Start With Prices: Five Lessons from Matt Zenz
What an evidence-based investor does while the rest of the market argues about bubbles.
We opened our conversation with Matt Zenz by suggesting that everybody navigating today’s markets could take a more evidence-based approach towards their investment strategies. Matt, the founder and chief investment officer of Longview Research Partners, accepted this premise only halfway. From his perspective, evidence-based investing is what everybody should already always be doing, though he concedes there are certain periods, like the one we’re currently in, when people may need the reminder. With social media touting levered products and hot new IPOs, he told us, sometimes it helps to go back to basics on what actually drives returns.
We spent the hour with Matt testing that claim against the loudest stories in the market right now, concentration at the top of the index, the AI capital spending boom, the SpaceX IPO, and the tax bill quietly compounding inside a bond fund. Matt responded to each topic the way he answers everything, by setting the story aside and starting with what prices actually say.
Lesson 1: You Get Paid to Feel Bad
Ask investors what they’ll do when their strategy struggles and most will tell you they’d handle it masterfully. In retrospect, investors look at the long-term chart and view periods of underperformance as opportunities. Put them through a decade of struggle like value investing just experienced and the reaction drifts even further from the memory.
The distance between drawdowns as people remember them and drawdowns as people live them sits near the center of how Matt thinks about returns, because that lived discomfort is where the returns come from.
If it didn’t feel bad, if it wasn’t painful to keep holding it, you wouldn’t get rewarded with higher returns.
We offered the shorthand that has floated around quant circles for years, possibly coined by Corey Hoffstein: no pain, no premium. Matt agreed and then widened the frame. You get paid for bearing risk, and risk can mean feeling uncomfortable, falling short of your goals, or absorbing downside returns. An investor who wants the reward while feeling none of those things is asking the market for something it has never offered anyone.
He tries to divorce himself from the feeling as much as possible, though he admitted that for the people he talks to, separating what they hear today from a century of history is almost impossible. Which is precisely why the premium survives; if holding through the bad stretch were easy, everyone would do it, and there’d be nothing left to collect.
Lesson 2: The Bubble Question Is the Wrong Starting Point
Although we initially promised Matt not to ask the age-old question of whether the market is currently in a bubble, we ended up giving in and asking him to help us make sense of a market plenty of people call bubble-like anyway.
He declined the frame politely.
Asking “is it a bubble?” he said, is usually the wrong starting point. People begin with a story, something like the market getting too concentrated, and then, in his words, “hunt for data to support that.” An evidence-based investor, as he defines it, tries to stay away from that entirely and instead runs the sequence in reverse. Start with prices and ask what the market is telling you through them. Right now, prices indicate that a handful of companies are extremely valuable because the market expects them to deliver enormous profits. “That might happen. It might not,” Matt noted.
Concentration does tell him one thing. Diversification is especially valuable during these periods, and he thinks about concentration in terms of economic engines rather than names.
Just think if Nvidia acquired Tesla and Exxon. That company would be even bigger than it is today. It might be 10% of the market. But the underlying economic exposures are the same as if you held the three companies separately.
What matters is the bet underneath, and if you own only the S&P 500, your main bet is US information technology. Add US small caps and international stocks and your top ten holdings fall from roughly forty percent of the portfolio to twenty-two or twenty-three. Bubbles, he reminded us, are super easy to identify in hindsight and really hard to know while you’re in one. The diversified investor gets to skip the argument about identifying this one in real time.
Lesson 3: A Scary Number Needs a Denominator
We’ve asked plenty of guests about the AI capital spending boom, usually through the lens of railroads and past manias. Matt has spent his career in factor research, so we asked a different question. What does the evidence say about companies that invest heavily? The research on the investment factor turns out to be quite specific. Companies with extremely high asset growth tend to deliver lower future returns, and extremely high means seventy to one hundred percent growth in assets, companies roughly doubling in size.
We do avoid companies that invest a lot, but a lot is actually more than you think.
Google and Microsoft are pouring money into data centers, and the headline figures sound enormous until you scale them. “They’re trillion-dollar companies,” Matt pointed out, and a couple tens of billions of dollars barely dents a denominator that large. The spending that alarms commentators doesn’t come close to the threshold where the evidence starts to worry. This is exactly the spot where you might expect a factor investor to sound the alarm, yet he felt no urgency to do so.
Just as notable was what Matt refused to claim. The data center buildout could work out or it could not. There simply isn’t enough data to claim one outcome over the other. A guest who spends an hour telling you what the evidence shows earns some credibility when he tells you where it goes silent. The habit transfers directly to any investor reading headlines. Before reacting to a massive number, ask what it’s massive relative to.
Lesson 4: The Top Ten List Never Stops Changing
A popular argument holds that the small cap universe is broken because the best companies now stay private. Matt can recite the reasoning himself. You look at OpenAI, Anthropic, and SpaceX, huge companies that have been incredible investments, and conclude that if they’d gone public early you would’ve captured them as part of the small cap premium. He admitted the argument sounds compelling. He also thinks it’s wrong, starting with survivorship bias.
You only know those companies exist because they were successful.
For every SpaceX success story there were countless private darlings that went nowhere. WeWork was an extremely popular company everybody was talking about, and it went bankrupt before ever managing to go public. Investors waiting for that IPO dodged a bullet they never saw.
We added a story of our own. When Michael Mauboussin came on the show, he walked us through a company with a dazzling list of characteristics, and as we listened we assumed he was describing Microsoft or Google. At the end he revealed the company was Enron.
Matt’s version of the same point is a chart of the largest ten US companies by decade, which never stops turning over. At the time it always feels like these companies are going to take over the world, he explained, and then ten years later it’s a different ten companies, and in hindsight the rotation makes perfect sense.
Lesson 5: Taxes Are the Fee Nobody Watches
When we turned to fixed income, a subject Matt has called “quietly the most inefficient corner of a client’s portfolio,” he joked that listeners treat bonds as a snooze fest and were probably reaching for the off button when the topic came up. Then he asked them to stick around for ten more minutes, because what followed would change how they think about bonds. Bold talk for the sleepy corner of the portfolio, but he backed it with arithmetic. Say the aggregate bond index yields around 4 percent. An investor at a 40 percent marginal rate loses 1.6 percent a year to taxes, at ordinary income rates, the highest there are. Compound that drag for twenty years and it consumes roughly half the value of the investment.
Now set that against how investors actually pick funds. People agonize over choosing one manager because the fee is ten basis points lower than another, while tax costs an order of magnitude larger run unexamined in the background. Fees used to be high enough to deserve the attention. As they’ve fallen, Matt argued, the real drag has moved.
The tax piece is the monster in the room.
His remedy is deferral. Capture bond returns as appreciation rather than annual income, and pay tax when you choose, at whatever rate applies then. He compared the logic to a Roth conversion decision, since future rates are often lower. He’s built an ETF to do this, but the principle stands on its own. For a long-term taxable investor, controlling when the tax gets paid is worth far more than the next ten basis points of fee shopping.
The Bottom Line: A Little Bit Back Into Reality
We closed by joking that we’d arrived ready to discuss the total addressable market of Mars and left feeling at least a little more grounded in reality. Investors fail, in Matt’s telling, because they live in the moment and forget what came before. They fall into the trap of starting with a story and then hunting for data to confirm it, rather than the other way around. And they treat the discomfort of holding as a signal to sell rather than the reason they’re being paid. None of the evidence will make the next drawdown feel better, and Matt considers that fine; the bad feeling is the price of admission, and starting with prices at least gives you a foothold that doesn’t move with the market’s mood. His correction from the first five minutes was the real thesis. Evidence-based investing, he’d told us, is what everybody should already be doing all of the time. Moments like this one are just when everybody remembers.
Watch the full episode here: