The Rational Reminder Podcast

To carry on the trend of amazing guests on the show, today we welcome Antti Ilmanen. Antti is the co-head of the Portfolio Solutions Group at AQR, and the author of a couple of really impactful books that we highly recommend. His most recent is Investing Amid Low Expected Returns, and in today's chat, we get to hear all about the ideas contained in its pages, and the most important moments in his career that have shaped his philosophy. Antti received his PhD in Finance from the University of Chicago and has had a long career of working with high profile names that you might recognize from past episodes of this podcast. Our guest talks about the need for cultivating your patience in relation to your investment portfolio and shares many other great pieces of practical advice that you can implement today. We delve into some bad investment habits that Antti noted in his book and also touch on the usefulness of bonds, illiquid assets, trend following, and much more. Be sure to tune in today to hear all that this great mind has to offer.   Key Points From This Episode:   The power and limitations of using historical data for calculating expected returns. [0:04:17] Balancing historical data with market-implied expected returns. [0:07:47] Antti comments on shifting into higher expected return equity markets. [0:11:37] The role of bonds in revenue generation and why to not give up on them completely. [0:13:00] Locating the roots of the positive premium that Antti associates with bonds. [0:16:35] The effect of illiquid assets on expected returns. [0:19:44] Why recent historical returns in real estate are not indicative of future expected returns. [0:23:40] The response from institutional investors to lower expected returns. [0:26:09] Situating value's current dip in a broader historical picture. [0:29:57] Some comments on the recent performance of rates, growth, and value. [0:33:39] Today's expected value returns in comparison with other points in history. [0:37:19] Antti unpacks the idea of trend following and its performance during the most recent crash. [0:39:53] Defining the defensive style premium and its relation to quality. [0:41:26] Antti differentiates carry and value strategies from each other. [0:45:55] An explanation of the importance of being 'long-short' to capturing the premium. [0:51:24] Locating the difference between alternative risk premia and alpha. [0:55:31] Practical tips for investors to wait out periods of poor performance. [0:57:45] The need for investors to be more fee-conscious in today's, low-return world. [1:01:35] Antti shares about what he calls the investor's 'premier bad habit'. [1:02:33] The impact of Ken French on Antti's career and philosophy. [1:05:29] How Antti defines success at this point in his life and the priority he gives to balance. [1:07:33]

Today, on the Rational Reminder Podcast, we are tackling a few interesting topics that tie into recent and forthcoming conversations with our amazing guests. In this 'us only' episode, we are focusing on thematic ETFs and the truth about dividend investing. After a quick look at The Quick Fix by Jesse Singal, some reflections on the past six months at ARK Invest, and the lessons we can still learn from the dot-com crash, we get into the meat of today's episode by way of Ben's recent experiences on a discussion panel about the utility of thematic investing. From there, we transition into the 'relevance of dividend irrelevance' and share some of the most illuminating and pertinent findings. In the end, our argument is simply that dividends are not the way to go and are an inefficient policy on many fronts. This has not deterred many investors, however, and we get to grips with the kinds of behaviours associated with dividends before espousing what this can mean for you and your objectives. To catch all of this and links to some of the best research available, be sure to listen in with us today.   Key Points From This Episode:   Today's book review of The Quick Fix by Jesse Singal and its critique of popular psychology. [0:12:30] Inflows at ARK Invest; the startling commitment that we are currently seeing. [0:21:48] Reflections and information that we dug up on the dot-com crash in the '90s. [0:22:30] Notes on thematic ETFs garnered from the recent panel Ben was on. [0:25:09] Disentangling the relevance of dividend irrelevance. [0:35:45] The performance of a dividend portfolio and a better idea of expected returns. [0:40:28] Empirical findings about dividend investors and their actions in relation to yields, diversification, and more. [0:42:01] The tax inefficiency of dividends and what this means for capital gains. [0:49:01] Underlining the importance of dividend investor's consumption and its sensitivity to dividends. [0:51:31] How the problem with dividends is compounded outside of the US. [0:57:11]  

We are so happy to bring you all our 200th episode, and who better to have on the podcast on this auspicious occasion than the legendary, Professor Gene Fama? This is one of the most jam-packed episodes we have ever recorded, with Gene providing concise and thought-provoking answers to our many, many questions. After delving into the foundations of Gene's work and philosophy, covering market efficiency, and its competing theories, Gene entertains our queries about a wide range of ideas and models, and generously shares the decades worth of wisdom that he is so widely known for. We also find time to talk about retirement plans, inflation, cryptocurrencies, and the influence of machine learning. Towards the end of our conversation, our guest touches on some more personal ideas about productivity, his career, his partnership with Ken French, and what success means to him at this point. For a landmark episode, with a true hero of the evidence-based approach to investing, make sure not to miss this.   Key Points From This Episode:   The basics of market efficiency and its main implications for investors. [0:04:49] Limitations of the efficient markets model for explaining specific cases. [0:08:02] Gene's perspective on the inelastic markets hypothesis and his interest in it for the future. [0:09:36] The anomalies that brought down the capital asset pricing model. [0:10:26] Unpacking the three-factor and five-factor asset pricing models that Fama and French created. [0:11:43] Thoughts on the Q-factor model, factor premiums, and data dredging. [0:15:43] Gene's reflections on building data sets dating back to the 1920s. [0:17:13] The best way to estimate expected returns and expected factor premiums according to Gene. [0:19:52] Structuring portfolios and how different investors should approach this. [0:24:10] Considering international diversification for investors in Canada. [0:29:05] Further thoughts on asset pricing models. [0:32:47] The assets that are hedged against expected and unexpected inflation. [0:33:31] Gene illuminates the role of the Fed in relation to inflation. [0:36:43] Advice for typical retirees from Gene. [0:38:22] The challenges that Gene has experienced translating theory into practice. [0:40:16] Lesson from Gene's work with Dimension Fund Advisors. [0:43:47] Gene's reflections on his impact and having his theories implemented in practice. [0:45:32] Weighing the value and impact of behavioral finance. [0:47:53] Technology and active managers; is it any different for those aiming to achieve alpha in the current context? [0:50:46] Gene weighs in on cryptocurrencies and how his perspective might have shifted. [0:53:08] A look at the people who have had the biggest influence on Gene's career. [1:03:05] Thoughts on productivity and making the most of periods of clear thinking. [1:03:39] Our guest's personal definition of a successful life. [1:06:17]

As we near the 200th episode of our little podcast, we wanted to have a chat with our friend Aydin Mirzaee about one of our favourite topics: books. Before welcoming Aydin into the conversation we round up some important news, go deeper than ever into the fascinating subject of bonds, and share some thoughts on Setting the Table. As the host of the Supermanagers Podcast and the CEO of Fellow, Aydin has an unusual and stimulating perspective on many of our usual interests, and we get to hear from him about the development of his own reading habit, what he most enjoys reading, what would make him recommend a book to someone else, and few pieces of advice for strengthening your reading practices. Aydin also talks about why advice can be dangerous, increasing your ability to retain information, and he is generous enough to do a round of Talking Sense cards with us to finish off the episode. To hear it all, make sure to join us.   Key Points From This Episode:   Today's book review, looking at Setting the Table by Danny Meyers. [0:08:47] Christopher Bloomstran's thought-provoking critique of Ark Invest. [0:18:06] A follow-up on our ongoing discussion about bonds and look at their recovery time. [0:20:04] Comparing real returns across the different decades. [0:27:30] Research into a more complete view of the historical returns of stocks versus bonds. [0:39:31] How correlations come into the conversation about stocks and bonds. [0:42:54] Aydin describes his reading habits; audiobooks on a commute, hacks, and more. The different purposes of books and how Aydin uses business content to generate ideas. [0:49:40] Books as leverage and some thoughts from Aydin on his favourite genres. [0:52:27] Where Aydin sources his books and what it takes for him to decide to recommend books to others. [0:56:12] The role that podcasts play in Aydin's reading habits. [0:58:30] Aydin's advice for how to read more and his approach to encouraging his children. [0:59:12] Considering different ways to increase information retention. [1:02:11] A round of Talking Cents cards with Aydin! [1:03:34]

Gerard O'Reilly, Co-CEO and CIO of Dimensional Fund Advisors, talks about the firm's research-based culture and rules-based approach to investing. He discusses risk assessment, factor tilted portfolios, operating profitability, and the value of combining multiple metrics. He also highlights the benefits of including small-cap stocks in portfolios and the changes in Dimensional portfolios over the past decade. Gerard's scientific learnings inform his unique portfolio adjustments and Dimensional's integrated approach.

Many people have been contemplating the death of bonds, which is why for the main topic of today’s episode we’re going to be talking about their immortality. After a vicarious trip to The Masters, an overview of The Art of Insubordination, and an explanation of why we’re concerned about the changes that WealthSimple has made to their business model, we get into the world of bonds. Bond returns have not been good this year, and bond index funds are down all round, but that doesn’t mean that bonds are necessarily the riskier choice of investment in the long term, or that you should be feeling disheartened about them. Tune into our conversation today to hear why!   Key Points From This Episode:   The incredible experience of attending The Masters, and how you can win a ticket. [0:02:21] Three business-focused TV series that we highly recommend. [0:02:27] Upcoming guests, and some very positive listener reviews. [0:03:34] An overview of The Art of Insubordination. [0:09:16] Why change is challenging for most people, and the value of creating environments that encourage dissent. [0:11:12] How dissenters can make their actions more impactful, and what leaders can do to encourage dissent. [0:13:16] Key takeaways from The Art of Insubordination. [0:16:39] Why we are disappointed with the changes that Wealthsimple has made to their business. [0:18:47] Nuances that Wealthsimple has left out of their venture capital analysis. [0:23:51] Today’s main topic: the immortality of bonds. [0:33:38] Statistics which highlight the fact that bond returns have not been good this year. [0:33:51] Why volatility is not the only risk that matters. [0:35:06] How Ken French defines risk. [0:37:51] Some of the pros and cons of bonds and stocks. [0:38:56] Calculations which show that stocks are not necessarily less volatile than bonds in the long run. [0:40:48] The five components of long-run predictive variance. [0:43:23] An explanation of a model we created for the dispersion of outcomes. [0:45:10] Why now is the time to get excited about bonds. [0:49:27] Today’s first misconception: high growth sectors/regions/companies are good investments. [0:53:52] Today’s second misconception: you can lose all of your money in stocks. [0:55:57]

Welcome back to the show all about sensible investing in Canada! Today we have yet another masterclass with a wonderful guest, Sebastien Betermier. Sebastian is an Associate Professor of Finance at Desautels Faculty of Management at McGill University, where he teaches investment management, applied investments, and pension funds retirement systems. We have a deep, thoughtful, and precise conversation with him about his recent research and papers, much of which stands in contrast to our usual fare on the show. In our chat, we dive into the nuts and bolts of asset allocation, hedging risk, and his research into what demographics can teach us about investment behaviours and returns. We also hear from our guest about interesting topics of expected persistence and tilting towards value stocks, before shifting the conversation towards homeownership and property investment. Sebastien provides some sound advice around when it might be a good idea to purchase property over other asset classes, and we evaluate this position from a number of different investing perspectives. Lastly, we spend some time looking at pension plans, and what we can learn from those available in Canada right now.   Key Points From This Episode:   Sebastien explains the theoretical relationship between labor income and financial asset allocation. [0:04:30] Findings on hedging labour income risks and the paper that Sebastien published on the subject. [0:06:47] The relationships between risk and age, gender, wealth, and heterogeneity across households. [0:10:05] Unpacking Sebastien's investigation into value and growth investors. [0:12:07] The effect that the characteristics of labor income have on the rate of progression on the value ladder. [0:18:43] What we can learn about expected persistence in the value premium. [0:22:39] Weighing the possibility of predictive demographics for future value premiums. [0:24:29] Advice for young investors looking to tilt towards value stocks. [0:27:50] Explaining differing returns according to the characteristics of people. [0:29:41] Sebastien explains the factors of markets, wealth, and age, in the pricing model. [0:31:24] Understanding how investors tilt to age and wealth factors, and what these portfolios look like. [0:38:19] The impact of age and wealth factors on wealth inequality, and how younger investors can combat this. [0:42:19] Possible rationales for homeownership and the storage of wealth in housing. [0:44:26] The household characteristics that are predictive of larger allocations to housing. [0:48:49] Economic importance of risk-free benefits of homeownership. [0:52:15] The decade-long rule of thumb for purchasing property; Sebastien weighs in. [0:55:31] Why asset-only performance is not the only correct way to measure the success of the Canadian pension fund model. [0:58:50] Differentiating asset-only performance and liability-hedging performance measurement. [1:02:29] A list and explanation of the assets that Canadian pension funds use for hedging real liabilities. [1:04:03] Lessons from the Canadian Pension Plan for individual investors and firms. [1:12:54] Sebastien's personal definition of success: making the most of opportunities and a balanced life. [1:16:07]

The world of personal finance is full of axioms, and new investors can get caught up in investing myths and ‘rules of thumb’ that are limiting at best and lead to underperformance and unnecessary losses at worst. In this week’s episode, we outline some of the common misconceptions that new investors have, the evidence (or lack thereof) surrounding them, and how to think more like a seasoned investor. Is value investing really a safer strategy with lower expected returns? Do you need to employ a Buffett-Lynch stock picking approach when value investing? Are all index funds good investments? Tune in to find out the answers to these questions and gain some insight into the relationship between risk and return, dividend investing versus total risk investing, and whether or not exclusively investing in US stocks is a good idea, plus so much more!   Key Points From This Episode:   Upcoming guests, including Professor Eugene Fama in Episode 200. [0:01:27] An update on our 22 in 22 Reading Challenge, with over 1,000 books read. [0:05:30] A review of The Great Depression: A Diary by Benjamin Roth and lessons learned. [0:07:18] A quick overview of The Bond King, the story of Bill Gross by Mary Childs. [0:17:10] This week’s news stories: 24/7 investing from Robinhood, stock splits, Wealthsimple portfolio changes, and more. [0:20:02] Our main topic: some of the common misconceptions that new investors have. [0:28:50] Whether or not value investing is a safer strategy with lower expected returns. [0:30:42] Some examples of where the myth that value stocks are safer comes from. [0:33:25] The fallacy that value investing requires discounted cash flow (DCF) analysis. [0:40:52] Why Warren Buffett’s outcome could be a challenge to systematic value investing. [0:43:41] Debunking the misconception at all index funds are good investments. [0:46:48] Conversely, Ben shares why not all actively managed funds are bad investments. [0:47:34] Why all exchange-traded funds (ETFs) tracking an asset class are not the same. [0:48:12] The myth that risk and return are always related and the cases when this isn’t true. [0:51:02] Ben shares his reflections on the misconception that dividend investing is less risky than total return investing. [0:53:14] Analysis that demonstrates whether or not dividends are actually safer. [0:56:09] Our last misconception for today: you should only invest in US stocks because they perform best. [0:59:40]

Bill Janeway, author of 'Doing Capitalism in the Innovation Economy', discusses the role of the state in innovation, venture capital operations, asset allocation for investors in innovative companies, reflections on financial bubbles, and insights into cryptocurrencies and decentralization.

Today on Rational Reminder we take a deep dive into the evolution of modern portfolio theory. We kick the show off with some updates and reviews on some of the brilliant shows and books we are watching right now. A key item from this selection is Stolen Focus: Why You Can’t Pay Attention and the points it makes about the value of flow state for learning and creativity. After this week’s news stories, we get into the main topic, and Ben starts with a breakdown of portfolio theory as it was laid out by Harry Markowitz in 1952. From there we talk about research that shaped the current understanding of portfolio theory, exploring the distinction between the mean-variance efficient portfolio and the multi-factor efficient portfolio, and how they theoretically combine to make the market portfolio. One of the biggest takeaways here is that your financial asset portfolios can look the same in terms of asset allocation but the person with more macroeconomic risk in the remainder of their financial situation is taking on more risk. Additionally, even if somebody is the perfect candidate to be the mean-variance investor and they could theoretically tilt toward value, it doesn’t necessarily mean they have to. We wrap up our conversation by inviting our good friend Larry Swedroe onto the show to speak about his love of reading and share his methods for incorporating what he learns from books into his work and thinking.   Key Points From This Episode:   Updates: Shows, books, upcoming guests, reviews, and our reading challenge. [0:00:22] A review on Stolen Focus: Why You Can’t Pay Attention. [0:11:00] News stories for the week: Wealthfront offers thematic ETFs and more. [0:18:47] Moving onto the main topic for today: How modern portfolio theory has changed since 1952. [0:23:00] Lessons to be taken away from Markowitz’s 1952 portfolio theory. [0:25:09] How the math changes when you have a risk-free asset in your portfolio problem. [0:26:59] The capital asset pricing model: the other foundational portfolio theory principle that comes from the mean-variance model. [0:29:08] Portfolio advice that stems from mean-variance optimization. [0:32:46] Building a tangency by expressing information beliefs. [0:36:06] Findings from Michael Jensen’s 1967 application of the CAPM. [0:37:04] Why diversification is important according to Markowitz’s portfolio theory. [0:38:02] Why the CAPM does not accurately reflect the relationship between risk and expected return. [0:39:49] The origins of multi-factor thinking and examples of multi-factor models. [0:41:10] How the allocation of the multi-factor efficient portfolio creates a third dimension. [0:49:29] How the theory predicts how people behave in aggregate. [0:52:44] Takeaways from today’s discussion to keep in mind when building your portfolio. [1:00:00] Larry Swedroe joins us to talk about the importance of reading. [1:03:32] The many subjects that Larry reads about. [1:04:12] How Larry’s reading habit works. [1:05:12] How to capture ideas you read for later use. [1:05:57] Larry’s storage system for all the books that he reads. [1:08:38] The effectiveness of making a public commitment to read more. [1:12:13]