Cliff, you and I go way back. We do, back to the days of Goldman in the 90s. Background for those that don't know: Cliff is the co-founder, managing principal, chief investment officer of AQR, a very large asset manager. We're going to go a hundred billion. What's our latest numbers?
115. And so we'll talk a little bit about AQR and talk about the business. But before we jump in there, one of the things that I think you might argue with in terms of a description of you, okay, is that others have described you, not me, as lovably crabby.
I don't argue with that. I strive for that.
Name a pet peeve that you feel like you're misunderstood. That's a legitimate one that others should have. One of them, and I'm sure you say this because everyone says it, so don't take it personally.
When they look at quants and go, 'Volatility is silly. Risk is the chance of a permanent loss of capital.' It's not that that's wrong. Of course, it's true. If you guarantee me something is not permanent, who cares, right? But rarely do you get that guarantee, right? And volatility in many cases, not all cases, is a fairly good indication of how extreme things might be. That sentence, which I'm sure I've said myself at times, so I'm guilty of this too. Permanent loss of capital. It basically says risk is being wrong. Because that's when you get a permanent loss of capital, when you're never right. And yeah, the best risk control being 'don't be wrong' doesn't feel like risk control to me.
The idea that risk is only a permanent loss of capital was the underpinning of the 'why not 100% equities' but it is a question we get a lot.
So I did write a paper on this. It was in response to a paper that was called 'Why Not 100% Equities?' with a question mark, implying you should have, you know, have you considered this? And that paper's argument was simple: you make more money long term. Now keep in mind you're supposed to, right? Most basic thing you study when you start plotting different security returns is stocks are probably more volatile and probably have a higher expected return than bonds. And I'm only going to talk about stocks and bonds, but I think these same principles apply to lots of other diversifying assets. Go back. I wrote a paper called 'Why Not 100% Equities,' taking the other side. At some point in your first finance class, you learn that you're supposed to always own a diversified portfolio. And if you're more aggressive than that, you lever it. If you're less aggressive, you delever it. And I said, a lot of people won't do this, but this paper I wrote said, what if you actually did it back to 1926 through some crazy, through the Great Depression, your worst cases were no worse, and you made, I forget the number, 100 basis points more doing it. So it's a very fair question to go, I'm long-term, so I should take a very fair observation to say, I'm long-term, I should take a lot of volatility. Yeah, you can still take that volatility better than a single bet on a single asset class. And leverage, which can be a tool to certainly abuse to take too much risk, can also be a tool to take a far more diversified portfolio, leverage back to a risk level you're comfortable with. In this case, it only required about 30% leverage, about, you know, borrow 30 cents on the dollar to I did a levered 60/40 to get back to the risk of equities and it just works. Theory works. So, I'm not actually disagreeing that a long-term investor should take more risk. I'm saying they should still get the most bang for the risk they take.
But there is, if you look at my papers carefully, they are intentionally less useful for making money today than you would imagine. I hope they're useful long term.
How much of this kind of asset do you... the 'why not 60/40, why you should lever a diversified portfolio' paper? That's not alpha. That's not secret sauce. That's something I find very interesting. I think is probably right and I think worth writing about. So if we come up with something we think is real alpha, we don't write it. This is half a joke but also half true. The perfect time for us to write a paper is 10 years after we've discovered something and made money from it and 18 minutes before someone else is going to write the paper.
I wrote a piece recently arguing that bubbles are probably more common over my career than they were before my career, and getting a little more severe.
I end this piece after arguing that these things will happen more often saying, if you can stick with a rational active strategy, you should make more money long term. Imagine the other case of perfectly efficient markets. The extreme case, it's not even Gene Fama believes they're perfect, right? But there, by definition, one definition of a perfectly efficient market is there is no alpha. So, we don't want that world, right? So, the more inefficient you'd think if you could stick with it, the more money you'd make, but the more you'll be tested.
Less efficient also means the swings away from whatever you consider fair will be bigger and perhaps last longer. And that's as important as bigger, by the way.
