Cliff Asness’ interview with Consuelo Mack aired this weekend on WealthTrack. The interview covers asset allocation, Shiller PE, Ben Graham, leverage, shorting, derivatives and more. The interview was really informative so we decided to transcribe it. The interview can be printed and/or made into a PDF by using the tool at the bottom of the page. NOTE: This is not a perfect transcription, but you can also see the full video below, enjoy!

Also see Cliff Asness: Low-risk investing Without industry Risk

Cliff Asness video and transcript

This week on WealthTrack  a financial thought leader and money manager who says you are not totally diversified until the 3 dirty words of finance are in your portfolio, AQR capital management’s Cliff Asness explains what they are next on Consuelo Mack WealthTrack Consuelo Mack

Hello and welcome to this addition of WealthTrack I am Consuelo Mack get a comfortable seat take out your note pads and be prepared for a graduate level seminar on investing mostly in laymen’s terms but just in case I am providing some definitions, our guest this week is a financial thought leader with an academic and research vent, he his Clifford Asness the managing and founding principal of AQR capital management, AQR stand for Applied quantitative research Asness and several of his team mates are what are known as Quants and I will define that in a moment, Asness co foundered AQR in 1998 the global investment management firm which runs Hedge funds mutual funds and a diversified collection of investments strategies as over 83 billion $ in assets under management 11 billion of which is in mutual funds, Asness has a PHD in finance from the university of Chicago as received several awards for numerous financial research papers some of which we will have on our website, so what does a quant do? Here is how the financial times puts it.

cliff asness

A quantitative analyst typically combines information and techniques from economic theory accounting statistics computer programming and information technology in order to identify the proper value for a financial instrument such as a stock bond derivative or other security, well that is as deep as I want to go but luckily Asness speaks plain English and was able to communicate on my level, and I started with the basics, why he believes stocks are expensive and will not provide the 8% annual returns most investors expect, he basis his lower forecasts on a valuation method devised by one of our favorite guests Yale professor Robert chillers cape ratio which stands for cyclically adjusted priced to earnings ratio, it is figured over a 10 year periods instead of the typical PE multiple which is based on current price and earnings.

Cliff Asness

It’s obvious that stocks have value and you want to use a longer term period to evaluate them Bobs method we have been using it for more than 10 years so we didn’t pick it because its 10 years and its very useful to use the same method for a long time, because it doesn’t let you cheat, and if you want to be a perma bear one great way to do it is to keep moving your method around to whatever measure set tells you what you like at that time but we have been using the same method for a long time, its be all end all its not perfect but the average for this number is going to be 15s,16s,17s something like that

Consuelo Mack

This pricing is multiple over 10 years

Cliff Asness

It’s right now around 23, 24

Consuelo Mack

So it’s relatively expensive

Cliff Asness

Well relatively expensive and historically if you look at every 10 year period and divide them into starting periods by this cape number and then look at the average return in the next 10 years, the average return has been zero over inflation, when starting from this level

Consuelo Mack

You just said we are talking about long term now even though, so you and I are looking at the current market by Bob Shillers price range ratio measure its expensive its 22 or 23 the average is 15 so that’s now but so looking at now let’s say 5 to 10 years you still think that stock returns are going top be lower than they have been in the past?

Cliff Asness

I think they are going to either be a little bit lower or a bunch lower, if PE stay high they will be a little bit lower because you won’t suffer that lost for me conversion but your buying at a higher price and a lower yield, and if they stay where they are instead of what historically has been a 5, 6,7 percent re over turn over inflation I think more like a 4% return over inflation, inflation you could argue what it is but if that’s a 2 right now and if it stays steady we are talking about a 6 instead of an 8, if inflation goes up I can get to an 8 but that’s not the fun way to get to an 8, that doesn’t make anyone any happier

Consuelo Mack

So why do I care so why is this so important to understand that the returns the real returns that’s actual inflation that you’re going to get from stocks are lower than what you have been expecting?

Cliff Asness

You care about this for planning purposes, if you have a fearing individual with a spreadsheet at home which I believe every individual who knows how to use a spreadsheet as tucked away somewhere of how much I have to save for retirement, one number you put into that spreadsheet is what am I going to earn on my nest egg, if you are an institution a pension fund and endowment and you have either obligations or you want to know what you can fund at a school that you’re going to get the endowment for, you make an assumption on what you’re going to make on your investments, if you are assuming 8 and the true answer is 6 your being too optimistic

Consuelo Mack

So that’s one of the things of how you can adjust that you can work longer or you can save more, but hey you’re a money manager and your running hedge funds and your running mutual funds, you have another approach that you think that we can get higher returns right? , so talk about number one how you think we should be adjusting our portfolio strategy and away from an over alliance on stocks which is dangerous to other strategies?

Cliff Asness

Well you are right we do start out thinking investors over rely on stocks, if you take your famous 60/40 investor I am not trying to say that actually owns it but we all use it the canonical example, bonds are also expensive these days that’s the last thing you need someone to come here and explain it they are lower yielding, they will tax you double  whammy but the typical portfolio if that’s 60/40 it’s really a stock portfolio, stocks drive the up stocks drive the downs they drive the long term

1, 234  - View Full Page