Jeffrey Sherman on Trading in Academics for Fund Management

He runs a number of farm funds as well as co runs some funds with Jeff Gunlock UH, and is as about as knowledgeable a quants working in the fixed income and equity and commodity space uh as as you'll ever want to meet. UM. We really don't go too deep into the weeds on the wonky quant stuff, but it's really a fascinating, roll up your sleeve sort of conversation. He understands this as well as anybody out in finance. He also hosts his own podcast, which we talked a

little bit about. So I found the conversation to be absolutely uh fascinating and intriguing, and I think you will too, so with no further ado, my conversation with Double Lines Other Jeff Jeffrey Sherman. My special guest today is Jeff Sherman of Double Line Capital, where he serves as Deputy Chief Investment Officer UH. The c i O of Double Line is Jeff Gunlock, who coincidentally was the very first

broadcast guest on Masters and Business UM. Jeff Sherman, previous to Double Line, worked as a senior VP at Trust Company of the West, where he was a portfolio manager and quant analysts focused on fixed income and real asset portfolios. He has a b s and applied mathematics from the University of Pacific and a master's degree in financial engineering from Claremont Graduate University. He is also a c f A charter holder as well as a financial podcaster. Jeff Sherman,

Welcome to Bloomberg. Thanks for having me, Barry. So I have to start with the the education applied mathematics and financial engineering. Did you know you wanted to go into asset management earlier in your life? Not at all, not whatsoever, really, because that would suggest, oh, here's the path to Wall Street. That's right, and um, what happened is is Um. Naturally, I guess I was. I was more inclined towards mathematics

along the way. I started off actually as a pure mathematician, which is a lot of abstract math and just trying to prove concepts, a lot of logic. Really, um and uh, although it was okay to me, it just didn't really seem to have a long term path. Obviously, you can be a professor. I mean talking about ring theory and groups. I mean you're already falling asleep. No, I love them. Okay, good, so um, so let's talk deeper about that. Everybody else, Oh,

there we go, so we'll transition them. But the idea was the applications of of mathematics. It typically it's applied to a lot of physics, right, and engineering concepts, And um, I was always kind of curious by statistics, and for some reason, I like the probabilition statistics course is a little more and so I'd actually changed my major around the middle of my junior year to become an applied mathematician.

But unlike the traditional folks, I didn't use the engineering and physics physics as the application actually used its stats and probability. So, um, you know, I forgot to really apply for a job as I was going through my Yeah, well, you know, you kind of get stuck in that academic lifestyle and so decided to take the g r S and just try to keep going to school. So ended up applying to grad school UM, and ended up down in Florida State, down in Tallahassee and uh, interesting place.

UM didn't really have a lot of application towards statistics and probability as you might think of them. They're they're pretty well honed on a meteorological tilt. Uh. There's these things called hurricanes that they study, and they're well known for that. So my application got thrown out the window of statistics, not my application for grad school. But they said everybody learns fluid mechanics here. Um and by the way, here's fifth semester physics. Figure it out, and so um

it was doing that along the way. It's kind of late. This was like late ninety nine early two thousand. Realized there are this quand jobs on Wall Street, and there's these programs that actually had a financial tilt and so similar types of equations like um, uh kind of like think in those areas and started taking simulation and things like that, and UH ended up transferring back to Claremont, closer to home, back in California, and UM went from

there financial engineering. Speaking of another mathematician, You're working at the Trust Company of the West with a gentleman named Jeff Gunlock. UM, what was that like when you were there? Tell us about about your relationship. Well, Um, it was non existent when I started. UM, it's worked in a different department. And I remember at the time. It's probably

a story a lot of people haven't heard. Is Mr Gunlock would go around and put out puzzles of the month and they were always some quirky, very deep in thought puzzle and it was always the rumor was if you could solve it within the month and turned into him, you could get a job in his department. I'm not here to tell you I solved one of those, by the way, UM, but it was always curious to me. UM. You know someone that's kind of challenging folks in the workplace.

And obviously as I was, I was working in the risk type of group and kind of the middle office type analyzing things and just seeing kind of tracker of the team and and how the team had some autonomy. It's always something that I wanted to do. Um, and so UM just kind of started hanging around the oaks on the team trying to, uh, you know, get my name known or something that, to try to get in the group. So you never solve one of his puzzles. Negative and then he I don't know if he actually

for fairness, I'm not sure if anyone ever did. I believe he probably did, but I'm not sure if anyone ever did and actually got rewarded with that. It could have just been a rumor. But the puzzles were available. I do know that it's an interesting crowdsourcing. They could be puzzles he couldn't solve and say, let's see if we can find someone else who can. Uh. Again, I don't know the answer to that, but you know, again

you have to ask him next time you see. I will so so he leaves to launch double line on his own. How did you go about saying, hey, Jeff, I think you need another Jeff in the shop right? Well, Um, you know I was on the team at that point in time. I've been with the team probably at least around five years, four to five years at the time, and Um, it was. It was a very quick kind of movement and a bunch of people on the desk we're talking about, you know, what should we do? And

it was a pretty easy decision. I was in my early thirties, Um, and I said, you know, if there's a risk to take, this is the time to do it. One and you know, one of the most respected investors in the world. Why wouldn't you take a risk to join this person on a new venture? And so from that perspective, it's it's almost one of those things people call a no brainer. Obviously there's a little bit of you know, strife and turmoil and internally and again look

back and the rest is history. You have a lot of different subject areas you cover your deputy c I, oh, you're on the executive committee. Uh, you're a fund manager. What takes the most of your time? What do you focus on the most? Well, I'll clarify that I don't run the executive Did I say it sounded like tend to give people promotion? You know, Hey, it's good to

be here. But that said, um, most of my day, you know, is spent between you know, facing clients, you know, portfolio review, strategy, reviews UM, giving outlooks and forecasts of how we're thinking about the markets UM and obviously you know, coming up with ideas for implementation. So UM our team works on the astilication side, So we're trying to kind of find relative valuation across various sectors of the bond market. UM. Additionally,

you know, we run our commodity strategy all quantitatively. Orned my team also helps run the equity products that we have on the UH. It's kind of a blend of an index with some active fixed income management. And so again it's it's UM. It's every day is different, but that's what makes it interesting, right, It's UM. You don't come in and do the same thing day and day out. UM. And it's I always viewed as a problem solving exercise, right, UH.

The ideas you're trying to find, you know, inefficiencies in the markets, something that looks attractive, perhaps something that people are missing in the puzzle, and more importantly, trying to poke holes in what we own today. Right. So that's a that's a big part of it, is that are

we missing some risk out there? Obviously the exogenous ones you can ever figure out to after the fact, but It's also are we are we getting lulled into, you know, an environment like today which is complacent, low volatility, not much going on? UM, Are we being lulled to sleep as well? And is there something we can do in our portfolios to help kind of offset that, or you know, try to think about something that's UM again, somewhat exogenous

to the process today. Here's a rumor that I just love Bob Schiller visits Double Lines Los Angeles office and more or less starts pitching Cape as a way to manage equities more safely, and then somehow this becomes a portfolio How how exaggerated? Is that there's some truth in it? Um? The facts are that we don't want fake news right,

want facts right. The facts are that Professor Schiller was in our office and Professor Schiller was talking about his Cape Index family of the products he had partnered with Barclays to work on UM. And I don't know if he pitched as a more safe way or that he was actually there truly pitching the product, because that's not that's not really Professor Schiller's style. You know. Yeah, he's he's very humble and he likes to talk about ideas, But I don't believe it was a full blown pitch.

The bankers with them, well, I think perhaps they were pitching um. And the question became, okay, this is great. We run a lot of fixed income assets, we have a macro fund, we have a hedge fund that we do things where we could body these types of products. But so do you want us to just trade this or what's the idea here? So from there what we ended up doing was taking a look at the at the family in disease and thinking about is there a

merit here? And at first, looking at it cursory glance, think, you know, just another value product, you know, So okay, great, good job, you know, yeah, using like a cape cape ratio, which is a tenure price. Duran's racist And because the longer time you got inflation adjust of course, full cycle blah blah blah. Well, who knows if it's a full cycle anymore? Here? Where are you're eight? You know? Will we uh? You know the low? I know, I know you're about that right the bull market starts with the

new high. I get it, um, But that being said, I've read, I've I've read enough and heard enough about it. But what we did is started to do some kind of statistical work on it, look at kind of factory decomposition and things, and I gotta The story I like to tell is that the first blush through, I just said, this is wrong. These these results make no sense. You still have like residual return of alpha in there after

this process of adjusting for factors. So in ways I'm saying there's something to this another when you say it's wrong, Hey, this is identifying an inefficiency that you hadn't previously considered. However, you don't know me well enough, Barry the first thing, I say, that's gonna be wrong, Right, it's gotta be wrong, um and so um. So crank through it again. And then the next step, after we see it again, go for monthly to daily, start looking at different time periods

like go, now, give me the data set. I want to make sure. Let me look through how you're doing it, and yeah, you're absolutely correct. It's that there seems to be something beyond what's in the factors. And there's nothing wrong with factory decomposition or factory portflows. They're great. But if everybody can deliver to you and it's commoditized, what's

my edge, right. So well, we ended up finding out there is that this this excess return seemed to exist, and we started going through regime changes and look at different rate environments and different growth and recessionary areas. What we found is it seems to be relatively robust. And so now the big question becomes, we have this equity inducts that we've seen that appears to deliver something different in the value space or even just in core large

cap equity in the US. What do you do with it? Right? Double Line historically have been known for being more fixed income oriented, So what do we do with him? And so first thing I think about is why not do it as an overlay? Right? So, an overlay means that you can get this exposure through a derivative like a swap, and you can put that on top of let's say a treasure report foil that will replicate the total return um and you can deliver that. But that's no fun,

that's just an index business um. And if you're not familiar, we run about a hundred and seventeen billion dollars of actively managed product. So from the standpoint of what to do with it, why not be a little active with that treasury PORTFOLIL, and why not run things beyond treasuries.

Why not do what we do well and try to build a diversified kind of lower risk fixed income probably don't look like the traditional intermediate term bond funds, but run something that'll will take a little bit of interest risk, take a little bit of credit risk, and use our macro forecasting to blend that together for the right environment. And if you do it right, you can add let's call it, a couple hundred basis points a year over

the index. So if you have a good product in a process that you believe in from the equity side, which UM really resonated with us, so you buy the four cheapest s and P five hundred sectors as measured by the ten year cape not precisely. So there's a couple of things different there. One is UM. Instead of using just the cap ratio to identify the value, think about like for instance, tech, the technology sector, and think

about utilities. Historically, utilities have always really traded a lower multiple than technology, right, and then there's reasons for that. Vall Um. You know, highly regulated industries versus high flying growthy stocks. David, Yeah, all the traditional kind of metrics you would think for that. So if you just used the cap ratio, you would always buy utilities, for instance, right, because it would be one of those lower valuation sectors as at least in a historical context, and that would

introduce bias to the portfolio. So to normalize this, or to try to standardize it, what you do is you compare each sector's cap ratio to its own historical average. So think about it's normalizing it for its own trading range. Now you have a basis to compare them. So in other words, you're picking the four least expensive sectors relative to their own history. You're almost there getting and thus far, that's all the information you have that is correct um.

So you rank these each month, and you're gonna pick the bottom five. And then of those five, which is the cheapest Because it's valuation, you want to avoid value traps, cheap getting cheaper, right, falling knife, all those you know, sexy adages we put to the to the to that process which you do is apply momentum. So the five sectors,

whicheveryone is the worst performer, you throw it away. So think about you're sitting in two thousand fourteen energy is extremely cheap on a on a multiple basis, especially real to its own history on this CAPE basis. And all of a sudden, oil starts declining in the middle of the second half of fourteen and by a couple of months because of such negative performance in the equities, it kicks it out of the index. So you're left with

the other four. Well, this actually would have saved you if you if you just only focus on the five, it saves you approximately six hundred basis points PERU over the next couple of years. Right, So that's just when those CAPE plus a factor plus plus a factor. But you're not trying to emphasize the factor, right, So I like to say that we're not factor investors. The factors are a result of the process. And who came up with this really interesting way to use CAPE as a

basis of creating an equity like product. Not me. First of all, I'm not going to take credit for that, even though you want to give me a promotion on No, no, no, not gonna do that. But this was a joint effort between Professor Schiller and the folks at Barclays. So after I think it was in early two thousand and ten, they started getting together working on this project to try to use the CAPE ratio to do something investable. You know,

there's all these critics out there about the KPE ratio. Oh, it doesn't work right, Uh, it's been above average for a long period. Well, you can't just use it as a buy or cell decision at face value. That's why people say it doesn't work, but they're really not looking at it correctly. I would agree with that, and I would agree that what what is KPE? It is a

valuation metric? What do evaluation metrics to They don't tell you when to time the market, They tell you how to think about prospective returns, right, And that's exactly what the cap ratio does. When it's above average, it says you should expect below average returns. Wow, that's not very hard. But people want to say, oh, it's at this level,

the market hasn't crashed. It's stupid, right, Um, But if you look at any valuation metric today, they are and apply it to the US equity market, at least as many as I'm aware of, They all say the market is overvalued, But it doesn't say it's gonna crash. But for some reason people get uh fascinated by this cape ratio and just want to attack it. And again it does have, um, some good credibility of of of talking about forward looking returns. In fact, it has one of

the highest our squares of the metrics out there. However, it doesn't say when to get out of the market. I'm fond of reminding people that stocks were cheap in the seventies and they did poorly, and they were expensive in the nineties and they did really well. Right well, Um, And you know the level we see on the KP ratio at the US equity market day large cap U has had. This is the third time we've been here, and both times, once it's hit this level, at some

point it collapsed. You you had the great depression which you lost about between friends. Yeah, especially if you compounded how it doesn't take it doesn't take much but five to get back to break even, that is, and then getting your bowl market as you'd like to say, right, um. But then the second time was in the technology kind of boom and it went up like another before it

ultimately did crash. Putting us all together, there's nothing that said, you know, we have two data points not very robust statistically set right, but it does, you know, it does strike some fear. But you know, if you want to get bullish, I just think of the Japanese stocks in the late eighties. I mean they traded with a high ninety cape multiple. So I mean, look, we've got in a couple percent to run without even earnings growing if

you believe in the Japanese model. Let's talk a little bit about the two Jeff's, which is how you and the other Jeff. Jeff Gunlock is known. Uh, he has a pretty wild origin story. He's a board drummer in hair bands, watching the television show Lifestyles are the Rich and Famous. When he decides he's tired of being broke and takes a phone book and just literally starts reaching out to finance companies. More or less, he looked at the word investment banker. That's right, And it wasn't in

the Yellow Pages. It was not in the Yellow Pages. Um, what was your origin story like? Uh? Nothing dramatic like that. Um. After I was in grad school and obviously one of the things you have to do as an internship, you know, to get some hands on experience. And I did my internship at a place called Trust Company in the West and so as an intern there. UM I accepted a full time position. Why I finished up the last piece of my graduate work. So unfortunately, nothing really sexy like

using the phone book at the time. I guess the if you could, if you want to get nostalgic the way I got the internship. UM, I actually accepted an internship back at Florida Power and Light down in West

Palm Beach. I knew some people there from my Florida State days, and so looking for an internship, I tried some local companies and then getting calls back, and I drove my Ford Ranger pick up you know, the two seat or not the extended cat and you can see I'm you know, I'm about six three, not the most comfortable ride cross country, UM in that four cylinder beasts that I had there, and drove to West Palm Beach from California. From California, I was because like a week

driving four days, four days. I mean, look, there's not a lot of money to go around internships. You get there as soon as you can. What those motels are expensive across the country at like thirty bucks a night. So anyway, I get there and why I say it's a little nostalgic. Is I get a call from my roommate back in l A who says, Hey, it's this guy from tc W who left you a voicemail, you know,

on the answering machine, right, this isn't cell phone days. Um, and so, UM, they're talking about interviewing you for internships. I said, great, I'll call them. So I ended up actually calling them. UH, did the interview, and at the end of it, I was like, you know, kind of what's your time frame, A couple of weeks or something like that, I said, I started, I started a job in like four days. Um, but if you guys can

offer me the internship, I'll come back. So I had to meet with someone else and um, fortunately they did, and I made the trek back three days this time, uh, because again no funds are coming into so those are like fourteen fifteen hour days. But that's how I came back to start my internship. That's a pretty good origin story, that one. That's not terrible. That's that's an interesting Uh.

Cross country and back in a week essentially, I mean essentially like five thousand miles over the course of a week, week and a half. Um, not the most pleasant experience. There was a lot of pit stops along the way. I think I was doing, you know, because of my legs aching no more than like ninety minutes. I was getting getting up in a corner tank at gas each time just to do something. Um that's uh. You know,

you gotta have a good playlist on your CDs. So the other Jeff, which is what people used to call you, the primary Jeff, is Gunlock. What'sh it like working with a guy who is a force of nature like him? Um, it's what I know. You know, Um, this this is the team I've worked with the majority of my career. I've been around this team, you know, in my entire formidable years of an as being an investor, and so you know, he's human like anybody else. Um, you know,

we we collaborate, we all work together. Um. He fosters a very great environment. Um you think about you know, the amount of talent we have surrounding from our emerging markets. Team are loan team are high yield folks are mortgage people. You know a BS we I mean we we span the entire universe and he provides folks with a lot of autonomy you know, UM foster growth, UM constructive criticism when necessary. But I think one thing that should be noted is he he is very a very good listener.

You know, if there's ideas, there's different ways to do something, he's always open to them. But if they're wrong, he'll tell you. You know. So it's it's a fair relationship. And I think that's why you see very limited turnover the investment staff is it's it's a good environment. What do you think when he goes on TV and says sell everything? How how do you guys respond to that school or what happens? Well, my team's office, we don't sit on the trading desk with everybody else. We're kind

of removed. I kind of like that low close knit with my team. But our team is right outside the media room. So we're going, that's happening right there, right now, now, sell everything. You know. I'm not gonna say that he's always hyperbolic, but I think he's trying to get a

point across. And what he's saying is that at the time, this was right around Brexit, where everyone is telling you that this is right prior to Brexit, that disinflation is taking over GDPs collapsing, we're gonna be stuck in this highly levered economy with no growth. I mean, it was just very negative time. And the idea is that we

can't break really new lows on the tenure. These markets aren't responding in a way that's consisting it with the message and to sell everything is that if you feel that you have too much risk on and you're nervous by the phrase sell everything, Barry, what that means is you probably own too much risk. And that was really the message behind it. Um. Again, clients don't take it as well as that. They're like, should I just sell everything? Um?

But it's like you tell people when you have a great market going on, like we have an the equity market, people get extremely nervous and they want to sell everything, sell a piece, monetize something. Um. But you gotta be able to get back in the game too, So let's

sell everything mantra. I think I'm not gonna call it hyperbolic, but it's meant to be there to try to drive a message home is that, look, there's a lot of risk out there you're not seeing reduce your risk levels, and anytime you sell something, you have to have a line in the sands to get back in. I assume

it's exactly right. And we were really focused on the bond market, and the thing wasn't just sell everything, you know, it was really related to an art piece too, where it was sell the house, sell the wife, sell the kids. And so I think he used that and he said just sell everything. Uh. And I think he used it on a webcast a few few days earlier. And you know, we we heard him staying it around the office. Didn't think it'd really go on TV and say it, but

he did. Um. And you know, look he was right at the time. I mean there was a lot of risk brewing, specifically in the blonde market and you'll shut up pretty quickly post Brexit, and so um there was the entry point to you know, we weren't really doing a lot of trains that time. We just hated the price levels and so it was time to start putting

things back to work. So it's being patient to making sure that you don't stray, don't let the central bankers force you into the box in the positions you're not comfortable with. UM, don't don't have the fomo, the fear of missing out with everybody else, and you know, make sure you're you're investing for your philosophy and what you're trying to achieve. And that's really what it is, is that people have gotten accustomed to taking a lot of

risk UM that's really not in their normal zones. I would say, let's talk a little bit about stocks and bonds and commodities, which is telling us where we are in the financials now. Well, I think each of those three sectors of the market, those asset classes have a different time perspective UM. And I think of the bond market as being more contemporaneous. It's digesting macro day as

it comes through. It tells us essentially where we are currently. Uh. The equity market, obviously, the forward discounting mechanism you think about when we're in the midst of a recession, Equity prices tend to be rising somewhat um when you're in the middle to the back end of the recession, as it's thinking about the prospects looking forward um. And then we call commodities the more of the laggard. They actually

tell you what has happened, uh. And the reason for that commodity is being on that kind of backward looking thing is because you're talking about already have consuming, already have consumed uh, the commodity of itself, and so you you kind of see this forward looking to it, the supply demanding balance gets out of whack and so UM, they all tell you different things, except or they have different time horizons. Except right now you're getting a little

contradictory efference between UM these markets. And in fact, with the commodity story, what you've seen is it's been based on a lot of growth, uh specifically industrial metals very very strong this year. So let me push back on you the immediate response on commodities. I hear from traders all the time, Oh, it's a weak dollar story. Well, you know the dollar has been weak, but if eight percent is going to spike, you know, industrial mother's prices,

I think there's a little disconnect the UM. So the strength of the dollar is not gonna pull if we we rallied back to you know, the early two thousand seventeen levels, I don't think it's gonna pull down. UM. You know industrial metal prices, copper nickels specifically UM and in that manner to to reset those prices. So UM, it's a good story, um, but we'll keep it as a narrative that's not necessarily factually correct. What about the

flattening yield curve. I keep hearing people say, you know, this yield curve is flattening, and that's a just a recession is not that far off, that's right. But they when they pull you the chart out, they start either in two thousand seventeen or they go back to really December of thirteen, at the end of the Taper tantrum,

remember the Taper tantrum, although not December. If you go back time, the peak what the tenure kind of close at three oh two, and what we're two is at that time like thirty basis points, right, I mean massively steep curve. Um. But if you actually pull the data set back respect history, um, what you see is the average experiences and you know kind of the high ninety basis points, like nineties seven basis points average, kind of using monthly data. The shape between two twos and tens. Yeah,

it's actually a differential between ten and the tube. We call it two s tens um. But today yeah, yeah, you're sitting in the mid seventies. UM. But that's not a recession indicator. In fact, we have some charts we use in a lot of our webcast UM that we show that this is an endemic of a FED tightening cycle, and so when the FED tightens, the yield curve tends

to flatten. UM. Where people get fearful is that if the yield curve inverts at the end of that Right, and so I hear I read a lot about oh, this is portending recession, recession, but it's barely below average to see a little bit this flatting could take place. But what about the gross story, Barry? What about the idea that you know we're growing on a nominal basis in the four handles, right, I real GDP is about two point three percent on a year over year basis.

We've been growing in the low two since the financial crisis. UM, And you have this inflation print. And if Camani has actually put you on the verge of getting a little more inflation system, perhaps the yeld curve actually does steep in a little bit. So we'll have to see kind of the inflation side, because the back end of the curve is gonna be priced closer to nominal GDP and we haven't been talked about the FEDS unwinding of their balance So let's talk a little bit about the FED

unwanting their balance sheet. I keep, by the way, every time I reference they said, I hear trading and say, you know the rumors that bounce around desks. One of the things we hear is, hey, you know, the Fed is behind the curve. They should have tightened much further already. What what are your thoughts on that? Well, if you want a recession, yes they shouldn't. They should have tightened

sooner um. But the behind the curve is garbage. I mean, the fact that we can't print a two handle inflation consistently. The fact that we can't print a to handle inflation print consistently. It really just destroys that thesis. Yes, unemployment is low, but there's no wage inflation behind it. Um. People use the hurricane spike at the you know, the two point nine percent average hourly growth a couple of months back, the month post hurrican, the hurricanes that it was,

Oh my gosh, here it comes, here, it comes. It's revised down a little bit. The next print to five. We're back in the in the middle of the range. And so the idea that the Feds behind the curve, I think once again it's just a myth. The Fed is pushed this year. I mean they've they've raised race twice.

They're on their path to third the third hike. And you know what you've seen though, is because it's put pressure on the front of the curve, which you know, the FED funds ties into live or prime all those rates, which you've actually done is constrict some parts of the consumer. When they talk about credit cards, loans that are tied on the front end of the curve. Almost everything outside of housing is tied to war right or some derivative

of via prime rate. So you've actually seen some constriction and consumer spending. Um. So it's a it's a little bit strange the bond market. You know, if you talk about term financing through Corporate America, yields are lower today than they were at the beginning here, but the consumer is paying you know, fifty plus basis points higher. So for consumer driven economy, they have to be very careful.

If it's sevent GDPs coming from the consumer, we've got to be careful of of like tightening net spigot too quickly. And so I don't buy the idea that the fits behind the curve. In fact, they're doing a double dose of tightening for the fact that they're going to raise rates there in the process of a hiking regime that's undeniable,

and they're reducing their balance sheet. They've already started last month in October, they started taking off ten billion dollars a month out of the balance sheet by lack of reinvestment. But stop there, because I've been discussing this with people, and you get that thousand yard stare when it starts. Explain what it means for them not to roll over paper. They have, how their balance sheet shrined by them doing

nothing right. So they have there's there's a maturity wall each month, there's securities that mature prior to October of seventeen. They reinvested those proceeds at some point along the curve, both through treasuries and agency mortgages government guaranteed mortgages, so buy them, not reinvesting the securities. That means those securities instead of being held in what I would call a price taker hands that the Fed buys bindly does not care what the yield is. Right, it now gets put

out in the float of the market. So from an equity perspective, if we draw that parallel, imagine insiders putting securities out in the marketplace. So those bonds need to be digested by price discrimination or people who are priced discriminatory when it comes to the price and yield those securities, as opposed to the FED that buys it any price. Finally, so you can think of the e c B sixty billion euros is still a month that they're doing until

the end of the year. So by the FED putting these securities out in supply in the market, it needs to be digested by investors, and so that means there's a net supply of new bonds in the marketplace. Without even discussing the budget, discussing the shortfalls there the the deficit neutral one point five trillion dollars that the new tax plan is gonna cost every ten years. So at the margin, it's not much on their balance sheet. It's only ten billion dollars. You know, some firms get that

in a month in terms of bond flows. So but the plan is yeah, right, that that's that's the elephant in the room, right. But what we're saying about the FED is don't take that money and roll it into a new bond, which means that bond is now those um what would have been purchased and put back on the FED balance sheet is now in the out in the market plans out in the market one, so the

market to digest it. But don't forget it goes from ten billion a month, and in January it's on schedule to go to twenty billion a month, and then in April thirty billion a month, and then July forty billion, and in October fifty billions. So this isn't them selling. This is simply them not renewing, not rolling over bonds that mature in order to strength their balance sheet. That's correct, and so that's has stated today. Remember the game plan can change, UM. So what that means is is that

these securities were set to mature anyway. And if you actually look at the Fed's balance sheet and the maturity schedule, it always is above this threshold. So they will be barring any changes in the plan UM putting these securities

out in the marketplace effectively. However, they do have a little thing and they'd say up to doesn't say exactly, And there are a few months which I can't recall off the top of my head, if there's one month in eighteen or it starts a nine team where there's not enough to actually dump the fifty billion a month. So we'll have to see how that plays out. But let's talk about what happens at the FED continues to press rates because they're behind the curve and we're putting

these these more more of these bonds in the marketplace. Um, we just feel that it has to be at the margin negative for yields me and they should go up because there's more float in the market, And yet yields have not really ticked up all that much. How do you explain that up to this point late in right, I think I'm gonna call it super Mario, you know. Um, And that's I'm referring to the CCP president And UM, you know, Droggy has he's really got himself a conundrum. Um.

He's got nominal GDP similar to ours. Right, he's got German Boone's the tenure trading sub forty basis points. You know what, we're sitting closer to HU forty basis points. Um so, and he's got overnight lending rates negative forty basis points. Um. You know, we're talking today at like one in three eights here in the US. UM, So what is the disconnect between their economy which is growing, they have margins expanding, you know, they never had this recession, um,

and they're contained to grow similar rates. Why are there yields? So why would he say they never had this recession. They had a bad up of the years, and they certainly suffered during the Great Great Recession. Sure, but also we did too, really in profitability in the US. It was highly correlated to energy, right, it infected the entire world. But I mean we had a profit recession here in the US, which I'm defined as declining corporate profits consecutively,

so I it was proxibly five quarters. We saved that off, right, And really they did too. Rite they never had the true economic recession that's typically associate with And that's that's one of the first times in history you've actually seen, even in the US go through the profit recession not leading to a true economic recession. So when you when you actually look at kind of spreads and everything, I do believe if you look at yields, there's been such

correlation in global bond yields. That the reason you have some of this um kind of I won't call it a ceiling, but the fact that you have yields in the US a little too low relative historical standards as measured by g d p UM. I think a lot of it stemps in the fact that you had this compression because they continue to buy bonds. It's not just that they won't hike rates negative forty basis points and overnight lending, but they also buying sixty billion euros. So

Draggy cuts thirty billion of that out in January. That's thirty less that thirty billion euros less he's buying, and the FEDS dumping more into the market, so we could see an increase in rates. And that's that's kind of our stance at this point, is that yield should push higher from these levels and historically long bonds and you know, trade around nominal GDP, so that says, you know, maybe they're about a hundred basis points too rich today and

long bomb being thirty. We have been speaking with Jeff Sherman. He is the deputy c i O at Double Line Capital. If you enjoy this conversation, we love your comments. Feedback end suggestions right to us at m IB podcast at Bloomberg dot net. You can check out my daily column on Bloomberg View dot com or follow me on Twitter at Rid Halts. Be sure and check out our podcast extras where we keep the tape rolling and continue discussing

all things UH, bonds, commodities and equities. You can find those podcast extras wherever finer podcasts are sold Apple iTunes, Overcast, SoundCloud, and Bloomberg dot com. I'm barrier It Holts. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast. Thank you Jeff for doing this. I had so much fun on your podcast earlier this year, and I knew

I've wanted to have you here for a while. UM, let's talk about a few things we didn't get to some questions I wanted to ask you, um during the regular broadcast portion, and then we'll jump into some more fun stuff. So you mentioned super Mario, we were talking about the FED. We left out the third player in Central Bank Corona Thon. Yes, what what do you think about Albanomics and what's going on in Japan? And can you ever recall a period where the US Japan and Europe.

We're so out of phase with their recoveries and or economic stimuli. Yeah, that's that's a lot to digest there. So um Essentially, I don't know how the bo j gets out of their policy. I mean, they own so many equities. I mean, the the data we see is like sixty percent of the equity market roughly the same as their et F market. Like you could let you could let bonds just mature and roll off, you can't do that with equities, right. And the other thing is

is that they're supposedly targeting the rate. The rate isn't the rate they're targeting. I mean, it's it's flat out trying to manipulate the curve. Um. But you know, the thing is is that they believe it's working. The ABBE got re elected, got the majority, which is the economy isn't bad, and you know, they think they're going to get their inflation. So we'll have to see, um. But I think they're the ones that are on cruise control.

They're not going to peel this back until they get their desire to fact, how do we explain that of all the major economies, they're the ones that's the most problematic in terms of their balance sheets, their demographics, their heavily export dependent economy. And yet what is the ten year in Japan? Now it's roughly it's usually in a single digit basis point. It's amazing. So so how do we explain that. Is Japan more credit worthy than Germany

or the US or is something else going on? I think it's something else going on to I mean, look, it's it's the home of the carry trade. It has been for so long. Um, it turns into the flight to quality asset when there's crisis because as Japanese based investors, they have to invest overseas to get any semblance of a return right. And so what you find is in when things go bad, they repatriate the money back home,

get the strength in the yam um. So I think the dynamics have changed over time, but I think what we should learn from it it's a precursor of things to come in developed world and Europe is on that track. The US is on that track. When you look at birth rates were barely at replacement rates here in the US, way ahead of Japan, though, I mean the US maybe the best birth rate of industrialize that that's why I say Europe is going to have the problem next, right,

And there's one way to hear the birth rate, have kids. Um. Immigration is another thing that you need workers. It's not necessarily you know, having children, because that takes a while. If we start tonight, Barry, it's gonna take you know, eighteen twenty years to get that thing going. So immigration is a is a good stop gap too for that time. But you look at things like Saudi Arabia, I mean their workforce in prime working age. It's like of their

area has in prime working age. So I think what you see in the Japan, it goes to Europe next, um, and then the US without changing its ways. Ultimately we go that direction. But you're talking decades, many decades down the road. But again we we shouldn't just turn a

blind eye to what's going on in Japan. And that's what happens when you have a closed off immigration system and you don't have the birthrate, and again the demography is horrible, you know, and yet they continue just puttering along.

It's it's it's good to control your own printing press well, to say, to say the least I have to push back against something you said or or I may have misheard previously you had said this is the only profit recession we've seen where there wasn't a subsequent economic recession. I believe that to be true. But so US unemployment doubled from five to ten percent, GDP dropped to zero. How is that not a I'm talking and I'm talking recently,

so you're not to the financial forever. Come on, Barry, alright, so it I've been around at least that low, right, So that's really when you had a drop in residing, drop in profits throughout most of the fifteen, at least sixteen, and then you start to see the recovery. So those are the five quarters I'm referring to. Got it so you can fact check it later too, But a number of I think it was Um, I'm trying to remember who Eckery was forecasting that as a recession, and it

never showed up, never materialized. And if you look at the conference Board leading Indicator, which is a great indicator recession, what you had in fifteen is we got close when it rolled over at least six team. We got almost to zero on that. And the negative area tends to be recessionary, not always, but again it's one point and that rebound there, so that indicator still looks pretty good.

That UM. That is the Ryan Hart and rogue Off um explanation is following financial crises, you get a very subpart GDP, very subpart employment and wage gains, and it looks like you're parent lee on the verge of a recession, but you're just slowly recovering and and there is no credit available to push you away from that, and there's sub one percent GDP, very little credit. I should say, then there's two things that I kind of um gleamed

from that UM. One is is that, um, you you also have this high debt burden, right, And that's the other part of the Reinhardt Rogoff study is that essentially when you hit certain debt to GDP ratios, you can just never recover. So and the second point I was trying to make too, is that ultimately or historically should say, when you had a nominal GDP sub five in the US that led to a recession and we've been perennial there,

sub five percent nominal not real? Okay, yeah, sorry I wasn't clear there, so including inflation, but that has to be tossed out. We've we've been sub five for a long time time, so I think it's consistent with the Rhino Rugoff study as well. And then the other thing I wanted to ask you about that I didn't get too while we were doing the broadcast portion was on the Schiller cap portfolio. There are a handful of questions. Um, First, this model, you guys at double one and now running

a billion dollars or so? Is that right? It's a little more than that's about six billion today six billion? So and who is the fun manager of that? Myself? All right? So the two jeffs are running this as a six billion dollar portfolio. You have the original version? Was us? I understand there's a European version of Yes, that's correct. Um, So the same basic models, same model. Instead of using the SMP five decomposing its sectors, take

the MSCI Europe and decomposion did sectors. So if you're taking ms A your ms C I Europe, could you do the same thing for ms CI Emerging Markets or Asia or what have you. You are correct? And there are other versions there is, um there's a Japanese version. We do not have a product on that today. Um. There is the Asia x Japan version as well. Um, and most people the first question is what about emerging markets? And so remember we're using earnings data to build a ratio.

So how do you think earnings ten years ago looked in the emerging market? Where the credibility of it? And so, although we've tried to gravitate to these international standards, um, the you know, I'm I'm skeptical of the data set and the actually how good the data is? So um, perhaps at sometimes someone will be able to create a standard methodology for that, but again it's I think it's too early to apply this in its form as it

exists today. So that's a really interesting product that that you helped to to create based on Bob Schiller's work. What is the process like for thinking about developing and rolling out new models, new funds? Knew? What have you? Yeah, I have a whiteboard in the office. Um, you know typically you know, when people have ideas, our team looks at it. You know. Um, you know, you know, what's the tar going to market? What's our edge? How do

we what what's what differentiates this from other things? And so um, although you know, we have probably seventeen strategies that we offer out to the public today. Um, when you look across them, they are different, but they're all consistent their macro consistent. There same thinkers, are the same portfolio managers, and it's different risk profiles. And so what I like to say is that it answers the question I get whenever I give a talk in front of

an audience. You know, if you had a hundred dollars, Barry, how would you allocate across your funds? And so instead of doing a good question, it is a great question. And so my response now is tell me a risk profile, what what kind of draw down do you like? What's your objective here? And we can give you probably a strategy. It's a one stop shop for it, right and so, Um, the idea is that if we find new things, you know,

we're happy to get involved with them. Um. But again, we don't want to saturate the market with products that we don't think has some different edge than something that currently exists. And so you know, we've rolled out ETFs over the years where we sub advise them UM different channels.

We've built a use of complex starting last year starting to take it's trying to take hold of the European markets and so um, right now we're looking at kind of you know, that horizontal type of distribution where trying to bring our services to more people, right and not not necessarily got to have new products to do that. So the the biggest theme in in the world of investing for the past I don't know year decade fill in the blank, has been the shift towards passive investing

on the equity side versus active stock picking. But I think a lot of people make the assumption that the same is true on the bond side, and from what most of the academic data shows is that active investing on bonds actually generates alpha. Tell us about um, why active on bonds is so much more effective than active on equities more a little question tiny topics, yea, how much time do you have for the rest of the day.

I think what's what's amazing about it is the bonds industries, first of all, historically have been kind of poorly constructed, and what they did is over inclusive, regardless of quality. Regardless, it's not necessarily overly inclusive. What I would argue is the it's the thesis pointed the fact that they use market value of debt to index it. So the more you borrow, the larger position you are in the index.

So trying to bring that market capitalization idea from the equity market and turn into market value in fixed income and so it doesn't make sense. So very as you borrow more money for me, you know, we more investors should give you more money and put a higher allocation because you're more credit worthy. No, you're absolutely less credit worthy. So it's actually inherently incorrect the way that in the traditional industries have looked at that. And obviously there's other

people trying to build new new models behind that. But I think if you look across the universe, there's a lot of SMP data that shows active fixedment income management tends out perform the indices over very long periods of time. Um, it just is such a different set of data versus equities. We'll look at We'll look at the e t F world the passive ETFs um, not the active ones, but the passive ones relative to active manage either E t

s or funds. It's the same things, is true. They're I'm not saying that people are picking off the E t F investors, but there you know what they're gonna buy. When the big new issue comes out, you don't want to participate in it because you know they're gonna gobble it down and their price takers. Once again just like the ft and so UM it's you can move the bond price a lot more than you can probably the

equity prices. That said this, this fervor for indexation on the equity side, there's gotta be a limit to it. Obviously the whole world can't be in Well, we're at thirty in the US, and if you listen to UM Bill McNab or Tim Buckley, the Income CEO, they point out that globally it's five. So so wherever that limit is, we're still fairly early days. He agreed. But I also also think back to how the products sold. The product

isn't sold buy and hold cheap. A lot of people, I know you profess that your team people say that, but a lot of people are saying active management doesn't work. So what the what the corell area is that they're telling people that indexing outperforms active management? So what happens when it doesn't? Are the people still going to stay there? One Secondly, we we take this idea that if you index, you're going to be buy and hold, you're going to be Now, your job as an advisor is to help

people stay invested. But let's be honest, a market correction, a legit kind of draw down, people are going to run for the hills too. Yes, but here's the pushback. So first, I don't disagree with anything you're saying. Accept The way it's best phrased is hey, active equity stock picking and or market timing can beat indexing. However, it's expensive and NETTA fees and costs, there's a there's a bog you to overcome, and what makes you think that

you're gonna find Bill Miller in not Bill Miller No. Seven. So those are the challenges, right, But I think that's that's I think that's also that's a different argument. It is, and and the thing about it is maybe what it is is maybe there's too many poor managers, maybe there's too many people hugging. The index itself actually comes out and says, I think that why are you paying up for closet index? Right? And I think those people should be exposed and they slowly are. You know what people

got upset about the d o L rule. But maybe we have too many bad advisors too that are flipping things and doing no doubt, so we're cleaning these all things. We're cleaning these things up. And if you're going to get an index product, pay index fees. I'm with you there. But I do think there are good stock pickers. I'm probably not one of them at this stage of the game, but there are people that you should reward there and

the activists, and you know, people have targeted niches. Those those people always be able to generate alpha because you have to identify them, yes, in advance, right in advance. The size you know that you have to pay four and forty four to get in, but and they won't even take you. And they won't take you, they'll close down, only run their own money. But not to mention any name. I don't know anyone that's done that, you know, so maybe, but so so let's talk about podcasting a little bit.

But active passive. We've beaten the death over the years everywhere. So you by the way, for those of you listening, Jeff has a podcast which is misnamed The Sherman Show. I have internally renamed it Sherman Says, which is what it should be called it and when you do when you when you were privileged to be invited on Jeff's podcast, they he has the word association and that segment is called Sherman says, and your job in word association is to come up with a word one word response, which

I actually think I was pretty pretty true too. Um, but you you were one of the successful people and only using one word. But when I've listened to other people's answers, they're like, paragraph long, how is this word association if you're giving me a storyline on it? So I did not want to do word association with you,

because that's your thing. But I did something I'm going to name drop here at at a recent conference, I did something with Cliff Astness, who is always amusing and fascinating and in very sharp tongued and witty right not only not only a math guy, but like a really funny um right side of the brain as well, and that his work is phenomenal, absolutely definitely a so, so for for a live Q and A I did with him, I came up with lightning rounds, which was you can

answer these longer short, you could do one word, you could do a sentence, but the idea is whatever comes into your head quick answer. All right, all right, you're ready for the for the lightning round with Jeff Sherman. Uh two year or ten for what? For anything? UM two's hires tens higher spread, relatively similar, Star Treker, Star Wars, Star Wars Europe or Emerging markets, emerging market. Still doll dollar will continue some weakness, and I think that's very

supportive l A Lakers, Golden State Warriors. I'm a Lakers fan, all right. I just wanted to give you an opportunity to I like everything else. Barry Santrancis good Giants, Samranson's good Niners. But I grew up watching the Lake Show, you know, with the magic and so and so. Look, I do root for Golden State in the playoffs because the Lakers can't ever make it anymore. Um so again, maybe one day with Lonzo we can get to get back together. Smart data or factor investing, Factor investing, you're

going to go that way. Taco or burrito taco. I'm a big taco fan, Yes, Bill Miller or Peter Lynch, Peter Lynch, that's interesting, Tesla P one BMW I eight. I'm a beamer guy. Okay, so I didn't know which way you're gonna go. Yeah, yeah, I don't feel it's still that much of pollution in there. So tax reform or infrastructure spending, infrastructure spinning. If you're going to do one point five trillion dollars, at least, let's put it

to work. Let's let's get some paved roads. And if you're gonna drive that I eight or that Tesla, you don't want to bounce down this, let me tell you they both have tight suspensions. What is your favorite pet peeve? When people just state things as facts with no evidence behind them. And so I know you do the Evidence based Investing conference and I'm a big fan of that. We hear so many rumors. We talked about the flattening the eel currentlyze things today and people just say it

with blatant fact, with a lot of confidence. It's not That's why it's called a con game, right, It's a confidence game. You gotta come across the sharp so um. You know, again, sometimes we misstate facts, but I'm always willing to retract the statement if that's indeed the case. But at least if you're gonna, you know, spread something around. Let's try to make it somewhat factual, and our our last lightning round, um, give us words to live by or your favorite motto. It's out of I mean, you

should at least prep me on that one. I will prep I prep you on the next section. This one. I wanted. I wanted this to be surprised as as you do. Yeah, I mean, I think you know, simply as honestly is the best policy. We're in the business of being fiduciaries, and when you we see these things where people are you know, conning clients and things, it makes our jobs harder. We're trying to come out factual.

We're trying to give things, so you know, maybe it's the golden rules like do onto others as It sounds kind of of corny, but it's a compliance friendly answer to right, So there we go. Let's jump to our longer form favorite questions that we ask all of our guests. Tell us the most important thing that people don't know about your background, the most important thing about the background.

You know that I had no intention of getting this business, you know, I mean I was just a lost um, you know, teenager into a young adult and just looking for something to do. And um, and that was grad school. Grad school, I've found it. And actually at Florida State, I really found it because I started to really, um, kind of all of all the maths really started to

click finally. You know, people talk about the aha Eureka moment and I finally had it where these subjects kind of started tying together all of a sudden and I felt like, I, Okay, now it all makes sense. Perhaps I was teaching too right, I was. I was a teaching assistant, which I taught calculus and the likes. And I think that really helped to try and explain to people not just you know, do they have to be visual or the a oral? Um, you know, what kind

of learner are you? And trying to get different perspectives so um, you know again, and I think that's what helps with this job is you know, we are narrators at times, right, we're giving out ideas, we're trying to explain why we're thinking what we're thinking. And um, you know, if you want to go back to the Pet Peeves question that you asked earlier, you know, I hate when people say, well, you're just talking your book the answers

you're absolutely right talking our book. Why Because we did a lot of analysis to position that book and here's the data. You're absolutely I'm telling you why we it's a chicken and egg thing. You're not talking your book to just go out and sell it. The book exists because of the underlying philosophy and the data behind. Absolutely right, and take it or leave it. If you like the way we think, then maybe you should invest with us. If you don't, it's fine. Um, you know other people

may so. Who are some of your early mentors? Yeah, I mean from a financial perspective. Have I had various layers of bosses too over time? Obviously admired Jeffrey Gunlock, you know, being there, I worked for one of his guys named Claude Herb for a while. Um. Taught me how to read a lot of financial literacy. He's written

a lot, he's won like a Graham Dat award. Um. You know he's running some scrolls over the years to good researcher and really taught me to think about every single asset class and you know, don't trust the day to keep grinding through it. Um. Good lessons there. Um. And you know there's the people that I've read like I would even say, like one guy I've only met once in person, Cliff Assess, reading materials from UM and

so UM. I spent a lot of time on SSR and you know, checking out what's what's the new stuff out there and so UM. There's a lot of people that I'm forgetting right now. But you know again that probably don't even know who the heck I am, but have been big fans of their work and what they put out. So your referenced Cliff Assness, tell me some

other investors who influenced your approach to investment. Yeah, I think you know, you gotta pull out Rob or not in there too, with what he's done and kind of valuation, and I'm gonna go before the factor stuff. You know, a lot of his stuff on on valuation I think was very very groundbreaking at the time too. Um you just just pre smart data, smart beta. So if you go back to the eighties, I mean he was always talking about multiples and really how those of driving sorry,

how those drove returns over years. A lot of people don't think about it's all divid and discount model. They don't think about the valuation components. And he's tried to apply that to smart beta factors too. There's a you know, there's a big debate between him and Asnes today about you know, well, really if the baskets turnover snifflely, is it really evaluation expands? According to Cliff, the debate is over. Um. I think in the last piece Cliff sent it's over

unless you want more, you know. Um. But again, uh, you know, there's been a lot of just kind of academic works like the uh the studies like from Ibbotson and Seeking phil things like that. Um. I'm just kind of a student of history of the financial markets too, because I think there's a lot to be gleamed there. It's not this cutting edge piece that really gives you the most information. It's respecting other periods that have similarities. And no two crises look the same. Uh, so don't

expect the last one to hit in the next time. So, speaking of history, let's let's talk about some of your favorite books. What do you read for fun, be it finance or nonfinance, fiction or nonfiction. Yeah, I think one of the best books. Um. Early on in my career, I was trying to read all these financial literature, you know, so you start the Michael Lewis is and you know, like monkey business, all these things, and one of the ones that really got a hold of me was Bernstein,

Peter Bernstein's book Against the Gods. Man, is that an amazing book? It is? And the perspectives I think is what is what really struck me within it? And what you're talking about, well, you know, five hundred thousands of years ago, people just blame the gods. There's no risk, right, it's the god's fault. And then man, I kind of think that today almost right, there's some people out there still say it's not me that did something wrong. Gets

you know, let's blame someone else. And the evolution of probability theory. And you know, again it's funny how it's always gambling that starts our station and probability theory, but trying to quantify things and understand it, and if you're going to get in the financial business or the investment management business, I mean this is thinking about risk is imperative. And again it leads you to the cliffhanger at the end.

It doesn't ever give you the answer. But I think that's the right answer to risk management, is that there is no perfect answer. We have all these models. Everybody has all these great data points and they're overfitted. Right, we don't know what the next thing is. Most people aren't predicting the crash. When it happens, you're always gonna get someone who's been so against the gods. That's by the way, I've never read his other one of his

other books called The Power of Gold. That's literally sitting next up. I'll take it as a recommendation. I liked Bookstaber's book on a Demon of Our Own Design Interesting, that was a really good one to um. And again that was trying to quantify things more so the parallels here kind the wrist side to the effect of of derivatives and how completely unanticipated the average investor unaware the

average investor was. Yeah, and so um, you know, I don't read a lot of fiction, you know, I spend more time, as I said, kind of the SSR in and things. But those those are kind of two things that really resonated. Well, um, you know the recent financial books I've read recently and have give me one more. We have to have a third book. Oh I didn't know yet, have three? Well, I've just made that rule up. Okay, well, if we're gonna go three, I'll go back to Uh,

I'll take Michael Lewis's money Ball though. Yeah yeah, but I'm a baseball guy, so you know, from a standpoint, I liked the stats. Um, there's something about it, so it's fantastic. And then he I, actually, i've never seen the movie. Uh, the movie is great. I should only recommended.

Lewis says that he missed the major point of money Ball, which Richard Taylor and Cass Sunstein reminded him, was Hey, using all this work from Amos Tversky and Danny Kahneman, which is what led him to the most, which is really if you haven't read that, I have read that one. It didn't really string. It's very different. It didn't resonate

as much with me. Um. But I do like the Taylor school of thought too, you know, talking more and Mortar Professor Schiller love the Behavioral Side too, and did you speak But speaking of Lewis, did you ever read The blind Side? I did? Would you think of it? I did like it, um, except that you know the opening scene you know, didn't resonate well with me as a forty Niners fan. Um, you know, with lt taking out you know, the career of Montana. So I got

through that and I thought it was a good book. Again, not a movie. I never watched the movie though, so I only have you for a few more minutes. Let me jump through my last favorite questions. Tell us about a time you failed and what you learned from the experience. Well, um, you know, the failure stuff is hard to recognize. But you know, oh no, no, I mean I think it's

the best thing you do to learn. Um. But you know, as an investor to just um you know again starting probably with the personal accounts to just um, you know, getting over confident, you know, as a young young trader,

you know, you think you know everything. Um. You know, I love the options market because you don't have much money, so it's a good way to leverage a bat um and you find the undoings of things, and um, how other people can corner you in positions um think about you know, kind of during the financial crisis, people step in and back companies too, and probably should have been

playing around with some of those trades too. But you know, um in you know personal life too, you know, I mean I've been moderately successful, never was you know, the top student in in things. And so I guess probably one of the biggest failings too, was when I was in the pure uh abstract math or pure math mathematics. Um, you know, there was some just tough times there where your brain doesn't click. You just don't get it. There's

no examples. You're talking about proving these delta epsilon proofs, which everybody's already sleep by now. Um, but just you know, really just getting my teeth kicked in and that stuff and bouncing back, you know, and so you know, some of it is hard work. You know, as all the sports athletes say adversity, I don't think in a game's adversity by the way. I think it's a little overused there.

But there is something to be said from from failing and learning from it and picking up and brushing itself off and yeah, and you have to do that and so again, and then just recognizing that, Look, you can't be an expert at everything, right, There's certain things you can only there's only so much time and there's so much brain capacity we have unless maybe our cliff um, you know that you can absorb all these topics and

so you know, dedicate yourself to something. And you know, I think I've you know, I've tried sports some I'm not good at, you know, and I'm never gonna try them again. So, so, speaking of that, what do you do to stay mentally and physical really fit outside of the office? What do you you cold right now? Outside of of the bubonic plague? When when you're not typhoid? Mary, what do you do to relax out of the office? Yeah, I just um, you know, I do some reading here

and there. Um, you know, I just um, I live in Santa Monica, just kind of kick back, enjoy kind of lifestyle there and signs check out or you know, I don't know how to surf. It's embarrassing. You're right by meb you should have met I know. I he did offer, he did offer the past. Yeah, And I don't know if he wants to see me. I'm the only the only thing I'm really good at sinking. So I have been doing some scuba diving lately. Um, you know. But the thing about the scuba diving is I'm still

just getting familiar with the environment. You want to talk about. Something scary is watching those those things just move around in their own environments. So quickly. Which anything, I'll say, even a sea turtle. These big sea turtles probably the most feared I've ever been scuba dives. Not the little sharks. It's the hundred pound a hundred fifty pound sea turtle. Just with the turbo jets go and buy you buzzing the tower. So and I feel helpless. So um, at

least I won't call it a failure. Yes, I was a wiss at the time, and UM, I'm better now. You gotta put yourself in someone's environments. So and then um, our last two questions, What sort of advice would you give a millennial who was interested in a career in finance. Yeah, you gotta be good. It's highly competitive now. Um, there's a lot of consolidation in the in the industry. Be well read in history, um, you know, specially political events. Um.

Financial history is extremely important. It's one great thing about you know, grad school and thing you learn history of subjects to. I think that's very pertinent. And you know, be open and listen. Um. You know, I think there's a lot of good people in the industry around you. Be the sponge, you know, make sure you you you kind of absorb that and you know, read scholarly articles.

You may not understand everything, but just press through. And the best thing to do when you find something you like, you find article like look at the footnotes. Education is the key here. And our final question, what is it that you know about investing today that you wish you knew twenty years ago that you're never gonna know at all? One? Um, mathematical models are not perfect. They are tools. They're not that albeit end game to everything. Um. And there's going

to be things that behave outside of your control. Um. You know, so that can be the security you buy that just tanks, it can be you know, um, the thesis you have and you realize all your bets are correlated, they're all the same thesis. Um, that's something very important. I see that a lot on these top ten lists in here. I know you have your what I did right and wrong kind of stuff or yeah right the

mayapa and so UM. You know understand that you know you've got to have that diversity in there, and that that's very important too, because sometimes you think you talk yourself and this idea that you have all these trades on but they're all just being long the dollar right when you really break them down or something like that. So make sure that you actually have those um you know, different exposure, your portfolio and m you know again, I think the best thing is, you know you come out cocky.

You studied all this math. I got the perfect model for this. No way such no such things. So thank you Jeff for being so generous with your time. Appreciated, Barry. Thanks. We have been speaking with Jeff Sherman. He is the

deputy Chief investment officer at Double Aligned Capital. UH. If you like this conversation, be sure to look up an Inch or down an Inch on Apple iTunes, Overcast, SoundCloud, Bloomberg, wherever final podcasts are sold, and you can see any of the other hundred and sixty five or so h such podcasts that we've done previously. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Medina Partwana is our producer and

audio engineer. Taylor Riggs as our booker. Michael bat Nick is our head of research. I'm Barry Ritolts. You've been listening to Masters in Business on Bloomberg Radio.