Transcript: Savita Subramanian

The transcript from this week’s, MiB: Savita Subramanian, US Equity & Quantitative Strategy, Bank of America, is below.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

~~~

This is Masters in business with Barry Ritholtz on Bloomberg Radio

Barry Ritholtz: On this week’s podcast. What can I say? Savita Sub Romanian, formerly of Merrill Lynch. They got bought by Bank America. She’s been with them for 23 years. Her current title is Head of Equity and Quantitative Strategies. SAVI is one of these women in the world of finance who is a powerhouse. Her quant work is wildly respected on the street. She’s a regular on the institutional investor all star. I think for like the past 11 years, she manages hun literally hundreds of models and helps create just an endless amount of research and content. Her work is super high quality and is relied on by a lot of institutional, as well as main street investors. I found the conversation really fascinating. She is one of the few people who combine quantitative investing with behavioral finance. Not a common one-two punch, and and she’s fantastic at it. I found the conversation to be absolutely intriguing and a whole lot of fun. And I think you will also, with no further ado, my discussion with Bank of America’s Savita. Subramanian.

Savita Subramanian: Thank you so much,

Barry Ritholtz: Subramanian. I think I’m getting your name right. Subramanian.

Savita Subramanian: I’ve heard all sorts of things, right?

Barry Ritholtz: I try not to butcher people’s names, but let’s talk a little bit about your, your background. So ba in mathematics and philosophy from Berkeley, an MBA from Columbia. I’m kind of in intrigued by the idea of philosophy and math. What was the career plan?

Savita Subramanian: Yeah. Well, there was no career plan really. So at Berkeley, I ended
up changing my major a few times;  I started out as an electrical engineering computer science
major. And then I realized that there are basically no girls in any of those classes.

Barry Ritholtz: Well, back then, maybe not more today. Not

Savita Subramanian: Now. Yeah. Right. Which is a, a huge relief. But I also realized that I love to write, I love to read, and I kind of wanted to have some sort of a liberal arts aspect in my career. I took a class called Existentialism in Film and Literature. It’s like one of these Berkeley classes that Right. You know, this like completely pointless once you graduate, but it was,

00:02:35 [Barry Ritholtz] It’s, it’s pointless. One year, I, I took an existential class in college. Yeah. I got a, a great mark on the midterm, and the final was a paper, which I never handed in. And the professor asked me why, and I said, what does it matter? And he is like, you know, I, I feel compelled to give you a grade for that

Savita Subramanian: At a plus. Yeah.

00:02:53 [Barry Ritholtz] You, I wish that was a joke, but it’s actually, it’s actually true. So

Savita Subramanian: I wasn’t that smart. I did all the work.

00:03:00 [Speaker Changed] I read a quote from you way back when you said your parents were pushing you to be either an engineer or a doctor. Is this true? I mean, it’s such a cliche. Indian parents, Jewish parents, go to school, become a doctor.

Savita Subramanian: Well, I mean, there’s a reason. It’s a cliche. It’s pretty much the norm. I mean, it happened to, like me and everybody I know who’s a, you know, child of a, an immigrant from India. So it’s kind of, I mean, I think it was, you know, it was the seventies. It was unclear how anybody was gonna make their living. My parents were both in high tech. My dad was an engineer and my mom was a
software person, so Oh, really? Yeah. They were both steeped in technology. We
00:03:42 [Speaker Changed] Lived in Silicon Valley.
00:03:43 [Speaker Changed] In Silicon Valley. They were, you know, early, early days in Mountain View
before it was, you know, Google eyes
00:03:50 [Speaker Changed] Crowded and, and just
00:03:52 [Speaker Changed] Exactly before there was traffic. But it was, it was, I think that my parents,
you know, they came here for us to have a better life to make some money, you know, not, you know,
to to, to basically live the American dream. And I think that the only legitimate careers were really in the
sciences or, you know, kind of practical applications today. They’ve completely accepted me for who I
am as the dark, you know, dark art of finance person. But, but back then,
00:04:23 [Speaker Changed] You’re the black sheep in the family. You didn’t become a doctor.
00:04:26 [Speaker Changed] I’m black sheep in the family. Exactly. You know,
00:04:27 [Speaker Changed] My, see, see, for Jewish parents, if you go to law school, they’ll put up with
that. It’s like the, the, the old joke
00:04:34 [Speaker Changed] Law school is just barely accepted.
00:04:35 [Speaker Changed] Right. It’s ti all right, we’ll, we’ll, we’ll allow it. It’s three years. We’ll allow it.
Right, right. But really, medical school is our first choice.
00:04:42 [Speaker Changed] Exactly, yes. You know, the drill. So yeah, so I was a rebel and, and I mean,
the reason I did mathematics and philosophy was that I have a very short attention span. So I found
myself getting kind of bored with my math problem sets, and then I could shift to philosophy and then
go back and forth. So it was actually pretty ideal for me.
00:05:01 [Speaker Changed] So, so how do you end up at, at Atcu Kemper In, in both New York and San
Francisco Yeah. In the 1990s. That, at that point, I know you, we will talk about your internship a little
later, but at that point, are you like, I think this is the career i, I wanna be in?
00:05:18 [Speaker Changed] No, I had no idea. When I graduated what I wanted to do, in fact, I was
convinced that I wanted to be a professor in philosophy, and I took the GRE and all those tests and I
applied and I was gonna get a PhD in philosophy. And I, you know, did all the work, but I realized I had to
support myself while I was waiting to hear back. So I got a job in finance. I moved to New York ’cause I’d
always wanted to be in New York. New York was my destination. And, and I got a job at SC doing
something really random. I think it was, I think I was working as a technical writer on their software
application, but I was just kind of bouncing around and looking for, you know, a place where I could earn
a steady living and abide my time before I went to grad school. And then I started to realize that
philosophers of professors of philosophy end up having to live in really random places in the country.
00:06:15 [Speaker Changed] Wherever they get a job,
00:06:16 [Speaker Changed] Wherever they get a job, they’re, you know, they don’t make a lot of cash.
And meanwhile, I was doing, you know, I was working at this financial services company and I was really
interested in what they were doing. It was, it was kind of like philosophy meets mathematics, because
finance to me is sort of a fuzzy science with no answers, very logical. So it’s got this math angle where it,
you know, it’s all numbers, but then there’s this behavioral angle and psychological angle where, you
know, it’s, it’s kind of a fun problem to tackle. So I realized I could make a lot more money working in
finance and being a philosophy professor. And, and I, I, I basically kind of stayed the course.
00:06:59 [Speaker Changed] Today’s episode of Barry confirming his priors is brought to you by, so that
very much is, you know, one of the reasons I was looking forward to this conversation is how much
everything you write is just right in my sweet spot. You could, you could pull that out. But let’s, I wanna
talk about the internship. So let’s talk, let, let’s go over there. So I mentioned you were an intern in
college, and this is kind of fascinating, you interned for a Merrill Lynch quant team, which fast forward
20 plus years later, that’s now the team that you lead at Bank of America Merrill Lynch, now known as B
of A.
00:07:40 [Speaker Changed] Right, exactly. So that was actually my internship during business school. So
after, after working at Scutter, I realized I didn’t really have the foundations for financials. I didn’t
understand, you know, kind of how to parse an income statement. And so I went to business school, I
decided to go to business school, get that formal education. And then in the year, the year in between
year one and two of business school, I did my internship with, with Merrill Lynch, with a gentleman
named Rich Bernstein. And yes, you know him, I know Rich, and, and it was, that was the beginning of,
you know, a wonderful career. But it’s, it’s sort of strange. I don’t know whether to feel proud or
depressed about this, but I am the only person I know from business school. I graduated Columbia 2002,
and I’m the only person I know who stayed in the same job for the last 23
00:08:35 [Speaker Changed] Years. So you shouldn’t be depressed about that. You should think about,
you should be grateful for Oh, I found what I wanted to do. It’s true. Right. Outta school. It’s, that’s true.
And I’ve been honing that craft for 23 years. That that is, that’s
00:08:49 [Speaker Changed] The half full
00:08:50 [Speaker Changed] Approach. A a lot of people, especially in finance, kind of flit from flower to
flower until they find the right nectar Yes. That that works for them. And it, it’s kind of, look, it’s not just
me. I’ve seen a bunch of people, they start out as brokers. They eventually get a CFP and they go to the
advisory side. Yeah. Or, or people start out with a CFA and they decide, you know, I would rather
manage the portfolio than tell I’d rather be a PM than advise the pm. Right. And, and so people kind of
have to, they path that journey, that path. Yeah. You were fortunate that, so not only did Scudder lead
you to business school, right, right. But business school led you to the job that you’ve had for the rest of
your life to,
00:09:34 [Speaker Changed] To rich, to quant strategy. Now equity, it’s just been a dream come true.
Yep.
00:09:39 [Speaker Changed] So you had mentioned the behavioral side of finance. Yeah. Not a lot of
quants marry behavioral finance to the mathematical side. Tell us how, how this sort of mixture, which,
which I love. It works so well for me, I, I, I started on a trading desk. I kind of stumbled into behavioral
finance in the mid nineties right. Before all the cool kids were doing it. And it suddenly like, oh, all of this
stuff that seems sort of random now, at least there’s an explanation for the randomness and it kind of
makes sense why people do the things they do. We’re, you know, we’re just not wired for this.
00:10:20 [Speaker Changed] Right, right, right, right. No, I think that that’s the part of it that I find the
most interesting is the idea that, you know, a stock price doesn’t really have a, you know, the fair value
of an an investment instrument is somewhat arbitrary. Right, right. And then it’s, you know, it’s supply
demand. It’s perception. Perception is reality for many of these companies. So, I mean, I think the, the
day that I realized that behavioral finance deserves a very prominent place in the arsenal of models that
we all use was when I got a, i, I got the job as equity strategist and I realized that probably the most
important number that I publish is our yearend target. It’s kind of a silly number, but people are going to
think you’re smart or dumb based on that number. And so I said, okay, let’s use all these quant models
that I’ve been building for the last 10 plus years. And after testing all of them, it turned out that there
was one model that was better than everything else of predicting the next 12 months of s and p returns.
And, and that was a behavioral model, really.
00:11:38 [Speaker Changed] How, how do you measure behavior in a quantitative model for equities?
00:11:42 [Speaker Changed] It’s a very cool model. And I actually was lucky enough to inherit it from my
former boss, rich, who I think inherited it from his former boss. So it’s been around at Merrill for, for,
you know, since the eighties.
00:11:54 [Speaker Changed] Who was, who was Rich’s former boss?
00:11:57 [Speaker Changed] I can’t remember. We’ll have to get him on and ask him. Okay. Alright. But
00:12:00 [Speaker Changed] I’ve had him on Yeah. And I’m sure he’s told me, but you know,
00:12:03 [Speaker Changed] He may, yeah, we’ll we’ll look it up in the annals, but you know, it’s been
around for, it predates rich Bernstein’s. So, so basically this model is just a simple straight average of all
the Wall Street strategists recommended allocations to stocks in a balanced portfolio. So if you go to
your broker and he or she tells you, you should put, you know, 60% in stocks, or you should put 40% in
stocks, we take all those numbers from the different houses and we average ’em together. We’ve been
doing this every month since you 1980. And it turns out to be the best contrary indicator
00:12:48 [Speaker Changed] On what Oh, really? To do with it. I thought you were gonna go with, oh, it’s
a very wisdom of crowds and the
00:12:53 [Speaker Changed] Averages. No,
00:12:53 [Speaker Changed] No, no, no. Whatever it averages out, run the opposite
00:12:56 [Speaker Changed] Direction. Do the opposite. Yes.
00:12:57 [Speaker Changed] No kidding.
00:12:58 [Speaker Changed] That was the punchline of this indicator. And I thought that was so
fascinating. But then when you peel back the onion, you realize there’s a reason for it. It’s because, you
know, when everybody’s looking at all this data and it all seems terrible, chances are that information’s
priced into the market. Exactly. And it’s gonna surprise in the opposite direction.
00:13:18 [Speaker Changed] I, I, I wanna say to go back to Rich Bernstein’s boss, was it Bob Farrell or
was Bob Farrell two bosses before? Gosh, I don’t even know. I kind of remember him his late eighties,
early
00:13:29 [Speaker Changed] Nineties. Yeah. Bob Ferrell was, I never met him
00:13:32 [Speaker Changed] Seventies 80 or like way before my time also. Did
00:13:34 [Speaker Changed] You ever have Oh, yeah, yeah, yeah, yeah. I
00:13:35 [Speaker Changed] Met him at a, a, a Market Technician’s Association. Oh, nice event. I, I, I
interviewed him for one of their events. But Bob Farrell’s 10 investing rules.
00:13:46 [Speaker Changed] Yes. Legendary.
00:13:47 [Speaker Changed] That was gospel. Yes. And and to this day is still Yes. Like I, you, you’re hard
pressed to find another 10 rules that are as insightful and astute and still relevant. Completely.
00:13:58 [Speaker Changed] It,
00:13:58 [Speaker Changed] It, it’s, he he’s always been spectacular. Yeah.
00:14:01 [Speaker Changed] He was onto something and, and he probably, he created this, this
framework. I, I don’t recall, but I mean, I still have financial advisors sending me these Bob Ferrell quotes
and I’m like, bring it. This is great. He was, he was a legend. Right.
00:14:17 [Speaker Changed] I, i, I wanna say that might’ve been one of his quotes. I could quickly find it,
which was something like, if everybody’s talking about it, it, it’s already reflected in the price. There’s no,
right, exactly. There’s no surprise there. Exactly. When all the experts and forecasts agree, something
else is gonna happen. That’s right. Rule number nine from Bob Farrell. So, so you’re, you’re definitely
channeling a little Farrell. Yep. So, so given this, how do you draw a price target or a market forecast
from, here’s the average of all the Wall Street strategists, let’s say it’s plus 8%. Yeah. What do you do
with that on average? Aren’t we about plus eight 9% on the s and p?
00:15:02 [Speaker Changed] We, yeah, so here’s the thing. I mean, if you think about just how much this
number changes over time. So it’s been, you know, back in, in 2001, strategists were telling you to put
about 70% of your money in stocks. But then, you know, just in, I think it was 2012 coming out of the
financial crisis, you know, after, after one round of QE Europe was in a, you know, a recession,
everybody was depressed,
00:15:33 [Speaker Changed] Brexit, grexit, it was all happening.
00:15:34 [Speaker Changed] Everything was all happening. The US just got downgraded. And, and that
was when that indicator plummeted to 43%. Wow. Which was exactly the right time you wanted to buy
equities. Right.
00:15:49 [Speaker Changed] I
00:15:49 [Speaker Changed] Remember minted money since then,
00:15:51 [Speaker Changed] 20 10, 20 11, 20 12, there was so much skepticism Yeah. About equity
markets. And my, my pushback to people was always show me another time when down 57% wasn’t a
spectacular entry Right. Into US equities. Right. And the answer is always 29 and 32. Okay. Is this like 32?
Is this remotely like 29? Right. Right. I mean, you already had the dotcom implosion, if you wanna say
that down 81% was your 29 fine. But that was, you know, seven, eight years ago. And here we are down
57% again,
00:16:27 [Speaker Changed] Here we are again. I know, I know. It was an interesting time. And that’s
right when I got the job as strategist. So it was really interesting ’cause I was looking at this model, which
was my holy grail, right out of everything, we back tested this, had the best predictive power over the
next 12 months, highest R squared. And it was telling us to back up the truck on equities. It was as low
as it had ever been since the 1980s. Wow. And I remember, you know, thinking, oh my gosh, is this a
data error? And I like triple, quadruple check the data. But it was, you know, really a prescient signal
that, that a lot of bad news was, was really priced into the market and it was more likely to, to move
higher. And, you know, since then it hasn’t dropped to 43%, but it’s been pretty low. I mean, I think
we’ve been in this market environment since the GFC where global financial crisis, where folks have just
been worried. And, and the most recent event that we anchor our, our memories to is this horrible
credit crisis that derailed the banking sector that crushed the consumer. And now we’re just assuming
that’s gonna repeat over and over again.
00:17:34 [Speaker Changed] That’s the, the post G-F-C-P-T-S-D. Exactly. What, what was your experience
during the first quarter of 2020 during the pandemic s and p down 34%. Yeah. Neatly within the quarter.
I noticed some people kind of panicked and here comes and other people were like, no, down 34% I’m a
buyer
00:17:54 [Speaker Changed] Buy. Yeah. I think that it was, it was one of those moments where I think I
went on TV at some point and they said, you know, do you buy hair or is there more to go? And
00:18:08 [Speaker Changed] I, yes and yes.
00:18:10 [Speaker Changed] I said, you buy here, you pick your stocks, but you buy here, there are
gonna be a lot of really high quality companies that have been crushed by fear and loathing and you
know, just heading for the hills. And this is an opportunity that we’re probably gonna look back on and
wanna buy. I wish we’d bought
00:18:31 [Speaker Changed] These companies. You know, unfortunately, sometimes people in media or
elsewhere, they talk about catching the bottom and rather than being the bottom tick, you could look at
that big sweeping parabola and say, I don’t need to be at the bottom. Right. I just want to buy as we’re
getting close. Yeah. And buy as we’re moving away from it. Right. And so that two years from now, my
average cost is just far below where the markets are. Exactly. You don’t have to nail the bottom. No.
00:19:00 [Speaker Changed] And you never will nail the bottom.
00:19:02 [Speaker Changed] Yeah. Someone is gonna get lucky. Someone’s gonna get that bottom tick.
Yeah. But 99% of people are not. Right. Right. Right, right, right. So, so rather than try and pick that,
yeah, hey, down X percent at down 25%, I’m a buyer at down 30%, I’m a buyer and I don’t have enough
dry powder that I can keep buying down 40% down 50%
00:19:21 [Speaker Changed] Completely
00:19:22 [Speaker Changed] At, at a certain point when everybody’s terrified. It’s a spectacular,
00:19:26 [Speaker Changed] It is, it’s a spectacular buying opportunity. I mean, there’s one thing that I
have looked at that seems to be a good leading indicator of, you know, when you wanna start stepping
in, which is, I mean, momentum, right? There’s a reason that there are so many momentum investors
because the market usually figures out whether things are kind of getting worse or getting better. And
one of the, the, the models that we’ve used to determine whether something is actually cheap and
attractive or cheap, and a falling knife is a falling knife, is looking at earnings revisions coupled with price
momentum. And what we’ve found is that when stocks are going lower, but analysts haven’t taken
down their earnings. So it looks cheap, but it’s only because the sell side is late to react. Right. That’s
when you don’t wanna buy it.
00:20:26 [Speaker Changed] You wanna, so if if there’s downside momentum and you’ve had a whole
bunch of, Hey, we’re changing our earnings estimate, we’re changing our price targets. Right. That, that
means it should be mostly priced then.
00:20:36 [Speaker Changed] Exactly. So you wanna buy a falling, you wanna buy a value stock when its
price decline is starting to slow down, but estimate revisions are still deeply negative. So you’re in this
environment where everybody hates risk and they’re downgrading, downgrading, downgrading, but the
market’s telling you, okay, things are actually not as bad.
00:20:57 [Speaker Changed] Huh. Really interesting. So let’s talk a little bit about a day in the life of a big
bank’s chief Quant. Tell us, how do you spend your time? What are you doing during the day and and
what do you, you know, what keeps you curious? What keeps you wondering about what comes next?
Yeah.
00:21:14 [Speaker Changed] So my day is never the same. And I’m sure it’s, it’s like this for you. I mean,
most people have have kind of things thrown at them that are, you know, out of the ordinary. And I
can’t say that, you know, I walk into the office and I sit down at my desk and I start chugging away at the
computer, even though that’s what I secretly wanna do.
00:21:35 [Speaker Changed] That’s what work from home is for. Yes, exactly. Stay home, keep your face
in the computer, you’re good. Once you get into the office, it’s,
00:21:42 [Speaker Changed] That’s done. Yeah. Game over. Right. But no, but I think that where I get my
best ideas is from talking to super smart people like you, like our financial advisors, like our hedge fund
clients, our, our long only investor clients pensions. So everyone out there who’s been a professional
investor for a while has some edge that is, you know, otherwise they would’ve been fired or left the
industry. But I found that people’s edges are different from one another. So I, I feel like every time I talk
to somebody new, there’s an angle that I haven’t thought about. And then what I like to do is try to
recreate that framework in a model, a replicable model, and then test it to see whether it’s something
worth throwing into the mix or not. And, you know, a lot of my work is just looking at, does, does this,
you know, this this indicator like PE ratio, right? We all talk about PE ratios and how you wanna be, you
wanna buy low PE stocks and you know, sell expensive stocks. But turns out the PE ratios sometimes
predict performance and sometimes they don’t. You can be
00:22:55 [Speaker Changed] In it, it’s kinda worthless if you can’t tell, is this, is this a good moment to
rely on pe or is this a bad moment to
00:23:02 [Speaker Changed] Rely on? Is this yes, is this a good value stock or is it a value trap? So, so
those are some of the things that we test. And then, you know, from talking to clients, we get ideas
around should you have a regime indicator? Should you think about what regime the market is in to
train your framework on what types of attributes to look for? What attributes right now are scarce
versus abundant? And where will investors pay up for a scarcity in the current environment? So, you
know, a lot of these are, are really born from behavioral finance and thinking about how people, you
know, look for opportunities, whether they’re gonna be a bargain hunter or whether they’re gonna be
risk averse and look for unassailable growth. But, but it’s interesting because I think that my best ideas
to this day have come from talking to our really smart clients out there on the field.
00:23:58 [Speaker Changed] So, so you guys run literally dozens of quant models, hundreds. Yeah. I get, I
get your research, I get a handful of research Yeah. From specific people at, at, I I still think of it as
Merrill Lynch, but
00:24:13 [Speaker Changed] Me too. But,
00:24:14 [Speaker Changed] But I notice, so we’ll talk about the content you guys put out, which is
enormous, and we’ll talk about the models. Let, let’s start with the model, since you mentioned it. So
you talked about the consensus of strategists and how that is often, I, I’m assuming not always, but
frequently a contrary indicator.
00:24:35 [Speaker Changed] Yes. It’s often, I mean, really it works the best at extremes. So if you’re in
some kind of neutral territory, it’s not as informative, but if
00:24:43 [Speaker Changed] True for all sentiment measures, right.
00:24:45 [Speaker Changed] For any sentiment measure. Exactly. So there are times when you really,
really, really wanna pay attention to it. And then there are other times where it gives you a little bit
more of a muddled signal.
00:24:54 [Speaker Changed] So, so that one stands out as prescient. What, what else do you think adds
a whole lot of value and helps you navigate what’s going on? What are the
00:25:03 [Speaker Changed] Models? Yeah, so I think when, when you look at, I mean, one of the things
that we’ve started looking at is just like kind of non-financial data. So, you know, not fundamental data.
Like, and
00:25:15 [Speaker Changed] You’re making a face as you say that. So yeah, I could tell you’re like, you’re
like, we, is the jury still out on that or how are you playing with non-financial data? Look,
00:25:25 [Speaker Changed] I think that some of it is really useful. A lot of it is just garbage. Right?
00:25:32 [Speaker Changed] When you say garbage, is it, is it not accurately depicting that sub-sector of
the world? Or is it just a noisy series with not a lot of signal in it?
00:25:42 [Speaker Changed] I mean, a lot of it is just noise or, or corporate corporate management
trying to gain the system. And I’ll give you an example. So let’s talk about earning surprise, right? Okay.
Earning surprise is something that should work, right? If a company beats everybody’s expectations on
earnings, it should drive monstrous performance, especially if it’s a big beat. But what we’ve all realized
over the last, you know, 20 years since Reg FD in 2001 is that management games, their numbers, and
then they beat these made up numbers systematically. And that surprise factor no longer seems to be as
effective as before. We had this sort of massaging of consensus estimates,
00:26:26 [Speaker Changed] The day before we recorded this, you put out a research report, strong
quarter earnings per share, up 6% year over year with better guidance. And here’s the really amazing
part. With 83% of the s and p 500 reporting earnings sales are roughly in line. And the stats were 72% of
these companies being on earnings. So it’s, if three quarters are beating on earnings, what’s the value of
an
00:26:55 [Speaker Changed] Earnings? Who cares? Exactly. Maybe we pay attention to misses because
those guys really screwed up and couldn’t beat their made up numbers. So, you know, I think that there
are different factors that tend to, you know, at some point work and then everybody figures out that
they work and then they start getting gamed. I mean, quants have basically made markets that much
more efficient by, or maybe inefficient. I’m not sure what the right way to look at this.
00:27:21 [Speaker Changed] No, I think I agree with you. I think qu have made, generally speaking, big
money relying on data that’s consistent. Yeah. You know, what starts to happen is the inefficiencies get
arbitraged out, right? They short go term
00:27:35 [Speaker Changed] Inefficiencies go away.
00:27:37 [Speaker Changed] So, so some people have blamed quants on why value has underperformed,
why small caps aren’t doing what the small cap factor is supposed to be. I, I, I don’t,
00:27:48 [Speaker Changed] I don’t buy into that. I,
00:27:49 [Speaker Changed] I’m right. I think the jury is still out on that accusation. Yeah. Yeah. That
said, there are a lot of models out there that aren’t particularly great. Let me ask you, what quant
models do people seem to really be enamored with that you think aren’t really worth it? You mentioned
pe Yeah. And fair value. Those aren’t particularly useful to investors.
00:28:11 [Speaker Changed] Snapshot multiples are not used. Right. I think price to normalized earnings
is useful, but, you know, the other data set that I just wonder about is flows
00:28:21 [Speaker Changed] Because they’re always on such a giant lag. Yeah. Like they were outflows
throughout 23 from mutual funds. Right. And if you, you’re saying, well, I, I, I guess if you’re going the
other way, if you’re saying it’s a sentiment indicator, but for, that’s not how people talk. People talk
about, oh, we have all these giant inflows into, into markets. Right.
00:28:41 [Speaker Changed] Okay. Who cares? That was yesterday. Right? I mean, why does that tell us
anything about the future?
00:28:46 [Speaker Changed] You got me gi gimme another model you think is overrated that people rely
on.
00:28:51 [Speaker Changed] So I think another model that’s overrated is just pure momentum, because I
think momentum works when, until it stops.
00:29:01 [Speaker Changed] It’s,
00:29:02 [Speaker Changed] Yes, exactly. So it’s when it works well, when it’s accompanied by a
fundamental reason. But the idea that you can predict price using price to me just seems to flaunt some
kind of basic financial understanding.
00:29:18 [Speaker Changed] I isn’t that the entire undergirding of trend following.
00:29:22 [Speaker Changed] Yeah. So trend following, I, I mean, I, I worry because I think we’ve been in a
market where trend following has worked remarkably well for at least, you know, a decade.
00:29:32 [Speaker Changed] Certainly for commodities and for currencies. Yeah,
00:29:35 [Speaker Changed] Exactly
00:29:35 [Speaker Changed] Right. Maybe less so for equities or fixed income.
00:29:38 [Speaker Changed] I mean, even in equities, one of the best performing quantitative factors
has been momentum for a really, really, really long time. And one of the worst performing factors has
been valuation. So we’re now in an environment where all the 45-year-old portfolio managers out there
have been, have worked their entire careers in these momentum fueled markets, and they’ve been
trained to believe that valuation doesn’t matter. And I think that’s wrong because valuation does
matter. You know, it matters over a longer time period than maybe just the next day or two
00:30:10 [Speaker Changed] Valuation matters. Eventually it,
00:30:12 [Speaker Changed] It matters. And in fact, one of the most powerful market timing models, not
over the next year, but over the next 10 years, is looking at just a price to normalized earnings ratio for
the s and p 500. So that has explained 80% of 10 year returns. That’s a super high r
00:30:29 [Speaker Changed] How, how do you think of Cape?
00:30:31 [Speaker Changed] Yeah. So it, this is the cyclically adjusted P ratio. And I think that this, that’s
exactly what you wanna pay attention to when you’re thinking about the long term. Unfortunately,
nobody has the luxury of picking stocks for a 10 year period anymore, except for in, you know, our
personal accounts. But, but professional money managers have basically been trained to believe that
price predicts price, and that has worked for a really long time. But I feel like there aren’t any value
investors left out there. Huh? Do you ever worry about that?
00:31:01 [Speaker Changed] So I have a vivid recollection of reading Adam Smith’s the money game and
not really understanding the discussion he had when I first read this, you know, 30 years ago, that
there’s a fund manager and all this fund manager does is hire young 20 something fund managers. And
he describes it as they’re smart enough and not battle scar enough to buy the stuff that terrifies me. And
so I will ride these managers until they blow up and then I’ll fire them and replace them with the next,
like it’s a chapter in, in the money game. And when I was younger, I didn’t get it. But exactly what you
said about if you’re 45. Yes. And per, you know, up until last year, the current generation of bond
managers never seen a rising rate goodness environment. Oh my, exactly. So, so what ends up
happening is you have to bring in these young people who don’t come with institutional memory,
00:32:02 [Speaker Changed] The
00:32:02 [Speaker Changed] Baggage and memory. Yes. So they’ll do things that you, you are terrified of,
and then eventually the conveyor belt replaces them. But I didn’t understand that when I first read it. I
dunno, 25 years ago. Now I kind of get it for exactly the reason you described. That’s
00:32:19 [Speaker Changed] Brilliant. Yeah, yeah, yeah, yeah. That
00:32:21 [Speaker Changed] Makes senses. And, and that book is just absolutely a, you know, a, a gem, a
Wall Street classic for sure.
00:32:26 [Speaker Changed] Yeah. And, and maybe that means that we should only have the tails of the
distribution, like the really old investors and the really young investors
00:32:35 [Speaker Changed] Take out. So it’s a barbell take out that take out everybody middle
00:32:39 [Speaker Changed] Age
00:32:40 [Speaker Changed] Investor. You and I we’re out, they gotta be older than me or or younger
than you. And that’s, that’s the range.
00:32:47 So thank you for getting us. Exactly. So we’re out of jobs losing a job, right? Yes. So, but there,
there is something to be said. So sometimes that works out and sometimes that is disastrous. Yes. So on
Twitter, I’ve been having this ongoing DM conversation with the guy, he’s still anonymous behind TikTok
investors. And what he does is he goes to TikTok and he finds the most absurd, ridiculous investment or
money advice on TikTok. And it’s that exact thing. It’s 20 something with no experience. Right. The one,
the one he said this morning is this guy who’s 20 something and he says, so I figured out how I never
have to pay taxes again. I make all my money in Bitcoin, I got a Bitcoin credit card, I go to the
supermarket, I do this, I do that. It’s all tax free. Like who’s gonna tell me I can’t do that? And then the
voiceover is the IRS. Yes. Yes. They track all of this. You
00:33:55 [Speaker Changed] Just called everybody,
00:33:55 [Speaker Changed] Right? You’re doing, you’re gonna get a 10 99 from wherever your bitcoin
exchange is. That goes to the IRS. What do you think they, they like, they woke up yesterday. I mean,
come on. So, so the problem with people who don’t have the battle scars. Yes. The problem with those
of us with battle scars are sometimes we’re a little risk averse. Right? The problem with people with no
battle scars are they have no sense of, hey, there’s a whole lot of risk in here. Yeah. In not paying your
taxes. Right. Or in day trading from home or whatever. Some, some of the
00:34:29 [Speaker Changed] Meme stocks and whatnot. Yeah, no, you’re right. So you need that, that
sort of institutional knowledge, that domain knowledge from the super old investor, right? And then you
need this like whole cadre of young investors that are kind of moronic, but also are willing to step in. It
takes a lot of risk.
00:34:46 [Speaker Changed] Love that. So what you’re saying, it it, it takes all kinds to make the market,
it takes,
00:34:50 [Speaker Changed] It takes all kinds,
00:34:51 [Speaker Changed] It takes all kinds. Hey, my, my, so when I started out on a desk, one, one of
my favorite, my head trader had all these great lines that, that I should have written down. And I only
remember some of them, but I used to ask a question, why is this person saying this? This is so obviously
wrong and money losing. And he is like, Hey, someone’s gotta be on the other side of the trade,
otherwise who are you gonna buy from? Right? I I guess that’s true. It takes, that’s the other, it takes
two sides to make a market.
00:35:17 [Speaker Changed] That’s, that’s the fascinating thing about markets, isn’t it? There’s always
somebody that’s willing to sell at a certain price and there’s always willing, there’s somebody that’s
willing to buy.
00:35:25 [Speaker Changed] So speaking of selling, let’s talk about something that dates back decades.
The sell side indicator, I remember it in the early days, it was the Merrill Lynch sell side indicator. Now
it’s the Bank of America. So what is the sell side indicator? How does it work?
00:35:39 [Speaker Changed] This is the model I was telling you about,
00:35:42 [Speaker Changed] The consensus
00:35:43 [Speaker Changed] Using Wall Street to do the opposite and make lots of money. That’s exactly
what it is.
00:35:49 [Speaker Changed] And you had nothing to do with its creation. You inherited it. I inherited it.
Have you tweaked it at all since you’ve had it?
00:35:56 [Speaker Changed] I’ve looked at it to see whether, you know, it makes sense to use different
leads or lags whether there’s information content in the actual distribution of strategists numbers. But I
think it’s just kind of, it’s a simple tool that just works because of the fact that, you know, what we were
talking about, just the fact that sentiment when everybody thinks one thing, the market’s gonna do the
opposite of whatever they’re expecting
00:36:25 [Speaker Changed] Has the change in institutional sales and trading. And just the way the sell
side has morphed over the past few decades, a lot of the sell side has moved to the buy side. Yeah. A lot
of big, big funds have their own analysts now that they used to rely on, on the street for. Right. Right.
Does that change this at all?
00:36:44 [Speaker Changed] No, it’s interesting. This is one model that has still kind of retained. Its of
efficacy. In fact, it’s become more effective since the global financial crisis. Huh. If you just look at its
track record of, of predicting positive or negative returns. So it’s kind of interesting to see that just this
old kind of horry chestnut of a model still works exactly the same way it always did and and kind of
sussing out group think herding and basically doing the opposite. So, so this, that’s why it’s one of my
favorites.
00:37:17 [Speaker Changed] So you guys have a huge institutional and sort of mom and pop main street
client base. What sort of analyses do you do with your own data? Yeah. You mentioned flows kind of are
so laggy. Yeah. Is there anything you see, especially on the behavioral side from like Herb Greenberg
used to talk about his email hate meter. Yeah. Like if he said something and he got like a ton of Haiti
pushback,
00:37:47 [Speaker Changed] He’s like, I’m gonna be right.
00:37:48 [Speaker Changed] Yeah. I’m onto something here. If everybody hates this.
00:37:51 [Speaker Changed] Yes. I use that as an informal gauge of, you know what, what if we’re
getting a lot of pushback on a call, I feel, you know, stressed out because everybody’s yelling at me. But I
also feel better about our call. But look, I think there are lots of tools you can use. So one, one tool that I
really like is looking at positioning of the buy side. Because what we’ve found is, especially today, there’s
a lot of group think there’s a lot of career risk driving investment decisions.
00:38:19 [Speaker Changed] When you say especially today, hasn’t that always been true? I
00:38:22 [Speaker Changed] Don’t know. I, I mean one of the things that I’ve been looking at is just
active share of the average active fund. And it’s gotten ver like the average active fund has gotten closer
and closer to the benchmark over the last five years.
00:38:37 [Speaker Changed] Bill Miller says active management is being destroyed by closet indexers.
Yes. And that’s the guy who beat the s and p 515 years in a row right Into, up until the financial crisis.
Yeah.
00:38:50 [Speaker Changed] And I think that is there empirically that’s borne out by what we’re seeing in
our data. But what’s really interesting is if you have a list of companies, one of the things we do every
month, and it’s just a laborious, horrible process. I used to do it and now I am fortunate to have one of
my teammates do it. But you just basically scrape all the 13 Fs out there. Right. You come up with what
everybody loves and what everybody hates. And it’s kind of like the sell side indicator. If you’ve got a
stock that is massively overweight, everybody owns it on in the professional community, there’s
probably not that much upside who’s
00:39:24 [Speaker Changed] Left to buy.
00:39:24 [Speaker Changed] Exactly. So I think that positioning data is important. I love looking at like a
new tool that we’ve been using more is kind of natural language processing applied to research or
transcripts or, you know, I’ll give you one example. So we came up with this analyst tone metric tone,
which tone? TONE. So we look at our own research and we track whether analysts within a sector are
getting more positive or negative by virtue of just their, their language, not their ratings or their
00:39:59 [Speaker Changed] Pricing. You’re, you’re counting how many great quarter guys? Or, or
00:40:03 [Speaker Changed] We’re Well, yeah. Essentially we’re looking at, we’re using these like
dictionary, these lexicon models to suss out how increasingly positive or negative analysts are getting on
certain companies, certain sectors, certain themes. And it turns out to be a very good leading indicator
for analysts changing their ratings for stock performance, for earnings revisions. So there is something to
be said for NLP or you know, kind of these more big data tools that are actually tracking broader signals
over a long period of time.
00:40:37 [Speaker Changed] So that’s a very specific application of AI to research. Yeah. How do you see
AI coming into your space, into the quants or behavioral space? Everybody says it’s gonna have a giant
impact. Yeah. When do you see that happening, if not already?
00:40:55 [Speaker Changed] I mean, I think it’s already happened. If you think about just like certain
industries have just gone away, right? You can, I mean, look, I think it’s gonna replace some of us. It’s
gonna replace a lot of these processes that we do that are really, really boring and laborious.
00:41:13 [Speaker Changed] That’s, scraping is a perfect
00:41:14 [Speaker Changed] Example like the scraping 13. But, but I think at some level you still need to
have that domain knowledge and, and that level of expertise that trains the models. I, I mean essentially
I think that we could just create a pocket analyst at this point. You could create an analyst that, you
know, basically puts together the rough limbs of a, you know, an earnings report, a report on earnings or
a report on, you know, a specific event. And then you have the analyst himself or herself read it and
make sure it makes sense and you know, tweak it, et cetera. But there’s a lot of that route activity that
can be replaced by ai. Whether AI can invest better than a human being. I, I doubt it because, you know,
I, I think that at some level you need that domain experience, you need that behavioral angle. You need
to analyze what’s different this time because there always is something different this time. I think that
that’s the other thing I’ve learned in finance is that you can never just apply the last crisis playbook to
the current environment. And that’s something that I think it’s hard to train a bot or a process on how to
actually sort of determine what you need to factor in this time that is different from all of the historical
data.
00:42:34 [Speaker Changed] Right. They may not repeat, but they rhyme as the old joke and very, very
true. Yeah,
00:42:39 [Speaker Changed] Exactly. But there’s always something that nobody’s paying attention to
that’s gonna blow everything up. And that’s what, you know, we need the human beings to fly around
and look into the whites of the eyes of company management and, you know, kind of figure out what’s
really going on behind the data. And I think it’s, it’s like, there’s an example of this. If you think about,
you know, even that NLP process that I talked about where you’re looking for positive and negative
sentiment. So one of the things that happened over the last, you know, 10 years is that management
realized that quants are scraping their transcripts on conference calls for positive and negative words.
And then there was a way to game it. You could just inject more positive words or, you know, take out
all the negative words. You could, you could basically edit your script so that it would look like, you
know, you were, you were saying all the right things for a quant model. So those are the types of things
that I think, you know, a AI is never gonna figure out, you know, when that’s already in the market when
folks are gaming the system versus when it’s an actual, actual accurate signal.
00:43:51 [Speaker Changed] Huh. That’s incredible. So let’s talk a little bit about some things that are
going on. I saw a quote of yours that I really liked the idea that the market is too expensive should be
debunked. Explain why.
00:44:07 [Speaker Changed] Yeah, so I, I think that there is this tendency of quants, myself included, to
look at a time series and say, okay, if the PE of the s and p 500 right now is 21 times, and it has mostly
been below 15 times and whenever it’s been 21 times in the past, it’s gone down. Those types of
analyses I think are just deeply flawed. Especially in, in light of the fact that the market itself is not one
kind of monolith that’s, that’s always the same. It’s a changing animal. And if you look at the s and p
today, 50% of it is asset light, innovation oriented healthcare and tech. Whereas in 1980, 70% of it was
manufacturing asset intensive, et cetera. So,
00:44:55 [Speaker Changed] So well let me ask you a question about that asset light side. Some people,
Michael MOBAs one, have made the argument that intangibles intellectual property, patents,
algorithms, et cetera, are are deserving of a higher multiple. That they don’t require a massive
investment in factories and, and they’re not capital intensive, right? They’re not manpower intensive,
they don’t need a ton of labor. Shouldn’t they be awarded a higher multiple than, you know, a steel
factory? Right?
00:45:24 [Speaker Changed] Right, right, right. So that’s the idea is that the margins are more stable,
they’re less reliant on risky labor, which, you know, people can go on strike or sue companies whereas
processes can’t. Yeah. So I think there’s, there’s validity to that point. I mean, when I look at the s and p
today, it’s, you know, it’s not only is it a different animal in terms of its sector mix, but it’s also less
levered. Everybody took advantage of super low interest rates, right. To term out their debt and you
know, kind of, so fixed rate obligations are day rigor for the average s and p company versus floating
rate obligations a few year, you know, prior to the crisis. I think that also when you look at the labor
intensity of the s and p 500, it’s become much more labor light. And oh by the way, AI is going to give us
the opportunity over the next 10 years to become even more labor light. I think the whole bull case
around AI right now is not buying the chip makers, it’s buying the index because the index is about to
become that much higher quality. You know,
00:46:35 [Speaker Changed] It’s, let me, let me see if I understand that. ’cause it’s really fascinating.
Everybody’s so focused with Nvidia and now Intel has caught a bid and a few other chip makers. But
really what you’re saying is look at who has a giant or outsized set of labor costs. Either they’re gonna be
able to reduce their head count or their existing head count is gonna become so much more productive
working with ai. Exactly. That we are not recognizing, you know, the
00:47:04 [Speaker Changed] No, but the ascribing that, that, that premium to all the clunky services
companies out there, right? Like this is why I’m bullish on large cap banks. One of the reasons is, which
are
00:47:15 [Speaker Changed] Cheap now, relatively speaking, which,
00:47:17 [Speaker Changed] Which are still in that value cohort and they are also one of the few sectors
that’s become more labor intensive since the financial crisis. Why? Because these regulated banks had
to hire all these legal and compliance and expert folks to make sure we weren’t doing anything bad,
right? So today, think about all those processes, those are much easier to replace with an automated AI
like, you know, bought whatever you wanna call it then than, than any period of time in the past.
Generative AI is new, it’s a new thing. It’s, it’s a game changer for many industries. Call centers have
gone away. I mean, entire industries have gone away, right? Overnight because of the advent of
generative ai. And that’s where I think it’s really bullish is in the ability to replace a lot of these rote, you
know, activities that people right now are being paid to do.
00:48:18 So one of the things that I’ve seen in my quant work is that if you look at any sector of the
market and any peer group, and you look at the labor intensive companies and the companies that are
labor light, the companies that are labor light almost always outperform their labor intensive peers. So
we are sitting right now at a point in time where over the next five to 10 years, or I don’t know how long
it takes, the s and p 500 has this opportunity and this new tool to become even labor lighter than it is
today. That is hugely bullish.
00:48:53 [Speaker Changed] Huh. Re really, really interesting. So this leads me to what you’ve said in not
too long ago, there’s a lot more to the s and p 500 than the semis and the mega cap tech. Is this the, is
AI what’s driving, Hey, you gotta look past, past Nvidia and past the magnificent seven to who are gonna
be the beneficiaries of all this new technology? Yeah,
00:49:17 [Speaker Changed] I think that’s right. I think it’s not just new economy chip purveyors, but it’s
also the companies that buy the chips and become better. But I also think there’s something going on
right now that we should be really excited about, which is that interest rates are no longer at zero,
they’re at 5%. So the Fed has done a lot of work for us. Companies are behaving much more rationally
today than they have in the past. They’re thinking about how to become more efficient. This is
something they haven’t thought about for a really long time because they had all these easy ways to
make money. If, if I’m a corp, if I’m a CFO and I’m not gonna make my earnings numbers next quarter, I
could have borrowed cash for free and bought back enough shares to beat that number, right? So there
were lots of low quality ways of making money since the global financial crisis.
00:50:03 Not anymore. But now we’re back to a more normal hurdle rate. 5% interest rates is not super
high. I think it’s manageable, right? And companies are making all the right moves. If you look at, even
these growth companies like Meta or Alphabet are now initiating dividends. They realize that part of
their mantra needs to be cash returning and capital discipline as well as growth. So, you know, I think
that we’re at a point where the reasons to be optimistic on stocks are that much more than when we
were at zero interest rates pre pandemic. I mean, think about it, the market has absorbed so much bad
news over the last few years.
00:50:44 [Speaker Changed] You, you, not too long ago someone asked you about markets climb a wall,
wall of worry, like it’s a bad thing. Yeah. It’s like, isn’t that a good thing? Isn’t that people are stressed
out about things that the market’s already sussed out? Right,
00:50:59 [Speaker Changed] Exactly. I think that’s right. And I think, you know, even when you think
about where we were in 2021, at the end of 2021, I felt really nervous about stocks because for the first
time we were forecasting negative real rates, which is really, you know, kind of a, a
00:51:19 [Speaker Changed] Problematic, to say the least. It’s,
00:51:21 [Speaker Changed] It’s irrational negative real rates. That’s an irrational environment.
00:51:26 [Speaker Changed] Let me borrow some money from you and I need a quarterly check from
you.
00:51:29 [Speaker Changed] Exactly. I mean that doesn’t make any sense. We were forecasting
something that didn’t make any sense. You know, every economist out there was forecasting negative
real rates and that just felt like something had gone wrong. Nobody was expecting two wars to break
out. Nobody was expecting the fed to hike interest rates from zero to five in a very short period of time.
By the end of 2021, our sell side indicator was at the most bullish levels we’d seen since Oh really? The
global financial crisis. Yep. Nobody thought anything was gonna go wrong. And then Whamo, you saw
bear market. So today I,
00:52:05 [Speaker Changed] And by the way, a bear market in both stocks and bonds
00:52:07 [Speaker Changed] And bonds, exactly.
00:52:08 [Speaker Changed] Which something that you don’t see every 40 years was the last time we we
saw that.
00:52:12 [Speaker Changed] Exactly.
00:52:13 [Speaker Changed] So, so they, the sell side indicator really worked exactly as planned. So, so
let’s talk about where we are in the current cycle. I know you like to discuss there are different phases of
the, of the, both the market and the economic cycle. Where are we in this cycle and and what does that
mean for the next couple of years?
00:52:34 [Speaker Changed] Yeah, I mean, so this is one area where, I’m gonna say this time it is
different. I’m going to say those dreaded words because I think that, you know, where we are today is
not necessarily as clear cut in terms of late cycle, early cycle, you know, recession, no recession. I think
we, you know, I think we’ve had areas of strength and areas of weakness over the last few years. I mean,
we had a global pandemic, a complete shutdown of global economic activity. And then you had certain
pockets of the economy become oversubscribed and other parts of the economy become
undersubscribed. And there’s, there’s been that shakeout ever since. So I still think we’re in this
environment where goods versus services, we’re working out that demand. We’ve seen inventory
tightness and inventory laxity. So we’ve, we’ve seen a lot of like, kind of cross currents that would
problematize just calling this a normal fed hiking cycle. I do think that the other factor that has shifted
demonstrably and deserves more airtime is the idea that, you know, if you look at the areas of risk today
across the spectrum, corporates and consumers were just given a bunch of money from the Fed and the
government. The areas of risk and indebtedness are sitting in the, the, on the government balance
sheet. Right. Not necessarily on corporate or consumer balance sheet. Right.
00:54:06 [Speaker Changed] Everybody refinanced except Uncle Sam.
00:54:08 [Speaker Changed] Exactly. Uncle Sam took, took the whole pile of it and it’s sitting right there
on our balance sheet.
00:54:16 [Speaker Changed] And, and I recall seeing a number of senators and congressmen and they
should chisel this on their tombstones. You know, if we refinance at lower rates, it’ll just encourage
more spending. It’s like, no, they’re gonna spend more no matter what the rates are, you might as well
get a better rate. Exactly. You know, it was just one of those like dumb things that politicians say that,
you know, as soon as you hear it’s not true. And now we’re stuck with a lot of debt and we didn’t even
get a benefit of a decade of, of low rates.
00:54:45 [Speaker Changed] Right, right. I mean, I, I think this debt sitting on government balance sheet
said something to worry about. I mean, I think the other aspect to worry about is not publicly traded
equities, which are marked to market on every change in every macro number, tick by tick, tick by tick
on a millisecond basis. But if you look at private credit, private equity, yeah. Commercial real estate, we
already know it’s, it’s, you know, it’s problematic residential real estate. We haven’t seen a lot of
turnover in residential real estate. ’cause nobody wants to walk away from them
00:55:16 [Speaker Changed] Mortgages. Golden
00:55:17 [Speaker Changed] Handcuffs. Yeah. Yeah. So I think those are the areas where we should be
more worried. But if you’re looking at a stock, it’s pricing in the current environment of rates inflation,
like kind of everything that’s going on right now is in a publicly traded equity vehicle.
00:55:31 [Speaker Changed] Not too long ago we were having a conversation about, you know, so
everything going on in the college campuses now, we were talking about the various endowments and
how they performed. And somehow in 2022 when, when stocks were down about 20% and bonds were
down about 15%. These endowments, some of which are 20, 30, 40% alternatives, like private equity
and private credit, they did just fine. Yeah. It, it’s great when you get to Mark to make believe. Yes. You
know, you could just put what do you, what should we mark this? I don’t know. What do you want it to
be? Right. All right, let’s, let’s put it flat for the year. Flat in this environment looks great. I, I wish I could
get away with that. I actually have to report real performance, not made up stuff. Exactly. And I’ve heard
consultants pitch it, you know, in a down year you have like two years to change your mark on that. And
by the time you change your mark, it’s probably recovered.
00:56:29 [Speaker Changed] Yeah. I mean, I think this is an area that could be ripe for regulation. I just
don’t know how the regulators will figure out how to regulate it. And I’m sure that that will create this
sort of whack-a-mole type of environment.
00:56:42 [Speaker Changed] Well, if you remember back during the financial crisis when everybody had
to mark to market, even things held to maturity that were under order, they had a mark to market. And
that was one of the changes that came about, okay, if this doesn’t have any payments due and you’re, it,
it’s in your hold to maturity account, you don’t have to mark to market, which allows a lot of junk to kind
of get swept under the rug. Absolutely. And, and, and that becomes, you know, that becomes a feature,
not a bug.
00:57:13 [Speaker Changed] And here’s the really worrisome thing. So if you think about just private
equity, the amount of capital raised since 2017 is basically it doubled the size of the private equity
market. Think about what, how we were, we were geared in 2017, 2018, 1920. We weren’t thinking
about 5% interest rates, right? It was, we
00:57:38 [Speaker Changed] Were
00:57:38 [Speaker Changed] Zero, it was lower for longer. This, right? Inflation’s gonna stay low.
Disinflationary pressures, disruption, blah, blah, blah. That was the mantra during that entire stretch of
time where, where a ton of money was raised in these long duration growth themes that were priced
for an environment of zero rates forever.
00:57:58 [Speaker Changed] Right? You’re getting nothing on bonds, but, hey, look, I can get you five or
6% in private equity. The only rub is it’s locked up for seven years. Exactly. So, so once you had the
pandemic, which changed everything, you had the biggest fiscal stimulus since World War II and the
FIRST CARES Act, right? Right. To say nothing of CARES Act two, those two under President Trump in
CARES Act three under President Biden, the fiscal, you mentioned regime change earlier. Yep. The
previous regime was all monetary in the 2010s in the 2020s. It’s mostly fiscal. It’s
00:58:31 [Speaker Changed] Fiscal, it’s inflationary, it’s protectionist. I mean, everything going on right
now, deglobalization and fiscal stimulus, these are inflationary trends. So I think that the idea that
inflation and rates are gonna remain low is, you know, it’s, it’s problematic. And, you know, I mean, even
this year, look what happened. The fed was supposed to cut, like, what was it? Four times? That’s,
00:58:55 [Speaker Changed] Well, we were also supposed to get a recession, and that supposed to, were
supposed, I
00:58:58 [Speaker Changed] Know all sorts of things
00:58:59 [Speaker Changed] Are gonna happen. So all these things, right. And none of them happen.
That’s, that is your sell side indicator in action. Exactly. All the consensus things. A recession in 22,
recession in 23, the Fed will start cutting in 23. No, we’re gonna push it out to 24. None of that has
proven to be true.
00:59:14 [Speaker Changed] Yeah. Yeah. Yeah. I mean, I think that where we are today is actually a
reasonably healthy point for equities. But the areas that I worry about are that, is that bottomless pit of,
you know, unmarked assets that have doubled or quadrupled in size in asset allocation. I mean, think
about the average teacher or firefighter’s pension plan, right? It’s 30% illiquid today versus Wow, 5%,
you know, back in the two thousands. So I, you know, stuff has changed and that’s where I worry. But I
don’t worry as much about, you know, big cap companies that everybody is tracking and watching and
monitoring.
00:59:51 [Speaker Changed] So I want to get to my favorite questions that we ask all of our guests. But
before I do that, I just have to throw a curve ball at you. So you had mentioned your predecessor, rich
Bernstein, who, who had been with Merrill for a long time before he went out and launched Rich
Bernstein, a Associates, rich Bernstein Advisors. Advisors, RBA, right? Yes. When he left Merrill Meryl, he
was roasted. And you famously read about 10 bullet points,
01:00:24 [Speaker Changed] 10 things I’ve learned from Rich in my 10 years working for him.
01:00:27 [Speaker Changed] They, they were hilarious. Perhaps my favorite, a midlife crisis on Wall
Street doesn’t have to involve a ferra and hair plugs, a mini Cooper and a leather, rubber metal man
bracelet will do just fine. Te tell us a little bit about your Rich’s exit roast.
01:00:46 [Speaker Changed] Oh, goodness. It was terrible because I went first and I said 10 really mean
things about Rich. And then everybody that did the did the speech after me said really nice things about
him.
01:01:00 [Speaker Changed] But that’s what a roast is supposed to be. I
01:01:02 [Speaker Changed] Know. I was like, this is not a good roast. You guys need to get into the
trenches and say some mean things, but I was the really mean one and everybody else was really nice.
01:01:12 [Speaker Changed] So if they were to gonna do a roast of you, what would the worst thing they
say about you on the way it
01:01:18 [Speaker Changed] Would be, oh gosh, there’s so many things they could say.
01:01:22 [Speaker Changed] Well, what’s the nice thing they would say about you? I, I mean, let me
rephrase that. What would you be most proud of someone saying about you?
01:01:31 [Speaker Changed] I don’t, I, well, that’s a good question. I think I would be happy if somebody
said about me that I was, I helped them in their career. I mean, I think that’s what we’re all here for. But
I think the terrible things that people could say about me were that I, you know, chronically forget my,
ID like four out of five days a week. I don’t bring my ID to the office, and I have to get the security guard
to look me up in the system.
01:01:56 [Speaker Changed] They’re, they’re sofa. This is absolutely true story. One day. So sometimes I
take this off when we’re recording. On the other side of that studio is where Mike sits, some guy named
Mike Bloomberg, and he must have taken his off and gone up to get coffee or something up there. And
on the way back, the guard says, sir, I can’t let you down without a, a tag. And to his credit, and this is a,
a good display of leadership Yes. Turnaround went down to the basement, got it. Temporary good for
him, came back and everybody saw it. If Mike did it well then how could we not do it?
01:02:32 [Speaker Changed] That’s right. That’s right.
01:02:32 [Speaker Changed] That’s pretty good for Mike. So what happens when you show up without
your, you know, your badge? Well,
01:02:37 [Speaker Changed] The sad thing is that all the security guards now they know you at this
point. Now know me because I’m
01:02:41 [Speaker Changed] There. So, but don’t you have to swipe in?
01:02:43 [Speaker Changed] Well, they give me a ba like a temporary id and then I go upstairs. But, but
yeah, there are a lot of things that, that I could be roasted on. I always walk the wrong direction out of a
door. I always go the opposite direction of where I’m supposed to be going.
01:02:59 [Speaker Changed] No, you don’t have a good internal gyroscope. I have
01:03:01 [Speaker Changed] No good. Yeah. My compass is is completely destroyed. But yeah, there are
a lot of, there’s a lot of raw material to roast me on. I, I mean, it would be one.
01:03:11 [Speaker Changed] Well, I hope I get invited to that, that, that sounds like that’ll be fun. So let’s
jump to our favorite questions that we ask all our guests. Starting with what have you been streaming
these days? What, what are you watching?
01:03:21 [Speaker Changed] Oh, well, I just
01:03:23 [Speaker Changed] Watching, listening to whatever, what’s keeping
01:03:24 [Speaker Changed] It, I just started watching the Gilded Age, which I thought was really
fascinating. It’s about
01:03:27 [Speaker Changed] The Gilded Age.
01:03:28 [Speaker Changed] It’s on HBO Max and it’s about like, old New York, like basically, you know,
the Upper East Side in the, in the, in the railroad Baron era.
01:03:40 [Speaker Changed] Was that really the Gilded era?
01:03:43 [Speaker Changed] I suppose that’s what they call it. I mean, it seemed pretty interesting. It
was kind of fun if you live in New York to watch that. Yeah. I re-watched Breaking Bad. ’cause
01:03:53 [Speaker Changed] That’s my, we were just talking about favorite I saw the first season and
kind of tapped out afterwards.
01:03:58 [Speaker Changed] I know. No, I, I mean, I, I hate to say this, but I really feel like you need to
give it another season.
01:04:04 [Speaker Changed] I mean, during the, during the pandemic, we were, you know, you stuck at
home. We went through a bunch of things like Mad Men. I had never watched a single episode of that.
Oh yeah. Without, when that was on tv and we blew right through it. So the competition for things that
were like, when someone says, you gotta give it a couple of seasons, I’m like, it turns out I don’t have to.
But I understand. Me too. I’ll make more. I understand the point. Yeah. We, we talked about Game of
Thrones. Yeah. Are, are you a fan? No.
01:04:33 [Speaker Changed] Couldn’t get into it. So
01:04:35 [Speaker Changed] I, I watched the f and, and I know a million people who say it’s the greatest
show you Yes. And you, you are a sci-fi fantasy guy. You should love it. Like, first of all, I can’t keep up
with all the names My brain is opening. It takes too much. Right. It’s like, wait, I need a, I need a
notepad. Like, this is who of Visigoth of what I like. I just, I like, I’m,
01:04:54 [Speaker Changed] Yes. I think I fell asleep like three times trying to watch the first episode.
01:04:59 [Speaker Changed] The first, it’s not a good time. The first couple episodes are very slow. Yeah.
And then the other, you know, so the first season of White, white Lotus was great.
01:05:09 [Speaker Changed] Oh yeah. I loved White Lotus.
01:05:10 [Speaker Changed] But we’re watching the second season and everybody is just a te they’re
not Succession bad, which is another show that Right. That’s next level everybody says is great. And why
do I wanna spend my time with these people? But like, I want to be entertained and come away with
like, ah,
01:05:25 [Speaker Changed] That was a positive feeling.
01:05:27 [Speaker Changed] That was fun, right? Yes. Yes. Not like, wow, those people are jerks. Thank
goodness I don’t work with anyone like them. It’s just like, so what else? So, so if you watched the Gilded
Age Yes. Did you see The Crown?
01:05:40 [Speaker Changed] Oh, I loved the Crown. Love the Crown.
01:05:42 [Speaker Changed] Love the Crown. So every episode was a joy.
01:05:44 [Speaker Changed] Yeah. That was fun to watch.
01:05:45 [Speaker Changed] It just visually a feast for the, it
01:05:47 [Speaker Changed] Was just my 12-year-old son watched that, which with really, which was
kind of cool because I didn’t realize he was
01:05:53 [Speaker Changed] A huge, it was, well, how did he, how did he find it?
01:05:55 [Speaker Changed] I don’t know. He just wandered into the room while I was watching it, and
then he sat down and then all of a sudden he was engrossed and we’re watching this series together
about the Queen of England.
01:06:05 [Speaker Changed] It was really fascinating. It was, it was. I I I know it’s sort of semi fictional,
but
01:06:12 [Speaker Changed] Semi Yeah.
01:06:13 [Speaker Changed] I found myself asking questions and Googling things.
01:06:17 [Speaker Changed] Oh, me too.
01:06:17 [Speaker Changed] Did that hat really? It, it was amazing. Yeah. Gi Gimme one other thing you
you’re watching that you thought was fun.
01:06:23 [Speaker Changed] Okay. Let’s see. Breaking Bad The Crown. Gosh, I’m coming up blank. You
01:06:29 [Speaker Changed] Know, the, the problem with Breaking Bad, there was a show I, I don’t
remember what I watched called fada about Israeli counterintelligence agents that are infiltrating
various terrorist groups. And it’s so stressful that if you watch the show after eight o’clock at night,
you’re not gonna sleep till midnight. And like you, I’m an early riser. Oh, right. I, I can’t like, be on my,
the edge of my seat wondering who’s going to, you know, be found out and gosh, and Murdered by the,
01:07:02 [Speaker Changed] Okay. I just remembered a show that gave me like PTSD 24. Have you ever
watched that?
01:07:08 [Speaker Changed] Oh, sure. Oh my goodness. It’s, I watched how Oh, husband, it’s s Tick down
the whole time. Oh,
01:07:13 [Speaker Changed] It was like, it, but I binge watched that. ’cause you can’t not watch an entire
season if your calendar allows to,
01:07:21 [Speaker Changed] Once you get, once you get into one episode, you’re just gonna
01:07:23 [Speaker Changed] Pause. But it was so stressful. I think that might have taken years off of my
life.
01:07:28 [Speaker Changed] We, we just finished The Gentleman, which is also kind of stressful. Mm.
And you, so I always save some comedy show as sort of like a pallet cleanser. Yes, yes. Now it’s Brooklyn
Nine Nine. But before that it was
01:07:42 [Speaker Changed] Ted Lasso.
01:07:43 [Speaker Changed] Oh God. Fantastic. Yeah. Very good. Ted Lasso was like regular. The the
other show that’s we’ve been watching on HBO that we loved is Hacks is season three just dropped and
01:07:54 [Speaker Changed] I have to write this
01:07:55 [Speaker Changed] Down. It’s so great. Yeah. Okay. So it’s a woman comedian in Vegas who is
slightly past her sell by date and her pushback against the men that run the casinos and the writer who
wants her to become younger and hipper in her material. Kind of a tell all thing. And it, it, it’s just really
fascinating. I love that to look at that.
01:08:17 [Speaker Changed] I, okay. That’s on my list.
01:08:19 [Speaker Changed] So Season one and two were both great. It’s not quite as cringey as Curb,
but there are moments where you’re like, don’t, don’t do that. Don’t do that. Oh, oh. You know, you just
see it coming and it’s just, don’t tweet that. That’s just gonna bite you in the behind. Don’t, don’t. But,
but you get sucked into it and you’re rooting for the character. That’s true. So that’s a perfect example
of fascinating characters who are flawed, but likable, but lovable. Exactly. Like you want them, you want
them to see you’re
01:08:48 [Speaker Changed] Rooting for them. Right. Exactly.
01:08:50 [Speaker Changed] Maybe I’m too old school Hollywood, but I don’t really wanna watch people
who I can’t stand
01:08:55 [Speaker Changed] That you hate. I know, right? I know. Know who needs that. Exactly. Who
needs that. Exactly. We work on Wall Street. You don’t need to go home to people
01:09:02 [Speaker Changed] That are jerks. That’s right. To, to have someone say something that like, I
think I have to slap that guy. You mention Rich Bernstein. Tell us about your mentors who helped guide
your career.
01:09:14 [Speaker Changed] Oh, rich, definitely. Like, just one of the key people that, you know, really
made me who I am today. I mean, I have to say my mother is like really who I imprinted on
01:09:25 [Speaker Changed] The software coder. My
01:09:27 [Speaker Changed] Mom was a coder. Yep. She came here from India when she was just 20
years old. She had an arranged marriage. They’re now divorced. One of the worst arranged marriages of
all time. But she was, you know, she had a lot of guts. She wore a sari to work every day, really, but
somehow ascended the corporate ladder at Digital Equipment Corporation and became a manager.
Even though people were like, you need to stop wearing the sari. She kept wearing it. She was true to
herself. So I i, I kind of look at her as a role model of how to just get stuff done, you know, fade the
haters and, you know, do something good for the world. Create some value.
01:10:07 [Speaker Changed] Huh. Really, really interesting. Let’s talk about books. I mentioned Adam
Smith’s Money Game. What are some of your favorites? What are you reading right now?
01:10:15 [Speaker Changed] Oh, right now I’m actually reading, well, I’m rereading an Agatha Christie
novel that I love. Which one? Which The Murder on the Orient expression. Oh, sure. I know. I’m a
obsessed with Aga Agatha
01:10:25 [Speaker Changed] Christus. You know, there’s been, I think three or four movies, film versions.
I don’t mean like subsequent.
01:10:31 [Speaker Changed] Yeah. But they’re all terrible. Have you seen them?
01:10:35 [Speaker Changed] I did not love them. So the early ones are kind of talky and slow, but they’re
kind of interesting character studies and Oh,
01:10:43 [Speaker Changed] Yeah, yeah, yeah,
01:10:44 [Speaker Changed] Yeah. You know, it’s, well, that’s get truer to the book then, you know, it’s
not supposed to be a James Bond novel. Right. But some, some of them try and turn ’em into almost a
to action suspense.
01:10:55 [Speaker Changed] Yeah, yeah, yeah, yeah. My favorite book of all time is a book called
Confederacy of duns.
01:11:02 [Speaker Changed] Sure.
01:11:03 [Speaker Changed] Did you read that?
01:11:04 [Speaker Changed] Long time ago? I love
01:11:05 [Speaker Changed] That book.
01:11:06 [Speaker Changed] I reread that. The author is,
01:11:07 [Speaker Changed] It’s John Kennedy to O’Toole and
01:11:11 [Speaker Changed] It’s just then I did not read it book. I’m of a different book.
01:11:14 [Speaker Changed] Okay. So I’ll get you a copy. It’s, it’s a good one. Hold on. I’m also reading
this book by Peter Atia on how to live, well, not necessarily long, but how to remain healthy and
thriving. I, I mean, I find that health is becoming a bigger part of my ser you know, concern set these
days as I get older. I mean, I turned 50 a year ago and I’m starting to think about, you know, I wanna see
my grandkids, right? So how do I keep this thing going and be happy and healthy?
01:11:50 [Speaker Changed] It, it’s not just about longevity, but of quality of life as
01:11:54 [Speaker Changed] We Exactly. And that’s what, that’s what Peter Atia is really focused on. So I
thought that was an interesting one. But yeah, there’s so many things to read. I don’t read a lot of
nonfiction that especially, I
01:12:05 [Speaker Changed] Don’t Oh really? I don’t read
01:12:06 [Speaker Changed] A lot that has to do with financial markets.
01:12:09 [Speaker Changed] As I’ve gotten older, I find myself reading more and more nonfiction.
Really? And when I was younger Interesting. You know, a big sci-fi fan. Yeah, me too too. Just like a, like
Philip
01:12:20 [Speaker Changed] Dick. That was my favorite.
01:12:22 [Speaker Changed] So my love Philip Dick. People don’t realize Minority Report, blade Runner.
Blade Runner. I know. Total recall. These are all, and, and then the, the, I think it was the Amazon series
that takes place when it’s a, it’s an alternative history where Japan and Germany win. World War II
01:12:48 [Speaker Changed] Is, there’s an Amazon series,
01:12:49 [Speaker Changed] Though, that’s an Amazon series based on a Philip k Dick book. Oh. Which
of course escapes my, my recollection right now, I
01:12:58 [Speaker Changed] I don’t think I read that one. Yeah,
01:13:00 [Speaker Changed] Man. In the high tower was the Philip K oh K Dick book. Right. That and that
became an Amazon series. Oh, I can’t believe I pulled that, that title out of my,
01:13:09 [Speaker Changed] That was really good. I kind of forgot. The nice thing about getting older is
that you can reread
01:13:14 [Speaker Changed] Books and it’s fresh.
01:13:15 [Speaker Changed] That’s like the first time
01:13:16 [Speaker Changed] You read it, it three Stigmata of Palmer, Eldridge, uic. Like I remember
those books as being Oh yeah, I uic that’s great. Super dense and super, you know, heady. Yeah. And
rereading ’em. Now it’s like, oh, okay. I have a different context to see
01:13:31 [Speaker Changed] These. Yes, I know. It’s,
01:13:32 [Speaker Changed] What sort of advice would you give a recent college grad interested in a
career in either finance, quantitative analysis or, or investing?
01:13:43 [Speaker Changed] Well, I mean, the first piece of advice isn’t specific to finance, but it’s just,
you know, don’t be a jerk.
01:13:50 [Speaker Changed] Okay.
01:13:51 [Speaker Changed] I think there are so many people out there who are trying to prove that
they know more than the next guy that, you know, they stop listening. They’re just like, you know, trying
to seem smart. And I think that’s your, your number one enemy in career.
01:14:06 [Speaker Changed] What drives that? Is that a modern thing with social media or is that always
throughout your career? I don’t been an issue. I
01:14:13 [Speaker Changed] Think it’s just like insecure people that needs to prove themselves. And
what I found is, you know, if the way you treat people that are working for you says a lot about you.
Huh. And the problem is, if you’re mean to the people that work for you someday, they might become
your boss. Huh. So I think that’s another piece of advice I would give.
01:14:35 [Speaker Changed] This has nothing to do with you being an intern at, at the Merrill Quan shop
and eventually leading that shop.
01:14:41 [Speaker Changed] No, no, no. I’ve not personally experienced that too many times in my life,
but I’ve heard about it many times, and I think that’s just bad practice when it comes to finance and
investing. I think the idea of being flexible in thought, always checking your own biases. I mean, this is
where the philosophy comes in. So f Friedrich Nietzche is, this has this theory of constantly overcoming,
and that’s the idea that you should always critically examine your assumptions and make sure that
you’re not making a mistake.
01:15:15 [Speaker Changed] Life is struggle.
01:15:16 [Speaker Changed] Yes. I mean, life is struggle. That’s also a Nietzsche and quote. Right, right.
But, but I think the idea of just always kind of checking yourself and seeing whether you’re assuming
things that aren’t necessarily true.
01:15:28 [Speaker Changed] And our final question. What do you know about the world of investing
today? You wish you knew when you were getting started in the early two thousands?
01:15:36 [Speaker Changed] Look, I wish I’d started investing earlier. I was always too risk averse. And
then once I started to get some kaj, I was, you know, 10 years into my career, I wish I’d just socked away
more money. And, you know, kind of the riskiest, most volatile asset classes, because that’s where,
when you’re young, you can really take a punt. You can,
01:15:59 [Speaker Changed] You can afford the risk and if, if you have a setback. So what, yeah, you can
overcome it.
01:16:03 [Speaker Changed] There’s time and volatility gets, gets easier with time. I think the other, the
other kind of metric that I wish I’d known about is, and this is specific to the s and p 500, but the
interesting thing is, if you own the s and p for a day, you have about a 50 50 chance of making money or
losing money. But
01:16:27 [Speaker Changed] If you meaning the next day,
01:16:28 [Speaker Changed] The next day, so you know, your, your probability of making money by
buying and selling the s and p over a one day period is about a coin flip a little bit better than a coin flip.
But if you have a buy and hold over a 10 year period, your probability of losing money is de minimis. It’s
like less than 5%. So that’s the idea of just extending your holding period, set it and forget it. I think
those are some of the tricks that I try to impress upon individual investors is, you know, the day that you
wanna sell, because the market just went down a lot, is probably the worst day to sell. Because the best
days for the s and p typically follow the worst
01:17:09 [Speaker Changed] Days. Right. They cluster together. Huh.
01:17:11 [Speaker Changed] So, so it’s just, you know, get, get rid of emotion when it comes to
investing.
01:17:15 [Speaker Changed] Savita, thank you for being so generous with your time. This was really
fascinating. We have been speaking with Savita Ian. She’s the head of US Equity and quantitative
strategy for Bank of America. If you enjoy this conversation, check out any of the 500 we’ve had over the
past 10 years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcast.
Speaking of podcast, check out my new podcast at the Money Short conversations with experts about
your money, earning it, spending it, and most of all investing it. Find that wherever you find your
favorite podcasts or here in the Masters in Business Feed, I would be remiss if I did not thank the crack
staff that helps put these conversations together each week. Sarah Livesey is my audio engineer. tko BR
is my project manager. Anna Luke is my producer. Sage Bauman is the head of podcasts here at
Bloomberg. Sean Russo is my head of research. I’m Barry Ri. You’ve been listening to Masters in Business
on Bloomberg Radio.

~~~