The Rational Reminder Podcast

The indexing revolution is something that underpins all of our work here at the Rational Reminder and is a subject we reference in different ways in almost all of our episodes. Today we have a special exploration of this history, as we welcome Gus Sauter, the former long-time CIO of Vanguard, to talk about his incredible history at the firm, the role he played in the rise of the company, and its huge role in reforming the investing landscape. We also hear from our guest about his experience of working on numerous investing committees since he retired about a decade ago. One of the most notable things about this conversation is Gus' ability to weigh both sides of the arguments about active management, and he does a great job of balancing what he sees as the potential positives of this way of doing things. This is all strengthen by the way he presents these ideas as a powerful mix of stories, evidence, and the research he himself has conducted. To all our listeners, be sure to listen right to the end of the episode, as after the official conversation ends, Gus shared a few more thoughts on Jack Bogle and ETFs as a bonus. Key Points From This Episode: (0:03:49) Looking back at the part that indexing played at Vanguard when Gus started at the company. (0:04:20) The rise of indexing in the subsequent years and the pivotal moments in this process. (0:06:28) Initial ways that indexing was denigrated by Vanguard's competition. (0:08:36) How the narrative changed around indexing when its utility became undeniable. (0:09:10) The role of the University of Chicago in the growth of indexing early on. (0:11:11) Changes in the active management space over the last few decades. (0:12:04) Considering the role of an active manager in today's climate. (0:14:43) Gus' opinion on balancing the strengths of indexing and active management. (0:20:48) Differences between traditional active management and factor investing, and Gus' preferences. (0:29:09) A look at Vanguard's recent forays into factor-based funds. (0:31:00) Recounting Jack Bogle's thoughts on active management at different points. (0:32:27) Evaluating active managers; weighing the processes and their maintenance. (0:35:09) Vanguard's relative low fees and how this impacted their success. (0:36:35) How Vanguard went about selecting investment managers. (0:38:44) Gus talks about the structure of Vanguard; what it meant to be a truly mutual company. (0:41:19) Thoughts on home country bias and global diversification in light of countries like Canada. (0:45:07) Approaches to private equity; Gus' recommendations for the average investor. (0:48:30) Access to private markets and the prohibitive effect of high fees. (0:51:25) Accounting for the recent large flows towards private equity and the current institutional philosophy around it. (0:54:10) Gus talks about the important questions he asks when joining a new investment committee. (0:56:30) Comments on hedge funds and liquid assets, and their decreased returns. (0:59:50) The psychological benefits of holding a single fund. (1:02:44) Gus comments on how direct indexing might figure into the future. (1:09:20) The education of investors; Gus talks about where he believes Vanguard's biggest success lies. (1:11:48) Reflection on the impact of introducing the implementation of ETFs at Vanguard. (1:12:56) Areas that still excite Gus about investing; the good and bad sides of increased opportunity. (1:14:48) Gus' definition of success and his gratitude for finding a home at Vanguard. (1:17:07) Bonus content: Gus talks about Jack Bogle's relationships with ETFs.

Welcome to another episode from our limited edition crypto series. The previous guests we have spoken to about crypto generally have experience in economics, finance, or technology. In this episode, we have a look at crypto through a legal lens with Professor William Magnuson, an Associate Professor of Law at Texas A&M University School of Law. He is also the author of Blockchain Democracy, which provides readers with a guide into the world of blockchain and Bitcoin, and highlights the reasons for their growing popularity. In our conversation, we delve into everything law and order within the crypto world as Professor Magnuson explains the causes of crime, the jurisdiction of crypto, the impact of decentralized cryptocurrency on the legal system, and how to overcome the legal challenges surrounding crypto. We also talk about the underlying ideology of crypto, the origins of cypherpunks, the people who are being negatively affected by, mechanisms to enforce regulations, and much more. Tune in to learn more about crypto and blockchain through the lens of the law with Professor Magnuson! Key Points From This Episode: A brief overview of the political philosophies of Thomas Hobbes and John Locke. [0:02:48] Find out which of the two political philosophies is closer to reality. [0:04:55] What it means for political or economic systems to be decentralized. [0:05:26] An overview of the advantages and disadvantages of a decentralized system. [0:07:36] Causes of a decentralized system to become centralized. [0:09:54] Where power in an initially decentralized system tends to centralize. [0:11:38] The systems that democracies use to maintain a desired level of decentralization. [0:12:33] How close the underlying political philosophy of Bitcoin falls to the philosophies of Locke and Hobbes. [0:13:34] We learn about the origins of cypherpunks and the associated ideology. [0:14:55] Whether the current state of our world resembles the dystopian future that the cypherpunks imagined. [0:16:41] Why digital cash was so important to cypherpunks and why early attempts failed. [0:17:36] The relationship between anonymity and crime is explained. [0:20:16] What role crime has played in the development and proliferation of cryptocurrencies. [0:22:48] Why comparing cryptocurrency to cash as a similar mechanism for crime is incorrect. [0:25:53] Professor Magnuson explains how social norms affect criminal behaviour. [0:27:48] He outlines the norms seen empirically within the blockchain communities. [0:30:12] Challenges in applying existing laws and regulations to cryptocurrencies. [0:33:04] Where cryptocurrencies fall under current regulatory and legal interpretations. [0:37:44] Whether cryptocurrencies are a regulation problem or a law problem. [0:39:43] How to enforce regulations and laws for cryptocurrencies. [0:40:44] He tells us if public blockchains jeopardize the existing legal system and democracy. [0:43:17] The costs of lightly regulated or unregulated markets in terms of capital allocation. [0:47:11] Who is bearing the cost of unregulated markets. [0:51:09] Hear what he thinks blockchain's greatest accomplishments are so far. [0:51:36] We end the show by hearing whether professor Magnuson thinks it is a revolutionary technology. [0:53:07]

We start the show with a brief highlight of recent episodes, upcoming guests, and feedback we have received about the show. We then review the book Running Remote, which provides evidence for the benefits of working remotely and asynchronous management. We also outline the three essential principles of an asynchronous mindset. We discuss the positives and benefits of remote work, why hybrid work is a flawed approach, and how to recreate face-to-face meetings in a remote world. We also give listeners a breakdown of an interesting journal article about inferring stock duration and equity trades, including key takeaways from the papers. We then welcome our special guest, Harley Finkelstein, to talk about the role that reading plays in his life. Harley is a lawyer, entrepreneur, and the President of Shopify and uses what he reads to push him further in his professional life. In our conversation, we learn the role reading has played in Shopify's culture, what his favourite books are, and inner details about his reading habit. Tune in for another jam-packed episode! Key Points From This Episode: We start the show with a recap of previous episodes and upcoming guests. [0:00:00] A brief highlight of some of the reviews we have received about the show. [0:03:41] An update on the Rational Reminder 22 and 22 reading challenge. [0:06:35] This week's review of the book, Running Remote. [0:09:24] The three fundamental principles of the asynchronous mindset. [0:16:58] Hear what the seven deadly sins are regarding remote team transitions. [0:24:35] Cameron shares a compelling paragraph from the book, Running Remote. [0:28:04] Learn a mind-blowing statistic Cameron read in a Bloomberg article. [0:32:31] Ben breaks down a journal article about inferring stock duration. [0:33:47] Another interesting paper regarding the retail price of equity trades. [0:44:10] Introduction to our guest Harley Finkelstein to talk about our 22 and 22 challenge. [0:47:20] Harley shares details about his reading habit. [0:47:50] How he incorporates what he has learned from reading into his professional life. [0:49:57] Ways in which Harley finds interesting books to read. [0:51:58] The role reading has played in Shopify's culture and work ethic. [0:53:57] What books have had the biggest impact on him. [0:58:12] Find out whether his daughters have embraced his love for books. [1:02:29] Advice that Harley has for people who want to read more. [1:04:32]

What is the real value of cryptocurrencies? Can crypto technology be applied to traditional financial markets? In this episode, we welcome David Gerard, a technologist and author of the books Libra Shrugged and Attack of the 50 Foot Blockchain. He uses his skills as a journalist to investigate the uses and hype around cryptocurrencies and is an outspoken skeptic of the technology. Although not originally from the technology sector, he has become an authority on the topic and has briefed the UK House of Commons Science and Technology Committee on the technology. He also runs a blog covering important aspects of the cryptocurrency space. In today's conversation, we learn some harsh realities about the benefits of cryptocurrencies and why they will not last in the long term. We learn what the real value of crypto-markets is, why he considers it to be a Ponzi scheme, what needs to change about cryptocurrencies, whether there are any benefits to the technology and the role of financial journalism in the crypto space. Listen as we unravel the political ideology which underpins crypto and whether it can be separated from the technology. We also discuss the outcome of El Salvador's bitcoin experiment and why it did not work. We also learn the reasons behind the recent crash in some crypto markets and find out which book David thinks everyone should read. Key Points From This Episode: We start the show by finding out the real dollar value of crypto markets. [0:03:45] The role financial journalism played in getting crypto to where it is today. [0:06:02] Reasons why he does not trust the value of cryptocurrencies. [0:11:04] Why he thinks cryptocurrency journalism is not credible. [0:12:00] He explains Bitcoin's underlying political ideology and the associated problems. [0:13:25] The classic debate of who should have control over financial markets. [0:16:41] Whether it is possible to remove the political ideology from crypto-technology. [0:17:34] What the most important aspect of cryptocurrency technology is. [0:18:24] The reasoning behind the argument, 'You just don't understand the technology.' [0:21:52] How to make cryptocurrency work in traditional financial markets. [0:23:50] Why the recent crash in the cryptocurrency markets occurred. [0:28:03] Find out if cryptocurrencies can be beneficial for the 'bankless'. [0:30:25] We discuss the outcome of El Salvador's bitcoin experiment. [0:32:20] He outlines why Salvadorans did not like the proposed bitcoin market. [0:38:11] Learn what the UK House of Commons Science and Technology Committee wanted to understand about cryptocurrency. [0:41:23] How his views on cryptocurrency were received by the commission. [0:43:46] An example of a crypto-based business that was operating illegally. [0:45:01] Whether NFTs will allow artists and musicians to keep more financial gains from their work. [0:46:13] We discuss whether crypto-based technologies will improve over time. [0:47:57] Examples of good uses for crypto and blockchain technology. [0:49:22] What would need to happen for David to change his opinion on crypto. [0:52:25]

Identity helps shape our perception and thinking about the world around us. What is identity? How does it influence our perspective? These are some of the questions we answer in this episode of the Rational Reminder Podcast. In this episode, we talk with Jay Van Bavel, an Associate Professor of Psychology and Neuroscience at the University of New York, an affiliate at the Stern School of Business in Management and Organizations, and Director of the Social Identity and Morality Lab. He is also co-author of the book The Power of Us, which provides readers with cutting-edge research in psychology and neuroscience to explain how identity really works and how we can harness it for the better. His research focuses on how group identities, moral values, and political beliefs shape the mind, brain, and behaviour. He has published over 100 academic publications on the topic and has won various awards for his research achievements. In our conversation, we unpack the complexity of identity and its influence on our perspective and decision-making abilities. We cover aspects such as the differences between self-identity and group identity, how to be aware of your biases, the role that leaders play in influencing identity, and how identity plays out in social relationships. We also talk about how group identity interacts with democracy and the role of social media in shaping our identity, as well as learn some practical advice to help broaden your perspective. Key Points From This Episode: We start the show by learning the basics of group identity. [0:03:29] How group identity differs from self-identity. [0:04:04] He explains how impactful group identity is to individual identity. [0:05:06] Whether there is good data on how many groups people typically identify with. [0:06:08] How aware people are of the groups they identify with. [0:07:27] Ways in which group identity affects decision-making. [0:08:12] The effect group identity has on setting and achieving goals. [0:09:35] General ways group identity affects social relationships. [0:15:21] A deeper explanation about groups, memberships, and physical presence. [0:17:28] Differences between introverts and extroverts. [0:19:18] How group identity affects our thinking and perspective. [0:20:43] Associate Professor Van Bavel explains how to foster social cohesion, using America as an example. [0:25:41] Find out if people have a default identity that determines their perspective. [0:28:41] What people can do to be aware of which identity is affecting their thinking. [0:30:10] Find out if group identity affects how people learn new information. [0:31:58] Whether people can change or broaden their identity to improve decision-making. [0:34:18] Practical advice to help broaden someone's perspective. [0:37:25] The challenges of changing your group identity entirely. [0:39:34] Steps that one can take to view the world more objectively. [0:42:04] A rundown of how leaders influence the thinking and decision-making of individuals. [0:45:47] An outline of what qualities to look out for in groups. [0:48:49] The influence of social media on which groups people identify with. [0:52:21] We learn if following people on social media with opposing views helps break down group barriers. [0:55:57] An explanation of how group identities interact with democracy. [0:58:48] The differences between current political divisions and past political divisions. [1:03:59] How well studies on the topic can be replicated. [1:05:43] We end the show by learning how Associate Professor Van Bavel defines success. [1:09:18]

In this episode, we speak to Quinn DuPont, a self-described technology historian and researcher of everything crypto. He is fascinated by what humans do and how technology affects what humans do. Quinn focuses his research on the history, meaning, use, and socio-technical development of cryptography. He has published many academic papers on the subject, including the book Cryptocurrencies and Blockchains, and is currently an adjunct professor at the UBC School of Information. He approaches investigating the world of crypto as a scientist making him neither a skeptic nor a proponent of the technology, offering listeners an objective perspective. In this episode, we unpack the basics of crypto and take a deep dive into the theoretical and technological concepts. We learn about the ideological foundations of crypto, how crypto technology will impact governance, what the definition of money is, the potential of the technology to society, and the social components associated with cryptocurrencies. We also find out the real value of crypto and learn about the ethical challenges Quinn faces as a researcher in the space. Key Points From This Episode: [0:05:16] The ideological worldview that resulted in cryptocurrencies. [0:10:51] Quinn explains his standard criticism of the critics. [0:13:43] Why the ideological origins of crypto are irrelevant today. [0:15:50] The nuance surrounding the immutability of crypto technology is discussed. [0:17:04] What the benefits of the cryptosystem are for governance. [0:19:48] How well he thinks crypto fits within a democratic society. [0:25:41] Reasons why political ideology needs to be taken into account. [0:28:19] Quinn tells us his definition of money. [0:31:18] What impact decentralized censorship-resistant monies have on society. [0:38:52] How valuable a cryptocurrency in the real world is. [0:40:48] Why paying your taxes gives money value. [0:44:25] Whether Quinn considers Bitcoin to be money. [0:46:09] He walks us through the benefits of DeFi to societies. [0:49:30] We learn what the downsides of DeFi to societies are. [0:50:22] Learn if blockchain solves any of the problems that exist in traditional finance. [0:57:57] The advantages of bitcoin-based technology for business logistics. [01:03:00] Why some blockchain business technology is marketing hype. [01:04:32] How a DAO is different from a traditional corporation. [01:10:24] Find out what would happen if we turned our podcast into a DAO. [01:15:35] Whether smart contracts replicate the role of traditional contractual relations. [01:19:51] Quinn outlines the ethical challenges to researching cryptocurrencies and blockchain. [01:27:32] Hear what he thinks the greatest disappointments and successes of crypto are. [01:31:32] We end the show by finding out if Quinn considers crypto and blockchain to be a technological revolution.

In today's episode, we beg the question: is factor investing worth it? Factor-tilted portfolios tend to perform independently of the market and today, we break down a few of the characteristics associated with higher expected returns, as well as the challenges of factor investing. We give a brief history of pricing models and walk step-by-step through a hypothetical factor investment; taking the Fama and French five-factor model into account. Additionally, we discuss liability duration and bond returns and speculate whether pooling finances results in greater relationship satisfaction. Tune in to hear our take on everything from book clubs and the impact of inflation on consumption liability assumptions to our final verdict on whether factor investing is, in fact, worth your while. Key Points From This Episode: The latest phenomenon of people paying to go on popular podcasts. [0:01:58] Interesting feedback we've received for our Crypto series. [0:03:49] Why not to make an investment decision based on one person's opinion. [0:04:53] The evaluation skills our Crypto series equips listeners with. [0:06:05] Upcoming guests on the Rational Reminder Podcast! [0:07:31] Some interesting LinkedIn connections we've made in the past few weeks. [0:16:06] Recommended book for kids: Way of the Warrior Kid 3. [0:18:11] Recommended book for adults: The Psychology of Money. [0:21:08] The model of our firm's book club and our experience of it so far. [0:22:02] Does pooling finances result in greater relationship satisfaction? [0:24:35] Liability duration and bond returns according to the current change in bond yields. [0:26:22] How inflation impacts consumption liability assumptions. [0:29:11] The positive effect the changes in the bond market have had on pension funds, relative to their liabilities. [0:30:20] The main topic of the day: is factor investing worth it? [0:32:30] The long-term volatility for factor-tilted portfolios. [0:33:56] What factor investing is and the added risk it entails. [0:34:51] A brief history of pricing models. [0:35:53] A few characteristics associated with higher expected returns. [0:39:25] The challenges of factor investing. [0:39:47] How to determine the mix of factors that captures all relevant state variable sensitivities. [0:42:56] The significance of size premium. [0:46:07] Speculating whether factors deliver premiums. [0:47:57] The steps involved in a hypothetical factor investment. [0:48:57] A few important facts about factors. [0:53:23] The benefits of having more independent risk premiums in a portfolio. [0:54:56] Our verdict as to whether or not factor investing is worth it. [0:57:02] Why it's important to take tracking error into account. [0:57:38] The tendency of factor-tilted portfolios to perform differently from the market. [0:57:48]

There is a lot of hype surrounding cryptocurrencies and DeFi technology, with excitement around the potential innovations they offer financial systems. Often lacking in the discussion is an objective and critically informed viewpoint, leading to confusion and misunderstanding. In today's conversation, we get the balanced perspective that we need with Professor Hilary Allen, who has a wealth of experience in banking, law, financial regulation, corporate finance, and business administration. She is a law professor at the American University of Washington College of Law and her research focuses on the impact of new financial technologies on the stability of the current finance system. She has written many academic papers on the subject, including the book Driverless Finance, which provides readers with a balanced perspective on the opportunities and threats of fintech innovations. In our candid and fascinating conversation with Professor Allen, we learn about the threats and opportunities DeFi technologies pose to the financial system. We hear what shadow banking is, the similarities that decentralized finance has with shadow banking, the risks of cryptocurrencies, if innovation in finance is always positive, why regulation is essential, whether DeFi is actually decentralized, the basics of stablecoins, how you can help affect change in the financial system, if you should invest in cryptocurrencies, and much more. Tune in to get the clarity you need about the world of crypto with expert Professor Hilary Allen! Key Points From This Episode: We start the show by learning what shadow banking is and how it is associated with the financial crisis in 2008. [0:04:05] Professor Allen explains what DeFi is and gives us some examples. [0:07:16] Learn about some of the innovations that DeFi technology proposes. [0:09:21] Similarities between shadow banking activities and DeFi technology. [0:11:06] Other risks that Professor Allen sees with the DeFi system. [0:12:12] What effect replacing intermediaries with algorithms have on financial systems. [0:16:03] The effect complexity has on a financial system. [0:17:19] She explains what financial stability is and the objective of financial regulation. [0:19:27] How the financial stability of the existing system compares to the DeFi system. [0:21:01] Whether stability of the existing financial system is exposed to problems within DeFi. [0:22:14] Which DeFi innovations pose the biggest risk to the current financial system. [0:23:23] Find out if stablecoins could affect monetary policy. [0:25:23] The regulatory lessons from the 2008 financial crisis that are relevant to DeFi. [0:26:28] Outline of the problems that the existing financial system has. [0:30:44] How successful DeFi has been at being decentralized. [0:33:14] If Professor Allen has any concerns that regulation might stifle innovation in DeFi. [0:36:06] Find out if financial innovation is always a good thing. [0:37:41] What the best possible regulatory outcomes are regarding crypto and DeFi. [0:39:30] Whether it is too late to regulate cryptocurrencies. [0:42:48] Why Professor Allen thinks some politicians are pushing crypto-friendly agendas. [0:43:52] How people can affect change in the right direction regarding the financial system. [0:46:08]

If you're ready for a serious education on market elasticity, demand system pricing, and stock market flows, you've come to the right place (disclaimer: don't expect light entertainment). Today's guest is Ralph Koijen, AQR Capital Management Professor of Finance and Fama Faculty Fellow at the University of Chicago, Booth School of Business. Tune in for a fascinating conversation about some of the most fundamental characteristics of our economy. To say we learned a lot from this conversation is an understatement, and we're sure you'll walk away with just as many lightbulb moments and impactful lessons as we did. Key Points From This Episode: Ralph provides an in-depth explanation of demand system pricing. [0:02:48] An example of how valuations can be affected while the connection between fundamentals and valuations remain relatively unaffected. [0:08:18] How Ralph's model for demand system asset pricing differs from other models. [0:41:26] The two components that investor demand is made up of. [0:14:54] Exploring the concept of latent demand and how to estimate it. [0:17:57] How the price impact from institutions and elasticity of markets has changed over time. [0:20:34] Understanding the surprising impact of households on stock market volatility in 2008. [0:20:34] How latent demand can be used to predict differences in expected returns. [0:25:46] Examples of factors that drive latent demand. [0:30:42] The most impactful group of investors (and why this is the case). [0:33:17] An overview of what would likely happen if the most influential investors switched to market cap indexing. [0:35:22] How huge firms influence the setting of prices. [0:36:25] Ralph shares his thoughts on the idea that index funds are distorting market prices as they continue to grow in magnitude. [0:35:22] What demand system pricing tells us about the effect of socially responsible investing on prices. [0:43:01] How US asset prices would be affected if foreign demand for US assets decreases. [0:35:22] Inelastic versus elastic markets. [0:47:23] Why prices are so much more volatile than fundamentals. [0:51:11] Comparing micro-elasticity and macro-elasticity. [0:52:18] Ways to estimate micro-elasticity and macro-elasticity, and the limitations of these approaches. [0:54:00] Ralph's estimate of what the macro-elasticity is. [01:01:00] Risk factors that impact elasticity. [01:02:07] An example which shows how flows work. [01:03:32] Factors that impact how long the price impact of flows lasts. [01:05:24] Dividend irrelevance in inelastic markets. [01:10:30] The role of the increasing market share of cap weighted indices on market elasticity. [01:12:28] How investors should behave when markets are inelastic. [01:15:11] Ralph's definition of success. [01:18:47]

For this week's episode, we are revisiting a portion of our conversation with the legendary Professor Campbell R. Harvey and and his more optimistic viewpoint on the crypto space. Campbell is the Professor of International Business at Duke University and is also a Research Associate at the National Bureau of Economic Research. In 2016 he served as the President of the American Finance Association, and from 2006 to 2012 he occupied the incredibly demanding role of Editor for the Journal of Finance. We hear about Campbell's latest book DeFi and the Future of Finance along with his most recent research. Discover how Campbell first became interested in the topic several years ago and decided to put together a course for his students. We also delve into the rise of decentralized finance (DeFi) and how we can expect it to shape global finance, trading, and the future of the internet.