4 Concentrated Factor Investing with Wesley Gray, PhD, Alpha Architect

Transcript:

Wes Gray, Alpha Architect – Concentrated Factor Investing Simple, but Not Easy

Pierre Daillie: [00:00:00] Hey everyone. We've got a really great episode and a really great conversation on deck for you today. Our guest is Wesley Gray CEO of Alpha Architect. I'm Pierre Daillie and my co-hosts are Mike Philbrick and Rodrigo Gordillo of ReSolve Asset Management SEZC. Welcome to Raise Your Average.

Disclaimer: [00:00:18] The views and opinions expressed in this broadcast or those of the individual guests, and do not necessarily reflect the official policy or position of advisor annalise.com or of our guests. This broadcast is meant to be for informational purposes. Only nothing discussed in this broadcast is intended to be considered as advice

Pierre Daillie: [00:00:40] and, uh, our guests today. We're very excited to bring you Wes Gray from Alpha Architect, uh, Wes is the CEO of Alpha Architect and, uh, Wes, uh, for those of you don't know is also Superhuman,

Wes welcome to the show.

Wesley Gray: [00:01:01] Thanks for having me here. Honoured to be here.

Pierre Daillie: [00:01:03] Very excited to, uh, to get a chance to have this chat with you and to hear about everything you're doing. Um, Wes, I think maybe to kick things off, it makes sense to talk about the, sort of the arc of your career, how you, uh, where you began, where you became interested in investing, um, and, and where that led you, uh, because it's been really sort of, uh, uh, varied and winding path for you, hasn't it?

Wesley Gray: [00:01:31] Yeah, it has been, I guess I give you the nickel tour, uh, going way back. Um, but yeah, I mean, I, I basically grew up on a cattle ranch and I had to work all the time and I basically asked my dad, like, this work sucks, like. You know, you know, how do you not have to do this? And he's like, Oh, you know, you should go get educated, blah, blah, blah.

Um, you know, long story short, I somehow stumbled into the whole investing thing through my grandmother. When I was a kid, we was raised like four H animals. And then I was like, Oh man, this is amazing. You can use money to just make money. That's a lot better than like bucking hay bells all day. Um, so that was my original incentive.

Just, you know, I hated doing manually April all the time. Um, and so I just wanted to get rich and then I dunno if it's bad luck or good luck, but you know, went to school. I actually started liking like intellectually just investing and like, you know, financial economics, um, And so when I was in college, I basically, instead of doing summer interns, I was essentially the data monkey and the programming monkey for the, uh, like the Wharton finance department.

And I actually liked it and they said, Hey, you know, you should do a PhD because this is what you do all day is just do research and like, think about stuff and get paid. I was like, well, that sounds awesome. Um, and so, so right after undergrad basically went into a PhD program and then spent a few years there.

And then I also like Mike and Rodrigo know, like, I like to do crazy stuff sometimes. So I just need to take a break from finance. So I went to the service, um, we like the military service to be clear. And, you know, it was there for four years, came back, uh, wrapped up by a PhD and then went out to initially was basically a professor job.

But simultaneously, I'm sure we'll get into it. I got basically cold called by a billionaire who said, Hey, I like your work. Uh, you wanna work with us too? Um, and then everything kind of went from there. And then eventually, you know, I moved into full-time Alpha Architect and in what we do today, which is essentially our mission is empower investors through education.

So there's a lot of details in between there, but that's the, that's the one.

Pierre Daillie: [00:03:47​] So what was it that got you the cold call from the billionaire?

Um, so we had, well, it gets me back in the day, but I used to have like a blog, um, like before blogging became a thing, it was like an old blog spot. And if you guys remember, uh, like the initial platforms, uh, but I, so my whole idea was I used to read academic papers all the time, which I still do, but like, I always need like a disciplining mechanism.

Because one thing to just go read a paper, but if you force yourself to like do something with it, it means you actually got to like internalize a little bit. So, so the original intent of the blog was not actually to have people read it, but it was more of a forcing mechanism, where if I read a paper and then I had to like do some sort of summary and try to regurgitate out what it meant to me, that means I probably had to know something about it.

Um, and then the concept was like, maybe there's like five geeks in the world that would read this blog. Um, turns out one of the geeks was really rich. So that's really how it happened. Um, this, this guy, it just came out of 2008 and there were the biggest, you know, uh, hedge fund seeder in the world for 30 years.

And they lived through the Oh eight crisis and they're like, wow. Um, we should probably take control of our money and stop paying these people, these huge fees and not having any positive. Ability to get our money when we actually need it, we're going to get rid of all of them. So literally their mission was ...Fire all the hedge fund managers, take internal control. Let's let's manage taxes, manage fees, and, Oh great. We don't also trust anyone on wall street. Here's this maniac Marine guy that I like his blog. He seems pretty trustworthy. Or at least he doesn't know what he's actually doing. Uh, let's just call him up.

And that's basically what happened in the old days. You think, Oh, this is so niche who would ever care, but because like, you know, the internet has made your audience, not like, you know, a few people, but you know, 8 billion. I mean, even if you get one basis point of one basis point of one basis point you could have an audience of a million people now. It's the most weird thing you ever thought of.

So I think just dumb luck, just, you know, being in the blog world and having access to, um, you know, anyone who wants to read the internet, that's just how it happened. So good luck and good

time when you finished, you finished at U Penn and then what made you decide? I mean, aside from a sabbatical, but what made you decide that you wanted to go to, uh, join the Marine Corps?

Um, so I had always wanted to do the service, uh, like my whole life, but I just kept having an opportunity, cost problems. So, so originally I went in, got into Penn. I was like, well, I'd probably go to college and I'll delay that to when I graduate. And then when I graduated from Penn, I got, you know, when you go to these PhD programs, especially on my deal, they were paying me what I thought was a lot of money to go to school.

And I was like, wow, that's an amazing deal. You're going to pay me to go to your school to get a PhD, sign me up. Um, so, so then I was like, all right, I'll, I'll, I'll, I'll put on the service thing. And then, you know, then after doing a few years in those PhD programs, it's just, you know, total beat down. Um, and I was thinking, you know what, like I'm 24.

I, if, if I graduate with a PhD from university of Chicago, my opportunity costs thing, like my excuse is only going to be even higher. Like I got either I got either shit or get off the pot. Uh, pardon the French. Um, so, so that was basically, it's just the timing of that was it was now or never basically.

Um, so that's why I did it at that, that particular

Mike Philbrick: [00:07:33] time. It was hazing harder in the Marines or in Chicago?

Wesley Gray: [00:07:39] No, I actually think Chicago. I'm real good at dealing with physical pain for some reason. Like my mom's like that too. Like, I don't know. I just, I think I have maybe a genetic benefit there. Um, but mental pain is, you know, cause you got to actually sit there.

Like I thought it was pretty bad. Like physical pain is pretty simple to deal with, but the mental pain of like having to learn and rewire all your neurons, I thought that was much more challenging for me personally. But everyone's a little bit different.

Pierre Daillie: [00:08:11] So, um, you, uh, you started work, you started, uh, advising the, uh, billionaire family office and, and then that eventually led to you founding, uh, several companies.

And, and then,

Wesley Gray: [00:08:26] yeah, so, um, yeah, so the way it worked is that when we started and the initial deal was. Like I, I was like, Oh, this was great. I finally met some really rich person. Now. I finally got someone who can seed our business because as there as you guys all know the problem with asset management is you, you need a track record, you need capital to get capital.

So unless your uncle's like got a hundred million dollars, it's hard for normal people that don't have access to a lot of money to ever start asset management business. But here's my chance. Like, you know, because you know, Virginia they're here and we're friendly, we're hitting it off. I could do it, but, but the problem was they were actively getting out of the seed business.

So, so my ask was, Hey, you're about to like, and the dad was the one who actually controlled everything. I, I dealt with the son. Um, but essentially he's like, listen, man. Uh, my dad is just gave me the mandate to get rid of all seed deals and you want a seed deal that ain't gonna work. So how about we do this?

You helped me out give me two years. Uh, you know, you're basically going to be my full-time consultant, build out the family office, give us the tools, give us the training. And then if you guys do a really good job, uh, I'll tell you what all, all convince my dad to do a seed deal. So that's basically what happened.

Right? 2010, we started 2012 is when we got our initial 20 mill seed and then it went to 50, but it was basically a two year kind of prove yourself out and, and let's build a relationship. We'll pitch. My dad. If he's cool with like making an exception to his old rule of, Hey, we're getting out of seeding business, you know, we'll get, we'll get back in the chips.

And then, so that's, that's that really got us cooking. Um, and then just through this blog, and now everyone does this, but I don't know, just random rich people would, their geeks would reach out and say, Hey, ruin like what you guys are doing. Sounds interesting. How do I invest with you? Um, and so we did originally did the estimates and we kept attracting w you know, rich people that essentially were not, uh, very into paying taxes.

And so I used to do all kinds of like tax loss, harvesting, and building algorithms to figure out how to optimize. And then it's a long story, but we, we ran into the tax structuring of the ETF vehicle, which is a little bit different and more, um, Generous down here in the States versus what you can do up there in Canada, but essentially it's a deferral mechanism.

And we look at that, we're like, Oh my God, we do active factors. Like things that turn over a decent amount. And we, all of our clients hate taxes. This ETF thing looks like a no brainer and the wave of the future. And we'll got lucky after fact it was, but th that's so that that's where a business transition there around 2013, one of our clients gave us, uh, like a million dollars of working capital and we decided to get in transition and get into the ETF business basically.

And then we started that and pretty much the worst timing for value, uh, top tick tick, but, uh, the, the end of 2014, we launched a value product after having like an amazing run the, the three years prior. And then we decided to go public in the world and then it just, you know, it went bad, uh, ever since then.

So yeah, those Google got into .

Mike Philbrick: [00:11:44] It's coming.

Wesley Gray: [00:11:48] I'm way less down. I don't make comments on when, when values come. And especially when everyone says

Rodrigo Gordillo: [00:11:54] it's coming across today between growth and value, it's looking good.

Wesley Gray: [00:11:59] It's looking good. It's looking good. But so we got

Rodrigo Gordillo: [00:12:04] back down almost 2% today. Value shooting up.

Mike Philbrick: [00:12:11] We jumped into the value. Um, actually, yeah. So you started off Alpha Architect. What were the, what were some of the driving? So value was obviously one of the driving factors. How did you sort of take all that research, all that brain damage you'd done through your schooling and decide on, Hey, here are the factors that I think are, you know, the ones that we should pursue.

How might you combine them? How did you come to that calculus?

Wesley Gray: [00:12:35] Yes. So originally in our life as affirm, we were just pure research and we studied everything. Right. We have a folder on every thing you could ever think about in financial markets. Cause that's all we did. We weren't in asset management business, we were just pure research business.

And our job was to see everything that got flung at the family office, from the street, you know, from Goldman prop desk or whoever, and just take it like deconstruct it and say, Hey, is this something that's actually adds value after fees, after taxes, after brain damage? Um, so, so that was our original business, but then we got into asset management with the seed and we started off with systematic value because hadn't have a book about it.

That's what I'd always done. My whole life. I was just value person. Like it was the only thing I believed in that was my religion. So that's what we did because that's what I had the most faith and confidence in. Um, it was decided to focus there. And then our problem though, is we were still research minded people.

So all we wanted to do is more research on like different things. So we had like prop strategies going on. We had like 50 strategies in our firm, uh, excuse me. Uh, I got a call there. Uh, and so we had too many things going on, but then we realized like, wait a second. In asset management business, you actually need to have assets and you gotta actually focus because no, one's going to believe you when you say, yeah, I understand all this shit because I've been studying it for my whole life.

And they were like, no way, you can't know everything about everything. And even though we, we, we thought we probably did at some level, we understood that, Hey, you need to focus. You need to actually have a business. Like you got to stop doing all this fun stuff and actually focus. Um, and so that, that's what we did.

And then our whole thing was. Uh, we wanted to provide like a lot of people provide like, like you guys do like diversification, which is great. I think that's awesome. But our, our main issue was like, Hey, I want to get the efficient frontier to expand up into the left eye. I really care about expected returns because expect the returns do not grow on trees for a vast majority of people that can't use leverage or have issues with leverage.

And so how do I gain organic leverage their investment vehicles? Well, there's these things called factors. And guess what, if you do concentrate factors, you get even more embedded leverage. So if you want to figure out how to gain access to high expected returns and sharp ratio is not necessarily your goal, because for a reason, like leverage is.

So I'm, you're just, it's not really part of your, your shtick. Um, that's what we want to do. And I just always like value. Uh, and then as you guys know, like eventually we, we got deep brainwashed and thought, Oh, this momentum stuff's pretty cool. Uh, and then we got further brainwashed and I thought, Oh, this trend following stuff is also pretty cool, but mainly because our, that original investor was a huge trend follower.

And I told him he was full of it for many years. And, but eventually, obviously I got convinced. Um, and you guys do great research on that. And I I'm, I'm obviously a buyer of it now, but it took me about 10 years. Cause, uh, I am a tried and true, uh,

Eugene Fama, uh, student. Uh, so the EMH was, was buried heavy into my brain for, uh, for a long part of my life.

Rodrigo Gordillo: [00:16:04] Yeah, man, when you're part of a cult, it's really tough to get out of it.

Wesley Gray: [00:16:10] Yeah. I was. That was so in on that code, I'm still in, on that code.

Rodrigo Gordillo: [00:16:16] Let's try to help other people get out of a certain cult, which I think is a cult of, of large safety in the factor space from these, these very big conglomerates, right? The BlackRocks and the likely these, these are, these are organizations that offer factor tilts in their portfolio.

Um, now when somebody looks at factor investing, what's the major difference that you would say exist between these multi-billion dollar organizations, giving you factor tilts, quote, unquote, and what you guys have decided to focus on and put together and your research and your, and your ETFs.

Wesley Gray: [00:16:54] Yeah. So, um, what, and, and you, you guys know this obviously being a boutique, but, but generally what happens in the asset management industry is once you have too much money, you have to basically become the market for all intents and purposes, right? You have too much capital. There's no way to take. There's no way to take an infinite amount of capital and be something that's not the market because you are the market. And so when, when you're a firm like BlackRock or Vanguard or anyone like this, where your whole business model is about how do I leverage my scale?

Well, in order to leverage my scale, I need to build products that can scale, right? Because that's the way you would do it. And so to the extent you want to build a scalable product, it's very important that it has tons of capacity. And a lot of times you're kind of perfectly positioned to be able to deliver like market returns.

Uh, at the lowest cost possible. So you're going to build portfolios that are essentially market portfolios that either market cap, weight, or own like thousands of securities in a particular market that you're trying to deliver that exposure, cheaply and knowing full well, you have the capacity to like pour 5,000 billion dollars in it.

Right. And, and so you can also do that in the context where like, you're talking about like a factor till we're, Hey, we're going to add this factor thing, but let's just add a little bit of factor juice on it because we still need to have tons of capacity. We still need to be able to leverage our scale, to make this a profitable, uh, enterprise or business for our enterprise.

And then there's the full other spectrum, which is what we are and what, you know, Mike and Rodrigo and a lot of people that's the boutique world. Well the boutique world, as it is kind of a double-edged sword. Your benefit is you have no assets. That's also the bad side, because if you had a lot of assets, you own a private Island, right.

But Hey, you gotta start somewhere. So when you're a boutique, you have to be different and you also have the benefit and the ability to be different. So you can build portfolios without constraints, to the extent that you say, Hey, I need to build this day one. So it has $50 billion capacity. I can wake up and say, I'm going to build a portfolio that might have a billion dollar capacity.

And I'm totally cool with that. Right. And so, so that's what we've chosen. We've chosen, chosen the route of the boutique. And so our portfolios are much more focused and concentrated in like the pure factor exposure, knowing full well that, yeah, if you gave me a hundred billion dollars, I'd have to go do what I shared with Vanguard do too.

But unfortunately, or fortunately, depending on how you look at it, I don't have $50 billion. So, so I gotta be different and actually try to add value and add uniqueness. Um, And, and that's just the nature of, uh, being a boutique versus a scale operator.

Rodrigo Gordillo: [00:19:43] So from a practical perspective, how many positions does a large factor tilted ETF have versus the amount of positions that you guys hold in your portfolios?

Wesley Gray: [00:19:52] Yeah, so, so perfect example is they may have like 500 to a thousand securities where they own them all, but they just kind of tilt one way or the other we're we're, our portfolios are as concentrated basis as we can be and still be in line with like the regulators in 40 act. And we usually hold around 40 securities.

Um, and again, it's obviously it's going to be very different, but the concept is it's going to be very focused in what we're actually trying to achieve, versus just doing a little tilt away from, you know, the thousand stocks plus or minus a few basis.

Mike Philbrick: [00:20:24] I think there's, there is use cases for that. Um, some, you know, you have a tracking error issue for some clients as well, so yeah.

You know, a thoughtful advisor is going to be thinking about, you know, is this client able to handle the tracking error that comes from the true, um, you know, let's call the value factor in this case, uh, versus just having a smidgen of a value in there. But I think, uh, I think the, the advisor misses the point on the fact that they could go buy, you know, the underlying index for the one basis point and sprinkle in, you know, a 10 or 15%, a position of true sort of deep value through one of Wes' portfolios, as an example, and be, you know, far, far further ahead on a gross fee basis.

And, you know, I think that, you know, that's something that has to be considered now. Some people would not be able to take the tracking error and the line item risk, of course. Um, but maybe you can comment on that a little bit

Wesley Gray: [00:21:25] best. Yeah. Yeah. So that's um, well, as you guys know, like, like there's, there's doing things rational and then there's just dealing with reality at time.

So the hyper rational advisor, who's trying to maximize the value proposition for their clients at the after fee, after tax risk adjusted basis. Um, in this theoretical world, they would do what you say. They'd say, wow, there's this, you know, this closet index fund, that's basically 95% at Vanguard, 5% actually like doing something factor based and they charged me 50 basis points.

Um, I could basically replicate that by going 90%, the Vanguard fund and 10% in some concentrated fund, and the only in cost might be five basis points. So you're going to get you basically financial engineer to the same end point, but like way more efficiently, uh, way more transparently.

Cause you can actually see what each item is doing, but as you guys know. Yeah. Like the line item risk. It's super weird. Right? Cause everything you learn in portfolio theories, you're not supposed to think in line items. You're supposed to think in a portfolio so you can gain the benefits of like non-correlated assets and things union while there are things yanging, um, that's like literally what the whole financial theory is based on.

And yet the whole industry is based on a reporting, uh, set up we're we're what do you do every quarter? You go show to your client, the quarterly statement. It has like every line, like this strategy benchmark, this strategy benchmark. And of course the client, like, let's say you have, you bought like an insurance asset.

They're like, why is this thing always go down 1% a month? They're like, this is stupid. Why do we own it? Because it's in the line item. And of course when the world blows up and it goes up 10000%, they're like, why don't we have all our money in that thing? You know? So, so I don't know why our industry has structured.

People to basically behavioral behaviourally be flawed and not actually be able to use actual portfolio theory, but it just is what it is. Um, I know you guys deal with that a lot with anytime you do anything, all ALTE are different and you, you have a line item and you're trying to pitch it like, Hey, you add this in a portfolio and adds a ton of value.

You know, people just don't care when it's losing money, basically. So, um, yeah. I don't know how to solve that.

Mike Philbrick: [00:23:49] Well, it's, it's the, uh, it's the, it's the duty of the fiduciary to continue to work their clients to, to that end, I guess in order to,

Wesley Gray: [00:23:57] to do that. Yeah, that's right. And really good advisors. We see do that, right?

They, they, they lower the reporting cycle. We're not going to look at your portfolio every day, every month, every quarter, we're going to do it once a year. And then it keeps them very focused on goals. Like, what is your goals? Not, you know, what did you think about the CNBC commentator, which is very good that just keeps people focused on the end state.

And then they also do their best to the extent they can within like the regulatory regime to just show the high level portfolio performance and not go into the weeds because that actually protects the client from doing stupid decisions and allows the advisor to actually be smart about how they think about adding different products and what have you, well,

Mike Philbrick: [00:24:42] How do you think about putting these factors together as you build portfolios at Alpha Architect, like you've got value, you've got momentum?

How have you kind of thoughtfully integrated those two approaches to have sort of a gestalt?

Wesley Gray: [00:24:59] Yeah, so we always say like, Hey, we do value and we do momentum. But obviously we use all factors. I just view the world through the lens of there's like top tier expected return driving factors. And then there's kind of like fine tuning factors that work on a quote unquote risk adjusted basis.

Right. So, so the primary goal is how do I gain organic leverage too high? Expect your recurrence. Well, I know I got to buy cheap stocks. I E the value factor. And of course, within our value factor strategy, you know, a big component of that is once you've found cheap stocks, let's do eco way construction.

Let's focus very heavily on quality. So we're, we're including indirectly like size and quality and low vol everything that everyone likes. But we just like to emphasize, like, value is really at the core of what we're doing. These other things are just kind of fine tuning it to help us try to extract the biggest expected return out of that value factor.

Um, similarly in momentum, like momentum is obviously it's high level, it's just pure momentum, right. But then as you get down into the algorithm, we have elements of, of like, we'll looking at like, you know, what, what is the quality of this momentum also like at the margin, like instead of owning like the mega cap, mega cap trillion dollar companies, if we can get more diversified exposure across things that aren't just mega caps, I E some of the size component.

Um, that also might be interesting. So we always, we always leave with like, Hey, we do value. We do momentum because that's the simplest narrative to get people going down the right path, earn higher expected returns. But obviously within those constructs, we're incorporating all the factors that everyone knows and loves.

It's just, they're less of a, um, emphasis because we feel they're less important to the goal of high expected returns with, without leverage basically Wes

Rodrigo Gordillo: [00:26:54] What's... – One of the reasons that you've put together value with momentum, uh, is that they're highly complimentary at the end of the day, right?

Wesley Gray: [00:27:05] Out of all the... you got it.

It's and it goes, for me, it goes beyond geek. It's just intuitively value is like a fundamental base. Philosophy that that's one religion. And then the other religion is like, okay, we don't care about fundamentals. We care about technicals and like sentiment and that's the momentum trend religion. And, and I just feel like these two religions hate each other.

And so they're just naturally I don't have to see a back test and I know like valuable momentum strategies throughout the history of the world for now in the past. And for the next thousand years, they're probably going to always be the union yang. So I liked their structural kind of pooling benefits.

Rodrigo Gordillo: [00:27:51] Yeah. And I think this is an important point that it's so silly, but it's so important to clear up when ever I mentioned something like that to an individual investor, they say, well, hold on a second. You're, you're buying something while the other one's losing it. And the other one's losing them when you're, when, when you're making money on the other one, don't you make a zero rate of return.

Right. And I think the key thing here is to think about it from, we like to talk about in Canada, That there are really no ski companies, right? And there are no bike companies. There was a store called skis and bikes because it's not that they're highly complimentary to each other, but independently they're going to make, they're going to have positive cashflow.

At the end of the year, they're going to make money on the ski companies gonna make money in the winter bike. Company's gonna make money in the summer. We put them together, your cashflow smooth out, you get an upward slope. We expect a positive expected rate of return from both of these. And yet they are generally speaking

Wesley Gray: [00:28:46] at different times.

That's right. You never will. Actually, the sad thing is if you really get deep geek, as you guys know, sometimes you do want to include negative expected return strategies. They have particular benefits to them, but in general to the normal person and what most people should focus on is anything you do in investing is you're trying to earn money.

Obviously, you want to make sure at the outset, as a standalone, they have high. Positive expected returns for sure. Uh, so independently though, they're both pretty good, but it, but if they kind of balance each other out on the risk component, you might get a diversification benefit is arguments, but that's a great point.

Rodrigo Gordillo: [00:29:26] One more, one more question that often comes from why, why are you not using growth? I thought that was his style and growth and value are really complimentary and whatnot. What's his momentum stuff. Why not focus on it?

Wesley Gray: [00:29:39] Honestly, it's all semantics. Um, you know, I just came out of academic world where we're a momentum, like you always wanted to find what you're talking about.

So momentum in the context of academic research is all about price action. Now, when you go and growth, Is all about being the opposite of value, like it's expensive stocks. So in academic literature, value is cheapest stocks on the PE ratio, right? Growth is definitionally – I'm not seeing this as right or wrong definitionally – It's the most expensive stocks in the market. And then momentum definitionally is you're buying the best winners based on price action. So, so that's just, we call them momentum. Cause that's what we actually focus on is the academic version of momentum means price action positively. Now, when you go, when you mentioned growth to me, where I pad my academic brain on them, I'm like, well, that's stupid.

Why do you want to own expensive stuff? But, but, but if you say, Oh, well you mentioned growth to me and say, Oh, but a big component of my growth algorithm is I'm focused on positive price action. I'm focused on like operational fundamental momentum. I'll be like, okay, we're actually talking about the same thing.

So it's really just one of those things where depending on who you're talk to, it's very important to just describe what are we actually talking about here? Are we academic lens practitioner lens? Just tell me what your definition of growth is and then we can communicate effectively. Um, so I have no problem with growth, to an extent as defined as like positive price action, positive like fundamental action and some other things that, that seem to make sense and, and capture kind of animal spirits and, uh, you know, greed, basically

Pierre Daillie: [00:31:27] Wes what is the biggest objection that you face?

What's one of the, like, is there one or two big ones that you deal with on a regular basis?

Wesley Gray: [00:31:40] Uh, well, one or two, there's probably a 5,000 at this point, but, uh, yeah, I mean the biggest thing on, um, they're just different levels to the game, right? So the first level is, wait, you don't use people. Like you're not stock-picking how do you know what's going on?

Like, like how do you ensure that, like, why has this computer got any capability to do this? Right. So, so there's one layer level of like the initial intro we're we're if someone just does not have any familiarity with Quant or like using computers to pick stocks, this is totally mind blowing that, that we don't use human.

Insight after the fact and what the algorithm tells us to actually like, change it. Like we actually just do what the algorithm says. Right. So, so that's one level. Um, and then, then the next level is once you get into people who are doing factors, um, and they're like, okay, got it. I understand like all the quant stuff and all the factors stuff, I'm, I'm a buyer of the concept of systematic versus human interference in the, in the process.

Now let's argue over like the exact details of your ingredients. Like, well, you guys use this. Why like that? You know, what about this thing? Like I read this paper to that told me this other thing. So there's always debates on that and who the heck knows what the right answer is. Um, but then the other one is it's not really a complaint.

It's just it's an is, is, is we obviously can construct our portfolios to try to maximize expect to return. We're we're, we're doing concentrated factors, which are mechanically, and we're telling people up front, this is going to capture a lot of fundamental risk. And it's going to put you in the position of eating a lot of career risk.

Like i.e. Like, look at the five-year relative performance chart. Like it's happened 10 times where you got fired. This is why this doesn't get arbitrage. You should, you want to do this? And so a lot of people just complain about that and they're like, well, why don't we just do this other thing? Well, I'm like, well, then just go buy the Vanguard fund.

Uh, that that's cool. So it's not really a complaint. It's just a lot of people because we're just so transparent about what we do and why they walk them selves into the corner of like, well, that makes sense. But then they walk themselves back out because it's fundamentally, it's just not appropriate for their.

Situation, and that's fine. We don't, we don't sell to everybody. Like we know we're a boutique. The

Rodrigo Gordillo: [00:34:06] Your clients are amazing. I've met them at the

March for the Fallen. Yeah. Yeah. They say things like 'Embrace the suck,' and 'I'm having portfolios for 10 years.' Really? Yeah.

Mike Philbrick: [00:34:20] Might not be long enough [laughing]

Rodrigo Gordillo: [00:34:22] long

Wesley Gray: [00:34:22] enough. Yeah. Yeah. Well, you guys know, I mean, like the thing is when you've been in this business for so long, you, you quickly realize the, the, the actual process of what you're doing matters a little bit, obviously, like you don't want to do stupid things, but in the end, if you just have a process, that's great, you've passed the 99% rule.

But then the other 1%, which is the most important is can you stick to this damn thing? And the behavioral components like that? That's everything like any, all processes are good. If you stick to them, if you switch every process every day, you're just a day trader that has a lot of frictional cost pays a lot of fees and just you're crazy.

Um, so I don't really, I don't get in deep arguments anymore with people over like the nuance of process. Like it's fun, but my whole focus now is on how do I get behavior? Correct because that'll solve way bigger problems than whether my book value is bigger than your cashflow value or something. You know, it's just, that doesn't matter to me.

At least it matters, but it's not, that's a geek conversation. It's not a client outcome

Mike Philbrick: [00:35:29] really important for investors to understand that if you are harnessing a factor and you have really, really focused down on that factor, like a like Alpha Architect does, and like Wes as that, the manifestation of that factor is going to be amplified by the concentration.

And thus, when you get challenging times or performance, in fact, you're your true value manager is going to have likely a larger draw down because they have a more pure exposure to this thing, which. Provides for an, an amazing opportunity for rebalancing. So rebalancing that Mar market cap weight, and, you know, we come back to that 90 10 discussion earlier about how you might think about, Hey, this is how I'm going to construct the portfolio.

You'll pay probably all the fees by simply rebalancing back between your 90% market cap, 10% value, a deep value ETF, you, and you have that opportunity to do so. If you can handle sort of the line item risk and the behavioral risk, there's a huge opportunity.

Wesley Gray: [00:36:42] Yeah. I mean, yeah. Yeah. Rebalance bonus, like the diversification opportunities.

I mean, all of that is. But, but the problem is, is all that stuff is, gets into deep geek territory and it gets quickly off the reservation of like warm and fuzzy narrative. Um, which is usually what most people like to focus in that lane. And most advisors and intermediaries, like lot better to tell a story than actually do the right thing, because it's more profitable.

Mike Philbrick: [00:37:12] I would change that here. This is Raise Your Average is the name of this. So this is why we're saying, this is the way we're going to go with the robot brain here. We're going to, yeah,

Wesley Gray:

This is the way like we got a process. Everyone's going to make fun of it. Like they say, Oh, well you wear your mass funnier. Why don't you take it off? Like, nah, this is the way like stick to the process, maintain discipline. And it doesn't really matter what the process is or what the dislike, the discipline matters process.

Doesn't just stick to it. This is the way, and you will be a better investor. You will Raise Your Average. Uh, but that's hard. It

Mike Philbrick: [00:38:05] is, but it's, it's absolutely critical to understand just, I want to make this one point just because you're going to go through, uh, an appraisal process in your portfolio, and you're going to look at these line items and you're going to say, Oh, look at this value manager, that's underperforming the value index during this time.

And your conclusion should be, if that process is or process is on-point and I generally have the right factors in direction. Is that I actually want to own that pure value player that has actually had worse performance than even the value benchmarking index. If the process is pure, that's where my higher expected return will be yet.

It's the exact opposite that occurs over and over again. And if we look at, um, what's that one, um, murder on the orient express piece, where they looked at institutionally managers that were replaced and just going forward, the manager that was fired did better than the manager that was hired. And these are the mistakes that occur regularly there, you know, um, non optimizers and they're not profit seeking either because they don't know, or, you know, they're, they're succumbing to the behavioral issues, but in either case there's excess return there.

Rodrigo Gordillo: [00:39:30] Yeah. Can I make one point and I want you to help me out with. Cause I think this is a practical takeaway for advisors, right? So right now you can get one of those big, uh, let's say value tilted, uh, uh, ETFs that are 50 basis points. Right? But in reality, when you actually in Wes has a, if you go to his website, there is an analyzing tool that allows you to tell you how much of that strategy is actually just playing beta and how much it is actually factor.

And I'm going to just make up numbers that are roughly accurate. But when you buy these, you're, you're getting, let's say, let's say we're getting 90%, just the market. And you're getting 10% the value factor. And you're being charged 50 basis ones. Okay. Now you like that profile because it's going to be more like the market.

It's not going to be as painful. Well, you can replicate that by buying 90% of the Vanguard ETF for one basis point or whatever it is in Canada. And then buying something like Wes' for 50, 60 basis points, right? And you ended up paying the 90, 90% of one basis point and the 10% and 60 basis points. You end up paying 16 basis points all in to get the exact same profile you had with buying that big ETF.

You just have to look through the titles. You have to look through the narrative and understand what you're buying. Right? You can, you can get much closer to it, but you know, again, the issue is that you've gone from one co-mingled line item for, you know, BlackRock Value ETF, to two line items, one, which is the S&P or the other one, which is a highly variable as, has a lot more variance and has a lot more tracking error.

So that line item still exists. It should be smaller though, if you, if you want to be like the, like you were before. So I think that's a clear takeaway, like an actionable step where you can save your clients money and get the same exposure if you want to.

Wesley Gray: [00:41:18] Yeah. Yeah, we call that stuff. Kind of get

Rodrigo Gordillo: [00:41:21] that.

Wesley Gray: [00:41:21] What's your, what's your, uh, I asked you. So Smart Beta down here. They call that Core Satellite but up there, the SmartBe group, they call that Beta and Blend um, so, so you just take your beta and then you just, you go with the blend and you use like super concentrated, unique kind of alternative exposures to give you collectively like a much cheaper profile, but you're the, process wise, you're, you're achieving the same goal just for usually a third, the cost. And as you, as you guys know, being in the Canadian market down here, it's a lot more competitive in the States where we're advisors have gotten this message already. But when you're in Canada, like the opportunity to do the Beta and Blend or like, you know, be a little bit smarter about how you engineer your portfolio is epic, because I would say 90% of our flows you see up there are like, Holy cow.

Um, you ever, uh, you ever thought about this at all? Um, whereas down here you still run into that every so often, but it's much rare occasion that, that you see, uh, a portfolio where it's obvious this could be improved without thinking too hard. Um, and I think that's just probably the nature of Canadian market.

It's just, it's a little bit different in the competitive pressures are also a little bit unique. How do you, what do you

Mike Philbrick: [00:42:40] think about the, the sector composition, uh, Wes, as you're, as you're building these out, you have some guard rails on that. How do you deal with

Wesley Gray: [00:42:47] that? So we have, um, so, so that this is also where, like I was saying in quant, there's kind of like an art versus science, cause you're going back to so many things, till you blow your brains out. Um, so on, on the sector component, the key thing was sectors is unfortunately, unless you're running long short, like when you're long only factor investing, which is what we do the, um, the, the value, a lot of these factor premiums in that being correlated with sectors in the short run.

And the problem is like, for example, if you want to do the value premium, um, sorry guys. So, so if you're trying to do the value premium and let, let's just take the extreme example of like 99, right? When, if you do a sector neutral, long, only value fund, Um, and unfortunately you got to own, let's say 50% of your book in tech.

Well, when the cheapest tech firm is like 200 times earnings, that's not capturing the value premium, right. Value premium, at least as I view it through the academic lens. And I think why it works. It's the fear trade you're buying dirt, Paul nasty, ugly firms that no one likes, they don't think they think they're dead.

And so you pay low costs, you get a higher earnings yield. And on average, they, you know, it's always bet a little bit better and expecting they make some extra money. Right. So, so that's the background. And so, but there's a trade off. You also may not want, okay. Energy is really cheap. Let's do a hundred percent energy because you do have like a massive idiosyncratic bet.

Obviously an energy, even though yes, it's true. That's where all the one PE stocks are. Uh, I should do that. So, so there's like this, trade-off where we want to maximize expected returns. And unfortunately we got to do crazy stuff, right? We can't be so benchmark hugging that we're forced to not capture the premium.

Cause our goal is not sharp ratio. Our goal is expected returns organically. Right. And, and so we we've gotta be able to bet sectors, but we put basically a 20% break on all of them. So, so you can never get too crazy. Right. So we've got to have some baseline, but we also got to allow ourselves if that's where value or momentum or whatever resides, you know, we unfortunately got to live there.

And the reason I mentioned at the outset that's really, or for long only is if you're long, short, that's a different ball game. Because if you're long short, I can go long a sector. Yeah. But now I can easily short that, that beta out that short beta. So it's a little bit easier to kind of fine tune how you're trying to like extract the factor.

But when you're long, only like you got limited tools, um, And, and so it just is what it is like there's, you know, different strokes for different

Mike Philbrick: [00:45:29] folks. You guys have. Go ahead here.

Pierre Daillie: [00:45:33] That's okay. I just wanted to ask why Wes, when you, like, how do you approach the, uh, the question of macro in terms of, uh, your strategies?

Wesley Gray: [00:45:45] Um, so macro is one of those things where, you know, I love talking about macro and I've read tons of papers on it. We used to actually run, like one of our original research products was, or for the family was, Hey, how do we use all this macro data? Like almost like a big data approach. This was like in 2010 to build predictive models for expected returns.

And so, and we did that. Like I wasted so much time in my life building out like the most crazy sophisticated. Timing models, trying to predict expected returns using a lot of macro data. Um, and then I, I kept coming back to this damn trend falling thing, probably because I was reading too many of the Philbrick blogs or something, but the issue is I have a complex with simplicity.

Um, and, and we can't find it. I was like, wait a second. I got this like insane model with like a hundred data items in, well, this stupid trend falling thing basically does the same thing, but with way less dials, and I actually have more confidence in like kind of the fundamental reason of why it works.

And so we ended up scrapping all that. And so I think macro is super interesting. Love to talk about it, but both from like a qualitative perspective and a quantitative perspective, I have never been convinced that it's that great at timing, or actually influencing your investment decisions. Save trend.

Unfortunately, like trend has only thing where I believe, like, I believe that works, but I also believe just like value, just like momentum being a trend follower sucks if from a careerist standpoint, because you got to not only be very different, you might gotta be cash. Well, everyone's riding the S&P looking like a genius.

And so the career risk element of trend while empirically, obviously it makes all the sense in the world. To me talk about a painful investment, you know, life, it it's it's the most,

Rodrigo Gordillo: [00:47:48] remember when, when you guys were triggering that cell in March, I remember how it was like, Oh my God, it's coming. This is, you guys are on Twitter.

Right. We're going to have to start doing something about this. Well, we hit it and when you hit it, I was like, yeah, exactly. You. Yeah. That is a, that's a tough gig. It was great. You guys got out of the way protected, right? And of course that means that we found from the bottom that, uh, and

Wesley Gray: [00:48:13] you get your, you get smoked out.

Exactly. Yeah. So I think Trend Following is the best factor in some sense, but also the worst in some sense. So, but yeah,

Rodrigo Gordillo: [00:48:27] put it all together. It's painful magic.

The other point I wanted to touch upon is something you said early in the conversation, which is the idea of, you know, we wanted to create something that was trying to move the efficient market frontier to the top left, without the issue of having to deal with leverage, or people who couldn't do leverage, or just didn't want to do leverage.

And so, you know, this is an interesting discussion because what you have created is in a way implicit leverage due to your concentration. Okay. So yeah. There's I'll give some numbers. I was just kind of looking up. So, and then you can explain what the basis behind all of this is. Right. But you, you can see the route from the recovery from March to let's say last week, uh, S&P 500 was up 70, 80%.

I think NASDAQ was up a bit higher. And your momentum [strategy] was up 200% from the bottom to the top, right? Like that's the leverage that we're talking about without having to use any leverage your value was also higher than, uh, any one of the S&P or the NASDAQ. Right. So what's happening there.

What does that means? Both variants on the upside and the downside, but why don't you talk a little bit about that implicit leverage concept.

Wesley Gray: [00:49:44] Sure. So, um, yeah, so for example, momentum's probably the easiest to understand, right? So when you do a momentum portfolio, just generically. It just it's in the name, right?

This thing is going to be volatile. It's momentum. So when the market's working, you're working, when the market's not working, you're not working. And then when you take momentum and you just concentrate that up to buying the top 50, like our momentum strategy, for example, has a beta of 1.3. I E just on average, when the market's up 1%, this thing's up 1.3%.

And if it's down 1%, you're down 1.3%. But, but you only put a dollar in to buy 1.3 beta, right? So, so you, you get like this, the same dollar buys you amped exposure to the market. Whereas if you wanted to replicate that by just, without taking the momentum component out of it, if you just wanted to buy the S&P to get the same exposure, you'd have to go borrow, you know, 30 cents on leverage to get a 1.3 beta.

So, so these concentrated focused. Uh, products. They're going to give you amped exposure a lot of times to like market beta. And obviously these factors we're talking about. Um, and of course the downside of that is they also come with a lot of extra volatility and a lot of that volatility is just volatility.

That's going to be there. But a lot of that volatility is arguably idiosyncratic or kind of unrelated to all your other stuff. So that's why I mentioned that our products are made to move that efficient frontier up and to the left. Because if you look at them standalone, you're like, Holy cow. Yeah, this has high returns, but dude, the standardization is like mind blowing, like I'm gonna die.

Um, and so that's why saying, well, you don't own this product for a hundred percent of your money, man. You pull this in your portfolio and because it has high expected return organically, it's going to move you up on your front tier. And, but because a lot of that volatility is truly randomness. Like presuming if you have a well-diversified portfolio, a lot of that's going to get washed away and you just got to, you get to kind of keep the benefit of the higher expected return.

Um, and obviously the, the, the geek argument is like, well, why don't you just focus on sharp ratio? Because if I have to have a better sharp ratio, I, my return versus my risk is higher. I can use leverage to do even better than what you guys are doing to which I say, yes, that's true. If you can use leverage and you don't get caught out on your leverage, you know, at the wrong time, which also happens a lot.

So it's not that, uh, being a sharp ratio, optimizer is a bad idea or what we do is necessarily a bad idea. There's just trade-offs and I'm just, I'm just trying to deliver something that gives you organic leverage, uh, and, and geared exposure via that either to the factors or beta. Um, if you have some sort of aversion to, sorry, leverage is either mechanically or intuitively or what have you.

So,

Rodrigo Gordillo: [00:52:50] and I think an important point that Mike and I have been on the podcast before I'm here with PR talking about advisors need to get comfortable with being uncomfortable. And one of the things that they need to get comfortable with is the fact that if they stay the same. With the evaluations that we're seeing today, they're going to have to expect lower returns for the client's portfolios.

And they're going to have to do nothing, talk to their clients and say, listen, you're going to have to work harder. You have to save more and that's totally fine. Right. But if your clients are not prepared to do that, then there's a few ways in a low return environment to increase your long-term expected rate of return.

One of them is to use leverage, right? And the other one is to use implicit leverage, which is what you're describing here. Right? And you get the same amount of money. You're able to use products that have 1.3 beta sometimes more and, uh, and actually inch up closer to what we expect, what your clients have expected.

Historically. You're probably not going to get there fully. You still have to manage some of those expectations and there's a savings and then working longer, but it does help. Right? So I think it's crucial to understand this concept if you're going to continue to, and you've got to again, get comfortable with being uncomfortable.

These are new things, higher variants. Don't have to explain it to your clients much more. But if you want to Raise Your Average, this is what you got to do. It's interesting

Mike Philbrick: [00:54:05] too. Yeah,

Wesley Gray: [00:54:05] I agree. Yeah. It's, it's easy. At least down here, like, like people always complain about getting out of the status quo and being comfortable being uncomfortable, but hello.

Have you ever been in a competitive marketplace? Like you don't get paid a lot for sitting on your ass doing nothing and like not adding value. Like if you want to earn returns, either as in your human capital, you better start adding value and bringing uniqueness and thinking hard because eventually some young millennial or whatever competitive element will, will, will element will enter your competitive marketplace and be like, Hmm, I'm going to go get Joe fat cat over there and steal his clients because he charged them 1%.

That is like, sit on a Vanguard fund all day. Or pick stocks like pot stocks like that guy's worthless, I'll charge 50 BEPS in build efficient for portfolios, you know, go buy resolve products or like I'll actually think hard about what I'm doing and you'll lose. So I think it's critical that you always want to be uncomfortable because that means you're doing something that's worth rents and, and worth, you know, economic gain, potentially

Mike Philbrick: [00:55:16] the expected return function is also another objective function that sometimes is underestimated for certain clients, if you are not taking any distributions.

And in fact, you know, um, Wes' daddy, big bucks who probably has cashflows constantly from other enterprises. It's not a bad

plan to say. I would like the highest expected return that I can get reasonably from these factors. And I'm going to be shoveling money in all the way along dollar cost averaging.

And I really have no intention of removing any money. And in those circumstances you certainly have, you know, a pretty good argument that what you want is expected return. I want, I want the end point to be as high as possible.

Wesley Gray: [00:56:04] Yeah, well, I mean, I'll just do my own empirical evidence, every rich person. I know, and I know a bunch of them at this point, they all get rich by doing the same thing, owning some asset that forced them to never be able to look at it as market basis.

There was stuck in the damn thing for 20 years, even though they hated it. And then all of a sudden they woke up rich because they couldn't screw it up along the way. Right. So this is like, You either got like a low basis asset from your grandma or like, well, I don't want to pay the taxes. You got real estate, whatever it is a business, it's always the same story.

I don't know anyone actually who's that rich who got rich, like doing like a trading strategy and like the markets, you know, because they never can stick to it. They're always doing the next trading strategy. So some of you said about just 20 year horizon and not worried about,

Mike Philbrick: [00:57:00] have you had any discussions or come across in your discussions with the, you know, sort of the, sort of the Mike Green narrative where the market cap feedback loop is just going to put, you know, the, these high market cap stocks in an infinite loop of superiority and maybe have some, some comments on that.

Cause I think that's gotta be a keen point of concern maybe for some of the value players or its clients

Wesley Gray: [00:57:24] or not. I, I, so we obviously live by Vanguard here. Um, And I'm fully aware that every day they clicked that little, you know, trading button that says buy, buy, buy, buy, buy, you know, , you know, like buying all that S&P click, click click, and I'm also fully aware that, you know, all, all of the poor bastards who run like active mutual funds and do active trading strategies all day long, their trading desk is going sell, sell, sell, sell, sell, liquidate, liquidate, liquidate.

I got to give money to Vanguard so they can transfer it to buy SB 500. Um, so it would be totally ridiculous and insane to not believe that supply and demand. Matt doesn't matter in financial markets. Of course it does, right? If you're selling all day long, small cap value stocks and turn around and blowing it out, an S&P 500 stocks, even Apple has capacity constraints, and there's going to be flows driven.

Price pressure. Obviously that's always been the case. The question, and then I guess the Mike Green argument is like, well, where's the magical arbitrage capital. Well, in the old days, there was a lot of magical arbitrage capital. So if the S&P click the button, people got too aggressive, there's always going to be someone out there like, well, I'll short it at that price, or, Hey, I'll buy it at that price.

Right. The problem is, is, is everyone gets liquidated. It's just the liquidity in the arbitrage pools is obviously getting probably smaller. So you're going to probably get more and more flows, driven markets, more and more kind of factor correlated, driven markets, which we already see. Um, and, and what's going to happen is you're going to start seeing more, probably inefficiency in individual names.

Like, like if there's a name in a, in a sector, it's going to move more with that sector than the fact that they just went bankrupt yesterday, right? Because the sector is up 10. Well, the bankrupt stock in the sector probably went up eight. But you're like, well, dude, it's bankrupt. Uh, so it was going to be more and more of those opportunities, but just like anything in capital markets, it has a time horizon.

And eventually if you get too much Slack, if there's too much opportunity, like the arbitrage, capital's going to start pitching it and being like, Hey, I'm starting to pick up these, these bankrupt companies that go up 8%. But if we just hold onto them, we make money. And eventually they'll, they'll restock their capital.

Cause it'll get too much Slack and it'll come all back and we'll be an equilibrium. And I'm sure that that equilibrium is further out because of the massive passive out-performance and the narrative that like cheap is better free forever. Like, you know, you get, you get, I always tell people, have you ever seen an equilibrium economics where something is.

Free infinite capacity and always works better than the alternative. Has that ever worked in any, in any situation in any that just defies common sense if you believe that? So of course this matters. I just, unlike Mike, like he has much more doomsdays tales on it, like, and which is fine. I don't know. I, I'm just more believer that like competitive markets are a little bit dynamic and we'll slowly adapt to this and figure it out.

Cause people love making money and it just might be a little slower this time you're already

Mike Philbrick: [01:00:42] seeding seeing the cycle. I mean, the sector performance started to change or you're seeing that the sort of those, those grand macro drivers of inflation expectations and growth expectations are going to drive.

Cash flows to certain types of assets, those assets, by the way, happened to be extremely cheap for some reason. And yeah, and they're getting massive cashflow, well, money does go where it's treated best eventually. I mean, you know,

Wesley Gray: [01:01:12] the margin,

Pierre Daillie: [01:01:13] the other plus you've got this, you've got this new cohort of investors coming in, right.

These, uh, you know, coming into Robin hood into the Robin hood platform, it's, it's creating, it's changing the dynamics of the market as well.

Wesley Gray: [01:01:28] So that, that, that arguably could be changing it or maybe just fueling the same old fire we've always had, like, honestly, just believe the fire is all about fear and greed, like values, the fear trade, you know, momentum's the greed trade.

And I don't know when we're in a sentiment market. I don't know when we're in like a gravity matters market, but it just seems like. That's unpredictable, but markets tend to move between those two realms of like, wow, like, you know, it's all sentiment like buy the art crap or buy our momentum stuff. You know, I look at those things like the actual companies, cause I can't handle it from a value perspective.

I'm like, this is stupid. Like who would want to own this crap? I mean, I do, as it has given me is

Rodrigo Gordillo: [01:02:12] your momentum is buying. It is like backing up. I love that you hate your own product, but he doesn't

Mike Philbrick: [01:02:16] own it forever. Those stocks, he marries the value ones.

Wesley Gray: [01:02:23] That's

Pierre Daillie: [01:02:24] right. That's what you've worked. You've worked really hard too, to simplify things.

Haven't you? I mean, I mean, it's not simple. What you do is, you know, simple investing is simple, not easy, and you've worked really hard to, to sort of remove the emotion from. From this, the, the rationalizing that people do, the behaviorals things that people go through, um, by, by investing in both or giving both of those religions love and, and, and, and, and at the same time being indifferent.

Wesley Gray: [01:03:00] Yes. So this is something that, um, anyone who knows, knows, right? It's like when you have a kid, like you have a kid, all these people are all, you know, they're like, Oh dude, it's going to change your life. It's such a miracle. And you're like, whatever, I'm going to drink some beers with my buddies or whatever.

And then you have a kid and you're like, Holy shit. They were right. Like, it's a miracle. Like this is unbelievable. You know, it, same thing like in quantum vesting, like, unless you've actually been in the pits, you know, losing your hair, stressing out and you get smoked doing stock-picking, which unfortunately, a lot of people are not learning this lesson because they think they're geniuses.

Like, I can tell you Tom blue in the face that dude just go systematic, stop thinking about this. You have way less stress, your way better outcomes. And your life will be better. They're not going to listen to us ever. I've learned that. It's just, they have to learn unfortunately, or I've never been able to figure out how to convince people.

They gotta learn their own way. When you have a baby finally, or you turn into a quant systematic you'll know. And once you're in our, once you're in our party, you'll be like, God, those poor little babies out there picking, like being all emotional, like getting, like, getting all wrapped into the narratives about, you know, they're friends with the CEOs, they did the channel checks like, Oh, but it's so obvious.

Cause of inflation like, well, why don't you just let that all free? And you literally have zero emotional. Like I don't even care about what the market does. I don't care what my products do. I have no. Zero care about them and it's liberating as hell. Yeah,

Mike Philbrick: [01:04:41] I think, I think, I think you are deeply caring about the long-term results and, and I'll I'll I, so I don't want that to be taken out of context and you care about the process and that should happens everyday, like Groundhog day over at Albert alpha, Arkansas, but th the daily outcomes, which are totally random is where you're fully disengaged.

Wesley Gray: [01:05:03] Yes. The noise, the worrying about it, like, Oh my God, the momentum up a hundred percent. Oh my God.the momentum down a hundred percent. Totally irrelevant because that process, I already know that's what it does. And like, that's a good example. Like, like recently everyone's like looking at momentum as you guys probably know, like it went on a ripper, it's been on a dipper.

And I was like, that's interesting. That seems pretty crazy. And so I just went back to, to like the nineties. And I looked at the monthly returns and like, we ha we don't even know like the magnitude

Rodrigo Gordillo: [01:05:39] you're talking about.

Wesley Gray: [01:05:40] Right. I haven't just looked for 95 to 99, just the monthly returns on like our momentum strategy.

And I was like, man, if people are amazed by the ups and the downs right now, they got something coming

Rodrigo Gordillo: [01:05:55] well, you publish an index, right. You publish an index. What I always find interesting is I also have a bunch of indices that we show and, you know, they, they kind of, they see the indices that they buy in and then six months later, something, well, within the average happens, I can't believe that this last, as much as you saw, you saw it again, like you just go back and take a look.

I, this is, this should not be a surprise. Now, now we don't, we don't get much of that. Uh, I think one of the benefits of the work that you've put out and, you know, w we're the same. Is putting content out there and having education first, which I think is a key aspect of what auth architect is about, allows you to, when people don't believe you and you know, you don't have to argue with them.

You can just point them to your content. I mean, and I highly recommend, I mean, I've written a bunch of books with a seam. He has, you know, the continuously writing great content and doing a they're actually reviewing other people's white papers and summarizing it for the average person. So they can understand quick reads, accessible, w you can spend days learning.

And then by the time they get to us or to you, their Congress, right. They're like, I cannot believe I ever felt or thought about in any other way about this. Right. And that's one of the greatest things that I think that you put in that you've been able to do. You make it accessible, you create, grab complexity, make it simpler.

And then get the emotional side, you know, that you got to embrace the suck and, you know, get your Marine roots in there. So anybody podcast needs to go in there and start reading, uh, start, you know, drinking that quantum religion, because I guess, you know, it's a one quad talking to the other, but it is something that is going to be a messy, valuable to marry both the efficiency, a quant with the emotional detachment of it.

Mike Philbrick: [01:07:51] Well, I think it's also the form of education that, that Wes has taken. That's so impressive, right? It's not, um, I'm going to educate you. No, no. I'm going to lay copious amounts of evidence at your feet for, for your consideration. And, and, and I'm just going to keep, you know, questioning my own beliefs, my own thoughts.

How can I improve that? Where my might, where, where might I be wrong? What's the other research saying. And it's in that type of education. I think that is the real opportunity for people to change. As, as you said earlier, Wes, it's like a person is a person until they embrace until they do the learning, whether it's losing money on, on stocks or having a child until you actually do the, the, the bathing and the information, and actually, um, dive into it, you really don't get there.

And so, you know, I think you do, you guys do an amazing opportunity for that, uh, for people to just here's the evidence you make your own mind up, you know?

Wesley Gray: [01:08:55] Yeah. Uh, the key behavioral hack here is, you know, we're not a nonprofit, but we always talk about the biggest issue here is behavior. And what is the most powerful behavioral issue?

Everyone has big ego. So if someone gets endowment effect on an idea and they own it, Now they can't blame you cause they're blaming themselves and everyone like me, all of us we're egomaniacs. And so the, all this education we're doing this because we want you to engage in an active behavior that gives you ownership of this decision.

Because then we know once you have ownership on this data and all this evidence, and it's not even our stuff, it could be anyone's stuff. Now I know that when we engage in this battle, which is really just a battle of wits, it's one thing. If all, well, Mike sold me this really cool sounding thing. This stuff's not working, Mike's an idiot.

He's gone. I'll go hire Rodrigo. He's a better looking, uh, smarter guy. Um, but now the problem, yeah. Now I go like, if Mike's like, Hey Wes, read this, you know, here's 10 articles saying different things. It's not always just my stuff, but I want you to really understand this. And w and w read it back to me.

And then I'll be like, God, like, that's really cool. That's a great idea. Like Mike, you should read these papers. And you're like, well, I sent you and you're like, Oh Mike, I'm seeing these papers. And there's a really cool stuff. Learn about this. And now what happens is when I buy Mike's product and it's doing its thing and it inevitably goes on a ripper, I'm like, God, I'm so smart that I hired that Mike Guy.

And then when it goes on a dipper, unlike, you know, and then you say, well, Wes, remember what you told me about how great this was like member, why it worked? I'm like, God, you're right, Mike, I can't fire you dude. Cause, cause you're right. I told you this. And so then I got in doubt when in fact they got ego and all we're doing is just making people, we're doing a trick on their own brain to get them to not be stupid and just stick to the program.

And so that's what the education is really all about. It's a way to get endowment effect. On clients so they can make better decisions because we cannot do that for them. Yeah.

Mike Philbrick: [01:11:11] They gotta know they got to know the strategies at their worst. If you take the time to know a strategy, it's worse. You have, you have a chance of succeeding because you know, when you go through what happens at the worst point, well, you quit.

That's the highest point of quitting. You're not, you'd nobody ever quits at the highest point. They always quit at the, at the terminal point. And, and they, they lock in all the risk and they forgo any future returns that they could possibly make. And so that, that critical juncture is that moment of discipline where you say, no, I'm going to stick with it.

In fact, I'm going to rebalance, right?

Wesley Gray: [01:11:48] Yeah. I'm going to go into heavier. And so, uh, I, yeah, that's the thing

Pierre Daillie: [01:11:54] I'm going to affect. What, at what point in your career did you decide? I don't give a shit whether they believe me or

Wesley Gray: [01:12:04] not. It was basically so, so back in old, I've always been trying to get an asset management business forever, right.

And failed many times to include a chance. This will I start a hedge fund in 2008. And it was actually, you know, looking back at genius idea that I didn't stick to. Cause I, I literally, this is like a blueprint for how to fuck it up. Sorry, I'm launching a hedge fund in September, 2008. Like you can't even make up worst time in that.

Right. I had like 3 million bucks. It was literally a systematic is based on the, our quant value system, but it was long and short back in the old days, we want to be a hedge fund person. Um, so you know, it was great. Beautiful. Stuck this program going in September, which you guys probably remember is like, when all those things just started blowing out.

Well, first month in did. Okay. But then my art two K short cause I was too, I didn't have the courage do individual names in that market eat got called in and I'm like, wait, the Russell 2000 could get the short called in cause of no borrow. Like that's not supposed to be possible. And I was like, well, wait a sec.

So now I can't even run all my beautiful back tests, long shirt fact, I can't even do that. You know, it's outlawed, you can't even short bank stocks. Now I came, sure are two K. I was like, Holy shit, that they didn't teach me that in Chicago. Where's that back test. Yeah.

Not in the fact that this is where I get all my alpha in my short book. And of course that didn't happen. So I was like, okay, Whatever. So we're going to have to, like, I can't remember. I think we started like moving to S P Y even then, like the rebate costs were insane, but I had to do something, but then it went to like November, December, and we had done well, because obviously we went in hedge and we didn't have exposure to the market.

And we were just an absolute return thing. So this was great. Like the market's down, like a bajillion were down like 20, but then all of a sudden I got this bright idea and there's all these stocks. Cause he used to be a penny stock value guy. And there's all these like biotech selling for less than cash.

And like all the same stories of like, wow, this is a unique time in the market. It's never been better. And so I literally went to my clients. I say, guys, We've got to stop this quant crap. I'm telling you the best opportunity I did this for 10 years, made a killing and like, you know, Ben Graham cigar butts, um, the whole nine yards.

So I literally transitioned the fund back to being a penny stock, deep value stock picker, right in long, only this was in December, 2008. So anyways, doing all this for like the next two years. And then of course I ended up having a situation where I'm like, I'm married, looking back. It's so stupid. I was like 60% in one stock.

It was like some stock thing. I like knew that CEO like flew down to Florida, like kick the tires. The guy was like an old army cat. Anyways, long story short. It was a frog that like totally bamboozled the guy was, it was just a fraud thing, man. Um, And, and, and just by dumb luck. So the fraud thing, like obviously blew up like 80%.

Like the fund got destroyed, even though I had a lot of gains, you know, basically equal and like, uh, or as less than R2K , but then I had another one that, that also had like some crazy lucky, like buyout. So like triple so on net after doing all this brain damage, I was so stressed out. I literally equal price R2K (Russell 2000) plus like three times of volatility with like 50X the heartburn.

And of course, when you read that tests, like, Hey, what if we just did the long, only quant value leg? You're like level their performance. And so that was like my kumbaya moment where I was like, man. Okay. Cause remember I was in this fraud and now telling all my peeps, like it was my money. Like my grandma had some capital I'm like guys, like I we're down.

Like, I don't even remember like 50% or something stupid, like versus the benchmark. And it, and I went to that pain moment of just feeling like a total idiot. And then I just got dumb luck, lucky that it all came raging back. So I was able to pay him out money. Good. But that, that whole experience just made me think, you know what I'm out.

And then what made it even worse? I was like, I am all in quantum. Never doing this shit. It's ridiculous. But I had one hangar. It was this thing called PRXI. It was like the old Titanic asset trade. Cause I had done so much research on this thing, man. I was like, you know what, Jack will tell you the story of my partner, Jack Vogel.

I was like, cause I was still, I was still a stock pick guy, you know, it was, you know, like in my DNA, even though I went quiet, I'm still in there. I was like, Jack dude, I'm telling you this thing is going to double the Titanic. It's a liquidate classic liquidation. You know, I've seen the bids out in the UK auction house.

Like I was inside scoop. These things are worth three times. You know, I talked to the CEO, they're in liquidation phase. It's like, it's stupid. It's selling for a dollar, two or $3 in liquidation. And of course, and he did it, you know, like my PhD student, I was still all in. I had like a big chunk and of course that trade also went South for all the normal reasons that like stupid stock picking goes South.

You're a hundred percent confident. And then you miss something. And then that was just my last, that was probably like 2012 or something. I have not picked a stock or done anything non systematic ever since been eight years now. It's like, I was a drug addict, man. And I'm out. Like, I it's like, I'm not cutting out call over him.

Yeah. I'm so done. It's been eight years of being drawn back, you know, and you

Rodrigo Gordillo: [01:18:01] decided to buy some of that game stop. You want it to, by

Wesley Gray: [01:18:07] shorting all of that. I wouldn't short game stop. Like honestly, the last active decision I made was, which was a dumb luck. One is I is I swapped out of our trend product and went all in value last March, just cause it was like 50% interim month draw down.

I was like, you know what? This is stupid. Um, and that was my last, but that one, I was careful cause I like, I still attribute it to a hundred percent dumb luck because I know if my little monkey brain thinks that skill, I might, I might get that drug again. So I'm off that drug.

Um, um, I'm just liberated, man, dude. I'm like, I'm like a gospel, like just, don't be a stock picker. It'll kill ya. Um, I love it.

Mike Philbrick: [01:18:55] So do you guys want to switch gears a little bit to the, um, ETF structuring learnings that a Wes has had for a few minutes to before we get where we wrap or what do you, what, how do you guys wanna go.

Pierre Daillie: [01:19:08] Yeah, I think, I think Wes, you should maybe talk about your, your ETF platform, the, uh,

Wesley Gray: [01:19:15] you know, Yep. You got it. So, you know, through all this brain damage of running a vertically-integrated ETF firm, like out of my garage with no budget, we've learned a lot over the past seven, eight years now. And you know, now we're actually, I guess professionals, technically, even though I'm wearing a sweatshirt, but you know, whatever,

that's not,

Mike Philbrick: [01:19:40] that's not, COVID either people. That's what he wore pre pre COVID posts,

Rodrigo Gordillo: [01:19:46] architects swag. It

Wesley Gray: [01:19:48] is out. So I guess it counts for maybe marketing or something. Um, but so, so we have this platform we're, we've kind of dialed in and we know where all the bodies are buried because we spent a lot of time figuring out every little piece of this ETF, you know, back office, you know, middle front, uh, back office on the ETF thing.

And then we've had this platform. We've all, we've always been like the low cost operator for our own funds. But as you guys are probably aware like, well, once you build one software stack, well guess what, you know, we could put our five and never add another one for another 50 years. Or if we just went for it, we could open this platform up and allow other people to basically take advantage of our infrastructure costs.

And so that's what we've been doing the last few years, and we haven't really been marketed it at all. Um, just cause we wanted to make sure, you know, we could operationalize for a third party effectively and, and we've done that and that we still don't market at all, but somehow everyone now knows about like our platform.

And so now all I do and probably those two or three calls that we heard is that they're all on this call. They were probably ETF Architect leads where people would call us up and say, Oh my God, we heard you guys are good at doing this. Like, can you help me launch an ETF? Um, and then my job is to basically say, no, you shouldn't launch an ETF.

Like, do you really want to join the most competitive, high capex, low fee business on the planet earth? Are you insane? That's my question, number one. And they're like, no, no, I get it. That's just really just a scare tactic to make sure, like, are you ready for what you're about to get into? And if they're ready to get into it.

All right, great. Check the box. Number one. And then we, then we'll just sit down with these entrepreneurs where if they're serious about getting this business, you know, our, our platform will give them an ability to access this market very efficiently. And then we're not going to bring distribution. Like you gotta do that.

You gotta be the passion, but we're going to be able to help you because we have sat in that seat for a long time and we've got a lot of scars on her back. So we're just passionate about helping entrepreneurs out because. As you guys know, we've all been there. And so anytime you can help someone that's, you know, wants to fulfill their dream.

It's, it's kind of like, if you feel like you're having an impact besides just, you know, maybe make a little bit of money here or there. So, you know, it's a fun business and, um, I think we're good at it. And yeah. If any of your listeners or what have you, you're interested in launching an ETF and they can pass that first question.

Like, are you insane? Do you really want to do this? You know, feel free to reach out and we'll have a conversation. Um, so that's fantastic. Good.

Rodrigo Gordillo: [01:22:34] So you're based out of the U.S. Wes. You have a range of momentum and value and a combination of them. And then you also, um, sub-advise here in Canada for SmartBe right? So for those Canadian investors and advisors that want to take a look at that, uh, these concepts in action, you know, it's available in the border, across the border.

For anybody that wants to feel the pain and awesome diversification, that painful diversification. Yeah. If you want constipation, even when you don't

Wesley Gray: [01:23:05] want it. Yeah. You got it. Build efficient portfolios, you can do it up in Canada and you can do it down here. We're worldwide.

Mike Philbrick: [01:23:14] We're worldwide in North America and out

Wesley Gray: [01:23:20] it looks like a worldwide. So

Mike Philbrick: [01:23:22] Alpha Architect.com.

And then what are you? You, what's your Twitter handle?

Wesley Gray: [01:23:27] Ah, just @AlphaArchitect

Mike Philbrick: [01:23:29] and anywhere

Rodrigo Gordillo: [01:23:30] else should got that picture of the one suit. He wore that one time.

Wesley Gray: [01:23:35] That's true. Yeah. When we got the fancy pictures I put on my suit, I was like, ah, here we go again. Oh,

Pierre Daillie: [01:23:41] that in your, in your, in your, in your white paper blog, there's a photo of you wearing a tan colored suit.

And the caption is, is a Wes in a, in a fancy suit. So,

Wesley Gray: [01:23:56] Oh, is it? Yeah. Yeah. I should probably read some of my blogs. Like we have blogs now. They're like 11, 12 years old and I go back to some of the old ones and like, Oh God, I need to read that this is a compliance

Pierre Daillie: [01:24:11] nightmare. I think that was from a week or two ago.

Wesley Gray: [01:24:15] Yeah. Okay. Yeah. All right. Yeah. I like it. That's good. Then if you read an old one, let me know if it says something silly. I'll I'll go hilarious.

Mike Philbrick: [01:24:26] One last thing too. I'd like you to do a plug for the March for the fallen. That's a place where we have been able to get together in the past. We weren't able to do it this last year, but we did it together apart.

Um, but maybe, maybe let everyone know what that is. And you're passionate about that too. So we look forward to making that Trek in, uh, in September, I guess, to Pennsylvania, the pilgrimage. Yeah. Asked

Wesley Gray: [01:24:47] his chair, you know, God willing. It's a, it's a live event. We'll see. It depends on what COVID does, but I think it's looking good, but yeah, there'll be late, late September, as you guys know, we go, uh, go up to the middle of nowhere in Pennsylvania and it's, I call it a direct consumer charity.

It's not like meant to raise money. Like the charity itself is represented out on this 28 mile ruck March. Um, where there's gold star families out there. And there's actually a lot of gold star members actually in our financial community, unfortunately. And it's really just opportunity to represent and let them know that we, you know, we still remember their sacrifice and, you know, we, we want them to know that we're part of their team and part of their community.

And w we'll still remember their, you know, fallen heroes basically. So it's a great opportunity to hang out with good looking guys like Mike and rod Rigo and ugly guys like me and my wife are, you know, there's ice women, uh, representation out there too. It's not just only maniac, uh, gorillas. Um, that's a great event.

Come on out a bunch of

Rodrigo Gordillo: [01:25:49] nerds going out and pretending that they're active. It's amazing. Once you go, once everybody starts reading the quant fin twit space and get into all the personalities, they'll have, there'll be starstruck once they get down to the March of the fallen. So, um, that's true. Definitely.

See if you can out how many hours drive from Toronto Mike? When we think it was 11, we did our drive. How many hours? I think it's 11, 11 hours down. Yeah. You speed. Like Mike did once and I mentioned that I was going to the March for the fall under speed. You can get out of that speech, Ted, you know, you're, you're helping out, you're helping out the, uh, real good cause you can speed up.

Wesley Gray: [01:26:29] Yeah. Our people fly down to Philly. We always run like convoys out just because it's efficient to come into Philly. Um, it's uh, yeah, I mean, we'll, we'll do whatever it takes, man. Uh, to get you out there represent it's, uh, it's not meant to be onerous on like a cost basis or any of them take care of logistics,

Mike Philbrick: [01:26:50] A tour of Alpha Architects headquarters.

Wesley Gray: [01:26:52] Yeah. That's true. Yeah. It got global world headquarters, which I'm sitting in right now. I love it.

Mike Philbrick: [01:26:59] I love it. Well, it's been awesome. It's always a pleasure to see you.

Pierre Daillie: [01:27:04] I got one last, I got one last question, something, something new that I want to start doing in, uh, in Raise Your Average. Would you rather it, so would you rather question, right.

And then follow up followed by a, why would you rather spend a week in the past or a week in the future and why

Wesley Gray: [01:27:31] weak in the past or weak in the future? I honestly, I, I kinda, I, I have a saying my personal life's called welcome to the adventure and the problem is if I knew the future, it wouldn't be an adventure. So I would probably spend a week in the past. Cause I already been there. I could relive, you know what I already know.

But I feel like I'd be cheating and it wouldn't be welcome to the venture. It'd be like, welcome to what you already know you're about to get into and you've already experienced, which would be very interesting to me. So I'm definitely, uh, uh, spent a week in the past guy, but, uh, my wife would be a week in the future.

She gets anxiety

Rodrigo Gordillo: [01:28:08] diversification.

Mike Philbrick: [01:28:11] There might be a gender bias.

Wesley Gray: [01:28:14] So we were kind, kinda like the value and momentum in our relationship. Um, love it. Same with this question. Imagine, but all good. That's a great one question.

Good

Pierre Daillie: [01:28:28] stuff. Yes. Thank you. Thank you. Uh, I can't. Thank you. And I mean, we can't thank you enough for all of your time and your wisdom and for, uh, you know, the fight that you're, uh, that you're fighting the good fight for, you know, simplifying investing, uh, because it certainly isn't easy and, and, uh, I think your work.

Uh, proves that out. But I have to say we're probably all on the same page when, when I say that, that, uh, we love the idea that you're not trying to convince anyone of what that, what you're doing is the right way to go. You're just doing it and you're telling people about it and you're educating them.

And that's kind of fits in really nicely with, uh, with Raise Your Average with what we're trying to do and what Mike and Rodrigo have been doing all along as well, which is, which is basically talking about what they do and how they do and how it works and how it can work for you. But, you know, um, I asked you that question because I wondered at what point, you know, did you have the epiphany that, that you're not going to try to convince anyone of anything anymore.

You're just, you're just going to do it. You're going to talk about it. And you're gonna, you're gonna, you're going to show as opposed to, as opposed to, uh, trying to sell anyone on anything in that Alpha Architect products are not for sale they're for buying.

Wesley Gray: [01:29:50] Yes. You got it. And just to be clear, like, I, I'm just happy to be part of this community. Like, I feel this is not like, this is just, we're one, you know, one person in the community out there that is trying to have this movement to empower investors education. And, you know, we all benefit. Like I read, you know, Adam, Butler's like 500 page, like white papers where I'm like, God, that guy's smart, man.

Like I keep, keep learning. I got a PhD in finance from Chicago and I just learned, um, every, you know, everyone's involved in it. We just try to, you know, we bring our shovel to the, to the party and dig a little hole with everyone else. And, uh, you know, the hope I think is just, I'm just proud to be part of the community and.

It's great. So you guys got a podcast that helps, you know, introduce your work, your users, and listeners to different people that are in our community and focused on education. So appreciate it.

Pierre Daillie: [01:30:44] Thank you.

Wesley Gray: [01:30:46] You got it, guys. Good stuff.