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Excess Returns
The Truth No One Sees | 41 Great Investors Share Their Most Controversial Belief
01:03:21
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- [00:01]
Ben Felix
This episode is brought to you by State Farm.
- [00:04]
Cameron Passmore
Listening to this podcast Smart move Being financially savvy Smart move. Another smart move having State Farm help you create a competitive price when you choose to bundle home and auto bundling.
- [00:16]
Ben Felix
Just another way to save with a.
- [00:18]
Cameron Passmore
Personal price plan like a good neighbor.
- [00:20]
Ben Felix
State Farm is there.
- [00:21]
Cameron Passmore
Prices are based on rating plans that vary by state.
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Ben Felix
Coverage options are selected by the customer.
- [00:26]
Cameron Passmore
Availability, amount of discounts and savings and eligibility vary by state. Want a secret to free holiday gifts? TikTok slash and free makes it real. Share a link Slash the price to 0 free item, free shipping Download and open TikTok search slash free tap to join and start slashing now I think.
- [00:46]
Ben Felix
That gold has been, is now and will be money. I believe that quantitative easing is always pro growth and inflationary. I don't believe alpha exists over the long term. I think that the policy monitor at fiscal policy officials maybe are nearly as important as we think.
- [01:15]
Cameron Passmore
My peers in traditional Wall street feel that there's some value in year end price targets. I think it's such a dumb exercise.
- [01:23]
Ben Felix
One of the most important things we all can do in investing is think about where we could be wrong. That idea and a Twitter thread from our good friend Meb Faber inspired us to add a second closing we ask all our guests on Excess what is one thing you believe about investing that the majority of your peers would disagree with? Over the history of the podcast, we have asked that question to almost 100 guests, ranging from great investors to academic experts to options and macro traders. In this episode, we share the answers from some of our most popular guests, all in one episode. So without further ado, here are our most popular guests sharing their one belief they think most investors would disagree with. I think that gold has been, is now, and will be money. I think that here this is even more. This is even more. Something even more people disagree with. I think that the historical cycle beginning in say 1971 or 73 to the present, in which paper money reigns supreme, will be seen as a failed experiment and monetary invention and that gold will reclaim someplace. I don't think people walk around with coins in their pockets, gold coins in the pocket. I think gold is coming. Gold is coming back. Not like the Old south, not like the Brooklyn Dodgers, not like the Cutthroat Razor, not like a sextant. But I think gold will have its day again as a form of money that is acknowledged as such and that it'll be good for the gold miners. Yeah, that's my story. My story. Matt, I'll take that. It's an easy one for me. I believe that quantitative easing is always pro growth and inflationary, despite the fact that everyone looks at the quantitative easing that occurred between 2008 and, and 2018 and sees that there was no inflation. And based on how I understand quantitative easing working and by the way, they then see the high inflation that happened when both monetary and fiscal spending was done and say it's not qe, it's just fiscal. And I'm just, I don't, I disagree. I think what happened in 2008-2018 was that there were so many other disinflationary forces at play during that period of time that quantitative easing didn't cause, didn't result in inflation because of the disinflationary forces that were happening. If it hadn't occurred, if quantitative easing hadn't occurred, I believe we would have had much, much lower inflation during that period. And that is not most people don't agree with.
- [04:22]
Cameron Passmore
Well, certainly my peers in traditional Wall street feel that there's some value in year end price targets. I think it's such a dumb exercise. And for our client base, which is all individual investors, we don't do it because I don't think it makes any sense. I mean somebody, I use this as an example. Somebody at the beginning of 1987 could put a price target for the end of the year about where the S and P was trading at the beginning of the year. And if the commentary associated with that was market's not going to do anything this year, nothing to see here, they might have said just at those two points in time, boy, I nailed it. But the ride along the way was anything but even. And the exercise of the constant adjusting of year end price targets. And maybe that's a way for institutions to judge one strategist versus another. For strategists themselves to get on the pages of II or be able to pat themselves on the back for saying I nailed the year end price target, but for individual investors, I just don't understand the value. So, you know, unless Schwab, the company all the way up to Chuck himself decides that, hey, we do want to do this, and that's never been the case in the past. That's the one thing I don't do and I'm happy about not.
- [05:41]
Ben Felix
When I used to teach in the grad school at nyu, one of the questions I used to ask the MBA students was what's the difference between the stock market and a horse race? And MBA students should actually be able to answer that question, they could not. They had a very tough time with it. And the reason why is because most investors, including professional investors, think of the stock market as a horse race. In other words, people use the vernacular. They say, I'm going to make a bet on Amazon or I'm going to make a bet on some. No, and, and I, I alluded to this very briefly before that the stock market is an exchange of corporate ownership. And I don't think people appreciate that, that it is not a horse race. It's not Seabiscuit in the 7. It's more like somebody owning Seabiscuit and having to buy the horse and then, you know, train the horse and groom the horse and stable the horse and then there's stud fees after the, after the races and are all done. The racing life is done and things like that. And it's a series of cash flows that come from this horse. And, and that's actually what the stock market is. So what people do, including professional investors, they concentrate on the race and they don't understand the bigger picture of ownership and what the point of the stock market is. I think people have taken on too much of a trader mentality and have gotten away from the investor mentality. And I think, I'm not sure that completely answers your question, but that's the way I would kind of look at it. I think the thing many investors would disagree with us on is that macro, you know, being a macro investor is something that can create a lot of value. I mean, that would be, again, that would be the thing that I think we, I have limited time. We're going to, we're going to spend time where we can have a competitive advantage that long term horizon, 120 companies. You know, I think my, you know, I've been around this, doing this for a long time. I've heard a lot of people talk about the Fed. I don't know if I've ever heard anybody say something about the Fed that actually ended up actually creating economic, creating value for shareholders. Creating value that you were able to make that an actual insight. Right. You know, every year someone calls a recession right and they're 90% of the time they're wrong. You know. You know. You know, if you get, you know, I think I have a much higher odds of getting the earnings power right on Rivety or Microsoft getting that right and having an edge on that with the longer term horizon then trying to predict what the GDP is going to be. Yeah, there are economists who spend 50 hours a week how Am I going to do that, do a better job than some economists on predicting Eurodollar relationship gdp? I'm not qualified to do that. And to become qualified, I'd have to turn away from all that micro analysis where we do have an edge. I just tell my team, let's focus on where we have a competitive edge, where we can find differentiation and create value for our shareholders. We wrote a book a decade ago called Shareholder Yield A Better Approach to Dividend Investing. And that's a pretty ballsy subtitle, right? Because Morningstar did a recent report where they outlined they were looking at dividend funds and there's over 300 of them managing over a trillion dollars. Right. So you're kind of coming at one of the most beloved brands and narratives of the past 100 years. Right. And so we're updating this book, Listener, so hopefully it'll be out before year end, but you can download the last version free online. But in the beginning, we demonstrate, we say, hey, look, you know, here's your return. If you only had price return of US Stocks for the past hundred years, then here it is. If you reinvested the dividends. Now, the key phrase in all of this is reinvested dividends. And I've been combing through a lot of the academic literature, and the consensus seems to be that most people don't reinvest their dividends, at least in the same proportion of what they invested in. You know, and if, and the fantasy I think most people have is of the dream, laying in bed, you're like, oh, I just can't wait till I get to Hawaii, sitting on the beach, drinking pina coladas, letting that sweet, sweet passive income roll in. Right? And so there's nothing wrong with dividends. They are very much a part of the investing stream. But if you live in a high tax state, like I do in California, the last thing in the world you want is dividends and high dividends. And so do dividends outperform historically, meaning high dividend yield? Yes, they do. Now, that factor, as we all call them, tends to put you in a little bit junkier companies. Right? But it gives you this value tilt, which, which in my opinion is really what you're looking to get, right? You want to be have that value tilt. But if you're going to do value, my opinion is always just do value, don't do a cousin of value dividend yield. And so there's a million different ways you could do this offshoot where, you know, we wrote probably our least downloaded or read paper was one that was targeting no yielding stocks. And we said, hey, if you did a value tilt and targeted no yielding or low yielding stocks, you ended up with a higher after tax return and a taxable account than if you invested in high dividend yield or the broad market. So there's all sorts of different ways you can go this. But the whole key being that I think, you know, the analogy we use in the book update, that's an old blog post, is we liken it to the old Coke Pepsi taste test. You guys remember that. So for the young, for the young listeners on here don't know what this is. You know, everyone prefers Coke and if you do a blind taste test, most people prefer Pepsi and but then you reveal it, most people go back to Coke. And a lot of this has to do with branding, I don't know, commercials, marketing, what your parents, maybe you just like Warren Buffett, big, big Coca Cola drinker. Anyway, I think it's the same thing was true with dividends. They have a great narrative, a great story. Don't even get me started on buybacks because that's the next 50 minutes of this, this discussion. I'm trying to keep these short because we got 20 of these. But it's. If you do the whole column, list of things that are horrific, terrible, no good, very bad ideas and the other list is things that are probably totally fine. Look, dividend investing is totally fine. It's not the worst thing in the world. But if you, if you get me into the. Is this optimal question and why are, why is, why are there better choices? There's, there's certainly, I think better choices and better ways to do it. I think it gets to, I think it's true6 about valuations. You know, I don't think it's like a black and white disagree. I think there's a, there's gray area here. I absolutely think valuations do matter when they get really extended. Like for talking about 50 or 60 or 80 forward PE on the entire market or you know, certain companies where it's like, it's really out of line. I think there's a case to be made that you know, maybe valuation actually do matter. But you know, so much of the discussion right now is stuff like 17 pe versus 22 pe. And I understand that in historical context that that seems like a lot. But you know, what's another way of thinking about PE ratio? 17 forward PE means it'll take 17 years of, you know, to earn back whatever you invest into a stock. And then 22 means 22 years. So what's the difference between 22 and 17 years?
- [13:37]
Cameron Passmore
You send your kids to a nice.
- [13:39]
Ben Felix
School in Boston and they can eat a lot of jam legs. That's the difference. Yeah. So like I said before, like, you know, the long history of charting earnings and charting price, you know, it has a very tight correlation and when we talk about, you know, 17 versus 22, it's just a brief pickup over time. So I wouldn't say valuations actually don't matter, but I think people spend way too much thinking about valuations when they're not that far from historical. What just hit me, I think why I sound different is the, if we just use the word believe and that's what I think the problem is. I think in our industry people believe a lot of things that aren't true and it's based on like insecurity. Right? Like we, we're so desperate to manage our clients wealth that we're looking at these historical representations and drawing inferences of them. And then that provides a belief system that then we think through. So I think about like things. There's so many things I don't even know how to pick. One is like, I don't believe alpha exists over the long term. I believe you can combine interesting betas. Obviously. I'm actually with MEB too. Like I think the Fed does a decent job. I don't know anybody else. I think that argues like the Fed's doing a terrible job. I know, I know two things. One, if they're a hedge fund manager, it means their P and L is down. And I'm like, you know, you could trade with whichever direction you think they're going, even if you think they're wrong. And then I also think rates don't matter, it's just a hurdle rate. And everybody, like entrepreneurs are going to be entrepreneurs no matter what the rates are. They can't help themselves. Trying to think. I was trying to give you a broad sample, but what it boils down to is essentially I think it's really difficult what we do. And I think that if we're truly honest, nobody knows the future, nobody has a crystal ball. And so I just think if I can hold most of the world's asset classes and rebalance, I should muddle along. Okay. And that's what I think the biggest lack of belief. I think it's more of a lack of belief that I have versus I. I'm always shocked by the things that people say in our industry because I'm like How do you believe that? What's, what's. How are you determined that what's, what's the base truth in what you're saying? And if you find, if you, if you. I feel like I'm a, I'm a six year old sometimes at some of these conferences, I'm. If you ask why three times, you know, they tend to fall apart. And, and it's very interesting that, you know, the emperor has no clothes. And you know what, it's, it's a really weird thing that, like, you know, the ultra wealthy and the, and the, the aged just love to think they have a crystal ball to predict the future. And it's always kind of shocking to me, and I just find myself out of kilter in that way. It's a lot harder today, right? Because if you'd asked me eight years ago, this is the same question that I was asked by Peter Thiel in which I introduced the concept of how passive was changing the behavior of markets. I honestly think most in investing now would actually acknowledge many of the points that I have emphasized and made around that. On the, on the investment front. I guess what I would really highlight is an element of Goodhart's law, which is once a measure becomes a. Once a metric becomes a measure, once you begin tracking it or attempting to use it, that it no longer becomes an efficient metric. You've actually changed it by its participation. And again, I highlighted this in my substack. You know, I think Austrian economics is largely bunk, right? I just want to be very clear. I think there's a deep misunderstanding of what money is in Austrian economics. But there is a really important concept in Austrian economics which is that we are all acting individuals. We are not passive participants in our lives or in the universe that exists around us. We tend to look at cycles from an anthropic principle, which is to say the world exists, right? And these cycles have played out through history, and therefore they will play out in my lifetime. The reality is those cycles were actually created by the actions of individuals who either resisted the cycles, amplified the cycles, tried to turn the cycles, et cetera. We've become so passive as a society that we're terrified of any attempt at action. And as a result, we're passively sitting by and saying, well, the cycle's gonna play out. No, if you don't act, the cycle's gonna be different and it's probably gonna be worse. And so I would just emphasize that, like, we should all be stopping and thinking at every stage, in every action that we do is it an intentional act to make the world a better place? And I don't think markets tell you that. I think the participants in the markets tell you that I'm really anti Sharpe ratio. I think it's only right to be anti Sharpe ratio when you're the distribution of your tradings is not normal and you're going to make money from 5 to 10% of your trades and they're going to be huge outlier trades. We're really big into diversification but you should not take us that seriously about diversification. We pretend that we're really big into diversification. When I trade crude West Texas and Brit and I trade London copper and New York copper and sometimes the differences between those are zero. However, the philosophy is yes, we want to spread it out, we want to have lots of different markets but we're really trying to find is those outlier trades. And sometimes New York copper will trend and make a lot of money and LME copper won't. And so you need to not have the optimal diversified portfolio and trade markets that have them in your portfolio that are not materially different 90% of the time. And I think that's another thing too that hitting oil trade I was telling you about in Fab 84 hitting all January didn't do anything. March didn't do anything. It was only February heating oil. So there in the lesson in the markets is that diversification is great. But look, the market that you're underweighting or you're assuming that you don't need to trade or underweight because it's correlated with other markets that can have a huge trend and you do not want to miss that it has a different name. So it's not the same thing. And I think yeah, the whole diversification thing, that's a better answer than Sharp. I like that one a little bit better. Trade markets, even though they're all the markets, as many as you can and ones that are sort of correlated because you never know, something could happen to one of those if you're trying to find the outlier and let those profits run well, I mean mine is much more hands off style investing so I don't believe in the trimming and adding and trading around your positions which all of my peers seem to love to do. You know, when stocks get expensive in their mind they cut it back and when they seem to find something they think is more expensive, they add to it. So there's a lot of activity going around the periphery of the portfolio and I don't do Any of that, I would buy something and just leave it. And how I've sometimes, and I should say that grows directly out of the work that I did for 100 baggers. I mean, I saw repeatedly, again and again, stocks, these great businesses that they would look very expensive for a time, but the market's making them expensive on the expectation of something good happening. And if you just left it alone, you would have done just fine, even from sometimes from peaks peak to peak, which, you know, were surprising. So I. It doesn't mean that you only buy things once and don't. Because, you know, if I have capital inflows or whatever, yeah, sure, I'm gonna add to some favorites that are down or whatever, but I'm much less active. And I think people would disagree with that a lot. They feel like as a money manager, they have the ability and they ought to, as part of their job, determine when something gets very expensive and they should cut it back. And when something becomes very compelling, they should add more capital to it. And the way I look at it is that if you really sit down and work out the math on that, after taxes, the amount of time you have to be right, it's a very high bar. It's not so easy. And so the way I look at it is that these truly great businesses are so hard to find, very hard to replace. You're probably just better off just leaving alone. So that's. That's one area I think if a stock has doubled or even tripled, you haven't missed it. So many times people think that because they've seen a stock go up significantly, the story's over, they should look elsewhere. And so many times that's just the first act to a very, very long play. And I think about this all the time sometimes in my mind, and this may be even more controversial to say I want to see the management team perform. I want to see the stock go up before I buy it. I want to see the story play out. And then I have more confidence that this story has long legs, that I can feel confident that they are on the right path. And there's something to be said for seeing some performance before you invest, particularly in the new issue market. And one of the things I probably should have mentioned about the Peter lynch conversation that I had is he looks at new issues a lot. We look at new issues as well. We think that there's new opportunities there that the market kind of hasn't discovered yet. And so if a stock has doubled or even tripled, you haven't missed it. I go back to my investment in Constellation Software in 2016. The stock had gone from a think it ipoed at around $16 a share to 650. When the geniuses from Los Angeles showed up to the annual meeting 10 years too late in Toronto to meet Mark Leonard and see the story for the first time, the stock had gone from 16 to 600, 650. And the stock chart when you kind of plotted it on Bloomberg was as scary a stock chart as you possibly could see. It was a vertical line going straight up like this. Because the ascension was so significant over those years and for whatever reason, maybe it was because I had remembered this lesson. For whatever reason, we weren't dissuaded. I think the reason we weren't dissuaded by the the move was because cash flow had followed the stock, the stock movement. And when you see cash flow following the stock market movement, you're not as concerned about this stock going backwards on you because you always have that backstop of, of forward momentum of the free cash flow going in your favor. And I think that that's maybe one of the more controversial things I could say if a stock has doubled or even tripled, you have not missed it. Maybe the other controversial thing is you don't have to have an opinion on every security and just focus on your high conviction businesses that you think you can predict and you know, put together a portfolio that comprises those elements.
- [25:15]
Cameron Passmore
So you're about to make a trade based on a friend's text but which u do you listen to? Is it we could buy a house in Tulum, get optioning those options, we could lose everything. Or let's do a little research, get your head in the trade and make the investment decision that's right for you. Learn more@finra.org TradeSmart.
- [25:46]
Ben Felix
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- [25:47]
Cameron Passmore
Highway driving takes the work out of.
- [25:49]
Ben Felix
Being behind the wheel, allowing you to.
- [25:52]
Cameron Passmore
Relax and reconnect while also staying in control. Enjoy the drive in BlueCruise enabled vehicles.
- [26:00]
Ben Felix
Like the F150 Explorer and Mustang Mach.
- [26:04]
Cameron Passmore
E available feature on equipped vehicles terms apply.
- [26:07]
Ben Felix
Does not replace safe driving.
- [26:08]
Cameron Passmore
See Ford.com BlueCruise for more details.
- [26:13]
Ben Felix
I don't know if people would agree with me or not, but I really believe that you have to manage risk with technicals with price and build conviction with fundamentals. And so I, I, you know, I think that like you said, when does the gold trade over? When is that over? Like I think price is the best way to manage risk. So quite Honestly, maybe the only way I know. And so that's my, one of my truisms that I live by. And I don't know, I think there's a ton of skepticism around technicals. I think a lot of it is well earned. There's some technical stuff out there that's, you know, quite frankly stupid. But you know, it doesn't mean that you, you throw it all, the baby out bath water. So that would be my. I don't know if that's. If people disagree with that or not. But the other thing would be I just don't think the market's overvalued, which we talked about. I don't think the market's overvalued here. And we've been saying that for a while and we'll see. I know that that pissed a lot of people off last year when we said that. I'm just probably only more mad people at this point in time, that cycle.
- [27:19]
Cameron Passmore
So I think, you know, in terms, my discipline of course is technical analysis. And you know, I do believe that you can make, you know, sort of investments based solely on technical analysis. And that's something probably that a lot of people would disagree with. Right. A completely price day decision. So I would put that out there as more of just, you know, a comment on not just me, but technical analysis in general. There's probably still a lot of skeptics out there, but what I would caution against is just using technical analysis for individual stocks because you better know what those companies do because if you don't, then you're taking on, you know, a lot more risk. So I think when you're applying technical analysis as your sole discipline for trading or investing, that you should do it more from a top down perspective. I mean, we have so many tools, by the way, at our disposal to not only understand the markets from a technical perspective, different software, some of it's free, but then also investable products, these diversified, you know, sort of thematic ETFs as an example. You can have a great technical take on a theme like AI and have this very low price investable product and you can leverage the swings in a way, you know, just through the price action. That can be very sort of profitable and beneficial, I think. So it's a matter of investing responsibly, of course, but I do think that there is that element that we can use the charts even as a standalone at time for that top down investing.
- [29:03]
Ben Felix
I talked about one of them earlier, just that I think that the Policy Efficiency Monitor at Fiscal Policy Officials maybe are nearly as important as we think that other important drivers should at work. Mainly just the independent decisions being made by laissez faire, if you will. And I think that's what people miss. They spend far too much time wondering whether the Fed's going to cut or not or what tax policy is going to be passed. And I think while they're doing that, a lot of economic policies being implemented every day, every hour, week, and that's probably more important in driving things a little bit. I think the other thing I talked about was valuation losing its import, which I think most people think I'm nuts on going there with that. And then I also maybe just say too that in many ways I think Main street sentiment, cultural sentiment, what I call it, is far more important for investors than Wall street cinema. We have a lot of bull bear indicators and that kind of stuff. But I think what would what the, the real potential or risk of a stock market a lot of more often has to do with culture sounding on me. Look, I mean I spent most of my career worried that I was a fraud and that that was going to get exposed. Okay. And I would argue that if you don't sometimes worry about that yourself, you're probably a bit of a side Joe. Okay, so if you start that, that, that, that is a like, okay, if you don't have some level of insecurity, you know, equity investment isn't for you, okay? Like I mean that like you might get lucky, you might, you know, you might buy Amazon because you like to Kindle and be right for the wrong reason, but that doesn't mean you're going to equity investor, you know what I mean? So like I think I'm always worried about like obsolescence of me as a relevant person and just generally. And so I spent a lot of time thinking about like, where's the like, which stocks have high company specific risk, which starts or stocks are hard to replicate in a hedge basket. And then spend my time on those things. Like if I can have a differentiated opinion from consensus on those names, I'll differentiate the index more. And we give a lot of advice to our institutional clients on what we call available alpha. Like if I have alpha generating work widgets working for me, where should I deploy those people to separate from the index? So I, I spent a lot of time motivated by like generating performance versus the index because I feel like that's where I can add value still as a human and I hope that lasts. But that didn't directly answer your question. I'd Say, the most out of consensus view I have is that I think the market's telling me that the health care sector will be 0% chance is the best performing sector in the next five years in the equity market. And I think it's like 30 to 40% chance. And so I'm trying to find more health care stocks to own because I feel like they're the primary beneficiary and the productivity side because they're so unproductive today. And so it's. Anything that's been out of consensus has just been wrong. Those are synonyms. But I feel like that's the area that we could look back five years now and say, wow, there was a lot of innovation and a lot of stocks worked here. I think there's a real tendency to try and emulate famous traders and investors. You know, trying too much to be the new drug or the new Warren Buffett. You know, I don't think that they would try to be themselves second time round. So, you know, yeah, by all means, read your market wizards, understand what they do. Take little snippets or, oh, I haven't thought of that, or whatever from, from these, you know, these, these investment geniuses of the past. But you've got to, you've got to, you've got to, you've got to craft your own, your own channel, right? There's no right answer. And there's only, the only right answer is the one that's right for your personality. Because it's the enemy within that needs to be conquered. I think that, I think that in the, investing, in the investing world in general that, that people are not willing to change their asset allocations vary dramatically in response to changing expected return or expected risk, premia and risk. You know, there's this feeling that changing your asset allocation is market timing and market timing is bad. You know, I think market timing is, what we mean by market timing is something different than this, that it's rational to change your asset allocation, but that, you know, for whatever reasons people have. I think a lot of people think it's rational. They just don't want it. They're just afraid to do it or they're cautious about doing it and they know how it, if they had done it, how it would have been, and they're cautious about that. But I think that's probably one thing that, that I think so many different investors are not really agreeing with me on, which is that we should be dynamic in our asset allocation and pretty, pretty dynamic, you know, not just a couple of percent here or there, but, you know, but fairly, you know, fairly big changes in asset allocation can be warranted by different conditions. I think most investors these days are actually pretty well behaved. And I think a lot of people.
- [34:22]
Cameron Passmore
Look at like mom and pop and.
- [34:23]
Ben Felix
Retail investors and think, oh, they're the idiots, right? They're the ones making all the mistakes. And those, those people do exist. But I think investors are far more well behaved these days than they've ever been at any time in history of investing.
- [34:36]
Cameron Passmore
Because I think we have all these different avenues.
- [34:38]
Ben Felix
We have Automatic investing in 401ks and IRAs and tax loss harvesting and robo advisors and target date funds and all these things and index funds. And I think the general investing public has gotten better at investing than they were in the past. I don't think a lot of pros actually believe that. It comes back to something I talked about at the very beginning, which is core to my worldview, which is the predictability of growth. And I think that most investors implicitly or explicitly believe that historic revenue or EBITDA growth as predictive of future revenue or profit growth. And I do not think it is. And I think the empirical evidence supports the idea that you can learn almost nothing about the future growth of a company by looking at its historic financial statements. And I think that is the most controversial thing. And I think the implications of it are so massive that I'd say that that's my greatest point. Well, there's one phrase that just bugs me to death and almost all of my peers would use it. And they say something along the lines of, even the best investors are right only 60% of the time. You've heard must have heard that. Oh yeah, okay, so I verbally disagree. Okay, So I think, and some of the very best investors say this. Now it might be semantics, and I'm being very pedantic here, but investors often forget that making a great decision and experiencing a great outcome are quite distinct. Right? So poker players understand this very well because they play multiple hands in a single session and they understand that when they've made it, sometimes they make a decision, they get a terrible outcome, sometimes they make a terrible decision and they've got a great outcome. But investors forget this all the time. Again, I think it's a function of investors being pummeled by their clients for core short term performance. If they say, oh, but I made the right decision, that tend to not go down very well, but, you know, it should go down well and plans should recognize that that is a, you know, the Amount of noise, of volatility and luck, frankly, in the investment industry is much, much higher than any in any poker game, which is controversial, but I 100% believe that. So if you go back to 60, right, 60% of the time, the correct phrase should be that the best investors have a 60% success ratio. That is 60% of their holdings go on to experience winning outcomes. Okay? Now we've actually measured the percentage of good decisions that you need to make in order to get to that 60% outcome, and the answer's 90% or 95%. So you need to make great decisions 90% of the time or 95% of the time to have a measly 60% winner ratio. So there's very little room for error. And I think that's underappreciated. This is a really, really tough, tough business.
- [37:26]
Cameron Passmore
So I will preface this as saying that I, I went to school and I got degrees in history and economics, so. But I believe that we spend far too much time as historians and not nearly enough time as futurists, as investors. So I, I think anchoring to these periods, having experienced them, you know, there are so many things that have happened in history that were point in time that if you put the actual context around, you realize that they may be at all applicable to what you're experiencing today. And so I think in order to actually be a successful investor, you know, you have to think about what might be instead of what's happened in the past.
- [38:07]
Ben Felix
Options are not a derivative. They are the underlying. When people refer to options and all the volume increases and wow, the, the, the, the phrase that everybody uses, it's wow, the tail is starting to wag the dog. I'm here to tell you that options are the dog. What do I mean by that? Well, pretty simple. If you look at a stock or a bond or any asset, right, HUD people, it's two dimensions, either goes up or down. What if I gave you two stocks, white label, no name on it, same market cap, same industry, same everything. You would say, well, those are the same stock. What if I peel back that option train and show you that one is incredibly right distributed with a left tail. The time which that distribution is completely different and the growth trajectories are different, whereas on the other one it's the exact opposite. You know, very much a value stock, maybe, maybe left distributed, right fat tail in case they come up with a solution. Completely different stocks. The actual options are giving you nodes and probability across the full distribution of what this thing looks like at the end of the day that asset, whether it's a stock or bond, has a full three dimensional picture of its characteristics, of what the asset is. The asset itself is the thing, not the stock price, not the asset value. The asset value is just a summary of that full distribution by arbitrage. Every node on that distribution that represents this asset is summarized by one price, which is the asset price, the stock value, the bond value. Everybody started in that asset value, that very simple two dimensional world. And derivatives are new, so we call them derivatives because they're derived from this thing. But the reality is they're not a derivation. It's a better technology, it's a better way to full. We're going from two dimensional sheet. Do you know a hologram. You're seeing the whole thing in its full essence. And the reason it hasn't been used more until more recently. But again we've seen secular growth since I've been in the business for 25 years and it's been exponential. But the reason is is because of network effects. Much like a technology. Even if it's a better idea. You need to build infrastructure for and you need more volume and you need more participants for it to be an active and to become the core thing that people everybody uses. What have we had in the last 25 years since I started in the business? We.
- [40:40]
Cameron Passmore
We went.
- [40:40]
Ben Felix
When I started in 1998, we had one one quarterly expiration in the S&P 500 and options were. Were priced at every 3 to 5% in the market.
- [40:52]
Cameron Passmore
That's it.
- [40:53]
Ben Felix
Now we have every day we and by the way the multipliers were 250. We have every day expiration, we have every five points in the S and P. We have an option. We have options for every single major equity and every single asset across the world. We have more education, we have access through brokerage. And regulation has thinned out to allow much more access. Not to mention we've gone from 250 multiplier to 100 to 50 to 10 to 1 to now 0.1. It is incredibly available now and people are beginning to get educated understand. But the reality is we are still at the tip of the iceberg. It is a superior way to position based on information that you have on any asset. You can express any point without the say of taking the full risk of the whole asset at any point in time or moneyness on that asset. And that is just a superior risk, a way to express information. So my view is that the world is going to options and that options will be the primary way to, to invest in the future. And whereas even though notionally there's more trading volume and realistically it's still 1% of total investment, that happens in the market. And my belief is that if you look forward in 20 years, 40 years even, we will be in a completely different world where options sit at the core of investment. So I think the first one is tariffs don't matter that much. I think that's the first one I'll give you. So we'll blow up your comment section with that. And then the second one, I think is that you don't have to, you don't have to account for every single thing in your investment process. Right. I think, I think this is less of a thing where it's, it's less of a concern when you have a really seasoned quant that's been doing it for a really long time. It's kind of like the most common questions I'll always get is, you know, how the latest, you know, thing that's moving news is going to impact our portfolios, our signals, and about 50% of the time, I have no idea. You know, and I think as, as quantitative investors, we need to be comfortable with that. Like, there's a certain amount of the distribution that we're trying to explain that we think that we can explain and where there is no way that your investment process is going to be able to account for every single thing and you're going to be able to engineer solutions for every single thing. So I think, you know, as a macro investor, being on top of every bit of news, what the Fed did, what color tie, Powell War like, you know, it just doesn't matter that much. Staying focused on the things that matter and staying true to that. I think that that's something I generally think that my peers don't seem to do. Simple. Usually works better. Close your eyes. Exhale. Feel your body relax, and let go of whatever you're carrying today.
- [43:44]
Cameron Passmore
Well, I'm letting go of the worry that I wouldn't get my new contacts in time for this class. I got them delivered free from 1-800-contacts. Oh, my gosh, they're so fast.
- [43:52]
Ben Felix
And breathe.
- [43:53]
Cameron Passmore
Oh, sorry. I almost couldn't breathe when I saw the discount they gave me on my first order. Oh, sorry. Namaste. Visit 1-800-contacts.com today to save on your first order. 1-800-contacts. Here's to quitting. Quitting the couch for a quick run. Quitting the snooze button for a morning workout. Quitting Giving up after two weeks. You see, staying committed to your fitness goals isn't easy. But with Apple Watch, you don't have to do it alone because Apple Watch gives you real time motivation plus advanced metrics that track all your workouts so you can stick to your New Year's fitness resolutions. And once and for all, quit quitting with Apple Watch iPhone 11 or later required.
- [44:39]
Ben Felix
Yeah, I mean, I think it's, I think, I think people think that hedge funds, I think people think hedge funds gravitate to complexity because it's necessarily better. The very best hedge fund managers that, and investors that I know it comes out of simple bets and the geniuses are the ones who can see through all the noise to what the fundamental underlying bet is. And, and as it relates to our business, we made a simple bet. We made a simple bet that we could accurately figure out the big exposures in such an efficient way that we would have a structural alpha advantage by cutting out what we saw were a lot of fees and expenses. We wouldn't be right all the time, but we would have. But going back to that model of being right often enough, and if that works, simply why would you change it? But that's disappointing to investors. A lot of allocators, because they're so used, they're so conditioned to hearing. And I end up always asking the question, like, look, if quants are so good, if quant models are so good, how can so many quant products are so bad? If complicated products are so good, why don't they generate better returns than the S and P? And so I think that's. He mentioned this quote about Renaissance, the quant investing gods. There's this great quote from one of the early statisticians who said that their superpower in a sense was just doing these simple regression models, but they were pulling people who were doing field theory, string theory at Harvard to do. Because it's about asking the right questions and getting it right and resisting the temptation, as you say, to keep. Because, you know, with models, people love to keep changing them. It's very, very hard to. And there's pressure to change them because investors want to see that. And so, you know, for years when we were talking about it, it was the fact that we weren't change shading. It was viewed as being, you know, we're being lazy, we're not paying attention, we're this, that and it's, it's, it's, it's hard. It actually ended up being a very contrary bet. But I think people are coming around to it. I still believe that a lot of my peers would dis agree with me with the idea of how little work you would actually have to do to be a successful investor in terms of research. There's this famous investor whose name escapes me, had this idea of a thin folder when we used to actually collect cutouts, newspapers, notes in a folder. And when you really think about it, and there was somebody who reposted a Forbes article about Buffett, how he's looking for things that are simple, easy to explain. I think we get drawn into investing because we think it's such a fascinating intellectual puzzle that we go about it with full force that I'm going to turn every single stone and I'm going to do all this research. And now there's no shortage of tools that will allow you to do incredible research and really produce 100 page reports about every single company within minutes, if not seconds. The point is that the, you don't need to do such an incredible amount of work. If the business makes sense, you can explain it in a simple sentence. If you cannot, I choose not to own it. I don't have anything in my portfolio that would take me, you know, more than a minute or two to explain why I hold it. And it's not that they're dumb businesses, they're doing incredible things, but the actual underlying thesis behind it is very, very simple. And as long as it applies no matter what the quarterly earnings look like, I'm going to hold on to them. And I felt for on things, held on to things for a decade or more. I mean it's, it's nothing unusual for me, but the amount of work that goes in, I would question that. You need a hundred page write up. And I think a lot of my colleagues would tell me that I'm crazy, but I'm going to say it. I think if you can explain it with a paragraph, I think you'll do just fine. The fees, I think advisor fees are. Advisor fee should be advisor fee for advice and asset management fee should be fees for asset management. I believe there should be a separation of the two. So if you're an advisor and you do both, you provide advice and you provide asset management. I believe they both should be separate line items on a report, you know, fee report. And it shouldn't all be lumped together in one wrap fee of. Call it 1% because I think that ends up overcharging the client for the advice side. So decide what you're going to charge the client for asset management. And it should Be reasonable. I mean, Vanguard charges 30 basis points. I think that's a fair fee. And then you're going to charge them maybe also fee for advice, which may be a flat annual fee. So I think they should be separated because there are two separate businesses that you're providing, two separate services you're providing. And I think I, I disagree with a lot of my peers on that point. If probably the biggest point I disagree with on.
- [49:43]
Cameron Passmore
I believe very strongly in a multidisciplinary approach to investing. And I think that there's never one school of thought, one, one answer to a single problem, which means that you have to look at the question of whatever you're looking at within markets from multiple different angles and multiple different disciplines. The best analogy I have for it is, is the, the men in the dark room feeling different parts of an elephant and not knowing what they're. And some people think it's a tree trunk and some people think it's a rope. That the way that we kind of illuminate that is by looking at technicals, looking at top down macro, looking at bottom up fundamentals, looking at quantitative, looking at, at, at behavioral and pulling them all together, knowing that they're going to disagree and they're going to tell you different messages about what's going on. But what, you know, what's the, the, the F. Scott Fitzgerald quote of the definition of intelligence is being able to hold two conflicting ideas in your mind at the same time. And I don't remember how the quote ends, but something like, you don't lose your mind. The whole point is to take from all these different methodologies of seeing the world, respecting them for their process and understanding the different regime that some work versus at different times versus others. So some people will throw out technicals and be like, I don't believe in it. It's all, it's all witchcraft. And I completely disagree. I think that it's an incredibly powerful tool when combined with a bunch of other methodologies. You know, when I saw that question, and I'm glad I saw that before I came on, because I really gave that some deep thought. I'm old school. I was trained old school. My aunt trained me right. And she came into the markets in 1956. She was a trailblazer. She was the first woman trader at Ladenburg Fleming. Of course, she didn't start as a trader. She started as a secretary. And back in those days, you know, Warren Buffett days, you bought blue chip companies and you held them and you collected dividends. And I still Believe in that strategy. I believe that that can fit in a portfolio. May not fit every client, but I still believe in that strategy where you should own good companies and collect a dividend. And if you can reinvest that dividend, now, baby boomers, retirees may want to have that cash flow right. And over time get appreciation, but it's a great way of compounding your returns. Over time, the market has become so focused on products, you know, ETFs for a form of investing. And I am not against ETFs, I am all for ETF investing and I'm not against products. But I do believe you can have a portion of your portfolio invested in blue chip companies.
- [52:26]
Ben Felix
I would say that it's turnover. I think there's a kind of a universal reaction to turnover as turnover being bad. And so I think I would differ most saying that, well, turnover should always be a reflection of the underlying strategy. So like in a value strategy, if you have a five year horizon. Yeah. Then high turnover is probably not good because you're not, you're not, you're not, you're not, you're not executing on that strategy. Right. But for a momentum strategy, you know, you don't want a momentum strategy with low turnover. That much I know. So I think, you know, the fact that turnover being universally bad is probably, you know, one thing that I differ with. I think it just depends on the strategy and what you're trying to accomplish. And so I don't think there's one answer, you know, high turnover, bad, low turnover, good. It really is that I just hear so much, what is your catalyst? You know, what is going to unlock value. And for us, you just, you really don't need a catalyst. What you need is to get the valuation right and to get the governance right. And, you know, as long as the company's gonna give you that cash back, you're happy. We're happy to have a low, low valuation. We're fine to sit at a low PE for a long time. If the management team does the right thing. That means we get a big dividend yield and they can buy back a lot of their shares and grow earnings really fast by doing it. So that's the number one thing I see people talk a lot about where I, why I don't agree with it. I think the majority of people would disagree with me on tariffs. I remember in like 2001, 2002, Lou Dobbs was going on Fox News and talking about tariffs and protectionism and stuff like that. And he was so like, he was not reading the room like people. It's kind of hard to remember what this was like, but back in the 90s and the early 2000s, like we were very much a free trade country. You know, people saw the benefits of free trade and over the last 20 years, like that's changed a lot. And I find myself consistently on the other side of people. It's almost to the point where I can't even really talk about it in my newsletter because people get upset. Like if I say pro free trade things, like people get kind of cross with me. So it's like I. Have you ever heard of the allegory of the sandwich? You ever heard of this story? Possibly. Who's this from? So the allegory of the sandwich is, let's say you're going to make a sandwich, but you're going to do it all yourself. You're not going to trade with anybody. So you need to grow wheat in your backyard and mill it into flour and make the bread and you need to raise hogs and slaughter the hogs and cure the meat and make ham and you need to grow lettuce and you need to grow tomato and I don't know where the hell you get mustard. So making one sandwich is like 10,000 hours worth of work, right? Where obviously you could just take money and go to the store and trade and get the ingredients for a sandwich. Trade is mutually beneficial transactions, makes everybody richer all the time. Right? So I, I'm very much opposed to what's going on right now. And by the way, I. One other thing point I'd like to make about that. You know, it's funny because the Democrats have become very much free traders over the last couple of months in opposition to Trump. My guess is if a Democrat wins in 2028, they're not going to get rid of the tariffs. The tariffs will stay. Right. It's, it's part of the zeitgeist. Like we are against free trade now. So I think we're in for a little bit of a dark time. The environment today is fundamentally different from the environment of the past 10, 20 years, even the past 40 years. Corporate, the investor world today believes that shareholder maximizing shareholder value is a unequivocal truth that they have been raised in an environment where the shareholder always comes first and their decision making reflects that bias. I don't believe the shareholder comes first anymore. I think the shareholder at best is third or fourth. Given the, the environment of dominant leaders that we have today. I don't like if it was pure peers for micro cap that are also micro cap investors. I don't think there's too many. I don't think there's anything that my peers who are also experienced microcappers would generally disagree with me on. I agree with Emily. I think that it would be just like a lot of things with investing. I think alpha is generated in a lot of small ways where we're, we, we agree, but it's just executed slightly differently. And I think that's how I'd answer that question. If I was directed towards other experienced microcap investors for peers that are investors in general but not micro cap investors. I would say probably. And we hit on this already. I think just the belief that low turnover is good and high turnover is bad. You know, I think that's where I would disagree with a lot of folks, you know, in generally on financial. Yeah, so I actually think that this is a really, really good question. So trading psyche in our opinion is extremely important. But a lot of guys in the volume space are, are like quant based and they tend to on that quite a bit. And I, I don't understand why, because I think if you go back and you look at some of the great traders that have come across, you know, all these years, guys like Paul Tudor Jones at Thorpe Druckenmiller, all those guys talk about like how important your trading psyche needs to be. So it's probably a controversial take with like the, the nerds in the space, but probably an uncontroversial take with the people who actually have done well. The idea that the most you can make is like what a top hedge fund makes. So the idea that, you know, you've got, I don't know, Bridgewater or whatever, and they make, you know, 9% a year, you know, so if Ray Dalio and his group of, you know, eggheads can make 9%, what's the chance you can only make 9%? That's total nonsense. There's all kinds of prop firms out there that make hundreds of percent per year and go to like, just go to the news and look at Jane street, look at Optiver, look at these prop firms that are just printing money year in, year out. And the idea that you can't time markets, that's also not true. You can totally time markets. So I would encourage people to learn more and try to figure out how to make money in the marketplace because there's tons of opportunity once you figure out what your niche is. So just the overall idea that I can't make money.
- [59:49]
Cameron Passmore
Everybody who Trades options, loses money.
- [59:51]
Ben Felix
Not true at all. Tons of people make money consistently trading options. I'm one of them.
- [59:55]
Cameron Passmore
So we can kind of continue on this AI theme because why not?
- [59:59]
Ben Felix
So, you know, a lot of folks.
- [60:03]
Cameron Passmore
Are pretty concerned about AI taking our jobs, not just in finance, but at least in our industry. Portfolio managers, financial analysts. So I actually wrote a paper on this, I actually wrote a few papers on this topic of how will AI LLMs impact our industry and our jobs. And I think the first thing to note is what I just told you guys just now, which is that I think that trying to use large language models to replace the kind of capital allocation component of investing. So in other words, hey, here's factors U of a thousand factors, find the best ones based on historical correlation with returns is non starter. I think that's actually not the way to do it. And I've written papers on this on why not. I think that the killer use case of AI and this was the 2020 paper I wrote where I said you don't want to do the first thing, but what you do want to do is to use large language models as a way of structuring unstructured data. I specifically called out this technology and said that this is the killer use case. And I think over the past five or so years since that paper came out, it's basically become common knowledge. Most people will agree that what large language models are good at doing is working with unstructured data. So now to take us to my point is in my last paper on AI financial analysts, one thing I did was I said let's look at the job of a financial Analyst or a PM and you can decompose it into say 20 or 30 different tasks. These are individual things like creating PowerPoints or mapping Q6, whatever, right? And it turns out that you can then ask the LLM or figure out which of these individual tasks are better accomplished using a large language model and which are better accomplished using a human. And the results are intuitive, right? Talking to clients, building your business, that's human. Using creativity to come up with new investment strategies, that's human. Creating PowerPoints, that's better by machines, proofreading. And so it turns out that about half of the tasks of an analyst today are better with large language models and half are with humans. And so you think about what our jobs are. They're just bundles of tasks. I don't see us kind of like net necessarily losing jobs. I just see a repackaging of those jobs. You almost think of a new AI enters The workforce, they take up the things that they're better at and you're left with the things that you're better at, which I think I'm pretty optimistic in general. I think that's actually a good thing. Right. I don't want to sit here map infusives. I don't want to sit here building security masters again. I don't want to sit here proofreading a PowerPoint. I want to sit here exercising high level thought and utilizing empathy and social skills to talk with other humans. So I think in many ways it's a positive development. And you think about the history of the labor markets over the past 200 years, there's been massive technological change. We went from being 90% agrarian to what, 2% now? And despite that, the employment rate has basically been the same. There's all these new jobs that have been created because of technology. Pilots, flight attendants, prompt engineers. And throughout this period we've seen just a massive increase in the wealth of society. So I think, yes, the jobs will be different moving forward, but we'll all be probably better off for AI and at least for those of us who are, you know, thoughtful about competitive advantage, thoughtful about exercising, you know, development and training our ability in areas that AI are less competitive, I think, you know, we're actually, you know, going to have a better time, you know, doing kind of more meaningful work than in the past.
- [63:35]
Ben Felix
Well, I would kind of get back. What I was just talking about is that you really can't forecast market and I think people would disagree with that. But there have been so many times we have expectations and your clients want to know what we think is going to happen. But we're not going to allocate based on that. We're not going to take a position based on that. So I think it's the idea you can forecast the market. We don't think you can. And we don't try to put out forecasts. We don't say that like you said earlier, the S P is going to this level. We don't do that kind of forecasting. And that, you know, I think the benefit of that is that if you. I remember way back, I think it was 1987 when 88, somewhere in there and there was a presentation and Ned Davis, the founder of the company, came out and he was wearing a green tie and he gave a really bullish presentation. And they said, oh, I brought, I brought the wrong tie, goes back, changes ties, puts on a red tie and.
- [64:38]
Cameron Passmore
Gave a bearish presentation.
- [64:39]
Ben Felix
So the point is, you can really make any case you want, especially when you have as much data and indicators as we have to support any argument you want to make. And so the danger of that is that if you have a view and you really want to support it, you will, but you end up on the wrong side of a major move and you end up losing money. So that would be my answer to the question. The bet that we've been making at Intelligent Alpha is that if we fast forward to clock a decade from now that the AI powered asset management industry will be a multi trillion dollar AUM industry. So just like we've seen this boom in in ETFs and indexing over the past 2030 years, I think you will see a similar boom in AI powered investing. Some of that will look active, some of that might look a little more passive, some of that might look even a little more exotic. But I think we're here chatting in 2035. I think Cliff Estes just did a prediction piece 2035. My prediction would be that we'll see a few trillion dollars being managed. Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess Returns network@excessreturnspod.com. if you have any feedback or questions, you can contact us@xcessreturnspodmail.com no information on.
- [65:59]
Cameron Passmore
This podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.