people who are just absolute rock stars within their space that most of the investing public probably is not familiar with, haven’t heard about them. Maybe they’re a little below the radar or institutionally facing. And so the average investor is unaware of them. You certainly are familiar with GMO, Jeremy Grantham shop with Mayo and Ulu, his, his partners that that shop was founded in 1977. The person who heads their focus and quality strategies, this gentleman named Tom Hancock. He also helped run some of their mutual funds and helped put together their first ETF, and he has really quite an astonishing track record. The Quality fund mutual fund that GMO runs that symbol G-Q-E-T-X, it’s just crushed it over the past decade. 13.6% a year, way over both. Its index and its benchmark. It’s in the top 1% of its peers. Morningstar five star gold rated. Just really, really interesting. And Tom has helped with the introduction of GMO’s first retail product, the quality ETF stock symbol Q-L-T-Y-G-M-O has been institutional since they launched in 1977. This is the first time they’re putting out a product for retail. And Tom explains what goes into quality stock selection, why they went to the ETF. You wouldn’t be surprised to learn the tax consequences of owning a mutual fund is a part of it. Really fascinating guy. Tremendous track record, unusual background comes from computer science and software and, and pivoted into quantitative investing. I found this conversation to be really fascinating. If you’re at all interested in focused portfolios, the concept of quality as a sub-sector under value and just how you build a portfolio and a track record, that’s tough to beat. I, I think you’ll find this conversation as fascinating as I did. With no further ado my discussion with GMOs, Tom Hancock. Thanks, 00:02:40 [Tom Hancock] Barry. It’s great to be here. 00:02:41 [Barry Ritholtz] So, so you have a really interesting and unusual background. Let, let, let’s start there. Computer science bachelor’s from, from RPI in 85, PhD in computer science from Harvard in 92. What, what was the career plan? 00:02:57 [Tom Hancock]] Yeah, well it wasn’t doing, investing in quality stocks in the early days, that’s for sure. I actually come from a very academic family. My father was a university professor. My mother worked as an editor. Her father had been a university professor. We have doctors in the family. I actually don’t know that anyone in my family actually had a job at a private for- profit traditional company ever. I’m the first, I’m kind of the black sheep. So that’s where I started from. In fact, the fact that I actually went into computer science rather than the more liberal arts discipline was a little bit non-traditional, let’s say. And I think that was kind of an early wise decision that I give myself credit for is back in high school. Like, you know, I was really interested in history and stuff, but I didn’t really wanna be a historian. So it’s like, what do I actually like to do as opposed to think was interesting. And that’s where at the time, you know, computer programming was becoming a thing. I really loved it. That led me down that track and really well, I had a software engineering job. I was always sort of pointing toward a research career. And then at some point after my PhD school studies, we could get into that if you like, but I kind of decided to switch and finance was kind of what was available for me at that point. Yeah. Let, 00:04:08 [Speaker Changed] Let’s lead up to that transition software engineer at IBM, then you get your PhD, then research at Siemens, which seems to be more of a technological position than a finance position. What was your focus within tech? 00:04:24 [Speaker Changed] I worked the area in which I studied in, in graduate school and then worked at Siemens, which as you say, it’s a, a research lab. Think like Bell Labs, IBM Watson, that kind of think tank environment. I worked on machine learning, which is a subfield of, of course artificial intelligence. 00:04:41 [Speaker Changed] Back in the nineties. 00:04:41 [Speaker Changed] Yeah, that was the nineties. So artificial intelligence is a, it’s an area that’s been around for a long time. I think the term was coined in the 1950s, but I was doing it, or I should say working on a, a small part of it back in the nineties of, in graduate school is at a, at a fairly theoretical way at Siemens it was with more applications in mind. 00:05:02 [Speaker Changed] So, so how does the transition to finance take place? It seems like maybe you’re gonna attack into research or academia. How did you, how did you find your way to both finance and GMO? 00:05:14 [Speaker Changed] Yeah, so there’s two parts to that. One is just sort of why not the academic track and then the why the finance part. So the, the why not the academic track was in academia. I was doing very theoretical stuff that was very maybe intellectually interesting, but understood by increasingly few people in the world. So I just sort of wanted to be something that was a little more relevant. And I thought maybe the research lab would provide that. And for various reasons it still didn’t feel like that. So I was, I was basically looking for something that was relevant. I, you know, I wanna be loved like everyone, right? So I wanna do something that I can talk to people about and they don’t realize, well, you 00:05:49 [Speaker Changed] Be loved or you wanna go into finance, it’s one or the other. 00:05:51 [Speaker Changed] Well that, so that leads to the other with finance, which wasn’t certainly an opportunistic element to that. Like what kind of industry hires people that values fancy academic degrees that don’t have necessarily a lot of developed specific skills and finance. I’d say management consulting is any of the other thing that least at that time was the other career trajectory, just my personality, more of a math oriented introvert. Finance was the natural fit for GMO. Particularly, I got really lucky when I was in graduate school. So I was at Harvard. Harvard has a smaller computer science department. We do a lot down the river at MIT, right? And I went to a, a research group there. I was headed by Ron ve, who’s perhaps known to some as the R behind RSA cryptography. But he also worked, oh, for Billy in machine learning in this area. 00:06:39 And he ran this research group of scruffy grad students and postdocs that I would go to. But there’s this one guy who came from downtown who wore a suit and no one quite knew who he was. I asked who’s that guy? Like, I think he’s a banker. And he was a very smart guy. My mental image was that he worked in the bank of, back of a bank approving mortgage applications. He was really frustrated and this was his intellectual outlook. It turns out that was not what he, he was, he was a guy named Chris Darnell who was the, started of the quantitative research effort at GMO. He was Chris Jeremy Grantham’s right hand man in the, in the early eighties. But he’s just, he also came from an academic family. He had broad interests. He came to this group. I’m not even quite sure how he found it, honestly. But in any case, when I was sort of casting around at places to look, that connection was rekindled and that was my entree into GMO. Really, 00:07:28 [Speaker Changed] Really interesting. And you joined GMO in 1995. You’ve been there ever since. That’s kind of unusual these days in finance to stay with one firm for, gee, it’s almost 30 years. What makes GMO so special? What’s kept you there for three decades? 00:07:45 [Speaker Changed] It’s been a great place to work, obviously. I’ve, I’ve thought so. I think GMO felt very familiar when, to me, when I joined as a smaller firm, I think maybe 60 people at the time. It’s very much of a intellectual debate, academic kind of vibe. It felt very comfortable to me. And the firm’s grown. I’ve kind of grown with it. I think one of the things that’s kept me engaged is I’ve actually done different things. So kind of as we’re alluding to, as you’d think, my background is very much on the quantitative side. Now I do fundamental side research portfolio management, which I just, 00:08:20 [Speaker Changed] So, so you joined GMO, there’s 60 people, 30 years. They’ve grown tremendously. How big is GMO today versus when you joined and what was that process like to experience all that growth? 00:08:33 [Speaker Changed] Yeah, I think it’s about 500 people today. Wow. The bulk are in Boston, which is where I sit. But we have investment offices in San Francisco, in London, and in Singapore and Sydney, Australia. So it’s a, it’s a global firm. The, you know, one of the things I think when, when I started at GMO, it was really just investment people almost. And ev all the sort of compliance, client service, legal, kind of, everything was done sort of on the side by investment people. And gradually we hire, we professionalized over time, right? So it’s, 00:09:11 [Speaker Changed] You’ve become an enterprise, it’s 10 x what it once was in terms of headcount, it’s much bigger in terms of assets. And I can tell you from personal experience, us finance people, we’re not great at accounting, legal, compliance, all the detail and stuff that, that keeps the firm running. Yeah. The 00:09:30 [Speaker Changed] Trick is we’re not great, but we think we are. So that’s where we get into trouble. 00:09:33 [Speaker Changed] That that’s, that’s a lot. That’s really true. We hear a lot about Jeremy Grantham thoughts on markets, but much less on how the firm is managed, how this growth came about and the culture as a business. Tell us a little bit about GMO as as a cultural enclave up in Boston. 00:09:55 [Speaker Changed] Yeah, well one thing to start with, there is the name GM and O. And it’s three people. And people know Jeremy Grantham, I think very well, but that Dick Mayo and Ike Van Loo are the other two. And that’s relevant to your question because from the very early days before I was there, they kind of operated separate investment teams. Dick Mayo was a traditional, I’d say portfolio, strong portfolio manager focused on US stocks. Ike was similarly international stocks. And Jeremy was kind of the go everywhere, top down, big ideas guy. And that a bit of that cult, Dick and Ike are both retired now. But a lot of that culture of different investment teams that do things a little bit differently is very much part of GMO. There is not one central view to the firm. Jeremy is a very strong, powerful persona and very deep thinker. Jeremy’s never really been a portfolio manager. His role has always been, in my experience at least, he’s always been much more of a gad flaw. He makes you think about things, he makes suggestions, he pushes you to come to your own conclusion. He leads you to water, but he’s not a hands on the, on the portfolio person. Huh. 00:11:04 [Speaker Changed] Really interesting. We, we had him down sometime last year, came by our offices and, and spoke. And I very much get the sense he has no interest in retiring. He loves what he does, he is very plugged into everything that’s going on. He, he’s gonna do this forever, isn’t he? 00:11:23 [Speaker Changed] That would be my guess. Yeah. I think he probably will outlast me in, in the industry. He’s, he is one of the smartest people I’ve ever met and one of the most driven people I’ve ever met. He has a, I think, I hope along professional lifespan ahead of him, I would say he is a little bit less focused on what you might call the day-to-day of investing at GMO. And he does a lot of stuff outside. He’s very involved with the Grantham Foundation, right? His charitable organization both on the, their mission, but also on the investing side of managing their portfolio too. 00:11:53 [Speaker Changed] So, so that raises a really interesting question. He’s a big picture guy. He’s always looking for what risks and what black swans might be coming at us that the investment community either hasn’t found yet or isn’t paying attention to. How do you translate that 30,000 foot view as to what’s going on in the world to something like quality and focused investing? Or is it really just there to sort of help you create a framework for looking at the universe? Yeah. 00:12:23 [Speaker Changed] Well, when I say he’s a big picture guy, I don’t necessarily mean just that he’s investing as to make macro calls. I mean more that he steps back from the fray a bit and thinks about the big ideas and what really matters. And that whole idea around quality investing that’s kind of Jeremy from the 1980s, early eighties and saying, bang, say, hey, you know, I cut my teeth as, as he and Dick Mayo did on VA traditional deep value investing, but we’re missing something here with these higher quality companies. How should we think about that? How can we invest about that? How can we improve our process? So that’s sort of philosophical outside and around the box thinking is kind of what really led to us having a quality oriented strategy today. 00:13:06 [Speaker Changed] And, and, and quality is really a subsection of value. Is that, is that what you’re suggesting? 00:13:13 [Speaker Changed] It’s an improvement of value or refinement on the definition of value. And people use these terms loosely, of course, and these all fall under the, the rubric of fundamental investing and buying companies that are great over the long term at great prices. But the idea that, you know, companies that can compound at high rates of return deserve premium multiples, you should be willing to pay for them, is the root of it. 00:13:35 [Speaker Changed] The quality funds ticker, GQ ETX has returned 13.6% a year over the past decade, putting it in the top 1% of its peers. So let’s talk a little bit about what goes into that sort of performance. What are the core themes at GMO around focus and quality? Tell us a little bit about what differentiates GMO from the way other value investors invest. 00:14:05 [Speaker Changed] If you think about value investors, value investors traditionally are people who kind of know the price of everything and the value of nothing, right? They’re much too focused on ratios around trailing fundamentals and not on the, on the plus side future growth opportunities. On the negative side, maybe competitive threat. So bringing the quality idea into that, thinking about what companies have a long trajectory to grow and to grow at high return on capital. That’s the key thing. Also, differentiating between growth, that’s just sort of throwing money at the wall and seeing a little bit come back to you versus very efficient growth. That’s the key to quality investing. I could maybe flip that around a little bit since I think particularly post 2008, 2009, the quality style of investing has become a lot more popular. People, certainly some people talk a lot about the difference between our approach and a lot of quality managers is that they’re really quality growth managers. So the quality but at a reasonable price. Or you could interpret that as not just chasing the companies everybody knows are high quality, but finding a few, maybe more neglected names, that quality to reasonable price is a little bit of a different style than I see most people practicing out there. 00:15:17 [Speaker Changed] So let’s get into some of the definitions of this. How does GMO define quality? 00:15:23 [Speaker Changed] Yeah, so we think about quality, first off, the ability to deliver high returns on investment going forward. Then what enables that you have to have some asset ability capability that competitors can’t equally duplicate. I mean, traditionally it could have been like a physical asset or brand. Of course these days in an IT world it’s much more about network effects of of platform companies and such. But you have to have that special sauce that’s not re reproducible. It has to be doing something that’s relevant. Like you would wanna avoid the trap of companies that do one thing well and that thing’s not growing. So they just try to do other stuff. And then management quality does also come into play. I do keep a strong balance sheet. Are you prudent? Do you invest when you should return capital when you shouldn’t? So as those assets, the relevance and then capital discipline are the key components for us. 00:16:11 [Speaker Changed] Given that definition of quality, has that evolved or changed over time? Or has that been pretty much the definition going back to the eighties or nineties? That’s, 0:16:20 [Speaker Changed] That’s been pretty much the definition. Going back to the eighties and nineties, I told you kind of the fundamental definition. There’s also quantitative metrics that we look at Those have evolved, but always within that capa, that cluster of high returns on investment stability across the economic cycle are consistent and strong balance sheets. What has changed over that period too is what kinds of companies best meet that threshold. So if you go back to the eighties and nineties, you really we’re talking about like the Cokes and Proctor and Gambles, right? And Johnson Johnson type 00:16:50 [Speaker Changed] Consumer companies, 00:16:51 [Speaker Changed] Right? And big consumer and healthcare. And now those are still there, but a lot more of the big tech companies, the, the FANG companies, more growth companies, frankly. 00:17:00 [Speaker Changed] So, so for a long time it looked like Apple was a value stock even as it became big and bigger than giant. But when we look at what people call the magnificent seven, are you seeing any real value there? Companies like Microsoft and Nvidia, Netflix, I assume are quality companies by your definition, but are they quality at a reasonable price? 00:17:24 [Speaker Changed] All the names you mentioned are quality companies. We believe, we don’t all, we don’t hold all of ’em. It’s the, the prices vary. If you think about meta and alphabet, those are kind of the value stocks in the bin, right? Those, 00:17:35 [Speaker Changed] Well, they got your lack over the past couple of years before last year’s recovery. 00:17:40 [Speaker Changed] Yeah. And we also hold Microsoft and, and Apple apple’s actually an interesting case study. ’cause we used that as an example of our investment at our investment conference 15 years ago about what a high quality company isn’t. And then Steve Jobs turned around in the iPhone and so forth. And of course the rest is history. The point is we were very wrong about them and we were late to the party, but the party had such long, such a long party that it’s okay to be late to it. You see, we still had a really good time with that company, which I think is a little bit of a lesson to, for quality investing, you don’t have to be the first one in the door there. These th these themes run for a long time and if you’re willing to admit you’re wrong and, and change your stripes, these, you can still make money. 00:18:20 [Speaker Changed] So there were a few come GMO Warren Buffet were quote unquote late to Apple, but did exceedingly well with that. So you don’t have to be at the there at the IPO, you don’t have to be there when they crash in the.com implosion. As long as the growth rate is there and the the value is reasonable, there’s an opportunity. 00:18:41 [Speaker Changed] Yep. And speaking of the.com implosion, like Microsoft via a case study where we, in previous strategies, we held Microsoft for a very long time, that’s where the valuation could help us in the.com bus. So Microsoft now is on 30 times earnings. It was over 50 right? In 2000, right. And I don’t think it was a much better company than, it’s a pretty good company now, right? Yeah, yeah. So there’s, you know, great company, you have to at some point be willing not to hold the stock. And yes, actually Microsoft by this point is outperformed since the peak of the cycle, but it took a long, long time for that to happen. So, 00:19:10 [Speaker Changed] Well the, the buler era was not where they really shined new CEO seems to have done a great job over the past, what is it, five years Nadal’s been there for? Yeah, 00:19:20 [Speaker Changed] Yeah. At least that I think at this point we held through the, and actually added in the Bombay era. So that would be up our taking the view that, at least in this case turned out to be right, that is something companies can fix if the core assets there, you know, the core network effects of everybody using their products, they’re being so entrenched in IT systems departments around the world that was still there. The easiest thing almost to fix as a CEO. So if a stock’s training at 13 times earnings and has all these great characteristics and you think the CEO can change, that can be a great time to invest, 00:19:53 [Speaker Changed] Throw the bum out, bring someone else in, and the rest is history. So I love this quote of yours on the backwardation of risk quote, the expectation is that achieving higher returns requires taking more risk, but higher quality stocks have outperformed lower quality stocks by a considerable margin despite being less risky. Explain 00:20:17 [Speaker Changed] Yeah, and that’s, that’s a point that Jeremy Grantham kind of observed very long time ago and is emphasizing for a long time. And actually Ben Inker is the head of our asset allocation group. Just wrote a, a very interesting piece on that too. This idea that at the big picture level, stocks versus bonds, things kind of behave what you’d expect. You get more return, but there’s more risk associated with it. Sure. But if you look within asset classes, that hasn’t been true just empirically. Like why is it, it’s perplexing, right? That high quality companies, which have been safer, right? They do better in recessions and such have, you’ve not had to pay for that with lower return. And that’s, that was really the core of Jeremy’s observation about quality stocks and why it’s not just that quality’s this silver bullet that just beats the market all the time. And I’m sure we necessarily believe that’s true, but it, it does improve your portfolio with lower risk without having to give up return. 00:21:10 [Speaker Changed] So the obvious answer is value makes a big difference within quality stocks. Is that what leads to the lower downside in, in a market dislocation, if you’re buying it right, there’s less room to fall, right? 00:21:26 [Speaker Changed] In isolation quality on average gives you downside protection, certainly did in 2007, eight for example. But then it didn’t in the, when the tech bubble burst, it didn’t last year in 2022. Right? Then the reason for that is a lot of the quality stocks were really expensive. So as the trade off compromise or combination of value and quality is what we think gives you that best downside protection, but without having to give up too much on the upside too. 00:21:50 [Speaker Changed] Huh. So let’s dive into the details of GMO’s. Quality strategies in 2022. Core quality and quality value outperformed the s and p 500 by a wide margin. 2022 was a a down 19% I think in the s and p 500, but last year, 2023 core quality and quality value slowed, but quality growth boomed somewhat different. Environment and quality growth was where all the gains were, were had. Is this a purposeful style diversification within quality? How, how do you think about core quality, quality value and quality growth? 00:22:32 [Speaker Changed] Yeah, when we think about the opportunity set for us of high quality companies, there are, as you say, really different kinds of companies within that quality is neither growth nor value. You can find both within it. And so when we talk about quality growth or think tech stocks, qua core quality, think defensive coke, consumer staples, value, think some of the more cyclical names. We like the fact that there are high quality companies in all these areas and generally we find them attractive. And we like the fact that as you point out, they tend to work at different parts of the market cycle. And so yes, it is deliberate that we have exposure across these, not that, you know, if it’s 1999, we’re probably not gonna have much quality growth. So it’s not a fixed allocation, but it does give us diversification. And because we’re familiar with stocks across this spectrum, it also gives us the ability to rebalance. And that’s one of the things that we’ve been quite successful with over the last few years, is not just that we hold both these kind of companies, but we’ve been leaning against the wind to buy the growth stocks at the end of 2022. The value stocks more recently just rebalancing has had a lot of value. 00:23:38 [Speaker Changed] Really interesting. You, you mentioned Ben Inker, who I know publishes pretty regularly. You publish on a, on a regular basis also not too long ago you put something out quality for the long run, A little play on Professor Siegel’s stocks for the long run. Tell us a little bit about the valuation discipline, quality investing offers and and why that’s so important when so many stocks have had such great run up over the past couple of quarters. 00:24:05 [Speaker Changed] Yeah, I think that’s maybe a mistake I’ve made in my, my career has been too rooted in looking at what did well over the last few quarters if a stock did really well thinking, oh, it must be expensive. Whereas the reality of IT markets are efficient enough that the vast majority of outperformance is driven by truly improved fundamental results. So we have to be with that level of humility. I think the other thing to think about is that if you’re a long-term investor, getting the valuation exactly right matters less, you know, the finessing, the entry exit point is less important if you’re gonna hold for five plus years, which is kind of what our ambition is to do with our stocks. But in extremis, which is the Microsoft and the Tonight 2000 example and maybe some other AI related stocks today, it really does matter. You really like the long time where you have to hold to make up that valuation whole is so long that you just really shouldn’t be involved. It’s kinda our basic philosophy. 00:25:03 [Speaker Changed] Another research piece you put out, I found kind of intriguing quality investing for greed and fear. Explain that. 00:25:10 [Speaker Changed] I mean, the fear part is kind of what we’ve been talking about. Like if you’re worried about market downturns, quality is a good sleep at night investment. And thing I laugh about is every time we think about writing an annual letter or something like that, someone wants to write in these uncertain times that we are now in today, it’s like, it’s always uncertain times. When has that not ever been the case? Right? Right. So people are always worried and so quality is always good for, for that constituency. The only thing I’d say is if when those worries come to pass, if you hold quality stocks that you really believe in, you’re less likely to sell at the wrong moment. So there’s that psychological advantage to them that goes beyond just statistical analysis of return periods over time. And the greed is the quality is not just a defensive portfolio, then the market’s going down, you hold cash, right? You don’t hold high quality stock. So the greed part is that high quality companies do participate in the upmarket. And so if you think, you know, AI is a great thing. If you think GLP ones are fantastic, if you think there’s innovation going on all around the world and you wanna participate in it, we think high quality companies are a great way to do that. 00:26:14 [Speaker Changed] I have a, a recollection, and I think it was the Onion, our long national nightmare of peace and prosperity is finally over was a 2000 headline. And it’s true. How often, how often can you say, well thank goodness we live in times where there’s no uncertainty and, and everything is rational 00:26:33 [Speaker Changed] When we say that run for the hills that 00:26:35 [Speaker Changed] That’s exactly right. GMO has released last quarter their first retail product an ETFI love the symbol QLTY. Let, let’s talk a little bit about the ETF and the thinking behind it. GMO has almost exclusively had institutional investors, very high net worth family offices. I mentioned the quality mutual fund, that’s a $5 million minimum. What was the thinking behind, hey, let’s do an ETF that anyone could buy for 50 bips? No minimum. 00:27:10 [Speaker Changed] Yeah, you’re exactly right. GMO has been an institutional in manager. We started in the endowments and foundations space and have gone from then. But as you also said, institutional includes increasingly family offices and wealthy individuals who pay taxes. And so just structurally the ETF is such a better vehicle. Yes, to pool clients and GMO’s always been an advocate of pooled investing. You get the, we think it’s be good a solution and allows more portfolio manager focus not to have separate accounts. And so really the launch, the genesis of having an ETF for us was less about entering the retail market or accessing different clients and more about better servicing the institutional tax paying clients. That said, we have a lot of respect for individual investors. I think they get a bum wrap among institutional managers. Institu individual investors can be very sophisticated, discerning, thoughtful. And it’s not a segment of the market we wanna shy away from other than just the operational complexity of having lots of small clients. And there the ETF market has matured to a point where we don’t really face that complexity. And so we’re glad to be able to be a lot more accessible. The only thing I’d say about ETFs, and they’ve been on our radar screen for a while of course, but in originally they were for no particular reason, but kind of associated with passive or more commoditized quantitative factor strategies. And it’s really over the last few years that an active strategy in an ETF has been something people would pay any attention to. 00:28:43 [Speaker Changed] So I mentioned previously the GMO Quality Mutual fund, top 1% of its peers, 13.6% a year for the past decade. How does the quality ETF strategy differ from the mutual fund strategy? 00:28:57 [Speaker Changed] Not very much. It’s the same investment process philosophy team and everything. The one simplification we’ve made for the ETF is it only, we only invest in US companies. So the quality fund is global and its opportunity set has had up to 20% in non-US domiciled multinationals, think like the Nestle’s of the world, that kind of company, right? Whereas the ETF is designed to be a more straightforward s and p 500 US only equity strategy 00:29:26 [Speaker Changed] And it’s concentrated 35 large cap stocks. Is it limited to what’s in the S&P 500 or is it any US stock? 00:29:34 [Speaker Changed] It’s not limited to the S&P500. What we’d like tends to be large cap established great businesses. So I think it is in fact all stocks are in the S&P500. 00:29:44 [Speaker Changed] And and 50 bips is not an unreasonable fee structure for an actively managed fund. Tell us the thinking behind this. Why go, I wouldn’t call it low cost, but it’s not a high cost etf. Some of the other active ETFs are a hundred bips or more. What was the thinking there? Yeah, 00:30:03 [Speaker Changed] Well we’re pricing it similarly to how we price our institutional accounts. As I mentioned, a lot of our, I think initial funds have come from tax paying investment advisors and such who might have a choice which to use. We wanted to make that a not fee driven choice, right? But just picking the right vehicle. Another reason why we can keep the costs low is these are very liquid stocks. There’s not really a capacity constraint around these. So it’s not like we have to charge an exceedingly high rate to be a profitable 00:30:33 [Speaker Changed] Business. And how often do those 35 stocks turn over? Is there any, hey, we’re gonna rebalance this once a year or once a quarter, or is it driven on whatever opportunities the quality stock team you work with decides we’re going to get rid of accident, replace it with them? 00:30:49 [Speaker Changed] Yeah, there’s no calendar to it. It’s driven by the opportunities as we see them. If we think about the mutual fund, and I don’t think this would be any different here. We’ve run been running turnover about 20% a year for the last few years. Which consistent with my remarks earlier, when we buy a company, we’re thinking about holding it for quite some time. In fact, probably about half that turnover is not so much new stocks entering or stocks exiting as more rebalancing around valuation moves in the portfolio. 00:31:16 [Speaker Changed] I love the ticker QLTY. It’s amazing that was even available this late in the ETF world. How did you guys start first thinking about we have clients paying all this phantom tax on the mutual fund side. ETFs really seem to be much more efficient from a tax perspective. Tell us a little bit about the, the discussions that led up to let’s create an ETF. 00:31:42 [Speaker Changed] I’m acutely aware of the tax issues as I put the bulk of my investing in our, our own strategies too, including the mutual fund now, now I’m invested in the ETF. I think it would go back to over a decade. Like we were well aware of ETFs for a very, very long time. And while we got the best ticker out there, there are other quality ETFs out there, which, you know, advisors were talking to us as competitors. So we were kind of looking at the competitive landscape and seeing, hey, what do they do that’s different from what we do? Why do we think our approach is better? You know, we’re more fundamental, we have the valuation, et cetera. There are a lot of differences. Felt like now was the time, I think largely because of the rise of active ETFs versus pure passive ones. 00:32:21 [Speaker Changed] Now, now this obviously isn’t the exact same holdings as the quality funds mutual fund, but I’m gonna assume they’ll track pretty closely over time. It’s the same process. It’s some of the favorite ideas from quality go into the ETF. Can, can we expect similar performance from this? 00:32:39 [Speaker Changed] Yeah. My, my expectation is they won’t differ is that we’ve never held more than 20% in non-US stocks and all the non-US, all the US stocks we hold in the fund. We also hold in the ETF at similar weights, there are a couple new names. So it’s not just a carve out, but it’s very, very similar in characteristics. 00:32:56 [Speaker Changed] So, so I know GMO has a variety of offerings. You do equities, alts, fixed income. How does the quality screen work with other asset classes besides equities? Can you do that with alts? Can you do that with fixed income or is it just specific to value stock investing? 00:33:17 [Speaker Changed] Focusing on quality characteristics as well as valuation and sort of quality at a reasonable price, sort of big picture is an idea that cuts pretty much across all of GMO’s strategies and the different asset classes in which we invest. Of course it means different things if you’re running a merger arb strategy, right, with a short horizon, then long term buy and hold investing like quote we do. But that’s, that’s there. Another thing to think about that sort of unites GMO as a firm is that a lot of our clients come sort of through the door, if you will, in our multi-asset class solutions. We, we call asset allocation at GMO. So a lot of the strategies that we’ve developed over the years at GMO, including originally the quality strategy derived from us, Jeremy and team Ben Inker and others, seeing a top-down opportunity in the market, us forming a strategy if that’s a conventional asset class or at the time a new asset or sub-asset class, like quality investing. That’s how a lot of what we do get started, it’s why we kind of have a complicated lineup for a firm our size. But that does impose a certain, I think, intellectual consistency on how we think about the world. 00:34:26 [Speaker Changed] So, so given the success of this first ETF and given this expertise in all these different areas, the obvious question is what’s the next ETF that’s gonna come out of GMO? Or are you guys good with quality and you’re not looking for any other retail products? Yeah, 00:34:44 [Speaker Changed] Well I’m not gonna break news on your podcast, but I think, you know, we do one with the idea certainly that we might do more and 00:34:52 [Speaker Changed] If this is continues to be successful, all these other asset classes that GMO plays in some of them are really ripe for an E 00:35:00 [Speaker Changed] Yeah, some, some were ripe than others. But I think there’s a lot of opportunity out there. If you maybe another way of asking that crisis, why did we start with this one? I think there are, there are a couple obvious reasons. One, it is our largest strategy, but another it is US equities, which are kind of the simplest, most liquid asset class. They fit well for the transparency of an ETF structure. It’s most easiest to do the market making around them. So it was a very obvious place for us to start. 00:35:23 [Speaker Changed] So the mutual fund is about $8 billion or so. Is there any limitation on how big the CTF can get? I mean, assuming it’s all large cap US stocks doesn’t seem like there are a lot of constraints on how large this can scale. 00:35:38 [Speaker Changed] Yeah. Not practical constraints, of course there is a constraint for everything, but we’d be talking about tens of billions of dollars where capacity would be, huh. 00:35:46 [Speaker Changed] Really interesting. So let’s talk a little bit about what’s going on in, in value today. I I, I’m impressed by this quote of yours and really curious if it’s still true. US deep value stocks are unusually cheap in the US market in particular, the cheapest 20% look cheaper than they ever have in 98% of the time through history. That’s really surprising. I keep hearing about how expensive stocks are. The bottom quintile of value is as cheap essentially as it ever gets. 00:36:20 [Speaker Changed] Yeah, that’s a quote that’s coming up from our asked allocation team about how they think about positioning equity portfolios to be maybe nuanced about that, where we’re talking about is the valuation that relative to the overall market. So it’s kind of two sides of the same coin. It’s not so much that cheap stocks are really, really cheap. It’s that the spread of valuation ratios is very wide. 00:36:41 [Speaker Changed] So the non-value stocks are very expensive. 00:36:43 [Speaker Changed] Yeah. And frankly I think that is where most of the action is. It’s that the non-value stocks are trading at much higher multiples than they normally have. And when we say deep value, it’s almost like, you know, two people talk about index because they divide the world 50 50. Right? There’s no magic to that. I think right now, just in a market cap sense, market concentration, there are a lot more growth stocks. So to find the true value stocks and making air quotes, you kind of have to go a little bit deeper into the percentiles of market cap than you would typically. 00:37:11 [Speaker Changed] And when we’re talking about value, you’re still discussing with the quality overlay. So you could have quality stocks and, and the least expensive quality stocks on a valuation basis. Yeah. 00:37:23 [Speaker Changed] Relatively 00:37:23 [Speaker Changed] Attractive, but maybe not absolutely attractive. I I don’t wanna put words in your mouth. 00:37:27 [Speaker Changed] Yeah, maybe apologize for confusing terminology on our part because when we say deep value, I think people often think just the lowest price to book stocks out there, right. In the GMO terminology, that’s deep value on a measure of what we’d call intrinsic value that blends a hefty ver version of quality into that. So, you know, that will include some stocks we hold in the quality and I think the metas of the world, companies like that. 00:37:49 [Speaker Changed] Gotcha. So I get the sense you guys don’t pay a whole lot of attention to the macro economy or geopolitics or what the fed’s doing. How, how important are these other aspects to the way you manage assets? 00:38:05 [Speaker Changed] Not that important. I think the thought experiment for us is if this is something that feels cyclical that isn’t going to affect where the world’s gonna be five years from now, then we’re only gonna pay attention to it. To the extent that if something happens, we react to it. Like it can create a dislocation, right? People might overreact to an interest rate move in our opinion, but we’re not gonna try to forecast it or pick stocks based on that. You did mention geopolitics in that list. Sure. Geopolitics is, in my mind a little bit different. And the reason that’s a little bit different is I’m not sure that’s gonna be solved five years from now, right? That could get worse or the trends that we’re on are different from where we’ve been in the last 20 or 30 years. So that is, I’d say, of those things, the one where we scratch our head a little bit more, not that I’m gonna claim we have the answers there, but it is front of mind for us. 00:38:52 [Speaker Changed] How, how do you think about interest rate risk or inflation or the whole transitory versus sticky debate? Does that become a key part of the asset allocation discussion or is it just kind of background noise that everybody has to deal with 00:39:10 [Speaker Changed] More background noise? GMO is kind of famous for doing seven year forecasts, right? And the reasons we do seven year forecast is that’s sort of the horizon where we feel like whatever the noise is that’s going on now, that that’ll kind of all be gone. So the philosophy behind those is, eh, seven years from now things will be kind of normal and I’m not sure what the path is to get there, but if that’s where they’re going, this is what that would imply about returns over that horizon. And, 00:39:34 [Speaker Changed] And one of your recent notes, you, you mentioned Jeremy Grantham’s super bubble thesis. How do you work in quality as a core equity allocation within the concept that, hey, maybe there’s a super bubble going on out there. Is that, is that consistent? 00:39:49 [Speaker Changed] Yeah, I’m a a humble portfolio manager who works from the bottom up. So I’m not really thinking about super bubbles very much. Honestly. I’m thinking about are these stocks that we’re investing in good quality business price to deliver a good return and good, I mean, sort of double digit type return over the next five ish years. So if it turns out that this is a super bubble and I think Jeremy’s technical definition of that is a very, very big bubble, then quality stocks are gonna go down. We will have been wrong to invest in them. The silver lining is at least we’ll have done better than pretty much anything else out there. 00:40:22 [Speaker Changed] The quality will go down less than, than the rest of the indices out 00:40:27 [Speaker Changed] There. Particularly quality with a sense of valuation. Huh. 00:40:30 [Speaker Changed] Alright, so let me jump to my favorite questions that I ask all of my guests. Starting with what have you been streaming these days? What’s been keeping you entertained either video or audio? 00:40:43 [Speaker Changed] Well, I have a 12-year-old daughter and she runs the family with an iron fist and she likes to still watch TV together. So I’ve been watching a lot of survivor episodes, although unfortunately I actually like those. She’s moving on to something else now that I like less well, but I won’t call it out in terms of, I, I listen to a lot of podcasts too. That’s where I get a little more sort of, I am sort of embarrassed to say this, but professionally it takes a little bit of the place of reading. I, I love Econ Talk, which is sort of theoretical economics debate podcast for fun. I love Judge John Hodgman. There’s all kinds of things out there. It’s a great world. 00:41:19 [Speaker Changed] Yeah, no, it really is. So let’s talk a little bit about your career. Who, who were your early mentors who helped shape the path you’ve taken professionally? 00:41:30 [Speaker Changed] I think in my case, a lot of the mentors come through kind of my academic career and teachers and, and professors going back. And my high high school math teacher, Mr. Hyde, he was the one who taught the computer programming course. He’s the one who sort of encouraged me to take college courses when I was in high school. He also taught me bridge, which is, I don’t really play that much anymore, but he is a great game. And let you think a lot about things in a, in a great way. My PhD advisor at Harvard, Les Valiant. I’d also pick out, I mentioned Chris Darnell at GMO. Rob EY was the name of my first manager there. He was a very wise, wise man. He, if I think about one of the things I’ve gained from these people too, particularly the professional ones, it’s kind of when to be willing to say no to stuff too. My colleagues now wouldn’t believe it, but I used to be like probably over accommodating. And maybe I’ve learned that lesson a bit over. Learned it. 00:42:23 [Speaker Changed] What are some of your favorite books? What are you reading currently? 00:42:27 [Speaker Changed] Well, this is the holiday time. I just came back from a long plane flight and I read this really fun detective book that my wife gave me for Christmas. But then I was reading a biography of Samuel Sewell, who’s one of the judges at the Salem Witch Trials actually. So a colonial era figure. It’s an interesting book to learn about that era. My favorite book of all time, and it’s not even close, is a children’s book called The Land of Green Ginger. Huh. Which is written by the screenwriter of the original Wizard of Oz movies. It is a satirical, clever take on kind of the postscript, the Aladdin myth from the Arabian Knights and I Rec, I recommend all of your listeners if they can find it, which is easy. Read that book, 00:43:11 [Speaker Changed]  Really interesting. What sort of advice would you give to a recent college grad interested in a career in investment and finance? 00:43:20 [Speaker Changed] So investment finance is actually a very broad area. So the first advice is kind of narrow that down. And the best way to narrow it down is to get exposure to lots of different things. And I think the best way to enable yourself to get exposure is don’t focus so much on finance investing. Just figure out about learning, learn all sorts of things. Learn math, learn history. You can always learn a trade after that. Don’t think, oh, I’m interested in finance, so I’m just gonna spend all my time listening to investment podcasts. No offense or, or none. Taken, gonna read 10 Ks. 00:43:55 [Speaker Changed] I, I don’t, I don’t imagine that anyone’s gonna listen to a couple of dozen podcasts and suddenly begin to outperform the benchmark. It’s a little more nuanced than that, isn’t it? 00:44:05 [Speaker Changed] I think all the great investors talk about reading and how much they, of their time they spend reading and just learning. And I think that is one of the things I like about the investment industry is you just spend so much of your time just learning about how businesses work, how the world works. You’re kind of an observer. You’re kind of a miserable critic, rather an actual creator of value, but an analyzer of others’ work 00:44:26 [Speaker Changed] It, it’s, it’s almost academic adjacent, given how much reading there is. And our final question, what do you know about the world of investing today? You wish you knew 30 years or so ago when you were first getting started, 00:44:38 [Speaker Changed] That appreciation of quality businesses and the value to pay for them. I come, my mindset is a little bit more contrarian and I think I, from an investing perspective, that manifest itself much more in a, a value orientation or value, meaning low multiple underperforming stocks, cigar butt of philosophy. And I think realizing the value of time and compounding and you know, just, it’s just worth paying up for a higher quality business 00:45:03 [Barry Rtholtz To say the very least. Thank you, Tom, for being so generous with your time. We have been speaking with Tom Hancock, head of the focus equity team at GMO. If you enjoy this conversation, well check out any of the previous 500 interviews we’ve conducted over the past nine years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcasts. Sign up for my daily reading list@alz.com. Follow me on Twitter at ritholtz. I would be remiss if I did not thank the crack team who helps us put these conversations together each week. My audio engineer is Kaylee Ro Tika. Val Run is my project manager. Shorten Russo is my head of research. Anna Luke is our producer. I’m Barry Rtholtz. You’ve been listening to Masters in Business on Bloomberg Radio. ~~~     The post Transcript: Tom Hancock, GMO appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 7th, 2024Related News

At the Money: Stock Picking vs. Value Investing 

   At the Money: Stock Picking vs. Value Investing  with Jeremy Schwartz, Wisdom Tree. (February 7, 2024) How much you pay for stocks really matters. Should value investing be part of that strategy? To find out more, I speak with Jeremy Schwartz, Global Chief Investment Officer of WisdomTree, leading the firm’s investment strategy team… Read More The post At the Money: Stock Picking vs. Value Investing  appeared first on The Big Picture.    At the Money: Stock Picking vs. Value Investing  with Jeremy Schwartz, Wisdom Tree. (February 7, 2024) How much you pay for stocks really matters. Should value investing be part of that strategy? To find out more, I speak with Jeremy Schwartz, Global Chief Investment Officer of WisdomTree, leading the firm’s investment strategy team in the construction of equity Indexes, quantitative active strategies and multi-asset Model Portfolios. Full transcript below. ~~~ About Jeremy Schwartz: Jeremy Schwartz is Global Chief Investment Officer of WisdomTree, leading the firm’s investment strategy team in the construction of equity Indexes, quantitative active strategies, and multi-asset Model Portfolios. He co-hosts the Behind the Markets podcast with Wharton finance Professor Jeremy Siegel and has helped update and revise Siegel’s Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies. For more info, see: Wisdom Tree Bio LinkedIn Twitter   Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg.       TRANSCRIPT: Jeremy Schwartz Value Investing   Barry Ritholtz: How much you pay for your stocks has a giant impact on how well they perform. Chase a hot ETF or mutual fund that’s run up, and you might come to regret it. I’m Barry Ritholtz. And on today’s edition of At the Money, we’re gonna discuss whether value investing should be part of your strategy. To help us unpack all of this and what it means for your portfolio, let’s bring in Jeremy Schwartz, global chief investment officer at Wisdom Tree Asset Management and longtime collaborator with Wharton professor Jeremy Siegel. Both Jeremy’s are coauthors of the investing classic, Stocks for the Long Run. Let’s start with a simple question. What Is value investing? Jeremy Schwartz: Value investing, we define as really looking at price versus some fundamental metric of value. Our our favorite ones are dividends and earnings. You say, why do you buy a stock? Present value of future cash flows, any asset is present value of future cash flows. And Stocks, those cash flows are dividends. Dividends come from earnings, and so those are sort of anchors to valuation. And, you know, it’s a critical component. Judging a stock based on what it produces to you as an investor. Barry Ritholtz: So last time we had you on, we discussed stocks for the long term. What advantages do you get from investing with a value tilt over the long term? Jeremy Schwartz: You know, I think 1 of the big risks to the market are these major bubbles. It’s where tech bubble in 2000 is the classic example. And, you know, Siegel had long been just a Vanguard buy and hold in stocks for long run. He gave Vanguard a lot of free publicity. He was saying buy the market, buy cheaply with index funds. Until the tech bubble where we started talking about this massive overvaluation in sort of these big cap tech stocks. Barry Ritholtz: He had a very famous Wall Street Journal piece In, like, late night fourteenth 2000. So days before the bubble popped. Jeremy Schwartz: And basically said that there’s huge Tech stocks, triple-digit PEs, you can never justify the valuations no matter what the growth rates are. So his own portfolio started selling the S&P 500 and buying value. And his second book, The Future for Investors, was all about these strategies to protect from bubbles and be a valuation-sensitive investor. And that’s where he focused a lot on dividends, a lot on earnings, and strategies that sorted the market by those factors to try to find the cheapest stocks on those fascvtors. Barry Ritholtz: So professor Siegel very specifically said, don’t focus on the short-term price movements. Instead, focus on the underlying fundamentals of the business. Jeremy Schwartz: Yeah, and we we tell a story in the book, Future for Investors – even now in the news and stocks for a long run of IBM versus Exxon – And there are 2 very interesting So they’ve been around for decades. So we look back 70 years of returns, and you look at the growth rates of IBM versus Exxon over the last 70 years. And you say, IBM beat Exxon by 3 percentage points a year on sales growth, 3 percent on earnings growth, dividend growth, book value. With any growth metric, It wins over all long-term time periods. But then why was Exxon the better return for the last 70 years? And it’s interesting. Like, Exxon sold At a 12 PE, IBM sold at a 22 PE on average. 1 sold at a 2 percent dividend yield. 1 sold at a 5 percent dividend yield. Right? So You had Exxon being the classic value stock, IBM the classic growth stock. I think of that largely like the market versus high dividend or value investing state. The S and P is Around 20 times like IBM was, it’s below 2 percent yield. High dividend stocks are like a 5 percent yield and 10 PEs. So it’s really this sort of valuation-sensitive approach, but people get too optimistic on the more expensive parts and too pessimistic on the value segments. Barry Ritholtz: So how should we measure value as an investor whether it’s picking out individual stocks or buying broad indexes? What’s the best way to think about value? Jeremy Schwartz: I mean, the real risk to value, are you buying these value traps where the price is low for good reason. Right. They’re forecasting that fundamentals aren’t sustainable and you never know that with a single stock. And so that is where We talked about diversification and buying index funds for the whole market is a very sensible way to do it. Even for these value strategies, you can get rules-based discipline strategies of hundreds of stocks that get you that type of value discipline, whether you’re looking at things like high dividends that we do at Wisdom Tree, other factors that you can sort by. Idea is getting a broad diversified portfolio, not trying to buy a single cheap stock. Barry Ritholtz: So for people who are trying to wrap their head around the typical value investor, give us some examples of famous value fund managers who put this into practice. Jeremy Schwartz: It was interesting. When we first I talked about “The Future For Investors” and we started working on that. Siegel suggested I go read everything Warren Buffett had ever and The time Buffett was coming out against the tech stocks too back 20 years ago and saying these Barry Ritholtz: I recall people saying, oh, this guy’s passed his his prime. He’s done. You could put a fork in Warren Buffett. Exactly. Jeremy Schwartz: And so we were reading every letter he’d written and, you know, it’s interesting Buffett’s own involvement from being a Ben Graham style Oh, buying just cheap price to book stocks, what he called cigar butt investing later on is getting glass puffs of these cigars that were through cheap stocks at their very last moments Towards actually morphing towards a quality investor and and buying Apple as one of his flagship companies now. And I do think over time, they found buying these high-quality businesses at fair value prices is also part of the value investing framework. But he’s definitely 1 that we looked up to and tried to model a lot of our thinking of what is value investing off of this high-quality franchise businesses too. Barry Ritholtz: You could do worse than Warren Buffett. And I recall When he was first buying Apple, it was trading at a PE of, like, 12 or 13. Very reasonable for what the company later became. Jeremy Schwartz: Yeah. Now it’s around 30 times not having the same growth rate as it used to, but it still has these huge valuable franchises. And they consistently grow their dividends, they do buybacks, they’re doing the types of Kearney cash to shareholders approach that he likes. Barry Ritholtz: So we’re recording this towards the end of 2023. Growth has done really well. What makes value more attractive than, let’s call it, growth investing? Jeremy Schwartz: You know what? We talk about the long-term benefits To value, but the last 15 years have been a very painful stretch to be a value investor. It has definitely been a 15-year stretch Hallmarked by growth until 2022, and then you had things like the Nasdaq down a third and high dividend stocks positive. Okay? Now it’s reversed again entirely this year in 2023. Going forward, you know, what’s driven growth, Things like Apple that you said were seeing, you know, 12 PEs. Microsoft, they had they had very low PEs and then they had above-average growth and expanding multiples. So we had two tailwinds: Better growth, multiple expansion. It’s gonna be hard for them to have the same multiple expansion ahead. And so then the question is all comes down to earnings growth. Can these big tech stocks keep growing earnings much faster than the market? That’s the real question, and they’re very big, and so then, we’ll see if they are able to keep their moats for some time, um, but often when you get these high multiples, earnings start to disappoint and that’s when the corrections come. In value, you know, high dividend basket at 10 PE, a 10 percent earnings yield. You don’t need real growth. You’re just getting the return. 10 percent is a very good return [Sure]. In real cash flows. And so I think that is a basket that I think, uh, I’m very optimistic on over the next 10 years. Barry Ritholtz: So I hate when people blame Bad performance on the Fed, but I can’t help but wonder: 15 years of outperformance by growth investors coincided with very, very low rates. Suddenly, the Fed normalizes rates. Maybe it was a little quickly, but rates are back up to over 5 percent — seems to be a period where value does better, when capital isn’t free. Any any truth to that? Jeremy Schwartz: It’s very interesting. And there’s there’s some debates back and forth. I have Cliff Asness saying that interest rates haven’t been a factor for value as a cycle. Professor Siegel’s talked a lot about The duration with these high expensive growth stocks are being more like long duration assets and that raising rates should impact The valuations of the the high highest gross stocks. It’s fascinating: A lot of the traditional relationships are flipped on their head. I thought of small caps as benefiting from a stronger economy, you see rising rates good for small caps. But small caps today are trading the opposite of rates where, you know, they have the most lending that’s tied to floating rate instruments. They don’t have debt, so they’re borrowing from banks and using bank loans. So they’re like the only people facing the cost of these higher rates as they’re paying more interest on their bank loans. And so when rates have been falling over the last few weeks, small caps have been outperforming or doing much better. So a lot of traditional relationships have been challenged this year, but I think we come back to valuation drives return over the very long run. So when we think about small caps at 10 to 11 PEs, High dividend stocks at 10 to 11 PEs, that we think will really matter over the long term and not just the Fed and the interest rate Situation. Barry Ritholtz:  So let’s talk exactly about that basket of stocks with a 10 PE versus a growth basket with a 30 PE. I like the idea of a pretty fat dividend yield and that low PE. Sometimes in the past, we’ve seen high-dividend stocks have their yields cut. What sort of risk factor are we looking at with these low PE high dividend stocks? Jeremy Schwartz: Yeah. It’s absolutely true. You know, a 30 PE was is just a 3 percent earnings yield. Those companies are expected and will grow their earnings faster than the high-dividend stocks. There’s no question they’re gonna have faster growth rates. Question is can they maintain the growth rates that the markets really do expect? And so that’s where there’s the the higher the PE, the more the expectation, the harder they fall when they disappoint over time. But there is this value trap sense, you know, are you buying just stocks that may cut the dividends? We tried to screen for things that could have sustainable dividend growth and, negative momentum is does the market know something that the fundamentals haven’t reflect, it’s not in the earnings, not in the dividends yet. Sso you try to screen for that. But in general, what we find is Over very long periods of time, the market overly discounts the bad news and sort of they become too cheap, uh, over a long period of time. Barry Ritholtz: So what you’re really driving towards is expectations matter a lot. High PE stocks, high growth stocks have very high matter a lot. High PE stocks, high growth stocks have very high expectations, and they can disappoint just by growing fast but not fast enough. And yet we look at these value stocks that are often overlooked, and they have very low expectations. Jeremy Schwartz: Yeah. I think that’s the classic case for, like, Novidia today, which is 1 of  the highest Multiple stocks in the S & P, they’ve been delivering. They’ve been 1 of the best growth stories you’ve ever heard, you know, continuing the the AI revolution. But Can they keep delivering this record growth rates? It’s gonna be tough for them. Barry Ritholtz: We saw the last quarter. They had great numbers, not great enough. Jeremy Schwartz: Yes, they haven’t quite broken this new all time high level. It’s a classic case of it’s just gonna be tough for them to keep delivering on these very elevated growth rates. Barry Ritholtz: So if an investor is thinking about managing risk and having a margin of safety, you’re obviously saying value is the better bet than growth. Jeremy Schwartz: Value and small caps today. Both you can get 10 to 12 times earnings. High dividend stocks, I think, are 1 of the cheaper segments of even within the value portfolios. High dividends have been Especially cheap today. Barry Ritholtz: So we’ve been talking about risk. We’ve been talking about volatility. We haven’t talked about performance. What are, if any, The value advantages over the long term, regarding performance. Jeremy Schwartz: We done some studies back to the S and P 500 inception in 1957, when we look back over that, you know, 60ish years, the most expensive stocks lag the market by a hundred to 200 basis points a year. The cheapest stocks outperformed by 200 basis points a year. And so these are compounding over 60 (not quite 70) years, but very long term periods, uh, and so that there is a a substantial wealth accumulation that comes with a 1 to 2 percent year advantage or a lag. Barry Ritholtz: So to wrap up, investors who concentrate more in value indexes tend to have less Volatility and lower risk than stock pickers and other investors do, and long term value investors also have the potential to generate Better returns.  I’m Barry Ritholtz. You’re listening to At the Money on Bloomberg Radio.   ~~~   The post At the Money: Stock Picking vs. Value Investing  appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 7th, 2024Related News

Retail as a Service

    Back in the bad old days of mainframes, “Time-sharing” was how computing power and database storage were provided to the large corporations that could afford it. Computing was less the purchase of goods than a service. The modern cloud-based era has seen the rise of “Software as a service” (SaaS).1 This approach was… Read More The post Retail as a Service appeared first on The Big Picture.     Back in the bad old days of mainframes, “Time-sharing” was how computing power and database storage were provided to the large corporations that could afford it. Computing was less the purchase of goods than a service. The modern cloud-based era has seen the rise of “Software as a service” (SaaS).1 This approach was based on the idea that it was more cost-effective for the consumer and more efficient (and profitable) for the provider to offer computing operations as services instead of physically distributed goods. ~~~ Since the pandemic ended, it has been obvious that the flexibility of “Work from Home” (WFH) and its preference among many employees was not going to end. The results have been office buildings operating far below historical average occupancy rates, resulting in a significant fall in value for commercial real estate (CRE). The resulting impact on CRE land and liabilities is a risk factor for the banking sector, and potentially a threat to the broader economic system. The response has included upgrading buildings to modern class A levels, extending loan provisions, and converting office buildings to residential spaces. So far, these have achieved only mixed success. I want to float a new concept to CRE owners: Retail as a Service (RaaS). In the pre-2020 seller’s market, building owners found ways to make nearly every square foot of CRE property profitable. Not just the upper floors that tenants rented, but the ground floor retail as well.2 Rents charged by the building were dependent upon the flow of traffic of tenants. A fully occupied office tower could be counted on to provide enough foot traffic to support a retail store, coffee shop or restaurant. Low vacancy rates not only allowed for higher overall office rents, but that in turn made the non-office spaces attractive to tenants. The current era has demolished that model. Retail is a tough business in the best of circumstances; costs are high, profit margins are razor thin, and the vast majority of new stores and restaurants fail to survive two years. In prior circumstances, the biggest threat was the state of the economy. But in the current era, when foot traffic is reduced anywhere from 10% to 40%, the businesses are guaranteed to fail. This is true for the small shops that rely primarily on a building’s tenants, as well as the larger restaurants and chain retailers that rely on the entire neighborhood as their clientele. Unattractive or missing ground floor tenants reduce the desirability of any office building to both new potential renters and existing tenants re-signing their leases. It creates a negative image for the building, leading to reduced occupancy rates and lower overall rent rolls. As building values fall, it creates a negative cycle that can be challenging to break. Worse still, it raises the potential for higher crime rates, further damaging property values. Walk through any urban neighborhood that has below-average office vacancy rates, and it looks like you are in an era of economic depression. It’s a variation of the “Broken Windows theory” – visible signs of economic distress lead to crime, antisocial behavior, and civil disorder. This creates an urban environment spiraling downward in a vicious cycle. Retail as a Service is a means to halt this problem. The idea is that attractive ground-floor retail stores and restaurants drive foot traffic and activity. They raise the desirability of an office building, increasing its rent rolls and value. However, the challenge of reduced foot traffic requires a dramatically different approach, one that includes substantially reduced rent to ground-floor tenants. This requires a major change in perspective. For many years, ground floor retail were profit centers. Building owners today need to rethink those spaces as marketing expenses. This will not just help specific buildings but will give a boost to neighborhoods in their entirety. These challenges were a long time in the making. Retail has been challenged by online shopping since the late 1990s. And the technology that has made WFH possible has been around for over a decade. The changes that took place in where people worked and shopped weren’t created by the Covid-era, they were merely accelerated by it. The status quo – high rents for ground floor spaces, significantly reduced office occupancy rates – is obviously unsustainable. Fixing this is going to require wrenching changes, including a rethink of the basic CRE business model. ~~~ There is an interesting parallel in the language of SaaS and CRE: Described as “multi-tenant architecture” with customers as “tenants,” it very much borrows jargon from real estate. Now CRE needs to borrow some of the efficiencies and cost savings of SaaS. Work from Home has created very specific challenges for CRE. It is hard to imagine we are ever returning to the occupancy rates that existed pre-2020. Hopefully, commercial real estate owners and their financers are up to the challenge of creating innovative, productive solutions. Retail as a Service is a promising part of those potential solutions…       Previously: WFH vs RTO (February 16, 2023) Of Course WFH is “Really Working” (March 29, 2023) Back in the Saddle (May 4, 2021) Sorry, We’re Closed (March 13, 2020)   See also: Why NYC Apartment Buildings Are on Sale Now for 50% Off (Bloomberg, February 4, 2024) 60 Minutes on Commerical Real Estate (CBS, January 14, 2024)     __________ 1. That subsequently allowed for Infrastructure as a service (IaaS) and Platform as a service (PaaS). 2. Some building owners found they could even use auxiliary floors such as basements or 2nd floor, which did not work well for office tenants or retail, but might do well as a gym, yoga studio, or classroom.   The post Retail as a Service appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 5th, 2024Related News

Update: Porsche 911 EV Conversion

    Our story so far: In 2022, I signed up with Moment Motors to get in their queue for an EV conversion. Thus began the hunt for a donor car. I mentioned last month that the originally selected car for this project turned out to be a rare(ish) 1988 Porsche 911 Cabrio that I… Read More The post Update: Porsche 911 EV Conversion appeared first on The Big Picture.     Our story so far: In 2022, I signed up with Moment Motors to get in their queue for an EV conversion. Thus began the hunt for a donor car. I mentioned last month that the originally selected car for this project turned out to be a rare(ish) 1988 Porsche 911 Cabrio that I did not want to devalue; instead, I restored the little cabrio back to factory spec (photos here) and decided its a keeper. What  I ended up finding for this project was a 1987 Carrera with nearly 300,000 miles on it, and a lot whole of factors that argued against any pricey restoration: replacement motor, period incorrect side view mirrors, wrong seats, 90’s steering wheel, etc. It had been in an accident to its right front end 20 years ago but was repaired + repainted (more on this below). I don’t know if/when the doors were replaced (post-accident?) but they are a slightly different color. Kind of a hot mess… The coupe started out as an interesting project car, with a few rare options. The color is lovely and unusual “Lagoon Green Metallic” which reads as a light blue to me; the paint was mostly clean; it has rear-wiper and a sunroof delete. It made sense to restore the M491 Cabrio back to stock, as it was still worth more than the purchase price plus the costs of repair. On a “Frankencar” like this, that made no financial sense. It took a year for my place in the queue to come up. In August 2023, I shipped the 1987 911 coupe to Texas for its EV heart transplant. It’s been a while since I last discussed where we are with the project, so I thought I would share some updates as to our progress. It’s been mostly good news, with a few surprises thrown in: The good news: The little striped monster arrived in Texas in good shape, with no issues from transport. I had dropped an Apple Airtag in the glovebox to track it across country (travel time was about 3 days). Soon after arrival, the Motor and transmission were removed without a hitch (photos below). Then the new HVAC system went in, as did a retro period-correct Blaupunkt Bremen SQR 46 DAB head unit (Bluetooth no screen!). (I’ll eventually replace the old speakers.) The surprise was that a known rust spot — the area around the 12-volt battery (nestled against the driver’s side front fender) — was much worse than thought. It had rusted so badly that it was affecting the structural integrity of the front trunk where the new EV batteries go — at nearly 200 pounds, they need solid support. You can see the before and after photos below. $9k later, it’s as good as new. In late December, the EV motor arrived. When we began this project back in May 2022, the state-of-the-art was the Fellten EV Series 1 motor. At 350hp, it was a nice bump up from the car’s original stock 210 hp flat 6. Alas, the Series I ended its run, and so we were delayed in getting the Series II Fellten kit (see photo below). That delay was worth the wait as the Series II horsepower is 440 — more than double the original stock engine. That is a helluva a lot of go for a 2500 lb car. For comparison, a 2012 Audi R8 has 420 horsepower and weighs ~1000 pounds more. The 0-60 times are similar, but I suspect the little 911 will feel faster. I’ll update again once the motor goes in; Photos of the progress below:     Previously: Update: Electrifying A Classic 911 (May 21, 2023) Electrifying Classic Cars (September 4, 2022) 1983 Porsche 911SC Coupe – EV? (September 16, 2022) 1988 M491 Porsche 911 Cabrio (January 21, 2024)     Engine out:   HVAC is in    Uh-oh: Rust!   Good as new!   Fellten Seriues II motor and components      The post Update: Porsche 911 EV Conversion appeared first on The Big Picture......»»

Category: blogSource: THEBIGPICTUREFeb 4th, 2024Related News