Podcast Summary: "Old Man Yells at the Cloud"
Title: The Compound and Friends
Episode: Old Man Yells at the Cloud
Release Date: November 22, 2024
Host: The Compound (Downtown Josh Brown, Michael Batnick)
Guest: Cliff Asness, Founder and Chief Investment Officer at AQR Capital Management
1. Introduction to Cliff Asness
The episode kicks off with Downtown Josh Brown and Michael Batnick warmly welcoming Cliff Asness, a revered figure in the investment world. Cliff shares nostalgic anecdotes about his early days, including his adeptness at fractions—a skill he humorously deems "useless today."
Cliff Asness [00:00]: "I'm old enough, of course, that I can do sixteenths and eighths math pretty well, which is useless today..."
2. Personal Anecdotes and Early Career
Cliff reminisces about the old payment methods using "eights and teenies," highlighting the bygone moments of his career.
Cliff Asness [00:36]: "I'd like a dime bag of Ginny Tens anyway."
The conversation then shifts to Cliff's tenure at Goldman Sachs, his transition to founding AQR Capital Management, and the challenges faced during this pivotal career move.
3. Transition from Goldman Sachs to AQR
Cliff details his departure from Goldman Sachs, emphasizing the creation of a new quant group independent of the firm's constraints.
Cliff Asness [02:19]: "We did stay about three weeks after a few of us quit to transition to the people who would take over for us which I think went a long way to smoothing over the relationship."
He discusses the initial independence of AQR, not being incubated within Goldman Sachs, and the ensuing tensions with former colleagues and the broader investment community.
4. Public Commentary on AMC and Market Reactions
Cliff shares his experience appearing on CNBC to discuss AMC, a prominent meme stock, and the subsequent backlash from the retail investor community.
Cliff Asness [05:37]: "Individual stocks is just, you guys know, not something you ask a quant about."
He candidly addresses the challenges of being labeled a "public enemy" by meme stock enthusiasts after his remarks.
Cliff Asness [08:06]: "I learned that I was actually saying that they could be right for all the quant stuff in the world."
5. The Less Efficient Markets Hypothesis
The core of the discussion revolves around Cliff's recent research on market efficiency, where he posits that markets have become less efficient over the past three decades.
a. Overview of the Hypothesis
Cliff asserts that the stock market's efficiency has declined, making disciplined value-based stock picking both riskier and potentially more rewarding in the long term.
Cliff Asness [24:25]: "I'm more sure that periods like the .com bubble 99-2000 and then 19 and 20 culminating but not caused by Covid. It was already as we measure it crazy pre Covid."
b. Three Hypotheses for Declining Efficiency
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Indexing and Passive Investing: Cliff argues that the rise of passive, cap-weighted indexing has reduced the number of active managers, potentially leading to less price discovery and increased inefficiencies.
Cliff Asness [62:49]: "Indexing is the devil or it's absolutely nothing to do with it."
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Prolonged Low Interest Rates: The era of extended low interest rates has influenced investor behavior, correlating with wacky market activities and misplaced optimism.
Cliff Asness [61:14]: "If you have super low interest rates, but it is correlated with some wacky behavior."
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Technological and Social Media Impacts: The advent of social media and instantaneous information dissemination has created environments where markets can be swayed by irrational mobs rather than independent, informed decision-making.
Cliff Asness [85:19]: "I'm saying this could be a reasonably part of crazy episodes."
c. Impact of Technology and Social Media
Cliff delves into how social media platforms foster echo chambers, leading to extreme market movements and reducing overall market efficiency.
Cliff Asness [86:07]: "Markets being efficient depends at least a fair amount on the famous idea of the wisdom of crowds. But the wisdom of crowds depends on a relatively independent crowd."
6. Volatility Laundering and Private Markets
The discussion transitions to the concept of volatility laundering in private equity and credit markets. Cliff critiques how private investment firms report lower volatility figures by not reflecting true market risks, misleading investors about the actual risk-return profiles.
Cliff Asness [79:02]: "I've seen more extreme numbers in private credit..."
He emphasizes the disparity between reported volatilities and real market exposures, underscoring the challenges investors face in assessing true risks.
7. Pet Peeves: Misrepresentation in Investments
Cliff expresses frustration with misleading representations in investment opportunities, particularly in private markets where transparency is often lacking.
Cliff Asness [86:46]: "How you just throw in A random insult to Michael straight away."
He underscores the importance of honesty and transparency, admonishing the behavior of firms that deceive investors about their strategies and risk levels.
8. Favorites: Comics, Movies, and Personal Interests
Shifting to lighter topics, Cliff shares his passion for Marvel comics, appreciating their relatable characters and real-life problems compared to more fantastical storytelling.
Cliff Asness [96:43]: "I was a Marvel more than a DC person. I liked dc. I read them, but I was Marvel."
The conversation also touches on favorite movies, with Cliff expressing enthusiasm for certain Marvel films while critiquing others.
Cliff Asness [97:14]: "I like the Snyder cut. Was the full Justice League Snyder cut."
9. Closing Remarks and Ways to Follow Cliff Asness
As the episode wraps up, Josh Brown and Michael Batnick encourage listeners to follow Cliff Asness's work through his blog and Twitter handle for more insights.
Cliff Asness [103:30]: "That's my blog. It's very sporadically done... If you go to AQR's website, there's a section called Cliff's Perspective."
Notable Quotes:
- Cliff Asness [00:00]: "I'm old enough, of course, that I can do sixteenths and eighths math pretty well, which is useless today..."
- Cliff Asness [08:06]: "I learned that I was actually saying that they could be right for all the quant stuff in the world."
- Cliff Asness [24:25]: "I'm more sure that periods like the .com bubble 99-2000 and then 19 and 20 culminating but not caused by Covid. It was already as we measure it crazy pre Covid."
- Cliff Asness [62:49]: "Indexing is the devil or it's absolutely nothing to do with it."
- Cliff Asness [85:19]: "I'm saying this could be a reasonably part of crazy episodes."
- Cliff Asness [86:07]: "Markets being efficient depends at least a fair amount on the famous idea of the wisdom of crowds. But the wisdom of crowds depends on a relatively independent crowd."
This episode offers a deep dive into the evolving landscape of market efficiency, the implications of passive investing, and the intricate dance between technology and investor behavior. Cliff Asness provides a blend of personal anecdotes, rigorous academic insights, and candid opinions, making this a compelling listen for those keen on understanding the complexities of modern investing.