1 00:00:00,840 --> 00:00:02,720 Ladies and gentlemen, welcome to the business Brew. 2 00:00:02,760 --> 00:00:06,000 I am your host, Bill Brewster. As always, this episode features 3 00:00:06,000 --> 00:00:08,840 Dan Rasmussen, founder of for Dad Advisors. 4 00:00:09,400 --> 00:00:12,320 Dan recently wrote a book called The Humble Investor. 5 00:00:13,760 --> 00:00:17,200 It's a it's a great read, especially for those. 6 00:00:17,280 --> 00:00:19,760 Well, I say it in the episode that that like sort of academic 7 00:00:19,760 --> 00:00:23,400 books, you're going to get some confirmation bias if you like 8 00:00:23,400 --> 00:00:27,640 the value factor and you're going to get questioned if you 9 00:00:27,680 --> 00:00:31,400 are a fan of private equity. Dan also has some interesting 10 00:00:31,400 --> 00:00:33,160 research on the profitability factor. 11 00:00:33,640 --> 00:00:35,640 So I would recommend to go out, pick it up. 12 00:00:35,640 --> 00:00:39,440 Also go to for Dad. Let's see, what is it for 13 00:00:39,440 --> 00:00:46,920 dadcap.com, VERDAD, Cap C, ap.com, and you can sign up for 14 00:00:47,000 --> 00:00:49,240 for Dad's weekly research. It's great stuff. 15 00:00:49,720 --> 00:00:53,920 Dan and his team, I refer to them as a Mensa organization in 16 00:00:54,480 --> 00:00:57,040 the podcast. Just go look up who's on the 17 00:00:57,040 --> 00:01:00,920 team and look at their BIOS. It's a smart group, so I hope 18 00:01:00,920 --> 00:01:03,760 that you enjoy the conversation. I enjoyed having it and I think 19 00:01:03,760 --> 00:01:07,600 that Dan is going to challenge conventional wisdom in this one. 20 00:01:09,280 --> 00:01:12,960 As always, nothing in this episode is financial advice. 21 00:01:12,960 --> 00:01:15,160 All of this is for entertainment purposes only. 22 00:01:15,520 --> 00:01:17,880 Please consult your financial advisors before making 23 00:01:18,160 --> 00:01:20,760 investment decisions and do your own due diligence. 24 00:01:22,480 --> 00:01:25,680 This episode is sponsored by fiscal dot AI. 25 00:01:26,040 --> 00:01:29,440 Please use the code fiscal dot AI forward slash brew. 26 00:01:29,520 --> 00:01:32,240 Again, that's fiscal dot AI forward slash brew should you 27 00:01:32,240 --> 00:01:37,240 want to try out the product for two week free trial and get 15% 28 00:01:37,240 --> 00:01:41,640 off any paid plans. You may have listened to my 29 00:01:41,640 --> 00:01:43,920 episode with Brayden. If you have not, please go 30 00:01:43,920 --> 00:01:46,480 listen to it. It's the one. 31 00:01:46,480 --> 00:01:50,400 It's a very good episode two. It's the actual pitch for fiscal 32 00:01:50,400 --> 00:01:57,040 AII can give you what I would been sort of told to read or not 33 00:01:57,040 --> 00:01:59,760 told, but you know, we discussed it and they were like, hey, you 34 00:01:59,760 --> 00:02:01,760 should talk about this. So what should I talk about? 35 00:02:01,760 --> 00:02:05,720 Fiscal dot AI forward slash brew is the complete modern data 36 00:02:05,720 --> 00:02:09,240 terminal for global equities. The fiscal dot AI forward slash 37 00:02:09,240 --> 00:02:12,560 brew platform combines a powerful user user experience 38 00:02:12,560 --> 00:02:15,000 with all financial data capabilities that professionals 39 00:02:15,000 --> 00:02:17,080 need. 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Dan Rasmussen, the Slayer of 63 00:03:59,200 --> 00:04:02,280 sacred cows. I love it. 64 00:04:03,400 --> 00:04:05,600 There you have it. So I'm glad you approved. 65 00:04:05,760 --> 00:04:08,600 I think everybody should be pretty familiar with your work, 66 00:04:08,600 --> 00:04:11,040 but for those that are not, you want to go into your background 67 00:04:11,040 --> 00:04:13,040 a little bit. Yeah, sure. 68 00:04:13,040 --> 00:04:16,720 So I graduated from Harvard in 2009. 69 00:04:16,720 --> 00:04:19,640 During college I interned at Bridgewater Associates. 70 00:04:19,880 --> 00:04:23,480 Then I spent a few years working in Bain Capital private equity. 71 00:04:23,600 --> 00:04:26,240 I left there to go to Stanford Business School and I founded 72 00:04:26,280 --> 00:04:28,800 Verdad Advisors while I was in Business School. 73 00:04:28,920 --> 00:04:32,680 We've grown from about 8 million under management, a little about 74 00:04:32,680 --> 00:04:36,280 about 1.2 billion today across a variety of different strategies. 75 00:04:36,320 --> 00:04:38,520 And I just published a book called The Humble Investor, 76 00:04:38,520 --> 00:04:42,160 which lays out my investment philosophy and describes some of 77 00:04:42,160 --> 00:04:45,560 the lessons from the last 10 years or 11 years of running for 78 00:04:45,560 --> 00:04:47,840 Dad. Yes, and the book is is quite 79 00:04:47,840 --> 00:04:50,000 good. I recommend especially those 80 00:04:50,000 --> 00:04:52,320 that that enjoy academic type books. 81 00:04:52,640 --> 00:04:55,760 I think that that this one is a a very strong read. 82 00:04:56,200 --> 00:05:01,920 I was I was perusing your company's sort of BIOS. 83 00:05:02,440 --> 00:05:05,720 How did you how did you get a Mensa corporation over there? 84 00:05:05,720 --> 00:05:08,400 What what happened? You're you're you. 85 00:05:09,360 --> 00:05:10,800 And then what? What did you say you were like, 86 00:05:10,800 --> 00:05:13,600 I'm only hiring people smarter than me and there's like 3 87 00:05:13,600 --> 00:05:17,240 people on the earth. And that's how the firm became 88 00:05:17,240 --> 00:05:19,960 what it is. Yeah, it's, it's we've, we've 89 00:05:19,960 --> 00:05:23,480 sort of grown slowly and carefully as we met people that 90 00:05:23,480 --> 00:05:27,840 were really excellent and a team of eight now and then we have a 91 00:05:27,840 --> 00:05:30,480 professor at Harvard Business Schools, our consultant. 92 00:05:30,600 --> 00:05:32,680 But I think we're a research shop, right? 93 00:05:32,680 --> 00:05:34,680 I mean, we, we write research, we do research. 94 00:05:34,680 --> 00:05:37,480 That's the day in, day out. And so we're looking for people 95 00:05:37,480 --> 00:05:39,520 that really love that. And if you come to our office, 96 00:05:39,520 --> 00:05:42,240 it's like a think tank. It's quiet, everyone's goes and 97 00:05:42,240 --> 00:05:43,480 works. And then you know, like, Oh my 98 00:05:43,480 --> 00:05:45,480 gosh, I discovered this, you know, come and look and you 99 00:05:45,480 --> 00:05:48,760 know, we all pile in and and it's a wonderful, wonderful 100 00:05:48,760 --> 00:05:50,520 culture. And I'd say what's probably not 101 00:05:50,720 --> 00:05:53,800 in everyone's BIOS, we also have a strong college athlete 102 00:05:54,360 --> 00:05:56,080 profile. There's a lot of rowers, 103 00:05:56,080 --> 00:05:59,320 swimmers, runners. So I think this sort of team 104 00:05:59,320 --> 00:06:02,280 athlete approach also is a contributor to our culture as 105 00:06:02,280 --> 00:06:03,760 well. Yeah, that makes sense. 106 00:06:04,160 --> 00:06:06,680 That makes a lot of sense. So how do you, how do you want 107 00:06:06,680 --> 00:06:10,480 to go about this interview? I mean, the, I guess the way 108 00:06:10,480 --> 00:06:14,320 that I would start and where I feel like your branding sort of 109 00:06:14,320 --> 00:06:17,400 historically was at least until I read this book and maybe it's 110 00:06:17,600 --> 00:06:22,040 my perception, but you are the man that crusades against over 111 00:06:22,040 --> 00:06:24,600 allocations to private equity, in my opinion. 112 00:06:25,600 --> 00:06:28,640 You want to maybe start there and then we can go to what you 113 00:06:28,640 --> 00:06:31,040 found elsewhere. Yeah, sounds good. 114 00:06:32,400 --> 00:06:36,120 So, so you, I, I believe what you, you're pointing out that 115 00:06:36,120 --> 00:06:39,400 there are some endowments that have upwards of $40.40 percent 116 00:06:39,680 --> 00:06:41,960 allocations to private equity. Is that accurate? 117 00:06:43,080 --> 00:06:45,760 Yeah, that's right. I mean, I think that essentially 118 00:06:45,760 --> 00:06:49,520 the private equity returns up until two or three years ago 119 00:06:49,520 --> 00:06:52,680 looked to be sort of consistently 2 to 3% above the 120 00:06:52,680 --> 00:06:55,120 public equity markets. And because of the way the 121 00:06:55,120 --> 00:06:58,320 volatility was reported, when you looked at it looked like it 122 00:06:58,320 --> 00:07:01,280 had the volatility of investment grade bonds and about half the 123 00:07:01,280 --> 00:07:03,200 volatility of the public equity market. 124 00:07:03,280 --> 00:07:05,960 And even though everyone said, oh, we knew, we know that's not 125 00:07:05,960 --> 00:07:07,920 true. And we, you know, we think of it 126 00:07:07,920 --> 00:07:09,920 differently. That was a pretty nice feature. 127 00:07:09,920 --> 00:07:12,920 And So what happened is that the endowment and foundation were 128 00:07:12,920 --> 00:07:15,520 all just went whole hog, right? They sort of said, well, we're 129 00:07:15,520 --> 00:07:18,000 permanent capital if this has better returns. 130 00:07:18,000 --> 00:07:21,160 And we like the risk profile, you know, why wouldn't we just 131 00:07:21,160 --> 00:07:23,960 take it to the Max? And they were encouraged to do 132 00:07:23,960 --> 00:07:27,680 that by investment consultants. And so you saw this this 133 00:07:27,680 --> 00:07:30,560 ratcheting up over time, you know, where pension funds are 134 00:07:30,560 --> 00:07:35,080 maybe 1520 and most of the top endowments are 40, even 50 135 00:07:35,680 --> 00:07:38,480 percent privates. It's just this massive love 136 00:07:38,480 --> 00:07:43,000 affair with an asset class. And you know, my theory of 137 00:07:43,000 --> 00:07:45,560 investing, which I write about in the Humble Investor, is this 138 00:07:45,560 --> 00:07:49,280 idea of that investing is not a game of analysis. 139 00:07:49,280 --> 00:07:51,480 It's a game of meta analysis. It's not what you think. 140 00:07:51,480 --> 00:07:53,680 It's about what everyone else, what you think relative to what 141 00:07:53,680 --> 00:07:56,680 everyone else thinks. And so I think I'm very focused 142 00:07:56,680 --> 00:07:59,400 on correlated beliefs that are wrong. 143 00:07:59,400 --> 00:08:03,880 And I think correlated belief among these top great minds and 144 00:08:03,880 --> 00:08:06,520 investing that private equity and private credit are the best 145 00:08:06,520 --> 00:08:09,400 thing since sliced bread is the single biggest investment 146 00:08:09,400 --> 00:08:11,120 mistake being made by smart people today. 147 00:08:11,120 --> 00:08:14,360 And it's a particularly salient thing right now because as that 148 00:08:14,360 --> 00:08:17,160 smart money has gotten burned, and we can talk about what's 149 00:08:17,160 --> 00:08:20,040 happened as last year or two have been quite dramatic as 150 00:08:20,040 --> 00:08:22,160 they've started to get their fingers burned by private 151 00:08:22,160 --> 00:08:25,160 equity, their fundraising, private equity fundraising has 152 00:08:25,160 --> 00:08:26,600 dropped. And private equity is now 153 00:08:26,600 --> 00:08:28,560 searching for new pools of capital. 154 00:08:28,560 --> 00:08:31,200 And there's a new pool that's being targeted, which is your 155 00:08:31,200 --> 00:08:33,600 4O1K. And so I think it's very topical 156 00:08:33,600 --> 00:08:36,159 to understand, you know, the sort of Arc of private equity, 157 00:08:36,600 --> 00:08:40,880 what's going on in it right now and why these why, what the 158 00:08:40,880 --> 00:08:43,600 sales pitch is and why it's why it's why it's wrong. 159 00:08:44,520 --> 00:08:49,320 Yeah, it's, I mean, it seemed to me that I can understand why 160 00:08:49,320 --> 00:08:51,120 people don't want to see real marks. 161 00:08:51,120 --> 00:08:53,760 So to the extent that they're willing to maybe give up a 162 00:08:53,760 --> 00:08:58,400 little bit of return in order to pretend, I guess I, I don't see 163 00:08:58,400 --> 00:09:02,160 that as completely irrational. It's maybe suboptimal, but not 164 00:09:02,160 --> 00:09:06,800 irrational. But the thing that is wild to me 165 00:09:06,800 --> 00:09:13,520 is I, you know, there are, I, I talked to somebody who when I, I 166 00:09:13,520 --> 00:09:16,880 guess it was 2021, maybe it was 2022, whatever. 167 00:09:16,880 --> 00:09:22,000 When, when mid American and Camden and the the Reitz re 168 00:09:22,000 --> 00:09:25,720 rated downward conversation that I had somebody said, you know, 169 00:09:25,720 --> 00:09:29,520 well, B REIT mark their NAV down a little bit this year too. 170 00:09:29,560 --> 00:09:33,000 And I asked what it was and I forget the exact number, but it 171 00:09:33,000 --> 00:09:35,200 was definitely single digits. And I was like, you're telling 172 00:09:35,200 --> 00:09:39,000 me that the big publicly traded Reit's that are less levered are 173 00:09:39,000 --> 00:09:45,360 down 30%, but a private REIT is down like maybe 9 Max, right? 174 00:09:45,360 --> 00:09:47,640 Like that doesn't make sense to me. 175 00:09:48,200 --> 00:09:54,320 And you know, I guess as long as if I'm an RIAA, as long as I 176 00:09:54,320 --> 00:09:59,120 have some defensible position to put in front of my clients and 177 00:09:59,120 --> 00:10:03,080 it locks up capital for 10 years and everybody's making money 178 00:10:03,080 --> 00:10:06,080 along the lot along the way. And I get invited to nice 179 00:10:06,080 --> 00:10:08,480 dinners and not just Rias. It can be anybody, right? 180 00:10:08,480 --> 00:10:11,400 But like, the incentive structure makes sense to me, but 181 00:10:11,400 --> 00:10:14,200 the actual outcomes do not. Yeah. 182 00:10:14,600 --> 00:10:18,280 So I think, and this is a really important, I think you need to 183 00:10:18,280 --> 00:10:23,800 develop sort of an intuition around what private equity is to 184 00:10:23,800 --> 00:10:26,080 kind of come to the common sense conclusions about it. 185 00:10:26,080 --> 00:10:29,800 So I'll walk you through sort of what private equity is. 186 00:10:30,080 --> 00:10:32,600 So first of all, you know, you can think in terms of market 187 00:10:32,600 --> 00:10:35,760 size. The S&P 500 is about 500 188 00:10:35,760 --> 00:10:38,040 companies that are worth an aggregate 50 trillion. 189 00:10:38,360 --> 00:10:41,160 Then there are 2000 small cap companies in the US which are 190 00:10:41,160 --> 00:10:43,120 part of the Russell 2000 small cap index. 191 00:10:43,120 --> 00:10:46,680 Those are two trillion, right? So a lot more companies, but a 192 00:10:46,680 --> 00:10:49,680 lot smaller. And then private equity is about 193 00:10:49,680 --> 00:10:54,040 a $2 trillion asset class in the US and there are 12,000 private 194 00:10:54,040 --> 00:10:57,200 equity backed companies, right. So if you think of the, you 195 00:10:57,200 --> 00:11:01,560 know, the sort of Russell 2000, these are, you know, order of 196 00:11:01,560 --> 00:11:04,920 magnitude or two smaller than the S&P 500 and private equities 197 00:11:04,920 --> 00:11:06,720 yet another order of magnitude smaller. 198 00:11:07,440 --> 00:11:10,560 And so you should have an intuition around the differences 199 00:11:10,560 --> 00:11:12,320 between small and large companies, right? 200 00:11:12,320 --> 00:11:15,280 If you're going from one extreme is your local restaurant or dry 201 00:11:15,280 --> 00:11:18,840 cleaner and the other extreme is NVIDIA or Apple, you should have 202 00:11:18,840 --> 00:11:22,560 the intuition that smaller companies are much riskier, much 203 00:11:22,560 --> 00:11:25,920 lower margin, much less diversified, etcetera, a much 204 00:11:25,920 --> 00:11:28,680 more likely to go bankrupt. All these things are true of 205 00:11:28,680 --> 00:11:31,760 small companies. Of course, your local restaurant 206 00:11:31,760 --> 00:11:35,680 could somehow become Chipotle and you could grow 1000 decks 207 00:11:35,680 --> 00:11:38,720 and maybe it's hard to imagine NVIDIA going up 1000 decks from 208 00:11:38,720 --> 00:11:41,040 here just given its size. So maybe there's some more 209 00:11:41,040 --> 00:11:43,960 upside skew, but the downside skew is certainly there too, 210 00:11:43,960 --> 00:11:45,560 right? Your local restaurant is pretty 211 00:11:45,560 --> 00:11:47,240 decent chance of going out of business next year. 212 00:11:47,320 --> 00:11:50,320 It doesn't as none. The next thing is that private 213 00:11:50,320 --> 00:11:52,960 equity used to be called the leveraged buyout industry, 214 00:11:52,960 --> 00:11:56,360 although they rebranded because that sounded so bad. 215 00:11:56,720 --> 00:11:58,880 It's leveraged and we're buying people out. 216 00:11:58,880 --> 00:12:00,360 You know, that just sounds sort of terrible. 217 00:12:00,360 --> 00:12:02,880 So that they rebranded private equity, which sounds so much 218 00:12:02,880 --> 00:12:06,120 better, but but it's right. So fundamentally for every two 219 00:12:06,120 --> 00:12:08,920 trillion of private equity, there's about 3 trillion of 220 00:12:08,920 --> 00:12:11,520 private credit, right? So that there's a lot of lending 221 00:12:11,520 --> 00:12:13,440 associated. So these are companies are big 222 00:12:13,440 --> 00:12:15,200 borrowers. And again, you should develop an 223 00:12:15,200 --> 00:12:17,280 intuition, right? What do we know about companies 224 00:12:17,280 --> 00:12:19,960 that borrow a lot of money? Well, companies borrow a lot of 225 00:12:19,960 --> 00:12:23,000 money or more risky, more likely to go bankrupt than companies 226 00:12:23,000 --> 00:12:24,720 that don't borrow money right now. 227 00:12:24,720 --> 00:12:27,840 Maybe again, there's more upside if it works because, you know, 228 00:12:27,840 --> 00:12:29,720 you're levered. You know, if you buy a house, 229 00:12:29,720 --> 00:12:32,800 the mortgage, let's say 90% levered, you buy a house for 230 00:12:32,800 --> 00:12:36,280 $100,000 and it goes up to $110,000, you doubled your money 231 00:12:36,760 --> 00:12:38,640 because you took out 90,000 of debt. 232 00:12:38,640 --> 00:12:41,400 So your 10,000 of equities. Now 20,000 of equity is a 233 00:12:41,400 --> 00:12:43,240 magnifying effect. But that's true on the downside. 234 00:12:43,240 --> 00:12:45,400 So, so we should have this intuition in our heads. 235 00:12:45,800 --> 00:12:48,000 Yeah, exactly. But we should have this 236 00:12:48,000 --> 00:12:50,680 intuition in our heads, right, That private equity, therefore 237 00:12:50,680 --> 00:12:53,640 is, is, is really risky, right? These are really small, really 238 00:12:53,640 --> 00:12:55,600 levered companies that should be really, really risky. 239 00:12:55,640 --> 00:12:58,000 And yet everybody in the investment community is treating 240 00:12:58,000 --> 00:13:00,920 these things as though they're not risky at all that they have 241 00:13:01,320 --> 00:13:05,080 these are owner operators with long term views who, you know, 242 00:13:05,080 --> 00:13:08,640 are a better form of capitalism because they're aligned owners 243 00:13:08,640 --> 00:13:11,800 and write all this crap. And, and that's the sales pitch. 244 00:13:11,800 --> 00:13:15,080 But the reality is that this is really small companies with a 245 00:13:15,080 --> 00:13:17,360 lot of debt that are obviously really risky. 246 00:13:17,440 --> 00:13:19,880 And so why people are taking this asset class that's, you 247 00:13:19,880 --> 00:13:23,480 know, 2 trillion, It's, it's, it's, it's 4% of the SP500 and 248 00:13:23,480 --> 00:13:27,200 putting 40 or 50% of their assets in it is crazy to me. 249 00:13:27,200 --> 00:13:30,520 But that is the, you know, the basically the number one sales 250 00:13:30,520 --> 00:13:34,080 pitch of every CIO at major large endowments, foundations 251 00:13:34,080 --> 00:13:36,720 and family offices who are saying that, or at least used to 252 00:13:36,720 --> 00:13:39,200 be saying, because things are kind of changed that this is the 253 00:13:39,200 --> 00:13:41,280 biggest source of alpha available in the market today. 254 00:13:41,280 --> 00:13:44,000 So. What has changed over the past 255 00:13:44,000 --> 00:13:48,240 two years that's got people maybe raising some questions? 256 00:13:49,480 --> 00:13:51,120 Yeah. So, so historically, the way 257 00:13:51,120 --> 00:13:53,480 private equity works is you commit capital and then the 258 00:13:53,480 --> 00:13:56,360 private equity firm calls that capital and then they buy a 259 00:13:56,360 --> 00:13:57,760 business. And then when they sell a 260 00:13:57,760 --> 00:14:00,440 business, three to five years later, they return capital. 261 00:14:00,480 --> 00:14:02,720 And then that private equity firm goes and raises another 262 00:14:02,720 --> 00:14:05,800 fund three or five years later. And so you as sort of an 263 00:14:05,800 --> 00:14:08,800 investor, you're putting the money in and then three to five 264 00:14:08,800 --> 00:14:11,000 years later you're kind of getting some of the money back 265 00:14:11,280 --> 00:14:13,680 and then the private equity funds starting a new fund and 266 00:14:13,680 --> 00:14:15,800 you're saying I'll recommit. So the money you're giving me 267 00:14:15,800 --> 00:14:18,280 back, I'm going to kind of give back to you for your next fund. 268 00:14:18,280 --> 00:14:20,440 And that's sort of how the the game goes. 269 00:14:20,440 --> 00:14:23,160 And so typically a private equity as an asset class 270 00:14:23,160 --> 00:14:27,920 distributes about 30% of its NAV per year. 271 00:14:27,920 --> 00:14:31,120 And so you can think of sort of a three-year cycle of buying 272 00:14:31,120 --> 00:14:33,680 companies and then three or four years later, you sell them and 273 00:14:33,680 --> 00:14:35,400 you get the money back and you redeploy it. 274 00:14:35,640 --> 00:14:38,920 But recently its distributions have fallen from 30% a year to 275 00:14:38,920 --> 00:14:41,400 about 10% a year. Private equity has just stopped 276 00:14:41,440 --> 00:14:44,440 being able to sell all the things that they bought 3 or 4 277 00:14:44,440 --> 00:14:46,080 years ago. And so if you think about what 278 00:14:46,080 --> 00:14:49,200 happened 3 or 4 years ago where it was sort of 2020-2021, it was 279 00:14:49,200 --> 00:14:52,440 this kind of big bubble years is COVID everything. 280 00:14:52,440 --> 00:14:55,960 There's a SPAC craze, there's this mania around tech 281 00:14:55,960 --> 00:14:59,360 companies. And so all the money that those 282 00:14:59,360 --> 00:15:03,400 private equity firms put to work in 2020 and 2021 now is sort of 283 00:15:03,400 --> 00:15:05,600 coming up for that time. And they should be selling it. 284 00:15:05,800 --> 00:15:07,880 And it turns out they can't really sell it because they 285 00:15:07,880 --> 00:15:11,880 overpaid and they can't really sell it at a price that's 286 00:15:11,880 --> 00:15:13,680 profitable. And so they've just stopped 287 00:15:13,680 --> 00:15:16,240 distributing money. And so as they've stopped 288 00:15:16,240 --> 00:15:19,880 distributing money, fundraising has dropped off because people 289 00:15:20,000 --> 00:15:22,640 because they're not getting back the money, they can't then re up 290 00:15:22,640 --> 00:15:24,560 and redeploy. And that creates another 291 00:15:24,560 --> 00:15:27,880 problem, which is that because private equity, about 40 to 50% 292 00:15:27,880 --> 00:15:30,440 of the deals are private equity to private equity. 293 00:15:30,440 --> 00:15:32,680 So, you know, Blackstone sells to KKR. 294 00:15:32,840 --> 00:15:35,520 Well, if KKR is new fund is smaller than its previous fund, 295 00:15:35,720 --> 00:15:39,000 it doesn't have enough money to buy Blackstone's deals anymore. 296 00:15:39,280 --> 00:15:42,480 Blackstones, this sort of aggregate exit opportunity is 297 00:15:42,480 --> 00:15:45,280 shrinking as fundraising shrinks, because fundraising is 298 00:15:45,280 --> 00:15:47,960 shrinking, distributions go down even further. 299 00:15:48,240 --> 00:15:50,600 And so it's this sort of vicious cycle. 300 00:15:50,600 --> 00:15:54,240 And as a result, if you look at sort of 135 year horizon, 301 00:15:54,240 --> 00:15:55,960 private equity has been underperforming the public 302 00:15:55,960 --> 00:15:58,600 market, which they all said would never happen. 303 00:15:58,680 --> 00:16:00,960 A few years ago, there was a survey that showed that 304 00:16:01,120 --> 00:16:04,080 something of like 90% of investment allocators thought 305 00:16:04,080 --> 00:16:06,880 private equity would outperform by 200 basis points a year or 306 00:16:06,880 --> 00:16:08,680 more, right? Complete consensus that this 307 00:16:08,680 --> 00:16:10,760 could only win. And now it's losing. 308 00:16:10,760 --> 00:16:13,240 And not only are they losing, but their money's trapped. 309 00:16:13,280 --> 00:16:16,000 And the additional problem is that it's really hard for the 310 00:16:16,000 --> 00:16:18,440 private equity firms to explain why the money is trapped. 311 00:16:18,920 --> 00:16:20,840 You know, you sort of say, aren't U.S. equity markets at 312 00:16:20,840 --> 00:16:22,720 all time highs? Isn't this right? 313 00:16:22,880 --> 00:16:26,600 I mean, how can you not sell? I mean, walk me through why when 314 00:16:26,600 --> 00:16:30,160 the S&P 500 is trading at 30 times PE or something, you're 315 00:16:30,160 --> 00:16:31,960 finding it difficult to sell your assets. 316 00:16:32,760 --> 00:16:34,800 And they're saying, you know, right, And you could have come 317 00:16:34,800 --> 00:16:37,680 around to this view that clearly their assets are just not worth 318 00:16:37,680 --> 00:16:38,840 what they're saying they're worth. 319 00:16:38,880 --> 00:16:41,640 Otherwise they'd be able to sell them at an attractive price and 320 00:16:41,640 --> 00:16:43,400 this whole app cycle would continue. 321 00:16:43,400 --> 00:16:45,640 So now what you're seeing, you know, again, is this sort of 322 00:16:45,640 --> 00:16:48,080 retrenching where the smart money has been burned because 323 00:16:48,080 --> 00:16:50,360 they put 40 or 50% of their assets and say it's now 324 00:16:50,360 --> 00:16:52,720 underperforming and where their money is now trapped and they 325 00:16:52,720 --> 00:16:55,080 can't get it out. And they're rethinking things. 326 00:16:55,160 --> 00:16:57,320 For the first time ever. They're starting to arise 327 00:16:57,320 --> 00:17:01,200 skepticism about private equity in in very important places in 328 00:17:01,200 --> 00:17:03,600 the investment world, which is just a sea change from three or 329 00:17:03,600 --> 00:17:05,640 four years ago. Yeah, I guess, I guess if I 330 00:17:05,640 --> 00:17:08,640 wanted to play devil's advocate, I might argue that though the 331 00:17:08,640 --> 00:17:12,760 S&P is at highs, if you look at some of the underlying sectors 332 00:17:12,760 --> 00:17:15,040 and like the Russell, they're pretty beaten up. 333 00:17:15,040 --> 00:17:19,000 So, but to your point, that just means you don't like your exit 334 00:17:19,200 --> 00:17:22,280 liquidity, right or Mark. So it's not right. 335 00:17:22,280 --> 00:17:23,280 You're just. Really not willing to 336 00:17:23,280 --> 00:17:25,200 acknowledge that you've been beaten up just like the 337 00:17:25,200 --> 00:17:27,880 Secretary Russell 2000. Yeah, that's exactly right. 338 00:17:27,920 --> 00:17:29,920 Yeah. Well, can't you just, you know, 339 00:17:29,920 --> 00:17:34,000 get like a private credit fund to just lend you 8 times 340 00:17:34,000 --> 00:17:35,640 leverage and then you buy it out that way? 341 00:17:35,640 --> 00:17:37,520 That's safe, right? Yeah. 342 00:17:37,520 --> 00:17:39,000 And that's really what's been happening. 343 00:17:39,000 --> 00:17:41,200 It's sort of this extend and and pretend, right? 344 00:17:41,320 --> 00:17:43,960 And private credit firms just this new, new, you know, that 345 00:17:43,960 --> 00:17:47,600 basically exists to lend LB OS have been willing to sort of 346 00:17:47,600 --> 00:17:50,360 extend and pretend. I think the, the problem is that 347 00:17:50,360 --> 00:17:54,360 by my calculations and the data that I've looked at, I think 348 00:17:54,480 --> 00:17:57,800 right now the majority of private equity backed companies, 349 00:17:57,800 --> 00:18:01,880 maybe 6000 of those 12,000 if not more are cash flow negative 350 00:18:01,880 --> 00:18:05,240 after debt service. I think it's a really tough 351 00:18:05,240 --> 00:18:07,280 position, right? Like they can't refinance 352 00:18:07,280 --> 00:18:08,600 because they're never going to deliver. 353 00:18:09,040 --> 00:18:11,560 They just don't have money to pay down debt or basically all, 354 00:18:11,760 --> 00:18:15,600 you know, in aggregate 0 margin. And so it's a really tricky 355 00:18:15,600 --> 00:18:19,000 situation, particularly for that, you know, 10 or 20 or 30% 356 00:18:19,000 --> 00:18:22,720 of the worst ones where they really need to refi because they 357 00:18:22,720 --> 00:18:24,600 really don't have the money. And right now they're doing 358 00:18:24,600 --> 00:18:27,880 payment in kind and things like that to sort of hold some 359 00:18:27,880 --> 00:18:30,880 stopgap. This is going to come to a head 360 00:18:30,880 --> 00:18:33,960 because if they don't refi, there has to be a restructuring 361 00:18:33,960 --> 00:18:36,400 and someone's gonna have to admit that they lost money, 362 00:18:36,400 --> 00:18:38,160 whether that's the private equity firm or the private 363 00:18:38,160 --> 00:18:39,400 credit firm or both. Yeah. 364 00:18:40,080 --> 00:18:42,720 Yeah, that makes some sense. Do you have a sense when you 365 00:18:42,720 --> 00:18:48,480 look at this stuff like the, the statement that a company is, is 366 00:18:48,480 --> 00:18:51,720 not cashflow positive obviously can be objectively correct. 367 00:18:51,720 --> 00:18:54,040 However, there's there can be arguments as to whether or not 368 00:18:54,040 --> 00:18:57,120 they're out spending like overspending on SGNA in order to 369 00:18:57,120 --> 00:19:00,360 invest for future growth. Is there a way to strip that out 370 00:19:00,360 --> 00:19:02,440 or do you just think that like if you look at data in the 371 00:19:02,440 --> 00:19:04,880 aggregate, aggregating the data sort of strips out 372 00:19:04,880 --> 00:19:06,960 idiosyncratic? Arguments, basically private 373 00:19:06,960 --> 00:19:09,120 private equity is pretty inscrutable because it's all 374 00:19:09,120 --> 00:19:10,680 private. You're all sort of you're 375 00:19:10,680 --> 00:19:13,520 looking at either proxies or samples to try to kind of 376 00:19:13,640 --> 00:19:16,160 discern what's going on. You know, there's just no way 377 00:19:16,160 --> 00:19:19,400 with any level of precision or granularity to, to make those 378 00:19:19,400 --> 00:19:22,360 kind of judgments. But my, my intuition is that 379 00:19:22,760 --> 00:19:26,240 when firms have margins that are that low and are so pressured on 380 00:19:26,240 --> 00:19:29,000 debt service that they're going to be cutting everything that 381 00:19:29,000 --> 00:19:30,600 they can cut. And I think the the sort of 382 00:19:30,600 --> 00:19:32,880 quick math to make it more clear what's going on, right is the 383 00:19:32,880 --> 00:19:37,760 private credit loans are generally 10% of 10% interest 384 00:19:37,760 --> 00:19:41,560 rate roughly So and these firms have generally levered up, you 385 00:19:41,560 --> 00:19:44,680 know, let's call it 6 to 8 times EBITDA would probably be the 386 00:19:44,680 --> 00:19:46,280 median. I'm somewhere in that range, 387 00:19:46,280 --> 00:19:48,560 right? So if you're putting 60 to 80% 388 00:19:48,560 --> 00:19:52,880 of your EBITDA into paying interest, right, what about 389 00:19:52,880 --> 00:19:56,640 taxes, What about CapEx, right? Like you know, what about any 390 00:19:56,640 --> 00:19:59,040 differences between EBITDA? What about changes in working 391 00:19:59,040 --> 00:20:01,960 capital, right? That's really tight, really 392 00:20:01,960 --> 00:20:03,680 tight. But that's the scenario that 393 00:20:03,680 --> 00:20:06,680 that roughly we're we're looking at and that's why such a large 394 00:20:06,680 --> 00:20:08,760 percentage of them are essentially cash flow negative. 395 00:20:08,760 --> 00:20:10,760 Well, the good news is if you run at a loss, you don't have 396 00:20:10,760 --> 00:20:12,440 taxes. So you got that going exactly. 397 00:20:12,760 --> 00:20:17,160 Exactly. One of one of the the really 398 00:20:17,160 --> 00:20:21,200 interesting, well actually I got, I got two thoughts here. 399 00:20:21,400 --> 00:20:26,480 So Part 1 is I thought the chart in your book that that 400 00:20:26,480 --> 00:20:31,080 demonstrated that value performs well because of a RE rating. 401 00:20:32,080 --> 00:20:38,600 I think is an interesting observation to ponder when 402 00:20:38,600 --> 00:20:41,680 thinking about why private equity returns have been so 403 00:20:41,680 --> 00:20:47,120 strong over the past 15 years and how it could be problematic 404 00:20:47,880 --> 00:20:51,320 for a group of smaller companies that in aggregate probably 405 00:20:51,320 --> 00:20:55,040 aren't growing much more than GDP if you're paying fair prices 406 00:20:55,040 --> 00:20:56,720 to begin with. Right. 407 00:20:56,720 --> 00:21:00,280 Like part part of the whole argument for value is it's 408 00:21:00,320 --> 00:21:04,560 oversold and over hated. But if you have sophisticated 409 00:21:04,560 --> 00:21:09,840 parties transacting in the exact same bucket of companies and the 410 00:21:09,840 --> 00:21:15,920 majority of the juice comes from RE rating, I, I that's, that's a 411 00:21:15,920 --> 00:21:20,200 hard thing to play forward in my head for the private equity. 412 00:21:20,200 --> 00:21:22,920 I think that's right. And I think this may be to zoom 413 00:21:22,920 --> 00:21:26,560 out from private equity to sort of my broader view of investing 414 00:21:26,560 --> 00:21:30,880 or how I think about it. I'd say the first thing that I 415 00:21:30,880 --> 00:21:34,000 would say is that investing is about making predictions about 416 00:21:34,000 --> 00:21:37,000 the future, right? If you think about the value of 417 00:21:37,000 --> 00:21:40,480 a stock as being worth the net present value of future cash 418 00:21:40,480 --> 00:21:42,480 flows, right, You have to predict future cash flows to 419 00:21:42,480 --> 00:21:44,960 discount them back to the presence of the stock is worth 420 00:21:45,280 --> 00:21:49,080 something relating to how optimistic or pessimistic you 421 00:21:49,080 --> 00:21:50,560 feel about that company's future, right? 422 00:21:50,560 --> 00:21:53,560 So the valuation you pay today is directly a measure of 423 00:21:53,600 --> 00:21:56,880 optimism or pessimism about the future growth of that business. 424 00:21:58,080 --> 00:22:01,480 And I think my next point is that therefore, we should study 425 00:22:01,640 --> 00:22:04,240 as investors, we should study the science of forecasting, 426 00:22:04,240 --> 00:22:05,800 right? We should say, what do we know 427 00:22:05,800 --> 00:22:07,120 about the growth rates of companies? 428 00:22:07,120 --> 00:22:08,960 What do we know about how to predict the growth rates of 429 00:22:08,960 --> 00:22:10,480 companies? Because that valuation is about 430 00:22:10,480 --> 00:22:12,800 predicting the growth rates. We should be the world's leading 431 00:22:12,800 --> 00:22:15,680 expert in predicted prediction, predictive science, and 432 00:22:15,680 --> 00:22:17,720 understanding the sort of base rates and statistical 433 00:22:17,720 --> 00:22:21,640 distribution of growth. And what I would observe is that 434 00:22:21,760 --> 00:22:24,320 there's this wonderful study from 2004 called the Persistence 435 00:22:24,320 --> 00:22:27,720 and Predictability of Growth Rates, which we updated with 20 436 00:22:27,720 --> 00:22:31,480 years of additional data. And that study definitively 437 00:22:31,480 --> 00:22:35,240 proves that growth, revenue growth and earnings growth does 438 00:22:35,240 --> 00:22:37,320 not persist. It is not predictable. 439 00:22:37,320 --> 00:22:40,880 So just because a company has grown fast in the past does not 440 00:22:40,880 --> 00:22:43,320 mean they're predict grow fast in the future. 441 00:22:43,320 --> 00:22:45,880 If slow in the past doesn't break from slow in the future, 442 00:22:46,120 --> 00:22:51,080 that the best prediction of future growth tends to be that 443 00:22:51,080 --> 00:22:52,680 growth will follow a random walk. 444 00:22:52,680 --> 00:22:55,720 Essentially that growth will be equal to GDP growth and that 445 00:22:55,720 --> 00:22:59,520 predicting the spread of high growth and low growth outside of 446 00:22:59,520 --> 00:23:01,520 that one year, right? There's ability to predict over 447 00:23:01,520 --> 00:23:05,160 the very short term is nearly impossible, right? 448 00:23:05,440 --> 00:23:09,160 And so if you then think about the game of, of investing, 449 00:23:09,160 --> 00:23:14,160 right, you're, you're trying to say, well, you know, how does my 450 00:23:14,160 --> 00:23:17,080 optimism or pessimism measure against the sort of likely set 451 00:23:17,080 --> 00:23:20,240 of outcomes for this company that are priced into the market? 452 00:23:20,760 --> 00:23:25,280 And there's a wonderful study we did in Japan, because in Japan, 453 00:23:25,280 --> 00:23:27,480 every company is required to issue guidance. 454 00:23:28,160 --> 00:23:30,920 And so you can divide the world into, you know, companies that 455 00:23:30,960 --> 00:23:34,040 have very high guidance, they expect to grow really fast, 456 00:23:34,320 --> 00:23:36,320 companies that sort of have a middling guidance and then 457 00:23:36,320 --> 00:23:39,960 companies have bad guidance. And you can say, well, Gee, you 458 00:23:39,960 --> 00:23:42,600 know, first of all, you know, how accurate are companies that 459 00:23:42,600 --> 00:23:45,080 sort of sorting it themselves into these categories? 460 00:23:45,680 --> 00:23:48,040 And it turns out that they're about 50% accurate. 461 00:23:48,400 --> 00:23:50,120 So, so better than random chance, right? 462 00:23:50,120 --> 00:23:53,000 That they're, you know, if you say you're going to grow, be 463 00:23:53,000 --> 00:23:55,640 high growth firm, you're, I mean, the top third of firms for 464 00:23:55,640 --> 00:24:00,840 growth, you're 50% of the time you're right and 50% of the time 465 00:24:00,880 --> 00:24:03,480 you're wrong. So there's over one year, you 466 00:24:03,480 --> 00:24:05,600 know, within a year, you know, that's sort of roughly your 467 00:24:05,600 --> 00:24:08,360 accuracy rate. And then you say, well, let's 468 00:24:08,360 --> 00:24:11,160 say I'm good at, you know, let's say that I have that good 469 00:24:11,160 --> 00:24:15,480 predictive accuracy that I'm 50% predicting a 30% outcome. 470 00:24:15,480 --> 00:24:17,560 So I'm pretty good. You know, what does that 471 00:24:17,560 --> 00:24:19,360 translate to in terms of stock prices? 472 00:24:19,840 --> 00:24:21,320 And here's the interesting thing, right? 473 00:24:21,320 --> 00:24:24,360 So if you look at companies that are forecast to grow fast, that 474 00:24:24,360 --> 00:24:27,240 do grow fast, those outperform the market, right? 475 00:24:27,240 --> 00:24:29,160 That they nailed it. They did well, they outperform, 476 00:24:29,680 --> 00:24:32,040 but the 50% of the ones that thought they were going to grow 477 00:24:32,040 --> 00:24:34,600 fast, that didn't really underperform because the people 478 00:24:34,600 --> 00:24:37,040 are really disappointed and rightfully so. 479 00:24:37,840 --> 00:24:39,960 On the other hand, if you go down to companies that are 480 00:24:39,960 --> 00:24:43,240 forecast to have low growth and 50% of the time they're right, 481 00:24:43,280 --> 00:24:45,880 they underperform the market by a little bit, not too much, but 482 00:24:45,880 --> 00:24:49,080 a little bit. But the 50% of the time that 483 00:24:49,840 --> 00:24:52,920 that they're wrong and the company actually grows medium, 484 00:24:52,920 --> 00:24:55,640 moderately or fast, they have massively outperformed the 485 00:24:55,640 --> 00:24:57,560 market. So if you then draw this sort of 486 00:24:57,560 --> 00:25:01,520 crosstab of like, should I use the guidance that's embedded in 487 00:25:01,520 --> 00:25:04,200 these forecasts to make stock price decisions? 488 00:25:04,360 --> 00:25:07,320 It turns out that it all, you know, you do a sum product and 489 00:25:07,320 --> 00:25:11,040 it's all essentially equal. There's no edge in Japan from 490 00:25:11,040 --> 00:25:14,320 using the guidance data to make forecasts because you're wrong 491 00:25:14,320 --> 00:25:16,600 enough of the time and the high growth and the low growth stuff 492 00:25:16,600 --> 00:25:19,560 and the surprises, right? So, you know, if anything, what 493 00:25:19,560 --> 00:25:22,080 you want to do actually is focus on the lower growth firms where 494 00:25:22,080 --> 00:25:23,840 you're more likely to be surprised to the upside. 495 00:25:24,400 --> 00:25:26,920 But I think what this, what this sort of shows is that there's 496 00:25:26,920 --> 00:25:33,240 this sort of persistent resorting happening, this this 497 00:25:33,240 --> 00:25:36,840 continued friction between prediction and reality, between 498 00:25:37,160 --> 00:25:41,720 expectations and surprises. And it's that that drives market 499 00:25:41,720 --> 00:25:44,240 volatility then. So when you're thinking as a 500 00:25:44,240 --> 00:25:48,000 sort of a meta analytic investor, you're trying to say, 501 00:25:48,000 --> 00:25:49,800 what do I think relative to what the market think? 502 00:25:50,200 --> 00:25:53,560 You want to be looking for these places where people have either, 503 00:25:53,720 --> 00:25:57,520 you know, a great consensus that something's going to be great or 504 00:25:57,520 --> 00:25:59,720 a great consensus that it's going to be bad. 505 00:26:00,040 --> 00:26:02,960 And then you want to come in and say, Hey, there's a 50% chance 506 00:26:02,960 --> 00:26:07,080 you're right. But if you're right, maybe 507 00:26:07,560 --> 00:26:09,800 you're so optimistic that you've, you know, you're not 508 00:26:09,800 --> 00:26:11,200 even going to make all that much money. 509 00:26:11,200 --> 00:26:14,080 If you're right, you know, it's like NVIDIA growing 50% and then 510 00:26:14,080 --> 00:26:16,400 the stock goes up 2%. You're like, well, that was an 511 00:26:16,400 --> 00:26:18,320 unbelievable outcome. Yeah, but it was priced in 512 00:26:19,720 --> 00:26:22,480 versus the 50% of the chance you're wrong. 513 00:26:23,000 --> 00:26:25,200 The stock is going to be changed dramatically. 514 00:26:25,720 --> 00:26:28,160 And so I think what, what I would say is this, this sort of 515 00:26:28,160 --> 00:26:31,800 re rating effect and, and value is what's going to drive your 516 00:26:31,800 --> 00:26:34,320 outcome much more than actual fundamentals. 517 00:26:35,000 --> 00:26:37,960 And that's why I'm so focused. You know, I, you said, you know, 518 00:26:37,960 --> 00:26:40,560 we were talking earlier and he said, why are you so focused on, 519 00:26:40,560 --> 00:26:42,880 on private equity or, you know, why have you focused there? 520 00:26:42,880 --> 00:26:45,120 And I said, you know, it's, it's this correlated mistake that 521 00:26:45,120 --> 00:26:47,360 people make. It's the, the most optimistic 522 00:26:47,360 --> 00:26:48,800 thing. If you look at surveys or if you 523 00:26:48,800 --> 00:26:51,760 look at valuations, it's the place people have just gone nuts 524 00:26:51,760 --> 00:26:54,280 over over the last 10 years when I've been investing. 525 00:26:54,840 --> 00:26:58,280 And I think in contrast, there are places like Japan or 526 00:26:58,280 --> 00:27:00,800 Japanese equities or now European equities that are just 527 00:27:00,800 --> 00:27:04,880 so out of favor, so left for dead that they're afflicted with 528 00:27:04,880 --> 00:27:07,520 the opposite scenario. And that's where I, I tend to 529 00:27:07,520 --> 00:27:10,200 make long investments. But but it's that it's 530 00:27:10,200 --> 00:27:12,920 understanding that dynamic and that friction that drives my my 531 00:27:12,920 --> 00:27:17,120 investment process. Yeah, I, I always, I, I guess I 532 00:27:18,160 --> 00:27:21,520 thought of you originally. I was like, OK, this is like a, 533 00:27:22,560 --> 00:27:26,240 a, when I say clever, I mean that in a, in a complimentary 534 00:27:26,240 --> 00:27:27,440 way. I don't mean that in like a 535 00:27:27,920 --> 00:27:30,120 deceitful way at all. But I, I figured that you were 536 00:27:30,120 --> 00:27:35,440 having a clever way of marketing private equity in public 537 00:27:36,200 --> 00:27:38,680 markets. But I don't know when you 538 00:27:38,680 --> 00:27:44,200 started talking about this, like the mistakes that people were 539 00:27:44,200 --> 00:27:46,400 going to make. I don't know when you started 540 00:27:46,400 --> 00:27:50,040 talking about it, but I feel like I first heard you talking 541 00:27:50,040 --> 00:27:53,560 about it in like 2018. So you were way early on this. 542 00:27:53,560 --> 00:27:56,320 And then the other, the other thing that I, I remember you 543 00:27:56,320 --> 00:27:59,040 talking about that like was really, really smart. 544 00:27:59,520 --> 00:28:04,240 And again, like you guys are so, but is how Japan didn't allow 545 00:28:04,240 --> 00:28:07,120 bankruptcy. So it, it allowed for you to 546 00:28:07,120 --> 00:28:10,080 implement a strategy of highly over leveraged Japanese 547 00:28:10,080 --> 00:28:12,640 companies and why that strategy worked. 548 00:28:12,640 --> 00:28:14,400 I was like, man, that's, that's smart. 549 00:28:15,440 --> 00:28:18,840 Yeah, Wait, yeah, we love Japan. I mean, I think the it's sort of 550 00:28:18,920 --> 00:28:21,760 a fascinating story of what's what's happened in Japan over 551 00:28:21,760 --> 00:28:24,480 the years. But but the Japanese equity 552 00:28:24,480 --> 00:28:26,640 market, right, it had this huge bubble in the 80s. 553 00:28:26,640 --> 00:28:29,800 And so, like, if you meet anyone that has been sick in their 60s 554 00:28:29,800 --> 00:28:31,960 that worked on Wall Street and you mentioned the word Japan, 555 00:28:32,160 --> 00:28:34,720 like, oh, I was in the Tokyo office for two years when I was 556 00:28:34,720 --> 00:28:37,760 at Merrill, or, you know, like, there's always some random Japan 557 00:28:37,760 --> 00:28:40,480 connection from the early 80s. And I had to go over in the go 558 00:28:40,480 --> 00:28:41,960 go years. Exactly. 559 00:28:41,960 --> 00:28:44,840 Just like, you know, when we're all retired, everyone's gonna 560 00:28:44,840 --> 00:28:48,360 have some AI connection or, you know, yeah, like, Oh yeah, we 561 00:28:48,360 --> 00:28:50,920 did this AI deal in the early twenty 20s, you know, blah, 562 00:28:50,920 --> 00:28:53,920 blah, blah. But but what happened after the 563 00:28:53,920 --> 00:28:56,600 bubble burst is that Japan's equity market was essentially 564 00:28:56,600 --> 00:28:58,440 flat for 30 years. You know, it just didn't go 565 00:28:58,440 --> 00:28:59,800 anywhere. Well, it crashed and then it 566 00:28:59,800 --> 00:29:02,160 would be a flat and. Could never happen here, right? 567 00:29:02,920 --> 00:29:04,880 Impossible. Could never happen here exactly 568 00:29:04,880 --> 00:29:06,520 market the US market only goes up. 569 00:29:07,120 --> 00:29:10,680 But but one of the big drivers of it, interestingly enough, is 570 00:29:10,680 --> 00:29:14,920 that over that period, Japanese companies returned far less to 571 00:29:14,920 --> 00:29:18,000 cap shareholders as sort of a percentage of earnings as any 572 00:29:18,000 --> 00:29:19,320 other country in the world really. 573 00:29:19,800 --> 00:29:22,520 The dividends were always low. There were no buybacks. 574 00:29:22,520 --> 00:29:25,040 And so one of the reasons stock price went nowhere is there's no 575 00:29:25,040 --> 00:29:26,600 one ever really earned any dividend deals. 576 00:29:26,680 --> 00:29:28,880 But the cash had to go somewhere, right, because they 577 00:29:28,880 --> 00:29:30,480 weren't profitable. These companies were making 578 00:29:30,480 --> 00:29:32,120 money and So what did they do with it? 579 00:29:32,120 --> 00:29:33,960 Well, they ended up just buying stuff. 580 00:29:34,080 --> 00:29:36,720 Either they put where they put money in the bank, they bought 581 00:29:36,720 --> 00:29:39,600 real estate or they did what's called cross shareholding. 582 00:29:39,600 --> 00:29:43,240 So, you know, they just, you know, are in Tokyo and they have 583 00:29:43,240 --> 00:29:46,560 a bank and they'd like buy stock in the bank or they're an auto 584 00:29:46,560 --> 00:29:49,480 supply company that sells parts to Toyota. 585 00:29:49,480 --> 00:29:53,040 So they'd make 50 million in profit and they buy 50 million 586 00:29:53,040 --> 00:29:55,280 of Toyota shares rather than doing dividends, right. 587 00:29:55,280 --> 00:29:58,200 This is like sort of irrational to us as Western investors. 588 00:29:58,200 --> 00:30:00,160 But this happened for like a period of like 20-30 years. 589 00:30:00,160 --> 00:30:04,240 And by 2020 is in late 2010's, these balance sheets had just 590 00:30:04,240 --> 00:30:06,960 gotten so out of control because you had, you might have a 591 00:30:06,960 --> 00:30:10,560 company that had tripled the value of its market cap in these 592 00:30:10,560 --> 00:30:13,120 accumulated assets from the 20 or 30 years they didn't do 593 00:30:13,120 --> 00:30:15,440 distributions. And the Tokyo Stock Exchange 594 00:30:15,440 --> 00:30:18,440 started to sort of take notice of this and started really in 595 00:30:18,440 --> 00:30:22,400 2022 and 23, this big push to say, hey, you know what, we got 596 00:30:22,400 --> 00:30:24,680 to stop doing this, right? We got to start returning cash 597 00:30:24,680 --> 00:30:26,280 to shareholders. And by the way, we got to clean 598 00:30:26,280 --> 00:30:28,680 up these balance sheets. And So what you have is this set 599 00:30:28,680 --> 00:30:31,240 of companies that have this huge, you know, years of 600 00:30:31,240 --> 00:30:34,400 accumulated profit on the balance sheet that now are being 601 00:30:34,400 --> 00:30:36,440 told that they need to distribute that profit. 602 00:30:36,440 --> 00:30:39,320 And again, they don't even need to make new profits because 603 00:30:39,320 --> 00:30:42,000 they've got years of worth of dividends just sitting on the 604 00:30:42,000 --> 00:30:44,200 balance sheet. All they need to do is take the 605 00:30:44,200 --> 00:30:46,080 money that's on the balance sheet and distribute it to 606 00:30:46,080 --> 00:30:48,640 shareholders. And as that has started to 607 00:30:48,640 --> 00:30:53,000 happen, and we're probably 2525% of the way from going from sort 608 00:30:53,000 --> 00:30:56,680 of the old Japan to sort of a Western and more normal capital 609 00:30:56,680 --> 00:31:00,000 allocation philosophy, the Japanese market has started to 610 00:31:00,000 --> 00:31:02,120 go nuts. And what's been most satisfying 611 00:31:02,120 --> 00:31:04,960 is the part of it that's gone the most nuts is the smallest 612 00:31:04,960 --> 00:31:07,040 and the cheapest companies, which were most sort of 613 00:31:07,040 --> 00:31:09,840 afflicted by the syndrome and had been most left for dead. 614 00:31:09,840 --> 00:31:12,840 And and so Japan has just been a wonderful place to do value 615 00:31:12,840 --> 00:31:15,000 investing because the things that people were most 616 00:31:15,000 --> 00:31:17,360 pessimistic about have just become rocket ships. 617 00:31:17,360 --> 00:31:21,000 And now, you know, at least on X, you know, you can read, there 618 00:31:21,000 --> 00:31:23,000 are all these people now tweeting about, you know, I 619 00:31:23,000 --> 00:31:26,120 found this, you know, Japanese soy sauce company that trades at 620 00:31:26,120 --> 00:31:30,040 .4 times book and as a $200 million real estate asset, You 621 00:31:30,120 --> 00:31:33,080 know, like it's kind of crazy. The only other thing people are 622 00:31:33,080 --> 00:31:35,720 tweeting about or axing about or whatever the right word is, or 623 00:31:35,720 --> 00:31:39,400 you know, AI stocks, NVIDIA, but there's this whole like random 624 00:31:39,400 --> 00:31:42,600 subculture of tweeting about Japanese value stocks, which I 625 00:31:42,600 --> 00:31:44,680 love. Yeah, yeah. 626 00:31:44,680 --> 00:31:49,520 I thought, I thought that I thought that that was when you 627 00:31:49,880 --> 00:31:52,160 first started talking about this, you were way early on it. 628 00:31:52,160 --> 00:31:54,560 So that was really interesting and thank you for highlighting 629 00:31:54,560 --> 00:31:58,120 that. I hope you're enjoying this 630 00:31:58,120 --> 00:32:01,080 conversation. I'm interrupting the program to 631 00:32:01,080 --> 00:32:04,640 remind you that this program is brought to you by Fiscal dot AI, 632 00:32:04,960 --> 00:32:07,360 which is the complete modern data terminal for global 633 00:32:07,360 --> 00:32:09,560 equities. The Fiscal dot AI platform 634 00:32:09,560 --> 00:32:11,920 combines a powerful user experience with all financial 635 00:32:11,920 --> 00:32:14,400 data capabilities that professional investors need. 636 00:32:14,760 --> 00:32:18,120 Users get up to 20 years of historical financials for all 637 00:32:18,120 --> 00:32:21,000 stocks globally that they can easily chart, compare, and 638 00:32:21,000 --> 00:32:24,040 export into their own models. Check it out for the segment and 639 00:32:24,040 --> 00:32:27,600 KPI data. They have things like Amazon's 640 00:32:27,600 --> 00:32:30,440 cloud revenues, Spotify's premium Subs, Google's quarterly 641 00:32:30,440 --> 00:32:33,040 paid clicks, yadda yadda. 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The other, you know, sort of, I 652 00:33:07,520 --> 00:33:11,400 guess thing that I into it that you put data to is that 653 00:33:11,400 --> 00:33:17,760 profitability is a strategy that can be embraced and you know, 654 00:33:17,760 --> 00:33:19,800 curious to hear your thoughts on that. 655 00:33:19,800 --> 00:33:22,000 But but one of the things that makes a lot of sense is 656 00:33:22,400 --> 00:33:24,960 profitable companies create value through growth, which 657 00:33:24,960 --> 00:33:27,480 makes a ton of sense, right? Value companies tend to create 658 00:33:27,480 --> 00:33:30,320 it through re rating, profitable companies create it through 659 00:33:30,320 --> 00:33:32,760 growth. I was kind of surprised to hear 660 00:33:32,920 --> 00:33:39,720 or to see that the valuation drag did not offset most of that 661 00:33:39,720 --> 00:33:41,960 growth, but it it does make sense. 662 00:33:41,960 --> 00:33:43,200 Yeah. So I think you got to think 663 00:33:43,200 --> 00:33:47,080 about it in terms of so, so reframing the the question of 664 00:33:47,080 --> 00:33:52,440 profitability and the way I think about profitability and 665 00:33:52,440 --> 00:33:55,400 it's sort of an academic sense of profitability is, is, is 666 00:33:55,400 --> 00:33:57,720 you're dividing something in the income statement or cash flow 667 00:33:57,720 --> 00:34:00,040 statements in the balance sheet. So you're really, it's a return 668 00:34:00,040 --> 00:34:03,480 on assets concept and the ones that we like to use is gross 669 00:34:03,480 --> 00:34:08,239 profit divided by a total assets and sort of the intuition behind 670 00:34:08,239 --> 00:34:10,159 that or this a real world example. 671 00:34:10,280 --> 00:34:13,120 You know, you have two companies that are both spend $100 million 672 00:34:13,120 --> 00:34:15,679 building a factory. Company A spends $100 million in 673 00:34:15,679 --> 00:34:18,880 the factory and in year 1 makes 80 million of gross profit from 674 00:34:18,880 --> 00:34:22,639 that factory and Company B makes 10 million of gross profit from 675 00:34:22,639 --> 00:34:25,000 the factory. And let's say both are valued at 676 00:34:25,000 --> 00:34:27,159 the same multiple of earnings the next year. 677 00:34:27,159 --> 00:34:30,280 Well, you'd say, well, Gee, I like the one that produces 678 00:34:30,280 --> 00:34:33,440 $80.00 for that $100.00 of assets because if they went and 679 00:34:33,440 --> 00:34:36,400 build another factory, think about the ratio of that 680 00:34:36,400 --> 00:34:38,199 investment to how much I would earn. 681 00:34:38,239 --> 00:34:41,480 It's clearly a better company. And by the way, if things went 682 00:34:41,480 --> 00:34:43,760 South in their industry and let's say they borrowed some 683 00:34:43,760 --> 00:34:45,880 money and they had to pay 10 million of interest and things 684 00:34:45,880 --> 00:34:48,159 went S, the industry profits are down 50%, right? 685 00:34:48,159 --> 00:34:50,000 They're still going to be able to service their debt, whereas 686 00:34:50,000 --> 00:34:53,040 the other one is not. So basically this idea of sort 687 00:34:53,040 --> 00:34:55,880 of return on invested capital or however you want to measure 688 00:34:55,880 --> 00:34:59,760 return on assets profitability we could call it is a is a 689 00:34:59,760 --> 00:35:02,520 measure of business quality that's very robust, right? 690 00:35:02,520 --> 00:35:06,480 And you can also think of like think of LVMH or something 691 00:35:06,480 --> 00:35:09,440 that's making some fancy back branded bag, right? 692 00:35:09,520 --> 00:35:11,840 They're going to for every dollar of assets, they're 693 00:35:11,840 --> 00:35:14,400 creating some crazy amount of profits because the value of the 694 00:35:14,400 --> 00:35:18,120 brand and the, you know, the IP, you know, versus, you know, a 695 00:35:18,120 --> 00:35:21,240 frac sand company that right and is basically going to sell for 696 00:35:21,240 --> 00:35:25,400 whatever the like 5% margin on the building of the assets to 697 00:35:25,400 --> 00:35:26,760 extract the sand. OK, right. 698 00:35:26,760 --> 00:35:28,960 It's just commoditized. So it becomes this wonderful 699 00:35:28,960 --> 00:35:32,600 metric of business quality and potential returns on on assets 700 00:35:32,720 --> 00:35:35,680 or in growth. Now, what's interesting because 701 00:35:35,720 --> 00:35:37,560 you immediately say, well, aren't these companies, you 702 00:35:37,560 --> 00:35:40,840 know, how do they sort of does the valuation drag offset it? 703 00:35:40,920 --> 00:35:43,400 And it turns out that essentially, right, Like no 704 00:35:43,400 --> 00:35:45,960 matter what the business is that has these for high returns on 705 00:35:45,960 --> 00:35:48,800 capital, it goes through periods of high growth and low growth 706 00:35:48,800 --> 00:35:51,560 just like every other company. And so the valuations, these 707 00:35:51,560 --> 00:35:54,360 companies don't end up trading at a massive premium to the rest 708 00:35:54,360 --> 00:35:57,320 of the market in aggregate, because everybody in the market 709 00:35:57,320 --> 00:35:59,000 is so focused on growth forecasting. 710 00:35:59,640 --> 00:36:02,040 So if the minute you kind of extract and say, you know what, 711 00:36:02,040 --> 00:36:04,320 I'm not going to play that game, I'm not going to worry about 712 00:36:04,480 --> 00:36:06,880 whether I think it's going to grow 5% or 10%. 713 00:36:07,320 --> 00:36:09,720 All I'm going to care about is it is a high quality business 714 00:36:09,720 --> 00:36:13,000 and is it attractively valued? You end up producing this return 715 00:36:13,000 --> 00:36:15,040 stream that's more differentiated because the, 716 00:36:15,040 --> 00:36:17,840 again, the valuations are so driven by the growth forecast 717 00:36:17,840 --> 00:36:20,040 that sometimes people forget and say, well, if there's an 718 00:36:20,040 --> 00:36:22,680 underlying, you know, great company, even if it grows at 719 00:36:22,680 --> 00:36:25,880 GDP, I still want to own that. It's still going to produce 720 00:36:25,960 --> 00:36:29,560 really attractive returns and be a safer asset than some company 721 00:36:29,560 --> 00:36:33,200 I think has just caught on to like the latest crazy fad in the 722 00:36:33,200 --> 00:36:33,720 market. I. 723 00:36:33,720 --> 00:36:37,000 Apologize if, if this is in the book and I and I forget it, but 724 00:36:37,000 --> 00:36:40,360 how did you control for like that? 725 00:36:40,360 --> 00:36:44,120 What was, what was the either valuation parameter that you put 726 00:36:44,120 --> 00:36:47,800 around or you know, some of the, there's an AI company that I 727 00:36:47,800 --> 00:36:51,760 can't think of that's trading at, I don't know, 30 times gross 728 00:36:51,760 --> 00:36:54,400 profit or something. It's tiny, but the gross profit 729 00:36:54,400 --> 00:36:58,280 to assets is actually large. And arguably as the losses 730 00:36:58,280 --> 00:37:01,720 accumulate, the assets kind of go lower like that, that kind of 731 00:37:01,720 --> 00:37:04,840 stuff can really skew the data. How do you how do you work 732 00:37:04,840 --> 00:37:06,280 through that? Yeah. 733 00:37:06,280 --> 00:37:09,520 So the way I think, I think you can do it separately, right? 734 00:37:09,520 --> 00:37:11,560 So you can treat value and quality separately. 735 00:37:11,800 --> 00:37:13,200 Yeah. And in some sense, that's what's 736 00:37:13,200 --> 00:37:18,040 in the US We talk about international in the US being 737 00:37:18,040 --> 00:37:20,600 focused on quality and forgetting about valuation has 738 00:37:20,600 --> 00:37:24,400 been the right answer, at least for the last 10 or 15 years. 739 00:37:25,000 --> 00:37:29,280 So just pure quality works, works better than trying to 740 00:37:29,560 --> 00:37:32,680 introduce a valuation overlay. Internationally, value has 741 00:37:32,680 --> 00:37:35,960 worked, qualities worked fine, but valuation has worked so well 742 00:37:35,960 --> 00:37:38,000 than anything with a valuation overlay has worked better. 743 00:37:38,000 --> 00:37:40,560 So I think that there's two ways to think about that, right? 744 00:37:40,560 --> 00:37:44,040 That company that you described, you know, one way to look at it, 745 00:37:44,040 --> 00:37:46,960 as you say, well, the gross profit to assets is so high, it 746 00:37:46,960 --> 00:37:49,520 merits a really high valuation. And so, you know, I'm going to 747 00:37:49,520 --> 00:37:52,200 sort of suspend some of my valuation skepticism because 748 00:37:52,200 --> 00:37:54,040 this company is clearly so great. 749 00:37:54,280 --> 00:37:56,320 And that's a perfectly reasonable thing to say, right? 750 00:37:56,320 --> 00:37:58,520 I'm not going to come out and say that that's wrong or there's 751 00:37:58,680 --> 00:38:00,840 a rationale to that. The other thing is to say, well, 752 00:38:00,840 --> 00:38:04,880 if the gross profit assets is this high, I start to worry that 753 00:38:04,880 --> 00:38:07,040 maybe it's over earning for some reason, right? 754 00:38:07,040 --> 00:38:10,640 Like, and I, you know, sometimes you meet, you know, in the 755 00:38:10,640 --> 00:38:14,160 private world. You know, there was a guy here 756 00:38:14,640 --> 00:38:18,160 in Boston who was telling me about a business that serviced 757 00:38:18,160 --> 00:38:20,240 biotech companies here in Boston. 758 00:38:20,240 --> 00:38:23,360 And basically they would build like kind of lab space out in 759 00:38:23,360 --> 00:38:25,840 the middle of nowhere. And then they would truck stuff 760 00:38:25,840 --> 00:38:29,280 back and forth from there, like high and high cost, you know, 761 00:38:29,280 --> 00:38:32,600 Boston Biotech Center headquarters out to the 762 00:38:32,760 --> 00:38:36,000 refrigeration center that was out in the middle of nowhere, 763 00:38:36,000 --> 00:38:39,280 Massachusetts and this business. Until that slams. 764 00:38:39,720 --> 00:38:42,440 Right, right. And it was crazily over earning 765 00:38:42,760 --> 00:38:45,320 until the biotech crash came and then like, of course, right, a 766 00:38:45,640 --> 00:38:47,400 reset. So there are businesses like 767 00:38:47,400 --> 00:38:51,040 that, right where they are an extraordinary GP to a for a 768 00:38:51,040 --> 00:38:53,840 period of time, but it's, it's because they're over earning for 769 00:38:53,840 --> 00:38:56,800 some temporary dislocation. But you do want to try to 770 00:38:56,800 --> 00:38:58,240 separate. And I think that can only be 771 00:38:58,240 --> 00:39:00,960 done in sort of fundamental way. The ones that are earning that 772 00:39:00,960 --> 00:39:02,600 for a reason that's sustainable for us. 773 00:39:02,600 --> 00:39:05,080 The ones that aren't, but that's sort of the the second 774 00:39:05,080 --> 00:39:07,560 generation passed the first insight, which is that quality 775 00:39:07,560 --> 00:39:08,960 is generally something worth paying for. 776 00:39:09,280 --> 00:39:12,720 Yeah, Yeah, that makes sense. One of the things that I was 777 00:39:12,720 --> 00:39:17,160 thinking about how to describe what I perceive you to do and, 778 00:39:17,160 --> 00:39:20,080 and one of the things that I like about your research and 779 00:39:20,080 --> 00:39:22,320 then your firm is you're building solutions, right? 780 00:39:22,320 --> 00:39:26,360 So one of the things that came out of the book is size and 781 00:39:26,360 --> 00:39:30,840 value matter a lot. How do you, how do you, you may 782 00:39:30,840 --> 00:39:33,480 not have this answer yet, but how do you build a product 783 00:39:33,800 --> 00:39:38,000 that's a good business, but also can exploit the illiquid nature 784 00:39:38,000 --> 00:39:42,640 that's needed to exploit in order to to realize the yeah, 785 00:39:42,800 --> 00:39:44,280 it's re rating food value, right? 786 00:39:44,880 --> 00:39:47,880 We've been spending a lot of time this is just hot, hot off 787 00:39:47,880 --> 00:39:49,440 the press is what we're working on now. 788 00:39:49,440 --> 00:39:52,560 But but there's this really interesting relationship between 789 00:39:52,920 --> 00:39:57,800 the, the, the equity factors, value profitability, etcetera 790 00:39:57,800 --> 00:40:00,080 that predict returns and they and they do predict returns, 791 00:40:00,080 --> 00:40:01,800 right. So value stocks do outperform. 792 00:40:02,040 --> 00:40:03,880 I know there's skepticism around that, but they do. 793 00:40:03,880 --> 00:40:06,240 But. There's an interaction between 794 00:40:06,240 --> 00:40:11,200 that and size. So a very cheap mega cap versus 795 00:40:11,200 --> 00:40:15,200 a very cheap micro cap. The mega cap actually is going 796 00:40:15,200 --> 00:40:20,880 to earn less of a premium for that its value Ness than the 797 00:40:20,880 --> 00:40:22,560 micro cap. And the way to think about that 798 00:40:22,560 --> 00:40:24,360 is the markets are pretty efficient. 799 00:40:24,600 --> 00:40:28,240 And so the more liquid and the bigger you get, the more likely 800 00:40:28,240 --> 00:40:32,600 it's cheap for a reason or that that right, essentially the 801 00:40:32,600 --> 00:40:36,480 valuation is more accurate at the larger cap end of the 802 00:40:36,480 --> 00:40:37,800 spectrum. So everything just sort of 803 00:40:37,800 --> 00:40:41,520 converges to the market return and the ability to generate 804 00:40:41,520 --> 00:40:45,360 alpha decreases as you go up in market cap, at least from 805 00:40:45,360 --> 00:40:46,880 traditional equity style factors. 806 00:40:46,880 --> 00:40:49,200 So you're going to get the biggest juice in the micro caps 807 00:40:49,200 --> 00:40:50,760 and the least juice and large caps. 808 00:40:51,360 --> 00:40:55,520 And so you as an asset manager think are sort of in my view, 809 00:40:55,560 --> 00:40:58,000 thinking through this sort of trade off, right, which is if 810 00:40:58,000 --> 00:41:01,040 I'm going to go play with the big boys, my ability to generate 811 00:41:01,040 --> 00:41:02,480 alpha is going to be very limited. 812 00:41:02,480 --> 00:41:04,360 And that's why indexing has become so popular, right? 813 00:41:04,360 --> 00:41:06,600 If you just want to own market beta, just own it really cheaply 814 00:41:06,600 --> 00:41:09,840 because the offset and fees is higher than the alpha that can 815 00:41:09,840 --> 00:41:12,120 be generated among those large cap equities. 816 00:41:12,200 --> 00:41:15,000 Unless the person is some, you know, once in a generation 817 00:41:15,000 --> 00:41:17,120 genius and the ability of you to predict that person would 818 00:41:17,120 --> 00:41:18,720 require once in a generation genius. 819 00:41:18,720 --> 00:41:21,800 So your genius to find them times their genius and investing 820 00:41:21,960 --> 00:41:24,400 the probability of that happening is so low, whereas in 821 00:41:24,400 --> 00:41:27,280 micro or small cap where things are less liquid, you know, the 822 00:41:27,280 --> 00:41:30,200 factor premium are just juicier. And so and by the way, it's 823 00:41:30,200 --> 00:41:32,440 harder to index because of the liquidity problems. 824 00:41:32,440 --> 00:41:35,480 And so, you know, I tend to think of building an asset 825 00:41:35,480 --> 00:41:38,520 management business in this current era. 826 00:41:38,520 --> 00:41:41,600 Is building a business cognizant of Vanguard, right? 827 00:41:41,720 --> 00:41:44,280 It just has to be right. You don't want to do anything 828 00:41:44,280 --> 00:41:48,200 that Vanguard can or will do or does do because likely they're 829 00:41:48,200 --> 00:41:51,960 going to do it better and cheaper than you, and your 830 00:41:51,960 --> 00:41:54,200 business will lose its risks on Detra. 831 00:41:54,200 --> 00:41:57,400 So I like to think of everything we build as being unindexable, 832 00:41:57,400 --> 00:42:00,080 as building something that's unique and that's sort of a 833 00:42:00,080 --> 00:42:02,200 precondition to doing something for us. 834 00:42:02,480 --> 00:42:06,120 And so we focused a lot on small and micro caps where the 835 00:42:06,120 --> 00:42:10,040 liquidity is a barrier to entry. We focused on weird places like 836 00:42:10,040 --> 00:42:13,760 Japan where they're nichy enough that people don't necessarily 837 00:42:13,760 --> 00:42:15,960 focus on them. And you know, when we pick new 838 00:42:15,960 --> 00:42:18,440 places to do research, we look for that set of things. 839 00:42:18,440 --> 00:42:21,360 So right now we're doing a ton of research on biotech, which 840 00:42:21,360 --> 00:42:24,720 just perfectly fits that right. Very hard to index, tends to be 841 00:42:24,720 --> 00:42:28,000 comprised of lots of small companies and probably big alpha 842 00:42:28,000 --> 00:42:30,160 opportunity in my view. So that's, that's sort of how I 843 00:42:30,160 --> 00:42:33,800 I think about it though. Yeah, the, the biotech research, 844 00:42:33,840 --> 00:42:37,480 I'm, I'm looking forward to whatever conclusions you end up 845 00:42:37,480 --> 00:42:39,000 with. I was listening to your podcast 846 00:42:39,000 --> 00:42:45,880 with Medfaber and it is, it's interesting that business like 847 00:42:45,880 --> 00:42:52,320 CRISPR has more the the R&D magnitude of the larger ones may 848 00:42:52,320 --> 00:42:57,400 actually I, I, I don't want to, I forget how you put it, but I, 849 00:42:57,400 --> 00:43:01,840 I think basically like the R&D size, you might actually have 850 00:43:01,840 --> 00:43:07,400 less risk with similar upside if you ignore some of the small 851 00:43:07,400 --> 00:43:10,000 which would fly in the face of some of the other research, but 852 00:43:10,360 --> 00:43:13,160 potentially applicable there. Yeah, I don't know. 853 00:43:13,160 --> 00:43:15,120 So. Biotech is is really, really 854 00:43:15,120 --> 00:43:17,440 weird. It's just the your typical 855 00:43:17,440 --> 00:43:20,480 equity factors don't work at all in biotech and the simplest one 856 00:43:20,480 --> 00:43:23,600 to understand is is value. So in if you think about a 857 00:43:23,600 --> 00:43:26,640 typical biotech, it's it's spending money on a science 858 00:43:26,640 --> 00:43:29,720 project and it has a bunch of cash that investors have given 859 00:43:29,720 --> 00:43:32,480 it to fund the research into that science project, right. 860 00:43:32,480 --> 00:43:34,520 This is the sort of the structure of a biotech firm. 861 00:43:34,520 --> 00:43:38,160 So in traditional valuation, the more cash you have, the bigger 862 00:43:38,160 --> 00:43:41,040 your enterprise value, therefore the more expensive you are. 863 00:43:41,040 --> 00:43:44,280 And on the other hand the more profit you have, right? 864 00:43:44,280 --> 00:43:47,640 The better if you're losing money, the more you lose, the 865 00:43:47,640 --> 00:43:50,560 worse the company is. But in biotech, you can think of 866 00:43:50,560 --> 00:43:55,120 sort of breaking that down into sort of a sort of X&Y axis, 867 00:43:55,120 --> 00:43:56,640 right? On the X axis you can be 868 00:43:56,640 --> 00:44:00,080 thinking of your spend relative to your market cap, how much you 869 00:44:00,080 --> 00:44:03,000 know, because a company that's sort of spending $500 million a 870 00:44:03,000 --> 00:44:04,920 year on research and development, right? 871 00:44:04,920 --> 00:44:06,320 You're sort of intuition is right. 872 00:44:06,320 --> 00:44:07,960 Well, they've got to be researching something pretty 873 00:44:07,960 --> 00:44:10,880 valuable for any of the money to do that. 874 00:44:11,080 --> 00:44:14,480 Yeah, versus some company out of Miami, some strip mall in Miami, 875 00:44:14,480 --> 00:44:16,760 it's spending $5,000,000 a year on research, right? 876 00:44:16,920 --> 00:44:18,520 Like these are different businesses, right? 877 00:44:18,520 --> 00:44:21,240 And 1 is probably higher quality right than the other, even 878 00:44:21,240 --> 00:44:23,400 though one is losing massively more money. 879 00:44:23,520 --> 00:44:26,600 And then on the other axis you have, you have how much cash you 880 00:44:26,600 --> 00:44:28,960 have relative to your cash burns, right? 881 00:44:28,960 --> 00:44:30,600 Like let's say you have $500 million of. 882 00:44:30,600 --> 00:44:32,600 Spend Runway 5. Billion in the bank. 883 00:44:32,760 --> 00:44:35,640 That's clearly better than $500 million of spend and in a 884 00:44:35,640 --> 00:44:37,640 billion in the bank. And so you think of those two 885 00:44:37,640 --> 00:44:40,440 axis, you're thinking already about biotech, therefore in a 886 00:44:40,440 --> 00:44:42,880 very different space than your traditional valuation. 887 00:44:42,960 --> 00:44:45,280 And you can kind of apply that throughout the sort of value 888 00:44:45,280 --> 00:44:47,720 chain and all the different metrics that you'd think of when 889 00:44:47,720 --> 00:44:51,320 analyzing a firm, you have to fix them and adjust them to kind 890 00:44:51,320 --> 00:44:53,080 of process what's going on in biotechs. 891 00:44:53,080 --> 00:44:55,440 It's such a unique space, which is the sort of project we've 892 00:44:55,440 --> 00:44:57,160 been embarking on. Yeah. 893 00:44:57,160 --> 00:44:59,520 I wonder if there's a way to figure out like patents per 894 00:44:59,520 --> 00:45:01,680 dollar spent or something like that. 895 00:45:01,680 --> 00:45:03,760 I don't know. Yeah, right. 896 00:45:03,920 --> 00:45:05,840 In fact, it's clinical trial data. 897 00:45:06,280 --> 00:45:08,520 Yeah. So we've spent massive amounts 898 00:45:08,520 --> 00:45:11,800 of time and money trying to marry the clinical trial data to 899 00:45:12,080 --> 00:45:14,600 to the public companies. So you can sort of try to figure 900 00:45:14,600 --> 00:45:17,560 out what's going on and how the clinical trial process relates 901 00:45:17,560 --> 00:45:19,280 to how the equities are valued etcetera. 902 00:45:19,800 --> 00:45:22,760 So how are you? You got to be automating a 903 00:45:22,760 --> 00:45:24,400 decent amount of that. Yeah, yeah. 904 00:45:25,040 --> 00:45:28,960 This is all that we all that we do basically is, you know, build 905 00:45:28,960 --> 00:45:32,960 out databases and do kind of quantitative research and build 906 00:45:32,960 --> 00:45:34,680 software to process the information. 907 00:45:35,600 --> 00:45:37,520 That's a big part of our day-to-day life. 908 00:45:37,520 --> 00:45:40,000 And one of the most fun things that we've been thinking about, 909 00:45:40,000 --> 00:45:41,080 right. Is that one of the things that's 910 00:45:41,080 --> 00:45:43,640 sort of unique about biotech, if you if you go and talk to the 911 00:45:43,800 --> 00:45:46,320 the best biotech investors, you know, they often have, you know, 912 00:45:46,320 --> 00:45:49,840 50 pH D's on staff or something that are going and reading 913 00:45:49,840 --> 00:45:51,840 clinical trial data and coming of you. 914 00:45:51,840 --> 00:45:54,120 And is this molecule good or is that molecule good? 915 00:45:54,120 --> 00:45:56,400 And for us is sort of a systematic quantitative manager. 916 00:45:56,400 --> 00:46:00,160 You know, we don't have the only pH D's we have to borrow from 917 00:46:00,160 --> 00:46:03,600 G's are the poor, hungry, desperate to get rich type, not 918 00:46:03,600 --> 00:46:09,520 the so, so, so that's us. But but you know, you think 919 00:46:09,520 --> 00:46:11,880 about it at that and what we say is, you know, we're never going 920 00:46:11,880 --> 00:46:14,840 to compete on that front. And you know, analyzing molecule 921 00:46:14,840 --> 00:46:17,920 by molecule, the 500 biotech companies, you know, but you 922 00:46:17,920 --> 00:46:20,840 know what's great? Because every biotech hedge fund 923 00:46:20,840 --> 00:46:24,000 files A13F filing, you know, we, we have an approved list, right? 924 00:46:24,000 --> 00:46:25,920 So if you think, if you know, if you think the guys at that 925 00:46:25,920 --> 00:46:28,960 biotech hedge fund with their 50 PhDs are really smart, we have 926 00:46:28,960 --> 00:46:31,280 an approved list from them of every company that they 927 00:46:31,280 --> 00:46:33,520 validated through their fundamental process. 928 00:46:33,520 --> 00:46:36,480 So, you know, you could pick the 10 how tech funds you want and 929 00:46:36,480 --> 00:46:39,080 you can say, let's, let's let's create sort of fundamental 930 00:46:39,080 --> 00:46:42,880 validation by industry experts as a factor and you can actually 931 00:46:42,880 --> 00:46:44,920 see that that factor outperforms over time. 932 00:46:45,080 --> 00:46:46,840 Interesting. It's a I mean that makes. 933 00:46:46,840 --> 00:46:48,800 Sense any other factor? Yeah, it makes sense, huh? 934 00:46:49,040 --> 00:46:51,080 That's neat. And then how do you, how do you, 935 00:46:51,080 --> 00:46:52,960 how does your firm generally manage money? 936 00:46:52,960 --> 00:46:56,320 Are you Smas? Is it like you don't have an ETF 937 00:46:56,320 --> 00:46:58,280 do you? No, we, we do everything. 938 00:46:58,280 --> 00:47:00,760 We're a hedge fund firm. So everything OK is generally 939 00:47:01,000 --> 00:47:02,720 commingled hedge funds and some Smas. 940 00:47:03,120 --> 00:47:04,560 Interesting. That's cool, dude. 941 00:47:04,600 --> 00:47:06,160 How do you how did I mean, what happened? 942 00:47:06,160 --> 00:47:08,040 You got out of college? Well, I mean, I know you get you 943 00:47:08,040 --> 00:47:12,040 started to work, but I I like how you said in the book that 944 00:47:12,040 --> 00:47:16,200 that you you quickly, you don't really get too far being the guy 945 00:47:16,200 --> 00:47:19,080 in the office saying, wait a second, none of this makes any 946 00:47:19,080 --> 00:47:21,640 sense. We we should we should be doing 947 00:47:21,640 --> 00:47:24,440 things differently. So what did it look like when 948 00:47:24,440 --> 00:47:29,200 you decided to go out on your own and and how did you get 949 00:47:29,200 --> 00:47:32,920 traction with your writing? Were you writing pieces and just 950 00:47:32,920 --> 00:47:34,760 cold sending it to people or did it? 951 00:47:35,160 --> 00:47:37,240 I know, I know Grant supported you a little bit in the 952 00:47:37,240 --> 00:47:38,440 beginning. How'd that happen? 953 00:47:38,440 --> 00:47:41,760 Yeah. So, you know, I think that I had 954 00:47:41,760 --> 00:47:45,440 this sort of experience of sort of doing a lot of research. 955 00:47:45,600 --> 00:47:49,160 I was probably really turned on by like the Phil Tetlock and 956 00:47:49,160 --> 00:47:52,840 Daniel Daniel Kahneman stuff about cognitive biases and also 957 00:47:52,840 --> 00:47:55,760 the science of forecasting. And then I started kind of going 958 00:47:55,760 --> 00:47:58,000 down that route and thinking about how that applies to 959 00:47:58,000 --> 00:48:01,200 investing and reading a lot of these academic studies about, 960 00:48:01,240 --> 00:48:03,960 you know, predictive power and resistance and predictability of 961 00:48:03,960 --> 00:48:05,320 growth. And right, like you kind of go 962 00:48:05,320 --> 00:48:07,320 in through this literature and you sort of start to come to 963 00:48:07,320 --> 00:48:10,400 this world view that like the future is really unpredictable 964 00:48:11,040 --> 00:48:13,120 and that a lot of the work that we do to try to predict the 965 00:48:13,120 --> 00:48:16,320 future increases our confidence that increasing our accuracy. 966 00:48:16,320 --> 00:48:20,240 So it's actually bad. And basically doing all that 967 00:48:20,240 --> 00:48:22,080 research and like thinking through all that, maybe a 968 00:48:22,080 --> 00:48:25,040 horrible employee at a private equity firm, right, where the 969 00:48:25,040 --> 00:48:28,040 entire job is like building future cash flow models. 970 00:48:28,040 --> 00:48:29,920 And like, what do we think is going to happen to this industry 971 00:48:29,920 --> 00:48:32,120 in four years, right? And like no one wants the 972 00:48:32,120 --> 00:48:33,640 analysts, but like, fuck if I know. 973 00:48:33,640 --> 00:48:35,280 Like this is completely unpredictable. 974 00:48:35,280 --> 00:48:37,840 It's a huge waste of time. Like we do two months of work, 975 00:48:37,840 --> 00:48:39,840 we're just gonna be more confident and no more accurate. 976 00:48:40,040 --> 00:48:42,600 Like that's not a helpful. Answer No it is not. 977 00:48:42,600 --> 00:48:43,080 It's. Really. 978 00:48:43,080 --> 00:48:45,920 Actually quite insufferable. I think I became sort of like 979 00:48:45,920 --> 00:48:49,520 the world's worst, most insufferably arrogant, obnoxious 980 00:48:49,520 --> 00:48:51,440 employee. Yeah, they're like, Sir, do you 981 00:48:51,440 --> 00:48:53,840 understand the job that you were hired here? 982 00:48:53,840 --> 00:48:56,800 You're not doing it. Yeah, we're paying you here. 983 00:48:56,800 --> 00:48:58,880 What the hell are you doing? You're just like creating 984 00:48:58,880 --> 00:48:59,840 problems. You're. 985 00:48:59,840 --> 00:49:02,320 Like the family member that argues at every dinner. 986 00:49:03,280 --> 00:49:05,760 Right, that was just awful. And, and so I think, you know, I 987 00:49:05,760 --> 00:49:07,680 was so young, it was my first job out of college. 988 00:49:07,680 --> 00:49:11,000 And so I sort of like that process that the way I process 989 00:49:11,000 --> 00:49:14,480 that experience, it's like, wow, I'm a terrible employee and I'm 990 00:49:14,480 --> 00:49:16,960 like anyone I go to work for is going to hate me. 991 00:49:17,480 --> 00:49:21,000 And therefore like I need to find something different to do 992 00:49:21,000 --> 00:49:23,720 where I I'm not going to get into this trap again because 993 00:49:23,720 --> 00:49:26,480 clearly this isn't working. So I sort of feel like I became 994 00:49:26,480 --> 00:49:29,840 an entrepreneur because there was number other option, or at 995 00:49:29,840 --> 00:49:32,760 least I didn't perceive one rather than that I'd always 996 00:49:32,760 --> 00:49:34,400 dreamed of being an entrepreneur, which is the story 997 00:49:34,400 --> 00:49:37,080 for so many people. And so I started the firm and I 998 00:49:37,080 --> 00:49:39,960 sort of thought, well, the best I can do is do it by myself 999 00:49:39,960 --> 00:49:43,000 because again, I'm I clearly am so insufferable and pissed 1000 00:49:43,000 --> 00:49:44,560 people off. And so that was sort of what led 1001 00:49:44,560 --> 00:49:47,040 me to do it. And then I just my next thing 1002 00:49:47,040 --> 00:49:48,640 was to come out with these things and it's out. 1003 00:49:48,640 --> 00:49:51,080 The future is unpredictable. No one can predict earnings. 1004 00:49:51,400 --> 00:49:54,840 And, you know, if you're someone trying to allocate money and you 1005 00:49:54,840 --> 00:49:56,720 hear that you're sort of like, well, who's this punk? 1006 00:49:56,720 --> 00:49:58,760 You know, What does he know? And I realized, like, I had to 1007 00:49:58,760 --> 00:50:01,520 explain myself that it like wasn't like, I just kind of like 1008 00:50:01,520 --> 00:50:04,040 thought this. It was like, oh, I spent years 1009 00:50:04,040 --> 00:50:06,080 reading about it and studying the literature on it. 1010 00:50:06,080 --> 00:50:08,720 So I just felt like a sort of try to defend myself. 1011 00:50:08,960 --> 00:50:11,280 I had to write. And so I started writing about 1012 00:50:11,280 --> 00:50:13,360 my views and where they came from and what the evidence for 1013 00:50:13,360 --> 00:50:15,440 them was. And I sort of started sending it 1014 00:50:15,440 --> 00:50:17,880 to everyone I knew. And then everyone I met with. 1015 00:50:17,880 --> 00:50:20,280 I, I don't know, maybe there are 50,000 people that read our 1016 00:50:20,280 --> 00:50:22,880 research now, but maybe there were 500 to start with. 1017 00:50:22,880 --> 00:50:25,440 And so it just sort of grew and grew overtime and the firm's 1018 00:50:25,440 --> 00:50:27,880 grew with it because there was like minded people out there who 1019 00:50:27,880 --> 00:50:30,160 liked what I was saying and liked my research. 1020 00:50:30,160 --> 00:50:32,360 And they'd come and call and say, hey, you know, Dan, do you 1021 00:50:32,360 --> 00:50:35,280 manage money? And, you know, can we, can we go 1022 00:50:35,280 --> 00:50:37,400 along for the ride with you on this, you know, intellectual 1023 00:50:37,400 --> 00:50:39,440 journey. And that's been a really 1024 00:50:39,440 --> 00:50:41,840 rewarding part of what we've, what we've done is sort of 1025 00:50:41,840 --> 00:50:45,240 finding these people all over the world that sort of think in 1026 00:50:45,240 --> 00:50:48,840 this sort of a unique or, or, or a different way that like what 1027 00:50:48,840 --> 00:50:51,800 we're doing and are willing to take some, some chances on some 1028 00:50:51,800 --> 00:50:54,720 of our risky ideas. And, you know, I, I think that, 1029 00:50:55,800 --> 00:50:58,600 you know, one of the things that I've been talking about recently 1030 00:50:58,600 --> 00:51:02,040 is the importance of waiting and investing because it, it, it 1031 00:51:02,040 --> 00:51:05,280 turns out that, you know, you were very nice to note that I 1032 00:51:05,280 --> 00:51:08,160 was early on private equity that and, and now it's good that I 1033 00:51:08,160 --> 00:51:09,960 was early, right? I thought of it first. 1034 00:51:10,040 --> 00:51:12,160 That was great. But for a while early just meant 1035 00:51:12,160 --> 00:51:14,520 that I was wrong. And you were just somebody that 1036 00:51:14,520 --> 00:51:16,960 was angry that private equity was doing well for a little 1037 00:51:16,960 --> 00:51:18,880 while. Exactly, exactly. 1038 00:51:18,880 --> 00:51:22,920 I was a sort of nasty cynics, snark, snarking in the corner or 1039 00:51:22,920 --> 00:51:25,640 whatever. And now people say, oh wow, 1040 00:51:25,680 --> 00:51:27,400 maybe we should have listened to Dan's warnings. 1041 00:51:27,400 --> 00:51:29,560 Maybe that was prescient. And maybe we should have gotten 1042 00:51:29,680 --> 00:51:32,600 out of private equity in 2018. We'd be in a lot better of a 1043 00:51:32,600 --> 00:51:36,360 place today that we had, but that wasn't evident for a few 1044 00:51:36,360 --> 00:51:38,240 years. And so I think that one of the 1045 00:51:38,600 --> 00:51:40,640 lessons I've learned is the importance of waiting and a 1046 00:51:40,640 --> 00:51:42,480 patience. And I think what you sort of 1047 00:51:42,480 --> 00:51:45,280 want to do and investing the sort of right answer is you put 1048 00:51:45,280 --> 00:51:46,680 yourself in the right position, right? 1049 00:51:46,680 --> 00:51:49,440 You, you, you, you think through what you're trying to achieve 1050 00:51:49,440 --> 00:51:51,640 and you put yourself in a position that reflects those 1051 00:51:51,640 --> 00:51:54,400 sort of core beliefs and values. And then you wait. 1052 00:51:54,680 --> 00:51:58,480 And waiting almost always seems like a precondition to success 1053 00:51:58,480 --> 00:52:00,120 in investing is the ability to wait. 1054 00:52:00,120 --> 00:52:03,640 And the ability to wait is dependent on the rigor of the 1055 00:52:03,640 --> 00:52:06,480 process that you went through to evaluate what you do at the 1056 00:52:06,480 --> 00:52:10,520 onset, because you won't be able to wait if your views are 1057 00:52:10,520 --> 00:52:13,560 shallowly held. And so I think a lot of my role 1058 00:52:13,560 --> 00:52:17,640 is sort of spending huge amounts of research time upfront to get 1059 00:52:17,640 --> 00:52:21,400 myself in a position to wait. And that's, that's sort of I 1060 00:52:21,400 --> 00:52:22,880 think what what we do these days. 1061 00:52:23,960 --> 00:52:25,760 That's interesting. How do you how do you? 1062 00:52:26,800 --> 00:52:30,400 Well, I don't think that you're you're you probably can lean 1063 00:52:30,400 --> 00:52:33,880 back on process, but how do you make sure that all of the 1064 00:52:33,880 --> 00:52:36,520 research that you're doing doesn't give you overconfidence 1065 00:52:36,520 --> 00:52:39,920 in the confidence that you're not confident in anything, if 1066 00:52:39,920 --> 00:52:41,400 that makes any sense That's. Pretty meta. 1067 00:52:41,400 --> 00:52:43,200 It's like we're looking in a mirror of a mirror. 1068 00:52:43,200 --> 00:52:45,120 Of a mirror of a conversations with yourself. 1069 00:52:46,160 --> 00:52:47,720 Yeah. I mean, I think a lot of it, you 1070 00:52:47,720 --> 00:52:49,520 know, through a sort of scientific or quantitative 1071 00:52:49,520 --> 00:52:52,160 process, right, of, of trying to say, Hey, can we, you know, 1072 00:52:52,160 --> 00:52:54,640 create a back testing environment that, you know, and 1073 00:52:54,640 --> 00:52:57,560 even then knowing that, hey, even what we back test is going 1074 00:52:57,560 --> 00:53:00,320 to be overconfident and, and real life's always going to be 1075 00:53:00,320 --> 00:53:03,360 worse than the back test. But I think it's, it's sort of 1076 00:53:03,360 --> 00:53:07,480 trying to apply a rigorous scientific quantitative approach 1077 00:53:08,000 --> 00:53:10,840 as sort of the best we can do. And then we bring in outside 1078 00:53:10,840 --> 00:53:13,560 experts to that what we do. So we have Sam Hanson, who's a 1079 00:53:13,560 --> 00:53:14,880 professor at Harvard Business School. 1080 00:53:14,880 --> 00:53:18,240 We bring him in once a month. He comes in like we, we present 1081 00:53:18,240 --> 00:53:19,480 his, you know, it's like a murder board. 1082 00:53:19,480 --> 00:53:21,560 We're going to present our research and, and, and he's 1083 00:53:21,560 --> 00:53:23,760 going to RIP it apart and we'll go back to the drawing board. 1084 00:53:23,760 --> 00:53:26,920 And, you know, I, I found that, you know, and, and we have a 1085 00:53:26,920 --> 00:53:30,080 great team, really smart people. And so if we create that sort of 1086 00:53:30,080 --> 00:53:32,600 environment where we're testing ideas and pushing on them and 1087 00:53:32,600 --> 00:53:35,080 everyone's reviewing them and arguing about them, you know, 1088 00:53:35,080 --> 00:53:36,480 we're going to get to a great outcome. 1089 00:53:36,480 --> 00:53:40,480 And and that's sort of what I've been trying to build if I if I 1090 00:53:40,480 --> 00:53:42,280 can. Yeah, I like it. 1091 00:53:42,280 --> 00:53:45,280 One thing that we haven't covered and it popped into my 1092 00:53:45,280 --> 00:53:48,720 head so apologies for jumping around here, but if earnings, if 1093 00:53:49,880 --> 00:53:53,800 like growth is not predictable, why is volatility or auto 1094 00:53:53,800 --> 00:53:57,480 correlated and why does that phenomenon exist in the world? 1095 00:53:57,480 --> 00:54:01,040 Is it just uncertain times breed uncertainty, or is there 1096 00:54:01,040 --> 00:54:03,320 something else that you've been able to sort of think about? 1097 00:54:03,920 --> 00:54:05,240 Yeah. So volatility is quite 1098 00:54:05,240 --> 00:54:08,280 predictable and it's predictable both in a cross section and a 1099 00:54:08,280 --> 00:54:11,760 time series. So, and I would say think about 1100 00:54:11,760 --> 00:54:14,240 it this way, right? In a given month, I'm very 1101 00:54:14,240 --> 00:54:17,440 confident that bonds are going to be less volatile than stocks, 1102 00:54:17,480 --> 00:54:19,640 but I'm actually less confident whether bonds are going to beat 1103 00:54:19,640 --> 00:54:21,800 stocks or underperforms. Like I know that stocks 1104 00:54:21,800 --> 00:54:24,800 outperform bonds in the long run in any given month, right? 1105 00:54:24,800 --> 00:54:28,560 Stocks, probably a 55 percent, 60% chance of beating bonds, but 1106 00:54:28,560 --> 00:54:30,920 it's like almost 100% that the stocks are going to be more 1107 00:54:30,920 --> 00:54:34,360 volatile than the bonds. And so in sort of a cross 1108 00:54:34,360 --> 00:54:35,640 section, right? And then you can think of like 1109 00:54:35,640 --> 00:54:38,840 within the stock market, like, hey, next month our biotech 1110 00:54:38,840 --> 00:54:41,520 stocks going to be more volatile or utility stocks going to be 1111 00:54:41,520 --> 00:54:43,000 more volatile. It's like, well, probably 1112 00:54:43,000 --> 00:54:44,960 biotech. And what about our small caps 1113 00:54:44,960 --> 00:54:47,120 gonna be more volatile? Large, yeah, small caps, right? 1114 00:54:47,120 --> 00:54:49,480 So it turns out that sort of volatility on a sort of 1115 00:54:49,480 --> 00:54:52,080 cross-sectional basis is very predictable. 1116 00:54:53,320 --> 00:54:55,720 And again, returns aren't, but the file is. 1117 00:54:56,360 --> 00:54:59,320 And then the next thing is that sort of in a time series right 1118 00:54:59,480 --> 00:55:02,520 now if if last week or last month was really volatile, 1119 00:55:02,720 --> 00:55:05,720 probably this month is going to also be be volatile, right. 1120 00:55:05,720 --> 00:55:08,200 Volatile doesn't follow a random walk because it's sort of like, 1121 00:55:08,520 --> 00:55:10,960 you know? People get kind of last month. 1122 00:55:10,960 --> 00:55:14,160 They're still going nuts and it'll take a little while for 1123 00:55:14,160 --> 00:55:16,720 them to calm down about whatever it is that sort of riled them 1124 00:55:16,720 --> 00:55:20,200 all up. And so you see that sort of last 1125 00:55:20,200 --> 00:55:22,720 month's fall is a pretty good predictor of next month's fall 1126 00:55:22,720 --> 00:55:24,040 and sort of an asset class level. 1127 00:55:24,040 --> 00:55:26,600 And so you combine those two cross-sectional and time series 1128 00:55:26,600 --> 00:55:29,280 fall predictability and you come up with a world in which you can 1129 00:55:29,280 --> 00:55:32,080 manage risk pretty well because you can understand the Vol 1130 00:55:32,080 --> 00:55:35,400 profile both of your assets and time and relative to other 1131 00:55:35,400 --> 00:55:37,600 assets that you're trading. Yeah. 1132 00:55:37,680 --> 00:55:41,240 And what I what I took away from the book, which is probably too 1133 00:55:41,240 --> 00:55:45,760 simplistic, but if, if Val is low and spreads are tight, maybe 1134 00:55:45,760 --> 00:55:48,400 people are overly confident. But I don't know what you do 1135 00:55:48,400 --> 00:55:52,760 with that information. And and I think we got to stay 1136 00:55:52,760 --> 00:55:55,040 tuned to your research to figure out what you do with the 1137 00:55:55,040 --> 00:55:56,440 information. Yeah. 1138 00:55:56,840 --> 00:56:00,840 I think that I would think about it as sort of like a California, 1139 00:56:02,080 --> 00:56:06,160 a California forest. And the longer the longer 1140 00:56:06,160 --> 00:56:10,360 there's been no rain and the longer there's been no effort to 1141 00:56:10,360 --> 00:56:13,440 manage the forests, the riskier the forest is for a forest fire. 1142 00:56:13,680 --> 00:56:15,720 And that's the way I think about low Vol and tight spreads, 1143 00:56:15,720 --> 00:56:17,280 right? It's the longer it's been, the 1144 00:56:17,280 --> 00:56:18,880 more risk doesn't mean it's gonna happen, right? 1145 00:56:18,880 --> 00:56:22,480 You still need a spark arsonist or someone to light a fire or 1146 00:56:22,480 --> 00:56:26,200 something bad to happen. But, but the probability is much 1147 00:56:26,200 --> 00:56:28,760 higher if there's been a protracted period of drought 1148 00:56:28,760 --> 00:56:31,680 than if there hadn't been. And, you know, in financial 1149 00:56:31,680 --> 00:56:34,080 markets, the longer the debt's been cheap and there's been no 1150 00:56:34,080 --> 00:56:37,240 bankruptcies, the more likely that there's a lot of risk of 1151 00:56:37,240 --> 00:56:40,440 people that have sort of gotten away with borrowing too much 1152 00:56:40,440 --> 00:56:43,680 money for for bad projects. Yeah, makes sense. 1153 00:56:44,440 --> 00:56:46,720 That's well, that's interesting, man. 1154 00:56:46,960 --> 00:56:50,360 I tell you there are, there are podcasts that when I do the 1155 00:56:50,360 --> 00:56:54,640 prep, it's less enjoyable than other ones. 1156 00:56:54,640 --> 00:56:56,840 I really enjoyed reading the book and I enjoyed doing the 1157 00:56:56,840 --> 00:56:58,320 prep for this. I, you know, I've read some of 1158 00:56:58,320 --> 00:57:00,720 your research that you have posted in your monthly research 1159 00:57:00,720 --> 00:57:02,840 and I thought the book was really interesting. 1160 00:57:02,840 --> 00:57:06,960 It's one of the few books that I, I mean, I don't want to give 1161 00:57:06,960 --> 00:57:09,400 away the end, but there's sort of isn't an end, right? 1162 00:57:09,640 --> 00:57:12,600 It's still a work in process. Exactly. 1163 00:57:12,600 --> 00:57:15,400 I'm hoping that in 10 years I can write the arrogant investor 1164 00:57:15,400 --> 00:57:16,880 because I've just been right about everything. 1165 00:57:17,120 --> 00:57:19,480 But the one in process is the humble investor. 1166 00:57:19,800 --> 00:57:24,080 So, so I think, but, but no, I think thank you for that. 1167 00:57:24,080 --> 00:57:27,640 And you know, I, I, I think, I think I've learned a lot from 1168 00:57:27,640 --> 00:57:29,560 the last few years. And I think if you're interested 1169 00:57:29,560 --> 00:57:32,040 in learning what I've learned, the the the book and the humble 1170 00:57:32,040 --> 00:57:34,400 investors is a is a great place to start. 1171 00:57:34,800 --> 00:57:38,560 As is the website, right? So that's where you publish 1172 00:57:38,560 --> 00:57:40,680 everything. And if people want to sign up 1173 00:57:40,680 --> 00:57:43,040 for your stuff, you know, where should they go? 1174 00:57:43,600 --> 00:57:46,200 Yeah, you can my ex account at Ford Adcap. 1175 00:57:46,400 --> 00:57:48,800 We've got a link to sign up for our weekly research in the bio 1176 00:57:49,560 --> 00:57:52,640 And we, we publish every Monday morning at 9:00 AM and it's 1177 00:57:52,640 --> 00:57:54,360 always sort of whatever the latest thing we're thinking 1178 00:57:54,360 --> 00:57:57,280 about is. And and and I, I tend to think 1179 00:57:57,280 --> 00:57:58,880 we think about pretty interesting things. 1180 00:57:59,280 --> 00:58:01,280 Yeah, I would agree. You're always you're always 1181 00:58:01,280 --> 00:58:04,880 interesting to listen to And I I thought, you know, people that 1182 00:58:04,880 --> 00:58:08,560 like this interview, listen to the MEB Faber interview that's 1183 00:58:08,560 --> 00:58:12,160 more long firm on biotech. I thought that was a great, 1184 00:58:12,320 --> 00:58:14,520 great podcast you did. Thank you. 1185 00:58:15,600 --> 00:58:18,040 Anything that I didn't cover in this interview that you want to 1186 00:58:18,040 --> 00:58:20,200 get out there? No, this has been great. 1187 00:58:20,480 --> 00:58:22,320 All right, cool. Well, thank you very much for 1188 00:58:22,320 --> 00:58:23,240 joining the show. My. 1189 00:58:23,280 --> 00:58:23,840 Pleasure. Thank you. 1190 00:58:23,920 --> 00:58:25,680 This was a lot of fun. Thanks for doing all the prep. 1191 00:58:25,680 --> 00:58:27,360 That really made it a great interview. 1192 00:58:27,360 --> 00:58:30,120 So it's fun for me, no? Worries man, again it was a 1193 00:58:30,120 --> 00:58:33,240 pleasure so look forward to staying in touch and thanks 1194 00:58:33,240 --> 00:58:35,080 again. You too. 1195 00:58:35,200 --> 00:59:02,880 Bye. None. 1196 00:59:38,740 --> 00:59:38,930 Music.