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Podcast Episode 2 – Guest: Patrick O’Shaughnessy – An Unexpected Drop-in from Patrick O’Shaughnessy

Episode #2: An Unexpected Drop-in from Patrick O’Shaughnessy



Guest: Patrick O’Shaughnessy of O’Shaughnessy Asset Management, a $5B+ asset management group. Patrick is also an author, having written the book Millennial Money while frequently posting on his blog, “The Investor’s Field Guide.”

Date: 6/8/16

Run-Time: 1:28:28

Topics: Meb and Patrick cover lots of ground in this fun episode. They discuss stocks not to own right now, Meb’s worst market loss of all time, and Patrick’s career advice in response to listener Q&A. They then get a laugh reading aloud the worst book reviews that each has received on their respective investing books (posted anonymously on Amazon). There’s far more, including discussion on stock buybacks, roboadvisors, value versus growth investing, some microbrew tasting, and even how Meb once cheated his own grandmother.

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Running Segment: “Things I find beautiful, useful or downright magical”:

Transcript of Episode #2:

Welcome Message: Welcome to the Meb Faber Show where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and Chief Investment Officer of Cambria Investment Management which offers a growing family of exchange traded funds, currently numbered at seven, as well as separately managed investment accounts. In accordance to regulations, Meb will not discuss Cambria’s funds on this podcast. For more information regarding his investment offerings, please visit and

Meb: Welcome to the show everyone. I am your host, Meb Faber. Today we have a special guest, Patrick O’Shaughnessy. Patrick hails from O’Shaughnessy Asset Management. He also writes the blog The Investor’s Field Guide as well as the book, “Millennial Money.” Patrick, Welcome to the show.

Patrick: Thanks, Meb. Happy to be here and we got lucky that I was in L.A. and crossed paths.

Meb: It’s a little fortuitous because Patrick shows up today and it just happens to be the day that our building is sponsoring two In-N-Out trucks. So Patrick had his first In-N-Out cheeseburger. What do you think?

Patrick: It was great. Lived up to the hype.

Meb: Sadly, they don’t have any French fries, but… You know, it’s interesting, the first time I met Patrick was at a little dive bar in New York City, is that correct? Can you call that a dive bar or more of a pub?

Patrick: Where was it, Molly’s?

Meb: I don’t know. The reason I remember is because we sat down for one drink, and one drink turned into three or four, and we sat and talked, talked about all sorts of stuff. Patrick’s a bit of a polymath [SP] so we talked about quant investing, behavioral finance. I imagine anyone else sitting at the bar probably would have thought it was kind of the most unbearable conversation ever, but I loved it. Hopefully, we’ll regurgitate some of it today. Patrick and I tend to agree on more than we disagree on, so I’m gonna try to play devil’s advocate a little bit today, find some places where we disagree on some items.

One of the ways that I want to start this podcast, and this is our very first guest, is that one of the things you can go do, and Patrick is now a prolific tweeter, you can go in and look up on Tweeter. There’s a kind of a poorly designed website called Favstar, Favstar, F-A-V-S-T-A-R, and you can go in and look at people’s top 10 most liked or re-tweeted tweets. And this is interesting thought experiment because a lot of people assume that there’s a lot of links so the best tweet, but in reality, it’s usually the signal is the link itself. So I went and printed out Patrick’s top 10 tweets. So I’m going to read off a few of those as jumping off points for conversation. And we’ll actually get to some reader Q&A a bit later.

So the first one is 600 days ago, you tweeted, “I started in asset management months before the 2007 high. Here’s what I learned out of the gate,” and it’s a link to an article you wrote. Maybe you can talk a little bit about that, what you learned starting right before the big global financial crisis.

Patrick: Yes. So looking back on it, both terrible but also very good timing for starting in this business. And my background was not in business, certainly not in quant investing. I studied philosophy in school. So I was very, very green coming into markets. This was kind of the tail-end of a nice five-or-so-year run, not only a good run for the markets but also a good run for quant strategies. So value had been working extremely well. Momentum had been working very well, and when you combine those together, your world-beating returns. And so my early days were, “Wow, this is gonna be easy. These strategies seem to be sort of the magic formula,” to borrow that phrase and obviously the next couple years were brutal.

And what I learned more than anything during those first few years was the behavioral side of things that, you know, you can have the best strategy, you can do the best research, but ultimately, discipline is the X Factor. And if you can’t live through a period like that and stick to your strategy, you probably need to index.

Meb: So when did you come out of undergrad?

Patrick: So I graduated in the summer of ’07.

Meb: Okay. So you probably weren’t investing then. for the most part, I assume, in the 2000 late bubble bear market, maybe a little bit?

Patrick: So not investing personally, very much aware. I come from investing family. I work with my dad. So I knew all of what was going on, but didn’t have the personal account to feel the pain.

Meb: It’s funny because much like you, but seven years prior, I had started my first job as a biotech stock analyst in 2000. So different bubbles, but equally as exciting, and depressing afterwards. But funny story, I’ve actually told very few people this, my first day on the job, I showed up and was doing a traditional publicity day. I was essentially research analyst for biotech stocks with the PM in New York is a biotech fund, and I actually hadn’t even started in the home office yet.

So this first day in New York City, first of all, the very first meeting was with Business Week, and we sit down and the guy… Before I even really had any time to hang out with the PM, the reporter takes one look at me and goes, “So what’s your role at the fund?” And we’ve never even really discussed it. I knew I was an analyst, for the most part, but I kind of stammered through whatever I may have stammered through. We go to lunch, and it was one of the most traditional, Wall Street, three-martini lunches. Here I am, I may not have even been 21, but let’s call it 21 at the time. And looking around, and these guys are just…not my company of course, but the rest of the crew just pounding martinis. And I was like, “Man, this really is what Wall Street’s like.”

Fast forward till about a few weeks later, a Business Week article comes out. I think, to my knowledge, this is my first quote in the popular press, I’m embarrassed to even be saying this, and I get quoted saying… They’re like basically, “Meb, you’re fairly young, are you qualified to be talking about researching biotech stocks?” In my quote, which I, to this day, say I never said was, “I’ve been studying this stuff for years.” Are you kidding me? I can’t imagine ever saying that. Maybe I did, but the most embarrassing thing ever.

Patrick: So piggybacking on that, so speaking of being young, so you can’t see because this is podcast, but I look pretty young, I’m 31, and get this all the time. It’s been a pain in my career of people looking at me and wondering why I’m there talking to them. In ’08, ’09, when I looked a whole lot younger even than I do today, I was sent out… We have a big client base, obviously lots of investors with… I know we lost a lot of money on an absolute basis, but in many cases, value strategies weren’t working. So you might have been down 50 instead of 45, so you have to explain why they’ve lost half their money and why they’ve lost more than the market. So imagine a snot-nosed little kid basically explaining to a bunch of seasoned investors why they need to stay the course. And so I fully appreciate how difficult it can be to be young in this game. It’s hard to break in.

Meb: This is a good jumping off point. Another one of your popular tweets, and we’ll get to a few more, was essentially about a paper that O’Shaughnessy Asset Management authored. You’re the lead on this called — and I loved this post — called “Alpha or Assets,” Factor Alpha versus Smart Beta. And there’s a bold quote and I’ll let you go from there but it says, “We believe that strategies should be built for alpha, not scale — but the asset management industry has gone in the opposite direction.” And you guys are not a small asset manager, you guys manager I think five billion plus?

Patrick: Yeah.

Meb: So tell me what this paper’s about, what’s the big take-aways from this?

Patrick: It gets at the heart of what I think is the most interesting issue in our business today which is this idea of tracking error, closet indexing, fees, and career risk. This idea of factor investing, of systematic strategies based on small cap or value, or momentum, or quality, or low volatility has become extremely popular. And it’s a midpoint between pure passive, which is obviously exceptionally cheap, probably going to be effectively free pretty soon, versus traditional active, maybe it’s the 1% fee that you hear about all the time. This factor investing idea is somewhere in-between. So you get a tilted index. A little smaller, a little cheaper than the market. You pay 20, 30, 40 basis points. That’s how factors have been broadly applied by the industry. That’s the term “Smart Beta.” We have a very different take on how factors like value, quality, momentum, etc., should be applied. We think that…

Meb: And a basic factor for listeners, like price to sales, [inaudible 00:09:03] and yield or price to book are pretty famous ones.

Patrick: Yeah, we like to talk about them in themes. So valuation is a theme that includes price to sales, price to earnings, yield, etc. And what you want to do is build a portfolio that’s full of stocks that we like to say that stocks are guilty until proven innocent, that you shouldn’t start with market weights and move away. You should say, “I want to build a reasonably diversified but very highly active strategy based on factors like this.” The trade-off is from capacity, right? So if you have a more concentrated differentiated portfolio you can’t manage $100 billion dollars. Most factor investors can and several have achieved that kind of scale. Some are 400 billion or more. It’s a fundamental philosophy difference that we think factor should be used more for alpha, not for tilted beta.

Meb: And where does the kink occur? What’s kind of the sweet spot for number of say, we’re doing even a U.S. stock strategy. What’s the sweet spot for number of stocks, and then really where does the performance start to roll off a cliff as far as assets under management? Is there any kind of guidepost for people?

Patrick: There’s all the classic research. that once you get to about 40 individual positions, you’ve diversified away a lot of the risk associated with any one stock in the portfolio.

Meb: So 40 minimum, you think?

Patrick: So 40 minimum. We don’t have any really that go quite that low. Maybe the minimum would be 50, 55, something like that, and it would be a function of where you’re hunting. So in the large cap space, there’d be fewer names, small cap, more names. So there’s a sweet spot, as you say, of diversification. Once you start getting a whole lot beyond that to several hundred stocks, the effectiveness of the factors starts to get diluted. You’re effectively spreading your bets more but not really getting compensated for it. Now of course, more names means you can have more assets under management. which is a nice feature for an asset management business, but for the end investor, probably not the ideal mix.

Meb: It’s also tough from an asset management standpoint because a lot of these guys that look different. That’s good if it has a good period, if the strategy has a great period. It’s horrible if it has a bad period because people are gonna, of course, be asking, “Why are you underperforming?” And one of the research pieces I’ve seen from you guys, and when you talk about themes rather than individual factors, so a value theme it incorporates price of sales, enterprise value to EBITDA, price to book, all these factors in one. I think you’ve shown that a factor such as price to book that’s widely known can go a decade underperforming others, if not more, right?

Patrick: Yes, so you’ve got this interesting combination where tracking area is a sword that cuts both ways. You can have phenomenal periods of excess return, and if you’ve been a concentrated deep value investor over the long term, you’d do really, really well. If you check your account once every 20 years, you’d be doing great. But people don’t do that. There is a balance that you have to try to strike because if a strategy is impossible to live with, it’s not worth your while. But we do think that higher tracking, your being willing to be more different to not be a cause of indexer, especially as a piece of an overall portfolio, maybe not the whole thing, but that is really the way I think that active management can work alongside passive or alongside an overall strategy.

Meb: And you have some really great charts in here. We’ll make sure to link to in the podcast show notes that show a lot of these charts of factors and size and everything else that will give you a little more context if you want some deep reading as well. Another paper that was authored by you guys this year which I thought was particularly interesting was called “Stocks You Shouldn’t Own.” So we’re kind of talking about a little bit of the top level factor alpha, smart beta, but then this paper you say focusing on another potential advantage, which is active stock elimination or identifying stocks not to own in the portfolio. And we’ve talked a lot about this, but maybe you could expand a little bit on what don’t you want to own? What do you want to avoid?

Patrick: Yes, so there’s tremendous value, I think. in studying short sellers. On podcasts like these, and on papers and books that you read, most of the time, the focus is on long investors who focus on the best companies to buy. I think it’s probably even more interesting to look at guys like Jim Chanos and their methodology for identifying companies to short in a way that’s useful for us is not that we’re not short sellers, but we know what stocks we can avoid. And when you look at the categories that a guy like Chanos says that he uses to identify potential short targets, he says, “Things like companies at the bad end of a capex boom-bust cycle.” So companies at the tail end of a capital cycle think exploration and production companies, mining companies, home builders, three recent examples that you want to avoid those. Growth by acquisitions, so Avaliant [SP], and more recently consumer fads, tech disruption, accounting games.

All of these things are methods that Chanos another short sellers use to identify targets. And the way we use them is to say, “Well, I don’t care how cheap a stock is, how great it’s price trend is, how good its dividend or yield is, if it looks terrible by these kinds of metrics — and we can get into it if you want to get a little wonky [SP] how we identify these things — let’s just avoid them completely, even if it’s Apple, even if it’s Exxon, some big names in the index, let’s not own them if they flag by some of these popular short metrics.”

Meb: We tend to be a little more macro, top down on our side even using valuation. And one of things we often say in the speech is that looking at countries for example, it’s not just about buying the cheap stuff, which is just hard enough to do, but avoiding the really expensive stuff like Japan in the ’80s or even, we would argue, a little bit of the U.S. right now. So why don’t you guys short? Do you think that that’s a value add, do you think it’s too hard, do you think it’s just too difficult to explain to people? What’s the reasoning there, because you guys are mostly along lonely shop. which I imagine can get pretty painful in the times when there’s big long bear markets?

Patrick: It’s something we think about a lot. I’ve certainly have tested and tried, dabbled in. It’s hard. A lot of the paper results that you can back test for short portfolios end up being small and microcap stocks are very expensive to borrow, extremely volatile in the short term. So for someone that’s hiring you to run a true hedge strategy, it can be difficult to stomach. So it’s not something that we’ll never do, we might do it someday. It’s just we’ve tried to keep our focus as narrowly as possible on one very specific thing, so that we can be really good at that one thing.

Meb: There’s a quote by Grinblatt who said something…someone asked him this question at one point, he said, “Why don’t you do market neutral, meaning long, 100%, good company, short, 100%.” He said, “The challenge is because you’ll often go broke.” Meaning at the times when an ’08 happens, you run the risk of the long stuff reversing and going down, and the stuff you’re short, going up. So you lose on both sides. Tends to be very challenging.

One of the ways we’ve thought about it, we did an old post, and I’m trying to remember the name, but it’s basically how to fix market neutral was that to adopt a long/short strategy, but for every 10% or 20% the market goes down. to reduce the short exposure, with the common sense being you probably don’t to be shot 100% when the market’s down 40%, 50%, 60%, 80%, but you want to reduce it. And that was at least, historically, a good way of doing it. Who knows in the future?

Patrick: So back to this whole idea of stocks you shouldn’t own. and you mentioned you could eliminate wide swaths of the global universe just using value, just never be willing to pay too much, right? And I think all this stuff gets at two kind of mindsets of are you going to be the gambler of the house, as investors. Gamblers can go on tremendous short term streaks, and all of those categories for identifying short will often identify companies that do extremely well in the near term – E&P, energy in general, was doing phenomenally well, fueled by debt, fueled by a lot of outside financing. If you’re gonna beat the house, what you’re trying to do is just put odds ever so slightly in your favor, just like the house has, you know, a 1% odds favor on blackjack or something like that. They understand they’re going to lose in the short term all the time. but you place enough bets or you let people place enough bets and it will ultimately work out for you. That’s our entire investing philosophy.

What are the factors, what are these characteristics of stocks that put the odds just slightly in your favor? And when you do that, you give up on a lot of the most exciting stuff. You’re going to give up on the most exciting grow stories, the most interesting companies typically. You’re never going to own them, and that’s okay because they just tend not to do well as a category.

Meb: I think this was opposed by you, and it may be opposed by Wes, so I may confuse you two guys, because you’re two of my favorite quants was that you looked at a lot of the best performers, but looked at the characteristics before they became the best performers. A lot more of them were these growth type stocks. So the irony is yes, they did great, but if you bought a basket of companies with those characteristics in the beginning, you would have done poorly because most of them don’t do well, it’s just this kind of lottery. Is that that you?

Patrick: Yeah, it was me. So I’m fascinated by the distributions of these returns, where growth stocks have a much, much fatter right tail, meaning there are a lot more growth stocks that have unbelievable, multiple 100% returns in fairly short windows of the times versus value stocks. So you don’t get that kind of insane lottery type outcomes from buying value stocks, you get a much more consistent steady excess return through time. The willingness to be a value investor means you have to forgo that lottery mindset. And yes, you’re gonna miss out on all the high flyers, and yes, a lot of the best performers start their run very expensive to begin with, but that’s the gunning for the winning lottery ticket, and it’s very hard to do consistently.

Meb: Right. It’s probably like hitting lots of singles, doubles, and triples, not striking out much is kind of the value strategy to an average to win, whereas a lot of the growth type of moonshots where you hit a few home runs, but you strike out a ton, and so on average, you have a much worse batting average.

Patrick: Yes, so think about like social media recently where now in hindsight you can say, “Wow, Facebook was an incredible investment when it came public, but if you had gone back then and it felt like an equal weighted portfolio of social media stocks, it’s been terrible.” It’s the same idea for growth, broadly speaking. There typically emerges one or two winners from a given industry. It’s very hard to pick those winners at a time. Maybe you get lucky a few times, but if you’re doing this for an investing lifetime, 20, 30 years, you’re just not going to win.

Meb: I have a lot of magnets on my fridge from friends’ companies that had started and looked very promising that are now defunct. I actually went back the other day in preparation for this podcast and I went and said, “I’m going to comb through the 1500 articles on my blog and see what some of the best posts are, maybe I can follow up on, maybe there are some ideas we talked about or something I forgot about.” And one of these huge takeaways and it was shocking is that whether it’s writers, companies, investors, strategies, it’s a huge complement just to have survived. It must be half of my links are broken to bloggers that wrote for a year and quit, or companies that seemed like a great idea that had now failed. And that’s probably the beauty of creative destruction.

There’s a great study by a buddy of ours, Eric Crittenden at Longboard, used to be Blackstar. We’ll get him on the podcast one of these days. And he talks about the distribution of stocks. And it shows that back to the ’80s, roughly two-thirds of stocks underperformed the index over time. So right there, you’re at a huge disadvantage, if you’re just picking a stock. And that’s one reason why the monkey throwing darts can often win. And half of all stocks have essentially a negative rate of return of their lifetime, and something like 20% go to 0. And really less than 20% generate all the gains. So that’s a beauty of at least market cap investing gets you that first starting point with then tilting towards some of these other areas may help as well. And so this is probably a good lead in to another paper.

Well, actually, before we go to this next paper, there’s one more in the same vein. You did a post…I’m trying to recall these all from memory where you essentially looked at what investors own by age cohort. And so younger investors, what stocks they owned and their characteristics versus older investors. Maybe you can talk about that briefly.

Patrick: Yeah. So it’s the same maybe everyone making the same mistakes over and over again, where when you plot the top 20 investments by young people or said differently, the stocks with the lowest median age of ownership, it’s all the really expensive exciting companies. It’s Tesla, it’s Amazon, Facebook, Google, Apple’s kinda the one outlier that actually is a little bit cheaper. So it’s all the companies, the kind of Peter Lynch philosophy of buy what you know, buy what you use, buy great companies, right, irrespective of price. And then the oldest stocks or the oldest median owners…

Meb: That’s a pretty good strategy in 2015.

Patrick: Yeah. It worked really well, so maybe…

Meb: The Fangs [SP]?

Patrick: They’re sitting pretty right now. I think, longer term, if they keep that up, they’re gonna be pretty sorry. And then you look at the opposite end of the spectrum, kind of the oldest median owners, and it’s the most boring, you know, the most boring stocks you can imagine: Dow Chemical, and all the old world’s industrial companies, etc., insurance companies. It’s interesting to see where they plot on that valuation continuum, where it’s really expensive, exciting stuff for young people, really boring but very cheap stuff for older people. If history rhymes, which it often does, then that older kind of more boring stodgy portfolio is probably going to do better, even though it’s not nearly as exciting.

Meb: Well, the old farts probably know a little something. They’ve been battle tested through some bear markets. If you look at a lot of top investors, whether it’s Paul Tudor Jones or Ray Dalio, they talk a lot about their biggest losses, and the challenges they’ve been through, in bear markets and all the scar tissue the day it fell. For those younger listeners on here that haven’t been through a bear market, because we haven’t had one in seven, eight years now, but two big wins over the past two decades, is that the pain of losing money is not just some theoretical exercise, right? It’s a very visceral feeling, and most of the research has shown that use a different part of your brain when losing money than making money. Making money, you’re thinking about buying a new house, going on vacation, how smart I was, I’m so brilliant to have bought Tesla.

I can’t tell you how many friends, in the past two years, have said, or and this is a little anecdotal said — because I don’t actually have any friends that own Teslas — is that, “So and so bought a Tesla with the profits he made from buying the stock.” So it’s free, it’s “free,” right? No one ever says, “Yeah, I bought and lost a million bucks, and so I had my house is now cost $2 million instead of $200,000, so it’s the opposite. But there’s a very real pain in losing money.

I went through this in the early 2000s where my worst trade ever was I was a biotech analyst and there was a company, I believe it was Biogen, that I knew, I knew the drug wasn’t getting approved. But I was smart enough to say, “You know what? I’m going to buy a straddle or a strangle,” which for listeners who don’t know is an option strategy that would pay out if the stock moved heavily one way or the other. So I would make a lot if the drug didn’t get approved, but I would break even, make a little bit if it got approved as well.

And so I bought this a few weeks before the announcement and so by the time the announcement came, the option values had already doubled because all the institutions were using the options and so the volatility went up. So the correct move probably would have been to take some chips off the table, but I was young, didn’t know better. I said, “No. I want to press my bets. I’m going to make a fortune here.” Now it comes out, the drug gets approved, I don’t even remember what the drug is, and so it goes up and so the strategy is profitable. It’s not a fortune, but I said, “You know what? I’m going to wait a day or two to let the market really appreciate this result.” And there’s only about four days left expiration.

A day later, the company pre-announces earnings, for no known reason, right? So you know exactly how this story ends, it ends in the stock going directly back to the strike price, me losing the entire investment, eating mustard and bologna sandwiches for the next year because I was broke, but you learn that lesson once, and it’s great.

A lot of people, these professional investors say, “It’s great to learn that lesson early when you don’t have as much money. It’s a lot more painful to learn when you have five kids and a job and lose all your money.” But the pain of losing money is very real, and I imagine you went through that and saw it very clearly in this bear market right after you started, which is one of the most damaging, particularly to a lot of value and a lot of value investors didn’t survive that.

Patrick: We’re in a phase like that now, where it hasn’t been as acute. It’s been a slower burn, but value is…

Meb: And when you’re referring to value underperforming?

Patrick: On a [inaudible 00:25:45], yeah, value underperforming growth stocks. So the discipline is such an important part of value investing because, unlike growth where you’re buying exciting things, thinking that they’ll grow very quickly, when that works out, you feel like a genius because not only is the portfolio interesting, but it’s doing great. With value, your portfolio is never interesting. It’s usually scary. So if you’ve got a seven-year run like the one we’re in right now, where not only do you own a bunch of old-world, dinosaur, boring stocks, or outright scary stocks, but you’ve also not won for seven years.

Living through something like that, so I think about that pain of losing more in relative terms than absolute terms, because obviously we’re active managers, hired to outperform the market, is incredibly hard to one, to live through. We eat all our own cooking, so I’m invested in these value-based tragedies. But incredibly hard to keep investors on course. And I think that that is the rub is that discipline is easy to talk about, easy to say you’re disciplined incredibly hard to actually do it in practice. And that’s, I think, the lesson that’s most important for people to get earlier on. Because if you’re a value investor, that [inaudible 00:26:51] discipline your toast.

Meb: And this is why investing is not only hard, but it’s such an challenging game is that you have an approach that works like value investing, or say dividend investing, and not only…so it works over long periods, but it goes through periods of under and outperformance which can last, oh by the way, a decade, but also the relative attractiveness of that strategy can change over time. There’s been some recent debates… I know Rob Arnott of Research Affiliates put out a paper on valuation of factors. So for example, price to book, the cheap price to book companies may be a good strategy over time, but sometimes they’re really cheap, and sometimes they’re actually quite expensive. When he was talking particularly right now, I believe, about high dividend yielders [SP] and low vol, and then on the flip side, you have someone like a Cliff Asness at AQR says, “You know what? You should avoid, I think, the name of the paper was the “Siren Song Factor Timing.”

Do you have an opinion on this either way? I have a few, but have you decided or thought about this at all?

Patrick: Yes. We take a very conservative, static, equal weight approach to factors. We don’t time them. I am deeply suspicious of anyone that says they’ve got evidence that they can time them and make money net of the increased turnover, so I’m much more with Cliff on this one. I do think that flows affect factors, and we’ve gone into this meta world where everyone used to care about stocks, and nobody talks about stocks anymore. Like the investment advisors I meet with, even end investors, now it’s ETFs, it’s asset classes, it’s factors, right. And so all these things have similar properties of stocks, they’re just aggregated. And we do worry about something like the fact that low vol securities are historically very expensive. Historically, they are value stocks, and now they’re not. But I don’t think that there’s convincing data or evidence that you can successfully time going into and out of a value strategy, going into and out of a momentum strategy.

Meb: Let me push back a little bit. Finally, we can have something to debate about. Not only that, I’m gonna use one of your own pieces of research. You guys did a post where you talked about dividend stocks, and the valuation of high dividend yielders. And you took it back to like, what, the 60s? And it showed that dividend stocks, on average, traded about a 20% discount to the overall market. And that’s one of the reasons dividend stocks work, as you get somewhat of a value strategy. It’s kind of a crappy way of enacting a value strategy, but a value strategy nonetheless.

And in your chart, you showed — and we’ll add this to the show notes — you showed in the late ’90s, no one wanted dividend stocks. Everyone wanted these large cap Ciscos of the world, big huge tech, biotech, market cap weighted bubble, whereas the dividend stocks actually didn’t even have a bear market for 2000, 2003 because they went from trading a 20% discount to a 50% discount based on valuation in late 90s. So a huge, fat pitch.

And then since then, what has happened? Everyone has rushed into dividend stocks over the past 15 years because that’s what’s worked. And in the search for yield, as yields have come down to, let’s call it one-and-a-half on the 10-year treasury, and for now, for the first time in a long time, most dividend yielders yield more than bonds. Now this was actually the case for the first half of the century. So it’s nothing totally out of the question, but dividend stocks now are more expense…are not only don’t trade at a discount, they traded a premium to the overall market for the first time, really, in the entire sample over the past few years. And you have to believe me, you can go look this up on Morning Star, type in the largest dividend ETF, look at the characteristics and it has like a price to book of something like four.

Patrick: Yeah. 20 some…

Meb: So how does someone look at…because to me, I want to hear the siren song. I want to be able to say, “No, no,” and I’ve been saying it the last few years, I’ve said, “You should run away from dividend stocks.” And of course, I’m horrifically wrong this year as dividend stocks have absolutely ripped, but I want to believe that it’s true and it almost seems to me like you could take a step back. When you’re at these extremes like this, and be a little thoughtful, but you say it’s not worth the effort or what’s the…?

Patrick: So let’s twist it a little bit. All of those, let’s say that those are traps. Let’s say that low vol and dividend stocks are just way too expensive and it’s…you bet a marketing-lead flow story and the biggest ETFs, etc. What we think is the way to get around all this problem and not have to worry about timing it, getting in and out, getting the timing right because it’s so hard to do is to be a multi-factor investor. So if instead of just buying low vol, you had a screen or a model that looked for multiple things in the same securities. So you’re looking at valuations, you’re looking at quality. Maybe you’re looking at low vol, maybe even momentum in that mix. You get around a lot of these extreme scenarios where an individual factor is very expensive because, let’s say that you are a high dividend yield investor, and no matter what, you wanted to be in high dividend stocks, but all you did was overlay a second factor that was other, non-yield value measures, let’s say the sales earnings, cash flow, EBITDA whatever.

What you would find is that your yield would have to come down because dividend yield, like you point out, now is barely correlated with other value factors, kind of this hunt for income anywhere people can find it, and you’d have a portfolio that doesn’t have all these things that people are concerned about. It wouldn’t be trading a four times book. It’s be trading at two times a book. It could be trading at 15 times earnings. Layer quality in there and it keeps getting better.

So I think if anything, it’s you should pick a strategy and stay the course, not try to time things, and just make it multi-factor, because if you make it multi-factor, you can go the other way. So let’s say you include momentum in a value strategy, then you can get around a lot of this value trap issue that you’re buying the proverbial falling daggers all the time, and getting smoked even after the fact by including momentum, as a part of a multi-factor model. I think that’s the answer — not trying to time factors.

Meb: What would give you pause as far as…there’s a lot of big multi-factor money managers. So if you type in a stock that you all probably own, you’ll see a laundry list, often, of DFA, AQR, probably, a lot of the other multi-factor guys. Do you ever get a little worried about saturation as far as everyone having the same PhDs and everyone being able to tease out the same data? What your response to that? Are you guys always in search of a new factor? Or are you thinking about different approaches or are you more just settled in and saying, “Hey, we’re all humans. People are gonna keep making the dumb mistakes.” What’s your approach to having many billion dollars of flows in competition into this world?

Patrick: Really good question. Something we think about and worry about a lot that these strategies had become more popular, there’s more prayers, there’s more… And certain enough, if you go to the 13F filing of some of our top names, you’re gonna see some of those names you just mentioned, along with some others. Is it worrying? To some extent. We think that everyone should build factors on their own from the ground up. Probably the most common thing you’ll see is a bunch of PhDs at companies like ours, we don’t have PhDs. We don’t really come from an academic background, much more from a practitioner background. So for example, we don’t even use price to book anywhere in the firm. That’s by far the most popular value factor. I think that…

Meb: It’s DFA’s favorite right?

Patrick: Interesting story here. So there’s there’s a law in economics called Goodhart’s law. So Goodhart’s law says that when a measure of something becomes a target, it ceases to become a good measure. So a funny example there was a rat infestation problem in colonial French Vietnam. And their solution was that they would offer like a small bounty if people turned in dead rats to try to cull this rat overpopulation. And the way you’d do so is you’d turn in a rat tail, and you get your 20 cents or whatever it was. All this started happening, people were collecting bounties, and then the officials were out in town and they started noticing all these rats running around without tails. And they realized that people were just chopping off the tails, letting the rats back into the sewer to breed to increase the bounty pool. And when you have this kind of perversion of a measure bad things can happen, and price to book is a really interesting example of that idea.

So you go back to Fama-French’s research in the early 1990s, they’re looking at small and value premiums, and they’re looking at value factors. And they look at cash flow, sales, earnings, book, and they all look at roughly the same in terms of cumulative excess return in the sample period from early ’60s to the early ’90s. They all look good. Right? And price to book is by far probably the simplest. It’s a stock, not a flow, it’s much lower turnover, right. So you can have a lower turnover strategy which, all things considered, is usually a good thing — taxes, transaction costs, etc. And it looks similar to the other value factors. So then you have massive amounts of flow go into stocks based on the price to book factor through big asset managers, through indexes, or Russell’s index methodology uses price to book as their measure of cheapness. It’s the de facto value factor.

You look at that same chart cumulative of excess return of those same four — sales, cash flows, earnings, and book — from 1992 until now, and price to book stands out as the significant laggard. It is way, way, way worse than any of those other three. Now it’s debatable whether or not it’s purely flows that cause that dislocation, but the fact is we really do believe you want unique takes on factors. We will err on the side of a factor that’s less common, that’s less common in the academic literature, that’s less common definition of something like value or momentum, and do it all ourselves. We could talk in a minute about shareholder yield and obviously a subject that we agree completely on. But as a take on this idea of capital allocation, so capital allocation is probably the thing I’ve studied most and I’m most interested in.

Meb: Let’s go ahead and move on to that. Go ahead and segue. But by the way before we go, it’s a funny real world example of your story. Growing up in North Carolina, my grandmother used to pay us and my friends to go pick up sticks in the front yard, and she pays a penny a stick, which is preposterous if you think about it now, we’d actually be doing this. But what do we do? Of course, we would bring back the sticks, and break them into thirds and triple our profits. We’d come back with all these essentially little nubs of sticks and she knew what was going on. But anyway, the incentives, like you mentioned, often change behavior of course, and we often say flows change factors.

So segue a little bit into in another paper you wrote, you guys are pretty prolific on research, it was called “High Conviction Buybacks.” And I’m going to read two quotes from the paper and then we can get into it, because I think buybacks are one of the most misunderstood areas in investing in finance, particularly by reporters but so many practitioners. I hear so many things that are just so horrifically wrong that it’s hard for me to bite my tongue and not say anything, but I’m going to read a couple quotes, and then you can riff on this a bit.

One was, “Since 1987, roughly half of all high conviction buybacks conducted by large U.S. firms were conducted when the firm’s stock was in the cheapest quintile of all large stocks. Two hundred and ten percent of high conviction buyback firms bought back shares when they were in the most expensive quintile of the market.” Then what that kind of infers is that CEOs are no dummies when they are doing the big time buybacks, buying back 5%, 10% more of their stock. It was actually cheap on a quantitative level, and on the flip side, when they’re issuing, it tend to be more expensive.

And then one more quote, “Buybacks may not be well-timed in aggregate,” because most of the literature shows that aggregate buybacks then to the follow the price of the stock market.

Patrick: Like M&A.

Meb: Right, like M&A, pretty much so, both are fairly volatile. And the [inaudible 00:38:19] is going to say, but they have been timed well, at least timed at cheaper relative prices by firms with high conviction buyback programs. You want to touch on that for a minute?

Patrick: Sure. So again something like buybacks, just like if you were to study a stock, like you can always get deeper, and deeper, and deeper, and there’s always another level. Buybacks is the whipping boy right now in kind of the financial press because capex has been lower, or maybe R&D hasn’t grown as fast as some pundits would like to see it grow, and companies are buying back a lot of their shares. Now you cannot paint buybacks with one broad brush because this idea of the conviction level is really important. So think about $2 billion businesses both engaged in buyback programs. One is re-purchasing $10 million dollars of their own shares, another are purchasing $100 million out of the billion total market cap.

That is a very, very different act and it’s a very different bet, right? The conviction level of the $100 million buyback program is obviously much higher. Now are they all for the right reasons? No, of course not. You need to make multiple bets on something like this. But what we’ve found historically is that those that are making the bigger bets in themselves, so let’s say, 5%, 6%, sometimes 10% plus of shares outstanding in a fairly short window of time net, so there’s all sorts of stuff that goes on the other side — secondary issuance, employee compensation, issuance in cash and stock acquisitions. You got to net all that out.

But when you do all that net and you see these companies that are buying back say 10% plus of their shares, one, they’re very rare. You just don’t see many of these in any given market. But two, they perform way better and way different from the mass buyback program that you see out there.

Meb: Charlie Munger calls it buying the cannibals. He says, “If you want to look to the companies are in themselves.” And thing that drives me crazy about a lot of the reporters out there and people making comments that hate buybacks is they’ll say, “Well, they’re bemoaning the fact these companies aren’t doing R&D., and they’re just buying back their shares.” And I said, “No, no, no. First of all, do you ever complain loudly that companies are paying dividends?” Because we all know, Finance 101, you have a CFA, you understand that dividend buybacks are the exact same thing. Ignoring taxes, but if conducted at intrinsic value, they’re literally the same exact thing. And so no one says, “Oh my God, this company’s paying way too much in dividends.” But they bemoan the fact they’re not doing enough R&D, but what you say is, “Look, this is a free market. This is capitalism.”

I guarantee you, if one company is over here deciding not to pursue some projects, someone else is going to. So they’re no dummies. No one’s sitting like some fat cat in a corner saying, “You know what? We don’t want to pursue high growth opportunities. We see this massive opportunity, you know, we’re not going to do it.” Right? And so people are greedy, that’s what drives capitalism. And so CEO’s job is to perform the highest return wherever that may be. And we always say there’s five uses of company cash: It’s dividends, buybacks, net pay down, reinvesting in the business, and M&A. And use whatever combination of those is the best return for shareholders. Great book on the topic, “Outsiders.” Is it “Outsiders?”

Patrick: Yes, of the Henry Singleton stories in there. So Singleton was the pioneer of all this, right, so he was an engineer he founded the company called Teledyne in 1961, spent 10 years bolting on acquisitions, like a hundred and some odd of them to build this massive industrial conglomerate, and then spent the next 25 years or so going the exact opposite direction. So he was a big acquirer, and then everything got expensive, and he said, “Well, forget this.” My own shares are the most attractive thing I can I can buy with my cash.” So he reduced his share count by 90% over the next 25 years. So just 10% of the shares outstanding lasted over that second part of his career. and it was one of the best performing stocks in the entire universe. And the only reason you don’t hear about him in the same breath as a Buffet or a Munger is that he quit to go be a farmer. He just wanted to do something different and stopped in the early ’90s.

But he was the pioneer of this idea of being a disciplined share repurchase, that when his own stock was cheap, and like you said, these like high ROIC projects don’t grow on trees. If you’re a disciplined capital allocator rather than an empire builder, you can do exceptionally well for your shareholders, even if your company’s not growing. So companies like more recently that maybe people could climb onto as a better example than Teledyne is Northrop Grumman. So Northrop Grumman did the same thing where from the mid-’90s to 2005, they were acquiring like crazy. They built up this big business with a lot of bolt-ons, and then have gone the opposite direction. So now there are 50% fewer shares today than they were 10 years ago. In that period, they’ve got a 16 and a half percent annualized return, so 11 years. S&P’s done half that, seven and a half. Their top line is down 20% from 10 years ago. So they have had no growth. They’re a very shrinking business from a revenue perspective, but because of really disciplined smart capital allocation, it’s been a phenomenal investment for their shareholders.

And so that’s the angle here is that maybe what you’re hearing in how Meb and I think about things is we’re trying to just build systems or automated process around really smart stock selection factors, and roll them all together. And that automated portion just makes us disciplined about it, because we didn’t know when we bought Northrop Grumman that it was going to be so great. We knew that it was one of a handful of bets that hopefully a couple of them, that parallel idea, 20% of them will be 80% of our excess return and that’s what you see.

So I think that’s the key is trying to find interesting angles on picking stocks, test to see if those angles have actually worked, and added value historically, build an automated wrapper around it, be willing to be different than the benchmark, and then just let it work. Don’t get in the way.

Meb: The interesting thing about shareholder yield, and you guys have done studies back to the ’20s on this, a lot of people don’t understand that dividends in general have historically underperformed in a rising rate environment. And shareholder yield, oddly enough, correlates more to a free cash flow strategy, the price of free cash flow, which is a great thing if you…as far as factors go, that’s one of the best. And by the way, I neglected to mention, I joked in the last podcast that when I was going to start having guests and Patrick was a last-minute guest, he just happened to be in town, giving a speech tomorrow, I said, “It’s going to be a little more of the style of back and forth, almost like a beers with Meb,” and by the way, I made Patrick, we got about four or five tastings going on out here. So if this podcast goes off the rails a little bit, and downhill, you will understand why because…

Patrick: We booked a good content early.

Meb: We have stout from Barrel House. We have a pale ale from Strand Brewing Company. The first one Paso Robels. Strand is local. Modern Times IPA, I think, is down in San Diego. And then a famous Belgian Trappist Rochefort? Rochefort? I am gonna murder that. I’m not touching that one because it’s 11% alcohol. So I will be under my desk in about 20 minutes.

Okay. All right. So what do we talk about next? There’s a few other things, we’re also going to get to a few questions from Twitter. People have chimed in asking lots and lots of questions, and one of which was, “You’re a fairly young guy. You got your CFA, which kudos to you, that sounds like three years of pain I could never live through.” People want to get an asset management. One fellow on Twitter says, “What sort of career advice do you have? And what’s the value of a CFA?” What do you think?

Patrick: It’s a hard question. The CFA is as much a testament to just your willingness to cram and kill yourself for three years as it is to any body of knowledge. I do think it’s useful. Like any body of knowledge, it has to evolve, and sometimes it’s a little bit slower to evolve and teaches things that, I think, may not end up working out great for investors. But I do think that as a baseline set of knowledge, it is extremely good. So I would definitely recommend that, really if you want to be in asset management, and if you want to be on the investment side doing analysis, that it is a really good credential to have, whether or not it means you make more or whatever, I don’t know. I don’t think there’s convincing data one way or the other.

But more than anything my advice, because it’s the one thing that worked for me early on was just be as hands-on as possible. Invest in these stuff yourself, eat your own cooking, live it yourself, talk to investors as much as you possibly can, because investor psychology is everything. It’s what ultimately drives prices, what drives the industry. And if you’re going to be in the business you need assets to manage and understanding the clients is extremely important, especially if you’re going to work with them for long term. And then just read like crazy. Read everything you can get your hands on. Read 10-Ks and I think that’s the best thing that you can do as an investor. If you’re an equity investor, read 10-Ks, because…and I’m probably the only quant that reads 10-K obsessively…

Meb: Yeah, my God, that sounds terrible.

Patrick: It is at first terrible, but maybe it was Munger or Buffet or someone that says doing it a lot, it starts to compound, because you start to realize what businesses are all about. It gives you great ideas for factors that tests, so a lot of the stuff that we look at is the result of reading some paragraph in a 10-K where the manager says, “This is our strategy,” and we think, “Huh! That’s interesting.” Like one we’ve been exploring more recently is using float as a source of financing, and to see a lot of the quality measures look at non-cash earnings, and stuff on the asset side, but float is this really interesting factor that the way that we’ve structured it really wouldn’t have come into being without reading some of these annual reports.

So that’s my advice. It’s just like, “Get immersed in the flow of information and data, and start figuring out your own angle,” because what I’ve noticed, and we’re guilty of it to some extent too, is that the industry is so similar. You hear all the same strategies. You’re never going to hear someone say, “We buy really expensive, shitty quality, poor momentum stocks.” Everyone’s talking up the same kinds of strategies.

Meb: I can name a few that do, they just don’t know it.

Patrick: Well, they’re not going to talk about it in those terms. So if you could somehow come at the markets with your own angle, do extremely deep research, really know whether it’s stocks or industries or factors, whatever your expertise is going to be, know it better than anybody else. That’s probably the only potential edge. Frankly, it’s an incredibly hard time for active management and it’s only going to get harder.

So if you want to get into this business, you better love it because the competition is extreme, it’s gotten harder and harder to outperform over the decades. Most money is going passive, so you need to love it. And if you do, you can hopefully do well, but it’s a tall order.

Meb: The challenge, of course, has been in that for a lot of people, my mom who’s getting in her later years often says still, “I don’t know what I want to be when I grow up.” The challenge of investing is a lot of people define their style that fits for them. And so for some people, mom is completely happy sitting in CDs, in uni bonds, whereas I differ from Patrick a lot in a ways that I’m a [inaudible 00:49:14] follower at heart. And so for me, I learned that after painfully losing money. I realized very quickly that I don’t have the capacity to sit and watch. Buffet will talk about, “Hey, if a stock market goes down 20%, 50%, etc.,” he gets more and more excited. I have the opposite reaction. It’s very painful for me. So I have to incorporate at least a fair chunk of my portfolio to trend following strategies.

I know Patrick has a fair amount of skin in the game as far as investing in his own funds. I put one 100% of my net worth in our funds, publish that portfolio every year, and as people can see, half of that in trend [inaudible 00:49:50] because it’s very difficult for me to watch things continue to go down. But at the same time, I finally believe in value and so allocate value as well.

Real quick on the career advice, because I get these emails a lot. And what I often tell people, there’s a great quote from Jim Simons, one of the best performing hedge fund managers of all time, highly recommend that people do a little research on him. Some of his videos are just fantastic. But he was giving a speech once, and near the end of the speech, he’s a code breaker, has a hedge fund that probably has the best performing track record, charges the most in fees, and someone asked him, he was a mathematics professor at Stony Brook, and he said, “Professor Simons, should I study math very broad-based but kind of shallow to have a good broad-based education, or should I focus super on a tiny niche and study that and learn more than anyone else in the world?” And he says, “Look, I can make the cliché either way. I can have examples of each where it’s worked out or not worked out.”

And so often when people ask me about career advice I say, “Look, my career path is the most winding different than anyone in the world, the way that you’re going to find your own path as well as your own investing style.” Because I firmly believe there’s a lot of investing styles that can work, you need to find that out yourself, and that’s more of a journey. That’s not something you necessarily know. Buffett says he’s always a value investor, kudos, but a lot of people don’t learn until they’ve been through it.

Patrick: Yeah. And another thing too is…this is probably making the cliché a different way, that this concept of getting to know people in the industry, I’m hesitating to use the term networking because I hate it… I’m an introvert by nature, but probably the most useful thing that I’ve done outside of the investing side of things is get to know guys like Meb, because Meb’s…my career is almost like Meb’s on a seven- or eight-year lag. And so being able to meet people who have built their own businesses, who have unique takes on the market, you can learn a lot very quickly from just meeting people with different viewpoints. Now Meb and I share a lot of investing philosophy, a high degree of overlap, but you can still learn a ton from people that are just looking at things in a slightly different way. And that’s probably the lowest hanging fruit of any sort of career advice.

The CFAs, whatever they say it is, it’s not really 300 hours a level, it’s probably 150 or something, but it’s a lot of hours and a lot of grueling study. It’s much more fun and much more interesting and you can do it much more quickly just to like put yourself out there, go and meet people, and do that as much as you can early on because that really does work.

Meb: So I’m going to read…you answered Morgan from the [inaudible 00:52:30] had asked, “How’s your investing strategy changed over your career?” So it hasn’t been that long but has anything resonated with you where you’ve had a shift? When you said I believe X that I didn’t believe it back then, or I believe this much more now? Is there anything? The answer could be no.

Patrick: I’m almost 10 years in now, and the answer is certainly closer to no than yes, that I believe a lot of the same things in terms of you should be disciplined, you should be a factor investor, you shouldn’t try to…picking individual stocks is extremely hard to do. But I definitely would say I’m a lot more humble about that pursuit, and I appreciate, to a greater degree, how long you can go with underperforming, and that, if anything, those cycles may be lengthening. And that there is, with anything, uncertainty. This style may not work for the next 10 years. I am extremely confident that it will over the longer term, that’s why I do what I do, but I think that you need to be exceptionally humble, because if you’re not, no matter who you are, you’re just going to get humbled constantly.

And so that’s the biggest thing I’ve learned is just to not think that you found something special, because, man, the people doing this are smart, and everyone’s looking at the same data, and it’s extremely competitive.

Meb: Good. We’ll have you back on the podcast in 10 years to follow up, to see how it went. One of the things that I’ve learned is that you have an investment approach, and let’s call your favorite investment approach. So my very first white paper was on Trend Following, came out a very fortuitous time, right before the crash.

Patrick: ’07, right?

Meb: ’07.

Patrick: I remember reading it.

Meb: Worked perfectly, right? It’s a perfect storm of markets. But then that strategy has largely underperformed, as most trend following strategies would in the bull market since then. As you talk about talking to investors, one of the biggest takeaways for me having managed individual accounts as well as institutional… By the way institutions don’t behave any better than retail do. They use a little more sophisticated words — committees, rigorous, etc. — but they make a lot of the same mistakes and chase investing fad of the day. But it’s the investing strategy that you’ll stick to.

So a lot of people, they can’t look too different for too long. And so someone like Buffet who stock picks have underperformed seven of the last nine years, but have outperformed by six percentage points a year back to 2000, how many people would have stuck with a manager that has had that streak of underperformance? None. Zero. I don’t care if you’re one of the top endowments, pension funds in the country… I actually just tweeted out, by the way, this drove me crazy and we’ll have to move on quickly from this, otherwise I’m going to start chugging Belgian 11%.

I read a study last night, right before I was going to bed, it was probably why I didn’t sleep, institutional study 400 respondents, real money — pension funds endowments, insurance companies. Their expected hedge fund net return… Did you see this?

Patrick: No.

Meb: Do you want to guess what the institutions expect their hedge funds net, net of all fees, to return?

Patrick: Oh, man, it’s going to be something outrageously high, 10%.

Meb: Thirteen percent.

Patrick: Jesus.

Meb: So the hedge fund indexes, even the ones that are survivor bias, so let’s look at those, have return of about 8% or 10%, so already, this is 50% higher than the survivor bias hedge fund indexes. They’ve only even been better than 13% twice in the last 16 years. These are the biased indexes. The only one you can invest in has return about 4% a year. So these guys are assuming…that means you need a 20%, almost 20%, it’s about 18 and a half gross return to be able to get to a 13% after 2 and 20 net return. That is preposterous.

Patrick: I mean that is insane. I think about these. These are the two big things that I think will have to happen is first of all, to achieve… And I’m thinking in equity terms, right. When I hear hedge fund in the equity world, I want relatively low net exposure. That’s what a hedge is. And to get numbers like that, 13%, you need a lot of beta. So you’ve got these hedge fund guys…

Meb: You love something, magic.

Patrick: These guys that are getting paid on beta where their benchmark is cash, I think that that will have to be backed out. In the future as fees come down, I think on the… Well, on this side, you have to back out something like active share to get a true cost, and in the hedge fund world, you have to back out net exposure. The thing that people maybe thinking about hedge funds as like these super high returning vehicles. If you had an equity market neutral strategy that was giving you 3%, 4%, 5% a year of pure alpha, that’s an amazing return stream, because that’s just alpha, right? That’s totally uncorrelated alpha. That is incredibly hard to deliver on its own. So when you hear 13%, that’s just…that’s nuts.

Meb: It’s bananas.

Patrick: As someone who deals with a lot of institutions, and at the end of the day, you’re managing money for pensioners right, it’s sad because these people are relying on returns that are just too big to hit targets.

Meb: There’s two Charlie Munger quotes, and I actually, I think, read one in the last podcast episode, but one is basically…Charlie was talking to an institutional investor that he knows and respects, and he said, “What do you tell your clients that your target is going return?” He said, “20%” He said, “That’s crazy,” because he knows he can’t return it, but the guy said, “But that’s what I have to tell them, otherwise they won’t invest with me.” Despite the fact that he will never return that, that’s what he has to do to sell it. And so that’s one of the problems with our world, but what shocked me was I’m guessing the CIOs of all of these companies, they shouldn’t be dummies. They should know better right? Like 13% for any intents and purposes, if you’re managing a pension fund endowment, you should know better.

Anyway, end of rant. I couldn’t sleep last night, and I’m already starting to chug my beer over here. Let’s move on. All right. So let’s see what some of your other good tweets were. We got about two more and then we’ll do a little Q&A from…I don’t know what this means, but Research Puzzle, our buddy Tom says, “Ask him about IA, not AI.” I don’t even know what that means. Hopefully, you do.

Patrick: I do.

Meb: Iowa Athletics?

Patrick: So Tom is from Minnesota, which is where I’m from originally. IA is short for my…is the nickname for my great grandfather whose name was Ignatius Aloysius O’Shaughnessy.

Meb: That is a mouthful. I thought Meban Thadley [SP] was a… Now that is…

Patrick: Yeah. So IA was a convenient shortcut. So IA was, in many ways, like the spiritual godfather of my whole family. He was an oil wildcatter, extremely successful. I think at one point, his company which is called Global Oil was, if not the largest, one of the largest privately run oil companies in the country.

Meb: And where was he doing that? Was this in the north Midwest?

Patrick: In the Midwest primarily, and he had his hands up and down the business, so much so that there was kind of antitrust stuff where he had to sell pieces of his business. But he was a…

Meb: That’s a good sign that you’re doing a good job.

Patrick: Yeah, it’s a very good sign.

Meb: If you get charged with antitrust.

Patrick: And so I think Tom had had heard of IA because he was, like I said, a spiritual godfather, so he made an incredible amount of money and gave it all away. So he gave it all to mostly colleges. He was a big Catholic guy, so some religious institutions as well, but definitely an interesting model to emulate because he was a nutcase entrepreneur, just constantly pushing the chips all in. And I think the reason he could do that was because he lived a relatively minimalist lifestyle. He wasn’t a big spender.

I went to Notre Dame, and the former president of Notre Dame, probably the most famous guy in Notre Dame history was a guy named Father Ted Hesburgh. And Hesburgh, actually just died last year at 98 years old, talked to me a lot about his friendship with IA. IA was a big benefactor of Notre Dame. And he said he’d go to Rome with IA. pretty much trying to pitch the Pope and others on building like ecumenical institutes and stuff like that. And then IA, then if you put it in today’s terms maybe not a billionaire but pretty close, would have holes in his hats and 10-year-old shoes and ratty clothes, and bags that didn’t close right. And so he was this kind of interesting guy who was just an incredible, like cold-blooded entrepreneur, and then gave it all away. So a really good, interesting person to have in your family’s history, and an amazing guy.

Meb: I hope no one’s starts to reference me by my initials after I pass, MF. That will stand out for something a little different. My brother’s funny, because his initials are WTF, which I didn’t really get.

Patrick: Mine are POS. I think that’s the worst one.

Meb: All right. Let’s see if we got anything else on Twitter. There’s one question, so you got a big, traditional money manager — long lonely equities. So there’s some very clear risks for you, one, obviously bear markets, high valuations in the U.S. We tweeted out a study the other day that said, well, maybe a little biased but, “Median price to sales ratio for stocks, highest it’s been to the ’50s.” You may have a comment on that, but also second is we had a question on Twitter about what you perceive as a potential threat or benefit of what’s going on with the robo-advisors. Because you guys do separate accounts as well as funds. Do you have any thoughts there? I imagine this will be quickly a wrap it all, so we’ll try to keep this hopefully short.

Patrick: Yes, so very high level. I think that every asset management company will be a hybrid technology company in the next 5 to 10 years. You’re just going to have to be. We already are, have a huge chunk of our headcount is programmers, people that just build software. I think that some of these robos have neat platforms, and I hope that one, maybe one of them, the best one survives, because it’s an easy way for younger people to invest. But it’s not a great business model. They’ve got tons of employees and fairly low…the assets they would need to gather to have a real meaningful business is a huge number.

So I just think that it highlights the fact that you need tech in this business. You need to do it now because otherwise you’re going to be left behind very, very quickly. And that’s what I take from the trend is embrace automating every clerkish type aspect of your asset management business right away, because that’s what’s going to happen.

Meb: As usual, I agree with you. Josh Brown, a reformed broker had a great quote on this. He goes, “Back in the ’90s, I was around when email first came out, and all the advisers who are early adopters and adopted email, no one called them email advisors.” So no one… It’s in the same way, robo-allocators, advisors will become a great piece of software that all advisors will eventually use. As a standalone business model, you mentioned it’s going to be tough for the custodians who have their own funds. We’ve seen this, and we’ve talked about this for a long time last years on the blog. They’ve come to dominate, because they have a structural advantage. And so we’ll be rolling out a product by the time this podcast comes on or maybe the next month or two for separate accounts. But listeners, just stay tuned on that. So I don’t want to go too far down the robo-advisor rabbit hole because that sounds like an entire podcast in and of itself.

So we’re probably getting closer to the end, but we’re going to touch on a few more things. Do you know what your number one most favorited and retweeted tweet?

Patrick: I don’t.

Meb: I’ll tell you. It was a quote and then a pictures. It says, “Well, nothing else matters.” A relatively recent event, you are a father for the second time?

Patrick: Yeah.

Meb: This was a son, right?

Patrick: This one’s a daughter, and the older one is a son.

Meb: Okay. Beautiful picture of a cute kid. And it’s funny because I had talked to Patrick. We talk a lot about collaborating on ideas, and one of which, because we both write a lot, I said, “Patrick, we should write this book,” that I think it would be a huge value add for a lot of people called, “Teach Your Child to Invest.” I don’t have any kids, I’ve seven nieces and nephews. But now that you’re a father and we talked about it, and I said so many people have these misincentives about the best way to teach their kids to invest. And Patrick said, “No, no.” he says, “I’m done with these 101 books. I don’t want to do any more of these. I’m more interested in the wonky side of the business — the esoteric factors, the really weird stuff. By the way, do you have any plans or writing more books? Are you done? What’s the…

Patrick: Well, I mean, you actually say, your model’s been interesting where you’ve self-published a lot of them, and I’m sure the cycle is just much faster and more bearable. I was frustrated by how long the traditional publishing route took, and that’s why I haven’t done another one. I would love to write more books, but it’s also easy to write a, you know, a 6000-, 7000-word post pretty quickly, you get that out there and not worry about crossing the t’s and dotting the i’s. It’s more instant feedback, and I think that that’s what people end up reading more. Like for example, that Alpha versus Assets post probably had twice as many readers as my book did. And as you know, you don’t make any money publishing books.

Meb: There’s nothing more frustrating to me than I will spend like weeks or months on this beautiful thought-provoking blog post. And I’m like, “This is the most profound thing I’ve written in two years.” And it’s just crickets. And then I’ll write something in my boxers at midnight while finishing dinner and clean up the kitchen, just a one-off and it’s like the most popular thing on the planet.

Patrick: Yes. So the way I set my site up was… It still reads this way in the About section, though it’s changed from this was that I set it up to be like a book in beta, that every post has an ability to give a lot of feedback. You can do like star ratings and comments and you can email me.

Meb: Oh, no. You have comments.

Patrick: All the stuff and…

Meb: Oh, my God. You’re a better man than I am.

Patrick: Anonymous, yeah.

Meb: I got rid of those a long time ago.

Patrick: Yeah, it’s been pretty benign. But anyway, so to your point, the stuff that I like the best either doesn’t get read or it gets poorly rated. The stuff that I just bang out ends up being extremely popular. And so I would love to write more books because I’m such a voracious reader and I think a good book is worth its weight in gold, but I don’t have any immediate plans to do it. I’ve had like five or six false starts and just haven’t gotten around to it. Two kids doesn’t help.

Meb: Yeah, I totally get that. While we’re on the topic of books, I printed out, and you may murder me for this, a handful of our one-star reviews from both of our books. And you’ve got to at least a four-star reviews, so this is with a bit tongue in cheek because if you had a one- or two-star book, that was a different scenario, but it’s kind of funny because the comments… The reason I got rid of comments a long time ago, and our buddy Barry often talks about this, we at least have the benefit, by the way, of being somewhat quantish in a high level, wo we’re not going to get a lot of hecklers. We’re not out there saying, “Hey, I think gold’s going to 5000. I think the stock market’s gonna crash.” Right there, that gets rid of a lot of the Yahoo message board crowd. But I used to get these hecklers. They would come on and they didn’t know… By the way, you’re never anonymous online. These guys did not know that when they logged in, I get to see their log in.

So there was this $100-million money managers. When I go to San Fran, they’d be like, “Hey. let’s grab dinner, let’s grab lunch.” And we’d talk, and hang out and it’d be fun and then they would just murder me on the comments. Eventually, I got tired of it. I emailed this guy, there’s more than one occurrence, I said, “Dude, what’s your problem? Why are you harassing me? You know I can see that this is you,” and then of course, it’s crickets.

So Barry had a great quote, he goes, “Comment and message boards where intelligence goes to die.” Because people can be anonymous. When they’re anonymous they behave poorly. Let’s give an example, so I printed out a few for me, a few for you. You get to read mine, I get to read yours, you go first.

Patrick: Let’s do it. So which book is this for? “Global Value: How to Spot Bubbles, Avoid Crashes, etc.” So the title of the review is “Waste of Money,” not starting good. “Ordered this book two weeks ago, this book is basically an advertisement for a certain method of off-the-wall type trading that has five good sentences in it. The rest is utter junk. Don’t waste your money on this. Your broker’s boilerplate pamphlet probably reads better than that this.”

Meb: First of all, the best part about this, the book’s $3, so don’t waste your money on it. Its $2.99. Second of all, this crazy strategy is literally the simplest value strategy on the planet. Rebouces once a year, takes five minutes. It’s been around for 100 years.

Patrick: I would pay $50 to know which five sentences this guy thinks…

Meb: No, I would pay way more. You could probably go and look in Kindle and see what’s most highlighted. I’ve never done that, but I can imagine. All right, here’s for you. This is from “Millennial Money.” “The author is a self-professed lowbrow who tried to slick-talk his way through school and failed.” You graduated, right? Then the second part, “The author is just another wannabe ‘Wolf of Wall Street’ total fail, one star.” If anyone who knows the “Wolf of Wall Street” by the way, an interesting side note is that years ago, and I lived in Manhattan Beach, I was moving into a new apartment, and talked to the landlord, this beautiful apartment. I had roommates at the time, half-broke, but moving in this beautiful apartment, and the landlord said, “Sorry, you got your application, I really liked you guys, I’m giving it to this other guy.” I’m like, “Oh no, really? You said we could have it.” I said, “Who?” She said, “Well, it’s actually an author and..” She tells us who it is, and we said, “Well, you know, you’re renting this to a felon, right?” Because we really wanted the apartment. And she says, “Yeah, but Leonardo DiCaprio is going to play him in a movie.” So that was a classic L.A. moment. Beyond all reason, anyway, if it’s not clear, I’m still quite bitter about that.

I’m going to read one more and then we can move on. “One, the title was ‘Little New Investment Advice,’ mostly the same adages, just presented in a hipster fashion,” which is kind of funny, because Patrick, by the way, most the time I see him, East Coash, fairly buttoned-up. He showed up today in California fashion, flip flops and jeans, so I appreciate, not quite a hipster but he’s adapting to the L.A. lifestyle. In this one, the body says, “The author is young-aged,” which I’ve never heard that expression, “but has read many books to aid…” I’m reading this as it was written, “The author is a young age, but has read many books to able to recount those famous books by his own words.”

Patrick: And that’s a one-star review?

Meb: I think so. It doesn’t say the star, but I’m guessing.

Patrick: So a couple funny reactions to this. So the first is that we should actually all root as authors for as many one-star, provided you still have a four-star rating overall, as many one stars as you can get, and the reason I think this is I read a book called “Dataclysm” which was written by one of the co-founders of OkCupid. So OkCupid’s the dating service.

Meb: They got a great quant team. They got [inaudible 01:11:18] posts.

Patrick: Yeah, really cool quant team, and they obviously have insane amounts of data that they can crunch. And one of the things that they found was that one of the highest predictors of success for people in terms of getting dates was the variance or the standard deviation of their ratings. So if you have two three-star girls, one three-star girl gets almost all three stars, one gets like half five stars, half one stars, the one that’s more polarizing gets a lot more dates. And that’s true of book sales. It’s true of like any popular medium that you want something to be polarizing need not consensus.

Meb: [Inaudible 01:11:52] attracts a niche?

Patrick: Well, no, you just want it to be… Because if you’re polarizing, it means you’re typically saying something different, something interesting. You represent something, you know, that girl that looks a little bit different but is really exciting to some people, not so to others. So if anything, as a book author, like if you go look at some of the bestsellers, you’ll find a ton of scathing one-star reviews and a ton of incredibly popular five-star reviews. So actually as the authors, who want more of these.

And the second interesting thing about the hipsters, and the hipster angle, so I can admit this now that now that I’m two years in… The book came out two years ago, and the publisher told me it was a two-year sale cycle, so I’m not selling them many more books. So the whole Millennial Money thing, a book aimed directly at young investors was something that was more pitched to me than me pitching the publishers. So I want…

Meb: You’re technically millennial?

Patrick: I am. Yeah. In chronology, probably not in spirit. So I wanted to write an investing book talking about factors and all the stuff that we’re talking about today, and they said, “Well, yeah. Okay. Fine we’ve seen stuff like that before. Let’s slap a couple of early chapters on talking specifically to young people, what they should be doing.” And so I begrudgingly did it, and then wrote the book in a very kind of casual conversational tone, which is all right anyway. And I really end up loving that part of it. So it all turned out well, but it’s funny that I’m accused of being a hipster when it was kind of shoved on me more than anything.

Meb: It’s okay. You can be a hipster. No one’s…

Patrick: Screw you, hipster of yore.

Meb: Yeah. One more tweet and then we’ll move on to the end part of the podcast, because otherwise, we’re gonna have you here for three hours. I love that this was a most retweeted. It says, “This data is crazy.” Speaking of OkCupid. “Women like slightly older men, no matter their age. Men like 22-year-olds. Score one for evolutionary psychology,” and it’s a picture of a scatter plot, of course, because we’re nerds and showing the preferences of men and women. And the reason I wanted to bring this up is that one of my favorite books in particularly, it’s not about investing, but it’s about evolutionary psychology. And so ignore the title. What it’s about it’s from this professor in the U.K., I think it’s Olivia Judson, called “Dr. Tatiana’s Sex Advice to All Creation.” Have you read this?

Patrick: No.

Meb: You need to read this. This is such a wonderful book because you spend so much time thinking about why people do the things they do. You’re staying up in Beverly Hills this week. and you see all these Lamborghinis fly by. Why are these people spending money on these really expensive cars? Why do people spend every day trying to attract mates? And you read about all these crazy animals and their behaviors, and you take a step back, and you’re like, “Well, you know people and humans do that too.” And so anyway, I thought that was very interesting, from a biotech nerd, because I’m a biotech guy, but love reading about evolutionary psychology, biology, how it impacts investing.

Patrick: By the way, people got pissed, some people got pissed with that tweet right? Because it’s kind of like undertones of chauvinism or something, which it’s obviously not meant as. It’s from that same book, “Datacylsm,” and it’s just…I mean, listen, the data’s the data, right? That there is this kind of linear relationship between the age that a woman finds attractive and there is no…the formula for the age that a man finds attractive is the number 22.

Meb: Right. I don’t know who’s going to find this offensive because you probably have 95% male followers anyway. Most of the finance world is sadly male-dominated.

Patrick: Well, I got a daughter, two sisters, a wife, a mom. I’ve got to be careful.

Meb: None of my family reads my tweets. All right. So one of the thing that Patrick does is he has a reading problem. I often say I have a reading problem. Patrick has a serious reading problem. If you go to Patrick’s blog, he has a book club where he writes about some of the best books, not just on investing but any books, every month. In 2015, he claims he read a 103 books. That’s probably 10x, at least, the books that I read. So anyway, Patrick, two things, one, you should all go subscribe to his newsletter. I actually told him before this. I said, “I wish I could just pay you and you send me a book or two a month, that way I wouldn’t have to read this. I would just read the books you told me to.” But I was I going say, “Do you have one or two or more, whatever, your favorite books of the past year or two? What do you recommend?” Put you on the spot.

Patrick: Yes. One is a very recent read, and I’ve been back and forth with the author because I just thought it was so unique and original and interesting. It’s an investing book, and the funny thing about that book list was it was designed to be investment books, or articles or white papers or whatever, and it’s now maybe 10% investing related stuff. It’s mostly other fiction and nonfiction. But this one is an investing book. It’s a book called “Dear Chairman.” It’s been getting some attention more recently. It’s effectively, I think it’s seven, eight, nine chapters, something like that, where the author who is himself an activist, kind of an activist hedge fund manager, and fairly successful.

Meb: He’s anonymous or no?

Patrick: No. His name is Jeff Gramm. He wrote these kind of seven vignettes where he found, and this is a big part of why it’s so interesting, he would go back and find via like 13D filings, and other methods, letters written by activists to investors or boards or CEOs that are interesting, provocative, and just an incredibly fun thing to read. So for example, the first chapter is about a letter that Ben Graham, and God, you think you’d read everything about Ben Graham but I never heard of this. So Ben Graham found this stock, it was a rail stock, which most stocks were back then, which had a trading price of, I don’t know, call it $60, and he did some diligence and figured out that they had this whole book of securities, just marketable, very liquid securities, worth like $90 a share that no one knew about, it just seemed to be sitting there. It’s like a conservative failsafe.

Meb: To be a security analyst a hundred years ago.

Patrick: So the largest shareholder of the business was the Rockefeller Foundation. They owned like 23% of the shares. And what he wanted to do was have them basically pay a special dividend, distribute all these securities out to shareholders who are the rightful owners. And he had to bust his ass to get the Rockefeller Foundation to vote, to have these guys distribute these securities. It just wasn’t the practice back then. And so Ben Graham, this is one of his really successful early investment, sort of the cigar butt, but trading at a discount to the cash, companies that he found, and it’s crazy how hard he has to work to convince, you know, this big foundation to accept all this cash because it wasn’t part of the culture.

So there’s nine of these stories. There’s one on Carl Icahn, which is good.

Meb: What other modern day? Do we have Loeb, [inaudible 01:18:28]?

Patrick: So there’s a Loeb in there.

Meb: He’s moderated a bit. He used to be a lot more…

Patrick: Yeah, a lot more fiery.

Meb: Sharp tongue.

Patrick: So that chapter’s really good. The chapter I like the most was the Ross Perot chapter which was really…I didn’t know any of it and it was fascinating, what an interesting guy. It opens with Ross Perot coordinating a special forces team to go and extract employees from him that are in like a sensitive region in the Middle East or something like that. It’s this crazy story of this guy’s life that I just knew him as a quirky presidential candidate.

Meb: He used to have a wonderful website. When he ran for president, he was famous for his charts, right? He used of this economic website. It’s called Perot Charts or something. I don’t think it exists anymore. It was the most beautiful chart book, mostly of government and economic series. I think it’s gone. I’ll look. We’ll add it to the show notes if it’s there. All right. Do you have one more or is that it?

Patrick: Yeah, one more. So definitely get “Dear Chairman.” That’s the best investing book I’ve read in a while. The other one I did, it wasn’t within the last year, but I’ll call this the most foolproof, kind of bulletproof book recommendation I’ve ever given, where literally every person that’s read it has come back and said, “That was incredible. I’m recommending it to everybody.” It’s a book called “Shadow Divers.”

Meb: Heard of it.

Patrick: It’s a nonfiction book. Certainly, if you have any interest in scuba diving, it’s going to be your bible. But it’s the story of this group, a kind of ragtag group of divers who find an unidentified U-boat off the East Coast, very close to the East Coast of the U.S. And no one knows what it is. It’s not in any history books. There’s no record of why this boat was here. And it’s the story of these guys uncovering, relentlessly researching and uncovering the story behind this boat. And it’s great for two reasons. It’s just incredible narrative non-fiction. Like you’ll read this book in a day. You won’t be able to put it down. But also, it shows the value of persistent diligence. Like there’s a clean investing analogy, where don’t accept things at face value. When you see a record in the history books, you see official information somewhere, oftentimes, it’s just someone that wants to go home and just wants to close the books on something.

So if you keep diving, you can often find interesting things. And what they end up finding out about this boat is very different than what’s on the historical record. Awesome book.

Meb: Fascinating. There used to be a publicly traded… there may still be stock, there was a treasure hunter called Odyssey Marine, that would find a lot of shipwrecks that had a better technology than a lot of government’s, but of course it got into a bunch of spats with the government of Spain, the boats got detained, but they would find millions from these old wrecks. Anyway, we’ll look that up, so we’ll follow up a little bit later. All right, we’re winding down to the last question. We may have to split this into two podcasts. This has been great, but we could go on probably for three, four more hours.

The last thing I always ask people, and I say always, you’re the first guess, but that I will plan on asking everyone is we did a post called, “Things I Find Beautiful, Useful or Downright Magical,” and so… By the way, we don’t tell Patrick to prepare anything for this interview, to say one thing, and so what do you have for us?

Patrick: So I think you should buy a Gränsfors American Felling Axe, which will cost you about $200 or so.

Meb: I don’t even know what that is. You mean like a chopping wood axe?

Patrick: So it’s an axe, there a lot of all kinds of axes. There’s one for you, maul axes for splitting wood, like splitting firewood. A felling axe is for taking down a tree yourself without a chainsaw. So I moved out of New York City. I lived there for eight years. About almost two years ago now, because my wife and I had kids, we wanted some more space.

Meb: You walk around with an axe in New York City, you’re going to get arrested.

Patrick: Yes. I have never chopped anything, and had never done any hatchet work, and now I’ve got kind of this this collection of axes and hatchets and things because I live in the woods. And so I take trees down myself, and it is, I think, it’s like…it’s the thing I look forward to the most, this incredibly meditative…

Meb: I feel like some people who are listening to this and find this little concerning.

Patrick: That’s all right.

Meb: [inaudible 01:22:12]

Patrick: Don’t knock it, till you try it. It’s an incredibly therapeutic thing to do. Actually, so here’s a third book I can throw in there. There’s a book called “Norwegian Wood” which is about basically chopping, splitting, seasoning, stacking, and burning wood, because it’s one of the main fuel sources in Scandinavia. And there’s this incredible like history and kind of like ecology component to all this that’s, I think, worth people’s time. So if you live in a wooded area, getting a good felling axe and going at a tree, if you had a hard day, pretty good way to burn some stress.

Meb: All right. I’ll buy one of those, leave it at my house in Colorado. If won’t do me any good here in L.A. All right, well, mine is one that probably listeners have heard me talk about before. It’s a website called And what this is is many people don’t know, but most state treasuries have billions leftover in investor assets that people will have either…it’s either dividend checks that they moved or utility bills, or they have stock they forgot about. So for you or your family members, you can go on, type in your name and you click on which state and you should also check states you used to live in, and type in your name and those your family members and you can find assets.

We’ve found, to date, over 200 grand worth of assets for our blog readers, for investors, a guy in the office found…a new employee found $16,000 of his uncles. My partner found $50,000 which I think is the highest. There was one was either $50,000 or $80,000. Also if you’re a financial advisor, there’s probably no other better client retention method. It’s a little creepy, but whatever. If you search your clients, find that they have assets, they’ll be your client forever, because A, you found them money; B, it’s money that the government has, so you’re taking it back from the government; and three, you’re thinking about them. So, wonderful resource, check it out. If you find more than $100, shoot me an email, send me a bottle of tequila. I’ll be happy. You’ll be happy.

Patrick: So I got one closing question for you.

Meb: Let’s hear it.

Patrick: Because you got to ask all the questions. So I know you got the robo thing, you’ve got obviously this podcast. Every time I talk to you, you say you’re never writing another book. But my question is anything in the hopper, anything new and interesting that might come out?

Meb: Well, I’ll tell you two things. One, there was a research project we worked on recently which is…and I emailed you about this over the years is that the premise was that dividend stocks are great, but it’s a poor way of expressing value. So what if, by the way, you avoided all dividend stocks because they’re very tax-efficient, because you’re paying taxes on dividends every time you get one. Could you replicate dividend returns without any dividends?

And so this was a strategy we worked on, first with Ned Davis, then with our buddy Wes at Alpha architects, and it turns out that using a simple value strategy… First of all, it was much better than dividends because it expressed value much better, a composite, like you talked about, using four or five value indicators combined into one. And even if you avoided dividend stocks, you would end up with a much higher return than dividend yield. It wasn’t as good as pure value, but on a net basis after tax, you would have been, in dividend stocks depending on the tax rate, because dividends used to get taxed at as high as your your current income, not anymore, but it used to be as high as 70%. You could have saved, historically, anywhere from 30 basis points, so 0.3% all the way up to like 2%, 3%, 4% a year depending on your…

Patrick: After tax.

Meb: Right, depending on… But let’s talk about the least marketable investment strategy of all time. Call this a no-yield fund, a low-yield fund, every retiree on the planet will avoid…

Patrick: You’re thinking about the naming all wrong. You’ve got to name it something like Tax Alpha…

Meb: Taxable value, I don’t know… Bo but that’s a great idea. And I’ve literally never seen in the literature, and I think a lot of our quant buddies, if you thought about this, no, no one’s crazy enough to think about that. So we wrote a blog post about that, but it probably is not going to go much farther.

I think I’m done writing books, at least for the foreseeable future. The one idea that I would love to work on that’s a lot of work… There’s two ideas. One is I would love to produce a beautiful coffee table book called like “The Chart Book,” that every investor would love to look through once a year, get a broad perspective, “Okay, here’s where we are. Late ’90 here’s where the huge valuation [inaudible 01:26:51] take perspective, or maybe ’09, where the cheap valuation.” But that takes a lot of effort. And then the one we talked about, how to teach your child to invest, that would take a lot of effort on the best ways to really teach…

Patrick: It’ll sell like cupcakes though.

Meb: Probably, probably, who knows. But in the investing world, that’s like 5,000 books. All right. we’re going to wind down. Look, Patrick, thanks so much for coming on the show.

Patrick: Honored.

Meb: I’m sure we’re going to have you back in the foreseeable future to talk about all the hundred other things we didn’t talk about. That’s all we have for you today. As always, you can find the show notes at If you have any feedback for us, Patrick or myself, as well as any questions for our mailbag Q&A, shoot us an email at [email protected] If you enjoyed the podcast, please subscribe on iTunes and feel free to share it with your friends and coworkers. And it would help us greatly to leave review on iTunes as well. That’s the end of the show, we’ll see you next time and best of luck investing.

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