The biggest reason I attend is to connect and share ideas with others that believe in an evidence based approach to investing. But the content is terrific as well.
By the end of the day, I had a dozen pages of notes and personal reflections. Rather than do a full download, below are brief summaries of each session along with some random notes and popular Tweets.
If you weren’t able to attend the event, hopefully you can glean a few tidbits. Maybe you’ll even consider joining the California event June 24-26, 2018.
Josh Brown opened the event with remarks on the growth of evidence based investing and the importance of embracing this practice, particularly as Millennials (now the largest portion of the adult population) enter their peak earning years.
Josh made the point that Millennials don’t care about legacy 20th century brands. And when you tell them stuff about investing, they look it up on the spot. They want to see evidence that an advisor’s strategy will work, not just during the sales process, but in ongoing conversations.
Keynote Presentation: Scott Galloway
Scott Galloway is an amazing speaker and my notes can’t possibly do his presentation justice. My advice is to check out his book The Four. Conference attendees received a complimentary copy and I started reading mine on the flight home. His thoughts on are equally compelling in written form.
Scott’s presentation focused on the four horsemen of modern technology, starting with how each appeal to specific human instinct or organ.
Google is the super brain human’s have always needed, but it’s position in our lives is much bigger than organizing information.
When we pray, we are hoping there is some sort of devine answer that is more credible than an answer we could come up with on our own. 1 in 6 queries asked to Google have never been asked before. Our modern man God is Google.
Facebook is tapping into the human need to love. The number one indicator for whether you will live to at least age 100 is how many people you love. Facebook is helping us love at scale.
Appeals to our reproductive organs. The brain is rational, but Apple appeals to the irrational.
You have between 10x and 100x more stuff in your closets and cabinets than you actually need. But we still want more. We want to feed our consumptive gut. Whoever does the best job of “more for less” is the most powerful company in the world.
Scott said that if he had to write a sequel to his book called “The One,” it would be about Amazon. His insights on Amazon were my favorite part of the presentation.
- Advertising sucks. Broadcast advertising is in decline, but that is the way you used to build a brand.
- Google and Facebook have 103% of the digital marketing revenue. The rest of the industry is in decline with digital marketing revenue declining 3%.
- 80% of your time on your phone is spent in app. Millennial will spend 2.5 years in their life on Facebook.
- You can pay to get rid of commercials, which makes advertising a cost only the poor or academically illiterate pay.
How Professionals Can Convey an Evidence-Based Approach
This incredible panel focused on how they use data to improve behavior and outcomes.
Liz Ann Sonders kicked off the discussion pointing out that the biggest mistake investors make is not understanding the connection between economic fundamentals and market fundamentals. There is also the problem that emotions drive decisions far more than the facts.
Liz Ann also explained that data from Schwab’s massive client base suggests that women are distinctly less emotional than men. Women tend to be more focused on facts and evidence, whereas men are more likely to take a gambling mentality. Similarly, when she studied differences in gender specific time horizons, the women showed a longer time horizon than men.
Eddy Eiffenbein added that “being an investor means being at war with your own instincts.” Consequently, successful investing requires countering your instincts and emotions, but people hate facts. Evidence isn’t always enough, they also need a narrative they can relate to.
Wes Gray described the importance of facilitating learning because it helps investors make better decisions. Taking the “I’m smart, so just trust me” approach isn’t effective for learning. Alpha Architect strives to take knowledge and make it more understandable to normal people. If you can take data and visualize it so that a normal person gets it, this helps facilitate learning. In turn, they make better decisions.
Vladimir Zdorovtsov went on to explain that “evidence based investing is the only kind of investing. Everything else is gambling with someone else’s money.” He described way to be an evidence based investor is religiously asking the question: “Why?” This helps you develop conceptually sound theory and then critically evaluating whether that theory makes sense.
- Apply critical reasoning to make sure you are asking the right questions. Religiously ask the question, “Why?”
- Education helps match long duration capital with long duration strategies like factor investing.
- Evidence based investing is creating conceptually sound theory and then critically looking at why that theory does and does not make sense.
Fireside Chat with Cliff Asness
Barry Ritholtz kicked off the conversation by asking Cliff Asness what factor in the Fama French 5-Factor Model he believed in most. His quick response was, “gotta love the market factor, but nobody is interested in talking about that.” This subtle insight didn’t garner much attention, but it was one of my personal favorites of the day. Most of a portfolio’s return and risk is going to be driven by market exposure, after all.
Cliff’s next favorite was the value factor and least favorite is the small cap factor. And, of course, you know Cliff can’t talk factors without bringing up momentum.
Much like listening to Barry interview guests on his podcast, Masters in Business, they covered a lot of ground in a short period of time. One of my favorite parts was hearing Cliff describe how he has evolved throughout his career. Aside from much longer footnotes in his writing, the biggest change is his lack of respect for a t-stat of 2.
Perhaps the most surprising statement was during a discussion of behavioral economists Robert Shiller and Richard Thaler winning Nobel Prizes. Cliff felt that Eugene Fama deserved to win a Nobel prize alone (rather than shared with Shiller) and ten years earlier.
Other topics of conversation were implications of machine learning and big data, market timing, the definition of “long term” in investing, and hedge funds.
The conversation ended with a fun set of questions from Barry including Star Trek vs Star Wars, iPhone vs Samsung, favorite super hero, sweet or salty, favorite pet peeve, etc.
- Machine Learning makes our potential for data mining higher. There are places machine learning makes sense with tons of data that happen over and over again (like trading).
- Big data and machine learning tend to get incorrectly lumped together, but they have very different applications. Strategies born from big data will decay quickly, which will make it an ongoing race and battle.
- To monetize being a long-term investor (defined as 10-20 years) you can take more risk, be the buyer of last resort in a crisis, and take advantage of the illiquidity premium.
- Hedge funds don’t hedge. They are highly correlated to markets. There two ways to get a low beta: actually hedge or infrequent pricing.
- Three things make up a portfolio: alpha, systematic exposures, market beta
- “There is no investment product that can’t be ruined by too high of a fee.”
An Evidence-Based Approach to Emerging Markets: How Should Investors Allocate in Asia, Latin America and Beyond?
Although I have fewer notes from this session, this was a highly knowledgeable group. It’s difficult to succinctly summarize the type of information they were sharing, so here were my favorite takeaway from each panelists:
Perth Tolle: The problem with market cap indices is that there is a huge allocation to just one region.
Jeremy Schwartz: Emerging markets used to be viewed as a commodity play, but that correlation has gone down.
The Next Frontier: As Quants Tackle New Data Sets, Which Will Work and Which Are Just Gimmicks?
Ben Carlson moderated a fascinating discussion on non-traditional metrics being exploited by professional investors as well as the implications of quantitative strategies becoming available to the mass public.
The conversation began with a discussion of systematic versus discretionary approaches to data use in hedge funds. Patrick O’Shaughnessy explained the two most common ways of implementing quant strategies are systematic (all data, no human oversight) and discretionary (humans making discretionary decisions with data-driven constraints).
Leigh Drogen was the biggest advocate for discretionary implementation, preferring to use data to augment fundamental expectations of a particular investment’s future revenue. In his view, fully systematic funds “are on an alpha treadmill” that will eventually get arbitraged away and become beta.
Corey Hoffstein pointed out that “we have a fetish around unique alpha, and most of us will never touch it.” The alpha in alternative data will remain out of reach for the typical investor. There is alpha in some of this new data, but it is already arbitraged away into beta by the time it gets to the broader public in an ETF wrapper.
Kevin Quigg adds that by design the alpha has to be watered down based on who products are being marketed to. Anyone with a smartphone can buy an ETF, so setting proper expectations on how the risk and return characteristics will differ from a real hedge fund is important. It’s essential to help people understand where their potential alpha will come from in their portfolio.
The group was in general consensus that quant funds can differentiate themselves despite having similar strategies through portfolio construction, the way factors are defined, the way you trade, etc. Most of the group felt that these processes should be systematized whenever possible.
They also each seemed to feel the black box is no longer acceptable as investors want to understand the processes. Patrick, however, gave a few examples within the industry where extreme privacy and secrecy still exists.
Tim Buckley on Leadership, Industry Dynamics, and What’s Next at Vanguard
Barry Ritholtz interviewed Tim Buckley, who is uniquely situated within the world of investing. Tim has worked at Vanguard for 26 years with roles including Chief Information Officer and Chief Investment Officer (an unusual combination). He is set to become the company’s CEO on January 1st.
As Barry pointed out, Tim skewed the average AUM in the room with Vanguard’s $4.7 trillion in assets.
The conversation started with a focus on technology since cyber security is the thing that keeps Tim up at night. He also shared insights into the investment in fintech. Vanguard wants to take the routine exercises and automate them, then they can scale the business and let humans focus on the less routine exercises.
We can expect Vanguard to continue lowering fees whenever the company grows faster than expected. When this happens, they have a choice to (1) reinvest in the business or new services that can exceed their hurdle rate, or (2) give excess profits back in the form of lower expenses. Over time, cost gets closer to zero.
Tim also took time to dispel the notion that indexing distorts price discovery. Indexing is about being a price taker. Most people are price takers in all areas of their life – Tim used an analogy of buying bananas at the grocery store without haggling over price. Indexing makes up 15% of equity markets, but only 5% of equity trading. It isn’t distorting prices because people are moving back and forth. Barry Ritholtz added the view from Andrew Lo is price discovery works if 90% of the market is passive.
In discussing ESG investing, Tim explained how the field was more of a fad in 2000 and focused on being exclusionary. Today’s ESG trend is about making positive selections (choosing companies that can benefit the world’s future). The other way to be an ESG investor is to ask for more disclosure about what might be environmental liabilities and what their opportunities might be to help inform people’s investment decisions.
Vanguard cares about the long-term returns of a company because they can’t sell a company in an index. They own 5%-7% of many companies and can vote the shares to make positive changes. They let companies know ahead of time what we thinking and send out letters about what they think good governance looks like. The idea is to give them a chance to make a change. If they don’t by the next year, then they use their vote. Tim described this as “trying to make quiet change.”
Is Technical Analysis an Evidence-Based Discipline?
This was one of the most passionate groups. At first glance, they looked to be one of these things don’t look like the other on the agenda, but they offered a good alternative view to many of the biases against professionals that consider themselves as technical.
Each panelist had the opportunity to show a series of charts and how they use them to inform their views. The consensus among the group was that the hobbyist or silly price pattern indicators give the discipline a bad name.
“Your Money and Your Brain” Turns 10 – A Conversation with Jason Zweig
When Jason Zweig took the stage, more people in the audience stood up to snap a photo than with any other speaker. Meeting Jason myself was definitely the highlight of the day for me. I know that many others felt the same way.
Josh Brown had the privilege of interviewing Jason, cracking jokes throughout about Bitcoin, technical charts, and great investors.
Jason discussed how he came to be interested in the behavioral side of finance, which led to him writing Your Money and Your Brain. He also explained how people are quick to acknowledge the behavioral biases of everyone else, but they ought to look in the mirror to see their own flaws.
Josh brought up the behaviors of people investing in Bitcoin, which Jason equated to Pascal’s Wager and noted it being the same approach Bill Miller is taking. It’s either going to be worth nothing or worth a boatload.
Jason suggests that people investing in Bitcoin should look into the behavioral mirror and that nothing is as poisioness as making massive amounts of money in short periods of time. You also ought to have controls in place and an exit strategy in mind, to which Josh replied, “my exit strategy is to have it stolen from me.”
As the conversation turned to some of the greatest investors that Jason has met or researched, Jason said it would be ridiculous to not say Buffett and Munger because of the way they invert emotions. This is a skill that very few people in the world ever have. It’s mostly innate, but also requires training.
Jason also spoke about Daniel Kahneman and their time working together on Thinking, Fast and Slow. Jason learned from Kahneman to question everything. Jason explained that for a moment, he didn’t know why he did anything.
Josh read a few passages from Jason’s latest book, The Devil’s Financial Dictionary:
BIASED, adj. Human.
DAY TRADER, n. See IDIOT.
DEFAULT, n. Also known as “de blame,” or what borrower and lender alike will try to assign to each other as soon as the borrower goes bust.
After the interview, Jason signed books and took pictures with countless individuals.
- The most dangerous bias we have is the bias we don’t know we have
- If something simple works, complicate it and charge more for it.
Do Commodities Belong in a Portfolio?
My appologies to Meb Faber, Charlie Bilello, Juan Carlos Artigas, and Anora Gaudiano – I got a little distracted by networking during a break and missed a substantial portion of this session. Here were my takeaways from the portion I did hear:
The idea that commodities could be a diversifier really started in 2005. If you do those same studies now, you might think that something changed. Now you see that adding commodities leads to a lower set of risk-adjusted returns.
Which data set should you believe? Has something changed with the benefit as more investors accepted commodities as part of a long-term asset allocation and rebalancing? Is that changing the risk premium that may have existed in the past?
Correlations aren’t static. They change over time.
The Case for Private Equity
My favorite part of the panel’s discussion was Morgan Housel comparison of venture capital (VC) to public markets. With VC, you are looking for one or two of your bets to give you all of your return. 5% of your components make up all of you gains and it takes 5-10 years to play out. In the Russell 3000 about 7% of the components making up all of the gains. Unlike VC, it just takes longer to realize the gains.
Brent Beshore explained some differences between VC and private equity (PE). I think the biggest one is that you won’t get a 100x returns, but you also won’t have a bust. In addition, you have more control with PE than VC.
Daphine Dufresne discussed how she evaluates a PE deal. She felt that the most difficult part of PE investing these days is maintaining discipline. Daphine provided a few examples of the incredibly competitive environment that has led to much higher multiples and more favorable terms for the business owners than 10+ years ago.
- You own private assets for the liquidity premium. If you are owning it from an asset class perspective is that you are taking away the liquidity premium. You should be rewarded for a 10-year lock up. You need to be compensated for that. That is the difference between public and private market returns.
- Even if you have a crystal ball and know that company X is going to be the next Google, you can’t invest in that company because they have already gotten money from the big players. VC requires a ton of networking.
- All 4 panelists felt that PE would never be available to retail investors.
Perspectives from the Product Side: ETFs, Indexing & Evidence-Based Investing
The final act was Josh Brown interviewing Jim Ross about the history of SPDRs, the growth of ETFs, and the trends that are defining the market at the moment (and going forward).
I found one of the most interesting moments to be Jim’s perspective of the need to ungroup ETFs more. With ETFs, you have some of the most straight forward vanilla funds and then you also have some of the highly complex, highly combustable ETFs. They all get grouped together.
I’d never really thought about it before, but people do use the term ETFs too broadly in debates about the vehicle’s usefulness. It would be like grouping all mutual funds together into a single group. It makes it a challenge for the investor.
- No reason to believe ETFs will regress in the next downturn. ETFs have survived crises in the past, most recently the Financial Crisis. They aren’t going to blow up.
- GLD was a unique product at the time because it democratized the purchase of gold. Despite it’s popularity, it doesn’t materially impact market supply and demand.
There were lots of laughs throughout the day and many great insights shared. However, the conversations and connections are the reason I intended this conference last year and again this year. It is always a treat to connect with so many amazing people.
I hope to see you in California next June.