Yes, LA Kings fans here, and pleased to see June Gloom in April ruin a Sunday but enable 12 hours of guilt-free hockey watching and the cleaning up of longer form investment pieces, proxy pieces and random 10K browsing.
In a March 8th interview in the FT (which is behind the paywall, so I will summarize), Cliff Asness of AQR continues to lead the charge for why seven stocks won’t rule the world forever. And a few other non-original thoughts that are still worth repeating.
In the “business” of investment management, being up 12% while the market is up 15% is bad for us, but great for the client…versus we are up 2% and the market is down 8%, which is good for us and obviously less good for the client. That assumes that money management has some social utility of delivering on goals for people or organizations vs. just trying to get out of Vegas with more cash than you started with.
From Cliff:
“ … strategy is susceptible to valuation changes. If your portfolio has three- to five-year holding periods, as a value strategy will often have, and then there’s a steady richening or cheapening of your strategy — your longs getting more expensive, your shorts getting cheaper, or vice versa — it matters a lot for your realised return. This piece tries to explain what fraction of [value’s] recent returns come from this richening and cheapening. The answer: most of it. Even adjusted for this, it did somewhat worse than history, but by a relatively modest amount. Most of it is just being out of favour on a long horizon.”
If you are “curating” vs buying 2000 stocks, this might mean less, but a tailwind doesn’t hurt. On a relative basis, your starting valuation matters for future returns, and it matters big time on a relative basis. Guess what seems cheaper on history and what seems expensive?
And somewhat obviously:
“…it tells you something that the stories can change so much. The US was cheaper than the world in 1990. Now the US is far more expensive than the world. Almost all of the US’s victory was from richening. You can argue if it’s justified, but you tend not to get a repeat — another 30-year relative tripling of the valuation ratio. I tell any US investor, you’re doing the right thing. It’s just the timescales these things work on.”
We are obviously replacing international with smallcap and value, but the last line is one of these looks good on paper ideas. I can assure you that jobs were lost by people who bet with AQR and the anointed Quant community 15 years ago, just as jobs and assets have been lost by leaning against “buy large growth” in the last 5 years.
And the problem is you have no other choice; no one knows the future. So you allocate what you think is the right amount of risk to things…because the secret is the whole stock market is just as susceptible.
Our industry has never been more educated about financial history and what we generally should be doing. It’s just not easy to do.
