Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Martín Escobari
[00:00:00] S0: Yeah, diversification. [00:00:00] S1: Diversification is the only free lunch. Thinking strategically about how to diversify, with whom to diversify is hard, but super valuable if you want that free lunch. [00:00:00] S0: Speaking of diversification, maybe the most interesting dimension of that today is geographic. We were talking before we hit record about the incredibly wide gulf between the pristine US equity assets and, basically, everywhere else in the world. There was a time when you saw this chart between the S&P 500 and the ACWI world, ex-US, or something, and it was back and forth and back and forth, and then the line has just gone like this for 20 years, where the US has just so completely dominated everybody else in enterprise value creation, or some measure like that. How do you interpret that shift? Is it secular? Is it going to be cyclical and go back towards the international markets? How do you think about that crazy bifurcation?
· Martín Escobari
[00:00:00] S1: The premium for US exceptionalism has never been higher. US public equities are trading at 26 times earnings for a 4% forecasted growth, which is at the 97th percentile of the last 25 years. The US dollar, despite a 10% depreciation this year, is pretty much two standard deviations away from the neutral state, so the US has never been this expensive. I love the US, it's still the number-one economy, I still have half my assets in the US, but not 90% of my assets in the US. Not only is it very expensive, total debt to GDP is 125% of GDP. That is the highest of the OECD. It's higher than it was after World War II, when America levered to defeat the Axis of evil. Current plans in place, within five years, we're going to be at 145% of GDP, which is higher than Greece and Italy, and the US has not had a recession since 2009. Are you sure you want to have 95% of your assets in the United States of America? I don't. If you look at the rest of the world, you can buy Europe at 14 times earnings, you can buy Brazil at nine times earnings, you can buy Mexico at 10 times earnings. We're finding 40, 50% growers at 12 times EBITDA, 14 times EBITDA, many of them serving dollarized clients, so the case for global diversification, the price for global earnings... The case has never been stronger, the price has never been lower on a relative basis, so I do think that, in the next 10 years, those who achieve some level of a diversification will be rewarded, because I do think there's a little bit of froth in the US market and the opposite in a lot of the emerging markets.
· Patrick O'Shaughnessy
[00:00:00] S0: What have you learned on any recent trips to China?
· Martín Escobari
[00:00:00] S1: China's fascinating. I've been going to China for 25 years, and I've seen the development. It's the fastest change in terms of per-capita GDP in modern history or any country at scale. It's an incredibly complex society, tremendous amount of innovation, and we were lucky, having been early in China, as GA, we've been investing there for 25 years. I am highly optimistic that tensions have stabilized and that market conditions are improving, and we've been underweight China for the last five years. We just did two deals, we're going to pick it up a little bit. There's always binary risk around the geopolitics. There's just so much innovation, there's so much entrepreneurial zeal. The one thing I learned, I actually learned over drinks with a Chinese entrepreneur, so I've done business in 19 countries and I love to connect on a human level with the entrepreneurs. Even at growth stage, so much of the assessment of the company and of the partnership is about chemistry, and it was very hard for me to build chemistry with the Chinese entrepreneurs. One night, I'm having a long dinner with lots of good food and alcohol with an entrepreneur who was an anthropology PhD from University of Arkansas. I said, "If someone can explain to me the Chinese mentality, it's this man." He said to me, like any oversimplification, it's unfair, but there's a grain of truth, and he said, "What you have to understand about the entrepreneurs you're dealing with," he said, "This generation of entrepreneurs, people who were in their thirties and forties, they're all children of the Cultural Revolution. Everything was taken away from these families, everything, and they are scarred and they have something to prove, because they think something was stolen and they will get it back. There's a level of drive and work ethic that probably matches the refugees of World War II that came to the States, and these great businesses after World War II, or other people that have had hardship in their life, but this applies to 98% of the entrepreneurs. They side with their parents, so that's the other condition you should take into account."
· Patrick O'Shaughnessy, Martín Escobari
[00:00:00] S0: How do your ancestors show up in your life and values? [00:00:00] S1: We're all products of our traumas and our adventures and our dreams is my worldview. What are my traumas? Some are personal and some are generational. Generational traumas, on my mother's side, Jewish family, had to flee the Russian Empire through Romania, then Argentina, then Bolivia. Fleeing, leaving everything behind. From my father's side, very wealthy, landed oligarchy of Bolivia. In 1952, there's a revolution. They lose everything, and their house and farms get burned down, and they almost die when my father was a teenager. On both sides, there's a sense of loss and escape that is very present, and decide to become communists and doctors. They're both doctors in public hospitals in a little town in Bolivia. That's their trauma, which I relate to the Cultural Revolution. They are religious, not atheist. In my personal life, trauma comes from two places for me. One is I grew up in Bolivia in the '80s, and that was chaos. Bolivia in the '80s, seven presidents in 10 years, including four coup d'etats. We had inflation. Now you got 5% inflation? [00:00:00] S0: Yeah. [00:00:00] S1: We had 35,000% inflation. [00:00:00] S0: 35,000.
· Patrick O'Shaughnessy, Martín Escobari
[00:00:00] S0: 35,000. [00:00:00] S1: Time value of money, I understand, okay? The only time my mom ever punished me was one time she sent me to exchange her salary for dollars when she got it, and I took a one-hour break to visit a friend... and it lost half its value in that hour. I was grounded for a year because of that one hour break through the exchange. So, anyways, and there was also a lot of violence, ethnic violence in Bolivia. So, it was rough, it felt unsafe, it felt turbulent. And then I, I have a genetic disorder. I bruise very easily, very, very easily. So, getting out of bed, deciding what activity to do is a risk reward, trade-off since the age of five, and that is a way of seeing the world that most people... [00:00:00] S0: Wires you for risk. Absolutely, yeah.