Bloomberg Audio Studios, Podcasts, radio News. Welcome to Meren Talks Money, the podcast in which people who know the markets explain the markets. I'm Merit suset Work. This week I'm speaking with Dan Rasmussen, founder of the investment management firm Verdered Advisors. Before starting Verda, Dan worked at Baine Capital Private Equity and Bridgewater Associates. And he's got a book coming out which I have read already, called The Humble Investor, How to Find a Winning Edge in a Surprising World. It's available for pre order now and out in bookstores in early February. I strongly recommend that you order it. The underlying theme, as Dan puts it, is the future is hard to protect, vicually impossible to predict. So don't assume you really know anything. The best approach is a humble one. The best investment opportunities come to you when you can see other people's eric identify where they are too confident, be they too optimistic or too pessimistic. We're going to get into all that, plus his thoughts on investing during stock market bubbles. Are we in one now? By the way, European and UK equities, Japanese equities and what he is most bullish on. Dan, Welcome to Marin Talk's Money.

Bloomberg Audio Studios, Podcasts, radio News. Welcome to Meren Talks Money, the podcast in which people who know the markets explain the markets. I'm Merit suset Work. This week I'm speaking with Dan Rasmussen, founder of the investment management firm Verdered Advisors. Before starting Verda, Dan worked at Baine Capital Private Equity and Bridgewater Associates. And he's got a book coming out which I have read already, called The Humble Investor, How to Find a Winning Edge in a Surprising World. It's available for pre order now and out in bookstores in early February. I strongly recommend that you order it. The underlying theme, as Dan puts it, is the future is hard to protect, vicually impossible to predict. So don't assume you really know anything. The best approach is a humble one. The best investment opportunities come to you when you can see other people's eric identify where they are too confident, be they too optimistic or too pessimistic. We're going to get into all that, plus his thoughts on investing during stock market bubbles. Are we in one now? By the way, European and UK equities, Japanese equities and what he is most bullish on. Dan, Welcome to Marin Talk's Money.

Thanks for having me.

Thanks for having me.

It's a pleasure now. I am excited to have been one of the first outsiders to have read your book. I finished it this morning and it is excellent. And as I said to you before we started talking, it fits with so many of my biases that I particularly enjoyed it. Every page and affirmation of thoughts I have already. Nothing works, Oh God, absolutely absolutely. We'd be having a different conversation if I'd gone through the book going no, that's not what I think already. Don't try and persuade me about things like that. Now. I wanted to start actually at the very beginning of the book what you talk about first, which is this idea, And it's particularly important this time of year, by the way, when we are overwhelmed, not me, by forecasts from everybody in the market about what they think is going to happen in the coming year. And we know, we know you, and I am pretty much everyone else in the market from my years of experience, that every single one of those forecasts is wrong, well, not all of them, They'll be one in the middle. By happen chance that that is correct. So I wanted to start by talking about that full costs, you say, full costs meet reality.

It's a pleasure now. I am excited to have been one of the first outsiders to have read your book. I finished it this morning and it is excellent. And as I said to you before we started talking, it fits with so many of my biases that I particularly enjoyed it. Every page and affirmation of thoughts I have already. Nothing works, Oh God, absolutely absolutely. We'd be having a different conversation if I'd gone through the book going no, that's not what I think already. Don't try and persuade me about things like that. Now. I wanted to start actually at the very beginning of the book what you talk about first, which is this idea, And it's particularly important this time of year, by the way, when we are overwhelmed, not me, by forecasts from everybody in the market about what they think is going to happen in the coming year. And we know, we know you, and I am pretty much everyone else in the market from my years of experience, that every single one of those forecasts is wrong, well, not all of them, They'll be one in the middle. By happen chance that that is correct. So I wanted to start by talking about that full costs, you say, full costs meet reality.

It's probably the single idea that most changed my career, which was, you know, I started out in investing, like many of us, do you know, building these discounted cash flow models, the LBO models that forecast revenue and profits years into the future. And there was so much emphasis put in on getting these Excel models right right, or you know whatever right, meant that I never stopped to ask how good are we predicting what's going to happen three or four years from now on the side, and I didn't. I didn't start out, and I didn't study finance or accounting or economics in undergrad And so when I started working investing, I talked to my sister and a few other folks who are in the business, and they said, well, wanted to go read as much as you can, and so I started reading all these books about theory and academic research and investing. And one of the ideas that I came upon was phil Tetlock's work on forecasting, and Tetlock finds that experts in their fields are no better than non experts at forecasting things, even in fields much they're experts, and the only difference is that they're more arrogant about it. And I said, you know, gee, I wonder if our growth forecasts are are right.

It's probably the single idea that most changed my career, which was, you know, I started out in investing, like many of us, do you know, building these discounted cash flow models, the LBO models that forecast revenue and profits years into the future. And there was so much emphasis put in on getting these Excel models right right, or you know whatever right, meant that I never stopped to ask how good are we predicting what's going to happen three or four years from now on the side, and I didn't. I didn't start out, and I didn't study finance or accounting or economics in undergrad And so when I started working investing, I talked to my sister and a few other folks who are in the business, and they said, well, wanted to go read as much as you can, and so I started reading all these books about theory and academic research and investing. And one of the ideas that I came upon was phil Tetlock's work on forecasting, and Tetlock finds that experts in their fields are no better than non experts at forecasting things, even in fields much they're experts, and the only difference is that they're more arrogant about it. And I said, you know, gee, I wonder if our growth forecasts are are right.

How would I sort of figure this out?

How would I sort of figure this out?

And I've done a variety of studies since having that original question, and the answer that I've come to is that our forecasts are really bad. At we really don't know much about the future, and the farther into the future we try to peer, the worse we get. In fact, Andre Schlipher at Harvard has done this wonderful study where he shows that long term growth forecasts are actually a perfectly negatively correlated with stock market returns. In other words, the more optimistic you are about long term growth, it's actually a totally contrarian signal. Now short term growth, you know, next year, for example, there's a little bit more accuracy. People have some good, decent chunk of ability to forecast. Okay, when we're talking about revenue or ebit das for example, or profits, you know what's going to happen in twenty twenty five. The problem is that it doesn't actually help you. So I just finished this wonderful study where in Japan almost all companies are required to issue one year forward guidance on revenue and net income, and so you can take you know, I took twenty years of this data and said, you know, how accurate are they? And then what does it mean for the stock prices? And what I found is that if you divide it into slow, medium, and high growth on a one year forward basis, Japanese companies are about fifty percent accurate. So thirty percent would be pure chance, you know, one hundred percent would be totally accurate. Fifty percent right, the other That sounds good, It sounds okay, right. But the challenge then is if you say, okay, well, let's say you're forecasting really high you know, you then think, oh, well, I should buy all the companies that are forecasting really high growth. You know, if they achieve that growth, it's going to be great. Well, it turns out that the companies that achieve high growth have sort of average returns.

And I've done a variety of studies since having that original question, and the answer that I've come to is that our forecasts are really bad. At we really don't know much about the future, and the farther into the future we try to peer, the worse we get. In fact, Andre Schlipher at Harvard has done this wonderful study where he shows that long term growth forecasts are actually a perfectly negatively correlated with stock market returns. In other words, the more optimistic you are about long term growth, it's actually a totally contrarian signal. Now short term growth, you know, next year, for example, there's a little bit more accuracy. People have some good, decent chunk of ability to forecast. Okay, when we're talking about revenue or ebit das for example, or profits, you know what's going to happen in twenty twenty five. The problem is that it doesn't actually help you. So I just finished this wonderful study where in Japan almost all companies are required to issue one year forward guidance on revenue and net income, and so you can take you know, I took twenty years of this data and said, you know, how accurate are they? And then what does it mean for the stock prices? And what I found is that if you divide it into slow, medium, and high growth on a one year forward basis, Japanese companies are about fifty percent accurate. So thirty percent would be pure chance, you know, one hundred percent would be totally accurate. Fifty percent right, the other That sounds good, It sounds okay, right. But the challenge then is if you say, okay, well, let's say you're forecasting really high you know, you then think, oh, well, I should buy all the companies that are forecasting really high growth. You know, if they achieve that growth, it's going to be great. Well, it turns out that the companies that achieve high growth have sort of average returns.

Right.

Right.

They forecast high growth and they achieve high growth, and they have average returns because that high growth was priced in with the time the guidance was issued. But the fifty percent of the time those companies that forecast high growth don't have high growth, their stocks collapse, and so you end up doing worse in the companies that forecast high growth or about you know, average in total, but a little bit worse. Whereas if you go to the companies that are forecasting low growth, yeah, fifty percent of the time they hit low growth, right, But then when they do, the stock returns average. They return the same as the high growth firms that achieved high growth. But when the slow growth firms achieve high growth, which they do fifty percent of the time, their stocks do really well.

They forecast high growth and they achieve high growth, and they have average returns because that high growth was priced in with the time the guidance was issued. But the fifty percent of the time those companies that forecast high growth don't have high growth, their stocks collapse, and so you end up doing worse in the companies that forecast high growth or about you know, average in total, but a little bit worse. Whereas if you go to the companies that are forecasting low growth, yeah, fifty percent of the time they hit low growth, right, But then when they do, the stock returns average. They return the same as the high growth firms that achieved high growth. But when the slow growth firms achieve high growth, which they do fifty percent of the time, their stocks do really well.

Okay, So knowing the growth thems in advance doesn't help you any even if you did. And is it also true to say that over those very short periods, so over a year or so. What we're not necessarily saying is that anyone is particularly good at forecasting anything out of reason. What we're saying is that people are jolly good at extrapolating the future, the short term future, from the past, and unless something goes wrong, it's quite likely that the next year will be similar to the previous year exactly.

Okay, So knowing the growth thems in advance doesn't help you any even if you did. And is it also true to say that over those very short periods, so over a year or so. What we're not necessarily saying is that anyone is particularly good at forecasting anything out of reason. What we're saying is that people are jolly good at extrapolating the future, the short term future, from the past, and unless something goes wrong, it's quite likely that the next year will be similar to the previous year exactly.

And this is where things get that get quite interesting, because I think you're exactly right, Marion. That the way people form their forecasts is they look at the recent past and they extrapolate that forward. That's the most common forecasting method in markets, which is why you see all the S and P five hundred forecasts for next year cluster around exactly what the S and P five hundred day last year. And there's a wonderful study that I updated and have done, you know, through for the last twenty years of data, where I look at the level and persistence of growth rates, and so you basically say, okay, let's look at every you know, every company's trailing growth over you know, let's say one year, three year, five year period. Does that forecast their growth rate over the next one, three or five years. And what you find is that revenue on a one year basis is a little bit forecastable, and then everything else is total chance.

And this is where things get that get quite interesting, because I think you're exactly right, Marion. That the way people form their forecasts is they look at the recent past and they extrapolate that forward. That's the most common forecasting method in markets, which is why you see all the S and P five hundred forecasts for next year cluster around exactly what the S and P five hundred day last year. And there's a wonderful study that I updated and have done, you know, through for the last twenty years of data, where I look at the level and persistence of growth rates, and so you basically say, okay, let's look at every you know, every company's trailing growth over you know, let's say one year, three year, five year period. Does that forecast their growth rate over the next one, three or five years. And what you find is that revenue on a one year basis is a little bit forecastable, and then everything else is total chance.

It's just pure coin flips.

It's just pure coin flips.

There's no relationship between past and future growth. And that's probably the single hardest thing for people to understand because it's just so against our views, right, because if you said, well, gee, Microsoft, and I don't know the gap or some apparel retailer, I'm trying to think of something very boring have an equal chance of having high growth over the next five years. You'd say, come on, that's absolutely not ei, there's no way that that's true.

There's no relationship between past and future growth. And that's probably the single hardest thing for people to understand because it's just so against our views, right, because if you said, well, gee, Microsoft, and I don't know the gap or some apparel retailer, I'm trying to think of something very boring have an equal chance of having high growth over the next five years. You'd say, come on, that's absolutely not ei, there's no way that that's true.

But statistically it is true.

But statistically it is true.

And I think that when you start to understand that, and you combine that with the insight about what's priced in and what's not, you start to see how the importance of understanding the structure of forecasts is to being a good investor. Because I like to say that investing is not a game of analysis, it's a game of meta analysis. It doesn't matter what you think, it matters what you think relative to what the market thinks.

And I think that when you start to understand that, and you combine that with the insight about what's priced in and what's not, you start to see how the importance of understanding the structure of forecasts is to being a good investor. Because I like to say that investing is not a game of analysis, it's a game of meta analysis. It doesn't matter what you think, it matters what you think relative to what the market thinks.

And so you need to understand.

And so you need to understand.

What other people are forecasts, knowing that everyone else is forecasting, and then you have to think, well, what if they're wrong? You know, how would I make money if they're wrong? And that, I think is my sort of key to unlocking or starting to think about what should work as an investing strategy based on behavioral economics.

What other people are forecasts, knowing that everyone else is forecasting, and then you have to think, well, what if they're wrong? You know, how would I make money if they're wrong? And that, I think is my sort of key to unlocking or starting to think about what should work as an investing strategy based on behavioral economics.

Yeah, I mean, it's not just we'll come back to that. I've wanted to talk about an anecdote that you had in the beginning of the book about the weather, and because one of the things that we often talk about is why do we bother with these forecasts? I mean this not just at the company level, but at the inflation level, GDP level, interest rates, etc. They're always wrong, And we have these GDP forecasts come out over and over from all our governments selling us GDP is going to be whatever it is with a couple of decimal points off to it. And we look at him like that, that's a nonsense. We know it's nonsense. Why do we listen? So tell us this lovely little weather anecdote from the book which explains it.

Yeah, I mean, it's not just we'll come back to that. I've wanted to talk about an anecdote that you had in the beginning of the book about the weather, and because one of the things that we often talk about is why do we bother with these forecasts? I mean this not just at the company level, but at the inflation level, GDP level, interest rates, etc. They're always wrong, And we have these GDP forecasts come out over and over from all our governments selling us GDP is going to be whatever it is with a couple of decimal points off to it. And we look at him like that, that's a nonsense. We know it's nonsense. Why do we listen? So tell us this lovely little weather anecdote from the book which explains it.

Yeah, so this is ken error. The famous economist was in the weather Core in World War Two, and being the genius that he was, he's and by the way that the weather Core asked for one year forward weather forecasts and so so they could plan troop movements and things like that, you know, when of the road's going to be too muddy, when there's once they're going to be snow by day.

Yeah, so this is ken error. The famous economist was in the weather Core in World War Two, and being the genius that he was, he's and by the way that the weather Core asked for one year forward weather forecasts and so so they could plan troop movements and things like that, you know, when of the road's going to be too muddy, when there's once they're going to be snow by day.

And so he was.

And so he was.

Tasked with creating these and and you know, he did a little bit of research and he found, you know, these these forecasts are completely wrong, They're completely useless, and so we just stopped doing them and I'll just send you the historic average table and just use that. And he sends a note to the General and and and and saying you know that that laying out his argument, and he gets a one sentence one back and it says, you know, the General knows that the forecasts are are useless, but he needs them for planning purposes.

Tasked with creating these and and you know, he did a little bit of research and he found, you know, these these forecasts are completely wrong, They're completely useless, and so we just stopped doing them and I'll just send you the historic average table and just use that. And he sends a note to the General and and and and saying you know that that laying out his argument, and he gets a one sentence one back and it says, you know, the General knows that the forecasts are are useless, but he needs them for planning purposes.

And then that's exactly it, isn't it. We need something to anchor what we're doing around even if we know it's wrong. We need the anchor.

And then that's exactly it, isn't it. We need something to anchor what we're doing around even if we know it's wrong. We need the anchor.

We need some way to plan. And even if we're not doing it consciously, we're often doing it subconsciously. And so you need some alternative way of thinking. And I think, you know, a lot of the research on forecasting suggests that the best way to make forecast is use base rates. Right, so you take a long historical time and you sort of say, what's the average over this long period of time, and that's generally the best you're going to get. And so I think that in my mind the game of investing, the way to make good investment decisions is, on the one hand, to take those base rates, to study history to understand what the context is over a long period, not one year, not three years, But what's a ten twenty year context, and what's the sort of distribution of potential outcomes? And then to secondarily to say, because we know everyone else is planning, we know everyone else's forecasting, where are they concentrating their excessive optimism and their excessive pessimism, And those are the places where we're likely to be able to find an arbitrage just betting that nobody knows. Right, Like, nobody knows is AI going to truly revolutionize the economy or is that one trillion these companies are spending going to be a to money. Maybe no one knows, you know. And if no one knows, you know, what's the bet that we should make.

We need some way to plan. And even if we're not doing it consciously, we're often doing it subconsciously. And so you need some alternative way of thinking. And I think, you know, a lot of the research on forecasting suggests that the best way to make forecast is use base rates. Right, so you take a long historical time and you sort of say, what's the average over this long period of time, and that's generally the best you're going to get. And so I think that in my mind the game of investing, the way to make good investment decisions is, on the one hand, to take those base rates, to study history to understand what the context is over a long period, not one year, not three years, But what's a ten twenty year context, and what's the sort of distribution of potential outcomes? And then to secondarily to say, because we know everyone else is planning, we know everyone else's forecasting, where are they concentrating their excessive optimism and their excessive pessimism, And those are the places where we're likely to be able to find an arbitrage just betting that nobody knows. Right, Like, nobody knows is AI going to truly revolutionize the economy or is that one trillion these companies are spending going to be a to money. Maybe no one knows, you know. And if no one knows, you know, what's the bet that we should make.

Yeah, if everyone else is betting that they will, but we know that nobody knows, then we should bet that they won't exactly. And that brings us to this idea of investing being not a game of analysis as a game of meta analysis. That's right, It's all about the relativity, all right. So with that in mind, that would make almost all the models that we use at the moment irrelevant. I'm one of the one of the models that you talk about in the book The Dividend discount model the way of investing by saying, you know, every company, every equity is worth the value of all the dividends that'll be paid to the owner of that equity in the future. And people spend hours on these models, don't they days days working out is actually worth But as they have absolutely no idea whatsoever what those dividends are going to be, the final number they come up with is nonsense.

Yeah, if everyone else is betting that they will, but we know that nobody knows, then we should bet that they won't exactly. And that brings us to this idea of investing being not a game of analysis as a game of meta analysis. That's right, It's all about the relativity, all right. So with that in mind, that would make almost all the models that we use at the moment irrelevant. I'm one of the one of the models that you talk about in the book The Dividend discount model the way of investing by saying, you know, every company, every equity is worth the value of all the dividends that'll be paid to the owner of that equity in the future. And people spend hours on these models, don't they days days working out is actually worth But as they have absolutely no idea whatsoever what those dividends are going to be, the final number they come up with is nonsense.

Call before you do the company. You know, you're the world's leading expert on you. So just tell me what's your year end bank balance going to be in twenty thirty And by the way, what's your income pre and post you know, your pre tax and post taxing home exactly for the next five years, And.

Call before you do the company. You know, you're the world's leading expert on you. So just tell me what's your year end bank balance going to be in twenty thirty And by the way, what's your income pre and post you know, your pre tax and post taxing home exactly for the next five years, And.

Just model that first.

Just model that first.

And if you can't do that accurately, you know, why do you think you can do it for Coca Cola?

And if you can't do that accurately, you know, why do you think you can do it for Coca Cola?

Yeah?

Yeah?

Right, okay, interesting, So it's let's go move then to what you think might work. So if none of these models that most people use, that everyone who has an MBA, etc. Sits around making these breadsheets all day, none of these work. What does And the thing that you say is that one thing that never changes, and you can extrapolate from is human psychology, which brings us back to this idea of the meta analysis. And in this section of the book, you use the analogy of ships because you spent some time observing how shipping works, right, And this is one of my colleagues when I was first starting as a broker, explained this to me in terms of of chips, in terms of semiconductors, but you do it much better with chips.

Right, okay, interesting, So it's let's go move then to what you think might work. So if none of these models that most people use, that everyone who has an MBA, etc. Sits around making these breadsheets all day, none of these work. What does And the thing that you say is that one thing that never changes, and you can extrapolate from is human psychology, which brings us back to this idea of the meta analysis. And in this section of the book, you use the analogy of ships because you spent some time observing how shipping works, right, And this is one of my colleagues when I was first starting as a broker, explained this to me in terms of of chips, in terms of semiconductors, but you do it much better with chips.

Well, it's a wonderful paper by a consulting economist here for a day at Sam Hanson as the presser at our business school. Really brilliant guy. And I love the shipping industry. Actually spend a summer in college working at a Greek shipping company, and I find that endlessly fascinating of the personalities involved and the dynamics and the way it interacts with global trade.

Well, it's a wonderful paper by a consulting economist here for a day at Sam Hanson as the presser at our business school. Really brilliant guy. And I love the shipping industry. Actually spend a summer in college working at a Greek shipping company, and I find that endlessly fascinating of the personalities involved and the dynamics and the way it interacts with global trade.

I mean, it's just so cool.

I mean, it's just so cool.

But there's this fascinating insight that these economists have by looking at shipping companies. And what happens is that shipping rates are very variable, right, So sometimes it's very expensive to ship rate, sometimes it's very cheap when rates are very high, and you plug those rates into a model of whether you should invest in a new ship or not. It turns out that investing in a new ship looks really profitable whenever shipping rates are high, and so people plug these into their model. Now, the challenge is that it takes three or four years to build a new ship, and so these Greek shipping companies they see the high rates and then they go and they order ships from these South Korean shipyards, and then three or four years from now, the ships are delivered and what ends up happening and he calls this competition neglect, which I think is such a wonderful and relevant term to what's going on in Ai. By the way, competition neglect. They don't realize that all their other buddies also ordered ships at the same time, because they all also did the same math, and they plugged the same shipping rates and the same cost to build a ship. And so there's this lot of ships that then show up on the market, all at the same time, three or four ears down the road, and all of a sudden, shipping prices crash because there are too many ships. And so you see the competition neglect, the inability of these shipping companies to anticipate that their competitors are doing the same thing. Is what's exacerbating the cycles and driving shipping rates too high and then too low, and then too high and then too low, and then everyone seems to be getting burned at the same time. And I think that that's such a wonderful analogy to what's going on in markets. Right you sort of say, wow, like AI is such a great opportunity, I should buy into it. What if somebody else figure this out before me? Or what's the fact that I thought it means that everyone else is thinking at the same time.

But there's this fascinating insight that these economists have by looking at shipping companies. And what happens is that shipping rates are very variable, right, So sometimes it's very expensive to ship rate, sometimes it's very cheap when rates are very high, and you plug those rates into a model of whether you should invest in a new ship or not. It turns out that investing in a new ship looks really profitable whenever shipping rates are high, and so people plug these into their model. Now, the challenge is that it takes three or four years to build a new ship, and so these Greek shipping companies they see the high rates and then they go and they order ships from these South Korean shipyards, and then three or four years from now, the ships are delivered and what ends up happening and he calls this competition neglect, which I think is such a wonderful and relevant term to what's going on in Ai. By the way, competition neglect. They don't realize that all their other buddies also ordered ships at the same time, because they all also did the same math, and they plugged the same shipping rates and the same cost to build a ship. And so there's this lot of ships that then show up on the market, all at the same time, three or four ears down the road, and all of a sudden, shipping prices crash because there are too many ships. And so you see the competition neglect, the inability of these shipping companies to anticipate that their competitors are doing the same thing. Is what's exacerbating the cycles and driving shipping rates too high and then too low, and then too high and then too low, and then everyone seems to be getting burned at the same time. And I think that that's such a wonderful analogy to what's going on in markets. Right you sort of say, wow, like AI is such a great opportunity, I should buy into it. What if somebody else figure this out before me? Or what's the fact that I thought it means that everyone else is thinking at the same time.

So do you think that there is overinvestment in AIO, too many companies investing at the same time and the same things like the ships.

So do you think that there is overinvestment in AIO, too many companies investing at the same time and the same things like the ships.

Well, I think there has.

Well, I think there has.

To be, right, I mean, you just think about how many of these AI companies there are. All of them are trying to build pretty much the same thing as far as I can tell. And I think there are a few things that are are are are clear right, Like we can study the history of the Internet, and one of the things that we observed that tends to be winner take all the best model tends to work Google winds search, Amazon winds, retail. You know, Microsoft winds productivity. So why should we think that AI will be twenty percent chat GBT twenty percent, Gemini twenty percent, right, like Claude twenty percent anthropic. It just is it's not plausible based on the history of the of the of the tech industry.

To be, right, I mean, you just think about how many of these AI companies there are. All of them are trying to build pretty much the same thing as far as I can tell. And I think there are a few things that are are are are clear right, Like we can study the history of the Internet, and one of the things that we observed that tends to be winner take all the best model tends to work Google winds search, Amazon winds, retail. You know, Microsoft winds productivity. So why should we think that AI will be twenty percent chat GBT twenty percent, Gemini twenty percent, right, like Claude twenty percent anthropic. It just is it's not plausible based on the history of the of the of the tech industry.

And we can't choose them, and we can't choose the winner.

And we can't choose them, and we can't choose the winner.

And we can't pick the winners. So like, some of these things are just incinerating capital, right, They've got to be, like, probably, probably all but one of them are incinerating capital. We just don't know which of them is incinerating capital, which of them are, and which of them aren't.

And we can't pick the winners. So like, some of these things are just incinerating capital, right, They've got to be, like, probably, probably all but one of them are incinerating capital. We just don't know which of them is incinerating capital, which of them are, and which of them aren't.

And does that mean that as investors we should avoid all of them?

And does that mean that as investors we should avoid all of them?

I think so. I think they're all terrifying.

I think so. I think they're all terrifying.

There's too much hype, too much optimism. How long have we thought that we would have robots that could think like us?

There's too much hype, too much optimism. How long have we thought that we would have robots that could think like us?

Right?

Right?

Like, this isn't the idea. Humans that are perpetually attracted to the idea of anthropic robots that can speak and think like us, And every time we've tried to do it it has worked, and it's not going to work this time.

Like, this isn't the idea. Humans that are perpetually attracted to the idea of anthropic robots that can speak and think like us, And every time we've tried to do it it has worked, and it's not going to work this time.

I don't think why do we think why do you think we're at trying to do it. Is it because we're lazy and we're just hoping to be able to invent something that can do everything for us?

I don't think why do we think why do you think we're at trying to do it. Is it because we're lazy and we're just hoping to be able to invent something that can do everything for us?

Well, it's the it's the ultimate vanity to create something in your own image, isn't it.

Well, it's the it's the ultimate vanity to create something in your own image, isn't it.

The closes complex?

The closes complex?

Okay? One of the tiny questions, not.

Okay? One of the tiny questions, not.

That any of our friends in the tech industry.

That any of our friends in the tech industry.

Of god, absolutely this idea about the measure analysis. What does that lead us to? What does that tell us about how we can actually invest? How can we really do it? What works?

Of god, absolutely this idea about the measure analysis. What does that lead us to? What does that tell us about how we can actually invest? How can we really do it? What works?

Yeah?

Yeah?

So I think that if we step aside and we say, gee, you know, forecasting doesn't work and the future is too unpredictable, and actually markets are too volatile, which is another thing. This is what Robert Schiller won the Nobel Prize force this idea of excessive volatility. What Schiller did, which is so brilliant, They said, you know, if the dividend discount model is right, and the net present values equal to some of the future cash flows discount by the interest rates, and if we know future cash flows and we know future indust rates, we can tell you what the net present value of the stock market should have been at any given time and how much it should have moved as those things changed. And he finds that about eighty plus percent of stock market volatility is inexplainable by changes and fundamentals.

So I think that if we step aside and we say, gee, you know, forecasting doesn't work and the future is too unpredictable, and actually markets are too volatile, which is another thing. This is what Robert Schiller won the Nobel Prize force this idea of excessive volatility. What Schiller did, which is so brilliant, They said, you know, if the dividend discount model is right, and the net present values equal to some of the future cash flows discount by the interest rates, and if we know future cash flows and we know future indust rates, we can tell you what the net present value of the stock market should have been at any given time and how much it should have moved as those things changed. And he finds that about eighty plus percent of stock market volatility is inexplainable by changes and fundamentals.

Okay, so even if you had the information for the model, it still wouldn't work exactly.

Okay, so even if you had the information for the model, it still wouldn't work exactly.

Even with full pressions, you can explain a very high percentage of volatility. And so where is this excess.

Even with full pressions, you can explain a very high percentage of volatility. And so where is this excess.

Volatility coming from?

Volatility coming from?

And I love this theory by this Stanford professor Mordecai Kurtz. And he comes up with this theory that what's happening is that everybody's making forecasts and then the future happens, and eighty percent of people realize they're wrong, and so they sell and they buy something else, and then they make new forecasts and then the same thing happens. Right, And it's that dynamic, and he should use some fancy match so that could explain it. All, right, that's what's going on. And I think what I sort of love about that idea. And we're so focused on efficient market theory, and efficient market theory is so many wonderful implications, right, and it's so useful. But I think one challenge to efficient markets theory is that it often gets interpreted as the price is always right. But anybody who's actually invested in markets at any point knows how frequently they make mistakes. And not only how frequently they make mistakes, but how frequently the market seems to make mistakes. Right, How could a stock be down thirty percent in a day if it wasn't a mistake yesterday?

And I love this theory by this Stanford professor Mordecai Kurtz. And he comes up with this theory that what's happening is that everybody's making forecasts and then the future happens, and eighty percent of people realize they're wrong, and so they sell and they buy something else, and then they make new forecasts and then the same thing happens. Right, And it's that dynamic, and he should use some fancy match so that could explain it. All, right, that's what's going on. And I think what I sort of love about that idea. And we're so focused on efficient market theory, and efficient market theory is so many wonderful implications, right, and it's so useful. But I think one challenge to efficient markets theory is that it often gets interpreted as the price is always right. But anybody who's actually invested in markets at any point knows how frequently they make mistakes. And not only how frequently they make mistakes, but how frequently the market seems to make mistakes. Right, How could a stock be down thirty percent in a day if it wasn't a mistake yesterday?

Right?

Right?

I mean, like, yes, the new news came out, but clearly the market didn't get that right. Otherwise the price wouldn't have moved as much as it did. And I think trying to reintroduce this idea of mistakes back into our vocabulary when we talk about markets and make it more human. Right, of course, mistakes are an integral component of investing. How could they not be. How could anybody who's ever experienced markets not know the mistakes are part of things? And how is that therefore driving rebalancing decisions? And then how can we as investors think through if.

I mean, like, yes, the new news came out, but clearly the market didn't get that right. Otherwise the price wouldn't have moved as much as it did. And I think trying to reintroduce this idea of mistakes back into our vocabulary when we talk about markets and make it more human. Right, of course, mistakes are an integral component of investing. How could they not be. How could anybody who's ever experienced markets not know the mistakes are part of things? And how is that therefore driving rebalancing decisions? And then how can we as investors think through if.

Other people are making mistakes, if we're making mistakes.

Other people are making mistakes, if we're making mistakes.

How should we build portfolios that take into account the idea that we are going to make mistakes and that everyone else is making mistakes too, and that that's part of the dynamics of what's driving market volatility.

How should we build portfolios that take into account the idea that we are going to make mistakes and that everyone else is making mistakes too, and that that's part of the dynamics of what's driving market volatility.

Okay, so was the answer, how are we going to build that portfolio?

Okay, so was the answer, how are we going to build that portfolio?

What we're looking for is some barometer of optimism or pessimism, right, If we could, if we could just have some barometer of how optimistic or pessimistic the market was about an individual security about the market as a whole, then we'd be in very good stead because we'd have a very good way of saying, you know, here's the stuff that's too extreme on one end or the other and going long or short that it turns out, in fact, that we have a very simple metric for doing that. And in the stock market, it's valuations.

What we're looking for is some barometer of optimism or pessimism, right, If we could, if we could just have some barometer of how optimistic or pessimistic the market was about an individual security about the market as a whole, then we'd be in very good stead because we'd have a very good way of saying, you know, here's the stuff that's too extreme on one end or the other and going long or short that it turns out, in fact, that we have a very simple metric for doing that. And in the stock market, it's valuations.

Right. You can pick almost.

Right. You can pick almost.

Any multiple, right, revenue multiples or book multiple, and you can erase to haksana on a on a ranking system, and you'll find that the ones that are the cheapest end up doing the best, and the ones that are the most expensive end up doing the worst. And that value reliably predicts stock returns. And in fact, over the last few years it hasn't in the United States.

Any multiple, right, revenue multiples or book multiple, and you can erase to haksana on a on a ranking system, and you'll find that the ones that are the cheapest end up doing the best, and the ones that are the most expensive end up doing the worst. And that value reliably predicts stock returns. And in fact, over the last few years it hasn't in the United States.

We should talk about why, but it.

We should talk about why, but it.

Has even internationally. People have declared the death of value investing. But value investing are the idea of ranking stocks by their relative optimism or pessimism and going along and things other people are pessimistic about and short things they're optimistic about should work. And I think you can also and we should talk about this separately, apply that to thinking about economy, whole markets and whole economy. But I think in the context of single stocks, what we've seen over the last few years has been some of the worst performance of value investing over its history. The last time it did this badly was in the late nineties during the tech bubble, and so we have to reckon with that, right, So I think it's all well and good for me to argue that we should use valuation ratios as a metcoroptimism or pessimism, and that we should be long things other people are pessimistic about.

Has even internationally. People have declared the death of value investing. But value investing are the idea of ranking stocks by their relative optimism or pessimism and going along and things other people are pessimistic about and short things they're optimistic about should work. And I think you can also and we should talk about this separately, apply that to thinking about economy, whole markets and whole economy. But I think in the context of single stocks, what we've seen over the last few years has been some of the worst performance of value investing over its history. The last time it did this badly was in the late nineties during the tech bubble, and so we have to reckon with that, right, So I think it's all well and good for me to argue that we should use valuation ratios as a metcoroptimism or pessimism, and that we should be long things other people are pessimistic about.

And there's an intuitive.

And there's an intuitive.

Logic to that, But there's also grappling with the fact that that hasn't worked recently in the United States. Again, it has worked internationally, it hasn't worked in the US, and so why And actually there was a period from COVID until the release of chat GBT when it did work, and then chat GBT just totally newked to value investing again, and so what I like to say about value investing.

Logic to that, But there's also grappling with the fact that that hasn't worked recently in the United States. Again, it has worked internationally, it hasn't worked in the US, and so why And actually there was a period from COVID until the release of chat GBT when it did work, and then chat GBT just totally newked to value investing again, and so what I like to say about value investing.

What's going on in the market today is.

What's going on in the market today is.

That we've had a period from in the twenty tens where there were a very small number of companies where they were forecasts to grow fast, and then they grew fast than the forecast, and they did that a few years in a row. That was the sort of fan mag stocks, as they.

That we've had a period from in the twenty tens where there were a very small number of companies where they were forecasts to grow fast, and then they grew fast than the forecast, and they did that a few years in a row. That was the sort of fan mag stocks, as they.

Were called them.

Were called them.

What is that a tribunal too, I'd say it was an innovation wave.

What is that a tribunal too, I'd say it was an innovation wave.

And these innovation waves happen, they do.

And these innovation waves happen, they do.

They happen with the Internet, they happen with railroads, and when they happen, they are these abnormal profit pools that are earned by the innovators. Now that doesn't last that long because at some point the customers need to benefit more than the innovators, and at some point the innovation get commoditized, and so these innovations don't last forever.

They happen with the Internet, they happen with railroads, and when they happen, they are these abnormal profit pools that are earned by the innovators. Now that doesn't last that long because at some point the customers need to benefit more than the innovators, and at some point the innovation get commoditized, and so these innovations don't last forever.

But in early windows they can be huge, huge booms. And that's what we're in the middle of.

But in early windows they can be huge, huge booms. And that's what we're in the middle of.

In the middle of or towards the end of.

In the middle of or towards the end of.

It depends on the future of AI and everything hinges on that. And again that's what you saw right like the sort of tech mania seemed to actually peak in COVID right in twenty twenty one, and then with the release of the vaccines, you had all that stuff clearly coming off. It all gone too far. Zoom had gone. People were using zoom too much, right, the people were buying too much on Amazon. It was peak Internet and then a client and then it looked like we were going to sort of return to a normal market where value investing worked again. And then chat GPT was released and it's just unleashed this total mania again and it now feels like we're back at twenty twenty one peaks. I mean, you know, you look at things like fart coin, and it's even worse than the SPACs, like at least the SPACs are companies.

It depends on the future of AI and everything hinges on that. And again that's what you saw right like the sort of tech mania seemed to actually peak in COVID right in twenty twenty one, and then with the release of the vaccines, you had all that stuff clearly coming off. It all gone too far. Zoom had gone. People were using zoom too much, right, the people were buying too much on Amazon. It was peak Internet and then a client and then it looked like we were going to sort of return to a normal market where value investing worked again. And then chat GPT was released and it's just unleashed this total mania again and it now feels like we're back at twenty twenty one peaks. I mean, you know, you look at things like fart coin, and it's even worse than the SPACs, like at least the SPACs are companies.

Well the hell is fart coin.

Well the hell is fart coin.

And yet it's valued at most more than you know, ninety percent of Japanese companies for example. You have to understand that, you know, markets are are reflective of human history and human events, and it's not it's not a linear math problem. And we know that there are certain things that we can rely on and should rely on, which is betting against tubris right, betting on things others are pessimistic about and being skeptical if things are too optimistic about. But sometimes the optimists are right, and they were right during the twenty tens. And the question is now the only question that matters for markets right now? In my mind, the most important question is are they right about AI or not?

And yet it's valued at most more than you know, ninety percent of Japanese companies for example. You have to understand that, you know, markets are are reflective of human history and human events, and it's not it's not a linear math problem. And we know that there are certain things that we can rely on and should rely on, which is betting against tubris right, betting on things others are pessimistic about and being skeptical if things are too optimistic about. But sometimes the optimists are right, and they were right during the twenty tens. And the question is now the only question that matters for markets right now? In my mind, the most important question is are they right about AI or not?

I mean, the other thing you can say, surely is that value investing doesn't work during a bubble.

I mean, the other thing you can say, surely is that value investing doesn't work during a bubble.

It doesn't work during a bubble.

It doesn't work during a bubble.

Aunts it doesn't work during a bubble, and so you can then make the case. So you might have might not want to make the case that the last few years are being suggestive of a bubble in the US market. And you look at the valuations and these are bubble valuations. So that could be the simplest way to look at it.

Aunts it doesn't work during a bubble, and so you can then make the case. So you might have might not want to make the case that the last few years are being suggestive of a bubble in the US market. And you look at the valuations and these are bubble valuations. So that could be the simplest way to look at it.

I think so too.

I think so too.

And I have this piece in the book about the nineties because I spent a lot of time thinking about bubbles. I went back and I read a bunch of investor letters from the great investors, Ray Dallio, Peter Lynch, Howard Mark, Seth Clarman. You know what were they saying in the nineties. And it was really interesting because all these great investors knew it was a bubble. They all wrote aboute about him, Ray Daalio said, we're approaching a blowoff phase of the US stock market. Peter Lynch said, not enough investors are worried. The only problem is that those two quotes are from nineteen ninety five, So you know, investor are often you know, smart data driven people. You can pick up on these things instead, the evaluations are too high. The problem is that smart investors tend to be way too early. Right, the bubble didn't burst for five years, right, and meeps up, and each subsequent year it doesn't burst. You look stupid, and the people that supported the bubble look right, And I think that that's the type of situation we're in now. It actually turned out that value investing, if you looked at it from ninety five to ninety nine, it looks like the stupidest investment strategy on the planet. So did international diversification. So right, but if you just fast forward two or three years, the bubble bursts so quickly that value investing, international diversification, all these things came out ahead with only one or two years after the bubble. And so I think that having patients, and I think understanding that there's historical context, being patient, but being guided by a sensitivity towards these behavioral insights that it doesn't you know, don't don't overthink it. You don't have to in some ways, you don't have to have the ends. I don't need the answer to in the I. I don't need to know that extended will succeed. All I need to know is are people too optimistic about it or not? And what it would be the signs of that excessive optimism. And if people are excessively optimistic, you know what should I do? I should stay away.

And I have this piece in the book about the nineties because I spent a lot of time thinking about bubbles. I went back and I read a bunch of investor letters from the great investors, Ray Dallio, Peter Lynch, Howard Mark, Seth Clarman. You know what were they saying in the nineties. And it was really interesting because all these great investors knew it was a bubble. They all wrote aboute about him, Ray Daalio said, we're approaching a blowoff phase of the US stock market. Peter Lynch said, not enough investors are worried. The only problem is that those two quotes are from nineteen ninety five, So you know, investor are often you know, smart data driven people. You can pick up on these things instead, the evaluations are too high. The problem is that smart investors tend to be way too early. Right, the bubble didn't burst for five years, right, and meeps up, and each subsequent year it doesn't burst. You look stupid, and the people that supported the bubble look right, And I think that that's the type of situation we're in now. It actually turned out that value investing, if you looked at it from ninety five to ninety nine, it looks like the stupidest investment strategy on the planet. So did international diversification. So right, but if you just fast forward two or three years, the bubble bursts so quickly that value investing, international diversification, all these things came out ahead with only one or two years after the bubble. And so I think that having patients, and I think understanding that there's historical context, being patient, but being guided by a sensitivity towards these behavioral insights that it doesn't you know, don't don't overthink it. You don't have to in some ways, you don't have to have the ends. I don't need the answer to in the I. I don't need to know that extended will succeed. All I need to know is are people too optimistic about it or not? And what it would be the signs of that excessive optimism. And if people are excessively optimistic, you know what should I do? I should stay away.

And so there is this sense from you anyway that investors in general overinvested in the US, underinvested outside the US, overinvested in AI, and underinvested in value absolutely.

And so there is this sense from you anyway that investors in general overinvested in the US, underinvested outside the US, overinvested in AI, and underinvested in value absolutely.

And I think one interesting sort of dynamic that's been going on right is the rise of passive investing, which is a wonderful thing.

And I think one interesting sort of dynamic that's been going on right is the rise of passive investing, which is a wonderful thing.

Right.

Right.

There are many reasons why passive is a wonderful, wonderful thing for investors, right, It's been great for consumers.

There are many reasons why passive is a wonderful, wonderful thing for investors, right, It's been great for consumers.

I love passive investing. I love Vanguard.

I love passive investing. I love Vanguard.

The only problem I see, and maybe there are others that other people can talk about, the real problem I see with passive investing is that when people go passive, they don't say I'm going to put my money in the S and P four hundred mid Cap Europe Index if such a thing exists. They think I'm gonna put in the S and P five hundred or the Vanguard Total Stock Market Fund.

The only problem I see, and maybe there are others that other people can talk about, the real problem I see with passive investing is that when people go passive, they don't say I'm going to put my money in the S and P four hundred mid Cap Europe Index if such a thing exists. They think I'm gonna put in the S and P five hundred or the Vanguard Total Stock Market Fund.

Yeah.

Yeah.

And I think when I last did this math, about eighty percent of Vanguard's assets were either in the S and P five hundred or in the Vanguard Total Stock Market Fund.

And I think when I last did this math, about eighty percent of Vanguard's assets were either in the S and P five hundred or in the Vanguard Total Stock Market Fund.

Yeah. Right.

Yeah. Right.

In other words, passive has hrded people into the same idea, and when Mordecai Kurtz, who has had that idea of rational expectations.

In other words, passive has hrded people into the same idea, and when Mordecai Kurtz, who has had that idea of rational expectations.

So the thing that we need to be most careful of is correlated beliefs, right.

So the thing that we need to be most careful of is correlated beliefs, right.

Correlated beliefs are the will create risk When investors' beliefs are too correlated, when everyone thinks the same thing, that's the problem.

Correlated beliefs are the will create risk When investors' beliefs are too correlated, when everyone thinks the same thing, that's the problem.

And there was an interesting bit in the book where you note that around seventy five percent of the US relative app performances come from valuation changes as opposed to revenue and profitability changes. And that's really interesting because it reflects pure optimism as opposed to reality.

And there was an interesting bit in the book where you note that around seventy five percent of the US relative app performances come from valuation changes as opposed to revenue and profitability changes. And that's really interesting because it reflects pure optimism as opposed to reality.

Which is always the case, Marion, because if you go back to Schiller's work, it's always valuation changes, it's always changes in our expectations about the future that dry the majority of stock market palito is always the case.

Which is always the case, Marion, because if you go back to Schiller's work, it's always valuation changes, it's always changes in our expectations about the future that dry the majority of stock market palito is always the case.

And then you say, which again I thought was an interesting way to look at it, that perhaps investors who want to think about this a little bit more closely should look at not necessarily at market cap when they come to invest internationally, but look perhaps at percentagive revenues or net income that comes from the US against other countries, and that would be about thirty percent US, right, So that in fact, if you were going to look at it in terms of the revenues from each country, you should have about thirty percent of your efforts in the US as opposed to what you probably do at the moment, which is more like sixty percent, maybe more exactly.

And then you say, which again I thought was an interesting way to look at it, that perhaps investors who want to think about this a little bit more closely should look at not necessarily at market cap when they come to invest internationally, but look perhaps at percentagive revenues or net income that comes from the US against other countries, and that would be about thirty percent US, right, So that in fact, if you were going to look at it in terms of the revenues from each country, you should have about thirty percent of your efforts in the US as opposed to what you probably do at the moment, which is more like sixty percent, maybe more exactly.

And I think the sort of negative side, we've been talking so much about being skeptical of bubbles, but we should also, and this is a big part of my investment strategy, be excited about things people are pessimistic about.

And I think the sort of negative side, we've been talking so much about being skeptical of bubbles, but we should also, and this is a big part of my investment strategy, be excited about things people are pessimistic about.

And when we see.

And when we see.

People giving up, when you see magazine covers about the death of that's the time that I get really excited about things. And I think there's actually a lot to be excited about right now. It's just not where other people are looking. I actually love the UK and Europe.

People giving up, when you see magazine covers about the death of that's the time that I get really excited about things. And I think there's actually a lot to be excited about right now. It's just not where other people are looking. I actually love the UK and Europe.

We love to hear that give the Europe bit. We love to hear you love the.

We love to hear that give the Europe bit. We love to hear you love the.

UK, you know.

UK, you know.

And actually it was it was funny. I was I was visiting with a friend who was a big Brexit supporter, and I follow politics as closely as any any normal person, but I honestly didn't follow the UK stuff so much. And I said, well, you know, reading the Ft and the Economist, I've come to the you know, it sounds like it's been a complete disaster. And what were you all thinking? And he said, Dan, you know, pull up your computer and look at UK GDP growth since Brexit and then compare it to continental Europe GDP growth since Brexit. And so I went and did it, and all of a sudden I found the UK had grown faster than continental Europe. And he was like, that's the only argument I need to make, you know, And and I sort of thought to myself, you know, if my narrative about that was a little bit wrong, you know, maybe maybe the common narrative about Europe as a whole is wrong. And I thought I do.

And actually it was it was funny. I was I was visiting with a friend who was a big Brexit supporter, and I follow politics as closely as any any normal person, but I honestly didn't follow the UK stuff so much. And I said, well, you know, reading the Ft and the Economist, I've come to the you know, it sounds like it's been a complete disaster. And what were you all thinking? And he said, Dan, you know, pull up your computer and look at UK GDP growth since Brexit and then compare it to continental Europe GDP growth since Brexit. And so I went and did it, and all of a sudden I found the UK had grown faster than continental Europe. And he was like, that's the only argument I need to make, you know, And and I sort of thought to myself, you know, if my narrative about that was a little bit wrong, you know, maybe maybe the common narrative about Europe as a whole is wrong. And I thought I do.

I hate to say this down but you need to go and look up GDP per head growth in Okay, all right, that might be a little bit of a downer for you. I'm afraid I'm with the sentiment that breaks. It really hasn't been so bad so far and could even have well, it's likely to have very positive rammications in the future. But GDPEP ahead doesn't tell the same story as GDP. We've had a very fast growing growing population.

I hate to say this down but you need to go and look up GDP per head growth in Okay, all right, that might be a little bit of a downer for you. I'm afraid I'm with the sentiment that breaks. It really hasn't been so bad so far and could even have well, it's likely to have very positive rammications in the future. But GDPEP ahead doesn't tell the same story as GDP. We've had a very fast growing growing population.

Sorry, all right, no, no, that's helpful moment. I'll go back and read visit my analysis. But I think you know, when I look globally at valuations, what you see is that Europe is phenomenally cheap. It's cheaper, way cheap relative to long term average, is way cheap relative to the US U CAN in particular. And what's sort of the second layer of that analysis, because you don't want to just be a contrarian for the sake of betorian and you don't want to buy cheap things just to buy cheap things. If the cheap things are bad, you want to buy cheap good things. And one of the interesting things if you look at return on asset type metrics or my favorite gross.

Sorry, all right, no, no, that's helpful moment. I'll go back and read visit my analysis. But I think you know, when I look globally at valuations, what you see is that Europe is phenomenally cheap. It's cheaper, way cheap relative to long term average, is way cheap relative to the US U CAN in particular. And what's sort of the second layer of that analysis, because you don't want to just be a contrarian for the sake of betorian and you don't want to buy cheap things just to buy cheap things. If the cheap things are bad, you want to buy cheap good things. And one of the interesting things if you look at return on asset type metrics or my favorite gross.

Profit to asset.

Profit to asset.

European companies are really high quality businesses. They're very well run, they're very hymerrich, and they're a very higher return asset. And in fact, the sort of leniars have actually that sort of capital starvation has forced the return on assets to go higher. The created higher discount rates, higher bar for new investments, and so when you look at Europe, you're not just buying really cheap companies, you're buying really cheap, really well run, really high return on assets.

European companies are really high quality businesses. They're very well run, they're very hymerrich, and they're a very higher return asset. And in fact, the sort of leniars have actually that sort of capital starvation has forced the return on assets to go higher. The created higher discount rates, higher bar for new investments, and so when you look at Europe, you're not just buying really cheap companies, you're buying really cheap, really well run, really high return on assets.

Absolutely, and same in the UK. You know, we have some really brilliantly run businesses here and they're incredibly cheap relative to similar businesses in.

Absolutely, and same in the UK. You know, we have some really brilliantly run businesses here and they're incredibly cheap relative to similar businesses in.

The US, exactly. And it's funny.

The US, exactly. And it's funny.

I did this analysis where I took share of revenue in the US, and then I said whether it's listed in the US, So it was a two part regression. And what I found is that because there are a lot of great UK companies, for example, that have fifty percent or plus of their revenues in the US, right, I mean, it's not unusual. And it turns out that the share of revenue in the US doesn't matter at all, and all that matters is where the company's listed, and I think that sort of relates to this passive investing or the sort of structure of investing that und enlisted companies just treated differently than the US last.

I did this analysis where I took share of revenue in the US, and then I said whether it's listed in the US, So it was a two part regression. And what I found is that because there are a lot of great UK companies, for example, that have fifty percent or plus of their revenues in the US, right, I mean, it's not unusual. And it turns out that the share of revenue in the US doesn't matter at all, and all that matters is where the company's listed, and I think that sort of relates to this passive investing or the sort of structure of investing that und enlisted companies just treated differently than the US last.

Yeah, I mean the problem for us there is that lots of these companies are now looking at whether they can relist somewhere else get a higher evaluation. So we don't want that to happen. We don't want that to happen because we rely on the infrastructure of our capital markets in the UK, so it's a big part of our economy.

Yeah, I mean the problem for us there is that lots of these companies are now looking at whether they can relist somewhere else get a higher evaluation. So we don't want that to happen. We don't want that to happen because we rely on the infrastructure of our capital markets in the UK, so it's a big part of our economy.

It's in my mind the greatest trade available at the moment is to buy high quality, cheap European businesses. Sometimes when everybody understands that there's a problem, you almost know it's going to get fixed. So you know, what are the big problems facing here? But what is this Ukraine war right, which is dragged down valuations a lot, And you wonder, like how far off is that from getting fixed?

It's in my mind the greatest trade available at the moment is to buy high quality, cheap European businesses. Sometimes when everybody understands that there's a problem, you almost know it's going to get fixed. So you know, what are the big problems facing here? But what is this Ukraine war right, which is dragged down valuations a lot, And you wonder, like how far off is that from getting fixed?

Right? How far off of a piece deal are we?

Right? How far off of a piece deal are we?

Maybe closer than we think. And I think, second, you know this regulatory burden which is just obviously a problem, and you say, like the UK, for example, Brexit has given the UK an option on deregulation.

Maybe closer than we think. And I think, second, you know this regulatory burden which is just obviously a problem, and you say, like the UK, for example, Brexit has given the UK an option on deregulation.

They haven't exercised that option.

They haven't exercised that option.

Okay, certainly not exercising yet, we have not, but.

Okay, certainly not exercising yet, we have not, but.

They bought the option. Brexit bought them the option, and there's a power, the potential deregulation. And if you in Europe can deregulate, and if they can solve the Ukraine issue, right, like, why wouldn't valuations go off?

They bought the option. Brexit bought them the option, and there's a power, the potential deregulation. And if you in Europe can deregulate, and if they can solve the Ukraine issue, right, like, why wouldn't valuations go off?

There is the other big problem in Europe under the UK's energy prices right, particularly in the UK is stunning lee high industrial electricity prices.

There is the other big problem in Europe under the UK's energy prices right, particularly in the UK is stunning lee high industrial electricity prices.

Right, And who knows how that's get solved, but there seems like there'll be a lot of pressure on people to solve it. Yes, and there aren't paths to do it.

Right, And who knows how that's get solved, but there seems like there'll be a lot of pressure on people to solve it. Yes, and there aren't paths to do it.

Yeah, yeah, okay, brilliant. Now that is all fascinating and as I say, fits neatly with lots of my verses. Thank you very much. The other thing I really wanted to talk to you about. You have a chapter in the book about is private equity. And I know that you are very concerned about private equity, and you make this great point that people talk about it as though it's a diversifier. It diversifies us from our equity holdings, but of course, private equity is just equities aren't listed. They're exactly the same, and we should treat them in the same way. And your concern is that there's trouble brewing in that sector.

Yeah, yeah, okay, brilliant. Now that is all fascinating and as I say, fits neatly with lots of my verses. Thank you very much. The other thing I really wanted to talk to you about. You have a chapter in the book about is private equity. And I know that you are very concerned about private equity, and you make this great point that people talk about it as though it's a diversifier. It diversifies us from our equity holdings, but of course, private equity is just equities aren't listed. They're exactly the same, and we should treat them in the same way. And your concern is that there's trouble brewing in that sector.

There are a few sort of very important facts to know about private equity. For the first, you know what is private equity? Well, what is a private acta you know, as opposed to a public equity, And it's really two things are different.

There are a few sort of very important facts to know about private equity. For the first, you know what is private equity? Well, what is a private acta you know, as opposed to a public equity, And it's really two things are different.

Right. The first thing is that private.

Right. The first thing is that private.

Equities tend to be much smaller than public equities.

Equities tend to be much smaller than public equities.

That they're all microcaps.

That they're all microcaps.

They have about a two hundred million dollars valuation on equity market cap on average, right, and that's compared to say thirty billion or something for the S and P five hundred, right, And the large end of the microcap in nex is Forourtullion. So the first thing you know is that they're really small companies. What do we know about small companies. We know that small companies have higher default rates than big companies. We know they're riskier, they're less diversified, their lower margin.

They have about a two hundred million dollars valuation on equity market cap on average, right, and that's compared to say thirty billion or something for the S and P five hundred, right, And the large end of the microcap in nex is Forourtullion. So the first thing you know is that they're really small companies. What do we know about small companies. We know that small companies have higher default rates than big companies. We know they're riskier, they're less diversified, their lower margin.

Right, all of these things.

Right, all of these things.

Are stylized true facts about small companies. Of course, right, once you get bigger, you're more stable you're more diversified, you tend to scale vanges, higher margins, right, less volatile, et cetera. But these are small companies, not just small, but really small.

Are stylized true facts about small companies. Of course, right, once you get bigger, you're more stable you're more diversified, you tend to scale vanges, higher margins, right, less volatile, et cetera. But these are small companies, not just small, but really small.

Right.

Right.

So if you love private equity but don't love public small caps or public microcaps, right, ask yourself why what's the disconnect? The second thing I have to remember is that private equity backed companies are a very levered. Generally, fifty to sixty percent of their total valuation is funded by debt, and that's mostly coming now from private credit, and it's usually coming at very high rates. And I joke that lending is the second oldest profession. There are no new innovations in lending. And so if a company has to borrow at very high rates, the reason they have to borrow at high rates is that they're very risky. And so you're looking at equity that's subordinated a very high interest rate debt issued by these private credit firms. That is reflective of the underlying risk and the underlying volatility of these businesses. Now, the reason people don't think it's risky is because it's private, and so you only get a mark once a quarter. And who does the mark? Accountants? Well, if you look at the volatility of private equity marks, it's about as volatility as the volatility of book value of public companies. It just isn't related to the market. And so what people get fooled by that lack of volatility into thinking that these tiny little companies with a ton of debt really aren't fair very risky, And of course they are.