Through research and much backtesting, Dr. Gray has found that a hybrid approach of momentum investing and value investing has provided the most comprehensive returns. On today’s show, Dr. Gray explains some of the concepts behind the way he looks at both approaches.  More importantly, he teaches the audience how to combine the two approaches into a single strategy.

In Today’s Show You’ll Learn

  • How and why to follow a trend in the stock and the bond markets
  • What the biggest mistake value investors make by not including momentum in their strategy
  • Ask The Investors: How do you build your fundamental knowledge in micro and macro investing?

Tweet your comments about this episode directly to Preston, Stig, and the rest of The Investor’s Podcast Community using #TIPMoney.

Get The Investor’s Podcast blog posts and podcast episode updates on your Facebook feed by liking We Study Billionaires.

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Podcast Transcript and Summary (automated)

Preston: [00:01:29] All right so welcome back to the show. Yes. Man we always have so much fun when you come on the show and chat because you always just have a tendency to show us different ways to look at things so we are very excited to have you back on the show. Thanks for taking time out of your day to be with us.

Wesley: [00:01:47] It’s always an honor to be here again.

: [00:01:29] All right so welcome back to the show. Yes. Man we always have so much fun when you come on the show and chat because you always just have a tendency to show us different ways to look at things so we are very excited to have you back on the show. Thanks for taking time out of your day to be with us.

: [00:01:47] It’s always an honor to be here again.

: [00:01:50] Well let’s talk about I’m sure everyone wants to kind of hear Wes Gray’s opinion on where we’re at in the market because the last time I checked this thing started to go parabolic and I’m just kind of curious what you’re thinking.

: [00:02:04] Sure. So there’s a two what I’m thinking and what I actually do because as you know I’m a Kuat now. Hey yeah I’m a fundamental dude wrapped in a quantus you know equilibrium here. So what I think is the markets are insanely overvalued and it’s crazy and you know I’ve been expecting to crash for five years now. But that hasn’t happened but that’s why I don’t think I use machines. And what were big trend follower so to the extent you know markets are moving and trending. We own it essentially buy and hold. So we’ve. I mean to the extent these markets keep trend and we’re we’re in valuation is it really isn’t relevant to how we think about owning beta risk because OK so yes I guess what you’re saying might come as a surprise to a lot of you who have followed your early careers.

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: [00:02:58] I mean you literally wrote a book about value investing so whenever you sing you’re doing Trend Following is it only on value picks or is it basically on out there even though the half say high multiples.

: [00:03:13] Yes. So it’s a great distinction to make clear. So at the stock selection level we’re buying cheap high quality right and right now like in the US you know the average yield on our stocks which is kind of how we look at the markets here. You know since your operating income over your enterprise value you know that basket by around 10 to 11 versus the market which is around 5. So we’re buying cheap stock straight up because we’re hard core value investors but embedded in any investment unless you’re market neutral is debatable. Right. If you are long stocks rather they’re cheap stocks are expensive stocks or anything in between. You know you have market risk embedded in there in how we think about timing the market risk component of what we do is based on trend. So the example we buy the cheapest dirtball stocks out there that we can find and there’s plenty of them even in today’s markets but how we think about whether we want to be long only or hedge is it has nothing to do with valuations and everything about trend. So right now we’re long cheap quality stocks and we’re not in a hedged position we’re not a long short of market neutral.

: [00:04:26] So let me ask you this so let’s say the trend starts to shift. Let’s say we’re three months four months later or a year later or whatever it is. And you start to see a statistical change in the trend. First of all what would you like for the market for you to start saying hey this trend is over or we think this trend is reversing. What are some of the things you’re looking at to be able to make that determination.

: [00:04:52] It’s very simple. So we use basic to rules only 50 50. And we got a 20 page blog post about it. But first one is this long term moving average like so the current price on S&P. We’re talking about domestic markets relative to 12 month moving average if it’s above rate Bohning value stocks and momentum stocks if it’s below that signal says we need to be hedged. And the other signal is it’s called time or will or absolutely momentum.

: [00:05:24] And we use you know Gheriah Antonacci if you gets from maritime has a great big momentum.

: [00:05:29] He kind of talks about this concept and we use one element of doom omentum it says literally current human return on S&P relative to the Kuuma turn on the t bills. Basically if it’s positive in. Otherwise you’re hedged. And so we have those two signals we’ll sell them every month. If you both say good to go we stay long whatever we’re own and if they if they’re 50/50 we’re 50 percent hedged and if they’re both say hey you know it’s time to jump off a bridge and then we’ll fully hedge the portfolio basically in completely short at that point yes it will be long. We’re always long names we’ll start layering down passive short like SB y or EFA or we’ll use futures. çınar pull out the beta component of the bet.

: [00:06:22] So since you’ve been market neutral so what are the numbers for this past month. When you when you did the analysis just to the audience can kind of understand what you mean by what you’re saying there in actual numbers.

: [00:06:35] Sure. So I don’t have the exact figures at the top of my tongue here but there has not been a trend break in either international or U.S. equity for I think at least a year and a half at this point and that makes sense because obviously we’ve been in a massive trend. And so we’d have to have a fairly substantial crash and it have to happen fairly quickly and robustly to hit a trend rule basically now do you use one year moving average not 200 days 100 days sir’s say 50 days memory each. So basically it doesn’t really matter.

: [00:07:14] Out of sample or whatever we’re using it currently is almost 100 percent. It’s not going to be that you know the one we should have used but all we know is that X any and all the research we’ve done on this as long as you’re in the general genre of long term trend you could do 200 day you could do you know three hundred and fifty six point two five days. We don’t really care all about this saying there’s a lot of noise around the signal but it is robust the concept. So we just use that because it’s simple it’s easy to communicate and it’s in the ballpark of you know it’s evidence based. That’s why we stick to that there’s no science that’s more the art of quantum signals.

: [00:07:59] I would think that you would get yourself into long term gains. You would limit your short term gains by going with a longer moving average like a year long. Like if you were at a 60 day moving average I would think that you’d incur a lot of short term gains because you’re constantly buying and selling as it would move in and out of that map out of that average with. Is that correct. Is that a better that.

: [00:08:20] That’s correct. And you know it really depends like Turn 5 is not an end all be all and for all intents and purposes a long term trend following metric is basically buying whole because it’s long trend. And so you are kind of a buy and hold most of the time and you do shorter trend models like the time the market to your point. You know it’s much more reactive but it’s also going to cost a lot more and frictional costs taxes and it’s unclear to me it’s any better for what we’re looking at it which is Hellers protection versus a long term one. But why not use the one that is not crazy and caused the brain damage all the time of use that so now so this can be applied when you’re doing this stuff.

: [00:09:04] I mean it because you really talk industry price action is what you’re paying attention to for hedging yourself.

: [00:09:11] Just to be clear on that because as I understand what I’m saying is heresy to you know the fundamental value investors which you know I still am that person that shell of a person I used to be. So what’s important to understand here is that there’s a difference between stock use and value to pick individual securities and when you’re picking individual stocks you want to be cheap and stay cheap. Right. But then when you start getting into the world of macro and timing market risk i.e. overall market valuations it’s there’s no evidence that I know of that is very robust. That suggests that just because I know today that the market that a 99 percent valuation metric that it can somehow tactically help me out perform like basically a generic buy and hold proposition and we’ve tried a million different ways to cut that cake. It’s just empirical fact. Here’s what we do know.

: [00:10:12] The one thing that can help you improve your risk return profile relative to buy and hold is Trent. And what’s really important is that trend is what you want to pay attention to especially when valuations are top heavy. You don’t want to time your your allocation is based on valuation alone. But to the extent that the trend sucks and valuations are high that that’s when you definitely want to get the hell away from the market. If you want to take the risks go you know market timing which I’m not saying it’s perfect but if you wanted to do it that would be would be the recipe for success at least historically do you.

: [00:10:54] Do you find yourself participating in other markets so we’ve seen that commodities have just been crushed for the last three or four years. That’s had a very bottoming effect over the last year where they’ve been really flat. And you’ve seen oil come back quite a bit recently. So I’m curious are you seeing a reversal. First of all do you participate in other markets outside of equities call commodities. And if so I’m kind of curious to hear your thoughts on that trend reversing at this point because it appears in a lull. You talked a lot of macro people they’re all saying that they’re seeing a reversal in the commodities sector.

: [00:11:30] Sure. So yes we may see trade or have traded anything that you can possibly trade and subside or equi business.

: [00:11:38] We are seeking a CPO a trade Manch future so we trade every future on the planet basically. And again there we are focused on trend and then the carry trade. So looking at backwardation contango. So and obviously you know the trend was kind of mixed in all over the place. But recently you know you’re pretty much along most the commodity complex especially in energy and the metals and and it’s also backwards in energy complex which hasn’t happened and you know God knows how long. So yeah I mean from a Kuat perspective it’s great. And even from a qualitative perspective if I can own you trending contracts that are also going to be backwards versus contango so I kept a roll yield. I mean the wind is at your back finally versus what it has been in the past.

: [00:12:32] Explain to the audience the backwardation piece here because some people might not be familiar with what you’re saying there.

: [00:12:38] Sure. So in futures contracts you know since your return is determined not really just necessarily by the spot movement but also by kind of the what they call the term structure of the future. So the extent that you the spot price is a bov the future price. It means that futures in backwardation. So what’s going to happen is over time the future’s going to roll up to the spot price right. It’s called Capturing kind of the roll yield whereas if you buy it if the current spot is below the future price and you buy that future that future price will slowly kind of decay down to the spot price which means you got negative role and historically at least in like oil futures for example like last 10 15 years you’ve always been because you don’t own a barrel of oil. You own a future in oil typically right when you buy any sort of desert product out there. So you kind of own obviously the risk of the spot price that comes into play and just like or like I say or last recent memory oil contracts has always been can Kango. So you need oil prices to move up when you also need it to overcome the negative role yil that you’ve been facing recently. But now you let’s just say the spot price stays the same. You’re still going to have a positive return on that investment because now you’re capturing a rodeo that’s positive which is cool.

: [00:14:08] Awesome would you say that there’s statistical significance behind the momentum change in commodities in general or would you just say that you’re starting to see it break through some of the moving averages that you track.

: [00:14:20] Yes so for sure so. So we run both long trend models which are basically like 12 month type ideas. You also run a short term one that’s much more you know high frequency and it’s a 10 100 crossover type model. So it’s you early compare like a 10 day versus 100 day. But if you look at like the like energy sector for example I mean it’s pretty much raging on everything. I mean it’s like count even though it’s price really bugs 60 by bugs right now or something on which contract you look at does I mean it it’s all signs are green from the ground perspective and and right now on a Kerry perspective same thing with the equity like valuation based timing on commodities is a noisy tough game but you know if you put a gun to my head and said hey is are commodities a better bet now than they were three or four years ago when they were the coolest thing since sliced bread. I’d say probably better now because everyone hates them and they got trained and they’re backward so you know the natural being a contrarian in me. You know I’d say commodities seem to be an interesting idea.

: [00:15:30] Yeah. JEFF Gunlock I mean he’s really tooting horns. I mean he’s screaming that’s the play of 2018 is commodities.

: [00:15:37] Yeah well I mean I’ll tell you what man like in our managed futures program. Again it’s just a Kwon’s system the same kind of built for crisis alpha. So it’s kind of saying we’re probably moving to an inflation world by the by saying we’re short the entire sovereign bond complex and we’re kind of long a lot of the metals and energy sector. There’s a mixed signal in kind of like the weeds in the soft right now but but in general I’d say it’s saying hey there’s going to be a crisis or surprise it’s going to be an inflationary surprise not a deflationary surprise. At least that’s what’s being shown and economists futures landed lol.

: [00:16:19] So you briefly hit on this and it really takes me to the next point that press and I wanted to cover. How do you look at the bond prices right now and the trend there. Yes. Because at least some of the billionaires that we fall have made some really crazy predictions of what’s going to happen.

: [00:16:37] I don’t know what the billionaires are saying but I do know that a lot of billionaires lost a lot of money the last 45 years because they’ve been saying that you know yields are going to go up forever now and they’ve been wrong.

: [00:16:49] However that’s why we don’t think we’re billionaires we just follow models right now is finally a point in time where you know long duration no credit or not credit the long duration sovereign bond ARMs. That trend sucks. And so we’re starting to get short. And so now it’s a situation where they’ve been over arguably overvalued forever. But as I mentioned that’s not a great timing mechanism at the sceptre bet. However when you have assets that have terrible trend and you have a sense that they’re systematically overvalued now might be the time to say hey you know maybe fixed income is not really a great place to be.

: [00:17:32] So on the shoulder of that at least 10 years since shorter that might be a reversion happening. I don’t know if you see this same way Wes or or if you models would tell you otherwise. So I’m curious about your opinion on this.

: [00:17:46] Oh yeah. I mean we only we track all of the 10 year sovereign bonds across the globe. In there literally across the board short which means they all have terrible trend i.e. the prices have been going down because the rates have been you know ballooning. So if you’re someone who’s a long term bond bear the trend is kind of confirming that. And I’d say if you’re going to find that bad and you know take risk out of that bucket this would be the time word probably makes sense versus you know last few years where it’s been know getting in from a steamroller base.

: [00:18:22] So if all that money’s coming out of the bond market let’s just say that that that theory is true and that that trend persists and it moves forward for the next six months and all that money comes out of the bond market.

: [00:18:33] Well I mean in general there’s always equilibrium right so even when Bonds are getting sold someone’s buying them.

: [00:18:39] So if the money’s still there it’s just someone else’s own and it is I’m not. That’s actually a really. It sounds like a simple question that’s actually a really tough question and frankly I don’t know.

: [00:18:51] The thing I like to ask really smart people like yourself every time I get a chance to talk with you is at least for the last quarter has been commodities because they’ve been just punished so badly over the last three years where everything else has just performed so well and then we’re seeing the bond markets start to turn itself inside out. So and I mean when you see the equity market going parabolic you’re exactly right this trend has not been broken whatsoever. This thing is still strong and it might keep going strong.

: [00:19:22] Yeah you got to and you’ve kind of a hit on what I call poor man’s managed futures. Well what I recommend is if I wasn’t going to do a 60 40. Because you know my advisers tell me that can charge the one percent to do that. You know the bad advice were my 40 I would say listen I don’t know if we’re going hyper inflation or hyper depletion but I do know that commodities and long duration bonds are kind of a barbell trade amongst those and this kind of trend for commodities again perked up a trend. And you know Treasuries are not Ameristar didn’t move in and commodities for my diversifier and away from duration bonds and vice versa. If the trend attends the other way and there right there is kind of a if you want it have a simple 60 40 but have protection in that 40. That’s not just deflation asset protection. You’d want to use commodities and bonds and can fall on the cross whether all the work and.

: [00:20:21] So how does the tax cut plane to this. I mean is giving the stocks. It seems like a lot of momentum is the markets so much in momentum that it doesn’t really add anything. Or how do you guys live in it.

: [00:20:35] Well we’re talking about macro level stuff we focus our trend exclusively extent you know in August that’s in the it’s in the price like the market’s telling you this is worth a lot which is why prices keep moving up. So would it be that trend. Because it probably the case I imagine the markets don’t even fully appreciate just how big that could be. Now you know that’s this also pontificating there that we just focus on the men and not the individual stock level like in value land. The reason you buy cheap with margin of safety is you bought cheap a margin of safety and anything that could potentially be good has a huge spike so that tax bill was great for value people whose value you guys are buying dirtball retailers and people that tend to pay a lot of high marginal tax rates.

: [00:21:27] And that is base and got net income doubled as they go from whatever a 40 percent marginal to 20. I mean that’s a big deal which is why like a lot of the kind of securities we’ve owned but been second when it just you know there aren’t a repeating tear but that’s more a function of just if you buy cheap but margin of safety. And the winds shift and you get lucky you know a bounce back with bad news which in this case was favorable. You know they go rip. But I could never predicted that. And I’ve been it is my only thing is that buy change and that works. Other than that we really incorporated into our processes that march to be honest.

: [00:22:07] So Wes I want to talk about one of your ETF. Wes has your company has an ETF its q v a L Q Vele and this is correct me if I’m wrong if I’m explaining this wrong but this ETF is basically purely based off of your book quantitative value that you did with to be Carnlough. As far as eBid to enterprise value is how this is making its selection’s is that correct.

: [00:22:32] Yeah yeah Fontenoy some purposes. The big muscle movements. You got it in it’s buy the cheapest highest quality stocks.

: [00:22:41] Hold that conviction don’t closet index and the cheapest is your point enterprise multiples and then that’s kind of a core driver of what we do. But then within the cheap as dirt balls we are soon identify the highest quality of the cheapest. So this is an area where I think are a little bit of disagreement Brightwood Toby but you know where we kind of like cheap but we also do want to have an element of quality in there.

: [00:23:09] I mean we’re Tobia just like a cheap.

: [00:23:11] Yeah he does like he does likes. Yeah I get chief.

: [00:23:16] But I am a believer that you know cheap would be cheap but at air quality element there is also at least Brar context important but you know if you just buy cheap too that’s also perfectly reasonable approach as you know different strokes for different folks I guess.

: [00:23:35] So it’s interesting because whenever I look at the performance of this compared to the S&P for the last year you guys have outperformed the S&P 500 with this thing. But if I go back to inception from whenever it first started you guys are underperforming because you went through this period in 2015 that was just it was really strange like you can see that everything is very closely correlated. For the most part to the S&P 500 except for this one little tiny spot in 2015 through kind of the second half of 2015 and if it wasn’t for that you guys would be you guys you’d be beating it since inception. I’m just curious if you know like Is there a way that you can explain what happened during that six month period of time. Or is that just how the numbers shake out some time.

: [00:24:26] Yes sort of give you a little history so. So that QVC had you been running for five years because because we got that CD and estimated in 2012. And so we’ve always done this concentrated value strategy we launched at like at the end of 2012 and it went on an app like all of the value guys it went on an epic rage. Right. It was like we were amazing and then we got this bright idea for tax reasons like hey we should launch this whole deal. And of course you know what I have. Perfect timing in my life also launched the hedge fund back today September so a launch this ETF in late 2014 about five months before one of the most epic drawdowns ever in the eBid. You know that fact Ill buy you a lot of just you know in the path of Amazon’s war machine. We’re just being in bad retail bets. What have you. But it just so happens that the EPF came up in a track record has started you know kind of the pinnacle right before it about collapse.

: [00:25:33] And then to your point like the last year it’s been on an epic rage or words like destroyed SCMP. That’s just the nature of value. You’re going to look like a total genius sometimes you look like a big idiot on the planet sometimes.

: [00:25:48] And the only thing we know is you got to just hold for a long haul and be willing to be very different if you plan on you know having even a chance of winning over the long haul. And you’ve seen that empirically and the Cuvee system.

: [00:26:04] I’m curious if you have an ETF that you’d be looking that would do kind of a hedging strategy. Is that something that you can even do with an ETF. You don’t know this.

: [00:26:14] You can. So I mean you we run one that has like a trend following component two words long you know the securities but the extent the trend starts not doing great. Well we’ll start layering hedge it’ll move towards like a market neutral stance but it’s kind of like a hedge fund strategy basically in an ETF wrapper which again we do that for tax reasons but it doesn’t but it doesn’t do inverses at that point it won’t go down as the inverse Lilly shorts because inverse is basically too expensive capital inefficient and frankly in my opinion it is stupid.

: [00:26:51] I understand why people sometimes do it in IRA because you’re not really allowed to short. But it’s much more cost effective if you want to hedge either short sell future or sell like ask me why short as opposed to buying an inverse.

: [00:27:06] Because that’s what they’re basically doing but they’re charging you like a lot of percent. Yes is not a smart idea. It’s much better to do it you know directly. And there’s a there’s a few others.

: [00:27:20] You know pastry tabs has some pretty cool products that you can go to hedge status that I think are going to start seeing that that’s going to be a new front here where right now an ETF plan kind of product innovations always in his closet indexing. And then the little small Smar Badir factor tail but AC closet indexing.

: [00:27:40] We kind of led the frontier on doing concentrated factors and I think the next frontier is going to be Basey moving all the hedge fund type strategies and they’re kind of unique risk profiles into the ETF wrapper which is going to be great because it will be packed efficient and more accessible and cheaper cost for a broader base of investors out there.

: [00:28:02] So let’s take a step back from the peak markets and the big movements in the markets that we’re seeing right now and talk about the individual invest and profits that just started to get their feet wet. What do you think. Westby your experience is the two biggest mistakes that you typically see this to conduct and what can we do to correct them.

: [00:28:21] The biggest one is just the too good to be true problem is a lot people they get into invest. They get real excited like Bitcoin is a great example or like this is easy to buy the saying goes up a thousand percent. So just like the number one mistake is just not understanding that when you go into a market you are fighting with grizzly bears and 200 IQ you know IQ people that you know they’re trying to feed their kids. So it’s super competitive super hardcore and going in with the expectation it’s going to be easy or there’s some kind of magic Breman lunch out there thing is the number one mistake and then kind of on the flip side of that the number two mistake is that if you want to be disciplined if you’ve got the right temperament and if you’ve got the kind of emotional capability you know not succumb to crazy behavioral biases to assume that you can’t beat the market. So it’s kind of an irony like on one hand assuming you can beat the market it’s easy money and airings you’re going to be true. Let’s do it. That’s one problem. The flip side if you do have the temperament just assuming that the market is perfectly efficient and you know what’s the point is also kind of stupid you know if you have the temperament loser tend to flip side of the same coin. But they represent two mistakes that a lot of people don’t get in the business or just started to succumb to.

: [00:29:56] I think so take this discussion further since you have this camp of hard core value investors she know the Warren Buffett investing philosophy type view. They’re looking straight at the fundamentals. You know like Preston is doing and perhaps not looking too much at the momentum the trend and and what’s happening in your alley. What is our biggest mistake in not considering your vantage point.

: [00:30:25] Well first of all I just want to clarify that just because I personally believe in momentum and trend I know that’s something that I understand that process I have the cop in it and I have because I have the confidence in it I personally have the emotional ability to stick to it. But it is totally inappropriate for people that just think it’s total baloney. So that’s cool. And it’s not it’s not me. And that’s what people should do it just that’s what I do not appropriately so. So it’s kind of it’s kind of a tough question because if you’re a value investor that thinks that everything that is mentioned about a trend in momentum is total you know horse manure that’s totally fine. In some sense you could argue it’s a mistake because based on the evidence it’s very clear to her that these are probably good ideas that are just as well evidence based and you know ingrained in the marketplace as deep value investing is. But on the flip side of that. Because you’re not Cotham because you think it’s baloney. It also would be a mistake to do it. So it’s kind of like this weird irony where on one hand they’re wrong because it’s just the facts of life on their hand because given you think it’s wrong it would also be wrong to actually do the strategy because the minute they started doing it they’d be like our CEO stop working Zubeir and grandpas. Yeah I know he was the god and wrote the Bible and you’re not supposed to do this stuff and these guys are stupid and they sell out. Of course you’re going to the wrong time. So really it all boils down to what your temperament or the process that you’re following and if you can’t stick to it then just don’t do it.

: [00:32:06] So it’s interesting because I was going to ask you the mistake that a lot of momentum guys that are just strictly momentum traders. What would be their mistake and I’d imagine you’d answer the exact same way that they don’t have fundamentals into their approach. But it’s also the irony involved with that would you agree. It’s just the inverse. You just said.

: [00:32:26] Exactly. The bottom line is everyone has got great ideas but people get emotionally attached to their ideas. It prevents them from thinking outside the box. But once they become emotional about ideas that are outside their box that’s also where the behavioral problems come in. So it’s like this and it’s circular logic where OK. You weren’t smart enough to realize that you should be doing it because you’re not smart enough to realize that you should be doing it because you have an emotional attachment to some other religion. If you were to go do it you would actually end up screwing yourself up anyway. So it’s kind of like a what they call like a second best equilibrium outcome were first best would you would just be purely evidence based on what the data say what gives you the best chance of a long run after tax after compounding. But that’s not reality for most people. So then if the second best solution of given your behavioral problems what optimizes and that’s what most people do which is cool awesome.

: [00:33:33] Hey I was looking around on your site recently and I see that you have a new tool platform where people can filter results based off of eBay to enterprise value which I know is a very useful metric for trying to find undervalued companies but it seems like your filter does this for ETF. Is that correct or does it do it for individual companies as well.

: [00:33:55] So built this cool. It’s in beta right now. You go to New Tools dot app architect that you can sign up yet to be. You have to bear prior professional and so do they stay in you. Dean you have that label though for free. But but but what we’re trying to solve for there is making sure that people understand what they’re buying and why they’re buying it. So it is a huge deep Aksaray look into the underlying holdings of each. Yes where you can like if someone says Hey I’m a value fund well let’s go sort of securities and look at how every individual security maps out on value like did you actually buy cheap stop or reduce cost indexing. You know this tool will be able to directly analyze that and you can also I don’t even had a chance to look at it. But if you can click on individual securities in an ETF portfolio it’ll drill down to the stock level and give you all the factor analysis and give you like hey what does this thing rank on enterprise multiples or price the book or whatever the heck it is. So it’s meant for folks that are looking at you. Yeah. But if you’re an individual stock person you you can look at any capital that owns a security and are interested and click on it and it’ll drill down to that level of detail.

: [00:35:13] What I like about this Wes is when you go and you do research on Yahoo Finance or a lot of these different platforms and you’re looking specifically at an ETF it’s really kind of hard to maybe find some of the information on even a P E ratios sometimes you can’t even find out what the ratio is for an ETF but look at your tool here this is incredible because you guys have a lot of data.

: [00:35:36] Yeah well we think it’s going to be kind of life changing and from a transparency standpoint and we’re trying to keep it open architecture we’re looking at tool like we don’t care about you. Bestor momentum Bestor we have like 20 or 30 different characteristics that you could analyze based on the Holding’s and all the data is there so if you look at a pond it’ll spit out Holding’s and have different parameters and what they rank on whatever you believe in whatever factor or characteristic that you think matters for your livelihood of investing. It gives you the basic the forensic details on that at the Holding’s level for any gap that’s at this point when U.S. traded Baumol we we’re going to have mutual funds here. But the engineering on this is a non-trivial thing.

: [00:36:26] All right so Wes last time we had you on we played a question from the audience and we got your feedback from the question Are you answered the question. So today we’re going to do that again. This question comes from Nate. He’s out in Silicon Valley and here’s his question.

: [00:36:41] Hi this is Nate. First just wanted to say thank you so much for putting on this podcast. I’ve learned from listening to you guys and I thank you very much for putting the summary. I found that when learning something new you need to start by building a foundational knowledge base strong basic understanding of how the fundamentals work. Then as you learn new things because you already have this foundation you know exactly where to put any new knowledge and you can see how it relates to everything else. As someone who is fairly new to investing I’ve learned a lot of things that are point learnings but I haven’t yet formed a foundational knowledge based upon which to build and place. Each of these points learnings. What would you recommend as the best way citing your podcasts to build that initial initial foundational knowledge base for investing knowledge and for broader macroeconomic knowledge. Thanks.

: [00:37:31] All right. So Wes fantastic question by the way I really like this question but I want to hear what you what you think.

: [00:37:38] Yeah I concur. I think it’s a great question and I don’t think it has a simple answer.

: [00:37:44] You could take a many different ways but I’d say if you want to get in the weeds on the micro components of fundamental valuation or stock selection you know unfortunately you got to go to the dig in a well and you know stick to things like security analysis intelligent vesture even though I know they’re you know seem like they’re too old books and they are for old guys. But I think that’s just a great baseline fundamental framework for figuring out how to value a stock like the classic method. Now if you want to move beyond kind of a micro valuation you know you google around there’s 500 resources. You know I know presidents they they have a great course on their Web site. Khan Academy almost certainly has great resources and there’s this good old thing called Google. I think a lot of times Google and around the machines of data optimized on yes answer the right question a bit of detail a lot of times the best resources are bubbled to the top and I’m sticking to that because it’s very good place to start.

: [00:38:50] So I completely agree with Wes on the Security Analysis. Benjamin Graham all that kind of stuff is really good for the for the micro level. I think first for a person who’s coming into this fairly new security analysis is probably going to be a little difficult to go through depending on if you’ve had business classes or what.

: [00:39:09] Like how much accounting experience you have might make it difficult.

: [00:39:12] Do you need an accounting. Well here’s another thing if you’re coming in new to investing I mean frankly it’s means you’re not going to be like a stock picker like you’ve become a professional. They’ve become an annuity. It’s really about more high level frameworks like we have the fax framework like no fees no liquidity No the complexity of the taxes a because you’re probably going up to buying the Vanguard fund anyways. It’s Zerilli if you’re going to get into the micro weeds. The reality is it’s painful and it requires you to basically read that kind of stuff a lot of it so it just is what it is. I mean if you don’t want to be a professional or somebody who is like dedicate their life to the trade and you really just kind of someone who wants to learn about investing and how you get out of your portfolio down the road you know you may not even want to go into that level of detail because it’s just going to make your head spin and it’s not going to be worth it.

: [00:40:11] And that’s why I say just buy.

: [00:40:13] I’m curious about this Wes and I know I’m changing gears away from the question. We were talking with Shane Parrish and I asked Shane if he had the choice between the intelligent investor or margin of safety if he had to pick one or the other. Which one would you pick. Yeah. And he said margin of safety and I tend to agree with them I’m kind of curious if you enjoyed that book as much as we like it. Yeah.

: [00:40:34] I mean I agree. But the problem is the buy that books like a thousand bucks that is more like the access.

: [00:40:41] But yes that karma is much better at Exposition and you kind of storyboarding it where it’s more tangible or intelligent investor offering is help frankly. You know it’s like eating your brussel sprouts sometimes the things that are good for you are exactly easier or fun but they’re still good for you. There’s I’m a big fan of you know big fan of it but you’re right margin of safety is also a great resource. That exchange can access the manuscript somehow I guess for me when it comes to micro.

: [00:41:13] I mean obviously you can have and fine books that’s very quantitive and you have a lot of key races salute Gad and a lot of. Again one of the most recent books that we read Eskil how the mighty fall that Jim Collins is Odins is the complete opposite of what you suggested. Yes there are a few key races in that but it’s a very different approach to understanding why companies fail. Was this at least in my opinion one of the best approach is to understand the flip side why companies are successful and you want to invest in them and not only in terms of making the acquisition of the stock but also to follow the progress and not just look at the numbers but also look what’s behind the numbers and perhaps considering when you should.

: [00:41:56] So to answer a question about macro I had a I. I think that one of the most profound reads that I’ve ever had on macro came off of Ray Dahlia’s website. I’ll put a link to it in the show notes bit Ray lays out his principles for basically macro and the way that he thinks about it in a lot of it is based off of the video that I’m sure most people know about by now. There’s a 30 minute video that he has on youtube about like how the economic machine works. I would highly recommend you watch that will put the video into the show notes as well. But the PTF that goes along with I want to say it’s like a 250 page white paper on his opinion on how macro works and how it all fits together. That is hands down the best thing that I’ve ever read on Macra that’s out there.

: [00:42:42] And we’ll have that all for free in the show and it’s if you guys want to check that out as well so I’ll second that motion because I agree that I mean that guy is honestly a genius. You remarry right. Yeah. Our machine is amazing. Yeah.

: [00:43:02] So Nate thank you so much for this really awesome question we really enjoyed talking about this one as a token of our appreciation for submitting your question. We want to give you our intrinsic value investment course which can be found on our T.P. Academi page. This is a paid course but because you asked such a great question you’ll get it completely for free. So if anyone else out there wants to get their questions played on the show and get a free course just go to ask the investors dot com and you can record your questions there.

: [00:43:28] So Wes thanks for coming on the show. I always have so much fun and you know what I want to thank you so much. We did a event in New York back in August and I’m I just want to say this publicly because that event would have never happened without West Gray West. You came to my rescue helping orchestrated we were able to have it at the CFA that was all because of Wes putting me in contact with the right people when just helping me organize it. You always come through and always help us out so much so I just want to thank you for that Wes. And I want to give you the opportunity to just tell our audience where they can learn more about you.

: [00:44:05] You know back to that event like like I mean not just hooking up. And actually I thought that was amazing. You write a great super entertaining and signed signed book by Mongar signed book collection and that’s what I thought I’d never get. I was like you got to be kidding me. I mean does it get freaking awesome meadowhall mold you order to participate. As far as us I mean. Yes. So we’ve got the three books you know eyepatch advisor quantitative value and quantitative momentum the two Quambatook momentum are a little bit hard core fear.

: [00:44:42] It have been doing science for a while but you know go for a challenge and then we have a blog partic dot com for Misha’s empowered through education so we’re not going to sell you anything. It’s what it is trying to help people out and we hope that’s reflected in the amount of content all free resources that we give folks out there.

: [00:45:02] I really want people to remember this because that ETF tool we were talking about earlier I going to have a link in the Schoenaerts for that. This thing is awesome. You guys really need to check it out it’s completely FREE. It’s 100 percent free so check it out. I think you’re going to be pretty impressed when you start playing around with it.

: [00:45:17] With respect to that tool I feel free to reach out later. Like we’re just trying to you know get better all the time so the next day you’re trying to break that thing and you find some you know broken or. Man I wish I had this. Just let us know. We want to actually make an app like the best tool on the web for people that want to get transparency on what they’re buying.

: [00:45:38] All right well West Gray thank you so much for coming on the show. It’s always such a pleasure to have you here. And we really appreciate it.

: [00:45:46] Always always enjoy it.

: [00:45:48] So guys I wanted to conclude this episode by telling you about our community event that we’re having alongside with the Berkshire Hathaway shareholders meeting. So this is open to anyone that wants to attend. And we always have such an incredible time together. You don’t need to own a three hundred twenty five thousand dollar share of Berkshire aid to attend we explain exactly how you can do it on our websites. Don’t worry about that. Warren and Charlie aren’t getting any younger and the time to see them is as right now we have plenty of people that come to the event all by themselves. But the common thing that we hear is that it was so easy for everyone to make friends and they had so much fun with all the other peers that attend the meeting. We do everything together so you won’t miss anything or you won’t feel left out if you’d like to attend this meeting with Stig myself and some of the guests that we have on the show. Simply go to THP Berkshire dot com. We bought the domain and we have a pointer to an information page where you can sign up and you can learn exactly what you need to do to attend the meeting. So let me repeat the address so you don’t forget it’s THP Berkshire. All one word dot com. We would love to hang out with you. So come and join us.

: [00:47:00] That was all that press on the hat for this week’s episode of the investors podcast. We see again next week.

: [00:47:06] Thanks for listening to the IPO to access the show. No courses for forums. Go to the investors podcast dot com. To get your questions played on the show go to ask the investors dot com and win a free subscription to any of our courses on the IP Academy. This show is for entertainment purposes only. Before making investment decisions consult a professional. The show is copyrighted by the IP network. Written permission must be granted before the syndication. We’re rebroadcasting.

Books and Resources Mentioned in this Podcast

Meet up with Preston, Stig and the TIP Community in Omaha for Berkshire Hathaway’s annual shareholder meeting: TIPberkshire.com

 

Dr. Wesley Gray’s  newest tool for ETF investing discussed in this podcast episode

Dr. Wesley Gray’s website: Alpha Architect

Dr. Wesley Gray’s book: Quantitative Momentum – Read Reviews for this book

Dr. Wesley Gray’s book: Quantitative Value – Read Reviews for this book

Dr. Wesley Gray’s Twitter

Seth Klarman’s book, Margin of Safety – Read reviews of this book

Benjamin Graham’s Book, Security Analysis – Read reviews of this book

Benjamin Graham’s Book, The Intelligent Investor – Read reviews of this book

Ray Dalio’s Video on how the Economic Machine Works

Ray Dalio’s white paper on Macro

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