The Exchanges

Q In your role of head of research, how did you structure it, and how did you think about research, which is quite different from the types of research you were doing at Ibbotson?

A Well, the head of research at a plan sponsor or asset owner is really more like a head of risk and asset allocation. You know, we didn't do research to help sell our product to clients. We did it for our own benefit, and ultimately the benefit of the people we give money to. So I structured the job as responding to requests by my boss, Linda, by trustees, because I was responsible for a lot of the communication with the foundation's trustees, and by other employees, other senior employees, to find out what They needed done, and then on my own account, so to speak, I was in touch with all the directors of research at brokerage houses, money management firms, professors at universities, consultant, this sort of Orc cloud of people that hang around the money management solar system, and just found out what they were doing, and tried to find little areas where I could contribute to it, and I published a lot, so I wanted to get my name out there, even more than I did at Davidson Associates, because the main job that you have when you have a job is to make sure that you can get another job. Pursued that route. No offense to the great Ford Foundation, but you have to keep your resume sharp, and the way that a research professional does it is by publishing a lot of research.

AI assessment note: “So I structured the job as responding to requests by my boss, Linda, by trustees”

Q spent that much time running around talking to great managers, and you had relationships with them, how did you think about when you stepped away whether you should take some of your capital and give it to some of those managers? Compared to just saying, okay, I'm on my own now. I should just index like everybody else who doesn't have the information I do about that active management community.

A Well, I thought that I should invest with some of the managers. It's just that they have high minimums. If you need a million dollars to invest with a manager, I'm not going to put a large percentage of my personal net wealth in with one manager, but one of them who has a 40 Act fund, I gave him 25,000 dollars and I have about 15,000 left. It's a frontier markets fund, and with the U.S. market down, the frontier markets are down more, but, you know, my philosophy is kind of buy all the way down, because at some point, you're going to be very happy with those prices, and I'm 65, but I'm fairly immature, and If I ever become a grown-up in a 75 or 85, I'll look back on today's prices and think that they were pretty good. They're not awesome in the United States, but in the rest of the world, I think the whole global stock market, ex-US, and maybe one or two countries, feels like a bargain to me.

AI assessment note: “Well, I thought that I should invest with some of the managers.”

Q released book, Fewer, Richer, Greener, which offers a case for long-term prosperity and growth, even amidst the unexpectedly challenging times we're currently facing. Please enjoy my conversation with Larry Siegel. I know you've been in the business a long time, and we certainly crossed paths over the years. Why don't you just dive in wherever you'd like and talk a little bit about your path to where you're sitting today?

A At one point, after getting an MBA from the University of Chicago, needed a job. And I had worked for my professor, Roger Ibbotson, as a research assistant, and he hired me as the first employee of Ibbotson Associates, which didn't actually exist. He handed me a big pile of paper, and he said, well, I'm testifying on a utility rate of return hearing tomorrow morning, and I'd like you to read this and tell me what it says. So, he gave me an office on the floor of his office, and I'm a night owl, and he's an early bird, so when he left around two, I got his desk, and I stayed up, and I wrote a summary of a pile of paper, and it was there for him when he got there in the morning, and that was the beginning of Ibbotson Associates. This eventually turned into a well-known data and consulting firm, which was merged into Morningstar a little more than a decade ago, Meanwhile, I had been recruited out of that organization in 1994 by the Ford Foundation, which made me their head of research. And I worked as a plan sponsor, selecting managers, evaluating performance, kind of acting as a deputy CIO for 15 years, working for Linda Strumpf, one of the great chief investment officers of our time, and after that amount of time, I retired and set up a consulting practice. It's hard to call it a firm because it's just me and a couple of part-time helpers, and that's what I do. I write, Mostly w…

AI assessment note: “after getting an MBA from the University of Chicago, needed a job.”

Q Well, I want to talk about two different pieces of work. One, a recent piece you put out on myths of investing as we look out past this difficult period of time. And then the other, of course, the book. So why don't we start with this, this myths piece?

A In 2011, I was invited to travel to Brazil. So I went because I wanted to see Rio de Janeiro, but the, the conference was in Sao Paulo. So I got to see two cities, one beautiful and the other not. And they asked me, what would you like to talk about? And I said, I believe that a lot of investors are beholden to wrong thinking. And It is fun to be a myth buster. It's fun to say that the emperor has no clothes. It's fun to say I'm smarter than other people. So I wrote a thing called Nine Myths of Investing, and I gave a talk there, and after five years, I updated it, published it again, and then 20 20 was so different from 20 16 that I said, why don't I just update the myths one more time, but have a different approach and look at more macro myths. For example, myth number one, there's so much indexing that the market must be getting more inefficient. Because there's not enough money managed by people who analyze securities. That's a myth.

AI assessment note: “So I wrote a thing called Nine Myths of Investing, and I gave a talk”

Q Let's move on. I mean, the next one is just sort of a really interesting take on the next wave of technology and investing. So why don't you dive right in there on number five?

A The next wave Is clearly something to do with big data and artificial intelligence, sometimes called machine learning. Brian Kelly, who is at Yale and AQR, used to be at the University of Chicago, gave a great talk on this when he spoke at the Q Group, which is a discussion group for investment executives, particularly quantitative executives. People. And he said that machine learning is just applied statistics, and it's what you learn when you took your statistics class in college or graduate school, and you read Thomas Bayes, who lived in the 1700, and Gauss, who lived in the 1800. And there's nothing that machine learning does that isn't in these foundational works, but it feels different and works differently when you apply it to really large amounts of data, you know, trillions of bytes, with really fast and cheap computers. So, This technology is valuable and Kelly uses it with his firm, the firm that he works for, AQR. He's a strong advocate of it, but he doesn't believe that people should be fooled into thinking that we've taught machines how to think the way that people think. Nor is having access to big data an automatic or magical way of making money. It's just fundamental analysis. If you have a satellite traveling over the parking lots, comparing the number of people who are parked in front of different stores, you're doing the same thing that a fundamental analyst…

AI assessment note: “The next wave Is clearly something to do with big data and artificial intelligence”

Q and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. Why do you think these shifts happen when the CEOs used to be the rock stars, and now we have the central bankers as the rock stars?

A Well, I haven't thought about that, but it occurs to me there was a period of about 30 years between those two where money managers were the rock stars. And Warren Buffett still is. Jim Simons. I can think of a handful of household names, but there are fads and fashions. There was jazz, and then there was rock, and then there's rap, and despite all of my best efforts, rap has not gone away. So Alan Greenspan Had something to do with it by being a very activist central banker. I'm a little uncomfortable with this explanation because it's a little too glib. There's been a tendency to think that governments are responsible for running the economy. Franklin D. Roosevelt certainly helped with that perception, but then it kind of went away. And with a succession of financial crises that happened starting in the 19 seventies with the great inflation, the rise of interest rates to about 15%. And then the more recent crises, we really had three in a row in a short period, the tech bubble, the great recession, and then the recent events with the coronavirus. You want a man on a white horse to ride the rescue and say everything is going to be fine, and neither corporations nor running managers are in a position to do that. Governments kind of are. I mean, they may be ineffective, but they can at least say that they're Positioned properly in society for that role. So maybe that's it.

AI assessment note: “You want a man on a white horse to ride the rescue”

Q In markets like this, when people Start paying a lot more attention to the indebtedness of corporations and the risk of bankruptcy. How do you think about the optimal capital structure for a government?

A The optimal capital structure for government would probably involve some way of owning equity in the government, but you're not allowed to do that. So I believe that a government should be prepared for emergencies because God knows we get them and should keep its debt level low because when there's a war or a pandemic or a depression, it's going to have to get high and then you want it to get low again as conditions improve so that it can go up again without a ratchet effect where you like Japan where you go to A hundred percent of GDP, then 200, then 300. So I, I guess I would say I'm a fiscal conservative. I believe that the government should conserve resources so it can use them to do what governments do, which is help people when times are tough.

AI assessment note: “The optimal capital structure for government would probably involve some way of owning equity”

Q Let me ask you one more before we just dive into some closing questions, which is, if you think about the thesis of fewer, richer, greener, what are the implications of it if you were sitting in your old seat at the Ford Foundation and other allocators?

A International diversification and a focus on equities. First of all, market conditions make it hard to focus on anything but equities. You can't make any money at negative . That's not the U.S. rate, but the U.S. rate seems to be headed that direction. There's going to be more wealth creation in the future than there was in the last 250 years. You may have to wait 250 years to get it, but Ford Foundation intends to be there in 250 years, and the first 30 of those are within the time horizons of people now living in and working in organizations. I believe equities have had a great run. It's hard to be bullish about something that's gone up that much, but after a period of adjustment like we've just had, I'm more optimistic about the future. The point is to participate as an investor in this continuing betterment of living standards around the world. And the way that the system lets you do that is through really three kinds of equity, publicly traded stocks, private equity of various kinds, including things like infrastructure deals, And real estate. So that would be my focus.

AI assessment note: “International diversification and a focus on equities.”

Q As the sophistication of those called data collection techniques grows, how do you think about the importance of that into active management?

A I don't know. I have a client. Pluribus Labs, run by some really smart people, which is going to try this. They haven't launched, and I don't know how they'll do when they do launch, but if anybody has a chance of beating their benchmark with that technology, it's them, and we'll see how they do. I guess I'm skeptical. They're going to have competition. A lot of people can set up Operations like that, the same way a lot of people can hire security analysts to tear apart balance sheets and visit companies. And the first mover advantage is that pioneers get shot. They spend a lot of money and invent the necessary technology, then the settlers get rich. So the second mover advantage is the real advantage. Then the third, fourth, and fifth face diminishing returns, and I don't know where this particular firm stands in that hierarchy, but I don't know. I feel like it's a Mixture of hype and a real advantage. If you have information other people don't have, you should use it.

AI assessment note: “I feel like it's a Mixture of hype and a real advantage.”

Q you were framing out was that this notion of if markets are kind of more normal returns, and we've recently gone through this period of turmoil, and a couple of your myths relate to this perception of a low return environment. Certainly on the bond side, I think that continues, and we'll see how this all shakes out with stocks, but why don't you Why don't you discuss those thoughts?

A The mantra a decade ago was we're going to be in a low return environment. People look back 10 years, we had had two crashes and looked like we were going to be in a low return environment because that was all anybody could remember. So we, if you're in a low return environment for long enough, you're in a high return environment. So then the stock market doubled and doubled again, bonds went up and up And so now that we've been in a high return environment until seven weeks ago, We're in a low return environment because prices are high. They're not necessarily internationally where they are in the United States, and the prices of fixed income internationally are simply out of sight. The idea of negative nominal yields is kind of like telling me that gravity has begun to pull things up instead of down. You can invest in German bonds where you Buy a bond for a 103 euros today, and in 30 years, having received no interest, you receive a hundred euros back. I don't know who would buy one unless they're forced to do so by regulation or contract, uh, contract being an index fund or some kind of a bank charter, but that's a low return environment. Remember when you used to be able to guarantee nine percent by buying a laddered portfolio of treasury bonds? I was about 24 when you could do that, but I was old enough to have a finance job and a finance education, so I knew what was happ…

AI assessment note: “The mantra a decade ago was we're going to be in a low return environment.”

Q when you're in the thick of it, running around the world, talking to all these smart managers, and trying to be smart, and then it sounds like, you know, when you come out, you're paying more attention to the Meyer Statman quote on the wall. So how have you changed the way you've thought About manager selection and the value added of active management since you've left the foreign foundation?

A Well, since I've left, I have only managed my own portfolio, which is a very modest portfolio, but it still takes management. And what I do is I buy index funds and then forget about them. And I don't literally subscribe to the view of never sell anything, because that's a tax strategy, and I don't pay taxes on my IRA and . But I believe that if you try to time in and out of markets, that you will tend to buy high and sell low, and that's the opposite of what you should be doing. My rancher friend in Oregon, Says his strategy is to buy sheep, sell deer. So I listened carefully, and I thought he was saying, buy sheep, sell deer, and that's what I'm trying to do, but I haven't had any luck with the sell deer part, only keep buying and hoping that it's cheap.

AI assessment note: “And what I do is I buy index funds and then forget about them.”

Q To what extent, when you're thinking about returns, are you thinking about valuation or economic growth?

A Well, I'm thinking about both. The underlying driver of a stock Isn't the growth of the overall economy. It's the growth of corporate profitability. So if you're in a country which is growing fast, but it's hard for companies to grow without taking tremendous amounts of delusion, or you can't buy the shares that the locals are getting, which are the good companies and they sell you the bad ones. This has happened. You have to distinguish between the growth of the economy and the valuation of the stock, and that's what active management in non-U.S. markets is good for. There are an awful lot of people who looked at the BRICS countries and said, well, these countries are growing at eight or five, the U.S. is growing at one or two, so we'll just put our money in them, and then they went down. Of course, some of them went up a lot before they went down. Period of 2003 to 2006 or seven. I believe the emerging markets index went up by a multiple of five to one. And that's how you get rich. You don't get rich at nine percent. You get rich by buying something that goes up by a multiple of five to one and still having it when the rise is over. And emerging markets were the great play of the first decade of the century, the oughts or nots. Now, they're disappointed. But the people in those countries still want to get rich. They'll do what it takes to become middle income and then upper i…

AI assessment note: “Well, I'm thinking about both. The underlying driver of a stock Isn't the growth”