Hey, it's Joel. I know you're not supposed to hear from me or Eric for another week, but I'm just too excited about our next episode. We recently sat down with legendary money manager, Bloomberg opinion columnists, podcast host, and general jack of all trades Barry Ritholtz for several hours. That's right, several hours. We talked about e t f s, the state of the economy, and whether we still even need financial advisors like Barry. We even threw caution to
the win and waded into politics and tariffs. Berry didn't hold back. So tune in next week for special double episode of Trillions, and in the meantime, check out Barry's podcasts Masters in Business while you wait. He's been doing this forever. He's amazing to get a taste of Masters in Business. Here's an excerpt from a recent interview that he did with research affiliates rob Or, not a big name in E t S. Let's talk a little bit
about factors investing. Um Fama French famously identified first the three factor model and the five factor model, then the seven factor model. Are there still factors out there that have yet to be discovered? Two answers to that question. Firstly, yes, there will be. They've already been five factors published five
and um, there will be hundreds more. Now the more pertinent question is how much of this is data mining finding relationships that prevailed in the past that have no reason to prevail in the future, and how much of it is, um truly factors that drive price that can be truly a reliable source of excess return, Meaning is there enough outperformance here that can be captured by a portfolio? Exactly so of those five So, if these were really good factors, why wouldn't we create a if not a
five hundred factor portfolio. Hey, let's put these in order of the strongest outperformance generators, and here are the fifty or five best factors. Why can't we do that? Well? I wrote a paper a couple of years ago called how can smart pay to Go Horribly Wrong? And I remember that it was massively controversial. I thought the controversy was amusing because if I'd written a paper entitled how
can stock picking go Horribly wrong? And I offered the the sage insight that if a stock soars and its fundamentals haven't, so it's valuation multiples have sword, it's past returns will look artificially wonderful, and if there's any mean or version on valuations, it's future performance will to use a technical term, suck. So um. People would have read
that paper and said, what's this nitwit talking about? Everybody knows that by saying exactly the same thing about factors and smart beta strategies, I was pilloried for suggesting that the same thing could apply for strategies. Now, if you go back historically, you find that the alpha of many of the smart beta factors have has not been tested in terms of how much of that access return came
from rising valuation multiples. We might as well have a an Apple factor that simply says Apple has outperformed magnificently. It is a powerful factor. You have a long Apple, short everything else factor, and because of the past performance, we know it's going to continue to work. Let's digress a little bit and and define factors for people who may not be familiar with Gene Fama, who won the Noble Prize a few years ago for his for a lot of his work. Um the original and it's Gene
Farm and Ken Frenchship. Dartmouth Farm is at Chicago. The original farm of French factor paper was small capitalization value, and I'm trying to remember was that momentum or quality market market beta market. So that's the three, okay, and then when we moved to five, we added um uh, quality and momentum, So that's the next lot, and then seven. I don't even know what the next two are. I'm
not certain, but I think it's illiquidity and investment. Right. So, so all of this comes back to let's let's keep it simple. Low cost stocks over long periods of time, better value stocks, not a expensive stocks. I don't mean low price tend to outperform expensive stocks over the long haul, exactly right Now. Advocates of efficient markets will say it's got to be because of some kind of hidden risk,
because you can't get something for nothing. Um. I would push back against that and say it's not risk with value. Might be risked with small cap because there and then there's a liquidity issues, but with value, it's the psychology. It's to behavior of who wants to buy this. Dominoes is one of my favorite examples. Domino's had a big, a whole run of issues late nineties early two thousand's
the stock did poorly. People were thinking, all right, well that chain is pretty much done, and dominoes over the past I think it's either fifteen or twenty years has handily outperformed Apple. I may be getting the timeframe wrong, glow so, and that's the psychology of who wants to touch that? And if you look from the trough in two thousand nine, Uh City ever so briefly dipped below a buck, be of a dipped to roughly two bucks.
And since then those have handily outperformed Apple. Um so, but they've outperformed it from a starting point of being thought on death's door. So value, it seems to me, does have a behavioral basis. Basically, when you have a value orientation, you're buying what's unloved, what people want to shun. That should be rewarded. Now is it a hidden risk factor only psychologically? Well, let me let me push back a little bit over there. Two companies in the financial
crisis look terrible. One of them's a I G. The other's Lehman Brothers. You can buy a i G rescued and and since pretty decent, not great, but pretty decent returns off of the bottom and Lehman. I guess we could call that of value trap. Although there were elements of fraud in RepA one O five, there was a whole different set of problems with Lehman. But the risk with value is am I buying something that's going to
be a zero. That's known as a value trap. It's a stock that looks cheap on its way to zero. Now it's hard to have a whole sector that looks cheap on its way to zero. I coined the term anti bubble in two thousand nine to describe what I perceived as the inverse of a bubble, where an entire sector of the economy is priced as if they're all headed for oblivion, when in fact, every failure clears the runway for the survivors to have higher profits, higher margins,
and greater success ahead. So unless you wanted to um accept the notion of armageddon the end of the economy, uh you, it made sense to think that collectively this sector was being dismissed when it shouldn't be. There's a whole group of people that are the armagen traders. I think the Ft called them the plastic bears. They'll scream arm again, but then they'll he here's what we can sell you while we're waiting for armagin um. The other thing about anti bubble is so fascinating. You could say,
there's an anti bubble in what was it? Home builders and oh five, and mortgage brokers and bankers and oh six and