Jim O'Shaughnessy: The Psychology of Investing

Jim O'Shaughnessy is a Wall Street legend and the Founder, Chairman, and Chief Investment Officer of O'Shaughnessy Asset Management, which has $6.2B in assets under management. In this conversation, Anthony Pompliano and Jim discuss the psychology behind investing, the similarities between the Dot Com Bubble and crypto, and whether or not Bitcoin can act as a store of value.

• 4:33Speaker 00

  And so I got an inkling that not paying up for a stock was a good way to invest. I did a comparison between the Dow stocks with the highest PEs versus the lowest PEs. And there was no comparison. Buying annually the 10 with the lowest PE just absolutely obliterated the 10 highest PE stocks. But then I also looked at dividend yield. I ultimately wrote an article for Barron's in 1993. You might be familiar with the famous dogs of the Dow strategy. Well, I took that back to when the modern Dow was created. There were a couple of other books, so I do not claim credit for having invented that strategy.

• 5:17Speaker 00

  But the other books only really went to the 1950s. And so I thought, well, you know, the Dow's been around since the late 20s. Let's go see how it does and we'll have this huge out of sample holdout period to see whether it works then as well. It did. And of course, I'm an 18-year-old male. I had other interests, including girls and parties and all of those things. So I kind of set that aside. Went to college and then met my current wife of 36 years at a college summer party. Graduated college and then started back in earnest. And now I had computers, so now I was really dangerous. Now you're rocking and rolling.

• 6:01Speaker 00

  And so I got hired by a big pension fund in the Twin Cities called Control Data. It was an old conglomerate. And back then, you know, the dark ages really were dark. A lot of people didn't even know what style their portfolio manager was using. Were they growth? Were they value? Were they growth at a reasonable price? You know, all of these things. And they said, we want you to come in and make some sense of this for us. So I founded the company O'Shaughnessy Capital Management in 1987 to do that. And we created what were called normal portfolios. They're like highly specialized benchmarks.

• 6:42Speaker 00

  It's not like using the S and P 500 or using the Russell One Value, you know, as a kind of a general benchmark for how a manager might be doing. What we did was take the manager's portfolios, put them on a database, look at the most extreme differences in their portfolio from that universe, and then use the most extreme differences to screen the same universe for a portfolio of stocks that looked, acted, and most importantly, performed like the underlying manager. The whole purpose of a normal portfolio was really simple. It was, is this manager, through his or her activity, trading, selling, buying, adding

• 7:26Speaker 00

  any significant value to their underlying style, or is it all the style? Well, what we found was my kind of aha moment. Even though we attributed huge transaction costs to the portfolios that we created as the normals, they killed their underlying managers. And I don't mean just by a percent or two. They absolutely destroyed them. Why? Because this was the inkling of, I wonder if that cartoon by Kelly is right, Pogo, we've met the enemy and it's us. And that's when I started to develop the theory that, basically, human beings are

• 8:11Speaker 00

  designed to suck as investors. Right? So we are optimized towards a history that no longer exists and hasn't existed in eons. Right? When we're out walking on the savanna and we see a bush rustling, it's probably a very good idea to turn around and run like hell. Right? Because you don't know what that is. It could be a predator, it could be something else, but you're not going to take your chances. You're just going to run. Well, all of our ancestors of everyone sitting in this room ran.

• 8:44Speaker 00

  So the ones who didn't run, the braver, all got killed. And so that, that made us optimized to be very, very fearful of, of perceived threats. And so when markets, as we know, are incredibly volatile, what do people do? The amygdalia takes over, the fear takes over the brain, and there's almost nothing you can do to fight it, unless you are a quantitative investor who does not override their model, right? So I started reading a lot of what is now known as behavioral finance. Um, and actually I found a book by a guy by the name of Robin Dawes, a Brit,

• 9:27Speaker 00

  uh, who, his book was actually about psychotherapy, but he had a great chapter uh, about all of the studies that had been done over actuarial outcomes, i.e. algorithmic outcomes, and clinical outcomes. That means I'm the doctor diagnosing you. And when they started all these things in the 50s, they all thought, all of the researchers thought that the human expert was going to soar above these simple algorithmic solutions. The algorithmic solutions destroyed them. And they destroyed them for one reason and one reason only. They were consistently applied time and time and time again.

• 10:11Speaker 00

  We humans are far more interesting, right? We get hung over, we have a fight with our spouse, we're in a bad mood, or we're in a good mood. And we let that influence our decisions in financial markets. You know, there's a study that just sticks out in my mind, and that is about people trying to get parole. If you want to get parole, make sure that you are one of the first appointments of the day. The people who are at the, you know, the eight to 10, uh, in their hearing, they get parole at, at something like 85% of the time. Guess who almost never gets paroled? The people whose appointment is right before lunch. And why is that?

• 10:54Speaker 00

  The judges are hungry. And so they're like, nope, nope, nope, time for lunch. And you know, it's amazing, but I've collected these examples over the years and you know, I often say to people, we have known about this for a long, long time. One of the best books that I think every new investor should read is Reminiscence of a Stock Operator, The Fictionalized Life of Jesse Livermore, who was a big trader back in the 20s and literally was short the market going into the 1929 crash. People, he had to hire security guards because people wanted to tear him limb from limb.

• 11:34Speaker 00

  Because again, if you understand human history, if you understand human psychology, we all look for a scapegoat, right? We had very famous scapegoats during the financial crisis, right? And that hasn't changed at all. And so, he had to go into hiding. And ultimately, the real sadness of Livermore is he ended up killing himself in the Sherri Lehman Hotel here in New York because he finally had that last trade which bankrupted him. And even though he knew, right, and his whole book, Reminiscence of a Stock Operator, is all about, nothing ever changes. The same thing that led Isaac Newton to buy in

• 12:16Speaker 00

  at the top of the South Sea Trading Company back in the 1700s is happening to us today. So I always say, different play, or sorry, different players, same play.

• 12:28Speaker 01

  Yep, absolutely. So, speaking of bubbles buying the top and kind of nothing changing, you know, you have a historian-type view of financial markets over a very long period, centuries of time. And I tend to agree with you that different players, same game. If you apply that to cryptocurrency, Bitcoin, digital assets, I think that many people would argue, we're actually seeing different players, same game, on steroids.

• 13:02Speaker 00

  No question about that. And so, you know, my disclaimer is, what I know about crypto, Patrick O'Shaughnessy, my son, taught me. And literally, he taught me in a Wichita hotel lobby while we were waiting for the golf bus to come. And I looked at him, I went, alright, Patrick, you know, because he's doing his whole Hash Power thing, which I thought turned out really well. But I go, okay. I'm five years old, explain it to me. And so I have, I, let's put it this way, I have just enough knowledge to be dangerous. And so, and so I always go into my standard, here is something financial people never say enough. I don't know. Okay?

• 13:47Speaker 00

  I don't know, and if we're gonna use that as our jumping off point, I'm happy to talk about it. But listeners, I don't know. So, I don't know. Sometimes the three, yeah, gets it across.

• 14:00Speaker 01

  A- absolutely, I mean, look, I, I think that, uh, the beauty and why I wanted to talk to you, right, was, uh, there is some, uh, ignorance and bliss, or are there some bliss and ignorance, right, around, um, the asset almost doesn't matter.

• 14:14Speaker 00

  No, and, and look, I, I've always said that the four horsemen of the investment apocalypse are fear, greed, hope, and ignorance. And if you think about that, only ignorance is not an emotion. Fear, greed, and hope have wiped out more fortunes than anything historically in auction-based markets. Um, and, you know, I, I, look, the last edge, in my opinion, is to arbitrage human behavior. Why? Markets change minute by minute. Human being and human nature changes imperceptibly millennium by millennium. There's your edge. Right? Because even though people are gonna say, oh, we'll never do that, we would never, ever, ever do that, they say that right up until the minute they do it.

• 14:58Speaker 00

  So, you were kinda looking for, uh, you know, where have we seen this movie before?

• 15:03Speaker 01

  Well, and I think, just, just to clarify, right, so, the asset is highly liquid, global, you know, it's all this stuff, but the bubble, right, or, or the correction that we just saw over, let's say, the last 12 months, I think, is a, a, a pattern, especially when you literally look at it on a chart, that is very, very reminiscent, and almost an, an exact overlay of many markets previously.

• 15:29Speaker 00

  Oh, definitely. In the fourth edition of What Works on Wall Street, uh, we had, uh, two charts in there. One was, uh, the South Sea Bubble that Isaac Newton lost a fortune in, and the other one was the NASDAQ. And they're identical, basically. Really? And, you know, we, the, the, the time that I remember that is so reminiscent of what we're seeing now. A little, a little of the edges off, though, because the correction's been pretty significant. Generally speaking, when the corrections get to be this significant, people are feeling real pain. And so the ebullience and the enthusiasm definitely wanes. Um, like Rothschild saying, wait until there's blood in the streets to buy.

• 16:15Speaker 00

  Um, but, uh, going into the dot com boom, uh, so this, I wrote a paper called the Internet Contrarian, which I can send you if you're interested, in April of 1999, basically outlining why I was about as bearish about any trend during my career. Um, and I said, when this ends, and it's going to end badly, the number of books that get written about, uh, by the, by authors, it's just going to end so badly because ultimately economics matters. And, and then what did I do? I founded an internet company.

• 16:57Speaker 00

  Not too smart, this one. Uh, so it was a company called NetFolio. It was the first robo-advisor in 2000. Um, and the, the valuation extremes were, I mean, it was crazy. It was literally crazy. And what, what happens, here's the guy who's talking about, you've got to have rules governing your emotions. You cannot get excited about this. It's going to ruin you. It's going to ruin you. Getting a good idea, which I think it was a good idea, for a robo-advisor, you could, uh, it's not like the current robos. It actually lets you trade without a cost. Um, and you could build your portfolio.

• 17:38Speaker 00

  We would show you a bunch of backtests on portfolios and you could go from very conservative to very aggressive. Uh, anti-smoking, kick Philip Morris out. The next name on the list comes up. So it was a pretty slick, uh, environment and offering. And of course, the ultimate internet crash came when a guy by the name of Jack Willoughby, who I know, he's a very interesting guy who writes for Barron's and very smart, but sometimes a little like Columbo. In other words, he's so smart, he tries to kind of convince you that he's not, but you can see it. Those are the ones to watch out for. Definitely. And so, he kind of thought, he was musing with his editor and he goes, "I wonder how much cash all of these internet companies have?" Yeah.

• 18:24Speaker 00

  "And what their burn rate is?" "Yeah, well, it would seem to me that if they can't raise more money, that these are all their death dates." Yep. And they're like, "Do it. Write the story." Now, the story's name, you can find it online. I'll send you a bunch of these links. But they changed the name from "Burn Rate" to something else, "Burning Money" or whatever. But that story literally took the internet down. Because it was like, everyone collectively woke up at exactly the same time and went, "Oh my God, we're all gonna die." Yep. And boom. And that was kind of it. It was the end. All the VCs,

• 19:08Speaker 00

  we had VCs wanting to throw huge valuations at us, disappeared. And, you know, the number of careers that got ruined in that. I once debated a guy on stage, because we always come at investing kind of from a value perspective. Yep. Although we do use momentum and other things, so we're not, you know, and quality, and we have a very kind of complicated sauce now. But he was onstage in Minneapolis with me, big crowd, and his, and it was a debate, and his advice to the people in the audience was, "Only buy technology companies, and especially internet companies."

• 19:54Speaker 00

  That was it. And I kind of looked at him, I said, I'm sure I heard you wrong. You didn't just say to buy not only just one sector, but a specific component of that sector? And he goes, he goes, the, the, the economy has radically changed forever. It is never going back to bricks and mortar. And you know, I was 39 at the time, he's saying, Jim, you know, you're, you're a bit of an old codger for someone who's only 39 years old. And I said, but, but math. And things didn't go well.

• 20:27Speaker 01

  It's, uh, we like to say the pesky facts.

• 20:30Speaker 00

  Yes, the pesky facts. And you know, so, so markets have always done this. And I think that that is the thing. My, my big areas of study, obviously, are in the, on the quantitative side of things. I, I've spent 30 years studying that side of the market. But I've also spent a lot of time understanding evolutionary biology and psychology. Um, because if you get a really good understanding of men and women and the way we are emotionally designed,

• 21:07Speaker 00

  uh, you can, you can have much greater faith in saying, nope, it's going to happen exactly the same way it happened before. And, and you know, it's funny because something that didn't cause anyone any consternation six months ago, now becomes, uh, that is, that's going to kill us. So, uh, you know, uh, the US government is going to make crypto illegal. Uh, okay, uh, and they're going to give the death penalty, uh, if you are found having crypto. Pretty strong deterrent. You know, FDR did it, uh, with gold.

• 21:46Speaker 00

  Uh, he confiscated all gold in the 1930s because he was going, moving completely off the gold standard because he had to. And, uh, everyone complied. And so having the world's biggest economy be unable to, uh, participate in crypto would definitely put a, a crimp in its style. Conversely, if you look at black markets, right? And that is something that I've looked at over the years. Black markets are enormous, even in free market societies like our own. Think about housekeepers, think about drugs, think about people who sell cigarettes that don't pay the tax.

• 22:30Speaker 00

  So even in a relatively free market like the US, huge black market, and then take places like Venezuela or whatever, and it's all black market. The interesting thing about those black markets is they are all priced in US dollars. So there is in inertia, a huge amount of money that's at stake. And sure, could some of those people convert their their dollars to cryptocurrency? Actually, there's a lot of good reasons why they should, right? Uh, but you know, a lot of, again, inertia is another one of the laws that I just love, and thank you, Sir Isaac Newton.

• 23:13Speaker 00

  You know, people are really strange in that, oh, I've got time, I've got time, I've got time, and then their time runs out. So I think that, you know, I, as I say, I don't know enough to to be a bull or a bear on on the whole space. We were talking earlier, and I think that one of your strategies, I know you have many. But one of your strategies about during the gold rush, you know, building the hotels, selling the pickaxes, selling the pails, that works. That works really well.

• 23:52Speaker 00

  And so I think that there's all sorts of secondary and ancillary people who can make a lot of money from crypto. But I definitely think that the the crypto world is still mysterious enough. Even to somebody like me who knows just enough to be dangerous, I know guys, I'm 58, so I know guys my own age, don't have a clue. Yep. And they'll call me on the phone and they'll say, Jim, you know, you you understand this crypto thing, and I go, no, here's Patrick's number, call him. Uh, because and and frankly, we uh, Oshana family partners, which is our family office,

• 24:37Speaker 00

  did make a small investment in crypto just to see how it worked. Uh, because we thought, well, this has the potential to be big. Um, so we want to see, I'm a huge believer in you can't learn anything unless you've got to get in the game.

• 24:53Speaker 01

  Yep.

• 24:54Speaker 00

  Uh, you know, because what happens is you intellectualize everything and oh, I would have definitely sold there. No, you wouldn't. You wouldn't have sold there.

• 25:02Speaker 01

  Everyone's a genius in hindsight.

• 25:03Speaker 00

  Exactly, exactly. Everyone's from Lake Wobegon, right? Above average. Uh, so, uh, I, I believe that, you know, we're doing a lot of really interesting work right now on machine learning. Um, and, uh, again, to really, really understand, you've got to have, you've got to have your own money on the line.

• 25:25Speaker 01

  Absolutely. What, um, let's talk about kind of the international, um, you know, kind of economic situations that are occurring, right? So you've got, uh, obviously Turkey, right? You've got Iran, you've got Venezuela, Zimbabwe. Uh, never these countries are either close to or are experiencing hyperinflation, et cetera. Um, you know, is there any time previously that you can think of where, you know, there was, I don't want to say it's widespread because it's still, you know, just a handful of countries and they're kind of the usual suspects type thing. Um, but where economic, uh, situations or chaos to some degree, uh, internationally really drove a change in investor interest in certain asset classes in the U.S.?

• 26:11Speaker 00

  Um, not so much in the U.S., but, uh, the best example of hyperinflation ruining a country was the Weimar Republic in Germany, uh, which extended to, uh, kind of vassal states, Austria. Um, for a brief time, people were literally going to the zoo and killing the animals to eat them.

• 26:32Speaker 01

  Wow.

• 26:33Speaker 00

  Uh, so. Things have gotten a lot worse. Um, but, uh, generally speaking, uh, when you have, when you have several things in place, um, you, your, your risk of that kind of nightmare economic apocalypse uh, is reduced rather dramatically. Uh, the first things is a relatively free market. Uh, the United States likes to say we're a free market. We're not a free market society. We are a regulated, uh, in many instances, uh, uh, captured by corporations of the political, uh, system, but still relatively free.

• 27:15Speaker 01

  Definitely compared to counterparts.

• 27:16Speaker 00

  Exactly, right? So we, you know, we're the cleanest shirt in the pile of dirt laundry. Um, the other thing that's really, really important is the rule of law. I think actually the rule of law is the most important. Uh, when you can adjudicate your disputes through a well set up and well respected and believed in system, that goes a really, really long way towards keeping all those boogeymen of hyperinflation and everything out of the picture. So it's not a surprise that when you see those kinds of economic events and they're devastating and I, I don't want to sound at all flipped, these people are really, really suffering.

• 28:02Speaker 00

  And, and so, uh, but, you know, there's a script for not having that. There's kind of a script for having it too.

• 28:10Speaker 01

  Of course.

• 28:11Speaker 00

  And the script for not having it is not democratic, not free institutions, no rule of law. And whenever you see a country that adheres to those, those, what I would call that toxic brew.

• 28:27Speaker 00

  Uh, the chances of that kind of thing happening are much, much higher, but keep in mind, there's nobody in Venezuela buying anything other than in US dollars.

• 28:37Speaker 01

  Mm-hmm.

• 28:37Speaker 00

  And that has remained very, very stable there. So if you're crazy and wanna, you know, use their currency, well, good luck. Get your wheelbarrows out.

• 28:46Speaker 01

  Yep.

• 28:47Speaker 00

  Uh, but, uh, again, markets are fascinating things because what they do is they find a way. And, and it's like, so just a brief digression. I tend to have a, a, a political outlook that is very different than most people. Um, I, I'm what I would say kind of a libertarian. Uh, and, and I think of things like drug laws. I think drug laws are insane. We have all of the history that shows that they're insane. We have all of the history that shows they created a much larger mafia.

• 29:26Speaker 01

  Mm-hmm.

• 29:27Speaker 00

  And we have all of the history of showing even in a great free democracy, uh, country like our own, a corruption at the upper levels of government, which is very troubling. Look at what, uh, they've done in Portugal. They made drugs, they decriminalized drugs 15 years ago. Guess what's happened? Drug use has plunged. All of the good things and all the kind of, you know, things that you could, if you were able to really think about it, happened. Now, does that mean that I personally take drugs? No, I don't. You know, I, I, I really don't. Um, I, I remember once at a party, I coming home and looking at my wife and saying, "You have no idea what a boy scout you're, uh, married to."

• 30:12Speaker 01

  But, but I, but I, I think that this is really interesting, right? Because it is, uh, you know, I, I think most people want to do what they're told they're not allowed to do.

• 30:24Speaker 00

  Oh, absolutely.

• 30:25Speaker 01

  There's no element of that. And so thi- this, uh, this work that you've done on the human psychology and how they interact with economic markets and stuff is really interesting because I think also, um... You know, somebody recently told me, they said, I think there's a saying that, you know, basically, when people can print money, they will.

• 30:42Speaker 00

  Oh, yeah.

• 30:42Speaker 01

  Right?

• 30:42Speaker 00

  Sure.

• 30:43Speaker 01

  And so I think that, you know, when you look at these, you know, kind of hyperinflation countries, literally, there's no checks and balances. And so there's usually one person who's kind of in charge of everything, and they print money.

• 30:53Speaker 00

  Yes, they do. And, you know, what else is interesting is, I know, and I can't disclose, because I, you know, it's kind of like, I could tell you, but I'd have to kill you. When we changed our currency completely, there was a reason for that. Some very bad people had treasury plates. And so, in a advanced democracy like the United States, done. I mean, that happened overnight, making those old plates absolutely worthless. So, when you have a very high-functioning democracy with institutions that have been

• 31:36Speaker 00

  around for a long, long time, those types of things don't generally happen. And the other thing that I always tell people, and I usually get non-Wall Street people just laughing in my face, and it is, people do not really understand that Wall Street is entirely based on trust.

• 31:59Speaker 00

  You know, get decayed. You know what decay means? Don't know. Right? If you get decayed in a trade, you're probably never, ever gonna trade with that guy or woman again, ever. And they are effectively boxed out. Because everything that we do is done on our word. You know, when you get on the phone, you say, whatever. Like, the guy buying the crypto earlier, he wasn't on the phone, but if, if, if his counterparty couldn't trust him, well, the markets would collapse. So, I think that the United States, obviously, has probably one of the best functioning market systems.

• 32:44Speaker 00

  Some in Europe, especially, interestingly enough, eastern, the former Eastern European states, like Estonia, etc., they have set up some really cool stuff. And, you know, like, flat tax rates, you can do it all by computer. Because they had the opportunity to, right? And that's the other thing that I'm a big believer in. Legacy can be a problem, right? So if you're a monster company and all of your software is circa 1985, getting rid of that and updating it to 2018 is her clean effort. And so you definitely, you know, I think you and your team are in a position that's interesting

• 33:29Speaker 00

  because you don't have to deal with any of those situations and you can kind of have best of class right away.

• 33:37Speaker 01

  Absolutely. Let's talk a little bit about money and kind of money supply. And so, you know, the US currency is based on a inflationary model. Bitcoin is obviously based on a deflationary model. Just given kind of, again, your experience in markets and, you know, really taking this economic perspective, pros, cons, you know, what do you think is kind of your outlook on that deflationary model and if it could work?

• 34:06Speaker 00

  So generally speaking, we did a study of when stocks performed the best.

• 34:12Speaker 01

  Okay.

• 34:13Speaker 00

  And interestingly enough, they did best under moderate inflation.

• 34:20Speaker 01

  Interesting.

• 34:21Speaker 00

  Not high inflation, but very, very moderate inflation. Deflation is a scary thing for an economy. And if you think about it for just a second, you'll understand why. We are going out and let's say we both want to buy a car. And we need the car. We need it for our job. We've got to get to our job, et cetera. But we look at each other and we say, yeah, but if we wait a month, this is going to be like $500 cheaper. And so what happens in a deflationary spiral is you lose the confidence of the consumers.

• 35:01Speaker 00

  And because they think in their mind that, wow, if I just wait, it's going to be a lot cheaper. So consumption declines precipitously and people hang on to cash. And so the, you know, the best case scenario, I think, would be if the various cryptocurrencies didn't have any You know, they could truly be a store of value.

• 35:32Speaker 01

  Mm hmm.

• 35:32Speaker 00

  Right? With with very small movements.

• 35:35Speaker 01

  Absolutely. And that's really because if you have a deflationary model at some point, take Bitcoin for a second. Twenty one million Bitcoins will be mined and be available, right? Some will be lost, some will, you know, people will remember they have them. So there's some, you know, kind of circulation that is actually not accessible. But for the most part, there will be a set number. And at that point, the logic, I think, holds that, you know, there will be some market equilibrium that's found, right? There won't be kind of constant supply going in or out of the system. And so that should be a decent store of value if you can find that equilibrium and that stability in the price.

• 36:14Speaker 00

  Yes.

• 36:15Speaker 01

  Theoretically.

• 36:16Speaker 00

  Big F.

• 36:17Speaker 01

  Yep.

• 36:17Speaker 00

  And so, you know, as an outsider who just is kind of interested in this and and watching where it's going.

• 36:26Speaker 01

  Mm hmm.

• 36:27Speaker 00

  Um, I definitely think a lot of those thoughts, you know, I think, uh, well, if you really can't have something uh, that people look at as a store of value that has twenty and thirty percent movements. Because it's, it, it, again, to psychology.

• 36:49Speaker 01

  Yep.

• 36:50Speaker 00

  If if if we're getting all excited because our Bitcoin went up thirty percent or we're despondent because it went down thirty percent. The fact is that does not lead to a sense of certainty about it. And, uh, you know, I think that's something that the US dollar still has. It, you know, I've read all the stuff on how it's a fiat currency and, you know, yada, yada, yada.

• 37:14Speaker 01

  Debt crisis.

• 37:15Speaker 00

  But, yeah, yeah, yeah.

• 37:16Speaker 01

  Yep.

• 37:16Speaker 00

  Um, and and I'm not convinced. I'm just not convinced. And when we did the QE, it had no inflationary effect and it had no inflationary effect because there was simply no demand for that money. It got it got put on people's bank balances.

• 37:33Speaker 01

  Mm hmm.

• 37:33Speaker 00

  And, you know, when when people understand that, they don't go crazy, right? And so I think I'm fascinated by the idea.

• 37:47Speaker 00

  Of a currency that can keep its store of value, I think the proof of work concept works really well.

• 37:55Speaker 01

  Yep.

• 37:55Speaker 00

  I think that the, the whole delivery system and the ability of transportability and all of that, look, I think if you were designing a currency, there's a lot of really good features.

• 38:08Speaker 01

  Yep.

• 38:09Speaker 00

  Of cryptocurrency. Until, right, markets treat it like a speculative asset, as they have been.

• 38:16Speaker 01

  Mm-hmm.

• 38:17Speaker 00

  And then suddenly, everyone's just like, ah, I, I, I, I'm, I'm not gonna do this stuff.

• 38:23Speaker 01

  It, it's almost as if, even if it is the best currency, but you lose the, the consumer confidence, right, of not only price volatility, right, but security, right, would be another piece. And then the, the part that I think gets lost in this conversation a lot is the acceptance.

• 38:44Speaker 00

  Right.

• 38:44Speaker 01

  Right, so, so even if I can store value, I either have to believe that somebody else will one day want to buy this from me, right, to, to basically get out of that store of value, so another consumer, etc. But then if it's money, an actual currency, I have to be able to give it to somebody in exchange for some other value.

• 39:01Speaker 00

  See, and that is the magic of currency systems. And you know, if you know your monetary history, you know that we've used things all over the map as currency, you know, clamshells, literally.

• 39:13Speaker 01

  Yep.

• 39:14Speaker 00

  Tulips, obviously gold. And, and it has to meet the criteria you have just outlined. You have to be absolutely certain that if you want to buy my iPhone from me, that I will sell it to you and I will accept that currency as a store of value for myself. And you conversely have to have exactly the same belief. Yep. And so that's where I find this is kind of interesting, right? Because I think that if if the crypto market had been able to kind of be introduced with a little less volatility. Mm hmm.

• 39:59Speaker 00

  Because the one thing that I do know from the stock market is volatility terrifies. And and I don't mean, oh, I'm kind of nervous here. I mean, people do incredibly rash and silly things. Mm hmm. We had clients in the financial crisis, taking $250,000 out of their bank account and putting it in safety deposit boxes. And and, you know, I would be on the phone with them saying, uh,

• 40:34Speaker 00

  that isn't gonna help you. Yeah.

• 40:39Speaker 00

  And and so, you know, when people are and we're, by the way, we are all the same. Mm hmm. Everyone sitting in this room, everyone in your family and my family, everyone we've ever known, we are human beings, homo sapiens sapiens, right? That's because of the new prefrontal cortex. But we are still being, you know, and I can't remember the author and I would love to give credit to him because it's such a great quote. But he said something along the lines of, you know, we are operating 21st century software on 50,000 year old hardware. And, you know, I mean, I think that just encapsulated. Yep. We we just are not optimized.

• 41:22Speaker 00

  And so my my thing was to say, you know what? I'm just going to admit, I don't know. Yep. I don't know. What I do know, that if I was left to my own devices, I would panic too. Mm hmm. Right? Mm hmm. Uh, because I'm a human being and I I'm not having been excused, excluded or excused from that class. And, you know, I always shake my heads at the people who, I did a little experiment on Twitter, uh, last week and I I said, I put a picture of the Wall Street Journal from after the big crash in 1987. And I said, you're reading this for the first time, what do you do? Well, of course, like more than 100, oh, buy, back up the truck. But.

• 42:07Speaker 00

  No, you wouldn't have. But that's what's so cool about the way the human mind works. They honestly believe that they would have. Because, and they don't understand that they have hindsight and that that happened thirty years ago. And so it's in the past and there's no emotion, right? And so you really, if you tried to get into an argument with them, you couldn't convince them that they thought that they were lying.

• 42:32Speaker 01

  Yep.

• 42:33Speaker 00

  That's the funny way the mind works. So I, I definitely think that we are all subject to these rules. And, and if you want to understand any financial instrument, understand this human behavior and interaction and then see where are you in that phase, right?

• 42:54Speaker 01

  How do you see behavior change between,

• 42:59Speaker 01

  what I think many would consider the great investors from everyone else? Is there a change or is it they've basically done the prep work to prevent themselves from making mistakes during those, those weak moments?

• 43:11Speaker 00

  So, well, Sir John Templeton was famous for when stocks were doing very poorly. He would make a list of his favorite stocks and put buy orders in at prices way below where they were. And his reasoning was if the stocks ever got to that level, he would not have the guts to put the order in. He just couldn't do it. So there was a guy who understood his own human nature.

• 43:39Speaker 01

  Love that.

• 43:40Speaker 00

  What we do is we are entirely rules based. I never override. I mean, you know, people would say to me, well, you know, is it the formulas? Is it? No, it's not the formulas. You know, if you've got the best idea in the world, you can scream it from the rooftops. And people either won't believe you, won't, you know, hear you, and certainly even if they attempt to do it, won't do it right.

• 44:03Speaker 01

  Yep.

• 44:04Speaker 00

  And so we're not worried about that. What we worry about is, look, we're, we're constantly improving our, our algorithms that select models and portfolios and I've got a great research team. That's what we spend all of our time on. But the thing that I think I am proudest of is the fact that in my thirty plus year career history as an investor, I have never emotionally given in.

• 44:33Speaker 01

  By overriding a model.

• 44:34Speaker 00

  By overriding a model.

• 44:35Speaker 01

  Yep.

• 44:36Speaker 00

  And we had, and that's hard.

• 44:39Speaker 01

  Yep, and just to clarify, so people who are on the same page as us, what you're talking about there is you have a model that is, you know, based on data, right?

• 44:48Speaker 00

  Correct.

• 44:48Speaker 01

  Formulas that you've created that tell you when to buy, when to sell, when to hold, right? Basically, they give you directions.

• 44:55Speaker 00

  They give us directions and we follow.

• 44:57Speaker 01

  And you can either listen or not.

• 44:58Speaker 00

  Yeah.

• 44:58Speaker 01

  Right?

• 44:58Speaker 00

  We used to, we used to have a context or a contest back at Oshana C Capital, where we would put the list of 50 names that were being selected by our small cap growth strategy. And we would have everyone guess which were going to be the 10 big performers and which were going to be the 10 worst performers. Well, you can see this coming a mile away. Everyone that they thought were going to be the 10 worst ended up being, for the most part, the 10 best. And the 10 best ended up being the 10 worst. And so, I just, you know, I basically made my mind up after a trade that I actually wrote about

• 45:41Speaker 00

  when I sold a huge position of puts right, literally, on the Friday before the Monday stock market crash.

• 45:49Speaker 01

  Oh.

• 45:50Speaker 00

  And I did that, which I'll send you a link to, I did that because I was watching TV and I was listening to the radio. And everyone was like, oh, this is so overdone. We're going to have the biggest bounce back rally ever. And I let my emotions determine what I was doing. And I always sold all the puts and then Monday happened. And so, I thought about, I used to keep a trade.

• 46:14Speaker 01

  You had a bad Monday, but for other reasons.

• 46:16Speaker 00

  Yes, for very other reasons. But, but I also recommend people keep journals so that you remember what you actually were thinking in real time. Because again, the brain will play beautiful tricks on you. It will make you think that you were not thinking that way at all. And then you go back and there it is in your own handwriting staring at you in the face. And you go, oh, God, I was thinking that. And so, but I wrote a lot about that, thought about a lot of that. And this was concurrent with reading all these books on, on the efficacy of these various decision trees. And by the way, not just Wall Street.

• 46:57Speaker 00

  Horse handicappers handicapping races, doctors diagnosing liver cancer, psychologists determining whether somebody has a treatable problem or not, college administrators try to determine who to let in, all of them are outperformed.

• 47:11Speaker 01

  I don't know, have you ever read the book Algorithms to Live By?

• 47:14Speaker 00

  Yes.

• 47:15Speaker 01

  Okay, so my favorite example of this is they go to the Israeli military and the officer training course and they basically, you know, it's early in the training course and they say to somebody, you know, pick who's going to be the best officer and they give them some criteria as to what that definition is and they almost always pick the strongest looking, most, you know, egotistical kind of type A personality is that's the one that's going to lead us into battle, they're going to be the best. And when the bullets start flying, usually they're the one who, you know, runs into the truck and gets on the radio.

• 47:43Speaker 00

  You know, it's really funny, I read a guy who's really into geopolitics and one of his quips was actually, it was an interesting piece, but he was saying, he would show a picture of soldiers, right? And he goes, who are the best soldiers here? And of course you go to the strapped guys with the big arms and everything.

• 48:06Speaker 01

  The guy who looks like you.

• 48:07Speaker 00

  They are the skinniest, wiriest, because they're fast, they're smart, and they know, they have the muscle memory for just everything they gotta do. So appearances really can be conceiving or deceiving and, you know, I think that's kind of the, that's the thing that's interesting with crypto. I think that, I think that once there is kind of an agreed upon set of rules, that then crypto could do pretty well. I think that, and again, I don't know, because I am no crypto expert, but I think that, you

• 48:52Speaker 00

  know, institutional participation is vital.

• 48:55Speaker 01

  Yep.

• 48:56Speaker 00

  You've definitely got to get the bigger financial institutions being willing.

• 49:01Speaker 01

  Yep.

• 49:02Speaker 00

  And once that happens, then, then things might...

• 49:07Speaker 00

  They might develop in a way unexpected or unforecasted. But if they're involved, my guess is that that is an imperator that you don't like have right now. Right? A lot of it is being announced and they're planning on doing. But you know, it's kind of like, uh, we'll wait until the cash is in the bank. Um, and when you have that moment, I think, I think that will be a real milestone for the cryptocurrency community. Because the, uh, that lending the legitimacy of some of these big financial institutions. You know, that, that could be huge.

• 49:47Speaker 01

  Absolutely. What, um, what's the best piece of financial investment advice you've ever received? Right? In terms of from another investor, what's the best piece of advice they ever gave you?

• 49:58Speaker 00

  Um, well, I have a friend named Brent Bishore, and this is going to be advice. Uh, through Brent because it didn't come directly from Brent.

• 50:08Speaker 01

  Brent is fantastic.

• 50:09Speaker 00

  Came from, uh, Warren Buffett. And Brent went to a dinner with him and by the way, full disclosure, our family is involved with, uh, an investment in Brent. Um, anyway, uh, Brent is a very detail oriented guy and a really super nice guy. Um, and you know, he wanted to hear all about Buffett's diligence. And you know, he had his paper ready to take his notes and Buffett looked at him and he goes. Price is my only diligence. And as I kind of thought about that, I thought, wow, that is like really brilliant. Right? Because at some point, everything gets worth buying.

• 50:54Speaker 00

  For the most part, if it's functioning and you know.

• 50:57Speaker 01

  It's not illegal, right?

• 50:58Speaker 00

  Yeah, there's not, there's not some quagmire that you're stepping into.

• 51:02Speaker 01

  Yep.

• 51:03Speaker 00

  And, and it's kind of like, yeah, I mean, ultimately. Uh, Jamie Dian, Diamond once said, give me a, uh, C rank plan with A rank players. And I'll take that all day long over an A rank plan with C rate players. Um, so I think, you know, most investment advice is really elemental. And, and it speaks to what I call the well, well duh, right? You know, so you hear Buffett say, price is my only diligence. And you think, well, if it wasn't Warren Buffett, no one would pay any attention to him. But they would, they would, because when you think about it and you wrap that around your head.

• 51:47Speaker 00

  And, and I looked at Brenton went, wow, that's, that's really profound. So I think one, one of the things that I've been on recently is, look, I believe that people, if they want to be great investors, they have to create their investment scheme that's right for them. What is right for me might not be right for you. Read as much as you can and read outside the field of finance, definitely. But as you do that, take notes, see what resonates with you, see what doesn't.

• 52:27Speaker 00

  Ask yourself, would I really be able to withstand that kind of downturn? And then ask yourself an even more obvious question. Okay, how did I perform during the financial crisis? If I sold all my stocks in January or February, I know I got a problem. And then I got to try to build an investment strategy that will work for me. Listen, good investing is simple, it's just not easy. And, and that is, you know, something that a lot of people, you know, go back to basic principles. And, you know, get somebody to be a wingman for you because for the most part you'll panic.

• 53:11Speaker 00

  I used to say to people, you know, do a letter from your advisor that's from you. That says, Dear Mr. Advisor, Mrs. Advisor, I know that at some point in the future I will panic about, you know, and then leave a space where you can fill it in. And you are going to tell me what a stupid idea that is for me and then show it to me at the time. Again, as long as human nature remains what it is, I got a day job.

• 53:39Speaker 01

  Absolutely. What element of crypto do you think is most analogous to the work that you guys do? Right? So you guys are very quantitatively driven, you're very aware of human psychology and kind of the market forces that are driven by that. When you look at the crypto market, you know, and you look at your business.

• 54:00Speaker 00

  Sure.

• 54:00Speaker 01

  What's the thing where you're like, you know, that makes a lot of sense to apply this approach to?

• 54:04Speaker 00

  Sure. So the only thing that we would have in our toolkit that I would just sort of say was a natural for crypto would be our momentum composite. You know, most CTAs are momentum players, and when you look at the most successful models in, you know, cotton and gold and whatever, they're momentum models. I mean, because, you know, there aren't really fundamentals about crypto. And so I would think that momentum could be very applicable. And we have many different types of momentum. The one we use the most is a composite of momentum that includes standard deviation of return.

• 54:49Speaker 00

  So it penalizes the most volatile and it gives more support to the less volatile. I could see that working pretty nicely. I mean, you know, if somebody said, Jim, you know, I'm putting a gun to your head and you got to trade this crypto and you better make some money. I would definitely use a momentum model.

• 55:09Speaker 01

  It's amazing. All right. So I end each podcast by letting the guest ask me one question. And before I let you do that, I'll give you a second to think. I have to comment because I have been impressed with your GIF game on Twitter. For those of you that don't know, Jim is quite active on Twitter and over the last couple of weeks, all of a sudden, it's like he discovered the GIF feature and has been lighting the internet on fire.

• 55:38Speaker 01

  And I've literally laughed out loud a few times when I've seen the things that you've posted.

• 55:42Speaker 00

  Well, thank you. Look, I think that, you know, here's another thing that I've found is that most of the smartest people I've ever met, I've met a lot of people in my life, I've been very, very blessed and lucky. Most of the smartest people I've met in life have a good sense of humor. And, and, and that's for two reasons, right? Because a good sense of humor also sees the dark side, right? And so I figure, Gifs, if we can't laugh and have a little fun, what's, you know, what, what, what's a day for? All right. The question that I have for you is,

• 56:24Speaker 00

  why did you abandon your logo that I re-tagged onto your messages?

• 56:32Speaker 01

  Oh, the virus is spreading.

• 56:35Speaker 00

  I loved that.

• 56:36Speaker 01

  The virus is spreading with the, with the rocket. All right. So because you're asking, I will, I will let one of my secrets go. So I think of Twitter as a combination between conversations that we're all having on the internet as characters of ourselves, right?

• 56:57Speaker 00

  Yep.

• 56:58Speaker 01

  And so if you were to look at Twitter through the lens of WWE, for example,

• 57:03Speaker 00

  Right.

• 57:03Speaker 01

  Right? And I asked you, I said, you know, who is the hero? Who is the, you know, villain? Who is the kind of the clowny person, right? And who is the announcer? And you could probably say, ah, this person kind of fits that, that character, right? And, and so the first time that I said it was not intentional in kind of any grand plan, but the logic-

• 57:27Speaker 00

  That's often how things go.

• 57:28Speaker 01

  Of course. The, the logic behind it was, Everyone's worried about the technology, right? But what was fascinating me, and I think you know why I'm drawn to a lot of things that you're thinking about, is the psychological element of this. It was capturing the mental energy of everyone, right? Across every industry, across every age demographic, geographic, I mean, just everything.

• 57:54Speaker 00

  It's a good meme. It's a very good meme.

• 57:56Speaker 01

  And I was like, this is viral, right? In the sense of kind of from the technology world, but it's spreading like a virus because no one can stop it, right? When a product goes viral, you can basically pull the plug and stop the growth. With a virus, a lot of times you can't stop it. And so I was like, you know, the virus is spreading and the internet lit up, right?

• 58:17Speaker 00

  Totally did.

• 58:18Speaker 01

  And people kept saying it over and over and over again.

• 58:19Speaker 00

  You were off for a little while and you came back and I saw that you didn't have it and I actually put it on.

• 58:25Speaker 01

  I do remember. Well, the reason, so when I came back.

• 58:28Speaker 00

  I went, "Pump, you're slipping here. You got a tagline."

• 58:32Speaker 01

  No, so there was two things as to why, and it wasn't, again, not even really intentional, but when I took the Twitter break, what I realized was it just, Twitter specifically, and I was during a drawdown, it was through all this stuff. I think that.

• 58:48Speaker 00

  A little more sobriety, a little more.

• 58:50Speaker 01

  Well, the pro and the con of all of this playing out digitally, right? And kind of on Twitter is this idea that somebody can come up with a thought, a thesis, you know, whatever, throw it out into the open and there's people from all walks of life, all perspectives, all levels of success and failure, and they just attack, right?

• 59:13Speaker 00

  True.

• 59:13Speaker 01

  Now, the good part of that is the law of attrition takes over. And so the ideas that can withstand those attacks are usually the strongest and have the most merit and kind of end up persisting over some long period of time. But there's a lot of ideas that never make it through that attrition.

• 59:30Speaker 00

  You know, there's a guy on Twitter who I follow and actually support his work. He's called Memetic Value.

• 59:36Speaker 01

  Okay.

• 59:37Speaker 00

  And he has a really interesting deck about, you know, John Campbell's, the hero's journey.

• 59:44Speaker 01

  Yep.

• 59:44Speaker 00

  And how, you know, every story that we hear is like one of six. But one of his ideas is there always has to be a scapegoat. And he talks about how the scapegoat, Steve Jobs, turned into the hero. And it's really interesting. I'll send you the link because I think you'd enjoy following him.

• 1:00:06Speaker 01

  For sure. Twitter is one of the places where, again, I think human psychology and incentives just play out perfectly.

• 1:00:15Speaker 00

  You know, it is the world's largest psychology experiment ever conducted, and we still don't know how it's going to turn out.

• 1:00:25Speaker 01

  50 years from now, when they are going through the data and they see your GIFs, you're gonna throw some sand in the wheels there.

• 1:00:36Speaker 01

  This is awesome. Thank you so much for coming in and sharing your perspective with us.

• 1:00:41Speaker 00

  Alright, thanks for having me.

• 1:00:43Speaker 02

  Hey, everyone. If you like this podcast and want to help crypto take over Apple, Spotify, and wherever else you're listening to it, please do us a favor and rate, review, and subscribe. To review, simply go to the Off the Chain homepage and scroll down until you see those five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way for us and the entire of the crypto takeover. See you next time on Off the Chain.