Full Transcript: Cliff Asness on Bubbles, Factors, and Market Logic

AQR’s Cliff Asness Revisits His Greatest Hits Papers

Matt: You’re watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. I’m Matt Zeigler. Jack Forehand’s in the co-host seat with me. And I was thinking about this time in 1997 when I go see The Rolling Stones, Bridges to Babylon Tour, Giants Stadium, and it’s just like all you can do is go out and play the hits.

Yeah. There’s just so many songs. And they had the B stage and, you know, he’s dancing across, and you’re thinking like, “He’s old, but he’s not old yet. They still got it.” They’re doing covers. They’re inviting guests out. And you’re like, this is such a cool thing. It’s a cherished memory.

Again, it’s almost 30 years old in my own brain at this point. But where are the people in all the other industries who could go out and play the hits and talk through stuff? Jack and I were talking about it. You know, we’re like, you know who would be killer, who’s got a greatest hits catalog to get to go through the hits and get some takes and some B stages?

Cliff Asness from AQR. I don’t know why you said yes to this, but you did. Cliff, how you doing?

Cliff: I’m good. You’re already getting us in trouble because most artists wanna do the new stuff. And then they get the audience all mad. But I will acquiesce and do the greatest hits.

I saw The Stones at Jazz Fest two or three years ago, and I think they were over 80 at the time. Yeah. And they were still jumping around the stage. I don’t know if they put them in some hyperbaric chamber when they’re not performing, but it was incredible. Like, if I’m doing that when I’m 80, I win.

Matt: Whatever the transition is from the old drugs to the new drugs — yeah, to still be moving like that, man, I mean, we need to get that for everybody. No, it was really good. So the Bridges to Babylon Tour was the first — I think it was the first time they did something where fans could vote in songs and they had this whole thing, but — oh, well, then you’re definitely gonna play the hits. Then you’re definitely gonna play the hits. And they always sneak a few in. So let’s take you back. I wanna start with Bubble Logic. Okay. How to learn to stop worrying and love the bull. Great movie reference. We can’t have enough Dr. Strangelove references. Yeah. Just inject them straight into all of our veins.

A lot of people don’t get that these days.

Cliff: You’re a man of a certain age.

Matt: I’ll take it. I’ll take it. I have to admit, Matt, I didn’t get it, so you’re doing better than I am. Jack, there’s no fighting in the war room. So you were talking about the height of the tech bubble, how the bull market created its own internal logic. Summarize it for us today. What do you think about this looking back?

Cliff: Well, again, this is ancient history for a lot of your listeners. For me, our firm — we launched one month before the great dot-com tech bubble of ‘99, 2000 really hit its explosive stage. It was an unpleasant year and a half for us.

Value is less of what we do these days, but still an important part, but it was more of the process back then. And to say probably what’s obvious, it was not a very fun period to be a value investor. Momentum certainly helped, but not nearly as much as value hurt. So we were hurting and in this book draft, I started out — like, the first line is, “Okay, I’m a money manager currently losing.”

So by the way, the story worked out quite well for us round trip. I just want to take the suspense away. But so I admitted that — you always should say, almost every paper is some degree of self-serving to some degree. So I like to get that stuff out there. But first, I should never have made it a book.

I was trying to write a book, and the first draft was like the end of ‘99, right near the peak, and I kept revising it and the last draft I did was June of 2000 when it was still crazy, but it had started to come down and then I’m like, “Well, it’s coming down and down and down and we’re making a lot of money as a firm now, so do I really need to write this book?”

So it’s permanently a book draft. The goal was both to make the argument that both the level of the overall market — and I stressed we’re not any better at market timing than everyone else. We’re talking the five to 10 year perspective returns looked very low, not the next month’s perspective returns.

That was when we famously hit, depending on your version, a Shiller CAPE of like 45 and, but even more so intra the stock market. I don’t like calling things value and growth. I prefer overpriced and underpriced or something like that, because the opposite of cheap is not growing. But that’s the vernacular certainly was at the time.

Growth was just destroying value. We’ve seen other periods like that since then, but this was — it probably, you know, COVID gave it a run for its money. Those were the two periods where I’ve seen the most extreme version of this, but this was the most extreme deviation in those two that we had ever seen in 50 years of data.

So part of it was kind of a more mundane — can we justify this? You know, if you try a million ways to justify it and fail, you haven’t proven you’re right. It’s hard to disprove a negative, but it’s the best you can do, right? Eventually you take a bet. The bubble logic concept came from me trying to get in the heads of what people were thinking. How would they argue for their — I thought patently in some cases insane positions.

So I’ll just give you a couple examples. The whole thing is chock-full of them. One was I made fun of the book — which only the old on this podcast will remember — Dow 36,000. This was a perfect foil for me because I’m talking about bubble logic. This is a book saying the Dow should be many times higher than it is today, when it was already super high compared to the fundamentals. By the way, if anyone out there is saying, “Well, the Dow hit 36,000 eventually,” that’s not the frigging point. If it hits it 25 years later and you made no money between now and then, it’s not...

So there’s always some smart aleck who says that. But here was the logic that was kind of fun to dissect of this book. The logic was this — over long-term horizons, call them at least 10, but probably more like 20 years, stocks have never lost to bonds. That’s actually mostly true. You could probably, you know, are they real returns or whatever. But it’s mostly true in the US, and it’s not as true outside the US, but let’s just take it as a given. Stocks have beaten bonds all the time. Therefore, for a long-term investor, which we all should really be, they’re not riskier. If you never lose, how are you riskier? Therefore, they shouldn’t have to offer an expected return premium.

You shouldn’t need more. In a rational market, the only reason you should — and we can talk about irrational markets later, but in a rational market, the reason you get paid a higher expected return is you’re taking on some risk. But if I just prove these things were riskless to the relevant investors, why don’t stocks and bonds offer the same return?

Now, this is idiocy, and I am mincing words, believe it or not, because it’s extremely circular logic. Imagine you got to a world where they were priced to the same expected long-term return. So you didn’t expect to make any more on your stocks. Stocks are still three to four times more volatile at pretty much any horizon.

Even at 10 and 20-year horizons, they have much wider dispersions of outcome. The reason they’ve won over time is they’ve had a higher average return. The dispersions around that average are still much higher at any horizon. So if you cut them down to no advantage in return, suddenly you have something with the same endpoint, but much more dispersion in where it may end up.

That’s called risk, and suddenly you go — you know, I need a risk premium to own these things. And you’re right back where you started from. It was a bestseller at the time. My other example of somewhat circular logic — not exactly circular but similar — I wanted — I was watching the message boards. The message boards was like proto social media. It was text-based. It was not as cool looking as today. Frankly, I thought the interface was better than Facebook, but that’s an entirely different story.

Matt: People — are you more Yahoo? Yahoo message boards? Or which one were you on?

Cliff: I was Yahoo. I was going on the NDX 100 and the Cisco message board a lot. But I was just a lurker because we have all these rules against posting. I can’t post like, “You should short this stock,” when we’re short. I asked compliance, “Can I just pose this question?” And they said yes, because it’s a very innocuous question. It was on the Cisco message board. Cisco was the internet picks and shovels company — that was one of the biggest companies in the world selling for 100 PE on very high earnings. So this is not a venture capital low E. You know, sometimes you can have a super high PE if the E is nonexistent. That’s just a bet on the future. But for huge E — and E is for earnings in case anyone’s not following along — so I posted a question. Everybody on this message board is bullish, right? They’re all, “Rah, rah, I think it’s gonna go to this.” “Oh, you’re a wuss. I think it’s gonna go to this.” I posted a question that I don’t even know if I intended to do this, but I framed it as a value investor.

I said, “All right, we all — everyone loves Cisco on this board. I get it. At what price would you be a seller?” And I’m looking for the concept that no matter how much you like it, you may like it 100 times more than me. You might disagree with me. I think it’s wildly overvalued right now. You might disagree. At what point do you agree? If it’s 1,000 times more. And I got no answers in the direction that I wanted of a higher price, but I had multiple people saying, “Oh, if it was down 25%, I’d be out.” So I cracked up. It was bittersweet because we were losing money at the time, but I was cracking up that I posed what I thought was a really cool value question to get people, get their minds reframed.

You know, once you accept that there is a price you wouldn’t wanna own something for the long term — and I think I did say for the long term, so it’s not a trade — then you start thinking, what should that price be? And you need a framework, and it can’t be — and I thought it’d be helpful. Didn’t help at all.

It was only — so there were tons of things like this. Wall Street analysts did not bring honor upon themselves at the time. I was very sarcastic about Wall Street. I said, like cars, they sell new and used stocks. And would you go to General Motors to get their strategist’s opinion of which car you should buy?

Eh, don’t think so. So it was both a tough time for us, but ultimately it worked out very well, and I had a lot of fun. This was also — I think that bubble kind of broke something in me, where it was the first thing I wrote in something that I’ve done again and again, where I tried to inject some humor and sarcasm and fun into it.

Everything till then, I was trying to be a Fama-French clone. I was a pretty good clone, actually. But it was dry and right down the middle. That was the one where I’m like, “All right, this is insane. I’m gonna have some fun with this.” So, not everything — I still write plenty of things that are dry — but I’ve gone Bubble Logic on a bunch of things since then.

Jack: I have to assume it took all your willpower not to respond to these people, right, in the message boards that are saying they would only be sellers down 25%?

Cliff: Oh, my God. I did respond, and once I was very clear with compliance. They were like, “Post it. No responses. None of you know my handle, so you’ll never be able to find it.”

Actually, now that I gave you the — it’s probably out. Everything, nothing dies on the internet, right? You probably could find it, but I was good. I followed the rules.

Matt: All right. So it wasn’t like AQR36K or something like that with the — yeah.

Jack: So your next paper, we’re gonna talk about Rubble Logic, “What Did We Learn From the Great Stock Market Bubble?” You argue this idea that, as we always do, all of us learn many of the wrong lessons from this period. So can you talk about that?

Cliff: That one I’m gonna be disappointing. I’m not gonna give you a great answer on this one, because let me tell you the truth behind Rubble Logic. You may notice it rhymes. I was very bitter that I never published Bubble Logic, so I took all the things I did in Bubble Logic and — didn’t pretend to be predicting anything, because by 2005, when I wrote this, the bubble had collapsed.

But I said, “Have people learned these lessons?” And I just went through the same stuff of Bubble Logic. And I think I posted some cynical stuff like, “I don’t think they fully learned these lessons,” with some examples. But there was hardly a shred of originality to Rubble Logic. It was a thinly veiled attempt to get some credit for a piece I loved and never wrote.

With some success, I might add.

Matt: I mean, you know, you could always have turned it around — revise it for Ruble Logic. We could —

Cliff: Yeah. With the Russians? That I would’ve had a right in 1998. In August of ‘98 when Russia defaulted, that would’ve been a really good title. All right. If we get the time machine — but, you know, one day they’ll default again and I’ll get to use that title, so —

Matt: All right, certain things you can count on. In your back pocket. You can trot that one out for the next tour of these things. I wanna relate just all that to where we are today just for a second, just do one present tense check-in. Sure. You lived through the bubble and the rubble. We had the global financial crisis, maybe COVID, I don’t know, whatever, how we wanna put it. Yeah, we’ve had some crazy things. Does any of this apply to today or is it a different world?

Cliff: You know, a lot of people make — the analogy everyone makes is to the same dot-com bubble we’re talking about. And now, the whole history doesn’t rhyme — or does rhyme but doesn’t repeat — is kind of true, but how much it rhymes is important.

I don’t think this is anything like the GFC. I think the GFC was — there was one hidden terrible assumption in everyone’s model that real estate can’t go down. When you have a lower bound of zero, you get some odd results. And then there was a derivative structure that was just unwise.

I can let the politicians and the professors debate that. But even people making some private credit analogies now — I don’t think it’s close to a GFC-like problem. But in the dot-com bubble, we saw a Shiller CAPE of about 45. We see it close to 40 now, which would be the second most in history.

The spread between cheap and expensive, something called the value spread, which we first wrote about in 1999, was higher than the dot-com bubble at one point. It actually — I never thought I’d see that in my career — and we did. And it took COVID to get you there. It was getting there before COVID, and then COVID sent it into the stratosphere.

Expensive stuff went to the roof and you remember the six months after COVID, you were only supposed to own Peloton. That was your diversified portfolio. Maybe Peloton and Tesla if you wanted to be a diversified portfolio. You can drive or you can bike in place. But the dot-com bubble — A, it was a tech bubble, and at least that’s what people are worried about now.

I think it certainly does rhyme, but the value spreads now are about 75th percentile. And I should be careful. The way we do it, like a lot of quants do, is we try very hard not to take an industry bet. So I don’t track that so well. So I am not making a strong statement that AI versus everything else is fair.

But on our versions of value, it’s good. It’s better than normal, and a lot of things in the world are less attractive than normal. But I wouldn’t make that as a super strong analogy. I would defend the analogy in one way. All the time you hear people say, “Yeah, but back then they were all dotcoms and worthless companies who made no money.”

That’s just not true. I saw a post by — I think it was Andy Constan — it was, yes, somebody on Twitter who talked about this today, and I had literally planned to talk to you guys about it, and I was a little mad he did that because I’m a stickler for citations, so I feel now obligated to mention that he said that.

But great minds think alike. I swear I was gonna bring it up. The actual dotcoms were insane. They were stupid. There was no chance that most of them weren’t going to zero. But they were a sideshow. They didn’t make up most of the index. If you look at the S&P 500, the Nasdaq 100, they were more like firms like Cisco, which made a ton of money and was still selling for a ridiculous price.

So what I can tell you — and you should never come to a quant for one grand thesis, is AI worth it? That’s not a quant thing. Quants wanna make a thousand longs and a thousand shorts and play the odds. So it could still turn out to be worth it. But it does look more similar just on the numbers, just because I reject some of these arguments that the numbers don’t apply. So the whole market looks almost as expensive. The spread between cheap and expensive, I imagine if you did it not like us, but allowed industry bets, you’d see something a little more comparable. So in a lot of ways I think the market is similar, but something like will AI — or back then, will the internet — pay off? That’s a single bet, and again, a quant doesn’t do that. And just, it may be 19 out of 20 times when you see crazy prices you haven’t seen before, you wanna bet against that. But 19 out of 20 — this’ll be the entire math we’ll have on this podcast — is not 20 out of 20. So I am not making any heroic bets.

We won’t do this at AQR, but shorting the market, shorting AI stocks. But call me in the middle. I think the market rhymes with back then, and the outcome’ll — if I had to guess, it’ll be at least directionally similar, but it doesn’t have to be. This is not an arbitrage.

Jack: One of the things I find within myself — and just like you, I have no idea how this is gonna play out — but I do find myself living inside of it, thinking about how this time is really different. Like, I’m looking at AI and I’m like, “Well, this is intelligence.” Like, this is — yeah, we can’t use old bubbles as our guide anymore because this is like — well — intelligence. Even though I know that’s completely wrong.

Cliff: It’s always different. We have this graph and we’ve moved so far beyond this. This is Fama and French book to market from 1990. And I love Fama and French, and by the way, I’d still bet this’ll make money in the next 100 years. But I don’t want anyone to think this is our current model. I get very paranoid about that.

When you say, “Can we imagine this doing well?” No one can imagine this doing well at this point. When meanwhile, famously, it’s lost for like 30 years, or at least been flat. It’s been a great disappointment since the original papers came out. Like, 80% of that is from the fact that growth got more expensive against value.

It was a capital loss, not a fundamental loss. Adjusted for that — which you can’t do in real life, by the way. If you bet on this thing, you actually did lose the money. But when it comes to estimating what the true long-term return is, I don’t think you ever wanna put in a valuation change. Because if you put that in, you’re baking in that it goes on forever.

And we’ve learned valuation changes can go on for a long time, but forever is a really long time. So when you redo that — and I wrote a piece on our website called “The Long Run Is Lying to You” — the value premium’s actually been about two-thirds as good in the out-of-sample period as the in-sample period.

So these things are hard. That’s about 30 years. That’s about since the tech bubble broke. I’m not saying that I’m any better than anyone else at getting someone to stick with a losing strategy for 30 years. I find about two, two and a half years is as long as most of your investors can take.

And I’ve never experienced longer than that, thankfully, but I have experienced that and it’s very hard. It’s very hard even when you’ve made a lot of money for many years and have a great story for why things are messed up and will come back. So I can’t imagine 30 years in. Can you imagine the review? “We’ve lost for 29 and a half years, but we really feel...” No, can’t happen. I totally forgot your original question. I talked too long.

Matt: No, you covered it. Okay. You got to that. But let’s keep us moving here into one of the great areas — your top 10 pet peeves list. Which was lovely, poetic. Thank you. Good, I had fun with it — good in all the ways. Letterman would’ve been proud.

So in my top 10 pet peeves, I wrote down a few of these. Do you have any that still stand out to you as you’re still peeved about? Or if not, I’ll jog your memory.

Cliff: Well, I don’t know if you guys know me well enough to know that no peeves roll off. They simply accumulate. I am open to being proven wrong, and I won’t share any of those with you on this podcast.

But believe it or not, in my career I have been wrong about things. But I did glance through them, and some of them are less relevant because some of them were more topical about stuff going on at the time. But there are none I would — like, there’s one where I’m talking about the GFC and who’s to blame, and I kinda divide it up.

And I think people tell a political story where the left wants it to be the banks and the right wants it to be the government subsidizing housing. And the truth is a little of both. The government subsidizing housing is partly what got real estate going. Now, I’m not sure you can even say real estate was in a bubble at the time. It’s way higher now. But clearly it was screaming up for a while, and that led to some silliness. And then Wall Street, with the help of some deregulation that was in the ‘90s, created this — so that was one that I think people are just bored talking about, and it’s a long time ago. One was defending high-frequency trading.

I think that ship has sailed. It’s just part of the firmament now. But some other ones — a perennial one was I was defending volatility as a risk measure. And all the time you hear people kinda diss volatility as some silly quant thing, short-term thing. Volatility’s not perfect. A, you have to estimate it, and estimates can always be wrong.

B, if you’re trying to estimate either an asymmetric security, like a very option-like security, symmetric volatility doesn’t make a lot of sense. And like any risk system looking backwards, there could always be an event that’s just never happened in history that happens and, you know, markets are not that well-behaved.

But the question is whether it’s useful. And the critique of it particularly annoys me because every single person who critiques this, including some super smart people, says, “The risk isn’t volatility. The risk is the permanent loss of capital.” To which I always respond — do you delete expletives on this — oh, no, we do not — I always respond, “No shit. You swear to me that this loss of capital is not permanent? I agree, it’s not risk. Can you swear that to me?” I’ve lost money and easily made it back over time, but it’s been painful.

And it’s been painful mostly because you have to deal with the world thinking you’re an idiot.

But also, as confident as I’ve been at these times, only a maniac is 100% confident. I don’t care what I write in a Bubble Logic or if I write something around COVID or about the value spreads. I damn well think I’m right and I’m betting a lot of my own money that I’m right. But a crazy person — you have to be a crazy person to say you are certain of something.

So I just think the idea of a permanent loss of capital — yeah, if you’re certain it’s gonna come back, it’s not risky. Otherwise, is volatility useful? Well, for most securities, again, options might be an exception. For most securities, volatility — if you’re short-term measured with daily or monthly numbers are very high, and then you look at five-year or 10-year outcomes. Some narrow a bit because of mean reversion, some don’t, but they are a more volatile security on monthly vol and will generally have a much wider dispersion of five and 10-year returns. That is a useful thing for me to know in building a portfolio.

I make other — I think I included this in the thing — permanent loss of capital. Did I get to say — this’ll come up again if we talk about privates — but when we were getting killed in the dot-com bubble, did I get to tell my investors, “Yeah, we’re down a ton for the risks we’re taking, but it’s not permanent and we’re gonna be right, so please leave me alone”? Jump cut. They did not leave me alone.

So permanent loss of capital is, to me, correct and a fairly vacuous statement. Another way I don’t like it — I’m sorry I’m going on and on about this — is it also says the method you do risk control, the way you do risk control is not being wrong. Because that’s what avoiding a permanent loss of capital means. It says you have to really not be long-term wrong. That is nice work if you can get it, and we all try to get it. We all try not to be wrong. But risk control to me is how bad is it if you are wrong or how bad is it if the market doesn’t recognize you’re right for a long time. Both those are two versions of risk control.

Risk control is a separate part of the firm, even if we all work together. There’s what do we think’s gonna happen, and then how risky is it — should not be the same question. So I had fun defending that. I led with that. I think that was number one. I convinced no one. By the way, every one of these peeves — it’s not like you don’t see them anymore because I spoke.

I always have this fantasy I will write something so convincing that suddenly it’ll all change and people are like, “Well, we don’t say that anymore.” It’s rare. It’s rare.

Jack: I wanna do one more before we leave this piece because it’s so good. Please. This idea that there’s a lot of cash on the sidelines, because in up markets, there’s cash on the sidelines, so it’s gonna come in and we’re gonna go up more.

In down markets, there’s cash on the sidelines. The cash, I don’t think, literally ever leaves the sidelines.

Cliff: There is no cash on the sidelines. When someone says there’s a lot of cash on the sidelines, I always ask, “All right, well, when that cash gets spent on stocks, they have to buy them from someone, right?”

Like, yeah. That person now has less stock and more cash. We have preserved the amount of cash in the system. There is no such thing. You can try to create sentiment indicators like — if I think there’s a lot of money in a particular kind of short-term instrument that tends to be a staging area for stocks — I’m making this up. It’s not something we trade. Tends to be a staging area for stocks. Maybe you’re making it behavioral — that when money’s here — but the notion that there’s cash on the sidelines — it’s only true in the long term. Issuance and buybacks can change the total amount of stock, and if you change the total amount of stock, you also change what’s on the sidelines.

If you buy back shares, there’s less stock and there’s more cash out there. But that is a much slower phenomenon. That is not what people mean when they say this. I’m giving them too much slack. I always try to make the best argument for the other side. The best argument is that in the long term, there are sidelines, but that’s not how people use it.

They use it as a short-term market timing tool, and I just love to just go — it’s a little bit of “The Matrix,” “There is no spoon.” Again, I’m dating myself. There are no sidelines. I like to be very Morpheus about that.

Matt: It’s a good thing to be very Morpheus about.

Cliff: And if you ever — was it Morpheus or was it the lady who said that? Whatever.

Matt: Well, somebody’s gonna tell us in the comments. I have not seen this in 20-plus years. That’s all right. Fair. We’re gonna take you to private equity next. Why does private equity get to play make-believe with prices? This is where you did volatility laundering.

This is also where — I mean, let’s be honest. If you were writing the books and debating these issues — don’t worry, you’ll — all right. If you were writing the book and debating these issues, you would’ve had to come up with follow-ups. Like, we’d have like — yeah — discount rate dry cleaning or something by now.

So we appreciate your ability to move on. But take us back there.

Cliff: Well, let me point out again — I said a lot of writing is always ultimately self-serving. I don’t apologize for that. If you’re writing about what you believe in and you’re not investing the way you believe in, there’s something wrong.

But I do, while not apologizing, I always admit it. So some of the genesis of this, admittedly, is a lot of the money in low correlation alternatives for a bunch of years — it started to change, but for a bunch of years — was all going to private investments. So I was a little annoyed by that.

So there’s that aspect, and people should know some of my motivation. If someone says to me — and I will challenge this assumption going forward in a minute — but if someone says to me, “Yeah, I know privates. I may not observe the volatility, but I know that they’re levered stock market bets, so they’re probably at least as scary as the stock market over longer horizons.”

And the stock market, even over 10 years, has had losses. If someone says that but they go, “I think I have the best manager in the world and I’m gonna outperform by 5%, and this is just an alpha story,” I may not agree, but that is not an argument that upsets me. That is an internally consistent argument.

And you see that sometimes, and it’s perfectly fine. But you also see a lot of advertising for privates where they have an efficient frontier. And of course, the expected return on privates is higher. They’re allowed to assume that. There’s not a money manager in the world that doesn’t assume their expected return is higher than whatever they’re trying to beat.

But an efficient frontier — on the Y-axis is expected return, on the X-axis is volatility. So a lot of these have the S&P 500 sitting out at 17% annual vol, privates 5%. And that would just send steam coming out. And when you have no hair on your head, the steam is really obvious. We all know the prices are moving, you’re just not observing them.

And I get it so many ways. I get back to the tech bubble. I love an example where — and this is related in some ways to the permanent loss of capital. They’re actually trying to get themselves enough rope to get to that point. When we were down a bunch — I did not get to tell my investors we’re marking it down four percent, but in actuality at our marks we think we’re up, so everything’s fine.

No, I told them we’re down eight gajillion percent, but we’re gonna make 82 gajillion percent back when we’re proven right. So a lot of it is just professional jealousy that they get to do that. It has consequences, though. If institutions are believing these numbers, then they are essentially over-invested in equities, and that will probably work out over good long time horizons because equities tend to go up.

But that word probably is doing a lot of work there. If it was certain to work out — well, we’d live in a different world. Nothing is certain. So they’re taking more equity risk than they think they can tolerate if they actually had to look at it. And at some point they’re gonna have to look at it.

Finally, and this is probably the most speculative, but it’s the most forward-looking. I think it has real implications for the return advantage or even possible disadvantage for private equity against public equity going forward. And here’s the argument. Go back to the — I don’t know — eighties, early nineties.

David Swensen at Yale famously pioneered — in fact, his book I think was called Pioneering Portfolio Management — famously pioneered things like privates in a very long-term endowment portfolio. Became known as the endowment model over time.

But if you read David’s book, or pretty much anyone at the time, a lot of the justification, a lot of the argument for privates was, “Hey, these are very long-term institutions. They don’t need the money for a while. So long lockups where you can’t touch it and whatnot are fine.” But a lot of the world doesn’t want that.

A lot of the world wants liquidity. So you get an illiquidity premium in extra returns. Just to be confusing, sometimes people call it a liquidity premium because they’re talking about prices. Prices, a liquidity premium would be high prices. That’s the same as saying low expected returns or an illiquidity premium in returns.

I probably did more confusion than I helped there, but the idea is you get paid extra for taking this thing that is considered a bug that nobody wants — illiquidity — and you’re the long-term institution that can take it. And over time you get paid, I don’t know, three, five percent more just to bear this horrible thing.

Now if you roll forward to today — and if you give credence, and I certainly do, to the notion that many, even perhaps most investors in these things, they might — they obviously still want good returns, but might actually value the illiquidity because it allows them to be long-term investors. And by the way, this can help also.

Something that lets you be a long-term investor is a positive. But if you value that, you don’t get paid a premium for something you value. That is a feature, not a bug. You pay for something you value. It gets bid up. If everyone wants it for a secondary purpose that was not the original purpose, it gets bid up.

And when a bug becomes a feature, the expected return is lower, not higher, for that bug, not that feature. So I think it’s entirely possible. And if you look at the rolling returns, they certainly have been narrowing over the long term. I think it’s entirely possible that privates originally, the point was nobody wants them.

Now the point is everyone wants them because it makes it easier to live through life, but you pay for that. And I think you should expect at the very least to make less of an advantage than you’ve made historically, but at the most perhaps to not have an advantage over publics going forward. Because you don’t get an advantage for doing something you really like and is fun.

So I think this whole thing might have flipped.

Jack: So I was gonna reach out to you and congratulate you for calling the top in private equity, or private credit and everything. But it turns out you had to go and write this, “I did not predict what is going on with privates,” and not take your victory lap.

So why’d you decide to do that?

Cliff: I was just getting some people pinging me on social media, like, “Oh, man.” Because this is the recent private — private equity has had some issues. Private credit has been — I don’t know how private credit’s gonna turn out. I’m far from an expert on that. But it’s been in the news a lot lately as, some people say scary, cockroaches. Some say it’s fine. I’m not weighing in on that. But they’ve both been kind of cast in at least a less positive light than the past, and people and investors have been worried, like the redemptions in private credit. And I had a bunch of people pinging me like, “You called this. You said privates.” I’m like, “No, man.

I’m not even sure that the expected returns are lower.” I can’t even put a sign on it — or lower than public. I’m pretty sure they’re lower than they were in the past. I’m making a statement that they are truly volatile, but I was not making a statement that the volatility would show up in 2026.

This happens all the time. Bob Shiller writes a book in 1996, Irrational Exuberance, saying the market is wildly expensive. He actually didn’t write a book. He wrote a paper and testified to the Fed. That’s when Alan Greenspan famously used that phrase and sent the market down, and the next day, very courageously, Greenspan said, “I was just kidding,” because he didn’t wanna send the market down. But Bob was making this argument since 1996. I love Bob Shiller. He’s a great economist. But his book came out sometime in 1999. So it looks like he kinda nailed it. He didn’t. The market timing did not work out.

And Nassim Taleb — you learn a lot from his books. Horrific person, I might add, and I’ll say that publicly, but that’s a different story. But brilliant guy. Writes a book, The Black Swan, that only says crazy stuff happens more often than people think. You get a lot of credit for that if crazy stuff happens.

But you didn’t actually call the GFC. You made a very general statement that crazy stuff happens, and you can’t point to any crazy thing and say — you can say, “See? I told you crazy stuff happens.” That’s fair. But you can’t go, “See? I told you that crazy thing would happen.” And he didn’t really do that, but a lot of people similar to me were like, “You called this.”

So it happens, and I just wanted to cut that off at the pass. And I had a secret agenda. I got to re-explain all of my actual arguments — where privates might make less going forward — while simultaneously saying I’m not the guy who called their demise.

Matt: In the theme of calling demise, and this is a pat on your back from all the financial advisors out there who suffer through all the mutual fund literature on missing the best 10 days.

You wrote, “So what if you miss the market’s best days? You only need to miss the best 10 days to destroy your long-term returns,” all this stuff. What’d you see there? What’s the issue you take with this? How do you think about it now?

Cliff: Well, there’s a story here. I first wrote this paper probably in the year 2000, and it got rejected by the Financial Analyst Journal.

Check. Just, for those out there who are aspiring authors, it happens to me too. It doesn’t happen to me as often as it did back then. There is a certain reputational thing. You get a little bump for that, I think. But I thought they were wrongly rejected. I don’t know anyone who’s ever been rejected who agreed with the referee, to be fair.

But I was taking on this argument, and I just kept seeing it for the next 25, 24 years. And I didn’t necessarily wanna revisit something I had written about already. But I never published it. So finally I’m like, I gotta — so, on the blog piece, I literally put the original article there and said there are some awkward sentences, there are some ways I’d write it differently. I’m not editing it. Warts and all, this is what I wrote back then, because I’m not necessarily a good writer. I think I’m a better writer than I was then. And then I updated the analysis. And the gist of the argument is if you miss — and there are tons of versions. Some people look at months instead of days, how many days you miss or not.

But the number of extremely well-respected Wall Street banks and money managers who put out a graphic like this saying, “Don’t time the market. If you miss the, call it, ten best days, you give up all the return advantage of being in the market over cash for fifty years, so it’s a terrible idea.”

That’s all a commercial for perhaps a worthy cause — to keep you invested long term. I wanna be careful. At no point am I gonna extol timing the market. What I’m gonna say is that this is a terrible reason not to time the market. It’s illogical and silly. That doesn’t mean there’s a good reason to time the market.

So this is me being quite pedantic. I hate this argument because it’s dumb, not because it leads to bad behavior. So here is my version. Miss the best ten days. What is that in English? That is — I have been invested in an S&P 500 index fund for fifty years. Ten times I sold every cent and bought it back the next day, and those were the ten worst possible times to do that.

That would be bad. You wanna know why that’s bad? Because it is a giant move done with uncanny, impossible skill. Negative skill. You know, if I made a giant move in my life ten times and got it horrifically wrong, as wrong as I possibly could get it to the day — we all know there are very big days. You lose big chunks.

Not interesting. What I did in the piece to illustrate this was show you the other side of the analysis that they never show you. What if you miss the ten worst days? Well, if your listeners have never heard this argument before, they’re probably way ahead of me. It’s virtually symmetric. The amount you do better — which is also freaking silly, right? My version is no less silly than the other one. But it’s just going, look, if you do a radical strategy — you go all in on a bet 10 times and you get it perfectly right or perfectly wrong — in a volatile world that has serious long-term impacts is not interesting. If you think you have no market timing ability, as most of us should probably default to, don’t do any of this.

If you think you have some, for whatever reason, you should do it proportional — like all bets. You should do it proportional to what you think your skill is at that bet. So if you think you have a modest ability to say that returns should have a higher expected return in the next six months than normal, do you own 10% more stocks for six months?

Maybe. But 100-0 for a day — it’s just a stupid example that doesn’t make the point people think it makes, all in service of a point that is probably a good point. So in the piece, I’m ridiculously careful to say like 19 times, market timing is probably still a bad idea. But I’m terrified someone will read my piece as, “Oh, that graphic is dumb. I guess I can time the market.” I am not saying that. And I’m also a little annoyed — and in the piece on our website, I link — I won’t name the names on your podcast because I’m a shrinking violet and I don’t wanna, you know, just be extra me. But I do link to like I think 10 links of major firms that have this graphic up on their website.

So I have a feeling — I don’t think I’ll ever cure the world of this. Though I have done my part. I have tried. It is dumb.

Jack: One of the topics you’ve written about a lot is international investing. And obviously there’s been many, many people out there over the past decade who’ve been talking about the US is just better and there’s no benefit to international investing.

And you wrote, “International diversification works eventually.” You wrote, “International diversification, still not crazy after all these years.” What would you say are the main arguments you’re making in support of international investing?

Cliff: Sure. There are a few, and they’re all related. One is the whole notion that international or any diversification doesn’t work usually has a flawed part to it.

It always works, and international equity diversification always works. It just doesn’t always work for everyone. The portfolio is almost invariably less volatile than any one country, and the average return on the portfolio — actually a little better because the volatility drag’s lower, but call it the average return on the constituents.

So on average, people are better off if everyone had diversified internationally. For a single country, it can certainly not work for long periods, as we’ve seen in the US. Now, a few other things. For the US, we particularly look at this, and there’s a third paper again, “The Long Run Is Lying to You,” that does this also, that shows — if I’m off by five, 10%, don’t yell at me.

But 80, 85% of the US’ victory — maybe 75 to 85% of the US’ call it 30-year victory over non-US stocks — has come from multiple expansion. Has come from 30 years ago, the US was trading cheaper than a world ex-US portfolio, and now people are paying more for US cash flows. And here’s the interesting part.

Even if that is justified because the US is in some sense better, it’s safer, it grows faster — by the way, 75 to 85% means 15 to 25% were true fundamental growth in the US. The US did outperform, but that is well less than half of the US’ outperformance. And again, I think one of the most dangerous things in the world is extrapolating a valuation change.

If you wanna be a very short-term momentum trader, fine. Build your system, go do it. But if you’re doing this for the long term, to assume — and I’m gonna use a simple example. These are more extreme than the actual numbers. That something that was valued in terms of the cash flows at half of something else at the end of the period is now valued at double something else — that’s a four-bagger built into the returns that came not from growth, that came from just revaluation.

So assuming that going forward is a little crazy. And even if the US is better, has better growth, the differences narrow dramatically when you don’t assume this. Now, of course, if you just go — I just read one of the president’s economic advisors forecasting 6% real GDP growth this year as a possibility.

I think that’s probably a little high. I’m not a real GDP growth forecaster. There’s always a growth forecast that can save you, right? If you’re willing to, with a straight face, go, “I think it’s gonna continue to outgrow by 7% a year forever,” then even at higher valuations, it’s gonna outperform. If it outgrows by two and a half percent at higher valuations, it’s gonna keep up.

So I’m not making a call here. I’m just saying the US’ victory is exaggerated by multiple expansion. Your base case, your kinda diffuse prior, I think is much closer to global than local. Why would you not own something? You have to have an active opinion not to own something. There could be some things consuming in your home currency, might be a little — I’m not getting into consumption baskets. People can make some arguments like that. But mostly, I think the default portfolio should be global for most people. That’s default, meaning I don’t have an opinion, so I’m gonna buy everything. So I think the US part is exaggerated by multiple expansion.

And if we do continue to outgrow the world, we have to do it by an awful lot now to beat the world, more than we have outgrown it if we don’t get more and more multiple expansion. Finally, “international diversification works eventually” was a very different argument, but also I think argues for diversification.

It said our time frames are off. And what we looked at — one knock you hear on diversifying internationally is, you know, when markets crash, they all crash together. It doesn’t really protect you. The problem with that argument for people like me is it’s true, and I have more difficulty refuting true arguments. But it’s also only answering one question, and I don’t think the most important question. What we did in this paper — and I wrote it with a few colleagues — was say we showed that at the one-month horizon out to one year, worst cases for individual countries were very similar to worst cases for global portfolios, meaning they all crashed at the same time.

Then we did worst ten-year cases. Rolling ten-year case. We did five-year, and then we did ten-year. Suddenly, the worst cases for individual countries, for every country we looked at, were considerably worse than for the global portfolio from their own currency’s perspective. So every currency — it comes out a little different in each one.

And what’s going on there? Crashes have tended to be global phenomena. And even if they weren’t, if one country crashes, it immediately affects other countries. Ten-year bad periods have been much more idiosyncratic. Every country has had one in our sample, but the most extreme and the poster child for this will always be Japan post the ‘89 bubble peak.

The ‘90s were an epically good period for US stocks and most stocks outside of Japan. They were a horrible period for Japanese stocks. When you do their worst case, it is probably — it may have been a different ten years slightly — it is probably that period at the ten-year horizon. I think over that ten years, you would have really preferred to be global rather than all Japanese.

I used to joke that if in the US people are writing “why diversify internationally,” in Japan, are they writing books or papers saying “why invest domestically?” Both could be right ex post, but I don’t think either are right ex ante. So if you’re a long-horizon investor, diversification has actually worked better than it has for crashes, and I think that’s the most relevant number actually.

If you’re worried about crashes — bonds, cash, a hedge fund you think is truly hedged. I’m not saying any of those things are great or the right thing, but trend following strategies — which is self-serving as we do, but have tended to do well in extreme markets. But yeah, other equity markets besides your own are probably not your best bet for a crash.

But if you’re worried that your country might be the basket case over the next ten years — maybe it’s an economic basket case, maybe it’s a valuation basket case. I’m not predicting this, but if the US reverts to a more normal valuation, we could be the loser over the next ten years, even if our companies perform fine.

So in almost every way, I think the arguments against diversifying outside of the US are very ex-post, very period-specific. And I’m not saying make a hero call and sell the US and buy extra international. I’m just saying I would stay diversified.

Matt: Perhaps the most important essay I will ever co-author.

You can validate if it’s still the most important one. I will attempt to hire you for the Philadelphia Flyers and see if you can assist for next season. Well, they just got swept, so — yeah. So, pulling the goalie. Yeah. Pulling the goalie — not the Seinfeld reference. Just — yeah. What do you — you are of a certain age. That’s good. Talk me through this paper. Sure.

Cliff: Still good advice? First, this is probably obvious to everyone listening, but “most important paper” was sarcasm. I’m writing a paper along with my co-author Aaron Brown, trying to come up with a quantitative method for when to pull the goaltender in a hockey game.

And just to — a lot of you probably know this, but just to make sure we’re all on the same page. Imagine there’s one minute left in a hockey game and you’re down by one. If you pull your goaltender, you have nobody guarding your net. You get to have a sixth attacker. Your chance of scoring goes way up because you’re six on five.

Their chance of scoring goes way, way up because even though they only have five players, you don’t have a goaltender. That at some point — and clearly by a minute in our opinion, and part of our point is we think it’s considerably longer than a minute — but with ten seconds left, it’s a no-brainer. What do you care if they score?

They score — there’s a strong analogy to options where it’s asymmetric payoffs. You don’t care how much you lose on an option buy, you just don’t get paid. If you’re long a call and it’s out of the money, doesn’t matter how much out of the money it is. So if there’s 10 seconds left, you know what you would do.

You would pull the goaltender because your chance of scoring goes up, and their chance of scoring going up is irrelevant. So yeah, the odds are still against you, but it’s your best shot at getting back in this game. We showed that if you apply this logic — and we use dynamic programming — it’s kind of funny, sounds like a big sledgehammer to use for hockey, but the sports are getting more analytic.

And we found that in the NHL, they probably pull the goaltender with a minute and a half left, sometimes two minutes left. It’s actually been lengthening over time, which I take no personal credit for, but I do love the juxtaposition. We found as a point estimate — and I won’t take point estimates super seriously — the optimal time is five and a half minutes.

Now, I should say for the hockey sticklers out there — yeah, if the face-off is in your own end, you probably put the goalie back in and stuff. People inundate you with stuff like that when you write a paper like this. So I’m not gonna deal with any of that. I’m speaking in generalities. One of the more fun results was if you’re losing by two, we find you should pull the goalie with over 10 minutes left in the game, which — the closest I’ve ever seen is Patrick Roy of the Islanders has done kind of five, six-minute goalie pulls.

So that’s getting there. But you just never see that though. Aside from him, I don’t think I’ve ever seen anything even similar, and you never see that. And it sounds so counterintuitive because they’re probably gonna score and embarrass you. But you have effectively lost the game probabilistically at that point.

So the chance that you get lucky and your higher chance of scoring kicks in before their much higher scoring chance kicks in. And the funny part is if you scored after a minute at that point, you’d put the goalie back in and pull it with the five and a half left because now you’re back in the original situation of down by one, and nine minutes was too early to pull the goalie because their advantage accumulates over time and it’s not a good idea.

So we had a lot of fun with that, but we actually published this in the Journal of Portfolio Management. And you might think, “What the hell is that doing in the Journal of Portfolio Management?” First of all, I didn’t even know that there were sports analytic journals at that point. I had only written things for things like the Journal of Portfolio Management.

So I went with what I knew. But Aaron and I spent the back half of the paper making hypotheses as to why people don’t act optimally — assuming we are right. You always have to say that. You know, if our math is wrong somehow, I’m not that arrogant to think we can’t make a mistake.

But assuming we are right, why don’t they do it? And finding that a lot of the reasons we would come up with or other people would offer apply to money management also. I think there are a lot of things in money management where people generally know this is the right thing to do but are too scared to do it because sometimes the practical implications of being wrong for a while.

You know, we just did an example of international diversification. It is not totally irrational for someone to listen to me and say, “I totally get what you’re saying, Cliff. Your math is right. It’s a better portfolio in terms of mean and variance and beta and all of the things we care about. But if I lose this way for five years, I will be fired.

And if I lose domestically for five years like most of my peers, even if international would’ve helped, I don’t think I’ll be fired.” Everyone is gonna act that way. A coach who pulls their goalie with ten and a half minutes left because he read mine and Aaron’s paper — always an error for someone to do that.

But a coach who does that — now this gets a little ridiculous. If they score again to make it a three-goal lead, mine and Aaron’s paper says there is still a tiny but finite chance of winning this game, keep the goalie pulled. So that coach loses by 11. Does that coach still have a job the next day?

There are these great results in sports analytics — the one I remember is fourth down. Toby Moskowitz, one of my partners and a Yale professor, wrote a book called Scorecasting. I hope he updates it. It’s probably like a ten-year-old book now. But it was the state of the art of sports analytics at the time.

And one of the things he talked about was going for it on fourth down. And sports fans out there will know that there’s been a little bit of a revolution in this. The geeks have moved the dial on this one, where they go for it on fourth down a lot more. And it turns out that turning it over to them on their own 40-yard line — well, if you punt it, a fair amount of the time it only comes back to the 20.

So we’re talking about a 20-yard difference. So if it’s fourth and three, turns out for a long time this was considered wacky. And it turned out that older successful coaches did the optimal thing, went for it more often. And the causality did not seem to go that that’s how they got successful by doing the optimal thing.

It seemed to go — well, I’m Bill Belichick and I’ve won 17 Super Bowls. I am probably not gonna be fired. Yeah, it’s Boston so they’re gonna yell at me the next day if this doesn’t work, but I’m not gonna lose my job. But if you’re a first year coach and you do a few of these, suddenly you’re on the hot seat.

So the analogy there to money managers — and some of us might feel we’ve earned this — is fair, but if you’ve had a successful 20-year track record, you probably can do the optimal thing a little easier. So we had fun. We had others in there I don’t remember. But it was fun analyzing hockey.

I’m a hockey fan and a quant geek so it came together. I will say, again — attribution, I’m a fanatic. Our paper did it somewhat differently than others, and I think it was a little novel and that adds to the literature. But when we first did this, I think we thought we were like the only — this was idiotic. We should have assumed. But we thought, like, “Oh, no one’s ever looked at this before.” Turns out tons of people have, and guess what? They’re all Canadian.

The good news is they largely came up with similar results to us, doing it in fairly different ways. You know, it’s funny, you think there’s one way to do something when you think of it, but that’s because you’re locked in on it.

Other people approach a problem differently. So when a bunch of people all come to a similar conclusion attacking a problem differently, it generally adds to your confidence you’re right. But the really fun part, though, was asking, “Okay, if we’re right, why does nobody do this?” It’s an advantage. You gain about a point in the standings on the year by our calculation by doing this. And that might not sound like a lot, but that could mean making the playoffs or not making the playoffs.

Most people brag about meeting very different people than I do. I got to meet Lou Lamoriello, who is the GM of the Islanders, who said he read the paper twice and agreed with it.

Matt: All you need is a Canadian Michael Lewis to step forward and write — yeah, yeah, yeah — Addie Puck, and you’re made. Blow the doors off this thing. You’re made.

Cliff: Now, I was terrified. Didn’t quiz Lou on the math. But I think he did get the gist. I think he got the logic and did agree with it. And I said something to him — it was all of a five-minute meeting — but I said something like, “So you gonna do it?”

And he’s like, “Oh, hell no.”

Jack: Cliff, this has been awesome. Matt, I know there’s been some double albums, right, in terms of greatest hits albums from some of the great bands. Is that right? Oh, you’ve got — yeah, you’ve got — there’ve been some greatest hits twos. Yeah, so we’re gonna have to have you back again, Cliff, because we didn’t get through all the papers.

So some other time we’re gonna have to have you back again. But we do have one standard closing question we ask all our guests, which is what’s one thing you believe about investing that most of your peers would disagree with?

Cliff: The hard part is coming up with most of our peers disagreeing with. Depends who you consider your peers.

The peers I really love would mostly agree. But call it the general world.

As we move into a world where machine learning is becoming a bigger part of the quant toolkit, we are big believers that economic intuition as a restraint on overfitting is still pretty important. I have been quoted as saying we’ve partially surrendered ourselves to the machines. The very idea of machine learning means you have to turn over some of what you used to do to the machines.

I was misquoted in one article because they left out the word “partially.” You really can’t leave out the word “partially” in that kind of thing. “We’ve surrendered ourselves to the machine,” sounds like something out of “The Terminator.” So I won’t argue that these techniques haven’t moved us more towards allowing the data to speak, but finance is still a high noise-to-signal ratio place.

And in that world, overfitting is a problem. Another counterintuitive thing that I think at least many would disagree with is the quant world has always worried correctly and obsessively — and obsessively correctly — over overfitting. Finding relationships in the past that worked randomly, didn’t work because they were real.

You know, you — old thing, you search 1,000 independent things, you’ll find one that’s one out of 1,000 good. You don’t find the person who won Powerball and bet a lot of money they’ll win it again. Unless they cheated and you figured it out, so let’s skip that. So, going forward, one thing ML has done, though, is even with all those worries about overfitting, it’s pointed out that underfitting is also a problem, and you have to balance the two.

ML excels at finding harder to find — harder to find than you can with the naked eye or simple regression — and more complex world relationships. The world is a more complex place. Didn’t actually have to be, by the way. Before starting down this road, it could’ve been that the simple stuff we were doing covers most of what’s going on in the world.

I think we and others have discovered — and again, it’s not just us — but I think there’s certainly some people who would disagree with this — that ML is, a lot of it is pushing into those complications. And you need to maintain some intuition or else you’ll go into the weeds and you’ll overfit.

But not using these techniques was probably underfitting and missing some of the true complication. One thing ML is particularly good at, better I think than old school statistics, is balancing these two, having penalty functions, being able to fit but not go as crazy overfitting and having it endogenous as part of the process.

So that’s pretty different. May I add one more? Fire away. Go ahead. For years for fun — I think we’re the ones who coined this term. I heard someone else use it recently and I’m like, “I think we coined this,” but I don’t know that. I might’ve stolen it from someone else. But we started talking about how useful —

You can blow yourself up with these three things. They can also be very useful. Leverage, short selling, and derivatives — which we intentionally, and this is what I think the person might have borrowed from us — we intentionally allow those to spell out LSD because — I always call that implicit disclosure. You know, if something spells out LSD, you should be careful.

But if you use, say, leverage to amp up the same bet you’re taking. And we talked about private equity a little bit. They run a mildly levered portfolio. That’s just more equity risk. It may be a good idea, they may make a lot of money from it long term, but you’re not creating a higher risk-adjusted return.

But what leverage can let you do is imagine you have a stock, bond, and commodities active strategy. Imagine you have opinions in all three and you think you’re some degree of good at it. If you put a dollar in each of these strategies, you know what you are? You’re a commodity manager. Because on an equal amount of dollars, commodities are [audio review: “blank and scary” — likely expletive obscured by TTS] scary.

They move a lot. If you put an equal number of dollars, you are not a bond manager. You may have those positions, but, you know, if you think the 10-year against the duration-matched 2-year is the same dollars as long crude oil, you are sadly mistaken.

If you lever the bond strategy — and when you use leverage, you have to think about worst cases a lot. And between Goldman Sachs and here, I’m surviving 33 years of worst cases doing this, so I think we have succeeded in that. But — don’t try this at home, folks — is probably warranted.

But if you lever the bond strategy, it could become a closer to equal partner because now you’re taking some real risks there. And interestingly, it’s not just a call to lever. You have to de-lever the commodity strategy to keep it from dominating, to put it on more of an even keel with the others. Derivatives is obvious.

If you’re trading these markets, you often do them with futures or forwards or whatnot. And short selling — to create an uncorrelated return, you pretty much need to be able to short sell. There are two main ways to create an uncorrelated return, and I’m not telling you — you could find some wildly weird asset somewhere that’s truly uncorrelated. I don’t wanna dismiss everything. But there are two main ways to do it. Short a relatively similar amount to what you’re long, or volatility laundering, and that only looks uncorrelated. So you can build interesting portfolios using these three things.

You gotta be careful. You need — a track record of surviving them is nice. There’s a little chicken and egg problem. To get that track record, you have to have someone trust you that you will survive. But these things are tools that get demonized, that have made us and our clients, I think, a fairly good risk-adjusted return for a long, long time. Albeit they’ve caused some pain at times because they are.

You know, when you lever and you use these things, you will have tough periods, but you can have tough periods in any investment. They actually haven’t been radically tougher than — if you do a levered long-short strategy, its short-term bad periods have not been worse than equity crashes.

That’s nothing to write home about. Equity crashes are painful. It’s long-term bear markets. Our versions have been less bad than 10-year bear markets for equities. So we have actually, I think, come through with pretty good grades on using these things for 30-plus years, but I’m a little leery of signing off with telling all your listeners you should use LSD, but I just did.

Matt: In all your LSD-induced wisdom, you got a greatest — what greatest hits album are you throwing on after this interview? Oh — who would you pick?

Cliff: I like Queen’s second greatest hits album. Yeah. A little more off-the-run songs, but a bunch of bangers. Love Queen as well. I haven’t added any music to my personal repertoire since 1983.

So — no, like, my best friend, he’s my age, we’re both turning 60 in a few months, knows all the new music and listens to it. I haven’t added something in forever. I think I may — if I go to a Broadway show, maybe I’ll hum that tune for a few days. But yeah, Queen Greatest Hits volume two.

Billy Joel Greatest Hits volume three has a lot of his ‘80s stuff, which is probably not his best stuff musically, but it’s what I grew up on. Still a good time. Yeah. Uptown Girl. Sure. Keeping the Faith, that’s a really good one too. Well, you know.

Matt: Better laugh with the sinners than die with the saints, right?

That’s what they say. Cliff, if people wanna bug you on the internet, find more of your stuff, where should they look you up?

Cliff: I’m on X at Clifford Asness. It’s very hidden. And I do tend to respond, sometimes quite meanly if you’re a jerk to me. But there are people at my firm who wish I wouldn’t respond.

But if you’re nice, I tend to — I think one of the bad parts of me is I have a short-term temper if someone’s a jerk. The good part of me is if someone asks a really nice, good question, I don’t care who they are, I will often go out of my way to try to answer.

Matt: It’s a fantastic thing in both directions.

I don’t know about both, but okay. Eh, you know, we’re entertained. We’re gonna take it at that face value, right?

Cliff: Yeah, you’re entertained, and my wife is like, “What did you do today?”

Matt: You know, she’s —

Cliff: Did you — you know what? Let me tell you, leave you with one funny story. Please. My wife had to come to me and say, “You banned, you blocked, you yelled at and blocked your brother’s nephew.”

Because he said something that I thought was kinda dumb, and he said it kinda rudely. And he had literally was under his own name, which I know very well, so I have no excuse. I just didn’t notice. But it came through the family grapevine, “Could you unblock Justin?” And I did. So you did. And he has — and he’s a very nice guy, a very smart guy who was — I am quick to block to save myself from myself so I don’t lose my temper.

I just go, “All right, not dealing with that,” and move on. So Justin was on the wrong end of that one day. All right, I’m gonna go forever if you guys don’t stop this.

Matt: All right, we’re gonna stop you right there. This is Excess Returns. Make sure you check out the Substack. We’re learning just like you out here and trying to capture these conversations.

Cliff, thank you so much for joining us. Like, comment, subscribe — all the things below, and we are out.