Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Paul Tudor Jones
[00:00:00] S0: Cascade of selling. [00:00:00] S1: Cascade of selling, that's a great way of putting it. And we're getting ready – I want to say that the contemplated IPOs for next year are going to be five or six percent of market cap. So why are we where we are right now? Because we've been retiring two or three percent of market cap, probably a little less than 2% of market cap, every year without fail for the past 10 years. [00:00:00] S0: Through buybacks and things like this. [00:00:00] S1: Through buybacks. [00:00:00] S0: Yeah.
· Paul Tudor Jones
[00:00:00] S1: And so now all of a sudden, you're gonna completely reverse that math. And so, I don't think it necessarily happens instantaneously with the IPOs, but then there'll be the unlocks. So you can see a situation where, okay, maybe we go through some kind of rolling top. And then 18 months from now – six months, we’ll have to look at the unlock schedule. But you're going to want to watch those because that'll just be adding equity supply. And you've already gonna be diminishing the buybacks because of all the commitment to capex from the hyper-scalers. They're already gonna be eating into their cash flow. So I think that's why tech has dogged it and why it will continue to dog it, because all the funding – much of the funding for these IPOs is going to come out of existing tech stocks. When you say, “Are we in a bubble?” I don't know if we're necessarily in a bubble. We're clearly so leveraged in equities in this country. We’re so dependent upon firm equity prices at this point in time. And when I say leveraged, we're 252% of stock market cap to GDP. So 1929 we were, I think at the top we were 65%. And then in '87 we got to about 85 or 90%. In 2000 we got to 170%. And now we're at 252. So you can just imagine, if you think about the periodicity of significant bear markets. Since 1970, we get kind of a mean reversion about, on average, every 10 years. When I say mean reversion, let's say mean revert to the past 25 or 30-year PE. So if we did that here, that would be – and again, these are elevated PEs, way elevated beyond the 20th century. That would be, say, a 30, 35% decline. Well, 35% on 250% of GDP is 80, 90% of GDP. The reverse wealth effect, oh my gosh. 10% of our tax revenues are capital gains, they go to zero. So you can see the budget deficit blowing up. You can see the bond market getting smoked. You can see this kind of negative self-reinforcing effect. And so it's troubling, it's troubling. So are we in a bubble? We're clearly in a sovereign debt bubble. In the stock market, we're over-equitized as a country. We have the highest individual equity weightings in the history of the country. And then the real problem is that we're also – if you look at private equity in 2007, 2008, that was about 7% of institutional portfolios. Now it's about 16% of the institutional portfolios. Real estate's gone up. Infrastructure bets have gone up.
· Paul Tudor Jones, Patrick O'Shaughnessy
We're so much more illiquid than we were in 2008. So, you have to be cognizant of that fact when you think about how you have your money deployed. I had a friend ask me – he was a wealth manager and he hates hedge funds because of the fees. He just says, “We just need to put money in the S&P 500.” He said, “If you were investing for 20 years, what would you tell somebody?” Because he knows that I'm supposed to say, “You just buy the S&P and close your eyes.” Well, the problem is that if you buy the S&P at this current valuation, the 10-year forward return is negative when you buy the S&P with a PE of 22. That's what history shows. So yes, the S&P is spectacular long-term, if you have a hundred-year view. But that's because that's an average of a hundred years, including times when the S&P 500 PE was 6 and 7 and 8, or one third of what it is right now. So, valuation matters a lot, and the stock market's really high and it's gonna be really hard to make money from here, I think, with any kind of long-term view. [00:00:00] S0: If I came and shadowed you on a given day today, how does it go? What are you doing? What does a day look like today? I know you have a system that you can be heard at all times by your execution traders. I know it's intense, but walk us through a day in the life.
· Paul Tudor Jones, Patrick O'Shaughnessy
[00:00:00] S1: I get up at 6:15. I work ‘til seven o'clock, I go work out ‘til 7:45. I try to do 45 minutes of hard cardio every day. I get in front of the screens for the opening. I typically won't have any meetings ‘til 10 o'clock. And then I'll probably do meetings ‘til about 12 o'clock. Typically have lunch with someone. Have a meeting after lunch. Try to make sure that I've got an hour before the close and an hour after the close to be able to map out what I want to do the next day. Because again, I want to have a plan, as well as think what's gonna happen that night in Tokyo, Hong Kong. I'll go home around five, walk with my wife for an hour. Go up and work for an hour, come back down and eat. I'll normally watch the news and the most mindless entertainment that I possibly can. I used to read a book and a half a week, and then once the internet came, forget it. I’m so tired of reading by nighttime. I've read one book in the last year, which is gonna be – by the way, I recommend everyone read it – it's David Woo. He's a newsletter writer, but he has written what's gonna be a spectacular bestseller on globalization and markets. It's fantastic. And I'll bet you it gets made into a Netflix series and I bet you it's gonna be a banger. Anyway, I'll try to watch something on Netflix, then I’ll work from say 9:30 to 10:15, and then I’ll go to bed and I'll wake up at. [00:00:00] S0: 6:15 and do it again? [00:00:00] S1: No, no, no. I'll wake up at probably 2:30 or 3 and I'll work for half an hour. [00:00:00] S0: Oh wow.
· Patrick O'Shaughnessy, Paul Tudor Jones
[00:00:00] S0: Oh wow. [00:00:00] S1: Watch the London open for 45 minutes or half an hour. And I'll do a lot of analytical work then. It's a quiet time, it's good. Then I'll go back to sleep and wake up at 6:15. [00:00:00] S0: Wow. And you've been doing that for 50 years? [00:00:00] S1: Yeah, I’ve been doing that certainly since the eighties. I feel like I work so much harder than I did 40 years ago, 30 years ago. [00:00:00] S0: Because there's more information? [00:00:00] S1: Oh my God, I get 800 to 1000 emails a day. If I think about when I was a pit trader, I think about – even the '80s when there was so much less information – I could spend more of my time intently focusing on what the highs and lows were gonna be in the day, which are really important for execution. Doing what my boss Eli did – just waiting, paying attention, focusing. Are we at a point of maximum pain? Is there so much fear right now, which is a great time to buy? Does it look like it's gonna go up forever? A great time to sell. You have to be intentional to be able to pick those points in a day. And when you're trading 25 different instruments, instrument by instrument by instrument, a lot of times they'll be correlated. Sometimes they're not, and you have to be very intentional about that. So, if while you're doing that there's 48 emails coming in at the same time, all of which could be actionable information. I think today, for me at least, it's just a lot, lot harder I think. Because the information overload distracts me from exquisite execution.
· Paul Tudor Jones, Patrick O'Shaughnessy
[00:00:00] S1: Oh my God, I get 800 to 1000 emails a day. If I think about when I was a pit trader, I think about – even the '80s when there was so much less information – I could spend more of my time intently focusing on what the highs and lows were gonna be in the day, which are really important for execution. Doing what my boss Eli did – just waiting, paying attention, focusing. Are we at a point of maximum pain? Is there so much fear right now, which is a great time to buy? Does it look like it's gonna go up forever? A great time to sell. You have to be intentional to be able to pick those points in a day. And when you're trading 25 different instruments, instrument by instrument by instrument, a lot of times they'll be correlated. Sometimes they're not, and you have to be very intentional about that. So, if while you're doing that there's 48 emails coming in at the same time, all of which could be actionable information. I think today, for me at least, it's just a lot, lot harder I think. Because the information overload distracts me from exquisite execution. [00:00:00] S0: What does that mean? Exquisite execution.