Invest in Fear and Greed
Invest in Fear and Greed
Join SmartBe Investments Chief Strategy Officer Mr. Gavin Graham for an informative and entertaining conversation about concentrated factor investing with Dr. Wes Gray, PhD and CEO of Alpha Architect. Regarded for their historic, academic and practical market insights the two will shed light on how risk and sentiment are the core ingredients of markets; the generational opportunity in value stocks, and; how momentum rides the wave which is currently crashing in on growth and lifting value. All this and more in this segment of the Gavin Graham Show.
About the Speakers
About the Speakers
About Wes Gray, PhD (CEO), Alpha Architect
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value(Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children.
Mr. Graham joins SmartBe with over 30 years of experience in Canadian and international markets. A graduate of Magdalen College at the University of Oxford, Mr. Graham has directed investment strategy at numerous institutions, such as the Guardian Group of Funds in the UK and BMO Asset Management in Canada. In addition to his position at SmartBe, he serves as a contributing editor to The Income Investor, a respected online Canadian investment journal. The Gavin Graham Show is a platform for Gavin to share his wealth of knowledge with the SmartBe community, as well as engage in stimulating conversations with peers and thought leaders.
00:00:00] Gavin: Hello and welcome to The Gavin Graham Show sponsored by SmartBe Investments. Today we're talking to Wes Gray, founder and chief executive officer of Alpha Architect LLC which has a factor based model, investing in factors which have consistently added value over time. Namely Value and Momentum.
Thanks very much for being with us today, Wes.
[00:00:25] Wes: Oh, thanks for having me Gavin. Appreciate you inviting me onto the podcast.
[00:00:28] Gavin: Yeah, absolutely. And what we've been doing is asking people to give us a little bit of background on their personal history and how they came to be involved in doing what they're doing. So could you just give our listeners a brief update?
I'm sure most people will probably be pretty familiar because we've been working together with you for the last three years plus. But just a sort of Coles Notes version.
[00:00:48] Wes: Yeah. So the quick CliffsNotes version on how I got into investing and where we sit today is, you know, started off as a diehard stock picker. Had some good luck. Had some terrible luck. Thought, hey, there must be a better way, let's use computers.
And that kind of was reinforced when I was in grad school. And then we basically got put in business by a huge Fama office back in 2010 following systematic evidence-based investment strategies. And here we are 12 years later and we're still following systematic evidence-based investment strategies. And all we do is, you know, systematic factor investing.
[00:01:22] Gavin: But what led you to actually choose those factors? Because obviously there are such an enormous variety, a menu of different factors, and lots of people feel some things are extremely important. What led you to the ones that you have used in Alpha Architect's success?
[00:01:39] Wes: I mean the main reason we use what we use is I was always trying to figure out how do I compound my own capital?
I was never in the investment business per se. So I just had the luxury of not being ruined in some sense by weird incentives of our industry. And so I just came at it from a pure research angle, looking at, hey, if I got a 20 year horizon and I'm trying to earn excess return over the long haul, how would I go about doing that?
Well, let's go do the research, understand the financial economics of the marketplace. Oh, there's these things called fear and greed. And there's a strategy called value. Buy cheap stocks, which basically captures the fear. And then there's another strategy called momentum where you basically buy shiny rocks and that obviously captures the greed trade.
So I just thought intuitively, hey, if you believe in fear and greed, which I believe in, and there's these two strategies called value vesting and momentum vesting. And, oh by the way, they're also not exactly the same and have some portfolio benefits. Let's just focus on that. So that's what we've kind of always done.
We're always refining and fine tuning it, but it just always made sense to me then to stick to those.
[00:02:48] Gavin: Because again, just very basic insights because fear and greed are obviously the major drivers, but it is fascinating that it's human emotions as it were that actually drive a lot of the performance. Which would not intuitively be in line with a man as an, or sorry, a person as a rational profit-maximizing person from traditional economic theory. Would it therefore be fair to say that the psychology is an important element in what you do?
[00:03:16] Wes: I think so, like, as you know, there's all these debates about risk versus behavior. And you've got, you know, professor Fama over there on the risk side. But then you also have Bob Schiller, you know, so we have our own Nobel Prize winner on the behavioral side of this.
And I think he makes a more compelling argument. Or at least it's an argument that I've came to appreciate more and more over time. That the reality of the marketplace is it's probably more about sentiment and human behavior driving the different asset prices. And sure risk or reward certainly matter.
But I think predominantly it really does boil down to fear and greed. And all I have to do is look at a GameStop chart to convince you of that.
[00:03:56] Gavin: No, that's absolutely correct. And it's certainly, we've seen massive swings and emotion over the last certainly two years since the outbreak of COVID, which has maybe reinforced some of those factors because obviously two years ago in February, March 2020 the world was coming to an end with this unknown
dreadful disease and essentially everything went on sale. And there was fear at the maximum. And then would it be fair to say that perhaps in, towards the end of 2020, beginning of 2021, we had greed? You mentioned GameStop, and all the meme stocks, and NFTs, and also a lot of the nonprofitable sort of future earnings stocks being very, very popular.
Would you agree that the last couple of years have almost been a laboratory for what's been going on as far as fear and greed is concerned?
[00:04:42] Wes: I think so. And it's pretty transparent when you just look at the performance chart of momentum versus value. Where to your point, you know, up until the last year here, where values seem to, you know, come back in vogue.
Because it seems like the greed and the shiny rock trade is coming to an end. I mean anything that smelled like you could make a lot of money, or had a great thematic, or had a great story went crazy. So for example, like our basic momentum strategies, you know, had amazing years, I think at post March 2020 went on like a 100, 150% run. Which is, you know, everything went up, but that was like really up.
But then of course, ever since that kind of the shiny rock trade has ended that's obviously also ended. And now it seems like things are moving towards value or it's all about like, hey fundamentals actually should matter. Price you pay should matter. Cashflows matter. Gravity matters. It seems like the sentiment has shifted that way.
[00:05:37] Gavin: No, and in fact I know you did a webinar for us a week or so ago where you were talking about maybe finally after a decade or so growth was being replaced by value as the dominant theme in the market. Could you expand on that? Because I thought you had some really interesting information there. Particularly about how long value's been out of favor and reasons why that might be changing.
[00:06:00] Wes: Sure. So as we discussed in that webinar value has been the most hated concept on planet earth for probably 10 years running now. And you see that in the valuation of the underlying value portfolios relative to like the broader market. And, you know, timing is always very challenging, but one thing we can state with certainty because it's just the empirical fact is at this point in time the valuation of a cheap stock portfolios, often called value portfolios, is at an all time discount versus the market.
So, what does that mean for tomorrow or the next day? Who knows? But I think over the intermediate to longer term, let's say like three to five years out, if you believe in any form of mean reversion or you believe in any form of gravity tied to fundamentals, people eventually start caring about the price paid for the value received. You know, I think value investing as a thematic, you know, has a stacked deck in its favour at this point in time.
[00:07:03] Gavin: That's a pretty strong statement, Wes. But again you said that value is at its largest discount ever to the title market. How far back does that go? Is that 20 years? Is that 30?
[00:07:16] Wes: Yeah, that goes back to around 30 years where you can get like the granular data on it. You can kind of do ad hoc versions of that analysis with obviously less granular data. And I think you're going to come to the same exact conclusion. Basically we're at an all time cheapness for cheap stocks.
Just to give perspective on that, like, if you look at the earnings yield on like the top decile cheapest firms right now, it's probably around like 15%. Where if you look at the earnings yield on just the broad, let's say SB 500, for example, it's under 5%. So cheap stocks are literally, they have a three times higher earnings yield than the broader market.
And so, yeah, maybe they're not as fun or exciting as some of the gross stocks that don't make any money, but they're incredibly cheap on a fundamental basis. And as we all know, you know, the price paid matters for your expected return.
[00:08:10] Gavin: But skeptics would say, Wes, that hasn't mattered for the last 5 years, last 10 years even. Know that that value trade those value stocks have kept getting cheaper and cheaper.
What do you think might be the reason for the change? Is it that finally central banks have started to withdraw liquidity and starting to talk about raising interest rates? Is that it?
[00:08:30] Wes: It could be. I think in the end, like at the top where we're talking about there, it's all about sentiment I think. So clearly all those people have been right. And that's what's got us to the current situation where the reason that right now we see all time cheapness valuations on value stocks is because people have been, you know, throwing them out, being left for dead. So they're a hundred percent correct in the sense that, and they're also right that the reason we got here is because of that exact attitude.
But at some point, you know, is the S and P at, you know, a hundred times earnings, a good deal? 200 times earnings? A trillion times earnings? Like, I don't know when the gravity of fundamentals starts to matter and no one can predict that. But to the extent you have the fundamentals backing you, the prices are appropriate.
And then for whatever reason, there's a change in sentiment out in the marketplace. Maybe it's hey we're an inflationary world, let's start focusing on things that actually generate cashflow and do real business. I don't know what changes the sentiment, but at some point I think fundamentals have to matter.
Otherwise what's the point of. Investing in the marketplace? You know, so I think it is, we're just getting to that stage where the valuation spreads got so extended and now they're at nosebleed spreads. People are starting to consider gravity again, and fundamentals again, and oh by the way they're way cheaper than these overvalued gross stocks that we keep buying that don't make any money. Keep over promising and under delivering.
I think sentiment is finally shifting. And that's obvious because a lot of those stocks are now down 70% from their highs.
[00:10:09] Gavin: That's right. And that's only in the last year or so. We were actually just looking at a chart of a Cathie Wood's Ark Innovation Fund, not to pick on anyone particularly, but I think it was down 50, 60% from its high in February 2021. Which is remarkable.
But that's probably the best example, as you say, of a vehicle for those very highly priced growth stocks. And would it also looking back, it'd be fair to say, that the last time we saw these types of valuation anomalies was at the end of the tech boom in 1999 to 2000. And then I think looking further back, maybe Japan in 1989?
So whenever you get this type of massive overvaluation in one area, it usually doesn't end well. Would that be fair to say?
[00:10:50] Wes: A hundred percent. And I think what's funny is I think everybody knows that intuitively. But again, going back to is the market driven by risk or is it driven by sentiment. I think most people, not right now, but if you asked them a year ago why are you buying this NFT, or why are you buying this company at 20 times, you know, priced to sells, the argument in their heart is not well because I think it's such an amazing company. It's because I think it's going to keep doubling because it's doubled in the past. And I think once you pull the sentiment, once you pull out the FOMO, as it was happening right now, people start gravitating towards fundamentals again.
And that's why I think you're like, we're already seeing it but I think we'll continue to see a move towards, you know, value fundamentals. A more hard money type investing market versus, you know, the internet bubble, you know, let's just buy anything at any valuation because price paid doesn't matter.
I think discipline might be coming back to the marketplace.
[00:11:50] Gavin: And that obviously would very much suit Alpha Architect given, as you say that it's systematic, evidence-based investing. Which didn't prevent you with the momentum strategy from benefiting from the fact that stocks are going up, kept going up.
But now certainly for the last year it's been exactly the opposite. Hasn't it? In that the value stocks have been doing well and the momentum stocks have been suffering.
[00:12:12] Wes: That's right. And even in momentum now, what you're starting to see a lot of people, I guess they recognize it, but they don't realize just how strong it is. Momentum is like a chameleon where it was playing in the Cathie Wood game but obviously it's been getting out of that game. And now it's more and more becoming kind of value like. And so what was interesting about momentum is momentum will definitely ride the waves. And it'll crash on the waves, but it'll adapt to whatever the new horizon, the new waves are out there. And so we're actually rebalancing momentum today.
And I was looking at the day, I was like oh this is more and more looking like a value portfolio and you know it'll go through that transition eventually change. But it's pretty interesting at this point in time to watch how the different factors are evolving in the marketplace.
[00:12:57] Gavin: That's right. Because the momentum fund now has a big exposure in energy, and some materials, and particularly . Financials.
And could you talk a little bit about the fact that the methodology used means that the value of vehicles don't own financials because it doesn't apply? And therefore, would that be fair to say it makes it a useful compliment to markets which have a big exposure to financials?
[00:13:19] Wes: Yeah. So we focus on trying to assess the valuation and quality of standard operating companies.
And one of the things we use is enterprise multiples, which is what private equity owners used by businesses. But the problem with financials is financials are a unique business. Where they're not like an operating business that sells widgets. They're basically a spread trading business where they have a funding rate.
They borrow money from the government, turn around and flip it at a spread to people that want to go fund loans or fund mortgages or what have you. And so the problem is assessing those businesses with the type of techniques that we use, which are suited for operating companies. It's just not appropriate.
So our form of value is more about buying operating businesses. And the good news is, to your point, there's a lot of other forms of people that have value or different strategies out there that they think, or they believe, they can assess financials. Which is great. And so if you compliment or couple our stuff with them, you know, perhaps you're gonna get a diversification benefit.
[00:14:22] Gavin: No, that's certainly true, but your momentum methodology does actually allow the purchase of financials.
[00:14:28] Wes: And there we're just following the wave.
[00:14:31] Gavin: And because they'd been amongst the best performing stocks in the last a year or so, which presumably is a reflection of the fact that now liquidity is tightening and spreads are widening and interest rates might even go up.
[00:14:43] Wes: Yeah. They could finally make money. It's it's hard to make money when you, you know, you could charge 50 basis points that you borrow at 25, but if you could borrow it 25 and flip it at 5 or 6 all of a sudden, you know, it gets interesting as a banker. So I think they've all been waiting with bated breath to: God when is the yield curve going to finally expand so we could start making bigger spreads? That time feels like it could be here with inflation and presumably higher rates in the future, but who knows?
[00:15:12] Gavin: Indeed. Because that's one thing, would it be fair to say, that you're not macroeconomic driven at all?
You don't make any predictions about the course of interest rates or what's going to be happening in the geopolitical scene or whatever. It's simply what the numbers tell you.
[00:15:26] Wes: Yes. I mean I love talking about it and I love making predictions. But I also am very cognizant that my predictions are just as terrible as every other person that tries to predict this stuff.
So, you know, I'm more than happy to engage in the conversation, but I always have the caveat you shouldn't listen to me and you shouldn't listen to anybody because all of the actual data and evidence suggests that they're all full of you know what. But it is fun for, you know, exercise.
[00:15:51] Gavin: Full of useful information you were going to say Wes? Or maybe something else? But at present then with the value methodology starting to do very well, what else is in there? You mentioned it's operating business and it's not financials. Which are the major sectors in the value ETFs at the moment?
[00:16:09] Wes: You know it's super interesting. In the old days it was a lot more concentrated because I think there was a lot more hate and discontent in particular areas.
So we would load up, you know, one point like energy. Basically, all the things that got destroyed that all of a sudden are getting exciting. The problem is that if things get too exciting, you know, they stop being value and they start moving into those momentum portfolios. But right now the value portfolio is the most, I guess, sector agnostic that I've ever seen it.
Like, obviously we're going to have your tilts towards your, you know, your brick and mortar consumers, you know, energy and what have you. But, in general, it's the most diversified I've actually seen in a while. And it's just finding value and quality kind of across the marketplace out there. Which is surprising in itself. Typically it concentrates a lot more, but we're at a stage now where it's the standard energy bets. It's the consumer bets where he got hard assets in place. The things a lot of people would consider to be value plays. But I'd just say it's a lot more diversified than it has been in the past.
[00:17:11] Gavin: Which would suggest that, as you say, that there's a fair amount of value in a large number of sectors now. Would that be a reflection merely of the extreme concentration on growth we've seen for the last two, three years?
[00:17:21] Wes: Yeah, I think so. I think it's just, well plus there's a lot of soul crushing going on in a lot of sectors that are tied to growth.
So like, you know, we'll pick up a few tech stocks all of a sudden. Like, which is weird, right? Like you would never do that, but whatever you have, you know, broad swats of stocks go down 70, 80% they're going to take down just everyone in that industry. Even the ones that might be the free cashflow generators who have real businesses.
And to the extent that they kind of pull down everybody, you know, now all of a sudden the value system is going to be like, oh wow. Some of those former shiny rocks are actually now value plays. You know, it may be an example, it's not there yet, but an example might be like Facebook. Right? Facebook was one of the shiny rocks. Facebook, if anyone has been paying attention has got absolutely destroyed. And it's not quite yet in our deep value territory. But it's getting very close, right? It's getting really cheap and it's obviously like a high quality business that generates more money than God. But there there's clearly a lot of like very negative sentiment.
And I think it's one, a good example of a situation where the whole sector of, you know, tech shiny rocks has been taken out. So all of a sudden you're starting to see like real businesses that generate real money, have real free cash flow. You know, they're getting interesting to value algorithms where historically, you know, just a year ago you'd be hard pressed to find a tech stock in the quant value system.
That that would be a rare sighting. Where more and more I think you're gonna start seeing a lot of that.
[00:18:55] Gavin: That's extremely interesting because it is an agnostic approach. It doesn't sectors or whatever, it's simply that the numbers say there is now some value starting to appear here. And in the same way, as you were saying with momentum, things that would be regarded as traditional value like energy, like financials, are now appearing there. Is there any other sector on the momentum side where we're seeing good momentum? Which is perhaps a little surprising to you in the same way as tech appearing in value?
[00:19:24] Wes: I don't think any of it's that surprising because momentum fundamentally is a simple idea. Buy winners. So anything that's tied to, you know, basically inflation. So financials, energy, you know, underlying manufacturers, energy commodity producers, anything related to the inflation trade, which has been on fire the last year versus everything that's not related to that. Presumably most of these shiny rock type deals like technology. That's what quantitative momentum is going to be owning.
Right now it's basically heavy in the inflation trade because that's where all the momentum is. And I don't think there's anything surprising about what we're seeing there. it's what you would expect I would say.
[00:20:05] Gavin: The implication there would be that the inflation trade, obviously, it's been on. You said it's been on fire for the last year, but also that it's likely to continue to be the place to be, as far as momentum is concerned, until such time as that momentum starts to stumble.
[00:20:18] Wes: Yeah. You got it. So whenever you're in inflation or deflationary setups, I mean I'm not a macro economist. I can't predict if we're in the real inflation set up, but these are not exactly short cycles. You don't go from like hyper inflation, turn around go to hyper deflation, turn around go to hyper inflation.
And so to the extent that one believes we're kind of in a regime shift here to a more inflationary environment, which it seems to be the case in my mind. But, like I said, I'm not a macro economist. I think something like momentum strategy is going to continue to be in these inflation tied names.
And to the extent that that theme continues to play out, obviously it's just going to load up more and more into that thematic. Because that's what it does. It's momentum. And to your point though, to the extent that that wave starts breaking, because we decide well that's fake, we weren't actually inflationary. You know, we're going into a great depression or something, you know, obviously momentum was going to slowly move out of that.
But I don't foresee that happening. Yeah, using my very bad predictions of macro economic future. Who knows? Anything can happen?
[00:21:27] Gavin: That's true. One element about Alpha Architect's portfolios. Whereas I think that's interesting is that they are pretty concentrated. So for us in SmartBe it's 50 stocks in the US ETFs and only 20 in Canada. Do you feel that's a big differentiator?
And is it simply that there's not much value added by going beyond those numbers?
[00:21:47] Wes: Yeah. So, I mean, the idea is if you're going to be taking active bets on factors or your stock picking prowess or whatever it is, you know, people aren't paying you to go closet index and just go rebuy the index and do small tilts, right?
The reason you would pay someone is hey I'm going to pay you to be different and deliver me that unique value that you're trying to provide. So it just makes sense to me that, you know, why would you have a 500 stock value portfolio that has the same price to earnings ratio as the market? That's not a value portfolio.
Like if you're going to get the value stocks by owning the 50 cheapest, and they're going to have a vastly different value characteristic than the market. But that's kind of the point, we're not trying to buy the market. You can go do that from Vanguard for free. Like we're trying to deliver something unique and differentiated.
It's going to give you that concentrated, focused exposure to our process and either the value strategy or the momentum strategy, but that's good. That's what you're paying for. And you want to pay for differentiation. You don't want to pay for a generic.
[00:22:52] Gavin: No. Absolutely. And that's a very important point because a number of the, as you say, so-called value or momentum portfolios effectively look pretty much like the index with a small tilt.
Does that mean that because you have these concentrated portfolios turnover is higher?
[00:23:07] Wes: Yes. So it's going to be more active. You're going to have at the margin, probably higher turnover. Cause you're more actively moving in to the names you want to own. And you're actively moving away from just being a benchmark hugger.
So that would be expected. Like obviously, you know, you need to manage the turnover against frictional costs and taxes and what have you. But that's already built into our systems. And so to the extent that we control for that, our objective is how do we deliver as concentrated a dose as we can of value, quality exposure, momentum exposure to the end consumer.
And how do we deliver that at affordable pricing. That's what the value proposition is.
[00:23:45] Gavin: And on the pricing side, it's fairly reasonable given the fact that you are active. Would that be fair to say?
[00:23:51] Wes: Yeah, there's obviously a lot of work involved, a lot of training involved, a lot of research involved.
So, you know, someone needs to be at the margin, compensated for the additional effort and work and to the extent they charge a reasonable price and you're not going crazy. It's a win-win cause. Cause hey I'm doing something unique, differentiated to give you a different return profile that you can go buy for free.
Well, it takes also more work than what you can buy for free. And, you know, nothing in life is free. And if you see something that says it's free, that means that there's a hidden agenda behind it. So it's just, you know, it's just transparent. Like, hey we're trying to charge an affordable, reasonable rate for, you know, extra work and effort to build a product, you know, to make sure it's a win-win equilibrium for everyone involved.
[00:24:37] Gavin: No, that makes a great deal of sense. And obviously it's been very successful. How much do you have in terms of assets under management now after your sort of 10 years or so?
[00:24:46] Wes: We have right now, I think, probably like 1.7 billion or 1.8 billion. I can't even keep track. Because I spent 10 years not having anything.
I slowly grew and then, you know, the old 10 year overnight success. You know I used to get excited. Well, I still get excited, but I used to get excited, like, oh my God we got 10 million. And now it seems like every day we get, you know, you get that. So it's just, we're kind of in that exponential growth stage at the moment.
So we just keep getting more assets and which is awesome. But you know, I'm still very cognizant of, you know, not having any assets and stick it to the grind and stick it to your core beliefs. Stick it to the mission. I haven't gotten to a stage where, you know, I feel like we could rest on our laurels.
[00:25:30] Gavin: Absolutely. How much of that has come in in the last 18 months or so? Presumably on the back of the excellent performance.
[00:25:36] Wes: Oh man. Probably a double. Yeah, probably something like that. Like, I don't know offhand, but yeah, probably a year ago we were maybe under a billion or right around there. And now we're almost double that. So yeah, that's a pretty fair thing to say.
[00:25:52] Gavin: Well many congratulations, because that's obviously just reward for the amount of time and effort. And, as you say, a 10 year overnight success. But would you anticipate that as people see the benefits of this concentrated factor investing, that there's likely to be a continuation of that growth and assets? Are you finding people much more willing to listen in a way that maybe they weren't when all you had to do was, as you put it, buy the shiny rocks and it went up?
[00:26:15] Wes: Yeah, I think what happens is you could tell people till you're blue in the face, hey if you go touch the fire you sometimes get burnt. And honestly we've been telling this to people for a long time. Do not buy extremely high priced securities because in the end you will get burnt. But no one wants to listen to you when they go up a hundred percent a year.
But now that obviously the fortunes have turned and now those things have all cratered, now people are starting to kind of, like, I went through the same phase early on in my career too. Oh, wow. Like maybe we should pay attention to valuations. Maybe we should pay attention to fundamentals. And now that I think the sentiment has broke that hey you can't just buy,
you know, these crazy overvalued stocks and expect them to always go up a hundred percent a year. You know, people are getting more disciplined about how they make their investment decisions. Which is obviously great because now they're much more amiable to conversations about value portfolios.
And focus on hey what price you paying? What's the benefit you're getting? So it's obviously opened up a lot more combos with people that just a year ago would say you're an idiot. I'm going to buy Cathie Woods Ark Fund. So that's useful.
[00:27:24] Gavin: It is. And some of those institutions ,what percentage of the money that's coming in the last little while would you say is institutional? Or is it very largely driven by files from advisors and individuals?
[00:27:34] Wes: It's predominantly, I'd say advisors and ultra high net worth. But we do deal with some institutions as well. And they're, just from talking to them recently, they're obviously in the value trade as well. Where I think everybody, whether you're a retail investor, an advisor, or an institutional investor, everyone has kind of said oh wait a second.
You know, these crazy shiny rocks have gotten destroyed. We can't just lean on that anymore. We should probably focus back on fundamentals. So I don't think there's no differentiation amongst investors out there in the public. I think everyone is coming to the realization, you know, price paid matters.
Warren Buffet one-on-one advice has been safe for 60 years now. But it seems like the investing marketplace of the public always needs a reminder. It only kind of comes in the form of a negative 70% draw down that their reminder hits them in the face. And then they're like, oh yeah. Okay. Gravity still matters. Let's talk about.
[00:28:32] Gavin: Yeah. What was his line? It's only when the tide goes out, you discover who's been swimming naked. And I think we've seen a, a fair amount of sites we wouldn't want to have seen in the last year or so. But then again, would it therefore be fair to say, Wes, that the major message you want to get across to investors is that the price you pay for something will dictate the return that you get over the long-term? Would that be a suitable summary?
[00:28:56] Wes: Yeah, I think that's a fair . Summary. And then of course, the one interesting exemption is momentum. So there's also another element where buy winners. Like that's also a fundamental principle of the marketplace. It seems to also matter. And those winners, in general, are probably going to be, like you said, if you pay the right price they have good strong earnings.
They have good future that that could work as well. But in general, from the value perspective, what you said is a hundred percent true. But from the momentum perspective, you also have to always pay attention to relative strength and buying winners, buying strength, whenever you can. Or at least as a compliment to your portfolio.
[00:29:34] Gavin: And that again, I think, is a very important point it's to say Alpha Architect is not a value manager. It's a manager of value products, but it's a manager of momentum products as well. And both are factors which have proven their ability to add value over time.
[00:29:49] Wes: Yup, exactly. A couple of good ideas.
We don't have a lot of them. We just do them concentrated. And then we recommend that you pool them both together because it's really hard to time when one is going to do better than the other. So we generally recommend, hey, unless you got a crystal ball maybe you could tilt towards one versus the other.
But if I'm being straight with folks, and what I do with my own capital, I diversify. Like everybody should diversify. You shouldn't be all in on value. You shouldn't be all in a momentum. You shouldn't be all in on anything. You know, just common sense would suggest that you should probably, you know, spread your eggs around in your basket a little bit. So not all of a break at the same time.
[00:30:28] Gavin: And just briefly also we've got US and Canadian ETFs here at SmartBe. You have an international ETF as well. Is that right? In the US?
[00:30:38] Wes: So we run strategies in the US, developed markets, international, and then Canada. You got it.
[00:30:45] Gavin: But it's exactly the same process for developed international markets. Do you find it's more difficult to get the data there? Do you find there's issues with trading costs or liquidity or does it actually all work straightforwardly?
[00:30:56] Wes: Well, I mean, we've been doing it for about 10 years, so we've finally gotten to a stage where I'm fairly confident we can control all that stuff. But certainly relative to the US market, or even the Canadian market, international markets are a lot more challenging on all the aspects that you mentioned. Doable, but not as easy as, you know, trading stocks and the S and P 500, obviously.
[00:31:18] Gavin: Do you charge a little more to reflect that difficulty?
[00:31:21] Wes: Yeah. Sure. So in general and everything we do, we have a core belief, a win-win. So, hey, if it's more work, you know, usually you got to charge more because usually there's alignment with effort and price. Charge is to help, you know, compensate and cover the cost of, of dealing with that reality.
[00:31:36] Gavin: But after taking all those factors into account, you've experienced the same performance for the two factors that you believe in. In international markets it works there just as well as it works in North America?
[00:31:47] Wes: Yeah. I mean, they obviously work at different times and in recent memory, the US market has really highlighted the divergence across like value momentum. But all of these factors which have been studied over at this point, you know, hundreds of years in every single market you could think of. In general, the basic concept is, hey, fear and greed actually matter.
Like value momentum actually matter. And we're regardless where we are, whether it's stocks, bonds, commodities, what have you, these concepts seem to be evergreen wherever you look. That doesn't mean they all, you know, value doesn't always if it works in the US that doesn't mean it's going to work in another market at that same time. But the general principle of buying cheap and buying winners, even though they don't work exactly at the same time, applies regardless of where you are in the world I think.
[00:32:38] Gavin: No, that's very important point to take away. I think, because it does go to show that these factors do work in essentially whatever circumstances they might be. Would you ever be tempted to do say emerging markets where you have a sort of a step change in terms of the logistics and the difficulties?
If it were practicable, would you be willing to look at doing that?
[00:32:59] Wes: Sure. Like we run emerging market funds that aren't focused on factors, just cause we operate a lot of funds for a lot of different people. It's just a problem and the challenge is, as a lot of people know, as an EM it's still at a stage where managing the taxes, managing the frictional costs, and just the cost of entering those markets, it's still challenging. And so I'd say we would definitely be open to it. It's just at this point in time, the cost benefit trade off doesn't seem to be there yet. But, you know, that could change obviously. Because those things can evolve. They can go into a new future where, hey, frictional costs are a lot lower and, hey, the ability to manage taxes has gotten a lot easier just like it is in developed markets in the US and even in Canadian markets,. But it's just not there yet in our opinion. The data supports the concept for sure. That, you know, using value, momentum, basically all the same things. It's no different. It's just more like the logistics and institutional details of making it happen. That cost benefit analysis hasn't gotten there yet for us.
[00:33:59] Gavin: Well, it's encouraging to know that those factors do work across virtually any marketplace you look at. Just to summarize here briefly, Wes. We are, you believe, seeing a major switch to value being the factor that's working best at the moment and looking into your perfect crystal ball, you feel that that's probably likely to continue for a while simply because these are not, to use someone else's phrase, transitory. They tend to be relatively long cycle.
Would that be an accurate expression of your views?
[00:34:28] Wes: Yeah. I think that's fair. With the caveat that I can't predict the future perfectly.
I'm sorry. Sorry I can't provide my crystal ball here, but I think what you say is true. If I was a betting person, you know, I would definitely tilt towards value versus other things at this stage in the factors cycle.
[00:34:48] Gavin: Well, that that's a pretty sort of strong statement of belief. Especially for somebody who has done such an excellent job in terms of being disciplined and systematic and has an excellent track record of the way that you have.
So thanks very much indeed, Wes. That's been enormously helpful and delighted to hear that, finally, after 10 years you are an overnight success. And we just hope the money, keeps running in as fast as it has continued to do so. Thanks very much, indeed.
[00:35:12] Wes: Thanks for your time and appreciate the interview, Gavin.
[00:35:21] Gavin: Thank you very much for listening to The Gavin Graham Show sponsored by SmartBe Investments. If you would like to learn more about the subjects discussed today, please go to our website at smartbeinvestments.com or @smartbeinvestments on any social media platform.
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