O’Shaughnessy on Disciplined Investing
“We think that you’re never going to get rewarded for making ‘comfortable’ investments.
The best investments begin in discomfort.”
— CEO Patrick O’Shaughnessy1
“Bloomberg Markets: O’Shaughnessy on Disciplined Investing” transcript:
(Bloomberg Radio, Wednesday 4:52 pm, January 24, 2018)
Carol Massar (BBR): Alright, he’s back with us [in our Bloomberg 1130 studio]… Jim O’Shaughnessy, Chairman and Chief Investment Officer at O’Shaughnessy Asset Management, a quantitative money management firm, and he brought along Patrick O’Shaughnessy who is CEO at O’Shaughnessy Asset Management based in Stamford Connecticut. about $6.9 billion in AUM/AUA.4 Nice to have you both here with us.
Jim O’Shaughnessy (Jim): Great to be here.
Patrick O’Shaughnessy (Patrick): Hey Carol!
BBR: This is a big time for you guys, right? Cause there’s some transition, some changes at the firm.
Jim: Yeah, very much so. You know, succession has always been something that a lot of firms do very poorly, and that can cause real problems down the road. And if you wanna be a multi-generational business, and we do, I felt it was very important to do this a little earlier than others might’ve done it. You know, Patrick has really hit the ball out of the park in all aspects of his career. And, I’m not an objective observer obviously —
BBR: I was gonna say, the proud Dad speaking.
Jim: I do talk to … a group of clients that we’ve had for, you know, 20+ years.
Jim: And a subset of them are the kind of, “We’re gonna tell you the way it really is” type of people. And to a client of that group, they were all saying, “Yeah, [Patrick] is the real deal.”
BBR: I was gonna say, he’s your son, but you also run a business and if it wasn’t working…
BBR: Sorry, Patrick.
Jim: Then it’s not working.
Patrick: Yeah, nepotism at its finest, but hopefully the proof’s in the pudding to some degree.
BBR: Tell me what it’s like, the back and forth, because I think it’s fascinating that Jim, you’ve seen a lot of different market cycles, you know … Patrick, now you’ve seen some. We were talking, Cory, a lot about Bitcoin and Blockchain before we got going. But I’m just curious about Old World companies, investment styles, new tech and stuff. And I’m sure you’re talking about new tech as well cause we’ve done it with you. You know, what’s the kind of conversations that are going back and forth?
Patrick: I would say that the underlying investment philosophy at OSAM is identical between me and my dad. It’s rooted in a tremendous amount of discipline tied to finding factors that have predictive power. So, things like as simple as value investing or momentum investing. But just applying them with this rigor, with this repeatable rigor, and the beauty of this succession happening now is my friend Ben Carlson has this term “organizational alpha” — like no strategy is any good if there’s not a good firm around to continue to deliver it. And now we’ve got a line of sight on, you know, 3, 4 decades more being able to do this for clients.
So, when we’re talking about investment strategy, we tend to see eye-to-eye. It’s basically the Scientific Method applied to markets, right?
Patrick: It’s gathering a lot of data, gathering an incredibly smart team of researchers, and try to find things that work and are predictive, and luckily those things are pretty straightforward.
Jim: And, you know, another reason why I’m delighted that this is happening now is I’m 57 and I’m gonna take after my grandfather who never retired. So, I’m not going anywhere! And I think that Patrick and I have, over the years, developed into a really great team. Because, as you pointed out, Patrick is totally up to speed on things that I’m really not up to speed on.
BBR: Mm-hmm [affirmative] …
Jim: I’m a little like Jamie Diamond on the Bitcoin thing and yet –
BBR: Although he’s turning around, Jamie Diamond.
Jim: He is! He’s turning me around.
BBR: No, Jamie Diamond is turning around.
Jim: I know, I know. But Patrick can take a very complicated subject and reduce it to its essence and its core.
Jim: And, you know, for us we wanna know about every aspect of the investment market. I mean, that’s something that’s not a nice-to-have, it’s a need-to-have.
Patrick: We think a lot about sources of alpha, sources of edge — obviously Active Management has a tall order in front of it, its been a rough run for Active Management.
Patrick: And so, if Active Management’s going to be successful in the future it’s gonna be on the back of new research, new opportunities, tied to old discipline, right? And so, Blockchain, you know … I don’t know what my opinion is on Blockchain, on the beta in Blockchain –
BBR: But you’re talking to a lot of folks on Wall Street, that’s what we were talking about.
Patrick: Yeah, I mean —
BBR: And what do you hear from them? Cause I think we’re all trying to figure out fact from fiction.
Patrick: What I think is that, what’s really important for everyone out there is to not dismiss it as a farce. It’s an incredibly powerful, very real thing being worked on by, in my opinion, the brightest people working out there today with a ton of capital behind it. From an investing standpoint it is the Wild West and it’s full of things that I think will lose people a lot of money. But you need to pay attention because it may affect every kind of business, especially in finance. There’s a company called Numerai — who knows if it’ll work — in the blockchain space, that is paying data scientists around the world in a crypto currency called “numeraire” to basically deliver the best stock market prediction algorithms back to Numerai, the parent company. That’s a competitor of ours. We need to know what’s going on: why they’re doing it, how they’re doing it. You know, I’m a big believer in this kind of mosaic view of understanding markets that we can’t just understand quantitative equities.
Patrick: We need to understand what’s happening in growth, and venture capital, and everywhere else.
Jim: I mean, it seems to me when it comes to crypto that the big differentiator are coins, or currencies — whatever noun you want to use — that have some functionality, and those that are just a theoretical store of value. There are some out there that are actually trying to do something.
Patrick: Yeah, I mean, there’s ones where it’s a utility coin or ones where the value’s intrinsic to the blockchain itself. So, Bitcoin — arguably what the network wants is security, right? So, miners provide security and the value sort of lives within the blockchain. What’ll be really interesting is if there become “tokenized securities.” Now, that could just be a way of cutting corners and getting around regulation in the short term. Or raising non-dilutive funds to start a business. But I do think we’ll see more of that, you know, solar coin or coins tied to file storage and things like this that will actually be used by the world. Now, they’re probably drastically overvalued today, but that doesn’t mean the technology’s not gonna be a game changer.
BBR: But there’s logic there.
Patrick: Absolutely, yes.
BBR: Alright, we’re gonna continue the conversation. We’ll move on from blockchain and bitcoin cause there’s a lot more to talk about. Jim O’Shaughnessy’s gonna stay with us, Chairman Chief Investment Officer at O’Shaughnessy Asset Management along with Patrick O’Shaughnessy, CEO at O’Shaughnessy Asset Management. You’re listening to Bloomberg market. I’m Carol Massar in our Bloomberg 1130 studio, Cory Johnson in our Bloomberg 960 studio in San Francisco. Dow closing the day up 41 points the S&P just down about 1, and the Nasdaq a decline of 45. This is Bloomberg Radio.
BBR: So, Jim, let me ask you, when we look at this market environment (and I know you guys have your algorithms) your strategy — and that’s what you really stick to, you don’t really care about with all the static that’s going on.
Jim: That’s right.
BBR: Whether it’s politics, whether it’s the macro environment.
Jim: Yeah, basically what we have seen historically: if you can take a very long-term viewpoint about your investments and not let short-term gyrations scare you out of the market, you’re gonna be in the upper 95% of performers in the stock market. You could be an amateur, you can be a pro —
BBR: Through the up and down cycles.
Jim: Yes, exactly. Because, listen, the drawdowns in the market are basically the reason for the equity risk premium, right?
BBR: Mm-hmm (affirmative)
Jim: So, it’s part and parcel of why equities do so well over the long periods of time. And so, our attitude has always been: investors are best served by saying, “Look, I’m 40 years old, I’m not gonna retire until whenever, I might have another 25 or 30 years here.” Think in those terms as opposed to what’s happening today. People who think about what’s happening today are pretty much going to be throwing in the towel because we’re emotional creatures — and we can’t get away from that. The way our brains are designed makes us very, very bad investors.
Jim: So, so, we always say: find some great strategy, stick with them, re balance, very, very simple stuff, and yet very, very hard to actually do.
Patrick: The other thing we would add in there in terms of today’s markets is that it’s really hard to say we’re talking about why this market is up. Is it tax reform? Is it politics? You know who knows any given time. We like to boil it down to underlying fundamentals of the market. Everyone talks about the U.S. market, which is honestly quite expensive. You have to pay 24, 25 times trillion earnings to buy the S&P 500. I think this is where Active Management can begin to shine again. Who knows when the turn will be, but you can build solid portfolios in the U.S. for 15–17 times earnings. Even that’s not hugely cheap, but it’s much better than 25. But, more importantly, you can look internationally. I think we’re so myopically-focused on the S&P 500 in the U.S. Why would we have anything else? It’s crushed everything for the last 10 years. But where you really see some interesting value is in some kind of international space, international small —
BBR: Where specifically? Small … or …
Patrick: Yeah, so you could go as specific as an International Small Cap Value or something like that. Nobody is talking about, or even knows what those stocks are and you’re paying far less. And, of course, there’s better risks in there that are different from U.S. exposure — currency, and other things. But I think investors have become overly-focused just on domestic equities.
Jim: And one of the things that I always say — I get questioned, you know “If you could give me one piece of advice, what would it be?” — I say, “Have a global portfolio.” Right now, [the U.S.] is pretty expensive. Right now, Europe and other areas are not so expensive. I think the fear is: people like to invest in things they know about, right? And that just doesn’t make any sense. That doesn’t mean that these companies in Europe and elsewhere are really fantastic companies. So, if you don’t have an international or global exposure, get one.
Look at Emerging Markets, are they more volatile? Yes, they are. But to have an overall global portfolio, you’re going to be better diversified and you’re gonna be in a position where, say, when the U.S. takes a breather, they might go on to do much better.
BBR: Cory, come on in on, I know you’re listening.
Cory Johnson (BBR2): Well, these guys are so interesting to listen to!
BBR: I know, I know.
BBR2: It’s such good —
Patrick: We can keep going!
Jim: Well, I guess, yeah. You know, we were talking earlier about GE. And I wonder if we could get a little more specific here about companies that are down-and-out — companies, that are disliked in the moment — and opportunities if a turnaround’s possible or if the market’s either undervaluing a stock because they’re worried about something or —
BBR: Is this something that’s come up for you guys?
Jim: Just neglecting the stock?
Patrick: Yeah, so GE’s a good example, where we’ve owned some GE. We’re ultimately Value investors at heart. We think that you’re never going to get paid for making “comfortable” investments. The best investments begin in discomfort.
BBR2: Right, right. My old boss used to call this looking for “neglected” equities.
Patrick: Yeah, neglected… and hated, despised, you know, pick your adjective. That’s why value works, we believe, and for kind of a behavioral reason. But it’s getting harder and harder to find those companies. And then you’ve got stories like GE where people get burned as Value investors and value as a style has gotten destroyed, frankly, by growth and by all the stocks that everybody loves these days, Amazon, etc., for 8, 9 years. So, it’s an interesting time in markets for sure. I think this is why discipline matters so much. You can’t get scared out of these strategies. And, I think value will return.
Jim: And one thing we really believe that you don’t want to be just a Deep Value investor, right? There are all sorts of other things you want to take a look at to make sure that you really want to own that stock. So, during the financial crisis, CitiCorp had one of the highest dividend yields in the S&P 500. Deep Value guys loved it! We didn’t like it because it had horrible financial strength scores, etc. So, look more broadly.
BBR: I always love having you guys on the show, come back any time! Jim O’Shaughnessy and Patrick O’Shaughnessy of O’Shaughnessy Asset Management. They’re based in Stamford CT —here in our New York studio on this Wednesday. This is Bloomberg.
You can expect many thought-provoking insights and new research in 2018. Subscribe to this Blog and get an email alert whenever we post new articles…
- Patrick is the Chief Executive Officer, a Portfolio Manager, and a member of the Research Team at O’Shaughnessy Asset Management (OSAM).
- Jim is the Chairman, Chief Investment Officer, and a Portfolio Manager at OSAM.
- For other recent interviews with members of the OSAM Research Team, visit our Blog’s interview archives.
- As of 1/24/2018, the $6.9 billion we managed or advised is comprised of approximately $6.4 billion in AUM assets and $0.5 billion in UMA/AUA assets.