Episode #474: Wes Gray & Jack Vogel, Alpha Architect – BOXX, HIDE, & Why Trend Following is Timeless. PLUS: Embarrassing Career Moments

Episode #474: Wes Gray & Jack Vogel, Alpha Architect – BOXX, HIDE, & Why Trend Following is Timeless. PLUS: Embarrassing Career Moments

 

Guest: Wes Gray is the founder and CEO of Alpha Architect, a quantitative asset management firm.  Jack Vogel heads the research department and serves as the CFO of Alpha Architect.

Date Recorded: 3/22/2023     |     Run-Time: 1:14:48

Summary: In today’s episode, we kick it off with an update on the ETF white-label business and some of their new funds, BOXX and HIDE.  Then we talk about why you need to think more about taxes when investing, the state of value, why trend-following is timeless, and what the most embarrassing moment in each of our careers. I-was-speechless.

Sponsor: Farmland LP is one of the largest investment funds in the US focused on converting chemical-based conventional farmland to organic, sustainably-managed farmland using a value-add commercial real estate strategy in the agriculture sector. Since 2009, they have built a 15,000-acre portfolio representing over $200M in AUM.

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Transcript: 

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Sponsor Message:

Farmland LP is one of the largest investment funds in the US, focused on converting conventional farmland to organic, sustainably managed farmland, and providing accredited investors access to the 3.7 trillion dollar farmland market in the United States. By combining decades of farming experience with modern technologies farmland LP seeks to generate competitive risk adjusted investing returns while supporting soil health, biodiversity and water quality on every acre. In farmland LPs adherence to certified organic standards give investors’ confidence that its business practices align with their sustainable investing goals. In today’s world of high inflation, bottle markets and uncertainty, consider doing what other investors, including Bill Gates, pro athletes, and others are doing and ad Farmland your investment portfolio. To learn more about their latest offering, visit www.farmlandlp.com or email them at ir@farmlandlp.com. Now back to the show.

Meb:

What’s up y’all? We got two of our favorites back today. Our returning guests are Alpha Architects, Wes Gray and Jack Vogel. In today’s episode, we kick it off with an update on their ETF White Label business back in 2019 when they were just a baby emergent ETF company with only a few hundred million under management. I predicted on Twitter they would eventually be a 10 billion shop in the next five, 10 years while we’re only three years in only a third of the way there and they’re over 3 billion dollars. Seriously, it couldn’t happen to a better crew. Really proud of these guys and their team. Onto the investing ideas. It’s pretty rare for someone who’s been in the business as long as I have to learn about a totally new strategy that no one’s ever described before. But the Alpha Architect squad surprised me with a new one today.

You’ll hear all about it. It’s pretty fun and wonky of course. We then talk about some of their new funds BOXX and HIDE, we talk about why you need to think more about boring things like taxes and investing the state of value, why trend following is timeless and what the most embarrassing moment in each of our careers is. Before we get to the episode, Wes’ brother was recently on the Joe Rogan podcast and helped Joe get a bunch of reviews. So, help Wes compete with his brother and go leave us a review on Apple, Spotify, wherever you listen to the show. Please enjoy this episode with Alpha Architects, Jack Vogel and Mr. Compound your face off Wes Gray. Wes and Jack, welcome back to the show.

Wes:

Happy to be here.

Jack:

Thanks for having us.

Meb:

You know guys haven’t been on since 2021, although you’ve definitely been on the show a handful of times. We’ll add the links to the show notes and I was thinking I have to ask the producer, Colby, on what family has the most all-time participants. You guys got to be up there. I know we’ve had Perth on the show. We’ve had the Bridgeway folks. We’ve had, who else in the Alpha Architect umbrella?

Wes:

Is it Kai Wu’s on there?

Meb:

Kai is the best. I love his is one of my favorites.

Jack:

Yeah, Doug there one time.

Wes:

Yeah, Doug Pugliese.

Meb:

So, we’re going to talk about a lot today, but we got to start with an update. Wes, I don’t know if you recognize my background. I actually used this for a couple years, but recently we found out how does it feel to be the second most famous Gray. Your brother Cliff was on Joe Rogan this past week. I listened to the whole thing and if you close your eyes, it kind of sounds like you’re listening to Wes.

Wes:

Well, he is really big into hunting and unfortunately Joe Rogan doesn’t really like finance, but he loves hunting. And my brother’s actually had a relationship with him for about 10 years now. And so he literally just texted him and said, “Hey, do you want to go on my show”, about three, four weeks ago? And Cliff’s like, “Wait, is this real? Yeah, I’ll go on your show.” So, that’s literally how it happened. And an interesting tidbit the day before he gets there, he’s like, man, does he have a manager? He’s such a big podcast, I haven’t heard from him. He gets a frantic call from Joe Rogan himself. He’s at the hotel booking the room for Cliff. It’s literally a one man band over at that podcast, even though it’s the biggest podcast on the planet.

Meb:

I just like that Grizz made an appearance in the show and I also, at one point he referenced you being a hedge fund manager. I was like, come on, you got to say my brother’s this ETF platform white label.

Wes:

I know, I know.

Meb:

But it was a fun one. So, with this picture, for the listeners who aren’t watching this on YouTube is a beautiful area sort of up near where Cliff does some of his hunting where Wes and I both spent plenty of time in our youth in Colorado. So, maybe we’ll do the next Alpha Architect democratized quant conference, someone in Colorado, Puerto Rico, you guys doing it this year in Philly. Jack, what’s itinerary? What’s the story?

Jack:

Yeah, we’re doing it in Philly this year, moving it to our new office. It’s actually hidden behind the little sign I put, drug it over so you don’t see everyone walking around. But yeah, we have a new office space in the Philly area in Havertown, so we’re having it here on the May 18th. It’s going to be virtual as well.

Meb:

It’s a little melancholy for me. I have a certain fondness for all of us when we’re kind of starting up just struggling through blood, sweat and tears. And here you are now one of the top ETF issuers last couple years I think you had what, 10 funds and maybe 500 million in assets. And now walk us through, where are you guys now today?

Wes:

So, on the ETF platform we have 34 funds and almost three and a half billion and we’re launching eight to 10 here just the next few months. So, it’s kind of crazy. We’re probably double again by the end of this year.

Meb:

We call it product market fit. But one of the things that you guys have really hit on, which is snowballing at an accelerating pace is this concept of this white label sort of business. We brainstormed years ago on some of these podcasts about you have the traditional big three launching funds, but then we said there’s a lot of ideas out there where there’s use cases for any number of organizations, whether it’s RIAs launching their own funds, whether it’s family offices, whether on and on, and you’re really starting to see it. So, tell us a little bit about some of the kind of developments. The one that’s obviously in the headlines is the mutual fund of ETF conversion and there’s been a bunch of big ones there and you guys have had some. Give us an overview. What are you guys seeing? What are you guys doing? And an update.

Wes:

So, as you mentioned, there’s basically a huge market need for essentially a Shopify of ETFs or an AWS of ETFs where iShares of Vanguard and State Street are not going to allow everyone else to use their low cost infrastructure to get access to the market. So, someone’s got to fill that void. And that’s basically what our platform is helping people do. And as you highlighted, there’s a lot of unique capabilities within ETF, especially on the tax-free conversion side where you could take SMAs, you could take hedge funds, you could take mutual funds, and we could convert those into an ETF in a tax-free manner, which is obviously a great way to seed and fuel an ETF with assets on day one.

Jack:

And just adding to what Wes said there, so besides mutual funds to ETFs, which everyone has seen with dimensional funds did massive mutual funds to ETF conversions, the advisor SMA into ETF conversion is an interesting use case. So, you have an advisor that’s running any number of strategies, could be tactical asset allocation, could be a stock strategy. And as you know, if you’re doing this for 100, 150 accounts, that can be a little difficult from operational side at times, especially if you care about taxes, you don’t want to have short term gains, you got to hold and certain people might, if you want to put a stock in, you have to worry, worry about cross counts. So, that is an interesting use case that we’ve seen recently, which is advisors doing SMA to ETF conversions.

Meb:

Yeah, I mean this is something where we had the hypothetical where we said why wouldn’t every advisor do this? Meaning, and we experienced this in our early days, like you’re on Fidelity or Schwab’s platform and you have, whether it’s dozens or hundreds, in some cases, thousands of clients, many do model-based asset management, so forget the totally bespoke, but for the ones where at least a portion or a large portion of the business is a model-based offering, you can take all the BS and headache of doing trades every time there’s deposits and withdrawals and having to deal with very specific structures, wrap it up into ETF and you mentioned a big huge one, improve their tax efficiency. But also for a lot of advisors too, we’ve seen a lot of them that will use it for smaller accounts, say, hey, maybe we’ll do a bespoke for this big allocation, but also for your nieces, nephews or kids, this 401k over here, let’s just throw that in the ETF and be done with it.

That’s accelerating. For a long time it was a hypothetical, we’re like, why don’t more people do this? And we were like, we did it, you guys did it and now it’s starting to happen, which I think is really exciting. So, listeners email Wes and Jack, not me, if you’re ready to launch a fund, but it’s cool, it’s cool to see it finally happening. One of the reasons I really wanted to get you guys back is it’s hard to keep up. You mentioned you guys going to launch another dozen or so with everything that’s going on, and occasionally I’ll see some new ideas and as opposed to the me toos of all the big ones, you know get all the me too ideas, you get some really new innovative ideas and I think they often may or may not get the attention they deserve.

So, I wanted to dig in because you guys are willing to launch the weird and wonky like we are. You don’t mind looking the little career risks. So, let’s dig in on a couple. Okay, the first of which is I really came after you guys is a new topic, a new fund that I’ve never heard of in my career, which I feel like is a little rare, but it’s a fixed income ETF, the ticker is BOXX. You guys got a good ticker game. You guys want to give us an overview of the strategy behind this new offering.

Wes:

To your point, as we discussed prior, I have a PhD in finance, Jack’s got PhD in finance. And up until about four or five years ago when this group from Susquehanna hit us up, they told us about box spreads. They were like, what are you talking about? And so this is a new idea to, it’s not a new idea, it’s been around for 20, 30 years, but unless you’ve been a option market maker or sitting on a prop desk your whole life, you’ve never heard of a box spread. All a box spread is doing mechanically is it is a four leg option trade that is isolating a fixed payoff at a certain time in the future. For example, you might do a box for say a thousand dollars delivery in three months from now. And what is it going to consist of? It’s going to consist of two trades, basically, a synthetic long position where you’re going to buy a call option and sell a put that’s say 4,000.

That’s going to create basically a synthetic long position and simultaneously you’re going to buy a put at 5,000 and sell a call at 5,000, which is effectively a synthetic short position. And so if you combine a synthetic long position and a synthetic short position, you have eliminated all market risk. And what you’ve done is you’ve isolated the delivery of the spread and strikes, which in this case is 5,000 minus 4,000, which is a thousand dollars. And so you will be getting delivered a thousand dollars three months from now.

And so the question is, well great, what do I got to pay for that? Well, the market determines that and because it’s delivering a guaranteed $1,000, it’s obviously going to sell at a pretty high price. And it’s effectively you’re going to be buying this for example, like 950. And so it acts and operates just like a treasury bill where you’re going to get delivered a set amount in the future and you pay a slight discount today. And that spread is basically the interest earned. And that that’s effectively what a box spread is doing. It’s just funding rates from the option markets.

Meb:

All right, so I imagine the listeners are now going to do a rewind two or three times, listen to that description again because it sounds like something that’s really complicated and the obvious question is why are you going to all this work? What’s the point of all this kind of convoluted trading? What’s the point of this? And by the way, you guys got some good videos and fact sheets on your website, listeners, we’ll add those as well.

Wes:

A hundred percent. Why would we waste all this brain damage to recreate a T-bill? It sounds kind of insane. And as you can imagine, this took a long time to get through the systems because SCC is like, wait a second, an option strategy doesn’t have market risk. What planet do you guys live on? And so we’ve had to explain this to everyone along the way, but the reason you would do this is really twofold. The first one is box spreads on the lending side when you’re buying the box to deploy your money to get extra return or whatever is generally going to be T-bills plus. And that ranges anywhere from zero to up to 50 basis points or higher. So, you’re going to be getting the T-bill return with the same risk, but an extra anywhere from zero to 50 basis points, which is awesome.

Meb:

That’s like the mythical unicorn you’re searching for.

Wes:

Exactly. It’s like holy cow, we’re going to get higher return for the same risk. And then the other benefit, know we could talk about it offline or whatever, and it’s kind of complicated, but essentially we believe that this has potential to be more tax efficient. And like I said, it’s not something we really want to go into the details on, but it’s something to certainly explore and could reach out to discuss.

Meb:

Listeners before all of you, we lose you and fall asleep. If you want to get deep into the tax weeds, email Wes and Jack and talk about it because it’s for the 0.01% of us who find this incredibly interesting, it’s worth a discussion, but I don’t want to lose everyone. Okay, so what’s the risk? What’s the catch? I think a lot of people listen to this say, okay, you guys are trading all these complicated options to get me T-bills plus a little bit. Obviously this has to have some sort of tail risk or why wouldn’t everyone be doing this? So, what’s the catch?

Wes:

So, frankly, this is a real arbitrage in some sense. The main difference on the risk side is the counterparty, which is the option clearing corporation versus the US government. But Stan and Pores has both. The US government is AA plus stable outlook. OCC is AA plus stable outlook, and it’s a SIF move, i.e., the US government’s going to back it anyway. So, arguably the risk is the same, it just delivers higher return. And we wouldn’t just say that because which Chicago, I believe the Fisher markets, but it just is what it is.

Jack:

Yeah, it’s just different counterparty risk. And just backing up what you said Meb, we’ve all been doing this for a long time and when I heard about this a couple years ago, was something I had never learned obviously before. And it is a neat idea where essentially it kind of exists in the marketplace. So, if I have money and I want to take a lever position at a broker, I generally have to borrow at T-bills plus. And if I want to lend just leave my money at a broker, I get paid T-bills minus. So, this kind of splits the difference where T-bills is the hypothetical. When you learn capm, it’s like you can borrow and you can lend at risk free, right? Well, we know that’s not true. So, that’s like the hypothetical, the general realistic is you do T-bills plus if you’re borrowing T-bills minus if you’re lending, this is kind of in the middle, but it requires, you know, do have to know how to do the trade, a box trade. You also have to use European options, which European versus American options are different.

Meb:

Explain real quick to the listeners what the difference is.

Jack:

High level European options can only be they basically are exercised at expiration, whereas American can be exercised prior. And I guess in theory, yeah, if you used American you’d be taking different risks.

Wes:

And to be clear, just to make sure for all the compliance officers out there, that’s the current market, but we believe in market efficiency. And if you were to say, hey, Wes and Jack, here’s 20 billion dollars, the reality is we might arbitrage our own trade here, because there’s just not a well develop developed lending counterparty on the box spread. And so, to extent, right now we have 150 million in this thing, but like I said, if you gave us 10 billion, we will self-arbitrage back closer down to T-bills. So, it’s not like there’s free money forever. This is a very unique new idea and as we develop this lending market, presumably it will tighten down over time, but that’d be a good problem for us to have.

Meb:

Yeah, no, and I think this will end up being one of your most successful funds. And listeners, full disclosure, we use plenty of Alpha Architect funds and more likely to continue use in the future. I always joke with people, I was like, look, if this X, Y, Z fund ever gets to 50 billion in a particularly niche area, you probably don’t want to own it because it can’t do some of the same things. And who knows, things develop and change of course, but some areas have a lot more capacity, but you guys are nowhere near that yet. So, really cool. I mean imagine the trading costs are relatively small relative to the liquidity of the underlying markets. Is that pretty safe to say?

Wes:

So, this trade, so boxes are predominantly done in SPX options, which are obviously they trade bazillions of dollars every single day. So, yes, liquidity is extremely high in the box spreads that we target because that’s where all the liquidity in the world exists and it’s a funding trade. And the best way to think about it, and Jack alluded to it, is if I’m a broker dealer or prop trader or hedge fund, I could go borrow from Goldman for fed funds plus 40 Bips or I could go to the box market, I could just say, hey, I’m just going to go sell the box to this other person who’s willing to lend to me for T-bill plus 30. And it’s a win-win for everybody because they’re not having to borrow at a higher bar rate from their prime and they get just borrowed directly. So, it’s really just cutting out the middlemen of Wall Street, frankly. That’s literally what box spreads are developed for. You’re just borrowers and lenders through the box spread.

Meb:

Is there a scenario where as you guys get bigger and or could force rank some of the opportunities, could you do this on various other markets within the fund or as other funds? So, is there the box spread on all these other option markets that may exist?

Wes:

Yes. So, right now the plan is get three months, one to three month, one year is also well developed. Three year is less developed in five years is even less developed. So, the concept here is we’re bringing a new fixed income concept to the marketplace and the issues we just need to develop the lending side, the education, the understanding, and almost certainly if we’re successful in this duration, there’s already liquidity out in one year and three year. We could extend it even longer because we just need the marketplace to realize like, oh, a box spread, I actually know what you’re talking about. It’s just another avenue through which to fund borrowing and lending and you don’t have to pay the broker. You basically go direct to the borrowers and lenders. You cut out the brokers, you cut out the banks. It’s just the problem is it’s an education challenge and we’re going to have to develop this market over time.

Meb:

But theoretically you could also do it for other markets, not just S&P, right? Or am I wrong on that?

Wes:

Yep, a hundred percent. You’d want to focus on European obviously to avoid early expiration, but yeah, you can do this on single stocks, flex options, you can do it on anything. It’s just SPX is where the vast majority of liquidity is and so we just focus where the liquidity is right now.

Meb:

Yeah, I’m just thinking in my head as you guys scale and also the inefficiencies where your algorithms are just running in the background and all of a sudden one day it’s like, oh no, actually you can capture X, Y, Z, bigger spread on this particular option that may be on treasuries or wheat or Tesla, whatever it may be. Anyway, just looking out to the future. But yes, it makes sense to start with the biggest and the most liquid at depth. You guys want more information on box, hit these guys, because it gets wonky quick. So, we started wonky, let’s get a little less wonky. You guys had another great ticker HIDE. Let’s talk about that. What’s the thesis behind that?

Jack:

Yeah, so the idea there I think is to offer, we had equity centric ETFs prior, so on HIDE, the idea is we want to create a strategy that we think is going to help diversify an equity portfolio in both times of high inflation and deflation. And for those familiar and who know managed futures, that’s kind of the idea of a managed future strategy. So, it’s the high inflation and deflation ETF, but we went about doing it, I would say I think smartly but also simple. And so the idea is in an equity drawdown scenario, we are of the view that you have inflation or deflation and in such a state of the world you want to, if you have a deflationary environment, own bonds, if you have an inflationary environment, you want to own things that are going to do well such as commodities.

We also have REITs as well. We view that as a hybrid asset, but for those who saw 2022 you know at times bonds can underperform, do poorly commodities in the proceeding years kind of perform. So, what we did was we simply have a trend follow system on those three asset classes. So, high level it’s a static targeted weight allocation of 50% towards intermediate treasuries, 25% to commodities and 25% to real estate. So, for example, if all the signals were on, we’d begin funds such as like IEF or in another intermediate term treasury ETF. On REITs, we’d be in VNQ, like Vanguard, VNQ. And on commodities we’d be in like COMB or PDBC, those type of just broad commodity ETFs. But what we do is we monthly trend follow, and actually as of this month, all of the signals say to be out of bonds, REITs and commodities. So, when we’re out of those asset classes, we just go into T-bills. So, we’re currently actually a hundred percent in T-bills, which is a kind of rare occurrence.

Meb:

Why don’t you guys just use box instead of T-bills, by the way, that seems like an obvious next step for you guys, but thinking about this, okay, I love talking about it from the perspective of the average investor. 60, 40 US or the average advisor has very little real asset exposure. So, a year like last year or years in higher unexpected and sustained inflation, that’s a problem. How do they mentally slot this in? Where does it fit? Because a lot of people bucket these sort of concepts. How do they think about using this? Is it the rando all in the alts bucket? What’s the framing?

Jack:

Generally what I’d say is the framing is it’s a part of the fixed income sleeve. So, as we mentioned, it is always at all times 50% fixed income. So, if you’re an advisor with 60, 40 portfolio in general, the discussion is hey, let’s do 60, 20, 20. So, 20% whatever bond mix you want to have, 20% potentially use in HIDE or 60, 30, 10. So, the waitings within the fixed income sleeve obviously are going to change. And the framing there is essentially it is fixed income, but even on the bond, the REIT and commodity sleeves, it is at max 50%. And we do do trend following within there.

So, for most advisors, I would say it really is in the bond side. You’re right, you could classify this as an alternative investment for certain people, but I would say from a simplistic standpoint, what does it do? Hey, if bond yields are moving up, we’re going to shorten duration. So, we go from IEF like seven to 10 year duration to T-bills, right? If commodities are doing poorly, we’re going to go into T-bills. So, I would say for the average investor, I view it more in the fixed income part of the portfolio.

Meb:

I think recording this, we’re probably the only people recording a podcast during the fed meeting, not something I traditionally spend much time watching, but the big discussion for the better part of our lifetimes has been we’ve been in a market regime where there hasn’t been inflation and you have this push pull uncertainty of hey, are we going to have sustained inflation or is it going to be rip right back down to deflationary inputs? And even if you look at the fed and there dot plots, it doesn’t seem like they know. I mean there’s a huge spread range of where they expect rates to be at the end of the year. It’s like two to five or 6% or something. And so this type of concept has vastly different outcomes, particularly with bonds, but also the real assets too. So, how often does this fund updated? Is it daily, monthly, quarterly?

Jack:

So, it’s monthly. We update the trend signals monthly. We use two signals for trend for each asset class. So, going into the year, I think we were half in commodities, which would be a 12.5% allocation of the overall portfolio, REITs and bonds where trend was off, so it was 87% in T-bills. So, yeah, monthly update, which that’s the cadence we’re going with right now.

Meb:

The two big things you guys talk a lot about, you talk about value, you talk about trend, they finally had a compound your face off sort of year in the last year or two and then this year has been a little reversal of that scenario. What’s y’all set up for how you think about the world today as regards to value or trend opportunity set. Would love to hear you guys talk also a little bit about your tools that you have on your website and how people could potentially access some of those as well.

Wes:

I just hit the high level. So, value stocks, the idea of buying cheap stocks is evergreen to me. I don’t know when it’s going to work, but I just know it makes sense. Buying momentum stocks, again, I don’t know when shiny rocks are cool or when they’re not, but I know a lot of times they are, so I’m going to do that. And then trend following is just intuitive. Buy stuff that’s trending, don’t buy stuff that’s on a path to death because that’s where all the death occurs is a bad trend. So, these are all evergreen concepts and so it doesn’t matter what the Fed does and my outlook does not change. I don’t think it ever will at this point.

Meb:

But I see a lot of tweets. Toby Carlisle, our mutual friend loves to screenshot one of your tools from your website. Tell us a little bit about that. Is this advisor only, how do you get access and what do these things do?

Jack:

Yeah, so we have various tools up on our website. One of the tools that you’re mentioning that Toby likes to screenshot looks at basically the value of value. So, is value relatively cheap or is it expensive relative to the past? And so anyone can sign up on our website and get access to the tool, number one. And then number two, what does it do? Well, simplistically cross a variety of measures such as different valuation measures, like book to market, PE, EBIT, TV, our preferred metric, what we look at, it’s a simple value of values tool where we look at the top decile of value stocks and we divide the EBIT, TV of that compared to the market. And so essentially that’s one way to assess and then we look at it over time. So, what you would see, which again we’re not sharing it here, but if you looked at the tool or if you looked at Toby’s tweets, what you would see is that this peak, that ratio peaked two times before, which was the end of the internet bubble December, 1999.

It peaked near the end of 2008 and currently it’s actually pretty high depending on which measures you’re looking at. So, EBIT, TV, it’s the highest it’s been. And so one thing I would say is obviously value has lagged, I would say past five to seven years, especially if we go that timeframe compared to the market and it would be a little more disconcerting if value lagged and that spread didn’t get wider kind of value, got cheaper. So, that’s a tool that we have on our website that anyone can view. We have other tools as well. But that’s the one I think you’re referencing that Toby likes to tweet out which kind of highlights value right now is cheap relative to where it has been in the past.

Meb:

And what’s the story there? I mean, you guys got any thesis for how that’s going to resolve? Is it just a bunch of energy companies that are going bankrupt or what’s the situation? A bunch of just regional banks that are all going down the toilet?

Wes:

So, with respect to the Enterpriseable tool, one, the good news is regional banks aren’t included because you can’t calculate their EBIT. And so I do think what you’re seeing here is probably just good old fashioned sentiment that hasn’t been burned off yet, where the broad market, there’s still these believers in unicorns of like, oh well let’s buy this tech firm that never makes money and we’ll pay 50 times PE for it. And then you have these guys like, Exxon who all they do is mint money all day long and will continue to do so and they’re not having any valuation boosts.

And so to the extent that the broad market is heavily invested in these still go-go stocks that are way overvalued and then there’s a whole bunch of firms that are really cheap and actually make money, until sentiment shifts and gravity matters again, you can see these divergences where you can get portfolios for 20% plus earnings yields versus some markets like 5%. It’s crazy. I mean does the growth differential on the market versus the cheap stocks justify a four x spread? It’s never been justified ever in the history of markets as we know it. And maybe that’s the case now because the world’s changed, but it’s always dangerous to say the world changed in the long term.

Meb:

You guys also have some cool tools that lets you look at the ETF universe and sort by various factors. I don’t know if I’ve seen this anywhere else. Can you guys give us a quick overview of what’s going on there?

Jack:

Yeah, the portfolio architect tool we have, which essentially is just a way to assess, I would say at a little more detailed level compared to maybe a Morningstar. So, Morningstar’s pretty good given high level overview of value, growth, et cetera. So, the tool allows you to do, it works only for ETFs right now, but it allows you to calculate and look at maybe you don’t really like book to market as your value measure. So, you want to do your Morningstar three by three box. Hey, well we can change our value metric to earnings to price and maybe we don’t want to do value in size, we want to do value in quality so we can change to EP and ROA and look at where funds are, you know, can compute active share amongst funds.

So, yeah, it’s a tool we built to help as I and Ryan and Wes at times have chats with advisors who are like, hey, do you mind taking a look at this portfolio? Tell me what’s going on. Do you have any suggestions? And the tool is very helpful in our analysis as well as the advisor, but in our analysis of what’s going on in your portfolio, because a lot of times would advisors don’t realize is you know, put all the ETFs together, compare them to SPY, and it’s like the same thing, which is fine if that’s the goal, but it just, it’s they’re tools that help us visually as well as more in the weeds show advisors, hey, what’s really going on in my portfolio?

Meb:

Well I think veneer surprised the end result conclusion often ends up being, hey, you’re getting SPY but for a lot higher expense because you either have super low active share or by mixing these four things together you end up with SPY with no active share at a higher cost. And it’s surprising to me how many times people kind of end up there, they have good intentions in the beginning and they build this sort of portfolio, but the end result is the same. And I think without seeing the data, it’s hard to really quantify that. And I think people go through that exercise and it’s often a big realization they say, oh, okay, I get it. I didn’t see that before but I kind of get it now.

Jack:

Visual images tend to stick with people, so that’s one of the reasons we help build it.

Meb:

Yeah, I mean we used to love to do, we talked with Eric Crittenden on the show about this, but when we were talking about trend following, specifically the blind taste test where you put certain characteristics of funds or strategies in an Excel sheet and then ask people to mix and match them or how they would go about it, invariably they end up with portfolios that are a lot more concentrated but particularly allocations to other and weird things that they usually would never invest in, whether it’s XUS markets, whether it’s real assets or strategies like value and trend.

But it’s also not, I was listening to a particular portfolio manager that always triggers me yesterday, Bloomberg, and she said, we recommend you put in 1% of your portfolio in this fund. And I was kind of pulling my hair out, because I’m like, everyone knows you put 1% in anything and it’s not going to change the outcome. Maybe on the third decimal point it’s not going to do anything. So, until you look at the end bowl of soup, it’s hard to see. Anyway, end of rant, you have a great tool.

Jack:

Thanks.

Meb:

Yeah. What else is on your mind, gents? You guys are always working on the lab, all sorts of crazy stuff, whether it’s strategies, what have you guys been writing about on the blog lately? What’s on the brain?

Wes:

I mean we’re always covered new ideas out there because we’ve got Tommy and well Larry as well, and Elizabeth, we got the PhDs and the 200 IQ folks always perusing the literature and posting out the latest and greatest that’s out there. I mean frankly I haven’t seen much that is mind boggling or life changing and much of it just reiterates what we already know. There’s a cool Cam Harvey paper price saw and what actually works and protects you in inflationary regimes and inflationary regimes.

Meb:

It’s gray paper.

Wes:

And it’s just nice to have someone who doesn’t write something at a pure asset management level. Let’s try to pitch you something and just say, hey, let’s look at all this stuff and just rank order what actually provided value in unexpected inflation versus this and that and the other thing. So, I thought that was pretty cool just because it was very simple, straightforward and addressed a basic question everyone wants to know.

Meb:

Yeah, when you say Larry, you mean Swedroe who is not afraid to mix it up on Twitter listeners.

Wes:

Yes.

Meb:

He has no problem with a New Yorker sort of attitude about debating you and he is a smart cookie too, so he’s great. He puts out some great stuff. One of the things that you guys are famous for quoting and actually heard referenced on masters in business the other day, the other Cliff, not your brother, but Asness was talking about one of Wes’ comments and it wasn’t, would God fail as an active manager? I think he’s talking about compounding your face off, I can’t remember, it was one of the Wes-isms. Give us an update while we’re here on trend following because you guys also have done in-house sort of managed futures offerings for many years. You now have some various trend exposed funds. One of my favorites we’ve used is Voldemort, VMOT.

I don’t think anyone else calls it that except for me. HIDE has now trend following inputs. Have you guys seen a marketably different attitude from advisors on trend? Because for the long part of the last decade is seemingly there’s this tiny cohort of people who are into trend and that’s their religion, the 99% or distaste or downright just not interested, but then 2022 comes along and it really helps. What’s the vibe? Tell us a little bit about how you guys think about trend in general. What’s been the response over the last year or two?

Wes:

So, on the production side, there’s been a vast increase in people who want launch managed futures ETFs or different product and usually people only want to launch product if there’s some sort of underlying demand that’s pushing it. So, I would just say from the production side, there certainly must be increase in demand because there’s more products that are coming to market that want to deliver these sort of exposures. The only thing I would say is the problem that you know with managed futures, especially, particularly long, short, complicated ones is they are the most alty of all alts that one could ever consider.

And the problem is 99% of the time they don’t work. They’re volatile, they’re ugly, they’re nasty, and you’re like, why would I ever do this? And then the one time they work, everyone thinks you’re a hero and that’s obviously the time that people pile in, but unless they’re program and actually understand what they’re buying and why, I just don’t see this ending well for a lot of people. They’re just hot money chasing a new idea that, well, it’s an old idea, but it’s a new idea to them just because it happened to work last year.

Jack:

And all I’d add is obviously trend following, that concept’s going to be around forever. And so for example, you mentioned managed futures. Well, we do trend on bonds, commodities, long short. Why? Because that compliments in general, the way we view the world, right or wrong is compliments an equity portfolio. So, essentially you got your equity, which you hope grows over time, but at times that’s going to underperform and that’s why you do trend on bonds commodities. So, kind of long and short and then going into, well we implemented trend in VMOT, but then also HIDE. HIDE, I think we wanted to put trend in there, but as Wes mentioned, it is I think trend for a lot of advisors is too complicated, too risky, potentially just the overall volatility. So, the idea on HIDE was to make it a little bit simpler where it’s like, hey, okay, well I missed the bond trend this month, so I lost out on 1%, right?

Not, hey, I’m like 400 levered, the 400% long or short to two year treasury future and I got hurt five, 6% in a day. So, we try to, I think make it simpler in there, but it does help advisors with the annoying questions they get of, hey, interest rates are rising, what do you do? Oh, we got some trend in here. Hey, we got high inflation, what do you do? Hey, we got commodities at times in our portfolio. So, that was our, I guess, attempt at trying to help the investing community advisors with using trend in maybe I think a more manageable way.

Meb:

I mean, having the ability to have been short bonds last year, looking back on this and I feel like I feel a fair amount of shame. A lot of investors kind of look back and were like, what was I thinking? Allocating the bonds in many sovereigns, negative yielding and then not at least hedging the possibility that a rise in interest rates was going to rip your face off, which is what happened. And so managed futures one of the very few allocations that could have at least shorted bonds and protected, and they did last year. It was a massive, massive benefit. The interesting thing about the alternatives, and this applies to stocks, we’ve seen this the last few years. There was a podcast that Pomp did with my first million guys and they’re course talking about crypto, but I think this applies equally to stocks as well as funds.

But they basically said a way to keep people from holding. They said, we need to have a brokerage that has what they call it, a paper hands bitch tax. Meaning if you sell this, if you have paper hands and you’re selling this investment, we’re going to charge you 25% if you exit in the first amount of time. And this was an idea we talked about for a long time, and so listeners, if you want to start this brokerage, let us know. I want to fund it. But basically the concept is, you established a certain holding period 1, 3, 5, 10 years and there’s some penalty for exiting that soon. I think the same thing really applies to professional investors and institutions when they allocate to alternatives. I see this time again, and it’s frustrating for me and I’m sure it’s for you guys, talking to people in a way where the time horizon is a month, six months, a year, what is happening now? I at least think it’s hard to predict when things like trend are going to do well. Does that make any sense? You guys have any thoughts on that?

Jack:

Yeah, I think a lot of times it’s life happens. So, it’s like you got professional investors, which might be an investment committee and they had someone on the board who’s like, Hey, yeah, we’re going to manage futures because then they explain why it’s like you add managed features for 2022, but they might’ve added that in 2016 and then that person left in 2020 and then everyone’s like, wait, what’s going on with this fund here? It’s flat for five years when the market’s straight up. So, I think unfortunately, I agree with you, I like the idea of locking, obviously who doesn’t want to be collecting management fees on money that’s locked up? It’s a great idea, man.

Meb:

The problem, you can’t do it in the ETF structures, so you have to do it in the brokerage wrapper, right? And the brokerage business sounds terrible to me. It sounds like all time nightmare as far as compliance or you have to do it in a mutual fund or a private fund wrapper, would you lose some of the tax benefits? But if anyone knows how to get wonky with structuring this, it’s you guys. So, let me know if you figure out, I’m game.

Wes:

Yeah, the only anti pitch on that is it’s one of those things where it’s kind of like a double-edged sword. So, to the extent you solve the behavior problem, you also solve the excess return problem, which we don’t want to solve. You kind of want this stuff to suck, to be difficult, to be painful, and you want to see people be stupid and trade and do bad things, because in the end, that’s why it works for those who have the discipline.

Meb:

We’ll let everyone else do it though. And so this fund brokerage isn’t going to be a trillion dollar fund, so it’ll soak up and then my idea behind this brokerage or fund was always you have the penalty of the bad behavior, but part or all of that cost recycles back to the other investors as a dividend. So, you get a good behavior, you get frequent flyer miles, doesn’t matter, some sort of reward to the people for behaving. I think this thing would absolutely kill, I got enough on my plate, you guys probably do too.

Wes:

I think the other problem with that is the only people that would probably rationally think that’s a good idea are already the people that are pretty rational, disciplined and are already our clients and your clients, they don’t need this as much and it’s really, it’s people that need it the most that don’t understand they need it the most and they’re never going to buy it. So, it’s like a chicken or the egg challenge I would think.

Meb:

I think there’s a big gifting market, not necessarily the annuity crowd where it’s a parent, you’re a grandparent, you buy this for a kid or someone else, you get them started.

Wes:

Oh, there you go. Yeah.

Meb:

And this is, you have to have a 10 year time horizon. Anyway, I talk about certain things like this way too much for very little actual production. So, listeners, you want to go through Y Combinator with this hit me up. The same thing on the alternatives I was discussing with someone, where was this, in Park City. Where was, it wasn’t in Park City, somewhere in the last week or two where we were talking about the concept of a strategy and it doesn’t matter what it is, you can call it managed futures, you can call it value, you can call it foreign, whatever. But having this same conversation with people, and I try to not shame people, but just reframe the analogy or the conversation, but they were talking about a fund that just our strategy that hadn’t done well is expected and so therefore they’re going to sell it.

It was one of our funds, I don’t even remember which one, not important, but I said, cool, that’s your prerogative. But also how many times in your career have you bought an investment and it did awesome, just spectacular. And you said, you know what? Here’s the criteria we had for this investment. It did way better than expected and so we have to sell it. No one has ever said that in my entire career to me. Meb, we bought your fund, it just absolutely crushed, but way more than it should have, so we got to sell it. No, they say they ascribed brilliance to you or the strategy or to themselves for deciding to make the strategy, but the concept theoretically should be the same where you have in our world of quantitative expected outcomes. And to me it’s sort of the same conclusion, but of course no one does that.

They say, ah, and it’s brilliant for making that decision. Anyway, let me know when someone tells you guys that he say, guys, you were just too good. I’m sorry we got to let you go. Speaking of let you go, we’re not going to let you do it yet. We had a few inbound questions from some other people, so let’s get to them. We talk a lot about this concept of being outliers, which you guys are for a lot of reasons, but thinking about your non-consensus views and we have a whole list of things that we believe that I think most of our professional peers don’t. So, 75% or more, what’s something that you know guys at your core is something that you look around, you talk to advisors, you talk to pros, you talk to people at the big institutions where they would just totally disagree with you about? Anything come to mind?

Jack:

Well, I got one, and this is just something we’ve known about for a long time, and I went through the whole rigamarole of writing a paper last year, an academic paper doing the whole referee process, which is a pain, it’s kind of very idiosyncratic to be honest with you. As you know Meb, you just get a random referee.

Meb:

I did it once and then gave up. I was like, that was the most ridiculous process. Now I’m just going to throw them online, let the entire internet dunk on it and just have at it. I was like once for the credential of being able to say I did it. But you exist in a little bit different world. You guys got PhDs after your name.

Jack:

And there’s pros to it as well. It’s just time. But I would say it is idiosyncratic, but the title of paper’s long only value investing, does size matter. So, got it published late last year. And the whole idea is if you talk to almost any even institutional investor and you say, hey, I have to do value investing, you’re like, oh, small cap value. That’s just a response. That’s essentially, they’ve been told, Hey, value works better and small, which it does from a long short perspective. Therefore I should allocate if I’m going to be a value investor in small cap value. And essentially the whole idea of the paper is to say, hey, what happens if we just look at the long legs of value, small cap value or large value, but we equal weight the portfolio, which that’s what we do. That’s what you do.

And we just say, Hey, let’s compare across different cuts, tursiles, quintiles, deciles, multiple measures combo measure. So, we create 15 test portfolios and small value 15 test portfolios in large value that we equal weight. And what you see is the returns are statistically insignificantly different. I.e. large value equal weighted using a specific measure is statistically insignificantly different than small value market cap weighted or equated. And the large value is more liquid, which is kind of cool. So, you get similar returns with more liquidity. Yet there are a lot of people that all say no, you have to do small cap value. So, hence obviously we’ve done large value equal weighted since 2012, late 2012, and we did that because hey, there are good small cap value managers out there. There are, we don’t need to be the 20th or 50th small cap value manager out there. We’re going to do large value, we’re going to equal weight. So, that’s my one consensus view that other people have that I would disagree with. And I think the data actually backs us up there.

Meb:

Well, when you say 20 or 50 small cap value, it’s more like 500 or a thousand, but I hear you. Well, it’s interesting because investors so much of the narrative in how they think about portfolios, and we see this a lot in the institutional and advisor community is very much like the Lego building blocks. And I’m not talking down on this, but for example, people are like, well, I have my spot for large cap value, mid-cap value, small cap value, large cap growth, mid-cap growth, and small cap growth.

There’s some of these philosophical discussions that people get into that depending on the design may or may not have a big impact, but if you end up diluting across everything, I think you end up as kind of the same way. It’s like the quants deciding between do you sort on value and momentum or do you do the average of both. Do you end up totally different portfolio, but does it kind of the same thing? No, I think that’s interesting and I think part of that is probably disbelief of small caps as a factor alone having Alpha. Do you think that’s part of the embedded bias on that idea?

Wes:

Let me just emphasize Jack’s point, because he mentioned it, but we got to make this painfully clear. Large cap value portfolios are statistically indistinguishable from small cap value portfolios. That statement alone will drive most people bonkers. The key reason why is when people do the analysis, they’re looking at value weight, large caps, which means really what you did is you put 50% of your company in these monster mega cap companies. But if you take out mega cap, which yes, it’s true mega cap value doesn’t do anything for you, but mega caps are like what, five stocks? Let’s just throw those out. If you’re outside of that large cap value is the same as small cap value.

That is such a profound statement that nobody believes and it is just a fact. And Jack has that shown quantitatively you could go hack on it yourself. It’s just a fact and I do not know, and there’s actually AQR has a whole paper saying it, size doesn’t matter. Robeco has a whole paper saying size doesn’t matter. The problem is they did it through kind of geeky factor long, short methods that no one actually understands. Jack just made it painfully obvious through the lens of how a normal person does it. Size does not matter. Valuation does. Buy cheap stocks wherever they reside. Do not buy small caps just because someone sold you that.

Meb:

By the way, listeners, there’s a lot of things I hate about academic papers. The number one being all the charts and tables are at the end. Number two, in our world, one of the most confusing things, and a lot of listeners I think don’t hear this, but when you say valuated, it doesn’t mean you’re weighting by valuations like factors. It means market cap weighting. By the way, did I get that right?

Jack:

Yeah, you did. Yes.

Meb:

And it’s the most confusing damn thing in the world because you hear people going, well, value weighted this, value weighted, and we’re like, oh, well you weighting based on price, earnings, or enterprise value. No, that just means market cap weighting and it’s the strangest descriptor that is the most confusing thing of anything I’ve ever been through in my entire career. I think when it involves factor base, it’s so confusing.

Jack:

You have to just follow the standard Meb.

Meb:

Yeah. Wes, you got all sorts of batshit ideas. So, what sort of non-consensus view really sticks out for you? Anything come to mind?

Wes:

I mean, I don’t really know what the consensus thinks, because I don’t really pay attention that much. But I mean in general, I’m evergreen, man. I think taxes are the biggest thing out there across the board. If you don’t solve that problem, you didn’t solve any problems.

Meb:

I mean, look, this is coming from someone who lives in California speaking to someone who lives in Puerto Rico, so there’s an arbitrage here that is probably more impactful than anything else we could do or talk about. We spend a lot of time talking about taxes.

Wes:

Yeah, yeah, we do for sure. I just think that people still don’t spend enough time thinking about it and it has such a huge influence on every aspect from a financial perspective. The other one that perplexes the hell out of me and even to this day is just basic momentum. Cross-sectional momentum, 212 jaggedy momentum, whatever relative strength, whatever hell you want to call it. We all know about it. Everyone talks about it. Even to this day there’s like a million value funds and there’s like 20 momentum funds, and if you go talk to institution allocators, none of them allocate to momentum. They all want to do value or stock picking value. I just find that baffling considered, if you just did a straight horse race and you had a 20 year objective of trying to compound your face off, you would allocate two momentum strategies. Nobody does this even though everybody knows about it. It’s very perplexing to me and I don’t understand it.

Meb:

I mean it is, a good example is, and listeners, we own this fund and we have for a while, but they have two momentum ETFs, QMOM, IMOM as well as some other momentum blends, but are there even any other momentum foreign XUS momentum equity funds out there? I don’t even know if there’s any ETFs that do it other than you guys.

Wes:

IShares has a half-assed one, kind of like MTUM where it’s called momentum, but it has a six month cycle. It’s not really, but no, not really.

Meb:

And so this goes back to our early discussion on is this a good thing that the market hasn’t embraced this idea because it continues to drive some of the inefficiency? Or is it, hey, we’re just banging our heads against the wall. We’re dealing with this on our side. We’re getting ready to write a 10 year retrospective on our shareholder yield strategies. So, I mean, we’re getting old guys. I mean this is going to be 10 years for us in May, and so Jack and Wes helped us on the original research for the book over a decade ago, and I look back on it and essentially there’s been very few, if any, shareholder yield ETFs launched in the past decade. And so part of me is like, are we just crazy or is the rest of the world crazy? I don’t know which, but I’ll find out one day.

Wes:

You know what I think is interesting as we’re talking about here is it seems to me as so much is driven by social proof and the Fama French papers in DFA, there’s these narratives that are so powerful in the marketplace. What is their narratives? Small values everything. What’s the other narrative? Momentum can’t be extracted because of frictional costs and this is just so pervasive and I don’t know why one random bald dude from Chicago who he is really cool and used to be my advisor, I don’t know why he has so much influence on the global narrative and it’s somehow seeped into the mindset of every investor out there. It’s baffling to me. I don’t know, I don’t understand it, but maybe it’s a human nature problem.

Meb:

Well, if to make it timely, value stocks are getting smoked today, particularly small cap value. So, we’re going to tie this to you guys. By the end of the day they’re probably going to be up, fed days, never know. One point put a bow on the tax discussion that I thought was interesting. So, I was at a conference recently, let’s call it a hundred, 200 high level financial professionals and they were talking about ETFs and there’s a little bit of ribbing and joking about how the ETF industry has grown. When we started a decade ago or even the decade prior, you go talk to many investors and you’d say ETF, and they’d say, what’s a, what’s A EFT? Is that a fund transfer? Even though ETFs have been around since the late nineties, there was still an educational process and now you say that 100% people know what it is.

And I was talking about taxes and this very specific panel was on private markets. And I go, okay, all of us know what ETFs are. I go raise your hands if you know what QSBS is. And we’ve done some episodes with you guys where we talk about all sorts of esoteric tax shit, but I said, raise your hand if you know what QSBS is. And one hand was raised, which was Jason Buck, which was the night before I talked about, talked with him and told him what I was talking about so he doesn’t count. So, essentially zero people. And I said, you guys, here’s a good example of something that could offer more value on the private side than anything else you could possibly come up with on security selection and all the other things we spend, the sexy stuff. And then here’s just boring old taxes listeners, you can Google it, but we’ve done some episodes on this, but just boring old taxes may be more impactful.

And so the ETF structure, I think in many cases, and also talking about your box strategies, but tax ideas can be more impactful than the asset allocation decision. What we need to do, here we go. As we start to reframe some of these old ideas that you say dominate the industry, and there’s the classic one about how, and they quote it wrong, but security selection drives 99% of returns. The quote B. Bauer, whatever it was, paper, but actually the real paper was actually not returns, it was volatility of returns. But anyway, you should do an [inaudible 01:01:35] to that where it’s like how much of the after tax is actually drives the returns and I bet that the portion is enormous. I’m just choosing fund structure.

Wes:

I’m going to say two things. First off, I thought you had a genius idea that no one even really understands except for tax geeks where you said, hey, I’m going to go own a pool of a bunch of random VCs that all qualify for QSBS and basically created long-term private tax free capital gain portfolio. Why everyone in the planet didn’t say like, oh my god, that’s a genius idea Meb came up with is beyond me. Because that’s like, I would totally do that if I had more money.

Meb:

I think the people that do it don’t talk about it, because they’re like, I don’t want this to go away. It almost ended up on the block at the last, always the last minutes. And to me listeners, I think it’s been the most impactful legislation that’s aimed at entrepreneurs in generating new like a Cambrian explosion of companies. But the people that know about it I feel like are kind of like, hey, let’s just not talk too much about this, because it’s such a good structure and it’s an amazing incentive. It’s Obama era legislation with Cory Booker and others. Anyway.

Wes:

Yeah, I forgot as well. I was so excited about your tax idea. I was like, yeah, yeah, more people should do that.

Jack:

Just ask Wes about tax stuff and we can chat for four hours.

Meb:

Well I mean this is the conversation gets amped up on, we gets see even weirder as like Peter Teal has a 5 billion IRA. So, it’s a similar situation where you know can put some of these binary exponential outcome investments into a sheltered account, but god forbid carried interest ever gets put on the chopping block. And I was laughing about that because a lot of the private equity industry, when the whole Silicon Valley bank stuff was going down, I said, this tech crowd better be careful because they keep poking the bear of the government. They’re going to turn on them quickly and take away some of the benefits they have. All right gentlemen, so we’re going to wind down here in a little bit. Colby wanted to ask me what the most embarrassing moment of your career is? I don’t know if that’s going to be something that can makes it to print. Is there something that you guys could even talk about? I’m trying to think of the most embarrassing. I’ll start if you guys can think of anything.

Wes:

Yeah, I have one. Unfortunately.

Meb:

The most paranoid, panicked I’ve ever been in my career was sitting down in my early days with Mark Haynes and Aaron Burnett and I absolutely froze up and couldn’t breathe. It has like never happened to me in my life before since it was on the NYSE floor we’re getting ready to go and all of a sudden I was like, I couldn’t swallow. And I was like, oh dear God, this is, and then you get panicky and your hearts start racing. You stop breathing and it gets worse. And it was made better because Mark just starts ranting and he looks at me, he’s like, every guy comes on here, they think they’re going to get Aaron’s number.

They think you’re just going to ask her out and go out and he is just ranting for 30 seconds. And I’m like, okay. I started breathing and then by the end of it I was like, well, can I get her number? And then he looked like he was about to reach out and strangle me and then it was like 3, 2, 1, go. And I was like, okay, fine. I feel better now. But I literally thought I was going to pass out and fall over.

Wes:

So, mine, this was probably 10 years ago, I was in what they call a Battle of the Quants competition and I was representing the quant side and then they had the stock pickers and there are all these 200 IQ-

Meb:

New York or where was it?

Wes:

Yeah, in New York. And I was like, all right, I got to represent man. So, I wore underneath my suit an I love quant shirt. And so my concept is, hey, what I’ll do is at the end I’ll do a few burpees and I’ll rip off my suit and because at the end they’ll be like, all right, give me your final pitch. And so I’m like, all right, that’s what I’m going to do. And so literally it’s 10 minutes before I’m going to go do this thing and I’m doing it a little rehearsal and I’m in my suit, I do a burpee and I hear this, what my entire pants slice in half, but I got nowhere to go. So, I got to show up to this thing and I have to explain, I literally pantless and I’ve got these dangling pants and I ended up doing it at the end, but it was very embarrassing because I’m rolling up at this formal event with my whole entire suit pants is the crotch has exploded. It was very terrible. Don’t do burpees before a speech.

Meb:

Jack, you probably haven’t done anything to embarrass yourself yet. You still have time. You got anything come to mind?

Jack:

Yeah, I would say mine and Wes will remember this, it was nothing public but it was more private. It was when Wes and I, this was probably back 2011, 2012, we’re working, hey, let’s build a model to predict the market. And when you first get into investing, you’re like, yeah, I’m going to build the best model. I can build a model to predict the market. And we were like, dude, we have it and send it over to the client. They’re like, this is awesome. How will we go in implement? So, I started looking to pull data. I’m like, okay, where are we going to get data feeds? And lo and behold, we had a look ahead bias in the Excel file.

Meb:

We like to call a you can build a 20 billion dollar business on that. That was the F squared. That’s what they did. It was like a two week ahead look ahead.

Jack:

Yes. And essentially it is true if you can look ahead into the future, you will be a very successful investor in equity markets. But at the time that was very-

Wes:

Yeah, and in fairness, that one was, it wasn’t blatant. It was kind of like a lot of those machine learning models, there’s like embedded look ahead that you don’t really notice unless you do second, third degree analysis. And yeah, we only found out to Jack’s point when we’re like, all right, let’s do this. And spent probably a year of brain power and we’re like, oh, well we can’t actually do this.

Meb:

Well, it’s funny, I spent a long time back in the day, Nelson Freeberg had these formula research and this was sort of a very early in my career, very impactful because I coded up all of his strategies and he used to write, one of the best writers in all of investing. I actually, and I told him this one day before he passed, but I said I was too cheap as a 20 or something to buy, subscribe to your issues. But I bought them all photocopied from some kid in Germany, So, I have this whole encyclopedia but added a bunch of these and you could come up with all these econometric models that kind of predict markets. And the takeaway always for me that as complicated and they could be just using trend alone gets you like 90% of the way there. And so we would have spreads and GDP and corporate bonds and interest rates on and on and on. And then you’re just like, well, trend is 90% of this. So, the simplification I feel like makes it a lot easier.

Jack:

Which is what we said earlier, trend is evergreen. It’s just going to be around because it works. It has historically.

Wes:

You know what I’ve been thinking a lot about? Because if you think about what are the things that we all like to do, what we like to do value, we like to do momentum and trend. Every single one of those things is basic price, right? Value is just price scaled with some fundamental, momentum is just relative price and trend is just absolute price. It’s in the end it all boils down if you really think about it. All that matters in the marketplace is price, period. I was thinking about that. I was like, this came to my light. Everything I do, everything we do, everything anyone that I think I respect does it boils down to there’s somehow incorporating price with something around that. But that’s all that matters because that is truth in markets.

Meb:

Yeah, well was the famous Ned Davis quote is, price is unique. It’s the only indicator that can’t diverge from itself. So, the problem with a lot of these other indicators, you have this history model this, and then at some point they go opposite.

Wes:

Yeah, it’s price is all that matters in the end.

Meb:

Gentlemen, this has been great. We’ve covered a lot. Anything else you guys want to hit on that we didn’t talk about today?

Wes:

We’re good.

Meb:

When are we going on an elk hunting trip? I’m excited. I’ve never been.

Wes:

Let’s iguana hunting man. Cliff sold the elk business. I got iguanas down here. There’s millions of them in Puerto Rico.

Meb:

Did you see when Florida went through its cold spell? They had a big huge iguana watch warning because apparently when it gets that cold they just fall out of the trees, they like hibernate and then they fall out of the trees and they land on people and concuss them. So, there’s like an iguana watch.

Wes:

Actually, trivia question for you guys. So, at the Beach Club the other day an iguana jumped in the pool and it just sat on the bottom and I said, all right, how long do we think that thing can hold its breath? How long do you guys think an iguana can hold its breath underwater?

Meb:

I mean, like-

Jack:

I’ll go two minutes.

Meb:

10.

Wes:

30.

Meb:

Oh my God.

Wes:

Yeah, they’re like fish man. And it was proven this little guy was sitting down there. 30 minutes they could hold their breath, man, isn’t that crazy?

Meb:

Did anybody get out of the pool or is it just Puerto Rico? There’s like whatever.

Wes:

Oh yeah, no, everyone got out of the pool. And then it was fun watching the pool boys like going there trying to fight the thing, but we were just curious because it sat on the bottom of the pool and we’re like, it’s got to be dead. And then I googled it and then I posed the trivia to everyone and obviously everyone’s like, oh, five minutes, 10 minutes and it is 30 minutes. I was like, well, that explains why he’s sitting on the pool and chilling out that that’s a crazy trivia fact.

Meb:

There was a great comedian recently, I think it was Bill Burr who was here and he was talking about going swimming in a pool and he is like, I don’t understand swimming in the ocean. He’s like, you’re basically going into a pool up to your neck and you have no idea what’s underneath there. He is like, how many people would get into a pool if you threw some crabs and some fish in there and he is like zero people would. They’d be like, that’s crazy. There’s a bunch of predators and other random disgusting things swimming around in there. But he is like, people have no problem getting in the ocean. He is like, I don’t get that. And I was like, that’s an interesting framing. I kind of feel the same way now.

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